Datasets:

TheFinAI

/

flare-ectsum-long

like 1

Follow

The Fin AI 51

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning and thank you for standing by. Welcome to the AbbVie first quarter 2024 earnings conference call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, senior vice president of investor relations. Ma'am, you may begin. Liz Shea -- Vice President, Investor Relations Good morning, and thanks for joining us. Also, on the call with me today are Rick Gonzalez, chairman of the board and chief executive officer; Rob Michael, president and chief operating officer; Jeff Stewart, executive vice president, chief commercial officer; Scott Reents, executive vice president, chief financial officer; Carrie Strom, senior vice president, AbbVie and president, global Allergan Aesthetics; and Roopal Thakkar, senior vice president, chief medical officer, global therapeutics. Joining us for the Q&A portion of the call is Tom Hudson, senior vice president, chief scientific officer, global research. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick. Rick Gonzalez -- Chairman and Chief Executive Officer Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'm extremely pleased with our start to 2024 with first quarter results exceeding our expectations. Before we discuss our performance in more detail, I'd like to share my perspective on the planned CEO transition that was announced earlier this year. After serving more than 11 years as AbbVie's first CEO, I have decided to retire from the role effective July 1, of this year and will continue to serve AbbVie as executive chairman of the board. As you heard me say before, it is important that we choose the right time to make this critical leadership transition. The board and I have been long planning for my eventual succession and now is the opportune time to move forward with the transition. As our business is performing very well and is in a strong position for the long-term. We are successfully navigating the Humira U.S. loss of exclusivity. We have built an outstanding company culture, an important priority and competitive advantage. And our productive R&D engine, which has yielded numerous innovative new medicines for patients will continue to fuel our robust pipeline for years to come. After a multi-year process, our board has unanimously selected Rob Michael, our current president and chief operating officer as AbbVie's next CEO. I have known and worked with Rob for many, many years and he is an excellent choice as my successor. He brings the experience, the leadership and the strategic vision to build on AbbVie's past successes, advance our strategy and enhance shareholder value. Since our inception, Rob has held several important leadership positions that have collectively had a tremendous impact on AbbVie from establishing our financial planning organization to navigating the end of exclusivity for Humira in the U.S., to driving key business development opportunities that have been critical to diversify our business and support long-term growth, including the acquisitions of Allergan and ImmunoGen and the pending Cerevel transaction. Looking back, AbbVie has evolved tremendously as an independent company and our performance has truly been exceptional. Since our inception, we've grown our revenue from $18 billion to $55 billion. Our market capitalization has increased substantially from $54 billion to roughly $300 billion today. We have achieved a total shareholder return of more than 675%, which is top tier relative to our peers. And importantly, we've substantially increased our investments in R&D to discover and develop new medicines that have the potential to improve the lives of patients. As I look ahead, our company has never been stronger and our future has never been brighter. We are executing well across all aspects of our business and our long-term growth prospects remain very strong. In summary, it has been a privilege and immensely gratifying to serve with all of my AbbVie colleagues for the past 11 years, growing AbbVie into what it is today. And I look forward to continuing to work with Rob and the leadership team to create meaningful value for our shareholders and all of our stakeholders. And I'd also like to take this opportunity to thank all of our shareholders for the trust and confidence you put in me as AbbVie's CEO. With that, I will turn the call over to Rob for comments on our recent business performance. Rob? Rob Michael -- President and Chief Operating Officer Thank you, Rick. Before I comment on our first quarter performance, I want to congratulate Rick on his exceptional leadership of AbbVie over the past 11 years. During his tenure, Rick made several strategic moves that have positioned AbbVie to have a bright future beyond Humira, consistently drove the organization to deliver very strong performance and demonstrated the genuine care for our employees, patients, shareholders and communities that has defined who we are as a company today. It has been my privilege to work closely with Rick over many years, and I look forward to working with him in his role as executive chairman. AbbVie's outlook is very strong and I am excited about the remarkable impact that we the remarkable impact that we will continue to have on patients' lives. Turning to first quarter performance, we're off to an excellent start to the year with strong top and bottom-line results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. Total net revenues were $12.3 billion approximately $400 million ahead of our expectations. This overachievement was driven by our ex-Humira growth platform, which delivered revenue growth of more than 15% this quarter and includes continued robust sales from Skyrizi and Rinvoq, with combined growth above 50% in their fifth full year on the market, as well as double-digit revenue growth from several other key products including Venclexta, Vraylar, Ubrelvy and Qulipta. This broad based sales momentum clearly demonstrates the strength of our diversified portfolio with multiple growth drivers to support our long-term outlook. We are also making excellent progress with several of our near-term priorities. We recently completed the acquisition of ImmunoGen, which accelerates our entry into the solid tumor market and strengthens our oncology pipeline. The integration has been seamless and we are impressed by the caliber of talent we have welcomed into AbbVie. We also remain on track with the pending acquisition of Cerevel, which we anticipate will close in the middle of the year. Cerevel's pipeline of differentiated assets will further augment our neuroscience portfolio. In addition, we continue to advance our R&D pipeline and invest for long-term growth. This progress includes the FDA's full approval of Elahere for FR alpha positive platinum resistant ovarian cancer, a meaningful first in class treatment for patients and a significant long-term growth opportunity for AbbVie in solid tumors. We also gained U.S. approval of Juvederm Voluma XC for temple hollows, further strengthening our leadership in aesthetic fillers, and we executed several business development opportunities adding novel early stage programs and partnerships in oncology and immunology. Given the strong results this quarter, we are raising our full year adjusted earnings per share guidance by $0.16 and now expect adjusted EPS between $11.13 and $11.33. In summary, this is an exciting time for AbbVie and I am extremely pleased with the momentum of our diverse portfolio. We're off to an excellent start to the year and we are well positioned to deliver a high-single-digit revenue CAGR through the end of the decade. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart -- Executive Vice President, Chief Commercial Officer Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of approximately $5.4 billion exceeding our expectations. Skyrizi global sales were $2 billion reflecting operational growth of 48%. We continue to see exceptional momentum across all of the approved indications. In psoriasis, Skyrizi is the clear market leader in the U.S. biologic psoriasis market with a total prescription share now above 35%. That's more than double the share of the next closest biologic therapy. Share is also ramping nicely in PsA, especially in the dermatology segment, where we are now capturing one out of every four new or switching in play biologic patients. Globally, Skyrizi has achieved psoriatic in play share leadership in nearly 30 key countries. In IBD, Skyrizi is on track to add more than $1 billion of incremental sales growth this year. We are seeing tremendous performance in Crohn's disease, where our compelling head-to-head data versus Stelara is driving a meaningful inflection of patient share. As a result, we have now achieved in play share leadership in Crohn's across all lines of therapy in both the U.S. and Japan, as well as other key markets around the world. And finally, we are preparing for the launch of Skyrizi in ulcerative colitis, which represents another substantial long-term growth driver. We expect approval decisions in the middle of this year and anticipate rapid access in the U.S. following our launch. Given the robust frontline capture for Skyrizi in Crohn's and the exceptional bio-naive data we have generated in UC, we anticipate a strong launch. Turning now to Rinvoq with global sales of approximately $1.1 billion, reflecting operational growth of 61.9%. In rheum, we continue to see strong prescription growth across each of the four approved indications, and I'm especially pleased with our performance in rheumatoid arthritis, where Rinvoq has achieved in play share leadership in nearly 20 key international markets. Atopic dermatitis is tracking in line with our expectations with continued market share momentum globally. Importantly, we recently announced positive results from LEVEL UP, our second head-to-head study in AD. LEVEL UP demonstrated Rinvoq superiority for patients starting therapy on the 15 milligram dose versus Dupixent across key efficacy parameters, including the high levels of skin clearance and itch reduction. We anticipate these strong head-to-head results will support additional share capture, especially given Rinvoq label use in the U.S., which requires that initiation with a 15 milligram dose. And in IBD, Rinvoq's uptake continues to be very strong. Rinvoq is capturing high teens in play patient share in ulcerative colitis, as well as mid-teens in play patient share in Crohn's disease. This performance is especially encouraging recognizing that we're still relatively early in the launch phase for both the UC and CD indications, and the lines of therapy are also expanding, with second line plus growing even faster as patients cycle to newer, higher efficacy agents like Rinvoq and IBD. Turning now to Humira, which delivered global sales of approximately $2.3 billion, down 35.2% on an operational basis due to biosimilar competition. Erosion in the U.S. played out slightly better than our expectations in the quarter with the vast majority of the impact this quarter driven by price. As previously communicated, the recent changes to the CVS template formularies were anticipated in our full year outlook for U.S. Humira and the volume impact is tracking in line with our expectations. Our guidance has also contemplated the impact of additional formulary changes that are expected to go into effect over the course of the year. We continue to anticipate that Humira will maintain parity access to biosimilars for a significant majority of patient lives this year. Moving now to oncology, where total revenues were more than $1.5 billion exceeding our expectations. Imbruvica global revenues were $838 million, down 4.5%, reflecting continued competitive pressure in CLL. Venclexta global sales were $614 million, up 16.3% on an operational basis and we are seeing robust momentum internationally with strong performance for both CLL and AML. Elahere generated $64 million of sales to AbbVie, reflecting a partial quarter of revenue following the February close of the ImmunoGen acquisition. The Elahere sales and marketing team is executing very well and I'm pleased with the smooth integration into our commercial organization. We anticipate that the recent positive updates in the NCCN guidelines for both platinum sensitive and platinum resistant ovarian cancer patients, as well as the full label approval, which of course, includes the compelling overall survival data that has never been achieved before in these platinum resistant patients will continue to drive strong Elahere uptake. Lastly, the global launch of Epkinly in third line plus DLBCL is also performing well and we remain on track for the potential label expansion for follicular lymphoma later this year. Neuroscience total revenues were nearly $2 billion, up 16% on an operational basis, again, ahead of our expectations. This robust performance is driven by continued double-digit growth of Vraylar with global sales of $694 million, Ubrelvy with total revenue of $203 million and Qulipta with global sales of $131 million. Each of these leading assets continue to gain share and remain competitively well positioned. Botox Therapeutic is also performing well, especially in chronic migraine. Total global sales were $748 million, up 4.5% on an operational basis. And finally, we are very excited about 951, which will be commercialized as Vyalev in the U.S. and represents a potentially transformative next generation therapy for advanced Parkinson's disease. Feedback from the launches in Japan and Europe have been very encouraging and we remain on track for commercial approval in the U.S. later this year. So overall, I'm extremely pleased with the strong and balanced growth across our therapeutic portfolio this quarter, a testament to our differentiated product profiles and commercial execution. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom -- Senior Vice President, AbbVie, and President, Global Allergan Aesthetics Thank you, Jeff. First quarter global aesthetic sales were over $1.2 billion, reflecting a modest decline on an operational basis. In the U.S., aesthetic sales of $776 million were roughly flat versus the prior year. We continue to see sustained momentum in the facial injectable market recovery that emerged in the back half of last year. Consistent with the past few quarters, the toxin market grew by a mid-single-digit percentage. We saw similar year-over-year increases in the number of facial filler procedures, representing a return to quarterly market growth for the first time since early 2022. From a competitive perspective, our U.S. aesthetics portfolio continues to perform well. Market share for both Botox Cosmetic and Juvederm was stable in the first quarter as these assets remain the clear market leaders. While we're pleased that the market and share trends across U.S. facial injectables are aligned with our previous expectations, our first quarter results were impacted by customers holding lower than normal inventory levels at quarter end. This dynamic relates to a decision made during the quarter to shift the timing of certain promotional activities into the second quarter. We therefore expect inventory levels to normalize in the second quarter and remain on track to deliver full year aesthetics sales growth in the U.S. Internationally, first quarter aesthetic sales were $473 million reflecting an operational decline of 5.5%. Consistent with our expectations, growth in China was impacted by persistent economic headwinds, as well as a challenging comparison versus the first quarter of last year, which benefited from a robust recovery post-COVID. We are monitoring the economic developments across China and continue to anticipate a recovery in the second half of this year. Our pipeline continues to generate important new assets. Uptake of our recently launched Volux and SkinVive products remain strong, underscoring the importance of innovation within aesthetics. Given this context, we are excited for the upcoming launch of Juvederm Voluma XC for the treatment of temple hollows. As the only dermal filler approved for use in the upper face, we anticipate the Voluma XC introduction will activate more consumers and support the long-term growth of our filler portfolio. And within our toxin pipeline, we continue to expect FDA approval of the platysma prominence indication for Botox near the end of this year, enhancing Botox growth potential as a noninvasive treatment to reduce the appearance of vertical neck bands and improve jawline definition. We also remain on track to submit a new drug application for our short acting toxin, BoNT/E, before the end of this year. This novel toxin has demonstrated a rapid onset of action, as well as a short duration of effect, meaningfully lowering the barrier for toxin adoption across consumers who have been considering but hesitant to try Botox. Given this profile, BoNT/E has significant market expansion potential as satisfied patients would naturally convert to Botox. Overall, the underlying trends across our aesthetics portfolio align well with our previous expectations and we remain on track to deliver high-single-digit global aesthetics growth this year. With that, I'll turn the call over to Roopal. Roopal Thakkar -- Senior Vice President, Chief Medical Officer Thank you, Carrie. I'll start with immunology. We recently announced positive top-line results from two Phase III studies for Rinvoq in dermatology and rheumatology. In the LEVEL UP study, which evaluated Rinvoq against dupilumab in atopic dermatitis, Rinvoq demonstrated superiority on the primary endpoint at week 16, which was a composite endpoint measuring skin clearance and itch reduction. Twice as many Rinvoq patients achieved this very stringent endpoint compared to dupilumab. Rinvoq also demonstrated superiority on all rank secondary endpoints in this trial. LEVEL UP was a study in which patients started on Rinvoq 15 milligrams and could escalate to 30 milligrams if they did not achieve treatment goals, which is how Rinvoq is prescribed for atopic dermatitis in the U.S. We also saw very rapid responses with Rinvoq demonstrating superiority on itch as early as week two and on skin lesions as early as week four. Rinvoq's safety profile in the LEVEL UP trial was consistent with what has been observed in previous studies. There were no serious infections in patients treated with Rinvoq and one in the dupilumab group. The rate of serious adverse events was similar across treatment arms. There were no malignancies, MACE events or VTEs reported in either treatment group. Based on these data, as well as results from previous Phase III studies, we remain very confident in Rinvoq's profile in atopic dermatitis, and we believe it offers meaningful advantages over other products on the market today. We also announced positive top-line results from our Phase III select giant cell arthritis trial, which evaluated Rinvoq in combination with a 26-week steroid taper regimen compared to patients receiving placebo in combination with a 52-week steroid taper. In the study, Rinvoq 15 milligrams met the primary and key secondary endpoints, demonstrating superiority on sustained remission from week 12 through week 52, as well as on disease flare and reduction in cumulative steroid exposure at week 52. Importantly, Rinvoq's safety profile was consistent with what has been observed in more than 15,000 patients previously studied across controlled trials. The mean age in this population was 71, which is the oldest population studied to date with Rinvoq. And the average prednisone equivalent dose at baseline was almost 35 milligram. Rates of serious adverse events and VTEs were similar across treatment groups. There were no MACE events in the Rinvoq arm, while there were two in the placebo group. Based on the results from the select GCA trial, we believe Rinvoq has the potential to be a safe and tolerable oral treatment option. We plan to submit our regulatory applications for this indication later this year. We continue to make very good progress with our inflammatory bowel disease programs. We anticipate several advancements this year, including the initiation of a Phase II study for lutikizumab in ulcerative colitis. The start of our Phase II Crohn's disease platform study, which will evaluate combinations of Skyrizi with lutikizumab and other novel biologics. And we remain on track for approval decisions for Skyrizi in ulcerative colitis, with the U.S. expected in the second quarter and Europe in the second half of the year. We also continue to invest in external innovation to expand our immunology pipeline, as evidenced by four deals that we announced in the first quarter. These include the acquisition of Landos Biopharma, which brings an oral NLRX1 agonist currently in Phase II for ulcerative colitis, a partnership with OSE immunotherapeutics to develop a novel ChemR23 agonist antibody for inflammatory conditions, such as IBD and RA. A collaboration with Parvus Therapeutics to utilize their immune tolerization platform to develop novel therapies for IBD, and a collaboration with Tentarix Biotherapeutics to develop conditionally active, multi-specific biologics in immunology and oncology. We are excited to partner with these companies who are all pursuing very innovative approaches to developing transformative therapies. Moving to oncology, where in the quarter, we closed the ImmunoGen transaction, which brings exciting programs in both solid and blood cancers. Last month, Elahere received full approval from the FDA for FR alpha positive platinum resistant ovarian cancer in patients treated with up to three prior therapies. This conversion to full approval was based on data from the confirmatory Phase III MIRASOL trial, where Elahere demonstrated an overall survival benefit and significantly reduced the risk of cancer progression. We expect to see results from additional ImmunoGen programs this year, including data from the Phase II PICCOLO study evaluating Elahere as a monotherapy in FR alpha positive third line plus platinum-sensitive ovarian cancer patients who are not eligible for retreatment with platinum-based therapies. And we expect to see data in the second half of the year from a potentially registration-enabling Phase II trial for our CD123 targeting ADC, Pivek in a rare blood cancer called blastic plasmacytoid dendritic cell neoplasm. Now, moving to program updates in hematologic oncology. Based on the totality of the data from our TRANSFORM-1 trial and following recent feedback from regulators, we will not be submitting navitoclax for approval in myelofibrosis, and we will wind down the TRANSFORM-2 study, in the relapsed refractory setting. In other areas of EMAC, we remain on track for several regulatory and clinical milestones this year, including regulatory approvals in the U.S. and Europe for a Epinkly in relapsed/refractory follicular lymphoma. The Phase III readout from the Venclexta VERONA trial, in treatment-naive, higher-risk MDS and initiation of a Phase III monotherapy study for ABBV-383 in third-line multiple myeloma. We remain very excited about this asset's potential to become a best-in-class BCMA CD3 bispecific by providing deep, durable responses and low incidence and severity of CRS and with the potential for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. Moving to other areas of our pipeline. In aesthetics, we remain on track to submit our regulatory application for BoNT/E in the second half of the year. Our rapid onset short-acting toxin as a highly differentiated clinical profile compared to currently available neurotoxins. BoNT/E is designed for patients that are considering using facial toxins for the first time or for a special event and will allow them to experience results over a very short period of time. This novel toxin will complement our existing business as patients would naturally transition to BOTOX following experience with this trial toxin. And in neuroscience, we continue to make good progress with 951, where we have received regulatory approvals in 33 countries thus far and anticipate an approval decision in the U.S. in the second quarter. As Rob mentioned, we remain on track to close the Cerevel transaction in the middle of this year. Cerevel recently announced positive top line results from their Phase III TEMPO-3 trial evaluating Tavapadon as adjunctive therapy to levodopa in patients with Parkinson's disease. In study, Tavapadon met the primary endpoint, demonstrating a 1.1 hour increase in total on time without troublesome dyskinesia compared to patients treated with levodopa and placebo. Tavapadon also met the key secondary endpoint in the trial, providing a significant reduction in off time compared to levodopa and placebo. Two additional Phase III studies for Tavapadon in Parkinson's disease are expected to read out later this year. The emracladine pivotal studies in schizophrenia remain on track to begin reading out later this year as well. We look forward to providing updates on these programs once the transaction has closed. With that, I'll turn the call over to Scott. Scott Reents -- Senior Vice President, Chief Financial Officer Thank you, Roopal. Starting with our first quarter results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. These results include an $0.08 unfavorable impact from acquired IP R&D expense. Total net revenues were $12.3 billion, $400 million ahead of our guidance and reflecting a return to growth of 1.6% on an operational basis, excluding a 0.9% unfavorable impact from foreign exchange. Importantly, these results reflect more than 15% sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 42.2% of sales. This includes adjusted gross margin of 82.9%, adjusted R&D expense of 14.7%, acquired IP R&D expense of 1.3% and adjusted SG&A expense of 24.6%. Adjusted net interest expense was $429 million. The adjusted tax rate was 14.8%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $11.13 and $11.33. This increase of $0.16 at the midpoint includes $0.26 of operating overperformance partially offset by $0.10 of higher dilution due to the earlier close of ImmunoGen. As previously communicated, this earnings per share guidance includes $0.42 of dilution related to the recently closed acquisition of ImmunoGen and the pending acquisition of Cerevel. Please also note that this guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $55 billion, an increase of $800 million. At current rates, we expect foreign exchange to have a 0.9% unfavorable impact on full year sales growth. This revenue forecast includes the following updated assumptions with the entire sales increase driven by our ex-Humira growth platform. We now expect Skyrizi global revenue of $10.7 billion, an increase of $200 million due to strong momentum across all approved indications. Rinvoq total sales of $5.6 billion, an increase of $100 million, reflecting robust uptake in IBD. Imbruvica total revenue of $3.1 billion, an increase of $200 million, reflecting lower erosion and Elahere total sales to AbbVie of $450 million, an increase of roughly $200 million, reflecting a partial year of revenue following the February close of the ImmunoGen acquisition. Moving to the P&L for 2024. We continue to forecast adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14%, adjusted SG&A expense of 23.5% and an adjusted operating margin ratio of roughly 46.5%. We now expect adjusted net interest expense of $2.2 billion, which includes the partial year cost in 2024 to finance the ImmunoGen and Caravel transactions. Turning to the second quarter, we anticipate net revenues of approximately $14 billion, which includes U.S. Humira erosion of approximately 32%, reflecting a step-up in volume erosion and with the recent CVS formulary change, partially offset by a onetime price benefit also associated with that change. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. We are forecasting adjusted operating margin ratio of approximately 49.5% of sales, and we are also modeling a non-GAAP tax rate of 16.4%. We expect adjusted earnings per share between $3.05 and $3.09. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. In closing, I'm very pleased with the excellent start to the year. We are demonstrating strong momentum across the portfolio and our financial outlook remains very strong. With that, I'll turn the call back over to Liz. Liz Shea -- Vice President, Investor Relations Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please. Questions & Answers: Operator First question comes from Mohit Bansal with Wells Fargo. Your line is open. Mohit Bansal -- Wells Fargo Securities -- Analyst Great. Thank you very much for taking my question, and congrats on the progress and congrats Rob as well. So maybe let's just start with 2024. I mean, so thanks for this guidance. But when we look from 2024 to '25, there are a couple of headwinds that you have highlighted in the past. So obviously, IRA Part D redesign will be there and Humira may have another leg down. And given the volume erosion here, people are a little bit concerned there. Can you help us understand that what is your current thinking on the trough, '24 versus '25? And could you give us some confidence that you can continue to grow in '25 despite these headwinds from IRA and Humira? Rob Michael -- President and Chief Operating Officer This is Rob. I'll take that question. So if you think about '24, '25. I mean, clearly, the ex-Humira growth platform is demonstrating great momentum. If you just think about Skyrizi and Rinvoq alone are growing by more than $4 billion per year. Aesthetics will recover to high single-digit growth. Our neuroscience franchise will grow by over $1 billion this year on the heels of strong momentum for Vraylar and our migraine portfolio and we will have incremental contributions from Vyalev and Elahere in '25. So we have several drivers that will offset Humira erosion next year, as well as the Part D benefit redesign impact and allow us to still deliver robust revenue growth. When you think about that redesign impact, it will really spread across our business, most concentrated in immunology and oncology. And we would estimate that total revenue impact could be worth several points of growth, while we'll still deliver robust revenue growth, we will have that headwind in '25. But keep in mind, for us, the IRA impact really hits us in '25 and isn't a significant headwind in the years that follow as products that are subject to negotiation will not have that Part D cost share impact. So the way to think about it is despite that headwind in '25, we will still deliver robust growth, with that growth rate accelerating in the years that follow. And then, if you think about on a margin perspective, we're going to continue to expand operating margins. So that will be a tailwind. You should be, though modeling annualization of interest expense from these transactions. And keep in mind that we essentially would have -- think of it as a roughly half year for Cereval and 10.5 months this year for ImmunoGen. So that should be something that you do model for '25. So we'll have robust revenue growth we'll have earnings growth, not quite at the rate of the revenue growth because of that annualization impact. But then when you get to '26 and beyond, you have even faster revenue growth and very robust earnings growth. So that's probably the best way to think about the profile of the company. But when you look at that ex-Humira growth platform, there's a lot of momentum there and we are very well positioned to deliver very robust growth. Mohit Bansal -- Wells Fargo Securities -- Analyst Super helpful. Thank you. Liz Shea -- Vice President, Investor Relations Thanks, Mohit. Operator, next question, please. Operator The next question is from Vamil Divan with Guggenheim. Your line is open. Vamil Divan -- Guggenheim Partners -- Analyst Great. Thanks for taking the questions. So maybe I could just ask a couple on the aesthetics side. It sounds like your commentary is pretty generally in line with Liz said before, but obviously, the number was a little lighter this quarter than even to your guidance that what people are expecting so. Can you maybe just talk a little bit more about that you mentioned some shift in promotional efforts to the second quarter and maybe inventory levels then as a result being lower and maybe I don't know if you can quantify that a little bit? And was this sort of planned when you gave your guidance back in February or is this something that's sort of evolved over the quarter? Maybe just kind of why the decision maybe would be helpful to give us some comfort on the outlook there? Thanks. Carrie Strom -- Senior Vice President, AbbVie, and President, Global Allergan Aesthetics Hi. This is Carrie. Thanks for the question. So first, I'll give a little bit of context to the fundamentals in terms of market growth and market share, which were in line with our expectations. So our market share continues to be strong and stable. For Botox Cosmetic, despite a new competitor, strong stable share at high levels. And then, for our Juvederm line continued share strength, even some share pickup in in the past few quarters, as we launch our new products. So like you said, those fundamentals are in line with our expectations. As we were going through the quarter, we really realized that the aesthetics market is quite sensitive to seasonality with Q2 and Q4 typically having the highest volume. And after a few years of COVID and economic disruption, we're now anticipating a return to that typical seasonality. So we shifted investment in some of our sales and marketing efforts into Q2, which impacted customer and sales promotional timing and activities, which then resulted in lower inventory held by our customers in Q1. And we do expect that to come back in Q2 and the rest year. And I'll let Scott address the rest of that question. Scott Reents -- Senior Vice President, Chief Financial Officer Sure. Thanks, Carrie. So Vamil to quantify the inventory impact in the first quarter, it was a little bit more than $50 million between Juvederm and Botox and you can think of that as being split roughly two thirds to about and one third to Juvederm. And I think as Carrie mentioned in her remarks that impact of that inventory will -- we expect that to turn in the second quarter. Liz Shea -- Vice President, Investor Relations Thanks, Vamil. Operator, next question, please. Operator Next question comes from Chris Shibutani with Goldman Sachs. Your line is open. Chris Shibutani -- Goldman Sachs -- Analyst Great. Thank you very much. When we think about the 2024 upcoming contracting season, which obviously has been quite dynamic for Humira over the past year plus. Can you provide us with any insights in terms of structural aspects within your contracts that you build in that may help provide offsets. We often have limited visibility. We're looking at the prescription volume trends. And it feels as if our calculus is sometimes incomplete. But what can you reassure us in terms of the dynamics as we're seeing this year two play out and how you're approaching contracting for the forward? Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Hi, Chris, it's Jeff. So the contracting season typically starts April or May. And frankly, as we've highlighted before can run in the immunology category really through the end of the year. So we have a few philosophies that we look toward, which are -- we want to continue to basically make sure that patients if possible, based on our pricing concessions aren't disrupted because when you start to disrupt patients, they do struggle with the change. It's a change in their treatment course. And so, as we look to that, we've historically highlighted that we are negotiating for parity contracts with Humira. And we do put some controls in place in some cases, but not all, we seek multi-year contracts with our payers to try to establish the relationship, the pricing, etc., and we will think of ways to make sure that those contracts can hold. So they have some teeth in them. They can't just be willy nilly discarded. And so, it is a long-term, in some cases, partnership over a couple of years with these payers. I can't go into the details over exactly how those controls work. But suffice it to say that there's terms and timing and limits in terms of when contracts can be changed even maybe some clawbacks in some cases. So because we want these more sustained relationships because of our position in the category with these great brands, we typically use those sort of techniques and that's how we go for it. So again, it's hard to look forward too much because it is dynamic as we look to '25. But we've been quite successful in maintaining good access for our brands and certainly, Humira is tracking in line with our expectations. Liz Shea -- Vice President, Investor Relations Thanks, Chris. Operator, next question, please. Operator Our next question comes from Chris Schott with J.P. Morgan. Your line is open. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much. Just a couple more on the Humira front. I think Humira you had mentioned that in 2024, you expected most of the impact would be price versus volume. I think the street has been concerned that we're seeing more volume erosion, particularly with the CVS book of business. I'm just interested in your latest thinking as we think about price versus volume for the remainder of this year as we consider CVS Cigna, etc. How should we think about that balance just so there's kind of surprises, I guess we watch these volume trends playing out? And then, maybe just on a related topic, can you talk at all about the tail for Humira sales in the U.S.? I guess the part of the question, do you expect that you'll see most players or payers eventually switch out Humira like we're seeing at CVS? And if so, is it still reasonable to think about there being a kind of a decent tale of revenue, I guess, for this product in the U.S. over time? Thanks so much. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yeah. Great question. There's a lot in there. Let me go through it in a systematic fashion. So I think, first, to directly answer your question. We still as we look forward, believe that the significant majority of our lives will be at parity. So that means our guidance around the majority being price is still holding in our go-forward look. Let me give you some perspective. I had some in my opening remarks over what's happening with CVS. So the first is that, as I mentioned, the step down in volume was really anticipated and based on our analysis of the data, which I'll highlight, it's really right in line with our expectations. Now, one of the things in my remarks, I often talk about new to brand or our in-play share capture, and that's a really good way to look at performance, particularly early in launch cycles when you're looking at capture rate or competitive dynamics. I think it's important that investors and analysts need to be very mindful when you have a dislocation or disruption or switching, you can get very, very full at looking at NRx or NBRx because it sort of overinflates what you might be looking at. So I think that's important. The other fact base that we look at is in terms of the step down is we look at other analogs and we look at the Cosentyx Taltz analog or Taltz was advantage in ESI for Cosentyx back in 2019. And we see that typically in this category, almost 90% of the erosion tracks within the first two to three weeks. And that's actually what we're starting to see, we believe with the CVS template following that similar pattern. So if you can't really look at NRx or NBRx, you really have to look at TRx in this case, Chris. And this is very interesting. And we would make sure to guide folks to look at what's happening with the TRx data in the market. And what we see is that not all of the Humira prescriptions are moving to a biosimilar. And if you look at the first two weeks, it's pretty meaningful. Over 20% of the Humira prescriptions are moving to other mechanisms of actions, including Skyrizi and Rinvoq. And in fact, while we haven't studied this week as much, it actually seems to have accelerated a bit from there. And that actually makes some sense because if you think it from the physician's perspective, when patients are being switched, they often take a break in a pause to say, are these patients really under control, should I consider an alternative. And that's actually what we see playing out in the market. So the pure degradation or step-down from Humira is in line with what we see, but we are seeing a fairly significant move to other mechanisms, as I mentioned, including our own Skyrizi and Rinvoq. And that could be very, very good for patients who are probably getting better care for control of their disease. Now, having said that as well, if we look through the rest of '24, we have very solid contracts with our payers through 2024. And remember that these payers can add biosimilars at parity whenever they choose. We saw that last year in the middle of the year, and that's really not different now. So when we look at the structure and controls of our existing agreements, we do not see widespread exclusions for the rest of the year, as we go forward. And so, I think we've been pretty consistent with that that select clients will move toward biosimilars over the course of the year. Last year, we saw that with Kaiser and Medicaid plans. We talked about the CVS exclusion for the template business. And we do see that some select plans may take another approach, which we've contemplated as the year goes on, which is they may move new patients to the biosimilar, but maintain the large existing base. And that's quite manageable because really only about 14% or 15% of the patients are new patients that cycle into Humira. So overall, that's our perspective. We're confident things are tracking in line. We're quite interested in this shift to other mechanisms, which is frankly somewhat anticipated, but maybe operating a little higher than we thought, and we still believe that a significant majority of Humira will see it at parity lives in '24. OK. So the tail we're going to be negotiating '25. And what we've highlighted is we are going to watch exactly how the interchangeables play out. We think we've got a good understanding of that. And so, it will probably become more apparent as we move through '25 where that tail may sit. And we've highlighted that it may start to emerge in '25 and probably be much more visible by '26. And that's going to ultimately depend on how over the course of '25, the price volume fully plays out in the marketplace. Rob Michael -- President and Chief Operating Officer And Chris, this is Rob. On your question regarding the guidance for this year. I think it's important to note yes, we've said that the vast majority of the erosion is price. We've talked about that dynamic. If you think about first half, second half, we have the annualization impact given the mid-year step-up in rebates last year. So the annualization impact comes through in the first half, you'd expect price erosion to be greater in the first half or the second half. But at the same time, we did contemplate volume erosion because we were very well aware of the CVS contract. We gave you that guidance. And so, we have contemplated that volume erosion, but that's more of a second half versus first half, as well as the potential for we knew with an interchangeable coming in, there could be some marginal amount of volume pickup there. So we did put in volume erosion in our guidance, but the vast majority of it is price, but I don't want investors to think that we didn't put any volume into our guidance. We were very well aware of the CVS contract. And I think we made some prudent assumptions on potentially other impacts. But overall, we're still tracking in line with that guidance. Liz Shea -- Vice President, Investor Relations Thanks, Chris. Operator, next question, please. Operator Our next question comes from Terence Flynn with Morgan Stanley. Your line is open. Terence Flynn -- Morgan Stanley -- Analyst Thanks so much for taking the questions and congrats to Rick and best of luck to Rob in a new role. Just wondering if you could maybe frame a little bit for us the opportunity for Skyrizi in UC versus Crohn's disease. I think last time we heard from J&J, Crohn's represented about $7 billion of Stelara sales. Obviously, you guys have made decent inroads there based on your comments. But just wondering think about the dollar opportunity in ulcerative colitis. And then, when you were talking through some of the latest Rinvoq data, I was just wondering if there's an opportunity down the road as you generate more clinical data, but also commercial data to potentially revisit the restrictions on line of therapy on the label at some point, or if we shouldn't think about that as a possibility. Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Thanks, Terence. It's Jeff. I'll take the first question. So Crohn's is larger than you see. I mean, if you look at the overall market or revenue, I think it's 65%, 70%. So it's -- Crohn's is very, very significant. Having said that, ulcerative colitis is a multibillion-dollar opportunity for us. It's still a very, very underpenetrated and substantial indication. So it's weighted about 65 -- 35 --70-30, but still, I wouldn't underestimate what ulcerative colitis means. And I think I would add in concert with my prepared remarks, we've seen very, very significant acceleration into frontline Crohn's disease with Skyrizi. And what's remarkable, we studied a very, very difficult population in ulcerative colitis, but we still had substantial amount of naive patients. And the performance in that naive population is exceptional. I mean, it is at the very, very top of the league table terms of overall ability to get to endoscopic clearance and symptom control. And so, we like that setup because, obviously, we have exactly the same representatives who are establishing the Crohn's indication in frontline, and we know that we can bring UC very fast afterwards when we get the approval this year. So it's a substantial global opportunity, not the size that we'll see over the LRP with Crohn's, but still one of our largest opportunities that we have in the category. And I'll ask Roopal based on the safety data he highlighted to comment on the second question. Roopal Thakkar -- Senior Vice President, Chief Medical Officer Yes, thank you. So the data we keep generating continues to at least drive confidence for sure that the original Phase III that came out with their safety profile, and what we continue to learn even with longer-term data, even in more high-risk patients confirms what we've always seen. And that will continue to drive confidence, I think with our clinicians. Now, from a health authority standpoint, I think the position there is that you have this oral surveillance study with upadacitinib, and they're going to apply those findings to the other assets in a similar class probably until there's another outcome study to sort of argue against that -- that's kind of how we see it, now that's in the U.S. I would say globally, there's still an opportunity for many jurisdictions where JAK inhibitors can be at parity. So you might start seeing some more movement there in earlier lines. But as Jeff stated in his prepared remarks, the second line and even third line of many of these indications continues to grow as people now have options where in the past, if all you had was a TNF, maybe you were cycling. But now that you know that there's other therapies you're starting to see people break sooner. So I think that second and third line is still a huge opportunity, and we'll continue to grow with this emerging data. Jeff Stewart -- Executive Vice President, Chief Commercial Officer And Terence, it's Jeff again. One more comment. I mentioned how we're excited about the naive position for both Skyrizi, CD and UC coming. But what's also nice is those same representatives are in the office and are able to highlight basically a one-two h, where you use Skyrizi first in earlier lines based on this exquisite data. And then, obviously, for later lines, you can use Rinvoq. And so, we actually see in the marketplace that that combination and that positioning is allowing us right now in real time, capturing almost toward 40% of all in-play share with Skyrizi first and Rinvoq second. So it's an encouraging position as we fill out that portfolio. Liz Shea -- Vice President, Investor Relations Thanks, Terence. Operator, next question, please. Operator The next question comes from Carter Gould with Barclays. Your line is open. Carter Gould -- Barclays -- Analyst Good morning. Thanks for taking the question. I wanted to circle back on the prior commentary around some of the TRx data. And I guess the overarching question is that, I guess, appropriately kind of capturing all the volume you're really seeing? And there's clearly with your part of your agreement with CVS and the Cordavis there, there is the potential for some Humira volume to potentially be shifting there. Is that being captured by TRx. So I guess, any commentary there on sort of the accuracy of that data that we're all seeing. And then, maybe if you just go back and I wanted to circle back on the EPS commentary on '25 sort of the way you framed that growth. Is that sort of x-IPR&D? Any color there would be appreciated. Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes, it's a great question. So it's early, but we believe the data is accurate. I mean, if you look at the first two weeks to give you some sense, and this is inclusive of the Cordavis Humira. There was a downdraft of about 13,000 prescriptions for Humira from baseline. And the biosimilars captured about -- which was primarily the Cordavis Humira, captured about 10. So there's 3,000 prescriptions or over 20% that we can see in our data moving to other mechanisms of action, including our Skyrizi and Rinvoq. And again, it's very logical because this is just not a one-to-one type of switch like these physicians are interviewing and discussing with patients, their care path forward. And so, we think that clearly, some are moving to other mechanisms, and we've seen that in other analogs as well. So we believe the data is accurate. Again, it's early. We're going to continue to monitor it. Where that ultimately lands, we'll have to see. Again, I want to reiterate the pure Humira downdraft is within line with what we assumed and we are seeing this other market behavior that's taking place. Rob Michael -- President and Chief Operating Officer And Carter, this is Rob. Just to clarify my earlier comments. Yes, it is ex-IP R&D. We always guide to ex-IP R&D. What I was trying to highlight is you should expect robust revenue growth in '25 and that growth accelerating in 2016 and beyond given that Part D benefit redesign impact in '25. And given that operating margin will expand, you typically would expect our earnings to grow faster than our revenue. And that is generally true with one exception in '25 being that we will have an annualization impact from net interest expense. We'll still deliver a very solid earnings growth. But as you model it, just keep in mind that while you expect typically earnings to outpace revenue growth given expanding operating margin, you do have that dynamic in '25, that's important for your modeling. Liz Shea -- Vice President, Investor Relations Thanks, Carter. Operator, next question, please. Operator Our next question comes from Simon Baker with Redburn Atlantic. Your line is open. Simon Baker -- Redburn Atlantic -- Analyst Thank you for taking my questions. Two quick ones, if I may. Just going back to Humira, but in a slightly broader sense. There's been a degree of political noise around the role of PBMs in blocking or rather than assisting biosimilar uptake. I just wondered if you expect that to come to anything in terms of structural changes within the market? And then, secondly, on Rinvoq and the Level Up deal -- Level Up data. I wonder how you see the competitive dynamics evolving in that space? Is this about switches? Or is this about market expectation expansion. I asked because this morning Sanofi said that they welcome competition as a way of expanding the number of people treated in an area that's still relatively unpenetrated. So I just wonder how you see the opportunity commercially? Thanks very much. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yeah. Thank you for the questions. It's Jeff again. I would say that we're not anticipating like a wholesale restructure of the PBM industry, for example. I mean, we certainly think that there's very reasonable chance of sort of transparency reform, exactly how some of the economics are working, maybe transparencies to the government or downstream to the clients, that's very possible. But a major wholesale change, we don't see that happening in the near-term. Obviously, we are continuing to monitor that and would make adjustments as we might need to. Regarding your atopic dermatitis question, I think the answer is really a bit of both. I think as we've highlighted before, the market here is exceptional in terms of the low bio penetration or oral and bio penetration. It's really only about 4% or 5%. And so, I think Sanofi's comments are very well timed. I mean, this marketplace is going to grow significantly as this innovation is able to be delivered to the global population with this very serious disease. But we also think this Level Up study is good for our market share penetration, and I'll give you some perspective. Our U.S. market share is lower. It's around 9%. So typically, where our countries have been able to highlight more direct comparisons. We couldn't do that because of the starting dose, I highlighted. We see that most of our international affiliates have market shares in the mid-teens in some cases in the low 20s. And so, the ability to bring a comparative study that's directly linked to the U.S. label and show the physicians how you can get to higher levels of control and really patients want -- they want no disease on their skin and they really don't want itch if they can get there. And that's what we studied in Level Up. So we think it's certainly going to help with both market expansion and in particular, around the world with our ability to capture some more share. So I hope that helps. Liz Shea -- Vice President, Investor Relations Thanks, Simon. Operator, next question, please. Operator Our next question comes from Tim Anderson with Wolfe Research. Your line is open. Tim Anderson -- Wolfe Research -- Analyst Thank you so much. I have questions on contracting for Skyrizi in '25. How many lives do you already have locked up through your general multi-year contracting? And then, do you continue to think that the availability of cheap versions of Humira, either brand or biosimilar won't lead to any increase in step edits on Skyrizi under the idea that while Skyrizi is better, something like Humira or biosimilar Stelara might be just fine. That same arrangement can be made in the statin category, for example, Crestor is the best Zocor might do just fine. Thanks. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes. I think we'll probably pass on the number of lives locked up. I mean, we are confident, given the market position TAM of Skyrizi and Rinvoq, I think, in particular around the momentum that we have across the Skyrizi indication that we're going to have very favorable access in 2025 and beyond. I think the other thing that we've highlighted is I'm very pleased with how the adoption of Skyrizi is going in IBD. I mean, it's very, very clear that we're taking significant share from Stelara and the doctors are voting with their pen, or they're basically electronic prescribing because the ability to get these very sensitive patients under significant control, the world's really never seen anything like the sequence trial in terms of the ability to control the most difficult aspect of this challenging disease. So as time goes by, we think that differentiation is going to aid us significantly as we think about the formulary positions relative to not only Humira, but also to Stelara. Liz Shea -- Vice President, Investor Relations Thanks, Tim. Operator, next question, please. Operator The next question comes from Luisa Hector with Berenberg. Your line is open. Luisa Hector -- Berenberg Capital Markets -- Analyst Thank you very much for taking my question. It's on Elahere. I wonder whether you might be able to tell us the full quarter of sales. And then, any commentary around penetration rate of Elahere and how much off-label use you think may be happening with the guideline inclusion? Thank you. Scott Reents -- Senior Vice President, Chief Financial Officer Sure. Thanks, Luisa. It's Scott. With respect to the Elahere full quarter of sales, we closed mid-year in February. Prior to that there were -- according to what we've seen approximately, just let me just double check here, $70 million -- I'm sorry, $110 million in the full quarter, $113 million in the full quarter. Jeff Stewart -- Executive Vice President, Chief Commercial Officer And it's Jeff. What we also see in the marketplace, a big catalyst that we saw in the first quarter was the movement from the accelerated approval to the full approval that Roopal highlighted with the MIRASOL data. So we were rapidly able to basically integrate that into all the material of the medical liaisons and certainly account managers and sales folks. And having that definitive table in the label and the ability to go deeper into our call plan is going to be very positive to continue the growth rates through the rest of the year. In terms of off-label, that's difficult to say. We think that the majority of the sales thus far are in that platinum-resistant population. However, the guidelines do allow for reimbursement with different levels of FRA alpha some of the updates that I mentioned in my prepared remarks. So we'll continue to monitor it, but there's certainly a significant headroom in terms of the populations that are coming in terms of the ovarian cancer marketplace. Liz Shea -- Vice President, Investor Relations Thanks, Luisa. Operator, next question, please. Operator The next question comes from Gary Nachman with Raymond James. Your line is open. Gary Nachman -- Raymond James -- Analyst Thanks. Good morning. When looking at the strong performance of the neuro franchise of Vraylar and migraine in particular, talk about the competitive dynamics there in those markets. And how did the gross connects impact you in 1Q versus what you expected? And how should that trend for the rest of the year? And then, with respect to Cerevel, just your confidence that it will still close by mid-year, and how FTC is viewing the schizophrenia market and how much overlap there might be between emraclidine and Vraylar? Just the latest thinking on that based on your conversations with FTC. Thanks. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Hi, it's Jeff. I'll take the competitiveness comment in terms of what we're looking at. We're very pleased with the competitive -- our ability to gain market share in these segments. I'll start off with migraine. We continue to be the new to brand share leader in Botox for chronic migraine, and we see that Qulipta is accelerating significantly. So Qulipta is now the leading preventative agent. And what's nice is there's very little interaction with Botox because if you're an injector, you use Botox, if you're not an injector, you have access to a fantastic drug with Qulipta. So Qulipta is really clearly taking over the market leadership position among the injectable and the oral CGRPs. Ubrelvy continues to have a very meaningful and substantial lead over the main competitor, Nurtec and we are seeing some increased penetration into the larger triptan segment, which is key to our long-term growth. Vraylar continues to perform very well, ongoing market growth. And it's really because we have -- if we look at our perceptions, Gary, of our key prescribers, you're at the very, very top of the table, the league table in terms of perceptions around the efficacy around adjunctive major depression, which is our most recent indication and we have probably the best scope of indications for bipolar one. And so, both of those are allowing us to continue to gain share. So we're in a pretty good position. We also feel that the gross to net our vouchers, our co-pay, which sometimes can get a little funky in the first quarter. We have strong controls there and we're seeing a lot of stability. So overall, those businesses are performing very well. Rob Michael -- President and Chief Operating Officer Gary, I'll take your question. This is Rob. I'll take your question on the FTC. We are working closely with the agency on their additional requests I mean, keep in mind that we do not have any overlapping MOAs with Cereval and Vraylar share in schizophrenia is very low. The vast majority of Vraylar sales comes from the bipolar and AMBD indications. In the case of davapidon, it will serve the early Parkinson's segment, which Duodopa and Vyalev do not participate in. So we don't have any concerns with the merits of the transaction and continue to expect closing it in the middle of the year. Liz Shea -- Vice President, Investor Relations Thanks, Garry. Operator, next question, please. Operator The next question comes from Steve Scala with TD Cowen. Your line is open. Steve Scala -- TD Cowen -- Analyst Thank you. Thank you very much and I apologize in advance for asking you to clarify on Humira. But you mentioned several times that things are playing out as planned. But in the prepared remarks, you said U.S. erosion played out slightly better than you thought in Q1. So is the conclusion that whatever was better is temporary. You also mentioned volume pressure, but price -- offset by price benefit. Can you quantify that? But when you sum it all up, it sounds like you expect volumes to underperform the expectations you set three months ago? And is that in part maybe due to the Accredo news from yesterday. So that's a big -- that's a long question, but that's only one question. And the second question is curious if the FDA has contacted at the about the potential safety issues with Emlacridine post the competitor issue with convulsions in rabbits. And have you seen this with your agent? Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes. So it's Jeff. So I'll try to take that. So the first part was the first quarter. I mean, it was marginally better in terms of overall performance because we didn't see -- obviously, we didn't see any volume disruption until 401. Now when you look at 401 and we look after three weeks, we look at our model in terms of the expectation around retention of Humira with the CVS template, that's largely tracking in line with what our expectations were with a bit of the surprise that some of that Humira is not going to the biosimilar, as I mentioned, is going to other mechanisms including Skyrizi and Rinvoq. So overall, as we look to the balance of the -- really the first quarter, what we're seeing play out in the second quarter and look to the full year, our commentary, and I'll ask Rob to highlight if he has anything to add is very much in line with what we've guided at the beginning of the year. So no material change in what we're seeing in the marketplace. Rob Michael -- President and Chief Operating Officer Yes, this is Rob. I'll confirm that, what Jeff is saying. I mean, it's tracking in line with our expectations. We are not saying that volume is worse than we originally guided. We're saying this is tracking in line with our expectations. We try to characterize for you the price versus volume dynamics? Obviously, saying it's the price erosion is the vast majority of the decline, but there is volume, and it's tracking exactly as we anticipated. So there isn't an additional downside here. As Jeff mentioned, we did have slightly better performance in the first quarter. But again, it was -- I mean, I think, to the tune of $30 million to $40 million on this book of business, not overly material, but ahead of the initial expectation. Roopal Thakkar -- Senior Vice President, Chief Medical Officer Steve, it's Roopal. I can take the next question. We did a thorough diligence. And when we look at data sets that offer clinical data, obviously, we do a deep dive there, also look at blinded data, but we also do a deep dive looking at toxicology, animal tox in particular. And we didn't observe anything that was consistent with what has been described thus far. And as I mentioned, when we look at blinded safety data either from the 1B or the current pivotals that are running, we don't see an adverse event like this that would be related. And as far as we know, no health authority has reached out to ask any further questions about this. Rob Michael -- President and Chief Operating Officer Steve, this is Rob. I'm going to come back to your previous question and maybe I understand where the confusion could be. That one-time price benefit is a year over year dynamic. It was contemplated in our guidance. When you have a formulary change you essentially have those rebates go away and you recognize that. That was part of our guidance. That was not a benefit versus our guidance. That's a benefit in the year over year. So if you look at Scott guided to I think it was 32%. Scott Reents -- Senior Vice President, Chief Financial Officer That's right. Rob Michael -- President and Chief Operating Officer Erosion in the second quarter, which is lower than -- it was around 40% in the first quarter. So naturally, you'd wonder why would you have less erosion. Well, there's that year over year dynamic but that was how we planned the year. We anticipated it because we knew about the change that was coming in April 1. So I don't want to interpret that as a benefit versus our guidance, that's a benefit in the year-over-year calculation. Liz Shea -- Vice President, Investor Relations Thanks, Steve. Operator, next question, please. Operator Our next question comes from Trung Huynh with UBS. Your line is open. Trung Huynh -- UBS -- Analyst Hi, guys. Trung Huynh from UBS. Congratulations, Rick, on the next chapter of the life and Rob for moving AbbVie forward. Again, on biosimilar Humira. In your remarks, you mentioned post the expected CVS contract, there was a step-up in price for Humira. Is that simply because you're giving away more price to CVS at the contract at the time. And you mentioned additional contracts moving to biosimilar like CVS this year. Are there any meaningful contracts here that you can flag so we're not surprised? And is it possible we could see a actually a pricing increase by year-end because of this? Thanks very much. Scott Reents -- Senior Vice President, Chief Financial Officer Trung, this is Scott. I'll start with your question regarding the price benefit. So in my remarks, I indicated that with the formulary change in CVS and the volume step-down we saw there that there's a onetime price benefit associated with that. And you can think of this as we have the volume declines, that volume had been associated with price that we would have been paying in terms of rebate that those rebates will no longer be paid. Therefore, there's a one-time price benefit associated with that initial step down in the quarter. So that's what that relates to. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes. And in terms of what we see going forward, as I highlighted, we don't see a significant exclusionary action where Humira would be removed from a formulary going forward. We did plan for, obviously, that smaller plans may make some adjustments to their formularies. That's all within the volume degradation and the pricing dynamics that we put into our guidance. And as I mentioned in one of the comments, some of the payers, not super large would maybe consider this idea of starting new patients on the biosimilars versus maintaining all the existing patients on Humira. So if you were to see that, you shouldn't be surprised about that and that would be within the contemplated approaches that we're taking as we look across '24 with our knowledge of what's happening in the marketplace. Liz Shea -- Vice President, Investor Relations Thanks, Trung. Operator, we have time for one final question. Operator And our final question comes from Evan Seigerman with BMO Capital Markets. Your line is open. Evan Seigerman -- BMO Capital Markets -- Analyst Hi, guys. Thank you so much for taking my question. On the aesthetics business, maybe talk to me about some of the dynamics you're seeing in China. I know that there's a lot of macro headwinds and this is a pretty big part of your business. And then, a bit of housekeeping on Skyrizi, where the last quarter you disclosed the $1.9 billion cash payment for royalties. Can you provide us any color on what this quarter's royalty was? And I believe that was for the full year last year but maybe just for the quarter. Thank you. Carrie Strom -- Senior Vice President, AbbVie, and President, Global Allergan Aesthetics Hi, this is Carrie. I'll address your question on aesthetics in China. And we do expect economic headwinds that we're seeing in China to persist over the near-term with the China aesthetics market flat overall for 2024. So the way to think about it is to expect negative market until the recovery starts to begin in the second half of 2024. China does remain a very important market for our aesthetics business. And as the market there starts to recover, we will continue to invest in consumer activation, injector training and continue to launch new products in the support market. Scott Reents -- Senior Vice President, Chief Financial Officer Hey, it's Scott. So you're right. With respect to the schedule relative payments. So you have to remember that these are on a bit of a lag, so they don't track each quarter sales. But the $400 million was the amount in the first quarter that we paid in cash payment. Liz Shea -- Vice President, Investor Relations Well, thanks, Evan. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Answer:

the AbbVie first quarter 2024 earnings conference call

Operator Good morning and thank you for standing by. Welcome to the AbbVie first quarter 2024 earnings conference call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, senior vice president of investor relations. Ma'am, you may begin. Liz Shea -- Vice President, Investor Relations Good morning, and thanks for joining us. Also, on the call with me today are Rick Gonzalez, chairman of the board and chief executive officer; Rob Michael, president and chief operating officer; Jeff Stewart, executive vice president, chief commercial officer; Scott Reents, executive vice president, chief financial officer; Carrie Strom, senior vice president, AbbVie and president, global Allergan Aesthetics; and Roopal Thakkar, senior vice president, chief medical officer, global therapeutics. Joining us for the Q&A portion of the call is Tom Hudson, senior vice president, chief scientific officer, global research. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick. Rick Gonzalez -- Chairman and Chief Executive Officer Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'm extremely pleased with our start to 2024 with first quarter results exceeding our expectations. Before we discuss our performance in more detail, I'd like to share my perspective on the planned CEO transition that was announced earlier this year. After serving more than 11 years as AbbVie's first CEO, I have decided to retire from the role effective July 1, of this year and will continue to serve AbbVie as executive chairman of the board. As you heard me say before, it is important that we choose the right time to make this critical leadership transition. The board and I have been long planning for my eventual succession and now is the opportune time to move forward with the transition. As our business is performing very well and is in a strong position for the long-term. We are successfully navigating the Humira U.S. loss of exclusivity. We have built an outstanding company culture, an important priority and competitive advantage. And our productive R&D engine, which has yielded numerous innovative new medicines for patients will continue to fuel our robust pipeline for years to come. After a multi-year process, our board has unanimously selected Rob Michael, our current president and chief operating officer as AbbVie's next CEO. I have known and worked with Rob for many, many years and he is an excellent choice as my successor. He brings the experience, the leadership and the strategic vision to build on AbbVie's past successes, advance our strategy and enhance shareholder value. Since our inception, Rob has held several important leadership positions that have collectively had a tremendous impact on AbbVie from establishing our financial planning organization to navigating the end of exclusivity for Humira in the U.S., to driving key business development opportunities that have been critical to diversify our business and support long-term growth, including the acquisitions of Allergan and ImmunoGen and the pending Cerevel transaction. Looking back, AbbVie has evolved tremendously as an independent company and our performance has truly been exceptional. Since our inception, we've grown our revenue from $18 billion to $55 billion. Our market capitalization has increased substantially from $54 billion to roughly $300 billion today. We have achieved a total shareholder return of more than 675%, which is top tier relative to our peers. And importantly, we've substantially increased our investments in R&D to discover and develop new medicines that have the potential to improve the lives of patients. As I look ahead, our company has never been stronger and our future has never been brighter. We are executing well across all aspects of our business and our long-term growth prospects remain very strong. In summary, it has been a privilege and immensely gratifying to serve with all of my AbbVie colleagues for the past 11 years, growing AbbVie into what it is today. And I look forward to continuing to work with Rob and the leadership team to create meaningful value for our shareholders and all of our stakeholders. And I'd also like to take this opportunity to thank all of our shareholders for the trust and confidence you put in me as AbbVie's CEO. With that, I will turn the call over to Rob for comments on our recent business performance. Rob? Rob Michael -- President and Chief Operating Officer Thank you, Rick. Before I comment on our first quarter performance, I want to congratulate Rick on his exceptional leadership of AbbVie over the past 11 years. During his tenure, Rick made several strategic moves that have positioned AbbVie to have a bright future beyond Humira, consistently drove the organization to deliver very strong performance and demonstrated the genuine care for our employees, patients, shareholders and communities that has defined who we are as a company today. It has been my privilege to work closely with Rick over many years, and I look forward to working with him in his role as executive chairman. AbbVie's outlook is very strong and I am excited about the remarkable impact that we the remarkable impact that we will continue to have on patients' lives. Turning to first quarter performance, we're off to an excellent start to the year with strong top and bottom-line results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. Total net revenues were $12.3 billion approximately $400 million ahead of our expectations. This overachievement was driven by our ex-Humira growth platform, which delivered revenue growth of more than 15% this quarter and includes continued robust sales from Skyrizi and Rinvoq, with combined growth above 50% in their fifth full year on the market, as well as double-digit revenue growth from several other key products including Venclexta, Vraylar, Ubrelvy and Qulipta. This broad based sales momentum clearly demonstrates the strength of our diversified portfolio with multiple growth drivers to support our long-term outlook. We are also making excellent progress with several of our near-term priorities. We recently completed the acquisition of ImmunoGen, which accelerates our entry into the solid tumor market and strengthens our oncology pipeline. The integration has been seamless and we are impressed by the caliber of talent we have welcomed into AbbVie. We also remain on track with the pending acquisition of Cerevel, which we anticipate will close in the middle of the year. Cerevel's pipeline of differentiated assets will further augment our neuroscience portfolio. In addition, we continue to advance our R&D pipeline and invest for long-term growth. This progress includes the FDA's full approval of Elahere for FR alpha positive platinum resistant ovarian cancer, a meaningful first in class treatment for patients and a significant long-term growth opportunity for AbbVie in solid tumors. We also gained U.S. approval of Juvederm Voluma XC for temple hollows, further strengthening our leadership in aesthetic fillers, and we executed several business development opportunities adding novel early stage programs and partnerships in oncology and immunology. Given the strong results this quarter, we are raising our full year adjusted earnings per share guidance by $0.16 and now expect adjusted EPS between $11.13 and $11.33. In summary, this is an exciting time for AbbVie and I am extremely pleased with the momentum of our diverse portfolio. We're off to an excellent start to the year and we are well positioned to deliver a high-single-digit revenue CAGR through the end of the decade. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart -- Executive Vice President, Chief Commercial Officer Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of approximately $5.4 billion exceeding our expectations. Skyrizi global sales were $2 billion reflecting operational growth of 48%. We continue to see exceptional momentum across all of the approved indications. In psoriasis, Skyrizi is the clear market leader in the U.S. biologic psoriasis market with a total prescription share now above 35%. That's more than double the share of the next closest biologic therapy. Share is also ramping nicely in PsA, especially in the dermatology segment, where we are now capturing one out of every four new or switching in play biologic patients. Globally, Skyrizi has achieved psoriatic in play share leadership in nearly 30 key countries. In IBD, Skyrizi is on track to add more than $1 billion of incremental sales growth this year. We are seeing tremendous performance in Crohn's disease, where our compelling head-to-head data versus Stelara is driving a meaningful inflection of patient share. As a result, we have now achieved in play share leadership in Crohn's across all lines of therapy in both the U.S. and Japan, as well as other key markets around the world. And finally, we are preparing for the launch of Skyrizi in ulcerative colitis, which represents another substantial long-term growth driver. We expect approval decisions in the middle of this year and anticipate rapid access in the U.S. following our launch. Given the robust frontline capture for Skyrizi in Crohn's and the exceptional bio-naive data we have generated in UC, we anticipate a strong launch. Turning now to Rinvoq with global sales of approximately $1.1 billion, reflecting operational growth of 61.9%. In rheum, we continue to see strong prescription growth across each of the four approved indications, and I'm especially pleased with our performance in rheumatoid arthritis, where Rinvoq has achieved in play share leadership in nearly 20 key international markets. Atopic dermatitis is tracking in line with our expectations with continued market share momentum globally. Importantly, we recently announced positive results from LEVEL UP, our second head-to-head study in AD. LEVEL UP demonstrated Rinvoq superiority for patients starting therapy on the 15 milligram dose versus Dupixent across key efficacy parameters, including the high levels of skin clearance and itch reduction. We anticipate these strong head-to-head results will support additional share capture, especially given Rinvoq label use in the U.S., which requires that initiation with a 15 milligram dose. And in IBD, Rinvoq's uptake continues to be very strong. Rinvoq is capturing high teens in play patient share in ulcerative colitis, as well as mid-teens in play patient share in Crohn's disease. This performance is especially encouraging recognizing that we're still relatively early in the launch phase for both the UC and CD indications, and the lines of therapy are also expanding, with second line plus growing even faster as patients cycle to newer, higher efficacy agents like Rinvoq and IBD. Turning now to Humira, which delivered global sales of approximately $2.3 billion, down 35.2% on an operational basis due to biosimilar competition. Erosion in the U.S. played out slightly better than our expectations in the quarter with the vast majority of the impact this quarter driven by price. As previously communicated, the recent changes to the CVS template formularies were anticipated in our full year outlook for U.S. Humira and the volume impact is tracking in line with our expectations. Our guidance has also contemplated the impact of additional formulary changes that are expected to go into effect over the course of the year. We continue to anticipate that Humira will maintain parity access to biosimilars for a significant majority of patient lives this year. Moving now to oncology, where total revenues were more than $1.5 billion exceeding our expectations. Imbruvica global revenues were $838 million, down 4.5%, reflecting continued competitive pressure in CLL. Venclexta global sales were $614 million, up 16.3% on an operational basis and we are seeing robust momentum internationally with strong performance for both CLL and AML. Elahere generated $64 million of sales to AbbVie, reflecting a partial quarter of revenue following the February close of the ImmunoGen acquisition. The Elahere sales and marketing team is executing very well and I'm pleased with the smooth integration into our commercial organization. We anticipate that the recent positive updates in the NCCN guidelines for both platinum sensitive and platinum resistant ovarian cancer patients, as well as the full label approval, which of course, includes the compelling overall survival data that has never been achieved before in these platinum resistant patients will continue to drive strong Elahere uptake. Lastly, the global launch of Epkinly in third line plus DLBCL is also performing well and we remain on track for the potential label expansion for follicular lymphoma later this year. Neuroscience total revenues were nearly $2 billion, up 16% on an operational basis, again, ahead of our expectations. This robust performance is driven by continued double-digit growth of Vraylar with global sales of $694 million, Ubrelvy with total revenue of $203 million and Qulipta with global sales of $131 million. Each of these leading assets continue to gain share and remain competitively well positioned. Botox Therapeutic is also performing well, especially in chronic migraine. Total global sales were $748 million, up 4.5% on an operational basis. And finally, we are very excited about 951, which will be commercialized as Vyalev in the U.S. and represents a potentially transformative next generation therapy for advanced Parkinson's disease. Feedback from the launches in Japan and Europe have been very encouraging and we remain on track for commercial approval in the U.S. later this year. So overall, I'm extremely pleased with the strong and balanced growth across our therapeutic portfolio this quarter, a testament to our differentiated product profiles and commercial execution. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom -- Senior Vice President, AbbVie, and President, Global Allergan Aesthetics Thank you, Jeff. First quarter global aesthetic sales were over $1.2 billion, reflecting a modest decline on an operational basis. In the U.S., aesthetic sales of $776 million were roughly flat versus the prior year. We continue to see sustained momentum in the facial injectable market recovery that emerged in the back half of last year. Consistent with the past few quarters, the toxin market grew by a mid-single-digit percentage. We saw similar year-over-year increases in the number of facial filler procedures, representing a return to quarterly market growth for the first time since early 2022. From a competitive perspective, our U.S. aesthetics portfolio continues to perform well. Market share for both Botox Cosmetic and Juvederm was stable in the first quarter as these assets remain the clear market leaders. While we're pleased that the market and share trends across U.S. facial injectables are aligned with our previous expectations, our first quarter results were impacted by customers holding lower than normal inventory levels at quarter end. This dynamic relates to a decision made during the quarter to shift the timing of certain promotional activities into the second quarter. We therefore expect inventory levels to normalize in the second quarter and remain on track to deliver full year aesthetics sales growth in the U.S. Internationally, first quarter aesthetic sales were $473 million reflecting an operational decline of 5.5%. Consistent with our expectations, growth in China was impacted by persistent economic headwinds, as well as a challenging comparison versus the first quarter of last year, which benefited from a robust recovery post-COVID. We are monitoring the economic developments across China and continue to anticipate a recovery in the second half of this year. Our pipeline continues to generate important new assets. Uptake of our recently launched Volux and SkinVive products remain strong, underscoring the importance of innovation within aesthetics. Given this context, we are excited for the upcoming launch of Juvederm Voluma XC for the treatment of temple hollows. As the only dermal filler approved for use in the upper face, we anticipate the Voluma XC introduction will activate more consumers and support the long-term growth of our filler portfolio. And within our toxin pipeline, we continue to expect FDA approval of the platysma prominence indication for Botox near the end of this year, enhancing Botox growth potential as a noninvasive treatment to reduce the appearance of vertical neck bands and improve jawline definition. We also remain on track to submit a new drug application for our short acting toxin, BoNT/E, before the end of this year. This novel toxin has demonstrated a rapid onset of action, as well as a short duration of effect, meaningfully lowering the barrier for toxin adoption across consumers who have been considering but hesitant to try Botox. Given this profile, BoNT/E has significant market expansion potential as satisfied patients would naturally convert to Botox. Overall, the underlying trends across our aesthetics portfolio align well with our previous expectations and we remain on track to deliver high-single-digit global aesthetics growth this year. With that, I'll turn the call over to Roopal. Roopal Thakkar -- Senior Vice President, Chief Medical Officer Thank you, Carrie. I'll start with immunology. We recently announced positive top-line results from two Phase III studies for Rinvoq in dermatology and rheumatology. In the LEVEL UP study, which evaluated Rinvoq against dupilumab in atopic dermatitis, Rinvoq demonstrated superiority on the primary endpoint at week 16, which was a composite endpoint measuring skin clearance and itch reduction. Twice as many Rinvoq patients achieved this very stringent endpoint compared to dupilumab. Rinvoq also demonstrated superiority on all rank secondary endpoints in this trial. LEVEL UP was a study in which patients started on Rinvoq 15 milligrams and could escalate to 30 milligrams if they did not achieve treatment goals, which is how Rinvoq is prescribed for atopic dermatitis in the U.S. We also saw very rapid responses with Rinvoq demonstrating superiority on itch as early as week two and on skin lesions as early as week four. Rinvoq's safety profile in the LEVEL UP trial was consistent with what has been observed in previous studies. There were no serious infections in patients treated with Rinvoq and one in the dupilumab group. The rate of serious adverse events was similar across treatment arms. There were no malignancies, MACE events or VTEs reported in either treatment group. Based on these data, as well as results from previous Phase III studies, we remain very confident in Rinvoq's profile in atopic dermatitis, and we believe it offers meaningful advantages over other products on the market today. We also announced positive top-line results from our Phase III select giant cell arthritis trial, which evaluated Rinvoq in combination with a 26-week steroid taper regimen compared to patients receiving placebo in combination with a 52-week steroid taper. In the study, Rinvoq 15 milligrams met the primary and key secondary endpoints, demonstrating superiority on sustained remission from week 12 through week 52, as well as on disease flare and reduction in cumulative steroid exposure at week 52. Importantly, Rinvoq's safety profile was consistent with what has been observed in more than 15,000 patients previously studied across controlled trials. The mean age in this population was 71, which is the oldest population studied to date with Rinvoq. And the average prednisone equivalent dose at baseline was almost 35 milligram. Rates of serious adverse events and VTEs were similar across treatment groups. There were no MACE events in the Rinvoq arm, while there were two in the placebo group. Based on the results from the select GCA trial, we believe Rinvoq has the potential to be a safe and tolerable oral treatment option. We plan to submit our regulatory applications for this indication later this year. We continue to make very good progress with our inflammatory bowel disease programs. We anticipate several advancements this year, including the initiation of a Phase II study for lutikizumab in ulcerative colitis. The start of our Phase II Crohn's disease platform study, which will evaluate combinations of Skyrizi with lutikizumab and other novel biologics. And we remain on track for approval decisions for Skyrizi in ulcerative colitis, with the U.S. expected in the second quarter and Europe in the second half of the year. We also continue to invest in external innovation to expand our immunology pipeline, as evidenced by four deals that we announced in the first quarter. These include the acquisition of Landos Biopharma, which brings an oral NLRX1 agonist currently in Phase II for ulcerative colitis, a partnership with OSE immunotherapeutics to develop a novel ChemR23 agonist antibody for inflammatory conditions, such as IBD and RA. A collaboration with Parvus Therapeutics to utilize their immune tolerization platform to develop novel therapies for IBD, and a collaboration with Tentarix Biotherapeutics to develop conditionally active, multi-specific biologics in immunology and oncology. We are excited to partner with these companies who are all pursuing very innovative approaches to developing transformative therapies. Moving to oncology, where in the quarter, we closed the ImmunoGen transaction, which brings exciting programs in both solid and blood cancers. Last month, Elahere received full approval from the FDA for FR alpha positive platinum resistant ovarian cancer in patients treated with up to three prior therapies. This conversion to full approval was based on data from the confirmatory Phase III MIRASOL trial, where Elahere demonstrated an overall survival benefit and significantly reduced the risk of cancer progression. We expect to see results from additional ImmunoGen programs this year, including data from the Phase II PICCOLO study evaluating Elahere as a monotherapy in FR alpha positive third line plus platinum-sensitive ovarian cancer patients who are not eligible for retreatment with platinum-based therapies. And we expect to see data in the second half of the year from a potentially registration-enabling Phase II trial for our CD123 targeting ADC, Pivek in a rare blood cancer called blastic plasmacytoid dendritic cell neoplasm. Now, moving to program updates in hematologic oncology. Based on the totality of the data from our TRANSFORM-1 trial and following recent feedback from regulators, we will not be submitting navitoclax for approval in myelofibrosis, and we will wind down the TRANSFORM-2 study, in the relapsed refractory setting. In other areas of EMAC, we remain on track for several regulatory and clinical milestones this year, including regulatory approvals in the U.S. and Europe for a Epinkly in relapsed/refractory follicular lymphoma. The Phase III readout from the Venclexta VERONA trial, in treatment-naive, higher-risk MDS and initiation of a Phase III monotherapy study for ABBV-383 in third-line multiple myeloma. We remain very excited about this asset's potential to become a best-in-class BCMA CD3 bispecific by providing deep, durable responses and low incidence and severity of CRS and with the potential for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. Moving to other areas of our pipeline. In aesthetics, we remain on track to submit our regulatory application for BoNT/E in the second half of the year. Our rapid onset short-acting toxin as a highly differentiated clinical profile compared to currently available neurotoxins. BoNT/E is designed for patients that are considering using facial toxins for the first time or for a special event and will allow them to experience results over a very short period of time. This novel toxin will complement our existing business as patients would naturally transition to BOTOX following experience with this trial toxin. And in neuroscience, we continue to make good progress with 951, where we have received regulatory approvals in 33 countries thus far and anticipate an approval decision in the U.S. in the second quarter. As Rob mentioned, we remain on track to close the Cerevel transaction in the middle of this year. Cerevel recently announced positive top line results from their Phase III TEMPO-3 trial evaluating Tavapadon as adjunctive therapy to levodopa in patients with Parkinson's disease. In study, Tavapadon met the primary endpoint, demonstrating a 1.1 hour increase in total on time without troublesome dyskinesia compared to patients treated with levodopa and placebo. Tavapadon also met the key secondary endpoint in the trial, providing a significant reduction in off time compared to levodopa and placebo. Two additional Phase III studies for Tavapadon in Parkinson's disease are expected to read out later this year. The emracladine pivotal studies in schizophrenia remain on track to begin reading out later this year as well. We look forward to providing updates on these programs once the transaction has closed. With that, I'll turn the call over to Scott. Scott Reents -- Senior Vice President, Chief Financial Officer Thank you, Roopal. Starting with our first quarter results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. These results include an $0.08 unfavorable impact from acquired IP R&D expense. Total net revenues were $12.3 billion, $400 million ahead of our guidance and reflecting a return to growth of 1.6% on an operational basis, excluding a 0.9% unfavorable impact from foreign exchange. Importantly, these results reflect more than 15% sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 42.2% of sales. This includes adjusted gross margin of 82.9%, adjusted R&D expense of 14.7%, acquired IP R&D expense of 1.3% and adjusted SG&A expense of 24.6%. Adjusted net interest expense was $429 million. The adjusted tax rate was 14.8%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $11.13 and $11.33. This increase of $0.16 at the midpoint includes $0.26 of operating overperformance partially offset by $0.10 of higher dilution due to the earlier close of ImmunoGen. As previously communicated, this earnings per share guidance includes $0.42 of dilution related to the recently closed acquisition of ImmunoGen and the pending acquisition of Cerevel. Please also note that this guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $55 billion, an increase of $800 million. At current rates, we expect foreign exchange to have a 0.9% unfavorable impact on full year sales growth. This revenue forecast includes the following updated assumptions with the entire sales increase driven by our ex-Humira growth platform. We now expect Skyrizi global revenue of $10.7 billion, an increase of $200 million due to strong momentum across all approved indications. Rinvoq total sales of $5.6 billion, an increase of $100 million, reflecting robust uptake in IBD. Imbruvica total revenue of $3.1 billion, an increase of $200 million, reflecting lower erosion and Elahere total sales to AbbVie of $450 million, an increase of roughly $200 million, reflecting a partial year of revenue following the February close of the ImmunoGen acquisition. Moving to the P&L for 2024. We continue to forecast adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14%, adjusted SG&A expense of 23.5% and an adjusted operating margin ratio of roughly 46.5%. We now expect adjusted net interest expense of $2.2 billion, which includes the partial year cost in 2024 to finance the ImmunoGen and Caravel transactions. Turning to the second quarter, we anticipate net revenues of approximately $14 billion, which includes U.S. Humira erosion of approximately 32%, reflecting a step-up in volume erosion and with the recent CVS formulary change, partially offset by a onetime price benefit also associated with that change. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. We are forecasting adjusted operating margin ratio of approximately 49.5% of sales, and we are also modeling a non-GAAP tax rate of 16.4%. We expect adjusted earnings per share between $3.05 and $3.09. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. In closing, I'm very pleased with the excellent start to the year. We are demonstrating strong momentum across the portfolio and our financial outlook remains very strong. With that, I'll turn the call back over to Liz. Liz Shea -- Vice President, Investor Relations Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please. Questions & Answers: Operator First question comes from Mohit Bansal with Wells Fargo. Your line is open. Mohit Bansal -- Wells Fargo Securities -- Analyst Great. Thank you very much for taking my question, and congrats on the progress and congrats Rob as well. So maybe let's just start with 2024. I mean, so thanks for this guidance. But when we look from 2024 to '25, there are a couple of headwinds that you have highlighted in the past. So obviously, IRA Part D redesign will be there and Humira may have another leg down. And given the volume erosion here, people are a little bit concerned there. Can you help us understand that what is your current thinking on the trough, '24 versus '25? And could you give us some confidence that you can continue to grow in '25 despite these headwinds from IRA and Humira? Rob Michael -- President and Chief Operating Officer This is Rob. I'll take that question. So if you think about '24, '25. I mean, clearly, the ex-Humira growth platform is demonstrating great momentum. If you just think about Skyrizi and Rinvoq alone are growing by more than $4 billion per year. Aesthetics will recover to high single-digit growth. Our neuroscience franchise will grow by over $1 billion this year on the heels of strong momentum for Vraylar and our migraine portfolio and we will have incremental contributions from Vyalev and Elahere in '25. So we have several drivers that will offset Humira erosion next year, as well as the Part D benefit redesign impact and allow us to still deliver robust revenue growth. When you think about that redesign impact, it will really spread across our business, most concentrated in immunology and oncology. And we would estimate that total revenue impact could be worth several points of growth, while we'll still deliver robust revenue growth, we will have that headwind in '25. But keep in mind, for us, the IRA impact really hits us in '25 and isn't a significant headwind in the years that follow as products that are subject to negotiation will not have that Part D cost share impact. So the way to think about it is despite that headwind in '25, we will still deliver robust growth, with that growth rate accelerating in the years that follow. And then, if you think about on a margin perspective, we're going to continue to expand operating margins. So that will be a tailwind. You should be, though modeling annualization of interest expense from these transactions. And keep in mind that we essentially would have -- think of it as a roughly half year for Cereval and 10.5 months this year for ImmunoGen. So that should be something that you do model for '25. So we'll have robust revenue growth we'll have earnings growth, not quite at the rate of the revenue growth because of that annualization impact. But then when you get to '26 and beyond, you have even faster revenue growth and very robust earnings growth. So that's probably the best way to think about the profile of the company. But when you look at that ex-Humira growth platform, there's a lot of momentum there and we are very well positioned to deliver very robust growth. Mohit Bansal -- Wells Fargo Securities -- Analyst Super helpful. Thank you. Liz Shea -- Vice President, Investor Relations Thanks, Mohit. Operator, next question, please. Operator The next question is from Vamil Divan with Guggenheim. Your line is open. Vamil Divan -- Guggenheim Partners -- Analyst Great. Thanks for taking the questions. So maybe I could just ask a couple on the aesthetics side. It sounds like your commentary is pretty generally in line with Liz said before, but obviously, the number was a little lighter this quarter than even to your guidance that what people are expecting so. Can you maybe just talk a little bit more about that you mentioned some shift in promotional efforts to the second quarter and maybe inventory levels then as a result being lower and maybe I don't know if you can quantify that a little bit? And was this sort of planned when you gave your guidance back in February or is this something that's sort of evolved over the quarter? Maybe just kind of why the decision maybe would be helpful to give us some comfort on the outlook there? Thanks. Carrie Strom -- Senior Vice President, AbbVie, and President, Global Allergan Aesthetics Hi. This is Carrie. Thanks for the question. So first, I'll give a little bit of context to the fundamentals in terms of market growth and market share, which were in line with our expectations. So our market share continues to be strong and stable. For Botox Cosmetic, despite a new competitor, strong stable share at high levels. And then, for our Juvederm line continued share strength, even some share pickup in in the past few quarters, as we launch our new products. So like you said, those fundamentals are in line with our expectations. As we were going through the quarter, we really realized that the aesthetics market is quite sensitive to seasonality with Q2 and Q4 typically having the highest volume. And after a few years of COVID and economic disruption, we're now anticipating a return to that typical seasonality. So we shifted investment in some of our sales and marketing efforts into Q2, which impacted customer and sales promotional timing and activities, which then resulted in lower inventory held by our customers in Q1. And we do expect that to come back in Q2 and the rest year. And I'll let Scott address the rest of that question. Scott Reents -- Senior Vice President, Chief Financial Officer Sure. Thanks, Carrie. So Vamil to quantify the inventory impact in the first quarter, it was a little bit more than $50 million between Juvederm and Botox and you can think of that as being split roughly two thirds to about and one third to Juvederm. And I think as Carrie mentioned in her remarks that impact of that inventory will -- we expect that to turn in the second quarter. Liz Shea -- Vice President, Investor Relations Thanks, Vamil. Operator, next question, please. Operator Next question comes from Chris Shibutani with Goldman Sachs. Your line is open. Chris Shibutani -- Goldman Sachs -- Analyst Great. Thank you very much. When we think about the 2024 upcoming contracting season, which obviously has been quite dynamic for Humira over the past year plus. Can you provide us with any insights in terms of structural aspects within your contracts that you build in that may help provide offsets. We often have limited visibility. We're looking at the prescription volume trends. And it feels as if our calculus is sometimes incomplete. But what can you reassure us in terms of the dynamics as we're seeing this year two play out and how you're approaching contracting for the forward? Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Hi, Chris, it's Jeff. So the contracting season typically starts April or May. And frankly, as we've highlighted before can run in the immunology category really through the end of the year. So we have a few philosophies that we look toward, which are -- we want to continue to basically make sure that patients if possible, based on our pricing concessions aren't disrupted because when you start to disrupt patients, they do struggle with the change. It's a change in their treatment course. And so, as we look to that, we've historically highlighted that we are negotiating for parity contracts with Humira. And we do put some controls in place in some cases, but not all, we seek multi-year contracts with our payers to try to establish the relationship, the pricing, etc., and we will think of ways to make sure that those contracts can hold. So they have some teeth in them. They can't just be willy nilly discarded. And so, it is a long-term, in some cases, partnership over a couple of years with these payers. I can't go into the details over exactly how those controls work. But suffice it to say that there's terms and timing and limits in terms of when contracts can be changed even maybe some clawbacks in some cases. So because we want these more sustained relationships because of our position in the category with these great brands, we typically use those sort of techniques and that's how we go for it. So again, it's hard to look forward too much because it is dynamic as we look to '25. But we've been quite successful in maintaining good access for our brands and certainly, Humira is tracking in line with our expectations. Liz Shea -- Vice President, Investor Relations Thanks, Chris. Operator, next question, please. Operator Our next question comes from Chris Schott with J.P. Morgan. Your line is open. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much. Just a couple more on the Humira front. I think Humira you had mentioned that in 2024, you expected most of the impact would be price versus volume. I think the street has been concerned that we're seeing more volume erosion, particularly with the CVS book of business. I'm just interested in your latest thinking as we think about price versus volume for the remainder of this year as we consider CVS Cigna, etc. How should we think about that balance just so there's kind of surprises, I guess we watch these volume trends playing out? And then, maybe just on a related topic, can you talk at all about the tail for Humira sales in the U.S.? I guess the part of the question, do you expect that you'll see most players or payers eventually switch out Humira like we're seeing at CVS? And if so, is it still reasonable to think about there being a kind of a decent tale of revenue, I guess, for this product in the U.S. over time? Thanks so much. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yeah. Great question. There's a lot in there. Let me go through it in a systematic fashion. So I think, first, to directly answer your question. We still as we look forward, believe that the significant majority of our lives will be at parity. So that means our guidance around the majority being price is still holding in our go-forward look. Let me give you some perspective. I had some in my opening remarks over what's happening with CVS. So the first is that, as I mentioned, the step down in volume was really anticipated and based on our analysis of the data, which I'll highlight, it's really right in line with our expectations. Now, one of the things in my remarks, I often talk about new to brand or our in-play share capture, and that's a really good way to look at performance, particularly early in launch cycles when you're looking at capture rate or competitive dynamics. I think it's important that investors and analysts need to be very mindful when you have a dislocation or disruption or switching, you can get very, very full at looking at NRx or NBRx because it sort of overinflates what you might be looking at. So I think that's important. The other fact base that we look at is in terms of the step down is we look at other analogs and we look at the Cosentyx Taltz analog or Taltz was advantage in ESI for Cosentyx back in 2019. And we see that typically in this category, almost 90% of the erosion tracks within the first two to three weeks. And that's actually what we're starting to see, we believe with the CVS template following that similar pattern. So if you can't really look at NRx or NBRx, you really have to look at TRx in this case, Chris. And this is very interesting. And we would make sure to guide folks to look at what's happening with the TRx data in the market. And what we see is that not all of the Humira prescriptions are moving to a biosimilar. And if you look at the first two weeks, it's pretty meaningful. Over 20% of the Humira prescriptions are moving to other mechanisms of actions, including Skyrizi and Rinvoq. And in fact, while we haven't studied this week as much, it actually seems to have accelerated a bit from there. And that actually makes some sense because if you think it from the physician's perspective, when patients are being switched, they often take a break in a pause to say, are these patients really under control, should I consider an alternative. And that's actually what we see playing out in the market. So the pure degradation or step-down from Humira is in line with what we see, but we are seeing a fairly significant move to other mechanisms, as I mentioned, including our own Skyrizi and Rinvoq. And that could be very, very good for patients who are probably getting better care for control of their disease. Now, having said that as well, if we look through the rest of '24, we have very solid contracts with our payers through 2024. And remember that these payers can add biosimilars at parity whenever they choose. We saw that last year in the middle of the year, and that's really not different now. So when we look at the structure and controls of our existing agreements, we do not see widespread exclusions for the rest of the year, as we go forward. And so, I think we've been pretty consistent with that that select clients will move toward biosimilars over the course of the year. Last year, we saw that with Kaiser and Medicaid plans. We talked about the CVS exclusion for the template business. And we do see that some select plans may take another approach, which we've contemplated as the year goes on, which is they may move new patients to the biosimilar, but maintain the large existing base. And that's quite manageable because really only about 14% or 15% of the patients are new patients that cycle into Humira. So overall, that's our perspective. We're confident things are tracking in line. We're quite interested in this shift to other mechanisms, which is frankly somewhat anticipated, but maybe operating a little higher than we thought, and we still believe that a significant majority of Humira will see it at parity lives in '24. OK. So the tail we're going to be negotiating '25. And what we've highlighted is we are going to watch exactly how the interchangeables play out. We think we've got a good understanding of that. And so, it will probably become more apparent as we move through '25 where that tail may sit. And we've highlighted that it may start to emerge in '25 and probably be much more visible by '26. And that's going to ultimately depend on how over the course of '25, the price volume fully plays out in the marketplace. Rob Michael -- President and Chief Operating Officer And Chris, this is Rob. On your question regarding the guidance for this year. I think it's important to note yes, we've said that the vast majority of the erosion is price. We've talked about that dynamic. If you think about first half, second half, we have the annualization impact given the mid-year step-up in rebates last year. So the annualization impact comes through in the first half, you'd expect price erosion to be greater in the first half or the second half. But at the same time, we did contemplate volume erosion because we were very well aware of the CVS contract. We gave you that guidance. And so, we have contemplated that volume erosion, but that's more of a second half versus first half, as well as the potential for we knew with an interchangeable coming in, there could be some marginal amount of volume pickup there. So we did put in volume erosion in our guidance, but the vast majority of it is price, but I don't want investors to think that we didn't put any volume into our guidance. We were very well aware of the CVS contract. And I think we made some prudent assumptions on potentially other impacts. But overall, we're still tracking in line with that guidance. Liz Shea -- Vice President, Investor Relations Thanks, Chris. Operator, next question, please. Operator Our next question comes from Terence Flynn with Morgan Stanley. Your line is open. Terence Flynn -- Morgan Stanley -- Analyst Thanks so much for taking the questions and congrats to Rick and best of luck to Rob in a new role. Just wondering if you could maybe frame a little bit for us the opportunity for Skyrizi in UC versus Crohn's disease. I think last time we heard from J&J, Crohn's represented about $7 billion of Stelara sales. Obviously, you guys have made decent inroads there based on your comments. But just wondering think about the dollar opportunity in ulcerative colitis. And then, when you were talking through some of the latest Rinvoq data, I was just wondering if there's an opportunity down the road as you generate more clinical data, but also commercial data to potentially revisit the restrictions on line of therapy on the label at some point, or if we shouldn't think about that as a possibility. Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Thanks, Terence. It's Jeff. I'll take the first question. So Crohn's is larger than you see. I mean, if you look at the overall market or revenue, I think it's 65%, 70%. So it's -- Crohn's is very, very significant. Having said that, ulcerative colitis is a multibillion-dollar opportunity for us. It's still a very, very underpenetrated and substantial indication. So it's weighted about 65 -- 35 --70-30, but still, I wouldn't underestimate what ulcerative colitis means. And I think I would add in concert with my prepared remarks, we've seen very, very significant acceleration into frontline Crohn's disease with Skyrizi. And what's remarkable, we studied a very, very difficult population in ulcerative colitis, but we still had substantial amount of naive patients. And the performance in that naive population is exceptional. I mean, it is at the very, very top of the league table terms of overall ability to get to endoscopic clearance and symptom control. And so, we like that setup because, obviously, we have exactly the same representatives who are establishing the Crohn's indication in frontline, and we know that we can bring UC very fast afterwards when we get the approval this year. So it's a substantial global opportunity, not the size that we'll see over the LRP with Crohn's, but still one of our largest opportunities that we have in the category. And I'll ask Roopal based on the safety data he highlighted to comment on the second question. Roopal Thakkar -- Senior Vice President, Chief Medical Officer Yes, thank you. So the data we keep generating continues to at least drive confidence for sure that the original Phase III that came out with their safety profile, and what we continue to learn even with longer-term data, even in more high-risk patients confirms what we've always seen. And that will continue to drive confidence, I think with our clinicians. Now, from a health authority standpoint, I think the position there is that you have this oral surveillance study with upadacitinib, and they're going to apply those findings to the other assets in a similar class probably until there's another outcome study to sort of argue against that -- that's kind of how we see it, now that's in the U.S. I would say globally, there's still an opportunity for many jurisdictions where JAK inhibitors can be at parity. So you might start seeing some more movement there in earlier lines. But as Jeff stated in his prepared remarks, the second line and even third line of many of these indications continues to grow as people now have options where in the past, if all you had was a TNF, maybe you were cycling. But now that you know that there's other therapies you're starting to see people break sooner. So I think that second and third line is still a huge opportunity, and we'll continue to grow with this emerging data. Jeff Stewart -- Executive Vice President, Chief Commercial Officer And Terence, it's Jeff again. One more comment. I mentioned how we're excited about the naive position for both Skyrizi, CD and UC coming. But what's also nice is those same representatives are in the office and are able to highlight basically a one-two h, where you use Skyrizi first in earlier lines based on this exquisite data. And then, obviously, for later lines, you can use Rinvoq. And so, we actually see in the marketplace that that combination and that positioning is allowing us right now in real time, capturing almost toward 40% of all in-play share with Skyrizi first and Rinvoq second. So it's an encouraging position as we fill out that portfolio. Liz Shea -- Vice President, Investor Relations Thanks, Terence. Operator, next question, please. Operator The next question comes from Carter Gould with Barclays. Your line is open. Carter Gould -- Barclays -- Analyst Good morning. Thanks for taking the question. I wanted to circle back on the prior commentary around some of the TRx data. And I guess the overarching question is that, I guess, appropriately kind of capturing all the volume you're really seeing? And there's clearly with your part of your agreement with CVS and the Cordavis there, there is the potential for some Humira volume to potentially be shifting there. Is that being captured by TRx. So I guess, any commentary there on sort of the accuracy of that data that we're all seeing. And then, maybe if you just go back and I wanted to circle back on the EPS commentary on '25 sort of the way you framed that growth. Is that sort of x-IPR&D? Any color there would be appreciated. Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes, it's a great question. So it's early, but we believe the data is accurate. I mean, if you look at the first two weeks to give you some sense, and this is inclusive of the Cordavis Humira. There was a downdraft of about 13,000 prescriptions for Humira from baseline. And the biosimilars captured about -- which was primarily the Cordavis Humira, captured about 10. So there's 3,000 prescriptions or over 20% that we can see in our data moving to other mechanisms of action, including our Skyrizi and Rinvoq. And again, it's very logical because this is just not a one-to-one type of switch like these physicians are interviewing and discussing with patients, their care path forward. And so, we think that clearly, some are moving to other mechanisms, and we've seen that in other analogs as well. So we believe the data is accurate. Again, it's early. We're going to continue to monitor it. Where that ultimately lands, we'll have to see. Again, I want to reiterate the pure Humira downdraft is within line with what we assumed and we are seeing this other market behavior that's taking place. Rob Michael -- President and Chief Operating Officer And Carter, this is Rob. Just to clarify my earlier comments. Yes, it is ex-IP R&D. We always guide to ex-IP R&D. What I was trying to highlight is you should expect robust revenue growth in '25 and that growth accelerating in 2016 and beyond given that Part D benefit redesign impact in '25. And given that operating margin will expand, you typically would expect our earnings to grow faster than our revenue. And that is generally true with one exception in '25 being that we will have an annualization impact from net interest expense. We'll still deliver a very solid earnings growth. But as you model it, just keep in mind that while you expect typically earnings to outpace revenue growth given expanding operating margin, you do have that dynamic in '25, that's important for your modeling. Liz Shea -- Vice President, Investor Relations Thanks, Carter. Operator, next question, please. Operator Our next question comes from Simon Baker with Redburn Atlantic. Your line is open. Simon Baker -- Redburn Atlantic -- Analyst Thank you for taking my questions. Two quick ones, if I may. Just going back to Humira, but in a slightly broader sense. There's been a degree of political noise around the role of PBMs in blocking or rather than assisting biosimilar uptake. I just wondered if you expect that to come to anything in terms of structural changes within the market? And then, secondly, on Rinvoq and the Level Up deal -- Level Up data. I wonder how you see the competitive dynamics evolving in that space? Is this about switches? Or is this about market expectation expansion. I asked because this morning Sanofi said that they welcome competition as a way of expanding the number of people treated in an area that's still relatively unpenetrated. So I just wonder how you see the opportunity commercially? Thanks very much. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yeah. Thank you for the questions. It's Jeff again. I would say that we're not anticipating like a wholesale restructure of the PBM industry, for example. I mean, we certainly think that there's very reasonable chance of sort of transparency reform, exactly how some of the economics are working, maybe transparencies to the government or downstream to the clients, that's very possible. But a major wholesale change, we don't see that happening in the near-term. Obviously, we are continuing to monitor that and would make adjustments as we might need to. Regarding your atopic dermatitis question, I think the answer is really a bit of both. I think as we've highlighted before, the market here is exceptional in terms of the low bio penetration or oral and bio penetration. It's really only about 4% or 5%. And so, I think Sanofi's comments are very well timed. I mean, this marketplace is going to grow significantly as this innovation is able to be delivered to the global population with this very serious disease. But we also think this Level Up study is good for our market share penetration, and I'll give you some perspective. Our U.S. market share is lower. It's around 9%. So typically, where our countries have been able to highlight more direct comparisons. We couldn't do that because of the starting dose, I highlighted. We see that most of our international affiliates have market shares in the mid-teens in some cases in the low 20s. And so, the ability to bring a comparative study that's directly linked to the U.S. label and show the physicians how you can get to higher levels of control and really patients want -- they want no disease on their skin and they really don't want itch if they can get there. And that's what we studied in Level Up. So we think it's certainly going to help with both market expansion and in particular, around the world with our ability to capture some more share. So I hope that helps. Liz Shea -- Vice President, Investor Relations Thanks, Simon. Operator, next question, please. Operator Our next question comes from Tim Anderson with Wolfe Research. Your line is open. Tim Anderson -- Wolfe Research -- Analyst Thank you so much. I have questions on contracting for Skyrizi in '25. How many lives do you already have locked up through your general multi-year contracting? And then, do you continue to think that the availability of cheap versions of Humira, either brand or biosimilar won't lead to any increase in step edits on Skyrizi under the idea that while Skyrizi is better, something like Humira or biosimilar Stelara might be just fine. That same arrangement can be made in the statin category, for example, Crestor is the best Zocor might do just fine. Thanks. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes. I think we'll probably pass on the number of lives locked up. I mean, we are confident, given the market position TAM of Skyrizi and Rinvoq, I think, in particular around the momentum that we have across the Skyrizi indication that we're going to have very favorable access in 2025 and beyond. I think the other thing that we've highlighted is I'm very pleased with how the adoption of Skyrizi is going in IBD. I mean, it's very, very clear that we're taking significant share from Stelara and the doctors are voting with their pen, or they're basically electronic prescribing because the ability to get these very sensitive patients under significant control, the world's really never seen anything like the sequence trial in terms of the ability to control the most difficult aspect of this challenging disease. So as time goes by, we think that differentiation is going to aid us significantly as we think about the formulary positions relative to not only Humira, but also to Stelara. Liz Shea -- Vice President, Investor Relations Thanks, Tim. Operator, next question, please. Operator The next question comes from Luisa Hector with Berenberg. Your line is open. Luisa Hector -- Berenberg Capital Markets -- Analyst Thank you very much for taking my question. It's on Elahere. I wonder whether you might be able to tell us the full quarter of sales. And then, any commentary around penetration rate of Elahere and how much off-label use you think may be happening with the guideline inclusion? Thank you. Scott Reents -- Senior Vice President, Chief Financial Officer Sure. Thanks, Luisa. It's Scott. With respect to the Elahere full quarter of sales, we closed mid-year in February. Prior to that there were -- according to what we've seen approximately, just let me just double check here, $70 million -- I'm sorry, $110 million in the full quarter, $113 million in the full quarter. Jeff Stewart -- Executive Vice President, Chief Commercial Officer And it's Jeff. What we also see in the marketplace, a big catalyst that we saw in the first quarter was the movement from the accelerated approval to the full approval that Roopal highlighted with the MIRASOL data. So we were rapidly able to basically integrate that into all the material of the medical liaisons and certainly account managers and sales folks. And having that definitive table in the label and the ability to go deeper into our call plan is going to be very positive to continue the growth rates through the rest of the year. In terms of off-label, that's difficult to say. We think that the majority of the sales thus far are in that platinum-resistant population. However, the guidelines do allow for reimbursement with different levels of FRA alpha some of the updates that I mentioned in my prepared remarks. So we'll continue to monitor it, but there's certainly a significant headroom in terms of the populations that are coming in terms of the ovarian cancer marketplace. Liz Shea -- Vice President, Investor Relations Thanks, Luisa. Operator, next question, please. Operator The next question comes from Gary Nachman with Raymond James. Your line is open. Gary Nachman -- Raymond James -- Analyst Thanks. Good morning. When looking at the strong performance of the neuro franchise of Vraylar and migraine in particular, talk about the competitive dynamics there in those markets. And how did the gross connects impact you in 1Q versus what you expected? And how should that trend for the rest of the year? And then, with respect to Cerevel, just your confidence that it will still close by mid-year, and how FTC is viewing the schizophrenia market and how much overlap there might be between emraclidine and Vraylar? Just the latest thinking on that based on your conversations with FTC. Thanks. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Hi, it's Jeff. I'll take the competitiveness comment in terms of what we're looking at. We're very pleased with the competitive -- our ability to gain market share in these segments. I'll start off with migraine. We continue to be the new to brand share leader in Botox for chronic migraine, and we see that Qulipta is accelerating significantly. So Qulipta is now the leading preventative agent. And what's nice is there's very little interaction with Botox because if you're an injector, you use Botox, if you're not an injector, you have access to a fantastic drug with Qulipta. So Qulipta is really clearly taking over the market leadership position among the injectable and the oral CGRPs. Ubrelvy continues to have a very meaningful and substantial lead over the main competitor, Nurtec and we are seeing some increased penetration into the larger triptan segment, which is key to our long-term growth. Vraylar continues to perform very well, ongoing market growth. And it's really because we have -- if we look at our perceptions, Gary, of our key prescribers, you're at the very, very top of the table, the league table in terms of perceptions around the efficacy around adjunctive major depression, which is our most recent indication and we have probably the best scope of indications for bipolar one. And so, both of those are allowing us to continue to gain share. So we're in a pretty good position. We also feel that the gross to net our vouchers, our co-pay, which sometimes can get a little funky in the first quarter. We have strong controls there and we're seeing a lot of stability. So overall, those businesses are performing very well. Rob Michael -- President and Chief Operating Officer Gary, I'll take your question. This is Rob. I'll take your question on the FTC. We are working closely with the agency on their additional requests I mean, keep in mind that we do not have any overlapping MOAs with Cereval and Vraylar share in schizophrenia is very low. The vast majority of Vraylar sales comes from the bipolar and AMBD indications. In the case of davapidon, it will serve the early Parkinson's segment, which Duodopa and Vyalev do not participate in. So we don't have any concerns with the merits of the transaction and continue to expect closing it in the middle of the year. Liz Shea -- Vice President, Investor Relations Thanks, Garry. Operator, next question, please. Operator The next question comes from Steve Scala with TD Cowen. Your line is open. Steve Scala -- TD Cowen -- Analyst Thank you. Thank you very much and I apologize in advance for asking you to clarify on Humira. But you mentioned several times that things are playing out as planned. But in the prepared remarks, you said U.S. erosion played out slightly better than you thought in Q1. So is the conclusion that whatever was better is temporary. You also mentioned volume pressure, but price -- offset by price benefit. Can you quantify that? But when you sum it all up, it sounds like you expect volumes to underperform the expectations you set three months ago? And is that in part maybe due to the Accredo news from yesterday. So that's a big -- that's a long question, but that's only one question. And the second question is curious if the FDA has contacted at the about the potential safety issues with Emlacridine post the competitor issue with convulsions in rabbits. And have you seen this with your agent? Thank you. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes. So it's Jeff. So I'll try to take that. So the first part was the first quarter. I mean, it was marginally better in terms of overall performance because we didn't see -- obviously, we didn't see any volume disruption until 401. Now when you look at 401 and we look after three weeks, we look at our model in terms of the expectation around retention of Humira with the CVS template, that's largely tracking in line with what our expectations were with a bit of the surprise that some of that Humira is not going to the biosimilar, as I mentioned, is going to other mechanisms including Skyrizi and Rinvoq. So overall, as we look to the balance of the -- really the first quarter, what we're seeing play out in the second quarter and look to the full year, our commentary, and I'll ask Rob to highlight if he has anything to add is very much in line with what we've guided at the beginning of the year. So no material change in what we're seeing in the marketplace. Rob Michael -- President and Chief Operating Officer Yes, this is Rob. I'll confirm that, what Jeff is saying. I mean, it's tracking in line with our expectations. We are not saying that volume is worse than we originally guided. We're saying this is tracking in line with our expectations. We try to characterize for you the price versus volume dynamics? Obviously, saying it's the price erosion is the vast majority of the decline, but there is volume, and it's tracking exactly as we anticipated. So there isn't an additional downside here. As Jeff mentioned, we did have slightly better performance in the first quarter. But again, it was -- I mean, I think, to the tune of $30 million to $40 million on this book of business, not overly material, but ahead of the initial expectation. Roopal Thakkar -- Senior Vice President, Chief Medical Officer Steve, it's Roopal. I can take the next question. We did a thorough diligence. And when we look at data sets that offer clinical data, obviously, we do a deep dive there, also look at blinded data, but we also do a deep dive looking at toxicology, animal tox in particular. And we didn't observe anything that was consistent with what has been described thus far. And as I mentioned, when we look at blinded safety data either from the 1B or the current pivotals that are running, we don't see an adverse event like this that would be related. And as far as we know, no health authority has reached out to ask any further questions about this. Rob Michael -- President and Chief Operating Officer Steve, this is Rob. I'm going to come back to your previous question and maybe I understand where the confusion could be. That one-time price benefit is a year over year dynamic. It was contemplated in our guidance. When you have a formulary change you essentially have those rebates go away and you recognize that. That was part of our guidance. That was not a benefit versus our guidance. That's a benefit in the year over year. So if you look at Scott guided to I think it was 32%. Scott Reents -- Senior Vice President, Chief Financial Officer That's right. Rob Michael -- President and Chief Operating Officer Erosion in the second quarter, which is lower than -- it was around 40% in the first quarter. So naturally, you'd wonder why would you have less erosion. Well, there's that year over year dynamic but that was how we planned the year. We anticipated it because we knew about the change that was coming in April 1. So I don't want to interpret that as a benefit versus our guidance, that's a benefit in the year-over-year calculation. Liz Shea -- Vice President, Investor Relations Thanks, Steve. Operator, next question, please. Operator Our next question comes from Trung Huynh with UBS. Your line is open. Trung Huynh -- UBS -- Analyst Hi, guys. Trung Huynh from UBS. Congratulations, Rick, on the next chapter of the life and Rob for moving AbbVie forward. Again, on biosimilar Humira. In your remarks, you mentioned post the expected CVS contract, there was a step-up in price for Humira. Is that simply because you're giving away more price to CVS at the contract at the time. And you mentioned additional contracts moving to biosimilar like CVS this year. Are there any meaningful contracts here that you can flag so we're not surprised? And is it possible we could see a actually a pricing increase by year-end because of this? Thanks very much. Scott Reents -- Senior Vice President, Chief Financial Officer Trung, this is Scott. I'll start with your question regarding the price benefit. So in my remarks, I indicated that with the formulary change in CVS and the volume step-down we saw there that there's a onetime price benefit associated with that. And you can think of this as we have the volume declines, that volume had been associated with price that we would have been paying in terms of rebate that those rebates will no longer be paid. Therefore, there's a one-time price benefit associated with that initial step down in the quarter. So that's what that relates to. Jeff Stewart -- Executive Vice President, Chief Commercial Officer Yes. And in terms of what we see going forward, as I highlighted, we don't see a significant exclusionary action where Humira would be removed from a formulary going forward. We did plan for, obviously, that smaller plans may make some adjustments to their formularies. That's all within the volume degradation and the pricing dynamics that we put into our guidance. And as I mentioned in one of the comments, some of the payers, not super large would maybe consider this idea of starting new patients on the biosimilars versus maintaining all the existing patients on Humira. So if you were to see that, you shouldn't be surprised about that and that would be within the contemplated approaches that we're taking as we look across '24 with our knowledge of what's happening in the marketplace. Liz Shea -- Vice President, Investor Relations Thanks, Trung. Operator, we have time for one final question. Operator And our final question comes from Evan Seigerman with BMO Capital Markets. Your line is open. Evan Seigerman -- BMO Capital Markets -- Analyst Hi, guys. Thank you so much for taking my question. On the aesthetics business, maybe talk to me about some of the dynamics you're seeing in China. I know that there's a lot of macro headwinds and this is a pretty big part of your business. And then, a bit of housekeeping on Skyrizi, where the last quarter you disclosed the $1.9 billion cash payment for royalties. Can you provide us any color on what this quarter's royalty was? And I believe that was for the full year last year but maybe just for the quarter. Thank you. Carrie Strom -- Senior Vice President, AbbVie, and President, Global Allergan Aesthetics Hi, this is Carrie. I'll address your question on aesthetics in China. And we do expect economic headwinds that we're seeing in China to persist over the near-term with the China aesthetics market flat overall for 2024. So the way to think about it is to expect negative market until the recovery starts to begin in the second half of 2024. China does remain a very important market for our aesthetics business. And as the market there starts to recover, we will continue to invest in consumer activation, injector training and continue to launch new products in the support market. Scott Reents -- Senior Vice President, Chief Financial Officer Hey, it's Scott. So you're right. With respect to the schedule relative payments. So you have to remember that these are on a bit of a lag, so they don't track each quarter sales. But the $400 million was the amount in the first quarter that we paid in cash payment. Liz Shea -- Vice President, Investor Relations Well, thanks, Evan. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and thank you for standing by. Welcome to Abbott's first-quarter 2024 earnings conference call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Mike Comilla, vice president, investor relations. Mike Comilla -- Vice President, Investor Relations Good morning, and thank you for joining us. With me today are Robert Ford, chairman and chief executive officer; Bob Funck, executive vice president, finance; and Phil Boudreau, senior vice president, finance, and chief financial officer. Robert and Phil will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2024. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31st, 2023. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note, that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the Company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford -- Chairman and Chief Executive Officer Thanks, Mike. Good morning everyone, and thank you for joining us. Today, we reported first-quarter adjusted earnings per share of $0.98, which was above analyst consensus estimates. We also raised the midpoint of our guidance ranges for both earnings per share and sales growth. We now forecast full-year adjusted earnings per share of $4.55 to $4.70 and organic sales growth, excluded COVID testing related sales of 8.5% to 10%. Organic sales growth, excluding COVID testing related sales was 10.8% in the quarter, which represents the fifth consecutive quarter of double-digit growth. The strong start to the year was driven by broad base growth across a portfolio, including growth of 14% in medical devices and established pharmaceuticals. In addition to exceeding expectations of both top and bottom lines this quarter, we accomplished a number of objectives across the pipeline, including obtaining several new product approvals and achieving important clinical trial related milestones. I'll now summarize our first-quarter results in more detail before turning the coal over to Phil, and I'll start with nutrition, where sales increased 8% in the quarter. Strong growth in the quarter was led by double-digit growth in pediatric nutrition, driven by continued market share gains in the U.S. infant formula business and growth across our international portfolio of infant formula, toddler, and adult nutrition brands. In January, we launched a new nutrition shake called Protality, which provides nutritional support for adults pursuing weight loss. As people eat less and lose weight from taking GLP-1 medications, undergoing a weight loss surgery, or following a calorie restricted diet. A portion of what is lost is lean muscle mass, which plays an important role in overall health. Combination of high protein and essential vitamins and minerals that totality offers can help people preserve muscle while pursuing their personal weight loss goals. Turning to EPD or sales increased 14% in the quarter. This quarter was a continuation of EPDs impressive trend of strong performance, including double-digit growth in four of the last five quarters. In addition to a strong track record of top-line growth, this business has delivered equally impressive gains on the bottom line with an operating margin profile last year that reflected more than 350 basis points of improvement compared to 2019. Moving to diagnostics, where sales increased more than 5%, excluding COVID testing sales. Growth in diagnostics continues to be led by the adoption of our market leading systems and demand for testing that takes place in a variety of settings, including hospitals, laboratories, urgent care centers, physician offices, retail pharmacies, and blood screening facilities. Our development efforts and diagnostics focus on developing new systems and creating new tests that play an important role in making healthcare decisions, expand the accessibility of testing and deliver a result as fast as possible. In April, we received FDA approval for a point of care diagnostic test that could help determine if someone suffered a mild traumatic brain injury or concussion in just 15 minutes. The test is run on our portable i-STAT Alinity instrument, which allows concussion testing to move beyond the traditional hospital setting and into urgent care centers, physician offices, and other locations that are closer to the patient, with nearly 5 million people in the U.S. going to the emergency room to be checked for suspected concussion each year. We believe this test has the potential to transform the standard of care for concussion testing, and I will wrap up with medical devices, where sales grew 14% in diabetes care. FreeStyle Libre sales were $1.5 billion in the quarter and grew 23%. As I previously mentioned, that Libre has several new growth opportunities that will help continue to fuel the strong sales trajectory we have forecasted. One of those growth opportunities relates to the continued expansion of reimbursement coverage for Libre, for individuals who use basal insulin therapy to manage their diabetes. Last year, we announced that Libre became the first and only continuous glucose monitoring system to be nationally reimbursed in France to include all people, who use basal insulin as part of their diabetes management. During this first quarter, Libre obtained reimbursement from a select number of institutional payers in Germany for basal insulin users who also use oral diabetes medication to manage their condition. These select public and private payers cover a limited number of the approximately 1 million basal insulin users in Germany, but this is an encouraging sign of the potential for further coverage expansion not only in Germany but across other European markets. In cardiovascular devices, sales grew 10.5% overall in the quarter, led by double-digit growth in electrophysiology, structural heart, and continued acceleration in our cardiac Rhythm Management and Vascular portfolios. In electrophysiology, sales grew 18%, driven by double-digit growth in all major geographic regions and across all major product categories, including double-digit growth in ablation catheters and cardiac mapping related products. We continue to make great progress toward bringing our innovative PFA catheter, Volt to market. In March, we completed enrollment in our CE Mark clinical study, putting us on track to file for international approval before the end of the year. We also recently began enrolling patients in our U.S. clinical trial called VOLT-AF, which will generate the data needed to support an FDA approval filing. In structural heart, growth of 13% was led by strong performance in several high-growth areas, including TAVR, LAA, mitral and tricuspid repair. Structural heart is an area that we have invested in over the past years in order to create a diversified portfolio that can sustainably deliver double-digit growth. In the past, we relied almost exclusively on MitraClip to drive the growth, but today the portfolio and growth are more balanced and reflect increasing contributions from newer products like Navitor, Amulet, and TriClip. In April, we received FDA approval for TriClip, a first of its kind heart valve repair device designed for the treatment of tricuspid regurgitation or a leaky tricuspid valve. Data from the clinical trial supporting this approval demonstrated that, patients who receive TriClip experienced a significant improvement in the severity of their symptoms and quality of life. We are excited to now offer this life-changing treatment option to people in the United States that suffer from this condition. In Rhythm Management, growth of 7.5% was led by AVEIR, our recently launched leadless pacemaker. AVEIR has rapidly captured market share in the single chamber pacing segment of the market and is now being used for dual chamber pacing, which is the largest segment of the pacing market. This revolutionary technology is helping to deliver growth rates in our Rhythm Management business that significantly exceed the overall growth in this market. And lastly, in neuromodulation, sales grew 17%, driven by Eterna, a rechargeable neurostimulation device for pain management. In January, we announced the launch of Liberta, the world's smallest rechargeable deep brain stimulation device, which is used to treat movement disorders such as Parkinson's disease. In summary, we're off to a very good start to the year, exceeding expectations on both top and bottom lines. And as a result, we have raised the midpoint of our sales and EPS guidance ranges. We continue to make good progress on our gross margin expansion initiatives and we're seeing strong returns from the investments we are making across our growth platforms. Our pipeline has continued to be highly productive, delivering several recently new product approvals and we're very well-positioned to continue to deliver strong results for the remainder of the year, and I'll turn over the call to Phil. Phil Boudreau -- Senior Vice President, Finance, and Chief Financial Officer Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates unless otherwise noted, are on an organic basis. Turning to our first-quarter results, sales increased 4.7% on an organic basis, which as expected includes the impact of year-over-year decline in COVID testing-related sales. Excluding COVID testing sales underlying base business, organic sales growth was 10.8% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 2.9% on first-quarter sales. During the quarter, we saw the U.S. dollar strengthen versus several currencies, which resulted in exchange having a more unfavorable impact on sales compared to exchange rates at the time of our earnings call in January. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.7% of sales, adjusted R&D was 6.7% of sales and adjusted SG&A was 29.4% of sales in the first quarter. Lastly, our first-quarter adjusted tax rate was 15%. Turning to our outlook for the full year, we now forecast full-year adjusted earnings per share of $4.55 to $4.70, which represents an increase at the midpoint of the range compared to the guidance range we provided in January. We also raised the midpoint of our guidance for organic sales growth. We now forecast organic sales growth, excluding COVID testing to be in the range of 8.5% to 10%. Based on current rates, we expect exchange to have an unfavorable impact of approximately 2.5% on full-year reported sales, which includes an expected unfavorable impact of approximately 3% on second-quarter reported sales. Lastly, for the second quarter, we forecast adjusted earnings per share of $1.08 to $1.12. With that, we'll now open the call for questions. Questions & Answers: Operator Thank you. [Operator Instructions] And our first question will come from Robbie Marcus from J.P. Morgan. Your line is open. Robbie Marcus -- JPMorgan Chase and Company -- Analyst Great. Thanks for taking the question. Congrats on a nice first quarter here. Two for me. I'll just ask them both upfront. First, Robert, we almost never see Abbott raise guidance, particularly on the top line in the first quarter. Looking back over the past, I don't know, five, 10 years, it's very rare. First part is what gave you the confidence to raise the midpoint of the guidance this early on in the year? And then second, obviously, there's been a lot of concern during the quarter with competitor's loss in a case for NEC as it relates to infant nutrition. I was hoping you could address that what's your stance on the ongoing litigation? I think there's about a thousand cases that have been filed and any upcoming data points or timelines we should be looking for. Robert Ford -- Chairman and Chief Executive Officer Let's go first to your question on the guidance, yeah, you're right. I guess I had to go back and take a look at that. I think the last time we did raise in Q1 was in 2016. I would say the framework here, Rob, is we've always done is, we set a guidance at the beginning of the year, which we believe is top tier, and then throughout the year, we want to beat that guidance, and we consider top tier to be high single-digit double-digit EPS growth. And that's obviously excluding the COVID testing portion, which is what investors are really more focused on. So that was the guidance that we set a couple months ago, back in January. We will target always have that top-tier guidance and find the appropriate balance between, the opportunities. And obviously, the challenge is that bracket that range. If you remember in January, I said I thought that there was more opportunities than risks. I think that some of the risks that we saw in January, I still think they haven't gone away. They are still there, whether it's geopolitics or whether it's FX, those are still there. But clearly, the performance of the business continues to be very, very strong. And some of our businesses, a lot of our businesses actually accelerating our in performance. As I said in my comments, five consecutive quarters of double-digit growth here. You look at each of the businesses, EPD consecutive, three consecutive of double-digit growth, great margin expansion, and the teams are now working to be able to introduce biosimilars in all the markets that we are participating in. Nutrition has done an incredible job at recovering share and growing our adult business. We have grown adult over $1 billion versus 2019. Diagnostics continues to have a great track record here, outperforming the market. We have got some great large account wins both in the U.S. and internationally that we're rolling out into this year. And medical devices, I mean, what can I tell you? It is just been a real strong performer. The team's done an incredible job there. Last year, we were the fastest-growing MedTech Company, at least from what I have seen from our guidance and from the other guidance's in the market. That's what it seems to be again this year. So you put all that together, plus the pipeline that's been contributing to an accelerated level, great new product approvals. I put all that together and I just feel that this type of performance that we deliver just gives us the confidence for the remainder of the outlook of the year. We felt comfortable raising the guidance again, in the first quarter, which is as you pointed out something that we don't usually do. I continue to believe going into the second quarter, as we move through that there's probably more opportunities than risks here, as we move forward. I guess that's the framework of raising our guidance in the first quarter, which is something that we usually don't do. Just great performance and great momentum. And then your other question was regarding the net cases. I would say from a date, we have some court cases that will happen in July. So that's maybe a milestone that we want to look at. But if you are asking me about kind of our framework of how we look at this. I'd say, for decades, we've provided specialized nutrition products that help doctors. And I think that's a key thing here. It helps doctors to provide the lifesaving nutrition to the premature infants. How you feed a premature infant, it's a medical decision, Robbie. Health care providers, they're going to use a range of options to meet the unique needs of each baby. That includes mother's milk, that includes pasteurized donor's milk, but that also includes preterm infant formula, because where mother's milk is not available, there is not a sufficient supply of donor milk to satisfy the nutritional needs of all of these premature infants that are born in the U.S. And quite frankly, even when they're available for some premature infants, human milk may lack some of the calories, the proteins, the vitamins, etc., that are necessary to support the nutritional needs of the premature infants. That mother's milk needs to be fortified in order to boost the nutritional output. The medical community, they consider these products to be critical part of the standard of care for feeding premature infants. Most of the societies when you read their positions, it is a standard of care to use these products. The doctors who work in the NICUs, they've used our products for decades and they continue to do so today. Countless babies, Robbie, have benefited from these products, lifesaving experiences over many, many years and there are clinical studies that have repeatedly established that, these products are safe. These litigation cases, they're really seeking to advance a theory promoted by plenty of lawyers that distorts the science and it distorts everything that we know and it's not supported by the medical community. We are preparing for our cases to be able to kind of lay out the facts, the science and the data and we stand behind our products. Robbie Marcus -- JPMorgan Chase and Company -- Analyst Appreciate it, Robert. Thanks a lot. Operator Thank you. Our next question will come from Larry Biegelsen from Fargo. Your line is now open. Larry Biegelsen -- Wells Fargo Securities -- Analyst Good morning. I'll echo, Robbie's, congratulations on the strong start to the year here. Robert, I just wanted to focus on EP. A multipart question here, but just one. The EP business grew nicely in the first quarter in the U.S. and outside the U.S. Can you talk about what drove that? What you're seeing with PFA in the different geographies? Your expectations for your EP business going forward before the Volt launch? Just lastly, it sounds like we should expect the Volt approval in Europe sometime next year based on the filing date. Just want to confirm that. Robert Ford -- Chairman and Chief Executive Officer Sure. Like I said in my opening comments, we completed the trial. There's a six-month follow-up, Larry. That means that, we will be on target here to file for CE mark by the end of this year. Then, it's just going to depend on that process. I think that's probably our anchor point here is getting the filing in before the end of the year. Yes, I mean, I'm not surprised by our EP growth. I know many on the call might be, but I'm not surprised. First of all, it's an important therapy. It's an underpenetrated disease. We know there's plenty of growth in this segment, and as a result of that, it's highly competitive. But we haven't been surprised by the growth. If you look at PFA, it's been in Europe for three years. If you average our growth rate over those last three years in Europe, we've been growing mid-teens, and the growth, it remains broad base. It was broad based in Europe, again, this quarter where we saw double-digit growth in ablation catheters. Not just on the mapping side, on the ablation catheter side also but then also great growth on the mapping side, and this technology has now come to the U.S. I think we probably had maybe two months of seeing the technology be rolled out here in the U.S. I think the competitors have been very aggressive here in terms of bringing the technology to the accounts in the U.S., and I can say, we've mapped a lot of those cases, Larry. I'm not going to say we've been in every single case, but I'd say, a vast majority of the cases we've been in there. And there are some similarities to Europe, but there are some differences to Europe. I think one of the things that we saw in Europe was that there was this inclination to use the technology starting off as kind of a one shot. So that had an impact more on the CRYO business than I would say on the RF side. And that's what we saw in our mapping cases. We saw here, at least in the first couple of months, that's where a large portion of those cases occurred, at least the ones that we mapped were in places where they were traditionally used in CRYO. I think the difference that we saw a little bit in Europe is that at least 90% of the cases that we were part of direct or indirectly were using mapping that that number was lower in Europe. So that's probably a little bit of the difference I saw here in the U.S., and that bodes well for us. Our end site system, our mapping system, our mapping catheters are widely viewed as an excellent option here for mapping these PFA cases. We have a large install base. Customers are familiar with it. Don't need a make room, don't need a fight for capital. We've got best-in-class clinical support. And the architecture here is open, as I've said in previous calls. So it integrates well with these PFA catheters. We actually recently released a software upgrade last month that provides even better visualization to these catheters and potential for faster procedures and less floor time. I think this is a perfect combination, quite frankly, in a time where there's going to be market transition, There's a lot of new products, there's a lot of choices. And when you have a situation like that, I think flexibility is key, and that's what we heard from our customers. One data point that I thought was also interesting to your question of what helped drive that in the cases that we were part of, and we saw, we also observed that an RF catheter was pulled in about a quarter of the cases that we saw. So on top of the PFA catheter, an RF catheter was pulled to do touchups, etc. I'd say right now, everything that we've seen in Europe on the positive side is happening. And then I think there's some interesting dynamics here in the U.S. that could be favorable for us also, but it's still very early. If I look at March, we had probably one of our most, we look at cases per day. That was probably one of our highest months. So far so good. And we're excited about the technology, we're excited about our program. We released data on our program and some recent medical meetings that occurred. And the feedback, from those that have been used in our product are very positive. And the integration with EnSite in including like the tissue contact force algorithm and the visualization, all of that is seen as a real promise and a differentiator versus what's being used today. Larry Biegelsen -- Wells Fargo Securities -- Analyst Thanks so much. Operator Thank you. Our next question will come from Josh Jennings from Cowen. Your line is now open. Josh Jennings -- TD Cowen -- Analyst Good morning. Thanks for taking the questions and great to see the strong start here, the Q1 results. Robert, I was hoping to just ask first on Libre and just internationally, any other payment or coverage decisions that we should have on our radar in various countries. Sounds like you have made sense, some nice progress already in Germany, and then in the U.S. I was hoping you could just help or share your thoughts on the share gain opportunity in integrated pump segment of CGM market versus the share loss risk in the Type 2 non-insulin cash pace segment with a competitive launch share early in 2024. I just have one follow-up. Robert Ford -- Chairman and Chief Executive Officer On your international question, I mean, it's always difficult to forecast exactly by month-a-quarter coverage kind of payment decisions. I can tell you though that the team has a full global map of all the work that's being done regarding clinical information and negotiations, etc. It's difficult to kind of forecast it, but what I have said is on previous calls and on some of my prepared remarks that I think you're going to see this just this build that will be occurring globally in the market as the data proves and shows the clinical medical and health economic benefit by reimbursing for this patient population. And I think we're well-positioned there. Internationally, I think we got some pretty large markets already. Canada, Japan, France, Italy, Germany, those are markets that are either fully reimbursed or starting their process. And like I said, I think you will see as the year progresses, whether it's in medical events or just as the year progresses, I think you'll see more coverage decisions. Maybe they don't get splashy, big PR news, but we are seeing continuous increasing there on that. On the U.S. side, I guess I disagree with your premise that I'm going to be trading share gains on the pump side for share losses on the non-insulin side. I mean, I'm just, right now I'm looking at the data, third party audited data, seven out of every 10 new prescriptions for this basal population, which is primarily served by the primary care channel, seven out of 10 are going to Libre. I think our product's going to get even more competitive and compelling, I think this is a great opportunity and our objective here is to maintain kind of our shared dominance and our share leadership as it results in this patient segment. But we do have an opportunity here to participate a little bit more actively in what is a little bit more of a smaller segment of the population, but nonetheless, a very important one, which is the AID and the market system. There's 150,000 to 200,000 new starts a year. There's an opportunity for share gain also of existing users. I think that, the opportunity to bring a dual analyte sensor with ketones. We showed some data at ATTD this year, that showed the safety benefit or the value proposition of a dual analyte sensor for AID system. I think that's going to be a compelling value proposition. We are working with all the pump companies here and I think as the year progresses, we'll see connectivity occur whether it's with Libre 2 Plus our streaming product, or whether it's with Libre 3. This is an area that we are focusing on and it's a new segment for us to compete in. But I don't think that, we are going to be taking our eye off the ball as it relates to the basal opportunity that exists. Josh Jennings -- TD Cowen -- Analyst Understood. Thanks. And then just wanted to ask on the transcatheter tricuspid market, congratulations on the TriClip approval, but there's been some questions around the patient opportunity breakdown between TIER, TriClip, and replacement with EVOQUE. Maybe just any internal team thoughts on that patient opportunity breakdown and then maybe you could share on the pricing strategy for TriClip in the setting of competitor pricing its replacement device at a significant premium? Thanks for taking the questions. Robert Ford -- Chairman and Chief Executive Officer I'm not going to comment on our pricing strategy for competitive reasons. It is a differentiated and novel technology. There is an opportunity, but we'll have to see how this all plays out. You got NTAP submissions and all this stuff going on right now. What we are focused on here is, launching the product and getting cases ramped up and that's what's happening. I got some feedback yesterday from the team after a couple of weeks, real nice cadence of growth. We are obviously focusing on our initial cases on most of the account that were part of our pivotal trial, but just but just real nice cadence growth there and great feedback from physicians and patients post-surgery. I mean, if you're trying to poke at, what's the breakdown going to be about replace and repair, listen, I think it's good to have options. I guess my view here is that, I believe that, probably safety is a key driver here, just to start off with. I think TriClip has shown a very strong excellent safety record, both in clinical trials and real world use. I think that's going to play a key role here in determining repair versus replace. I expect repair or TriClip at least to be the preferred option unless the valves are too damaged and then obviously replacement is the only option. But there is a large pool of patients here. You got 5 million people globally, 2 million people here in the U.S. and it's going to be an opportunity here that we will be generating more data, expand the indication of the product. I think this is easily a $1 billion opportunity for us here as we build the capabilities and as we build more clinical data. Josh Jennings -- TD Cowen -- Analyst Excellent. Thank you. Operator Thank you. Our next question will come from Travis Steed from BofA Securities. Your line is open. Travis Steed -- Bank of America Merrill Lynch -- Analyst Hey. Congrats on the good quarter. Maybe just while we're on the pipeline, talk a little bit about AVEIR it sounds like that product's going really well. And then I had a question on gross margins as well. Trying to think about is this the right pace to kind of get back to pre-COVID levels and still the opportunity kind of longer term for gross margins? Robert Ford -- Chairman and Chief Executive Officer I think if AVEIR's done very well, I mean, we all know the advantages it has over the competitive system, whether it's single and dual chamber, the longer lasting battery, the ability for replacement, retrievability, upgradeability. It's done very well. From a single chamber perspective, I think we are now at about 50 share of the US market. So that's been doing very well. It's performed, we started doing our dual chamber procedures toward the end of last year. Seeing a nice kind of ramp-up over this first quarter here. Focus here really is a really about, it's a completely different procedure, right? If you think about how these devices have been implanted, this is probably the first time in like 30 years that you have like a real meaningful change on how this is done. Our focus here is really getting great clinical results real thoughtful approach here about opening new sensors and training. And that's been working very well for us. And you could see the impact on our growth rate. I mean, historically our CRM business has been relatively flat with some platforms going up, some platforms going down. Our goal here with this program was to get our CRM portfolio to at least be contributor to growth mid-single digits, 6%, 7%. These last couple of quarters we've done seven and a half percent, and so AVEIR's been doing well, and it's going to continue to get better as more and more physicians get trained and we increase the amount of accounts. So I really like the cadence of how we're forecasting this business and the impact that it's going to have on our CRM portfolio. What was your other question? Travis Steed -- Bank of America Merrill Lynch -- Analyst Just on gross margins, kind of thinking about the path back to pre-COVID levels over the long term and is this the right kind of cadence that you're -- this year's cadence, the right way to think about that? Robert Ford -- Chairman and Chief Executive Officer I think that's a good cadence. I think we're forecasting here about 70 basis points of improvement this year. Feel good about that. I've talked about this not being a question of if, just a question of when, so I think that's not a bad cadence. And we're going to focus on the things that we can control and the things that we can control are obviously our cost and our cost teams and the teams that are working on improving gross margin, they're delivering great results here, while at the same time maintaining high service levels not running to back orders, etc. But probably the biggest the biggest opportunity we have here Travis, is just to expand the gross margin through portfolio mix. When you have our medical device businesses growing at mid-teens consistently over the last, whatever, four or five quarters, that has a real strong impact on our gross margin. So a lot of focus on what we control our gross margin, the cadence. That's what we are targeting. It's not really a question of if it's just a question of when. Travis Steed -- Bank of America Merrill Lynch -- Analyst Great. Thanks a lot and congrats again. Operator Thank you. Our next question will come from Vijay Kumar from Evercore, ISI. Your line is open. Vijay Kumar -- Evercore ISI -- Analyst Hey, guys. Thanks for taking my question. Robert, I had a two forward question. A lot of questions on pipeline, but I'm curious when people ask us on sustainability of growth, if you could elaborate on pipeline, what else is there? When you look at the future, that gives us the confidence of sustaining its premium growth within the med tech industry. My second part was on the financial modeling side, looks like FX headwinds came in a little bit higher. Prior guidance that is $0.20 headwind to EPS from FX. Did that increase? I'm just curious on because some questions on why the high end of the guidance was not raised. I suspect the FX headwind increase. Robert Ford -- Chairman and Chief Executive Officer As I said, there are certain challenges that still remain with us from January and FX is one of them. I'll let Phil answer that one. On your question on pipeline, listen, I could spend a whole hour on this just going through the pipeline, but I guess I would bucket them into like three categories, Vijay. I would say you got your current contributors and Libre and Alinity, they still operate like pipeline projects and products. We still got multiple innovations going through them. MitraClip, great familiarity, AVEIR, Navitor, TriClip, Amulet, Protality, or our concussion tests, I think got great opportunity, and CardioMEMS, I mean, these are all products that I would still characterize them as early innings. Yes, they're established, but they're still early innings and they got a lot of growth rate there. The second group of products I would call, probably near-term future contributors, so think about it in the next 12 to 18 months, these products coming to market and starting to kind of generate revenue there. Our lingo product, I'm very excited about that and bringing that to the U.S. and expanding that globally. Our dual analyte sensor, our Volt system Esprit, which is our drug eluding bioabsorbable stent for below the knee. It will be the first of its kind. We are developing a whole new Alinity system that will target a segment of the market that we currently don't participate in. And there'll be more to come on that. And then just the great opportunity we have with biosimilars into the emerging markets and doing it in a very capital efficient way. And bringing that and leveraging our position there. That's our next 12 to 18 month kind of catalyst there. Then thinking about beyond 2026, I mean, we are working on a PFA, RF catheter. You got leadless, another kind of leadless pacing system that would be launching. We have a second generation Amulet, excited about entry into the IVL market sometime in 2027, coronary DCB, we're working on kind of new TAVR systems also that allow us to branch out into other segments. We've got a whole plethora of new analytes in our bio wearables market that will start to come out and have different applications in 2026. And then on top of that, all the clinical work that we're doing to expand indications, expand market, whether it's in TAVR, whether it's in LAA, whether it's in mitral. So we've got, I'd say a real nice cadence here of products and pipeline beyond, I'd say, the next 12, 18 months. We're looking at this '26, '27, '28 and I feel really excited about that. There's obviously more that we need to do and add, but I think the base here looks really good in terms of the pipeline. And then I think your question on FX, Phil, you want to take that? Phil Boudreau -- Senior Vice President, Finance, and Chief Financial Officer Yes. I mentioned at the onset here, Vijay, in Q1, we saw about a 2.9% headwind on sales growth and we kind of the current rates anticipate something similar here in Q2. From a full-year perspective at the current rates, it's about a 2.5% headwind on the top line. That said, kind of the earnings guide that we have here is in line with the organic sales performance and drop through to earnings on the increased midpoint on EPS guidance. Vijay Kumar -- Evercore ISI -- Analyst Thanks, guys. Operator Thank you. Our next question will come from Joanne Wuensch from Citi. Your line is now open. Joanne Wuensch -- Citi -- Analyst Good morning. May I add my compliments and congratulations to the quarter? I have two questions put them right up front. The first one is on concussion testing. I'd love to understand the go-to-market strategy for that, how you think about the financial benefit impact, and all that kind of good stuff? But I think my second question is a little bit more big picture. As you step back in a post-pandemic environment a couple of years into the CEO seat, how do you think about taking Abbott sort of to the next level? I mean, we all sit here and take a look at an incredibly strong balance sheet. How do you put that cash to work? Are these segments, divisions, ones you want to keep? Or how do you think about adding to it? Robert Ford -- Chairman and Chief Executive Officer Sure. On the point of care concussion test, I guess I'd summarize the opportunity here in twofold. I think there's a market conversion component to this, Joanne. I mentioned there are 5 million ER visits to diagnose a concussion. The number one method there to use that is on a CT scan. I think there's an opportunity here to transform that and allow one to get a faster response in that emergency kind of emergency room visit, which is where the -- and the point of care team already have a good position with some of our other blood gas and other assays that we provide to that segment. I think this will slide right into that team. The value proposition here is going to be, OK, what's the cost of the system and can we bend that cost curve. I think we've shown a little bit how we think about things Joanne, if you look at Libre, if you look at Binax, if you look at how we think about pricing our products, when it comes to market conversion and the opportunities that we have there? We'll be able to do it at a nice return for our shareholders. I think that's an important part. The market expansion opportunity that we have, I think is going to still require some work on the product. Right now the product is approved whole blood, but it's a venous draw. We're going to be working on a capillary draw and if you can then run this assay, taking a sample from a finger prick, then you can look at bringing that technology even closer to where the need for a rapid concussion test would be. You could just look at how many universities exist in this country, how many high schools exist in this country? You can do some multiplications there and say, this is a great market creation, market expansion opportunity. I think that that's how we're thinking about it commercially, conversion and creation slash expansion. There's some more work to be done in terms of the product and the claims and the trials there. This will be a multi-year kind of program over here where we'll start to see kind of nice growth in that segment. And then your other question was about the portfolio and balance sheet. And do we like the four segments? The answer to that is yes, we like all the four segments. We feel that it gives us a real unique view into the healthcare system as a whole starting with nutrition that's obviously the bedrock of good health. But then, things happen and you need to get a diagnosis. And we've got a great diagnostic portfolio that we've been expanding on and building on to make sure that we can capitalize on all the different types of modalities and locations where people can get tested. And then, once a physician knows what the problem is, then they got to run through treatment, right? And we do that either through a medicines business or through a medical device business. I think all four segments are super well aligned to the global demographics and trends in healthcare. And so we like that there's always opportunities to add, and we've shown that if there are areas that we feel that we can bring value in a combination then as you mentioned we've got a strong balance sheet and strategic flexibility to do that. As long as we feel that we can add value to that asset. We felt like that about CSI, we felt like that about St. Jude. We felt like that about Alere. And those deals, they obviously help kind of reshape the company and accelerate our growth rates. But I think that's predicated on us really believing that we can kind of bring value and we're not trying to fill some top-line gap or some issues. ROIC for us matters, profitability matters. We've got opportunities and we could be a little bit more selective to be able to add, but I like the four segments that we're in. And they've been well to shareholders, especially the long-term shareholders. Joanne Wuensch -- Citi -- Analyst Thank you. Operator Thank you. Our next question will come from Matt Miksic from Barclays. Your line is open. Matt Miksic -- Barclays -- Analyst Hey. Good morning. Thanks for putting me in and congrats on the really strong quarter, particularly med devices. I had one follow-up on the -- sorry, here, background. One question on structural heart. Robert, you talked a little bit about the portfolio and the combination of the leading peer device and MitraClip of being a little bit more mature in the category of structural heart, but being kind of augmented by some of these new products like most recently, obviously TriClip. And if you could talk a little bit about sort of the momentum in the portfolio as well as how much of the build out of this portfolio is still coming organically or under review kind of strategically, I appreciate it. Robert Ford -- Chairman and Chief Executive Officer Sure. I mean I didn't want my comments on mitral to be construed like that 1 there is slowing down, and we're relying on others to drive the growth. I mean, that wasn't the intent. If you look at MitraClip this quarter, it's high single digits. And if you look at the last 5 quarters, that's what it's been doing between high single-digits, low double-digits. And that's good. But we always had a view here that this is an attractive area of growth, an attractive area of medical need. And we wanted to be a leader here. So yes, MitraClip, I guess we can call MitraClip, the founding father of our structural heart portfolio. But I think the team here has done an incredible job at bringing organic innovation into the portfolio. So if you look at our structural heart, I mean, we grew 13% today. MitraClip grew high single digits. But it accounted for 3% of that growth. The rest -- the other 10% came from all the rest of the portfolio that's being built. So I think that you'll continue to see that. We'll continue to make investments in this business, continue to make investments in the pipeline. I'd say right now, most of it is organic, whether it's innovating on LAA, innovating on our TAVR side, and all the clinical trial that we're doing there. If there's an opportunity inorganically, I just put that in the same bucket that I think I answered kind of Joanne's question here if it makes sense. And we can add it. We've got the flexibility to do it. But the whole strategy here was to say, listen, we're going to build a multibillion-dollar structural heart business that can sustainably grow double digits. And the way to do that is you can't be a division of only one product. And I think the teams over the last four or five years, have done a really good job at building that and there's more opportunity. I'd say probably the one that we're looking at and is very exciting for us is mitral replacement. We've launched our Pendine product, which was more a transapical system. Our Cephea system is the transfemoral transseptal and feedback that we've seen from early implanters, early first in man is that this is a great, great valve. So there's an opportunity there also. So I'd say most organic, but we got the capacity for inorganic if it makes sense. Matt Miksic -- Barclays -- Analyst Thanks so much. Mike Comilla -- Vice President, Investor Relations Operator, we'll take one more question, please. Operator Thank you. And our final question will come from Danielle Antalffy from UBS. Your line is open. Danielle Antalffy -- UBS -- Analyst Hey. Good morning, everyone. Thanks so much for taking the question and yes, congrats on a strong start to the year. Robert, we spent a lot of time talking about the durability of growth in the med-tech business. So I don't want to get too greedy, but just following up on Joanne's question regarding you guys do have a strong balance sheet. Are there any areas -- I guess sort of how do you feel about the state of the med tech business today? And do you feel there are growth areas within med tech that maybe Abbott isn't participating in today that Abbott could or should participate in today? And where are you looking beyond your current markets, if at all? I'll just leave it to one. Robert Ford -- Chairman and Chief Executive Officer Sure. I get the attempt for triangulation here in the multiple different ways, and I guess I'll sign a little bit boring here in terms of how I talk about this. I've been public that, yes, we are interested. We look at areas that we can add value to. I'd say, probably the ones that have jumped out more at us in terms of a study and looking at are probably more in the medical device side and on the diagnostic side. We did look at a strategy for biosimilars for our medicines business and that was a pretty capital efficient way to do it. Yes, we're looking. We continue to study, but I'm not going to sit here and telegraph exactly it's this, it's that. I think the key thing here is just, I mean, look at our medtech business did this quarter, look what it did previous four quarters and that allows me to be a little bit more selective. Over the last couple of months we've seen some fairly large transactions in the medtech space. Those seem to be attractive growth areas. I talked about us getting access to some early IVL technology with the CSI acquisition. That's an important area for us to focus on. But I don't feel that, with our strong organic growth that we need to go out and not pay attention to like other key financial metrics that for us are important in terms of ROICs and those, because we've got that strong growth rate in medtech. You won't get me telegraphing here exactly, Danielle, what specific segments we are looking at. What I can tell you is, we have an active team. They study a lot. We look a lot. We follow a lot. If there's a moment that makes sense for us and those segments continue to be interesting, we've got the balance sheet and the track record to show that, we can drive value out of these acquisitions. I'll just leave it like that. Yes, we've got flexibility, that doesn't mean that we don't pay attention to other key financial returns as we're looking at it. I feel that I can do that because we've got such a strong top-line growth and great pipeline and prospects. With that, I'll leave it like that. I'll just close by saying that, we're very pleased with a very strong start to the year. We delivered another quarter of double-digit organic sales growth on the base business. The investments that we've made during all those years of COVID are generating real strong returns. The pipeline continues to be highly productive, as I've outlined. We've got clear visibility to a pipeline all the way out to '27, '28. Obtained several new product approvals that are going to help us accelerate our growth in certain areas. Typically don't raise guidance in the first quarter, but given the strong performance and the outlook and the remainder of the year, we felt comfortable doing that and we're very well-positioned to continue to sustainably deliver top-tier results. With that, I'll wrap up and thank all of you for joining us today. Mike Comilla -- Vice President, Investor Relations Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 am Central Time today on Abbott's Investor Relations website at abbotinvestor.com. Thank you for joining us today. Answer:

Abbott's first-quarter 2024 earnings conference call

Operator Good morning, and thank you for standing by. Welcome to Abbott's first-quarter 2024 earnings conference call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Mike Comilla, vice president, investor relations. Mike Comilla -- Vice President, Investor Relations Good morning, and thank you for joining us. With me today are Robert Ford, chairman and chief executive officer; Bob Funck, executive vice president, finance; and Phil Boudreau, senior vice president, finance, and chief financial officer. Robert and Phil will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2024. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31st, 2023. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note, that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the Company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford -- Chairman and Chief Executive Officer Thanks, Mike. Good morning everyone, and thank you for joining us. Today, we reported first-quarter adjusted earnings per share of $0.98, which was above analyst consensus estimates. We also raised the midpoint of our guidance ranges for both earnings per share and sales growth. We now forecast full-year adjusted earnings per share of $4.55 to $4.70 and organic sales growth, excluded COVID testing related sales of 8.5% to 10%. Organic sales growth, excluding COVID testing related sales was 10.8% in the quarter, which represents the fifth consecutive quarter of double-digit growth. The strong start to the year was driven by broad base growth across a portfolio, including growth of 14% in medical devices and established pharmaceuticals. In addition to exceeding expectations of both top and bottom lines this quarter, we accomplished a number of objectives across the pipeline, including obtaining several new product approvals and achieving important clinical trial related milestones. I'll now summarize our first-quarter results in more detail before turning the coal over to Phil, and I'll start with nutrition, where sales increased 8% in the quarter. Strong growth in the quarter was led by double-digit growth in pediatric nutrition, driven by continued market share gains in the U.S. infant formula business and growth across our international portfolio of infant formula, toddler, and adult nutrition brands. In January, we launched a new nutrition shake called Protality, which provides nutritional support for adults pursuing weight loss. As people eat less and lose weight from taking GLP-1 medications, undergoing a weight loss surgery, or following a calorie restricted diet. A portion of what is lost is lean muscle mass, which plays an important role in overall health. Combination of high protein and essential vitamins and minerals that totality offers can help people preserve muscle while pursuing their personal weight loss goals. Turning to EPD or sales increased 14% in the quarter. This quarter was a continuation of EPDs impressive trend of strong performance, including double-digit growth in four of the last five quarters. In addition to a strong track record of top-line growth, this business has delivered equally impressive gains on the bottom line with an operating margin profile last year that reflected more than 350 basis points of improvement compared to 2019. Moving to diagnostics, where sales increased more than 5%, excluding COVID testing sales. Growth in diagnostics continues to be led by the adoption of our market leading systems and demand for testing that takes place in a variety of settings, including hospitals, laboratories, urgent care centers, physician offices, retail pharmacies, and blood screening facilities. Our development efforts and diagnostics focus on developing new systems and creating new tests that play an important role in making healthcare decisions, expand the accessibility of testing and deliver a result as fast as possible. In April, we received FDA approval for a point of care diagnostic test that could help determine if someone suffered a mild traumatic brain injury or concussion in just 15 minutes. The test is run on our portable i-STAT Alinity instrument, which allows concussion testing to move beyond the traditional hospital setting and into urgent care centers, physician offices, and other locations that are closer to the patient, with nearly 5 million people in the U.S. going to the emergency room to be checked for suspected concussion each year. We believe this test has the potential to transform the standard of care for concussion testing, and I will wrap up with medical devices, where sales grew 14% in diabetes care. FreeStyle Libre sales were $1.5 billion in the quarter and grew 23%. As I previously mentioned, that Libre has several new growth opportunities that will help continue to fuel the strong sales trajectory we have forecasted. One of those growth opportunities relates to the continued expansion of reimbursement coverage for Libre, for individuals who use basal insulin therapy to manage their diabetes. Last year, we announced that Libre became the first and only continuous glucose monitoring system to be nationally reimbursed in France to include all people, who use basal insulin as part of their diabetes management. During this first quarter, Libre obtained reimbursement from a select number of institutional payers in Germany for basal insulin users who also use oral diabetes medication to manage their condition. These select public and private payers cover a limited number of the approximately 1 million basal insulin users in Germany, but this is an encouraging sign of the potential for further coverage expansion not only in Germany but across other European markets. In cardiovascular devices, sales grew 10.5% overall in the quarter, led by double-digit growth in electrophysiology, structural heart, and continued acceleration in our cardiac Rhythm Management and Vascular portfolios. In electrophysiology, sales grew 18%, driven by double-digit growth in all major geographic regions and across all major product categories, including double-digit growth in ablation catheters and cardiac mapping related products. We continue to make great progress toward bringing our innovative PFA catheter, Volt to market. In March, we completed enrollment in our CE Mark clinical study, putting us on track to file for international approval before the end of the year. We also recently began enrolling patients in our U.S. clinical trial called VOLT-AF, which will generate the data needed to support an FDA approval filing. In structural heart, growth of 13% was led by strong performance in several high-growth areas, including TAVR, LAA, mitral and tricuspid repair. Structural heart is an area that we have invested in over the past years in order to create a diversified portfolio that can sustainably deliver double-digit growth. In the past, we relied almost exclusively on MitraClip to drive the growth, but today the portfolio and growth are more balanced and reflect increasing contributions from newer products like Navitor, Amulet, and TriClip. In April, we received FDA approval for TriClip, a first of its kind heart valve repair device designed for the treatment of tricuspid regurgitation or a leaky tricuspid valve. Data from the clinical trial supporting this approval demonstrated that, patients who receive TriClip experienced a significant improvement in the severity of their symptoms and quality of life. We are excited to now offer this life-changing treatment option to people in the United States that suffer from this condition. In Rhythm Management, growth of 7.5% was led by AVEIR, our recently launched leadless pacemaker. AVEIR has rapidly captured market share in the single chamber pacing segment of the market and is now being used for dual chamber pacing, which is the largest segment of the pacing market. This revolutionary technology is helping to deliver growth rates in our Rhythm Management business that significantly exceed the overall growth in this market. And lastly, in neuromodulation, sales grew 17%, driven by Eterna, a rechargeable neurostimulation device for pain management. In January, we announced the launch of Liberta, the world's smallest rechargeable deep brain stimulation device, which is used to treat movement disorders such as Parkinson's disease. In summary, we're off to a very good start to the year, exceeding expectations on both top and bottom lines. And as a result, we have raised the midpoint of our sales and EPS guidance ranges. We continue to make good progress on our gross margin expansion initiatives and we're seeing strong returns from the investments we are making across our growth platforms. Our pipeline has continued to be highly productive, delivering several recently new product approvals and we're very well-positioned to continue to deliver strong results for the remainder of the year, and I'll turn over the call to Phil. Phil Boudreau -- Senior Vice President, Finance, and Chief Financial Officer Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates unless otherwise noted, are on an organic basis. Turning to our first-quarter results, sales increased 4.7% on an organic basis, which as expected includes the impact of year-over-year decline in COVID testing-related sales. Excluding COVID testing sales underlying base business, organic sales growth was 10.8% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 2.9% on first-quarter sales. During the quarter, we saw the U.S. dollar strengthen versus several currencies, which resulted in exchange having a more unfavorable impact on sales compared to exchange rates at the time of our earnings call in January. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.7% of sales, adjusted R&D was 6.7% of sales and adjusted SG&A was 29.4% of sales in the first quarter. Lastly, our first-quarter adjusted tax rate was 15%. Turning to our outlook for the full year, we now forecast full-year adjusted earnings per share of $4.55 to $4.70, which represents an increase at the midpoint of the range compared to the guidance range we provided in January. We also raised the midpoint of our guidance for organic sales growth. We now forecast organic sales growth, excluding COVID testing to be in the range of 8.5% to 10%. Based on current rates, we expect exchange to have an unfavorable impact of approximately 2.5% on full-year reported sales, which includes an expected unfavorable impact of approximately 3% on second-quarter reported sales. Lastly, for the second quarter, we forecast adjusted earnings per share of $1.08 to $1.12. With that, we'll now open the call for questions. Questions & Answers: Operator Thank you. [Operator Instructions] And our first question will come from Robbie Marcus from J.P. Morgan. Your line is open. Robbie Marcus -- JPMorgan Chase and Company -- Analyst Great. Thanks for taking the question. Congrats on a nice first quarter here. Two for me. I'll just ask them both upfront. First, Robert, we almost never see Abbott raise guidance, particularly on the top line in the first quarter. Looking back over the past, I don't know, five, 10 years, it's very rare. First part is what gave you the confidence to raise the midpoint of the guidance this early on in the year? And then second, obviously, there's been a lot of concern during the quarter with competitor's loss in a case for NEC as it relates to infant nutrition. I was hoping you could address that what's your stance on the ongoing litigation? I think there's about a thousand cases that have been filed and any upcoming data points or timelines we should be looking for. Robert Ford -- Chairman and Chief Executive Officer Let's go first to your question on the guidance, yeah, you're right. I guess I had to go back and take a look at that. I think the last time we did raise in Q1 was in 2016. I would say the framework here, Rob, is we've always done is, we set a guidance at the beginning of the year, which we believe is top tier, and then throughout the year, we want to beat that guidance, and we consider top tier to be high single-digit double-digit EPS growth. And that's obviously excluding the COVID testing portion, which is what investors are really more focused on. So that was the guidance that we set a couple months ago, back in January. We will target always have that top-tier guidance and find the appropriate balance between, the opportunities. And obviously, the challenge is that bracket that range. If you remember in January, I said I thought that there was more opportunities than risks. I think that some of the risks that we saw in January, I still think they haven't gone away. They are still there, whether it's geopolitics or whether it's FX, those are still there. But clearly, the performance of the business continues to be very, very strong. And some of our businesses, a lot of our businesses actually accelerating our in performance. As I said in my comments, five consecutive quarters of double-digit growth here. You look at each of the businesses, EPD consecutive, three consecutive of double-digit growth, great margin expansion, and the teams are now working to be able to introduce biosimilars in all the markets that we are participating in. Nutrition has done an incredible job at recovering share and growing our adult business. We have grown adult over $1 billion versus 2019. Diagnostics continues to have a great track record here, outperforming the market. We have got some great large account wins both in the U.S. and internationally that we're rolling out into this year. And medical devices, I mean, what can I tell you? It is just been a real strong performer. The team's done an incredible job there. Last year, we were the fastest-growing MedTech Company, at least from what I have seen from our guidance and from the other guidance's in the market. That's what it seems to be again this year. So you put all that together, plus the pipeline that's been contributing to an accelerated level, great new product approvals. I put all that together and I just feel that this type of performance that we deliver just gives us the confidence for the remainder of the outlook of the year. We felt comfortable raising the guidance again, in the first quarter, which is as you pointed out something that we don't usually do. I continue to believe going into the second quarter, as we move through that there's probably more opportunities than risks here, as we move forward. I guess that's the framework of raising our guidance in the first quarter, which is something that we usually don't do. Just great performance and great momentum. And then your other question was regarding the net cases. I would say from a date, we have some court cases that will happen in July. So that's maybe a milestone that we want to look at. But if you are asking me about kind of our framework of how we look at this. I'd say, for decades, we've provided specialized nutrition products that help doctors. And I think that's a key thing here. It helps doctors to provide the lifesaving nutrition to the premature infants. How you feed a premature infant, it's a medical decision, Robbie. Health care providers, they're going to use a range of options to meet the unique needs of each baby. That includes mother's milk, that includes pasteurized donor's milk, but that also includes preterm infant formula, because where mother's milk is not available, there is not a sufficient supply of donor milk to satisfy the nutritional needs of all of these premature infants that are born in the U.S. And quite frankly, even when they're available for some premature infants, human milk may lack some of the calories, the proteins, the vitamins, etc., that are necessary to support the nutritional needs of the premature infants. That mother's milk needs to be fortified in order to boost the nutritional output. The medical community, they consider these products to be critical part of the standard of care for feeding premature infants. Most of the societies when you read their positions, it is a standard of care to use these products. The doctors who work in the NICUs, they've used our products for decades and they continue to do so today. Countless babies, Robbie, have benefited from these products, lifesaving experiences over many, many years and there are clinical studies that have repeatedly established that, these products are safe. These litigation cases, they're really seeking to advance a theory promoted by plenty of lawyers that distorts the science and it distorts everything that we know and it's not supported by the medical community. We are preparing for our cases to be able to kind of lay out the facts, the science and the data and we stand behind our products. Robbie Marcus -- JPMorgan Chase and Company -- Analyst Appreciate it, Robert. Thanks a lot. Operator Thank you. Our next question will come from Larry Biegelsen from Fargo. Your line is now open. Larry Biegelsen -- Wells Fargo Securities -- Analyst Good morning. I'll echo, Robbie's, congratulations on the strong start to the year here. Robert, I just wanted to focus on EP. A multipart question here, but just one. The EP business grew nicely in the first quarter in the U.S. and outside the U.S. Can you talk about what drove that? What you're seeing with PFA in the different geographies? Your expectations for your EP business going forward before the Volt launch? Just lastly, it sounds like we should expect the Volt approval in Europe sometime next year based on the filing date. Just want to confirm that. Robert Ford -- Chairman and Chief Executive Officer Sure. Like I said in my opening comments, we completed the trial. There's a six-month follow-up, Larry. That means that, we will be on target here to file for CE mark by the end of this year. Then, it's just going to depend on that process. I think that's probably our anchor point here is getting the filing in before the end of the year. Yes, I mean, I'm not surprised by our EP growth. I know many on the call might be, but I'm not surprised. First of all, it's an important therapy. It's an underpenetrated disease. We know there's plenty of growth in this segment, and as a result of that, it's highly competitive. But we haven't been surprised by the growth. If you look at PFA, it's been in Europe for three years. If you average our growth rate over those last three years in Europe, we've been growing mid-teens, and the growth, it remains broad base. It was broad based in Europe, again, this quarter where we saw double-digit growth in ablation catheters. Not just on the mapping side, on the ablation catheter side also but then also great growth on the mapping side, and this technology has now come to the U.S. I think we probably had maybe two months of seeing the technology be rolled out here in the U.S. I think the competitors have been very aggressive here in terms of bringing the technology to the accounts in the U.S., and I can say, we've mapped a lot of those cases, Larry. I'm not going to say we've been in every single case, but I'd say, a vast majority of the cases we've been in there. And there are some similarities to Europe, but there are some differences to Europe. I think one of the things that we saw in Europe was that there was this inclination to use the technology starting off as kind of a one shot. So that had an impact more on the CRYO business than I would say on the RF side. And that's what we saw in our mapping cases. We saw here, at least in the first couple of months, that's where a large portion of those cases occurred, at least the ones that we mapped were in places where they were traditionally used in CRYO. I think the difference that we saw a little bit in Europe is that at least 90% of the cases that we were part of direct or indirectly were using mapping that that number was lower in Europe. So that's probably a little bit of the difference I saw here in the U.S., and that bodes well for us. Our end site system, our mapping system, our mapping catheters are widely viewed as an excellent option here for mapping these PFA cases. We have a large install base. Customers are familiar with it. Don't need a make room, don't need a fight for capital. We've got best-in-class clinical support. And the architecture here is open, as I've said in previous calls. So it integrates well with these PFA catheters. We actually recently released a software upgrade last month that provides even better visualization to these catheters and potential for faster procedures and less floor time. I think this is a perfect combination, quite frankly, in a time where there's going to be market transition, There's a lot of new products, there's a lot of choices. And when you have a situation like that, I think flexibility is key, and that's what we heard from our customers. One data point that I thought was also interesting to your question of what helped drive that in the cases that we were part of, and we saw, we also observed that an RF catheter was pulled in about a quarter of the cases that we saw. So on top of the PFA catheter, an RF catheter was pulled to do touchups, etc. I'd say right now, everything that we've seen in Europe on the positive side is happening. And then I think there's some interesting dynamics here in the U.S. that could be favorable for us also, but it's still very early. If I look at March, we had probably one of our most, we look at cases per day. That was probably one of our highest months. So far so good. And we're excited about the technology, we're excited about our program. We released data on our program and some recent medical meetings that occurred. And the feedback, from those that have been used in our product are very positive. And the integration with EnSite in including like the tissue contact force algorithm and the visualization, all of that is seen as a real promise and a differentiator versus what's being used today. Larry Biegelsen -- Wells Fargo Securities -- Analyst Thanks so much. Operator Thank you. Our next question will come from Josh Jennings from Cowen. Your line is now open. Josh Jennings -- TD Cowen -- Analyst Good morning. Thanks for taking the questions and great to see the strong start here, the Q1 results. Robert, I was hoping to just ask first on Libre and just internationally, any other payment or coverage decisions that we should have on our radar in various countries. Sounds like you have made sense, some nice progress already in Germany, and then in the U.S. I was hoping you could just help or share your thoughts on the share gain opportunity in integrated pump segment of CGM market versus the share loss risk in the Type 2 non-insulin cash pace segment with a competitive launch share early in 2024. I just have one follow-up. Robert Ford -- Chairman and Chief Executive Officer On your international question, I mean, it's always difficult to forecast exactly by month-a-quarter coverage kind of payment decisions. I can tell you though that the team has a full global map of all the work that's being done regarding clinical information and negotiations, etc. It's difficult to kind of forecast it, but what I have said is on previous calls and on some of my prepared remarks that I think you're going to see this just this build that will be occurring globally in the market as the data proves and shows the clinical medical and health economic benefit by reimbursing for this patient population. And I think we're well-positioned there. Internationally, I think we got some pretty large markets already. Canada, Japan, France, Italy, Germany, those are markets that are either fully reimbursed or starting their process. And like I said, I think you will see as the year progresses, whether it's in medical events or just as the year progresses, I think you'll see more coverage decisions. Maybe they don't get splashy, big PR news, but we are seeing continuous increasing there on that. On the U.S. side, I guess I disagree with your premise that I'm going to be trading share gains on the pump side for share losses on the non-insulin side. I mean, I'm just, right now I'm looking at the data, third party audited data, seven out of every 10 new prescriptions for this basal population, which is primarily served by the primary care channel, seven out of 10 are going to Libre. I think our product's going to get even more competitive and compelling, I think this is a great opportunity and our objective here is to maintain kind of our shared dominance and our share leadership as it results in this patient segment. But we do have an opportunity here to participate a little bit more actively in what is a little bit more of a smaller segment of the population, but nonetheless, a very important one, which is the AID and the market system. There's 150,000 to 200,000 new starts a year. There's an opportunity for share gain also of existing users. I think that, the opportunity to bring a dual analyte sensor with ketones. We showed some data at ATTD this year, that showed the safety benefit or the value proposition of a dual analyte sensor for AID system. I think that's going to be a compelling value proposition. We are working with all the pump companies here and I think as the year progresses, we'll see connectivity occur whether it's with Libre 2 Plus our streaming product, or whether it's with Libre 3. This is an area that we are focusing on and it's a new segment for us to compete in. But I don't think that, we are going to be taking our eye off the ball as it relates to the basal opportunity that exists. Josh Jennings -- TD Cowen -- Analyst Understood. Thanks. And then just wanted to ask on the transcatheter tricuspid market, congratulations on the TriClip approval, but there's been some questions around the patient opportunity breakdown between TIER, TriClip, and replacement with EVOQUE. Maybe just any internal team thoughts on that patient opportunity breakdown and then maybe you could share on the pricing strategy for TriClip in the setting of competitor pricing its replacement device at a significant premium? Thanks for taking the questions. Robert Ford -- Chairman and Chief Executive Officer I'm not going to comment on our pricing strategy for competitive reasons. It is a differentiated and novel technology. There is an opportunity, but we'll have to see how this all plays out. You got NTAP submissions and all this stuff going on right now. What we are focused on here is, launching the product and getting cases ramped up and that's what's happening. I got some feedback yesterday from the team after a couple of weeks, real nice cadence of growth. We are obviously focusing on our initial cases on most of the account that were part of our pivotal trial, but just but just real nice cadence growth there and great feedback from physicians and patients post-surgery. I mean, if you're trying to poke at, what's the breakdown going to be about replace and repair, listen, I think it's good to have options. I guess my view here is that, I believe that, probably safety is a key driver here, just to start off with. I think TriClip has shown a very strong excellent safety record, both in clinical trials and real world use. I think that's going to play a key role here in determining repair versus replace. I expect repair or TriClip at least to be the preferred option unless the valves are too damaged and then obviously replacement is the only option. But there is a large pool of patients here. You got 5 million people globally, 2 million people here in the U.S. and it's going to be an opportunity here that we will be generating more data, expand the indication of the product. I think this is easily a $1 billion opportunity for us here as we build the capabilities and as we build more clinical data. Josh Jennings -- TD Cowen -- Analyst Excellent. Thank you. Operator Thank you. Our next question will come from Travis Steed from BofA Securities. Your line is open. Travis Steed -- Bank of America Merrill Lynch -- Analyst Hey. Congrats on the good quarter. Maybe just while we're on the pipeline, talk a little bit about AVEIR it sounds like that product's going really well. And then I had a question on gross margins as well. Trying to think about is this the right pace to kind of get back to pre-COVID levels and still the opportunity kind of longer term for gross margins? Robert Ford -- Chairman and Chief Executive Officer I think if AVEIR's done very well, I mean, we all know the advantages it has over the competitive system, whether it's single and dual chamber, the longer lasting battery, the ability for replacement, retrievability, upgradeability. It's done very well. From a single chamber perspective, I think we are now at about 50 share of the US market. So that's been doing very well. It's performed, we started doing our dual chamber procedures toward the end of last year. Seeing a nice kind of ramp-up over this first quarter here. Focus here really is a really about, it's a completely different procedure, right? If you think about how these devices have been implanted, this is probably the first time in like 30 years that you have like a real meaningful change on how this is done. Our focus here is really getting great clinical results real thoughtful approach here about opening new sensors and training. And that's been working very well for us. And you could see the impact on our growth rate. I mean, historically our CRM business has been relatively flat with some platforms going up, some platforms going down. Our goal here with this program was to get our CRM portfolio to at least be contributor to growth mid-single digits, 6%, 7%. These last couple of quarters we've done seven and a half percent, and so AVEIR's been doing well, and it's going to continue to get better as more and more physicians get trained and we increase the amount of accounts. So I really like the cadence of how we're forecasting this business and the impact that it's going to have on our CRM portfolio. What was your other question? Travis Steed -- Bank of America Merrill Lynch -- Analyst Just on gross margins, kind of thinking about the path back to pre-COVID levels over the long term and is this the right kind of cadence that you're -- this year's cadence, the right way to think about that? Robert Ford -- Chairman and Chief Executive Officer I think that's a good cadence. I think we're forecasting here about 70 basis points of improvement this year. Feel good about that. I've talked about this not being a question of if, just a question of when, so I think that's not a bad cadence. And we're going to focus on the things that we can control and the things that we can control are obviously our cost and our cost teams and the teams that are working on improving gross margin, they're delivering great results here, while at the same time maintaining high service levels not running to back orders, etc. But probably the biggest the biggest opportunity we have here Travis, is just to expand the gross margin through portfolio mix. When you have our medical device businesses growing at mid-teens consistently over the last, whatever, four or five quarters, that has a real strong impact on our gross margin. So a lot of focus on what we control our gross margin, the cadence. That's what we are targeting. It's not really a question of if it's just a question of when. Travis Steed -- Bank of America Merrill Lynch -- Analyst Great. Thanks a lot and congrats again. Operator Thank you. Our next question will come from Vijay Kumar from Evercore, ISI. Your line is open. Vijay Kumar -- Evercore ISI -- Analyst Hey, guys. Thanks for taking my question. Robert, I had a two forward question. A lot of questions on pipeline, but I'm curious when people ask us on sustainability of growth, if you could elaborate on pipeline, what else is there? When you look at the future, that gives us the confidence of sustaining its premium growth within the med tech industry. My second part was on the financial modeling side, looks like FX headwinds came in a little bit higher. Prior guidance that is $0.20 headwind to EPS from FX. Did that increase? I'm just curious on because some questions on why the high end of the guidance was not raised. I suspect the FX headwind increase. Robert Ford -- Chairman and Chief Executive Officer As I said, there are certain challenges that still remain with us from January and FX is one of them. I'll let Phil answer that one. On your question on pipeline, listen, I could spend a whole hour on this just going through the pipeline, but I guess I would bucket them into like three categories, Vijay. I would say you got your current contributors and Libre and Alinity, they still operate like pipeline projects and products. We still got multiple innovations going through them. MitraClip, great familiarity, AVEIR, Navitor, TriClip, Amulet, Protality, or our concussion tests, I think got great opportunity, and CardioMEMS, I mean, these are all products that I would still characterize them as early innings. Yes, they're established, but they're still early innings and they got a lot of growth rate there. The second group of products I would call, probably near-term future contributors, so think about it in the next 12 to 18 months, these products coming to market and starting to kind of generate revenue there. Our lingo product, I'm very excited about that and bringing that to the U.S. and expanding that globally. Our dual analyte sensor, our Volt system Esprit, which is our drug eluding bioabsorbable stent for below the knee. It will be the first of its kind. We are developing a whole new Alinity system that will target a segment of the market that we currently don't participate in. And there'll be more to come on that. And then just the great opportunity we have with biosimilars into the emerging markets and doing it in a very capital efficient way. And bringing that and leveraging our position there. That's our next 12 to 18 month kind of catalyst there. Then thinking about beyond 2026, I mean, we are working on a PFA, RF catheter. You got leadless, another kind of leadless pacing system that would be launching. We have a second generation Amulet, excited about entry into the IVL market sometime in 2027, coronary DCB, we're working on kind of new TAVR systems also that allow us to branch out into other segments. We've got a whole plethora of new analytes in our bio wearables market that will start to come out and have different applications in 2026. And then on top of that, all the clinical work that we're doing to expand indications, expand market, whether it's in TAVR, whether it's in LAA, whether it's in mitral. So we've got, I'd say a real nice cadence here of products and pipeline beyond, I'd say, the next 12, 18 months. We're looking at this '26, '27, '28 and I feel really excited about that. There's obviously more that we need to do and add, but I think the base here looks really good in terms of the pipeline. And then I think your question on FX, Phil, you want to take that? Phil Boudreau -- Senior Vice President, Finance, and Chief Financial Officer Yes. I mentioned at the onset here, Vijay, in Q1, we saw about a 2.9% headwind on sales growth and we kind of the current rates anticipate something similar here in Q2. From a full-year perspective at the current rates, it's about a 2.5% headwind on the top line. That said, kind of the earnings guide that we have here is in line with the organic sales performance and drop through to earnings on the increased midpoint on EPS guidance. Vijay Kumar -- Evercore ISI -- Analyst Thanks, guys. Operator Thank you. Our next question will come from Joanne Wuensch from Citi. Your line is now open. Joanne Wuensch -- Citi -- Analyst Good morning. May I add my compliments and congratulations to the quarter? I have two questions put them right up front. The first one is on concussion testing. I'd love to understand the go-to-market strategy for that, how you think about the financial benefit impact, and all that kind of good stuff? But I think my second question is a little bit more big picture. As you step back in a post-pandemic environment a couple of years into the CEO seat, how do you think about taking Abbott sort of to the next level? I mean, we all sit here and take a look at an incredibly strong balance sheet. How do you put that cash to work? Are these segments, divisions, ones you want to keep? Or how do you think about adding to it? Robert Ford -- Chairman and Chief Executive Officer Sure. On the point of care concussion test, I guess I'd summarize the opportunity here in twofold. I think there's a market conversion component to this, Joanne. I mentioned there are 5 million ER visits to diagnose a concussion. The number one method there to use that is on a CT scan. I think there's an opportunity here to transform that and allow one to get a faster response in that emergency kind of emergency room visit, which is where the -- and the point of care team already have a good position with some of our other blood gas and other assays that we provide to that segment. I think this will slide right into that team. The value proposition here is going to be, OK, what's the cost of the system and can we bend that cost curve. I think we've shown a little bit how we think about things Joanne, if you look at Libre, if you look at Binax, if you look at how we think about pricing our products, when it comes to market conversion and the opportunities that we have there? We'll be able to do it at a nice return for our shareholders. I think that's an important part. The market expansion opportunity that we have, I think is going to still require some work on the product. Right now the product is approved whole blood, but it's a venous draw. We're going to be working on a capillary draw and if you can then run this assay, taking a sample from a finger prick, then you can look at bringing that technology even closer to where the need for a rapid concussion test would be. You could just look at how many universities exist in this country, how many high schools exist in this country? You can do some multiplications there and say, this is a great market creation, market expansion opportunity. I think that that's how we're thinking about it commercially, conversion and creation slash expansion. There's some more work to be done in terms of the product and the claims and the trials there. This will be a multi-year kind of program over here where we'll start to see kind of nice growth in that segment. And then your other question was about the portfolio and balance sheet. And do we like the four segments? The answer to that is yes, we like all the four segments. We feel that it gives us a real unique view into the healthcare system as a whole starting with nutrition that's obviously the bedrock of good health. But then, things happen and you need to get a diagnosis. And we've got a great diagnostic portfolio that we've been expanding on and building on to make sure that we can capitalize on all the different types of modalities and locations where people can get tested. And then, once a physician knows what the problem is, then they got to run through treatment, right? And we do that either through a medicines business or through a medical device business. I think all four segments are super well aligned to the global demographics and trends in healthcare. And so we like that there's always opportunities to add, and we've shown that if there are areas that we feel that we can bring value in a combination then as you mentioned we've got a strong balance sheet and strategic flexibility to do that. As long as we feel that we can add value to that asset. We felt like that about CSI, we felt like that about St. Jude. We felt like that about Alere. And those deals, they obviously help kind of reshape the company and accelerate our growth rates. But I think that's predicated on us really believing that we can kind of bring value and we're not trying to fill some top-line gap or some issues. ROIC for us matters, profitability matters. We've got opportunities and we could be a little bit more selective to be able to add, but I like the four segments that we're in. And they've been well to shareholders, especially the long-term shareholders. Joanne Wuensch -- Citi -- Analyst Thank you. Operator Thank you. Our next question will come from Matt Miksic from Barclays. Your line is open. Matt Miksic -- Barclays -- Analyst Hey. Good morning. Thanks for putting me in and congrats on the really strong quarter, particularly med devices. I had one follow-up on the -- sorry, here, background. One question on structural heart. Robert, you talked a little bit about the portfolio and the combination of the leading peer device and MitraClip of being a little bit more mature in the category of structural heart, but being kind of augmented by some of these new products like most recently, obviously TriClip. And if you could talk a little bit about sort of the momentum in the portfolio as well as how much of the build out of this portfolio is still coming organically or under review kind of strategically, I appreciate it. Robert Ford -- Chairman and Chief Executive Officer Sure. I mean I didn't want my comments on mitral to be construed like that 1 there is slowing down, and we're relying on others to drive the growth. I mean, that wasn't the intent. If you look at MitraClip this quarter, it's high single digits. And if you look at the last 5 quarters, that's what it's been doing between high single-digits, low double-digits. And that's good. But we always had a view here that this is an attractive area of growth, an attractive area of medical need. And we wanted to be a leader here. So yes, MitraClip, I guess we can call MitraClip, the founding father of our structural heart portfolio. But I think the team here has done an incredible job at bringing organic innovation into the portfolio. So if you look at our structural heart, I mean, we grew 13% today. MitraClip grew high single digits. But it accounted for 3% of that growth. The rest -- the other 10% came from all the rest of the portfolio that's being built. So I think that you'll continue to see that. We'll continue to make investments in this business, continue to make investments in the pipeline. I'd say right now, most of it is organic, whether it's innovating on LAA, innovating on our TAVR side, and all the clinical trial that we're doing there. If there's an opportunity inorganically, I just put that in the same bucket that I think I answered kind of Joanne's question here if it makes sense. And we can add it. We've got the flexibility to do it. But the whole strategy here was to say, listen, we're going to build a multibillion-dollar structural heart business that can sustainably grow double digits. And the way to do that is you can't be a division of only one product. And I think the teams over the last four or five years, have done a really good job at building that and there's more opportunity. I'd say probably the one that we're looking at and is very exciting for us is mitral replacement. We've launched our Pendine product, which was more a transapical system. Our Cephea system is the transfemoral transseptal and feedback that we've seen from early implanters, early first in man is that this is a great, great valve. So there's an opportunity there also. So I'd say most organic, but we got the capacity for inorganic if it makes sense. Matt Miksic -- Barclays -- Analyst Thanks so much. Mike Comilla -- Vice President, Investor Relations Operator, we'll take one more question, please. Operator Thank you. And our final question will come from Danielle Antalffy from UBS. Your line is open. Danielle Antalffy -- UBS -- Analyst Hey. Good morning, everyone. Thanks so much for taking the question and yes, congrats on a strong start to the year. Robert, we spent a lot of time talking about the durability of growth in the med-tech business. So I don't want to get too greedy, but just following up on Joanne's question regarding you guys do have a strong balance sheet. Are there any areas -- I guess sort of how do you feel about the state of the med tech business today? And do you feel there are growth areas within med tech that maybe Abbott isn't participating in today that Abbott could or should participate in today? And where are you looking beyond your current markets, if at all? I'll just leave it to one. Robert Ford -- Chairman and Chief Executive Officer Sure. I get the attempt for triangulation here in the multiple different ways, and I guess I'll sign a little bit boring here in terms of how I talk about this. I've been public that, yes, we are interested. We look at areas that we can add value to. I'd say, probably the ones that have jumped out more at us in terms of a study and looking at are probably more in the medical device side and on the diagnostic side. We did look at a strategy for biosimilars for our medicines business and that was a pretty capital efficient way to do it. Yes, we're looking. We continue to study, but I'm not going to sit here and telegraph exactly it's this, it's that. I think the key thing here is just, I mean, look at our medtech business did this quarter, look what it did previous four quarters and that allows me to be a little bit more selective. Over the last couple of months we've seen some fairly large transactions in the medtech space. Those seem to be attractive growth areas. I talked about us getting access to some early IVL technology with the CSI acquisition. That's an important area for us to focus on. But I don't feel that, with our strong organic growth that we need to go out and not pay attention to like other key financial metrics that for us are important in terms of ROICs and those, because we've got that strong growth rate in medtech. You won't get me telegraphing here exactly, Danielle, what specific segments we are looking at. What I can tell you is, we have an active team. They study a lot. We look a lot. We follow a lot. If there's a moment that makes sense for us and those segments continue to be interesting, we've got the balance sheet and the track record to show that, we can drive value out of these acquisitions. I'll just leave it like that. Yes, we've got flexibility, that doesn't mean that we don't pay attention to other key financial returns as we're looking at it. I feel that I can do that because we've got such a strong top-line growth and great pipeline and prospects. With that, I'll leave it like that. I'll just close by saying that, we're very pleased with a very strong start to the year. We delivered another quarter of double-digit organic sales growth on the base business. The investments that we've made during all those years of COVID are generating real strong returns. The pipeline continues to be highly productive, as I've outlined. We've got clear visibility to a pipeline all the way out to '27, '28. Obtained several new product approvals that are going to help us accelerate our growth in certain areas. Typically don't raise guidance in the first quarter, but given the strong performance and the outlook and the remainder of the year, we felt comfortable doing that and we're very well-positioned to continue to sustainably deliver top-tier results. With that, I'll wrap up and thank all of you for joining us today. Mike Comilla -- Vice President, Investor Relations Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 am Central Time today on Abbott's Investor Relations website at abbotinvestor.com. Thank you for joining us today.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to the Agree Realty first quarter 2024 conference call. All participants are in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Note that this event is being recorded. I would now like to turn the conference over to Brian Hawthorne, director of corporate finance. Please go ahead, Brian. Brian Hawthorne -- Director, Corporate Finance Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's first quarter 2024 earnings call. Before turning the call over to Joey and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws, including statements related to our 2024 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA. Reconciliations of our historical non-GAAP financial measures to most directly comparable GAAP measures can be found in our earnings release, website and SEC filings. I'll now turn the call over to Joey. Joey Agree -- President and Chief Executive Officer Thanks, Brian, and thank you all for joining us this morning. We mentioned on our last call that we will remain nimble and opportunistic, ensuring we are well positioned to capitalize on opportunities as we uncover them. I am pleased to report that is precisely what we have done so far this year when our organization is focused on every day. While the net lease transaction market continues to sort itself out, our team is doing a tremendous job leveraging our relationships and uncovering unique opportunities. We see little competition in the marketplace and are often the first and last call when a seller is prepared to transact. Though first quarter acquisition volume was light, we've seen an acceleration in the second quarter while achieving similar yields and continuing to focus on best-in-class retailers across the country. This is being driven by the sheer effort of our team, our proprietary data environment and the depth of our industrywide relationships. Year-to-date, our origination team has made an average of approximately 420 outbound calls weekly to contacts within our vast database, to mine for opportunities, which is up 20% year-over-year. Our conversion rate of deals approved by our investment committee to letters of intent signed is the highest in over two years at approximately 38%. Simultaneously, we have ramped up our efforts and leveraged our tenant relationships, exemplifying how we create proprietary deal flow and accretive off-market opportunities. We continue to work hand-in-hand with the country's leading operators to drive efficiencies and reduce operating expenses. Our portfolio remains extremely well positioned with approximately 69% of rents derived from investment-grade retailers, a weighted-average lease maturity of over eight years and minimal lease term maturities. Similarly, our balance sheet is in excellent shape with total liquidity over $920 million, more than $385 million of hedged capital and no material debt maturities until 2028. This quarter marks the first time that we've introduced formal AFFO per share guidance. We believe it is important to demonstrate to shareholders that regardless of the environment, we can provide material earnings growth while adhering to our time-tested strategy. Our enhanced origination efforts, combined with our best-in-class portfolio and fortress balance sheet give us confidence that we can achieve AFFO per share between $4.10 and $4.13 for the year. This reflects 4.2% year-over-year growth at the midpoint, demonstrating our ability to provide consistent and reliable long-term earnings growth through different economic environments. We have conviction that we'll be able to continue to deploy capital consistent with the spreads we have articulated and achieved year-to-date. At this time, we have visibility into over half of the approximately $600 million acquisition guide. With anticipated full year disposition activity of $50 million to $100 million, roughly $237 million of outstanding forward equity and free cash flow approaching $100 million on an annualized basis, we'll be able to fund this activity in a largely leverage-neutral basis, ending the year well within our targeted leverage range. Turning to our three external growth platforms. During the first quarter, we invested $140 million in 50 high-quality retail net lease properties across all three platforms. The efforts I highlighted earlier enabled us to push cap rates significantly higher during the quarter with a weighted average cap rate reaching 7.7%. This represents a 50-basis-point increase quarter-over-quarter and a 100-basis-point increase year-over-year. Investment-grade retailers accounted for 64% of the annualized base rents acquired. Our focus remains on achieving investment spreads of at least 100 basis points on the best risk-adjusted opportunities and not simply aggregating volume. During the quarter, we also commenced four development and DFP projects with total anticipated costs of approximately $18 million. In total, we had 20 projects completed or under construction during the quarter with anticipated total cost of approximately $82 million, inclusive of the $48 million of costs incurred through March 31. We mentioned the potential for more opportunistic dispositions on our last call and that has come to fruition with six properties sold for gross proceeds of over $22 million during the quarter. The weighted average cap rate for the dispositions was approximately 6.2% and less than a third of the rents were derived from investment-grade retailers. We will continue to sell assets at attractive yields and reinvest that capital at approximately 150-basis-point spreads. Included in these sales were a select set of assets, including a Mister Car Wash and Gerber Collision in Florida, which continues to see elevated 1031 activity relative to the overall market. On the asset management front, we executed new leases, extensions or options on approximately 405,000 square feet of gross leasable area during the quarter. Notable extensions or options included a Best Buy in Danvers, Massachusetts, a Hobby Lobby in Port Arthur, Texas, and a Walmart Supercenter in Mena, Arkansas. Two leases were executed with new tenants during the quarter. A former Rite Aid in North Cape May, New Jersey was leased to Fresenius Medical Care and a former Big Lots in Jackson, Mississippi will be home to an O'Reilly Auto Parts sub-store. We achieved favorable releasing spreads averaging 111% for both locations and are also the beneficiary of significant credit upgrades with long-term leases containing considerable escalations. Our remaining lease expirations for the year are de minimis with only 12 leases or 40 basis points of annualized base rents maturing. Additionally, we are very pleased with the progress on the only former remaining Bed Bath & Beyond of the three that were in our portfolio. We intend to demolish the existing box and are currently negotiating leases and finalizing letters of intent with multiple retailers to ground lease to be created pad sites. While I should have more detailed information to share next quarter, I will say that we anticipate a very significant lift relative to the former Bed Bath & Beyond rent, which I believe will further highlight our real estate underwriting. Given the questions that we received, they wanted to address the recently announced Dollar Tree and Family Dollar store closures. Based on our current discussions with Dollar Tree, they will not be closing any of our stores that have less than three years of lease term. The stores they do plan to close have a weighted average lease term of 7.5 years in which Dollar Tree will continue to pay all rent and nets and represent only 30 basis points of our total portfolio base rent. We have already received interest in several of our retail partners to backfill half of the locations that are closing. Lastly, with a best-in-class team in a proprietary technology platform, we see a significant opportunity to continue to drive earnings growth. Our model is built for all markets. We are uncovering opportunities across all three platforms and are pleased that we can deliver AFFO per share growth of over 4% at the midpoint. Combined with a growing dividend that yields over 5%, the country's leading retail portfolio and a fortress balance sheet, we believe we offer a very compelling value proposition in the current environment. With that, I'll hand the call over to Peter, and then we can open up for questions. Peter Coughenour -- Chief Financial Officer Thank you, Joey. Starting with earnings. Core FFO for the first quarter was $1.01 per share, representing a 3.5% year-over-year increase. AFFO per share for the first quarter increased 4.6% year-over-year to $1.03. We received approximately $1.4 million of percentage rent during the quarter which contributed more than $0.01 of earnings to core FFO and AFFO per share, respectively. Tenants typically pay percentage rent during the first quarter of each year. As Joey mentioned, we have introduced AFFO per share guidance for full year 2024 of $4.10 to $4.13, representing 4.2% growth at the midpoint. We provide guidance on several other inputs in our earnings release, including acquisition and disposition volume, general and administrative expenses, non-reimbursable real estate expenses, and income and other tax expenses. Our guidance further demonstrates our ability to drive consistent earnings growth which supports a growing and well-covered dividend. During the first quarter, we declared monthly cash dividends of $0.247 per common share for each of January, February, and March. On an annualized basis, the monthly dividends represent a 2.9% increase over the annualized dividend from the first quarter of 2023. Our dividend is very well covered with a payout ratio of 72% of AFFO per share for the first quarter. Subsequent to quarter end, we announced a monthly cash dividend of $0.25 per common share for April. The monthly dividend equates to an annualized dividend of $3 per share and also represents a 2.9% year-over-year increase. Moving to the balance sheet. We remain in excellent position with over $920 million of total liquidity at quarter end, including roughly $237 million of outstanding forward equity, $670 million of availability on the revolver and more than $15 million of cash on hand. We have also entered into $150 million of forward starting swaps effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at just under 4%. Combined with our outstanding forward equity, this provides us with over $385 million of hedged capital to fund this year's investment activity. Our revolving credit facility and term loan also have accordion options, allowing us to request additional lender commitments of $750 million and $150 million, respectively. Further bolstering our liquidity position is free cash flow after the dividend, approaching $100 million on an annualized basis and $50 million to $100 million of anticipated disposition proceeds. As of the end of the quarter, pro forma for the settlement of our outstanding forward equity, net debt to recurring EBITDA was approximately 4.3 times, which is flat quarter-over-quarter. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.8 times. Our total debt to enterprise value was approximately 30% while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, is very healthy at 4.9 times. With that, I'd like to turn the call back over to Joey. Joey Agree -- President and Chief Executive Officer Thank you, Peter. At this time, operator, we'll open it up for questions. Questions & Answers: Operator [Operator instructions] First question comes from R.J. Milligan at Raymond James. Please go ahead. R.J. Milligan -- Raymond James -- Analyst Hey, good morning, guys. So I just want to start off with the newly issued AFFO per share guidance. Obviously, a long history of not providing it. I'm just curious what the catalyst was to provide it now. Joey Agree -- President and Chief Executive Officer Good morning, R.J. A couple of things. I think, first, just given the most -- probably the uncertainty in the macro environment, we're in a pretty crazy world -- I think we're a bordering net lease REIT and that by definition should provide for clarity and certainty of execution. And I think this guidance solidifies that in this macro environment. I don't recall a net lease REIT ever performing well with uncertainty surrounding it. And then second, I think our investor deck, the third page is consistency. And we wanted to once again reinforce that we will be a consistent growth REIT here with a defensive portfolio, obviously, and a fortress balance sheet. And then lastly, I'd say just the confidence in the team here to recalibrate to the new world order that everybody is in. This isn't easy going from a world of free money today. And so frankly, none of them have seen it from that perspective, obviously, the last time being the GFC. So as a leadership team, we needed to reset internally. Our theme for the year is dialed in and cascade it down to the entire team. So my hats off to the leadership team. Also thank you to the lineage team, which has been integral in our operating strategy and our operating execution, but everyone here is now embracing the new normal. We talked about it on the last call. And we're working our tails off here and we're not in this game just to play it, we're in it to win it. And so given those factors, I think providing this level of clarity to the street is historically consistent with our performance. R.J. Milligan -- Raymond James -- Analyst That makes sense. Thank you for that. You mentioned that you have visibility on about half of the total acquisition volume guided for the year. Can you just talk about where those cap rates are falling? Joey Agree -- President and Chief Executive Officer Right in line -- effectively in line with Q1, that is Q2. We're just wrapping up sourcing for Q2, probably in the next few days here. So right in line, plus or minus 10 basis points, subject to timing of closings or something leaking into Q3 or falling out. But right in line here. We're going to hold to that strict mandate of 100 basis point plus spreads without going up the risk curve. R.J. Milligan -- Raymond James -- Analyst And have you noticed any changes in terms of the pipeline, just given the recent move that we've seen in interest rates? Joey Agree -- President and Chief Executive Officer The most recent move, I assume, I'll say -- any changes in our pipeline, as I mentioned in the prepared remarks, are a function of the hard work. This is in market-based transactions. And so with 400-plus outbound that we track through ARC with conversion rates that are higher, we're extremely focused on those sellers that have a strong desire and/or need to transact. And so we'll continue to attempt to push cap rates higher here. We'll look for those unique or asymmetrical opportunities where we have insight or knowledge that can create value or bring value to the table. But again, it's hard to see what cap rates will do from here with the volatility of the tenure. R.J. Milligan -- Raymond James -- Analyst And just one follow-up. Joey, I think in your prepared remarks, you mentioned 110% on some releasing. I'm just curious if you can clarify, is that a 110% recovery? Or is it a 110% positive rent spread? Joey Agree -- President and Chief Executive Officer It's 110% recovery. So the Fresenius and -- go ahead, sorry. R.J. Milligan -- Raymond James -- Analyst I was going to say so rents are 10% higher than the previous term. Joey Agree -- President and Chief Executive Officer Correct. The Fresenius and Cape May, New Jersey, which took the former Rite Aid and then the former Big Lots with the O'Reilly hub. So I think most importantly or as important is we're getting new 15-year base terms here with significant escalations with obviously vastly superior operators as well. R.J. Milligan -- Raymond James -- Analyst Thank you so much. Joey Agree -- President and Chief Executive Officer Thanks, R.J. Operator Thank you. Next question comes from Nick Joseph from Citigroup. Please go ahead. Nick Joseph -- Citi -- Analyst Thanks. Joey, I just want to go over what is really driving the 50 basis point sequential increase in cap rates from first quarter to fourth quarter. Obviously, that was a pretty big jump. So I just want to understand if there is any change in tenant credit there or the makeup of deal relative to what you saw in the fourth quarter? Joey Agree -- President and Chief Executive Officer No. Very similar composition. We're still operating within the context of our sandbox as we've defined it. Obviously, volume was down for Q1. I talked about the acceleration coming for Q2, but we aren't stretching the box here. And we're going to remain disciplined. We're not going to go up the risk curve. We're not loading up on dollar stores and pharmacies to check the proverbial IG box and so the composition is very similar to what you've seen historically. Frankly, no new names. Nick Joseph -- Citi -- Analyst Thanks. And then just kind of on the theme of where cap rates potentially may move with given what's happening on the tenure side. How long of a lag would you expect to see if the tenure stays where it is before cap rates start to adjust up or was the kind of the sequential increase you saw into the first quarter already kind of contemplating a higher rate environment, this is bringing it more into a normalized range. Joey Agree -- President and Chief Executive Officer It's a great question. There's no direct correlation. I think it's fair to say there's causation there. But what we see in the net lease and all stabilized real estate asset classes without a need to sell -- I mean, this applies all the way down to the single-family residential market. Without the need to sell, there just really isn't the impetus for owners to transact. And so again, our focuses are on what Peter often references or refers to as the 3Ds. Situations where there's death, divorce, and debt maturing here, or shorter-term opportunities that we're working hand in glove with retailers to extend high-performing opportunities or just solid underlying fundamental real estate where we know there's a mark-to-market opportunity embedded in it. So I'd tell you, it will be interesting to see how cap rates, I think we're going to -- I would hope we'll see more of those types of instances here. But a lot of it is driven, frankly, by seller's hesitancy to transact in a market when they were hoping for a March cut, now they're hoping for a June cut or a September cut. And so it's -- there's obviously murkiness to the overall environment from a seller's perspective, at least. Nick Joseph -- Citi -- Analyst Thank you very much. Joey Agree -- President and Chief Executive Officer Thanks, Nick. Operator Next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead. Ronald Kamdem -- Morgan Stanley -- Analyst Two quick ones. Starting with the guidance. Just -- what are you guys thinking in terms of bad debt? What's baked into that number? And how does that compare to historical? Peter Coughenour -- Chief Financial Officer Yes. So Ron, this is Peter. Last year, when we came out with the do-nothing scenario of over 3% AFFO per share growth, we talked about, embedded in that scenario, 50 basis points of credit loss, which at the time we framed as a conservative assumption. I think that is still a conservative assumption today. And this guidance range contemplates 50 basis points of credit loss. I think as I've talked about historically, our longer-term average is closer to 25 basis points. And particularly with visibility here through April, we view 50 basis points as a conservative level in our guidance range today. Ronald Kamdem -- Morgan Stanley -- Analyst Great. And then just my second quick one on the acquisitions. I think you talked about the cap rates, but can you talk about sort of sale-leaseback activity in the ground lease market. How are things sort of reacting on a cap rate basis with the recent interest rate move? Joey Agree -- President and Chief Executive Officer Sale-leasebacks, most tenants, unless they need the money, are very reticent to enter into the sale leaseback. We've got a couple -- market today, given the rising rates, we've had a couple of discussions in the last week with tenants that are in a holding pattern. We're working on a potential couple of opportunities in Q2. We'll see if those materialize. But I think sale-leaseback activity outside of private equity sponsors here is going to be fairly muted until we get some stability in base rates. And then most of these are IG issuers, right? And so they're comparing where they can issue in the unsecured market to the sale-leaseback market. I think most importantly, we're not going to transact with any tenants that need our capital. And so I think they're being patient and we're being patient, but there are a couple of opportunities out there that we're looking at. Ronald Kamdem -- Morgan Stanley -- Analyst And the ground lease market. Joey Agree -- President and Chief Executive Officer The ground lease market, Ron, like I've always said, is essentially the same sourcing methodologies and the same ownership pool or the same seller pool as the traditional net lease market. I would note that this quarter, our second largest acquisition was a ground lease to Home Depot in Joliet, Illinois. Everyone can go take a look at it. It's in a dominant retail corridor with 700 feet of frontage, only has about 4 years remaining of lease term, paying approximately $600,000 in rent. So to the questions out there that may be forthcoming and for anyone is wondering if we're going up the risk curve in terms of WALT, weighted average lease term. Just look at the underlying real estate on your own Google Maps. This is a high-performing store with significant frontage, subsidized by a Dunkin' Donuts sublease on one outlet. So we're finding those opportunities in the ground lease space, but it's the same sourcing methodology and they've got to make sense for us in the confines of our underwriting. Ronald Kamdem -- Morgan Stanley -- Analyst Great. Thanks for the guidance. That's it for me. Joey Agree -- President and Chief Executive Officer Thanks, Ron. Operator Thank you. Next question comes from Ki Bin Kim from Truist. Please go ahead. Ki Bin Kim -- Truist Securities -- Analyst Thanks. Good morning, Joey. Just going back to your guidance. Just trying to gauge how much conservativeness is built into the midpoint, basically trying to see how fast you have to run to achieve it, given that it's your first time issuing it, I think we're just trying to get a sense of your philosophical approach to it. Joey Agree -- President and Chief Executive Officer I think our guidance is realistic. It's something that we're obviously confident that we're going to be able to achieve. As the year plays out, we'll hopefully have the opportunity to narrow that guidance and give you even more visibility. Peter, anything you would add there? Peter Coughenour -- Chief Financial Officer No. I would just add, in April, obviously, we have some visibility into the year just in terms of timing of when we're introducing guidance. It's a relatively tight range from $4.10 to $4.13. And I think that speaks to the confidence we have in hitting that range. Ki Bin Kim -- Truist Securities -- Analyst OK. And I guess what's changed over the past couple of months? Last quarter, you were talking about -- I don't want to put words in your mouth, but more of a kind of pencils down approach that there was unclarity in the market and maybe the deal flow wasn't there. So what's basically changed in the past quarter? Joey Agree -- President and Chief Executive Officer Well, if we -- we're hardly back to the fourth quarter, we saw the 10-year treasury go from four to five down to 3.85 in a combined 80 days or so, plus or minus. Then we've had some stability. Obviously, the 10-year has been on a march upward since then, we've had some stability. But I think more important to that again, I'll reiterate, the team here led by the leadership team has recalibrated our approach. We are not wasting time on sellers that are in 2022 still. We are focused on the opportunities that are readily available to transact with real sellers. And that, in conjunction with ramping our outbound efforts, rolling our sleeves up and leveraging our tenant relationships, which are very deep, gives us proprietary access to deal flow. And so we're creating opportunities. I referenced manufacturing transactions on the last call. I apologize if that was taken incorrectly. When I referenced to manufacturing transactions, finding short-term opportunities and doing early extensions, finding high-performing stores and working with retailers. Working with retailers to reduce their occupancy costs on stores or the landlords that are no longer fit within their profile or framework. And so it's a value creation exercise, but it's -- this is -- look, this is hand-to-hand combat. This isn't wholesale buying like most people were accustomed to with 12 years of declining interest rates and cap rates. And so the team has done a tremendous job refocusing, recalibrating in a wholly different environment. Ki Bin Kim -- Truist Securities -- Analyst OK. Thank you. Operator Next question comes from Joshua Dennerlein from Bank of America. Please go ahead. Unknown speaker This is [Inaudible] on behalf of Josh. I just wanted to touch on -- I know last quarter, there was comments on the most attractive investment verticals in terms of investment spreads. Are you still seeing developments as you're most attractive? Or do you have any other commentary around that? Joey Agree -- President and Chief Executive Officer Our development and DFP platform remain active. The standard mode of the majority of retailers growth through merchant developers is broken today. And so we continue to have those conversations with both the developers as well as the retailers on how we can step in and create value. As I mentioned last quarter here, we can be a solution, but that solution has duration risk, whether it's a four-month project or an 18-month project, and we're going to price in that duration risk. And so we continue to have those conversations. I'll be on the road actually with a couple of retailers headquarters in the next few weeks here to see how we can continue to be a solution in a world where elevated construction costs, lower loan to values, higher interest rates and unknown cap rates upon completion, frankly, just inhibit a merchant builder's ability to perform. Unknown speaker Right. And also, when you were mentioning the increase in call volumes outbound, is this a new internal initiative just going forward? Or what was a shift in the increase? Joey Agree -- President and Chief Executive Officer So ARC. Obviously, ARC is instrumental and tracks all of our connections through conversion rates, utilizing KPIs across all functions really here at the company. But we've made a concerted effort led by Craig Erlich, our chief growth officer, to ramp that call volume up to mine, use our vast database embedded in ARC to mine for opportunities out there that aren't glossy brochures and in an auction environment. And so those -- I'll reiterate, those opportunities are really going to come to fruition more so in Q2 here. Q1 sourcing, the majority of that was done during Q4, right? If we just use our standard 70 days to letter of intent execution to close, we only got 20 days of sourcing in Q1. Now Q2 is really post rollout of incumbent up on -- after the New Year here of our dial data strategy, and that's the theme here for the year, it's dialed in, and we'll see that come to fruition in Q2 here. Unknown speaker Great. Thank you. Joey Agree -- President and Chief Executive Officer Thank you. Operator Next question comes from Eric Borden at BMO. Please go ahead. Eric Borden -- BMO Capital Markets -- Analyst Hey, good morning. Just one on the disposition guidance. I was hoping that you could talk about some of the opportunistic capital recycling program that you have going on. What are the different tenant types or geographies that you're looking to prune from the portfolio? Joey Agree -- President and Chief Executive Officer Yes. As I mentioned in the prepared remarks, there seems to be a disproportionate amount of activity, albeit in a low base of 1031 activity. Specifically in Florida, we disposed of Gerber Collision of Mister Car Wash. I think you'll continue to see us dispose of and recycle some noncore assets, primarily in Florida, but also opportunities that are inbound with the 1031 that needs to be filled quickly where we can opportunistically sell an asset and recycle that capital of 150 basis point spread. So again, Florida seems to be the hotspot for a number of reasons. And so we're very confident in that range of 50 to 100, considering we've already closed over 20 and have visibility into over 20 for Q2. Eric Borden -- BMO Capital Markets -- Analyst That's helpful. And then I just noticed occupancy had a small dip sequentially. I was just hoping you could provide some additional color on the kind of vacates and how should we be thinking about occupancy for the remainder of the year? Joey Agree -- President and Chief Executive Officer Well, we were 99.8% in Q4, which is pretty high. I mean, it's effectively occupied. I'd argue 99.6% is effectively occupied. It's really the resolution of one box, which we anticipate in Q2. We're going to have some interesting embedded real estate opportunities inclusive of the Bed Bath & Beyond redevelopment in Memphis, Tennessee in Q2, it looks here. And I think it's going to demonstrate our underwriting prowess and our real estate prowess and also our ability to identify assets within our portfolio that have real estate fundamentals that aren't being frankly utilized to the highest and best purpose. And so hopefully, those are done and complete in Q2, and we can give, obviously, much more detailed breakdown. Eric Borden -- BMO Capital Markets -- Analyst All right. Thanks very much. Joey Agree -- President and Chief Executive Officer Thank you. Operator Next question comes from Rob Stevenson from Janney Montgomery. Please go ahead. Rob Stevenson -- Janney Montgomery Scott -- Analyst Good morning, guys. Joey, can you talk a little bit about the expected return on the $74 million of development DFP projects that were under construction at the end of the quarter? And what was a similar sort of return to the projects you completed in '23. Joey Agree -- President and Chief Executive Officer Yes. I don't recall that the 2023 returns off hand. And again, it's really duration. Obviously, there's real estate and credit, but duration becomes the critical aspect. If we're able to retrofit an existing building through either projects and the tenant is going to be paying rent in 120 or 150 days. We do that often with Sunbelt Rentals. We do that often with Gerber Collision. We're looking to, I would say, approximately 50 basis point spreads to where we can buy like-kind assets. Now if we're talking about the entitlement process and a new build, we're very frankly wide of that if it's going to be a 12- to 18-month project. We're not going to go out there on the duration curve without a significant preview. And so that's really the tension again, which we're trying to work through with retailers and merchant developers here. The team is on the phone all day talking to developers with broken projects where they can't get financing or the returns don't make sense, and they're unable to perform or frankly, just won't perform because they don't have clarity up on the back end. And so there's a significant opportunity there. The question becomes, which ones hit the risk-adjusted return threshold, that we just talked about, Rob. But you can assume that if we're buying here in the mid upper 7s, we're certainly not putting our financing shovels in the ground at those rates. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then you talked a bit earlier about the Dollar Trees. And can you talk about how many are likely to close or not likely to be Dollar Trees in the near future given your current discussions that you're going to need to retenant at some point? And what's the average size of those boxes? Joey Agree -- President and Chief Executive Officer Yes. So just to reiterate, we have no stores on the closing list that have less than three years of term. That is obviously subject to Dollar Tree's chain. They'll be responsible for all rent and net. There's corporate guarantees behind all of these leases. Ironically, the weighted average lease term of the approximately 15 stores that will be closed is approaching eight years, seven and a half, eight years, so they're on the hook there. And then we've had inbounds for over half. We're going to start discussions. Obviously, they've got a lot going through Dollar Tree right now, whether they're going to sublease or whether they want to pay a termination fee here and then we'll enter into direct leases, but you can imagine the retail partners inclusive of other dollar stores, auto parts operators, low price point operators that are looking at those opportunities. But I think we're very pleased with the outcome given the store closure announcement there. It will have nothing expiring within three years. And again, these are average $100,000 in rent per store with a weighted average lease term approaching eight years. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then last one for me. Can you talk a little bit about the market out there for vacant sites given the financing environment? So if there's -- like your vacant Bed Bath & Beyond or whether or not there's movie theaters, etc., are there people out there actively buying these for redevelopment play at this point? Or is the financing not allowing them to do that? Is that an opportunity for you guys to use capital on some of the better located vacant retailers to do stuff like you're doing with the Bed Bath site, and you've done historically with a number of other stuff dating back to the Kmart days? Joey Agree -- President and Chief Executive Officer Kmart days. It's a broad question. First, the lack of financing, given the regional bank credit crunch here, has made development a very difficult proposition with loan to cost at 60% to 65% as opposed to getting 90%, 95%. That's one, plus obviously the elevated interest rates. So the movie theaters, I mean, those are teared out, right? If you're a movie theater owner here, there's too many screens in this country. Those are teardowns and redevelopments that's not really within our sandbox. The Bed Bath & Beyond opportunity, I'll tell you, well, first, there's an insatiable appetite for highly or well-located boxes that are of marketable size. So if you have a 20,000 to 25,000 square foot junior box, the replacement cost on vertical alone is $160 per square foot. And so those numbers don't pencil to build. And so what we see is significant interest in any existing boxes that are well located from a whole host of tenants. I mean 90% of the tenants in our portfolio are looking to grow today. It's just the cost structures and the ability to execute that growth. The Bed Bath & Beyond case and I'll give a little bit more detail on it. It's fairly unique. It's out in front of a mall in Memphis, Tennessee. It's perpendicular to the road and isn't maximizing the frontage. We've written white papers about this and the migration to freestanding format is driving really an insatiable demand for pad sites from C-store users from chicken users or chicken sellers, chicken restaurants -- chicken based restaurants, I'll call them. There's a lot of chicken going around. Car washes, we all know. And so these freestanding operators are continuing to grow and grow and grow. We looked at the 45,000 square foot Bed Bath & Beyond box and I'll be honest, a 45,000 square foot box today isn't very marketable. There aren't many users for 45,000 feet. We had an offer to take the box in the mid-single digits from a user. And then we looked at it and said wait a second. The highest and best use here is to take the box down and create freestanding pad sites along a major retail corridor. It will be my first redevelopment of a freestanding box, which includes the total tear down and conversion to pad sites in my career. And we're going to have a very significant lift here upon completion of that redevelopment. And we think there are other opportunities in the portfolio, and both outside the portfolio, to continue to really take advantage of the migration and really the expansion of the freestanding operators. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. Thanks. Appreciate the time. Joey Agree -- President and Chief Executive Officer Thanks, Rob. Operator The next question comes from Alec Feygin from Baird. Please go ahead. Alec Feygin -- Robert W. Baird and Company -- Analyst Hey, good morning. Thank you for taking my questions. First one is, what are the plans, if I need to issue debt? And is there anything of the sort assumed in guidance? Peter Coughenour -- Chief Financial Officer Thanks, Alec. This is Peter. I think first, just in terms of our funding plans for the year, as we said in the prepared remarks, we can execute on that $600 million acquisition guide on a leverage-neutral basis without needing to raise any external capital. And so we're in a great position for the remainder of the year. We have plenty of flexibility in terms of how and when we access the capital markets. In terms of debt funding plans for the year, again, we can be flexible. We do have $150 million of forward starting swaps in place, which have hedged a future 10-year unsecured debt issuance at an effective base rate of just under 4%. And so we'll look to be opportunistic in terms of accessing the debt markets, but we have over a year to use those swaps and can afford to be nimble and flexible in terms of how and when we come to the market. Alec Feygin -- Robert W. Baird and Company -- Analyst That's helpful. Thank you. Second one for me is kind of on the pipeline of potential developer takeouts? And is that -- are those conversations increasing or decreasing? I know, Joe, you talked about this merchant developer or retailer kind of bind right now. But just curious if those conversations have been increasing. Joey Agree -- President and Chief Executive Officer Increasing. We built out that team. We've launched an ARC module for that team. We've added to that team in terms of team members. They are increasing. They're daily, multiple times per day trying to piece together projects that can work. And so it's really just shifting through the returns that work for the retail -- for the developer and/or retailer, the rent per square foot, they're the output and figuring out the duration premium and/or term or credit premium that we're going to require relative to where a standard acquisition. Alec Feygin -- Robert W. Baird and Company -- Analyst Got it. And one last one for me. Is the company having any more direct conversations with retailers about expansion, so not for the developers, but directly? I know you mentioned you're about to go meet with some retailers, but any more color on that? Joey Agree -- President and Chief Executive Officer Yes. very frequently, whether it's coming in and stepping in as a solution or working with retailers on a standard rollout, those are a big focus for us along with DFP. Alec Feygin -- Robert W. Baird and Company -- Analyst Got it. That's it for me. Thank you. Operator The next question comes from Linda Tsai from Jefferies. Please go ahead. Linda Tsai -- Jefferies -- Analyst Hi. Good morning. I know you're confident about the $600 million in acquisitions this year, but what does the low and high end of AFFO per share guidance baking for acquisition volumes? Peter Coughenour So the acquisition -- sorry, the AFFO per share guidance range assumes approximately $600 million of acquisitions. When I think about hitting the low end or the high end of that AFFO per share guidance range, I would look to the other inputs that we guided to in the earnings release. And obviously, the more favorable end of those ranges will result in us being closer to the high end of our AFFO per share guide range. At the less favorable end of those ranges, we'd be closer to the low end. But in terms of acquisition volume, we're assuming approximately $600 million. Linda Tsai -- Jefferies -- Analyst Thanks. That's helpful. And the 5.7% to 6% of G&A, I know it's a little early, but would this be a reasonable run rate to assume as we look out to next year? Joey Agree -- President and Chief Executive Officer Well, I think first, we've continued to scale. So the G&A as a percentage of revenues has continued to scale. I would assume next year, you'll see that continued scale as well. Obviously, that's subject to revenue, which is driven by investment volumes, but this company has become much more efficient from a technology standpoint, from a process standpoint. And so you'll see that number continue to scale. The denominator there, I think, will be the biggest moving piece, the revenue number, Peter? Peter Coughenour -- Chief Financial Officer Yes. That's correct. And Linda, just for some more context. If you look back four years ago, G&A as a percent of revenue was roughly 8%. And so we've seen, based on our guide this year, roughly 200 basis points of scale just in the last four years and expect that we'll continue to see scale here going forward. Linda Tsai -- Jefferies -- Analyst Thanks for that. And those 15 Family Dollar boxes, what's the IRR you'll expect on those as you release [Inaudible]. And I know you have [Inaudible]. Joey Agree -- President and Chief Executive Officer We haven't got that far yet. There is no resolution. We feel that, as I mentioned, inquiries for over half of them already. The base case is that Dollar Tree is on the hook for the weighted average lease term of almost eight years for the rent and nets on all of them. But we haven't looked at disposition yet or whether we're going to -- Dollar Tree will be subleasing themselves or we would take a termination fee and enter into a direct lease with a net new tenant. So this is all pretty fresh, hot off the press, but we'll be working through that, I would think, this quarter. Linda Tsai -- Jefferies -- Analyst One last question. You emphasized Florida a couple of times. Why is now the right time to sell there? Is it asset or state-specific? Joey Agree -- President and Chief Executive Officer State specific, it just seems that a disproportionate amount of 1031 activity, which is very muted, as we all know, is attracted to the Sunshine State. Florida seems to be the new California. It's international capital, it's private capital, some of the stories, frankly, of the buyer profile don't even really add up. But if they come to the closing table, we're happy with it. I mean we had a buyer walk away on a sales, the first time in my career, from a $75,000 nonrefundable deposit the day before closing on a couple of million dollar sale in Florida as well. So it's very interesting, but we'll again continue to look to opportunistically dispose of assets at these cap rates and then recycle it. But Florida seems to be an outlier here of 1031 activity. Now it's -- I will mention it is fractional -- 1031 overall activity is fractional of what it's been in past years. And so this is opportunistic. They don't all close. Half of them will terminate, but we're working prudently through it, and we've built out the disposition team under Nicole, and we're actively pursuing it. Linda Tsai -- Jefferies -- Analyst Thanks for the color. Joey Agree -- President and Chief Executive Officer Thanks, Linda. Operator And the next question comes from Haendel St. Juste at Mizuho. Please go ahead. Haendel St. Juste -- Mizuho Securities -- Analyst Thank you for taking may question. Joey, can you talk a little bit about the economics behind backfilling for the Big Lots. I think it was filled within O'Reilly's -- maybe some color on the capital that was required, the new lease term, the releasing spreads. And I know Linda just asked a question about dollar stores, but I'm just curious how different are the in-place rent and box sizes of the Big Lots versus the dollar stores and anything else that could be relevant or informative there? Thanks. Joey Agree -- President and Chief Executive Officer Yes. The only thing I can share with you -- again, we put the two leases, 110% or 111% of former rents. Both leases, both the Big Lots -- sorry, the O'Reilly as well as the Fresenius are long-term leases with escalators. We're seeing tenants more amenable to escalators. Obviously, given the inflationary environment. I think there's a misnomer that investment-grade operators are flat leases that is patently false. These leases have been proved that wrong. De minimis landlord work, again, this is going to be a hub store. And so we have a few other hub stores, but these are the distribution as well for other commercial locations and body shops as well as a retail storefront. So we're excited to add that. Obviously, a significant upgrade. That box, if I recall, was probably 30,000 feet, so it was a larger box. The dollar stores range from about 8,000 to 10,000 feet generally. And so they're smaller boxes than the Big Lots. And so the marketability of them is very different, I would just say from the prospective tenant pool than a junior box such as the former Big Lots. Haendel St. Juste -- Mizuho Securities -- Analyst That's helpful. Appreciate it. And I wanted to go back quickly on the commentary earlier on, I think you were saying you're expecting less activity on the sale-leaseback side. I would have thought that with debt cost still fairly high here, that a lot of these guys don't have better alternatives than sale leaseback. So maybe some more color on what you're hearing or seeing on that front would be helpful. Thank you. Joey Agree -- President and Chief Executive Officer Well, general, we're talking to sophisticated operators of potential counterparties and former counterparties on sale leasebacks. Most of them have extremely strong balance sheets, rated BBB or higher. They're industry leaders. For them to go enter into a sale leaseback on a spread over where they can issue today just doesn't make economic sense, and they have the balance sheet and liquidity profile to hope for lower rates. It's that simple. And so I think all of them, knowing where cap rates would trade today, are holding out for better for -- honestly, better pricing. And so a number of the retailers we transacted with last year on the sale-leaseback front. We've had discussions with them and want to continue. They publicly commented on their earnings calls about sale leaseback activity. But in reality, I'm not sure they're ready to stomach the pricing that is really going to clear in today's market. And so it's a game of wait and see. Some are getting full on their balance sheet and looking for solutions. And others are saying, "Hey, we'll hold for the long term unless something -- unless the winds change." So again, the tenants that we're doing at leasebacks with don't need the money. That's the most important thing. We're a small piece of their overall capital stack. And so it's almost a secondary exercise in terms of capex. It is a secondary exercise in terms of capital sourcing for them. If it's not favorable, they're not going to do anything. Haendel St. Juste -- Mizuho Securities -- Analyst Helpful. Thank you. Joey Agree -- President and Chief Executive Officer Thanks, Haendel. Operator Thank you. We have no further questions. I will turn the call back over for closing comments. Joey Agree -- President and Chief Executive Officer Well, thank you, everybody, for joining us this morning. We appreciate everyone's time and look forward to seeing you in the upcoming conferences. Appreciate it. Thank you. Answer:

the Agree Realty first quarter 2024 conference call

Operator Good morning, and welcome to the Agree Realty first quarter 2024 conference call. All participants are in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Note that this event is being recorded. I would now like to turn the conference over to Brian Hawthorne, director of corporate finance. Please go ahead, Brian. Brian Hawthorne -- Director, Corporate Finance Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's first quarter 2024 earnings call. Before turning the call over to Joey and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws, including statements related to our 2024 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA. Reconciliations of our historical non-GAAP financial measures to most directly comparable GAAP measures can be found in our earnings release, website and SEC filings. I'll now turn the call over to Joey. Joey Agree -- President and Chief Executive Officer Thanks, Brian, and thank you all for joining us this morning. We mentioned on our last call that we will remain nimble and opportunistic, ensuring we are well positioned to capitalize on opportunities as we uncover them. I am pleased to report that is precisely what we have done so far this year when our organization is focused on every day. While the net lease transaction market continues to sort itself out, our team is doing a tremendous job leveraging our relationships and uncovering unique opportunities. We see little competition in the marketplace and are often the first and last call when a seller is prepared to transact. Though first quarter acquisition volume was light, we've seen an acceleration in the second quarter while achieving similar yields and continuing to focus on best-in-class retailers across the country. This is being driven by the sheer effort of our team, our proprietary data environment and the depth of our industrywide relationships. Year-to-date, our origination team has made an average of approximately 420 outbound calls weekly to contacts within our vast database, to mine for opportunities, which is up 20% year-over-year. Our conversion rate of deals approved by our investment committee to letters of intent signed is the highest in over two years at approximately 38%. Simultaneously, we have ramped up our efforts and leveraged our tenant relationships, exemplifying how we create proprietary deal flow and accretive off-market opportunities. We continue to work hand-in-hand with the country's leading operators to drive efficiencies and reduce operating expenses. Our portfolio remains extremely well positioned with approximately 69% of rents derived from investment-grade retailers, a weighted-average lease maturity of over eight years and minimal lease term maturities. Similarly, our balance sheet is in excellent shape with total liquidity over $920 million, more than $385 million of hedged capital and no material debt maturities until 2028. This quarter marks the first time that we've introduced formal AFFO per share guidance. We believe it is important to demonstrate to shareholders that regardless of the environment, we can provide material earnings growth while adhering to our time-tested strategy. Our enhanced origination efforts, combined with our best-in-class portfolio and fortress balance sheet give us confidence that we can achieve AFFO per share between $4.10 and $4.13 for the year. This reflects 4.2% year-over-year growth at the midpoint, demonstrating our ability to provide consistent and reliable long-term earnings growth through different economic environments. We have conviction that we'll be able to continue to deploy capital consistent with the spreads we have articulated and achieved year-to-date. At this time, we have visibility into over half of the approximately $600 million acquisition guide. With anticipated full year disposition activity of $50 million to $100 million, roughly $237 million of outstanding forward equity and free cash flow approaching $100 million on an annualized basis, we'll be able to fund this activity in a largely leverage-neutral basis, ending the year well within our targeted leverage range. Turning to our three external growth platforms. During the first quarter, we invested $140 million in 50 high-quality retail net lease properties across all three platforms. The efforts I highlighted earlier enabled us to push cap rates significantly higher during the quarter with a weighted average cap rate reaching 7.7%. This represents a 50-basis-point increase quarter-over-quarter and a 100-basis-point increase year-over-year. Investment-grade retailers accounted for 64% of the annualized base rents acquired. Our focus remains on achieving investment spreads of at least 100 basis points on the best risk-adjusted opportunities and not simply aggregating volume. During the quarter, we also commenced four development and DFP projects with total anticipated costs of approximately $18 million. In total, we had 20 projects completed or under construction during the quarter with anticipated total cost of approximately $82 million, inclusive of the $48 million of costs incurred through March 31. We mentioned the potential for more opportunistic dispositions on our last call and that has come to fruition with six properties sold for gross proceeds of over $22 million during the quarter. The weighted average cap rate for the dispositions was approximately 6.2% and less than a third of the rents were derived from investment-grade retailers. We will continue to sell assets at attractive yields and reinvest that capital at approximately 150-basis-point spreads. Included in these sales were a select set of assets, including a Mister Car Wash and Gerber Collision in Florida, which continues to see elevated 1031 activity relative to the overall market. On the asset management front, we executed new leases, extensions or options on approximately 405,000 square feet of gross leasable area during the quarter. Notable extensions or options included a Best Buy in Danvers, Massachusetts, a Hobby Lobby in Port Arthur, Texas, and a Walmart Supercenter in Mena, Arkansas. Two leases were executed with new tenants during the quarter. A former Rite Aid in North Cape May, New Jersey was leased to Fresenius Medical Care and a former Big Lots in Jackson, Mississippi will be home to an O'Reilly Auto Parts sub-store. We achieved favorable releasing spreads averaging 111% for both locations and are also the beneficiary of significant credit upgrades with long-term leases containing considerable escalations. Our remaining lease expirations for the year are de minimis with only 12 leases or 40 basis points of annualized base rents maturing. Additionally, we are very pleased with the progress on the only former remaining Bed Bath & Beyond of the three that were in our portfolio. We intend to demolish the existing box and are currently negotiating leases and finalizing letters of intent with multiple retailers to ground lease to be created pad sites. While I should have more detailed information to share next quarter, I will say that we anticipate a very significant lift relative to the former Bed Bath & Beyond rent, which I believe will further highlight our real estate underwriting. Given the questions that we received, they wanted to address the recently announced Dollar Tree and Family Dollar store closures. Based on our current discussions with Dollar Tree, they will not be closing any of our stores that have less than three years of lease term. The stores they do plan to close have a weighted average lease term of 7.5 years in which Dollar Tree will continue to pay all rent and nets and represent only 30 basis points of our total portfolio base rent. We have already received interest in several of our retail partners to backfill half of the locations that are closing. Lastly, with a best-in-class team in a proprietary technology platform, we see a significant opportunity to continue to drive earnings growth. Our model is built for all markets. We are uncovering opportunities across all three platforms and are pleased that we can deliver AFFO per share growth of over 4% at the midpoint. Combined with a growing dividend that yields over 5%, the country's leading retail portfolio and a fortress balance sheet, we believe we offer a very compelling value proposition in the current environment. With that, I'll hand the call over to Peter, and then we can open up for questions. Peter Coughenour -- Chief Financial Officer Thank you, Joey. Starting with earnings. Core FFO for the first quarter was $1.01 per share, representing a 3.5% year-over-year increase. AFFO per share for the first quarter increased 4.6% year-over-year to $1.03. We received approximately $1.4 million of percentage rent during the quarter which contributed more than $0.01 of earnings to core FFO and AFFO per share, respectively. Tenants typically pay percentage rent during the first quarter of each year. As Joey mentioned, we have introduced AFFO per share guidance for full year 2024 of $4.10 to $4.13, representing 4.2% growth at the midpoint. We provide guidance on several other inputs in our earnings release, including acquisition and disposition volume, general and administrative expenses, non-reimbursable real estate expenses, and income and other tax expenses. Our guidance further demonstrates our ability to drive consistent earnings growth which supports a growing and well-covered dividend. During the first quarter, we declared monthly cash dividends of $0.247 per common share for each of January, February, and March. On an annualized basis, the monthly dividends represent a 2.9% increase over the annualized dividend from the first quarter of 2023. Our dividend is very well covered with a payout ratio of 72% of AFFO per share for the first quarter. Subsequent to quarter end, we announced a monthly cash dividend of $0.25 per common share for April. The monthly dividend equates to an annualized dividend of $3 per share and also represents a 2.9% year-over-year increase. Moving to the balance sheet. We remain in excellent position with over $920 million of total liquidity at quarter end, including roughly $237 million of outstanding forward equity, $670 million of availability on the revolver and more than $15 million of cash on hand. We have also entered into $150 million of forward starting swaps effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at just under 4%. Combined with our outstanding forward equity, this provides us with over $385 million of hedged capital to fund this year's investment activity. Our revolving credit facility and term loan also have accordion options, allowing us to request additional lender commitments of $750 million and $150 million, respectively. Further bolstering our liquidity position is free cash flow after the dividend, approaching $100 million on an annualized basis and $50 million to $100 million of anticipated disposition proceeds. As of the end of the quarter, pro forma for the settlement of our outstanding forward equity, net debt to recurring EBITDA was approximately 4.3 times, which is flat quarter-over-quarter. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.8 times. Our total debt to enterprise value was approximately 30% while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, is very healthy at 4.9 times. With that, I'd like to turn the call back over to Joey. Joey Agree -- President and Chief Executive Officer Thank you, Peter. At this time, operator, we'll open it up for questions. Questions & Answers: Operator [Operator instructions] First question comes from R.J. Milligan at Raymond James. Please go ahead. R.J. Milligan -- Raymond James -- Analyst Hey, good morning, guys. So I just want to start off with the newly issued AFFO per share guidance. Obviously, a long history of not providing it. I'm just curious what the catalyst was to provide it now. Joey Agree -- President and Chief Executive Officer Good morning, R.J. A couple of things. I think, first, just given the most -- probably the uncertainty in the macro environment, we're in a pretty crazy world -- I think we're a bordering net lease REIT and that by definition should provide for clarity and certainty of execution. And I think this guidance solidifies that in this macro environment. I don't recall a net lease REIT ever performing well with uncertainty surrounding it. And then second, I think our investor deck, the third page is consistency. And we wanted to once again reinforce that we will be a consistent growth REIT here with a defensive portfolio, obviously, and a fortress balance sheet. And then lastly, I'd say just the confidence in the team here to recalibrate to the new world order that everybody is in. This isn't easy going from a world of free money today. And so frankly, none of them have seen it from that perspective, obviously, the last time being the GFC. So as a leadership team, we needed to reset internally. Our theme for the year is dialed in and cascade it down to the entire team. So my hats off to the leadership team. Also thank you to the lineage team, which has been integral in our operating strategy and our operating execution, but everyone here is now embracing the new normal. We talked about it on the last call. And we're working our tails off here and we're not in this game just to play it, we're in it to win it. And so given those factors, I think providing this level of clarity to the street is historically consistent with our performance. R.J. Milligan -- Raymond James -- Analyst That makes sense. Thank you for that. You mentioned that you have visibility on about half of the total acquisition volume guided for the year. Can you just talk about where those cap rates are falling? Joey Agree -- President and Chief Executive Officer Right in line -- effectively in line with Q1, that is Q2. We're just wrapping up sourcing for Q2, probably in the next few days here. So right in line, plus or minus 10 basis points, subject to timing of closings or something leaking into Q3 or falling out. But right in line here. We're going to hold to that strict mandate of 100 basis point plus spreads without going up the risk curve. R.J. Milligan -- Raymond James -- Analyst And have you noticed any changes in terms of the pipeline, just given the recent move that we've seen in interest rates? Joey Agree -- President and Chief Executive Officer The most recent move, I assume, I'll say -- any changes in our pipeline, as I mentioned in the prepared remarks, are a function of the hard work. This is in market-based transactions. And so with 400-plus outbound that we track through ARC with conversion rates that are higher, we're extremely focused on those sellers that have a strong desire and/or need to transact. And so we'll continue to attempt to push cap rates higher here. We'll look for those unique or asymmetrical opportunities where we have insight or knowledge that can create value or bring value to the table. But again, it's hard to see what cap rates will do from here with the volatility of the tenure. R.J. Milligan -- Raymond James -- Analyst And just one follow-up. Joey, I think in your prepared remarks, you mentioned 110% on some releasing. I'm just curious if you can clarify, is that a 110% recovery? Or is it a 110% positive rent spread? Joey Agree -- President and Chief Executive Officer It's 110% recovery. So the Fresenius and -- go ahead, sorry. R.J. Milligan -- Raymond James -- Analyst I was going to say so rents are 10% higher than the previous term. Joey Agree -- President and Chief Executive Officer Correct. The Fresenius and Cape May, New Jersey, which took the former Rite Aid and then the former Big Lots with the O'Reilly hub. So I think most importantly or as important is we're getting new 15-year base terms here with significant escalations with obviously vastly superior operators as well. R.J. Milligan -- Raymond James -- Analyst Thank you so much. Joey Agree -- President and Chief Executive Officer Thanks, R.J. Operator Thank you. Next question comes from Nick Joseph from Citigroup. Please go ahead. Nick Joseph -- Citi -- Analyst Thanks. Joey, I just want to go over what is really driving the 50 basis point sequential increase in cap rates from first quarter to fourth quarter. Obviously, that was a pretty big jump. So I just want to understand if there is any change in tenant credit there or the makeup of deal relative to what you saw in the fourth quarter? Joey Agree -- President and Chief Executive Officer No. Very similar composition. We're still operating within the context of our sandbox as we've defined it. Obviously, volume was down for Q1. I talked about the acceleration coming for Q2, but we aren't stretching the box here. And we're going to remain disciplined. We're not going to go up the risk curve. We're not loading up on dollar stores and pharmacies to check the proverbial IG box and so the composition is very similar to what you've seen historically. Frankly, no new names. Nick Joseph -- Citi -- Analyst Thanks. And then just kind of on the theme of where cap rates potentially may move with given what's happening on the tenure side. How long of a lag would you expect to see if the tenure stays where it is before cap rates start to adjust up or was the kind of the sequential increase you saw into the first quarter already kind of contemplating a higher rate environment, this is bringing it more into a normalized range. Joey Agree -- President and Chief Executive Officer It's a great question. There's no direct correlation. I think it's fair to say there's causation there. But what we see in the net lease and all stabilized real estate asset classes without a need to sell -- I mean, this applies all the way down to the single-family residential market. Without the need to sell, there just really isn't the impetus for owners to transact. And so again, our focuses are on what Peter often references or refers to as the 3Ds. Situations where there's death, divorce, and debt maturing here, or shorter-term opportunities that we're working hand in glove with retailers to extend high-performing opportunities or just solid underlying fundamental real estate where we know there's a mark-to-market opportunity embedded in it. So I'd tell you, it will be interesting to see how cap rates, I think we're going to -- I would hope we'll see more of those types of instances here. But a lot of it is driven, frankly, by seller's hesitancy to transact in a market when they were hoping for a March cut, now they're hoping for a June cut or a September cut. And so it's -- there's obviously murkiness to the overall environment from a seller's perspective, at least. Nick Joseph -- Citi -- Analyst Thank you very much. Joey Agree -- President and Chief Executive Officer Thanks, Nick. Operator Next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead. Ronald Kamdem -- Morgan Stanley -- Analyst Two quick ones. Starting with the guidance. Just -- what are you guys thinking in terms of bad debt? What's baked into that number? And how does that compare to historical? Peter Coughenour -- Chief Financial Officer Yes. So Ron, this is Peter. Last year, when we came out with the do-nothing scenario of over 3% AFFO per share growth, we talked about, embedded in that scenario, 50 basis points of credit loss, which at the time we framed as a conservative assumption. I think that is still a conservative assumption today. And this guidance range contemplates 50 basis points of credit loss. I think as I've talked about historically, our longer-term average is closer to 25 basis points. And particularly with visibility here through April, we view 50 basis points as a conservative level in our guidance range today. Ronald Kamdem -- Morgan Stanley -- Analyst Great. And then just my second quick one on the acquisitions. I think you talked about the cap rates, but can you talk about sort of sale-leaseback activity in the ground lease market. How are things sort of reacting on a cap rate basis with the recent interest rate move? Joey Agree -- President and Chief Executive Officer Sale-leasebacks, most tenants, unless they need the money, are very reticent to enter into the sale leaseback. We've got a couple -- market today, given the rising rates, we've had a couple of discussions in the last week with tenants that are in a holding pattern. We're working on a potential couple of opportunities in Q2. We'll see if those materialize. But I think sale-leaseback activity outside of private equity sponsors here is going to be fairly muted until we get some stability in base rates. And then most of these are IG issuers, right? And so they're comparing where they can issue in the unsecured market to the sale-leaseback market. I think most importantly, we're not going to transact with any tenants that need our capital. And so I think they're being patient and we're being patient, but there are a couple of opportunities out there that we're looking at. Ronald Kamdem -- Morgan Stanley -- Analyst And the ground lease market. Joey Agree -- President and Chief Executive Officer The ground lease market, Ron, like I've always said, is essentially the same sourcing methodologies and the same ownership pool or the same seller pool as the traditional net lease market. I would note that this quarter, our second largest acquisition was a ground lease to Home Depot in Joliet, Illinois. Everyone can go take a look at it. It's in a dominant retail corridor with 700 feet of frontage, only has about 4 years remaining of lease term, paying approximately $600,000 in rent. So to the questions out there that may be forthcoming and for anyone is wondering if we're going up the risk curve in terms of WALT, weighted average lease term. Just look at the underlying real estate on your own Google Maps. This is a high-performing store with significant frontage, subsidized by a Dunkin' Donuts sublease on one outlet. So we're finding those opportunities in the ground lease space, but it's the same sourcing methodology and they've got to make sense for us in the confines of our underwriting. Ronald Kamdem -- Morgan Stanley -- Analyst Great. Thanks for the guidance. That's it for me. Joey Agree -- President and Chief Executive Officer Thanks, Ron. Operator Thank you. Next question comes from Ki Bin Kim from Truist. Please go ahead. Ki Bin Kim -- Truist Securities -- Analyst Thanks. Good morning, Joey. Just going back to your guidance. Just trying to gauge how much conservativeness is built into the midpoint, basically trying to see how fast you have to run to achieve it, given that it's your first time issuing it, I think we're just trying to get a sense of your philosophical approach to it. Joey Agree -- President and Chief Executive Officer I think our guidance is realistic. It's something that we're obviously confident that we're going to be able to achieve. As the year plays out, we'll hopefully have the opportunity to narrow that guidance and give you even more visibility. Peter, anything you would add there? Peter Coughenour -- Chief Financial Officer No. I would just add, in April, obviously, we have some visibility into the year just in terms of timing of when we're introducing guidance. It's a relatively tight range from $4.10 to $4.13. And I think that speaks to the confidence we have in hitting that range. Ki Bin Kim -- Truist Securities -- Analyst OK. And I guess what's changed over the past couple of months? Last quarter, you were talking about -- I don't want to put words in your mouth, but more of a kind of pencils down approach that there was unclarity in the market and maybe the deal flow wasn't there. So what's basically changed in the past quarter? Joey Agree -- President and Chief Executive Officer Well, if we -- we're hardly back to the fourth quarter, we saw the 10-year treasury go from four to five down to 3.85 in a combined 80 days or so, plus or minus. Then we've had some stability. Obviously, the 10-year has been on a march upward since then, we've had some stability. But I think more important to that again, I'll reiterate, the team here led by the leadership team has recalibrated our approach. We are not wasting time on sellers that are in 2022 still. We are focused on the opportunities that are readily available to transact with real sellers. And that, in conjunction with ramping our outbound efforts, rolling our sleeves up and leveraging our tenant relationships, which are very deep, gives us proprietary access to deal flow. And so we're creating opportunities. I referenced manufacturing transactions on the last call. I apologize if that was taken incorrectly. When I referenced to manufacturing transactions, finding short-term opportunities and doing early extensions, finding high-performing stores and working with retailers. Working with retailers to reduce their occupancy costs on stores or the landlords that are no longer fit within their profile or framework. And so it's a value creation exercise, but it's -- this is -- look, this is hand-to-hand combat. This isn't wholesale buying like most people were accustomed to with 12 years of declining interest rates and cap rates. And so the team has done a tremendous job refocusing, recalibrating in a wholly different environment. Ki Bin Kim -- Truist Securities -- Analyst OK. Thank you. Operator Next question comes from Joshua Dennerlein from Bank of America. Please go ahead. Unknown speaker This is [Inaudible] on behalf of Josh. I just wanted to touch on -- I know last quarter, there was comments on the most attractive investment verticals in terms of investment spreads. Are you still seeing developments as you're most attractive? Or do you have any other commentary around that? Joey Agree -- President and Chief Executive Officer Our development and DFP platform remain active. The standard mode of the majority of retailers growth through merchant developers is broken today. And so we continue to have those conversations with both the developers as well as the retailers on how we can step in and create value. As I mentioned last quarter here, we can be a solution, but that solution has duration risk, whether it's a four-month project or an 18-month project, and we're going to price in that duration risk. And so we continue to have those conversations. I'll be on the road actually with a couple of retailers headquarters in the next few weeks here to see how we can continue to be a solution in a world where elevated construction costs, lower loan to values, higher interest rates and unknown cap rates upon completion, frankly, just inhibit a merchant builder's ability to perform. Unknown speaker Right. And also, when you were mentioning the increase in call volumes outbound, is this a new internal initiative just going forward? Or what was a shift in the increase? Joey Agree -- President and Chief Executive Officer So ARC. Obviously, ARC is instrumental and tracks all of our connections through conversion rates, utilizing KPIs across all functions really here at the company. But we've made a concerted effort led by Craig Erlich, our chief growth officer, to ramp that call volume up to mine, use our vast database embedded in ARC to mine for opportunities out there that aren't glossy brochures and in an auction environment. And so those -- I'll reiterate, those opportunities are really going to come to fruition more so in Q2 here. Q1 sourcing, the majority of that was done during Q4, right? If we just use our standard 70 days to letter of intent execution to close, we only got 20 days of sourcing in Q1. Now Q2 is really post rollout of incumbent up on -- after the New Year here of our dial data strategy, and that's the theme here for the year, it's dialed in, and we'll see that come to fruition in Q2 here. Unknown speaker Great. Thank you. Joey Agree -- President and Chief Executive Officer Thank you. Operator Next question comes from Eric Borden at BMO. Please go ahead. Eric Borden -- BMO Capital Markets -- Analyst Hey, good morning. Just one on the disposition guidance. I was hoping that you could talk about some of the opportunistic capital recycling program that you have going on. What are the different tenant types or geographies that you're looking to prune from the portfolio? Joey Agree -- President and Chief Executive Officer Yes. As I mentioned in the prepared remarks, there seems to be a disproportionate amount of activity, albeit in a low base of 1031 activity. Specifically in Florida, we disposed of Gerber Collision of Mister Car Wash. I think you'll continue to see us dispose of and recycle some noncore assets, primarily in Florida, but also opportunities that are inbound with the 1031 that needs to be filled quickly where we can opportunistically sell an asset and recycle that capital of 150 basis point spread. So again, Florida seems to be the hotspot for a number of reasons. And so we're very confident in that range of 50 to 100, considering we've already closed over 20 and have visibility into over 20 for Q2. Eric Borden -- BMO Capital Markets -- Analyst That's helpful. And then I just noticed occupancy had a small dip sequentially. I was just hoping you could provide some additional color on the kind of vacates and how should we be thinking about occupancy for the remainder of the year? Joey Agree -- President and Chief Executive Officer Well, we were 99.8% in Q4, which is pretty high. I mean, it's effectively occupied. I'd argue 99.6% is effectively occupied. It's really the resolution of one box, which we anticipate in Q2. We're going to have some interesting embedded real estate opportunities inclusive of the Bed Bath & Beyond redevelopment in Memphis, Tennessee in Q2, it looks here. And I think it's going to demonstrate our underwriting prowess and our real estate prowess and also our ability to identify assets within our portfolio that have real estate fundamentals that aren't being frankly utilized to the highest and best purpose. And so hopefully, those are done and complete in Q2, and we can give, obviously, much more detailed breakdown. Eric Borden -- BMO Capital Markets -- Analyst All right. Thanks very much. Joey Agree -- President and Chief Executive Officer Thank you. Operator Next question comes from Rob Stevenson from Janney Montgomery. Please go ahead. Rob Stevenson -- Janney Montgomery Scott -- Analyst Good morning, guys. Joey, can you talk a little bit about the expected return on the $74 million of development DFP projects that were under construction at the end of the quarter? And what was a similar sort of return to the projects you completed in '23. Joey Agree -- President and Chief Executive Officer Yes. I don't recall that the 2023 returns off hand. And again, it's really duration. Obviously, there's real estate and credit, but duration becomes the critical aspect. If we're able to retrofit an existing building through either projects and the tenant is going to be paying rent in 120 or 150 days. We do that often with Sunbelt Rentals. We do that often with Gerber Collision. We're looking to, I would say, approximately 50 basis point spreads to where we can buy like-kind assets. Now if we're talking about the entitlement process and a new build, we're very frankly wide of that if it's going to be a 12- to 18-month project. We're not going to go out there on the duration curve without a significant preview. And so that's really the tension again, which we're trying to work through with retailers and merchant developers here. The team is on the phone all day talking to developers with broken projects where they can't get financing or the returns don't make sense, and they're unable to perform or frankly, just won't perform because they don't have clarity up on the back end. And so there's a significant opportunity there. The question becomes, which ones hit the risk-adjusted return threshold, that we just talked about, Rob. But you can assume that if we're buying here in the mid upper 7s, we're certainly not putting our financing shovels in the ground at those rates. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then you talked a bit earlier about the Dollar Trees. And can you talk about how many are likely to close or not likely to be Dollar Trees in the near future given your current discussions that you're going to need to retenant at some point? And what's the average size of those boxes? Joey Agree -- President and Chief Executive Officer Yes. So just to reiterate, we have no stores on the closing list that have less than three years of term. That is obviously subject to Dollar Tree's chain. They'll be responsible for all rent and net. There's corporate guarantees behind all of these leases. Ironically, the weighted average lease term of the approximately 15 stores that will be closed is approaching eight years, seven and a half, eight years, so they're on the hook there. And then we've had inbounds for over half. We're going to start discussions. Obviously, they've got a lot going through Dollar Tree right now, whether they're going to sublease or whether they want to pay a termination fee here and then we'll enter into direct leases, but you can imagine the retail partners inclusive of other dollar stores, auto parts operators, low price point operators that are looking at those opportunities. But I think we're very pleased with the outcome given the store closure announcement there. It will have nothing expiring within three years. And again, these are average $100,000 in rent per store with a weighted average lease term approaching eight years. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then last one for me. Can you talk a little bit about the market out there for vacant sites given the financing environment? So if there's -- like your vacant Bed Bath & Beyond or whether or not there's movie theaters, etc., are there people out there actively buying these for redevelopment play at this point? Or is the financing not allowing them to do that? Is that an opportunity for you guys to use capital on some of the better located vacant retailers to do stuff like you're doing with the Bed Bath site, and you've done historically with a number of other stuff dating back to the Kmart days? Joey Agree -- President and Chief Executive Officer Kmart days. It's a broad question. First, the lack of financing, given the regional bank credit crunch here, has made development a very difficult proposition with loan to cost at 60% to 65% as opposed to getting 90%, 95%. That's one, plus obviously the elevated interest rates. So the movie theaters, I mean, those are teared out, right? If you're a movie theater owner here, there's too many screens in this country. Those are teardowns and redevelopments that's not really within our sandbox. The Bed Bath & Beyond opportunity, I'll tell you, well, first, there's an insatiable appetite for highly or well-located boxes that are of marketable size. So if you have a 20,000 to 25,000 square foot junior box, the replacement cost on vertical alone is $160 per square foot. And so those numbers don't pencil to build. And so what we see is significant interest in any existing boxes that are well located from a whole host of tenants. I mean 90% of the tenants in our portfolio are looking to grow today. It's just the cost structures and the ability to execute that growth. The Bed Bath & Beyond case and I'll give a little bit more detail on it. It's fairly unique. It's out in front of a mall in Memphis, Tennessee. It's perpendicular to the road and isn't maximizing the frontage. We've written white papers about this and the migration to freestanding format is driving really an insatiable demand for pad sites from C-store users from chicken users or chicken sellers, chicken restaurants -- chicken based restaurants, I'll call them. There's a lot of chicken going around. Car washes, we all know. And so these freestanding operators are continuing to grow and grow and grow. We looked at the 45,000 square foot Bed Bath & Beyond box and I'll be honest, a 45,000 square foot box today isn't very marketable. There aren't many users for 45,000 feet. We had an offer to take the box in the mid-single digits from a user. And then we looked at it and said wait a second. The highest and best use here is to take the box down and create freestanding pad sites along a major retail corridor. It will be my first redevelopment of a freestanding box, which includes the total tear down and conversion to pad sites in my career. And we're going to have a very significant lift here upon completion of that redevelopment. And we think there are other opportunities in the portfolio, and both outside the portfolio, to continue to really take advantage of the migration and really the expansion of the freestanding operators. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. Thanks. Appreciate the time. Joey Agree -- President and Chief Executive Officer Thanks, Rob. Operator The next question comes from Alec Feygin from Baird. Please go ahead. Alec Feygin -- Robert W. Baird and Company -- Analyst Hey, good morning. Thank you for taking my questions. First one is, what are the plans, if I need to issue debt? And is there anything of the sort assumed in guidance? Peter Coughenour -- Chief Financial Officer Thanks, Alec. This is Peter. I think first, just in terms of our funding plans for the year, as we said in the prepared remarks, we can execute on that $600 million acquisition guide on a leverage-neutral basis without needing to raise any external capital. And so we're in a great position for the remainder of the year. We have plenty of flexibility in terms of how and when we access the capital markets. In terms of debt funding plans for the year, again, we can be flexible. We do have $150 million of forward starting swaps in place, which have hedged a future 10-year unsecured debt issuance at an effective base rate of just under 4%. And so we'll look to be opportunistic in terms of accessing the debt markets, but we have over a year to use those swaps and can afford to be nimble and flexible in terms of how and when we come to the market. Alec Feygin -- Robert W. Baird and Company -- Analyst That's helpful. Thank you. Second one for me is kind of on the pipeline of potential developer takeouts? And is that -- are those conversations increasing or decreasing? I know, Joe, you talked about this merchant developer or retailer kind of bind right now. But just curious if those conversations have been increasing. Joey Agree -- President and Chief Executive Officer Increasing. We built out that team. We've launched an ARC module for that team. We've added to that team in terms of team members. They are increasing. They're daily, multiple times per day trying to piece together projects that can work. And so it's really just shifting through the returns that work for the retail -- for the developer and/or retailer, the rent per square foot, they're the output and figuring out the duration premium and/or term or credit premium that we're going to require relative to where a standard acquisition. Alec Feygin -- Robert W. Baird and Company -- Analyst Got it. And one last one for me. Is the company having any more direct conversations with retailers about expansion, so not for the developers, but directly? I know you mentioned you're about to go meet with some retailers, but any more color on that? Joey Agree -- President and Chief Executive Officer Yes. very frequently, whether it's coming in and stepping in as a solution or working with retailers on a standard rollout, those are a big focus for us along with DFP. Alec Feygin -- Robert W. Baird and Company -- Analyst Got it. That's it for me. Thank you. Operator The next question comes from Linda Tsai from Jefferies. Please go ahead. Linda Tsai -- Jefferies -- Analyst Hi. Good morning. I know you're confident about the $600 million in acquisitions this year, but what does the low and high end of AFFO per share guidance baking for acquisition volumes? Peter Coughenour So the acquisition -- sorry, the AFFO per share guidance range assumes approximately $600 million of acquisitions. When I think about hitting the low end or the high end of that AFFO per share guidance range, I would look to the other inputs that we guided to in the earnings release. And obviously, the more favorable end of those ranges will result in us being closer to the high end of our AFFO per share guide range. At the less favorable end of those ranges, we'd be closer to the low end. But in terms of acquisition volume, we're assuming approximately $600 million. Linda Tsai -- Jefferies -- Analyst Thanks. That's helpful. And the 5.7% to 6% of G&A, I know it's a little early, but would this be a reasonable run rate to assume as we look out to next year? Joey Agree -- President and Chief Executive Officer Well, I think first, we've continued to scale. So the G&A as a percentage of revenues has continued to scale. I would assume next year, you'll see that continued scale as well. Obviously, that's subject to revenue, which is driven by investment volumes, but this company has become much more efficient from a technology standpoint, from a process standpoint. And so you'll see that number continue to scale. The denominator there, I think, will be the biggest moving piece, the revenue number, Peter? Peter Coughenour -- Chief Financial Officer Yes. That's correct. And Linda, just for some more context. If you look back four years ago, G&A as a percent of revenue was roughly 8%. And so we've seen, based on our guide this year, roughly 200 basis points of scale just in the last four years and expect that we'll continue to see scale here going forward. Linda Tsai -- Jefferies -- Analyst Thanks for that. And those 15 Family Dollar boxes, what's the IRR you'll expect on those as you release [Inaudible]. And I know you have [Inaudible]. Joey Agree -- President and Chief Executive Officer We haven't got that far yet. There is no resolution. We feel that, as I mentioned, inquiries for over half of them already. The base case is that Dollar Tree is on the hook for the weighted average lease term of almost eight years for the rent and nets on all of them. But we haven't looked at disposition yet or whether we're going to -- Dollar Tree will be subleasing themselves or we would take a termination fee and enter into a direct lease with a net new tenant. So this is all pretty fresh, hot off the press, but we'll be working through that, I would think, this quarter. Linda Tsai -- Jefferies -- Analyst One last question. You emphasized Florida a couple of times. Why is now the right time to sell there? Is it asset or state-specific? Joey Agree -- President and Chief Executive Officer State specific, it just seems that a disproportionate amount of 1031 activity, which is very muted, as we all know, is attracted to the Sunshine State. Florida seems to be the new California. It's international capital, it's private capital, some of the stories, frankly, of the buyer profile don't even really add up. But if they come to the closing table, we're happy with it. I mean we had a buyer walk away on a sales, the first time in my career, from a $75,000 nonrefundable deposit the day before closing on a couple of million dollar sale in Florida as well. So it's very interesting, but we'll again continue to look to opportunistically dispose of assets at these cap rates and then recycle it. But Florida seems to be an outlier here of 1031 activity. Now it's -- I will mention it is fractional -- 1031 overall activity is fractional of what it's been in past years. And so this is opportunistic. They don't all close. Half of them will terminate, but we're working prudently through it, and we've built out the disposition team under Nicole, and we're actively pursuing it. Linda Tsai -- Jefferies -- Analyst Thanks for the color. Joey Agree -- President and Chief Executive Officer Thanks, Linda. Operator And the next question comes from Haendel St. Juste at Mizuho. Please go ahead. Haendel St. Juste -- Mizuho Securities -- Analyst Thank you for taking may question. Joey, can you talk a little bit about the economics behind backfilling for the Big Lots. I think it was filled within O'Reilly's -- maybe some color on the capital that was required, the new lease term, the releasing spreads. And I know Linda just asked a question about dollar stores, but I'm just curious how different are the in-place rent and box sizes of the Big Lots versus the dollar stores and anything else that could be relevant or informative there? Thanks. Joey Agree -- President and Chief Executive Officer Yes. The only thing I can share with you -- again, we put the two leases, 110% or 111% of former rents. Both leases, both the Big Lots -- sorry, the O'Reilly as well as the Fresenius are long-term leases with escalators. We're seeing tenants more amenable to escalators. Obviously, given the inflationary environment. I think there's a misnomer that investment-grade operators are flat leases that is patently false. These leases have been proved that wrong. De minimis landlord work, again, this is going to be a hub store. And so we have a few other hub stores, but these are the distribution as well for other commercial locations and body shops as well as a retail storefront. So we're excited to add that. Obviously, a significant upgrade. That box, if I recall, was probably 30,000 feet, so it was a larger box. The dollar stores range from about 8,000 to 10,000 feet generally. And so they're smaller boxes than the Big Lots. And so the marketability of them is very different, I would just say from the prospective tenant pool than a junior box such as the former Big Lots. Haendel St. Juste -- Mizuho Securities -- Analyst That's helpful. Appreciate it. And I wanted to go back quickly on the commentary earlier on, I think you were saying you're expecting less activity on the sale-leaseback side. I would have thought that with debt cost still fairly high here, that a lot of these guys don't have better alternatives than sale leaseback. So maybe some more color on what you're hearing or seeing on that front would be helpful. Thank you. Joey Agree -- President and Chief Executive Officer Well, general, we're talking to sophisticated operators of potential counterparties and former counterparties on sale leasebacks. Most of them have extremely strong balance sheets, rated BBB or higher. They're industry leaders. For them to go enter into a sale leaseback on a spread over where they can issue today just doesn't make economic sense, and they have the balance sheet and liquidity profile to hope for lower rates. It's that simple. And so I think all of them, knowing where cap rates would trade today, are holding out for better for -- honestly, better pricing. And so a number of the retailers we transacted with last year on the sale-leaseback front. We've had discussions with them and want to continue. They publicly commented on their earnings calls about sale leaseback activity. But in reality, I'm not sure they're ready to stomach the pricing that is really going to clear in today's market. And so it's a game of wait and see. Some are getting full on their balance sheet and looking for solutions. And others are saying, "Hey, we'll hold for the long term unless something -- unless the winds change." So again, the tenants that we're doing at leasebacks with don't need the money. That's the most important thing. We're a small piece of their overall capital stack. And so it's almost a secondary exercise in terms of capex. It is a secondary exercise in terms of capital sourcing for them. If it's not favorable, they're not going to do anything. Haendel St. Juste -- Mizuho Securities -- Analyst Helpful. Thank you. Joey Agree -- President and Chief Executive Officer Thanks, Haendel. Operator Thank you. We have no further questions. I will turn the call back over for closing comments. Joey Agree -- President and Chief Executive Officer Well, thank you, everybody, for joining us this morning. We appreciate everyone's time and look forward to seeing you in the upcoming conferences. Appreciate it. Thank you.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning and welcome to the AGNC Investment Corp first-quarter 2024 Shareholder Call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in investor relations. Please go ahead. Katie Turlington -- Investor Relations Thank you all for joining AGNC Investment Corp.'s first-quarter 2024 earnings call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on this call include Peter Federico, director, president, and chief executive officer; Bernie Bell, executive vice president and chief financial officer; Chris Kuehl, executive vice president and chief investment officer; Aaron Pas, senior vice president, non-agency portfolio management; and Sean Reid, executive vice president, strategy and corporate development. With that, I will turn the call over to Peter Federico. Peter Federico -- Director, President, and Chief Executive Officer Good morning and thank you, all for joining our earnings call. AGNC generated a strong economic return of 5.7% in the first quarter, driven by a combination of our compelling dividend and book value appreciation. On our earnings call last quarter, we talked about our growing confidence that the difficult transition period for Agency MBS was nearing its conclusion and that a durable and favorable investment environment for AGNC was slowly emerging. We highlighted our belief that short-term rates had peaked for this tightening cycle that interest rate volatility would decline and that Agency MBS would remain in this new, more attractive trading range. These positive dynamics were all present to some degree in the first quarter and will ultimately drive AGNC's performance over the remainder of the year. With respect to monetary policy, there were both positive and negative developments in the quarter. On the positive side, there was a growing consensus among Fed members regarding the level and direction of short-term interest rates. As reflected in the March Minutes, participants judge that policy rate was likely at its peak for this tightening cycle and almost all participants noted that it would be appropriate to move to a less restrictive monetary policy stance this year if the economy evolved as expected. In his testimony before Congress, Chairman Powell characterized the Fed's position as waiting for a bit more data and that rate cuts may not be far away. Importantly, the Fed also indicated that it would reduce the pace of runoff on its treasury portfolio at an upcoming meeting. This initial balance sheet action is a positive development for fixed-income investors. The negative development was stronger-than-expected economic data. Inflation indicators did not show the continued decline that the Fed was hoping for and growth in labor readings remain surprisingly robust. As a result, the timing and magnitude of future rate cuts became considerably more uncertain. The interest rate environment during the quarter was generally positive as interest rates increased gradually across the yield curve. Interest rate volatility also declined meaningfully during the quarter. Against this backdrop, Agency MBS performance across the coupon stack was mixed, with spreads on lower coupon securities widening and spreads on higher coupon securities tightening. Also noteworthy, Agency MBS spreads remained in the same well-defined trading range and spread volatility declined meaningfully. In fact, in the first quarter, spread volatility was 20% to 30% lower than what we experienced last year. The supply and demand technicals for Agency MBS were also favorable in the first quarter as seasonal factors and affordability issues significantly curtailed origination activity. At the same time, bank demand proved to be greater than expected. This uptick in bank demand was in part due to a view that Basel III would be substantially revised. Collectively, these factors drove our favorable first-quarter results. That said, periods of market turbulence are to be expected given the evolving nature of monetary policy. April is a good example of such an episode. After a period of relative stability in the first quarter, benchmark interest rates and volatility increased sharply due to less optimistic inflation expectations and escalating geopolitical risks. Against this backdrop, Agency MBS spreads widened meaningfully but remained below the midpoint of the recent trading range. Absent further adverse inflation developments, which caused the Fed to change the direction of monetary policy, we believe this period of fixed-income market turbulence will be relatively short-lived. Looking beyond the recent downturn, the long-term fundamentals for Agency MBS continue to be favorable and give us reason for optimism with absolute yields above 6%, and backed by the explicit support of the U.S. government, Agency MBS are appealing to an expanding universe of investors. Moreover, if monetary policy evolves largely as expected, interest rate volatility will decline, the yield curve will steepen and quantitative tightening will come to an end. The specific timing of Fed rate cuts is not critical to the long-run performance of Agency MBS. As a highly liquid pure-play levered Agency MBS investment vehicle, we believe AGNC is well-positioned to benefit from these favorable investment dynamics as they evolve over time. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail. Bernie Bell -- Executive Vice President, Chief Financial Officer Thank you, Peter. For the first quarter, AGNC had comprehensive income of $0.48 per share and generated an economic return on tangible common equity of 5.7%, which included $0.36 of dividends declared per common share and a $0.14 increase in tangible net book value per share. As Peter mentioned, the investment environment has been more challenging in April with longer-term interest rates moving sharply higher and Agency MBS spreads widening 10 to 15 basis points across the coupon stack. At the worst point late last week, our tangible net book value was lower by about 8% after deducting our monthly dividend accrual. Leverage as of the end of the first quarter increased modestly to 7.1 times tangible equity compared to seven times as of Q4, while average leverage for the quarter decreased to seven from 7.4 times in Q4. Net spread and dollar roll income for the quarter remained strong at $0.58 per share. The modest decline of $0.02 per share for the quarter was due to a decrease in our net interest spread of 10 basis points to a little under 300 basis points for the quarter as higher swap costs more than offset the increase in the average asset yield in our portfolio. Consistent with higher interest rates, the average projected life CPR for our portfolio at quarter end decreased 100 basis points to 10.4%. Actual CPRs for the quarter averaged 5.7%, down from 6.2% for the prior quarter. In the first quarter, we also successfully raised approximately $240 million of common equity through our aftermarket offering program at a significant price to book premium. Lastly, with Unencumbered Cash and Agency MBS of $5.4 billion or 67% of our tangible equity as of quarter end, our liquidity continues to be very strong. We believe the substantial liquidity not only enables us to withstand episodes of volatility, but also to take advantage of attractive investment opportunities as they arise. And with that, I'll now turn the call over to Chris Kuehl to discuss the agency mortgage market. Chris Kuehl -- Executive Vice President, Chief Investment Officer Thank you, Bernie. Stronger-than-expected economic data during the first quarter led to a material repricing of market expectations for Fed rate cuts in 2024. Accordingly, yields on five and 10-year U.S. treasuries were higher by 36 and 32 basis points, respectively. In general, risk assets handled the repricing well considering the magnitude of the adjustment with the S&P gaining more than 10% and in the Bloomberg investment-grade corporate bond index generating an excess return of approximately 90 basis points. =-In aggregate, the Bloomberg Agency MBS index lagged the performance of other fixed-income sectors with spreads slightly wider versus U.S. treasuries. However, given the large move in rates, the relatively benign magnitude of aggregate underperformance was encouraging as compared to the way that MBS performed last year during similar moves. The performance of Agency MBS by individual coupons varied considerably, with spreads on the lowest index coupons widening approximately 10 basis points as the potential for bank supply weight heavily on these coupons. In contrast, higher coupon MBS performed very well during the quarter, tightening 5 to 10 basis points as relatively slow prepayment speeds, limited supply, and steady fixed income inflows provided a favorable backdrop for these coupons. Our portfolio increased $3.1 billion from the start of the year to end the quarter at $63.3 billion as of March 31st. During the first quarter, we continued to gradually move up in coupon and optimize our holdings in specified pools versus TBA. Our TBA position ended the quarter higher at $8.4 billion with Ginnie Mae TBA representing approximately $5.2 billion as of quarter end. Our hedge portfolio totaled $56.3 billion as of March 31st, and as I mentioned on the call last quarter, we began to gradually shift the composition in favor of a heavier allocation to swap-based hedges. This move benefited our performance during the first quarter as swap spreads widened 9 basis points and 5 basis points at the five and 10-year points on the curve, respectively. As Peter discussed, the data-dependent nature of current Fed policy will likely create some volatility in markets. However, the longer-run earnings environment for Agency MBS is very favorable with historically wide spreads low levels of pre-payment risk in deep and liquid financing markets. I'll now turn the call over to Aaron to discuss the non-agency markets. Aaron Pas -- Senior Vice President, Non-Agency Portfolio Management Thank you, Chris. While higher rate environments typically have negative implications for both consumer and corporate credit fundamentals, the current robust employment landscape continues to bolster credit performance. Consequently, fixed-income credit generally performed well in the quarter, resulting in positive excess returns across most sectors. As an indicator for credit spreads in Q1, the synthetic investment grade in high-yield indices adjusting for the role tightened by approximately 10 and 45 basis points, respectively. On the credit fundamental side, we continue to expect an increasing divergence of consumer performance metrics. As we have previously noted, U.S. households have experienced varying degrees of inflationary pressures primarily bifurcated between households with low note rate mortgage debt, who are relatively immune to the higher rate environment and housing inflationary impacts and renter households who are not. As a result, we expect the divergence of credit performance between the two groups to widen with renters at a relatively high risk of falling behind on obligations such as rent, auto loan payments, and credit card debt. Given our current portfolio construction, deteriorating performance for this cohort would be expected to have a negligible impact on our holdings. Accumulated inflation pressures and prolonged exposure to increased rate levels could, however, become a more material issue for a broader group of consumers to the extent they persist for a significant period of time. Turning to our portfolio. The market value of our non-agency securities ended the quarter at $1 billion, in line with the prior quarter. The composition of our holdings was largely unchanged, though we did continue to rotate some of our credit risk transfer securities down the capital structure, where we saw relative value opportunities to improve risk-adjusted returns. Lastly, although asset spreads have continued to tighten, presenting a challenge for projected future returns, the funding landscape for non-agency securities is currently stable and remains relatively attractive. With that, I'll turn the call back over to Peter. Peter Federico -- Director, President, and Chief Executive Officer Thank you, Aaron. We'll now open the call up to your questions. Questions & Answers: Operator [Operator instructions] The first question comes from the line of Bose George with KBW. Please go ahead. Bose George -- Keefe, Bruyette and Woods -- Analyst Hey, everyone. Good morning. Peter Federico -- Director, President, and Chief Executive Officer Good morning, Bose. Bose George -- Keefe, Bruyette and Woods -- Analyst Can you discuss the level of current spreads and what that implies is in terms of incremental ROEs? Peter Federico -- Director, President, and Chief Executive Officer Sure, I appreciate the question, Bose. Yes, as we talked about and Bernie mentioned, we see mortgage spreads across the coupon stack widening somewhere between 10 and 15 basis points really in the month of April. The middle coupons, the 5.5% kind of area has been actually the worst-performing coupons quarter to date. But when you look at where mortgage spreads are now and they are approaching the middle of the range, but they're still below the middle of the range, roughly, you look at the current coupon to the five and 10-year treasury at the low 150 range. If you look at it importantly to where five and 10-year swaps are, that's more like 185 basis points. So it depends on what your hedge mix will obviously drive our net interest margin the current coupon part of the stack right now. But that would translate to, given the way we hedge mix of swaps and treasuries and leaning more toward swaps than treasuries in this environment could put that initial margin up in the 170 to 175 basis point range, an operating with the leverage that we typically operate in the mid-7s, low to mid-7s currently in this environment. That still translates to expected ROE of somewhere between, call it, 16% and 18% given our cost structure. So mortgages are obviously more attractive than they were at the end of last quarter, they are more attractive right now, and that seems to be a pretty compelling level from our perspective. Bose George -- Keefe, Bruyette and Woods -- Analyst OK. Great. Thanks. And then just a related question, can you just talk about the comfort level on the dividend, the breakeven ROE now, I guess, high 17s, but I guess that's within the range you just mentioned? Peter Federico -- Director, President, and Chief Executive Officer Yeah. And as you pointed out in the past, it depends on how you look at that calculation. I think you're referring to the dividend yield on our common and that would translate to 17. So you'd have to think about leverage on common if you want to think about it that way. And I think if you did that same calculation, we just went through, but did it on the common leverage, you would end up with an ROE above that 17% level. I'd like to look at it, and we've talked about this. It's important given our capital structure and the amount of preferred that's still generating a lot of incremental value for our common shareholders. The average cost of our preferred stock, I think at the end of last quarter was around 7.25%. It's a little higher now given the reset of one of our preferreds. But there's a lot of incremental value there. So if you think about it from a total cost of capital the amount of common dividends we pay preferred dividends and our operating costs and you think about that as a percentage of equity. At the end of last quarter, I think that came to around 15.7% or thereabouts. So I look at the portfolio today at current valuation levels. And I think you can see that our dividend level and that total cost of capital remains well aligned. Bose George -- Keefe, Bruyette and Woods -- Analyst OK. Great. Thank you. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate the good questions, Bose. Operator The next question comes from the line of Rick Shane with J.P. Morgan. Please go ahead. Rick Shane -- JPMorgan Chase and Company -- Analyst Hey, guys. Thanks for taking my questions this morning. Look, so one of the interesting facets of the portfolio as the contribution from swaps over the next several months, you have $8.5 billion notional rolling off. Those swaps essentially contribute about 20% to 25% of your spread income. As you look forward, given the opportunity, how do you replace that runoff? Peter Federico -- Director, President, and Chief Executive Officer Yeah. I appreciate the question, Rick. Yes, I think I didn't hear the -- actually the first part of your question, but I think you're talking about swap spreads and swap spread performance to some extent. And that was an important driver of performance because swap spreads tightened a lot. But when you think about our net interest margin, we talked a lot about this. Our net interest margin has remained really, really robust. Last quarter, it was 298 basis points and that is not consistent with the economics that we just went through. If you think about that net interest margin at around 300 basis points, and you divide that and think about that from an ROE perspective, you're going to get an ROE of 25%, 26% or take our net spread and dollar roll income and divide that by our common equity, which would be consistent with that 300 basis points of net interest margin, you're going to get an ROE of 25%, 26%. The economics of our business, as we just talked about, are in the mid to high teens. And what's going to happen over time is as those swaps run off and you are right, we have about $8.5 billion still maturing and we had about $5 billion mature, by the way, in the first quarter and that contributed to somewhat that slight decline in our net interest margin. Those will roll off over time and our net spread in dollar -- or our net interest margin because of those swaps rolling off will come down. There are other factors, though, that you got to consider. So it's not as easy as just those swaps rolling off. We will put other swaps on that have positive carry on them. If you put on longer-term swap today, it's still a positive carry by, for example, a 10-year by 150 or so basis points. And also our asset yield is still below market yields. Our asset yield is still 25, 30 basis points below market yields. So as Chris and team roll the portfolio over, and we continue to move our assets around, we'll end up seeing some uptick in our asset yield like you saw last quarter. But over time, that net interest margin over a longer time will come down more in line with the economics of our business. So that's what you'll see over the next several quarters to years as old swaps roll off, new swaps come on, assets get replaced, net interest margin should come back down in alignment with the economics of our business, which is really the mark-to-market yield that we just talked about in the previous question. Rick Shane -- JPMorgan Chase and Company -- Analyst Got it. Yes. And that really does get to the punchline, which is that as you're looking forward to all of those factors, that's really what's dictating the dividend policy and -- Peter Federico -- Director, President, and Chief Executive Officer I appreciate that clarification. That's exactly right. It's setting the dividend policy based on the level of return from an economic perspective that we're seeing as opposed to the current period earnings -- that gets reflected in our net interest margin. Rick Shane -- JPMorgan Chase and Company -- Analyst OK. Thank you very much. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate the question. Operator Our next question comes from the line of Terry Ma with Barclays. Please go ahead. Peter Federico -- Director, President, and Chief Executive Officer Good morning, Terry. Terry Ma -- Barclays -- Analyst Hey. Good morning. Thank you. So you mentioned that you thought the recent volatility would be short-lived. Can you maybe just give a little bit more color on what gives you confidence that it will be short-lived -- and then maybe just your expectations on where near-term spreads are set once the volatility this year? Peter Federico -- Director, President, and Chief Executive Officer Sure. Both Chris and I tried to address this to some extent in our in our prepared remarks. And I think Chris referenced the fact that this quarter looked a lot different than previous quarters when we had similar moves. And that's really a critical point from our perspective. What occurred in the first quarter was generally a very stable market conditions, but there was a very significant repricing of the timing and magnitude of short-term rate moves from the Fed. Importantly, it was not a shift and has not yet become a shift in paradigm with respect to monetary policy. Said another way, the Fed was really clear in a number of communications that the policy rate was likely at its peak and the next move was likely going to be an ease. What we had in the first quarter was simply a plateauing of CPI data -- it came in at 3.9% and then 3.8% and 3.8% again. It just didn't show the improvement that the Fed was looking for. And in the two or three days following each of those CPI reports the 10-year treasury moved up 20 to 25 basis points and at stance taking out one. So when we started the year, the market probably incorrectly so may be too optimistic, expected the Fed to ease five or six times. Now as we sit here today, the market has repriced to only one and a half moves this year and importantly, in aggregate, the Fed funds futures in 2027 tell us there's only six moves in total, meaning that the Fed funds rate now according to the market's projections is going to settle out at around 4%. That's materially higher than what the Fed's own long-run target is, which is still 2.5%. So what we had occur is a very significant repricing of the path of short-term interest rates. We did not have a paradigm shift. If inflation continues to not evolve or reaccelerate, there could be a shift in monetary policy. We don't believe that's going to happen. We get important inflation data at the end of this week in the PCE report. But we believe, and I think the Fed still believes that inflation will show signs of improvement. We will move more toward the Fed's long-run target, which, by the way, the Fed's own estimate of PC at the end of this year, is 2.6%. That's not going to be materially off where the number comes out at the end of this week. And with that projection, the Fed expected to remove. So we think that where the 10-year is at, call it, 4.5 to 4.75. That seems like a pretty healthy place for the 10-year in the context of a Fed funds target that's ultimately going to move to 3%. We think the inflation report ultimately come in favor of the direction the Fed ones. And I think this repricing has simply been just a healthy movement of where short-term rate cuts are going to occur and the magnitude of those, not a paradigm shift. And so spreads moved. We had a lot of geopolitical risk. We had volatility following inflation reports. If we get two or three inflation reports that are at or better than expected, we'll have the same sort of significant repricing in the opposite direction. I think the Fed is looking for two or three months in a row of better data to have sufficient confidence. And once they get that data, then everybody will be pricing in the eases again and the direction of monetary policy will be clear again. Right now, it's a little uncertain, but we think the repricing is largely over. With respect to spreads, you asked that. Again, when you look at current coupon spreads near the middle of the range, that seems like a good place from our perspective. Current coupons of the five- and 10-year treasury at 150 to 160 basis points seems like a healthy place against swaps, 180 to 190, seems like a healthy place. We do have some negative seasonals right now between this next April and May should be kind of the worst seasonal months for mortgages in terms of origination. So the market sort of, I think, is in a good place right now with the repricing that has taken place. Terry Ma -- Barclays -- Analyst Got it. Thank you. Very helpful color. And then just on your hedge ratio and your duration gap, you guys took the hedge ratio down and you're now running a slightly positive duration gap. So maybe just a little bit more color on that move and then talk about where you're comfortable running the book in this environment. Peter Federico -- Director, President, and Chief Executive Officer Sure. I've talked about this for a while. It does make sense for us to gradually move our hedge ratio down as the Fed's monetary policy outlook changes. We obviously wanted to run with a very high hedge ratio. More than 100% of our short-term debt essentially termed out in order to protect our funding cost in a rising short-term rate environment. We're now at the inflection point -- and so over time, I would expect that to come down. And as we get more confidence when and the magnitude of the Fed cuts, then we'll ultimately probably operate with even a lower hedge ratio such that at some point in the monetary policy easing process we would want to operate with, in a sense, some percent of our short-term debt unhedged, have that -- a bigger part of our funding mix. So over time, we'll do that. Chris mentioned, and I'll let him speak to this. He mentioned our gradual movement to more toward swaps in our hedge mix. And I think we have a sort of a positive outlook. Chris, do you want to talk a little bit about that? Chris Kuehl -- Executive Vice President, Chief Investment Officer Yeah. So our funding is obviously sulfur based. And so logically, we want to have generally a more significant portion of our hedges and sulfur-based swaps, which also have better carry. But over the last couple of years, the bid for mortgages was highly correlated with treasuries, given the dominant investor base were index funds as opposed to banks. And so, it made sense to have a more sizable component of our hedge book in treasury based hedges. U.S. Treasury issuance was also extraordinarily high at a time when banks were not in a position to grow the securities holdings. And so that had the effect of cheapening treasuries versus swaps. And now with bank deposits stabilizing and QT likely drawing to an end, we're gradually moving our hedge book to have a higher concentration in swap-based hedges. But this will be a gradual shift, and we want to maintain diversification within our hedge portfolio composition just as we do on the asset side. Terry Ma -- Barclays -- Analyst OK. Great. Thank you. Peter Federico -- Director, President, and Chief Executive Officer Sure. Thanks for the question. Operator Our next question comes from the line of Crispin Love with Piper Sandler. Please go ahead. Crispin Love -- Piper Sandler -- Analyst Thanks. Good morning. I appreciate for taking the question, thanks. Good morning, Peter. Just looking at fund flows, bond flows have been very positive. Government fund flows have been positive as well, which have positive implications agency, but only tells part of the story. So can you just speak to what you're seeing on the flow side? Who are the major buyers right now of Agency MBS? I think you mentioned a little bit about banks coming back in the first quarter, but do you think some of the recent rate moves could keep some of them on the sidelines for a bit? Peter Federico -- Director, President, and Chief Executive Officer Yeah. Well, we certainly did see that. You're right. If you look at the -- and this is part of the reason why didn't feel like a paradigm shift in why the first quarter was not nearly as disruptive despite the amount of repricing that took place because bond fund flows generally stayed positive throughout the quarter, there was probably a week or two where they actually got to zero, maybe negative, but there was never really any big movement out of bond flows like we saw at different times last year. So the bond fund flows continue to be neutral to positive. I think we're also starting to see outside the bond fund complex inflows into mortgage-backed securities. Those flows are obviously hard to quantify, I think they are evident in particular, if you look at the way the mortgages performed across the coupon stack were lower in the first quarter where lower coupons underperformed in higher coupons. The current coupon are really above the six and six and a half in particular -- actually tightened on the quarter. I think that shows you that there's new demand for those sort of high-yielding securities. With the backup that we have, the current coupon now at around 6.5% that, again, looks really, really attractive to treasuries. It also looks really attractive to investment-grade corporates. That spread has again widened out to around 30 basis points. So mortgages look cheap to investment grade. Corporates -- current coupon in particular or the highest yielding ones. They look cheap to treasuries. I think the credit quality, obviously backed by the support of the U.S. government, helps in an environment where the economy is ultimately slowing. So I think those are going to continue to drive demand for agency mortgage-backed securities not so much on a levered basis, but actually on an unlevered basis, and that has a really positive long run fundamental. So I think that -- I think that trend is going to stay in place for a while. They just -- those reallocations tend to take time for slow-moving reallocations. Crispin Love -- Piper Sandler -- Analyst Great. Thanks, Peter. Appreciate taking my questions. Operator Our next question comes from the line of Doug Harter with UBS. Please go ahead. Peter Federico -- Director, President, and Chief Executive Officer Good morning, Doug. Doug Harter -- UBS -- Analyst Good morning. The way you've kind of described the market, how are you thinking about continued capital raises and the attractiveness of that opportunity? Peter Federico -- Director, President, and Chief Executive Officer Yeah. I appreciate the question. Well, obviously, we always look at it through the lens of our existing shareholders, first and foremost. And as Bernie mentioned, we were able to raise capital through our at the money program, at the market program very accretively in the first quarter. And we'll continue to look at those opportunities. The first quarter is a really good example of one, the cost-effective nature of that capital issuance, the book value accretion that can be generated by it, but also the flexibility that affords us. As Chris mentioned, we added about little over $3 billion worth of mortgages in the quarter. If you think about that, given the amount of capital we raised, we were able to deploy those proceeds immediately into the mortgage market. About half of those purchases if you will, went toward levering that new capital immediately. So there's no drag from a dividend perspective. It's accretive to book value. That translates to value for our existing shareholders. We will continue to look for opportunities to do that. I like mortgages better. Obviously, at this level, mortgages did spend a lot of time in the first quarter near the tighter end of the range, which gave us a little bit of pause. But we will continue to be opportunistic with it if we can generate existing value -- we can generate value for our existing shareholders through our capital markets activities, we will certainly look to do that. Doug Harter -- UBS -- Analyst And then Peter, just contrast -- Peter Federico -- Director, President, and Chief Executive Officer I am sorry, Doug. Go ahead. Doug Harter -- UBS -- Analyst Yes. No, sorry. And if you could just contrast that with kind of how you see leverage today and kind of how leverage might move around given kind of book value weakness but also ability to add -- protect and/or add new assets? Peter Federico -- Director, President, and Chief Executive Officer Yes. Well, we certainly have a lot of capacity the way I would describe it today, a lot of flexibility. And I think that's appropriate because we are moving, it sort of made this, I mean in our -- in my initial remarks that we are moving in a positive direction, but we are still moving essentially in that direction slowly, and there is going to be volatility along the way. And we want to be disciplined with our capital deployment and our leverage because monetary policy is still evolving. There is lots of variables that are going to drive the Fed. Over time, we are going to get more clarity. And there may be a time where we have even more confidence in the outlook. But our confidence is growing. We have a lot of -- as Bernie mentioned, we have a very strong liquidity position of $5.4 billion. As a percent of equity, I think it maybe was one of our highest points just last quarter at 67%. If you think about that on our assets, it's over 8%. So we have a lot of capacity, but we also want to be disciplined. And what's important about the outlook from our perspective is that we think we are entering a period that's going to be from a long-term durable, attractive investment opportunities, so we don't feel any rush to deploy capital. We feel like we can be disciplined. We feel like we can continue to be opportunistic like we were in the first quarter. And so the environment is going to evolve over time. Our confidence will grow. Mortgage spread behavior within the trading range is important. And I think what we are starting to see is some consolidation in that spread, which I think is a healthy development for the market. Said another way, for mortgages to move to the high end of the range, I think it's becoming more challenging for that to occur. And there is growing reasons why mortgages can trade at the lower end of the range. We just haven't seen them all evolve fully yet, but we will see that over time, and we will see how the economy unfolds over the next three months to six months and how the Fed's behavior and the Fed outlook changes. That's really going to be a key driver for the fixed income market is what happens to monetary policy because once the Fed starts to ease, I think ultimately, the market will price the Fed moving the Fed funds rate all the way back to 3%. But they have to start that move from a place of confidence and the market doesn't have that confidence, yet the Fed doesn't have that confidence. Doug Harter -- UBS -- Analyst Great. Thank you, Peter. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate that. Operator Our next question comes from the line of Jason Weaver with JonesTrading. Please go ahead. Jason Weaver -- JonesTrading -- Analyst Hi. Good morning. I was hoping you could expand a little bit more on Doug's first question there. The 25 million shares you issued during the quarter, can you talk a little bit about the timing and coupon deployment of that capital in the quarter and subsequently. Peter Federico -- Director, President, and Chief Executive Officer I am sorry, could you repeat the first part? I didn't have a little to here in your question. Jason Weaver -- JonesTrading -- Analyst Sorry, Peter. I was just trying to expand on the answer to Doug's first question about the timing and deployment of the ATM issuance you raised in the first quarter. Peter Federico -- Director, President, and Chief Executive Officer Well, yes, like I have said, the ATM gives us a lot of flexibility. So we were able to raise money through our -- through the ATM program and deploy it immediately. As Chris mentioned, you could talk about where we would like a coupon staff. But that gets deployed really simultaneously almost. Chris Kuehl -- Executive Vice President, Chief Investment Officer Peter mentioned the $3 billion increase. That was a fair value increase. We added roughly $4 billion in Agency MBS during the quarter in current phase terms. Majority of which was in higher coupon 30-year TBA. We also added about $400 million in hybrid ARMs. Jason Weaver -- JonesTrading -- Analyst Was that sort of weighted throughout the quarter or weighted toward the beginning or end? Can you speak to that? Peter Federico -- Director, President, and Chief Executive Officer No. We usually don't give those sorts of details. I appreciate the question, but -- Jason Weaver -- JonesTrading -- Analyst Fair enough. Peter Federico -- Director, President, and Chief Executive Officer Yes. Jason Weaver -- JonesTrading -- Analyst No. that's fine. And here is -- what were you thinking about the implications for the Fed's reduction in Q2 and how that might change your portfolio strategy, hedging strategy? Peter Federico -- Director, President, and Chief Executive Officer Well, as Chris mentioned, just real quickly, I will make a couple of comments. As Chris mentioned, obviously, the Fed is going to move first and significantly with respect to its treasury portfolio. So I expect the Fed to announce next week at the meeting that they will cut the treasury cap by half. It does not appear based on the minutes that they are going to make a change at this point to the mortgage cap because the mortgages are running off so far below. They are actually running off at about half of the cap right now. So I don't expect the Fed to make a change on that. But I do expect treasuries to come down and over the remainder of the year, I expect treasury run-off cap to actually come to zero. And that has a positive development generally speaking, for treasuries versus swaps. When you think about bank regulation and the fact that bank regulation is going to be less onerous, I think that's going to also push us to, as Chris mentioned, to swap. So I think that's where it has an implication from a hedging perspective. Longer term, I think it's still unclear exactly how the Fed is going to handle its mortgage portfolio with respect to its changes to its balance sheet. And this is going to be an important development. Last week, for example, there was a paper that came out from the open markets desk at the New York Fed, where they show two examples of how the Fed may approach tapering its portfolio runoff. And in both of those scenarios, they had the mortgage cap getting cut in half. Now, that won't have any practical impact on the speed of runoff because mortgages for the Fed's portfolio are running off between $17 billion and $20 billion. But it would have a long-term stabilizing effect on the mortgage market if they did choose a cap structure like that, they could still achieve their stated purpose of allowing mortgages to run off and be redeployed into treasuries. And ultimately, over a very long time horizon, they would be able to achieve their objective of having primarily treasuries. But this is -- that would be a sort of transfer of mortgages to treasuries that would occur over multiple years. If they use a lower cap to allow that to happen, that could be a positive development for mortgages. We will have to wait and see how the Fed handles that. I don't think we are going to get that level of detail right now, at this first initial move, but I think we will get that over time. Jason Weaver -- JonesTrading -- Analyst All right. Thank you for that. Peter Federico -- Director, President, and Chief Executive Officer Sure. Operator Our next question comes from the line of Merrill Ross with Compass Point. Please go ahead. Merrill Ross -- Compass Point Research and Trading -- Analyst Good morning and thank you. You might not answer this, given what you have just said. But did you add to the portfolio into April's volatility, particularly in the five and a half and what is the current leverage given the decline -- the 8% decline that Bernie referred to in book value? Peter Federico -- Director, President, and Chief Executive Officer I am sorry, I didn't hear this last part. We have a little bit of a bad connection. I think the first part was, did we add to the portfolio in April? What was the second? Merrill Ross -- Compass Point Research and Trading -- Analyst The current leverage. Peter Federico -- Director, President, and Chief Executive Officer Current leverage, yes, Chris could talk a little bit about mortgages in the current environment and where he is adding and seeing value. With respect to current leverage, it's a little higher today. It's actually around 7.4 given the backup in net asset value and portfolio activity to date. Anything that's particular about today's market? Chris Kuehl -- Executive Vice President, Chief Investment Officer Yes. With respect to -- we haven't had any material changes in the size of the portfolio quarter to date. With respect to relative value within the agency space, as I mentioned earlier, higher coupons significantly outperformed lower coupons during the quarter, in part, given concerns around bank sales and lower coupons related to some M&A balance sheet restructuring announcements that were made. But also in response to very favorable prepayment reports that showed considerably flatter refi responses in higher coupons compared with what we saw during the last refi wave during COVID with similar incentives to refinance. And so up in coupon benefited from that as well. And despite the higher coupons outperforming, I would say relative value is still generally upward sloping across the coupon stack. Merrill Ross -- Compass Point Research and Trading -- Analyst OK. I have one other unrelated question, if you don't mind. Peter Federico -- Director, President, and Chief Executive Officer Sure. Merrill Ross -- Compass Point Research and Trading -- Analyst The Series C that's callable. Wouldn't you use some of your liquidity? I mean maybe on the margin, it's not really material to you? I am just curious. Peter Federico -- Director, President, and Chief Executive Officer Appreciate that question. We are constantly evaluating our capital structure. And you are right, that series is callable. But as I mentioned, even though it has reset higher and the coupon on that one is a little, 10.7%. It is certainly materially higher than our other fixed-rate preferreds. Even at 10.7%, given where the returns are on our portfolio, that is still a lot of value that is accruing to the benefit of our common shareholders. So we will look for always as we do, look for opportunities to optimize that cost of our capital. The preferred market has been relatively quiet right now. So there is not a lot of activity going on in part because of the rate uncertainty. But I expect that to change over the remainder of the year, and there might be opportunities in the preferred market as we move forward. So we will continue to evaluate that. But it does generate incremental value right now for our common shareholders. Merrill Ross -- Compass Point Research and Trading -- Analyst I believe MSA refinanced a series at 9%, I am just curious, not that, that seems like a really huge relative value trade from 10% to 9%, but -- Peter Federico -- Director, President, and Chief Executive Officer And the other important part -- the other important point about the floating rate preferred obviously is your -- we are likely at the peak of that coupon. And obviously, coupon can change very, very rapidly. So there is lot of option value in those series right now. The Fed obviously, a couple of quarters or a couple of months of positive inflation data, and the forward curve will be materially downward sloping and those coupons could look very attractive in a year or so. Merrill Ross -- Compass Point Research and Trading -- Analyst Great. Thank you. Peter Federico -- Director, President, and Chief Executive Officer Sure. I appreciate your question. Operator And our last question comes from the line of Eric Hagen with BTIG. Please go ahead. Jake Katsikas -- BTIG -- Analyst Good morning. This is actually Jake Katsikas on for Eric. Appreciate you guys taking my questions. First one, could you flesh out a little bit the outlook you have for prepayment speeds including how much room you might see for your forecast to change with mortgage rates kind of coming up recently. Do you think faster speeds would be a benefit or maybe a headwind on earnings or possible economic return? Thanks. Peter Federico -- Director, President, and Chief Executive Officer Sure. Chris, do you want to talk about prepayment? Chris Kuehl -- Executive Vice President, Chief Investment Officer Given our coupon composition, slower speeds, the prepay reports over the last two months have been some of the more interesting reports than we have had -- that we have had over the last couple of years after spending December, sort of through the December mid-February timeframe. It's sort of local lows and mortgage rates with rates around 6.5% to 6.75% after spending the second quarter and third quarter last year, originating pools with 7.5% to 8% note rates. And so we got a lot of insight into what the refi response was going to look like on a sizable population of loans with, call it, 75 basis points to 100 basis points of incentive to refinance. And what we learned was that speeds were quite a bit slower than what many had feared and slower than what we observed during COVID on loans with similar incentives to refinance. And so this, as I mentioned, has provided a tailwind to higher coupons. It's interesting. I think there are a number of factors that likely contributed to the slower response than what we saw during the last refi wave. So slower speeds are favorable for our position. With respect to the lowest coupons, which are a very small percentage of our holdings, even there, I would say, turnover speeds have been over the last year, a little better or a little faster than what many had feared. So hopefully, that gives you some insight into our outlook on speeds. Jake Katsikas -- BTIG -- Analyst Yes, it does. Appreciate that. And then finally, just going back to leverage, what is your historical range for leverage been? And do you think that range might change at all if mortgage spreads remain historically wide? Peter Federico -- Director, President, and Chief Executive Officer Yes. I mean look, if you look back over a very long history and we have put these numbers out, our leverage has ranged probably at the low point, maybe around 6% or thereabouts and at the highest print was probably in the 9%, 9.5%. So it sort of give you some bookends. But really, what you have to think about is when you think about leverage is it's dependent on the environment. It depends on where mortgage spreads are, if mortgage spreads being tight versus mortgage spreads being historically wide that's a really critical driver of the interest rate environment to volatility. As I talked about a lot over the last couple of years, all other things equal, in an environment that we have just gone through, where there has been a significant negative fixed income market repricing as the Fed went from quantitative easing to quantitative tightening, bad for all fixed income securities volatility was really high. Liquidity was challenging at times. You sort of have to volatility adjust down the leverage. Said another way, each unit of leverage has a higher risk element to it. So all other things equal, we had to bring our leverage down to account for the increased volatility. As the environment changes, as we get more and more confident that mortgage spreads will not break out of this new range that the high end, importantly, of the range will hold like it has held now for better part of seven quarters. Those will be important drivers for leverage going forward. But it's going to depend on monetary policy. It's going to depend on the volatility of interest rates, the cost to rebalance, liquidity in the market, and obviously our view on where mortgage spreads may go. Jake Katsikas -- BTIG -- Analyst Thank you so much. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate all the questions. Operator We have now completed the question-and-answer session. I would like to turn the call back over to Peter Federico, for closing remarks. Peter Federico -- Director, President, and Chief Executive Officer Again, we appreciate everybody's time this morning, and we look forward to speaking to you again at the end of the second quarter. Answer:

the AGNC Investment Corp first-quarter 2024 Shareholder Call

Operator Good morning and welcome to the AGNC Investment Corp first-quarter 2024 Shareholder Call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in investor relations. Please go ahead. Katie Turlington -- Investor Relations Thank you all for joining AGNC Investment Corp.'s first-quarter 2024 earnings call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on this call include Peter Federico, director, president, and chief executive officer; Bernie Bell, executive vice president and chief financial officer; Chris Kuehl, executive vice president and chief investment officer; Aaron Pas, senior vice president, non-agency portfolio management; and Sean Reid, executive vice president, strategy and corporate development. With that, I will turn the call over to Peter Federico. Peter Federico -- Director, President, and Chief Executive Officer Good morning and thank you, all for joining our earnings call. AGNC generated a strong economic return of 5.7% in the first quarter, driven by a combination of our compelling dividend and book value appreciation. On our earnings call last quarter, we talked about our growing confidence that the difficult transition period for Agency MBS was nearing its conclusion and that a durable and favorable investment environment for AGNC was slowly emerging. We highlighted our belief that short-term rates had peaked for this tightening cycle that interest rate volatility would decline and that Agency MBS would remain in this new, more attractive trading range. These positive dynamics were all present to some degree in the first quarter and will ultimately drive AGNC's performance over the remainder of the year. With respect to monetary policy, there were both positive and negative developments in the quarter. On the positive side, there was a growing consensus among Fed members regarding the level and direction of short-term interest rates. As reflected in the March Minutes, participants judge that policy rate was likely at its peak for this tightening cycle and almost all participants noted that it would be appropriate to move to a less restrictive monetary policy stance this year if the economy evolved as expected. In his testimony before Congress, Chairman Powell characterized the Fed's position as waiting for a bit more data and that rate cuts may not be far away. Importantly, the Fed also indicated that it would reduce the pace of runoff on its treasury portfolio at an upcoming meeting. This initial balance sheet action is a positive development for fixed-income investors. The negative development was stronger-than-expected economic data. Inflation indicators did not show the continued decline that the Fed was hoping for and growth in labor readings remain surprisingly robust. As a result, the timing and magnitude of future rate cuts became considerably more uncertain. The interest rate environment during the quarter was generally positive as interest rates increased gradually across the yield curve. Interest rate volatility also declined meaningfully during the quarter. Against this backdrop, Agency MBS performance across the coupon stack was mixed, with spreads on lower coupon securities widening and spreads on higher coupon securities tightening. Also noteworthy, Agency MBS spreads remained in the same well-defined trading range and spread volatility declined meaningfully. In fact, in the first quarter, spread volatility was 20% to 30% lower than what we experienced last year. The supply and demand technicals for Agency MBS were also favorable in the first quarter as seasonal factors and affordability issues significantly curtailed origination activity. At the same time, bank demand proved to be greater than expected. This uptick in bank demand was in part due to a view that Basel III would be substantially revised. Collectively, these factors drove our favorable first-quarter results. That said, periods of market turbulence are to be expected given the evolving nature of monetary policy. April is a good example of such an episode. After a period of relative stability in the first quarter, benchmark interest rates and volatility increased sharply due to less optimistic inflation expectations and escalating geopolitical risks. Against this backdrop, Agency MBS spreads widened meaningfully but remained below the midpoint of the recent trading range. Absent further adverse inflation developments, which caused the Fed to change the direction of monetary policy, we believe this period of fixed-income market turbulence will be relatively short-lived. Looking beyond the recent downturn, the long-term fundamentals for Agency MBS continue to be favorable and give us reason for optimism with absolute yields above 6%, and backed by the explicit support of the U.S. government, Agency MBS are appealing to an expanding universe of investors. Moreover, if monetary policy evolves largely as expected, interest rate volatility will decline, the yield curve will steepen and quantitative tightening will come to an end. The specific timing of Fed rate cuts is not critical to the long-run performance of Agency MBS. As a highly liquid pure-play levered Agency MBS investment vehicle, we believe AGNC is well-positioned to benefit from these favorable investment dynamics as they evolve over time. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail. Bernie Bell -- Executive Vice President, Chief Financial Officer Thank you, Peter. For the first quarter, AGNC had comprehensive income of $0.48 per share and generated an economic return on tangible common equity of 5.7%, which included $0.36 of dividends declared per common share and a $0.14 increase in tangible net book value per share. As Peter mentioned, the investment environment has been more challenging in April with longer-term interest rates moving sharply higher and Agency MBS spreads widening 10 to 15 basis points across the coupon stack. At the worst point late last week, our tangible net book value was lower by about 8% after deducting our monthly dividend accrual. Leverage as of the end of the first quarter increased modestly to 7.1 times tangible equity compared to seven times as of Q4, while average leverage for the quarter decreased to seven from 7.4 times in Q4. Net spread and dollar roll income for the quarter remained strong at $0.58 per share. The modest decline of $0.02 per share for the quarter was due to a decrease in our net interest spread of 10 basis points to a little under 300 basis points for the quarter as higher swap costs more than offset the increase in the average asset yield in our portfolio. Consistent with higher interest rates, the average projected life CPR for our portfolio at quarter end decreased 100 basis points to 10.4%. Actual CPRs for the quarter averaged 5.7%, down from 6.2% for the prior quarter. In the first quarter, we also successfully raised approximately $240 million of common equity through our aftermarket offering program at a significant price to book premium. Lastly, with Unencumbered Cash and Agency MBS of $5.4 billion or 67% of our tangible equity as of quarter end, our liquidity continues to be very strong. We believe the substantial liquidity not only enables us to withstand episodes of volatility, but also to take advantage of attractive investment opportunities as they arise. And with that, I'll now turn the call over to Chris Kuehl to discuss the agency mortgage market. Chris Kuehl -- Executive Vice President, Chief Investment Officer Thank you, Bernie. Stronger-than-expected economic data during the first quarter led to a material repricing of market expectations for Fed rate cuts in 2024. Accordingly, yields on five and 10-year U.S. treasuries were higher by 36 and 32 basis points, respectively. In general, risk assets handled the repricing well considering the magnitude of the adjustment with the S&P gaining more than 10% and in the Bloomberg investment-grade corporate bond index generating an excess return of approximately 90 basis points. =-In aggregate, the Bloomberg Agency MBS index lagged the performance of other fixed-income sectors with spreads slightly wider versus U.S. treasuries. However, given the large move in rates, the relatively benign magnitude of aggregate underperformance was encouraging as compared to the way that MBS performed last year during similar moves. The performance of Agency MBS by individual coupons varied considerably, with spreads on the lowest index coupons widening approximately 10 basis points as the potential for bank supply weight heavily on these coupons. In contrast, higher coupon MBS performed very well during the quarter, tightening 5 to 10 basis points as relatively slow prepayment speeds, limited supply, and steady fixed income inflows provided a favorable backdrop for these coupons. Our portfolio increased $3.1 billion from the start of the year to end the quarter at $63.3 billion as of March 31st. During the first quarter, we continued to gradually move up in coupon and optimize our holdings in specified pools versus TBA. Our TBA position ended the quarter higher at $8.4 billion with Ginnie Mae TBA representing approximately $5.2 billion as of quarter end. Our hedge portfolio totaled $56.3 billion as of March 31st, and as I mentioned on the call last quarter, we began to gradually shift the composition in favor of a heavier allocation to swap-based hedges. This move benefited our performance during the first quarter as swap spreads widened 9 basis points and 5 basis points at the five and 10-year points on the curve, respectively. As Peter discussed, the data-dependent nature of current Fed policy will likely create some volatility in markets. However, the longer-run earnings environment for Agency MBS is very favorable with historically wide spreads low levels of pre-payment risk in deep and liquid financing markets. I'll now turn the call over to Aaron to discuss the non-agency markets. Aaron Pas -- Senior Vice President, Non-Agency Portfolio Management Thank you, Chris. While higher rate environments typically have negative implications for both consumer and corporate credit fundamentals, the current robust employment landscape continues to bolster credit performance. Consequently, fixed-income credit generally performed well in the quarter, resulting in positive excess returns across most sectors. As an indicator for credit spreads in Q1, the synthetic investment grade in high-yield indices adjusting for the role tightened by approximately 10 and 45 basis points, respectively. On the credit fundamental side, we continue to expect an increasing divergence of consumer performance metrics. As we have previously noted, U.S. households have experienced varying degrees of inflationary pressures primarily bifurcated between households with low note rate mortgage debt, who are relatively immune to the higher rate environment and housing inflationary impacts and renter households who are not. As a result, we expect the divergence of credit performance between the two groups to widen with renters at a relatively high risk of falling behind on obligations such as rent, auto loan payments, and credit card debt. Given our current portfolio construction, deteriorating performance for this cohort would be expected to have a negligible impact on our holdings. Accumulated inflation pressures and prolonged exposure to increased rate levels could, however, become a more material issue for a broader group of consumers to the extent they persist for a significant period of time. Turning to our portfolio. The market value of our non-agency securities ended the quarter at $1 billion, in line with the prior quarter. The composition of our holdings was largely unchanged, though we did continue to rotate some of our credit risk transfer securities down the capital structure, where we saw relative value opportunities to improve risk-adjusted returns. Lastly, although asset spreads have continued to tighten, presenting a challenge for projected future returns, the funding landscape for non-agency securities is currently stable and remains relatively attractive. With that, I'll turn the call back over to Peter. Peter Federico -- Director, President, and Chief Executive Officer Thank you, Aaron. We'll now open the call up to your questions. Questions & Answers: Operator [Operator instructions] The first question comes from the line of Bose George with KBW. Please go ahead. Bose George -- Keefe, Bruyette and Woods -- Analyst Hey, everyone. Good morning. Peter Federico -- Director, President, and Chief Executive Officer Good morning, Bose. Bose George -- Keefe, Bruyette and Woods -- Analyst Can you discuss the level of current spreads and what that implies is in terms of incremental ROEs? Peter Federico -- Director, President, and Chief Executive Officer Sure, I appreciate the question, Bose. Yes, as we talked about and Bernie mentioned, we see mortgage spreads across the coupon stack widening somewhere between 10 and 15 basis points really in the month of April. The middle coupons, the 5.5% kind of area has been actually the worst-performing coupons quarter to date. But when you look at where mortgage spreads are now and they are approaching the middle of the range, but they're still below the middle of the range, roughly, you look at the current coupon to the five and 10-year treasury at the low 150 range. If you look at it importantly to where five and 10-year swaps are, that's more like 185 basis points. So it depends on what your hedge mix will obviously drive our net interest margin the current coupon part of the stack right now. But that would translate to, given the way we hedge mix of swaps and treasuries and leaning more toward swaps than treasuries in this environment could put that initial margin up in the 170 to 175 basis point range, an operating with the leverage that we typically operate in the mid-7s, low to mid-7s currently in this environment. That still translates to expected ROE of somewhere between, call it, 16% and 18% given our cost structure. So mortgages are obviously more attractive than they were at the end of last quarter, they are more attractive right now, and that seems to be a pretty compelling level from our perspective. Bose George -- Keefe, Bruyette and Woods -- Analyst OK. Great. Thanks. And then just a related question, can you just talk about the comfort level on the dividend, the breakeven ROE now, I guess, high 17s, but I guess that's within the range you just mentioned? Peter Federico -- Director, President, and Chief Executive Officer Yeah. And as you pointed out in the past, it depends on how you look at that calculation. I think you're referring to the dividend yield on our common and that would translate to 17. So you'd have to think about leverage on common if you want to think about it that way. And I think if you did that same calculation, we just went through, but did it on the common leverage, you would end up with an ROE above that 17% level. I'd like to look at it, and we've talked about this. It's important given our capital structure and the amount of preferred that's still generating a lot of incremental value for our common shareholders. The average cost of our preferred stock, I think at the end of last quarter was around 7.25%. It's a little higher now given the reset of one of our preferreds. But there's a lot of incremental value there. So if you think about it from a total cost of capital the amount of common dividends we pay preferred dividends and our operating costs and you think about that as a percentage of equity. At the end of last quarter, I think that came to around 15.7% or thereabouts. So I look at the portfolio today at current valuation levels. And I think you can see that our dividend level and that total cost of capital remains well aligned. Bose George -- Keefe, Bruyette and Woods -- Analyst OK. Great. Thank you. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate the good questions, Bose. Operator The next question comes from the line of Rick Shane with J.P. Morgan. Please go ahead. Rick Shane -- JPMorgan Chase and Company -- Analyst Hey, guys. Thanks for taking my questions this morning. Look, so one of the interesting facets of the portfolio as the contribution from swaps over the next several months, you have $8.5 billion notional rolling off. Those swaps essentially contribute about 20% to 25% of your spread income. As you look forward, given the opportunity, how do you replace that runoff? Peter Federico -- Director, President, and Chief Executive Officer Yeah. I appreciate the question, Rick. Yes, I think I didn't hear the -- actually the first part of your question, but I think you're talking about swap spreads and swap spread performance to some extent. And that was an important driver of performance because swap spreads tightened a lot. But when you think about our net interest margin, we talked a lot about this. Our net interest margin has remained really, really robust. Last quarter, it was 298 basis points and that is not consistent with the economics that we just went through. If you think about that net interest margin at around 300 basis points, and you divide that and think about that from an ROE perspective, you're going to get an ROE of 25%, 26% or take our net spread and dollar roll income and divide that by our common equity, which would be consistent with that 300 basis points of net interest margin, you're going to get an ROE of 25%, 26%. The economics of our business, as we just talked about, are in the mid to high teens. And what's going to happen over time is as those swaps run off and you are right, we have about $8.5 billion still maturing and we had about $5 billion mature, by the way, in the first quarter and that contributed to somewhat that slight decline in our net interest margin. Those will roll off over time and our net spread in dollar -- or our net interest margin because of those swaps rolling off will come down. There are other factors, though, that you got to consider. So it's not as easy as just those swaps rolling off. We will put other swaps on that have positive carry on them. If you put on longer-term swap today, it's still a positive carry by, for example, a 10-year by 150 or so basis points. And also our asset yield is still below market yields. Our asset yield is still 25, 30 basis points below market yields. So as Chris and team roll the portfolio over, and we continue to move our assets around, we'll end up seeing some uptick in our asset yield like you saw last quarter. But over time, that net interest margin over a longer time will come down more in line with the economics of our business. So that's what you'll see over the next several quarters to years as old swaps roll off, new swaps come on, assets get replaced, net interest margin should come back down in alignment with the economics of our business, which is really the mark-to-market yield that we just talked about in the previous question. Rick Shane -- JPMorgan Chase and Company -- Analyst Got it. Yes. And that really does get to the punchline, which is that as you're looking forward to all of those factors, that's really what's dictating the dividend policy and -- Peter Federico -- Director, President, and Chief Executive Officer I appreciate that clarification. That's exactly right. It's setting the dividend policy based on the level of return from an economic perspective that we're seeing as opposed to the current period earnings -- that gets reflected in our net interest margin. Rick Shane -- JPMorgan Chase and Company -- Analyst OK. Thank you very much. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate the question. Operator Our next question comes from the line of Terry Ma with Barclays. Please go ahead. Peter Federico -- Director, President, and Chief Executive Officer Good morning, Terry. Terry Ma -- Barclays -- Analyst Hey. Good morning. Thank you. So you mentioned that you thought the recent volatility would be short-lived. Can you maybe just give a little bit more color on what gives you confidence that it will be short-lived -- and then maybe just your expectations on where near-term spreads are set once the volatility this year? Peter Federico -- Director, President, and Chief Executive Officer Sure. Both Chris and I tried to address this to some extent in our in our prepared remarks. And I think Chris referenced the fact that this quarter looked a lot different than previous quarters when we had similar moves. And that's really a critical point from our perspective. What occurred in the first quarter was generally a very stable market conditions, but there was a very significant repricing of the timing and magnitude of short-term rate moves from the Fed. Importantly, it was not a shift and has not yet become a shift in paradigm with respect to monetary policy. Said another way, the Fed was really clear in a number of communications that the policy rate was likely at its peak and the next move was likely going to be an ease. What we had in the first quarter was simply a plateauing of CPI data -- it came in at 3.9% and then 3.8% and 3.8% again. It just didn't show the improvement that the Fed was looking for. And in the two or three days following each of those CPI reports the 10-year treasury moved up 20 to 25 basis points and at stance taking out one. So when we started the year, the market probably incorrectly so may be too optimistic, expected the Fed to ease five or six times. Now as we sit here today, the market has repriced to only one and a half moves this year and importantly, in aggregate, the Fed funds futures in 2027 tell us there's only six moves in total, meaning that the Fed funds rate now according to the market's projections is going to settle out at around 4%. That's materially higher than what the Fed's own long-run target is, which is still 2.5%. So what we had occur is a very significant repricing of the path of short-term interest rates. We did not have a paradigm shift. If inflation continues to not evolve or reaccelerate, there could be a shift in monetary policy. We don't believe that's going to happen. We get important inflation data at the end of this week in the PCE report. But we believe, and I think the Fed still believes that inflation will show signs of improvement. We will move more toward the Fed's long-run target, which, by the way, the Fed's own estimate of PC at the end of this year, is 2.6%. That's not going to be materially off where the number comes out at the end of this week. And with that projection, the Fed expected to remove. So we think that where the 10-year is at, call it, 4.5 to 4.75. That seems like a pretty healthy place for the 10-year in the context of a Fed funds target that's ultimately going to move to 3%. We think the inflation report ultimately come in favor of the direction the Fed ones. And I think this repricing has simply been just a healthy movement of where short-term rate cuts are going to occur and the magnitude of those, not a paradigm shift. And so spreads moved. We had a lot of geopolitical risk. We had volatility following inflation reports. If we get two or three inflation reports that are at or better than expected, we'll have the same sort of significant repricing in the opposite direction. I think the Fed is looking for two or three months in a row of better data to have sufficient confidence. And once they get that data, then everybody will be pricing in the eases again and the direction of monetary policy will be clear again. Right now, it's a little uncertain, but we think the repricing is largely over. With respect to spreads, you asked that. Again, when you look at current coupon spreads near the middle of the range, that seems like a good place from our perspective. Current coupons of the five- and 10-year treasury at 150 to 160 basis points seems like a healthy place against swaps, 180 to 190, seems like a healthy place. We do have some negative seasonals right now between this next April and May should be kind of the worst seasonal months for mortgages in terms of origination. So the market sort of, I think, is in a good place right now with the repricing that has taken place. Terry Ma -- Barclays -- Analyst Got it. Thank you. Very helpful color. And then just on your hedge ratio and your duration gap, you guys took the hedge ratio down and you're now running a slightly positive duration gap. So maybe just a little bit more color on that move and then talk about where you're comfortable running the book in this environment. Peter Federico -- Director, President, and Chief Executive Officer Sure. I've talked about this for a while. It does make sense for us to gradually move our hedge ratio down as the Fed's monetary policy outlook changes. We obviously wanted to run with a very high hedge ratio. More than 100% of our short-term debt essentially termed out in order to protect our funding cost in a rising short-term rate environment. We're now at the inflection point -- and so over time, I would expect that to come down. And as we get more confidence when and the magnitude of the Fed cuts, then we'll ultimately probably operate with even a lower hedge ratio such that at some point in the monetary policy easing process we would want to operate with, in a sense, some percent of our short-term debt unhedged, have that -- a bigger part of our funding mix. So over time, we'll do that. Chris mentioned, and I'll let him speak to this. He mentioned our gradual movement to more toward swaps in our hedge mix. And I think we have a sort of a positive outlook. Chris, do you want to talk a little bit about that? Chris Kuehl -- Executive Vice President, Chief Investment Officer Yeah. So our funding is obviously sulfur based. And so logically, we want to have generally a more significant portion of our hedges and sulfur-based swaps, which also have better carry. But over the last couple of years, the bid for mortgages was highly correlated with treasuries, given the dominant investor base were index funds as opposed to banks. And so, it made sense to have a more sizable component of our hedge book in treasury based hedges. U.S. Treasury issuance was also extraordinarily high at a time when banks were not in a position to grow the securities holdings. And so that had the effect of cheapening treasuries versus swaps. And now with bank deposits stabilizing and QT likely drawing to an end, we're gradually moving our hedge book to have a higher concentration in swap-based hedges. But this will be a gradual shift, and we want to maintain diversification within our hedge portfolio composition just as we do on the asset side. Terry Ma -- Barclays -- Analyst OK. Great. Thank you. Peter Federico -- Director, President, and Chief Executive Officer Sure. Thanks for the question. Operator Our next question comes from the line of Crispin Love with Piper Sandler. Please go ahead. Crispin Love -- Piper Sandler -- Analyst Thanks. Good morning. I appreciate for taking the question, thanks. Good morning, Peter. Just looking at fund flows, bond flows have been very positive. Government fund flows have been positive as well, which have positive implications agency, but only tells part of the story. So can you just speak to what you're seeing on the flow side? Who are the major buyers right now of Agency MBS? I think you mentioned a little bit about banks coming back in the first quarter, but do you think some of the recent rate moves could keep some of them on the sidelines for a bit? Peter Federico -- Director, President, and Chief Executive Officer Yeah. Well, we certainly did see that. You're right. If you look at the -- and this is part of the reason why didn't feel like a paradigm shift in why the first quarter was not nearly as disruptive despite the amount of repricing that took place because bond fund flows generally stayed positive throughout the quarter, there was probably a week or two where they actually got to zero, maybe negative, but there was never really any big movement out of bond flows like we saw at different times last year. So the bond fund flows continue to be neutral to positive. I think we're also starting to see outside the bond fund complex inflows into mortgage-backed securities. Those flows are obviously hard to quantify, I think they are evident in particular, if you look at the way the mortgages performed across the coupon stack were lower in the first quarter where lower coupons underperformed in higher coupons. The current coupon are really above the six and six and a half in particular -- actually tightened on the quarter. I think that shows you that there's new demand for those sort of high-yielding securities. With the backup that we have, the current coupon now at around 6.5% that, again, looks really, really attractive to treasuries. It also looks really attractive to investment-grade corporates. That spread has again widened out to around 30 basis points. So mortgages look cheap to investment grade. Corporates -- current coupon in particular or the highest yielding ones. They look cheap to treasuries. I think the credit quality, obviously backed by the support of the U.S. government, helps in an environment where the economy is ultimately slowing. So I think those are going to continue to drive demand for agency mortgage-backed securities not so much on a levered basis, but actually on an unlevered basis, and that has a really positive long run fundamental. So I think that -- I think that trend is going to stay in place for a while. They just -- those reallocations tend to take time for slow-moving reallocations. Crispin Love -- Piper Sandler -- Analyst Great. Thanks, Peter. Appreciate taking my questions. Operator Our next question comes from the line of Doug Harter with UBS. Please go ahead. Peter Federico -- Director, President, and Chief Executive Officer Good morning, Doug. Doug Harter -- UBS -- Analyst Good morning. The way you've kind of described the market, how are you thinking about continued capital raises and the attractiveness of that opportunity? Peter Federico -- Director, President, and Chief Executive Officer Yeah. I appreciate the question. Well, obviously, we always look at it through the lens of our existing shareholders, first and foremost. And as Bernie mentioned, we were able to raise capital through our at the money program, at the market program very accretively in the first quarter. And we'll continue to look at those opportunities. The first quarter is a really good example of one, the cost-effective nature of that capital issuance, the book value accretion that can be generated by it, but also the flexibility that affords us. As Chris mentioned, we added about little over $3 billion worth of mortgages in the quarter. If you think about that, given the amount of capital we raised, we were able to deploy those proceeds immediately into the mortgage market. About half of those purchases if you will, went toward levering that new capital immediately. So there's no drag from a dividend perspective. It's accretive to book value. That translates to value for our existing shareholders. We will continue to look for opportunities to do that. I like mortgages better. Obviously, at this level, mortgages did spend a lot of time in the first quarter near the tighter end of the range, which gave us a little bit of pause. But we will continue to be opportunistic with it if we can generate existing value -- we can generate value for our existing shareholders through our capital markets activities, we will certainly look to do that. Doug Harter -- UBS -- Analyst And then Peter, just contrast -- Peter Federico -- Director, President, and Chief Executive Officer I am sorry, Doug. Go ahead. Doug Harter -- UBS -- Analyst Yes. No, sorry. And if you could just contrast that with kind of how you see leverage today and kind of how leverage might move around given kind of book value weakness but also ability to add -- protect and/or add new assets? Peter Federico -- Director, President, and Chief Executive Officer Yes. Well, we certainly have a lot of capacity the way I would describe it today, a lot of flexibility. And I think that's appropriate because we are moving, it sort of made this, I mean in our -- in my initial remarks that we are moving in a positive direction, but we are still moving essentially in that direction slowly, and there is going to be volatility along the way. And we want to be disciplined with our capital deployment and our leverage because monetary policy is still evolving. There is lots of variables that are going to drive the Fed. Over time, we are going to get more clarity. And there may be a time where we have even more confidence in the outlook. But our confidence is growing. We have a lot of -- as Bernie mentioned, we have a very strong liquidity position of $5.4 billion. As a percent of equity, I think it maybe was one of our highest points just last quarter at 67%. If you think about that on our assets, it's over 8%. So we have a lot of capacity, but we also want to be disciplined. And what's important about the outlook from our perspective is that we think we are entering a period that's going to be from a long-term durable, attractive investment opportunities, so we don't feel any rush to deploy capital. We feel like we can be disciplined. We feel like we can continue to be opportunistic like we were in the first quarter. And so the environment is going to evolve over time. Our confidence will grow. Mortgage spread behavior within the trading range is important. And I think what we are starting to see is some consolidation in that spread, which I think is a healthy development for the market. Said another way, for mortgages to move to the high end of the range, I think it's becoming more challenging for that to occur. And there is growing reasons why mortgages can trade at the lower end of the range. We just haven't seen them all evolve fully yet, but we will see that over time, and we will see how the economy unfolds over the next three months to six months and how the Fed's behavior and the Fed outlook changes. That's really going to be a key driver for the fixed income market is what happens to monetary policy because once the Fed starts to ease, I think ultimately, the market will price the Fed moving the Fed funds rate all the way back to 3%. But they have to start that move from a place of confidence and the market doesn't have that confidence, yet the Fed doesn't have that confidence. Doug Harter -- UBS -- Analyst Great. Thank you, Peter. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate that. Operator Our next question comes from the line of Jason Weaver with JonesTrading. Please go ahead. Jason Weaver -- JonesTrading -- Analyst Hi. Good morning. I was hoping you could expand a little bit more on Doug's first question there. The 25 million shares you issued during the quarter, can you talk a little bit about the timing and coupon deployment of that capital in the quarter and subsequently. Peter Federico -- Director, President, and Chief Executive Officer I am sorry, could you repeat the first part? I didn't have a little to here in your question. Jason Weaver -- JonesTrading -- Analyst Sorry, Peter. I was just trying to expand on the answer to Doug's first question about the timing and deployment of the ATM issuance you raised in the first quarter. Peter Federico -- Director, President, and Chief Executive Officer Well, yes, like I have said, the ATM gives us a lot of flexibility. So we were able to raise money through our -- through the ATM program and deploy it immediately. As Chris mentioned, you could talk about where we would like a coupon staff. But that gets deployed really simultaneously almost. Chris Kuehl -- Executive Vice President, Chief Investment Officer Peter mentioned the $3 billion increase. That was a fair value increase. We added roughly $4 billion in Agency MBS during the quarter in current phase terms. Majority of which was in higher coupon 30-year TBA. We also added about $400 million in hybrid ARMs. Jason Weaver -- JonesTrading -- Analyst Was that sort of weighted throughout the quarter or weighted toward the beginning or end? Can you speak to that? Peter Federico -- Director, President, and Chief Executive Officer No. We usually don't give those sorts of details. I appreciate the question, but -- Jason Weaver -- JonesTrading -- Analyst Fair enough. Peter Federico -- Director, President, and Chief Executive Officer Yes. Jason Weaver -- JonesTrading -- Analyst No. that's fine. And here is -- what were you thinking about the implications for the Fed's reduction in Q2 and how that might change your portfolio strategy, hedging strategy? Peter Federico -- Director, President, and Chief Executive Officer Well, as Chris mentioned, just real quickly, I will make a couple of comments. As Chris mentioned, obviously, the Fed is going to move first and significantly with respect to its treasury portfolio. So I expect the Fed to announce next week at the meeting that they will cut the treasury cap by half. It does not appear based on the minutes that they are going to make a change at this point to the mortgage cap because the mortgages are running off so far below. They are actually running off at about half of the cap right now. So I don't expect the Fed to make a change on that. But I do expect treasuries to come down and over the remainder of the year, I expect treasury run-off cap to actually come to zero. And that has a positive development generally speaking, for treasuries versus swaps. When you think about bank regulation and the fact that bank regulation is going to be less onerous, I think that's going to also push us to, as Chris mentioned, to swap. So I think that's where it has an implication from a hedging perspective. Longer term, I think it's still unclear exactly how the Fed is going to handle its mortgage portfolio with respect to its changes to its balance sheet. And this is going to be an important development. Last week, for example, there was a paper that came out from the open markets desk at the New York Fed, where they show two examples of how the Fed may approach tapering its portfolio runoff. And in both of those scenarios, they had the mortgage cap getting cut in half. Now, that won't have any practical impact on the speed of runoff because mortgages for the Fed's portfolio are running off between $17 billion and $20 billion. But it would have a long-term stabilizing effect on the mortgage market if they did choose a cap structure like that, they could still achieve their stated purpose of allowing mortgages to run off and be redeployed into treasuries. And ultimately, over a very long time horizon, they would be able to achieve their objective of having primarily treasuries. But this is -- that would be a sort of transfer of mortgages to treasuries that would occur over multiple years. If they use a lower cap to allow that to happen, that could be a positive development for mortgages. We will have to wait and see how the Fed handles that. I don't think we are going to get that level of detail right now, at this first initial move, but I think we will get that over time. Jason Weaver -- JonesTrading -- Analyst All right. Thank you for that. Peter Federico -- Director, President, and Chief Executive Officer Sure. Operator Our next question comes from the line of Merrill Ross with Compass Point. Please go ahead. Merrill Ross -- Compass Point Research and Trading -- Analyst Good morning and thank you. You might not answer this, given what you have just said. But did you add to the portfolio into April's volatility, particularly in the five and a half and what is the current leverage given the decline -- the 8% decline that Bernie referred to in book value? Peter Federico -- Director, President, and Chief Executive Officer I am sorry, I didn't hear this last part. We have a little bit of a bad connection. I think the first part was, did we add to the portfolio in April? What was the second? Merrill Ross -- Compass Point Research and Trading -- Analyst The current leverage. Peter Federico -- Director, President, and Chief Executive Officer Current leverage, yes, Chris could talk a little bit about mortgages in the current environment and where he is adding and seeing value. With respect to current leverage, it's a little higher today. It's actually around 7.4 given the backup in net asset value and portfolio activity to date. Anything that's particular about today's market? Chris Kuehl -- Executive Vice President, Chief Investment Officer Yes. With respect to -- we haven't had any material changes in the size of the portfolio quarter to date. With respect to relative value within the agency space, as I mentioned earlier, higher coupons significantly outperformed lower coupons during the quarter, in part, given concerns around bank sales and lower coupons related to some M&A balance sheet restructuring announcements that were made. But also in response to very favorable prepayment reports that showed considerably flatter refi responses in higher coupons compared with what we saw during the last refi wave during COVID with similar incentives to refinance. And so up in coupon benefited from that as well. And despite the higher coupons outperforming, I would say relative value is still generally upward sloping across the coupon stack. Merrill Ross -- Compass Point Research and Trading -- Analyst OK. I have one other unrelated question, if you don't mind. Peter Federico -- Director, President, and Chief Executive Officer Sure. Merrill Ross -- Compass Point Research and Trading -- Analyst The Series C that's callable. Wouldn't you use some of your liquidity? I mean maybe on the margin, it's not really material to you? I am just curious. Peter Federico -- Director, President, and Chief Executive Officer Appreciate that question. We are constantly evaluating our capital structure. And you are right, that series is callable. But as I mentioned, even though it has reset higher and the coupon on that one is a little, 10.7%. It is certainly materially higher than our other fixed-rate preferreds. Even at 10.7%, given where the returns are on our portfolio, that is still a lot of value that is accruing to the benefit of our common shareholders. So we will look for always as we do, look for opportunities to optimize that cost of our capital. The preferred market has been relatively quiet right now. So there is not a lot of activity going on in part because of the rate uncertainty. But I expect that to change over the remainder of the year, and there might be opportunities in the preferred market as we move forward. So we will continue to evaluate that. But it does generate incremental value right now for our common shareholders. Merrill Ross -- Compass Point Research and Trading -- Analyst I believe MSA refinanced a series at 9%, I am just curious, not that, that seems like a really huge relative value trade from 10% to 9%, but -- Peter Federico -- Director, President, and Chief Executive Officer And the other important part -- the other important point about the floating rate preferred obviously is your -- we are likely at the peak of that coupon. And obviously, coupon can change very, very rapidly. So there is lot of option value in those series right now. The Fed obviously, a couple of quarters or a couple of months of positive inflation data, and the forward curve will be materially downward sloping and those coupons could look very attractive in a year or so. Merrill Ross -- Compass Point Research and Trading -- Analyst Great. Thank you. Peter Federico -- Director, President, and Chief Executive Officer Sure. I appreciate your question. Operator And our last question comes from the line of Eric Hagen with BTIG. Please go ahead. Jake Katsikas -- BTIG -- Analyst Good morning. This is actually Jake Katsikas on for Eric. Appreciate you guys taking my questions. First one, could you flesh out a little bit the outlook you have for prepayment speeds including how much room you might see for your forecast to change with mortgage rates kind of coming up recently. Do you think faster speeds would be a benefit or maybe a headwind on earnings or possible economic return? Thanks. Peter Federico -- Director, President, and Chief Executive Officer Sure. Chris, do you want to talk about prepayment? Chris Kuehl -- Executive Vice President, Chief Investment Officer Given our coupon composition, slower speeds, the prepay reports over the last two months have been some of the more interesting reports than we have had -- that we have had over the last couple of years after spending December, sort of through the December mid-February timeframe. It's sort of local lows and mortgage rates with rates around 6.5% to 6.75% after spending the second quarter and third quarter last year, originating pools with 7.5% to 8% note rates. And so we got a lot of insight into what the refi response was going to look like on a sizable population of loans with, call it, 75 basis points to 100 basis points of incentive to refinance. And what we learned was that speeds were quite a bit slower than what many had feared and slower than what we observed during COVID on loans with similar incentives to refinance. And so this, as I mentioned, has provided a tailwind to higher coupons. It's interesting. I think there are a number of factors that likely contributed to the slower response than what we saw during the last refi wave. So slower speeds are favorable for our position. With respect to the lowest coupons, which are a very small percentage of our holdings, even there, I would say, turnover speeds have been over the last year, a little better or a little faster than what many had feared. So hopefully, that gives you some insight into our outlook on speeds. Jake Katsikas -- BTIG -- Analyst Yes, it does. Appreciate that. And then finally, just going back to leverage, what is your historical range for leverage been? And do you think that range might change at all if mortgage spreads remain historically wide? Peter Federico -- Director, President, and Chief Executive Officer Yes. I mean look, if you look back over a very long history and we have put these numbers out, our leverage has ranged probably at the low point, maybe around 6% or thereabouts and at the highest print was probably in the 9%, 9.5%. So it sort of give you some bookends. But really, what you have to think about is when you think about leverage is it's dependent on the environment. It depends on where mortgage spreads are, if mortgage spreads being tight versus mortgage spreads being historically wide that's a really critical driver of the interest rate environment to volatility. As I talked about a lot over the last couple of years, all other things equal, in an environment that we have just gone through, where there has been a significant negative fixed income market repricing as the Fed went from quantitative easing to quantitative tightening, bad for all fixed income securities volatility was really high. Liquidity was challenging at times. You sort of have to volatility adjust down the leverage. Said another way, each unit of leverage has a higher risk element to it. So all other things equal, we had to bring our leverage down to account for the increased volatility. As the environment changes, as we get more and more confident that mortgage spreads will not break out of this new range that the high end, importantly, of the range will hold like it has held now for better part of seven quarters. Those will be important drivers for leverage going forward. But it's going to depend on monetary policy. It's going to depend on the volatility of interest rates, the cost to rebalance, liquidity in the market, and obviously our view on where mortgage spreads may go. Jake Katsikas -- BTIG -- Analyst Thank you so much. Peter Federico -- Director, President, and Chief Executive Officer Sure. Appreciate all the questions. Operator We have now completed the question-and-answer session. I would like to turn the call back over to Peter Federico, for closing remarks. Peter Federico -- Director, President, and Chief Executive Officer Again, we appreciate everybody's time this morning, and we look forward to speaking to you again at the end of the second quarter.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings. Welcome to the Align first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology. You may begin. Shirley Stacy -- Vice President, Corporate and Investor Relations Good afternoon, and thank you for joining us. I'm Shirley Stacy, vice president of corporate communications and investor relations. Joining me for today's call is Joe Hogan, president and CEO; and John Morici, CFO. We issued first quarter 2024 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website, at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our first quarter 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's president and CEO, Joe Hogan. Joe? Joe Hogan -- President and Chief Executive Officer Thanks, Shirley. Good afternoon, and thanks for joining us on our call today.I'll provide an overview of our first quarter results and discuss a few highlights from our two operating segments, System Services and Clear Aligners. John will provide more detail on our Q1 financial performance and comment on our views for the second quarter and 2024 in total. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report better-than-expected revenue and earnings for the first quarter and a solid start to the year. For Q1, total worldwide revenues were up 5.8% year over year, reflecting 3.5% growth from our Clear Aligner segment and 17.5% growth from Systems and Services. On a year-over-year basis, Q1 revenue growth was up across all regions and was driven by strong Clear Aligner volumes, primarily in the Asia Pacific region. Year-over-year growth also reflects strength in the orthodontic channel with total Invisalign case starts from teens and younger patients up 5.8% year over year, driven by continued momentum across all regions from Invisalign First as well as Invisalign DSP touch-up cases. On a sequential basis, Q1 total revenues were up 4.3%, reflecting a sequential increase in Clear Aligner revenues, especially from North America orthodontists, as well as strong Systems and Services revenues primarily driven by iTero Lumina wand upgrades in North America. During the quarter, we achieved several significant milestones. We completed the acquisition of Cubicure, a leader in direct 3D printing solutions, which is the foundation for our next-generation aligner manufacturing. We successfully launched the iTero Lumina intraoral scanner, our next generation of digital scanning technology. We launched the Invisalign Palatal Expander or IPE system in the U.S. and Canada, and we received regulatory approval for the Invisalign Palatal Expander in Australia and New Zealand. Q1 Systems and Services revenue year-over-year growth reflects non-Systems revenues driven by iTero Lumina wand upgrades and higher scanner volumes and increased Services revenue from a larger base of scanners sold. On a sequential basis, Q1 Systems and Services revenue were up 3.1%, reflecting growth from non-Systems revenues and higher scanner ASPs, partially offset by lower volumes due to seasonality and strong fourth quarter. The iTero Lumina intraoral scanner is available now with orthodontic workflows as a new stand-alone scanner or as a wand upgrade to iTero Element 5D Plus. The restorative workflow is expected to be available in the fourth quarter of 2024. In the meantime, GP practices can benefit from the iTero Lumina's new Multi-Direct Capture technology that replaces the confocal imaging technology in earlier models. The iTero Lumina intraoral scanner has a 3x wider field of capture and a 50% smaller and 45% lighter wand, delivering faster scanning speed, higher accuracy, super visualization, and more comfortable scanning experience. Overall, we're really pleased with the launch of the iTero Lumina scanner. Customer feedback has been positive, and we're really excited about the feedback from doctors, so we've included some great verbatims in our webcast slides. Q1 total Clear Aligner revenues were up year over year, reflecting revenue growth across the regions from strong year-over-year volume growth across APAC markets as well as the EMEA region. For the Americas region, Q1 Clear Aligner volume was consistent with prior year. For Q1, total Clear Aligner shipments were up 2.1% sequentially, reflecting seasonality with increased volumes in the Americas regions offset somewhat by EMEA and APAC regions. For Q1, Clear Aligner shipments include over 23,000 Invisalign Doctor subscription cases or DSP touch-up cases, primarily from North America ortho channel, an increase of approximately 49% year over year from Q1 '23. These DSP touch-up cases are a component of the overall DSP program, which consists of retainers and touch-up cases or aligners, and it continues to be an important offering for our customers and their patients. DSP is currently available in the United States, Canada, Iberia, Nordics, the U.K., and most recently in Italy, France, and Poland. We expect to continue expanding DSP into other country markets in EMEA in Q2, including a 14-stage touch-up aligner offering. For non-case revenues, Q1 was up 7.5% year over year primarily due to continued growth from Vivera retainers along with Invisalign DSP retainer revenues. In the teen market, nearly 200,000 teens and younger patients started treatment with Invisalign Clear Aligners in Q1, up 5.8% year over year. This represents a record number of teen cases shipped as compared to prior quarters, reflecting strength in APAC and EMEA. Teen starts were up sequentially 1.2%, reflecting strength in EMEA and North America, offset by seasonally fewer teen starts in China. While the teen market tends to be less susceptible to consumer demand around discretionary spending and more resilient than adult orthodontic case starts, we're pleased that in Q1, our Clear Aligner volumes for both adults and teens were up sequentially and year over year. We believe the Invisalign Palatal Expander system is one of the most exciting innovations we have developed in our 27-year history and is a better option for expanding a growing patient's narrow palate. Initial response from doctors and patients for Invisalign Palatal Expander system is positive. Invisalign Palatal Expander system is not a traditional Invisalign aligner. It is a series of direct 3D-printed orthodontic appliances based on proprietary and patented technology that has force systems designed for skeletal expansion. Clinical data shows the Invisalign Palatal Expander system is safe, effective, and proven to deliver skeletal expansion. Specifically, our clinical data is based on 49 patients across the United States and Canada between the ages of 6.9 and 11, with a mean age 8.8 years. In this group, the mean expansion of six millimeters was achieved with minimal tipping with range between 3.4 millimeters to 10.7 millimeters, as measured using the change in intermolar width between initial and post-expansion scans, with a mean expansion efficacy of 97%. In addition, we found that surveyed doctors agree the Invisalign Palatal Expander is less painful than traditional expanders and it facilitates better oral hygiene, compared to traditional metal expanders. Phase 1 or early interceptive treatment includes both skeletal/orthopedic and dental/orthodontic arch expansion and makes up to 20% of orthodontic case starts each year. Combined with Invisalign First aligner treatment, Invisalign Palatal Expanders provide doctors with a full early interceptive treatment solution that allows doctors to treat all Phase 1 patients. We expect Invisalign Palatal Expander to be available in other markets pending future applicable regulatory approvals. Today, Invisalign is the most recognized orthodontic brand globally and Invisalign Clear Aligner treatment is faster and more effective than traditional metal braces, yet the underlying market opportunity remains huge and untapped. We continue to invest in consumer marketing and demand creation initiatives that raise awareness and drive potential patients to Invisalign practices globally. Below are several highlights from Q1 and more information is available in our Q1 '24 earnings webcast slides. In Q1 '24, we delivered 14.5 billion impressions and have 43 million visits to our websites globally. To increase awareness and educate young adults, parents, and teens about the benefits of the Invisalign brand, we continued to invest and create campaigns in top media platforms such as TikTok, Instagram, YouTube, SnapChat, and WeChat across markets. Reaching young adults as well as teens and their parents also requires the right engagement through Invisalign influencers and creator-centric campaigns. Our teen Invis is Drama Free campaign was recently recognized by the Association of National Advertisers with a Silver award in the Reggie Awards for creative and strategic excellence. In the U.S., in addition to our ongoing influencer campaigns, we partnered with athletes such as Mazz Crosby, TikTok GenZ influencer OverTime Meg, and the famous fashion designer Kristin Juszczyk to create a compelling brand activation at the Super Bowl. Our campaigns delivered more than 6.1 billion impressions and 18.1 million unique visitors to our consumer websites across the America. In the EMEA region, we partnered with influencers to reach consumers across social media platforms, including TikTok and Meta and launched our global consumer campaigns for teens and parents. Our campaigns delivered more than 1.6 billion media impressions and 8.9 million visitors to our website. We continued to invest in consumer advertising across the APAC region, resulting in more than 6.6 billion impressions and 16 million visitors to our websites, a 195% increase year over year. We expanded our reach in Japan and India via Meta and YouTube and partnered with key influencers to reach consumers across social media. We saw increased brand interest from consumers as evidenced by a 285% year-over-year increase in unique visitors to our website in India and a 129% increase in Japan. Finally, digital tools such as My Invisalign Consumer and Patient app continued to increase with 4 million downloads to date and over 381,000 monthly active users, a 15% year-over-year growth rate. Q1 '24 Clear Aligner volume from DSO customers increased sequentially, reflecting growth from the Americas and EMEA regions, and increased year over year, reflecting growth across international regions. Dental Service Organization, or DSOs, represents a large and growing opportunity to help drive adoption of digital technology across the dental industry. We have established relationships with many DSOs globally that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the Align Digital Platform, including increased practice efficiency and profitability, as well as delivering a better patient experience from shorter cycle times and proximity to their customers. Smile Docs and Heartland Dental are some of our largest DSO partners, and we are continuously exploring collaboration with DSOs that can further adoption of digital dentistry. Each DSO has a different strategy and business model, and our focus is on working with and encouraging DSOs aligned with our vision, strategy, and business model goals. Today, we announced an additional $75 million equity increase in Heartland, following the previous $75 million equity investment a year ago. Heartland is a multidisciplinary DSO with GP and Ortho practices across the United States. Their growth strategy includes Heartland's De Novo dental practices which feature modern technology, located in areas with a strong community need for dentistry where Heartland provides practices with opportunities for mentorship, leadership training, and continuing education. In the last four years, Heartland opened 240 state-of-the-art De Novo practices across the U.S. and are planning to continue investing through more De Novo openings. We have a shared sense of purpose with Heartland; their mission is to help doctors and their teams deliver the highest quality digital dental care to the communities they serve. With that, I'll now turn it over to John. John Morici -- Chief Financial Officer Thanks, Joe. Now, for our Q1 financial results, total revenues for the first quarter were $997.4 million, up 4.3% from the prior quarter and up 5.8% from the corresponding quarter a year ago. On a constant currency basis, Q1 '24 revenues were impacted by favorable foreign exchange of approximately $10 million or approximately 1% sequentially and were unfavorably impacted by approximately $4.8 million year over year or approximately 0.5%. For Clear Aligners, Q1 revenues of $817.3 million were up 4.5% sequentially, primarily from higher ASPs and higher volumes. On a year-over-year basis, Q1 Clear Aligner revenues were up 3.5%, primarily due to higher volumes and ASPs and increased non-case revenues. For Q1, Invisalign ASPs for comprehensive treatment were up sequentially and up year over year. On a sequential basis, ASPs primarily reflect higher additional aligners and price increases and the favorable impacts of foreign exchange, partially offset by a product mix shift to lower ASP products. On a year-over-year basis, the increase in comprehensive ASPs primarily reflect higher additional aligners and price increases, partially offset by a product mix shift to lower ASP products and higher discounts and the unfavorable impact from foreign exchange. For Q1, Invisalign ASPs for non-comprehensive treatment were down sequentially and year over year. On a sequential basis, the decline in ASPs reflect unfavorable country mix shift and higher discounts, partially offset by the favorable impact from foreign exchange. On a year-over-year basis, the decrease in noncomprehensive ASPs reflect the product mix shifts to lower ASP products, unfavorable country mix shifts, and higher discounts, partially offset by lower net revenue deferrals. As a reminder, we announced about a 5% global price increase for some Invisalign products across most markets effective January 1, 2024. This price increase did not include Invisalign comprehensive 3-and-3 product. Invisalign comprehensive 3-and-3 product is available in North America and in certain markets in EMEA and APAC, most recently launching in French territories and in the Middle East. We are pleased with the continued adoption of the Invisalign comprehensive 3-and-3 product and anticipate it will continue increasing, providing doctors the flexibility they want and allowing us to recognize more revenue upfront, with deferred revenue being recognized over a shorter period of time compared to our traditional Invisalign comprehensive product. Q1 '24 Clear Aligner revenues were impacted by a favorable foreign exchange of approximately $8.4 million, or approximately 1% sequentially. On a year-over-year basis, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $3.9 million or approximately 0.5%. Clear Aligner deferred revenues on the balance sheet decreased $26.7 million or 2% sequentially and increased $15.8 million or 1.2% year over year and will be recognized as additional aligners are shipped. Q1 '24 Systems and Services revenue of $180.2 million were up 3.1% sequentially, primarily due to increased non-Systems revenues, mostly related to upgrades, and higher ASPs, partially offset by lower volumes. Q1 '24 Systems and Services revenue were up 17.5% year over year primarily due to increased non-Systems revenues, mostly related to upgrades, higher scanner volumes, and higher Services revenues from our larger base of scanner sold. CAD/CAM and Services revenue for Q1 represents approximately 51% of our Systems and Services business. Q1 '24 Systems and Services revenues were favorably impacted by foreign exchange of approximately $1.5 million, or approximately 0.9% sequentially. On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $0.9 million, or approximately 0.5%. Systems and Services deferred revenues on the balance sheet was down $14.3 million or 5.5% sequentially and down $25.3 million or 9.4% year over year, primarily due to the recognition of Services revenues, which is recognized ratably over the service period. The decline in deferred revenues both sequentially and year over year reflects the shorter duration of Service contracts with initial scanner purchases. As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers to upgrade and make trade-ins, in addition to other scanner leasing and rental programs. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and our DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold. We are pleased to be able to leverage our technological innovations and operational capabilities and efficiencies to provide different types of go-to-market models to our customers such as rentals and leasing, selling the way that our customers want to buy. Moving on to gross margin. First quarter overall gross margin was 70%, approximately flat sequentially and year over year. Overall gross margin was favorably impacted by foreign exchange by approximately 0.3 points sequentially and unfavorably impacted by approximately 0.1 points on a year-over-year basis. Clear Aligner gross margin for the first quarter was 70.9%, down 0.3 points sequentially, primarily due to higher manufacturing spend, partially offset by higher ASP. Clear Aligner gross margin for the first quarter was down 0.8 points year over year, primarily due to higher manufacturing spend, partially offset by favorable ASP. Systems and Services gross margin for the first quarter was 65.9%, up 1.1 points sequentially due to higher ASP, partially offset by manufacturing variances. Systems and Services gross margin for the first quarter was up 4.3 points year over year, primarily due to higher ASP, lower service and manufacturing costs. Q1 operating expenses were $543.7 million, up 9.2% sequentially and 3.1% year over year. On a sequential basis, operating expenses were up by $45.7 million from higher incentive compensation and consumer marketing spend, partially offset by restructuring and other charges not recurring in Q1. Year over year, operating expenses increased by $16.5 million, primarily due to our continued investments in sales and R&D activities and higher incentive compensation. On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions, and restructuring and other charges, operating expenses were $506.1 million, up 13.3% sequentially and up 3.2% year over year. Our first quarter operating income of $154.1 million resulted in an operating margin of 15.5%, down 2.5 points sequentially and up 1.3 points year over year. The sequential decrease in operating margin is primarily attributed to investments in our go-to-market teams and higher incentive compensation. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs, partially offset by unfavorable impact from foreign exchange of approximately 0.7 points. On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, and restructuring and other charges, operating margin for the first quarter was 19.8%, down four points sequentially and up 1.3 points year over year. Interest and other income expense net for the first quarter was an income of $4.3 million compared to an income of $1.3 million in Q4 of '23 and an income of $1.1 million in Q1 of '23, primarily driven by a gain on our equity investments and net interest income and offset by unfavorable foreign exchange. The GAAP effective tax rate in the first quarter was 33.7% compared to 28.3% in the fourth quarter and 34.8% in the first quarter of the prior year. The first quarter GAAP effective tax rate was higher than the fourth quarter effective tax rate primarily due to discrete tax benefits recognized in Q4 of '23, partially offset by increased earnings in low tax jurisdictions in Q1 of '24. Our non-GAAP effective tax rate in the first quarter was 20%, which reflects our long-term projected tax rate. First quarter net income per diluted share was $1.39, down sequentially $0.24, and up $0.26 compared to the prior year. Our EPS was not impacted on a sequential basis from foreign exchange. Our EPS was unfavorably impacted by $0.09 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.14 for the first quarter, down $0.28 sequentially, and up $0.32 year over year. Moving on to the balance sheet. As of March 31, 2024, cash, cash equivalents, and short-term and long-term marketable securities were $902.5 million, down sequentially $78.2 million, and down $18.9 million year over year. Of our $902.5 million balance, $217.5 million was held in the U.S. and $685 million was held by our international entities. In January 2024, we received approximately 37,000 shares of our common stock upon final settlement of the $250 million accelerated share repurchase from Q4 of '23. In total, we repurchased approximately 1.1 million shares at an average price per share of $230.13 under the Q4 ASR contract. We have $650 million available for repurchase of our common stock under our January 2023 repurchase program. During Q2 '24, we expect to repurchase up to $150 million of our common stock through either a combination of open market repurchase or an accelerated stock repurchase agreement. Q1 accounts receivable balance was $950.7 million, up sequentially. Our overall days sales outstanding was 86 days, up approximately one day sequentially and up approximately three days as compared to Q1 last year. Cash flow from operations for the first quarter was $28.7 million. Capital expenditures for the first quarter were $9.4 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations, less capital expenditures, amounted to $19.3 million. We're continuing to use our healthy balance sheet to drive growth and profitability. During the quarter, we continued to make disciplined investments in our strategic growth drivers. We completed the acquisition of Cubicure, which will enable us to scale our 3D printing operations to eventually direct print millions of custom appliances per day, and we exited the quarter with a healthy cash flow position and no long-term debt, maintaining a strong position to support our additional $75 million investment in our DSO partner Heartland Dental and $150 million stock buyback. Now, turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q2 and fiscal 2024. For Q2 '24, we provide the following business outlook. For Q2 '24, we expect worldwide revenues to be in the range of $1.030 billion to $1.050 billion. We expect Clear Aligner volume to be up sequentially and Clear Aligner ASP to be down slightly sequentially, primarily as a result of unfavorable foreign exchange. We expect Systems and Services revenue to be up sequentially as we continue to ramp iTero Lumina in Q2 2024. We expect Q2 '24 GAAP operating margin and non-GAAP operating margin to be slightly above Q1 '24 GAAP and non-GAAP operating margins, respectively. For fiscal '24, we provide the following business outlook. We expect fiscal '24 total revenue to be up 6% to 8% versus 2023, which is higher than our prior outlook of up mid-single-digit growth compared to 2023. The increase in our 2024 revenue outlook reflects our Q1 results, Q2 outlook, and continued execution of our growth strategies. We anticipate that the incremental revenue reflected in our 2024 outlook will be roughly split 50-50 between our two operating segments. We expect fiscal 2024 Clear Aligner ASPs to be slightly up year over year. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our capital -- our investments in capital expenditures for fiscal 2024 to be approximately $100 million. Capital expenditures primarily relate to building construction and improvements as well as manufacturing capacity in support of our continued expansion. With that, I'll turn it back over to Joe for final comments. Joe? Joe Hogan -- President and Chief Executive Officer Thanks, John. In summary, Q1 was a good start for the year. While I'm pleased with our results, I'm even more excited about Align's innovation in 2024 and our next wave of growth drivers that we believe will continue to revolutionize the orthodontic and dental industry in scanning, software, and direct 3D printing. Our focused execution of our product roadmap and innovation pipeline has resulted in the largest introduction of new products and technologies in our history, further advancing our software, scanning, and 3D printing capabilities. We're excited about the potential for these strategic investments to enable a new phase of growth to transform the orthodontic industry again. The iTero Lumina intraoral scanner has the potential to set a new standard of care for dental practices by simplifying the scanning of complex oral regions while offering superior chair-side visualization and a more comfortable experience for patients, especially kids. The Invisalign Palatal Expander increases the clinical applicability of the Invisalign system to nearly 100% of orthodontic case starts. It is a revolutionary removable 3D-printed appliance that is clinically proven to be safe and effective, is less painful than traditional metal expanders, and promotes better oral hygiene. And our recent acquisition of Cubicure, a pioneer of direct 3D printing solutions for polymer additive manufacturing, brings a talented team and unique cutting-edge technology into Align to help us scale our 3D printing operations providing ultimate design freedom and highly customized outcomes from a customer and patient standpoint, as well as operational benefits to the business. We see incredible opportunities in this business to continue making the Invisalign system the standard of care in orthodontics. By continually innovating and developing digital technologies and services that enable more doctors to easily diagnose and treat patients with crooked teeth, and help them retain their healthy beautiful smiles, we are increasing access to care for millions of people who might not otherwise receive orthodontic treatment. With that, I thank you for your time today. We look forward to sharing our continued progress in leading the digital transformation of the orthodontic and restorative dental industry progress in leading the digital transformation of the orthodontic and restorative dental industry. I'll now turn the call over to the operator for your questions. Operator? Questions & Answers: Operator Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from Elizabeth Anderson with Evercore ISI. You may proceed. Elizabeth Anderson -- Evercore ISI -- Analyst Hi, guys. Thanks so much for the question. I was wondering if you could talk about how you're seeing the overall demand environment. I guess, I'm particularly curious about the U.S., sort of how you're seeing it from like a consumer demand perspective. Especially, any comments you could make on the SmileDirect impact on volumes in the quarter? And then secondarily, if you could comment a little bit more on the broader demand environment in China, that would be super helpful. Thank you. Joe Hogan -- President and Chief Executive Officer Hey, Elizabeth. I'll start off and have John jump in on anything. First of all, we described the business right now as stable, same things that we talked about as we came out of the fourth quarter, and we see that stability broadly around the globe. And you saw in our script that we just read to that it's good from an adult standpoint and also a teen standpoint, too, which again led to that kind of stability that we talk about. If I look around the world, I mean, we've -- that stability exists, whether it's in Asia, whether we've seen it in parts of Europe and we see it in the United States and the Americas also. So, it's hard for us to call out a particular region or whatever that is dramatically down or dramatically up. We just see them moving pretty much in unison in the first quarter. John, would you add anything? John Morici -- Chief Financial Officer No, I agree. And that's -- we're driving the growth strategies. As we've said, we've seen that stability in the environment and we're executing against that. Joe Hogan -- President and Chief Executive Officer And Elizabeth, last thing on your SmileDirectClub comment and them not being advertising like they were before or whatever, we can't attribute any part of the demand equation up or down as part of that. And obviously, that was more pronounced in the United States than it was anywhere else in the world. But I can't attribute any change in the marketplace because of them not advertising at this point in time. Elizabeth Anderson -- Evercore ISI -- Analyst Great to hear. Thank you so much. Appreciate the commentary. Joe Hogan -- President and Chief Executive Officer Thanks, Elizabeth. Operator Thank you. One moment for questions. Our next question comes from Brandon Vazquez with William Blair. You may proceed. Brandon Vazquez -- William Blair -- Analyst Hi, everyone. Thanks for taking the question. I wanted to focus for a second on the teen side. You have the Palatal Expander out there now, getting great reviews, and it seems like it closes, if I'm understanding the numbers correctly, maybe 20% of that market that you haven't been able to hit before. This is such a big opportunity. I'm curious if you can just reflect on like how does commercialization within teens look in the next couple of years now that you have kind of a broader and more full portfolio here compared to the prior couple of years. And what does that mean for growth rates within that teen section and adoption within teen that's underpenetrated relative to teens as we look forward the next couple of years? Thanks. Joe Hogan -- President and Chief Executive Officer That's a good question, Brandon. I think, as we mentioned, it's 20%. And then, we call them tweens really. They're young students before they really hit the teen years and have mature dentition. With Invisalign First and now with IPE, we can handle the 20% that's out there on the Phase 1. And some teens just need -- the tweens just need dental expansion. In some, you really have to split the suture and widen the palate overall. We feel in both those cases with IPE and Invisalign First, these are very unique products specific to that area. And we think it'll actually make doctors that aren't comfortable with Phase 1, maybe even more comfortable now because of the impact on patients is not what it was before when you tried to work these kinds of cases with wires and brackets or hyrax expanders and those kinds of things. But like anything in the orthodontic community, it takes time. It takes time for acceptance. And the good thing about this is IPE is about a 30- to 35-day kind of an episode. So, our feedback loop is really good. You can tell from my transcript also is, right now, we're approved in the United States and Canada and recently in ANZ. And right now, we're throttled by the regulatory procedures we have to go throughout the world. So, we'll be able to give you more specificity on this, Brandon, as we go forward. But as I mentioned in my closing, too, we're really excited about that technology. And we didn't tie it together. The new Lumina scanner has such a broad kind of a bandwidth from a scanning standpoint. It scans that palate that you have to cover with Invisalign First extremely well. So, those technologies thread together very well out there. So, we're excited about it and more to come. Operator Thank you. One moment for questions. Our next question comes from Jon Block with Stifel. You may proceed. Jon Block -- Stifel Financial Corp. -- Analyst Hey, guys. Hey, Joe. Good afternoon. Hoping to ask two. Maybe just the first one, throughout the quarter there was sort of like an obsession or a big focus from investors on month-to-month trends. There was talk about February strength, March weakness. I don't think if anyone really knew if it was the consumer or the calendar or both. So, maybe you guys can talk a little bit about how it played out for you guys elaborate on February and March? And then, as much as you can just touch on April here for the first two to three weeks? And then, I'll ask my follow-up. Thanks. John Morici -- Chief Financial Officer Yeah, Jon, this is John. Look, from -- as we talk about the quarter and think about, we're very pleased with our results in Q1. We saw stability, as Joe mentioned, and that really continued from the end of the year into the quarter, less about month to month. I mean, it was the stability and then the execution that we had throughout the quarter with our products. Jon Block -- Stifel Financial Corp. -- Analyst OK. And then I'll just shift gears. John, I might stick with you. I believe the wording is slightly above the 2023 OM, which I think is 21.4% unchanged despite the higher revenues, the midpoint going from roughly 5% to 7%. So, can you talk about where that extra spend is going? Do we see the returns on that this year, or will that aid and give you some more tailwinds into 2025? And then just to tack on to that, the new higher guidance doesn't -- implies at a 6% in the back part of this year, year-over-year growth, which isn't too dissimilar from 1H, but the comps get more difficult, so the stacks need to accelerate. Why should we be comfortable with that? Is that just an accelerating contribution from some of those new products like Lumina and IPE? Thanks, guys. John Morici -- Chief Financial Officer That latter point is how I would look at it, Jon. We're making investments -- we make investments throughout the year. We get the shorter-, longer-term investments that we make, different returns on whether they're short or long term. But what we see is a stable environment, continued investments in go-to-market activities. We have new products coming, so that helps us accelerate with things that we'll have on the iTero side as well as IPE and others that Joe talked about, where we really get the approval later in the year. So, it's about a stable environment, making investments into that environment, and then executing on our growth strategies. And that should give us the benefits that you described in the second half. Operator Thank you. One moment for questions. Our next question comes from Jeff Johnson with Baird. You may proceed. Joe Hogan -- President and Chief Executive Officer Hi, Jeff. Jeff Johnson -- Baird -- Analyst Thank you. Good afternoon, guys. Hey, guys. How are you? So, John, maybe following up on Jon's question there and just a little finer point on the guidance itself. You've taken that guidance from mid-single digits to 6% to 8% scanner and CAD/CAM services came in obviously strongly in the double-digits upper teens. Should we think about kind of that double digits maybe not in the upper teens, but double digits is kind of where the scanner and services continues this year, and your Clear Aligner revenue guidance kind of still in the mid-single digits? I think last quarter we were talking about both those segments being mid-single digit growers. It seems like to me now maybe the raise here is being driven more by the scanner and CAD/CAM services. And as Joe calls the market stable, then maybe the Clear Aligner revenue still kind of expected to be in that mid-ish single digits. Is that a fair kind of way to look at guidance? John Morici -- Chief Financial Officer That's a fair way to look at it, Jeff. I mean, you would see given the new products that we have with Lumina and iTero, you'll see a little bit faster growth. We're very pleased with what we saw in the first quarter. Typically, in the first quarter, you don't have a sequential gain in revenue from the fourth quarter, being an equipment business. So, we're very pleased with what we saw there. But then, we also look at the Clear Aligner business, and we expect to be able to grow and continue to grow there, both in terms of the investments that we're making in a relatively stable environment and some of the new products that should help supplement that growth. Jeff Johnson -- Baird -- Analyst Yeah, that's helpful. And then, one other follow-up. I think it's been asked in the past maybe at an Analyst Day or something, I don't remember if you've given a clear answer, but it's something I keep getting asked here more recently, and that's percentage of your patient base or maybe orthodontic cases that get financed through some sort of third-party patient financing company. We have seen in areas like full arch implants, some of the aesthetic procedures outside of dental where lending standards have gone up, FICO scores have gone from the 500s to 700s something like that to qualify for patient financing in this cost of capital and tougher capital environment. So, what percentage -- do you know a percentage or roundabout of what cases get financed, and if those lending standards have changed at all or put any incremental pressure on patients here more recently? Thanks. John Morici -- Chief Financial Officer Yeah. What we see, Jeff, is -- and it varies country by country, I'll say U.S. maybe the most -- and I'll combine ortho and GP together, roughly a third of the cases that we see get some type of external financing. Remember, many patients or parents will pay in advance. That's great for doctors. Many doctors, especially orthos, will do some type of kind of internal financing where you kind of pay as you go and so on. And many doctors are continuing to do that, especially in the tougher environment. And we're doing things to help doctors to try to give them a little bit more extension in payments so that they can provide and pass that on to their patients as well. And we'll work with DSO partners to really try to help them work with these external companies to try to give better financing rates to try to get these patients to go into treatment. So, we're well aware. We know we can help. We have the balance sheet and the cash to be able to help with our customers so that they can pass that on. And that's something that we want to keep working toward. Jeff Johnson -- Baird -- Analyst John, any change to note over just the past few months even in those lending standards getting tougher, or you feel like that's stable as well as just kind of the overall environment as you've described that way? Thanks. John Morici -- Chief Financial Officer I look at that as more stable. I think there was a lot of things. If you go back to last year, people were really getting a bit of sticker shock in terms of the higher interest rates when they came to try to go into treatment. I think people are past that. I think when I see this or what I hear from doctors or see from our customers that it's a little bit more stable. There's not a big change. Jeff Johnson -- Baird -- Analyst Thank you. Operator Thank you. One moment for questions. Our next question comes from Michael Cherny with Leerink Partners. You may proceed. Michael Cherny -- Leerink Partners -- Analyst Hey, can you hear me OK? Shirley Stacy -- Vice President, Corporate and Investor Relations Yeah, we can hear you fine. Michael Cherny -- Leerink Partners -- Analyst OK. So, just relative to the spend, I want to dive in a little bit more if possible, you talked about the investment growth. Can you delineate relative to that investment, how you're thinking about the growth into, call it, your core markets for some of the new product launches? And especially with regards to the ramp on the printing side, how much incremental printing spend, so to speak, is coming now versus where you think it's going to grow, what the run rate should be on ramping that over time? John Morici -- Chief Financial Officer Yeah. I think we have a core business that we're running. And obviously, there's a certain amount of investment that you have to be able to grow around sales, sales, and marketing and the go-to-market activities that we have. There's also R&D spending that we've had throughout the time. And now as that R&D in the case of acquiring Cubicure and now turning this into more of a platform to be able to build our 3D printing, there's a certain amount of spend that we have. How that lays out, it varies over time that we'll have, but rest assured, we know how to scale products. We know how to scale 3D printing. We'll make the right investments to be able to start scaling up that direct fab printing while making sure that the core business has the right investments for growth, and we'll balance that as we go forward. Michael Cherny -- Leerink Partners -- Analyst Got it. Thank you. Operator Thank you. One moment for questions. Our next question comes from Jason Bednar with Piper Sandler. You may proceed. Joe Hogan -- President and Chief Executive Officer Hi, Jason. Jason Bednar -- Piper Sandler -- Analyst Hey, good afternoon. Thanks for taking the questions. First, I want to build on some of the macro questions that have been asked. I don't want to belabor the point, but other consumer discretionary companies called out a downtick in March. It doesn't sound like you saw any of that, but just wanted to confirm that's the case with respect to Invisalign demand. And maybe speak to your confidence to drive Clear Aligner volumes going forward now that comps turn a little bit tougher. How much do you think you might need to fund that growth with investments to drive more traffic into the office? Joe Hogan -- President and Chief Executive Officer Hey, Jason, on the first part is, we talk about the stable environment that we've seen that stability of it. We read and I read what's going on there with the consumer investment, some concerns particularly on the luxury goods or what's going on out there. But honestly, I think often what we see and analysts who follow us here just really pick up the U.S. data, and what we see is differences all around the world and that's what's great about having international business. You have some counter-cycling in the sense of the demand patterns and what goes on out there. But I would say there's nothing that we would highlight right now that would say that we think something has changed what we saw in the second half of 2023 to what we saw in the first quarter of this year. John, anything? John Morici -- Chief Financial Officer Yeah. In terms of investments, we make the investments that we need, go-to-market and manufacture, and other expansion as we continue to grow. We'll continue those investments. But as we've talked about, not only for now the second quarter when we're talking about that sequential improvement in op margin and what we've talked about in total year, where we expect the year-over-year improvement in margin, we're making sure that we're investing with that right amount of profitability. We'd still be able to grow into our market and expand the opportunity -- expand on the opportunities that we have, but then being respectful in terms of what margin we need to be able to deliver for the company. Jason Bednar -- Piper Sandler -- Analyst All right. Very helpful, Joe and John. And maybe one follow-up here, to maybe a multiparter on teen, so bear with me. This might be a nuanced look. It seems like a lot of emphasis here just recently in product development and marketing that's really trying to tap into that much younger market, that Phase 1 opportunity. IPE fits in there, your new marketing branding plan and emphasis there. There seems to be some benefits for younger patients with Lumina. So, it's really it seems intentional, but wondering if you could bifurcate for us how your Invisalign business is performing in this younger patient population relative to teens as a whole? Where does your penetration sit in those younger patients versus the broader teen channel? And maybe what kind of outsized growth you're expecting from this part of the channel as we look out over the near to intermediate term? Joe Hogan -- President and Chief Executive Officer Hey, Jason. I'll just delve back up on your question, just to give you kind of a conceptual view. When you think of Phase 1, it's actually been controversial in the orthodontic market for years. Some orthodontists don't want to do Phase 1 because, as I mentioned before, the kind of devices that have been used have been kind of difficult from a consumer standpoint. So, those wait for all permanent dentition and move on to there. We feel confident that with Invisalign First now for dental expansion and then for palate expansion or a morphological change, IPE will do that. And we think it will attract more orthodontists to begin Phase 1 treatment. But this is an industry that takes a while for things to bake in and for them to gain confidence and I understand it because you're working with kids' teeth and mouths and their dentition. But we actually think that a significant amount of growth could come from this area, but we think it will take time. But it's been a great focus for us and it's going to be interesting to watch how orthodontists in the future actually focus on Phase 1, Phase 2 because these kinds of devices make it simpler for them and for patients in the future. So, right now, I can't really just kind of give you the ground rules on that, that we've changed those rules in a sense, but I can't project exactly where it's going. Jason Bednar -- Piper Sandler -- Analyst Any sense penetration-wise or maybe where you're at relative to the broader teen market? Joe Hogan -- President and Chief Executive Officer I'd say we're just in that story. I mean, even Invisalign First is used sometimes on more permanent dentition, too. So, it's hard -- we'd have to split our cases out of Invisalign First is what the age of patients are or whatever. But as we get more data and we really get through with IPE and some more specificity around this, we'll share it with you and the rest of the people. Shirley Stacy -- Vice President, Corporate and Investor Relations Yeah. I mean, the only thing that -- I mean, if you've tracked us for a while, you know that our average age of teen patients gets younger and younger. I think we're 14 now versus 15-plus before. So, I mean, that's a reflection of just being able to go after those younger patients with first. Jason Bednar -- Piper Sandler -- Analyst All right. Very helpful. Thank you. Operator Thank you. One moment for questions. Our next question comes from Nathan Rich with Goldman Sachs. You may proceed. Nate Rich -- Goldman Sachs -- Analyst Great. Good afternoon. Joe Hogan -- President and Chief Executive Officer Hi, Nathan. Nate Rich -- Goldman Sachs -- Analyst Hi. And thanks for the questions. I wanted to go back to the guidance. I know it's kind of been touched on a few different times, but I wanted to ask on the Clear Aligner revenue outlook. It looks like you're raising the outlook for the full year by about 1%. I guess, could you maybe just touch on what changed specifically with respect to that outlook? It sounds like maybe its expectations around IPE and DSP versus market improvement. But I'd be curious. Any color you could share there and maybe anything on teen versus adult within the updated guidance would be great. John Morici -- Chief Financial Officer Yeah. I'll start, Nate. So, overall, we went from -- we had talked to a mid-single-digit, so call it 5% to raising it to the midpoint of 7% on a year over year, so up two points. And really that's a reflection of a few things. One is the continued stability that we're seeing. We're operating in an environment that's more stable. We saw that coming into the fourth quarter and now into this quarter as well. So, that's good. We want that stability there. And then you look at the execution that we have about -- on our core business to be able to grow with a lot of the innovations that we have, the promotions and other things that we have as we get into -- further into teen season, supplemented with the various new products that we talked about. We feel really good about Lumina and the launch that we have in iTero and the further expansion that, that can drive, as well as some of the new products like IPE and others to really not only help those unit sales there, but then as Joe described, we had to pull in other products around Invisalign First and others to really help drive some of that growth that we could see in the teen business. So, it's a combination of things, Nate, but it's what we're seeing in stability, how we're executing on our core strategies and then some of the new products really supplementing that extended growth to help us. And that's why we adjusted our total year. Nate Rich -- Goldman Sachs -- Analyst OK. That's helpful. And then, John, maybe just sticking with you, the 2Q operating margin, I know up slightly sequentially, but down year over year. And I think historically it's been a little bit variable, but you've seen more of a step up in the second quarter than I think what the guidance implies. Anything to call out with respect to FX? Or I think you mentioned some manufacturing cost spend, but just anything there that we should keep in mind as it regards the margin cadence? John Morici -- Chief Financial Officer Certainly, we are seeing a stronger dollar. So, that's something that we talked about when we think about our guide, too, we see a stronger dollar coming out of the first quarter into the second quarter. Our guide reflects that as well. But then you look at the continued investments that we're making to be able to drive more submitters, more doctors into our ecosystem and then ultimately drive more and more utilization. Some of it is that the core business that we have to able to drive growth, and some of it's some of the new products where there is a certain amount of opex spend that we have with that. But we're being very mindful of what we can do to be able to drive growth and then what it also means from an operating margin standpoint. And we're delivering that sequential improvement from 1Q to 2Q in operating margin, and then talk to the total year of being up on a year-over-year basis. Nate Rich -- Goldman Sachs -- Analyst Great. Thank you. Operator Thank you. One moment for questions. Our next question comes from Erin Wright with Morgan Stanley. You may proceed. Erin Wright -- Morgan Stanley -- Analyst Great. Thanks. Hi. I'll ask my two upfront here, but I'll follow up on the guidance and I don't want to belabor this too much. But do you think you have better visibility now just on the underlying demand trends globally? Or would you say that there's still an element or healthy element of macro uncertainty that still embedded in your guidance and some conservatism there? And then second would be on Lumina and the launch. And just can you talk about where you're seeing the most success with the launch in the target markets and promotions that where you're focused in terms of expanding share and upgrades as well? Thanks. John Morici -- Chief Financial Officer Hi, Erin. This is John. I'll talk a little bit about visibility and guidance. I think what we enjoy now and what we want to be able to have in an operator environment is more stability and that stability is there. Markets are open. There's a higher -- overall higher inflation and interest rates, but people are operating in that environment. That stability transcends it to other things that we have. We see the Michigan index or other indices that kind of point to that stability. Based on that stability, the investments that we're making, how we're going to market, some of the new products that we have, other things that we know that can, on a core basis, drive our business as well as the new products and initiatives that we have, that's what gives us confidence to be able to have a guidance that we gave for Q2 and what it means for the total year. Joe Hogan -- President and Chief Executive Officer Yeah. Erin, on the Lumina piece, it's Joe, obviously, as I mentioned in the closing on my script, we're really excited about that technology. We've been working on it for six years. It is a true new platform. It's not a derivative of the old confocal imaging platform, and there's really no other scanner in the world that's like that and how we've built it. And it'll take a while for the -- I think the market to absorb that as you have to do this doctor by doctor and place by place. But we've had a very enthusiastic response from the orthodontic community, but also the general dentistry community, too, even though we're not completely ready for the restorative piece. And we mentioned it will be the fourth quarter this year, we'll have that capability out. It's just the speed of that wand, the simplicity of being able to scan, the dimensional tolerances and all that's used in the sense of both comprehensive and orthodontic cases are really unmatched. So, we're excited about that, but we just have to take this thing. We've only had it out now for roughly a couple of months, but we are expecting to have a really strong year, but more importantly, to have that really be to set the standard from a scanner standpoint for the industry going forward. Operator Thank you. [Operator instructions] And our next question comes from Michael Ryskin with Bank of America. You may proceed. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst Hey, Joe, John, thanks for taking the question, and congrats on the quarter. John Morici -- Chief Financial Officer Hey, Michael. Joe Hogan -- President and Chief Executive Officer Hey, Michael. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst Hey. I want to follow up on something I think, Joe, you touched on in the prepared remarks. If I caught it correctly, you kind of pointed to a little bit of strength in U.S. ortho or Americas ortho in the quarter stood out for us. It seems like it's one of the stronger results in a number of quarters. Just wondering if you could expand on that a little bit. Is it the Lumina launch? Is the fact that you're moving into younger teens and younger kids, which obviously is going to be a little bit more ortho-focused? Just any structural change you're seeing there with that group of dentists. Or am I just reading too much -- Joe Hogan -- President and Chief Executive Officer Michael, I understand your question. I'd say it's -- we feel it's -- we've seen more stability in that market this year than we have last year. We've always known that the teen segment of that much more solid than the adult segment, but the adult segment held up for us in the Quarter 2. And so, that aspect of the adults was good for us also. But I'm very cautious about projecting this market going forward because as you can see with a lot of the surveys that are done, this moves pretty dramatically from month to month. But again, it's not just the United States market we're focused on, the global market has been good for us too in that sense. So, we're going to take this thing a month at a time, but we're confident enough to say this is stable, that we have products in here that are very helpful from an orthodontic standpoint in new, like you mentioned, Lumina and also IPE that gives us more ground to stand on the sense of those orthos. And so, we're excited about that. But in no way do I think there's a phase change between what we saw last year and this year in ortho. It's just more stable and we have more continuity is another word that I'd use to describe it. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst OK. And if I could squeeze in a follow-up if there's time. Again, also impressed by the DSP touch-up progress that you called it out in the deck. You got some additional launches later this year. You got the 14-stage touch-up aligner offering you're talking about. Any way you can start framing in terms of would you incorporate that into guidance at some point in terms of where you think that can go in terms of volumes and revenues or any update longer term, how you see DSP and touch-up evolving over time? Thanks. John Morici -- Chief Financial Officer Yes, Mike, I'll take that one. Look, DSP is very popular because it really serves the needs that doctors have. They want to be able to buy things kind of the way they want to buy. They want to be able to instead of making things or doing things themselves, they can use our aligners as part of that DSP and be able to treat those touch-up cases. And we like that, that's incremental for us in terms of what we see there. And they can also then use a lot of the aligners that they have for retention. And that's great too because that's typically incremental volume that we have. So, I think when we see us rolling this out, like we said a few years ago, it was U.S. and North America and now into Europe, it continues to do what we expect it to do. Doctors start. They adopt it more and more because part of their workflow and we see positive volume from that. And in success for projects -- programs like that, we'll continue to expand those out. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst All right. Thanks. Shirley Stacy -- Vice President, Corporate and Investor Relations OK. Thanks, Michael. Operator, we can take one more question. Operator Thank you. One moment for question. And our last question comes from Kevin Caliendo with UBS. You may proceed. Kevin Caliendo -- UBS -- Analyst Hi. Thanks for getting me in. I appreciate it. I have two questions. So, the first one is on Heartland, can you talk a little bit about the benefits of the Heartland investment operationally? And also, Heartland is -- my understanding is a pretty profitable business and now with two separate investments there. How does their profits -- or how does the accounting work for that from your perspective at this point? And then, secondly, if you can provide -- I guess, with regards to the guidance, I think we understand it. But was that in any way based on the trends that you've seen so far in April? If you can elaborate on those in any way, that would be great. Thanks. John Morici -- Chief Financial Officer I can start with the guidance part of that, Kevin. Look, we use a lot of factors to look at where our guidance is. So, we're using data from Q1 and the most recent information. But it goes back to the stability that we've seen. You can see it in a lot of the surveys and other things that a lot of people do, but what we see is that stability, coupled with what we're trying to do to go-to-market to drive the initiatives we have and the new products that we have. So, that's a key part of what we factor in into our guidance. No change from what we normally do. This is how we've come together in terms of a guidance standpoint. In terms of Heartland, we look at Heartland as this is a great investment from investing in a company that shares a digital orthodontic mindset that we have, to be able to do things in a similar mindset, to be able to expand like they're expanding, to be able to get into markets that in some cases, we don't have much market share with or a big presence there. And they share that same mindset, that expansion. They've been around for a lot of years as well. With this investment, it's less than 5%. There's no consolidation or anything else that's required. And we'll evaluate going forward on whether there's any mark-to-market that we have to do going forward. But it's a continuation of that investment, the expansion that they're doing, and we're pleased with the results that we've seen over the last year. Kevin Caliendo -- UBS -- Analyst Super helpful. Thank you. Shirley Stacy -- Vice President, Corporate and Investor Relations Thanks, Kevin. That actually concludes -- sorry, go ahead, operator. Operator And we have reached the end of our question-and-answer session. I will now turn the call back over to Shirley Stacy for closing remarks. Shirley Stacy -- Vice President, Corporate and Investor Relations Thank you so much, and thank you, everyone, for joining us today. We look forward to speaking to you at upcoming financial conferences and industry meetings, including the American Association of Orthodontics meeting in New Orleans, May 4 and 5. If you have any questions, please give us a call. Thank you. Answer:

the Align first quarter 2024 earnings call

Operator Greetings. Welcome to the Align first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology. You may begin. Shirley Stacy -- Vice President, Corporate and Investor Relations Good afternoon, and thank you for joining us. I'm Shirley Stacy, vice president of corporate communications and investor relations. Joining me for today's call is Joe Hogan, president and CEO; and John Morici, CFO. We issued first quarter 2024 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website, at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our first quarter 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's president and CEO, Joe Hogan. Joe? Joe Hogan -- President and Chief Executive Officer Thanks, Shirley. Good afternoon, and thanks for joining us on our call today.I'll provide an overview of our first quarter results and discuss a few highlights from our two operating segments, System Services and Clear Aligners. John will provide more detail on our Q1 financial performance and comment on our views for the second quarter and 2024 in total. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report better-than-expected revenue and earnings for the first quarter and a solid start to the year. For Q1, total worldwide revenues were up 5.8% year over year, reflecting 3.5% growth from our Clear Aligner segment and 17.5% growth from Systems and Services. On a year-over-year basis, Q1 revenue growth was up across all regions and was driven by strong Clear Aligner volumes, primarily in the Asia Pacific region. Year-over-year growth also reflects strength in the orthodontic channel with total Invisalign case starts from teens and younger patients up 5.8% year over year, driven by continued momentum across all regions from Invisalign First as well as Invisalign DSP touch-up cases. On a sequential basis, Q1 total revenues were up 4.3%, reflecting a sequential increase in Clear Aligner revenues, especially from North America orthodontists, as well as strong Systems and Services revenues primarily driven by iTero Lumina wand upgrades in North America. During the quarter, we achieved several significant milestones. We completed the acquisition of Cubicure, a leader in direct 3D printing solutions, which is the foundation for our next-generation aligner manufacturing. We successfully launched the iTero Lumina intraoral scanner, our next generation of digital scanning technology. We launched the Invisalign Palatal Expander or IPE system in the U.S. and Canada, and we received regulatory approval for the Invisalign Palatal Expander in Australia and New Zealand. Q1 Systems and Services revenue year-over-year growth reflects non-Systems revenues driven by iTero Lumina wand upgrades and higher scanner volumes and increased Services revenue from a larger base of scanners sold. On a sequential basis, Q1 Systems and Services revenue were up 3.1%, reflecting growth from non-Systems revenues and higher scanner ASPs, partially offset by lower volumes due to seasonality and strong fourth quarter. The iTero Lumina intraoral scanner is available now with orthodontic workflows as a new stand-alone scanner or as a wand upgrade to iTero Element 5D Plus. The restorative workflow is expected to be available in the fourth quarter of 2024. In the meantime, GP practices can benefit from the iTero Lumina's new Multi-Direct Capture technology that replaces the confocal imaging technology in earlier models. The iTero Lumina intraoral scanner has a 3x wider field of capture and a 50% smaller and 45% lighter wand, delivering faster scanning speed, higher accuracy, super visualization, and more comfortable scanning experience. Overall, we're really pleased with the launch of the iTero Lumina scanner. Customer feedback has been positive, and we're really excited about the feedback from doctors, so we've included some great verbatims in our webcast slides. Q1 total Clear Aligner revenues were up year over year, reflecting revenue growth across the regions from strong year-over-year volume growth across APAC markets as well as the EMEA region. For the Americas region, Q1 Clear Aligner volume was consistent with prior year. For Q1, total Clear Aligner shipments were up 2.1% sequentially, reflecting seasonality with increased volumes in the Americas regions offset somewhat by EMEA and APAC regions. For Q1, Clear Aligner shipments include over 23,000 Invisalign Doctor subscription cases or DSP touch-up cases, primarily from North America ortho channel, an increase of approximately 49% year over year from Q1 '23. These DSP touch-up cases are a component of the overall DSP program, which consists of retainers and touch-up cases or aligners, and it continues to be an important offering for our customers and their patients. DSP is currently available in the United States, Canada, Iberia, Nordics, the U.K., and most recently in Italy, France, and Poland. We expect to continue expanding DSP into other country markets in EMEA in Q2, including a 14-stage touch-up aligner offering. For non-case revenues, Q1 was up 7.5% year over year primarily due to continued growth from Vivera retainers along with Invisalign DSP retainer revenues. In the teen market, nearly 200,000 teens and younger patients started treatment with Invisalign Clear Aligners in Q1, up 5.8% year over year. This represents a record number of teen cases shipped as compared to prior quarters, reflecting strength in APAC and EMEA. Teen starts were up sequentially 1.2%, reflecting strength in EMEA and North America, offset by seasonally fewer teen starts in China. While the teen market tends to be less susceptible to consumer demand around discretionary spending and more resilient than adult orthodontic case starts, we're pleased that in Q1, our Clear Aligner volumes for both adults and teens were up sequentially and year over year. We believe the Invisalign Palatal Expander system is one of the most exciting innovations we have developed in our 27-year history and is a better option for expanding a growing patient's narrow palate. Initial response from doctors and patients for Invisalign Palatal Expander system is positive. Invisalign Palatal Expander system is not a traditional Invisalign aligner. It is a series of direct 3D-printed orthodontic appliances based on proprietary and patented technology that has force systems designed for skeletal expansion. Clinical data shows the Invisalign Palatal Expander system is safe, effective, and proven to deliver skeletal expansion. Specifically, our clinical data is based on 49 patients across the United States and Canada between the ages of 6.9 and 11, with a mean age 8.8 years. In this group, the mean expansion of six millimeters was achieved with minimal tipping with range between 3.4 millimeters to 10.7 millimeters, as measured using the change in intermolar width between initial and post-expansion scans, with a mean expansion efficacy of 97%. In addition, we found that surveyed doctors agree the Invisalign Palatal Expander is less painful than traditional expanders and it facilitates better oral hygiene, compared to traditional metal expanders. Phase 1 or early interceptive treatment includes both skeletal/orthopedic and dental/orthodontic arch expansion and makes up to 20% of orthodontic case starts each year. Combined with Invisalign First aligner treatment, Invisalign Palatal Expanders provide doctors with a full early interceptive treatment solution that allows doctors to treat all Phase 1 patients. We expect Invisalign Palatal Expander to be available in other markets pending future applicable regulatory approvals. Today, Invisalign is the most recognized orthodontic brand globally and Invisalign Clear Aligner treatment is faster and more effective than traditional metal braces, yet the underlying market opportunity remains huge and untapped. We continue to invest in consumer marketing and demand creation initiatives that raise awareness and drive potential patients to Invisalign practices globally. Below are several highlights from Q1 and more information is available in our Q1 '24 earnings webcast slides. In Q1 '24, we delivered 14.5 billion impressions and have 43 million visits to our websites globally. To increase awareness and educate young adults, parents, and teens about the benefits of the Invisalign brand, we continued to invest and create campaigns in top media platforms such as TikTok, Instagram, YouTube, SnapChat, and WeChat across markets. Reaching young adults as well as teens and their parents also requires the right engagement through Invisalign influencers and creator-centric campaigns. Our teen Invis is Drama Free campaign was recently recognized by the Association of National Advertisers with a Silver award in the Reggie Awards for creative and strategic excellence. In the U.S., in addition to our ongoing influencer campaigns, we partnered with athletes such as Mazz Crosby, TikTok GenZ influencer OverTime Meg, and the famous fashion designer Kristin Juszczyk to create a compelling brand activation at the Super Bowl. Our campaigns delivered more than 6.1 billion impressions and 18.1 million unique visitors to our consumer websites across the America. In the EMEA region, we partnered with influencers to reach consumers across social media platforms, including TikTok and Meta and launched our global consumer campaigns for teens and parents. Our campaigns delivered more than 1.6 billion media impressions and 8.9 million visitors to our website. We continued to invest in consumer advertising across the APAC region, resulting in more than 6.6 billion impressions and 16 million visitors to our websites, a 195% increase year over year. We expanded our reach in Japan and India via Meta and YouTube and partnered with key influencers to reach consumers across social media. We saw increased brand interest from consumers as evidenced by a 285% year-over-year increase in unique visitors to our website in India and a 129% increase in Japan. Finally, digital tools such as My Invisalign Consumer and Patient app continued to increase with 4 million downloads to date and over 381,000 monthly active users, a 15% year-over-year growth rate. Q1 '24 Clear Aligner volume from DSO customers increased sequentially, reflecting growth from the Americas and EMEA regions, and increased year over year, reflecting growth across international regions. Dental Service Organization, or DSOs, represents a large and growing opportunity to help drive adoption of digital technology across the dental industry. We have established relationships with many DSOs globally that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the Align Digital Platform, including increased practice efficiency and profitability, as well as delivering a better patient experience from shorter cycle times and proximity to their customers. Smile Docs and Heartland Dental are some of our largest DSO partners, and we are continuously exploring collaboration with DSOs that can further adoption of digital dentistry. Each DSO has a different strategy and business model, and our focus is on working with and encouraging DSOs aligned with our vision, strategy, and business model goals. Today, we announced an additional $75 million equity increase in Heartland, following the previous $75 million equity investment a year ago. Heartland is a multidisciplinary DSO with GP and Ortho practices across the United States. Their growth strategy includes Heartland's De Novo dental practices which feature modern technology, located in areas with a strong community need for dentistry where Heartland provides practices with opportunities for mentorship, leadership training, and continuing education. In the last four years, Heartland opened 240 state-of-the-art De Novo practices across the U.S. and are planning to continue investing through more De Novo openings. We have a shared sense of purpose with Heartland; their mission is to help doctors and their teams deliver the highest quality digital dental care to the communities they serve. With that, I'll now turn it over to John. John Morici -- Chief Financial Officer Thanks, Joe. Now, for our Q1 financial results, total revenues for the first quarter were $997.4 million, up 4.3% from the prior quarter and up 5.8% from the corresponding quarter a year ago. On a constant currency basis, Q1 '24 revenues were impacted by favorable foreign exchange of approximately $10 million or approximately 1% sequentially and were unfavorably impacted by approximately $4.8 million year over year or approximately 0.5%. For Clear Aligners, Q1 revenues of $817.3 million were up 4.5% sequentially, primarily from higher ASPs and higher volumes. On a year-over-year basis, Q1 Clear Aligner revenues were up 3.5%, primarily due to higher volumes and ASPs and increased non-case revenues. For Q1, Invisalign ASPs for comprehensive treatment were up sequentially and up year over year. On a sequential basis, ASPs primarily reflect higher additional aligners and price increases and the favorable impacts of foreign exchange, partially offset by a product mix shift to lower ASP products. On a year-over-year basis, the increase in comprehensive ASPs primarily reflect higher additional aligners and price increases, partially offset by a product mix shift to lower ASP products and higher discounts and the unfavorable impact from foreign exchange. For Q1, Invisalign ASPs for non-comprehensive treatment were down sequentially and year over year. On a sequential basis, the decline in ASPs reflect unfavorable country mix shift and higher discounts, partially offset by the favorable impact from foreign exchange. On a year-over-year basis, the decrease in noncomprehensive ASPs reflect the product mix shifts to lower ASP products, unfavorable country mix shifts, and higher discounts, partially offset by lower net revenue deferrals. As a reminder, we announced about a 5% global price increase for some Invisalign products across most markets effective January 1, 2024. This price increase did not include Invisalign comprehensive 3-and-3 product. Invisalign comprehensive 3-and-3 product is available in North America and in certain markets in EMEA and APAC, most recently launching in French territories and in the Middle East. We are pleased with the continued adoption of the Invisalign comprehensive 3-and-3 product and anticipate it will continue increasing, providing doctors the flexibility they want and allowing us to recognize more revenue upfront, with deferred revenue being recognized over a shorter period of time compared to our traditional Invisalign comprehensive product. Q1 '24 Clear Aligner revenues were impacted by a favorable foreign exchange of approximately $8.4 million, or approximately 1% sequentially. On a year-over-year basis, Clear Aligner revenues were unfavorably impacted by foreign exchange of approximately $3.9 million or approximately 0.5%. Clear Aligner deferred revenues on the balance sheet decreased $26.7 million or 2% sequentially and increased $15.8 million or 1.2% year over year and will be recognized as additional aligners are shipped. Q1 '24 Systems and Services revenue of $180.2 million were up 3.1% sequentially, primarily due to increased non-Systems revenues, mostly related to upgrades, and higher ASPs, partially offset by lower volumes. Q1 '24 Systems and Services revenue were up 17.5% year over year primarily due to increased non-Systems revenues, mostly related to upgrades, higher scanner volumes, and higher Services revenues from our larger base of scanner sold. CAD/CAM and Services revenue for Q1 represents approximately 51% of our Systems and Services business. Q1 '24 Systems and Services revenues were favorably impacted by foreign exchange of approximately $1.5 million, or approximately 0.9% sequentially. On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $0.9 million, or approximately 0.5%. Systems and Services deferred revenues on the balance sheet was down $14.3 million or 5.5% sequentially and down $25.3 million or 9.4% year over year, primarily due to the recognition of Services revenues, which is recognized ratably over the service period. The decline in deferred revenues both sequentially and year over year reflects the shorter duration of Service contracts with initial scanner purchases. As our scanner portfolio expands and we introduce new products, we increase the opportunities for customers to upgrade and make trade-ins, in addition to other scanner leasing and rental programs. Developing new capital equipment opportunities to meet the digital transformation needs of our customers and our DSO partners is a natural progression for our equipment business with a large and growing base of scanners sold. We are pleased to be able to leverage our technological innovations and operational capabilities and efficiencies to provide different types of go-to-market models to our customers such as rentals and leasing, selling the way that our customers want to buy. Moving on to gross margin. First quarter overall gross margin was 70%, approximately flat sequentially and year over year. Overall gross margin was favorably impacted by foreign exchange by approximately 0.3 points sequentially and unfavorably impacted by approximately 0.1 points on a year-over-year basis. Clear Aligner gross margin for the first quarter was 70.9%, down 0.3 points sequentially, primarily due to higher manufacturing spend, partially offset by higher ASP. Clear Aligner gross margin for the first quarter was down 0.8 points year over year, primarily due to higher manufacturing spend, partially offset by favorable ASP. Systems and Services gross margin for the first quarter was 65.9%, up 1.1 points sequentially due to higher ASP, partially offset by manufacturing variances. Systems and Services gross margin for the first quarter was up 4.3 points year over year, primarily due to higher ASP, lower service and manufacturing costs. Q1 operating expenses were $543.7 million, up 9.2% sequentially and 3.1% year over year. On a sequential basis, operating expenses were up by $45.7 million from higher incentive compensation and consumer marketing spend, partially offset by restructuring and other charges not recurring in Q1. Year over year, operating expenses increased by $16.5 million, primarily due to our continued investments in sales and R&D activities and higher incentive compensation. On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions, and restructuring and other charges, operating expenses were $506.1 million, up 13.3% sequentially and up 3.2% year over year. Our first quarter operating income of $154.1 million resulted in an operating margin of 15.5%, down 2.5 points sequentially and up 1.3 points year over year. The sequential decrease in operating margin is primarily attributed to investments in our go-to-market teams and higher incentive compensation. The year-over-year increase in operating margin is primarily attributed to operating leverage and proactively managing our costs, partially offset by unfavorable impact from foreign exchange of approximately 0.7 points. On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, and restructuring and other charges, operating margin for the first quarter was 19.8%, down four points sequentially and up 1.3 points year over year. Interest and other income expense net for the first quarter was an income of $4.3 million compared to an income of $1.3 million in Q4 of '23 and an income of $1.1 million in Q1 of '23, primarily driven by a gain on our equity investments and net interest income and offset by unfavorable foreign exchange. The GAAP effective tax rate in the first quarter was 33.7% compared to 28.3% in the fourth quarter and 34.8% in the first quarter of the prior year. The first quarter GAAP effective tax rate was higher than the fourth quarter effective tax rate primarily due to discrete tax benefits recognized in Q4 of '23, partially offset by increased earnings in low tax jurisdictions in Q1 of '24. Our non-GAAP effective tax rate in the first quarter was 20%, which reflects our long-term projected tax rate. First quarter net income per diluted share was $1.39, down sequentially $0.24, and up $0.26 compared to the prior year. Our EPS was not impacted on a sequential basis from foreign exchange. Our EPS was unfavorably impacted by $0.09 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.14 for the first quarter, down $0.28 sequentially, and up $0.32 year over year. Moving on to the balance sheet. As of March 31, 2024, cash, cash equivalents, and short-term and long-term marketable securities were $902.5 million, down sequentially $78.2 million, and down $18.9 million year over year. Of our $902.5 million balance, $217.5 million was held in the U.S. and $685 million was held by our international entities. In January 2024, we received approximately 37,000 shares of our common stock upon final settlement of the $250 million accelerated share repurchase from Q4 of '23. In total, we repurchased approximately 1.1 million shares at an average price per share of $230.13 under the Q4 ASR contract. We have $650 million available for repurchase of our common stock under our January 2023 repurchase program. During Q2 '24, we expect to repurchase up to $150 million of our common stock through either a combination of open market repurchase or an accelerated stock repurchase agreement. Q1 accounts receivable balance was $950.7 million, up sequentially. Our overall days sales outstanding was 86 days, up approximately one day sequentially and up approximately three days as compared to Q1 last year. Cash flow from operations for the first quarter was $28.7 million. Capital expenditures for the first quarter were $9.4 million, primarily related to our continued investments to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations, less capital expenditures, amounted to $19.3 million. We're continuing to use our healthy balance sheet to drive growth and profitability. During the quarter, we continued to make disciplined investments in our strategic growth drivers. We completed the acquisition of Cubicure, which will enable us to scale our 3D printing operations to eventually direct print millions of custom appliances per day, and we exited the quarter with a healthy cash flow position and no long-term debt, maintaining a strong position to support our additional $75 million investment in our DSO partner Heartland Dental and $150 million stock buyback. Now, turning to our outlook. Assuming no circumstances occur beyond our control, we provide the following framework for Q2 and fiscal 2024. For Q2 '24, we provide the following business outlook. For Q2 '24, we expect worldwide revenues to be in the range of $1.030 billion to $1.050 billion. We expect Clear Aligner volume to be up sequentially and Clear Aligner ASP to be down slightly sequentially, primarily as a result of unfavorable foreign exchange. We expect Systems and Services revenue to be up sequentially as we continue to ramp iTero Lumina in Q2 2024. We expect Q2 '24 GAAP operating margin and non-GAAP operating margin to be slightly above Q1 '24 GAAP and non-GAAP operating margins, respectively. For fiscal '24, we provide the following business outlook. We expect fiscal '24 total revenue to be up 6% to 8% versus 2023, which is higher than our prior outlook of up mid-single-digit growth compared to 2023. The increase in our 2024 revenue outlook reflects our Q1 results, Q2 outlook, and continued execution of our growth strategies. We anticipate that the incremental revenue reflected in our 2024 outlook will be roughly split 50-50 between our two operating segments. We expect fiscal 2024 Clear Aligner ASPs to be slightly up year over year. We expect fiscal 2024 GAAP operating margin and non-GAAP operating margin to be slightly above the 2023 GAAP operating margin and non-GAAP operating margin, respectively. We expect our capital -- our investments in capital expenditures for fiscal 2024 to be approximately $100 million. Capital expenditures primarily relate to building construction and improvements as well as manufacturing capacity in support of our continued expansion. With that, I'll turn it back over to Joe for final comments. Joe? Joe Hogan -- President and Chief Executive Officer Thanks, John. In summary, Q1 was a good start for the year. While I'm pleased with our results, I'm even more excited about Align's innovation in 2024 and our next wave of growth drivers that we believe will continue to revolutionize the orthodontic and dental industry in scanning, software, and direct 3D printing. Our focused execution of our product roadmap and innovation pipeline has resulted in the largest introduction of new products and technologies in our history, further advancing our software, scanning, and 3D printing capabilities. We're excited about the potential for these strategic investments to enable a new phase of growth to transform the orthodontic industry again. The iTero Lumina intraoral scanner has the potential to set a new standard of care for dental practices by simplifying the scanning of complex oral regions while offering superior chair-side visualization and a more comfortable experience for patients, especially kids. The Invisalign Palatal Expander increases the clinical applicability of the Invisalign system to nearly 100% of orthodontic case starts. It is a revolutionary removable 3D-printed appliance that is clinically proven to be safe and effective, is less painful than traditional metal expanders, and promotes better oral hygiene. And our recent acquisition of Cubicure, a pioneer of direct 3D printing solutions for polymer additive manufacturing, brings a talented team and unique cutting-edge technology into Align to help us scale our 3D printing operations providing ultimate design freedom and highly customized outcomes from a customer and patient standpoint, as well as operational benefits to the business. We see incredible opportunities in this business to continue making the Invisalign system the standard of care in orthodontics. By continually innovating and developing digital technologies and services that enable more doctors to easily diagnose and treat patients with crooked teeth, and help them retain their healthy beautiful smiles, we are increasing access to care for millions of people who might not otherwise receive orthodontic treatment. With that, I thank you for your time today. We look forward to sharing our continued progress in leading the digital transformation of the orthodontic and restorative dental industry progress in leading the digital transformation of the orthodontic and restorative dental industry. I'll now turn the call over to the operator for your questions. Operator? Questions & Answers: Operator Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from Elizabeth Anderson with Evercore ISI. You may proceed. Elizabeth Anderson -- Evercore ISI -- Analyst Hi, guys. Thanks so much for the question. I was wondering if you could talk about how you're seeing the overall demand environment. I guess, I'm particularly curious about the U.S., sort of how you're seeing it from like a consumer demand perspective. Especially, any comments you could make on the SmileDirect impact on volumes in the quarter? And then secondarily, if you could comment a little bit more on the broader demand environment in China, that would be super helpful. Thank you. Joe Hogan -- President and Chief Executive Officer Hey, Elizabeth. I'll start off and have John jump in on anything. First of all, we described the business right now as stable, same things that we talked about as we came out of the fourth quarter, and we see that stability broadly around the globe. And you saw in our script that we just read to that it's good from an adult standpoint and also a teen standpoint, too, which again led to that kind of stability that we talk about. If I look around the world, I mean, we've -- that stability exists, whether it's in Asia, whether we've seen it in parts of Europe and we see it in the United States and the Americas also. So, it's hard for us to call out a particular region or whatever that is dramatically down or dramatically up. We just see them moving pretty much in unison in the first quarter. John, would you add anything? John Morici -- Chief Financial Officer No, I agree. And that's -- we're driving the growth strategies. As we've said, we've seen that stability in the environment and we're executing against that. Joe Hogan -- President and Chief Executive Officer And Elizabeth, last thing on your SmileDirectClub comment and them not being advertising like they were before or whatever, we can't attribute any part of the demand equation up or down as part of that. And obviously, that was more pronounced in the United States than it was anywhere else in the world. But I can't attribute any change in the marketplace because of them not advertising at this point in time. Elizabeth Anderson -- Evercore ISI -- Analyst Great to hear. Thank you so much. Appreciate the commentary. Joe Hogan -- President and Chief Executive Officer Thanks, Elizabeth. Operator Thank you. One moment for questions. Our next question comes from Brandon Vazquez with William Blair. You may proceed. Brandon Vazquez -- William Blair -- Analyst Hi, everyone. Thanks for taking the question. I wanted to focus for a second on the teen side. You have the Palatal Expander out there now, getting great reviews, and it seems like it closes, if I'm understanding the numbers correctly, maybe 20% of that market that you haven't been able to hit before. This is such a big opportunity. I'm curious if you can just reflect on like how does commercialization within teens look in the next couple of years now that you have kind of a broader and more full portfolio here compared to the prior couple of years. And what does that mean for growth rates within that teen section and adoption within teen that's underpenetrated relative to teens as we look forward the next couple of years? Thanks. Joe Hogan -- President and Chief Executive Officer That's a good question, Brandon. I think, as we mentioned, it's 20%. And then, we call them tweens really. They're young students before they really hit the teen years and have mature dentition. With Invisalign First and now with IPE, we can handle the 20% that's out there on the Phase 1. And some teens just need -- the tweens just need dental expansion. In some, you really have to split the suture and widen the palate overall. We feel in both those cases with IPE and Invisalign First, these are very unique products specific to that area. And we think it'll actually make doctors that aren't comfortable with Phase 1, maybe even more comfortable now because of the impact on patients is not what it was before when you tried to work these kinds of cases with wires and brackets or hyrax expanders and those kinds of things. But like anything in the orthodontic community, it takes time. It takes time for acceptance. And the good thing about this is IPE is about a 30- to 35-day kind of an episode. So, our feedback loop is really good. You can tell from my transcript also is, right now, we're approved in the United States and Canada and recently in ANZ. And right now, we're throttled by the regulatory procedures we have to go throughout the world. So, we'll be able to give you more specificity on this, Brandon, as we go forward. But as I mentioned in my closing, too, we're really excited about that technology. And we didn't tie it together. The new Lumina scanner has such a broad kind of a bandwidth from a scanning standpoint. It scans that palate that you have to cover with Invisalign First extremely well. So, those technologies thread together very well out there. So, we're excited about it and more to come. Operator Thank you. One moment for questions. Our next question comes from Jon Block with Stifel. You may proceed. Jon Block -- Stifel Financial Corp. -- Analyst Hey, guys. Hey, Joe. Good afternoon. Hoping to ask two. Maybe just the first one, throughout the quarter there was sort of like an obsession or a big focus from investors on month-to-month trends. There was talk about February strength, March weakness. I don't think if anyone really knew if it was the consumer or the calendar or both. So, maybe you guys can talk a little bit about how it played out for you guys elaborate on February and March? And then, as much as you can just touch on April here for the first two to three weeks? And then, I'll ask my follow-up. Thanks. John Morici -- Chief Financial Officer Yeah, Jon, this is John. Look, from -- as we talk about the quarter and think about, we're very pleased with our results in Q1. We saw stability, as Joe mentioned, and that really continued from the end of the year into the quarter, less about month to month. I mean, it was the stability and then the execution that we had throughout the quarter with our products. Jon Block -- Stifel Financial Corp. -- Analyst OK. And then I'll just shift gears. John, I might stick with you. I believe the wording is slightly above the 2023 OM, which I think is 21.4% unchanged despite the higher revenues, the midpoint going from roughly 5% to 7%. So, can you talk about where that extra spend is going? Do we see the returns on that this year, or will that aid and give you some more tailwinds into 2025? And then just to tack on to that, the new higher guidance doesn't -- implies at a 6% in the back part of this year, year-over-year growth, which isn't too dissimilar from 1H, but the comps get more difficult, so the stacks need to accelerate. Why should we be comfortable with that? Is that just an accelerating contribution from some of those new products like Lumina and IPE? Thanks, guys. John Morici -- Chief Financial Officer That latter point is how I would look at it, Jon. We're making investments -- we make investments throughout the year. We get the shorter-, longer-term investments that we make, different returns on whether they're short or long term. But what we see is a stable environment, continued investments in go-to-market activities. We have new products coming, so that helps us accelerate with things that we'll have on the iTero side as well as IPE and others that Joe talked about, where we really get the approval later in the year. So, it's about a stable environment, making investments into that environment, and then executing on our growth strategies. And that should give us the benefits that you described in the second half. Operator Thank you. One moment for questions. Our next question comes from Jeff Johnson with Baird. You may proceed. Joe Hogan -- President and Chief Executive Officer Hi, Jeff. Jeff Johnson -- Baird -- Analyst Thank you. Good afternoon, guys. Hey, guys. How are you? So, John, maybe following up on Jon's question there and just a little finer point on the guidance itself. You've taken that guidance from mid-single digits to 6% to 8% scanner and CAD/CAM services came in obviously strongly in the double-digits upper teens. Should we think about kind of that double digits maybe not in the upper teens, but double digits is kind of where the scanner and services continues this year, and your Clear Aligner revenue guidance kind of still in the mid-single digits? I think last quarter we were talking about both those segments being mid-single digit growers. It seems like to me now maybe the raise here is being driven more by the scanner and CAD/CAM services. And as Joe calls the market stable, then maybe the Clear Aligner revenue still kind of expected to be in that mid-ish single digits. Is that a fair kind of way to look at guidance? John Morici -- Chief Financial Officer That's a fair way to look at it, Jeff. I mean, you would see given the new products that we have with Lumina and iTero, you'll see a little bit faster growth. We're very pleased with what we saw in the first quarter. Typically, in the first quarter, you don't have a sequential gain in revenue from the fourth quarter, being an equipment business. So, we're very pleased with what we saw there. But then, we also look at the Clear Aligner business, and we expect to be able to grow and continue to grow there, both in terms of the investments that we're making in a relatively stable environment and some of the new products that should help supplement that growth. Jeff Johnson -- Baird -- Analyst Yeah, that's helpful. And then, one other follow-up. I think it's been asked in the past maybe at an Analyst Day or something, I don't remember if you've given a clear answer, but it's something I keep getting asked here more recently, and that's percentage of your patient base or maybe orthodontic cases that get financed through some sort of third-party patient financing company. We have seen in areas like full arch implants, some of the aesthetic procedures outside of dental where lending standards have gone up, FICO scores have gone from the 500s to 700s something like that to qualify for patient financing in this cost of capital and tougher capital environment. So, what percentage -- do you know a percentage or roundabout of what cases get financed, and if those lending standards have changed at all or put any incremental pressure on patients here more recently? Thanks. John Morici -- Chief Financial Officer Yeah. What we see, Jeff, is -- and it varies country by country, I'll say U.S. maybe the most -- and I'll combine ortho and GP together, roughly a third of the cases that we see get some type of external financing. Remember, many patients or parents will pay in advance. That's great for doctors. Many doctors, especially orthos, will do some type of kind of internal financing where you kind of pay as you go and so on. And many doctors are continuing to do that, especially in the tougher environment. And we're doing things to help doctors to try to give them a little bit more extension in payments so that they can provide and pass that on to their patients as well. And we'll work with DSO partners to really try to help them work with these external companies to try to give better financing rates to try to get these patients to go into treatment. So, we're well aware. We know we can help. We have the balance sheet and the cash to be able to help with our customers so that they can pass that on. And that's something that we want to keep working toward. Jeff Johnson -- Baird -- Analyst John, any change to note over just the past few months even in those lending standards getting tougher, or you feel like that's stable as well as just kind of the overall environment as you've described that way? Thanks. John Morici -- Chief Financial Officer I look at that as more stable. I think there was a lot of things. If you go back to last year, people were really getting a bit of sticker shock in terms of the higher interest rates when they came to try to go into treatment. I think people are past that. I think when I see this or what I hear from doctors or see from our customers that it's a little bit more stable. There's not a big change. Jeff Johnson -- Baird -- Analyst Thank you. Operator Thank you. One moment for questions. Our next question comes from Michael Cherny with Leerink Partners. You may proceed. Michael Cherny -- Leerink Partners -- Analyst Hey, can you hear me OK? Shirley Stacy -- Vice President, Corporate and Investor Relations Yeah, we can hear you fine. Michael Cherny -- Leerink Partners -- Analyst OK. So, just relative to the spend, I want to dive in a little bit more if possible, you talked about the investment growth. Can you delineate relative to that investment, how you're thinking about the growth into, call it, your core markets for some of the new product launches? And especially with regards to the ramp on the printing side, how much incremental printing spend, so to speak, is coming now versus where you think it's going to grow, what the run rate should be on ramping that over time? John Morici -- Chief Financial Officer Yeah. I think we have a core business that we're running. And obviously, there's a certain amount of investment that you have to be able to grow around sales, sales, and marketing and the go-to-market activities that we have. There's also R&D spending that we've had throughout the time. And now as that R&D in the case of acquiring Cubicure and now turning this into more of a platform to be able to build our 3D printing, there's a certain amount of spend that we have. How that lays out, it varies over time that we'll have, but rest assured, we know how to scale products. We know how to scale 3D printing. We'll make the right investments to be able to start scaling up that direct fab printing while making sure that the core business has the right investments for growth, and we'll balance that as we go forward. Michael Cherny -- Leerink Partners -- Analyst Got it. Thank you. Operator Thank you. One moment for questions. Our next question comes from Jason Bednar with Piper Sandler. You may proceed. Joe Hogan -- President and Chief Executive Officer Hi, Jason. Jason Bednar -- Piper Sandler -- Analyst Hey, good afternoon. Thanks for taking the questions. First, I want to build on some of the macro questions that have been asked. I don't want to belabor the point, but other consumer discretionary companies called out a downtick in March. It doesn't sound like you saw any of that, but just wanted to confirm that's the case with respect to Invisalign demand. And maybe speak to your confidence to drive Clear Aligner volumes going forward now that comps turn a little bit tougher. How much do you think you might need to fund that growth with investments to drive more traffic into the office? Joe Hogan -- President and Chief Executive Officer Hey, Jason, on the first part is, we talk about the stable environment that we've seen that stability of it. We read and I read what's going on there with the consumer investment, some concerns particularly on the luxury goods or what's going on out there. But honestly, I think often what we see and analysts who follow us here just really pick up the U.S. data, and what we see is differences all around the world and that's what's great about having international business. You have some counter-cycling in the sense of the demand patterns and what goes on out there. But I would say there's nothing that we would highlight right now that would say that we think something has changed what we saw in the second half of 2023 to what we saw in the first quarter of this year. John, anything? John Morici -- Chief Financial Officer Yeah. In terms of investments, we make the investments that we need, go-to-market and manufacture, and other expansion as we continue to grow. We'll continue those investments. But as we've talked about, not only for now the second quarter when we're talking about that sequential improvement in op margin and what we've talked about in total year, where we expect the year-over-year improvement in margin, we're making sure that we're investing with that right amount of profitability. We'd still be able to grow into our market and expand the opportunity -- expand on the opportunities that we have, but then being respectful in terms of what margin we need to be able to deliver for the company. Jason Bednar -- Piper Sandler -- Analyst All right. Very helpful, Joe and John. And maybe one follow-up here, to maybe a multiparter on teen, so bear with me. This might be a nuanced look. It seems like a lot of emphasis here just recently in product development and marketing that's really trying to tap into that much younger market, that Phase 1 opportunity. IPE fits in there, your new marketing branding plan and emphasis there. There seems to be some benefits for younger patients with Lumina. So, it's really it seems intentional, but wondering if you could bifurcate for us how your Invisalign business is performing in this younger patient population relative to teens as a whole? Where does your penetration sit in those younger patients versus the broader teen channel? And maybe what kind of outsized growth you're expecting from this part of the channel as we look out over the near to intermediate term? Joe Hogan -- President and Chief Executive Officer Hey, Jason. I'll just delve back up on your question, just to give you kind of a conceptual view. When you think of Phase 1, it's actually been controversial in the orthodontic market for years. Some orthodontists don't want to do Phase 1 because, as I mentioned before, the kind of devices that have been used have been kind of difficult from a consumer standpoint. So, those wait for all permanent dentition and move on to there. We feel confident that with Invisalign First now for dental expansion and then for palate expansion or a morphological change, IPE will do that. And we think it will attract more orthodontists to begin Phase 1 treatment. But this is an industry that takes a while for things to bake in and for them to gain confidence and I understand it because you're working with kids' teeth and mouths and their dentition. But we actually think that a significant amount of growth could come from this area, but we think it will take time. But it's been a great focus for us and it's going to be interesting to watch how orthodontists in the future actually focus on Phase 1, Phase 2 because these kinds of devices make it simpler for them and for patients in the future. So, right now, I can't really just kind of give you the ground rules on that, that we've changed those rules in a sense, but I can't project exactly where it's going. Jason Bednar -- Piper Sandler -- Analyst Any sense penetration-wise or maybe where you're at relative to the broader teen market? Joe Hogan -- President and Chief Executive Officer I'd say we're just in that story. I mean, even Invisalign First is used sometimes on more permanent dentition, too. So, it's hard -- we'd have to split our cases out of Invisalign First is what the age of patients are or whatever. But as we get more data and we really get through with IPE and some more specificity around this, we'll share it with you and the rest of the people. Shirley Stacy -- Vice President, Corporate and Investor Relations Yeah. I mean, the only thing that -- I mean, if you've tracked us for a while, you know that our average age of teen patients gets younger and younger. I think we're 14 now versus 15-plus before. So, I mean, that's a reflection of just being able to go after those younger patients with first. Jason Bednar -- Piper Sandler -- Analyst All right. Very helpful. Thank you. Operator Thank you. One moment for questions. Our next question comes from Nathan Rich with Goldman Sachs. You may proceed. Nate Rich -- Goldman Sachs -- Analyst Great. Good afternoon. Joe Hogan -- President and Chief Executive Officer Hi, Nathan. Nate Rich -- Goldman Sachs -- Analyst Hi. And thanks for the questions. I wanted to go back to the guidance. I know it's kind of been touched on a few different times, but I wanted to ask on the Clear Aligner revenue outlook. It looks like you're raising the outlook for the full year by about 1%. I guess, could you maybe just touch on what changed specifically with respect to that outlook? It sounds like maybe its expectations around IPE and DSP versus market improvement. But I'd be curious. Any color you could share there and maybe anything on teen versus adult within the updated guidance would be great. John Morici -- Chief Financial Officer Yeah. I'll start, Nate. So, overall, we went from -- we had talked to a mid-single-digit, so call it 5% to raising it to the midpoint of 7% on a year over year, so up two points. And really that's a reflection of a few things. One is the continued stability that we're seeing. We're operating in an environment that's more stable. We saw that coming into the fourth quarter and now into this quarter as well. So, that's good. We want that stability there. And then you look at the execution that we have about -- on our core business to be able to grow with a lot of the innovations that we have, the promotions and other things that we have as we get into -- further into teen season, supplemented with the various new products that we talked about. We feel really good about Lumina and the launch that we have in iTero and the further expansion that, that can drive, as well as some of the new products like IPE and others to really not only help those unit sales there, but then as Joe described, we had to pull in other products around Invisalign First and others to really help drive some of that growth that we could see in the teen business. So, it's a combination of things, Nate, but it's what we're seeing in stability, how we're executing on our core strategies and then some of the new products really supplementing that extended growth to help us. And that's why we adjusted our total year. Nate Rich -- Goldman Sachs -- Analyst OK. That's helpful. And then, John, maybe just sticking with you, the 2Q operating margin, I know up slightly sequentially, but down year over year. And I think historically it's been a little bit variable, but you've seen more of a step up in the second quarter than I think what the guidance implies. Anything to call out with respect to FX? Or I think you mentioned some manufacturing cost spend, but just anything there that we should keep in mind as it regards the margin cadence? John Morici -- Chief Financial Officer Certainly, we are seeing a stronger dollar. So, that's something that we talked about when we think about our guide, too, we see a stronger dollar coming out of the first quarter into the second quarter. Our guide reflects that as well. But then you look at the continued investments that we're making to be able to drive more submitters, more doctors into our ecosystem and then ultimately drive more and more utilization. Some of it is that the core business that we have to able to drive growth, and some of it's some of the new products where there is a certain amount of opex spend that we have with that. But we're being very mindful of what we can do to be able to drive growth and then what it also means from an operating margin standpoint. And we're delivering that sequential improvement from 1Q to 2Q in operating margin, and then talk to the total year of being up on a year-over-year basis. Nate Rich -- Goldman Sachs -- Analyst Great. Thank you. Operator Thank you. One moment for questions. Our next question comes from Erin Wright with Morgan Stanley. You may proceed. Erin Wright -- Morgan Stanley -- Analyst Great. Thanks. Hi. I'll ask my two upfront here, but I'll follow up on the guidance and I don't want to belabor this too much. But do you think you have better visibility now just on the underlying demand trends globally? Or would you say that there's still an element or healthy element of macro uncertainty that still embedded in your guidance and some conservatism there? And then second would be on Lumina and the launch. And just can you talk about where you're seeing the most success with the launch in the target markets and promotions that where you're focused in terms of expanding share and upgrades as well? Thanks. John Morici -- Chief Financial Officer Hi, Erin. This is John. I'll talk a little bit about visibility and guidance. I think what we enjoy now and what we want to be able to have in an operator environment is more stability and that stability is there. Markets are open. There's a higher -- overall higher inflation and interest rates, but people are operating in that environment. That stability transcends it to other things that we have. We see the Michigan index or other indices that kind of point to that stability. Based on that stability, the investments that we're making, how we're going to market, some of the new products that we have, other things that we know that can, on a core basis, drive our business as well as the new products and initiatives that we have, that's what gives us confidence to be able to have a guidance that we gave for Q2 and what it means for the total year. Joe Hogan -- President and Chief Executive Officer Yeah. Erin, on the Lumina piece, it's Joe, obviously, as I mentioned in the closing on my script, we're really excited about that technology. We've been working on it for six years. It is a true new platform. It's not a derivative of the old confocal imaging platform, and there's really no other scanner in the world that's like that and how we've built it. And it'll take a while for the -- I think the market to absorb that as you have to do this doctor by doctor and place by place. But we've had a very enthusiastic response from the orthodontic community, but also the general dentistry community, too, even though we're not completely ready for the restorative piece. And we mentioned it will be the fourth quarter this year, we'll have that capability out. It's just the speed of that wand, the simplicity of being able to scan, the dimensional tolerances and all that's used in the sense of both comprehensive and orthodontic cases are really unmatched. So, we're excited about that, but we just have to take this thing. We've only had it out now for roughly a couple of months, but we are expecting to have a really strong year, but more importantly, to have that really be to set the standard from a scanner standpoint for the industry going forward. Operator Thank you. [Operator instructions] And our next question comes from Michael Ryskin with Bank of America. You may proceed. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst Hey, Joe, John, thanks for taking the question, and congrats on the quarter. John Morici -- Chief Financial Officer Hey, Michael. Joe Hogan -- President and Chief Executive Officer Hey, Michael. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst Hey. I want to follow up on something I think, Joe, you touched on in the prepared remarks. If I caught it correctly, you kind of pointed to a little bit of strength in U.S. ortho or Americas ortho in the quarter stood out for us. It seems like it's one of the stronger results in a number of quarters. Just wondering if you could expand on that a little bit. Is it the Lumina launch? Is the fact that you're moving into younger teens and younger kids, which obviously is going to be a little bit more ortho-focused? Just any structural change you're seeing there with that group of dentists. Or am I just reading too much -- Joe Hogan -- President and Chief Executive Officer Michael, I understand your question. I'd say it's -- we feel it's -- we've seen more stability in that market this year than we have last year. We've always known that the teen segment of that much more solid than the adult segment, but the adult segment held up for us in the Quarter 2. And so, that aspect of the adults was good for us also. But I'm very cautious about projecting this market going forward because as you can see with a lot of the surveys that are done, this moves pretty dramatically from month to month. But again, it's not just the United States market we're focused on, the global market has been good for us too in that sense. So, we're going to take this thing a month at a time, but we're confident enough to say this is stable, that we have products in here that are very helpful from an orthodontic standpoint in new, like you mentioned, Lumina and also IPE that gives us more ground to stand on the sense of those orthos. And so, we're excited about that. But in no way do I think there's a phase change between what we saw last year and this year in ortho. It's just more stable and we have more continuity is another word that I'd use to describe it. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst OK. And if I could squeeze in a follow-up if there's time. Again, also impressed by the DSP touch-up progress that you called it out in the deck. You got some additional launches later this year. You got the 14-stage touch-up aligner offering you're talking about. Any way you can start framing in terms of would you incorporate that into guidance at some point in terms of where you think that can go in terms of volumes and revenues or any update longer term, how you see DSP and touch-up evolving over time? Thanks. John Morici -- Chief Financial Officer Yes, Mike, I'll take that one. Look, DSP is very popular because it really serves the needs that doctors have. They want to be able to buy things kind of the way they want to buy. They want to be able to instead of making things or doing things themselves, they can use our aligners as part of that DSP and be able to treat those touch-up cases. And we like that, that's incremental for us in terms of what we see there. And they can also then use a lot of the aligners that they have for retention. And that's great too because that's typically incremental volume that we have. So, I think when we see us rolling this out, like we said a few years ago, it was U.S. and North America and now into Europe, it continues to do what we expect it to do. Doctors start. They adopt it more and more because part of their workflow and we see positive volume from that. And in success for projects -- programs like that, we'll continue to expand those out. Michael Ryskin -- Bank of America Merrill Lynch -- Analyst All right. Thanks. Shirley Stacy -- Vice President, Corporate and Investor Relations OK. Thanks, Michael. Operator, we can take one more question. Operator Thank you. One moment for question. And our last question comes from Kevin Caliendo with UBS. You may proceed. Kevin Caliendo -- UBS -- Analyst Hi. Thanks for getting me in. I appreciate it. I have two questions. So, the first one is on Heartland, can you talk a little bit about the benefits of the Heartland investment operationally? And also, Heartland is -- my understanding is a pretty profitable business and now with two separate investments there. How does their profits -- or how does the accounting work for that from your perspective at this point? And then, secondly, if you can provide -- I guess, with regards to the guidance, I think we understand it. But was that in any way based on the trends that you've seen so far in April? If you can elaborate on those in any way, that would be great. Thanks. John Morici -- Chief Financial Officer I can start with the guidance part of that, Kevin. Look, we use a lot of factors to look at where our guidance is. So, we're using data from Q1 and the most recent information. But it goes back to the stability that we've seen. You can see it in a lot of the surveys and other things that a lot of people do, but what we see is that stability, coupled with what we're trying to do to go-to-market to drive the initiatives we have and the new products that we have. So, that's a key part of what we factor in into our guidance. No change from what we normally do. This is how we've come together in terms of a guidance standpoint. In terms of Heartland, we look at Heartland as this is a great investment from investing in a company that shares a digital orthodontic mindset that we have, to be able to do things in a similar mindset, to be able to expand like they're expanding, to be able to get into markets that in some cases, we don't have much market share with or a big presence there. And they share that same mindset, that expansion. They've been around for a lot of years as well. With this investment, it's less than 5%. There's no consolidation or anything else that's required. And we'll evaluate going forward on whether there's any mark-to-market that we have to do going forward. But it's a continuation of that investment, the expansion that they're doing, and we're pleased with the results that we've seen over the last year. Kevin Caliendo -- UBS -- Analyst Super helpful. Thank you. Shirley Stacy -- Vice President, Corporate and Investor Relations Thanks, Kevin. That actually concludes -- sorry, go ahead, operator. Operator And we have reached the end of our question-and-answer session. I will now turn the call back over to Shirley Stacy for closing remarks. Shirley Stacy -- Vice President, Corporate and Investor Relations Thank you so much, and thank you, everyone, for joining us today. We look forward to speaking to you at upcoming financial conferences and industry meetings, including the American Association of Orthodontics meeting in New Orleans, May 4 and 5. If you have any questions, please give us a call. Thank you.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2024 first quarter earnings call. [Operator instructions] Today's call is being recorded and will be accessible for future playback at alaskaair.com. [Operator instructions] I would now like to turn the call over to Alaska Air Group's vice president of finance, planning, and investor relations, Ryan St. John. Ryan St. John -- Vice President of Finance, Planning, and Investor Relations Thank you, operator, and good morning. Thank you for joining us for our first quarter 2024 earnings call. This morning, we issued our earnings release, along with several accompanying slides, detailing our results, which are available at investor.alaskaair.com. On today's call, you'll hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported a first quarter GAAP net loss of $132 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported an adjusted net loss of $116 million. As a reminder, our comments today will include forward-looking statements about future performance, which may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit costs, excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben. Ben Minicucci -- President and Chief Executive Officer Thanks, Ryan, and good morning, everyone. As you are all aware, the most significant event this quarter was the accident involving Flight 1282 and the subsequent four-week grounding of a third of our fleet. Our focus has been on the safe return of our fleet, caring for our employees and guests, and enhancing our oversight of the production of our new aircraft. This event also had a substantial financial impact, totaling $162 million, which Boeing has fully compensated us for. To provide clarity on our core business performance, I will discuss our Q1 results, excluding the effects of Flight 1282 and the MAX grounding. During the quarter, we also received a second request for information from the DOJ, regarding our proposed acquisition of Hawaiian Airlines. We are working to respond to these requests as quickly as possible. Given the substantial volume of information involved, we have granted the government an additional 60 days to review our responses, and we'll continue to work with them to advance the process as swiftly as possible. We still believe strongly in the pro-consumer and pro-competitive merits of this deal and are excited by the opportunities this will unlock for Alaska, both domestically and internationally. A year ago, I set a goal for my team to reduce losses in the first quarter, traditionally our weakest, with the aim of progressing toward breakeven over the next three years. I am proud to announce that excluding the grounding impact we have achieved this goal in one year. Our Q1 performance far exceeded our initial expectation of a 30% profit improvement coming into this year. We not only reduced losses, but we turned a small profit, absent the MAX grounding on record revenue for the quarter. Several factors contributed to this positive performance, including disciplined and thoughtful capacity planning, a concerted effort to reconfigure and optimize our network, the return of West Coast business travel, particularly among technology companies, and strong leisure demand throughout our markets. While we strive to do even better going forward, the underlying improvement in our core business in Q1, despite the significant disruption felt across our business from the MAX grounding is a fantastic result for Air Group. With this outperformance, we are revising our full-year adjusted EPS from $3.25 to $5.25, which does not reflect any compensation. We remain encouraged by our Q2 outlook and beyond. We've continued to see robust demand through the spring break travel season and have visibility to double-digit adjusted pre-tax margins in the second quarter despite higher fuel prices. Our commitment to changing the outcome in Q1 positions us at a better starting point, not only for the rest of this year but also in years to come, as we look to grow profits and earnings over time from a stronger base. Now looking ahead, our focus remains on driving our strategic initiatives forward and managing the elements of our business within our control. We are excited to be back on track and running a solid operation with our full fleet and service. As I stated earlier, we have received $162 million in cash compensation from Boeing, making us hope for the total Q1 profit impact related to the MAX grounding. Our long-standing partnership with Boeing is important to us and to our success. The financial agreement we've reached with them is a strong reflection of that relationship. We remain committed partners. But we will hold Boeing to the highest bar for quality out of the factory. And to that end, we have enhanced our in-person oversight of our 737 production line and are regularly engaging with Boeing leadership on quality and schedule. Alaska needs Boeing. Our industry Boeing, and our country needs Boeing to be a leader in airplane manufacturing. Operationally, we've regained our reliability by returning our entire fleet to service on February 8. The response from our guests has been incredibly positive with strong demand evident throughout February and beyond. Our teams have dedicated themselves around the clock to restore operational excellence, resulting in an improved completion rate of 99.5% from the second week of February through March, were in line with our historical standard of performance. A big shout-out to our entire maintenance and engineering team for bringing back all our MAX lines into service safely and reliably. Safety is a foundational and uncompromising value for Air Group, and we expect nothing but the highest quality aircraft from Boeing. Regarding 2024 aircraft deliveries, as we've stated before, we expect Boeing will fall short of the '23 planned deliveries to us this year. Andrew will discuss Q2 capacity in more detail but our objective will be to deliver a schedule with a high level of service and reliability our guests expect and know from us. And Shane will discuss the impact to full-year CapEx due to fewer deliveries. As we kick off the second quarter, one of our busiest and most profitable periods, we are optimistic and determined to drive strong results in our business. Safety remains paramount. And we've successfully restored operational excellence. Building on our Q1 profitability improvements, we're now focused on leveraging these strengths to expand profitability and generate free cash flow. With last year's strong unit cost performance as our foundation, we're enhancing productivity across the board and our careful management of capacity, combined with our focus on a premium guest experience, positions us well to deliver solid financial results over the next three quarters. And lastly, I just want to acknowledge this amazing Alaska team from our exceptional frontline employees who deliver consistently strong operational results and guest service to our leadership team that holds itself accountable to being better each day. Together, we're driving success every step of the way. And with that, I'll turn it over to Andrew. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Thanks, Ben, and good morning, everyone. Today, my comments will speak to our first quarter results with a focus on unpacking our core performance and addressing second quarter trends and guidance. We achieved record first quarter revenues totaling $2.2 billion, up 1.6% year over year. This is an incredible result, especially when you consider the $150 million in revenue that we lost due to the grounding. Our team did a masterful job rethinking the deployment of our Q1 network in order to combat the seasonal challenges we face and to best serve the demand in our geographies. Capacity ended the quarter down 2.1% year over year, inclusive of an approximate 5.5-point impact from the grounding. This result was better than our initial expectation immediately following the accident due to high utilization, a better-than-expected completion rate, and no significant winter weather. Absent the grounding, capacity would have been up approximately 3.5%, a level we feel was appropriate for the Q1 environment and our network reconfiguration. In addition to our focused network efforts, we were positively impacted by the rapid return of corporate travel revenues and general close-in strength, which drove a strong unit revenue result. For the quarter, unit revenue was up 3.8% year over year. Excluding the impact of the grounding, unit revenue would have been up 5%, which is markedly higher than our original guidance of up 1% to 2%. This outperformance was driven by three factors. First, 1.5 points of RASM outperformance came from better-than-expected results related to the reallocation of flying. These changes more successfully met the demand across our markets, as we capitalized on more leisure flying. Second, 1.5 points of RASM improvement came from a material step-up in business travel beginning in January, especially from large technology companies. In Q1, managed business revenue grew 22%, approximately 50% driven from yield and 50% from volume. Tech companies saw the biggest improvement with revenues up over 50% year over year and professional services revenue an impressive 20%. To put the speed of recovery into perspective, managed business revenues increased 10% in January, a stunning 30% in February, and 24% in March. These results were achieved despite the grounding and book away we experienced. Today, managed corporate revenue has fully recovered the 2019 levels, while Tech is approximately 85% recovered. As we've said for some time, we expected business travel to come back which we are clearly seeing today. While we did not bake this into our Q1 forecast, we do not anticipate any step back in corporate travel in Q2. And third, half point of RASM improvement came once we restored our schedule reliability, and we saw strength in close-in leisure demand return. This strength is especially evident in February, where revenue beat our original pre-grounding expectations, despite loss flying and book away at the beginning of the month. Similarly, our total March revenue surpassed our record-breaking result last year on just over 1 point lower load factor, bolstered by yields that improved 2 points in month driven by strong close-in performance. Taken altogether, these impacts drove a 3.5-point improvement above the midpoint of our original guide for the quarter. Lastly, our Premium Cabin performance continues to support what we believe to be a structural shift in higher demand for premium products. First and Premium Class revenues finished up 4% and 11%, respectively, during the quarter, with our first-class paid load factor hitting monthly records at 68% during February and 69% in March. What makes these premium revenue results even more significant is that they would have been higher had we not experienced the grounding. Our paid premium capacity has come a long way from the days of paid load factors in the 40% range for Mainline and an all-Coach Regional fleet. As we continue to refine our premium strategy across our products and markets, we have further upside to come and remain committed to building on our premium guest experience, offering the products our guests and loyalty members want. Our loyalty program, which we hope to share more on later this year, also continues to post strong results. With co-brand cash remuneration of approximately $430 million in Q1, up 4.2% year over year, notwithstanding the grounding and a major contributor to the 48% of revenues we generate outside the main cabin. Now turning to our outlook and guidance. We expect capacity to step up 5% to 7% year over year in the second quarter, with the low end of this range, assuming no aircraft are delivered this quarter. Given the uncertainty around delivery timing, following the grounding, we have extended retirements of several of our older aircraft over the next few months and pushed utilization slightly higher across the Mainline Fleet, where we had opportunity. We also added back more capacity on the regional side through Horizon and SkyWest, given higher utilization from improved pilot staffing. Through the combination of these changes, we are confident in flying a reliable schedule for our guests. While the second quarter will be our highest growth this year, it is also our most profitable growth, with June, a clear peak month for us. While we've added a handful of new routes across our network, the majority of our added flying is focused on additional frequencies in high-demand markets, where we have conviction in their profitability. Second quarter bookings so far are encouraging, with yields continuing at healthy levels in April and beyond albeit slightly moderating through the quarter on growing industry capacity. This year, we have seen a more normalized yield and booking curve, building in strength as we get closer in, a trend we expect should persist. Looking beyond Q2, the back half of the year looks to be shaping up well as industry capacity constraints remain in place and competitive intensity dynamics across our West Coast markets stabilize. In closing, the team has done a tremendous job in reshaping our network to produce a strong result for our most seasonally challenged period, with the full value of our differentiated product offering from premium seating to lounges to global partnerships, I believe we are well-positioned to drive another solid quarter of performance, as we move into our peak periods this summer. And with that, I'll pass it over to Shane. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Thanks, Andrew, and good morning, everyone. In what has been a challenging start to the year, our people and our business model have shown amazing resilience. Safety, of course, is our absolute priority, and it will continue to be our top focus above all else. It has, however, been encouraging to see the level of improvement to our core first quarter performance this year. While managing through the difficult circumstances of Flight 1282 and its aftermath. The teams did an admirable job operating safely and on time, and our commercial team put together a network plan that coupled with strong demand, positioned us well to meet our long-term target to breakeven in Q1. We are not shy about setting ambitious goals for ourselves, and we have a good history of delivering on those commitments. Our financial focus remains on continuing to strengthen our business model and delivering strong financial performance over the long term. Turning to our results. For the first quarter, our adjusted loss per share was $0.92, which excludes compensation received from Boeing related to our MAX fleet grounding. The profit impact of the fleet grounding in Q1 was $162 million or $0.95 of EPS and 7 points of margin. Fuel price per gallon was $3.08, as West Coast refining margins continue to be a unique margin headwind to our results relative to the rest of the country. Our total liquidity inclusive of on-hand cash and undrawn lines of credit stood at $2.8 billion, as of March 31. Debt repayments for the quarter were approximately $100 million and are expected to be approximately $50 million in the second quarter. Our leverage levels remain healthy at 47% debt to cap and 1.1 times net debt to EBITDAR, while our ROIC stands above 9%. For the quarter, unit costs were up 11.2% year over year, 6 points of which are directly attributable to the fleet grounding, primarily from the significant loss of planned capacity. So we also incurred approximately $30 million of incremental operational recovery costs due to the grounding as well. Our core unit costs, absent grounding impacts were up approximately 5% year over year in the first quarter. The drivers remain similar to prior quarters and are consistent with pressures faced by most airlines, the primary of which is higher labor rates for our people. We have completed seven labor contracts over the past two years, including a recently signed agreement with our aircraft technicians, and we continue to prioritize finalizing an agreement with our flight attendants. We remain committed to high productivity in our contracts. And absent the MAX grounding, we would have had a 2% increase in productivity year over year, as measured by passengers carried per FTE. We expect continued productivity improvements throughout the year across the company. And in May, we'll operate under our new preferential bidding system for pilots for the first time, which will allow for both enhanced pilot productivity and importantly, schedules that are more aligned with our pilots priorities. While costs are materially higher structurally for the industry, our margin profile for the first quarter is evidence, we are making the right decisions on capacity deployment. And we will continue to prioritize the overall margin health of the company over growth for the sake of unit cost performance alone. We are committed to also retain our relative cost advantage, and we continue to do well on that basis. We achieved the industry's best cost performance last year and looking at our rolling four-quarter unit costs, we have outperformed both Delta and United by 3 points on a stage length adjusted unit cost basis. While we may experience quarterly variances on a unit basis, we are not ceding any of our relative advantage. We have widened the gap over the past 12 months, and we remain focused on managing to aggressive budgets and delivering strong margin performance. Not only did we improve profitability, excluding the grounding by $120 million year over year, when compared to the first quarter of 2019 and 2023, we've closed the margin gap to our largest peers by approximately 2 to 3 points. As we look ahead to Q2 and the rest of the year. I will provide capacity fuel, EPS, and capex guidance, consistent with the metrics we shared last quarter and our focus on the overall margin profile of the business. For the full year, as Ben shared, we do not expect to receive all 23 deliveries from Boeing that we had originally planned for this year. We are in discussions with Boeing. And as we gain more clarity on those deliveries, we will update our expectations but we expect full-year capacity growth at this point to be below 3%. Also, due to lower expected deliveries, we now expect capex of $1.2 billion to $1.3 billion versus our prior expectation of $1.4 billion to $1.5 billion. We expect economic fuel cost per gallon to be between $3 and $3.20 for the second quarter and expect refining margins on the West Coast to be more in line with Gulf Coast, which we've seen in the past several weeks. Given the significant spread in West Coast fuel costs versus the rest of the country, we are developing strategies to mitigate this disadvantage. Our first step was to discontinue our hedging program, given refining margins have become the more volatile component of fuel costs, which hedging did not protect us from. The full value of hedging cost reduction will take several quarters to bleed in. We are also changing our strategy for our annual fuel tender process to obtain better pricing and are likely to begin a program to begin a modest amount of self-supply of fuel later this year and into 2025. While these will take time to fully mature into our results, we expect these actions to close the current fuel headwind we face versus the rest of the industry and will help us to be well-positioned to lead the industry in margins. And as Ben mentioned, we expect full-year EPS to now land between $3.25 and $5.25 for the full year and $2.20 and $2.40 for Q2. Despite a likely $0.35 year-over-year headwind from fuel, we have visibility to a path back to healthy double-digit margins in the second quarter on our way to another strong full-year performance. With the immediate impact of the grounding behind us and our operational reliability back on track, we are optimistic about our outlook for the rest of the year. The economy continues to expand with supportive wage growth, recently improving consumer sentiment and trends indicating a continuing preference to prioritize spending on travel and experiences over goods. By remaining focused on our historical strength, safety, operational excellence, and relative cost performance and continuing to reap the benefits of our commercial initiatives. Our business is configured to compete, to maintain our relative advantage and to continue to deliver strong financial results. And with that, let's go to your questions. Questions & Answers: Operator [Operator instructions] And our first question will come from Andrew Didora with Bank of America. Andrew Didora -- Bank of America Merrill Lynch -- Analyst Hi. Good morning, everyone. Shane, I know you're not guiding to CASM, but if I were to just think about 1Q being up 3% on 3.5% capacity. Are there any kind of puts and takes you would call out for 2Q, whereby we wouldn't see kind of CASM stepped down nicely given you're growing at 6%? And then similarly, as I think about the back half as growth comes down, I would expect CASM to maybe flex back up. Is that a fair assessment? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Hye, Andrew. Good morning. Yeah, I think that's the right contour that we're expecting to see this year. We'll see a decent improvement in unit cost in the second quarter, given the growth profile of the company. And as you mentioned, growth slows down in the back half of the year, and we'll probably see a little more pressure in the back half of the year again on unit costs. I think -- I do just want to mention like the company, I like -- I think we've done a nice job though balancing capacity versus unit cost. You've heard us increasingly talk about our focus on the margin health of the company. So we're going to continue to be smart about how we put capacity into the market, and we'll continue to compete really well on a unit-cost basis against the larger airlines in our markets. Andrew Didora -- Bank of America Merrill Lynch -- Analyst That's great. And then just a follow-up for Andrew. I appreciate all the color you gave on corporate travel. Do you know what percentage of your revenues today are corporate and how that compares to pre-pandemic? And any color you can give us just in terms of what the RASM premium would be on corporate, say, versus leisure travel? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yeah. Thanks, Andrew. We don't disclose that sort of information. But I will tell you that we see continued improvement in strength in our corporate position, the business that is coming our way. And again, as we've shared for some time, this return from West Coast business travel, especially in the technology area. It's just been very significant. And I think when you look at others' comments around how much their managed business travel increased, hours increased significantly more year over year, which is very encouraging. Operator And our next question will come from Helane Becker with TD Cowen. Helane Becker -- TD Cowen -- Analyst Thanks very much, operator. Hi, team. Hope all is well. Just a question with respect to the way we should think about the second half of the year. So second quarter continues kind of the first quarter strength? And then how are you thinking third quarter versus second quarter? Some of your peer group have been talking about a shift in seasonality, maybe stronger July. I want to say a stronger July and June and maybe not so strong August, so much or how you guys -- the pattern of travel goes? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yeah. Helane, yes, we're seeing the same thing. I think August and the return of schools and just the exposure of our network across different geographies. June is becoming the single strongest month. And so what you'll see here is we move capacity around to accommodate that. So we feel pretty good about getting ahead of that mix. Helane Becker -- TD Cowen -- Analyst OK. That's really helpful. And then, Andrew, as you look at like Alaska and the state of Alaska, what's the capacity -- industry capacity situation look like up there? I've been seeing some other airlines adding capacity to Anchorage and Fairbanks from various cities, not Seattle. And I'm just kind of wondering if that's impacting your overall, I don't know, market share maybe is the right word up there? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. I think it ebbs and flows. People love to put their capacity into Alaska, as we go into the summer period. I would say industry capacity, what I call Alaska long haul is up decently. So that's putting a little bit of pressure. But overall, we feel really good about our position in Alaska and the routes that we serve. And of course, we are very well-positioned to serve anybody who is wanting to travel to Alaska. Operator Your next question will come from Savi Syth with Raymond James. Laura Prendergast -- Raymond James -- Analyst Hi. This is Laura on for Savi. What's the general environment that you're assuming for the second half of the year that's reflected in your full-year EPS guide? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes. Look, I think the second half of the year, we expect to continue to be strong and stable. We view it right now, we think it's going to be consistent with what we're seeing today. I don't think there's a sign that demand is slowing down. We don't expect that at all. I think fuel costs are a little higher than we had planned for the year, which was roughly $3 and came in at $3.08. And I think some of that increase in costs, we expect to be offset by the stronger close-in demand certainly on the business side. And so net-net, we haven't really changed our expectation for the full year, and we think it's going to continue to be a strong demand environment. Laura Prendergast -- Raymond James -- Analyst OK. Sounds good. And then one more, if you can provide any color about your recent commercial initiatives like Alaska Access and your expectations for the contribution from these programs, that would be great. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Well, I'm glad you noticed Alaska Access. I think what you're really seeing here is that we're continuing to broaden the products and services that we offer. That's obviously something that's quite small. The reality is the distribution landscape is materially changing. You've got NEC, but you've also got offer order, settlement and delivery these technology changes are going to massively increase our ability on the revenue side to distribute our various products and services. So what you're going to see us continue to do is to bifurcate all the products and services that we have and continue to distribute those in different forms and ways over time. So we're really excited about just the technology that's coming our way to help us generate greater revenues. Operator And our next question will come from Ravi Shanker with Morgan Stanley. Ravi Shanker -- Morgan Stanley -- Analyst Thanks. Good morning, everyone. So just on the closing commentary. Your comments on the strength of close-in was particularly notable because some of your competitors have been having some challenges with close-end strength or weakness, actually. So are you doing something differently, as the strength idiosyncratic to you as the weakness idiosyncratic to them? If you can unpack that that would be great. Andrew Harrison -- Executive Vice President, Chief Commercial Officer I can't specifically speak to other carriers. What I can tell you sitting here looking into April. Demand is coming in very nicely with double-digit increases in unit revenues year over year, as we move through the month of April. And as we look to May and June, where we have, obviously, a little bit more industry capacity. We're also seeing a very positive direction in the yields that are coming in through our system. So overall, we feel that Q2 is going to continue to be strong. Our network is well configured. Our premium class is performing. Our ancillary revenues are performing, they were actually up 6% in the first quarter, even though passengers were down. So we feel good about our setup for the second quarter. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer And, Ravi, I might just -- there could be some effect that. As you know, the West Coast have been more depressed on a business recovery basis. And I think that's caught up pretty quickly here in the first quarter, and that could be helping us. And then I also think just premium continues to be the place where most of the demand growth is happening, and I think we're doing a good job meeting that demand. Ravi Shanker -- Morgan Stanley -- Analyst Got it. That's helpful. And maybe a follow-up to that. Thanks for the detail on the slides in the CASM and the RASM walk. Can you maybe help us understand kind of what that gap between CASM and RASM might look like in 2Q and maybe for the rest of the year as well? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Well, Ravi, we're not going to give guidance on those two-unit metrics, but I would tell you, I think that as we mentioned earlier, maybe the first question, I think CASM will perform better in the second quarter than it did in the first quarter, just given the higher capacity, we'll be able to see a better result. It could like approach flattish. I think CASM could in the second quarter, we'll see ultimately, if we get to the midpoint of our capacity guide or not, based on deliveries over the next couple of months. And I think unit revenues, they're going to be still pressured a bit by the grounding impact of 1282 and some of the book away in spring break that happened over the first quarter. But I think they're going to be strong. I think they're going to continue to perform among the best in the industry, on a domestic basis anyhow. So I think we're looking at a strong second quarter from a margin perspective, which is what we said in the script. Operator And we'll move next to Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey, thank you. Can you talk a little bit about what you're seeing in Hawaii how you're thinking about the recovery in Maui and your capacity recovery there? And what you're seeing competitively, any changes there? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes, Duane, Yes. So on Hawaii, actually, we were very pleasantly surprised as far as just the general framework and strength of Hawaii in general. That said, I think our capacity was down close to 40% out of Maui in total, still going to be down 20% as we move through. So outside of Maui, Hawaii is performing within expectations. I think it's going to be some time before Maui recovers, just to be frank. And so we are adjusting our capacity to meet the demand that we're seeing there. But it's certainly a slow journey. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. So maybe the down 40% recovers to down 20% and you kind of wait and see at that level. Is that a fair way to think about it? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes, I think the way to think about it is we get through this summer and then as we look into the back end of the year, which is more seasonally weak, we're going to assess how demand is and we'll adjust capacity appropriately. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Great. And then I guess, Shane, you piqued my interest with self-supply of fuel. Can you just elaborate on that? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Sure, Duane. Thanks for asking about fuel supply. Look, I think we've been pretty passive other than the hedging program on managing the fuel line in the business. As you know, we've had significant headwinds that are unique to us, relative to the rest of the industry. And I think it prevented us from being the top margin producer in the industry last year, just on a refining margin basis on the West Coast relative to Gulf Coast. So we're not going to sit idly by and let that continue to impact our results. We spent a lot of time in the first quarter understanding why we have a $0.30 differential relative to the rest of the industry. And one of the things we believe we can do is ultimately buy our own fuel from other places around the globe and ship it into some of our larger cities. It takes a while to get that done. Other airlines do it. It's not a brand-new idea to the industry. And I think there'll be a way of saving a few pennies per gallon, which we're going to go after, later this year and into next year. We'll say more about it as we firm up plans. Duane Pfennigwerth -- Evercore ISI -- Analyst That's great. And if I could sneak one more in here. Just on regional mix. Can you talk broad strokes, what regionals would be as a percent of your capacity maybe this year versus last year? And I know you're not giving point estimates on the metrics, but just broad strokes how we should be thinking about it kind of tailwind to RASM, headwind to CASM, and maybe margin impacts. It feels like there's probably parts of your network that we're starving for more regional lift, which is help us think about that. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. Thanks for the question. I think from our perspective, it's give or take around 10% of our capacity is regional. I don't see that materially changing. That said, the Regional businesses are profitability, just with the return of utilization and redeployment has jumped significantly, and they've been a valuable partner, both SkyWest and Horizon to help us with our Boeing deliveries and those Embraer 175 is backfilling some markets that we otherwise couldn't serve. Ben Minicucci -- President and Chief Executive Officer Yes. And Duane, I'll just say for -- on Horizon's part, this is Ben. Horizon is just performing fantastic. Margins are up. We put a lot of focus in the last few years in our Regional business, and it's really performing nicely, and we continue to see that trend continue over the rest of the year. Operator Your next question will come from Jamie Baker with J.P. Morgan. Jamie Baker -- JPMorgan Chase and Company -- Analyst Hey, good morning. I'll admit I had to Google Alaska Access, a little embarrassing to start off with that. So obviously, the corporate momentum is a positive. Can you speak though to how corporate patterns compared to those are pre-COVID? How does trip duration compare as the booking curve elongated, as change fees have gone away, that sort of thing -- behavioral change, I guess, is what I'm asking about. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. Thanks, Jamie. I think I probably will have a better answer for you next quarter. As I shared, the rapid up 10%, up 30%, up 24%, just in this first quarter with everything else going on was something we need to better digest, as we move through the second quarter. But I am seeing a lot of the traditional demand return as we've seen it historically. But I'll have a better answer after we've digested this quarter and get through the second quarter. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK. Well, then you won't fold me when I asked the same question in 90 days. So second question, just on the revised full-year guide, First quarter was solid. You've got good visibility, and in the second, I guess I'm wondering what's driving the $2 range in the guide. I mean, to be fair, United has a $2 range as well. Is it just stylistic that you chose to maintain that range? Or do you really think there's that much variability and uncertainty in the second half? And if so, what are the most uncertain inputs in your model besides fuel? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yeah. Thank you, Jamie. There's probably a large component of it that's just habit. Like we've habitually done a $2 range and we tied it in the maybe in the fourth quarter or something. I do think fuel is the largest immediate driver typically that we see that will run us up or down that EPS guide. But yes, I do think the $2 range is more just out of habit than anything. That we're trying to architect around like a specific set of outcomes on the worst-case side versus the best-case side. Jamie Baker -- JPMorgan Chase and Company -- Analyst And just if I can sneak in a clarification. Earlier in the call, did you say double-digit RASM on 3% capacity in April? Andrew Harrison -- Executive Vice President, Chief Commercial Officer What I said was that our intakes coming into the months are up double digit for April. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Like the tickets we're selling today. Not the entire held book -- Jamie Baker -- JPMorgan Chase and Company -- Analyst Yes, that makes sense. I was pinged by a client about that. So I hadn't heard it that way either. So thank you for the clarification. Operator And we'll move next to Scott Group with Wolfe Research. Scott Group -- Wolfe Research -- Analyst Hey, thanks. Good morning. So I just want to follow up on that last point because if you assume that CASM is approaching flat, right, it feels like the guidance assumes RASM that's flat to down and you're saying it was up 5% in Q1. You sound like everything is really, really good in Q2. So I'm not sure if I'm missing something or if there's a lot of conservatism in the guide. Or any color would be helpful. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. I think -- Scott, I think the thing to remember in the first quarter is, it's obviously by far our seasonally weakest. Second quarter is very, very strong. And capacity industrywide is growing, obviously, much more in a second. So it's all relative. I think what your statements around CASM and RASM directionally are spot on. And as we've been shared before, as we get into this period and then we look at our margins and profitability for the second quarter, very strong. And as we've shared before, as we move through this quarter and beyond, West Coast capacity from the industry is reducing growth is reducing. So there's a really good setup for the back half of the year. Scott Group -- Wolfe Research -- Analyst OK. I think I understand. And then you had a comment about we'll tell you more at some point about loyalty, but maybe just give us a little bit of some thoughts about what you're referring to, and that would be helpful. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes, Scott, I think in general, I'm not going to share much today, but we have a number of things in the works that we're working on. And at the right time, we're going to be sharing more. I just really wanted folks to know, especially on the revenue side. We have some really good things in store, and we're not ready to share those yet. Ben Minicucci -- President and Chief Executive Officer Andrew was just teasing, Scott. But I -- look, there's a lot of things that we've got a lot of irons in the fire in terms of loyalty and products and stuff. So yes, when the time is right, we'll provide more color on those. But I'm really excited about them. Operator Our next question will come from Stephen Trent with Citigroup. Stephen Trent -- Citi -- Analyst Hi. Good morning, everyone, and thanks for taking my question. The first one kind of an ignorant one for me, but let's say, hypothetically Alaska and Hawaiian merge, there aren't any sort of major adjustments in capacity that the DOJ passes down. Could you tell at this juncture whether your exposure to West Coast refining cost would rise with the combined Hawaiian? Or would it kind of stay the same or is it kind of too early to tell? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes. Thanks, Steve, I'll -- I'm not going to hypothesize too much, but I'll tell you that the fuel prices in Hawaii are significantly lower than you see in the Continental U.S. Stephen Trent -- Citi -- Analyst OK. Very clear. Super. And just one quick follow-up. I mentioned 90 days ago about what you guys are doing and the nice work you've done and having that investment-grade credit rating. Could you refresh my memory sort of what the push might be to get an investment-grade rating from all three agencies? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes, Stephen, good question. I think we deserve it, and we are hopeful that they review us soon and reconsider their ratings. We're not actively out talking with the other two agencies right now. We've got a lot going on, and we're really focused on hopefully, closing the proposed acquisition of Hawaiian, we've got to go to market potentially and raise some money to do that. So that's our focus right now. We'll get that behind us and then I think we've got really good debt metrics, credit metrics. I think we're definitely deserving of reconsideration by the other two agencies, and we'll keep making our case over time to them. Operator And we'll move next to Conor Cunningham with Melius Research. Conor Cunningham -- Melius Research -- Analyst Everyone, thank you. As you talked to Boeing, are you looking to completely rework the order book? It just seems like -- the comments today seem like you're more focused on '24, but is there an opportunity to kind of, I don't know, stabilize that over the next couple of years? I'm just trying to understand what you want in a new delivery stream from them going forward. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes. Thanks, Conor. I think -- yes, look, there's two or three moving pieces, their own ability to get back to production rates that support a consistent and reliable delivery stream, which most important to us is the quality and safety of the manufacturing process. So we've got to sort that out. We also prefer the MAX 10 at this point. It's not certified yet. We've got to make decisions about when to expect that. I think it's going to come later than we had expected, which was second half of next year. And then again, if the proposed transaction is able to proceed, we've got another 60 to 65 aircraft to think about, along with 330 or so we have today. So we just need to take some time, look at all of these variables, and put together a new skyline for the Boeing MAX deliveries. I think, directionally, it will probably be less than we had been thinking about even a year ago. So it should be good for capex story, good for a free cash flow story over time, but we need another quarter or two to really work through that on our side and then with our partners over at Boeing. Conor Cunningham -- Melius Research -- Analyst OK. That's helpful. And then on this -- on the Premium revenue and then versus your Saver, I'm just -- it seems like there's a pretty huge spread going on. And I don't know if there's anything to glean into like your main cabin Saver Fare option. Is -- I'm just trying to understand how you think about that spread over the long term. And then maybe as -- sorry, as an incremental follow-up to that. Your -- I think your inventory -- you didn't sell your inventory as far out as you initially did and you talked about closing. Are you thinking about changing how you -- how your inventory sits going forward to try to capture more of the close-in demand given your premium offering? Sorry about that. I realize it's like nine questions, but thanks. Andrew Harrison -- Executive Vice President, Chief Commercial Officer It's all right. I'll answer by just high level. I think the Saver Fare has been a very good product for us. In fact, we've made it significantly more available than we did last year. We've also seen significant increase in revenues buying out of Saver. And it's at a very valuable tool in the seasonality, given where our network moves around. I think we're focused on and probably, historically, we've pretty much chased loads to some respect. And I think as we're seeing where the industry is and where we are, we're putting more focus on yields and how we structure the pricing of our cabins, both Main and Premium and the Saver. And I think what I can tell you is that we're more than ever getting more deliberate about how we manage our product setup in our cabin. And I think there's only good news to come from that. Operator And we'll move next to Mike Linenberg with Deutsche Bank. Mike Linenberg -- Deutsche Bank -- Analyst Hey, good morning, everyone. Andrew, you probably have better than anyone, a good sense of this evolution of close-in Leisure. I really feel like it was something that hit the scene big time during COVID. A lot of it had to do with just last-minute reopenings and the like. I sort of feel pre-COVID, it was either a bereavement fare or I don't know, maybe your pal scored you a ticket to the Taylor Swift concert and you found out about it last minute. But it's becoming a bigger piece. And I don't know if it's 5% of kind of your -- when you look at your various segments, corporate, discretionary, whatever long-haul international. Can you talk about that evolution? Because I don't think it's a category, but maybe it's become a much bigger category than what I realize, and it can have a meaningful impact on RASM. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Well, number one, flattery will get you everywhere. So thank you. But we had a huge learning from COVID. We were squeezing out the cabin because we went for loads. And there was a robust leisure. And of course, when I talk about leisure, I'm talking also about Chase loyalty and Costco and major leisure agencies. So what we're really seeing is that for us at least, we had structured our cabin and our demand environment to take more further out and leave less closer in. And I think what we're finding is there is a -- the whole group of customers and guests who are a strong leisure traveler that just book a lot closer in and we're making seats available for them today. And of course, given the fair fencing and how that all works, the yields are much better than they would be further out. Mike Linenberg -- Deutsche Bank -- Analyst Absolutely. Absolutely. That makes sense. And then just my second, I know you did talk about a couple of teasers and things that we should look out for. You did drop loyalty. I know Ben mentioned loyalty. If anything, are we up for renewal this year? Andrew Harrison -- Executive Vice President, Chief Commercial Officer No. We're past that. But I think -- if you just -- what I would say about loyalty, and you've heard other side is such a very powerful and important part of our business. If you look at the environment and how loyalty programs, they're all evolving and there's changes. And so we are looking at how our loyalty program needs to change and evolve. And I think there's just real upside. And again, we're not willing to share anything today other than this is an area of focus for us. Operator And we'll move next to Dan McKenzie with Seaport Global. Dan McKenzie -- Seaport Global Securities -- Analyst Hey, good morning. Thanks. A couple of questions here. I guess my first question really is a head count versus fleet count question. So what number of deliveries are you -- I guess, are you guys hiring to? And then I guess where I'm going with that is the overhead or the cost burden that Alaska is carrying because the deliveries are coming in a little less than expected. And then I guess, is Boeing compensating you for that cost burden? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Thanks, Dan. A couple of things here on this one. I think we originally had anticipated 23 deliveries. Of course, when they come is an important variable as well. As evidenced by our revised full-year capacity guide and capex guide, we expect to get fewer than that. Boeing actually has 10 aircraft essentially built and going through the final review and ticketing process. So we expect to get all of those and probably some additional units beyond that. So we're thinking somewhere between 10 and 20. We have a number of aircraft we are planning to retire. So many of those aircraft were going to replace older 900 classics. So our headcount situation is in really good shape relative to the delivery stream coming our way. We're not going to be materially overstaffed. I don't believe in any part of our business. We watch that closely. We had to staff up a bit throughout the end of last year to get ready for this year and the spring, but I don't think that we're going to be in a significant drag position from a cost perspective. And to the extent that we are having conversations with Boeing in terms of compensating us for that. Dan McKenzie -- Seaport Global Securities -- Analyst Yes. Very good. OK. And then I guess, Shane, another question for you here. In the 10-K, Alaska highlighted 200 million gallons of SAF through 2030. And I guess I'm just curious, how many gallons you're planning to buy here in 2024? And what is the cost differential today of that versus West Coast jet fuel? And then where do you think that differential can go, say, in two to three years' time? And I guess what I'm trying to get at is probably a small percent of your overall volume, but I'm just trying to get a sense of the margin headwind from that. Diana Rakow -- Vice President, External Relations Yes. Thanks for the question. So it is a small part of the overall buying and that's in large part because it's a small part of the supply in the world at large. For 2024, it will be about 1% of our total fuel and that's coming from a couple of different suppliers. It is -- there is a green premium over the cost of Jet A. We're fortunate to have a lot of really strong corporate partners that are working with us to co-invest in SaaS in a way that also offsets the Scope 3 emissions of their business travel. And we're doing a lot in the market to try to grow and mature the staff market in the future and which includes looking at the cost down curve of different technologies and different producers. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Dan, I think -- thanks, Diana, for the color. I don't think there's a noticeable margin headwind from it this year. Obviously, it's a consideration for the entire industry as we move forward and becomes a larger part of supply, but we're probably a few years before it really starts to show up in a way that increases materially the cost of fuel going into the plan. Operator Your next question will come from Chris with Susquehanna Financial Group. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst Good morning. Thanks for taking my question. Shane, the comment you said for 2Q, I think it was flattish CASMex. Just want to confirm that that's ex the freighter cost. And then freighters are not typically discussed here. I think you're sizing up that fleet. Can you just remind us of the current size and where that's going this year? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Thanks, Chris. Yes. And that comment is ex freighter cost. But you'll be able to see the year over year. I don't think it's going to be materially different even if you included freighter costs in both years. Yes, we had a fleet of three, which is a small fleet. They do a lot of work for us up in the State of Alaska. It's really important to our customers up there. It's something we're proud of being able to do. We've been the predominant cargo carrier in the State of Alaska for most of our history. We're moving to five dedicated freighters. Again, most all of that Lyft will be in the State of Alaska. And who knows over time, if we'll be able to continue to increment from that base of five. We would certainly like to if the business remains strong. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst OK. And just my follow-up, and Ben, I think you said in your prepared remarks that you're anticipating a better supply demand balance in the core markets in the second half. And so we've had a competitor retreat from parts of L.A. It doesn't look like they're coming back, outside of this, I'm curious how confident are you in this supply backdrop or this sort of new dynamic, if you will, going forward? Ben Minicucci -- President and Chief Executive Officer Well, look, I think if you look at how Q1 turned out for us and again, it was just an amazing quarter from what it was in Q1 of 2023. So we're just looking at just the higher water level we're starting from in Q1, and that's translating forward into Q2. Just based on everything we're seeing in terms of demand and Andrew touched on a lot of those things, we just feel like we're well-positioned. So that's why we're forecasting double-digit pre-tax margins. And so we're feeling really strong. It's our most profitable quarter. And so I think we're really set up well for Q2 and the rest of the year. Thank you so much, Chris, and thank you, everyone, for joining us. You guys have a great day, and we'll see -- we'll talk to you guys next quarter. Answer:

the Alaska Air Group 2024 first quarter earnings call

Operator Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2024 first quarter earnings call. [Operator instructions] Today's call is being recorded and will be accessible for future playback at alaskaair.com. [Operator instructions] I would now like to turn the call over to Alaska Air Group's vice president of finance, planning, and investor relations, Ryan St. John. Ryan St. John -- Vice President of Finance, Planning, and Investor Relations Thank you, operator, and good morning. Thank you for joining us for our first quarter 2024 earnings call. This morning, we issued our earnings release, along with several accompanying slides, detailing our results, which are available at investor.alaskaair.com. On today's call, you'll hear updates from Ben, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported a first quarter GAAP net loss of $132 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported an adjusted net loss of $116 million. As a reminder, our comments today will include forward-looking statements about future performance, which may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit costs, excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Ben. Ben Minicucci -- President and Chief Executive Officer Thanks, Ryan, and good morning, everyone. As you are all aware, the most significant event this quarter was the accident involving Flight 1282 and the subsequent four-week grounding of a third of our fleet. Our focus has been on the safe return of our fleet, caring for our employees and guests, and enhancing our oversight of the production of our new aircraft. This event also had a substantial financial impact, totaling $162 million, which Boeing has fully compensated us for. To provide clarity on our core business performance, I will discuss our Q1 results, excluding the effects of Flight 1282 and the MAX grounding. During the quarter, we also received a second request for information from the DOJ, regarding our proposed acquisition of Hawaiian Airlines. We are working to respond to these requests as quickly as possible. Given the substantial volume of information involved, we have granted the government an additional 60 days to review our responses, and we'll continue to work with them to advance the process as swiftly as possible. We still believe strongly in the pro-consumer and pro-competitive merits of this deal and are excited by the opportunities this will unlock for Alaska, both domestically and internationally. A year ago, I set a goal for my team to reduce losses in the first quarter, traditionally our weakest, with the aim of progressing toward breakeven over the next three years. I am proud to announce that excluding the grounding impact we have achieved this goal in one year. Our Q1 performance far exceeded our initial expectation of a 30% profit improvement coming into this year. We not only reduced losses, but we turned a small profit, absent the MAX grounding on record revenue for the quarter. Several factors contributed to this positive performance, including disciplined and thoughtful capacity planning, a concerted effort to reconfigure and optimize our network, the return of West Coast business travel, particularly among technology companies, and strong leisure demand throughout our markets. While we strive to do even better going forward, the underlying improvement in our core business in Q1, despite the significant disruption felt across our business from the MAX grounding is a fantastic result for Air Group. With this outperformance, we are revising our full-year adjusted EPS from $3.25 to $5.25, which does not reflect any compensation. We remain encouraged by our Q2 outlook and beyond. We've continued to see robust demand through the spring break travel season and have visibility to double-digit adjusted pre-tax margins in the second quarter despite higher fuel prices. Our commitment to changing the outcome in Q1 positions us at a better starting point, not only for the rest of this year but also in years to come, as we look to grow profits and earnings over time from a stronger base. Now looking ahead, our focus remains on driving our strategic initiatives forward and managing the elements of our business within our control. We are excited to be back on track and running a solid operation with our full fleet and service. As I stated earlier, we have received $162 million in cash compensation from Boeing, making us hope for the total Q1 profit impact related to the MAX grounding. Our long-standing partnership with Boeing is important to us and to our success. The financial agreement we've reached with them is a strong reflection of that relationship. We remain committed partners. But we will hold Boeing to the highest bar for quality out of the factory. And to that end, we have enhanced our in-person oversight of our 737 production line and are regularly engaging with Boeing leadership on quality and schedule. Alaska needs Boeing. Our industry Boeing, and our country needs Boeing to be a leader in airplane manufacturing. Operationally, we've regained our reliability by returning our entire fleet to service on February 8. The response from our guests has been incredibly positive with strong demand evident throughout February and beyond. Our teams have dedicated themselves around the clock to restore operational excellence, resulting in an improved completion rate of 99.5% from the second week of February through March, were in line with our historical standard of performance. A big shout-out to our entire maintenance and engineering team for bringing back all our MAX lines into service safely and reliably. Safety is a foundational and uncompromising value for Air Group, and we expect nothing but the highest quality aircraft from Boeing. Regarding 2024 aircraft deliveries, as we've stated before, we expect Boeing will fall short of the '23 planned deliveries to us this year. Andrew will discuss Q2 capacity in more detail but our objective will be to deliver a schedule with a high level of service and reliability our guests expect and know from us. And Shane will discuss the impact to full-year CapEx due to fewer deliveries. As we kick off the second quarter, one of our busiest and most profitable periods, we are optimistic and determined to drive strong results in our business. Safety remains paramount. And we've successfully restored operational excellence. Building on our Q1 profitability improvements, we're now focused on leveraging these strengths to expand profitability and generate free cash flow. With last year's strong unit cost performance as our foundation, we're enhancing productivity across the board and our careful management of capacity, combined with our focus on a premium guest experience, positions us well to deliver solid financial results over the next three quarters. And lastly, I just want to acknowledge this amazing Alaska team from our exceptional frontline employees who deliver consistently strong operational results and guest service to our leadership team that holds itself accountable to being better each day. Together, we're driving success every step of the way. And with that, I'll turn it over to Andrew. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Thanks, Ben, and good morning, everyone. Today, my comments will speak to our first quarter results with a focus on unpacking our core performance and addressing second quarter trends and guidance. We achieved record first quarter revenues totaling $2.2 billion, up 1.6% year over year. This is an incredible result, especially when you consider the $150 million in revenue that we lost due to the grounding. Our team did a masterful job rethinking the deployment of our Q1 network in order to combat the seasonal challenges we face and to best serve the demand in our geographies. Capacity ended the quarter down 2.1% year over year, inclusive of an approximate 5.5-point impact from the grounding. This result was better than our initial expectation immediately following the accident due to high utilization, a better-than-expected completion rate, and no significant winter weather. Absent the grounding, capacity would have been up approximately 3.5%, a level we feel was appropriate for the Q1 environment and our network reconfiguration. In addition to our focused network efforts, we were positively impacted by the rapid return of corporate travel revenues and general close-in strength, which drove a strong unit revenue result. For the quarter, unit revenue was up 3.8% year over year. Excluding the impact of the grounding, unit revenue would have been up 5%, which is markedly higher than our original guidance of up 1% to 2%. This outperformance was driven by three factors. First, 1.5 points of RASM outperformance came from better-than-expected results related to the reallocation of flying. These changes more successfully met the demand across our markets, as we capitalized on more leisure flying. Second, 1.5 points of RASM improvement came from a material step-up in business travel beginning in January, especially from large technology companies. In Q1, managed business revenue grew 22%, approximately 50% driven from yield and 50% from volume. Tech companies saw the biggest improvement with revenues up over 50% year over year and professional services revenue an impressive 20%. To put the speed of recovery into perspective, managed business revenues increased 10% in January, a stunning 30% in February, and 24% in March. These results were achieved despite the grounding and book away we experienced. Today, managed corporate revenue has fully recovered the 2019 levels, while Tech is approximately 85% recovered. As we've said for some time, we expected business travel to come back which we are clearly seeing today. While we did not bake this into our Q1 forecast, we do not anticipate any step back in corporate travel in Q2. And third, half point of RASM improvement came once we restored our schedule reliability, and we saw strength in close-in leisure demand return. This strength is especially evident in February, where revenue beat our original pre-grounding expectations, despite loss flying and book away at the beginning of the month. Similarly, our total March revenue surpassed our record-breaking result last year on just over 1 point lower load factor, bolstered by yields that improved 2 points in month driven by strong close-in performance. Taken altogether, these impacts drove a 3.5-point improvement above the midpoint of our original guide for the quarter. Lastly, our Premium Cabin performance continues to support what we believe to be a structural shift in higher demand for premium products. First and Premium Class revenues finished up 4% and 11%, respectively, during the quarter, with our first-class paid load factor hitting monthly records at 68% during February and 69% in March. What makes these premium revenue results even more significant is that they would have been higher had we not experienced the grounding. Our paid premium capacity has come a long way from the days of paid load factors in the 40% range for Mainline and an all-Coach Regional fleet. As we continue to refine our premium strategy across our products and markets, we have further upside to come and remain committed to building on our premium guest experience, offering the products our guests and loyalty members want. Our loyalty program, which we hope to share more on later this year, also continues to post strong results. With co-brand cash remuneration of approximately $430 million in Q1, up 4.2% year over year, notwithstanding the grounding and a major contributor to the 48% of revenues we generate outside the main cabin. Now turning to our outlook and guidance. We expect capacity to step up 5% to 7% year over year in the second quarter, with the low end of this range, assuming no aircraft are delivered this quarter. Given the uncertainty around delivery timing, following the grounding, we have extended retirements of several of our older aircraft over the next few months and pushed utilization slightly higher across the Mainline Fleet, where we had opportunity. We also added back more capacity on the regional side through Horizon and SkyWest, given higher utilization from improved pilot staffing. Through the combination of these changes, we are confident in flying a reliable schedule for our guests. While the second quarter will be our highest growth this year, it is also our most profitable growth, with June, a clear peak month for us. While we've added a handful of new routes across our network, the majority of our added flying is focused on additional frequencies in high-demand markets, where we have conviction in their profitability. Second quarter bookings so far are encouraging, with yields continuing at healthy levels in April and beyond albeit slightly moderating through the quarter on growing industry capacity. This year, we have seen a more normalized yield and booking curve, building in strength as we get closer in, a trend we expect should persist. Looking beyond Q2, the back half of the year looks to be shaping up well as industry capacity constraints remain in place and competitive intensity dynamics across our West Coast markets stabilize. In closing, the team has done a tremendous job in reshaping our network to produce a strong result for our most seasonally challenged period, with the full value of our differentiated product offering from premium seating to lounges to global partnerships, I believe we are well-positioned to drive another solid quarter of performance, as we move into our peak periods this summer. And with that, I'll pass it over to Shane. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Thanks, Andrew, and good morning, everyone. In what has been a challenging start to the year, our people and our business model have shown amazing resilience. Safety, of course, is our absolute priority, and it will continue to be our top focus above all else. It has, however, been encouraging to see the level of improvement to our core first quarter performance this year. While managing through the difficult circumstances of Flight 1282 and its aftermath. The teams did an admirable job operating safely and on time, and our commercial team put together a network plan that coupled with strong demand, positioned us well to meet our long-term target to breakeven in Q1. We are not shy about setting ambitious goals for ourselves, and we have a good history of delivering on those commitments. Our financial focus remains on continuing to strengthen our business model and delivering strong financial performance over the long term. Turning to our results. For the first quarter, our adjusted loss per share was $0.92, which excludes compensation received from Boeing related to our MAX fleet grounding. The profit impact of the fleet grounding in Q1 was $162 million or $0.95 of EPS and 7 points of margin. Fuel price per gallon was $3.08, as West Coast refining margins continue to be a unique margin headwind to our results relative to the rest of the country. Our total liquidity inclusive of on-hand cash and undrawn lines of credit stood at $2.8 billion, as of March 31. Debt repayments for the quarter were approximately $100 million and are expected to be approximately $50 million in the second quarter. Our leverage levels remain healthy at 47% debt to cap and 1.1 times net debt to EBITDAR, while our ROIC stands above 9%. For the quarter, unit costs were up 11.2% year over year, 6 points of which are directly attributable to the fleet grounding, primarily from the significant loss of planned capacity. So we also incurred approximately $30 million of incremental operational recovery costs due to the grounding as well. Our core unit costs, absent grounding impacts were up approximately 5% year over year in the first quarter. The drivers remain similar to prior quarters and are consistent with pressures faced by most airlines, the primary of which is higher labor rates for our people. We have completed seven labor contracts over the past two years, including a recently signed agreement with our aircraft technicians, and we continue to prioritize finalizing an agreement with our flight attendants. We remain committed to high productivity in our contracts. And absent the MAX grounding, we would have had a 2% increase in productivity year over year, as measured by passengers carried per FTE. We expect continued productivity improvements throughout the year across the company. And in May, we'll operate under our new preferential bidding system for pilots for the first time, which will allow for both enhanced pilot productivity and importantly, schedules that are more aligned with our pilots priorities. While costs are materially higher structurally for the industry, our margin profile for the first quarter is evidence, we are making the right decisions on capacity deployment. And we will continue to prioritize the overall margin health of the company over growth for the sake of unit cost performance alone. We are committed to also retain our relative cost advantage, and we continue to do well on that basis. We achieved the industry's best cost performance last year and looking at our rolling four-quarter unit costs, we have outperformed both Delta and United by 3 points on a stage length adjusted unit cost basis. While we may experience quarterly variances on a unit basis, we are not ceding any of our relative advantage. We have widened the gap over the past 12 months, and we remain focused on managing to aggressive budgets and delivering strong margin performance. Not only did we improve profitability, excluding the grounding by $120 million year over year, when compared to the first quarter of 2019 and 2023, we've closed the margin gap to our largest peers by approximately 2 to 3 points. As we look ahead to Q2 and the rest of the year. I will provide capacity fuel, EPS, and capex guidance, consistent with the metrics we shared last quarter and our focus on the overall margin profile of the business. For the full year, as Ben shared, we do not expect to receive all 23 deliveries from Boeing that we had originally planned for this year. We are in discussions with Boeing. And as we gain more clarity on those deliveries, we will update our expectations but we expect full-year capacity growth at this point to be below 3%. Also, due to lower expected deliveries, we now expect capex of $1.2 billion to $1.3 billion versus our prior expectation of $1.4 billion to $1.5 billion. We expect economic fuel cost per gallon to be between $3 and $3.20 for the second quarter and expect refining margins on the West Coast to be more in line with Gulf Coast, which we've seen in the past several weeks. Given the significant spread in West Coast fuel costs versus the rest of the country, we are developing strategies to mitigate this disadvantage. Our first step was to discontinue our hedging program, given refining margins have become the more volatile component of fuel costs, which hedging did not protect us from. The full value of hedging cost reduction will take several quarters to bleed in. We are also changing our strategy for our annual fuel tender process to obtain better pricing and are likely to begin a program to begin a modest amount of self-supply of fuel later this year and into 2025. While these will take time to fully mature into our results, we expect these actions to close the current fuel headwind we face versus the rest of the industry and will help us to be well-positioned to lead the industry in margins. And as Ben mentioned, we expect full-year EPS to now land between $3.25 and $5.25 for the full year and $2.20 and $2.40 for Q2. Despite a likely $0.35 year-over-year headwind from fuel, we have visibility to a path back to healthy double-digit margins in the second quarter on our way to another strong full-year performance. With the immediate impact of the grounding behind us and our operational reliability back on track, we are optimistic about our outlook for the rest of the year. The economy continues to expand with supportive wage growth, recently improving consumer sentiment and trends indicating a continuing preference to prioritize spending on travel and experiences over goods. By remaining focused on our historical strength, safety, operational excellence, and relative cost performance and continuing to reap the benefits of our commercial initiatives. Our business is configured to compete, to maintain our relative advantage and to continue to deliver strong financial results. And with that, let's go to your questions. Questions & Answers: Operator [Operator instructions] And our first question will come from Andrew Didora with Bank of America. Andrew Didora -- Bank of America Merrill Lynch -- Analyst Hi. Good morning, everyone. Shane, I know you're not guiding to CASM, but if I were to just think about 1Q being up 3% on 3.5% capacity. Are there any kind of puts and takes you would call out for 2Q, whereby we wouldn't see kind of CASM stepped down nicely given you're growing at 6%? And then similarly, as I think about the back half as growth comes down, I would expect CASM to maybe flex back up. Is that a fair assessment? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Hye, Andrew. Good morning. Yeah, I think that's the right contour that we're expecting to see this year. We'll see a decent improvement in unit cost in the second quarter, given the growth profile of the company. And as you mentioned, growth slows down in the back half of the year, and we'll probably see a little more pressure in the back half of the year again on unit costs. I think -- I do just want to mention like the company, I like -- I think we've done a nice job though balancing capacity versus unit cost. You've heard us increasingly talk about our focus on the margin health of the company. So we're going to continue to be smart about how we put capacity into the market, and we'll continue to compete really well on a unit-cost basis against the larger airlines in our markets. Andrew Didora -- Bank of America Merrill Lynch -- Analyst That's great. And then just a follow-up for Andrew. I appreciate all the color you gave on corporate travel. Do you know what percentage of your revenues today are corporate and how that compares to pre-pandemic? And any color you can give us just in terms of what the RASM premium would be on corporate, say, versus leisure travel? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yeah. Thanks, Andrew. We don't disclose that sort of information. But I will tell you that we see continued improvement in strength in our corporate position, the business that is coming our way. And again, as we've shared for some time, this return from West Coast business travel, especially in the technology area. It's just been very significant. And I think when you look at others' comments around how much their managed business travel increased, hours increased significantly more year over year, which is very encouraging. Operator And our next question will come from Helane Becker with TD Cowen. Helane Becker -- TD Cowen -- Analyst Thanks very much, operator. Hi, team. Hope all is well. Just a question with respect to the way we should think about the second half of the year. So second quarter continues kind of the first quarter strength? And then how are you thinking third quarter versus second quarter? Some of your peer group have been talking about a shift in seasonality, maybe stronger July. I want to say a stronger July and June and maybe not so strong August, so much or how you guys -- the pattern of travel goes? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yeah. Helane, yes, we're seeing the same thing. I think August and the return of schools and just the exposure of our network across different geographies. June is becoming the single strongest month. And so what you'll see here is we move capacity around to accommodate that. So we feel pretty good about getting ahead of that mix. Helane Becker -- TD Cowen -- Analyst OK. That's really helpful. And then, Andrew, as you look at like Alaska and the state of Alaska, what's the capacity -- industry capacity situation look like up there? I've been seeing some other airlines adding capacity to Anchorage and Fairbanks from various cities, not Seattle. And I'm just kind of wondering if that's impacting your overall, I don't know, market share maybe is the right word up there? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. I think it ebbs and flows. People love to put their capacity into Alaska, as we go into the summer period. I would say industry capacity, what I call Alaska long haul is up decently. So that's putting a little bit of pressure. But overall, we feel really good about our position in Alaska and the routes that we serve. And of course, we are very well-positioned to serve anybody who is wanting to travel to Alaska. Operator Your next question will come from Savi Syth with Raymond James. Laura Prendergast -- Raymond James -- Analyst Hi. This is Laura on for Savi. What's the general environment that you're assuming for the second half of the year that's reflected in your full-year EPS guide? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes. Look, I think the second half of the year, we expect to continue to be strong and stable. We view it right now, we think it's going to be consistent with what we're seeing today. I don't think there's a sign that demand is slowing down. We don't expect that at all. I think fuel costs are a little higher than we had planned for the year, which was roughly $3 and came in at $3.08. And I think some of that increase in costs, we expect to be offset by the stronger close-in demand certainly on the business side. And so net-net, we haven't really changed our expectation for the full year, and we think it's going to continue to be a strong demand environment. Laura Prendergast -- Raymond James -- Analyst OK. Sounds good. And then one more, if you can provide any color about your recent commercial initiatives like Alaska Access and your expectations for the contribution from these programs, that would be great. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Well, I'm glad you noticed Alaska Access. I think what you're really seeing here is that we're continuing to broaden the products and services that we offer. That's obviously something that's quite small. The reality is the distribution landscape is materially changing. You've got NEC, but you've also got offer order, settlement and delivery these technology changes are going to massively increase our ability on the revenue side to distribute our various products and services. So what you're going to see us continue to do is to bifurcate all the products and services that we have and continue to distribute those in different forms and ways over time. So we're really excited about just the technology that's coming our way to help us generate greater revenues. Operator And our next question will come from Ravi Shanker with Morgan Stanley. Ravi Shanker -- Morgan Stanley -- Analyst Thanks. Good morning, everyone. So just on the closing commentary. Your comments on the strength of close-in was particularly notable because some of your competitors have been having some challenges with close-end strength or weakness, actually. So are you doing something differently, as the strength idiosyncratic to you as the weakness idiosyncratic to them? If you can unpack that that would be great. Andrew Harrison -- Executive Vice President, Chief Commercial Officer I can't specifically speak to other carriers. What I can tell you sitting here looking into April. Demand is coming in very nicely with double-digit increases in unit revenues year over year, as we move through the month of April. And as we look to May and June, where we have, obviously, a little bit more industry capacity. We're also seeing a very positive direction in the yields that are coming in through our system. So overall, we feel that Q2 is going to continue to be strong. Our network is well configured. Our premium class is performing. Our ancillary revenues are performing, they were actually up 6% in the first quarter, even though passengers were down. So we feel good about our setup for the second quarter. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer And, Ravi, I might just -- there could be some effect that. As you know, the West Coast have been more depressed on a business recovery basis. And I think that's caught up pretty quickly here in the first quarter, and that could be helping us. And then I also think just premium continues to be the place where most of the demand growth is happening, and I think we're doing a good job meeting that demand. Ravi Shanker -- Morgan Stanley -- Analyst Got it. That's helpful. And maybe a follow-up to that. Thanks for the detail on the slides in the CASM and the RASM walk. Can you maybe help us understand kind of what that gap between CASM and RASM might look like in 2Q and maybe for the rest of the year as well? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Well, Ravi, we're not going to give guidance on those two-unit metrics, but I would tell you, I think that as we mentioned earlier, maybe the first question, I think CASM will perform better in the second quarter than it did in the first quarter, just given the higher capacity, we'll be able to see a better result. It could like approach flattish. I think CASM could in the second quarter, we'll see ultimately, if we get to the midpoint of our capacity guide or not, based on deliveries over the next couple of months. And I think unit revenues, they're going to be still pressured a bit by the grounding impact of 1282 and some of the book away in spring break that happened over the first quarter. But I think they're going to be strong. I think they're going to continue to perform among the best in the industry, on a domestic basis anyhow. So I think we're looking at a strong second quarter from a margin perspective, which is what we said in the script. Operator And we'll move next to Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey, thank you. Can you talk a little bit about what you're seeing in Hawaii how you're thinking about the recovery in Maui and your capacity recovery there? And what you're seeing competitively, any changes there? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes, Duane, Yes. So on Hawaii, actually, we were very pleasantly surprised as far as just the general framework and strength of Hawaii in general. That said, I think our capacity was down close to 40% out of Maui in total, still going to be down 20% as we move through. So outside of Maui, Hawaii is performing within expectations. I think it's going to be some time before Maui recovers, just to be frank. And so we are adjusting our capacity to meet the demand that we're seeing there. But it's certainly a slow journey. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. So maybe the down 40% recovers to down 20% and you kind of wait and see at that level. Is that a fair way to think about it? Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes, I think the way to think about it is we get through this summer and then as we look into the back end of the year, which is more seasonally weak, we're going to assess how demand is and we'll adjust capacity appropriately. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Great. And then I guess, Shane, you piqued my interest with self-supply of fuel. Can you just elaborate on that? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Sure, Duane. Thanks for asking about fuel supply. Look, I think we've been pretty passive other than the hedging program on managing the fuel line in the business. As you know, we've had significant headwinds that are unique to us, relative to the rest of the industry. And I think it prevented us from being the top margin producer in the industry last year, just on a refining margin basis on the West Coast relative to Gulf Coast. So we're not going to sit idly by and let that continue to impact our results. We spent a lot of time in the first quarter understanding why we have a $0.30 differential relative to the rest of the industry. And one of the things we believe we can do is ultimately buy our own fuel from other places around the globe and ship it into some of our larger cities. It takes a while to get that done. Other airlines do it. It's not a brand-new idea to the industry. And I think there'll be a way of saving a few pennies per gallon, which we're going to go after, later this year and into next year. We'll say more about it as we firm up plans. Duane Pfennigwerth -- Evercore ISI -- Analyst That's great. And if I could sneak one more in here. Just on regional mix. Can you talk broad strokes, what regionals would be as a percent of your capacity maybe this year versus last year? And I know you're not giving point estimates on the metrics, but just broad strokes how we should be thinking about it kind of tailwind to RASM, headwind to CASM, and maybe margin impacts. It feels like there's probably parts of your network that we're starving for more regional lift, which is help us think about that. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. Thanks for the question. I think from our perspective, it's give or take around 10% of our capacity is regional. I don't see that materially changing. That said, the Regional businesses are profitability, just with the return of utilization and redeployment has jumped significantly, and they've been a valuable partner, both SkyWest and Horizon to help us with our Boeing deliveries and those Embraer 175 is backfilling some markets that we otherwise couldn't serve. Ben Minicucci -- President and Chief Executive Officer Yes. And Duane, I'll just say for -- on Horizon's part, this is Ben. Horizon is just performing fantastic. Margins are up. We put a lot of focus in the last few years in our Regional business, and it's really performing nicely, and we continue to see that trend continue over the rest of the year. Operator Your next question will come from Jamie Baker with J.P. Morgan. Jamie Baker -- JPMorgan Chase and Company -- Analyst Hey, good morning. I'll admit I had to Google Alaska Access, a little embarrassing to start off with that. So obviously, the corporate momentum is a positive. Can you speak though to how corporate patterns compared to those are pre-COVID? How does trip duration compare as the booking curve elongated, as change fees have gone away, that sort of thing -- behavioral change, I guess, is what I'm asking about. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. Thanks, Jamie. I think I probably will have a better answer for you next quarter. As I shared, the rapid up 10%, up 30%, up 24%, just in this first quarter with everything else going on was something we need to better digest, as we move through the second quarter. But I am seeing a lot of the traditional demand return as we've seen it historically. But I'll have a better answer after we've digested this quarter and get through the second quarter. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK. Well, then you won't fold me when I asked the same question in 90 days. So second question, just on the revised full-year guide, First quarter was solid. You've got good visibility, and in the second, I guess I'm wondering what's driving the $2 range in the guide. I mean, to be fair, United has a $2 range as well. Is it just stylistic that you chose to maintain that range? Or do you really think there's that much variability and uncertainty in the second half? And if so, what are the most uncertain inputs in your model besides fuel? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yeah. Thank you, Jamie. There's probably a large component of it that's just habit. Like we've habitually done a $2 range and we tied it in the maybe in the fourth quarter or something. I do think fuel is the largest immediate driver typically that we see that will run us up or down that EPS guide. But yes, I do think the $2 range is more just out of habit than anything. That we're trying to architect around like a specific set of outcomes on the worst-case side versus the best-case side. Jamie Baker -- JPMorgan Chase and Company -- Analyst And just if I can sneak in a clarification. Earlier in the call, did you say double-digit RASM on 3% capacity in April? Andrew Harrison -- Executive Vice President, Chief Commercial Officer What I said was that our intakes coming into the months are up double digit for April. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Like the tickets we're selling today. Not the entire held book -- Jamie Baker -- JPMorgan Chase and Company -- Analyst Yes, that makes sense. I was pinged by a client about that. So I hadn't heard it that way either. So thank you for the clarification. Operator And we'll move next to Scott Group with Wolfe Research. Scott Group -- Wolfe Research -- Analyst Hey, thanks. Good morning. So I just want to follow up on that last point because if you assume that CASM is approaching flat, right, it feels like the guidance assumes RASM that's flat to down and you're saying it was up 5% in Q1. You sound like everything is really, really good in Q2. So I'm not sure if I'm missing something or if there's a lot of conservatism in the guide. Or any color would be helpful. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes. I think -- Scott, I think the thing to remember in the first quarter is, it's obviously by far our seasonally weakest. Second quarter is very, very strong. And capacity industrywide is growing, obviously, much more in a second. So it's all relative. I think what your statements around CASM and RASM directionally are spot on. And as we've been shared before, as we get into this period and then we look at our margins and profitability for the second quarter, very strong. And as we've shared before, as we move through this quarter and beyond, West Coast capacity from the industry is reducing growth is reducing. So there's a really good setup for the back half of the year. Scott Group -- Wolfe Research -- Analyst OK. I think I understand. And then you had a comment about we'll tell you more at some point about loyalty, but maybe just give us a little bit of some thoughts about what you're referring to, and that would be helpful. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Yes, Scott, I think in general, I'm not going to share much today, but we have a number of things in the works that we're working on. And at the right time, we're going to be sharing more. I just really wanted folks to know, especially on the revenue side. We have some really good things in store, and we're not ready to share those yet. Ben Minicucci -- President and Chief Executive Officer Andrew was just teasing, Scott. But I -- look, there's a lot of things that we've got a lot of irons in the fire in terms of loyalty and products and stuff. So yes, when the time is right, we'll provide more color on those. But I'm really excited about them. Operator Our next question will come from Stephen Trent with Citigroup. Stephen Trent -- Citi -- Analyst Hi. Good morning, everyone, and thanks for taking my question. The first one kind of an ignorant one for me, but let's say, hypothetically Alaska and Hawaiian merge, there aren't any sort of major adjustments in capacity that the DOJ passes down. Could you tell at this juncture whether your exposure to West Coast refining cost would rise with the combined Hawaiian? Or would it kind of stay the same or is it kind of too early to tell? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes. Thanks, Steve, I'll -- I'm not going to hypothesize too much, but I'll tell you that the fuel prices in Hawaii are significantly lower than you see in the Continental U.S. Stephen Trent -- Citi -- Analyst OK. Very clear. Super. And just one quick follow-up. I mentioned 90 days ago about what you guys are doing and the nice work you've done and having that investment-grade credit rating. Could you refresh my memory sort of what the push might be to get an investment-grade rating from all three agencies? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes, Stephen, good question. I think we deserve it, and we are hopeful that they review us soon and reconsider their ratings. We're not actively out talking with the other two agencies right now. We've got a lot going on, and we're really focused on hopefully, closing the proposed acquisition of Hawaiian, we've got to go to market potentially and raise some money to do that. So that's our focus right now. We'll get that behind us and then I think we've got really good debt metrics, credit metrics. I think we're definitely deserving of reconsideration by the other two agencies, and we'll keep making our case over time to them. Operator And we'll move next to Conor Cunningham with Melius Research. Conor Cunningham -- Melius Research -- Analyst Everyone, thank you. As you talked to Boeing, are you looking to completely rework the order book? It just seems like -- the comments today seem like you're more focused on '24, but is there an opportunity to kind of, I don't know, stabilize that over the next couple of years? I'm just trying to understand what you want in a new delivery stream from them going forward. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Yes. Thanks, Conor. I think -- yes, look, there's two or three moving pieces, their own ability to get back to production rates that support a consistent and reliable delivery stream, which most important to us is the quality and safety of the manufacturing process. So we've got to sort that out. We also prefer the MAX 10 at this point. It's not certified yet. We've got to make decisions about when to expect that. I think it's going to come later than we had expected, which was second half of next year. And then again, if the proposed transaction is able to proceed, we've got another 60 to 65 aircraft to think about, along with 330 or so we have today. So we just need to take some time, look at all of these variables, and put together a new skyline for the Boeing MAX deliveries. I think, directionally, it will probably be less than we had been thinking about even a year ago. So it should be good for capex story, good for a free cash flow story over time, but we need another quarter or two to really work through that on our side and then with our partners over at Boeing. Conor Cunningham -- Melius Research -- Analyst OK. That's helpful. And then on this -- on the Premium revenue and then versus your Saver, I'm just -- it seems like there's a pretty huge spread going on. And I don't know if there's anything to glean into like your main cabin Saver Fare option. Is -- I'm just trying to understand how you think about that spread over the long term. And then maybe as -- sorry, as an incremental follow-up to that. Your -- I think your inventory -- you didn't sell your inventory as far out as you initially did and you talked about closing. Are you thinking about changing how you -- how your inventory sits going forward to try to capture more of the close-in demand given your premium offering? Sorry about that. I realize it's like nine questions, but thanks. Andrew Harrison -- Executive Vice President, Chief Commercial Officer It's all right. I'll answer by just high level. I think the Saver Fare has been a very good product for us. In fact, we've made it significantly more available than we did last year. We've also seen significant increase in revenues buying out of Saver. And it's at a very valuable tool in the seasonality, given where our network moves around. I think we're focused on and probably, historically, we've pretty much chased loads to some respect. And I think as we're seeing where the industry is and where we are, we're putting more focus on yields and how we structure the pricing of our cabins, both Main and Premium and the Saver. And I think what I can tell you is that we're more than ever getting more deliberate about how we manage our product setup in our cabin. And I think there's only good news to come from that. Operator And we'll move next to Mike Linenberg with Deutsche Bank. Mike Linenberg -- Deutsche Bank -- Analyst Hey, good morning, everyone. Andrew, you probably have better than anyone, a good sense of this evolution of close-in Leisure. I really feel like it was something that hit the scene big time during COVID. A lot of it had to do with just last-minute reopenings and the like. I sort of feel pre-COVID, it was either a bereavement fare or I don't know, maybe your pal scored you a ticket to the Taylor Swift concert and you found out about it last minute. But it's becoming a bigger piece. And I don't know if it's 5% of kind of your -- when you look at your various segments, corporate, discretionary, whatever long-haul international. Can you talk about that evolution? Because I don't think it's a category, but maybe it's become a much bigger category than what I realize, and it can have a meaningful impact on RASM. Andrew Harrison -- Executive Vice President, Chief Commercial Officer Well, number one, flattery will get you everywhere. So thank you. But we had a huge learning from COVID. We were squeezing out the cabin because we went for loads. And there was a robust leisure. And of course, when I talk about leisure, I'm talking also about Chase loyalty and Costco and major leisure agencies. So what we're really seeing is that for us at least, we had structured our cabin and our demand environment to take more further out and leave less closer in. And I think what we're finding is there is a -- the whole group of customers and guests who are a strong leisure traveler that just book a lot closer in and we're making seats available for them today. And of course, given the fair fencing and how that all works, the yields are much better than they would be further out. Mike Linenberg -- Deutsche Bank -- Analyst Absolutely. Absolutely. That makes sense. And then just my second, I know you did talk about a couple of teasers and things that we should look out for. You did drop loyalty. I know Ben mentioned loyalty. If anything, are we up for renewal this year? Andrew Harrison -- Executive Vice President, Chief Commercial Officer No. We're past that. But I think -- if you just -- what I would say about loyalty, and you've heard other side is such a very powerful and important part of our business. If you look at the environment and how loyalty programs, they're all evolving and there's changes. And so we are looking at how our loyalty program needs to change and evolve. And I think there's just real upside. And again, we're not willing to share anything today other than this is an area of focus for us. Operator And we'll move next to Dan McKenzie with Seaport Global. Dan McKenzie -- Seaport Global Securities -- Analyst Hey, good morning. Thanks. A couple of questions here. I guess my first question really is a head count versus fleet count question. So what number of deliveries are you -- I guess, are you guys hiring to? And then I guess where I'm going with that is the overhead or the cost burden that Alaska is carrying because the deliveries are coming in a little less than expected. And then I guess, is Boeing compensating you for that cost burden? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Thanks, Dan. A couple of things here on this one. I think we originally had anticipated 23 deliveries. Of course, when they come is an important variable as well. As evidenced by our revised full-year capacity guide and capex guide, we expect to get fewer than that. Boeing actually has 10 aircraft essentially built and going through the final review and ticketing process. So we expect to get all of those and probably some additional units beyond that. So we're thinking somewhere between 10 and 20. We have a number of aircraft we are planning to retire. So many of those aircraft were going to replace older 900 classics. So our headcount situation is in really good shape relative to the delivery stream coming our way. We're not going to be materially overstaffed. I don't believe in any part of our business. We watch that closely. We had to staff up a bit throughout the end of last year to get ready for this year and the spring, but I don't think that we're going to be in a significant drag position from a cost perspective. And to the extent that we are having conversations with Boeing in terms of compensating us for that. Dan McKenzie -- Seaport Global Securities -- Analyst Yes. Very good. OK. And then I guess, Shane, another question for you here. In the 10-K, Alaska highlighted 200 million gallons of SAF through 2030. And I guess I'm just curious, how many gallons you're planning to buy here in 2024? And what is the cost differential today of that versus West Coast jet fuel? And then where do you think that differential can go, say, in two to three years' time? And I guess what I'm trying to get at is probably a small percent of your overall volume, but I'm just trying to get a sense of the margin headwind from that. Diana Rakow -- Vice President, External Relations Yes. Thanks for the question. So it is a small part of the overall buying and that's in large part because it's a small part of the supply in the world at large. For 2024, it will be about 1% of our total fuel and that's coming from a couple of different suppliers. It is -- there is a green premium over the cost of Jet A. We're fortunate to have a lot of really strong corporate partners that are working with us to co-invest in SaaS in a way that also offsets the Scope 3 emissions of their business travel. And we're doing a lot in the market to try to grow and mature the staff market in the future and which includes looking at the cost down curve of different technologies and different producers. Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Dan, I think -- thanks, Diana, for the color. I don't think there's a noticeable margin headwind from it this year. Obviously, it's a consideration for the entire industry as we move forward and becomes a larger part of supply, but we're probably a few years before it really starts to show up in a way that increases materially the cost of fuel going into the plan. Operator Your next question will come from Chris with Susquehanna Financial Group. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst Good morning. Thanks for taking my question. Shane, the comment you said for 2Q, I think it was flattish CASMex. Just want to confirm that that's ex the freighter cost. And then freighters are not typically discussed here. I think you're sizing up that fleet. Can you just remind us of the current size and where that's going this year? Shane Tackett -- Executive Vice President, Finance and Chief Financial Officer Thanks, Chris. Yes. And that comment is ex freighter cost. But you'll be able to see the year over year. I don't think it's going to be materially different even if you included freighter costs in both years. Yes, we had a fleet of three, which is a small fleet. They do a lot of work for us up in the State of Alaska. It's really important to our customers up there. It's something we're proud of being able to do. We've been the predominant cargo carrier in the State of Alaska for most of our history. We're moving to five dedicated freighters. Again, most all of that Lyft will be in the State of Alaska. And who knows over time, if we'll be able to continue to increment from that base of five. We would certainly like to if the business remains strong. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst OK. And just my follow-up, and Ben, I think you said in your prepared remarks that you're anticipating a better supply demand balance in the core markets in the second half. And so we've had a competitor retreat from parts of L.A. It doesn't look like they're coming back, outside of this, I'm curious how confident are you in this supply backdrop or this sort of new dynamic, if you will, going forward? Ben Minicucci -- President and Chief Executive Officer Well, look, I think if you look at how Q1 turned out for us and again, it was just an amazing quarter from what it was in Q1 of 2023. So we're just looking at just the higher water level we're starting from in Q1, and that's translating forward into Q2. Just based on everything we're seeing in terms of demand and Andrew touched on a lot of those things, we just feel like we're well-positioned. So that's why we're forecasting double-digit pre-tax margins. And so we're feeling really strong. It's our most profitable quarter. And so I think we're really set up well for Q2 and the rest of the year. Thank you so much, Chris, and thank you, everyone, for joining us. You guys have a great day, and we'll see -- we'll talk to you guys next quarter.

edtsum6

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and thank you for standing by. Welcome to the Ally Financial first quarter 2024 earnings conference call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sean Leary, head of investor relations. Please go ahead. Sean Leary -- Head of Investor Relations Thank you, Elizabeth. Good morning, and welcome to Ally Financial's first quarter 2024 earnings call. This morning, our Interim CEO, Doug Timmerman; and our CFO, Russ Hutchinson, will review Ally's results before taking questions. The presentation we'll reference can be found in the investor relations section of our website, ally.com. Forward-looking statements and risk factor language governing today's call are on Slide 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on Slide 3. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. And with that, I'll turn the call over to Doug. Doug Timmerman -- Interim Chief Executive Officer Thank you, Sean. Good morning, everyone, and thank you for joining the call. I'll start on Page 4. Before we get into the quarter, I want to comment on our CEO transition. As we announced last month, Michael Rhodes will be taking over as CEO on April 29. I've been fortunate to spend time with Michael throughout the process, and I'm certain he is the right person to lead Ally. He respects what we've built and his deep banking experience based on a natural fit to continue advancing Ally's businesses. On behalf of myself and the entire leadership team, we are thrilled to welcome Michael to Ally in a few weeks. I'd also like to say it's been an absolute privilege for me to serve as the interim CEO these past few months. I've been with Ally for over 30 years and the things that have always energized me the most are our people and culture. At Ally, the culture runs deep and it revolves around our employees, customers and communities. It starts and stops with our 11,000 associates and very importantly to my teammates, thank you for your support, hard work and dedication and, of course, caring for our customers. I firmly believe when you take care of your people, they take care of everything else, including our customers and communities. In the first quarter, we were once again named on Fortune 100's Best Companies to Work For List. For us, it's never about awards, but it's an achievement we can be proud of. What I'm most proud of are the employee survey results. 89% of employees said Ally is a great place to work. 93% of employees felt good about the way Ally contributes to the community. And the staff that most resonated with me was that more than 90% of employees were proud to tell others they are part of Ally. Creating an engaged workforce that embraces our Do It Right approach is essential to our business and our growing customer base. And as we continue to navigate a fluid environment, we'll continue leaning our culture, and lead core values to guide our actions. With that, let's turn to Page number 5 and get into the results. First quarter adjusted EPS were $0.45, a revenue of $2 billion reflects solid operational execution as our teammates remain focused on priorities that are big enough to matter and drive solid returns. Net interest margin of 3.16% was again pressured by rising rates. However, we've now raised an inflection point and expect NIM expansion beginning in the second quarter. Before discussing operational results, I want to hit a few notable items in the first quarter. In March, we successfully closed on the sale of Ally Lending, which generated capital and allows us to better serve our dealer and consumer customers. We also tapped the securitization market to deconsolidated retail auto loans from the balance sheet, which created incremental capital and generated a nice earnings benefit within the period. Strong investor interest and the earnings benefit created by this transaction are another validation the loans we originate have attractive returns. And finally, we recognized an incremental $10 million of expense from a revised FDIC special assessment, which was not included in core results. Moving to operational results in dealer financial services, within auto, we decisioned a record 3.8 million applications and booked nearly $10 billion of originations. Retail auto originations had an average yield of 10.92% while 40% of originations came from our highest quality credit tier. First quarter net charge-offs of retail auto were 227 basis points, in line with the guidance we gave about a month ago. Insurance earned premiums of $349 million were also a record, and we see continued momentum as we grow OEM partnerships and continue leveraging our expansive auto finance dealer network. Turning to Ally Bank, deposits continue to be a source of strength for Ally. We grew deposits $2.9 billion in the quarter, while adding more than 100,000 customers. Our deposit franchise was established 15 years ago and now serves more than 3 million customers, provides stable and efficient funding and makes Ally a structurally more profitable company. Ally Credit Card is performing in line with expectations. As we've mentioned, losses will be elevated near-term. However, we remain encouraged by its long-term compelling return profile. Corporate finance continued to drive strong financial results and next month, we'll celebrate its 25th anniversary. The business generated a 31% ROE in the first quarter, and our $10 billion portfolio remains historically strong from a credit standpoint. Let's turn to Page number 6 to talk about Ally's market-leading franchises. Last week marked 10 years of being a publicly traded company and the transformation since that time has been remarkable. What began as an auto finance captive has now made up of two market-leading franchises, a dealer-centric and diversified auto finance provider and the largest all-digital direct U.S. bank with more than 3 million customers and $145 billion of retail deposits. Our Dealer Financial Services platform revolves around the dealer, deepening those relationships and providing a comprehensive value proposition to help grow their businesses. We have continued to evolve the business to find new ways to help our dealer customers while also optimizing risk-adjusted returns for Ally. Over the past 10 years, Ally Bank has built on its reputation as the leading, innovative digital bank. We pride ourselves on providing best-in-class customer experiences and a strong value proposition that extends beyond rates. And our deposits franchise has been the key driver for customer acquisition and engagement. We have expanded our products and features to deepen customer relationships, including Ally Home and Ally Invest; and Credit Card and Corporate Finance are businesses that diversify revenue and improve our consolidated profitability. Both dealer financial services and Ally Bank have scaled, lead in the respective markets and position Ally for profitable growth in the years ahead. And with that, I'd like to turn it over to Russ to cover detailed financial results. Russ Hutchinson -- Chief Financial Officer Thank you, Doug. Good morning, everyone. I'll begin on Slide 7. In the first quarter, net financing revenue, excluding OID, of $1.5 billion is down versus prior periods, driven by higher funding costs, partially offset by strong originated yields. Increasing funding costs have been a persistent headwind since the tightening cycle began, but we've reached an inflection point as rates have stabilized. Continued strength in originated yields in the auto business has positioned the balance sheet for NIM expansion beginning in the second quarter. We'll discuss asset and liability dynamics that are driving our NIM expansion in a few slides. Adjusted other revenue of $519 million is up from prior periods, driven by continued momentum in diversified fee revenue, including insurance, as higher vehicle inventory balances drove higher earned premiums. We continue to see expanding other revenue driven by strength in insurance and fee revenue streams in auto, including our smart auction and pass-through programs. Insurance, smart auction and our pass-through programs are highly valued by our dealers, and they drive capital-efficient revenue for Ally. Provision expense of $507 million increased from prior year and was down on a linked quarter basis. Credit performance in the quarter was in line with our expectations. Retail auto NCOs came in around the middle of our guide that we provided at the conference last month. Losses within the quarter were impacted by softer used values throughout much of the quarter, but we did see stability in March and are exiting the first quarter flat versus December. I'll cover retail auto credit in more detail shortly. As Doug mentioned, we executed another loan sale via the securitization market, which drove a $15 million earnings benefit in the quarter that was realized through the provision expense line. We deconsolidated $1.1 billion of retail auto loans originated predominantly in 2023, with yields below our average originated yield for the year. Investors' strong interest in our loans and the $15 million earnings benefit we realized demonstrate the attractive return profile in a dynamic environment. Adjusted noninterest expense of $1.3 billion was up year over year, primarily driven by continued growth in the insurance business. Controllable expenses, which exclude insurance losses, commissions and FDIC fees were down 1% year over year. Tax expense of $14 million resulted in an effective tax rate of 8%, which is lower than our guide as we continue to benefit from strong EV lease originations. GAAP and adjusted EPS for the quarter were $0.42 and $0.45, respectively. Moving to Slide 8, net interest margin excluding OID, of 3.16% decreased four basis points quarter over quarter and was slightly above the high end of guidance we provided at an investor conference last month. Earning asset yields expanded modestly quarter over quarter, while funding costs increased by nine basis points. As I mentioned earlier, margin has been pressured by increasing funding costs throughout the tightening cycle, but we've positioned the balance sheet for NIM expansion from here. Strength in fixed rate asset pricing, particularly retail auto loans with originated yields at 10.9%, will continue to drive earning asset yields higher as our portfolio naturally turns over. We expect earning assets to be flat over the medium term, but favorable mix dynamics will continue to drive asset yields higher as lower yielding mortgages and securities are replaced by higher-yielding auto, corporate finance and credit card loans. Turning to liabilities, cost of funds moved up within the quarter, driven primarily by higher deposit costs. We moved our OSA rate in mid-December, so our 1Q results reflect a full quarter at the peak rate, and we continue to see CD portfolio yields move slightly higher as expected. Within the quarter, we took meaningful actions to reduce deposit pricing across CDs and our $100 billion liquid savings portfolio. We've been delighted with the trends we've seen in deposits, which enabled us to move meaningfully well in advance of Fed rate cuts. Strength in retail auto yields, favorable asset mix and now having moved past the peak in retail deposit costs, we are confident in NIM expansion starting in the second quarter. Let's turn to Page 9 and talk about the auto franchise. Our model is simple. We help our dealers sell as many cars and trucks as possible and encourage our dealers to send us all of their application volume. We leverage our differentiated go-to-market approach, coupling high-tech and high-touch to earn their partnership. 22,000 dealer partners delivered 13.8 million applications last year, and that momentum has continued in 2024. This quarter, we saw 3.8 million applications, our best quarter ever and resulted in $9.8 billion of consumer volume within the quarter. Strength in application flow enabled us to be dynamic in what we originate. We shifted our credit mix in April of 2023 and since that time, more than 40% of our originations have been in our highest credit year. We've now originated over 10% yields for five consecutive quarters that creates momentum, which I will cover on the next page. Let's turn to Slide 10 to discuss retail auto portfolio yields in more detail. The current yield on the total retail auto portfolio is just over 9%. While we continue to originate loans at close to 11% each quarter, as older vintages mature and are replaced with new origination, the portfolio yield will continue to migrate higher. Given the natural liability-sensitive nature of our balance sheet, we consistently utilized pay-fixed hedges tied to retail auto loans to reduce exposure to rising rates. These hedges are serving as an effective bridge while our retail auto loan portfolio is repricing higher over time. We manage the hedge position dynamically, but currently expect it to amortize down over time, which means its contribution to NIM will continue to decline. The natural repricing momentum created by strong originated yields will continue to outpace a declining hedge contribution, resulting in a total portfolio yield that we expect to increase to 9.5% by year-end and continue to migrate toward originated yields over time. This momentum coupled with deposit costs that at peak position Ally for NIM expansion without the benefit of Fed rate cuts. The other dynamic influencing portfolio yield is origination mix. As we covered on the prior slide, we are consistently originating more than 40% of our consumer volume in our highest credit tier. Historically, that tier has accounted for just under 30% of total originations. Over time, we do expect to migrate closer to our historical origination mix. For context, a shift to our historical mix would add up to 100 basis points of originated yield today. With 10.9% yields on originations that skew heavily toward our S-tier, we are pleased with the risk-adjusted yields we're getting today and are not assuming any significant shift over the next few quarters. But over time, we would anticipate a gradual migration closer to historical mix, which provides yet another yield tailwind going forward that will help offset an eventual decline in benchmark rates. Let's move to Slide 11 to talk about the strength of the deposits franchise. Ally Bank was launched 15 years ago and has evolved into the largest all-digital direct bank in the U.S., serving more than 3 million customers. We have been intentional about creating a comprehensive value proposition that goes beyond consistently competitive range. We offer best-in-class customer service and digital experiences and over time, added features and products that are important for our customers, including how I invest, home and credit card, and we continue to serve as relentless allies to our customers with high levels of service through online, mobile, text and telephone, as well as a consumer-friendly approach to fees, including leading the way on overdraft elimination. This approach has led to 95% plus customer retention rates, 90% plus satisfaction scores, favorable NPS and strong balance trends across every vintage inception of the bank. And while we do not focus on accolades, we do think the countless awards received over the last 15 years validates the strength of the brand and the bank. The 15-year journey led to exceptionally strong performance over the tightening cycle and puts Ally in a position of strength moving forward. We have consistently grown deposits and seen record customer acquisition without being a top payer since the Fed began tightening. As we sit today, we're core funded with 90% of our liability stack in the form of deposits, and we expect earning assets to be relatively flat over the next few years, which results in less need for significant deposit growth going forward. The combination of a great brand and comprehensive value proposition enabled us to lag competition from a pricing perspective on the way up and positions us to lead on the way down. We took significant pricing actions in the quarter while maintaining our commitment to offering our customers attractive deposit rates and a compelling overall experience. We reduced rates 75 basis points on our most popular CD term, 15 basis points on our money market account and 10 basis points on an $84 billion savings product. In terms of deposit flows, we saw nearly $3 billion of growth within the quarter while adding more than 100,000 customers. Growth within the quarter was favorable to our expectations and positions us well for a seasonal tax outflow in the second quarter. We expect deposit balances to decline in 2Q as we typically see outflows from existing customers related to tax payments. Given outperformance in 1Q and our fully funded flat balance sheet, we're not expecting to drive growth to offset seasonal taxes like we have in prior years. We do expect growth on a full year basis, but less than what we delivered in 2023. Turning to Page 12. CET1 of 9.4% increased quarter over quarter. At current levels, we exceed our 7% regulatory CET1 operating minimum by $3.8 billion. We recently submitted our capital plan as we are scoped into CCAR for 2024, and we'll get an updated view of our SCB later this year. Within the quarter, we closed on the sale of Ally Lending generating a 15 basis point CET1 benefit and executed another retail auto loan sale generating 6 basis points of CET1. The loan sale reflected strong investor interest in our loans and drove a $15 million pre-tax earnings benefit while creating capital and generating servicing income going forward. We faced in another quarter of the capital impact from the transition to CECL, which was worth 18 basis points in the quarter, which was more than offset by the sale of Ally Lending and the retail auto loan sale. One more phase-in remains with total impact fully phased in by 1Q 2025. We recently announced our quarterly dividend of $0.30, which remained flat to prior quarter. We remain committed to acting on attractive opportunities to create excess capital to invest in our highest returning businesses and driving tangible book value per share growth over time. Let's turn to Slide 13 to review asset quality trends. The consolidated net charge-off rate of 155 basis points reflects performance in line with expectations. Net charge-offs were down quarter over quarter as discrete losses in corporate finance and commercial auto in the prior period did not repeat. Retail auto net charge-offs of 227 basis points were in line with expectations. In the bottom right, 30 and 60-day retail auto loan delinquencies reflect seasonal trends. The year-over-year increase in 30-day delinquencies has moderated for the fifth consecutive quarter and give us confidence that delinquencies are at or near peak on a seasonally adjusted basis. Moving to Slide 14. Consolidated coverage remains steady at 2.57%. Retail auto coverage of 3.65% was unchanged from the prior quarter, while allowance was down $32 million driven by lower balances. We maintained robust retail auto coverage level at 10% above CECL Day-1, partly driven by portfolio mix as we've shifted into more profitable volume over time. Assuming macro variables remain consistent, we're not anticipating much change in the retail auto coverage rate over the medium-term. While the retail auto coverage rate is well above CECL Day-1 levels, our mid-teens ROE guidance does not assume any reductions in coverage from here. As a reminder, our CECL reserving process has a 12-month reasonable and supportable forecast, which assumes unemployment increasing to 4.1% later this year, and we assumed gradual reversion to 6% unemployment from months 12 and 36. Let's turn to Slide 15 to discuss retail auto credit in more detail. First quarter NCOs were consistent with the preview we gave at a recent investor conference. And we saw another quarter of declining year-over-year increase in total portfolio delinquency as shown in the bottom left chart. Losses for the first half of this year will be elevated as the 2022 vintage, which is producing losses above price expectations, works through its peak loss period. That vintage is at its peak loss period today and accounted for more than 40% of losses reported in the first quarter. As we move throughout the year, portfolio losses will increasingly – will be increasingly driven by more recent vintages, which continue to show favorable loss and delinquency trends relative to the 2022 vintage. Similar to last quarter, we've shown a comparison of delinquency trends for the 2022 and 2023 vintages on the bottom of the page. After 15 months on book, the 2023 vintage delinquency rate is now 28 basis points below where the 2022 vintage was at the same point in time. Excluding the impact of recent loan sales, which skew the words high credit quality loans, the gap is 34 basis points. That gap has widened since our last earnings call, which showed the 2023 vintage, 22 basis points favorable at 12 months on book. I also want to point out this particular comparison after 15 months on book is impacted by where the last day of the month fell. The final calendar day of 1Q 2023 was a Friday, which is typically our strongest day of cash collection as it lines up with the pay periods for many consumers. In 2024, the final calendar day fell not only on a Sunday, but also a holiday. As a result, the spot delinquency rate for the 2023 vintage after 15 months was elevated. As we move into the first few days of April, the gap between 2022 and 2023 vintages widen further. So we remain confident, 2023 and 2024 vintages will perform favorably to the 2022 vintage that is driving higher losses today. In addition to delinquency and loss frequency trends, we continue to closely monitor the impact of used values on loss severity. Values were weaker for much of the quarter, which drove 1Q losses slightly higher than expectations, but we saw a nice rebound in March, which has persisted through the first half of April. Used vehicle values have since rebounded and are now flat to year-end as we begin the second quarter. Used vehicle guidance have been choppy. However, we continue to expect the Ally use index to settle out around 120 by the end of the year, which would imply a 5% to 6% decline from where we are today. Based on 1Q actuals and elevated loss content from the 2022 vintage, our estimate of losses is up marginally versus January to approximately 2% for the year. Importantly, we remain pleased with the impact of curtailments over the past 12 months and performance trends on recent vintages. Let's turn to Slide 16 to review auto segment highlights. Pre-tax income of $322 million was lower year over year driven by higher provision expense and non-interest expense. Provision reflected elevated net charge-off performance compared to the prior year period. Non-interest expense is up year over year as we navigate a period of elevated loss content driving higher servicing costs. Other revenue of $97 million is up $20 million year over year as we continue to focus on diversifying revenue with fee income. Our SmartAuction and pass-through platforms are great examples of how we help serve our dealers while also generating capital-efficient revenue. SmartAuction enables dealer to dealer transactions generating fee revenue while providing real-time data on market pricing and trends. Despite pressure on industry volume, SmartAuction grew revenue by 60% between 2019 and 2023. Through White Label relationships, we see more opportunity to grow this business and deliver incremental fee revenue while strengthening our dealer value proposition. With a focus on increasing application volume, our pass-through program is yet another way for us to deliver enhanced value to our dealers. For certain loans that do not meet our underwriting criteria, we pass through those applications to our partners. For loans that are ultimately funded by our partners, Ally receives an origination fee and generate servicing revenue without using any capital. SmartAuction and pass-through revenues are expected to grow to $190 million in 2024, up 120% since 2019. Both products demonstrate the strength and scale we have in the marketplace and are a win-win for Ally and the dealer. Lease portfolio trends are on the bottom right, dealer and lessee buyouts declined to 57%, but remain elevated compared to historical levels. Turning to insurance results on Slide 17. Core pre-tax income of $53 million included the highest quarterly premium earned since our IPO. Insurance losses of $112 million are up $24 million year over year, driven primarily by growth, including higher insured values and higher weather losses. We saw solid operating leverage within the quarter as premiums earned increased by $40 million, while acquisition and underwriting expenses were up modestly. Total written premium of $354 million increased 15% year over year as we see continued success in expanding our all-in dealer value proposition. We have seen nice momentum related to conquest activity as we recently launched relationships with two major OEMs, which will provide an immediate boost to written and earned premiums. Growth in insurance will naturally increase our non-controllable expenses, specifically commissions and losses, but those are more than offset with fee revenue. And importantly, we have a reinsurance program in place that reduces volatility from weather losses across our P&C inventory exposure. As we look ahead, insurance remains integral to our dealer value proposition and is the main driver of continued fee revenue growth. Turning to Corporate Finance on Slide 18. The pre-tax income of $90 million reflects solid financial performance. Net financing revenue was up, driven by higher average balances and higher benchmarks as the entire portfolio is floating rate. Our $10.1 billion HFI portfolio is well diversified in virtually all first lien. Balances are up marginally year over year, but down linked quarter. Favorable capital markets conditions, including a strong CLO market, led to elevated payoffs, particularly within our lender finance vertical. From a credit standpoint, the portfolio is in fantastic shape with criticized assets and nonaccrual loans at historically low levels. Commercial real estate exposure makes up a little more than $1 billion and is entirely related to the healthcare industry. With a track record of delivering strong returns, including 25% in 2023 and 31% this quarter, we continue to be excited about the long-term trajectory of this business as we celebrate its 25th anniversary. Mortgage results are on Slide 19. Mortgage generated pre-tax income of $25 million and $233 million of direct-to-consumer originations reflective of the current environment and our predominantly variable cost structure. Our health for investment assets continued to decrease quarter over quarter as loans mature and we operate the business on a primarily originate-to-sell basis. Our mortgage HFI assets will continue to decrease as we remain disciplined in allocating capital to our highest-returning businesses and managing the duration of our balance sheet. Mortgage remains a complementary product for our deposit customers, who accounted for the majority of our originations in the quarter. We are committed to providing a best-in-class customer experience and operational efficiency. I'll touch on the 2024 outlook before we move into Q&A. We've been pleased with the execution of our business and our outlook for this year and beyond remains consistent. In terms of net interest margin, first quarter represents a trough in NIM, and we expect meaningful expansion from here with or without a decrease in the Fed funds rate. As we've said before, we look at our outlook under a variety of right scenarios and are not relying on rate cuts to get to an exit rate of 3.4% to 3.5% this year. And we are confident we will reach 4% NIM run rate in late 2025. In terms of quarterly cadence, it won't be a straight line as things like lease terminations and gains do have some seasonality, but we expect five to 15 basis points of NIM expansion per quarter for the rest of the year. We are increasing our fee revenue guidance from up 5% to 10% to up 9% to 12%. We continue to see momentum in growth in insurance and SmartAuction and the auto pass-through offerings, which drives durable revenues with minimal capital requirements. In insurance specifically, we've seen P&C exposure increased through higher dealer inventory levels and our new business complex, which immediately increases revenues. Continued expansion in insurance is driving the only change to our operating expense guidance. Controllable expenses are still expected to be down 1%, but as we've talked about in the past, growth in P&C does add commission and loss expenses. So total expenses are expected to be up less than 2% year over year, which is up slightly from the original guide. Importantly, net changes in insurance are immediately accretive to pre-tax earnings as the revenue lift more than offsets expenses. This is a trade we will take all day, and that's the guidance we continue to give our insurance teammates. No change to the expected consolidated loss rate of 1.4% to 1.5%. And as I mentioned, we see retail NCOs around 2%, up marginally from approximately 1.9% in January. The continued runoff of the 2022 vintage and the favorable performance of the 2023 vintage is expected to drive seasonally adjusted loss rates down later in the year. And while structural supply and demand dynamics continue to give us confidence in the path of the used vehicles over the medium term, volatility in the short term will certainly impact our loss performance. We continue to expect the balance sheet in total to be pretty flat for the foreseeable future with favorable mix dynamics contributing to NIM expansion. On the tax rate, we've adjusted our full year guide to 15%, reflecting one quarter of actual and a rate of around 18% for the rest of the year. EV lease originations are the largest driver of the tax favorability we saw this quarter. To the extent we continue to see strong momentum here, we may outperform that 15% guide for the year. We remain confident that we are on a path to a run rate with 4% NIM, $6 of EPS and mid-teens returns. As we have said before, the timing of Fed rate cuts will impact the timing of our expansion in 2025, but not the destination. We will remain focused on executing on our scale franchises, taking care of our associates and customers and being disciplined in allocating our resources, including capital. I'll close by echoing Doug's comments that we're excited to welcome Michael Rhodes to Ally and we are confident in Ally's ability to deliver for our shareholders for many years to come. And with that, Sean, I'll turn it over to you for Q&A. Sean Leary -- Head of Investor Relations Thank you, Russ. As we head into Q&A, we do ask that participants limit yourself to one question and one follow-up. Elizabeth, please begin the Q&A. Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Moshe Orenbuch with TD Cowen. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks. I guess the question that seems to be the – there's such a strong origination yield – and yet it feels like you're letting – there's opportunity to do more. And so, the question is, I guess, is that in fact the case? And you did talk about the ability that stuff that you're doing in your highest tiers versus the rest of the credit spectrum. Is there an opportunity to do more and perhaps sell those loans to keep your balance sheet flat as your plan? Is that something that you're considering doing during 2024 or 2025? Russ Hutchinson -- Chief Financial Officer Thanks for the question, Moshe, I agree with you. The competitive environment remains favorable to us. Both the mix that we're getting with continuing to get 40% in the S-Tier, as well as the strong originated yield that we're seeing are both testament to that. And so, we agree with your sentiment on the competitive environment and the opportunity set remaining rich for us. As you know, as you're well aware, we're dealing in a capital-constrained environment with the expectation of regulations coming down the pipeline, all very manageable. And as you also pointed out, we've been – we've also been opportunistic in terms of looking for opportunities to liberally leverage our dealer relationships and our balance sheet. So you saw us deconsolidate over the course of fourth quarter and this past quarter, $2.7 billion of auto loans through sales in the securitization markets. Those transactions were well received. We're seeing strong appetite. You saw us take a $15 million earnings benefit this quarter on the sale of $1.1 billion of loans to the securitization market, again, testament to the attractiveness of our loans in the capital markets. We will continue to look at opportunities like that. We will continue to look at whether it's deconsolidation through securitization, we'll also look at credit risk transfer transactions as ways of freeing up RWA in order to redeploy in the business. So I think we are in agreement with you, and we continue to pursue opportunities opportunistically. Doug Timmerman -- Interim Chief Executive Officer I would just add what's unique and obviously, I've been doing this for a long time, 30-plus years. So obviously, competition oftentimes softens during, call it, tougher credit environments. But today, it's different. It's also softening due to the fact that there's change in regulatory environment coming at us. So everyone is seeing that impact to capital liquidity. So from my view, the opportunity for us is actually going to last longer than what you normally would say. So we feel really good about the competitive environment, really good about our ability to continue to originate at a high level and very importantly originate high yields. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks. And maybe as a follow-up, the vintage performance that you discussed, is there a way to kind of separate out how much of that is a result of kind of that better – more of your originations coming in the higher tier of pricing or just kind of fundamental better performance from borrowers that you originated in 2023? And can you relate that to your comments about a flat reserve? Russ Hutchinson -- Chief Financial Officer Yes. Maybe I'll start and Doug can chip in here. But I would say when we look at the performance of our book, I would say delinquencies are elevated across the book – across vintage and across credit tiers. And we are dealing with a customer that is struggling with inflation. All that being said, when we look at the difference between the 2023 vintages versus 2022, I think what we're seeing in that improvement is the effect of curtailments that we've been put in place over time. And as you know, we've been kind of ratcheting up the level of curtailment over the course of 2023. So we take a lot of confidence seeing that differentiation between the vintages. And as you would expect, we look at it at a pretty granular level, looking at vintages on a monthly basis, on a quarterly basis, and really kind of analyzing and understanding the differences in their performance in terms of both delinquencies and also net charge-off levels, which are also important. So hopefully, that addresses your question, but I think the delinquency issue is one. The delinquency issue and the elevated credit that we're seeing is across all vintages and across all credit tiers. But I think the main driver has just been the level of curtailment that we've put in place over the course of 2023. Doug Timmerman -- Interim Chief Executive Officer Yes, I agree. Obviously, it's two-pronged. And it's curtailing those segments that are underperforming the most. That's our opportunity to be able to move to a better quality mix, which gets back to the benefit we have relative to our application flow. But I would also say that very importantly, we view credit to be very manageable and confident that the appropriate adjustments have been made and those adjustments are accounted for in our 2023 vintage. Operator Our next question will come from the line of Ryan Nash with Goldman Sachs. Ryan Nash -- Goldman Sachs -- Analyst Thanks. Good morning, Doug. Good morning, Russ. Doug Timmerman -- Interim Chief Executive Officer Good morning. Ryan Nash -- Goldman Sachs -- Analyst So maybe I start off a two-part question. So you reiterated the margin guidance, I noted you still expect 4% by end of next year, Russ. How does the cadence in 2024 and 2025 differ under higher – for longer and forwards? And then, second, I think you recently decreased the savings and money market rates again for the second time in recent weeks. Are these cuts there to offset margin weakness in other areas? Or are they actually additive to the NIM? And does this actually improve the level of the timing you get to that 4%? And I have a follow-up. Russ Hutchinson -- Chief Financial Officer Great questions. Thanks, Ryan. Maybe I'll just start on the 4% by end of 2025 in terms of NIM. As we said on the call and we said before, our 2024 guidance, 3.25 to 3.30 exit rate at 3.40 to 3.50 does not depend on rate cuts. So that guidance is intact, even if we are in an environment we're at 5.50 for the remainder of this year. As you know, we took opportunities at the end of last year, effectively putting on additional hedges in order to take that risk right off the table for the course of 2024. Really, what we're talking about is the timing within 2025 in terms of getting to the 4% margin. And as you can imagine, we run a range of rate scenarios and that certainly impacts that. I think based on kind of where we sit today our expectation is we get to the 4% NIM toward the end of 2025, but again, no impact on 2024 even if we're flat through the course of this year. On bank deposits and our deposit rates, you are correct. We took another 5 basis points of our savings product that's $84 billion of deposits. We took that off this morning. That is just in response to the fact that we've seen strong deposit flows even coming through tax season now, we just – we feel great about where we are. We feel great about our bank franchise and about the – just the general level of engagement among our customers. I'd say at this point, sitting here in mid-April, it's hard to say if that just reflects kind of lower rates and higher NIM going forward, or what we've done is we've really just kind of taken advantage of the opportunity and pulled it forward somewhat. But I'd say, just sitting right here, we feel great about the franchise and about the stickiness of our customers and about just the overall competitive environment for deposits. Ryan Nash -- Goldman Sachs -- Analyst Got it. Thanks for the color, Russ. And maybe a question on credit. So I think you noted delinquencies are near or at the peak on a seasonally adjusted basis. And you said that as we move through 2024, it should be more driven by recent vintages. So can you help us think about losses over the next few quarters? I think you noted that seasonally adjusted losses should be down later in the year. Can you maybe just put a finer point on that? When do we actually see the shift happen from underperforming on a seasonally adjusted basis to actually outperform it? Thank you. Russ Hutchinson -- Chief Financial Officer Yes. It's through the second half of this year. As you know, the auto asset is great and that you get a really good sense of how credit is developing over the first 18 months, right? That's when our loans typically hit peak loss rate. The 2022 vintage was large. And as we've said before, it's a vintage that's been particularly impacted by the current environment, and it's where we're seeing losses that exceed our price expectations. And so, as we get through the first half of this year, as we get through June, we should be through that, and we should see more of our losses actually driven by our 2023 and then increasingly by our 2024 vintages. As you know, we've ramped up the level of curtailment over the course of 2023. We're seeing that benefit as we look at charge-offs and NCOs. And so, our expectation is as that 2023 vintage becomes more dominant in terms of driving our losses, we'll start to see that performance improve. Ryan Nash -- Goldman Sachs -- Analyst Thanks for the color, Russ. Operator Our next question will come from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thanks. Good morning. Doug, you mentioned how different this time, the competitive dynamics are. I'm just curious – as we think about competitors possibly even considering reengaging with the market, like how easy would it be to come sort of disrupt what you guys have in terms of the situation right now? I'm just trying to think about where they stand in terms of dealer mind share. Obviously, the dynamics are so strong and put you in a really good position right now? Doug Timmerman -- Interim Chief Executive Officer Yes. I think the big part of our secret sauce, obviously, is decades of being very consistent and focused on things that dealer truly values. Application flow is the differentiator for us. We, as Russ indicated in his comments, we asked the dealer to send us all the applications. We're willing to do the work, we don't want to miss out an opportunity to help them sell another car and truck. We don't want to miss an opportunity to capture the business. That resonates very well with the dealer. But the dealer is not going to give that opportunity to multiple providers, because of our relationship, we get that advantage. So that's a big differentiator versus the competition. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst OK. And Russ, could you just talk about the loan sales? I just want to make sure I understand what happened this quarter versus what you might do in the future in terms of magnitude. Was there any gain on the sale of the loans? And maybe as we look ahead, should we expect the economic dynamics to sort of shift as you consider more of these types of things and sort of what kind of magnitude could these loan sales take? Thanks. Russ Hutchinson -- Chief Financial Officer Yes. Look, I think it's a fair question. We've been pretty opportunistic, and so we haven't committed to any volume, and you'll see that we'll – we did loan sales in the fourth quarter and the first quarter of this year. We're not going to do them every quarter. And we're also looking at different ways of doing it. So for example, if we do a credit risk transfer transaction, it's kind of a different impact in terms of the balance sheet and the P&L versus a loan sale. And so, yes, this is going to be a little bit kind of lumpy. But we think this is an important tool for us to have as we look at managing capital and positioning ourselves to take advantage of the opportunities that are in the market today and also better serve our dealers. If you just kind of turn to the loan sale we did this quarter, we sold $1.1 billion of loans. There was a $15 million earnings benefit and that earnings benefit is effectively the net benefit given where we hold the loans, including the reserve and provision impact. And so, that $15 million benefit was realized through the provision line, but that is a positive P&L event for us and again, reflects strong investor interest in the overall loan portfolio. I would say the loans that we sold, they were predominantly 2023 vintage. There was some older stuff in there from 2022 and 2021 as well. So the blended yield, as we said on the call, was lower than what we're currently originating in the market today. And so, again, we feel good about the economics we got, given the yield on the loans that we sold. So again, strong investor interest. We'll continue to be opportunistic. We'll look for more opportunities to do this. And it's all good in allowing us to capture opportunity and better serve our dealers. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Operator Our next question will come from the line of Jeff Adelson with Morgan Stanley. Jeff Adelson -- Morgan Stanley -- Analyst Hey. Good morning. Thanks for taking the question. Russ, I just – I know the forward curve has sort of eased the expectation for cuts recently. And I know you are still looking for the 4% by the end of 2025 with that rate cuts. But if the forward curve does come through, do you still think there is an opportunity for the 4% to come a bit earlier in the year ignoring the lumpiness that might be happening on a quarter-to-quarter basis? Russ Hutchinson -- Chief Financial Officer I think right now, we are on track for 4% by the end of 2025 and so we feel pretty good about that. We do run a variety of reasonable rate scenarios here, and we feel pretty good about end of 2025 under a range of scenarios, including scenarios where we are flat for the duration of 2024. And again, we think we've kind of taken that risk off the table for this year in terms of its impact on our yield. Jeff Adelson -- Morgan Stanley -- Analyst And on the remarketing side, I mean, it seems like you guys have seen some real strength in the lease termination volumes lately. I think that's coming off the back of the originations you did a couple of years ago. And I think the less the dealer-buyer figure dropped the most, it's dropped since you started disclosing that. Can you just talk a little bit more about the outlook there? Is that something that could actually maybe help your NIM going forward even as used car prices continue to kind of moderate? Is there may be like a kind of Goldilocks type zone there where used car prices moderating is actually something that helps you as more consumers are bringing their cars back to you? Russ Hutchinson -- Chief Financial Officer I think lease terminations can be a little bit lumpy and that some of the – that's one of the factors that contributes to the lumpiness in terms of our NIM progression, and that's why we give you that 5 to 15 basis points. Yes, I'd say if I look over the course of the first quarter, lease terminations were actually weak toward the beginning of the quarter and kind of came back toward the end. And so, we saw that lumpiness quite nicely even within the quarter. I think on the contractual buyouts, I think we expect the level of contractual buyouts to continue to normalize, particularly as used car prices reach that 120 level that we've been talking about, that's all obviously – that's all stuff that will ebb and flow over the course of the quarter and over the course of the remainder of the year. I think we've priced in kind of reasonable expectations in terms of how we set the guide, around just the kind of the overall level of lease terminations and the level of contractual buyouts, again, normalizing and used car prices normalizing around that 120 level. Jeff Adelson -- Morgan Stanley -- Analyst OK. Great. Thank you. Operator Our next question will come from the line of Rob Wildhack with Autonomous Research. Rob Wildhack -- Autonomous Research -- Analyst Good morning, guys. Russ Hutchinson -- Chief Financial Officer Good morning, Rob. Rob Wildhack -- Autonomous Research -- Analyst One more question around loan sales. Russ, what's the rate limiting factor today that's preventing you or keeping you from doing more loan sales and taking advantage of this competitive opportunity that you guys are highlighting? Is it demand from loan buyers or investors? Is it pricing? Is it something else? Russ Hutchinson -- Chief Financial Officer No, we've seen really great demand from investors. I think we've been able to get done what we've tried to get done in each of the two transactions – each of the three transactions that we've completed so far. I think we're – we feel pretty good about what we've done. Again, we don't set targets on how much we want to do in a given quarter or a given year. But again, we continue to feel pretty good about what we've done, and we feel pretty good about on the other side of it, what we're originating and how it allows us to support our business. Rob Wildhack -- Autonomous Research -- Analyst OK. Thanks. And then, how much more room do you think you have with respect to deposit repricing, especially as fewer rate cuts are now being priced in? And then, maybe to follow on from that, what degree of deposit repricing is included in your outlook for the NIM expansion and the exit rate in the fourth quarter? Russ Hutchinson -- Chief Financial Officer Got it. Look, we've been really pleased with the amount of pricing flexibility we've gotten so far. As we pointed out on the call, we took – we started with CDs, we took 75 basis points off of our 12 months, our most popular CD product. We took – we've taken off liquids. We took another 5 basis points of our savings product this morning. We continue to feel great about the deposit flows we're getting. And so, we've seen the competitive environment for deposits is clearly eased. Our own demand for deposit growth has obviously changed as well, being 90% funded by deposits with a flat balance sheet expectation going forward. And so, we feel pretty good about where we are. As I said to Ryan earlier, it's hard for us to say at this point whether what we've done is we've just pulled forward cuts to pricing that we would have made later or if we're on track to a lower place. I'd say our overall forecast in terms of exit rate is conservative. We consider a range of different rate scenarios, including the possibility of Fed funds being flat for the remainder of the year. And as you'd expect, our pricing assumptions actually change depending on the actual path of Fed funds and the overall competitive environment. So it's hard to give you kind of one because we look at a lot of different paths. But again, through a range of path, given the quality – given the strength of the repricing we're seeing on the auto loan side, given the hedging portfolio that we have in place, we feel pretty good about our exit rate and our overall NIM guidance for the year. Rob Wildhack -- Autonomous Research -- Analyst OK. Thank you. Operator Our next question will come from the line of Bill Carcache with Wolfe Research Securities. Bill Carcache -- Wolfe Research -- Analyst Thank you. Good morning, Doug, and Russ. A flat reserve rate versus falling DQ rate formation suggests growing conservatism. What's the trigger that would give you comfort allowing that reserve rate to drift back down to Day-1 levels? And let me flip the question, are you seeing anything that could lead you to have to take reserve coverage higher from here? Russ Hutchinson -- Chief Financial Officer I think as we said on the call, our expectation is, we'll keep that reserve coverage flat. I don't think it reflects any particular conservatism on our side. It's – quite frankly, it's kind of how we're running the business today. And it reflects, in some ways, the fact that – as we look at the assets we're originating today versus what we would have originated in, say, 2019, we are focusing on a product with a richer yield and that carries more credit with it. And we think we're getting more than compensated for the additional credit that we're taking. But it's a different mix and a different place in the credit spectrum than we would have been in 2019. Bill Carcache -- Wolfe Research -- Analyst Understood. On interest rate risk, you guys put on the hedge in part as protection – or higher for longer rate environment, and it seems to have performed as intended. How are you thinking about any potential future incremental hedging activity as the rate environment evolves? Russ Hutchinson -- Chief Financial Officer We're pretty happy with the performance of the hedges. I think they're performing as intended. They are a bridge for us right there. They bridge to that kind of natural portfolio turnover to the more recent higher-yielding originations. At this point, our expectation is that we will allow those hedges to amortize and that we're kind of in the right place in terms of bridging that portfolio turnover. But obviously, we manage dynamically, and we'll continue to kind of assess the situation as we see market dynamics play out. Bill Carcache -- Wolfe Research -- Analyst Thank you for taking my questions. Russ Hutchinson -- Chief Financial Officer Thanks, Bill. Operator Our next question comes from the line of John Pancari with Evercore ISI. Chase Haynes -- Evercore ISI -- Analyst Hey, how's it going? This is Chase Haynes on for John Pancari. I want to try to get a sense for auto – consumer auto loan demand, just given what you're saying about elevated insurance premiums due to those higher inventory levels – is that due to a decrease in demand that you're seeing in big ticket items? Or is that just a normalization effect? And do you expect consumer auto demand in the go-forward quarters to kind of remain where they've been at or decrease or increase a bit? Doug Timmerman -- Interim Chief Executive Officer Well, I think it's a little bit unique to us because if you look at our application flow and what we've been hitting records quarter after quarter after quarter, so we're getting a greater market share of application flow, which obviously gives us significant kind of up, if you will, relative to what we can originate. And then, of course, you put that on top of a competitive environment that is very constructive for growth. Those are the real two drivers. But yes, I think the general market is such that I think volumes would be pretty consistent or flat, but I think our ability to do more is heavily driven just by the fact that we're driving that increased application flow. Chase Haynes -- Evercore ISI -- Analyst Got it. Thank you, guys. Doug Timmerman -- Interim Chief Executive Officer That, of course, also allows us to be selective as to where we want to play on top of it. So – Sean Leary -- Head of Investor Relations Thank you, Doug. It's shown right at the top of the hour here, so that's all the time that we have for today. As always, if you have any additional questions, please feel free to reach out to investor relations. Thank you for joining us this morning. That concludes today's call. Answer:

the Ally Financial first quarter 2024 earnings conference call

Operator Good day, and thank you for standing by. Welcome to the Ally Financial first quarter 2024 earnings conference call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sean Leary, head of investor relations. Please go ahead. Sean Leary -- Head of Investor Relations Thank you, Elizabeth. Good morning, and welcome to Ally Financial's first quarter 2024 earnings call. This morning, our Interim CEO, Doug Timmerman; and our CFO, Russ Hutchinson, will review Ally's results before taking questions. The presentation we'll reference can be found in the investor relations section of our website, ally.com. Forward-looking statements and risk factor language governing today's call are on Slide 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on Slide 3. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. And with that, I'll turn the call over to Doug. Doug Timmerman -- Interim Chief Executive Officer Thank you, Sean. Good morning, everyone, and thank you for joining the call. I'll start on Page 4. Before we get into the quarter, I want to comment on our CEO transition. As we announced last month, Michael Rhodes will be taking over as CEO on April 29. I've been fortunate to spend time with Michael throughout the process, and I'm certain he is the right person to lead Ally. He respects what we've built and his deep banking experience based on a natural fit to continue advancing Ally's businesses. On behalf of myself and the entire leadership team, we are thrilled to welcome Michael to Ally in a few weeks. I'd also like to say it's been an absolute privilege for me to serve as the interim CEO these past few months. I've been with Ally for over 30 years and the things that have always energized me the most are our people and culture. At Ally, the culture runs deep and it revolves around our employees, customers and communities. It starts and stops with our 11,000 associates and very importantly to my teammates, thank you for your support, hard work and dedication and, of course, caring for our customers. I firmly believe when you take care of your people, they take care of everything else, including our customers and communities. In the first quarter, we were once again named on Fortune 100's Best Companies to Work For List. For us, it's never about awards, but it's an achievement we can be proud of. What I'm most proud of are the employee survey results. 89% of employees said Ally is a great place to work. 93% of employees felt good about the way Ally contributes to the community. And the staff that most resonated with me was that more than 90% of employees were proud to tell others they are part of Ally. Creating an engaged workforce that embraces our Do It Right approach is essential to our business and our growing customer base. And as we continue to navigate a fluid environment, we'll continue leaning our culture, and lead core values to guide our actions. With that, let's turn to Page number 5 and get into the results. First quarter adjusted EPS were $0.45, a revenue of $2 billion reflects solid operational execution as our teammates remain focused on priorities that are big enough to matter and drive solid returns. Net interest margin of 3.16% was again pressured by rising rates. However, we've now raised an inflection point and expect NIM expansion beginning in the second quarter. Before discussing operational results, I want to hit a few notable items in the first quarter. In March, we successfully closed on the sale of Ally Lending, which generated capital and allows us to better serve our dealer and consumer customers. We also tapped the securitization market to deconsolidated retail auto loans from the balance sheet, which created incremental capital and generated a nice earnings benefit within the period. Strong investor interest and the earnings benefit created by this transaction are another validation the loans we originate have attractive returns. And finally, we recognized an incremental $10 million of expense from a revised FDIC special assessment, which was not included in core results. Moving to operational results in dealer financial services, within auto, we decisioned a record 3.8 million applications and booked nearly $10 billion of originations. Retail auto originations had an average yield of 10.92% while 40% of originations came from our highest quality credit tier. First quarter net charge-offs of retail auto were 227 basis points, in line with the guidance we gave about a month ago. Insurance earned premiums of $349 million were also a record, and we see continued momentum as we grow OEM partnerships and continue leveraging our expansive auto finance dealer network. Turning to Ally Bank, deposits continue to be a source of strength for Ally. We grew deposits $2.9 billion in the quarter, while adding more than 100,000 customers. Our deposit franchise was established 15 years ago and now serves more than 3 million customers, provides stable and efficient funding and makes Ally a structurally more profitable company. Ally Credit Card is performing in line with expectations. As we've mentioned, losses will be elevated near-term. However, we remain encouraged by its long-term compelling return profile. Corporate finance continued to drive strong financial results and next month, we'll celebrate its 25th anniversary. The business generated a 31% ROE in the first quarter, and our $10 billion portfolio remains historically strong from a credit standpoint. Let's turn to Page number 6 to talk about Ally's market-leading franchises. Last week marked 10 years of being a publicly traded company and the transformation since that time has been remarkable. What began as an auto finance captive has now made up of two market-leading franchises, a dealer-centric and diversified auto finance provider and the largest all-digital direct U.S. bank with more than 3 million customers and $145 billion of retail deposits. Our Dealer Financial Services platform revolves around the dealer, deepening those relationships and providing a comprehensive value proposition to help grow their businesses. We have continued to evolve the business to find new ways to help our dealer customers while also optimizing risk-adjusted returns for Ally. Over the past 10 years, Ally Bank has built on its reputation as the leading, innovative digital bank. We pride ourselves on providing best-in-class customer experiences and a strong value proposition that extends beyond rates. And our deposits franchise has been the key driver for customer acquisition and engagement. We have expanded our products and features to deepen customer relationships, including Ally Home and Ally Invest; and Credit Card and Corporate Finance are businesses that diversify revenue and improve our consolidated profitability. Both dealer financial services and Ally Bank have scaled, lead in the respective markets and position Ally for profitable growth in the years ahead. And with that, I'd like to turn it over to Russ to cover detailed financial results. Russ Hutchinson -- Chief Financial Officer Thank you, Doug. Good morning, everyone. I'll begin on Slide 7. In the first quarter, net financing revenue, excluding OID, of $1.5 billion is down versus prior periods, driven by higher funding costs, partially offset by strong originated yields. Increasing funding costs have been a persistent headwind since the tightening cycle began, but we've reached an inflection point as rates have stabilized. Continued strength in originated yields in the auto business has positioned the balance sheet for NIM expansion beginning in the second quarter. We'll discuss asset and liability dynamics that are driving our NIM expansion in a few slides. Adjusted other revenue of $519 million is up from prior periods, driven by continued momentum in diversified fee revenue, including insurance, as higher vehicle inventory balances drove higher earned premiums. We continue to see expanding other revenue driven by strength in insurance and fee revenue streams in auto, including our smart auction and pass-through programs. Insurance, smart auction and our pass-through programs are highly valued by our dealers, and they drive capital-efficient revenue for Ally. Provision expense of $507 million increased from prior year and was down on a linked quarter basis. Credit performance in the quarter was in line with our expectations. Retail auto NCOs came in around the middle of our guide that we provided at the conference last month. Losses within the quarter were impacted by softer used values throughout much of the quarter, but we did see stability in March and are exiting the first quarter flat versus December. I'll cover retail auto credit in more detail shortly. As Doug mentioned, we executed another loan sale via the securitization market, which drove a $15 million earnings benefit in the quarter that was realized through the provision expense line. We deconsolidated $1.1 billion of retail auto loans originated predominantly in 2023, with yields below our average originated yield for the year. Investors' strong interest in our loans and the $15 million earnings benefit we realized demonstrate the attractive return profile in a dynamic environment. Adjusted noninterest expense of $1.3 billion was up year over year, primarily driven by continued growth in the insurance business. Controllable expenses, which exclude insurance losses, commissions and FDIC fees were down 1% year over year. Tax expense of $14 million resulted in an effective tax rate of 8%, which is lower than our guide as we continue to benefit from strong EV lease originations. GAAP and adjusted EPS for the quarter were $0.42 and $0.45, respectively. Moving to Slide 8, net interest margin excluding OID, of 3.16% decreased four basis points quarter over quarter and was slightly above the high end of guidance we provided at an investor conference last month. Earning asset yields expanded modestly quarter over quarter, while funding costs increased by nine basis points. As I mentioned earlier, margin has been pressured by increasing funding costs throughout the tightening cycle, but we've positioned the balance sheet for NIM expansion from here. Strength in fixed rate asset pricing, particularly retail auto loans with originated yields at 10.9%, will continue to drive earning asset yields higher as our portfolio naturally turns over. We expect earning assets to be flat over the medium term, but favorable mix dynamics will continue to drive asset yields higher as lower yielding mortgages and securities are replaced by higher-yielding auto, corporate finance and credit card loans. Turning to liabilities, cost of funds moved up within the quarter, driven primarily by higher deposit costs. We moved our OSA rate in mid-December, so our 1Q results reflect a full quarter at the peak rate, and we continue to see CD portfolio yields move slightly higher as expected. Within the quarter, we took meaningful actions to reduce deposit pricing across CDs and our $100 billion liquid savings portfolio. We've been delighted with the trends we've seen in deposits, which enabled us to move meaningfully well in advance of Fed rate cuts. Strength in retail auto yields, favorable asset mix and now having moved past the peak in retail deposit costs, we are confident in NIM expansion starting in the second quarter. Let's turn to Page 9 and talk about the auto franchise. Our model is simple. We help our dealers sell as many cars and trucks as possible and encourage our dealers to send us all of their application volume. We leverage our differentiated go-to-market approach, coupling high-tech and high-touch to earn their partnership. 22,000 dealer partners delivered 13.8 million applications last year, and that momentum has continued in 2024. This quarter, we saw 3.8 million applications, our best quarter ever and resulted in $9.8 billion of consumer volume within the quarter. Strength in application flow enabled us to be dynamic in what we originate. We shifted our credit mix in April of 2023 and since that time, more than 40% of our originations have been in our highest credit year. We've now originated over 10% yields for five consecutive quarters that creates momentum, which I will cover on the next page. Let's turn to Slide 10 to discuss retail auto portfolio yields in more detail. The current yield on the total retail auto portfolio is just over 9%. While we continue to originate loans at close to 11% each quarter, as older vintages mature and are replaced with new origination, the portfolio yield will continue to migrate higher. Given the natural liability-sensitive nature of our balance sheet, we consistently utilized pay-fixed hedges tied to retail auto loans to reduce exposure to rising rates. These hedges are serving as an effective bridge while our retail auto loan portfolio is repricing higher over time. We manage the hedge position dynamically, but currently expect it to amortize down over time, which means its contribution to NIM will continue to decline. The natural repricing momentum created by strong originated yields will continue to outpace a declining hedge contribution, resulting in a total portfolio yield that we expect to increase to 9.5% by year-end and continue to migrate toward originated yields over time. This momentum coupled with deposit costs that at peak position Ally for NIM expansion without the benefit of Fed rate cuts. The other dynamic influencing portfolio yield is origination mix. As we covered on the prior slide, we are consistently originating more than 40% of our consumer volume in our highest credit tier. Historically, that tier has accounted for just under 30% of total originations. Over time, we do expect to migrate closer to our historical origination mix. For context, a shift to our historical mix would add up to 100 basis points of originated yield today. With 10.9% yields on originations that skew heavily toward our S-tier, we are pleased with the risk-adjusted yields we're getting today and are not assuming any significant shift over the next few quarters. But over time, we would anticipate a gradual migration closer to historical mix, which provides yet another yield tailwind going forward that will help offset an eventual decline in benchmark rates. Let's move to Slide 11 to talk about the strength of the deposits franchise. Ally Bank was launched 15 years ago and has evolved into the largest all-digital direct bank in the U.S., serving more than 3 million customers. We have been intentional about creating a comprehensive value proposition that goes beyond consistently competitive range. We offer best-in-class customer service and digital experiences and over time, added features and products that are important for our customers, including how I invest, home and credit card, and we continue to serve as relentless allies to our customers with high levels of service through online, mobile, text and telephone, as well as a consumer-friendly approach to fees, including leading the way on overdraft elimination. This approach has led to 95% plus customer retention rates, 90% plus satisfaction scores, favorable NPS and strong balance trends across every vintage inception of the bank. And while we do not focus on accolades, we do think the countless awards received over the last 15 years validates the strength of the brand and the bank. The 15-year journey led to exceptionally strong performance over the tightening cycle and puts Ally in a position of strength moving forward. We have consistently grown deposits and seen record customer acquisition without being a top payer since the Fed began tightening. As we sit today, we're core funded with 90% of our liability stack in the form of deposits, and we expect earning assets to be relatively flat over the next few years, which results in less need for significant deposit growth going forward. The combination of a great brand and comprehensive value proposition enabled us to lag competition from a pricing perspective on the way up and positions us to lead on the way down. We took significant pricing actions in the quarter while maintaining our commitment to offering our customers attractive deposit rates and a compelling overall experience. We reduced rates 75 basis points on our most popular CD term, 15 basis points on our money market account and 10 basis points on an $84 billion savings product. In terms of deposit flows, we saw nearly $3 billion of growth within the quarter while adding more than 100,000 customers. Growth within the quarter was favorable to our expectations and positions us well for a seasonal tax outflow in the second quarter. We expect deposit balances to decline in 2Q as we typically see outflows from existing customers related to tax payments. Given outperformance in 1Q and our fully funded flat balance sheet, we're not expecting to drive growth to offset seasonal taxes like we have in prior years. We do expect growth on a full year basis, but less than what we delivered in 2023. Turning to Page 12. CET1 of 9.4% increased quarter over quarter. At current levels, we exceed our 7% regulatory CET1 operating minimum by $3.8 billion. We recently submitted our capital plan as we are scoped into CCAR for 2024, and we'll get an updated view of our SCB later this year. Within the quarter, we closed on the sale of Ally Lending generating a 15 basis point CET1 benefit and executed another retail auto loan sale generating 6 basis points of CET1. The loan sale reflected strong investor interest in our loans and drove a $15 million pre-tax earnings benefit while creating capital and generating servicing income going forward. We faced in another quarter of the capital impact from the transition to CECL, which was worth 18 basis points in the quarter, which was more than offset by the sale of Ally Lending and the retail auto loan sale. One more phase-in remains with total impact fully phased in by 1Q 2025. We recently announced our quarterly dividend of $0.30, which remained flat to prior quarter. We remain committed to acting on attractive opportunities to create excess capital to invest in our highest returning businesses and driving tangible book value per share growth over time. Let's turn to Slide 13 to review asset quality trends. The consolidated net charge-off rate of 155 basis points reflects performance in line with expectations. Net charge-offs were down quarter over quarter as discrete losses in corporate finance and commercial auto in the prior period did not repeat. Retail auto net charge-offs of 227 basis points were in line with expectations. In the bottom right, 30 and 60-day retail auto loan delinquencies reflect seasonal trends. The year-over-year increase in 30-day delinquencies has moderated for the fifth consecutive quarter and give us confidence that delinquencies are at or near peak on a seasonally adjusted basis. Moving to Slide 14. Consolidated coverage remains steady at 2.57%. Retail auto coverage of 3.65% was unchanged from the prior quarter, while allowance was down $32 million driven by lower balances. We maintained robust retail auto coverage level at 10% above CECL Day-1, partly driven by portfolio mix as we've shifted into more profitable volume over time. Assuming macro variables remain consistent, we're not anticipating much change in the retail auto coverage rate over the medium-term. While the retail auto coverage rate is well above CECL Day-1 levels, our mid-teens ROE guidance does not assume any reductions in coverage from here. As a reminder, our CECL reserving process has a 12-month reasonable and supportable forecast, which assumes unemployment increasing to 4.1% later this year, and we assumed gradual reversion to 6% unemployment from months 12 and 36. Let's turn to Slide 15 to discuss retail auto credit in more detail. First quarter NCOs were consistent with the preview we gave at a recent investor conference. And we saw another quarter of declining year-over-year increase in total portfolio delinquency as shown in the bottom left chart. Losses for the first half of this year will be elevated as the 2022 vintage, which is producing losses above price expectations, works through its peak loss period. That vintage is at its peak loss period today and accounted for more than 40% of losses reported in the first quarter. As we move throughout the year, portfolio losses will increasingly – will be increasingly driven by more recent vintages, which continue to show favorable loss and delinquency trends relative to the 2022 vintage. Similar to last quarter, we've shown a comparison of delinquency trends for the 2022 and 2023 vintages on the bottom of the page. After 15 months on book, the 2023 vintage delinquency rate is now 28 basis points below where the 2022 vintage was at the same point in time. Excluding the impact of recent loan sales, which skew the words high credit quality loans, the gap is 34 basis points. That gap has widened since our last earnings call, which showed the 2023 vintage, 22 basis points favorable at 12 months on book. I also want to point out this particular comparison after 15 months on book is impacted by where the last day of the month fell. The final calendar day of 1Q 2023 was a Friday, which is typically our strongest day of cash collection as it lines up with the pay periods for many consumers. In 2024, the final calendar day fell not only on a Sunday, but also a holiday. As a result, the spot delinquency rate for the 2023 vintage after 15 months was elevated. As we move into the first few days of April, the gap between 2022 and 2023 vintages widen further. So we remain confident, 2023 and 2024 vintages will perform favorably to the 2022 vintage that is driving higher losses today. In addition to delinquency and loss frequency trends, we continue to closely monitor the impact of used values on loss severity. Values were weaker for much of the quarter, which drove 1Q losses slightly higher than expectations, but we saw a nice rebound in March, which has persisted through the first half of April. Used vehicle values have since rebounded and are now flat to year-end as we begin the second quarter. Used vehicle guidance have been choppy. However, we continue to expect the Ally use index to settle out around 120 by the end of the year, which would imply a 5% to 6% decline from where we are today. Based on 1Q actuals and elevated loss content from the 2022 vintage, our estimate of losses is up marginally versus January to approximately 2% for the year. Importantly, we remain pleased with the impact of curtailments over the past 12 months and performance trends on recent vintages. Let's turn to Slide 16 to review auto segment highlights. Pre-tax income of $322 million was lower year over year driven by higher provision expense and non-interest expense. Provision reflected elevated net charge-off performance compared to the prior year period. Non-interest expense is up year over year as we navigate a period of elevated loss content driving higher servicing costs. Other revenue of $97 million is up $20 million year over year as we continue to focus on diversifying revenue with fee income. Our SmartAuction and pass-through platforms are great examples of how we help serve our dealers while also generating capital-efficient revenue. SmartAuction enables dealer to dealer transactions generating fee revenue while providing real-time data on market pricing and trends. Despite pressure on industry volume, SmartAuction grew revenue by 60% between 2019 and 2023. Through White Label relationships, we see more opportunity to grow this business and deliver incremental fee revenue while strengthening our dealer value proposition. With a focus on increasing application volume, our pass-through program is yet another way for us to deliver enhanced value to our dealers. For certain loans that do not meet our underwriting criteria, we pass through those applications to our partners. For loans that are ultimately funded by our partners, Ally receives an origination fee and generate servicing revenue without using any capital. SmartAuction and pass-through revenues are expected to grow to $190 million in 2024, up 120% since 2019. Both products demonstrate the strength and scale we have in the marketplace and are a win-win for Ally and the dealer. Lease portfolio trends are on the bottom right, dealer and lessee buyouts declined to 57%, but remain elevated compared to historical levels. Turning to insurance results on Slide 17. Core pre-tax income of $53 million included the highest quarterly premium earned since our IPO. Insurance losses of $112 million are up $24 million year over year, driven primarily by growth, including higher insured values and higher weather losses. We saw solid operating leverage within the quarter as premiums earned increased by $40 million, while acquisition and underwriting expenses were up modestly. Total written premium of $354 million increased 15% year over year as we see continued success in expanding our all-in dealer value proposition. We have seen nice momentum related to conquest activity as we recently launched relationships with two major OEMs, which will provide an immediate boost to written and earned premiums. Growth in insurance will naturally increase our non-controllable expenses, specifically commissions and losses, but those are more than offset with fee revenue. And importantly, we have a reinsurance program in place that reduces volatility from weather losses across our P&C inventory exposure. As we look ahead, insurance remains integral to our dealer value proposition and is the main driver of continued fee revenue growth. Turning to Corporate Finance on Slide 18. The pre-tax income of $90 million reflects solid financial performance. Net financing revenue was up, driven by higher average balances and higher benchmarks as the entire portfolio is floating rate. Our $10.1 billion HFI portfolio is well diversified in virtually all first lien. Balances are up marginally year over year, but down linked quarter. Favorable capital markets conditions, including a strong CLO market, led to elevated payoffs, particularly within our lender finance vertical. From a credit standpoint, the portfolio is in fantastic shape with criticized assets and nonaccrual loans at historically low levels. Commercial real estate exposure makes up a little more than $1 billion and is entirely related to the healthcare industry. With a track record of delivering strong returns, including 25% in 2023 and 31% this quarter, we continue to be excited about the long-term trajectory of this business as we celebrate its 25th anniversary. Mortgage results are on Slide 19. Mortgage generated pre-tax income of $25 million and $233 million of direct-to-consumer originations reflective of the current environment and our predominantly variable cost structure. Our health for investment assets continued to decrease quarter over quarter as loans mature and we operate the business on a primarily originate-to-sell basis. Our mortgage HFI assets will continue to decrease as we remain disciplined in allocating capital to our highest-returning businesses and managing the duration of our balance sheet. Mortgage remains a complementary product for our deposit customers, who accounted for the majority of our originations in the quarter. We are committed to providing a best-in-class customer experience and operational efficiency. I'll touch on the 2024 outlook before we move into Q&A. We've been pleased with the execution of our business and our outlook for this year and beyond remains consistent. In terms of net interest margin, first quarter represents a trough in NIM, and we expect meaningful expansion from here with or without a decrease in the Fed funds rate. As we've said before, we look at our outlook under a variety of right scenarios and are not relying on rate cuts to get to an exit rate of 3.4% to 3.5% this year. And we are confident we will reach 4% NIM run rate in late 2025. In terms of quarterly cadence, it won't be a straight line as things like lease terminations and gains do have some seasonality, but we expect five to 15 basis points of NIM expansion per quarter for the rest of the year. We are increasing our fee revenue guidance from up 5% to 10% to up 9% to 12%. We continue to see momentum in growth in insurance and SmartAuction and the auto pass-through offerings, which drives durable revenues with minimal capital requirements. In insurance specifically, we've seen P&C exposure increased through higher dealer inventory levels and our new business complex, which immediately increases revenues. Continued expansion in insurance is driving the only change to our operating expense guidance. Controllable expenses are still expected to be down 1%, but as we've talked about in the past, growth in P&C does add commission and loss expenses. So total expenses are expected to be up less than 2% year over year, which is up slightly from the original guide. Importantly, net changes in insurance are immediately accretive to pre-tax earnings as the revenue lift more than offsets expenses. This is a trade we will take all day, and that's the guidance we continue to give our insurance teammates. No change to the expected consolidated loss rate of 1.4% to 1.5%. And as I mentioned, we see retail NCOs around 2%, up marginally from approximately 1.9% in January. The continued runoff of the 2022 vintage and the favorable performance of the 2023 vintage is expected to drive seasonally adjusted loss rates down later in the year. And while structural supply and demand dynamics continue to give us confidence in the path of the used vehicles over the medium term, volatility in the short term will certainly impact our loss performance. We continue to expect the balance sheet in total to be pretty flat for the foreseeable future with favorable mix dynamics contributing to NIM expansion. On the tax rate, we've adjusted our full year guide to 15%, reflecting one quarter of actual and a rate of around 18% for the rest of the year. EV lease originations are the largest driver of the tax favorability we saw this quarter. To the extent we continue to see strong momentum here, we may outperform that 15% guide for the year. We remain confident that we are on a path to a run rate with 4% NIM, $6 of EPS and mid-teens returns. As we have said before, the timing of Fed rate cuts will impact the timing of our expansion in 2025, but not the destination. We will remain focused on executing on our scale franchises, taking care of our associates and customers and being disciplined in allocating our resources, including capital. I'll close by echoing Doug's comments that we're excited to welcome Michael Rhodes to Ally and we are confident in Ally's ability to deliver for our shareholders for many years to come. And with that, Sean, I'll turn it over to you for Q&A. Sean Leary -- Head of Investor Relations Thank you, Russ. As we head into Q&A, we do ask that participants limit yourself to one question and one follow-up. Elizabeth, please begin the Q&A. Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Moshe Orenbuch with TD Cowen. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks. I guess the question that seems to be the – there's such a strong origination yield – and yet it feels like you're letting – there's opportunity to do more. And so, the question is, I guess, is that in fact the case? And you did talk about the ability that stuff that you're doing in your highest tiers versus the rest of the credit spectrum. Is there an opportunity to do more and perhaps sell those loans to keep your balance sheet flat as your plan? Is that something that you're considering doing during 2024 or 2025? Russ Hutchinson -- Chief Financial Officer Thanks for the question, Moshe, I agree with you. The competitive environment remains favorable to us. Both the mix that we're getting with continuing to get 40% in the S-Tier, as well as the strong originated yield that we're seeing are both testament to that. And so, we agree with your sentiment on the competitive environment and the opportunity set remaining rich for us. As you know, as you're well aware, we're dealing in a capital-constrained environment with the expectation of regulations coming down the pipeline, all very manageable. And as you also pointed out, we've been – we've also been opportunistic in terms of looking for opportunities to liberally leverage our dealer relationships and our balance sheet. So you saw us deconsolidate over the course of fourth quarter and this past quarter, $2.7 billion of auto loans through sales in the securitization markets. Those transactions were well received. We're seeing strong appetite. You saw us take a $15 million earnings benefit this quarter on the sale of $1.1 billion of loans to the securitization market, again, testament to the attractiveness of our loans in the capital markets. We will continue to look at opportunities like that. We will continue to look at whether it's deconsolidation through securitization, we'll also look at credit risk transfer transactions as ways of freeing up RWA in order to redeploy in the business. So I think we are in agreement with you, and we continue to pursue opportunities opportunistically. Doug Timmerman -- Interim Chief Executive Officer I would just add what's unique and obviously, I've been doing this for a long time, 30-plus years. So obviously, competition oftentimes softens during, call it, tougher credit environments. But today, it's different. It's also softening due to the fact that there's change in regulatory environment coming at us. So everyone is seeing that impact to capital liquidity. So from my view, the opportunity for us is actually going to last longer than what you normally would say. So we feel really good about the competitive environment, really good about our ability to continue to originate at a high level and very importantly originate high yields. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks. And maybe as a follow-up, the vintage performance that you discussed, is there a way to kind of separate out how much of that is a result of kind of that better – more of your originations coming in the higher tier of pricing or just kind of fundamental better performance from borrowers that you originated in 2023? And can you relate that to your comments about a flat reserve? Russ Hutchinson -- Chief Financial Officer Yes. Maybe I'll start and Doug can chip in here. But I would say when we look at the performance of our book, I would say delinquencies are elevated across the book – across vintage and across credit tiers. And we are dealing with a customer that is struggling with inflation. All that being said, when we look at the difference between the 2023 vintages versus 2022, I think what we're seeing in that improvement is the effect of curtailments that we've been put in place over time. And as you know, we've been kind of ratcheting up the level of curtailment over the course of 2023. So we take a lot of confidence seeing that differentiation between the vintages. And as you would expect, we look at it at a pretty granular level, looking at vintages on a monthly basis, on a quarterly basis, and really kind of analyzing and understanding the differences in their performance in terms of both delinquencies and also net charge-off levels, which are also important. So hopefully, that addresses your question, but I think the delinquency issue is one. The delinquency issue and the elevated credit that we're seeing is across all vintages and across all credit tiers. But I think the main driver has just been the level of curtailment that we've put in place over the course of 2023. Doug Timmerman -- Interim Chief Executive Officer Yes, I agree. Obviously, it's two-pronged. And it's curtailing those segments that are underperforming the most. That's our opportunity to be able to move to a better quality mix, which gets back to the benefit we have relative to our application flow. But I would also say that very importantly, we view credit to be very manageable and confident that the appropriate adjustments have been made and those adjustments are accounted for in our 2023 vintage. Operator Our next question will come from the line of Ryan Nash with Goldman Sachs. Ryan Nash -- Goldman Sachs -- Analyst Thanks. Good morning, Doug. Good morning, Russ. Doug Timmerman -- Interim Chief Executive Officer Good morning. Ryan Nash -- Goldman Sachs -- Analyst So maybe I start off a two-part question. So you reiterated the margin guidance, I noted you still expect 4% by end of next year, Russ. How does the cadence in 2024 and 2025 differ under higher – for longer and forwards? And then, second, I think you recently decreased the savings and money market rates again for the second time in recent weeks. Are these cuts there to offset margin weakness in other areas? Or are they actually additive to the NIM? And does this actually improve the level of the timing you get to that 4%? And I have a follow-up. Russ Hutchinson -- Chief Financial Officer Great questions. Thanks, Ryan. Maybe I'll just start on the 4% by end of 2025 in terms of NIM. As we said on the call and we said before, our 2024 guidance, 3.25 to 3.30 exit rate at 3.40 to 3.50 does not depend on rate cuts. So that guidance is intact, even if we are in an environment we're at 5.50 for the remainder of this year. As you know, we took opportunities at the end of last year, effectively putting on additional hedges in order to take that risk right off the table for the course of 2024. Really, what we're talking about is the timing within 2025 in terms of getting to the 4% margin. And as you can imagine, we run a range of rate scenarios and that certainly impacts that. I think based on kind of where we sit today our expectation is we get to the 4% NIM toward the end of 2025, but again, no impact on 2024 even if we're flat through the course of this year. On bank deposits and our deposit rates, you are correct. We took another 5 basis points of our savings product that's $84 billion of deposits. We took that off this morning. That is just in response to the fact that we've seen strong deposit flows even coming through tax season now, we just – we feel great about where we are. We feel great about our bank franchise and about the – just the general level of engagement among our customers. I'd say at this point, sitting here in mid-April, it's hard to say if that just reflects kind of lower rates and higher NIM going forward, or what we've done is we've really just kind of taken advantage of the opportunity and pulled it forward somewhat. But I'd say, just sitting right here, we feel great about the franchise and about the stickiness of our customers and about just the overall competitive environment for deposits. Ryan Nash -- Goldman Sachs -- Analyst Got it. Thanks for the color, Russ. And maybe a question on credit. So I think you noted delinquencies are near or at the peak on a seasonally adjusted basis. And you said that as we move through 2024, it should be more driven by recent vintages. So can you help us think about losses over the next few quarters? I think you noted that seasonally adjusted losses should be down later in the year. Can you maybe just put a finer point on that? When do we actually see the shift happen from underperforming on a seasonally adjusted basis to actually outperform it? Thank you. Russ Hutchinson -- Chief Financial Officer Yes. It's through the second half of this year. As you know, the auto asset is great and that you get a really good sense of how credit is developing over the first 18 months, right? That's when our loans typically hit peak loss rate. The 2022 vintage was large. And as we've said before, it's a vintage that's been particularly impacted by the current environment, and it's where we're seeing losses that exceed our price expectations. And so, as we get through the first half of this year, as we get through June, we should be through that, and we should see more of our losses actually driven by our 2023 and then increasingly by our 2024 vintages. As you know, we've ramped up the level of curtailment over the course of 2023. We're seeing that benefit as we look at charge-offs and NCOs. And so, our expectation is as that 2023 vintage becomes more dominant in terms of driving our losses, we'll start to see that performance improve. Ryan Nash -- Goldman Sachs -- Analyst Thanks for the color, Russ. Operator Our next question will come from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thanks. Good morning. Doug, you mentioned how different this time, the competitive dynamics are. I'm just curious – as we think about competitors possibly even considering reengaging with the market, like how easy would it be to come sort of disrupt what you guys have in terms of the situation right now? I'm just trying to think about where they stand in terms of dealer mind share. Obviously, the dynamics are so strong and put you in a really good position right now? Doug Timmerman -- Interim Chief Executive Officer Yes. I think the big part of our secret sauce, obviously, is decades of being very consistent and focused on things that dealer truly values. Application flow is the differentiator for us. We, as Russ indicated in his comments, we asked the dealer to send us all the applications. We're willing to do the work, we don't want to miss out an opportunity to help them sell another car and truck. We don't want to miss an opportunity to capture the business. That resonates very well with the dealer. But the dealer is not going to give that opportunity to multiple providers, because of our relationship, we get that advantage. So that's a big differentiator versus the competition. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst OK. And Russ, could you just talk about the loan sales? I just want to make sure I understand what happened this quarter versus what you might do in the future in terms of magnitude. Was there any gain on the sale of the loans? And maybe as we look ahead, should we expect the economic dynamics to sort of shift as you consider more of these types of things and sort of what kind of magnitude could these loan sales take? Thanks. Russ Hutchinson -- Chief Financial Officer Yes. Look, I think it's a fair question. We've been pretty opportunistic, and so we haven't committed to any volume, and you'll see that we'll – we did loan sales in the fourth quarter and the first quarter of this year. We're not going to do them every quarter. And we're also looking at different ways of doing it. So for example, if we do a credit risk transfer transaction, it's kind of a different impact in terms of the balance sheet and the P&L versus a loan sale. And so, yes, this is going to be a little bit kind of lumpy. But we think this is an important tool for us to have as we look at managing capital and positioning ourselves to take advantage of the opportunities that are in the market today and also better serve our dealers. If you just kind of turn to the loan sale we did this quarter, we sold $1.1 billion of loans. There was a $15 million earnings benefit and that earnings benefit is effectively the net benefit given where we hold the loans, including the reserve and provision impact. And so, that $15 million benefit was realized through the provision line, but that is a positive P&L event for us and again, reflects strong investor interest in the overall loan portfolio. I would say the loans that we sold, they were predominantly 2023 vintage. There was some older stuff in there from 2022 and 2021 as well. So the blended yield, as we said on the call, was lower than what we're currently originating in the market today. And so, again, we feel good about the economics we got, given the yield on the loans that we sold. So again, strong investor interest. We'll continue to be opportunistic. We'll look for more opportunities to do this. And it's all good in allowing us to capture opportunity and better serve our dealers. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Operator Our next question will come from the line of Jeff Adelson with Morgan Stanley. Jeff Adelson -- Morgan Stanley -- Analyst Hey. Good morning. Thanks for taking the question. Russ, I just – I know the forward curve has sort of eased the expectation for cuts recently. And I know you are still looking for the 4% by the end of 2025 with that rate cuts. But if the forward curve does come through, do you still think there is an opportunity for the 4% to come a bit earlier in the year ignoring the lumpiness that might be happening on a quarter-to-quarter basis? Russ Hutchinson -- Chief Financial Officer I think right now, we are on track for 4% by the end of 2025 and so we feel pretty good about that. We do run a variety of reasonable rate scenarios here, and we feel pretty good about end of 2025 under a range of scenarios, including scenarios where we are flat for the duration of 2024. And again, we think we've kind of taken that risk off the table for this year in terms of its impact on our yield. Jeff Adelson -- Morgan Stanley -- Analyst And on the remarketing side, I mean, it seems like you guys have seen some real strength in the lease termination volumes lately. I think that's coming off the back of the originations you did a couple of years ago. And I think the less the dealer-buyer figure dropped the most, it's dropped since you started disclosing that. Can you just talk a little bit more about the outlook there? Is that something that could actually maybe help your NIM going forward even as used car prices continue to kind of moderate? Is there may be like a kind of Goldilocks type zone there where used car prices moderating is actually something that helps you as more consumers are bringing their cars back to you? Russ Hutchinson -- Chief Financial Officer I think lease terminations can be a little bit lumpy and that some of the – that's one of the factors that contributes to the lumpiness in terms of our NIM progression, and that's why we give you that 5 to 15 basis points. Yes, I'd say if I look over the course of the first quarter, lease terminations were actually weak toward the beginning of the quarter and kind of came back toward the end. And so, we saw that lumpiness quite nicely even within the quarter. I think on the contractual buyouts, I think we expect the level of contractual buyouts to continue to normalize, particularly as used car prices reach that 120 level that we've been talking about, that's all obviously – that's all stuff that will ebb and flow over the course of the quarter and over the course of the remainder of the year. I think we've priced in kind of reasonable expectations in terms of how we set the guide, around just the kind of the overall level of lease terminations and the level of contractual buyouts, again, normalizing and used car prices normalizing around that 120 level. Jeff Adelson -- Morgan Stanley -- Analyst OK. Great. Thank you. Operator Our next question will come from the line of Rob Wildhack with Autonomous Research. Rob Wildhack -- Autonomous Research -- Analyst Good morning, guys. Russ Hutchinson -- Chief Financial Officer Good morning, Rob. Rob Wildhack -- Autonomous Research -- Analyst One more question around loan sales. Russ, what's the rate limiting factor today that's preventing you or keeping you from doing more loan sales and taking advantage of this competitive opportunity that you guys are highlighting? Is it demand from loan buyers or investors? Is it pricing? Is it something else? Russ Hutchinson -- Chief Financial Officer No, we've seen really great demand from investors. I think we've been able to get done what we've tried to get done in each of the two transactions – each of the three transactions that we've completed so far. I think we're – we feel pretty good about what we've done. Again, we don't set targets on how much we want to do in a given quarter or a given year. But again, we continue to feel pretty good about what we've done, and we feel pretty good about on the other side of it, what we're originating and how it allows us to support our business. Rob Wildhack -- Autonomous Research -- Analyst OK. Thanks. And then, how much more room do you think you have with respect to deposit repricing, especially as fewer rate cuts are now being priced in? And then, maybe to follow on from that, what degree of deposit repricing is included in your outlook for the NIM expansion and the exit rate in the fourth quarter? Russ Hutchinson -- Chief Financial Officer Got it. Look, we've been really pleased with the amount of pricing flexibility we've gotten so far. As we pointed out on the call, we took – we started with CDs, we took 75 basis points off of our 12 months, our most popular CD product. We took – we've taken off liquids. We took another 5 basis points of our savings product this morning. We continue to feel great about the deposit flows we're getting. And so, we've seen the competitive environment for deposits is clearly eased. Our own demand for deposit growth has obviously changed as well, being 90% funded by deposits with a flat balance sheet expectation going forward. And so, we feel pretty good about where we are. As I said to Ryan earlier, it's hard for us to say at this point whether what we've done is we've just pulled forward cuts to pricing that we would have made later or if we're on track to a lower place. I'd say our overall forecast in terms of exit rate is conservative. We consider a range of different rate scenarios, including the possibility of Fed funds being flat for the remainder of the year. And as you'd expect, our pricing assumptions actually change depending on the actual path of Fed funds and the overall competitive environment. So it's hard to give you kind of one because we look at a lot of different paths. But again, through a range of path, given the quality – given the strength of the repricing we're seeing on the auto loan side, given the hedging portfolio that we have in place, we feel pretty good about our exit rate and our overall NIM guidance for the year. Rob Wildhack -- Autonomous Research -- Analyst OK. Thank you. Operator Our next question will come from the line of Bill Carcache with Wolfe Research Securities. Bill Carcache -- Wolfe Research -- Analyst Thank you. Good morning, Doug, and Russ. A flat reserve rate versus falling DQ rate formation suggests growing conservatism. What's the trigger that would give you comfort allowing that reserve rate to drift back down to Day-1 levels? And let me flip the question, are you seeing anything that could lead you to have to take reserve coverage higher from here? Russ Hutchinson -- Chief Financial Officer I think as we said on the call, our expectation is, we'll keep that reserve coverage flat. I don't think it reflects any particular conservatism on our side. It's – quite frankly, it's kind of how we're running the business today. And it reflects, in some ways, the fact that – as we look at the assets we're originating today versus what we would have originated in, say, 2019, we are focusing on a product with a richer yield and that carries more credit with it. And we think we're getting more than compensated for the additional credit that we're taking. But it's a different mix and a different place in the credit spectrum than we would have been in 2019. Bill Carcache -- Wolfe Research -- Analyst Understood. On interest rate risk, you guys put on the hedge in part as protection – or higher for longer rate environment, and it seems to have performed as intended. How are you thinking about any potential future incremental hedging activity as the rate environment evolves? Russ Hutchinson -- Chief Financial Officer We're pretty happy with the performance of the hedges. I think they're performing as intended. They are a bridge for us right there. They bridge to that kind of natural portfolio turnover to the more recent higher-yielding originations. At this point, our expectation is that we will allow those hedges to amortize and that we're kind of in the right place in terms of bridging that portfolio turnover. But obviously, we manage dynamically, and we'll continue to kind of assess the situation as we see market dynamics play out. Bill Carcache -- Wolfe Research -- Analyst Thank you for taking my questions. Russ Hutchinson -- Chief Financial Officer Thanks, Bill. Operator Our next question comes from the line of John Pancari with Evercore ISI. Chase Haynes -- Evercore ISI -- Analyst Hey, how's it going? This is Chase Haynes on for John Pancari. I want to try to get a sense for auto – consumer auto loan demand, just given what you're saying about elevated insurance premiums due to those higher inventory levels – is that due to a decrease in demand that you're seeing in big ticket items? Or is that just a normalization effect? And do you expect consumer auto demand in the go-forward quarters to kind of remain where they've been at or decrease or increase a bit? Doug Timmerman -- Interim Chief Executive Officer Well, I think it's a little bit unique to us because if you look at our application flow and what we've been hitting records quarter after quarter after quarter, so we're getting a greater market share of application flow, which obviously gives us significant kind of up, if you will, relative to what we can originate. And then, of course, you put that on top of a competitive environment that is very constructive for growth. Those are the real two drivers. But yes, I think the general market is such that I think volumes would be pretty consistent or flat, but I think our ability to do more is heavily driven just by the fact that we're driving that increased application flow. Chase Haynes -- Evercore ISI -- Analyst Got it. Thank you, guys. Doug Timmerman -- Interim Chief Executive Officer That, of course, also allows us to be selective as to where we want to play on top of it. So – Sean Leary -- Head of Investor Relations Thank you, Doug. It's shown right at the top of the hour here, so that's all the time that we have for today. As always, if you have any additional questions, please feel free to reach out to investor relations. Thank you for joining us this morning. That concludes today's call.

edtsum7

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and thank you for holding. Welcome to Aon plc's first-quarter 2024 conference call. [Operator instructions] I would also like to remind all parties that this call is being recorded. If anyone has any objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press conference covering our first-quarter 2024 results, as well as having been posted on our website. Now, it is my pleasure to turn the call over to Greg Case, CEO of Aon plc. Greg Case -- Chief Executive Officer Good morning, everyone, and welcome to our first-quarter conference call. I'm joined by Christa Davies, our CFO, and Eric Andersen, our president. For your convenience, we posted a detailed financial presentation on our website. As always, we begin by thanking our colleagues around the world for the incredible work they do every day to support each other and deliver the best of our firm to clients. And this quarter, I also want to single out one colleague in particular, our chief financial officer and my friend and partner, Christa Davies. As you know, Christa announced her retirement from her role as CFO earlier this month, following over 16 years of tremendous service. With Christa's guidance, we developed a seamless transition plan. As previously announced, Christa remains in our CFO role in the second quarter earnings and we're making strong progress against well-defined plans to have her successor in place to begin the handoff. I'm grateful that you'll continue to serve as a senior advisor into 2025 to ensure great continuity. Now to begin our report today, it's important we start by highlighting an incredibly exciting milestone for our firm, the completion of our work to bring NFP into the Aon family as we closed the transaction yesterday. To the 7,700 NFP colleagues, who now join our firm, welcome to Aon. NFP's client relationships, capabilities, focused sales force, and market knowledge provides a meaningfully expanded position in the fast-growing $31 billion North American middle market. Since our announcement late December, we've gotten to know the team even better and our appreciation and excitement for what we can do together has continued to grow and the opportunity is even more clear. In Commercial Risk, complementary specialist resources and expertise from both organizations will enhance what we bring to clients. Delivering Aon's analytics and decision support tools to the NFP sales force allows for real differentiation on top of their highly integrated sales approach. Further, we can reintroduce and introduce, reinforce NFP's offerings with access to our programs and facilities like Aon Client Treaty, and also in Commercial Risk, we can leverage our global Aon network for clients who require seamless global service to enhance an already strong NFP value proposition. In Wealth Solutions, we see great opportunity to bring our capabilities around pension risk transfer to NFP clients, as well as to continue to build on our investment offerings together, ensuring all clients have access to retirement options that best support their people. And in Health Solutions, our businesses are highly complementary with new opportunities in the health value chain where we don't operate today, or for clients that we only serve in one solution line. And for example, NFP brings outstanding health value proposition for clients with under 100 employees, an attractive option for our smaller clients in Commercial Risk. Conversely, we see great opportunity to provide NFP's clients with our data and analytics solutions, including benchmarking and tools on health equity, network strategies, and high-cost claimants. Further, we can support current NFP clients with specialized capabilities in areas such as global benefits, pharmacy consulting, and consumer benefits. Another great strength of NFP is their exceptional M&A engine and very strong acquisition pipeline as we look to the future. On deal financials, we're delighted to close much earlier than originally modeled with fewer shares issued and realization of benefits that now occur a year earlier. Noting, we now expect EPS accretion to '26 and thereafter and additional free cash flow of $300 million and $600 million in 2025 and 2026, respectively. We're incredibly excited about the opportunity as we bring Aon and NFP content capabilities together, enabled by Aon Business Services. We also see great value in the operating model built around the principle of independent and connected to deliver Risk Capital and Human Capital capability to our clients. All in, this acquisition is another strong step forward in our Aon United journey and reinforces our long-term financial guidance to deliver mid-single digit or greater organic revenue growth, adjusted operating margin expansion, and double-digit free cash flow growth over the long term. Turning now to our results in the quarter. Overall, our team delivered a strong start to the year with 5% overall organic revenue growth, 100 basis points of adjusted margin expansion, and 9% EPS growth. Within our solution lines, Reinsurance delivered 7% organic revenue growth, as our team helped clients navigate continued market challenges, but with greater capacity and stable pricing on programs. Further, our team is increasingly building on traditional capabilities with enhanced data, analytics, and advisory capabilities. In Health Solutions, we delivered 6% organic revenue growth with strong growth in core health across all major geographies, driven by strong ongoing new business generation and retention and strength in specialist capabilities like consumer and pharmacy benefits. In Wealth Solutions, organic revenue growth of 4% reflected strength in retirement as our teams continue to help clients reduce risk through pension risk transfer and manage the ongoing impact of regulatory changes as we continue to bring leading capabilities to help clients match risk and capital. In Commercial Risk, we saw 3% organic revenue growth, highlighted by strength in Asia and the Pacific, Continental Europe, and areas in our portfolio like construction. As we look at these results, especially in the U.S., we've seen the impact of our business mix play out, as we have strength and strong weighting in larger clients and specialty lines like D&O. These are significant areas within our U.S. Business and again areas where we're strong and we see substantial long-term top- and bottom-line growth potential despite some current pressure reflected in net new business. Going forward, we'll continue to be strong in these categories and continue hiring and investment in priority areas like energy and construction. We also observed, as we've mentioned previously, we're not seeing a real rebound yet in M&A and IPO activity, though we know there's demand and dry powder building. And until yesterday, we were relatively smaller in a $31 billion North American middle market, although now with the close of NFP, we've added 7,700 colleagues and established a much more meaningful position in this fast-growing market. Overall, across the firm, we continue to focus on our most critical asset, our talent. Our engagement remains at historically high levels, and our voluntary attrition in Q1 is at the lowest level in many years. On talent acquisition, we continue to increase hiring in selected client-facing areas, as well as an analytics capability to support our efforts in Risk Capital and Human Capital. In summary, we're making great progress to start the year. Our first-quarter results and the close of NFP put us in a strong position to continue delivering results through 2024 and over the long term. This progress fully reinforces our 3x3 plan, focused on three fundamental commitments over the next three years, including capitalizing on our work in Risk Capital and Human Capital, delivering Aon client leadership, and amplifying these efforts through Aon Business Services. The strength, importance, and momentum of this plan is being strongly reinforced by ongoing client and colleague feedback. And this plan defines a powerful path forward, one that drives ongoing top- and bottom-line growth and greater levels of long-term free cash flow growth, exactly consistent with our ongoing financial guidance. Finally, as I turn the call over to Christa, I want to return to my opening comments and thank her again for her partnership, leadership, and friendship. Ultimately, Christa will have left a permanent imprint on our Aon United strategy. For 16 years, our shared mission has been to connect our colleagues to a "one firm" mindset so they can deliver more value to clients. That mission is universally focused on accelerating Aon United, and now, in arguably our most exciting period, it's fully reflected in our 3x3 plan, and Christa has been a critical partner in all of this work. Our Aon colleagues will miss Christa in the CFO role. Personally, the journey with Christa is a highlight of my professional career. Our 52,000 colleagues, and as of today, 60,000 and their families are in a better position because of Christa. We're all grateful that Christa will be staying with us as a senior advisor to continue to drive momentum as she moves on to her next mission. And most important, we fully appreciate that there are other missions in life of higher priority, and we embrace Christa's decision to shift her focus at this time. Christa, my friend, over to you. Christa Davies -- Chief Financial Officer Thank you so much, Greg. I want to start by thanking you for the opportunity over the last 16 years to contribute to the incredible success we've had at Aon. This will be the defining role of my career, and that's really what's at the heart of this decision. As you described, this decision isn't about other professional pursuits. My decision is to focus my time differently at this point in my life. I'm grateful that our work together has created the ability for me to make this choice. I must say that our 3x3 plan delivers on its full potential in the months ahead, including with the great addition of NFP. I'm going to truly miss working so closely with this team to realize the tremendous value creation that is ahead for Aon. We're also very pleased to announce the completion of the NFP acquisition. I'm delighted to welcome the NFP to Aon. We're excited to work together to capture the growth opportunities we see for clients, colleagues, and shareholders. As we announced yesterday, we closed the transaction for a total enterprise value of $13 billion. The faster-than-expected close date means we now expect to achieve a similar benefit a year earlier with improvements in certain metrics. Noting, we maintained guidance for revenue and cost synergies of $235 million, which now occur a year earlier given the close date. We achieved a lower interest rate on deal-related debt of 5.7%, and we issued fewer shares at 19 million. Collectively, this results in similar deal-related financial benefits of accretion and free cash flow that are realized a year earlier than initially modeled. We now expect the deal to add $300 million to free cash flow in 2025 and $600 million in 2026, and be accretive in 2026 and over the long term. We've also provided detailed financial information for NFP in our materials. NFP built on our long-term proven track record of strategically allocating capital at scale to high-return opportunities to create long-term value for clients, colleagues, and shareholders. And as Greg mentioned, it reinforces and accelerates our Aon United strategy and our 3x3 plan, and adds to our strong momentum as we drive results in 2024 and over the long term. Now turning to the quarter. We delivered strong operational performance to start the year, highlighted by 5% organic revenue growth, which translated into 100 basis points of adjusted operating margin expansion, 8% adjusted operating income growth, and 9% adjusted EPS growth. As Greg noted, organic revenue growth was 5%, driven by ongoing strong retention and net new business generation. I'd note that fiduciary investment income, which is not included in organic revenue growth, was $79 million. If you were to include fiduciary investment income, organic revenue growth would have been 70 basis points higher. We continue to expect mid-single digit or greater organic revenue growth for the full year 2024 and over the long term. And as we look forward, we continue to expect that NFP will contribute to the firm's overall revenue growth through organic revenue growth, including $175 million of net revenue synergies by 2026 and inorganic growth from ongoing M&A. Moving to operating performance. We delivered strong operational improvement in Q1 with adjusted operating margins of 39.7%, an increase of 100 basis points, driven by revenue growth, portfolio mix shift, efficiencies from Aon Business Services, and restructuring savings, overcoming expense growth, including investments in colleagues and technology, to drive long-term growth. Restructuring savings in Q1 were $20 million and contributed 50 basis points to adjusted operating margin expansion. Restructuring actions completed so far are expected to generate $90 million of savings in 2024, and we expect restructuring savings will fall to the bottom line. At this time, we continue to expect $100 million of realized savings in 2024 as we continue to execute against our plans for Aon Business Services and our business. Regarding the program, we are seeing real progress in our acceleration of Aon Business Services. This includes streamlining and improving operational processes around working capital, moving work to the best locations, and enhancing clients' and colleagues' experience with great new tools such as our property, casualty, D&O, and cyber analyzers. As we've said previously, we know delivering our Aon Business Services strategy will result in long-term top- and bottom-line growth as we drive more value for clients, colleagues, and shareholders. As we think about adjusted operating margins going forward, we continue to expect to drive margin expansion over the long term through ongoing revenue growth and portfolio mix shift to higher growth, higher margin areas of the portfolio, driven by efficiencies from Aon Business Services. Now that we've closed NFP, margins will be initially lower. Considering the close timing, we think the right baseline from which to measure 2024 adjusted operating margin growth is 30.6%, calculated as our 31.6% in 2023, less a 100 basis point drag from NFP for the period from April 25th close through the end of 2024. In our materials, we've detailed 2023 operating performance for NFP. On a full-year basis, we would note that NFP would have had a full-year pro forma drag of a 140 basis points for 2023, so there'll be some ongoing drag on 2025 margins until we lap the close in April 2025. We also expect fiduciary investment income to be relatively flat year over year based on current interest rate expectations. So the tailwind that we've seen in Q1 this year will be reduced, although we remain committed to driving full-year adjusted operating margin expansion in 2024 against this adjusted baseline of 30.6% and over the long term. Turning to EPS, adjusted EPS grew 9% in the quarter, reflecting 8% adjusted operating income growth and ongoing share buyback, partially offset by a higher tax rate in the quarter. With respect to NFP, as we previously communicated, we expect the acquisition to be dilutive to adjusted EPS in the remainder of 2024, breakeven in 2025, and accretive to adjusted EPS in 2026 and beyond. Turning to free cash flow. I'd note Q1 has historically been our seasonally smallest quarter from a cash flow standpoint due primarily to incentive compensation payments. And as we've communicated before, free cash flow can be lumpy quarter to quarter. We generated $261 million of free cash flow in the first quarter, reflecting strong operating income growth and lower capex, offset by higher receivables, payments related to E&O, restructuring, NFP transaction integration charges, and higher cash tax payments, as we've previously communicated. As we look forward, we expect ongoing negative impacts of free cash flow in the near term from restructuring, higher interest expense, and NFP deal and integration costs. The NFP acquisition strengthens our long-term free cash flow outlook with $300 million of incremental free cash flow in 2025 and $600 million in 2026. Over the long term, we would expect to return to our trajectory of double-digit free cash flow growth, driven by operating income growth and a $500 million opportunity in working capital. Now turning to capital allocation. We allocate capital based on return on capital and a long-term value creation, which we've done over time through core business investment, share buyback, and M&A. Regarding M&A, as you look historically, we have a successful track record of balancing acquisitions, divestitures, and share buyback as we continue to optimize our portfolio against our priority investment areas on an ROIC basis. We're incredibly excited about NFP's impressive M&A engine, noting their strong history of M&A. We look forward to building on their established track record and executing against their strong pipeline to drive future growth in this space within our ROIC framework. We still expect share buyback to remain the top priority for capital allocation. As we think about capital allocation in 2024, we'd observe there are puts and takes around free cash flow that we've communicated. And while buyback will be lower than last year, we expect it will still be substantial at $1 billion or more based on our current M&A expectations for the rest of the year. We have a very strong long-term free cash flow outlook for the firm and are confident that share repurchase will continue to remain our highest ROIC opportunity for meaningful ongoing capital allocation over time. Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet. As previously communicated, we funded the cash and assumed liabilities portion of the NFP purchase with approximately $7 billion of new debt, with $5 billion raised in March 2024, and $2 billion borrowed at close. And I'd note, the average interest rate for the $5 billion of transaction related senior notes and the $2 billion term loan is 5.7%, about 80 basis points better than what we modeled when we announced the deal. We expect our credit ratios to be elevated over the next 12 to 18 months as we bring our leverage ratios back in line with levels consistent with our credit profile, 2.8 times to 3 times debt to EBITDA on a GAAP basis. This is driven by substantial free cash flow generation and incremental debt capacity from EBITDA growth, noting our track record of effectively managing leverage within current ratings. In summary, our operating performance in Q1 is a strong start to the year, and we're well-positioned to build on this momentum in the rest of the year. We're delighted to have closed NFP acquisition ahead of schedule, enabling us to achieve financial benefits of accretion and free cash flow a year earlier than initially modeled. We look forward to enhancing NFP's strong client relationships with Aon's content and capabilities and see real opportunity to learn from each other and bring better solutions to our clients together. It's another step forward in our 3x3 plan as we accelerate our Aon United strategy, catalyzed by Aon Business Services and reinforced by the restructuring program. With that, I'll turn the call back to the operator, and we'd be delighted to take your questions. Questions & Answers: Operator Thank you.[Operator instructions] Our first question is from Andrew Kligerman with TD Securities. Please proceed with your question. Andrew Kligerman -- TD Cowen -- Analyst Thank you. Good morning, and congratulations, Christa. Greg, you mentioned in the opening remarks the lowest attrition that Aon has seen in a while. Could you put any details around that? Any color? It sounds very interesting. Greg Case -- Chief Executive Officer Well, Andrew, I appreciate the question. Listen, if you step back and think about sort of talent overall and what we're about and what we're up to, this is really about how we've built on Aon United and the strategy around the culture, and it's been foundational, how we connect our colleagues, support each other, and deliver the best we can for our clients. And that has just continued to build, and it really gives them an opportunity to sit across the table to do some pretty unique things with clients, which is why they're here, why they're excited about being part of our firm. And then on top of that now, we've got the 3x3 plan, Andrew, which literally is going to continue to enhance this very substantially with greater content and capability in Risk Capital and Human Capital, as well as the analytics that underpin all that driven by ABS. So for all those reasons, this is a pretty unique place to be at a time when clients have high need. But, Eric, what else would you add to that? Eric Andersen -- President Yeah. Greg, maybe I'll just take it down. If you're an account leader or a colleague working with a client, just picking up on your example, culture capabilities, team support, all those drive a decision to either come or stay at our firm. And if you just think about it, historically, if you were part of a client team, you were having a product discussion with a client. Today, you're having -- if it's a risk client, you're having a risk capital discussion. So you're having colleagues from commercial risk, from [Inaudible], maybe captives, maybe risk consulting, using new tools, like, at the risk analyzers that Christa mentioned, that are created with our ABS colleagues. It creates a professional development for them, and it creates a team-based environment where you're actually providing real new value to clients. So I think all of that drives why people come and then ultimately why they stay with us. Andrew Kligerman -- TD Cowen -- Analyst Awesome. And then just shifting over to the tax rate, around 23% this quarter, it's a bit surprising just given that over the last several years, it's kind of hovered around 18.5%. And I know Christa doesn't give guidance on this, but maybe given the big move in the tax rate and your points in the write up about changing geography, you could give us a little color on, A, the change in geography of the tax? And B, maybe an exception and an indication of where we might expect the tax rate to be going forward, especially with NFP there? Christa Davies -- Chief Financial Officer Thanks so much for the question, Andrew. And we did see a higher tax rate this quarter, driven by, as you said, changes in the geographic distribution of income and unfavorable discretes. And I will note, Andrew, that discretes have historically been positive for us, and in this quarter, they really did just line up to be net negative. And what I would say is, look, it's just lumpy to quarter to quarter. And, as you said, we don't give guidance going forward. But if we look back historically, exclusive of the impacts of discretes, which can be positive or negative, our historical underlying rate for the last five years has been 18%. Andrew Kligerman -- TD Cowen -- Analyst OK. Thank you very much. Operator Our next question is from Jimmy Bhullar with J.P. Morgan. Please proceed with your question. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst Good morning. So first just had a question on organic growth in Commercial Risk. If we look over the past year, year and a half or so it seems to have lagged what we've seen at some of your peers. And initially, I think a lot of people were concerned that this was because of the fallout from Willis. You've highlighted, the capital markets activity pressuring your results more than peers as well. But wondering if you could just talk about why you feel your growth has lagged some of your large peers even though historically you've actually been fairly consistent with growth with most of the other competitors? Greg Case -- Chief Executive Officer Jimmy, really appreciate the question. And maybe what I'll do is I'll step back and just again orient overall for global Aon, how we think about the firm and how we think about progress over time. And if you step back, we'd essentially say, first of all, this is not about one quarter, it really is about as you look across over the year, kind of how we're performing across global Aon over the course of the year. And our mission right now, which we're going to continue to push on and really amplify is to build on the 3x3 plan over the next three years. And this is really capitalizing on Risk Capital and Human Capital, amplifying through Aon Business Services and delivering Aon client leadership, which we know, Jimmy, is going to together deliver both top-line and bottom-line performance and most important the double-digit annual free cash flow growth compared to our '23 baseline that Christa described. And if you think about the quarter, which you're coming back to now asking specifically, I'm going to get to Commercial Risk very explicitly in a second, but our goals in the quarter from our standpoint were actually accelerated in terms of that 3x3 plan. If you think about ABS, the introduction of our analyzers and the client experience improvements, client response has been exceptional and real progress in the quarter. Our restructuring plan, as Christa highlighted, strengthens really what we've done in ABS substantially and it really supports substantial hiring in priority areas. So all good from a priority standpoint, and obviously, of course, the announcement of NFP with truly game-changer access into the North American middle market, and really every -- think about all aspects or generally aspects of the close improved since our December 20th announcement. So if we step back, Jimmy, and you sort of say, how are we doing from our standpoint, we feel very good, especially about the 3x3 plan and the progress we made on it. And if you think about the quarter overall for Aon, we delivered mid-single digit growth 5% with strength in Health and Reinsurance in Continental Europe and Asia and the Pacific, margin expansion of 100 basis points, EPS growth of 9% and free cash flow exactly in line with expectations. And then specifically to your question, because I want to make sure I get to that, look, we saw strength in Commercial across Continental Europe, Asia and Pacific, all very good. We highlighted the mix play, as we think about where we really have large portions of our business weighted to our larger clients, especially in some of the specialty lines like D&O and there's some pressure there, but we also observed, obviously as we just described, we were very underweight in the fast-growing middle market until yesterday. And now we see a massive opportunity going forward. They're all consistent with the 3x3 plan. And we've communicated previously the negative impact on transaction and IPO activity, which is yet to rebound, but we are very confident it will. So from our standpoint, look, we feel very good about the trajectory and what we're going to be able to do over time and deliver on the 3x3 plan in a very clear way. And it's going to be great outcome for clients, great outcome for our colleagues who would deliver that value and ultimately for our shareholders. And I just want to reiterate as what Christa described, we're at mid-single digit organic growth or greater and that commitment holds across '24 and over the long term. And we fully expect to translate that into frankly strong top-line and bottom-line performance. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst OK. Thanks. And then just following up on buybacks, I'm assuming this year is going to be lower than last year partly because of the drag because of NFP then also the drag because of the restructuring program. But if we think about 1Q, was it also depressed because of the seasonality of cash flows or is this sort of a normal quarter in terms of buyback? Christa Davies -- Chief Financial Officer Yeah. So, Jimmy, thank you for the question. And I did actually give specific guidance in my opening remarks about buyback because I recognize that there's a lot of puts and takes around free cash flow as we've communicated. And while buyback will be lower than last year, we expect it will be -- still be substantial for the full year 2024 at $1 billion or more based on our current M&A expectations for the rest of the year. And as we mentioned, Q1 is our seasonally smallest free cash flow quarter. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst OK. Thank you. Operator Thank you. Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed with your question. Mike Zaremski -- BMO Capital Markets -- Analyst Hey. Good morning. Congrats, Christa. On the NFP deal closing, is there anything we should be aware of in terms of the shares Aon will be issuing to the owners of NFP and whether there's like a lockup or expected sale of those shares over time given how a large amount it is? Christa Davies -- Chief Financial Officer Thanks so much for the question. And we did issue the 19 million shares yesterday, so that occurred. And we haven't disclosed anything related to the MDP lockup. What we can say is, the NFP management team did receive a meaningful amount of Aon shares, and the purchase agreement refers to their lockup period. And we have spent time with our new investors, and they're really excited about the Aon story and appreciate how the acquisition furthers our Aon United strategy, and I'm particularly excited about the 3x3 plan, too. Mike Zaremski -- BMO Capital Markets -- Analyst OK. Got it. My follow-up is also on the NFP deal. Now that it's closed, the math you gave when the deal was announced on the interest expense appeared to bake in a slightly higher interest rate level in our -- it looks like than current interest rates. And just given cost of capital, it's actually even a bit higher today. Would this also kind of incentivize Aon to pay down the debt faster as well than you had thought maybe a few months ago when the deal was announced? Thanks. Christa Davies -- Chief Financial Officer Thanks so much for the question, Mike. And so if you look at the financials we've outlined, the synergies and deal financials, what you'll observe with the interest expense is, when we originally announced this in December, we had $230 million of interest expense in the stub period, which at the time was a six-month stub period, and we now have $285 million in that period, and it's really a result of the two extra months. Interest is actually at a lower average interest rate. We had originally forecast the average interest rate on the $7 billion of debt to be 6.5%. It's now 5.7%, so a whole 80 basis points less. So the interest rate is less, but you've got two more months. And then, you can see that the interest expense in the future years, 2025 and 2026, is coming down from our original estimate. So the $310 million we now have in 2025, compares to the $410 million we had before, and the $275 million, compares to the $340 million. So you can see how the lower interest rates are impacted those future years. Mike Zaremski -- BMO Capital Markets -- Analyst OK. Got it. I'll look at that. Thank you. Operator Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question. Elyse Greenspan -- Wells Fargo Securities -- Analyst Hi. Thanks. Good morning. My first question, I was hoping to get more color just on why the new business was down year over year in the U.S. specifically versus other regions. And, Greg, I know you called out some business lines, but can you just help us think about how that might rebound from here? Greg Case -- Chief Executive Officer I appreciate the question, Elyse. Start, overall globally, very strong profile across the board as we said before both on retention, exceptionally high, and on new business overall. All we just did is highlight a couple areas in the U.S. where we're seeing some pressure, and that's really what we're showing up. That that will rebound over time, as we continue to talk to clients about the opportunities they've got to read as they think about their overall programs in terms of where they are. But, Eric, anything you'd add to that perspective? Eric Andersen -- President Yeah. Greg, I mean, you talked about D&O in particular, but I would also say we've had some really solid growth in areas like energy and construction and other places where we're investing in talent to grow our capabilities there. That's the sector piece. But we're also investing in geographic areas called Continental Europe, Asia Pacific, where we're also seeing good growth. So I think we will see great opportunity for us as we go forward through the year. Elyse Greenspan -- Wells Fargo Securities -- Analyst And then, in terms of the transactional, the M&A and the SPAC, and the IPO business, I guess, how would the Q1 compare, right? That's been a business that's been a headwind for you guys right over the last six, seven quarters. How would -- have you started to see any of that business come back, or would you still say we're close to trough levels there? Eric Andersen -- President So, Elyse, I don't think there's anybody on the planet that looks at it closer than us as we've been watching it. We hear people talk of green shoots, but the reality is, and I think we've said it on the past, that our opportunity happens when the deals close. And so at this point, you hear things in the market about dry powder and people wanting to do transactions, but at this point, it's still fairly depressed. Greg Case -- Chief Executive Officer I think we would say, Elyse, as Eric described, we see the pipeline, we love it. It looks very strong, but we don't count it anymore. We count it when it's done, and that's what we're going to do. When we see the opportunity, we're going to count it when it's done. Elyse Greenspan -- Wells Fargo Securities -- Analyst And then, one on the margin side. You gave the baseline, Christa, of 30.6% for this year. I know in the past, you'll typically point to your historical kind of 80 basis points to 90 basis points of margin improvement annually. Is that the right way to think about the improvement off of the 36% given the puts and takes of fiduciary investment income savings and then just leverage against your revenue growth? Christa Davies -- Chief Financial Officer So, Elyse, the 30.6% is absolutely the right starting point for 2024 margin expansion. We don't give specific guidance. What we do say is we're committed to margin expansion each and every year, including 2024 of that 30.6% margin base, but all the drivers still hold. We're driving margin expansion due to organic revenue growth, portfolio mix shift, and synergies and efficiencies from Aon Business Services. Elyse Greenspan -- Wells Fargo Securities -- Analyst Thank you. Operator Our next question is from David Motemaden with Evercore ISI. Please proceed with your question. David Motemaden -- Evercore ISI -- Analyst Hi. Thanks. Good morning. Just wanted to hear your guys' opinion on the potential FTC ban of non-competes and what sort of impact that might have on your business and specifically on the acquisition economics of NFP. Greg Case -- Chief Executive Officer I'll start overall. First, Dave, appreciate the question. It's not something we generally enter into, particularly in the U.S., where obviously this is going to focus on. But the macro point is really the talent question I think you're really getting at, which is fundamental. Maybe Eric can offer some thoughts on that. This is a place we live every day. It's our focus. Eric Andersen -- President Yeah. And I think, whether it's the attrition numbers, which are historically low, whether it's our ability to attract talent into the firm, we talked a little bit before about all the different tools that we've been investing in, and the culture and the team environment is all very important to keep the people. So as Greg said, we don't normally enter into non-compete, so this isn't a big issue for us, but it's all the other factors that drive it. And I think you also asked a question about NFP and the colleagues there. And I would just say that -- and both Greg and Christa mentioned it in the written remarks about how excited we are to have them. I think the opportunity for us to work together to add more value to their clients, which ultimately adds more value to their colleagues who have more capabilities and more opportunities to do more with them with our content. And then, obviously, the scale that we get from ABS, whether it's efficiency or the ability to deliver insights and tools and all the different aspects across health and risk, I think, provide great opportunity for the NFP colleagues as they join the firm. So really excited about that as I know everybody has been saying, and we see great opportunity going forward. David Motemaden -- Evercore ISI -- Analyst Got it. Great. Thanks. That's helpful. And then just my second question, it looks like U.S. organic growth within CRS was down in the first quarter compared to being flat in the fourth quarter. I'm just wondering, was there anything that got incrementally worse in the first quarter versus the fourth quarter? It feels like the pressures were kind of all kind of consistent. So I'm just wondering what that incremental -- what's driving that incremental decline, if I look at the organic growth in first quarter versus 4Q? Greg Case -- Chief Executive Officer We appreciate it, David. From our standpoint, we're not really looking Q4 to Q1 over time. Again, this is kind of an overall annual approach in terms of how we think about it. And as we said before, nothing has changed committed to mid-single digit or greater over the course of the year for our firm, and fully on track to do that across our firm. So I wouldn't look for anything in particular. We highlighted a few areas because we wanted to call them out. But listen, this is client leadership at a time when we're doubling down and investing on more client leadership. This is Risk Capital and Human Capital. This is Aon Business Services with the analyzers. And as we've launched those, they have met with hugely positive client feedback and the colleague feedback in terms of what they need, as well as ABS, which really enables all that, amplifies it, and creates a client experience environment that's better than ever before and on top of the content. So for us, no, we feel very good about the progress in Q1 and what it means for our trajectory going forward. David Motemaden -- Evercore ISI -- Analyst Understood. Thanks so much. Operator Our next question is from Rob Cox with Goldman Sachs. Please proceed with your question. Robert Cox -- Goldman Sachs -- Analyst Hey. Thanks. I think in the previous presentation on NFP, the target was for sort of similar to historical levels of total revenue growth, I think about 14%. Are you guys still -- is that projection sort of maintained here? And are you still confident in that projection, considering there could be some slowing levels of inflation or caution around the economy going forward? Greg Case -- Chief Executive Officer Rob, maybe I'll just take a quick step back. I think it's worthwhile just reflecting on sort of the whole NFP process and getting Eric to comment on this specifically in terms of sort of once we see the opportunity. Look, we just feel great about this combination. This is the $31 billion North American market in which we're vastly underway. We have an opportunity because of ABS to really go after that market in a way that's not just making us more sizable, but we think better. And better is this idea of really independent and connected in the way Eric described before, and I wanted to talk a bit about that. All these things sort of, as we've spent time over the last few months with Doug and Mike and the team, have been substantially reinforced. And so this is, at the top-line level on revenue opportunities in terms of how we do it and the yield we get out of that, all these things are better. And then, we reflect kind of some of the deal economics that also are better. So from our standpoint, we just see huge momentum. But Eric, you've been living this with Doug and Mike and the team. Maybe comment a little bit here and address some of Rob's questions more specifically. Eric Andersen -- President Yeah. I think there's two components. And first, just to touch on the independent and connected piece, which is such a critical part of how both the NFP team and the Aon team have been approaching this. And the independent piece is really to respect and sort of celebrate the way NFP approaches its clients locally and how the team service those clients. So really focusing in to make sure that those teams know exactly what they were doing before is what they're going to continue to do. The connected part is really about two pieces. There's an efficiency play with our ABS platform around tech and ops and areas where we can get some cost synergy. But, also more importantly, I think it's how we connect around product and capability. How we can bring our thought leadership, how we can bring structured portfolio solutions and product capability and thought leadership and get it to those to those teams in a way that their clients can digest it. So I think how we connect is really about content, and it's a little bit about the cost synergies, but it's really a revenue play for us as we look at the middle market. And I think on the growth number, there's an organic play here that we're talking a lot about. There's also an inorganic play that, as Greg mentioned in his opening remarks, their M&A pipeline and the way they approach adding organizations to NFP is really one of the strengths of the firm and something we're going to continue to work with. Greg Case -- Chief Executive Officer And just to amplify one more piece, this is a tour de force revenue opportunity, right? That's been the focus since the jump and that's what we've seen for the last few months. And it's both ways. Incredible capability. We hope to be able to bring with a producer who can sit across the table and do more on behalf of a client, which they just -- they're phenomenal at they love. But also on our side, we're going to benefit tremendously too as they -- in the ways they approach the market and how they can help Aon. It's just a -- we had high expectations going into the conversations, they've been exceeded over the last few months as we come together. So while we're not giving specific guidance on the growth number, this is tour de force growth and, man, do we see a great opportunity here to access this very, very substantial market where we're underway, but do so in a way again, it's not just bigger, but candidly better. Robert Cox -- Goldman Sachs -- Analyst Great. Appreciate the color. And then maybe as a follow-up, on transaction solutions, I think you guys have talked about doubling down on transaction solutions in the past. Could you talk about exactly what that means? And have you added talent there recently and expanded your practice, basically, anticipation of a rebound in M&A? Eric Andersen -- President So I would answer it in two ways. I think when we've talked about doubling down on it, the history of that product has historically been a PE-backed business. They were the original users of reps and warranties and tax insurance and things like that. Moving that over into the corporate space, where it's corporate to corporate, has been an area that we've been investing and understanding among our client leaders as well as the subject matter experts that know that space. So we've held the team. That was the goal, and I think that's what we've been saying for the last two years and the slowdown, knowing that at some stage, the market will come back. And we wanted to make sure the industry-leading expertise stayed with Aon. And so we continue to use them to reinforce the existing relationships that they have, while also building out a broader potential client set as M&A comes back. Robert Cox -- Goldman Sachs -- Analyst Thank you. Operator Thank you. Our final question comes from Meyer Shields with KBW. Please proceed with your question. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst Great. Thanks. Good morning. And Christa, congratulations. One question on the first-quarter margin. I guess if we take out fiduciary investment income in the savings, it doesn't seem -- and compare that to the same issue last year, it doesn't seem like there's been a lot of margin expansion despite the 5% organic growth. And I was hoping you could walk us through why that would be the case. Christa Davies -- Chief Financial Officer Yeah. So, Meyer, the way we think about margins is total margins. I know you're passing it into different components, and I understand the math. But we are -- we think about gross margins, which are substantial, and then we reinvest to deliver net margin expansion each year, which we will deliver again in 2024. And that's driven by organic revenue growth, portfolio mix shift, restructuring savings, which as you pointed, will drop to the bottom line, and efficiencies from Aon Business Services. And so we continue to invest in technology and Aon Business Services to drive future innovation and growth with clients. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK. No, that's fair. Makes sense that gets modeled in. For reporting purposes, is NFP's organic growth going to be included in the organic growth number that you report on a consolidated basis? Christa Davies -- Chief Financial Officer Yes. It is. And so that's why we've broken out in the numbers, Meyer. The revenue from NFP in that table, of 2023, by quarter, by solution line, so you can add it in. And so the way you do that for revenue is you add two months of Q2 of NFP plus the three months of Aon as your starting point for 2023, and then you grow that. And you will see the NFP numbers come through on that M&A table in our organic table. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK. Perfect. Thanks so much. Operator Thank you. I would now like to turn the call back over to Greg Case for closing remarks. Greg Case -- Chief Executive Officer I don't have a lot, but I have one message I want to deliver on behalf of Eric and Christa and I. We just want to say, on this very historic day for NFP and for Aon, a huge heartfelt welcome to our 7,700 new colleagues. We're just truly, truly excited to partner with you as we begin this journey together. So we're really looking forward to it, and welcome. Thanks, everybody for joining, and look forward to our next call. Take care. Answer:

Aon plc's first-quarter 2024 conference call

Operator Good morning, and thank you for holding. Welcome to Aon plc's first-quarter 2024 conference call. [Operator instructions] I would also like to remind all parties that this call is being recorded. If anyone has any objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward looking in nature as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press conference covering our first-quarter 2024 results, as well as having been posted on our website. Now, it is my pleasure to turn the call over to Greg Case, CEO of Aon plc. Greg Case -- Chief Executive Officer Good morning, everyone, and welcome to our first-quarter conference call. I'm joined by Christa Davies, our CFO, and Eric Andersen, our president. For your convenience, we posted a detailed financial presentation on our website. As always, we begin by thanking our colleagues around the world for the incredible work they do every day to support each other and deliver the best of our firm to clients. And this quarter, I also want to single out one colleague in particular, our chief financial officer and my friend and partner, Christa Davies. As you know, Christa announced her retirement from her role as CFO earlier this month, following over 16 years of tremendous service. With Christa's guidance, we developed a seamless transition plan. As previously announced, Christa remains in our CFO role in the second quarter earnings and we're making strong progress against well-defined plans to have her successor in place to begin the handoff. I'm grateful that you'll continue to serve as a senior advisor into 2025 to ensure great continuity. Now to begin our report today, it's important we start by highlighting an incredibly exciting milestone for our firm, the completion of our work to bring NFP into the Aon family as we closed the transaction yesterday. To the 7,700 NFP colleagues, who now join our firm, welcome to Aon. NFP's client relationships, capabilities, focused sales force, and market knowledge provides a meaningfully expanded position in the fast-growing $31 billion North American middle market. Since our announcement late December, we've gotten to know the team even better and our appreciation and excitement for what we can do together has continued to grow and the opportunity is even more clear. In Commercial Risk, complementary specialist resources and expertise from both organizations will enhance what we bring to clients. Delivering Aon's analytics and decision support tools to the NFP sales force allows for real differentiation on top of their highly integrated sales approach. Further, we can reintroduce and introduce, reinforce NFP's offerings with access to our programs and facilities like Aon Client Treaty, and also in Commercial Risk, we can leverage our global Aon network for clients who require seamless global service to enhance an already strong NFP value proposition. In Wealth Solutions, we see great opportunity to bring our capabilities around pension risk transfer to NFP clients, as well as to continue to build on our investment offerings together, ensuring all clients have access to retirement options that best support their people. And in Health Solutions, our businesses are highly complementary with new opportunities in the health value chain where we don't operate today, or for clients that we only serve in one solution line. And for example, NFP brings outstanding health value proposition for clients with under 100 employees, an attractive option for our smaller clients in Commercial Risk. Conversely, we see great opportunity to provide NFP's clients with our data and analytics solutions, including benchmarking and tools on health equity, network strategies, and high-cost claimants. Further, we can support current NFP clients with specialized capabilities in areas such as global benefits, pharmacy consulting, and consumer benefits. Another great strength of NFP is their exceptional M&A engine and very strong acquisition pipeline as we look to the future. On deal financials, we're delighted to close much earlier than originally modeled with fewer shares issued and realization of benefits that now occur a year earlier. Noting, we now expect EPS accretion to '26 and thereafter and additional free cash flow of $300 million and $600 million in 2025 and 2026, respectively. We're incredibly excited about the opportunity as we bring Aon and NFP content capabilities together, enabled by Aon Business Services. We also see great value in the operating model built around the principle of independent and connected to deliver Risk Capital and Human Capital capability to our clients. All in, this acquisition is another strong step forward in our Aon United journey and reinforces our long-term financial guidance to deliver mid-single digit or greater organic revenue growth, adjusted operating margin expansion, and double-digit free cash flow growth over the long term. Turning now to our results in the quarter. Overall, our team delivered a strong start to the year with 5% overall organic revenue growth, 100 basis points of adjusted margin expansion, and 9% EPS growth. Within our solution lines, Reinsurance delivered 7% organic revenue growth, as our team helped clients navigate continued market challenges, but with greater capacity and stable pricing on programs. Further, our team is increasingly building on traditional capabilities with enhanced data, analytics, and advisory capabilities. In Health Solutions, we delivered 6% organic revenue growth with strong growth in core health across all major geographies, driven by strong ongoing new business generation and retention and strength in specialist capabilities like consumer and pharmacy benefits. In Wealth Solutions, organic revenue growth of 4% reflected strength in retirement as our teams continue to help clients reduce risk through pension risk transfer and manage the ongoing impact of regulatory changes as we continue to bring leading capabilities to help clients match risk and capital. In Commercial Risk, we saw 3% organic revenue growth, highlighted by strength in Asia and the Pacific, Continental Europe, and areas in our portfolio like construction. As we look at these results, especially in the U.S., we've seen the impact of our business mix play out, as we have strength and strong weighting in larger clients and specialty lines like D&O. These are significant areas within our U.S. Business and again areas where we're strong and we see substantial long-term top- and bottom-line growth potential despite some current pressure reflected in net new business. Going forward, we'll continue to be strong in these categories and continue hiring and investment in priority areas like energy and construction. We also observed, as we've mentioned previously, we're not seeing a real rebound yet in M&A and IPO activity, though we know there's demand and dry powder building. And until yesterday, we were relatively smaller in a $31 billion North American middle market, although now with the close of NFP, we've added 7,700 colleagues and established a much more meaningful position in this fast-growing market. Overall, across the firm, we continue to focus on our most critical asset, our talent. Our engagement remains at historically high levels, and our voluntary attrition in Q1 is at the lowest level in many years. On talent acquisition, we continue to increase hiring in selected client-facing areas, as well as an analytics capability to support our efforts in Risk Capital and Human Capital. In summary, we're making great progress to start the year. Our first-quarter results and the close of NFP put us in a strong position to continue delivering results through 2024 and over the long term. This progress fully reinforces our 3x3 plan, focused on three fundamental commitments over the next three years, including capitalizing on our work in Risk Capital and Human Capital, delivering Aon client leadership, and amplifying these efforts through Aon Business Services. The strength, importance, and momentum of this plan is being strongly reinforced by ongoing client and colleague feedback. And this plan defines a powerful path forward, one that drives ongoing top- and bottom-line growth and greater levels of long-term free cash flow growth, exactly consistent with our ongoing financial guidance. Finally, as I turn the call over to Christa, I want to return to my opening comments and thank her again for her partnership, leadership, and friendship. Ultimately, Christa will have left a permanent imprint on our Aon United strategy. For 16 years, our shared mission has been to connect our colleagues to a "one firm" mindset so they can deliver more value to clients. That mission is universally focused on accelerating Aon United, and now, in arguably our most exciting period, it's fully reflected in our 3x3 plan, and Christa has been a critical partner in all of this work. Our Aon colleagues will miss Christa in the CFO role. Personally, the journey with Christa is a highlight of my professional career. Our 52,000 colleagues, and as of today, 60,000 and their families are in a better position because of Christa. We're all grateful that Christa will be staying with us as a senior advisor to continue to drive momentum as she moves on to her next mission. And most important, we fully appreciate that there are other missions in life of higher priority, and we embrace Christa's decision to shift her focus at this time. Christa, my friend, over to you. Christa Davies -- Chief Financial Officer Thank you so much, Greg. I want to start by thanking you for the opportunity over the last 16 years to contribute to the incredible success we've had at Aon. This will be the defining role of my career, and that's really what's at the heart of this decision. As you described, this decision isn't about other professional pursuits. My decision is to focus my time differently at this point in my life. I'm grateful that our work together has created the ability for me to make this choice. I must say that our 3x3 plan delivers on its full potential in the months ahead, including with the great addition of NFP. I'm going to truly miss working so closely with this team to realize the tremendous value creation that is ahead for Aon. We're also very pleased to announce the completion of the NFP acquisition. I'm delighted to welcome the NFP to Aon. We're excited to work together to capture the growth opportunities we see for clients, colleagues, and shareholders. As we announced yesterday, we closed the transaction for a total enterprise value of $13 billion. The faster-than-expected close date means we now expect to achieve a similar benefit a year earlier with improvements in certain metrics. Noting, we maintained guidance for revenue and cost synergies of $235 million, which now occur a year earlier given the close date. We achieved a lower interest rate on deal-related debt of 5.7%, and we issued fewer shares at 19 million. Collectively, this results in similar deal-related financial benefits of accretion and free cash flow that are realized a year earlier than initially modeled. We now expect the deal to add $300 million to free cash flow in 2025 and $600 million in 2026, and be accretive in 2026 and over the long term. We've also provided detailed financial information for NFP in our materials. NFP built on our long-term proven track record of strategically allocating capital at scale to high-return opportunities to create long-term value for clients, colleagues, and shareholders. And as Greg mentioned, it reinforces and accelerates our Aon United strategy and our 3x3 plan, and adds to our strong momentum as we drive results in 2024 and over the long term. Now turning to the quarter. We delivered strong operational performance to start the year, highlighted by 5% organic revenue growth, which translated into 100 basis points of adjusted operating margin expansion, 8% adjusted operating income growth, and 9% adjusted EPS growth. As Greg noted, organic revenue growth was 5%, driven by ongoing strong retention and net new business generation. I'd note that fiduciary investment income, which is not included in organic revenue growth, was $79 million. If you were to include fiduciary investment income, organic revenue growth would have been 70 basis points higher. We continue to expect mid-single digit or greater organic revenue growth for the full year 2024 and over the long term. And as we look forward, we continue to expect that NFP will contribute to the firm's overall revenue growth through organic revenue growth, including $175 million of net revenue synergies by 2026 and inorganic growth from ongoing M&A. Moving to operating performance. We delivered strong operational improvement in Q1 with adjusted operating margins of 39.7%, an increase of 100 basis points, driven by revenue growth, portfolio mix shift, efficiencies from Aon Business Services, and restructuring savings, overcoming expense growth, including investments in colleagues and technology, to drive long-term growth. Restructuring savings in Q1 were $20 million and contributed 50 basis points to adjusted operating margin expansion. Restructuring actions completed so far are expected to generate $90 million of savings in 2024, and we expect restructuring savings will fall to the bottom line. At this time, we continue to expect $100 million of realized savings in 2024 as we continue to execute against our plans for Aon Business Services and our business. Regarding the program, we are seeing real progress in our acceleration of Aon Business Services. This includes streamlining and improving operational processes around working capital, moving work to the best locations, and enhancing clients' and colleagues' experience with great new tools such as our property, casualty, D&O, and cyber analyzers. As we've said previously, we know delivering our Aon Business Services strategy will result in long-term top- and bottom-line growth as we drive more value for clients, colleagues, and shareholders. As we think about adjusted operating margins going forward, we continue to expect to drive margin expansion over the long term through ongoing revenue growth and portfolio mix shift to higher growth, higher margin areas of the portfolio, driven by efficiencies from Aon Business Services. Now that we've closed NFP, margins will be initially lower. Considering the close timing, we think the right baseline from which to measure 2024 adjusted operating margin growth is 30.6%, calculated as our 31.6% in 2023, less a 100 basis point drag from NFP for the period from April 25th close through the end of 2024. In our materials, we've detailed 2023 operating performance for NFP. On a full-year basis, we would note that NFP would have had a full-year pro forma drag of a 140 basis points for 2023, so there'll be some ongoing drag on 2025 margins until we lap the close in April 2025. We also expect fiduciary investment income to be relatively flat year over year based on current interest rate expectations. So the tailwind that we've seen in Q1 this year will be reduced, although we remain committed to driving full-year adjusted operating margin expansion in 2024 against this adjusted baseline of 30.6% and over the long term. Turning to EPS, adjusted EPS grew 9% in the quarter, reflecting 8% adjusted operating income growth and ongoing share buyback, partially offset by a higher tax rate in the quarter. With respect to NFP, as we previously communicated, we expect the acquisition to be dilutive to adjusted EPS in the remainder of 2024, breakeven in 2025, and accretive to adjusted EPS in 2026 and beyond. Turning to free cash flow. I'd note Q1 has historically been our seasonally smallest quarter from a cash flow standpoint due primarily to incentive compensation payments. And as we've communicated before, free cash flow can be lumpy quarter to quarter. We generated $261 million of free cash flow in the first quarter, reflecting strong operating income growth and lower capex, offset by higher receivables, payments related to E&O, restructuring, NFP transaction integration charges, and higher cash tax payments, as we've previously communicated. As we look forward, we expect ongoing negative impacts of free cash flow in the near term from restructuring, higher interest expense, and NFP deal and integration costs. The NFP acquisition strengthens our long-term free cash flow outlook with $300 million of incremental free cash flow in 2025 and $600 million in 2026. Over the long term, we would expect to return to our trajectory of double-digit free cash flow growth, driven by operating income growth and a $500 million opportunity in working capital. Now turning to capital allocation. We allocate capital based on return on capital and a long-term value creation, which we've done over time through core business investment, share buyback, and M&A. Regarding M&A, as you look historically, we have a successful track record of balancing acquisitions, divestitures, and share buyback as we continue to optimize our portfolio against our priority investment areas on an ROIC basis. We're incredibly excited about NFP's impressive M&A engine, noting their strong history of M&A. We look forward to building on their established track record and executing against their strong pipeline to drive future growth in this space within our ROIC framework. We still expect share buyback to remain the top priority for capital allocation. As we think about capital allocation in 2024, we'd observe there are puts and takes around free cash flow that we've communicated. And while buyback will be lower than last year, we expect it will still be substantial at $1 billion or more based on our current M&A expectations for the rest of the year. We have a very strong long-term free cash flow outlook for the firm and are confident that share repurchase will continue to remain our highest ROIC opportunity for meaningful ongoing capital allocation over time. Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet. As previously communicated, we funded the cash and assumed liabilities portion of the NFP purchase with approximately $7 billion of new debt, with $5 billion raised in March 2024, and $2 billion borrowed at close. And I'd note, the average interest rate for the $5 billion of transaction related senior notes and the $2 billion term loan is 5.7%, about 80 basis points better than what we modeled when we announced the deal. We expect our credit ratios to be elevated over the next 12 to 18 months as we bring our leverage ratios back in line with levels consistent with our credit profile, 2.8 times to 3 times debt to EBITDA on a GAAP basis. This is driven by substantial free cash flow generation and incremental debt capacity from EBITDA growth, noting our track record of effectively managing leverage within current ratings. In summary, our operating performance in Q1 is a strong start to the year, and we're well-positioned to build on this momentum in the rest of the year. We're delighted to have closed NFP acquisition ahead of schedule, enabling us to achieve financial benefits of accretion and free cash flow a year earlier than initially modeled. We look forward to enhancing NFP's strong client relationships with Aon's content and capabilities and see real opportunity to learn from each other and bring better solutions to our clients together. It's another step forward in our 3x3 plan as we accelerate our Aon United strategy, catalyzed by Aon Business Services and reinforced by the restructuring program. With that, I'll turn the call back to the operator, and we'd be delighted to take your questions. Questions & Answers: Operator Thank you.[Operator instructions] Our first question is from Andrew Kligerman with TD Securities. Please proceed with your question. Andrew Kligerman -- TD Cowen -- Analyst Thank you. Good morning, and congratulations, Christa. Greg, you mentioned in the opening remarks the lowest attrition that Aon has seen in a while. Could you put any details around that? Any color? It sounds very interesting. Greg Case -- Chief Executive Officer Well, Andrew, I appreciate the question. Listen, if you step back and think about sort of talent overall and what we're about and what we're up to, this is really about how we've built on Aon United and the strategy around the culture, and it's been foundational, how we connect our colleagues, support each other, and deliver the best we can for our clients. And that has just continued to build, and it really gives them an opportunity to sit across the table to do some pretty unique things with clients, which is why they're here, why they're excited about being part of our firm. And then on top of that now, we've got the 3x3 plan, Andrew, which literally is going to continue to enhance this very substantially with greater content and capability in Risk Capital and Human Capital, as well as the analytics that underpin all that driven by ABS. So for all those reasons, this is a pretty unique place to be at a time when clients have high need. But, Eric, what else would you add to that? Eric Andersen -- President Yeah. Greg, maybe I'll just take it down. If you're an account leader or a colleague working with a client, just picking up on your example, culture capabilities, team support, all those drive a decision to either come or stay at our firm. And if you just think about it, historically, if you were part of a client team, you were having a product discussion with a client. Today, you're having -- if it's a risk client, you're having a risk capital discussion. So you're having colleagues from commercial risk, from [Inaudible], maybe captives, maybe risk consulting, using new tools, like, at the risk analyzers that Christa mentioned, that are created with our ABS colleagues. It creates a professional development for them, and it creates a team-based environment where you're actually providing real new value to clients. So I think all of that drives why people come and then ultimately why they stay with us. Andrew Kligerman -- TD Cowen -- Analyst Awesome. And then just shifting over to the tax rate, around 23% this quarter, it's a bit surprising just given that over the last several years, it's kind of hovered around 18.5%. And I know Christa doesn't give guidance on this, but maybe given the big move in the tax rate and your points in the write up about changing geography, you could give us a little color on, A, the change in geography of the tax? And B, maybe an exception and an indication of where we might expect the tax rate to be going forward, especially with NFP there? Christa Davies -- Chief Financial Officer Thanks so much for the question, Andrew. And we did see a higher tax rate this quarter, driven by, as you said, changes in the geographic distribution of income and unfavorable discretes. And I will note, Andrew, that discretes have historically been positive for us, and in this quarter, they really did just line up to be net negative. And what I would say is, look, it's just lumpy to quarter to quarter. And, as you said, we don't give guidance going forward. But if we look back historically, exclusive of the impacts of discretes, which can be positive or negative, our historical underlying rate for the last five years has been 18%. Andrew Kligerman -- TD Cowen -- Analyst OK. Thank you very much. Operator Our next question is from Jimmy Bhullar with J.P. Morgan. Please proceed with your question. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst Good morning. So first just had a question on organic growth in Commercial Risk. If we look over the past year, year and a half or so it seems to have lagged what we've seen at some of your peers. And initially, I think a lot of people were concerned that this was because of the fallout from Willis. You've highlighted, the capital markets activity pressuring your results more than peers as well. But wondering if you could just talk about why you feel your growth has lagged some of your large peers even though historically you've actually been fairly consistent with growth with most of the other competitors? Greg Case -- Chief Executive Officer Jimmy, really appreciate the question. And maybe what I'll do is I'll step back and just again orient overall for global Aon, how we think about the firm and how we think about progress over time. And if you step back, we'd essentially say, first of all, this is not about one quarter, it really is about as you look across over the year, kind of how we're performing across global Aon over the course of the year. And our mission right now, which we're going to continue to push on and really amplify is to build on the 3x3 plan over the next three years. And this is really capitalizing on Risk Capital and Human Capital, amplifying through Aon Business Services and delivering Aon client leadership, which we know, Jimmy, is going to together deliver both top-line and bottom-line performance and most important the double-digit annual free cash flow growth compared to our '23 baseline that Christa described. And if you think about the quarter, which you're coming back to now asking specifically, I'm going to get to Commercial Risk very explicitly in a second, but our goals in the quarter from our standpoint were actually accelerated in terms of that 3x3 plan. If you think about ABS, the introduction of our analyzers and the client experience improvements, client response has been exceptional and real progress in the quarter. Our restructuring plan, as Christa highlighted, strengthens really what we've done in ABS substantially and it really supports substantial hiring in priority areas. So all good from a priority standpoint, and obviously, of course, the announcement of NFP with truly game-changer access into the North American middle market, and really every -- think about all aspects or generally aspects of the close improved since our December 20th announcement. So if we step back, Jimmy, and you sort of say, how are we doing from our standpoint, we feel very good, especially about the 3x3 plan and the progress we made on it. And if you think about the quarter overall for Aon, we delivered mid-single digit growth 5% with strength in Health and Reinsurance in Continental Europe and Asia and the Pacific, margin expansion of 100 basis points, EPS growth of 9% and free cash flow exactly in line with expectations. And then specifically to your question, because I want to make sure I get to that, look, we saw strength in Commercial across Continental Europe, Asia and Pacific, all very good. We highlighted the mix play, as we think about where we really have large portions of our business weighted to our larger clients, especially in some of the specialty lines like D&O and there's some pressure there, but we also observed, obviously as we just described, we were very underweight in the fast-growing middle market until yesterday. And now we see a massive opportunity going forward. They're all consistent with the 3x3 plan. And we've communicated previously the negative impact on transaction and IPO activity, which is yet to rebound, but we are very confident it will. So from our standpoint, look, we feel very good about the trajectory and what we're going to be able to do over time and deliver on the 3x3 plan in a very clear way. And it's going to be great outcome for clients, great outcome for our colleagues who would deliver that value and ultimately for our shareholders. And I just want to reiterate as what Christa described, we're at mid-single digit organic growth or greater and that commitment holds across '24 and over the long term. And we fully expect to translate that into frankly strong top-line and bottom-line performance. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst OK. Thanks. And then just following up on buybacks, I'm assuming this year is going to be lower than last year partly because of the drag because of NFP then also the drag because of the restructuring program. But if we think about 1Q, was it also depressed because of the seasonality of cash flows or is this sort of a normal quarter in terms of buyback? Christa Davies -- Chief Financial Officer Yeah. So, Jimmy, thank you for the question. And I did actually give specific guidance in my opening remarks about buyback because I recognize that there's a lot of puts and takes around free cash flow as we've communicated. And while buyback will be lower than last year, we expect it will be -- still be substantial for the full year 2024 at $1 billion or more based on our current M&A expectations for the rest of the year. And as we mentioned, Q1 is our seasonally smallest free cash flow quarter. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst OK. Thank you. Operator Thank you. Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed with your question. Mike Zaremski -- BMO Capital Markets -- Analyst Hey. Good morning. Congrats, Christa. On the NFP deal closing, is there anything we should be aware of in terms of the shares Aon will be issuing to the owners of NFP and whether there's like a lockup or expected sale of those shares over time given how a large amount it is? Christa Davies -- Chief Financial Officer Thanks so much for the question. And we did issue the 19 million shares yesterday, so that occurred. And we haven't disclosed anything related to the MDP lockup. What we can say is, the NFP management team did receive a meaningful amount of Aon shares, and the purchase agreement refers to their lockup period. And we have spent time with our new investors, and they're really excited about the Aon story and appreciate how the acquisition furthers our Aon United strategy, and I'm particularly excited about the 3x3 plan, too. Mike Zaremski -- BMO Capital Markets -- Analyst OK. Got it. My follow-up is also on the NFP deal. Now that it's closed, the math you gave when the deal was announced on the interest expense appeared to bake in a slightly higher interest rate level in our -- it looks like than current interest rates. And just given cost of capital, it's actually even a bit higher today. Would this also kind of incentivize Aon to pay down the debt faster as well than you had thought maybe a few months ago when the deal was announced? Thanks. Christa Davies -- Chief Financial Officer Thanks so much for the question, Mike. And so if you look at the financials we've outlined, the synergies and deal financials, what you'll observe with the interest expense is, when we originally announced this in December, we had $230 million of interest expense in the stub period, which at the time was a six-month stub period, and we now have $285 million in that period, and it's really a result of the two extra months. Interest is actually at a lower average interest rate. We had originally forecast the average interest rate on the $7 billion of debt to be 6.5%. It's now 5.7%, so a whole 80 basis points less. So the interest rate is less, but you've got two more months. And then, you can see that the interest expense in the future years, 2025 and 2026, is coming down from our original estimate. So the $310 million we now have in 2025, compares to the $410 million we had before, and the $275 million, compares to the $340 million. So you can see how the lower interest rates are impacted those future years. Mike Zaremski -- BMO Capital Markets -- Analyst OK. Got it. I'll look at that. Thank you. Operator Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question. Elyse Greenspan -- Wells Fargo Securities -- Analyst Hi. Thanks. Good morning. My first question, I was hoping to get more color just on why the new business was down year over year in the U.S. specifically versus other regions. And, Greg, I know you called out some business lines, but can you just help us think about how that might rebound from here? Greg Case -- Chief Executive Officer I appreciate the question, Elyse. Start, overall globally, very strong profile across the board as we said before both on retention, exceptionally high, and on new business overall. All we just did is highlight a couple areas in the U.S. where we're seeing some pressure, and that's really what we're showing up. That that will rebound over time, as we continue to talk to clients about the opportunities they've got to read as they think about their overall programs in terms of where they are. But, Eric, anything you'd add to that perspective? Eric Andersen -- President Yeah. Greg, I mean, you talked about D&O in particular, but I would also say we've had some really solid growth in areas like energy and construction and other places where we're investing in talent to grow our capabilities there. That's the sector piece. But we're also investing in geographic areas called Continental Europe, Asia Pacific, where we're also seeing good growth. So I think we will see great opportunity for us as we go forward through the year. Elyse Greenspan -- Wells Fargo Securities -- Analyst And then, in terms of the transactional, the M&A and the SPAC, and the IPO business, I guess, how would the Q1 compare, right? That's been a business that's been a headwind for you guys right over the last six, seven quarters. How would -- have you started to see any of that business come back, or would you still say we're close to trough levels there? Eric Andersen -- President So, Elyse, I don't think there's anybody on the planet that looks at it closer than us as we've been watching it. We hear people talk of green shoots, but the reality is, and I think we've said it on the past, that our opportunity happens when the deals close. And so at this point, you hear things in the market about dry powder and people wanting to do transactions, but at this point, it's still fairly depressed. Greg Case -- Chief Executive Officer I think we would say, Elyse, as Eric described, we see the pipeline, we love it. It looks very strong, but we don't count it anymore. We count it when it's done, and that's what we're going to do. When we see the opportunity, we're going to count it when it's done. Elyse Greenspan -- Wells Fargo Securities -- Analyst And then, one on the margin side. You gave the baseline, Christa, of 30.6% for this year. I know in the past, you'll typically point to your historical kind of 80 basis points to 90 basis points of margin improvement annually. Is that the right way to think about the improvement off of the 36% given the puts and takes of fiduciary investment income savings and then just leverage against your revenue growth? Christa Davies -- Chief Financial Officer So, Elyse, the 30.6% is absolutely the right starting point for 2024 margin expansion. We don't give specific guidance. What we do say is we're committed to margin expansion each and every year, including 2024 of that 30.6% margin base, but all the drivers still hold. We're driving margin expansion due to organic revenue growth, portfolio mix shift, and synergies and efficiencies from Aon Business Services. Elyse Greenspan -- Wells Fargo Securities -- Analyst Thank you. Operator Our next question is from David Motemaden with Evercore ISI. Please proceed with your question. David Motemaden -- Evercore ISI -- Analyst Hi. Thanks. Good morning. Just wanted to hear your guys' opinion on the potential FTC ban of non-competes and what sort of impact that might have on your business and specifically on the acquisition economics of NFP. Greg Case -- Chief Executive Officer I'll start overall. First, Dave, appreciate the question. It's not something we generally enter into, particularly in the U.S., where obviously this is going to focus on. But the macro point is really the talent question I think you're really getting at, which is fundamental. Maybe Eric can offer some thoughts on that. This is a place we live every day. It's our focus. Eric Andersen -- President Yeah. And I think, whether it's the attrition numbers, which are historically low, whether it's our ability to attract talent into the firm, we talked a little bit before about all the different tools that we've been investing in, and the culture and the team environment is all very important to keep the people. So as Greg said, we don't normally enter into non-compete, so this isn't a big issue for us, but it's all the other factors that drive it. And I think you also asked a question about NFP and the colleagues there. And I would just say that -- and both Greg and Christa mentioned it in the written remarks about how excited we are to have them. I think the opportunity for us to work together to add more value to their clients, which ultimately adds more value to their colleagues who have more capabilities and more opportunities to do more with them with our content. And then, obviously, the scale that we get from ABS, whether it's efficiency or the ability to deliver insights and tools and all the different aspects across health and risk, I think, provide great opportunity for the NFP colleagues as they join the firm. So really excited about that as I know everybody has been saying, and we see great opportunity going forward. David Motemaden -- Evercore ISI -- Analyst Got it. Great. Thanks. That's helpful. And then just my second question, it looks like U.S. organic growth within CRS was down in the first quarter compared to being flat in the fourth quarter. I'm just wondering, was there anything that got incrementally worse in the first quarter versus the fourth quarter? It feels like the pressures were kind of all kind of consistent. So I'm just wondering what that incremental -- what's driving that incremental decline, if I look at the organic growth in first quarter versus 4Q? Greg Case -- Chief Executive Officer We appreciate it, David. From our standpoint, we're not really looking Q4 to Q1 over time. Again, this is kind of an overall annual approach in terms of how we think about it. And as we said before, nothing has changed committed to mid-single digit or greater over the course of the year for our firm, and fully on track to do that across our firm. So I wouldn't look for anything in particular. We highlighted a few areas because we wanted to call them out. But listen, this is client leadership at a time when we're doubling down and investing on more client leadership. This is Risk Capital and Human Capital. This is Aon Business Services with the analyzers. And as we've launched those, they have met with hugely positive client feedback and the colleague feedback in terms of what they need, as well as ABS, which really enables all that, amplifies it, and creates a client experience environment that's better than ever before and on top of the content. So for us, no, we feel very good about the progress in Q1 and what it means for our trajectory going forward. David Motemaden -- Evercore ISI -- Analyst Understood. Thanks so much. Operator Our next question is from Rob Cox with Goldman Sachs. Please proceed with your question. Robert Cox -- Goldman Sachs -- Analyst Hey. Thanks. I think in the previous presentation on NFP, the target was for sort of similar to historical levels of total revenue growth, I think about 14%. Are you guys still -- is that projection sort of maintained here? And are you still confident in that projection, considering there could be some slowing levels of inflation or caution around the economy going forward? Greg Case -- Chief Executive Officer Rob, maybe I'll just take a quick step back. I think it's worthwhile just reflecting on sort of the whole NFP process and getting Eric to comment on this specifically in terms of sort of once we see the opportunity. Look, we just feel great about this combination. This is the $31 billion North American market in which we're vastly underway. We have an opportunity because of ABS to really go after that market in a way that's not just making us more sizable, but we think better. And better is this idea of really independent and connected in the way Eric described before, and I wanted to talk a bit about that. All these things sort of, as we've spent time over the last few months with Doug and Mike and the team, have been substantially reinforced. And so this is, at the top-line level on revenue opportunities in terms of how we do it and the yield we get out of that, all these things are better. And then, we reflect kind of some of the deal economics that also are better. So from our standpoint, we just see huge momentum. But Eric, you've been living this with Doug and Mike and the team. Maybe comment a little bit here and address some of Rob's questions more specifically. Eric Andersen -- President Yeah. I think there's two components. And first, just to touch on the independent and connected piece, which is such a critical part of how both the NFP team and the Aon team have been approaching this. And the independent piece is really to respect and sort of celebrate the way NFP approaches its clients locally and how the team service those clients. So really focusing in to make sure that those teams know exactly what they were doing before is what they're going to continue to do. The connected part is really about two pieces. There's an efficiency play with our ABS platform around tech and ops and areas where we can get some cost synergy. But, also more importantly, I think it's how we connect around product and capability. How we can bring our thought leadership, how we can bring structured portfolio solutions and product capability and thought leadership and get it to those to those teams in a way that their clients can digest it. So I think how we connect is really about content, and it's a little bit about the cost synergies, but it's really a revenue play for us as we look at the middle market. And I think on the growth number, there's an organic play here that we're talking a lot about. There's also an inorganic play that, as Greg mentioned in his opening remarks, their M&A pipeline and the way they approach adding organizations to NFP is really one of the strengths of the firm and something we're going to continue to work with. Greg Case -- Chief Executive Officer And just to amplify one more piece, this is a tour de force revenue opportunity, right? That's been the focus since the jump and that's what we've seen for the last few months. And it's both ways. Incredible capability. We hope to be able to bring with a producer who can sit across the table and do more on behalf of a client, which they just -- they're phenomenal at they love. But also on our side, we're going to benefit tremendously too as they -- in the ways they approach the market and how they can help Aon. It's just a -- we had high expectations going into the conversations, they've been exceeded over the last few months as we come together. So while we're not giving specific guidance on the growth number, this is tour de force growth and, man, do we see a great opportunity here to access this very, very substantial market where we're underway, but do so in a way again, it's not just bigger, but candidly better. Robert Cox -- Goldman Sachs -- Analyst Great. Appreciate the color. And then maybe as a follow-up, on transaction solutions, I think you guys have talked about doubling down on transaction solutions in the past. Could you talk about exactly what that means? And have you added talent there recently and expanded your practice, basically, anticipation of a rebound in M&A? Eric Andersen -- President So I would answer it in two ways. I think when we've talked about doubling down on it, the history of that product has historically been a PE-backed business. They were the original users of reps and warranties and tax insurance and things like that. Moving that over into the corporate space, where it's corporate to corporate, has been an area that we've been investing and understanding among our client leaders as well as the subject matter experts that know that space. So we've held the team. That was the goal, and I think that's what we've been saying for the last two years and the slowdown, knowing that at some stage, the market will come back. And we wanted to make sure the industry-leading expertise stayed with Aon. And so we continue to use them to reinforce the existing relationships that they have, while also building out a broader potential client set as M&A comes back. Robert Cox -- Goldman Sachs -- Analyst Thank you. Operator Thank you. Our final question comes from Meyer Shields with KBW. Please proceed with your question. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst Great. Thanks. Good morning. And Christa, congratulations. One question on the first-quarter margin. I guess if we take out fiduciary investment income in the savings, it doesn't seem -- and compare that to the same issue last year, it doesn't seem like there's been a lot of margin expansion despite the 5% organic growth. And I was hoping you could walk us through why that would be the case. Christa Davies -- Chief Financial Officer Yeah. So, Meyer, the way we think about margins is total margins. I know you're passing it into different components, and I understand the math. But we are -- we think about gross margins, which are substantial, and then we reinvest to deliver net margin expansion each year, which we will deliver again in 2024. And that's driven by organic revenue growth, portfolio mix shift, restructuring savings, which as you pointed, will drop to the bottom line, and efficiencies from Aon Business Services. And so we continue to invest in technology and Aon Business Services to drive future innovation and growth with clients. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK. No, that's fair. Makes sense that gets modeled in. For reporting purposes, is NFP's organic growth going to be included in the organic growth number that you report on a consolidated basis? Christa Davies -- Chief Financial Officer Yes. It is. And so that's why we've broken out in the numbers, Meyer. The revenue from NFP in that table, of 2023, by quarter, by solution line, so you can add it in. And so the way you do that for revenue is you add two months of Q2 of NFP plus the three months of Aon as your starting point for 2023, and then you grow that. And you will see the NFP numbers come through on that M&A table in our organic table. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK. Perfect. Thanks so much. Operator Thank you. I would now like to turn the call back over to Greg Case for closing remarks. Greg Case -- Chief Executive Officer I don't have a lot, but I have one message I want to deliver on behalf of Eric and Christa and I. We just want to say, on this very historic day for NFP and for Aon, a huge heartfelt welcome to our 7,700 new colleagues. We're just truly, truly excited to partner with you as we begin this journey together. So we're really looking forward to it, and welcome. Thanks, everybody for joining, and look forward to our next call. Take care.

edtsum8

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator [Audio gap] quarter 2024 earnings call. [Operator instructions] As a reminder, this conference call is being recorded. I would like to turn the conference call over to your host, Brett Feldman, senior vice president, finance and investor relations. Please go ahead. Brett Feldman -- Senior Vice President, Finance and Investor Relations Thank you, and good morning, everyone. Welcome to our first-quarter call. I'm Brett Feldman, head of investor relations for AT&T. Joining me on the call today are John Stankey, our CEO; and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they're subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. Additional information as well as our earnings materials are available on the Investor Relations website. With that, I'll turn the call over to John Stankey. John? John Stankey -- Chief Executive Officer Thanks, Brett. I appreciate you all joining us this morning. We started the year with a solid first quarter as we continue to make steady progress on our investment-led strategy being the best connectivity provider through 5G and fiber. We're growing the right way by adding valuable long-term wireless and broadband subscribers. Since Pascal will cover first-quarter results in detail, I'd like to spend some time highlighting how our strategic priorities are enabling us to deliver positive results and build a long runway for sustainable growth. When you look under the hood, it's clear that our largest and most powerful EBITDA growth engine, Mobility, is running well. Our strength and value proposition helped us deliver 349,000 postpaid phone net adds in the quarter. We now have about 71.6 million high-value postpaid phone subscribers, which is up 1.5 million from a year ago, and these are empty calorie additions. Our results reflect the quality of our customer growth with higher ARPU and higher adjusted operating income, improved margins, and lower postpaid churn. We're also growing efficiently, thanks to our consistent and simple go-to-market strategy. Our postpaid phone churn of 0.72% was our lowest first-quarter churn ever on record. And once again, we expect to report the lowest postpaid phone churn among the major service providers this quarter. This highlights the value customers place on the wireless service we provide and the continued strength of our best deals for everyone's strategy. Now let's move to fiber, which is our fastest-growing engine. The story here is familiar and one we like, where we have fiber, we win. And we're bringing fiber to more Americans than anyone else. Since the first quarter of last year, we passed about 2.4 million locations with fiber and now pass more than 27 million consumer and business locations. Over the last year, we grew our AT&T Fiber consumer subscriber base by about 1.1 million to nearly 8.6 million customers. This includes 252,000 AT&T Fiber net additions in the first quarter. As a result of our established fiber success in early AT&T Internet Air subscriber growth, we've grown our consumer broadband subscriber base for three consecutive quarters, and we expect this trend to continue. We're even more excited about the converging power of 5G and fiber together, where we have AT&T Fiber, our strong national 5G wireless brand provides us the opportunity to be customers' single converged provider seamlessly connecting them both in the home and on the go. We're able to deliver convergence at a level that none of our peers can match as we're the only provider that benefits from owner economics and scale with both 5G and fiber. This all matters because convergence presents clear benefits. When a customer has both our wireless and fiber products, we see a meaningful improvement in churn and Net Promoter Scores. This ultimately translates to much higher lifetime values for converged customers. We're also making great progress on ensuring more Americans have access to high-speed Internet. Just this month, we expanded our commitment to $5 billion over this decade to help bridge the digital divide in our country. We've already contributed to connecting approximately 5 million Americans and our goal is to help connect 25 million people in total by 2030. We believe that connecting changes everything and that we must collectively address the communications capabilities of our country's needs for the next century, not the last one. To make this happen, we need sound policy that's done right and our teams are working hard to make that happen. The future of connectivity is critical to advancing our society. That's why we're focused on growing and evolving our networks. As a result of these efforts, the areas where we're investing most heavily through 5G and fiber are performing very well. For perspective, in 2023, Mobility and Consumer Wireline together represented more than 80% of revenue and about 85% of EBITDA in our Communications segment. This means we're growing the large majority of our business and driving improved operating leverage across it. We expect this to continue. However, we still have legacy elements of our business that we're in the midst of transitioning, particularly in Business Wireline. In the quarter, Business Wireline EBITDA was down 16.5% as the industrywide secular decline of legacy voice continues. While the wholesale market has stabilized, the reality is that businesses are transitioning to mobile and cloud-based services at an accelerated rate as post-pandemic workplace restructuring takes hold. We see the benefits from this connectivity transition in business solutions where wireless service revenues grew 4.6% in the first quarter, outpacing our overall Mobility services revenue growth. While we continue to actively work our legacy transition strategies to end-of-life products, reduce our operating footprint, and eliminate fixed costs, we're advancing several cost savings and productivity initiatives to align with this reality such as vendor and management workforce rationalization. We also strongly believe that the future focused area of business solutions aligns well with our core connectivity competencies and we continue to build out a connectivity portfolio with real long-term growth opportunity. Take FirstNet. This prioritized service for first responders shows what we're able to accomplish when we focus on growing our business in areas where we have traditionally under-indexed. Additionally, our continued 5G and fiber expansion will enable new growth when paired with broader distribution. We have relationships with nearly 2.5 million business customers today and an opportunity to win with more small to medium-sized businesses. One way we intend to meet small and medium businesses connectivity needs is with our new fixed wireless service AT&T Internet Air for business. We believe this is a durable national play with business because it's able to serve as a reliable 5G-powered primary Internet connection, where fiber is not available in remote locations when temporary access is needed or with small and medium businesses that don't require always-on video streaming. While it's still early, we've been very pleased with the solid demand we're seeing from businesses. Given our success, growing core connectivity, we're focused on furthering the AT&T value proposition in ways that matter to our business customers, and security is at the top of the list. That's why we introduced AT&T Dynamic Defense, which provides built-in security controls on top of world-class access. The takeaway is that we're well-positioned to capitalize on urging connectivity opportunities with businesses, thanks to the strong relationships we have with almost all of the Fortune 1000 and our leading position in fiber, and the fact we operate the largest wireless network in the U.S. Our Business Wireline operations transformation will not be a linear process and we're going through the heaviest lift right now. However, our strong momentum across our growth areas of Mobility and broadband is allowing us to outpace legacy declines and drive positive consolidated results, and we remain on track to deliver on all the consolidated financial guidance we shared in January. Now let's spend a moment on our second priority of being effective and efficient in everything we do. Last year, we set a new target for an incremental $2 billion-plus in run rate cost savings by mid-2026. This came on top of the $6 billion-plus run rate cost savings target we achieved last year. The continued adoption of AI is not only helping us make progress on this goal but also benefiting our employee and customer experience. This focus on efficiency is translating into improved operating leverage despite continued elevated inflation. You can see this in our cash operating expenses, which were down year over year in the first quarter, contributing to adjusted EBITDA margin expansion of 170 basis points. This brings me to our final priority, which is our deliberate and balanced approach to capital allocation. As we indicated would happen, our capital investment levels have come down over the years as we move past the peak of our 5G rollout. Still, we remain a top investor in Americas connectivity and continue to expand fiber at a steady pace. Even with this continued investment, we delivered first-quarter free cash flow of $3.1 billion, compared to $1 billion a year ago. This aligns with the expectations we shared for more ratable quarterly free cash flow which we've accomplished by efficiently growing EBITDA, improving cash conversion, and reducing our short-term financing balances. Our strong free cash flow has also enabled us to pay down debt. We finished the first quarter with net debt to adjusted EBITDA of 2.9 times and continue to expect to reach our target in the 2.5 times range in the first half of 2025. So it's clear we're operating well against our business priorities. And as a result, we're growing share with 5G and fiber. In Mobility, we've been increasing our share of wireless service revenue growth even without the benefit of fixed wireless, which is reported in Consumer Wireline. We also expect that this will be the 11th time in the last 13 quarters where we deliver the industry's lowest postpaid phone churn. In Consumer Wireline, we're outpacing cable as we add broadband customers. This is driven by AT&T Fiber, which is consistently captured over one-third of broadband net adds across major providers for the past three years. So in summary, across the services and technologies most important to the future, 5G and fiber, we're performing well and growing our share in a healthy industry environment. This gives me confidence in our strategy and tells me our team is making solid progress on our priorities. With that, I'll turn it over to Pascal. Pascal? Pascal Desroches -- Chief Financial Officer Thank you, John, and good morning, everyone. So let's start by reviewing our first-quarter financial -- on Slide 7. In the first quarter, revenues were down slightly as the decline in low-margin Mobility equipment revenues and Business Wireline revenues offset growth in high-margin wireless service revenues and fiber revenues. Adjusted EBITDA was up 4.3% for the quarter as growth in Mobility, Consumer Wireline, and Mexico were partially offset by a continued decline in Business Wireline. For the full year, we still expect adjusted EBITDA growth in the 3% range. Adjusted EPS was $0.55, compared to $0.60 in the year-ago quarter. In the quarter, there were about $0.11 of aggregated EPS headwinds from four items we discussed last quarter. These include higher depreciation, higher noncash postretirement benefit costs, lower capitalized interest, and lower equity income from DirecTV. For the full year, our expectations remain for adjusted EPS of $2.15 to $2.25. First-quarter free cash flow of $3.1 billion was up more than $2 billion compared to last year. The important takeaway is that improved conversion of EBITDA to free cash flow has allowed us to pay down short-term supplier obligations. The pay down of these facilities should allow us to continue to drive more ratable quarterly free cash flow. Cash from operating activities came in at $7.5 billion versus $6.7 billion last year. As a reminder, the first quarter is typically the high watermark for device payments, and we expect payments to get progressively lower throughout the year. Capital investment for the quarter was $4.6 billion, down about $1.8 billion compared to the prior year. Capital expenditures were $3.8 billion, compared to $4.3 billion in the prior year. Now let's look at our Mobility operating results on Slide 8. The wireless remains healthy, and our Mobility business continues to deliver strong results driven by our consistent go-to-market strategy and solid execution. For the quarter, we reported 349,000 postpaid phone net adds. We grew service revenue by 3.3%, which included the impact of customer credits. This was offset by lower equipment revenues with postpaid upgrade rate of 3%, which was down from 3.7% last year. We continue to expect wireless service revenue growth in the 3% range for the full year. Mobility EBITDA grew 7% or about $600 million year over year, which exceeded service revenue growth on a dollar basis. This demonstrates we're significantly improving operating leverage and highlights the efficiency of our consistent go-to-market strategy, which has enabled us to take cost out of the business. We now expect our Mobility EBITDA to grow in the higher end of the mid-single-digit range this year, driven by better-than-expected performance with Business Wireless customers and continued disciplined cost management. Our postpaid foreign ARPU was $55.57. This was up nearly 1% year over year, largely driven by higher upper ARPU legacy plants. For the year, we continue to expect modest postpaid phone ARPU growth. Now let's move to Consumer Wireline results on Slide 9. Our growth in Consumer Wireline was led once again by our fiber subscriber growth, which consistently yielded strong returns. In the quarter, we had 252,000 AT&T Fiber net adds, which is in line with the outlook we provided. This is the 17th consecutive quarter with AT&T Fiber net adds above 200,000. We now have penetration of 40% with several markets well above that level. Broadband revenues grew 7.7%, including strong fiber revenue growth of 19.5%. For the full year, we continue to expect broadband revenue growth of 7% plus. Fiber ARPU of $68.61 was up more than 4% year over year with intake ARPU remaining above $70. Consumer Wireline EBITDA grew 14.6% due to growth in broadband revenues and ongoing cost transmission. We now expect Consumer Wireline EBITDA to grow in the mid- to high single-digit range this year driven by continued strong fiber revenue growth and disciplined cost management, partially offset by continued legacy copper declines. As our customer base continues to migrate to fiber from legacy services, our broadband support cost are decreasing, thanks to fiber's more efficient operating model, greater reliability, and higher quality service. While fiber remains our focus and lead product, we continue to be encouraged by the early performance of AT&T Internet Air, our targeted fixed wireless service, which is available in parts of 95 locations. We now have more than 200,000 AT&T Internet Air consumer subscribers, having added 110,000 in the quarter. Ultimately, we couldn't be more excited about the future of Consumer Wireline with AT&T Fiber well-positioned to lead our growth and AT&T Internet Air, helping us provide quality broadband service to customers where we do offer fiber. Now let's cover Business Wireline on Slide 10. Business Wireline EBITDA was down 16.5% due to faster-than-anticipated rate of decline for our legacy voice services. At the start of the year, we shared that we expected Business Wireline EBITDA trends to improve on a full-year basis. However, due to faster-than-expected decline of legacy voice services, we now expect full-year Business Wireline EBITDA declines in the mid-teens range versus our prior outlook of a decline of 10% plus or minus. As John mentioned, we're advancing several cost saving and productivity initiatives. This should benefit results in the second half of the year when we also have more favorable year-over-year comparison. As we transition this business, we believe our 5G and fiber expansion presents plenty of growth opportunities. We're already seeing this in some of the parts of our broader business solution results today. A great example is FirstNet, where wireless connections grew about 320,000 sequentially. We're also pleased with early demand for AT&T Internet Air for business, which we expect to benefit results in the second half of the year. Now let's move to Slide 11 for an update on our capital allocation strategy. Our approach to capital allocation remains deliberate. We're successfully balancing long-term network investment to fuel sustainable subscriber and service revenue growth, paying down debt and returning value to shareholders. We remain on track for full-year capital investments in the $21 billion to $22 billion range versus approximately $24 billion in 2023. While our overall capital investment will be lower in 2024 compared to recent years, we continue to invest in key growth areas given the compelling returns on these investments. In Mobility, we are focused on modernizing our network through our Open RAN initiative. And with fiber, we remain on track to pass 30 million-plus consumer and business locations by the end of 2025. As we've stated before, the better-than-expected returns we're seeing on our fiber investment potentially expands the opportunity to go beyond our initial target by roughly 10 million to 15 million additional locations. This also assumes similar build -- and a regulatory environment that remains attractive to building infrastructure. It's important to note that as we continue to build out our network this year, we expect to have lower vendor financing payments while increasing the total investment we make directly into our networks as we continue to invest in fiber expansion and wireless network transformation. In other words, we expect our total capital investment and capital intensity to decline this year even as we boost investments in our network. We also remain laser focused on deleveraging. Over the last four quarters, we reduced the debt by about $6 billion. At the end of March, Net debt to adjusted EBITDA was 2.9 times, and we're making steady progress on achieving our target in the 2.5 times range in the first half of 2025. As I mentioned last quarter, we expect to address near-term maturities with cash on hand, and this quarter, we repaid $4.7 billion of long-term debt maturities. Looking forward, our debt maturities are very manageable and we are in a great position with more than 95% of our long-term debt fixed with an ad rate of 4.2%. In addition to paying down debt, we reduced vendor and direct supplier financing obligations by about $2.3 billion during the quarter. This was partially offset by $400 million in additional proceeds on our securitization facility. These efforts highlight the quality of the free cash flow we're delivering. DirecTV distributions in the quarter were $500 million, compared to $1.3 billion in the first quarter of 2023. For the year, and thereafter, we continue to exact DirecTV cash distributions to decline at a similar rate to 2023 or by about 20% annually. With $3.1 billion in first-quarter free cash flow, we've dramatically improved our free cash flow ratability just as we committed we would last year. Looking forward, we still anticipate generating approximately 40% of our total 2024 free cash flow in the first half of the year and continue to expect full-year free cash flow of $17 billion to $18 billion range. To close, I'm really pleased with our team's overall performance in the quarter. Despite managing through legacy declines, our strength in Mobility and Consumer Wireline has us on pace to deliver on our full-year consolidated financial guidance. Brett, that's our presentation. We're now ready for the Q&A. Brett Feldman -- Senior Vice President, Finance and Investor Relations Thank you, Pascal. Operator, we're ready to take the first question. Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Simon Flannery of Morgan Stanley. Please go ahead. Simon Flannery -- Morgan Stanley -- Analyst Great. Thank you very much. Good morning. Good to hear the reiteration of the 2.5 leverage target for early next year. It would be great if you could just go through how you're thinking about the various capital allocation alternatives, buybacks, dividend growth, deleveraging, the 10 million to 15 million fiber adds need investments. Any other considerations? And how we should think about the profile, presumably this time, next year, will be having a more fulsome conversation. But anything more you could add around that would be great. And then just housekeeping on the outage. Maybe you could just size the credit for us? And was there any impact on net adds in the quarter? Thanks. John Stankey -- Chief Executive Officer So I don't know that I'm going to give you a whole lot more than what I previously said. I mean, it's really good to have choices, and we clearly have choices coming up, and we've worked really hard to put ourselves in this position to do that. And I told you there would be a very deliberate process that the board would go through to understand what they want to do as those choices start to materialize, and we're in the middle of doing that. We are working through a pretty systemic process. And at the top of that, as you can well imagine, is we're very cognizant of a desire to ensure that we're treating our shareholders well and -- where we can and doing it in a smart way. And so as I've said before, we'll evaluate at that time where things like interest rates stand. We'll evaluate where we are on the dividend yield relative to the equity value and where we have opportunities for reinvestment in the business and kind of understand what we think the right combination of those are. And we have a pretty deliberate approach to making that happen. I would give you some characterization now as we've worked really hard over the last couple of years to ensure we protect the dividend. I think you've seen that we've done that, and we've put ourselves in a really strong financial position. That's paramount and important to us as we move into this. You heard Pascal's comments that we feel pretty good about where the balance sheet sits today relative to what we're paying for the capital on the balance sheet and our abilities to manage that moving forward. I don't feel like we've got some immediate need to move differently than the trajectory we've been on. So if I was waiting, we'll be waiting against those other options that we think about and how we want to go and get the mix right. So I think you'll see more as we get to the end of the year. As I said, the board is working really hard on this issue, and I don't want to take away any degrees of freedom and latitude they have to debate it and figure out what they want to do, given what's going on in the market at the time we arrive. On the outage, look, I'm upset that we had it. It's unfortunate we had it. The entire team feels responsible for it. We know we can do better. We've put in place an awful lot of steps to ensure that we do better moving forward. I think I'm confident that we have done that, and I feel like we can operate better than what we exhibited on that particular morning. Now having said that, I'm really proud of the way they responded to the circumstances when they occurred, and they managed through the situation as well as could be expected. And in fact, I think you see that in the metrics. You see that we had a really, really good churn quarter. Obviously, that wouldn't happen if we didn't do the right things with the customer base. I'm pleased relative to what I've seen -- reported so far in the industry of our customer growth. I'm sure there were a couple of days of maybe some suppressed activity as a result of the outage. I think it's probably something that's measured in days. It wasn't measured in weeks and months, but we feel pretty good about where we stand right now. Certainly, as you might guess, we have a variety of -- methodologies that we use in research with our customer base and prospective customers. Those indicators don't show me anything that causes me to be concerned about what transpired or what occurred. I think some of our recovery methods that we use with our customer base was -- they were the right decisions. And you've seen most of that reflected in the first-quarter financials. There's a little bit that will drag into the second quarter base on how bill rounds go but you should expect that you've seen the bulk of that move through numbers. And I'm satisfied that where we ended up on service revenue growth and margins that that was a strong quarter in aggregate, inclusive of what we had to do in terms of the credits. Brett Feldman -- Senior Vice President, Finance and Investor Relations Alright, operator -- go ahead. Go ahead, Simon. John Stankey -- Chief Executive Officer Nothing that I think -- as I said last quarter, Simon, I think BEAD is a 2025 issue. It's not a 2024 issue. It doesn't feel like it's moving in any particular way, all that fast at the state level. And as I've also indicated, it's pretty clear to me that there's places where we're going to be more energized about playing and places where we're going to be less energized about playing based on how various states are approaching this. And I don't think there's anything right now -- I can tell you point blank, we won't be coming back in with the revisions to our guidance or anything like that, that is relevant to 2024. I think through this year, there may be some incremental things that we talk about in 2025 in terms of how we choose to reinvest capital and where we choose to go. But it's not anything that I see right now that's front and center. Simon Flannery -- Morgan Stanley -- Analyst Many thanks. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. We'll take our next question now, operator. Operator Our next question will come from the line of John Hodulik of UBS. Please go ahead. John Hodulik -- UBS -- Analyst Great. Thanks. Good morning, guys. First, sort of a follow-up to Simon's question, the data breach. That's a sort of a second-quarter issue, but just want to make sure to see if there's any impact that you saw early in the quarter from the data breach. And then certainly, one of the themes that we're seeing here in the first quarter is the low upgrades and low churn environment. Do you expect that to continue despite the fact that we may have a sort of AI device launch later this year? And does that low churn environment give the industry and AT&T, in particular, pricing power as you look into the rest of the year? John Stankey -- Chief Executive Officer The -- I don't want to characterize this incorrectly, but there are a lot of things going on broadly beyond AT&T and the cyber environment. I'm sure you're all -- obviously, consumers and -- are seeing the dynamics of what's happening. There's clearly -- the bad actors have stepped up level in the last several months, I think. And if I were to broadly step back and say, are we going to see more activity and more problems, partly because of just the activity level and how robust the business opportunities are for hackers and those that want to inflict bad acts on folks and partly, I think, because of reporting requirements, I expect you're probably going to see the noise level go up. What we have seen from our notification is very similar to the outage. I don't see anything in the customer metrics or anything that's going on that suggests that it creates a long-term issue on sentiment. That doesn't mean we don't take it seriously. That doesn't mean that we're not examining what happened back in 2019 and trying to understand what root causes are around that. Those actions are all underway, but it doesn't appear to me that it's doing anything to impact our business as we stand here today in 2024. But we'll continue to evaluate that, and we'll continue to work through the dynamics that are occurring. I would tell you that on the upgrade rates and churn, we've seen, as I've said last quarter, a little bit of tapering in the industry. We expected that to occur. We expected upgrade needs to be a little bit more tempered than what we had seen last year. I don't see anything going on right now that suggests we're out of pattern to what our expectations were as we set up plan for 2024. We'll probably see a little bit of ebb and flow each quarter. I'm not sure that I'm of the mindset that there's going to be something that occurs in the device portfolio that dramatically changes things in the latter part of the year. There'll be the usual holiday promotions. There'll be the usual devices and opportunities for individuals to create something that's special during the holidays. But that's a seasonal pattern we're accustomed to. And I think we'll be seeing things on the margin adjusting left and right. I just don't believe we're going to be into a cycle that's what I would consider to be an out-of-pattern cycle in any way, shape or form. And I'm going to give you the same answer I always give on where we are in pricing power. Look, I think the industry is healthy. I think as I've indicated before, we're coming off of policies that drove record levels of investment in the industry. I think all players are mindful after record levels of investment to try to yield the appropriate returns that you would have to get after making those things, and I see that kind of dynamic occurring. I think I know we're mindful of it, and we want to make sure that we're getting reasonable returns off that level of capital. And my observations of what I see being reported over the last couple of quarters is that others are doing the same. And we're providing tremendous amount more value to customers. They're using 30% more of our product, 35% more every year. The performance of these networks is increasingly better. There's choices that are coming in and how they apply the use of the technology for mobile to fix. So one would expect that maybe there's an opportunity to change the value equation and continue to take a little price in places. And we're going to continue to do that. Where we think certain products have that kind of same power, I think we've been pretty consistent over the last couple of years of saying there's opportunities to do that. I think we've tried to stress with you when we do it. We're very mindful of doing it intelligently. I believe our churn numbers reflect that we've executed pretty well on that front. And I feel good about the fact that we've been able to drive our ARPUs up, keep our margins in check, if not improve them, and continue to do some things that take some price in certain places where we think we can keep the value equation in check. And I expect we're going to continue to do that as we move through this year. John Hodulik -- UBS -- Analyst Great. Thanks, John. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Operator, we'll take our next question, please. Operator Peter Supino of Wolfe Research. Please go ahead. Peter Supino -- Wolfe Research -- Analyst Hi. Good morning, everybody. A question about the Mobility side. Obviously, the consolidated or segment results were really good. And looking at the EBIT growth, it's similar to the rate of service revenue growth in a quarter when gross adds and churn were lower, a great thing, less cost. And I'm just wondering why -- what else is happening in the cost structure so that EBITDA wouldn't outgrow service revenue in a quarter like this? And then a quick one on Internet Air for business. Is your intent to distribute that nationally? Or will that be a more regional strategy in the way that IA has been so far in residential? Pascal Desroches -- Chief Financial Officer Peter, Pascal. In terms of EBIT, and you're talking about operating income, that's inclusive of the depreciation, correct? Peter Supino -- Wolfe Research -- Analyst Yes, I am. Pascal Desroches -- Chief Financial Officer Remember, we guided that as a result of the Ericsson Open RAN deal, we would have accelerated depreciation associated with some of the equipment that was previously in our network that we were going to depreciate over shorter lines. That's a dynamic you're seeing come through there. I feel really good about the overall expense management and overall cost profile, and you see that coming through in our EBITDA margin expansion in that business. John Stankey -- Chief Executive Officer And Peter, we broadly, as I indicated in my remarks, we see Internet Air for business being a national product. You probably maybe noticed that it may not be a golfer, but you noticed during the masters, we kind of previewed some of our advertising that we'll be coming out on the product that's geared toward the business market segment. And it doesn't mean that it's a product for every business, but it certainly is a product for every state is what I would say. We want to be mindful of making sure that we match the product to businesses that have the right usage characteristics that we think we can provide a quality level of service and right value. There are many businesses that match that, and there are many businesses that have usage characteristics and behaviors that are atypical to a typical single-family dwelling. And that's why we think it's a good place to invest time, energy, money and I think that was consistent with what our expectations were from the founding of the product and where we thought we'd go to market with it. Peter Supino -- Wolfe Research -- Analyst Understood. Thank you. Brett Feldman -- Senior Vice President, Finance and Investor Relations Operator, will take the next question, please. Operator Bryan Kraft of Deutsche Bank. Please go ahead. Bryan Kraft -- Deutsche Bank -- Analyst Hi, good morning. Thank you. John, can you talk about how you're balancing the marketing and sales budget today between customer acquisition and retention and how that's driving AT&T's performance relative to your competitors? I think one of the concerns we often hear from investors is that while churn has been great, gross adds have been down for several quarters, but I suspect this is at least partly a function of the strategy. So if you could shed some light there, that would be great. John Stankey -- Chief Executive Officer You've answered your question. It's intentional with the strategy. I'm more than happy to take gross in places where I think I can drive gross profitably. And I think in some cases, we have to think about how much people are paying for growth, and then we also have to think about gross and we have to think about whether or not that gross really has yield on it, if it's what the end user is paying ultimately when they come on a network. And so I think some of the numbers ultimately are what I refer to in my opening remarks, a bit low calorie. I don't really want to play in the low-calorie space. I want to make sure I'm getting my fair share of the high-calorie subscribers, and that's why we're focused on share of service revenues as maybe being a better benchmark of is the company balancing its growth in the right way. And when you think about how we balance our budget and what we do internally is we're pretty rigorous around asking ourselves those questions and the segments we attack, how we go after them, the longevity and look, churn's a key driver when you're investing for that growth. And I'll take lower churn all the time. I don't think that's a bad sign necessarily. I'm perfectly OK with where we stand on that front. We've talked previously, Bryan, that one of the things I look about where we've been in the market and that I think is, frankly, sustainable probably a year and a half ago or two years ago, most of the questions on this call was where's the growth coming from, and I kept saying the growth was balanced. It's coming from a lot of different segments. We're seeing it come from different parts of the business community, and we're giving you the fact that our business growth has been strong. We like what we're picking up in the residential environment and the consumer environment and where we see our growth coming from there in terms of what we're taking. So we have a pretty balanced approach to our distribution right now that I think that diversity is helpful. It diversifies our portfolio. It diversifies the base, and that's one of the reasons why the churn numbers are as strong as they are. Bryan Kraft -- Deutsche Bank -- Analyst Thank you. Brett Feldman -- Senior Vice President, Finance and Investor Relations Operator, we're ready for the next question. Operator David Barden of Bank of America. Please go ahead. David Barden -- Bank of America Merrill Lynch -- Analyst Thanks so much for taking the question. I guess, first, a follow-up question, if I could. John, thank you for your comments about kind of having digested the impact of the outage, but the postpaid phone ARPU was obviously down about a little over 1% in the quarter, and I'm assuming at least some, if not all, of that had to do with the credit and the GAAP accounting for that. And so I was wondering if we could get a -- maybe as -- jumping off point of where ARPU really is if we normalize for that credit. And then second, another kind of housekeeping question is, with the sale of Sky Mexico back to, I think Televisa, what happens now? Like how does that affect the reporting as we think about the rest of the year? Pascal Desroches -- Chief Financial Officer All right. Dave, I can take both questions. First on postpaid phone ARPU, I'm assuming you're citing the sequential trend as opposed to year over year because we -- year over year. The sequential trend, a couple of things to keep in mind. Yes, the credit was a factor. But it's part of the mix, and we told you at the time it was not significant, but it was still guiding sequential trends. And the other thing to keep in mind, too, is there is seasonality associated with international roaming, that there are periods where international roaming is going to be higher than not, and that impacts ARPU as well. Overall, we feel really good about the guidance we gave for mod ARPU growth for the year. So nothing substantive there. . And your second question was remind me -- John Stankey -- Chief Executive Officer Mexico was a nonevent. Pascal Desroches -- Chief Financial Officer Mexico, it was a nonevent, Dave. We didn't consolidate. It was an equity method in test that it wasn't in the context of AT&T, not a significant item. David Barden -- Bank of America Merrill Lynch -- Analyst Great. And then just one follow-up, if I could. Pascal, you said that we should expect a 20% rate of kind of run rate decline in DTV hash contributions on an annual basis, on a kind of go-forward basis? Is that the -- Pascal Desroches -- Chief Financial Officer Yes. That is our best judgment, yes. And that's the guidance we gave at the beginning of the year, and that hasn't changed. In Q1, there was some -- last year, there were some onetime items, and that's probably why you saw some of the decline year over year, but we feel good about the guidance we previously provided, which put us at a round -- Unknown speaker Thank you for calling the AT&T conference replay system. Pascal Desroches -- Chief Financial Officer Dave, are you still there? David Barden -- Bank of America Merrill Lynch -- Analyst I'm here. I'm listening, all of it. Pascal Desroches -- Chief Financial Officer Yes. So for the year, we expect to have overall $3 billion of cash distribution from DirecTV. David Barden -- Bank of America Merrill Lynch -- Analyst I appreciate it, guys. Thank you so much. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. We'll take the next question now. Operator Michael Rollins of Citi. Please go ahead. Mike Rollins -- Citi -- Analyst Thanks for taking the question and good morning. When we look at the EBITDA growth for first quarter of the 4.3% year over year and compare that to the guidance of 3% range for the full year, can you just frame some of the elements that may be changing, whether it's by segment or between revenue and cash expenses, just to think about the differences there? And then this could be a related question. Can you review your exposure to the ACP program, your expectations on the program possibly discontinued and potential impact to AT&T's financial results? Pascal Desroches -- Chief Financial Officer Mike, thank you for the question. So first, as it relates to our segment-level guidance, relative to the start of the year, as I noted in my comments, I anticipate Business Wireline will be a little bit worse than we thought, principally because of an acceleration of legacy voice decline. So putting that down in the mid-teens. But look, you saw the strong start to both our Mobility business including the record low churn. And Consumer Wireline, I mean, we delivered over 14% of EBITDA growth. And the dynamics for both, we would anticipate -- what you saw in Q1, we would anticipate being there for the balance of this year. Those businesses are operating really well. The transformation work we've done the last few years is really setting us up to have margin expansion in those businesses, and we feel really good about the trajectory of those two businesses. Business Wireline is, at an earlier point, in the product transition. And while we are growing fiber revenues, and as John mentioned, AT&T Internet Air for business, that's going to grow. And of course, the wireless business relationships will also grow, but those will be offset by legacy declines and we're confident we can manage through that in the balance of the year and still -- on around 3%. John Stankey -- Chief Executive Officer Mike, I think we indicated last quarter, and I still -- no different position that we could work through the ACP sunset if, in fact, that occurs, and I would say it's probably more likely than not, that it does occur and we could do so without any revisions or changes to what we guided you to. And we still feel that way. We've started the process, as you might guess, of notifying customers and working with them and we're not just idly sitting by. I think we'll be successful in many instances, finding ways to continue relationships with customers and ease them into different constructs that make sense for them. But I feel good about how we went about using the program. I think we used it consistent with the way that policymakers probably would have liked to have seen it used, which is to over-index more than anything else on fixed broadband capabilities. And I think we had a quality customer base relative to how the program was set up, and that's going to allow us to probably transition some of them into other approaches for how to use the service and those that we ultimately do is because of the subsidy. So that -- I don't think it's going to be anything that impacts ultimately what we're giving you in terms of our ability to operate the business and hit our financials. Mike Rollins -- Citi -- Analyst Thanks. Great. Brett Feldman -- Senior Vice President, Finance and Investor Relations Thanks, Mike. We'll go ahead with the next question. Operator Sebastiano Petti of J.P. Morgan. Please go ahead. Sebastiano Petti -- JPMorgan Chase and Company -- Analyst Thank you. A couple of quick housekeeping questions. John, I think you talked about the balance growth on the Mobility side. You have cited those some underpenetrated segments. I was hoping you can give us an update on the opportunity there, I think SMB value and fiber selling on the Mobility side. When do you expect to see some of the share gains, I guess, within some of these segments? Is that more of a -- is that -- could we see that within '24? Does that take some time to build '25 and beyond? And then on the Business Wireline side, I think, obviously, some focus there on the EBITDA trajectory, but you mentioned you are accelerating some cost-cutting initiatives. Would that be within the context of the $2 billion cost-cutting program? Or should we maybe think of these as additive to that program? John Stankey -- Chief Executive Officer I would tell you that as we indicated, we've accelerated some of the work that we're doing. So this is things that probably would have occurred later in the cycle that we're moving forward. So we'll get some incremental run rate benefit to that, maybe -- and accelerating our forecast not necessarily changed the endpoint, I guess, is the way I would describe that. And on our progress around where we're trying to make sure that we're operating more effectively and how our channel distribution works with distribution, I would say that we've made some reasonable progress and have things in place around what we're able to do to penetrate fiber, where we don't have fiber on a wireless subscriber that is eligible to get fiber and the reverse of that. I feel pretty good about what we have lined up around that front. I think we're going to see progress in that regard as we move through '24. We expected in our business plan and how we've communicated to you our performance that we would have progress in that regard. And I do think I'm starting to see the machine work the right way. We're working hard in trying to position ourselves in the value segment. I would say that it's been a little bit slower ramping in that space and specifically, getting the right lineup and the right products in the right place. I do expect as we move through this year, that we will make progress in that regard. Again, we expected we would make progress in that regard in terms of how we guided our expectations around the performance of the business, and we'll keep pushing and working on it. And I would also say that it's probably the same statement and truth and -- where we see certain ethnic segments that maybe we'd do a little bit better at than what we're doing right now, and we'll continue to work those as well. Sebastiano Petti -- JPMorgan Chase and Company -- Analyst Probably got -- quickly just on Mike's question about the ACP. Obviously, access from AT&T program was a portion within the commitment that you made earlier in the month. Do you see this as an opportunity to leaning in perhaps on access from AT&T as an opportunity to gain some share from ACP subs you're may be churning for peers? Or do you see this is an opportunity to lean in a little bit into the low-income segments to drive greater adoption of broadband over time? John Stankey -- Chief Executive Officer So we intend to continue to keep the access from AT&T in the market, and we'll continue to actively promote it and try to apply it where it makes sense. And I think we're going to continue to see the same segments we were attempting when ACP was live to find that an attractive place to go. I'm -- I don't know exactly how some of our competitors have used the ACP subsidy. I know how I've used it. I think we've used it in a way where we believe we're catching the waterfront of what we think are the right customers to be putting the subsidy in front of, which are the right customers that should get access from AT&T. Does that mean that incrementally, we should see more coming back our way? I don't know. I would have intuitively hoped that in the form of the competitive markets in which we operate, that our message is equally communicated to those who chose us, those who didn't choose us. So I don't know that just because ACP goes away that I'm going to dramatically see that equation change. And so I don't expect there's going to be a strong pivot over to AT&T, and I would expect that our competitors might continue to leave some kind of a discounted offer in place for those that qualify for it. So I'm not expecting huge shifts as a result of that. I'm -- Sebastiano, I'm pretty proud actually and comfortable given the overall state of the -- what I'll call the fixed broadband market of our performance and how we've been growing in that space. A big deal. We just hit 40% -- about 40% penetration of our fiber base right now. And if you'd ask me two years ago that I think we'd arrive at that level, given the number of households we're adding and building to, and I probably wouldn't have we arrived that quickly. So I think our goal is to just keep operating as effectively as we have been in taking the good growth that's coming our way, and I think you see that reflected in the overall performance of the numbers. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Operator, we're going to take the next question. Operator Frank Louthan of Raymond James. Please go ahead. Frank Louthan -- Raymond James -- Analyst Great. Thank you. I want to delve in on the business side. First, can you give us your overall read on the economy and your outlook there? And then secondly, what is sort of the endgame on the Business Wireline side? It continues to kind of decline. Is there a bottom there? And can you give us maybe a split between what's left in that revenue that's voice versus other data services to get an idea of where the weakness might be? John Stankey -- Chief Executive Officer Yes, Frank. So first of all, look, I don't -- I'm not going to sit here and tell you that I think the shifts in the business segment are economic driven. I know there's been some discussion around what's happening in business investment and communication services. And I fully expect there are going to be businesses that look around and say, gosh, I need to find incremental money to invest in AI. And as we don't know how our corporations that we're part of work, sometimes it's -- you take from one to invest in another. And I expect we're going to see that happening. But I think the fundamentals under what's occurring in the business segment are largely technology-driven. I think we've known for a long time that traditional voice had a shelf life. And ultimately, it was going to get replaced with integrated communication services and as-a-service capabilities that run over the top of IP. I think what we saw is a bit during the pandemic, there was a suppression of change for whatever reason, people were out of the office. It wasn't a priority. People didn't want to mess around with their communications infrastructure while they were working hard to accommodate a different hybrid work environment. And now we're kind of seeing that evolution kind of pick up with a degree of steam. There's probably some good business reasons that's occurring. People are rationalizing office space. They're moving things around. They're working differently. They're evaluating the kind of technology they want in place as a result of that. And that's, from my point of view, why we're seeing a little bit of that step-up in that voice transition and what's occurring. I think we're going to try to do some more broadly, not just specific to business, but we'll give you some transparency and visibility of what's left in the legacy businesses and what's going on around those things. As we move through this year, I think we're working on maybe some ways to schedule some of that for you. So you kind of get a sense of what's occurring there. I understand your desire to want to understand it. I think what I would balance that with is, as we stressed multiple times this morning, those things that we're investing in right now, we've got a really good, strong, solid growth business, and those growth business are built on 5G and fiber and businesses endgame is really no different. We're shifting to build a company that is good at selling 5G and fiber into business, and selling 5G and fiber in the business, not just at the top end of the market for the Fortune 1000, but across the continuum of the market. And that's a bit of a transition for AT&T because I would say where we made our bread and butter over the last decade, rightly or wrongly, has been at the top end of the market. And so as we shift and generate more revenues and more share out of the mid-portion of the market, we're having to rebuild some muscle and some distribution and the right product mix to attack that. And we can do that. And the endgame is we will catch this decline and we'll ultimately catch the decline with connectivity-based services both in fiber and 5G. We're just going through that transition to make that happen. And unfortunately, as you know, some of the historic voice services are really high-margin services. They're being replaced with good margin services, but not quite as high. And it's going to be a little bit painful for a couple of quarters as we move through this transition. But I have ultimate confidence that the AT&T brand plays incredibly well in business. All of our research suggests that. I have very high confidence that we walk in and we talk to businesses of any size about using AT&T for either their wireless or fixed connectivity, we're high in the consideration set and can win that business. And I have confidence that there was another generation of incremental services that go on top of that connectivity, as I alluded to in my opening remarks and what we're doing with Dynamic Defense is a good example, which is overlaying incremental service that comes on top of the base transport that allows us to scrub traffic on behalf of the customer to improve their security posture. I think there's a lot more of those things that can come on in the middle market, given the lack of sophistication, the lack of ability to have a full-time staff dedicated to those things. And I think that's just natural for us to extend our capabilities into that space. And I'm long-term bullish that it's the right thing for us to be in both the fixed and the wireless market, given our brand presence, our distribution channel capabilities and how we build products. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Operator, we have time for one last question. Operator Our last question in queue will come from the line of Walter Piecyk of LightShed. Please go ahead. Walt Piecyk -- LightShed Partners -- Analyst Thanks. John, I just want to get your kind of refreshed views on the fixed wireless market. If you look at Verizon, they've added a percentage point of overall wireless growth using fixed wireless. T-Mobile has added, I think, 160 basis points. We're seeing advertisements for, I guess, I think what you call free air or something like that. What do you think in terms of the growth opportunity here? And if you were able to get some additional spectrum or maybe even with your existing spectrum, as you've seen the usage from some of your early learnings, can this be as broad of an opportunity for you as it's been for Verizon and T-Mobile? John Stankey -- Chief Executive Officer I think the short answer to the last part of your question is I don't intend to promote it in the market in a manner that Verizon and T-Mobile are promoting at the market. And I just -- I said on the sideline and I observed, I also see them doing some things right now to try to manage the dynamics around those product sets that are reflective of what I believe the ultimate outcome was going to be and what I've been saying for a period of time, which is wireless networks aren't particularly the best place to take a single-family home that streams hours and hours of video a day and try to serve them with a kind of $50 a month product or service. And I just don't see that as long-term sustainable or healthy growth of returns for the business, and I've been pretty consistent in saying that, and I'm still consistent in saying that. And that's what we're making a choice in our capital allocation to invest more heavily in fiber as the basis of which to make an investment that we think has a long runway and a long annuity stream and is a technology that has flexibility to deal with what we know is going to be continuing calls and demands on growth for high-performance networking and homes and businesses. Now having said that, I've also been very, very clear that there is a place for fixed wireless in our portfolio. And I don't believe my point of view on this has changed in any way, shape or form nor our execution's any different than that. I've said from the start that there are businesses that do not have the characteristics of single-family homes. And as a result of that, fixed wireless can be a really effective way of meeting their needs and doing so at a value proposition, price, and performance that makes sense for them, especially when you start to think about those companies that have a convergence of both fixed and mobility needs. It's a natural in those cases. And I'd like to participate in that market aggressively, and I will go after it as aggressively as my competitors and picking up any of those business customers that I can on a national basis. And I think that's a margin-accretive decision within the context of how we're allocating capital between spectrum investments and fiber investments. I've also said that in the consumer space there are places where I would apply technology. I gave a couple of specific examples. We have some places where we have a good copper DSL base that we're in the process of deploying fiber and in some cases, fixed wireless can give better performance in what our copper network can deliver, and we know that we'll be 12 months, 18 months from fiber deployment and we may want to hold some customers, offer a better service, and we'll use it as a bridging or hold strategy for customers that are high value to us, and we'll continue to use that technique where we can. I've indicated that we will use it as an opportunity for us to turn down footprint. So where I've got small numbers of data customers in place, I need to get them off of fixed infrastructure that I ultimately want to shutter because that allows me to turn down a geography that is a low utilization geography and a low profitable geography on the fixed side. And I can turn out the lights, walk away, take cost out of business, I will do that. And I've also said we have some select markets where our penetration levels in mobility are low and our spectrum position is high, and we may choose in those markets to do some incremental marketing to do, as you indicated, to buy some incremental growth that we believe has a longer runway. So that's how the team is operationalizing around this. But in the end, when all those plays are put together, no, I don't think you're going to see us have the same posture that two of our competitors do because our posture is different. We're investing in fiber, and I don't see myself moving into the market just to buy spectrum so that I can change the operating posture I just described to you. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Well, thank you, everyone, for joining us. Operator, you go ahead and close out the call. Answer:

[Audio gap] quarter 2024 earnings call

Operator [Audio gap] quarter 2024 earnings call. [Operator instructions] As a reminder, this conference call is being recorded. I would like to turn the conference call over to your host, Brett Feldman, senior vice president, finance and investor relations. Please go ahead. Brett Feldman -- Senior Vice President, Finance and Investor Relations Thank you, and good morning, everyone. Welcome to our first-quarter call. I'm Brett Feldman, head of investor relations for AT&T. Joining me on the call today are John Stankey, our CEO; and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they're subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. Additional information as well as our earnings materials are available on the Investor Relations website. With that, I'll turn the call over to John Stankey. John? John Stankey -- Chief Executive Officer Thanks, Brett. I appreciate you all joining us this morning. We started the year with a solid first quarter as we continue to make steady progress on our investment-led strategy being the best connectivity provider through 5G and fiber. We're growing the right way by adding valuable long-term wireless and broadband subscribers. Since Pascal will cover first-quarter results in detail, I'd like to spend some time highlighting how our strategic priorities are enabling us to deliver positive results and build a long runway for sustainable growth. When you look under the hood, it's clear that our largest and most powerful EBITDA growth engine, Mobility, is running well. Our strength and value proposition helped us deliver 349,000 postpaid phone net adds in the quarter. We now have about 71.6 million high-value postpaid phone subscribers, which is up 1.5 million from a year ago, and these are empty calorie additions. Our results reflect the quality of our customer growth with higher ARPU and higher adjusted operating income, improved margins, and lower postpaid churn. We're also growing efficiently, thanks to our consistent and simple go-to-market strategy. Our postpaid phone churn of 0.72% was our lowest first-quarter churn ever on record. And once again, we expect to report the lowest postpaid phone churn among the major service providers this quarter. This highlights the value customers place on the wireless service we provide and the continued strength of our best deals for everyone's strategy. Now let's move to fiber, which is our fastest-growing engine. The story here is familiar and one we like, where we have fiber, we win. And we're bringing fiber to more Americans than anyone else. Since the first quarter of last year, we passed about 2.4 million locations with fiber and now pass more than 27 million consumer and business locations. Over the last year, we grew our AT&T Fiber consumer subscriber base by about 1.1 million to nearly 8.6 million customers. This includes 252,000 AT&T Fiber net additions in the first quarter. As a result of our established fiber success in early AT&T Internet Air subscriber growth, we've grown our consumer broadband subscriber base for three consecutive quarters, and we expect this trend to continue. We're even more excited about the converging power of 5G and fiber together, where we have AT&T Fiber, our strong national 5G wireless brand provides us the opportunity to be customers' single converged provider seamlessly connecting them both in the home and on the go. We're able to deliver convergence at a level that none of our peers can match as we're the only provider that benefits from owner economics and scale with both 5G and fiber. This all matters because convergence presents clear benefits. When a customer has both our wireless and fiber products, we see a meaningful improvement in churn and Net Promoter Scores. This ultimately translates to much higher lifetime values for converged customers. We're also making great progress on ensuring more Americans have access to high-speed Internet. Just this month, we expanded our commitment to $5 billion over this decade to help bridge the digital divide in our country. We've already contributed to connecting approximately 5 million Americans and our goal is to help connect 25 million people in total by 2030. We believe that connecting changes everything and that we must collectively address the communications capabilities of our country's needs for the next century, not the last one. To make this happen, we need sound policy that's done right and our teams are working hard to make that happen. The future of connectivity is critical to advancing our society. That's why we're focused on growing and evolving our networks. As a result of these efforts, the areas where we're investing most heavily through 5G and fiber are performing very well. For perspective, in 2023, Mobility and Consumer Wireline together represented more than 80% of revenue and about 85% of EBITDA in our Communications segment. This means we're growing the large majority of our business and driving improved operating leverage across it. We expect this to continue. However, we still have legacy elements of our business that we're in the midst of transitioning, particularly in Business Wireline. In the quarter, Business Wireline EBITDA was down 16.5% as the industrywide secular decline of legacy voice continues. While the wholesale market has stabilized, the reality is that businesses are transitioning to mobile and cloud-based services at an accelerated rate as post-pandemic workplace restructuring takes hold. We see the benefits from this connectivity transition in business solutions where wireless service revenues grew 4.6% in the first quarter, outpacing our overall Mobility services revenue growth. While we continue to actively work our legacy transition strategies to end-of-life products, reduce our operating footprint, and eliminate fixed costs, we're advancing several cost savings and productivity initiatives to align with this reality such as vendor and management workforce rationalization. We also strongly believe that the future focused area of business solutions aligns well with our core connectivity competencies and we continue to build out a connectivity portfolio with real long-term growth opportunity. Take FirstNet. This prioritized service for first responders shows what we're able to accomplish when we focus on growing our business in areas where we have traditionally under-indexed. Additionally, our continued 5G and fiber expansion will enable new growth when paired with broader distribution. We have relationships with nearly 2.5 million business customers today and an opportunity to win with more small to medium-sized businesses. One way we intend to meet small and medium businesses connectivity needs is with our new fixed wireless service AT&T Internet Air for business. We believe this is a durable national play with business because it's able to serve as a reliable 5G-powered primary Internet connection, where fiber is not available in remote locations when temporary access is needed or with small and medium businesses that don't require always-on video streaming. While it's still early, we've been very pleased with the solid demand we're seeing from businesses. Given our success, growing core connectivity, we're focused on furthering the AT&T value proposition in ways that matter to our business customers, and security is at the top of the list. That's why we introduced AT&T Dynamic Defense, which provides built-in security controls on top of world-class access. The takeaway is that we're well-positioned to capitalize on urging connectivity opportunities with businesses, thanks to the strong relationships we have with almost all of the Fortune 1000 and our leading position in fiber, and the fact we operate the largest wireless network in the U.S. Our Business Wireline operations transformation will not be a linear process and we're going through the heaviest lift right now. However, our strong momentum across our growth areas of Mobility and broadband is allowing us to outpace legacy declines and drive positive consolidated results, and we remain on track to deliver on all the consolidated financial guidance we shared in January. Now let's spend a moment on our second priority of being effective and efficient in everything we do. Last year, we set a new target for an incremental $2 billion-plus in run rate cost savings by mid-2026. This came on top of the $6 billion-plus run rate cost savings target we achieved last year. The continued adoption of AI is not only helping us make progress on this goal but also benefiting our employee and customer experience. This focus on efficiency is translating into improved operating leverage despite continued elevated inflation. You can see this in our cash operating expenses, which were down year over year in the first quarter, contributing to adjusted EBITDA margin expansion of 170 basis points. This brings me to our final priority, which is our deliberate and balanced approach to capital allocation. As we indicated would happen, our capital investment levels have come down over the years as we move past the peak of our 5G rollout. Still, we remain a top investor in Americas connectivity and continue to expand fiber at a steady pace. Even with this continued investment, we delivered first-quarter free cash flow of $3.1 billion, compared to $1 billion a year ago. This aligns with the expectations we shared for more ratable quarterly free cash flow which we've accomplished by efficiently growing EBITDA, improving cash conversion, and reducing our short-term financing balances. Our strong free cash flow has also enabled us to pay down debt. We finished the first quarter with net debt to adjusted EBITDA of 2.9 times and continue to expect to reach our target in the 2.5 times range in the first half of 2025. So it's clear we're operating well against our business priorities. And as a result, we're growing share with 5G and fiber. In Mobility, we've been increasing our share of wireless service revenue growth even without the benefit of fixed wireless, which is reported in Consumer Wireline. We also expect that this will be the 11th time in the last 13 quarters where we deliver the industry's lowest postpaid phone churn. In Consumer Wireline, we're outpacing cable as we add broadband customers. This is driven by AT&T Fiber, which is consistently captured over one-third of broadband net adds across major providers for the past three years. So in summary, across the services and technologies most important to the future, 5G and fiber, we're performing well and growing our share in a healthy industry environment. This gives me confidence in our strategy and tells me our team is making solid progress on our priorities. With that, I'll turn it over to Pascal. Pascal? Pascal Desroches -- Chief Financial Officer Thank you, John, and good morning, everyone. So let's start by reviewing our first-quarter financial -- on Slide 7. In the first quarter, revenues were down slightly as the decline in low-margin Mobility equipment revenues and Business Wireline revenues offset growth in high-margin wireless service revenues and fiber revenues. Adjusted EBITDA was up 4.3% for the quarter as growth in Mobility, Consumer Wireline, and Mexico were partially offset by a continued decline in Business Wireline. For the full year, we still expect adjusted EBITDA growth in the 3% range. Adjusted EPS was $0.55, compared to $0.60 in the year-ago quarter. In the quarter, there were about $0.11 of aggregated EPS headwinds from four items we discussed last quarter. These include higher depreciation, higher noncash postretirement benefit costs, lower capitalized interest, and lower equity income from DirecTV. For the full year, our expectations remain for adjusted EPS of $2.15 to $2.25. First-quarter free cash flow of $3.1 billion was up more than $2 billion compared to last year. The important takeaway is that improved conversion of EBITDA to free cash flow has allowed us to pay down short-term supplier obligations. The pay down of these facilities should allow us to continue to drive more ratable quarterly free cash flow. Cash from operating activities came in at $7.5 billion versus $6.7 billion last year. As a reminder, the first quarter is typically the high watermark for device payments, and we expect payments to get progressively lower throughout the year. Capital investment for the quarter was $4.6 billion, down about $1.8 billion compared to the prior year. Capital expenditures were $3.8 billion, compared to $4.3 billion in the prior year. Now let's look at our Mobility operating results on Slide 8. The wireless remains healthy, and our Mobility business continues to deliver strong results driven by our consistent go-to-market strategy and solid execution. For the quarter, we reported 349,000 postpaid phone net adds. We grew service revenue by 3.3%, which included the impact of customer credits. This was offset by lower equipment revenues with postpaid upgrade rate of 3%, which was down from 3.7% last year. We continue to expect wireless service revenue growth in the 3% range for the full year. Mobility EBITDA grew 7% or about $600 million year over year, which exceeded service revenue growth on a dollar basis. This demonstrates we're significantly improving operating leverage and highlights the efficiency of our consistent go-to-market strategy, which has enabled us to take cost out of the business. We now expect our Mobility EBITDA to grow in the higher end of the mid-single-digit range this year, driven by better-than-expected performance with Business Wireless customers and continued disciplined cost management. Our postpaid foreign ARPU was $55.57. This was up nearly 1% year over year, largely driven by higher upper ARPU legacy plants. For the year, we continue to expect modest postpaid phone ARPU growth. Now let's move to Consumer Wireline results on Slide 9. Our growth in Consumer Wireline was led once again by our fiber subscriber growth, which consistently yielded strong returns. In the quarter, we had 252,000 AT&T Fiber net adds, which is in line with the outlook we provided. This is the 17th consecutive quarter with AT&T Fiber net adds above 200,000. We now have penetration of 40% with several markets well above that level. Broadband revenues grew 7.7%, including strong fiber revenue growth of 19.5%. For the full year, we continue to expect broadband revenue growth of 7% plus. Fiber ARPU of $68.61 was up more than 4% year over year with intake ARPU remaining above $70. Consumer Wireline EBITDA grew 14.6% due to growth in broadband revenues and ongoing cost transmission. We now expect Consumer Wireline EBITDA to grow in the mid- to high single-digit range this year driven by continued strong fiber revenue growth and disciplined cost management, partially offset by continued legacy copper declines. As our customer base continues to migrate to fiber from legacy services, our broadband support cost are decreasing, thanks to fiber's more efficient operating model, greater reliability, and higher quality service. While fiber remains our focus and lead product, we continue to be encouraged by the early performance of AT&T Internet Air, our targeted fixed wireless service, which is available in parts of 95 locations. We now have more than 200,000 AT&T Internet Air consumer subscribers, having added 110,000 in the quarter. Ultimately, we couldn't be more excited about the future of Consumer Wireline with AT&T Fiber well-positioned to lead our growth and AT&T Internet Air, helping us provide quality broadband service to customers where we do offer fiber. Now let's cover Business Wireline on Slide 10. Business Wireline EBITDA was down 16.5% due to faster-than-anticipated rate of decline for our legacy voice services. At the start of the year, we shared that we expected Business Wireline EBITDA trends to improve on a full-year basis. However, due to faster-than-expected decline of legacy voice services, we now expect full-year Business Wireline EBITDA declines in the mid-teens range versus our prior outlook of a decline of 10% plus or minus. As John mentioned, we're advancing several cost saving and productivity initiatives. This should benefit results in the second half of the year when we also have more favorable year-over-year comparison. As we transition this business, we believe our 5G and fiber expansion presents plenty of growth opportunities. We're already seeing this in some of the parts of our broader business solution results today. A great example is FirstNet, where wireless connections grew about 320,000 sequentially. We're also pleased with early demand for AT&T Internet Air for business, which we expect to benefit results in the second half of the year. Now let's move to Slide 11 for an update on our capital allocation strategy. Our approach to capital allocation remains deliberate. We're successfully balancing long-term network investment to fuel sustainable subscriber and service revenue growth, paying down debt and returning value to shareholders. We remain on track for full-year capital investments in the $21 billion to $22 billion range versus approximately $24 billion in 2023. While our overall capital investment will be lower in 2024 compared to recent years, we continue to invest in key growth areas given the compelling returns on these investments. In Mobility, we are focused on modernizing our network through our Open RAN initiative. And with fiber, we remain on track to pass 30 million-plus consumer and business locations by the end of 2025. As we've stated before, the better-than-expected returns we're seeing on our fiber investment potentially expands the opportunity to go beyond our initial target by roughly 10 million to 15 million additional locations. This also assumes similar build -- and a regulatory environment that remains attractive to building infrastructure. It's important to note that as we continue to build out our network this year, we expect to have lower vendor financing payments while increasing the total investment we make directly into our networks as we continue to invest in fiber expansion and wireless network transformation. In other words, we expect our total capital investment and capital intensity to decline this year even as we boost investments in our network. We also remain laser focused on deleveraging. Over the last four quarters, we reduced the debt by about $6 billion. At the end of March, Net debt to adjusted EBITDA was 2.9 times, and we're making steady progress on achieving our target in the 2.5 times range in the first half of 2025. As I mentioned last quarter, we expect to address near-term maturities with cash on hand, and this quarter, we repaid $4.7 billion of long-term debt maturities. Looking forward, our debt maturities are very manageable and we are in a great position with more than 95% of our long-term debt fixed with an ad rate of 4.2%. In addition to paying down debt, we reduced vendor and direct supplier financing obligations by about $2.3 billion during the quarter. This was partially offset by $400 million in additional proceeds on our securitization facility. These efforts highlight the quality of the free cash flow we're delivering. DirecTV distributions in the quarter were $500 million, compared to $1.3 billion in the first quarter of 2023. For the year, and thereafter, we continue to exact DirecTV cash distributions to decline at a similar rate to 2023 or by about 20% annually. With $3.1 billion in first-quarter free cash flow, we've dramatically improved our free cash flow ratability just as we committed we would last year. Looking forward, we still anticipate generating approximately 40% of our total 2024 free cash flow in the first half of the year and continue to expect full-year free cash flow of $17 billion to $18 billion range. To close, I'm really pleased with our team's overall performance in the quarter. Despite managing through legacy declines, our strength in Mobility and Consumer Wireline has us on pace to deliver on our full-year consolidated financial guidance. Brett, that's our presentation. We're now ready for the Q&A. Brett Feldman -- Senior Vice President, Finance and Investor Relations Thank you, Pascal. Operator, we're ready to take the first question. Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Simon Flannery of Morgan Stanley. Please go ahead. Simon Flannery -- Morgan Stanley -- Analyst Great. Thank you very much. Good morning. Good to hear the reiteration of the 2.5 leverage target for early next year. It would be great if you could just go through how you're thinking about the various capital allocation alternatives, buybacks, dividend growth, deleveraging, the 10 million to 15 million fiber adds need investments. Any other considerations? And how we should think about the profile, presumably this time, next year, will be having a more fulsome conversation. But anything more you could add around that would be great. And then just housekeeping on the outage. Maybe you could just size the credit for us? And was there any impact on net adds in the quarter? Thanks. John Stankey -- Chief Executive Officer So I don't know that I'm going to give you a whole lot more than what I previously said. I mean, it's really good to have choices, and we clearly have choices coming up, and we've worked really hard to put ourselves in this position to do that. And I told you there would be a very deliberate process that the board would go through to understand what they want to do as those choices start to materialize, and we're in the middle of doing that. We are working through a pretty systemic process. And at the top of that, as you can well imagine, is we're very cognizant of a desire to ensure that we're treating our shareholders well and -- where we can and doing it in a smart way. And so as I've said before, we'll evaluate at that time where things like interest rates stand. We'll evaluate where we are on the dividend yield relative to the equity value and where we have opportunities for reinvestment in the business and kind of understand what we think the right combination of those are. And we have a pretty deliberate approach to making that happen. I would give you some characterization now as we've worked really hard over the last couple of years to ensure we protect the dividend. I think you've seen that we've done that, and we've put ourselves in a really strong financial position. That's paramount and important to us as we move into this. You heard Pascal's comments that we feel pretty good about where the balance sheet sits today relative to what we're paying for the capital on the balance sheet and our abilities to manage that moving forward. I don't feel like we've got some immediate need to move differently than the trajectory we've been on. So if I was waiting, we'll be waiting against those other options that we think about and how we want to go and get the mix right. So I think you'll see more as we get to the end of the year. As I said, the board is working really hard on this issue, and I don't want to take away any degrees of freedom and latitude they have to debate it and figure out what they want to do, given what's going on in the market at the time we arrive. On the outage, look, I'm upset that we had it. It's unfortunate we had it. The entire team feels responsible for it. We know we can do better. We've put in place an awful lot of steps to ensure that we do better moving forward. I think I'm confident that we have done that, and I feel like we can operate better than what we exhibited on that particular morning. Now having said that, I'm really proud of the way they responded to the circumstances when they occurred, and they managed through the situation as well as could be expected. And in fact, I think you see that in the metrics. You see that we had a really, really good churn quarter. Obviously, that wouldn't happen if we didn't do the right things with the customer base. I'm pleased relative to what I've seen -- reported so far in the industry of our customer growth. I'm sure there were a couple of days of maybe some suppressed activity as a result of the outage. I think it's probably something that's measured in days. It wasn't measured in weeks and months, but we feel pretty good about where we stand right now. Certainly, as you might guess, we have a variety of -- methodologies that we use in research with our customer base and prospective customers. Those indicators don't show me anything that causes me to be concerned about what transpired or what occurred. I think some of our recovery methods that we use with our customer base was -- they were the right decisions. And you've seen most of that reflected in the first-quarter financials. There's a little bit that will drag into the second quarter base on how bill rounds go but you should expect that you've seen the bulk of that move through numbers. And I'm satisfied that where we ended up on service revenue growth and margins that that was a strong quarter in aggregate, inclusive of what we had to do in terms of the credits. Brett Feldman -- Senior Vice President, Finance and Investor Relations Alright, operator -- go ahead. Go ahead, Simon. John Stankey -- Chief Executive Officer Nothing that I think -- as I said last quarter, Simon, I think BEAD is a 2025 issue. It's not a 2024 issue. It doesn't feel like it's moving in any particular way, all that fast at the state level. And as I've also indicated, it's pretty clear to me that there's places where we're going to be more energized about playing and places where we're going to be less energized about playing based on how various states are approaching this. And I don't think there's anything right now -- I can tell you point blank, we won't be coming back in with the revisions to our guidance or anything like that, that is relevant to 2024. I think through this year, there may be some incremental things that we talk about in 2025 in terms of how we choose to reinvest capital and where we choose to go. But it's not anything that I see right now that's front and center. Simon Flannery -- Morgan Stanley -- Analyst Many thanks. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. We'll take our next question now, operator. Operator Our next question will come from the line of John Hodulik of UBS. Please go ahead. John Hodulik -- UBS -- Analyst Great. Thanks. Good morning, guys. First, sort of a follow-up to Simon's question, the data breach. That's a sort of a second-quarter issue, but just want to make sure to see if there's any impact that you saw early in the quarter from the data breach. And then certainly, one of the themes that we're seeing here in the first quarter is the low upgrades and low churn environment. Do you expect that to continue despite the fact that we may have a sort of AI device launch later this year? And does that low churn environment give the industry and AT&T, in particular, pricing power as you look into the rest of the year? John Stankey -- Chief Executive Officer The -- I don't want to characterize this incorrectly, but there are a lot of things going on broadly beyond AT&T and the cyber environment. I'm sure you're all -- obviously, consumers and -- are seeing the dynamics of what's happening. There's clearly -- the bad actors have stepped up level in the last several months, I think. And if I were to broadly step back and say, are we going to see more activity and more problems, partly because of just the activity level and how robust the business opportunities are for hackers and those that want to inflict bad acts on folks and partly, I think, because of reporting requirements, I expect you're probably going to see the noise level go up. What we have seen from our notification is very similar to the outage. I don't see anything in the customer metrics or anything that's going on that suggests that it creates a long-term issue on sentiment. That doesn't mean we don't take it seriously. That doesn't mean that we're not examining what happened back in 2019 and trying to understand what root causes are around that. Those actions are all underway, but it doesn't appear to me that it's doing anything to impact our business as we stand here today in 2024. But we'll continue to evaluate that, and we'll continue to work through the dynamics that are occurring. I would tell you that on the upgrade rates and churn, we've seen, as I've said last quarter, a little bit of tapering in the industry. We expected that to occur. We expected upgrade needs to be a little bit more tempered than what we had seen last year. I don't see anything going on right now that suggests we're out of pattern to what our expectations were as we set up plan for 2024. We'll probably see a little bit of ebb and flow each quarter. I'm not sure that I'm of the mindset that there's going to be something that occurs in the device portfolio that dramatically changes things in the latter part of the year. There'll be the usual holiday promotions. There'll be the usual devices and opportunities for individuals to create something that's special during the holidays. But that's a seasonal pattern we're accustomed to. And I think we'll be seeing things on the margin adjusting left and right. I just don't believe we're going to be into a cycle that's what I would consider to be an out-of-pattern cycle in any way, shape or form. And I'm going to give you the same answer I always give on where we are in pricing power. Look, I think the industry is healthy. I think as I've indicated before, we're coming off of policies that drove record levels of investment in the industry. I think all players are mindful after record levels of investment to try to yield the appropriate returns that you would have to get after making those things, and I see that kind of dynamic occurring. I think I know we're mindful of it, and we want to make sure that we're getting reasonable returns off that level of capital. And my observations of what I see being reported over the last couple of quarters is that others are doing the same. And we're providing tremendous amount more value to customers. They're using 30% more of our product, 35% more every year. The performance of these networks is increasingly better. There's choices that are coming in and how they apply the use of the technology for mobile to fix. So one would expect that maybe there's an opportunity to change the value equation and continue to take a little price in places. And we're going to continue to do that. Where we think certain products have that kind of same power, I think we've been pretty consistent over the last couple of years of saying there's opportunities to do that. I think we've tried to stress with you when we do it. We're very mindful of doing it intelligently. I believe our churn numbers reflect that we've executed pretty well on that front. And I feel good about the fact that we've been able to drive our ARPUs up, keep our margins in check, if not improve them, and continue to do some things that take some price in certain places where we think we can keep the value equation in check. And I expect we're going to continue to do that as we move through this year. John Hodulik -- UBS -- Analyst Great. Thanks, John. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Operator, we'll take our next question, please. Operator Peter Supino of Wolfe Research. Please go ahead. Peter Supino -- Wolfe Research -- Analyst Hi. Good morning, everybody. A question about the Mobility side. Obviously, the consolidated or segment results were really good. And looking at the EBIT growth, it's similar to the rate of service revenue growth in a quarter when gross adds and churn were lower, a great thing, less cost. And I'm just wondering why -- what else is happening in the cost structure so that EBITDA wouldn't outgrow service revenue in a quarter like this? And then a quick one on Internet Air for business. Is your intent to distribute that nationally? Or will that be a more regional strategy in the way that IA has been so far in residential? Pascal Desroches -- Chief Financial Officer Peter, Pascal. In terms of EBIT, and you're talking about operating income, that's inclusive of the depreciation, correct? Peter Supino -- Wolfe Research -- Analyst Yes, I am. Pascal Desroches -- Chief Financial Officer Remember, we guided that as a result of the Ericsson Open RAN deal, we would have accelerated depreciation associated with some of the equipment that was previously in our network that we were going to depreciate over shorter lines. That's a dynamic you're seeing come through there. I feel really good about the overall expense management and overall cost profile, and you see that coming through in our EBITDA margin expansion in that business. John Stankey -- Chief Executive Officer And Peter, we broadly, as I indicated in my remarks, we see Internet Air for business being a national product. You probably maybe noticed that it may not be a golfer, but you noticed during the masters, we kind of previewed some of our advertising that we'll be coming out on the product that's geared toward the business market segment. And it doesn't mean that it's a product for every business, but it certainly is a product for every state is what I would say. We want to be mindful of making sure that we match the product to businesses that have the right usage characteristics that we think we can provide a quality level of service and right value. There are many businesses that match that, and there are many businesses that have usage characteristics and behaviors that are atypical to a typical single-family dwelling. And that's why we think it's a good place to invest time, energy, money and I think that was consistent with what our expectations were from the founding of the product and where we thought we'd go to market with it. Peter Supino -- Wolfe Research -- Analyst Understood. Thank you. Brett Feldman -- Senior Vice President, Finance and Investor Relations Operator, will take the next question, please. Operator Bryan Kraft of Deutsche Bank. Please go ahead. Bryan Kraft -- Deutsche Bank -- Analyst Hi, good morning. Thank you. John, can you talk about how you're balancing the marketing and sales budget today between customer acquisition and retention and how that's driving AT&T's performance relative to your competitors? I think one of the concerns we often hear from investors is that while churn has been great, gross adds have been down for several quarters, but I suspect this is at least partly a function of the strategy. So if you could shed some light there, that would be great. John Stankey -- Chief Executive Officer You've answered your question. It's intentional with the strategy. I'm more than happy to take gross in places where I think I can drive gross profitably. And I think in some cases, we have to think about how much people are paying for growth, and then we also have to think about gross and we have to think about whether or not that gross really has yield on it, if it's what the end user is paying ultimately when they come on a network. And so I think some of the numbers ultimately are what I refer to in my opening remarks, a bit low calorie. I don't really want to play in the low-calorie space. I want to make sure I'm getting my fair share of the high-calorie subscribers, and that's why we're focused on share of service revenues as maybe being a better benchmark of is the company balancing its growth in the right way. And when you think about how we balance our budget and what we do internally is we're pretty rigorous around asking ourselves those questions and the segments we attack, how we go after them, the longevity and look, churn's a key driver when you're investing for that growth. And I'll take lower churn all the time. I don't think that's a bad sign necessarily. I'm perfectly OK with where we stand on that front. We've talked previously, Bryan, that one of the things I look about where we've been in the market and that I think is, frankly, sustainable probably a year and a half ago or two years ago, most of the questions on this call was where's the growth coming from, and I kept saying the growth was balanced. It's coming from a lot of different segments. We're seeing it come from different parts of the business community, and we're giving you the fact that our business growth has been strong. We like what we're picking up in the residential environment and the consumer environment and where we see our growth coming from there in terms of what we're taking. So we have a pretty balanced approach to our distribution right now that I think that diversity is helpful. It diversifies our portfolio. It diversifies the base, and that's one of the reasons why the churn numbers are as strong as they are. Bryan Kraft -- Deutsche Bank -- Analyst Thank you. Brett Feldman -- Senior Vice President, Finance and Investor Relations Operator, we're ready for the next question. Operator David Barden of Bank of America. Please go ahead. David Barden -- Bank of America Merrill Lynch -- Analyst Thanks so much for taking the question. I guess, first, a follow-up question, if I could. John, thank you for your comments about kind of having digested the impact of the outage, but the postpaid phone ARPU was obviously down about a little over 1% in the quarter, and I'm assuming at least some, if not all, of that had to do with the credit and the GAAP accounting for that. And so I was wondering if we could get a -- maybe as -- jumping off point of where ARPU really is if we normalize for that credit. And then second, another kind of housekeeping question is, with the sale of Sky Mexico back to, I think Televisa, what happens now? Like how does that affect the reporting as we think about the rest of the year? Pascal Desroches -- Chief Financial Officer All right. Dave, I can take both questions. First on postpaid phone ARPU, I'm assuming you're citing the sequential trend as opposed to year over year because we -- year over year. The sequential trend, a couple of things to keep in mind. Yes, the credit was a factor. But it's part of the mix, and we told you at the time it was not significant, but it was still guiding sequential trends. And the other thing to keep in mind, too, is there is seasonality associated with international roaming, that there are periods where international roaming is going to be higher than not, and that impacts ARPU as well. Overall, we feel really good about the guidance we gave for mod ARPU growth for the year. So nothing substantive there. . And your second question was remind me -- John Stankey -- Chief Executive Officer Mexico was a nonevent. Pascal Desroches -- Chief Financial Officer Mexico, it was a nonevent, Dave. We didn't consolidate. It was an equity method in test that it wasn't in the context of AT&T, not a significant item. David Barden -- Bank of America Merrill Lynch -- Analyst Great. And then just one follow-up, if I could. Pascal, you said that we should expect a 20% rate of kind of run rate decline in DTV hash contributions on an annual basis, on a kind of go-forward basis? Is that the -- Pascal Desroches -- Chief Financial Officer Yes. That is our best judgment, yes. And that's the guidance we gave at the beginning of the year, and that hasn't changed. In Q1, there was some -- last year, there were some onetime items, and that's probably why you saw some of the decline year over year, but we feel good about the guidance we previously provided, which put us at a round -- Unknown speaker Thank you for calling the AT&T conference replay system. Pascal Desroches -- Chief Financial Officer Dave, are you still there? David Barden -- Bank of America Merrill Lynch -- Analyst I'm here. I'm listening, all of it. Pascal Desroches -- Chief Financial Officer Yes. So for the year, we expect to have overall $3 billion of cash distribution from DirecTV. David Barden -- Bank of America Merrill Lynch -- Analyst I appreciate it, guys. Thank you so much. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. We'll take the next question now. Operator Michael Rollins of Citi. Please go ahead. Mike Rollins -- Citi -- Analyst Thanks for taking the question and good morning. When we look at the EBITDA growth for first quarter of the 4.3% year over year and compare that to the guidance of 3% range for the full year, can you just frame some of the elements that may be changing, whether it's by segment or between revenue and cash expenses, just to think about the differences there? And then this could be a related question. Can you review your exposure to the ACP program, your expectations on the program possibly discontinued and potential impact to AT&T's financial results? Pascal Desroches -- Chief Financial Officer Mike, thank you for the question. So first, as it relates to our segment-level guidance, relative to the start of the year, as I noted in my comments, I anticipate Business Wireline will be a little bit worse than we thought, principally because of an acceleration of legacy voice decline. So putting that down in the mid-teens. But look, you saw the strong start to both our Mobility business including the record low churn. And Consumer Wireline, I mean, we delivered over 14% of EBITDA growth. And the dynamics for both, we would anticipate -- what you saw in Q1, we would anticipate being there for the balance of this year. Those businesses are operating really well. The transformation work we've done the last few years is really setting us up to have margin expansion in those businesses, and we feel really good about the trajectory of those two businesses. Business Wireline is, at an earlier point, in the product transition. And while we are growing fiber revenues, and as John mentioned, AT&T Internet Air for business, that's going to grow. And of course, the wireless business relationships will also grow, but those will be offset by legacy declines and we're confident we can manage through that in the balance of the year and still -- on around 3%. John Stankey -- Chief Executive Officer Mike, I think we indicated last quarter, and I still -- no different position that we could work through the ACP sunset if, in fact, that occurs, and I would say it's probably more likely than not, that it does occur and we could do so without any revisions or changes to what we guided you to. And we still feel that way. We've started the process, as you might guess, of notifying customers and working with them and we're not just idly sitting by. I think we'll be successful in many instances, finding ways to continue relationships with customers and ease them into different constructs that make sense for them. But I feel good about how we went about using the program. I think we used it consistent with the way that policymakers probably would have liked to have seen it used, which is to over-index more than anything else on fixed broadband capabilities. And I think we had a quality customer base relative to how the program was set up, and that's going to allow us to probably transition some of them into other approaches for how to use the service and those that we ultimately do is because of the subsidy. So that -- I don't think it's going to be anything that impacts ultimately what we're giving you in terms of our ability to operate the business and hit our financials. Mike Rollins -- Citi -- Analyst Thanks. Great. Brett Feldman -- Senior Vice President, Finance and Investor Relations Thanks, Mike. We'll go ahead with the next question. Operator Sebastiano Petti of J.P. Morgan. Please go ahead. Sebastiano Petti -- JPMorgan Chase and Company -- Analyst Thank you. A couple of quick housekeeping questions. John, I think you talked about the balance growth on the Mobility side. You have cited those some underpenetrated segments. I was hoping you can give us an update on the opportunity there, I think SMB value and fiber selling on the Mobility side. When do you expect to see some of the share gains, I guess, within some of these segments? Is that more of a -- is that -- could we see that within '24? Does that take some time to build '25 and beyond? And then on the Business Wireline side, I think, obviously, some focus there on the EBITDA trajectory, but you mentioned you are accelerating some cost-cutting initiatives. Would that be within the context of the $2 billion cost-cutting program? Or should we maybe think of these as additive to that program? John Stankey -- Chief Executive Officer I would tell you that as we indicated, we've accelerated some of the work that we're doing. So this is things that probably would have occurred later in the cycle that we're moving forward. So we'll get some incremental run rate benefit to that, maybe -- and accelerating our forecast not necessarily changed the endpoint, I guess, is the way I would describe that. And on our progress around where we're trying to make sure that we're operating more effectively and how our channel distribution works with distribution, I would say that we've made some reasonable progress and have things in place around what we're able to do to penetrate fiber, where we don't have fiber on a wireless subscriber that is eligible to get fiber and the reverse of that. I feel pretty good about what we have lined up around that front. I think we're going to see progress in that regard as we move through '24. We expected in our business plan and how we've communicated to you our performance that we would have progress in that regard. And I do think I'm starting to see the machine work the right way. We're working hard in trying to position ourselves in the value segment. I would say that it's been a little bit slower ramping in that space and specifically, getting the right lineup and the right products in the right place. I do expect as we move through this year, that we will make progress in that regard. Again, we expected we would make progress in that regard in terms of how we guided our expectations around the performance of the business, and we'll keep pushing and working on it. And I would also say that it's probably the same statement and truth and -- where we see certain ethnic segments that maybe we'd do a little bit better at than what we're doing right now, and we'll continue to work those as well. Sebastiano Petti -- JPMorgan Chase and Company -- Analyst Probably got -- quickly just on Mike's question about the ACP. Obviously, access from AT&T program was a portion within the commitment that you made earlier in the month. Do you see this as an opportunity to leaning in perhaps on access from AT&T as an opportunity to gain some share from ACP subs you're may be churning for peers? Or do you see this is an opportunity to lean in a little bit into the low-income segments to drive greater adoption of broadband over time? John Stankey -- Chief Executive Officer So we intend to continue to keep the access from AT&T in the market, and we'll continue to actively promote it and try to apply it where it makes sense. And I think we're going to continue to see the same segments we were attempting when ACP was live to find that an attractive place to go. I'm -- I don't know exactly how some of our competitors have used the ACP subsidy. I know how I've used it. I think we've used it in a way where we believe we're catching the waterfront of what we think are the right customers to be putting the subsidy in front of, which are the right customers that should get access from AT&T. Does that mean that incrementally, we should see more coming back our way? I don't know. I would have intuitively hoped that in the form of the competitive markets in which we operate, that our message is equally communicated to those who chose us, those who didn't choose us. So I don't know that just because ACP goes away that I'm going to dramatically see that equation change. And so I don't expect there's going to be a strong pivot over to AT&T, and I would expect that our competitors might continue to leave some kind of a discounted offer in place for those that qualify for it. So I'm not expecting huge shifts as a result of that. I'm -- Sebastiano, I'm pretty proud actually and comfortable given the overall state of the -- what I'll call the fixed broadband market of our performance and how we've been growing in that space. A big deal. We just hit 40% -- about 40% penetration of our fiber base right now. And if you'd ask me two years ago that I think we'd arrive at that level, given the number of households we're adding and building to, and I probably wouldn't have we arrived that quickly. So I think our goal is to just keep operating as effectively as we have been in taking the good growth that's coming our way, and I think you see that reflected in the overall performance of the numbers. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Operator, we're going to take the next question. Operator Frank Louthan of Raymond James. Please go ahead. Frank Louthan -- Raymond James -- Analyst Great. Thank you. I want to delve in on the business side. First, can you give us your overall read on the economy and your outlook there? And then secondly, what is sort of the endgame on the Business Wireline side? It continues to kind of decline. Is there a bottom there? And can you give us maybe a split between what's left in that revenue that's voice versus other data services to get an idea of where the weakness might be? John Stankey -- Chief Executive Officer Yes, Frank. So first of all, look, I don't -- I'm not going to sit here and tell you that I think the shifts in the business segment are economic driven. I know there's been some discussion around what's happening in business investment and communication services. And I fully expect there are going to be businesses that look around and say, gosh, I need to find incremental money to invest in AI. And as we don't know how our corporations that we're part of work, sometimes it's -- you take from one to invest in another. And I expect we're going to see that happening. But I think the fundamentals under what's occurring in the business segment are largely technology-driven. I think we've known for a long time that traditional voice had a shelf life. And ultimately, it was going to get replaced with integrated communication services and as-a-service capabilities that run over the top of IP. I think what we saw is a bit during the pandemic, there was a suppression of change for whatever reason, people were out of the office. It wasn't a priority. People didn't want to mess around with their communications infrastructure while they were working hard to accommodate a different hybrid work environment. And now we're kind of seeing that evolution kind of pick up with a degree of steam. There's probably some good business reasons that's occurring. People are rationalizing office space. They're moving things around. They're working differently. They're evaluating the kind of technology they want in place as a result of that. And that's, from my point of view, why we're seeing a little bit of that step-up in that voice transition and what's occurring. I think we're going to try to do some more broadly, not just specific to business, but we'll give you some transparency and visibility of what's left in the legacy businesses and what's going on around those things. As we move through this year, I think we're working on maybe some ways to schedule some of that for you. So you kind of get a sense of what's occurring there. I understand your desire to want to understand it. I think what I would balance that with is, as we stressed multiple times this morning, those things that we're investing in right now, we've got a really good, strong, solid growth business, and those growth business are built on 5G and fiber and businesses endgame is really no different. We're shifting to build a company that is good at selling 5G and fiber into business, and selling 5G and fiber in the business, not just at the top end of the market for the Fortune 1000, but across the continuum of the market. And that's a bit of a transition for AT&T because I would say where we made our bread and butter over the last decade, rightly or wrongly, has been at the top end of the market. And so as we shift and generate more revenues and more share out of the mid-portion of the market, we're having to rebuild some muscle and some distribution and the right product mix to attack that. And we can do that. And the endgame is we will catch this decline and we'll ultimately catch the decline with connectivity-based services both in fiber and 5G. We're just going through that transition to make that happen. And unfortunately, as you know, some of the historic voice services are really high-margin services. They're being replaced with good margin services, but not quite as high. And it's going to be a little bit painful for a couple of quarters as we move through this transition. But I have ultimate confidence that the AT&T brand plays incredibly well in business. All of our research suggests that. I have very high confidence that we walk in and we talk to businesses of any size about using AT&T for either their wireless or fixed connectivity, we're high in the consideration set and can win that business. And I have confidence that there was another generation of incremental services that go on top of that connectivity, as I alluded to in my opening remarks and what we're doing with Dynamic Defense is a good example, which is overlaying incremental service that comes on top of the base transport that allows us to scrub traffic on behalf of the customer to improve their security posture. I think there's a lot more of those things that can come on in the middle market, given the lack of sophistication, the lack of ability to have a full-time staff dedicated to those things. And I think that's just natural for us to extend our capabilities into that space. And I'm long-term bullish that it's the right thing for us to be in both the fixed and the wireless market, given our brand presence, our distribution channel capabilities and how we build products. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Operator, we have time for one last question. Operator Our last question in queue will come from the line of Walter Piecyk of LightShed. Please go ahead. Walt Piecyk -- LightShed Partners -- Analyst Thanks. John, I just want to get your kind of refreshed views on the fixed wireless market. If you look at Verizon, they've added a percentage point of overall wireless growth using fixed wireless. T-Mobile has added, I think, 160 basis points. We're seeing advertisements for, I guess, I think what you call free air or something like that. What do you think in terms of the growth opportunity here? And if you were able to get some additional spectrum or maybe even with your existing spectrum, as you've seen the usage from some of your early learnings, can this be as broad of an opportunity for you as it's been for Verizon and T-Mobile? John Stankey -- Chief Executive Officer I think the short answer to the last part of your question is I don't intend to promote it in the market in a manner that Verizon and T-Mobile are promoting at the market. And I just -- I said on the sideline and I observed, I also see them doing some things right now to try to manage the dynamics around those product sets that are reflective of what I believe the ultimate outcome was going to be and what I've been saying for a period of time, which is wireless networks aren't particularly the best place to take a single-family home that streams hours and hours of video a day and try to serve them with a kind of $50 a month product or service. And I just don't see that as long-term sustainable or healthy growth of returns for the business, and I've been pretty consistent in saying that, and I'm still consistent in saying that. And that's what we're making a choice in our capital allocation to invest more heavily in fiber as the basis of which to make an investment that we think has a long runway and a long annuity stream and is a technology that has flexibility to deal with what we know is going to be continuing calls and demands on growth for high-performance networking and homes and businesses. Now having said that, I've also been very, very clear that there is a place for fixed wireless in our portfolio. And I don't believe my point of view on this has changed in any way, shape or form nor our execution's any different than that. I've said from the start that there are businesses that do not have the characteristics of single-family homes. And as a result of that, fixed wireless can be a really effective way of meeting their needs and doing so at a value proposition, price, and performance that makes sense for them, especially when you start to think about those companies that have a convergence of both fixed and mobility needs. It's a natural in those cases. And I'd like to participate in that market aggressively, and I will go after it as aggressively as my competitors and picking up any of those business customers that I can on a national basis. And I think that's a margin-accretive decision within the context of how we're allocating capital between spectrum investments and fiber investments. I've also said that in the consumer space there are places where I would apply technology. I gave a couple of specific examples. We have some places where we have a good copper DSL base that we're in the process of deploying fiber and in some cases, fixed wireless can give better performance in what our copper network can deliver, and we know that we'll be 12 months, 18 months from fiber deployment and we may want to hold some customers, offer a better service, and we'll use it as a bridging or hold strategy for customers that are high value to us, and we'll continue to use that technique where we can. I've indicated that we will use it as an opportunity for us to turn down footprint. So where I've got small numbers of data customers in place, I need to get them off of fixed infrastructure that I ultimately want to shutter because that allows me to turn down a geography that is a low utilization geography and a low profitable geography on the fixed side. And I can turn out the lights, walk away, take cost out of business, I will do that. And I've also said we have some select markets where our penetration levels in mobility are low and our spectrum position is high, and we may choose in those markets to do some incremental marketing to do, as you indicated, to buy some incremental growth that we believe has a longer runway. So that's how the team is operationalizing around this. But in the end, when all those plays are put together, no, I don't think you're going to see us have the same posture that two of our competitors do because our posture is different. We're investing in fiber, and I don't see myself moving into the market just to buy spectrum so that I can change the operating posture I just described to you. Brett Feldman -- Senior Vice President, Finance and Investor Relations All right. Well, thank you, everyone, for joining us. Operator, you go ahead and close out the call.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning and welcome to the General Motors Company first-quarter 2024 earnings conference call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. We are asking analysts to limit their questions to one and a brief follow-up. [Operator instructions] As a reminder, this conference call is being recorded, Tuesday, April 23rd, 2024. I would now like to turn the conference over to Ashish Kohli, GM's vice president of investor relations. Ashish Kohli -- Vice President, Investor Relations Thanks, and good morning, everyone. We appreciate you joining us as we review GM's financial results for the first quarter of 2024. Our conference call materials were issued this morning and are available on GM's Investor relations website. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM's chair and CEO; and Paul Jacobson, GM's executive vice president and CFO. Dan Berce, president and CEO of GM Financial, will also be joining us for the Q&A portion of the call. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the Safe Harbor statement on the first page of our presentation as the content of our call will be governed by this language. And with that, I'm delighted to turn the call over to Mary. Mary Barra -- Chairman and Chief Executive Officer Thanks, Ashish, and good morning, everyone. In January, we outlined clear priorities for 2024 that are designed to build on our strength and learn from the challenges we faced in 2023. I'm very pleased to share that the team is executing well against all of them. Around the world, we are very focused on growth and profitability, which means taking full advantage of our winning product portfolio to grow share without chasing unprofitable business. In North America, the fundamental strengths of Chevrolet, Buick, GMC ,and Cadillac truly stand out. The team delivered a 10.6% EBIT margin in the quarter, thanks to our industry-leading full-size pickups, the momentum we're building in midsize pickups, the growth we are seeing in our SUV business, profit improvement in our EV portfolio, and our overall operating discipline. We again grew retail shares and market share in the US during the quarter with incentives that remained well below the industry average, especially in our truck business. We grew our combined Chevrolet and GMC full-size pickup sales by 3% year over year and grew our retail market share 1.8 points to 43.8% with much lower incentives than our closest competitors whose sales were down. In March, we doubled sales of the GMC Canyon year over year, and the Chevrolet Colorado was the fastest growing truck in the midsize pickup segment, thanks to its purity of function, simple elegance, and execution, and value. Those are MotorTrend's words, not mine. We also continue to gain market share and grow EBIT with our new small SUVs, including the Chevrolet Trax and the Buick Envista. These vehicles are helping us win new customers, and we will continue to excel at customer retention. During the quarter, S&P Global Mobility announced that GM has now had the highest loyalty of any OEM for nine consecutive years. That's a powerful competitive advantage. In our EV business, we are building momentum in production and profitability. For example, we have increased battery module production by 300% over the last six months. Quality is very good and continuing to improve, and the installation and validation of our new high-speed module assembly lines is on track. We are projecting to double our current capacity by the end of the summer. EV production rose sharply during the quarter, and our dealers translated that into a 21% year over-year-increase in EV retail customer deliveries. For example, the Cadillac Lyriq outsold all of the EVs from European luxury brands in the first quarter, and since mid-March, we are now delivering Chevrolet Blazer EVs with updated and improved software. All of our product programs are benefiting from the end-to-end improvements we've made in software, including the increased rigor we have instilled in our quality and validation processes. More importantly, the talented executives and engineers we've hired from the tech industry are raising the bar for software design and execution, which will help us truly differentiate our customer experience and the suite of software-driven products and services we offer. We're also making progress at Cruise. The team is back on the road in Phoenix updating mapping, gathering more road information. This is a critical step for validating our improved self-driving system and building upon the more than 5 million driverless miles we've logged before the pause. We are engaging frequently with regulators and stakeholders and building trust as we regain momentum. Safety will remain front and center and will guide our progress. I am pleased with our ICE performance, our progress in EV execution and growth, our new software organizations performance, and the steps we're taking to regain momentum at Cruise. In addition, I'm very proud of the GM team and all of our stakeholders for really leaning in to keep our momentum going. Their commitment and tenacity helped give us the confidence to raise our full-year 2024 EBIT, EPS and automotive adjusted free cash flow guidance. In our ICE business, the redesigned Chevrolet Traverse, GMC Acadia, and Chevrolet Equinox are all launching in high-volume segments starting this quarter, so are the Chevrolet Spin and the S10 in South America, and they have higher margins than the outgoing models. Then this summer, the stunning new Buick Enclave will arrive. It's the first Enclave to offer Super Cruise. Later in the year, we will make important design and technology upgrades to our best-selling GMC Yukon, Chevrolet Tahoe, and Chevrolet Suburban full-size SUVs. They include redesigned tech-focused interiors, safety and security features that include a suite of connected cameras, ride and handling improvements, styling enhancements, and more. Mark and our performance team also have the unbelievable Corvette ZR1 coming, and we can't wait to put customers behind the wheel. And we've already begun installing equipment at our Fort Wayne assembly plant to produce our next-generation full-size ICE pickups. In our EV business, the Ultium cell plant in Spring Hill is shipping sales and scaling production through the year. The Chevrolet Equinox EV will arrive in showrooms this quarter, and we're very excited because it will be the most affordable long-range EV in the market. It will also offer Super Cruise like all of our Chevrolet, GMC, and Cadillac EVs on the Ultium platform. We will then introduce more affordable Trim series for the Chevrolet Equinox EV, the Blazer EV, and the Silverado EV in the second half of the year which will help grow volume and share. Also, in the second half of the year, Cadillac will expand its EV lineup to include the Optiq and the Escalade IQ. This is important because EV adoption and luxury segments is higher and more resilient than in the broader market. Two of our most highly anticipated launches are the GMC Sierra EV Denali and the Chevrolet Silverado EV RST. They are best in class in ways that truly matter to truck customers. By optimizing the battery, aerodynamics, and other systems, we were able to increase the range of the RST and the Denali by 10% to an estimated 440 miles, which is about 40 miles better than the median range of ICE vehicles on the road today. No EV pickup on the road today even comes close, and it's possible to go even further. A few weeks ago, two road testers took the RST on a drive from Las Vegas to Phoenix, and they drove it like customers do: on paved and gravel roads at freeway speeds, at different temperatures, and different elevations. At the end, they managed to travel 460 miles on a single charge. It's the same story for towing. One journalist drove a Silverado EV work truck and three competing battery electric trucks on a 500-mile trip over the Rocky Mountains while towing trailers. It wasn't even a competition. The Silverado EV stopped once to charge, while every other truck had to stop four to five times. Chevrolet and GMC are also the only pickup brands that allow drivers to tow while using Super Cruise, our hands-free driving technology. That's just one of the several features that uniquely differentiates our products. This is exactly the kind of design and engineering functionality that excites people, motivates them, and turns them into customers. It's the same formula for Chevrolet and GMC, have followed with ICE trucks, and those results speak for themselves. Based on the feedback we're hearing from customers and dealers, the early sales momentum we are seeing, we're confident that continuing to scale every production is the right move. We know that transparency matters in every transformation. So, Paul and I will give you regular updates throughout the year, including at our Investor Day we're planning for this fall as we achieve our EV production, sales, and profitability milestones. All of these great ICE and EV products were made possible by the investments we made to drive transformation and growth. As a result, our spending was above historic levels for several years. Now that the foundation is largely built and we're starting to see results, our focus has turned back to driving free cash flow through enhanced profitability and capital discipline, finding ways to spend less for the same results and with an unwavering focus on the customer. You're already seeing some examples of this. Our winning with Simplicity discipline is a great example of how we're improving capital efficiency and lowering costs. The next-generation Ultium-based Chevrolet Bolt EV is another. It's a profitable and capital-efficient program that will deliver one of the most affordable electric vehicles around when it arrives in late 2025. There will be many more examples as we move forward. With that said, I'd now like to turn the call over to Paul to take you through our results and our new higher guidance for the calendar year. Paul Jacobson -- Executive Vice President, Chief Financial Officer Thank you, Mary, and I appreciate you all joining us this morning. We're off to a good start to the year, and I'd like to thank our team for all their hard work and helping deliver another strong set of financial results. We experienced consistent pricing trends during the quarter below the 2% to 2.5% headwind we built into our full-year guidance. For Q1, pricing was down only about $200 million year over year, driven by demand for our products and a disciplined go-to-market strategy that prioritizes profitability and margins. And so far, in April, we've seen pricing remain relatively consistent. That said, our comparisons get tougher as we lap price increases taken in Q2 of last year. The US retail industry experienced a slight mix shift away from the full-size truck segment during the quarter. However, we increased our volume and share with lower incentives than our competitors, which speaks to our strong truck franchises and our customer loyalty. Retail sales were up 6%, while fleet sales decreased more than 20% driven by two main factors. First, we encountered some production constraints impacting the timing of fleet deliveries on our commercial van and midsize pickups. We expect to recover most of this volume in the second half of the year. Second, we made the strategic decision to produce more retail full-size SUVs compared to last year to satisfy our strong customer demand. Retail sales on our full-size SUVs have a higher trim mix that earned us more revenue per vehicle. We are committed to growing our strong and profitable fleet business but will continue to balance fleet and retail customer demands with a focus on profitability. We generated healthy cash flow during the quarter, helping support $600 million of year-to-date open market stock repurchases incremental to the ongoing ASR, retiring another 14 million shares since the beginning of the year. We now have approximately $800 million remaining in our existing share repurchase authorization. In addition, we completed the first tranche of the $10 billion ASR last fall, retiring 4 million shares in Q1. Our fully diluted share count at the end of the quarter was 1.16 billion, down 17% from where we were just one year ago. Given the strong momentum we've seen thus far and our confidence in the 2024 outlook, we are raising full-year guidance to EBIT adjusted in the $12.5 billion to $14.5 billion range, EPS diluted adjusted to the $9 to $10 range, and adjusted automotive free cash flow in the $8.5 billion to $10.5 billion range. Now, let's get into the Q1 results. We grew total company revenue by 8% to $43 billion, driven by higher wholesale volumes in North America. Over the last 24 months, we've achieved consistent revenue growth, resulting in a CAGR of more than 15% over that period. We also achieved $3.9 billion in EBIT-adjusted, 9% EBIT-adjusted margins, and $2.62 in EPS diluted adjusted. EBIT adjusted was up year over year and well above consensus, driven by our continued strong ICE performance, improving EV profitability, and our strategic cost actions, mitigating the effect of higher labor costs. We achieved adjusted automotive free cash flow of $1.1 billion, up materially versus being flat in Q1 of 2023, driven by improved working capital benefits through inventory management and production timing. North America delivered Q1 EBIT adjusted margins of 10.6%, driving $3.8 billion of EBIT adjusted, up $300 million year over year, primarily from higher wholesale volumes, combined with steady pricing and ongoing cost containment. During the quarter, we continued to benefit from our fixed cost reduction program, realizing an incremental $300 million from lower marketing and engineering spend. Our fixed cost basis is at its lowest since Q1 2022, and we are on track to achieve the full $2 billion, net of depreciation and amortization, by the end of 2024. Dealer inventory levels ended the quarter slightly above our 50- to 60-day end-of-year target at 63 days. However, we believe we are well positioned from an inventory standpoint as we head into a seasonally stronger part of the year and incur a few weeks of planned downtime in Q2 on our full-size pickups to prepare for future launches and to install new equipment. GM International Q1 EBIT adjusted was breakeven, down $350 million year over year. China equity income was a loss of $100 million, down $200 million year over year as we lowered production to balance dealer inventory levels. This was slightly better than expected due to a continued focus on cost efficiencies. Having made progress reducing inventory levels, production is normalizing and we expect a return to profitability in Q2. EBIT adjusted in GM International, excluding China equity income, was $100 million, down $150 million year over year, driven by lower volume in South America and strategic decisions to protect margins. We anticipate new product launches and further cost efficiencies will help drive profitability improvements beginning in Q2. GM Financial continues to perform well with Q1 EBT adjusted of $700 million, in line with last year and tracking well within the full year $2.5 billion to $3 billion guidance range. They continue to drive portfolio growth and paid a $450 million dividend to GM during the quarter. Cruise expenses were $400 million in the quarter, down from $800 million in Q4 '23, reflecting our cost reduction activities and a more focused operational plan. As Mary mentioned, Cruise is resuming operations in Phoenix, along with testing and simulated environments and on closed courses, while they work to earn trust and build partnerships with regulators and customers. We expect full-year Cruise expenses to be around $1.7 billion. Let's move now to one of the most important metrics we're focused on: EV profitability. We continue to see sequential and year-over-year improvements in variable profit and EBIT margins as we benefit from scale, material cost, and mix improvements. Since last year, we have significantly reduced cell costs with a large driver being lower battery raw material costs, especially for lithium. We ramped our first battery JV plant last year. And as they increased production and made other efficiencies, the cost of cells came down significantly. And cell plant number two in Tennessee is ramping even faster based on the learnings from plant one and is expected to reach full Installed capacity by the end of the year. Collectively, these factors are helping improve vehicle profitability. For example, we have seen more than $12,000 of year-over-year cost savings in the Lyriq alone. As we continue to ramp, we expect to see the benefits from the production tax credit continue to grow and our fixed cost absorption to improve meaningfully. We wholesaled 22,000 Ultium-based EVs in Q1, up from less than 2,000 in the first quarter of last year, and remain on track to achieve our 200,000 to 300,000-unit production and wholesale volume target for 2024. We will share more on EV profitability as we progress through the year. I would also like to touch on EV pricing which we recently adjusted on the 2024 Blazer EV. This action has been well received by our dealers and customers, and as Mary mentioned, the vehicle is gaining momentum. We assume some pricing pressure for both ICE and EVs in our business plan and guidance for 2024, but we continue to work on finding additional offsets through cost performance and other efficiencies. Importantly, this pricing action doesn't change our expectation to achieve positive variable profit for our EV portfolio in the second half of the year or our mid-single-digit margin target in 2025. We remain confident that when consumers see our new EVs and get a chance to drive them, they will appreciate the unique combination of design, performance, range, and value that we offer at multiple price points. And because of our supply chain efforts, customers are well positioned to leverage the $7,500 clean energy consumer purchase tax credit. In closing, I want to reiterate our capital allocation framework, along with our intention to be much more consistent in how we deploy capital. We are generating strong cash flow, which is funding our EV transformation and growth opportunities. These efforts include investing in future products, transitioning manufacturing capacity to EVs, and deploying resources into cutting-edge battery technology. At the same time, you've seen us adapt to the dynamic market, particularly for EVs, and made bold decisions to be more efficient with our capital spend, something we will continue to do moving forward. Our balance sheet remains strong. And on shareholder returns, we executed the ASR last November, and the response has been overwhelmingly positive with GM stock outperforming its peers and being up nearly 50% since the announcement. We have seen about a one-turn improvement in our PE multiple since the ASR, but we are still significantly undervalued relative to our historical average, as well as our competitors and other industrial companies. Obviously, we're not satisfied and know that we have a lot of work to do on our valuation and remain committed to improving it. As we move forward, we believe the strong cash generated by our ICE portfolio, along with improved execution on our EV strategy, as well as tangible progress on Cruise, will help generate significant returns for all GM stakeholders. This concludes our opening comments, and we'll now move to the Q&A portion of the call. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Joe Spak with UBS. You may proceed. Joe Spak -- UBS -- Analyst Thanks. Good morning, everyone. Mary Barra -- Chairman and Chief Executive Officer Good morning. Joe Spak -- UBS -- Analyst First, on -- on the guidance, Paul, I just want to understand the pricing assumption. Is it now just 2% to 2.5% negative for the remaining three quarters? And then, you mentioned a couple of things on mix. So, you've got, you know, higher EV sales, smaller crossovers. Both of those seem like they should, you know, continue through the year. And then -- and then, I think you also mentioned some potential Trim headwinds in pickups, but then on the other hand, you have, you know, the EV variable profit turning positive in the second half. So, I guess I just want to understand a little bit better how those -- how those all intersect. And -- and should we actually see some maybe net improvement in mix as we move through the year? Paul Jacobson -- Executive Vice President, Chief Financial Officer So, good morning, Joe. You're right that, at the end of the day, 2% to 2.5% for the rest of the year is in our assumptions. So, essentially, what we have done with the guidance is -- is taken the outperformance that we saw in Q1 and built it into the full year. So, really not much has changed on the assumption going forward. So, when you look at seasonality and you look at trend lines, keep in mind, you know, in the second half of the year, we've got more EV volume coming in and -- and also, you know, we've got -- we've got some of those pricing headwinds that we've built in. So, we feel like this is a good -- good move to go ahead and take it up from where we are. But, you know, we're still sort of guided by the same principles as when we put out our -- our initial guidance for the year going forward. So, you know, as far -- as -- as far as mix goes, you know, we -- we've talked about that a lot. We've obviously been trending fairly strong. You know, we are lapping some price increases that we took last year. So, as I said, the year-over-year comps get a little bit more difficult but -- but overall, you know, I think the market is holding up fairly well. And as we said before, if -- if we see pricing, you know, continuing with this momentum, we expect that we'd be in a position to take up guidance again. Joe Spak -- UBS -- Analyst OK. Thank you. As a second question, just on -- on Cruise, with the relaunch, you know, I understand the manually operated and mapping, but Mary, you emphasized an improved system. So, maybe you could just give us a little bit more color on -- on how much of the existing technology stack is -- is really sort of being leveraged and what's being redone. And then, just on -- on the financial side, does the guidance assume any further steps toward that relaunch? And -- and what about a capital need with -- with the cash balance down to 700 million? Mary Barra -- Chairman and Chief Executive Officer Sure. Well, first, Cruise, we're very excited that they're back on the roads in Phoenix. As I said it is manual, but then we'll progress to supervise and then to unsupervised. And the core tech stack, what we've been doing since, you know, we made the decision to pause is continuing to work and improving it. So, we've actually strengthened, you know, the safety of the system by continuing to -- to, you know, make sure we comprehend, I'd say, a low probability but higher severity-type issues because what we recognize in October, although I think mainly it was an issue of not having built the right relationship with the regulatory agencies at all levels, as well as the public and then being transparent. But we also realize even though we demonstrated and externally validated that the technology was safer than an average human driver, we need to do more. And so, that's what we've been focused on. That's why we're -- as we're going back to Phoenix, we're, you know, making sure we're up to date, but very excited about where we are in the technology and very much believe in it, for what we plan to do this year of getting back on the road and demonstrating, you know, that the model works in one city, as I've said in the past and then expanding from there, we believe it's comprehended in the budget that we have. And then, as you look at how we plan to fund the business, we're exploring quite a few options right now, including potentially outside -- taking outside investments as well. And so, we'll have more to say about that as we move through the year. But I'm very excited to be back on the road. We believe in the technology. We're making it even better. That didn't stop through this whole period, since last October. Joe Spak -- UBS -- Analyst Thanks for the color. Operator Thank you. Our next question comes from Itay Michaeli with Citi. Your line is open. Itay Michaeli -- Citi -- Analyst Great. Thanks. Good morning, everyone, and congrats. Just two questions for me. Maybe first for Paul, just can you remind us of how we should think about the volume mix of -- of your new and refreshed ICE crossovers, the next couple of quarters, and how you're feeling about the prior margin improvement targets that you spoke about, I think it was last quarter? And then. maybe for Mary, hopefully, we kind of go back to -- to the software strategy and maybe talk about some of the goals that we should be expecting for software and the Ultifi platform over the next six to 12 months. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Itay. Thanks for the question. You know, on our -- on our crossovers, we've talked about the -- you know, the new -- the new Chevy Trax and Buick Envista, both of which are significantly improved from their prior profitability of the -- before the upgrades. And, you know, we've seen particularly the Chevy Trax really take off. Sales were up 500% in the quarter. And, you know, it's -- it's really performing well for us. So, you know, some of the -- some of the trends in average transaction prices, I think, are muddied by the fact that the volume on those crossovers are going up considerably, but we've still seen strength in our truck pricing and our SUV pricing as well. So, we continue to think that that's accretive and additive to the -- to the portfolio, and it's built into our, you know, strong guidance that we're updating today. Mary Barra -- Chairman and Chief Executive Officer And then, as it relates to the software strategy, as we move through the year and beyond, first, you know, as Mike stepped back over the past year, though, he did an incredible job of reevaluating and changing our software development process, as well as our validation process, and brought in an incredibly strong team of, you know, probably more than a dozen people at the senior level to really focus on having the right software strategy as we move forward. So, I'm very confident. You know, we paused at the beginning of this year with the Blazer as we saw limited number of -- of consumers had an issue. We've moved past that now, and that's allowed us to strengthen the software of all of our upcoming vehicles. And so, we'll -- you know, the goals for the next couple of months are to launch with quality on time, and we're on a -- on a path to do that. And then, as we go forward, as -- as the -- the new software goes across multiple vehicles and that gives us an opportunity to focus more on growing subscriptions and services. But I'm very pleased with where we are, with the team that we have, and the progress they've made, and it's showing in our ability to launch with quality. Itay Michaeli -- Citi -- Analyst Terrific. That's all very helpful. Thank you. Operator Thank you. Our next question comes from John Murphy with Bank of America. Your line is open. John Murphy -- Bank of America Merrill Lynch -- Analyst Good morning, everybody. You know, Mary, I just wanted to ask one strategic question, you know, on -- on China. You know, at this point, it's really not, you know, a moneymaker for you, and there's a lot of obviously, you know, noise on a geopolitical basis and sort of our relationship -- or the U.S.'s relationship with China. I'm just curious, is it time to really start thinking about strategic alternatives over there to potentially, you know, closing or selling the business? You know, how do you kind of think about that in the context of sort of the broader portfolio over the next few years? Mary Barra -- Chairman and Chief Executive Officer Yeah, you know, just in general, you know, with everything that's happened over the last several years with -- with COVID and then with the supply -- the supply chain issues around the chip shortage and then just broad supply chain issues, we have worked and really strengthened the resiliency of our supply chain and will continue to do that. But over the long term, we're committed to China. We believe that it's a market that, over the medium term, will have substantial growth. We're continuing to draw on not only our global solutions but, in some cases, local solutions as we advance our electrification strategy. You know, right now, NEVs account for about 30% of GM's total China deliveries from a Q1 perspective. And we're going to build on that through this year because we have an intense NEV launch cadence. From Q2, then moving forward, we have several PHEV we'll be launching and -- and moving with full EVs as well. So, we also have established the Durant Guild and that allows us to focus on some niche segments in China that are premium and more lifestyle-oriented. And for instance, the Tahoe and the Yukon will be available for preorder later this year. So, we think clearly the -- the market has shifted and the landscape has shifted from -- with -- with the capability of the Chinese OEMs. But we still think there's a role and a place for GM to play with luxury premium and, again, as I mentioned, leveraging not only our global solutions but local solutions. So, that is our focus, but we've done that while focusing on supply chain resiliency as well. John Murphy -- Bank of America Merrill Lynch -- Analyst OK. And then, I just have one quick follow-up on pricing. You know, saying 2&% to 2.5% I understand is your best estimate right now, but you know, the calling pricing is difficult. So I -- just curious, maybe, Paul, if you could give us sort of a high level of how you think about pricing because there's a lot of crosscurrents. I mean, there's EV price cutting, but there seems like there's resilience on the ICE side. When you look at your cap, you -- you're at 100% capacity utilization, which means you're kind of tight on your sort of structural supply. Look at zero to six-year-old vehicles, they're going to continue to shrink through the next, you know, two years probably. So, like, you know, the used vehicle market is going to stay relatively tight. So, I mean, I think people are looking at this dealer inventory and saying, "Hey, things are getting a little bit toppy." You know, there's risk on pricing. But when you look at some of the structural aspects of supply, they're reasonably constrained. And it seems like even in the tier 2 and 3 supply base, they're constrained and, you know, on labor. I mean I just, you know, it just -- it just seems like this resilience may be with us a little bit longer than people are fearing. I mean, the Colorado and Canyon as well as your vans, you said you were short on -- on some stuff that you were getting to, you know, fleets that you'll -- you'll catch up later in the year. So, there's -- there's just all these kind of pockets of -- of shortages that still persist, and it seems like the kind of thing that's going to last for longer than people are fearing. How do you -- how do you really kind of concoct or come up with that estimate of 2% to 2.5%? And, you know, where do you think things will kind of land over the next couple of years? Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, well, look, good morning, John. And, you know, as we've as we've talked about, the 2% to 2.5%, I want to be very clear, is not an expectation. That's an assumption that we've put into the guidance and provided for people to run their models from that standpoint. But as we've seen with the first quarter outperformance, we weren't there. And April is actually holding up quite well for us with ATPs actually trending slightly higher than -- than where they did coming out of the quarter. So, not really an expectation as much as we built an assumption in recognizing that, you know, there may be some macro headwinds out there. We do know that, you know, our comps get tougher as -- as we lap our price increases that we took in the summer of last year. But -- but, overall, the commercial environment continues to be resilient. And I think this is a very common theme that we've had now for, you know, more than more than a year worth of quarters of -- of you know, there's -- there's a lot of sort of downward bias, but we're continuing to manage commercially month to month and -- and producing in line with demand. And I think with that balance, it's been very favorable for us on -- on both pricing and margins. John Murphy -- Bank of America Merrill Lynch -- Analyst OK. All right. Thank you very much. Paul Jacobson -- Executive Vice President, Chief Financial Officer Thanks, John. Operator Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is open. Mark Delaney -- Goldman Sachs -- Analyst Yes, good morning. Thanks very much for taking the questions. First quarter EBIT was strong and annualizing at about 15.5 billion. I think guidance for the full year on EBIT is now 12.5 billion to 14.5 billion for the year. So, I'm hoping to better understand some of the factors that temper EBIT over the balance of the year compared to the first quarter run rate. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Mark. So, you know, I would say it comes down to a couple of things. One is there's still the assumption in there of the down 2% to 2.5% And as we scale up EVs and we continue to make progress about getting them to variable profit positive, the margins on those are -- are not as strong as -- as -- as ICE, obviously. So, we see a little bit of pressure in the back half from that, but -- but overall, we'll remain consistent. And, you know, as I've said, if we don't see that pricing softness, I would expect that there's an opportunity to outperform these numbers. Mark Delaney -- Goldman Sachs -- Analyst That's helpful, Paul. Another question on EVs and on the pricing topic. The company spoke to good demand and feedback for its EVs, but the broader market has been quite competitive for -- for EV in terms of pricing. I'm hoping to better understand if you think GM is going to need to take additional pricing actions this year to reach the 200,000 to 300,000 outlook that you have in North America. Or do the demand signals you have from the market suggest you can hit that kind of volumes this year with relatively firm pricing going forward? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Sure. Well, you know, obviously, the -- the early results here as we're ramping up Ultium are pretty strong with retail sales up about 20% year over year despite the fact that the Bolt, which is sunsetting the prior generation, was down about 60% during the quarter. So, retail demand remains strong. We -- we've obviously seen a lot of softness in fleet, particularly on the rental side, for EVs, but -- but we see customers responding. Now, you know, these are on admittedly lower volumes as we scale up, but we're building that momentum that I think we need with the products to be able to, you know, show consumers what -- what our capabilities are. When you look at the statistics that Mary cited in the script about the range and what's in our earnings deck, you see that the purpose-built EVs are actually better in terms of performance range, charging speed, towing capabilities, etc., than many of the other products. That are out there on the market. And I think as consumers continue to -- to see that, we'll be well positioned as -- as EV demands at the retail side continue to trend. So, we're obviously going to watch it closely, but the early indications are strong. Mark Delaney -- Goldman Sachs -- Analyst Thank you. Operator Thank you. Our next question comes from Dan Ives with Wedbush. Your line is open. Dan Ives -- Wedbush Securities -- Analyst Yeah, thanks. So, does it then -- and for Mary and Paul, does it feel like, now with UAW in the rearview mirror, a lot of the EV strategy now coming to fruition that the company is just in a stronger position with just less uncertainty? I mean, can you maybe compare it today even six to nine months ago internally? Mary Barra -- Chairman and Chief Executive Officer No, I think you make a really good point, Dan. We do, I feel much better of where we are. As I -- as I mentioned, you know, we now have -- we're ramping up and the module issue is behind us. Our -- all the additional lines that we were scaling are all on track. So, we feel very good about that. Obviously, we're pleased that we were able to get an agreement with the UAW. We continue to work with them on a number of fronts and, you know, build the relationship with the new leadership team as they were named pretty close to when we, you know, started negotiations last year. So, I feel that, you know, we're continuing to talk, raise issues with each other, and problem-solve where we have challenges. So, I feel much better about that. And as Paul said, you know, we're seeing good progress with our Ultium-based EVs because they are purpose-built, and they do have -- there's customers not making a trade-off. And we also see the charging infrastructure get better every quarter. So, I feel very good about where we are. And I think we've got momentum, and believe me, we have a very aligned team, across GM that is -- is going to seize all these opportunities. I would also add, Dan, that, you know, I feel very good, as I mentioned earlier, about where we are with software. You know, the work and the talent that is in the company now and the -- the progress that we've made gives me confidence we're going to be in a good position there as well. So, from last year to now, much better, much more positive. Dan Ives -- Wedbush Securities -- Analyst Great, congrats. Mary Barra -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from James Picariello with BNP Paribas. Your line is open. James Picariello -- Exane BNP Paribas -- Analyst Hi, good morning, everybody. Just thinking about wholesale growth for the full year, global volumes were up almost 4% in the quarter. Can you help dimension the impact for this current quarter's full-size pickup downtime and just what the -- what the full -- what the first-half or second-half split might -- might look like for the Ultium volumes relative to that 200,000 to 300,000 units targeted? Thanks. Mary Barra -- Chairman and Chief Executive Officer Well, I think let me just comment on -- on full-size pickups. You know, we have taken -- announced that we have some down weeks to start installing equipment so we can have a seamless launch as we get to the next model. And we're just going to stay focused on where the customer demand is at. We feel we've got really strong products that, as Paul mentioned, we're growing share. We grew share in the first half, with strong -- with strong pricing. So, I think that speaks for the strength of our product. But we're going to be customer demanded, and we're going to make sure that we don't overbuild because cause, you know, I think it's important to manage residuals and to -- to make sure that we're managing our inventory. I think that's one of the things that we've done that allows us to continue to be strong with pricing and -- and with our products. And as it relates to overall wholesale growth, I don't know, Paul, if you want to talk about that from a EV perspective. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah. So, you know, on the -- on the EV growth, you know, obviously, demand -- supply is going to increase throughout the year as we ramp up to the 200,000 to 300,000 units of production that we've talked about. Spring Hill is coming online in Q -- came online in Q1, and we're ramping up production pretty steadily, and that's Ultium cell plant two. And as module production kicks up, we see an exit rate that's -- that's significantly greater. Now, of course, we're all going to be paced -- we're going to be paced by where the consumer is from that standpoint. Early indications are that the ramp is going well, and we should expect to see that consistently growing throughout the year. James Picariello -- Exane BNP Paribas -- Analyst Got it. And then, just to hit on the quarter's China JV losses, is the expectation to see profitability the remainder of the year, or could this take another quarter or two? And then, for GMI consolidated, can you just shed any light on the profitability actions that are taking place in South America? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, sure. So, you know, as China -- I think it's progressing, as we articulated at the initial guidance range. We did trend slightly better than what we expected, but we foreshadowed the loss in Q1. We do expect that to reverse and be profitable for the rest of the year, and we said results that were similar to slightly down from -- from last year in China. So, the rest of the year is -- you know, we'll have to manage it. But like I said, Q1 was a little bit ahead of expectations but generally in line. So, we'll be profitable. For the rest of GMI, you know, we had some downtime in South America. In particular, we're watching Argentina fairly closely as we continue to -- to see the reforms that are going on there. But overall, you know, we -- we see that improving from kind of where we were and not overly concerned about that just yet, but that's -- that's a market that we're continuing to watch. James Picariello -- Exane BNP Paribas -- Analyst Thanks. Operator Thank you. Our next question comes from Alex Potter with Piper Sandler. You may proceed. Alex, you may need to unmute your line. Alex Potter -- Piper Sandler -- Analyst Yeah, hi. Can you hear me? Mary Barra -- Chairman and Chief Executive Officer Yes, we can hear you. Paul Jacobson -- Executive Vice President, Chief Financial Officer We got you, Alex. Alex Potter -- Piper Sandler -- Analyst OK, very good. So, first question on Ultium. You stuck to the 200,000 to 300,000 production guidance, which is good to see. But at the same time, you talk about how you're going to use consumer demand as sort of a gating factor. Is -- would you say that -- the 200 to 300, is that something that you're going to stick to sort of come hell or high water, and then gauge consumer demand from there? Or is it something that you could slow walk maybe toward midyear or toward the second half if it doesn't seem like the consumer demand is materializing? Mary Barra -- Chairman and Chief Executive Officer Yeah, we're never going to build -- just build products come hell or high water because the number's out there. We're always going to be responsive to the customer. But we do believe that we're going to be in that $200,000 to $300,000 range with the number of -- of -- of EVs that we have launching off of Ultium. You know, we're seeing strength with Hummer as we're ramping that up. We're seeing strength with Lyriq, and Blazer is, you know, just now ramping up. We've got the Equinox coming. There's an -- there's several more. So, I think when you look at the fact that these are all going to meet customers exactly, you know, with the performance and functionality that they need, we think we're well positioned there. So, I would also say, though, as you look across our portfolio, we are well positioned whether it's ICE or EV from a -- with the strength of our ICE portfolio. So, we're well positioned to respond to the customer. Like I said, we -- we are very focused on making sure that we don't overbuild that we're able to maintain our price, our margins, and we think we've got the strength. And, you know, specifically, if you look at Spring Hill, we can build EV or ICE in that plant. So, I think we're well positioned. We think we're going to be in that 200,000 to 300,000 range by by customer demand, and we'll just continue to adapt. Alex Potter -- Piper Sandler -- Analyst OK, perfect. And the second, you know, we talked a little bit about competition within China. I'm interested in hearing sort of your updated views on competition from the Chinese outside China. What's, I guess, GM's stance on this? Do you think protectionism is necessary? Are you more of a free market sort of philosophy from a company standpoint competing against the Chinese globally, particularly in places like South America? Yeah, any comments on China? Thanks. Mary Barra -- Chairman and Chief Executive Officer Yeah, it's a great question. And first of all, you know, I think, in general, we want to have our best products. And if there's a level playing field, then it's -- you know, we want to compete based on product. I think you have to look at where is there a level playing field and -- and what's happening around the world. But, you know, there's a lot that can happen from a regulatory or -- you know, a trade perspective, but we're focused on is making sure we have great vehicles at the right price. So, what is going to help, you know, GM maintain its share around the world, you know, when you look at South America, the Chevy brand is incredibly strong. And we're going to continue to focus on having great designs with great -- great product portfolio with the right features and functions. And we're constantly working on taking cost out of the system. So, it's a -- there's value there as well. And that's the way we're going to compete around the world. But I think the focus has got to be on a level playing field. Alex Potter -- Piper Sandler -- Analyst Great. Thanks. Operator Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open. Bruno Dossena -- Wolfe Research -- Analyst Hi, this is Bruno on for Rod. Thanks for taking the question. I'd like to understand the key assumptions you're making in your EV margin outlook for positive contribution margins this year and positive overall margins next year. Based on the hints you've given us, we think you need to improve contribution margins per EV by, like, 10 to -- 10,000 to 15,000 in 2025 compared to '23. I think if I heard correctly, that's about in line with what you're seeing on the Lyriq year over year. But if you could just help us understand the key buckets of lower cost and what's driving that and your underlying assumptions around in pricing and -- and costs. Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Bruno. Thanks for the question. So, if you go back to presentation that we did back in November, we kind of highlighted the road map for 60 points of EBIT improvement in 2024, with about 60% of that driven by scale benefits. So, if you think about where we are, we -- we've invested a lot into the infrastructure, battery plants and manufacturing facilities, supply chain, etc., to ramp up production. So, you know, some of our EBIT losses are really driven by the fact that we need to grow into what we've built. And so, that's about 60% of that 60 points improvement. The rest is really kind of split evenly between trims and launches and also material cost reductions. So, we've gotten off to a good start as we've seen battery raw materials start to come into the -- the cell costs this year. We've done a good job of reducing cell costs. And as we said, the Lyriq is down $12,000 in cost year over year. So, that's the type of progress that we expect. And then, as we get into 2025, scale becomes a lower driver, and we get into more of material cost reductions in the vehicles that we're producing as they get out of their early years and we start to -- to harness savings in each vehicle line in second, third year of production, etc. So, there's a pretty good road map there. Pricing, obviously, we're going to continue to watch and see where the market is. As we talked about, what we did on the Blazer was built into our expectations. So, we're not -- we're not changing off of -- off of those targets. And, you know, we're just a quarter in on the -- on the LTM ramp, but the early indications are positive. Bruno Dossena -- Wolfe Research -- Analyst OK, thank you. And -- and -- and then just stepping back, we wonder if there's multiple paths to -- to the EV losses that are currently being incurred eventually reversing. Specifically, if the demand or pricing environment for these EVs is softer than expected, how much flexibility do you have to lower costs in the EV business, including as it relates to battery plans? I think your plan is for 160 gigawatt hours eventually over 2 million units. Is there flexibility to rationalize that if the demand differs from your expectations? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Well, you know, I think you've seen us take -- to take steps before, you know. We had -- we had a delay in the Orion plant where we've really kind of taken advantage of some of the slowdown to put improvements into that plant that are -- that are going to help us lower the costs. That came out of some of the early learnings from production at Factory Zero and things that we can do going forward. So, I think you're going to see us be very nimble, and we're trying to build as much flexibility as we can to navigate from here to significantly higher EV adoption going forward. But when you look at our portfolio across both an ICE and EV, it's probably the best portfolio in our history, and -- and customers are responding to that. So, we're going to -- we're going to meet the customer where they are and continue to endeavor to exceed their expectations and -- and really reward them for that loyalty that they have to us, going forward. And we think that that can translate into the EV market as well. But as Mary said, we're going to continue to be guided by demand for -- for our products and our vehicles, and the early indications are that it's -- that it's going quite well. Operator Thank you. Our next question comes from Chris McNally with Evercore. Your line is open. Chris McNally -- Evercore ISI -- Analyst Thanks so much team. Just wanted to -- to dive into some of the questions on -- on seasonality, follow-on to some of Mark's questions prior. Paul, could you talk about the seasonality in wholesale? I think you've talked about, you know, full year being up sort of mid-single digits, which would imply somewhere in the low to mid-800,000 range for the rest of the year. But if you could just help us with -- with just a little bit of the cadence given some of the downtime you mentioned in Q2. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, there was probably a little bit of pull forward from Q1 to Q2, particularly with the trucks as we -- as we prep for that -- that downtime and that retooling that's going to happen for a few weeks. But, you know, generally, seasonality, we expect to be very similar with Q1 and Q4 being slightly lower than Q2 and Q3. So, nothing has dramatically changed, but around the edges, maybe a little bit of pull forward from from Q2 into Q1. So, you know, as we look at the second half, I just, you know, want to caution that, you know, we've got to continue to be guided by the -- the assumption that's in there on pricing, which obviously has a bigger second-half impact given the performance that we've already booked in Q1 and -- and certainly where April is looking right now. And then -- and then, with the EV volume ratcheting up in the back half, that's where we see a little bit of front-half loading in the guidance that we've -- that we've provided. Chris McNally -- Evercore ISI -- Analyst Perfect. All -- all makes sense. And then, maybe just on the actual production side, should we think of sort of, you know, truck T1 production as -- as maybe at its height in -- in Q1? Do we -- you know, do we get back to -- to this level in -- in Q4 just looking at -- at the overall year and inventory build? Paul Jacobson -- Executive Vice President, Chief Financial Officer You know, I think that, you know, obviously, we're going to continue to watch demand, where it is. You know, the inventory, while we built in March, we're still -- we came out of the quarter about 63 days of -- of inventory across the system. So, some of that was intentional, knowing that we were going to have this downtime. So, once we get through that, you know, I think we could see third-quarter production trend a little bit higher, but we're going to be guided by where demand sits. Chris McNally -- Evercore ISI -- Analyst Okay, great. Thanks so much, team. Mary Barra -- Chairman and Chief Executive Officer Thank you. Paul Jacobson -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. Our next question comes from Ryan Brinkman with J.P. Morgan. Your line is open. Ryan Brinkman -- JPMorgan Chase and Company -- Analyst Good morning. Thanks for all the detail on your planned upcoming BEV launches in the U.S. It does seem likely you will gain share there with the number and attractiveness of the offerings. I'm curious if you have a similarly aggressive EV rollout strategy planned for China, including because it seems your share in China has declined amid the industry transition there to EVs. I heard you citing earlier, you know, the increased competitiveness of the domestic Chinese automakers as another contributing factor. And there may be still other factors, but would a blitz of new EVs be sufficient, do you think, at this stage to stabilize the share trend in China? Do you have such a blitz planned over the next one to two years? And -- and would that be a pathway to improved financial performance or you know, given some of the recent pricing trends, represent maybe more of an investment with the payoff some years further out? Mary Barra -- Chairman and Chief Executive Officer Yeah, I think -- we do have, I think, some strong NEVs coming in China this year. We're repositioning the -- the lead. We've got the Cadillac Optiq launch coming. You'll see that at the Beijing Auto Show. And we also have PHEV entries in the Buick GL8 and the Equinox. And then, for our ICE vehicles, we do also have like, for instance, a lead with GLA, and there'll be more upgrades coming there as well. So -- and then, SGM, we're also -- we have a new -- excuse me, new NEV launches as well. So, I think we're going to be better positioned, and that's just going to continue as we move through this year into next year. And that's why I think we can play in the NEV market, both plug-in hybrid, hybrids, and ICE vehicles, and as well as EVs, and then, as I mentioned, with the Durant Guild in the niche segment. So, I think there's a place for GM to play and grow share. Ryan Brinkman -- JPMorgan Chase and Company -- Analyst OK, great. Thanks. And, you know, with all these questions about the -- the new vehicle operations in China, maybe just highlight some of the attractiveness, if it is, you know, that you can draw from the installed base of vehicles there, you know, the OnStar, the financing, sales, service, GM Goodwrench, etc. How do you feel about that element of the China business? Mary Barra -- Chairman and Chief Executive Officer Well, you know, you've mentioned all of the things that come together to allow us to be successful in market. But I would say one of the other things is, last year, we also established in China a dedicated software and digital business organization. And that is going to allow us to continue to improve and compete on a software basis and also on a services basis along with, you know, what we have from a GMF perspective, financing as well as OnStar. So, we'll continue to build that. Ryan Brinkman -- JPMorgan Chase and Company -- Analyst Very helpful. Thank you. Operator Thank you. Our last question comes from the line of Tom Narayan with RBC. Your line is open. Tom Narayan -- RBC Capital Markets -- Analyst Hi, yeah, good morning, and thanks for taking the question. Paul, just a follow-up on that comment on the EV margin. So, 60% of the 60-basis-point improvement coming from scale benefits. So, you know, if the -- if BEVs were kind of closer, let's say, to the 200,000 versus the 300,000, is that a net negative or positive to overall margins? Presumably, you know, BEVs come at lower margins, but if you're selling few of them, then there's a negative impact from less scale benefit. So, you know, just trying to understand that, like, how do we think about that volume number impact to -- to the -- to -- to the company's margins? Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Tom. You know, what I would say is that, you know, obviously, based on just where we are in the in the journey, scale matters quite a bit when you built the infrastructure that we have. So, certainly, in the short run, lower volume would have a negative effect on that -- on that trajectory. But, you know, I think what we're looking at is, you know, kind of breakeven on the variable profit side, around low 200,000. So, we still -- we still are tracking to -- to be able to get that goal. But I look at that as more of a little bit of timing of when we grow into what we've built. And I think from a strategic perspective, you know, growing capacity slightly ahead of adoption to make sure that we can pace and meter ourselves on this journey. Remember, we're playing a 10, 15-year-plus game from that standpoint. So, you know, we've built the flexibility in to be able to respond to ebbs and flows, and we're at a phase right now where we've got to grow into that scale we've built. But those are all really really sound investments, and we feel good about where that's going to go in the short to intermediate term. And then, we're going to continue to watch that going forward. Tom Narayan -- RBC Capital Markets -- Analyst OK, thanks. And a quick follow-up, on the battery rods, obviously, we've seen lithium down like something like 80% or since the peaks. Just curious how your contracts work. When -- have we seen the best of that reduction, or is -- there is kind of a lag where you see the -- is there more benefits to come given the -- the lag in your ramp -- battery ramp contracts? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer So, what I would say is, you know, there's still -- there's still some goodness to come in -- in '24. So, while we saw battery costs come down, remember, we exited the year with a pretty sizable inventory of cells as we ramp up our module production. So, as a result of that, there's still some historical cost in there from last year. But that'll -- that'll flip pretty much, I think, by the time we get to midsummer. And in the second half of the year, we'll -- we'll see cells that have much closer to current prices. And then, as you look at the -- the kind of vertical integration and investment steps that we made, most of that capacity is in 2026 and beyond. There isn't anything that we've done that I would say we regret because we locked in higher prices, etc. Everything that we've done has been done with a portfolio approach to make sure that we get value for our investment either through floors and caps or discounts to market, etc. So, we haven't done anything that would -- would have locked in sort of historically high prices, and that should be a benefit for us as we roll forward into 2026 and beyond. Tom Narayan -- RBC Capital Markets -- Analyst Great. Thank you so much. Operator Thank you. I'd now like to turn the call over to Mary Barra with her closing comments. Mary Barra -- Chairman and Chief Executive Officer Thank you, and thanks, everyone, for your question. As we've talked today, we are making extremely good progress across the board. We're driving revenue growth. We've got with great margins. Our free cash flow is strong, and that's enabling us to reinvest in the business and our employees. So, we plan to efficiently invest between10.5 billion and 11.5 billion in capital this year to leverage the strength of not only our ICE business, but also grow our EV business profitably. And we're also advancing our software-defined vehicle capability. So, I feel very good about the key areas of focus and how we're doing there. In addition, we've set aside more than $160 million in profit sharing for the first quarter to recognize the contributions of the manufacturing team members in the U.S., which were significant both in terms of production volumes and quality. And our shareholders are also benefiting from the progress, too, thanks to our improved execution, a higher dividend, and the value-enhancing benefits of the ASR we launched in November. We are on track to reduce our shares outstanding to fewer than a billion. So, I can say to everyone with confidence and conviction that our team is very much on point. We're focused, and we're going to do everything in our power to keep this momentum going. 2024 can be a very strong year for GM. So, thank you all for your time. Answer:

the General Motors Company first-quarter 2024 earnings conference call

Operator Good morning and welcome to the General Motors Company first-quarter 2024 earnings conference call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. We are asking analysts to limit their questions to one and a brief follow-up. [Operator instructions] As a reminder, this conference call is being recorded, Tuesday, April 23rd, 2024. I would now like to turn the conference over to Ashish Kohli, GM's vice president of investor relations. Ashish Kohli -- Vice President, Investor Relations Thanks, and good morning, everyone. We appreciate you joining us as we review GM's financial results for the first quarter of 2024. Our conference call materials were issued this morning and are available on GM's Investor relations website. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM's chair and CEO; and Paul Jacobson, GM's executive vice president and CFO. Dan Berce, president and CEO of GM Financial, will also be joining us for the Q&A portion of the call. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the Safe Harbor statement on the first page of our presentation as the content of our call will be governed by this language. And with that, I'm delighted to turn the call over to Mary. Mary Barra -- Chairman and Chief Executive Officer Thanks, Ashish, and good morning, everyone. In January, we outlined clear priorities for 2024 that are designed to build on our strength and learn from the challenges we faced in 2023. I'm very pleased to share that the team is executing well against all of them. Around the world, we are very focused on growth and profitability, which means taking full advantage of our winning product portfolio to grow share without chasing unprofitable business. In North America, the fundamental strengths of Chevrolet, Buick, GMC ,and Cadillac truly stand out. The team delivered a 10.6% EBIT margin in the quarter, thanks to our industry-leading full-size pickups, the momentum we're building in midsize pickups, the growth we are seeing in our SUV business, profit improvement in our EV portfolio, and our overall operating discipline. We again grew retail shares and market share in the US during the quarter with incentives that remained well below the industry average, especially in our truck business. We grew our combined Chevrolet and GMC full-size pickup sales by 3% year over year and grew our retail market share 1.8 points to 43.8% with much lower incentives than our closest competitors whose sales were down. In March, we doubled sales of the GMC Canyon year over year, and the Chevrolet Colorado was the fastest growing truck in the midsize pickup segment, thanks to its purity of function, simple elegance, and execution, and value. Those are MotorTrend's words, not mine. We also continue to gain market share and grow EBIT with our new small SUVs, including the Chevrolet Trax and the Buick Envista. These vehicles are helping us win new customers, and we will continue to excel at customer retention. During the quarter, S&P Global Mobility announced that GM has now had the highest loyalty of any OEM for nine consecutive years. That's a powerful competitive advantage. In our EV business, we are building momentum in production and profitability. For example, we have increased battery module production by 300% over the last six months. Quality is very good and continuing to improve, and the installation and validation of our new high-speed module assembly lines is on track. We are projecting to double our current capacity by the end of the summer. EV production rose sharply during the quarter, and our dealers translated that into a 21% year over-year-increase in EV retail customer deliveries. For example, the Cadillac Lyriq outsold all of the EVs from European luxury brands in the first quarter, and since mid-March, we are now delivering Chevrolet Blazer EVs with updated and improved software. All of our product programs are benefiting from the end-to-end improvements we've made in software, including the increased rigor we have instilled in our quality and validation processes. More importantly, the talented executives and engineers we've hired from the tech industry are raising the bar for software design and execution, which will help us truly differentiate our customer experience and the suite of software-driven products and services we offer. We're also making progress at Cruise. The team is back on the road in Phoenix updating mapping, gathering more road information. This is a critical step for validating our improved self-driving system and building upon the more than 5 million driverless miles we've logged before the pause. We are engaging frequently with regulators and stakeholders and building trust as we regain momentum. Safety will remain front and center and will guide our progress. I am pleased with our ICE performance, our progress in EV execution and growth, our new software organizations performance, and the steps we're taking to regain momentum at Cruise. In addition, I'm very proud of the GM team and all of our stakeholders for really leaning in to keep our momentum going. Their commitment and tenacity helped give us the confidence to raise our full-year 2024 EBIT, EPS and automotive adjusted free cash flow guidance. In our ICE business, the redesigned Chevrolet Traverse, GMC Acadia, and Chevrolet Equinox are all launching in high-volume segments starting this quarter, so are the Chevrolet Spin and the S10 in South America, and they have higher margins than the outgoing models. Then this summer, the stunning new Buick Enclave will arrive. It's the first Enclave to offer Super Cruise. Later in the year, we will make important design and technology upgrades to our best-selling GMC Yukon, Chevrolet Tahoe, and Chevrolet Suburban full-size SUVs. They include redesigned tech-focused interiors, safety and security features that include a suite of connected cameras, ride and handling improvements, styling enhancements, and more. Mark and our performance team also have the unbelievable Corvette ZR1 coming, and we can't wait to put customers behind the wheel. And we've already begun installing equipment at our Fort Wayne assembly plant to produce our next-generation full-size ICE pickups. In our EV business, the Ultium cell plant in Spring Hill is shipping sales and scaling production through the year. The Chevrolet Equinox EV will arrive in showrooms this quarter, and we're very excited because it will be the most affordable long-range EV in the market. It will also offer Super Cruise like all of our Chevrolet, GMC, and Cadillac EVs on the Ultium platform. We will then introduce more affordable Trim series for the Chevrolet Equinox EV, the Blazer EV, and the Silverado EV in the second half of the year which will help grow volume and share. Also, in the second half of the year, Cadillac will expand its EV lineup to include the Optiq and the Escalade IQ. This is important because EV adoption and luxury segments is higher and more resilient than in the broader market. Two of our most highly anticipated launches are the GMC Sierra EV Denali and the Chevrolet Silverado EV RST. They are best in class in ways that truly matter to truck customers. By optimizing the battery, aerodynamics, and other systems, we were able to increase the range of the RST and the Denali by 10% to an estimated 440 miles, which is about 40 miles better than the median range of ICE vehicles on the road today. No EV pickup on the road today even comes close, and it's possible to go even further. A few weeks ago, two road testers took the RST on a drive from Las Vegas to Phoenix, and they drove it like customers do: on paved and gravel roads at freeway speeds, at different temperatures, and different elevations. At the end, they managed to travel 460 miles on a single charge. It's the same story for towing. One journalist drove a Silverado EV work truck and three competing battery electric trucks on a 500-mile trip over the Rocky Mountains while towing trailers. It wasn't even a competition. The Silverado EV stopped once to charge, while every other truck had to stop four to five times. Chevrolet and GMC are also the only pickup brands that allow drivers to tow while using Super Cruise, our hands-free driving technology. That's just one of the several features that uniquely differentiates our products. This is exactly the kind of design and engineering functionality that excites people, motivates them, and turns them into customers. It's the same formula for Chevrolet and GMC, have followed with ICE trucks, and those results speak for themselves. Based on the feedback we're hearing from customers and dealers, the early sales momentum we are seeing, we're confident that continuing to scale every production is the right move. We know that transparency matters in every transformation. So, Paul and I will give you regular updates throughout the year, including at our Investor Day we're planning for this fall as we achieve our EV production, sales, and profitability milestones. All of these great ICE and EV products were made possible by the investments we made to drive transformation and growth. As a result, our spending was above historic levels for several years. Now that the foundation is largely built and we're starting to see results, our focus has turned back to driving free cash flow through enhanced profitability and capital discipline, finding ways to spend less for the same results and with an unwavering focus on the customer. You're already seeing some examples of this. Our winning with Simplicity discipline is a great example of how we're improving capital efficiency and lowering costs. The next-generation Ultium-based Chevrolet Bolt EV is another. It's a profitable and capital-efficient program that will deliver one of the most affordable electric vehicles around when it arrives in late 2025. There will be many more examples as we move forward. With that said, I'd now like to turn the call over to Paul to take you through our results and our new higher guidance for the calendar year. Paul Jacobson -- Executive Vice President, Chief Financial Officer Thank you, Mary, and I appreciate you all joining us this morning. We're off to a good start to the year, and I'd like to thank our team for all their hard work and helping deliver another strong set of financial results. We experienced consistent pricing trends during the quarter below the 2% to 2.5% headwind we built into our full-year guidance. For Q1, pricing was down only about $200 million year over year, driven by demand for our products and a disciplined go-to-market strategy that prioritizes profitability and margins. And so far, in April, we've seen pricing remain relatively consistent. That said, our comparisons get tougher as we lap price increases taken in Q2 of last year. The US retail industry experienced a slight mix shift away from the full-size truck segment during the quarter. However, we increased our volume and share with lower incentives than our competitors, which speaks to our strong truck franchises and our customer loyalty. Retail sales were up 6%, while fleet sales decreased more than 20% driven by two main factors. First, we encountered some production constraints impacting the timing of fleet deliveries on our commercial van and midsize pickups. We expect to recover most of this volume in the second half of the year. Second, we made the strategic decision to produce more retail full-size SUVs compared to last year to satisfy our strong customer demand. Retail sales on our full-size SUVs have a higher trim mix that earned us more revenue per vehicle. We are committed to growing our strong and profitable fleet business but will continue to balance fleet and retail customer demands with a focus on profitability. We generated healthy cash flow during the quarter, helping support $600 million of year-to-date open market stock repurchases incremental to the ongoing ASR, retiring another 14 million shares since the beginning of the year. We now have approximately $800 million remaining in our existing share repurchase authorization. In addition, we completed the first tranche of the $10 billion ASR last fall, retiring 4 million shares in Q1. Our fully diluted share count at the end of the quarter was 1.16 billion, down 17% from where we were just one year ago. Given the strong momentum we've seen thus far and our confidence in the 2024 outlook, we are raising full-year guidance to EBIT adjusted in the $12.5 billion to $14.5 billion range, EPS diluted adjusted to the $9 to $10 range, and adjusted automotive free cash flow in the $8.5 billion to $10.5 billion range. Now, let's get into the Q1 results. We grew total company revenue by 8% to $43 billion, driven by higher wholesale volumes in North America. Over the last 24 months, we've achieved consistent revenue growth, resulting in a CAGR of more than 15% over that period. We also achieved $3.9 billion in EBIT-adjusted, 9% EBIT-adjusted margins, and $2.62 in EPS diluted adjusted. EBIT adjusted was up year over year and well above consensus, driven by our continued strong ICE performance, improving EV profitability, and our strategic cost actions, mitigating the effect of higher labor costs. We achieved adjusted automotive free cash flow of $1.1 billion, up materially versus being flat in Q1 of 2023, driven by improved working capital benefits through inventory management and production timing. North America delivered Q1 EBIT adjusted margins of 10.6%, driving $3.8 billion of EBIT adjusted, up $300 million year over year, primarily from higher wholesale volumes, combined with steady pricing and ongoing cost containment. During the quarter, we continued to benefit from our fixed cost reduction program, realizing an incremental $300 million from lower marketing and engineering spend. Our fixed cost basis is at its lowest since Q1 2022, and we are on track to achieve the full $2 billion, net of depreciation and amortization, by the end of 2024. Dealer inventory levels ended the quarter slightly above our 50- to 60-day end-of-year target at 63 days. However, we believe we are well positioned from an inventory standpoint as we head into a seasonally stronger part of the year and incur a few weeks of planned downtime in Q2 on our full-size pickups to prepare for future launches and to install new equipment. GM International Q1 EBIT adjusted was breakeven, down $350 million year over year. China equity income was a loss of $100 million, down $200 million year over year as we lowered production to balance dealer inventory levels. This was slightly better than expected due to a continued focus on cost efficiencies. Having made progress reducing inventory levels, production is normalizing and we expect a return to profitability in Q2. EBIT adjusted in GM International, excluding China equity income, was $100 million, down $150 million year over year, driven by lower volume in South America and strategic decisions to protect margins. We anticipate new product launches and further cost efficiencies will help drive profitability improvements beginning in Q2. GM Financial continues to perform well with Q1 EBT adjusted of $700 million, in line with last year and tracking well within the full year $2.5 billion to $3 billion guidance range. They continue to drive portfolio growth and paid a $450 million dividend to GM during the quarter. Cruise expenses were $400 million in the quarter, down from $800 million in Q4 '23, reflecting our cost reduction activities and a more focused operational plan. As Mary mentioned, Cruise is resuming operations in Phoenix, along with testing and simulated environments and on closed courses, while they work to earn trust and build partnerships with regulators and customers. We expect full-year Cruise expenses to be around $1.7 billion. Let's move now to one of the most important metrics we're focused on: EV profitability. We continue to see sequential and year-over-year improvements in variable profit and EBIT margins as we benefit from scale, material cost, and mix improvements. Since last year, we have significantly reduced cell costs with a large driver being lower battery raw material costs, especially for lithium. We ramped our first battery JV plant last year. And as they increased production and made other efficiencies, the cost of cells came down significantly. And cell plant number two in Tennessee is ramping even faster based on the learnings from plant one and is expected to reach full Installed capacity by the end of the year. Collectively, these factors are helping improve vehicle profitability. For example, we have seen more than $12,000 of year-over-year cost savings in the Lyriq alone. As we continue to ramp, we expect to see the benefits from the production tax credit continue to grow and our fixed cost absorption to improve meaningfully. We wholesaled 22,000 Ultium-based EVs in Q1, up from less than 2,000 in the first quarter of last year, and remain on track to achieve our 200,000 to 300,000-unit production and wholesale volume target for 2024. We will share more on EV profitability as we progress through the year. I would also like to touch on EV pricing which we recently adjusted on the 2024 Blazer EV. This action has been well received by our dealers and customers, and as Mary mentioned, the vehicle is gaining momentum. We assume some pricing pressure for both ICE and EVs in our business plan and guidance for 2024, but we continue to work on finding additional offsets through cost performance and other efficiencies. Importantly, this pricing action doesn't change our expectation to achieve positive variable profit for our EV portfolio in the second half of the year or our mid-single-digit margin target in 2025. We remain confident that when consumers see our new EVs and get a chance to drive them, they will appreciate the unique combination of design, performance, range, and value that we offer at multiple price points. And because of our supply chain efforts, customers are well positioned to leverage the $7,500 clean energy consumer purchase tax credit. In closing, I want to reiterate our capital allocation framework, along with our intention to be much more consistent in how we deploy capital. We are generating strong cash flow, which is funding our EV transformation and growth opportunities. These efforts include investing in future products, transitioning manufacturing capacity to EVs, and deploying resources into cutting-edge battery technology. At the same time, you've seen us adapt to the dynamic market, particularly for EVs, and made bold decisions to be more efficient with our capital spend, something we will continue to do moving forward. Our balance sheet remains strong. And on shareholder returns, we executed the ASR last November, and the response has been overwhelmingly positive with GM stock outperforming its peers and being up nearly 50% since the announcement. We have seen about a one-turn improvement in our PE multiple since the ASR, but we are still significantly undervalued relative to our historical average, as well as our competitors and other industrial companies. Obviously, we're not satisfied and know that we have a lot of work to do on our valuation and remain committed to improving it. As we move forward, we believe the strong cash generated by our ICE portfolio, along with improved execution on our EV strategy, as well as tangible progress on Cruise, will help generate significant returns for all GM stakeholders. This concludes our opening comments, and we'll now move to the Q&A portion of the call. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Joe Spak with UBS. You may proceed. Joe Spak -- UBS -- Analyst Thanks. Good morning, everyone. Mary Barra -- Chairman and Chief Executive Officer Good morning. Joe Spak -- UBS -- Analyst First, on -- on the guidance, Paul, I just want to understand the pricing assumption. Is it now just 2% to 2.5% negative for the remaining three quarters? And then, you mentioned a couple of things on mix. So, you've got, you know, higher EV sales, smaller crossovers. Both of those seem like they should, you know, continue through the year. And then -- and then, I think you also mentioned some potential Trim headwinds in pickups, but then on the other hand, you have, you know, the EV variable profit turning positive in the second half. So, I guess I just want to understand a little bit better how those -- how those all intersect. And -- and should we actually see some maybe net improvement in mix as we move through the year? Paul Jacobson -- Executive Vice President, Chief Financial Officer So, good morning, Joe. You're right that, at the end of the day, 2% to 2.5% for the rest of the year is in our assumptions. So, essentially, what we have done with the guidance is -- is taken the outperformance that we saw in Q1 and built it into the full year. So, really not much has changed on the assumption going forward. So, when you look at seasonality and you look at trend lines, keep in mind, you know, in the second half of the year, we've got more EV volume coming in and -- and also, you know, we've got -- we've got some of those pricing headwinds that we've built in. So, we feel like this is a good -- good move to go ahead and take it up from where we are. But, you know, we're still sort of guided by the same principles as when we put out our -- our initial guidance for the year going forward. So, you know, as far -- as -- as far as mix goes, you know, we -- we've talked about that a lot. We've obviously been trending fairly strong. You know, we are lapping some price increases that we took last year. So, as I said, the year-over-year comps get a little bit more difficult but -- but overall, you know, I think the market is holding up fairly well. And as we said before, if -- if we see pricing, you know, continuing with this momentum, we expect that we'd be in a position to take up guidance again. Joe Spak -- UBS -- Analyst OK. Thank you. As a second question, just on -- on Cruise, with the relaunch, you know, I understand the manually operated and mapping, but Mary, you emphasized an improved system. So, maybe you could just give us a little bit more color on -- on how much of the existing technology stack is -- is really sort of being leveraged and what's being redone. And then, just on -- on the financial side, does the guidance assume any further steps toward that relaunch? And -- and what about a capital need with -- with the cash balance down to 700 million? Mary Barra -- Chairman and Chief Executive Officer Sure. Well, first, Cruise, we're very excited that they're back on the roads in Phoenix. As I said it is manual, but then we'll progress to supervise and then to unsupervised. And the core tech stack, what we've been doing since, you know, we made the decision to pause is continuing to work and improving it. So, we've actually strengthened, you know, the safety of the system by continuing to -- to, you know, make sure we comprehend, I'd say, a low probability but higher severity-type issues because what we recognize in October, although I think mainly it was an issue of not having built the right relationship with the regulatory agencies at all levels, as well as the public and then being transparent. But we also realize even though we demonstrated and externally validated that the technology was safer than an average human driver, we need to do more. And so, that's what we've been focused on. That's why we're -- as we're going back to Phoenix, we're, you know, making sure we're up to date, but very excited about where we are in the technology and very much believe in it, for what we plan to do this year of getting back on the road and demonstrating, you know, that the model works in one city, as I've said in the past and then expanding from there, we believe it's comprehended in the budget that we have. And then, as you look at how we plan to fund the business, we're exploring quite a few options right now, including potentially outside -- taking outside investments as well. And so, we'll have more to say about that as we move through the year. But I'm very excited to be back on the road. We believe in the technology. We're making it even better. That didn't stop through this whole period, since last October. Joe Spak -- UBS -- Analyst Thanks for the color. Operator Thank you. Our next question comes from Itay Michaeli with Citi. Your line is open. Itay Michaeli -- Citi -- Analyst Great. Thanks. Good morning, everyone, and congrats. Just two questions for me. Maybe first for Paul, just can you remind us of how we should think about the volume mix of -- of your new and refreshed ICE crossovers, the next couple of quarters, and how you're feeling about the prior margin improvement targets that you spoke about, I think it was last quarter? And then. maybe for Mary, hopefully, we kind of go back to -- to the software strategy and maybe talk about some of the goals that we should be expecting for software and the Ultifi platform over the next six to 12 months. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Itay. Thanks for the question. You know, on our -- on our crossovers, we've talked about the -- you know, the new -- the new Chevy Trax and Buick Envista, both of which are significantly improved from their prior profitability of the -- before the upgrades. And, you know, we've seen particularly the Chevy Trax really take off. Sales were up 500% in the quarter. And, you know, it's -- it's really performing well for us. So, you know, some of the -- some of the trends in average transaction prices, I think, are muddied by the fact that the volume on those crossovers are going up considerably, but we've still seen strength in our truck pricing and our SUV pricing as well. So, we continue to think that that's accretive and additive to the -- to the portfolio, and it's built into our, you know, strong guidance that we're updating today. Mary Barra -- Chairman and Chief Executive Officer And then, as it relates to the software strategy, as we move through the year and beyond, first, you know, as Mike stepped back over the past year, though, he did an incredible job of reevaluating and changing our software development process, as well as our validation process, and brought in an incredibly strong team of, you know, probably more than a dozen people at the senior level to really focus on having the right software strategy as we move forward. So, I'm very confident. You know, we paused at the beginning of this year with the Blazer as we saw limited number of -- of consumers had an issue. We've moved past that now, and that's allowed us to strengthen the software of all of our upcoming vehicles. And so, we'll -- you know, the goals for the next couple of months are to launch with quality on time, and we're on a -- on a path to do that. And then, as we go forward, as -- as the -- the new software goes across multiple vehicles and that gives us an opportunity to focus more on growing subscriptions and services. But I'm very pleased with where we are, with the team that we have, and the progress they've made, and it's showing in our ability to launch with quality. Itay Michaeli -- Citi -- Analyst Terrific. That's all very helpful. Thank you. Operator Thank you. Our next question comes from John Murphy with Bank of America. Your line is open. John Murphy -- Bank of America Merrill Lynch -- Analyst Good morning, everybody. You know, Mary, I just wanted to ask one strategic question, you know, on -- on China. You know, at this point, it's really not, you know, a moneymaker for you, and there's a lot of obviously, you know, noise on a geopolitical basis and sort of our relationship -- or the U.S.'s relationship with China. I'm just curious, is it time to really start thinking about strategic alternatives over there to potentially, you know, closing or selling the business? You know, how do you kind of think about that in the context of sort of the broader portfolio over the next few years? Mary Barra -- Chairman and Chief Executive Officer Yeah, you know, just in general, you know, with everything that's happened over the last several years with -- with COVID and then with the supply -- the supply chain issues around the chip shortage and then just broad supply chain issues, we have worked and really strengthened the resiliency of our supply chain and will continue to do that. But over the long term, we're committed to China. We believe that it's a market that, over the medium term, will have substantial growth. We're continuing to draw on not only our global solutions but, in some cases, local solutions as we advance our electrification strategy. You know, right now, NEVs account for about 30% of GM's total China deliveries from a Q1 perspective. And we're going to build on that through this year because we have an intense NEV launch cadence. From Q2, then moving forward, we have several PHEV we'll be launching and -- and moving with full EVs as well. So, we also have established the Durant Guild and that allows us to focus on some niche segments in China that are premium and more lifestyle-oriented. And for instance, the Tahoe and the Yukon will be available for preorder later this year. So, we think clearly the -- the market has shifted and the landscape has shifted from -- with -- with the capability of the Chinese OEMs. But we still think there's a role and a place for GM to play with luxury premium and, again, as I mentioned, leveraging not only our global solutions but local solutions. So, that is our focus, but we've done that while focusing on supply chain resiliency as well. John Murphy -- Bank of America Merrill Lynch -- Analyst OK. And then, I just have one quick follow-up on pricing. You know, saying 2&% to 2.5% I understand is your best estimate right now, but you know, the calling pricing is difficult. So I -- just curious, maybe, Paul, if you could give us sort of a high level of how you think about pricing because there's a lot of crosscurrents. I mean, there's EV price cutting, but there seems like there's resilience on the ICE side. When you look at your cap, you -- you're at 100% capacity utilization, which means you're kind of tight on your sort of structural supply. Look at zero to six-year-old vehicles, they're going to continue to shrink through the next, you know, two years probably. So, like, you know, the used vehicle market is going to stay relatively tight. So, I mean, I think people are looking at this dealer inventory and saying, "Hey, things are getting a little bit toppy." You know, there's risk on pricing. But when you look at some of the structural aspects of supply, they're reasonably constrained. And it seems like even in the tier 2 and 3 supply base, they're constrained and, you know, on labor. I mean I just, you know, it just -- it just seems like this resilience may be with us a little bit longer than people are fearing. I mean, the Colorado and Canyon as well as your vans, you said you were short on -- on some stuff that you were getting to, you know, fleets that you'll -- you'll catch up later in the year. So, there's -- there's just all these kind of pockets of -- of shortages that still persist, and it seems like the kind of thing that's going to last for longer than people are fearing. How do you -- how do you really kind of concoct or come up with that estimate of 2% to 2.5%? And, you know, where do you think things will kind of land over the next couple of years? Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, well, look, good morning, John. And, you know, as we've as we've talked about, the 2% to 2.5%, I want to be very clear, is not an expectation. That's an assumption that we've put into the guidance and provided for people to run their models from that standpoint. But as we've seen with the first quarter outperformance, we weren't there. And April is actually holding up quite well for us with ATPs actually trending slightly higher than -- than where they did coming out of the quarter. So, not really an expectation as much as we built an assumption in recognizing that, you know, there may be some macro headwinds out there. We do know that, you know, our comps get tougher as -- as we lap our price increases that we took in the summer of last year. But -- but, overall, the commercial environment continues to be resilient. And I think this is a very common theme that we've had now for, you know, more than more than a year worth of quarters of -- of you know, there's -- there's a lot of sort of downward bias, but we're continuing to manage commercially month to month and -- and producing in line with demand. And I think with that balance, it's been very favorable for us on -- on both pricing and margins. John Murphy -- Bank of America Merrill Lynch -- Analyst OK. All right. Thank you very much. Paul Jacobson -- Executive Vice President, Chief Financial Officer Thanks, John. Operator Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is open. Mark Delaney -- Goldman Sachs -- Analyst Yes, good morning. Thanks very much for taking the questions. First quarter EBIT was strong and annualizing at about 15.5 billion. I think guidance for the full year on EBIT is now 12.5 billion to 14.5 billion for the year. So, I'm hoping to better understand some of the factors that temper EBIT over the balance of the year compared to the first quarter run rate. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Mark. So, you know, I would say it comes down to a couple of things. One is there's still the assumption in there of the down 2% to 2.5% And as we scale up EVs and we continue to make progress about getting them to variable profit positive, the margins on those are -- are not as strong as -- as -- as ICE, obviously. So, we see a little bit of pressure in the back half from that, but -- but overall, we'll remain consistent. And, you know, as I've said, if we don't see that pricing softness, I would expect that there's an opportunity to outperform these numbers. Mark Delaney -- Goldman Sachs -- Analyst That's helpful, Paul. Another question on EVs and on the pricing topic. The company spoke to good demand and feedback for its EVs, but the broader market has been quite competitive for -- for EV in terms of pricing. I'm hoping to better understand if you think GM is going to need to take additional pricing actions this year to reach the 200,000 to 300,000 outlook that you have in North America. Or do the demand signals you have from the market suggest you can hit that kind of volumes this year with relatively firm pricing going forward? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Sure. Well, you know, obviously, the -- the early results here as we're ramping up Ultium are pretty strong with retail sales up about 20% year over year despite the fact that the Bolt, which is sunsetting the prior generation, was down about 60% during the quarter. So, retail demand remains strong. We -- we've obviously seen a lot of softness in fleet, particularly on the rental side, for EVs, but -- but we see customers responding. Now, you know, these are on admittedly lower volumes as we scale up, but we're building that momentum that I think we need with the products to be able to, you know, show consumers what -- what our capabilities are. When you look at the statistics that Mary cited in the script about the range and what's in our earnings deck, you see that the purpose-built EVs are actually better in terms of performance range, charging speed, towing capabilities, etc., than many of the other products. That are out there on the market. And I think as consumers continue to -- to see that, we'll be well positioned as -- as EV demands at the retail side continue to trend. So, we're obviously going to watch it closely, but the early indications are strong. Mark Delaney -- Goldman Sachs -- Analyst Thank you. Operator Thank you. Our next question comes from Dan Ives with Wedbush. Your line is open. Dan Ives -- Wedbush Securities -- Analyst Yeah, thanks. So, does it then -- and for Mary and Paul, does it feel like, now with UAW in the rearview mirror, a lot of the EV strategy now coming to fruition that the company is just in a stronger position with just less uncertainty? I mean, can you maybe compare it today even six to nine months ago internally? Mary Barra -- Chairman and Chief Executive Officer No, I think you make a really good point, Dan. We do, I feel much better of where we are. As I -- as I mentioned, you know, we now have -- we're ramping up and the module issue is behind us. Our -- all the additional lines that we were scaling are all on track. So, we feel very good about that. Obviously, we're pleased that we were able to get an agreement with the UAW. We continue to work with them on a number of fronts and, you know, build the relationship with the new leadership team as they were named pretty close to when we, you know, started negotiations last year. So, I feel that, you know, we're continuing to talk, raise issues with each other, and problem-solve where we have challenges. So, I feel much better about that. And as Paul said, you know, we're seeing good progress with our Ultium-based EVs because they are purpose-built, and they do have -- there's customers not making a trade-off. And we also see the charging infrastructure get better every quarter. So, I feel very good about where we are. And I think we've got momentum, and believe me, we have a very aligned team, across GM that is -- is going to seize all these opportunities. I would also add, Dan, that, you know, I feel very good, as I mentioned earlier, about where we are with software. You know, the work and the talent that is in the company now and the -- the progress that we've made gives me confidence we're going to be in a good position there as well. So, from last year to now, much better, much more positive. Dan Ives -- Wedbush Securities -- Analyst Great, congrats. Mary Barra -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from James Picariello with BNP Paribas. Your line is open. James Picariello -- Exane BNP Paribas -- Analyst Hi, good morning, everybody. Just thinking about wholesale growth for the full year, global volumes were up almost 4% in the quarter. Can you help dimension the impact for this current quarter's full-size pickup downtime and just what the -- what the full -- what the first-half or second-half split might -- might look like for the Ultium volumes relative to that 200,000 to 300,000 units targeted? Thanks. Mary Barra -- Chairman and Chief Executive Officer Well, I think let me just comment on -- on full-size pickups. You know, we have taken -- announced that we have some down weeks to start installing equipment so we can have a seamless launch as we get to the next model. And we're just going to stay focused on where the customer demand is at. We feel we've got really strong products that, as Paul mentioned, we're growing share. We grew share in the first half, with strong -- with strong pricing. So, I think that speaks for the strength of our product. But we're going to be customer demanded, and we're going to make sure that we don't overbuild because cause, you know, I think it's important to manage residuals and to -- to make sure that we're managing our inventory. I think that's one of the things that we've done that allows us to continue to be strong with pricing and -- and with our products. And as it relates to overall wholesale growth, I don't know, Paul, if you want to talk about that from a EV perspective. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah. So, you know, on the -- on the EV growth, you know, obviously, demand -- supply is going to increase throughout the year as we ramp up to the 200,000 to 300,000 units of production that we've talked about. Spring Hill is coming online in Q -- came online in Q1, and we're ramping up production pretty steadily, and that's Ultium cell plant two. And as module production kicks up, we see an exit rate that's -- that's significantly greater. Now, of course, we're all going to be paced -- we're going to be paced by where the consumer is from that standpoint. Early indications are that the ramp is going well, and we should expect to see that consistently growing throughout the year. James Picariello -- Exane BNP Paribas -- Analyst Got it. And then, just to hit on the quarter's China JV losses, is the expectation to see profitability the remainder of the year, or could this take another quarter or two? And then, for GMI consolidated, can you just shed any light on the profitability actions that are taking place in South America? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, sure. So, you know, as China -- I think it's progressing, as we articulated at the initial guidance range. We did trend slightly better than what we expected, but we foreshadowed the loss in Q1. We do expect that to reverse and be profitable for the rest of the year, and we said results that were similar to slightly down from -- from last year in China. So, the rest of the year is -- you know, we'll have to manage it. But like I said, Q1 was a little bit ahead of expectations but generally in line. So, we'll be profitable. For the rest of GMI, you know, we had some downtime in South America. In particular, we're watching Argentina fairly closely as we continue to -- to see the reforms that are going on there. But overall, you know, we -- we see that improving from kind of where we were and not overly concerned about that just yet, but that's -- that's a market that we're continuing to watch. James Picariello -- Exane BNP Paribas -- Analyst Thanks. Operator Thank you. Our next question comes from Alex Potter with Piper Sandler. You may proceed. Alex, you may need to unmute your line. Alex Potter -- Piper Sandler -- Analyst Yeah, hi. Can you hear me? Mary Barra -- Chairman and Chief Executive Officer Yes, we can hear you. Paul Jacobson -- Executive Vice President, Chief Financial Officer We got you, Alex. Alex Potter -- Piper Sandler -- Analyst OK, very good. So, first question on Ultium. You stuck to the 200,000 to 300,000 production guidance, which is good to see. But at the same time, you talk about how you're going to use consumer demand as sort of a gating factor. Is -- would you say that -- the 200 to 300, is that something that you're going to stick to sort of come hell or high water, and then gauge consumer demand from there? Or is it something that you could slow walk maybe toward midyear or toward the second half if it doesn't seem like the consumer demand is materializing? Mary Barra -- Chairman and Chief Executive Officer Yeah, we're never going to build -- just build products come hell or high water because the number's out there. We're always going to be responsive to the customer. But we do believe that we're going to be in that $200,000 to $300,000 range with the number of -- of -- of EVs that we have launching off of Ultium. You know, we're seeing strength with Hummer as we're ramping that up. We're seeing strength with Lyriq, and Blazer is, you know, just now ramping up. We've got the Equinox coming. There's an -- there's several more. So, I think when you look at the fact that these are all going to meet customers exactly, you know, with the performance and functionality that they need, we think we're well positioned there. So, I would also say, though, as you look across our portfolio, we are well positioned whether it's ICE or EV from a -- with the strength of our ICE portfolio. So, we're well positioned to respond to the customer. Like I said, we -- we are very focused on making sure that we don't overbuild that we're able to maintain our price, our margins, and we think we've got the strength. And, you know, specifically, if you look at Spring Hill, we can build EV or ICE in that plant. So, I think we're well positioned. We think we're going to be in that 200,000 to 300,000 range by by customer demand, and we'll just continue to adapt. Alex Potter -- Piper Sandler -- Analyst OK, perfect. And the second, you know, we talked a little bit about competition within China. I'm interested in hearing sort of your updated views on competition from the Chinese outside China. What's, I guess, GM's stance on this? Do you think protectionism is necessary? Are you more of a free market sort of philosophy from a company standpoint competing against the Chinese globally, particularly in places like South America? Yeah, any comments on China? Thanks. Mary Barra -- Chairman and Chief Executive Officer Yeah, it's a great question. And first of all, you know, I think, in general, we want to have our best products. And if there's a level playing field, then it's -- you know, we want to compete based on product. I think you have to look at where is there a level playing field and -- and what's happening around the world. But, you know, there's a lot that can happen from a regulatory or -- you know, a trade perspective, but we're focused on is making sure we have great vehicles at the right price. So, what is going to help, you know, GM maintain its share around the world, you know, when you look at South America, the Chevy brand is incredibly strong. And we're going to continue to focus on having great designs with great -- great product portfolio with the right features and functions. And we're constantly working on taking cost out of the system. So, it's a -- there's value there as well. And that's the way we're going to compete around the world. But I think the focus has got to be on a level playing field. Alex Potter -- Piper Sandler -- Analyst Great. Thanks. Operator Thank you. Our next question comes from Rod Lache with Wolfe Research. Your line is open. Bruno Dossena -- Wolfe Research -- Analyst Hi, this is Bruno on for Rod. Thanks for taking the question. I'd like to understand the key assumptions you're making in your EV margin outlook for positive contribution margins this year and positive overall margins next year. Based on the hints you've given us, we think you need to improve contribution margins per EV by, like, 10 to -- 10,000 to 15,000 in 2025 compared to '23. I think if I heard correctly, that's about in line with what you're seeing on the Lyriq year over year. But if you could just help us understand the key buckets of lower cost and what's driving that and your underlying assumptions around in pricing and -- and costs. Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Bruno. Thanks for the question. So, if you go back to presentation that we did back in November, we kind of highlighted the road map for 60 points of EBIT improvement in 2024, with about 60% of that driven by scale benefits. So, if you think about where we are, we -- we've invested a lot into the infrastructure, battery plants and manufacturing facilities, supply chain, etc., to ramp up production. So, you know, some of our EBIT losses are really driven by the fact that we need to grow into what we've built. And so, that's about 60% of that 60 points improvement. The rest is really kind of split evenly between trims and launches and also material cost reductions. So, we've gotten off to a good start as we've seen battery raw materials start to come into the -- the cell costs this year. We've done a good job of reducing cell costs. And as we said, the Lyriq is down $12,000 in cost year over year. So, that's the type of progress that we expect. And then, as we get into 2025, scale becomes a lower driver, and we get into more of material cost reductions in the vehicles that we're producing as they get out of their early years and we start to -- to harness savings in each vehicle line in second, third year of production, etc. So, there's a pretty good road map there. Pricing, obviously, we're going to continue to watch and see where the market is. As we talked about, what we did on the Blazer was built into our expectations. So, we're not -- we're not changing off of -- off of those targets. And, you know, we're just a quarter in on the -- on the LTM ramp, but the early indications are positive. Bruno Dossena -- Wolfe Research -- Analyst OK, thank you. And -- and -- and then just stepping back, we wonder if there's multiple paths to -- to the EV losses that are currently being incurred eventually reversing. Specifically, if the demand or pricing environment for these EVs is softer than expected, how much flexibility do you have to lower costs in the EV business, including as it relates to battery plans? I think your plan is for 160 gigawatt hours eventually over 2 million units. Is there flexibility to rationalize that if the demand differs from your expectations? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer Well, you know, I think you've seen us take -- to take steps before, you know. We had -- we had a delay in the Orion plant where we've really kind of taken advantage of some of the slowdown to put improvements into that plant that are -- that are going to help us lower the costs. That came out of some of the early learnings from production at Factory Zero and things that we can do going forward. So, I think you're going to see us be very nimble, and we're trying to build as much flexibility as we can to navigate from here to significantly higher EV adoption going forward. But when you look at our portfolio across both an ICE and EV, it's probably the best portfolio in our history, and -- and customers are responding to that. So, we're going to -- we're going to meet the customer where they are and continue to endeavor to exceed their expectations and -- and really reward them for that loyalty that they have to us, going forward. And we think that that can translate into the EV market as well. But as Mary said, we're going to continue to be guided by demand for -- for our products and our vehicles, and the early indications are that it's -- that it's going quite well. Operator Thank you. Our next question comes from Chris McNally with Evercore. Your line is open. Chris McNally -- Evercore ISI -- Analyst Thanks so much team. Just wanted to -- to dive into some of the questions on -- on seasonality, follow-on to some of Mark's questions prior. Paul, could you talk about the seasonality in wholesale? I think you've talked about, you know, full year being up sort of mid-single digits, which would imply somewhere in the low to mid-800,000 range for the rest of the year. But if you could just help us with -- with just a little bit of the cadence given some of the downtime you mentioned in Q2. Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, there was probably a little bit of pull forward from Q1 to Q2, particularly with the trucks as we -- as we prep for that -- that downtime and that retooling that's going to happen for a few weeks. But, you know, generally, seasonality, we expect to be very similar with Q1 and Q4 being slightly lower than Q2 and Q3. So, nothing has dramatically changed, but around the edges, maybe a little bit of pull forward from from Q2 into Q1. So, you know, as we look at the second half, I just, you know, want to caution that, you know, we've got to continue to be guided by the -- the assumption that's in there on pricing, which obviously has a bigger second-half impact given the performance that we've already booked in Q1 and -- and certainly where April is looking right now. And then -- and then, with the EV volume ratcheting up in the back half, that's where we see a little bit of front-half loading in the guidance that we've -- that we've provided. Chris McNally -- Evercore ISI -- Analyst Perfect. All -- all makes sense. And then, maybe just on the actual production side, should we think of sort of, you know, truck T1 production as -- as maybe at its height in -- in Q1? Do we -- you know, do we get back to -- to this level in -- in Q4 just looking at -- at the overall year and inventory build? Paul Jacobson -- Executive Vice President, Chief Financial Officer You know, I think that, you know, obviously, we're going to continue to watch demand, where it is. You know, the inventory, while we built in March, we're still -- we came out of the quarter about 63 days of -- of inventory across the system. So, some of that was intentional, knowing that we were going to have this downtime. So, once we get through that, you know, I think we could see third-quarter production trend a little bit higher, but we're going to be guided by where demand sits. Chris McNally -- Evercore ISI -- Analyst Okay, great. Thanks so much, team. Mary Barra -- Chairman and Chief Executive Officer Thank you. Paul Jacobson -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. Our next question comes from Ryan Brinkman with J.P. Morgan. Your line is open. Ryan Brinkman -- JPMorgan Chase and Company -- Analyst Good morning. Thanks for all the detail on your planned upcoming BEV launches in the U.S. It does seem likely you will gain share there with the number and attractiveness of the offerings. I'm curious if you have a similarly aggressive EV rollout strategy planned for China, including because it seems your share in China has declined amid the industry transition there to EVs. I heard you citing earlier, you know, the increased competitiveness of the domestic Chinese automakers as another contributing factor. And there may be still other factors, but would a blitz of new EVs be sufficient, do you think, at this stage to stabilize the share trend in China? Do you have such a blitz planned over the next one to two years? And -- and would that be a pathway to improved financial performance or you know, given some of the recent pricing trends, represent maybe more of an investment with the payoff some years further out? Mary Barra -- Chairman and Chief Executive Officer Yeah, I think -- we do have, I think, some strong NEVs coming in China this year. We're repositioning the -- the lead. We've got the Cadillac Optiq launch coming. You'll see that at the Beijing Auto Show. And we also have PHEV entries in the Buick GL8 and the Equinox. And then, for our ICE vehicles, we do also have like, for instance, a lead with GLA, and there'll be more upgrades coming there as well. So -- and then, SGM, we're also -- we have a new -- excuse me, new NEV launches as well. So, I think we're going to be better positioned, and that's just going to continue as we move through this year into next year. And that's why I think we can play in the NEV market, both plug-in hybrid, hybrids, and ICE vehicles, and as well as EVs, and then, as I mentioned, with the Durant Guild in the niche segment. So, I think there's a place for GM to play and grow share. Ryan Brinkman -- JPMorgan Chase and Company -- Analyst OK, great. Thanks. And, you know, with all these questions about the -- the new vehicle operations in China, maybe just highlight some of the attractiveness, if it is, you know, that you can draw from the installed base of vehicles there, you know, the OnStar, the financing, sales, service, GM Goodwrench, etc. How do you feel about that element of the China business? Mary Barra -- Chairman and Chief Executive Officer Well, you know, you've mentioned all of the things that come together to allow us to be successful in market. But I would say one of the other things is, last year, we also established in China a dedicated software and digital business organization. And that is going to allow us to continue to improve and compete on a software basis and also on a services basis along with, you know, what we have from a GMF perspective, financing as well as OnStar. So, we'll continue to build that. Ryan Brinkman -- JPMorgan Chase and Company -- Analyst Very helpful. Thank you. Operator Thank you. Our last question comes from the line of Tom Narayan with RBC. Your line is open. Tom Narayan -- RBC Capital Markets -- Analyst Hi, yeah, good morning, and thanks for taking the question. Paul, just a follow-up on that comment on the EV margin. So, 60% of the 60-basis-point improvement coming from scale benefits. So, you know, if the -- if BEVs were kind of closer, let's say, to the 200,000 versus the 300,000, is that a net negative or positive to overall margins? Presumably, you know, BEVs come at lower margins, but if you're selling few of them, then there's a negative impact from less scale benefit. So, you know, just trying to understand that, like, how do we think about that volume number impact to -- to the -- to -- to the company's margins? Paul Jacobson -- Executive Vice President, Chief Financial Officer Yeah, good morning, Tom. You know, what I would say is that, you know, obviously, based on just where we are in the in the journey, scale matters quite a bit when you built the infrastructure that we have. So, certainly, in the short run, lower volume would have a negative effect on that -- on that trajectory. But, you know, I think what we're looking at is, you know, kind of breakeven on the variable profit side, around low 200,000. So, we still -- we still are tracking to -- to be able to get that goal. But I look at that as more of a little bit of timing of when we grow into what we've built. And I think from a strategic perspective, you know, growing capacity slightly ahead of adoption to make sure that we can pace and meter ourselves on this journey. Remember, we're playing a 10, 15-year-plus game from that standpoint. So, you know, we've built the flexibility in to be able to respond to ebbs and flows, and we're at a phase right now where we've got to grow into that scale we've built. But those are all really really sound investments, and we feel good about where that's going to go in the short to intermediate term. And then, we're going to continue to watch that going forward. Tom Narayan -- RBC Capital Markets -- Analyst OK, thanks. And a quick follow-up, on the battery rods, obviously, we've seen lithium down like something like 80% or since the peaks. Just curious how your contracts work. When -- have we seen the best of that reduction, or is -- there is kind of a lag where you see the -- is there more benefits to come given the -- the lag in your ramp -- battery ramp contracts? Thanks. Paul Jacobson -- Executive Vice President, Chief Financial Officer So, what I would say is, you know, there's still -- there's still some goodness to come in -- in '24. So, while we saw battery costs come down, remember, we exited the year with a pretty sizable inventory of cells as we ramp up our module production. So, as a result of that, there's still some historical cost in there from last year. But that'll -- that'll flip pretty much, I think, by the time we get to midsummer. And in the second half of the year, we'll -- we'll see cells that have much closer to current prices. And then, as you look at the -- the kind of vertical integration and investment steps that we made, most of that capacity is in 2026 and beyond. There isn't anything that we've done that I would say we regret because we locked in higher prices, etc. Everything that we've done has been done with a portfolio approach to make sure that we get value for our investment either through floors and caps or discounts to market, etc. So, we haven't done anything that would -- would have locked in sort of historically high prices, and that should be a benefit for us as we roll forward into 2026 and beyond. Tom Narayan -- RBC Capital Markets -- Analyst Great. Thank you so much. Operator Thank you. I'd now like to turn the call over to Mary Barra with her closing comments. Mary Barra -- Chairman and Chief Executive Officer Thank you, and thanks, everyone, for your question. As we've talked today, we are making extremely good progress across the board. We're driving revenue growth. We've got with great margins. Our free cash flow is strong, and that's enabling us to reinvest in the business and our employees. So, we plan to efficiently invest between10.5 billion and 11.5 billion in capital this year to leverage the strength of not only our ICE business, but also grow our EV business profitably. And we're also advancing our software-defined vehicle capability. So, I feel very good about the key areas of focus and how we're doing there. In addition, we've set aside more than $160 million in profit sharing for the first quarter to recognize the contributions of the manufacturing team members in the U.S., which were significant both in terms of production volumes and quality. And our shareholders are also benefiting from the progress, too, thanks to our improved execution, a higher dividend, and the value-enhancing benefits of the ASR we launched in November. We are on track to reduce our shares outstanding to fewer than a billion. So, I can say to everyone with confidence and conviction that our team is very much on point. We're focused, and we're going to do everything in our power to keep this momentum going. 2024 can be a very strong year for GM. So, thank you all for your time.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome, everyone. Thank you for standing by for the Alphabet first-quarter 2024 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead. Jim Friedland -- Director, Investor Relations Thank you. Good afternoon, everyone, and welcome to Alphabet's first-quarter 2024 earnings conference call. With us today are Sundar Pichai, Philipp Schindler, and Ruth Porat. Now I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise. And now I'll turn the call over to Sundar. Sundar Pichai -- Chief Executive Officer Thank you, Jim. And hello, everyone. It was a great quarter led by strong performance from Search, YouTube, and Cloud. Today, I want to share how we are thinking about the business and the opportunity more broadly. Of course, that's heavily focused on AI and search. Then I'll take you through some highlights from the quarter in Cloud, YouTube, and beyond. Let's discuss our momentum and strategy. Taking a step back, it took Google more than 15 years to reach $100 billion in annual revenue. In just the last six years, we have gone from $100 billion to more than $300 billion in annual revenue. Of course, Search continues to power that as you see in our Q1 results. But in addition, we expect YouTube overall and Cloud to exit 2024 at a combined annual run rate of over $100 billion. This shows our track record of investing in and building successful new growing businesses. Now let's look at how well we are positioned for the next wave of AI innovation and the opportunity ahead. There are six points to make: one, research leadership; two, infrastructure leadership; three, innovation and search; four, our global product footprint; five, velocity in execution; six, monetization paths. First, our foundation of research leadership. We've been an AI-first company since 2016, pioneering many of the modern breakthroughs that power AI progress for us and for the industry. Last week, we further consolidated teams that build AI models under Google DeepMind. This will help simplify development and establish a single access point for our product teams as they build generative AI applications with these models. The teams are making rapid progress, developing Gemini and other models. In February, we rolled out Gemini 1.5 Pro, which shows dramatic performance enhancements across a number of dimensions. It includes a breakthrough in long context understanding, achieving the longest context window of any large-scale foundation model yet. Combining this with Gemini's native multimodal understanding across audio, video, text code, and more, it's highly capable. We are already seeing developers and enterprise customers enthusiastically embrace Gemini 1.5 and use it for a wide range of things. Beyond Gemini, we have built other useful models, including our Gemma open models as well as Imagine visual models, and others. Second, infrastructure leadership. We have the best infrastructure for the AI era. Building world-leading infrastructure is in our DNA, starting in our earliest days when we had to design purpose-built hardware to power search. Our data centers are some of the most high-performing, secure, reliable, and efficient in the world. They've been purpose-built for training cutting-edge AI models and designed to achieve unprecedented improvements in efficiency. We have developed new AI models and algorithms that are more than 100 times more efficient than they were 18 months ago. Our custom TPUs, now in their fifth generation, are powering the next generation of ambitious AI projects. Gemini was trained on and is served using TPUs. We are committed to making the investments required to keep us at the leading edge in technical infrastructure. You can see that from the increases in our capital expenditures. This will fuel growth in Cloud, help us push the frontiers of AI models, and enable innovation across our services, especially in Search. AI innovations in Search are the third and perhaps the most important point I want to make. We have been through technology shifts before, to the web, to mobile, and even to voice technology. Each shift expanded what people can do with Search and led to new growth. We are seeing a similar shift happening now with generative AI. For nearly a year, we've been experimenting with SGE in search labs across a wide range of queries. And now we are starting to bring AI overviews to the main Search page. We are being measured in how we do this, focusing on areas where gen AI can improve the search experience while also prioritizing traffic to websites and merchants. We have already served billions of queries with our generative AI features. It's enabling people to access new information, to ask questions in new ways and to ask more complex questions. Most notably, based on our testing, we are encouraged that we are seeing an increase in search usage among people who use the new AI overviews as well as increased user satisfaction with the results. And with Circle to Search, people can now circle what they see on their Android screens, ask a question about an image or object in a video and get an AI overview with Lens. Fourth, our global product footprint beyond Search. We have 6 products with more than 2 billion monthly users, including 3 billion Android devices. 15 products have 0.5 billion users and we operate across 100-plus countries. This gives us a lot of opportunities to bring helpful gen AI features and multimodal capabilities to people everywhere and improve their experiences. We have brought many new AI features to Pixel, Photos, Chrome, Messages, and more. We are also pleased with the progress we are seeing with Gemini and Gemini Advanced through the Gemini app on Android and the Google app on iOS. Fifth, improved velocity and execution. We've been really focused on simplifying our structures to help us move faster. In addition to bringing together our model-building teams under Google DeepMind, we recently unified our ML infrastructure and ML developer teams to enable faster decisions, smarter compute allocation, and a better customer experience. Earlier this year, we brought our Search teams together under one leader. And last week, we took another step, bringing together our platforms and devices teams. The new combined team will focus on delivering high-quality products and experiences, bolstering the Android and Chrome ecosystems, and bringing our best innovations to partners faster. We also remain focused on long-term efforts to durably reengineer our cost base. You can see the impact of this work reflected in our operating margin improvement. We continue to manage our headcount growth and align teams with our highest priority areas. This speeds up decision-making, reduces layers, and enables us to invest in the right areas. Beyond our teams, we are very focused on our cost structures, procurement, and efficiency. And a number of technical breakthroughs are enhancing machine speed and efficiency, including the new family of Gemini models and a new generation of TPUs. For example, since introducing SGE about a year ago, machine costs associated with SGE responses have decreased 80% from when first introduced in Labs, driven by hardware, engineering, and technical breakthroughs. We remain committed to all of this work. Finally, our monetization path. We have clear paths to AI monetization through Ads and Cloud as well as subscriptions. Philipp will talk more about new AI features that are helping advertisers, including bringing Gemini models into Performance Max. Our Cloud business continues to grow as we bring the best of Google AI to enterprise customers and organizations around the world. And Google One Now has crossed 100 million paid subscribers. And in Q1, we introduced a new AI premium plan with Gemini advanced. OK. Those are the six points so now let me turn to quarterly highlights from Cloud and YouTube in a bit more detail. In Cloud, we have announced more than 1,000 new products and features over the past 8 months. At Google Cloud Next, more than 300 customers and partners spoke about their generative AI successes with Google Cloud, including global brands like Bayer, Cintas, Mercedes Benz, Walmart, and many more. Our differentiation in cloud begins with our AI hypercomputer, which provides efficient and cost-effective infrastructure to train and serve models. Today, more than 60% of funded gen AI start-ups and nearly 90% of gen AI unicorns are Google Cloud customers. And customers like PayPal and Kakao Brain are choosing our infrastructure. We offer an industry-leading portfolio of NVIDIA GPUs along with our TPUs. This includes TPU V5P, which is now generally available and NVIDIA's latest generation of Blackwell GPUs. We also announced Axion, our new Google design and ARM-based CPU. In benchmark testing, it has performed up to 50% better than comparable x86-based systems. On top of our infrastructure, we offer more than 130 models, including our own models, open source models, and third-party models. We made Gemini 1.5 Pro available to customers as well as Imagine 2.0 at Cloud Next. And we shared that more than 1 million developers are now using our generative AI across tools, including AI Studio and Vertex AI. We spoke about how customers like Bristol-Myers Squibb and Etsy can quickly and easily build agents and connect them to their existing systems. For example, Discover Financial has begun deploying gen AI-driven tools to its nearly 10,000 call center agents to achieve faster resolution times for customers. Customers can also now ground their gen AI with Google Search and their own data from their enterprise databases and applications. In Workspace, we announced that organizations like Uber, Pepperdine University, and PennyMac are using Gemini and Google Workspace, our AI-powered agent that's built right into GMA dock sheets and more. We also announced Google Vids, a new application to create stories in short video format. And we introduced Gemini for Meetings and Messaging and Gemini Security for Workspace. Customers are choosing Workspace because they have deep trust in our powerful security and privacy features. Our Cloud business is now widely seen as the leader in cybersecurity. I saw this first time when I went to the Munich Security Conference in February. Cybersecurity analysts are using Gemini to help spot threats, summarize intelligence, and take action against attacks, helping companies like American Family Insurance aggregate and analyze security data in seconds instead of days. Turning next to YouTube, which continues to grow and lead in streaming. We announced that on average, viewers are watching over 1 billion hours of YouTube content on TVs daily. AI experiments like Dream Screen will give anyone the ability to make AI-generated backgrounds for YouTube Shorts. And on subscriptions, which are increasingly important for YouTube, we announced that in Q1, YouTube surpassed 100 million Music and Premium subscribers globally, including trialers. And YouTube TV now has more than 8 million paid subscribers. Finally, in Other Bets, Waymo's fully autonomous service continues to grow ridership in San Francisco and Phoenix with high customer satisfaction, and we started offering paid rides in Los Angeles and testing rider-only trips in Austin. Overall, it was a great quarter, and there's more to come. IO is in less than 3 weeks, followed by Brandcast and Google Marketing Life. I want to thank our employees around the world who are at the heart of this progress and who continue to focus on building innovative products, helpful services, and new opportunities for businesses and partners around the world. Thank you. Philipp? Philipp Schindler -- Senior Vice President and Chief Business Officer Thanks, Sundar. And hi, everyone. Google services revenue of $70 billion were up 14% year-on-year. Search and other revenues grew 14% year-on-year, led again by solid growth in the retail vertical with particular strength from APAC-based retailers, which began in the second quarter of 2023. YouTube Ads revenues were up 21% year-on-year, driven by growth in both direct response and brand. Network revenues declined 1% year-on-year. In subscriptions, platforms, and devices, year-on-year revenues increased 18%, driven again by strong growth in YouTube subscriptions. Let's now talk about a few highlights from the quarter from a product innovation and advertising performance perspective. First, it bears repeating that AI innovation across our Ads ecosystem is core to every aspect of our product portfolio from targeting, bidding, creative, measurement, and across campaign types. We've talked about whole solutions like smart bidding use AI to predict future ad conversions and their value in helping businesses stay agile and responsive to rapid shifts in demand and how products like Broadmatch leverage LLMs to match ads to relevant searches and help advertisers respond to what millions of people are searching for. This is foundational. As advances accelerate in our underlying AI models, our ability to help businesses users at speed and scale and drive ROI just keeps getting better. We're especially excited about the doors gen AI is opening for creative capabilities, helping deliver on the premise of getting the right ad to the right user in the right moment. Look at Performance Max. In February, we rolled Gemini into PMax. It's helping curate and generate text and image assets so businesses can meet PMax asset requirements instantly. This is available to all U.S. advertisers and starting to roll out internationally in English, and early results are encouraging. Advertisers using PMax asset generation are 63% more likely to publish a campaign with good or excellent ad strength. And those who improved their PMax ad strength to excellent see 6% more conversions on average. We're also driving improved results for businesses opting into automatically created assets, which are supercharged with gen AI. Those adopting ACA see, on average, 5% more conversions at a similar cost per conversion in Search and Performance Max campaigns. And then there's Dimension. Advertisers are loving its ability to engage new and existing customers and drive purchase consideration across our most immersive and visual touch points like YouTube, Shorts, Gmail, and Discover. Hollywood film and TV studio, Lionsgate, partnered with Horizon Media to test what campaign type will deliver the most ticketing page views for its The Hunger Games: The Ballad of Songbirds & Snakes film. Over a 3-week test, demand gen was significantly more efficient versus social benchmarks with an 85% more efficient CPC and 96% more efficient cost per page view. Lionsgate has since rolled out demand gen for 2 new titles. We're also bringing new creative features to demand gen. Earlier this month, we announced new generative image tools to help advertisers create high-quality assets in a few steps with a few simple prompts. This will be a win for up-leveling visual storytelling and testing creative concepts more efficiently. And then there's obviously Search generative experience, which Sundar talked about. l'll add that innovation and the user experience on Search has historically opened up new opportunities for advertisers. We saw this when we successfully navigated from desktop to mobile. We're continuing to experiment with new ad formats, including search and shopping ads alongside search results in SGE. And we shared in March how folks are finding ads either above or below the SGE results helpful. We're excited to have a solid baseline to keep innovating on and confident in the role SGE, including ads, will play in delighting users and expanding opportunities to meet user needs, which brings me to Search and our strong performance in the first quarter. In Q1, retail was again the top contributor. Our focus remains on driving profitability and growth for retailers, helping them optimize digital performance for both online and off-line as well as innovate across our shopping and merchant experiences. Highlights include: continued upsides for retailers, leading into agile budget and bidding strategies across Search, PMax or both; take-home goods retailer IKEA, who leaned into Google's store sales measurement to understand its total omnichannel revenue opportunity across search. By measuring 2.3 times more revenue and using value-based bidding solutions to bid to its omnichannel customers, Ikea drove a significant increase in omni revenue in Q1 and is now scaling this strategy globally. We also expanded local inventory ads into 23 countries, helping drive shopper confidence and off-line sales. Retailers can convert intent into action by showcasing in-store availability, pricing, pickup options, and more all in one ad format. Moving to YouTube. Last quarter, I went deep into our strategy. It all starts with creation, which drives viewership, which leads to monetization. A few updates to build on Sundar's remarks. First, creation, which is all about giving creators the tools to create amazing content, grow their audiences, and build their businesses. In 2023, more people created content on YouTube than ever before, and the number of channels uploading Shorts year-on-year grew 50%. We also hit a new milestone with 3 million-plus channels in our YouTube partner program. We recently shared that YPP has paid out more than any other creator monetization platform, including over $70 billion to creators, artists, and media companies over the last 3 years. From a viewer's perspective, watch time across YouTube continues to grow, with strength in both shorts and CTV. According to Nielsen, YouTube has been the leader in U.S. streaming watch time for the last 12-plus months. In the first quarter, living room benefited from a combination of strong watch time growth, innovation in the user and advertiser experience and a shift in brand advertising budgets from linear TV to YouTube. Viewers are watching YouTube because they expect to access everything in one place across screens and formats, their favorite creators, live sports, breaking news, educational content, movies, music, and more. And advertisers continue to lean in to find audiences they can't find elsewhere, which brings me to monetization. We're pleased with our Q1 performance across both our ad-supported and subscription offerings. Sundar covered subscription growth. On the ad front, direct and brands were both strong this quarter. Short monetization continued to improve with Shorts ads now supported on mobile, tablet, living room and desktop, and available to both performance and brand advertisers. In the U.S., the monetization rate of Shorts relative to viewing has more than doubled in the past 12 months, including a 10-point sequential improvement in the first quarter alone. Just last week, we introduced new ways for brands to get the most out of their Shorts ads with new lineups on YouTube Select, including sports, beauty, fashion and lifestyle and entertainment. For YouTube advertisers, increasing brand lift is one of the core goals. In Q1, we saw strong traction from the introduction of a pause ads pilot on connected TVs, a new non-interruptive ad format that appears when users pause their organic content. Initial results show that pause ads are driving strong brand lift results and are commanding premium pricing from advertisers. Before I wrap, two quick highlights on how we're helping our partners transform and accelerate impact with the best across Google. Number one, to help McDonald's build the restaurant of the future, we're deepening our partnership across cloud and ads. Part of this includes them connecting Google Cloud's latest hardware and data technologies across restaurants globally and starting to apply gen AI to enhance its customer and employee experiences. Number two, WPP. At Google Cloud Next, we announced a new collaboration that will redefine marketing through the integration of our Gemini models with WPP Open. WPP's AI-powered marketing operating system already used by more than 35,000 of its people and adopted by key clients, including The Coca-Cola Company, L'Oreal, and Nestle. We're just getting started here and excited about the innovation this partnership will unlock. With that, a huge thank you to our customers and partners, many of whom we're excited to see at Google Marketing Live and Brandcast in just a few weeks. And a huge thank you, as always, to our incredible teams for their agility and hard work this quarter. Ruth, you're up. Ruth Porat -- Chief Financial Officer Thank you, Philipp. We are very pleased with our financial results for the first quarter, driven, in particular, by strength in search and cloud as well as the ongoing efforts to durably reengineer our cost base. My comments will be on year-over-year comparisons for the first quarter unless I state otherwise. I will start with results at the Alphabet level, followed by segment results and conclude with our outlook. For the first quarter, our consolidated revenues were $80.5 billion, up 15% or up 16% in constant currency. Search remained the largest contributor to revenue growth. In terms of total expenses, the year-on-year comparisons reflect the impact of the restructuring charges we took in the first quarter of 2023 of $2.6 billion as well as the $716 million in employee severance and related charges in the first quarter of 2024. As you can see in our earnings release, these charges were allocated across the expense lines in other cost of revenues and opex based on associated headcount. To help with year-on-year comparisons, we included a table in our earnings release to adjust other cost of revenues, operating expenses, operating income, and operating margin to exclude the impact of severance and related office space charges in the first quarter of 2023 versus 2024. In terms of expenses, total cost of revenues was $33.7 billion, up 10%. Other cost of revenues was $20.8 billion, up 10% on a reported basis, with the increase driven primarily by content acquisition costs associated with YouTube, given the very strong revenue growth in both subscription offerings and ad-supported content. On an adjusted basis, other cost of revenues were up 13% year-on-year. Operating expenses were $21.4 billion, down 2% on a reported basis, primarily reflecting expense decreases in sales and marketing and G&A, offset by an increase in R&D. The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters. On an adjusted basis, operating expenses were up 5%, reflecting, first in R&D, an increase in compensation expense, primarily for Google DeepMind and Cloud; and second, in sales and marketing, a slight increase year-on-year, reflecting increases in compensation expense primarily for Cloud sales. Operating income was $25.5 billion, up 46% on a reported basis, and our operating margin was 32%. On an adjusted basis, operating income was up 31%, and our operating margin was 33%. Net income was $23.7 billion, and EPS was $1.89. We delivered free cash flow of $16.8 billion in the first quarter and $69.1 billion for the trailing 12 months. We ended the quarter with $108 billion in cash and marketable securities. Turning to segment results. Within Google Services, revenues were $70.4 billion, up 14%. Google Search and other advertising revenues of $46.2 billion in the quarter were up 14%, led again by growth in retail. YouTube advertising revenues of $8.1 billion were up 21%, driven by both direct response and brand advertising. Network advertising revenues of $7.4 billion were down 1%. Subscriptions, platforms, and devices revenues were $8.7 billion, up 18%, primarily reflecting growth in YouTube subscription revenues. TAC was $12.9 billion, up 10%. Google Services operating income was $27.9 billion, up 28%, and the operating margin was 40%. Turning to the Google Cloud segment. Revenues were $9.6 billion for the quarter, up 28%, reflecting significant growth in GCP with an increasing contribution from AI and strong Google Workspace growth, primarily driven by increases in average revenue per seat. Google Cloud delivered operating income of $900 million and an operating margin of 9%. As to our Other Bets for the first quarter, revenues were $495 million, benefiting from a milestone payment in one of the Other Bets. The operating loss was $1 billion. Turning to our outlook for the business. With respect to Google Services, first, within Advertising, we are very pleased with the momentum of our Ads businesses. Search had broad-based strength across verticals. In YouTube, we had acceleration in revenue growth driven by brand and direct response. Looking ahead, two points to call out. First, results in our advertising business in Q1 continued to reflect strength in spend from APAC-based retailers, a trend that began in the second quarter of 2023 and continued through Q1, which means we will begin lapping that impact in the second quarter. Second, the YouTube acceleration in revenue growth in Q1 reflects, in part, lapping the negative year-on-year growth we experienced in the first quarter of 2023. Turning to subscriptions, platforms, and devices. We continue to deliver significant growth in our subscriptions business, which drives the majority of revenue growth in this line. The sequential quarterly decline in year-on-year revenue growth for the line in Q1 versus Q4 reflects, in part, the fact that we had only 1 week of SUNDAY TICKET subscription revenue in Q1 versus 14 weeks in Q4. Looking forward, we will anniversary last year's price increase in YouTube TV starting in May. With regard to platforms, we are pleased with the performance in play driven by an increase in buyers. With respect to Google Cloud, performance in Q1 reflects strong demand for our GCP infrastructure and solutions as well as the contribution from our Workspace productivity tools. The growth we are seeing across Cloud is underpinned by the benefit AI provides for our customers. We continue to invest aggressively while remaining focused on profitable growth. As we look ahead, two points that will affect sequential year-on-year revenue growth comparisons across Alphabet. First, Q1 results reflect the benefit of leap year, which contributed slightly more than 1 point to our revenue growth rate at the consolidated level in the first quarter. Second, at current spot rates, we expect a larger headwind from foreign exchange in Q2 versus Q1. Turning to margins. Our efforts to durably reengineer our cost base are reflected in a 400-basis-point expansion of our Alphabet operating margin year-on-year, excluding the impact of restructuring and severance charges in both periods. You can also see the impact in the quarter-on-quarter decline in headcount in Q1, which reflects both actions we have taken over the past few months and a much slower pace of hiring. As we have discussed previously, we are continuing to invest in top engineering and technical talent, particularly in Cloud, Google DeepMind, and technical infrastructure. Looking ahead, we remain focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure. We believe these efforts will enable us to deliver full-year 2024 Alphabet operating margin expansion relative to 2023. With respect to capex, our reported capex in the first quarter was $12 billion, once again driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The significant year-on-year growth in capex in recent quarters reflects our confidence in the opportunities offered by AI across our business. Looking ahead, we expect quarterly capex throughout the year to be roughly at or above the Q1 level, keeping in mind that the timing of cash payments can cause variability in quarterly reported capex. With regard to Other Bets, we similarly have work streams underway to enhance overall returns. Finally, as I trust you saw in the press release, we are very pleased to be adding a quarterly dividend of $0.20 per share to our capital return program as well as a new $70 billion authorization in share repurchases. The core of our capital allocation framework remains the same, beginning with investing aggressively in our business, as you have heard us talk about today, given the extraordinary opportunities ahead. We view the introduction of the dividend as further strengthening our overall capital return program. Thank you. Sundar, Philipp, and I will now take your questions. Questions & Answers: Operator [Operator instructions] Our first question comes from Brian Nowak with Morgan Stanley. Please go ahead. Brian Nowak -- Morgan Stanley -- Analyst Hey, thanks for taking my questions. I have two. The first one, I wanted to ask about overall search behavior. Philipp, I know you talked in the past about how overall query trends continue to grow. Can I ask you to drill a little bit more into monetizable and commercial query trends? Has there been any changes in sort of your commercial query trends growth? Has just been all these new entrants moving around in e-commerce? It's my first one. Then the second one for Ruth. When you talked about sort of more efforts to moderate expense growth from here. Can you just sort of give us some examples of areas where you still see the potential for more optimization or work streams in place to continue to reengineer the opex base as we go throughout 2024? Thanks. Sundar Pichai -- Chief Executive Officer Thanks, Brian. To your first question, look, I think broadly, we've always found that over many years when things work well on the organic side, monetization follows. So, typically, the trends we see carry over well. Overall, I think with generative AI in Search, with our AIO views, we are definitely -- I think we will expand the type of queries we can serve our users. We can answer more complex question as well as in general. That all seems to carry over across quarter categories. Obviously, it's still early, and we are going to be measured and put user experience at front, but we are positive about what this transition means. Ruth Porat -- Chief Financial Officer And on the second question in terms of the various work streams, as both Sundar and I said, we remain very focused on ongoing efforts to slow the pace of expense growth, what we've been calling durably reengineering our cost base. And I made this point in opening comments that we are very cognizant of the increasing headwind we have from higher depreciation and expenses associated with the higher capex, and so these efforts are ongoing. And they're very much the same that we've talked with you about previously. It starts with product and process prioritization, all of the work around organizational efficiency and structure. These are ongoing. And so as an example, the work that Sundar talked about, combining devices and services with our platforms and ecosystems, product area is a really good example because unifying the teams not only helps us deliver higher-quality products and experiences, but we think it enables us to move with greater velocity and efficiency. And then the other work streams we've talked to you about in the past, like all of the work around technical infrastructure, which Sundar alluded to, streamlining operations within the company through the use of AI, what we're doing with procurement with our suppliers and vendors, which he also referenced, the work you've seen on real estate optimization, these are all ongoing work streams, which is why we have them under the umbrella, durably reengineering our cost base and they are ongoing. Operator Our next question comes from Doug Anmuth with J.P. Morgan. Your line is now open. Doug Anmuth -- JPMorgan Chase and Company -- Analyst Thanks for taking my questions. Sundar, you talked about bringing more generative AI features into the main Search page. Can you just talk about what kind of queries or scenarios do you think that that's working best for so far? And just how we should think about the cadence of continuing to adopt more of those features within core search? And then Ruth, on capex spending, the $12 billion in 1Q. Can we assume that run rating that and above is reasonable for this year? And I know it's very early, but should we generally expect higher capex next year as well? Sundar Pichai -- Chief Executive Officer Thanks, Doug. On SGE and Search, look, I think it tends to really -- we are seeing early confirmation of our thesis that this will expand the universe of queries where we are able to really provide people with a mix of actual answers linked to sources across the web and bring a variety of perspectives, all in an innovative way. And we've been rolling out AI overviews in the U.S. and the U.K., trying to mainly tackle queries, which are more complex, where we think SGE will clearly improve the experience. We've already served billions of queries, and it seems to cut across categories. But we are still continuing our testing, and we'll keep -- we are metrics-driven in these areas. And so we'll -- but I am optimistic that it clearly improves the user experience, users are telling us that, and we are seeing it in our metrics, and we'll continue evolving it through the course of this year. Ruth Porat -- Chief Financial Officer And then in terms of capex, as I said in opening comments, we do expect the quarterly capex throughout the year to be roughly at or above the $12 billion cash capex we had here in Q1. As I said, you can always have variability in the reported quarterly capex just due to the timing of cash payments but roughly at or above this level. And it really goes to Sundar's comment -- opening comment that we're very committed to making the investments required to keep us at the leading edge in technical infrastructure to support the growth in Cloud, all the innovation in Search that he and Philipp has spoken about and our lead with Gemini. I will note that most -- nearly all, I should say, of the capex was in our technical infrastructure. We expect that our investment in office facilities will be about less than 10% of the total capex in 2024, roughly flat with our capex but is still there. And then with respect to 2025, as you said, it's premature to comment so nothing to add on that. Doug Anmuth -- JPMorgan Chase and Company -- Analyst Great. Thank you. Operator Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan -- Goldman Sachs -- Analyst Maybe just one question on the big picture in nature for Sundar. Sundar, if we come back to your earlier comments at the beginning of the call and framing up longer-term initiatives and longer-term narratives, I wanted if you could talk a little bit about both the opportunities and the challenges of operating at scale in a time like this where there's a lot of technology innovation going on and how you see the elements of trying to strike a balance toward moving the organization forward while still continuing to both invest for growth as well as balance margins. Thanks so much. Sundar Pichai -- Chief Executive Officer Thanks, Eric. Great question. Obviously, I think the AI transition, I think it's a once-in-a-generation kind of an opportunity. We've definitely been gearing up for this for a long time. You can imagine we started building TPUs in 2016. So we've definitely been gearing it for a long time. The real opportunities we see is the scale of research and innovation, which we have built up and are going to continue to deliver. I think for the first time, we can work on AI in a horizontal way, and it impacts the entire breadth of the company, be it Search, be it YouTube, be it Cloud, be it Waymo, and so on. And we see a rapid pace of innovation in that underlying. So it's a very leveraged way to do it, and I see that as a real opportunity ahead. In terms of the challenges, I think making sure I think we are constantly -- I think it's been a mindset shift, which we've been driving across the company to make sure that we are embracing this opportunity but being very efficient in how we are approaching it, making sure we are redirecting our people to the highest priorities across the company, building on our 20 years of experience in driving machine efficiencies year-on-year so that we can put our dollars to work as efficiently as possible. So making sure balancing all of that moving forward in a very bold and responsible way at the same time. Those are the important things to get right from my perspective. Operator Our next question comes from Stephen Ju with UBS. Your line is now open. Stephen Ju -- UBS -- Analyst All right. Thank you so much. So, hi, Philipp, I think it's approaching the 2-year anniversary for the launch of Ads on YouTube Shorts. And you've given us an update on monetization pickup sequentially. But with that in mind, I think YouTube has launched an array of ad products and automation tools to help advertisers transfer what they're doing to the vertical screen. So, how is this translating into buy-in among your advertiser clients? And secondly, based on what you've seen over the last 2 years, are there any structural reasons that you can cite as to why the monetization cannot match what is already the case on the horizontal screen? Thanks. Philipp Schindler -- Senior Vice President and Chief Business Officer Yeah. Look, this is a great question, first of all. I mean, let's start with the fact that YouTube performance was very strong in this quarter. And on Shorts specifically in the U.S., I mentioned how the monetization rate of Shorts relative to in-stream viewing has more than doubled in the last 12 months. I think that's what you were referring to. And yes, we're obviously very happy with this development. The way to think about it is advertisers really only spend with us when they see a positive ROI, so you can assume that this wouldn't be happening unless it were to work for advertisers in the short term and also in the long term. That's an important part, I think. Overall, short is a long-term bet for the business. It has really helped us respond to both creator and viewer demand for short-form video. We talked about the strong growth, averaging 70 billion daily views. I mentioned a number of channels. Uploading has increased 50% year-over-year. So again, very happy with us in development. And to your question, structural reasons, whether we can't get to a match here, I have a hard time seeing those at the moment over time. Stephen Ju -- UBS -- Analyst Thank you. Operator Our next question comes from Justin Post with Bank of America. Your line is now open. Justin Post -- Bank of America Merrill Lynch -- Analyst OK. Thank you. I'm going to ask another one on capex. It seems to be your biggest investment area. Just first, you saw the big uptick the last 2 quarters but you've been investing in AI for years. Is the uptick because supply is getting easier to get or do you see more opportunities with the available supply to really fuel AI? So has the GPUs and everything gotten better that you feel more, investing more? And then thinking about the returns, both for Advertising and Cloud on capex, do you feel like this is a higher cost of doing business? Or do you think this is an opportunity to even get better returns on your capital spend than you've had in the past? Thank you. Ruth Porat -- Chief Financial Officer So the increase in capex, as Sundar said and I said, really reflects the opportunity we continue to see across the company. It starts with all that we're doing in support of the foundation model called the Gemini, foundational model. But then also, clearly, the work across Cloud, on behalf of Cloud customers and the growth that we're seeing with GCP and the infrastructure work there. And then, of course, as both Sundar and Philipp talked about the application across Search, YouTube, and more broadly, the services that we're able to offer. So it's the growing application and our focus on ensuring that we have the compute capacity to deliver in support of the services and opportunities we see across Alphabet. And it really goes to the second part of your question, which is that as we're investing in capex and applying it across our various businesses, it opens up more services and products, which bring revenue opportunities, and we're very focused on the monetization opportunity, it does underlie everything that we're doing in Google Services and Google Clap. And as Sundar noted, we're, at the same time, very focused on the efficiency of all elements of delivering that compute capacity from hardware, software, and beyond. Operator Our next question comes from Mark Mahaney with Evercore. Your line is now open. Jian Li -- Evercore ISI -- Analyst Thank you. This is Jian Li for Mark Mahaney. A couple of questions. One, just maybe an expansion on the Search question on before. More like Search volume and maybe in the context of the off-Google environment like AI chat bot, for example, we've seen kind of Meta AI directing to Google Search results. Do you think there's actually a scenario where like AI system can create a step function change in Search volume or use cases of Google? If you can give us more color on what are you seeing right now or what are you expecting to see in that area. And then the second question on just the comment of YouTube and Cloud exiting at $100 billion run rate. What is informing this outlook or visibility for you? If you can talk about, is it driven by any sort of Cloud demand inflection or step change in the gen AI workload demand, if you can flesh it out a little bit? Thanks a lot. Sundar Pichai -- Chief Executive Officer On your first question, look, I said this before, but to be clear, we view this moment as a positive moment for Search. And I think it allows us to evolve our product in a profound way. And Search is a unique experience. People come and they get to -- be it if you want answers, if you want to explore more, if you want to get perspectives from across the web and to be able to do it across the breadth and depth of everything they are looking for and the innovation you would need to keep that up, I think it's what we've been building on for a long time. And so I feel we are extraordinarily well setup, particularly given the innovation path we are on. And overall, I view this moment as a positive moment. So that's how I would say it. On the second part, Ruth? Ruth Porat -- Chief Financial Officer I'm sorry, what was the -- I think the-- Sundar Pichai -- Chief Executive Officer YouTube and Cloud. Jian Li -- Evercore ISI -- Analyst Yeah, like in terms of your comment about $100 billion exit rate for YouTube and Cloud, what's driven this -- what's driving this visibility for you? And any kind of inflection you're seeing in the Cloud demand? Ruth Porat -- Chief Financial Officer Oh, I would just say from Sundar's opening comments, it's just the ongoing momentum that we've seen in the business that we've been talking about, the ongoing growth and strong performance. And so what we were really getting at in that comment, what Sundar was getting at, is that we've continued to build strong businesses over time, and that just helps dimension it. We had similar comments last quarter when you talk about our subscription business. We're really proud of all the work that teams are doing across the company, building new, strong opportunities, delivering for our users, for customers, for advertisers in profound ways. And so it was just helping to dimension what we have built over the years. Operator Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open. Ken Gawrelski -- Wells Fargo Securities -- Analyst Thank you very much. Two, if I may. First on GCP, you had nice acceleration in the quarter. Could you talk a little bit about the opportunities and constraints upon GCP's ability to continue to address that large addressable market and accelerate growth? Is it more sales-oriented? Is it more product sales solutions or both? And would a -- will you -- do you plan to address most of these organically or could a partner approach work for you? And then the second one, just more detail on YouTube and sports rights. Could you talk -- could you reiterate your view on further live sports rights? There's some larger, mostly in the U.S., league rights coming up soon and will be more over the next several years. Could you just talk about your philosophy there beyond NFL Sunday Ticket? Thank you. Sundar Pichai -- Chief Executive Officer Thanks. Look, on the Cloud side, obviously, it's definitely a point of inflection overall. I think the AI transformation is making everyone think about their whole stack, and we are engaged in a number of conversations. I think paid AI infrastructure, people really looking to Vertex AI, given our depth and breadth of model choice or using Workspace to transform productivity in your workplace, et cetera. So I think the opportunities there are all related to that, both all the work we've built up and AI being a point of inflection in terms of driving conversations. I think you'll see us do it both organically and with a strong partner program as well. So we'll do it with a combination. And the challenges here are always and in -- for -- there are switching costs to Cloud, and the challenges we see is how do we make it easier for people. There's a lot of interest, but there's definitely barriers in terms of people switching, and so that's an area where we are constantly investing to make it easier for our customers. Philipp Schindler -- Senior Vice President and Chief Business Officer And with regard to your sports rights question, look, I mean, we've had long-standing and significant partnerships with the most popular sports league here in the U.S., around the globe, federations teams, athletes, broadcasters. And obviously, these partnerships, in combination with our very vast audience of sports fans, drives investment in subscription experiences across many offerings. NFL Sunday Ticket, YouTube TV, YouTube Primetime Channels, and so on. But there's nothing that we have to announce at the moment. We're obviously always looking at where we can create more value for our users, for our advertisers, for creators. But nothing specific to talk about at this moment. Ken Gawrelski -- Wells Fargo Securities -- Analyst Thank you. Operator Our next question comes from Ross Sandler with Barclays. Your line is now open. Ross Sandler -- Barclays -- Analyst Great. Sundar, I had a question about smartphone-based AI searches. So you guys are powering all these new AI interactions and searches on Pixel and on Samsung devices. And I think there's speculation that Gemini might be used on iOS in a future state. So the question is, if users start searching on smartphones and those searches are basically rendered on the model, on the phone without accessing the web, how do you guys anticipate monetizing some of these smartphone-based behaviors that are kind of run on the edge? Any thoughts on that? Sundar Pichai -- Chief Executive Officer Look, I think the -- if you look at what users are looking for, people are looking for information and an ability to connect with things outside. So I think there will be a set of use cases which you will be able to do on device. But for a lot of what people are looking to do, I think you will need the richness of the cloud, the web, and you have to deliver it to users. So I think -- so again, to my earlier comments, I think through all these moments, you saw what we have done with Samsung with Circle to Search. I think it gives a new way for people to access Search conveniently wherever they are. And so we view this as a positive way to bring our services to users in a more seamless manner. So I think it's positive from that perspective. In terms of on-device cloud, there will be needs which can be done on-device and we should to help it from a privacy standpoint. But there are many, many things for which people will need to reach out to the cloud, and so I don't see that as being a big driver in the on cloud versus off cloud in any way. Operator And our last question comes from Colin Sebastian with Baird. Your line is now open. Coiln Sebastian -- Robert W. Baird and Company -- Analyst Thanks, and good afternoon. I guess first, a follow-up on some of the questions on SGE and, of course, Search. I guess I'm wondering, along with some of those changes in behavior, is there a way to quantify that overall engagement shift, whether that's an increase in time spent or increase in -- or level of increase in queries for both sort of traditional search as well as more generative answers? And then secondly, on the hardware roadmap, I assume later this year, we'll hear more about some of the products. But any areas of a particular focus or that you would point out that we should keep in mind in terms of hardware launches in the back half? Thank you. Sundar Pichai -- Chief Executive Officer On the first question on Search, not much more to add to what I said. But what we have seen and we've been in live experiments just for a few weeks in U.S. and U.K. and on a slice of our queries where -- and all indications are positive that it improves user satisfaction. We see an increase in engagement, but I see this as something which will play out over time. But if you were to step back at this moment, there were a lot of questions last year, and we always felt confident and comfortable that we would be able to improve the user experience. People question whether these things would be costly to serve, and we are very, very confident we can manage the cost of how to serve these queries. People worried about latency. I think we are -- when I look at the progress we have made in latency and efficiency, we feel comfortable. There are questions about monetization. And based on our testing so far, I'm comfortable and confident that we'll be able to manage the monetization transition here well as well. It will play out over time, but I feel we are well-positioned. And more importantly, when I look at the innovation that's ahead and the way the teams are working hard on it, I am very excited about the future ahead. Operator Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks. Jim Friedland -- Director, Investor Relations Thanks, everyone, for joining us today. We look forward to speaking with you again on our second-quarter 2024 call. Thank you, and have a good evening. Answer:

the Alphabet first-quarter 2024 earnings conference call

Operator Welcome, everyone. Thank you for standing by for the Alphabet first-quarter 2024 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead. Jim Friedland -- Director, Investor Relations Thank you. Good afternoon, everyone, and welcome to Alphabet's first-quarter 2024 earnings conference call. With us today are Sundar Pichai, Philipp Schindler, and Ruth Porat. Now I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise. And now I'll turn the call over to Sundar. Sundar Pichai -- Chief Executive Officer Thank you, Jim. And hello, everyone. It was a great quarter led by strong performance from Search, YouTube, and Cloud. Today, I want to share how we are thinking about the business and the opportunity more broadly. Of course, that's heavily focused on AI and search. Then I'll take you through some highlights from the quarter in Cloud, YouTube, and beyond. Let's discuss our momentum and strategy. Taking a step back, it took Google more than 15 years to reach $100 billion in annual revenue. In just the last six years, we have gone from $100 billion to more than $300 billion in annual revenue. Of course, Search continues to power that as you see in our Q1 results. But in addition, we expect YouTube overall and Cloud to exit 2024 at a combined annual run rate of over $100 billion. This shows our track record of investing in and building successful new growing businesses. Now let's look at how well we are positioned for the next wave of AI innovation and the opportunity ahead. There are six points to make: one, research leadership; two, infrastructure leadership; three, innovation and search; four, our global product footprint; five, velocity in execution; six, monetization paths. First, our foundation of research leadership. We've been an AI-first company since 2016, pioneering many of the modern breakthroughs that power AI progress for us and for the industry. Last week, we further consolidated teams that build AI models under Google DeepMind. This will help simplify development and establish a single access point for our product teams as they build generative AI applications with these models. The teams are making rapid progress, developing Gemini and other models. In February, we rolled out Gemini 1.5 Pro, which shows dramatic performance enhancements across a number of dimensions. It includes a breakthrough in long context understanding, achieving the longest context window of any large-scale foundation model yet. Combining this with Gemini's native multimodal understanding across audio, video, text code, and more, it's highly capable. We are already seeing developers and enterprise customers enthusiastically embrace Gemini 1.5 and use it for a wide range of things. Beyond Gemini, we have built other useful models, including our Gemma open models as well as Imagine visual models, and others. Second, infrastructure leadership. We have the best infrastructure for the AI era. Building world-leading infrastructure is in our DNA, starting in our earliest days when we had to design purpose-built hardware to power search. Our data centers are some of the most high-performing, secure, reliable, and efficient in the world. They've been purpose-built for training cutting-edge AI models and designed to achieve unprecedented improvements in efficiency. We have developed new AI models and algorithms that are more than 100 times more efficient than they were 18 months ago. Our custom TPUs, now in their fifth generation, are powering the next generation of ambitious AI projects. Gemini was trained on and is served using TPUs. We are committed to making the investments required to keep us at the leading edge in technical infrastructure. You can see that from the increases in our capital expenditures. This will fuel growth in Cloud, help us push the frontiers of AI models, and enable innovation across our services, especially in Search. AI innovations in Search are the third and perhaps the most important point I want to make. We have been through technology shifts before, to the web, to mobile, and even to voice technology. Each shift expanded what people can do with Search and led to new growth. We are seeing a similar shift happening now with generative AI. For nearly a year, we've been experimenting with SGE in search labs across a wide range of queries. And now we are starting to bring AI overviews to the main Search page. We are being measured in how we do this, focusing on areas where gen AI can improve the search experience while also prioritizing traffic to websites and merchants. We have already served billions of queries with our generative AI features. It's enabling people to access new information, to ask questions in new ways and to ask more complex questions. Most notably, based on our testing, we are encouraged that we are seeing an increase in search usage among people who use the new AI overviews as well as increased user satisfaction with the results. And with Circle to Search, people can now circle what they see on their Android screens, ask a question about an image or object in a video and get an AI overview with Lens. Fourth, our global product footprint beyond Search. We have 6 products with more than 2 billion monthly users, including 3 billion Android devices. 15 products have 0.5 billion users and we operate across 100-plus countries. This gives us a lot of opportunities to bring helpful gen AI features and multimodal capabilities to people everywhere and improve their experiences. We have brought many new AI features to Pixel, Photos, Chrome, Messages, and more. We are also pleased with the progress we are seeing with Gemini and Gemini Advanced through the Gemini app on Android and the Google app on iOS. Fifth, improved velocity and execution. We've been really focused on simplifying our structures to help us move faster. In addition to bringing together our model-building teams under Google DeepMind, we recently unified our ML infrastructure and ML developer teams to enable faster decisions, smarter compute allocation, and a better customer experience. Earlier this year, we brought our Search teams together under one leader. And last week, we took another step, bringing together our platforms and devices teams. The new combined team will focus on delivering high-quality products and experiences, bolstering the Android and Chrome ecosystems, and bringing our best innovations to partners faster. We also remain focused on long-term efforts to durably reengineer our cost base. You can see the impact of this work reflected in our operating margin improvement. We continue to manage our headcount growth and align teams with our highest priority areas. This speeds up decision-making, reduces layers, and enables us to invest in the right areas. Beyond our teams, we are very focused on our cost structures, procurement, and efficiency. And a number of technical breakthroughs are enhancing machine speed and efficiency, including the new family of Gemini models and a new generation of TPUs. For example, since introducing SGE about a year ago, machine costs associated with SGE responses have decreased 80% from when first introduced in Labs, driven by hardware, engineering, and technical breakthroughs. We remain committed to all of this work. Finally, our monetization path. We have clear paths to AI monetization through Ads and Cloud as well as subscriptions. Philipp will talk more about new AI features that are helping advertisers, including bringing Gemini models into Performance Max. Our Cloud business continues to grow as we bring the best of Google AI to enterprise customers and organizations around the world. And Google One Now has crossed 100 million paid subscribers. And in Q1, we introduced a new AI premium plan with Gemini advanced. OK. Those are the six points so now let me turn to quarterly highlights from Cloud and YouTube in a bit more detail. In Cloud, we have announced more than 1,000 new products and features over the past 8 months. At Google Cloud Next, more than 300 customers and partners spoke about their generative AI successes with Google Cloud, including global brands like Bayer, Cintas, Mercedes Benz, Walmart, and many more. Our differentiation in cloud begins with our AI hypercomputer, which provides efficient and cost-effective infrastructure to train and serve models. Today, more than 60% of funded gen AI start-ups and nearly 90% of gen AI unicorns are Google Cloud customers. And customers like PayPal and Kakao Brain are choosing our infrastructure. We offer an industry-leading portfolio of NVIDIA GPUs along with our TPUs. This includes TPU V5P, which is now generally available and NVIDIA's latest generation of Blackwell GPUs. We also announced Axion, our new Google design and ARM-based CPU. In benchmark testing, it has performed up to 50% better than comparable x86-based systems. On top of our infrastructure, we offer more than 130 models, including our own models, open source models, and third-party models. We made Gemini 1.5 Pro available to customers as well as Imagine 2.0 at Cloud Next. And we shared that more than 1 million developers are now using our generative AI across tools, including AI Studio and Vertex AI. We spoke about how customers like Bristol-Myers Squibb and Etsy can quickly and easily build agents and connect them to their existing systems. For example, Discover Financial has begun deploying gen AI-driven tools to its nearly 10,000 call center agents to achieve faster resolution times for customers. Customers can also now ground their gen AI with Google Search and their own data from their enterprise databases and applications. In Workspace, we announced that organizations like Uber, Pepperdine University, and PennyMac are using Gemini and Google Workspace, our AI-powered agent that's built right into GMA dock sheets and more. We also announced Google Vids, a new application to create stories in short video format. And we introduced Gemini for Meetings and Messaging and Gemini Security for Workspace. Customers are choosing Workspace because they have deep trust in our powerful security and privacy features. Our Cloud business is now widely seen as the leader in cybersecurity. I saw this first time when I went to the Munich Security Conference in February. Cybersecurity analysts are using Gemini to help spot threats, summarize intelligence, and take action against attacks, helping companies like American Family Insurance aggregate and analyze security data in seconds instead of days. Turning next to YouTube, which continues to grow and lead in streaming. We announced that on average, viewers are watching over 1 billion hours of YouTube content on TVs daily. AI experiments like Dream Screen will give anyone the ability to make AI-generated backgrounds for YouTube Shorts. And on subscriptions, which are increasingly important for YouTube, we announced that in Q1, YouTube surpassed 100 million Music and Premium subscribers globally, including trialers. And YouTube TV now has more than 8 million paid subscribers. Finally, in Other Bets, Waymo's fully autonomous service continues to grow ridership in San Francisco and Phoenix with high customer satisfaction, and we started offering paid rides in Los Angeles and testing rider-only trips in Austin. Overall, it was a great quarter, and there's more to come. IO is in less than 3 weeks, followed by Brandcast and Google Marketing Life. I want to thank our employees around the world who are at the heart of this progress and who continue to focus on building innovative products, helpful services, and new opportunities for businesses and partners around the world. Thank you. Philipp? Philipp Schindler -- Senior Vice President and Chief Business Officer Thanks, Sundar. And hi, everyone. Google services revenue of $70 billion were up 14% year-on-year. Search and other revenues grew 14% year-on-year, led again by solid growth in the retail vertical with particular strength from APAC-based retailers, which began in the second quarter of 2023. YouTube Ads revenues were up 21% year-on-year, driven by growth in both direct response and brand. Network revenues declined 1% year-on-year. In subscriptions, platforms, and devices, year-on-year revenues increased 18%, driven again by strong growth in YouTube subscriptions. Let's now talk about a few highlights from the quarter from a product innovation and advertising performance perspective. First, it bears repeating that AI innovation across our Ads ecosystem is core to every aspect of our product portfolio from targeting, bidding, creative, measurement, and across campaign types. We've talked about whole solutions like smart bidding use AI to predict future ad conversions and their value in helping businesses stay agile and responsive to rapid shifts in demand and how products like Broadmatch leverage LLMs to match ads to relevant searches and help advertisers respond to what millions of people are searching for. This is foundational. As advances accelerate in our underlying AI models, our ability to help businesses users at speed and scale and drive ROI just keeps getting better. We're especially excited about the doors gen AI is opening for creative capabilities, helping deliver on the premise of getting the right ad to the right user in the right moment. Look at Performance Max. In February, we rolled Gemini into PMax. It's helping curate and generate text and image assets so businesses can meet PMax asset requirements instantly. This is available to all U.S. advertisers and starting to roll out internationally in English, and early results are encouraging. Advertisers using PMax asset generation are 63% more likely to publish a campaign with good or excellent ad strength. And those who improved their PMax ad strength to excellent see 6% more conversions on average. We're also driving improved results for businesses opting into automatically created assets, which are supercharged with gen AI. Those adopting ACA see, on average, 5% more conversions at a similar cost per conversion in Search and Performance Max campaigns. And then there's Dimension. Advertisers are loving its ability to engage new and existing customers and drive purchase consideration across our most immersive and visual touch points like YouTube, Shorts, Gmail, and Discover. Hollywood film and TV studio, Lionsgate, partnered with Horizon Media to test what campaign type will deliver the most ticketing page views for its The Hunger Games: The Ballad of Songbirds & Snakes film. Over a 3-week test, demand gen was significantly more efficient versus social benchmarks with an 85% more efficient CPC and 96% more efficient cost per page view. Lionsgate has since rolled out demand gen for 2 new titles. We're also bringing new creative features to demand gen. Earlier this month, we announced new generative image tools to help advertisers create high-quality assets in a few steps with a few simple prompts. This will be a win for up-leveling visual storytelling and testing creative concepts more efficiently. And then there's obviously Search generative experience, which Sundar talked about. l'll add that innovation and the user experience on Search has historically opened up new opportunities for advertisers. We saw this when we successfully navigated from desktop to mobile. We're continuing to experiment with new ad formats, including search and shopping ads alongside search results in SGE. And we shared in March how folks are finding ads either above or below the SGE results helpful. We're excited to have a solid baseline to keep innovating on and confident in the role SGE, including ads, will play in delighting users and expanding opportunities to meet user needs, which brings me to Search and our strong performance in the first quarter. In Q1, retail was again the top contributor. Our focus remains on driving profitability and growth for retailers, helping them optimize digital performance for both online and off-line as well as innovate across our shopping and merchant experiences. Highlights include: continued upsides for retailers, leading into agile budget and bidding strategies across Search, PMax or both; take-home goods retailer IKEA, who leaned into Google's store sales measurement to understand its total omnichannel revenue opportunity across search. By measuring 2.3 times more revenue and using value-based bidding solutions to bid to its omnichannel customers, Ikea drove a significant increase in omni revenue in Q1 and is now scaling this strategy globally. We also expanded local inventory ads into 23 countries, helping drive shopper confidence and off-line sales. Retailers can convert intent into action by showcasing in-store availability, pricing, pickup options, and more all in one ad format. Moving to YouTube. Last quarter, I went deep into our strategy. It all starts with creation, which drives viewership, which leads to monetization. A few updates to build on Sundar's remarks. First, creation, which is all about giving creators the tools to create amazing content, grow their audiences, and build their businesses. In 2023, more people created content on YouTube than ever before, and the number of channels uploading Shorts year-on-year grew 50%. We also hit a new milestone with 3 million-plus channels in our YouTube partner program. We recently shared that YPP has paid out more than any other creator monetization platform, including over $70 billion to creators, artists, and media companies over the last 3 years. From a viewer's perspective, watch time across YouTube continues to grow, with strength in both shorts and CTV. According to Nielsen, YouTube has been the leader in U.S. streaming watch time for the last 12-plus months. In the first quarter, living room benefited from a combination of strong watch time growth, innovation in the user and advertiser experience and a shift in brand advertising budgets from linear TV to YouTube. Viewers are watching YouTube because they expect to access everything in one place across screens and formats, their favorite creators, live sports, breaking news, educational content, movies, music, and more. And advertisers continue to lean in to find audiences they can't find elsewhere, which brings me to monetization. We're pleased with our Q1 performance across both our ad-supported and subscription offerings. Sundar covered subscription growth. On the ad front, direct and brands were both strong this quarter. Short monetization continued to improve with Shorts ads now supported on mobile, tablet, living room and desktop, and available to both performance and brand advertisers. In the U.S., the monetization rate of Shorts relative to viewing has more than doubled in the past 12 months, including a 10-point sequential improvement in the first quarter alone. Just last week, we introduced new ways for brands to get the most out of their Shorts ads with new lineups on YouTube Select, including sports, beauty, fashion and lifestyle and entertainment. For YouTube advertisers, increasing brand lift is one of the core goals. In Q1, we saw strong traction from the introduction of a pause ads pilot on connected TVs, a new non-interruptive ad format that appears when users pause their organic content. Initial results show that pause ads are driving strong brand lift results and are commanding premium pricing from advertisers. Before I wrap, two quick highlights on how we're helping our partners transform and accelerate impact with the best across Google. Number one, to help McDonald's build the restaurant of the future, we're deepening our partnership across cloud and ads. Part of this includes them connecting Google Cloud's latest hardware and data technologies across restaurants globally and starting to apply gen AI to enhance its customer and employee experiences. Number two, WPP. At Google Cloud Next, we announced a new collaboration that will redefine marketing through the integration of our Gemini models with WPP Open. WPP's AI-powered marketing operating system already used by more than 35,000 of its people and adopted by key clients, including The Coca-Cola Company, L'Oreal, and Nestle. We're just getting started here and excited about the innovation this partnership will unlock. With that, a huge thank you to our customers and partners, many of whom we're excited to see at Google Marketing Live and Brandcast in just a few weeks. And a huge thank you, as always, to our incredible teams for their agility and hard work this quarter. Ruth, you're up. Ruth Porat -- Chief Financial Officer Thank you, Philipp. We are very pleased with our financial results for the first quarter, driven, in particular, by strength in search and cloud as well as the ongoing efforts to durably reengineer our cost base. My comments will be on year-over-year comparisons for the first quarter unless I state otherwise. I will start with results at the Alphabet level, followed by segment results and conclude with our outlook. For the first quarter, our consolidated revenues were $80.5 billion, up 15% or up 16% in constant currency. Search remained the largest contributor to revenue growth. In terms of total expenses, the year-on-year comparisons reflect the impact of the restructuring charges we took in the first quarter of 2023 of $2.6 billion as well as the $716 million in employee severance and related charges in the first quarter of 2024. As you can see in our earnings release, these charges were allocated across the expense lines in other cost of revenues and opex based on associated headcount. To help with year-on-year comparisons, we included a table in our earnings release to adjust other cost of revenues, operating expenses, operating income, and operating margin to exclude the impact of severance and related office space charges in the first quarter of 2023 versus 2024. In terms of expenses, total cost of revenues was $33.7 billion, up 10%. Other cost of revenues was $20.8 billion, up 10% on a reported basis, with the increase driven primarily by content acquisition costs associated with YouTube, given the very strong revenue growth in both subscription offerings and ad-supported content. On an adjusted basis, other cost of revenues were up 13% year-on-year. Operating expenses were $21.4 billion, down 2% on a reported basis, primarily reflecting expense decreases in sales and marketing and G&A, offset by an increase in R&D. The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters. On an adjusted basis, operating expenses were up 5%, reflecting, first in R&D, an increase in compensation expense, primarily for Google DeepMind and Cloud; and second, in sales and marketing, a slight increase year-on-year, reflecting increases in compensation expense primarily for Cloud sales. Operating income was $25.5 billion, up 46% on a reported basis, and our operating margin was 32%. On an adjusted basis, operating income was up 31%, and our operating margin was 33%. Net income was $23.7 billion, and EPS was $1.89. We delivered free cash flow of $16.8 billion in the first quarter and $69.1 billion for the trailing 12 months. We ended the quarter with $108 billion in cash and marketable securities. Turning to segment results. Within Google Services, revenues were $70.4 billion, up 14%. Google Search and other advertising revenues of $46.2 billion in the quarter were up 14%, led again by growth in retail. YouTube advertising revenues of $8.1 billion were up 21%, driven by both direct response and brand advertising. Network advertising revenues of $7.4 billion were down 1%. Subscriptions, platforms, and devices revenues were $8.7 billion, up 18%, primarily reflecting growth in YouTube subscription revenues. TAC was $12.9 billion, up 10%. Google Services operating income was $27.9 billion, up 28%, and the operating margin was 40%. Turning to the Google Cloud segment. Revenues were $9.6 billion for the quarter, up 28%, reflecting significant growth in GCP with an increasing contribution from AI and strong Google Workspace growth, primarily driven by increases in average revenue per seat. Google Cloud delivered operating income of $900 million and an operating margin of 9%. As to our Other Bets for the first quarter, revenues were $495 million, benefiting from a milestone payment in one of the Other Bets. The operating loss was $1 billion. Turning to our outlook for the business. With respect to Google Services, first, within Advertising, we are very pleased with the momentum of our Ads businesses. Search had broad-based strength across verticals. In YouTube, we had acceleration in revenue growth driven by brand and direct response. Looking ahead, two points to call out. First, results in our advertising business in Q1 continued to reflect strength in spend from APAC-based retailers, a trend that began in the second quarter of 2023 and continued through Q1, which means we will begin lapping that impact in the second quarter. Second, the YouTube acceleration in revenue growth in Q1 reflects, in part, lapping the negative year-on-year growth we experienced in the first quarter of 2023. Turning to subscriptions, platforms, and devices. We continue to deliver significant growth in our subscriptions business, which drives the majority of revenue growth in this line. The sequential quarterly decline in year-on-year revenue growth for the line in Q1 versus Q4 reflects, in part, the fact that we had only 1 week of SUNDAY TICKET subscription revenue in Q1 versus 14 weeks in Q4. Looking forward, we will anniversary last year's price increase in YouTube TV starting in May. With regard to platforms, we are pleased with the performance in play driven by an increase in buyers. With respect to Google Cloud, performance in Q1 reflects strong demand for our GCP infrastructure and solutions as well as the contribution from our Workspace productivity tools. The growth we are seeing across Cloud is underpinned by the benefit AI provides for our customers. We continue to invest aggressively while remaining focused on profitable growth. As we look ahead, two points that will affect sequential year-on-year revenue growth comparisons across Alphabet. First, Q1 results reflect the benefit of leap year, which contributed slightly more than 1 point to our revenue growth rate at the consolidated level in the first quarter. Second, at current spot rates, we expect a larger headwind from foreign exchange in Q2 versus Q1. Turning to margins. Our efforts to durably reengineer our cost base are reflected in a 400-basis-point expansion of our Alphabet operating margin year-on-year, excluding the impact of restructuring and severance charges in both periods. You can also see the impact in the quarter-on-quarter decline in headcount in Q1, which reflects both actions we have taken over the past few months and a much slower pace of hiring. As we have discussed previously, we are continuing to invest in top engineering and technical talent, particularly in Cloud, Google DeepMind, and technical infrastructure. Looking ahead, we remain focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure. We believe these efforts will enable us to deliver full-year 2024 Alphabet operating margin expansion relative to 2023. With respect to capex, our reported capex in the first quarter was $12 billion, once again driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The significant year-on-year growth in capex in recent quarters reflects our confidence in the opportunities offered by AI across our business. Looking ahead, we expect quarterly capex throughout the year to be roughly at or above the Q1 level, keeping in mind that the timing of cash payments can cause variability in quarterly reported capex. With regard to Other Bets, we similarly have work streams underway to enhance overall returns. Finally, as I trust you saw in the press release, we are very pleased to be adding a quarterly dividend of $0.20 per share to our capital return program as well as a new $70 billion authorization in share repurchases. The core of our capital allocation framework remains the same, beginning with investing aggressively in our business, as you have heard us talk about today, given the extraordinary opportunities ahead. We view the introduction of the dividend as further strengthening our overall capital return program. Thank you. Sundar, Philipp, and I will now take your questions. Questions & Answers: Operator [Operator instructions] Our first question comes from Brian Nowak with Morgan Stanley. Please go ahead. Brian Nowak -- Morgan Stanley -- Analyst Hey, thanks for taking my questions. I have two. The first one, I wanted to ask about overall search behavior. Philipp, I know you talked in the past about how overall query trends continue to grow. Can I ask you to drill a little bit more into monetizable and commercial query trends? Has there been any changes in sort of your commercial query trends growth? Has just been all these new entrants moving around in e-commerce? It's my first one. Then the second one for Ruth. When you talked about sort of more efforts to moderate expense growth from here. Can you just sort of give us some examples of areas where you still see the potential for more optimization or work streams in place to continue to reengineer the opex base as we go throughout 2024? Thanks. Sundar Pichai -- Chief Executive Officer Thanks, Brian. To your first question, look, I think broadly, we've always found that over many years when things work well on the organic side, monetization follows. So, typically, the trends we see carry over well. Overall, I think with generative AI in Search, with our AIO views, we are definitely -- I think we will expand the type of queries we can serve our users. We can answer more complex question as well as in general. That all seems to carry over across quarter categories. Obviously, it's still early, and we are going to be measured and put user experience at front, but we are positive about what this transition means. Ruth Porat -- Chief Financial Officer And on the second question in terms of the various work streams, as both Sundar and I said, we remain very focused on ongoing efforts to slow the pace of expense growth, what we've been calling durably reengineering our cost base. And I made this point in opening comments that we are very cognizant of the increasing headwind we have from higher depreciation and expenses associated with the higher capex, and so these efforts are ongoing. And they're very much the same that we've talked with you about previously. It starts with product and process prioritization, all of the work around organizational efficiency and structure. These are ongoing. And so as an example, the work that Sundar talked about, combining devices and services with our platforms and ecosystems, product area is a really good example because unifying the teams not only helps us deliver higher-quality products and experiences, but we think it enables us to move with greater velocity and efficiency. And then the other work streams we've talked to you about in the past, like all of the work around technical infrastructure, which Sundar alluded to, streamlining operations within the company through the use of AI, what we're doing with procurement with our suppliers and vendors, which he also referenced, the work you've seen on real estate optimization, these are all ongoing work streams, which is why we have them under the umbrella, durably reengineering our cost base and they are ongoing. Operator Our next question comes from Doug Anmuth with J.P. Morgan. Your line is now open. Doug Anmuth -- JPMorgan Chase and Company -- Analyst Thanks for taking my questions. Sundar, you talked about bringing more generative AI features into the main Search page. Can you just talk about what kind of queries or scenarios do you think that that's working best for so far? And just how we should think about the cadence of continuing to adopt more of those features within core search? And then Ruth, on capex spending, the $12 billion in 1Q. Can we assume that run rating that and above is reasonable for this year? And I know it's very early, but should we generally expect higher capex next year as well? Sundar Pichai -- Chief Executive Officer Thanks, Doug. On SGE and Search, look, I think it tends to really -- we are seeing early confirmation of our thesis that this will expand the universe of queries where we are able to really provide people with a mix of actual answers linked to sources across the web and bring a variety of perspectives, all in an innovative way. And we've been rolling out AI overviews in the U.S. and the U.K., trying to mainly tackle queries, which are more complex, where we think SGE will clearly improve the experience. We've already served billions of queries, and it seems to cut across categories. But we are still continuing our testing, and we'll keep -- we are metrics-driven in these areas. And so we'll -- but I am optimistic that it clearly improves the user experience, users are telling us that, and we are seeing it in our metrics, and we'll continue evolving it through the course of this year. Ruth Porat -- Chief Financial Officer And then in terms of capex, as I said in opening comments, we do expect the quarterly capex throughout the year to be roughly at or above the $12 billion cash capex we had here in Q1. As I said, you can always have variability in the reported quarterly capex just due to the timing of cash payments but roughly at or above this level. And it really goes to Sundar's comment -- opening comment that we're very committed to making the investments required to keep us at the leading edge in technical infrastructure to support the growth in Cloud, all the innovation in Search that he and Philipp has spoken about and our lead with Gemini. I will note that most -- nearly all, I should say, of the capex was in our technical infrastructure. We expect that our investment in office facilities will be about less than 10% of the total capex in 2024, roughly flat with our capex but is still there. And then with respect to 2025, as you said, it's premature to comment so nothing to add on that. Doug Anmuth -- JPMorgan Chase and Company -- Analyst Great. Thank you. Operator Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan -- Goldman Sachs -- Analyst Maybe just one question on the big picture in nature for Sundar. Sundar, if we come back to your earlier comments at the beginning of the call and framing up longer-term initiatives and longer-term narratives, I wanted if you could talk a little bit about both the opportunities and the challenges of operating at scale in a time like this where there's a lot of technology innovation going on and how you see the elements of trying to strike a balance toward moving the organization forward while still continuing to both invest for growth as well as balance margins. Thanks so much. Sundar Pichai -- Chief Executive Officer Thanks, Eric. Great question. Obviously, I think the AI transition, I think it's a once-in-a-generation kind of an opportunity. We've definitely been gearing up for this for a long time. You can imagine we started building TPUs in 2016. So we've definitely been gearing it for a long time. The real opportunities we see is the scale of research and innovation, which we have built up and are going to continue to deliver. I think for the first time, we can work on AI in a horizontal way, and it impacts the entire breadth of the company, be it Search, be it YouTube, be it Cloud, be it Waymo, and so on. And we see a rapid pace of innovation in that underlying. So it's a very leveraged way to do it, and I see that as a real opportunity ahead. In terms of the challenges, I think making sure I think we are constantly -- I think it's been a mindset shift, which we've been driving across the company to make sure that we are embracing this opportunity but being very efficient in how we are approaching it, making sure we are redirecting our people to the highest priorities across the company, building on our 20 years of experience in driving machine efficiencies year-on-year so that we can put our dollars to work as efficiently as possible. So making sure balancing all of that moving forward in a very bold and responsible way at the same time. Those are the important things to get right from my perspective. Operator Our next question comes from Stephen Ju with UBS. Your line is now open. Stephen Ju -- UBS -- Analyst All right. Thank you so much. So, hi, Philipp, I think it's approaching the 2-year anniversary for the launch of Ads on YouTube Shorts. And you've given us an update on monetization pickup sequentially. But with that in mind, I think YouTube has launched an array of ad products and automation tools to help advertisers transfer what they're doing to the vertical screen. So, how is this translating into buy-in among your advertiser clients? And secondly, based on what you've seen over the last 2 years, are there any structural reasons that you can cite as to why the monetization cannot match what is already the case on the horizontal screen? Thanks. Philipp Schindler -- Senior Vice President and Chief Business Officer Yeah. Look, this is a great question, first of all. I mean, let's start with the fact that YouTube performance was very strong in this quarter. And on Shorts specifically in the U.S., I mentioned how the monetization rate of Shorts relative to in-stream viewing has more than doubled in the last 12 months. I think that's what you were referring to. And yes, we're obviously very happy with this development. The way to think about it is advertisers really only spend with us when they see a positive ROI, so you can assume that this wouldn't be happening unless it were to work for advertisers in the short term and also in the long term. That's an important part, I think. Overall, short is a long-term bet for the business. It has really helped us respond to both creator and viewer demand for short-form video. We talked about the strong growth, averaging 70 billion daily views. I mentioned a number of channels. Uploading has increased 50% year-over-year. So again, very happy with us in development. And to your question, structural reasons, whether we can't get to a match here, I have a hard time seeing those at the moment over time. Stephen Ju -- UBS -- Analyst Thank you. Operator Our next question comes from Justin Post with Bank of America. Your line is now open. Justin Post -- Bank of America Merrill Lynch -- Analyst OK. Thank you. I'm going to ask another one on capex. It seems to be your biggest investment area. Just first, you saw the big uptick the last 2 quarters but you've been investing in AI for years. Is the uptick because supply is getting easier to get or do you see more opportunities with the available supply to really fuel AI? So has the GPUs and everything gotten better that you feel more, investing more? And then thinking about the returns, both for Advertising and Cloud on capex, do you feel like this is a higher cost of doing business? Or do you think this is an opportunity to even get better returns on your capital spend than you've had in the past? Thank you. Ruth Porat -- Chief Financial Officer So the increase in capex, as Sundar said and I said, really reflects the opportunity we continue to see across the company. It starts with all that we're doing in support of the foundation model called the Gemini, foundational model. But then also, clearly, the work across Cloud, on behalf of Cloud customers and the growth that we're seeing with GCP and the infrastructure work there. And then, of course, as both Sundar and Philipp talked about the application across Search, YouTube, and more broadly, the services that we're able to offer. So it's the growing application and our focus on ensuring that we have the compute capacity to deliver in support of the services and opportunities we see across Alphabet. And it really goes to the second part of your question, which is that as we're investing in capex and applying it across our various businesses, it opens up more services and products, which bring revenue opportunities, and we're very focused on the monetization opportunity, it does underlie everything that we're doing in Google Services and Google Clap. And as Sundar noted, we're, at the same time, very focused on the efficiency of all elements of delivering that compute capacity from hardware, software, and beyond. Operator Our next question comes from Mark Mahaney with Evercore. Your line is now open. Jian Li -- Evercore ISI -- Analyst Thank you. This is Jian Li for Mark Mahaney. A couple of questions. One, just maybe an expansion on the Search question on before. More like Search volume and maybe in the context of the off-Google environment like AI chat bot, for example, we've seen kind of Meta AI directing to Google Search results. Do you think there's actually a scenario where like AI system can create a step function change in Search volume or use cases of Google? If you can give us more color on what are you seeing right now or what are you expecting to see in that area. And then the second question on just the comment of YouTube and Cloud exiting at $100 billion run rate. What is informing this outlook or visibility for you? If you can talk about, is it driven by any sort of Cloud demand inflection or step change in the gen AI workload demand, if you can flesh it out a little bit? Thanks a lot. Sundar Pichai -- Chief Executive Officer On your first question, look, I said this before, but to be clear, we view this moment as a positive moment for Search. And I think it allows us to evolve our product in a profound way. And Search is a unique experience. People come and they get to -- be it if you want answers, if you want to explore more, if you want to get perspectives from across the web and to be able to do it across the breadth and depth of everything they are looking for and the innovation you would need to keep that up, I think it's what we've been building on for a long time. And so I feel we are extraordinarily well setup, particularly given the innovation path we are on. And overall, I view this moment as a positive moment. So that's how I would say it. On the second part, Ruth? Ruth Porat -- Chief Financial Officer I'm sorry, what was the -- I think the-- Sundar Pichai -- Chief Executive Officer YouTube and Cloud. Jian Li -- Evercore ISI -- Analyst Yeah, like in terms of your comment about $100 billion exit rate for YouTube and Cloud, what's driven this -- what's driving this visibility for you? And any kind of inflection you're seeing in the Cloud demand? Ruth Porat -- Chief Financial Officer Oh, I would just say from Sundar's opening comments, it's just the ongoing momentum that we've seen in the business that we've been talking about, the ongoing growth and strong performance. And so what we were really getting at in that comment, what Sundar was getting at, is that we've continued to build strong businesses over time, and that just helps dimension it. We had similar comments last quarter when you talk about our subscription business. We're really proud of all the work that teams are doing across the company, building new, strong opportunities, delivering for our users, for customers, for advertisers in profound ways. And so it was just helping to dimension what we have built over the years. Operator Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open. Ken Gawrelski -- Wells Fargo Securities -- Analyst Thank you very much. Two, if I may. First on GCP, you had nice acceleration in the quarter. Could you talk a little bit about the opportunities and constraints upon GCP's ability to continue to address that large addressable market and accelerate growth? Is it more sales-oriented? Is it more product sales solutions or both? And would a -- will you -- do you plan to address most of these organically or could a partner approach work for you? And then the second one, just more detail on YouTube and sports rights. Could you talk -- could you reiterate your view on further live sports rights? There's some larger, mostly in the U.S., league rights coming up soon and will be more over the next several years. Could you just talk about your philosophy there beyond NFL Sunday Ticket? Thank you. Sundar Pichai -- Chief Executive Officer Thanks. Look, on the Cloud side, obviously, it's definitely a point of inflection overall. I think the AI transformation is making everyone think about their whole stack, and we are engaged in a number of conversations. I think paid AI infrastructure, people really looking to Vertex AI, given our depth and breadth of model choice or using Workspace to transform productivity in your workplace, et cetera. So I think the opportunities there are all related to that, both all the work we've built up and AI being a point of inflection in terms of driving conversations. I think you'll see us do it both organically and with a strong partner program as well. So we'll do it with a combination. And the challenges here are always and in -- for -- there are switching costs to Cloud, and the challenges we see is how do we make it easier for people. There's a lot of interest, but there's definitely barriers in terms of people switching, and so that's an area where we are constantly investing to make it easier for our customers. Philipp Schindler -- Senior Vice President and Chief Business Officer And with regard to your sports rights question, look, I mean, we've had long-standing and significant partnerships with the most popular sports league here in the U.S., around the globe, federations teams, athletes, broadcasters. And obviously, these partnerships, in combination with our very vast audience of sports fans, drives investment in subscription experiences across many offerings. NFL Sunday Ticket, YouTube TV, YouTube Primetime Channels, and so on. But there's nothing that we have to announce at the moment. We're obviously always looking at where we can create more value for our users, for our advertisers, for creators. But nothing specific to talk about at this moment. Ken Gawrelski -- Wells Fargo Securities -- Analyst Thank you. Operator Our next question comes from Ross Sandler with Barclays. Your line is now open. Ross Sandler -- Barclays -- Analyst Great. Sundar, I had a question about smartphone-based AI searches. So you guys are powering all these new AI interactions and searches on Pixel and on Samsung devices. And I think there's speculation that Gemini might be used on iOS in a future state. So the question is, if users start searching on smartphones and those searches are basically rendered on the model, on the phone without accessing the web, how do you guys anticipate monetizing some of these smartphone-based behaviors that are kind of run on the edge? Any thoughts on that? Sundar Pichai -- Chief Executive Officer Look, I think the -- if you look at what users are looking for, people are looking for information and an ability to connect with things outside. So I think there will be a set of use cases which you will be able to do on device. But for a lot of what people are looking to do, I think you will need the richness of the cloud, the web, and you have to deliver it to users. So I think -- so again, to my earlier comments, I think through all these moments, you saw what we have done with Samsung with Circle to Search. I think it gives a new way for people to access Search conveniently wherever they are. And so we view this as a positive way to bring our services to users in a more seamless manner. So I think it's positive from that perspective. In terms of on-device cloud, there will be needs which can be done on-device and we should to help it from a privacy standpoint. But there are many, many things for which people will need to reach out to the cloud, and so I don't see that as being a big driver in the on cloud versus off cloud in any way. Operator And our last question comes from Colin Sebastian with Baird. Your line is now open. Coiln Sebastian -- Robert W. Baird and Company -- Analyst Thanks, and good afternoon. I guess first, a follow-up on some of the questions on SGE and, of course, Search. I guess I'm wondering, along with some of those changes in behavior, is there a way to quantify that overall engagement shift, whether that's an increase in time spent or increase in -- or level of increase in queries for both sort of traditional search as well as more generative answers? And then secondly, on the hardware roadmap, I assume later this year, we'll hear more about some of the products. But any areas of a particular focus or that you would point out that we should keep in mind in terms of hardware launches in the back half? Thank you. Sundar Pichai -- Chief Executive Officer On the first question on Search, not much more to add to what I said. But what we have seen and we've been in live experiments just for a few weeks in U.S. and U.K. and on a slice of our queries where -- and all indications are positive that it improves user satisfaction. We see an increase in engagement, but I see this as something which will play out over time. But if you were to step back at this moment, there were a lot of questions last year, and we always felt confident and comfortable that we would be able to improve the user experience. People question whether these things would be costly to serve, and we are very, very confident we can manage the cost of how to serve these queries. People worried about latency. I think we are -- when I look at the progress we have made in latency and efficiency, we feel comfortable. There are questions about monetization. And based on our testing so far, I'm comfortable and confident that we'll be able to manage the monetization transition here well as well. It will play out over time, but I feel we are well-positioned. And more importantly, when I look at the innovation that's ahead and the way the teams are working hard on it, I am very excited about the future ahead. Operator Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks. Jim Friedland -- Director, Investor Relations Thanks, everyone, for joining us today. We look forward to speaking with you again on our second-quarter 2024 call. Thank you, and have a good evening.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, ladies and gentlemen, and welcome to the GrafTech first-quarter 2024 earnings conference call and webcast conference call. [Operator instructions] This call is being recorded on Friday, April 26th, 2024, and I would now like to turn the call over to Mike Dillon. Please go ahead. Mike Dillon -- Vice President, Investor Relations and Corporate Communications Good morning, and welcome to GrafTech International's first-quarter 2024 earnings call. On with me today are Tim Flanagan, chief executive officer; Jeremy Halford, chief operating officer; and Catherine Delgado, interim chief financial officer. Tim will begin with opening comments. Jeremy will then discuss safety, the commercial environment, sales, and operational matters. Catherine will review our quarterly results and other financial details, and Tim will close with comments on our outlook. We will then open the call to questions. As you are likely aware, GrafTech is currently involved in a proxy contest related to its upcoming annual meeting. The purpose of today's call is to discuss our earnings outlook and other business updates. As such, we will not be commenting on nor taking questions on the proxy contest during this call. If stockholders have questions on the proxy contest that you would like to discuss with management, please reach out to me after this call. Turning to the next slide. As a reminder, some of the matters discussed on this call may include forward-looking statements regarding, among other things, performance trends and strategies. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures, and these slides include the relevant non-GAAP reconciliations. You can find these slides in the Investor Relations section of our website at www.graftech.com. A replay of the call will also be available on our website. I'll now turn the call over to Tim. Tim Flanagan -- Chief Executive Officer Good morning, everyone, and thank you for joining this morning's call. In the first quarter, GrafTech delivered on our outlook and on the initiative discussed on our last earnings call. That said, we're not satisfied nor will we ever be satisfied with breakeven EBITDA performance and negative free cash flow. This is a pivotal time for GrafTech with many challenges still in front of us. Yet, we are up to the challenge and remain excited about the path we are on and the opportunities that lie ahead. We are confident that GrafTech can return to the position of generating great value for its shareholders. And on a personal note, I'm honored and excited to have the opportunity to lead the company and the talented team. As I move into this role on a permanent basis, let me highlight three of the key reasons I'm optimistic about the future of GrafTech. First, we are confident about our ability to meet the needs of our customers now and into the future. We continue to proactively engage with our customers, reinforcing the importance of our relationship with them and a shared view that this is a mutual partnership. In addition, we are investing in our customer value proposition to further differentiate GrafTech from our competitors. Our initiative to expand our product offerings by adding 800-millimeter supersized electrodes to our portfolio is proceeding well. We are on track for the initial trials to occur in the third quarter of this year. In addition, we are expanding the breadth of our architect system, building upon our best-in-class technical service capabilities. And with the majority of our original long-term agreements coming to an end, we are broadening our range of contract terms, which can be tailored to meet the needs of our customers. Lastly, on the commercial front. As it relates to the LTAs, we are pleased to have received the final award in a long-standing and our largest of our LTA arbitrations. In March, the sole arbitrator ruled in GrafTech's favor. Importantly, as we turn the page and move forward, we are focused on strengthening relationships with existing customers while also fostering new ones with prospective customers. Secondly, we have taken the right actions to improve our cost structure, and we are successfully executing these plans. We are safely and thoughtfully winding down the production activities at St. Marys and are on track to conclude the work by the end of the second quarter. In addition, we have completed the activities related to the reduction in our overhead structure. And while actions that impact employees are never easy, these are the right steps for the long-term health of the company and for the collective benefit of our stakeholders. The steps we are taking to manage working cat levels are evident in the further reduction of inventory during the first quarter. Overall, we are on track to achieve the stated benefits from these initiatives, including the anticipated $25 million of annualized cost savings comprised of $15 million reduction in our fixed manufacturing costs and $10 million lower administrative costs. Third, with our cost savings and optimization initiatives having been designed to preserve our ability to capitalize on long-term industry tailwinds, could be pursuing growth opportunities. I already spoke to some of the actions we are taking to reinforce customer confidence in our graphite electrode business. As a result, we believe we are well-positioned to benefit as the global steel market inevitably rebounds. Longer term, as decarbonization efforts further -- decarbonization efforts drive a further shift to electric arc furnace steelmaking. This will be supportive of increased graphite electrode demand, and we are poised to capitalize on the anticipated growth. Beyond graphite electrodes, we remain proactive in pursuing opportunities in the battery anode space. We continue to engage with a number of third parties on initiatives, which would leverage GrafTech's unique capabilities related to both needle coke and graphitization. Against this backdrop, we have not lost sight of where I started my comments. We are still facing many challenges as the industry remains in a cyclical downturn. While there is much work to be done, we are confident in emerging in this period as a stronger GrafTech. Let me now turn it over to Jeremy to provide more color on the current state of the industry and our commercial performance. Jeremy Halford -- Chief Operating Officer Thank you, Tim, and good morning, everyone. Before I provide an industry update, I'll start with a brief comment on our safety performance, which is a core value at GrafTech. We are pleased to have ongoing momentum with a first-quarter recordable incident rate that showed further improvement over our solid performance in 2023. And I would like to commend all of our team members for their efforts. While encouraged by this performance, we will not be satisfied until we achieve our ultimate goal of 0 injuries. Let me now turn to the next slide to discuss the commercial environment. As you know, we operate in a cyclical industry and currently find ourselves in a challenging part of the cycle. The macro-environment continues to be impacted economic uncertainty and geopolitical conflict, which has contributed to the constrained global steel industry. Looking at the numbers, using data published by the World Steel Association earlier this week. On a global basis, steel production outside of China was approximately 213 million tons in the first quarter of 2024. This represents a nearly 4% year-over-year increase with approximately three-quarters of the growth attributable to Turkey and India. As it relates to Turkey, with the first-quarter 2023 production having been significantly impacted by the earthquake that occurred in February of last year. This year-over-year growth represents a recovery to historic first-quarter norms. Commensurate with the global increase in steel production, the global steel capacity utilization rate outside of China ticked up slightly to 68%. Looking at some of our key commercial regions. For North America, steel production was down 2% in the first quarter on a year-over-year basis, reflecting a slight reversal of recent trends in what has been a relatively stable steel market. Steel output in the EU declined 1% as the market remains relatively stagnant, reflecting a weak construction sector and high-interest rates that continue to weigh on demand. Further, steel output in the EU remains well below historic production and utilization rates for that region. These dynamics within the global steel industry have, in turn, resulted in persistent challenges in the commercial environment for graphite electrodes. Specifically, industrywide demand for graphite electrodes has remained weak, with challenging pricing dynamics persisting in most regions. To expand further, the graphite electrode industry continues to suffer from low capacity utilization. While our competitors in the graphite electrode industry have also acknowledge near-term industrywide headwinds, we were the first and thus far only industry participant to announce definitive actions to reduce capacity. Conversely, despite the weak demand environment, we continue to see a healthy level of electrodes export ported from certain countries, including India and China into nontariff protected regions, such as the Middle East. These are typically lower-priced electrodes with prices declined further of late. As we have spoken to in the past, these export dynamics, we see a knock-on pricing effect in tariff-protected countries, such as within the EU as Tier 1 competitors have continued to lower prices in these regions to support volume. We are also seeing this dynamic play out in the U.S. with prices softening of weight, all of which represent challenges we must manage in the near term. With that background, let's turn to the next slide for more details on our results. Our production volume in the first quarter of 2024 was 26,000 metric tons. Our sales volume was 24,000 metric tons, a year-over-year increase of 43% and in line with our stated outlook for the first quarter. As a reminder, sales volume for the first quarter of 2023 was significantly impacted by the temporary suspension of our operations in Monterrey, Mexico that occurred in late 2022. Shipments for the first quarter of 2024 included 20,000 metric tons of non-LTA sales at a weighted average realized price of approximately $4400 per metric ton, and approximately 4,000 metric tons sold under our LTAs at a weighted average realized price of $8,700 per metric ton. Expanding on our weighted average price for non-LTA sales. This represented a 27% year-over-year decline and a sequential decline from the fourth quarter of 2023 of approximately 8%, reflecting the pricing dynamics I referenced earlier. Net sales in the first quarter of 2024 decreased 2% compared to the first quarter of 2023. The decline in pricing, along with the ongoing shift in the mix of our business from LTA to non-LTA volume led to the slight year-over-year decline in net sales as these factors were mostly offset by the higher sales volume. Looking forward, for the reasons already mentioned, we expect that industrywide demand for graphite electrodes in the near term will remain weak and pricing pressures will persist in most regions. In response, we remain selective in the commercial opportunities we're choosing to pursue with a focus on competing responsibly. We expect our sales volume in the second quarter of 2024 to be broadly in line with the sales volume for the first quarter. Further, we continue to expect a modest year-over-year improvement in sales volume for the full year. Let me now turn it over to Catherine to cover the rest of our financial details. Catherine Delgado -- Interim Chief Financial Officer Thank you, Jeremy, and good morning. For the first quarter of 2024, we had a net loss of $31 million or $0.12 per share. Adjusted EBITDA was essentially breakeven in the first quarter compared to adjusted EBITDA of $15 million in the first quarter of 2023. The decline reflected lower weighted average pricing and the continued shift in the mix of our business toward non-LTE volume. These factors were, however, partially offset by year-over-year reduction in cash costs on a per metric ton basis as well as with the benefit of higher sales volume. As Jeremy previously provided color on most of these drivers, let me expand on the topic of costs. As shown in the reconciliation provided in our earnings call materials posted on our website, our first-quarter 2024 cash COGS per metric ton declined 18% on a year-over-year basis. On a sequential basis, it declined 16% from the fourth quarter of 2023. Contributing to the sequential decline was a $5 million benefit or approximately $200 per metric ton, reflecting the portion of the lower cost to market inventory write-down recorded in the fourth quarter of 2023, which is now related to the inventory sold in the first quarter of this year. Beyond this, the majority of the sequential cost improvement reflected two key drivers. Let me provide some color on each one. First, as we mentioned in our fourth quarter call, we are addressing all elements of our cost structure. Our efforts related to variable costs are yielding benefits this quarter. Specifically, our technical team continues to work on engineering cost out of our manufacturing processes without compromising quality or performance. Additionally, we are aggressively working with our existing supplier base and qualifying new suppliers as we enhance our procurement practices related to certain key input costs. We are pleased to see these benefits beginning to flow through our variable costs. Second, we had a quarter-over-quarter reduction in the level of fixed costs being recognized on an accelerated basis due to low production levels. As a reminder, these are costs recognized in the current period that would have been inventoried if we were operating at normal production levels. In the first quarter, as utilization rates at both our graphite electrode and [Inaudible] facilities increased sequentially, we recognized approximately $6 million of such costs, compared to approximately $10 million in the fourth quarter of 2023. Then while not materially benefiting the first-quarter cash cost performance, our initiatives to reduce fixed costs are on track to generate cost savings as we proceed through the year. Reflecting the progress we're making on our cost structure as it relates to the full year, we now anticipate a mid-teen percentage point decline in our cash COGS per metric ton for 2024 compared to the full-year cash COGS per metric for 2023. This compares to our original guidance provided on the fourth quarter call of a year-over-year low-teen percentage point decline. Turning now to cash flow. For the first quarter of 2024, cash from operating activities was essentially breakeven as the net loss was offset by, among other factors, a further reduction in working capital, most notably inventory. Reflecting our first-quarter capital expenditures adjusted free cash flow was negative $11 million. We continue to anticipate our full-year 2024 capital expenditures will be in the range of $35 million to $40 million. Now moving to the next slide. We ended the first quarter with a liquidity position of $275 million, consisting of $165 million of cash and $110 million available under our revolving credit facility. This reflects the financial covenants that limit borrowing availability under our revolver in certain circumstances. More importantly, we do not anticipate the need to borrow against the revolver in 2024. And further, we know that we have no debt maturities until the end of 2028. Let me turn the call back over to Tim for some final comments on our outlook. Tim Flanagan -- Chief Executive Officer Let me reiterate my earlier comment that there are many reasons for optimism about the long-term prospects for our company. As we look to the near term, we recognize that a significant amount of global economic uncertainty remains as an overhead on steel demand, and therefore, graphite electrode demand. While it's prudent to remain cautious on near-term industry trends, we can't lose sight of the fact that all cyclical downturns eventually come to an end. Earlier this month, the World Steel Association published their updated short-term forecast on global steel demand. The forecast calls for low to mid-single-digit percentage increases in steel demand in both 2024 and 2025, for nearly all of our key regions, including the EU, the U.S., and Middle East. As I mentioned earlier, we are well-positioned to benefit as the global steel market recovers. We believe we provide a compelling value proposition to our customers and we can compete on more than just price. Our value proposition includes strategically positioned manufacturing footprint that provides operational flexibility and reach to key steelmaking regions. Being the only large-scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, best-in-class customer technical services and solutions and a focus on continually expanding our commercial and product offerings. Longer term, as I noted earlier, decarbonization efforts are driving a transition in steel with electric arc furnaces continuing to increase share of total steel production. The ongoing transition toward EAF steelmaking is expected to drive demand growth for graphite electrodes over the longer term. Overall, considering planned EAF capacity additions based on steel producer announcements, along with production increases at existing EAF plants. We estimate that this would translate to global graphite electrode demand outside of China growing at a 3% to 4% CAGR over the next five years. As the strategic actions we are taking to reduce costs have been designed to preserve our ability to capitalize on long-term industry tailwinds, we view GrafTech as being well-positioned to benefit from this trend. Further, anticipated demand growth for petroleum needle coke, the key raw material we use to produce graphite electrodes will also present a tailwind for our business given our substantial vertical integration. To expand on this point, needle coke demand is expected to accelerate driven by its use to produce synthetic graphite for the anode portion of lithium-ion batteries using the electric vehicle market. Growing demand for needle coke should result in elevated needle coke pricing and given the high historical correlation between petroleum needle coke pricing and graphite electrode pricing, this trend should translate to higher market pricing for electrodes. Additionally, we continue to see potential long-term value creation opportunities by directly participating in the development of Western supply chain for the EV battery market. With our needle coke and graphitization capabilities, we possess key assets, resources, and know-how that uniquely position GrafTech to participate in this industry. We remain excited about the development of the supply chain and our associated prospects. In closing, we are working through the challenges we face but have many reasons for optimism as we look ahead. We continue to believe GrafTech will successfully manage through the near-term challenges and remain an industry-leading supplier of mission-critical products to the EAF industry. Longer term, we possess a distinct set of assets, capabilities, and competitive advantages to capitalize on growth opportunities. As we think about the company's key stakeholders, we are instilling a renewed focus on a customer-first mantra as meeting the needs of our customers must be central to everything we do. At the same time, we must ensure the safety and professional growth over more than 1,200 employees, our most valuable asset. We must act responsible as stewards in our local communities, protecting our environment and investing in community programs. If we do right for our customers, our employees, and the communities in which we operate, we are confident we can deliver long-term value for our shareholders. This concludes our prepared remarks. We'll now open up the call for questions. Questions & Answers: Operator Thank you. [Operator instructions] Your first question comes from the line of Curt Woodworth from UBS. Please go ahead. Curt Woodworth -- UBS -- Analyst I was wondering if you could help us understand maybe some of the relative profitability differences between what you see in your EU operations relative the facility in Mexico. I mean our understanding is that pricing is significantly below North America and Europe? And can you comment on if there's any discussion around potentially taking more permanent capacity actions in Europe to accelerate fixed cost reduction and potentially baseload other facilities? And then just with respect to pricing in Europe and incremental competition from China. Is there been any further capacity rationalization you've seen in Europe? And have there been any discussions on potential more trade actions or things that Europe could do to try to safeguard the profitability of local suppliers in Europe? Tim Flanagan -- Chief Executive Officer Thanks, Curt, and I appreciate that question. And if I miss a piece of it, please let me know because there is a lot there. I think, first and foremost, let's start with kind of the EU and the current state of the market there. As Jeremy noted, right, the EU remains stagnant from an overall steel demand. I think we're down probably 15% from the high back in 2021. And while there's some anticipated demand growth here this year, into 2025 based on the latest world steel projections, it's still a relatively muted environment, and that obviously has an impact on pricing and electric demand as well. In terms of capacity in Europe right now. I'm not going to speak to anything that anybody else is doing. Back in Q1, we took the steps that we felt were the right steps to align our production capacity to how we see demand evolving over the short term, midterm, and longer term, and we'll continue to rationalize our production accordingly. Back in fourth quarter conference call, we talked about the actions in St. Marys in particular, but then. As it relates to the EU, we will be taking normalized summer outages in Europe, again, to match our production with the demand forecast. As we think about our overall production network, we think about it globally, right? We don't necessarily say the EU versus Monterrey or vice versa. So right now, certainly, there are markets that are more challenged in other markets from a pricing perspective, but we'll continue to remain focused on what we can control, which is the efforts on the cost front, as well as operating our plants as efficiently as we can in the interim and then pricing down the road will take care of itself. Curt Woodworth -- UBS -- Analyst And then as a follow-up just on the cost guidance for down mid-teens, it would seem to imply that you'd be roughly where you are this quarter. And I know in 1Q, you also had a roughly $10 million benefit from byproduct credit. Can you just elaborate on how you see byproducts benefits this year? And then in terms of the arbitration settlement, can you kind of quantify what the benefit to the business would be for that? Tim Flanagan -- Chief Executive Officer Yes. So let me start with the cost, and then we'll go to the arbitration. On the cost side, you mentioned the byproduct credit. That actually gets backed out of our cash COGS per ton. So roughly $9 million. So that doesn't factor into the cost numbers that we're otherwise putting out as we look. So Catherine, anything you want to add on the cost side? Catherine Delgado -- Interim Chief Financial Officer Yes. So just as I indicated, we do expect now -- our estimates say that we will have a cost decrease in the mid-teen percentage point versus last year. And essentially, this is due in part to our overachievement on cost in the first quarter, and I talked to that overachievement in my prepared remarks. We also continue to expect the benefit of the initiatives to rationalize our fixed cost structure, as we indicated in our February earnings call, and so we expect that our costs would show the impact of the decline in fixed cost. We talked about the $15 million annualized benefit to our fixed cost, which will be fully implemented by the end of the second quarter. And then with the modest year-over-year improvement that we expect in our sales and production volume in 2024 that will also benefit our cash COGS per metric ton. So this was to add a bit of color on the mid-teens percentage point decline expected on cash COGS for the full year as compared to last year. Tim Flanagan -- Chief Executive Officer And then with respect to the arbitration, right, as I noted in my prepared remarks, that the final award was issued. All of the claims against GrafTech were dismissed, and we were awarded reimbursement of legal fees and expenses. We expect that to be about $9 million once that gets settled. But I mean, I think the important thing is in arbitration is really a means of resolving a contractual dispute, and we've maintained commercial relationships through this process. And really, I think we're happy to have this behind us so that we can focus all of our efforts on the commercial relationship going forward. Curt Woodworth -- UBS -- Analyst Great. Thank you very much. Operator Your next question comes from the line of Bill Peterson from J.P. Morgan. Please go ahead. Bill Peterson -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking the questions. Maybe piggybacking on the cost improvements. If we were just even, I guess, flat line the cost improvements in the first quarter, it would seem to kind of indicate a high teens, maybe closer to 17% year-on-year cost decline. So I'm trying to understand, is that right? And I guess, are there -- is this mid-teens? Is that kind of the way you think about it? Or is there further upside there? Just trying to get a better sense of how to think about the cost down from here as we look ahead? Tim Flanagan -- Chief Executive Officer Certainly, we feel confident in the mid-teen number that we're putting out there. There is some variability of our cost structure as we move through the year as we think about the summer outages that I referenced earlier that will take in Europe some of the pricing dynamics with our power contracts, they're not flat over the course of the year. So that's why I would say that the mid-teens is a good number given those considerations. Catherine Delgado -- Interim Chief Financial Officer Yes. I will add to that that the recognition of the lower cost of market write-down in the fourth quarter of 2023. As you heard earlier, benefited the first-quarter cost of sales by about $5 million or $200 per metric ton. So we see a higher impact of that write-down in the first half of the year than in the second half of the year. Bill Peterson -- JPMorgan Chase and Company -- Analyst Maybe kind of turning into the U.S., not asking for pricing per se, but I think you mentioned that the market spend, you're seeing weakness there, too. But if we think about the U.S. market, the utilization trends have been relatively better, maybe stable, maybe even upper bias depending on how you look at it over the last few months. with some new capacity coming online, too, that should help as well. But trying to understand how you do reconcile the weaker price environment, again, given the utilization trends are -- have been relatively steady year with some add a benefit of capacity coming online? Tim Flanagan -- Chief Executive Officer Yes. I would describe the U.S. market from a demand perspective certainly a stable, right? You see it in the statistics, both in terms of production and utilization rate. But the fact is, is when you've got weakness in the other markets around the world, everybody pushes toward the strongest market, which has historically been the U.S., and we are seeing increased competition in the U.S. that maybe people had outlets in other parts of the world differently. So it's not certainly a weak demand environment by any means, but we are seeing more competition in the U.S. than what we've historically seen. Bill Peterson -- JPMorgan Chase and Company -- Analyst OK. Thanks. I'll pass on Operator Your next question comes from the line of Arun Viswanathan from RBC. Please go ahead. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. Thanks for taking my questions. So yes, I guess, first off, just carrying further on that last question. I guess there is a heightened level of competitive activity in U.S. electrode markets. and you alluded to maybe some of the weaker regions domestically exporting some of those volumes maybe out of China and India. So I guess implicit in that comment also is an acknowledgment that those Chinese electrodes are now at equal competitive levels. Maybe could you just comment on maybe the quality of the product that's coming out of China to your knowledge, I mean in the past, we had always kind of assumed that those electrodes were smaller in diameter, they would break and there was maybe a little bit of an inherent yield there. But it sounds like now the customers are OK using those electrodes and so that would kind of implied that some of this share has been structurally displaced. Is that a fair characterization? Or how do you expect to see a decline in this competitive activity or at least win back that share? Tim Flanagan -- Chief Executive Officer Yes. So I don't think that's a fair characterization because I don't think we're implying that the Chinese are the driver of the increased competition, right? I would still suggest, and I still think we strongly believe that there is a market differentiation in terms of what we provide, not only in the quality of the electrodes that we produce but also the other elements of our value proposition versus the Chinese competitors and think that longer term that we compete on more than just price with the Chinese. Right now, if you look across the globe, it's a challenging market just about everywhere where competition is pretty fierce. But we'll continue to focus on those things that we can control. And again, operating our plants as efficiently as possible, continuing to improve our overall cost position and move from there. But again, longer term, and our views around quality and where demand goes, haven't changed, and we think that the market will recover. Arun Viswanathan -- RBC Capital Markets -- Analyst And then another question along those lines. Just given your utilization rates, where would you, I guess, you see those kind of trending over the next several quarters? Do you see -- because I think some of your competitors, some of the Indian competitors are operating in the 80% rate or above? And I know that, that could be -- some of those volumes could be exported and not necessarily reflective of actual demand levels. But do you see a path for your own utilization rates to get back to 80% or so and obviously functioning in closure of St. Marys? How do you see those evolving? And the reason I'm asking is because to me, it seems like that's probably the most important lever to getting your cost per ton down and your profitability back up would be higher utilization. So maybe you can just comment on that. Tim Flanagan -- Chief Executive Officer Yes, sure. And certainly, fixed cost leverage will help improve our cost structures, and we've been commented on this before as we look into the future and we return to what we would consider a normal operating rate in kind of mid-cycle sort of conditions. There is a benefit from that, but there still are benefits that will drive out of our cost structure via the variable cost side and actually taking costs out of the system, not just getting better absorption of our fixed costs. With respect to utilization, we were at 58% in the first quarter. I would expect, just given our overall view on the commercial side for the year where we're guiding to a modest increase over last year. and the fact that we've more rightsized our inventory that we will continue to see a small uptick in our utilization rates. But until we start getting back into more mid-cycle like demand conditions, we're not going to be operating at an 80% level. But definitely think there's a path as we look out into the future kind of given all of the midterm and long-term trends we've talked about. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. And then one more just on your overall liquidity and financial position. So we've gotten some questions around liquidity levels and your comfort there. So could you just maybe kind of walk us through how you see kind of cash burn over the next couple of quarters? And your liquidity needs and if you need any -- the need to raise capital at all? Tim Flanagan -- Chief Executive Officer So in terms of liquidity, right? We ended the first quarter with $275 million of total liquidity. $165 million of that is cash and $110 million of that is availability under our revolver. And again, given the structure of our revolver, that remains available to us kind of in any period or cycle. We've noted and we'll say again that we don't anticipate borrowing against the revolver in the current year. So we feel comfortable about the liquidity position and where we sit today. And we'll go from there as the market moves forward. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. And then if I could, just one last one is, would you consider further portfolio moves, I know that some of these assets do have significant value that's potentially not reflected in your market value right now. So what is the path forward to as you evaluate the portfolio, do you feel comfortable where you are? And maybe you can just comment that in the frame of your further investments into the anode side of the EV battery. Would you need all of these assets to kind of make those investments as well? Or maybe some of the graphitization could be disposed or at least monetize to accelerate that process? Tim Flanagan -- Chief Executive Officer Yes. Arun, I think it's a good kind of line of discussion. We look at our business right now as an electrode business. As we look out into the future, this will be an electrode business and a battery anode business because there's a great parallel between our capabilities from the production of needle coke as well as the ability to graphitize those materials, which are two of the major steps in producing synthetic graphite for anodes. So we think that the combination of assets we have on the ground position us to be a significant player in both the electrode business going forward, our core business as well as in the development of the Western supply chain for electric vehicles and the related battery materials. So disposing of additional assets, monetizing for short-term benefit with the detriment of longer-term shareholder value creation, certainly isn't the way we're looking at it. We think that we can capitalize on the assets we have and really strengthen our business as we look forward. Arun Viswanathan -- RBC Capital Markets -- Analyst Thanks. Operator Your next question comes from the line of Alex Hacking from Citi. Please go ahead. Alex Hacking -- Citi -- Analyst Hi. Yes. Thanks. So just a follow up on your last point there. Any update or thoughts around the timing of when you might do something on the EV side? Tim Flanagan -- Chief Executive Officer Yes. So no real updates. We continue to progress on the permitting process at Seadrift. We just went through the public comment period and that continues to move forward. Again, this all really depends on the development of the market and how quickly the OEMs, the battery makers, and everybody kind of aligned. I would say that we've gone from a very fevered pitched market a year or so or 18 months ago to a very hot market or still really compelling market, but everybody is just now kind of aligning their supply chains ultimately looking forward to kind of production and scale starting in 2026. So no updates beyond that from a timing perspective. Alex Hacking -- Citi -- Analyst And then I just want to check my math on the LTA pricing. I think it was $8,700 in the quarter. If I look at the full-year numbers, it seems like the price should be closer to $8,100. I don't know if my math there is correct. And is there a reason why the first-quarter LTA price looks so relatively strong. Tim Flanagan -- Chief Executive Officer Yes, Alex, your math is spot on. We guide you to the $8,100 for the full year. There's a mix issue, right? Not all LTA contracts are priced the same. If you remember, given the fact that these are now winding down and coming to end of life, there are certain contracts that are still under their original terms or other contracts that have been blended and extended. So you've got a little bit of a variety of pricing constructs that are in the tail end of these contracts. So the $8,700 was the number for Q1 and $8,100 is still a good data point based on the math that we provided for the full year. Alex Hacking -- Citi -- Analyst OK. And then just one final one. Would you characterize the steel industry as destocking electrodes at the moment or inventory levels there fairly stable. I guess what I'm getting at is this current electrode demand reflect current steel production? Or is it lagging? Tim Flanagan -- Chief Executive Officer Yes. Let me let Jeremy answer that one. Jeremy Halford -- Chief Operating Officer Yes. So our comments on this are always kind of broad brush, right? But in general, we've said in the past that the steel industry tends to -- it tends to hold about three months' worth of electrode inventory. And really, we're seeing trends similar to what we saw in Q4. In North America, we continue to see steelmakers holding somewhere in the neighborhood of about 4 months' worth of electrode inventory reflecting their confidence in the ongoing strength of the domestic industry, whereas in Europe, we're seeing an industry that's not as strong. And as a result, some of our customers are a little bit more hand to mouth. And so we're seeing them run a lot tighter from an inventory perspective, carrying about two months' worth of inventory. And so not that changed from what we saw in the fourth quarter at the moment. Tim Flanagan -- Chief Executive Officer Yes. So we're about two to three quarters now, I think, of similar dynamics, both in Europe and in the U.S. So I think buying patterns are really reflective of demand at this point in time. Alex Hacking -- Citi -- Analyst But there isn't -- I guess there isn't a destock, right? Like different regions have different levels, but those levels? Tim Flanagan -- Chief Executive Officer And those levels have stayed relatively constant over the last couple of quarters. So nobody is buying excess and nobody is selling or destocking, as you said. Alex Hacking -- Citi -- Analyst OK. So in order to get better electrode demand, we need better steel production activity? Tim Flanagan -- Chief Executive Officer That's right. Alex Hacking -- Citi -- Analyst Thank you very much. Operator Your next question comes from the line of Matt Vittorioso from Jefferies. Please go ahead. Matthew Vittorioso -- Jefferies -- Analyst Yeah. Good morning. Thanks for taking my question. I guess just on capacity, you mentioned in your comments that you guys are kind of the only participant that's taken any meaningful action on capacity. I mean what do you think needs to happen there? Why does nobody else want to curtail capacity to help support the price? I mean typically, when a commodity goes into the basement here like electrode pricing has, you'll get some kind of supply response that we just haven't seen the cycle at least so far. So any comments on that would be helpful. Tim Flanagan -- Chief Executive Officer Yes, Matt, I think it would be unfair of me commenting on what the mindset or what other people are doing or the decisions they're making. We took the actions. We took to not only improve our cost structure, but do what we thought was appropriate, given kind of our outlook on demand here in the short and midterm. Beyond that, I don't think everybody can continue to run at utilization rates in the 50% to 60% range for a long time, but how they respond, I can't speculate. Matthew Vittorioso -- Jefferies -- Analyst Well, I guess that's my question maybe just said another way. Is there some cost advantage that your competitors have that allow them to continue to throw supply into this market? Or is it your expectation that at some point, that supply response will come? Tim Flanagan -- Chief Executive Officer Yes. I mean if you look at broadly speaking against our Tier 1 competitors, they operate in the same geographic regions that we do and are subject to the same labor and power and supply costs that we would otherwise find ourselves. So in the current environment, I think we're all in a similar cost position. I think as demand picks up in our vertical integration with Seadrift, I think that gives us a little bit of advantage. But I don't think there's a meaningful advantage that they have over us from a cost perspective right now. Matthew Vittorioso -- Jefferies -- Analyst And then maybe just, Tim, if you could just maybe talk a little bit more about -- I think you've probably been out seeing customers quite a bit in your new role and looking to maybe rebuild certain customer relationships post some of the LTA friction that has occurred. Maybe just talk a little bit about how those conversations are going? And then also, I think you've mentioned some of the other services that you guys provide or the value add that GrafTech provides away from just a good quality product. Maybe just talk briefly about some of those services that you guys provide monitoring electric arc furnaces and whatnot just kind of increase the value add that GrafTech offers. Tim Flanagan -- Chief Executive Officer Yes. And I'll speak to the customer side, and then I'll let Jeremy comment on architect and what we're doing there with our customer technical service team. But I mean, Listen, we're moving away from the LTA world and the structured contracts to a more spot-oriented business. And so I think it's more important than ever that we're engaging with customers on a regular and maybe even more frequent cadence as we go forward. And like any business, all relationships are not equal, but it's important that we're engaging and putting energy to every customer relationship we have. And while getting into particular customer situations. I think overall, our conversations have been encouraging and I think we've really been out there stressing a couple of things. One, we want our customer to understand the value proposition and what we bring to the table. Two, we want to make sure we're meeting their needs from a depth and breadth of product offerings, which includes how we're supporting them via architect and CTS, but I think lastly and probably most importantly is that they understand we're focused on long-term partnerships and remain willing to invest in those partnerships alongside of them. We made some big announcements in the fourth quarter as it related to our footprint, our cost structure and things that we are doing, and we thought it was important that we had direct face-to-face conversations with our customers about what we're doing, why we're doing it and how we're positioning ourselves to be long-term suppliers for them. So all in all, I think very positive developments from a customer standpoint. Jeremy, do you want to comment on architect and CTS? Jeremy Halford -- Chief Operating Officer Yes, I would say that all of this is just part of the long-term investment we've been making month-over-month, year over year in strengthening our relationships with our customers, between the CTS individuals that go on a regular base to be physically present in the steel mills and meet with not just the procurement, but it's really our opportunity to meet with melt shop managers and the people that are actually operating their furnaces. And all of this is sort of an effort to help our customers be better at what they do. And architect is a tool that we use that not only gives them better visibility into their own operations, but also gives us an opportunity to provide remote support when we can't be there in person. And we continue to work with the customers to understand where else or how else we can deploy a tool like that in order to continue to benefit them and help them continue to get what they do. So we really appreciate the partnership that we have with those customers. And through the support that we give them, they also help us make our product offering better as well. Matthew Vittorioso -- Jefferies -- Analyst That's helpful. Maybe just lastly, I know you've commented on liquidity and certainly understand the comments there. I mean, I guess, I would say with $165 million of cash on hand to say that you won't grow against the revolver, I don't think you need to it's comforting, but maybe it doesn't say a whole lot. But there's certainly been financial news sources highlighting that there are groups out there talking about ways that they could maybe offer you additional liquidity. Maybe just comment on your openness and you think it makes sense now to consider such a move just in case that the downturn in pricing holds for longer than you expected? I mean sometimes it's better to just take the liquidity when it's offered and have it for a rainy day? Tim Flanagan -- Chief Executive Officer Yes. Thanks. And again, I'm not going to comment on market speculation or articles quoting unnamed sources. But I think to the latter part of your question, right, I think even since I joined two and a half years ago, we've always had a look to our balance sheet, our capital structure and try to be proactive in terms of refinancing the revolver, refinancing our notes. So we're always having conversations with our advisors, our banks about our capital structure and how to best optimize our positioning. But beyond that, I think we're comfortable with the liquidity position we sit in today. and we'll continue to work on the cost side of our business and focus on those things that we keep control. Matthew Vittorioso -- Jefferies -- Analyst Got it. Thanks for the time. Appreciate it. Operator Your next question comes from the line of Abe Landa from Bank of America. Please go ahead. Abe Landa -- Bank of America Merrill Lynch -- Analyst Good morning. Thank you for taking my questions. Maybe the first one, just on -- I know you've historically provided this, but there were needle coke prices in 1Q, and where do you see them now and kind of for the rest of the year? I know we see some charts on Bloomberg versus it looks like the Chinese version has kind of declined 10% year to date. Jeremy Halford -- Chief Operating Officer Yes. So looking at export statistics, what we would see is that things are pretty much where they were a quarter ago. We would be looking for pricing for super premium needle coke in the range of $1,000 to $1,300 for the higher rent or super premium needle cokes that are typically used in our applications. With regard to the rest of the year, of course, we don't know, right? As you know, needle coke pricing can be highly volatile reflecting the market conditions at the time. But currently, we see things at $1,000 to $1,300, but in the recent past, we've seen prices as high as $3,000 in 2022. And as low as $1,000 a year before that kind of consistent with where we find ourselves currently. So I don't really have a good guidance for you for where I think it's going to go for the balance of the year. Volatility is really kind of key in the needle coke space. Tim Flanagan -- Chief Executive Officer Yes. The only thing I'd add is, I think we saw a fairly steady quarter-over-quarter decline as we moved throughout '23. And now we've probably seen a bit of flattening of the pricing here over the last quarter or two, and it's held kind of in this range that Jeremy talked about. Abe Landa -- Bank of America Merrill Lynch -- Analyst That's very helpful color. And then if I look at Seadrift, I mean, how does your costs at Seadrift kind of compared to the market pricing today? And what is Seadrift utilization currently? And kind of how do you expect that to trend as well? Tim Flanagan -- Chief Executive Officer Yes. So Seadrift utilization is going to align with our overall kind of utilization rates, right? We're running Seadrift in line with kind of our internal demand for needle coke for our graphite electrode plants as we go forward. Kind of like our large electrode plants, right, running them at capacity makes them more cost effective. I'd say Seadrift is competitive in this market, but does not give us the same cost advantage that we normally would benefit from in being vertically integrated as you do when you see needle coke prices kind of more in the mid-cycle type levels or even the high end of the ranges that Jeremy was speaking to earlier. Abe Landa -- Bank of America Merrill Lynch -- Analyst That's very helpful. And then maybe my last question, this is kind of a follow-up question from an earlier one. You kind of mentioned an increased competition with the U.S. Is that primarily coming from like your traditional Tier 1 Japanese competitors? Or is it coming from kind of these other Chinese or Indian. Like I know one of the Indian competitors just added 20,000 tons of capacity. Just kind of more color on the competition. Tim Flanagan -- Chief Executive Officer Yes. So that 20,000 tons came on at the end of last year. But the competition really is from those Tier 1 competitors, right? I mean, again, the U.S. tends to be the strongest market out there, and you're seeing everybody fight for volumes in that market. Abe Landa -- Bank of America Merrill Lynch -- Analyst Thank you very much for that color. Appreciate it. Operator Your next question comes from the line of Kirk Ludtke from Imperial Capital. Please go ahead. Kirk Ludtke -- Imperial Capital -- Analyst Hello, Tim, Jeremy, Catherine. Mike, thanks for the call. Just a couple of follow-ups. This came up earlier. I was curious, could you expand on the on any pending trade restrictions, anything on the regulatory front that we might want to keep an eye on? Tim Flanagan -- Chief Executive Officer Yes. So just as a recap, right, you've got trade protections right now in the EU against both Indian and Chinese electrodes. You have trade protection in the U.S. against Chinese imports. And then I think all of those cases are pretty stable. I don't think any of them are coming up for renewal or rejudgment here anytime in the near future. I think there was just an announced trade case in Japan against Chinese electrodes. So I think everybody is starting to take note of what the Chinese are doing in the market. Outside of that, I don't think there's anything pending that I can comment right now. Kirk Ludtke -- Imperial Capital -- Analyst OK. I appreciate that. With respect to the monetization of the battery opportunity you reiterated, I think, 2026. When would you have to make a decision in terms of your capacity at Seadrift in order to participate on that kind of time line? Tim Flanagan -- Chief Executive Officer Yes. Jeremy, do you want to talk the construction time line and then we can come back to when we have to start making decisions? Jeremy Halford -- Chief Operating Officer Yes. So the -- we would expect the permit to come through sometime in the third quarter of this year is kind of our expectation right now on that. And then once we make a decision on an investment, we're probably looking at a time line of somewhere around 18 months, I would guess, for construction assuming that all the permitting is in place and we're in good shape. Tim Flanagan -- Chief Executive Officer And in terms of broader strategic time line and decision-making, it really depends on where we go with the process, right? Our ability right now, I just commented previously about Seadrift not running at capacity. If we just wanted to sell more needle coke into the market, we could do that and make that decision here today. Obviously, the further you go into the supply chain and the fully developing of an anode plant. That obviously will take a longer lead time just given the construction window that Jeremy pointed and also the capital requirements of that. So it really depends on where ultimately we land in terms of our position in the full value chain. Kirk Ludtke -- Imperial Capital -- Analyst Got it. And then lastly, have you recovered -- I know market share is a bit of a moving target, but do you feel as though you've recovered the share you lost pursuant to Monterrey? Tim Flanagan -- Chief Executive Officer Yes. I mean I think we talked a little bit about this at year-end, right? We're rolling off an environment where we're highly contracted. Obviously, we had the challenges that were caused by the shutdown of Monterrey. And we're doing all of this during a very challenging demand environment broadly from a market standpoint. So I think we made good progress in the commercial cycle that we concluded in the third and fourth quarter of '23, and we'll continue to work through it, but we're not going to get it all back just in one fell swoop. So we think we're headed in the right direction and making good progress. But you don't recover from everything just in one bidding cycle. Kirk Ludtke -- Imperial Capital -- Analyst Got it. Would you say that you're tracking on that front in line with expectations? Tim Flanagan -- Chief Executive Officer Very much so, yes. Kirk Ludtke -- Imperial Capital -- Analyst Thank you very much. Operator This concludes our question-and-answer session. I will now hand the call back over to Mr. Flanagan for closing comments. Please go ahead. Tim Flanagan -- Chief Executive Officer With that, I'd like to thank everyone on this call for your interest in GrafTech, and we look forward to speaking with you again next quarter. Have a great day. Answer:

the GrafTech first-quarter 2024 earnings conference call and webcast conference call

Operator Good morning, ladies and gentlemen, and welcome to the GrafTech first-quarter 2024 earnings conference call and webcast conference call. [Operator instructions] This call is being recorded on Friday, April 26th, 2024, and I would now like to turn the call over to Mike Dillon. Please go ahead. Mike Dillon -- Vice President, Investor Relations and Corporate Communications Good morning, and welcome to GrafTech International's first-quarter 2024 earnings call. On with me today are Tim Flanagan, chief executive officer; Jeremy Halford, chief operating officer; and Catherine Delgado, interim chief financial officer. Tim will begin with opening comments. Jeremy will then discuss safety, the commercial environment, sales, and operational matters. Catherine will review our quarterly results and other financial details, and Tim will close with comments on our outlook. We will then open the call to questions. As you are likely aware, GrafTech is currently involved in a proxy contest related to its upcoming annual meeting. The purpose of today's call is to discuss our earnings outlook and other business updates. As such, we will not be commenting on nor taking questions on the proxy contest during this call. If stockholders have questions on the proxy contest that you would like to discuss with management, please reach out to me after this call. Turning to the next slide. As a reminder, some of the matters discussed on this call may include forward-looking statements regarding, among other things, performance trends and strategies. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures, and these slides include the relevant non-GAAP reconciliations. You can find these slides in the Investor Relations section of our website at www.graftech.com. A replay of the call will also be available on our website. I'll now turn the call over to Tim. Tim Flanagan -- Chief Executive Officer Good morning, everyone, and thank you for joining this morning's call. In the first quarter, GrafTech delivered on our outlook and on the initiative discussed on our last earnings call. That said, we're not satisfied nor will we ever be satisfied with breakeven EBITDA performance and negative free cash flow. This is a pivotal time for GrafTech with many challenges still in front of us. Yet, we are up to the challenge and remain excited about the path we are on and the opportunities that lie ahead. We are confident that GrafTech can return to the position of generating great value for its shareholders. And on a personal note, I'm honored and excited to have the opportunity to lead the company and the talented team. As I move into this role on a permanent basis, let me highlight three of the key reasons I'm optimistic about the future of GrafTech. First, we are confident about our ability to meet the needs of our customers now and into the future. We continue to proactively engage with our customers, reinforcing the importance of our relationship with them and a shared view that this is a mutual partnership. In addition, we are investing in our customer value proposition to further differentiate GrafTech from our competitors. Our initiative to expand our product offerings by adding 800-millimeter supersized electrodes to our portfolio is proceeding well. We are on track for the initial trials to occur in the third quarter of this year. In addition, we are expanding the breadth of our architect system, building upon our best-in-class technical service capabilities. And with the majority of our original long-term agreements coming to an end, we are broadening our range of contract terms, which can be tailored to meet the needs of our customers. Lastly, on the commercial front. As it relates to the LTAs, we are pleased to have received the final award in a long-standing and our largest of our LTA arbitrations. In March, the sole arbitrator ruled in GrafTech's favor. Importantly, as we turn the page and move forward, we are focused on strengthening relationships with existing customers while also fostering new ones with prospective customers. Secondly, we have taken the right actions to improve our cost structure, and we are successfully executing these plans. We are safely and thoughtfully winding down the production activities at St. Marys and are on track to conclude the work by the end of the second quarter. In addition, we have completed the activities related to the reduction in our overhead structure. And while actions that impact employees are never easy, these are the right steps for the long-term health of the company and for the collective benefit of our stakeholders. The steps we are taking to manage working cat levels are evident in the further reduction of inventory during the first quarter. Overall, we are on track to achieve the stated benefits from these initiatives, including the anticipated $25 million of annualized cost savings comprised of $15 million reduction in our fixed manufacturing costs and $10 million lower administrative costs. Third, with our cost savings and optimization initiatives having been designed to preserve our ability to capitalize on long-term industry tailwinds, could be pursuing growth opportunities. I already spoke to some of the actions we are taking to reinforce customer confidence in our graphite electrode business. As a result, we believe we are well-positioned to benefit as the global steel market inevitably rebounds. Longer term, as decarbonization efforts further -- decarbonization efforts drive a further shift to electric arc furnace steelmaking. This will be supportive of increased graphite electrode demand, and we are poised to capitalize on the anticipated growth. Beyond graphite electrodes, we remain proactive in pursuing opportunities in the battery anode space. We continue to engage with a number of third parties on initiatives, which would leverage GrafTech's unique capabilities related to both needle coke and graphitization. Against this backdrop, we have not lost sight of where I started my comments. We are still facing many challenges as the industry remains in a cyclical downturn. While there is much work to be done, we are confident in emerging in this period as a stronger GrafTech. Let me now turn it over to Jeremy to provide more color on the current state of the industry and our commercial performance. Jeremy Halford -- Chief Operating Officer Thank you, Tim, and good morning, everyone. Before I provide an industry update, I'll start with a brief comment on our safety performance, which is a core value at GrafTech. We are pleased to have ongoing momentum with a first-quarter recordable incident rate that showed further improvement over our solid performance in 2023. And I would like to commend all of our team members for their efforts. While encouraged by this performance, we will not be satisfied until we achieve our ultimate goal of 0 injuries. Let me now turn to the next slide to discuss the commercial environment. As you know, we operate in a cyclical industry and currently find ourselves in a challenging part of the cycle. The macro-environment continues to be impacted economic uncertainty and geopolitical conflict, which has contributed to the constrained global steel industry. Looking at the numbers, using data published by the World Steel Association earlier this week. On a global basis, steel production outside of China was approximately 213 million tons in the first quarter of 2024. This represents a nearly 4% year-over-year increase with approximately three-quarters of the growth attributable to Turkey and India. As it relates to Turkey, with the first-quarter 2023 production having been significantly impacted by the earthquake that occurred in February of last year. This year-over-year growth represents a recovery to historic first-quarter norms. Commensurate with the global increase in steel production, the global steel capacity utilization rate outside of China ticked up slightly to 68%. Looking at some of our key commercial regions. For North America, steel production was down 2% in the first quarter on a year-over-year basis, reflecting a slight reversal of recent trends in what has been a relatively stable steel market. Steel output in the EU declined 1% as the market remains relatively stagnant, reflecting a weak construction sector and high-interest rates that continue to weigh on demand. Further, steel output in the EU remains well below historic production and utilization rates for that region. These dynamics within the global steel industry have, in turn, resulted in persistent challenges in the commercial environment for graphite electrodes. Specifically, industrywide demand for graphite electrodes has remained weak, with challenging pricing dynamics persisting in most regions. To expand further, the graphite electrode industry continues to suffer from low capacity utilization. While our competitors in the graphite electrode industry have also acknowledge near-term industrywide headwinds, we were the first and thus far only industry participant to announce definitive actions to reduce capacity. Conversely, despite the weak demand environment, we continue to see a healthy level of electrodes export ported from certain countries, including India and China into nontariff protected regions, such as the Middle East. These are typically lower-priced electrodes with prices declined further of late. As we have spoken to in the past, these export dynamics, we see a knock-on pricing effect in tariff-protected countries, such as within the EU as Tier 1 competitors have continued to lower prices in these regions to support volume. We are also seeing this dynamic play out in the U.S. with prices softening of weight, all of which represent challenges we must manage in the near term. With that background, let's turn to the next slide for more details on our results. Our production volume in the first quarter of 2024 was 26,000 metric tons. Our sales volume was 24,000 metric tons, a year-over-year increase of 43% and in line with our stated outlook for the first quarter. As a reminder, sales volume for the first quarter of 2023 was significantly impacted by the temporary suspension of our operations in Monterrey, Mexico that occurred in late 2022. Shipments for the first quarter of 2024 included 20,000 metric tons of non-LTA sales at a weighted average realized price of approximately $4400 per metric ton, and approximately 4,000 metric tons sold under our LTAs at a weighted average realized price of $8,700 per metric ton. Expanding on our weighted average price for non-LTA sales. This represented a 27% year-over-year decline and a sequential decline from the fourth quarter of 2023 of approximately 8%, reflecting the pricing dynamics I referenced earlier. Net sales in the first quarter of 2024 decreased 2% compared to the first quarter of 2023. The decline in pricing, along with the ongoing shift in the mix of our business from LTA to non-LTA volume led to the slight year-over-year decline in net sales as these factors were mostly offset by the higher sales volume. Looking forward, for the reasons already mentioned, we expect that industrywide demand for graphite electrodes in the near term will remain weak and pricing pressures will persist in most regions. In response, we remain selective in the commercial opportunities we're choosing to pursue with a focus on competing responsibly. We expect our sales volume in the second quarter of 2024 to be broadly in line with the sales volume for the first quarter. Further, we continue to expect a modest year-over-year improvement in sales volume for the full year. Let me now turn it over to Catherine to cover the rest of our financial details. Catherine Delgado -- Interim Chief Financial Officer Thank you, Jeremy, and good morning. For the first quarter of 2024, we had a net loss of $31 million or $0.12 per share. Adjusted EBITDA was essentially breakeven in the first quarter compared to adjusted EBITDA of $15 million in the first quarter of 2023. The decline reflected lower weighted average pricing and the continued shift in the mix of our business toward non-LTE volume. These factors were, however, partially offset by year-over-year reduction in cash costs on a per metric ton basis as well as with the benefit of higher sales volume. As Jeremy previously provided color on most of these drivers, let me expand on the topic of costs. As shown in the reconciliation provided in our earnings call materials posted on our website, our first-quarter 2024 cash COGS per metric ton declined 18% on a year-over-year basis. On a sequential basis, it declined 16% from the fourth quarter of 2023. Contributing to the sequential decline was a $5 million benefit or approximately $200 per metric ton, reflecting the portion of the lower cost to market inventory write-down recorded in the fourth quarter of 2023, which is now related to the inventory sold in the first quarter of this year. Beyond this, the majority of the sequential cost improvement reflected two key drivers. Let me provide some color on each one. First, as we mentioned in our fourth quarter call, we are addressing all elements of our cost structure. Our efforts related to variable costs are yielding benefits this quarter. Specifically, our technical team continues to work on engineering cost out of our manufacturing processes without compromising quality or performance. Additionally, we are aggressively working with our existing supplier base and qualifying new suppliers as we enhance our procurement practices related to certain key input costs. We are pleased to see these benefits beginning to flow through our variable costs. Second, we had a quarter-over-quarter reduction in the level of fixed costs being recognized on an accelerated basis due to low production levels. As a reminder, these are costs recognized in the current period that would have been inventoried if we were operating at normal production levels. In the first quarter, as utilization rates at both our graphite electrode and [Inaudible] facilities increased sequentially, we recognized approximately $6 million of such costs, compared to approximately $10 million in the fourth quarter of 2023. Then while not materially benefiting the first-quarter cash cost performance, our initiatives to reduce fixed costs are on track to generate cost savings as we proceed through the year. Reflecting the progress we're making on our cost structure as it relates to the full year, we now anticipate a mid-teen percentage point decline in our cash COGS per metric ton for 2024 compared to the full-year cash COGS per metric for 2023. This compares to our original guidance provided on the fourth quarter call of a year-over-year low-teen percentage point decline. Turning now to cash flow. For the first quarter of 2024, cash from operating activities was essentially breakeven as the net loss was offset by, among other factors, a further reduction in working capital, most notably inventory. Reflecting our first-quarter capital expenditures adjusted free cash flow was negative $11 million. We continue to anticipate our full-year 2024 capital expenditures will be in the range of $35 million to $40 million. Now moving to the next slide. We ended the first quarter with a liquidity position of $275 million, consisting of $165 million of cash and $110 million available under our revolving credit facility. This reflects the financial covenants that limit borrowing availability under our revolver in certain circumstances. More importantly, we do not anticipate the need to borrow against the revolver in 2024. And further, we know that we have no debt maturities until the end of 2028. Let me turn the call back over to Tim for some final comments on our outlook. Tim Flanagan -- Chief Executive Officer Let me reiterate my earlier comment that there are many reasons for optimism about the long-term prospects for our company. As we look to the near term, we recognize that a significant amount of global economic uncertainty remains as an overhead on steel demand, and therefore, graphite electrode demand. While it's prudent to remain cautious on near-term industry trends, we can't lose sight of the fact that all cyclical downturns eventually come to an end. Earlier this month, the World Steel Association published their updated short-term forecast on global steel demand. The forecast calls for low to mid-single-digit percentage increases in steel demand in both 2024 and 2025, for nearly all of our key regions, including the EU, the U.S., and Middle East. As I mentioned earlier, we are well-positioned to benefit as the global steel market recovers. We believe we provide a compelling value proposition to our customers and we can compete on more than just price. Our value proposition includes strategically positioned manufacturing footprint that provides operational flexibility and reach to key steelmaking regions. Being the only large-scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, best-in-class customer technical services and solutions and a focus on continually expanding our commercial and product offerings. Longer term, as I noted earlier, decarbonization efforts are driving a transition in steel with electric arc furnaces continuing to increase share of total steel production. The ongoing transition toward EAF steelmaking is expected to drive demand growth for graphite electrodes over the longer term. Overall, considering planned EAF capacity additions based on steel producer announcements, along with production increases at existing EAF plants. We estimate that this would translate to global graphite electrode demand outside of China growing at a 3% to 4% CAGR over the next five years. As the strategic actions we are taking to reduce costs have been designed to preserve our ability to capitalize on long-term industry tailwinds, we view GrafTech as being well-positioned to benefit from this trend. Further, anticipated demand growth for petroleum needle coke, the key raw material we use to produce graphite electrodes will also present a tailwind for our business given our substantial vertical integration. To expand on this point, needle coke demand is expected to accelerate driven by its use to produce synthetic graphite for the anode portion of lithium-ion batteries using the electric vehicle market. Growing demand for needle coke should result in elevated needle coke pricing and given the high historical correlation between petroleum needle coke pricing and graphite electrode pricing, this trend should translate to higher market pricing for electrodes. Additionally, we continue to see potential long-term value creation opportunities by directly participating in the development of Western supply chain for the EV battery market. With our needle coke and graphitization capabilities, we possess key assets, resources, and know-how that uniquely position GrafTech to participate in this industry. We remain excited about the development of the supply chain and our associated prospects. In closing, we are working through the challenges we face but have many reasons for optimism as we look ahead. We continue to believe GrafTech will successfully manage through the near-term challenges and remain an industry-leading supplier of mission-critical products to the EAF industry. Longer term, we possess a distinct set of assets, capabilities, and competitive advantages to capitalize on growth opportunities. As we think about the company's key stakeholders, we are instilling a renewed focus on a customer-first mantra as meeting the needs of our customers must be central to everything we do. At the same time, we must ensure the safety and professional growth over more than 1,200 employees, our most valuable asset. We must act responsible as stewards in our local communities, protecting our environment and investing in community programs. If we do right for our customers, our employees, and the communities in which we operate, we are confident we can deliver long-term value for our shareholders. This concludes our prepared remarks. We'll now open up the call for questions. Questions & Answers: Operator Thank you. [Operator instructions] Your first question comes from the line of Curt Woodworth from UBS. Please go ahead. Curt Woodworth -- UBS -- Analyst I was wondering if you could help us understand maybe some of the relative profitability differences between what you see in your EU operations relative the facility in Mexico. I mean our understanding is that pricing is significantly below North America and Europe? And can you comment on if there's any discussion around potentially taking more permanent capacity actions in Europe to accelerate fixed cost reduction and potentially baseload other facilities? And then just with respect to pricing in Europe and incremental competition from China. Is there been any further capacity rationalization you've seen in Europe? And have there been any discussions on potential more trade actions or things that Europe could do to try to safeguard the profitability of local suppliers in Europe? Tim Flanagan -- Chief Executive Officer Thanks, Curt, and I appreciate that question. And if I miss a piece of it, please let me know because there is a lot there. I think, first and foremost, let's start with kind of the EU and the current state of the market there. As Jeremy noted, right, the EU remains stagnant from an overall steel demand. I think we're down probably 15% from the high back in 2021. And while there's some anticipated demand growth here this year, into 2025 based on the latest world steel projections, it's still a relatively muted environment, and that obviously has an impact on pricing and electric demand as well. In terms of capacity in Europe right now. I'm not going to speak to anything that anybody else is doing. Back in Q1, we took the steps that we felt were the right steps to align our production capacity to how we see demand evolving over the short term, midterm, and longer term, and we'll continue to rationalize our production accordingly. Back in fourth quarter conference call, we talked about the actions in St. Marys in particular, but then. As it relates to the EU, we will be taking normalized summer outages in Europe, again, to match our production with the demand forecast. As we think about our overall production network, we think about it globally, right? We don't necessarily say the EU versus Monterrey or vice versa. So right now, certainly, there are markets that are more challenged in other markets from a pricing perspective, but we'll continue to remain focused on what we can control, which is the efforts on the cost front, as well as operating our plants as efficiently as we can in the interim and then pricing down the road will take care of itself. Curt Woodworth -- UBS -- Analyst And then as a follow-up just on the cost guidance for down mid-teens, it would seem to imply that you'd be roughly where you are this quarter. And I know in 1Q, you also had a roughly $10 million benefit from byproduct credit. Can you just elaborate on how you see byproducts benefits this year? And then in terms of the arbitration settlement, can you kind of quantify what the benefit to the business would be for that? Tim Flanagan -- Chief Executive Officer Yes. So let me start with the cost, and then we'll go to the arbitration. On the cost side, you mentioned the byproduct credit. That actually gets backed out of our cash COGS per ton. So roughly $9 million. So that doesn't factor into the cost numbers that we're otherwise putting out as we look. So Catherine, anything you want to add on the cost side? Catherine Delgado -- Interim Chief Financial Officer Yes. So just as I indicated, we do expect now -- our estimates say that we will have a cost decrease in the mid-teen percentage point versus last year. And essentially, this is due in part to our overachievement on cost in the first quarter, and I talked to that overachievement in my prepared remarks. We also continue to expect the benefit of the initiatives to rationalize our fixed cost structure, as we indicated in our February earnings call, and so we expect that our costs would show the impact of the decline in fixed cost. We talked about the $15 million annualized benefit to our fixed cost, which will be fully implemented by the end of the second quarter. And then with the modest year-over-year improvement that we expect in our sales and production volume in 2024 that will also benefit our cash COGS per metric ton. So this was to add a bit of color on the mid-teens percentage point decline expected on cash COGS for the full year as compared to last year. Tim Flanagan -- Chief Executive Officer And then with respect to the arbitration, right, as I noted in my prepared remarks, that the final award was issued. All of the claims against GrafTech were dismissed, and we were awarded reimbursement of legal fees and expenses. We expect that to be about $9 million once that gets settled. But I mean, I think the important thing is in arbitration is really a means of resolving a contractual dispute, and we've maintained commercial relationships through this process. And really, I think we're happy to have this behind us so that we can focus all of our efforts on the commercial relationship going forward. Curt Woodworth -- UBS -- Analyst Great. Thank you very much. Operator Your next question comes from the line of Bill Peterson from J.P. Morgan. Please go ahead. Bill Peterson -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking the questions. Maybe piggybacking on the cost improvements. If we were just even, I guess, flat line the cost improvements in the first quarter, it would seem to kind of indicate a high teens, maybe closer to 17% year-on-year cost decline. So I'm trying to understand, is that right? And I guess, are there -- is this mid-teens? Is that kind of the way you think about it? Or is there further upside there? Just trying to get a better sense of how to think about the cost down from here as we look ahead? Tim Flanagan -- Chief Executive Officer Certainly, we feel confident in the mid-teen number that we're putting out there. There is some variability of our cost structure as we move through the year as we think about the summer outages that I referenced earlier that will take in Europe some of the pricing dynamics with our power contracts, they're not flat over the course of the year. So that's why I would say that the mid-teens is a good number given those considerations. Catherine Delgado -- Interim Chief Financial Officer Yes. I will add to that that the recognition of the lower cost of market write-down in the fourth quarter of 2023. As you heard earlier, benefited the first-quarter cost of sales by about $5 million or $200 per metric ton. So we see a higher impact of that write-down in the first half of the year than in the second half of the year. Bill Peterson -- JPMorgan Chase and Company -- Analyst Maybe kind of turning into the U.S., not asking for pricing per se, but I think you mentioned that the market spend, you're seeing weakness there, too. But if we think about the U.S. market, the utilization trends have been relatively better, maybe stable, maybe even upper bias depending on how you look at it over the last few months. with some new capacity coming online, too, that should help as well. But trying to understand how you do reconcile the weaker price environment, again, given the utilization trends are -- have been relatively steady year with some add a benefit of capacity coming online? Tim Flanagan -- Chief Executive Officer Yes. I would describe the U.S. market from a demand perspective certainly a stable, right? You see it in the statistics, both in terms of production and utilization rate. But the fact is, is when you've got weakness in the other markets around the world, everybody pushes toward the strongest market, which has historically been the U.S., and we are seeing increased competition in the U.S. that maybe people had outlets in other parts of the world differently. So it's not certainly a weak demand environment by any means, but we are seeing more competition in the U.S. than what we've historically seen. Bill Peterson -- JPMorgan Chase and Company -- Analyst OK. Thanks. I'll pass on Operator Your next question comes from the line of Arun Viswanathan from RBC. Please go ahead. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. Thanks for taking my questions. So yes, I guess, first off, just carrying further on that last question. I guess there is a heightened level of competitive activity in U.S. electrode markets. and you alluded to maybe some of the weaker regions domestically exporting some of those volumes maybe out of China and India. So I guess implicit in that comment also is an acknowledgment that those Chinese electrodes are now at equal competitive levels. Maybe could you just comment on maybe the quality of the product that's coming out of China to your knowledge, I mean in the past, we had always kind of assumed that those electrodes were smaller in diameter, they would break and there was maybe a little bit of an inherent yield there. But it sounds like now the customers are OK using those electrodes and so that would kind of implied that some of this share has been structurally displaced. Is that a fair characterization? Or how do you expect to see a decline in this competitive activity or at least win back that share? Tim Flanagan -- Chief Executive Officer Yes. So I don't think that's a fair characterization because I don't think we're implying that the Chinese are the driver of the increased competition, right? I would still suggest, and I still think we strongly believe that there is a market differentiation in terms of what we provide, not only in the quality of the electrodes that we produce but also the other elements of our value proposition versus the Chinese competitors and think that longer term that we compete on more than just price with the Chinese. Right now, if you look across the globe, it's a challenging market just about everywhere where competition is pretty fierce. But we'll continue to focus on those things that we can control. And again, operating our plants as efficiently as possible, continuing to improve our overall cost position and move from there. But again, longer term, and our views around quality and where demand goes, haven't changed, and we think that the market will recover. Arun Viswanathan -- RBC Capital Markets -- Analyst And then another question along those lines. Just given your utilization rates, where would you, I guess, you see those kind of trending over the next several quarters? Do you see -- because I think some of your competitors, some of the Indian competitors are operating in the 80% rate or above? And I know that, that could be -- some of those volumes could be exported and not necessarily reflective of actual demand levels. But do you see a path for your own utilization rates to get back to 80% or so and obviously functioning in closure of St. Marys? How do you see those evolving? And the reason I'm asking is because to me, it seems like that's probably the most important lever to getting your cost per ton down and your profitability back up would be higher utilization. So maybe you can just comment on that. Tim Flanagan -- Chief Executive Officer Yes, sure. And certainly, fixed cost leverage will help improve our cost structures, and we've been commented on this before as we look into the future and we return to what we would consider a normal operating rate in kind of mid-cycle sort of conditions. There is a benefit from that, but there still are benefits that will drive out of our cost structure via the variable cost side and actually taking costs out of the system, not just getting better absorption of our fixed costs. With respect to utilization, we were at 58% in the first quarter. I would expect, just given our overall view on the commercial side for the year where we're guiding to a modest increase over last year. and the fact that we've more rightsized our inventory that we will continue to see a small uptick in our utilization rates. But until we start getting back into more mid-cycle like demand conditions, we're not going to be operating at an 80% level. But definitely think there's a path as we look out into the future kind of given all of the midterm and long-term trends we've talked about. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. And then one more just on your overall liquidity and financial position. So we've gotten some questions around liquidity levels and your comfort there. So could you just maybe kind of walk us through how you see kind of cash burn over the next couple of quarters? And your liquidity needs and if you need any -- the need to raise capital at all? Tim Flanagan -- Chief Executive Officer So in terms of liquidity, right? We ended the first quarter with $275 million of total liquidity. $165 million of that is cash and $110 million of that is availability under our revolver. And again, given the structure of our revolver, that remains available to us kind of in any period or cycle. We've noted and we'll say again that we don't anticipate borrowing against the revolver in the current year. So we feel comfortable about the liquidity position and where we sit today. And we'll go from there as the market moves forward. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. And then if I could, just one last one is, would you consider further portfolio moves, I know that some of these assets do have significant value that's potentially not reflected in your market value right now. So what is the path forward to as you evaluate the portfolio, do you feel comfortable where you are? And maybe you can just comment that in the frame of your further investments into the anode side of the EV battery. Would you need all of these assets to kind of make those investments as well? Or maybe some of the graphitization could be disposed or at least monetize to accelerate that process? Tim Flanagan -- Chief Executive Officer Yes. Arun, I think it's a good kind of line of discussion. We look at our business right now as an electrode business. As we look out into the future, this will be an electrode business and a battery anode business because there's a great parallel between our capabilities from the production of needle coke as well as the ability to graphitize those materials, which are two of the major steps in producing synthetic graphite for anodes. So we think that the combination of assets we have on the ground position us to be a significant player in both the electrode business going forward, our core business as well as in the development of the Western supply chain for electric vehicles and the related battery materials. So disposing of additional assets, monetizing for short-term benefit with the detriment of longer-term shareholder value creation, certainly isn't the way we're looking at it. We think that we can capitalize on the assets we have and really strengthen our business as we look forward. Arun Viswanathan -- RBC Capital Markets -- Analyst Thanks. Operator Your next question comes from the line of Alex Hacking from Citi. Please go ahead. Alex Hacking -- Citi -- Analyst Hi. Yes. Thanks. So just a follow up on your last point there. Any update or thoughts around the timing of when you might do something on the EV side? Tim Flanagan -- Chief Executive Officer Yes. So no real updates. We continue to progress on the permitting process at Seadrift. We just went through the public comment period and that continues to move forward. Again, this all really depends on the development of the market and how quickly the OEMs, the battery makers, and everybody kind of aligned. I would say that we've gone from a very fevered pitched market a year or so or 18 months ago to a very hot market or still really compelling market, but everybody is just now kind of aligning their supply chains ultimately looking forward to kind of production and scale starting in 2026. So no updates beyond that from a timing perspective. Alex Hacking -- Citi -- Analyst And then I just want to check my math on the LTA pricing. I think it was $8,700 in the quarter. If I look at the full-year numbers, it seems like the price should be closer to $8,100. I don't know if my math there is correct. And is there a reason why the first-quarter LTA price looks so relatively strong. Tim Flanagan -- Chief Executive Officer Yes, Alex, your math is spot on. We guide you to the $8,100 for the full year. There's a mix issue, right? Not all LTA contracts are priced the same. If you remember, given the fact that these are now winding down and coming to end of life, there are certain contracts that are still under their original terms or other contracts that have been blended and extended. So you've got a little bit of a variety of pricing constructs that are in the tail end of these contracts. So the $8,700 was the number for Q1 and $8,100 is still a good data point based on the math that we provided for the full year. Alex Hacking -- Citi -- Analyst OK. And then just one final one. Would you characterize the steel industry as destocking electrodes at the moment or inventory levels there fairly stable. I guess what I'm getting at is this current electrode demand reflect current steel production? Or is it lagging? Tim Flanagan -- Chief Executive Officer Yes. Let me let Jeremy answer that one. Jeremy Halford -- Chief Operating Officer Yes. So our comments on this are always kind of broad brush, right? But in general, we've said in the past that the steel industry tends to -- it tends to hold about three months' worth of electrode inventory. And really, we're seeing trends similar to what we saw in Q4. In North America, we continue to see steelmakers holding somewhere in the neighborhood of about 4 months' worth of electrode inventory reflecting their confidence in the ongoing strength of the domestic industry, whereas in Europe, we're seeing an industry that's not as strong. And as a result, some of our customers are a little bit more hand to mouth. And so we're seeing them run a lot tighter from an inventory perspective, carrying about two months' worth of inventory. And so not that changed from what we saw in the fourth quarter at the moment. Tim Flanagan -- Chief Executive Officer Yes. So we're about two to three quarters now, I think, of similar dynamics, both in Europe and in the U.S. So I think buying patterns are really reflective of demand at this point in time. Alex Hacking -- Citi -- Analyst But there isn't -- I guess there isn't a destock, right? Like different regions have different levels, but those levels? Tim Flanagan -- Chief Executive Officer And those levels have stayed relatively constant over the last couple of quarters. So nobody is buying excess and nobody is selling or destocking, as you said. Alex Hacking -- Citi -- Analyst OK. So in order to get better electrode demand, we need better steel production activity? Tim Flanagan -- Chief Executive Officer That's right. Alex Hacking -- Citi -- Analyst Thank you very much. Operator Your next question comes from the line of Matt Vittorioso from Jefferies. Please go ahead. Matthew Vittorioso -- Jefferies -- Analyst Yeah. Good morning. Thanks for taking my question. I guess just on capacity, you mentioned in your comments that you guys are kind of the only participant that's taken any meaningful action on capacity. I mean what do you think needs to happen there? Why does nobody else want to curtail capacity to help support the price? I mean typically, when a commodity goes into the basement here like electrode pricing has, you'll get some kind of supply response that we just haven't seen the cycle at least so far. So any comments on that would be helpful. Tim Flanagan -- Chief Executive Officer Yes, Matt, I think it would be unfair of me commenting on what the mindset or what other people are doing or the decisions they're making. We took the actions. We took to not only improve our cost structure, but do what we thought was appropriate, given kind of our outlook on demand here in the short and midterm. Beyond that, I don't think everybody can continue to run at utilization rates in the 50% to 60% range for a long time, but how they respond, I can't speculate. Matthew Vittorioso -- Jefferies -- Analyst Well, I guess that's my question maybe just said another way. Is there some cost advantage that your competitors have that allow them to continue to throw supply into this market? Or is it your expectation that at some point, that supply response will come? Tim Flanagan -- Chief Executive Officer Yes. I mean if you look at broadly speaking against our Tier 1 competitors, they operate in the same geographic regions that we do and are subject to the same labor and power and supply costs that we would otherwise find ourselves. So in the current environment, I think we're all in a similar cost position. I think as demand picks up in our vertical integration with Seadrift, I think that gives us a little bit of advantage. But I don't think there's a meaningful advantage that they have over us from a cost perspective right now. Matthew Vittorioso -- Jefferies -- Analyst And then maybe just, Tim, if you could just maybe talk a little bit more about -- I think you've probably been out seeing customers quite a bit in your new role and looking to maybe rebuild certain customer relationships post some of the LTA friction that has occurred. Maybe just talk a little bit about how those conversations are going? And then also, I think you've mentioned some of the other services that you guys provide or the value add that GrafTech provides away from just a good quality product. Maybe just talk briefly about some of those services that you guys provide monitoring electric arc furnaces and whatnot just kind of increase the value add that GrafTech offers. Tim Flanagan -- Chief Executive Officer Yes. And I'll speak to the customer side, and then I'll let Jeremy comment on architect and what we're doing there with our customer technical service team. But I mean, Listen, we're moving away from the LTA world and the structured contracts to a more spot-oriented business. And so I think it's more important than ever that we're engaging with customers on a regular and maybe even more frequent cadence as we go forward. And like any business, all relationships are not equal, but it's important that we're engaging and putting energy to every customer relationship we have. And while getting into particular customer situations. I think overall, our conversations have been encouraging and I think we've really been out there stressing a couple of things. One, we want our customer to understand the value proposition and what we bring to the table. Two, we want to make sure we're meeting their needs from a depth and breadth of product offerings, which includes how we're supporting them via architect and CTS, but I think lastly and probably most importantly is that they understand we're focused on long-term partnerships and remain willing to invest in those partnerships alongside of them. We made some big announcements in the fourth quarter as it related to our footprint, our cost structure and things that we are doing, and we thought it was important that we had direct face-to-face conversations with our customers about what we're doing, why we're doing it and how we're positioning ourselves to be long-term suppliers for them. So all in all, I think very positive developments from a customer standpoint. Jeremy, do you want to comment on architect and CTS? Jeremy Halford -- Chief Operating Officer Yes, I would say that all of this is just part of the long-term investment we've been making month-over-month, year over year in strengthening our relationships with our customers, between the CTS individuals that go on a regular base to be physically present in the steel mills and meet with not just the procurement, but it's really our opportunity to meet with melt shop managers and the people that are actually operating their furnaces. And all of this is sort of an effort to help our customers be better at what they do. And architect is a tool that we use that not only gives them better visibility into their own operations, but also gives us an opportunity to provide remote support when we can't be there in person. And we continue to work with the customers to understand where else or how else we can deploy a tool like that in order to continue to benefit them and help them continue to get what they do. So we really appreciate the partnership that we have with those customers. And through the support that we give them, they also help us make our product offering better as well. Matthew Vittorioso -- Jefferies -- Analyst That's helpful. Maybe just lastly, I know you've commented on liquidity and certainly understand the comments there. I mean, I guess, I would say with $165 million of cash on hand to say that you won't grow against the revolver, I don't think you need to it's comforting, but maybe it doesn't say a whole lot. But there's certainly been financial news sources highlighting that there are groups out there talking about ways that they could maybe offer you additional liquidity. Maybe just comment on your openness and you think it makes sense now to consider such a move just in case that the downturn in pricing holds for longer than you expected? I mean sometimes it's better to just take the liquidity when it's offered and have it for a rainy day? Tim Flanagan -- Chief Executive Officer Yes. Thanks. And again, I'm not going to comment on market speculation or articles quoting unnamed sources. But I think to the latter part of your question, right, I think even since I joined two and a half years ago, we've always had a look to our balance sheet, our capital structure and try to be proactive in terms of refinancing the revolver, refinancing our notes. So we're always having conversations with our advisors, our banks about our capital structure and how to best optimize our positioning. But beyond that, I think we're comfortable with the liquidity position we sit in today. and we'll continue to work on the cost side of our business and focus on those things that we keep control. Matthew Vittorioso -- Jefferies -- Analyst Got it. Thanks for the time. Appreciate it. Operator Your next question comes from the line of Abe Landa from Bank of America. Please go ahead. Abe Landa -- Bank of America Merrill Lynch -- Analyst Good morning. Thank you for taking my questions. Maybe the first one, just on -- I know you've historically provided this, but there were needle coke prices in 1Q, and where do you see them now and kind of for the rest of the year? I know we see some charts on Bloomberg versus it looks like the Chinese version has kind of declined 10% year to date. Jeremy Halford -- Chief Operating Officer Yes. So looking at export statistics, what we would see is that things are pretty much where they were a quarter ago. We would be looking for pricing for super premium needle coke in the range of $1,000 to $1,300 for the higher rent or super premium needle cokes that are typically used in our applications. With regard to the rest of the year, of course, we don't know, right? As you know, needle coke pricing can be highly volatile reflecting the market conditions at the time. But currently, we see things at $1,000 to $1,300, but in the recent past, we've seen prices as high as $3,000 in 2022. And as low as $1,000 a year before that kind of consistent with where we find ourselves currently. So I don't really have a good guidance for you for where I think it's going to go for the balance of the year. Volatility is really kind of key in the needle coke space. Tim Flanagan -- Chief Executive Officer Yes. The only thing I'd add is, I think we saw a fairly steady quarter-over-quarter decline as we moved throughout '23. And now we've probably seen a bit of flattening of the pricing here over the last quarter or two, and it's held kind of in this range that Jeremy talked about. Abe Landa -- Bank of America Merrill Lynch -- Analyst That's very helpful color. And then if I look at Seadrift, I mean, how does your costs at Seadrift kind of compared to the market pricing today? And what is Seadrift utilization currently? And kind of how do you expect that to trend as well? Tim Flanagan -- Chief Executive Officer Yes. So Seadrift utilization is going to align with our overall kind of utilization rates, right? We're running Seadrift in line with kind of our internal demand for needle coke for our graphite electrode plants as we go forward. Kind of like our large electrode plants, right, running them at capacity makes them more cost effective. I'd say Seadrift is competitive in this market, but does not give us the same cost advantage that we normally would benefit from in being vertically integrated as you do when you see needle coke prices kind of more in the mid-cycle type levels or even the high end of the ranges that Jeremy was speaking to earlier. Abe Landa -- Bank of America Merrill Lynch -- Analyst That's very helpful. And then maybe my last question, this is kind of a follow-up question from an earlier one. You kind of mentioned an increased competition with the U.S. Is that primarily coming from like your traditional Tier 1 Japanese competitors? Or is it coming from kind of these other Chinese or Indian. Like I know one of the Indian competitors just added 20,000 tons of capacity. Just kind of more color on the competition. Tim Flanagan -- Chief Executive Officer Yes. So that 20,000 tons came on at the end of last year. But the competition really is from those Tier 1 competitors, right? I mean, again, the U.S. tends to be the strongest market out there, and you're seeing everybody fight for volumes in that market. Abe Landa -- Bank of America Merrill Lynch -- Analyst Thank you very much for that color. Appreciate it. Operator Your next question comes from the line of Kirk Ludtke from Imperial Capital. Please go ahead. Kirk Ludtke -- Imperial Capital -- Analyst Hello, Tim, Jeremy, Catherine. Mike, thanks for the call. Just a couple of follow-ups. This came up earlier. I was curious, could you expand on the on any pending trade restrictions, anything on the regulatory front that we might want to keep an eye on? Tim Flanagan -- Chief Executive Officer Yes. So just as a recap, right, you've got trade protections right now in the EU against both Indian and Chinese electrodes. You have trade protection in the U.S. against Chinese imports. And then I think all of those cases are pretty stable. I don't think any of them are coming up for renewal or rejudgment here anytime in the near future. I think there was just an announced trade case in Japan against Chinese electrodes. So I think everybody is starting to take note of what the Chinese are doing in the market. Outside of that, I don't think there's anything pending that I can comment right now. Kirk Ludtke -- Imperial Capital -- Analyst OK. I appreciate that. With respect to the monetization of the battery opportunity you reiterated, I think, 2026. When would you have to make a decision in terms of your capacity at Seadrift in order to participate on that kind of time line? Tim Flanagan -- Chief Executive Officer Yes. Jeremy, do you want to talk the construction time line and then we can come back to when we have to start making decisions? Jeremy Halford -- Chief Operating Officer Yes. So the -- we would expect the permit to come through sometime in the third quarter of this year is kind of our expectation right now on that. And then once we make a decision on an investment, we're probably looking at a time line of somewhere around 18 months, I would guess, for construction assuming that all the permitting is in place and we're in good shape. Tim Flanagan -- Chief Executive Officer And in terms of broader strategic time line and decision-making, it really depends on where we go with the process, right? Our ability right now, I just commented previously about Seadrift not running at capacity. If we just wanted to sell more needle coke into the market, we could do that and make that decision here today. Obviously, the further you go into the supply chain and the fully developing of an anode plant. That obviously will take a longer lead time just given the construction window that Jeremy pointed and also the capital requirements of that. So it really depends on where ultimately we land in terms of our position in the full value chain. Kirk Ludtke -- Imperial Capital -- Analyst Got it. And then lastly, have you recovered -- I know market share is a bit of a moving target, but do you feel as though you've recovered the share you lost pursuant to Monterrey? Tim Flanagan -- Chief Executive Officer Yes. I mean I think we talked a little bit about this at year-end, right? We're rolling off an environment where we're highly contracted. Obviously, we had the challenges that were caused by the shutdown of Monterrey. And we're doing all of this during a very challenging demand environment broadly from a market standpoint. So I think we made good progress in the commercial cycle that we concluded in the third and fourth quarter of '23, and we'll continue to work through it, but we're not going to get it all back just in one fell swoop. So we think we're headed in the right direction and making good progress. But you don't recover from everything just in one bidding cycle. Kirk Ludtke -- Imperial Capital -- Analyst Got it. Would you say that you're tracking on that front in line with expectations? Tim Flanagan -- Chief Executive Officer Very much so, yes. Kirk Ludtke -- Imperial Capital -- Analyst Thank you very much. Operator This concludes our question-and-answer session. I will now hand the call back over to Mr. Flanagan for closing comments. Please go ahead. Tim Flanagan -- Chief Executive Officer With that, I'd like to thank everyone on this call for your interest in GrafTech, and we look forward to speaking with you again next quarter. Have a great day.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and thank you for standing by. Welcome to the Goosehead Insurance first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Again, please be advised that today's conference is being recorded. I'd now like to hand the conference over to Dan Farrell, vice president, capital markets. Please go ahead. Dan Farrell -- Vice President, Capital Markets Thank you, and good afternoon. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of the management as of today. Forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you all to our recent SEC filings for a more detailed discussion of risks and uncertainties that could impact future operating results and financial conditions of Goosehead. We disclaim any intention or obligation to update and revise any forward-looking statements except to the extent required by applicable law. I would also like to point out that during the call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons period to period by including potential differences caused by variations in capital structure, tax position, depreciation, amortization, and certain other items that we believe are not representative of our core business. For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast. An archived version will be available shortly after the call ends on the investor relations portion of the company's website at goosehead.com. Now I would like to turn the call over to our chairman and CEO, Mark Jones. Mark Jones -- Chairman and Chief Executive Officer Thanks, Dan, and welcome, everyone, to our first quarter call. I'm very pleased with the progress we have made toward our goals. Personal lines insurance distribution is a quintessential long-tail business. I tell people all the time that it is not a give-away business. It's to get ridge over time but Staybridge business, driving substantive change in our company generally takes many quarters to achieve, but those changes when made tend to be very sticky and sustained. I am pleased to report that our hard work over the last year and a half bore more fruit in the first quarter. Franchise producer headcount has begun growing again. We ended the quarter with 1,963 producers. Our recruitment efforts to support franchisees that want to add producers are going extremely well with a total of 168 producers being placed in existing agencies during Q1. As a reminder, when an agency adds a new producer, on average, it improves the productivity of everyone in that agency. So, helping our franchise partners add producers remain an incredibly long lever for us and an important area of focus. Our focus on enhancing the quality of our producers is also driving very large productivity gains. First-year franchise productivity is up 86% year over year, but the gains are not limited to that cohort. Our existing franchises have delivered 19% same-store sales growth in the first quarter on the heels of 23% same-store sales growth in the fourth quarter. Our franchise network currently accounts for 78% of our premium volume. So, productivity gains here can really move the growth and earnings deals over time. We're also proud to have continued to deliver strong margins through smart cost discipline and maniacal focus on productivity. We believe all of these enhancements to be structural and will benefit our business for years to come. As I prepare to hand off the CEO role to Mark Miller, I'm very happy with the capabilities of our senior team and the way they are working so effectively together. While we're excited for these wins in the short term, we're facing some temporary headwinds. We are operating in the hardest insurance market and macro environment we've experienced in our 20-plus years in business. That being said, we know that insurance is a market that cycles between hard and soft and these cycles impact product pricing and availability with derivative impacts on client retention. Historically, hard market cycles last two to four years. Our current cycle has been amplified by the COVID Black Swan event, but we have reason for optimism as carriers report gains and profitability resulting from rate increases to cover inflation impact on claims costs, as well as product rationalization. When even California's insurance regulators allow carriers to price more rationally, you know that the first steps toward market normalcy are close at hand. An example of how this can affect our business in March, we saw same-store sales increases of 107% in California. There's a positive to the temporary market challenges we face in strengthening the long-term health of our business because we have been forced to level up our game, enhancing and hardening our skills and adding to our competitive arsenal. We are seeing very temporary challenges in our retention rates, but are highly confident we will return to our historically high retention as we progress through the current market cycle. While we navigate the current environment, we're committed to continuing to deliver on our earnings growth through aggressive cost management and careful scrutiny on where we invest the dollar of our capital and an hour of our time. Our smarter shareholders, and these are the bulk of our largest investors, understand the dynamics of our business, our structural improvements, and our transitory challenges. They invest for the long term and know these temporary headwinds will have a trivial impact on our long-term results. I'm pleased to announce that our board of directors has authorized a substantial stock buyback plan, which we will utilize as we see fit to take advantage of market dislocations. You'll hear more about this later on in the call. I believe we are better positioned today to deliver on our long-term goal, which is becoming the largest distributor of personal lines insurance in the United States during my lifetime than we have ever been in our company's history. We will continue to remain maniacally focused on what we do best, deliver world-class service for our clients, deliver the best agent experience, and bring the most favorable and attractive client risks available to underwriters and our carrier partners. Thank you to our team for delivering on another successful quarter. And with that, I will turn the call over to our president and chief operating officer, Mark Miller. Mark Miller -- Chief Executive Officer Thanks, Mark, and good afternoon, everyone. To summarize operations in Q1, I'll provide updates on three key areas: franchise productivity, commission retention, and producer headcount. First, let's dive into franchise productivity. The franchise network now accounts for 87% of our total agent count and 80% of new business production. After a 30% increase in franchise productivity in Q4 2023, we saw an even stronger 42% increase in Q1 of 2024. This improvement was led by an 86% increase in our less than one-year franchises. We note first-year productivity strongly correlates to long-term franchise success. So, we believe our newer vintage of franchises will perform very well for many years to come. We have had a relentless focus on quality over quantity for the past year, targeting candidates with the desire and strong skill set to grow a scaling multi-agent business. We're starting to see signs this strategy is bearing fruit as we continue to launch higher quality and faster ramping new franchises. If you dive into what's driving the increased productivity, it's primarily an increase in the number of referral partner leads per agent. With the challenging insurance environment, putting downward pressure on close rates, the only solution to drive productivity is to get more leads. And the best way to do that is by marketing to referral partners. Going into Q4, we doubled down on our referral partner marketing strategy. These efforts take time, and they had some impact on Q4, but they are the primary driver of Q1 productivity growth. As a reminder, ou r agents have access to an exclusive tool that shows them the production data of every loan originator in America. These mortgage professionals all have an insurance agent they refer clients to, but many are frustrated with that experience. Some refer business to a captive agent who only has one offering and may not be competitive. Others refer to an independent agent but they're frustrated by the turnaround time on proof of insurance, which can cause closing delays. Goosehead agents offer more value to these referral partners than any other agent in the industry. Our value centers on three components: choice. We have the most robust product offering in the industry to make sure we find clients the right coverage at the right price. Speed. We have a service team dedicated to servicing these referral partners, which means we can get them proof of insurance in under an hour partnership. Our local agents will partner with loan officers to market to realtors and generate more business. The challenging home insurance environment and higher interest rates have made our value proposition to these referral partners more pronounced than ever. We're also providing more support in training to our agents on executing the strategy than ever before. For example, over the past two quarters, we have been sending out sales leaders into the field to go execute on half-day referral partner visits with our agents. After one of these field visits, we generally see a greater than 75% lift in the number of referral partner leads that agent gets over the following month. In Q1, we saw a 27% year-over-year improvement in the number of deferral partner activations. This was the best quarter on record. We believe these investments will allow us to sustain high levels of productivity for years to come. What's more exciting is that as the housing market improves, these new referral partners will send a higher volume of leads to our agents. And as the insurance market improves, our agents will close those leads at higher rates, leading to increased productivity. We are incredibly encouraged by the trends in the franchise productivity. As a reminder, these productivity gains do not immediately materialize on our revenue line. They will, however, boost revenue as policies renew in the second year as royalties contractually go from 20% to 50%. Second, let's dive into commission retention. Because of a combination of inflation, higher reinsurance costs and unprecedented weather activity, insurance underwriters experienced some of the worst results on record in 2022 and 2023. To fix that, carriers have taken aggressive price increases, changed underwriting guidelines and decided to not renew many policies. Nowhere is this more pronounced than Texas homeowners insurance, our largest concentration of clients. Texas homeowners insurance went up over 20% in 2023, over twice the national average rate. These rate increases have led to unprecedented shopping activity. In addition, in Texas, there are a few large captive carriers who haven't raised rates as aggressively and are losing billions of dollars. These losses are not sustainable with increased shopping activity and mispriced captives that have led to a decrease in client retention. In addition, two carriers who have been under extreme financial distress significantly lowered commission rates, which is having a near-term negative impact on our commission retention. Importantly, the carriers who are truly partners such as Progressive, SageSure, Safeco, and Mercury among many others, have taken a long-term view and not impacting commissions at all. These carriers know that agents have a long-term memory and they want to maintain a great reputation so that they can start growing again when the time is right. The good news is we see no impediment to being able to get back to our historic retention levels as the market heals. Texas is generally a more flexible state that will allow insurance carriers to make the changes they need in order to open back up for business. Many carriers are moving to higher deductibles and depreciable roof schedules to create a product where they can be profitable. As our carrier partners open back up and the captive carriers raise rates, we believe our retention will go back to 89% plus. Third, let's dive into producer headcount growth. We continue to believe that helping our existing franchises add producers is one of the longest levers in our business, helping source a new producer for an existing franchise provides incredible value to our franchises and is very low cost for us. Every new producer added to a high-performing franchise is the equivalent of launching almost two new franchises. Additionally, when a new producer is added, we see productivity of everyone else in the franchise increase. Our scaling franchises added 168 producers in the quarter through a combination of our corporate recruiting program and their own sourcing efforts. Producers per franchise ended the quarter at 1.7, compared to 1.6 in Q4 and 1.51 a year ago. Our team dedicated to recruiting franchise producers now total 17 and we expect this team to help us add several hundred more producers to the franchise network this year. As a result, we believe overall franchise producer count will grow from current levels, and we will see an increasing number of agents per franchise. Franchise producers ended the quarter at 1,963 up from 1,957 in the fourth quarter. This represents the first sequential producer growth in the last six quarters. One great example of an agency adding agents quickly is the Gary Miller Agency out of Flowery Branch, Georgia. Gary has no relation to me, launched back in March of 2020, and he has been a part of our agency staffing program since inception. Gary has hired six producers in his agency as a result. He has had great success utilizing this program, particularly with the producer, Zach Miller-Hogg. Over the quarter, Zach produced approximately $15,000 of new business revenue per month, which is around 2.6 times higher than the average producer in Georgia. We will continue to assist Gary in recruiting top talent to his agency as his hiring needs continue. In corporate, we've had tremendous success with college recruiting and have locked in the majority of signings for our summer class. We expect to end the year with at least 375 corporate agents. Many of these agents view their time at corporate as a paid apprenticeship. They come in for a few years, learn to be an expert at their craft, develop a large referral partner network, gained leadership experience, and then go launch a franchise. This opportunity is allowing us to attract higher-caliber talent than ever before. One example of this is Noah Taxman. Noah joined our Denver corporate office in August after graduating from the University of Denver. He immediately found success activating new referral partner relationships and started generating over $20,000 per month in revenue within three months. Now Noah is in his seventh month, he is now generating over $30,000 per month in revenue and continuing to grow. Noah will likely earn over $175,000 in his first year out of college, and he will have many compelling Goosehead career options in the future. This opportunity is unrivaled on campus, and we continue to recruit top talent to join an industry that has historically struggled to do so. Recruiting this level of talent and then launching them into franchises remains one of our largest competitive advantages. We will continue to capitalize on this strategy and grow our corporate team up to our absorptive capacity. To summarize, in Q1, we created structural changes that are here to stay. We're incredibly excited about the gains in franchise productivity and headcount growth. We know the market headwinds will eventually abate. And when they do, we believe we are perfectly positioned to rapidly reaccelerate revenue growth. We're extraordinarily confident we have the right strategy and the right team to execute our long-term vision of becoming the largest distributor of personal lines insurance and our founders lifetime. With that, I will turn the call over to Mark Jones, Jr. to give more color on our financial results. Mark Jones -- Chairman and Chief Executive Officer Thanks, Mark, and good afternoon to everyone on the call. In the first quarter of 2024, we began our growth reacceleration phase. Total revenue, core revenue, new business premium growth, and franchise producer count all accelerated sequentially over the fourth quarter of 2023. On top of that, we generated more cash than in the first quarter in any year in our company's history. We have placed a tremendous amount of scrutiny in every aspect of our business within our control and made strategic decisions to minimize the impact of forces outside of our control. Quarter end, total franchise producers were 1,963 up from 1,957 as of the year-end. As Mark Jones mentioned, our existing franchises added 168 producers into their agencies, growing our producers per franchise for the fifth consecutive quarter to 1.7%. As a reminder, adding a producer to an existing agency typically drives the production equivalent of two new agencies. Our agency staffing program has been delivering strong results, which should drive a virtuous cycle of continued momentum in the franchise business. Each time a franchise onboards a successful producer, they become more confident in the program and generate cash flow to fund the next producer and overall growth of their agency. As a reminder, each time a producer is added to a franchise, it improves the productivity of everyone in that agency. This remains an incredibly powerful tool for future new business growth. Corporate producers at quarter end were 292, up 6% from the prior-year period. We are excited about the health of our corporate team, and we're now in a position to onboard a new class of college recruits over the summer. We've already locked in a significant portion of our summer class with approximately 65% of planned hires having already signed their offer letters. We expect by the end of the year, our corporate agent headcount will be over 375, which sets us up to drive further acceleration in new business production in 2025. Mark Miller discussed some of the challenges we have faced in the carrier environment and how those have impacted not only new business generation, but also retention rates. One avenue we've taken to combat those impacts is to increase our marketing efforts to drive additional lead flow. Because our close rates have seen a temporary decline, we need to generate more at the top of the funnel to fill the gap. In the first quarter, in the face of cyclical lows in housing activity, we generated a 31% increase in lead flow per agent over the prior-year period through a combination of increased share of wallet with our existing referral partners, new referral partner activations and lead flow diversification from strategic partnerships. As the temporary headwind of product availability inevitably abates, we believe there is significant upside in productivity through converting a higher percentage of this increased lead flow. Total written premiums, the leading indicator for future revenues grew 28% over the prior-year period to $819 million. This includes franchise premium growth of 32% to $650 million and corporate premium growth of 15% to $169 million. The first quarter was the second consecutive quarter we observed an acceleration of new business premium in both distribution networks, with franchise new business premium up 19% and corporate new business growth, up 11%. The building momentum in new business premium is being partially offset by the continued slowing of our renewal premiums due to declining retention rates related to the temporary market challenges. As carrier profitability is restored through a combination of pricing increases and modifications to underwriting models, we expect that our client retention will progress back toward our historical long-term average of 89%. We've made significant investments and improvements in the quality of our service function that give us confidence in our ability to drive increasing client retention as the carrier market normalizes. Total revenue for the quarter grew to $64.5 million, representing 11% growth over the prior-year period, with core revenues of $58.8 million, representing 13% growth over the prior-year period, both accelerating sequentially over the fourth quarter of 2023. As we have previously mentioned, a larger and accelerating portion of our core revenues is being driven by the franchise network with 60% of the first quarter's core revenue coming from royalty fees, compared to 55% in the first quarter of 2023. We expect this trend to continue as franchises onboard producers and reduce the productivity gap between the average corporate producer and the average franchise producer. This has a lag effect on revenue growth rates as we recognize only our 20% royalty fee in the first term of policy, which steps up to 50% in each subsequent term. Policies in force grew 13% versus the year-ago quarter as the temporary decline in retention rates are muting the impact of improved new business generation. We expect to see a reacceleration in the policy-in-force growth rate beginning in the third quarter of this year. Contingent commissions for the quarter were $2.7 million versus $1.9 million a year ago. For 2024, we are assuming contingent commissions to be roughly 35 basis points of the total written premium. We are expecting approximately $1 million of contingent commissions in the second quarter, compared to $4 million of contingent in the year-ago period. Longer term, we expect to see contingent commissions returning to the historical average of 80 basis points of total written premium. However, we are remaining cautious and prudent in our near-term forecasting as the timing and pace of the recovery of profitability for carriers, a major driver of continued commission has uncertainty and is not entirely within our control. Cost recovery revenue for the quarter was $2.5 million, compared to $3.5 million in the year-ago quarter. For 2024, we are expecting cost recovery revenue to decline moderately from the 2023 levels as we have dramatically improved the health of our franchise network, resulting in fewer franchise terminations and less accelerated recognition of initial franchise fees for GAAP purposes. It is important to remember that this changes nothing from a cash basis as we collect franchise fees at the time of training and they're nonrefundable at that point, but we are required to recognize the revenue over a 10-year period or the life of the franchise. Adjusted EBITDA grew to $11.7 million in the quarter, compared to $10.2 million in the year-ago period. Adjusted EBITDA margin for the quarter held steady at 18%, compared to the year-ago period. We continue to expect total margin expansion for the full year as we remain focused on cost management to mitigate the bottom-line impact of moderately lower revenue growth expectations for the near term. We expect the majority of the margin expansion for the year to occur during the fourth quarter as our class of new corporate agents ramp up production, the accelerating franchise new business from the fourth quarter of 2023 converts to more profitable renewal business and the timing of year-over-year contingent commissions. As a result of increased business in various geographies, we have now met certain state tax nexus thresholds, which result in additional state tax filings. Because of these additional state tax filings, our significant deferred tax assets produced large-state deferred taxes resulted in a current period benefit for future state tax deductions. As of March 31, 2024, we had cash and cash equivalents of $51 million. Our unused line of credit was $49.8 million, and total outstanding term notes payable balance was $75.6 million. Operating cash flow generated in the quarter was $11.9 million, compared to the use of cash of operations of $639,000 a year ago. Our free cash flow generated in the quarter was $9.1 million, compared to a use of cash of $4.2 million in the year-ago period. As a reminder, the first quarter generally represents our seasonally weakest quarter of the year from an earnings and cash generation perspective. Given the uncertainty in the carrier product environment and its temporary impact on client retention, we are revising our guidance for the full year. As a reminder, our philosophy on guidance is to be as transparent and accurate as possible. We guide to what we actually believe we will achieve for the year. For the full year 2024, total written premiums placed are expected to be between $3.62 billion and $3.82 billion, representing 22% organic growth in the low end of the range and 29% growth on the high end of the range. Total revenues are expected to be between $290 million and $310 million, representing 11% organic growth in the low end of the range and 19% organic growth in the high end of the range. Adjusted EBITDA margin is expected to expand for the full year. The reduction in the high end of our guidance marginally incorporates the experience we've seen in Q1. The low end of our guidance range is incorporating the possibility of continued temporary decline in retention rates and performance of the renewal book in the near term. We've made significant structural and foundational improvements to the core business that we believe will continue to drive performance for many years to come. The insurance market has a long history of hard and soft cycles and the current challenges we are facing are transitory. We remain incredibly excited about the future of our organization and have more confidence in the underlying operations than ever. Our balance sheet flexibility and strong cash generation provide us with additional options to create shareholder value. Our current net debt to trailing adjusted EBITDA is just 0.3 times. And over the last 12 months, we've generated operating cash of $63 million. Historically, we have favored returning significant excess cash to shareholders in the form of special dividends. However, we believe there's a significant dislocation in our current valuation versus our long-term earnings growth expectations. As a result, our board of directors approved a $100 million share repurchase authorization in connection with an upsizing of our existing credit facility. The upsized facility will include an expansion of our revolving credit facility to $75 million and an increase of the total term loan of $25 million, while maintaining the existing pricing grid and tenor of the agreement. Given our current valuation, we believe that shares a dosed stock represents an attractive buying opportunity. I want to thank our leadership team, our service team, our sales agents, our carrier partners and our shareholders for their support as we continue on our path to industry leadership. With that, let's open the line up for questions. Operator? Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Matt Carletti with Citizens JMP. Matt Carletti -- Citizens JMP -- Analyst Hey, thanks. Good afternoon. Mark Jones -- Chairman and Chief Executive Officer Hey, Matt. Matt Carletti -- Citizens JMP -- Analyst My first question is a little bit asking if you fit out your crystal ball, but you obviously talked a lot about the product environment. And I think that's no surprise like anybody is paying attention to personal lines, I think, is talking about it a lot. Just where do you think we are kind of in that process? Like you guys see it on the ground day to day. Does it feel later innings? Are you starting to feel that the underwriters are thinking they're in a good spot in terms of pricing and getting changes in terms of conditions into the book and you expect an improvement in the not-too-distant future? Or do you think it's a little more middle innings and time will tell. Mark Miller -- Chief Executive Officer Matt, this is Mark Miller. How are you doing? Matt Carletti -- Citizens JMP -- Analyst I'm good. How are you? Mark Miller -- Chief Executive Officer I'll start and then I think Brian and I are probably closest to it because when the carrier executive teams come in, we usually talk to them. I would say break it down by home and then auto or auto then home. I would say auto is improving more quickly toward the end of that cycle, and we're starting to see some of the major carriers come back in. On the home side, our expectation was it would start to recover by kind of this time about, and it's been slower than our expectations would be. We still have carriers that are in the market and offering product at reasonably good prices, but the broader coverage of places like Texas, pretty tough right now still. So, we're waiting and seeing. But I don't know whether we're at the end of the cycle, but I would say we're toward at least the middle of it and coming out of it. But Brian, what's your opinion? Brian Pattillo -- Vice President, Strategy Yeah, I think that's exactly right. When you look at progressive results, you have been posting mid-'80s combined ratio. They're looking to dial up growth now and they're starting to dial back restrictions. Some of the bundled carriers are waiting to dial back auto restrictions until the home is in a better place. And to add to Mark's point, I think home is a little bit still wait and see, especially in markets like Texas. So, I think probably more middle innings on home, later innings in auto. Matt Carletti -- Citizens JMP -- Analyst Yeah. That makes sense. I mean we see a big correction like California which gives me some optimism -- Mark Jones -- Chairman and Chief Executive Officer We are seeing some early -- this is Mark Jones, Matt. We are seeing some early progress in that the -- like, for example, progressive home, their combined ratio has come down substantially from its size, which doesn't necessarily mean that we're at the end of the game yet, but it is at least, it's a light at the end of the tunnel and we don't think it's a train. Mark Miller -- Chief Executive Officer Yeah. And the ones that moves quickly, I think the -- so it's different by carriers. Some moves quickly and raise their price and they're becoming profitable now. Other ones relate to the game. And like we've said on the call, there are a handful of captives that are mispriced compared to everybody else but have not raised the price yet. So, it kind of depends on what they do. Matt Carletti -- Citizens JMP -- Analyst Got it. And then if I could ask you, was the right way to ask this is, but I guess, like you provided the 24% guidance and you got a little more conservative and I thought you made a lot of really good color on why that is. I'd imagine you have some form of '25 guidance internally. As you think through this being temporary and understanding your model in terms of how premiums convert to revenue and things like that, given kind of the change in the '24 guidance over the last quarter or so, was there any change in that kind of internal view of what '25 might look like staying better or worse? Mark Jones -- Chairman and Chief Executive Officer No. Matt, this is Mark Junior Jones. Looking at 2025, we're going to be putting a lot more players in the field here over the next few months as we onboard the new college class and our first-year corporate agents are ramping up just as well, if not better, in many indications they have in the previous year. So, we feel very good about that. And our existing agencies are continuing to hire. You saw that producer count numbers grow sequentially for the first time this quarter in a while. So, we feel very good about the new business generation looking into 2025. And our expectation is as the product market normalizes, you actually sort of get a tailwind from client retention as opposed to as big of a headwind as it has been right now. So, we do not really have any changes in expectations for what 2025 or longer than that looks like. And the other thing is as carriers restore profitability, the contingent commission number starts to look very attractive as you grow your premium base and start to get a higher percentage of that as contingencies, which are, again, 100% earnings. The other point I would make is we made comments in the prepared remarks that we've taken steps to kind of rationalize the cost base to make sure that we don't sacrifice bottom-line earnings where we're kind of dealing with a short-term headwind revenue growth number. All of those costs don't immediately get put back in the P&L in 2025. So, you come out of this leaner and more effective as soon as you get to some more normal product environment. Matt Carletti -- Citizens JMP -- Analyst Yeah, super helpful. Thank you for the color. Mark Jones -- Chairman and Chief Executive Officer Thanks, Matt. Operator Our next question will come from the line of Brian Meredith with UBS. Brian, your line is now open. Brian Meredith -- UBS -- Analyst Thank you. A couple here for you. First, I'm just curious, looking at and maybe that's just to do with the fact that you're getting some commission rate cuts. But if I look at corporate, call it, core revenues divided by, call it, corporate written premium, and the same thing for franchise called fees divided by the franchise kind of premiums. It's kind of been consistently declining over the last couple of years. I'm curious, is that because of what's going on with commission rates? Or is there something else going on there? Brian Pattillo -- Vice President, Strategy Yeah. So, commission rates is part of it, and we mentioned it's just a couple of carriers. It's not a broad-scale issue. A lot of it is just as the mix shifts from the corporate side, driving the majority of -- not necessarily the majority, but the majority of the growth in new business production to the franchise side driving the majority of the growth that naturally just causes the lag from premium revenue growth, considering 20% on the first term of a policy and 50% subsequent to that. That's really the largest driver of that. And we talked a lot about over the last couple of years, the rationalization of the corporate team after we kind of peaked at that 506 headcount. That just causes a little bit of a short-term drag in your total aggregate new business production, although it made material improvements to the health of the corporate team, it was the right decision. But we expect that to continue to grow into the future, which you'll see that flow into renewals in the following years. Brian Meredith -- UBS -- Analyst Gotcha. Would the mix of auto versus home affect that too, though would assume auto commissions are lower than home? Brian Pattillo -- Vice President, Strategy We don't see a big difference in commission rate between product lines. Where that would be impacted is just a carrier do not renewing a policy, whether it's a home or an auto. So, if your auto is retaining better because carriers feel like they've got better pricing, to the extent a disproportionate amount of your book is home that could impact you there, which ours is 55% home. Brian Meredith -- UBS -- Analyst Gotcha. And then my second question, just curious, looking at your corporate sales agents with greater than one-year tenure to continue to decline. Is that going to be bottoming out here soon? And I appreciate you're going to have a lot more corporate agents at the end of the year, but I assume that's going to also meaningfully impact productivity overall is you've got a much lower percentage of one-year tenured agents are greater. Brian Pattillo -- Vice President, Strategy Yeah. I mean we talked about this a little bit in the last call. As you continue to launch out franchises and promote people into management out of that tenure bucket and naturally kind of places the cap and what that productivity looks like because you're taking your best, most productive agents and putting them into a different distribution network, either on the franchise side or in management. So, I don't necessarily expect to continue to see the slide that we have seen this year. But you got to remember, looking at this year versus last year, we just have started the franchise launch program. And so, you've got 35 people at this point who are included in that number at the beginning of last year, who are now not included in that number. So, as your year-over-year trend normalizes looking into 2025, you shouldn't see that kind of impact. Although you may see a little bit more of that this year as we continue to pump out more franchises and the year-over-year numbers look a little skewed. Brian Meredith -- UBS -- Analyst Great. Thank you. Operator Thank you. One moment for our next question. Our next question will come from the line of Michael Zaremski with BMO. Michael Zaremski -- BMO Capital Markets -- Analyst Hey, good afternoon. Maybe going back to the comments about some carriers cutting their commisions. I guess just look in hindsight, I think it kind of makes sense being an analyst because the carriers are seeking to improve their profitability. So, I'm just kind of into the lever, but I'm just kind of curious then if -- how much of this is just a new trend that just surprised you all and you're baking into your guidance in case other carriers do the same? And then on contingent I'm assuming that this would impact contingent. So, unless the carriers eventually went back to the old better commission structure, I would continue to go back to their historical levels over time. Brian Pattillo -- Vice President, Strategy Mike, just to your comment on the guidance, we are not expecting to see any more of that. This is very isolated situation, and Mark Miller can give some more color on that. It also shouldn't impact the contingent commissions because those are not carriers that we were receiving contingencies from in 2023 or we're expecting to in 2024. So, it doesn't impact what the medium or longer-term outlook on contingency look like. And also, I would argue that the vast majority of carriers understand the benefit of having an independent agent that knows how to distribute your product very successfully. And this is a very shortsighted move. Mark Miller -- Chief Executive Officer Yes, this is Mark Miller. I'll just jump on that comment for a second. First of all, I think this is short term in nature. I've not seen or had any discussions with any other carriers. These are two carriers that, as we mentioned in the call, they were financially distressed, they came to us and said, we are in a financial position where we need to back away. So, this was Homeowners of America and HIPPO. They wanted to pull out of the market and they wanted to reduce commissions as a result of it. One of those carriers dramatically changed the contracts for our clients underneath it as well. So, it's not even the same paper. I haven't seen that out of any other major carriers other than those two. And the market naturally adjusts to the carriers that have the right paper at the right price. In this case, they don't, so the market is correcting itself. So, when I say it's temporary, the business starts to move to other carriers. Michael Zaremski -- BMO Capital Markets -- Analyst OK. Just switching gears a bit, and I believe you teased this out in the prepared remarks, but I just want to ask it because I feel like it's more complicated. So, when we look at the revenue guide versus the premium written guide, you have a much bigger decline in the guide on the revenues. And so, are you explaining that more of your revenues or more of your premiums are going to come from the franchise segment from new producers. So, that's driving the delta? Or is there more -- or is that an offer as a lower commission? Mark Jones -- Chairman and Chief Executive Officer Yes, that's exactly right, Mike. So, with the performance we've seen thus far this year, the franchise side of the business is doing a really, really great job of continuing to drive productivity, and our expectations now will happen for the remainder of the year as well. And so, you feel the impact of that immediately in premium. That's why you see the premium guide move is not as large as a revenue guide move, but that doesn't have the same impact on revenue, right? It's $0.20 on the dollar. So, you're exactly right on that. Michael Zaremski -- BMO Capital Markets -- Analyst OK. Got it. I guess, lastly, I don't know how much you can say, but there have been rumblings in the trade rags, insurance trade rags about a very large auto insurance carrier, maybe the third largest in the US potentially looking to enter the AI channel. I don't know if you could say anything. Or is that something that you've heard too or maybe that could help in terms of the product you all have to offer your clients? Brian Pattillo -- Vice President, Strategy This is Brian. Yes, our belief, I mean we've seen this trend happen for years now where there's been movement both on the captive side and on the direct side toward the independent channel. If you look at some of the big captives have made big acquisitions and done moves to focus on a choice model and then similar in direct companies that really sought to go direct-to-consumer, has pivoted going to a dual distribution model really following Progressive news. We know that what progressive calls the Robinson Client, right, $200 billion of the market is the preferred home auto customer that retains performs well. I think every auto carrier wants more of that type of business. So, I can't speak to any specific carrier, but we do believe that the trend will continue and that more of the direct carrier and captive will embrace independent distribution to go after that segment of the market. Michael Zaremski -- BMO Capital Markets -- Analyst Thank you. Operator Thank you. Our next question will come from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman -- TD Cowen -- Analyst Hey, everybody. And I apologize in advance for the background noise. But before I get into my questions, can I just ask a couple of quick statistics. One being you're citing 89% retention. Where was it this quarter? And then with regard to HIPPO and Homeowners of America, what percentage of your book of business are those two carriers? I mean, it kind of sounds like a real nonevent when I hear the names of these two components. Mark Jones -- Chairman and Chief Executive Officer Andrew. So, client retention for the quarter, 85%, just to hit on your first one. On your second question there, we have been in business with Homeowners America for a very long time. And so, over a period of time, we've built up a really nice partnership and a relatively sizable book of business. And as they've made decisions that they're going to make, a lot of that book of business has rotated off to other carriers as naturally the value to the client and to the agent has declined in that product. So, just naturally, that happens. It may not have seemed like that's a super big carrier, but they were a relatively important partner for us in the early days. Andrew Kligerman -- TD Cowen -- Analyst So, that has -- Mark Miller -- Chief Executive Officer As Mark is saying they were really big HIPPO and auto [Inaudible] for us. Andrew Kligerman -- TD Cowen -- Analyst I see. And the commission reduction, how much was that? Mark Miller -- Chief Executive Officer Yeah. I don't think we're going to get into specifics on the rate, but it was enough for us to call it out. Andrew Kligerman -- TD Cowen -- Analyst OK. Fair enough. Thank you. And then with regard to expenses, I saw that G&A only went up 8%, which was great. But the employee comp was up 14%, you listed out a lot of reasons in the press release, but I'm wondering if you, A, could have tempered that a bit more; and B, maybe clarified a little bit why it was up that much just given the pressures on revenue. Brian Pattillo -- Vice President, Strategy I mean, how we secure our future revenue growth is by continuing to hire and onboard really, really talented people. And so, we've said forever our secret sauce is that human capital we're able to bring to the table that's so differentiated in the industry. So, we believe strongly and continue to do that. So, while we can manage the cost bar very well with G&A on that side of the business, I don't want to limit who we're hiring and who we're bringing into the system because that's going to be a short-term decision that's going to have long-term impact. Andrew Kligerman -- TD Cowen -- Analyst That makes a lot of sense. And then just lastly, there was some new legislation reducing commissions to real estate agents. Does that concern you at all? Should that have any pressure on you as you move forward? Mark Miller -- Chief Executive Officer I mean we've seen some recent interest on the franchise side of real estate brokers wanting to get into insurance as a side business, but I haven't seen any other negative to our business. Andrew Kligerman -- TD Cowen -- Analyst So, the fact that they're seeing lower commissions isn't going to -- I mean home sales will be what home sales will be and you'll still get your leads? Is that how you're thinking about it? Mark Miller -- Chief Executive Officer Correct. It doesn't change our relationship with the real estate brokers and real estate volume is going to be a real estate volume is, but I think we're getting an upsized percentage of the leads that come out of the industry and growing well, and we're also targeting for the referral partners, the highest volume realtors and they're not going to be the ones that are affected. It will be the lower-productivity realtors to get squeezed. And so, that will have much less effect on us. Andrew Kligerman -- TD Cowen -- Analyst Got it. Thanks so much. Mark Miller -- Chief Executive Officer Thanks, Andrew. Operator Thank you. One moment for our next question. This question will come from the line of Tommy McJoynt with KBW. Tommy McJoynt -- KBW -- Analyst Hey, good afternoon. Thanks for taking my questions here. You gave a good explanation on sort of the bridging the change in the guidance on the revenues. I just want to make sure I understand kind of the lowering the lower end of the range on the premium side. If you could just kind of bridge what changed there in terms of -- was it rate policy count number of producers just explaining that premium change? Mark Jones -- Chairman and Chief Executive Officer That's largely a function of retention. And so, if we don't get the home market to stabilize as quickly as we would like, there is the opportunity for client retention to continue to slide a little bit more throughout the year. Now we have seen the peak of what we believe that do not renew from carriers is, so we should be on the back half of that. But really, it's a function of client retention being slightly lower than what it has historically been. So, certainly, if that returns faster than what we are expecting, you could see that premium number be closer to the high end of the range, but I would rather be conservative in the forecasting. Tommy McJoynt -- KBW -- Analyst OK. Got it. And then just the other area of question on the expense side, and it sounds like you may have touched on this, but do you have visibility into what equity-based comp should be for the rest of the year? And then as we think about kind of into 2025, is there any reason that it should either step up or step down year over year just given what you know about vesting schedules related to that? Mark Jones -- Chairman and Chief Executive Officer Yeah. Looking at Q1 as your past estimate for what it should be that full year. So, typically, the first quarter is when you get new options awarded to the managing directors here. And so, then that -- a similar number to that would be recorded in each quarter of the year. Looking at 2025, there will be additional options that are awarded to the senior team and at which point you would see a step up in equity-based compensation. Just as a reminder, our philosophy on that has been kind of between 1% and 2% of the share count is an appropriate level for the dilution because the Black-Scholes valuation given the volatility in our stock tends to overvalue the actual economic reality of those options awarded to the employees. Tommy McJoynt -- KBW -- Analyst Got it. Thanks. Operator Our next question will come from the line of Mark Hughes with Truist Securities. Mark Hughes -- Truist Securities -- Analyst Good afternoon. Do the new do not renews go into the 100% premium retention measure? Mark Jones -- Chairman and Chief Executive Officer Yeah, they do because that would be a premium that was on the books last year and will not be on the books this year. And so, that premium retention is a trailing 12 number. And so, it's kind of got a lag effect on what exactly is happening in the book. But yes, they are included in that. Mark Hughes -- Truist Securities -- Analyst OK. So, it's trailing 12 And then you talked about the NAR settlement. Can you have a rough breakout for how much of your business comes from realtor versus, say, a mortgage lender? Mark Jones -- Chairman and Chief Executive Officer I would say definitely a majority mortgage lenders. We work quite a bit with realtors. But obviously the majority I mean, I think probably of that 75% plus comes from lenders. If you look at our referral partner business altogether, which is roughly two-thirds of our new business, probably 75% from lenders is maybe 25% from realtors. Mark Hughes -- Truist Securities -- Analyst Very good. Thank you. Operator Our next question will come from the line of Paul Newsome with Piper Sandler. Paul Newsome -- Piper Sandler -- Analyst Good afternoon. Thanks for the call. I wanted to revisit the guidance change and just sort of laying down sort of the pieces. I would have thought that sounds like retention is a problem, commissions were down and -- but that should have been offset by the fairly large price increases we've seen for home and auto. I guess the question is, is there another piece in there that we're missing? And I was thinking, for example, are we actually thinking more policy in force growth will slow, as well as part of that equation. Mark Jones -- Chairman and Chief Executive Officer Yeah. Paul, I think we said in our prepared remarks, we would expect policy-in-force growth rate to reaccelerate in the third quarter of this year, which we do believe that will be the case, which means you do have one more quarter of deceleration in that number. Now it's still, I think, relatively strong growth. It's not what we've historically done, but we fully believe we'll be able to drive back to kind of our historical numbers on policy in force growth rate. The revenue guide is truly a function of client retention as a temporary, very temporary headwind. We expect that that will improve ideally by the end of this year, but certainly in 2025, at which point it becomes a tailwind. But the new business productivity, especially, on the franchise side of the business is doing very, very well. And that's why you see the premium number not move as much as the revenue number. Paul Newsome -- Piper Sandler -- Analyst So, just to do a little bit, was the actual sort of push out of the decelerated PIP growth the quarter before that unchanged from -- with the prior guidance is? Mark Jones -- Chairman and Chief Executive Officer No, that number is unchanged. It's just a function of the amount of policies that are renewing. So, maybe it's moved by a couple of weeks. It's not necessarily moved massively. But if you just think about how much of the book is home and how challenged the home environment is now, it's challenging to keep those clients on if they're getting a 100% price increase. Paul Newsome -- Piper Sandler -- Analyst And my second question, we were talking about productivity for the agents. Is that an average number? Or are we looking at sort of by cohorts? And I would imagine cohorts as they age become more productive regardless. So, I was wondering if there's any way to sort of tease out what is sort of actual productivity of like the average this year is much better than the average. But maybe that's happening, but maybe you could talk to that. Is it -- because getting rid of your poor agents would automatically improve productivity just from an average perspective, but maybe is there actual by cohort productivity improvements that you can talk about? Mark Jones -- Chairman and Chief Executive Officer Yes. Yes, there definitely is. So, if you look at the productivity disclosures that we provide, you'll see it broken down into less than one year greater than one-year agents on both the branches and the corporate side. On the corporate side, the tenure of that bucket is actually a couple of months lower this year than what it was last year, just from timing of onboarding. And so, the ramp-up of those agents is just as good as it was in the previous years. We feel very good about that first-year corporate agent productivity. On the greater than one-year bucket, we talked about a little bit already that transition of corporate agents into franchises or in management. And so, if you adjust it for those items, you can do the math, it's around 19% productivity improvement if you kept those same agents that launched franchises in that greater than one-year corporate bucket. So, we are seeing very strong productivity improvements, I believe, in the corporate side. On the franchise side of the business, it's even more profound. And so, if you look at just the same-store sales numbers, which has nothing to do with the amount of agents that you're pulling this franchise existed this year and this franchise exited last year, Q4, that number was 22%. It's up again another 19% in Q1, and we feel like that's going to continue to grow. So, we feel very good about the productivity of the agent force, and we don't necessarily see a cap on that in the near term, especially if you get some product tailwinds. Paul Newsome -- Piper Sandler -- Analyst Great. Appreciate the help as always. Operator Thank you. Our next question will come from the line of Scott Heleniak with RBC Capital Markets. Scott Heleniak -- RBC Capital Markets -- Analyst Yeah, thanks. I just had a quick question on the franchises. You talked about adding hundreds more on the franchise producers. Is that mainly going to be to the existing franchises like you have now? And can you talk about the franchise conversions? Are they still on track? I think you had said before 30. You didn't mention in the prepared remarks. So, I was just wondering if that's still expected to be the case. Mark Jones -- Chairman and Chief Executive Officer Yeah. So, I think we've talked about this year in 2024, it would be more like $20 million to $30 million, not necessarily that full $30 million. Remember, we started the year with less corporate agents in 2024 than we did in 2023. So, which is a smaller pool to pick from? As that team grows, which it will, in 2024, we indicated in the prepared remarks that we'll be over 375 by the end of the year. So, we feel great about that. But producers into existing franchises, yes, that will be hundreds more this year. We're going to continue to launch more high-quality franchises. But I think the vast majority of your producer growth is going to be coming out of producers into existing agencies, which obviously, just as a reminder, creates much more productive capacity than adding a new franchise. Mark Miller -- Chief Executive Officer Half of those people being added to the franchises come through our recruiting program that we've established, which I said has 17 recruiters now doing nothing but full-time recruiting for franchises. The other half come from franchises recruiting on their own. And then we're less worried about the quantity of new franchises that we launch and more about the quality of the franchises. And so, we're just being very selective about people we're letting into the franchise network right now and being very selective about the state. So, we're very state-specific right now in where we need to grow geographically. Scott Heleniak -- RBC Capital Markets -- Analyst Got it. Understood. And then just a quick question. Mark, you referenced the margin expansion comment. You said most of that would come from Q4. Do you still expect margins to be up in Q2 and Q3 year over year? I know the majority is Q4, but do you have anything you add to Q2 and Q3? OK. And just last one, too, on retention. I know it's been talked about a lot and you're targeting 89% or 85% now. But is that being dragged down by what's happening in Texas? Is it significantly different by state and so things lift in one or two states and it kind of brings it up? Or is it just pretty similar across the board? Mark Jones -- Chairman and Chief Executive Officer Yes. I mean all states have a bit of a retention issue compared to our historic numbers, but Texas is, by far, our largest state. Home is our largest product and Texas is really suffering right now just from availability of product. And one indicator of what's going on is Texas premiums are up, I believe the number is 23% year over year. If you look on a national average, they're up about 10% or 11%. So, it's up twice as much in our shopping activity mirrors that. So, we look at how many people we have asked them for reshop, they get upset when their price goes up by a certain amount, that's a trigger point. So, 20%, I want to shop. And so, shopping activity for the number of policies is up twice as much and a lot of that is coming out of Texas. And so, until the home carriers come back into the market, we're going to fight retention as hard as we can, but it's going to be a struggle. Scott Heleniak -- RBC Capital Markets -- Analyst Yeah, no, that's a good detail. Thanks a lot. Operator Our next question will come from the line of Pablo Singzon with J.P. Morgan. Pablo Singzon -- J.P. Morgan -- Analyst I just wanted to follow up on the commission disclosure. When were they thought exactly just so that we have a better sense of when the impact started and when that should be fully in the run rate? And then I guess related to that, what part of the book is Texas versus non-Texas? Because I know corporate is multi-Texas franchising, I think of sectors, but if you could give us an update on the mix there? Mark Jones -- Chairman and Chief Executive Officer Yes. I think the whole book is about 54% or 55% in Texas. So, it's still a big disproportionate, and that it's got 45% Texas. So, it's a disproportionate amount, Texas. And we really sort of feel the effects of those commission impacts here in the first quarter. Pablo Singzon -- J.P. Morgan -- Analyst OK. And then my second question, I was a little bit surprised by the positive comments in California, just given all the announced exits by carriers and homeowners. And I know some of those comments have been made by captive insurers, right? So, maybe not directly relevant. But in your view, is what's happening in California, the dislocation there net positive or negative? Mark Miller -- Chief Executive Officer It's definitely a net positive. So, our business has gone up significantly in California, and we have the product availability. So, our agents have told me that they haven't seen an environment like this before in a long time. Pablo Singzon -- J.P. Morgan -- Analyst And then last, sorry, if I missed the buyback program, will that be financed by operating cash flow or the increased debt capacity? I just wanted to get a sense of how that will be funded. Thank you. Mark Jones -- Chairman and Chief Executive Officer Yes. It's a combination of both. And so, in their prepared remarks, you mentioned that the term loan is being increased by $25 million, and so that transaction closed today. So, a portion of the buyback plan will be funded by that. A portion of it will be funded by operating cash flow. And as needed, we will draw down on the revolver capacity to fund the additional share repurchases. Pablo Singzon -- J.P. Morgan -- Analyst Got it. Thank you. Operator Thank you. That concludes today's question-and-answer session. I'd like to turn the call back to Mark Jones for closing remarks. Mark Jones -- Chairman and Chief Executive Officer Thanks, everyone. We appreciate your participation in the call. Answer:

the Goosehead Insurance first quarter 2024 earnings conference call

Operator Good day, and thank you for standing by. Welcome to the Goosehead Insurance first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Again, please be advised that today's conference is being recorded. I'd now like to hand the conference over to Dan Farrell, vice president, capital markets. Please go ahead. Dan Farrell -- Vice President, Capital Markets Thank you, and good afternoon. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of the management as of today. Forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you all to our recent SEC filings for a more detailed discussion of risks and uncertainties that could impact future operating results and financial conditions of Goosehead. We disclaim any intention or obligation to update and revise any forward-looking statements except to the extent required by applicable law. I would also like to point out that during the call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons period to period by including potential differences caused by variations in capital structure, tax position, depreciation, amortization, and certain other items that we believe are not representative of our core business. For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast. An archived version will be available shortly after the call ends on the investor relations portion of the company's website at goosehead.com. Now I would like to turn the call over to our chairman and CEO, Mark Jones. Mark Jones -- Chairman and Chief Executive Officer Thanks, Dan, and welcome, everyone, to our first quarter call. I'm very pleased with the progress we have made toward our goals. Personal lines insurance distribution is a quintessential long-tail business. I tell people all the time that it is not a give-away business. It's to get ridge over time but Staybridge business, driving substantive change in our company generally takes many quarters to achieve, but those changes when made tend to be very sticky and sustained. I am pleased to report that our hard work over the last year and a half bore more fruit in the first quarter. Franchise producer headcount has begun growing again. We ended the quarter with 1,963 producers. Our recruitment efforts to support franchisees that want to add producers are going extremely well with a total of 168 producers being placed in existing agencies during Q1. As a reminder, when an agency adds a new producer, on average, it improves the productivity of everyone in that agency. So, helping our franchise partners add producers remain an incredibly long lever for us and an important area of focus. Our focus on enhancing the quality of our producers is also driving very large productivity gains. First-year franchise productivity is up 86% year over year, but the gains are not limited to that cohort. Our existing franchises have delivered 19% same-store sales growth in the first quarter on the heels of 23% same-store sales growth in the fourth quarter. Our franchise network currently accounts for 78% of our premium volume. So, productivity gains here can really move the growth and earnings deals over time. We're also proud to have continued to deliver strong margins through smart cost discipline and maniacal focus on productivity. We believe all of these enhancements to be structural and will benefit our business for years to come. As I prepare to hand off the CEO role to Mark Miller, I'm very happy with the capabilities of our senior team and the way they are working so effectively together. While we're excited for these wins in the short term, we're facing some temporary headwinds. We are operating in the hardest insurance market and macro environment we've experienced in our 20-plus years in business. That being said, we know that insurance is a market that cycles between hard and soft and these cycles impact product pricing and availability with derivative impacts on client retention. Historically, hard market cycles last two to four years. Our current cycle has been amplified by the COVID Black Swan event, but we have reason for optimism as carriers report gains and profitability resulting from rate increases to cover inflation impact on claims costs, as well as product rationalization. When even California's insurance regulators allow carriers to price more rationally, you know that the first steps toward market normalcy are close at hand. An example of how this can affect our business in March, we saw same-store sales increases of 107% in California. There's a positive to the temporary market challenges we face in strengthening the long-term health of our business because we have been forced to level up our game, enhancing and hardening our skills and adding to our competitive arsenal. We are seeing very temporary challenges in our retention rates, but are highly confident we will return to our historically high retention as we progress through the current market cycle. While we navigate the current environment, we're committed to continuing to deliver on our earnings growth through aggressive cost management and careful scrutiny on where we invest the dollar of our capital and an hour of our time. Our smarter shareholders, and these are the bulk of our largest investors, understand the dynamics of our business, our structural improvements, and our transitory challenges. They invest for the long term and know these temporary headwinds will have a trivial impact on our long-term results. I'm pleased to announce that our board of directors has authorized a substantial stock buyback plan, which we will utilize as we see fit to take advantage of market dislocations. You'll hear more about this later on in the call. I believe we are better positioned today to deliver on our long-term goal, which is becoming the largest distributor of personal lines insurance in the United States during my lifetime than we have ever been in our company's history. We will continue to remain maniacally focused on what we do best, deliver world-class service for our clients, deliver the best agent experience, and bring the most favorable and attractive client risks available to underwriters and our carrier partners. Thank you to our team for delivering on another successful quarter. And with that, I will turn the call over to our president and chief operating officer, Mark Miller. Mark Miller -- Chief Executive Officer Thanks, Mark, and good afternoon, everyone. To summarize operations in Q1, I'll provide updates on three key areas: franchise productivity, commission retention, and producer headcount. First, let's dive into franchise productivity. The franchise network now accounts for 87% of our total agent count and 80% of new business production. After a 30% increase in franchise productivity in Q4 2023, we saw an even stronger 42% increase in Q1 of 2024. This improvement was led by an 86% increase in our less than one-year franchises. We note first-year productivity strongly correlates to long-term franchise success. So, we believe our newer vintage of franchises will perform very well for many years to come. We have had a relentless focus on quality over quantity for the past year, targeting candidates with the desire and strong skill set to grow a scaling multi-agent business. We're starting to see signs this strategy is bearing fruit as we continue to launch higher quality and faster ramping new franchises. If you dive into what's driving the increased productivity, it's primarily an increase in the number of referral partner leads per agent. With the challenging insurance environment, putting downward pressure on close rates, the only solution to drive productivity is to get more leads. And the best way to do that is by marketing to referral partners. Going into Q4, we doubled down on our referral partner marketing strategy. These efforts take time, and they had some impact on Q4, but they are the primary driver of Q1 productivity growth. As a reminder, ou r agents have access to an exclusive tool that shows them the production data of every loan originator in America. These mortgage professionals all have an insurance agent they refer clients to, but many are frustrated with that experience. Some refer business to a captive agent who only has one offering and may not be competitive. Others refer to an independent agent but they're frustrated by the turnaround time on proof of insurance, which can cause closing delays. Goosehead agents offer more value to these referral partners than any other agent in the industry. Our value centers on three components: choice. We have the most robust product offering in the industry to make sure we find clients the right coverage at the right price. Speed. We have a service team dedicated to servicing these referral partners, which means we can get them proof of insurance in under an hour partnership. Our local agents will partner with loan officers to market to realtors and generate more business. The challenging home insurance environment and higher interest rates have made our value proposition to these referral partners more pronounced than ever. We're also providing more support in training to our agents on executing the strategy than ever before. For example, over the past two quarters, we have been sending out sales leaders into the field to go execute on half-day referral partner visits with our agents. After one of these field visits, we generally see a greater than 75% lift in the number of referral partner leads that agent gets over the following month. In Q1, we saw a 27% year-over-year improvement in the number of deferral partner activations. This was the best quarter on record. We believe these investments will allow us to sustain high levels of productivity for years to come. What's more exciting is that as the housing market improves, these new referral partners will send a higher volume of leads to our agents. And as the insurance market improves, our agents will close those leads at higher rates, leading to increased productivity. We are incredibly encouraged by the trends in the franchise productivity. As a reminder, these productivity gains do not immediately materialize on our revenue line. They will, however, boost revenue as policies renew in the second year as royalties contractually go from 20% to 50%. Second, let's dive into commission retention. Because of a combination of inflation, higher reinsurance costs and unprecedented weather activity, insurance underwriters experienced some of the worst results on record in 2022 and 2023. To fix that, carriers have taken aggressive price increases, changed underwriting guidelines and decided to not renew many policies. Nowhere is this more pronounced than Texas homeowners insurance, our largest concentration of clients. Texas homeowners insurance went up over 20% in 2023, over twice the national average rate. These rate increases have led to unprecedented shopping activity. In addition, in Texas, there are a few large captive carriers who haven't raised rates as aggressively and are losing billions of dollars. These losses are not sustainable with increased shopping activity and mispriced captives that have led to a decrease in client retention. In addition, two carriers who have been under extreme financial distress significantly lowered commission rates, which is having a near-term negative impact on our commission retention. Importantly, the carriers who are truly partners such as Progressive, SageSure, Safeco, and Mercury among many others, have taken a long-term view and not impacting commissions at all. These carriers know that agents have a long-term memory and they want to maintain a great reputation so that they can start growing again when the time is right. The good news is we see no impediment to being able to get back to our historic retention levels as the market heals. Texas is generally a more flexible state that will allow insurance carriers to make the changes they need in order to open back up for business. Many carriers are moving to higher deductibles and depreciable roof schedules to create a product where they can be profitable. As our carrier partners open back up and the captive carriers raise rates, we believe our retention will go back to 89% plus. Third, let's dive into producer headcount growth. We continue to believe that helping our existing franchises add producers is one of the longest levers in our business, helping source a new producer for an existing franchise provides incredible value to our franchises and is very low cost for us. Every new producer added to a high-performing franchise is the equivalent of launching almost two new franchises. Additionally, when a new producer is added, we see productivity of everyone else in the franchise increase. Our scaling franchises added 168 producers in the quarter through a combination of our corporate recruiting program and their own sourcing efforts. Producers per franchise ended the quarter at 1.7, compared to 1.6 in Q4 and 1.51 a year ago. Our team dedicated to recruiting franchise producers now total 17 and we expect this team to help us add several hundred more producers to the franchise network this year. As a result, we believe overall franchise producer count will grow from current levels, and we will see an increasing number of agents per franchise. Franchise producers ended the quarter at 1,963 up from 1,957 in the fourth quarter. This represents the first sequential producer growth in the last six quarters. One great example of an agency adding agents quickly is the Gary Miller Agency out of Flowery Branch, Georgia. Gary has no relation to me, launched back in March of 2020, and he has been a part of our agency staffing program since inception. Gary has hired six producers in his agency as a result. He has had great success utilizing this program, particularly with the producer, Zach Miller-Hogg. Over the quarter, Zach produced approximately $15,000 of new business revenue per month, which is around 2.6 times higher than the average producer in Georgia. We will continue to assist Gary in recruiting top talent to his agency as his hiring needs continue. In corporate, we've had tremendous success with college recruiting and have locked in the majority of signings for our summer class. We expect to end the year with at least 375 corporate agents. Many of these agents view their time at corporate as a paid apprenticeship. They come in for a few years, learn to be an expert at their craft, develop a large referral partner network, gained leadership experience, and then go launch a franchise. This opportunity is allowing us to attract higher-caliber talent than ever before. One example of this is Noah Taxman. Noah joined our Denver corporate office in August after graduating from the University of Denver. He immediately found success activating new referral partner relationships and started generating over $20,000 per month in revenue within three months. Now Noah is in his seventh month, he is now generating over $30,000 per month in revenue and continuing to grow. Noah will likely earn over $175,000 in his first year out of college, and he will have many compelling Goosehead career options in the future. This opportunity is unrivaled on campus, and we continue to recruit top talent to join an industry that has historically struggled to do so. Recruiting this level of talent and then launching them into franchises remains one of our largest competitive advantages. We will continue to capitalize on this strategy and grow our corporate team up to our absorptive capacity. To summarize, in Q1, we created structural changes that are here to stay. We're incredibly excited about the gains in franchise productivity and headcount growth. We know the market headwinds will eventually abate. And when they do, we believe we are perfectly positioned to rapidly reaccelerate revenue growth. We're extraordinarily confident we have the right strategy and the right team to execute our long-term vision of becoming the largest distributor of personal lines insurance and our founders lifetime. With that, I will turn the call over to Mark Jones, Jr. to give more color on our financial results. Mark Jones -- Chairman and Chief Executive Officer Thanks, Mark, and good afternoon to everyone on the call. In the first quarter of 2024, we began our growth reacceleration phase. Total revenue, core revenue, new business premium growth, and franchise producer count all accelerated sequentially over the fourth quarter of 2023. On top of that, we generated more cash than in the first quarter in any year in our company's history. We have placed a tremendous amount of scrutiny in every aspect of our business within our control and made strategic decisions to minimize the impact of forces outside of our control. Quarter end, total franchise producers were 1,963 up from 1,957 as of the year-end. As Mark Jones mentioned, our existing franchises added 168 producers into their agencies, growing our producers per franchise for the fifth consecutive quarter to 1.7%. As a reminder, adding a producer to an existing agency typically drives the production equivalent of two new agencies. Our agency staffing program has been delivering strong results, which should drive a virtuous cycle of continued momentum in the franchise business. Each time a franchise onboards a successful producer, they become more confident in the program and generate cash flow to fund the next producer and overall growth of their agency. As a reminder, each time a producer is added to a franchise, it improves the productivity of everyone in that agency. This remains an incredibly powerful tool for future new business growth. Corporate producers at quarter end were 292, up 6% from the prior-year period. We are excited about the health of our corporate team, and we're now in a position to onboard a new class of college recruits over the summer. We've already locked in a significant portion of our summer class with approximately 65% of planned hires having already signed their offer letters. We expect by the end of the year, our corporate agent headcount will be over 375, which sets us up to drive further acceleration in new business production in 2025. Mark Miller discussed some of the challenges we have faced in the carrier environment and how those have impacted not only new business generation, but also retention rates. One avenue we've taken to combat those impacts is to increase our marketing efforts to drive additional lead flow. Because our close rates have seen a temporary decline, we need to generate more at the top of the funnel to fill the gap. In the first quarter, in the face of cyclical lows in housing activity, we generated a 31% increase in lead flow per agent over the prior-year period through a combination of increased share of wallet with our existing referral partners, new referral partner activations and lead flow diversification from strategic partnerships. As the temporary headwind of product availability inevitably abates, we believe there is significant upside in productivity through converting a higher percentage of this increased lead flow. Total written premiums, the leading indicator for future revenues grew 28% over the prior-year period to $819 million. This includes franchise premium growth of 32% to $650 million and corporate premium growth of 15% to $169 million. The first quarter was the second consecutive quarter we observed an acceleration of new business premium in both distribution networks, with franchise new business premium up 19% and corporate new business growth, up 11%. The building momentum in new business premium is being partially offset by the continued slowing of our renewal premiums due to declining retention rates related to the temporary market challenges. As carrier profitability is restored through a combination of pricing increases and modifications to underwriting models, we expect that our client retention will progress back toward our historical long-term average of 89%. We've made significant investments and improvements in the quality of our service function that give us confidence in our ability to drive increasing client retention as the carrier market normalizes. Total revenue for the quarter grew to $64.5 million, representing 11% growth over the prior-year period, with core revenues of $58.8 million, representing 13% growth over the prior-year period, both accelerating sequentially over the fourth quarter of 2023. As we have previously mentioned, a larger and accelerating portion of our core revenues is being driven by the franchise network with 60% of the first quarter's core revenue coming from royalty fees, compared to 55% in the first quarter of 2023. We expect this trend to continue as franchises onboard producers and reduce the productivity gap between the average corporate producer and the average franchise producer. This has a lag effect on revenue growth rates as we recognize only our 20% royalty fee in the first term of policy, which steps up to 50% in each subsequent term. Policies in force grew 13% versus the year-ago quarter as the temporary decline in retention rates are muting the impact of improved new business generation. We expect to see a reacceleration in the policy-in-force growth rate beginning in the third quarter of this year. Contingent commissions for the quarter were $2.7 million versus $1.9 million a year ago. For 2024, we are assuming contingent commissions to be roughly 35 basis points of the total written premium. We are expecting approximately $1 million of contingent commissions in the second quarter, compared to $4 million of contingent in the year-ago period. Longer term, we expect to see contingent commissions returning to the historical average of 80 basis points of total written premium. However, we are remaining cautious and prudent in our near-term forecasting as the timing and pace of the recovery of profitability for carriers, a major driver of continued commission has uncertainty and is not entirely within our control. Cost recovery revenue for the quarter was $2.5 million, compared to $3.5 million in the year-ago quarter. For 2024, we are expecting cost recovery revenue to decline moderately from the 2023 levels as we have dramatically improved the health of our franchise network, resulting in fewer franchise terminations and less accelerated recognition of initial franchise fees for GAAP purposes. It is important to remember that this changes nothing from a cash basis as we collect franchise fees at the time of training and they're nonrefundable at that point, but we are required to recognize the revenue over a 10-year period or the life of the franchise. Adjusted EBITDA grew to $11.7 million in the quarter, compared to $10.2 million in the year-ago period. Adjusted EBITDA margin for the quarter held steady at 18%, compared to the year-ago period. We continue to expect total margin expansion for the full year as we remain focused on cost management to mitigate the bottom-line impact of moderately lower revenue growth expectations for the near term. We expect the majority of the margin expansion for the year to occur during the fourth quarter as our class of new corporate agents ramp up production, the accelerating franchise new business from the fourth quarter of 2023 converts to more profitable renewal business and the timing of year-over-year contingent commissions. As a result of increased business in various geographies, we have now met certain state tax nexus thresholds, which result in additional state tax filings. Because of these additional state tax filings, our significant deferred tax assets produced large-state deferred taxes resulted in a current period benefit for future state tax deductions. As of March 31, 2024, we had cash and cash equivalents of $51 million. Our unused line of credit was $49.8 million, and total outstanding term notes payable balance was $75.6 million. Operating cash flow generated in the quarter was $11.9 million, compared to the use of cash of operations of $639,000 a year ago. Our free cash flow generated in the quarter was $9.1 million, compared to a use of cash of $4.2 million in the year-ago period. As a reminder, the first quarter generally represents our seasonally weakest quarter of the year from an earnings and cash generation perspective. Given the uncertainty in the carrier product environment and its temporary impact on client retention, we are revising our guidance for the full year. As a reminder, our philosophy on guidance is to be as transparent and accurate as possible. We guide to what we actually believe we will achieve for the year. For the full year 2024, total written premiums placed are expected to be between $3.62 billion and $3.82 billion, representing 22% organic growth in the low end of the range and 29% growth on the high end of the range. Total revenues are expected to be between $290 million and $310 million, representing 11% organic growth in the low end of the range and 19% organic growth in the high end of the range. Adjusted EBITDA margin is expected to expand for the full year. The reduction in the high end of our guidance marginally incorporates the experience we've seen in Q1. The low end of our guidance range is incorporating the possibility of continued temporary decline in retention rates and performance of the renewal book in the near term. We've made significant structural and foundational improvements to the core business that we believe will continue to drive performance for many years to come. The insurance market has a long history of hard and soft cycles and the current challenges we are facing are transitory. We remain incredibly excited about the future of our organization and have more confidence in the underlying operations than ever. Our balance sheet flexibility and strong cash generation provide us with additional options to create shareholder value. Our current net debt to trailing adjusted EBITDA is just 0.3 times. And over the last 12 months, we've generated operating cash of $63 million. Historically, we have favored returning significant excess cash to shareholders in the form of special dividends. However, we believe there's a significant dislocation in our current valuation versus our long-term earnings growth expectations. As a result, our board of directors approved a $100 million share repurchase authorization in connection with an upsizing of our existing credit facility. The upsized facility will include an expansion of our revolving credit facility to $75 million and an increase of the total term loan of $25 million, while maintaining the existing pricing grid and tenor of the agreement. Given our current valuation, we believe that shares a dosed stock represents an attractive buying opportunity. I want to thank our leadership team, our service team, our sales agents, our carrier partners and our shareholders for their support as we continue on our path to industry leadership. With that, let's open the line up for questions. Operator? Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Matt Carletti with Citizens JMP. Matt Carletti -- Citizens JMP -- Analyst Hey, thanks. Good afternoon. Mark Jones -- Chairman and Chief Executive Officer Hey, Matt. Matt Carletti -- Citizens JMP -- Analyst My first question is a little bit asking if you fit out your crystal ball, but you obviously talked a lot about the product environment. And I think that's no surprise like anybody is paying attention to personal lines, I think, is talking about it a lot. Just where do you think we are kind of in that process? Like you guys see it on the ground day to day. Does it feel later innings? Are you starting to feel that the underwriters are thinking they're in a good spot in terms of pricing and getting changes in terms of conditions into the book and you expect an improvement in the not-too-distant future? Or do you think it's a little more middle innings and time will tell. Mark Miller -- Chief Executive Officer Matt, this is Mark Miller. How are you doing? Matt Carletti -- Citizens JMP -- Analyst I'm good. How are you? Mark Miller -- Chief Executive Officer I'll start and then I think Brian and I are probably closest to it because when the carrier executive teams come in, we usually talk to them. I would say break it down by home and then auto or auto then home. I would say auto is improving more quickly toward the end of that cycle, and we're starting to see some of the major carriers come back in. On the home side, our expectation was it would start to recover by kind of this time about, and it's been slower than our expectations would be. We still have carriers that are in the market and offering product at reasonably good prices, but the broader coverage of places like Texas, pretty tough right now still. So, we're waiting and seeing. But I don't know whether we're at the end of the cycle, but I would say we're toward at least the middle of it and coming out of it. But Brian, what's your opinion? Brian Pattillo -- Vice President, Strategy Yeah, I think that's exactly right. When you look at progressive results, you have been posting mid-'80s combined ratio. They're looking to dial up growth now and they're starting to dial back restrictions. Some of the bundled carriers are waiting to dial back auto restrictions until the home is in a better place. And to add to Mark's point, I think home is a little bit still wait and see, especially in markets like Texas. So, I think probably more middle innings on home, later innings in auto. Matt Carletti -- Citizens JMP -- Analyst Yeah. That makes sense. I mean we see a big correction like California which gives me some optimism -- Mark Jones -- Chairman and Chief Executive Officer We are seeing some early -- this is Mark Jones, Matt. We are seeing some early progress in that the -- like, for example, progressive home, their combined ratio has come down substantially from its size, which doesn't necessarily mean that we're at the end of the game yet, but it is at least, it's a light at the end of the tunnel and we don't think it's a train. Mark Miller -- Chief Executive Officer Yeah. And the ones that moves quickly, I think the -- so it's different by carriers. Some moves quickly and raise their price and they're becoming profitable now. Other ones relate to the game. And like we've said on the call, there are a handful of captives that are mispriced compared to everybody else but have not raised the price yet. So, it kind of depends on what they do. Matt Carletti -- Citizens JMP -- Analyst Got it. And then if I could ask you, was the right way to ask this is, but I guess, like you provided the 24% guidance and you got a little more conservative and I thought you made a lot of really good color on why that is. I'd imagine you have some form of '25 guidance internally. As you think through this being temporary and understanding your model in terms of how premiums convert to revenue and things like that, given kind of the change in the '24 guidance over the last quarter or so, was there any change in that kind of internal view of what '25 might look like staying better or worse? Mark Jones -- Chairman and Chief Executive Officer No. Matt, this is Mark Junior Jones. Looking at 2025, we're going to be putting a lot more players in the field here over the next few months as we onboard the new college class and our first-year corporate agents are ramping up just as well, if not better, in many indications they have in the previous year. So, we feel very good about that. And our existing agencies are continuing to hire. You saw that producer count numbers grow sequentially for the first time this quarter in a while. So, we feel very good about the new business generation looking into 2025. And our expectation is as the product market normalizes, you actually sort of get a tailwind from client retention as opposed to as big of a headwind as it has been right now. So, we do not really have any changes in expectations for what 2025 or longer than that looks like. And the other thing is as carriers restore profitability, the contingent commission number starts to look very attractive as you grow your premium base and start to get a higher percentage of that as contingencies, which are, again, 100% earnings. The other point I would make is we made comments in the prepared remarks that we've taken steps to kind of rationalize the cost base to make sure that we don't sacrifice bottom-line earnings where we're kind of dealing with a short-term headwind revenue growth number. All of those costs don't immediately get put back in the P&L in 2025. So, you come out of this leaner and more effective as soon as you get to some more normal product environment. Matt Carletti -- Citizens JMP -- Analyst Yeah, super helpful. Thank you for the color. Mark Jones -- Chairman and Chief Executive Officer Thanks, Matt. Operator Our next question will come from the line of Brian Meredith with UBS. Brian, your line is now open. Brian Meredith -- UBS -- Analyst Thank you. A couple here for you. First, I'm just curious, looking at and maybe that's just to do with the fact that you're getting some commission rate cuts. But if I look at corporate, call it, core revenues divided by, call it, corporate written premium, and the same thing for franchise called fees divided by the franchise kind of premiums. It's kind of been consistently declining over the last couple of years. I'm curious, is that because of what's going on with commission rates? Or is there something else going on there? Brian Pattillo -- Vice President, Strategy Yeah. So, commission rates is part of it, and we mentioned it's just a couple of carriers. It's not a broad-scale issue. A lot of it is just as the mix shifts from the corporate side, driving the majority of -- not necessarily the majority, but the majority of the growth in new business production to the franchise side driving the majority of the growth that naturally just causes the lag from premium revenue growth, considering 20% on the first term of a policy and 50% subsequent to that. That's really the largest driver of that. And we talked a lot about over the last couple of years, the rationalization of the corporate team after we kind of peaked at that 506 headcount. That just causes a little bit of a short-term drag in your total aggregate new business production, although it made material improvements to the health of the corporate team, it was the right decision. But we expect that to continue to grow into the future, which you'll see that flow into renewals in the following years. Brian Meredith -- UBS -- Analyst Gotcha. Would the mix of auto versus home affect that too, though would assume auto commissions are lower than home? Brian Pattillo -- Vice President, Strategy We don't see a big difference in commission rate between product lines. Where that would be impacted is just a carrier do not renewing a policy, whether it's a home or an auto. So, if your auto is retaining better because carriers feel like they've got better pricing, to the extent a disproportionate amount of your book is home that could impact you there, which ours is 55% home. Brian Meredith -- UBS -- Analyst Gotcha. And then my second question, just curious, looking at your corporate sales agents with greater than one-year tenure to continue to decline. Is that going to be bottoming out here soon? And I appreciate you're going to have a lot more corporate agents at the end of the year, but I assume that's going to also meaningfully impact productivity overall is you've got a much lower percentage of one-year tenured agents are greater. Brian Pattillo -- Vice President, Strategy Yeah. I mean we talked about this a little bit in the last call. As you continue to launch out franchises and promote people into management out of that tenure bucket and naturally kind of places the cap and what that productivity looks like because you're taking your best, most productive agents and putting them into a different distribution network, either on the franchise side or in management. So, I don't necessarily expect to continue to see the slide that we have seen this year. But you got to remember, looking at this year versus last year, we just have started the franchise launch program. And so, you've got 35 people at this point who are included in that number at the beginning of last year, who are now not included in that number. So, as your year-over-year trend normalizes looking into 2025, you shouldn't see that kind of impact. Although you may see a little bit more of that this year as we continue to pump out more franchises and the year-over-year numbers look a little skewed. Brian Meredith -- UBS -- Analyst Great. Thank you. Operator Thank you. One moment for our next question. Our next question will come from the line of Michael Zaremski with BMO. Michael Zaremski -- BMO Capital Markets -- Analyst Hey, good afternoon. Maybe going back to the comments about some carriers cutting their commisions. I guess just look in hindsight, I think it kind of makes sense being an analyst because the carriers are seeking to improve their profitability. So, I'm just kind of into the lever, but I'm just kind of curious then if -- how much of this is just a new trend that just surprised you all and you're baking into your guidance in case other carriers do the same? And then on contingent I'm assuming that this would impact contingent. So, unless the carriers eventually went back to the old better commission structure, I would continue to go back to their historical levels over time. Brian Pattillo -- Vice President, Strategy Mike, just to your comment on the guidance, we are not expecting to see any more of that. This is very isolated situation, and Mark Miller can give some more color on that. It also shouldn't impact the contingent commissions because those are not carriers that we were receiving contingencies from in 2023 or we're expecting to in 2024. So, it doesn't impact what the medium or longer-term outlook on contingency look like. And also, I would argue that the vast majority of carriers understand the benefit of having an independent agent that knows how to distribute your product very successfully. And this is a very shortsighted move. Mark Miller -- Chief Executive Officer Yes, this is Mark Miller. I'll just jump on that comment for a second. First of all, I think this is short term in nature. I've not seen or had any discussions with any other carriers. These are two carriers that, as we mentioned in the call, they were financially distressed, they came to us and said, we are in a financial position where we need to back away. So, this was Homeowners of America and HIPPO. They wanted to pull out of the market and they wanted to reduce commissions as a result of it. One of those carriers dramatically changed the contracts for our clients underneath it as well. So, it's not even the same paper. I haven't seen that out of any other major carriers other than those two. And the market naturally adjusts to the carriers that have the right paper at the right price. In this case, they don't, so the market is correcting itself. So, when I say it's temporary, the business starts to move to other carriers. Michael Zaremski -- BMO Capital Markets -- Analyst OK. Just switching gears a bit, and I believe you teased this out in the prepared remarks, but I just want to ask it because I feel like it's more complicated. So, when we look at the revenue guide versus the premium written guide, you have a much bigger decline in the guide on the revenues. And so, are you explaining that more of your revenues or more of your premiums are going to come from the franchise segment from new producers. So, that's driving the delta? Or is there more -- or is that an offer as a lower commission? Mark Jones -- Chairman and Chief Executive Officer Yes, that's exactly right, Mike. So, with the performance we've seen thus far this year, the franchise side of the business is doing a really, really great job of continuing to drive productivity, and our expectations now will happen for the remainder of the year as well. And so, you feel the impact of that immediately in premium. That's why you see the premium guide move is not as large as a revenue guide move, but that doesn't have the same impact on revenue, right? It's $0.20 on the dollar. So, you're exactly right on that. Michael Zaremski -- BMO Capital Markets -- Analyst OK. Got it. I guess, lastly, I don't know how much you can say, but there have been rumblings in the trade rags, insurance trade rags about a very large auto insurance carrier, maybe the third largest in the US potentially looking to enter the AI channel. I don't know if you could say anything. Or is that something that you've heard too or maybe that could help in terms of the product you all have to offer your clients? Brian Pattillo -- Vice President, Strategy This is Brian. Yes, our belief, I mean we've seen this trend happen for years now where there's been movement both on the captive side and on the direct side toward the independent channel. If you look at some of the big captives have made big acquisitions and done moves to focus on a choice model and then similar in direct companies that really sought to go direct-to-consumer, has pivoted going to a dual distribution model really following Progressive news. We know that what progressive calls the Robinson Client, right, $200 billion of the market is the preferred home auto customer that retains performs well. I think every auto carrier wants more of that type of business. So, I can't speak to any specific carrier, but we do believe that the trend will continue and that more of the direct carrier and captive will embrace independent distribution to go after that segment of the market. Michael Zaremski -- BMO Capital Markets -- Analyst Thank you. Operator Thank you. Our next question will come from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman -- TD Cowen -- Analyst Hey, everybody. And I apologize in advance for the background noise. But before I get into my questions, can I just ask a couple of quick statistics. One being you're citing 89% retention. Where was it this quarter? And then with regard to HIPPO and Homeowners of America, what percentage of your book of business are those two carriers? I mean, it kind of sounds like a real nonevent when I hear the names of these two components. Mark Jones -- Chairman and Chief Executive Officer Andrew. So, client retention for the quarter, 85%, just to hit on your first one. On your second question there, we have been in business with Homeowners America for a very long time. And so, over a period of time, we've built up a really nice partnership and a relatively sizable book of business. And as they've made decisions that they're going to make, a lot of that book of business has rotated off to other carriers as naturally the value to the client and to the agent has declined in that product. So, just naturally, that happens. It may not have seemed like that's a super big carrier, but they were a relatively important partner for us in the early days. Andrew Kligerman -- TD Cowen -- Analyst So, that has -- Mark Miller -- Chief Executive Officer As Mark is saying they were really big HIPPO and auto [Inaudible] for us. Andrew Kligerman -- TD Cowen -- Analyst I see. And the commission reduction, how much was that? Mark Miller -- Chief Executive Officer Yeah. I don't think we're going to get into specifics on the rate, but it was enough for us to call it out. Andrew Kligerman -- TD Cowen -- Analyst OK. Fair enough. Thank you. And then with regard to expenses, I saw that G&A only went up 8%, which was great. But the employee comp was up 14%, you listed out a lot of reasons in the press release, but I'm wondering if you, A, could have tempered that a bit more; and B, maybe clarified a little bit why it was up that much just given the pressures on revenue. Brian Pattillo -- Vice President, Strategy I mean, how we secure our future revenue growth is by continuing to hire and onboard really, really talented people. And so, we've said forever our secret sauce is that human capital we're able to bring to the table that's so differentiated in the industry. So, we believe strongly and continue to do that. So, while we can manage the cost bar very well with G&A on that side of the business, I don't want to limit who we're hiring and who we're bringing into the system because that's going to be a short-term decision that's going to have long-term impact. Andrew Kligerman -- TD Cowen -- Analyst That makes a lot of sense. And then just lastly, there was some new legislation reducing commissions to real estate agents. Does that concern you at all? Should that have any pressure on you as you move forward? Mark Miller -- Chief Executive Officer I mean we've seen some recent interest on the franchise side of real estate brokers wanting to get into insurance as a side business, but I haven't seen any other negative to our business. Andrew Kligerman -- TD Cowen -- Analyst So, the fact that they're seeing lower commissions isn't going to -- I mean home sales will be what home sales will be and you'll still get your leads? Is that how you're thinking about it? Mark Miller -- Chief Executive Officer Correct. It doesn't change our relationship with the real estate brokers and real estate volume is going to be a real estate volume is, but I think we're getting an upsized percentage of the leads that come out of the industry and growing well, and we're also targeting for the referral partners, the highest volume realtors and they're not going to be the ones that are affected. It will be the lower-productivity realtors to get squeezed. And so, that will have much less effect on us. Andrew Kligerman -- TD Cowen -- Analyst Got it. Thanks so much. Mark Miller -- Chief Executive Officer Thanks, Andrew. Operator Thank you. One moment for our next question. This question will come from the line of Tommy McJoynt with KBW. Tommy McJoynt -- KBW -- Analyst Hey, good afternoon. Thanks for taking my questions here. You gave a good explanation on sort of the bridging the change in the guidance on the revenues. I just want to make sure I understand kind of the lowering the lower end of the range on the premium side. If you could just kind of bridge what changed there in terms of -- was it rate policy count number of producers just explaining that premium change? Mark Jones -- Chairman and Chief Executive Officer That's largely a function of retention. And so, if we don't get the home market to stabilize as quickly as we would like, there is the opportunity for client retention to continue to slide a little bit more throughout the year. Now we have seen the peak of what we believe that do not renew from carriers is, so we should be on the back half of that. But really, it's a function of client retention being slightly lower than what it has historically been. So, certainly, if that returns faster than what we are expecting, you could see that premium number be closer to the high end of the range, but I would rather be conservative in the forecasting. Tommy McJoynt -- KBW -- Analyst OK. Got it. And then just the other area of question on the expense side, and it sounds like you may have touched on this, but do you have visibility into what equity-based comp should be for the rest of the year? And then as we think about kind of into 2025, is there any reason that it should either step up or step down year over year just given what you know about vesting schedules related to that? Mark Jones -- Chairman and Chief Executive Officer Yeah. Looking at Q1 as your past estimate for what it should be that full year. So, typically, the first quarter is when you get new options awarded to the managing directors here. And so, then that -- a similar number to that would be recorded in each quarter of the year. Looking at 2025, there will be additional options that are awarded to the senior team and at which point you would see a step up in equity-based compensation. Just as a reminder, our philosophy on that has been kind of between 1% and 2% of the share count is an appropriate level for the dilution because the Black-Scholes valuation given the volatility in our stock tends to overvalue the actual economic reality of those options awarded to the employees. Tommy McJoynt -- KBW -- Analyst Got it. Thanks. Operator Our next question will come from the line of Mark Hughes with Truist Securities. Mark Hughes -- Truist Securities -- Analyst Good afternoon. Do the new do not renews go into the 100% premium retention measure? Mark Jones -- Chairman and Chief Executive Officer Yeah, they do because that would be a premium that was on the books last year and will not be on the books this year. And so, that premium retention is a trailing 12 number. And so, it's kind of got a lag effect on what exactly is happening in the book. But yes, they are included in that. Mark Hughes -- Truist Securities -- Analyst OK. So, it's trailing 12 And then you talked about the NAR settlement. Can you have a rough breakout for how much of your business comes from realtor versus, say, a mortgage lender? Mark Jones -- Chairman and Chief Executive Officer I would say definitely a majority mortgage lenders. We work quite a bit with realtors. But obviously the majority I mean, I think probably of that 75% plus comes from lenders. If you look at our referral partner business altogether, which is roughly two-thirds of our new business, probably 75% from lenders is maybe 25% from realtors. Mark Hughes -- Truist Securities -- Analyst Very good. Thank you. Operator Our next question will come from the line of Paul Newsome with Piper Sandler. Paul Newsome -- Piper Sandler -- Analyst Good afternoon. Thanks for the call. I wanted to revisit the guidance change and just sort of laying down sort of the pieces. I would have thought that sounds like retention is a problem, commissions were down and -- but that should have been offset by the fairly large price increases we've seen for home and auto. I guess the question is, is there another piece in there that we're missing? And I was thinking, for example, are we actually thinking more policy in force growth will slow, as well as part of that equation. Mark Jones -- Chairman and Chief Executive Officer Yeah. Paul, I think we said in our prepared remarks, we would expect policy-in-force growth rate to reaccelerate in the third quarter of this year, which we do believe that will be the case, which means you do have one more quarter of deceleration in that number. Now it's still, I think, relatively strong growth. It's not what we've historically done, but we fully believe we'll be able to drive back to kind of our historical numbers on policy in force growth rate. The revenue guide is truly a function of client retention as a temporary, very temporary headwind. We expect that that will improve ideally by the end of this year, but certainly in 2025, at which point it becomes a tailwind. But the new business productivity, especially, on the franchise side of the business is doing very, very well. And that's why you see the premium number not move as much as the revenue number. Paul Newsome -- Piper Sandler -- Analyst So, just to do a little bit, was the actual sort of push out of the decelerated PIP growth the quarter before that unchanged from -- with the prior guidance is? Mark Jones -- Chairman and Chief Executive Officer No, that number is unchanged. It's just a function of the amount of policies that are renewing. So, maybe it's moved by a couple of weeks. It's not necessarily moved massively. But if you just think about how much of the book is home and how challenged the home environment is now, it's challenging to keep those clients on if they're getting a 100% price increase. Paul Newsome -- Piper Sandler -- Analyst And my second question, we were talking about productivity for the agents. Is that an average number? Or are we looking at sort of by cohorts? And I would imagine cohorts as they age become more productive regardless. So, I was wondering if there's any way to sort of tease out what is sort of actual productivity of like the average this year is much better than the average. But maybe that's happening, but maybe you could talk to that. Is it -- because getting rid of your poor agents would automatically improve productivity just from an average perspective, but maybe is there actual by cohort productivity improvements that you can talk about? Mark Jones -- Chairman and Chief Executive Officer Yes. Yes, there definitely is. So, if you look at the productivity disclosures that we provide, you'll see it broken down into less than one year greater than one-year agents on both the branches and the corporate side. On the corporate side, the tenure of that bucket is actually a couple of months lower this year than what it was last year, just from timing of onboarding. And so, the ramp-up of those agents is just as good as it was in the previous years. We feel very good about that first-year corporate agent productivity. On the greater than one-year bucket, we talked about a little bit already that transition of corporate agents into franchises or in management. And so, if you adjust it for those items, you can do the math, it's around 19% productivity improvement if you kept those same agents that launched franchises in that greater than one-year corporate bucket. So, we are seeing very strong productivity improvements, I believe, in the corporate side. On the franchise side of the business, it's even more profound. And so, if you look at just the same-store sales numbers, which has nothing to do with the amount of agents that you're pulling this franchise existed this year and this franchise exited last year, Q4, that number was 22%. It's up again another 19% in Q1, and we feel like that's going to continue to grow. So, we feel very good about the productivity of the agent force, and we don't necessarily see a cap on that in the near term, especially if you get some product tailwinds. Paul Newsome -- Piper Sandler -- Analyst Great. Appreciate the help as always. Operator Thank you. Our next question will come from the line of Scott Heleniak with RBC Capital Markets. Scott Heleniak -- RBC Capital Markets -- Analyst Yeah, thanks. I just had a quick question on the franchises. You talked about adding hundreds more on the franchise producers. Is that mainly going to be to the existing franchises like you have now? And can you talk about the franchise conversions? Are they still on track? I think you had said before 30. You didn't mention in the prepared remarks. So, I was just wondering if that's still expected to be the case. Mark Jones -- Chairman and Chief Executive Officer Yeah. So, I think we've talked about this year in 2024, it would be more like $20 million to $30 million, not necessarily that full $30 million. Remember, we started the year with less corporate agents in 2024 than we did in 2023. So, which is a smaller pool to pick from? As that team grows, which it will, in 2024, we indicated in the prepared remarks that we'll be over 375 by the end of the year. So, we feel great about that. But producers into existing franchises, yes, that will be hundreds more this year. We're going to continue to launch more high-quality franchises. But I think the vast majority of your producer growth is going to be coming out of producers into existing agencies, which obviously, just as a reminder, creates much more productive capacity than adding a new franchise. Mark Miller -- Chief Executive Officer Half of those people being added to the franchises come through our recruiting program that we've established, which I said has 17 recruiters now doing nothing but full-time recruiting for franchises. The other half come from franchises recruiting on their own. And then we're less worried about the quantity of new franchises that we launch and more about the quality of the franchises. And so, we're just being very selective about people we're letting into the franchise network right now and being very selective about the state. So, we're very state-specific right now in where we need to grow geographically. Scott Heleniak -- RBC Capital Markets -- Analyst Got it. Understood. And then just a quick question. Mark, you referenced the margin expansion comment. You said most of that would come from Q4. Do you still expect margins to be up in Q2 and Q3 year over year? I know the majority is Q4, but do you have anything you add to Q2 and Q3? OK. And just last one, too, on retention. I know it's been talked about a lot and you're targeting 89% or 85% now. But is that being dragged down by what's happening in Texas? Is it significantly different by state and so things lift in one or two states and it kind of brings it up? Or is it just pretty similar across the board? Mark Jones -- Chairman and Chief Executive Officer Yes. I mean all states have a bit of a retention issue compared to our historic numbers, but Texas is, by far, our largest state. Home is our largest product and Texas is really suffering right now just from availability of product. And one indicator of what's going on is Texas premiums are up, I believe the number is 23% year over year. If you look on a national average, they're up about 10% or 11%. So, it's up twice as much in our shopping activity mirrors that. So, we look at how many people we have asked them for reshop, they get upset when their price goes up by a certain amount, that's a trigger point. So, 20%, I want to shop. And so, shopping activity for the number of policies is up twice as much and a lot of that is coming out of Texas. And so, until the home carriers come back into the market, we're going to fight retention as hard as we can, but it's going to be a struggle. Scott Heleniak -- RBC Capital Markets -- Analyst Yeah, no, that's a good detail. Thanks a lot. Operator Our next question will come from the line of Pablo Singzon with J.P. Morgan. Pablo Singzon -- J.P. Morgan -- Analyst I just wanted to follow up on the commission disclosure. When were they thought exactly just so that we have a better sense of when the impact started and when that should be fully in the run rate? And then I guess related to that, what part of the book is Texas versus non-Texas? Because I know corporate is multi-Texas franchising, I think of sectors, but if you could give us an update on the mix there? Mark Jones -- Chairman and Chief Executive Officer Yes. I think the whole book is about 54% or 55% in Texas. So, it's still a big disproportionate, and that it's got 45% Texas. So, it's a disproportionate amount, Texas. And we really sort of feel the effects of those commission impacts here in the first quarter. Pablo Singzon -- J.P. Morgan -- Analyst OK. And then my second question, I was a little bit surprised by the positive comments in California, just given all the announced exits by carriers and homeowners. And I know some of those comments have been made by captive insurers, right? So, maybe not directly relevant. But in your view, is what's happening in California, the dislocation there net positive or negative? Mark Miller -- Chief Executive Officer It's definitely a net positive. So, our business has gone up significantly in California, and we have the product availability. So, our agents have told me that they haven't seen an environment like this before in a long time. Pablo Singzon -- J.P. Morgan -- Analyst And then last, sorry, if I missed the buyback program, will that be financed by operating cash flow or the increased debt capacity? I just wanted to get a sense of how that will be funded. Thank you. Mark Jones -- Chairman and Chief Executive Officer Yes. It's a combination of both. And so, in their prepared remarks, you mentioned that the term loan is being increased by $25 million, and so that transaction closed today. So, a portion of the buyback plan will be funded by that. A portion of it will be funded by operating cash flow. And as needed, we will draw down on the revolver capacity to fund the additional share repurchases. Pablo Singzon -- J.P. Morgan -- Analyst Got it. Thank you. Operator Thank you. That concludes today's question-and-answer session. I'd like to turn the call back to Mark Jones for closing remarks. Mark Jones -- Chairman and Chief Executive Officer Thanks, everyone. We appreciate your participation in the call.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: David Coleman Hello, and thank you for joining the Halliburton first quarter 2024 conference call. We will make the recording of today's webcast available for seven days on Halliburton's website after this call. Joining me today are Jeff Miller, chairman, president and CEO; and Eric Carre, executive vice president, and CFO. Some of today's comments may include forward-looking statements, reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2023, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter earnings release and in the Quarterly Results & Presentation section of our website. Now, I'll turn the call over to Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you, David, and good morning, everyone. Halliburton delivered solid first quarter results that again demonstrated the power of our strategy and the strength of our execution. Here are the quarter highlights. We delivered total company revenue of $5.8 billion, and operating margin of 17%. Both divisions demonstrated margin improvement year over year. International revenue was $3.3 billion, and grew 12% year over year, led by Latin America, which delivered a 21% increase. North America revenue was $2.5 billion, a 5% increase over the fourth quarter of 2023. Finally, during the first quarter, we generated $487 million of cash flow from operations, $206 million of free cash flow, and repurchased $250 million of our common stock. Let me begin today's discussion with my views on the strength of the oilfield services market. Global energy use is on the rise, with crude oil demand projected to grow between 1.2 million and 2.3 million barrels per day in 2024. This demand growth is greatest in non-OECD countries, where we expect more per capita energy consumption, not less as they develop their economies and improve their quality of life. Globally, secure, reliable hydrocarbon production powers industries, moves people, and advances economies. In the U.S., after stable electricity demand for nearly two decades, we now expect it to grow more than 15% by 2030. Today, over 40% of United States electricity is supplied by natural gas, and we expect strong demand for natural gas as a base fuel well into the future. The world requires more energy, not less, and I'm more convinced than ever that oil and gas will fill a critical role in the global energy mix for decades to come. My outlook is confirmed by our customers' multiyear activity plans across multiple markets and asset types. Everything I see points toward long-term growth for Halliburton's services. My outlook for the industry is not new, and it drives our focus on oilfield services, and sets our strategy. This focus is the basis for our technology investment, capital allocation, and culture. This multiyear upcycle together with our successful strategy execution make this a great time for Halliburton. Now, let's turn to international markets, where Halliburton's strategy of profitable growth delivered another solid quarter. International revenue grew 12% year over year with growth demonstrated by each region. This marks the 11th consecutive quarter of year-on-year growth in our international business. For 2024, I expect full-year revenue growth in the low double-digits. Equally important, the international market remains tight for equipment, and people, and therefore, we expect to see margin expansion over last year. One of the many things that excites me about our international business is our technology that creates meaningful value for our customers, and drives above-market growth for Halliburton. In the Drilling and Evaluation Division, our leading formation evaluation tools such as the EarthStar X logging-while-drilling system, and our Reservoir Xaminer Formation Sampling Service, both see strong adoption and increasing levels of demand. The advanced measurements these systems provide create unique insights for our customers and drive profitable growth for Halliburton. In the Completion and Production division, our Artificial Lift technology continues to generate profitable growth throughout each of our international regions. Our electric submersible pump portfolio proved to be a market leader in the competitive North America market, and we expect to deliver similar results over time in the international markets. Our complete solution, which includes downhole motors, pumps, and surface systems with remote monitoring and automation, provides an end-to-end solution, and the ability to operate at scale. A great example is in Kuwait, where in less than three years, we captured a nearly 20% market share with over 700 ESP installs. Before we move on, I want to share an observation. I'm consistently seeing more global interest in unconventionals. I can recall over a decade ago, the global scramble to find unconventionals with limited success. Today, two significant markets outside of North America achieve scale, which serves as a proof point for what is possible, and drives interest by others. As global markets grow, the technologies and processes Halliburton developed as the leader in North America over the last three decades have broad applications to unconventional reservoirs throughout the world, which makes this a fantastic long-term opportunity for Halliburton. I'm confident in the duration of this international upcycle in 2024 and beyond. Turning to North America, our first quarter revenue grew 5% over last quarter. As expected, North America land completion activity bottomed in the fourth quarter of last year and rebounded in the first quarter as our customers quickly resumed operations after the holidays. Looking ahead for the rest of 2024 in North America, we expect steady activity levels for Halliburton. Our customers are planning for the long-term and I expect they will execute work throughout the year as planned. This is consistent with a more industrialized approach to asset development in North America. And while we expect an eventual recovery in natural gas activity driven by demand from LNG expansions, our 2024 plan does not anticipate this recovery. Overall, we expect that full-year North America revenue and margins will be flattish compared with 2023 levels. Clearly, our strategy is to maximize value in North America. We do it in multiple ways. Today, I want to talk about two of them. The first is the ZEUS platform and the second is our new North America focused directional drilling system. The ZEUS platform, its electrification, automation and subsurface diagnostics continue to advance. This quarter, we introduced Sensory, which is the latest generation of our subsurface measurement technology. Sensory provides an easy to deploy, cost effective and automated system for real time subsurface measurement of fracturing operations. Additionally, our automation technologies are at the heart of our highly efficient simul-frac and trimul-frac operations and they continue to expand their capabilities creating value for Halliburton and our customers. The ZEUS platform demonstrates its uniqueness every day. And importantly, it's deployed at scale. Our scale allows for rapid technology innovation. Each technology improvement to the ZEUS platform widens the moat around our leading position in the fracturing market. This creates outsized value for Halliburton and our customers. I am pleased with the results we see in North America from our drilling services product line, which late last year launched a new version of our iCruise Rotary Steerable System specifically engineered for the North America unconventional market. The new iCruise CX system is designed for the challenging curve and lateral applications in North America. The system's performance is driving strong uptake and this quarter, our iCruise footage drilled in North America more than doubled over last year. We also coupled this high performing system with an asset light sales and rental model that increases the addressable market when compared to a full-service model. This is how iCruise CX both participates in new market segments and increases its speed of market penetration. The key trend that I see in North America drilling is the move to longer laterals and more complex wells which customers drill to improve economics. iCruise CX is specifically designed for these applications. And its performance is why I am excited about Halliburton's growth in the North America drilling market. To close out, I would like to thank our employees. I regularly hear from our customers about the work you do. How much it means to them, and how your execution of our value proposition differentiates Halliburton from our competitors. Well done. I am excited about the business outlook for Halliburton. Energy demand growth is strong and so is demand for our services. I expect that our focus on oilfield services and execution of our strategy will generate strong free cash flow and shareholder returns. This quarter, Halliburton repurchased $250 million of our common stock, a solid start to the year and a good benchmark for our expectations going forward. Now, I'll turn the call over to Eric to provide more details of our financial results. Eric? Eric Carre -- SVP, Drilling and Evaluation Thank you, Jeff, and good morning. Our Q1 reported net income per diluted share was $0.68. Adjusted net income per diluted share was $0.76. Total company revenue for the first quarter of 2024 was $5.8 billion. Operating income was $987 million. And operating margin was 17%; flat compared to Q1 2023. Beginning with our Completion and Production division; revenue in Q1 was $3.4 billion, down slightly from Q1 2023. Operating income was $688 million, up 3% when compared to Q1 2023. And operating income margin was 20%. Compared to Q1 of last year, these results were primarily driven by reduced pressure pumping services in U.S. land. Partially offset by higher activity in international markets. In our Drilling and Evaluation division, revenue in Q1 was $2.4 billion, an increase of 7% compared to Q1 2023. Operating income was $398 million, up 8%, and operating margin was 16%, an increase of 10 basis points over Q1 last year. These results were primarily driven by higher drilling-related services in the Middle East and North America, as well as improvements across multiple product lines in Latin America. Now, let's move on to geographic results. Our Q1 international revenue increased 12% year over year. Europe/Africa revenue in the first quarter of 2024 was $729 million, an increase of 10% year over year. This increase was primarily driven by higher completion tool sales in the region and fluid services in Norway and the Caspian area. Middle East/Asia revenue in the first quarter of 2024 was $1.4 million, an increase of 6% year over year. This increase was primarily related to improved activity in multiple product service lines in Kuwait, Saudi Arabia, and Oman. Latin America revenue in the first quarter of 2024 was $1.1 billion, an increase of 21% year over year. This improvement was primarily related to higher drilling-related services and increased software sales in Mexico, improved pressure pumping service and fluid services in Argentina, and increased activity in multi-product service lines in Brazil and Ecuador. In North America, revenue was $2.5 billion, representing an 8% decrease year over year, but a 5% increase from the last quarter. This year-over-year decline was primarily driven by lower pressure pumping services in U.S. land, as well as lower wireline activity. Moving on to other items, in Q1, our corporate and other expense was $65 million. For the second quarter of 2024, we expect our corporate expenses to be approximately flat. Our SAP deployment remains on budget and is on schedule to conclude in 2025. In Q1, we spent $34 million, or about $0.04 per diluted share, on SAP S4 migration, which is included in our results. For the second quarter, we expect SAP expenses to be approximately flat. Net interest expense for the quarter was $92 million. For the second quarter 2024, we expect net interest expense to be roughly flat. Other net expense for Q1 was $108 million, higher than expected, primarily due to impairment of an investment in Argentina and currency devaluation in Egypt. For the second quarter 2024, we expect this expense to be approximately $35 million. Our adjusted effective tax rate for Q1 was 21.5%. Based on our anticipated geographic earnings mix, we expect our second quarter 2024 effective tax rate to increase approximately 75 basis points. Capital expenditures for Q1 were $330 million. For the full year of 2024, we expect capital expenditures to remain approximately 6% of revenue. Our Q1 cash flow from operations was $487 million, and free cash flow was $206 million. During the quarter, we repurchased $250 million of our common stock. For the full year 2024, we expect free cash flow to be at least 10% higher than 2023. Now, let me provide you with some comments on our expectations for the second quarter. In our Completion and Production division, we anticipate sequential revenue to be up 2% to 4% and margins to increase by 25 to 75 basis points. In our drilling and evaluation division, we expect sequential revenue to increase 1% to 3% and margins to increase by 25 to 75 basis points. I will now turn the call back to Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thanks, Eric. Let me summarize our discussion today. Halliburton delivered solid first quarter results. I am confident in the strength and duration of this up cycle. We expect our North America business to deliver flattish revenues and margins year on year despite lower activity levels. We also expect our international business revenue to grow at low double digits year on year. I'm excited about the outlook for Halliburton and expect Halliburton to deliver strong free cash flow and shareholder returns. And now let's open it up for questions. Questions & Answers: Operator Thank you. [Operator instructions] One moment for our first question, and it comes from the line of David Anderson with Barclays. Please proceed. David Anderson -- Barclays -- Analyst Thanks. Good morning, Jeff. I want to ask you about a couple of things that you talked about in your prepared remarks. And the first is on the ZEUS fleet. You had an impressive 5% sequential increase in North America this quarter, despite the flat rate count. I have to think it's probably attributed to these e-fleets being rolled out. It's pretty clear, this is a big step change in efficiency for your customer, and demand seems to be exceeding supply at least for the next couple of years, but I guess, the question is what prevents the industry from building out? And can you talk about your competitive advantage today and how you maintain that? You were first to market, establish leadership, but is there differentiated technology? Is it more about relationships? I guess, the question is really on the moat on this business as you see it over the next few years. Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Thank you, Dave. Look, the most important point is this is a comprehensive platform. ZEUS is a platform. Clearly, it's electric. Yes, it drives efficiency, but the embedded automation actually really changes the dynamics of how it performs. And then, also the subsurface measurements with Sensory that are embedded in this system, and uniquely embedded. And so, that widens the moat. And I think equally important is being at scale. So, it's one thing to do a research project around a thing, but when we're working at scale, these are solutions that can be pushed to the platform at any point in time. So, it's really the ability to grow the moat on existing equipment, as well as any new turns on the science as it goes forward. So, I'm super excited about it. Yes, obviously lowest TCO, but it's the technology differentiation as well that widens the moat. David Anderson -- Barclays -- Analyst And then, just to touch on something else, you had talked about some unconventional fields in international markets. Clearly, one of the big stories this year has been the Saudi shift in capex from offshore toward those unconventionals, specifically around Jafurah. You have a toehold in that field with that liquid mud plant facility, but this is just starting development. My understanding is there's a bunch of tenders on the way more coming. Can you talk about sort of the opportunity set for Halliburton on this field in the near-term, maybe incremental growth you see in '25? And how do you support these build-outs? You said capacity is really tight in the market. Is this a market maybe you bring some diesel fleets in there? Is there other equipment in the region, or how do you think about that, the tightness and the capacity as it relates to building out to some conventional field? Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you, David. And I'm really excited about it. And there's a lot of opportunity for Halliburton around unconventionals, as you know. How we address it, we've got a lot of ways to address it, including some of the technology we've talked about today. We've got a good position in there, but I think with even more opportunity to grow, particularly with drilling technology that continues to advance. You mentioned mud, but also other aspects of that where we'll be very competitive. So, I think that's a big move forward. And I think more broadly, so good for Halliburton, but I think that more broadly, just the discussion around unconventionals internationally, what can you see today are two markets, at least outside the U.S., that are truly at scale. And I think that serves as a bit of a template for how that can be done, because it was really unclear a decade ago, as you recall. But I think we're in a different place with unconventionals today. And so, we do hear more discussion around, hey, this is possible, and how Halliburton would play a more meaningful role in that in additional markets, so super encouraged. David Anderson -- Barclays -- Analyst Thank you, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. One moment, it comes from the line of Neil Mehta with Goldman Sachs. Please proceed. Neil Mehta -- Goldman Sachs -- Analyst Good morning, Jeff, and team. Jeff, you've talked about wanting to drive your free cash flow per share higher. And so, it's great to see the share repurchases for a couple quarters run rating at this $250 million mark. Can you talk about why you think that's the right number to use going forward? And how does share repurchase fit in the seriatim of capital allocation? Eric Carre -- SVP, Drilling and Evaluation Yes, Neil, it's Eric. So, the baseline that we use is the framework that we announced several quarters ago to return a minimum of 50% of free cash flow to shareholders. We actually returned over that at just about 60% in 2023. So, when we look at the improvements in free cash flow year over year, which we mentioned to be about 10%. So, when we think through that, we think that the $250 million of buyback is a good base load for us to be repurchasing shares. So, expect more buybacks in dollars, expect more overall returns to shareholder dollar-wise, and then, we see where the overall percentage lands, but it should be pretty close to what we did last year. Yes. Neil Mehta -- Goldman Sachs -- Analyst OK. That's really helpful. And then, the follow-up is, we are seeing signs of industry consolidation, certainly more in E&P and services, but we start to see some in services as well. Halliburton always struck us as more of a organically driven business, but be curious on how you're thinking about M&A as you plan to go forward for the business? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, Neil, no change to our strategy. You're correct. We like bolt-on M&A technology acquisitions. We think about M&A in terms really of research and development. Is it something that advances research? Does it move it more quickly so that we get to market more quickly? But we see significant organic growth in the businesses that we're in. And so, we like where we are and we see plenty of growth. And we also, I believe that organic growth generates more value for shareholders. And we've seen that with other things that we've done in the past in terms of small acquisitions that we're able to then grow and push through our channel. But we like the space where we compete and we like the technology and how we develop that. And so, you shouldn't expect any change from Halliburton. Neil Mehta -- Goldman Sachs -- Analyst All right. Thanks, team. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. And it comes from the line of Arun Jayaram with J.P. Morgan Securities. Please proceed. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Yes. Good morning, Jeff. I wanted to see if you could characterize your thoughts on the future prospects of the opex versus the D&C cycle on a go forward basis. Can you talk about your current leverage to opex and production? And is this an area strategically you'd like to grow either organically or inorganically over time? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Well, I want to answer the second part of that first in terms of organically. Yes. So, we don't see a change to our strategy or approach to markets. So, yes, we do see quite a bit of organic growth for us in the opex part of the market. We're in that business today. We've got strong, I mean, strong lift business today. We're in the chemicals business today. And we're in the intervention business today in a pretty big way. And we continue to develop technology similar to as we've done in the past. And so, it's my outlook for opex cycle. We've got plenty of exposure to that and have had. Now, I want to be careful and say the D&C cycle is very strong and continues to grow. And I suspect that it continues to grow also. So, I think we're well balanced across really all elements of this, whether it's exploration, development, drilling, and opex today. Some of the things we've done in the past, again, we bought smaller businesses that we've grown into bigger businesses. And so, again, a strategy that works for us and it delivers the organic growth that we believe is really good for our shareholders. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Great. Jeff, second question is, I wanted to see if you could give us your perspective on any potential impact to how from the changing mix of activity in Saudi Arabia, which looks to be a little bit more onshore versus shallow water. And maybe you could just talk about the year over growth in MENA, which at 6% seemed a little bit lower than we were expecting. Jeff Miller -- Chairman, President, and Chief Executive Officer Well, I think the first part of that in terms of Saudi growth, '24 is still growing, by the way. We expect growth in Saudi in '24. And the rebalancing, the gas and unconventionals is very good for Halliburton. We've got a very strong onshore business in Saudi Arabia. We participate in all aspects of that market. And that market remains tight for equipment. So, I feel good about that market. And I'm very confident in the long-term growth of that market. The rebalancing again to gas is, we're meaningful players in that part of the market and expect that will only be good for Halliburton. Pivot to growth, look, a couple of things. No. 1, international business grew 12% overall. So, I want to start there. Clearly, I'd expect more growth in the region, but here's what we're doing. I want to be really clear that profitable growth has been our primary focus. We see a good pipeline of opportunities. We expect to continue to see growth in MENA. But at the same time, we want to make certain we're building a foundation shipment for growth. That means that we are delivering the technology, we're making the investment while expanding margins and growing, and that's been sort of our mantra, our strategy is profitable international growth. And that's what we saw this quarter. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. And one moment for our next question, please. And it comes from the line of Roger Read with Wells Fargo Securities. Please proceed. Roger Read -- Wells Fargo Securities -- Analyst Yes. Thanks. Good morning. Jeff, I'd like to get back in on the international growth. So, double digits, what you've delivered, double digits, where you're guiding or where you're headed. How much of this would you describe as due to new products or products and services or new markets and how much of it to just underlying expansion? Why don't you get kind of an -- you've talked about a lot of the new stuff you're putting in, just how effective that is in driving some of this growth? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes, thanks. Look, I think the growth is broad based, but the technology matters. It's not necessarily new products. It's actually an expanding market. A couple of things are happening at one time, yes, activity is growing, but we're participating in a larger share of that growth than maybe in the past based on some of the technology I described. So, we're competing differently technically, and so we get a bigger part of that growth. We've added some new things, yes, like Lift internationally, that's a new product for growth, a new product that's a whole business, but it's growth end markets, and we're really pleased with the progress that that's making. And then, obviously, pricing in the tight market internationally helps us well because that's helping growth all around. But I would not overlook the importance of the improvement in drilling technology, particularly just because it's more access to a larger market and at a much better rate of return for us given the improvement over legacy technology. The capital efficiency of the new technology is probably is right about 40% more capital efficient than the legacy tools. So, getting sort of improvement along several dimensions there, growing market, bigger share, better pricing and better capital efficiency. Roger Read -- Wells Fargo Securities -- Analyst Thanks for that. And then, just to pivot back real quick to North America, you mentioned not really anticipating or certainly not built into the expectations for recovery in gas this year. Presuming that that's kind of a well completions way you're thinking about it, at what point of the year would you have to see an increase maybe in activity spending rig count in gas to think that there was a chance that you could outperform I say you, but the market could outperform your expectation. Like if we get to the third quarter and we haven't seen an improvement, we should close the books on '24 having any improvements to dig about '25? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes, look thanks. I think that's the next big leg of growth in North America. It's a question of timing, but it is no question going to drive a lot of growth in North America. And I expect it will drive market growth '25 and beyond. And I think what's overlooked, look through the current timing and look forward to what's coming, attrition has really shrunk the fleet. The fleet for the market is shrinking to meet the demand that is there today and that happens every day. Equipment is not being built, new equipment. So, when we get to that point in time, it will be an incredibly tight market. And so, I'm actually quite excited and confident about what gas means to the North America market. Just saying, yes, the leading indicators of that will be well construction, it will be offtake contracts for LNG. There will be a number of things that sort of happen, but it will happen just given the capital has been invested on the export side. There's no question that the gas will be developed to meet that. Roger Read -- Wells Fargo Securities -- Analyst Great. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. And it's from the line of James West with Evercore ISI. Please proceed. James West -- Evercore ISI -- Analyst Hey. Good morning, Jeff. Good morning, Eric. Jeff Miller -- Chairman, President, and Chief Executive Officer Good morning, James. Eric Carre -- SVP, Drilling and Evaluation Good morning, James. James West -- Evercore ISI -- Analyst So, Jeff, one of the areas that we haven't discussed in detail yet in the Q&A is really deepwater where you guys have an advantage position this cycle, I think relative to prior cycles even though you've been strong there for a while. But the technology enhancements that have happened at Halliburton puts you in a unique position to have more share, better profitability. And I'm curious kind of where you're seeing right now the biggest growth? And I think we know kind of Brazil and some other places, but where do you think we're going to be surprised as we go into kind of probably '25 and '26? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think the surprise will be West Africa and North Sea in terms of '25 and beyond. I think really we're planning work now. There are great opportunities today that are being planned by clients with the full expectation that we see a meaningful step up as we go into '25 and beyond. And these are all long-term type projects that will extend into the end of the decade. So, but I do think that's where we'll see a lot of activity. James West -- Evercore ISI -- Analyst OK. OK. That makes sense. And then, maybe just back to North America to pivot back there. Again, I don't want to beat a dead horse, but you guys are dramatically outperforming some of the peers in North America. And where do you hold the line, I guess on kind of pricing? And where do you sacrifice utilization in a market that may be down a little bit? Is it -- we just we'll give up the utilization to keep our pricing, or do you -- are you willing to give some discount to keep utilization high? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Look, James, do we see some pressure? Yes. But does that affect our strategy? Absolutely not. We've got a strategy with maximized value in North America. 40% of our equipment is contracted under long-term contracts, and we're not terribly exposed where we do see that pressure. And I think maybe more answer than you want, but I think it's important that we keep central as our strategy is delivering unique technologies that create real value for customers. And so, that's what lowest TCO looks like and that's why we're also work solving for recovery with ZEUS platform and Sensory. We think those two things alone create significant value for customers and so we keep that central. James West -- Evercore ISI -- Analyst Right, right. Totally get it. Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you, James. Operator Thank you. One moment for our next question, please. And it comes from the line of Scott Gruber with Citigroup. Please proceed. Scott Gruber -- Citi -- Analyst Yes. Good morning. Jeff Miller -- Chairman, President, and Chief Executive Officer Good morning, Scott. Eric Carre -- SVP, Drilling and Evaluation Good morning, Scott. Scott Gruber -- Citi -- Analyst Well, it's getting later in the call, so I'll give you a chance to mention AI a few times. Not that it's needed. But are global customers starting to discuss additional demands from power for data centers? And do you think this has the potential to pull forward additional gas developments over the next few years around the world? Or is this still off the horizon? Jeff Miller -- Chairman, President, and Chief Executive Officer I think gas is a critical fuel. And look, yes, I think we mentioned in the prepared remarks that the growth in demand for gas or gas and electricity and that being the most effective way to deliver power certainly today in the most reliable. So, I think that this is almost becoming, it's one of those things that you don't see it until it's on top of you. And I think that right now that demand is on top of us. And so, I think that can only be additive to demand. I have no question that will be additive. And clearly, AI consumes more power than traditional data centers. So, I think all of that combined, there's almost it's not almost, it is a secular trend toward demanding more power and that can only be good for our industry and for Halliburton. Scott Gruber -- Citi -- Analyst Yes, it'll be interesting to watch. Just turning back to the near-term, Latin America was a big outperformer versus our expectation. Can you just provide some more color on the details of what drove the outperformance in Latin America? And overall, what type of growth would you anticipate from the market this year? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, Latin America performed very well. It's broad based growth in Latin America. So, really it's several geographies and types of markets, whether Argentina, Mexico, Caribbean, Ecuador. So, we saw strong growth all over. And important to say, our team in Latin America is doing an exceptional job. I'm very appreciative and pleased with the work that team does. And I think it also demonstrates how oil and gas is critical to economies. Those are economies that require oil and gas. They view oil and gas as critical to both security and economic growth, things that are important in Latin America. And so, I expect there's more to come. Scott Gruber -- Citi -- Analyst Got it. Appreciate it, Jeff. Thank you. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. And it comes from the line of Luke Lemoine with Piper Sandler. Please proceed. Luke Lemoine -- Piper Sandler -- Analyst Hey. Good morning. Jeff, you've reiterated your full-year international revs up low-double-digits with margins expanding this year. But could you maybe talk more specifically about how you see the D&E margins unfolding on a full-year basis? And then, also, as we kind of look over the next couple of years as international continues to unfold, you roll out new products and services like iStar and iCruise, what are kind of the aspirational targets here in D&E? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Look, I like the trajectory that we're seeing in D&E. And I say that because we're growing the business, but we're growing the business at a pace that's profitable and building the kind of foundation that we can use the technology in markets where we know we've got solid growth and profitability and then be able to reach out from there. But clearly, it is a balance of growing margins while opening for example, new businesses. So, we've opened a few new markets while growing profitably. And I think that's sort of the foundational part of our D&E trajectory. So, I expect to continue to see it aspirationally, continue to expect it to go up and expand quarter over quarter, year on year. And in the first quarter, we actually saw flooding in some markets. We saw weather in some others, maybe more than we would have expected. Though I expect that we continue on the trajectory in spite of all of the things that sort of come along and businesses that are open. So, should expect to continue to see that moving up. Luke Lemoine -- Piper Sandler -- Analyst OK. Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thanks. And one moment for our next question. And it comes from the line of Stephen Gengaro with Stifel. Please proceed. Stephen Gengaro -- Stifel Financial Corp. -- Analyst Thanks. Good morning, everybody. Jeff Miller -- Chairman, President, and Chief Executive Officer Good morning, Stephen. Stephen Gengaro -- Stifel Financial Corp. -- Analyst Two from me, the first, you mentioned the strength in iCruise in North America. I think you said more than double a year ago footage drilled. Is that displacing competitors? Is that organic growth? Is that replacing all technology that you're offering? Can you give some color around that? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, it's performing very well and the uptake has been strong. And so, it is different technology than what we've ever had in the past. It's designed for this market. It's built on the iCruise platform. So, how it gets to market is really customer driven and there's been just more uptake on the technology self. Yes, it's all organic. In terms of it, we developed the technology ourselves. We've worked on it for some time. We built a platform that has been very effective internationally and now we've gotten to the North America part of it. So, it's early days, but stay tuned. I mean, we're really pleased with the advancement that it's making, but it's really customers will drive the uptake for that. So, the increase in footage drilled is indicative of customers gaining confidence in the performance of that technology, particularly in the curved lateral. Stephen Gengaro -- Stifel Financial Corp. -- Analyst Great. Thank you. And I know this may be a little harder for you to answer directly, but when we think about the CHX, SLV deal and what's going on in production chemicals, I would imagine it's an area that would have interest to you. But my question is really, you had a great amount of success with Summit and what you bought and built over the last, I guess five, six years plus and the strength of that business. Is that something that you can replicate in production chemicals if you went down that road? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think, I'll revert back to strategically we like to grow things organically. We own the kernel of a business there. We continue to make progress. We've got the plant. The capacity is filling up in the Middle East. So, the trade-off is speed, but I think also the trade-off from our perspective anyway has been, we know how to do this and we believe it generates a lot of value for our shareholders when we go about it this way. And so, we're going to continue to grow our chemicals business around the world on the back of some assets that we built ourselves. And so, I'm pleased, I think there's opportunities for organic growth in chemicals, organic growth, and strong growth in intervention, a whole lot of different areas. Stephen Gengaro -- Stifel Financial Corp. -- Analyst OK. Great. Now, thank you for the call. Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Thanks. Operator Thank you. One moment for our next question, and it comes from the line of Marc Bianchi with TD Cowen. Please proceed. Marc Bianchi -- TD Cowen -- Analyst Hi. I wanted to circle back to the discussion on pricing for North America just because you made the comment that you've seen some softening, but you're not changing your strategy. Could you just comment on how sort of the market has evolved over the last 90 days, if anything has changed. We've had a competitor out there saying that they're going to go after share at the expensive price. Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I don't comment on competitors, but from a strategic perspective we haven't changed. What we're doing and I like where we are. A big part of our fleet is contracted today. We focus on delivering top-notch efficiency, sort of record-setting efficiency, and also lowest ECO. And so, that's where our primary focus is, and we plan to stay with that. Marc Bianchi -- TD Cowen -- Analyst OK. Great. Thanks for that, Jeff. And then, on the second quarter outlook, you gave the C&P and D&E, should we assume that that's a similar profile for international in North America or anything that we should be contemplating there? Jeff Miller -- Chairman, President, and Chief Executive Officer In terms of -- I don't – Marc Bianchi -- TD Cowen -- Analyst Yes. Go ahead Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Look, in terms of growth, I think the margin growth I expect will continue. I mean, I think that we talked about expanding margins and D&E and also C&P is continuing to grow. And I think we're solid. We're in a number of very good businesses around C&P. Marc Bianchi -- TD Cowen -- Analyst OK. Maybe just to clarify, the question was more on revenue, so I guess what I'm wondering is to get to the low double digits for international, it would seem that you need a pretty healthy growth in the remaining -- all three remaining quarters of the year sequentially. Jeff Miller -- Chairman, President, and Chief Executive Officer Oh, yes, sorry, I -- Marc Bianchi -- TD Cowen -- Analyst Could you talk about where that's coming from? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. So, that's pretty broad-based. I mean, and so for C&P that's completion tools around the world. It's production enhancement around the world. So, in a very strong position, and we see a number of things growing, not the least of which would be lift, for example, and some things like that. So, I had heavy lift, I don't see it as a -- I see it as a very middle of the fairway, very doable from where we sit today. And again, equipment's tight. I think that we'll continue to see strengthening there as well, expanding margins in price. Marc Bianchi -- TD Cowen -- Analyst Very good. Thank you. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, and it comes from the line of Kurt Hallead with Benchmark. Please proceed. Kurt Hallead -- The Benchmark Company -- Analyst Hey. Good morning. Good morning, everybody. Thanks for slotting me in here. So, Jeff you've been at this a long time. You referenced on more than one occasion, not just today, but in other calls about increasing level of visibility, especially on the international front and talking about opportunities that could extend out to the end of the decade. I think a lot of investors are wanting to kind of get inside the room with you, if you will, and try to get the same sort of conviction you have with respect to that duration. So, I'm just kind of curious if you could give us some perspectives and insights on how those conversations are taking place, how much lead time your customers are asking for, and effectively, what two or three things are you seeing that continue to underpin this confidence and conviction that this cycle is going to extend through the end of the decade? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes, thanks. Look, some of its work that will begin in '25 that is planned to go through the end of the decade. So, I feel very confident about that. Others are work that we're working on planning with clients that again are the types of projects that extend that far. I think just the price of the commodity and the tightness and the rising demand for oil and gas gives me confidence and it gives our clients confidence. And clearly, we've seen a bit of a return to oil and gas and its importance in a lot of places, but the type of work that we're starting, the type of offshore work that we're starting is takes time to get started and it takes a long time to do, and so, very confident about that broadly. And I would include, anyway, the outlook for North America is similar in terms of duration. I mean, this is the kind of investments that we've seen in North America that are not for a quarter or two. These are decade-long investments that we've seen happen. And the next leg on gas and the demand for gas, it's already been talked about on this call. I feel very confident in the resilience of this cycle. Kurt Hallead -- The Benchmark Company -- Analyst That's great. I appreciate that. So, the other dynamic you referenced was approving margins, right? So, you've booked contracts that tend to last, I don't know, two to three years on average in the international market, so those will roll through this year and next year and so on. Just curious in the context of that margin improvement from here, right, if you were to try to rank and order it. Is how much of the pricing how much is it? Is it volume? How much is the technology value proposition? Can you give us some additional sense on how you see that? What's driving that margin improvement? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think it's a combination of those. Some of it is certainly tightness in the market and pricing, but at the same time we've talked about our R&D investment over the last eight years has all been directed at better capital efficiency, and that drives margin also. That drives margins in our drilling business, it drives margin in our frac business. But these are deliberate choices that we've made to drive down or to improve capital efficiency and return. And I think that's evident, probably most evident in our drilling technology and our ZEUS technology.But at the same time, that's been a practice in all of our business. And so, anything that we're producing today, sort of its first criteria has to be improved capital efficiency and better returns out of R&D. And so, I'm really pleased with the success we've had there. And so, I would say all are contributing today, in addition to having sort of more market access, more opportunity to compete on the back of improved technology. Kurt Hallead -- The Benchmark Company -- Analyst I appreciate that. Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, and it comes from the line of Doug Becker with Capital One. Please proceed. Doug Becker -- Capital One Securities -- Analyst Thanks. Jeff, would you expand a little bit more on the drivers behind the sequential margin expansion in D&E? And really, the question is just a function that the last several years D&E margins actually declined in 2Q from 1Q. Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think that's, again, I'm back to the foundation building that I described. So, we've got a better foundation, broader-based work, and so I expect to continue to see expansion, certainly year over year. And then, also as that foundation gets stronger, that gives us more ability to grow the business profitably, but from a sound base. Eric Carre -- SVP, Drilling and Evaluation I think Doug, it's Eric here, that the typical drop in margin in Q2 happens with the reduction in our software business. The way we recognize revenue in our software business means that it's essentially taken in Q4 and in Q1, so we see a bit of a drop there. You see that being more muted this year because, as Jeff mentioned, the D&E margins were softer than we were expecting in Q1, as we had much more significant weather issues in the North Sea in Norway, in Alaska, and then the flooding over in Indonesia. So, the combination of the muted effect and the more traditional software impact moving from Q1 to Q2 results in margins going up here. Doug Becker -- Capital One Securities -- Analyst That all makes sense. Maybe switching to North America, U.S. more specifically, last quarter you were talking about ZEUS e-fleets would represent about 40% by the end of the year, going to maybe 50% in 2025. Is there a reasonable or realistic or probable scenario where you would accelerate this deployment? The results certainly suggest the outperformance and there might be a case for that. Jeff Miller -- Chairman, President, and Chief Executive Officer No. Look, this is a market push. The whole strategy behind e-fleet for us has been build the best technologies and clients demand it, and we've built to the demand that we see in hand, and therefore, they are not built on spec, they are built for customers that plan to use them. And we don't plan to change that. And so, in some ways that adds central to maximizing value in North America. When we maximize value in North America, we are not going to build things, we don't have home. And so, I expect to continue to see market demand for this equipment. 2024 is actually already in hand. It's just delivering the units themselves. They already have homes. And in '25, we actually have some deliveries. And I expect that we will see more as we go forward. But I think that important to remember that that our approach is to build to contract. Doug Becker -- Capital One Securities -- Analyst That makes sense. Thank you. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Eric Carre -- SVP, Drilling and Evaluation Thank you. Operator Thank you. And with that, we conclude our Q&A session for today. I will pass it back to management for final comments. Jeff Miller -- Chairman, President, and Chief Executive Officer OK. Thank you, Carmen. Let me close out the call with this, I am excited about the outlook for Halliburton and expect Halliburton to deliver strong free cash flow and shareholder returns. Look forward to speaking with you next quarter. Let's close out the call. Answer:

the Halliburton first quarter 2024 conference call

David Coleman Hello, and thank you for joining the Halliburton first quarter 2024 conference call. We will make the recording of today's webcast available for seven days on Halliburton's website after this call. Joining me today are Jeff Miller, chairman, president and CEO; and Eric Carre, executive vice president, and CFO. Some of today's comments may include forward-looking statements, reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2023, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter earnings release and in the Quarterly Results & Presentation section of our website. Now, I'll turn the call over to Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you, David, and good morning, everyone. Halliburton delivered solid first quarter results that again demonstrated the power of our strategy and the strength of our execution. Here are the quarter highlights. We delivered total company revenue of $5.8 billion, and operating margin of 17%. Both divisions demonstrated margin improvement year over year. International revenue was $3.3 billion, and grew 12% year over year, led by Latin America, which delivered a 21% increase. North America revenue was $2.5 billion, a 5% increase over the fourth quarter of 2023. Finally, during the first quarter, we generated $487 million of cash flow from operations, $206 million of free cash flow, and repurchased $250 million of our common stock. Let me begin today's discussion with my views on the strength of the oilfield services market. Global energy use is on the rise, with crude oil demand projected to grow between 1.2 million and 2.3 million barrels per day in 2024. This demand growth is greatest in non-OECD countries, where we expect more per capita energy consumption, not less as they develop their economies and improve their quality of life. Globally, secure, reliable hydrocarbon production powers industries, moves people, and advances economies. In the U.S., after stable electricity demand for nearly two decades, we now expect it to grow more than 15% by 2030. Today, over 40% of United States electricity is supplied by natural gas, and we expect strong demand for natural gas as a base fuel well into the future. The world requires more energy, not less, and I'm more convinced than ever that oil and gas will fill a critical role in the global energy mix for decades to come. My outlook is confirmed by our customers' multiyear activity plans across multiple markets and asset types. Everything I see points toward long-term growth for Halliburton's services. My outlook for the industry is not new, and it drives our focus on oilfield services, and sets our strategy. This focus is the basis for our technology investment, capital allocation, and culture. This multiyear upcycle together with our successful strategy execution make this a great time for Halliburton. Now, let's turn to international markets, where Halliburton's strategy of profitable growth delivered another solid quarter. International revenue grew 12% year over year with growth demonstrated by each region. This marks the 11th consecutive quarter of year-on-year growth in our international business. For 2024, I expect full-year revenue growth in the low double-digits. Equally important, the international market remains tight for equipment, and people, and therefore, we expect to see margin expansion over last year. One of the many things that excites me about our international business is our technology that creates meaningful value for our customers, and drives above-market growth for Halliburton. In the Drilling and Evaluation Division, our leading formation evaluation tools such as the EarthStar X logging-while-drilling system, and our Reservoir Xaminer Formation Sampling Service, both see strong adoption and increasing levels of demand. The advanced measurements these systems provide create unique insights for our customers and drive profitable growth for Halliburton. In the Completion and Production division, our Artificial Lift technology continues to generate profitable growth throughout each of our international regions. Our electric submersible pump portfolio proved to be a market leader in the competitive North America market, and we expect to deliver similar results over time in the international markets. Our complete solution, which includes downhole motors, pumps, and surface systems with remote monitoring and automation, provides an end-to-end solution, and the ability to operate at scale. A great example is in Kuwait, where in less than three years, we captured a nearly 20% market share with over 700 ESP installs. Before we move on, I want to share an observation. I'm consistently seeing more global interest in unconventionals. I can recall over a decade ago, the global scramble to find unconventionals with limited success. Today, two significant markets outside of North America achieve scale, which serves as a proof point for what is possible, and drives interest by others. As global markets grow, the technologies and processes Halliburton developed as the leader in North America over the last three decades have broad applications to unconventional reservoirs throughout the world, which makes this a fantastic long-term opportunity for Halliburton. I'm confident in the duration of this international upcycle in 2024 and beyond. Turning to North America, our first quarter revenue grew 5% over last quarter. As expected, North America land completion activity bottomed in the fourth quarter of last year and rebounded in the first quarter as our customers quickly resumed operations after the holidays. Looking ahead for the rest of 2024 in North America, we expect steady activity levels for Halliburton. Our customers are planning for the long-term and I expect they will execute work throughout the year as planned. This is consistent with a more industrialized approach to asset development in North America. And while we expect an eventual recovery in natural gas activity driven by demand from LNG expansions, our 2024 plan does not anticipate this recovery. Overall, we expect that full-year North America revenue and margins will be flattish compared with 2023 levels. Clearly, our strategy is to maximize value in North America. We do it in multiple ways. Today, I want to talk about two of them. The first is the ZEUS platform and the second is our new North America focused directional drilling system. The ZEUS platform, its electrification, automation and subsurface diagnostics continue to advance. This quarter, we introduced Sensory, which is the latest generation of our subsurface measurement technology. Sensory provides an easy to deploy, cost effective and automated system for real time subsurface measurement of fracturing operations. Additionally, our automation technologies are at the heart of our highly efficient simul-frac and trimul-frac operations and they continue to expand their capabilities creating value for Halliburton and our customers. The ZEUS platform demonstrates its uniqueness every day. And importantly, it's deployed at scale. Our scale allows for rapid technology innovation. Each technology improvement to the ZEUS platform widens the moat around our leading position in the fracturing market. This creates outsized value for Halliburton and our customers. I am pleased with the results we see in North America from our drilling services product line, which late last year launched a new version of our iCruise Rotary Steerable System specifically engineered for the North America unconventional market. The new iCruise CX system is designed for the challenging curve and lateral applications in North America. The system's performance is driving strong uptake and this quarter, our iCruise footage drilled in North America more than doubled over last year. We also coupled this high performing system with an asset light sales and rental model that increases the addressable market when compared to a full-service model. This is how iCruise CX both participates in new market segments and increases its speed of market penetration. The key trend that I see in North America drilling is the move to longer laterals and more complex wells which customers drill to improve economics. iCruise CX is specifically designed for these applications. And its performance is why I am excited about Halliburton's growth in the North America drilling market. To close out, I would like to thank our employees. I regularly hear from our customers about the work you do. How much it means to them, and how your execution of our value proposition differentiates Halliburton from our competitors. Well done. I am excited about the business outlook for Halliburton. Energy demand growth is strong and so is demand for our services. I expect that our focus on oilfield services and execution of our strategy will generate strong free cash flow and shareholder returns. This quarter, Halliburton repurchased $250 million of our common stock, a solid start to the year and a good benchmark for our expectations going forward. Now, I'll turn the call over to Eric to provide more details of our financial results. Eric? Eric Carre -- SVP, Drilling and Evaluation Thank you, Jeff, and good morning. Our Q1 reported net income per diluted share was $0.68. Adjusted net income per diluted share was $0.76. Total company revenue for the first quarter of 2024 was $5.8 billion. Operating income was $987 million. And operating margin was 17%; flat compared to Q1 2023. Beginning with our Completion and Production division; revenue in Q1 was $3.4 billion, down slightly from Q1 2023. Operating income was $688 million, up 3% when compared to Q1 2023. And operating income margin was 20%. Compared to Q1 of last year, these results were primarily driven by reduced pressure pumping services in U.S. land. Partially offset by higher activity in international markets. In our Drilling and Evaluation division, revenue in Q1 was $2.4 billion, an increase of 7% compared to Q1 2023. Operating income was $398 million, up 8%, and operating margin was 16%, an increase of 10 basis points over Q1 last year. These results were primarily driven by higher drilling-related services in the Middle East and North America, as well as improvements across multiple product lines in Latin America. Now, let's move on to geographic results. Our Q1 international revenue increased 12% year over year. Europe/Africa revenue in the first quarter of 2024 was $729 million, an increase of 10% year over year. This increase was primarily driven by higher completion tool sales in the region and fluid services in Norway and the Caspian area. Middle East/Asia revenue in the first quarter of 2024 was $1.4 million, an increase of 6% year over year. This increase was primarily related to improved activity in multiple product service lines in Kuwait, Saudi Arabia, and Oman. Latin America revenue in the first quarter of 2024 was $1.1 billion, an increase of 21% year over year. This improvement was primarily related to higher drilling-related services and increased software sales in Mexico, improved pressure pumping service and fluid services in Argentina, and increased activity in multi-product service lines in Brazil and Ecuador. In North America, revenue was $2.5 billion, representing an 8% decrease year over year, but a 5% increase from the last quarter. This year-over-year decline was primarily driven by lower pressure pumping services in U.S. land, as well as lower wireline activity. Moving on to other items, in Q1, our corporate and other expense was $65 million. For the second quarter of 2024, we expect our corporate expenses to be approximately flat. Our SAP deployment remains on budget and is on schedule to conclude in 2025. In Q1, we spent $34 million, or about $0.04 per diluted share, on SAP S4 migration, which is included in our results. For the second quarter, we expect SAP expenses to be approximately flat. Net interest expense for the quarter was $92 million. For the second quarter 2024, we expect net interest expense to be roughly flat. Other net expense for Q1 was $108 million, higher than expected, primarily due to impairment of an investment in Argentina and currency devaluation in Egypt. For the second quarter 2024, we expect this expense to be approximately $35 million. Our adjusted effective tax rate for Q1 was 21.5%. Based on our anticipated geographic earnings mix, we expect our second quarter 2024 effective tax rate to increase approximately 75 basis points. Capital expenditures for Q1 were $330 million. For the full year of 2024, we expect capital expenditures to remain approximately 6% of revenue. Our Q1 cash flow from operations was $487 million, and free cash flow was $206 million. During the quarter, we repurchased $250 million of our common stock. For the full year 2024, we expect free cash flow to be at least 10% higher than 2023. Now, let me provide you with some comments on our expectations for the second quarter. In our Completion and Production division, we anticipate sequential revenue to be up 2% to 4% and margins to increase by 25 to 75 basis points. In our drilling and evaluation division, we expect sequential revenue to increase 1% to 3% and margins to increase by 25 to 75 basis points. I will now turn the call back to Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thanks, Eric. Let me summarize our discussion today. Halliburton delivered solid first quarter results. I am confident in the strength and duration of this up cycle. We expect our North America business to deliver flattish revenues and margins year on year despite lower activity levels. We also expect our international business revenue to grow at low double digits year on year. I'm excited about the outlook for Halliburton and expect Halliburton to deliver strong free cash flow and shareholder returns. And now let's open it up for questions. Questions & Answers: Operator Thank you. [Operator instructions] One moment for our first question, and it comes from the line of David Anderson with Barclays. Please proceed. David Anderson -- Barclays -- Analyst Thanks. Good morning, Jeff. I want to ask you about a couple of things that you talked about in your prepared remarks. And the first is on the ZEUS fleet. You had an impressive 5% sequential increase in North America this quarter, despite the flat rate count. I have to think it's probably attributed to these e-fleets being rolled out. It's pretty clear, this is a big step change in efficiency for your customer, and demand seems to be exceeding supply at least for the next couple of years, but I guess, the question is what prevents the industry from building out? And can you talk about your competitive advantage today and how you maintain that? You were first to market, establish leadership, but is there differentiated technology? Is it more about relationships? I guess, the question is really on the moat on this business as you see it over the next few years. Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Thank you, Dave. Look, the most important point is this is a comprehensive platform. ZEUS is a platform. Clearly, it's electric. Yes, it drives efficiency, but the embedded automation actually really changes the dynamics of how it performs. And then, also the subsurface measurements with Sensory that are embedded in this system, and uniquely embedded. And so, that widens the moat. And I think equally important is being at scale. So, it's one thing to do a research project around a thing, but when we're working at scale, these are solutions that can be pushed to the platform at any point in time. So, it's really the ability to grow the moat on existing equipment, as well as any new turns on the science as it goes forward. So, I'm super excited about it. Yes, obviously lowest TCO, but it's the technology differentiation as well that widens the moat. David Anderson -- Barclays -- Analyst And then, just to touch on something else, you had talked about some unconventional fields in international markets. Clearly, one of the big stories this year has been the Saudi shift in capex from offshore toward those unconventionals, specifically around Jafurah. You have a toehold in that field with that liquid mud plant facility, but this is just starting development. My understanding is there's a bunch of tenders on the way more coming. Can you talk about sort of the opportunity set for Halliburton on this field in the near-term, maybe incremental growth you see in '25? And how do you support these build-outs? You said capacity is really tight in the market. Is this a market maybe you bring some diesel fleets in there? Is there other equipment in the region, or how do you think about that, the tightness and the capacity as it relates to building out to some conventional field? Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you, David. And I'm really excited about it. And there's a lot of opportunity for Halliburton around unconventionals, as you know. How we address it, we've got a lot of ways to address it, including some of the technology we've talked about today. We've got a good position in there, but I think with even more opportunity to grow, particularly with drilling technology that continues to advance. You mentioned mud, but also other aspects of that where we'll be very competitive. So, I think that's a big move forward. And I think more broadly, so good for Halliburton, but I think that more broadly, just the discussion around unconventionals internationally, what can you see today are two markets, at least outside the U.S., that are truly at scale. And I think that serves as a bit of a template for how that can be done, because it was really unclear a decade ago, as you recall. But I think we're in a different place with unconventionals today. And so, we do hear more discussion around, hey, this is possible, and how Halliburton would play a more meaningful role in that in additional markets, so super encouraged. David Anderson -- Barclays -- Analyst Thank you, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. One moment, it comes from the line of Neil Mehta with Goldman Sachs. Please proceed. Neil Mehta -- Goldman Sachs -- Analyst Good morning, Jeff, and team. Jeff, you've talked about wanting to drive your free cash flow per share higher. And so, it's great to see the share repurchases for a couple quarters run rating at this $250 million mark. Can you talk about why you think that's the right number to use going forward? And how does share repurchase fit in the seriatim of capital allocation? Eric Carre -- SVP, Drilling and Evaluation Yes, Neil, it's Eric. So, the baseline that we use is the framework that we announced several quarters ago to return a minimum of 50% of free cash flow to shareholders. We actually returned over that at just about 60% in 2023. So, when we look at the improvements in free cash flow year over year, which we mentioned to be about 10%. So, when we think through that, we think that the $250 million of buyback is a good base load for us to be repurchasing shares. So, expect more buybacks in dollars, expect more overall returns to shareholder dollar-wise, and then, we see where the overall percentage lands, but it should be pretty close to what we did last year. Yes. Neil Mehta -- Goldman Sachs -- Analyst OK. That's really helpful. And then, the follow-up is, we are seeing signs of industry consolidation, certainly more in E&P and services, but we start to see some in services as well. Halliburton always struck us as more of a organically driven business, but be curious on how you're thinking about M&A as you plan to go forward for the business? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, Neil, no change to our strategy. You're correct. We like bolt-on M&A technology acquisitions. We think about M&A in terms really of research and development. Is it something that advances research? Does it move it more quickly so that we get to market more quickly? But we see significant organic growth in the businesses that we're in. And so, we like where we are and we see plenty of growth. And we also, I believe that organic growth generates more value for shareholders. And we've seen that with other things that we've done in the past in terms of small acquisitions that we're able to then grow and push through our channel. But we like the space where we compete and we like the technology and how we develop that. And so, you shouldn't expect any change from Halliburton. Neil Mehta -- Goldman Sachs -- Analyst All right. Thanks, team. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. And it comes from the line of Arun Jayaram with J.P. Morgan Securities. Please proceed. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Yes. Good morning, Jeff. I wanted to see if you could characterize your thoughts on the future prospects of the opex versus the D&C cycle on a go forward basis. Can you talk about your current leverage to opex and production? And is this an area strategically you'd like to grow either organically or inorganically over time? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Well, I want to answer the second part of that first in terms of organically. Yes. So, we don't see a change to our strategy or approach to markets. So, yes, we do see quite a bit of organic growth for us in the opex part of the market. We're in that business today. We've got strong, I mean, strong lift business today. We're in the chemicals business today. And we're in the intervention business today in a pretty big way. And we continue to develop technology similar to as we've done in the past. And so, it's my outlook for opex cycle. We've got plenty of exposure to that and have had. Now, I want to be careful and say the D&C cycle is very strong and continues to grow. And I suspect that it continues to grow also. So, I think we're well balanced across really all elements of this, whether it's exploration, development, drilling, and opex today. Some of the things we've done in the past, again, we bought smaller businesses that we've grown into bigger businesses. And so, again, a strategy that works for us and it delivers the organic growth that we believe is really good for our shareholders. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Great. Jeff, second question is, I wanted to see if you could give us your perspective on any potential impact to how from the changing mix of activity in Saudi Arabia, which looks to be a little bit more onshore versus shallow water. And maybe you could just talk about the year over growth in MENA, which at 6% seemed a little bit lower than we were expecting. Jeff Miller -- Chairman, President, and Chief Executive Officer Well, I think the first part of that in terms of Saudi growth, '24 is still growing, by the way. We expect growth in Saudi in '24. And the rebalancing, the gas and unconventionals is very good for Halliburton. We've got a very strong onshore business in Saudi Arabia. We participate in all aspects of that market. And that market remains tight for equipment. So, I feel good about that market. And I'm very confident in the long-term growth of that market. The rebalancing again to gas is, we're meaningful players in that part of the market and expect that will only be good for Halliburton. Pivot to growth, look, a couple of things. No. 1, international business grew 12% overall. So, I want to start there. Clearly, I'd expect more growth in the region, but here's what we're doing. I want to be really clear that profitable growth has been our primary focus. We see a good pipeline of opportunities. We expect to continue to see growth in MENA. But at the same time, we want to make certain we're building a foundation shipment for growth. That means that we are delivering the technology, we're making the investment while expanding margins and growing, and that's been sort of our mantra, our strategy is profitable international growth. And that's what we saw this quarter. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. And one moment for our next question, please. And it comes from the line of Roger Read with Wells Fargo Securities. Please proceed. Roger Read -- Wells Fargo Securities -- Analyst Yes. Thanks. Good morning. Jeff, I'd like to get back in on the international growth. So, double digits, what you've delivered, double digits, where you're guiding or where you're headed. How much of this would you describe as due to new products or products and services or new markets and how much of it to just underlying expansion? Why don't you get kind of an -- you've talked about a lot of the new stuff you're putting in, just how effective that is in driving some of this growth? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes, thanks. Look, I think the growth is broad based, but the technology matters. It's not necessarily new products. It's actually an expanding market. A couple of things are happening at one time, yes, activity is growing, but we're participating in a larger share of that growth than maybe in the past based on some of the technology I described. So, we're competing differently technically, and so we get a bigger part of that growth. We've added some new things, yes, like Lift internationally, that's a new product for growth, a new product that's a whole business, but it's growth end markets, and we're really pleased with the progress that that's making. And then, obviously, pricing in the tight market internationally helps us well because that's helping growth all around. But I would not overlook the importance of the improvement in drilling technology, particularly just because it's more access to a larger market and at a much better rate of return for us given the improvement over legacy technology. The capital efficiency of the new technology is probably is right about 40% more capital efficient than the legacy tools. So, getting sort of improvement along several dimensions there, growing market, bigger share, better pricing and better capital efficiency. Roger Read -- Wells Fargo Securities -- Analyst Thanks for that. And then, just to pivot back real quick to North America, you mentioned not really anticipating or certainly not built into the expectations for recovery in gas this year. Presuming that that's kind of a well completions way you're thinking about it, at what point of the year would you have to see an increase maybe in activity spending rig count in gas to think that there was a chance that you could outperform I say you, but the market could outperform your expectation. Like if we get to the third quarter and we haven't seen an improvement, we should close the books on '24 having any improvements to dig about '25? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes, look thanks. I think that's the next big leg of growth in North America. It's a question of timing, but it is no question going to drive a lot of growth in North America. And I expect it will drive market growth '25 and beyond. And I think what's overlooked, look through the current timing and look forward to what's coming, attrition has really shrunk the fleet. The fleet for the market is shrinking to meet the demand that is there today and that happens every day. Equipment is not being built, new equipment. So, when we get to that point in time, it will be an incredibly tight market. And so, I'm actually quite excited and confident about what gas means to the North America market. Just saying, yes, the leading indicators of that will be well construction, it will be offtake contracts for LNG. There will be a number of things that sort of happen, but it will happen just given the capital has been invested on the export side. There's no question that the gas will be developed to meet that. Roger Read -- Wells Fargo Securities -- Analyst Great. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. And it's from the line of James West with Evercore ISI. Please proceed. James West -- Evercore ISI -- Analyst Hey. Good morning, Jeff. Good morning, Eric. Jeff Miller -- Chairman, President, and Chief Executive Officer Good morning, James. Eric Carre -- SVP, Drilling and Evaluation Good morning, James. James West -- Evercore ISI -- Analyst So, Jeff, one of the areas that we haven't discussed in detail yet in the Q&A is really deepwater where you guys have an advantage position this cycle, I think relative to prior cycles even though you've been strong there for a while. But the technology enhancements that have happened at Halliburton puts you in a unique position to have more share, better profitability. And I'm curious kind of where you're seeing right now the biggest growth? And I think we know kind of Brazil and some other places, but where do you think we're going to be surprised as we go into kind of probably '25 and '26? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think the surprise will be West Africa and North Sea in terms of '25 and beyond. I think really we're planning work now. There are great opportunities today that are being planned by clients with the full expectation that we see a meaningful step up as we go into '25 and beyond. And these are all long-term type projects that will extend into the end of the decade. So, but I do think that's where we'll see a lot of activity. James West -- Evercore ISI -- Analyst OK. OK. That makes sense. And then, maybe just back to North America to pivot back there. Again, I don't want to beat a dead horse, but you guys are dramatically outperforming some of the peers in North America. And where do you hold the line, I guess on kind of pricing? And where do you sacrifice utilization in a market that may be down a little bit? Is it -- we just we'll give up the utilization to keep our pricing, or do you -- are you willing to give some discount to keep utilization high? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Look, James, do we see some pressure? Yes. But does that affect our strategy? Absolutely not. We've got a strategy with maximized value in North America. 40% of our equipment is contracted under long-term contracts, and we're not terribly exposed where we do see that pressure. And I think maybe more answer than you want, but I think it's important that we keep central as our strategy is delivering unique technologies that create real value for customers. And so, that's what lowest TCO looks like and that's why we're also work solving for recovery with ZEUS platform and Sensory. We think those two things alone create significant value for customers and so we keep that central. James West -- Evercore ISI -- Analyst Right, right. Totally get it. Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you, James. Operator Thank you. One moment for our next question, please. And it comes from the line of Scott Gruber with Citigroup. Please proceed. Scott Gruber -- Citi -- Analyst Yes. Good morning. Jeff Miller -- Chairman, President, and Chief Executive Officer Good morning, Scott. Eric Carre -- SVP, Drilling and Evaluation Good morning, Scott. Scott Gruber -- Citi -- Analyst Well, it's getting later in the call, so I'll give you a chance to mention AI a few times. Not that it's needed. But are global customers starting to discuss additional demands from power for data centers? And do you think this has the potential to pull forward additional gas developments over the next few years around the world? Or is this still off the horizon? Jeff Miller -- Chairman, President, and Chief Executive Officer I think gas is a critical fuel. And look, yes, I think we mentioned in the prepared remarks that the growth in demand for gas or gas and electricity and that being the most effective way to deliver power certainly today in the most reliable. So, I think that this is almost becoming, it's one of those things that you don't see it until it's on top of you. And I think that right now that demand is on top of us. And so, I think that can only be additive to demand. I have no question that will be additive. And clearly, AI consumes more power than traditional data centers. So, I think all of that combined, there's almost it's not almost, it is a secular trend toward demanding more power and that can only be good for our industry and for Halliburton. Scott Gruber -- Citi -- Analyst Yes, it'll be interesting to watch. Just turning back to the near-term, Latin America was a big outperformer versus our expectation. Can you just provide some more color on the details of what drove the outperformance in Latin America? And overall, what type of growth would you anticipate from the market this year? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, Latin America performed very well. It's broad based growth in Latin America. So, really it's several geographies and types of markets, whether Argentina, Mexico, Caribbean, Ecuador. So, we saw strong growth all over. And important to say, our team in Latin America is doing an exceptional job. I'm very appreciative and pleased with the work that team does. And I think it also demonstrates how oil and gas is critical to economies. Those are economies that require oil and gas. They view oil and gas as critical to both security and economic growth, things that are important in Latin America. And so, I expect there's more to come. Scott Gruber -- Citi -- Analyst Got it. Appreciate it, Jeff. Thank you. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, please. And it comes from the line of Luke Lemoine with Piper Sandler. Please proceed. Luke Lemoine -- Piper Sandler -- Analyst Hey. Good morning. Jeff, you've reiterated your full-year international revs up low-double-digits with margins expanding this year. But could you maybe talk more specifically about how you see the D&E margins unfolding on a full-year basis? And then, also, as we kind of look over the next couple of years as international continues to unfold, you roll out new products and services like iStar and iCruise, what are kind of the aspirational targets here in D&E? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Look, I like the trajectory that we're seeing in D&E. And I say that because we're growing the business, but we're growing the business at a pace that's profitable and building the kind of foundation that we can use the technology in markets where we know we've got solid growth and profitability and then be able to reach out from there. But clearly, it is a balance of growing margins while opening for example, new businesses. So, we've opened a few new markets while growing profitably. And I think that's sort of the foundational part of our D&E trajectory. So, I expect to continue to see it aspirationally, continue to expect it to go up and expand quarter over quarter, year on year. And in the first quarter, we actually saw flooding in some markets. We saw weather in some others, maybe more than we would have expected. Though I expect that we continue on the trajectory in spite of all of the things that sort of come along and businesses that are open. So, should expect to continue to see that moving up. Luke Lemoine -- Piper Sandler -- Analyst OK. Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thanks. And one moment for our next question. And it comes from the line of Stephen Gengaro with Stifel. Please proceed. Stephen Gengaro -- Stifel Financial Corp. -- Analyst Thanks. Good morning, everybody. Jeff Miller -- Chairman, President, and Chief Executive Officer Good morning, Stephen. Stephen Gengaro -- Stifel Financial Corp. -- Analyst Two from me, the first, you mentioned the strength in iCruise in North America. I think you said more than double a year ago footage drilled. Is that displacing competitors? Is that organic growth? Is that replacing all technology that you're offering? Can you give some color around that? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, it's performing very well and the uptake has been strong. And so, it is different technology than what we've ever had in the past. It's designed for this market. It's built on the iCruise platform. So, how it gets to market is really customer driven and there's been just more uptake on the technology self. Yes, it's all organic. In terms of it, we developed the technology ourselves. We've worked on it for some time. We built a platform that has been very effective internationally and now we've gotten to the North America part of it. So, it's early days, but stay tuned. I mean, we're really pleased with the advancement that it's making, but it's really customers will drive the uptake for that. So, the increase in footage drilled is indicative of customers gaining confidence in the performance of that technology, particularly in the curved lateral. Stephen Gengaro -- Stifel Financial Corp. -- Analyst Great. Thank you. And I know this may be a little harder for you to answer directly, but when we think about the CHX, SLV deal and what's going on in production chemicals, I would imagine it's an area that would have interest to you. But my question is really, you had a great amount of success with Summit and what you bought and built over the last, I guess five, six years plus and the strength of that business. Is that something that you can replicate in production chemicals if you went down that road? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think, I'll revert back to strategically we like to grow things organically. We own the kernel of a business there. We continue to make progress. We've got the plant. The capacity is filling up in the Middle East. So, the trade-off is speed, but I think also the trade-off from our perspective anyway has been, we know how to do this and we believe it generates a lot of value for our shareholders when we go about it this way. And so, we're going to continue to grow our chemicals business around the world on the back of some assets that we built ourselves. And so, I'm pleased, I think there's opportunities for organic growth in chemicals, organic growth, and strong growth in intervention, a whole lot of different areas. Stephen Gengaro -- Stifel Financial Corp. -- Analyst OK. Great. Now, thank you for the call. Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. Thanks. Operator Thank you. One moment for our next question, and it comes from the line of Marc Bianchi with TD Cowen. Please proceed. Marc Bianchi -- TD Cowen -- Analyst Hi. I wanted to circle back to the discussion on pricing for North America just because you made the comment that you've seen some softening, but you're not changing your strategy. Could you just comment on how sort of the market has evolved over the last 90 days, if anything has changed. We've had a competitor out there saying that they're going to go after share at the expensive price. Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I don't comment on competitors, but from a strategic perspective we haven't changed. What we're doing and I like where we are. A big part of our fleet is contracted today. We focus on delivering top-notch efficiency, sort of record-setting efficiency, and also lowest ECO. And so, that's where our primary focus is, and we plan to stay with that. Marc Bianchi -- TD Cowen -- Analyst OK. Great. Thanks for that, Jeff. And then, on the second quarter outlook, you gave the C&P and D&E, should we assume that that's a similar profile for international in North America or anything that we should be contemplating there? Jeff Miller -- Chairman, President, and Chief Executive Officer In terms of -- I don't – Marc Bianchi -- TD Cowen -- Analyst Yes. Go ahead Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Look, in terms of growth, I think the margin growth I expect will continue. I mean, I think that we talked about expanding margins and D&E and also C&P is continuing to grow. And I think we're solid. We're in a number of very good businesses around C&P. Marc Bianchi -- TD Cowen -- Analyst OK. Maybe just to clarify, the question was more on revenue, so I guess what I'm wondering is to get to the low double digits for international, it would seem that you need a pretty healthy growth in the remaining -- all three remaining quarters of the year sequentially. Jeff Miller -- Chairman, President, and Chief Executive Officer Oh, yes, sorry, I -- Marc Bianchi -- TD Cowen -- Analyst Could you talk about where that's coming from? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes. So, that's pretty broad-based. I mean, and so for C&P that's completion tools around the world. It's production enhancement around the world. So, in a very strong position, and we see a number of things growing, not the least of which would be lift, for example, and some things like that. So, I had heavy lift, I don't see it as a -- I see it as a very middle of the fairway, very doable from where we sit today. And again, equipment's tight. I think that we'll continue to see strengthening there as well, expanding margins in price. Marc Bianchi -- TD Cowen -- Analyst Very good. Thank you. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, and it comes from the line of Kurt Hallead with Benchmark. Please proceed. Kurt Hallead -- The Benchmark Company -- Analyst Hey. Good morning. Good morning, everybody. Thanks for slotting me in here. So, Jeff you've been at this a long time. You referenced on more than one occasion, not just today, but in other calls about increasing level of visibility, especially on the international front and talking about opportunities that could extend out to the end of the decade. I think a lot of investors are wanting to kind of get inside the room with you, if you will, and try to get the same sort of conviction you have with respect to that duration. So, I'm just kind of curious if you could give us some perspectives and insights on how those conversations are taking place, how much lead time your customers are asking for, and effectively, what two or three things are you seeing that continue to underpin this confidence and conviction that this cycle is going to extend through the end of the decade? Jeff Miller -- Chairman, President, and Chief Executive Officer Yes, thanks. Look, some of its work that will begin in '25 that is planned to go through the end of the decade. So, I feel very confident about that. Others are work that we're working on planning with clients that again are the types of projects that extend that far. I think just the price of the commodity and the tightness and the rising demand for oil and gas gives me confidence and it gives our clients confidence. And clearly, we've seen a bit of a return to oil and gas and its importance in a lot of places, but the type of work that we're starting, the type of offshore work that we're starting is takes time to get started and it takes a long time to do, and so, very confident about that broadly. And I would include, anyway, the outlook for North America is similar in terms of duration. I mean, this is the kind of investments that we've seen in North America that are not for a quarter or two. These are decade-long investments that we've seen happen. And the next leg on gas and the demand for gas, it's already been talked about on this call. I feel very confident in the resilience of this cycle. Kurt Hallead -- The Benchmark Company -- Analyst That's great. I appreciate that. So, the other dynamic you referenced was approving margins, right? So, you've booked contracts that tend to last, I don't know, two to three years on average in the international market, so those will roll through this year and next year and so on. Just curious in the context of that margin improvement from here, right, if you were to try to rank and order it. Is how much of the pricing how much is it? Is it volume? How much is the technology value proposition? Can you give us some additional sense on how you see that? What's driving that margin improvement? Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think it's a combination of those. Some of it is certainly tightness in the market and pricing, but at the same time we've talked about our R&D investment over the last eight years has all been directed at better capital efficiency, and that drives margin also. That drives margins in our drilling business, it drives margin in our frac business. But these are deliberate choices that we've made to drive down or to improve capital efficiency and return. And I think that's evident, probably most evident in our drilling technology and our ZEUS technology.But at the same time, that's been a practice in all of our business. And so, anything that we're producing today, sort of its first criteria has to be improved capital efficiency and better returns out of R&D. And so, I'm really pleased with the success we've had there. And so, I would say all are contributing today, in addition to having sort of more market access, more opportunity to compete on the back of improved technology. Kurt Hallead -- The Benchmark Company -- Analyst I appreciate that. Thanks, Jeff. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Operator Thank you. One moment for our next question, and it comes from the line of Doug Becker with Capital One. Please proceed. Doug Becker -- Capital One Securities -- Analyst Thanks. Jeff, would you expand a little bit more on the drivers behind the sequential margin expansion in D&E? And really, the question is just a function that the last several years D&E margins actually declined in 2Q from 1Q. Jeff Miller -- Chairman, President, and Chief Executive Officer Look, I think that's, again, I'm back to the foundation building that I described. So, we've got a better foundation, broader-based work, and so I expect to continue to see expansion, certainly year over year. And then, also as that foundation gets stronger, that gives us more ability to grow the business profitably, but from a sound base. Eric Carre -- SVP, Drilling and Evaluation I think Doug, it's Eric here, that the typical drop in margin in Q2 happens with the reduction in our software business. The way we recognize revenue in our software business means that it's essentially taken in Q4 and in Q1, so we see a bit of a drop there. You see that being more muted this year because, as Jeff mentioned, the D&E margins were softer than we were expecting in Q1, as we had much more significant weather issues in the North Sea in Norway, in Alaska, and then the flooding over in Indonesia. So, the combination of the muted effect and the more traditional software impact moving from Q1 to Q2 results in margins going up here. Doug Becker -- Capital One Securities -- Analyst That all makes sense. Maybe switching to North America, U.S. more specifically, last quarter you were talking about ZEUS e-fleets would represent about 40% by the end of the year, going to maybe 50% in 2025. Is there a reasonable or realistic or probable scenario where you would accelerate this deployment? The results certainly suggest the outperformance and there might be a case for that. Jeff Miller -- Chairman, President, and Chief Executive Officer No. Look, this is a market push. The whole strategy behind e-fleet for us has been build the best technologies and clients demand it, and we've built to the demand that we see in hand, and therefore, they are not built on spec, they are built for customers that plan to use them. And we don't plan to change that. And so, in some ways that adds central to maximizing value in North America. When we maximize value in North America, we are not going to build things, we don't have home. And so, I expect to continue to see market demand for this equipment. 2024 is actually already in hand. It's just delivering the units themselves. They already have homes. And in '25, we actually have some deliveries. And I expect that we will see more as we go forward. But I think that important to remember that that our approach is to build to contract. Doug Becker -- Capital One Securities -- Analyst That makes sense. Thank you. Jeff Miller -- Chairman, President, and Chief Executive Officer Thank you. Eric Carre -- SVP, Drilling and Evaluation Thank you. Operator Thank you. And with that, we conclude our Q&A session for today. I will pass it back to management for final comments. Jeff Miller -- Chairman, President, and Chief Executive Officer OK. Thank you, Carmen. Let me close out the call with this, I am excited about the outlook for Halliburton and expect Halliburton to deliver strong free cash flow and shareholder returns. Look forward to speaking with you next quarter. Let's close out the call.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good Morning. And welcome to Hasbro first quarter 2024 earnings conference call. [Operator instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Kern Kapoor, senior vice president of investor relations. Please go ahead. Kern Kapoor -- Senior Vice President, Investor Relations Thank you and good morning, everyone. Joining me today are Chris Cocks, Hasbro's chief executive officer; and Gina Goetter, Hasbro's chief financial officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, and then we will take your questions. Our earnings release and presentation slides for today's call are posted on our Investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our Annual Report on Form 10-K, or our most recent 10-Q, in today's press release, and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cocks. Chris? Chris Cocks -- Chief Executive Officer Thanks, Kern and good morning. For the past several quarters you have heard us reaffirm Hasbro's strategy to refocus on play with our fewer, bigger, better principles. In our Q1 results, we're seeing Hasbro's strategy come to life. We are applying a franchise-first mindset. We're realizing our brand's potential through licensing with success across digital and consumer products. And we're continuing to invest in innovation across toys and games, appealing to consumers of all ages across play patterns. We began 2024 with a healthier balance sheet, a leaner cost structure, and an improved inventory position. In Q1, we saw tangible progress on our turnaround. Our revenue landed as expected, and our margins outperformed. While most of the year remains ahead of us, I'm glad to see the business is on a solid track. It gives me confidence Hasbro is pointed toward sustainable, long-term growth, backed by industry-leading innovation across games, toys, and partner-led entertainment and licensing. Digging into the quarter, there were several highlights. Let's start with licensing. Monopoly Go! from our partners at Scopely has crossed over $2 billion in lifetime revenue and 150 million downloads, breaking records as the fastest-growing mobile game ever. Baldur's Gate 3 from our partners at Larian Studios continued its momentum from last year with even more recognition. It's now the only game to ever win all five prestigious Game of the Year awards. While the success of Baldur's Gate 3 is in a league of its own, we see a long-term opportunity to leverage the richness of D&D across more games. In Q1, we signed new licensing agreements with Resolution Games, best known for the VR game Demeo, as well as Game Loft, makers of Disney Dreamlight Valley, both to build within the D&D universe. And to celebrate D&D's 50th anniversary, we executed new partnerships with LEGO, Converse, and Black Milk Apparel. Dungeons & Dragons Red Dragon's Tale is a 3,700-piece fan favorite that combines the building fun of LEGO and the rich world-building of D&D. I can't wait to build my own. Our success in licensing extends to our toy brands. We saw positive early results in Q1 from Littlest Pet Shop, now manufactured and distributed by Basic Fun. And just this week, we announced a strategic relationship with Playmates to produce and distribute Power Rangers toys starting in 2025. These are high-profit partnerships that leverage great partners with iconic brands from our extensive IP vault. Our new asset-light entertainment model is already paying dividends. We look forward to bringing the star-studded animated film Transformers 1 to theaters this September with our partners at Paramount. In Q1, we announced deals with Lionsgate and Margot Robbie's production company, Lucky Chap, to produce a live-action Monopoly movie, as well as with the CW to create game shows around Trivial Pursuit and Scrabble. And of course, I can't wait to see what Sony has in store for us with the just-announced film and TV projects for Clue. The movie was a favorite of mine from the 1980s. And our success in asset-light, partner-based entertainment extends well beyond the screen. We now have 115 Hasbro-branded partner-led properties bringing in over 55 million visitors last year alone. We see those figures increasing significantly over the next couple of years, as our partners bring our brands to life through thrilling experiences and attractions and billions of dollars of third-party capital investment, with quality executions like Hasbro City in Mexico, which was just awarded the best family entertainment center in the world by the International Association of Amusement Parks and Attractions. Reinvigorating our innovation and driving operational rigor underpins our turnaround. In games, we continue to make changes within our board games portfolio, opening the door for share gains and growth categories like party, strategy, and card games. In Q1, we launched Life in Reterra, a tile-laying strategy game from acclaimed designer Eric Lang, and Fork Milk Kidnap, a fun new adult party game. We also are doubling down in where we are the clear leader. In February, we launched the second edition of Monopoly Prism NBA board Game at the NBA All-Star Weekend, and it helped make Monopoly the number two growth property in the games category in the U.S. for the quarter. We expect to see more crossover opportunities for the brand and sports in the future. Magic the Gathering saw healthy growth in Q1, driven by timing of sales for our latest release, Outlaws of Thunder Junction, and strong demand for Fallout Commander. Q2 is an important quarter for Magic, with the releases of both Outlaws and Modern Horizons 3, what we expect to be our biggest set of the year. While we expect Magic to be down to the year after a record 2023, we maintain our long-term bullishness on the brand based on the continued robust fan engagement and a killer lineup of new Universes Beyond collaborations, including upcoming sets in 2025 for Final Fantasy and Marvel. And stay tuned for more exciting innovations from our D&D team later this year as we continue to scale D&D Beyond and expand the richness of tabletop gameplay to digital. We expect to connect to an even wider audience while delighting our existing fans as D&D celebrates its 50th anniversary. Finally, let's turn to toys where our turnaround efforts are well underway. We began Q1 with inventories at multi-year lows, down over 50% from the prior year. As a result of our cleanup efforts, we saw a significant reduction in closeout volume in Q1. Thanks to our operational discipline and careful skew management, we're in a good position with our large retail partners as we work toward new product innovation, including Beyblade, Nerf, and a refreshed lineup for Baby Alive. We also are seeing solid progress in revamping our approach to marketing, significantly shifting our mix to digital, driving stronger than ever partnerships with our e-commerce and multi-channel partners like our just completed birthday shop execution with Walmart and are seeing improved return on advertising spend as a result. We continue to see momentum with Furby, one of last year's top new toys, including our latest best-seller, Fur Blitz. According to Serkan, these fuzzy little friends were the top selling item in the special feature plush category in the U.S. And earlier this week, we announced glow in the dark Furby Galaxy coming this summer. We've also seen encouraging POS trends from Transformers as we celebrate the brand's 40th anniversary. While we're lapping last year's successful film, Transformers Rise of the Beasts in Q2, we look forward to sales rebounding in the back half as we gear up for Transformers One. Last but not least, our retail and licensing partnerships are among our most important. Last month in New York City, Hasbro and Amazon collaborated with the Walt Disney Company to create a Star Wars experience at their first ever March to May the 4th event. Through an immersive retail experience in the main floor of the Empire State Building, fans were able to take photos with costume characters, including Darth Vader, and check out Hasbro's latest Black Series helmets and Kyber Core Lightsabers collectibles. Before I wrap up, I want to highlight the recent changes to our board of directors, bringing in new members with extensive games and retail operations experience. I'd like to welcome Darin, Frank, and Owen to the board. I also want to thank Tracy, Linda, and Michael, who will be retiring from the board following our shareholder meeting next month. I'm grateful for their support and guidance over the past few years. And lastly, I want to honor Alan Hassenfeld, who will be stepping away from his role as Emeritus chairman. Alan has been and always will be a prominent architect of Hasbro's legacy, and he will continue to be engaged with Hasbro in guiding the company's philanthropic efforts, providing development and relief for children around the world. To recap, it was a good quarter. We landed revenue where we expected, with wins across digital licensing, board games, and continued momentum for Furby. We continue to sharpen our execution, staying within our guardrails and inventory, and delivering meaningful cost productivity across the P&L. While it's still early, our turnaround efforts in consumer products are going well, and we look forward to monitoring our progress over the next couple of quarters. I'd now like to turn over the call to Gina to share more of our detailed results and guidance for the year. Gina? Gina Goetter -- Chief Financial Officer Thanks, Chris and good morning, everyone. In February, I outlined our strategy to build on the foundation we put in place last year after resetting the business and the necessary steps we're taking to reinvigorate innovation across the portfolio while continuing to drive operational rigor. I am pleased with how we executed in the first quarter with our strength in digital licensing and Magic contributing to a more profitable business mix while our turnaround efforts in toys started to take shape. We continue to deliver supply chain productivity ahead of inflation, and we made meaningful progress on reducing operating expense. We see more room to drive our cost footprint lower as we further refine our supply chain and optimize product design across each brand. We have already identified significant savings through this design-to-value strategy, with our teams leveraging customer insights and competitive analysis to inform our actions. Looking at our toy turnaround in more detail, while Q1 represents the smallest contributor to full-year sales, we maintained our controlled stance on inventories after the cleanup efforts last year. We ended Q1 with inventories at very healthy levels, down over 50% from a year ago, and roughly flat to where we ended in 2023. Our number of days in inventory were at multi-year lows for Q1 at around 66 days. And while we expect to see our inventory days increase over the next couple of quarters, in line with normal business seasonality, we are still planning for total owned inventory levels to finish the year relatively flat versus 2023. Our much improved inventory position led to over 50% reduction in closeout sales in the quarter. And although this negatively impacted our consumer product segment revenue growth, we did realize a margin benefit from the improved sales rates, and we expect this trend to continue as we move through Q2. While improving the profitability of toys and delivering our cost savings target, are two of the company's top priorities, I want to emphasize that we are concurrently staying vigilant around what investment opportunities require incremental spend to drive the most profitable revenue across the portfolio. Through greater analytics, we are already seeing an improvement in our marketing efficacy, and this is an area we will lean into as we ramp our innovation across toys and games and prepare for a stronger holiday season. Moving now to our Q1 financial results, total Hasbro revenue was $757 million, down 24% versus Q1 of last year. If you exclude the impact of the E1 divestiture, total revenue was down 9% versus a year ago. Growth of 7% in our Wizards of the Coast segment led by Magic and licensed digital games, and 65% growth in entertainment driven by a renewal deal for Peppa Pig was more than offset by the 21% decline in consumer products driven primarily by category declines and reduced volume moving through closeout. Q1 adjusted operating profit was $149 million with an operating margin of 19.6%, up about 15.0 per year. This improvement was largely driven by a reduction in cost stemming from our operational excellence program, as well as supply chain productivity gains and favorable business mix, including the E1 divestiture. In aggregate, we were able to deliver significant margin improvement despite ongoing volume de-leverage across our toys business. Total Hasbro Q1 adjusted net earnings were $85 million with diluted earnings per share of $0.61, driven by the improvement in operating profit, as well as favorability from a stock compensation adjustment and net interest expense reduction. Operating cash flow was $178 million, an $89 million improvement over the same period last year, driven by the increase in net earnings, as well as reduced production expense in connection with our sale of E1. We gave back $97 million to shareholders through the dividend and ended the period with $570 million of cash in our balance sheet. Now, let's look at our two major segments in more detail. Starting with Wizards of the Coast and digital gaming, revenue grew 7% behind ongoing digital licensing contributions from Baldur's Gate 3 and Monopoly Go! which as a reminder, neither recorded revenue in Q1 of last year. We also saw growth in Magic Tabletop revenue, benefiting from shipments for our latest set release, Outlaws of Thunder Junction, which arrived in stores last week, as well as a strong reception to our fallout commander set. Operating margin for this segment finished at 38.8%, up roughly 13 points year on year, driven by supply chain productivity, cost savings, and improved business mix, given the growth in digital licensing. Turning to consumer products, the total revenue decline of 21% was mostly driven by broader market softness across our key brands, exacerbated by a reduction in closeout volume, following our inventory cleanup efforts in Q4. We also saw some modest impacts from our exited brands, as well as a timing related headwind within our direct consumer platform, Pulse, which is lapping a strong product offering in Q1 of last year. The volume decline was in line with our expectations and resulted in an improvement in our growth to net sales rate, reflecting a more disciplined stance around discounting, which we expect will continue to benefit the CP segment profitability as volumes recover. As Chris mentioned, we saw some bright spots with the recent launch of Fur Blitz, as well as the Play-Doh and Hasbro Gaming. And conversely, we had continued softness in the blaster category, which negatively impacted Nerf, as well as action figures, due to the light entertainment slate and lapping last year's successful launch of Transformers Rise of the Beast. Operating margin for consumer products came in at negative 9.2%, which is down roughly two margin points compared to last year. As expected, we saw a material impact from de-leverage associated with the volume decline, which was partially offset with supply chain productivity gains, managed expense savings, and improved gross connect selling rate due to lower close-up volume. It's important to note that the CP gross margins grew by over five margin points, demonstrating the improvement in the underlying profitability of the business, despite the negative impact from de-leverage. Turning to guidance for 2024, while we are pleased with our Q1 progress, we recognize that the quarter represents a small portion of our full-year sell-through for toys, and we want to monitor throughout Q2 our progress in Wizards, particularly in digital licensing and Magic, before potentially revising our outlook for the full year. So at this time, we are reaffirming our initial guidance, and as a reminder this calls for total Wizards revenue to be down 3% to 5%. The decline is primarily a result of the strong growth delivered in 2023. Within Wizards, we continue to plan for licensed digital games to be relatively flat versus last year, with contributions from Baldur's Gate 3 tapering down as we move through the year. For Monopoly Go! we are still planning to record the contract minimum guarantee through the first half of the year, and we'll continue to watch the data closely as we move through the second quarter. If the current trends continue, there could be the ability to book above the minimum guarantee sooner than the second half, but at this time, we are holding our initial guidance. Wizards operating margin will be between 38% and 40%, up two points from last year, driven by the favorable mix shift within digital, lower royalty rates across Magic and strong cost management, both in supply chain as well as within operating expenses. For consumer products, revenue will be down at 7% to 12%, and operating profit margin will be between 4% and 6%. As a reminder, about half of the revenue decline is due to actions we've taken to improve profitability, and the other half is due to prevailing category trends. We continue to expect a similar revenue decline in Q2 as we saw in Q1 with the pace of decline moderating in Q3 and flipping to growth in Q4 behind sharper innovation and marketing effectiveness as well as healthy retail inventory levels heading into the holidays. However, we expect to see profitability improving as we move through the year as we build volume ahead of the holidays, and we realize more of our net cost savings. For entertainment, adjusting for the impact of the E1 divestiture revenue will be down approximately $15 million versus last year, and operating margin will be roughly 60%, up significantly driven by operating expense reductions as well as lapping the impact of the D&D movie impairment in 2023. We remain firmly on track toward our target of $750 million of gross cost savings by 2025 and given the results in Q1, we are on pace to deliver $200 million to $250 million of net cost savings in 2024. We continue to expect total Hasbro EBITDA in the range of $925 million to $1 billion, driven by our cost savings and the lap of nonrecurring inventory cleanup charges taken last year which will more than offset the revenue decline and cost inflation. Ending cash will be slightly down versus 2023, driven by relatively flat owned inventory levels, increased capital project spending, and additional costs associated with the restructuring actions announced in December. And from a capital allocation standpoint, our priorities remain to first invest behind the core business. Second is to return cash to shareholders via the dividend, and third, to continue progressing toward our long-term leverage targets and pay down debt. And with that, I'll turn it back to Chris to wrap up. Chris Cocks -- Chief Executive Officer Thanks, Gina. We're pleased with our first quarter performance. We're doing what we said we would do, driving a shift in games in licensing, fixing our toy business, and lowering our costs. It's still early, and we have lots of 2024 to go, but I think it's fair to say this was a good start to the year. We'll now pause to take your questions. Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Eric Handler with Roth MKM. Please proceed with your question. Eric Handler -- ROTH MKM -- Analyst Yes, good morning. And thanks for the questions. First, Gina, I wonder if you could maybe help refine the guidance a little bit in providing what the numbers you provided equates to on an EPS basis? And then given the sizable beat you had relative to consensus expectations, while maintaining guidance, where do you think Street expectations are maybe overestimating in their model in future quarters? Gina Goetter -- Chief Financial Officer Got it. Good morning, Eric. So we are not -- we don't give EPS guidance specifically. We've been through the models. I would say analysts are coming up pretty close to kind of our internal math. I think the one thing to keep in mind for the quarter that just finished here is that we had about $0.10 of favorability from a stock adjustment, in fact compensation adjustment that will carry forward through and into the year and into your model. But we're not giving specific EPS guidance at this point. Eric Handler -- ROTH MKM -- Analyst OK. And certainly for Chris, it's been a while since you guys have talked about Magic Arena. Wonder if you could give us a little bit of an update there, it seems to be sort of lagging the tabletop segment, just what are you doing to sort of maybe broaden the appeal of Arena? Chris Cocks -- Chief Executive Officer Hey, Eric. Thanks for the question. Yes. So Arena was down a bit in Q1. Mostly that was due not lapping a remastered set that we did last year for Shadows over Innistrad. Barring that it would have been roughly in line with the overall property, which was up about 4% on tabletop. So we continue to invest in Arena. We continue to mimic all the card sets that are inside of it. And we're also investing over the long term to refresh the platform. So you'll be hearing more about that over the coming couple of years because it's going to be a long-term digital project. But when you look at Magic and where our growth has been, a lot of that growth has been in social-based play like Commander and in collectability. So certainly, we'll be investing in those areas on the digital platform over the long term. Eric Handler -- ROTH MKM -- Analyst Thank you. Operator Thank you. Our next question comes from the line of Megan Alexander with Morgan Stanley. Please proceed with your question. Megan Alexander -- Morgan Stanley -- Analyst Hi, thanks very much. And good morning. Wanted -- kind of a two-part question. You just did almost a 20% operating margin in what's typically your smallest quarter of the year from a sales perspective. In the slides, you did reiterate that 20% full year target by 2027. So I guess first question, why wouldn't you be able to get to that 20% number this year, if not higher than that? And maybe second part, was there something in that 1Q operating profit performance that won't repeat, the corporate segment, in particular, did stand out to us, maybe you can just clarify what's in there and how we should kind of think about the run rate of that segment going forward? Gina Goetter -- Chief Financial Officer Yeah, sure Megan. Good question. So as we -- let's start with the corporate segment. So there was $45 million of profit that we posted in there. About half of that is that non-stock comp adjustment that we made. And so that is roughly half of that $45 million, and it will not repeat. So when you think about our margin profile in the quarter, about two and half points of kind of our margin performance came from that adjustment, that's not going to carry forward as we go. As we think about the balance of the year, there's going to be puts and takes within the margin. So in Q2, we're going to still have that deleverage happening with toy in Q3, though, remember, there's the impact last year that we had in all of the digital with Baldur's Gate, Lord of the Rings, there was a lot of favorability coming into Q3 last year that we begin the comps. But there's no doubt that our margin performance at the start of the year is really healthy. I mean our supply chain performance, I mean, we are killing it within supply chain. I think our team is really out to make our supply chain the most cost competitive, best-in-class supply chain. And we've seen an acceleration in the benefits within that area that if that keeps continuing, yes, there's some good momentum that could carry us forward to the end of the year and get us closer to that 20% sooner rather than later. But there's a lot of things that need to play out as we go through the year before we commit to that. Megan Alexander -- Morgan Stanley -- Analyst Understood, thank you. That's super helpful. And then maybe just on the consumer products top line. I think you said POS for the industry was down. I was wondering if you could talk about Hasbro POS? And then I think you also said related to that 2Q decline similar to 1Q, I think the closeouts are typically more of a 1Q phenomenon than 2Q. So maybe can you just unpack in terms of the dynamics between the closeouts and POS, how we should think about that 2Q being down 20% again? Chris Cocks -- Chief Executive Officer Well, I think when you look at Q1, January and February in our results were pretty heavily impacted based on two factors; one, the reduction in closeouts. And two, not lapping a couple releases that we had with Pulse in the prior year. We had some fairly large ones. Those two factors kind of contributed to that underperformance in February and January. Starting March though, we saw very healthy trends on our point of sale and our Easter trends normalizing for the dates were also quite healthy. And so far into April, we're seeing those positive point-of-sale trends continue. Now I think the thing that gives us a little bit of pause that we're monitoring in Q2, is just a relatively light slate of entertainment. Last year, we had the D&D movie and Transformers: Rise of the Beasts, which both were pretty positive contributors to the quarter. Also our partners at Disney had just an amazing slate of content both in streaming and in theaters. That's not going to be lapped as completely. So we're taking a little bit of a cautious tone and wanting to monitor our performance. I think the thing that helps to negate may be the impact of the entertainment-related headwinds is our marketing effectiveness. We're seeing a significant improvement in our overall return on advertising spend. We've retooled our marketing team. And so that tailwind we have to look at and monitor. And we'll get back to you guys at the end of Q2, on a potential revision to guidance if we continue to see positive trends play out. Gina Goetter -- Chief Financial Officer And the only other thing I would add on your closeout comment, so you're right, it is typically heavy in Q1. But given what we were going through last year and trying to clear out all of the inventory, it was a factor in all four of our quarters. And so that is -- that will be the huge reduction that we took in inventory last year, the fact that we don't have that overhang that will be a positive contributor every quarter that we go. We'll continue to see that close up volume being down. So I should say a positive contributor on the margin side and negative contributor on the revenue side in every quarter. Megan Alexander -- Morgan Stanley -- Analyst Great, thank you both. Operator Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question. Drew Crum -- Stifel Financial Corp. -- Analyst OK, thanks guys. Good morning. So Gina, just going back to consumer products, you discussed improved underlying performance and benefits from operational excellence, but you still saw adjusted OI down and some margin compression. If the volume decline headwind is moderating as you progress through the year, when should we start to see positive bottom line comps for that business? Gina Goetter -- Chief Financial Officer Yeah. Drew, good question. If you think about our -- how we've kind of talked about our top line flow for CP, so we'll be down similarly in Q2. And we start to rebound in Q3 and we're back to growth in Q4. So I would expect our margin to follow suit. So I think we're still going to see that same kind of material delev headwind in Q2. It starts to stabilize in Q3 and then our margins. Our margins are growing absent even the huge comp that we have on inventory but then that's kind of onetime margin pickup that we have will further expand our margins in Q4. So it's going to kind of follow with the top line. Drew Crum -- Stifel Financial Corp. -- Analyst Got it. OK. And then Chris, you had some comments on the universe beyond sets. Can you address the performance of Fallout Commander, I know it's still early, but has that changed your view on Magic revenue for the year, does it have any impact on segment margin? And then just wanted to get a sense as to how you're sizing up or thinking about Final Fantasy and Marvel sets next year, how those compare to Lord of the Rings? Thanks. Chris Cocks -- Chief Executive Officer Yeah. So I would say Fallout has been great set. I'm a little bit of a fan boy so I will try not to playing it a little bit too much. I've been playing it since the '90s. But it's probably our best-performing Commander set ever. Whether it's a Universe at the Onset or not. However, Commander sets tend to be quite a bit smaller than our overall premier sets. So you have to weight that accordingly. I would say our view on Magic is pretty healthy. Engagement is -- has reached pre-pandemic levels. Our stores are all healthy. Fallout is doing well. Outlaws and Thunder Junction, which is our first major release of Q2, it's early, but it's off to a promising start. So I think our caution in Magic is just Q2 as a big quarter. We've got modern horizons at the end of the quarter, and we want to monitor how those do. But I think signs are pointing in the right direction for us. In terms of the long-term view on Universes Beyond, man, I think Final Fantasy and Marvel are going to be pretty significant sets. I would put them in the same league at least as what we saw with Lord of the Rings. Marvel is just a huge IP. We're going to be doing multiple sets with the Walt Disney Company on that, which we're pretty excited about. And then Final Fantasy, it's huge inside of North America and Europe. But our sales in Japan will probably to do with what we did with Lord of the Rings because of the resonance that it has in that market which you should remember is the number two market for Magic and the number two market overall for trading card games. Drew Crum -- Stifel Financial Corp. -- Analyst Super helpful. Thanks guys. Operator Thank you. Our next question comes from the line of Arpine Kocharyan with UBS. Please proceed with your question. Arpine Kocharyan -- UBS -- Analyst Hi, good morning. Thank you for taking my question. Just to clarify on POS, you mentioned down for the quarter. Have your expectations changed at all regarding full year industry retail trends? And then I have a quick follow-up. Chris Cocks -- Chief Executive Officer Yeah. I mean, Q1 for the industry is usually around 14% to 15%. So it's still in terms of the total volume that Q1 represents. So I think it was a positive quarter. Certainly, we saw momentum exiting the quarter that's been continuing into Q2. But it's just super early. And the toy industry has been a difficult one to predict for the last 18 months or so. So we're going to continue to monitor it this quarter, particularly in light of the relative pause in entertainment that helps to drive toy sales. That said, I think it was a good start to the year for us and for the industry as a whole. And my hope is it continues. Arpine Kocharyan -- UBS -- Analyst Thank you. And then margin is clearly the highlight for your results today, and I think it's going to be the theme for the year as well. Could you maybe talk about cadence for margins for the rest of the year, I mean Q2, will obviously have strong Wizard, I think, so that helps flow through and you have closeout sales sort of easing or the impact of that easing. What are other big input you would highlight for Q2 and as we think about the back half as far as margins go? Chris Cocks -- Chief Executive Officer Yes, I'll start, and then I'll turn it over to Gina. So I'll maybe do a little bit of semantics and then turn it over to Gina to go into the details of your question, Arpiné. I think what you're seeing in Q1 is kind of our overall strategic thesis playing out, which I think will play out knock on wood through the rest of the year and for the foreseeable future. And I think that is as Hasbro games, IP and toy company effectively in that order. And I think our margins will start to shape around those style of industries, and those style of TAMs and growth opportunities. And so what you're seeing in Q1 is, wow, when you have a healthy games business, when you have great IP like we have and great partners that you can leverage it through and you start to get your act together on your cost structure and your operational efficiency in your underlying toy business and start to address kind of some of the marketing deficiencies you have, good things happen. Gina Goetter -- Chief Financial Officer And when you kind of ladder it like that, that uplift, how it will play out by quarter. So if you kind of look at the pieces in Q1 that mix and that as we continue to shift into gaming and into digital is going to continue to be a tailwind for us as we move through the balance of the year. The fact that supply chain productivity is going to more than offset inflation, that trend is going to continue as we move throughout the year. And then operating expenses and all of the work that we're doing on purchase cost reduction, people cost reduction, that benefit will continue to impact us as we move throughout the year. So the one quarter that we'll just have to watch is Q3 because of how strong it was in Q3 of 2023. So it's still going to be a very healthy margin, but there was just so much positivity last year at that time that there could be a slight dip year over year but all of that, the underpinnings of the cost structure that is going to hold and carry with us for the year. Chris Cocks -- Chief Executive Officer Q3 is going to be the big Baldur's Gate 3 launch time. Gina Goetter -- Chief Financial Officer And the Monopoly Go! started to hit -- the minimum guarantee started to hit for Monopoly Go!. Arpine Kocharyan -- UBS -- Analyst Right. And that's a great segue to my -- for the last question. Sorry for three questions. You just talked about digital coming in flat. And I think that's unchanged versus what you said last time. Everything we've been able to track on this shows that there could be upside to that given how strong Monopoly Go! has been. Why not raise that guidance today and could you talk about sort of your visibility on that because it's clearly -- at least seasonally, it's not a toy business, right, it's sort of digital games where you probably have a little bit more to say in terms of visibility? Gina Goetter -- Chief Financial Officer Yes. And the short answer is it's just really too early in the year to call it out. But to your point, the trends are favorable if they continue to play out in the way that everyone is watching and some of the other variables that are out of our control kind of break our way and become positive contributors. We absolutely did see that there could be upside. We just want to watch it play out here as we move through Q2 before we officially take guidance up for it. Chris Cocks -- Chief Executive Officer The challenge within our P&A is it's really a comp one. And so we just need more time. Arpine Kocharyan -- UBS -- Analyst Alright. Thank you very much. Thank you, both. Operator Thank you. Our question comes from the line of Christopher Horvers with J.P. Morgan. Please proceed with your question. Chris Horvers -- JPMorgan Chase and Company -- Analyst Thanks, and good morning. So I just want to follow up on the corporate line item. It was $45 million, you said roughly half of it was stock comp and that benefit does not sustain. What's the other half of that and does that continue? Yes. Gina Goetter -- Chief Financial Officer It is the material amount of money. Yes, the other half is all due to the operational excellence program. And I would think of it as a timing element of where it sits. So it's real money. It's purchase cost savings, it's people cost savings. And sometimes within the quarters in the year, it just settles out in corporate. As we move through the balance of the year, that's going to be allocated back. That favorability will be allocated back to the two segments of CP and Wizard. So that will kind of flush its way through. It's just a timing element of where it sat at the end of Q1. Last year, in the corporate P&L, I believe it was roughly $20 million annually of operating profit. I would expect maybe a little bit more just given that stock comp adjustment, but that's how you should think about Q1. Half of it was the stock comp, half of it was just some timing stuff that will get flushed back through the segments. Chris Horvers -- JPMorgan Chase and Company -- Analyst And did you say that the nonrepeating portion was $0.10 or is that half because if you do have, it's a bigger number than $0.10? Gina Goetter -- Chief Financial Officer No, it's about $0.10 of earnings per share. Yes, it was right about that. Chris Cocks -- Chief Executive Officer About half of 45, which translates to around $0.10 a share. Chris Horvers -- JPMorgan Chase and Company -- Analyst OK. OK. I got it. And I guess to try to build on that last question. I guess if you -- like if Monopoly Go! does continue at the current pacing, correct me if I'm wrong, but I think you're looking at like maybe $50 million to $70 million in the back half from Monopoly Go! sort of any comments on what it could be if what you see today continues, could it be 2x that? Chris Cocks -- Chief Executive Officer I don't think we're prepared to give you a sizing on it. As Gina said, if current revenue trends and the current advertising spend to revenue continues it will be quite favorable for us. And we'd likely exceed the minimum guarantee within Q2. Chris Horvers -- JPMorgan Chase and Company -- Analyst Got it, thanks very much. Operator Thank you. Our question comes from the line of Stephen Laszczyk with Goldman Sachs. Please proceed with your question. Stephen Laszczyk -- Goldman Sachs -- Analyst Hey, great. Thanks for taking the questions. Maybe just to follow-up on the marketing strategy, Chris, you talked about some success that you're seeing in the first quarter. Perhaps you can talk a little bit more about what you're doing differently and then if that success does continue, how should we thinking about the upside drivers throughout the year, do you think it's more of a top line growth driver or perhaps something on the cost side? Chris Cocks -- Chief Executive Officer Well, I think it's a pretty simple rubric that we're using, which is spend where we can measure, which is primarily digital. We have traditionally been a little traditional in our media planning. It's worked, but we haven't been able to really refine it down to the SKU level and down to the partner level. So we're spending a lot more in digital. We're spending a lot more with our retail partners near the point of sale or near the point of decision. And we're seeing a significant multiple effect in terms of the effectiveness of the spend. Still early in the year, and we still have to scale it, but it is certainly positive for us. I would say the majority of that will go to topline inside of CP if it continues to work like what we're hoping. And I think that's part of the thesis that we have for our Q3 and Q4 projections. And then that top line, particularly given the cost structure efficiencies we're driving and supply chain efficiencies we're driving, that will have a nice flow through to bottom line results, which again, I think kind of goes to the margin comments that Gina made earlier. Stephen Laszczyk -- Goldman Sachs -- Analyst Got it, thanks for that. And then maybe one more, just on freight. Gina, can you update us on what you're seeing in the freight market at the moment, just given the disruptions in the Middle East and perhaps how we should monitor that from our side as you think about any margin pressure that could come in 2024 or 2025? Gina Goetter -- Chief Financial Officer Yes. Good question. For us, every -- kind of the whole Red Sea, all that is really been immaterial on our business. I think in the P&L in Q1, it was less than a couple of hundred thousand dollars of impact and even since then, our team has been doing a good job navigating around and finding productivity to offset. So it is not a factor that I would call out as impacting our business right now. Overall, what we're seeing across freight is some moderation, capacity is opening up. We're seeing rates come down. So that is absolutely benefiting the P&L part of our guidance. We said that there was going to be two points of inflation in the year. So it's playing within that but the environment is much more rational for us this year. And our team has done a really nice job renegotiating rates, renegotiating our contracts, and then getting after our network in a way that benefits the P&L. Chris Cocks -- Chief Executive Officer Yes. And I think an important thing to keep in mind about us, when you think about things like the Red Sea and exposure, maybe toy dominant companies would have is most of our profit pools are nearshore. Magic, board Games, PLAY-DOH almost all of our licensing business has very little -- has very little sea freight dependencies associated with it because they're either made in market or they're made in markets that really aren't affected by kind of like a traditional Southeast Asian or Chinese freight lanes. So I think that's a competitive advantage of us -- for us in a world that has a little bit of tumult on the freight lines. Stephen Laszczyk -- Goldman Sachs -- Analyst Got it. Thanks, Chris. Thanks, Gina. Operator Thank you. Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question. Alex Perry -- Bank of America Merrill Lynch -- Analyst Hi, thanks for taking my questions here. You gave really good color on sort of the 2Q expectations for the CP segment and op margin. But could we get sort of how you're thinking about Wizards in 2Q from a revenue and op margin perspective? Thank you. Gina Goetter -- Chief Financial Officer For Wizards in Q2 is going to be probably pretty favorable from a top line standpoint and a bottom line, so it's going to look pretty consistent, just given the release schedule that we have on the top line. So we expect there to be another kind of growing quarter. And then on the bottom line, again, just given the mix that we're seeing within the business and the shift toward digital, we'll see consistent trends there. I would say, for both businesses, for both CP and Wasi, we've got the benefit from operating expenses that will continue to flow in as well throughout the quarter. Chris Cocks -- Chief Executive Officer And then there should be a nice royalty benefit in Q2 as well for Magic, Modern Horizon 3 is not royalty bearing. Lord of the Rings did fantastically, but there wasn't royalty associated with it. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. And then just my follow-up is on Magic, actually. So can you talk about any timing shifts that may have supported the quarter and how we should think about sort of phasing of growth there as we move through the year? Chris Cocks -- Chief Executive Officer I think in Q1, you saw a bit of Outlaws of Thunder Junction, which is the colorful name for our first major Q2 release, a bit of that shift in Q1, and I think that helped. For the balance of the year, I don't think there are any huge quarter-over-quarter shifts. You'll probably see a bit lighter release schedule in Q4 which I think might affect that quarter as you think about things. But Q2 should be reasonable for Magic, Q3 should also be reasonable and then Q4 will probably be the light one. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect, that's really helpful. Best of luck going forward. Gina Goetter -- Chief Financial Officer Thanks, Alex. Nice to hear your voice. Operator Thank you. Our next question comes from the line of James Hardiman with Citi. Please proceed with your question. James Hardiman -- Citi -- Analyst Hey, good morning. First, I just want to close the loop on this corporate and other last question, I promised Gina. So $45 million in the first quarter, what should that number be for the year, it sounds like you're saying less -- it's actually going to be less than $45 million. So that -- we should expect that to go negative for the balance of the year or maybe just give us a sort of North Star, how to think about that full year number? Gina Goetter -- Chief Financial Officer Yeah, good question. I know it's confusing to just given some of the timing components. Last year in 2023, it was roughly $20 million. When all kind of get settled out, it was roughly $20 million. I would say we'll probably be around that plus or minus a bit just given that we have this stock comp adjustment sitting in there. It's really held as a lot of our corporate costs sit within there. It's trying to represent kind of that corporate overhead structure, but then much of it gets allocated back as we go throughout the year. And all of that just given all of the work that we're doing in that area is a little bit as you can imagine, it's moving. It's agile this year as we make all of those changes. So I would say, call it, $20 million, $30 million by the end of the year. James Hardiman -- Citi -- Analyst And just to clarify, and then I have a follow-up. But any way to think about that from quarter to quarter, because that could be a pretty big swing factor as we think about potentially some negative numbers, does that start right away or is that more back half rated? Gina Goetter -- Chief Financial Officer I would say in Q2 and -- Q2, Q3, Q4, you're not going to have that $20 million adjustment for the stock comp in there. And so then you're looking kind of plus or minus a few million dollars moving in and out. So it really becomes an immaterial impact as we move through the next few quarters. James Hardiman -- Citi -- Analyst Got it. OK. And then consumer products margin, obviously pretty negative for the first quarter. But if anything, it sounds like you feel pretty positive about the trajectory of that margin. How should we think about -- I don't know if there's a way to think about an exit rate for this year. It seems like it would be meaningfully better than that 4% to 6% range given the starting point. What I'm really trying to get at is what -- how do you feel about where that's headed, particularly for 2025 and beyond? Gina Goetter -- Chief Financial Officer Got it. Yeah, I think we feel based on what we delivered in Q1, really good about our ability to deliver that 4% to 6% guidance range. And to your point, a big drag that we saw in Q1 was the one. And as we kind of push past that and move into growth in Q4 you're going to see some nice underlying profitability within the business. As we move then into 2025, we've publicly said that, our goal is to get this as close to double digits as we can through 2025. And it's going to be some of the same levers that you're hearing us talk about, continue to focus on cost structure, continuing to refine our supply chain, getting really smart with our product mix and how we're pricing in markets. And then lastly, the last lever we haven't brought up yet on this call is the whole design to value and all of the work that we're doing within our product design. So far, that hasn't had a material positive benefit on the P&L. We see that picking up as we move into Q4 and really into 2025. So I think we feel good about where Q1 landed. It tells us we're on the right path to get us within that range of 4% to 6%, and we're continuing to march into 2025, thinking that we're going to push that double-digit margin. James Hardiman -- Citi -- Analyst Is it crazy to say that we're going to be pretty close to that double-digit rate sort of implied in second half or fourth quarter? Gina Goetter -- Chief Financial Officer No, I think that in fourth quarter -- particularly, you got to keep in mind we had that big inventory adjustment last year that becomes a huge benefit for us in the fourth quarter. James Hardiman -- Citi -- Analyst Got it, perfect. Thanks, Gina. Operator Thank you. Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question. Fred Wightman -- Wolfe Research -- Analyst Hey, guys. Good morning. I just wanted to come back to margins. In the slides, you guys are calling out cost saves net of two points of inflation. And we've seen some other toy companies talk about actual benefits from deflation. So can you talk about where you're seeing that cost inflation specifically and how to think about that as we move throughout the balance of the year? Gina Goetter -- Chief Financial Officer Good question. Yes, we wouldn't call it deflation per se. So we are seeing a couple of points of inflation. The three areas I'd call it, one is labor. That's our biggest cost in the P&L. We're continuing to see that inflate a few points. The second, then when you think about our largest kind of ingredient that we're purchasing in Horizon, that also is inflationary in the year. But those are kind of the big two, I would say. I mean, our logistics cost there's pluses and minuses. Overall, we're managing logistics pretty well. For the year, in the quarter, we saw about two points of inflation. That's why we think that is going to play through the rest of the year, about two points of inflation. Chris Cocks -- Chief Executive Officer Yes. Just on an apples-to-apples, I'm not sure how other companies are talking deflation. When we talk about it, we talk about it as productivity based on our teams working with our vendors. And so our productivity is significantly scaling past underlying inflation in the supply chain to a pretty healthy manner, which is driving our gross margin productivity. Fred Wightman -- Wolfe Research -- Analyst Yes, that makes sense. Thanks, Chris. And maybe another one for you, Chris. You talked about the traction from the Littlest Pet Shop license. You also talked about the deal for Power Rangers. Does the early success that you're seeing with some of these licensing decisions change how you're thinking about the need to own versus license some of these CP brands going forward? Chris Cocks -- Chief Executive Officer No. I mean I think it's validating that we made the right choice. Two years ago, we outlined what our selection criteria would be basically. Can we generate $50 million in revenue at a 10% OP and can we grow to $100 million or more revenue at a 15% OP on a line. And so basically, we've chosen the lines to outsource that we don't think meet those thresholds. But another company with maybe a different cost structure or a different set of expertise could still make a really nice business even if it was sub-$50 million. So I think we're basically done without licensing. We certainly will be driving cross-licensing and leveraging our brands for category expansion and new product opportunities like we're doing with LEGO, like we're doing with Mattel, like we're doing with location-based entertainment. But I think Power Rangers is probably -- it's probably the last brand that we will outsource. Fred Wightman -- Wolfe Research -- Analyst Makes sense. Thanks a lot. Operator Thank you. Our final question comes from the line of Kylie Cohu with Jefferies. Please proceed with your question. Kylie Cohu -- Jefferies -- Analyst Hey, good morning. Thank you so much for taking my questions. Just kind of wanted to double click a little bit on the timing aspect. Anything that you can quantify from Easter, how has that affected the quarter, and how are you kind of thinking about how that would affect Q2 as well would be helpful. Chris Cocks -- Chief Executive Officer Yes. Easter gave a modest lift in the quarter, maybe, call it, one or two points based on it being earlier. Funnily though we're seeing April kind of continue to positive trends even barring kind of like what's going on with Easter. I think we were up in the last week, our total global POS in the last week of April that we measured, we were up 7% without our divested brands included and up about 4% when you even include those divested brands. So while we think Easter would help in Q1, it wasn't really a decisive help. Kylie Cohu -- Jefferies -- Analyst Got it. Great. That color is super helpful. And then I know you mentioned earlier about how most of your major profitability drivers are kind of being near sourced. But can you just remind us what your exposure kind of is to China at this point in time, I know we've been getting a lot of inbounds on that? Chris Cocks -- Chief Executive Officer Yes, about 50% or so of our... Gina Goetter -- Chief Financial Officer 40%. When you add in Wizards, we're about 40%. Chris Cocks -- Chief Executive Officer About 40% of our total volume is built in China today. But only or 5% or 10% of our total profit is sourced out of China. Kylie Cohu -- Jefferies -- Analyst Got you. Great. Well, thank you guys so much. I appreciate the time. Gina Goetter -- Chief Financial Officer Thank you. Chris Cocks -- Chief Executive Officer Thanks. Answer:

Hasbro first quarter 2024 earnings conference call

Operator Good Morning. And welcome to Hasbro first quarter 2024 earnings conference call. [Operator instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Kern Kapoor, senior vice president of investor relations. Please go ahead. Kern Kapoor -- Senior Vice President, Investor Relations Thank you and good morning, everyone. Joining me today are Chris Cocks, Hasbro's chief executive officer; and Gina Goetter, Hasbro's chief financial officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, and then we will take your questions. Our earnings release and presentation slides for today's call are posted on our Investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our Annual Report on Form 10-K, or our most recent 10-Q, in today's press release, and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cocks. Chris? Chris Cocks -- Chief Executive Officer Thanks, Kern and good morning. For the past several quarters you have heard us reaffirm Hasbro's strategy to refocus on play with our fewer, bigger, better principles. In our Q1 results, we're seeing Hasbro's strategy come to life. We are applying a franchise-first mindset. We're realizing our brand's potential through licensing with success across digital and consumer products. And we're continuing to invest in innovation across toys and games, appealing to consumers of all ages across play patterns. We began 2024 with a healthier balance sheet, a leaner cost structure, and an improved inventory position. In Q1, we saw tangible progress on our turnaround. Our revenue landed as expected, and our margins outperformed. While most of the year remains ahead of us, I'm glad to see the business is on a solid track. It gives me confidence Hasbro is pointed toward sustainable, long-term growth, backed by industry-leading innovation across games, toys, and partner-led entertainment and licensing. Digging into the quarter, there were several highlights. Let's start with licensing. Monopoly Go! from our partners at Scopely has crossed over $2 billion in lifetime revenue and 150 million downloads, breaking records as the fastest-growing mobile game ever. Baldur's Gate 3 from our partners at Larian Studios continued its momentum from last year with even more recognition. It's now the only game to ever win all five prestigious Game of the Year awards. While the success of Baldur's Gate 3 is in a league of its own, we see a long-term opportunity to leverage the richness of D&D across more games. In Q1, we signed new licensing agreements with Resolution Games, best known for the VR game Demeo, as well as Game Loft, makers of Disney Dreamlight Valley, both to build within the D&D universe. And to celebrate D&D's 50th anniversary, we executed new partnerships with LEGO, Converse, and Black Milk Apparel. Dungeons & Dragons Red Dragon's Tale is a 3,700-piece fan favorite that combines the building fun of LEGO and the rich world-building of D&D. I can't wait to build my own. Our success in licensing extends to our toy brands. We saw positive early results in Q1 from Littlest Pet Shop, now manufactured and distributed by Basic Fun. And just this week, we announced a strategic relationship with Playmates to produce and distribute Power Rangers toys starting in 2025. These are high-profit partnerships that leverage great partners with iconic brands from our extensive IP vault. Our new asset-light entertainment model is already paying dividends. We look forward to bringing the star-studded animated film Transformers 1 to theaters this September with our partners at Paramount. In Q1, we announced deals with Lionsgate and Margot Robbie's production company, Lucky Chap, to produce a live-action Monopoly movie, as well as with the CW to create game shows around Trivial Pursuit and Scrabble. And of course, I can't wait to see what Sony has in store for us with the just-announced film and TV projects for Clue. The movie was a favorite of mine from the 1980s. And our success in asset-light, partner-based entertainment extends well beyond the screen. We now have 115 Hasbro-branded partner-led properties bringing in over 55 million visitors last year alone. We see those figures increasing significantly over the next couple of years, as our partners bring our brands to life through thrilling experiences and attractions and billions of dollars of third-party capital investment, with quality executions like Hasbro City in Mexico, which was just awarded the best family entertainment center in the world by the International Association of Amusement Parks and Attractions. Reinvigorating our innovation and driving operational rigor underpins our turnaround. In games, we continue to make changes within our board games portfolio, opening the door for share gains and growth categories like party, strategy, and card games. In Q1, we launched Life in Reterra, a tile-laying strategy game from acclaimed designer Eric Lang, and Fork Milk Kidnap, a fun new adult party game. We also are doubling down in where we are the clear leader. In February, we launched the second edition of Monopoly Prism NBA board Game at the NBA All-Star Weekend, and it helped make Monopoly the number two growth property in the games category in the U.S. for the quarter. We expect to see more crossover opportunities for the brand and sports in the future. Magic the Gathering saw healthy growth in Q1, driven by timing of sales for our latest release, Outlaws of Thunder Junction, and strong demand for Fallout Commander. Q2 is an important quarter for Magic, with the releases of both Outlaws and Modern Horizons 3, what we expect to be our biggest set of the year. While we expect Magic to be down to the year after a record 2023, we maintain our long-term bullishness on the brand based on the continued robust fan engagement and a killer lineup of new Universes Beyond collaborations, including upcoming sets in 2025 for Final Fantasy and Marvel. And stay tuned for more exciting innovations from our D&D team later this year as we continue to scale D&D Beyond and expand the richness of tabletop gameplay to digital. We expect to connect to an even wider audience while delighting our existing fans as D&D celebrates its 50th anniversary. Finally, let's turn to toys where our turnaround efforts are well underway. We began Q1 with inventories at multi-year lows, down over 50% from the prior year. As a result of our cleanup efforts, we saw a significant reduction in closeout volume in Q1. Thanks to our operational discipline and careful skew management, we're in a good position with our large retail partners as we work toward new product innovation, including Beyblade, Nerf, and a refreshed lineup for Baby Alive. We also are seeing solid progress in revamping our approach to marketing, significantly shifting our mix to digital, driving stronger than ever partnerships with our e-commerce and multi-channel partners like our just completed birthday shop execution with Walmart and are seeing improved return on advertising spend as a result. We continue to see momentum with Furby, one of last year's top new toys, including our latest best-seller, Fur Blitz. According to Serkan, these fuzzy little friends were the top selling item in the special feature plush category in the U.S. And earlier this week, we announced glow in the dark Furby Galaxy coming this summer. We've also seen encouraging POS trends from Transformers as we celebrate the brand's 40th anniversary. While we're lapping last year's successful film, Transformers Rise of the Beasts in Q2, we look forward to sales rebounding in the back half as we gear up for Transformers One. Last but not least, our retail and licensing partnerships are among our most important. Last month in New York City, Hasbro and Amazon collaborated with the Walt Disney Company to create a Star Wars experience at their first ever March to May the 4th event. Through an immersive retail experience in the main floor of the Empire State Building, fans were able to take photos with costume characters, including Darth Vader, and check out Hasbro's latest Black Series helmets and Kyber Core Lightsabers collectibles. Before I wrap up, I want to highlight the recent changes to our board of directors, bringing in new members with extensive games and retail operations experience. I'd like to welcome Darin, Frank, and Owen to the board. I also want to thank Tracy, Linda, and Michael, who will be retiring from the board following our shareholder meeting next month. I'm grateful for their support and guidance over the past few years. And lastly, I want to honor Alan Hassenfeld, who will be stepping away from his role as Emeritus chairman. Alan has been and always will be a prominent architect of Hasbro's legacy, and he will continue to be engaged with Hasbro in guiding the company's philanthropic efforts, providing development and relief for children around the world. To recap, it was a good quarter. We landed revenue where we expected, with wins across digital licensing, board games, and continued momentum for Furby. We continue to sharpen our execution, staying within our guardrails and inventory, and delivering meaningful cost productivity across the P&L. While it's still early, our turnaround efforts in consumer products are going well, and we look forward to monitoring our progress over the next couple of quarters. I'd now like to turn over the call to Gina to share more of our detailed results and guidance for the year. Gina? Gina Goetter -- Chief Financial Officer Thanks, Chris and good morning, everyone. In February, I outlined our strategy to build on the foundation we put in place last year after resetting the business and the necessary steps we're taking to reinvigorate innovation across the portfolio while continuing to drive operational rigor. I am pleased with how we executed in the first quarter with our strength in digital licensing and Magic contributing to a more profitable business mix while our turnaround efforts in toys started to take shape. We continue to deliver supply chain productivity ahead of inflation, and we made meaningful progress on reducing operating expense. We see more room to drive our cost footprint lower as we further refine our supply chain and optimize product design across each brand. We have already identified significant savings through this design-to-value strategy, with our teams leveraging customer insights and competitive analysis to inform our actions. Looking at our toy turnaround in more detail, while Q1 represents the smallest contributor to full-year sales, we maintained our controlled stance on inventories after the cleanup efforts last year. We ended Q1 with inventories at very healthy levels, down over 50% from a year ago, and roughly flat to where we ended in 2023. Our number of days in inventory were at multi-year lows for Q1 at around 66 days. And while we expect to see our inventory days increase over the next couple of quarters, in line with normal business seasonality, we are still planning for total owned inventory levels to finish the year relatively flat versus 2023. Our much improved inventory position led to over 50% reduction in closeout sales in the quarter. And although this negatively impacted our consumer product segment revenue growth, we did realize a margin benefit from the improved sales rates, and we expect this trend to continue as we move through Q2. While improving the profitability of toys and delivering our cost savings target, are two of the company's top priorities, I want to emphasize that we are concurrently staying vigilant around what investment opportunities require incremental spend to drive the most profitable revenue across the portfolio. Through greater analytics, we are already seeing an improvement in our marketing efficacy, and this is an area we will lean into as we ramp our innovation across toys and games and prepare for a stronger holiday season. Moving now to our Q1 financial results, total Hasbro revenue was $757 million, down 24% versus Q1 of last year. If you exclude the impact of the E1 divestiture, total revenue was down 9% versus a year ago. Growth of 7% in our Wizards of the Coast segment led by Magic and licensed digital games, and 65% growth in entertainment driven by a renewal deal for Peppa Pig was more than offset by the 21% decline in consumer products driven primarily by category declines and reduced volume moving through closeout. Q1 adjusted operating profit was $149 million with an operating margin of 19.6%, up about 15.0 per year. This improvement was largely driven by a reduction in cost stemming from our operational excellence program, as well as supply chain productivity gains and favorable business mix, including the E1 divestiture. In aggregate, we were able to deliver significant margin improvement despite ongoing volume de-leverage across our toys business. Total Hasbro Q1 adjusted net earnings were $85 million with diluted earnings per share of $0.61, driven by the improvement in operating profit, as well as favorability from a stock compensation adjustment and net interest expense reduction. Operating cash flow was $178 million, an $89 million improvement over the same period last year, driven by the increase in net earnings, as well as reduced production expense in connection with our sale of E1. We gave back $97 million to shareholders through the dividend and ended the period with $570 million of cash in our balance sheet. Now, let's look at our two major segments in more detail. Starting with Wizards of the Coast and digital gaming, revenue grew 7% behind ongoing digital licensing contributions from Baldur's Gate 3 and Monopoly Go! which as a reminder, neither recorded revenue in Q1 of last year. We also saw growth in Magic Tabletop revenue, benefiting from shipments for our latest set release, Outlaws of Thunder Junction, which arrived in stores last week, as well as a strong reception to our fallout commander set. Operating margin for this segment finished at 38.8%, up roughly 13 points year on year, driven by supply chain productivity, cost savings, and improved business mix, given the growth in digital licensing. Turning to consumer products, the total revenue decline of 21% was mostly driven by broader market softness across our key brands, exacerbated by a reduction in closeout volume, following our inventory cleanup efforts in Q4. We also saw some modest impacts from our exited brands, as well as a timing related headwind within our direct consumer platform, Pulse, which is lapping a strong product offering in Q1 of last year. The volume decline was in line with our expectations and resulted in an improvement in our growth to net sales rate, reflecting a more disciplined stance around discounting, which we expect will continue to benefit the CP segment profitability as volumes recover. As Chris mentioned, we saw some bright spots with the recent launch of Fur Blitz, as well as the Play-Doh and Hasbro Gaming. And conversely, we had continued softness in the blaster category, which negatively impacted Nerf, as well as action figures, due to the light entertainment slate and lapping last year's successful launch of Transformers Rise of the Beast. Operating margin for consumer products came in at negative 9.2%, which is down roughly two margin points compared to last year. As expected, we saw a material impact from de-leverage associated with the volume decline, which was partially offset with supply chain productivity gains, managed expense savings, and improved gross connect selling rate due to lower close-up volume. It's important to note that the CP gross margins grew by over five margin points, demonstrating the improvement in the underlying profitability of the business, despite the negative impact from de-leverage. Turning to guidance for 2024, while we are pleased with our Q1 progress, we recognize that the quarter represents a small portion of our full-year sell-through for toys, and we want to monitor throughout Q2 our progress in Wizards, particularly in digital licensing and Magic, before potentially revising our outlook for the full year. So at this time, we are reaffirming our initial guidance, and as a reminder this calls for total Wizards revenue to be down 3% to 5%. The decline is primarily a result of the strong growth delivered in 2023. Within Wizards, we continue to plan for licensed digital games to be relatively flat versus last year, with contributions from Baldur's Gate 3 tapering down as we move through the year. For Monopoly Go! we are still planning to record the contract minimum guarantee through the first half of the year, and we'll continue to watch the data closely as we move through the second quarter. If the current trends continue, there could be the ability to book above the minimum guarantee sooner than the second half, but at this time, we are holding our initial guidance. Wizards operating margin will be between 38% and 40%, up two points from last year, driven by the favorable mix shift within digital, lower royalty rates across Magic and strong cost management, both in supply chain as well as within operating expenses. For consumer products, revenue will be down at 7% to 12%, and operating profit margin will be between 4% and 6%. As a reminder, about half of the revenue decline is due to actions we've taken to improve profitability, and the other half is due to prevailing category trends. We continue to expect a similar revenue decline in Q2 as we saw in Q1 with the pace of decline moderating in Q3 and flipping to growth in Q4 behind sharper innovation and marketing effectiveness as well as healthy retail inventory levels heading into the holidays. However, we expect to see profitability improving as we move through the year as we build volume ahead of the holidays, and we realize more of our net cost savings. For entertainment, adjusting for the impact of the E1 divestiture revenue will be down approximately $15 million versus last year, and operating margin will be roughly 60%, up significantly driven by operating expense reductions as well as lapping the impact of the D&D movie impairment in 2023. We remain firmly on track toward our target of $750 million of gross cost savings by 2025 and given the results in Q1, we are on pace to deliver $200 million to $250 million of net cost savings in 2024. We continue to expect total Hasbro EBITDA in the range of $925 million to $1 billion, driven by our cost savings and the lap of nonrecurring inventory cleanup charges taken last year which will more than offset the revenue decline and cost inflation. Ending cash will be slightly down versus 2023, driven by relatively flat owned inventory levels, increased capital project spending, and additional costs associated with the restructuring actions announced in December. And from a capital allocation standpoint, our priorities remain to first invest behind the core business. Second is to return cash to shareholders via the dividend, and third, to continue progressing toward our long-term leverage targets and pay down debt. And with that, I'll turn it back to Chris to wrap up. Chris Cocks -- Chief Executive Officer Thanks, Gina. We're pleased with our first quarter performance. We're doing what we said we would do, driving a shift in games in licensing, fixing our toy business, and lowering our costs. It's still early, and we have lots of 2024 to go, but I think it's fair to say this was a good start to the year. We'll now pause to take your questions. Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Eric Handler with Roth MKM. Please proceed with your question. Eric Handler -- ROTH MKM -- Analyst Yes, good morning. And thanks for the questions. First, Gina, I wonder if you could maybe help refine the guidance a little bit in providing what the numbers you provided equates to on an EPS basis? And then given the sizable beat you had relative to consensus expectations, while maintaining guidance, where do you think Street expectations are maybe overestimating in their model in future quarters? Gina Goetter -- Chief Financial Officer Got it. Good morning, Eric. So we are not -- we don't give EPS guidance specifically. We've been through the models. I would say analysts are coming up pretty close to kind of our internal math. I think the one thing to keep in mind for the quarter that just finished here is that we had about $0.10 of favorability from a stock adjustment, in fact compensation adjustment that will carry forward through and into the year and into your model. But we're not giving specific EPS guidance at this point. Eric Handler -- ROTH MKM -- Analyst OK. And certainly for Chris, it's been a while since you guys have talked about Magic Arena. Wonder if you could give us a little bit of an update there, it seems to be sort of lagging the tabletop segment, just what are you doing to sort of maybe broaden the appeal of Arena? Chris Cocks -- Chief Executive Officer Hey, Eric. Thanks for the question. Yes. So Arena was down a bit in Q1. Mostly that was due not lapping a remastered set that we did last year for Shadows over Innistrad. Barring that it would have been roughly in line with the overall property, which was up about 4% on tabletop. So we continue to invest in Arena. We continue to mimic all the card sets that are inside of it. And we're also investing over the long term to refresh the platform. So you'll be hearing more about that over the coming couple of years because it's going to be a long-term digital project. But when you look at Magic and where our growth has been, a lot of that growth has been in social-based play like Commander and in collectability. So certainly, we'll be investing in those areas on the digital platform over the long term. Eric Handler -- ROTH MKM -- Analyst Thank you. Operator Thank you. Our next question comes from the line of Megan Alexander with Morgan Stanley. Please proceed with your question. Megan Alexander -- Morgan Stanley -- Analyst Hi, thanks very much. And good morning. Wanted -- kind of a two-part question. You just did almost a 20% operating margin in what's typically your smallest quarter of the year from a sales perspective. In the slides, you did reiterate that 20% full year target by 2027. So I guess first question, why wouldn't you be able to get to that 20% number this year, if not higher than that? And maybe second part, was there something in that 1Q operating profit performance that won't repeat, the corporate segment, in particular, did stand out to us, maybe you can just clarify what's in there and how we should kind of think about the run rate of that segment going forward? Gina Goetter -- Chief Financial Officer Yeah, sure Megan. Good question. So as we -- let's start with the corporate segment. So there was $45 million of profit that we posted in there. About half of that is that non-stock comp adjustment that we made. And so that is roughly half of that $45 million, and it will not repeat. So when you think about our margin profile in the quarter, about two and half points of kind of our margin performance came from that adjustment, that's not going to carry forward as we go. As we think about the balance of the year, there's going to be puts and takes within the margin. So in Q2, we're going to still have that deleverage happening with toy in Q3, though, remember, there's the impact last year that we had in all of the digital with Baldur's Gate, Lord of the Rings, there was a lot of favorability coming into Q3 last year that we begin the comps. But there's no doubt that our margin performance at the start of the year is really healthy. I mean our supply chain performance, I mean, we are killing it within supply chain. I think our team is really out to make our supply chain the most cost competitive, best-in-class supply chain. And we've seen an acceleration in the benefits within that area that if that keeps continuing, yes, there's some good momentum that could carry us forward to the end of the year and get us closer to that 20% sooner rather than later. But there's a lot of things that need to play out as we go through the year before we commit to that. Megan Alexander -- Morgan Stanley -- Analyst Understood, thank you. That's super helpful. And then maybe just on the consumer products top line. I think you said POS for the industry was down. I was wondering if you could talk about Hasbro POS? And then I think you also said related to that 2Q decline similar to 1Q, I think the closeouts are typically more of a 1Q phenomenon than 2Q. So maybe can you just unpack in terms of the dynamics between the closeouts and POS, how we should think about that 2Q being down 20% again? Chris Cocks -- Chief Executive Officer Well, I think when you look at Q1, January and February in our results were pretty heavily impacted based on two factors; one, the reduction in closeouts. And two, not lapping a couple releases that we had with Pulse in the prior year. We had some fairly large ones. Those two factors kind of contributed to that underperformance in February and January. Starting March though, we saw very healthy trends on our point of sale and our Easter trends normalizing for the dates were also quite healthy. And so far into April, we're seeing those positive point-of-sale trends continue. Now I think the thing that gives us a little bit of pause that we're monitoring in Q2, is just a relatively light slate of entertainment. Last year, we had the D&D movie and Transformers: Rise of the Beasts, which both were pretty positive contributors to the quarter. Also our partners at Disney had just an amazing slate of content both in streaming and in theaters. That's not going to be lapped as completely. So we're taking a little bit of a cautious tone and wanting to monitor our performance. I think the thing that helps to negate may be the impact of the entertainment-related headwinds is our marketing effectiveness. We're seeing a significant improvement in our overall return on advertising spend. We've retooled our marketing team. And so that tailwind we have to look at and monitor. And we'll get back to you guys at the end of Q2, on a potential revision to guidance if we continue to see positive trends play out. Gina Goetter -- Chief Financial Officer And the only other thing I would add on your closeout comment, so you're right, it is typically heavy in Q1. But given what we were going through last year and trying to clear out all of the inventory, it was a factor in all four of our quarters. And so that is -- that will be the huge reduction that we took in inventory last year, the fact that we don't have that overhang that will be a positive contributor every quarter that we go. We'll continue to see that close up volume being down. So I should say a positive contributor on the margin side and negative contributor on the revenue side in every quarter. Megan Alexander -- Morgan Stanley -- Analyst Great, thank you both. Operator Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question. Drew Crum -- Stifel Financial Corp. -- Analyst OK, thanks guys. Good morning. So Gina, just going back to consumer products, you discussed improved underlying performance and benefits from operational excellence, but you still saw adjusted OI down and some margin compression. If the volume decline headwind is moderating as you progress through the year, when should we start to see positive bottom line comps for that business? Gina Goetter -- Chief Financial Officer Yeah. Drew, good question. If you think about our -- how we've kind of talked about our top line flow for CP, so we'll be down similarly in Q2. And we start to rebound in Q3 and we're back to growth in Q4. So I would expect our margin to follow suit. So I think we're still going to see that same kind of material delev headwind in Q2. It starts to stabilize in Q3 and then our margins. Our margins are growing absent even the huge comp that we have on inventory but then that's kind of onetime margin pickup that we have will further expand our margins in Q4. So it's going to kind of follow with the top line. Drew Crum -- Stifel Financial Corp. -- Analyst Got it. OK. And then Chris, you had some comments on the universe beyond sets. Can you address the performance of Fallout Commander, I know it's still early, but has that changed your view on Magic revenue for the year, does it have any impact on segment margin? And then just wanted to get a sense as to how you're sizing up or thinking about Final Fantasy and Marvel sets next year, how those compare to Lord of the Rings? Thanks. Chris Cocks -- Chief Executive Officer Yeah. So I would say Fallout has been great set. I'm a little bit of a fan boy so I will try not to playing it a little bit too much. I've been playing it since the '90s. But it's probably our best-performing Commander set ever. Whether it's a Universe at the Onset or not. However, Commander sets tend to be quite a bit smaller than our overall premier sets. So you have to weight that accordingly. I would say our view on Magic is pretty healthy. Engagement is -- has reached pre-pandemic levels. Our stores are all healthy. Fallout is doing well. Outlaws and Thunder Junction, which is our first major release of Q2, it's early, but it's off to a promising start. So I think our caution in Magic is just Q2 as a big quarter. We've got modern horizons at the end of the quarter, and we want to monitor how those do. But I think signs are pointing in the right direction for us. In terms of the long-term view on Universes Beyond, man, I think Final Fantasy and Marvel are going to be pretty significant sets. I would put them in the same league at least as what we saw with Lord of the Rings. Marvel is just a huge IP. We're going to be doing multiple sets with the Walt Disney Company on that, which we're pretty excited about. And then Final Fantasy, it's huge inside of North America and Europe. But our sales in Japan will probably to do with what we did with Lord of the Rings because of the resonance that it has in that market which you should remember is the number two market for Magic and the number two market overall for trading card games. Drew Crum -- Stifel Financial Corp. -- Analyst Super helpful. Thanks guys. Operator Thank you. Our next question comes from the line of Arpine Kocharyan with UBS. Please proceed with your question. Arpine Kocharyan -- UBS -- Analyst Hi, good morning. Thank you for taking my question. Just to clarify on POS, you mentioned down for the quarter. Have your expectations changed at all regarding full year industry retail trends? And then I have a quick follow-up. Chris Cocks -- Chief Executive Officer Yeah. I mean, Q1 for the industry is usually around 14% to 15%. So it's still in terms of the total volume that Q1 represents. So I think it was a positive quarter. Certainly, we saw momentum exiting the quarter that's been continuing into Q2. But it's just super early. And the toy industry has been a difficult one to predict for the last 18 months or so. So we're going to continue to monitor it this quarter, particularly in light of the relative pause in entertainment that helps to drive toy sales. That said, I think it was a good start to the year for us and for the industry as a whole. And my hope is it continues. Arpine Kocharyan -- UBS -- Analyst Thank you. And then margin is clearly the highlight for your results today, and I think it's going to be the theme for the year as well. Could you maybe talk about cadence for margins for the rest of the year, I mean Q2, will obviously have strong Wizard, I think, so that helps flow through and you have closeout sales sort of easing or the impact of that easing. What are other big input you would highlight for Q2 and as we think about the back half as far as margins go? Chris Cocks -- Chief Executive Officer Yes, I'll start, and then I'll turn it over to Gina. So I'll maybe do a little bit of semantics and then turn it over to Gina to go into the details of your question, Arpiné. I think what you're seeing in Q1 is kind of our overall strategic thesis playing out, which I think will play out knock on wood through the rest of the year and for the foreseeable future. And I think that is as Hasbro games, IP and toy company effectively in that order. And I think our margins will start to shape around those style of industries, and those style of TAMs and growth opportunities. And so what you're seeing in Q1 is, wow, when you have a healthy games business, when you have great IP like we have and great partners that you can leverage it through and you start to get your act together on your cost structure and your operational efficiency in your underlying toy business and start to address kind of some of the marketing deficiencies you have, good things happen. Gina Goetter -- Chief Financial Officer And when you kind of ladder it like that, that uplift, how it will play out by quarter. So if you kind of look at the pieces in Q1 that mix and that as we continue to shift into gaming and into digital is going to continue to be a tailwind for us as we move through the balance of the year. The fact that supply chain productivity is going to more than offset inflation, that trend is going to continue as we move throughout the year. And then operating expenses and all of the work that we're doing on purchase cost reduction, people cost reduction, that benefit will continue to impact us as we move throughout the year. So the one quarter that we'll just have to watch is Q3 because of how strong it was in Q3 of 2023. So it's still going to be a very healthy margin, but there was just so much positivity last year at that time that there could be a slight dip year over year but all of that, the underpinnings of the cost structure that is going to hold and carry with us for the year. Chris Cocks -- Chief Executive Officer Q3 is going to be the big Baldur's Gate 3 launch time. Gina Goetter -- Chief Financial Officer And the Monopoly Go! started to hit -- the minimum guarantee started to hit for Monopoly Go!. Arpine Kocharyan -- UBS -- Analyst Right. And that's a great segue to my -- for the last question. Sorry for three questions. You just talked about digital coming in flat. And I think that's unchanged versus what you said last time. Everything we've been able to track on this shows that there could be upside to that given how strong Monopoly Go! has been. Why not raise that guidance today and could you talk about sort of your visibility on that because it's clearly -- at least seasonally, it's not a toy business, right, it's sort of digital games where you probably have a little bit more to say in terms of visibility? Gina Goetter -- Chief Financial Officer Yes. And the short answer is it's just really too early in the year to call it out. But to your point, the trends are favorable if they continue to play out in the way that everyone is watching and some of the other variables that are out of our control kind of break our way and become positive contributors. We absolutely did see that there could be upside. We just want to watch it play out here as we move through Q2 before we officially take guidance up for it. Chris Cocks -- Chief Executive Officer The challenge within our P&A is it's really a comp one. And so we just need more time. Arpine Kocharyan -- UBS -- Analyst Alright. Thank you very much. Thank you, both. Operator Thank you. Our question comes from the line of Christopher Horvers with J.P. Morgan. Please proceed with your question. Chris Horvers -- JPMorgan Chase and Company -- Analyst Thanks, and good morning. So I just want to follow up on the corporate line item. It was $45 million, you said roughly half of it was stock comp and that benefit does not sustain. What's the other half of that and does that continue? Yes. Gina Goetter -- Chief Financial Officer It is the material amount of money. Yes, the other half is all due to the operational excellence program. And I would think of it as a timing element of where it sits. So it's real money. It's purchase cost savings, it's people cost savings. And sometimes within the quarters in the year, it just settles out in corporate. As we move through the balance of the year, that's going to be allocated back. That favorability will be allocated back to the two segments of CP and Wizard. So that will kind of flush its way through. It's just a timing element of where it sat at the end of Q1. Last year, in the corporate P&L, I believe it was roughly $20 million annually of operating profit. I would expect maybe a little bit more just given that stock comp adjustment, but that's how you should think about Q1. Half of it was the stock comp, half of it was just some timing stuff that will get flushed back through the segments. Chris Horvers -- JPMorgan Chase and Company -- Analyst And did you say that the nonrepeating portion was $0.10 or is that half because if you do have, it's a bigger number than $0.10? Gina Goetter -- Chief Financial Officer No, it's about $0.10 of earnings per share. Yes, it was right about that. Chris Cocks -- Chief Executive Officer About half of 45, which translates to around $0.10 a share. Chris Horvers -- JPMorgan Chase and Company -- Analyst OK. OK. I got it. And I guess to try to build on that last question. I guess if you -- like if Monopoly Go! does continue at the current pacing, correct me if I'm wrong, but I think you're looking at like maybe $50 million to $70 million in the back half from Monopoly Go! sort of any comments on what it could be if what you see today continues, could it be 2x that? Chris Cocks -- Chief Executive Officer I don't think we're prepared to give you a sizing on it. As Gina said, if current revenue trends and the current advertising spend to revenue continues it will be quite favorable for us. And we'd likely exceed the minimum guarantee within Q2. Chris Horvers -- JPMorgan Chase and Company -- Analyst Got it, thanks very much. Operator Thank you. Our question comes from the line of Stephen Laszczyk with Goldman Sachs. Please proceed with your question. Stephen Laszczyk -- Goldman Sachs -- Analyst Hey, great. Thanks for taking the questions. Maybe just to follow-up on the marketing strategy, Chris, you talked about some success that you're seeing in the first quarter. Perhaps you can talk a little bit more about what you're doing differently and then if that success does continue, how should we thinking about the upside drivers throughout the year, do you think it's more of a top line growth driver or perhaps something on the cost side? Chris Cocks -- Chief Executive Officer Well, I think it's a pretty simple rubric that we're using, which is spend where we can measure, which is primarily digital. We have traditionally been a little traditional in our media planning. It's worked, but we haven't been able to really refine it down to the SKU level and down to the partner level. So we're spending a lot more in digital. We're spending a lot more with our retail partners near the point of sale or near the point of decision. And we're seeing a significant multiple effect in terms of the effectiveness of the spend. Still early in the year, and we still have to scale it, but it is certainly positive for us. I would say the majority of that will go to topline inside of CP if it continues to work like what we're hoping. And I think that's part of the thesis that we have for our Q3 and Q4 projections. And then that top line, particularly given the cost structure efficiencies we're driving and supply chain efficiencies we're driving, that will have a nice flow through to bottom line results, which again, I think kind of goes to the margin comments that Gina made earlier. Stephen Laszczyk -- Goldman Sachs -- Analyst Got it, thanks for that. And then maybe one more, just on freight. Gina, can you update us on what you're seeing in the freight market at the moment, just given the disruptions in the Middle East and perhaps how we should monitor that from our side as you think about any margin pressure that could come in 2024 or 2025? Gina Goetter -- Chief Financial Officer Yes. Good question. For us, every -- kind of the whole Red Sea, all that is really been immaterial on our business. I think in the P&L in Q1, it was less than a couple of hundred thousand dollars of impact and even since then, our team has been doing a good job navigating around and finding productivity to offset. So it is not a factor that I would call out as impacting our business right now. Overall, what we're seeing across freight is some moderation, capacity is opening up. We're seeing rates come down. So that is absolutely benefiting the P&L part of our guidance. We said that there was going to be two points of inflation in the year. So it's playing within that but the environment is much more rational for us this year. And our team has done a really nice job renegotiating rates, renegotiating our contracts, and then getting after our network in a way that benefits the P&L. Chris Cocks -- Chief Executive Officer Yes. And I think an important thing to keep in mind about us, when you think about things like the Red Sea and exposure, maybe toy dominant companies would have is most of our profit pools are nearshore. Magic, board Games, PLAY-DOH almost all of our licensing business has very little -- has very little sea freight dependencies associated with it because they're either made in market or they're made in markets that really aren't affected by kind of like a traditional Southeast Asian or Chinese freight lanes. So I think that's a competitive advantage of us -- for us in a world that has a little bit of tumult on the freight lines. Stephen Laszczyk -- Goldman Sachs -- Analyst Got it. Thanks, Chris. Thanks, Gina. Operator Thank you. Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question. Alex Perry -- Bank of America Merrill Lynch -- Analyst Hi, thanks for taking my questions here. You gave really good color on sort of the 2Q expectations for the CP segment and op margin. But could we get sort of how you're thinking about Wizards in 2Q from a revenue and op margin perspective? Thank you. Gina Goetter -- Chief Financial Officer For Wizards in Q2 is going to be probably pretty favorable from a top line standpoint and a bottom line, so it's going to look pretty consistent, just given the release schedule that we have on the top line. So we expect there to be another kind of growing quarter. And then on the bottom line, again, just given the mix that we're seeing within the business and the shift toward digital, we'll see consistent trends there. I would say, for both businesses, for both CP and Wasi, we've got the benefit from operating expenses that will continue to flow in as well throughout the quarter. Chris Cocks -- Chief Executive Officer And then there should be a nice royalty benefit in Q2 as well for Magic, Modern Horizon 3 is not royalty bearing. Lord of the Rings did fantastically, but there wasn't royalty associated with it. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. And then just my follow-up is on Magic, actually. So can you talk about any timing shifts that may have supported the quarter and how we should think about sort of phasing of growth there as we move through the year? Chris Cocks -- Chief Executive Officer I think in Q1, you saw a bit of Outlaws of Thunder Junction, which is the colorful name for our first major Q2 release, a bit of that shift in Q1, and I think that helped. For the balance of the year, I don't think there are any huge quarter-over-quarter shifts. You'll probably see a bit lighter release schedule in Q4 which I think might affect that quarter as you think about things. But Q2 should be reasonable for Magic, Q3 should also be reasonable and then Q4 will probably be the light one. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect, that's really helpful. Best of luck going forward. Gina Goetter -- Chief Financial Officer Thanks, Alex. Nice to hear your voice. Operator Thank you. Our next question comes from the line of James Hardiman with Citi. Please proceed with your question. James Hardiman -- Citi -- Analyst Hey, good morning. First, I just want to close the loop on this corporate and other last question, I promised Gina. So $45 million in the first quarter, what should that number be for the year, it sounds like you're saying less -- it's actually going to be less than $45 million. So that -- we should expect that to go negative for the balance of the year or maybe just give us a sort of North Star, how to think about that full year number? Gina Goetter -- Chief Financial Officer Yeah, good question. I know it's confusing to just given some of the timing components. Last year in 2023, it was roughly $20 million. When all kind of get settled out, it was roughly $20 million. I would say we'll probably be around that plus or minus a bit just given that we have this stock comp adjustment sitting in there. It's really held as a lot of our corporate costs sit within there. It's trying to represent kind of that corporate overhead structure, but then much of it gets allocated back as we go throughout the year. And all of that just given all of the work that we're doing in that area is a little bit as you can imagine, it's moving. It's agile this year as we make all of those changes. So I would say, call it, $20 million, $30 million by the end of the year. James Hardiman -- Citi -- Analyst And just to clarify, and then I have a follow-up. But any way to think about that from quarter to quarter, because that could be a pretty big swing factor as we think about potentially some negative numbers, does that start right away or is that more back half rated? Gina Goetter -- Chief Financial Officer I would say in Q2 and -- Q2, Q3, Q4, you're not going to have that $20 million adjustment for the stock comp in there. And so then you're looking kind of plus or minus a few million dollars moving in and out. So it really becomes an immaterial impact as we move through the next few quarters. James Hardiman -- Citi -- Analyst Got it. OK. And then consumer products margin, obviously pretty negative for the first quarter. But if anything, it sounds like you feel pretty positive about the trajectory of that margin. How should we think about -- I don't know if there's a way to think about an exit rate for this year. It seems like it would be meaningfully better than that 4% to 6% range given the starting point. What I'm really trying to get at is what -- how do you feel about where that's headed, particularly for 2025 and beyond? Gina Goetter -- Chief Financial Officer Got it. Yeah, I think we feel based on what we delivered in Q1, really good about our ability to deliver that 4% to 6% guidance range. And to your point, a big drag that we saw in Q1 was the one. And as we kind of push past that and move into growth in Q4 you're going to see some nice underlying profitability within the business. As we move then into 2025, we've publicly said that, our goal is to get this as close to double digits as we can through 2025. And it's going to be some of the same levers that you're hearing us talk about, continue to focus on cost structure, continuing to refine our supply chain, getting really smart with our product mix and how we're pricing in markets. And then lastly, the last lever we haven't brought up yet on this call is the whole design to value and all of the work that we're doing within our product design. So far, that hasn't had a material positive benefit on the P&L. We see that picking up as we move into Q4 and really into 2025. So I think we feel good about where Q1 landed. It tells us we're on the right path to get us within that range of 4% to 6%, and we're continuing to march into 2025, thinking that we're going to push that double-digit margin. James Hardiman -- Citi -- Analyst Is it crazy to say that we're going to be pretty close to that double-digit rate sort of implied in second half or fourth quarter? Gina Goetter -- Chief Financial Officer No, I think that in fourth quarter -- particularly, you got to keep in mind we had that big inventory adjustment last year that becomes a huge benefit for us in the fourth quarter. James Hardiman -- Citi -- Analyst Got it, perfect. Thanks, Gina. Operator Thank you. Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question. Fred Wightman -- Wolfe Research -- Analyst Hey, guys. Good morning. I just wanted to come back to margins. In the slides, you guys are calling out cost saves net of two points of inflation. And we've seen some other toy companies talk about actual benefits from deflation. So can you talk about where you're seeing that cost inflation specifically and how to think about that as we move throughout the balance of the year? Gina Goetter -- Chief Financial Officer Good question. Yes, we wouldn't call it deflation per se. So we are seeing a couple of points of inflation. The three areas I'd call it, one is labor. That's our biggest cost in the P&L. We're continuing to see that inflate a few points. The second, then when you think about our largest kind of ingredient that we're purchasing in Horizon, that also is inflationary in the year. But those are kind of the big two, I would say. I mean, our logistics cost there's pluses and minuses. Overall, we're managing logistics pretty well. For the year, in the quarter, we saw about two points of inflation. That's why we think that is going to play through the rest of the year, about two points of inflation. Chris Cocks -- Chief Executive Officer Yes. Just on an apples-to-apples, I'm not sure how other companies are talking deflation. When we talk about it, we talk about it as productivity based on our teams working with our vendors. And so our productivity is significantly scaling past underlying inflation in the supply chain to a pretty healthy manner, which is driving our gross margin productivity. Fred Wightman -- Wolfe Research -- Analyst Yes, that makes sense. Thanks, Chris. And maybe another one for you, Chris. You talked about the traction from the Littlest Pet Shop license. You also talked about the deal for Power Rangers. Does the early success that you're seeing with some of these licensing decisions change how you're thinking about the need to own versus license some of these CP brands going forward? Chris Cocks -- Chief Executive Officer No. I mean I think it's validating that we made the right choice. Two years ago, we outlined what our selection criteria would be basically. Can we generate $50 million in revenue at a 10% OP and can we grow to $100 million or more revenue at a 15% OP on a line. And so basically, we've chosen the lines to outsource that we don't think meet those thresholds. But another company with maybe a different cost structure or a different set of expertise could still make a really nice business even if it was sub-$50 million. So I think we're basically done without licensing. We certainly will be driving cross-licensing and leveraging our brands for category expansion and new product opportunities like we're doing with LEGO, like we're doing with Mattel, like we're doing with location-based entertainment. But I think Power Rangers is probably -- it's probably the last brand that we will outsource. Fred Wightman -- Wolfe Research -- Analyst Makes sense. Thanks a lot. Operator Thank you. Our final question comes from the line of Kylie Cohu with Jefferies. Please proceed with your question. Kylie Cohu -- Jefferies -- Analyst Hey, good morning. Thank you so much for taking my questions. Just kind of wanted to double click a little bit on the timing aspect. Anything that you can quantify from Easter, how has that affected the quarter, and how are you kind of thinking about how that would affect Q2 as well would be helpful. Chris Cocks -- Chief Executive Officer Yes. Easter gave a modest lift in the quarter, maybe, call it, one or two points based on it being earlier. Funnily though we're seeing April kind of continue to positive trends even barring kind of like what's going on with Easter. I think we were up in the last week, our total global POS in the last week of April that we measured, we were up 7% without our divested brands included and up about 4% when you even include those divested brands. So while we think Easter would help in Q1, it wasn't really a decisive help. Kylie Cohu -- Jefferies -- Analyst Got it. Great. That color is super helpful. And then I know you mentioned earlier about how most of your major profitability drivers are kind of being near sourced. But can you just remind us what your exposure kind of is to China at this point in time, I know we've been getting a lot of inbounds on that? Chris Cocks -- Chief Executive Officer Yes, about 50% or so of our... Gina Goetter -- Chief Financial Officer 40%. When you add in Wizards, we're about 40%. Chris Cocks -- Chief Executive Officer About 40% of our total volume is built in China today. But only or 5% or 10% of our total profit is sourced out of China. Kylie Cohu -- Jefferies -- Analyst Got you. Great. Well, thank you guys so much. I appreciate the time. Gina Goetter -- Chief Financial Officer Thank you. Chris Cocks -- Chief Executive Officer Thanks.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, ladies and gentlemen, and welcome to Northrop Grumman's first-quarter 2024 conference call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, vice president, investor relations. Mr. Ernst, please proceed. Todd Ernst -- Vice President, Investor Relations and Treasurer Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's First Quarter 2024 Conference Call. We'll refer to a presentation that is posted on our IR website this morning. Before we start, matter is discussed on today's call, including guidance and outlooks for 2024 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. And on the call today are Kathy Warden, chair, CEO, and president; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden -- Chairman, President, and Chief Executive Officer Thank you, Todd. Good morning, everyone. It's so good to have you joining us today. So earlier this morning, we released our first quarter results. And as you can see, we are off to a strong start to the year. with broad-based growth across our portfolio. The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance has positioned us for continued success. Growing global demand for our capabilities led to an exceptional 9% year-over-year increase in Q1 sales. driven by growth in all four of our sectors. The productivity and cost-efficiency measures we've been implementing are gaining traction, and our program performance in the quarter was strong, resulting in segment operating margin dollars increasing by 10%. Operating profit expansion, along with the lower share count helped to drive 15% EPS growth. Overall, our first quarter performance was in line with or better than our expectations, and we are reaffirming our 2024 company-level guidance. Global demand for our products continues to be robust, fueled by rising defense budgets and our market position. We're pleased that an agreement was reached on the U.S. fiscal year 2024 defense budget, which includes support for our key programs and represents a 6% growth in investment accounts over 2023. In March, the administration released the 2025 defense budget and future years' defense program or fight it. And these also were consistent with our expectations. We continue to see robust support for our program portfolio in areas that include nuclear modernization, microelectronics, advanced weapons in space. Together, the appropriations and site-up give us confidence in our longer-term outlook even if we experience a somewhat slower top-line growth environment for the U.S. defense budget in the short term. As we look beyond the domestic market, we continue to see numerous new international opportunities as well. They span a wide range of capabilities across our portfolio, and they provide an additional avenue for sustainable and profitable growth. In the first quarter, Poland signed a letter of acceptance with the U.S. government for an additional implementation of our IBCS product line, known as Narav. This represents the short-range air and missile defense portion of Poland's missle defense architecture, and it will augment the medium-range portion, which is currently being deployed. In addition to Poland, we see an IBCS pipeline now of approximately $10 billion from numerous countries who are considering this joint battle management system. Another important suite of international opportunities for Northrop Grumman is sensor modernization of fourth-generation aircraft. This includes our IVUS electronic warfare offering, which leverages the U.S. program of record. IVUS has been down selected by two international partners, and we are in discussions with seven other countries. Overall, IVUS has the potential to be a new multibillion-dollar product line for us. We're also well-positioned to address emerging international opportunities for autonomous systems. The first of four Triton aircraft is expected to be delivered to Australia later this year. In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability among allied nations. We believe our Triton program is well suited to meet these requirements, providing an opportunity for up to five aircraft. And we see additional Triton opportunities emerging elsewhere in Europe. There also continues to be an uptrend in U.S. and allied partner demand for missile products and ammunition. This includes several significant ammunition opportunities for allies that in aggregate have the potential to support further growth in our Defense Systems portfolio at solid margins. And this week, the U.S. Congress has supplemental funding bill, which includes munitions procurement and missile product capacity expansion. As we shared in our prior calls, to meet growing demand across our weapon systems business, we have been investing in our largest solid rocket motor production facility over the past five years, and we have now tripled our production capacity for tactical SRMs. Technology leadership is an important part of our business strategy. And we've been investing to maintain our lead in microelectronics for defense applications. To further this objective, we recently established the Northrop Grumman Microelectronics Center, which brings together our microelectronic capability from across the company into one organization. It will be led by our Mission Systems business, where over 80% of their revenue is enabled by our innovation and investments in microelectronics. Today, our U.S. microelectronics facilities produce over 1 million microchips a year. with tailored design, fabrication, and advanced packaging needed to support the most advanced defense systems and sensors. We also work with leading-edge technology developers in the commercial space, like NVIDIA to incorporate their technology into our national security solutions. In addition to advancement in capability, we are expanding our capacity in this important technology area. In the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Wattensboro, Virginia. With this $200 million investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions. As I mentioned earlier, we are laser-focused on performance and driving cost efficiencies in our business. This includes deploying systems and tools that help enable increased productivity across our business. In the first quarter, we completed the implementation of a significant financial ERP upgrade, which consolidated multiple versions of our prior system, and it will significantly improve the efficiency of our operations. This new system provides a foundation that supports many of the other digital transformation initiatives. And it plays an integral role in our longer-term margin expansion strategy. The upgrade, as you would understand, was a massive undertaking that was achieved with minimal disruption to our business. It's really a credit to the entire team who worked tirelessly to achieve this outcome. We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers. We saw benefits of this in the first quarter, particularly in production programs at both AS and DS. Efficiency in both direct and indirect cost management continues to be a priority across the company. Program execution is another area of particular emphasis in 2024. In our space sector, after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers, executing our extensive backlog and generating strong returns in the process. This includes the progress we're making on the Sentinel program. We're continuing to execute the EMD phase of the program, and we've made solid progress on design and development activities for the facilities and support equipment as well as the missile itself. The Nunn-McCurdy review is continuing, and we are providing support to the Department of Defense in that process as well. It's a complex undertaking to modernize the U.S. strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that deterrent. We're honored to be part of this vital mission, so we're partnering with our customers in bringing the focus, resources, and talent needed to deliver on those commitments. Finally, I'd like to provide an update on our capital deployment strategy. First and foremost, we are investing in capabilities that meet our customers' needs to address rapidly evolving threats. This year, we continue to expect that we'll invest roughly $1.8 billion in capital expenditures bringing our total investment to nearly $8 billion since the beginning of 2020. These investments have contributed to our strong growth performance and outlook. At the same time, we are efficiently returning capital to shareholders, including nearly $1.5 billion in the first quarter. So in summary, with a broad portfolio of well-supported programs continued new domestic and international opportunities, a relentless focus on performance, and a capital deployment strategy designed to create value for customers and shareholders alike. Northrop Grumman Corporation is well-positioned for the future. So with that, I'd like to hand the call over to Dave, and he's going to cover some of the details of our financial performance and outlook before we take your questions. Dave? Dave Keffer -- Chief Financial Officer Thanks, and good morning, everyone. As Kathy highlighted, we're off to a strong start to the year. Sales, operating income, and EPS all increased meaningfully from the first quarter of 2023 as we execute on our backlog and drive efficiencies in our business. Starting with our top-line results on Slide 4 in our earnings deck. First-quarter sales increased 9% to $10.1 billion. We were pleased to deliver higher Q1 sales at all four of our segments. These results were ahead of our initial projections for the first quarter, due in part to the timing of material volume on certain programs. With that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years. I'll address the factors contributing to this as I walk through updates to our segment guidance. As sales were particularly strong, up 18%, driven by higher volume on the B-21 program as well as on mature production programs like F-35. Defense Systems sales increased 3%, primarily due to growth on multiple programs in our weapons business, and as expected, were partially offset by lower volume on an international training program. Mission Systems sales grew by 4% and led by rapid growth on advanced microelectronics programs in our restricted portfolio, partially offset by lower volume on SABR. And sales at space increased by 9% with broad-based growth throughout the portfolio, including on the SDA transport layer programs as they continue to ramp. Turning to the bottom line. We remain laser-focused on performance. In Q1, we generated segment operating income of $1.1 billion, a year-over-year increase of 10%. Margin rate was also solid at 10.9%. As we've outlined on previous earnings calls, we expect to increase our margin rate over time as mix shifts favorably, macro conditions improve and productivity measures continue to bear fruit. Aeronautics operating income increased 25% for an operating margin rate of 10%. Efficient indirect rate performance, driven by productivity initiatives and careful cost management helped to generate a healthy volume of favorable net EAC adjustments. These adjustments were recognized across the AS portfolio but primarily benefited mature production programs. On B-21, there were no significant changes to our EACs, and we continue to make good progress in the test phase of the EMD program and on the build of the LRIP production units in flow. We have finalized negotiations with additional suppliers on the LRIP phase of the program and are in the late stages of negotiations with the remaining. Defense Systems operating income grew 11%. They also benefited from favorable mix and indirect rate performance, driving their OM rate to 12.5%. At Mission Systems, segment operating income increased 5% and margin rate increased 20 basis points to 14.2%. MS' OM rate benefited from favorable mix on higher-margin advanced microelectronics programs, partially offset by lower net favorable EAC adjustments. We see opportunities to further improve performance at MS, driven by operational efficiencies and investments we've made in our factories. Lastly, space operating income increased 6% and its margin rate was a solid 9.1%. Moving to earnings per share on Slide 6. Diluted EPS were $6.32 in Q1, an increase of 15% from the prior year. The increase was driven by our strong growth in segment performance as well as from higher net pension income and a lower share count. Turning to cash flow. We're pleased with our cash performance. particularly in light of our ERP conversion that went live in the first quarter. This was a significant undertaking that will help to drive additional efficiencies in our business over time. Q1 free cash flow was an outflow of approximately $1 billion, and we expect a strong quarter of cash generation in Q2. This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year. Moving to guidance. We are reaffirming our 2024 company-level guidance and have a few updates at the segment level. We continue to project a book-to-bill ratio close to 1x for the year. Note, we expect a higher ratio at AS, DS and MS and a lower ratio at space. given all the backlog growth that has generated in recent years and flattening U.S. space budgets. At the company level, we expect our second-quarter sales and segment margin volume to be roughly in line with the strong Q1 results with modest expansion in the second half. We expect the quarterly profile to vary at the segment level, so I'll take a moment to provide some additional color. First, DS and MS sales and margin dollars are expected to ramp throughout the year, generally consistent with prior year patterns. Restricted programs in MS continue to expand, and the DS Weapons business has significant demand that Kathy described, which should lead to further second-half growth. Our margin rate guidance was adjusted slightly higher at DS and slightly lower at MS, reflecting our Q1 performance and latest expectations for the remainder of the year. At Aeronautics we are increasing our sales guidance to the mid-$11 billion to reflect our strong Q1 results and our latest projections for B-21 sales timing. But the quarterly sales profile is projected to be different this year than it was in 2023. We the timing of materials volume, primarily on F-35 and B-21, drove additional Q1 sales. So we'd expect a flatter profile through the remaining quarters. As our full-year guidance indicates, AS margin rates are expected to be lower in subsequent quarters based on business mix and the strength of Q1 EAC adjustments. For the full year, we continue to expect margins in the mid-9% range. And at Space, we're lowering our sales guidance to the low to mid $14 billion, which roughly reflects 3% annual growth. Sales volume is now expected to trend lower over the remaining quarters of 2024, reflecting the NGI decision and the contract termination and restricted space that we noted last quarter. This is expected to be partially offset by continued growth in Sentinel and the SDA portfolio. Below the segment line, we are reaffirming our company-level guidance reflecting the strength of our broad portfolio. We continue to expect corporate unallocated costs to be weighted toward the second half of the year, consistent with prior years. Interest expense will also be higher in future quarters due to the additional debt issuance in Q1, and we continue to project an effective tax rate around 17%. As we've noted before, we're monitoring any changes in tax legislation and any updates in our tax appeals processes that by their nature, are not factored into our guidance. And as a reminder, we completed a $2.5 billion debt offering at attractive rates shortly after the filing of our 10-K. The proceeds will be used in part to retire $1.5 billion of notes that are maturing in January 2025 as well as for general corporate purposes, including share repurchases. We initiated a $1 billion accelerated share repurchase in Q1, which is now nearly complete. In total, including our open market purchases, our Q1 repurchases were $1.2 billion. For the full year, we have increased our expectations for share repurchases to greater than $2 billion. We also remain committed to providing a strong and growing dividend. Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows in our diverse and durable portfolio. We continue to project industry-leading investments in our business to support our customers while returning excess cash to shareholders. We're confident that this business strategy will create value for all our stakeholders. In summary, we're off to a great start to the year, and we remain upbeat about our long-term outlook. And with that, let's open the call for questions. Questions & Answers: Operator Thank you [Operator instructions] Our first question comes from Ron Epstein with Bank of America. You may proceed. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, everyone. Kathy, if you could speak to just maybe a little more detail in that $95 billion supplemental, what potentially is in there for Northrop given everything you guys have been doing in those related businesses. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. Well, as I noted, we are pleased that the supplemental did pass this week. And as we are looking through it. There are a number of areas that align to our program portfolio. Some where we are prime in weapons programs, others where we are a supplier of solid rocket motors. And then there is a line for additional capacity expansion. I talked about the capacity expansion that we have done for solid rocket motors in our largest production facility that over the last several years has enabled us to triple capacity, there is additional funding that would take that capacity even higher and reflects what's needed to support those programs that are funded in the supplemental. So we are bullish on the opportunity to fulfill that demand through both the investments we've made and the additional capacity that we can lay in over the coming months and years. Ron Epstein -- Bank of America Merrill Lynch -- Analyst And maybe just a quick follow-up, if I may. With the push out to FAXX, I mean how does that have -- like what strategic impact does that have on the Aeronautics business? Kathy Warden -- Chairman, President, and Chief Executive Officer There are a number of opportunities in aeronautics that we are pursuing that being one of them. It doesn't really have an impact on our near-term outlook for that business. As we shared today, we're raising the sales guidance for that business this year, and that's really on the strength of the current portfolio and the growth that we continue to see there, but we will continue to pursue additive opportunities that maybe program being one of them. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Great. Thank you very much. Operator Thank you. One moment for questions. Our next question comes from Doug Harned with Bernstein. You may proceed. Doug Harned -- AllianceBernstein -- Analyst Good morning. Thank you. You talked a little bit about outlook for book-to-bill this year and backlog was down in each segment in Q1. I understand some of the space issues. But on AS and MS, if you're looking at a book-to-bill of above one for the year, can you talk about where that's likely to come from? What will drive those business units since that the backlog was down in Q1? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. Doug, as we've talked about before, awards can be very lumpy, and so we tend to look at our book-to-bill over a longer stretch of time. And our last two years have been well over one, so we expected this first quarter to be lighter. We had signaled that. As we look at the full year, we still believe that we'll be near one. And it's largely going to be driven by our shorter-cycle businesses, so think Commission Systems and Defense Systems and space will clearly be the lowest as we digest the NGI loss and, of course, the cancellation that we had in the first quarter. But I'll remind you, our space business has nearly doubled over the last four years, and the book to builder has been incredibly strong. So they're still carrying a large backlog of business that supports the growth rates that we're projecting for them. Doug Harned -- AllianceBernstein -- Analyst Well, and then just on space, you mentioned the importance of Sentinel and -- and you've talked over the last quarter about some of the Nunn-McCurdy breach and those issues. But when you look at the Air Force moving the IOC schedule back by two years, how does that affect your growth path on Sentinel? Kathy Warden -- Chairman, President, and Chief Executive Officer We had talked about Sentinel growth coming flattening out for a few years and then returning to growth as we moved into phase later in the decade that still holds true. That timing has, of course, moved as the program schedule is moving, but the profile still is similar to what we have been discussing. And it was so far out in the future, it really wasn't in any of the projections that we had in '24 or even '25. It was well beyond that. Still a healthy ramp is expected for that program, and we are laser-focused on delivering and meeting the schedule commitments that we are working toward with the Air Force. Doug Harned -- AllianceBernstein -- Analyst OK. Very good. Thank you. Operator Thank you. One moment for questions. Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning, Kathy and Dave. The Air Force lowered its near-term requested funding levels for B-21 in the fiscal year '25 budget proposal. And they talked about lower negotiated prices on low-rate production. How does this change alter the economics of the program and risks of incremental charges? Kathy Warden -- Chairman, President, and Chief Executive Officer It doesn't change the economics of the program. What happened is the budget was set based on the independent cost estimates. And as we move toward the contract phases where LRIP was exercised the first option the government is now reconciling to our contract value. There was no change in price schedule quantities. It's just a reflection of them moving off of an independent cost estimate and moving to our contract value, which, of course, was lower than their intended cost estimates. Kristine Liwag -- Morgan Stanley -- Analyst Great. Thank you for the color. Operator Thank you. One moment for questions. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, everyone. Thank you so much. Kathy, I wanted to ask about DS. Maybe can you talk about the puts and takes there just given supply chain as well as services and incremental opportunities such as IBCS and Missile Systems. How do you think about the trajectory just given some of the positive movements we've seen in missiles, initial defense, and obviously, supplementals and the driver of potential margin improvement there? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. So our Defense Systems portfolio has been undergoing a transformation over the past several years. As you know, we divested the services business, and we still have a sustainment and modernization business. That business has flattish. And this year, we talked about a headwind in that business to growth associated with an international training program. You see that weighing a bit on first-quarter growth in DS being 3%. Over time, we expect that growth rate to reflect the other two portions of the business more and more as that mix shifts toward weapons and our battle management portfolio. That's where IBCS sits. I spoke on today's call about some of those opportunities, both domestically and internationally in the weapons and portfolios. And so we expect those to contribute to growth, and they are also higher margin than our sustainment business. So as that mix shifts, so will margins improve. Sheila Kahyaoglu -- Jefferies -- Analyst Thank you Operator Thank you. One moment for questions. Our next question comes from Seth Seifman with J.P. Morgan. You may proceed. Seth Seifman -- JPMorgan Chase and Company -- Analyst Thanks very much and good morning. Kathy, I wanted to ask on autonomous aircraft and the CCA program, we saw last night the news about Anduril's selection along with General Atomics. And I was wondering if you can -- with that news, maybe update us on Northrop's strategy to capture a new work in the autonomous space. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. So we're obviously disappointed to learn that we weren't selected on this phase of the CCA program. The -- as Air Force has described this acquisition strategy as a continuous competition and they're already outlining future phases. So we'll see what that presents in terms of future entry point. We also see the other services in the U.S., and I talked about international partners as well, continuing to look to add to their autonomous vehicle fleet. And so we are pursuing those opportunities. We haven't learned anything at this point that fundamentally changes our strategy in autonomy. but we'll monitor how the CCA program progresses and will incorporate any learnings that we have into those future opportunities. And for us, you didn't ask, but this phase of the program was relatively small. We didn't have it assumed in our plan. So there's no impact to the guidance that we shared this morning for the AS sector. Seth Seifman -- JPMorgan Chase and Company -- Analyst OK. OK. Great. And then maybe a follow-up on it. When you think about where you want to be focused in autonomy. I guess the legacy of the company is more on the exquisite side, and there will probably be some demand for that, but also demand for quantity and -- which requires affordability. Do you plan to pursue opportunities in both of those submarkets or really focus more on that kind of legacy exquisite piece of the market? Kathy Warden -- Chairman, President, and Chief Executive Officer We are obviously working toward affordability in our product line, so we do not want to be viewed as only offering exquisite and expensive technology. So we've been working to drive down the cost of our offerings, and I think we had quite a compelling offering CCA and can compete in that marketplace. We are really positioned to provide the best solutions that our customer needs against a high-end threat, however, we are not looking to compete in a more commoditized part of the market that's very low cost and not survivable systems. That's just not our business model, and we know that. So we'll remain disciplined in where we invest in the pieces of the market that we pursue, but we think that what we provide is still highly relevant. Seth Seifman -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Operator Thank you. One moment for questions. Our next question comes from David Strauss with Barclays. You may proceed. David Strauss -- Barclays -- Analyst Thanks. Good morning. Kathy Warden -- Chairman, President, and Chief Executive Officer Good morning David Strauss -- Barclays -- Analyst Kathy, I wanted to ask about MS margins. A couple of years ago, we were running in the 15 level, they stepped down a little bit last year. You took down a margin guide there. Can you just kind of talk about what's driving the lower margins? Is it just solely mix that's driving the lower margin in that MS? Kathy Warden -- Chairman, President, and Chief Executive Officer It's a bit of mix as we've been talking about. They have a higher cost plus mix now than they have historically, and we expect that to shift over time, but they are still at a high watermark. And there also is a productivity element to the story. We've talked about supply chain disruption as we have ramped and we are also increasing the scale of that business. You see a mid-single-digit level growth in Mission Systems. But with price coming down on microelectronics, it's actually a much higher volume ramp than is reflected in the total sales growth of the business. So as we have climbed that ramp productivity has taken a bit of a dip. But as we said, we're focused on getting back to our performance levels at now this higher volume level, and we see that as something this team is very capable of doing. And that's why you see a margin profile that always is start a little slower and ramp through the year for MS, but you'll see it again reflected this year based on those productivity improvements that we expect to achieve throughout the year. David Strauss -- Barclays -- Analyst OK. Got it. And then similar question over on the Space side. So you took down the top line there, I assume that was partially NGI. The slower growth, should we see that potentially reflect itself in a little bit better margin profile? I know you got the margin guidance unchanged at nine, but I guess the NGI loss and just a little bit slower growth, could that actually help the -- help enhance the margin side of things. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. As we look at the slower growth, it is largely development programs that are dilutive to the both space margin rate and the company margin rate. So as -- that part of the business is no longer as significant. You will see that be both margin and cash tailwinds because there was also capex investments planned that we will not extend in those programs now either. David Strauss -- Barclays -- Analyst Thanks very much. Operator Thank you. One moment for questions. Our next question comes from Cai von Rumohr with TD Cowen. You may proceed. Cai von Rumohr -- TD Cowen -- Analyst Thank you so much and good performance, Kathy. So following up on Dave's focus on space, I think I've got two questions. First, the restricted program that was canceled, is there any chance that we heard a rumor it might have been related to a supplier issue. Is there any chance that, that function or that program might reappear again in the future? And secondly, the FDA business, you basically decided not to bid on contract. Is that as a group, are those profitable contracts? Because every time I look, there's another new small supplier coming in and they're all fixed price contracts. Kathy Warden -- Chairman, President, and Chief Executive Officer So let me start with your first question on the restricted program. There's very little I can say, given the nature of that program, except to say that the Air Force canceled that program largely due to budgetary concerns and prioritization, but the requirement likely does still exist. And so we will see how that plays out over time. I also -- as we look at the broader space portfolio, we'll answer your FDA question more generally. We see a whole variety of opportunities that we can pursue, so we're simply selective on which ones we're best positioned to win, where we think that we can competitively. And with FDA, we've been quite successful and those programs are profitable. But that's because we're remaining disciplined in choosing where we can best compete and win with a reasonable fee and the probability of success. Cai von Rumohr -- TD Cowen -- Analyst But you did know bid that one program. As we move forward, is the pricing here getting a little bit more competitive as more people join the party? Kathy Warden -- Chairman, President, and Chief Executive Officer The way I think about this strategy is if there is an area where you have a differentiated value, then you are going to be able to price accordingly. If you don't, you won't. And so we don't bid when we don't feel like we have a differentiated value that's going to be successful with the price we need to bid to both win and execute. It's really a decision we make on every capture it's fundamental to the way we both commit and execute as well as deliver the returns that we expect. So no change there and no difference in states than it is in other parts of our portfolio. Cai von Rumohr -- TD Cowen -- Analyst Thank you very much. Operator Thank you. One moment for questions. Our next question comes from Robert Stallard with Vertical Research. You may proceed. Robert, your line is now open. Rob Stallard -- Vertical Research Partners -- Analyst Sorry. I was on mute. Thanks very much. Good morning. Kathy, I just wanted to follow up on your comments at the start of the call where you talked about the FY '25 request and DoD spending leveling off. I was wondering who you think could be the bill payers in that budget scenario or whether there's any vulnerability in the Northrop Grumman portfolio? Kathy Warden -- Chairman, President, and Chief Executive Officer We looked at the FY '25 president's budget is very much in line with our expectations. So no surprises and no concerns about our portfolio. Obviously, we talked about two things where budget was a factor in choosing to down select early on NGI was largely due to budgetary constraints. And then, of course, the restricted space program that we mentioned, but those we have now digested and, of course, reflected not only in our outlook, but my comments about the FY '25 budget. So nothing else that we see in there that is concerning. And as I noted, '24 ended up being a strong year for the investment accounts with 6% growth over '23. And we also have the supplemental on top of that. So it's early in looking at '25 and where the budget environment will actually end up in the U.S. But I also just keep pointing back to international demand, that's the strongest that I've seen in a long time. And so we look at global demand, not just the U.S. marketplace. Rob Stallard -- Vertical Research Partners -- Analyst Which is -- I've got a quick follow-on on that actually because you did mention exports as well. And I was wondering if you could give us an update on what sort of scale as a percentage of revenues, exports are at the moment and what that could grow to in the future. Kathy Warden -- Chairman, President, and Chief Executive Officer They're about 14% right now. And while we don't see that moving significantly in the near term because there's opportunities I noted in the pipeline do take a while to prosecute and turn into sales. We do expect that will be a faster segment of growth than our domestic business over the next several years, just the richness of the pipeline. Rob Stallard -- Vertical Research Partners -- Analyst All right. Thank you very much. Operator Thank you. One moment for questions. Our next question comes from Pete Skibitski with Alembic Global. You may proceed. Pete Skibitski -- Alembic Global -- Analyst Yeah. Good morning. Thanks. Kathy, can you talk about Northrop's roll in the shipbuilding supply chain, which I guess is the marine unit in MS just because the Navy has talked about some of the supply chain challenges in shipbuilding. Maybe you could just kind of swage any concerns maybe in terms of how that unit is performing and the growth outlook there? And just kind of how you guys are managing that unit to just so we have a good feel that smoke doesn't turn into fire kind of scenarios? Kathy Warden -- Chairman, President, and Chief Executive Officer Absolutely. It's a critically important part of our portfolio. We're very focused on delivering for our customers in that portfolio. And there have been challenges that we own. We've been working on a development program for nearly 10 years. It's going to deliver an amazing function improvement in propulsion for the Columbia class submarines. And we are near delivering those first care of turbine generators. And that's what the secretary of the Navy was referring to in his testimony on the Hill. We are working to address supply chain challenges, as you have heard across the entire shipbuilding enterprise, our experience is very consistent with that. These programs are long cycle. And so we only go through these development efforts once over a multi-decade period and there's learning that happens. But in this case, I think we are largely through that learning and on a path for delivery, and we're optimistic of the future ahead in being able to deliver this capability. From a financial perspective that you asked about, this is relatively small, so not something that you should think of as having a material financial impact, but that doesn't mean we don't take it very seriously. Pete Skibitski -- Alembic Global -- Analyst OK. Great. Appreciate the color. Operator Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle -- Deutsche Bank -- Analyst Hey. Good morning. Dave, just to clarify, what's the message on space growth beyond this year? Does it reaccelerate off this 4% or so this year? Dave Keffer -- Chief Financial Officer Yes, I appreciate the question. As you know, we'll provide more specific guidance for all of our businesses and at the enterprise level later this year and provide some indications on the October call as is our traditional approach. I think the broader themes that we've talked about in space today are important. We've touched on the restricted program cancellation in the NGI down select news. But broadly speaking, the doubling of that business's backlog over the last five years, the 17% CAGR in sales over that business in the last four years, both position us really well for continued success in that business. And there is margin rate and margin dollar expansion opportunity on top of that. So we'll provide more specifics as we go about the combination of headwinds from the items we mentioned and tailwinds from the continued growth on other programs. So more specific later in the year, but we continue to be confident in the long-term outlook of the Space business. Scott Deuschle -- Deutsche Bank -- Analyst OK. Great. And then, Kathy, you flagged opportunities for increased demand for ammunition from U.S. allies, so I was wondering if you could talk a bit more about maybe the specific ammunition products that allies you're looking to purchase from Northrop? And in which regions you're seeing that demand percolate? So I understand that there's at least one specific European supplier of ammunition to generate something like 25% operating margins off that revenue. So just curious to understand what that opportunity could mean for Northrop. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. of course. So as we look at our weapons portfolio today, it's about 6% to 7% of revenue growing double digit, and we expect that to continue. A good part of that growth will be supported both by the supplemental that I spoke about in my opening comments in response to Ron's question, but also the European demand has strengthen. So we have a number of opportunities, countries across Europe looking to do the exact same thing the U.S. is doing in replenishing stockpiles for munitions. And those are basic and nonstandard AMO contracts that we have, our business grew nicely last year. We expect that to continue this year. And we also have programs like AARGM, where there's international demand, that's a longer-term proposition as we look to provide those products to our European allies, particularly as they feel the F-35. So a wide ranging set from ammunition all the way up to tactical missiles. And then, of course, our solid rocket motor facility expansion supports many of our peer programs like GMLRS, PAC-3, looking to be a second source to support us and fix all of those opportunities are in the mix for us. Scott Deuschle -- Deutsche Bank -- Analyst Thank you. Operator Thank you. One moment for questions. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton -- Wolfe Research -- Analyst Thank you. Good morning. Kathy, you provided a ton of international color both in your opening remarks and also a follow-up to Rob's question. But when I look at the sales disclosures, it's been pretty locked in at $5 billion for five years of absolute dollar revenue. So is there a color you can give us on the backlog that shows that this international opportunity is at least working its way into backlog, if not sales in the coming year? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. So in terms of backlog, what you would look to see as we signed the IBCS deals that I mentioned with additional countries as we sign the contracts for Triton that I highlighted in the call today. the views that are in the early stages that two countries progressing toward awards. These are all awards that would be in new franchises that we have not had in the past, while we continue to see just the standard growth in areas like F-35 international and the Triton portfolio with the Australians are already underway or franchise with France and Japan. So those are still in the backlog and then you'd add to that, the opportunities that I highlighted this morning that are new franchises for us. Myles Walton -- Wolfe Research -- Analyst OK. So the percent of the backlog that's international has been expanding that, I think, is what you're saying? Kathy Warden -- Chairman, President, and Chief Executive Officer It has, although really what we see now is a whole set of opportunities for product lines that were not in our backlog over the last five years. So that's the difference. Our portfolio has largely been high-end capabilities that aren't exportable. And as you look at how the portfolio has evolved over time, these new franchises that I spoke about today or franchises like Triton now getting permissibility for exports to more countries is really opening up a whole new set of opportunities for our company. Myles Walton -- Wolfe Research -- Analyst OK. Thank you. Operator Thank you. One moment for questions. Our next question comes from Gavin Parsons with UBS. You may proceed. Gavin Parsons -- UBS -- Analyst Thanks. Good morning. Kathy, you mentioned you've finalized negotiations with additional suppliers on the B-21. Were those all in line with your expectations? Can you share what percentage of suppliers are now locked in? And then when you expect that to be fully finalized? Kathy Warden -- Chairman, President, and Chief Executive Officer So they were largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter. We are far along in negotiations with all of our suppliers, and we expect to be closing on those shortly that we're making sure that we have the best scale possible and that we work those negotiations diligently. So I'm not at a time barrier to the team more so an outcome set of objectives for them, and they're doing quite well against those expectations. And our suppliers are obviously key to us. We want to make sure that they are able to support investment in this program that's necessary. And so we're taking their interest in line as well. Gavin Parsons -- UBS -- Analyst OK. Great. That's helpful. And then, Dave, maybe just on Aeronautics margin, I think you mentioned the strength in 1Q will be a little lighter through the rest of the year. But was 1Q as expected? Was that in guide? Or did you perform better than you thought you would in the first quarter? Dave Keffer -- Chief Financial Officer The first quarter was particularly strong, as we mentioned. We had anticipated an opportunity for productivity gains and indirect rate-driven enhancement to the margin as well this year that was baked into our guidance. and the timing was such that a lot of that came in, in the first quarter, which is why we've noted that we expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gate at 10%. And so while there's no single onetime item in the first quarter, it was a particularly strong start and a great way to kick off the year for AS. Gavin Parsons -- UBS -- Analyst Well, thank you both. Operator Thank you. One moment for questions. Our next question comes from Matt Akers with Wells Fargo. You may proceed. Matt Akers -- Wells Fargo Securities -- Analyst Yeah. Good morning, guys. Thanks for the question. I wanted to ask on Sentinel. You mentioned you're supporting the Nunn-McCurdy review. Just curious what you think the outcomes of that could be? And if there's any risk to that program or do you think that's not the case just given sort of health criticality? Kathy Warden -- Chairman, President, and Chief Executive Officer Well, there has been strong bipartisan support for the program. We expect that will continue. It, of course, is the nation's policy as reviewed in the nuclear posture review to have three legs of strategic deterrent. So we do expect that the program will be recertified, but the government needs to take the process seriously. It's a good process. and they're working through the phases of that recertification now. And as I said, we're providing support to them. and fit committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn-McCurdy but supporting it fully. Matt Akers -- Wells Fargo Securities -- Analyst Yes. Got it. And I guess one for Dave. Just thoughts on where EACs at the company level kind of go from here, you're still running quite a bit below where you were a couple of years ago, it sounds like AS had some good EACs, but just thoughts on the progress from here. Dave Keffer -- Chief Financial Officer Sure. I agree with your characterization that there was good progress in the first quarter. And you'll see that further detailed in our 10-Q disclosures as well. we had been running substantially above the levels of 2022 and 2023 in prior years before the macroeconomic disruptions. And so over time, we anticipate that we will normalize to levels more like our history and we saw progress toward that in the first quarter, as you mentioned, particularly in AS. But really across the business, you're seeing the results of our heavy focus on program performance and cost efficiency. It's one of the three drivers that we anticipate for margin expansion, along with business mix enhancement, and the gradual decline of macroeconomic pressures. And so across those three dimensions, we see an opportunity to continue to see margins normalize over the next several years, and Q1 was a good example of what you can anticipate there. Matt Akers -- Wells Fargo Securities -- Analyst Great. Thank you. Operator Thank you. One moment for questions. Our next question comes from Jason Gursky with Citi. You may proceed. Jason Gursky -- Citi -- Analyst Hey. Good morning, everybody. Kathy, I was wondering if I could ask you to dive a little deep on the space business in two areas, maybe starting with sensors and patent loads. And talk a little bit about the pipeline of business opportunity that you have there. where you're seeing the most interest kind of like type of sensor, letter optical communications, SAAR, RF, that kind of thing. Just talk a little bit about the general kind of ecosystem and what's going on in the sensors and payload business that you've got there and what you're kind of excited about today? Kathy Warden -- Chairman, President, and Chief Executive Officer So we are seeing interest in modernizing really the entire architecture and space. And I've been talking about this for a while, so whether it's intelligence surveillance reconnaissance, communications, missile warning and tracking, the entire space architecture is being upgraded, both in terms of advancing the capability of those sensors and payloads but also the coverage with the broadening of the space architecture. And so we're involved selectively in all of those areas. As you know, we play a key role in ISR communications, and very informed of both missile tracking and missile warning. So really, we have a very broad portfolio that stretches across those areas we don't focus in on one over the other, and we see them all equally attractive and really, in many ways, that modernization is well underway and is what has contributed to the strong growth of our backlog and space over the last few years. Jason Gursky -- Citi -- Analyst OK. And maybe a similar kind of discussion on the ground systems side of things and whether that's all the sensor payloads that we're launching open space are driving the ground system business, just kind of what the competitive environment looks like for you there? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. They are, and we do participate in the ground segment. I'd say our strength is more in the sensors and payloads we look at a full integrated solution and often are asked by the government to support them on the ground systems development that go with the satellites that we're fielding. And so we see that as a marketplace where we absolutely can compete. We just choose to be a bit more selective there, again, back to where we're differentiated. Jason Gursky -- Citi -- Analyst Great. Thank you. Todd Ernst -- Vice President, Investor Relations and Treasurer Josh, we have time for one more question. Operator One moment for our last question. And our last question comes from Peter Arment with Baird. Peter Arment -- Robert W. Baird and Company -- Analyst Yeah. Good morning, Kathy and Dave. Nice results. Kathy, can you maybe just talk a little bit about what you expect on your capex kind of profile when we think about last year, you had a big step up and things are staying elevated here, but you also have just tremendous demand signals, both domestically and internationally. Just how you're thinking about how capex should trend? Have you made enough of the investment. It sounds like you have on the solid rocket side and microelectronics, but just thinking about more broadly? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. Some part of why we highlighted today some of those investments that we're making that will support growth over the long term. is to reflect the statements that we've made that we do see this year being the peak 4% of revenue capex expenditures and then starting to see those come down gradually more toward a normalized level in our company. Still see those as a robust growth environment. And so there will be investments that we're making. We're committed to do that. But we do not see the same demand for those investments over the next several years that we've seen over the last several. Peter Arment -- Robert W. Baird and Company -- Analyst Very, very helpful. Thanks. Kathy Warden -- Chairman, President, and Chief Executive Officer Well, thank you all for joining us on the call today. We -- as you see, we're off to a strong start to the year, and we will carry that momentum into the following quarters. as our team focuses relentlessly on delivering that technology advantage for our customers and value to our shareholders. So thanks again for joining us. I look forward to speaking with you on our next call in July. Answer:

Northrop Grumman's first-quarter 2024 conference call

Operator Good day, ladies and gentlemen, and welcome to Northrop Grumman's first-quarter 2024 conference call. Today's call is being recorded. My name is Josh, and I will be your operator today. [Operator instructions] I would now like to turn the call over to your host, Mr. Todd Ernst, vice president, investor relations. Mr. Ernst, please proceed. Todd Ernst -- Vice President, Investor Relations and Treasurer Thanks, Josh, and good morning, everyone, and welcome to Northrop Grumman's First Quarter 2024 Conference Call. We'll refer to a presentation that is posted on our IR website this morning. Before we start, matter is discussed on today's call, including guidance and outlooks for 2024 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. And on the call today are Kathy Warden, chair, CEO, and president; and Dave Keffer, our CFO. At this time, I'd like to turn the call over to Kathy. Kathy? Kathy Warden -- Chairman, President, and Chief Executive Officer Thank you, Todd. Good morning, everyone. It's so good to have you joining us today. So earlier this morning, we released our first quarter results. And as you can see, we are off to a strong start to the year. with broad-based growth across our portfolio. The team's relentless execution of our strategy, which includes technology leadership aligned to our customers' priorities and a laser focus on performance has positioned us for continued success. Growing global demand for our capabilities led to an exceptional 9% year-over-year increase in Q1 sales. driven by growth in all four of our sectors. The productivity and cost-efficiency measures we've been implementing are gaining traction, and our program performance in the quarter was strong, resulting in segment operating margin dollars increasing by 10%. Operating profit expansion, along with the lower share count helped to drive 15% EPS growth. Overall, our first quarter performance was in line with or better than our expectations, and we are reaffirming our 2024 company-level guidance. Global demand for our products continues to be robust, fueled by rising defense budgets and our market position. We're pleased that an agreement was reached on the U.S. fiscal year 2024 defense budget, which includes support for our key programs and represents a 6% growth in investment accounts over 2023. In March, the administration released the 2025 defense budget and future years' defense program or fight it. And these also were consistent with our expectations. We continue to see robust support for our program portfolio in areas that include nuclear modernization, microelectronics, advanced weapons in space. Together, the appropriations and site-up give us confidence in our longer-term outlook even if we experience a somewhat slower top-line growth environment for the U.S. defense budget in the short term. As we look beyond the domestic market, we continue to see numerous new international opportunities as well. They span a wide range of capabilities across our portfolio, and they provide an additional avenue for sustainable and profitable growth. In the first quarter, Poland signed a letter of acceptance with the U.S. government for an additional implementation of our IBCS product line, known as Narav. This represents the short-range air and missile defense portion of Poland's missle defense architecture, and it will augment the medium-range portion, which is currently being deployed. In addition to Poland, we see an IBCS pipeline now of approximately $10 billion from numerous countries who are considering this joint battle management system. Another important suite of international opportunities for Northrop Grumman is sensor modernization of fourth-generation aircraft. This includes our IVUS electronic warfare offering, which leverages the U.S. program of record. IVUS has been down selected by two international partners, and we are in discussions with seven other countries. Overall, IVUS has the potential to be a new multibillion-dollar product line for us. We're also well-positioned to address emerging international opportunities for autonomous systems. The first of four Triton aircraft is expected to be delivered to Australia later this year. In addition, NATO is actively looking to expand its maritime surveillance capabilities, enabling a higher degree of interoperability among allied nations. We believe our Triton program is well suited to meet these requirements, providing an opportunity for up to five aircraft. And we see additional Triton opportunities emerging elsewhere in Europe. There also continues to be an uptrend in U.S. and allied partner demand for missile products and ammunition. This includes several significant ammunition opportunities for allies that in aggregate have the potential to support further growth in our Defense Systems portfolio at solid margins. And this week, the U.S. Congress has supplemental funding bill, which includes munitions procurement and missile product capacity expansion. As we shared in our prior calls, to meet growing demand across our weapon systems business, we have been investing in our largest solid rocket motor production facility over the past five years, and we have now tripled our production capacity for tactical SRMs. Technology leadership is an important part of our business strategy. And we've been investing to maintain our lead in microelectronics for defense applications. To further this objective, we recently established the Northrop Grumman Microelectronics Center, which brings together our microelectronic capability from across the company into one organization. It will be led by our Mission Systems business, where over 80% of their revenue is enabled by our innovation and investments in microelectronics. Today, our U.S. microelectronics facilities produce over 1 million microchips a year. with tailored design, fabrication, and advanced packaging needed to support the most advanced defense systems and sensors. We also work with leading-edge technology developers in the commercial space, like NVIDIA to incorporate their technology into our national security solutions. In addition to advancement in capability, we are expanding our capacity in this important technology area. In the quarter, we held a groundbreaking ceremony for our new advanced electronics facility in Wattensboro, Virginia. With this $200 million investment, we are increasing our ability to manufacture and test advanced electronics and mission solutions. As I mentioned earlier, we are laser-focused on performance and driving cost efficiencies in our business. This includes deploying systems and tools that help enable increased productivity across our business. In the first quarter, we completed the implementation of a significant financial ERP upgrade, which consolidated multiple versions of our prior system, and it will significantly improve the efficiency of our operations. This new system provides a foundation that supports many of the other digital transformation initiatives. And it plays an integral role in our longer-term margin expansion strategy. The upgrade, as you would understand, was a massive undertaking that was achieved with minimal disruption to our business. It's really a credit to the entire team who worked tirelessly to achieve this outcome. We also continue to proactively address our overhead costs and indirect rates to drive affordability for our customers. We saw benefits of this in the first quarter, particularly in production programs at both AS and DS. Efficiency in both direct and indirect cost management continues to be a priority across the company. Program execution is another area of particular emphasis in 2024. In our space sector, after rapid growth over the last several years, we are keenly focused on delivering key capabilities for our customers, executing our extensive backlog and generating strong returns in the process. This includes the progress we're making on the Sentinel program. We're continuing to execute the EMD phase of the program, and we've made solid progress on design and development activities for the facilities and support equipment as well as the missile itself. The Nunn-McCurdy review is continuing, and we are providing support to the Department of Defense in that process as well. It's a complex undertaking to modernize the U.S. strategic deterrent, which requires delivering the most advanced capabilities in the world to form the basis of that deterrent. We're honored to be part of this vital mission, so we're partnering with our customers in bringing the focus, resources, and talent needed to deliver on those commitments. Finally, I'd like to provide an update on our capital deployment strategy. First and foremost, we are investing in capabilities that meet our customers' needs to address rapidly evolving threats. This year, we continue to expect that we'll invest roughly $1.8 billion in capital expenditures bringing our total investment to nearly $8 billion since the beginning of 2020. These investments have contributed to our strong growth performance and outlook. At the same time, we are efficiently returning capital to shareholders, including nearly $1.5 billion in the first quarter. So in summary, with a broad portfolio of well-supported programs continued new domestic and international opportunities, a relentless focus on performance, and a capital deployment strategy designed to create value for customers and shareholders alike. Northrop Grumman Corporation is well-positioned for the future. So with that, I'd like to hand the call over to Dave, and he's going to cover some of the details of our financial performance and outlook before we take your questions. Dave? Dave Keffer -- Chief Financial Officer Thanks, and good morning, everyone. As Kathy highlighted, we're off to a strong start to the year. Sales, operating income, and EPS all increased meaningfully from the first quarter of 2023 as we execute on our backlog and drive efficiencies in our business. Starting with our top-line results on Slide 4 in our earnings deck. First-quarter sales increased 9% to $10.1 billion. We were pleased to deliver higher Q1 sales at all four of our segments. These results were ahead of our initial projections for the first quarter, due in part to the timing of material volume on certain programs. With that in mind, we expect a more gradual ramp in our quarterly sales profile than in the past few years. I'll address the factors contributing to this as I walk through updates to our segment guidance. As sales were particularly strong, up 18%, driven by higher volume on the B-21 program as well as on mature production programs like F-35. Defense Systems sales increased 3%, primarily due to growth on multiple programs in our weapons business, and as expected, were partially offset by lower volume on an international training program. Mission Systems sales grew by 4% and led by rapid growth on advanced microelectronics programs in our restricted portfolio, partially offset by lower volume on SABR. And sales at space increased by 9% with broad-based growth throughout the portfolio, including on the SDA transport layer programs as they continue to ramp. Turning to the bottom line. We remain laser-focused on performance. In Q1, we generated segment operating income of $1.1 billion, a year-over-year increase of 10%. Margin rate was also solid at 10.9%. As we've outlined on previous earnings calls, we expect to increase our margin rate over time as mix shifts favorably, macro conditions improve and productivity measures continue to bear fruit. Aeronautics operating income increased 25% for an operating margin rate of 10%. Efficient indirect rate performance, driven by productivity initiatives and careful cost management helped to generate a healthy volume of favorable net EAC adjustments. These adjustments were recognized across the AS portfolio but primarily benefited mature production programs. On B-21, there were no significant changes to our EACs, and we continue to make good progress in the test phase of the EMD program and on the build of the LRIP production units in flow. We have finalized negotiations with additional suppliers on the LRIP phase of the program and are in the late stages of negotiations with the remaining. Defense Systems operating income grew 11%. They also benefited from favorable mix and indirect rate performance, driving their OM rate to 12.5%. At Mission Systems, segment operating income increased 5% and margin rate increased 20 basis points to 14.2%. MS' OM rate benefited from favorable mix on higher-margin advanced microelectronics programs, partially offset by lower net favorable EAC adjustments. We see opportunities to further improve performance at MS, driven by operational efficiencies and investments we've made in our factories. Lastly, space operating income increased 6% and its margin rate was a solid 9.1%. Moving to earnings per share on Slide 6. Diluted EPS were $6.32 in Q1, an increase of 15% from the prior year. The increase was driven by our strong growth in segment performance as well as from higher net pension income and a lower share count. Turning to cash flow. We're pleased with our cash performance. particularly in light of our ERP conversion that went live in the first quarter. This was a significant undertaking that will help to drive additional efficiencies in our business over time. Q1 free cash flow was an outflow of approximately $1 billion, and we expect a strong quarter of cash generation in Q2. This profile is consistent with our seasonal pattern of generating the majority of our free cash flow in the second half of the year. Moving to guidance. We are reaffirming our 2024 company-level guidance and have a few updates at the segment level. We continue to project a book-to-bill ratio close to 1x for the year. Note, we expect a higher ratio at AS, DS and MS and a lower ratio at space. given all the backlog growth that has generated in recent years and flattening U.S. space budgets. At the company level, we expect our second-quarter sales and segment margin volume to be roughly in line with the strong Q1 results with modest expansion in the second half. We expect the quarterly profile to vary at the segment level, so I'll take a moment to provide some additional color. First, DS and MS sales and margin dollars are expected to ramp throughout the year, generally consistent with prior year patterns. Restricted programs in MS continue to expand, and the DS Weapons business has significant demand that Kathy described, which should lead to further second-half growth. Our margin rate guidance was adjusted slightly higher at DS and slightly lower at MS, reflecting our Q1 performance and latest expectations for the remainder of the year. At Aeronautics we are increasing our sales guidance to the mid-$11 billion to reflect our strong Q1 results and our latest projections for B-21 sales timing. But the quarterly sales profile is projected to be different this year than it was in 2023. We the timing of materials volume, primarily on F-35 and B-21, drove additional Q1 sales. So we'd expect a flatter profile through the remaining quarters. As our full-year guidance indicates, AS margin rates are expected to be lower in subsequent quarters based on business mix and the strength of Q1 EAC adjustments. For the full year, we continue to expect margins in the mid-9% range. And at Space, we're lowering our sales guidance to the low to mid $14 billion, which roughly reflects 3% annual growth. Sales volume is now expected to trend lower over the remaining quarters of 2024, reflecting the NGI decision and the contract termination and restricted space that we noted last quarter. This is expected to be partially offset by continued growth in Sentinel and the SDA portfolio. Below the segment line, we are reaffirming our company-level guidance reflecting the strength of our broad portfolio. We continue to expect corporate unallocated costs to be weighted toward the second half of the year, consistent with prior years. Interest expense will also be higher in future quarters due to the additional debt issuance in Q1, and we continue to project an effective tax rate around 17%. As we've noted before, we're monitoring any changes in tax legislation and any updates in our tax appeals processes that by their nature, are not factored into our guidance. And as a reminder, we completed a $2.5 billion debt offering at attractive rates shortly after the filing of our 10-K. The proceeds will be used in part to retire $1.5 billion of notes that are maturing in January 2025 as well as for general corporate purposes, including share repurchases. We initiated a $1 billion accelerated share repurchase in Q1, which is now nearly complete. In total, including our open market purchases, our Q1 repurchases were $1.2 billion. For the full year, we have increased our expectations for share repurchases to greater than $2 billion. We also remain committed to providing a strong and growing dividend. Our capital deployment plans are enabled by our ability to generate strong and predictable cash flows in our diverse and durable portfolio. We continue to project industry-leading investments in our business to support our customers while returning excess cash to shareholders. We're confident that this business strategy will create value for all our stakeholders. In summary, we're off to a great start to the year, and we remain upbeat about our long-term outlook. And with that, let's open the call for questions. Questions & Answers: Operator Thank you [Operator instructions] Our first question comes from Ron Epstein with Bank of America. You may proceed. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, everyone. Kathy, if you could speak to just maybe a little more detail in that $95 billion supplemental, what potentially is in there for Northrop given everything you guys have been doing in those related businesses. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. Well, as I noted, we are pleased that the supplemental did pass this week. And as we are looking through it. There are a number of areas that align to our program portfolio. Some where we are prime in weapons programs, others where we are a supplier of solid rocket motors. And then there is a line for additional capacity expansion. I talked about the capacity expansion that we have done for solid rocket motors in our largest production facility that over the last several years has enabled us to triple capacity, there is additional funding that would take that capacity even higher and reflects what's needed to support those programs that are funded in the supplemental. So we are bullish on the opportunity to fulfill that demand through both the investments we've made and the additional capacity that we can lay in over the coming months and years. Ron Epstein -- Bank of America Merrill Lynch -- Analyst And maybe just a quick follow-up, if I may. With the push out to FAXX, I mean how does that have -- like what strategic impact does that have on the Aeronautics business? Kathy Warden -- Chairman, President, and Chief Executive Officer There are a number of opportunities in aeronautics that we are pursuing that being one of them. It doesn't really have an impact on our near-term outlook for that business. As we shared today, we're raising the sales guidance for that business this year, and that's really on the strength of the current portfolio and the growth that we continue to see there, but we will continue to pursue additive opportunities that maybe program being one of them. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Great. Thank you very much. Operator Thank you. One moment for questions. Our next question comes from Doug Harned with Bernstein. You may proceed. Doug Harned -- AllianceBernstein -- Analyst Good morning. Thank you. You talked a little bit about outlook for book-to-bill this year and backlog was down in each segment in Q1. I understand some of the space issues. But on AS and MS, if you're looking at a book-to-bill of above one for the year, can you talk about where that's likely to come from? What will drive those business units since that the backlog was down in Q1? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. Doug, as we've talked about before, awards can be very lumpy, and so we tend to look at our book-to-bill over a longer stretch of time. And our last two years have been well over one, so we expected this first quarter to be lighter. We had signaled that. As we look at the full year, we still believe that we'll be near one. And it's largely going to be driven by our shorter-cycle businesses, so think Commission Systems and Defense Systems and space will clearly be the lowest as we digest the NGI loss and, of course, the cancellation that we had in the first quarter. But I'll remind you, our space business has nearly doubled over the last four years, and the book to builder has been incredibly strong. So they're still carrying a large backlog of business that supports the growth rates that we're projecting for them. Doug Harned -- AllianceBernstein -- Analyst Well, and then just on space, you mentioned the importance of Sentinel and -- and you've talked over the last quarter about some of the Nunn-McCurdy breach and those issues. But when you look at the Air Force moving the IOC schedule back by two years, how does that affect your growth path on Sentinel? Kathy Warden -- Chairman, President, and Chief Executive Officer We had talked about Sentinel growth coming flattening out for a few years and then returning to growth as we moved into phase later in the decade that still holds true. That timing has, of course, moved as the program schedule is moving, but the profile still is similar to what we have been discussing. And it was so far out in the future, it really wasn't in any of the projections that we had in '24 or even '25. It was well beyond that. Still a healthy ramp is expected for that program, and we are laser-focused on delivering and meeting the schedule commitments that we are working toward with the Air Force. Doug Harned -- AllianceBernstein -- Analyst OK. Very good. Thank you. Operator Thank you. One moment for questions. Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning, Kathy and Dave. The Air Force lowered its near-term requested funding levels for B-21 in the fiscal year '25 budget proposal. And they talked about lower negotiated prices on low-rate production. How does this change alter the economics of the program and risks of incremental charges? Kathy Warden -- Chairman, President, and Chief Executive Officer It doesn't change the economics of the program. What happened is the budget was set based on the independent cost estimates. And as we move toward the contract phases where LRIP was exercised the first option the government is now reconciling to our contract value. There was no change in price schedule quantities. It's just a reflection of them moving off of an independent cost estimate and moving to our contract value, which, of course, was lower than their intended cost estimates. Kristine Liwag -- Morgan Stanley -- Analyst Great. Thank you for the color. Operator Thank you. One moment for questions. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, everyone. Thank you so much. Kathy, I wanted to ask about DS. Maybe can you talk about the puts and takes there just given supply chain as well as services and incremental opportunities such as IBCS and Missile Systems. How do you think about the trajectory just given some of the positive movements we've seen in missiles, initial defense, and obviously, supplementals and the driver of potential margin improvement there? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. So our Defense Systems portfolio has been undergoing a transformation over the past several years. As you know, we divested the services business, and we still have a sustainment and modernization business. That business has flattish. And this year, we talked about a headwind in that business to growth associated with an international training program. You see that weighing a bit on first-quarter growth in DS being 3%. Over time, we expect that growth rate to reflect the other two portions of the business more and more as that mix shifts toward weapons and our battle management portfolio. That's where IBCS sits. I spoke on today's call about some of those opportunities, both domestically and internationally in the weapons and portfolios. And so we expect those to contribute to growth, and they are also higher margin than our sustainment business. So as that mix shifts, so will margins improve. Sheila Kahyaoglu -- Jefferies -- Analyst Thank you Operator Thank you. One moment for questions. Our next question comes from Seth Seifman with J.P. Morgan. You may proceed. Seth Seifman -- JPMorgan Chase and Company -- Analyst Thanks very much and good morning. Kathy, I wanted to ask on autonomous aircraft and the CCA program, we saw last night the news about Anduril's selection along with General Atomics. And I was wondering if you can -- with that news, maybe update us on Northrop's strategy to capture a new work in the autonomous space. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. So we're obviously disappointed to learn that we weren't selected on this phase of the CCA program. The -- as Air Force has described this acquisition strategy as a continuous competition and they're already outlining future phases. So we'll see what that presents in terms of future entry point. We also see the other services in the U.S., and I talked about international partners as well, continuing to look to add to their autonomous vehicle fleet. And so we are pursuing those opportunities. We haven't learned anything at this point that fundamentally changes our strategy in autonomy. but we'll monitor how the CCA program progresses and will incorporate any learnings that we have into those future opportunities. And for us, you didn't ask, but this phase of the program was relatively small. We didn't have it assumed in our plan. So there's no impact to the guidance that we shared this morning for the AS sector. Seth Seifman -- JPMorgan Chase and Company -- Analyst OK. OK. Great. And then maybe a follow-up on it. When you think about where you want to be focused in autonomy. I guess the legacy of the company is more on the exquisite side, and there will probably be some demand for that, but also demand for quantity and -- which requires affordability. Do you plan to pursue opportunities in both of those submarkets or really focus more on that kind of legacy exquisite piece of the market? Kathy Warden -- Chairman, President, and Chief Executive Officer We are obviously working toward affordability in our product line, so we do not want to be viewed as only offering exquisite and expensive technology. So we've been working to drive down the cost of our offerings, and I think we had quite a compelling offering CCA and can compete in that marketplace. We are really positioned to provide the best solutions that our customer needs against a high-end threat, however, we are not looking to compete in a more commoditized part of the market that's very low cost and not survivable systems. That's just not our business model, and we know that. So we'll remain disciplined in where we invest in the pieces of the market that we pursue, but we think that what we provide is still highly relevant. Seth Seifman -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Operator Thank you. One moment for questions. Our next question comes from David Strauss with Barclays. You may proceed. David Strauss -- Barclays -- Analyst Thanks. Good morning. Kathy Warden -- Chairman, President, and Chief Executive Officer Good morning David Strauss -- Barclays -- Analyst Kathy, I wanted to ask about MS margins. A couple of years ago, we were running in the 15 level, they stepped down a little bit last year. You took down a margin guide there. Can you just kind of talk about what's driving the lower margins? Is it just solely mix that's driving the lower margin in that MS? Kathy Warden -- Chairman, President, and Chief Executive Officer It's a bit of mix as we've been talking about. They have a higher cost plus mix now than they have historically, and we expect that to shift over time, but they are still at a high watermark. And there also is a productivity element to the story. We've talked about supply chain disruption as we have ramped and we are also increasing the scale of that business. You see a mid-single-digit level growth in Mission Systems. But with price coming down on microelectronics, it's actually a much higher volume ramp than is reflected in the total sales growth of the business. So as we have climbed that ramp productivity has taken a bit of a dip. But as we said, we're focused on getting back to our performance levels at now this higher volume level, and we see that as something this team is very capable of doing. And that's why you see a margin profile that always is start a little slower and ramp through the year for MS, but you'll see it again reflected this year based on those productivity improvements that we expect to achieve throughout the year. David Strauss -- Barclays -- Analyst OK. Got it. And then similar question over on the Space side. So you took down the top line there, I assume that was partially NGI. The slower growth, should we see that potentially reflect itself in a little bit better margin profile? I know you got the margin guidance unchanged at nine, but I guess the NGI loss and just a little bit slower growth, could that actually help the -- help enhance the margin side of things. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. As we look at the slower growth, it is largely development programs that are dilutive to the both space margin rate and the company margin rate. So as -- that part of the business is no longer as significant. You will see that be both margin and cash tailwinds because there was also capex investments planned that we will not extend in those programs now either. David Strauss -- Barclays -- Analyst Thanks very much. Operator Thank you. One moment for questions. Our next question comes from Cai von Rumohr with TD Cowen. You may proceed. Cai von Rumohr -- TD Cowen -- Analyst Thank you so much and good performance, Kathy. So following up on Dave's focus on space, I think I've got two questions. First, the restricted program that was canceled, is there any chance that we heard a rumor it might have been related to a supplier issue. Is there any chance that, that function or that program might reappear again in the future? And secondly, the FDA business, you basically decided not to bid on contract. Is that as a group, are those profitable contracts? Because every time I look, there's another new small supplier coming in and they're all fixed price contracts. Kathy Warden -- Chairman, President, and Chief Executive Officer So let me start with your first question on the restricted program. There's very little I can say, given the nature of that program, except to say that the Air Force canceled that program largely due to budgetary concerns and prioritization, but the requirement likely does still exist. And so we will see how that plays out over time. I also -- as we look at the broader space portfolio, we'll answer your FDA question more generally. We see a whole variety of opportunities that we can pursue, so we're simply selective on which ones we're best positioned to win, where we think that we can competitively. And with FDA, we've been quite successful and those programs are profitable. But that's because we're remaining disciplined in choosing where we can best compete and win with a reasonable fee and the probability of success. Cai von Rumohr -- TD Cowen -- Analyst But you did know bid that one program. As we move forward, is the pricing here getting a little bit more competitive as more people join the party? Kathy Warden -- Chairman, President, and Chief Executive Officer The way I think about this strategy is if there is an area where you have a differentiated value, then you are going to be able to price accordingly. If you don't, you won't. And so we don't bid when we don't feel like we have a differentiated value that's going to be successful with the price we need to bid to both win and execute. It's really a decision we make on every capture it's fundamental to the way we both commit and execute as well as deliver the returns that we expect. So no change there and no difference in states than it is in other parts of our portfolio. Cai von Rumohr -- TD Cowen -- Analyst Thank you very much. Operator Thank you. One moment for questions. Our next question comes from Robert Stallard with Vertical Research. You may proceed. Robert, your line is now open. Rob Stallard -- Vertical Research Partners -- Analyst Sorry. I was on mute. Thanks very much. Good morning. Kathy, I just wanted to follow up on your comments at the start of the call where you talked about the FY '25 request and DoD spending leveling off. I was wondering who you think could be the bill payers in that budget scenario or whether there's any vulnerability in the Northrop Grumman portfolio? Kathy Warden -- Chairman, President, and Chief Executive Officer We looked at the FY '25 president's budget is very much in line with our expectations. So no surprises and no concerns about our portfolio. Obviously, we talked about two things where budget was a factor in choosing to down select early on NGI was largely due to budgetary constraints. And then, of course, the restricted space program that we mentioned, but those we have now digested and, of course, reflected not only in our outlook, but my comments about the FY '25 budget. So nothing else that we see in there that is concerning. And as I noted, '24 ended up being a strong year for the investment accounts with 6% growth over '23. And we also have the supplemental on top of that. So it's early in looking at '25 and where the budget environment will actually end up in the U.S. But I also just keep pointing back to international demand, that's the strongest that I've seen in a long time. And so we look at global demand, not just the U.S. marketplace. Rob Stallard -- Vertical Research Partners -- Analyst Which is -- I've got a quick follow-on on that actually because you did mention exports as well. And I was wondering if you could give us an update on what sort of scale as a percentage of revenues, exports are at the moment and what that could grow to in the future. Kathy Warden -- Chairman, President, and Chief Executive Officer They're about 14% right now. And while we don't see that moving significantly in the near term because there's opportunities I noted in the pipeline do take a while to prosecute and turn into sales. We do expect that will be a faster segment of growth than our domestic business over the next several years, just the richness of the pipeline. Rob Stallard -- Vertical Research Partners -- Analyst All right. Thank you very much. Operator Thank you. One moment for questions. Our next question comes from Pete Skibitski with Alembic Global. You may proceed. Pete Skibitski -- Alembic Global -- Analyst Yeah. Good morning. Thanks. Kathy, can you talk about Northrop's roll in the shipbuilding supply chain, which I guess is the marine unit in MS just because the Navy has talked about some of the supply chain challenges in shipbuilding. Maybe you could just kind of swage any concerns maybe in terms of how that unit is performing and the growth outlook there? And just kind of how you guys are managing that unit to just so we have a good feel that smoke doesn't turn into fire kind of scenarios? Kathy Warden -- Chairman, President, and Chief Executive Officer Absolutely. It's a critically important part of our portfolio. We're very focused on delivering for our customers in that portfolio. And there have been challenges that we own. We've been working on a development program for nearly 10 years. It's going to deliver an amazing function improvement in propulsion for the Columbia class submarines. And we are near delivering those first care of turbine generators. And that's what the secretary of the Navy was referring to in his testimony on the Hill. We are working to address supply chain challenges, as you have heard across the entire shipbuilding enterprise, our experience is very consistent with that. These programs are long cycle. And so we only go through these development efforts once over a multi-decade period and there's learning that happens. But in this case, I think we are largely through that learning and on a path for delivery, and we're optimistic of the future ahead in being able to deliver this capability. From a financial perspective that you asked about, this is relatively small, so not something that you should think of as having a material financial impact, but that doesn't mean we don't take it very seriously. Pete Skibitski -- Alembic Global -- Analyst OK. Great. Appreciate the color. Operator Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle -- Deutsche Bank -- Analyst Hey. Good morning. Dave, just to clarify, what's the message on space growth beyond this year? Does it reaccelerate off this 4% or so this year? Dave Keffer -- Chief Financial Officer Yes, I appreciate the question. As you know, we'll provide more specific guidance for all of our businesses and at the enterprise level later this year and provide some indications on the October call as is our traditional approach. I think the broader themes that we've talked about in space today are important. We've touched on the restricted program cancellation in the NGI down select news. But broadly speaking, the doubling of that business's backlog over the last five years, the 17% CAGR in sales over that business in the last four years, both position us really well for continued success in that business. And there is margin rate and margin dollar expansion opportunity on top of that. So we'll provide more specifics as we go about the combination of headwinds from the items we mentioned and tailwinds from the continued growth on other programs. So more specific later in the year, but we continue to be confident in the long-term outlook of the Space business. Scott Deuschle -- Deutsche Bank -- Analyst OK. Great. And then, Kathy, you flagged opportunities for increased demand for ammunition from U.S. allies, so I was wondering if you could talk a bit more about maybe the specific ammunition products that allies you're looking to purchase from Northrop? And in which regions you're seeing that demand percolate? So I understand that there's at least one specific European supplier of ammunition to generate something like 25% operating margins off that revenue. So just curious to understand what that opportunity could mean for Northrop. Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. of course. So as we look at our weapons portfolio today, it's about 6% to 7% of revenue growing double digit, and we expect that to continue. A good part of that growth will be supported both by the supplemental that I spoke about in my opening comments in response to Ron's question, but also the European demand has strengthen. So we have a number of opportunities, countries across Europe looking to do the exact same thing the U.S. is doing in replenishing stockpiles for munitions. And those are basic and nonstandard AMO contracts that we have, our business grew nicely last year. We expect that to continue this year. And we also have programs like AARGM, where there's international demand, that's a longer-term proposition as we look to provide those products to our European allies, particularly as they feel the F-35. So a wide ranging set from ammunition all the way up to tactical missiles. And then, of course, our solid rocket motor facility expansion supports many of our peer programs like GMLRS, PAC-3, looking to be a second source to support us and fix all of those opportunities are in the mix for us. Scott Deuschle -- Deutsche Bank -- Analyst Thank you. Operator Thank you. One moment for questions. Our next question comes from Myles Walton with Wolfe Research. You may proceed. Myles Walton -- Wolfe Research -- Analyst Thank you. Good morning. Kathy, you provided a ton of international color both in your opening remarks and also a follow-up to Rob's question. But when I look at the sales disclosures, it's been pretty locked in at $5 billion for five years of absolute dollar revenue. So is there a color you can give us on the backlog that shows that this international opportunity is at least working its way into backlog, if not sales in the coming year? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. So in terms of backlog, what you would look to see as we signed the IBCS deals that I mentioned with additional countries as we sign the contracts for Triton that I highlighted in the call today. the views that are in the early stages that two countries progressing toward awards. These are all awards that would be in new franchises that we have not had in the past, while we continue to see just the standard growth in areas like F-35 international and the Triton portfolio with the Australians are already underway or franchise with France and Japan. So those are still in the backlog and then you'd add to that, the opportunities that I highlighted this morning that are new franchises for us. Myles Walton -- Wolfe Research -- Analyst OK. So the percent of the backlog that's international has been expanding that, I think, is what you're saying? Kathy Warden -- Chairman, President, and Chief Executive Officer It has, although really what we see now is a whole set of opportunities for product lines that were not in our backlog over the last five years. So that's the difference. Our portfolio has largely been high-end capabilities that aren't exportable. And as you look at how the portfolio has evolved over time, these new franchises that I spoke about today or franchises like Triton now getting permissibility for exports to more countries is really opening up a whole new set of opportunities for our company. Myles Walton -- Wolfe Research -- Analyst OK. Thank you. Operator Thank you. One moment for questions. Our next question comes from Gavin Parsons with UBS. You may proceed. Gavin Parsons -- UBS -- Analyst Thanks. Good morning. Kathy, you mentioned you've finalized negotiations with additional suppliers on the B-21. Were those all in line with your expectations? Can you share what percentage of suppliers are now locked in? And then when you expect that to be fully finalized? Kathy Warden -- Chairman, President, and Chief Executive Officer So they were largely in line with our expectations, which is reflected in the fact that we had no EAC change in the quarter. We are far along in negotiations with all of our suppliers, and we expect to be closing on those shortly that we're making sure that we have the best scale possible and that we work those negotiations diligently. So I'm not at a time barrier to the team more so an outcome set of objectives for them, and they're doing quite well against those expectations. And our suppliers are obviously key to us. We want to make sure that they are able to support investment in this program that's necessary. And so we're taking their interest in line as well. Gavin Parsons -- UBS -- Analyst OK. Great. That's helpful. And then, Dave, maybe just on Aeronautics margin, I think you mentioned the strength in 1Q will be a little lighter through the rest of the year. But was 1Q as expected? Was that in guide? Or did you perform better than you thought you would in the first quarter? Dave Keffer -- Chief Financial Officer The first quarter was particularly strong, as we mentioned. We had anticipated an opportunity for productivity gains and indirect rate-driven enhancement to the margin as well this year that was baked into our guidance. and the timing was such that a lot of that came in, in the first quarter, which is why we've noted that we expect the margin rate to be slightly lower in subsequent quarters than it was right out of the gate at 10%. And so while there's no single onetime item in the first quarter, it was a particularly strong start and a great way to kick off the year for AS. Gavin Parsons -- UBS -- Analyst Well, thank you both. Operator Thank you. One moment for questions. Our next question comes from Matt Akers with Wells Fargo. You may proceed. Matt Akers -- Wells Fargo Securities -- Analyst Yeah. Good morning, guys. Thanks for the question. I wanted to ask on Sentinel. You mentioned you're supporting the Nunn-McCurdy review. Just curious what you think the outcomes of that could be? And if there's any risk to that program or do you think that's not the case just given sort of health criticality? Kathy Warden -- Chairman, President, and Chief Executive Officer Well, there has been strong bipartisan support for the program. We expect that will continue. It, of course, is the nation's policy as reviewed in the nuclear posture review to have three legs of strategic deterrent. So we do expect that the program will be recertified, but the government needs to take the process seriously. It's a good process. and they're working through the phases of that recertification now. And as I said, we're providing support to them. and fit committed and very focused on delivering the program in the meantime, not getting distracted by the activity associated with the Nunn-McCurdy but supporting it fully. Matt Akers -- Wells Fargo Securities -- Analyst Yes. Got it. And I guess one for Dave. Just thoughts on where EACs at the company level kind of go from here, you're still running quite a bit below where you were a couple of years ago, it sounds like AS had some good EACs, but just thoughts on the progress from here. Dave Keffer -- Chief Financial Officer Sure. I agree with your characterization that there was good progress in the first quarter. And you'll see that further detailed in our 10-Q disclosures as well. we had been running substantially above the levels of 2022 and 2023 in prior years before the macroeconomic disruptions. And so over time, we anticipate that we will normalize to levels more like our history and we saw progress toward that in the first quarter, as you mentioned, particularly in AS. But really across the business, you're seeing the results of our heavy focus on program performance and cost efficiency. It's one of the three drivers that we anticipate for margin expansion, along with business mix enhancement, and the gradual decline of macroeconomic pressures. And so across those three dimensions, we see an opportunity to continue to see margins normalize over the next several years, and Q1 was a good example of what you can anticipate there. Matt Akers -- Wells Fargo Securities -- Analyst Great. Thank you. Operator Thank you. One moment for questions. Our next question comes from Jason Gursky with Citi. You may proceed. Jason Gursky -- Citi -- Analyst Hey. Good morning, everybody. Kathy, I was wondering if I could ask you to dive a little deep on the space business in two areas, maybe starting with sensors and patent loads. And talk a little bit about the pipeline of business opportunity that you have there. where you're seeing the most interest kind of like type of sensor, letter optical communications, SAAR, RF, that kind of thing. Just talk a little bit about the general kind of ecosystem and what's going on in the sensors and payload business that you've got there and what you're kind of excited about today? Kathy Warden -- Chairman, President, and Chief Executive Officer So we are seeing interest in modernizing really the entire architecture and space. And I've been talking about this for a while, so whether it's intelligence surveillance reconnaissance, communications, missile warning and tracking, the entire space architecture is being upgraded, both in terms of advancing the capability of those sensors and payloads but also the coverage with the broadening of the space architecture. And so we're involved selectively in all of those areas. As you know, we play a key role in ISR communications, and very informed of both missile tracking and missile warning. So really, we have a very broad portfolio that stretches across those areas we don't focus in on one over the other, and we see them all equally attractive and really, in many ways, that modernization is well underway and is what has contributed to the strong growth of our backlog and space over the last few years. Jason Gursky -- Citi -- Analyst OK. And maybe a similar kind of discussion on the ground systems side of things and whether that's all the sensor payloads that we're launching open space are driving the ground system business, just kind of what the competitive environment looks like for you there? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. They are, and we do participate in the ground segment. I'd say our strength is more in the sensors and payloads we look at a full integrated solution and often are asked by the government to support them on the ground systems development that go with the satellites that we're fielding. And so we see that as a marketplace where we absolutely can compete. We just choose to be a bit more selective there, again, back to where we're differentiated. Jason Gursky -- Citi -- Analyst Great. Thank you. Todd Ernst -- Vice President, Investor Relations and Treasurer Josh, we have time for one more question. Operator One moment for our last question. And our last question comes from Peter Arment with Baird. Peter Arment -- Robert W. Baird and Company -- Analyst Yeah. Good morning, Kathy and Dave. Nice results. Kathy, can you maybe just talk a little bit about what you expect on your capex kind of profile when we think about last year, you had a big step up and things are staying elevated here, but you also have just tremendous demand signals, both domestically and internationally. Just how you're thinking about how capex should trend? Have you made enough of the investment. It sounds like you have on the solid rocket side and microelectronics, but just thinking about more broadly? Kathy Warden -- Chairman, President, and Chief Executive Officer Yes. Some part of why we highlighted today some of those investments that we're making that will support growth over the long term. is to reflect the statements that we've made that we do see this year being the peak 4% of revenue capex expenditures and then starting to see those come down gradually more toward a normalized level in our company. Still see those as a robust growth environment. And so there will be investments that we're making. We're committed to do that. But we do not see the same demand for those investments over the next several years that we've seen over the last several. Peter Arment -- Robert W. Baird and Company -- Analyst Very, very helpful. Thanks. Kathy Warden -- Chairman, President, and Chief Executive Officer Well, thank you all for joining us on the call today. We -- as you see, we're off to a strong start to the year, and we will carry that momentum into the following quarters. as our team focuses relentlessly on delivering that technology advantage for our customers and value to our shareholders. So thanks again for joining us. I look forward to speaking with you on our next call in July.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, everyone, and welcome to the first quarter 2024 ServiceNow earnings conference call. Today's call is being recorded. I would now like to turn the call over to Darren Yip, group vice president of investor relations. Please go ahead. Darren Yip -- Vice President, Investor Relations Good afternoon, and thank you for joining ServiceNow's first quarter 2024 earnings conference call. Joining me are Bill McDermott, our chairman and chief executive officer; Gina Mastantuono, our chief financial officer; and CJ Desai, our president and chief operating officer. During today's call, we will review our first quarter 2021 results and discuss our guidance for the second quarter and full year 2024. Before we get started, we want to emphasize that the information discussed on this call, including our guidance, is based on information as of today and contains forward-looking statements that involve risks, uncertainties, and assumptions. We undertake no duty or obligation to update such statements as a result of new information or future events. Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and 2023 10-K for factors that may cause actual results to differ materially from our forward-looking statements. We'd also like to point out that we present non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discuss today are non-GAAP except for revenues, remaining performance obligations, or RPO, current RPO, and cash and investments. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, which are both posted on our website at investors.servicenow.com. A replay of today's call will also be posted on our website. With that, I'll turn the call over to Bill. Bill McDermott -- Chairman and Chief Executive Officer Thank you very much, Darren, and thank you, everyone, for joining today's call. ServiceNow's first quarter results were outstanding. We once again outperformed our guidance across all top line and profitability metrics. Subscription revenue grew by 24.5% year over year in constant currency. That's approximately 50 basis points above the high end of our guidance. CRPO grew 21% year over year in constant currency, 100 basis points above our guidance. Operating margin was over 30%, 150 basis points above our guidance. Even as Q1 is not traditionally a large quarter, we had eight deals over $5 million in net new ACV, a 100% increase year over year. Four deals were over $10 million, which is a 300% increase year over year. ServiceNow is strengthening its position as the AI platform for business transformation. This is fueling strong performances for each of our key businesses. ITSM and ITOM were each in 16 of the top 20 deals. Security and risk combined were in 11 of the top 20, customer creator and employee workflows were in 10 of the top 20 deals. gen AI adoption remained on a tear in Q1. Companies are leaning into gen AI as a powerful deflationary force to drive productivity. That's why NACVIEW for Pro Plus is record-breaking. In fact, it's the fastest-selling offering in the company's history. Iconic brands are adopting ServiceNow's Now Assist AI as a standard for their gen AI road maps. This quarter, we expanded our long-standing partnership with Microsoft to include new generative AI capabilities while also integrating Now Assist AI and copilot into employee experiences, really exciting. Hitachi Energy is using case summarization with Now Assist for ITSM to resolve cases faster, saving millions. Equinix is deploying Now Assist AI for HR workflows, aiming to increase agent productivity by 30%. ServiceNow at IBM are combining the power of the Now Platform with Watson X to increase productivity for IBM's employees, customers, and partners. BNY Mellon and ServiceNow are exploring the utilization of AI and other leading technologies and IT service management helping to unlock additional value for the bank and its clients. We look forward to further demonstrating the exceptional gen AI customer successes and a detailed road map at our Financial Analyst Day on May 6 in Las Vegas. From an industry perspective, public sector continues to excel globally. Major transactions in Q1 included government of Australia's health department and the government of Italy's IT division, Sojek, the government of Sao Paulo Motor Vehicle Department created an app on ServiceNow to give customers, in that case, Citizens, a fast, transparent digital experience that handles requests in minutes. Our global footprint is booming. We're seeing a vast expansion in our most important geographies. This quarter, our Japan team signed the largest NNACV deal in its history. Novartis in Switzerland is implementing ServiceNow gen AI technology to transform the business into one of the most innovative companies in therapeutic medicine. NEOM is harnessing ServiceNow single data model along with other partners to scale its IT services across the Middle East region while seeking to create the first cognitive city where data-driven intelligence meets urban everyday needs. Suzuki, Tokyo Gas i Net, ANA Systems are all top deals signed in Q1. And this is just scratching the surface of what we achieved this quarter. There's a lot of guesswork out there right now about the geopolitics and economic policies among other things. ServiceNow's philosophy is simple. We focus on the things we can control, building great products, delivering great service for our customers, and forging a winning culture, where people can do the best work of their careers. And that's why we perform well when some others don't. It's also why our guidance, as you'll hear from Gina, remains ever strong. Let's talk about the demand environment for enterprise software. AI is not simply a fast-maturing technology. AI is a catalyst for business transformation. When I speak to CEOs all over the world, they recognize this is a change moment. Over the past 15 years, enterprise has experienced a massive decentralization of technology governance. As every department became an IT buyer, the result was too many systems, too many apps, low data quality, and high vulnerability to cybersecurity risk. And here's the key. Those decisions have been made. So, even as CEOs want to consolidate onto strategic platforms for the long term, they also don't want to delay the potential of net new innovation in the short term. They want to derisk the past while getting immediate business value from AI. Process optimization is the No. 1 gen AI use case in the global economy today. This is why ServiceNow's strategic relevance as the AI platform for business transformation has never been higher. Every business workflow in every enterprise will be engineered with gen AI at its core. We are the single pane of glass that enables end-to-end digital transformation. At ServiceNow, we pride ourselves on being the living embodiment of an AI-run company through our Now on Now strategy. Every week that passes the impact of our own Now on Now AI deployments continues to grow. gen AI depletion rates have doubled for both our employees and customers, and they are improving each and every month. So, for engineers are accepting 48% of Texaco generation. These are meaningful productivity improvements and it's only the beginning. That's why IDC estimates an $11 trillion impact from AI in the next three years. It's also why businesses will spend more than $0.5 trillion on gen AI in 2027, according to IDC. So, contrary to some opinions out there, we are witnessing the biggest enterprise software market opportunity in a generation. Business leaders are waking up to the fact that they have a fresh choice now. They can radically simplify the tech stack. We are entering a new frontier. We are in a race to put AI to work for people, and that's a ray ServiceNow intends to win for our customers. There's a lot happening at ServiceNow that only heightens our optimism for the remainder of this year and beyond. Our recent Washington, D.C. platform release included very exciting new features for our customers. Now Assist AI for ITOM AIOPs supercharges ServiceNow's market-leading solution, applying generative AI to speed up issue resolution. Sales and order management unites the sales order life cycles across the front, middle, and back office teams on the ServiceNow Platform. ServiceNow is also staying at the forefront of building innovative enterprise gen AI applications. As one example, Now Assist AI for telecommunications service management, what we call TSM, which also uses NVIDIA AI, will boost agent productivity and build on our great partnership. It's also worth noting the ServiceNow research team is stacked with world-renowned AI experts helping our customers stay on the cutting edge. We're expanding our ecosystem capacity to meet growing customer demand. One example is our investment in Plat4mation, a global IT consultancy, and leading ServiceNow implementation partner to enhance expertise and generative AI-enabled technology. And anyone who'd like to get the full story, I warmly invite you to join us for Knowledge 2024 in Las Vegas on May 7. In closing, I'll end how I began, the company is in a market-leading position. We have the product recognition from the industry analysts. All of them were showing up on all of the most admired company lists and we're moving up the ranks every year. Those things are always encouraging, and we're proud of it all. But the biggest indication I can give you is qualitative. It's how our team feels about what we're doing together. This culture is different. It's rooted in ServiceNow as early as days as a customer-obsessed company. We are ever hungry, ever humble. So, when I'm told that over 1 million people applied to join us last year, I'm not surprised. When you have a galvanizing ambition to become the defining enterprise software company in the 21st century, people want to be a part of that. They recognize this is about more than technology. This is about helping people to know more, care more, and do more. We'll continue on this mission in Q2, I'd like to thank all of you for the trust that you've invested in ServiceNow. We're going to keep working hard for you, and we're going to keep striving to honor our brand promise. The world works with ServiceNow. I'll now hand things over to our outstanding CFO, Gina Mastantuono. Gina, over to you. Gina Mastantuono -- Chief Financial Officer Thank you, Bill. Q1 set a strong precedent for the year ahead. Building on the momentum from Q4, our team delivered another exceptional outperformance. We surpassed all of our top line and profitability guidance metrics for the quarter. With gen AI conversations serving as a digital transformation catalyst, we see that momentum carrying into Q2. Turning to our results. In Q1, subscription revenues were $2.523 billion, growing 24.5% year over year in constant currency, exceeding the high end of our guidance range by approximately 50 basis points. RPO ended the quarter at approximately $17.7 billion, representing 27% year-over-year constant-currency growth. We continue to see average contract terms increase year over year as the strategic importance of the Now Platform has driven longer-duration deals. Current RPO was $8.45 billion, representing 21% year-over-year constant-currency growth, a 100-basis-point beat versus our guidance. From an industry perspective, technology, media, and telecom was extremely robust, growing net new ACV over 100% year over year. Education had a fantastic quarter, growing nearly 50% year over year. Transportation and Logistics, Business and Consumer Services, and Retail and Hospitality also saw strength. Our renewal rate was a best-in-class 98% as the Now Platform remains a strategic imperative for our customers' operations. We closed 59 deals greater than $1 million in net new ACV in the quarter with four deals greater than $10 million, representing 300% year-over-year growth. Our focus on selling a comprehensive platform continued to drive more multiproduct deals as 15 of our top 20 deals included seven or more products. We now have 1,933 customers paying us over $1 million in ACV. In addition, the number of customers paying us $20 million or more grew over 50% year over year. In Q1, our gen AI products continue to see very healthy adoption. As Bill mentioned, our Pro Plus net new ACV to date continued the trend ahead of any new product family launched for the comparable period. Our gen AI products were in seven of our top 10 deals, and we closed seven deals over $1 million in ACV in the quarter. We had wins at a second Wall Street Bank, a leading cybersecurity firm, and many more, including a significant win for ITOM Pro Plus, which just launched in March. Turning to profitability, non-GAAP operating margin was over 30%, approximately 150 basis points above our guidance, driven by the timing of marketing spend, opex efficiencies, and our top-line outperformance. Our free cash flow margin was 47%, up 12 points year over year. We ended the quarter with a robust balance sheet, including $8.8 billion in cash and investments. In Q1, we bought back 225,000 shares as part of our share repurchase program with the primary objective of managing the impact of dilution. As of the end of the quarter, we have approximately $787 million remaining of the original $1.5 billion authorization. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth, profitability, and shareholder value. Moving to our guidance. In Q1, we initiated a program to hedge a portion of our foreign currency-denominated revenues. The initiative is expected to lessen the impact of recent movements in the euro and pound, but the incremental strengthening of the U.S. dollar has still resulted in FX headwinds compared to our previous guidance. Given our Q1 outperformance, we are raising our 2024 top-line outlook to more than offset those moves. For 2024, we are raising our subscription revenues by $20 million at the midpoint of the range to more than offset an incremental $17 million headwind from FX. This raises a net increase of $3 million on a narrowed range of $10.560 billion to $10.575 billion, representing 21.5% to 22% year-over-year growth or 21.5% on a constant-currency basis. We continue to expect subscription gross margin of 84.5%, operating margin of 29%, and free cash flow margin of 31%. Finally, we expect GAAP diluted weighted average outstanding shares of $208 million. For Q2, we expect subscription revenues between $2.525 billion and $2.530 billion, representing 21.5% to 22% year-over-year growth or 22% on a constant-currency basis. We expect CRPO growth of 20.5%, both on a reported and constant-currency basis. We expect an operating margin of 25%. Finally, we expect 208 million GAAP diluted weighted average outstanding shares for the quarter. In summary, Q1 was a great start to what we expect to be another tremendous year. Organizations are under more pressure than ever to maximize the benefits of the technology investments. In this environment, ServiceNow's traction as the intelligent platform for end-to-end digital transformation continues to intensify. gen AI is only as powerful as the platform is built on. The Now Platform gives us deep insights with the remarkable ability to tailor AI outputs to the specific needs of our customers. Business users need AI to power actions across the enterprise. Our workflows are designed to do just that, deliver complete solutions to supercharge experiences, creating extraordinary value. You'll hear more about these experiences, our strategy, and long-term opportunities at our upcoming Investor Day on May 6, which will be webcast on our Investor Relations website. Finally, before moving on to Q&A, I want to thank all of our employees worldwide for helping make ServiceNow one of the Fortune 100 Best Places to Work yet again in 2024. ServiceNow's greatest asset is its people, and you all continue to make us, ServiceNow strong. Bill and I couldn't be prouder of this incredible team. With that, I'll open it up for Q&A. Questions & Answers: Operator Thank you. [Operator instructions] We'll now take our first question from Kash Rangan with Goldman Sachs. Kash Rangan -- Goldman Sachs -- Analyst Thank you very much. First earnings report and software for the year, Bill, good to see the optimism. My question on AI is at what point does AI get more broadly adopted, at least from a sales cycle standpoint, that despite the tough economic environment, you can actually draw in more potential prospects into the category because of the cost savings here. And one for Gina. I noticed that -- it's still too early in the year, CRPO, RPO, a bit of seasonality there. Can you give us some insight into what to make of the rest of the year? Thank you so much and congratulations. Bill McDermott -- Chairman and Chief Executive Officer Thank you very much for the question, Kash. As I said, process optimization is the single biggest gen AI use case in the enterprise. And any process that exists in the enterprise today. will be reengineered or engineered depending on how messy the process is with gen AI. So, every workflow in every enterprise will be rethought. So, just think about the sales process, for example, and the whole order to cash process, for example, or think about employees and onboarding and training and providing all the services to them. Think about agent productivity, which is something that we're obviously moving very quickly on where you can bypass the systems that don't integrate very well. And instead of swivel sharing around or putting customers on hold or I'll get back to you tomorrow, have real-time data where most of the cases are deflected from virtual agent, but if an agent is involved, they have choice A or B, which one is more pleasing to the customer. OK, you like B, you got B. And the case is closed. Think about managing complex cases across an enterprise where all those screens are open, and data is being processed instead of having spreadsheets and workarounds and emails and text. Now, you have everything done on one platform with full case information and case closure. So, literally, from running a business in every department to building software, like I said, with the breakthrough on natural language tech turning into code. Every single enterprise will run completely differently because of gen AI and because of our clean sheet platform. Gina Mastantuono -- Chief Financial Officer Yeah. And Kash, on your question around seasonality about the CRPO. So, first and foremost, really proud of the fact that we beat our guide in Q1 by 100 basis points. That beat was twofold: one, strong net new ACV growth as well as higher early renewals. And so, from a seasonality perspective, you'll remember, we talked about the Fed duration. And so, Q2 is slightly more impacted, right, before it pops up again in Q3. And so, we feel really good about the trends that we're seeing. And again, feel really good. We continue to be prudent in our guide around early renewals, while we are seeing them stronger than we saw last year, again, from a guidance perspective and a forecast perspective, we're continuing to be prudent there. Kash Rangan -- Goldman Sachs -- Analyst Awesome. Thank you. Gina Mastantuono -- Chief Financial Officer Thanks, Kash. Operator We'll take our next question from Karl Keirstead with UBS. Karl Keirstead -- UBS -- Analyst Yeah. Hi. Thanks. Bill and Gina, maybe even CJ, I wonder if you could just comment on the environment that you're seeing. I think in prior quarters, you've described it as after a pretty rough, call it, year stretch, it started to stabilize in 3Q and stabilized again in 4Q. Was that still the case in Q1? Were there one or two verticals that maybe lag, maybe some of the puts and takes about how the environment broadly felt? Thank you. CJ Desai -- President and Chief Operating Officer So, I would say, Karl, I would start first is environment, and we shared this in January, Bill, Gina, and I, it remains pretty much the same from our perspective as it -- and what we mean by that, it is not 2021, specifically. So, it still takes many approvals and all the things that we discussed from a sales perspective in trying to get business validation done or a purchase being made. And pretty much, I would say, that's a standard across industries and geographies. We are absolutely executing well within that environment given our promise of efficiency and automation so that is absolutely resonating and combine that with our in-platform generative AI, which also resonates really well because that is an accelerant to the productivity enhancements that an organization can take. So, whether it's Wall Street banks, whether it's a life sciences corporation, whether it's governments, that story of automation, digital, productivity, enhance via gen AI is absolutely resonating and that is what is helping us, despite the environment continuing to be the same. Bill McDermott -- Chairman and Chief Executive Officer And I would just build on that, Karl, just for your benefit on the budgets themselves. The budgets are going up. And what I definitely see is the preference for gen AI now. I think we're ending one era in the enterprise, and we've begun another. And we're into a new frontier now where gen AI has opened up the eyes of the customer to say, there might be a different way of doing this. And that's creating real opportunity for us. So, CJ is exactly right on the value-based economy, but also, I do see the budgets not only going up in IT but also just see gen AI becoming more of a business imperative. And if you can increase productivity, take cost out, and show that in a value case, this money that will be spent, and maybe different people approving it, but the money will be spent. I also want to acknowledge some really great partnerships that we've achieved with Microsoft and IBM and NVIDIA. And I look at great companies like Novartis really rethinking the whole pharma process altogether with gen AI. There's just so much goodness going on in this market. And I feel that you're coming off a strong Q4 to have a great print like this in Q1 with the momentum going into knowledge. I don't think I've ever felt this good in the five years that I've been here than I do right now on this call with you right now, absolutely best I've felt. Karl Keirstead -- UBS -- Analyst Thank you both. Operator We'll take our next question from Matt Hedberg with RBC Capital Markets. Matt Hedberg -- RBC Capital Markets -- Analyst Great. Thanks for taking my question, guys. Bill, given your comments on Pro Plus net new ACV growth, are you seeing faster Pro Plus deal cycles relative to what you saw when the Pro was first launched? And anything you just need to call out from a discounting perspective on Pro Plus relative to maybe some of your initial expectations? Gina Mastantuono -- Chief Financial Officer Yes. Hey, Matt, I'll take that one. So, yes, we are absolutely seeing faster Pro Plus adoption versus Pro. It's two quarters out, right? So, it's early days, but we feel really good about the adoption curve. And we've been talking about whether or not that adoption curve would be faster. And we posited that it would be, and that's certainly proving out to be the case, although again, early days. With respect to discounting versus initial expectations, we feel really good about the realized pricing, and it has been very much in line with our initial expectations. And we'll talk a lot more as you would expect at Investor Day about the overall gen AI opportunity for ServiceNow as well as where we are to date. But we feel very good about what we're seeing in the markets. Customers are really leaning in. We talked about seven deals in the top 10 had gen AI in it, significant deals over $1 million as well. So, we're definitely seeing monetization happening already. Matt Hedberg -- RBC Capital Markets -- Analyst Thank you, Gina. Gina Mastantuono -- Chief Financial Officer Thanks, Matt. Operator We'll take our next question from Brad Sills with Bank of America Securities. Brad Sills -- Bank of America Merrill Lynch -- Analyst Great. Thank you so much. A question for Gina, please. Real nice results on RPO. I think this is the second quarter since we've seen significant outperformance there versus CRPO. Just curious what's driving that? And does that give you some visibility perhaps for CRPO to ramp from here given perhaps a ramping component in there? Thank you. Gina Mastantuono -- Chief Financial Officer Yes, it's a great point, and I did call that out. So, RPO growth was 27% year over year in constant currency, which is 300 basis points improvement versus last year. And yes, that is our longer-term backlog. So, as you think more longer term about the opportunity in ServiceNow, I couldn't be more excited about that. We are seeing the average duration growing. And in fact, duration this Q1 is the largest it's been in the Q1 since, I think, 2019. And so, I feel really good about what that means for the mid- and long-term opportunity here for sure. Brad Sills -- Bank of America Merrill Lynch -- Analyst Great to hear. Thanks, Gina. Gina Mastantuono -- Chief Financial Officer Thanks, Brad. Operator We'll take our next question from Keith Weiss with Morgan Stanley. Sanjit Singh -- Morgan Stanley -- Analyst Hi. Sanjit Singh in for Keith Weiss. Bill, I wanted to ask a little bit about gen AI adoption within ServiceNow, you mentioned Now on Now, but in terms of just like the gen AI adoption, both broadly and with the engineering team, it looks like you're hiring for this quarter in R&D, you kept a pace. How is gen AI adoption changing or not changing your hiring plans more broadly and specifically in some of the engineering team? CJ Desai -- President and Chief Operating Officer This is CJ. And here is where I would say that specifically, we absolutely believe, and we have seen it that gen AI is helping our software engineers code faster. I mean, straight up. It helps us our software engineers code faster, whether they are junior software engineers or very senior software engineers, they still can leverage and continue to leverage generative AI. So, I'll start with that is increasing our engineering productivity and it varies depending on how senior the engineer is or how junior the engineer is. And number two, it helps us increase our innovation velocity. So, that is really, really important to us that it increases our innovation velocity. When I flip that for our customers is that when customers leverage ServiceNow generative AI, and if they can do automation faster, whether he's using text-to-code or text-to-workflow types of use cases that they can not only increase the number of workflows that they put on ServiceNow, but second, it also increases that digital efficiency. So, it's both ways. Our engineers are able to innovate faster and then our customers are able to workflow faster because of generative AI. Bill McDermott -- Chairman and Chief Executive Officer And one thing just to share with you, Keith, we have 20 gen AI cases on the Now on Now story within ServiceNow. And our chief information officer, Chris Bedi, put a very interesting LinkedIn post out there. Please take a look at it. Not only is he doing a great job. But if you think about ServiceNow, we have a financial system in ServiceNow. It's a system of record. We have one of them. Unlike many customers out there that have hundreds, we have a CRM system. We have one of them. And we have an HR system. We have one of them. But they are feeding the ServiceNow Platform. So, all the data from those systems of record in terms of how we run this company, we run the whole company on ServiceNow. And now we have 20 different gen AI use cases across all the departments of the company. So, my full expectation is that someday, we could do the earnings call where we're all in this room together and we'll take you through the living, learning lab of a gen AI-run company here at ServiceNow. Gina Mastantuono -- Chief Financial Officer Yes. And I would just add -- I think I would just add, we are absolutely customer zero, 100% on all of our gen AI use cases. Deflection rates have doubled for both our employees and customers and they're improving every month. right? It's really early days. So, it's learning faster and faster. Software engineers are accepting 48% of text-to-code generation. So, there's absolutely the ability to see leverage in our R&D as we look to the mid- and long term. So, thank you for the question. Sanjit Singh -- Morgan Stanley -- Analyst Appreciate all the thoughts. Thank you. Operator We'll take our next question from Keith Bachman with BMO. Keith Bachman -- BMO Capital Markets -- Analyst Hi. Many thanks. I have two questions, but I'll ask them as one. First, Gina, I don't know if this is for you or not but acknowledge that the adoption does seem quite strong for the various gen AI offerings and so how would you characterize -- and yet you're pointing to decelerating growth through 2024. So, what's not growing as well? If gen AI is getting great adoption probably small dollar amounts contribution. But what's not growing as well? And the second part is perhaps going to come at the Analyst Day, but is there any specific metrics you could give us on dollars of ACV or anything else related to the gen AI SKUs? Or should we wait for Analyst Day perhaps to some more specific indications on what the adoption is. Thank you. Gina Mastantuono -- Chief Financial Officer Yes. So, we'll definitely give you a lot more details on all things of gen AI at Investor Day, and that's in a week and a bit. So, stay tuned there. Yes, the adoption curve is stronger than we've seen in any new product category launch, but that's starting from zero, right? So, it's a small dollar at this point in time, but the speed at which it's going to grow to be a really meaningful contributor is faster than anything we've seen. And so, what I'd say is that 24.5% revenue growth at the scale at which we are, the larger numbers is pretty incredible. And we see continued traction across the board, whether it's our technology workflows, our customer workflows, or our creator as well. And so, really across the board, employees had a really strong quarter, ITSM core had a really strong quarter. ITSM core remains healthy in 16 of our top 20 deals, 10 deals over $1 million. ITOM was included also in 16 of the top 20 deals with nine deals over $1 million, security and risk in totality, still doing well. And so, it's the great thing about having a platform with the breadth that ServiceNow has, that we continue to drive really, really good growth at our scale across the platform. CJ Desai -- President and Chief Operating Officer Yes. And the only thing I would add there is every single workflow continues to still grow double digits plus, plus. So, we have no, hey, this has been taken out of x or this been taken out of y besides Gina individually calling out all our growth vectors, whether it's our core, which is ITSM and ITOM, or whether it's our growth, which our CSM and other products, App Engine, part of creator and customer, all of them continue to grow very nicely, and they grew very nicely in Q1. Keith Bachman -- BMO Capital Markets -- Analyst Many thanks. Gina Mastantuono -- Chief Financial Officer Thanks, Keith. Operator We'll take our next question from Tyler Radke with Citi. Tyler Radke -- Citi -- Analyst Yes. Thanks for taking the question. I wanted to ask you how you're seeing the momentum just in terms of standard to Pro migrations. We talked a lot about Pro Plus, but it would seem that still a huge opportunity in terms of, I think close to 50% of the installed base on standard. Have you started to see an acceleration in those migrations? Can you just talk about the opportunity there? Thank you. CJ Desai -- President and Chief Operating Officer So, first, I'll use, Tyler, one quick example that I was in a conversation at a bank, very technical audience in their technology organization. They were still on ITSM standard. Once they saw what we have done with Pro Plus, they actually bought Pro and Pro Plus together. And that is just amazing that they bought both technologies together, not just saying, "Hey, I'm going to go to Pro and then staircase to Pro Plus." That's a very specific example. But the way we look at this specific product line, whether it's ITSM or whether it's CSM, our customer service, is I look at both Pro and enterprise in total. So, when I look at Pro and Enterprise in total, so I'm excluding Pro Plus on purpose here, so Pro and enterprise, which are the bigger SKUs at a higher priced amount, they grew nicely for ITSM, for CSM for our HR service delivery. Three of our anchor businesses, when you combine Pro and enterprise, that is still a high-growth business and the new add Pro Plus, that's what allows us, at this scale of $2.52 billion to grow at 24.5%. Tyler Radke -- Citi -- Analyst Thank you. Operator We'll take our next question from Gregg Moskowitz with Mizuho. Gregg Moskowitz -- Mizuho Securities -- Analyst Thank you very much for taking the question. Bill, getting back to the topic of IT budgets as it relates to ServiceNow broadly, you took a sense of how much of gen AI software spend is incremental today as opposed to perhaps coming from other areas of IT. Thank you. Bill McDermott -- Chairman and Chief Executive Officer Yes. It's a really important question, Greg. I really believe the IT budgets in their own right will go up on a standard rate basis as we've seen now for many, many years. The business executives, however, are inserting their will into the generative AI revolution because the CEO is in a boardroom with her senior team sitting around a table with the board of directors, and they're like, "Hey, what are you guys doing on gen AI," and they know now that they got to go into that room with a story because this is a lot like when we had the internet, then we had the iPhone moment, everything went mobile. Everything is going gen AI. It's just a question of how quickly you get there. So, I believe that a lot of the business operating spend will be moved to gen AI technology use cases that serve the business. And the reason I believe I'm right on that, if you look at great companies, some of them in this quarter like Microsoft and Novartis, so Hitachi Energy or Equinix or IBM, they're looking at this as, hey, what does this mean to my employees, to my customers, to my partners and they're very well aware of the fact that inflation is sticky and rates are high, and they're on their own. They've got to deal with this stuff. And the only way to change the game is to rethink the game and move from checkers to chefs and gen AI is now opening up the window for transformational conversations. And that's why I say we are the AI platform for business transformation because we're using technology to transform the business, how can the business run at a lower cost? They're asking questions like, why am I on several different leases on-premise and in cloud, and why do I have all these systems? I need a system for every 1,000 employees, it's ridiculous. So they want to rethink things and so I think there's two things that are going to happen: one is business budget is going to move into the gen AI category, and it's not going to take away from the IT spend in the end; and two, there's going to be real winners and real losers and real winners and real losers has already begun its formation because if you don't plant the AI flag in the ground in the next eight months, there's not going to be an AI flag to put in the ground and ours are getting put in the ground all over the global economy. And the company that I see out there doing extremely well in that regard is what Microsoft is doing with CoPilot. And I see what we are doing with Now Assist AI. And I think it's the combination of those two players in the enterprise. And obviously, you've got the great ones like NVIDIA and so forth that's building the GPU force, but that is really what I'm seeing. And I'm also super honored this quarter to see IBM really jump in as a friend and a partner with ServiceNow, and we feel the same way about Watson X. And we're very open to all the participants that are making LLMs, and they can all integrate with ServiceNow and we'll own the domain-specific to ServiceNow, but we welcome all participants. And I think that's another unique part of ServiceNow that we're not interested in shutting anybody out. We're actually technology capable enough to open up to everybody and that's really turning on the whole ecosystem in our favor. So, plans are being put in flags in the ground in the Kingdom of Saudi Arabia, all the way to Japan and beyond. We are winning. Gregg Moskowitz -- Mizuho Securities -- Analyst Perfect. Thanks, Bill. Bill McDermott -- Chairman and Chief Executive Officer Thank you, Gregg. Operator We'll take our next question from Mark Murphy with JPMorgan. Gina Mastantuono -- Chief Financial Officer Mark? Operator I do apologize. It looks like Mark has disconnected. We'll take our next question from Brad Zelnick with Deutsche Bank. Brad Zelnick -- Deutsche Bank -- Analyst Great. Thanks so much for taking the question. It's great to hear all the traction in international. You called out deals in Australia, Italy, Brazil. But I want to focus, Bill, on what you just mentioned about the Kingdom of Saudi Arabia, where in your press release, you called out a $500 million investment in that market given obviously it's a massive, massive opportunity. Gina, can you double-click into the $500 million investment you're making over what time period, where it lands on the financials? And maybe more generally, how should we think about your strategic use of capital and capex for these types of deals? Thanks. Gina Mastantuono -- Chief Financial Officer Brad, thanks so much for the question. So, we're really excited about the investment in Saudi. And rest assured that $500 million is a long-term investment over a long horizon period. It will be in -- most of that investment is in data center, so it will be in cost of sales, but you'll -- again, we manage our margin very tightly. And the growth that we're expecting from that investment is huge. The opportunity that we see in Riyadh and Saudi, NEOM, is great. And Bill spent a nice time there at the LEAP conference, and we're really excited about really pulling our technology to really help that society grow and become a digital-first economy. And they're leaning in very heavy with ServiceNow and are really excited about our product portfolio, not only our gen AI but really the breadth of the entirety of the portfolio. So, it will be within our capex guide that you have always seen, it's not on top of, and we're just really excited about planning flags more in the Middle East. Brad Zelnick -- Deutsche Bank -- Analyst Awesome. Thanks for the color. Gina Mastantuono -- Chief Financial Officer Thanks, Brad. Operator And Mark Murphy has dialed back in. We will go to Mark Murphy with JPMorgan. Mark Murphy -- JPMorgan Chase and Company -- Analyst Thank you. Make sure to not hang up the phone this time. Bill, I'm curious how you're looking at the onboarding of talent into the ServiceNow ecosystem because we're being told that the demand for ServiceNow consultants is at a multiyear high. We're wondering if the economy can create those jobs quickly enough to keep up with the bookings that you're driving. And also, is there a pivot point coming where you would want to crank up your own hiring engine within ServiceNow to keep up with the top-line growth? Bill McDermott -- Chairman and Chief Executive Officer Yes. First of all, Mark, thank you very much. Incidentally, my compliments on the research that you put out. I read your email this morning and you called the quarter exactly as it was. So, super well done on your part, not surprising considering the great company you work for. I will give you a couple of things. Leadership is everything. We just hired a great leader who is leading our training initiatives globally, both internally and externally, world-renowned, and she is going to drive not only a knowledge revolution within our own company but also within the ecosystem. And no, we're not going to build a services company here. We're very comfortable with the ecosystem and building out the ecosystem. We made a commitment with RiseUp with ServiceNow that we have 1 million people trained around the world on the ServiceNow Platform, and we're well on our way to achieving that goal. I talked about Plat4mation as one company that probably not everybody on this call ever heard of, but you know all the big ones, and they're all investing huge human capital contributions and some of them have literally multi, multibillion business plans built with ServiceNow. So, we really like the fact that we can impact the customers' value case with our ServiceNow Six Sigma knowledge team and then we can extend the feet on the street through the ecosystem and also the trust that we have with the ecosystem where they know we're not trying to duplicate their business models on the contrary. We need them to invest in their business models to move our ambition to be the defining one forward. So, it's a really good question actually. And you are right, we're working really hard at it, but it's also true for you to know that the partners see the opportunity like never before. and they're doubling down on ServiceNow. So, we think we got a good formed strategy, and we think that we are going to be able to cover this global economy, and we're moving at warp speed to do so. Mark Murphy -- JPMorgan Chase and Company -- Analyst Thank you so much. Really appreciate it. Bill McDermott -- Chairman and Chief Executive Officer Thank you, Mark. Operator We'll take our next question from Samad Samana with Jefferies. Samad Samana -- Jefferies -- Analyst Hi. Good morning. Thanks for taking my question. Gina Mastantuono -- Chief Financial Officer Hi, Samad. Samad Samana -- Jefferies -- Analyst Hey. How are you? I hope everybody is doing well. Thank you, as always, for squeezing me in. I guess, Bill, I wanted to follow up a little bit to Mark's question because sales and marketing hiring in the first quarter was basically as many heads as you did the last three quarters of 2023. And I know there's some seasonality to it, but is that you guys ramping hiring back up as you see more demand? Is it a certain type of salesperson that you need as you think of more AI-driven sales? Just maybe help us understand what you saw in 1Q and maybe the philosophy around it. Bill McDermott -- Chairman and Chief Executive Officer Yeah. Samad, we see the biggest opportunity we've ever seen. And we know the gen AI revolution is real, and we're doubling down. What you're seeing our investments are very focused on building the best software in the world and selling the best software in the world. So, we have great leadership on both the engineering side and the go-to-market side and we're going to have more clarity of focus in the way we drive the go-to-market. Now, we're getting to size and scale the calls for that. So, there are various motions to market that will have single line of sight accountability and responsibility for a number and the accountability can't be stressed highly enough because we need leaders that can run businesses here. And that's what really big leaders want to do anyway. And Gina rightfully pointed out, we don't do anything without the margin in mind. So, we have a pipeline. We manage the whole company on something we call the CEO dashboard. We are in real time with a rolling four-quarter average pipe. We have our gen AI use cases that are against that pipe based on the stage of the sales cycle. So, we know how many we can afford to hire based on probability of closure within 1% to 2%. That is how we drive the financial performance of the company and how many people we let in the door. I do want to stress because we run a clean platform here and we run a gen AI company here. That's our absolute commitment. We are going to run a super efficient company. So, on the G&A side of the equation, we continue to be lean and as we get bigger as a percent of revenue, that will drop even further. So, I think you're going to like that. And I think a lot of companies now are showing up here at our doorstep, they want to see the Now on Now story because they're like, how is it that you could have one financial system for thousands and thousands and one HR system and one CRM system, when my company has hundreds and I can't even keep track of them all. And I think a lot of what I'm trying to explain to you is we're in the beginning stages of the end of one era and the beginning of another. Gina Mastantuono -- Chief Financial Officer And I would just add to that, Samad. Samad Samana -- Jefferies -- Analyst Yeah. Yeah. Gina Mastantuono -- Chief Financial Officer I would just add that last year, might have looked like we slowed down sales and marketing, but there's a lot in that number, and we talked about this, a lot of operations ops. And we actually were very focused even last year on continuing to hire quota-bearing feet on the street sales folks. We're entering -- we entered 2024 with the higher -- the highest increase in ramp reps that we have in a while. So, yes, we will be reaccelerating. We feel really good about pipe. We feel really good about demand. But I want to make clear that we didn't stop hiring salespeople feet on the street last year. We continue to hire, and we will continue to do that because our pipe looks strong and demand looks great. Samad Samana -- Jefferies -- Analyst Very helpful. And then I had a quick follow-up for you. On CRPO, you mentioned, I think, in response to another question about maybe some early renewals in 1Q. Can you maybe just help us understand if it was material enough to impact the guidance or just I know the guidance was good, but just trying to think through on that timing, if there's anything we should consider for 2Q and then maybe even the back half based on your expectations on renewals? Gina Mastantuono -- Chief Financial Officer Yes. So, if you remember, Samad, last year, we've been -- over the last year, we've been more prudent in how we've been forecasting early renewals because it's hard to forecast. It's very customer-specific and customer by customer. And so, in Q1, our beat was really strong on our net new ACV growth, but we also saw early renewals than our prudent forecast. I haven't changed how we're thinking about forecasting. I'm still remaining prudent given the macro. And so, as we think about seasonality. I talked about Q2 being lower, slightly lower, but then it bounced back up in Q3 when Fed is our strong quarter. And so, again, it wasn't material enough to impact the Q2 guidance, but I'm not assuming better early renewals in Q2 like we saw in Q1. Samad Samana -- Jefferies -- Analyst Awesome. See you guys in a week and a bit. Gina Mastantuono -- Chief Financial Officer Awesome. Thanks, Samad. Bill McDermott -- Chairman and Chief Executive Officer By the way, Samad, when you show up, you'll notice that it will be a stunning knowledge, and you'll see thousands more people than you saw last year. We just keep getting bigger and bigger. So, get ready for the best Vegas show you've ever seen. Samad Samana -- Jefferies -- Analyst Looking forward to it, Bill. Thank you. Bill McDermott -- Chairman and Chief Executive Officer Thank you. Operator We'll take our next question from Patrick Walravens with JMP Securities. Patrick, your line is open. Please go ahead. Patrick Walravens -- JMP Securities -- Analyst Great. Thank you. Bill and CJ, can you help us understand how important it is to have and release your own LLM? So, you guys had StarCoder in February, Databricks and DBRX in March. Let's just say Snowflake did their Arctic family. CJ Desai -- President and Chief Operating Officer I would say it is extremely important, Patrick, is the simple answer. Here are the three things we are solving for with our own LLMs. First of all, they are use case-specific. And ServiceNow has many use cases that are used by our customers, whether it's IT service management, customer service, our ITOM, all of our key product lines. These are use case-specific. And sometimes you would say, even for what Bill talked about agent summarization and other things or text-to-code, we always want use case-specific LLMs. So, then the question is why, one, the accuracy is higher; number two, these are smaller models which are efficient to run, as you have seen, our gross margin guidance that Gina provided that we feel comfortable with the cost to run these models because when the models are smaller, the cost to run them is not high; and number three, from an end-user perspective, a smaller model always performs better. So, I consider this as a unique strategy that we are fortunate to have a great AI teams at ServiceNow focused on not only the engineering execution but combine that with research and experience on how our customers will consume Pro Plus, these things matter. And that's why domain-specific small language models is the right strategy for ServiceNow. We can run it in our cloud. customers' data is protected, and they have higher throughput and get higher value. Patrick Walravens -- JMP Securities -- Analyst That's super helpful. Thank you. Operator We'll take our next question from John DiFucci with Guggenheim. John DiFucci -- Guggenheim Partners -- Analyst Thank you for taking my question. Bill, you both talked about the strong government across the world and emphasizing international. I know the U.S. government is strong for you. And I suppose it's still pretty good for you. But Gina, you didn't mention it in the list of verticals that did well this quarter. Can you comment a little bit more on the U.S. federal government and what you expect for the rest of the year? Gina Mastantuono -- Chief Financial Officer Absolutely, John. Thanks for the question. I didn't mention it because we had such great results in so many other industries and sectors. But our federal business also was strong and had its biggest Q1 ever with $8 million plus deals and net new ACV growth that accelerated. And so, we hosted our largest Fed forum ever with customers representing more than $1 billion in ACV and triple the number of attendees at our executive circle and over 35 partner sponsorships and so really strong federal business. And actually, our gen AI offerings are reinforcing our ability to help accelerate the transformation journey for our federal customers. And so, we're seeing early adopters and healthy industry -- sorry, healthy interest in our domain-specific models, which offer better security that CJ just talked about and really can drive tremendous efficiency gains. And so, exciting themes ahead for 2024 and feel really good about what the federal business will continue to do for us as well as public sector as a whole. So, thanks so much for the question. John DiFucci -- Guggenheim Partners -- Analyst Thanks, Gina. Operator We'll take our next question from Ethan Bruck with Wolfe Research. Alex Zukin -- Wolfe Research -- Analyst This is Alex Zukin from Wolfe. Maybe just the question that you guys have gotten a couple of times on Pro Plus adoption. Listen, it's very clear that the enthusiasm is there, the interest level is there. You talked about it at length in terms of the new product launch being the fastest ever. Is there a way to kind of stratify or at a high level, just give us a sense for what percentage of your deals or pipeline either for Q1 included Pro Plus and how it looks for the rest of the year? And how -- like that compares to your kind of expectations when you set on this journey? And then I've got a quick follow-up. CJ Desai -- President and Chief Operating Officer Hey, Alex, great to hear from you. So, I'll take this on. So, there are a couple of things we are seeing. So, when we launched Pro in 2018 September, and we launched Pro Plus in 2023 September. As Bill outlined in his comments, the Pro Plus uptake by our customers is at a higher pace than Pro uptake was across not only just ITSM but also CSM and also HR, which are three big product lines for ServiceNow. So, when you look at exactly two quarters and two days that we have been in the market, it has exceeded our internal projections on what Pro Plus will do and our ability to sell them. And as Gina outlined, that not only it was in the seven out of 10 deals, which are the top deals for ServiceNow in Q1, we had $7 million-plus deals, including public sector deals in a regulated environment where our engineers have made the technology work for this regulated environment. So, overall, when I see what is happening on the demand environment, it is at a higher pace given very clear metrics around productivity for whether it's IT agents, customer service agents, HR staff, or for the employees. And that's what is driving the demand because it accelerates the productivity or multiplies it, however you want to call it. The second thing I would say is when I look out Q2, Q3, Q4, I still see significant interest from customers, and they are saying, "OK, CJ, what's going on with the customers who purchased this in, say, for example, Q4?" Now, here is a really positive news that I do want to report, and we will share more details at our Financial Analyst Day, Alex, is that customers are, for the first time very eager to turn on Pro Plus and want to see and work with us on where the productivity improvements they are seeing and say, help us understand, I saw that when a call got transferred from one IT into the other IT agent on Follow the Sun model, the quick summarization help them significantly, so they didn't ask the end user same question. So, there are a lot of nuances we are learning as we work with our customers, but they are deploying and when I say deploying, as in implementing Pro Plus at a much faster rate than Pro, which is allowing us and our sales team to use this as an example while convincing other customers to sell. So, overall, not only the demand environment I'm seeing is better for Pro Plus than Pro. If you ask me the same question in 2019 April, which was five years ago. But I'm also seeing that customers are turning on Pros and working with us saying, here is where I'm seeing the improvement. Here is how I should think about it. And our engineering teams are doing a phenomenal job releasing improvements literally on a monthly basis to make sure that our customers are successful with Pro Plus. Operator And we'll take our next question from Michael Turrin with Wells Fargo Securities. Michael Turrin -- Wells Fargo Securities -- Analyst Hey, great. Thanks. I appreciate you squeezing me in. Gina, 47% free cash flow margin certainly stands out, maybe walk us through the drivers of strength there for Q1. Anything one-time for us to consider? And maybe just given we're holding on to the margin guide for the year, just how we should think about seasonality of free cash flow throughout the rest of the year. Thank you. Gina Mastantuono -- Chief Financial Officer Yeah. Thanks, Michael, for noticing. We're really proud of the 47% free cash flow margin. Year over year, though, you have to remember that Q1 of last year was lower than normal given the Silicon Valley Bank and regional bank prices that happened that quarter. All of that being said, even if you normalize for that, we are significantly higher. And that's testament to the strong margin, operating margin and some nice work that we've been doing on working capital efficiencies. And so, we feel really good seasonality for free cash flow will be similar to what you've seen historically. And so, just really strong results. The team has done an outstanding job on working capital efficiencies, and we'll continue to see that as well. Operator And we have time for one last question. We'll take our last question from Derrick Wood with Cowen. Derrick Wood -- TD Cowen -- Analyst Great. Thanks. CJ, just to kind of follow up on that last discussion. Just in terms of how you're seeing adoption of gen AI. I guess on one end of the spectrum, perhaps it's easy to drop this into the hands of workers, let them experiment quickly figure out how to drive productivity. On the other end of the spectrum, perhaps there's a lot of data hygiene investments needed. You need SIs to come in and help drive real process change and really drive the learning curve. I guess where do you guys -- what end of the spectrum are you seeing when it comes to adopting LLMs within the ServiceNow Platform? CJ Desai -- President and Chief Operating Officer So, first of all, thanks for the question, Derrick. Here is how I would describe it. Our design goals and engineering goals were, this has to be super simple to turn it on, as in Pro Plus, once you are on Pro, and you can start using our Pro Plus capabilities, whether it's for agents, employees and so on. That has been our design principle. The setup is super simple, and customers are turning it on and seeing where they are seeing improvements on productivity, whether it's for agents or employees. So, that's number one. Number two, I absolutely do not expect that this requires a heavy system integrator types of implementation that is drawn out in the old machine learning technologies, where you create a model, refine a model and you need data scientists, machine learning engineers, and so on. This is pretty straightforward for ServiceNow use cases where system integrators can help is what Bill talked about that, hey, is there a new way to look at this process? And should I even put in another process on ServiceNow Platform because I can see this is just super fast to get value out of ServiceNow? So, in terms of implementation cycles, they are actually faster on Pro than they have ever been before. And we don't expect a heavy implementation cost. However, if our customers want to leverage system integrators, the biggest value that they always had is helping them think through what additional generative AI use cases they can use and redefining processes. Bill McDermott -- Chairman and Chief Executive Officer And Derrick, I would just give you one thing to think about, too. You could take great companies like Novartis, who want to be a global leader in their industry. And that industry has been held back with six-and-a-half-year clinical trials. And these kinds of CEOs are rethinking everything and they're using generative AI as the gateway to change. And they're looking at not only gen AI, but they're also looking at ServiceNow as a fresh new platform design to take on some of the tougher process challenges that has slowed companies down. And as CJ said, which I think is a major point, the time to implementation on these gen AI use cases has been faster than anything I've seen, not just against Pro but against anything. They want it in now. So, there's an urgency and that urgency is coming from the C-suite, and it's a movement. And I've never seen a desire for implementation speed like I have for gen AI. And that, to me, is a big factor as you navigate and the way you think about this business, this business model and gen AI is a category, who's going to win, who's going to lose, and which customers really want the solution, how quickly do they want the solution if they see the value they want it yesterday, and that's a great sign for us. Operator Thank you. And with that, that does conclude today's presentation. Answer:

the first quarter 2024 ServiceNow earnings conference call

Operator Good day, everyone, and welcome to the first quarter 2024 ServiceNow earnings conference call. Today's call is being recorded. I would now like to turn the call over to Darren Yip, group vice president of investor relations. Please go ahead. Darren Yip -- Vice President, Investor Relations Good afternoon, and thank you for joining ServiceNow's first quarter 2024 earnings conference call. Joining me are Bill McDermott, our chairman and chief executive officer; Gina Mastantuono, our chief financial officer; and CJ Desai, our president and chief operating officer. During today's call, we will review our first quarter 2021 results and discuss our guidance for the second quarter and full year 2024. Before we get started, we want to emphasize that the information discussed on this call, including our guidance, is based on information as of today and contains forward-looking statements that involve risks, uncertainties, and assumptions. We undertake no duty or obligation to update such statements as a result of new information or future events. Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and 2023 10-K for factors that may cause actual results to differ materially from our forward-looking statements. We'd also like to point out that we present non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discuss today are non-GAAP except for revenues, remaining performance obligations, or RPO, current RPO, and cash and investments. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, which are both posted on our website at investors.servicenow.com. A replay of today's call will also be posted on our website. With that, I'll turn the call over to Bill. Bill McDermott -- Chairman and Chief Executive Officer Thank you very much, Darren, and thank you, everyone, for joining today's call. ServiceNow's first quarter results were outstanding. We once again outperformed our guidance across all top line and profitability metrics. Subscription revenue grew by 24.5% year over year in constant currency. That's approximately 50 basis points above the high end of our guidance. CRPO grew 21% year over year in constant currency, 100 basis points above our guidance. Operating margin was over 30%, 150 basis points above our guidance. Even as Q1 is not traditionally a large quarter, we had eight deals over $5 million in net new ACV, a 100% increase year over year. Four deals were over $10 million, which is a 300% increase year over year. ServiceNow is strengthening its position as the AI platform for business transformation. This is fueling strong performances for each of our key businesses. ITSM and ITOM were each in 16 of the top 20 deals. Security and risk combined were in 11 of the top 20, customer creator and employee workflows were in 10 of the top 20 deals. gen AI adoption remained on a tear in Q1. Companies are leaning into gen AI as a powerful deflationary force to drive productivity. That's why NACVIEW for Pro Plus is record-breaking. In fact, it's the fastest-selling offering in the company's history. Iconic brands are adopting ServiceNow's Now Assist AI as a standard for their gen AI road maps. This quarter, we expanded our long-standing partnership with Microsoft to include new generative AI capabilities while also integrating Now Assist AI and copilot into employee experiences, really exciting. Hitachi Energy is using case summarization with Now Assist for ITSM to resolve cases faster, saving millions. Equinix is deploying Now Assist AI for HR workflows, aiming to increase agent productivity by 30%. ServiceNow at IBM are combining the power of the Now Platform with Watson X to increase productivity for IBM's employees, customers, and partners. BNY Mellon and ServiceNow are exploring the utilization of AI and other leading technologies and IT service management helping to unlock additional value for the bank and its clients. We look forward to further demonstrating the exceptional gen AI customer successes and a detailed road map at our Financial Analyst Day on May 6 in Las Vegas. From an industry perspective, public sector continues to excel globally. Major transactions in Q1 included government of Australia's health department and the government of Italy's IT division, Sojek, the government of Sao Paulo Motor Vehicle Department created an app on ServiceNow to give customers, in that case, Citizens, a fast, transparent digital experience that handles requests in minutes. Our global footprint is booming. We're seeing a vast expansion in our most important geographies. This quarter, our Japan team signed the largest NNACV deal in its history. Novartis in Switzerland is implementing ServiceNow gen AI technology to transform the business into one of the most innovative companies in therapeutic medicine. NEOM is harnessing ServiceNow single data model along with other partners to scale its IT services across the Middle East region while seeking to create the first cognitive city where data-driven intelligence meets urban everyday needs. Suzuki, Tokyo Gas i Net, ANA Systems are all top deals signed in Q1. And this is just scratching the surface of what we achieved this quarter. There's a lot of guesswork out there right now about the geopolitics and economic policies among other things. ServiceNow's philosophy is simple. We focus on the things we can control, building great products, delivering great service for our customers, and forging a winning culture, where people can do the best work of their careers. And that's why we perform well when some others don't. It's also why our guidance, as you'll hear from Gina, remains ever strong. Let's talk about the demand environment for enterprise software. AI is not simply a fast-maturing technology. AI is a catalyst for business transformation. When I speak to CEOs all over the world, they recognize this is a change moment. Over the past 15 years, enterprise has experienced a massive decentralization of technology governance. As every department became an IT buyer, the result was too many systems, too many apps, low data quality, and high vulnerability to cybersecurity risk. And here's the key. Those decisions have been made. So, even as CEOs want to consolidate onto strategic platforms for the long term, they also don't want to delay the potential of net new innovation in the short term. They want to derisk the past while getting immediate business value from AI. Process optimization is the No. 1 gen AI use case in the global economy today. This is why ServiceNow's strategic relevance as the AI platform for business transformation has never been higher. Every business workflow in every enterprise will be engineered with gen AI at its core. We are the single pane of glass that enables end-to-end digital transformation. At ServiceNow, we pride ourselves on being the living embodiment of an AI-run company through our Now on Now strategy. Every week that passes the impact of our own Now on Now AI deployments continues to grow. gen AI depletion rates have doubled for both our employees and customers, and they are improving each and every month. So, for engineers are accepting 48% of Texaco generation. These are meaningful productivity improvements and it's only the beginning. That's why IDC estimates an $11 trillion impact from AI in the next three years. It's also why businesses will spend more than $0.5 trillion on gen AI in 2027, according to IDC. So, contrary to some opinions out there, we are witnessing the biggest enterprise software market opportunity in a generation. Business leaders are waking up to the fact that they have a fresh choice now. They can radically simplify the tech stack. We are entering a new frontier. We are in a race to put AI to work for people, and that's a ray ServiceNow intends to win for our customers. There's a lot happening at ServiceNow that only heightens our optimism for the remainder of this year and beyond. Our recent Washington, D.C. platform release included very exciting new features for our customers. Now Assist AI for ITOM AIOPs supercharges ServiceNow's market-leading solution, applying generative AI to speed up issue resolution. Sales and order management unites the sales order life cycles across the front, middle, and back office teams on the ServiceNow Platform. ServiceNow is also staying at the forefront of building innovative enterprise gen AI applications. As one example, Now Assist AI for telecommunications service management, what we call TSM, which also uses NVIDIA AI, will boost agent productivity and build on our great partnership. It's also worth noting the ServiceNow research team is stacked with world-renowned AI experts helping our customers stay on the cutting edge. We're expanding our ecosystem capacity to meet growing customer demand. One example is our investment in Plat4mation, a global IT consultancy, and leading ServiceNow implementation partner to enhance expertise and generative AI-enabled technology. And anyone who'd like to get the full story, I warmly invite you to join us for Knowledge 2024 in Las Vegas on May 7. In closing, I'll end how I began, the company is in a market-leading position. We have the product recognition from the industry analysts. All of them were showing up on all of the most admired company lists and we're moving up the ranks every year. Those things are always encouraging, and we're proud of it all. But the biggest indication I can give you is qualitative. It's how our team feels about what we're doing together. This culture is different. It's rooted in ServiceNow as early as days as a customer-obsessed company. We are ever hungry, ever humble. So, when I'm told that over 1 million people applied to join us last year, I'm not surprised. When you have a galvanizing ambition to become the defining enterprise software company in the 21st century, people want to be a part of that. They recognize this is about more than technology. This is about helping people to know more, care more, and do more. We'll continue on this mission in Q2, I'd like to thank all of you for the trust that you've invested in ServiceNow. We're going to keep working hard for you, and we're going to keep striving to honor our brand promise. The world works with ServiceNow. I'll now hand things over to our outstanding CFO, Gina Mastantuono. Gina, over to you. Gina Mastantuono -- Chief Financial Officer Thank you, Bill. Q1 set a strong precedent for the year ahead. Building on the momentum from Q4, our team delivered another exceptional outperformance. We surpassed all of our top line and profitability guidance metrics for the quarter. With gen AI conversations serving as a digital transformation catalyst, we see that momentum carrying into Q2. Turning to our results. In Q1, subscription revenues were $2.523 billion, growing 24.5% year over year in constant currency, exceeding the high end of our guidance range by approximately 50 basis points. RPO ended the quarter at approximately $17.7 billion, representing 27% year-over-year constant-currency growth. We continue to see average contract terms increase year over year as the strategic importance of the Now Platform has driven longer-duration deals. Current RPO was $8.45 billion, representing 21% year-over-year constant-currency growth, a 100-basis-point beat versus our guidance. From an industry perspective, technology, media, and telecom was extremely robust, growing net new ACV over 100% year over year. Education had a fantastic quarter, growing nearly 50% year over year. Transportation and Logistics, Business and Consumer Services, and Retail and Hospitality also saw strength. Our renewal rate was a best-in-class 98% as the Now Platform remains a strategic imperative for our customers' operations. We closed 59 deals greater than $1 million in net new ACV in the quarter with four deals greater than $10 million, representing 300% year-over-year growth. Our focus on selling a comprehensive platform continued to drive more multiproduct deals as 15 of our top 20 deals included seven or more products. We now have 1,933 customers paying us over $1 million in ACV. In addition, the number of customers paying us $20 million or more grew over 50% year over year. In Q1, our gen AI products continue to see very healthy adoption. As Bill mentioned, our Pro Plus net new ACV to date continued the trend ahead of any new product family launched for the comparable period. Our gen AI products were in seven of our top 10 deals, and we closed seven deals over $1 million in ACV in the quarter. We had wins at a second Wall Street Bank, a leading cybersecurity firm, and many more, including a significant win for ITOM Pro Plus, which just launched in March. Turning to profitability, non-GAAP operating margin was over 30%, approximately 150 basis points above our guidance, driven by the timing of marketing spend, opex efficiencies, and our top-line outperformance. Our free cash flow margin was 47%, up 12 points year over year. We ended the quarter with a robust balance sheet, including $8.8 billion in cash and investments. In Q1, we bought back 225,000 shares as part of our share repurchase program with the primary objective of managing the impact of dilution. As of the end of the quarter, we have approximately $787 million remaining of the original $1.5 billion authorization. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth, profitability, and shareholder value. Moving to our guidance. In Q1, we initiated a program to hedge a portion of our foreign currency-denominated revenues. The initiative is expected to lessen the impact of recent movements in the euro and pound, but the incremental strengthening of the U.S. dollar has still resulted in FX headwinds compared to our previous guidance. Given our Q1 outperformance, we are raising our 2024 top-line outlook to more than offset those moves. For 2024, we are raising our subscription revenues by $20 million at the midpoint of the range to more than offset an incremental $17 million headwind from FX. This raises a net increase of $3 million on a narrowed range of $10.560 billion to $10.575 billion, representing 21.5% to 22% year-over-year growth or 21.5% on a constant-currency basis. We continue to expect subscription gross margin of 84.5%, operating margin of 29%, and free cash flow margin of 31%. Finally, we expect GAAP diluted weighted average outstanding shares of $208 million. For Q2, we expect subscription revenues between $2.525 billion and $2.530 billion, representing 21.5% to 22% year-over-year growth or 22% on a constant-currency basis. We expect CRPO growth of 20.5%, both on a reported and constant-currency basis. We expect an operating margin of 25%. Finally, we expect 208 million GAAP diluted weighted average outstanding shares for the quarter. In summary, Q1 was a great start to what we expect to be another tremendous year. Organizations are under more pressure than ever to maximize the benefits of the technology investments. In this environment, ServiceNow's traction as the intelligent platform for end-to-end digital transformation continues to intensify. gen AI is only as powerful as the platform is built on. The Now Platform gives us deep insights with the remarkable ability to tailor AI outputs to the specific needs of our customers. Business users need AI to power actions across the enterprise. Our workflows are designed to do just that, deliver complete solutions to supercharge experiences, creating extraordinary value. You'll hear more about these experiences, our strategy, and long-term opportunities at our upcoming Investor Day on May 6, which will be webcast on our Investor Relations website. Finally, before moving on to Q&A, I want to thank all of our employees worldwide for helping make ServiceNow one of the Fortune 100 Best Places to Work yet again in 2024. ServiceNow's greatest asset is its people, and you all continue to make us, ServiceNow strong. Bill and I couldn't be prouder of this incredible team. With that, I'll open it up for Q&A. Questions & Answers: Operator Thank you. [Operator instructions] We'll now take our first question from Kash Rangan with Goldman Sachs. Kash Rangan -- Goldman Sachs -- Analyst Thank you very much. First earnings report and software for the year, Bill, good to see the optimism. My question on AI is at what point does AI get more broadly adopted, at least from a sales cycle standpoint, that despite the tough economic environment, you can actually draw in more potential prospects into the category because of the cost savings here. And one for Gina. I noticed that -- it's still too early in the year, CRPO, RPO, a bit of seasonality there. Can you give us some insight into what to make of the rest of the year? Thank you so much and congratulations. Bill McDermott -- Chairman and Chief Executive Officer Thank you very much for the question, Kash. As I said, process optimization is the single biggest gen AI use case in the enterprise. And any process that exists in the enterprise today. will be reengineered or engineered depending on how messy the process is with gen AI. So, every workflow in every enterprise will be rethought. So, just think about the sales process, for example, and the whole order to cash process, for example, or think about employees and onboarding and training and providing all the services to them. Think about agent productivity, which is something that we're obviously moving very quickly on where you can bypass the systems that don't integrate very well. And instead of swivel sharing around or putting customers on hold or I'll get back to you tomorrow, have real-time data where most of the cases are deflected from virtual agent, but if an agent is involved, they have choice A or B, which one is more pleasing to the customer. OK, you like B, you got B. And the case is closed. Think about managing complex cases across an enterprise where all those screens are open, and data is being processed instead of having spreadsheets and workarounds and emails and text. Now, you have everything done on one platform with full case information and case closure. So, literally, from running a business in every department to building software, like I said, with the breakthrough on natural language tech turning into code. Every single enterprise will run completely differently because of gen AI and because of our clean sheet platform. Gina Mastantuono -- Chief Financial Officer Yeah. And Kash, on your question around seasonality about the CRPO. So, first and foremost, really proud of the fact that we beat our guide in Q1 by 100 basis points. That beat was twofold: one, strong net new ACV growth as well as higher early renewals. And so, from a seasonality perspective, you'll remember, we talked about the Fed duration. And so, Q2 is slightly more impacted, right, before it pops up again in Q3. And so, we feel really good about the trends that we're seeing. And again, feel really good. We continue to be prudent in our guide around early renewals, while we are seeing them stronger than we saw last year, again, from a guidance perspective and a forecast perspective, we're continuing to be prudent there. Kash Rangan -- Goldman Sachs -- Analyst Awesome. Thank you. Gina Mastantuono -- Chief Financial Officer Thanks, Kash. Operator We'll take our next question from Karl Keirstead with UBS. Karl Keirstead -- UBS -- Analyst Yeah. Hi. Thanks. Bill and Gina, maybe even CJ, I wonder if you could just comment on the environment that you're seeing. I think in prior quarters, you've described it as after a pretty rough, call it, year stretch, it started to stabilize in 3Q and stabilized again in 4Q. Was that still the case in Q1? Were there one or two verticals that maybe lag, maybe some of the puts and takes about how the environment broadly felt? Thank you. CJ Desai -- President and Chief Operating Officer So, I would say, Karl, I would start first is environment, and we shared this in January, Bill, Gina, and I, it remains pretty much the same from our perspective as it -- and what we mean by that, it is not 2021, specifically. So, it still takes many approvals and all the things that we discussed from a sales perspective in trying to get business validation done or a purchase being made. And pretty much, I would say, that's a standard across industries and geographies. We are absolutely executing well within that environment given our promise of efficiency and automation so that is absolutely resonating and combine that with our in-platform generative AI, which also resonates really well because that is an accelerant to the productivity enhancements that an organization can take. So, whether it's Wall Street banks, whether it's a life sciences corporation, whether it's governments, that story of automation, digital, productivity, enhance via gen AI is absolutely resonating and that is what is helping us, despite the environment continuing to be the same. Bill McDermott -- Chairman and Chief Executive Officer And I would just build on that, Karl, just for your benefit on the budgets themselves. The budgets are going up. And what I definitely see is the preference for gen AI now. I think we're ending one era in the enterprise, and we've begun another. And we're into a new frontier now where gen AI has opened up the eyes of the customer to say, there might be a different way of doing this. And that's creating real opportunity for us. So, CJ is exactly right on the value-based economy, but also, I do see the budgets not only going up in IT but also just see gen AI becoming more of a business imperative. And if you can increase productivity, take cost out, and show that in a value case, this money that will be spent, and maybe different people approving it, but the money will be spent. I also want to acknowledge some really great partnerships that we've achieved with Microsoft and IBM and NVIDIA. And I look at great companies like Novartis really rethinking the whole pharma process altogether with gen AI. There's just so much goodness going on in this market. And I feel that you're coming off a strong Q4 to have a great print like this in Q1 with the momentum going into knowledge. I don't think I've ever felt this good in the five years that I've been here than I do right now on this call with you right now, absolutely best I've felt. Karl Keirstead -- UBS -- Analyst Thank you both. Operator We'll take our next question from Matt Hedberg with RBC Capital Markets. Matt Hedberg -- RBC Capital Markets -- Analyst Great. Thanks for taking my question, guys. Bill, given your comments on Pro Plus net new ACV growth, are you seeing faster Pro Plus deal cycles relative to what you saw when the Pro was first launched? And anything you just need to call out from a discounting perspective on Pro Plus relative to maybe some of your initial expectations? Gina Mastantuono -- Chief Financial Officer Yes. Hey, Matt, I'll take that one. So, yes, we are absolutely seeing faster Pro Plus adoption versus Pro. It's two quarters out, right? So, it's early days, but we feel really good about the adoption curve. And we've been talking about whether or not that adoption curve would be faster. And we posited that it would be, and that's certainly proving out to be the case, although again, early days. With respect to discounting versus initial expectations, we feel really good about the realized pricing, and it has been very much in line with our initial expectations. And we'll talk a lot more as you would expect at Investor Day about the overall gen AI opportunity for ServiceNow as well as where we are to date. But we feel very good about what we're seeing in the markets. Customers are really leaning in. We talked about seven deals in the top 10 had gen AI in it, significant deals over $1 million as well. So, we're definitely seeing monetization happening already. Matt Hedberg -- RBC Capital Markets -- Analyst Thank you, Gina. Gina Mastantuono -- Chief Financial Officer Thanks, Matt. Operator We'll take our next question from Brad Sills with Bank of America Securities. Brad Sills -- Bank of America Merrill Lynch -- Analyst Great. Thank you so much. A question for Gina, please. Real nice results on RPO. I think this is the second quarter since we've seen significant outperformance there versus CRPO. Just curious what's driving that? And does that give you some visibility perhaps for CRPO to ramp from here given perhaps a ramping component in there? Thank you. Gina Mastantuono -- Chief Financial Officer Yes, it's a great point, and I did call that out. So, RPO growth was 27% year over year in constant currency, which is 300 basis points improvement versus last year. And yes, that is our longer-term backlog. So, as you think more longer term about the opportunity in ServiceNow, I couldn't be more excited about that. We are seeing the average duration growing. And in fact, duration this Q1 is the largest it's been in the Q1 since, I think, 2019. And so, I feel really good about what that means for the mid- and long-term opportunity here for sure. Brad Sills -- Bank of America Merrill Lynch -- Analyst Great to hear. Thanks, Gina. Gina Mastantuono -- Chief Financial Officer Thanks, Brad. Operator We'll take our next question from Keith Weiss with Morgan Stanley. Sanjit Singh -- Morgan Stanley -- Analyst Hi. Sanjit Singh in for Keith Weiss. Bill, I wanted to ask a little bit about gen AI adoption within ServiceNow, you mentioned Now on Now, but in terms of just like the gen AI adoption, both broadly and with the engineering team, it looks like you're hiring for this quarter in R&D, you kept a pace. How is gen AI adoption changing or not changing your hiring plans more broadly and specifically in some of the engineering team? CJ Desai -- President and Chief Operating Officer This is CJ. And here is where I would say that specifically, we absolutely believe, and we have seen it that gen AI is helping our software engineers code faster. I mean, straight up. It helps us our software engineers code faster, whether they are junior software engineers or very senior software engineers, they still can leverage and continue to leverage generative AI. So, I'll start with that is increasing our engineering productivity and it varies depending on how senior the engineer is or how junior the engineer is. And number two, it helps us increase our innovation velocity. So, that is really, really important to us that it increases our innovation velocity. When I flip that for our customers is that when customers leverage ServiceNow generative AI, and if they can do automation faster, whether he's using text-to-code or text-to-workflow types of use cases that they can not only increase the number of workflows that they put on ServiceNow, but second, it also increases that digital efficiency. So, it's both ways. Our engineers are able to innovate faster and then our customers are able to workflow faster because of generative AI. Bill McDermott -- Chairman and Chief Executive Officer And one thing just to share with you, Keith, we have 20 gen AI cases on the Now on Now story within ServiceNow. And our chief information officer, Chris Bedi, put a very interesting LinkedIn post out there. Please take a look at it. Not only is he doing a great job. But if you think about ServiceNow, we have a financial system in ServiceNow. It's a system of record. We have one of them. Unlike many customers out there that have hundreds, we have a CRM system. We have one of them. And we have an HR system. We have one of them. But they are feeding the ServiceNow Platform. So, all the data from those systems of record in terms of how we run this company, we run the whole company on ServiceNow. And now we have 20 different gen AI use cases across all the departments of the company. So, my full expectation is that someday, we could do the earnings call where we're all in this room together and we'll take you through the living, learning lab of a gen AI-run company here at ServiceNow. Gina Mastantuono -- Chief Financial Officer Yes. And I would just add -- I think I would just add, we are absolutely customer zero, 100% on all of our gen AI use cases. Deflection rates have doubled for both our employees and customers and they're improving every month. right? It's really early days. So, it's learning faster and faster. Software engineers are accepting 48% of text-to-code generation. So, there's absolutely the ability to see leverage in our R&D as we look to the mid- and long term. So, thank you for the question. Sanjit Singh -- Morgan Stanley -- Analyst Appreciate all the thoughts. Thank you. Operator We'll take our next question from Keith Bachman with BMO. Keith Bachman -- BMO Capital Markets -- Analyst Hi. Many thanks. I have two questions, but I'll ask them as one. First, Gina, I don't know if this is for you or not but acknowledge that the adoption does seem quite strong for the various gen AI offerings and so how would you characterize -- and yet you're pointing to decelerating growth through 2024. So, what's not growing as well? If gen AI is getting great adoption probably small dollar amounts contribution. But what's not growing as well? And the second part is perhaps going to come at the Analyst Day, but is there any specific metrics you could give us on dollars of ACV or anything else related to the gen AI SKUs? Or should we wait for Analyst Day perhaps to some more specific indications on what the adoption is. Thank you. Gina Mastantuono -- Chief Financial Officer Yes. So, we'll definitely give you a lot more details on all things of gen AI at Investor Day, and that's in a week and a bit. So, stay tuned there. Yes, the adoption curve is stronger than we've seen in any new product category launch, but that's starting from zero, right? So, it's a small dollar at this point in time, but the speed at which it's going to grow to be a really meaningful contributor is faster than anything we've seen. And so, what I'd say is that 24.5% revenue growth at the scale at which we are, the larger numbers is pretty incredible. And we see continued traction across the board, whether it's our technology workflows, our customer workflows, or our creator as well. And so, really across the board, employees had a really strong quarter, ITSM core had a really strong quarter. ITSM core remains healthy in 16 of our top 20 deals, 10 deals over $1 million. ITOM was included also in 16 of the top 20 deals with nine deals over $1 million, security and risk in totality, still doing well. And so, it's the great thing about having a platform with the breadth that ServiceNow has, that we continue to drive really, really good growth at our scale across the platform. CJ Desai -- President and Chief Operating Officer Yes. And the only thing I would add there is every single workflow continues to still grow double digits plus, plus. So, we have no, hey, this has been taken out of x or this been taken out of y besides Gina individually calling out all our growth vectors, whether it's our core, which is ITSM and ITOM, or whether it's our growth, which our CSM and other products, App Engine, part of creator and customer, all of them continue to grow very nicely, and they grew very nicely in Q1. Keith Bachman -- BMO Capital Markets -- Analyst Many thanks. Gina Mastantuono -- Chief Financial Officer Thanks, Keith. Operator We'll take our next question from Tyler Radke with Citi. Tyler Radke -- Citi -- Analyst Yes. Thanks for taking the question. I wanted to ask you how you're seeing the momentum just in terms of standard to Pro migrations. We talked a lot about Pro Plus, but it would seem that still a huge opportunity in terms of, I think close to 50% of the installed base on standard. Have you started to see an acceleration in those migrations? Can you just talk about the opportunity there? Thank you. CJ Desai -- President and Chief Operating Officer So, first, I'll use, Tyler, one quick example that I was in a conversation at a bank, very technical audience in their technology organization. They were still on ITSM standard. Once they saw what we have done with Pro Plus, they actually bought Pro and Pro Plus together. And that is just amazing that they bought both technologies together, not just saying, "Hey, I'm going to go to Pro and then staircase to Pro Plus." That's a very specific example. But the way we look at this specific product line, whether it's ITSM or whether it's CSM, our customer service, is I look at both Pro and enterprise in total. So, when I look at Pro and Enterprise in total, so I'm excluding Pro Plus on purpose here, so Pro and enterprise, which are the bigger SKUs at a higher priced amount, they grew nicely for ITSM, for CSM for our HR service delivery. Three of our anchor businesses, when you combine Pro and enterprise, that is still a high-growth business and the new add Pro Plus, that's what allows us, at this scale of $2.52 billion to grow at 24.5%. Tyler Radke -- Citi -- Analyst Thank you. Operator We'll take our next question from Gregg Moskowitz with Mizuho. Gregg Moskowitz -- Mizuho Securities -- Analyst Thank you very much for taking the question. Bill, getting back to the topic of IT budgets as it relates to ServiceNow broadly, you took a sense of how much of gen AI software spend is incremental today as opposed to perhaps coming from other areas of IT. Thank you. Bill McDermott -- Chairman and Chief Executive Officer Yes. It's a really important question, Greg. I really believe the IT budgets in their own right will go up on a standard rate basis as we've seen now for many, many years. The business executives, however, are inserting their will into the generative AI revolution because the CEO is in a boardroom with her senior team sitting around a table with the board of directors, and they're like, "Hey, what are you guys doing on gen AI," and they know now that they got to go into that room with a story because this is a lot like when we had the internet, then we had the iPhone moment, everything went mobile. Everything is going gen AI. It's just a question of how quickly you get there. So, I believe that a lot of the business operating spend will be moved to gen AI technology use cases that serve the business. And the reason I believe I'm right on that, if you look at great companies, some of them in this quarter like Microsoft and Novartis, so Hitachi Energy or Equinix or IBM, they're looking at this as, hey, what does this mean to my employees, to my customers, to my partners and they're very well aware of the fact that inflation is sticky and rates are high, and they're on their own. They've got to deal with this stuff. And the only way to change the game is to rethink the game and move from checkers to chefs and gen AI is now opening up the window for transformational conversations. And that's why I say we are the AI platform for business transformation because we're using technology to transform the business, how can the business run at a lower cost? They're asking questions like, why am I on several different leases on-premise and in cloud, and why do I have all these systems? I need a system for every 1,000 employees, it's ridiculous. So they want to rethink things and so I think there's two things that are going to happen: one is business budget is going to move into the gen AI category, and it's not going to take away from the IT spend in the end; and two, there's going to be real winners and real losers and real winners and real losers has already begun its formation because if you don't plant the AI flag in the ground in the next eight months, there's not going to be an AI flag to put in the ground and ours are getting put in the ground all over the global economy. And the company that I see out there doing extremely well in that regard is what Microsoft is doing with CoPilot. And I see what we are doing with Now Assist AI. And I think it's the combination of those two players in the enterprise. And obviously, you've got the great ones like NVIDIA and so forth that's building the GPU force, but that is really what I'm seeing. And I'm also super honored this quarter to see IBM really jump in as a friend and a partner with ServiceNow, and we feel the same way about Watson X. And we're very open to all the participants that are making LLMs, and they can all integrate with ServiceNow and we'll own the domain-specific to ServiceNow, but we welcome all participants. And I think that's another unique part of ServiceNow that we're not interested in shutting anybody out. We're actually technology capable enough to open up to everybody and that's really turning on the whole ecosystem in our favor. So, plans are being put in flags in the ground in the Kingdom of Saudi Arabia, all the way to Japan and beyond. We are winning. Gregg Moskowitz -- Mizuho Securities -- Analyst Perfect. Thanks, Bill. Bill McDermott -- Chairman and Chief Executive Officer Thank you, Gregg. Operator We'll take our next question from Mark Murphy with JPMorgan. Gina Mastantuono -- Chief Financial Officer Mark? Operator I do apologize. It looks like Mark has disconnected. We'll take our next question from Brad Zelnick with Deutsche Bank. Brad Zelnick -- Deutsche Bank -- Analyst Great. Thanks so much for taking the question. It's great to hear all the traction in international. You called out deals in Australia, Italy, Brazil. But I want to focus, Bill, on what you just mentioned about the Kingdom of Saudi Arabia, where in your press release, you called out a $500 million investment in that market given obviously it's a massive, massive opportunity. Gina, can you double-click into the $500 million investment you're making over what time period, where it lands on the financials? And maybe more generally, how should we think about your strategic use of capital and capex for these types of deals? Thanks. Gina Mastantuono -- Chief Financial Officer Brad, thanks so much for the question. So, we're really excited about the investment in Saudi. And rest assured that $500 million is a long-term investment over a long horizon period. It will be in -- most of that investment is in data center, so it will be in cost of sales, but you'll -- again, we manage our margin very tightly. And the growth that we're expecting from that investment is huge. The opportunity that we see in Riyadh and Saudi, NEOM, is great. And Bill spent a nice time there at the LEAP conference, and we're really excited about really pulling our technology to really help that society grow and become a digital-first economy. And they're leaning in very heavy with ServiceNow and are really excited about our product portfolio, not only our gen AI but really the breadth of the entirety of the portfolio. So, it will be within our capex guide that you have always seen, it's not on top of, and we're just really excited about planning flags more in the Middle East. Brad Zelnick -- Deutsche Bank -- Analyst Awesome. Thanks for the color. Gina Mastantuono -- Chief Financial Officer Thanks, Brad. Operator And Mark Murphy has dialed back in. We will go to Mark Murphy with JPMorgan. Mark Murphy -- JPMorgan Chase and Company -- Analyst Thank you. Make sure to not hang up the phone this time. Bill, I'm curious how you're looking at the onboarding of talent into the ServiceNow ecosystem because we're being told that the demand for ServiceNow consultants is at a multiyear high. We're wondering if the economy can create those jobs quickly enough to keep up with the bookings that you're driving. And also, is there a pivot point coming where you would want to crank up your own hiring engine within ServiceNow to keep up with the top-line growth? Bill McDermott -- Chairman and Chief Executive Officer Yes. First of all, Mark, thank you very much. Incidentally, my compliments on the research that you put out. I read your email this morning and you called the quarter exactly as it was. So, super well done on your part, not surprising considering the great company you work for. I will give you a couple of things. Leadership is everything. We just hired a great leader who is leading our training initiatives globally, both internally and externally, world-renowned, and she is going to drive not only a knowledge revolution within our own company but also within the ecosystem. And no, we're not going to build a services company here. We're very comfortable with the ecosystem and building out the ecosystem. We made a commitment with RiseUp with ServiceNow that we have 1 million people trained around the world on the ServiceNow Platform, and we're well on our way to achieving that goal. I talked about Plat4mation as one company that probably not everybody on this call ever heard of, but you know all the big ones, and they're all investing huge human capital contributions and some of them have literally multi, multibillion business plans built with ServiceNow. So, we really like the fact that we can impact the customers' value case with our ServiceNow Six Sigma knowledge team and then we can extend the feet on the street through the ecosystem and also the trust that we have with the ecosystem where they know we're not trying to duplicate their business models on the contrary. We need them to invest in their business models to move our ambition to be the defining one forward. So, it's a really good question actually. And you are right, we're working really hard at it, but it's also true for you to know that the partners see the opportunity like never before. and they're doubling down on ServiceNow. So, we think we got a good formed strategy, and we think that we are going to be able to cover this global economy, and we're moving at warp speed to do so. Mark Murphy -- JPMorgan Chase and Company -- Analyst Thank you so much. Really appreciate it. Bill McDermott -- Chairman and Chief Executive Officer Thank you, Mark. Operator We'll take our next question from Samad Samana with Jefferies. Samad Samana -- Jefferies -- Analyst Hi. Good morning. Thanks for taking my question. Gina Mastantuono -- Chief Financial Officer Hi, Samad. Samad Samana -- Jefferies -- Analyst Hey. How are you? I hope everybody is doing well. Thank you, as always, for squeezing me in. I guess, Bill, I wanted to follow up a little bit to Mark's question because sales and marketing hiring in the first quarter was basically as many heads as you did the last three quarters of 2023. And I know there's some seasonality to it, but is that you guys ramping hiring back up as you see more demand? Is it a certain type of salesperson that you need as you think of more AI-driven sales? Just maybe help us understand what you saw in 1Q and maybe the philosophy around it. Bill McDermott -- Chairman and Chief Executive Officer Yeah. Samad, we see the biggest opportunity we've ever seen. And we know the gen AI revolution is real, and we're doubling down. What you're seeing our investments are very focused on building the best software in the world and selling the best software in the world. So, we have great leadership on both the engineering side and the go-to-market side and we're going to have more clarity of focus in the way we drive the go-to-market. Now, we're getting to size and scale the calls for that. So, there are various motions to market that will have single line of sight accountability and responsibility for a number and the accountability can't be stressed highly enough because we need leaders that can run businesses here. And that's what really big leaders want to do anyway. And Gina rightfully pointed out, we don't do anything without the margin in mind. So, we have a pipeline. We manage the whole company on something we call the CEO dashboard. We are in real time with a rolling four-quarter average pipe. We have our gen AI use cases that are against that pipe based on the stage of the sales cycle. So, we know how many we can afford to hire based on probability of closure within 1% to 2%. That is how we drive the financial performance of the company and how many people we let in the door. I do want to stress because we run a clean platform here and we run a gen AI company here. That's our absolute commitment. We are going to run a super efficient company. So, on the G&A side of the equation, we continue to be lean and as we get bigger as a percent of revenue, that will drop even further. So, I think you're going to like that. And I think a lot of companies now are showing up here at our doorstep, they want to see the Now on Now story because they're like, how is it that you could have one financial system for thousands and thousands and one HR system and one CRM system, when my company has hundreds and I can't even keep track of them all. And I think a lot of what I'm trying to explain to you is we're in the beginning stages of the end of one era and the beginning of another. Gina Mastantuono -- Chief Financial Officer And I would just add to that, Samad. Samad Samana -- Jefferies -- Analyst Yeah. Yeah. Gina Mastantuono -- Chief Financial Officer I would just add that last year, might have looked like we slowed down sales and marketing, but there's a lot in that number, and we talked about this, a lot of operations ops. And we actually were very focused even last year on continuing to hire quota-bearing feet on the street sales folks. We're entering -- we entered 2024 with the higher -- the highest increase in ramp reps that we have in a while. So, yes, we will be reaccelerating. We feel really good about pipe. We feel really good about demand. But I want to make clear that we didn't stop hiring salespeople feet on the street last year. We continue to hire, and we will continue to do that because our pipe looks strong and demand looks great. Samad Samana -- Jefferies -- Analyst Very helpful. And then I had a quick follow-up for you. On CRPO, you mentioned, I think, in response to another question about maybe some early renewals in 1Q. Can you maybe just help us understand if it was material enough to impact the guidance or just I know the guidance was good, but just trying to think through on that timing, if there's anything we should consider for 2Q and then maybe even the back half based on your expectations on renewals? Gina Mastantuono -- Chief Financial Officer Yes. So, if you remember, Samad, last year, we've been -- over the last year, we've been more prudent in how we've been forecasting early renewals because it's hard to forecast. It's very customer-specific and customer by customer. And so, in Q1, our beat was really strong on our net new ACV growth, but we also saw early renewals than our prudent forecast. I haven't changed how we're thinking about forecasting. I'm still remaining prudent given the macro. And so, as we think about seasonality. I talked about Q2 being lower, slightly lower, but then it bounced back up in Q3 when Fed is our strong quarter. And so, again, it wasn't material enough to impact the Q2 guidance, but I'm not assuming better early renewals in Q2 like we saw in Q1. Samad Samana -- Jefferies -- Analyst Awesome. See you guys in a week and a bit. Gina Mastantuono -- Chief Financial Officer Awesome. Thanks, Samad. Bill McDermott -- Chairman and Chief Executive Officer By the way, Samad, when you show up, you'll notice that it will be a stunning knowledge, and you'll see thousands more people than you saw last year. We just keep getting bigger and bigger. So, get ready for the best Vegas show you've ever seen. Samad Samana -- Jefferies -- Analyst Looking forward to it, Bill. Thank you. Bill McDermott -- Chairman and Chief Executive Officer Thank you. Operator We'll take our next question from Patrick Walravens with JMP Securities. Patrick, your line is open. Please go ahead. Patrick Walravens -- JMP Securities -- Analyst Great. Thank you. Bill and CJ, can you help us understand how important it is to have and release your own LLM? So, you guys had StarCoder in February, Databricks and DBRX in March. Let's just say Snowflake did their Arctic family. CJ Desai -- President and Chief Operating Officer I would say it is extremely important, Patrick, is the simple answer. Here are the three things we are solving for with our own LLMs. First of all, they are use case-specific. And ServiceNow has many use cases that are used by our customers, whether it's IT service management, customer service, our ITOM, all of our key product lines. These are use case-specific. And sometimes you would say, even for what Bill talked about agent summarization and other things or text-to-code, we always want use case-specific LLMs. So, then the question is why, one, the accuracy is higher; number two, these are smaller models which are efficient to run, as you have seen, our gross margin guidance that Gina provided that we feel comfortable with the cost to run these models because when the models are smaller, the cost to run them is not high; and number three, from an end-user perspective, a smaller model always performs better. So, I consider this as a unique strategy that we are fortunate to have a great AI teams at ServiceNow focused on not only the engineering execution but combine that with research and experience on how our customers will consume Pro Plus, these things matter. And that's why domain-specific small language models is the right strategy for ServiceNow. We can run it in our cloud. customers' data is protected, and they have higher throughput and get higher value. Patrick Walravens -- JMP Securities -- Analyst That's super helpful. Thank you. Operator We'll take our next question from John DiFucci with Guggenheim. John DiFucci -- Guggenheim Partners -- Analyst Thank you for taking my question. Bill, you both talked about the strong government across the world and emphasizing international. I know the U.S. government is strong for you. And I suppose it's still pretty good for you. But Gina, you didn't mention it in the list of verticals that did well this quarter. Can you comment a little bit more on the U.S. federal government and what you expect for the rest of the year? Gina Mastantuono -- Chief Financial Officer Absolutely, John. Thanks for the question. I didn't mention it because we had such great results in so many other industries and sectors. But our federal business also was strong and had its biggest Q1 ever with $8 million plus deals and net new ACV growth that accelerated. And so, we hosted our largest Fed forum ever with customers representing more than $1 billion in ACV and triple the number of attendees at our executive circle and over 35 partner sponsorships and so really strong federal business. And actually, our gen AI offerings are reinforcing our ability to help accelerate the transformation journey for our federal customers. And so, we're seeing early adopters and healthy industry -- sorry, healthy interest in our domain-specific models, which offer better security that CJ just talked about and really can drive tremendous efficiency gains. And so, exciting themes ahead for 2024 and feel really good about what the federal business will continue to do for us as well as public sector as a whole. So, thanks so much for the question. John DiFucci -- Guggenheim Partners -- Analyst Thanks, Gina. Operator We'll take our next question from Ethan Bruck with Wolfe Research. Alex Zukin -- Wolfe Research -- Analyst This is Alex Zukin from Wolfe. Maybe just the question that you guys have gotten a couple of times on Pro Plus adoption. Listen, it's very clear that the enthusiasm is there, the interest level is there. You talked about it at length in terms of the new product launch being the fastest ever. Is there a way to kind of stratify or at a high level, just give us a sense for what percentage of your deals or pipeline either for Q1 included Pro Plus and how it looks for the rest of the year? And how -- like that compares to your kind of expectations when you set on this journey? And then I've got a quick follow-up. CJ Desai -- President and Chief Operating Officer Hey, Alex, great to hear from you. So, I'll take this on. So, there are a couple of things we are seeing. So, when we launched Pro in 2018 September, and we launched Pro Plus in 2023 September. As Bill outlined in his comments, the Pro Plus uptake by our customers is at a higher pace than Pro uptake was across not only just ITSM but also CSM and also HR, which are three big product lines for ServiceNow. So, when you look at exactly two quarters and two days that we have been in the market, it has exceeded our internal projections on what Pro Plus will do and our ability to sell them. And as Gina outlined, that not only it was in the seven out of 10 deals, which are the top deals for ServiceNow in Q1, we had $7 million-plus deals, including public sector deals in a regulated environment where our engineers have made the technology work for this regulated environment. So, overall, when I see what is happening on the demand environment, it is at a higher pace given very clear metrics around productivity for whether it's IT agents, customer service agents, HR staff, or for the employees. And that's what is driving the demand because it accelerates the productivity or multiplies it, however you want to call it. The second thing I would say is when I look out Q2, Q3, Q4, I still see significant interest from customers, and they are saying, "OK, CJ, what's going on with the customers who purchased this in, say, for example, Q4?" Now, here is a really positive news that I do want to report, and we will share more details at our Financial Analyst Day, Alex, is that customers are, for the first time very eager to turn on Pro Plus and want to see and work with us on where the productivity improvements they are seeing and say, help us understand, I saw that when a call got transferred from one IT into the other IT agent on Follow the Sun model, the quick summarization help them significantly, so they didn't ask the end user same question. So, there are a lot of nuances we are learning as we work with our customers, but they are deploying and when I say deploying, as in implementing Pro Plus at a much faster rate than Pro, which is allowing us and our sales team to use this as an example while convincing other customers to sell. So, overall, not only the demand environment I'm seeing is better for Pro Plus than Pro. If you ask me the same question in 2019 April, which was five years ago. But I'm also seeing that customers are turning on Pros and working with us saying, here is where I'm seeing the improvement. Here is how I should think about it. And our engineering teams are doing a phenomenal job releasing improvements literally on a monthly basis to make sure that our customers are successful with Pro Plus. Operator And we'll take our next question from Michael Turrin with Wells Fargo Securities. Michael Turrin -- Wells Fargo Securities -- Analyst Hey, great. Thanks. I appreciate you squeezing me in. Gina, 47% free cash flow margin certainly stands out, maybe walk us through the drivers of strength there for Q1. Anything one-time for us to consider? And maybe just given we're holding on to the margin guide for the year, just how we should think about seasonality of free cash flow throughout the rest of the year. Thank you. Gina Mastantuono -- Chief Financial Officer Yeah. Thanks, Michael, for noticing. We're really proud of the 47% free cash flow margin. Year over year, though, you have to remember that Q1 of last year was lower than normal given the Silicon Valley Bank and regional bank prices that happened that quarter. All of that being said, even if you normalize for that, we are significantly higher. And that's testament to the strong margin, operating margin and some nice work that we've been doing on working capital efficiencies. And so, we feel really good seasonality for free cash flow will be similar to what you've seen historically. And so, just really strong results. The team has done an outstanding job on working capital efficiencies, and we'll continue to see that as well. Operator And we have time for one last question. We'll take our last question from Derrick Wood with Cowen. Derrick Wood -- TD Cowen -- Analyst Great. Thanks. CJ, just to kind of follow up on that last discussion. Just in terms of how you're seeing adoption of gen AI. I guess on one end of the spectrum, perhaps it's easy to drop this into the hands of workers, let them experiment quickly figure out how to drive productivity. On the other end of the spectrum, perhaps there's a lot of data hygiene investments needed. You need SIs to come in and help drive real process change and really drive the learning curve. I guess where do you guys -- what end of the spectrum are you seeing when it comes to adopting LLMs within the ServiceNow Platform? CJ Desai -- President and Chief Operating Officer So, first of all, thanks for the question, Derrick. Here is how I would describe it. Our design goals and engineering goals were, this has to be super simple to turn it on, as in Pro Plus, once you are on Pro, and you can start using our Pro Plus capabilities, whether it's for agents, employees and so on. That has been our design principle. The setup is super simple, and customers are turning it on and seeing where they are seeing improvements on productivity, whether it's for agents or employees. So, that's number one. Number two, I absolutely do not expect that this requires a heavy system integrator types of implementation that is drawn out in the old machine learning technologies, where you create a model, refine a model and you need data scientists, machine learning engineers, and so on. This is pretty straightforward for ServiceNow use cases where system integrators can help is what Bill talked about that, hey, is there a new way to look at this process? And should I even put in another process on ServiceNow Platform because I can see this is just super fast to get value out of ServiceNow? So, in terms of implementation cycles, they are actually faster on Pro than they have ever been before. And we don't expect a heavy implementation cost. However, if our customers want to leverage system integrators, the biggest value that they always had is helping them think through what additional generative AI use cases they can use and redefining processes. Bill McDermott -- Chairman and Chief Executive Officer And Derrick, I would just give you one thing to think about, too. You could take great companies like Novartis, who want to be a global leader in their industry. And that industry has been held back with six-and-a-half-year clinical trials. And these kinds of CEOs are rethinking everything and they're using generative AI as the gateway to change. And they're looking at not only gen AI, but they're also looking at ServiceNow as a fresh new platform design to take on some of the tougher process challenges that has slowed companies down. And as CJ said, which I think is a major point, the time to implementation on these gen AI use cases has been faster than anything I've seen, not just against Pro but against anything. They want it in now. So, there's an urgency and that urgency is coming from the C-suite, and it's a movement. And I've never seen a desire for implementation speed like I have for gen AI. And that, to me, is a big factor as you navigate and the way you think about this business, this business model and gen AI is a category, who's going to win, who's going to lose, and which customers really want the solution, how quickly do they want the solution if they see the value they want it yesterday, and that's a great sign for us. Operator Thank you. And with that, that does conclude today's presentation.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning and good afternoon, and welcome to the Novartis Q1 2024 results release conference call and live webcast. [Operator instructions] The conference is being recorded. [Operator instructions] A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, head of investor relations. Please go ahead, madam. Sloan Simpson -- Head of Investor Relations Thank you so much, operator. Good morning, and good afternoon, everyone. Thank you for joining our first-quarter 2024 earnings call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors. These may cause actual results to be materially different from any future results, performance, or achievements expressed or implied by such statements. For a description of some of these factors, please refer to the company's Form 20-F and its most recent quarterly results on Form 6-K that respectively were filed with and furnished to the U.S. Securities and Exchange Commission. And with that, I will hand across to Vas. Vas Narasimhan -- Chief Executive Officer Thank you, Sloan. I'd like to open today's call by first thanking Samir Shah for his incredible tenure as our head of investor relations for over a decade. We're grateful for all of his contributions. We look forward to continued contributions and the new role at Novartis. And I want to welcome Sloan Simpson, I think Sloan will do an absolutely outstanding job serving all of you as our Head of Investor Relations. I've worked with her for many, many years. I think we're really pleased and grateful to have her on board. So let's turn to the quarter. Novartis delivered a really strong start to the year with double-digit sales growth core margin expansion, which enabled us to upgrade our guidance, and Harry will go through the guidance in more detail. Sales were up 11% in constant currencies. Core operating income was up 22%. Our core margin reached 38.4% as we steadily march to our goal of 40% plus by 2027. In addition, we had a number of important innovation milestones in the quarter, which I'll go through over the course of the call. But a few I'd want to particularly highlight the Fabhalta positive opinion enables us to launch Fabhalta in Europe. Scemblix first-line readout, we think will be very important for a major medicine for the company. And we also had the updated PSMA-4 OS results, which will enable us now to move forward with the filing of Pluvicto in the United States. Now moving to Slide 5. Now our growth in the quarter was broad based, and we had strong contributions from many of our key growth drivers, including Entresto, Kesimpta, Cosentyx, which had a very strong quarter as well as Kisqali. I would also say geographically, our performance was broad-based with strong growth across U.S., Europe, China with very strong growth, and Japan. As you can see on the chart, the strong growth was indicated by 41% constant currency growth, and we expect this growth to continue over the course of the year, which is what gives us confidence to do the upgraded guidance that we've outlined this morning. Now moving to Slide 6, and we'll walk through the brands one by one as we always do. First, with Entresto, we had double-digit growth, up 36% in Quarter 1. That was, again, geographically broad-based U.S. and ex U.S. In the U.S., our weekly TRx continue to reach new highs. We had 38% constant currency growth outside of the U.S. And we continue to see momentum for this brand. We're in a strong guideline position both in the U.S. and in Europe. We have further penetration opportunities in heart failure globally and specifically in hypertension in China, in Japan or in Japan, we have protection into the early 2030s with this medicine. For forecasting purposes, no change in our Entresto LOE outlook continue to guide to a mid-2025 LOE while continuing to aggressively defend our various patents. And then in terms of the EU, we continue to guide to RDP in November 2026 benefiting from our pediatric extension. Now moving to Slide 7. Cosentyx grew 25% in the quarter, and I think really got back to the dynamic growth we expect for this medicine. This was fueled both by our core indications, but also some strong launches, and I'll go through that in a bit more detail. U.S. was up 25% in constant currencies, ex U.S., 24%. We had highly -- we're highly competitive in our core indications. And so we saw a return to market share improvement in psoriasis and in the rheumatology indications both in the U.S. and in Europe. And we're now the leading originator biologic in the IL-17 class in EU and China. Now in terms of our new launches, we saw very strong performance in HS, hidradenitis superatevia, where we have over 50% now NBRx share versus adalimumab in U.S. and Germany. When we compare our launch on a comparable basis to the adalimumab launch in this indication, we currently see ourselves at nearly three times the performance of that previous launch. I think really highlighting how strong the uptake for Cosentyx has been in this new indication. We also had very strong performance in the intravenous indication ahead of the J code, which we expect in July. I think, again, that indicates there is strong interest in having an IV option for patients with Cosentyx in the rheumatology indications. So we'll look forward to further acceleration in the back half of the year once we have that J code in place. Now moving to Slide 8. Kesimpta delivered 66% growth on the quarter, and this was again global U.S. and ex U.S. driven. We have over 100,000 patients treated worldwide on the medicine, and the majority of these patients are either naive or first switch, which reflects the strategy we have for this brand. In the U.S., we saw a very strong demand-driven growth with NBRx volume at plus 26% versus prior quarter. And one of our key priorities now in the U.S. is to increase our B-cell market share over the coming quarters. Outside of the U.S., we have leadership now in seven out of 10 major markets, and we look forward to continuing to drive the convenience and high efficacy story that Kesimpta presents in these markets. In the quarter as well, we announced the Alethia six-year long-term data, which demonstrated sustained efficacy and the consistent safety profile for Kesimpta. In this study, nine out of 10 patients were free on the net of three score of disease activity. And we also saw treatment-naive patients derive substantial benefits across multiple markers of disease activity. So even in the face of some competitor launches, we feel very confident about the one minute a month self-administered dosing, high efficacy, strong safety profile of Kesimpta. Now moving to Slide 9. Kisqali grew 54% in metastatic breast cancer with now continued leading share in new patient starts. U.S. was up 72%. And I think there's increasing recognition of the unique profile that Kisqali offers given its broad data set of OS across three different studies in metastatic breast cancer. We have leading NBRx share at 45%. And we see a steady growth in writers. We're also working to increase depth as well as improve our market access position across key accounts ahead of the early breast cancer launch. Now outside of the United States, 39% growth. We're the fastest-growing CDK4/6 in Europe and a market leader in the premenopausal indication. We also successfully entered the NRDL list in China in Quarter 1, and it's early days in China, but given the strength of our China operations, we're hopeful we can draw dynamic growth for Kisqali in China over time. The regulatory review in early breast cancer is ongoing. We're filed in the U.S. and EU and currently expect regulatory review to proceed as planned. Our manufacturing adjustments, which we disclosed a few weeks ago are on track to assure alignment with the latest regulatory standards in early breast cancer by the end of Q2, and we continue to expect to be able to launch this medicine in the second half of this year. Now moving to Slide 10. Pluvicto had strong growth of 47% in the quarter, driven by new patient starts and very early beginnings of growth as well outside of the U.S. we have 400 treatment sites now up and running in the U.S. on a steady progress to our goal to get well over 500 sites fully certified for the use of Pluvicto. Also, our supply performance is now consistently at a very high level with over 99.5% of injections administered on the planned day. So ample supply, Indianapolis facility up and running, continued expansion of our manufacturing network. So we really feel like we're now in a position to fully supply the market consistently globally for this medicine. Now over the course of 2024, we're going to focus on share expansion within existing sites and particularly expanding the referral network of medical oncologists who can refer into a Pluvicto-treating center, we feel like this will be the key now in the post-taxane setting. We also want to build our business outside of the United States with some important launches in Europe as we also build toward launches -- planned launches in Japan and China, both countries where we have planned new manufacturing facilities to support the Pluvicto and Lutathera business. Our existing indications are also on track. We announced earlier this quarter that the PSMAfore submission-enabling OS readout was achieved. And this will put us in a position to file Pluvicto early in the second half, so a midyear filing for this medicine. And then PSMA addition also on track as well as the PSMA delayed castration localized algo metastatic program as well. Now a little more detail on the PSMAfore submission-enabling OS readout. We had a primary endpoint that we read out last year where we met the primary endpoints as well as really strong data across all of the secondary and exploratory endpoints, a very impressive relative risk reduction for rPFS, strong profile across the patient-reported outcomes as well as the various response, ORR, DCR, and DOR. What we announced earlier in the quarter was the updated third interim, which gave us a higher proportion of OS events. The OS hazard ratio was less than one, which puts us in a position to file midyear. And other secondary endpoints were consistent with the previous results as was the rPFS. And what we feel and see is with the additional eight months of follow-up, we have high confidence in the safety profile of Pluvicto. And so these results will be presented at an upcoming medical congress. And of course, we're working as quickly as we can to get this file in. Now moving to Slide 12. Like also had a really strong quarter. Adoption expanded steadily in the U.S., but also outside of the United States, as you can see here, on the left-hand chart, very strong performance, both in the U.S. and outside the U.S. Taking the U.S. first, we had growth outpacing the advanced lipid lowering market. We have now nearly 3,900 facilities that are ordering increased breadth and depth across our key accounts. We continue to see buy and bill as the key driver overall of the business. But we do see also the use of other channels as well. Outside of the U.S., we have a consistent rollout. Now we have 29 countries where is publicly reimbursed in an additional 39 with private commercial coverage. This puts us in a strong position with our top 3 European markets contributing 50% of international sales, but really strong growth across the international region. And strong early uptake in China in the self-pay setting with over 200 new patients a day ahead of our planned NRDL listing in the first half -- first part of next year. Lastly, we had new data at ACC and a publication as well, which supported the early initiation of demonstrating that starting early in patients requiring secondary prevention for a cardiovascular event, a lot of these patients to achieve their LDL-C goals earlier. Now moving to the next slide, Slide 14. Scemblix, grew 83% in the quarter again, primarily driven by the third line indication with our first-line submission on track to be completed in the coming months. We had continued momentum in the core third line indication, over 40% NBRx share. Outside of the U.S., we're at a 32% total market share driven by our key markets, Japan, France and Germany. And here in the third line setting, we primarily focus on early identification of patients who could benefit from a switch to Scemblix post two TKIs. As a reminder, our ASC4FIRST study enabled first-in-line submission -- first-line submission in half one. Primary endpoints were met versus all standard of care TKIs and versus Gleevec as well, favorable safety and tolerability profile, and we can confirm that the full data will be presented at ASCO in 2024. Now turning to Fabhalta. We're at the early stages of the PNH launch, and we didn't expect really to see significant sales at this very early stage, given the complexity of the launch. But we are very pleased with the early launch indicators we've had a rapid increase in the number of HCPs who are certified under the REMS program, an increase in new riders and patient starts, which are exceeding our internal expectations we see uptake across naive and switch patients for this medicine. And we also are really happy to see HCPs willing to work through the medical exception process to get patients on this medicine. So we've also have the positive CHMP opinion for PNH, and we expect that full approval to happen in the coming few months. and we'll consistently work to launch this medicine across the globe as well as drive rapid uptake in the United States. Now turning to Slide 15. We also announced our phase 3 applause IgAN study, full results earlier in the quarter, where we demonstrated 38% proteinuria reduction relative to placebo. In this study, we randomized patients to eptacopan versus placebo. The results we read out was the nine-month interim proteinuria analysis. These patients will be continue to be followed out to month 24 for the full eGFR analysis. You can see on the right-hand panel, very impressive proteinuria reduction of 43.8% versus placebo at 9%, clinically meaningful and statistically significant. We know that complement activation is a key driver of inflammation in IgAN. And importantly, the overall safety profile was consistent with data we've previously reported. We've submitted this data to FDA. And just one clarification. We did not use a priority review voucher for this medicine. The FDA has granted us priority review based on the data set to be -- we provided. So this study continues as well for its eGFR readout in 2025, and we look forward to really getting a full approval very shortly -- or getting the initial approval in the coming period. Moving to Slide 16. Now remibrutinib demonstrated -- had already demonstrated in an earlier study at 12 weeks robust efficacy and safety. But we needed to wait for the 52-week data to be in a position to file in chronic spontaneous urticaria. And this data came out positive, enabling us now to move forward toward this important filing. As a reminder, there's about 400,000 CSU patients in the U.S. not controlled or refractory to antihistamines. And only less than 20% of these patients are currently on biologics. So there's a large opportunity for a high-efficacy oral medicine the previous primary endpoint data at week 12 as shown here, where we very consistently showed improvements versus placebo at the week 12 on the UAS7 score. And so we'll look forward to presenting the full data set in the second quarter for this medicine out to 52 weeks. And with the consistent favorable safety profile we've demonstrated with overall rates to be comparable to placebo and balanced liver function test as well as the clear efficacy data, we'll look forward to global submissions in the second half of remibrutinib. So all taken together, we're on track across our innovation goals for the year. I did want to highlight that we have shifted our ataclopan C3G U.S. submission to the second half. There is no great correlate for efficacy in C3G, given the ultra-rare nature of this disease. We provided the FDA our six-month data. While certainly, we believe that six-month data was very compelling. The FDA wanted to see the additional 6-month follow-up for these patients after all patients had rolled over onto active the first 6-month period was randomized, second 6-month period, all patients are inactive. So we will complete that 6-month follow-up and then file in the second half. And we remain very excited about the opportunity to bring as well to patients with C3G. So moving to the next slide. We also are on track for our range of submissions, '24, '25, and '26 to '28. So we'll continue to keep you abreast of how data sets unfold as well as potential readout time lines as we understand those readout time lines better and really excited about the catalyst-rich profile that we have out through the coming years. So moving to Slide 19, I'll hand it over to Harry. Harry Kirsch -- Chief Financial Officer Yeah. Thank you very much, Vas. Good morning, good afternoon, everyone. I'm now going to walk you through some of the financials for the first quarter. And as always, my comments refer to growth rates in constant currencies unless otherwise noted. Also, throughout the presentation, I refer to continuing operations. And as you see from the numbers, it has been a very strong start to the year. So on Slide 20, you see a summary of our financial performance. with net sales up 11% and core operating income up 22%. Our core margin grew 340 basis points to reach 38.4%, showing that we are very well on track to achieve our midterm margin guidance of 40% plus by 2027. Core EPS was $1.80 for the first quarter, growing 23%, a bit ahead of Corbin due to the share buyback program. Free cash flow was $2 billion, declining versus Quarter 1 of 2023, but that was due to a prior year one-timer and the timing of some tax payments this year. However, and importantly, for the full year 2024, free cash flow is expected to grow approximately in line with core operating income. So in summary, very strong start to the year as our efforts to focus and streamline the business continue to pay off. This brings us already to our full year guidance on Slide 21. So the strong momentum in our business across our in-market growth brands and launches, both in the U.S. and international markets give us the confidence to upgrade both top and bottom line guidance. We have also a favorable update on generic entry assumptions in U.S., but that's actually a smaller element of the analysis driving our 2024 guidance upgrade. We now expect net sales to grow in the range of high single digit to low double digit and core operating income to grow in the range of low double digit to mid-teens. Underpinning our guidance are two key assumptions that no Entresto and no Promacta generics will launch in 2024 in U.S. And to complete our 24 full year guidance, please note that we continue to expect core net financial expenses to be in the range of $0.6 billion to $0.7 billion. Our core tax rate to be around 16.5%. Now moving to Slide 22. I'm very pleased with the quality of our Quarter 1 sales growth driven by our key in-market brands, which grew as Vas showed also on the prior slide, 41% in the quarter. And the vast majority of these brands still have many years of patent protection ahead of them. So their continued momentum strongly supports our midterm growth outlook of 5% CAGR through 2028. Slide 23, please. Just to highlight that we continue our shareholder-friendly capital allocation strategy in Quarter 1, of course, investing in the business alongside returning capital to shareholders. Notably, in Q1, we announced two value-creating bolt-ons in our core therapeutic areas, the proposed acquisition of MorphoSys and the licensing deal of both of which align with our strategic focus in oncology. In terms of returning capital to our shareholders, we paid $7.6 billion of our growing dividend in Quarter 1. And we also continue our up to 15 billion share buyback program and we still have $11.7 billion remaining to be executed by the end of 2025. Already to my final slide, 24, we have outlined some of the details regarding the FX impact. And as you see, in Quarter 1, FX had a 1% negative impact on sales and 6 points negative on core operating income, the latter driven by the strong Swiss franc. And if late April rates prevail, including the most recent strengthening of the U.S. dollar, we expect the full-year impact of currency still to be less, it was in '23 on a top line negative 2% and bottom line, a negative 4%. As a reminder, this is hard to forecast from the outside and moving all the time, we are updating our -- the expected FX impact on our website on a monthly basis. And with that, I hand back to Vas. Vas Narasimhan -- Chief Executive Officer Great. Thanks, Harry. So as you heard, a strong start to the year with double-digit sales growth, strong core margin expansion. And with the strong momentum we see in the business, we're able to raise our guidance for the year. We saw this momentum across all of our key growth brands and across geographies, I think, indicating the high quality of the performance that we're seeing in the company. Our pipeline continues to advance with multiple submissions and submission-enabling readouts as we outlined and we continue to have confidence in our midterm guidance of 5% constant currency sales growth, '23 to '28 and 40% plus core operating income margin by 2027. So with that, I'll hand it back to Sloan, who will outline some of our upcoming investor events. Sloan Simpson -- Head of Investor Relations Thank you, Vas. Before we open up for questions, I just wanted to flag a few investor events that we're planning to hold this year. First, we'll have an in-person event at ASCO in Chicago on June 2nd, highlighting Alcon ASCO data, which Vas mentioned. We'll also have a virtual event on our renal pipeline in the second half of the year. and we'll be having our Annual Meet Novartis Management event in London on November 20 to 21. We hope to see many of you at these events. And with that, operator, let's open the line for questions, please. Questions & Answers: Operator Thank you [Operator instructions] And your first question comes from the line of Matthew Weston, UBS. Please go ahead. Matt Weston -- UBS -- Analyst Thank you for taking my question. It's going to be on Pluvicto. And so Vas, you set out some of the metrics in terms of improving revenue. I think there's definitely an expectation among investors that we might see an inflection as supply comes online and physicians get more comfortable with your ability to supply and add nurses and chairs into their networks. I wanted to understand whether you thought that was a realistic assumption or whether or not investors should get more comfortable with a kind of continuous grind in the growth of Pluvicto over the coming quarters? Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Matthew. So first, on Pluvicto, we have resolved our supply issue, but we are still working through, I think, the remnants of the base of patients that were a bit lower in Quarter 4, given that we were still working through things then. And when you think about the growth of Pluvicto medium to long term, first, we have this post-taxane indication, where you can see we're already annualizing at a pretty healthy blockbuster, $1 billion plus sales range. And we expect that to steadily grow, and we guided to that indication to being a multibillion dollar, so a $2 billion-plus indication. So we expect it to steadily grow over the coming quarters in that post-taxane setting. And this will be primarily driven by, as I mentioned, expanding the base of medical oncologists who are able to refer into the existing centers. We don't see the opportunity at this point in terms of expanding the number of centers for this indication. So that will steadily grow over the course of 2024 to get us steadily marching up toward that multibillion dollar guidance, $2 billion-plus guidance that we've given in the vision indication. Then we expect the PSMAfore pre-taxane indication to be the next catalyst, and we do expect an inflection on that launch which will then -- I should also mention in Pluvicto outside of the U.S. as well, we will get additional momentum as we bring on board Germany, France, other countries in Europe. And then in the coming years, we do expect a substantial inflection from China and Japan. We're building dedicated manufacturing facilities for those countries in order to drive further growth, both in the pre-taxane and the post taxing indication. Next catalyst will be the pre-taxane approval, which we hope to have in the first half of next year. Then the hormone-sensitive indication than the algo metastatic. And then we also have two programs advancing with actinium PSMA as well to also further bolster the overall portfolio. So I think a steady growth in the vision indication within catalysts coming from ex U.S. expansion and the indication expansions for the brand. Thanks. Matthew. Next question, operator? Operator Thank you. Your next question comes from the line of Steve Scala from TD Cowen. Please go ahead. Steve Scala -- TD Cowen -- Analyst Thank you so much. As you noted in the prepared remarks that the Kisqali review was on track, but how confident is Novartis that FDA will meet the priority review regulatory deadline for Kisqali with a broad label. There seems to be a number of things that could give FDA pause, including the nitrosamine issue as well as liver tox. So what is your level of confidence? Thank you. Vas Narasimhan -- Chief Executive Officer Yes, Steve. We're very confident on the broad label. I think on the time line, we currently guide to the current time line that we have as we implement these manufacturing shifts. We of course, are discussing these manufacturing adjustments and their minor adjustments, but they do require discussions with FDA. And so once we have a better clarity on -- if at all, if there was any shift in time line, we would, of course, let the markets know. But we think this will be still a second-half launch for this medicine, and we feel very good about that guidance. And so while we talk here about minor shifts, we're not talking about anything significant. And again, expect the broad label, we don't have concerns about liver. This is something that's well known with Kisqali are currently monitored in the metastatic breast cancer setting. No change in monitoring requirements is what we expect. So overall, we feel good with the ability to launch this medicine in the second half of the year. Thank you. Next question, operator? Operator Thank you. Your next question comes from the line of Graham Parry, Bank of America. Please go ahead. Graham Parry -- Bank of America Merrill Lynch -- Analyst OK. Thanks for taking my question. Another one on Kisqali, just could you just explain just what the process amendment needed for Kisqali is in early breast cancer. So is that something in the actual reaction? Is it purification? And do you know at the moment whether you do or don't need an inspection by FDA? And if there is one, do you think that would still be completed within the second quarter time frame and therefore, not delay the naturally produce time line. Thank you. Vas Narasimhan -- Chief Executive Officer Graham. So first on the manufacturer adjustments that we talk about here. Just as a reminder, Kisqali already meets the requirements in metastatic breast cancer. So these are just additional requirements given that early breast cancer is an asymptomatic population. The adjustments we talked about here are primarily how we source material from third parties. We want to go to higher quality sourcing of third-party material, which is something we believe we can implement in a very straightforward way. And then also just some additional adjustments within our supply chain for the management of Kisqali prior to actually leaving our supply chain to go to physicians. So these are we believe relatively minor changes. Nonetheless, changes we do need to review with the regulators. In terms of inspection, we don't believe there would be any inspection required for this. And so that's what I think overall gives us confidence in the guidance to launch the medicine in the second half. Thank you. Next question, operator. Operator Thank you. Your next question comes from the line of Emily Field from Barclays. Please go ahead. Emily Field -- Barclays -- Analyst Hi. Thanks for taking my question. I just want to ask a question on Cosentyx. I know you mentioned your second to J code, but are you currently generating much sales from the IV formulation just in that context, if you could frame the current pricing environment in the U.S. specifically? Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Emily. So Cosentyx IV, I'd say better-than-expected uptick than what we had thought prior to the J code. But when you look at Cosentyx current outperformance in the quarter, it was driven primarily by the strong hidradenitis Suprativo launch as well as that leading to stronger performance as well in psoriasis globally. So the IV launch is still, I think, in the midst of kicking up. What I would say is we are having a -- we have reached already the vast majority of accounts that we expected to order Cosentyx IV. They're already at least in the process of ordering the medicine ahead of the J code, trying to use an exceptional code to use the medicine. So in terms of account reach, we're already in a very good position. And we think we'll be able to then drive a strong depth once we actually get the J code in place. So we feel very good. So this could be another, I think, good driver for Cosentyx growth in the second half post that J-code being rolled out. Next question, operator? Operator Thank you. Your next question comes from the line of Simon Baker, Redburn Atlantic. Please go ahead. Simon Baker -- Redburn Atlantic -- Analyst Thanks so much for taking my question. It's a broad question on the commercial performance. as you've highlighted a few specific reasons for strength in the quarter like the Cosentyx HS launch. But -- to what extent is the broad-based performance we've seen in this quarter a result of the changes to the commercial organization that have been underway over the last couple of years. I wonder to what extent that is responsible if you could give any color on where it's impacting? And how much is there left to come from that initiative? Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Simon. We do believe that probably the biggest -- big picture driver for our strong performance over the recent quarters has been the reorganization and focus of the focusing of the company. And as a reminder for investors, a few things we did, we elevated the U.S. and we went to a geographic model, U.S. international we focused down the portfolio to four key therapeutic areas. We focus the commercial area on nine key drugs. We shifted our investments in most places, over 75% of the M&S investments go to the growth drivers. A heavy focus on U.S., China, Japan, and Germany -- and taken together, that I think is compounding to show the broad-based performance you see across the U.S. and international and particularly in some markets like China, very, very strong performance. So that is, I think, the biggest sustainable driver. In terms of specifics in the quarter, clearly, Cosentyx performed extremely well putting aside consensus, if you look at the growth rates of Kisqali and Kisqali, Scemblix these were all very, very strong, even Pluvicto, if we put aside on quarter-on-quarter growth. These were all very strong growth rates. And I think that also, I think, gives us confidence to raise the guidance for the full year. Next question, operator. Operator Thank you. Your next question comes from the line of Emmanuel Papadakis from Deutsche Bank. Please go ahead. Emmanuel Papadakis -- Deutsche Bank -- Analyst Thanks for taking the question. Since you flagged it will be forthcoming at ASCO, perhaps just a question on Scemblix data details. The primary end point was we're going to be very interested to see how that fares was obviously a physician standard or physician choice of standard care control on versus the potential comparators in particular, to signal, can you talk a little bit about what we could expect to see in terms of some of the standard care competitors on that primary endpoint? And indeed, any secondaries you're willing to my thoughts would be helpful as well. Vas Narasimhan -- Chief Executive Officer Yes. Let me outline how the Scemblix study was designed and then hopefully give you some perspective. So -- this was a first-line study and this is, of course, our third medicine in the world of chronic myelogenous leukemia, so a long history in the company. The primary endpoint was Scemblix versus investigator choice TKI with a goal that over 50 -- roughly 50% of patients would be on imatinib or -- and the primary endpoint was Scemblix versus the overall pool of patients intention to treat regardless of TKI. So that's first primary endpoint. And the co-primary endpoint was Scemblix versus Gleevec. And we hit both of those primary endpoints with clinically meaningful, highly statistically significant improvements in -- then we had a descriptive secondary endpoint of Scemblix versus the two second-gen TKIs. And again, there, we will disclose the full data at ASCO, but we feel very good about the profile of the medicine. And then on safety, which I think is one of the key elements of Semble story already in the third line setting, we saw outstanding safety profile. So I think that's the other thing to look out for at the ASCO presentation is the overall safety profile of Scemblix because clearly, to move into that frontline setting, physicians will want to see both strong efficacy and a clean safety profile. Now it's important to note that once we get to the point of filing the medicine shortly and then ultimately launch the medicine, in the U.S., we believe there's a portion of the market where we can drive very rapid uptake. These are patients who are currently on second-gen TKIs or in physician practices that are very open to switching. We do know that there is an element of the CML market that's contracted and that tends to use generic imatinib, that will take us longer to overall to move through. But I think one of the exciting things about Scemblix is that this has a long -- and based on targeting a rare disease, it's not part of IRA negotiations. So we have here a medicine that can drive growth through this decade and well into next decade, both U.S. and around the globe. And we, of course, are one of the global leaders in CML. So I think that positions us well overall. So thanks for the question, Emmanuel. Next question, operator? Operator Thank you. Your next question comes from the line of Richard Vosser from J.P. Morgan. Please go ahead. Richard Vosser -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking my question. Can I return to Cosentyx. And you mentioned the launch in HS being sort of three times How do you see the sizing of the indication of HS now? Is that a $2 billion to $3 billion indication for Cosentyx. And thus, do you see continued potential double-digit growth over the next few years for the product? And I suppose one just clarification just to -- any quantification on the size of the HS contribution at this stage? And I don't think there was any pricing or stocking in the first quarter, but just to clarify that as well. Thanks very much. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Richard. So just as context, we estimate as best we can from public information that adalimumab had over $1 billion in sales in HS historically. We do think that the market is significantly underserved. There's a large number of patients who are not on biologics in this indication. So it could be a substantial market. I don't think we've given yet guidance on specifically the overall size of the market. But certainly, there's a potential of a multibillion-dollar market here. So we think Cosentyx has the opportunity to drive very significant growth for the brand as we try to reach $7 billion, probably not in a position yet to give specific indication-based guidance on Cosentyx. But we think with the combination of HS, of IV, giant cell arteritis phase 2, which is ongoing, the polymyalgia Rheumatic indication that we also have as well as the strong performance we have in China that just gives us even more conviction that we can get to that $7 billion peak sales by the end of the decade. Next question, operator. Thanks, Richard. Operator Thank you. Your next question comes from the line of Tim Anderson, Wolfe Research. Please go ahead. Tim Anderson -- Wolfe Research -- Analyst Thank you. I have a couple of questions on Entresto and just timing of generic entry. So in the U.S. Can you map out for us what we should be tracking from here in terms of events and news flow that will help inform whether mid-'25 is a good assumption. And as we've conceived well, the sometime in '24, you'll have a different point of view. And then ex U.S. and the timing of generic entry you guide for later '26, is there a similar level of uncertainty on that then if you could wrap in China as part of that discussion on generic timing as well. Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Tim. So on Entresto right now, we do have an appeal ongoing to the circuit court on the combination patent, which we believe will be heard and ruled on in the second half of this year. It's important to note that there have been no Entresto generics approved as of yet, and we have two citizens petitions pending at the FDA on the basis for approval and also the labeling for any potential product with respect to Entresto. So based on that fact that we don't expect any generics to launch this year that we can never exclude, of course, somebody trying to do something at risk. And then separate from that, we have a number of other patents that are currently being litigated toward the end of this year and then toward the -- all through the coming period, which is what overall makes us have the best estimate in the U.S. of mid-2025. And of course, as we get better resolution on that, we can, of course, provide further color I would also say that Entresto is on the IRA negotiation list so that we would expect in Jan 2026 to our best understanding, at least in the Medicare population that IRA pricing would hold, and we would get a better read on how that looks in September. Outside of the United States, we already include our pediatric exclusivity. So we think our current guide of end of 2026 is reasonable. Of course, we're always looking for ways to adequately depend all of our patents, but we think that's a very reasonable assumption at this point in time. In China, at the moment, we currently have, I think, a number of different approaches, but the key there will be the number of generics and when they get approved. And so I think we could reasonably expect potential entry of Chinese generics sometime in the course of 2025. But the question in China was when we will enter the VBP list. And that, of course, is something we're monitoring. And once we have a better understanding of the number of generics and their status legally when we enter the VBP list, we'll be able to provide further clarity. And lastly, in Japan, we currently outlook 2031, I believe, 2031 or 2032. Our team will get back to you exactly. But certainly into the 2030s for Japan at the current point in time. So hopefully, that's helpful, Tim. Thank you for the question. Next question, operator? Operator Thank you. Your next question comes from the line of Richard Parkes, BNP Paribas. Please go ahead. Richard Parkes -- Exane BNP Paribas -- Analyst Hi. Thanks for taking my question. Just wondered if you could help us with cost phasing. I think guidance is implying a lower margin improvement than the very strong margin improvement you saw in Q1. And I know there's slightly mismodeled last year going into Q4, extrapolating the margin. So can you just help us understand the phasing in terms of costs over this year? That would be very helpful. Thank you. Vas Narasimhan -- Chief Executive Officer Thanks, Richard. I'll hand that to Harry. Harry? Harry Kirsch -- Chief Financial Officer Thank you, Richard. So overall, as you have seen, our Quarter 1 costs were growing in constant currency, roughly 2%, which was driven by R&D right up roughly 6%, while SG&A was basically flat. That's a consequence also of the full implementation of transformation for growth, restructuring programs, leaning out, going to one organization locally between pharma onco and leading out above country and customer-facing functions, our organizational structures and leading our processes. So we see some continued benefits from that. Of course, we will continue to leverage new technologies, leaner processes to keep driving the multiple launches. But all within our four therapeutic areas where we have significant commercial infrastructure and medical infrastructure. So I would expect that SG&A continues to be quite flattish. Maybe here, they are a bit more investment, but certainly significantly below sales growth. And then the level of specialty development spend depends also a bit on the M&A, in-licensing agenda. So clearly, we have some placeholder for that in the second half of the year as well. And then we will update you after Q2, of course, how things are going, when we have a clear visibility. But overall, very good focus on cost consciousness. As Vas mentioned, excellent resource allocation to our top 9 brands and prelaunches. And with that, as always, outlook, the key contribution to our margin growth is expected to come from SG&A as we expect very dynamic sales growth this year on a five-year basis and very limited SG&A growth. Vas Narasimhan -- Chief Executive Officer Thanks, Harry. Thanks, Richard. Next question, operator? Operator Thank you. Your next question comes from the line of Mark Purcell from Morgan Stanley. Please go ahead. Your line is open. Mark Purcell -- Morgan Stanley -- Analyst Thanks very much for taking my question. It's on Scemblix. I wonder if you could help us understand the level of uptake you anticipate in the first-line setting. The slide shows 40% MBR shown third-line setting, and you talked about the sort of potential ease of identifying specific patients who might most likely benefit from scale versus the current standard -- and I also wondered on Scemblix. Have you seen any early impacts of the Part D redesign when it comes to treatment initiations and volumes? Any sort of comment there for Scemblix across your business would be great. Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Mark. I think on Scemblix, we would expect, I would say, a modest early uptake because we would have to work through -- CML is one of the few cancer areas that's currently contracted. And so we would need to work through the access in the first couple of quarters from launch. But then after that, we believe that given the overall data set that we'll share at ASCO, that it should be able to drive very strong uptake. And of course, you all know well that the second-gen TKIs were on the order of $2 billion medicines. Gleevec was a $4 billion-plus global medicine. And certainly, our goal is to make this over time, the leading CML treatment in the world. we wouldn't face any competition, at least branded competition and given that we we'll have demonstrated MMR superiority over the pooled group of Gleevec and the second in TKIs. It should put us in a very good position over time to make this into a significant medicine. I think on Part D redesign, it's really early days for us to have a strong sense of the impact. And so we're monitoring this very closely, also reading all of your reports on how you're monitoring it to really understand what is the impact of out-of-pocket caps and some of the other shifts that are happening in the system on patients taking up their medicines. I think certainly, as we move down from a $3,500 cap to a $2,000 cap I would expect, in general, to see more patients' ability to fulfill their medicines to improve as the cost becomes lower at the pharmacy counter. But we need to see that, I think, in the data before we can really provide you more color. Next question operator. Thanks, Mark. Operator Thank you. Your next question comes from the line of Peter Welford from Jefferies. Please go ahead. Peter Welford -- Jefferies -- Analyst Hi. Thanks for taking my question. It's on the planned proposed morphosis transaction. I wonder if you can just outline when you did that, how much of the acquisition price that you're considering was based on getting broad, both geographical and send to the market approval for pelabresib. And versus, on the other hand, how much of the transaction is described to what you're thinking with regards to the EZH2 and also the royalties that you would potentially owe and how we should think about, I guess, that deal and the potential of fitting that into the cost structure business as it is today. Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Peter. Probably -- I can't say more than what we've already said, given that we have an ongoing share tender offer out in the market. So what we previously outlined is we believe there is an opportunity globally for collaborative in both Europe and in the United States, and that's an exciting opportunity given our Jakavi business and the opportunity that we have to leverage our long history in myelofibrosis, and position in myelofibrosis outside the United States and our strong hematology footprint inside the United States. So we would see polaperative is fitting nicely within that global infrastructure that we have. And yes, we would also benefit from the historical royalties, particularly on ionilumab, where we see the opportunity of a significant medicine, both in immunology and in cancer. And so I think that's a pretty exciting opportunity for us to get those royalties back and then hopefully drive very significant medicine with a significant medicine in a royalty freeway. And then lastly, the company does have an EZH1/2 inhibitor in prostate cancer that we think could also be very interesting for us going forward. So -- those are the three components of why we saw some value in the deal. Next question, operator? Operator Your next question comes from the line of Andrew Baum from Citi. Please go ahead. Hello, Andrew, is your line on mute? Andrew Baum -- Citi -- Analyst Apologies. Yeah. Thank you. Just going back to the ASC first trial with Scemblix. Could you just expand your previous comments on the dynamics of the CNL market, particularly the current market shares in first line generically versus others, the Medicare versus non-Medicare segmentation, just to help us think about the barriers to entry in a different segment in terms of authorization step edits. Thank you. Vas Narasimhan -- Chief Executive Officer Yes. So Andrew, a couple of things. I think, one, we see this is a market that on the order of 40% -- 35% to 40% imatinib, Syglivic generics, and 60% TKIs. And then in terms of commercial and Medicare, we can come back to you with the exact data. But my recollection is it's largely evenly split between Medicare and private commercial plans. So the way we look at the overall market opportunity in that 60% or so of patients who are on second-gen TKI, this is an opportunity as this class goes generic certainly and for commercial plans as well, given that we won't have to compete against a rebate from those players, we would certainly have the opportunity to educate physicians on the great profile that we have here particularly around the safety profile, also the efficacy profile and then hopefully drive switches. And we see that's the early opportunity for the medicine in that second-gen TKI, particularly second-gen TKI, commercial and then eventually the Medicare. We find that patients who are currently on imatinib tend to be in community oncology and tend to be with physicians who have a long history of using imatinib and therefore, might be more resistant to change. And that will take us longer to eventually, I think we think move through though. We do think we have good strategies to get there that segment of the market will be a longer lift for us to eventually move through. So that's in the ex U.S. -- in the U.S. setting. I think ex U.S. will really vary by geography. Certainly, in Europe, it will be critical for us to demonstrate differentiation with imatinib from a payer standpoint to justify what we think is a fair price for the medicine. We would expect in Japan, in China, the opportunity for strong uptake. These are markets where we do think we can get reimbursed. And certainly in Japan, there's a very well-educated CML physician community. So that's, I think, a relatively large opportunity as well. So that's kind of the high-level dynamics. But I think at the ASCO presentation in June, we can provide more insights into the overall market structure and how we're seeing the opportunity to launch the medicine. Thank you, Andrew. Next question, operator? Operator Thank you. Your next question comes from the line of Seamus Fernandez from Guggenheim Securities. Please go ahead. Seamus Fernandez -- Guggenheim Partners -- Analyst Thanks so much for the question. So really, I just wanted to focus in on IgAN and some of the activity that we're seeing from a competitive perspective there and acquisitions in the space. So I just wanted to get your thoughts on the acquisitions that you've made in gain and the opportunity that you see in that space, whether it be for atacapan or for the acquisitions that you've made? I know you specified a lot of opportunity there. But interested to sort of see if you view this as a validation of the IgAN market opportunity and how you're thinking about the competitive landscape going forward? Thanks. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Seamus. So in general, I mean, IgAN is, we believe, a significant market opportunities. Patients don't have -- historically have not had great medicines. They do progress at a relatively high rate in the 10-year period toward needing transplantation or going on to dialysis. And we're talking about a segment here that's over 130,000 patients in the U.S. alone. So we think it is a sizable opportunity. When we think about the treatment paradigm, you -- of course, you start out -- you want to -- historically, this has been a steroid-driven treatment paradigm, but we think this will shift to wanting to somehow manage the hemodynamic component of the medicine -- of these patients where we have atrasentan. You want to manage then the inflammatory component for these patients along two dimensions, complement inhibition and APRIL inhibition as well. Now we're in a position where we will have atrasentan for hemodynamic inhibition. We'll have iptacopan for complement inhibition, and we'll have ZakiBard also acquired in our Chinook acquisition for the anti-April component. We acknowledge there will be competitors, particularly on the anti-April side of things where we're going to have a few other competitors enter. We believe we'll be the only company positioned with really the full range of hemodynamic complement anti-April. I should note as well, of course, upstream the SGLT2 inhibitors, which are also going generic will also be part of that early treatment paradigm. But post SGLT2 inhibitors and perhaps generic hypertensives, you're going to want to move down this paradigm of really more potent hemodynamic control and then also trying to get to the inflammatory component. And we think having three medicines will allow us to be well-positioned with patients, physicians, contracting the various elements of the U.S. supply chain and also globally. So that's how we're approaching it. I do think the recent acquisitions to point to that anti-April and this whole area is exciting, right? And we have an asset there others now are also coming but certainly something we're looking at very carefully to also see, can you expand APRIL inhibition with or without BAF inhibition for other indications as well? Next question, operator? Operator Thank you. Your next question comes from the line of Eric Le Berrigaud from Stifel. Please go ahead. Eric Le Berrigaud -- Stifel Financial Corp. -- Analyst Thank you. We saw the split in sales by geography on Leqvio being significantly different from the past and now ex U.S. being more significant than U.S. Could you maybe elaborate a little bit on the kind of agreements you reached in ex U.S. territories, maybe the main three markets in Europe and China, how the drug is delivered? How are you billing for the drug in those geographies? Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Eric. We're pleased to see Leqvio now getting to a steady march upward in terms of its overall sales growth. Outside of the United States, there have been a few key dynamics. So first is China self-pay, where I mentioned over 250 patients a day, steady growth as well in terms of the number of patients that were being able to get on treatment in China. And that's ahead of where we hope to get listed full listing on the NRDL in the first part of next year. And given the strength of our cardiovascular operations in China with Entresto, we believe we can drive pretty significant uptake of Leqvio over time in China. We also have reimbursement in Japan, and we're in the very early days of launching in Japan. So Japan was not a significant contributor in Q1, but we expect consistently now in the coming quarters, Japan to be a more significant contribution. In Europe, we've had very steady uptake in the commercial market in Germany as well as improving performance in Italy and the U.K. And so I mean, the U.K. has been a disappointment relative to where we hoped it would be, but nonetheless, is steadily moving up as well. And then interestingly, while it's a smaller contributor, given the number of countries around the globe, we have reimbursement we do have public health agreements in places like the Gulf Coast countries as well as other markets in our international business that's also contributing. So step by step, all of this comes together to drive the performance that you saw in Quarter 1. And we'll see. We hope we can continue that now in the coming quarters and steadily get Leqvio up to that multibillion dollar outlook that we've given. Next question, operator? Operator Thank you. Your next question comes from the line of Steve Scala from Cowen. Please go ahead. Steve Scala -- TD Cowen -- Analyst Thank you so much On Entresto, were there any onetime factors driving Q1 sales such as rebates and/or inventory? If not, then what in your opinion led to it not tracking prescriptions in the quarter? Thank you. Vas Narasimhan -- Chief Executive Officer Yes, Steve, we're not aware of any one-timers on Entresto. We saw strong TRx growth. We saw outstanding growth in China. And I think that was a big driver of the performance you saw in the quarter, also steady uptake in Japan. But no one-timers that we're aware of looking at Harry yet. So no one-timers that we see. This was just underlying performance, and I think driven both in the U.S. but also China and Japan. Next question, operator? Operator Thank you. Your next question comes from the line of Graham Parry, Bank of America. Please go ahead. Graham Parry -- Bank of America Merrill Lynch -- Analyst OK. Thanks for the follow-up. Just wondering in terms of the charges we were talking about timing earlier, just what's assumed in your guidance for adjuvant breast camps or Kisqali for this year. So here any significant contribution in there? Is that de minimis at this point? And then just I'll flip in the second one, just at the ASCO event, on Scemblix. So I was wondering if you're going to be in a position to give some sort of updated peak sales guidance for that asset. There's obviously a lot of questions on the call about market that's what is fishing for. Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Graham. On Natalie, not a material contribution or really any contribution in this year. So I don't think that's something that needs to be factored in, in terms of our guidance. On Scemblix, we'll take it under advisement. I can't commit one way or another, but we'll certainly take the feedback on trying to guide. It's always tough, of course, before we've even got an approval or launched a medicine to really know the outlook. But I think we've got reasonable benchmarks in the CML market with Gleevec and the second-gen TKIs. And as I outlined, we really believe, but we'll see as we present the data that this can be really the best-in-class medicine to treat CML that's been launched in this industry. So we hope we can live up to that profile. Next question, operator? Operator Thank you. And your final question today comes from the line of Emily Field, Barclays. Emily Field -- Barclays -- Analyst Hi. Thanks for taking my question. Question on given that this morning, we did see phase 3 success in ITP from a competitor BTK inhibitor. So I was just wondering given that you also have a BTK here of your own, why you're pursuing ITP with the BAF inhibition and you think that, that's the right mechanism of action? And while you're also prioritizing second line or first line? I believe that's what it says to the lead indication in the slides. Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. So first, on BTK inhibition, we really tried to focus our BTK inhibitor outside of the oncology indications. I mean we look at the indication range we're pursuing it's immunology, the full range, HS, food allergy, we have also ideas to pursue remibrutinib in other immunology indications and multiple sclerosis. So we've tried to steer clear of the oncology setting overall and really focus ianilumab in both oncology but also in more hard-to-treat immunology indications based on our best guidance from FDA and the agreements on the phase 3 study, we think this was a stepwise approach in ITP, especially for a subcu medicine like ianilumab. And then Yes, we'll see if we can move into the frontline setting. So I think that's probably the best guidance I can give. I'm trying to recall if we looked at remibrutinib in ITP, but we'd have to get back to you, Emily, I just can't recall if we looked at it in our phase 2 program. So we can come back to you if we have studied our BTK inhibitor in those indications. So thanks very much. I think that was the last question. So I really appreciate everybody's time today. We look forward to keeping you updated, and we will see you all at our event at ASCO. So thank you and have a great quarter season and wish you a great spring. Answer:

the Novartis Q1 2024 results release conference call and live webcast

Operator Good morning and good afternoon, and welcome to the Novartis Q1 2024 results release conference call and live webcast. [Operator instructions] The conference is being recorded. [Operator instructions] A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, head of investor relations. Please go ahead, madam. Sloan Simpson -- Head of Investor Relations Thank you so much, operator. Good morning, and good afternoon, everyone. Thank you for joining our first-quarter 2024 earnings call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors. These may cause actual results to be materially different from any future results, performance, or achievements expressed or implied by such statements. For a description of some of these factors, please refer to the company's Form 20-F and its most recent quarterly results on Form 6-K that respectively were filed with and furnished to the U.S. Securities and Exchange Commission. And with that, I will hand across to Vas. Vas Narasimhan -- Chief Executive Officer Thank you, Sloan. I'd like to open today's call by first thanking Samir Shah for his incredible tenure as our head of investor relations for over a decade. We're grateful for all of his contributions. We look forward to continued contributions and the new role at Novartis. And I want to welcome Sloan Simpson, I think Sloan will do an absolutely outstanding job serving all of you as our Head of Investor Relations. I've worked with her for many, many years. I think we're really pleased and grateful to have her on board. So let's turn to the quarter. Novartis delivered a really strong start to the year with double-digit sales growth core margin expansion, which enabled us to upgrade our guidance, and Harry will go through the guidance in more detail. Sales were up 11% in constant currencies. Core operating income was up 22%. Our core margin reached 38.4% as we steadily march to our goal of 40% plus by 2027. In addition, we had a number of important innovation milestones in the quarter, which I'll go through over the course of the call. But a few I'd want to particularly highlight the Fabhalta positive opinion enables us to launch Fabhalta in Europe. Scemblix first-line readout, we think will be very important for a major medicine for the company. And we also had the updated PSMA-4 OS results, which will enable us now to move forward with the filing of Pluvicto in the United States. Now moving to Slide 5. Now our growth in the quarter was broad based, and we had strong contributions from many of our key growth drivers, including Entresto, Kesimpta, Cosentyx, which had a very strong quarter as well as Kisqali. I would also say geographically, our performance was broad-based with strong growth across U.S., Europe, China with very strong growth, and Japan. As you can see on the chart, the strong growth was indicated by 41% constant currency growth, and we expect this growth to continue over the course of the year, which is what gives us confidence to do the upgraded guidance that we've outlined this morning. Now moving to Slide 6, and we'll walk through the brands one by one as we always do. First, with Entresto, we had double-digit growth, up 36% in Quarter 1. That was, again, geographically broad-based U.S. and ex U.S. In the U.S., our weekly TRx continue to reach new highs. We had 38% constant currency growth outside of the U.S. And we continue to see momentum for this brand. We're in a strong guideline position both in the U.S. and in Europe. We have further penetration opportunities in heart failure globally and specifically in hypertension in China, in Japan or in Japan, we have protection into the early 2030s with this medicine. For forecasting purposes, no change in our Entresto LOE outlook continue to guide to a mid-2025 LOE while continuing to aggressively defend our various patents. And then in terms of the EU, we continue to guide to RDP in November 2026 benefiting from our pediatric extension. Now moving to Slide 7. Cosentyx grew 25% in the quarter, and I think really got back to the dynamic growth we expect for this medicine. This was fueled both by our core indications, but also some strong launches, and I'll go through that in a bit more detail. U.S. was up 25% in constant currencies, ex U.S., 24%. We had highly -- we're highly competitive in our core indications. And so we saw a return to market share improvement in psoriasis and in the rheumatology indications both in the U.S. and in Europe. And we're now the leading originator biologic in the IL-17 class in EU and China. Now in terms of our new launches, we saw very strong performance in HS, hidradenitis superatevia, where we have over 50% now NBRx share versus adalimumab in U.S. and Germany. When we compare our launch on a comparable basis to the adalimumab launch in this indication, we currently see ourselves at nearly three times the performance of that previous launch. I think really highlighting how strong the uptake for Cosentyx has been in this new indication. We also had very strong performance in the intravenous indication ahead of the J code, which we expect in July. I think, again, that indicates there is strong interest in having an IV option for patients with Cosentyx in the rheumatology indications. So we'll look forward to further acceleration in the back half of the year once we have that J code in place. Now moving to Slide 8. Kesimpta delivered 66% growth on the quarter, and this was again global U.S. and ex U.S. driven. We have over 100,000 patients treated worldwide on the medicine, and the majority of these patients are either naive or first switch, which reflects the strategy we have for this brand. In the U.S., we saw a very strong demand-driven growth with NBRx volume at plus 26% versus prior quarter. And one of our key priorities now in the U.S. is to increase our B-cell market share over the coming quarters. Outside of the U.S., we have leadership now in seven out of 10 major markets, and we look forward to continuing to drive the convenience and high efficacy story that Kesimpta presents in these markets. In the quarter as well, we announced the Alethia six-year long-term data, which demonstrated sustained efficacy and the consistent safety profile for Kesimpta. In this study, nine out of 10 patients were free on the net of three score of disease activity. And we also saw treatment-naive patients derive substantial benefits across multiple markers of disease activity. So even in the face of some competitor launches, we feel very confident about the one minute a month self-administered dosing, high efficacy, strong safety profile of Kesimpta. Now moving to Slide 9. Kisqali grew 54% in metastatic breast cancer with now continued leading share in new patient starts. U.S. was up 72%. And I think there's increasing recognition of the unique profile that Kisqali offers given its broad data set of OS across three different studies in metastatic breast cancer. We have leading NBRx share at 45%. And we see a steady growth in writers. We're also working to increase depth as well as improve our market access position across key accounts ahead of the early breast cancer launch. Now outside of the United States, 39% growth. We're the fastest-growing CDK4/6 in Europe and a market leader in the premenopausal indication. We also successfully entered the NRDL list in China in Quarter 1, and it's early days in China, but given the strength of our China operations, we're hopeful we can draw dynamic growth for Kisqali in China over time. The regulatory review in early breast cancer is ongoing. We're filed in the U.S. and EU and currently expect regulatory review to proceed as planned. Our manufacturing adjustments, which we disclosed a few weeks ago are on track to assure alignment with the latest regulatory standards in early breast cancer by the end of Q2, and we continue to expect to be able to launch this medicine in the second half of this year. Now moving to Slide 10. Pluvicto had strong growth of 47% in the quarter, driven by new patient starts and very early beginnings of growth as well outside of the U.S. we have 400 treatment sites now up and running in the U.S. on a steady progress to our goal to get well over 500 sites fully certified for the use of Pluvicto. Also, our supply performance is now consistently at a very high level with over 99.5% of injections administered on the planned day. So ample supply, Indianapolis facility up and running, continued expansion of our manufacturing network. So we really feel like we're now in a position to fully supply the market consistently globally for this medicine. Now over the course of 2024, we're going to focus on share expansion within existing sites and particularly expanding the referral network of medical oncologists who can refer into a Pluvicto-treating center, we feel like this will be the key now in the post-taxane setting. We also want to build our business outside of the United States with some important launches in Europe as we also build toward launches -- planned launches in Japan and China, both countries where we have planned new manufacturing facilities to support the Pluvicto and Lutathera business. Our existing indications are also on track. We announced earlier this quarter that the PSMAfore submission-enabling OS readout was achieved. And this will put us in a position to file Pluvicto early in the second half, so a midyear filing for this medicine. And then PSMA addition also on track as well as the PSMA delayed castration localized algo metastatic program as well. Now a little more detail on the PSMAfore submission-enabling OS readout. We had a primary endpoint that we read out last year where we met the primary endpoints as well as really strong data across all of the secondary and exploratory endpoints, a very impressive relative risk reduction for rPFS, strong profile across the patient-reported outcomes as well as the various response, ORR, DCR, and DOR. What we announced earlier in the quarter was the updated third interim, which gave us a higher proportion of OS events. The OS hazard ratio was less than one, which puts us in a position to file midyear. And other secondary endpoints were consistent with the previous results as was the rPFS. And what we feel and see is with the additional eight months of follow-up, we have high confidence in the safety profile of Pluvicto. And so these results will be presented at an upcoming medical congress. And of course, we're working as quickly as we can to get this file in. Now moving to Slide 12. Like also had a really strong quarter. Adoption expanded steadily in the U.S., but also outside of the United States, as you can see here, on the left-hand chart, very strong performance, both in the U.S. and outside the U.S. Taking the U.S. first, we had growth outpacing the advanced lipid lowering market. We have now nearly 3,900 facilities that are ordering increased breadth and depth across our key accounts. We continue to see buy and bill as the key driver overall of the business. But we do see also the use of other channels as well. Outside of the U.S., we have a consistent rollout. Now we have 29 countries where is publicly reimbursed in an additional 39 with private commercial coverage. This puts us in a strong position with our top 3 European markets contributing 50% of international sales, but really strong growth across the international region. And strong early uptake in China in the self-pay setting with over 200 new patients a day ahead of our planned NRDL listing in the first half -- first part of next year. Lastly, we had new data at ACC and a publication as well, which supported the early initiation of demonstrating that starting early in patients requiring secondary prevention for a cardiovascular event, a lot of these patients to achieve their LDL-C goals earlier. Now moving to the next slide, Slide 14. Scemblix, grew 83% in the quarter again, primarily driven by the third line indication with our first-line submission on track to be completed in the coming months. We had continued momentum in the core third line indication, over 40% NBRx share. Outside of the U.S., we're at a 32% total market share driven by our key markets, Japan, France and Germany. And here in the third line setting, we primarily focus on early identification of patients who could benefit from a switch to Scemblix post two TKIs. As a reminder, our ASC4FIRST study enabled first-in-line submission -- first-line submission in half one. Primary endpoints were met versus all standard of care TKIs and versus Gleevec as well, favorable safety and tolerability profile, and we can confirm that the full data will be presented at ASCO in 2024. Now turning to Fabhalta. We're at the early stages of the PNH launch, and we didn't expect really to see significant sales at this very early stage, given the complexity of the launch. But we are very pleased with the early launch indicators we've had a rapid increase in the number of HCPs who are certified under the REMS program, an increase in new riders and patient starts, which are exceeding our internal expectations we see uptake across naive and switch patients for this medicine. And we also are really happy to see HCPs willing to work through the medical exception process to get patients on this medicine. So we've also have the positive CHMP opinion for PNH, and we expect that full approval to happen in the coming few months. and we'll consistently work to launch this medicine across the globe as well as drive rapid uptake in the United States. Now turning to Slide 15. We also announced our phase 3 applause IgAN study, full results earlier in the quarter, where we demonstrated 38% proteinuria reduction relative to placebo. In this study, we randomized patients to eptacopan versus placebo. The results we read out was the nine-month interim proteinuria analysis. These patients will be continue to be followed out to month 24 for the full eGFR analysis. You can see on the right-hand panel, very impressive proteinuria reduction of 43.8% versus placebo at 9%, clinically meaningful and statistically significant. We know that complement activation is a key driver of inflammation in IgAN. And importantly, the overall safety profile was consistent with data we've previously reported. We've submitted this data to FDA. And just one clarification. We did not use a priority review voucher for this medicine. The FDA has granted us priority review based on the data set to be -- we provided. So this study continues as well for its eGFR readout in 2025, and we look forward to really getting a full approval very shortly -- or getting the initial approval in the coming period. Moving to Slide 16. Now remibrutinib demonstrated -- had already demonstrated in an earlier study at 12 weeks robust efficacy and safety. But we needed to wait for the 52-week data to be in a position to file in chronic spontaneous urticaria. And this data came out positive, enabling us now to move forward toward this important filing. As a reminder, there's about 400,000 CSU patients in the U.S. not controlled or refractory to antihistamines. And only less than 20% of these patients are currently on biologics. So there's a large opportunity for a high-efficacy oral medicine the previous primary endpoint data at week 12 as shown here, where we very consistently showed improvements versus placebo at the week 12 on the UAS7 score. And so we'll look forward to presenting the full data set in the second quarter for this medicine out to 52 weeks. And with the consistent favorable safety profile we've demonstrated with overall rates to be comparable to placebo and balanced liver function test as well as the clear efficacy data, we'll look forward to global submissions in the second half of remibrutinib. So all taken together, we're on track across our innovation goals for the year. I did want to highlight that we have shifted our ataclopan C3G U.S. submission to the second half. There is no great correlate for efficacy in C3G, given the ultra-rare nature of this disease. We provided the FDA our six-month data. While certainly, we believe that six-month data was very compelling. The FDA wanted to see the additional 6-month follow-up for these patients after all patients had rolled over onto active the first 6-month period was randomized, second 6-month period, all patients are inactive. So we will complete that 6-month follow-up and then file in the second half. And we remain very excited about the opportunity to bring as well to patients with C3G. So moving to the next slide. We also are on track for our range of submissions, '24, '25, and '26 to '28. So we'll continue to keep you abreast of how data sets unfold as well as potential readout time lines as we understand those readout time lines better and really excited about the catalyst-rich profile that we have out through the coming years. So moving to Slide 19, I'll hand it over to Harry. Harry Kirsch -- Chief Financial Officer Yeah. Thank you very much, Vas. Good morning, good afternoon, everyone. I'm now going to walk you through some of the financials for the first quarter. And as always, my comments refer to growth rates in constant currencies unless otherwise noted. Also, throughout the presentation, I refer to continuing operations. And as you see from the numbers, it has been a very strong start to the year. So on Slide 20, you see a summary of our financial performance. with net sales up 11% and core operating income up 22%. Our core margin grew 340 basis points to reach 38.4%, showing that we are very well on track to achieve our midterm margin guidance of 40% plus by 2027. Core EPS was $1.80 for the first quarter, growing 23%, a bit ahead of Corbin due to the share buyback program. Free cash flow was $2 billion, declining versus Quarter 1 of 2023, but that was due to a prior year one-timer and the timing of some tax payments this year. However, and importantly, for the full year 2024, free cash flow is expected to grow approximately in line with core operating income. So in summary, very strong start to the year as our efforts to focus and streamline the business continue to pay off. This brings us already to our full year guidance on Slide 21. So the strong momentum in our business across our in-market growth brands and launches, both in the U.S. and international markets give us the confidence to upgrade both top and bottom line guidance. We have also a favorable update on generic entry assumptions in U.S., but that's actually a smaller element of the analysis driving our 2024 guidance upgrade. We now expect net sales to grow in the range of high single digit to low double digit and core operating income to grow in the range of low double digit to mid-teens. Underpinning our guidance are two key assumptions that no Entresto and no Promacta generics will launch in 2024 in U.S. And to complete our 24 full year guidance, please note that we continue to expect core net financial expenses to be in the range of $0.6 billion to $0.7 billion. Our core tax rate to be around 16.5%. Now moving to Slide 22. I'm very pleased with the quality of our Quarter 1 sales growth driven by our key in-market brands, which grew as Vas showed also on the prior slide, 41% in the quarter. And the vast majority of these brands still have many years of patent protection ahead of them. So their continued momentum strongly supports our midterm growth outlook of 5% CAGR through 2028. Slide 23, please. Just to highlight that we continue our shareholder-friendly capital allocation strategy in Quarter 1, of course, investing in the business alongside returning capital to shareholders. Notably, in Q1, we announced two value-creating bolt-ons in our core therapeutic areas, the proposed acquisition of MorphoSys and the licensing deal of both of which align with our strategic focus in oncology. In terms of returning capital to our shareholders, we paid $7.6 billion of our growing dividend in Quarter 1. And we also continue our up to 15 billion share buyback program and we still have $11.7 billion remaining to be executed by the end of 2025. Already to my final slide, 24, we have outlined some of the details regarding the FX impact. And as you see, in Quarter 1, FX had a 1% negative impact on sales and 6 points negative on core operating income, the latter driven by the strong Swiss franc. And if late April rates prevail, including the most recent strengthening of the U.S. dollar, we expect the full-year impact of currency still to be less, it was in '23 on a top line negative 2% and bottom line, a negative 4%. As a reminder, this is hard to forecast from the outside and moving all the time, we are updating our -- the expected FX impact on our website on a monthly basis. And with that, I hand back to Vas. Vas Narasimhan -- Chief Executive Officer Great. Thanks, Harry. So as you heard, a strong start to the year with double-digit sales growth, strong core margin expansion. And with the strong momentum we see in the business, we're able to raise our guidance for the year. We saw this momentum across all of our key growth brands and across geographies, I think, indicating the high quality of the performance that we're seeing in the company. Our pipeline continues to advance with multiple submissions and submission-enabling readouts as we outlined and we continue to have confidence in our midterm guidance of 5% constant currency sales growth, '23 to '28 and 40% plus core operating income margin by 2027. So with that, I'll hand it back to Sloan, who will outline some of our upcoming investor events. Sloan Simpson -- Head of Investor Relations Thank you, Vas. Before we open up for questions, I just wanted to flag a few investor events that we're planning to hold this year. First, we'll have an in-person event at ASCO in Chicago on June 2nd, highlighting Alcon ASCO data, which Vas mentioned. We'll also have a virtual event on our renal pipeline in the second half of the year. and we'll be having our Annual Meet Novartis Management event in London on November 20 to 21. We hope to see many of you at these events. And with that, operator, let's open the line for questions, please. Questions & Answers: Operator Thank you [Operator instructions] And your first question comes from the line of Matthew Weston, UBS. Please go ahead. Matt Weston -- UBS -- Analyst Thank you for taking my question. It's going to be on Pluvicto. And so Vas, you set out some of the metrics in terms of improving revenue. I think there's definitely an expectation among investors that we might see an inflection as supply comes online and physicians get more comfortable with your ability to supply and add nurses and chairs into their networks. I wanted to understand whether you thought that was a realistic assumption or whether or not investors should get more comfortable with a kind of continuous grind in the growth of Pluvicto over the coming quarters? Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Matthew. So first, on Pluvicto, we have resolved our supply issue, but we are still working through, I think, the remnants of the base of patients that were a bit lower in Quarter 4, given that we were still working through things then. And when you think about the growth of Pluvicto medium to long term, first, we have this post-taxane indication, where you can see we're already annualizing at a pretty healthy blockbuster, $1 billion plus sales range. And we expect that to steadily grow, and we guided to that indication to being a multibillion dollar, so a $2 billion-plus indication. So we expect it to steadily grow over the coming quarters in that post-taxane setting. And this will be primarily driven by, as I mentioned, expanding the base of medical oncologists who are able to refer into the existing centers. We don't see the opportunity at this point in terms of expanding the number of centers for this indication. So that will steadily grow over the course of 2024 to get us steadily marching up toward that multibillion dollar guidance, $2 billion-plus guidance that we've given in the vision indication. Then we expect the PSMAfore pre-taxane indication to be the next catalyst, and we do expect an inflection on that launch which will then -- I should also mention in Pluvicto outside of the U.S. as well, we will get additional momentum as we bring on board Germany, France, other countries in Europe. And then in the coming years, we do expect a substantial inflection from China and Japan. We're building dedicated manufacturing facilities for those countries in order to drive further growth, both in the pre-taxane and the post taxing indication. Next catalyst will be the pre-taxane approval, which we hope to have in the first half of next year. Then the hormone-sensitive indication than the algo metastatic. And then we also have two programs advancing with actinium PSMA as well to also further bolster the overall portfolio. So I think a steady growth in the vision indication within catalysts coming from ex U.S. expansion and the indication expansions for the brand. Thanks. Matthew. Next question, operator? Operator Thank you. Your next question comes from the line of Steve Scala from TD Cowen. Please go ahead. Steve Scala -- TD Cowen -- Analyst Thank you so much. As you noted in the prepared remarks that the Kisqali review was on track, but how confident is Novartis that FDA will meet the priority review regulatory deadline for Kisqali with a broad label. There seems to be a number of things that could give FDA pause, including the nitrosamine issue as well as liver tox. So what is your level of confidence? Thank you. Vas Narasimhan -- Chief Executive Officer Yes, Steve. We're very confident on the broad label. I think on the time line, we currently guide to the current time line that we have as we implement these manufacturing shifts. We of course, are discussing these manufacturing adjustments and their minor adjustments, but they do require discussions with FDA. And so once we have a better clarity on -- if at all, if there was any shift in time line, we would, of course, let the markets know. But we think this will be still a second-half launch for this medicine, and we feel very good about that guidance. And so while we talk here about minor shifts, we're not talking about anything significant. And again, expect the broad label, we don't have concerns about liver. This is something that's well known with Kisqali are currently monitored in the metastatic breast cancer setting. No change in monitoring requirements is what we expect. So overall, we feel good with the ability to launch this medicine in the second half of the year. Thank you. Next question, operator? Operator Thank you. Your next question comes from the line of Graham Parry, Bank of America. Please go ahead. Graham Parry -- Bank of America Merrill Lynch -- Analyst OK. Thanks for taking my question. Another one on Kisqali, just could you just explain just what the process amendment needed for Kisqali is in early breast cancer. So is that something in the actual reaction? Is it purification? And do you know at the moment whether you do or don't need an inspection by FDA? And if there is one, do you think that would still be completed within the second quarter time frame and therefore, not delay the naturally produce time line. Thank you. Vas Narasimhan -- Chief Executive Officer Graham. So first on the manufacturer adjustments that we talk about here. Just as a reminder, Kisqali already meets the requirements in metastatic breast cancer. So these are just additional requirements given that early breast cancer is an asymptomatic population. The adjustments we talked about here are primarily how we source material from third parties. We want to go to higher quality sourcing of third-party material, which is something we believe we can implement in a very straightforward way. And then also just some additional adjustments within our supply chain for the management of Kisqali prior to actually leaving our supply chain to go to physicians. So these are we believe relatively minor changes. Nonetheless, changes we do need to review with the regulators. In terms of inspection, we don't believe there would be any inspection required for this. And so that's what I think overall gives us confidence in the guidance to launch the medicine in the second half. Thank you. Next question, operator. Operator Thank you. Your next question comes from the line of Emily Field from Barclays. Please go ahead. Emily Field -- Barclays -- Analyst Hi. Thanks for taking my question. I just want to ask a question on Cosentyx. I know you mentioned your second to J code, but are you currently generating much sales from the IV formulation just in that context, if you could frame the current pricing environment in the U.S. specifically? Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Emily. So Cosentyx IV, I'd say better-than-expected uptick than what we had thought prior to the J code. But when you look at Cosentyx current outperformance in the quarter, it was driven primarily by the strong hidradenitis Suprativo launch as well as that leading to stronger performance as well in psoriasis globally. So the IV launch is still, I think, in the midst of kicking up. What I would say is we are having a -- we have reached already the vast majority of accounts that we expected to order Cosentyx IV. They're already at least in the process of ordering the medicine ahead of the J code, trying to use an exceptional code to use the medicine. So in terms of account reach, we're already in a very good position. And we think we'll be able to then drive a strong depth once we actually get the J code in place. So we feel very good. So this could be another, I think, good driver for Cosentyx growth in the second half post that J-code being rolled out. Next question, operator? Operator Thank you. Your next question comes from the line of Simon Baker, Redburn Atlantic. Please go ahead. Simon Baker -- Redburn Atlantic -- Analyst Thanks so much for taking my question. It's a broad question on the commercial performance. as you've highlighted a few specific reasons for strength in the quarter like the Cosentyx HS launch. But -- to what extent is the broad-based performance we've seen in this quarter a result of the changes to the commercial organization that have been underway over the last couple of years. I wonder to what extent that is responsible if you could give any color on where it's impacting? And how much is there left to come from that initiative? Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Simon. We do believe that probably the biggest -- big picture driver for our strong performance over the recent quarters has been the reorganization and focus of the focusing of the company. And as a reminder for investors, a few things we did, we elevated the U.S. and we went to a geographic model, U.S. international we focused down the portfolio to four key therapeutic areas. We focus the commercial area on nine key drugs. We shifted our investments in most places, over 75% of the M&S investments go to the growth drivers. A heavy focus on U.S., China, Japan, and Germany -- and taken together, that I think is compounding to show the broad-based performance you see across the U.S. and international and particularly in some markets like China, very, very strong performance. So that is, I think, the biggest sustainable driver. In terms of specifics in the quarter, clearly, Cosentyx performed extremely well putting aside consensus, if you look at the growth rates of Kisqali and Kisqali, Scemblix these were all very, very strong, even Pluvicto, if we put aside on quarter-on-quarter growth. These were all very strong growth rates. And I think that also, I think, gives us confidence to raise the guidance for the full year. Next question, operator. Operator Thank you. Your next question comes from the line of Emmanuel Papadakis from Deutsche Bank. Please go ahead. Emmanuel Papadakis -- Deutsche Bank -- Analyst Thanks for taking the question. Since you flagged it will be forthcoming at ASCO, perhaps just a question on Scemblix data details. The primary end point was we're going to be very interested to see how that fares was obviously a physician standard or physician choice of standard care control on versus the potential comparators in particular, to signal, can you talk a little bit about what we could expect to see in terms of some of the standard care competitors on that primary endpoint? And indeed, any secondaries you're willing to my thoughts would be helpful as well. Vas Narasimhan -- Chief Executive Officer Yes. Let me outline how the Scemblix study was designed and then hopefully give you some perspective. So -- this was a first-line study and this is, of course, our third medicine in the world of chronic myelogenous leukemia, so a long history in the company. The primary endpoint was Scemblix versus investigator choice TKI with a goal that over 50 -- roughly 50% of patients would be on imatinib or -- and the primary endpoint was Scemblix versus the overall pool of patients intention to treat regardless of TKI. So that's first primary endpoint. And the co-primary endpoint was Scemblix versus Gleevec. And we hit both of those primary endpoints with clinically meaningful, highly statistically significant improvements in -- then we had a descriptive secondary endpoint of Scemblix versus the two second-gen TKIs. And again, there, we will disclose the full data at ASCO, but we feel very good about the profile of the medicine. And then on safety, which I think is one of the key elements of Semble story already in the third line setting, we saw outstanding safety profile. So I think that's the other thing to look out for at the ASCO presentation is the overall safety profile of Scemblix because clearly, to move into that frontline setting, physicians will want to see both strong efficacy and a clean safety profile. Now it's important to note that once we get to the point of filing the medicine shortly and then ultimately launch the medicine, in the U.S., we believe there's a portion of the market where we can drive very rapid uptake. These are patients who are currently on second-gen TKIs or in physician practices that are very open to switching. We do know that there is an element of the CML market that's contracted and that tends to use generic imatinib, that will take us longer to overall to move through. But I think one of the exciting things about Scemblix is that this has a long -- and based on targeting a rare disease, it's not part of IRA negotiations. So we have here a medicine that can drive growth through this decade and well into next decade, both U.S. and around the globe. And we, of course, are one of the global leaders in CML. So I think that positions us well overall. So thanks for the question, Emmanuel. Next question, operator? Operator Thank you. Your next question comes from the line of Richard Vosser from J.P. Morgan. Please go ahead. Richard Vosser -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking my question. Can I return to Cosentyx. And you mentioned the launch in HS being sort of three times How do you see the sizing of the indication of HS now? Is that a $2 billion to $3 billion indication for Cosentyx. And thus, do you see continued potential double-digit growth over the next few years for the product? And I suppose one just clarification just to -- any quantification on the size of the HS contribution at this stage? And I don't think there was any pricing or stocking in the first quarter, but just to clarify that as well. Thanks very much. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Richard. So just as context, we estimate as best we can from public information that adalimumab had over $1 billion in sales in HS historically. We do think that the market is significantly underserved. There's a large number of patients who are not on biologics in this indication. So it could be a substantial market. I don't think we've given yet guidance on specifically the overall size of the market. But certainly, there's a potential of a multibillion-dollar market here. So we think Cosentyx has the opportunity to drive very significant growth for the brand as we try to reach $7 billion, probably not in a position yet to give specific indication-based guidance on Cosentyx. But we think with the combination of HS, of IV, giant cell arteritis phase 2, which is ongoing, the polymyalgia Rheumatic indication that we also have as well as the strong performance we have in China that just gives us even more conviction that we can get to that $7 billion peak sales by the end of the decade. Next question, operator. Thanks, Richard. Operator Thank you. Your next question comes from the line of Tim Anderson, Wolfe Research. Please go ahead. Tim Anderson -- Wolfe Research -- Analyst Thank you. I have a couple of questions on Entresto and just timing of generic entry. So in the U.S. Can you map out for us what we should be tracking from here in terms of events and news flow that will help inform whether mid-'25 is a good assumption. And as we've conceived well, the sometime in '24, you'll have a different point of view. And then ex U.S. and the timing of generic entry you guide for later '26, is there a similar level of uncertainty on that then if you could wrap in China as part of that discussion on generic timing as well. Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Tim. So on Entresto right now, we do have an appeal ongoing to the circuit court on the combination patent, which we believe will be heard and ruled on in the second half of this year. It's important to note that there have been no Entresto generics approved as of yet, and we have two citizens petitions pending at the FDA on the basis for approval and also the labeling for any potential product with respect to Entresto. So based on that fact that we don't expect any generics to launch this year that we can never exclude, of course, somebody trying to do something at risk. And then separate from that, we have a number of other patents that are currently being litigated toward the end of this year and then toward the -- all through the coming period, which is what overall makes us have the best estimate in the U.S. of mid-2025. And of course, as we get better resolution on that, we can, of course, provide further color I would also say that Entresto is on the IRA negotiation list so that we would expect in Jan 2026 to our best understanding, at least in the Medicare population that IRA pricing would hold, and we would get a better read on how that looks in September. Outside of the United States, we already include our pediatric exclusivity. So we think our current guide of end of 2026 is reasonable. Of course, we're always looking for ways to adequately depend all of our patents, but we think that's a very reasonable assumption at this point in time. In China, at the moment, we currently have, I think, a number of different approaches, but the key there will be the number of generics and when they get approved. And so I think we could reasonably expect potential entry of Chinese generics sometime in the course of 2025. But the question in China was when we will enter the VBP list. And that, of course, is something we're monitoring. And once we have a better understanding of the number of generics and their status legally when we enter the VBP list, we'll be able to provide further clarity. And lastly, in Japan, we currently outlook 2031, I believe, 2031 or 2032. Our team will get back to you exactly. But certainly into the 2030s for Japan at the current point in time. So hopefully, that's helpful, Tim. Thank you for the question. Next question, operator? Operator Thank you. Your next question comes from the line of Richard Parkes, BNP Paribas. Please go ahead. Richard Parkes -- Exane BNP Paribas -- Analyst Hi. Thanks for taking my question. Just wondered if you could help us with cost phasing. I think guidance is implying a lower margin improvement than the very strong margin improvement you saw in Q1. And I know there's slightly mismodeled last year going into Q4, extrapolating the margin. So can you just help us understand the phasing in terms of costs over this year? That would be very helpful. Thank you. Vas Narasimhan -- Chief Executive Officer Thanks, Richard. I'll hand that to Harry. Harry? Harry Kirsch -- Chief Financial Officer Thank you, Richard. So overall, as you have seen, our Quarter 1 costs were growing in constant currency, roughly 2%, which was driven by R&D right up roughly 6%, while SG&A was basically flat. That's a consequence also of the full implementation of transformation for growth, restructuring programs, leaning out, going to one organization locally between pharma onco and leading out above country and customer-facing functions, our organizational structures and leading our processes. So we see some continued benefits from that. Of course, we will continue to leverage new technologies, leaner processes to keep driving the multiple launches. But all within our four therapeutic areas where we have significant commercial infrastructure and medical infrastructure. So I would expect that SG&A continues to be quite flattish. Maybe here, they are a bit more investment, but certainly significantly below sales growth. And then the level of specialty development spend depends also a bit on the M&A, in-licensing agenda. So clearly, we have some placeholder for that in the second half of the year as well. And then we will update you after Q2, of course, how things are going, when we have a clear visibility. But overall, very good focus on cost consciousness. As Vas mentioned, excellent resource allocation to our top 9 brands and prelaunches. And with that, as always, outlook, the key contribution to our margin growth is expected to come from SG&A as we expect very dynamic sales growth this year on a five-year basis and very limited SG&A growth. Vas Narasimhan -- Chief Executive Officer Thanks, Harry. Thanks, Richard. Next question, operator? Operator Thank you. Your next question comes from the line of Mark Purcell from Morgan Stanley. Please go ahead. Your line is open. Mark Purcell -- Morgan Stanley -- Analyst Thanks very much for taking my question. It's on Scemblix. I wonder if you could help us understand the level of uptake you anticipate in the first-line setting. The slide shows 40% MBR shown third-line setting, and you talked about the sort of potential ease of identifying specific patients who might most likely benefit from scale versus the current standard -- and I also wondered on Scemblix. Have you seen any early impacts of the Part D redesign when it comes to treatment initiations and volumes? Any sort of comment there for Scemblix across your business would be great. Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Mark. I think on Scemblix, we would expect, I would say, a modest early uptake because we would have to work through -- CML is one of the few cancer areas that's currently contracted. And so we would need to work through the access in the first couple of quarters from launch. But then after that, we believe that given the overall data set that we'll share at ASCO, that it should be able to drive very strong uptake. And of course, you all know well that the second-gen TKIs were on the order of $2 billion medicines. Gleevec was a $4 billion-plus global medicine. And certainly, our goal is to make this over time, the leading CML treatment in the world. we wouldn't face any competition, at least branded competition and given that we we'll have demonstrated MMR superiority over the pooled group of Gleevec and the second in TKIs. It should put us in a very good position over time to make this into a significant medicine. I think on Part D redesign, it's really early days for us to have a strong sense of the impact. And so we're monitoring this very closely, also reading all of your reports on how you're monitoring it to really understand what is the impact of out-of-pocket caps and some of the other shifts that are happening in the system on patients taking up their medicines. I think certainly, as we move down from a $3,500 cap to a $2,000 cap I would expect, in general, to see more patients' ability to fulfill their medicines to improve as the cost becomes lower at the pharmacy counter. But we need to see that, I think, in the data before we can really provide you more color. Next question operator. Thanks, Mark. Operator Thank you. Your next question comes from the line of Peter Welford from Jefferies. Please go ahead. Peter Welford -- Jefferies -- Analyst Hi. Thanks for taking my question. It's on the planned proposed morphosis transaction. I wonder if you can just outline when you did that, how much of the acquisition price that you're considering was based on getting broad, both geographical and send to the market approval for pelabresib. And versus, on the other hand, how much of the transaction is described to what you're thinking with regards to the EZH2 and also the royalties that you would potentially owe and how we should think about, I guess, that deal and the potential of fitting that into the cost structure business as it is today. Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Peter. Probably -- I can't say more than what we've already said, given that we have an ongoing share tender offer out in the market. So what we previously outlined is we believe there is an opportunity globally for collaborative in both Europe and in the United States, and that's an exciting opportunity given our Jakavi business and the opportunity that we have to leverage our long history in myelofibrosis, and position in myelofibrosis outside the United States and our strong hematology footprint inside the United States. So we would see polaperative is fitting nicely within that global infrastructure that we have. And yes, we would also benefit from the historical royalties, particularly on ionilumab, where we see the opportunity of a significant medicine, both in immunology and in cancer. And so I think that's a pretty exciting opportunity for us to get those royalties back and then hopefully drive very significant medicine with a significant medicine in a royalty freeway. And then lastly, the company does have an EZH1/2 inhibitor in prostate cancer that we think could also be very interesting for us going forward. So -- those are the three components of why we saw some value in the deal. Next question, operator? Operator Your next question comes from the line of Andrew Baum from Citi. Please go ahead. Hello, Andrew, is your line on mute? Andrew Baum -- Citi -- Analyst Apologies. Yeah. Thank you. Just going back to the ASC first trial with Scemblix. Could you just expand your previous comments on the dynamics of the CNL market, particularly the current market shares in first line generically versus others, the Medicare versus non-Medicare segmentation, just to help us think about the barriers to entry in a different segment in terms of authorization step edits. Thank you. Vas Narasimhan -- Chief Executive Officer Yes. So Andrew, a couple of things. I think, one, we see this is a market that on the order of 40% -- 35% to 40% imatinib, Syglivic generics, and 60% TKIs. And then in terms of commercial and Medicare, we can come back to you with the exact data. But my recollection is it's largely evenly split between Medicare and private commercial plans. So the way we look at the overall market opportunity in that 60% or so of patients who are on second-gen TKI, this is an opportunity as this class goes generic certainly and for commercial plans as well, given that we won't have to compete against a rebate from those players, we would certainly have the opportunity to educate physicians on the great profile that we have here particularly around the safety profile, also the efficacy profile and then hopefully drive switches. And we see that's the early opportunity for the medicine in that second-gen TKI, particularly second-gen TKI, commercial and then eventually the Medicare. We find that patients who are currently on imatinib tend to be in community oncology and tend to be with physicians who have a long history of using imatinib and therefore, might be more resistant to change. And that will take us longer to eventually, I think we think move through though. We do think we have good strategies to get there that segment of the market will be a longer lift for us to eventually move through. So that's in the ex U.S. -- in the U.S. setting. I think ex U.S. will really vary by geography. Certainly, in Europe, it will be critical for us to demonstrate differentiation with imatinib from a payer standpoint to justify what we think is a fair price for the medicine. We would expect in Japan, in China, the opportunity for strong uptake. These are markets where we do think we can get reimbursed. And certainly in Japan, there's a very well-educated CML physician community. So that's, I think, a relatively large opportunity as well. So that's kind of the high-level dynamics. But I think at the ASCO presentation in June, we can provide more insights into the overall market structure and how we're seeing the opportunity to launch the medicine. Thank you, Andrew. Next question, operator? Operator Thank you. Your next question comes from the line of Seamus Fernandez from Guggenheim Securities. Please go ahead. Seamus Fernandez -- Guggenheim Partners -- Analyst Thanks so much for the question. So really, I just wanted to focus in on IgAN and some of the activity that we're seeing from a competitive perspective there and acquisitions in the space. So I just wanted to get your thoughts on the acquisitions that you've made in gain and the opportunity that you see in that space, whether it be for atacapan or for the acquisitions that you've made? I know you specified a lot of opportunity there. But interested to sort of see if you view this as a validation of the IgAN market opportunity and how you're thinking about the competitive landscape going forward? Thanks. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Seamus. So in general, I mean, IgAN is, we believe, a significant market opportunities. Patients don't have -- historically have not had great medicines. They do progress at a relatively high rate in the 10-year period toward needing transplantation or going on to dialysis. And we're talking about a segment here that's over 130,000 patients in the U.S. alone. So we think it is a sizable opportunity. When we think about the treatment paradigm, you -- of course, you start out -- you want to -- historically, this has been a steroid-driven treatment paradigm, but we think this will shift to wanting to somehow manage the hemodynamic component of the medicine -- of these patients where we have atrasentan. You want to manage then the inflammatory component for these patients along two dimensions, complement inhibition and APRIL inhibition as well. Now we're in a position where we will have atrasentan for hemodynamic inhibition. We'll have iptacopan for complement inhibition, and we'll have ZakiBard also acquired in our Chinook acquisition for the anti-April component. We acknowledge there will be competitors, particularly on the anti-April side of things where we're going to have a few other competitors enter. We believe we'll be the only company positioned with really the full range of hemodynamic complement anti-April. I should note as well, of course, upstream the SGLT2 inhibitors, which are also going generic will also be part of that early treatment paradigm. But post SGLT2 inhibitors and perhaps generic hypertensives, you're going to want to move down this paradigm of really more potent hemodynamic control and then also trying to get to the inflammatory component. And we think having three medicines will allow us to be well-positioned with patients, physicians, contracting the various elements of the U.S. supply chain and also globally. So that's how we're approaching it. I do think the recent acquisitions to point to that anti-April and this whole area is exciting, right? And we have an asset there others now are also coming but certainly something we're looking at very carefully to also see, can you expand APRIL inhibition with or without BAF inhibition for other indications as well? Next question, operator? Operator Thank you. Your next question comes from the line of Eric Le Berrigaud from Stifel. Please go ahead. Eric Le Berrigaud -- Stifel Financial Corp. -- Analyst Thank you. We saw the split in sales by geography on Leqvio being significantly different from the past and now ex U.S. being more significant than U.S. Could you maybe elaborate a little bit on the kind of agreements you reached in ex U.S. territories, maybe the main three markets in Europe and China, how the drug is delivered? How are you billing for the drug in those geographies? Vas Narasimhan -- Chief Executive Officer Yes. Thanks, Eric. We're pleased to see Leqvio now getting to a steady march upward in terms of its overall sales growth. Outside of the United States, there have been a few key dynamics. So first is China self-pay, where I mentioned over 250 patients a day, steady growth as well in terms of the number of patients that were being able to get on treatment in China. And that's ahead of where we hope to get listed full listing on the NRDL in the first part of next year. And given the strength of our cardiovascular operations in China with Entresto, we believe we can drive pretty significant uptake of Leqvio over time in China. We also have reimbursement in Japan, and we're in the very early days of launching in Japan. So Japan was not a significant contributor in Q1, but we expect consistently now in the coming quarters, Japan to be a more significant contribution. In Europe, we've had very steady uptake in the commercial market in Germany as well as improving performance in Italy and the U.K. And so I mean, the U.K. has been a disappointment relative to where we hoped it would be, but nonetheless, is steadily moving up as well. And then interestingly, while it's a smaller contributor, given the number of countries around the globe, we have reimbursement we do have public health agreements in places like the Gulf Coast countries as well as other markets in our international business that's also contributing. So step by step, all of this comes together to drive the performance that you saw in Quarter 1. And we'll see. We hope we can continue that now in the coming quarters and steadily get Leqvio up to that multibillion dollar outlook that we've given. Next question, operator? Operator Thank you. Your next question comes from the line of Steve Scala from Cowen. Please go ahead. Steve Scala -- TD Cowen -- Analyst Thank you so much On Entresto, were there any onetime factors driving Q1 sales such as rebates and/or inventory? If not, then what in your opinion led to it not tracking prescriptions in the quarter? Thank you. Vas Narasimhan -- Chief Executive Officer Yes, Steve, we're not aware of any one-timers on Entresto. We saw strong TRx growth. We saw outstanding growth in China. And I think that was a big driver of the performance you saw in the quarter, also steady uptake in Japan. But no one-timers that we're aware of looking at Harry yet. So no one-timers that we see. This was just underlying performance, and I think driven both in the U.S. but also China and Japan. Next question, operator? Operator Thank you. Your next question comes from the line of Graham Parry, Bank of America. Please go ahead. Graham Parry -- Bank of America Merrill Lynch -- Analyst OK. Thanks for the follow-up. Just wondering in terms of the charges we were talking about timing earlier, just what's assumed in your guidance for adjuvant breast camps or Kisqali for this year. So here any significant contribution in there? Is that de minimis at this point? And then just I'll flip in the second one, just at the ASCO event, on Scemblix. So I was wondering if you're going to be in a position to give some sort of updated peak sales guidance for that asset. There's obviously a lot of questions on the call about market that's what is fishing for. Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. Thanks, Graham. On Natalie, not a material contribution or really any contribution in this year. So I don't think that's something that needs to be factored in, in terms of our guidance. On Scemblix, we'll take it under advisement. I can't commit one way or another, but we'll certainly take the feedback on trying to guide. It's always tough, of course, before we've even got an approval or launched a medicine to really know the outlook. But I think we've got reasonable benchmarks in the CML market with Gleevec and the second-gen TKIs. And as I outlined, we really believe, but we'll see as we present the data that this can be really the best-in-class medicine to treat CML that's been launched in this industry. So we hope we can live up to that profile. Next question, operator? Operator Thank you. And your final question today comes from the line of Emily Field, Barclays. Emily Field -- Barclays -- Analyst Hi. Thanks for taking my question. Question on given that this morning, we did see phase 3 success in ITP from a competitor BTK inhibitor. So I was just wondering given that you also have a BTK here of your own, why you're pursuing ITP with the BAF inhibition and you think that, that's the right mechanism of action? And while you're also prioritizing second line or first line? I believe that's what it says to the lead indication in the slides. Thank you. Vas Narasimhan -- Chief Executive Officer Yeah. So first, on BTK inhibition, we really tried to focus our BTK inhibitor outside of the oncology indications. I mean we look at the indication range we're pursuing it's immunology, the full range, HS, food allergy, we have also ideas to pursue remibrutinib in other immunology indications and multiple sclerosis. So we've tried to steer clear of the oncology setting overall and really focus ianilumab in both oncology but also in more hard-to-treat immunology indications based on our best guidance from FDA and the agreements on the phase 3 study, we think this was a stepwise approach in ITP, especially for a subcu medicine like ianilumab. And then Yes, we'll see if we can move into the frontline setting. So I think that's probably the best guidance I can give. I'm trying to recall if we looked at remibrutinib in ITP, but we'd have to get back to you, Emily, I just can't recall if we looked at it in our phase 2 program. So we can come back to you if we have studied our BTK inhibitor in those indications. So thanks very much. I think that was the last question. So I really appreciate everybody's time today. We look forward to keeping you updated, and we will see you all at our event at ASCO. So thank you and have a great quarter season and wish you a great spring.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to Otis' first quarter 2024 earnings conference call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com. I'll now turn it over to Michael Rednor, vice president of investor relations. Please go ahead. Michael Rednor -- Vice President, Investor Relations Thank you, Sarah. Welcome to Otis' first quarter 2024 earnings conference call. On the call with me today are Judy Marks, chair, CEO, and president; and Anurag Maheshwari, executive vice president and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. The Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. Now I'd like to turn the call over to Judy. Judy Marks -- President and Chief Executive Officer Thank you, Mike, and good morning, afternoon and evening, everyone. Thank you for joining us. Starting on Slide 3. Otis started the year off with a solid first quarter, again confirming and demonstrating the continued strength of our service-driven business model, as we outlined during our investor day in February. Through the hard work and commitment of our colleagues across the globe, we achieved mid-single-digit organic sales growth driven by our service business. We expanded adjusting operating margins by 80 basis points with both service and new equipment operating profit margins expanding 70 and 20 basis points, respectively. With another quarter of maintenance portfolio growth above 4% and solid modernization sales, we delivered 6.5% service organic sales growth. Mod orders increased 12.9% in the first quarter with growth across all regions while challenging market conditions and new equipment continue. Delivering operational excellence across the organization drove 10% adjusted EPS growth. This quarter, we executed our capital strategy with excellence. We continue to work to repatriate cash from overseas and use it for the benefit of our shareholders. As such, we were able to repurchase $300 million of shares in the quarter. Additionally, yesterday, we announced a 14.7% increase to our quarterly dividend. We have nearly doubled our dividend since spin, emphasizing the importance we place on delivering shareholder value. We also made important progress toward our environmental goals. Earlier this month, the science-based targets initiative approved our near-term science-based greenhouse gas emissions reduction targets. This is a meaningful step on our sustainability journey, and our steady progress meeting our commitments will be shared in our next ESG report expected to be published later this year. Turning to our orders performance on Slide 4. New equipment orders were down 10% in the first quarter as anticipated due to the tough compare versus the prior year. Double-digit growth in EMEA and mid-single-digit growth in Asia Pacific were more than offset by a double-digit decline in the Americas and high teens decline in China. Nevertheless, our new equipment backlog at constant currency was roughly flat versus the prior year and up slightly versus the prior quarter. Service side, we continue to deliver consistent solid performance with another quarter portfolio growth above 4% and demonstrating the value of modernization new strategic imperative 13% orders growth and 15% backlog growth at constant currency, setting us up well for modernization sales through the rest of the year and into 2025. Reflecting the hard work of our colleagues around the world, I'll highlight a few orders we received during the quarter. In China, Otis Electric will provide 46 escalators and nine elevators for an expansion of the Shenzhen Metro Line 5. The elevators and escalators will be installed at three new stations connecting to the city's grand theater, where passengers can transfer to two other metro lines. In Canada, Otis will provide 19 elevators at the South Niagara Hospital, a 12-story facility that will consolidate and expand acute care services in the region. It's designed to meet the Canada Green Building Council's lead silver standards and is an important step toward becoming the first well-certified hospital in Canada. These elevators will be equipped with Otis ONE, EMS Panorama, and autonomous mobile robot system integration. In Japan, Otis is modernizing six elevators and six escalators at the Hamamatsu Act tower in Hamamatsu city. We look forward to continuing to service the 212-meter tall tower as we've done for nearly three decades. And in the United Kingdom, the National Health Service of Wales has been an Otis customer since 2018 and has recently renewed their service contract, covering 450 elevators across many health facilities in the country for an additional five years. Building upon our trusted relationship, we will now modernize 19 elevators at the University Hospital, Wales, and Cardif. Turning to Q1 results on Slide 5. We delivered net sales of $3.4 billion in the first quarter, with organic sales up 3.8%. Despite dynamic market conditions, we have delivered organic growth every quarter since the end of 2020. Adjusted operating profit, excluding a $7 million foreign exchange headwind, was up $50 million with both segments contributing. Adjusted EPS grew 10% or $0.08 in the quarter, driven by strong operational performance, improvement in the tax rate, Early results from UpLift, and back of a lower share count offset headwinds from foreign exchange translation and increased interest expense. With that, I'll turn it over to Anurag to walk through our results in more detail. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Thank you, Judy. Starting with segment sales performance on Slide 6. This new equipment organic sales were roughly flat in the first quarter when compared to the prior year. Americas grew mid-teens and solid backlog conversion, EMEA and Asia Pacific both grew low single digits, driven by growth in key markets, and China experienced a double-digit decline due to the lower backlog and weaker market conditions that Judy mentioned. New equipment pricing was strong in the Americas, EMEA, and Asia Pacific in the first quarter, up low to mid-single digits. In China, while the pricing environment remains challenging, we continue to drive productivity and capitalize on lower commodity prices. Service sales were $2.2 billion in the first quarter with organic sales growth of 6.5%, reflecting growth across all regions and in all lines of business and marking the 12th consecutive quarter of mid-single-digit or greater organic sales growth. Maintenance and repair continues to perform well, up 5.8% from portfolio growth, robust repair volumes, and maintenance pricing, which was up more than 3 points, excluding the impact of mix and churn. On modernization, double-digit growth in China and Asia Pacific drove organic sales up approximately 10% in the quarter. Turning to segment operating performance on Slide 7. First quarter new equipment operating profit of $71 million, was up $6 million at constant currency. Favorable pricing, productivity, and commodity tailwinds more than offset mix headwinds and drove 20 basis points of margin expansion. Service operating profit of $523 million, was up $47 million at constant currency as drop-through on higher volume, favorable pricing, and productivity more than offset annual wage inflation. This led to margin expansion of 70 basis points for the segment. Additionally, the ramp of UpLift initiatives alongside cost controls, improved our SG&A as a percent of sales by 50 basis points year over year. All in all, we expanded overall adjusted margins by 80 basis points and grew EPS 10%. Shifting to cash. We generated $155 million of adjusted free cash flow in the first quarter, reflecting a build in working capital following a snapback from a strong Q4 and the timing of billings in the quarter. We are off to a good start. The strength of our service business, including the execution of a modernization strategy, combined with productivity efforts and the UpLift program more than offset the subdued new equipment markets. As a result and with good line of sight through the rest of the year, we are raising our profit guidance. I'll turn it back to Judy to discuss our 2024 outlook. Questions & Answers: Operator Thank you. [Operator instructions] Your first question comes from the line of Rob Wertheimer with Melius Research. Your line is open. Rob Wertheimer -- Melius Research -- Analyst Thank you. Good morning, everybody. Happy to be here. So my question is just around mods, where sales and orders are showing obviously healthy double-digit-ish growth. Would you talk a little bit about margin in those orders in the backlogs and the drivers of it? I know you're working on standardizing production on the product and a bunch of stuff, low price is a positive driver there in the backlog as well as you kind of continue on that journey to bring margins up and above. And I wonder if you could just talk a little bit about what the environment is out there for that product? Is there a lot of customer pull on it? Do you have solid demand where you can kind of embrace pricing, maybe just the demand environment around that? Thank you. Judy Marks -- President and Chief Executive Officer Sure. Thanks, Rob. Listen, mod was up nicely in all regions. I think our strategy is on track. Our team is executing that strategy. And these are still early days in what will be probably more than a decade-long mod growth market. So we're really encouraged by what we're seeing. Orders up almost 13% in the quarter, backlog up 15%. So now we're just building on quarter after quarter of double-digit growth. The standouts, we really saw in the quarter from the demand side, Asia Pacific and Americas, were up really nicely, but Asia Pacific was a standout and China did well, too, double digit. So everyone, again, all regions are up. We're seeing a mix of major projects and just really good volume package demand by customers and we're performing well. In terms of the margin, I'll turn it over to Anurag for help with the backlog, but what I think is important, what we shared at investor day was that we would shortly be surpassing mod margins would be surpassing equipment margins. I'm really pleased to share that in Q1, we saw that inflection point and mod margins are now higher than new equipment margins. Anurag, I'll let you add some color. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yes. Thanks. Just to add to that, so a few quarters ago, we said that we should be higher than the new and margin. We are here right now, modestly higher, as Judy said, one quarter does not make a trend, but we are very encouraged by what we are seeing in terms mod margins. And as the year goes by, we should see more of the expansion on mod margin and more differential between that and new equipment. What's driving the mod margin expansion is more of us becoming more productive on the cost side, right? The initiatives that we mentioned around standardization, we are across the supply be at the factory, be the product, and doing field installation at a lower cost, all of is helping out and it's really driving the margin expansion. So it's more on the product side that we control. But we've got to do a lot more than that and let's see how the year plays out but very encouraged. Judy Marks -- President and Chief Executive Officer Yes. The last thing I'll add, Rob, is that mod market has potential of several million units in every of our regions. So this won't be lopsided growth. We anticipate significant growth by all regions. Rob Wertheimer -- Melius Research -- Analyst Perfect. Thank you. Operator Your next question comes from the line of Julian Mitchell with Barclays Capital. Your line is open. Julian Mitchell -- Barclays -- Analyst Hi. Good morning. Just wondered when you're looking the overall sort of global picture on new equipment. The backlog was flat at constant currency year on year with TTM orders down. It seems like TTM orders should be down again in the second quarter. Just wondered how you're thinking about the year as a whole, if you could frame up sort of any expectations in new equipment around, say, book-to-bill and how we should think about the confidence in the new equipment backlog not shrinking year on year over the balance of the year? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yeah. Thanks, Julian, for the question. Listen, as we said, mod was down about 10% in the first quarter, second quarter -- sorry, new equipment was down 10% in the first quarter, expected to be down mid- to high single digit in the second quarter. So as the year kind of progresses, the compares do get better in the second half of the year because we started seeing the slowdown on the new equipment side, especially in Americas and EMEA more toward starting from 2Q of last year. So let's see how that progresses. If we perform in line with what the market does, the backlog of new equipment could be down a couple of points. If we do better than the market, then it could be flattish. So there is a possibility that the new equipment backlog as we end this year, could be flattish to down low single digits. And as we kind of mentioned at the investor day, if you look forward to the next few years, clearly, we're expecting new equipment to be flattish. But where we see a lot of growth coming in is on the mod side. And the mod backlogs are up 15%. We continue to perform well in the mod, new equipment, and mod as we end the year, that backlog should be up low single digit as we enter into 2025. Julian Mitchell -- Barclays -- Analyst That's helpful. Thank you. And then just maybe, my second question on the service margins, very good performance in the first quarter, up 70 bps year on year. Based on what you said about the second quarter could be up similarly year on year sort of 60, 70 bps in Q2 and the first half. So that guide of plus 50 bps of margin for the year, is that just reflecting sort of it's still only April a long way to go. Or is there anything specific happening with costs or technician wages or something in the back half? Maybe just any update around that wage inflation headwind. Judy Marks -- President and Chief Executive Officer Yeah. Let me unpack a few of those questions, Julian, and start with service margins. It is early in the year, but what we're seeing, again, with the portfolio growth of four plus what we're getting in service pricing like for like over 3 points, we're feeling good there. We do have a mix coming into play a little bit as mod revenue grows, and it grows a little faster than maintenance and repair. There's a little bit of a mix there that we've kind of factored into that margin outlook. But we've done -- our team has done a fantastic job on the productivity side, especially in the field and on driving repairs and the repair backlog as well, especially in the Americas. So right now, we'll continue to watch it. We feel comfortable at the 50 basis points. This is our 17th straight quarter of service-adjusted operating profit increasing, and it is the engine, as you know, to our model and our service-driven business model. Wage inflation, we're not seeing anything unusual. And obviously, we focus on productivity to offset that. Julian Mitchell -- Barclays -- Analyst Great. Thank you. Operator Your next question comes from the line of Nigel Coe with Wolfe Research. Your line is open. Nigel Coe -- Wolfe Research -- Analyst Thanks. Good morning, everyone. So as a proud Watchman, I was very pleased to hear called out a couple of times there, so thanks for that, Judy. So it's not -- it doesn't have happen very often in these calls. So -- Judy Marks -- President and Chief Executive Officer I know. I'm fun selecting them, Nigel. Nigel Coe -- Wolfe Research -- Analyst Yeah. I appreciate that. The key quite unusual for you guys to give so much color on the quarter. So just -- is this like a new world in here where you're going to give us a bit more kind of color or is there just some unusual stuff happening in the second quarter? I think you wanted to call out. And then maybe just in the spirit of maybe helping us to fill out the model, perhaps below the second line, I mean, tax rate seems to have come a bit lower, but anything on that we should be as well? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yeah. Thanks for the question, Nigel. The reason we give a little bit -- we typically give quite good color on the new equipment and service outstanding for the quarter. You gave a little bit more color this time was exactly the question you asked was on the tax rate, which was much lower in the quarter coming in at 20% for the full year. The guide is roughly the same at 25.5%. But because of planning and discrete items, they shift quarter to quarter, so wanted to kind of highlight the fact that where tax was coming in for the quarter. And obviously, the team is doing a really good job in terms of mating it through the course and bringing it down in year come. On the corporate expense, yes, it's going to be a few million dollars higher in the quarter, probably 0.9% to 1% of revenue. As we look at this year, nothing unusual there, except for ForEx, we do have some ForEx headwinds and that does get reflected in our corporate expense. So that probably increases by 6 to 10 basis points. Nigel Coe -- Wolfe Research -- Analyst OK. That's really helpful. And then on the free cash flow, I understand it's mainly AR timing, but is there anything in the mix of business on mod, so anything else that may be leading to a lengthening in the billing cycles, just curious seeing AR increasing from 4Q to Q. Anything to call out there? Or was it just timing? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer It's essentially timing. I mean if you look back at the past few years, we have more than 100% conversion. We are confident that we will get to the 100% conversion this year. We built up a couple of hundred million dollars of working capital part, but a little bit of it was because of lower down payments due to lower new equipment orders, but a larger part of it was just the timing of billings through the course of the quarter, where a lot happened in the month of March. We've already started unwinding that in the second quarter, we'll get to the $1.6 billion, and the confidence is reflected in the dividend and also increasing our share repurchase of $800 million to $1 billion. So no real structural change in terms of in terms of cash flow generation. Nigel Coe -- Wolfe Research -- Analyst That's great. Thank you. Operator Your next question comes from the line of Steve Tusa with J.P. Morgan. Your line is open. Steve Tusa -- JPMorgan Chase and Company -- Analyst Hi. Good morning. I think that there has been, from your peers a little bit of chatter around China and pricing there. Can you just clarify what you're seeing on the ground? Judy Marks -- President and Chief Executive Officer Yeah. Let me break it into new equipment and service pricing. China is by far the most competitive pricing market we are in anywhere in the globe, and it's the only region where we are not getting price for new equipment. Now we've offset that with both productivity and on commodities, where we've seen -- we've locked in and we've seen steel prices, which are 80% of our commodity purchases come down. But it is extremely competitive. And we see that through the public bids, we see that through the volume bids, and we just see that through the segment. I mean the segment itself, the new equipment market is weak. It's down 10% in the quarter, and we're calling it down high single digit to 10% for the year, and that's after really two years of it already being down. So if you ask us, Steve, we would tell you that the China segment for 2024 will be at about 450,000 units, and we expect new equipment pricing to remain competitive. Again, focusing -- we focus, we brought in some new product innovations in the quarter, and we'll continue to exercise and work with our dealers and our agents and distributors and increase our sales channel, and continue to grow share. On service pricing. Service pricing, again, in China is kind of flattish. And -- but the drivers are less price in service and more on productivity, volume density, and Otis ONE and Otis ONE is really a nice contributor for us. We grew our portfolio. We're now at 400,000 units and more than half cover with Otis ONE, and that's driving some significant productivity challenges. But we are -- price in China is challenging. Steve Tusa -- JPMorgan Chase and Company -- Analyst When you say challenging, I mean, can you give us a little bit of magnitude around that? I mean, is that down five, down 10, like just any kind of magnitude on a year-over-year basis? Judy Marks -- President and Chief Executive Officer No. I mean, it's been challenging. This is year three of challenging pricing there. Again, Sally and the team are just focused on productivity, on commodities, on everything we can in terms of getting cost out of our products even from an engineering perspective and installation. So I think we've done a really good job there staying as neutral as we can in terms of price cost. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer And, Steve, just to add to that, right, so because it's a deflationary economy input costs are coming down. But if you look at the overall new equipment backlog for us, even after having about $20 million of pricing tailwind in the quarter, flushing through the P&L, our backlog margin for new equipment is still higher relative to last year. I mean Americas EME at mid-single-digit price increases, Asia Pacific low. So really, really good progress in terms of backlog margin, building it up, and pushing it through the P&L as well. Steve Tusa -- JPMorgan Chase and Company -- Analyst OK, yeah. That makes a lot of sense. All right. Thanks, guys. Operator Your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open. Joe ODea -- Wells Fargo Securities -- Analyst Hi. Good morning. Wanted to just start on your observations of ABI and Dodge Momentum, most recent prints, how that aligns with what you're seeing in the market, clearly, some softening in those lead indexes. While at the same time, your Americas new equipment outlook actually improving a little bit since prior. And so whether this is the result of just kind of long lead times on projects or if there's any kind of incremental softening that you're seeing on the ground out there in North America? Judy Marks -- President and Chief Executive Officer Yes. So in North America, I would tell you that the new equipment market segment that we saw in Q1, it remained weak but it was at a lesser pace than the weakness we saw in the second half of '23. And you saw we delivered -- we increased price and we delivered on the backlog significantly because our revenue was up 15%. Our orders challenge in the first quarter was a really tough compare. North America to us as Canada and the U.S. We had several fully, Joe. What I would tell you is all verticals this quarter in North America were down. Commercial was down more than resi. Resi is becoming more stable. And for the part of infrastructure where we compete and where we are successful, that has been more stable as well. Joe ODea -- Wells Fargo Securities -- Analyst That's helpful. And then just on capital deployment and increasing the share repurchase for the year, it sounds like some opportunities there related to repatriation. My question is just related to the M&A side of things, what you're seeing on opportunities there, the pipeline just expectations for being able to execute on any bolt-on opportunities this year? Judy Marks -- President and Chief Executive Officer Yeah. Well, as Anurag shared on the cash repatriation, kudos to our team, this is the first time I think we've made a significant decrease in our cash balance bringing it down from $1 billion to $900 million and continuing to focus on how we can do that since spin. So that's allowed us to repatriate $300 million and gave us the confidence between the cash and the repatriation to increase. This is the first time we're doing -- we've announced a share repurchase that starts with $1 billion since spin. So it's our fourth year patriot -- of cash buybacks -- of stock buybacks. But we're feeling confident there. In terms of M&A, the bolt-on business is still healthy. We've got a good book of business. It's just kind of timing when those get closed. We outlook every year, about $50 million to $100 million of bolt-ons. For us, they have to -- eventually, they have to be accretive. They have to as well be -- give us the density and be in the right locations and have one of our teams that knows how to integrate them well. And I think we've proven that year after year and decade after decade. In terms of anything else, generational, obviously, we've got a strong balance sheet. These opportunities don't come up frequently in the elevator, escalator market. And we will continue to evaluate anything that comes to market. But I -- again, being the leading provider, our service strategy is working, our capital strategy is working, our operational strategy is working. So we don't feel the need to have to do generational M&A, but of course, we'll take a look at it. Operator Thank you. Your next question comes from the line of Nick Housden with RBC Capital Markets. Your line is open. Nick Housden -- RBC Capital Markets -- Analyst Just on the outlook for modernization. The sales growth guidance was tweaked up to 8% to 9% growth but that's against a backlog that's up 15%. So I mean I'm just trying to understand what the relationship is between backlog growth and maybe the next 12 months of sales growth that we can expect to see there. Is it just to do with converted times, why it wouldn't be a little bit higher than that? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yes, you got it. It's more around the conversion time, right? So if you look at our modernization sales growth, it's actually been picking up every quarter. There's no reason why it should not be going up double-digits in the next three to four quarters. And as the sales conversion catches up with backlog. And part of it is the same thing which is driving a margin increase. I think it's more around standardization of products, reaching the lead time from the factory, reducing the lead time to install it. I think those are drivers which will help us get there. So it's ticking up in the right direction, but where it should kind of mirror is where the backlog grows at, and we should be there in the next few quarters. Judy Marks -- President and Chief Executive Officer Yes. Nick, what we've done is we've taken everything we've learned in new equipment service over four years, whether that's go-to-market strategy, whether that's sales specialization driving common installation beyond industrializing the packages, supply chain, and everything else. So we're really encouraged by the continued mod trajectory. And as we said, we're going to continue to expand margins there and focus on backlog conversion. Nick Housden -- RBC Capital Markets -- Analyst That's great. And then just on the service pricing, I think a couple of times that it was 3 points in the quarter net, maybe I'm misremembering, but I think previously you commented saying that you were expecting 100 basis points of net pricing for 2024. So I'm just wondering where the extra 2 points has come from. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Just to clarify, the 300 basis points that we spoke excludes mix and churn. So it's a gross pricing. The net for the quarter was a little bit higher than being flattish over there, but it's consistent to what we are seeing in pricing in the service business. So EME is seeing mid-single-digit price increases. America is close to that. Asia Pacific has always been on the lower side. So from a pricing perspective, it's sticking well in the market, and we're seeing good traction over there. What's really helping our service margins to grow besides that is clearly more on the productivity side. And with the productivity because of that, we kind of increase the profit on the service business for the year. Nick Housden -- RBC Capital Markets -- Analyst Great. Thank you very much. Operator Your next question comes from the line of Miguel Borrega with BNP Paribas. Your line is open. Miguel Borrega -- Exane BNP Paribas -- Analyst Hi. Good morning, everyone. I've got two questions. The first one, just on China. For several quarters now, you mentioned three years in a row that you're seeing price pressure. I know you're offsetting with lower product costs, but where do you think the price -- that the floor of pricing is? When you look at your competitors that are putting pressure on pricing, how long do you think this will keep going? And then long term, where do you think margins in China new equipment will ultimately converge to if you think it'll end up at Western levels? That's my first question. Judy Marks -- President and Chief Executive Officer Yeah. Let me start, and Anurag will add on the margin side. But Miguel, we -- listen, I'm not here to declare a trough. As soon as we see that in terms of the competitive pricing and the segment, we will share that but we're not predicting it this year as you can tell with our outlook. Again though, I can say, having been in China in March and meeting with multiple government officials as part of the China Development Forum, there are efforts underway. The government is taking action. It has not changed sentiment or the liquidity easing yet. But as that happens, obviously, our team will respond. They'll respond quickly, and we have the ability to see price inflect. I believe you will see us do that as we have led in pricing in China many times. Margins? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yeah. Just exactly. It's a balance between the pricing and the share of segment, and I think we look at both. In terms of margins for us, if pricing is coming down in China, as we earlier mentioned, it's also commodity prices. We've seen tailwinds over there, and we're taking cost out and seeing more supply chain efficiencies. So we are maintaining our margin rates in China. And as we go forward, between price, between share, between margin, we're going to find a balance between all three of that so we can continue to grow our profitability as we move along. Judy Marks -- President and Chief Executive Officer Yeah. And that's really what you're seeing, Miguel, with a now. Service now being 25% of our revenue in China and growing mod element of that grew double digit last quarter. That's going to continue to grow and continue. So you'll see this trade we normally do between volume, price in every market, but in China, explicitly, we see it moving to becoming more of a mature market and reflecting that, especially in service. Miguel Borrega -- Exane BNP Paribas -- Analyst That's great. And then just a follow-up on capital allocation. So after you upped the dividend and buyback, I know you're buying the minorities in Japan. So does that mean there's not much out there? I know you talked about bolt-ons, but how would you think about potential targets in Southeast Asia, Japan also, what would be the rationale for buying more companies in Southeast Asia versus the rest of the world? Judy Marks -- President and Chief Executive Officer Well, our M&A approach for bolt-ons, no matter where it is, is a similar model. It's got to again be accretive to us. It's got to be in a place where we know how to integrate it, and it's got to happen in a location where it adds density to our routes. Now we're fortunate in most markets that that works for people when they're ready to sell. But we're always interested in bolt-ons everywhere in the world. We ended up buying Schindler's portfolio in Japan in 2016, and that integration has gone extremely well. And our team has continued to grow our service business in Japan, where conversion rates are highest in the world, call back rates are in the world. So it's a high-quality, good margin business for us, and we thank our partners in Nippon Otis, but it was time we felt to -- like we've done with our disciplined capital everywhere else, for us to get our legal entities in order, as well as get our balance sheet in order. So you'll see that in the NCI line in the future. And it just like we did Zardoya made sense to us. Other -- as I said, other larger properties will evaluate, but again, only where they make sense for Otis and for us, for us serving our customers, as well as for our shareholders. Operator Your next question comes from the line of Gautam Khanna with Cowen. Your line is open. Gautam Khanna -- TD Cowen -- Analyst Hey, good morning, guys. I wanted to ask about India specifically, and just what -- it sounds like that's a source of strength still. If you could just talk about what the big drivers are there? And if you could dimensionalize how big that is relative to the rest Asia-Pac? Judy Marks -- President and Chief Executive Officer Yeah. I mean, India -- yeah, India -- Gautam, thanks. India is the highest growth market anywhere in the world. It's the No. 2 new equipment globally after China, but it's got different attributes than China because the conversion rates look far more like mature markets like EMEA. We've been doing -- we installed our first unit in India in the 1890. So -- and we've had an operating company in India for a long time. We've got residents there. I really like our position. We got a factor there, have Made in India product across elevators and public and commercial escalators. The growth we're seeing is really in every area, but infrastructure is moving very rapidly. Obviously, large population population, the rising middle class is driving not just urbanization, but demand for higher-end residential, especially multifamily, so -- and multi-use. So every vertical in India growing, and we see that market growing double digit, and we are investing in it. We're investing in it in terms of adding colleagues and field colleagues. We've got them all over the country. Obviously, our factory is driving significant production increase quarter over quarter. Our supply chain continues to focus and developing more of that local supply chain. It is competitive. And we have to hit some competitive cost points, but our team has managed through that extremely effectively. But think of it as more -- even though it's a high-growth market, more of a mature market, where you don't have this thousands of ISPs, you have this ability to convert at the 90-plus level like a mature market, so our service portfolio grows there as well. And we have a really strong team under SEBI's leadership in India that understands how to do business in India, do it well, do it right, and quarter after quarter has just proven significant growth. We are very, very bullish on India. And we'll continue to invest there. Gautam Khanna -- TD Cowen -- Analyst Thank you. That's helpful. And I just wondered if you could also just talk about supply chain generally. Where, if any, constraints still exist, and how your own lead times have changed over the last three months? Judy Marks -- President and Chief Executive Officer Yes. We -- the good news is we've worked through the majority of any of our supply chain issues. From a comfort perspective for you on commodities, we expect this year after last year, we drove about $44 million, $45 million of savings on commodities. This year, we're looking at $15 million to $20 million. We think we can get that on top of last year's. And the only reason I say $15 million to $20 million instead of $20 million is we've seen steel increase in certain parts of the world. But we are locked in terms of our commodities for the rest of this year from a productivity and a cost standpoint, fairly well, 60% locked, 80% on steel, our magnets are fully locked. So our supply chain team has done a great job through the challenges and now is optimizing. So it's not impacting at all. And really, there's no single call out. Are there still some people that are recovering some smaller suppliers there are a continue to focus on dual sourcing, resiliency in our supply chain. And I got to tell you, our factories on new equipment this first quarter they delivered. Operator Thank you. This concludes the question-and-answer session. I will turn the call to Judy for closing remarks. Judy Marks -- President and Chief Executive Officer Thank you, Sarah. We are quite pleased with our first quarter results as we make steady progress delivering value for our customers and shareholders throughout the remainder of the year. Everyone, thank you for joining us. Stay safe and well. Goodbye. Answer:

Otis' first quarter 2024 earnings conference call

Operator Good morning, and welcome to Otis' first quarter 2024 earnings conference call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com. I'll now turn it over to Michael Rednor, vice president of investor relations. Please go ahead. Michael Rednor -- Vice President, Investor Relations Thank you, Sarah. Welcome to Otis' first quarter 2024 earnings conference call. On the call with me today are Judy Marks, chair, CEO, and president; and Anurag Maheshwari, executive vice president and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. The Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. Now I'd like to turn the call over to Judy. Judy Marks -- President and Chief Executive Officer Thank you, Mike, and good morning, afternoon and evening, everyone. Thank you for joining us. Starting on Slide 3. Otis started the year off with a solid first quarter, again confirming and demonstrating the continued strength of our service-driven business model, as we outlined during our investor day in February. Through the hard work and commitment of our colleagues across the globe, we achieved mid-single-digit organic sales growth driven by our service business. We expanded adjusting operating margins by 80 basis points with both service and new equipment operating profit margins expanding 70 and 20 basis points, respectively. With another quarter of maintenance portfolio growth above 4% and solid modernization sales, we delivered 6.5% service organic sales growth. Mod orders increased 12.9% in the first quarter with growth across all regions while challenging market conditions and new equipment continue. Delivering operational excellence across the organization drove 10% adjusted EPS growth. This quarter, we executed our capital strategy with excellence. We continue to work to repatriate cash from overseas and use it for the benefit of our shareholders. As such, we were able to repurchase $300 million of shares in the quarter. Additionally, yesterday, we announced a 14.7% increase to our quarterly dividend. We have nearly doubled our dividend since spin, emphasizing the importance we place on delivering shareholder value. We also made important progress toward our environmental goals. Earlier this month, the science-based targets initiative approved our near-term science-based greenhouse gas emissions reduction targets. This is a meaningful step on our sustainability journey, and our steady progress meeting our commitments will be shared in our next ESG report expected to be published later this year. Turning to our orders performance on Slide 4. New equipment orders were down 10% in the first quarter as anticipated due to the tough compare versus the prior year. Double-digit growth in EMEA and mid-single-digit growth in Asia Pacific were more than offset by a double-digit decline in the Americas and high teens decline in China. Nevertheless, our new equipment backlog at constant currency was roughly flat versus the prior year and up slightly versus the prior quarter. Service side, we continue to deliver consistent solid performance with another quarter portfolio growth above 4% and demonstrating the value of modernization new strategic imperative 13% orders growth and 15% backlog growth at constant currency, setting us up well for modernization sales through the rest of the year and into 2025. Reflecting the hard work of our colleagues around the world, I'll highlight a few orders we received during the quarter. In China, Otis Electric will provide 46 escalators and nine elevators for an expansion of the Shenzhen Metro Line 5. The elevators and escalators will be installed at three new stations connecting to the city's grand theater, where passengers can transfer to two other metro lines. In Canada, Otis will provide 19 elevators at the South Niagara Hospital, a 12-story facility that will consolidate and expand acute care services in the region. It's designed to meet the Canada Green Building Council's lead silver standards and is an important step toward becoming the first well-certified hospital in Canada. These elevators will be equipped with Otis ONE, EMS Panorama, and autonomous mobile robot system integration. In Japan, Otis is modernizing six elevators and six escalators at the Hamamatsu Act tower in Hamamatsu city. We look forward to continuing to service the 212-meter tall tower as we've done for nearly three decades. And in the United Kingdom, the National Health Service of Wales has been an Otis customer since 2018 and has recently renewed their service contract, covering 450 elevators across many health facilities in the country for an additional five years. Building upon our trusted relationship, we will now modernize 19 elevators at the University Hospital, Wales, and Cardif. Turning to Q1 results on Slide 5. We delivered net sales of $3.4 billion in the first quarter, with organic sales up 3.8%. Despite dynamic market conditions, we have delivered organic growth every quarter since the end of 2020. Adjusted operating profit, excluding a $7 million foreign exchange headwind, was up $50 million with both segments contributing. Adjusted EPS grew 10% or $0.08 in the quarter, driven by strong operational performance, improvement in the tax rate, Early results from UpLift, and back of a lower share count offset headwinds from foreign exchange translation and increased interest expense. With that, I'll turn it over to Anurag to walk through our results in more detail. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Thank you, Judy. Starting with segment sales performance on Slide 6. This new equipment organic sales were roughly flat in the first quarter when compared to the prior year. Americas grew mid-teens and solid backlog conversion, EMEA and Asia Pacific both grew low single digits, driven by growth in key markets, and China experienced a double-digit decline due to the lower backlog and weaker market conditions that Judy mentioned. New equipment pricing was strong in the Americas, EMEA, and Asia Pacific in the first quarter, up low to mid-single digits. In China, while the pricing environment remains challenging, we continue to drive productivity and capitalize on lower commodity prices. Service sales were $2.2 billion in the first quarter with organic sales growth of 6.5%, reflecting growth across all regions and in all lines of business and marking the 12th consecutive quarter of mid-single-digit or greater organic sales growth. Maintenance and repair continues to perform well, up 5.8% from portfolio growth, robust repair volumes, and maintenance pricing, which was up more than 3 points, excluding the impact of mix and churn. On modernization, double-digit growth in China and Asia Pacific drove organic sales up approximately 10% in the quarter. Turning to segment operating performance on Slide 7. First quarter new equipment operating profit of $71 million, was up $6 million at constant currency. Favorable pricing, productivity, and commodity tailwinds more than offset mix headwinds and drove 20 basis points of margin expansion. Service operating profit of $523 million, was up $47 million at constant currency as drop-through on higher volume, favorable pricing, and productivity more than offset annual wage inflation. This led to margin expansion of 70 basis points for the segment. Additionally, the ramp of UpLift initiatives alongside cost controls, improved our SG&A as a percent of sales by 50 basis points year over year. All in all, we expanded overall adjusted margins by 80 basis points and grew EPS 10%. Shifting to cash. We generated $155 million of adjusted free cash flow in the first quarter, reflecting a build in working capital following a snapback from a strong Q4 and the timing of billings in the quarter. We are off to a good start. The strength of our service business, including the execution of a modernization strategy, combined with productivity efforts and the UpLift program more than offset the subdued new equipment markets. As a result and with good line of sight through the rest of the year, we are raising our profit guidance. I'll turn it back to Judy to discuss our 2024 outlook. Questions & Answers: Operator Thank you. [Operator instructions] Your first question comes from the line of Rob Wertheimer with Melius Research. Your line is open. Rob Wertheimer -- Melius Research -- Analyst Thank you. Good morning, everybody. Happy to be here. So my question is just around mods, where sales and orders are showing obviously healthy double-digit-ish growth. Would you talk a little bit about margin in those orders in the backlogs and the drivers of it? I know you're working on standardizing production on the product and a bunch of stuff, low price is a positive driver there in the backlog as well as you kind of continue on that journey to bring margins up and above. And I wonder if you could just talk a little bit about what the environment is out there for that product? Is there a lot of customer pull on it? Do you have solid demand where you can kind of embrace pricing, maybe just the demand environment around that? Thank you. Judy Marks -- President and Chief Executive Officer Sure. Thanks, Rob. Listen, mod was up nicely in all regions. I think our strategy is on track. Our team is executing that strategy. And these are still early days in what will be probably more than a decade-long mod growth market. So we're really encouraged by what we're seeing. Orders up almost 13% in the quarter, backlog up 15%. So now we're just building on quarter after quarter of double-digit growth. The standouts, we really saw in the quarter from the demand side, Asia Pacific and Americas, were up really nicely, but Asia Pacific was a standout and China did well, too, double digit. So everyone, again, all regions are up. We're seeing a mix of major projects and just really good volume package demand by customers and we're performing well. In terms of the margin, I'll turn it over to Anurag for help with the backlog, but what I think is important, what we shared at investor day was that we would shortly be surpassing mod margins would be surpassing equipment margins. I'm really pleased to share that in Q1, we saw that inflection point and mod margins are now higher than new equipment margins. Anurag, I'll let you add some color. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yes. Thanks. Just to add to that, so a few quarters ago, we said that we should be higher than the new and margin. We are here right now, modestly higher, as Judy said, one quarter does not make a trend, but we are very encouraged by what we are seeing in terms mod margins. And as the year goes by, we should see more of the expansion on mod margin and more differential between that and new equipment. What's driving the mod margin expansion is more of us becoming more productive on the cost side, right? The initiatives that we mentioned around standardization, we are across the supply be at the factory, be the product, and doing field installation at a lower cost, all of is helping out and it's really driving the margin expansion. So it's more on the product side that we control. But we've got to do a lot more than that and let's see how the year plays out but very encouraged. Judy Marks -- President and Chief Executive Officer Yes. The last thing I'll add, Rob, is that mod market has potential of several million units in every of our regions. So this won't be lopsided growth. We anticipate significant growth by all regions. Rob Wertheimer -- Melius Research -- Analyst Perfect. Thank you. Operator Your next question comes from the line of Julian Mitchell with Barclays Capital. Your line is open. Julian Mitchell -- Barclays -- Analyst Hi. Good morning. Just wondered when you're looking the overall sort of global picture on new equipment. The backlog was flat at constant currency year on year with TTM orders down. It seems like TTM orders should be down again in the second quarter. Just wondered how you're thinking about the year as a whole, if you could frame up sort of any expectations in new equipment around, say, book-to-bill and how we should think about the confidence in the new equipment backlog not shrinking year on year over the balance of the year? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yeah. Thanks, Julian, for the question. Listen, as we said, mod was down about 10% in the first quarter, second quarter -- sorry, new equipment was down 10% in the first quarter, expected to be down mid- to high single digit in the second quarter. So as the year kind of progresses, the compares do get better in the second half of the year because we started seeing the slowdown on the new equipment side, especially in Americas and EMEA more toward starting from 2Q of last year. So let's see how that progresses. If we perform in line with what the market does, the backlog of new equipment could be down a couple of points. If we do better than the market, then it could be flattish. So there is a possibility that the new equipment backlog as we end this year, could be flattish to down low single digits. And as we kind of mentioned at the investor day, if you look forward to the next few years, clearly, we're expecting new equipment to be flattish. But where we see a lot of growth coming in is on the mod side. And the mod backlogs are up 15%. We continue to perform well in the mod, new equipment, and mod as we end the year, that backlog should be up low single digit as we enter into 2025. Julian Mitchell -- Barclays -- Analyst That's helpful. Thank you. And then just maybe, my second question on the service margins, very good performance in the first quarter, up 70 bps year on year. Based on what you said about the second quarter could be up similarly year on year sort of 60, 70 bps in Q2 and the first half. So that guide of plus 50 bps of margin for the year, is that just reflecting sort of it's still only April a long way to go. Or is there anything specific happening with costs or technician wages or something in the back half? Maybe just any update around that wage inflation headwind. Judy Marks -- President and Chief Executive Officer Yeah. Let me unpack a few of those questions, Julian, and start with service margins. It is early in the year, but what we're seeing, again, with the portfolio growth of four plus what we're getting in service pricing like for like over 3 points, we're feeling good there. We do have a mix coming into play a little bit as mod revenue grows, and it grows a little faster than maintenance and repair. There's a little bit of a mix there that we've kind of factored into that margin outlook. But we've done -- our team has done a fantastic job on the productivity side, especially in the field and on driving repairs and the repair backlog as well, especially in the Americas. So right now, we'll continue to watch it. We feel comfortable at the 50 basis points. This is our 17th straight quarter of service-adjusted operating profit increasing, and it is the engine, as you know, to our model and our service-driven business model. Wage inflation, we're not seeing anything unusual. And obviously, we focus on productivity to offset that. Julian Mitchell -- Barclays -- Analyst Great. Thank you. Operator Your next question comes from the line of Nigel Coe with Wolfe Research. Your line is open. Nigel Coe -- Wolfe Research -- Analyst Thanks. Good morning, everyone. So as a proud Watchman, I was very pleased to hear called out a couple of times there, so thanks for that, Judy. So it's not -- it doesn't have happen very often in these calls. So -- Judy Marks -- President and Chief Executive Officer I know. I'm fun selecting them, Nigel. Nigel Coe -- Wolfe Research -- Analyst Yeah. I appreciate that. The key quite unusual for you guys to give so much color on the quarter. So just -- is this like a new world in here where you're going to give us a bit more kind of color or is there just some unusual stuff happening in the second quarter? I think you wanted to call out. And then maybe just in the spirit of maybe helping us to fill out the model, perhaps below the second line, I mean, tax rate seems to have come a bit lower, but anything on that we should be as well? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yeah. Thanks for the question, Nigel. The reason we give a little bit -- we typically give quite good color on the new equipment and service outstanding for the quarter. You gave a little bit more color this time was exactly the question you asked was on the tax rate, which was much lower in the quarter coming in at 20% for the full year. The guide is roughly the same at 25.5%. But because of planning and discrete items, they shift quarter to quarter, so wanted to kind of highlight the fact that where tax was coming in for the quarter. And obviously, the team is doing a really good job in terms of mating it through the course and bringing it down in year come. On the corporate expense, yes, it's going to be a few million dollars higher in the quarter, probably 0.9% to 1% of revenue. As we look at this year, nothing unusual there, except for ForEx, we do have some ForEx headwinds and that does get reflected in our corporate expense. So that probably increases by 6 to 10 basis points. Nigel Coe -- Wolfe Research -- Analyst OK. That's really helpful. And then on the free cash flow, I understand it's mainly AR timing, but is there anything in the mix of business on mod, so anything else that may be leading to a lengthening in the billing cycles, just curious seeing AR increasing from 4Q to Q. Anything to call out there? Or was it just timing? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer It's essentially timing. I mean if you look back at the past few years, we have more than 100% conversion. We are confident that we will get to the 100% conversion this year. We built up a couple of hundred million dollars of working capital part, but a little bit of it was because of lower down payments due to lower new equipment orders, but a larger part of it was just the timing of billings through the course of the quarter, where a lot happened in the month of March. We've already started unwinding that in the second quarter, we'll get to the $1.6 billion, and the confidence is reflected in the dividend and also increasing our share repurchase of $800 million to $1 billion. So no real structural change in terms of in terms of cash flow generation. Nigel Coe -- Wolfe Research -- Analyst That's great. Thank you. Operator Your next question comes from the line of Steve Tusa with J.P. Morgan. Your line is open. Steve Tusa -- JPMorgan Chase and Company -- Analyst Hi. Good morning. I think that there has been, from your peers a little bit of chatter around China and pricing there. Can you just clarify what you're seeing on the ground? Judy Marks -- President and Chief Executive Officer Yeah. Let me break it into new equipment and service pricing. China is by far the most competitive pricing market we are in anywhere in the globe, and it's the only region where we are not getting price for new equipment. Now we've offset that with both productivity and on commodities, where we've seen -- we've locked in and we've seen steel prices, which are 80% of our commodity purchases come down. But it is extremely competitive. And we see that through the public bids, we see that through the volume bids, and we just see that through the segment. I mean the segment itself, the new equipment market is weak. It's down 10% in the quarter, and we're calling it down high single digit to 10% for the year, and that's after really two years of it already being down. So if you ask us, Steve, we would tell you that the China segment for 2024 will be at about 450,000 units, and we expect new equipment pricing to remain competitive. Again, focusing -- we focus, we brought in some new product innovations in the quarter, and we'll continue to exercise and work with our dealers and our agents and distributors and increase our sales channel, and continue to grow share. On service pricing. Service pricing, again, in China is kind of flattish. And -- but the drivers are less price in service and more on productivity, volume density, and Otis ONE and Otis ONE is really a nice contributor for us. We grew our portfolio. We're now at 400,000 units and more than half cover with Otis ONE, and that's driving some significant productivity challenges. But we are -- price in China is challenging. Steve Tusa -- JPMorgan Chase and Company -- Analyst When you say challenging, I mean, can you give us a little bit of magnitude around that? I mean, is that down five, down 10, like just any kind of magnitude on a year-over-year basis? Judy Marks -- President and Chief Executive Officer No. I mean, it's been challenging. This is year three of challenging pricing there. Again, Sally and the team are just focused on productivity, on commodities, on everything we can in terms of getting cost out of our products even from an engineering perspective and installation. So I think we've done a really good job there staying as neutral as we can in terms of price cost. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer And, Steve, just to add to that, right, so because it's a deflationary economy input costs are coming down. But if you look at the overall new equipment backlog for us, even after having about $20 million of pricing tailwind in the quarter, flushing through the P&L, our backlog margin for new equipment is still higher relative to last year. I mean Americas EME at mid-single-digit price increases, Asia Pacific low. So really, really good progress in terms of backlog margin, building it up, and pushing it through the P&L as well. Steve Tusa -- JPMorgan Chase and Company -- Analyst OK, yeah. That makes a lot of sense. All right. Thanks, guys. Operator Your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open. Joe ODea -- Wells Fargo Securities -- Analyst Hi. Good morning. Wanted to just start on your observations of ABI and Dodge Momentum, most recent prints, how that aligns with what you're seeing in the market, clearly, some softening in those lead indexes. While at the same time, your Americas new equipment outlook actually improving a little bit since prior. And so whether this is the result of just kind of long lead times on projects or if there's any kind of incremental softening that you're seeing on the ground out there in North America? Judy Marks -- President and Chief Executive Officer Yes. So in North America, I would tell you that the new equipment market segment that we saw in Q1, it remained weak but it was at a lesser pace than the weakness we saw in the second half of '23. And you saw we delivered -- we increased price and we delivered on the backlog significantly because our revenue was up 15%. Our orders challenge in the first quarter was a really tough compare. North America to us as Canada and the U.S. We had several fully, Joe. What I would tell you is all verticals this quarter in North America were down. Commercial was down more than resi. Resi is becoming more stable. And for the part of infrastructure where we compete and where we are successful, that has been more stable as well. Joe ODea -- Wells Fargo Securities -- Analyst That's helpful. And then just on capital deployment and increasing the share repurchase for the year, it sounds like some opportunities there related to repatriation. My question is just related to the M&A side of things, what you're seeing on opportunities there, the pipeline just expectations for being able to execute on any bolt-on opportunities this year? Judy Marks -- President and Chief Executive Officer Yeah. Well, as Anurag shared on the cash repatriation, kudos to our team, this is the first time I think we've made a significant decrease in our cash balance bringing it down from $1 billion to $900 million and continuing to focus on how we can do that since spin. So that's allowed us to repatriate $300 million and gave us the confidence between the cash and the repatriation to increase. This is the first time we're doing -- we've announced a share repurchase that starts with $1 billion since spin. So it's our fourth year patriot -- of cash buybacks -- of stock buybacks. But we're feeling confident there. In terms of M&A, the bolt-on business is still healthy. We've got a good book of business. It's just kind of timing when those get closed. We outlook every year, about $50 million to $100 million of bolt-ons. For us, they have to -- eventually, they have to be accretive. They have to as well be -- give us the density and be in the right locations and have one of our teams that knows how to integrate them well. And I think we've proven that year after year and decade after decade. In terms of anything else, generational, obviously, we've got a strong balance sheet. These opportunities don't come up frequently in the elevator, escalator market. And we will continue to evaluate anything that comes to market. But I -- again, being the leading provider, our service strategy is working, our capital strategy is working, our operational strategy is working. So we don't feel the need to have to do generational M&A, but of course, we'll take a look at it. Operator Thank you. Your next question comes from the line of Nick Housden with RBC Capital Markets. Your line is open. Nick Housden -- RBC Capital Markets -- Analyst Just on the outlook for modernization. The sales growth guidance was tweaked up to 8% to 9% growth but that's against a backlog that's up 15%. So I mean I'm just trying to understand what the relationship is between backlog growth and maybe the next 12 months of sales growth that we can expect to see there. Is it just to do with converted times, why it wouldn't be a little bit higher than that? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yes, you got it. It's more around the conversion time, right? So if you look at our modernization sales growth, it's actually been picking up every quarter. There's no reason why it should not be going up double-digits in the next three to four quarters. And as the sales conversion catches up with backlog. And part of it is the same thing which is driving a margin increase. I think it's more around standardization of products, reaching the lead time from the factory, reducing the lead time to install it. I think those are drivers which will help us get there. So it's ticking up in the right direction, but where it should kind of mirror is where the backlog grows at, and we should be there in the next few quarters. Judy Marks -- President and Chief Executive Officer Yes. Nick, what we've done is we've taken everything we've learned in new equipment service over four years, whether that's go-to-market strategy, whether that's sales specialization driving common installation beyond industrializing the packages, supply chain, and everything else. So we're really encouraged by the continued mod trajectory. And as we said, we're going to continue to expand margins there and focus on backlog conversion. Nick Housden -- RBC Capital Markets -- Analyst That's great. And then just on the service pricing, I think a couple of times that it was 3 points in the quarter net, maybe I'm misremembering, but I think previously you commented saying that you were expecting 100 basis points of net pricing for 2024. So I'm just wondering where the extra 2 points has come from. Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Just to clarify, the 300 basis points that we spoke excludes mix and churn. So it's a gross pricing. The net for the quarter was a little bit higher than being flattish over there, but it's consistent to what we are seeing in pricing in the service business. So EME is seeing mid-single-digit price increases. America is close to that. Asia Pacific has always been on the lower side. So from a pricing perspective, it's sticking well in the market, and we're seeing good traction over there. What's really helping our service margins to grow besides that is clearly more on the productivity side. And with the productivity because of that, we kind of increase the profit on the service business for the year. Nick Housden -- RBC Capital Markets -- Analyst Great. Thank you very much. Operator Your next question comes from the line of Miguel Borrega with BNP Paribas. Your line is open. Miguel Borrega -- Exane BNP Paribas -- Analyst Hi. Good morning, everyone. I've got two questions. The first one, just on China. For several quarters now, you mentioned three years in a row that you're seeing price pressure. I know you're offsetting with lower product costs, but where do you think the price -- that the floor of pricing is? When you look at your competitors that are putting pressure on pricing, how long do you think this will keep going? And then long term, where do you think margins in China new equipment will ultimately converge to if you think it'll end up at Western levels? That's my first question. Judy Marks -- President and Chief Executive Officer Yeah. Let me start, and Anurag will add on the margin side. But Miguel, we -- listen, I'm not here to declare a trough. As soon as we see that in terms of the competitive pricing and the segment, we will share that but we're not predicting it this year as you can tell with our outlook. Again though, I can say, having been in China in March and meeting with multiple government officials as part of the China Development Forum, there are efforts underway. The government is taking action. It has not changed sentiment or the liquidity easing yet. But as that happens, obviously, our team will respond. They'll respond quickly, and we have the ability to see price inflect. I believe you will see us do that as we have led in pricing in China many times. Margins? Anurag Maheshwari -- Executive Vice President, Chief Financial Officer Yeah. Just exactly. It's a balance between the pricing and the share of segment, and I think we look at both. In terms of margins for us, if pricing is coming down in China, as we earlier mentioned, it's also commodity prices. We've seen tailwinds over there, and we're taking cost out and seeing more supply chain efficiencies. So we are maintaining our margin rates in China. And as we go forward, between price, between share, between margin, we're going to find a balance between all three of that so we can continue to grow our profitability as we move along. Judy Marks -- President and Chief Executive Officer Yeah. And that's really what you're seeing, Miguel, with a now. Service now being 25% of our revenue in China and growing mod element of that grew double digit last quarter. That's going to continue to grow and continue. So you'll see this trade we normally do between volume, price in every market, but in China, explicitly, we see it moving to becoming more of a mature market and reflecting that, especially in service. Miguel Borrega -- Exane BNP Paribas -- Analyst That's great. And then just a follow-up on capital allocation. So after you upped the dividend and buyback, I know you're buying the minorities in Japan. So does that mean there's not much out there? I know you talked about bolt-ons, but how would you think about potential targets in Southeast Asia, Japan also, what would be the rationale for buying more companies in Southeast Asia versus the rest of the world? Judy Marks -- President and Chief Executive Officer Well, our M&A approach for bolt-ons, no matter where it is, is a similar model. It's got to again be accretive to us. It's got to be in a place where we know how to integrate it, and it's got to happen in a location where it adds density to our routes. Now we're fortunate in most markets that that works for people when they're ready to sell. But we're always interested in bolt-ons everywhere in the world. We ended up buying Schindler's portfolio in Japan in 2016, and that integration has gone extremely well. And our team has continued to grow our service business in Japan, where conversion rates are highest in the world, call back rates are in the world. So it's a high-quality, good margin business for us, and we thank our partners in Nippon Otis, but it was time we felt to -- like we've done with our disciplined capital everywhere else, for us to get our legal entities in order, as well as get our balance sheet in order. So you'll see that in the NCI line in the future. And it just like we did Zardoya made sense to us. Other -- as I said, other larger properties will evaluate, but again, only where they make sense for Otis and for us, for us serving our customers, as well as for our shareholders. Operator Your next question comes from the line of Gautam Khanna with Cowen. Your line is open. Gautam Khanna -- TD Cowen -- Analyst Hey, good morning, guys. I wanted to ask about India specifically, and just what -- it sounds like that's a source of strength still. If you could just talk about what the big drivers are there? And if you could dimensionalize how big that is relative to the rest Asia-Pac? Judy Marks -- President and Chief Executive Officer Yeah. I mean, India -- yeah, India -- Gautam, thanks. India is the highest growth market anywhere in the world. It's the No. 2 new equipment globally after China, but it's got different attributes than China because the conversion rates look far more like mature markets like EMEA. We've been doing -- we installed our first unit in India in the 1890. So -- and we've had an operating company in India for a long time. We've got residents there. I really like our position. We got a factor there, have Made in India product across elevators and public and commercial escalators. The growth we're seeing is really in every area, but infrastructure is moving very rapidly. Obviously, large population population, the rising middle class is driving not just urbanization, but demand for higher-end residential, especially multifamily, so -- and multi-use. So every vertical in India growing, and we see that market growing double digit, and we are investing in it. We're investing in it in terms of adding colleagues and field colleagues. We've got them all over the country. Obviously, our factory is driving significant production increase quarter over quarter. Our supply chain continues to focus and developing more of that local supply chain. It is competitive. And we have to hit some competitive cost points, but our team has managed through that extremely effectively. But think of it as more -- even though it's a high-growth market, more of a mature market, where you don't have this thousands of ISPs, you have this ability to convert at the 90-plus level like a mature market, so our service portfolio grows there as well. And we have a really strong team under SEBI's leadership in India that understands how to do business in India, do it well, do it right, and quarter after quarter has just proven significant growth. We are very, very bullish on India. And we'll continue to invest there. Gautam Khanna -- TD Cowen -- Analyst Thank you. That's helpful. And I just wondered if you could also just talk about supply chain generally. Where, if any, constraints still exist, and how your own lead times have changed over the last three months? Judy Marks -- President and Chief Executive Officer Yes. We -- the good news is we've worked through the majority of any of our supply chain issues. From a comfort perspective for you on commodities, we expect this year after last year, we drove about $44 million, $45 million of savings on commodities. This year, we're looking at $15 million to $20 million. We think we can get that on top of last year's. And the only reason I say $15 million to $20 million instead of $20 million is we've seen steel increase in certain parts of the world. But we are locked in terms of our commodities for the rest of this year from a productivity and a cost standpoint, fairly well, 60% locked, 80% on steel, our magnets are fully locked. So our supply chain team has done a great job through the challenges and now is optimizing. So it's not impacting at all. And really, there's no single call out. Are there still some people that are recovering some smaller suppliers there are a continue to focus on dual sourcing, resiliency in our supply chain. And I got to tell you, our factories on new equipment this first quarter they delivered. Operator Thank you. This concludes the question-and-answer session. I will turn the call to Judy for closing remarks. Judy Marks -- President and Chief Executive Officer Thank you, Sarah. We are quite pleased with our first quarter results as we make steady progress delivering value for our customers and shareholders throughout the remainder of the year. Everyone, thank you for joining us. Stay safe and well. Goodbye.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and welcome to the Polaris first quarter 2024 earnings conference call and webcast. All participants will be in listen-only mode. [Operator instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator instructions]. Please note, today's event is being recorded. I'd now like to turn the conference over to J.C. Weigelt, vice president, investor relations. Please go ahead. J.C. Weigelt -- Vice President, Investor Relations Thank you, Rocco, and good morning or afternoon, everyone. I'm J.C. Weigelt, vice president of investor relations at Polaris. Thank you for joining us for our 2024 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our chief executive officer; and Bob Mack, our chief financial officer. Both have prepared remarks summarizing the first quarter, as well as our expectations for the remainder of 2024, then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2023 10-K for additional details regarding risks and uncertainties. All references to the first quarter actual results and 2024 guidance are for our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now, I will turn it over to Mike Speetzen. Go ahead, Mike. Mike Speetzen -- Chief Executive Officer Thanks, J.C. Good morning, everyone, and thank you for joining us today. First quarter performance largely put out consistent with our expectations. You'll recall that headed into the year, we expected the first quarter to be one of the most challenging quarters given the difficult year over year comparisons and our plan to actively manage dealer inventory coupled with a more normalized production delivery of Snowmobiles. Q1 also saw us focused on continuing to execute the early stages to improve delivery, increase efficiencies and drive down operating costs in our larger manufacturing facilities. Sales in the first quarter were down 20%, which was in line with our expectations and adjusted EPS came in above our expectations given better performance on cost management. While we're pleased with our financial performance, we did experience the worst Snowmobile season we've seen in 13 years, driven by a lack of Snow across much of North America. Overall, it was great to see our products take share in ORV, motorcycles and marine. Our new product innovation is resonating with customers, which will drive future share gains. That, coupled with our operational improvements, makes me very optimistic about the direction of the business. North America retail was down 10%, driven by a weak Snow season, but was up 3% when you exclude Snow. Utility Off-Road vehicles continue to lead the way with strong demand for our RANGER lineup. Recreation was down, while On-Road was up for the quarter, driven by strength in North American markets, somewhat offset by international market weakness. Within Marine, we believe retail was flat during the first quarter using our internal registration data as we await the March data from SSI. We continue to play offense when it comes to innovation. Our RZR XP, Polaris XPEDITION and RANGER XD products are dealers in garnering much attention for their attractive features, cutting-edge technology with RIDE COMMAND+ and industry-leading capabilities. And we recently added to this launch with the new model year full-size RANGER portfolio and the new Indian motorcycle Scout portfolio. Once again, we delivered industry-leading innovation, further reinforcing our position as the global leader in powersports. Following through on our commitment to actively managed dealer inventory, we flexed inventory up in categories where we've seen consistent growth, such as Off-Road utility and new product models. We also reduced shipments to help better manage dealer inventory in categories that have been underperforming, such as Off-Road recreation and Marine. I'd also remind you that we've been doing this for several quarters. This approach is driven by our ability to adjust to trends we've seen materializing over multiple quarters, aided by our retail flow management system, which is one of the most sophisticated dealer inventory tools in the industry, allowing us to quickly adapt our production and delivery system to current demand environment. The system gives us near real-time access to our dealer inventory by region, by product, by dealer. We use this data in conjunction with conversations with our dealers to actively manage inventory to enable dealers to have the right inventory to efficiently run their business. Adjusted gross profit margin was down 248 basis points, driven by elevated promotions that began last year, as well as higher warranty costs. Partially offsetting these headwinds was the continued progress to improve our operations. This operational improvement enabled us to more than offset deleverage in the quarter given the lower volumes. We're targeting $150 million of operational savings this year, and while it's still early in the year, our progress thus far aligns with this objective. During the first quarter, we saw meaningful savings on material costs and logistics and our Huntsville manufacturing facility made tremendous strides in reducing indirect labor and rework costs and achieve significant improvements in execution against their build schedule. We are also seeing significant improvements in Monterrey, where the production line that created significant issues for us in delivering XPEDITION and RANGER XD in the second half of 2023. It's now operating at the targeted output rate, and we're seeing significant improvements in efficiencies starting to materialize within the facility more broadly. In summary, it was encouraging to see results that were largely in line to slightly above our original expectations, recognizing there were a number of headwinds we had entering the year. As we proceed through the remaining three quarters of the year, we're expecting further share gains given the significant innovation we've introduced over the past few years and we remain committed to actively manage dealer inventory and drive efficiencies within the business. I'm incredibly proud of our team's execution in the first quarter and want to thank them for their continued dedication and focus. Turning to more detail on retail. Broadly speaking, retail trends remain consistent with what we've seen over the past year with the exception being Snowmobiles. Recreation Off-Road vehicles were down for the sixth straight quarter. As we've shared previously, we view the purchase of these vehicles as more discretionary and more sensitive to economic conditions such as elevated interest rates. Our utility portfolio, consisting of RANGER side-by-sides and ATVs continue to see strength as reflected in our mid-single-digit increase in retail. As a reminder, this category is far less discretionary and plays an important part in work applications for ranchers, farmers, owners of multiple acres of land, as well as commercial settings and makes up approximately 65% of our Off-Road segment sales. As expected, promotions were elevated across the industry during the quarter and we expect a higher promotional environment to continue through 2024. This impacts each of our segments as the industry grapples with elevated interest rates. For Polaris and the industry, this impact is more noticeable within the Marine and Off-Road recreational categories where we've seen weak retail for several quarters, resulting in elevated inventory. Hearing from dealers, they continue to view all powersports inventory is too high and are actively looking for opportunities to manage inventory with strategies ranging from reducing the number of OEMs they carry to adding additional promotional dollars from their own wallet, as well as taking fewer shipments from OEMs. Every dealer is dealing with their own unique version of these industry issues. And while we can't influence other OEMs, we do believe that in total, we are doing our part to assist dealers. We're reducing shipments in product segments most challenged and adding promotional dollars where necessary to assist them with moving product. Given the current trends in rec and utility and the weak Snow season, we have adjusted our manufacturing outlook for these lines for the remainder of the year. We've made some meaningful cuts in Snow for the upcoming season, given the elevated inventory that is in the channel today. We've also reduced RZR side-by-side production as recreation retail has been down, and we do not see a near-term improvement given elevated interest rates impacting consumer purchasing decisions and the likelihood that rates stay higher longer than originally anticipated. We've also decreased production of Slingshots, which have a higher mix of consumers who finance their vehicles. While it's early in the retail season, the Marine environment is largely playing out as anticipated. In Utility, we've made the decision to increase production of our RANGER side-by-sides given multiple quarters of strong retail growth and healthy dealer inventory turns. Polaris continues to operate in a disciplined manner regarding our dealer inventory to ensure we have the right inventory in the field to maintain our competitive position while not burdening dealers with excess flooring costs. Our goal is to remain agile while being the partner of choice with our dealer to ensure a healthy relationship today and into the future. Moving to one of my favorite topics, innovation. We've had a busy couple of months with the launch of our new Indian Scout platform, the new 2025 Snowmobile lineup and the 2025 lineup of full-size RANGERs. The Scout platform was first launched by Polaris 10 years ago and has quickly grown to become the best-selling platform in the Indian motorcycle lineup. We're excited to carry on the tradition of this historically important bike with this new launch. Not only does the bike have a completely new engine, but also added highly sought after tech features to enhance the rider experience. Scout is an entry point into the brand with more than 90% of Scout owners being new to Indian motorcycle and also serves as a pipeline for growth into the other parts of our lineup. We've seen roughly 70% of our midsized riders move up to the heavyweight cruisers or our bagger and touring lineup with their next motorcycle purchase, further reinforcing the importance of Scout and the role plays to drive further share gains. We also announced and started shipping the lineup of model year 2025 full-size RANGER side-by-sides. These new RANGERs have rider inspired design enhancements and upgraded transmission and additional factory installed accessories. The new lineup makes the best-selling vehicle in the market even better. RANGER is the No. 1 side by side in the market and as the utility market continues to grow, we're excited to bring more innovation to our core utility customers. Wrapping up my comments on the quarter, we executed well in what we knew was going to be a challenging environment. We gained share with a strong product portfolio, made even stronger with our recent new product launches. We're working in partnership with our dealers to ensure they have the right mix and quantity of inventory to effectively manage their business and we continue to execute our plan to drive $150 million in operating savings in 2024, consistent with our long-term path to drive EBITDA margin expansion. I'll now turn it over to Bob, who will summarize our first quarter performance and provide updated commentary around our guidance and expectations for 2024. Bob? Bob Mack -- Chief Financial Officer Thanks, Mike, and good morning or afternoon to everyone on the call today. First quarter sales were $1.7 billion, down 20% versus last year. The decline was expected due to several factors we called out when we spoke in January. These included late-season Snowmobile shipments in Q1 2023 as a result of supply constraints, which did not repeat in Q1 2024. The lapping of ORV and marine channel fill in the first quarter of 2023, lower planned factory shipments to contend with elevated dealer inventory in Off-Road recreation and Marine and lower net price given the high promotional environment versus Q1 of last year. Therefore, there were not many surprises on the top line, although the Snow season was weaker than we expected, which in the quarter, mostly impacted our Snow whole good retail and related Snow PG&A lines. Despite this, PG&A sales were up 3%, with strength in our factory installed accessories in Off-Road. We continue to view our PG&A business as a driver for both sales and margin throughout the year. Adjusted EBITDA margin was down 459 basis points due to many of the same factors impacting sales such as volume and higher promotions. In addition, we are seeing slightly higher warranty costs in Off-Road and continue to experience higher finance interest associated with flooring interest support for our dealers. As expected, foreign exchange was also a headwind. Somewhat offsetting these headwinds was a positive contribution from operations despite the deleverage from lower volume and controlled operating expense spending. One unique item to note is that our tax rate in the quarter was 49.3%, which was more a function of lower net income year over year versus anything structural and we still expect our full-year tax rate to be between 21.5% and 22.5%. Adjusted EPS of $0.23 was above our initial expectations for the quarter. In our Off-Road business, revenue was down 16%, mainly driven by factors already discussed, such as the channel fill and the lapping of Snow season shipments last year. We shipped close to 6,000 units of our new Polaris XPEDITION and RANGER XD combined during the quarter as we strive to meet customer demand for these category-defining vehicles. Data shows we gained share on a unit and dollar basis during the quarter in ORV. On a dollar basis, which puts more weight on the premium side of the market versus the lower end and youth, we gained more share in our nearly 50% of the ORV market. We believe this illustrates our strength as a premium OEM within the ORV market versus inflating market share with youth and lower-tier products. The lack of Snow across most of North America impacted both our retail and industry retail. Primary impact to us is a change in expected selling of Snowmobiles for next season given current dealer inventory levels. I will cover this further in a moment. Margins in the quarter were pressured by volume, higher promotional levels and finance interest. Operational improvements within our plants were realized and are expected to contribute more dollars as the year progresses. Thinking about the second quarter, we expect longer-term trends to continue within utility and recreation. Promotions are expected to remain elevated and we believe our competitive position should only get stronger with the recent launch of our new RANGER portfolio, as well as continued interest in the products we launched last year. On margins, we expect meaningful gross margin expansion as we continue to make progress on our operational savings strategy. Switching to On-Road. Sales during the quarter were down 14%, driven by weakness in Slingshot and a soft international motorcycle market. Indian Motorcycles gained modest share during the quarter, driven by continued strength in the midsized category, which is an area of strength for us, especially with the launch of the new Scout. On-Road gross profit margin was up 41 basis points due to strength from our European businesses, Aixam Mega somewhat offset by higher promotions in the heavyweight categories. During the second quarter, we expect a modest benefit from the new Scout launch with offsetting pressure coming from Slingshot and continued promotions. In Marine, sales were down 53% as the industry continues to deal with elevated dealer inventory levels and higher interest rates impacting the consumer's decision to purchase. Our shipments in the quarter were in line with our expectations given the trends we are seeing in the second half -- we were seeing in the second half of 2023, which resulted in lower volumes in the first quarter and a reduction of dealer inventory versus first quarter 2023. SSI data through February reflected the decline in year over year retail, although our internal data through March suggest our brands are going to be relatively flat year over year in the first quarter. As we head into the Spring selling season and compare inventory levels to previous years, we feel that our position is much healthier than many of our competitors. Gross profit margin was down 776 basis points given top line pressures and less labor absorption at our plants. Our team continues to actively manage the variable components of our cost structure to help protect profits. We continue to see the industry challenge during the second quarter as dealers work through current inventory levels and consumer purchases are hampered by elevated interest rates. Moving to our financial position. We knew the first quarter was going to be a quarter with minimal EBITDA and cash generation as is typically the case during the early part of the year with dealer holdback and employee bonus payments being made in Q1. Therefore, we have limited share repurchase activity in the first quarter as we prioritized maintaining our net leverage ratio in the range that we have previously communicated. For the full-year, we expect to repurchase enough shares to offset dilution from stock-based compensation plans, and we remain well ahead of our 2026 target of reducing the basic shares outstanding by 10%. During the quarter, we used cash to support capex investments and returned $53 million to shareholders in the form of dividends and share repurchases. We remain confident in our financial position and our net debt-to-EBITDA ratio is expected to trend lower as we generate more EBITDA and cash as the year progresses. We continue to expect strong adjusted free cash flow this year and believe our capital deployment priorities are aligned with the strategy to build shareholder value. Now, let's move to guidance and expectations for 2024. We are not changing our full-year guidance for Polaris at this time but are making a minor adjustment at the segment sales level given the adjustments we have made within On-Road to account for current trends. This updated outlook calls for On-Road 2024 sales to be down mid-single digits versus our original guidance of flat year over year sales. Recall the On-Road change is in response to weaker trends we are seeing in Slingshot, some additional pressure on motorcycles internationally. While both of these markets are being impacted by higher interest rates, we have seen a more pronounced impact on Slingshot retail and thus have adjusted our production schedule downward. Promotions and finance interest are expected to remain at elevated levels, which continues to add pressure to our top line and margin. We maintain our guidance for Off-Road 2024 sales at down mid-single-digits. Within Off-Road, we are now expecting lower Snow sales in the second half of the year given dealer inventory levels coming out of this past season. Additionally, we have pulled back on recreation, Off-Road vehicles, vehicle volume given retail and industry trends. These pullbacks have been offset by the added volume from continued strength we see in our Utility Off-Road vehicles. Regarding dealer inventory, we are actively addressing areas with elevated inventory coupled with weaker retail trends, particularly in Off-Road recreation and marine by reducing shipments of those products to help minimize flooring interest for our dealers. We are also actively managing the mix of products in those segments to align trim levels with consumer expectations. We target building inventory with new products and in growth categories. One such growth area is Utility where dealers hold approximately three turns of RANGER inventory, which is comparable to pre-pandemic levels. Indian Motorcycles is also at similar turns versus pre-pandemic levels. We have a strong discipline around dealer inventory and understand the frustration our dealers have with other OEMs overshipping the channel or lacking a sophisticated inventory management system. We strive to be a business partner of choice for our approximately 4,000 dealers globally and want to share in their success. As previously communicated, our margin guidance calls for expanding both gross profit and EBITDA margins with most of the expansion resulting from savings and efficiencies at the gross profit level. In total, we are targeting over $150 million in operational savings with an even larger funnel of opportunity. Foreign currencies remain volatile and are expected to continue to be a headwind. Given the recent strength of the dollar, we see additional downside pressure from FX, we now believe the negative impact on EBITDA for the year is about $30 million versus our original expectation of approximately $20 million. For the second quarter, a few things to note. As I mentioned on the January call, we expect sales in the remaining three quarters of the year to be relatively flat year over year, including the second quarter. Our assumption is that industry retail is going to be down modestly for the year remains intact with Polaris gaining modest share through the year. Higher year over year promotions and finance interest continue to be headwinds. Operational synergies are expected to be larger to be reflected in margin expansion during the quarter. Lastly, FX and interest expense continue to be unfavorable year over year. Before I turn it back to Mike, I want to emphasize how encouraging our recent operating review meetings have been. The energy level around lean and operational improvements is clear. While these improvements take time, we believe we have the right team in place for the journey and we expect to begin seeing results and margin expansion in the second quarter. It's an exciting time to be at Polaris and witness the innovation we are launching and the passion from our team. We have a lot of opportunities to improve our market share position, margin profile and cash generation capabilities, all of which I believe can lead to increasing value for our shareholders. With that, I will turn it back over to Mike to wrap up the call. Go ahead, Mike. Mike Speetzen -- Chief Executive Officer Thanks, Bob. The macro environment remains uncertain. And given that, we expect to remain agile regarding both production and dealer inventory. We carried our North American market share gains from last year into the first quarter of 2024. Our expectation is that we'll continue to take share this year with industry-leading innovation, a healthy partnership with our dealers and a strong value proposition to bring memorable experiences to our customers who enjoy working and playing outside. Introducing new customers to powersports continues to be a focus for us as they make up a strong portion of the business. During the first quarter, we saw similar patterns with approximately 70% of our customers being new to Polaris vehicles. This is a great statistic to see. As the market leader, we continue to grow the space and create awareness for the capabilities and experiences provided by our vehicles. Operationally, we're on a journey. I was encouraged with the progress we made at the largest facilities and I'm confident in our improvement plans for the year. I believe our first quarter results, coupled with a focus to drive market share and margin expansion positions us well to deliver on our 2024 guidance. We thank you for your continued support. And with that, I'll turn the call back over for any questions. Questions & Answers: Operator Thank you. [Operator instructions] Today's first question comes from Craig Kennison with Baird. Please go ahead. Craig Kennison -- Robert W. Baird and Company -- Analyst Hey. Good morning. Thanks for taking my questions. I guess I wanted to get your perspective, Mike, on the health of the dealer network, given feedback from dealers that inventory is just way too high and a lot of evidence that there's stress in the market caused by skinny margins and high floor plan expense. I feel like you're feeling -- you've done it all, you've done it right and -- but your competitors have too much inventory. And I'm not sure that's exactly what I hear from dealers. Mike Speetzen -- Chief Executive Officer Yes. No, look, I appreciate it, Craig. And certainly, in this environment, it's something we're spending a disproportionate amount of time on I can tell you different from many of our competitors, Bob and I and our GBU leaders spent a lot of time out in the field with our dealers. In January, we were with our Indian motorcycle dealers. And March, Bob and I were out at marine dealers in Michigan, which is the largest market. And then, we're headed back out with Steve in May to talk to Off-Road dealers on the West Coast. Look, they certainly are under stress. I can tell you from sitting in those dealerships that the conversation is not just a simple five-minute phone call. It's in detail. First and foremost, I think we probably have the best grip on this across the industry. We've got incredible visibility that's enabled through the systems that we have. The RFM process gives us essentially real-time data. We are always going to be the largest part of the discussion because we are the market leader. You have to add up a lot of the other OEMs to even get close to our numbers. So they are typically going to have more inventory for Polaris than they do with the others. But the devils in the details relative to the efficiency of the inventory. And we know because we can see through the systems through CDK, where we have visibility into about 70% of the inventory that we are either No. 1 or top quartile when you look at things like days sales outstanding, six, 12 months at the dealership or you look at their mix of current inventory to noncurrent inventory. In that bucket, we are No. 1. Just to give you a frame of reference. There's an OEM that was shipping over 70% through the first quarter of the inventory into dealers that was from model year '23. And so, that puts into perspective some of the dynamics that are going on at the dealers. In my prepared remarks, I talked about the fact that dealers are taking things into their own hands. One of the things that became evident as we've met with the marine dealers is that they're trying to move out some of the smaller brands that they brought in during the pandemic when they were desperate just to get their hands on Boats. They still have inventory in those brands that they're trying to move and there's a lot of focus and attention around that. And financially, it's a bit of a drag. Through our JV with Wells Fargo, which is expanding to cover our Marine segment, we have good visibility into each of our dealers. We watch their financial health. Bob is the chairman of the board for that JV. And we keep a very close eye. That JV has been effective for well over 20 years and helping us make sure that we're working with the dealers. Hopefully, as the industry leader, we'll get the rest of the OEMs to follow suit and behave in a consistent manner. We can't control that. So we're going to do everything we can to do our part. But I'd look at things like dealer inventory, we're up versus where we were in Q1 of last year. If you remember, last year, we -- the channel was still very light in inventory. But when I look at the models that are not moving quickly, so the models that we outlined, whether that's marine or Boats, Slingshots, in aggregate, we've taken those categories down 14% year over year. That's pretty significant. And I think reflective of making sure that we're working with our dealers, we're not perfect, but we know where the soft pockets are, and we are actively pulling those inventory levels down. We've adjusted our production schedules. The good news is, given our RANGER lineup and the concentration we have around utility, which is a market that remains strong, we're obviously recognizing the benefit. That's good for our dealers. Those are high-margin vehicles. They bring a lot of accessories along with them. And so, we're obviously pushing production up on that and we think that's going to go a long way. So I think the message is look, we're going to operate with an incredible level of discipline. We were clear when we gave guidance, we reiterated it today that, as retail goes, our business goes and we're going to make sure that we stay true to that, and we're going to make sure that we keep our dealers healthy here in the near term because we really value that long-term relationship and health of the network. Bob Mack -- Chief Financial Officer I think a couple of things to think about, Craig. Like Mike said, obviously, we're the biggest in the industry, we're always going to have the highest box count. We also put out more innovative products than other folks. And so, we've got new product launches, which causes some level of channel fill. We do manage with RFM. And if you really look at the rec categories, Mike talked about how much we've taken that inventory down, typically, Q1 to Q2, both in categories like RZR and Marine, you would build coming into the season, you would build the dealer inventory mid- to high double-digit range, 15% to 20%. This year, we're down in RZR, we're flat in Marine. And so, not only did we constrain dealer inventory as in '23 and in the first quarter at '24. But we didn't see the typical build we would have going into seasonality. So we're going to hopefully use that seasonality to help keep those inventory levels down in the categories that we see most challenged. So I feel like we've been probably the most aggressive by a large margin in terms of really managing dealer inventory. Our Marine inventory is very clean. It's been a challenging market. We talked about in the prepared remarks, we think it will be relatively flat for Q1. Hopefully, we'll see some good response as the warmer weather shows up, but we're not sitting on dealer or inventory at our factories. We build to order. And so, we've managed that business with what we see as incoming dealer orders. And so, we think we're in a pretty good position compared to a lot of other OEMs. Craig Kennison -- Robert W. Baird and Company -- Analyst Thanks, Bob. Operator And our next question today comes from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Hi. Thanks for taking my question. I guess you kind of talked through this a little bit, but in terms of kind of where you are on the ORV side, in terms of mix, what do you think that implies for promo levels relative to Q1? And then, if you could just kind of talk through the operational improvements that you're realizing and the ability to offset promo looking ahead? And then, second, not to pry too much, but I think sometimes you give some EPS color on the forward quarter. So just any thoughts there would be helpful. Thanks. Mike Speetzen -- Chief Executive Officer Yes. On the ORV mix and in promo implications, when we talked about the year over year '24 versus '23 and we talked about the increase in promo, most of that really happened in Q1 of this year. And we expect those levels to essentially remain similar as we go into Q2, Q3 and Q4. But if you look back to last year, promo would start ramping up through the course of the year. So we think promo will be up. It's probably going to be a little higher than we originally expected because we know that there's a lot of noncurrent inventory from some of our competitors out in the market. But as we look at how we've rebalanced production, we brought RZR and Slingshot, Snow down, but we're increasing RANGER to recognize the utility strength. We feel like those things all somewhat counterbalance, but we do think there will be a little bit of a headwind from a promo standpoint, but that's all well within the guidance range that we've talked about. I talked about the operational improvements. I don't know that I'd sit here and tell you that we're going to be able to push those higher than what we had. I mean, we've got a pretty good slug of work in front of us. The team did an excellent job. We talked in the call in late January, early February, about the progress we've seen coming out of '23, and that momentum is continuing into '24 in terms of the underlying factory performance. And essentially digging out of the hole we had gotten ourselves into operationally. The cost improvement was relatively small in Q1 relative to the total bucket, but that was expected because it was our smallest quarter and the team is driving that forward. Bob talked about it in his prepared remarks. I mean, we've got a lot of rigor focused around making sure that we get results to the bottom line coming out of this category. I'll let Bob talk a little bit about the EPS cadence. Bob Mack -- Chief Financial Officer Yes. I mean, like we said, revenue is going to be relatively flat quarter over quarter or year over year for the remaining three quarters. We're not going to give EPS guidance by quarter. We don't do that. But I would say you'll see stronger operating improvements in the back half of the year just because all the improvements you make kind of lag a quarter. So what we saw in Q1 really was a result of a lot of the work that happened in Q4. And so, those will build through the year in terms of earnings, but that's all the guidance we're going to give on EPS for the quarter. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Thank you. Operator And our next question today comes from Joe Altobello with Raymond James. Please go ahead. Joe Altobello -- Raymond James -- Analyst Thanks guys. Good morning. So you mentioned earlier that the earnings upside in the quarter really came from better-than-expected operational costs. How much of that was timing related? Maybe you realized some costs earlier than you expected. And is there upside potentially to that $150 million number this year? Bob Mack -- Chief Financial Officer Yes. Thanks, Joe. I wouldn't say it was hugely time related. Just we got a little bit more and there were a lot of puts and takes in the quarter. So the operational improvements are on track with where we thought they would be. They do -- they obviously build through the year. I don't know that there's significant upside to the $150 million. It's a lot of work to get there. And like I said a couple of times over the last few calls, your efforts -- the results lagged the efforts by a solid quarter. And so, everybody is working really hard. But we're focused on getting the $150 million this year, and then having a good exit rate that can carry into '25, but I wouldn't plan on a lot of upside to the $150 million as we sit here today. Joe Altobello -- Raymond James -- Analyst OK. That's helpful. Maybe secondly, the strategy behind shipping model year '25 RANGERs here in April, it seems a little early? Bob Mack -- Chief Financial Officer Yes. I mean, the product, obviously we work on these products for a long time. The product was ready. We're coming into season. We've got strong performance in the Utility segment. And so, we wanted to get that product in the hands of consumers. We made a lot of really good quality and drivability improvements that we think are responsive to what consumers have been looking for in that product. And so, with it being ready, we decided to go with model year '25 here in April. Mike Speetzen -- Chief Executive Officer It's all about leaning into the most favorable market right now, Joe. And I can tell you, they're excellent products. We've addressed a number of the things that were, I'll call them, source spots with customers around shifting. But also, we spend a lot of time with consumers looking for ways to enhance what was already an excellent vehicle. And so, we were excited to get it out. The team did an excellent job of executing the program, so we were in a position to be able to ship. And there's a lot of excitement around that vehicle as is with the vehicles we launched last year. Joe Altobello -- Raymond James -- Analyst Got it. OK. Thank you, guys. Mike Speetzen -- Chief Executive Officer Thanks, Joe. Operator Thank you. And our next question today comes from Fred Wightman with Wolfe Research. Please go ahead. Fred Wightman -- Wolfe Research -- Analyst Hey, guys. Good morning. Thanks for the question. I guess, just simplistically, you've given a handful of puts and takes some changes to sort of the production makeup or expectations for the rest of the year, but you guys did beat where you thought you would in 1Q. What is sort of the offset? Is there something later in the year that you're more cautious on as far as why you didn't address the full-year outlook? Mike Speetzen -- Chief Executive Officer Well, I mean, I think, Fred, I kind of hit on it a little bit earlier in terms of the promo levels are slightly elevated from where we expected them to be or expect them to be for the rest of the year. I mean, Q1 was pretty close to what we were thinking. But as we look out through the balance of the year, just given interest rates are likely to move, we had expected around three reductions for the balance of the year. And in light of the inflation rate holding up and the comments that the Fed has made were likely not to see three. I think we're worried if we'll see any. And so, there's a little bit of that that will likely play out in higher promo rates as we continue to adjust through the rest of the year. Bob Mack -- Chief Financial Officer Yes. I mean, the interest cost isn't, we have planned them late in the year. So the impact from a forecast standpoint is not particularly significant. To Mike's point, I think we think that consumers that if there's a few rate cuts would start to feel a little better and that might have some positive benefit to retail and promo. And if that doesn't happen, obviously, we're going to be in the same environment we're in today. So we're sort of prepared for that and things were a little bit better in the first quarter. We made a little bit more progress than we thought we would, but nothing that would, at this point, cause us to change our view of the year. Fred Wightman -- Wolfe Research -- Analyst Fair enough. Thanks. And I guess, Bob, you mentioned earlier just that sequential build in dealer inventories that you normally see from 4Q into 1Q. Didn't see that this year, right, because you guys are managing that closely. I guess when you look at the embedded benefit that you're expecting for gross margins as we move throughout the year from some of the new products. Do you think that inventories where they are today, should still support a portion of the gross margin expansion that was from mix? Bob Mack -- Chief Financial Officer Yes. We are seeing good inventory build on XPEDITION and XD and the new products, RANGER. I mean, we launched the product, I guess about a week ago and we started shipping immediately. I think they've started to hit dealers just in the last couple of days. So we -- that was all factored in. I mean, a lot of the cost improvement is things that are either just the cost of operating the plants, the efficiency in the plants. So that shows up fairly immediately as those vehicles get into inventory and same thing on materials. So we have that all still very aligned. Fred Wightman -- Wolfe Research -- Analyst Great. Thanks a lot. Operator Thank you. And our next question today comes from Megan Alexander with Morgan Stanley. Please go ahead. Megan Alexander -- Morgan Stanley -- Analyst Hey, thanks very much. Just wanted to follow-up on 2Q. Bob, I think you did clarify you expect sales to be down year over year. You talked about significant margin expansion, understand interest expenses, a headwind, understand you're not going to give an actual range, but the net of that does suggest earnings should be up year over year, I guess, is that right? Bob Mack -- Chief Financial Officer Yes. So thinking about Q2, what we've said is we think revenue is going to be relatively flat year over year. So the revenue side of it will be a big positive or negative. We'll see the cost improvements from the work we're doing on the operations side and which will then play out into the earnings. So we're not giving specific guidance, but I think relatively flat year over year is a way to think about it. Megan Alexander -- Morgan Stanley -- Analyst OK. Understood. That's helpful. Thank you. And then, maybe a follow-up on the ORV retail in 1Q, that 3%. Can you just talk about maybe the cadence over the quarter and what you're seeing so far in April? Mike Speetzen -- Chief Executive Officer Yes, I mean, what I would tell you is that the commentary I provided pretty much sums it up. The rec market around RZR specifically remain weak. We've got now six quarters of that performance. In the RANGER business, utility has remained pretty solid, pretty strong. And so, we did have to try and adapt within the quarter. But as we see those trends continuing through the year were, as we talked about in my prepared remarks, we're making those changes in production rates at Monterrey and in Huntsville to adjust for those trends that we see. So we were probably a little bit more hopeful that the rec would start to stabilize. And I think the fact that inflation is at 3.5%, I think people are having to make a lot of trade-offs. Gas is still expensive. And with the hope of interest rate relief coming, dimming, mortgage rates hit an all-time high. I think you just see consumers continuing to be cautious and careful with how they're spending their money. And that just is going to prolong that replenishment cycle for our rec business. So at some point in time, we know who these customers are. We know that they're driven by innovation. Once a little bit of relief comes, they're going to want to upgrade their vehicle and we know that through our repurchase cycle. So it's probably more of a delay, whether that's later this year or into next year is anybody's guess at this point. Megan Alexander -- Morgan Stanley -- Analyst Got it. That's helpful. Thank you. Operator Thank you. And our next question today comes from Alex Perry of Bank of America. Please go ahead. Alex Perry -- Bank of America Merrill Lynch -- Analyst Hi. Thanks for taking my questions here. I guess just my first question, can you talk about how much new innovation supported retail? What has been the feedback on the RANGER XP 1500 and the XPEDITION? And then, any early reads you can give on the new Indian Scout lineup and the new RANGER lineup as well? Thank you. Mike Speetzen -- Chief Executive Officer Yes. Well, I mean, I would say that new innovation, we look at the utility segment. And while it's not new, the work that we did to introduce the RANGER NorthStar and specifically around the call it, the premium and the ultimate lines. Those have become incredibly popular. They've moved into making up a high percentage of that utility revenue. And so, that coupled with the capabilities that we enable through Ride Command+ being one of the only connected vehicles out in the marketplace, great audio systems, all that. I mean, it really makes for an incredible value proposition. So when you look at the innovation that's being driven in terms of retail and what we're doing in our RANGER business, that's why we've leaned in so heavy, and it's why we launched the model year '25 new RANGERs. There's a lot of incredible commentary around those vehicles. Dealers are anxious to get their hands on them. Specifically around the things we've addressed that were some of the detractors that customers had. And we'll have those vehicles out demoing and getting visibility with influencers, which is an important aspect of that business. The XD is now making its way out into the marketplace. Receptivity has been very strong. It is an incredible vehicle with incredible capability. The steel belt technology really affords a smooth riding vehicle that can handle workloads that are equivalent to some of the best pickup trucks out in the marketplace. XPEDITION, specifically the higher-end trims, the ultimate's in the NorthStar cabs. It's tough to keep up with demand on those. They're really serving the purpose that we have. I'd tell you that there's a little bit playing out in the lower end of that market in general in terms of customers trying to figure out if they want to go with a general or if they want to go with the lower-end XPEDITION. And so, we'll continue to watch and monitor that, do what we do and adapt to it as time goes on. The Scout Lineup, the team did an excellent job. We started teasing that well ahead of the launch. There's a number of videos you can go watch in terms of influencers who've gotten their hands on those vehicles, ridden them. Bob and I and the management team wrote them late last year. They're incredible motorcycles. We know dealers are very excited. We gave them a essentially a sequestered view back in January when Bob and I were with Mike Dougherty and team at the dealer meeting down in Arizona. So they were able to get an advanced view of the bikes, the launch campaign and they were incredibly anxious to get those things out in the marketplace. So as I talked about in my prepared remarks, it brings in new customers to the Indian segment. It's the largest selling bike we have, and we know that it is a funnel into larger bikes and a lifetime of Indian ownership. So we're really excited about it. I'm proud of the team. The innovation continues to exceed our expectations and we've now got a good solid three years of incredible launches across just about every part of our business, and I think that sets us up well for the long term. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. That's helpful. And then, just my quick follow-up is I wanted to ask what is embedded in terms of the guidance in terms of rate cuts. I think prior year contemplating three rate cuts. Is that still the expectation where are you sort of waiting to see how things play out? Thank you. Bob Mack -- Chief Financial Officer Yes. So we had originally embedded three rate cuts. At this point, we're down to two, but we've got them late in Q4. So there's no meaningful risk to those rate cuts in terms of actual interest expense for the company or for our share of dealer floor plan. As we said earlier, the real impact is just we have a view that the rate cuts will at least provide some stimulus, maybe not actually financially, but mentally to consumers. And if that doesn't happen, we'll be in the environment we're in, which is what we've got contemplated right now. So it won't be meaningful either way for us. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. That's helpful. Best of luck going forward. Bob Mack -- Chief Financial Officer Thanks Alex. Operator And our next question today comes from David MacGregor with Longbow Research. Please go ahead. David MacGregor -- Longbow Research -- Analyst Yes. Good morning, everyone. And thanks for taking my questions. I wanted to just ask about the production curtailments. So you talked about taking down Snow RZR, Slingshot, Green. You picked up RANGER. How should we think about the impact of the production curtailments on 2Q as it would relate to or compared to maybe the first quarter? Bob Mack -- Chief Financial Officer Well, in Q2, so we were down nearly $500 million in revenue for the full-year, and most of that was in Q1. So Q2 looking relatively flat in comparison to last year will be a fair amount of volume. We took a lot of marine out of Q1 relative to -- particularly relative to the year before, but even relative to a normal year. So marine will be -- will start to pick up a little bit as we get into seasonality. And then, really, the RANGER -- the added RANGER build helps offset a weaker RZR build. So pretty much an even trade-off there. Snow doesn't really come into play until Q3, Q4. And like we said in our prepared remarks, the Snow build for the year will be down because dealers are still sitting on a fair amount of model year -- snow model year '24 inventory that didn't sell this season given the lack of Snow. So I think it will still play out the way we had originally guided, which was quarter over quarter revenue year over year, 23% versus 24% revenue being relatively flat through the remaining three quarters. Mike Speetzen -- Chief Executive Officer And the only thing I'd add, David, is it sounds relatively simple in terms of, well, we'll take RANGER up to offset RZR and Snow. The operational teams who are already doing pretty substantial work. I mean, obviously, we don't make all those products in the same facilities. And so, behind the scenes, there's a lot of work being done to work within the confines of Roseau, Huntsville, and Monterrey to work through how those impacts of rebalancing Snow, Slingshot, RZR, and RANGER are executed. And in light of the improvements that we made starting last year and gain momentum on in the first quarter. I've a lot of confidence in the team to be able to execute on that. But it is a change, but it's the right thing to do because not only does it lean into where we have strong retail, but it also recognizes where retail softer and consistent with what we keep reiterating, it helps us manage that dealer inventory position with our network, and that's incredibly important to us. Bob Mack -- Chief Financial Officer The other piece of dealer inventory management, we haven't really talked a lot about, but is kind of reality of the market right now is we are focused on managing trim levels also. And coming out of the pandemic, there's been a lot of focus for consumers on sort of higher-end trim levels. And so, I think really across all products and really across all manufacturers, everybody was leaning into their highest trim level products. I think that was true in auto as well. And as the market started to change, consumers are looking for some more of the entry-level trims that they can do accessorize later after their purchase to keep the initial purchase price a little bit lower. And so, starting last year, we started adjusting those trim levels, and we continue to do that. So it's not just having the right number of units, but it's having the right trim level of units in the field, and we think we've made a lot of progress on that. And it plays to our strength because we've got the biggest accessory business in the industry. And so, if a consumer buys a vehicle that doesn't have as many accessories on it. We've got the most likely opportunity to sell them those accessories later at good margins. So it's a good switch for us. David MacGregor -- Longbow Research -- Analyst That make sense. The second question I had was just regarding your cost savings program, the $150 million that you've talked about. How should we think about how much of that makes it to the bottom line in your guidance versus maybe being channeled into other investments? Bob Mack -- Chief Financial Officer So the $150 million is embedded in the guidance as falling to the bottom line as cost improvement. I mean, obviously, there'll be puts and takes on other operational things like warranty and absorption with volumes as volumes move around. But the whole $150 million is true cost savings. And like we said, it's -- it builds through the year, so it will have a bigger impact later in the year, but you'll see margins improve sequentially through the quarters. Mike Speetzen -- Chief Executive Officer Yes. I mean, I think when you look at the fact that we're talking about the year being down from a revenue standpoint, but pushing margins up, we're doing everything we can. We're being prudent from an operating expense standpoint. But when we look at our manufacturing facilities and baseline back to 2019, and I'm not necessarily suggesting 2019 is the hallmark for us, but it's a good comparison point. There's a lot that we have to get out of those businesses. Some of that is tougher because things like commodities are -- while coming down sequentially or still elevated from where they were labor rates are elevated, but there's a lot of other inefficiencies that crept into the facilities that we've got to get back to. And we're not saying that 2019 is the benchmark. We think we can be better than that, but that's the focus, which means we have to get all that to the bottom line. David MacGregor -- Longbow Research -- Analyst Thanks very much. Good luck. Mike Speetzen -- Chief Executive Officer Yup. Sure. Thanks. Bob Mack -- Chief Financial Officer Thanks. Operator And the next question comes from James Hardiman with Citi. Please go ahead. James Hardiman -- Citi -- Analyst Hey. Good morning, guys. I just wanted to ask one more question on the inventory front. So you've given us a lot of bread crumbs, I think you said inventory was flat sequentially, three turns for RANGER and for Indian. Is there any way to just give us an aggregate where inventory is year over year or versus 2019? I can't believe we're still comparing things to 2019, but it's at least some reference point. Any way to think about where we are in aggregate? Bob Mack -- Chief Financial Officer Yes. I mean, so like we said, we're flat. If you exclude youth and the new products, we're down two. If you think about RZR, we're down high-single digits quarter over quarter from Q4 total rec same way. I think I commented earlier, Marine is flat. And normally, we would have built a lot of Boats going into seasonality. So we feel good about where that is. RZR, we would have built kind of 15% to 20% going normally coming out of Q4 into Q1 headed into Q2 into seasonality. And even RANGER rec is not up significantly. So we didn't -- it's not like we built tons of inventory there either and a lot of it is in the new products. So overall, we feel pretty good about where we are. And hopefully, that's enough to get you to. James Hardiman -- Citi -- Analyst But just to clarify, those are all sequential numbers, right, which I think a lot of us sort of -- we don't normally think about it that way. So is there any way to put that in the context of last year? Mike Speetzen -- Chief Executive Officer Well, I mean, the problem, James, is when you look at Q1 of last year, we're up 29%. But Q1 of last year, on average, the network had 80 days or less of inventory, which is well below where the industry has ever been. We were still in a restocking position. And so, I think until we get ourselves work through the year, the year over year comparisons, while they're interesting, they don't necessarily tell you a lot. I mean, what we're spending time on is the absolute levels of inventory by product across the network by region, by dealer. And we're looking at the measures that really matter in terms of how quickly is that inventory turning, what's the retail trend that we're seeing on it, what's the current, noncurrent mix so that we can adjust? And that's what's really driving us to make the corrections that we do. And frankly, the challenge for us is 2x everybody else, just given the size and complexity of our business. But like I said, when we look at the data that comes through CDK and we can see our performance relative to the other OEMs we are outperforming the group. And I'll continue to reemphasize that, because we have talked about this for the last couple of years. We don't just talk about it. We're actually acting on it. A lot of folks are talking about it, but when we look at the data, they aren't acting on it. And we take it seriously. We know that we're a big part of the dealers business. And so, it really is up to us to take the lead. And hopefully, they'll continue to put the pressure on the other guys or work them out of their dealerships. James Hardiman -- Citi -- Analyst Got it. That make sense. And then, I think, Mike, in your prepared remarks, you talked about what dealers are doing in response to some of the pressure you talked about. I think I wrote down, reduced OEMs, fewer shipments and then contributing their own promotional dollars. I guess, first, is there any concern about the health of the dealer base? Could we see a pickup in dealer failures? But then also that reduced OEM seemed like a significant comment that I wanted to circle back on. I'm assuming we're talking about maybe some of the low-end players, but that feels like that could be a positive to you guys longer term if we're able to sort of rationalize the OEM space? Thanks. Mike Speetzen -- Chief Executive Officer Yes, we -- so a couple of things from a health standpoint, obviously, we are concerned and keep a very close eye on this. Within each of our businesses, we have a dealer management group. We get a lot of good data through the Wells Fargo JV. And if you look at the history of that JV, I mean, even during the '08, '09 time period, because of the proactive nature of how we manage that, the dealer failures were pretty small. Quite frankly, what does concern me is the behavior of some of the other OEMs because, obviously, with 70% of our dealer network shared, 100% of our Boat network shared. It isn't just up to us. Hopefully, because of the behavior we exhibit, it helps the dealers put some of that same pressure. When we've been out with the dealers, like I said in my prepared remarks, one of the things that during the pandemic is they were bringing in any OEM that had availability. Even if those OEMs were delivering in a year, a fraction of anything that we would given delivery constraints, they were bringing that inventory in because people are coming in and whether it's a rec vehicle or a Pontoon, Boat they wanted something. But now as the market is shaking out, in a lot of instances, those short lines that they brought in did play more to the value lower-end buyer, who has really retreated in this marketplace. They're highly interest rate sensitive. Discretionary income is much lower and these are highly discretionary purchases. So they're getting low priority relative to cost of living, increases that they're continuing with. So as we've talked with dealers, they've been pretty straightforward that one of the options that they're looking at is they've got to move the Boats they have or they've got to move the vehicles they have, but they don't plan to continue to carry some of those lines. And so, we're not going to get into names and all that kind of stuff because, quite frankly, it varies by dealer by region. But I think it is reflective of the dealer understanding that moving forward, whether you look at our Pontoon business, our Off-Road business, our Motorcycle business, they are a disproportionate share of the market and we're the player to really bet on as they go forward. James Hardiman -- Citi -- Analyst That's good color. Thanks Mike. Operator Thank you. And our next question comes from Tristan Thomas-Martin with BMO Capital Markets. Please go ahead. Tristan Thomas-Martin -- BMO Capital Markets -- Analyst Hi. Good morning. I have one question on pricing. Looking at your RANGER '25 lineup, base models are -- it seems like there's been price productions on the premium, I think they're higher year over year, but with that adoption. So how should we think about your overall 25% pricing on average across all your products? And then, second part of the question, what's the margin difference between a factory installed accessory relative to one that you ship into the dealer channel? Bob Mack -- Chief Financial Officer I'll answer the second question first. The margin difference is not significant. The bigger advantage to factory installed is that you don't -- you get more. Typically, people buy more when they're shown a fully accessorized vehicle. And then, also you don't have to worry about a dealer or the customer selecting a non-Polaris accessory, because it's already on the vehicle. So that's the bigger advantage. I think the way to think about pricing. There's been a lot of price noise in the market coming through the pandemic between MSRP increases, surcharges and now increased promo. And so, I think across the OEM space, you're seeing people as new model years come out, sort of adjust that mix of MSRP, surcharge and promo. I don't know that the impact on net price is going to be particularly significant. It's just where it shows up. That said, I don't think the industry has got a tremendous amount of pricing power going into model year '25, given just all the increases that have happened in the current state of the consumer. I think what you'll see us focus on, you saw it well in RANGER is we try to get the trim levels right so that the customer is comparing vehicles that are spec-ed in the ways they want to buy them. And sometimes that's taken stuff off on lower trends and adding things on higher trims, but that's something that we tweak every year to try to get the trim level right for what the consumer is coming into dealership and asking for them. Tristan Thomas-Martin -- BMO Capital Markets -- Analyst OK. Thank you. Operator Thank you. And our final question today comes from Robin Farley with UBS. Please go ahead. Mike Speetzen -- Chief Executive Officer Robin? Operator Robin, your line is open. Are you on mute perhaps? Robin Farley -- UBS -- Analyst Yes, thanks. So you mentioned your expectation that you're about gaining share through the year. But you also talked about how other OEMs have some more work to do that maybe some other. I don't know if that was specific to ORV, but you mentioned that others may have more work to do in terms of clearing inventory. So I guess, I mean, wouldn't that sort of suggest that it will be tough to grow share, not that share loss to another OEM that's clearing inventory is meaningful or long term. But wouldn't that make it difficult to grow share, if you're sort of saying others have more inventory clearing to do than Polaris has? Mike Speetzen -- Chief Executive Officer Yes. I mean, it's not helpful. And there certainly are pockets. I mean, when we talk about share, the internal discussion is far more in-depth by model, by trim line, things like that. So there are areas that it has presented a far bigger challenge. We're not going to go crazy trying to protect when we're battling someone who's clearing inventory that's a year or more old. The good news is that that eventually comes to an end, and we'll be on a better foot as we move forward. And as the last question indicated, we're making real-time adjustments between price and promo to make sure that we're reflecting where the market is. And given the innovation that we have around our products and the competitive nature, I'd stack us up No. 1 relative to anybody coming after us. So I feel great. I look at the new products, that new RANGER is going to be highly desired. The new Scout is going to be highly desired. We're just now getting momentum around XPEDITION and XD. And then, certainly, as some of the rec markets come back around RZR with the new products that we introduced over the past several years with the XP and the Pro R, we feel really good about the position that we've got there. Within our Marine business, we've refreshed a ton of the Godfrey line. We've refreshed and are refreshing a lot of the Hurricane models. We went after the low end of the Bennington and obviously, we're going to continue forward on that. So we'll have a lot of new models from our Marine segment. So I feel really good about where we're at, and we'll manage those competitive dynamics and make sure that we're staying disciplined around dealer inventory. Robin Farley -- UBS -- Analyst Great. And just one follow-up on you think about restocking and kind of what floor share will look like after everybody has gone through this inventory clearing, which it sounds like if you're expecting retail for the industry to be down modestly for the year. It sounds like maybe Q2 will be the last kind of big clearing. And when you think about the others restocking, some dealers talk about some OEMs that are not as penetrated, right, in terms of dealer penetration. They can still charge close to MSRP. And so, they can make money on even though it's a lower-priced product than a Polaris product. And I guess how do you think about competing for floor share when dealers are restocking if they're saying they can make more on a different OEM price point but not have to kind of compete with other dealers carrying that same brand. Is there anything that you can sort of do to combat that dynamic? Mike Speetzen -- Chief Executive Officer I mean, I'm sure there's some pockets of that, but I wouldn't say that's a large scale. I think you sit down and you spend time like we do, talking with our dealers, I mean, it's evident. We are such a big part of the majority of our dealers. And that's important from a profitability standpoint. And they know and they've seen what's happened when they carry some of these smaller brands and you get into difficult times and they don't have as sophisticated inventory management. Any margins that they were making on those quickly get eroded because they carry too much inventory and they're paying all the interest costs. So I think the good dealers that take a long-term view, understand that and really drive to make sure that we've got a strong relationship with them. And I think the dealer cultivation we do, whether it's in Indian or Off-Road or our Marine business is really setting the bar high, and I have a lot of confidence that we'll continue to build those relationships. Bob Mack -- Chief Financial Officer Yes. And we've continued to evolve. For most dealers, we are far and away the largest dollar profit contributor to their dealerships, our NorthStar Rewards program that we use to manage our dealers. There's a lot of criteria in that around floor space and how they need to present our brands. And there's real money tied to it and the dealers understand that, and we manage it. So I feel like we're in a good position to deal with that type of situation, Robin. Robin Farley -- UBS -- Analyst OK. Great. Thank you. Bob Mack -- Chief Financial Officer Thank you. Answer:

the Polaris first quarter 2024 earnings conference call and webcast

Operator Good day, and welcome to the Polaris first quarter 2024 earnings conference call and webcast. All participants will be in listen-only mode. [Operator instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator instructions]. Please note, today's event is being recorded. I'd now like to turn the conference over to J.C. Weigelt, vice president, investor relations. Please go ahead. J.C. Weigelt -- Vice President, Investor Relations Thank you, Rocco, and good morning or afternoon, everyone. I'm J.C. Weigelt, vice president of investor relations at Polaris. Thank you for joining us for our 2024 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our chief executive officer; and Bob Mack, our chief financial officer. Both have prepared remarks summarizing the first quarter, as well as our expectations for the remainder of 2024, then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2023 10-K for additional details regarding risks and uncertainties. All references to the first quarter actual results and 2024 guidance are for our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now, I will turn it over to Mike Speetzen. Go ahead, Mike. Mike Speetzen -- Chief Executive Officer Thanks, J.C. Good morning, everyone, and thank you for joining us today. First quarter performance largely put out consistent with our expectations. You'll recall that headed into the year, we expected the first quarter to be one of the most challenging quarters given the difficult year over year comparisons and our plan to actively manage dealer inventory coupled with a more normalized production delivery of Snowmobiles. Q1 also saw us focused on continuing to execute the early stages to improve delivery, increase efficiencies and drive down operating costs in our larger manufacturing facilities. Sales in the first quarter were down 20%, which was in line with our expectations and adjusted EPS came in above our expectations given better performance on cost management. While we're pleased with our financial performance, we did experience the worst Snowmobile season we've seen in 13 years, driven by a lack of Snow across much of North America. Overall, it was great to see our products take share in ORV, motorcycles and marine. Our new product innovation is resonating with customers, which will drive future share gains. That, coupled with our operational improvements, makes me very optimistic about the direction of the business. North America retail was down 10%, driven by a weak Snow season, but was up 3% when you exclude Snow. Utility Off-Road vehicles continue to lead the way with strong demand for our RANGER lineup. Recreation was down, while On-Road was up for the quarter, driven by strength in North American markets, somewhat offset by international market weakness. Within Marine, we believe retail was flat during the first quarter using our internal registration data as we await the March data from SSI. We continue to play offense when it comes to innovation. Our RZR XP, Polaris XPEDITION and RANGER XD products are dealers in garnering much attention for their attractive features, cutting-edge technology with RIDE COMMAND+ and industry-leading capabilities. And we recently added to this launch with the new model year full-size RANGER portfolio and the new Indian motorcycle Scout portfolio. Once again, we delivered industry-leading innovation, further reinforcing our position as the global leader in powersports. Following through on our commitment to actively managed dealer inventory, we flexed inventory up in categories where we've seen consistent growth, such as Off-Road utility and new product models. We also reduced shipments to help better manage dealer inventory in categories that have been underperforming, such as Off-Road recreation and Marine. I'd also remind you that we've been doing this for several quarters. This approach is driven by our ability to adjust to trends we've seen materializing over multiple quarters, aided by our retail flow management system, which is one of the most sophisticated dealer inventory tools in the industry, allowing us to quickly adapt our production and delivery system to current demand environment. The system gives us near real-time access to our dealer inventory by region, by product, by dealer. We use this data in conjunction with conversations with our dealers to actively manage inventory to enable dealers to have the right inventory to efficiently run their business. Adjusted gross profit margin was down 248 basis points, driven by elevated promotions that began last year, as well as higher warranty costs. Partially offsetting these headwinds was the continued progress to improve our operations. This operational improvement enabled us to more than offset deleverage in the quarter given the lower volumes. We're targeting $150 million of operational savings this year, and while it's still early in the year, our progress thus far aligns with this objective. During the first quarter, we saw meaningful savings on material costs and logistics and our Huntsville manufacturing facility made tremendous strides in reducing indirect labor and rework costs and achieve significant improvements in execution against their build schedule. We are also seeing significant improvements in Monterrey, where the production line that created significant issues for us in delivering XPEDITION and RANGER XD in the second half of 2023. It's now operating at the targeted output rate, and we're seeing significant improvements in efficiencies starting to materialize within the facility more broadly. In summary, it was encouraging to see results that were largely in line to slightly above our original expectations, recognizing there were a number of headwinds we had entering the year. As we proceed through the remaining three quarters of the year, we're expecting further share gains given the significant innovation we've introduced over the past few years and we remain committed to actively manage dealer inventory and drive efficiencies within the business. I'm incredibly proud of our team's execution in the first quarter and want to thank them for their continued dedication and focus. Turning to more detail on retail. Broadly speaking, retail trends remain consistent with what we've seen over the past year with the exception being Snowmobiles. Recreation Off-Road vehicles were down for the sixth straight quarter. As we've shared previously, we view the purchase of these vehicles as more discretionary and more sensitive to economic conditions such as elevated interest rates. Our utility portfolio, consisting of RANGER side-by-sides and ATVs continue to see strength as reflected in our mid-single-digit increase in retail. As a reminder, this category is far less discretionary and plays an important part in work applications for ranchers, farmers, owners of multiple acres of land, as well as commercial settings and makes up approximately 65% of our Off-Road segment sales. As expected, promotions were elevated across the industry during the quarter and we expect a higher promotional environment to continue through 2024. This impacts each of our segments as the industry grapples with elevated interest rates. For Polaris and the industry, this impact is more noticeable within the Marine and Off-Road recreational categories where we've seen weak retail for several quarters, resulting in elevated inventory. Hearing from dealers, they continue to view all powersports inventory is too high and are actively looking for opportunities to manage inventory with strategies ranging from reducing the number of OEMs they carry to adding additional promotional dollars from their own wallet, as well as taking fewer shipments from OEMs. Every dealer is dealing with their own unique version of these industry issues. And while we can't influence other OEMs, we do believe that in total, we are doing our part to assist dealers. We're reducing shipments in product segments most challenged and adding promotional dollars where necessary to assist them with moving product. Given the current trends in rec and utility and the weak Snow season, we have adjusted our manufacturing outlook for these lines for the remainder of the year. We've made some meaningful cuts in Snow for the upcoming season, given the elevated inventory that is in the channel today. We've also reduced RZR side-by-side production as recreation retail has been down, and we do not see a near-term improvement given elevated interest rates impacting consumer purchasing decisions and the likelihood that rates stay higher longer than originally anticipated. We've also decreased production of Slingshots, which have a higher mix of consumers who finance their vehicles. While it's early in the retail season, the Marine environment is largely playing out as anticipated. In Utility, we've made the decision to increase production of our RANGER side-by-sides given multiple quarters of strong retail growth and healthy dealer inventory turns. Polaris continues to operate in a disciplined manner regarding our dealer inventory to ensure we have the right inventory in the field to maintain our competitive position while not burdening dealers with excess flooring costs. Our goal is to remain agile while being the partner of choice with our dealer to ensure a healthy relationship today and into the future. Moving to one of my favorite topics, innovation. We've had a busy couple of months with the launch of our new Indian Scout platform, the new 2025 Snowmobile lineup and the 2025 lineup of full-size RANGERs. The Scout platform was first launched by Polaris 10 years ago and has quickly grown to become the best-selling platform in the Indian motorcycle lineup. We're excited to carry on the tradition of this historically important bike with this new launch. Not only does the bike have a completely new engine, but also added highly sought after tech features to enhance the rider experience. Scout is an entry point into the brand with more than 90% of Scout owners being new to Indian motorcycle and also serves as a pipeline for growth into the other parts of our lineup. We've seen roughly 70% of our midsized riders move up to the heavyweight cruisers or our bagger and touring lineup with their next motorcycle purchase, further reinforcing the importance of Scout and the role plays to drive further share gains. We also announced and started shipping the lineup of model year 2025 full-size RANGER side-by-sides. These new RANGERs have rider inspired design enhancements and upgraded transmission and additional factory installed accessories. The new lineup makes the best-selling vehicle in the market even better. RANGER is the No. 1 side by side in the market and as the utility market continues to grow, we're excited to bring more innovation to our core utility customers. Wrapping up my comments on the quarter, we executed well in what we knew was going to be a challenging environment. We gained share with a strong product portfolio, made even stronger with our recent new product launches. We're working in partnership with our dealers to ensure they have the right mix and quantity of inventory to effectively manage their business and we continue to execute our plan to drive $150 million in operating savings in 2024, consistent with our long-term path to drive EBITDA margin expansion. I'll now turn it over to Bob, who will summarize our first quarter performance and provide updated commentary around our guidance and expectations for 2024. Bob? Bob Mack -- Chief Financial Officer Thanks, Mike, and good morning or afternoon to everyone on the call today. First quarter sales were $1.7 billion, down 20% versus last year. The decline was expected due to several factors we called out when we spoke in January. These included late-season Snowmobile shipments in Q1 2023 as a result of supply constraints, which did not repeat in Q1 2024. The lapping of ORV and marine channel fill in the first quarter of 2023, lower planned factory shipments to contend with elevated dealer inventory in Off-Road recreation and Marine and lower net price given the high promotional environment versus Q1 of last year. Therefore, there were not many surprises on the top line, although the Snow season was weaker than we expected, which in the quarter, mostly impacted our Snow whole good retail and related Snow PG&A lines. Despite this, PG&A sales were up 3%, with strength in our factory installed accessories in Off-Road. We continue to view our PG&A business as a driver for both sales and margin throughout the year. Adjusted EBITDA margin was down 459 basis points due to many of the same factors impacting sales such as volume and higher promotions. In addition, we are seeing slightly higher warranty costs in Off-Road and continue to experience higher finance interest associated with flooring interest support for our dealers. As expected, foreign exchange was also a headwind. Somewhat offsetting these headwinds was a positive contribution from operations despite the deleverage from lower volume and controlled operating expense spending. One unique item to note is that our tax rate in the quarter was 49.3%, which was more a function of lower net income year over year versus anything structural and we still expect our full-year tax rate to be between 21.5% and 22.5%. Adjusted EPS of $0.23 was above our initial expectations for the quarter. In our Off-Road business, revenue was down 16%, mainly driven by factors already discussed, such as the channel fill and the lapping of Snow season shipments last year. We shipped close to 6,000 units of our new Polaris XPEDITION and RANGER XD combined during the quarter as we strive to meet customer demand for these category-defining vehicles. Data shows we gained share on a unit and dollar basis during the quarter in ORV. On a dollar basis, which puts more weight on the premium side of the market versus the lower end and youth, we gained more share in our nearly 50% of the ORV market. We believe this illustrates our strength as a premium OEM within the ORV market versus inflating market share with youth and lower-tier products. The lack of Snow across most of North America impacted both our retail and industry retail. Primary impact to us is a change in expected selling of Snowmobiles for next season given current dealer inventory levels. I will cover this further in a moment. Margins in the quarter were pressured by volume, higher promotional levels and finance interest. Operational improvements within our plants were realized and are expected to contribute more dollars as the year progresses. Thinking about the second quarter, we expect longer-term trends to continue within utility and recreation. Promotions are expected to remain elevated and we believe our competitive position should only get stronger with the recent launch of our new RANGER portfolio, as well as continued interest in the products we launched last year. On margins, we expect meaningful gross margin expansion as we continue to make progress on our operational savings strategy. Switching to On-Road. Sales during the quarter were down 14%, driven by weakness in Slingshot and a soft international motorcycle market. Indian Motorcycles gained modest share during the quarter, driven by continued strength in the midsized category, which is an area of strength for us, especially with the launch of the new Scout. On-Road gross profit margin was up 41 basis points due to strength from our European businesses, Aixam Mega somewhat offset by higher promotions in the heavyweight categories. During the second quarter, we expect a modest benefit from the new Scout launch with offsetting pressure coming from Slingshot and continued promotions. In Marine, sales were down 53% as the industry continues to deal with elevated dealer inventory levels and higher interest rates impacting the consumer's decision to purchase. Our shipments in the quarter were in line with our expectations given the trends we are seeing in the second half -- we were seeing in the second half of 2023, which resulted in lower volumes in the first quarter and a reduction of dealer inventory versus first quarter 2023. SSI data through February reflected the decline in year over year retail, although our internal data through March suggest our brands are going to be relatively flat year over year in the first quarter. As we head into the Spring selling season and compare inventory levels to previous years, we feel that our position is much healthier than many of our competitors. Gross profit margin was down 776 basis points given top line pressures and less labor absorption at our plants. Our team continues to actively manage the variable components of our cost structure to help protect profits. We continue to see the industry challenge during the second quarter as dealers work through current inventory levels and consumer purchases are hampered by elevated interest rates. Moving to our financial position. We knew the first quarter was going to be a quarter with minimal EBITDA and cash generation as is typically the case during the early part of the year with dealer holdback and employee bonus payments being made in Q1. Therefore, we have limited share repurchase activity in the first quarter as we prioritized maintaining our net leverage ratio in the range that we have previously communicated. For the full-year, we expect to repurchase enough shares to offset dilution from stock-based compensation plans, and we remain well ahead of our 2026 target of reducing the basic shares outstanding by 10%. During the quarter, we used cash to support capex investments and returned $53 million to shareholders in the form of dividends and share repurchases. We remain confident in our financial position and our net debt-to-EBITDA ratio is expected to trend lower as we generate more EBITDA and cash as the year progresses. We continue to expect strong adjusted free cash flow this year and believe our capital deployment priorities are aligned with the strategy to build shareholder value. Now, let's move to guidance and expectations for 2024. We are not changing our full-year guidance for Polaris at this time but are making a minor adjustment at the segment sales level given the adjustments we have made within On-Road to account for current trends. This updated outlook calls for On-Road 2024 sales to be down mid-single digits versus our original guidance of flat year over year sales. Recall the On-Road change is in response to weaker trends we are seeing in Slingshot, some additional pressure on motorcycles internationally. While both of these markets are being impacted by higher interest rates, we have seen a more pronounced impact on Slingshot retail and thus have adjusted our production schedule downward. Promotions and finance interest are expected to remain at elevated levels, which continues to add pressure to our top line and margin. We maintain our guidance for Off-Road 2024 sales at down mid-single-digits. Within Off-Road, we are now expecting lower Snow sales in the second half of the year given dealer inventory levels coming out of this past season. Additionally, we have pulled back on recreation, Off-Road vehicles, vehicle volume given retail and industry trends. These pullbacks have been offset by the added volume from continued strength we see in our Utility Off-Road vehicles. Regarding dealer inventory, we are actively addressing areas with elevated inventory coupled with weaker retail trends, particularly in Off-Road recreation and marine by reducing shipments of those products to help minimize flooring interest for our dealers. We are also actively managing the mix of products in those segments to align trim levels with consumer expectations. We target building inventory with new products and in growth categories. One such growth area is Utility where dealers hold approximately three turns of RANGER inventory, which is comparable to pre-pandemic levels. Indian Motorcycles is also at similar turns versus pre-pandemic levels. We have a strong discipline around dealer inventory and understand the frustration our dealers have with other OEMs overshipping the channel or lacking a sophisticated inventory management system. We strive to be a business partner of choice for our approximately 4,000 dealers globally and want to share in their success. As previously communicated, our margin guidance calls for expanding both gross profit and EBITDA margins with most of the expansion resulting from savings and efficiencies at the gross profit level. In total, we are targeting over $150 million in operational savings with an even larger funnel of opportunity. Foreign currencies remain volatile and are expected to continue to be a headwind. Given the recent strength of the dollar, we see additional downside pressure from FX, we now believe the negative impact on EBITDA for the year is about $30 million versus our original expectation of approximately $20 million. For the second quarter, a few things to note. As I mentioned on the January call, we expect sales in the remaining three quarters of the year to be relatively flat year over year, including the second quarter. Our assumption is that industry retail is going to be down modestly for the year remains intact with Polaris gaining modest share through the year. Higher year over year promotions and finance interest continue to be headwinds. Operational synergies are expected to be larger to be reflected in margin expansion during the quarter. Lastly, FX and interest expense continue to be unfavorable year over year. Before I turn it back to Mike, I want to emphasize how encouraging our recent operating review meetings have been. The energy level around lean and operational improvements is clear. While these improvements take time, we believe we have the right team in place for the journey and we expect to begin seeing results and margin expansion in the second quarter. It's an exciting time to be at Polaris and witness the innovation we are launching and the passion from our team. We have a lot of opportunities to improve our market share position, margin profile and cash generation capabilities, all of which I believe can lead to increasing value for our shareholders. With that, I will turn it back over to Mike to wrap up the call. Go ahead, Mike. Mike Speetzen -- Chief Executive Officer Thanks, Bob. The macro environment remains uncertain. And given that, we expect to remain agile regarding both production and dealer inventory. We carried our North American market share gains from last year into the first quarter of 2024. Our expectation is that we'll continue to take share this year with industry-leading innovation, a healthy partnership with our dealers and a strong value proposition to bring memorable experiences to our customers who enjoy working and playing outside. Introducing new customers to powersports continues to be a focus for us as they make up a strong portion of the business. During the first quarter, we saw similar patterns with approximately 70% of our customers being new to Polaris vehicles. This is a great statistic to see. As the market leader, we continue to grow the space and create awareness for the capabilities and experiences provided by our vehicles. Operationally, we're on a journey. I was encouraged with the progress we made at the largest facilities and I'm confident in our improvement plans for the year. I believe our first quarter results, coupled with a focus to drive market share and margin expansion positions us well to deliver on our 2024 guidance. We thank you for your continued support. And with that, I'll turn the call back over for any questions. Questions & Answers: Operator Thank you. [Operator instructions] Today's first question comes from Craig Kennison with Baird. Please go ahead. Craig Kennison -- Robert W. Baird and Company -- Analyst Hey. Good morning. Thanks for taking my questions. I guess I wanted to get your perspective, Mike, on the health of the dealer network, given feedback from dealers that inventory is just way too high and a lot of evidence that there's stress in the market caused by skinny margins and high floor plan expense. I feel like you're feeling -- you've done it all, you've done it right and -- but your competitors have too much inventory. And I'm not sure that's exactly what I hear from dealers. Mike Speetzen -- Chief Executive Officer Yes. No, look, I appreciate it, Craig. And certainly, in this environment, it's something we're spending a disproportionate amount of time on I can tell you different from many of our competitors, Bob and I and our GBU leaders spent a lot of time out in the field with our dealers. In January, we were with our Indian motorcycle dealers. And March, Bob and I were out at marine dealers in Michigan, which is the largest market. And then, we're headed back out with Steve in May to talk to Off-Road dealers on the West Coast. Look, they certainly are under stress. I can tell you from sitting in those dealerships that the conversation is not just a simple five-minute phone call. It's in detail. First and foremost, I think we probably have the best grip on this across the industry. We've got incredible visibility that's enabled through the systems that we have. The RFM process gives us essentially real-time data. We are always going to be the largest part of the discussion because we are the market leader. You have to add up a lot of the other OEMs to even get close to our numbers. So they are typically going to have more inventory for Polaris than they do with the others. But the devils in the details relative to the efficiency of the inventory. And we know because we can see through the systems through CDK, where we have visibility into about 70% of the inventory that we are either No. 1 or top quartile when you look at things like days sales outstanding, six, 12 months at the dealership or you look at their mix of current inventory to noncurrent inventory. In that bucket, we are No. 1. Just to give you a frame of reference. There's an OEM that was shipping over 70% through the first quarter of the inventory into dealers that was from model year '23. And so, that puts into perspective some of the dynamics that are going on at the dealers. In my prepared remarks, I talked about the fact that dealers are taking things into their own hands. One of the things that became evident as we've met with the marine dealers is that they're trying to move out some of the smaller brands that they brought in during the pandemic when they were desperate just to get their hands on Boats. They still have inventory in those brands that they're trying to move and there's a lot of focus and attention around that. And financially, it's a bit of a drag. Through our JV with Wells Fargo, which is expanding to cover our Marine segment, we have good visibility into each of our dealers. We watch their financial health. Bob is the chairman of the board for that JV. And we keep a very close eye. That JV has been effective for well over 20 years and helping us make sure that we're working with the dealers. Hopefully, as the industry leader, we'll get the rest of the OEMs to follow suit and behave in a consistent manner. We can't control that. So we're going to do everything we can to do our part. But I'd look at things like dealer inventory, we're up versus where we were in Q1 of last year. If you remember, last year, we -- the channel was still very light in inventory. But when I look at the models that are not moving quickly, so the models that we outlined, whether that's marine or Boats, Slingshots, in aggregate, we've taken those categories down 14% year over year. That's pretty significant. And I think reflective of making sure that we're working with our dealers, we're not perfect, but we know where the soft pockets are, and we are actively pulling those inventory levels down. We've adjusted our production schedules. The good news is, given our RANGER lineup and the concentration we have around utility, which is a market that remains strong, we're obviously recognizing the benefit. That's good for our dealers. Those are high-margin vehicles. They bring a lot of accessories along with them. And so, we're obviously pushing production up on that and we think that's going to go a long way. So I think the message is look, we're going to operate with an incredible level of discipline. We were clear when we gave guidance, we reiterated it today that, as retail goes, our business goes and we're going to make sure that we stay true to that, and we're going to make sure that we keep our dealers healthy here in the near term because we really value that long-term relationship and health of the network. Bob Mack -- Chief Financial Officer I think a couple of things to think about, Craig. Like Mike said, obviously, we're the biggest in the industry, we're always going to have the highest box count. We also put out more innovative products than other folks. And so, we've got new product launches, which causes some level of channel fill. We do manage with RFM. And if you really look at the rec categories, Mike talked about how much we've taken that inventory down, typically, Q1 to Q2, both in categories like RZR and Marine, you would build coming into the season, you would build the dealer inventory mid- to high double-digit range, 15% to 20%. This year, we're down in RZR, we're flat in Marine. And so, not only did we constrain dealer inventory as in '23 and in the first quarter at '24. But we didn't see the typical build we would have going into seasonality. So we're going to hopefully use that seasonality to help keep those inventory levels down in the categories that we see most challenged. So I feel like we've been probably the most aggressive by a large margin in terms of really managing dealer inventory. Our Marine inventory is very clean. It's been a challenging market. We talked about in the prepared remarks, we think it will be relatively flat for Q1. Hopefully, we'll see some good response as the warmer weather shows up, but we're not sitting on dealer or inventory at our factories. We build to order. And so, we've managed that business with what we see as incoming dealer orders. And so, we think we're in a pretty good position compared to a lot of other OEMs. Craig Kennison -- Robert W. Baird and Company -- Analyst Thanks, Bob. Operator And our next question today comes from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Hi. Thanks for taking my question. I guess you kind of talked through this a little bit, but in terms of kind of where you are on the ORV side, in terms of mix, what do you think that implies for promo levels relative to Q1? And then, if you could just kind of talk through the operational improvements that you're realizing and the ability to offset promo looking ahead? And then, second, not to pry too much, but I think sometimes you give some EPS color on the forward quarter. So just any thoughts there would be helpful. Thanks. Mike Speetzen -- Chief Executive Officer Yes. On the ORV mix and in promo implications, when we talked about the year over year '24 versus '23 and we talked about the increase in promo, most of that really happened in Q1 of this year. And we expect those levels to essentially remain similar as we go into Q2, Q3 and Q4. But if you look back to last year, promo would start ramping up through the course of the year. So we think promo will be up. It's probably going to be a little higher than we originally expected because we know that there's a lot of noncurrent inventory from some of our competitors out in the market. But as we look at how we've rebalanced production, we brought RZR and Slingshot, Snow down, but we're increasing RANGER to recognize the utility strength. We feel like those things all somewhat counterbalance, but we do think there will be a little bit of a headwind from a promo standpoint, but that's all well within the guidance range that we've talked about. I talked about the operational improvements. I don't know that I'd sit here and tell you that we're going to be able to push those higher than what we had. I mean, we've got a pretty good slug of work in front of us. The team did an excellent job. We talked in the call in late January, early February, about the progress we've seen coming out of '23, and that momentum is continuing into '24 in terms of the underlying factory performance. And essentially digging out of the hole we had gotten ourselves into operationally. The cost improvement was relatively small in Q1 relative to the total bucket, but that was expected because it was our smallest quarter and the team is driving that forward. Bob talked about it in his prepared remarks. I mean, we've got a lot of rigor focused around making sure that we get results to the bottom line coming out of this category. I'll let Bob talk a little bit about the EPS cadence. Bob Mack -- Chief Financial Officer Yes. I mean, like we said, revenue is going to be relatively flat quarter over quarter or year over year for the remaining three quarters. We're not going to give EPS guidance by quarter. We don't do that. But I would say you'll see stronger operating improvements in the back half of the year just because all the improvements you make kind of lag a quarter. So what we saw in Q1 really was a result of a lot of the work that happened in Q4. And so, those will build through the year in terms of earnings, but that's all the guidance we're going to give on EPS for the quarter. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Thank you. Operator And our next question today comes from Joe Altobello with Raymond James. Please go ahead. Joe Altobello -- Raymond James -- Analyst Thanks guys. Good morning. So you mentioned earlier that the earnings upside in the quarter really came from better-than-expected operational costs. How much of that was timing related? Maybe you realized some costs earlier than you expected. And is there upside potentially to that $150 million number this year? Bob Mack -- Chief Financial Officer Yes. Thanks, Joe. I wouldn't say it was hugely time related. Just we got a little bit more and there were a lot of puts and takes in the quarter. So the operational improvements are on track with where we thought they would be. They do -- they obviously build through the year. I don't know that there's significant upside to the $150 million. It's a lot of work to get there. And like I said a couple of times over the last few calls, your efforts -- the results lagged the efforts by a solid quarter. And so, everybody is working really hard. But we're focused on getting the $150 million this year, and then having a good exit rate that can carry into '25, but I wouldn't plan on a lot of upside to the $150 million as we sit here today. Joe Altobello -- Raymond James -- Analyst OK. That's helpful. Maybe secondly, the strategy behind shipping model year '25 RANGERs here in April, it seems a little early? Bob Mack -- Chief Financial Officer Yes. I mean, the product, obviously we work on these products for a long time. The product was ready. We're coming into season. We've got strong performance in the Utility segment. And so, we wanted to get that product in the hands of consumers. We made a lot of really good quality and drivability improvements that we think are responsive to what consumers have been looking for in that product. And so, with it being ready, we decided to go with model year '25 here in April. Mike Speetzen -- Chief Executive Officer It's all about leaning into the most favorable market right now, Joe. And I can tell you, they're excellent products. We've addressed a number of the things that were, I'll call them, source spots with customers around shifting. But also, we spend a lot of time with consumers looking for ways to enhance what was already an excellent vehicle. And so, we were excited to get it out. The team did an excellent job of executing the program, so we were in a position to be able to ship. And there's a lot of excitement around that vehicle as is with the vehicles we launched last year. Joe Altobello -- Raymond James -- Analyst Got it. OK. Thank you, guys. Mike Speetzen -- Chief Executive Officer Thanks, Joe. Operator Thank you. And our next question today comes from Fred Wightman with Wolfe Research. Please go ahead. Fred Wightman -- Wolfe Research -- Analyst Hey, guys. Good morning. Thanks for the question. I guess, just simplistically, you've given a handful of puts and takes some changes to sort of the production makeup or expectations for the rest of the year, but you guys did beat where you thought you would in 1Q. What is sort of the offset? Is there something later in the year that you're more cautious on as far as why you didn't address the full-year outlook? Mike Speetzen -- Chief Executive Officer Well, I mean, I think, Fred, I kind of hit on it a little bit earlier in terms of the promo levels are slightly elevated from where we expected them to be or expect them to be for the rest of the year. I mean, Q1 was pretty close to what we were thinking. But as we look out through the balance of the year, just given interest rates are likely to move, we had expected around three reductions for the balance of the year. And in light of the inflation rate holding up and the comments that the Fed has made were likely not to see three. I think we're worried if we'll see any. And so, there's a little bit of that that will likely play out in higher promo rates as we continue to adjust through the rest of the year. Bob Mack -- Chief Financial Officer Yes. I mean, the interest cost isn't, we have planned them late in the year. So the impact from a forecast standpoint is not particularly significant. To Mike's point, I think we think that consumers that if there's a few rate cuts would start to feel a little better and that might have some positive benefit to retail and promo. And if that doesn't happen, obviously, we're going to be in the same environment we're in today. So we're sort of prepared for that and things were a little bit better in the first quarter. We made a little bit more progress than we thought we would, but nothing that would, at this point, cause us to change our view of the year. Fred Wightman -- Wolfe Research -- Analyst Fair enough. Thanks. And I guess, Bob, you mentioned earlier just that sequential build in dealer inventories that you normally see from 4Q into 1Q. Didn't see that this year, right, because you guys are managing that closely. I guess when you look at the embedded benefit that you're expecting for gross margins as we move throughout the year from some of the new products. Do you think that inventories where they are today, should still support a portion of the gross margin expansion that was from mix? Bob Mack -- Chief Financial Officer Yes. We are seeing good inventory build on XPEDITION and XD and the new products, RANGER. I mean, we launched the product, I guess about a week ago and we started shipping immediately. I think they've started to hit dealers just in the last couple of days. So we -- that was all factored in. I mean, a lot of the cost improvement is things that are either just the cost of operating the plants, the efficiency in the plants. So that shows up fairly immediately as those vehicles get into inventory and same thing on materials. So we have that all still very aligned. Fred Wightman -- Wolfe Research -- Analyst Great. Thanks a lot. Operator Thank you. And our next question today comes from Megan Alexander with Morgan Stanley. Please go ahead. Megan Alexander -- Morgan Stanley -- Analyst Hey, thanks very much. Just wanted to follow-up on 2Q. Bob, I think you did clarify you expect sales to be down year over year. You talked about significant margin expansion, understand interest expenses, a headwind, understand you're not going to give an actual range, but the net of that does suggest earnings should be up year over year, I guess, is that right? Bob Mack -- Chief Financial Officer Yes. So thinking about Q2, what we've said is we think revenue is going to be relatively flat year over year. So the revenue side of it will be a big positive or negative. We'll see the cost improvements from the work we're doing on the operations side and which will then play out into the earnings. So we're not giving specific guidance, but I think relatively flat year over year is a way to think about it. Megan Alexander -- Morgan Stanley -- Analyst OK. Understood. That's helpful. Thank you. And then, maybe a follow-up on the ORV retail in 1Q, that 3%. Can you just talk about maybe the cadence over the quarter and what you're seeing so far in April? Mike Speetzen -- Chief Executive Officer Yes, I mean, what I would tell you is that the commentary I provided pretty much sums it up. The rec market around RZR specifically remain weak. We've got now six quarters of that performance. In the RANGER business, utility has remained pretty solid, pretty strong. And so, we did have to try and adapt within the quarter. But as we see those trends continuing through the year were, as we talked about in my prepared remarks, we're making those changes in production rates at Monterrey and in Huntsville to adjust for those trends that we see. So we were probably a little bit more hopeful that the rec would start to stabilize. And I think the fact that inflation is at 3.5%, I think people are having to make a lot of trade-offs. Gas is still expensive. And with the hope of interest rate relief coming, dimming, mortgage rates hit an all-time high. I think you just see consumers continuing to be cautious and careful with how they're spending their money. And that just is going to prolong that replenishment cycle for our rec business. So at some point in time, we know who these customers are. We know that they're driven by innovation. Once a little bit of relief comes, they're going to want to upgrade their vehicle and we know that through our repurchase cycle. So it's probably more of a delay, whether that's later this year or into next year is anybody's guess at this point. Megan Alexander -- Morgan Stanley -- Analyst Got it. That's helpful. Thank you. Operator Thank you. And our next question today comes from Alex Perry of Bank of America. Please go ahead. Alex Perry -- Bank of America Merrill Lynch -- Analyst Hi. Thanks for taking my questions here. I guess just my first question, can you talk about how much new innovation supported retail? What has been the feedback on the RANGER XP 1500 and the XPEDITION? And then, any early reads you can give on the new Indian Scout lineup and the new RANGER lineup as well? Thank you. Mike Speetzen -- Chief Executive Officer Yes. Well, I mean, I would say that new innovation, we look at the utility segment. And while it's not new, the work that we did to introduce the RANGER NorthStar and specifically around the call it, the premium and the ultimate lines. Those have become incredibly popular. They've moved into making up a high percentage of that utility revenue. And so, that coupled with the capabilities that we enable through Ride Command+ being one of the only connected vehicles out in the marketplace, great audio systems, all that. I mean, it really makes for an incredible value proposition. So when you look at the innovation that's being driven in terms of retail and what we're doing in our RANGER business, that's why we've leaned in so heavy, and it's why we launched the model year '25 new RANGERs. There's a lot of incredible commentary around those vehicles. Dealers are anxious to get their hands on them. Specifically around the things we've addressed that were some of the detractors that customers had. And we'll have those vehicles out demoing and getting visibility with influencers, which is an important aspect of that business. The XD is now making its way out into the marketplace. Receptivity has been very strong. It is an incredible vehicle with incredible capability. The steel belt technology really affords a smooth riding vehicle that can handle workloads that are equivalent to some of the best pickup trucks out in the marketplace. XPEDITION, specifically the higher-end trims, the ultimate's in the NorthStar cabs. It's tough to keep up with demand on those. They're really serving the purpose that we have. I'd tell you that there's a little bit playing out in the lower end of that market in general in terms of customers trying to figure out if they want to go with a general or if they want to go with the lower-end XPEDITION. And so, we'll continue to watch and monitor that, do what we do and adapt to it as time goes on. The Scout Lineup, the team did an excellent job. We started teasing that well ahead of the launch. There's a number of videos you can go watch in terms of influencers who've gotten their hands on those vehicles, ridden them. Bob and I and the management team wrote them late last year. They're incredible motorcycles. We know dealers are very excited. We gave them a essentially a sequestered view back in January when Bob and I were with Mike Dougherty and team at the dealer meeting down in Arizona. So they were able to get an advanced view of the bikes, the launch campaign and they were incredibly anxious to get those things out in the marketplace. So as I talked about in my prepared remarks, it brings in new customers to the Indian segment. It's the largest selling bike we have, and we know that it is a funnel into larger bikes and a lifetime of Indian ownership. So we're really excited about it. I'm proud of the team. The innovation continues to exceed our expectations and we've now got a good solid three years of incredible launches across just about every part of our business, and I think that sets us up well for the long term. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. That's helpful. And then, just my quick follow-up is I wanted to ask what is embedded in terms of the guidance in terms of rate cuts. I think prior year contemplating three rate cuts. Is that still the expectation where are you sort of waiting to see how things play out? Thank you. Bob Mack -- Chief Financial Officer Yes. So we had originally embedded three rate cuts. At this point, we're down to two, but we've got them late in Q4. So there's no meaningful risk to those rate cuts in terms of actual interest expense for the company or for our share of dealer floor plan. As we said earlier, the real impact is just we have a view that the rate cuts will at least provide some stimulus, maybe not actually financially, but mentally to consumers. And if that doesn't happen, we'll be in the environment we're in, which is what we've got contemplated right now. So it won't be meaningful either way for us. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. That's helpful. Best of luck going forward. Bob Mack -- Chief Financial Officer Thanks Alex. Operator And our next question today comes from David MacGregor with Longbow Research. Please go ahead. David MacGregor -- Longbow Research -- Analyst Yes. Good morning, everyone. And thanks for taking my questions. I wanted to just ask about the production curtailments. So you talked about taking down Snow RZR, Slingshot, Green. You picked up RANGER. How should we think about the impact of the production curtailments on 2Q as it would relate to or compared to maybe the first quarter? Bob Mack -- Chief Financial Officer Well, in Q2, so we were down nearly $500 million in revenue for the full-year, and most of that was in Q1. So Q2 looking relatively flat in comparison to last year will be a fair amount of volume. We took a lot of marine out of Q1 relative to -- particularly relative to the year before, but even relative to a normal year. So marine will be -- will start to pick up a little bit as we get into seasonality. And then, really, the RANGER -- the added RANGER build helps offset a weaker RZR build. So pretty much an even trade-off there. Snow doesn't really come into play until Q3, Q4. And like we said in our prepared remarks, the Snow build for the year will be down because dealers are still sitting on a fair amount of model year -- snow model year '24 inventory that didn't sell this season given the lack of Snow. So I think it will still play out the way we had originally guided, which was quarter over quarter revenue year over year, 23% versus 24% revenue being relatively flat through the remaining three quarters. Mike Speetzen -- Chief Executive Officer And the only thing I'd add, David, is it sounds relatively simple in terms of, well, we'll take RANGER up to offset RZR and Snow. The operational teams who are already doing pretty substantial work. I mean, obviously, we don't make all those products in the same facilities. And so, behind the scenes, there's a lot of work being done to work within the confines of Roseau, Huntsville, and Monterrey to work through how those impacts of rebalancing Snow, Slingshot, RZR, and RANGER are executed. And in light of the improvements that we made starting last year and gain momentum on in the first quarter. I've a lot of confidence in the team to be able to execute on that. But it is a change, but it's the right thing to do because not only does it lean into where we have strong retail, but it also recognizes where retail softer and consistent with what we keep reiterating, it helps us manage that dealer inventory position with our network, and that's incredibly important to us. Bob Mack -- Chief Financial Officer The other piece of dealer inventory management, we haven't really talked a lot about, but is kind of reality of the market right now is we are focused on managing trim levels also. And coming out of the pandemic, there's been a lot of focus for consumers on sort of higher-end trim levels. And so, I think really across all products and really across all manufacturers, everybody was leaning into their highest trim level products. I think that was true in auto as well. And as the market started to change, consumers are looking for some more of the entry-level trims that they can do accessorize later after their purchase to keep the initial purchase price a little bit lower. And so, starting last year, we started adjusting those trim levels, and we continue to do that. So it's not just having the right number of units, but it's having the right trim level of units in the field, and we think we've made a lot of progress on that. And it plays to our strength because we've got the biggest accessory business in the industry. And so, if a consumer buys a vehicle that doesn't have as many accessories on it. We've got the most likely opportunity to sell them those accessories later at good margins. So it's a good switch for us. David MacGregor -- Longbow Research -- Analyst That make sense. The second question I had was just regarding your cost savings program, the $150 million that you've talked about. How should we think about how much of that makes it to the bottom line in your guidance versus maybe being channeled into other investments? Bob Mack -- Chief Financial Officer So the $150 million is embedded in the guidance as falling to the bottom line as cost improvement. I mean, obviously, there'll be puts and takes on other operational things like warranty and absorption with volumes as volumes move around. But the whole $150 million is true cost savings. And like we said, it's -- it builds through the year, so it will have a bigger impact later in the year, but you'll see margins improve sequentially through the quarters. Mike Speetzen -- Chief Executive Officer Yes. I mean, I think when you look at the fact that we're talking about the year being down from a revenue standpoint, but pushing margins up, we're doing everything we can. We're being prudent from an operating expense standpoint. But when we look at our manufacturing facilities and baseline back to 2019, and I'm not necessarily suggesting 2019 is the hallmark for us, but it's a good comparison point. There's a lot that we have to get out of those businesses. Some of that is tougher because things like commodities are -- while coming down sequentially or still elevated from where they were labor rates are elevated, but there's a lot of other inefficiencies that crept into the facilities that we've got to get back to. And we're not saying that 2019 is the benchmark. We think we can be better than that, but that's the focus, which means we have to get all that to the bottom line. David MacGregor -- Longbow Research -- Analyst Thanks very much. Good luck. Mike Speetzen -- Chief Executive Officer Yup. Sure. Thanks. Bob Mack -- Chief Financial Officer Thanks. Operator And the next question comes from James Hardiman with Citi. Please go ahead. James Hardiman -- Citi -- Analyst Hey. Good morning, guys. I just wanted to ask one more question on the inventory front. So you've given us a lot of bread crumbs, I think you said inventory was flat sequentially, three turns for RANGER and for Indian. Is there any way to just give us an aggregate where inventory is year over year or versus 2019? I can't believe we're still comparing things to 2019, but it's at least some reference point. Any way to think about where we are in aggregate? Bob Mack -- Chief Financial Officer Yes. I mean, so like we said, we're flat. If you exclude youth and the new products, we're down two. If you think about RZR, we're down high-single digits quarter over quarter from Q4 total rec same way. I think I commented earlier, Marine is flat. And normally, we would have built a lot of Boats going into seasonality. So we feel good about where that is. RZR, we would have built kind of 15% to 20% going normally coming out of Q4 into Q1 headed into Q2 into seasonality. And even RANGER rec is not up significantly. So we didn't -- it's not like we built tons of inventory there either and a lot of it is in the new products. So overall, we feel pretty good about where we are. And hopefully, that's enough to get you to. James Hardiman -- Citi -- Analyst But just to clarify, those are all sequential numbers, right, which I think a lot of us sort of -- we don't normally think about it that way. So is there any way to put that in the context of last year? Mike Speetzen -- Chief Executive Officer Well, I mean, the problem, James, is when you look at Q1 of last year, we're up 29%. But Q1 of last year, on average, the network had 80 days or less of inventory, which is well below where the industry has ever been. We were still in a restocking position. And so, I think until we get ourselves work through the year, the year over year comparisons, while they're interesting, they don't necessarily tell you a lot. I mean, what we're spending time on is the absolute levels of inventory by product across the network by region, by dealer. And we're looking at the measures that really matter in terms of how quickly is that inventory turning, what's the retail trend that we're seeing on it, what's the current, noncurrent mix so that we can adjust? And that's what's really driving us to make the corrections that we do. And frankly, the challenge for us is 2x everybody else, just given the size and complexity of our business. But like I said, when we look at the data that comes through CDK and we can see our performance relative to the other OEMs we are outperforming the group. And I'll continue to reemphasize that, because we have talked about this for the last couple of years. We don't just talk about it. We're actually acting on it. A lot of folks are talking about it, but when we look at the data, they aren't acting on it. And we take it seriously. We know that we're a big part of the dealers business. And so, it really is up to us to take the lead. And hopefully, they'll continue to put the pressure on the other guys or work them out of their dealerships. James Hardiman -- Citi -- Analyst Got it. That make sense. And then, I think, Mike, in your prepared remarks, you talked about what dealers are doing in response to some of the pressure you talked about. I think I wrote down, reduced OEMs, fewer shipments and then contributing their own promotional dollars. I guess, first, is there any concern about the health of the dealer base? Could we see a pickup in dealer failures? But then also that reduced OEM seemed like a significant comment that I wanted to circle back on. I'm assuming we're talking about maybe some of the low-end players, but that feels like that could be a positive to you guys longer term if we're able to sort of rationalize the OEM space? Thanks. Mike Speetzen -- Chief Executive Officer Yes, we -- so a couple of things from a health standpoint, obviously, we are concerned and keep a very close eye on this. Within each of our businesses, we have a dealer management group. We get a lot of good data through the Wells Fargo JV. And if you look at the history of that JV, I mean, even during the '08, '09 time period, because of the proactive nature of how we manage that, the dealer failures were pretty small. Quite frankly, what does concern me is the behavior of some of the other OEMs because, obviously, with 70% of our dealer network shared, 100% of our Boat network shared. It isn't just up to us. Hopefully, because of the behavior we exhibit, it helps the dealers put some of that same pressure. When we've been out with the dealers, like I said in my prepared remarks, one of the things that during the pandemic is they were bringing in any OEM that had availability. Even if those OEMs were delivering in a year, a fraction of anything that we would given delivery constraints, they were bringing that inventory in because people are coming in and whether it's a rec vehicle or a Pontoon, Boat they wanted something. But now as the market is shaking out, in a lot of instances, those short lines that they brought in did play more to the value lower-end buyer, who has really retreated in this marketplace. They're highly interest rate sensitive. Discretionary income is much lower and these are highly discretionary purchases. So they're getting low priority relative to cost of living, increases that they're continuing with. So as we've talked with dealers, they've been pretty straightforward that one of the options that they're looking at is they've got to move the Boats they have or they've got to move the vehicles they have, but they don't plan to continue to carry some of those lines. And so, we're not going to get into names and all that kind of stuff because, quite frankly, it varies by dealer by region. But I think it is reflective of the dealer understanding that moving forward, whether you look at our Pontoon business, our Off-Road business, our Motorcycle business, they are a disproportionate share of the market and we're the player to really bet on as they go forward. James Hardiman -- Citi -- Analyst That's good color. Thanks Mike. Operator Thank you. And our next question comes from Tristan Thomas-Martin with BMO Capital Markets. Please go ahead. Tristan Thomas-Martin -- BMO Capital Markets -- Analyst Hi. Good morning. I have one question on pricing. Looking at your RANGER '25 lineup, base models are -- it seems like there's been price productions on the premium, I think they're higher year over year, but with that adoption. So how should we think about your overall 25% pricing on average across all your products? And then, second part of the question, what's the margin difference between a factory installed accessory relative to one that you ship into the dealer channel? Bob Mack -- Chief Financial Officer I'll answer the second question first. The margin difference is not significant. The bigger advantage to factory installed is that you don't -- you get more. Typically, people buy more when they're shown a fully accessorized vehicle. And then, also you don't have to worry about a dealer or the customer selecting a non-Polaris accessory, because it's already on the vehicle. So that's the bigger advantage. I think the way to think about pricing. There's been a lot of price noise in the market coming through the pandemic between MSRP increases, surcharges and now increased promo. And so, I think across the OEM space, you're seeing people as new model years come out, sort of adjust that mix of MSRP, surcharge and promo. I don't know that the impact on net price is going to be particularly significant. It's just where it shows up. That said, I don't think the industry has got a tremendous amount of pricing power going into model year '25, given just all the increases that have happened in the current state of the consumer. I think what you'll see us focus on, you saw it well in RANGER is we try to get the trim levels right so that the customer is comparing vehicles that are spec-ed in the ways they want to buy them. And sometimes that's taken stuff off on lower trends and adding things on higher trims, but that's something that we tweak every year to try to get the trim level right for what the consumer is coming into dealership and asking for them. Tristan Thomas-Martin -- BMO Capital Markets -- Analyst OK. Thank you. Operator Thank you. And our final question today comes from Robin Farley with UBS. Please go ahead. Mike Speetzen -- Chief Executive Officer Robin? Operator Robin, your line is open. Are you on mute perhaps? Robin Farley -- UBS -- Analyst Yes, thanks. So you mentioned your expectation that you're about gaining share through the year. But you also talked about how other OEMs have some more work to do that maybe some other. I don't know if that was specific to ORV, but you mentioned that others may have more work to do in terms of clearing inventory. So I guess, I mean, wouldn't that sort of suggest that it will be tough to grow share, not that share loss to another OEM that's clearing inventory is meaningful or long term. But wouldn't that make it difficult to grow share, if you're sort of saying others have more inventory clearing to do than Polaris has? Mike Speetzen -- Chief Executive Officer Yes. I mean, it's not helpful. And there certainly are pockets. I mean, when we talk about share, the internal discussion is far more in-depth by model, by trim line, things like that. So there are areas that it has presented a far bigger challenge. We're not going to go crazy trying to protect when we're battling someone who's clearing inventory that's a year or more old. The good news is that that eventually comes to an end, and we'll be on a better foot as we move forward. And as the last question indicated, we're making real-time adjustments between price and promo to make sure that we're reflecting where the market is. And given the innovation that we have around our products and the competitive nature, I'd stack us up No. 1 relative to anybody coming after us. So I feel great. I look at the new products, that new RANGER is going to be highly desired. The new Scout is going to be highly desired. We're just now getting momentum around XPEDITION and XD. And then, certainly, as some of the rec markets come back around RZR with the new products that we introduced over the past several years with the XP and the Pro R, we feel really good about the position that we've got there. Within our Marine business, we've refreshed a ton of the Godfrey line. We've refreshed and are refreshing a lot of the Hurricane models. We went after the low end of the Bennington and obviously, we're going to continue forward on that. So we'll have a lot of new models from our Marine segment. So I feel really good about where we're at, and we'll manage those competitive dynamics and make sure that we're staying disciplined around dealer inventory. Robin Farley -- UBS -- Analyst Great. And just one follow-up on you think about restocking and kind of what floor share will look like after everybody has gone through this inventory clearing, which it sounds like if you're expecting retail for the industry to be down modestly for the year. It sounds like maybe Q2 will be the last kind of big clearing. And when you think about the others restocking, some dealers talk about some OEMs that are not as penetrated, right, in terms of dealer penetration. They can still charge close to MSRP. And so, they can make money on even though it's a lower-priced product than a Polaris product. And I guess how do you think about competing for floor share when dealers are restocking if they're saying they can make more on a different OEM price point but not have to kind of compete with other dealers carrying that same brand. Is there anything that you can sort of do to combat that dynamic? Mike Speetzen -- Chief Executive Officer I mean, I'm sure there's some pockets of that, but I wouldn't say that's a large scale. I think you sit down and you spend time like we do, talking with our dealers, I mean, it's evident. We are such a big part of the majority of our dealers. And that's important from a profitability standpoint. And they know and they've seen what's happened when they carry some of these smaller brands and you get into difficult times and they don't have as sophisticated inventory management. Any margins that they were making on those quickly get eroded because they carry too much inventory and they're paying all the interest costs. So I think the good dealers that take a long-term view, understand that and really drive to make sure that we've got a strong relationship with them. And I think the dealer cultivation we do, whether it's in Indian or Off-Road or our Marine business is really setting the bar high, and I have a lot of confidence that we'll continue to build those relationships. Bob Mack -- Chief Financial Officer Yes. And we've continued to evolve. For most dealers, we are far and away the largest dollar profit contributor to their dealerships, our NorthStar Rewards program that we use to manage our dealers. There's a lot of criteria in that around floor space and how they need to present our brands. And there's real money tied to it and the dealers understand that, and we manage it. So I feel like we're in a good position to deal with that type of situation, Robin. Robin Farley -- UBS -- Analyst OK. Great. Thank you. Bob Mack -- Chief Financial Officer Thank you.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and Welcome to the Cincinnati Financial first quarter 2024 earnings conference call. All participants will be in listen-only mode. [Operator instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Dennis McDaniel, investor relations officer. Please go ahead. Dennis McDaniel -- Investor Relations Officer Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our first quarter 2024 earnings conference call. Late yesterday, we issued a news release on our results along with our supplemental financial package, including our quarter-end investment portfolio. To find copies of any of these documents, please visit our investor website cinfin.com/investors. The shortest route to the information is the quarterly results link in the Navigation menu on the far left. On this call, you'll first hear from chairman and chief executive officer, Steve Johnston; and then from executive vice president and chief financial officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including President Steve Spray; Chief Investment officer Steve Soloria; and Cincinnati Insurance's chief claims officer, Marc Schambow; and senior vice president of corporate finance, Theresa Hoffer. First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. Now, I'll turn-over the call to Steve. Steve Johnston -- Chairman and Chief Executive Officer Good morning, and thank you for joining us today to hear more about our results. In short, we are off to a great start. Our first-quarter results reflect the success of our initiatives to continue balancing the profit and growth of our insurance operations coupled with strong investment income. Net income of $755 million for the first quarter of 2024 included recognition of $484 million on an after-tax basis were the increase in fair value of equity securities still held, representing about three quarters of the increase in net income. Strong operating results generated the rest of the increase. Non-GAAP operating income of $272 million for the first quarter nearly doubled last year's $141 million, including a decrease in catastrophe losses of $93 million on an after-tax basis. The 93.6% first quarter 2024 property casualty combined ratio was 7.1 points better than the first quarter of last year, including a decrease of 6.9 points for catastrophe losses. While our combined ratio for accident year 2024 before catastrophe losses was a percentage point higher than accident year 2023 at three months, if we exclude Cincinnati Re and Cincinnati Global, the ratio improved by one point. Accident year 2024 also improved on a case incurred basis. However, we increased incurred but not reported or IBNR reserves as we continue to recognize uncertainty regarding ultimate losses and remain prudent in our reserve estimates until longer-term loss cost trends become more clear. We are also pleased with other measures indicating good momentum in our operating performance. Another quarter of pricing segmentation by risk plus average price increases helped to improve our underwriting profitability, combining with careful risk selection and other efforts to address elevated inflation effects on incurred losses. Agencies representing Cincinnati Insurance, supported by our experienced and professional associates produced another quarter of profitable business for us. Our underwriters continue to emphasize retaining profitable accounts and managing ones that we determine have inadequate pricing based on our risk selection and pricing expertise. Estimated average renewal price increases for the first quarter continued at a healthy pace with commercial lines near the low-end of the high single-digit percentage range, excess and surplus lines in the high single-digit range. Personal auto in the low double-digit range and homeowner in the high single-digit range. Our consolidated property casualty net written premiums grew 11% for the quarter with what we believe was a nice mix of new business and renewals. I'll briefly review operating performance by insurance segment, highlighting premium growth and improved profitability compared to a year-ago. Commercial lines grew net written premiums 7% in the first quarter with a 96.5% combined ratio that improved by 3.9 percentage points, including 4.2 points from lower catastrophe losses. Personal lines grew net written premiums 33%, including growth in middle-market accounts in addition to private client business for our agency's high-net worth clients. Its combined ratio was a very profitable 93.9%, 18.6 percentage points better than last year, including 15.9 points from lower catastrophe losses. Excess and surplus lines also produced a profitable combined ratio of 91.9%, rising 2 percentage points from the first quarter a year-ago, along with net written premium growth of 7%. Both Cincinnati Re and Cincinnati Global continue to produce significant underwriting profit, reflecting our efforts to diversify risk and further improve income stability. Cincinnati Re's combined ratio for the first quarter of 2024 was an excellent 78.6%. That includes IBNR that we routinely carry for expected losses from reinsurance treaties. We believe our potential exposure for losses from the Baltimore bridge collapse is immaterial. Cincinnati Re's net written premiums decreased by 12% overall, driven by a shifting casualty portfolio mix in response to changing market conditions. Property and specialty premiums increased due to attractive opportunities in pricing. Cincinnati Global's combined ratio was also excellent at 69.8%, they again reported strong growth with net written premiums up 28%. Our life insurance subsidiary continued its strong performance, including first quarter 2024 net income of $19 million and operating income growth of 17%. Term life insurance earned premiums grew 2%. I'll conclude with our primary measure of long-term financial performance to value-creation ratio. Our first quarter 2024 DCR was a strong 5.9%. Net income before investment gains or losses for the quarter contributed 2.3%, higher overall valuation of our investment portfolio and other items contributed 3.6%. Next, Chief Financial Officer Mike Sewell will add comments to highlight other parts of our financial performance. Mike Sewell -- Executive Vice President, Chief Financial Officer Thank you, Steve, and thanks for all of you for joining us today. Investment income growth continued at a strong pace, up 17% for the first quarter 2024 compared with the first quarter of 2023. Dividend income was up 9% for the quarter despite net equity security sales for the first three months of 2024 that totaled $40 million. Bond interest income grew 21% for the first quarter of this year. We continue to add more fixed maturity securities to our investment portfolio with net purchases totaling $374 million for the first three months of the year. The first quarter pre-tax average yield of 4.65% for the fixed maturity portfolio was up 40 basis points compared with last year. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the first quarter of 2024 was 5.79%. Valuation changes in aggregate for the first quarter 2024 were favorable for our equity portfolio and unfavorable for our bond portfolio. Before tax effects, the net gain was $602 million for the equity portfolio, partially offset by a net loss of $65 million for the bond portfolio. At the end of the quarter, total investment portfolio net appreciated value was approximately $6.6 billion. The equity portfolio was in a net gain position of $7.2 billion, while the fixed maturity portfolio was in a net loss position of $625 million. Cash flow continued to benefit investment income in addition to higher bond yields. Cash flow from operating activities for the first three months of 2024 was $353 million, up 41% from a year ago. Our expense management objectives include an appropriate balance between controlling expenses and making strategic investments in our business. The first quarter 2024 property casualty underwriting expense ratio was 0.7 percentage points higher than last year, primarily related to higher levels of profit-sharing commissions for agencies. Regarding loss reserves, our approach remains consistent and aims for net amounts in the upper half of the actuarily estimated range of net loss and loss expense reserves. As we do each quarter, we consider new information such as paid losses and case reserves. Then we updated estimated ultimate losses and loss expenses by accident year and line of business. For the first three months of 2024, our net addition to property casualty loss expense reserves was $233 million, including $272 million for the IBNR portion. During the first quarter, we experienced $100 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 5.0 percentage points. Almost every line of business had favorable development except for commercial casualty, which was unfavorable by just $254,000. We added reserves to several older prior accident years and reduced reserves for the three most recent accident years. On an all lines basis by accident year, net reserve development for the first three months of 2024 included favorable $184 million for 2023, favorable $24 million for 2022 and an unfavorable $108 million in aggregate for accident years prior to 2022. The unfavorable amount reflects our slowing the release of IBNR reserves for those older accident years. I'll conclude my comments with capital management highlights, another area where we have a consistent long-term approach. We paid $116 million in dividends to shareholders during the first quarter of 2024. We also repurchased 680,000 shares at an average price per share of $109.89. We think our financial flexibility and our financial strength are both in excellent shape. Parent company cash and marketable securities at quarter-end was nearly $5 billion. Debt-to-total capital continued to be under 10% and our quarter-end book value was a record high, $80.83 per share with $12.7 billion of GAAP consolidated shareholders' equity providing plenty of capacity for profitable growth of our insurance operations. Now, I'll turn the call back over to Steve. Steve Johnston -- Chairman and Chief Executive Officer Thank you, Mike. As we previously announced, this is my last conference call as CEO. Effective at our Annual Meeting of Shareholders next Saturday, President Steve Spray will add the role of chief executive officer. As I've mentioned before, Steve is the right person to build on our decade of profitable growth. He understands the importance of our agency-centered strategy and the unique advantages it brings. I'm confident in his abilities to bring innovative ideas together with the hallmarks of Cincinnati Insurance to create opportunities for shareholders, agents and associates. I look forward to continuing to work with him as chairman of the board. As a reminder, with Mike and me today are Steve Spray, Steve Soloria, Marc Schambow, and Theresa Hoffer. Raghav, please open the call for questions. Questions & Answers: Operator [Operator instructions] Our first question comes from Charlie Lederer with Citi. Please go ahead. Charlie Lederer -- Citi -- Analyst Hi. Thanks. Good morning. You gave some helpful color on your loss picks, but I'm curious, how should we think about your loss picks in commercial casualty? Have you made any changes to your view of loss trend just given the trajectory of the current accident year loss ratio and are you baking in additional caution? Should we expect you to hold a bit more of a buffer near-term given uncertainty? Steve Johnston -- Chairman and Chief Executive Officer Yes. We feel confident, Charlie, with the loss pick that we had, we are reflecting uncertainty. There's a lot of good going on in the commercial casualty with rates we feel exceeding our loss cost trends. However, for first quarter where there's additional uncertainty, we are recognizing that in our loss ticket. Charlie Lederer -- Citi -- Analyst Got it. Thank you. Maybe in workers' comp, it looks like pricing took an incremental step down in your initial loss ticket higher too. Is there anything in that pick, I guess, beyond pricing being down more or I guess, are you seeing anything there? Steve Johnston -- Chairman and Chief Executive Officer So, we're just continuing to see the same trends that we have been seeing with rates under pressure there, but also strong performance historically from the line. We are though recognizing the uncertainty that it comes with the rate decreases with a little bit higher loss pick for the current year. Charlie Lederer -- Citi -- Analyst OK. Thank you. Steve Johnston -- Chairman and Chief Executive Officer Thank you. Operator And our next question comes from Mike Zaremski with BMO. Please go ahead. Mike Zaremski -- BMO Capital Markets -- Analyst Hi. Thanks. In the earnings release, you talked about the underlying loss ratio for commercial improving one point, but you said excluding Cincinnati Re and Global. But was there a reason you pointed that out is what -- why did -- I'm not sure I may have missed it, why did the Cincinnati Re, Global underlying loss ratio increase so much? Steve Johnston -- Chairman and Chief Executive Officer Yes I think the point of pointing is out is we have the three segments commercialized, personalized, in excess of surplus lines. To get to the consolidated, you also have to add the other portion, which includes Cincinnati Re and Cincinnati Global. So, since the first three segments I mentioned had improvements, we pointed out those in the other segment. I will emphasize that things are going great for both Cincinnati Re and Cincinnati Global. I think one of the things that -- as we mentioned, we don't think we have material exposure to the bridge collapse in Baltimore. We have been shaping the Cincinnati Re book in a very positive manner in terms of derisking. And so, I think one of the things that caused the attritional to go up if we compare it to the same quarter a year ago is that the mix has shifted to a little bit more of a pro rata or proportional reinsurance, which would have less risk margin in it. It would have a higher attritional pick, but there would be less volatility there. And so, I think that would be driving what we're seeing there in Cincinnati Re, a very strong zero CATs for the quarter, 10.4 points of favorable development versus 7.7 of adverse a year ago. I think the $14 million in favorable development that we show, about $13 million of it came from 2023. With the full year combined ratio of 2023 at 77.7% in this first quarter at a strong 78.6%, this hard work in reshaping the book has really paid off. The inception-to-date combined ratio at the end of the year 2022 was 101.2 and with those two strong marks in the full year of 2023 and the first quarter here and now in just over a year, our inception-to-date is at 94.5. So I think the action is paying off and it does show a higher pick in the current action year, but I think it's a less risky portfolio at this point. I think the same thing for Cincinnati Global, but I don't know if you want to talk a little bit more about Cincinnati Global. For Cincinnati Global, same thing, strong 69.8%. They have had three consecutive years now as a top quartile Lloyd's underwriter and while they've done that, they've been diversifying in terms of their footprint by product line, by geography, and they're also providing an additional avenue for access to Lloyd's for the agents that are appointed by CIC. So a lot of positive at CGU reflected with strong results. And again, it's pretty tough at Lloyd's to be top quartile three years in a row the way they've done. Also, this quarter, zero CATs versus 11.1 a year ago. And then, the reserve development is favorable by 25.6 points this year versus adverse by 3.2 a year ago. So I think in both of those businesses, there's a ton of positive going on. And we've only pointed it out so that the math would be easier as you saw the consolidated CLD, the commercialized department, the personal lines and the excess and surplus and then to add the other portion to get to the consolidated. Mike Zaremski -- BMO Capital Markets -- Analyst OK. That's helpful color. And I guess would you say then because of some of the business mix-shift and since they read and we should be thinking about the underlying loss ratio structurally being maybe a little bit higher, but then -- but less potential volatility around the overall combined ratio at? Did I interject, did you guys want to say something else or I'll move on to my follow-up? Steve Johnston -- Chairman and Chief Executive Officer No, please move on to the follow-up. Mike Zaremski -- BMO Capital Markets -- Analyst OK. Thanks. So just thinking about going commercial lines ex reinsurance and global. You've been on along this path of taking action to add, I guess, some reserves or just conservatism into your picks given the inflationary environment which you're -- clearly is persisting a bit. If I look at like overall top line growth and maybe I'll -- you can talk about the whole segment, but I'll just focus on commercial casualty because that's been one of the areas where inflation has been higher than expected. If I look at just overall top line growth, net premium written growth, now it's still not at I think your historical levels relative to the industry, but it has been ticking up a bit. And are you -- so given you're still in an environment where you seem to be kind of adding more IBNR, are you getting to a point, is pricing at a level or is the environment there where you want to start playing more offense? Or are we still kind of in the -- it's best to be cautious in terms of your top line growth. Steve Johnston -- Chairman and Chief Executive Officer So yes, I think that we can balance the two. I think we feel good about our growth, double digit overall at 11%, really strong growth in Personal lines. And with each of our lines, we write it on a package basis for Commercial lines, and so there's going to be a little bit of variance between the different lines. But we think we are in a good place with our pricing, but we realize that you need to stick to adequate pricing. And you can't fall into a trap where if others are underpricing business that you follow that path. So we're going to maintain the discipline, charge the adequate rate on a on a risk by risk basis and we think that offers us plenty of opportunity to grow the company. Mike Zaremski -- BMO Capital Markets -- Analyst And one quick follow-up, and I might have asked this in the past, but within your commercial casualty, the US non-global and reinsurance portfolio, I believe you might think about things between small -- very small commercial versus mid versus large or maybe I'm incorrect, but just curious if you're -- now that you've had more time to reflect on results, it is -- doesn't the inflationary issues you have brought up, have they been emanating from any certain parts of the business mix other than just -- Steve Johnston -- Chairman and Chief Executive Officer Yes, I think we're doing a good job of pricing adequately in all those areas. I do think and I pointed out on the calls before, you really do have to pay a close attention to the higher levels because there's a leveraged effect of inflation with every layer that you go up for a constant ground-up inflation rate, there'll be more or higher inflation with each layer as you go up because of the layer below inflating into the higher layer. But we've been on this for some time. We've got some really talented actuaries that are working with our larger risks and we feel we were addressing it early on from the beginning and that we're in a good position across the board. Mike Zaremski -- BMO Capital Markets -- Analyst Thanks for the color. Steve Johnston -- Chairman and Chief Executive Officer Thank you. Operator Thank you. And our next question comes from Michael Phillips with Oppenheimer. Please go ahead. Michael Phillips -- Oppenheimer and Company -- Analyst Thanks, good morning. In terms of personal auto, your comments, Steve, in the beginning, were pretty similar in terms of pricing from last quarter. You had a bit of an uptick back in the loss ratio there. I guess, can you remind us where you expect this year to kind of pan out in terms of just the profitability of personal auto and when you think your pricing will maybe peak and start to come back down? It looks like -- and you don't give it, but you're probably still above 100% combined ratio there. So when do you expect kind of profitability in personal auto? Steve Johnston -- Chairman and Chief Executive Officer I think we're in a good position. Personal lines across the board, it is sold a lot on a package -- in a package position. The first quarter was -- for current accident year was actually down a little bit from first quarter a year ago and pretty flat with the full year. So we feel we feel good about the pricing that we've been able to get-in auto, home and in the other lines. And we think it will reap benefits. And I think Steve's got a little to add-on. Steve Spray -- President Yes, thanks for the question, Mike. I think one of the strengths that we have going and it's been a plan we've been executing on, continue to work on for the last several years. So it's nothing new. But I think it's adding value to the company and to our agents is that we've become a premium or premier writer for our agents both in the middle-market space and in the high-net worth. And that gives us both product diversification, as well as geographic diversification. High-net worth, while we write it everywhere, tends to be maybe a little more focused in certain geographies. High-net worth or private client is heavier on the property side. And then, on the middle-market, we give geographic diversification as that book is primarily, I'll call it, a Midwestern, Southeastern part of the US book of business and it's heavier in auto. So we're getting one, being that much more important to each of our agents, being able to attract more of their business, but at the same time, get the diversification both geographically and by line of business. Steve Johnston -- Chairman and Chief Executive Officer Yes, I think too, just the history of personal lines in general with the $795 million combined this year. Last year, we were over just a touch over $100 million and then it was what, the four prior years to 2023, we were under $100 million. So we've really -- I think we've demonstrated a history of being able to price personal lines pretty darn well across the spectrum as Steve mentions. Steve Spray -- President And then, now I might add, we've got our -- we've got the E&S capability that we can provide solutions for our agents and their clients. And that's now active in nine states. So we just feel really good about all personal lines, the growth there, the momentum that we have. So, feel very bullish on personal lines. Michael Phillips -- Oppenheimer and Company -- Analyst OK. Thank you. Next one is just back on the commercial lines and this is kind of a number-specific question. So, if it requires a follow-up, I'm happy to do so. But if I look at your claim -- reported claim counts that you give in your statutory data, for other liability, it's down significantly for 2023 accident year. I mean, more so than the 2020 accident year COVID-related. So I don't know if there's a data thing there or not, but reported claim counts at 12 months or 15% down in other liability. I don't know if that's something that you've seen or expect or can you comment on that? Again, paid losses aren't, but the reported claim counts for GL, i.e., the liability are down significantly at age 12. Steve Johnston -- Chairman and Chief Executive Officer Yes, they are. And I think that's very helpful in terms of the way we're underwriting the book. It is a severity issue that we're seeing there. Michael Phillips -- Oppenheimer and Company -- Analyst So you recognize the frequency is down significantly then for other liabilities, Steve? Steve Johnston -- Chairman and Chief Executive Officer Yes, we do. Michael Phillips -- Oppenheimer and Company -- Analyst OK. All right. Thank you. Operator And our next question today comes from Greg Peters at Raymond James. Please go ahead. Greg Peters -- Raymond James -- Analyst Good morning, everyone. So the first question I'll focus on is just growth in the commercial lines business because it seems like you're -- when you look at the stats from a new business production, you're having a lot of success there. And I was wondering if you could give us some sense on how your quote to bind ratio is working or give us some parameters to think about it because I guess given the results, we'd expect some increased competition at some point that doesn't seem to necessarily be reflecting in your numbers. Steve Spray -- President Thanks for the question, Greg. Steve Spray. If you recall last year throughout 2023, especially starting the year, our new commercial lines business was under pressure really for that first six months and we were down quite a bit on the same over 2022. We were really executing on underwriting term condition, pricing discipline through that first six months. We stuck to our guns. I think some others maybe just had a little different view of the risk and our new business was under pressure. On the back half of 2023, we continue to see our new business improve. We stuck to our guns as well. We stayed disciplined in the pricing, the underwriting terms and conditions. Back half of 2023, new business really picked up. That is obviously -- that trend has obviously continued into 2024. The beauty of it is that like Steve said, we're a package underwriter, we look at every single risk on its own merits and we have the tools to price the business with predictive analytics for each major line of business, look at it by line of business and then for the total account. So I see runway still for new business and commercial lines in 2024, but like Steve said, the key is that we stay disciplined with our underwriting and our pricing and earn the business, not buy it. Greg Peters -- Raymond James -- Analyst Yes, that makes sense. So another topic that's come up that you guys have talked about is the concept of a multi-year policy that I know you guys use in certain lines of business. Can you give us an update on where you are with the three-year policies, which lines of business and has it increased as a percentage of your total book, etc.? Steve Spray -- President I mean, you may have to follow-up on that, which percentage has increased, Greg. But yes, this is the three-year policy in general, it's a differentiator for us. It's something that we have been very committed to for many years and remain committed today. I think it's even better that we write three-year policies today because we have the sophisticated segment and pricing that we do. So our underwriters, when they quote a three-year, whether it be new or renewal, just as a reminder, even though we have a three-year package policy, about 75% of the premium that we have in commercial lines is adjusted on an annual basis. So it'd be those accounts that are coming off of a three-year are actually renewing, our commercial auto, our commercial umbrella and then workers' compensation are all adjusted annually. It's really just the property, the general liability, crime, and the marine where that rate is guaranteed. Now, I will tell you this too. Our three-year policy on a loss ratio standpoint outperforms our one-year policy. So our underwriters are executing with our agents on the -- not only the science of underwriting, but the art and intuitively, they are picking our best business, our best price business to put on a three-year package and the results show that. So we're committed to it. Our retentions are much better on a three-year policy in the middle of that three-year policy. So I think that helps agents' retentions, it helps ours. It's an expense. It certainly helps on the expense side. And then, I think most importantly, it shows our agents and it shows our policyholders that we're a company that is looking for long-term relationships. And we're committed to the three-year and we think it gives us an advantage in the marketplace. Greg Peters -- Raymond James -- Analyst Yes, the percentage question, just I feel like this would be the time to be using more of that in this market considering the market conditions. And so, I was just curious if it's, from a commercial standpoint, we can take it offline, but that's where I was thinking -- what I was thinking about when I was asking for percentages. Steve Spray -- President Yes. OK. No, I got it. That makes total sense. Greg. Yes, wherever we feel like we can get the adequate price on account, we are wanting to use our three-year package policy. Greg Peters -- Raymond James -- Analyst Got it. Thanks for the answers. Steve Spray -- President Thank you. Operator And our next question comes from Grace Carter at Bank of America. Please go ahead. Grace Carter -- Bank of America Merrill Lynch -- Analyst Hi, everyone. Looking at the commercial casualty core loss ratio, just given that it's a bit higher than it ran in the latter part of last year, as well as the commentary on increased IBNR, I was just curious if that's primarily driven by GL or excess casualty or if it's a mix of both this quarter. And I was just curious if there is -- if you all could comment on how you're thinking about rate adequacy across both of those pieces of the book. Steve Johnston -- Chairman and Chief Executive Officer I think it's kind of across the board, Grace. I do think that higher pick is something that we would do in the first quarter. Typically, we have run the first quarter a little bit higher than the full year prior just due to the newness of the accident year, but we feel very good. We feel very good about the way that we are our pricing the GL and really across the spectrum there, including the umbrella. Grace Carter -- Bank of America Merrill Lynch -- Analyst Thank you. And I guess on the commercial auto side, it looks like growth picked up a little bit this quarter. I was just wondering if that indicates that maybe you all are starting to add some additional units rather than just top line growth being primarily driven by rate. And just kind of curious on how you all are thinking about potential growth in that environment, just given that it has been such a challenging line for the industry for so long? Steve Spray -- President Yes. Thanks for the question, Grace. Again, Steve Spray. It's a little bit of both. Candidly, it's -- we're still getting ranked through that commercial book and we are growing the new business. Again, we're a package writer. So we don't write monoline auto. That auto would come along with the rest of the package. And again, feel really good about the pricing that we have in commercial auto and our direction there. If you recall back, I think it was back to 2016, 2017 when we really undertook some real tough action on our commercial auto book, both in risk selection and then primarily in pricing, and really had commercial auto in a good place. Inflation came along and we had to -- we obviously had to work with that, but feel really good about where that commercial auto book is, both from a pricing risk selection and looking to grow that book as well along with our package business, again, risk-by-risk and adequate pricing. Grace Carter -- Bank of America Merrill Lynch -- Analyst Thank you. Steve Spray -- President Thank you, Grace. Operator [Operator instructions] Our next question comes from Meyer Shields with KBW. Please go ahead. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst Great. Thanks so much. To go back to the Cincinnati global and reinsurance side of things, just I'm not sure I understand, when you talk about lower volatility, is that a function of less seasonality or less catastrophic exposure? Steve Johnston -- Chairman and Chief Executive Officer It would be less catastrophic exposure. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK, perfect. The second question sort of related. Can you talk about what you're seeing in terms of the year over year, I guess, trend or the observed claim inflation rate for commercial property, is that decelerating at all compared to last year? Steve Johnston -- Chairman and Chief Executive Officer I think we still see inflation. We look at so much on a risk by risk basis that I don't know that I have a good number for you across the board on what we're seeing with inflation. And it's been a sticky thing in the inflation rates on insurance related items, building materials and wages and so forth have been higher than the general CPI. So we take a cautious view, but certainly the rate of the increase in the second derivatives has been slowing down. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK. Perfect. That's very helpful. And Steve, congratulations, and thanks for everything. Steve Johnston -- Chairman and Chief Executive Officer Well, thank you Meyer. It's been great. Operator Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Management for any closing remarks. Steve Johnston -- Chairman and Chief Executive Officer Thank you to everyone for their excellent questions and thank you for joining us today. We hope to see some of you at our shareholder meeting next Saturday, May 4 at the Cincinnati Financial Headquarters Office here. You're welcome to listen to our webcast of the meeting also available at cinfin.com/investors. Steve and Mike, look forward to speaking with you again on our second quarter call. Answer:

the Cincinnati Financial first quarter 2024 earnings conference call

Operator Good day, and Welcome to the Cincinnati Financial first quarter 2024 earnings conference call. All participants will be in listen-only mode. [Operator instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Dennis McDaniel, investor relations officer. Please go ahead. Dennis McDaniel -- Investor Relations Officer Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our first quarter 2024 earnings conference call. Late yesterday, we issued a news release on our results along with our supplemental financial package, including our quarter-end investment portfolio. To find copies of any of these documents, please visit our investor website cinfin.com/investors. The shortest route to the information is the quarterly results link in the Navigation menu on the far left. On this call, you'll first hear from chairman and chief executive officer, Steve Johnston; and then from executive vice president and chief financial officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including President Steve Spray; Chief Investment officer Steve Soloria; and Cincinnati Insurance's chief claims officer, Marc Schambow; and senior vice president of corporate finance, Theresa Hoffer. First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. Now, I'll turn-over the call to Steve. Steve Johnston -- Chairman and Chief Executive Officer Good morning, and thank you for joining us today to hear more about our results. In short, we are off to a great start. Our first-quarter results reflect the success of our initiatives to continue balancing the profit and growth of our insurance operations coupled with strong investment income. Net income of $755 million for the first quarter of 2024 included recognition of $484 million on an after-tax basis were the increase in fair value of equity securities still held, representing about three quarters of the increase in net income. Strong operating results generated the rest of the increase. Non-GAAP operating income of $272 million for the first quarter nearly doubled last year's $141 million, including a decrease in catastrophe losses of $93 million on an after-tax basis. The 93.6% first quarter 2024 property casualty combined ratio was 7.1 points better than the first quarter of last year, including a decrease of 6.9 points for catastrophe losses. While our combined ratio for accident year 2024 before catastrophe losses was a percentage point higher than accident year 2023 at three months, if we exclude Cincinnati Re and Cincinnati Global, the ratio improved by one point. Accident year 2024 also improved on a case incurred basis. However, we increased incurred but not reported or IBNR reserves as we continue to recognize uncertainty regarding ultimate losses and remain prudent in our reserve estimates until longer-term loss cost trends become more clear. We are also pleased with other measures indicating good momentum in our operating performance. Another quarter of pricing segmentation by risk plus average price increases helped to improve our underwriting profitability, combining with careful risk selection and other efforts to address elevated inflation effects on incurred losses. Agencies representing Cincinnati Insurance, supported by our experienced and professional associates produced another quarter of profitable business for us. Our underwriters continue to emphasize retaining profitable accounts and managing ones that we determine have inadequate pricing based on our risk selection and pricing expertise. Estimated average renewal price increases for the first quarter continued at a healthy pace with commercial lines near the low-end of the high single-digit percentage range, excess and surplus lines in the high single-digit range. Personal auto in the low double-digit range and homeowner in the high single-digit range. Our consolidated property casualty net written premiums grew 11% for the quarter with what we believe was a nice mix of new business and renewals. I'll briefly review operating performance by insurance segment, highlighting premium growth and improved profitability compared to a year-ago. Commercial lines grew net written premiums 7% in the first quarter with a 96.5% combined ratio that improved by 3.9 percentage points, including 4.2 points from lower catastrophe losses. Personal lines grew net written premiums 33%, including growth in middle-market accounts in addition to private client business for our agency's high-net worth clients. Its combined ratio was a very profitable 93.9%, 18.6 percentage points better than last year, including 15.9 points from lower catastrophe losses. Excess and surplus lines also produced a profitable combined ratio of 91.9%, rising 2 percentage points from the first quarter a year-ago, along with net written premium growth of 7%. Both Cincinnati Re and Cincinnati Global continue to produce significant underwriting profit, reflecting our efforts to diversify risk and further improve income stability. Cincinnati Re's combined ratio for the first quarter of 2024 was an excellent 78.6%. That includes IBNR that we routinely carry for expected losses from reinsurance treaties. We believe our potential exposure for losses from the Baltimore bridge collapse is immaterial. Cincinnati Re's net written premiums decreased by 12% overall, driven by a shifting casualty portfolio mix in response to changing market conditions. Property and specialty premiums increased due to attractive opportunities in pricing. Cincinnati Global's combined ratio was also excellent at 69.8%, they again reported strong growth with net written premiums up 28%. Our life insurance subsidiary continued its strong performance, including first quarter 2024 net income of $19 million and operating income growth of 17%. Term life insurance earned premiums grew 2%. I'll conclude with our primary measure of long-term financial performance to value-creation ratio. Our first quarter 2024 DCR was a strong 5.9%. Net income before investment gains or losses for the quarter contributed 2.3%, higher overall valuation of our investment portfolio and other items contributed 3.6%. Next, Chief Financial Officer Mike Sewell will add comments to highlight other parts of our financial performance. Mike Sewell -- Executive Vice President, Chief Financial Officer Thank you, Steve, and thanks for all of you for joining us today. Investment income growth continued at a strong pace, up 17% for the first quarter 2024 compared with the first quarter of 2023. Dividend income was up 9% for the quarter despite net equity security sales for the first three months of 2024 that totaled $40 million. Bond interest income grew 21% for the first quarter of this year. We continue to add more fixed maturity securities to our investment portfolio with net purchases totaling $374 million for the first three months of the year. The first quarter pre-tax average yield of 4.65% for the fixed maturity portfolio was up 40 basis points compared with last year. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the first quarter of 2024 was 5.79%. Valuation changes in aggregate for the first quarter 2024 were favorable for our equity portfolio and unfavorable for our bond portfolio. Before tax effects, the net gain was $602 million for the equity portfolio, partially offset by a net loss of $65 million for the bond portfolio. At the end of the quarter, total investment portfolio net appreciated value was approximately $6.6 billion. The equity portfolio was in a net gain position of $7.2 billion, while the fixed maturity portfolio was in a net loss position of $625 million. Cash flow continued to benefit investment income in addition to higher bond yields. Cash flow from operating activities for the first three months of 2024 was $353 million, up 41% from a year ago. Our expense management objectives include an appropriate balance between controlling expenses and making strategic investments in our business. The first quarter 2024 property casualty underwriting expense ratio was 0.7 percentage points higher than last year, primarily related to higher levels of profit-sharing commissions for agencies. Regarding loss reserves, our approach remains consistent and aims for net amounts in the upper half of the actuarily estimated range of net loss and loss expense reserves. As we do each quarter, we consider new information such as paid losses and case reserves. Then we updated estimated ultimate losses and loss expenses by accident year and line of business. For the first three months of 2024, our net addition to property casualty loss expense reserves was $233 million, including $272 million for the IBNR portion. During the first quarter, we experienced $100 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 5.0 percentage points. Almost every line of business had favorable development except for commercial casualty, which was unfavorable by just $254,000. We added reserves to several older prior accident years and reduced reserves for the three most recent accident years. On an all lines basis by accident year, net reserve development for the first three months of 2024 included favorable $184 million for 2023, favorable $24 million for 2022 and an unfavorable $108 million in aggregate for accident years prior to 2022. The unfavorable amount reflects our slowing the release of IBNR reserves for those older accident years. I'll conclude my comments with capital management highlights, another area where we have a consistent long-term approach. We paid $116 million in dividends to shareholders during the first quarter of 2024. We also repurchased 680,000 shares at an average price per share of $109.89. We think our financial flexibility and our financial strength are both in excellent shape. Parent company cash and marketable securities at quarter-end was nearly $5 billion. Debt-to-total capital continued to be under 10% and our quarter-end book value was a record high, $80.83 per share with $12.7 billion of GAAP consolidated shareholders' equity providing plenty of capacity for profitable growth of our insurance operations. Now, I'll turn the call back over to Steve. Steve Johnston -- Chairman and Chief Executive Officer Thank you, Mike. As we previously announced, this is my last conference call as CEO. Effective at our Annual Meeting of Shareholders next Saturday, President Steve Spray will add the role of chief executive officer. As I've mentioned before, Steve is the right person to build on our decade of profitable growth. He understands the importance of our agency-centered strategy and the unique advantages it brings. I'm confident in his abilities to bring innovative ideas together with the hallmarks of Cincinnati Insurance to create opportunities for shareholders, agents and associates. I look forward to continuing to work with him as chairman of the board. As a reminder, with Mike and me today are Steve Spray, Steve Soloria, Marc Schambow, and Theresa Hoffer. Raghav, please open the call for questions. Questions & Answers: Operator [Operator instructions] Our first question comes from Charlie Lederer with Citi. Please go ahead. Charlie Lederer -- Citi -- Analyst Hi. Thanks. Good morning. You gave some helpful color on your loss picks, but I'm curious, how should we think about your loss picks in commercial casualty? Have you made any changes to your view of loss trend just given the trajectory of the current accident year loss ratio and are you baking in additional caution? Should we expect you to hold a bit more of a buffer near-term given uncertainty? Steve Johnston -- Chairman and Chief Executive Officer Yes. We feel confident, Charlie, with the loss pick that we had, we are reflecting uncertainty. There's a lot of good going on in the commercial casualty with rates we feel exceeding our loss cost trends. However, for first quarter where there's additional uncertainty, we are recognizing that in our loss ticket. Charlie Lederer -- Citi -- Analyst Got it. Thank you. Maybe in workers' comp, it looks like pricing took an incremental step down in your initial loss ticket higher too. Is there anything in that pick, I guess, beyond pricing being down more or I guess, are you seeing anything there? Steve Johnston -- Chairman and Chief Executive Officer So, we're just continuing to see the same trends that we have been seeing with rates under pressure there, but also strong performance historically from the line. We are though recognizing the uncertainty that it comes with the rate decreases with a little bit higher loss pick for the current year. Charlie Lederer -- Citi -- Analyst OK. Thank you. Steve Johnston -- Chairman and Chief Executive Officer Thank you. Operator And our next question comes from Mike Zaremski with BMO. Please go ahead. Mike Zaremski -- BMO Capital Markets -- Analyst Hi. Thanks. In the earnings release, you talked about the underlying loss ratio for commercial improving one point, but you said excluding Cincinnati Re and Global. But was there a reason you pointed that out is what -- why did -- I'm not sure I may have missed it, why did the Cincinnati Re, Global underlying loss ratio increase so much? Steve Johnston -- Chairman and Chief Executive Officer Yes I think the point of pointing is out is we have the three segments commercialized, personalized, in excess of surplus lines. To get to the consolidated, you also have to add the other portion, which includes Cincinnati Re and Cincinnati Global. So, since the first three segments I mentioned had improvements, we pointed out those in the other segment. I will emphasize that things are going great for both Cincinnati Re and Cincinnati Global. I think one of the things that -- as we mentioned, we don't think we have material exposure to the bridge collapse in Baltimore. We have been shaping the Cincinnati Re book in a very positive manner in terms of derisking. And so, I think one of the things that caused the attritional to go up if we compare it to the same quarter a year ago is that the mix has shifted to a little bit more of a pro rata or proportional reinsurance, which would have less risk margin in it. It would have a higher attritional pick, but there would be less volatility there. And so, I think that would be driving what we're seeing there in Cincinnati Re, a very strong zero CATs for the quarter, 10.4 points of favorable development versus 7.7 of adverse a year ago. I think the $14 million in favorable development that we show, about $13 million of it came from 2023. With the full year combined ratio of 2023 at 77.7% in this first quarter at a strong 78.6%, this hard work in reshaping the book has really paid off. The inception-to-date combined ratio at the end of the year 2022 was 101.2 and with those two strong marks in the full year of 2023 and the first quarter here and now in just over a year, our inception-to-date is at 94.5. So I think the action is paying off and it does show a higher pick in the current action year, but I think it's a less risky portfolio at this point. I think the same thing for Cincinnati Global, but I don't know if you want to talk a little bit more about Cincinnati Global. For Cincinnati Global, same thing, strong 69.8%. They have had three consecutive years now as a top quartile Lloyd's underwriter and while they've done that, they've been diversifying in terms of their footprint by product line, by geography, and they're also providing an additional avenue for access to Lloyd's for the agents that are appointed by CIC. So a lot of positive at CGU reflected with strong results. And again, it's pretty tough at Lloyd's to be top quartile three years in a row the way they've done. Also, this quarter, zero CATs versus 11.1 a year ago. And then, the reserve development is favorable by 25.6 points this year versus adverse by 3.2 a year ago. So I think in both of those businesses, there's a ton of positive going on. And we've only pointed it out so that the math would be easier as you saw the consolidated CLD, the commercialized department, the personal lines and the excess and surplus and then to add the other portion to get to the consolidated. Mike Zaremski -- BMO Capital Markets -- Analyst OK. That's helpful color. And I guess would you say then because of some of the business mix-shift and since they read and we should be thinking about the underlying loss ratio structurally being maybe a little bit higher, but then -- but less potential volatility around the overall combined ratio at? Did I interject, did you guys want to say something else or I'll move on to my follow-up? Steve Johnston -- Chairman and Chief Executive Officer No, please move on to the follow-up. Mike Zaremski -- BMO Capital Markets -- Analyst OK. Thanks. So just thinking about going commercial lines ex reinsurance and global. You've been on along this path of taking action to add, I guess, some reserves or just conservatism into your picks given the inflationary environment which you're -- clearly is persisting a bit. If I look at like overall top line growth and maybe I'll -- you can talk about the whole segment, but I'll just focus on commercial casualty because that's been one of the areas where inflation has been higher than expected. If I look at just overall top line growth, net premium written growth, now it's still not at I think your historical levels relative to the industry, but it has been ticking up a bit. And are you -- so given you're still in an environment where you seem to be kind of adding more IBNR, are you getting to a point, is pricing at a level or is the environment there where you want to start playing more offense? Or are we still kind of in the -- it's best to be cautious in terms of your top line growth. Steve Johnston -- Chairman and Chief Executive Officer So yes, I think that we can balance the two. I think we feel good about our growth, double digit overall at 11%, really strong growth in Personal lines. And with each of our lines, we write it on a package basis for Commercial lines, and so there's going to be a little bit of variance between the different lines. But we think we are in a good place with our pricing, but we realize that you need to stick to adequate pricing. And you can't fall into a trap where if others are underpricing business that you follow that path. So we're going to maintain the discipline, charge the adequate rate on a on a risk by risk basis and we think that offers us plenty of opportunity to grow the company. Mike Zaremski -- BMO Capital Markets -- Analyst And one quick follow-up, and I might have asked this in the past, but within your commercial casualty, the US non-global and reinsurance portfolio, I believe you might think about things between small -- very small commercial versus mid versus large or maybe I'm incorrect, but just curious if you're -- now that you've had more time to reflect on results, it is -- doesn't the inflationary issues you have brought up, have they been emanating from any certain parts of the business mix other than just -- Steve Johnston -- Chairman and Chief Executive Officer Yes, I think we're doing a good job of pricing adequately in all those areas. I do think and I pointed out on the calls before, you really do have to pay a close attention to the higher levels because there's a leveraged effect of inflation with every layer that you go up for a constant ground-up inflation rate, there'll be more or higher inflation with each layer as you go up because of the layer below inflating into the higher layer. But we've been on this for some time. We've got some really talented actuaries that are working with our larger risks and we feel we were addressing it early on from the beginning and that we're in a good position across the board. Mike Zaremski -- BMO Capital Markets -- Analyst Thanks for the color. Steve Johnston -- Chairman and Chief Executive Officer Thank you. Operator Thank you. And our next question comes from Michael Phillips with Oppenheimer. Please go ahead. Michael Phillips -- Oppenheimer and Company -- Analyst Thanks, good morning. In terms of personal auto, your comments, Steve, in the beginning, were pretty similar in terms of pricing from last quarter. You had a bit of an uptick back in the loss ratio there. I guess, can you remind us where you expect this year to kind of pan out in terms of just the profitability of personal auto and when you think your pricing will maybe peak and start to come back down? It looks like -- and you don't give it, but you're probably still above 100% combined ratio there. So when do you expect kind of profitability in personal auto? Steve Johnston -- Chairman and Chief Executive Officer I think we're in a good position. Personal lines across the board, it is sold a lot on a package -- in a package position. The first quarter was -- for current accident year was actually down a little bit from first quarter a year ago and pretty flat with the full year. So we feel we feel good about the pricing that we've been able to get-in auto, home and in the other lines. And we think it will reap benefits. And I think Steve's got a little to add-on. Steve Spray -- President Yes, thanks for the question, Mike. I think one of the strengths that we have going and it's been a plan we've been executing on, continue to work on for the last several years. So it's nothing new. But I think it's adding value to the company and to our agents is that we've become a premium or premier writer for our agents both in the middle-market space and in the high-net worth. And that gives us both product diversification, as well as geographic diversification. High-net worth, while we write it everywhere, tends to be maybe a little more focused in certain geographies. High-net worth or private client is heavier on the property side. And then, on the middle-market, we give geographic diversification as that book is primarily, I'll call it, a Midwestern, Southeastern part of the US book of business and it's heavier in auto. So we're getting one, being that much more important to each of our agents, being able to attract more of their business, but at the same time, get the diversification both geographically and by line of business. Steve Johnston -- Chairman and Chief Executive Officer Yes, I think too, just the history of personal lines in general with the $795 million combined this year. Last year, we were over just a touch over $100 million and then it was what, the four prior years to 2023, we were under $100 million. So we've really -- I think we've demonstrated a history of being able to price personal lines pretty darn well across the spectrum as Steve mentions. Steve Spray -- President And then, now I might add, we've got our -- we've got the E&S capability that we can provide solutions for our agents and their clients. And that's now active in nine states. So we just feel really good about all personal lines, the growth there, the momentum that we have. So, feel very bullish on personal lines. Michael Phillips -- Oppenheimer and Company -- Analyst OK. Thank you. Next one is just back on the commercial lines and this is kind of a number-specific question. So, if it requires a follow-up, I'm happy to do so. But if I look at your claim -- reported claim counts that you give in your statutory data, for other liability, it's down significantly for 2023 accident year. I mean, more so than the 2020 accident year COVID-related. So I don't know if there's a data thing there or not, but reported claim counts at 12 months or 15% down in other liability. I don't know if that's something that you've seen or expect or can you comment on that? Again, paid losses aren't, but the reported claim counts for GL, i.e., the liability are down significantly at age 12. Steve Johnston -- Chairman and Chief Executive Officer Yes, they are. And I think that's very helpful in terms of the way we're underwriting the book. It is a severity issue that we're seeing there. Michael Phillips -- Oppenheimer and Company -- Analyst So you recognize the frequency is down significantly then for other liabilities, Steve? Steve Johnston -- Chairman and Chief Executive Officer Yes, we do. Michael Phillips -- Oppenheimer and Company -- Analyst OK. All right. Thank you. Operator And our next question today comes from Greg Peters at Raymond James. Please go ahead. Greg Peters -- Raymond James -- Analyst Good morning, everyone. So the first question I'll focus on is just growth in the commercial lines business because it seems like you're -- when you look at the stats from a new business production, you're having a lot of success there. And I was wondering if you could give us some sense on how your quote to bind ratio is working or give us some parameters to think about it because I guess given the results, we'd expect some increased competition at some point that doesn't seem to necessarily be reflecting in your numbers. Steve Spray -- President Thanks for the question, Greg. Steve Spray. If you recall last year throughout 2023, especially starting the year, our new commercial lines business was under pressure really for that first six months and we were down quite a bit on the same over 2022. We were really executing on underwriting term condition, pricing discipline through that first six months. We stuck to our guns. I think some others maybe just had a little different view of the risk and our new business was under pressure. On the back half of 2023, we continue to see our new business improve. We stuck to our guns as well. We stayed disciplined in the pricing, the underwriting terms and conditions. Back half of 2023, new business really picked up. That is obviously -- that trend has obviously continued into 2024. The beauty of it is that like Steve said, we're a package underwriter, we look at every single risk on its own merits and we have the tools to price the business with predictive analytics for each major line of business, look at it by line of business and then for the total account. So I see runway still for new business and commercial lines in 2024, but like Steve said, the key is that we stay disciplined with our underwriting and our pricing and earn the business, not buy it. Greg Peters -- Raymond James -- Analyst Yes, that makes sense. So another topic that's come up that you guys have talked about is the concept of a multi-year policy that I know you guys use in certain lines of business. Can you give us an update on where you are with the three-year policies, which lines of business and has it increased as a percentage of your total book, etc.? Steve Spray -- President I mean, you may have to follow-up on that, which percentage has increased, Greg. But yes, this is the three-year policy in general, it's a differentiator for us. It's something that we have been very committed to for many years and remain committed today. I think it's even better that we write three-year policies today because we have the sophisticated segment and pricing that we do. So our underwriters, when they quote a three-year, whether it be new or renewal, just as a reminder, even though we have a three-year package policy, about 75% of the premium that we have in commercial lines is adjusted on an annual basis. So it'd be those accounts that are coming off of a three-year are actually renewing, our commercial auto, our commercial umbrella and then workers' compensation are all adjusted annually. It's really just the property, the general liability, crime, and the marine where that rate is guaranteed. Now, I will tell you this too. Our three-year policy on a loss ratio standpoint outperforms our one-year policy. So our underwriters are executing with our agents on the -- not only the science of underwriting, but the art and intuitively, they are picking our best business, our best price business to put on a three-year package and the results show that. So we're committed to it. Our retentions are much better on a three-year policy in the middle of that three-year policy. So I think that helps agents' retentions, it helps ours. It's an expense. It certainly helps on the expense side. And then, I think most importantly, it shows our agents and it shows our policyholders that we're a company that is looking for long-term relationships. And we're committed to the three-year and we think it gives us an advantage in the marketplace. Greg Peters -- Raymond James -- Analyst Yes, the percentage question, just I feel like this would be the time to be using more of that in this market considering the market conditions. And so, I was just curious if it's, from a commercial standpoint, we can take it offline, but that's where I was thinking -- what I was thinking about when I was asking for percentages. Steve Spray -- President Yes. OK. No, I got it. That makes total sense. Greg. Yes, wherever we feel like we can get the adequate price on account, we are wanting to use our three-year package policy. Greg Peters -- Raymond James -- Analyst Got it. Thanks for the answers. Steve Spray -- President Thank you. Operator And our next question comes from Grace Carter at Bank of America. Please go ahead. Grace Carter -- Bank of America Merrill Lynch -- Analyst Hi, everyone. Looking at the commercial casualty core loss ratio, just given that it's a bit higher than it ran in the latter part of last year, as well as the commentary on increased IBNR, I was just curious if that's primarily driven by GL or excess casualty or if it's a mix of both this quarter. And I was just curious if there is -- if you all could comment on how you're thinking about rate adequacy across both of those pieces of the book. Steve Johnston -- Chairman and Chief Executive Officer I think it's kind of across the board, Grace. I do think that higher pick is something that we would do in the first quarter. Typically, we have run the first quarter a little bit higher than the full year prior just due to the newness of the accident year, but we feel very good. We feel very good about the way that we are our pricing the GL and really across the spectrum there, including the umbrella. Grace Carter -- Bank of America Merrill Lynch -- Analyst Thank you. And I guess on the commercial auto side, it looks like growth picked up a little bit this quarter. I was just wondering if that indicates that maybe you all are starting to add some additional units rather than just top line growth being primarily driven by rate. And just kind of curious on how you all are thinking about potential growth in that environment, just given that it has been such a challenging line for the industry for so long? Steve Spray -- President Yes. Thanks for the question, Grace. Again, Steve Spray. It's a little bit of both. Candidly, it's -- we're still getting ranked through that commercial book and we are growing the new business. Again, we're a package writer. So we don't write monoline auto. That auto would come along with the rest of the package. And again, feel really good about the pricing that we have in commercial auto and our direction there. If you recall back, I think it was back to 2016, 2017 when we really undertook some real tough action on our commercial auto book, both in risk selection and then primarily in pricing, and really had commercial auto in a good place. Inflation came along and we had to -- we obviously had to work with that, but feel really good about where that commercial auto book is, both from a pricing risk selection and looking to grow that book as well along with our package business, again, risk-by-risk and adequate pricing. Grace Carter -- Bank of America Merrill Lynch -- Analyst Thank you. Steve Spray -- President Thank you, Grace. Operator [Operator instructions] Our next question comes from Meyer Shields with KBW. Please go ahead. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst Great. Thanks so much. To go back to the Cincinnati global and reinsurance side of things, just I'm not sure I understand, when you talk about lower volatility, is that a function of less seasonality or less catastrophic exposure? Steve Johnston -- Chairman and Chief Executive Officer It would be less catastrophic exposure. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK, perfect. The second question sort of related. Can you talk about what you're seeing in terms of the year over year, I guess, trend or the observed claim inflation rate for commercial property, is that decelerating at all compared to last year? Steve Johnston -- Chairman and Chief Executive Officer I think we still see inflation. We look at so much on a risk by risk basis that I don't know that I have a good number for you across the board on what we're seeing with inflation. And it's been a sticky thing in the inflation rates on insurance related items, building materials and wages and so forth have been higher than the general CPI. So we take a cautious view, but certainly the rate of the increase in the second derivatives has been slowing down. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst OK. Perfect. That's very helpful. And Steve, congratulations, and thanks for everything. Steve Johnston -- Chairman and Chief Executive Officer Well, thank you Meyer. It's been great. Operator Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Management for any closing remarks. Steve Johnston -- Chairman and Chief Executive Officer Thank you to everyone for their excellent questions and thank you for joining us today. We hope to see some of you at our shareholder meeting next Saturday, May 4 at the Cincinnati Financial Headquarters Office here. You're welcome to listen to our webcast of the meeting also available at cinfin.com/investors. Steve and Mike, look forward to speaking with you again on our second quarter call.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, ladies and gentlemen. My name is Rob, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs first-quarter 2024 earnings conference call. [Operator instructions] The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news release filed with the SEC, which are available on the company's website. Today's conference call is also available and being broadcast clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results, excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release which was published yesterday. At this time, I would like to introduce Celso Goncalves, executive vice president and chief financial officer. Celso Goncalves -- Executive Vice President, Chief Financial Officer Good morning, everyone. As I did on the last conference call, I'm going to start today by providing an update on capital allocation and M&A. On our last call in February, I indicated that we would be much more aggressive with returning capital to shareholders, and made it very clear that share buybacks are now the number one capital allocation priority for Cleveland-Cliffs. Consistent with what we said we would do, we bought back more than 30 million CLF shares during Q1 by utilizing the remaining $608 million from our prior $1 billion share buyback program announced in 2022. In the last couple of years, we have reduced our diluted share count by over 100 million shares, or 17%, realizing an average purchase price of $18.79 per share on open market repurchases, significantly below where we are trading today. Going forward, given our strong free cash flow outlook and healthy liquidity, we are introducing a new $1.5 billion share repurchase program that we plan to deploy immediately and aggressively during open windows. This new buyback program is also supported by the fact that we are no longer compelled to preserve as much dry powder for M&A given the limited number of possible outcomes for U.S. Steel. It's now clear that their strategic alternatives review process was only robust and competitive, because the company and their financial advisors at Barclays and Goldman Sachs invited foreign buyers, creative consortiums, and companies with no support from the USW. As we explain to U.S. Steel to their advisors and to the entire market early in the process last year, there is no way to close the sale of U.S. Steel without agreement and full support from the USW. We discussed publicly in August that the USW has de facto veto power in the outcome of this process, but U.S. Steel denied it. Back then, Cliffs was right and U.S. Steel was wrong. Today, we continue to be right and they continue to be wrong. There's no denying reality anymore. The USW has said from the very beginning that they would not endorse any other buyer, only Cleveland-Cliffs. Union leaders do not go back on their word. And now after President, Biden has clearly expressed his position unequivocally against foreign ownership of U.S. Steel, the list of real buyers for the company is even more evidently a party of one. Cliffs is the only union-friendly American solution for U.S. Steel. The Nippon deal is dead and other buyers stand no chance to close a deal involving U.S. Steel union assets. In terms of value, the inflated bids resulting from the blind auction process that included unrealistic buyers don't represent a meaningful proxy for real valuation and neither do the stand-alone price targets coming from research firms pandering to the arts. A company is only worth what a real buyer or investor is willing to pay for it and everything else is just an opinion. The last time that real steel industry investors owned U.S. Steel, the stock was valued at $22.72. The valuation reset lower is far from over. We will have to reassess everything, including value, once we have the chance to reengage in M&A due diligence, as everything we saw last year is now stale. Obviously, there's no assurance that U.S. Steel will even want to sell to Cliffs. The company can always stick around as a stand-alone entity and the ARBs holding the stock can always sell their shares back to the real investors in the 20s. In the meantime, Cliffs will continue to buy back our own CLF stock handover Cliffs like we did in Q1. Buying our own stock and returning dollars to our Cliffs shareholders who are real investors, is a much better use of capital than any M&A opportunities at current valuations. From a leverage standpoint, we are implementing a more shareholder-friendly leverage target of two and a half times net debt to last 12 months adjusted EBITDA, allowing ourselves even more flexibility for aggressive shareholder returns. We have made a lot of progress on the balance sheet over the past few years. As of the end of 2023, we outperformed our prior net debt target level of $3 billion, but the rating agencies gave us no credit for the massive debt reduction last year and kept our ratings unchanged. If the agencies are just going to keep our ratings where they are now, we might as well give ourselves the flexibility to buy back more stock. At two and a half times net debt to EBITDA, there is also no risk of a ratings downgrade from where we currently are. We have flexibility up to three or and a half times before risking any downgrade. By self-imposing the two and a half times threshold on ourselves, we are just allowing for more flexibility while remaining comfortably within the spectrum of our existing ratings category. This new leverage target just gives us the ability to continue to execute open market share buybacks. And even if we deploy the entire $1.5 billion program throughout this year, our net leverage would still be comfortably well below two and a half times. This new leverage target also applies in the context of M&A. Any acquisition situation would also be limited to pro forma net leverage at the same self-imposed two and a half times target level. Obviously, any M&A that we do will come with meaningful EBITDA contribution, significant synergy realization and increased scale that will be viewed by the rating agencies and bond investors as a credit positive. For the avoidance of doubt, we are not currently performing due diligence on any M&A opportunity that would prohibit us from buying back stock today. And even if the U.S. Steel situation were to resurface at some point in the future, we would need to refresh our due diligence at that point and reset valuation expectations from current levels. Our balance sheet continues to be in great shape with near-record liquidity and no secured bonds in our capital structure for the first time since 2017. During the quarter, we launched the redemption of our final tranche of secured debt that was also our nearest dated bond maturity. With no debt maturities until 2027, we now have a three-year maturity runway that gives us even further comfort with our new target level. This is the best shape our capital structure has been in since Lourenco took over the company 10 years ago. As a result of higher automotive sales during the quarter, our Q1 adjusted EBITDA of $414 million marked a rebound in profitability from the latest trough in Q4. With production and sales of cars, trucks, and SUVs remaining healthy in the U.S. throughout Q1, our average sales pricing came in much better than expected due to a greater participation of automotive in our Q1 steel sales mix. Conversely, in January and February, service centers went on a typical buyer strike, which led to reduced sales to the distribution sector. The net result of this dynamic of more sales to automotive and fewer tons delivered to service centers, led to a reduced sales output of 3.9 million net tons. Now that the distributors and service centers have come off the sidelines and steel pricing is on an upward trend, we expect to again exceed the 4 million tonne shipment level in the second quarter. Unit costs were, of course, impacted by the heavy automotive mix in Q1, as well as the overall lower production volumes. Though we maintain our previous guidance of an approximately $30 per net ton reduction in unit cost in 2024 compared to 2023. That will begin here in Q2 with an expected $20 per ton drop in costs quarter over quarter. The lower production volume in Q1 and heavier automotive mix impact on unit costs, have been offset by lower natural gas prices. As is typical in the first quarter, working capital represented a use of cash, which we expect to recover in the second quarter. Also during Q1, as widely publicized by the U.S. government, we were selected for award negotiations related to two decarbonization projects for a total of $575 million worth of DOE grants. These projects should not impact our capital spend expectations for this year. And in the case of the Middletown DRI EMF project, the new investment will significantly mitigate future expenditures related to the Middletown blast furnace and other infrastructure. Our investment expectation related to the two projects is that our net capital expenditures will hover around $1 billion from 2025 through 2028 with the ultimate outcome of $550 million in annual cost savings starting in 2029, with virtually no impact to production. With that, I will turn it over to Lourenco for his remarks. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you, Celso, and good morning, everyone. Cleveland-Cliffs has a very simple yet somehow unique way of conducting business in corporate America. We respect our workforce. There is nothing special or particularly complex beyond that. Our employees drive our performance and our profitability. Our workforce is the reason why we're here, and they are treated accordingly. Of course, this has always been the case during the last 10 years I have been running Cliffs. But the events of the past year have obviously shared a brighter light on this. Our relationship with all workers and particularly with the union represented workers, is a function of the long view we have taken with respect to our labor force and not something that can be outshined by empty promises from outsiders written on worthless pieces of paper. Nippon Steel, the unsuccessful attempted acquirer of U.S. Steel has failed to understand this. It still baffles me to this day that the clueless individuals representing Nippon Steel in this embarrassing event felt that they could do this without union support. You just cannot do it with USW represented workforce. This historic M&A fiasco was a direct consequence of the goals, the U.S. Steel CEO and his fellow board members had in mind. First, to do good for the stockholders only, ignoring everyone else; and second, to break the back of the USW. Therefore, for them, it was necessary not to sell to Cleveland-Cliffs. To give a sense of the enormous prejudice against Cliffs and against the USW, despite all we have clearly demonstrated to them, they were still directors and their advisors from Milbank, Wachtel, Goldman Sachs and Barclays, it still shows a buyer that cannot close the deal. We are grateful that the U.S. government shares the same view we have always had about the importance of union jobs for a thriving middle class in America. The Biden administration has different ways to terminate the Nippon transaction and we believe that will be done sooner rather than later. Before the President of the United States had expressed his clear position, we attempted to offer a solution to Nippon Steel, where we would acquire the union represented assets of U.S. Steel and Nippon would keep the assets they wanted in the first place, the non-union Big River steel facility. Nippon did not accept that. And now after President Biden has spoken, this option is no longer available to them. Nippon is now saying they actually value the blast furnaces because they can apply the great technology. Let me be clear. This talking point on technology is complete hogwash. There is nothing special about the Japanese blast furnace technology. We are far ahead of them on everything blast furnace related. The use of iron ore pellets in low center, direct reduction the charging of HBI in blast furnaces, the injection of natural gas and hydrogen, we already have all that in the United States at Cleveland-Cliffs, and they do not have any of that in Japan. They so-called superior technology is not even remotely based on facts. But one thing that's good about Nippon Steel now being held bent on owning blast furnaces and BOFs in the United States is that people that used to say that blast furnaces and BOFs are bad, don't know what to say anymore. They are now on mute. Thanks, Nippon Steel, for validating my point. You have to pay the breakup fee of $565 million just to prove my point, and I appreciate that. Your money will be well spent. Another relevant point ignored by the U.S. Steel board. Nippon still has been a perpetual violate of our trade laws. Probably the worst actor in the international steel trade over the past several decades among all. In my view, Nippon Steel is actually worse than the Chinese. And they also have significant interest in China, which they love to downplay. Unfortunately, for them, Nippon Steel cannot hide their deep ties with the Chinese, and that has also been completely exposed. Nippon's existence in the U.S. is also bad for customers. By the way, in order to obtain a price increase back in Japan, Nippon Steel has recently sued the largest Japanese automotive manufacturer, Toyota. Cleveland-Cliffs has never done that here in the United States. And for the record, Toyota here in the United States is our largest automotive clients. When this thing ultimately ends, we are in a whole new world. If the feelings of rescue directors are hurt, but by what I have said or done and they still don't want to sell the company to Cleveland-Cliffs, that's their prerogative. At the end of the day, they don't have to sell themselves to Cliffs. And there is no easy way to force them to do so. But their only other alternative after they collect the breakup fee from Nippon is to continue as steel level company. If that's going to be the case, good luck running the assets that you hate with the workers, you don't respect. From our side, Cliffs has several other opportunities with or without M&A. The most relevant example of that right now is our share repurchases. We were overdue in Q1 and with our new reauthorization we are still buyers of our stock at today's price. We also just displayed our ability to growth profits organically, with the two projects we are initiating with support of the U.S. government. The $1.3 billion investment at Middletown Works replacing our blast furnaces with a DRI facility and two electrical melting furnaces is a game changer for our company and for our industry. The $500 million co-investment will receive makes this project the largest federally supported de-carbonization initiative in U.S. history. The government took note of our investment in direct reduction made seven years ago as well as our 30% reduction in CO2 emissions over a six-year period and our technological advances on hydrogen utilization. In our recently published Sustainability Report, we reported another reduction in integrated emissions intensity to 1.54 metric tons of CO2 per metric ton of steel, down from 1.82 in 2020 and significantly below the current global average of 2.15. When the Middletown project is in full operation, Middletown works will be the lowest cost steel producing facility in the United States. To illustrate the cost savings, our current cost to produce pig iron in Middletown is about $470 per net ton, and our current cost to produce DRI is less than $200 per net ton. Hot DRI will be fed into a melting furnace, a very simple process to melt solid DRI into liquid, creating a pig iron equivalent that can be fed into our existing BOFs and process it further downstream. Knowing that scrap will be gained scarce, expensive and more contaminated over time, we will avoid any increase in our scrap intake, maintaining our ability to serve the highest quality demand in end markets like the automotive market by using pure iron. That's technology, American technology, not Japanese hogwash PR. At Bottleworks, we were awarded $75 million by the to replace our natural gas fired lab reheat furnaces with electrified lab furnaces. That will reduce emissions, improve productivity and enhance our production of GOS, grain-oriented electrical steel, critical to our country's electrical grid. The future of our production of GOS was at risk under the initial draft of the DOE's new emissions standard as proposed last year. If adopted, as initially proposed, the new standard would have effectively replaced the use of GOS in all transformers used in the United States with made in Japan amorphous metal. Fortunately, the DOE heard what Cliffs and our American clients, the company is producing transformers in the United States, we're telling them. And with great help from elected officials like Senator Sherrod Brown of Ohio, Senator Bob Casey of Pennsylvania, and Governor Josh Shapiro of Pennsylvania as well as Representative Mike Kelly from Butler County in Pennsylvania and Representative Chris Deluzio of Pittsburgh, Pennsylvania, just to name a few, a more reasonable standard was adopted. With that, our customers will continue to be in business, and they will continue to use GOS to produce the transformers our country needs. By the way, there is pent-up demand for transformers in the United States and that's a great opportunity to produce more transformers and to generate more jobs for American workers. We expect to see significant investment from our customers in this important piece of infrastructure and we must produce more made in USA transformers. That's totally viable because Cliffs already has enough additional still producing capacity for GOS to deploy in Butler, Pennsylvania, and Zanesville, Ohio. Our other major move this quarter was announcing the indefinite idle of our Weirton facility, which officially ceased production on April 11. Over the past three years, Weirton's average annual contribution to our EBITDA was a negative $100 million due largely to unfairly trade imports of tin plate products. In January, the Department of Commerce recommended antidumping and countervailing duties on some of these imports, which would have mitigated this issue. But in February, the International Trade Commission in a totally surprising decision reverse the Department of Commerce recommendation allowing for low-priced imports to continue to flow into the United States. As a result, we had no choice but to exit the tin plate market, leaving more than 900 Weirton employees without a job. Some of these employees elected to retire and we were able to offer the impacted workers employment at other Cliffs facilities. As of today, we have been able to relocate over 100 employees to other Cliffs locations. Our GAAP loss in Q1 is primarily driven by the approximately $170 million in one-time charges taken at to written mainly employee support costs along with asset impairments and other expenses. Clearly, this was an eventful quarter for us. Our automotive business carried the day for us once again as the automotive sector in the U.S. continues to improve, growing for the fourth consecutive year. Our customers need us for our best-in-class quality, deliver performance, customer service, and technical expertise. Buying steel for other suppliers is just a price-driven decision for each one of the individual car manufacturers but not all common manufacturers are willing to bet their performance on less competent suppliers just to save a few bucks per ton. Some are willing to do so and these ones will be treated by Cleveland-Cliffs accordingly. Message delivered. On the flip side, service center business lagged on both volume and price during the past quarter, impacting our production volume. Demand has since returned and we have had success in implementing our recent price increase. This should support prices and shipments above the 4 million-ton level in Q2. With that, I will turn it over to Rob for Q&A. Questions & Answers: Operator Thank you. [Operator instructions] Our first question today is from the line of Lucas Pipes with B. Riley Securities. Please proceed with your question. Lucas Pipes -- B. Riley Financial -- Analyst Thank you very much, Rob. Good morning, everyone. Lourenco, you said the option that Nippon essentially acquires the non-union assets and you acquire the union assets is dead. And I wondered, is there anything that could revive that option and piece out of that? Thank you very much. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you for the question, Lucas, and good morning to you. By the way, I said that I offered this option, but I'm assuming that between Citibank and the bank representing Nippon Steel and ropes and gray the law firm representing Nippon Steel, they were able to at least deliver the message to Nippon Steel, because Nippon Steel never had the courtesy to reply to my offer, to sit down and discuss. So I'm just assuming that they said what they did -- what they said they had done to deliver the proposal to Nippon Steel. That said, yes, the proposed is gone, because at this point, the President of the United States already said what he's going to do. He's not a dictator. He needs to wait for the process to run. And then he will do what he already promised publicly to the workers of the USW, to the President of the USW, Dave McCall, and he has repeated in public situations. So it's game over. I cannot go against the word of the President of the United States. So, therefore, my option is totally 100% of the table. Lucas Pipes -- B. Riley Financial -- Analyst That's very clear. Thank you. Thank you for that. And so I think in the prepared remarks, you mentioned since Q2, could you remind me or are those? And also what would be the impact on margins in the current steel environment in Q2 and also for the rest of the year? And as you think about free cash flow, any portion that would go toward deleveraging off of kind of higher Q1 levels or 100% toward the buyback? Thank you very much. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. Sure. Hey, Lucas. Good morning. As it relates to costs, we indicated that from 2023 to 2024, we're going to achieve a $30 per ton decrease, which equates to kind of a $500 million savings on an annualized basis. And that's going to come from primarily lower-cost coal. We negotiated our coal contracts very well, lower natural gas, lower alloy costs. So these are the three primary drivers that are going to help our costs. As it relates to Q2 specifically, costs are going to be down $20 a ton, you'll start to see the full benefit from these lower coal contracts. Natural gas has also been lower than we expected, and the mix is going to be slightly less value-add here in Q2, which is going to help costs. As it relates to your other question, I believe you asked in terms of free cash flow and deleveraging. I think we made it pretty clear that share buybacks would be the number one priority. I made that abundantly clear in the last call. But obviously, if we do see opportunities to buy back bonds in the open market. We'll look to do that as well. We didn't have that opportunity during Q1, because our bonds were essentially all trading above par, and we had already paid down the entire balance of ABL. We're giving ourselves this flexibility to use a little bit more leverage within our existing rating category, to buy back more stock. But if there are opportunities to buy back bonds in the open market, we'll look to do that as well. Lucas Pipes -- B. Riley Financial -- Analyst Sounds good. Thank you very much for all the color, Lourenco, and team. Continue best of luck. Thank you. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you, Lucas. Appreciate it. Operator Our next question is from the line of Bill Peterson with J.P. Morgan. Please proceed with your question. Bill Peterson -- JPMorgan Chase and Company -- Analyst Yeah. Hi. Good morning, Lourenco, Celso, and team. Thanks for taking the questions. I wanted to follow up on that, and you said -- you answered a little bit on the prior question, but how should we think about the product mix? And then as that impacts the trajectory of pricing into the second quarter? And maybe -- maybe related to that, if we think about the negotiations you've had with the auto contract negotiations, how do they play out, especially with the Japan headquarters companies given their fiscal year timing? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Good morning, Bill. The auto negotiations for this period are the ones related to the clients that have April 1st renewal time. And those are basically the Asians, Japanese, Korean transplant because they're their fiscal year is April 1st in their respective countries. And I'm glad to inform that, these negotiations are completely uneventful and everything went totally smooth. And we accomplish what we are asking for. And I'm sure that they are happy because the tonnages delivered to each one of these guys are growing on each one of them. So consolidating, for example, one of the agents are both Stellantis as a bigger client for Cleveland-Cliffs. So these specific client is now much bigger than Stellantis, Stellantis for us became like another part of the pack. It's no longer a top priority for me and for Cleveland-Cliffs. They are now treated here as a second-class citizens, and we are going to continue to do that for the ones that are price driven like Stellantis. So April was great. It was fantastic. And keep in mind, we continue to grow tonnage for automotive. The only difference is that we are concentrating more on the -- some of the clients and selling less for other clients. This will be reflected on the quality of the cars. It's a matter of time. When you're only hitting for low cost, at the end of the day, we end up building a car that. And that's what I expect to happen, and we are going to help differentiate the good ones from the bad ones. I would say that the April crowd was in its totality, part of the good one block. Bill Peterson -- JPMorgan Chase and Company -- Analyst Yeah. Maybe you can also -- maybe speak to the product mix and trajectory of pricing into the second quarter, please? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Let me take the product mix as well. Second quarter will be a lot more normal, Bill, than the first quarter because if you recall, January and February, we had kind of a buyer's strike among service centers. They're all expecting price to go down and not buying, uncertainty and waiting for the Fed and waiting for this, waiting for that and no buyers buy. And that was a very complicated period for us at the beginning of the first quarter. And that's also why we had so much more concentration on automotive. Unlike Automotive was buying a lot more because service centers will buy a lot less. But then things resolved after we announced the first price increase -- first price increase went through very well. Then we announced the second price increase, then our competitor announced a price that became kind of a reference in the marketplace just to bring a different perspective, their intentions. But at the end of the day, that is still playing out in the marketplace, and we are still working through the consequences of that event. But all in all, I see Q2 returning to a more -- much more normal mix between service center and distribution and automotive. So automotive will continue to be good. Service center and distribution will become bigger, and that will bring the mix back to where the mix normally is. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes, Bill, and just to answer your question on selling price, which I believe is what you were focused on. Obviously, this mix -- the mix will have an impact on pricing, obviously, in Q2. And I think we've given enough in terms of bread crumbs that you can kind of calculate what the impact might be. But just to kind of refresh for everyone in terms of what the contract lags are related to our index-linked contracts. We're about 40% to 45% fixed with full year price. And then we have 20% which are on CRU month lags about 10% of the volumes are slab on a two-month lag. Our CRU quarter lags and the rest, call it, 10% to 15% is true spot. So when you think about Q2, the monthly lag is down from Q1, the quarter lag is up from Q1. But overall, you can kind of expect Q2 average selling price to be down around $40 a ton. Bill Peterson -- JPMorgan Chase and Company -- Analyst That's super helpful. Thanks for that -- all that insight. Second one is on capex. And I guess, thinking about the company on a stand-alone basis with net capex excluding awards and so forth. You talked about like, I guess, $1 billion normalized over the next four years after this year. Can you provide a little more granularity on 2025, in particular, with assuming you have better visibility or maybe even the '26? Just a lot of questions we've been getting is how to think about your free cash flow generation ability beyond this year. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. I think it's a little too early to go into the granularity of 2025. I think the easiest way to think about it is just stick to that $700 million for this year, which we're very confident. With 2025, probably won't even get to $1 billion and then you're only exceeding $1 billion when you get to 2026. But as we get closer, we'll be able to share more detail related to '25 and '26. Bill Peterson -- JPMorgan Chase and Company -- Analyst Thanks, Celso. Celso Goncalves -- Executive Vice President, Chief Financial Officer Thank you. Operator Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Hey. Good morning. Celso Goncalves -- Executive Vice President, Chief Financial Officer Good morning, Phil. Phil Gibbs -- KeyBanc Capital Markets -- Analyst A question just on the timing of the DOE grant. You obviously have two very substantial capex projects over '25 to '28 time frame. Do those DOE brands get lag as you spend the capital on the project? Or is that kind of a lump sum fund that you get upfront before you start funding? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer I'll let Celso take that. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. No, Phil, you're right, they're paid out pro rata with the spend. That's the just way to think about it. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Thank you. And then maybe with the Middletown project, given that it's so substantial in timing and scope, can you give us kind of the time line of or the pockets of phases as you all are looking at it? And what more do you need to complete in terms of due diligence or design. You've given this is relatively new technology, at least to the states. I think people would just be interested in hearing that. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Yeah. No. Look, it's a brand-new facility there, but it's not, by any stretch, new technology, because it's the combination of a direct reduction plant that instead of producing DRI, we will be producing -- I'm sorry, instead of producing HBI like our plant in Toledo, we'll be producing hot DRI and that hot DRI will be fed in on-site through to EMFs. And what's an EMF? It's just electric cart furnace to melt iron ore to melt -- in the case of this facility iron ore metallic, because it will be sponge iron, hot DRI from the direct reduction plant. So it's a simple setup. There's nothing really complex. And these are two things that we do extremely well. We have electric cart furnaces, so we dominate this operation. And we absolutely have the best-in-class direct reduction plant as far as I know in the world. So we are going to be hydrogen ready and we are hydrogen ready in Toledo. We have been using hydrogen. So hopefully, by 2029, when this plant goes into operation, we are able to start with the hydrogen or we'll start just for the stock up with the natural gas and then immediately go to sync gas and in the short-term, be 100% hydrogen by the early 30s. So this is real game changing in terms of the technology to produce steel, in particular to produce automotive grade steel. But it's a combination of a lot of things that; one, we have full knowledge and full operational capability. And second, we are operational proven in terms of how to use all these things. So there's no big deal. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Thanks, Lourenco. And then just lastly on the mix. You mentioned auto carried the day in Q1, the service centers took a step back, are we expecting or are you expecting rather auto to be relatively stable in Q2, and then service centers to be the driver of the increased volume? Or is automotive improving as well? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Phil, automotive continues to do very well, particularly now that they are no longer all pursuing to be the next Tesla. They are not as hell bent on going all into electric vehicles as they were even six months or 12 months ago. They are now talking Turkey. The cars that are selling are the ICE and now the hybrids. So the ones that are moving faster to hybrids are the ones that are winning the day. And because we are so big and supporting pretty much all of them except one that only buys cheap stuff. We are going to really continue to support the ones that are growing. And we don't have a problem picking winners and losers among the car manufacturer. For example, yesterday, I announced that I'm no longer selling steel to Volkswagen in Mexico because there is no point in selling steel from the United States to Mexico, just to have Volkswagen then sending back cars to the United States just to pay cheaper wages to workers in Mexico. I'm not going to support that, particularly now that UAW was able to unionize the plant in Chattanooga, Tennessee for Volkswagen. I would rather sell to Chattanooga, Tennessee. So we are going to start to be a lot more selective among our automotive clients. But make no mistake, automotive is a good business for us. But the only innovation that the alliance for American innovation can come up with this we need to sell to lower price. So we are not going to do that. And we are going to continue to play the Cleveland-Cliffs game. We don't need to grow our size in automotive through M&A. We are a big enough, but we can be smaller, but be is market. And that's what we are going to do, and that will bear fruit for Cleveland Cliffs going forward. Phil Gibbs -- KeyBanc Capital Markets -- Analyst And lastly, Lourenco and team on the grain ore intellectual steel market. I think your comments over the next several years are very bullish, particularly as it relates to grid spend and the timing of around when that is going to take place. But what's your outlook in the shorter term, maybe in the next six months to 12 months in terms of volumes? And then within that question, you also mentioned in your prepared remarks that you expected some reshoring perhaps after this spate we saw in the last 10 years of offshoring into Canada and Mexico on the transformer side. Maybe shed some light on that aspect, too. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Look, this situation of reshoring only happens because for a while, we allowed the thing to go away from us. But we have been working very hard since the Trump administration to stop this bleeding. If you recall, during the last couple of years of the Trump administration, we worked very hard to put a Section 232 on cores and laminations. And the main reason was the distribution with Mexico that was allowing that to happen. We were able to fix that without the Section 232, which by the way, was never signed by President Trump despite the great efforts from the USTR ambassador, Bob Lighthizer. For some reason, President Trump never signed that thing. But this is water are under the bridge. We fixed the thing with the clients. And the clients are not doing that in Mexico anymore, at least not to a major scale. On the other hand, we still have the importation of transformers into this country. And I was discussed in that situation yesterday with Secretary, Jennifer Granholm about the risk we are taking when we import transformer. Among other things, we don't even know what's inside the transformer when you import the entire transformers. So we need to stop that and that's financial security reasons. So we will continue to work with the Biden administration. And whoever is the President after the election, we will continue to work on that. We need to stop importing transformers. We can't allow that to happen. We need to build more transformers in the United States. The good thing is that our dialogue with these clients that produce transformers in the United States is fantastic. We are working on a solution for Wilton that will resolve a lot of the situation with the transformers, will allow us to produce more gold. We have spare capacity with minor investments, we can increase 50% to 70% or throughput in bottle just to produce more gold, grain-oriented the electrical steels for transformers. So we want to put up a new factory in Wilton, West Virginia using our workforce there to produce transformations. We can co-invest, we can just support with the steel. We can do whatever it takes, but we need to increase the throughput and the availability of transformers for the supply chain, mainly in USA transformers and hopefully with the union workers. That's what we are working on, and we believe we're going to be successful. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Thank you so much. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you. Operator Our next question is from the line of Alex Hacking with Citi. Please proceed with your question. Alex Hacking -- Citi -- Analyst Yeah. Morning Lourenco and Celso. Just coming back to the DOE awards. It sounds like the negotiations there are somewhat of a formality, and you're very confident that that money will be awarded is that assumption. Am I correct in that assumption? And then what would be the timing there, the expected timing of when those awards would be confirmed? Thank you. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Good morning, Alex. I don't believe it's a formality because they are asking a lot of good questions, and we are providing with what we believe a lot of good answers. And the timeframe for the negotiation or the discussions over whatever you call is basically, we are going to use the rest of this year to finalize this negotiation. But we are fairly confident that we're going to be successful. But I don't think it's a formality. I believe that they are doing a good job. They are doing the due diligence that they need to do. At the end of the day, they are going to be giving us $575 million, $500 million for Middletown and $75 million for [Inaudible], so it's a lot of money. And it's at the end of the day, tax payer's money and we take this very seriously. But it's not a formality. We are doing the work. And in the process, the most important part that in the process, we are having the ability to educate the government on what we do. Instead of having them only reading what is in the trade press or in the report from research analysts, they are learning from the ones they really know what they're talking about. Alex Hacking -- Citi -- Analyst OK. Thanks. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Yeah. That includes you in the ground that don't know what you're talking about. You're right about that. But that's just me, you know me, Alex. So yes, what's next? Alex Hacking -- Citi -- Analyst What's next? Let's say the money wasn't awarded. It sounds like for whatever reason, it sounds like the economics of the electric melt furnace would be compelling even without the award. But is that a project that you would still move ahead with in that circumstance? Or you can't really say it's until you reach that point? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Alex, I'm very confident that I will get the money. And we, of course, run the projections with and without. But with the money coming from the DOE, it's a no-brainer. It's a very, very compelling case of return on investment, it's money well spent. It's a real game changer. We are going to be reducing our costs to produce the same ton of liquid steel by more than $250 per ton. That's super significant. So we want that project. And, yes, the ROI without the grant is still OK, but the ROI with the grant is unbelievable. And I believe that so far, based on what Cleveland-Cliffs is doing in terms of, among other things, working together with the government and working together with our workforce, we deserve to get the money. Alex Hacking -- Citi -- Analyst And I guess just finally, I mean you mentioned that the $250 number earlier. I mean is that really like the direct savings from shifting the technology because that would obviously provide a massive uplift, right, in EBITDA per ton. Celso Goncalves -- Executive Vice President, Chief Financial Officer Exactly right. Alex Hacking -- Citi -- Analyst An apples-to-apples comparison Celso Goncalves -- Executive Vice President, Chief Financial Officer Exactly right. Because I'm a metallurgist, I like technology. It would be so easy to shut down blast furnaces and BOFs and put TAFs and not be able to produce all kinds of steel that are produced today and producing massive unemployment. Europe is doing that. The U.K. is doing that. When I was -- when I had a conversation with in Minister of the Economy of Slovakia, he said that there was £600 million granted money for Košice just to shut down the blast furnace and replace with the EAFs. And I said, do you move that two-thirds of your -- your personnel will be let go? So yes, unfortunately, that's the consequence of decarbonizing. Mr. Minister, you don't know what you're talking about, with all due respect. So we've got to see the big picture. We got to understand where cost is. If you believe that cost is safe by cutting $20 per ton today and $30 per ton tomorrow, you end up with what we created here in the United States. And then you decimate and steel industry that was the envy of the world, four years ago, and you create China. And then you realize that China is an enemy to be beating. And yes, so we got to see the big picture and it takes a lot of education and a lot of technology and a lot of engineering to do things the way we are doing here at Cleveland-Cliffs. We are very happy that we found a willing counterparty in several cabinet members of the Biden administration, and we are happy with that. Alex Hacking -- Citi -- Analyst OK. Thanks. Best of luck. Celso Goncalves -- Executive Vice President, Chief Financial Officer Thank you. Same to you. Operator Thank you. Our next question is from the line of Tristan Gresser with BNP Paribas. Please proceed with your question. Tristan Gresser -- Exane BNP Paribas -- Analyst Yes. Hi. Good morning and thank you for taking my questions. Just maybe a follow-up on the decarbonization project. Can you please maybe split the gross capex elements of the project in Middletown and give us a sense on not on a net capex basis, but on a gross basis, what the normalized capex would look like 2024, 2025, 2026, 2027. Would it be close to 1.2 billion? That's my first question. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Yes. I'll let Celso take that. Celso, please. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes, sure. Hey, Tristan, like I said, there's no impact to capex from these DOE projects in 2024, just to be abundantly clear, everything starts in 2025. And if you want to break that down, in 2025, the Cliffs portion of the Middletown spend is about $250 million. And the total capex related to everything is about $985 million. So that's why I said in 2025, we don't even crack above the $1 billion market. And then when you go to 2026, Middletown steps up to about $400 million and the total goes to about $1.2 million. So that's the breakdown for the next couple of years. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. That's helpful. And that's a net number, right, the $1.2 billion, so removing the reline and the grant. Celso Goncalves -- Executive Vice President, Chief Financial Officer Correct. Yes. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. And then the second question, should we think as Middleton project as the way forward for the rest of the footprint, given the carbon benefits you mentioned that can translate into selling premiums, but also the cost benefits. I think you mentioned in the past that there was a next reline at Burns Harbor in 2026. So basically, it doesn't make sense to gradually convert your BF footprint to this kind of this PRI melting unit setups. And if that's the case, would more funding be available should you decide to go this way? Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. It's a very good question. But let's go piece by piece on where my cost savings are, the numbers that I just gave to you. The biggest problem for us in Middletown is our very punitive contract that we have with SunCoke. That contract is absolutely horrible. And our cost of coke in Middletown is one of the reasons why we started studying this project in the first place. So that situation is going to change no matter what. We are not going to be keeping ourselves penalized by SunCoke with that horrible contract that we have. So for Middletown, the numbers are the numbers I mentioned to you. And we are going to go in that direction coming high we're. I'm going to get the grant. But the project there is our response to the contract we have with SunCoke. When we go to a company like -- to a plant like, for example, Burns Harbor, the switch is not as clear as that because we have been improving a lot our ability to produce coke at a reasonable cost. Burns Harbor is because of that -- among other things, but because of that, mainly -- it's our lowest cost production plant in the entire footprint. So I don't see us going to Burns Harbor so quickly. But of course, the new configuration that we are implementing in Middletown will be our first in the company like we did with our plant -- our direct reduction plant in Toledo. And with that, we were able to now easily go to Middletown with a new direct reduction plant because we know we dominate the technology. So it's a first, I don't know, if we are going to continue in their route but there's a possibility and we have our priorities in terms of who would be next and who will be next, if that's the case. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. That's very clear. Maybe one final question. Maybe if you can discuss a little bit the situation at Calvert, you have a slab supply agreement. The facility there is ramping up its upstream could go with the second year. So I think the contract is up for renewal next year, but what are the solution is, let's say, well, Calvert decide well to go with upstream or some other slab supply? Do you have options? Is that already a topic of discussion or negotiation. So if you could share some thoughts on that, that would be helpful. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. The negotiation has just started. And of course, I'm not going to give you -- I can't give you details of how the negotiation is going. But I will tell you what the outcome will be. We will end up with a much better contract for us or no contract. Either one is good for Cleveland-Cliffs. No contract is good. And a better contract might be good. The contract we have was the last piece of the puzzle for us to close the deal and acquire ArcelorMittal USA, and that was in December of 2020, we closed. So that negotiation happened September 2020. So that was almost four years ago. I knew exactly where I was walking us into. And now it's the time of expiration. And it's like any situation with the contract. We prepared Cleveland-Cliffs to be without that contract, we're going to be OK. And if that contract improves, we still can work with our friends at ArcelorMittal middle. Otherwise, we continue to be frank, but they'll have to find slab somewhere else. That's the deal. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. Thank you very much. Celso Goncalves -- Executive Vice President, Chief Financial Officer Thank you. Operator Our next question is from the line of Lawson Winder with Bank of America. Please proceed with your questions. Lawson Winder -- Bank of America Merrill Lynch -- Analyst Thanks very much, operator, and also good morning Celso and Lourenco. Thank you for taking my question. I would like to ask about the NOES expansion at Zanesville. Has that started to ship to customers? And how is that ramping up? Celso Goncalves -- Executive Vice President, Chief Financial Officer The NOES expansion in Zanesville is in operation and mission accomplished. We always believe that we would have more used for non-oriented electrical steels, particularly for motors of electrical vehicles. And we created a modest increase in our capacity by investing relatively small amount of money in capex. So we're good. The project was executed as planned. We are selling oriented electrical steels. We continue develop applications with our -- mainly with our automotive clients and we are fine with that and we have no intention to expand beyond what we already have for NOS. Lawson Winder -- Bank of America Merrill Lynch -- Analyst OK. Thank you for that. And can I also ask about the base price as price that you set at $900 per short ton. So I mean the price reporters are still indicating prices in the lower 800s. Are you guys realizing pricing in that $900 per short-ton range? And what's your thinking on pricing over the next month or two? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer I never give public predictions on price. We announced our price increase and we are working to get that price increase. We are not in an island. In the meantime, that we announced our price increase and everything was actually growing in the right direction. We're still selling for $900 for that matter. We are. So the answer to your question is, yes. But other clients -- I'm sorry, other clients, other competitors came with different price points. And we live in a world of pricing competition particularly in a world that everybody reads every single line that comes out of the trade press. And you just said what you would like to hit. So the prices are 800 and low 800 they will take that to the -- like the bio. But I'm telling you, we're selling for 900. But is that easy right now to get there? No. It was easier before things that happened during the latter part of the quarter. But these are always -- it's an always changing environment. And at the end of the day, we will see what's going to happen. And we expect to sell more particularly for Service Centers that are completely depleted in terms of inventory because not buying seems to be the only diet that they can do when they want to lose weight on their inventory. I suggest Mounjaro or Ozempic, that would be a lot more effective. All right. With that, I think we're done right, Rob? Operator Yes. That's correct. Would you like to make some closing comments? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Done. Mounjaro, Ozempic. You'll lose weight with that and bear with exercise. But as far as inventory service centers are supposed to carry inventory. For a service center, you don't carry inventory, you are setting yourself up for a disgrace. So but be my guest. Good luck. Thank you, everybody. I'll talk to you soon. Bye now. Answer:

Cleveland-Cliffs first-quarter 2024 earnings conference call

Operator Good morning, ladies and gentlemen. My name is Rob, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs first-quarter 2024 earnings conference call. [Operator instructions] The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news release filed with the SEC, which are available on the company's website. Today's conference call is also available and being broadcast clevelandcliffs.com. At the conclusion of the call, it will be archived on the website and available for replay. The company will also discuss results, excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release which was published yesterday. At this time, I would like to introduce Celso Goncalves, executive vice president and chief financial officer. Celso Goncalves -- Executive Vice President, Chief Financial Officer Good morning, everyone. As I did on the last conference call, I'm going to start today by providing an update on capital allocation and M&A. On our last call in February, I indicated that we would be much more aggressive with returning capital to shareholders, and made it very clear that share buybacks are now the number one capital allocation priority for Cleveland-Cliffs. Consistent with what we said we would do, we bought back more than 30 million CLF shares during Q1 by utilizing the remaining $608 million from our prior $1 billion share buyback program announced in 2022. In the last couple of years, we have reduced our diluted share count by over 100 million shares, or 17%, realizing an average purchase price of $18.79 per share on open market repurchases, significantly below where we are trading today. Going forward, given our strong free cash flow outlook and healthy liquidity, we are introducing a new $1.5 billion share repurchase program that we plan to deploy immediately and aggressively during open windows. This new buyback program is also supported by the fact that we are no longer compelled to preserve as much dry powder for M&A given the limited number of possible outcomes for U.S. Steel. It's now clear that their strategic alternatives review process was only robust and competitive, because the company and their financial advisors at Barclays and Goldman Sachs invited foreign buyers, creative consortiums, and companies with no support from the USW. As we explain to U.S. Steel to their advisors and to the entire market early in the process last year, there is no way to close the sale of U.S. Steel without agreement and full support from the USW. We discussed publicly in August that the USW has de facto veto power in the outcome of this process, but U.S. Steel denied it. Back then, Cliffs was right and U.S. Steel was wrong. Today, we continue to be right and they continue to be wrong. There's no denying reality anymore. The USW has said from the very beginning that they would not endorse any other buyer, only Cleveland-Cliffs. Union leaders do not go back on their word. And now after President, Biden has clearly expressed his position unequivocally against foreign ownership of U.S. Steel, the list of real buyers for the company is even more evidently a party of one. Cliffs is the only union-friendly American solution for U.S. Steel. The Nippon deal is dead and other buyers stand no chance to close a deal involving U.S. Steel union assets. In terms of value, the inflated bids resulting from the blind auction process that included unrealistic buyers don't represent a meaningful proxy for real valuation and neither do the stand-alone price targets coming from research firms pandering to the arts. A company is only worth what a real buyer or investor is willing to pay for it and everything else is just an opinion. The last time that real steel industry investors owned U.S. Steel, the stock was valued at $22.72. The valuation reset lower is far from over. We will have to reassess everything, including value, once we have the chance to reengage in M&A due diligence, as everything we saw last year is now stale. Obviously, there's no assurance that U.S. Steel will even want to sell to Cliffs. The company can always stick around as a stand-alone entity and the ARBs holding the stock can always sell their shares back to the real investors in the 20s. In the meantime, Cliffs will continue to buy back our own CLF stock handover Cliffs like we did in Q1. Buying our own stock and returning dollars to our Cliffs shareholders who are real investors, is a much better use of capital than any M&A opportunities at current valuations. From a leverage standpoint, we are implementing a more shareholder-friendly leverage target of two and a half times net debt to last 12 months adjusted EBITDA, allowing ourselves even more flexibility for aggressive shareholder returns. We have made a lot of progress on the balance sheet over the past few years. As of the end of 2023, we outperformed our prior net debt target level of $3 billion, but the rating agencies gave us no credit for the massive debt reduction last year and kept our ratings unchanged. If the agencies are just going to keep our ratings where they are now, we might as well give ourselves the flexibility to buy back more stock. At two and a half times net debt to EBITDA, there is also no risk of a ratings downgrade from where we currently are. We have flexibility up to three or and a half times before risking any downgrade. By self-imposing the two and a half times threshold on ourselves, we are just allowing for more flexibility while remaining comfortably within the spectrum of our existing ratings category. This new leverage target just gives us the ability to continue to execute open market share buybacks. And even if we deploy the entire $1.5 billion program throughout this year, our net leverage would still be comfortably well below two and a half times. This new leverage target also applies in the context of M&A. Any acquisition situation would also be limited to pro forma net leverage at the same self-imposed two and a half times target level. Obviously, any M&A that we do will come with meaningful EBITDA contribution, significant synergy realization and increased scale that will be viewed by the rating agencies and bond investors as a credit positive. For the avoidance of doubt, we are not currently performing due diligence on any M&A opportunity that would prohibit us from buying back stock today. And even if the U.S. Steel situation were to resurface at some point in the future, we would need to refresh our due diligence at that point and reset valuation expectations from current levels. Our balance sheet continues to be in great shape with near-record liquidity and no secured bonds in our capital structure for the first time since 2017. During the quarter, we launched the redemption of our final tranche of secured debt that was also our nearest dated bond maturity. With no debt maturities until 2027, we now have a three-year maturity runway that gives us even further comfort with our new target level. This is the best shape our capital structure has been in since Lourenco took over the company 10 years ago. As a result of higher automotive sales during the quarter, our Q1 adjusted EBITDA of $414 million marked a rebound in profitability from the latest trough in Q4. With production and sales of cars, trucks, and SUVs remaining healthy in the U.S. throughout Q1, our average sales pricing came in much better than expected due to a greater participation of automotive in our Q1 steel sales mix. Conversely, in January and February, service centers went on a typical buyer strike, which led to reduced sales to the distribution sector. The net result of this dynamic of more sales to automotive and fewer tons delivered to service centers, led to a reduced sales output of 3.9 million net tons. Now that the distributors and service centers have come off the sidelines and steel pricing is on an upward trend, we expect to again exceed the 4 million tonne shipment level in the second quarter. Unit costs were, of course, impacted by the heavy automotive mix in Q1, as well as the overall lower production volumes. Though we maintain our previous guidance of an approximately $30 per net ton reduction in unit cost in 2024 compared to 2023. That will begin here in Q2 with an expected $20 per ton drop in costs quarter over quarter. The lower production volume in Q1 and heavier automotive mix impact on unit costs, have been offset by lower natural gas prices. As is typical in the first quarter, working capital represented a use of cash, which we expect to recover in the second quarter. Also during Q1, as widely publicized by the U.S. government, we were selected for award negotiations related to two decarbonization projects for a total of $575 million worth of DOE grants. These projects should not impact our capital spend expectations for this year. And in the case of the Middletown DRI EMF project, the new investment will significantly mitigate future expenditures related to the Middletown blast furnace and other infrastructure. Our investment expectation related to the two projects is that our net capital expenditures will hover around $1 billion from 2025 through 2028 with the ultimate outcome of $550 million in annual cost savings starting in 2029, with virtually no impact to production. With that, I will turn it over to Lourenco for his remarks. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you, Celso, and good morning, everyone. Cleveland-Cliffs has a very simple yet somehow unique way of conducting business in corporate America. We respect our workforce. There is nothing special or particularly complex beyond that. Our employees drive our performance and our profitability. Our workforce is the reason why we're here, and they are treated accordingly. Of course, this has always been the case during the last 10 years I have been running Cliffs. But the events of the past year have obviously shared a brighter light on this. Our relationship with all workers and particularly with the union represented workers, is a function of the long view we have taken with respect to our labor force and not something that can be outshined by empty promises from outsiders written on worthless pieces of paper. Nippon Steel, the unsuccessful attempted acquirer of U.S. Steel has failed to understand this. It still baffles me to this day that the clueless individuals representing Nippon Steel in this embarrassing event felt that they could do this without union support. You just cannot do it with USW represented workforce. This historic M&A fiasco was a direct consequence of the goals, the U.S. Steel CEO and his fellow board members had in mind. First, to do good for the stockholders only, ignoring everyone else; and second, to break the back of the USW. Therefore, for them, it was necessary not to sell to Cleveland-Cliffs. To give a sense of the enormous prejudice against Cliffs and against the USW, despite all we have clearly demonstrated to them, they were still directors and their advisors from Milbank, Wachtel, Goldman Sachs and Barclays, it still shows a buyer that cannot close the deal. We are grateful that the U.S. government shares the same view we have always had about the importance of union jobs for a thriving middle class in America. The Biden administration has different ways to terminate the Nippon transaction and we believe that will be done sooner rather than later. Before the President of the United States had expressed his clear position, we attempted to offer a solution to Nippon Steel, where we would acquire the union represented assets of U.S. Steel and Nippon would keep the assets they wanted in the first place, the non-union Big River steel facility. Nippon did not accept that. And now after President Biden has spoken, this option is no longer available to them. Nippon is now saying they actually value the blast furnaces because they can apply the great technology. Let me be clear. This talking point on technology is complete hogwash. There is nothing special about the Japanese blast furnace technology. We are far ahead of them on everything blast furnace related. The use of iron ore pellets in low center, direct reduction the charging of HBI in blast furnaces, the injection of natural gas and hydrogen, we already have all that in the United States at Cleveland-Cliffs, and they do not have any of that in Japan. They so-called superior technology is not even remotely based on facts. But one thing that's good about Nippon Steel now being held bent on owning blast furnaces and BOFs in the United States is that people that used to say that blast furnaces and BOFs are bad, don't know what to say anymore. They are now on mute. Thanks, Nippon Steel, for validating my point. You have to pay the breakup fee of $565 million just to prove my point, and I appreciate that. Your money will be well spent. Another relevant point ignored by the U.S. Steel board. Nippon still has been a perpetual violate of our trade laws. Probably the worst actor in the international steel trade over the past several decades among all. In my view, Nippon Steel is actually worse than the Chinese. And they also have significant interest in China, which they love to downplay. Unfortunately, for them, Nippon Steel cannot hide their deep ties with the Chinese, and that has also been completely exposed. Nippon's existence in the U.S. is also bad for customers. By the way, in order to obtain a price increase back in Japan, Nippon Steel has recently sued the largest Japanese automotive manufacturer, Toyota. Cleveland-Cliffs has never done that here in the United States. And for the record, Toyota here in the United States is our largest automotive clients. When this thing ultimately ends, we are in a whole new world. If the feelings of rescue directors are hurt, but by what I have said or done and they still don't want to sell the company to Cleveland-Cliffs, that's their prerogative. At the end of the day, they don't have to sell themselves to Cliffs. And there is no easy way to force them to do so. But their only other alternative after they collect the breakup fee from Nippon is to continue as steel level company. If that's going to be the case, good luck running the assets that you hate with the workers, you don't respect. From our side, Cliffs has several other opportunities with or without M&A. The most relevant example of that right now is our share repurchases. We were overdue in Q1 and with our new reauthorization we are still buyers of our stock at today's price. We also just displayed our ability to growth profits organically, with the two projects we are initiating with support of the U.S. government. The $1.3 billion investment at Middletown Works replacing our blast furnaces with a DRI facility and two electrical melting furnaces is a game changer for our company and for our industry. The $500 million co-investment will receive makes this project the largest federally supported de-carbonization initiative in U.S. history. The government took note of our investment in direct reduction made seven years ago as well as our 30% reduction in CO2 emissions over a six-year period and our technological advances on hydrogen utilization. In our recently published Sustainability Report, we reported another reduction in integrated emissions intensity to 1.54 metric tons of CO2 per metric ton of steel, down from 1.82 in 2020 and significantly below the current global average of 2.15. When the Middletown project is in full operation, Middletown works will be the lowest cost steel producing facility in the United States. To illustrate the cost savings, our current cost to produce pig iron in Middletown is about $470 per net ton, and our current cost to produce DRI is less than $200 per net ton. Hot DRI will be fed into a melting furnace, a very simple process to melt solid DRI into liquid, creating a pig iron equivalent that can be fed into our existing BOFs and process it further downstream. Knowing that scrap will be gained scarce, expensive and more contaminated over time, we will avoid any increase in our scrap intake, maintaining our ability to serve the highest quality demand in end markets like the automotive market by using pure iron. That's technology, American technology, not Japanese hogwash PR. At Bottleworks, we were awarded $75 million by the to replace our natural gas fired lab reheat furnaces with electrified lab furnaces. That will reduce emissions, improve productivity and enhance our production of GOS, grain-oriented electrical steel, critical to our country's electrical grid. The future of our production of GOS was at risk under the initial draft of the DOE's new emissions standard as proposed last year. If adopted, as initially proposed, the new standard would have effectively replaced the use of GOS in all transformers used in the United States with made in Japan amorphous metal. Fortunately, the DOE heard what Cliffs and our American clients, the company is producing transformers in the United States, we're telling them. And with great help from elected officials like Senator Sherrod Brown of Ohio, Senator Bob Casey of Pennsylvania, and Governor Josh Shapiro of Pennsylvania as well as Representative Mike Kelly from Butler County in Pennsylvania and Representative Chris Deluzio of Pittsburgh, Pennsylvania, just to name a few, a more reasonable standard was adopted. With that, our customers will continue to be in business, and they will continue to use GOS to produce the transformers our country needs. By the way, there is pent-up demand for transformers in the United States and that's a great opportunity to produce more transformers and to generate more jobs for American workers. We expect to see significant investment from our customers in this important piece of infrastructure and we must produce more made in USA transformers. That's totally viable because Cliffs already has enough additional still producing capacity for GOS to deploy in Butler, Pennsylvania, and Zanesville, Ohio. Our other major move this quarter was announcing the indefinite idle of our Weirton facility, which officially ceased production on April 11. Over the past three years, Weirton's average annual contribution to our EBITDA was a negative $100 million due largely to unfairly trade imports of tin plate products. In January, the Department of Commerce recommended antidumping and countervailing duties on some of these imports, which would have mitigated this issue. But in February, the International Trade Commission in a totally surprising decision reverse the Department of Commerce recommendation allowing for low-priced imports to continue to flow into the United States. As a result, we had no choice but to exit the tin plate market, leaving more than 900 Weirton employees without a job. Some of these employees elected to retire and we were able to offer the impacted workers employment at other Cliffs facilities. As of today, we have been able to relocate over 100 employees to other Cliffs locations. Our GAAP loss in Q1 is primarily driven by the approximately $170 million in one-time charges taken at to written mainly employee support costs along with asset impairments and other expenses. Clearly, this was an eventful quarter for us. Our automotive business carried the day for us once again as the automotive sector in the U.S. continues to improve, growing for the fourth consecutive year. Our customers need us for our best-in-class quality, deliver performance, customer service, and technical expertise. Buying steel for other suppliers is just a price-driven decision for each one of the individual car manufacturers but not all common manufacturers are willing to bet their performance on less competent suppliers just to save a few bucks per ton. Some are willing to do so and these ones will be treated by Cleveland-Cliffs accordingly. Message delivered. On the flip side, service center business lagged on both volume and price during the past quarter, impacting our production volume. Demand has since returned and we have had success in implementing our recent price increase. This should support prices and shipments above the 4 million-ton level in Q2. With that, I will turn it over to Rob for Q&A. Questions & Answers: Operator Thank you. [Operator instructions] Our first question today is from the line of Lucas Pipes with B. Riley Securities. Please proceed with your question. Lucas Pipes -- B. Riley Financial -- Analyst Thank you very much, Rob. Good morning, everyone. Lourenco, you said the option that Nippon essentially acquires the non-union assets and you acquire the union assets is dead. And I wondered, is there anything that could revive that option and piece out of that? Thank you very much. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you for the question, Lucas, and good morning to you. By the way, I said that I offered this option, but I'm assuming that between Citibank and the bank representing Nippon Steel and ropes and gray the law firm representing Nippon Steel, they were able to at least deliver the message to Nippon Steel, because Nippon Steel never had the courtesy to reply to my offer, to sit down and discuss. So I'm just assuming that they said what they did -- what they said they had done to deliver the proposal to Nippon Steel. That said, yes, the proposed is gone, because at this point, the President of the United States already said what he's going to do. He's not a dictator. He needs to wait for the process to run. And then he will do what he already promised publicly to the workers of the USW, to the President of the USW, Dave McCall, and he has repeated in public situations. So it's game over. I cannot go against the word of the President of the United States. So, therefore, my option is totally 100% of the table. Lucas Pipes -- B. Riley Financial -- Analyst That's very clear. Thank you. Thank you for that. And so I think in the prepared remarks, you mentioned since Q2, could you remind me or are those? And also what would be the impact on margins in the current steel environment in Q2 and also for the rest of the year? And as you think about free cash flow, any portion that would go toward deleveraging off of kind of higher Q1 levels or 100% toward the buyback? Thank you very much. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. Sure. Hey, Lucas. Good morning. As it relates to costs, we indicated that from 2023 to 2024, we're going to achieve a $30 per ton decrease, which equates to kind of a $500 million savings on an annualized basis. And that's going to come from primarily lower-cost coal. We negotiated our coal contracts very well, lower natural gas, lower alloy costs. So these are the three primary drivers that are going to help our costs. As it relates to Q2 specifically, costs are going to be down $20 a ton, you'll start to see the full benefit from these lower coal contracts. Natural gas has also been lower than we expected, and the mix is going to be slightly less value-add here in Q2, which is going to help costs. As it relates to your other question, I believe you asked in terms of free cash flow and deleveraging. I think we made it pretty clear that share buybacks would be the number one priority. I made that abundantly clear in the last call. But obviously, if we do see opportunities to buy back bonds in the open market. We'll look to do that as well. We didn't have that opportunity during Q1, because our bonds were essentially all trading above par, and we had already paid down the entire balance of ABL. We're giving ourselves this flexibility to use a little bit more leverage within our existing rating category, to buy back more stock. But if there are opportunities to buy back bonds in the open market, we'll look to do that as well. Lucas Pipes -- B. Riley Financial -- Analyst Sounds good. Thank you very much for all the color, Lourenco, and team. Continue best of luck. Thank you. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you, Lucas. Appreciate it. Operator Our next question is from the line of Bill Peterson with J.P. Morgan. Please proceed with your question. Bill Peterson -- JPMorgan Chase and Company -- Analyst Yeah. Hi. Good morning, Lourenco, Celso, and team. Thanks for taking the questions. I wanted to follow up on that, and you said -- you answered a little bit on the prior question, but how should we think about the product mix? And then as that impacts the trajectory of pricing into the second quarter? And maybe -- maybe related to that, if we think about the negotiations you've had with the auto contract negotiations, how do they play out, especially with the Japan headquarters companies given their fiscal year timing? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Good morning, Bill. The auto negotiations for this period are the ones related to the clients that have April 1st renewal time. And those are basically the Asians, Japanese, Korean transplant because they're their fiscal year is April 1st in their respective countries. And I'm glad to inform that, these negotiations are completely uneventful and everything went totally smooth. And we accomplish what we are asking for. And I'm sure that they are happy because the tonnages delivered to each one of these guys are growing on each one of them. So consolidating, for example, one of the agents are both Stellantis as a bigger client for Cleveland-Cliffs. So these specific client is now much bigger than Stellantis, Stellantis for us became like another part of the pack. It's no longer a top priority for me and for Cleveland-Cliffs. They are now treated here as a second-class citizens, and we are going to continue to do that for the ones that are price driven like Stellantis. So April was great. It was fantastic. And keep in mind, we continue to grow tonnage for automotive. The only difference is that we are concentrating more on the -- some of the clients and selling less for other clients. This will be reflected on the quality of the cars. It's a matter of time. When you're only hitting for low cost, at the end of the day, we end up building a car that. And that's what I expect to happen, and we are going to help differentiate the good ones from the bad ones. I would say that the April crowd was in its totality, part of the good one block. Bill Peterson -- JPMorgan Chase and Company -- Analyst Yeah. Maybe you can also -- maybe speak to the product mix and trajectory of pricing into the second quarter, please? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Let me take the product mix as well. Second quarter will be a lot more normal, Bill, than the first quarter because if you recall, January and February, we had kind of a buyer's strike among service centers. They're all expecting price to go down and not buying, uncertainty and waiting for the Fed and waiting for this, waiting for that and no buyers buy. And that was a very complicated period for us at the beginning of the first quarter. And that's also why we had so much more concentration on automotive. Unlike Automotive was buying a lot more because service centers will buy a lot less. But then things resolved after we announced the first price increase -- first price increase went through very well. Then we announced the second price increase, then our competitor announced a price that became kind of a reference in the marketplace just to bring a different perspective, their intentions. But at the end of the day, that is still playing out in the marketplace, and we are still working through the consequences of that event. But all in all, I see Q2 returning to a more -- much more normal mix between service center and distribution and automotive. So automotive will continue to be good. Service center and distribution will become bigger, and that will bring the mix back to where the mix normally is. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes, Bill, and just to answer your question on selling price, which I believe is what you were focused on. Obviously, this mix -- the mix will have an impact on pricing, obviously, in Q2. And I think we've given enough in terms of bread crumbs that you can kind of calculate what the impact might be. But just to kind of refresh for everyone in terms of what the contract lags are related to our index-linked contracts. We're about 40% to 45% fixed with full year price. And then we have 20% which are on CRU month lags about 10% of the volumes are slab on a two-month lag. Our CRU quarter lags and the rest, call it, 10% to 15% is true spot. So when you think about Q2, the monthly lag is down from Q1, the quarter lag is up from Q1. But overall, you can kind of expect Q2 average selling price to be down around $40 a ton. Bill Peterson -- JPMorgan Chase and Company -- Analyst That's super helpful. Thanks for that -- all that insight. Second one is on capex. And I guess, thinking about the company on a stand-alone basis with net capex excluding awards and so forth. You talked about like, I guess, $1 billion normalized over the next four years after this year. Can you provide a little more granularity on 2025, in particular, with assuming you have better visibility or maybe even the '26? Just a lot of questions we've been getting is how to think about your free cash flow generation ability beyond this year. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. I think it's a little too early to go into the granularity of 2025. I think the easiest way to think about it is just stick to that $700 million for this year, which we're very confident. With 2025, probably won't even get to $1 billion and then you're only exceeding $1 billion when you get to 2026. But as we get closer, we'll be able to share more detail related to '25 and '26. Bill Peterson -- JPMorgan Chase and Company -- Analyst Thanks, Celso. Celso Goncalves -- Executive Vice President, Chief Financial Officer Thank you. Operator Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Hey. Good morning. Celso Goncalves -- Executive Vice President, Chief Financial Officer Good morning, Phil. Phil Gibbs -- KeyBanc Capital Markets -- Analyst A question just on the timing of the DOE grant. You obviously have two very substantial capex projects over '25 to '28 time frame. Do those DOE brands get lag as you spend the capital on the project? Or is that kind of a lump sum fund that you get upfront before you start funding? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer I'll let Celso take that. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. No, Phil, you're right, they're paid out pro rata with the spend. That's the just way to think about it. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Thank you. And then maybe with the Middletown project, given that it's so substantial in timing and scope, can you give us kind of the time line of or the pockets of phases as you all are looking at it? And what more do you need to complete in terms of due diligence or design. You've given this is relatively new technology, at least to the states. I think people would just be interested in hearing that. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Yeah. No. Look, it's a brand-new facility there, but it's not, by any stretch, new technology, because it's the combination of a direct reduction plant that instead of producing DRI, we will be producing -- I'm sorry, instead of producing HBI like our plant in Toledo, we'll be producing hot DRI and that hot DRI will be fed in on-site through to EMFs. And what's an EMF? It's just electric cart furnace to melt iron ore to melt -- in the case of this facility iron ore metallic, because it will be sponge iron, hot DRI from the direct reduction plant. So it's a simple setup. There's nothing really complex. And these are two things that we do extremely well. We have electric cart furnaces, so we dominate this operation. And we absolutely have the best-in-class direct reduction plant as far as I know in the world. So we are going to be hydrogen ready and we are hydrogen ready in Toledo. We have been using hydrogen. So hopefully, by 2029, when this plant goes into operation, we are able to start with the hydrogen or we'll start just for the stock up with the natural gas and then immediately go to sync gas and in the short-term, be 100% hydrogen by the early 30s. So this is real game changing in terms of the technology to produce steel, in particular to produce automotive grade steel. But it's a combination of a lot of things that; one, we have full knowledge and full operational capability. And second, we are operational proven in terms of how to use all these things. So there's no big deal. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Thanks, Lourenco. And then just lastly on the mix. You mentioned auto carried the day in Q1, the service centers took a step back, are we expecting or are you expecting rather auto to be relatively stable in Q2, and then service centers to be the driver of the increased volume? Or is automotive improving as well? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Phil, automotive continues to do very well, particularly now that they are no longer all pursuing to be the next Tesla. They are not as hell bent on going all into electric vehicles as they were even six months or 12 months ago. They are now talking Turkey. The cars that are selling are the ICE and now the hybrids. So the ones that are moving faster to hybrids are the ones that are winning the day. And because we are so big and supporting pretty much all of them except one that only buys cheap stuff. We are going to really continue to support the ones that are growing. And we don't have a problem picking winners and losers among the car manufacturer. For example, yesterday, I announced that I'm no longer selling steel to Volkswagen in Mexico because there is no point in selling steel from the United States to Mexico, just to have Volkswagen then sending back cars to the United States just to pay cheaper wages to workers in Mexico. I'm not going to support that, particularly now that UAW was able to unionize the plant in Chattanooga, Tennessee for Volkswagen. I would rather sell to Chattanooga, Tennessee. So we are going to start to be a lot more selective among our automotive clients. But make no mistake, automotive is a good business for us. But the only innovation that the alliance for American innovation can come up with this we need to sell to lower price. So we are not going to do that. And we are going to continue to play the Cleveland-Cliffs game. We don't need to grow our size in automotive through M&A. We are a big enough, but we can be smaller, but be is market. And that's what we are going to do, and that will bear fruit for Cleveland Cliffs going forward. Phil Gibbs -- KeyBanc Capital Markets -- Analyst And lastly, Lourenco and team on the grain ore intellectual steel market. I think your comments over the next several years are very bullish, particularly as it relates to grid spend and the timing of around when that is going to take place. But what's your outlook in the shorter term, maybe in the next six months to 12 months in terms of volumes? And then within that question, you also mentioned in your prepared remarks that you expected some reshoring perhaps after this spate we saw in the last 10 years of offshoring into Canada and Mexico on the transformer side. Maybe shed some light on that aspect, too. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Look, this situation of reshoring only happens because for a while, we allowed the thing to go away from us. But we have been working very hard since the Trump administration to stop this bleeding. If you recall, during the last couple of years of the Trump administration, we worked very hard to put a Section 232 on cores and laminations. And the main reason was the distribution with Mexico that was allowing that to happen. We were able to fix that without the Section 232, which by the way, was never signed by President Trump despite the great efforts from the USTR ambassador, Bob Lighthizer. For some reason, President Trump never signed that thing. But this is water are under the bridge. We fixed the thing with the clients. And the clients are not doing that in Mexico anymore, at least not to a major scale. On the other hand, we still have the importation of transformers into this country. And I was discussed in that situation yesterday with Secretary, Jennifer Granholm about the risk we are taking when we import transformer. Among other things, we don't even know what's inside the transformer when you import the entire transformers. So we need to stop that and that's financial security reasons. So we will continue to work with the Biden administration. And whoever is the President after the election, we will continue to work on that. We need to stop importing transformers. We can't allow that to happen. We need to build more transformers in the United States. The good thing is that our dialogue with these clients that produce transformers in the United States is fantastic. We are working on a solution for Wilton that will resolve a lot of the situation with the transformers, will allow us to produce more gold. We have spare capacity with minor investments, we can increase 50% to 70% or throughput in bottle just to produce more gold, grain-oriented the electrical steels for transformers. So we want to put up a new factory in Wilton, West Virginia using our workforce there to produce transformations. We can co-invest, we can just support with the steel. We can do whatever it takes, but we need to increase the throughput and the availability of transformers for the supply chain, mainly in USA transformers and hopefully with the union workers. That's what we are working on, and we believe we're going to be successful. Phil Gibbs -- KeyBanc Capital Markets -- Analyst Thank you so much. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Thank you. Operator Our next question is from the line of Alex Hacking with Citi. Please proceed with your question. Alex Hacking -- Citi -- Analyst Yeah. Morning Lourenco and Celso. Just coming back to the DOE awards. It sounds like the negotiations there are somewhat of a formality, and you're very confident that that money will be awarded is that assumption. Am I correct in that assumption? And then what would be the timing there, the expected timing of when those awards would be confirmed? Thank you. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Good morning, Alex. I don't believe it's a formality because they are asking a lot of good questions, and we are providing with what we believe a lot of good answers. And the timeframe for the negotiation or the discussions over whatever you call is basically, we are going to use the rest of this year to finalize this negotiation. But we are fairly confident that we're going to be successful. But I don't think it's a formality. I believe that they are doing a good job. They are doing the due diligence that they need to do. At the end of the day, they are going to be giving us $575 million, $500 million for Middletown and $75 million for [Inaudible], so it's a lot of money. And it's at the end of the day, tax payer's money and we take this very seriously. But it's not a formality. We are doing the work. And in the process, the most important part that in the process, we are having the ability to educate the government on what we do. Instead of having them only reading what is in the trade press or in the report from research analysts, they are learning from the ones they really know what they're talking about. Alex Hacking -- Citi -- Analyst OK. Thanks. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Yeah. That includes you in the ground that don't know what you're talking about. You're right about that. But that's just me, you know me, Alex. So yes, what's next? Alex Hacking -- Citi -- Analyst What's next? Let's say the money wasn't awarded. It sounds like for whatever reason, it sounds like the economics of the electric melt furnace would be compelling even without the award. But is that a project that you would still move ahead with in that circumstance? Or you can't really say it's until you reach that point? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Alex, I'm very confident that I will get the money. And we, of course, run the projections with and without. But with the money coming from the DOE, it's a no-brainer. It's a very, very compelling case of return on investment, it's money well spent. It's a real game changer. We are going to be reducing our costs to produce the same ton of liquid steel by more than $250 per ton. That's super significant. So we want that project. And, yes, the ROI without the grant is still OK, but the ROI with the grant is unbelievable. And I believe that so far, based on what Cleveland-Cliffs is doing in terms of, among other things, working together with the government and working together with our workforce, we deserve to get the money. Alex Hacking -- Citi -- Analyst And I guess just finally, I mean you mentioned that the $250 number earlier. I mean is that really like the direct savings from shifting the technology because that would obviously provide a massive uplift, right, in EBITDA per ton. Celso Goncalves -- Executive Vice President, Chief Financial Officer Exactly right. Alex Hacking -- Citi -- Analyst An apples-to-apples comparison Celso Goncalves -- Executive Vice President, Chief Financial Officer Exactly right. Because I'm a metallurgist, I like technology. It would be so easy to shut down blast furnaces and BOFs and put TAFs and not be able to produce all kinds of steel that are produced today and producing massive unemployment. Europe is doing that. The U.K. is doing that. When I was -- when I had a conversation with in Minister of the Economy of Slovakia, he said that there was £600 million granted money for Košice just to shut down the blast furnace and replace with the EAFs. And I said, do you move that two-thirds of your -- your personnel will be let go? So yes, unfortunately, that's the consequence of decarbonizing. Mr. Minister, you don't know what you're talking about, with all due respect. So we've got to see the big picture. We got to understand where cost is. If you believe that cost is safe by cutting $20 per ton today and $30 per ton tomorrow, you end up with what we created here in the United States. And then you decimate and steel industry that was the envy of the world, four years ago, and you create China. And then you realize that China is an enemy to be beating. And yes, so we got to see the big picture and it takes a lot of education and a lot of technology and a lot of engineering to do things the way we are doing here at Cleveland-Cliffs. We are very happy that we found a willing counterparty in several cabinet members of the Biden administration, and we are happy with that. Alex Hacking -- Citi -- Analyst OK. Thanks. Best of luck. Celso Goncalves -- Executive Vice President, Chief Financial Officer Thank you. Same to you. Operator Thank you. Our next question is from the line of Tristan Gresser with BNP Paribas. Please proceed with your question. Tristan Gresser -- Exane BNP Paribas -- Analyst Yes. Hi. Good morning and thank you for taking my questions. Just maybe a follow-up on the decarbonization project. Can you please maybe split the gross capex elements of the project in Middletown and give us a sense on not on a net capex basis, but on a gross basis, what the normalized capex would look like 2024, 2025, 2026, 2027. Would it be close to 1.2 billion? That's my first question. Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Yes. I'll let Celso take that. Celso, please. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes, sure. Hey, Tristan, like I said, there's no impact to capex from these DOE projects in 2024, just to be abundantly clear, everything starts in 2025. And if you want to break that down, in 2025, the Cliffs portion of the Middletown spend is about $250 million. And the total capex related to everything is about $985 million. So that's why I said in 2025, we don't even crack above the $1 billion market. And then when you go to 2026, Middletown steps up to about $400 million and the total goes to about $1.2 million. So that's the breakdown for the next couple of years. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. That's helpful. And that's a net number, right, the $1.2 billion, so removing the reline and the grant. Celso Goncalves -- Executive Vice President, Chief Financial Officer Correct. Yes. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. And then the second question, should we think as Middleton project as the way forward for the rest of the footprint, given the carbon benefits you mentioned that can translate into selling premiums, but also the cost benefits. I think you mentioned in the past that there was a next reline at Burns Harbor in 2026. So basically, it doesn't make sense to gradually convert your BF footprint to this kind of this PRI melting unit setups. And if that's the case, would more funding be available should you decide to go this way? Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. It's a very good question. But let's go piece by piece on where my cost savings are, the numbers that I just gave to you. The biggest problem for us in Middletown is our very punitive contract that we have with SunCoke. That contract is absolutely horrible. And our cost of coke in Middletown is one of the reasons why we started studying this project in the first place. So that situation is going to change no matter what. We are not going to be keeping ourselves penalized by SunCoke with that horrible contract that we have. So for Middletown, the numbers are the numbers I mentioned to you. And we are going to go in that direction coming high we're. I'm going to get the grant. But the project there is our response to the contract we have with SunCoke. When we go to a company like -- to a plant like, for example, Burns Harbor, the switch is not as clear as that because we have been improving a lot our ability to produce coke at a reasonable cost. Burns Harbor is because of that -- among other things, but because of that, mainly -- it's our lowest cost production plant in the entire footprint. So I don't see us going to Burns Harbor so quickly. But of course, the new configuration that we are implementing in Middletown will be our first in the company like we did with our plant -- our direct reduction plant in Toledo. And with that, we were able to now easily go to Middletown with a new direct reduction plant because we know we dominate the technology. So it's a first, I don't know, if we are going to continue in their route but there's a possibility and we have our priorities in terms of who would be next and who will be next, if that's the case. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. That's very clear. Maybe one final question. Maybe if you can discuss a little bit the situation at Calvert, you have a slab supply agreement. The facility there is ramping up its upstream could go with the second year. So I think the contract is up for renewal next year, but what are the solution is, let's say, well, Calvert decide well to go with upstream or some other slab supply? Do you have options? Is that already a topic of discussion or negotiation. So if you could share some thoughts on that, that would be helpful. Celso Goncalves -- Executive Vice President, Chief Financial Officer Yes. The negotiation has just started. And of course, I'm not going to give you -- I can't give you details of how the negotiation is going. But I will tell you what the outcome will be. We will end up with a much better contract for us or no contract. Either one is good for Cleveland-Cliffs. No contract is good. And a better contract might be good. The contract we have was the last piece of the puzzle for us to close the deal and acquire ArcelorMittal USA, and that was in December of 2020, we closed. So that negotiation happened September 2020. So that was almost four years ago. I knew exactly where I was walking us into. And now it's the time of expiration. And it's like any situation with the contract. We prepared Cleveland-Cliffs to be without that contract, we're going to be OK. And if that contract improves, we still can work with our friends at ArcelorMittal middle. Otherwise, we continue to be frank, but they'll have to find slab somewhere else. That's the deal. Tristan Gresser -- Exane BNP Paribas -- Analyst All right. Thank you very much. Celso Goncalves -- Executive Vice President, Chief Financial Officer Thank you. Operator Our next question is from the line of Lawson Winder with Bank of America. Please proceed with your questions. Lawson Winder -- Bank of America Merrill Lynch -- Analyst Thanks very much, operator, and also good morning Celso and Lourenco. Thank you for taking my question. I would like to ask about the NOES expansion at Zanesville. Has that started to ship to customers? And how is that ramping up? Celso Goncalves -- Executive Vice President, Chief Financial Officer The NOES expansion in Zanesville is in operation and mission accomplished. We always believe that we would have more used for non-oriented electrical steels, particularly for motors of electrical vehicles. And we created a modest increase in our capacity by investing relatively small amount of money in capex. So we're good. The project was executed as planned. We are selling oriented electrical steels. We continue develop applications with our -- mainly with our automotive clients and we are fine with that and we have no intention to expand beyond what we already have for NOS. Lawson Winder -- Bank of America Merrill Lynch -- Analyst OK. Thank you for that. And can I also ask about the base price as price that you set at $900 per short ton. So I mean the price reporters are still indicating prices in the lower 800s. Are you guys realizing pricing in that $900 per short-ton range? And what's your thinking on pricing over the next month or two? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer I never give public predictions on price. We announced our price increase and we are working to get that price increase. We are not in an island. In the meantime, that we announced our price increase and everything was actually growing in the right direction. We're still selling for $900 for that matter. We are. So the answer to your question is, yes. But other clients -- I'm sorry, other clients, other competitors came with different price points. And we live in a world of pricing competition particularly in a world that everybody reads every single line that comes out of the trade press. And you just said what you would like to hit. So the prices are 800 and low 800 they will take that to the -- like the bio. But I'm telling you, we're selling for 900. But is that easy right now to get there? No. It was easier before things that happened during the latter part of the quarter. But these are always -- it's an always changing environment. And at the end of the day, we will see what's going to happen. And we expect to sell more particularly for Service Centers that are completely depleted in terms of inventory because not buying seems to be the only diet that they can do when they want to lose weight on their inventory. I suggest Mounjaro or Ozempic, that would be a lot more effective. All right. With that, I think we're done right, Rob? Operator Yes. That's correct. Would you like to make some closing comments? Lourenco Goncalves -- Chairman, President, and Chief Executive Officer Done. Mounjaro, Ozempic. You'll lose weight with that and bear with exercise. But as far as inventory service centers are supposed to carry inventory. For a service center, you don't carry inventory, you are setting yourself up for a disgrace. So but be my guest. Good luck. Thank you, everybody. I'll talk to you soon. Bye now.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and welcome to the Centene first quarter 2024 financial results conference call. [Operator instructions] Please note today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, senior vice president, finance and investor relations. Please go ahead. Jennifer Gilligan -- Senior Vice President, Finance and Investor Relations Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2024 earnings results conference call. Sarah London, chief executive officer; and Drew Asher, executive vice president and chief financial officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Ken Fasola, Centene's president will also be available as a participant during Q&A. Any remarks that Centene may make about future expectations, plans, and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 20th, 2024, and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2024 press release, which is available on the company's website under the Investors section. With that, I would like to turn the call over to our CEO, Sarah London. Sarah? Sarah London -- Chief Executive Officer Thanks, Jen, and thanks, everyone for joining us as we discuss our first quarter 2024 results. This morning, we reported first quarter adjusted EPS of $2.26, ahead of our previous expectations for the period. As a result of this strong start to the year, we are increasing our full-year 2024 adjusted EPS guidance to greater than $6.80. Drew will cover the quarter and our updated financial outlook in further detail in a few moments. While there is still more work to do, we are pleased with the first quarter results and will look to harness the positive momentum we are generating in our core businesses as we move through the balance of the year. In 2024, Centene's focus remains on our work to streamline and modernize the underlying infrastructure of our company and to assemble the people, processes, and tools necessary to deliver best-in-class experiences to our members, providers, regulators, and state partners. Let me share a couple of examples of progress here. During the first quarter, we completed an important initiative to simplify our prior authorization process by automating our real-time source data. This simplification improves the timeliness of authorization decisions, ensuring our members get the care they need quickly and removing friction from the process overall for both members and providers. Q1 also saw the accumulation of months of thoughtful and thorough go-live preparation in Oklahoma. Our team obtained perfect scores in our readiness review from the state, and we are thrilled to be serving Oklahomans statewide as of April 1. Finally, our improved operational agility also allowed Centene to mobilize quickly in support of our members and provider partners in the wake of the Change Healthcare cybersecurity incident. This included launching a national provider outreach campaign that spans Centene provider network across all products, Medicaid, Medicare, and Marketplace, and has included targeted efforts to support those disproportionately impacted by the outage, including FQHC's safety net hospitals, rural health clinics, and behavioral health providers. We appreciate the focus on and support for last-mile providers from HHS and CMS throughout this process as these clinicians represent a critical component of the infrastructure through which our members access high-quality healthcare. Now on to our business lines. We are roughly 90% of the way through redeterminations, and our Medicaid franchise continues to demonstrate resilience as we navigate the complexities of this unprecedented process. As you can see from today's release, our first quarter membership tracked slightly higher than our expectation at investor day in December. Overall, we continue to be well guided with respect to membership and rate by the projection model we built state by state more than a year ago and that we continue to refine as we move through the redeterminations process. As we've noted before, 2024 represents an important year for blocking and tackling through acuity shifts and corresponding rate discussions with our state partners to ensure we are positioned to provide high-quality services for our members. We are actively engaged in that process and are seeing solid results thus far with opportunities still ahead. As we move through the remainder of the year, we expect these discussions to increasingly represent the regular back-and-forth dialog we maintain with our state partners in the normal course of managing the dynamics around each individual Medicaid program we serve. At the same time, we have been executing on important reprocurements, and the early months of 2024 delivered notable data points. Most of the key RFP results are now public, positioning us well to generate continued Medicaid growth in a post-redeterminations world. Centene reprocured one of our largest contracts with the recent announcement of intended awards by the state of Florida. Although the protest period is ongoing, Centene is well-positioned based on Florida's determination that Sunshine Health is among those that will provide best value to the state. In Michigan, we were thrilled to be selected to continue serving the vast majority of our existing membership with some opportunity to grow, and we look forward to our continued collaboration with the state. In Texas, our protest remains ongoing. We are honored to have served Texans for 25 years and intend to defend Superior Health's ability to provide access to affordable and high-quality healthcare for our members in the Lone Star State. We are proud of the way our health plans and business development team have delivered so far during this critical cycle of reprocurement. The Centene value proposition remains a powerful one, built on more than four decades of experience serving Medicaid communities, an unwavering local approach, and a commitment to innovation in the services and support we bring to our members. We are honored to provide access to care, as well as community-based support, to improve the lives of those we serve in 31 states across the country. Moving to Medicare. The Medicare Advantage macro landscape remains challenging. Consistent with our prior view, we see final 2025 funding levels as insufficient with respect to general medical cost trend expectations. Drew will provide some early commentary around our strategy to navigate Medicare in 2025 as a result. Medicare Advantage star ratings remain the single most powerful lever to drive performance in this vital business and continue to represent a top priority across the organization. As we drive to our goal of 85% of members in three-and-a-half star contracts by October of 2025, we continue to see improved progress and stability in our performance and expect those to be reflected in our results come October. We are tracking year-over-year improvements in our core operations, as well as in the ways we support our members as they receive care, and we are carrying forward this positive momentum into 2024 as our teams are clearly focused and aligned on quality. Longer term, Medicare Advantage remains an important business for Centene. The strategic link between Medicare and Medicaid has only become more explicit since our last earnings call. Recent CMS rulemaking included final requirements to better coordinate Dual Special Needs Plan, or D-SNP, participation with important milestones beginning in 2027. By the end of the decade, a Medicaid footprint will be a prerequisite to D-SNP growth. Centene is perfectly positioned to gain positive momentum from this growing bond between Medicare and Medicaid. Finally, Marketplace. This business continues to represent a unique and powerful growth segment for Centene, and our teams are executing well against the opportunity. With approximately 4.3 million Marketplace lives at the end of the first quarter, Centene's Marketplace membership has more than doubled in size compared to just two short years ago. This exceptional growth has been accompanied by consistent margin expansion as our deep product knowledge and staying power in the market enable us to forecast pre-tax margins well within our targeted range of 5% to 7.5% for 2024. We are pleased with the traction our Ambetter Health products are generating and see additional room to expand the reach of health insurance Marketplace offerings overall. In 2024, the source of our membership growth is widely diversified. Based on a survey we conducted following open enrollment, nearly 40% of new members identify as previously uninsured. Approximately 25% joined us from another Marketplace carrier, and approximately 10% chose Ambetter after losing access to an employer-sponsored plan. This is in addition to those members who selected Ambetter after losing Medicaid coverage. As we look to the future of Marketplace, we expect new member growth to be driven by an increasingly addressable and accessible uninsured population and the evolution occurring as employers consider alternative options for providing employer-sponsored insurance. Centene has been rapidly evolving as an organization over the last two years. We have been resolute in creating focus, trimming the organization down to the core strategic assets that give us the strongest platform for future growth. We are executing against our strategic plans, fortifying and modernizing our infrastructure, and successfully delivering access to affordable high-quality healthcare for millions of Americans. Our strong first quarter results demonstrate the power of our diversified earnings drivers as we deliver on our financial commitments, maintain our posture of disciplined capital deployment, and continue to invest to support long-term growth. As always, we want to thank our nationwide workforce of nearly 60,000 for showing up every day, committed to improving the lives of our members and transforming the health of the communities we serve. This CenTeam is the engine that ultimately powers our results and amplifies our impact. With that, let's turn the call over to Drew for more details around our performance in the first quarter and our updated financial outlook for 2024. Drew? Drew Asher -- Executive Vice President, Chief Financial Officer Thank you, Sarah. Today, we reported first quarter 2024 results, including $36.3 billion in premium and service revenue and adjusted diluted earnings per share of $2.26 in the quarter, 7% higher than Q1 of 2023. This result was better than our expectations, and we are increasing full-year 2024 adjusted EPS guidance by $0.10 to greater than $6.80. This quarter is a good example of the benefit of a diversified business with multiple levers to drive results. Our Q1 consolidated HBR was 87.1%, which is right on track for our full-year guidance. Here's an example of the benefit of that diversification since we provide you with transparency into the line of business components. Medicaid at 90.9% was a little higher in the quarter than we expected as we continue to work through the appropriate matching of rates and acuity in the short term. Redeterminations are certainly front and center in the acuity rate match process, but getting the right match for other circumstances, such as states changing pharmacy programs or behavioral health practices, are also important initiatives in a handful of states. On the other hand, our commercial HBR at 73.3% was a little better than we had planned in the quarter, driven by the continued strength of our Marketplace business. And our Medicare segment at 90.8% was right on track in the quarter, all of this netting out to 87.1%, a good result. Going a little bit deeper into each of our business lines. Medicaid membership at 13.3 million members was slightly better than the 13.2 million members we forecasted as of Q1 -- for Q1 as our -- as of our investor day. Drivers of membership for the remainder of the year include, one, new wins, such as Oklahoma and Arizona LTSS; two, the return of slight growth in markets once redeterminations are complete, plus the rejoiners dynamic; net of three, the substantial wind down of redeterminations over the next three to four months. Upon reforecasting the sloping of membership and revenue for 2024, including Q1 membership being a little bit higher than planned, we added $1 billion of Medicaid premium revenue to our 2024 guidance. The overall composite rate is running a little above the 2.5% we last referenced, and we have over 75% member month rate visibility into the 2024 calendar year. Regardless of the temporary work to match rates and acuity, our long-term goal remains to return to the high 89s HBR as we look out over the 2025, 2026 time frame. All things considered, we are pretty pleased with the performance of our Medicaid business one year into a very complex redetermination process. And as Sarah covered, we could not be more pleased with our performance in recent Florida and Michigan Medicaid RFPs. The Texas protest process still needs to play out. Our commercial business performed very well in the quarter in terms of both growth and HBR. Consistent with previous comments, we grew from 3.9 million Marketplace members at year end to 4.3 million at the end of Q1. For the past two years, we have consistently delivered a combination of growth, coupled with improving margin. Our guidance assumes that we stay at 4.3 million Marketplace members for the rest of 2024. If we can grow during the special enrollment period, which we've been able to do in the past two years, there would be upside to our premium and service revenue guidance, so stay tuned. Our current 2024 guidance assumes about $16 billion of Medicare Advantage revenue, representing 12% of total premium and service revenue guidance and approximately $4 billion of PDP revenue. I previously mentioned at a conference that Medicare inpatient authorizations were higher than expected in January and February. March authorizations ended up being lower than February, though still elevated from Q4. And Medicare outpatient trend continues at the elevated level we first saw in Q2 of 2023, though reasonably steady. Nonetheless, the performance in the quarter for the Medicare segment was in line with our expectations, and our full-year view has not changed. We had good performance with our new pharmacy cost structure and executed well on other operating levers. As we look ahead, I feel like we are making 2025 decisions with our eyes wide open: inpatient and outpatient trends, complex pharmacy changes from the Inflation Reduction Act, an insufficient 2025 rate environment based upon the final rate notice, and a risk model being phased in beginning in 2024 that is punitive to partial and full duals. It also seems like many of our peers should have more religion in setting benefits at sustainable levels given these headwinds. I'll repeat what I said on the mic at a conference in March: to accomplish our strategic goals with our Medicare Advantage business, it doesn't matter if we ultimately level off at $14 billion, $15 billion, or $16 billion of Medicare Advantage revenue. What is strategically important is the alignment with Medicaid and those complex populations we want to serve, especially given where the puck is heading with regulations pulling duals and Medicaid closer together. We're still in the process of making 2025 county-by-county decisions and will finalize and submit Medicare bids in early June, so we'll provide you with more 2025 Medicare commentary on our Q2 call. We expect Medicare to be a good business for us in the long run, and it's an important part of our overall portfolio. We need to deliver on STARS improvements, clinical levers, and SG&A actions over the next few years, and those efforts remain on track. Going to other P&L and balance sheet items, our adjusted SG&A expense ratio is 8.7% in the first quarter, consistent with our updated mix of business, including growth in Marketplace. Cash flow used in operations was $456 million for Q1, primarily driven by net earnings, more than offset by the timing of risk-corridor payments, a delay in March's premium payment from one of our large state partners subsequently received in early April, and slower receipt of pharmacy rebates as we transition to a new third-party PBM in January of 2024. From January 1st through mid-April, we repurchased 3.4 million shares of our common stock for $251 million. Our share repurchase goal for 2024 is unchanged at 3 billion to 3.5 billion. Our debt to adjusted EBITDA was 2.9 times at quarter end, consistent with year end. And during Q1, we were pleased to maintain our S&P BBB minus rating under the updated S&P rating model. Our medical claims liability at quarter end represented 53 days in claims payable, down one day from Q1 and Q4 of 2023. DCP was actually up due to Change Healthcare claims receipt delays then back down due to an acceleration of state-directed payments to providers and lower pharmacy invoices outstanding at quarter end. You'll see in the reserve table that our 2024 Medicare Advantage PDR is up $50 million in the quarter. This progression in the 2024 PDR was expected and planned for due to quarterly seasonality in Medicare Advantage. Though it's early in the year, we are comfortable adding $1 billion of premium and service revenue and $0.10 of adjusted EPS to our 2024 guidance. You'll also see some mechanical changes to total revenue driven by pass-through premium taxes and the GAAP effective tax rate due to the Circle divestiture. We also expect investment income to be a little bit above our previous forecast of $1.4 billion while still providing for a few rate cuts in 2024. Q1 was a quarter of momentum. We put another quarter of redeterminations behind us. We reprocured one of our largest contracts and are well-positioned in Florida. We executed well in the Marketplace annual enrollment period and put up a strong quarter of both growth and margin. We delivered on the January 1st PBM conversion, and our businesses and customers are benefiting from an improved cost structure. We continue to advance our multiyear operational improvements, and Centene continues to attract talent. And all of this resulted in strong Q1 results and increased 2024 guidance. While there's plenty more to achieve, we are off to a good start in 2024. Thank you for your interest in Centene. Rocco, please open the line up for questions. Questions & Answers: Operator Yes, sir. [Operator instructions] Today's first question comes from Kevin Fischbeck with Bank of America. Please go ahead. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Great. Thanks. I just wanted to go into your margin commentary on the exchanges. Because I guess from our expectations, too, it came in a little bit better. I guess that's the fastest growing part of your business, which always potentially lowers the visibility into claims receipts, and obviously you had change going on at the same time. So I mean, I guess how comfortable are you or what points do you look at to give you comfort that MLR outperformance is true and durable rather than potentially some issue around rapid membership growth or change disruption? Thanks. Sarah London -- Chief Executive Officer Yeah. Thanks, Kevin. I think two important points there. One is just the confidence in the overall HBR. And I think as we look back over the last two cycles, we have seen rapid growth in the market overall. And obviously growth in our book, it's more than doubled in the last two years. And I think we've tracked very well to the HBR implications of that. So understanding where SEP grows may have pressured margins in year but then the fact that the sophomore effect of that growth that we accumulated last year starts to play out this year is consistent with our expectations. So again, I think the team has demonstrated a really solid ability to track the moving parts which gives us confidence in the performance of that book. We've also, as we've talked about in the past, implemented a really strong program around clinical initiatives, and so that has continued to mature, which I think also helps overall management of the book. And then relative to the visibility on Change, maybe I'll just hit that sort of broadly because I think that question probably applies across lines of business. And as I said in my remarks, just incredibly proud of how the teams mobilized here in our response, demonstrating operational agility, prioritizing member access to care, and then a huge push around getting out to providers and finding every way possible to get them reconnected as fast as possible so that they could get paid and they can support our members, which is priority No. 1. And then of course, we can have the visibility that we need. And on that point throughout that process, we had very solid visibility from an inpatient perspective because auths were not disturbed at any point during that process. Centene also has a long-standing practice of using received claims not paid, which Drew has talked about before. And so outpatient visibility was good coming into that incident on a relative basis and then being able to catch up quickly as a result as providers reconnected. So the highest point we were missing, mid-teens percentage of our claims. But by the time we closed the quarter, the impact was very modest, and we accounted for that in our financial processes. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst OK. Thanks. Operator Thank you. And our next question comes from Stephen Baxter at Wells Fargo. Please go ahead. Stephen Baxter -- Wells Fargo Securities -- Analyst Yeah, hi. Thanks. I wanted to ask about the revised premium and service revenue guidance first. It seems like based on what you saw in the first quarter that you'd annualized to something closer to around $145 billion versus the revised guidance of $137 billion. So I'm wondering if there's anything we should be keeping in mind just as another kind of callout. The Medicaid premiums in the quarter were well above our model, so I don't know if there's anything there that's influencing it. And then from the Medicaid MLR perspective, how are you thinking about Medicaid MLR progression through the year from the starting point and the factors that are influencing that? Thanks. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah, Stephen. In Q1, we did have a fair amount of state-directed payments. In fact, some states we believe in response to the Change incident accelerated a number of those. That actually also had about a 20-basis-point impact on our Q1 Medicaid HBR relative to our expectations of a normal level of state-directed payments. So that also showed up in our premium revenue, so you can't quite annualize Q1. And there could be a little bit more -- we expect a little bit more redetermination attrition through Q2, maybe a little bit into Q3. But then on the flip side, we've got some growth coming in as well. So that would be the progression of Medicaid revenue throughout the rest of the year. Medicare, probably a little bit more attrition throughout the year as we prepare for our 2025 bids and the bid decisions we're going to make in terms of where we want to emphasize where we want to de-emphasize products, PBPs, states, age contracts for '25, so we will probably have a little bit more attrition in Medicare Advantage, as planned, throughout the year. So those are some of the things to think through. Marketplace, we're assuming flat at 4.3 million members. Hopefully, there's some upside there to your point in premium and service revenue if we can grow during the SEP, but we just didn't want to bet on that in guidance. You also ask about Medicaid HBR, yeah, so we came in at 90.9% for the quarter. We definitely expect 20 of that sort of being pressed on by the state-directed payments above our expectations, but we've got some work to do. We've got initiatives to drive down the HBR from the Q1 level. Remember that half of our rates -- about half of our rates show up in that 7/1 to 10/1 time frame. I think that's a little bit higher distribution than the industry broadly in Medicaid, but so far so good there in a number of cases. And there's always states where we've got to make sure that we're presenting the data, whether it's a PBM carve-out or a behavioral health costs and changes in state practices, that we're getting paid for that. But that's more normal course stuff. So we do expect to drive down that 90.9% throughout the rest of the year. Operator Thank you. And our next question today comes from Justin Lake with Wolfe Research. Please go ahead. Justin Lake -- Wolfe Research -- Analyst Thanks. Good morning. First, just wanted to ask given your update here, where do you expect your exchange margins to come in this year relative to your 5% to 7.5% target? And then more broadly, on your PDP strategy, right, they're getting a lot of questions here. There's a ton of changes coming in 2025. Drew, would love to understand kind of how you see the moving parts for 2025 and maybe you could just tell us -- you're going to take on a lot more liability. You're going to have to price up for things like bad debt. Can you tell us if -- even if your membership didn't change, how much more premium would you have? Like how much premium do you have in '24? And then how much would you have in 2025 in terms of Part D premium, just so we could think about the order of magnitude at flat membership? Thanks. Sarah London -- Chief Executive Officer Thanks, Justin. Yeah, as we've said before, our expectation for Marketplace is that we will be well within our target 5% to 7.5% range in 2024. That has not changed, and then I'll let Drew get into the details on PDP. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah, so PDP, and I hit this at the Barclays conference, which -- for which the replay is available, but let me go over more of this because it's a really good question. And you're right. The impact of the Inflation Reduction Act, we had some of that this year in 2024. But the real larger changes come in '25, to your point, Justin. So for '24, the direct subsidy went up for the first time since 2010, and it went from $2 to $29. And to your point, that drives revenue yield because the direct subsidy is what the federal government pays to the payer based upon all the payers bids. And so for '25, we actually think now that we've gotten risk scores by member since that March conference, we can rip through the mechanics of cost share and the changes around how quickly the members can get to the maximum amount of pocket. It's likely more than $100 increase to that $29, and that's driven by, to your point, the catastrophic phase going from 20% to 60%. So we're underwriting that now. And the good news is we've been in this business since 2006. We've got all the data, so we're just taking a slice of risk that we've been administering anyhow. I mentioned the member out of pocket, the way to think through that and any behavior changes in the members. Very good point on the bad debt. Hopefully, people are thinking about that, the MPDP program where the members can essentially smooth out the cost share. You do have to assume some bad debt. We've got data from our Marketplace business that we're using to triangulate where we think that should be bid. And then manufacturer behavior with all the changes to the IRA impacting manufacturers, you know, thinking about what they might do with some of their behavior. So you're right, all of that goes into the bid process, and it should drive the direct subsidy up significantly, which will drive the yield up. And we will think about the balance between membership retention and PDP because, you're right, naturally, that business is going to grow a fair amount from a revenue standpoint based upon the direct subsidy going up. Thanks for asking about that. Operator Thank you. And our next question today comes from Josh Raskin with Nephron. Please go ahead. Josh Raskin -- Nephron Research -- Analyst Thanks, and good morning. I wanted to go back to Medicare Advantage and 2025 bid strategy with an understanding you're not going to submit your bids for another couple of months here. But was that allusion to $14 billion, $15 billion, or $16 billion a suggestion that you would expect membership to be sort of flat to down based on what you know today? And then do you expect to book another PDR in terms of where you think margins would be for next year? And then lastly, I heard some commentary. I don't think we've heard this before, sort of defending the idea that Medicare Advantage is still an important segment, but is there a scenario where MA is not a core operating business for Centene? I understand the advantage with the Medicaid footprint becoming more important, but is there a scenario where just contribution to earnings and even revenues is not large enough to justify the infrastructure? Sarah London -- Chief Executive Officer Yeah. Thanks, Josh. Maybe I'll take the last question first and say that as we look at the landscape today, the -- again, the tie between Medicare and Medicaid and what that produces in terms of long-term growth opportunity we see as very compelling. And so we're always evaluating how the landscape changes, but we're very committed to rebuilding our Medicare franchise, focused on the low-income complex members and using that to drive growth across both lines of business. Obviously see opportunity for earnings contribution and then longer-term growth in that business. Relative to 2025, certainly a more challenging rate environment than I think most might have expected. But again, we're really focused on building a high-quality sort of durable franchise that will allow us to remain agile as the landscape shifts. What hasn't changed for us is -- and the things that we can control are STARS. As Drew said, the biggest lever being two-thirds of performance improvement for Medicare and then SG&A and clinical initiatives, which we remain focused on and are on track. Obviously too early, as you said, to discuss bid strategy, but we do continue to see volume as the lever as we sharpen the focus of the book position to support those quality improvement efforts and make county-by-county decisions to improve profitability. I think it's also too early to weigh in on a PDR, but we're obviously taking into account all of the factors as we think about the guidance that we set and sort of the balance of the year as we come through finalizing those decisions over the next six to eight weeks. Operator Thank you. And our next question today comes from Andrew Mok with Barclays. Please go ahead. Andrew Mok -- Barclays -- Analyst Hi. I just wanted to follow up on the Medicare MLR. And just given the strong growth in PDP, combined with the strong MLR seasonality of that business, can you give us a sense for underlying trends there and how that's supposed to impact the balance of the year on the Medicare MLR? Thanks. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. You're right on seasonality of the PDP business in our Medicare segment. So unlike a commercial business where you've got deductibles in the beginning of the year and your HBR goes up through the year, it's the opposite in PDP. So we still feel good about the range around 90% for our Medicare segment HBR for the full year. Underneath that trend, the outpatient is still elevated but consistent with that higher level since Q2 of '23. And we've got assumptions of that perpetuating throughout '24 embedded in our forecast. Inpatient, as I said earlier, a little bit of a tick-up in authorizations in January and February. It's good to see a little bit of relief in March relative to February but still elevated relative to Q1, so we've thought about that going forward as well. And then we've got good performance in Medicare. There's other clinical initiatives that we've been able to execute on and getting paid the right amount of revenue as well that have helped sort of curtail some of that inpatient authorization. So I feel pretty good about Q1 and expect that to sort of carry on through the year. Operator Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead. Nate Rich -- Goldman Sachs -- Analyst Good morning, and thanks for the question. I wanted to stick on Medicare Advantage. I guess I think duals are about a third of your membership right now, and obviously you had highlighted the opportunity there. I guess could you give us a sense of maybe where margins are currently on that population relative to non-duals and when you're thinking about changes that need to be made in terms of bid design for 2025, how you're approaching that population given the prioritizing and serving this population longer term? Thank you. Sarah London -- Chief Executive Officer Yeah, Nathan. Thanks for the question. So we -- and we talked about this a little bit earlier this year. But we intentionally came into the 2024 cycle redesigning our product offerings with the duals population and again low-income complex population more broadly in mind, and we're really pleased with how the team executed during AEP. And that is inclusive of product design, but it's also being really thoughtful about what distribution channels best reach those members and the experience that really drives loyalty among that population. And so saw an uptick in the concentration of duals in our overall population in this AEP, consistent with what we were looking for. And I think that bodes well in terms of our team's ability to really understand that population to leverage the local knowledge that we have and that synergy across the Medicaid and Medicare population in serving these members, those local community resources that matter in terms of driving health outcomes. So all that is to say, I think it bodes well in terms of being able to design products as we go into the 2025 cycle and drive further focus in the book on that population to continue to yield those members to whom we feel like we're going to deliver the best value over the long term. Operator Thank you. And our next question today comes from Sarah James at Cantor Fitzgerald. Please go ahead. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. I wanted to go back to Medicare. So given where rates came out and your evolving strategy around overlapping footprint, do you still think the couple of hundred basis points of SG&A leverage on Medicare is the goal point? I think you guys rolled that out at I-Day. And then how do you think about the SG&A framework for your Medicare business overall? Because typically, I think about it being a couple of percent higher than Medicaid would run. But given the scale that you're targeting, is that still a fair ballpark for where the overhead costs would run for that business unit? Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. So you're right. We need to take out, I said, at least 200 basis points of SG&A over the next few years to be -- to get to sort of where we want to get to in Medicare Advantage. And the plans are on track to do that. Think about -- WellCare had well below 1 million members, well below 1 million members when WellCare came into the Centene combination. And WellCare was at scale and operating effectively and efficiently. So the scale -- we're not really concerned about scale issues with Medicare even as we expect a little bit more attrition as we prioritize the strategic goals of being in Medicare and the tie-in to Medicaid, to your point, the footprint matching up, as well as prioritizing margin recovery over the next few years, driven predominantly by STARS but other levers like SG&A that we're talking about here and clinical initiatives. So it's certainly a much higher SG&A ratio than Medicaid because you've got distribution costs and open enrollment costs and things like that. And Marketplace is actually a little bit higher than Medicare itself. So that does mechanically work its way into our SG&A rate. So we're not concerned about being subscale in Medicare Advantage. We want that business to sit side by side with our Medicaid business to seize the opportunities of the future later on in the decade, and we'll power through 2025, even if that means some attrition. Operator Thank you. And our next question today comes from Gary Taylor at TD Cowen. Please go ahead. Gary Taylor -- TD Cowen -- Analyst Hi. Actually, I just kind of wanted to follow up, I guess, on that last comment for just a second. We're just looking at total employees down 12% sequentially, 8,000 sequentially. I was just trying to think through what the implications are sequentially into 2Q, 3Q in terms of G&A or even some of those employees might be medical support in the MedEx line. And then just my second question would be just to clarify on the -- when we see the $50 million additional PDR for Medicare in the 10-Q, is that an additional $50 million that ran through the P&L this quarter and impacted the reported EPS and weighed on the reported Medicare MLR this quarter? Drew Asher -- Executive Vice President, Chief Financial Officer Yeah, good questions. Most of the change in the employee base is the divestiture of Circle. That was pretty employee-intensive in Great Britain. So that was a result of divestiture. Although we are constantly managing the right amount of resources, it's our job to, on behalf of taxpayers, on behalf of the federal and state governments, managing efficiently, matching resources with the business that we have and trying to do that efficiently and effectively. But that big move was due to divestiture. And you're right, the $50 million, while we expected it as we mapped out the seasonality of Medicare during the year, and that has the PDR sort of pushing up a little bit in Q2, maybe a little bit more in Q3 and then being relieved completely relative to the 2024 policy year in Q4, that $50 million did hit the P&L. It did make its way into the loss ratio for the Medicare segment. But it was exactly as -- it was as planned, so it wasn't a surprise to us. Operator Thank you. And our next question today comes from Cal Sternick with J.P. Morgan. Please go ahead. Calvin Sternick -- JPMorgan Chase and Company -- Analyst Thanks. I had a couple of clarifications. First, on Medicaid, did you see fewer disenrolled members than you anticipated in the quarter? Or was there a higher reconnect rate? Just curious if you could give a little more color on what the drivers of the higher membership were in the quarter and how do you see those developing over the rest of the year relative to that 13.6 million membership number you previously guided to. And then second, on the Medicare -- on the Medicaid composite rate, the 2.5%, just want to clarify, is that the core is running a little bit better than you expected? Or is that 2.5% inclusive of the accelerated state payments? Thanks. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. On membership, we still expect to be in that mid-13s by year end. And so I think 100,000-member difference on -- to 13.3 million, some may call rounding, but luckily, it's rounding in the right direction, right? But it's probably more timing of precision around redeterminations, and some of that will carry into Q2. And there's even a few states that will tail off into Q3 as they've stretched out the redetermination process. But all of that is in the mid-13s estimate of membership by year end, which includes a couple of nice growth opportunities too that we seized, Oklahoma, which commenced 4/1. And as you heard in Sarah's remarks, that went really well operationally. And then subject to protest, the Arizona LTSS win, low membership but high revenue. And then your question on composite rate, the 2.5%, yes, we're a little bit above that. And that's sort of an all-in view of a composite rate, whether the rate relates to acuity, whether the rate relates to redeterminations or just general trend. Operator Thank you. And our next question today comes from Scott Fidel with Stephens. Please go ahead. Scott Fidel -- Stephens, Inc. -- Analyst Hi. Thanks. Just had a couple of modeling questions that would be helpful. One, just on investment income, if you can sort of walk us toward what you view as sort of the run rate for the second quarter and for the balance of the year. I know there were a few gains included in the first quarter investment income. And then also on operating cash flow, obviously that was noisy in the first quarter for the reasons you mentioned. If you wouldn't mind just giving us an update on the full-year CFFO expectation and then how you're thinking maybe about the second quarter given that you did get that state payment came in, in April. Drew Asher -- Executive Vice President, Chief Financial Officer Yes. Investment income, if you peel away gains, we disclosed those throughout the Q, which we just filed. So understandably, you haven't ripped through that yet. You get a little bit over $400 million in the quarter. But you can't just multiply that by four. We expect the full year to be above -- a little bit above the $1.4 billion that we guided to at investor day. But the difference between that and just annualizing is we've got multiple rate-cut scenarios built into our forecast. Maybe those play out to be conservative, but the Federal Reserve will decide that. You also saw that we had a lot of payables. Look at our balance sheet, we relieved a lot of payables in the quarter. We accelerated state-directed payments on behalf of our providers. So obviously, when you relieve payables and you're building up pharmacy rebate receivables, that has an impact on investment income as well. But pleased that we're going to come in -- we expect to come in a little bit above that $1.4 billion. On the operating cash flow, as you know, in this business that bounces around quite a bit. A large state decides pay us on 4/2 versus 3/31, and you have a big flip between quarters. Just mentioned some things that impact cash flow as well, the timing of pharmacy rebate receivables or payable invoices. So it's sort of maybe a fool's errand to try to predict that quarter to quarter in terms of how that will play out. What really matters in this business is the dividends from subs, the cash flow, not only GAAP cash flow statement but the cash that comes from subsidiaries to parent such that we can deploy capital. And we expect that to pick up, as you'll see in the Q, over the next few quarters. And that will drive our capital deployment later in the year for share buyback and some debt -- a little bit of debt reduction as well. So that's what we're looking forward to. Operator Thank you. And our next question today comes from A.J. Rice at UBS. Please go ahead. A.J. Rice -- UBS -- Analyst Hi. Thanks. A couple of quick things here. Appreciate the reiteration of the long-term target of the high 89s for your Medicaid HBR. I wondered, if you think you're finishing up on redeterminations largely in the second quarter, the disenrollments and maybe a little spills in the third quarter, when do you think you get visibility once and for all on how that whole process has impacted the risk pool? And are you still thinking -- I think at investor day, you said that you could get 30 basis points of margin improvement '24 and '25 in Medicaid. Is that still your thought at this point? Sarah London -- Chief Executive Officer Yes. Thanks, A.J. You're right. So we're roughly 90% of the way through redeterminations from a membership standpoint. Obviously, the cumulative member months impact sort of trails that a little bit. And we do think that the tail of membership will run through Q2 and Q3 and sort of largely be complete by that point. I would say the nice thing is that I don't think that we have seen -- we've not had to wait to see sort of the shifting risk pool. We've been watching that really closely, and that's part of the preparation of the team did leading into this process over a year ago, which allowed us to have those proactive modeling conversations with our state partners through the rate cycles in the last year. And we're mirroring that same process as we move through the rate updates that Drew talked about between 7/1 and 10/1. And so really sort of trying to address the bolus of any dislocation between rate and acuity in that cycle, but obviously leaving open, as we said before, the idea that some of that tailwind of margin will get picked back up in '25 and possibly trailing a little bit into '26. And that's where we see the recovery in terms of that basis point on the margin. Operator Thank you. And our next question today comes from Dave Windley with Jefferies. Please go ahead. Dave Windley -- Jefferies -- Analyst Hi, everybody. So just maybe a brief one on that last comment, last point. On the rate visibility, I think you called out 75%. You talked about matching acuity which, Sarah, you just commented on. Is the matching of acuity and getting those payments squared up, is -- should we think about that being in the remaining 25% that you don't have rate visibility on yet? Or are you expecting some amount of kind of retro catch-up from states where you actually have already had rate discussions? And just kind of understanding the mix of that is what I'm hoping to do. Sarah London -- Chief Executive Officer Yes -- OK. Drew Asher -- Executive Vice President, Chief Financial Officer OK. Sorry. The 75% is a member month view of what we know for the 2024 calendar year member months, and the 25% would be there's 7/1 rates we don't know. We certainly don't know 9/1 or 10/1 rates, but they have a limited impact on the 2024 calendar year. To the macro point, we need -- ultimately, we're going to need to have rates match acuity, and that -- we expect that to shake out. It may not be perfect in this rate cycle, which means sort of the 2025, 2026 time period is when we would expect to get back into the high 89s based upon today's mix of business. So there might be a couple of retros. It seems like different companies have different definitions of retro. We're only waiting on a couple of retros. There might be adjustments going forward where the state realizes and their actuaries, "Hey, we missed the mark last time. Let me fix this going forward." But we are still expecting a couple of retros as we talked about at investor day and on the Q1 call. But it's largely getting the rates correct and matching acuity going forward. And that's why we're not expecting to move into the -- back into the high 89s immediately. It may take a rate cycle or so. But that does remain a margin expansion opportunity. On a company that's performing well on a consolidated basis, actually that creates some capacity for margin expansion in Medicaid as we look at '25, '26. Sarah London -- Chief Executive Officer Yes. And the only thing I would add, which is just that as we've watched the team sort of work through the complexity of this process where we have encountered those targeted dislocations, I've just been really impressed with how our teams have stepped up to that dialogue. There is clarity on the drivers. It's a very data-driven approach. They've clearly built really solid collaborative dialogue with our state partners and are really solutions-oriented in how they step into those conversations. And so I think building credibility with our state partners as we work through this process has been consistent throughout and, I think, again sort of creates the framework to get back to a matching state and get that tailwind opportunity. Operator Thank you. And our next question today comes from George Hill with Deutsche Bank. Please go ahead. George Hill -- Deutsche Bank -- Analyst Hey, good morning, guys, and thanks for taking the question. Just two quick ones for me. I guess as you talked about the progress and the STARS goals for 2025, I would just love, at a high level, if you could talk about kind of the strategy and the progress toward achieving that goal. And Drew, as you were talking about kind of all the changes to Part D for 2025, I didn't hear you talk about the new Part D risk model. I would just be interested if you could make quick comments on how you think the new risk model in Part D kind of impacts the ability to drive revenue in that part of the business. Thanks. Sarah London -- Chief Executive Officer Sure. Thanks, George. So quality, obviously a top priority for the organization regardless of line of business. But we remain very focused on STARS because of the impact it has for the Medicare trajectory. Very pleased with the work underway, engagement across the organization. We're leveraging a comprehensive governance process, and that has given us great visibility in terms of progress on initiatives at a detailed level. Based on what we know today, we believe that we have maintained last year's progress and made additional advancements on admin and ops programs and metrics, which, you'll remember, was sort of the focus in the first cycle. And then in this past cycle, HEDIS and CAHPS were most in focus for us. We're in the middle of those processes. Those will wrap up in the next 30 to 60 days. We also have TTY that's still in flight. So those are the last pieces that will land here toward the end of Q2 and then allow us to sort of rerun projections with a high degree of -- higher degree of confidence as we look to October. And so expect more detail in terms of what we're looking for in October on the Q2 call. But overall, just really pleased with how the team continues to show up, and again, alignment across the organization that this is a critical priority. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. And you're absolutely right. The risk model bifurcation between PDP and MAPD, that's a factor as well that needs to be worked into the bid cycle. And I think I did mention that we were able to run risk scores by member and the mechanics and how that rips through the -- not just the risk scores but also the timing of members with cost share and getting to the maximum out of pocket, or the MOOP. Those are all important things to think about. And really, the message is -- that's why there's reason for cautiousness for the industry in bidding PDP for 2025. Operator Thank you. And our next question comes from Lance Wilkes with Bernstein. Please go ahead. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks. Can you talk a little bit about the PBM migration? And in particular, I was interested in if all the savings levers turned on, on January 1, if there should be a ramp of that over the course of the year with things like formulary alignment, etc., and if any of that might spill into '25. And maybe then as a broader question, just on your ongoing dialogues with states, how are they looking at GLP-1s and kind of adding coverage to that? Thanks a lot. Sarah London -- Chief Executive Officer Thanks, Lance, for the question, mostly because I don't think I can brag enough about our pharmacy team and the phenomenal job they did in such a massive undertaking. We've talked before about how well that went, January 1. But I think everybody who's been through something that significant knows that you don't just drop the mic the next day. And so these folks have continued to work tirelessly over the last couple of months to make sure that that process just gets smoother and smoother for our members. We've had great collaboration with ESI. And so trajectory on that front just continues to be really positive. And then I'll let Drew talk a little bit about the step-up in the economics and some of the GLP-1 activity. Drew Asher -- Executive Vice President, Chief Financial Officer Yes. So we didn't want to wait for economics. So we do have a stairstep benefit on behalf of our state and federal customers and our members as of 1/1/24. But we're constantly working with our partner at ESI to figure out ways to deliver value to our customers and manage costs. So we expect sort of normal course improvements from that point forward, and we'll continue to try to drive efficiencies in the pharmacy ecosystem. On GLP-1s, not a lot of uptake yet by states. There's a couple of states where -- have decided to allow GLP-1s for the weight loss indication. Obviously, GLP-1s for the diabetes indication, we could see the volume coming through there. But for the weight loss indication, there's only a couple, and we're quick to go share the data with them to show them what it's costing them, but it's not that material to the company as a whole. And that's where the states control the formulary, the preferred drug list and make the decisions that we then administer and take risk for. And we just need to make sure that the states have the data so they can match rates with the cost that they choose to allow in their benefit plans. Operator Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks. Sarah London -- Chief Executive Officer Thanks, Rocco, and thanks, everyone. Appreciate the time and interest this morning. Overall, we are pleased with how we're powering through a dynamic landscape and with the progress that we've demonstrated so far. So appreciate you joining us, and we'll see you next quarter. Answer:

the Centene first quarter 2024 financial results conference call

Operator Good day, and welcome to the Centene first quarter 2024 financial results conference call. [Operator instructions] Please note today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, senior vice president, finance and investor relations. Please go ahead. Jennifer Gilligan -- Senior Vice President, Finance and Investor Relations Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2024 earnings results conference call. Sarah London, chief executive officer; and Drew Asher, executive vice president and chief financial officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Ken Fasola, Centene's president will also be available as a participant during Q&A. Any remarks that Centene may make about future expectations, plans, and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 20th, 2024, and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2024 press release, which is available on the company's website under the Investors section. With that, I would like to turn the call over to our CEO, Sarah London. Sarah? Sarah London -- Chief Executive Officer Thanks, Jen, and thanks, everyone for joining us as we discuss our first quarter 2024 results. This morning, we reported first quarter adjusted EPS of $2.26, ahead of our previous expectations for the period. As a result of this strong start to the year, we are increasing our full-year 2024 adjusted EPS guidance to greater than $6.80. Drew will cover the quarter and our updated financial outlook in further detail in a few moments. While there is still more work to do, we are pleased with the first quarter results and will look to harness the positive momentum we are generating in our core businesses as we move through the balance of the year. In 2024, Centene's focus remains on our work to streamline and modernize the underlying infrastructure of our company and to assemble the people, processes, and tools necessary to deliver best-in-class experiences to our members, providers, regulators, and state partners. Let me share a couple of examples of progress here. During the first quarter, we completed an important initiative to simplify our prior authorization process by automating our real-time source data. This simplification improves the timeliness of authorization decisions, ensuring our members get the care they need quickly and removing friction from the process overall for both members and providers. Q1 also saw the accumulation of months of thoughtful and thorough go-live preparation in Oklahoma. Our team obtained perfect scores in our readiness review from the state, and we are thrilled to be serving Oklahomans statewide as of April 1. Finally, our improved operational agility also allowed Centene to mobilize quickly in support of our members and provider partners in the wake of the Change Healthcare cybersecurity incident. This included launching a national provider outreach campaign that spans Centene provider network across all products, Medicaid, Medicare, and Marketplace, and has included targeted efforts to support those disproportionately impacted by the outage, including FQHC's safety net hospitals, rural health clinics, and behavioral health providers. We appreciate the focus on and support for last-mile providers from HHS and CMS throughout this process as these clinicians represent a critical component of the infrastructure through which our members access high-quality healthcare. Now on to our business lines. We are roughly 90% of the way through redeterminations, and our Medicaid franchise continues to demonstrate resilience as we navigate the complexities of this unprecedented process. As you can see from today's release, our first quarter membership tracked slightly higher than our expectation at investor day in December. Overall, we continue to be well guided with respect to membership and rate by the projection model we built state by state more than a year ago and that we continue to refine as we move through the redeterminations process. As we've noted before, 2024 represents an important year for blocking and tackling through acuity shifts and corresponding rate discussions with our state partners to ensure we are positioned to provide high-quality services for our members. We are actively engaged in that process and are seeing solid results thus far with opportunities still ahead. As we move through the remainder of the year, we expect these discussions to increasingly represent the regular back-and-forth dialog we maintain with our state partners in the normal course of managing the dynamics around each individual Medicaid program we serve. At the same time, we have been executing on important reprocurements, and the early months of 2024 delivered notable data points. Most of the key RFP results are now public, positioning us well to generate continued Medicaid growth in a post-redeterminations world. Centene reprocured one of our largest contracts with the recent announcement of intended awards by the state of Florida. Although the protest period is ongoing, Centene is well-positioned based on Florida's determination that Sunshine Health is among those that will provide best value to the state. In Michigan, we were thrilled to be selected to continue serving the vast majority of our existing membership with some opportunity to grow, and we look forward to our continued collaboration with the state. In Texas, our protest remains ongoing. We are honored to have served Texans for 25 years and intend to defend Superior Health's ability to provide access to affordable and high-quality healthcare for our members in the Lone Star State. We are proud of the way our health plans and business development team have delivered so far during this critical cycle of reprocurement. The Centene value proposition remains a powerful one, built on more than four decades of experience serving Medicaid communities, an unwavering local approach, and a commitment to innovation in the services and support we bring to our members. We are honored to provide access to care, as well as community-based support, to improve the lives of those we serve in 31 states across the country. Moving to Medicare. The Medicare Advantage macro landscape remains challenging. Consistent with our prior view, we see final 2025 funding levels as insufficient with respect to general medical cost trend expectations. Drew will provide some early commentary around our strategy to navigate Medicare in 2025 as a result. Medicare Advantage star ratings remain the single most powerful lever to drive performance in this vital business and continue to represent a top priority across the organization. As we drive to our goal of 85% of members in three-and-a-half star contracts by October of 2025, we continue to see improved progress and stability in our performance and expect those to be reflected in our results come October. We are tracking year-over-year improvements in our core operations, as well as in the ways we support our members as they receive care, and we are carrying forward this positive momentum into 2024 as our teams are clearly focused and aligned on quality. Longer term, Medicare Advantage remains an important business for Centene. The strategic link between Medicare and Medicaid has only become more explicit since our last earnings call. Recent CMS rulemaking included final requirements to better coordinate Dual Special Needs Plan, or D-SNP, participation with important milestones beginning in 2027. By the end of the decade, a Medicaid footprint will be a prerequisite to D-SNP growth. Centene is perfectly positioned to gain positive momentum from this growing bond between Medicare and Medicaid. Finally, Marketplace. This business continues to represent a unique and powerful growth segment for Centene, and our teams are executing well against the opportunity. With approximately 4.3 million Marketplace lives at the end of the first quarter, Centene's Marketplace membership has more than doubled in size compared to just two short years ago. This exceptional growth has been accompanied by consistent margin expansion as our deep product knowledge and staying power in the market enable us to forecast pre-tax margins well within our targeted range of 5% to 7.5% for 2024. We are pleased with the traction our Ambetter Health products are generating and see additional room to expand the reach of health insurance Marketplace offerings overall. In 2024, the source of our membership growth is widely diversified. Based on a survey we conducted following open enrollment, nearly 40% of new members identify as previously uninsured. Approximately 25% joined us from another Marketplace carrier, and approximately 10% chose Ambetter after losing access to an employer-sponsored plan. This is in addition to those members who selected Ambetter after losing Medicaid coverage. As we look to the future of Marketplace, we expect new member growth to be driven by an increasingly addressable and accessible uninsured population and the evolution occurring as employers consider alternative options for providing employer-sponsored insurance. Centene has been rapidly evolving as an organization over the last two years. We have been resolute in creating focus, trimming the organization down to the core strategic assets that give us the strongest platform for future growth. We are executing against our strategic plans, fortifying and modernizing our infrastructure, and successfully delivering access to affordable high-quality healthcare for millions of Americans. Our strong first quarter results demonstrate the power of our diversified earnings drivers as we deliver on our financial commitments, maintain our posture of disciplined capital deployment, and continue to invest to support long-term growth. As always, we want to thank our nationwide workforce of nearly 60,000 for showing up every day, committed to improving the lives of our members and transforming the health of the communities we serve. This CenTeam is the engine that ultimately powers our results and amplifies our impact. With that, let's turn the call over to Drew for more details around our performance in the first quarter and our updated financial outlook for 2024. Drew? Drew Asher -- Executive Vice President, Chief Financial Officer Thank you, Sarah. Today, we reported first quarter 2024 results, including $36.3 billion in premium and service revenue and adjusted diluted earnings per share of $2.26 in the quarter, 7% higher than Q1 of 2023. This result was better than our expectations, and we are increasing full-year 2024 adjusted EPS guidance by $0.10 to greater than $6.80. This quarter is a good example of the benefit of a diversified business with multiple levers to drive results. Our Q1 consolidated HBR was 87.1%, which is right on track for our full-year guidance. Here's an example of the benefit of that diversification since we provide you with transparency into the line of business components. Medicaid at 90.9% was a little higher in the quarter than we expected as we continue to work through the appropriate matching of rates and acuity in the short term. Redeterminations are certainly front and center in the acuity rate match process, but getting the right match for other circumstances, such as states changing pharmacy programs or behavioral health practices, are also important initiatives in a handful of states. On the other hand, our commercial HBR at 73.3% was a little better than we had planned in the quarter, driven by the continued strength of our Marketplace business. And our Medicare segment at 90.8% was right on track in the quarter, all of this netting out to 87.1%, a good result. Going a little bit deeper into each of our business lines. Medicaid membership at 13.3 million members was slightly better than the 13.2 million members we forecasted as of Q1 -- for Q1 as our -- as of our investor day. Drivers of membership for the remainder of the year include, one, new wins, such as Oklahoma and Arizona LTSS; two, the return of slight growth in markets once redeterminations are complete, plus the rejoiners dynamic; net of three, the substantial wind down of redeterminations over the next three to four months. Upon reforecasting the sloping of membership and revenue for 2024, including Q1 membership being a little bit higher than planned, we added $1 billion of Medicaid premium revenue to our 2024 guidance. The overall composite rate is running a little above the 2.5% we last referenced, and we have over 75% member month rate visibility into the 2024 calendar year. Regardless of the temporary work to match rates and acuity, our long-term goal remains to return to the high 89s HBR as we look out over the 2025, 2026 time frame. All things considered, we are pretty pleased with the performance of our Medicaid business one year into a very complex redetermination process. And as Sarah covered, we could not be more pleased with our performance in recent Florida and Michigan Medicaid RFPs. The Texas protest process still needs to play out. Our commercial business performed very well in the quarter in terms of both growth and HBR. Consistent with previous comments, we grew from 3.9 million Marketplace members at year end to 4.3 million at the end of Q1. For the past two years, we have consistently delivered a combination of growth, coupled with improving margin. Our guidance assumes that we stay at 4.3 million Marketplace members for the rest of 2024. If we can grow during the special enrollment period, which we've been able to do in the past two years, there would be upside to our premium and service revenue guidance, so stay tuned. Our current 2024 guidance assumes about $16 billion of Medicare Advantage revenue, representing 12% of total premium and service revenue guidance and approximately $4 billion of PDP revenue. I previously mentioned at a conference that Medicare inpatient authorizations were higher than expected in January and February. March authorizations ended up being lower than February, though still elevated from Q4. And Medicare outpatient trend continues at the elevated level we first saw in Q2 of 2023, though reasonably steady. Nonetheless, the performance in the quarter for the Medicare segment was in line with our expectations, and our full-year view has not changed. We had good performance with our new pharmacy cost structure and executed well on other operating levers. As we look ahead, I feel like we are making 2025 decisions with our eyes wide open: inpatient and outpatient trends, complex pharmacy changes from the Inflation Reduction Act, an insufficient 2025 rate environment based upon the final rate notice, and a risk model being phased in beginning in 2024 that is punitive to partial and full duals. It also seems like many of our peers should have more religion in setting benefits at sustainable levels given these headwinds. I'll repeat what I said on the mic at a conference in March: to accomplish our strategic goals with our Medicare Advantage business, it doesn't matter if we ultimately level off at $14 billion, $15 billion, or $16 billion of Medicare Advantage revenue. What is strategically important is the alignment with Medicaid and those complex populations we want to serve, especially given where the puck is heading with regulations pulling duals and Medicaid closer together. We're still in the process of making 2025 county-by-county decisions and will finalize and submit Medicare bids in early June, so we'll provide you with more 2025 Medicare commentary on our Q2 call. We expect Medicare to be a good business for us in the long run, and it's an important part of our overall portfolio. We need to deliver on STARS improvements, clinical levers, and SG&A actions over the next few years, and those efforts remain on track. Going to other P&L and balance sheet items, our adjusted SG&A expense ratio is 8.7% in the first quarter, consistent with our updated mix of business, including growth in Marketplace. Cash flow used in operations was $456 million for Q1, primarily driven by net earnings, more than offset by the timing of risk-corridor payments, a delay in March's premium payment from one of our large state partners subsequently received in early April, and slower receipt of pharmacy rebates as we transition to a new third-party PBM in January of 2024. From January 1st through mid-April, we repurchased 3.4 million shares of our common stock for $251 million. Our share repurchase goal for 2024 is unchanged at 3 billion to 3.5 billion. Our debt to adjusted EBITDA was 2.9 times at quarter end, consistent with year end. And during Q1, we were pleased to maintain our S&P BBB minus rating under the updated S&P rating model. Our medical claims liability at quarter end represented 53 days in claims payable, down one day from Q1 and Q4 of 2023. DCP was actually up due to Change Healthcare claims receipt delays then back down due to an acceleration of state-directed payments to providers and lower pharmacy invoices outstanding at quarter end. You'll see in the reserve table that our 2024 Medicare Advantage PDR is up $50 million in the quarter. This progression in the 2024 PDR was expected and planned for due to quarterly seasonality in Medicare Advantage. Though it's early in the year, we are comfortable adding $1 billion of premium and service revenue and $0.10 of adjusted EPS to our 2024 guidance. You'll also see some mechanical changes to total revenue driven by pass-through premium taxes and the GAAP effective tax rate due to the Circle divestiture. We also expect investment income to be a little bit above our previous forecast of $1.4 billion while still providing for a few rate cuts in 2024. Q1 was a quarter of momentum. We put another quarter of redeterminations behind us. We reprocured one of our largest contracts and are well-positioned in Florida. We executed well in the Marketplace annual enrollment period and put up a strong quarter of both growth and margin. We delivered on the January 1st PBM conversion, and our businesses and customers are benefiting from an improved cost structure. We continue to advance our multiyear operational improvements, and Centene continues to attract talent. And all of this resulted in strong Q1 results and increased 2024 guidance. While there's plenty more to achieve, we are off to a good start in 2024. Thank you for your interest in Centene. Rocco, please open the line up for questions. Questions & Answers: Operator Yes, sir. [Operator instructions] Today's first question comes from Kevin Fischbeck with Bank of America. Please go ahead. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Great. Thanks. I just wanted to go into your margin commentary on the exchanges. Because I guess from our expectations, too, it came in a little bit better. I guess that's the fastest growing part of your business, which always potentially lowers the visibility into claims receipts, and obviously you had change going on at the same time. So I mean, I guess how comfortable are you or what points do you look at to give you comfort that MLR outperformance is true and durable rather than potentially some issue around rapid membership growth or change disruption? Thanks. Sarah London -- Chief Executive Officer Yeah. Thanks, Kevin. I think two important points there. One is just the confidence in the overall HBR. And I think as we look back over the last two cycles, we have seen rapid growth in the market overall. And obviously growth in our book, it's more than doubled in the last two years. And I think we've tracked very well to the HBR implications of that. So understanding where SEP grows may have pressured margins in year but then the fact that the sophomore effect of that growth that we accumulated last year starts to play out this year is consistent with our expectations. So again, I think the team has demonstrated a really solid ability to track the moving parts which gives us confidence in the performance of that book. We've also, as we've talked about in the past, implemented a really strong program around clinical initiatives, and so that has continued to mature, which I think also helps overall management of the book. And then relative to the visibility on Change, maybe I'll just hit that sort of broadly because I think that question probably applies across lines of business. And as I said in my remarks, just incredibly proud of how the teams mobilized here in our response, demonstrating operational agility, prioritizing member access to care, and then a huge push around getting out to providers and finding every way possible to get them reconnected as fast as possible so that they could get paid and they can support our members, which is priority No. 1. And then of course, we can have the visibility that we need. And on that point throughout that process, we had very solid visibility from an inpatient perspective because auths were not disturbed at any point during that process. Centene also has a long-standing practice of using received claims not paid, which Drew has talked about before. And so outpatient visibility was good coming into that incident on a relative basis and then being able to catch up quickly as a result as providers reconnected. So the highest point we were missing, mid-teens percentage of our claims. But by the time we closed the quarter, the impact was very modest, and we accounted for that in our financial processes. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst OK. Thanks. Operator Thank you. And our next question comes from Stephen Baxter at Wells Fargo. Please go ahead. Stephen Baxter -- Wells Fargo Securities -- Analyst Yeah, hi. Thanks. I wanted to ask about the revised premium and service revenue guidance first. It seems like based on what you saw in the first quarter that you'd annualized to something closer to around $145 billion versus the revised guidance of $137 billion. So I'm wondering if there's anything we should be keeping in mind just as another kind of callout. The Medicaid premiums in the quarter were well above our model, so I don't know if there's anything there that's influencing it. And then from the Medicaid MLR perspective, how are you thinking about Medicaid MLR progression through the year from the starting point and the factors that are influencing that? Thanks. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah, Stephen. In Q1, we did have a fair amount of state-directed payments. In fact, some states we believe in response to the Change incident accelerated a number of those. That actually also had about a 20-basis-point impact on our Q1 Medicaid HBR relative to our expectations of a normal level of state-directed payments. So that also showed up in our premium revenue, so you can't quite annualize Q1. And there could be a little bit more -- we expect a little bit more redetermination attrition through Q2, maybe a little bit into Q3. But then on the flip side, we've got some growth coming in as well. So that would be the progression of Medicaid revenue throughout the rest of the year. Medicare, probably a little bit more attrition throughout the year as we prepare for our 2025 bids and the bid decisions we're going to make in terms of where we want to emphasize where we want to de-emphasize products, PBPs, states, age contracts for '25, so we will probably have a little bit more attrition in Medicare Advantage, as planned, throughout the year. So those are some of the things to think through. Marketplace, we're assuming flat at 4.3 million members. Hopefully, there's some upside there to your point in premium and service revenue if we can grow during the SEP, but we just didn't want to bet on that in guidance. You also ask about Medicaid HBR, yeah, so we came in at 90.9% for the quarter. We definitely expect 20 of that sort of being pressed on by the state-directed payments above our expectations, but we've got some work to do. We've got initiatives to drive down the HBR from the Q1 level. Remember that half of our rates -- about half of our rates show up in that 7/1 to 10/1 time frame. I think that's a little bit higher distribution than the industry broadly in Medicaid, but so far so good there in a number of cases. And there's always states where we've got to make sure that we're presenting the data, whether it's a PBM carve-out or a behavioral health costs and changes in state practices, that we're getting paid for that. But that's more normal course stuff. So we do expect to drive down that 90.9% throughout the rest of the year. Operator Thank you. And our next question today comes from Justin Lake with Wolfe Research. Please go ahead. Justin Lake -- Wolfe Research -- Analyst Thanks. Good morning. First, just wanted to ask given your update here, where do you expect your exchange margins to come in this year relative to your 5% to 7.5% target? And then more broadly, on your PDP strategy, right, they're getting a lot of questions here. There's a ton of changes coming in 2025. Drew, would love to understand kind of how you see the moving parts for 2025 and maybe you could just tell us -- you're going to take on a lot more liability. You're going to have to price up for things like bad debt. Can you tell us if -- even if your membership didn't change, how much more premium would you have? Like how much premium do you have in '24? And then how much would you have in 2025 in terms of Part D premium, just so we could think about the order of magnitude at flat membership? Thanks. Sarah London -- Chief Executive Officer Thanks, Justin. Yeah, as we've said before, our expectation for Marketplace is that we will be well within our target 5% to 7.5% range in 2024. That has not changed, and then I'll let Drew get into the details on PDP. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah, so PDP, and I hit this at the Barclays conference, which -- for which the replay is available, but let me go over more of this because it's a really good question. And you're right. The impact of the Inflation Reduction Act, we had some of that this year in 2024. But the real larger changes come in '25, to your point, Justin. So for '24, the direct subsidy went up for the first time since 2010, and it went from $2 to $29. And to your point, that drives revenue yield because the direct subsidy is what the federal government pays to the payer based upon all the payers bids. And so for '25, we actually think now that we've gotten risk scores by member since that March conference, we can rip through the mechanics of cost share and the changes around how quickly the members can get to the maximum amount of pocket. It's likely more than $100 increase to that $29, and that's driven by, to your point, the catastrophic phase going from 20% to 60%. So we're underwriting that now. And the good news is we've been in this business since 2006. We've got all the data, so we're just taking a slice of risk that we've been administering anyhow. I mentioned the member out of pocket, the way to think through that and any behavior changes in the members. Very good point on the bad debt. Hopefully, people are thinking about that, the MPDP program where the members can essentially smooth out the cost share. You do have to assume some bad debt. We've got data from our Marketplace business that we're using to triangulate where we think that should be bid. And then manufacturer behavior with all the changes to the IRA impacting manufacturers, you know, thinking about what they might do with some of their behavior. So you're right, all of that goes into the bid process, and it should drive the direct subsidy up significantly, which will drive the yield up. And we will think about the balance between membership retention and PDP because, you're right, naturally, that business is going to grow a fair amount from a revenue standpoint based upon the direct subsidy going up. Thanks for asking about that. Operator Thank you. And our next question today comes from Josh Raskin with Nephron. Please go ahead. Josh Raskin -- Nephron Research -- Analyst Thanks, and good morning. I wanted to go back to Medicare Advantage and 2025 bid strategy with an understanding you're not going to submit your bids for another couple of months here. But was that allusion to $14 billion, $15 billion, or $16 billion a suggestion that you would expect membership to be sort of flat to down based on what you know today? And then do you expect to book another PDR in terms of where you think margins would be for next year? And then lastly, I heard some commentary. I don't think we've heard this before, sort of defending the idea that Medicare Advantage is still an important segment, but is there a scenario where MA is not a core operating business for Centene? I understand the advantage with the Medicaid footprint becoming more important, but is there a scenario where just contribution to earnings and even revenues is not large enough to justify the infrastructure? Sarah London -- Chief Executive Officer Yeah. Thanks, Josh. Maybe I'll take the last question first and say that as we look at the landscape today, the -- again, the tie between Medicare and Medicaid and what that produces in terms of long-term growth opportunity we see as very compelling. And so we're always evaluating how the landscape changes, but we're very committed to rebuilding our Medicare franchise, focused on the low-income complex members and using that to drive growth across both lines of business. Obviously see opportunity for earnings contribution and then longer-term growth in that business. Relative to 2025, certainly a more challenging rate environment than I think most might have expected. But again, we're really focused on building a high-quality sort of durable franchise that will allow us to remain agile as the landscape shifts. What hasn't changed for us is -- and the things that we can control are STARS. As Drew said, the biggest lever being two-thirds of performance improvement for Medicare and then SG&A and clinical initiatives, which we remain focused on and are on track. Obviously too early, as you said, to discuss bid strategy, but we do continue to see volume as the lever as we sharpen the focus of the book position to support those quality improvement efforts and make county-by-county decisions to improve profitability. I think it's also too early to weigh in on a PDR, but we're obviously taking into account all of the factors as we think about the guidance that we set and sort of the balance of the year as we come through finalizing those decisions over the next six to eight weeks. Operator Thank you. And our next question today comes from Andrew Mok with Barclays. Please go ahead. Andrew Mok -- Barclays -- Analyst Hi. I just wanted to follow up on the Medicare MLR. And just given the strong growth in PDP, combined with the strong MLR seasonality of that business, can you give us a sense for underlying trends there and how that's supposed to impact the balance of the year on the Medicare MLR? Thanks. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. You're right on seasonality of the PDP business in our Medicare segment. So unlike a commercial business where you've got deductibles in the beginning of the year and your HBR goes up through the year, it's the opposite in PDP. So we still feel good about the range around 90% for our Medicare segment HBR for the full year. Underneath that trend, the outpatient is still elevated but consistent with that higher level since Q2 of '23. And we've got assumptions of that perpetuating throughout '24 embedded in our forecast. Inpatient, as I said earlier, a little bit of a tick-up in authorizations in January and February. It's good to see a little bit of relief in March relative to February but still elevated relative to Q1, so we've thought about that going forward as well. And then we've got good performance in Medicare. There's other clinical initiatives that we've been able to execute on and getting paid the right amount of revenue as well that have helped sort of curtail some of that inpatient authorization. So I feel pretty good about Q1 and expect that to sort of carry on through the year. Operator Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead. Nate Rich -- Goldman Sachs -- Analyst Good morning, and thanks for the question. I wanted to stick on Medicare Advantage. I guess I think duals are about a third of your membership right now, and obviously you had highlighted the opportunity there. I guess could you give us a sense of maybe where margins are currently on that population relative to non-duals and when you're thinking about changes that need to be made in terms of bid design for 2025, how you're approaching that population given the prioritizing and serving this population longer term? Thank you. Sarah London -- Chief Executive Officer Yeah, Nathan. Thanks for the question. So we -- and we talked about this a little bit earlier this year. But we intentionally came into the 2024 cycle redesigning our product offerings with the duals population and again low-income complex population more broadly in mind, and we're really pleased with how the team executed during AEP. And that is inclusive of product design, but it's also being really thoughtful about what distribution channels best reach those members and the experience that really drives loyalty among that population. And so saw an uptick in the concentration of duals in our overall population in this AEP, consistent with what we were looking for. And I think that bodes well in terms of our team's ability to really understand that population to leverage the local knowledge that we have and that synergy across the Medicaid and Medicare population in serving these members, those local community resources that matter in terms of driving health outcomes. So all that is to say, I think it bodes well in terms of being able to design products as we go into the 2025 cycle and drive further focus in the book on that population to continue to yield those members to whom we feel like we're going to deliver the best value over the long term. Operator Thank you. And our next question today comes from Sarah James at Cantor Fitzgerald. Please go ahead. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. I wanted to go back to Medicare. So given where rates came out and your evolving strategy around overlapping footprint, do you still think the couple of hundred basis points of SG&A leverage on Medicare is the goal point? I think you guys rolled that out at I-Day. And then how do you think about the SG&A framework for your Medicare business overall? Because typically, I think about it being a couple of percent higher than Medicaid would run. But given the scale that you're targeting, is that still a fair ballpark for where the overhead costs would run for that business unit? Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. So you're right. We need to take out, I said, at least 200 basis points of SG&A over the next few years to be -- to get to sort of where we want to get to in Medicare Advantage. And the plans are on track to do that. Think about -- WellCare had well below 1 million members, well below 1 million members when WellCare came into the Centene combination. And WellCare was at scale and operating effectively and efficiently. So the scale -- we're not really concerned about scale issues with Medicare even as we expect a little bit more attrition as we prioritize the strategic goals of being in Medicare and the tie-in to Medicaid, to your point, the footprint matching up, as well as prioritizing margin recovery over the next few years, driven predominantly by STARS but other levers like SG&A that we're talking about here and clinical initiatives. So it's certainly a much higher SG&A ratio than Medicaid because you've got distribution costs and open enrollment costs and things like that. And Marketplace is actually a little bit higher than Medicare itself. So that does mechanically work its way into our SG&A rate. So we're not concerned about being subscale in Medicare Advantage. We want that business to sit side by side with our Medicaid business to seize the opportunities of the future later on in the decade, and we'll power through 2025, even if that means some attrition. Operator Thank you. And our next question today comes from Gary Taylor at TD Cowen. Please go ahead. Gary Taylor -- TD Cowen -- Analyst Hi. Actually, I just kind of wanted to follow up, I guess, on that last comment for just a second. We're just looking at total employees down 12% sequentially, 8,000 sequentially. I was just trying to think through what the implications are sequentially into 2Q, 3Q in terms of G&A or even some of those employees might be medical support in the MedEx line. And then just my second question would be just to clarify on the -- when we see the $50 million additional PDR for Medicare in the 10-Q, is that an additional $50 million that ran through the P&L this quarter and impacted the reported EPS and weighed on the reported Medicare MLR this quarter? Drew Asher -- Executive Vice President, Chief Financial Officer Yeah, good questions. Most of the change in the employee base is the divestiture of Circle. That was pretty employee-intensive in Great Britain. So that was a result of divestiture. Although we are constantly managing the right amount of resources, it's our job to, on behalf of taxpayers, on behalf of the federal and state governments, managing efficiently, matching resources with the business that we have and trying to do that efficiently and effectively. But that big move was due to divestiture. And you're right, the $50 million, while we expected it as we mapped out the seasonality of Medicare during the year, and that has the PDR sort of pushing up a little bit in Q2, maybe a little bit more in Q3 and then being relieved completely relative to the 2024 policy year in Q4, that $50 million did hit the P&L. It did make its way into the loss ratio for the Medicare segment. But it was exactly as -- it was as planned, so it wasn't a surprise to us. Operator Thank you. And our next question today comes from Cal Sternick with J.P. Morgan. Please go ahead. Calvin Sternick -- JPMorgan Chase and Company -- Analyst Thanks. I had a couple of clarifications. First, on Medicaid, did you see fewer disenrolled members than you anticipated in the quarter? Or was there a higher reconnect rate? Just curious if you could give a little more color on what the drivers of the higher membership were in the quarter and how do you see those developing over the rest of the year relative to that 13.6 million membership number you previously guided to. And then second, on the Medicare -- on the Medicaid composite rate, the 2.5%, just want to clarify, is that the core is running a little bit better than you expected? Or is that 2.5% inclusive of the accelerated state payments? Thanks. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. On membership, we still expect to be in that mid-13s by year end. And so I think 100,000-member difference on -- to 13.3 million, some may call rounding, but luckily, it's rounding in the right direction, right? But it's probably more timing of precision around redeterminations, and some of that will carry into Q2. And there's even a few states that will tail off into Q3 as they've stretched out the redetermination process. But all of that is in the mid-13s estimate of membership by year end, which includes a couple of nice growth opportunities too that we seized, Oklahoma, which commenced 4/1. And as you heard in Sarah's remarks, that went really well operationally. And then subject to protest, the Arizona LTSS win, low membership but high revenue. And then your question on composite rate, the 2.5%, yes, we're a little bit above that. And that's sort of an all-in view of a composite rate, whether the rate relates to acuity, whether the rate relates to redeterminations or just general trend. Operator Thank you. And our next question today comes from Scott Fidel with Stephens. Please go ahead. Scott Fidel -- Stephens, Inc. -- Analyst Hi. Thanks. Just had a couple of modeling questions that would be helpful. One, just on investment income, if you can sort of walk us toward what you view as sort of the run rate for the second quarter and for the balance of the year. I know there were a few gains included in the first quarter investment income. And then also on operating cash flow, obviously that was noisy in the first quarter for the reasons you mentioned. If you wouldn't mind just giving us an update on the full-year CFFO expectation and then how you're thinking maybe about the second quarter given that you did get that state payment came in, in April. Drew Asher -- Executive Vice President, Chief Financial Officer Yes. Investment income, if you peel away gains, we disclosed those throughout the Q, which we just filed. So understandably, you haven't ripped through that yet. You get a little bit over $400 million in the quarter. But you can't just multiply that by four. We expect the full year to be above -- a little bit above the $1.4 billion that we guided to at investor day. But the difference between that and just annualizing is we've got multiple rate-cut scenarios built into our forecast. Maybe those play out to be conservative, but the Federal Reserve will decide that. You also saw that we had a lot of payables. Look at our balance sheet, we relieved a lot of payables in the quarter. We accelerated state-directed payments on behalf of our providers. So obviously, when you relieve payables and you're building up pharmacy rebate receivables, that has an impact on investment income as well. But pleased that we're going to come in -- we expect to come in a little bit above that $1.4 billion. On the operating cash flow, as you know, in this business that bounces around quite a bit. A large state decides pay us on 4/2 versus 3/31, and you have a big flip between quarters. Just mentioned some things that impact cash flow as well, the timing of pharmacy rebate receivables or payable invoices. So it's sort of maybe a fool's errand to try to predict that quarter to quarter in terms of how that will play out. What really matters in this business is the dividends from subs, the cash flow, not only GAAP cash flow statement but the cash that comes from subsidiaries to parent such that we can deploy capital. And we expect that to pick up, as you'll see in the Q, over the next few quarters. And that will drive our capital deployment later in the year for share buyback and some debt -- a little bit of debt reduction as well. So that's what we're looking forward to. Operator Thank you. And our next question today comes from A.J. Rice at UBS. Please go ahead. A.J. Rice -- UBS -- Analyst Hi. Thanks. A couple of quick things here. Appreciate the reiteration of the long-term target of the high 89s for your Medicaid HBR. I wondered, if you think you're finishing up on redeterminations largely in the second quarter, the disenrollments and maybe a little spills in the third quarter, when do you think you get visibility once and for all on how that whole process has impacted the risk pool? And are you still thinking -- I think at investor day, you said that you could get 30 basis points of margin improvement '24 and '25 in Medicaid. Is that still your thought at this point? Sarah London -- Chief Executive Officer Yes. Thanks, A.J. You're right. So we're roughly 90% of the way through redeterminations from a membership standpoint. Obviously, the cumulative member months impact sort of trails that a little bit. And we do think that the tail of membership will run through Q2 and Q3 and sort of largely be complete by that point. I would say the nice thing is that I don't think that we have seen -- we've not had to wait to see sort of the shifting risk pool. We've been watching that really closely, and that's part of the preparation of the team did leading into this process over a year ago, which allowed us to have those proactive modeling conversations with our state partners through the rate cycles in the last year. And we're mirroring that same process as we move through the rate updates that Drew talked about between 7/1 and 10/1. And so really sort of trying to address the bolus of any dislocation between rate and acuity in that cycle, but obviously leaving open, as we said before, the idea that some of that tailwind of margin will get picked back up in '25 and possibly trailing a little bit into '26. And that's where we see the recovery in terms of that basis point on the margin. Operator Thank you. And our next question today comes from Dave Windley with Jefferies. Please go ahead. Dave Windley -- Jefferies -- Analyst Hi, everybody. So just maybe a brief one on that last comment, last point. On the rate visibility, I think you called out 75%. You talked about matching acuity which, Sarah, you just commented on. Is the matching of acuity and getting those payments squared up, is -- should we think about that being in the remaining 25% that you don't have rate visibility on yet? Or are you expecting some amount of kind of retro catch-up from states where you actually have already had rate discussions? And just kind of understanding the mix of that is what I'm hoping to do. Sarah London -- Chief Executive Officer Yes -- OK. Drew Asher -- Executive Vice President, Chief Financial Officer OK. Sorry. The 75% is a member month view of what we know for the 2024 calendar year member months, and the 25% would be there's 7/1 rates we don't know. We certainly don't know 9/1 or 10/1 rates, but they have a limited impact on the 2024 calendar year. To the macro point, we need -- ultimately, we're going to need to have rates match acuity, and that -- we expect that to shake out. It may not be perfect in this rate cycle, which means sort of the 2025, 2026 time period is when we would expect to get back into the high 89s based upon today's mix of business. So there might be a couple of retros. It seems like different companies have different definitions of retro. We're only waiting on a couple of retros. There might be adjustments going forward where the state realizes and their actuaries, "Hey, we missed the mark last time. Let me fix this going forward." But we are still expecting a couple of retros as we talked about at investor day and on the Q1 call. But it's largely getting the rates correct and matching acuity going forward. And that's why we're not expecting to move into the -- back into the high 89s immediately. It may take a rate cycle or so. But that does remain a margin expansion opportunity. On a company that's performing well on a consolidated basis, actually that creates some capacity for margin expansion in Medicaid as we look at '25, '26. Sarah London -- Chief Executive Officer Yes. And the only thing I would add, which is just that as we've watched the team sort of work through the complexity of this process where we have encountered those targeted dislocations, I've just been really impressed with how our teams have stepped up to that dialogue. There is clarity on the drivers. It's a very data-driven approach. They've clearly built really solid collaborative dialogue with our state partners and are really solutions-oriented in how they step into those conversations. And so I think building credibility with our state partners as we work through this process has been consistent throughout and, I think, again sort of creates the framework to get back to a matching state and get that tailwind opportunity. Operator Thank you. And our next question today comes from George Hill with Deutsche Bank. Please go ahead. George Hill -- Deutsche Bank -- Analyst Hey, good morning, guys, and thanks for taking the question. Just two quick ones for me. I guess as you talked about the progress and the STARS goals for 2025, I would just love, at a high level, if you could talk about kind of the strategy and the progress toward achieving that goal. And Drew, as you were talking about kind of all the changes to Part D for 2025, I didn't hear you talk about the new Part D risk model. I would just be interested if you could make quick comments on how you think the new risk model in Part D kind of impacts the ability to drive revenue in that part of the business. Thanks. Sarah London -- Chief Executive Officer Sure. Thanks, George. So quality, obviously a top priority for the organization regardless of line of business. But we remain very focused on STARS because of the impact it has for the Medicare trajectory. Very pleased with the work underway, engagement across the organization. We're leveraging a comprehensive governance process, and that has given us great visibility in terms of progress on initiatives at a detailed level. Based on what we know today, we believe that we have maintained last year's progress and made additional advancements on admin and ops programs and metrics, which, you'll remember, was sort of the focus in the first cycle. And then in this past cycle, HEDIS and CAHPS were most in focus for us. We're in the middle of those processes. Those will wrap up in the next 30 to 60 days. We also have TTY that's still in flight. So those are the last pieces that will land here toward the end of Q2 and then allow us to sort of rerun projections with a high degree of -- higher degree of confidence as we look to October. And so expect more detail in terms of what we're looking for in October on the Q2 call. But overall, just really pleased with how the team continues to show up, and again, alignment across the organization that this is a critical priority. Drew Asher -- Executive Vice President, Chief Financial Officer Yeah. And you're absolutely right. The risk model bifurcation between PDP and MAPD, that's a factor as well that needs to be worked into the bid cycle. And I think I did mention that we were able to run risk scores by member and the mechanics and how that rips through the -- not just the risk scores but also the timing of members with cost share and getting to the maximum out of pocket, or the MOOP. Those are all important things to think about. And really, the message is -- that's why there's reason for cautiousness for the industry in bidding PDP for 2025. Operator Thank you. And our next question comes from Lance Wilkes with Bernstein. Please go ahead. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks. Can you talk a little bit about the PBM migration? And in particular, I was interested in if all the savings levers turned on, on January 1, if there should be a ramp of that over the course of the year with things like formulary alignment, etc., and if any of that might spill into '25. And maybe then as a broader question, just on your ongoing dialogues with states, how are they looking at GLP-1s and kind of adding coverage to that? Thanks a lot. Sarah London -- Chief Executive Officer Thanks, Lance, for the question, mostly because I don't think I can brag enough about our pharmacy team and the phenomenal job they did in such a massive undertaking. We've talked before about how well that went, January 1. But I think everybody who's been through something that significant knows that you don't just drop the mic the next day. And so these folks have continued to work tirelessly over the last couple of months to make sure that that process just gets smoother and smoother for our members. We've had great collaboration with ESI. And so trajectory on that front just continues to be really positive. And then I'll let Drew talk a little bit about the step-up in the economics and some of the GLP-1 activity. Drew Asher -- Executive Vice President, Chief Financial Officer Yes. So we didn't want to wait for economics. So we do have a stairstep benefit on behalf of our state and federal customers and our members as of 1/1/24. But we're constantly working with our partner at ESI to figure out ways to deliver value to our customers and manage costs. So we expect sort of normal course improvements from that point forward, and we'll continue to try to drive efficiencies in the pharmacy ecosystem. On GLP-1s, not a lot of uptake yet by states. There's a couple of states where -- have decided to allow GLP-1s for the weight loss indication. Obviously, GLP-1s for the diabetes indication, we could see the volume coming through there. But for the weight loss indication, there's only a couple, and we're quick to go share the data with them to show them what it's costing them, but it's not that material to the company as a whole. And that's where the states control the formulary, the preferred drug list and make the decisions that we then administer and take risk for. And we just need to make sure that the states have the data so they can match rates with the cost that they choose to allow in their benefit plans. Operator Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks. Sarah London -- Chief Executive Officer Thanks, Rocco, and thanks, everyone. Appreciate the time and interest this morning. Overall, we are pleased with how we're powering through a dynamic landscape and with the progress that we've demonstrated so far. So appreciate you joining us, and we'll see you next quarter.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and thank you for standing by. Welcome to the Capital One Q1 2024 earnings call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norris, senior vice president of finance. Please go ahead. Jeff Norris -- Senior Vice President, Global Finance Thanks very much, Josh, and welcome to everyone. We are webcasting live over the internet this evening. To access the call on the internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our first quarter 2024 results. With me this evening are Mr. Richard Fairbank, Capital One's chairman and chief executive officer; and Mr. Andrew Young, Capital One's chief financial officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website and click on Investors and click on Financials and then click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials, and Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section called Forward-looking information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC. And with that, I'll turn the call over to Rich -- to Andrew. Mr. Young? Andrew Young -- Chief Financial Officer Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the first quarter, Capital One earned $1.3 billion or $3.13 per diluted common share. Included in the results for the quarter was a $42 million additional accrual for our updated estimate of the FDIC special assessment. Net of this adjusting item, first-quarter earnings per share were $3.21. Relative to the prior quarter, period-end loans held for investment decreased 2% and period-end deposits increased 1%. Both average loans and average deposits were flat. Our percentage of FDIC-insured deposits remained at 82% of total deposits. Pre-provision earnings in the first quarter increased 13% from the fourth quarter or 6% adjusting for the impacts of FDIC special assessments in both quarters. Revenue in the linked quarter declined 1%, largely driven by lower noninterest income. Noninterest expense decreased 6% on an adjusted basis, driven by declines in both operating and marketing expenses. Our provision for credit losses was $2.7 billion in the quarter, a decrease of $174 million compared to the prior quarter. The decrease was driven by $57 million lower net reserve build, partially offset by an $83 million increase in net charge-offs. Turning to Slide 4, I will cover the allowance in greater detail. We built $91 million in allowance this quarter, bringing the balance to $15.4 billion, an increase of less than 1% from the fourth quarter. The slight increase in allowance balance was driven by modest builds in our Auto and Domestic Card portfolios. Our total portfolio coverage ratio increased 11 basis points to 4.88%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. Our baseline economic forecast modestly improved this quarter compared to what we assumed last quarter, which generally aligns with consensus. We continue to consider a range of economic outcomes in our reserving process. In our Domestic Card business, the allowance coverage ratio increased by 22 basis points to 7.85%. The increase in coverage was primarily driven by the denominator effect of the runoff of the fourth quarter's seasonal outstandings. In our Consumer Banking segment, the allowance increased by $46 million, resulting in a seven-basis-point increase to the coverage ratio. The allowance increase was primarily driven by a higher level of originations in the Auto Finance business. And finally, our Commercial Banking allowance decreased by $7 million, primarily driven by portfolio contraction. Coverage ratio increased by one basis point to 1.72%. Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves in the quarter increased to $127 billion, about $7 billion higher than last quarter. Our cash position ended the quarter at approximately $51 billion, up about $8 billion from the prior quarter. The increase in cash was driven by continued strong deposit growth in our retail banking business and the seasonality of our card balances. Our average liquidity coverage ratio during the first quarter remained strong and well above regulatory minimums at 164%. Turning to Page 7, I'll cover our net interest margin. Our first-quarter net interest margin was 6.69%, four basis points lower than last order and nine basis points higher than the year-ago quarter. The quarter-over-quarter decrease in NIM was largely driven by the impact of having one fewer day in the quarter. Modestly higher asset yields were mostly offset by higher funding costs in the quarter. Turning to Slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 13.1%, approximately 20 basis points higher than the prior quarter. Strong earnings and lower risk-weighted assets more than offset the impact of CECL phase in dividends and share repurchases. We repurchased approximately $100 million of shares in the first quarter. Our repurchase activity in the quarter was impacted by blackout restrictions and daily purchase volume limitations related to the announcement of the Discover transaction. With that, I will turn the call over to Rich. Rich? Rich Fairbank -- Chief Executive Officer Thanks, Andrew, and good evening, everyone. Slide 10 shows first quarter results in our Credit Card business. Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on Slide 11. Top-line growth trends in the Domestic Card business remained strong in the first quarter. Year-over-year purchase volume growth for the first quarter was 6%. Ending loan balances increased $12.9 billion or about 10% year over year. Average loans increased 11%, and first-quarter revenue was up 12% year over year, driven by the growth in purchase volume and loans. The charge-off rate for the quarter was up 190 basis points year over year to 5.94%, about 18% above its pre-pandemic level in the first quarter of 2019. The 30-plus delinquency rate at quarter end increased 82 basis points from the prior year to 4.48%. On a sequential-quarter basis, the charge-off rate was up 59 basis points, and the 30-plus delinquency rate was down 13 basis points. The linked-quarter delinquency and charge-off rate trends were modestly worse than what we would expect from normal seasonality. We believe this is largely driven by lower and later tax refund payments to consumers so far in 2024, relative to what we've historically observed. Tax refunds are an important factor in credit seasonality. Each year, they drive an improvement in delinquency payments and recoveries starting in February. Our portfolio trends generally have a more pronounced seasonal pattern than the industry average. Last quarter, our view was that the charge-off rate was settling out about 15% above 2019 levels in the near term. That was based on an extrapolation of our delinquency inventory and flow rates over three to six months, and that was the horizon of our estimate. If the trend of lower tax refunds sustains, it could raise the level of charge-off somewhat in the near term but this does not change our view that credit is settling out modestly above pre-pandemic levels in 2018 and 2019. The continuing deceleration in the pace of credit normalization trends sometimes referred to as the improving second derivative supports our view. The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the first quarter. Domestic Card noninterest expense was up 6% compared to the first quarter of 2023, with increases in both operating expense and marketing expense. Total company marketing expense of about $1 billion for the quarter was up 13% year over year. Total company marketing drives growth and builds franchise in our Domestic Card and Consumer Banking businesses and builds and leverages the value of our brand. Our choices in Domestic Card are the biggest driver of total company marketing. We continue to see attractive growth opportunities in our Domestic Card business. Our opportunities are enhanced by our technology transformation. Our marketing continues to deliver strong new account growth across the domestic Card business. And in the first quarter, Domestic Card marketing also included higher early spend businesses driven by strong new account growth, higher media spend, and increased marketing for franchise enhancements like our travel portal, airport lounges, and Capital One shopping. We continue to lean into marketing to drive resilient growth and enhance our Domestic Card franchise. As always, we're keeping a close eye on competitor actions and potential marketplace risks. Slide 12 shows first quarter results for our Consumer Banking business. In the first quarter, Auto originations increased 21% from the prior year quarter, a return to growth after several quarters of year-over-year declines. Consumer Banking ending loans decreased about $3.1 billion or 4% year over year, on a linked quarter basis ending loans were essentially flat. We posted another quarter of year-over-year growth in consumer deposits. First quarter ending deposits in the consumer bank were up just under $10 billion or 3% year over year. Compared to the sequential quarter, ending deposits were up about 2%. Average deposits were up 6% year over year and up 1% from the sequential quarter, powered by our modern technology and leading digital capabilities our digital-first national direct banking strategy continues to deliver strong consumer deposit growth. Consumer Banking revenue for the quarter was down about 13% year over year, largely driven by lower auto loan balances and higher deposit costs. Noninterest expense was down about 3% compared to the first quarter of 2023. Lower operating expenses were partially offset by an increase in marketing to support our national digital bank. The Auto charge-off rate for the quarter was 1.99%, up 46 basis points year over year. The 30-plus delinquency rate was 5.28%, up 28 basis points year over year. Compared to the linked quarter, the charge-off rate was down 20 basis points, while the 30-plus delinquency rate was down 106 basis points. The linked-quarter charge-off rate improvement modestly underperformed the typical seasonal patterns we've historically observed driven by the tax refund trends I just discussed. Even with the tax refund effects, auto credit performance remains strong. Slide 13 shows first quarter results for our Commercial Banking business. Compared to the linked quarter ending loan balances decreased about 1%. Average loans were also down about 1%. The modest declines are largely the result of choices we made in 2023 to tighten credit. Ending deposits were down about 5% from the linked quarter. Average deposits were down about 8%. The declines are largely driven by our continued choices to manage down selected less attractive commercial deposit balances. First quarter revenue was up 2% from the linked quarter. Noninterest expense was up about 6%. The Commercial Banking annualized net charge-off rate for the first quarter decreased 40 basis points from the sequential quarter to 0.13%. The Commercial Banking criticized performing loan rate was 8.39% down 42 basis points compared to the linked quarter. The criticized nonperforming loan rate increased 44 basis points to 1.28%. Commercial credit risks continue to be most pronounced in the commercial office portfolio, which is less than 1% of total company loan balances. In closing, we continued to deliver strong results in the first quarter. We posted another quarter of top-line growth in Domestic Card revenue, purchase volume, and loans. Domestic Card credit trends continue to stabilize and Auto credit trends remained stable and in line with normal seasonal patterns. We grew consumer deposits, and we added liquidity and maintain capital to further strengthen our already strong and resilient balance sheet. Over the last decade, we've driven significant operating efficiency improvement even as we've invested to transform our technology, and we continue to drive for efficiency improvement over time. For the full year 2024, we continue to expect annual operating efficiency ratio net of adjustments to be flat to modestly down compared to 2023. Our expectation includes the partial year impact of the proposed CFPB late fee rule, assuming the rule takes effect in October 2024. The timing of the new rule remains uncertain. If the rule were to take effect at an earlier date, it would be a headwind to the 2024 operating efficiency ratio. Of course, the biggest news in the quarter was our announcement that we entered into a definitive agreement to acquire Discover. We've submitted our application for regulatory approval, and we're fully mobilized to plan and deliver a successful integration. The combination of Capital One and Discover creates game-changing strategic opportunities. The Discover payment position Capital One as a more diversified, vertically integrated global payments platform, and adding Capital One's debit spending and a growing portion of Credit Card purchase volume to the Discover network will add significant scale, increasing the network's value to merchants, small businesses, and consumers and driving enhanced network growth. In the Credit Card business, we're bringing together two proven franchises with complementary strategy and a shared focus on the customer. And we can accelerate the growth of our national digital-first consumer banking business by adding the Discover's consumer deposit franchise and the vertical integration benefits of the debt network. We will be able to leverage and scale the benefits of our 11 years transformation across every business and the network, which will serve as the catalyst for innovation and enhanced capabilities in risk management and compliance underwriting marketing, and customer service. Pulling way up, the acquisition of Discover is a singular opportunity. It will create Consumer Banking and global payments platform with unique capability, modern technology, powerful brands, and a franchise of more than 100 million customers. It delivers compelling financial results, and it offers the potential to create significant value for merchants and customers and an unparalleled strategic and economic upside over the long term. And now, we'll be happy to answer your questions. Jeff? Jeff Norris -- Senior Vice President, Global Finance Thank you, Rich. We'll now start Q&A session. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. And if you have follow-up questions after the Q&A session, the Investor Relations team will be available after the call. Josh, please start the Q&A session. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from Ryan Nash with Goldman Sachs. You may proceed. Ryan Nash -- Goldman Sachs -- Analyst Hey, good evening, guys. So, Rich, maybe just start off on credit. It sounds like you're running a little bit ahead of what you had outlined in the last quarter. But when you put aside the time the tax refund, maybe just talk about what you're seeing from the consumer. And do you think we've now reached the inflection where we can more closely follow seasonal patterns? And once the noise settles, do you think we're kind of back at that 15% level that you had outlined? Thank you. Rich Fairbank -- Chief Executive Officer Thank you, Ryan. Look, I think that the story continues to be one of -- well, in terms of -- there's sort of the consumer itself. Let's just talk about the consumer for a second and then let's talk about Capital One's credit performance but just the health of the consumer. I think the U.S. consumer remains a source of strength in the economy. The labor market remains strikingly resilient. Rising incomes have kept consumer debt servicing burdens relatively low by historical standards. And when we look at our customers, we see that they have higher bank balances than before the pandemic, and this is true across income levels. On the other hand, of course, inflation shrank real incomes for almost two years. And in this high interest rate environment, the cost of new borrowing has gone up in every major asset class. And I think at the margin, these effects stretch some consumers financially. But on the whole, I'd say consumers are in reasonably good shape relative -- pretty strong shape relative to historical benchmarks. So, in terms of Capital One's performance, we continue to see a settling out. We consider -- we believe that for Capital One, I can't speak for all card issuers, but we definitely have seen what we think is sort of a landing. And our -- so we feel very good about where the credit is. The point that I wanted to make about the tax refunds, let's just pull up for a second on that. The tax refunds are something that nobody knows for sure exactly what's behind seasonality, but I think it's a -- we believe, a very important driver of seasonality. It's a bigger effect for us than other players because I think cash refunds just play a little bit bigger role in -- collectively across our customer base. So, the tax refunds in the very near-term effect credit performance, Ryan, what you're referring to the 15% guidance that we gave, that was not an annual guidance number that was saying, if we just extrapolate in the very near window of just what we see in terms of delinquencies and delinquency roll rates. That's where we would see charge-offs, and charge-offs tend to be higher in the first half of the year. So, what we're doing is giving a window to the higher part of charge-offs for the year, and we were saying they were settling out looked like around 15% above 2019 levels. Part of that -- and so basically, what I'm saying is that includes our assumptions about what happens with tax refund and the seasonality effect. As we can see in the government data, tax refunds are lower and later than by historical patterns. And so, that affects our near-term credit performance. And actually, we often talk about, well, isn't the 6-month window basically once charge-offs start bubbling and going through the roll rate buckets we can pretty much see where charge-offs are going. Tax refunds actually affect the payment rates in every bucket. So, our point was in the very near term, it actually leads to a bit of a higher charge-off rate than we had guided to over that near window. But that doesn't change our view that credit has settled out but the 15% was not a guidance for the year. We haven't really given credit guidance for the year. What we're really saying is we have seen credit settle out but we wanted to just flag that both in the Credit Card business and in our Auto business while credit continues to be very strong, and you've seen things like really improving delinquencies, we just wanted to point out that in the very near term, relative to what we have seen in terms of historical seasonality and kind of confirmed by what we watch as the patterns of tax refunds, there is -- it's coming in lower and later. And we just wanted to flag that effect because it affects the very near-term numbers that we cited earlier. Ryan Nash -- Goldman Sachs -- Analyst Got it. Maybe as my quick follow-up for Andrew. I guess, given Rich's answer, what does that mean for the trajectory of the allowance? It seems like we've heard a handful of other issuers talk about us being at the peak or maybe even coming down and potentially being below where it ended the prior year. Can you maybe just talk about what you think this means for Capital One given your credit expectations? Andrew Young -- Chief Financial Officer Yeah. Sure, Ryan. I'd like to say from my perspective that there's a simple answer but there's not. And then there's a host of things that are going to drive allowance from here, not the least of which is growth, but just focusing on coverage and assuming that's what others are pointing to. The first thing I'd highlight and I said in my talking points that fourth quarter had seasonal balances, they quickly pay off in the first quarter and therefore, have negligible coverage, which we see every year. So, the coverage ratio this quarter up a bit from last quarter is really a result of that dynamic. But if you look at coverage ratio now, it's largely in line with the preceding quarters, I mean, the biggest driver as we look ahead, are the projected loss rates. And as we've been saying for a number of quarters, delinquencies are the best leading indicator of that. And so, every quarter, we're going to look out over the next 12 months and then the reversion from there. And we're going to take into account a range of outcomes and uncertainties. And so, you've seen over the last few quarters, keeping the coverage ratio flat. I will note, though, even in a period where projected losses in future quarters are lower than today and might indicate a release otherwise, you could very well see a coverage ratio that remains flat or only modestly declined as we incorporate the uncertainty of that future projection into the allowance. And so, eventually, the projected losses will -- when they're lower will flow through the allowance and bring the coverage ratio down as those uncertainties become more certain. And under that scenario, you would see a decline. But at this point, like I'm not going to be in the forecasting business of when that actually is going to take into account because, like I said, we really need to take the factor of uncertainty as we look ahead every quarter that we go through the reserving process. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. One moment for questions. Our next question comes from Mihir Bhatia with Bank of America. You may proceed. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Hi. Thank you. Rich, if I could switch for a second to the Discover acquisition? There's been a lot of talk around deal approval, particularly focusing around potential antitrust issues within the Card business. And I was wondering if you could share your thoughts and perspective on that issue if you've heard anything from regulators but also just to hear how you are thinking about that issue. Thank you. Rich Fairbank -- Chief Executive Officer OK. Thank you, Mihir. So, we have filed our merger applications with both the Fed and the OCC, and we are engaged with the -- sorry, with the DOJ as they, of course, play a key role in advising the Fed and the OCC on competition questions. We believe our applications make a very compelling case for approval. We believe strongly that this merger will increase competition among banks and credit card issuers and payment networks, and provide significant benefits for consumers, merchants, and the communities that we serve. While some have raised concerns about competition, we believe that the facts in favor of the deal will be compelling. On the network side, let's remember that we're not currently in that business. If the deal is approved, we will still have four networks just like we do today but we will be adding new customers and scale to the smallest by far of the four networks and be able to leverage our technology talent and marketing capabilities to greatly enhance Discovery's competitive viability. Their market share was 6% a decade ago and sits at just 4% today. The significant investments that we are planning will provide substantial benefits for consumers and merchants as we've outlined in our regulatory applications. On the Credit Card side, the regulators have found every time they've studied it that the credit card market is highly competitive and not at all concentrated. In fact, it's less concentrated today than it was 10 years ago. Consumers can choose from over 4,000 issuers, all able to offer products with similar capabilities. Imagine this, a card issued by a small credit union can be used every place that a card issued by a bank like Capital One can be used, anywhere in the world, that kind of level playing field doesn't exist in any other industry, and certainly not in airlines or grocery stores or many of the others. There's a reason that we ask folks what's in your wallet. We compete not only with these 4,000 other issuers to gain your business in the first place but also with every other card you likely already own. Put another way, we have to compete every day for every single transaction because our customers can simply choose at any moment to use another card. And if they don't like the card they have, they can stop using it entirely or close the account, or switch to another card with another bank, large or small, in minutes. We also believe that the facts will show that there are no barriers to entry in the credit card business as thousands of current issuers and the new ones are forming all the time demonstrate. New and incumbent fintechs backed by significant VC funding are able to leverage the infrastructure of sort of credit card as a service players like Marqeta to achieve instant scale and high growth. Also, any existing bank can choose where in the credit spectrum they play simply by changing their credit policy. Let's also remember that consumers can choose to use another form of payment entirely, cash, debit, or buy now pay later, which has exploded onto the marketplace. New fintechs are entering the payments in small-dollar credit space every day all looking to take market share from traditional credit card players like Capital One. We faced this competition for years and we'll continue to face it in the future. It's powerful evidence of a healthy and fiercely competitive marketplace. But we have been successful by focusing on the needs of our customers and offering credit card and retail banking products with the most straightforward terms and fewest fees in the industry. We're the only major bank where all of our deposit products come with no fees, no minimums, and no overdraft fees. So, pulling way up, we believe the facts will show that this transaction is both pro-competitive and pro-consumer, bringing our best-in-class products and services to a broader set of consumers and small businesses and greatly enhancing opportunities and benefits for merchants. In the end, that is what we believe the regulators will use their very vigorous process to evaluate. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. That is helpful. Just turning back to the health of the consumer for a second for my follow-up. If you could just talk a little bit about the environment for card acquisitions, you did mention, I think, that the growth you see good growth opportunities in the card business. So, wondering if you can expand on that. Maybe talk about just some of the puts and takes as you consider where to make those investments. Are there parts of the market where you're being more cautious given the environment? Thank you. Rich Fairbank -- Chief Executive Officer Mihir, we are leaning in pretty much across the board in the card business, powered by a healthy consumer and the traction that we're getting in our business, we are really all parts of the card business are seeing very nice account originations, seeing good traction on the purchase volume side. And -- so it's very much a positive time for leaning in, as you see reflected in our marketing, as you see reflected in some of the growth numbers, and as I see in numbers behind the numbers that you see, just a lot of traction. And just -- let's just savor for a second, some of the things that are powering that are two things that I would flag is: one, the continued investment that we are making to win at the top of the market. And I think that not only affects our success at the top of the market, but I really believe there's a lifting of all boats from those investments and that traction there. Also, we continue to just have a lot of success powered by our technology transformation, including not only the customer experience and some of the product capabilities that we're able to offer but really impacts on the whole way that we run the business and very notably on the credit and marketing side of the business, the ability to create mass-customized offerings and real-time solutions just enables us to have more traction on the growth side. Also, I just want to say that we also are pleased to see things picking up in the Auto business and also we continue to have a lot of traction on our national bank. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Rick Shane with JPMorgan. You may proceed. Rick Shane -- JPMorgan Chase and Company -- Analyst Thanks for taking my questions this afternoon. Rich, I want to make sure I fully understand what you're describing in terms of credit. The framework is that charge-off rates will be about 15% higher than '18, '19 levels in the near term. But now with tax refunds, it might be a little bit higher than that that, over time, it will converge back toward slightly above '18, '19 levels. When I look at the delinquencies. And one of the things we've observed is that role from delinquency to charge-off is actually higher than it has been pretty much at any time in recent history. Does that suggest that delinquencies actually need to get back below '18, '19 levels to achieve that level of charge-off performance? Rich Fairbank -- Chief Executive Officer So, Rick, there's a lot. First of all, let me clarify some of the things that you were saying weren't exactly I think as we intended to state them. So, let me just -- so we talked about -- so yes, we talked about credit. We're saying credit settling out. We said in the very near term, where charge-offs tend to be higher in the first half of the year. In the near term, based on extrapolation from delinquency buckets and roll rates we would expect them to settle out at 15% higher than pre-pandemic. That was a near-term forecast. That was not an annual forecast. And then you -- just to clarify your comments that, and over time, it will converge back to slightly above 2018 and 2019. I just want to say those are your words, not ours. We have not given guidance on full-year charge-offs. We tend not generally to give guidance on full-year charge-offs. But we very much like to give you the feel of how things are going. So, we are very much seeing credit settling out. You can see that the trends that continue on the second derivative of delinquencies, and that's a very positive thing. There's another factor that affects charge-offs, which is recoveries. And the recoveries have been -- we've been saying for quite some time, recoveries are lower than usual because of the very low charge-offs we saw over the past three years. So, that all else equal, pushes up net losses relative to pre-pandemic levels. And that impacts probably larger and more prolonged for us than for some of our competitors because we tend to have higher recovery rates than the industry probably as a result of our business mix and our strategy, and we tend to work most of our recoveries in-house rather than selling debt. So, we see a longer tail of recoveries from past charge-offs than most do. By the way, the recoveries, we had talked about recoveries. There probably sort of been at their bottom in terms of that brownout and over time probably heading in a more positive direction. But that also impacts the relationship between charge-offs pre pandemic and where they are today. So, pulling way up, we don't have guidance for credit for the year. We continue to be very happy about charge-offs the way after years of -- after a long period of normalization, that charge-offs are settling out. We've given -- we just wanted to flag that the seasonality, let's just comment -- let's just pause for a second on the seasonality. It still remains to be seen whether the tax refunds are just lower end of story or whether they're later The key thing right now is they are lower cumulatively than they have been -- than they were pre-pandemic for this period of time. And what will take a look at is how it plays out from here to see how much was just later and how much was lower. But what we're saying is, to the extent that it's lower than that impacts in the very near term the charge-off numbers that we had talked about before. But it doesn't change our view about Credit settling out. It doesn't change our view about very positively about the consumer, about credit performance, but it's just something we wanted to flag across both the Credit Card and Auto business. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from John Pancari with Evercore ISI. You may proceed. John Pancari -- Evercore ISI -- Analyst Good afternoon. I guess back to the Discover combination, any update to your thoughts around the timing of the deal close? I know the Fed, the OCC just extended the comment period. And I know you put out there, you expect late '24, early '25. So, any change in terms of your expectation around the timing of the close or any of the key financial metrics that you set out? Rich Fairbank -- Chief Executive Officer OK. Thanks, John. So, let me comment on the Federal Reserve and the OCC extending the comment period. It's standard practice for the Federal Reserve to extend the comment period on bank mergers. We expected the extension, and we don't take any signaling on our deal from the Fed's decision here. So, with respect to the overall timing, the Fed and the OCC typically take several months to work through bank merger applications in consultation with the DOJ on competition questions and they engage frequently with our team along the way. And of course, that process is underway. And we continue to have the same views about the timing of all of this that we did at the time of the announcement. John Pancari -- Evercore ISI -- Analyst OK. OK. Great. Thanks. And then separately, just regarding the -- your expectation on the CET1 front for a pro forma CET1 ratio of about just shy of 14%. Any change to that expectation? And any change to your thoughts around buyback activity in the near term? Could you remain active on that front? Thanks. Andrew Young -- Chief Financial Officer Yeah. John, with respect to the deal, I'll just say, as we talked about when we announced it, we, at the time, used a blend of consensus estimates of where we would have the CET1 at the time of close. There's a number of variables that are going to move between now and in legal day 1, not just the stand-alone performance of each of our companies but balance sheet marks, some of which are driven by credit and stock price. And so, I'm not going to be in the business of sort of recasting every time a little number moves. But I will say our valuation of the deal considered a wide range of outcomes. And so, we remain just as excited today about the financial and strategic benefits of the transaction as we did when we announced the deal. With respect to our stand-alone repurchases, Capital Ones, I'll note that the agreement with Discover does not prohibit us from buying shares. I noted in my prepared remarks, we were blacked out for a period leading up to the deal. And afterwards, the SEC has safe harbor rules that limit the daily average amount of purchases we can do for a period of time after the announcement. So, as a result of those limitations, Q1 had a pace that was less than what we've done in recent quarters. I will also just note that there's also blackout restrictions on repurchases during the proxy vote period. But again, outside of those blackouts, we're not prohibited, and we're able to continue repurchasing shares. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Moshe Orenbuch with TD Cowen. You may proceed. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks. Rich, putting aside the tax refund thing, I mean, yours -- we're sitting here looking you've still got what has been a somewhat persistently high inflation environment and the potential for increases in unemployment, given the nature of your portfolio, you've got kind of a lower end consumer and higher-end consumer. How do you think about that, those factors in terms of thinking about what type of charge-off level you're going to reach over some period of time, not a particular point in time, but over some point in the next year or two, like where you think about that -- they driving a higher level of charge-off expectations? Or how should we think about that? Rich Fairbank -- Chief Executive Officer Moshe, so our -- I think what you're partly getting at is because we have -- part of our portfolio is subprime consumers, how do we feel about how they're performing and sort of in the context of an environment of higher inflation and so on. Let me just comment a little bit about the subprime consumer. In the global financial crisis, we observed that credit metrics in subprime moved earlier in both directions, subprime -- we saw that, but then we saw sort of everything move proportionately, in fact, subprime moved frankly, somewhat less proportionately than prime as a multiple, but obviously, all portfolios worsened quite a bit during the global financial crisis in the pandemic, subprime credit improved more and more quickly than prime but it also began to normalize more quickly, too. And of course, that's in the context of lower-income consumers seeing disproportionate benefits of government aid and then unwinding that over time. And subprime is, of course, not synonymous with lower income, although they are somewhat correlated. So, on the other hand, so if we look at how they have been doing, the income growth from -- for say, lower-income consumers has been consistently higher over the past several years. And we have seen really quite -- other than the tax refund effect, which does show up more in our lower end part of our customer base than the higher credit end. Really, we have seen the subprime performance be very strong. It just worsened faster. And then on a proportional basis, everything caught up with it. But it frankly always seems to be a first mover, and it settled out, frankly, a little bit earlier than -- started settling out a little bit earlier than the rest of our portfolio. So based on current performance, we feel very good across the credit spectrum. We also -- it certainly catches our attention when we see the inflation specter sort of become greater lately. So, we have a real eye on that. As you know, we continue to look at the marketplace and trim around the edges and so on. But the net impression that I would leave you is we continue to feel very good about really the full spectrum of our customers, we continue to lean into the growth opportunities. We have, for some time, just been doing some trimming around the edges and just being a little tighter on the credit lines and things like that credit line increases. But the impression that I want to leave with you is that we are still pretty feel good about this marketplace and the growth opportunities there. Moshe Orenbuch -- TD Cowen -- Analyst Got it. And maybe just as a follow-up question, you alluded to or Andrew alluded to the fact that you expect that late fee -- you can still kind of achieve your objectives from an efficiency ratio even with the late fee coming into effect. But could you talk a little bit about your thoughts about any mitigating efforts that you're planning or in the process of doing? Or is it something that you're going to try and use from a competitive standpoint to take share? How do you think about it? Rich Fairbank -- Chief Executive Officer OK. Thanks, Moshe. So, let's just pull up and reflect on the fact that the CFPB's rule on late fees is scheduled to take effect on May 14. We are prepared to implement the rule on this timeline, if necessary, but ongoing litigation efforts continue to create uncertainty on the ultimate outcome and the timing of the rule. As we've said before, when the rule is implemented, there will be significant impact to our P&L. We expect that this impact will gradually resolve itself within a couple of years from the implementation of our mitigating actions. These mitigating actions include changes to our policies, products, and investment choices. Some of these mitigating actions have already been implemented and are underway. We are planning on additional actions once we learn more about where the litigation settles out. Ultimately, these mitigating actions will play through different line items in the P&L and will mitigate the impact of the late fee rule on our P&L within a couple of years of their implementation. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Don Fandetti with Wells Fargo. You may proceed. Don Fandetti -- Wells Fargo Securities -- Analyst Yes. Rich, can you provide your latest thoughts on auto lending? I know a lot of focus has been around cards, but -- and used car prices have been a little bit lighter recently as well as the tax issue. Maybe talk a bit about a potential pivot there. Rich Fairbank -- Chief Executive Officer Yeah. So, we're feeling very good about the Auto business. So, let's just pull way up. Auto industry margins have recovered somewhat over the past few quarters. Our origination volumes in Q1 were up 20% on a year-over-year basis and a quarter-over-quarter basis, and we're pleased with that growth. Now, there are still headwinds to the auto business. Affordability remains a concern due to the combined effects of high interest rates and still high car prices. And even as car prices have normalized significantly from their peaks, they haven't yet reached a new equilibrium. So, we anticipated the risks in this business, tightening up credit back in 2022, I think, several quarters before some of our competitors. As a result, the performance of recent originations from '22 and '23 has been really strong and frankly, even better than our pre-pandemic originations. And vintage over vintage, that risk remains stable. And as margins have recovered a bit, we're seeing an opportunity to lean back in. So, our years of investments in industry-leading technology and credit infrastructure have allowed us to remain nimble and enabled us to make targeted adjustments to our origination strategies where we see opportunities for growth or emerging risks. So, looking ahead, we remain confident in the business that we're booking and bullish about the opportunities for growth. So, we continue to set pricing in terms that we're comfortable with and feel good about the opportunities that we see in the market. And after talking for really a couple of years about sort of dialing back. I think this is sort of a period where it's moving more into a leaning into it situation for Capital One. And we're, I think, very benefited by the choices that we made over the last couple of years and seeing very strong performance in our vintages. Don Fandetti -- Wells Fargo Securities -- Analyst Thank you. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Sanjay Sakhrani with KBW. You may proceed. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Rich, I think your point on tax refund is clearly a very valid one. Interestingly, though, to your point on the second derivative, that's improved quite nicely even into March. And I think when I look at the tax refund stats now from the IRS, it seems like you've seen a catch-up in refunds and it seems like the average refund numbers have kind of come in line with last year, if not slightly higher. So, I think those are improving, too. Is there a lag effect there? So, like should we see that more pronounced if that's the case in April and May? How has been in the past? Rich Fairbank -- Chief Executive Officer Yeah. So, I can see that you're a student of tax refunds. Just think of all the areas of expertise that you've developed over the years trying to really get your head around this credit card business, things that neither you nor I thought we would really have to learn. Let me make a couple of comments here. So, a key question is, what are we benchmarking things to? So, relative to -- if we talk about relative to last year, the things were even lagging relative to last year, and they've actually crossed over very, very recently crossed over the curve from last year, which I think you're referring to. But then last year really was somewhat of an outlier relative to pre pandemic. Now, one might ask, well, why didn't we just used last year as the seasonality benchmark? Last year itself was an odd year. And from a credit point of view with all the normalization. It was hard to read things through the noise. As we watch the patterns this year, we're going to really end up comparing by the time it's done, how this year compares to last year and whether collectively this year and last year represent sort of a new seasonality that we have to modify relative to the past. I think it's premature on that. And relative to reading seasonality, it's really hard to look at last year's credit metrics just because there was so much normalization. So, we've had an eye on this. We have tended to stick with our seasonality benchmarks, which are developed over a number of years. And I think when this is -- when we're done with this period, we'll sit back and look at it and say, did we learn something about the business that where seasonality might be less magnified in a business like ours than it was before. I think it is too early to tell. But to your other point, even relative to last year, it has very recently crossed over in terms of tax refunds. And yes, to your point, these are things that themselves then have lag effects because people have to get the refunds then they have to make payments. So, this is why very much we are flagging a phenomenon that is sort of in the middle of happening. And the key thing will be by the time it's done was the cumulative tax refund effect. And we're just kind of sharing with you as we go along. And the reason I'm particularly leaning into this particular one is because last time we made a very near-term sort of extrapolation just from our windows of delinquency buckets about where the -- given that in a year, the high part of the year is in the first half of the year, we were just kind of saying in that high part of the year, where things were sort of settling out. And I wanted to give that a little bit -- we're not revising the number but just to say if the seasonality patterns are probably driven by the tax refund effect if it doesn't catch up to historical patterns, then in the very near term, the numbers will be higher than that in this very -- this window we're talking about higher than the 15% number that I said. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Understood. Understood. The second derivative looked good nonetheless for March. Rich Fairbank -- Chief Executive Officer Right. So, look, can I just -- I want to just seize that point. The second derivative continues to be strong. In fact, when you look at sort of all the card players, you can see the strength of Capital One's second derivative. There's another topic, so you didn't know when you were studying all that calculus that this would be at the heart of what you do. So, there's lots of good to pull from this. I just wanted to just clarify the tax refund effect, which I think has a little bit more impact on Capital One than certain other players, and to point out that we actually think we see that effect in both of our consumer businesses. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Great. Just one follow-up for Andrew. Just on the capital return question earlier. Can we step up the run rate relative to some of the last quarters as we look ahead? I know there's been a lot of volatility on some of the regulatory proposals on capital. But as we look ahead, I know there's no limitations, but can we see a step up in the level of capital return relative to the past few quarters as we look ahead, given your capital levels today? Andrew Young -- Chief Financial Officer Well, there's two parts to that, Sanjay. The first is, given the transaction, we are in the process of submitting a new capital plan. So, that's just a procedural piece. So, once that new capital plan is approved, then we have unlimited capacity relative to the SCB in this intervening period, the amount that we repurchase is constrained to what we've requested. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Bill Carcache with Wolfe Research. You may proceed. Bill Carcache -- Wolfe Research -- Analyst Thanks. Good evening, Rich and Andrew. Following up on your comments on Auto, how much of an advantage is your excess capital position? Are you seeing competitors who are capital-constrained and perhaps can't take advantage of the attractive market conditions to the same degree? And then I'll just ask my follow-up now. As Capital One continues to grow, could you speak to your category 2 preparedness? Andrew Young -- Chief Financial Officer Yeah, I'll start, Bill, with the -- Rich, do you want to do the -- Rich Fairbank -- Chief Executive Officer Competitive dynamics in auto. My observation about the auto business is that it's still a very competitive marketplace. But when we see our opportunities to grow, we tend to zig a little bit while others zag. And so, we sort of pulled back for a little while and others leaned in. And my point is really now I think we're leaning in and others are pulling back a little bit more. I hadn't really sort of analyzed it in terms of really capital choices really as much as just the very natural rhythms of the marketplace and some of the advantages that Capital One has by virtue of our choices that we made over the last couple of years. But we'll have to think about that. But I just think this is just very much sort of as you've seen numerous times in the past where there's a little bit of an inflection point for Capital One at a time that's a little different and occasionally in a different direction than the inflection points of others. Andrew Young -- Chief Financial Officer And then, Bill, with respect to category 2, well, first, let me just note, we're going to be below the $700 billion threshold at closing and the trigger is really a four-quarter average beyond that. So, I just wanted to mention the specifics of what is going to trigger it. But within category 2 to category 3, there's really three big distinctions. The first one is losing the tailoring benefit for LCR and NSFR, and you can see based on the ratios that we hold there and our conservatism around liquidity. We feel very well prepared. The other two, which are the inclusion of AOCI in regulatory capital and the DTA threshold going from 25 to 10. Those are both already included at least in what was proposed for the Basel III end-game rules. We all know that those proposals are being debated and refined. But ultimately, we're looking at those two implications as part of the proposal anyway. And so, we don't really see a big difference in the long-term implications, at least as we sit today, again, the proposal may take a different form. But from a planning perspective, those were two things that we already had our eye on. And so, we ultimately feel well prepared all of the implications of either category 2 or the Basel III end-game proposals if they were to go in as currently constructed. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. And our final question comes from Jeff Adelson with Morgan Stanley. You may proceed. Jeff Adelson -- Morgan Stanley -- Analyst Hey, good evening. Thanks for fitting me in. Rich, I just wanted to circle back on your comment about how you continue to kind of trim around the edges. I think last quarter, you were suggesting that the trimming was sort of abating after a number of years of trimming. But given your comments today about how you're continuing to lean in, how the U.S. consumer remains a strength of source, how are you thinking about potentially opening up the credit box a little bit more from here? And relatedly, does the pending deal with Discover factor into how you're thinking about allocating capital at all into more growth at this point? Rich Fairbank -- Chief Executive Officer Thanks, Jeff. The trimming around the edges is, of course, what we do all the time and reactively to not only what we observe in the marketplace but what we think may be coming in the marketplace. We are very much sort of in the same place we were three months ago when we've been talking about this. In other words, the trimming around the edges and the dialing back was a little bit more pronounced in the quarters during the big credit normalization than it has been as we see things settling out. And the drivers of that continue to be -- probably -- in addition to what I said about the consumer, very much also the -- observing our credit performance, not only just the overall portfolio performance but very much the performance of our originations. And strikingly, our originations continue to come out generally on top of each other quarter after quarter. Obviously, that's lagged data that we're viewing but we're -- we've been struck by how long it's been and how consistently it's been that our originations have been generally on top of each other. And a lot of that comes from the trimming around the edges that we have been doing even as there's been some underlying a little bit sort of worsening of overall consumer credit metrics. So, we're in a very similar place to where we were. We feel good about our credit performance and origination performance. We are leaning in across the credit spectrum. With respect to the Discover deal, it's not really altering our origination strategy that's very much continuing as it was before. Obviously, we're very excited about the Discover deal. But I think that with respect to our own strategy, it's really pretty much the same as it was before. Jeff Adelson -- Morgan Stanley -- Analyst And I also wanted to just ask really quickly about the small business car strategy. I know you recently just launched that new Venture X business card recently. It seems like a really unique value proposition with the charge card component. Can you just talk a little bit more about the opportunity to drive growth there and maybe how that's going so far? Any early reason to the type of customers you're getting? Rich Fairbank -- Chief Executive Officer OK. Yes, Jeff. So, we launched the Venture X business card, broadly in the third quarter of last year, and we're pleased with the market response and the customer engagement so far. So, Venture X business, much like our Spark cash plus card was developed to help business owners run and invest in their business with no preset spending limit, great travel benefits, and elevated earn everywhere. And it's a great example of our business is leveraging each other's innovations because we've taken many of the industry-leading travel features of our consumer Venture X product and combine them with the business-grade capabilities of our small business offerings, including the flexible spending capacity that is designed for larger businesses. So, we have been investing in our small business card program, and more broadly, to win at the top of the market for years. And this launch stands on the shoulders of all of that investment, it stands on the shoulders of our technology transformation, and is another example in the continuing drive of Capital One to win at the top of the market across consumers and small business. So, I appreciate the question and we certainly are excited by our continuing progress. Jeff Norris -- Senior Vice President, Global Finance Well, thanks, Rich and Andrew. Thanks, everybody, for joining us this evening and for your continuing interest in Capital One. Have a great evening. Answer:

the Capital One Q1 2024 earnings call

Operator Good day, and thank you for standing by. Welcome to the Capital One Q1 2024 earnings call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norris, senior vice president of finance. Please go ahead. Jeff Norris -- Senior Vice President, Global Finance Thanks very much, Josh, and welcome to everyone. We are webcasting live over the internet this evening. To access the call on the internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our first quarter 2024 results. With me this evening are Mr. Richard Fairbank, Capital One's chairman and chief executive officer; and Mr. Andrew Young, Capital One's chief financial officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website and click on Investors and click on Financials and then click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials, and Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section called Forward-looking information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC. And with that, I'll turn the call over to Rich -- to Andrew. Mr. Young? Andrew Young -- Chief Financial Officer Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the first quarter, Capital One earned $1.3 billion or $3.13 per diluted common share. Included in the results for the quarter was a $42 million additional accrual for our updated estimate of the FDIC special assessment. Net of this adjusting item, first-quarter earnings per share were $3.21. Relative to the prior quarter, period-end loans held for investment decreased 2% and period-end deposits increased 1%. Both average loans and average deposits were flat. Our percentage of FDIC-insured deposits remained at 82% of total deposits. Pre-provision earnings in the first quarter increased 13% from the fourth quarter or 6% adjusting for the impacts of FDIC special assessments in both quarters. Revenue in the linked quarter declined 1%, largely driven by lower noninterest income. Noninterest expense decreased 6% on an adjusted basis, driven by declines in both operating and marketing expenses. Our provision for credit losses was $2.7 billion in the quarter, a decrease of $174 million compared to the prior quarter. The decrease was driven by $57 million lower net reserve build, partially offset by an $83 million increase in net charge-offs. Turning to Slide 4, I will cover the allowance in greater detail. We built $91 million in allowance this quarter, bringing the balance to $15.4 billion, an increase of less than 1% from the fourth quarter. The slight increase in allowance balance was driven by modest builds in our Auto and Domestic Card portfolios. Our total portfolio coverage ratio increased 11 basis points to 4.88%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. Our baseline economic forecast modestly improved this quarter compared to what we assumed last quarter, which generally aligns with consensus. We continue to consider a range of economic outcomes in our reserving process. In our Domestic Card business, the allowance coverage ratio increased by 22 basis points to 7.85%. The increase in coverage was primarily driven by the denominator effect of the runoff of the fourth quarter's seasonal outstandings. In our Consumer Banking segment, the allowance increased by $46 million, resulting in a seven-basis-point increase to the coverage ratio. The allowance increase was primarily driven by a higher level of originations in the Auto Finance business. And finally, our Commercial Banking allowance decreased by $7 million, primarily driven by portfolio contraction. Coverage ratio increased by one basis point to 1.72%. Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves in the quarter increased to $127 billion, about $7 billion higher than last quarter. Our cash position ended the quarter at approximately $51 billion, up about $8 billion from the prior quarter. The increase in cash was driven by continued strong deposit growth in our retail banking business and the seasonality of our card balances. Our average liquidity coverage ratio during the first quarter remained strong and well above regulatory minimums at 164%. Turning to Page 7, I'll cover our net interest margin. Our first-quarter net interest margin was 6.69%, four basis points lower than last order and nine basis points higher than the year-ago quarter. The quarter-over-quarter decrease in NIM was largely driven by the impact of having one fewer day in the quarter. Modestly higher asset yields were mostly offset by higher funding costs in the quarter. Turning to Slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 13.1%, approximately 20 basis points higher than the prior quarter. Strong earnings and lower risk-weighted assets more than offset the impact of CECL phase in dividends and share repurchases. We repurchased approximately $100 million of shares in the first quarter. Our repurchase activity in the quarter was impacted by blackout restrictions and daily purchase volume limitations related to the announcement of the Discover transaction. With that, I will turn the call over to Rich. Rich? Rich Fairbank -- Chief Executive Officer Thanks, Andrew, and good evening, everyone. Slide 10 shows first quarter results in our Credit Card business. Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on Slide 11. Top-line growth trends in the Domestic Card business remained strong in the first quarter. Year-over-year purchase volume growth for the first quarter was 6%. Ending loan balances increased $12.9 billion or about 10% year over year. Average loans increased 11%, and first-quarter revenue was up 12% year over year, driven by the growth in purchase volume and loans. The charge-off rate for the quarter was up 190 basis points year over year to 5.94%, about 18% above its pre-pandemic level in the first quarter of 2019. The 30-plus delinquency rate at quarter end increased 82 basis points from the prior year to 4.48%. On a sequential-quarter basis, the charge-off rate was up 59 basis points, and the 30-plus delinquency rate was down 13 basis points. The linked-quarter delinquency and charge-off rate trends were modestly worse than what we would expect from normal seasonality. We believe this is largely driven by lower and later tax refund payments to consumers so far in 2024, relative to what we've historically observed. Tax refunds are an important factor in credit seasonality. Each year, they drive an improvement in delinquency payments and recoveries starting in February. Our portfolio trends generally have a more pronounced seasonal pattern than the industry average. Last quarter, our view was that the charge-off rate was settling out about 15% above 2019 levels in the near term. That was based on an extrapolation of our delinquency inventory and flow rates over three to six months, and that was the horizon of our estimate. If the trend of lower tax refunds sustains, it could raise the level of charge-off somewhat in the near term but this does not change our view that credit is settling out modestly above pre-pandemic levels in 2018 and 2019. The continuing deceleration in the pace of credit normalization trends sometimes referred to as the improving second derivative supports our view. The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the first quarter. Domestic Card noninterest expense was up 6% compared to the first quarter of 2023, with increases in both operating expense and marketing expense. Total company marketing expense of about $1 billion for the quarter was up 13% year over year. Total company marketing drives growth and builds franchise in our Domestic Card and Consumer Banking businesses and builds and leverages the value of our brand. Our choices in Domestic Card are the biggest driver of total company marketing. We continue to see attractive growth opportunities in our Domestic Card business. Our opportunities are enhanced by our technology transformation. Our marketing continues to deliver strong new account growth across the domestic Card business. And in the first quarter, Domestic Card marketing also included higher early spend businesses driven by strong new account growth, higher media spend, and increased marketing for franchise enhancements like our travel portal, airport lounges, and Capital One shopping. We continue to lean into marketing to drive resilient growth and enhance our Domestic Card franchise. As always, we're keeping a close eye on competitor actions and potential marketplace risks. Slide 12 shows first quarter results for our Consumer Banking business. In the first quarter, Auto originations increased 21% from the prior year quarter, a return to growth after several quarters of year-over-year declines. Consumer Banking ending loans decreased about $3.1 billion or 4% year over year, on a linked quarter basis ending loans were essentially flat. We posted another quarter of year-over-year growth in consumer deposits. First quarter ending deposits in the consumer bank were up just under $10 billion or 3% year over year. Compared to the sequential quarter, ending deposits were up about 2%. Average deposits were up 6% year over year and up 1% from the sequential quarter, powered by our modern technology and leading digital capabilities our digital-first national direct banking strategy continues to deliver strong consumer deposit growth. Consumer Banking revenue for the quarter was down about 13% year over year, largely driven by lower auto loan balances and higher deposit costs. Noninterest expense was down about 3% compared to the first quarter of 2023. Lower operating expenses were partially offset by an increase in marketing to support our national digital bank. The Auto charge-off rate for the quarter was 1.99%, up 46 basis points year over year. The 30-plus delinquency rate was 5.28%, up 28 basis points year over year. Compared to the linked quarter, the charge-off rate was down 20 basis points, while the 30-plus delinquency rate was down 106 basis points. The linked-quarter charge-off rate improvement modestly underperformed the typical seasonal patterns we've historically observed driven by the tax refund trends I just discussed. Even with the tax refund effects, auto credit performance remains strong. Slide 13 shows first quarter results for our Commercial Banking business. Compared to the linked quarter ending loan balances decreased about 1%. Average loans were also down about 1%. The modest declines are largely the result of choices we made in 2023 to tighten credit. Ending deposits were down about 5% from the linked quarter. Average deposits were down about 8%. The declines are largely driven by our continued choices to manage down selected less attractive commercial deposit balances. First quarter revenue was up 2% from the linked quarter. Noninterest expense was up about 6%. The Commercial Banking annualized net charge-off rate for the first quarter decreased 40 basis points from the sequential quarter to 0.13%. The Commercial Banking criticized performing loan rate was 8.39% down 42 basis points compared to the linked quarter. The criticized nonperforming loan rate increased 44 basis points to 1.28%. Commercial credit risks continue to be most pronounced in the commercial office portfolio, which is less than 1% of total company loan balances. In closing, we continued to deliver strong results in the first quarter. We posted another quarter of top-line growth in Domestic Card revenue, purchase volume, and loans. Domestic Card credit trends continue to stabilize and Auto credit trends remained stable and in line with normal seasonal patterns. We grew consumer deposits, and we added liquidity and maintain capital to further strengthen our already strong and resilient balance sheet. Over the last decade, we've driven significant operating efficiency improvement even as we've invested to transform our technology, and we continue to drive for efficiency improvement over time. For the full year 2024, we continue to expect annual operating efficiency ratio net of adjustments to be flat to modestly down compared to 2023. Our expectation includes the partial year impact of the proposed CFPB late fee rule, assuming the rule takes effect in October 2024. The timing of the new rule remains uncertain. If the rule were to take effect at an earlier date, it would be a headwind to the 2024 operating efficiency ratio. Of course, the biggest news in the quarter was our announcement that we entered into a definitive agreement to acquire Discover. We've submitted our application for regulatory approval, and we're fully mobilized to plan and deliver a successful integration. The combination of Capital One and Discover creates game-changing strategic opportunities. The Discover payment position Capital One as a more diversified, vertically integrated global payments platform, and adding Capital One's debit spending and a growing portion of Credit Card purchase volume to the Discover network will add significant scale, increasing the network's value to merchants, small businesses, and consumers and driving enhanced network growth. In the Credit Card business, we're bringing together two proven franchises with complementary strategy and a shared focus on the customer. And we can accelerate the growth of our national digital-first consumer banking business by adding the Discover's consumer deposit franchise and the vertical integration benefits of the debt network. We will be able to leverage and scale the benefits of our 11 years transformation across every business and the network, which will serve as the catalyst for innovation and enhanced capabilities in risk management and compliance underwriting marketing, and customer service. Pulling way up, the acquisition of Discover is a singular opportunity. It will create Consumer Banking and global payments platform with unique capability, modern technology, powerful brands, and a franchise of more than 100 million customers. It delivers compelling financial results, and it offers the potential to create significant value for merchants and customers and an unparalleled strategic and economic upside over the long term. And now, we'll be happy to answer your questions. Jeff? Jeff Norris -- Senior Vice President, Global Finance Thank you, Rich. We'll now start Q&A session. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. And if you have follow-up questions after the Q&A session, the Investor Relations team will be available after the call. Josh, please start the Q&A session. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from Ryan Nash with Goldman Sachs. You may proceed. Ryan Nash -- Goldman Sachs -- Analyst Hey, good evening, guys. So, Rich, maybe just start off on credit. It sounds like you're running a little bit ahead of what you had outlined in the last quarter. But when you put aside the time the tax refund, maybe just talk about what you're seeing from the consumer. And do you think we've now reached the inflection where we can more closely follow seasonal patterns? And once the noise settles, do you think we're kind of back at that 15% level that you had outlined? Thank you. Rich Fairbank -- Chief Executive Officer Thank you, Ryan. Look, I think that the story continues to be one of -- well, in terms of -- there's sort of the consumer itself. Let's just talk about the consumer for a second and then let's talk about Capital One's credit performance but just the health of the consumer. I think the U.S. consumer remains a source of strength in the economy. The labor market remains strikingly resilient. Rising incomes have kept consumer debt servicing burdens relatively low by historical standards. And when we look at our customers, we see that they have higher bank balances than before the pandemic, and this is true across income levels. On the other hand, of course, inflation shrank real incomes for almost two years. And in this high interest rate environment, the cost of new borrowing has gone up in every major asset class. And I think at the margin, these effects stretch some consumers financially. But on the whole, I'd say consumers are in reasonably good shape relative -- pretty strong shape relative to historical benchmarks. So, in terms of Capital One's performance, we continue to see a settling out. We consider -- we believe that for Capital One, I can't speak for all card issuers, but we definitely have seen what we think is sort of a landing. And our -- so we feel very good about where the credit is. The point that I wanted to make about the tax refunds, let's just pull up for a second on that. The tax refunds are something that nobody knows for sure exactly what's behind seasonality, but I think it's a -- we believe, a very important driver of seasonality. It's a bigger effect for us than other players because I think cash refunds just play a little bit bigger role in -- collectively across our customer base. So, the tax refunds in the very near-term effect credit performance, Ryan, what you're referring to the 15% guidance that we gave, that was not an annual guidance number that was saying, if we just extrapolate in the very near window of just what we see in terms of delinquencies and delinquency roll rates. That's where we would see charge-offs, and charge-offs tend to be higher in the first half of the year. So, what we're doing is giving a window to the higher part of charge-offs for the year, and we were saying they were settling out looked like around 15% above 2019 levels. Part of that -- and so basically, what I'm saying is that includes our assumptions about what happens with tax refund and the seasonality effect. As we can see in the government data, tax refunds are lower and later than by historical patterns. And so, that affects our near-term credit performance. And actually, we often talk about, well, isn't the 6-month window basically once charge-offs start bubbling and going through the roll rate buckets we can pretty much see where charge-offs are going. Tax refunds actually affect the payment rates in every bucket. So, our point was in the very near term, it actually leads to a bit of a higher charge-off rate than we had guided to over that near window. But that doesn't change our view that credit has settled out but the 15% was not a guidance for the year. We haven't really given credit guidance for the year. What we're really saying is we have seen credit settle out but we wanted to just flag that both in the Credit Card business and in our Auto business while credit continues to be very strong, and you've seen things like really improving delinquencies, we just wanted to point out that in the very near term, relative to what we have seen in terms of historical seasonality and kind of confirmed by what we watch as the patterns of tax refunds, there is -- it's coming in lower and later. And we just wanted to flag that effect because it affects the very near-term numbers that we cited earlier. Ryan Nash -- Goldman Sachs -- Analyst Got it. Maybe as my quick follow-up for Andrew. I guess, given Rich's answer, what does that mean for the trajectory of the allowance? It seems like we've heard a handful of other issuers talk about us being at the peak or maybe even coming down and potentially being below where it ended the prior year. Can you maybe just talk about what you think this means for Capital One given your credit expectations? Andrew Young -- Chief Financial Officer Yeah. Sure, Ryan. I'd like to say from my perspective that there's a simple answer but there's not. And then there's a host of things that are going to drive allowance from here, not the least of which is growth, but just focusing on coverage and assuming that's what others are pointing to. The first thing I'd highlight and I said in my talking points that fourth quarter had seasonal balances, they quickly pay off in the first quarter and therefore, have negligible coverage, which we see every year. So, the coverage ratio this quarter up a bit from last quarter is really a result of that dynamic. But if you look at coverage ratio now, it's largely in line with the preceding quarters, I mean, the biggest driver as we look ahead, are the projected loss rates. And as we've been saying for a number of quarters, delinquencies are the best leading indicator of that. And so, every quarter, we're going to look out over the next 12 months and then the reversion from there. And we're going to take into account a range of outcomes and uncertainties. And so, you've seen over the last few quarters, keeping the coverage ratio flat. I will note, though, even in a period where projected losses in future quarters are lower than today and might indicate a release otherwise, you could very well see a coverage ratio that remains flat or only modestly declined as we incorporate the uncertainty of that future projection into the allowance. And so, eventually, the projected losses will -- when they're lower will flow through the allowance and bring the coverage ratio down as those uncertainties become more certain. And under that scenario, you would see a decline. But at this point, like I'm not going to be in the forecasting business of when that actually is going to take into account because, like I said, we really need to take the factor of uncertainty as we look ahead every quarter that we go through the reserving process. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. One moment for questions. Our next question comes from Mihir Bhatia with Bank of America. You may proceed. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Hi. Thank you. Rich, if I could switch for a second to the Discover acquisition? There's been a lot of talk around deal approval, particularly focusing around potential antitrust issues within the Card business. And I was wondering if you could share your thoughts and perspective on that issue if you've heard anything from regulators but also just to hear how you are thinking about that issue. Thank you. Rich Fairbank -- Chief Executive Officer OK. Thank you, Mihir. So, we have filed our merger applications with both the Fed and the OCC, and we are engaged with the -- sorry, with the DOJ as they, of course, play a key role in advising the Fed and the OCC on competition questions. We believe our applications make a very compelling case for approval. We believe strongly that this merger will increase competition among banks and credit card issuers and payment networks, and provide significant benefits for consumers, merchants, and the communities that we serve. While some have raised concerns about competition, we believe that the facts in favor of the deal will be compelling. On the network side, let's remember that we're not currently in that business. If the deal is approved, we will still have four networks just like we do today but we will be adding new customers and scale to the smallest by far of the four networks and be able to leverage our technology talent and marketing capabilities to greatly enhance Discovery's competitive viability. Their market share was 6% a decade ago and sits at just 4% today. The significant investments that we are planning will provide substantial benefits for consumers and merchants as we've outlined in our regulatory applications. On the Credit Card side, the regulators have found every time they've studied it that the credit card market is highly competitive and not at all concentrated. In fact, it's less concentrated today than it was 10 years ago. Consumers can choose from over 4,000 issuers, all able to offer products with similar capabilities. Imagine this, a card issued by a small credit union can be used every place that a card issued by a bank like Capital One can be used, anywhere in the world, that kind of level playing field doesn't exist in any other industry, and certainly not in airlines or grocery stores or many of the others. There's a reason that we ask folks what's in your wallet. We compete not only with these 4,000 other issuers to gain your business in the first place but also with every other card you likely already own. Put another way, we have to compete every day for every single transaction because our customers can simply choose at any moment to use another card. And if they don't like the card they have, they can stop using it entirely or close the account, or switch to another card with another bank, large or small, in minutes. We also believe that the facts will show that there are no barriers to entry in the credit card business as thousands of current issuers and the new ones are forming all the time demonstrate. New and incumbent fintechs backed by significant VC funding are able to leverage the infrastructure of sort of credit card as a service players like Marqeta to achieve instant scale and high growth. Also, any existing bank can choose where in the credit spectrum they play simply by changing their credit policy. Let's also remember that consumers can choose to use another form of payment entirely, cash, debit, or buy now pay later, which has exploded onto the marketplace. New fintechs are entering the payments in small-dollar credit space every day all looking to take market share from traditional credit card players like Capital One. We faced this competition for years and we'll continue to face it in the future. It's powerful evidence of a healthy and fiercely competitive marketplace. But we have been successful by focusing on the needs of our customers and offering credit card and retail banking products with the most straightforward terms and fewest fees in the industry. We're the only major bank where all of our deposit products come with no fees, no minimums, and no overdraft fees. So, pulling way up, we believe the facts will show that this transaction is both pro-competitive and pro-consumer, bringing our best-in-class products and services to a broader set of consumers and small businesses and greatly enhancing opportunities and benefits for merchants. In the end, that is what we believe the regulators will use their very vigorous process to evaluate. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. That is helpful. Just turning back to the health of the consumer for a second for my follow-up. If you could just talk a little bit about the environment for card acquisitions, you did mention, I think, that the growth you see good growth opportunities in the card business. So, wondering if you can expand on that. Maybe talk about just some of the puts and takes as you consider where to make those investments. Are there parts of the market where you're being more cautious given the environment? Thank you. Rich Fairbank -- Chief Executive Officer Mihir, we are leaning in pretty much across the board in the card business, powered by a healthy consumer and the traction that we're getting in our business, we are really all parts of the card business are seeing very nice account originations, seeing good traction on the purchase volume side. And -- so it's very much a positive time for leaning in, as you see reflected in our marketing, as you see reflected in some of the growth numbers, and as I see in numbers behind the numbers that you see, just a lot of traction. And just -- let's just savor for a second, some of the things that are powering that are two things that I would flag is: one, the continued investment that we are making to win at the top of the market. And I think that not only affects our success at the top of the market, but I really believe there's a lifting of all boats from those investments and that traction there. Also, we continue to just have a lot of success powered by our technology transformation, including not only the customer experience and some of the product capabilities that we're able to offer but really impacts on the whole way that we run the business and very notably on the credit and marketing side of the business, the ability to create mass-customized offerings and real-time solutions just enables us to have more traction on the growth side. Also, I just want to say that we also are pleased to see things picking up in the Auto business and also we continue to have a lot of traction on our national bank. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Rick Shane with JPMorgan. You may proceed. Rick Shane -- JPMorgan Chase and Company -- Analyst Thanks for taking my questions this afternoon. Rich, I want to make sure I fully understand what you're describing in terms of credit. The framework is that charge-off rates will be about 15% higher than '18, '19 levels in the near term. But now with tax refunds, it might be a little bit higher than that that, over time, it will converge back toward slightly above '18, '19 levels. When I look at the delinquencies. And one of the things we've observed is that role from delinquency to charge-off is actually higher than it has been pretty much at any time in recent history. Does that suggest that delinquencies actually need to get back below '18, '19 levels to achieve that level of charge-off performance? Rich Fairbank -- Chief Executive Officer So, Rick, there's a lot. First of all, let me clarify some of the things that you were saying weren't exactly I think as we intended to state them. So, let me just -- so we talked about -- so yes, we talked about credit. We're saying credit settling out. We said in the very near term, where charge-offs tend to be higher in the first half of the year. In the near term, based on extrapolation from delinquency buckets and roll rates we would expect them to settle out at 15% higher than pre-pandemic. That was a near-term forecast. That was not an annual forecast. And then you -- just to clarify your comments that, and over time, it will converge back to slightly above 2018 and 2019. I just want to say those are your words, not ours. We have not given guidance on full-year charge-offs. We tend not generally to give guidance on full-year charge-offs. But we very much like to give you the feel of how things are going. So, we are very much seeing credit settling out. You can see that the trends that continue on the second derivative of delinquencies, and that's a very positive thing. There's another factor that affects charge-offs, which is recoveries. And the recoveries have been -- we've been saying for quite some time, recoveries are lower than usual because of the very low charge-offs we saw over the past three years. So, that all else equal, pushes up net losses relative to pre-pandemic levels. And that impacts probably larger and more prolonged for us than for some of our competitors because we tend to have higher recovery rates than the industry probably as a result of our business mix and our strategy, and we tend to work most of our recoveries in-house rather than selling debt. So, we see a longer tail of recoveries from past charge-offs than most do. By the way, the recoveries, we had talked about recoveries. There probably sort of been at their bottom in terms of that brownout and over time probably heading in a more positive direction. But that also impacts the relationship between charge-offs pre pandemic and where they are today. So, pulling way up, we don't have guidance for credit for the year. We continue to be very happy about charge-offs the way after years of -- after a long period of normalization, that charge-offs are settling out. We've given -- we just wanted to flag that the seasonality, let's just comment -- let's just pause for a second on the seasonality. It still remains to be seen whether the tax refunds are just lower end of story or whether they're later The key thing right now is they are lower cumulatively than they have been -- than they were pre-pandemic for this period of time. And what will take a look at is how it plays out from here to see how much was just later and how much was lower. But what we're saying is, to the extent that it's lower than that impacts in the very near term the charge-off numbers that we had talked about before. But it doesn't change our view about Credit settling out. It doesn't change our view about very positively about the consumer, about credit performance, but it's just something we wanted to flag across both the Credit Card and Auto business. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from John Pancari with Evercore ISI. You may proceed. John Pancari -- Evercore ISI -- Analyst Good afternoon. I guess back to the Discover combination, any update to your thoughts around the timing of the deal close? I know the Fed, the OCC just extended the comment period. And I know you put out there, you expect late '24, early '25. So, any change in terms of your expectation around the timing of the close or any of the key financial metrics that you set out? Rich Fairbank -- Chief Executive Officer OK. Thanks, John. So, let me comment on the Federal Reserve and the OCC extending the comment period. It's standard practice for the Federal Reserve to extend the comment period on bank mergers. We expected the extension, and we don't take any signaling on our deal from the Fed's decision here. So, with respect to the overall timing, the Fed and the OCC typically take several months to work through bank merger applications in consultation with the DOJ on competition questions and they engage frequently with our team along the way. And of course, that process is underway. And we continue to have the same views about the timing of all of this that we did at the time of the announcement. John Pancari -- Evercore ISI -- Analyst OK. OK. Great. Thanks. And then separately, just regarding the -- your expectation on the CET1 front for a pro forma CET1 ratio of about just shy of 14%. Any change to that expectation? And any change to your thoughts around buyback activity in the near term? Could you remain active on that front? Thanks. Andrew Young -- Chief Financial Officer Yeah. John, with respect to the deal, I'll just say, as we talked about when we announced it, we, at the time, used a blend of consensus estimates of where we would have the CET1 at the time of close. There's a number of variables that are going to move between now and in legal day 1, not just the stand-alone performance of each of our companies but balance sheet marks, some of which are driven by credit and stock price. And so, I'm not going to be in the business of sort of recasting every time a little number moves. But I will say our valuation of the deal considered a wide range of outcomes. And so, we remain just as excited today about the financial and strategic benefits of the transaction as we did when we announced the deal. With respect to our stand-alone repurchases, Capital Ones, I'll note that the agreement with Discover does not prohibit us from buying shares. I noted in my prepared remarks, we were blacked out for a period leading up to the deal. And afterwards, the SEC has safe harbor rules that limit the daily average amount of purchases we can do for a period of time after the announcement. So, as a result of those limitations, Q1 had a pace that was less than what we've done in recent quarters. I will also just note that there's also blackout restrictions on repurchases during the proxy vote period. But again, outside of those blackouts, we're not prohibited, and we're able to continue repurchasing shares. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Moshe Orenbuch with TD Cowen. You may proceed. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks. Rich, putting aside the tax refund thing, I mean, yours -- we're sitting here looking you've still got what has been a somewhat persistently high inflation environment and the potential for increases in unemployment, given the nature of your portfolio, you've got kind of a lower end consumer and higher-end consumer. How do you think about that, those factors in terms of thinking about what type of charge-off level you're going to reach over some period of time, not a particular point in time, but over some point in the next year or two, like where you think about that -- they driving a higher level of charge-off expectations? Or how should we think about that? Rich Fairbank -- Chief Executive Officer Moshe, so our -- I think what you're partly getting at is because we have -- part of our portfolio is subprime consumers, how do we feel about how they're performing and sort of in the context of an environment of higher inflation and so on. Let me just comment a little bit about the subprime consumer. In the global financial crisis, we observed that credit metrics in subprime moved earlier in both directions, subprime -- we saw that, but then we saw sort of everything move proportionately, in fact, subprime moved frankly, somewhat less proportionately than prime as a multiple, but obviously, all portfolios worsened quite a bit during the global financial crisis in the pandemic, subprime credit improved more and more quickly than prime but it also began to normalize more quickly, too. And of course, that's in the context of lower-income consumers seeing disproportionate benefits of government aid and then unwinding that over time. And subprime is, of course, not synonymous with lower income, although they are somewhat correlated. So, on the other hand, so if we look at how they have been doing, the income growth from -- for say, lower-income consumers has been consistently higher over the past several years. And we have seen really quite -- other than the tax refund effect, which does show up more in our lower end part of our customer base than the higher credit end. Really, we have seen the subprime performance be very strong. It just worsened faster. And then on a proportional basis, everything caught up with it. But it frankly always seems to be a first mover, and it settled out, frankly, a little bit earlier than -- started settling out a little bit earlier than the rest of our portfolio. So based on current performance, we feel very good across the credit spectrum. We also -- it certainly catches our attention when we see the inflation specter sort of become greater lately. So, we have a real eye on that. As you know, we continue to look at the marketplace and trim around the edges and so on. But the net impression that I would leave you is we continue to feel very good about really the full spectrum of our customers, we continue to lean into the growth opportunities. We have, for some time, just been doing some trimming around the edges and just being a little tighter on the credit lines and things like that credit line increases. But the impression that I want to leave with you is that we are still pretty feel good about this marketplace and the growth opportunities there. Moshe Orenbuch -- TD Cowen -- Analyst Got it. And maybe just as a follow-up question, you alluded to or Andrew alluded to the fact that you expect that late fee -- you can still kind of achieve your objectives from an efficiency ratio even with the late fee coming into effect. But could you talk a little bit about your thoughts about any mitigating efforts that you're planning or in the process of doing? Or is it something that you're going to try and use from a competitive standpoint to take share? How do you think about it? Rich Fairbank -- Chief Executive Officer OK. Thanks, Moshe. So, let's just pull up and reflect on the fact that the CFPB's rule on late fees is scheduled to take effect on May 14. We are prepared to implement the rule on this timeline, if necessary, but ongoing litigation efforts continue to create uncertainty on the ultimate outcome and the timing of the rule. As we've said before, when the rule is implemented, there will be significant impact to our P&L. We expect that this impact will gradually resolve itself within a couple of years from the implementation of our mitigating actions. These mitigating actions include changes to our policies, products, and investment choices. Some of these mitigating actions have already been implemented and are underway. We are planning on additional actions once we learn more about where the litigation settles out. Ultimately, these mitigating actions will play through different line items in the P&L and will mitigate the impact of the late fee rule on our P&L within a couple of years of their implementation. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Don Fandetti with Wells Fargo. You may proceed. Don Fandetti -- Wells Fargo Securities -- Analyst Yes. Rich, can you provide your latest thoughts on auto lending? I know a lot of focus has been around cards, but -- and used car prices have been a little bit lighter recently as well as the tax issue. Maybe talk a bit about a potential pivot there. Rich Fairbank -- Chief Executive Officer Yeah. So, we're feeling very good about the Auto business. So, let's just pull way up. Auto industry margins have recovered somewhat over the past few quarters. Our origination volumes in Q1 were up 20% on a year-over-year basis and a quarter-over-quarter basis, and we're pleased with that growth. Now, there are still headwinds to the auto business. Affordability remains a concern due to the combined effects of high interest rates and still high car prices. And even as car prices have normalized significantly from their peaks, they haven't yet reached a new equilibrium. So, we anticipated the risks in this business, tightening up credit back in 2022, I think, several quarters before some of our competitors. As a result, the performance of recent originations from '22 and '23 has been really strong and frankly, even better than our pre-pandemic originations. And vintage over vintage, that risk remains stable. And as margins have recovered a bit, we're seeing an opportunity to lean back in. So, our years of investments in industry-leading technology and credit infrastructure have allowed us to remain nimble and enabled us to make targeted adjustments to our origination strategies where we see opportunities for growth or emerging risks. So, looking ahead, we remain confident in the business that we're booking and bullish about the opportunities for growth. So, we continue to set pricing in terms that we're comfortable with and feel good about the opportunities that we see in the market. And after talking for really a couple of years about sort of dialing back. I think this is sort of a period where it's moving more into a leaning into it situation for Capital One. And we're, I think, very benefited by the choices that we made over the last couple of years and seeing very strong performance in our vintages. Don Fandetti -- Wells Fargo Securities -- Analyst Thank you. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Sanjay Sakhrani with KBW. You may proceed. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Rich, I think your point on tax refund is clearly a very valid one. Interestingly, though, to your point on the second derivative, that's improved quite nicely even into March. And I think when I look at the tax refund stats now from the IRS, it seems like you've seen a catch-up in refunds and it seems like the average refund numbers have kind of come in line with last year, if not slightly higher. So, I think those are improving, too. Is there a lag effect there? So, like should we see that more pronounced if that's the case in April and May? How has been in the past? Rich Fairbank -- Chief Executive Officer Yeah. So, I can see that you're a student of tax refunds. Just think of all the areas of expertise that you've developed over the years trying to really get your head around this credit card business, things that neither you nor I thought we would really have to learn. Let me make a couple of comments here. So, a key question is, what are we benchmarking things to? So, relative to -- if we talk about relative to last year, the things were even lagging relative to last year, and they've actually crossed over very, very recently crossed over the curve from last year, which I think you're referring to. But then last year really was somewhat of an outlier relative to pre pandemic. Now, one might ask, well, why didn't we just used last year as the seasonality benchmark? Last year itself was an odd year. And from a credit point of view with all the normalization. It was hard to read things through the noise. As we watch the patterns this year, we're going to really end up comparing by the time it's done, how this year compares to last year and whether collectively this year and last year represent sort of a new seasonality that we have to modify relative to the past. I think it's premature on that. And relative to reading seasonality, it's really hard to look at last year's credit metrics just because there was so much normalization. So, we've had an eye on this. We have tended to stick with our seasonality benchmarks, which are developed over a number of years. And I think when this is -- when we're done with this period, we'll sit back and look at it and say, did we learn something about the business that where seasonality might be less magnified in a business like ours than it was before. I think it is too early to tell. But to your other point, even relative to last year, it has very recently crossed over in terms of tax refunds. And yes, to your point, these are things that themselves then have lag effects because people have to get the refunds then they have to make payments. So, this is why very much we are flagging a phenomenon that is sort of in the middle of happening. And the key thing will be by the time it's done was the cumulative tax refund effect. And we're just kind of sharing with you as we go along. And the reason I'm particularly leaning into this particular one is because last time we made a very near-term sort of extrapolation just from our windows of delinquency buckets about where the -- given that in a year, the high part of the year is in the first half of the year, we were just kind of saying in that high part of the year, where things were sort of settling out. And I wanted to give that a little bit -- we're not revising the number but just to say if the seasonality patterns are probably driven by the tax refund effect if it doesn't catch up to historical patterns, then in the very near term, the numbers will be higher than that in this very -- this window we're talking about higher than the 15% number that I said. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Understood. Understood. The second derivative looked good nonetheless for March. Rich Fairbank -- Chief Executive Officer Right. So, look, can I just -- I want to just seize that point. The second derivative continues to be strong. In fact, when you look at sort of all the card players, you can see the strength of Capital One's second derivative. There's another topic, so you didn't know when you were studying all that calculus that this would be at the heart of what you do. So, there's lots of good to pull from this. I just wanted to just clarify the tax refund effect, which I think has a little bit more impact on Capital One than certain other players, and to point out that we actually think we see that effect in both of our consumer businesses. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Great. Just one follow-up for Andrew. Just on the capital return question earlier. Can we step up the run rate relative to some of the last quarters as we look ahead? I know there's been a lot of volatility on some of the regulatory proposals on capital. But as we look ahead, I know there's no limitations, but can we see a step up in the level of capital return relative to the past few quarters as we look ahead, given your capital levels today? Andrew Young -- Chief Financial Officer Well, there's two parts to that, Sanjay. The first is, given the transaction, we are in the process of submitting a new capital plan. So, that's just a procedural piece. So, once that new capital plan is approved, then we have unlimited capacity relative to the SCB in this intervening period, the amount that we repurchase is constrained to what we've requested. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. Our next question comes from Bill Carcache with Wolfe Research. You may proceed. Bill Carcache -- Wolfe Research -- Analyst Thanks. Good evening, Rich and Andrew. Following up on your comments on Auto, how much of an advantage is your excess capital position? Are you seeing competitors who are capital-constrained and perhaps can't take advantage of the attractive market conditions to the same degree? And then I'll just ask my follow-up now. As Capital One continues to grow, could you speak to your category 2 preparedness? Andrew Young -- Chief Financial Officer Yeah, I'll start, Bill, with the -- Rich, do you want to do the -- Rich Fairbank -- Chief Executive Officer Competitive dynamics in auto. My observation about the auto business is that it's still a very competitive marketplace. But when we see our opportunities to grow, we tend to zig a little bit while others zag. And so, we sort of pulled back for a little while and others leaned in. And my point is really now I think we're leaning in and others are pulling back a little bit more. I hadn't really sort of analyzed it in terms of really capital choices really as much as just the very natural rhythms of the marketplace and some of the advantages that Capital One has by virtue of our choices that we made over the last couple of years. But we'll have to think about that. But I just think this is just very much sort of as you've seen numerous times in the past where there's a little bit of an inflection point for Capital One at a time that's a little different and occasionally in a different direction than the inflection points of others. Andrew Young -- Chief Financial Officer And then, Bill, with respect to category 2, well, first, let me just note, we're going to be below the $700 billion threshold at closing and the trigger is really a four-quarter average beyond that. So, I just wanted to mention the specifics of what is going to trigger it. But within category 2 to category 3, there's really three big distinctions. The first one is losing the tailoring benefit for LCR and NSFR, and you can see based on the ratios that we hold there and our conservatism around liquidity. We feel very well prepared. The other two, which are the inclusion of AOCI in regulatory capital and the DTA threshold going from 25 to 10. Those are both already included at least in what was proposed for the Basel III end-game rules. We all know that those proposals are being debated and refined. But ultimately, we're looking at those two implications as part of the proposal anyway. And so, we don't really see a big difference in the long-term implications, at least as we sit today, again, the proposal may take a different form. But from a planning perspective, those were two things that we already had our eye on. And so, we ultimately feel well prepared all of the implications of either category 2 or the Basel III end-game proposals if they were to go in as currently constructed. Jeff Norris -- Senior Vice President, Global Finance Next question, please. Operator Thank you. And our final question comes from Jeff Adelson with Morgan Stanley. You may proceed. Jeff Adelson -- Morgan Stanley -- Analyst Hey, good evening. Thanks for fitting me in. Rich, I just wanted to circle back on your comment about how you continue to kind of trim around the edges. I think last quarter, you were suggesting that the trimming was sort of abating after a number of years of trimming. But given your comments today about how you're continuing to lean in, how the U.S. consumer remains a strength of source, how are you thinking about potentially opening up the credit box a little bit more from here? And relatedly, does the pending deal with Discover factor into how you're thinking about allocating capital at all into more growth at this point? Rich Fairbank -- Chief Executive Officer Thanks, Jeff. The trimming around the edges is, of course, what we do all the time and reactively to not only what we observe in the marketplace but what we think may be coming in the marketplace. We are very much sort of in the same place we were three months ago when we've been talking about this. In other words, the trimming around the edges and the dialing back was a little bit more pronounced in the quarters during the big credit normalization than it has been as we see things settling out. And the drivers of that continue to be -- probably -- in addition to what I said about the consumer, very much also the -- observing our credit performance, not only just the overall portfolio performance but very much the performance of our originations. And strikingly, our originations continue to come out generally on top of each other quarter after quarter. Obviously, that's lagged data that we're viewing but we're -- we've been struck by how long it's been and how consistently it's been that our originations have been generally on top of each other. And a lot of that comes from the trimming around the edges that we have been doing even as there's been some underlying a little bit sort of worsening of overall consumer credit metrics. So, we're in a very similar place to where we were. We feel good about our credit performance and origination performance. We are leaning in across the credit spectrum. With respect to the Discover deal, it's not really altering our origination strategy that's very much continuing as it was before. Obviously, we're very excited about the Discover deal. But I think that with respect to our own strategy, it's really pretty much the same as it was before. Jeff Adelson -- Morgan Stanley -- Analyst And I also wanted to just ask really quickly about the small business car strategy. I know you recently just launched that new Venture X business card recently. It seems like a really unique value proposition with the charge card component. Can you just talk a little bit more about the opportunity to drive growth there and maybe how that's going so far? Any early reason to the type of customers you're getting? Rich Fairbank -- Chief Executive Officer OK. Yes, Jeff. So, we launched the Venture X business card, broadly in the third quarter of last year, and we're pleased with the market response and the customer engagement so far. So, Venture X business, much like our Spark cash plus card was developed to help business owners run and invest in their business with no preset spending limit, great travel benefits, and elevated earn everywhere. And it's a great example of our business is leveraging each other's innovations because we've taken many of the industry-leading travel features of our consumer Venture X product and combine them with the business-grade capabilities of our small business offerings, including the flexible spending capacity that is designed for larger businesses. So, we have been investing in our small business card program, and more broadly, to win at the top of the market for years. And this launch stands on the shoulders of all of that investment, it stands on the shoulders of our technology transformation, and is another example in the continuing drive of Capital One to win at the top of the market across consumers and small business. So, I appreciate the question and we certainly are excited by our continuing progress. Jeff Norris -- Senior Vice President, Global Finance Well, thanks, Rich and Andrew. Thanks, everybody, for joining us this evening and for your continuing interest in Capital One. Have a great evening.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Ken Posner Good morning, and welcome to Mr. Cooper Group's first quarter earnings call. My name is Ken Posner, and I'm SVP of strategic planning and investor relations. With me today are Jay Bray, chairman and CEO; Mike Weinbach, president; and Kurt Johnson, executive vice president and CFO. As a reminder, this call is being recorded. You can find the slides on our investor relations webpage at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. And with that, I'll now turn the call over to Jay. Jay Bray -- Chairman and Chief Executive Officer Thanks, Ken, and good morning, everyone, and welcome to our call. This morning, I plan to talk about Mr. Cooper's technology strategy, which has been a major driver of our growth and which is the key to sustaining higher returns. But first, let's review the quarterly highlights on Slide 3. Operating ROTCE hit 14.5%, which was a great way to start the year as this gets us into our guidance range of 14% to 18% and we continue to see opportunities to progress higher into this range by executing on our strategy. We were pleased to report tangible book value at 15% year over year to $65.48. Now turning to servicing, the portfolio hit $1.1 trillion as we acquired $54 billion in MSRs, with double-digit yields and completed onboarding a $9 billion portfolio from an important new subservicing client. On a year-over-year basis, the portfolio is up 33%. At this point in the cycle, we are clearly pulling away from competitors in terms of building scale. Thanks to fast portfolio growth and impressive operating leverage, servicing income reached $273 million. Mike will comment more on the pipeline in a minute, but I'll spill a little bit of this thunder and tell you we're continuing to see super attractive opportunities in the bulk market, which we believe reflects the shakeout going on in the industry with banks pulling back from the asset class and originators seeking a source of liquidity. Turning to Originations, our team did a great job generating $32 million in pre-tax income while continuing to be an industry leader in retention. As you'll recall, during the quarter we issued $1 billion in high-yield notes priced to yield 7.25%, which I would add represents the tightest spread in the company's history. That was a nice vote of confidence from the high-yield community, and we were also encouraged to see Moody's upgrade our corporate credit rating by two notches and S&P upgrade our outlook to positive. We finished the quarter with record liquidity and a very strong capital ratio, as Kurt will take you through, while also continuing our share repurchases, albeit at a slightly lower level, given the strong returns we saw in the bulk MSR market. Now let's pull up and spend a moment on technology. If you'll turn to Slide 4, we've built our business model around a series of self-reinforcing competitive advantages. A great customer experience leads to strong retention, which maximizes returns and makes us the best bid for acquiring MSRs. Growing scale in turn gives us the resources to invest in technology, which is how we've delivered the operational and cost leadership, which has propelled the company over nearly 30 years to become the nation's largest servicer. Let's turn to Slide 5 and talk about our strategy. AI is in the headlines, as it should be, but to implement AI you need a state-of-the-art platform. So let's start by talking about the cloud, which we embraced much earlier than our peers. In fact, we built our servicing platform to be cloud-native from the start, which is why we were able to sell the IP to Sagent in early 2022 for a 20% interest in their firm. Sagent is now integrating our technology onto a cloud-native core to create a new platform called Dara, which will offer real time, anytime end-to-end processing and will be the first to benefit. But more importantly, by picking the right partner for cloud-native servicing technology, we were able to reallocate resources to other strategically important projects. These include building proprietary tools for customer retention, loan modification, and onboarding portfolios. We've also devoted resources to further digitizing processes and originations and servicing and improving our foundation. And of course, a top priority for us over several years now has been machine learning and AI. Let's turn to Slide 6 and talk about Pyro, our patented mortgage-centric AI platform which we've been actively developing since 2019 in partnership with Google. Initially, we focused Pyro on document extraction and classification, which is a huge project for servicers, since we deal with vast quantities of documents, including lots of non-standard forms. In 2020, we used Pyro to process 150 million pages of data. And today, we are running at well north of 600 million pages per year. How does Pyro help us? When we buy a portfolio of MSRs, we typically ingest hundreds of thousands of documents. Pyro scans and reads these documents using mortgage-specific learning models, harnessing AI to recognize and classify the data and populate it directly into our system. And in addition to capturing standard loan and customer attributes, our technology also detects unstructured content such as signatures and stamps. Pyro is fast, typically processing a new portfolio within 24 hours, and now that it's been trained on hundreds of millions of documents, it's very accurate, with accuracy rates of 97% or higher without any humans in the loop. When it comes to bidding on portfolios, Pyro gives us a massive advantage because we can respond to sellers with great speed and confidence. For example, think of the complexity that goes into modeling advances for a pool of MSRs. Before Pyro, we'd spend months reconciling invoices and filing claims with sellers. And for large portfolios with missing files, this process sometimes dragged on for years. Today with Pyro, we get a crystal clear understanding of advances within hours of reviewing the deal tape, which allows us to price the deal quickly and accurately while the seller doesn't need to worry about a tail of liabilities. Pyro also helps us provide our new customers with a seamless onboarding experience since we have all their data properly recorded. Now to be sure, thanks to Pyro, we've definitely trimmed expenses with fewer people dedicated to data entry, indexing, and reconciliations. But more importantly, with four years of experience, we're now ready to roll out Pyro in many other areas. If you'll turn to Slide 7, let's talk about where we're taking Pyro from here. Over the next few years, AI will radically transform our operations in many ways. For example, we're starting to apply supervised learning techniques to solve unstructured problems. The way this works in a call center is that Pyro continually gathers diagnostic information by listening to calls in real time, monitoring agent actions, and tracking the outcomes. Then the platform uses this information to optimize the flow of calls by recognizing patterns, anticipating issues, and routing calls to the right teams, and prompting agents with the information the customers need. Supervised learning in the call center will mean fewer, faster calls and happier customers whose needs are solved quickly. Now this won't happen overnight and you can't implement these kinds of solutions without a robust digital platform, but over time, these applications will result in massive efficiency gains. We're already taking the first steps on this journey. For example, by using Pyro to automatically summarize calls and trigger follow-up actions. The summaries free up agents from note-taking, allowing them to focus on their customers. And we're finding this application saves roughly 40 seconds off the average call, which for an operation with thousands of calls per day, adds up to millions of dollars in savings. Now, as with any new technology, AI brings risks. That's why we and other companies operate under a rubric of responsible AI, which includes controls to ensure the applications are unbiased, compliant, and secure. To wrap up, I'll leave you with a final point, which is that our technology strategy has benefited from our balanced business model, which shelters us from the extreme swings and profitability of origination-focused peers, and which has allowed us to invest in technology on a consistent basis year in and year out, as we work on the never-ending goal of perfecting our platform. Today, given our momentum and the challenges facing the rest of the industry, we have an opportunity to take our competitive advantages and make them decisive. In other words, we'll use the cloud, AI, and other applications to provide world-class service to our customers, operate as the trusted partner for our agency and investor stakeholders, and drive unmatched costs and operational leadership, which will translate into the rising ROTCE we're guiding you to expect. With that, I'll turn the call over to President Mike Weinbach to take you through the operating results. Mike Weinbach -- President Thanks, Jay, and good morning, everyone. I'd like to start by saying how thrilled I am to be a part of the Mr. Cooper team and how excited I feel to be playing offense in an industry which has such an important customer mission. I'm going to start on Slide 8 and discuss the servicing portfolio, where we're clearly enjoying a period of rapid growth. As of March 31, the portfolio has reached $1.1 trillion, which is up 33% from a year ago. We now have over 5 million customers whom we look forward to serving for many years to come. Growth in the first quarter was split between MSR acquisitions and subservicing. In the MSR market, we've seen very robust volume so far this year, reflecting the two key trends which are reshaping the servicing industry. First, originators are selling MSRs for liquidity if they deal with nearly two years of negative margins in what is one of the most difficult markets in memory. And second, banks are reassessing their exposure to MSRs, due to regulatory capital concerns and the technology investments required to stay competitive relative to their reduced market share. These trends are translating into very strong supply in the bulk market. In the first quarter, our pipeline hit a record level, as we evaluated 52 bulk transactions, which is up nearly 50% from the level a year ago. These include deals brought to market by the MSR broker community, where we have excellent relationships, as well as the considerable volume of transactions which sellers bring us directly. For many sellers Mr. Cooper's the preferred buyer. That's because of our hard-earned reputation for timely closing and smooth onboarding and as Jay just explained Pyro means we can respond to sellers with even greater speed and accuracy. This was also a great quarter for our subservicing business where Mr. Cooper's rapidly becoming the platform of choice. In addition to the new client we onboarded, we're benefiting from portfolio growth at many of our existing partners. Our team is actively talking with various MSR owners, including investors, originators, and regional banks, and we're optimistic that we'll be able to win new clients. Subservicing is central to our growth strategy because it adds to our scale advantages and generates fee income without requiring capital or liquidity and is thus an important lever for raising ROTCE into that high teens range. Looking ahead to the second quarter, the momentum should continue with approximately another $100 billion in UPB scheduled to board, again, split between MSRs and subservicing. After that, growth will depend on the yields available in the market. While we're optimistic about a continued robust supply of MSRs, we're also seeing some signs of aggressive pricing, especially for portfolios that are closer to the money. You should expect us to remain disciplined in how we deploy our capital. We have no problem taking a pause from growth if conditions warrant. Turning to Slide 9, let's spend a moment on servicing earnings, which were quite strong at $273 million this quarter, up from $229 million in the fourth quarter. There were several factors driving strong performance, of which the most important was portfolio growth, which drove a $70 million sequential lift in operational revenues. Additionally, servicing earnings benefited from very low CPRs, which came in at 4.2% during the first quarter, minimizing our amortization expense. Finally, we did an outstanding job generating positive operating leverage, with expenses up only $6 million sequentially, despite our rapid growth. This leverage is the payoff from the intense focus on technology and operations that Jay discussed. Now please don't project this level of operating leverage every quarter, as you should expect ongoing investments in new applications, as well as ensuring we have the right number of people to take care of our customers. That said, we expect continued operating leverage even as we continue to invest in the platform. Looking ahead to the second quarter, we guide you to servicing income being flat to up in a range of $270 million to $290 million, depending on the impact of CPRs from the recent uptick in mortgage rates. Now let's turn to Slide 10 and discuss originations where we reported pre-tax earnings of $32 million which came in slightly above guidance. As you recall, when mortgage rates dipped toward the end of last year, our direct-to-consumer team was very nimble in helping customers take advantage of the opportunity to save money. As a result, we saw a slight uptick in rate and term refis which made up 12% of funded volumes in the first quarter. Otherwise, the mix remains dominated by cash out purchase and second liens, which are the products that provide the most value for our customers in this environment. You'll notice our refi recapture rates dip slightly to 70% and the industry dropped from 20% to 18%. This was partly due to a lower mix of cash-out refis, which provides some lift to the ratio since a new cash out loan has a higher UPB than the payoff. Overall, our recapture remains strong at almost four times the industry average. To maximize the value for our customers, we're continuing to invest in our DTC platform. You'll recall last year we talked about how Project Flash helped us realize 20% unit cost savings and processing by digitizing those workflows, which means breaking them down into discrete steps, which can then be automated. Well, now we're applying Flash to underwriting with similar productivity goals. We're also investing in a range of enhancements designed to make the application experience quicker and easier. And we're starting to use AI in originations as well, such as in automating income verification. We're beginning to see a return on these investments in the form of faster cycle times, higher pull through, and lower cost per loan to originate. As we look ahead, the Originations environment remains difficult, but as we continue to grow our servicing portfolio, that means more opportunities to help customers save money or access the equity they built in their homes. For the second quarter, we'd guide you to expect Originations Earnings Before Tax to be flat to up in the range of $30 million to $40 million. Now I'll turn the call over to Kurt who will take you through our financial performance. Kurt Johnson -- Executive Vice President, Chief Financial Officer Thanks, Mike. Good morning. I'll start on slide 11 with a brief recap of our financials. To summarize, net income was $181 million, which includes a positive $42 million mark, $199 million in pre-tax operating earnings, and adjustments of $7 million. In addition to the servicing and operating results, which Mike just took you through, Xome continued to operate around break even with a $1 million loss in the quarter. Adjustments consisted of $2 million in trailing expenses associated with Home Point and other acquisitions last year, and a $4 million loss associated with equity investments. During the quarter, we marked up the MSR by $164 million due to higher interest rates and expectations for lower CPRs, leading to a quarter-end valuation of 155 basis points of UPB or a 5.3 multiple of the base servicing fee strip. This was offset by a $122 million hedge loss, which equated to 74% coverage, which is pretty much right on top of our target ratio of 75%. I'll add that with a weighted average coupon of only 4.1%, our portfolio has significantly less duration and convexity risk than an at-the-money MSR, which makes hedging a relatively simple exercise. Our deferred tax asset declined by $46 million this quarter and now totals $426 million. We continue to utilize our DTAs to offset taxable income and minimize our cash tax payments, which strengthens our cash flow. Tangible book value per share increased 15% year on year to $65.48. You may have noticed that our ending share count ticked up slightly in the quarter from 64.6 million to 64.7 million shares. This was due to issuance of 0.7 million shares relating to investing of employee stock incentives, which is something that typically happens in the first quarter of every year. Slide 12 gives you an update on asset quality, which continues to be a very good story for Mr. Cooper. Last year the markets were concerned about a recession lying just around the corner. And this year, while those concerns have abated, we all know that the cycle eventually turns. And we've put a lot of thought to constructing a portfolio that can perform in bad times, as well as good. As you may recall, Mr. Cooper's growth really took off in the aftermath of the global financial crisis when we took on large troubled portfolios from institutions that didn't have the capacity to manage losses or effectively help their customers. Agencies, MBS investors, and other stakeholders expect a servicer to perform in these conditions, which is arguably one of the most important ways in which we contribute to the health and stability of the mortgage and housing market. In the first quarter delinquencies in our MSR portfolio dropped an all-time low of 1.1% down from a previous record low of 1.3% in the fourth quarter and 2.3% in the first quarter a year ago, with declines in both conventional and government loans. Now clearly the strong credit environment is a major driver of these results, but also we have by design constructed a high-quality book with weighted average FICO scores at a record high while the weighted average LTV continues to decline. This is not accidental. We've been deliberately acquiring seasoned bulk portfolios where the customer's note rates are well below market and where customers have substantial equity built up in their homes. We've also been working to help our customers take advantage of the latest generation of modification programs offered by Fannie Mae, Freddie Mac, FHA, and VA. During the first quarter, we implemented 24,000 workouts up 50% year over year. Rolling out these programs at scale is another example of the power of our digital platform, and it also demonstrates our commitment to keeping the dream of homeownership alive. To wrap up, our balance sheet remains exceptionally strong as you can see on Slide 13. Liquidity reached another record high of $3.3 billion, thanks to $1 billion senior note issuance during the quarter, which we used to pay down our MSR lines. Liquidity consisted of $578 million in unrestricted cash with a remaining in MSR line capacity, which is fully collateralized and immediately available. We did draw on our MSR lines for purchases during the quarter, but this brought us new collateral and we were able to upsize our borrowing capacity by $200 million during the quarter and another $250 million after quarter end. Additionally, we began renegotiating existing MSR lines to extend maturities to 2026. Our capital ratio, as measured by tangible net worth to assets, ended the quarter at 29%, down 30 basis points due to asset growth, but still above our target range of 20% to 25%. As we continue to deploy our capital in a measured, thoughtful, and disciplined manner. As Mike mentioned, we're anticipating boarding another $100 billion in UPB in second quarter, split between owned and subservicing. Just to anticipate the question, at that point we would have capacity for another $50 billion to $55 billion in owned UPB, while still remaining comfortably in compliance with all our capital and liquidity policies. And with our servicing portfolio now generating well in excess of $1 billion per year, we can continue to grow with a combination of cash generated from our business, along with secured and unsecured debt. As you know, we're also pursuing asset-light growth strategies, including subservicing and the launch of a commingled MSR fund and separate managed accounts. Raising LP capital in this environment is not a fast process, but we're having very positive discussions with sovereign wealth funds, pension plans, and other asset managers who view the double-digit uncorrelated net returns available from MSRs, as an attractive opportunity within their private credit allocations. Let me echo Jay's comments about how pleased we are with operating ROTCE already at 14.5%, although obviously it will take not just a single quarter but strong performance over time to demonstrate what we believe the business model is capable of. The 14% to 18% guidance does not assume lower interest rates or higher leverage, but merely that we continue to execute on our technology strategy in both servicing and originations and that we grow asset-light strategies like subservicing. Last quarter, we shared guidance in excess of $10 in operating EPS for 2025. And given our execution on plan, we continue to be extremely confident in our expectations. With that, I'd like to thank you for joining us on today's call and for your interest in Mr. Cooper. I'd now like to turn the call back over to Ken for Q&A. Ken Posner Thanks, Kurt, and Michelle, we'd like to now start the Q&A, please. Questions & Answers: Operator Thank you. [Operator instructions] And our first question is going to come from the line of Crispin Love with Piper Sandler. Your line is open. Please go ahead. Crispin Love -- Piper Sandler -- Analyst Thanks, and good morning. I appreciate taking my questions. Just first -- can you discuss a little bit what you're seeing competition-wise in the origination segment, as you've seen a solid improvement in margins and then also a pick-up in volumes in the quarter? And do you think that you can hold margins steady or they might pull back a bit from the elevated levels you had in the first quarter? Mike Weinbach -- President Yeah, hi, it's Mike. As we look across the originations market, obviously with rates up, it continues to be a challenging market. But at the same time as our portfolio grows, we have more opportunities to help customers take advantage of the equity they have in their homes, find ways to have a lower rate or if they're looking to move, help them with a purchase in a new home. So we don't give specific guidance on margins, but we feel good about the opportunities we've had to be consistently profitable in this space and to continue to take great care of our customers. So, we expect it to continue to be a competitive market if rates are higher. Obviously, that'll change if rates come down, but we mostly focus on being there to serve our customers regardless of the rate environment. Crispin Love -- Piper Sandler -- Analyst I appreciate the color there. And then you also -- you mentioned that the MSR bulk purchase market remains attractive and you put some numbers around that as well. But let's dig a little bit deeper there and discuss, one the competition you're seeing, and then, two what types of portfolios you're most interested in, and -- is it higher coupon, lower coupon, more agency, or just any other color? Thank you, and I appreciate you taking my questions. Jay Bray -- Chairman and Chief Executive Officer Sure. Hey, this is Jay. Look, we think the bulk market is extremely attractive. I think as Mike pointed out, we looked at over 50 opportunities in the quarter and it's a mix. It's a blend of legacy portfolios, as well as at-the-money, kind of newly originated portfolios. And our approach is just to maintain our discipline. We look at all these portfolios. We run them. We have more data and more information probably than anybody in the industry around how certain sellers are going to perform, how the collateral is going to perform from a prepayment standpoint, default standpoint, etc. And we just exercise our consistent discipline in hitting our targeted returns. So I won't say we're indifferent with respect to what the portfolios look -- come out or what's in the market, but we'll just continue to exercise our discipline and hit our targeted returns. But we're very, very bullish on the opportunity, and we just actually bought some additional portfolios this week. So we think the market is there and it's going to continue to be there. Operator Thank you. [Operator instructions] And our next question is going to come from the line of Bose George with KBW. Your line is open. Please go ahead. Bose George -- Keefe, Bruyette and Woods -- Analyst Hey, everyone. Good morning. Can you talk about the potential longer-term growth in the servicing portfolio? I mean, could we see, you know, $2 trillion at some point and would regulators see that as a concern or as a plus as servicing moves toward larger, well-capitalized servicers like you? Mike Weinbach -- President Yeah, hey Bose, it's Mike. Happy to start with that one and Jay and Kurt can chime in as well. In the past, we had a target of reaching $1 trillion in servicing. I think as we move forward, you're going to hear us talking a lot more about targeted returns. So we are not targeting a certain size. We look at what the market offers. And as Jay just talked about, we're disciplined in terms of the way we price opportunities and so the market really dictate what our future growth is. We feel good about the ability to continue to earn good returns for our shareholders. The only thing I'd add though is, if you look at the market overall, there's about $14 trillion in mortgages outstanding and actually over $30 trillion of equity in the homeowner's homes. And that's grown probably from $10 trillion a decade ago. So there's been some slow and steady growth in the market. You'd expect that to continue. In addition, it's a challenging business. It requires -- making sure you're making the investments to stay compliant with Federal, State & Local Laws and rolling out new programs that investors ask for four years. So we're continually investing back in the business, and I think part of the reason you're seeing us grow is because there's a lot of other people in the mortgage ecosystem who are focused on something other than servicing, helping homeowners get into new homes, leading investment and management platforms. And people have been able to partner with us either through us offering subservicing where they could focus on what they do best or focusing on originations and selling what they originate to be able to fund their business, which has allowed us to grow. So a long way of saying, even with our growth in servicing, it's still a single-digit share of an overall market. And we think there's a lot of reasons for the market to continue consolidating. So the rest of the ecosystem can focus on what they do best. Jay Bray -- Chairman and Chief Executive Officer Yeah, the only thing I would add Bose, is that if you look at our performance, scorecard standpoint, I mean we're consistently number one, number two from all of our stakeholders. And so I think there's a lot of confidence in Mr. Cooper as a servicer. And it's just natural, to Mike's point, it's a large scale matters, technology matters, investment matters. You know, if you look at other financial services, you know, types of companies, market share can grow considerably. And so we don't see any impediment to growth from here. The last comment I would make is about half of our portfolio is subservicing, right? And so we don't really have the capital risk or -- it's completely capitalized business. So long answer to your question, but that's how we think about it. Bose George -- Keefe, Bruyette and Woods -- Analyst That's great, that's very helpful, thanks. And then actually just a question on the corporate segment outlook there. Actually, this quarter's number a reasonable run rate going forward? I mean, there are a couple of little blips, but is this kind of a reasonable level? Jay Bray -- Chairman and Chief Executive Officer No, I think we've actually made some investments in the corporate segment to look to reduce it going forward. We think there's an opportunity in the coming quarters to actually reduce expenses in the corporate segment. So you shouldn't think -- you should really look at that as an investment that we made to actually identify some future savings. Bose George -- Keefe, Bruyette and Woods -- Analyst So, just specifically, some of the expenses in the first quarter were the investments, so you see it kind of trending down from here. Jay Bray -- Chairman and Chief Executive Officer Exactly. Kurt Johnson -- Executive Vice President, Chief Financial Officer Although, Bose it's Kurt, I just wanted to comment that the debt expense had only two out of three months on the new billion-dollar issuance. So that will take up slightly, but it's pretty close to our run rate. And we do call that out separately. Bose George -- Keefe, Bruyette and Woods -- Analyst OK, perfect. Thanks a lot. Operator [Operator instructions] And our next question is going to come from the line of Doug Harter with UBS. Your line is open, please go ahead. Doug Harter -- UBS -- Analyst Thanks, can you talk about the outlook for cost per loan on the servicing side, as you think -- can you continue to drive that lower and does that come from the technology investments because it comes from continued scale or both? Jay Bray -- Chairman and Chief Executive Officer I'll start and let these guys come in. Hey Doug, I mean I'll just give you an example of the power of the platform. You know we boarded $130 billion in the first quarter and our actual little compensation expense went down and we think we could board a $100 billion portfolio today and add less than 50 people. And so we've got incredible scale, incredible power in the platform. And I think we're in still the middle innings of what's possible from a cost-per-loan standpoint, which is why we -- sometime today talking about AI and the investments there. But we've been investing in data and technology for years, and AI is just now another arrow in the quiver to continue to drive costs down. So we really are bullish on continuing to take costs out there. So I don't know, Mike, if you would add anything. Mike Weinbach -- President Yeah, nothing to add. That's the plan. Doug Harter -- UBS -- Analyst Great. Thank you. Operator [Operator instructions] And our next question is going to come from the line of Kyle Joseph with Jefferies. Your line is open, please go ahead. Kyle Joseph -- Jefferies -- Analyst Hey, good morning, thanks for taking my questions. Just looking at Slide 12, wanted to dig a little bit more into industry DQs, particularly on the Ginnie side you're seeing. DQs even come down in that segment. What's driving that dynamic? Have you been able to refi those into Fannie and Freddie products? Kurt Johnson -- Executive Vice President, Chief Financial Officer Hey Kyle, it's Kurt. I'll take a stab at that question. You can see obviously FHA coming down a lot faster than VA and USDA. FHA has done a really great job from a modification standpoint of just putting programs in place that are easy for the servicer to implement and really attractive for the customer as well. So they have programs that allow the customer to stay in their low rate mortgages and capitalize sort of all of their [Inaudible] on the back end of the mortgage. And we've actually seen them perform quite well as well. So the customer, once they recover from their temporary hardship, is able to go into these, keep the same mortgage rate, and really kind of continue to perform. And that's why we're seeing sort of the drop off in FHA. Now, VA hasn't had the same programs historically, and so that's why you've seen sort of a slower decline, particularly around customers that are coming off of forbearance. But VA just introduced a new program this last week, where customers can get a modification with a 2.5% rate and a 30-year to 40-year amortization. So we do think that VA in the near term will probably have some good opportunities as well. But that's really what's driving it. And yes, we are seeing it industrywide. If you look at kind of the FHA performance, you'll see their delinquencies have dropped overall over the last couple of months, and I think you'll continue to see them decline as servicers are able to implement these programs. Kyle Joseph -- Jefferies -- Analyst Got it, and then kind of a tangential follow-up just in terms of Xome, you know, was the first quarter -- is that a decent revenue run rate? You know, obviously the lower DQs would impact that business but just give us a sense for how that business is performing given the declines in DQs. Jay Bray -- Chairman and Chief Executive Officer I mean, I think Xome is performing as expected, right? We're not expecting anything terribly exciting from Xome in this market. I mean, delinquencies are at all-time lows. We don't see that changing anytime soon. Given Kurt's point, the government continues to roll out programs to keep borrowers in their homes, which is obviously very, very positive for the servicing business. But I think, until the cycle changes and you start to see more foreclosures meaningful, I don't think you should expect a lot out of them. But again, we're patient. It's a very valuable asset. We've got a great platform there. We continue to win market share, and we'll be patient. Kyle Joseph -- Jefferies -- Analyst Got it, thanks very much for taking my question. Operator [Operator instructions] Our next question is going to come from the line of Giuliano Bologna with Compass Point. Your line is open. Please go ahead. Giuliano Bologna -- Compass Point Research and Trading -- Analyst Good morning. Congratulations on the continued execution. Jay Bray -- Chairman and Chief Executive Officer Thanks, Giuliano. Giuliano Bologna -- Compass Point Research and Trading -- Analyst One thing I'd be curious about is, you've obviously grown the portfolio a lot, and you obviously have another $100 billion projected for next quarter. Is there any preference for balanced portfolios or at-the-money portfolios going forward? And is there any kind of preference for the different products out there? Jay Bray -- Chairman and Chief Executive Officer Again, I think the way we think about it is we're always going to be a market participant and we're always going to look at what's in the market and stick with our kind of disciplined approach to hit our targeted returns. And so we today, I would say, are buying more conventional than Ginnie. And historically, I've bought more out of what I would call out of the money portfolios. But as the market evolves and changes, I think you'll see more at-the-money portfolios coming to market, especially from the originators. And so we're going to be active, but we're going to be disciplined. And we don't see really any change in the velocity of what's coming to market just given where the banks are at and where the origination markets at we'll just continue to focus on what we do and we have a real competitive advantage from a loan boarding standpoint, cost standpoint, recapture standpoint, so we feel good about the opportunity. Mike Weinbach -- President The only thing I'd add is that we do look at all the transactions on an option-adjusted spread basis. And so we price with the optionality at-the-money portfolios and where we see value, we will buy and to Jay's point, we're relatively indifferent. We just want to make sure that we're adding value to our shareholders with every single purchase that we do. We do think our recapture is best-in-class. And so as there are opportunities for at-the-money, I think that there's some good opportunities for DTC and to leverage that platform a little bit more. So you may see us a little bit more active at closer to at-the-money and giving our portfolio a little bit of room for growth from an originations perspective. But again, discipline around the price and we said we looked at 52 portfolios. You know, we didn't win anywhere close to 52. So it's still a competitive marketplace and where we think -- we see value and where we see additive to our earnings potential, that's where we're going to be a winning bettor. Giuliano Bologna -- Compass Point Research and Trading -- Analyst Yeah, that's very helpful. And then, one that the -- hopefully it's not -- too early to bring up, but Freddie Mac has a proposal out, still a proposal, hasn't been approved yet, but around insuring and enabling second mortgages that would be fixed rates in 20 years' term instead of HELOC for current Freddie Mac loans. I'm curious if you think about that type of a product, obviously it's only proposed for Freddie so far, and it'd be interesting to see the goes for, it ends up being close for Fannie as well. But I'm curious if there's any opportunity around that product or you've thought about the potential opportunity because it could obviously bring in another wave of origination, kind of quasi cash or refi volume that could be added to the origination platform and also to the servicing platform. Just curious if you've thought about -- what that opportunity could look like. I realize it's fairly early days. Mike Weinbach -- President Yeah, hey, Giuliano, it's Mike. You said a lot of the answer in your question which is -- it's relatively early days but we think it's very interesting and we exist to serve homeowners and if there are more tools that give us opportunities to help homeowners take advantage of the equity in their home, it's great for our customers and it's great for us. As this market is developing, I mean, if you think back to the HELOC market before the financial crisis, obviously that didn't end up very well. And so since then it's been much more responsible and we appreciate that and support that and want to continue to see that. And it's still in the early innings of evolving. So the vast majority of Americans with a mortgage have a mortgage at a much lower rate than where loans are being originated today. I go back to some of the stats I threw out earlier. Over $30 trillion of equity available in homes against $14 trillion of mortgages. So the LTV of the market as a whole is in the low 30s. So there's a lot of opportunity there. And we'd love to see products come out that are simpler for homeowners. And Freddie is in a great position. They have the first lien. They know a lot about that customer. They know a lot about the value of the loan. They know a lot about the security of the instrument. And so we're really excited to see they're looking at ways to innovate to make things easier for customers and their servicers and their investors to help customers take advantage of the equity in their homes. Jay Bray -- Chairman and Chief Executive Officer And the only thing I'd add is we're doing second-lien today, right, when you look at our platform, it's a -- not an insignificant percentage of what the origination platform is funding today. So we have the operational capability to roll this out. So, you know, we're excited about it, and I think it will be a real opportunity. Giuliano Bologna -- Compass Point Research and Trading -- Analyst That's very helpful, and I appreciate it. And I will jump back in the queue. Operator [Operator instructions] And our next question is going to come from the line of Terry Ma with Barclays. Your line is open. Please go ahead. Terry Ma -- Barclays -- Analyst Hey, thanks. Good morning. I just want to follow up on the MSR opportunity, maybe to ask it a slightly different way. Maybe like this quarter out of 52 deals, can you give us a sense of how many of those deals actually hit your return hurdles or were in your wheelhouse? And then out of that, maybe how many did you win due to pricing and competition? Jay Bray -- Chairman and Chief Executive Officer I think we're still winning a pretty small percentage in the grand scheme of things. We don't really comment on specifics around that process, but we looked at it all alone. We have a very tight investment committee process around that -- and we're still winning a fairly small percentage, which again we're OK with because we want to make sure we're hitting the returns for our shareholders. Mike Weinbach -- President The only thing I'd add, to reiterate what Jay said, we lose more than we win. We bid almost all of them and we think we get to see almost everything that's in the market because people know our ability to very quickly evaluate a portfolio against our return hurdles and come back with a price. So, yeah, we like that we continue to see everything. We're going to remain disciplined. We're going to be an active participant in the market. And, you know, even losing more than we win, it's helped us be able to grow. Jay Bray -- Chairman and Chief Executive Officer And the last piece I would add is we do have sellers that consistently come to us directly because we've had a proven track record with them. We've been able to execute time and time again. And so there, obviously, we're going to win those in most cases because we have a track record with that seller. So that's one other element of the process. Terry Ma -- Barclays -- Analyst Got it. That's helpful. And then I may have missed this, but on the servicing pre-tax for the quarter, you guys had some pretty good operating leverage. Was there anything one-timers sees knowing that? Now that we think about, I guess, maybe the margin going forward. Kurt Johnson -- Executive Vice President, Chief Financial Officer No, there really wasn't much in the way of one-timers in servicing, particularly not from an expense standpoint. So I think you can -- as Mike said, you can't count on the operating leverage sort of being that robust on a go-forward basis, but I think, Jay pointed out, right, $100 billion of additions with less than 50 ads from a headcount perspective, I think the operating leverage continues to exist and you'll see that play out on a go-forward basis. Mike Weinbach -- President And the only thing I'd add is obviously there's an element of rates there. So with higher rates CPRs were lower. If the environment had been different you might see what appears to be less operating leverage, but what underlies that regardless of rate is we're continuing to invest in the platform, which has given us the capabilities that Jay talked about to bring on new loans without needing to add significant amounts of expense. So we feel great about the scalability of the platform. We're going to continue to invest to realize it, but as I said up front, we expect to see continued operating leverage going forward. Terry Ma -- Barclays -- Analyst Great. Thank you. Operator [Operator instructions] And one moment as we move on to our next question. And our next question is going to be from the line of Eric Hagen with BTIG. Your line is open. Please go ahead. Eric Hagen -- BTIG -- Analyst Hey, thanks. Good morning. On the $50 billion of MSRs that you're onboarding this quarter, can you share how you're financing that? Is it all in cash or using any debt? Was it competitively bid? And any recapture expectations you might expect for that portfolio? And then a follow-up there, I mean is it right to assume that the amortization expense that you expect as you onboard that is sort of proportional to the amortization expense in the overall portfolio right now? Kurt Johnson -- Executive Vice President, Chief Financial Officer Yeah, all good questions, Eric. Look the $50 billion and I'm trying to remember all the questions now because we were a lot of components, Eric. $50 billion was largely competitively bad. To Jay's point there were a couple that probably came directly to us, but for the most part, it was competitively bad. I think, yes, you'll see a pro rata amortization expense, but as Mike pointed out, a lot of that is interest rate dependent. So, if the rates stay kind of where they are in this higher range, I think you'll definitely see sort of a pro-rata amortization. If they increase a little bit, or sorry, if they decrease a little bit, you'll see that go up. I think you'll see a corresponding increase in our DTC performance as well. So again, the focus is on the balanced business model and we do think that these returns are really interest rate agnostic and that where you see a drop off in servicing because of a rate rally, you'll see an increase in our DTC channel. Eric Hagen -- BTIG -- Analyst Yeah, OK, that's helpful. Good discussion on this call. I mean, we've seen the investor base for MSRs evolve very considerably over the last couple of years. Do you feel like a more concentrated ownership of servicing from the non-bank community and mortgage rates contributes to higher volatility for the asset class? How do you think about your footprint in light of the ownership base? Jay Bray -- Chairman and Chief Executive Officer I mean, the short answer is no. From our standpoint, when you look at the buyers that are out there today, typically strong, well-capitalized. You've got the financial buyer segment, which we subservice for, and there are strong counterparties, good operators like a Mr. Cooper. And then you've got, if you look at someone like us, clearly we think our goal is to be the leader in the market, to continue to provide stable, consistent earnings, hit our returns, and, you know, have a fortress balance sheet. I mean, that's the way we think about the business. To be a leader, you need those things. So no, we certainly don't think that it's introduced more volatility into the system. Kurt Johnson -- Executive Vice President, Chief Financial Officer And I would say that the banks are still there, right? They are still bidding against us, and we've seen them win a couple of portfolios in Q1. So it's not like they're entirely out of the marketplace either. Eric Hagen -- BTIG -- Analyst Yeah, got you, I appreciate you, guys. Thank you. Kurt Johnson -- Executive Vice President, Chief Financial Officer Thanks, Eric. Operator Thank you, and I'm showing no further questions at this time, and I'd like to hand the conference back to Jay Bray for any closing remarks. Jay Bray -- Chairman and Chief Executive Officer We appreciate everyone for joining the call. Have a great day. Thank you. Answer:

Mr. Cooper Group's first quarter earnings call

Ken Posner Good morning, and welcome to Mr. Cooper Group's first quarter earnings call. My name is Ken Posner, and I'm SVP of strategic planning and investor relations. With me today are Jay Bray, chairman and CEO; Mike Weinbach, president; and Kurt Johnson, executive vice president and CFO. As a reminder, this call is being recorded. You can find the slides on our investor relations webpage at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. And with that, I'll now turn the call over to Jay. Jay Bray -- Chairman and Chief Executive Officer Thanks, Ken, and good morning, everyone, and welcome to our call. This morning, I plan to talk about Mr. Cooper's technology strategy, which has been a major driver of our growth and which is the key to sustaining higher returns. But first, let's review the quarterly highlights on Slide 3. Operating ROTCE hit 14.5%, which was a great way to start the year as this gets us into our guidance range of 14% to 18% and we continue to see opportunities to progress higher into this range by executing on our strategy. We were pleased to report tangible book value at 15% year over year to $65.48. Now turning to servicing, the portfolio hit $1.1 trillion as we acquired $54 billion in MSRs, with double-digit yields and completed onboarding a $9 billion portfolio from an important new subservicing client. On a year-over-year basis, the portfolio is up 33%. At this point in the cycle, we are clearly pulling away from competitors in terms of building scale. Thanks to fast portfolio growth and impressive operating leverage, servicing income reached $273 million. Mike will comment more on the pipeline in a minute, but I'll spill a little bit of this thunder and tell you we're continuing to see super attractive opportunities in the bulk market, which we believe reflects the shakeout going on in the industry with banks pulling back from the asset class and originators seeking a source of liquidity. Turning to Originations, our team did a great job generating $32 million in pre-tax income while continuing to be an industry leader in retention. As you'll recall, during the quarter we issued $1 billion in high-yield notes priced to yield 7.25%, which I would add represents the tightest spread in the company's history. That was a nice vote of confidence from the high-yield community, and we were also encouraged to see Moody's upgrade our corporate credit rating by two notches and S&P upgrade our outlook to positive. We finished the quarter with record liquidity and a very strong capital ratio, as Kurt will take you through, while also continuing our share repurchases, albeit at a slightly lower level, given the strong returns we saw in the bulk MSR market. Now let's pull up and spend a moment on technology. If you'll turn to Slide 4, we've built our business model around a series of self-reinforcing competitive advantages. A great customer experience leads to strong retention, which maximizes returns and makes us the best bid for acquiring MSRs. Growing scale in turn gives us the resources to invest in technology, which is how we've delivered the operational and cost leadership, which has propelled the company over nearly 30 years to become the nation's largest servicer. Let's turn to Slide 5 and talk about our strategy. AI is in the headlines, as it should be, but to implement AI you need a state-of-the-art platform. So let's start by talking about the cloud, which we embraced much earlier than our peers. In fact, we built our servicing platform to be cloud-native from the start, which is why we were able to sell the IP to Sagent in early 2022 for a 20% interest in their firm. Sagent is now integrating our technology onto a cloud-native core to create a new platform called Dara, which will offer real time, anytime end-to-end processing and will be the first to benefit. But more importantly, by picking the right partner for cloud-native servicing technology, we were able to reallocate resources to other strategically important projects. These include building proprietary tools for customer retention, loan modification, and onboarding portfolios. We've also devoted resources to further digitizing processes and originations and servicing and improving our foundation. And of course, a top priority for us over several years now has been machine learning and AI. Let's turn to Slide 6 and talk about Pyro, our patented mortgage-centric AI platform which we've been actively developing since 2019 in partnership with Google. Initially, we focused Pyro on document extraction and classification, which is a huge project for servicers, since we deal with vast quantities of documents, including lots of non-standard forms. In 2020, we used Pyro to process 150 million pages of data. And today, we are running at well north of 600 million pages per year. How does Pyro help us? When we buy a portfolio of MSRs, we typically ingest hundreds of thousands of documents. Pyro scans and reads these documents using mortgage-specific learning models, harnessing AI to recognize and classify the data and populate it directly into our system. And in addition to capturing standard loan and customer attributes, our technology also detects unstructured content such as signatures and stamps. Pyro is fast, typically processing a new portfolio within 24 hours, and now that it's been trained on hundreds of millions of documents, it's very accurate, with accuracy rates of 97% or higher without any humans in the loop. When it comes to bidding on portfolios, Pyro gives us a massive advantage because we can respond to sellers with great speed and confidence. For example, think of the complexity that goes into modeling advances for a pool of MSRs. Before Pyro, we'd spend months reconciling invoices and filing claims with sellers. And for large portfolios with missing files, this process sometimes dragged on for years. Today with Pyro, we get a crystal clear understanding of advances within hours of reviewing the deal tape, which allows us to price the deal quickly and accurately while the seller doesn't need to worry about a tail of liabilities. Pyro also helps us provide our new customers with a seamless onboarding experience since we have all their data properly recorded. Now to be sure, thanks to Pyro, we've definitely trimmed expenses with fewer people dedicated to data entry, indexing, and reconciliations. But more importantly, with four years of experience, we're now ready to roll out Pyro in many other areas. If you'll turn to Slide 7, let's talk about where we're taking Pyro from here. Over the next few years, AI will radically transform our operations in many ways. For example, we're starting to apply supervised learning techniques to solve unstructured problems. The way this works in a call center is that Pyro continually gathers diagnostic information by listening to calls in real time, monitoring agent actions, and tracking the outcomes. Then the platform uses this information to optimize the flow of calls by recognizing patterns, anticipating issues, and routing calls to the right teams, and prompting agents with the information the customers need. Supervised learning in the call center will mean fewer, faster calls and happier customers whose needs are solved quickly. Now this won't happen overnight and you can't implement these kinds of solutions without a robust digital platform, but over time, these applications will result in massive efficiency gains. We're already taking the first steps on this journey. For example, by using Pyro to automatically summarize calls and trigger follow-up actions. The summaries free up agents from note-taking, allowing them to focus on their customers. And we're finding this application saves roughly 40 seconds off the average call, which for an operation with thousands of calls per day, adds up to millions of dollars in savings. Now, as with any new technology, AI brings risks. That's why we and other companies operate under a rubric of responsible AI, which includes controls to ensure the applications are unbiased, compliant, and secure. To wrap up, I'll leave you with a final point, which is that our technology strategy has benefited from our balanced business model, which shelters us from the extreme swings and profitability of origination-focused peers, and which has allowed us to invest in technology on a consistent basis year in and year out, as we work on the never-ending goal of perfecting our platform. Today, given our momentum and the challenges facing the rest of the industry, we have an opportunity to take our competitive advantages and make them decisive. In other words, we'll use the cloud, AI, and other applications to provide world-class service to our customers, operate as the trusted partner for our agency and investor stakeholders, and drive unmatched costs and operational leadership, which will translate into the rising ROTCE we're guiding you to expect. With that, I'll turn the call over to President Mike Weinbach to take you through the operating results. Mike Weinbach -- President Thanks, Jay, and good morning, everyone. I'd like to start by saying how thrilled I am to be a part of the Mr. Cooper team and how excited I feel to be playing offense in an industry which has such an important customer mission. I'm going to start on Slide 8 and discuss the servicing portfolio, where we're clearly enjoying a period of rapid growth. As of March 31, the portfolio has reached $1.1 trillion, which is up 33% from a year ago. We now have over 5 million customers whom we look forward to serving for many years to come. Growth in the first quarter was split between MSR acquisitions and subservicing. In the MSR market, we've seen very robust volume so far this year, reflecting the two key trends which are reshaping the servicing industry. First, originators are selling MSRs for liquidity if they deal with nearly two years of negative margins in what is one of the most difficult markets in memory. And second, banks are reassessing their exposure to MSRs, due to regulatory capital concerns and the technology investments required to stay competitive relative to their reduced market share. These trends are translating into very strong supply in the bulk market. In the first quarter, our pipeline hit a record level, as we evaluated 52 bulk transactions, which is up nearly 50% from the level a year ago. These include deals brought to market by the MSR broker community, where we have excellent relationships, as well as the considerable volume of transactions which sellers bring us directly. For many sellers Mr. Cooper's the preferred buyer. That's because of our hard-earned reputation for timely closing and smooth onboarding and as Jay just explained Pyro means we can respond to sellers with even greater speed and accuracy. This was also a great quarter for our subservicing business where Mr. Cooper's rapidly becoming the platform of choice. In addition to the new client we onboarded, we're benefiting from portfolio growth at many of our existing partners. Our team is actively talking with various MSR owners, including investors, originators, and regional banks, and we're optimistic that we'll be able to win new clients. Subservicing is central to our growth strategy because it adds to our scale advantages and generates fee income without requiring capital or liquidity and is thus an important lever for raising ROTCE into that high teens range. Looking ahead to the second quarter, the momentum should continue with approximately another $100 billion in UPB scheduled to board, again, split between MSRs and subservicing. After that, growth will depend on the yields available in the market. While we're optimistic about a continued robust supply of MSRs, we're also seeing some signs of aggressive pricing, especially for portfolios that are closer to the money. You should expect us to remain disciplined in how we deploy our capital. We have no problem taking a pause from growth if conditions warrant. Turning to Slide 9, let's spend a moment on servicing earnings, which were quite strong at $273 million this quarter, up from $229 million in the fourth quarter. There were several factors driving strong performance, of which the most important was portfolio growth, which drove a $70 million sequential lift in operational revenues. Additionally, servicing earnings benefited from very low CPRs, which came in at 4.2% during the first quarter, minimizing our amortization expense. Finally, we did an outstanding job generating positive operating leverage, with expenses up only $6 million sequentially, despite our rapid growth. This leverage is the payoff from the intense focus on technology and operations that Jay discussed. Now please don't project this level of operating leverage every quarter, as you should expect ongoing investments in new applications, as well as ensuring we have the right number of people to take care of our customers. That said, we expect continued operating leverage even as we continue to invest in the platform. Looking ahead to the second quarter, we guide you to servicing income being flat to up in a range of $270 million to $290 million, depending on the impact of CPRs from the recent uptick in mortgage rates. Now let's turn to Slide 10 and discuss originations where we reported pre-tax earnings of $32 million which came in slightly above guidance. As you recall, when mortgage rates dipped toward the end of last year, our direct-to-consumer team was very nimble in helping customers take advantage of the opportunity to save money. As a result, we saw a slight uptick in rate and term refis which made up 12% of funded volumes in the first quarter. Otherwise, the mix remains dominated by cash out purchase and second liens, which are the products that provide the most value for our customers in this environment. You'll notice our refi recapture rates dip slightly to 70% and the industry dropped from 20% to 18%. This was partly due to a lower mix of cash-out refis, which provides some lift to the ratio since a new cash out loan has a higher UPB than the payoff. Overall, our recapture remains strong at almost four times the industry average. To maximize the value for our customers, we're continuing to invest in our DTC platform. You'll recall last year we talked about how Project Flash helped us realize 20% unit cost savings and processing by digitizing those workflows, which means breaking them down into discrete steps, which can then be automated. Well, now we're applying Flash to underwriting with similar productivity goals. We're also investing in a range of enhancements designed to make the application experience quicker and easier. And we're starting to use AI in originations as well, such as in automating income verification. We're beginning to see a return on these investments in the form of faster cycle times, higher pull through, and lower cost per loan to originate. As we look ahead, the Originations environment remains difficult, but as we continue to grow our servicing portfolio, that means more opportunities to help customers save money or access the equity they built in their homes. For the second quarter, we'd guide you to expect Originations Earnings Before Tax to be flat to up in the range of $30 million to $40 million. Now I'll turn the call over to Kurt who will take you through our financial performance. Kurt Johnson -- Executive Vice President, Chief Financial Officer Thanks, Mike. Good morning. I'll start on slide 11 with a brief recap of our financials. To summarize, net income was $181 million, which includes a positive $42 million mark, $199 million in pre-tax operating earnings, and adjustments of $7 million. In addition to the servicing and operating results, which Mike just took you through, Xome continued to operate around break even with a $1 million loss in the quarter. Adjustments consisted of $2 million in trailing expenses associated with Home Point and other acquisitions last year, and a $4 million loss associated with equity investments. During the quarter, we marked up the MSR by $164 million due to higher interest rates and expectations for lower CPRs, leading to a quarter-end valuation of 155 basis points of UPB or a 5.3 multiple of the base servicing fee strip. This was offset by a $122 million hedge loss, which equated to 74% coverage, which is pretty much right on top of our target ratio of 75%. I'll add that with a weighted average coupon of only 4.1%, our portfolio has significantly less duration and convexity risk than an at-the-money MSR, which makes hedging a relatively simple exercise. Our deferred tax asset declined by $46 million this quarter and now totals $426 million. We continue to utilize our DTAs to offset taxable income and minimize our cash tax payments, which strengthens our cash flow. Tangible book value per share increased 15% year on year to $65.48. You may have noticed that our ending share count ticked up slightly in the quarter from 64.6 million to 64.7 million shares. This was due to issuance of 0.7 million shares relating to investing of employee stock incentives, which is something that typically happens in the first quarter of every year. Slide 12 gives you an update on asset quality, which continues to be a very good story for Mr. Cooper. Last year the markets were concerned about a recession lying just around the corner. And this year, while those concerns have abated, we all know that the cycle eventually turns. And we've put a lot of thought to constructing a portfolio that can perform in bad times, as well as good. As you may recall, Mr. Cooper's growth really took off in the aftermath of the global financial crisis when we took on large troubled portfolios from institutions that didn't have the capacity to manage losses or effectively help their customers. Agencies, MBS investors, and other stakeholders expect a servicer to perform in these conditions, which is arguably one of the most important ways in which we contribute to the health and stability of the mortgage and housing market. In the first quarter delinquencies in our MSR portfolio dropped an all-time low of 1.1% down from a previous record low of 1.3% in the fourth quarter and 2.3% in the first quarter a year ago, with declines in both conventional and government loans. Now clearly the strong credit environment is a major driver of these results, but also we have by design constructed a high-quality book with weighted average FICO scores at a record high while the weighted average LTV continues to decline. This is not accidental. We've been deliberately acquiring seasoned bulk portfolios where the customer's note rates are well below market and where customers have substantial equity built up in their homes. We've also been working to help our customers take advantage of the latest generation of modification programs offered by Fannie Mae, Freddie Mac, FHA, and VA. During the first quarter, we implemented 24,000 workouts up 50% year over year. Rolling out these programs at scale is another example of the power of our digital platform, and it also demonstrates our commitment to keeping the dream of homeownership alive. To wrap up, our balance sheet remains exceptionally strong as you can see on Slide 13. Liquidity reached another record high of $3.3 billion, thanks to $1 billion senior note issuance during the quarter, which we used to pay down our MSR lines. Liquidity consisted of $578 million in unrestricted cash with a remaining in MSR line capacity, which is fully collateralized and immediately available. We did draw on our MSR lines for purchases during the quarter, but this brought us new collateral and we were able to upsize our borrowing capacity by $200 million during the quarter and another $250 million after quarter end. Additionally, we began renegotiating existing MSR lines to extend maturities to 2026. Our capital ratio, as measured by tangible net worth to assets, ended the quarter at 29%, down 30 basis points due to asset growth, but still above our target range of 20% to 25%. As we continue to deploy our capital in a measured, thoughtful, and disciplined manner. As Mike mentioned, we're anticipating boarding another $100 billion in UPB in second quarter, split between owned and subservicing. Just to anticipate the question, at that point we would have capacity for another $50 billion to $55 billion in owned UPB, while still remaining comfortably in compliance with all our capital and liquidity policies. And with our servicing portfolio now generating well in excess of $1 billion per year, we can continue to grow with a combination of cash generated from our business, along with secured and unsecured debt. As you know, we're also pursuing asset-light growth strategies, including subservicing and the launch of a commingled MSR fund and separate managed accounts. Raising LP capital in this environment is not a fast process, but we're having very positive discussions with sovereign wealth funds, pension plans, and other asset managers who view the double-digit uncorrelated net returns available from MSRs, as an attractive opportunity within their private credit allocations. Let me echo Jay's comments about how pleased we are with operating ROTCE already at 14.5%, although obviously it will take not just a single quarter but strong performance over time to demonstrate what we believe the business model is capable of. The 14% to 18% guidance does not assume lower interest rates or higher leverage, but merely that we continue to execute on our technology strategy in both servicing and originations and that we grow asset-light strategies like subservicing. Last quarter, we shared guidance in excess of $10 in operating EPS for 2025. And given our execution on plan, we continue to be extremely confident in our expectations. With that, I'd like to thank you for joining us on today's call and for your interest in Mr. Cooper. I'd now like to turn the call back over to Ken for Q&A. Ken Posner Thanks, Kurt, and Michelle, we'd like to now start the Q&A, please. Questions & Answers: Operator Thank you. [Operator instructions] And our first question is going to come from the line of Crispin Love with Piper Sandler. Your line is open. Please go ahead. Crispin Love -- Piper Sandler -- Analyst Thanks, and good morning. I appreciate taking my questions. Just first -- can you discuss a little bit what you're seeing competition-wise in the origination segment, as you've seen a solid improvement in margins and then also a pick-up in volumes in the quarter? And do you think that you can hold margins steady or they might pull back a bit from the elevated levels you had in the first quarter? Mike Weinbach -- President Yeah, hi, it's Mike. As we look across the originations market, obviously with rates up, it continues to be a challenging market. But at the same time as our portfolio grows, we have more opportunities to help customers take advantage of the equity they have in their homes, find ways to have a lower rate or if they're looking to move, help them with a purchase in a new home. So we don't give specific guidance on margins, but we feel good about the opportunities we've had to be consistently profitable in this space and to continue to take great care of our customers. So, we expect it to continue to be a competitive market if rates are higher. Obviously, that'll change if rates come down, but we mostly focus on being there to serve our customers regardless of the rate environment. Crispin Love -- Piper Sandler -- Analyst I appreciate the color there. And then you also -- you mentioned that the MSR bulk purchase market remains attractive and you put some numbers around that as well. But let's dig a little bit deeper there and discuss, one the competition you're seeing, and then, two what types of portfolios you're most interested in, and -- is it higher coupon, lower coupon, more agency, or just any other color? Thank you, and I appreciate you taking my questions. Jay Bray -- Chairman and Chief Executive Officer Sure. Hey, this is Jay. Look, we think the bulk market is extremely attractive. I think as Mike pointed out, we looked at over 50 opportunities in the quarter and it's a mix. It's a blend of legacy portfolios, as well as at-the-money, kind of newly originated portfolios. And our approach is just to maintain our discipline. We look at all these portfolios. We run them. We have more data and more information probably than anybody in the industry around how certain sellers are going to perform, how the collateral is going to perform from a prepayment standpoint, default standpoint, etc. And we just exercise our consistent discipline in hitting our targeted returns. So I won't say we're indifferent with respect to what the portfolios look -- come out or what's in the market, but we'll just continue to exercise our discipline and hit our targeted returns. But we're very, very bullish on the opportunity, and we just actually bought some additional portfolios this week. So we think the market is there and it's going to continue to be there. Operator Thank you. [Operator instructions] And our next question is going to come from the line of Bose George with KBW. Your line is open. Please go ahead. Bose George -- Keefe, Bruyette and Woods -- Analyst Hey, everyone. Good morning. Can you talk about the potential longer-term growth in the servicing portfolio? I mean, could we see, you know, $2 trillion at some point and would regulators see that as a concern or as a plus as servicing moves toward larger, well-capitalized servicers like you? Mike Weinbach -- President Yeah, hey Bose, it's Mike. Happy to start with that one and Jay and Kurt can chime in as well. In the past, we had a target of reaching $1 trillion in servicing. I think as we move forward, you're going to hear us talking a lot more about targeted returns. So we are not targeting a certain size. We look at what the market offers. And as Jay just talked about, we're disciplined in terms of the way we price opportunities and so the market really dictate what our future growth is. We feel good about the ability to continue to earn good returns for our shareholders. The only thing I'd add though is, if you look at the market overall, there's about $14 trillion in mortgages outstanding and actually over $30 trillion of equity in the homeowner's homes. And that's grown probably from $10 trillion a decade ago. So there's been some slow and steady growth in the market. You'd expect that to continue. In addition, it's a challenging business. It requires -- making sure you're making the investments to stay compliant with Federal, State & Local Laws and rolling out new programs that investors ask for four years. So we're continually investing back in the business, and I think part of the reason you're seeing us grow is because there's a lot of other people in the mortgage ecosystem who are focused on something other than servicing, helping homeowners get into new homes, leading investment and management platforms. And people have been able to partner with us either through us offering subservicing where they could focus on what they do best or focusing on originations and selling what they originate to be able to fund their business, which has allowed us to grow. So a long way of saying, even with our growth in servicing, it's still a single-digit share of an overall market. And we think there's a lot of reasons for the market to continue consolidating. So the rest of the ecosystem can focus on what they do best. Jay Bray -- Chairman and Chief Executive Officer Yeah, the only thing I would add Bose, is that if you look at our performance, scorecard standpoint, I mean we're consistently number one, number two from all of our stakeholders. And so I think there's a lot of confidence in Mr. Cooper as a servicer. And it's just natural, to Mike's point, it's a large scale matters, technology matters, investment matters. You know, if you look at other financial services, you know, types of companies, market share can grow considerably. And so we don't see any impediment to growth from here. The last comment I would make is about half of our portfolio is subservicing, right? And so we don't really have the capital risk or -- it's completely capitalized business. So long answer to your question, but that's how we think about it. Bose George -- Keefe, Bruyette and Woods -- Analyst That's great, that's very helpful, thanks. And then actually just a question on the corporate segment outlook there. Actually, this quarter's number a reasonable run rate going forward? I mean, there are a couple of little blips, but is this kind of a reasonable level? Jay Bray -- Chairman and Chief Executive Officer No, I think we've actually made some investments in the corporate segment to look to reduce it going forward. We think there's an opportunity in the coming quarters to actually reduce expenses in the corporate segment. So you shouldn't think -- you should really look at that as an investment that we made to actually identify some future savings. Bose George -- Keefe, Bruyette and Woods -- Analyst So, just specifically, some of the expenses in the first quarter were the investments, so you see it kind of trending down from here. Jay Bray -- Chairman and Chief Executive Officer Exactly. Kurt Johnson -- Executive Vice President, Chief Financial Officer Although, Bose it's Kurt, I just wanted to comment that the debt expense had only two out of three months on the new billion-dollar issuance. So that will take up slightly, but it's pretty close to our run rate. And we do call that out separately. Bose George -- Keefe, Bruyette and Woods -- Analyst OK, perfect. Thanks a lot. Operator [Operator instructions] And our next question is going to come from the line of Doug Harter with UBS. Your line is open, please go ahead. Doug Harter -- UBS -- Analyst Thanks, can you talk about the outlook for cost per loan on the servicing side, as you think -- can you continue to drive that lower and does that come from the technology investments because it comes from continued scale or both? Jay Bray -- Chairman and Chief Executive Officer I'll start and let these guys come in. Hey Doug, I mean I'll just give you an example of the power of the platform. You know we boarded $130 billion in the first quarter and our actual little compensation expense went down and we think we could board a $100 billion portfolio today and add less than 50 people. And so we've got incredible scale, incredible power in the platform. And I think we're in still the middle innings of what's possible from a cost-per-loan standpoint, which is why we -- sometime today talking about AI and the investments there. But we've been investing in data and technology for years, and AI is just now another arrow in the quiver to continue to drive costs down. So we really are bullish on continuing to take costs out there. So I don't know, Mike, if you would add anything. Mike Weinbach -- President Yeah, nothing to add. That's the plan. Doug Harter -- UBS -- Analyst Great. Thank you. Operator [Operator instructions] And our next question is going to come from the line of Kyle Joseph with Jefferies. Your line is open, please go ahead. Kyle Joseph -- Jefferies -- Analyst Hey, good morning, thanks for taking my questions. Just looking at Slide 12, wanted to dig a little bit more into industry DQs, particularly on the Ginnie side you're seeing. DQs even come down in that segment. What's driving that dynamic? Have you been able to refi those into Fannie and Freddie products? Kurt Johnson -- Executive Vice President, Chief Financial Officer Hey Kyle, it's Kurt. I'll take a stab at that question. You can see obviously FHA coming down a lot faster than VA and USDA. FHA has done a really great job from a modification standpoint of just putting programs in place that are easy for the servicer to implement and really attractive for the customer as well. So they have programs that allow the customer to stay in their low rate mortgages and capitalize sort of all of their [Inaudible] on the back end of the mortgage. And we've actually seen them perform quite well as well. So the customer, once they recover from their temporary hardship, is able to go into these, keep the same mortgage rate, and really kind of continue to perform. And that's why we're seeing sort of the drop off in FHA. Now, VA hasn't had the same programs historically, and so that's why you've seen sort of a slower decline, particularly around customers that are coming off of forbearance. But VA just introduced a new program this last week, where customers can get a modification with a 2.5% rate and a 30-year to 40-year amortization. So we do think that VA in the near term will probably have some good opportunities as well. But that's really what's driving it. And yes, we are seeing it industrywide. If you look at kind of the FHA performance, you'll see their delinquencies have dropped overall over the last couple of months, and I think you'll continue to see them decline as servicers are able to implement these programs. Kyle Joseph -- Jefferies -- Analyst Got it, and then kind of a tangential follow-up just in terms of Xome, you know, was the first quarter -- is that a decent revenue run rate? You know, obviously the lower DQs would impact that business but just give us a sense for how that business is performing given the declines in DQs. Jay Bray -- Chairman and Chief Executive Officer I mean, I think Xome is performing as expected, right? We're not expecting anything terribly exciting from Xome in this market. I mean, delinquencies are at all-time lows. We don't see that changing anytime soon. Given Kurt's point, the government continues to roll out programs to keep borrowers in their homes, which is obviously very, very positive for the servicing business. But I think, until the cycle changes and you start to see more foreclosures meaningful, I don't think you should expect a lot out of them. But again, we're patient. It's a very valuable asset. We've got a great platform there. We continue to win market share, and we'll be patient. Kyle Joseph -- Jefferies -- Analyst Got it, thanks very much for taking my question. Operator [Operator instructions] Our next question is going to come from the line of Giuliano Bologna with Compass Point. Your line is open. Please go ahead. Giuliano Bologna -- Compass Point Research and Trading -- Analyst Good morning. Congratulations on the continued execution. Jay Bray -- Chairman and Chief Executive Officer Thanks, Giuliano. Giuliano Bologna -- Compass Point Research and Trading -- Analyst One thing I'd be curious about is, you've obviously grown the portfolio a lot, and you obviously have another $100 billion projected for next quarter. Is there any preference for balanced portfolios or at-the-money portfolios going forward? And is there any kind of preference for the different products out there? Jay Bray -- Chairman and Chief Executive Officer Again, I think the way we think about it is we're always going to be a market participant and we're always going to look at what's in the market and stick with our kind of disciplined approach to hit our targeted returns. And so we today, I would say, are buying more conventional than Ginnie. And historically, I've bought more out of what I would call out of the money portfolios. But as the market evolves and changes, I think you'll see more at-the-money portfolios coming to market, especially from the originators. And so we're going to be active, but we're going to be disciplined. And we don't see really any change in the velocity of what's coming to market just given where the banks are at and where the origination markets at we'll just continue to focus on what we do and we have a real competitive advantage from a loan boarding standpoint, cost standpoint, recapture standpoint, so we feel good about the opportunity. Mike Weinbach -- President The only thing I'd add is that we do look at all the transactions on an option-adjusted spread basis. And so we price with the optionality at-the-money portfolios and where we see value, we will buy and to Jay's point, we're relatively indifferent. We just want to make sure that we're adding value to our shareholders with every single purchase that we do. We do think our recapture is best-in-class. And so as there are opportunities for at-the-money, I think that there's some good opportunities for DTC and to leverage that platform a little bit more. So you may see us a little bit more active at closer to at-the-money and giving our portfolio a little bit of room for growth from an originations perspective. But again, discipline around the price and we said we looked at 52 portfolios. You know, we didn't win anywhere close to 52. So it's still a competitive marketplace and where we think -- we see value and where we see additive to our earnings potential, that's where we're going to be a winning bettor. Giuliano Bologna -- Compass Point Research and Trading -- Analyst Yeah, that's very helpful. And then, one that the -- hopefully it's not -- too early to bring up, but Freddie Mac has a proposal out, still a proposal, hasn't been approved yet, but around insuring and enabling second mortgages that would be fixed rates in 20 years' term instead of HELOC for current Freddie Mac loans. I'm curious if you think about that type of a product, obviously it's only proposed for Freddie so far, and it'd be interesting to see the goes for, it ends up being close for Fannie as well. But I'm curious if there's any opportunity around that product or you've thought about the potential opportunity because it could obviously bring in another wave of origination, kind of quasi cash or refi volume that could be added to the origination platform and also to the servicing platform. Just curious if you've thought about -- what that opportunity could look like. I realize it's fairly early days. Mike Weinbach -- President Yeah, hey, Giuliano, it's Mike. You said a lot of the answer in your question which is -- it's relatively early days but we think it's very interesting and we exist to serve homeowners and if there are more tools that give us opportunities to help homeowners take advantage of the equity in their home, it's great for our customers and it's great for us. As this market is developing, I mean, if you think back to the HELOC market before the financial crisis, obviously that didn't end up very well. And so since then it's been much more responsible and we appreciate that and support that and want to continue to see that. And it's still in the early innings of evolving. So the vast majority of Americans with a mortgage have a mortgage at a much lower rate than where loans are being originated today. I go back to some of the stats I threw out earlier. Over $30 trillion of equity available in homes against $14 trillion of mortgages. So the LTV of the market as a whole is in the low 30s. So there's a lot of opportunity there. And we'd love to see products come out that are simpler for homeowners. And Freddie is in a great position. They have the first lien. They know a lot about that customer. They know a lot about the value of the loan. They know a lot about the security of the instrument. And so we're really excited to see they're looking at ways to innovate to make things easier for customers and their servicers and their investors to help customers take advantage of the equity in their homes. Jay Bray -- Chairman and Chief Executive Officer And the only thing I'd add is we're doing second-lien today, right, when you look at our platform, it's a -- not an insignificant percentage of what the origination platform is funding today. So we have the operational capability to roll this out. So, you know, we're excited about it, and I think it will be a real opportunity. Giuliano Bologna -- Compass Point Research and Trading -- Analyst That's very helpful, and I appreciate it. And I will jump back in the queue. Operator [Operator instructions] And our next question is going to come from the line of Terry Ma with Barclays. Your line is open. Please go ahead. Terry Ma -- Barclays -- Analyst Hey, thanks. Good morning. I just want to follow up on the MSR opportunity, maybe to ask it a slightly different way. Maybe like this quarter out of 52 deals, can you give us a sense of how many of those deals actually hit your return hurdles or were in your wheelhouse? And then out of that, maybe how many did you win due to pricing and competition? Jay Bray -- Chairman and Chief Executive Officer I think we're still winning a pretty small percentage in the grand scheme of things. We don't really comment on specifics around that process, but we looked at it all alone. We have a very tight investment committee process around that -- and we're still winning a fairly small percentage, which again we're OK with because we want to make sure we're hitting the returns for our shareholders. Mike Weinbach -- President The only thing I'd add, to reiterate what Jay said, we lose more than we win. We bid almost all of them and we think we get to see almost everything that's in the market because people know our ability to very quickly evaluate a portfolio against our return hurdles and come back with a price. So, yeah, we like that we continue to see everything. We're going to remain disciplined. We're going to be an active participant in the market. And, you know, even losing more than we win, it's helped us be able to grow. Jay Bray -- Chairman and Chief Executive Officer And the last piece I would add is we do have sellers that consistently come to us directly because we've had a proven track record with them. We've been able to execute time and time again. And so there, obviously, we're going to win those in most cases because we have a track record with that seller. So that's one other element of the process. Terry Ma -- Barclays -- Analyst Got it. That's helpful. And then I may have missed this, but on the servicing pre-tax for the quarter, you guys had some pretty good operating leverage. Was there anything one-timers sees knowing that? Now that we think about, I guess, maybe the margin going forward. Kurt Johnson -- Executive Vice President, Chief Financial Officer No, there really wasn't much in the way of one-timers in servicing, particularly not from an expense standpoint. So I think you can -- as Mike said, you can't count on the operating leverage sort of being that robust on a go-forward basis, but I think, Jay pointed out, right, $100 billion of additions with less than 50 ads from a headcount perspective, I think the operating leverage continues to exist and you'll see that play out on a go-forward basis. Mike Weinbach -- President And the only thing I'd add is obviously there's an element of rates there. So with higher rates CPRs were lower. If the environment had been different you might see what appears to be less operating leverage, but what underlies that regardless of rate is we're continuing to invest in the platform, which has given us the capabilities that Jay talked about to bring on new loans without needing to add significant amounts of expense. So we feel great about the scalability of the platform. We're going to continue to invest to realize it, but as I said up front, we expect to see continued operating leverage going forward. Terry Ma -- Barclays -- Analyst Great. Thank you. Operator [Operator instructions] And one moment as we move on to our next question. And our next question is going to be from the line of Eric Hagen with BTIG. Your line is open. Please go ahead. Eric Hagen -- BTIG -- Analyst Hey, thanks. Good morning. On the $50 billion of MSRs that you're onboarding this quarter, can you share how you're financing that? Is it all in cash or using any debt? Was it competitively bid? And any recapture expectations you might expect for that portfolio? And then a follow-up there, I mean is it right to assume that the amortization expense that you expect as you onboard that is sort of proportional to the amortization expense in the overall portfolio right now? Kurt Johnson -- Executive Vice President, Chief Financial Officer Yeah, all good questions, Eric. Look the $50 billion and I'm trying to remember all the questions now because we were a lot of components, Eric. $50 billion was largely competitively bad. To Jay's point there were a couple that probably came directly to us, but for the most part, it was competitively bad. I think, yes, you'll see a pro rata amortization expense, but as Mike pointed out, a lot of that is interest rate dependent. So, if the rates stay kind of where they are in this higher range, I think you'll definitely see sort of a pro-rata amortization. If they increase a little bit, or sorry, if they decrease a little bit, you'll see that go up. I think you'll see a corresponding increase in our DTC performance as well. So again, the focus is on the balanced business model and we do think that these returns are really interest rate agnostic and that where you see a drop off in servicing because of a rate rally, you'll see an increase in our DTC channel. Eric Hagen -- BTIG -- Analyst Yeah, OK, that's helpful. Good discussion on this call. I mean, we've seen the investor base for MSRs evolve very considerably over the last couple of years. Do you feel like a more concentrated ownership of servicing from the non-bank community and mortgage rates contributes to higher volatility for the asset class? How do you think about your footprint in light of the ownership base? Jay Bray -- Chairman and Chief Executive Officer I mean, the short answer is no. From our standpoint, when you look at the buyers that are out there today, typically strong, well-capitalized. You've got the financial buyer segment, which we subservice for, and there are strong counterparties, good operators like a Mr. Cooper. And then you've got, if you look at someone like us, clearly we think our goal is to be the leader in the market, to continue to provide stable, consistent earnings, hit our returns, and, you know, have a fortress balance sheet. I mean, that's the way we think about the business. To be a leader, you need those things. So no, we certainly don't think that it's introduced more volatility into the system. Kurt Johnson -- Executive Vice President, Chief Financial Officer And I would say that the banks are still there, right? They are still bidding against us, and we've seen them win a couple of portfolios in Q1. So it's not like they're entirely out of the marketplace either. Eric Hagen -- BTIG -- Analyst Yeah, got you, I appreciate you, guys. Thank you. Kurt Johnson -- Executive Vice President, Chief Financial Officer Thanks, Eric. Operator Thank you, and I'm showing no further questions at this time, and I'd like to hand the conference back to Jay Bray for any closing remarks. Jay Bray -- Chairman and Chief Executive Officer We appreciate everyone for joining the call. Have a great day. Thank you.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's first quarter 2024 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I will now turn the conference call over to the general manager of investor relations of Chevron Corporation, Mr. Jake Spiering. Please go ahead. Jake Spiering -- General Manager, Investor Relations. Thank you, Katie. Welcome to Chevron's first quarter 2024 earnings conference call and webcast. I'm Jake Spiering, general manager of investor relations. Our chairman and CEO, Mike Wirth; and CFO, Eimear Bonner, are on the call with me today. We will refer to the slides and prepared remarks that are available on Chevron's website. Before we begin, please be reminded that this presentation contains estimates, projections, and other forward-looking statements. Reconciliation of non-GAAP measures can be found in the appendix of this presentation. Please review the cautionary statement on Slide 2. Now I'll turn it over to Mike. Mike Wirth -- Chairman and Chief Executive Officer Thanks, Jake, and thank you, everyone, for joining us today. Chevron continues to deliver strong operational performance, maintain cost and capital discipline, and consistently return cash to shareholders. First quarter marked nine consecutive quarters with adjusted earnings over $5 billion and adjusted ROCE above 12%. During the quarter, we also returned $6 billion in cash to shareholders, the eighth straight quarter over $5 billion. We also grew production more than 10% from the same quarter last year and announced final investment decisions to grow our renewable fuels and hydrogen businesses. Earlier this month, we announced our third Future Energy Fund focused on venture investments in lower-carbon technologies. The merger with Hess is advancing, and we intend to certify substantial compliance with the FTC second request in the coming weeks. We believe that a pre-emption right does not apply to this transaction and are confident this will be affirmed in arbitration. We expect the proxy for the Hess shareholder vote to be mailed in April with a special meeting date in late May. This strategic combination creates a premier energy company with world-class capabilities and assets to deliver superior shareholder value, and we look forward to bringing the two companies together. At TCO, we had achieved start-up of WPMP this month with the first inlet separator and pressure boost compressor in service, and conversion of the first metering station to low pressure now complete. Later this quarter, we expect a second pressure boost compressor online and a third gas turbine generator to provide power to the Tengiz grid. Metering station conversions are planned through the remainder of the year as additional pressure boost compressors start up, keeping the existing plants full around planned SGI and KTL turnarounds. We continue to make significant progress on FGP and expect to have additional major equipment ready for operations in the third quarter. Costs and scheduled guidance remain unchanged with FGP expected to start up in the first half of 2025. Now over to Eimear to discuss the financials. Eimear Bonner -- Chief Financial Officer Thanks, Mike. We delivered another quarter of strong earnings, ROCE, and cash returns to shareholders. We reported first quarter earnings of $5.5 billion or $2.97 per share. Adjusted earnings were $5.4 billion or $2.93 per share. Cash flow from operations was impacted by an approximate $300 million international upstream ARO settlement payment and $200 million for the expansion of the retail marketing network. We also had a working capital build during the quarter consistent with historical trends. Chevron delivered on all of its financial priorities during the quarter, an 8% increase in dividend per share; organic capex aligned with ratable budget inclusive of progress payments for new LNG ships; sustained net debt in the single digits while issuing commercial paper to manage timing of affiliate dividends and working capital; and share repurchases of $3 billion. Adjusted earnings were lower by $1 billion versus last quarter. Adjusted upstream earnings were down due to lower realization and liquids liftings. Partly offsetting were favorable tax impacts. Adjusted downstream earnings were lower mainly due to timing effects associated with the rising commodity price environment. All other decreased on higher employee costs and an unfavorable swing in tax items. Adjusted first quarter earnings were down $1.3 billion versus last year. Adjusted upstream earnings were down modestly. Higher liftings were more than offset by lower natural gas realizations. DD&A was higher due to the PDC acquisition and Permian growth. Adjusted downstream earnings were lower mainly due to lower refining margins and timing effects. Worldwide oil equivalent production was the highest first quarter in our company's history. Production was up over 12% from last year, including an increase of 35% in the United States largely due to the PDC Energy acquisition and organic growth in the Permian Basin. Looking ahead to the second quarter, we have planned turnarounds at TCO and several Gulf of Mexico assets. Following another strong quarter in the Permian, production is trending better than our previous guidance, and we now expect first-half production to be down less than 2% from the fourth quarter. Impacts from refinery turnarounds are mostly driven by El Segundo and Richmond. We anticipate higher affiliate dividends in the second quarter largely from TCO. With the start-up of WPMP, we expect TCO's DD&A to increase by approximately $400 million over the remainder of the year. Share repurchases are restricted under SEC regulations through the Hess shareholder vote, after which we intend to resume buybacks at the $17.5 billion annual rate. We've published a new document with our consolidated guidance and sensitivities that will be updated quarterly and posted to our website the month prior to our earnings call.Back to you, Jake. Jake Spiering -- General Manager, Investor Relations. That concludes our prepared remarks. We are now ready to take your questions. [Operator instructions] We will do our best to get all of your questions answered. Katie, please open the line. Questions & Answers: Operator [Operator instructions] Our first question comes from Sam Margolin with Wolfe Research. Sam Margolin -- Wolfe Research -- Analyst Hi. Good morning, everybody. Thanks for taking the question. Mike Wirth -- Chairman and Chief Executive Officer Good morning, Sam. Sam Margolin -- Wolfe Research -- Analyst Maybe we could start with Tengiz because there's movement there. And specifically, the effects of the WPMP start-up, if you don't mind going into some detail. I think the market understands that it's FGP phase that really rerates kind of TCO's distribution capacity. But if there's any incremental benefits from WPMP starting up, whether it's reliability or potential to produce over nameplate or even just the capex run rate and what it means for maybe an annualized TCO distribution at this stage, that would be very helpful. Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Sam, let me talk a little bit to the project and operational dimensions of this, and then I'll let Eimear comment on the financial ramifications of that. So look, we're really pleased with the progress that's been making and pleased that we've begun the initial start-up of WPMP with the first PBF compressor online and processing crude through the plants after conversion of the first metering station. It's an important milestone. I'm proud of the team and the work they've been doing. They've done this safely. We're seeing initial operation that is well aligned with our expectations. In fact, we've been encouraged by very strong production response from the wells that feed into this first metering station. We now have the second metering station planned for conversion as offline, and that conversion is underway. And as we bring on more of the PBF compression capacity, we'll complete more metering stations over the balance of the year. What happens here is we get higher production because the wells are now flowing against lower back pressure. And as I said, Sam, we've seen really strong response on this first set of wells. What that does is it gives us a high degree of confidence in keeping the plants full all year long with the fact being that we've got some turnarounds we have to do. We've got an SGI turnaround and a KTL turnaround, SGI this quarter, KTL next quarter, to do some tie-ins and some other normal maintenance. But in the periods in between those, it increases deliverability and the confidence of the plant will be full throughout that period of time. We've got a lot of project scope operational is the other thing that I just would remind you of. We're producing from new wells. We've got upgraded to new utilities now, gathering system, a new control center, power distribution system, two new, big-frame nine gas turbine generators in service. So the reliability of the infrastructure and all of the control networks and everything is significantly improved as we got more modern equipment in place. So all of this reads through to higher degree of reliability, strong production performance. And last year was the second strongest year in the past several. So it gives us high confidence in delivering what we've said we'll deliver there. And then as we get into the third quarter, we'll start commissioning some of the process equipment as part of FGP, which, as you say, first-half start-up next year is when you see the incremental production come online. So good progress all the way around. I'll reiterate that schedule and cost guidance are unchanged. And we'll continue to provide details each quarter on milestones and progress as we proceed. Eimear, maybe you can just talk about what that means financially. Eimear Bonner -- Chief Financial Officer Yeah. Thanks, Mike. Yes, Sam, well, after years of investing, as the project starts up over the next couple of years, we do expect the capex profile to continue to decline, and that will enable free cash flow over the next couple of years to grow. With WPMP, it will keep the plants full. So this will allow IBS business to generate significant cash, and that will be available for distribution. With the second phase of the project then next year in '25, TCOs free cash flow is going to grow even further because, with that phase of the project, we get incremental production. So what does this mean for Chevron? Well, we expect $4 billion of free cash flow in 2025 and $5 billion in 2026. This is a $60 Brent. This will flow to us through a combination of dividends, so you'll see this come through cash flow from operations and loan repayments, which will flow through cash for investing. So we do expect dividends this year. We have guidance -- affiliate guidance to dividends for 2024. But we've also included in the deck today the outlook for affiliate dividends for the second quarter, $1 billion to $1.5 billion. And a significant portion of that is an assumption around TCO. Operator Thank you. We'll go next to Neil Mehta with Goldman Sachs. Neil Mehta -- Goldman Sachs -- Analyst Yeah, good morning, Mike and Sam. My question is really on the exploration program. Specifically, you have an interesting position in West Africa and Namibia. So maybe you can just give us some historical context of how you got involved here. Is this an asset that you see a lot of opportunity in, especially given some of the announcements from peers over the last couple of weeks? And how do you think about prosecuting it going forward? Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thank you, Neil. We've got a nice portfolio of exploration opportunities around the world and including numerous prospects on Block 90 in the Orange Basin offshore Namibia, which lies just outshore -- outbound of where there was a recent discovery announced by another company. We're planning to spud the first exploration well in that block late this year or early next year based on rig availability. The rig will be completed in early '25. We farmed into another block, Block 82, which is further north in the Walvis space, and that was just announced earlier this week. And as you know, there have been a number of discoveries made by companies in the Orange Basin. Our block is on trend with those discoveries. We're encouraged by the success we see from others. And this is certainly an area where the industry has had a high -- a good batting average, a high degree of success. And we're pleased that we've got two blocks now offshore Namibia. And of course, we'll talk to you more as we get into the exploration program there. Neil Mehta -- Goldman Sachs -- Analyst Thanks, Mike. Operator Thank you. We'll go next to Paul Cheng with Scotiabank. Paul Cheng -- Scotiabank -- Analyst Thank you. Good morning. You guys did a small deal look like on the retail marketing asset, adding over 200 stations in the Gulf Coast and West Coast. I actually don't remember. I think since you've become the head of downstream, say, call it, 20 years ago, you guys have been selling asset there. So is there a change of your view in terms of the overall strategy we made to that part of the business? And whether that -- this deal you are going to be owning the asset or that this is wholesale marketing docker network type of deal that you are acquiring? Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thank you, Paul. As you know, I come out of that part of the business. I love talking about retail. Look, we've got three really strong brands around the world. Caltex internationally; in Asia, primarily; in Middle East and Africa, a little bit. Chevron and Texaco here primarily in the Americas. And you're right, we only own about 5% in the U.S., even less than 5% of our branded stations. So most of our business is done through large retailers and distributors. We enter into agreements of supply agreements and brand agreements with these marketers. And there are times, different mechanisms, we use to support their investments. We've done a couple of deals here in the last quarter that are substantial, that add a few hundred stations to our network. And as part of that, we advanced some cash to support their brand conversion efforts, their investment in the network and to solidify our relationship with really important customers of ours that ultimately sell on to consumers. And so you saw that consume some cash. It technically from an accounting standpoint doesn't get classified as capital, but we want to disclose it because it is cash. And it helps us grow our branded sales. And so it's an important part of our business. We're doing these kinds of deals all the time, Paul. They tend to be oftentimes smaller magnitude, so they don't necessarily get to a size where we would mention it the way that we did today. But we won't own these stations. They're owned by really strong independent retailers. Thanks for the question. Operator Thank you. We'll go next to Betty Jiang with Barclays. Wei Jiang -- Barclays -- Analyst Good morning. Mike, just -- so we're seeing that the U.S. operations look pretty strong quarter, especially with Permian holding in better than expected relative to your expectations. Could you just talk about what drove the better performance in the Permian and how you think the rest of the year unfolds? And then just anything else within the U.S. that you want to highlight? Mike Wirth -- Chairman and Chief Executive Officer Sure. So yeah, first quarter production in the Permian was good, 859,000 barrels a day, down about 1% from the fourth quarter of last year, stronger than what we had anticipated. Really good, strong performance in our company-operated business, building off the momentum from the fourth quarter of last year. We have seen reliability improvements that translate into a slightly less decline in our base production. We saw a significantly shorter frack to POP cycle time, so between completed frack and when we put it on production. So that resulted in a few more wells being POP-ed in the first quarter, which you see in the production. Well performance itself was generally aligned with our expectations. And so we've been talking a lot about type curves the last few quarters. We're seeing strong performance that's aligned with or even a little bit stronger than what we expected. And then we also saw some good contributions from our royalty acreage, which is the highest-return barrels we have because we really have no investment there and it's attractive acreage. Others are developing it. And we saw increased activity that resulted in increased royalty production. NOJV, right on plan with what we expected, and a lot of visibility into the non-operated joint venture portfolio for this year, more even than last year at this time, and confidence that that will deliver. So all of that translated into a very strong first quarter. Eimear mentioned that we now expect our first half to be better than we'd previously guided. We said 2% to 4% down versus fourth quarter of last year. We now think we'll be less than 2% down. And then, of course, the back half of the year, we had another frack spread. We've got more wells online and expect to exit the year around 900,000 barrels a day. So really strong performance there and consistent with the momentum that you've seen in prior quarters. The -- I guess the other thing I would mention relative to the U.S. more broadly is the Anchor project in the deepwater Gulf of Mexico is we've guided toward midyear start-up of that. It's right on track. The floating production unit is being commissioned. As we speak, we've got both buyback gas and back oil in the facilities. So that means the pipelines, the process units are now charged with live hydrocarbons. We're commissioning some of the subsea infrastructure, including flow lines. The completion of the first well is in progress. Second well is drilled and will be completed shortly. Third well is being drilled right now. So we'll talk more about this, but everything is right on track for start-up of Anchor midyear. And then, of course, we've got other Gulf of Mexico projects as well that are kind of stacked up right behind Anchor over subsequent quarters. So the outlook in the U.S. is especially strong. Operator Thank you. We'll go next to Josh Silverstein with UBS. Josh Silverstein -- UBS -- Analyst Good morning, guys. You had around $1 billion of debt this quarter to manage some of the working capital and really distribution timing. Do you see the cash balance growing sequentially? Did you repay the commercial paper in 2Q? Just wanted to get a sense of where the cash outlook may go sequentially. Mike Wirth -- Chairman and Chief Executive Officer Eimear, why don't you take that? Eimear Bonner -- Chief Financial Officer Yes. Josh, yes, so we had some commercial paper issued in the first quarter, and it was just to manage short-term liquidity. Timing of affiliate dividends can be a bit lumpy, repatriation of cash can be a bit lumpy. So this was normal business for us in the first quarter. I think in terms of what to expect in terms of cash on the balance sheet, I mean, we target to hold about $5 billion in cash, and that will bounce around as well. But I think $5 billion is a good number. We have access to lots of liquidity and commercial paper, bond investors, credit facilities. So while we've had higher cash in the balance sheet in the past, holding excess cash with low debt and lots of access to liquidity can be a drag in returns. So we're quite comfortable with the $5 billion cash, and that's a good number for you to focus on there. Josh Silverstein -- UBS -- Analyst Thanks. Mike Wirth -- Chairman and Chief Executive Officer Thanks, Josh. Operator We'll go next to Biraj Borkhataria with RBC. Biraj Borkhataria -- RBC Capital Markets -- Analyst Hi. Thanks for taking my question. I wanted to ask a follow-up on the Permian. So you put out there the updated well productivity slide, which is very helpful. But a few quarters ago, Mike, you talked about some of the broader constraints in the Permian, whether it's CO2, water handling, and so on. It doesn't look like it's impacted your volumes in the near term, which have performed very well. So could you just refresh us on if anything has changed in your views on that there? Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thanks, Biraj. Nothing's really changed. I mean, this is a very large base business now with thousands of wells over a very large footprint. And it's important that we focus not only on productivity, efficiency and reliability, and drilling and completions, but also in all aspects of operations. And that's midstream takeaway, it's gas processing, it's water handling. And we've got more development underway this year in the New Mexico portion of the Delaware, which is going to require a build-out of some of this capability, which will be part of our capital program addresses. But you really have to stay on top of base business reliability on all these things. Seismic is another one we've seen some issues on. And so they're all part of managing the business for safety and reliability each and every day. We had a quarter -- a couple of quarters back where a number of those things were a challenge. And the current quarter, we saw really good performance. Last thing I might mention, which might be implied in your question, you see some talk about the takeaway capacity out of the basin and are people constrained, is that impacting particularly gas prices within the other commodities? We're covered on takeaway capacity out of the basin on oil, NGL, and gas well out into the future. And so we're not exposed to any in-basin discounted pricing as a result of that. Operator We'll go next to Nitin Kumar with Mizuho. Nitin Kumar -- Mizuho Securities -- Analyst Hi. Good morning, and thanks for taking my questions. Mike, I just wanted to maybe get an update on Venezuela. There were some reports that Biden administration is reinstating some of the export bans on that country. Specifically said that Chevron was not included, but just your thoughts on sort of the future of oil production and exports from the country and how it would impact Chevron? Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thanks, Nitin. So you might recall that the Department of Treasury and OPEC, a division within treasury, has issued a couple of different, what are called general licenses for operations for companies in Venezuela. There's one called General License 41, which primarily pertains to our position in the country. There's some specific licenses as well that kind of go along with that. And then there had been a second one that was issued subsequently called General License 44, which applied more broadly. That's the one where the administration has announced some changes. And those don't really impact us. There have been no changes to GL 41. And so we're not really affected by the news you've read about recently. I'll just remind you, we're not putting new capital into Venezuela right now. All the spending is really self-funded from the cash from operations. We've been lifting oil and bringing it to the U.S., which has been helpful for the U.S. refining system, not just ours but others as well. And since that license was issued now a little bit more than a year ago, we've seen production at the joint ventures that we're participating in increase from about 120,000 barrels a day at the time that that license was issued to about 180,000 barrels a day now. So that's an update. There are some -- maybe it might be worth reminding just how the financial side of that works because it's a little bit different than some of the other parts of our production. So Eimear, do you want to touch on that? Eimear Bonner -- Chief Financial Officer Yeah. Nitin, just as a reminder, for Venezuela, we do cost accounting, not equity accounting. So Chevron is not recording the production here or the reserves. We record earnings when we receive cash, and that shows up under other income and income statement. Just to put this into context, in 2023, the cash was modest, probably less than 2% cash flow from operations. Nitin Kumar -- Mizuho Securities -- Analyst Thanks. Operator Thank you. We'll go next to Jason Gabelman with TD Cowen. Jason Gabelman -- TD Cowen -- Analyst Yeah. Hey, good morning. Thanks for taking my questions. I wanted to ask about the divestment program. I know when the Hess deal was announced, you discussed $10 billion to $15 billion. But given that's in a bit of a holding pattern here, I'm just wondering what you expect the cadence or the target for divestments to be. I think historically, you've done about $2 billion a year. So that's not too far from what the guidance was with the Hess deal. Just trying to try and lay those two numbers and getting a sense of what the divestment program could look like while that deal is in a bit of a holding pattern. If you could just remind us the assets that have been discussed in the market, that would be great. Mike Wirth -- Chairman and Chief Executive Officer Yeah, yeah. Sure. Happy to do that, Jason. So the first thing is you're right. We're always high-grading our portfolio. And it's not because we need the cash. You already covered the strength of the balance sheet. But it's really to set value to optimize our portfolio. We find times there are things that don't compete for capital in our portfolio and they fit better with somebody else. They tend to be early in-life assets. We were at Rosebank and divested that a few years ago or things that are much later in life and might fit better with somebody who works those kinds of assets. Over the last decade or so, 2012 through 2023, we divested about $35 billion worth. Our long-term history has been about $2 billion per year, maybe 1% of our capital employed, give or take. And our guidance for this year is 1% to 2%, so it's pretty consistent with history. We did say that upon the closure of the Hess transaction, we're going to add some assets that are going to be highly attractive for capital investment. And that means as you look through the rest of the portfolio, if we stay capital-disciplined, there are probably some things that we might otherwise have invested in that now we would choose not to. And so that's where the 10 to 15 guidance came from. That would still stand upon closure. The things we're doing now are things we would have done in the normal course. And so they're not really related to high-grading post the Hess addition. The things that are in the public domain, we talked about Myanmar, which we exited as of April 1. We've announced that we intend to exit the Congo, and we've got a deal there. We expect that to close before the end of the year. We have talked about our position in unconventionals in Canada and in Kaybob, Duvernay, which is a nice asset, which has some growth opportunities, but it may be a better fit for others. So we're looking at alternatives there. And then also the Haynesville, we paused our development activity in the Haynesville last year, and that's another one that we think may fit better with others. So I think those are the ones that are out in the public right now, Jason. Operator We'll go next to Bob Brackett with Bernstein Research. Mike Wirth -- Chairman and Chief Executive Officer Good morning, Bob. Bob Brackett -- AllianceBernstein -- Analyst Hey, good morning. Given the launch of Future Energy Fund 3, can you give us a thought of what you saw success cases coming out of 1 and 2 that caused you to move to 3? And maybe compare and contrast how you do it yourself in-house solar to hydrogen, for example, versus where you might see third parties to try new technologies. Mike Wirth -- Chairman and Chief Executive Officer Yeah. So I appreciate that. This is one that we probably haven't talked about with investors as much as some of the other parts of our business. Funds 1 and 2 were smaller, $100 million, $300 million. And they're not actually fully subscribed yet, but they're getting there, which is why we announced fund No. 3. We've been in the venture investing business for a quarter of a century, so going back to the late '90s when we first set up our venture investing organization. And in the Future Energy Funds, which are those that are really need on energy transition themes, through Funds 1 and 2, we've invested more than 30 companies already. We're collaborating with 250 or so other co-investors in these companies. We can serve as a pilot bed for their technology so we can help them bring things from the lab and kind of bench scale out into the real world. And I've visited last year, one of our carbon capture pilots in the San Joaquin Valley with a company that's got some really interesting technology to help us improve the efficiency, reduce the cost for carbon capture. And so we're looking at things like industrial decarbonization, hydrogen, emerging mobility, energy decentralization, the circular carbon economy. And what we're really looking to do is support innovation in things that we probably aren't doing within the company, within our own R&D or scale up. As you mentioned, the projects in the Permian Basin or in the San Joaquin Valley, the solar to green hydrogen is using established technologies that are well proven. What we're doing in our venture investing is trying to develop these new technologies, new materials, new novel ways to integrate AI and other kinds of technology systems to help solve some of these problems. And hopefully, we find things that will help our business and help the world. Last thing I'll say is over the 25 years, we've more than earned our money back in our return on our investment. Not every one of these companies is successful, but we've seen a lot of technologies move into our business. We've seen a lot of the companies become successful. And there's a lot of innovation going on out there. This allows us to leverage ourselves into smaller start-up innovation that we might not otherwise see. So it's been a very, very positive for us, and we're excited to announce the new fund. Operator Thank you. We'll go next to Roger Read with Wells Fargo. Roger Read -- Wells Fargo Securities -- Analyst Yeah, thanks. Good morning. Can we talk a little bit about Eastern Med? I know at one point, operations shut down. It sounds like everything is back up and running. But also you would kind of tie that into Egypt a little bit, where there's been some exploration talk and in the government trying to do some things to improve the overall investment, I guess, environment there. Mike Wirth -- Chairman and Chief Executive Officer Yeah, you bet. So first of all, we are back in full operations in the Eastern Med. We've -- Tamar was down for about a month at the very beginning of hostilities. But we're excited about the opportunities there. Just to remind you, we've got the two existing platforms, Tamar and Leviathan, in service. And we've really structured our development plans there to focus on capital efficiency, higher returns, to the earlier answer, things we've got to compete for capital in our portfolio. Since we've closed on the Noble acquisition, we've increased production at Tamar and Leviathan by more than 10% just through debottlenecking and reliability. We've sanctioned projects at both of those that are currently in progress that will increase production by another 40% over the next couple of years. And we're looking at larger expansion, particularly for Leviathan, where we've got a number of concepts that are being evaluated. Obviously, in the current environment, we're moving carefully with development of those. You mentioned Egypt. We've got a discovery at Argus. We expect another appraisal well there in late this year or early next year to better characterize the field and refine our development plan. We've got a number of other blocks that have not been drilled yet that we shot a seismic on. And we plan to spud a well in Block 4 there before the end of this year. And so it's an area that I think has got real prospectivity. As you look at growth in both the near term, with the projects I mentioned, and then the longer expansion of existing and exploration prospectivity, it's a part of our portfolio that I expect us to see growth from over the coming decade. Operator Thank you. We'll go next to Lloyd Byrne with Jefferies. Lloyd Byrne -- Jefferies -- Analyst Hey, good morning. Mike, I know we've covered a lot of ground this morning. We talked about the Permian productivity, which looks really good. But could you just touch on the DJ? And that production looks stronger than we expected. And then also any political risk you might want to comment on that there? Mike Wirth -- Chairman and Chief Executive Officer Sure. So yeah, first quarter production in the DJ was above 400,000 barrels a day, kind of higher than what our long-term guidance is. We had timing -- a lot of fourth quarter '23 wells put on production there. You'd typically expect some weather-related downtime in Colorado over the first quarter. We saw some of that, but less than what we had planned for. So production was good. Second quarter, there's maybe some minimal impacts that we expect from a third-party gas plant that's had an outage. But continued strong performance there thus far in the second quarter. These are high cash margin, low-breakeven barrels that we're really pleased to have in our portfolio. If you go back three years ago, we didn't have anything in DJ. We were not talking 400,000 barrels a day of production there. We plan to hold our plateau there around 400,000 barrels a day, and it will fluctuate a little bit based on the timing of bringing new pads on and completion of wells, etc. But it's a really strong asset for us. Let me talk about the politics and kind of the operating environment a little bit, and then maybe I'll have Eimear just touch on PDC and the benefits of that. But Colorado is a state where energy is an important part of the economy. And I grew up there. The environment is very important to the people and the state as well. And I think their goal has been to be a leader in responsible development and to recognize the important economic contribution that our industry makes to the states. I'm confident that that will continue to be the case. We've got good relationships with members of the legislature, with the executive branch, with the governor. And as the largest oil and gas producer in the state with over 1,000 employees who live and work there and we were a significant investor there, we engage broadly within the community. And I think there's a recognition that responsible development in Colorado is what everybody wants and what we are committed to. And there's -- can be some noise around ballot proposals. There can be some noise around legislative proposals. But we're confident that the state is interested in working with us to be a responsible player and for this to be an important part of the economy. Eimear, maybe PDC, some of the benefits, just so people are reminded of that. Eimear Bonner -- Chief Financial Officer Yeah. It's been about nine months since we closed with PDC Energy. We're really pleased with the progress that we're seeing, the synergies. On the capex side, to date, we've captured $500 million, which is $100 million more than what we had initially guided to. We're also seeing capture on the opex side as well. So we're nearing $100 million there. The teams are continuing to integrate. We're bringing the best of both companies together and building a development playbook focused on optimizing returns in the basin. We're realizing strong free cash flow from these assets. So we're ahead of pace for the incremental $1 billion in annual free cash flow that we guided to. Operator Thank you. We'll go next to Devin McDermott with Morgan Stanley. Devin McDermott -- Morgan Stanley -- Analyst Hey, good morning. Thanks for taking my question. I wanted to bring it back to TCO. And Mike, I think you've talked in the past about how there is some similarity in the design between WPMP and FGP as a result of that. As you bring WPMP online, it helps derisk part of the FGP ramp as well. I was wondering if you could remind us what some of that commonality is. And as you look at the milestones you look out over the next few months at WPMP, which are the ones that you think about as being key to help derisk FGP as well? Mike Wirth -- Chairman and Chief Executive Officer Yeah. So it's -- just to remind everybody, this is a massive field. Some of you have visited it. And FGP, the Future Growth Project, is taking things we did almost 20 years ago now with the second generation plant in sour gas injection, where we injected about half of the sour gas. And we're now injecting all the sour gas, increasing production. And at the same time, we're reducing back pressure on the field and using compression to push the production into the facilities so that we're not relying on field pressure to do that. And that increases the life and longevity of the production out of the field. The other thing this project brings with it is what I've described sometimes as urban renewal. And it takes infrastructure that was built back even before Kazakhstan was independent. And it brings power and utility infrastructure, control infrastructure up to modern-day technology and modern-day standards. So the projects are quite integrated. The start-up sequencing in terms of what you do to walk down systems, ensure they're ready for operation, do all the testing and start-up is very similar, whether you're in one portion of the project or another. And the productivity of the field resources that we see on WPMP reads across to FGP as well. And so while they're fundamentally different project scopes and objectives, so much of the work is similar across equipment and the commissioning and start-up activities that I think the positive progress we're making, the success we're seeing in commissioning and start-up at FGP reads straight -- at WPMP, reads straight across to FGP as well. Operator Thank you. We'll go next to Ryan Todd with Piper Sandler. Ryan Todd -- Piper Sandler -- Analyst Maybe one on the renewable side of your portfolio. I mean, you announced FIDs on a couple of different renewable projects, one in biofuels, one in solar to hydrogen. Can you provide some color on what underpins confidence in these specific projects, whether it's commercial or technical or regulatory support? And do you see further opportunities to develop similar projects in the portfolio going forward? Or are there specific things about these ones in particular that make them attractive? Mike Wirth -- Chairman and Chief Executive Officer Yeah. So the two projects. One is an oilseed processing plant in our joint venture with Bunge. It's a project at Destrehan, Louisiana. And so FID was announced for a new oilseed processing plant there. This one will feature a very flexible design, and that's important because it gives you feedstock flexibility, which matters in any fuels manufacturing business. So in this case, we can process soybeans and softseeds, but we can also be able to process winter oilseed crops, things like winter canola, cover crest. And so it gives us a greater range of potential feedstocks that can then feed into our renewable fuels business, particularly the Geismar real diesel project, which will start up later this year. And it's really important that we have exposure across these value chains. The margins can move from the crush margin into the upgrading margin or what you consider the refining margin, into the marketing margin. And just like in our traditional business, being able to catch all margin across the value chain as it moves is important. Having flexibility, scale and reliability are important. So all of those underpin the investment decision there. The project in California on green hydrogen is smaller in scale. And it really uses existing solar production capacity. We've got a five-megawatt production facility in our Lost Hills oilfield in Kern County. And we're going to produce about a metric ton per day of hydrogen for retail fuel stations. So we're using existing infrastructure. We're integrating into the value chain. We've got another venture that is building hydrogen refueling facilities in California. And so we're leveraging existing assets, existing value chains, and capabilities to invest here. As I say, smaller scale, and I don't want to overplay it, but it's very consistent with our strategy. And these things have got to start small and then scale. And so we're pleased with both of these. There are markets, maybe to your point about economics that are, in some ways, heavily influenced by government policy, be it the renewable fuel standard and the Low Carbon Fuel Standard, which affect renewable fuels or some of the things in the investment or the inflation reduction act that affect hydrogen. And so it makes them a little bit different than our traditional business, which really works off market fundamentals. But we look at a lot of cases there, and we invest in projects where we believe there's confidence that over time, we can generate a good return. Operator We'll go next to John Royall with J.P. Morgan. John Royall -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Thanks for taking my question. So my question is on West Coast refining. We now have one West asset producing gasoline on the West Coast, and TMX should be increasing the availability of heavy crudes once it's ramped. But it's a tough regulatory climate. And you're well-positioned as one of the players that still has multiple assets in California. How are you thinking about that region today? And should we see structurally higher gasoline margins in California given we've had some capacity come out? Mike Wirth -- Chairman and Chief Executive Officer Well, look, we've been in California for our entire existence, 145 years. We've got an integrated value chain that allows us to serve two competitive refineries and advantaged logistics that take us out into a market where we've got a very strong brand and where the demand for all forms of energy continues to grow, be it power, be it transportation fuels. It's an economy that is large and demand continues to go up. That said, the policy environment has been one that is geared toward reducing investment in traditional energy, encouraging investments in these lower-carbon energies. And you've seen assets go out of the system, fossil fuel-fired power plants. There's a lot of questions about the one remaining nuclear power plant in the state. And you've seen refineries close down, as you say, some permanently, some to convert to uses, including to renewable fuels. And what that does is it creates a tighter supply demand balance, particularly as demand continues to be strong and you need to have strong operations out of that entire system or you need to bring in supplies from somewhere else if you've got planned or unplanned issues that the system is dealing with. And so on an average, what does that mean? It means margins are probably under more pressure. It means reliable operations are very important. And it's a place where we've operated for a long time and expect to continue to do so. But putting new investment into the state is a different question. And I think we've been pretty clear that we've got a global portfolio, and we'll invest where we see the best conditions, and I wouldn't describe California that way today. Operator Thank you. We'll go next to Alastair Syme with Citi. Alastair Syme -- Citi -- Analyst Thanks, Mike. Can you help me understand a bit the sequencing of the base case on the Hess timetable? I've read all the documents, but just to get your sort of view. We've got a shareholder vote in May and we got limbo pending regulatory issues, but obviously, importantly, the arbitration. But maybe just talk about the arbitration timetable. Mike Wirth -- Chairman and Chief Executive Officer Yeah. So there are, I think, really three things, if you're looking at sequencing and timing here. One is the shareholder vote. And as I said, the proxy will be mailed out in April, and the shareholder vote will occur in May. You've got regulatory approval through the FTC, and we're making good progress on that. We're working closely with the FTC in respect to their role in the process and expect us to be substantially complete with that here by midyear. And then we have the arbitration, which is, I think, a little bit less well-defined at this point. The specific scheduling and time line will be established by the arbitration tribunal. In our S-4, we indicated that Hess has asked the tribunal to hear the merits of the cases in the third quarter with an outcome in the fourth quarter, which would allow us to close the transaction shortly thereafter. We see no legitimate reason to delay that timeline. It's consistent with what Exxon has outlined is what they would expect. But I can't say that's exactly how it unfolds because we haven't seen specific scheduling from the tribunal yet. Operator Thank you. We'll take our last question from Neal Dingmann with Truist. Neal Dingmann -- Truist Securities -- Analyst Hi. Good morning, Mike. Thanks for squeezing me in. My question is on broad capital spend question specifically. Could you just maybe speak to -- do you have sort of broad strokes what percent of total spend would be directed toward the New Energies and maybe the Chevron technology ventures? And I'm just wondering how you think about margins, even though it's still early for some, how the margins of these compare to your higher-return traditional margin business. Mike Wirth -- Chairman and Chief Executive Officer Yeah. So there's a couple of kind of broad framing points, I think, to bear in mind as you think about that. Number one is we've guided to a long-term capital spend at around $16 billion. This year, we've got $15.5 billion to $16.5 billion as a range. And we intend to be very disciplined with our capital investment and only invest in the most attractive opportunities. We've also indicated that over a period of time, beginning in 2022 through 2028, I think it was when we announced our -- we had our energy transition spotlight, that we expected to spend about $10 billion in our New Energies business over that period of time, $8 billion in kind of the newer -- emerging business lines of carbon capture and storage, renewable fuels and hydrogen and then another couple of billion in decarbonizing our own operations and businesses. It's not completely ratable. And that is a guide that we may or may not achieve. We may be a little below that, we may be a little above that, depending upon how these opportunities mature in new businesses. And to the earlier question, we need to be sure we've got confidence when we're putting capital, particularly large capital, some of the smaller things to help accelerate technology, learning, etc., like our venture investments, which tend to be a few millions of dollars in any particular company. We recognize the risk-return equation there. But larger investments, we've got to have a belief that this is a business that's going to deliver a return over time, and we're on the path to building a portfolio of businesses that will do that. And so that $10 billion is a guide, but we'll invest in things that make sense, and we'll explain the numbers if they end up a little bit different than that. And so what that can tell you is the majority of our spend is still going into our traditional business because the majority of the world's energy is still provided by our traditional business, and we've got an obligation to meet that demand as long as it's there. But we're going to be very disciplined in what we invest in and only invest in the highest-return opportunities. And so each year, we issue specific guidance that we can -- you can look at. But longer term, I think you have to stay within those broad parameters and expect us to remain disciplined. Jake Spiering -- General Manager, Investor Relations. We would like to thank everyone for your time today. We appreciate your interest in Chevron and your participation on today's call. Please stay safe and healthy.Katie, back to you. Answer:

Chevron's first quarter 2024 earnings conference call

Operator Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's first quarter 2024 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I will now turn the conference call over to the general manager of investor relations of Chevron Corporation, Mr. Jake Spiering. Please go ahead. Jake Spiering -- General Manager, Investor Relations. Thank you, Katie. Welcome to Chevron's first quarter 2024 earnings conference call and webcast. I'm Jake Spiering, general manager of investor relations. Our chairman and CEO, Mike Wirth; and CFO, Eimear Bonner, are on the call with me today. We will refer to the slides and prepared remarks that are available on Chevron's website. Before we begin, please be reminded that this presentation contains estimates, projections, and other forward-looking statements. Reconciliation of non-GAAP measures can be found in the appendix of this presentation. Please review the cautionary statement on Slide 2. Now I'll turn it over to Mike. Mike Wirth -- Chairman and Chief Executive Officer Thanks, Jake, and thank you, everyone, for joining us today. Chevron continues to deliver strong operational performance, maintain cost and capital discipline, and consistently return cash to shareholders. First quarter marked nine consecutive quarters with adjusted earnings over $5 billion and adjusted ROCE above 12%. During the quarter, we also returned $6 billion in cash to shareholders, the eighth straight quarter over $5 billion. We also grew production more than 10% from the same quarter last year and announced final investment decisions to grow our renewable fuels and hydrogen businesses. Earlier this month, we announced our third Future Energy Fund focused on venture investments in lower-carbon technologies. The merger with Hess is advancing, and we intend to certify substantial compliance with the FTC second request in the coming weeks. We believe that a pre-emption right does not apply to this transaction and are confident this will be affirmed in arbitration. We expect the proxy for the Hess shareholder vote to be mailed in April with a special meeting date in late May. This strategic combination creates a premier energy company with world-class capabilities and assets to deliver superior shareholder value, and we look forward to bringing the two companies together. At TCO, we had achieved start-up of WPMP this month with the first inlet separator and pressure boost compressor in service, and conversion of the first metering station to low pressure now complete. Later this quarter, we expect a second pressure boost compressor online and a third gas turbine generator to provide power to the Tengiz grid. Metering station conversions are planned through the remainder of the year as additional pressure boost compressors start up, keeping the existing plants full around planned SGI and KTL turnarounds. We continue to make significant progress on FGP and expect to have additional major equipment ready for operations in the third quarter. Costs and scheduled guidance remain unchanged with FGP expected to start up in the first half of 2025. Now over to Eimear to discuss the financials. Eimear Bonner -- Chief Financial Officer Thanks, Mike. We delivered another quarter of strong earnings, ROCE, and cash returns to shareholders. We reported first quarter earnings of $5.5 billion or $2.97 per share. Adjusted earnings were $5.4 billion or $2.93 per share. Cash flow from operations was impacted by an approximate $300 million international upstream ARO settlement payment and $200 million for the expansion of the retail marketing network. We also had a working capital build during the quarter consistent with historical trends. Chevron delivered on all of its financial priorities during the quarter, an 8% increase in dividend per share; organic capex aligned with ratable budget inclusive of progress payments for new LNG ships; sustained net debt in the single digits while issuing commercial paper to manage timing of affiliate dividends and working capital; and share repurchases of $3 billion. Adjusted earnings were lower by $1 billion versus last quarter. Adjusted upstream earnings were down due to lower realization and liquids liftings. Partly offsetting were favorable tax impacts. Adjusted downstream earnings were lower mainly due to timing effects associated with the rising commodity price environment. All other decreased on higher employee costs and an unfavorable swing in tax items. Adjusted first quarter earnings were down $1.3 billion versus last year. Adjusted upstream earnings were down modestly. Higher liftings were more than offset by lower natural gas realizations. DD&A was higher due to the PDC acquisition and Permian growth. Adjusted downstream earnings were lower mainly due to lower refining margins and timing effects. Worldwide oil equivalent production was the highest first quarter in our company's history. Production was up over 12% from last year, including an increase of 35% in the United States largely due to the PDC Energy acquisition and organic growth in the Permian Basin. Looking ahead to the second quarter, we have planned turnarounds at TCO and several Gulf of Mexico assets. Following another strong quarter in the Permian, production is trending better than our previous guidance, and we now expect first-half production to be down less than 2% from the fourth quarter. Impacts from refinery turnarounds are mostly driven by El Segundo and Richmond. We anticipate higher affiliate dividends in the second quarter largely from TCO. With the start-up of WPMP, we expect TCO's DD&A to increase by approximately $400 million over the remainder of the year. Share repurchases are restricted under SEC regulations through the Hess shareholder vote, after which we intend to resume buybacks at the $17.5 billion annual rate. We've published a new document with our consolidated guidance and sensitivities that will be updated quarterly and posted to our website the month prior to our earnings call.Back to you, Jake. Jake Spiering -- General Manager, Investor Relations. That concludes our prepared remarks. We are now ready to take your questions. [Operator instructions] We will do our best to get all of your questions answered. Katie, please open the line. Questions & Answers: Operator [Operator instructions] Our first question comes from Sam Margolin with Wolfe Research. Sam Margolin -- Wolfe Research -- Analyst Hi. Good morning, everybody. Thanks for taking the question. Mike Wirth -- Chairman and Chief Executive Officer Good morning, Sam. Sam Margolin -- Wolfe Research -- Analyst Maybe we could start with Tengiz because there's movement there. And specifically, the effects of the WPMP start-up, if you don't mind going into some detail. I think the market understands that it's FGP phase that really rerates kind of TCO's distribution capacity. But if there's any incremental benefits from WPMP starting up, whether it's reliability or potential to produce over nameplate or even just the capex run rate and what it means for maybe an annualized TCO distribution at this stage, that would be very helpful. Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Sam, let me talk a little bit to the project and operational dimensions of this, and then I'll let Eimear comment on the financial ramifications of that. So look, we're really pleased with the progress that's been making and pleased that we've begun the initial start-up of WPMP with the first PBF compressor online and processing crude through the plants after conversion of the first metering station. It's an important milestone. I'm proud of the team and the work they've been doing. They've done this safely. We're seeing initial operation that is well aligned with our expectations. In fact, we've been encouraged by very strong production response from the wells that feed into this first metering station. We now have the second metering station planned for conversion as offline, and that conversion is underway. And as we bring on more of the PBF compression capacity, we'll complete more metering stations over the balance of the year. What happens here is we get higher production because the wells are now flowing against lower back pressure. And as I said, Sam, we've seen really strong response on this first set of wells. What that does is it gives us a high degree of confidence in keeping the plants full all year long with the fact being that we've got some turnarounds we have to do. We've got an SGI turnaround and a KTL turnaround, SGI this quarter, KTL next quarter, to do some tie-ins and some other normal maintenance. But in the periods in between those, it increases deliverability and the confidence of the plant will be full throughout that period of time. We've got a lot of project scope operational is the other thing that I just would remind you of. We're producing from new wells. We've got upgraded to new utilities now, gathering system, a new control center, power distribution system, two new, big-frame nine gas turbine generators in service. So the reliability of the infrastructure and all of the control networks and everything is significantly improved as we got more modern equipment in place. So all of this reads through to higher degree of reliability, strong production performance. And last year was the second strongest year in the past several. So it gives us high confidence in delivering what we've said we'll deliver there. And then as we get into the third quarter, we'll start commissioning some of the process equipment as part of FGP, which, as you say, first-half start-up next year is when you see the incremental production come online. So good progress all the way around. I'll reiterate that schedule and cost guidance are unchanged. And we'll continue to provide details each quarter on milestones and progress as we proceed. Eimear, maybe you can just talk about what that means financially. Eimear Bonner -- Chief Financial Officer Yeah. Thanks, Mike. Yes, Sam, well, after years of investing, as the project starts up over the next couple of years, we do expect the capex profile to continue to decline, and that will enable free cash flow over the next couple of years to grow. With WPMP, it will keep the plants full. So this will allow IBS business to generate significant cash, and that will be available for distribution. With the second phase of the project then next year in '25, TCOs free cash flow is going to grow even further because, with that phase of the project, we get incremental production. So what does this mean for Chevron? Well, we expect $4 billion of free cash flow in 2025 and $5 billion in 2026. This is a $60 Brent. This will flow to us through a combination of dividends, so you'll see this come through cash flow from operations and loan repayments, which will flow through cash for investing. So we do expect dividends this year. We have guidance -- affiliate guidance to dividends for 2024. But we've also included in the deck today the outlook for affiliate dividends for the second quarter, $1 billion to $1.5 billion. And a significant portion of that is an assumption around TCO. Operator Thank you. We'll go next to Neil Mehta with Goldman Sachs. Neil Mehta -- Goldman Sachs -- Analyst Yeah, good morning, Mike and Sam. My question is really on the exploration program. Specifically, you have an interesting position in West Africa and Namibia. So maybe you can just give us some historical context of how you got involved here. Is this an asset that you see a lot of opportunity in, especially given some of the announcements from peers over the last couple of weeks? And how do you think about prosecuting it going forward? Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thank you, Neil. We've got a nice portfolio of exploration opportunities around the world and including numerous prospects on Block 90 in the Orange Basin offshore Namibia, which lies just outshore -- outbound of where there was a recent discovery announced by another company. We're planning to spud the first exploration well in that block late this year or early next year based on rig availability. The rig will be completed in early '25. We farmed into another block, Block 82, which is further north in the Walvis space, and that was just announced earlier this week. And as you know, there have been a number of discoveries made by companies in the Orange Basin. Our block is on trend with those discoveries. We're encouraged by the success we see from others. And this is certainly an area where the industry has had a high -- a good batting average, a high degree of success. And we're pleased that we've got two blocks now offshore Namibia. And of course, we'll talk to you more as we get into the exploration program there. Neil Mehta -- Goldman Sachs -- Analyst Thanks, Mike. Operator Thank you. We'll go next to Paul Cheng with Scotiabank. Paul Cheng -- Scotiabank -- Analyst Thank you. Good morning. You guys did a small deal look like on the retail marketing asset, adding over 200 stations in the Gulf Coast and West Coast. I actually don't remember. I think since you've become the head of downstream, say, call it, 20 years ago, you guys have been selling asset there. So is there a change of your view in terms of the overall strategy we made to that part of the business? And whether that -- this deal you are going to be owning the asset or that this is wholesale marketing docker network type of deal that you are acquiring? Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thank you, Paul. As you know, I come out of that part of the business. I love talking about retail. Look, we've got three really strong brands around the world. Caltex internationally; in Asia, primarily; in Middle East and Africa, a little bit. Chevron and Texaco here primarily in the Americas. And you're right, we only own about 5% in the U.S., even less than 5% of our branded stations. So most of our business is done through large retailers and distributors. We enter into agreements of supply agreements and brand agreements with these marketers. And there are times, different mechanisms, we use to support their investments. We've done a couple of deals here in the last quarter that are substantial, that add a few hundred stations to our network. And as part of that, we advanced some cash to support their brand conversion efforts, their investment in the network and to solidify our relationship with really important customers of ours that ultimately sell on to consumers. And so you saw that consume some cash. It technically from an accounting standpoint doesn't get classified as capital, but we want to disclose it because it is cash. And it helps us grow our branded sales. And so it's an important part of our business. We're doing these kinds of deals all the time, Paul. They tend to be oftentimes smaller magnitude, so they don't necessarily get to a size where we would mention it the way that we did today. But we won't own these stations. They're owned by really strong independent retailers. Thanks for the question. Operator Thank you. We'll go next to Betty Jiang with Barclays. Wei Jiang -- Barclays -- Analyst Good morning. Mike, just -- so we're seeing that the U.S. operations look pretty strong quarter, especially with Permian holding in better than expected relative to your expectations. Could you just talk about what drove the better performance in the Permian and how you think the rest of the year unfolds? And then just anything else within the U.S. that you want to highlight? Mike Wirth -- Chairman and Chief Executive Officer Sure. So yeah, first quarter production in the Permian was good, 859,000 barrels a day, down about 1% from the fourth quarter of last year, stronger than what we had anticipated. Really good, strong performance in our company-operated business, building off the momentum from the fourth quarter of last year. We have seen reliability improvements that translate into a slightly less decline in our base production. We saw a significantly shorter frack to POP cycle time, so between completed frack and when we put it on production. So that resulted in a few more wells being POP-ed in the first quarter, which you see in the production. Well performance itself was generally aligned with our expectations. And so we've been talking a lot about type curves the last few quarters. We're seeing strong performance that's aligned with or even a little bit stronger than what we expected. And then we also saw some good contributions from our royalty acreage, which is the highest-return barrels we have because we really have no investment there and it's attractive acreage. Others are developing it. And we saw increased activity that resulted in increased royalty production. NOJV, right on plan with what we expected, and a lot of visibility into the non-operated joint venture portfolio for this year, more even than last year at this time, and confidence that that will deliver. So all of that translated into a very strong first quarter. Eimear mentioned that we now expect our first half to be better than we'd previously guided. We said 2% to 4% down versus fourth quarter of last year. We now think we'll be less than 2% down. And then, of course, the back half of the year, we had another frack spread. We've got more wells online and expect to exit the year around 900,000 barrels a day. So really strong performance there and consistent with the momentum that you've seen in prior quarters. The -- I guess the other thing I would mention relative to the U.S. more broadly is the Anchor project in the deepwater Gulf of Mexico is we've guided toward midyear start-up of that. It's right on track. The floating production unit is being commissioned. As we speak, we've got both buyback gas and back oil in the facilities. So that means the pipelines, the process units are now charged with live hydrocarbons. We're commissioning some of the subsea infrastructure, including flow lines. The completion of the first well is in progress. Second well is drilled and will be completed shortly. Third well is being drilled right now. So we'll talk more about this, but everything is right on track for start-up of Anchor midyear. And then, of course, we've got other Gulf of Mexico projects as well that are kind of stacked up right behind Anchor over subsequent quarters. So the outlook in the U.S. is especially strong. Operator Thank you. We'll go next to Josh Silverstein with UBS. Josh Silverstein -- UBS -- Analyst Good morning, guys. You had around $1 billion of debt this quarter to manage some of the working capital and really distribution timing. Do you see the cash balance growing sequentially? Did you repay the commercial paper in 2Q? Just wanted to get a sense of where the cash outlook may go sequentially. Mike Wirth -- Chairman and Chief Executive Officer Eimear, why don't you take that? Eimear Bonner -- Chief Financial Officer Yes. Josh, yes, so we had some commercial paper issued in the first quarter, and it was just to manage short-term liquidity. Timing of affiliate dividends can be a bit lumpy, repatriation of cash can be a bit lumpy. So this was normal business for us in the first quarter. I think in terms of what to expect in terms of cash on the balance sheet, I mean, we target to hold about $5 billion in cash, and that will bounce around as well. But I think $5 billion is a good number. We have access to lots of liquidity and commercial paper, bond investors, credit facilities. So while we've had higher cash in the balance sheet in the past, holding excess cash with low debt and lots of access to liquidity can be a drag in returns. So we're quite comfortable with the $5 billion cash, and that's a good number for you to focus on there. Josh Silverstein -- UBS -- Analyst Thanks. Mike Wirth -- Chairman and Chief Executive Officer Thanks, Josh. Operator We'll go next to Biraj Borkhataria with RBC. Biraj Borkhataria -- RBC Capital Markets -- Analyst Hi. Thanks for taking my question. I wanted to ask a follow-up on the Permian. So you put out there the updated well productivity slide, which is very helpful. But a few quarters ago, Mike, you talked about some of the broader constraints in the Permian, whether it's CO2, water handling, and so on. It doesn't look like it's impacted your volumes in the near term, which have performed very well. So could you just refresh us on if anything has changed in your views on that there? Thank you. Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thanks, Biraj. Nothing's really changed. I mean, this is a very large base business now with thousands of wells over a very large footprint. And it's important that we focus not only on productivity, efficiency and reliability, and drilling and completions, but also in all aspects of operations. And that's midstream takeaway, it's gas processing, it's water handling. And we've got more development underway this year in the New Mexico portion of the Delaware, which is going to require a build-out of some of this capability, which will be part of our capital program addresses. But you really have to stay on top of base business reliability on all these things. Seismic is another one we've seen some issues on. And so they're all part of managing the business for safety and reliability each and every day. We had a quarter -- a couple of quarters back where a number of those things were a challenge. And the current quarter, we saw really good performance. Last thing I might mention, which might be implied in your question, you see some talk about the takeaway capacity out of the basin and are people constrained, is that impacting particularly gas prices within the other commodities? We're covered on takeaway capacity out of the basin on oil, NGL, and gas well out into the future. And so we're not exposed to any in-basin discounted pricing as a result of that. Operator We'll go next to Nitin Kumar with Mizuho. Nitin Kumar -- Mizuho Securities -- Analyst Hi. Good morning, and thanks for taking my questions. Mike, I just wanted to maybe get an update on Venezuela. There were some reports that Biden administration is reinstating some of the export bans on that country. Specifically said that Chevron was not included, but just your thoughts on sort of the future of oil production and exports from the country and how it would impact Chevron? Mike Wirth -- Chairman and Chief Executive Officer Yeah. Thanks, Nitin. So you might recall that the Department of Treasury and OPEC, a division within treasury, has issued a couple of different, what are called general licenses for operations for companies in Venezuela. There's one called General License 41, which primarily pertains to our position in the country. There's some specific licenses as well that kind of go along with that. And then there had been a second one that was issued subsequently called General License 44, which applied more broadly. That's the one where the administration has announced some changes. And those don't really impact us. There have been no changes to GL 41. And so we're not really affected by the news you've read about recently. I'll just remind you, we're not putting new capital into Venezuela right now. All the spending is really self-funded from the cash from operations. We've been lifting oil and bringing it to the U.S., which has been helpful for the U.S. refining system, not just ours but others as well. And since that license was issued now a little bit more than a year ago, we've seen production at the joint ventures that we're participating in increase from about 120,000 barrels a day at the time that that license was issued to about 180,000 barrels a day now. So that's an update. There are some -- maybe it might be worth reminding just how the financial side of that works because it's a little bit different than some of the other parts of our production. So Eimear, do you want to touch on that? Eimear Bonner -- Chief Financial Officer Yeah. Nitin, just as a reminder, for Venezuela, we do cost accounting, not equity accounting. So Chevron is not recording the production here or the reserves. We record earnings when we receive cash, and that shows up under other income and income statement. Just to put this into context, in 2023, the cash was modest, probably less than 2% cash flow from operations. Nitin Kumar -- Mizuho Securities -- Analyst Thanks. Operator Thank you. We'll go next to Jason Gabelman with TD Cowen. Jason Gabelman -- TD Cowen -- Analyst Yeah. Hey, good morning. Thanks for taking my questions. I wanted to ask about the divestment program. I know when the Hess deal was announced, you discussed $10 billion to $15 billion. But given that's in a bit of a holding pattern here, I'm just wondering what you expect the cadence or the target for divestments to be. I think historically, you've done about $2 billion a year. So that's not too far from what the guidance was with the Hess deal. Just trying to try and lay those two numbers and getting a sense of what the divestment program could look like while that deal is in a bit of a holding pattern. If you could just remind us the assets that have been discussed in the market, that would be great. Mike Wirth -- Chairman and Chief Executive Officer Yeah, yeah. Sure. Happy to do that, Jason. So the first thing is you're right. We're always high-grading our portfolio. And it's not because we need the cash. You already covered the strength of the balance sheet. But it's really to set value to optimize our portfolio. We find times there are things that don't compete for capital in our portfolio and they fit better with somebody else. They tend to be early in-life assets. We were at Rosebank and divested that a few years ago or things that are much later in life and might fit better with somebody who works those kinds of assets. Over the last decade or so, 2012 through 2023, we divested about $35 billion worth. Our long-term history has been about $2 billion per year, maybe 1% of our capital employed, give or take. And our guidance for this year is 1% to 2%, so it's pretty consistent with history. We did say that upon the closure of the Hess transaction, we're going to add some assets that are going to be highly attractive for capital investment. And that means as you look through the rest of the portfolio, if we stay capital-disciplined, there are probably some things that we might otherwise have invested in that now we would choose not to. And so that's where the 10 to 15 guidance came from. That would still stand upon closure. The things we're doing now are things we would have done in the normal course. And so they're not really related to high-grading post the Hess addition. The things that are in the public domain, we talked about Myanmar, which we exited as of April 1. We've announced that we intend to exit the Congo, and we've got a deal there. We expect that to close before the end of the year. We have talked about our position in unconventionals in Canada and in Kaybob, Duvernay, which is a nice asset, which has some growth opportunities, but it may be a better fit for others. So we're looking at alternatives there. And then also the Haynesville, we paused our development activity in the Haynesville last year, and that's another one that we think may fit better with others. So I think those are the ones that are out in the public right now, Jason. Operator We'll go next to Bob Brackett with Bernstein Research. Mike Wirth -- Chairman and Chief Executive Officer Good morning, Bob. Bob Brackett -- AllianceBernstein -- Analyst Hey, good morning. Given the launch of Future Energy Fund 3, can you give us a thought of what you saw success cases coming out of 1 and 2 that caused you to move to 3? And maybe compare and contrast how you do it yourself in-house solar to hydrogen, for example, versus where you might see third parties to try new technologies. Mike Wirth -- Chairman and Chief Executive Officer Yeah. So I appreciate that. This is one that we probably haven't talked about with investors as much as some of the other parts of our business. Funds 1 and 2 were smaller, $100 million, $300 million. And they're not actually fully subscribed yet, but they're getting there, which is why we announced fund No. 3. We've been in the venture investing business for a quarter of a century, so going back to the late '90s when we first set up our venture investing organization. And in the Future Energy Funds, which are those that are really need on energy transition themes, through Funds 1 and 2, we've invested more than 30 companies already. We're collaborating with 250 or so other co-investors in these companies. We can serve as a pilot bed for their technology so we can help them bring things from the lab and kind of bench scale out into the real world. And I've visited last year, one of our carbon capture pilots in the San Joaquin Valley with a company that's got some really interesting technology to help us improve the efficiency, reduce the cost for carbon capture. And so we're looking at things like industrial decarbonization, hydrogen, emerging mobility, energy decentralization, the circular carbon economy. And what we're really looking to do is support innovation in things that we probably aren't doing within the company, within our own R&D or scale up. As you mentioned, the projects in the Permian Basin or in the San Joaquin Valley, the solar to green hydrogen is using established technologies that are well proven. What we're doing in our venture investing is trying to develop these new technologies, new materials, new novel ways to integrate AI and other kinds of technology systems to help solve some of these problems. And hopefully, we find things that will help our business and help the world. Last thing I'll say is over the 25 years, we've more than earned our money back in our return on our investment. Not every one of these companies is successful, but we've seen a lot of technologies move into our business. We've seen a lot of the companies become successful. And there's a lot of innovation going on out there. This allows us to leverage ourselves into smaller start-up innovation that we might not otherwise see. So it's been a very, very positive for us, and we're excited to announce the new fund. Operator Thank you. We'll go next to Roger Read with Wells Fargo. Roger Read -- Wells Fargo Securities -- Analyst Yeah, thanks. Good morning. Can we talk a little bit about Eastern Med? I know at one point, operations shut down. It sounds like everything is back up and running. But also you would kind of tie that into Egypt a little bit, where there's been some exploration talk and in the government trying to do some things to improve the overall investment, I guess, environment there. Mike Wirth -- Chairman and Chief Executive Officer Yeah, you bet. So first of all, we are back in full operations in the Eastern Med. We've -- Tamar was down for about a month at the very beginning of hostilities. But we're excited about the opportunities there. Just to remind you, we've got the two existing platforms, Tamar and Leviathan, in service. And we've really structured our development plans there to focus on capital efficiency, higher returns, to the earlier answer, things we've got to compete for capital in our portfolio. Since we've closed on the Noble acquisition, we've increased production at Tamar and Leviathan by more than 10% just through debottlenecking and reliability. We've sanctioned projects at both of those that are currently in progress that will increase production by another 40% over the next couple of years. And we're looking at larger expansion, particularly for Leviathan, where we've got a number of concepts that are being evaluated. Obviously, in the current environment, we're moving carefully with development of those. You mentioned Egypt. We've got a discovery at Argus. We expect another appraisal well there in late this year or early next year to better characterize the field and refine our development plan. We've got a number of other blocks that have not been drilled yet that we shot a seismic on. And we plan to spud a well in Block 4 there before the end of this year. And so it's an area that I think has got real prospectivity. As you look at growth in both the near term, with the projects I mentioned, and then the longer expansion of existing and exploration prospectivity, it's a part of our portfolio that I expect us to see growth from over the coming decade. Operator Thank you. We'll go next to Lloyd Byrne with Jefferies. Lloyd Byrne -- Jefferies -- Analyst Hey, good morning. Mike, I know we've covered a lot of ground this morning. We talked about the Permian productivity, which looks really good. But could you just touch on the DJ? And that production looks stronger than we expected. And then also any political risk you might want to comment on that there? Mike Wirth -- Chairman and Chief Executive Officer Sure. So yeah, first quarter production in the DJ was above 400,000 barrels a day, kind of higher than what our long-term guidance is. We had timing -- a lot of fourth quarter '23 wells put on production there. You'd typically expect some weather-related downtime in Colorado over the first quarter. We saw some of that, but less than what we had planned for. So production was good. Second quarter, there's maybe some minimal impacts that we expect from a third-party gas plant that's had an outage. But continued strong performance there thus far in the second quarter. These are high cash margin, low-breakeven barrels that we're really pleased to have in our portfolio. If you go back three years ago, we didn't have anything in DJ. We were not talking 400,000 barrels a day of production there. We plan to hold our plateau there around 400,000 barrels a day, and it will fluctuate a little bit based on the timing of bringing new pads on and completion of wells, etc. But it's a really strong asset for us. Let me talk about the politics and kind of the operating environment a little bit, and then maybe I'll have Eimear just touch on PDC and the benefits of that. But Colorado is a state where energy is an important part of the economy. And I grew up there. The environment is very important to the people and the state as well. And I think their goal has been to be a leader in responsible development and to recognize the important economic contribution that our industry makes to the states. I'm confident that that will continue to be the case. We've got good relationships with members of the legislature, with the executive branch, with the governor. And as the largest oil and gas producer in the state with over 1,000 employees who live and work there and we were a significant investor there, we engage broadly within the community. And I think there's a recognition that responsible development in Colorado is what everybody wants and what we are committed to. And there's -- can be some noise around ballot proposals. There can be some noise around legislative proposals. But we're confident that the state is interested in working with us to be a responsible player and for this to be an important part of the economy. Eimear, maybe PDC, some of the benefits, just so people are reminded of that. Eimear Bonner -- Chief Financial Officer Yeah. It's been about nine months since we closed with PDC Energy. We're really pleased with the progress that we're seeing, the synergies. On the capex side, to date, we've captured $500 million, which is $100 million more than what we had initially guided to. We're also seeing capture on the opex side as well. So we're nearing $100 million there. The teams are continuing to integrate. We're bringing the best of both companies together and building a development playbook focused on optimizing returns in the basin. We're realizing strong free cash flow from these assets. So we're ahead of pace for the incremental $1 billion in annual free cash flow that we guided to. Operator Thank you. We'll go next to Devin McDermott with Morgan Stanley. Devin McDermott -- Morgan Stanley -- Analyst Hey, good morning. Thanks for taking my question. I wanted to bring it back to TCO. And Mike, I think you've talked in the past about how there is some similarity in the design between WPMP and FGP as a result of that. As you bring WPMP online, it helps derisk part of the FGP ramp as well. I was wondering if you could remind us what some of that commonality is. And as you look at the milestones you look out over the next few months at WPMP, which are the ones that you think about as being key to help derisk FGP as well? Mike Wirth -- Chairman and Chief Executive Officer Yeah. So it's -- just to remind everybody, this is a massive field. Some of you have visited it. And FGP, the Future Growth Project, is taking things we did almost 20 years ago now with the second generation plant in sour gas injection, where we injected about half of the sour gas. And we're now injecting all the sour gas, increasing production. And at the same time, we're reducing back pressure on the field and using compression to push the production into the facilities so that we're not relying on field pressure to do that. And that increases the life and longevity of the production out of the field. The other thing this project brings with it is what I've described sometimes as urban renewal. And it takes infrastructure that was built back even before Kazakhstan was independent. And it brings power and utility infrastructure, control infrastructure up to modern-day technology and modern-day standards. So the projects are quite integrated. The start-up sequencing in terms of what you do to walk down systems, ensure they're ready for operation, do all the testing and start-up is very similar, whether you're in one portion of the project or another. And the productivity of the field resources that we see on WPMP reads across to FGP as well. And so while they're fundamentally different project scopes and objectives, so much of the work is similar across equipment and the commissioning and start-up activities that I think the positive progress we're making, the success we're seeing in commissioning and start-up at FGP reads straight -- at WPMP, reads straight across to FGP as well. Operator Thank you. We'll go next to Ryan Todd with Piper Sandler. Ryan Todd -- Piper Sandler -- Analyst Maybe one on the renewable side of your portfolio. I mean, you announced FIDs on a couple of different renewable projects, one in biofuels, one in solar to hydrogen. Can you provide some color on what underpins confidence in these specific projects, whether it's commercial or technical or regulatory support? And do you see further opportunities to develop similar projects in the portfolio going forward? Or are there specific things about these ones in particular that make them attractive? Mike Wirth -- Chairman and Chief Executive Officer Yeah. So the two projects. One is an oilseed processing plant in our joint venture with Bunge. It's a project at Destrehan, Louisiana. And so FID was announced for a new oilseed processing plant there. This one will feature a very flexible design, and that's important because it gives you feedstock flexibility, which matters in any fuels manufacturing business. So in this case, we can process soybeans and softseeds, but we can also be able to process winter oilseed crops, things like winter canola, cover crest. And so it gives us a greater range of potential feedstocks that can then feed into our renewable fuels business, particularly the Geismar real diesel project, which will start up later this year. And it's really important that we have exposure across these value chains. The margins can move from the crush margin into the upgrading margin or what you consider the refining margin, into the marketing margin. And just like in our traditional business, being able to catch all margin across the value chain as it moves is important. Having flexibility, scale and reliability are important. So all of those underpin the investment decision there. The project in California on green hydrogen is smaller in scale. And it really uses existing solar production capacity. We've got a five-megawatt production facility in our Lost Hills oilfield in Kern County. And we're going to produce about a metric ton per day of hydrogen for retail fuel stations. So we're using existing infrastructure. We're integrating into the value chain. We've got another venture that is building hydrogen refueling facilities in California. And so we're leveraging existing assets, existing value chains, and capabilities to invest here. As I say, smaller scale, and I don't want to overplay it, but it's very consistent with our strategy. And these things have got to start small and then scale. And so we're pleased with both of these. There are markets, maybe to your point about economics that are, in some ways, heavily influenced by government policy, be it the renewable fuel standard and the Low Carbon Fuel Standard, which affect renewable fuels or some of the things in the investment or the inflation reduction act that affect hydrogen. And so it makes them a little bit different than our traditional business, which really works off market fundamentals. But we look at a lot of cases there, and we invest in projects where we believe there's confidence that over time, we can generate a good return. Operator We'll go next to John Royall with J.P. Morgan. John Royall -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Thanks for taking my question. So my question is on West Coast refining. We now have one West asset producing gasoline on the West Coast, and TMX should be increasing the availability of heavy crudes once it's ramped. But it's a tough regulatory climate. And you're well-positioned as one of the players that still has multiple assets in California. How are you thinking about that region today? And should we see structurally higher gasoline margins in California given we've had some capacity come out? Mike Wirth -- Chairman and Chief Executive Officer Well, look, we've been in California for our entire existence, 145 years. We've got an integrated value chain that allows us to serve two competitive refineries and advantaged logistics that take us out into a market where we've got a very strong brand and where the demand for all forms of energy continues to grow, be it power, be it transportation fuels. It's an economy that is large and demand continues to go up. That said, the policy environment has been one that is geared toward reducing investment in traditional energy, encouraging investments in these lower-carbon energies. And you've seen assets go out of the system, fossil fuel-fired power plants. There's a lot of questions about the one remaining nuclear power plant in the state. And you've seen refineries close down, as you say, some permanently, some to convert to uses, including to renewable fuels. And what that does is it creates a tighter supply demand balance, particularly as demand continues to be strong and you need to have strong operations out of that entire system or you need to bring in supplies from somewhere else if you've got planned or unplanned issues that the system is dealing with. And so on an average, what does that mean? It means margins are probably under more pressure. It means reliable operations are very important. And it's a place where we've operated for a long time and expect to continue to do so. But putting new investment into the state is a different question. And I think we've been pretty clear that we've got a global portfolio, and we'll invest where we see the best conditions, and I wouldn't describe California that way today. Operator Thank you. We'll go next to Alastair Syme with Citi. Alastair Syme -- Citi -- Analyst Thanks, Mike. Can you help me understand a bit the sequencing of the base case on the Hess timetable? I've read all the documents, but just to get your sort of view. We've got a shareholder vote in May and we got limbo pending regulatory issues, but obviously, importantly, the arbitration. But maybe just talk about the arbitration timetable. Mike Wirth -- Chairman and Chief Executive Officer Yeah. So there are, I think, really three things, if you're looking at sequencing and timing here. One is the shareholder vote. And as I said, the proxy will be mailed out in April, and the shareholder vote will occur in May. You've got regulatory approval through the FTC, and we're making good progress on that. We're working closely with the FTC in respect to their role in the process and expect us to be substantially complete with that here by midyear. And then we have the arbitration, which is, I think, a little bit less well-defined at this point. The specific scheduling and time line will be established by the arbitration tribunal. In our S-4, we indicated that Hess has asked the tribunal to hear the merits of the cases in the third quarter with an outcome in the fourth quarter, which would allow us to close the transaction shortly thereafter. We see no legitimate reason to delay that timeline. It's consistent with what Exxon has outlined is what they would expect. But I can't say that's exactly how it unfolds because we haven't seen specific scheduling from the tribunal yet. Operator Thank you. We'll take our last question from Neal Dingmann with Truist. Neal Dingmann -- Truist Securities -- Analyst Hi. Good morning, Mike. Thanks for squeezing me in. My question is on broad capital spend question specifically. Could you just maybe speak to -- do you have sort of broad strokes what percent of total spend would be directed toward the New Energies and maybe the Chevron technology ventures? And I'm just wondering how you think about margins, even though it's still early for some, how the margins of these compare to your higher-return traditional margin business. Mike Wirth -- Chairman and Chief Executive Officer Yeah. So there's a couple of kind of broad framing points, I think, to bear in mind as you think about that. Number one is we've guided to a long-term capital spend at around $16 billion. This year, we've got $15.5 billion to $16.5 billion as a range. And we intend to be very disciplined with our capital investment and only invest in the most attractive opportunities. We've also indicated that over a period of time, beginning in 2022 through 2028, I think it was when we announced our -- we had our energy transition spotlight, that we expected to spend about $10 billion in our New Energies business over that period of time, $8 billion in kind of the newer -- emerging business lines of carbon capture and storage, renewable fuels and hydrogen and then another couple of billion in decarbonizing our own operations and businesses. It's not completely ratable. And that is a guide that we may or may not achieve. We may be a little below that, we may be a little above that, depending upon how these opportunities mature in new businesses. And to the earlier question, we need to be sure we've got confidence when we're putting capital, particularly large capital, some of the smaller things to help accelerate technology, learning, etc., like our venture investments, which tend to be a few millions of dollars in any particular company. We recognize the risk-return equation there. But larger investments, we've got to have a belief that this is a business that's going to deliver a return over time, and we're on the path to building a portfolio of businesses that will do that. And so that $10 billion is a guide, but we'll invest in things that make sense, and we'll explain the numbers if they end up a little bit different than that. And so what that can tell you is the majority of our spend is still going into our traditional business because the majority of the world's energy is still provided by our traditional business, and we've got an obligation to meet that demand as long as it's there. But we're going to be very disciplined in what we invest in and only invest in the highest-return opportunities. And so each year, we issue specific guidance that we can -- you can look at. But longer term, I think you have to stay within those broad parameters and expect us to remain disciplined. Jake Spiering -- General Manager, Investor Relations. We would like to thank everyone for your time today. We appreciate your interest in Chevron and your participation on today's call. Please stay safe and healthy.Katie, back to you.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good afternoon, my name is Doug and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation March quarter 2024 earnings conference call and webcast. All participant lines have been placed on a listen-only mode to prevent any background noise. [Operator instructions] Thank you. I will now turn the call over to Kevin Kessel, vice president of investor relations and market analytics. Please go ahead. Kevin Kessel -- Vice President of Investor Relations and Market Analytics Thank you for joining our earnings call to discuss the March 2024 results in the June quarter outlook. I am joined by our CEO Rick Wallace and our CFO Bren Higgins. We will discuss today's results released after the market close and available on our IR website along with the supplemental materials. Today's discussion and metrics are presented on a non-GAAP financial basis unless otherwise specified. All four-year references are to calendar years. Earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events, presentations, corporate governance information, and links to the SEC filings, including our most recent annual report and quarterly reports on Forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the disclosures of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will begin the call with some introductory comments, followed by Brent with additional financial highlights, including our outlook. We'll now turn the call over to our CEO, Rick Wallace. Rick? Rick Wallace -- Chief Executive Officer Thank you, Kevin. Today I will review KLA's March quarter results and highlights and address the new market share reports, as well as a broader industry outlook. KLA's revenue of $2.36 billion was above the midpoint of our guidance range. EPS results, both non-GAAP and GAAP, were above the midpoint of the adjusted guidance we provided on March 18th, in conjunction with the decision to exit the flat panel business. Market conditions have stabilized, and we expect our business to improve as we progress through the year. We're encouraged by the improvement in our customers' business across multiple end markets, which is driving discussions with our customers about future opportunities for leading-edge capacity investments. At the start of each year, new global market share reports are published by third parties that provide additional insights into the state of our industry. These reports show consistent, long-term KLA market leadership and process control, and demonstrate the strength of our diverse portfolio that offers our customers unique capabilities to address their technology challenges while meeting their productivity demands. This year, following significant gains in 2022, KLA's 2023 market share declined by nearly 1%, driven primarily by a loss in access to approximately 10% of the China market as a result of US government export controls. That said, KLA's consistent market leadership and process control, and some of the most critical markets in WFE, reflect the success of our customer-focused strategies and the power of our portfolio. We're confident that KLA's quarterly revenues bottomed in the March quarter, as expressed in our prior earnings call. In foundry/logic, simultaneous investments across multiple nodes and slowly rising capital intensity continue to be a long-term tailwind. Additionally, the increasing complexity in advanced packaging applications for AI and other advanced technologies drives demand for both our process tool and process control products. Overall demand growth, along with increasing technology requirements, will drive the need for more capability from inspection and metrology systems. Our advanced packaging business will generate approximately $400 million in run rate in 2024, and we expect this business to achieve growth rates meaningfully above the growth rate of WFE going forward. In services, our business grew to $590 million in the quarter, up 4% sequentially and 12% year over year. Quarterly free cash flow was $838 million, and the last 12-month free cash flow was $3.1 billion, with a free cash flow margin of 32% over the period. KLA's quarterly results continue to demonstrate our sustained process control leadership and the success of our broad portfolio and product strategies. Customers continue to prioritize and invest in leading-edge technology transition, and this aligns with KLA's highest-value product offerings. In this industry environment, KLA will continue to focus on supporting customer requirements, executing on product roadmaps, and preparing for growth at the leading edge. Bren will now discuss the financials and our outlook further. Bren Higgins -- Chief Financial Officer Thank you, Rick. KLA's quarterly results demonstrated a consistent execution of our global team. Despite the challenges and complexity of the current industry environment, KLA continues to show resourcefulness and the ability to adapt to meeting customers' changing requirements. Quarterly revenue was $2.36 billion, above the guidance midpoint of $2.3 billion. Non-GAAP diluted EPS was $5.26, above the guidance midpoint of $4.83. GAAP diluted EPS was $4.43, above the guidance midpoint of $4.06. In the March quarter, both non-GAAP and GAAP diluted EPS were negatively impacted by a $62 million charge for excess and obsolete inventory related to the company's strategic decision to exit the flat panel display business announced on March 18. This charge had a $0.40 impact on EPS. Excluding this item, diluted non-GAAP EPS would have been $5.66. Non-GAAP gross margin was 59.8%, above the top end of the revised guidance range. Excluding the FPD charge, non-GAAP gross margin would have been 62.4%, and roughly flat sequentially. Non-GAAP operating expenses were flat sequentially at $544 million, comprised of $320 million in R&D and $224 million in SG&A. Non-GAAP EPS at the 13.5% guided tax rate would have been $0.04 higher, or $5.30. Non-GAAP operating margin was 36.8%, non-GAAP other income and expense net was a $34 million expense, and the quarterly non-GAAP effective tax rate was 14.2%. Quarterly non-GAAP net income was $715 million, GAAP net income was $602 million, cash flow from operations was $910 million, and free cash flow was $838 million. The breakdown of revenue by reportable segments and markets and major products and regions can be found within the shareholder letter and slides. Turning to the balance sheet, KLA ended the quarter with $4.3 billion in total cash, cash equivalents, and marketable securities, debt of $6.7 billion, and a flexible and attractive bond maturity profile, supported by strong investment grade ratings from all three agencies. On February 1st, KLA issued $500 million of 4.7% senior notes due in 2034 and $250 million of 4.95% senior notes due in 2052. The company expects to use the net proceeds from the notes operating for general corporate purposes, including the repayment of outstanding indebtedness at or prior to maturity. Moving to our outlook, we remain encouraged by constructive customer discussions around their future investment plans, which are further supported by recent reports of an improving end-market demand environment and customer profitability. Consistent with these industry trends, as we indicated last quarter, we believe our business bottomed from a revenue perspective in the March quarter, and looking ahead through the balance of calendar 2024, growth is resuming in the June quarter, and we expect business levels to improve as we progress through the year. For calendar 2024, our high-level outlook remains unchanged. We still expect WFE demand to be roughly flat to modestly up from 2023, and that the second half of the calendar year will be stronger than the first half. KLA's June quarter guidance is as follows. Revenue of $2.5 billion, plus or minus $125 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 82%, and memory is expected to be 18% of semi-process control systems revenue. Within memory, DRAM is expected to be about 78% of the segment mix, and NAND the remaining 22%. Non-GAAP gross margin is forecasted to be in a range of 61.5%, plus or minus one percentage point based on product mix expectations. For calendar 2024, based on current industry outlook, top-line growth expectations, higher forecasted growth in services, and expected systems product mix, we are modeling non-GAAP gross margins to be relatively stable around the mid-61% range. Variability quarter to quarter is typically driven by product mix fluctuations. Non-GAAP operating expenses are forecasted in the June quarter to be approximately $550 million, as our merit adjustment process occurred in the March quarter. Looking ahead, we continue to expect $5 million to $10 million incremental growth in quarterly operating expenses for the remainder of calendar 2024, supported by expected revenue growth. Other model assumptions for the June quarter include non-GAAP other income and expense net of approximately a $38 million expense. GAAP diluted EPS is expected to be $5.66, plus or minus $0.60, and non-GAAP diluted EPS of $6.07, plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 135.4 million shares. In conclusion, as we articulated 12 weeks ago, we are encouraged with the indicators and improvement ranging from our customers' conversations to the public reports over the past few months. KLA remains focused on delivering a differentiated product portfolio that anticipates customers' technology roadmap requirements and drives our longer-term growth expectations. With the KLA operating model guiding best-in-class execution, KLA continues to implement strategic objectives which are geared to drive outperformance. With a focus on customer success, delivering innovative and differentiated solutions, and operational excellence, KLA is able to deliver industry-leading financial and free cash flow performance and return capital consistently. The past few years have solidified our confidence in the increasing importance of process control and enabling technology advancements and optimizing yield across a high semiconductor device design mix volume production environment. This bodes well for KLA's long-term growth outlook as near-term industry demand trends are continuing to improve. In alignment with this, KLA's business is improving, and the long-term secular trends driving semiconductor industry demand and investments in WFE remain intact in both legacy and leading-edge markets. That concludes the prepared remarks. Kevin, let's begin the Q&A. Kevin Kessel -- Vice President of Investor Relations and Market Analytics Thank you, Bren. Operator, can you please provide instructions for polling? Questions & Answers: Operator Absolutely. [Operator instructions] In the interest of time, we also ask that you please limit yourself to one question and one follow-up. We'll now take our first question from Harlan Sur with J.P. Morgan. Please go ahead. Your line is open. Harlan Sur -- J.P. Morgan -- Analyst Good afternoon. Thanks for taking my question. Last year and first half of this year was more mature node by spending maybe more infrastructure focused as well. As you step into the second half of this year, it does feel like advanced momentum is starting to accelerate, rate, both foundry and logic and memory, and appears to be reflected in your confidence on improving spending outlook for this calendar year. Given your relatively longer lead time, your critical role in enabling these advanced technology migrations. Like how are customer discussions the initial forecast visibility and outlook for calendar 2025 shaping up for the team. I mean, I assume it's a more advanced technology-driven profile next year, which should be good for the team, but wanted to get your views. Rick Wallace -- Chief Executive Officer Great, Harlan. Thanks for the question, this is Rick. Absolutely, we are having different kind of discussions now than we've had for a while with our leading-edge logic and memory customers. As they prepare for the ramp and we're seeing increased demand for, they are seeing increased demand, they're talking about tool availability, scheduling of resources, making sure that they don't get behind, really conversations we haven't had for a while. I think the build-outs are still as we indicated, we see kind of stability with rising demand through the year, but the real build-out is going to come in 2025 and beyond that as we see some of the conversations we're having. So, really good indicators, leading indicators, design starts, advanced node discussions, R&D work. So, we feel pretty good about the setup. Harlan Sur -- J.P. Morgan -- Analyst Great. Thanks for that. And did you see the continued growth in the services business with industry utilization is clearly on an upward trajectory. You've got record number of tools coming off warranty customers, I think, wanting more value-added services and offerings just given the complexity challenges ahead. Has the view on the services growth profile improved relative to the last earnings call? I know you talked about being at the upper end of that sort of 12% to 14% sort of target range this year on the last call. Has that changed? Bren Higgins -- Chief Financial Officer I would say hey Harlan, it's Bren. I would say, look, we're continuing to see very strong momentum utilization rates are improving. We had a lot of tools come off of warranty, and they go into contract and our conversion rate is about 95%. So, that's very positive. Customers are extending lives of the systems, which bodes well for long-term service growth overall. So, I think as we track here, I think we feel pretty good about the range that we have, and we're closer to the upper end for sure than the lower end as we move forward over the next few years. Harlan Sur -- J.P. Morgan -- Analyst Thank you. Operator We'll take our next question from C.J. Muse with Cantor Fitzgerald. Please go ahead. Your line is open. C.J. Muse -- Cantor Fitzgerald -- Analyst Good afternoon, thanks for taking the question. I guess first question, a near-term question on the mix you expect for June, which a pretty massive shift to foundry/logic from memory. So, I guess as part of that, can you speak to some of the underlying drivers? And within that, do you see perhaps a pickup from domestic China memory beyond the June quarter? Or I think in the prior quarter, you talked about revenue rec pushed to the June quarter. So, curious about the moving parts there. Bren Higgins -- Chief Financial Officer Yeah. I would say as far as China memory goes, it's more first half heavy than second half, while we're having very positive conversations with our customers on the memory front, as Rick indicated, in terms of long-term plans, we're seeing their businesses now improve. We're seeing profitability and cash flow starting to improve. But we don't expect any significant investments as we move through the rest of the year. Nothing could change. But I think that the profile, it might tick up a little bit in the second half overall, non-China but I don't see it changing in a real meaningful way. If you look back at our business, we were a little bit over 70%, maybe logic/foundry in 2023. And I think we're going to be right around 70%. I think it's going to be a pretty similar overall mix this year. C.J. Muse -- Cantor Fitzgerald -- Analyst Excellent. And then in terms of your commentary around accelerating top-line revenues throughout the remainder of calendar 2024. I guess can you speak to the main drivers there as it relates to perhaps two-nanometer pilot, logic in Arizona, handset-related EPC. What's really driving that? And is there sort of a percentage growth rate we should be thinking about half on half? Thanks so much. Bren Higgins -- Chief Financial Officer Yes. CJ, I think you covered most of them, right? We will see some early investment in two-nanometer. You have the three-nanometer build-out. You have the investment that you mentioned in Arizona. So, those are all pretty good for the logic/foundry segment. Right now, when I look at the overall business first half versus second half, I think the second half is high single digits versus the first half in that ballpark. We're not guiding, but I think it's going to end up in that range as we progress through the year. On the EPC front, I think it is a little bit stronger. You do have some seasonality in EPC in the first part of the year. But we'll see some improvement there, I think, as we move through the second half of the year as well. Rick Wallace -- Chief Executive Officer And of course, service is growing quarter on quarter. So, you've got that effect as well. Operator And we'll take our next question from Krish Sankar with TD Cowen. Please go ahead. Your line is open. Krish Sankar -- TD Cowen -- Analyst Yes, thanks for taking my questions. Two of them. One is Bren, last quarter you kind of said that for KLA, the overall calendar 2024 revenues could grow mid-single digits based on WFE. And obviously, some of these expectations WFE growth is going to be higher thanks to [indiscernible]. Given that you do have some exposure on that side. I'm just kind of curious how to think about your overall revenue profile for this year, year over year. And then I have a follow-up. Bren Higgins -- Chief Financial Officer Yes. And when you look at the WFE level, we talked about flat to modestly up. And that, I think, depends on your view of WFE as everybody adds it up differently. Our view is that WFE was probably $90 billion to $91 billion, and then it's slightly up from there or flat to slightly up from there in terms of how we're looking at this year. So, I think that's the way to think about it. It simply put, given the WFE is more or less flat to modestly up, that we were going to see this increase in service that we've talked about. We're going to see some modest improvement in EPC. And we've seen some improvement given the outperformance we saw in March, the incremental guide into June in our semi-PC business. So, I think overall, semi-EPC share in the overall market is probably going to be fairly consistent, maybe a little bit up from what we saw in 2023. And all that translates into our semi-EPC business roughly performing mostly in line with where we think the market is going to be for this year. Krish Sankar -- TD Cowen -- Analyst Got it. That's very helpful. And then a quick follow-up on China. Give you a long lead time, so I'm kind of curious how do you think about China. You did say memory would be filtrated overall China revenues. And along the same path, if I back out the FPD gross margins from March to June is down 90 basis points QoQ. You said it's product mix? Is it mainly from China? I'm just kind of curious on this. Thank you. Bren Higgins -- Chief Financial Officer Yes. No, it's mostly product mix quarter on quarter, down from the FPD adjustment related to the inventory that we took related to the decision there. So, it's mostly just product mix across our semi-PC business. You do have some growth in service quarter on quarter and services is dilutive to the overall gross margin. We believe it's accretive to the operating margin, but the gross margin is a little dilutive. And then the rest is just the normal product mix we have across the portfolio. Different margin profiles across the portfolio. And so, depending on what we're revenue in a given quarter, it can cause some fluctuation. But I think the guidance range is appropriate, like we saw, I think we guided somewhere around 61.5% last quarter. It came in above 62%, depending on how things end up revenueing as we engage with customers and ship systems. There's always room for upside, which is why we give the range that we give. So, there's nothing really particular to actual customers. It's more about the product mix of all regions. It's more about the product mix of the products we're shipping and getting acceptance on. Krish Sankar -- TD Cowen -- Analyst And then is China's fitment to the rest of the year, similar range or? Bren Higgins -- Chief Financial Officer So, China is interesting. I think it's probably flattish over the course of the year. Second half is more or less flattish with the first half. The mix is changing a bit in terms of the end market mix. But we see it as a percent of the total coming down as we see most of the growth in the year coming from our non-China customers. Krish Sankar -- TD Cowen -- Analyst Thank you very much. Operator We'll take our next question from Brian Chin with Stifel. Please go ahead. Your line is open. Brian Chin -- Stifel Financial Corp. -- Analyst Hi, there. Thanks for letting us ask a few questions. I guess, is sort of asked earlier, but with all these CHIPS Act announcements continuing to roll in, has this solidified the timing or magnitude of any of the US greenfields to build out or maybe what is your latest thinking on some of these projects? Rick Wallace -- Chief Executive Officer Well, yeah, there have been many announcements, and it's exciting to see. But when you look at the timing for those projects, even, for example, the one that was announced today in New York, that one's quite a ways out. So, I think the approval of the funding relative to the timing, the customers we talk to, they're excited about this, the chance to reshore under the US, but they're still building their capacity based on market demand. So, it doesn't really affect the overall capacity investment. They're gauging that based on the overall demand. And I think what happens is it's the size of the investment in terms of how many wafers start to go out at what point is driven by the market. So, we'd stick to the comments about when the, what we see for the business environment, relatively independent of what location that the customers are choosing to make those investments. Brian Chin -- Stifel Financial Corp. -- Analyst Got it. That's fair. And then maybe I did notice that in the shareholder letter and on the call, you highlighted advanced packaging revenue could be around $400 million in calendar 2024, what growth rate does that represent versus calendar 2023? And then how would you size your served addressable market in advanced packaging, which I know certainly cross is, I guess, boundaries across your portfolio? Bren Higgins -- Chief Financial Officer Yes, so it's greater than 25%. So, we're somewhere down in around 300 in 2023, a little over 300, and close to 400 expectation for 2024. It's across a broad portfolio, right? We have process control, which we sell to those customers, which is inspection metrology, but also process tools in our specialty semiconductor business. It's about 50-50 in terms of the contribution from each part of the portfolio. And I think on the go forward, we feel pretty excited about the opportunity to see a growth rate that's meaningfully faster than WFE. Rick Wallace -- Chief Executive Officer Yeah, and I think for opportunity, there's a couple of factors that are in play. One is the speed with which customers are accelerating their packaging efforts, the degree with which those are requiring leading edge. Our ability to make it make sense from a business standpoint, the packaging challenges really need to be leading edge. So, there's still a number of packaging applications that are in markets that are served by lower-end competitors that we're not really competing for. So, it has to do with how quickly the new technologies come on. But this has been an increased conversation in meetings that we've been having with leading customers for the last year or so. It was already talked about, but it's accelerating. So, I think it's hard to judge exactly what the growth rate will be at this point, but it's pretty clear that there's a huge demand. And for many customers, they view it as the competitive necessity in order to, there's very much of a race of getting that new capability into the market, especially as it pertains to some of the AI applications. So, I would say that it's a huge driver for our customers. We're engaged. There's a lot of requests for new capability, and some of it comes down to us developing solutions in conjunction with those customers to meet those demands. But on its own, as it stands right now, it will outgrow WFE, and we think it has the potential to go well beyond that, depending on how the adoption goes and how we continue to execute against it. Brian Chin -- Stifel Financial Corp. -- Analyst Great. Thanks for all the color. Operator We'll take our next question from Tim Arcuri with UBS. Please go ahead. Your line is open. Tim Arcuri -- UBS -- Analyst Thanks a lot. I wanted to ask about N2, Rick. So, there has been a lot of talk recently about the big volume for N2 is not going to be probably until 2026, although there will certainly be some customers, crypto customers, and what not, that will ramp in 2025. So, there will be capacity that gets installed next year. So, I guess my question is, how much of a driver do you think N2 will specifically be for your business? Are you seeing any of that yet? Is it more of a back-happening this year thing? I'm just asking about timing, when that starts to help your business. Rick Wallace -- Chief Executive Officer Yeah, great question. It is definitely being one of the conversations we're having with critical customers about timing, and we have seen part of our optimism going forward is those conversations are being pulled in in terms of the needs because our customers are feeling end market pull. So, I think you're right that the bulk of it, the highest volume, will be in 2026. But for KLA, we're already seeing those conversations, and we'll start to see some meaningful business in 2025 for that with orders coming toward the end of 2024, as customers figure it out. The other thing is we're seeing a number of advanced design starts for the two-nanometer node. It's a big, as Tim, it's a big power-favorable node. And so, for a lot of customers, some of the challenges around data center and, frankly, around AI are power-related in terms of customers being able to even build those sites. So, it's a big driver for our customers right now. So, we think N2 is going to be a very significant node, and we're going to definitely see a lot of that. We're already seeing the activity, but it'll be a big factor in 2025 and then as we go through 2025. Tim Arcuri -- UBS -- Analyst Got it. Got it. OK, perfect. And then I want to ask about China. Bren, you just said, I think you said China is going to be flattest, shorter than the back half of the year. I mean, it sounds like every quarter China keeps getting stronger, and I think it's going to down-tick, and it doesn't because they're just going to take tools as long as they're allowed to take tools. So, my question is really just on the mix around China. Is the back half filling in a bit because of new customers? I mean, there's probably 30 or 40 new hubs being built, if not more than that, that are part of these compilations just under different names. And so, is it these new, newly named fabs that are coming on that are sort of filling in the back half of the year? And then if, we've seen a lot of headlines around potential entity list additions, if this happens, which there's been a lot of headlines about it, but if it does happen, is this downside to what you're thinking for the back half of the year or for next year? Thanks. Bren Higgins -- Chief Financial Officer Well, Tim, I don't want to speculate about hypotheticals about what might come or not come from the US government in regards to further export controls, and we're continuing to work very closely with the government and spend a lot of time and resources to make sure that whatever the rules are that we're compliant. It's a pretty decent mix. I talked about DRAM being down. I think the wafer infrastructure in the second half, I think the wafer infrastructure is probably down a little bit in the second half. I think the reticle infrastructure is probably up, and then the logic/foundry is up overall. And then when you net it all out, it's basically a flattish profile. The customer mix, you do have a number of new projects continuing to take systems, but you also have the, I'll call them the more mature legacy customers in China that are also part of that mix. So, I think, it's continuing to be healthy, I think, through this year. And I think the profile as we, even beyond this year, feels like, kind of continues more or less at current levels. Obviously, those are like half to half. I mean, in any given quarter, we'll see some movement, but that's how we see things today. Tim Arcuri -- UBS -- Analyst OK. Awesome, thank you Bren. Operator We'll take our next question from c with Needham. Please go ahead. Your line is open. Charles Shi -- Needham and Company -- Analyst Thanks. I want to ask a question to build on what was discussed with the team earlier. So, TSMC definitely said that the revenue is going to ramp in 2026 for N2. And you kind of alluded to that, that you think the 2026 volume for you will be higher than 2025. But if I look at how the 30-nanometer ramp look like? And it occurs to me that 2022, which was one year in terms of production timeline for the three-nanometer was a higher volume for you guys compared with probably 2023. So, I just really wonder about the fact that you said you think that 2026 will be a high volume for you compared with 2025. Was that coming from some discussion with the customers? And what's changed this time, why they want the kind of I mean, move the capacity to a little bit closer to the high volume at the point of entry to the high-volume production? Thanks. Rick Wallace -- Chief Executive Officer Yes, it's a great question. And there's a couple of things to consider when thinking about N2. First of all, this is now very clear in our customers' minds a race for AI capability. And so, you see several designs start happening, not just the ones we're most familiar with, but other players, too, designing for capability. So, you have a very different demand environment. You also have a constrained capacity environment, now constrained somewhat even by the ability to build facilities. But the last factor is you have the KLA phenomenon is we get pulled in early. So, we're front-end loaded into some of these facilities because you need our systems to be able to qualify the rest. So, it is a different node than what we've seen in quite a while because of those factors. And as we meet with customers, they are very concerned about supporting the demand that they're seeing. That's why we believe we're going to get a lot of pressure to support the end of this calendar year to start supporting some of the POs that we're going to see as they plan out those nodes. And it will go through, and we're talking about volume in 2026 for them, but toward the end of 2025 is when we'll be seeing more and more of that business. And, of course, we don't know how much broader it's going to get in terms of the number of design starts. It is remarkable that there are this many designs specifically for one application at this point in the process. But it's pretty remarkably consistent as we talk to different customers and even their customers. Charles Shi -- Needham and Company -- Analyst Thanks for the color. Maybe a second question I want to ask you about the advanced packaging capability you're building there. It sounds like you're having more of the constructive conversation with your customers, maybe to put more KLA, more advanced process control capabilities into the packaging side of the process control. So, I get the overall idea, but I just really hope for you to provide a little bit more color. What kind of areas do you think the customers are facing challenges in terms of maybe wrapping up COAs, maybe wrapping up SOIC, and where do you see, from a process control perspective, the biggest opportunities for KLA? Thanks. Rick Wallace -- Chief Executive Officer Yes, I'll give you some color just from two stories. One, years ago when we bought ICOS, part of the theory of that case was it was giving us exposure to the back end. And I remember meeting with one of our big customers and their back-end people, and they literally said to me, why are you guys talking to us about the back-end? That's not a KLA market. And fast forward to the end of last year, calendar year, in a meeting that Ahmad and I had with a critical customer, they had two topics they wanted to talk about. One was our support of EUV and the ramping of continuous ramping of EUV designs and capabilities, and the other was advanced packaging. And these were the folks that were historically and traditionally responsible for the front end. And one of the things they said is we think you guys have the capability in a lot of your front-end tools, but we need that modified, and we need that for the back end, because the back end is a critical part of our differentiation, and that's the part that we need you to work with us to take what you consider front end tools and make it. And what we're more concerned with than cost, and this is often the case at the beginning of a node, they're more concerned with capability than they were necessarily on cost. So, the dynamic has shifted pretty considerably. And again, I go to one of the biggest drivers for all this is all the work that's going on with AI, and if you look at the success and the requirement to have advanced packaging as part of those solutions, that's what's driving it. So, we kind of anticipated a few years ago that more and more trend was going to become more and more relevant, but we're seeing it very specifically with customers bringing front-end people that they've worked in the front end, having them work on these back-end challenges, and asking specifically for capability that we have in the front end to be used in the back end. And in some cases, we've done that with some of our inspection tools and capability. But as you know, we have to make modifications to handling and some of the operating conditions to make that work. So, we're definitely seeing that, and in some cases, our ability to support and modify those systems will be the gating item for us to realize revenue on it, not the demand. The demand is there, and from a competitive standpoint, we're uniquely positioned to do that. So, we feel pretty good about the opportunity, and it's a major focus area for the company. Charles Shi -- Needham and Company -- Analyst Thanks so much. Operator We'll take our next question from Chris Caso with Wolfe Research. Please go ahead. Your line is open. Chris Caso -- Wolfe Research -- Analyst Yeah, thank you. Good evening. Just a follow-up question with regards to memory. And I think I understand what you're saying with regard to this year, perhaps some improvement in non-China memory, but nothing significant. I guess, what are your customers telling you to be prepared for perhaps as you're going into next year? We're starting to see some prices go up, utilization up. What's your expectations for the potential improvement in 2025? Bren Higgins -- Chief Financial Officer Yeah, Chris, you're seeing all the things you want to see, right? You're seeing pricing improve, customers are taking up utilization. Utilizations were very low. And so, there's a fair amount of capacity that's been out there. We're seeing the profitability improve and ultimately, that will translate into cash flow and then what we expect to be investment next year. I think we're seeing more in DRAM driven by the leading edge of DRAM or expect to see more there. And then, of course, the drivers related to high bandwidth memory. But I think in some ways, it's the device market -- part of the market is improving this year, and that will translate into investment next year. Chris Caso -- Wolfe Research -- Analyst Got it. As a follow-up, with regard to service, I think last quarter, you talked about your expectation that being kind of the high end of a 12% to 14% target. Is that still the right way of thinking about it? Again, we've seen utilization rates improve here. Does that make that change your view of where services come out for the year? Bren Higgins -- Chief Financial Officer Well, it's certainly a factor in the growth that we're seeing this year. So, I've been pretty open that I thought that we'd be somewhere between 250 to 300 million of incremental service this year versus in 2023. I think we're closer to the top end of that range than the bottom. It is a factor, and given the nature of process control and the complexity of our systems, the mix, and the relatively lower volume, our customers tend to rely on us to ensure that they're optimizing their capital, particularly in environments when capital is constrained. Yields matter a lot. And so, our utilizations never drop as much as process tools where they have more redundancy. But we are seeing it continue to improve, and so I think it's a good sign in terms of the overall market health and in our confidence about some of the growth drivers into next year. Chris Caso -- Wolfe Research -- Analyst Thank you. Operator We'll take our next question from Joe Quatrochi with Wells Fargo. Please go ahead. Your line is open. Joe Quatrochi -- Wells Fargo Securities -- Analyst Yes, thanks for taking the question. Wondering if you could comment, obviously, you seem pretty positive in terms of just the opportunity looking into next year and thinking about the size of N2 and recovery in the memory market, I guess, how does the conversation with your customers over the last several months and just thinking about your lead times to give you confidence in your ability to reach that 2026 target model? Bren Higgins -- Chief Financial Officer Well, I think our confidence is pretty good. We've made a lot of investments around the company in 2021 and 2022, both in terms of our own capacity, but also to ensure that our key suppliers have the capacity to support that kind of demand environment. So, it's one of the reasons why my inventory levels today are higher than -- and they continue to grow even where the market has corrected some because of the commitments we've made to ensure that the suppliers keep that capacity in place. So, we feel very good about our ability to leverage what we have. I don't think we really have to make a lot of big investments to be able to support that trajectory. And I think we'll -- because of the investments, I think, frankly, they're a little bit of a headwind today in terms of the margins. So, I think over time, the leverage opportunity is also compelling if we see the kind of growth environment that we expect over the next couple of years. Joe Quatrochi -- Wells Fargo Securities -- Analyst OK. As a quick follow-up, Bren, I was wondering if you could give us RPO exiting the quarter. Bren Higgins -- Chief Financial Officer It wouldn't be a quarterly conference call without your question, Joe. So, $9.9-ish, we're going to file the Q in the morning or sometime tomorrow, I think. $9.9 billion, it was down about $750 million quarter on quarter. Deposits are about $677 million. Joe Quatrochi -- Wells Fargo Securities -- Analyst Perfect. Thank you. Operator We will take our next question from Tom O'Malley with Barclays. Please go ahead. Your line is open. Tom O'Malley -- Barclays -- Analyst Hey guys, thanks for taking the question. I think there's been a lot of discussion on the call about advanced packaging, and you guys have talked about how you had conversations already about potentially bringing some of your solutions from the front end to the back end. There's obviously some adjustments to those tools to get them ready. Can you talk about the timing of bringing those solutions there? Obviously, you're seeing a big growth rate in the back end. But from the moment that you say, hey, we want to take a tool and address the back end to when you're actually selling that to a customer. Can you talk about how long that takes? Rick Wallace -- Chief Executive Officer Sure. And we had, yes, let's be clear. I mean we have some of our products already from the front end that are being used in the back end. That started a while ago. We're just seeing an accelerated conversation about more tools where some customers will actually name specific tools that they want. So, it very much depends on the tool, and I can give you a range where it could be from three months, it could be a couple of years, depending on whether you're modifying something that's already being used in that kind of application and specializing it. So, it really depends, but I do think that we have some that are already there. So, part of our $400 million is from tools that were from the front end. A fair amount of those, probably half of those, actually, and some are process capability from SPTS. So, it's really those are examples where we have it. And also, the case is some of those tools need to be upgraded to the later specifications as customers move forward in technology. So, that's why, you know, net-net, it's a positive, it's a growth segment for us. We think it will continue to grow. Bren talked about the growth from last year, and it was a big driver for going back in time for the Orbotech acquisition was our belief that packaging opportunity was going to continue to grow. So, that's where we are on it. But it's very tool-specific how long it takes to modify. Bren Higgins -- Chief Financial Officer We also have new products that are going to support the substrate transition as the substrate integrates into the package. On the inspection side, as the lines and spaces shrink in the connecting layers, it will drive the need for more capability for more advanced inspection and metrology systems. And so, anytime you add sensitivity, you add capability, there tends to be a throughput or a volume hit. So, it creates an opportunity for us to sell, higher ASP systems that have more capability. But if you're going to maintain the same sampling rate, then you'll need more systems. So, it's all a factor in terms of all these factors are all, positive in terms of how we think about the long-term opportunities. Tom O'Malley -- Barclays -- Analyst Super helpful. And then my second one is just kind of on the tidbits that you've given for the year. So, you said second half over first half, high single digits and you talked about kind of the mix of foundry/logic being similar to calendar year 2023, about that 70%. If you take those clues, you obviously see some really strong growth in memory in the second half. Could you just help us with any color, obviously, March to June, your DRAM percentage went down a bit in terms of its contribution to memory? But in the second half, how should we be thinking about the DRAM and NAND growth profile? Thank you. Bren Higgins -- Chief Financial Officer Yes, I think I don't think it's going to, you know, it'll be a little bit stronger potentially in the second half than the first, but not much. Because, like I said earlier, the expected DRAM investments in China, I would expect in the second half to be lower than the first half. Operator [Operator instructions] I'll take our next question from Srini Pajjuri with Raymond James. Please go ahead. Your line is open. Srini Pajjuri -- Raymond James -- Analyst Sorry, I joined a little late, so if these questions have already been asked, I apologize. But I think last quarter, Bren, you had a customer push-out that kind of impacted your revenue for the year. I'm just wondering if there's any change or any update to that customer if you're including that in the current year's guidance. Bren Higgins -- Chief Financial Officer Yeah, it affected the March quarter as we had some shifting around, frankly, affected a little bit in the December quarter and the March quarter, but the shifting around to make the December quarter work, obviously, the shortfall was in March. So, I don't think anything has really changed. I don't expect to see much activity from that customer until we get into 2025. I mean, look, things could change. We could see some surprises. But right now, at least from a planning point of view, we put it in 2025. And if it pulls in great, we can support it. Srini Pajjuri -- Raymond James -- Analyst Got it. Thank you. And then on the two-nanometer, I think your foundry customers are transitioning aggressively to get all around. Obviously, that helps you. But at the same time, I think the EUV layer count is going to be somewhat flattish. So, I'm just wondering what sort of impact it will have on process control intensity if you go to GA and keep the, I guess, EUV kind of flattish in terms of layers. Should we expect any impact, or is it kind of a non-event for you? Rick Wallace -- Chief Executive Officer Oh, it's an event. I mean, our customers are definitely -- so you think about the dynamic. Our customers don't want to add process control intensity if they can avoid it. They also want to ramp and yield. So, that's the trade-off. So, in the prototyping stage or the early pilot, they inspect more and they measure more in order to debug the process, if you will, and ramp it. And the question is, how much do they have to maintain when they ramp? And that's really what drives process control. They're definitely using more capability at the front end, and there's some areas where they're going to have to increase their sampling or measurement to keep up with the additional challenges of a smaller design role. And there's also some new capability they have to bring because of FinFET. And so, we've talked in the past about modifications of a Gen 4 optical inspector to be able to support the FinFET. But it's not the only change in that process. So, the EUV layers matter, but the process integration challenges are still going to be there. When we model it, though, we do see an increase. We have different scenarios for how much process control intensity will go up, but it's consistent with we think there will be a modest increase in the overall process control intensity for the leaders who have been successfully doing three nanometers. Anybody else that tries to jump to that node, though, will see a dramatic increase in their process control intensity because they don't benefit from the learning of having done three at volume. So, in aggregate, depending on how many people are supporting it over time, it will drive our intensity up for our customers. We're also expecting a more robust design environment, certainly in the first few years, than what we saw with three-nanometer and likely a steeper ramp. So, in addition to the challenges of just the gate all around architecture, what it means from inspection, but also metrology, but also more volume earlier, steeper ramp, and a more robust design environment, which will challenge the customer's process integration more than you see when you just have a few designs. So, we're encouraged on a number of fronts. Srini Pajjuri -- Raymond James -- Analyst Got it. Thank you. Operator We'll take another question from Krish Sankar with TD Cohen. Please go ahead. Your line is open. Krish Sankar -- TD Cowen -- Analyst Hi. Thanks for doing my follow-up. Rick, I just had a follow-up on gate all around. Clearly, you have exposure to your Gen 4 optical inspection and the metrology for high-k metal gates. Is there a way to quantify what you think your gate all-around revenues could be in calendar 2024? Rick Wallace -- Chief Executive Officer Yes. I'd be making it up, Krish. I mean, we don't really look at it that way. We do think about what is the node requirement. So, from that standpoint, if you think N2, you'd attribute it all to gate all around. So, we think about node intensity for process control and blended. And as I said in the prior answer, that's slightly up, but we don't have a specific number specifically around gate all around. But obviously, that's the big driver for the change and why customers are pushing for N2. And we don't know yet, but that's consistent with the 2026 model that we've had where we see rising process control intensity or corresponding increase per share for KLA. Krish Sankar -- TD Cowen -- Analyst Got it. That's helpful. And then just if I could squeeze one more in, I'm just kind of curious about your Gen 4 lead times. I think last time we said it was like seven to nine months. As a change, if you assume that mature nodes are kind of slowing, China might moderate as the year progresses, is there a view that the lead times are coming in, or is it still like seven to nine months? Rick Wallace -- Chief Executive Officer Gen 4 is highly demanded across nodes. It's a very configurable system. And in fact, we recently introduced a non-upgradable version specifically for gate all around. So, it's a product that has a lot of extendability. It's been challenged in terms of supply, the ability to get supply to meet demand. I would say, and we will see some increase this year in revenue from that system, which it hurt us last year just because we weren't able to get any incremental supply around key components. I'll see that increase this year, and so that will help. I still think lead times are probably in the 18-month to 24-month range for that product, although we do a lot of juggling to make sure that we're in position to support all of our customers. But it has demand on multiple fronts, and I think it's a testament to its extendability and the favorability of a broadband system, which has the ability to scale the deployment lengths to meet very different inspection requirements across multiple nodes. Bren Higgins -- Chief Financial Officer Thank you, Krish. And I do think, Krish, you were referring to what we said about Gen 5, the seven to nine-month, a quarter-ago brand. So, I don't know on Gen 5 if there's any change there. No, Gen 5 is in the same ballpark. Still the same ballpark. Perfect. All right. So, that brings us to the end of our call. We want to thank everyone for your time and attention. We know it's a very busy day. With that, I will pass the call back over to our operator to conclude. Answer:

the KLA Corporation March quarter 2024 earnings conference call and webcast

Operator Good afternoon, my name is Doug and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation March quarter 2024 earnings conference call and webcast. All participant lines have been placed on a listen-only mode to prevent any background noise. [Operator instructions] Thank you. I will now turn the call over to Kevin Kessel, vice president of investor relations and market analytics. Please go ahead. Kevin Kessel -- Vice President of Investor Relations and Market Analytics Thank you for joining our earnings call to discuss the March 2024 results in the June quarter outlook. I am joined by our CEO Rick Wallace and our CFO Bren Higgins. We will discuss today's results released after the market close and available on our IR website along with the supplemental materials. Today's discussion and metrics are presented on a non-GAAP financial basis unless otherwise specified. All four-year references are to calendar years. Earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future investor events, presentations, corporate governance information, and links to the SEC filings, including our most recent annual report and quarterly reports on Forms 10-K and 10-Q. Our comments today are subject to risks and uncertainties reflected in the disclosures of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. Rick will begin the call with some introductory comments, followed by Brent with additional financial highlights, including our outlook. We'll now turn the call over to our CEO, Rick Wallace. Rick? Rick Wallace -- Chief Executive Officer Thank you, Kevin. Today I will review KLA's March quarter results and highlights and address the new market share reports, as well as a broader industry outlook. KLA's revenue of $2.36 billion was above the midpoint of our guidance range. EPS results, both non-GAAP and GAAP, were above the midpoint of the adjusted guidance we provided on March 18th, in conjunction with the decision to exit the flat panel business. Market conditions have stabilized, and we expect our business to improve as we progress through the year. We're encouraged by the improvement in our customers' business across multiple end markets, which is driving discussions with our customers about future opportunities for leading-edge capacity investments. At the start of each year, new global market share reports are published by third parties that provide additional insights into the state of our industry. These reports show consistent, long-term KLA market leadership and process control, and demonstrate the strength of our diverse portfolio that offers our customers unique capabilities to address their technology challenges while meeting their productivity demands. This year, following significant gains in 2022, KLA's 2023 market share declined by nearly 1%, driven primarily by a loss in access to approximately 10% of the China market as a result of US government export controls. That said, KLA's consistent market leadership and process control, and some of the most critical markets in WFE, reflect the success of our customer-focused strategies and the power of our portfolio. We're confident that KLA's quarterly revenues bottomed in the March quarter, as expressed in our prior earnings call. In foundry/logic, simultaneous investments across multiple nodes and slowly rising capital intensity continue to be a long-term tailwind. Additionally, the increasing complexity in advanced packaging applications for AI and other advanced technologies drives demand for both our process tool and process control products. Overall demand growth, along with increasing technology requirements, will drive the need for more capability from inspection and metrology systems. Our advanced packaging business will generate approximately $400 million in run rate in 2024, and we expect this business to achieve growth rates meaningfully above the growth rate of WFE going forward. In services, our business grew to $590 million in the quarter, up 4% sequentially and 12% year over year. Quarterly free cash flow was $838 million, and the last 12-month free cash flow was $3.1 billion, with a free cash flow margin of 32% over the period. KLA's quarterly results continue to demonstrate our sustained process control leadership and the success of our broad portfolio and product strategies. Customers continue to prioritize and invest in leading-edge technology transition, and this aligns with KLA's highest-value product offerings. In this industry environment, KLA will continue to focus on supporting customer requirements, executing on product roadmaps, and preparing for growth at the leading edge. Bren will now discuss the financials and our outlook further. Bren Higgins -- Chief Financial Officer Thank you, Rick. KLA's quarterly results demonstrated a consistent execution of our global team. Despite the challenges and complexity of the current industry environment, KLA continues to show resourcefulness and the ability to adapt to meeting customers' changing requirements. Quarterly revenue was $2.36 billion, above the guidance midpoint of $2.3 billion. Non-GAAP diluted EPS was $5.26, above the guidance midpoint of $4.83. GAAP diluted EPS was $4.43, above the guidance midpoint of $4.06. In the March quarter, both non-GAAP and GAAP diluted EPS were negatively impacted by a $62 million charge for excess and obsolete inventory related to the company's strategic decision to exit the flat panel display business announced on March 18. This charge had a $0.40 impact on EPS. Excluding this item, diluted non-GAAP EPS would have been $5.66. Non-GAAP gross margin was 59.8%, above the top end of the revised guidance range. Excluding the FPD charge, non-GAAP gross margin would have been 62.4%, and roughly flat sequentially. Non-GAAP operating expenses were flat sequentially at $544 million, comprised of $320 million in R&D and $224 million in SG&A. Non-GAAP EPS at the 13.5% guided tax rate would have been $0.04 higher, or $5.30. Non-GAAP operating margin was 36.8%, non-GAAP other income and expense net was a $34 million expense, and the quarterly non-GAAP effective tax rate was 14.2%. Quarterly non-GAAP net income was $715 million, GAAP net income was $602 million, cash flow from operations was $910 million, and free cash flow was $838 million. The breakdown of revenue by reportable segments and markets and major products and regions can be found within the shareholder letter and slides. Turning to the balance sheet, KLA ended the quarter with $4.3 billion in total cash, cash equivalents, and marketable securities, debt of $6.7 billion, and a flexible and attractive bond maturity profile, supported by strong investment grade ratings from all three agencies. On February 1st, KLA issued $500 million of 4.7% senior notes due in 2034 and $250 million of 4.95% senior notes due in 2052. The company expects to use the net proceeds from the notes operating for general corporate purposes, including the repayment of outstanding indebtedness at or prior to maturity. Moving to our outlook, we remain encouraged by constructive customer discussions around their future investment plans, which are further supported by recent reports of an improving end-market demand environment and customer profitability. Consistent with these industry trends, as we indicated last quarter, we believe our business bottomed from a revenue perspective in the March quarter, and looking ahead through the balance of calendar 2024, growth is resuming in the June quarter, and we expect business levels to improve as we progress through the year. For calendar 2024, our high-level outlook remains unchanged. We still expect WFE demand to be roughly flat to modestly up from 2023, and that the second half of the calendar year will be stronger than the first half. KLA's June quarter guidance is as follows. Revenue of $2.5 billion, plus or minus $125 million. Foundry logic revenue from semiconductor customers is forecasted to be approximately 82%, and memory is expected to be 18% of semi-process control systems revenue. Within memory, DRAM is expected to be about 78% of the segment mix, and NAND the remaining 22%. Non-GAAP gross margin is forecasted to be in a range of 61.5%, plus or minus one percentage point based on product mix expectations. For calendar 2024, based on current industry outlook, top-line growth expectations, higher forecasted growth in services, and expected systems product mix, we are modeling non-GAAP gross margins to be relatively stable around the mid-61% range. Variability quarter to quarter is typically driven by product mix fluctuations. Non-GAAP operating expenses are forecasted in the June quarter to be approximately $550 million, as our merit adjustment process occurred in the March quarter. Looking ahead, we continue to expect $5 million to $10 million incremental growth in quarterly operating expenses for the remainder of calendar 2024, supported by expected revenue growth. Other model assumptions for the June quarter include non-GAAP other income and expense net of approximately a $38 million expense. GAAP diluted EPS is expected to be $5.66, plus or minus $0.60, and non-GAAP diluted EPS of $6.07, plus or minus $0.60. EPS guidance is based on a fully diluted share count of approximately 135.4 million shares. In conclusion, as we articulated 12 weeks ago, we are encouraged with the indicators and improvement ranging from our customers' conversations to the public reports over the past few months. KLA remains focused on delivering a differentiated product portfolio that anticipates customers' technology roadmap requirements and drives our longer-term growth expectations. With the KLA operating model guiding best-in-class execution, KLA continues to implement strategic objectives which are geared to drive outperformance. With a focus on customer success, delivering innovative and differentiated solutions, and operational excellence, KLA is able to deliver industry-leading financial and free cash flow performance and return capital consistently. The past few years have solidified our confidence in the increasing importance of process control and enabling technology advancements and optimizing yield across a high semiconductor device design mix volume production environment. This bodes well for KLA's long-term growth outlook as near-term industry demand trends are continuing to improve. In alignment with this, KLA's business is improving, and the long-term secular trends driving semiconductor industry demand and investments in WFE remain intact in both legacy and leading-edge markets. That concludes the prepared remarks. Kevin, let's begin the Q&A. Kevin Kessel -- Vice President of Investor Relations and Market Analytics Thank you, Bren. Operator, can you please provide instructions for polling? Questions & Answers: Operator Absolutely. [Operator instructions] In the interest of time, we also ask that you please limit yourself to one question and one follow-up. We'll now take our first question from Harlan Sur with J.P. Morgan. Please go ahead. Your line is open. Harlan Sur -- J.P. Morgan -- Analyst Good afternoon. Thanks for taking my question. Last year and first half of this year was more mature node by spending maybe more infrastructure focused as well. As you step into the second half of this year, it does feel like advanced momentum is starting to accelerate, rate, both foundry and logic and memory, and appears to be reflected in your confidence on improving spending outlook for this calendar year. Given your relatively longer lead time, your critical role in enabling these advanced technology migrations. Like how are customer discussions the initial forecast visibility and outlook for calendar 2025 shaping up for the team. I mean, I assume it's a more advanced technology-driven profile next year, which should be good for the team, but wanted to get your views. Rick Wallace -- Chief Executive Officer Great, Harlan. Thanks for the question, this is Rick. Absolutely, we are having different kind of discussions now than we've had for a while with our leading-edge logic and memory customers. As they prepare for the ramp and we're seeing increased demand for, they are seeing increased demand, they're talking about tool availability, scheduling of resources, making sure that they don't get behind, really conversations we haven't had for a while. I think the build-outs are still as we indicated, we see kind of stability with rising demand through the year, but the real build-out is going to come in 2025 and beyond that as we see some of the conversations we're having. So, really good indicators, leading indicators, design starts, advanced node discussions, R&D work. So, we feel pretty good about the setup. Harlan Sur -- J.P. Morgan -- Analyst Great. Thanks for that. And did you see the continued growth in the services business with industry utilization is clearly on an upward trajectory. You've got record number of tools coming off warranty customers, I think, wanting more value-added services and offerings just given the complexity challenges ahead. Has the view on the services growth profile improved relative to the last earnings call? I know you talked about being at the upper end of that sort of 12% to 14% sort of target range this year on the last call. Has that changed? Bren Higgins -- Chief Financial Officer I would say hey Harlan, it's Bren. I would say, look, we're continuing to see very strong momentum utilization rates are improving. We had a lot of tools come off of warranty, and they go into contract and our conversion rate is about 95%. So, that's very positive. Customers are extending lives of the systems, which bodes well for long-term service growth overall. So, I think as we track here, I think we feel pretty good about the range that we have, and we're closer to the upper end for sure than the lower end as we move forward over the next few years. Harlan Sur -- J.P. Morgan -- Analyst Thank you. Operator We'll take our next question from C.J. Muse with Cantor Fitzgerald. Please go ahead. Your line is open. C.J. Muse -- Cantor Fitzgerald -- Analyst Good afternoon, thanks for taking the question. I guess first question, a near-term question on the mix you expect for June, which a pretty massive shift to foundry/logic from memory. So, I guess as part of that, can you speak to some of the underlying drivers? And within that, do you see perhaps a pickup from domestic China memory beyond the June quarter? Or I think in the prior quarter, you talked about revenue rec pushed to the June quarter. So, curious about the moving parts there. Bren Higgins -- Chief Financial Officer Yeah. I would say as far as China memory goes, it's more first half heavy than second half, while we're having very positive conversations with our customers on the memory front, as Rick indicated, in terms of long-term plans, we're seeing their businesses now improve. We're seeing profitability and cash flow starting to improve. But we don't expect any significant investments as we move through the rest of the year. Nothing could change. But I think that the profile, it might tick up a little bit in the second half overall, non-China but I don't see it changing in a real meaningful way. If you look back at our business, we were a little bit over 70%, maybe logic/foundry in 2023. And I think we're going to be right around 70%. I think it's going to be a pretty similar overall mix this year. C.J. Muse -- Cantor Fitzgerald -- Analyst Excellent. And then in terms of your commentary around accelerating top-line revenues throughout the remainder of calendar 2024. I guess can you speak to the main drivers there as it relates to perhaps two-nanometer pilot, logic in Arizona, handset-related EPC. What's really driving that? And is there sort of a percentage growth rate we should be thinking about half on half? Thanks so much. Bren Higgins -- Chief Financial Officer Yes. CJ, I think you covered most of them, right? We will see some early investment in two-nanometer. You have the three-nanometer build-out. You have the investment that you mentioned in Arizona. So, those are all pretty good for the logic/foundry segment. Right now, when I look at the overall business first half versus second half, I think the second half is high single digits versus the first half in that ballpark. We're not guiding, but I think it's going to end up in that range as we progress through the year. On the EPC front, I think it is a little bit stronger. You do have some seasonality in EPC in the first part of the year. But we'll see some improvement there, I think, as we move through the second half of the year as well. Rick Wallace -- Chief Executive Officer And of course, service is growing quarter on quarter. So, you've got that effect as well. Operator And we'll take our next question from Krish Sankar with TD Cowen. Please go ahead. Your line is open. Krish Sankar -- TD Cowen -- Analyst Yes, thanks for taking my questions. Two of them. One is Bren, last quarter you kind of said that for KLA, the overall calendar 2024 revenues could grow mid-single digits based on WFE. And obviously, some of these expectations WFE growth is going to be higher thanks to [indiscernible]. Given that you do have some exposure on that side. I'm just kind of curious how to think about your overall revenue profile for this year, year over year. And then I have a follow-up. Bren Higgins -- Chief Financial Officer Yes. And when you look at the WFE level, we talked about flat to modestly up. And that, I think, depends on your view of WFE as everybody adds it up differently. Our view is that WFE was probably $90 billion to $91 billion, and then it's slightly up from there or flat to slightly up from there in terms of how we're looking at this year. So, I think that's the way to think about it. It simply put, given the WFE is more or less flat to modestly up, that we were going to see this increase in service that we've talked about. We're going to see some modest improvement in EPC. And we've seen some improvement given the outperformance we saw in March, the incremental guide into June in our semi-PC business. So, I think overall, semi-EPC share in the overall market is probably going to be fairly consistent, maybe a little bit up from what we saw in 2023. And all that translates into our semi-EPC business roughly performing mostly in line with where we think the market is going to be for this year. Krish Sankar -- TD Cowen -- Analyst Got it. That's very helpful. And then a quick follow-up on China. Give you a long lead time, so I'm kind of curious how do you think about China. You did say memory would be filtrated overall China revenues. And along the same path, if I back out the FPD gross margins from March to June is down 90 basis points QoQ. You said it's product mix? Is it mainly from China? I'm just kind of curious on this. Thank you. Bren Higgins -- Chief Financial Officer Yes. No, it's mostly product mix quarter on quarter, down from the FPD adjustment related to the inventory that we took related to the decision there. So, it's mostly just product mix across our semi-PC business. You do have some growth in service quarter on quarter and services is dilutive to the overall gross margin. We believe it's accretive to the operating margin, but the gross margin is a little dilutive. And then the rest is just the normal product mix we have across the portfolio. Different margin profiles across the portfolio. And so, depending on what we're revenue in a given quarter, it can cause some fluctuation. But I think the guidance range is appropriate, like we saw, I think we guided somewhere around 61.5% last quarter. It came in above 62%, depending on how things end up revenueing as we engage with customers and ship systems. There's always room for upside, which is why we give the range that we give. So, there's nothing really particular to actual customers. It's more about the product mix of all regions. It's more about the product mix of the products we're shipping and getting acceptance on. Krish Sankar -- TD Cowen -- Analyst And then is China's fitment to the rest of the year, similar range or? Bren Higgins -- Chief Financial Officer So, China is interesting. I think it's probably flattish over the course of the year. Second half is more or less flattish with the first half. The mix is changing a bit in terms of the end market mix. But we see it as a percent of the total coming down as we see most of the growth in the year coming from our non-China customers. Krish Sankar -- TD Cowen -- Analyst Thank you very much. Operator We'll take our next question from Brian Chin with Stifel. Please go ahead. Your line is open. Brian Chin -- Stifel Financial Corp. -- Analyst Hi, there. Thanks for letting us ask a few questions. I guess, is sort of asked earlier, but with all these CHIPS Act announcements continuing to roll in, has this solidified the timing or magnitude of any of the US greenfields to build out or maybe what is your latest thinking on some of these projects? Rick Wallace -- Chief Executive Officer Well, yeah, there have been many announcements, and it's exciting to see. But when you look at the timing for those projects, even, for example, the one that was announced today in New York, that one's quite a ways out. So, I think the approval of the funding relative to the timing, the customers we talk to, they're excited about this, the chance to reshore under the US, but they're still building their capacity based on market demand. So, it doesn't really affect the overall capacity investment. They're gauging that based on the overall demand. And I think what happens is it's the size of the investment in terms of how many wafers start to go out at what point is driven by the market. So, we'd stick to the comments about when the, what we see for the business environment, relatively independent of what location that the customers are choosing to make those investments. Brian Chin -- Stifel Financial Corp. -- Analyst Got it. That's fair. And then maybe I did notice that in the shareholder letter and on the call, you highlighted advanced packaging revenue could be around $400 million in calendar 2024, what growth rate does that represent versus calendar 2023? And then how would you size your served addressable market in advanced packaging, which I know certainly cross is, I guess, boundaries across your portfolio? Bren Higgins -- Chief Financial Officer Yes, so it's greater than 25%. So, we're somewhere down in around 300 in 2023, a little over 300, and close to 400 expectation for 2024. It's across a broad portfolio, right? We have process control, which we sell to those customers, which is inspection metrology, but also process tools in our specialty semiconductor business. It's about 50-50 in terms of the contribution from each part of the portfolio. And I think on the go forward, we feel pretty excited about the opportunity to see a growth rate that's meaningfully faster than WFE. Rick Wallace -- Chief Executive Officer Yeah, and I think for opportunity, there's a couple of factors that are in play. One is the speed with which customers are accelerating their packaging efforts, the degree with which those are requiring leading edge. Our ability to make it make sense from a business standpoint, the packaging challenges really need to be leading edge. So, there's still a number of packaging applications that are in markets that are served by lower-end competitors that we're not really competing for. So, it has to do with how quickly the new technologies come on. But this has been an increased conversation in meetings that we've been having with leading customers for the last year or so. It was already talked about, but it's accelerating. So, I think it's hard to judge exactly what the growth rate will be at this point, but it's pretty clear that there's a huge demand. And for many customers, they view it as the competitive necessity in order to, there's very much of a race of getting that new capability into the market, especially as it pertains to some of the AI applications. So, I would say that it's a huge driver for our customers. We're engaged. There's a lot of requests for new capability, and some of it comes down to us developing solutions in conjunction with those customers to meet those demands. But on its own, as it stands right now, it will outgrow WFE, and we think it has the potential to go well beyond that, depending on how the adoption goes and how we continue to execute against it. Brian Chin -- Stifel Financial Corp. -- Analyst Great. Thanks for all the color. Operator We'll take our next question from Tim Arcuri with UBS. Please go ahead. Your line is open. Tim Arcuri -- UBS -- Analyst Thanks a lot. I wanted to ask about N2, Rick. So, there has been a lot of talk recently about the big volume for N2 is not going to be probably until 2026, although there will certainly be some customers, crypto customers, and what not, that will ramp in 2025. So, there will be capacity that gets installed next year. So, I guess my question is, how much of a driver do you think N2 will specifically be for your business? Are you seeing any of that yet? Is it more of a back-happening this year thing? I'm just asking about timing, when that starts to help your business. Rick Wallace -- Chief Executive Officer Yeah, great question. It is definitely being one of the conversations we're having with critical customers about timing, and we have seen part of our optimism going forward is those conversations are being pulled in in terms of the needs because our customers are feeling end market pull. So, I think you're right that the bulk of it, the highest volume, will be in 2026. But for KLA, we're already seeing those conversations, and we'll start to see some meaningful business in 2025 for that with orders coming toward the end of 2024, as customers figure it out. The other thing is we're seeing a number of advanced design starts for the two-nanometer node. It's a big, as Tim, it's a big power-favorable node. And so, for a lot of customers, some of the challenges around data center and, frankly, around AI are power-related in terms of customers being able to even build those sites. So, it's a big driver for our customers right now. So, we think N2 is going to be a very significant node, and we're going to definitely see a lot of that. We're already seeing the activity, but it'll be a big factor in 2025 and then as we go through 2025. Tim Arcuri -- UBS -- Analyst Got it. Got it. OK, perfect. And then I want to ask about China. Bren, you just said, I think you said China is going to be flattest, shorter than the back half of the year. I mean, it sounds like every quarter China keeps getting stronger, and I think it's going to down-tick, and it doesn't because they're just going to take tools as long as they're allowed to take tools. So, my question is really just on the mix around China. Is the back half filling in a bit because of new customers? I mean, there's probably 30 or 40 new hubs being built, if not more than that, that are part of these compilations just under different names. And so, is it these new, newly named fabs that are coming on that are sort of filling in the back half of the year? And then if, we've seen a lot of headlines around potential entity list additions, if this happens, which there's been a lot of headlines about it, but if it does happen, is this downside to what you're thinking for the back half of the year or for next year? Thanks. Bren Higgins -- Chief Financial Officer Well, Tim, I don't want to speculate about hypotheticals about what might come or not come from the US government in regards to further export controls, and we're continuing to work very closely with the government and spend a lot of time and resources to make sure that whatever the rules are that we're compliant. It's a pretty decent mix. I talked about DRAM being down. I think the wafer infrastructure in the second half, I think the wafer infrastructure is probably down a little bit in the second half. I think the reticle infrastructure is probably up, and then the logic/foundry is up overall. And then when you net it all out, it's basically a flattish profile. The customer mix, you do have a number of new projects continuing to take systems, but you also have the, I'll call them the more mature legacy customers in China that are also part of that mix. So, I think, it's continuing to be healthy, I think, through this year. And I think the profile as we, even beyond this year, feels like, kind of continues more or less at current levels. Obviously, those are like half to half. I mean, in any given quarter, we'll see some movement, but that's how we see things today. Tim Arcuri -- UBS -- Analyst OK. Awesome, thank you Bren. Operator We'll take our next question from c with Needham. Please go ahead. Your line is open. Charles Shi -- Needham and Company -- Analyst Thanks. I want to ask a question to build on what was discussed with the team earlier. So, TSMC definitely said that the revenue is going to ramp in 2026 for N2. And you kind of alluded to that, that you think the 2026 volume for you will be higher than 2025. But if I look at how the 30-nanometer ramp look like? And it occurs to me that 2022, which was one year in terms of production timeline for the three-nanometer was a higher volume for you guys compared with probably 2023. So, I just really wonder about the fact that you said you think that 2026 will be a high volume for you compared with 2025. Was that coming from some discussion with the customers? And what's changed this time, why they want the kind of I mean, move the capacity to a little bit closer to the high volume at the point of entry to the high-volume production? Thanks. Rick Wallace -- Chief Executive Officer Yes, it's a great question. And there's a couple of things to consider when thinking about N2. First of all, this is now very clear in our customers' minds a race for AI capability. And so, you see several designs start happening, not just the ones we're most familiar with, but other players, too, designing for capability. So, you have a very different demand environment. You also have a constrained capacity environment, now constrained somewhat even by the ability to build facilities. But the last factor is you have the KLA phenomenon is we get pulled in early. So, we're front-end loaded into some of these facilities because you need our systems to be able to qualify the rest. So, it is a different node than what we've seen in quite a while because of those factors. And as we meet with customers, they are very concerned about supporting the demand that they're seeing. That's why we believe we're going to get a lot of pressure to support the end of this calendar year to start supporting some of the POs that we're going to see as they plan out those nodes. And it will go through, and we're talking about volume in 2026 for them, but toward the end of 2025 is when we'll be seeing more and more of that business. And, of course, we don't know how much broader it's going to get in terms of the number of design starts. It is remarkable that there are this many designs specifically for one application at this point in the process. But it's pretty remarkably consistent as we talk to different customers and even their customers. Charles Shi -- Needham and Company -- Analyst Thanks for the color. Maybe a second question I want to ask you about the advanced packaging capability you're building there. It sounds like you're having more of the constructive conversation with your customers, maybe to put more KLA, more advanced process control capabilities into the packaging side of the process control. So, I get the overall idea, but I just really hope for you to provide a little bit more color. What kind of areas do you think the customers are facing challenges in terms of maybe wrapping up COAs, maybe wrapping up SOIC, and where do you see, from a process control perspective, the biggest opportunities for KLA? Thanks. Rick Wallace -- Chief Executive Officer Yes, I'll give you some color just from two stories. One, years ago when we bought ICOS, part of the theory of that case was it was giving us exposure to the back end. And I remember meeting with one of our big customers and their back-end people, and they literally said to me, why are you guys talking to us about the back-end? That's not a KLA market. And fast forward to the end of last year, calendar year, in a meeting that Ahmad and I had with a critical customer, they had two topics they wanted to talk about. One was our support of EUV and the ramping of continuous ramping of EUV designs and capabilities, and the other was advanced packaging. And these were the folks that were historically and traditionally responsible for the front end. And one of the things they said is we think you guys have the capability in a lot of your front-end tools, but we need that modified, and we need that for the back end, because the back end is a critical part of our differentiation, and that's the part that we need you to work with us to take what you consider front end tools and make it. And what we're more concerned with than cost, and this is often the case at the beginning of a node, they're more concerned with capability than they were necessarily on cost. So, the dynamic has shifted pretty considerably. And again, I go to one of the biggest drivers for all this is all the work that's going on with AI, and if you look at the success and the requirement to have advanced packaging as part of those solutions, that's what's driving it. So, we kind of anticipated a few years ago that more and more trend was going to become more and more relevant, but we're seeing it very specifically with customers bringing front-end people that they've worked in the front end, having them work on these back-end challenges, and asking specifically for capability that we have in the front end to be used in the back end. And in some cases, we've done that with some of our inspection tools and capability. But as you know, we have to make modifications to handling and some of the operating conditions to make that work. So, we're definitely seeing that, and in some cases, our ability to support and modify those systems will be the gating item for us to realize revenue on it, not the demand. The demand is there, and from a competitive standpoint, we're uniquely positioned to do that. So, we feel pretty good about the opportunity, and it's a major focus area for the company. Charles Shi -- Needham and Company -- Analyst Thanks so much. Operator We'll take our next question from Chris Caso with Wolfe Research. Please go ahead. Your line is open. Chris Caso -- Wolfe Research -- Analyst Yeah, thank you. Good evening. Just a follow-up question with regards to memory. And I think I understand what you're saying with regard to this year, perhaps some improvement in non-China memory, but nothing significant. I guess, what are your customers telling you to be prepared for perhaps as you're going into next year? We're starting to see some prices go up, utilization up. What's your expectations for the potential improvement in 2025? Bren Higgins -- Chief Financial Officer Yeah, Chris, you're seeing all the things you want to see, right? You're seeing pricing improve, customers are taking up utilization. Utilizations were very low. And so, there's a fair amount of capacity that's been out there. We're seeing the profitability improve and ultimately, that will translate into cash flow and then what we expect to be investment next year. I think we're seeing more in DRAM driven by the leading edge of DRAM or expect to see more there. And then, of course, the drivers related to high bandwidth memory. But I think in some ways, it's the device market -- part of the market is improving this year, and that will translate into investment next year. Chris Caso -- Wolfe Research -- Analyst Got it. As a follow-up, with regard to service, I think last quarter, you talked about your expectation that being kind of the high end of a 12% to 14% target. Is that still the right way of thinking about it? Again, we've seen utilization rates improve here. Does that make that change your view of where services come out for the year? Bren Higgins -- Chief Financial Officer Well, it's certainly a factor in the growth that we're seeing this year. So, I've been pretty open that I thought that we'd be somewhere between 250 to 300 million of incremental service this year versus in 2023. I think we're closer to the top end of that range than the bottom. It is a factor, and given the nature of process control and the complexity of our systems, the mix, and the relatively lower volume, our customers tend to rely on us to ensure that they're optimizing their capital, particularly in environments when capital is constrained. Yields matter a lot. And so, our utilizations never drop as much as process tools where they have more redundancy. But we are seeing it continue to improve, and so I think it's a good sign in terms of the overall market health and in our confidence about some of the growth drivers into next year. Chris Caso -- Wolfe Research -- Analyst Thank you. Operator We'll take our next question from Joe Quatrochi with Wells Fargo. Please go ahead. Your line is open. Joe Quatrochi -- Wells Fargo Securities -- Analyst Yes, thanks for taking the question. Wondering if you could comment, obviously, you seem pretty positive in terms of just the opportunity looking into next year and thinking about the size of N2 and recovery in the memory market, I guess, how does the conversation with your customers over the last several months and just thinking about your lead times to give you confidence in your ability to reach that 2026 target model? Bren Higgins -- Chief Financial Officer Well, I think our confidence is pretty good. We've made a lot of investments around the company in 2021 and 2022, both in terms of our own capacity, but also to ensure that our key suppliers have the capacity to support that kind of demand environment. So, it's one of the reasons why my inventory levels today are higher than -- and they continue to grow even where the market has corrected some because of the commitments we've made to ensure that the suppliers keep that capacity in place. So, we feel very good about our ability to leverage what we have. I don't think we really have to make a lot of big investments to be able to support that trajectory. And I think we'll -- because of the investments, I think, frankly, they're a little bit of a headwind today in terms of the margins. So, I think over time, the leverage opportunity is also compelling if we see the kind of growth environment that we expect over the next couple of years. Joe Quatrochi -- Wells Fargo Securities -- Analyst OK. As a quick follow-up, Bren, I was wondering if you could give us RPO exiting the quarter. Bren Higgins -- Chief Financial Officer It wouldn't be a quarterly conference call without your question, Joe. So, $9.9-ish, we're going to file the Q in the morning or sometime tomorrow, I think. $9.9 billion, it was down about $750 million quarter on quarter. Deposits are about $677 million. Joe Quatrochi -- Wells Fargo Securities -- Analyst Perfect. Thank you. Operator We will take our next question from Tom O'Malley with Barclays. Please go ahead. Your line is open. Tom O'Malley -- Barclays -- Analyst Hey guys, thanks for taking the question. I think there's been a lot of discussion on the call about advanced packaging, and you guys have talked about how you had conversations already about potentially bringing some of your solutions from the front end to the back end. There's obviously some adjustments to those tools to get them ready. Can you talk about the timing of bringing those solutions there? Obviously, you're seeing a big growth rate in the back end. But from the moment that you say, hey, we want to take a tool and address the back end to when you're actually selling that to a customer. Can you talk about how long that takes? Rick Wallace -- Chief Executive Officer Sure. And we had, yes, let's be clear. I mean we have some of our products already from the front end that are being used in the back end. That started a while ago. We're just seeing an accelerated conversation about more tools where some customers will actually name specific tools that they want. So, it very much depends on the tool, and I can give you a range where it could be from three months, it could be a couple of years, depending on whether you're modifying something that's already being used in that kind of application and specializing it. So, it really depends, but I do think that we have some that are already there. So, part of our $400 million is from tools that were from the front end. A fair amount of those, probably half of those, actually, and some are process capability from SPTS. So, it's really those are examples where we have it. And also, the case is some of those tools need to be upgraded to the later specifications as customers move forward in technology. So, that's why, you know, net-net, it's a positive, it's a growth segment for us. We think it will continue to grow. Bren talked about the growth from last year, and it was a big driver for going back in time for the Orbotech acquisition was our belief that packaging opportunity was going to continue to grow. So, that's where we are on it. But it's very tool-specific how long it takes to modify. Bren Higgins -- Chief Financial Officer We also have new products that are going to support the substrate transition as the substrate integrates into the package. On the inspection side, as the lines and spaces shrink in the connecting layers, it will drive the need for more capability for more advanced inspection and metrology systems. And so, anytime you add sensitivity, you add capability, there tends to be a throughput or a volume hit. So, it creates an opportunity for us to sell, higher ASP systems that have more capability. But if you're going to maintain the same sampling rate, then you'll need more systems. So, it's all a factor in terms of all these factors are all, positive in terms of how we think about the long-term opportunities. Tom O'Malley -- Barclays -- Analyst Super helpful. And then my second one is just kind of on the tidbits that you've given for the year. So, you said second half over first half, high single digits and you talked about kind of the mix of foundry/logic being similar to calendar year 2023, about that 70%. If you take those clues, you obviously see some really strong growth in memory in the second half. Could you just help us with any color, obviously, March to June, your DRAM percentage went down a bit in terms of its contribution to memory? But in the second half, how should we be thinking about the DRAM and NAND growth profile? Thank you. Bren Higgins -- Chief Financial Officer Yes, I think I don't think it's going to, you know, it'll be a little bit stronger potentially in the second half than the first, but not much. Because, like I said earlier, the expected DRAM investments in China, I would expect in the second half to be lower than the first half. Operator [Operator instructions] I'll take our next question from Srini Pajjuri with Raymond James. Please go ahead. Your line is open. Srini Pajjuri -- Raymond James -- Analyst Sorry, I joined a little late, so if these questions have already been asked, I apologize. But I think last quarter, Bren, you had a customer push-out that kind of impacted your revenue for the year. I'm just wondering if there's any change or any update to that customer if you're including that in the current year's guidance. Bren Higgins -- Chief Financial Officer Yeah, it affected the March quarter as we had some shifting around, frankly, affected a little bit in the December quarter and the March quarter, but the shifting around to make the December quarter work, obviously, the shortfall was in March. So, I don't think anything has really changed. I don't expect to see much activity from that customer until we get into 2025. I mean, look, things could change. We could see some surprises. But right now, at least from a planning point of view, we put it in 2025. And if it pulls in great, we can support it. Srini Pajjuri -- Raymond James -- Analyst Got it. Thank you. And then on the two-nanometer, I think your foundry customers are transitioning aggressively to get all around. Obviously, that helps you. But at the same time, I think the EUV layer count is going to be somewhat flattish. So, I'm just wondering what sort of impact it will have on process control intensity if you go to GA and keep the, I guess, EUV kind of flattish in terms of layers. Should we expect any impact, or is it kind of a non-event for you? Rick Wallace -- Chief Executive Officer Oh, it's an event. I mean, our customers are definitely -- so you think about the dynamic. Our customers don't want to add process control intensity if they can avoid it. They also want to ramp and yield. So, that's the trade-off. So, in the prototyping stage or the early pilot, they inspect more and they measure more in order to debug the process, if you will, and ramp it. And the question is, how much do they have to maintain when they ramp? And that's really what drives process control. They're definitely using more capability at the front end, and there's some areas where they're going to have to increase their sampling or measurement to keep up with the additional challenges of a smaller design role. And there's also some new capability they have to bring because of FinFET. And so, we've talked in the past about modifications of a Gen 4 optical inspector to be able to support the FinFET. But it's not the only change in that process. So, the EUV layers matter, but the process integration challenges are still going to be there. When we model it, though, we do see an increase. We have different scenarios for how much process control intensity will go up, but it's consistent with we think there will be a modest increase in the overall process control intensity for the leaders who have been successfully doing three nanometers. Anybody else that tries to jump to that node, though, will see a dramatic increase in their process control intensity because they don't benefit from the learning of having done three at volume. So, in aggregate, depending on how many people are supporting it over time, it will drive our intensity up for our customers. We're also expecting a more robust design environment, certainly in the first few years, than what we saw with three-nanometer and likely a steeper ramp. So, in addition to the challenges of just the gate all around architecture, what it means from inspection, but also metrology, but also more volume earlier, steeper ramp, and a more robust design environment, which will challenge the customer's process integration more than you see when you just have a few designs. So, we're encouraged on a number of fronts. Srini Pajjuri -- Raymond James -- Analyst Got it. Thank you. Operator We'll take another question from Krish Sankar with TD Cohen. Please go ahead. Your line is open. Krish Sankar -- TD Cowen -- Analyst Hi. Thanks for doing my follow-up. Rick, I just had a follow-up on gate all around. Clearly, you have exposure to your Gen 4 optical inspection and the metrology for high-k metal gates. Is there a way to quantify what you think your gate all-around revenues could be in calendar 2024? Rick Wallace -- Chief Executive Officer Yes. I'd be making it up, Krish. I mean, we don't really look at it that way. We do think about what is the node requirement. So, from that standpoint, if you think N2, you'd attribute it all to gate all around. So, we think about node intensity for process control and blended. And as I said in the prior answer, that's slightly up, but we don't have a specific number specifically around gate all around. But obviously, that's the big driver for the change and why customers are pushing for N2. And we don't know yet, but that's consistent with the 2026 model that we've had where we see rising process control intensity or corresponding increase per share for KLA. Krish Sankar -- TD Cowen -- Analyst Got it. That's helpful. And then just if I could squeeze one more in, I'm just kind of curious about your Gen 4 lead times. I think last time we said it was like seven to nine months. As a change, if you assume that mature nodes are kind of slowing, China might moderate as the year progresses, is there a view that the lead times are coming in, or is it still like seven to nine months? Rick Wallace -- Chief Executive Officer Gen 4 is highly demanded across nodes. It's a very configurable system. And in fact, we recently introduced a non-upgradable version specifically for gate all around. So, it's a product that has a lot of extendability. It's been challenged in terms of supply, the ability to get supply to meet demand. I would say, and we will see some increase this year in revenue from that system, which it hurt us last year just because we weren't able to get any incremental supply around key components. I'll see that increase this year, and so that will help. I still think lead times are probably in the 18-month to 24-month range for that product, although we do a lot of juggling to make sure that we're in position to support all of our customers. But it has demand on multiple fronts, and I think it's a testament to its extendability and the favorability of a broadband system, which has the ability to scale the deployment lengths to meet very different inspection requirements across multiple nodes. Bren Higgins -- Chief Financial Officer Thank you, Krish. And I do think, Krish, you were referring to what we said about Gen 5, the seven to nine-month, a quarter-ago brand. So, I don't know on Gen 5 if there's any change there. No, Gen 5 is in the same ballpark. Still the same ballpark. Perfect. All right. So, that brings us to the end of our call. We want to thank everyone for your time and attention. We know it's a very busy day. With that, I will pass the call back over to our operator to conclude.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, everyone, and welcome to the Kimberly Clark first quarter 2024 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chris Jakubik. Sir, the floor is yours. Chris Jakubik -- Vice President, Investor Relations Thank you, and hello, everyone. This is Chris Jakubik, head of investor relations at Kimberly Clark, and welcome to our Q&A session for our first quarter 2024 business update. During our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures today, and these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.kimberly clark.com. Before we begin, I'm going to hand it to our chairman and CEO, Mike Hsu, for a few quick opening comments. Mike Hsu -- Chairman and Chief Executive Officer OK. Thank you, Chris. Hey, before we get into the Q&A, I would like to start by saying thank you to all my colleagues at Kimberly Clark who worked really diligently over the past few years to build our strong foundation and to deliver these Q1 results that provide a very good start to our next chapter of growth. Our strategy to elevate our categories with breakthrough innovation and expand our markets is working. We are effectively navigating the ever-changing external dynamics of today's new normal while driving our consumer-centric culture. We are making the company better, stronger, and faster. I'm very, very proud of our progress to date, and I'm confident that we're going to continue to leverage our core strengths to achieve our potential. We are on an exciting path and are well-positioned to deliver durable growth and sustainable shareholder returns. So, with that, I'd like to open it up for your questions. Questions & Answers: Operator Certainly. Everyone, at this time, we'll be conducting a question-and-answer session. [Operator instructions] Your first question is coming from Bonnie Herzog from Goldman Sachs. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Bonnie. Bonnie Herzog -- Goldman Sachs -- Analyst All right. Nelson Urdaneta -- Chief Financial Officer Hi, Bonnie. Bonnie Herzog -- Goldman Sachs -- Analyst Good morning. Hope you're all well. First, I have a quick question on your guidance. You reported a better-than-expected Q1, so curious to hear why you didn't pass through the full Q1 beat. And then also hoping, you know, for a little more color on the better-than-expected volume growth you saw in the quarter. You know, what were the key drivers behind this and, you know, ultimately, how sustainable is this moving forward? And, you know, curious, was there any pull forward, for instance, or should we expect to see continued volume improvements as the year progresses? Thank you. Mike Hsu -- Chairman and Chief Executive Officer Yeah, Bonnie. Maybe I'll start, and Nelson will talk about what we decided to pass through and our logic for that. But really, you know, I'm encouraged with our good start. You know, I think our organization is running very, very well in what we would call internally our new normal, right? And I think this is like the first year in a few that we've had kind of a stable business despite a lot of the geopolitical things that are going on. So, you know, the underlying strength in the quarter was predicated on, you know, couple of good fundamental factors. One, better volume, which you observed, and there was no pull forward. And in fact, it was the opposite. We had an inventory -- retail inventory reduction in the quarter, but kind of -- I think the volume -- the inherent strength in the consumption kind of overshot -- overcompensated for that. And so, I think that was part one. Also, the market shares are moving kind of in the right direction. So, I think we feel very good about the underlying volume momentum in the business. And then on top of that then, with a stable input cost environment, the productivity that was strong in the quarter tends to drop a little bit stronger through the bottom line. And so, that's the underlying kind of driver of our strong Q1. And we feel really great about it. The team has done a great job, you know, operating. You know, there are still a couple wars going on in the world, as you're well aware. Argentina has been very volatile, and our teams are doing a great job there. So, you know, we feel like we're really running well in a new normal environment. Nelson. Nelson Urdaneta -- Chief Financial Officer Yeah. And just to add a few details on what happened in Q1, Bonnie. So, first, obviously, very pleased with the start of the year, and Q1 was particularly strong as we saw a significant benefit in China from our Chinese New Year execution; and particularly in March, I mean, the trends in the business continued. China grew volumes double digit in the quarter. And in North America, in particular, as Mike said, while the trade destock happened as we had projected back in January, and just for perspective, total company, that was around 80 basis points of growth, that still -- we came in March and had a much better consumption in the month in March, which flowed through in the quarter. So, that was the other bit on volume as we thought about what happened and reconciled the numbers for the quarter. Having said that, as we look at what's going to happen in the balance of the year, a couple of things. One, as Mike said, we're cautiously optimistic. A few things that we're all aware of is we still have geopolitical challenges underway and we have begun to see some of our commodities begin to uptick. Just for perspective, in the first quarter, we've seen how pulp and the fiber complex has increased, you know, in the single digits in the first quarter sequentially versus Q4. For perspective, in the full year, we now expect commodities to be -- you know, the net input cost, the total basket to be around $250 million inflationary. So, we are taking that into account. That's within the range that we have provided back in January, but it's still something that we're watching. A couple of other things to keep in mind is that as we head into the back half of the year, we expect to see about an $0.08 headwind from the personal protective equipment divestiture in profit that's built into our outlook, but that is something that we -- that is new news versus the outlook we provided back in January. And the other bit to keep in mind is, you know, we will further step up investments as the year progresses. On a year-over-year basis, our advertising spend increased 50 basis points. That was largely in line with what we had in Q4. And what we said at the beginning of the year is that as our innovation pipeline builds up, and that's starting in Q2, we will further step up investments as the year progresses, and we expect it to be at around another 50 basis points for the balance of the year. Bonnie Herzog -- Goldman Sachs -- Analyst All right. Thank you. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Bonnie. Operator Thank you. Your next question is coming from Anna Lizzul from Bank of America. Your line is live. Anna Lizzul -- Bank of America Merrill Lynch -- Analyst Hi. Good morning and thank you for the question. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Anna. Anna Lizzul -- Bank of America Merrill Lynch -- Analyst I was wondering if you can comment on market share. A competitor mentioned a misstep on their part with a lack of innovation at the lower end of the pricing ladder in toilet paper, which caused some pressure there. So, I was wondering if that helped you to pick up share. And if you can comment on how you're progressing in terms of market share also on a weighted category basis, that would be helpful. And then as a follow-up, volumes were clearly better than expected despite some retail inventory reductions in the quarter that you had anticipated for Q1. So, I was just wondering to what extent this ended up impacting the quarter and how should we be thinking about it for the full year. Thank you. Mike Hsu -- Chairman and Chief Executive Officer OK. Yeah. Anna, thanks for the question. Great question. You know, market share, you know, I'm very encouraged. I think we've made very, very solid progress on overall market share. I expect further improvement in the year -- as the year progresses. You know, overall in the quarter, we were up and even in just under 60% of our market category combinations. Although, I would say also flat on a weighted basis. And we look at share in two ways on both metrics. Importantly, I'd say North America improving. North America was up or even in six of eight categories. You know, we were soft in 2023, as you may recall. A lot of that was predicated on severe supply constraints that we had last year. And so, I think this was like maybe the second quarter that we've had in a row of unconstrained supply, and I think that kind of performance reflects our ability to ship product and kind of restore promotions. Just for reference, Kleenex in the quarter was up 400 basis points on share -- or more than 400 basis points on share. You know, what drove it? Well, we did have a new social media campaign around cold, flu, and allergy season, which, I think, has been very, very good. But the other part is we restored merchandising, which we had been off from for several months. And so, you know, again, I think our merchandising, we still plan -- you know, we're probably still under-indexed versus the overall category, but we're just kind of returning to kind of normalized, you know, merchandising behavior. So, we feel good about our performance overall. And again, market share in other markets like in China, we were up a couple of hundred basis points, and Huggies diapers had a very, very strong Chinese New Year execution. So, you know, volumes were up double-digit against the category that was still down about 10% in China. So, I think, overall, we're feeling, you know, very optimistic about the performance of the business and feel good about the volume delivery of the business. Nelson Urdaneta -- Chief Financial Officer And just to build on Mike's point and to your question on what to expect on volumes for the balance of the year, as we said in January, I mean, 2024 should mainly reflect the pacing of our innovation pipeline and in-market programming. We still have the innovation and a lot of the programming coming into place as we go into Q2 and the second half of the year, hence why, from an overall perspective and volume plans, we don't see any changes versus what we had planned back in January and, you know, taking into account the volume over delivery that we had in Q1. Anna Lizzul -- Bank of America Merrill Lynch -- Analyst Thank you. Very helpful. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Anna. Operator Thank you. Your next question is coming from Lauren Lieberman from Barclays. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Lauren. Nelson Urdaneta -- Chief Financial Officer Hi, Lauren. Lauren Lieberman -- Barclays -- Analyst Hey. Good morning. Hey, guys. So, the first thing I wanted to ask about was the productivity. In the release or in the prepared remarks, you called out 120 million realized this quarter, and I was just curious how to think about that in the context of the 3 billion in productivity and also 200 million of SG&A savings that you articulated at the Investor Day. So, that's just my first question. Mike Hsu -- Chairman and Chief Executive Officer I'll -- Nelson will comment. I will say good start and we're tracking well. Nelson Urdaneta -- Chief Financial Officer Yup. And then just to give a little bit of color on the 3 billion and the 200 million, Lauren. So, you know, overall, first, it's based on the integrated margin management process that we unveiled in our Investor Day at the end of March. This is really giving us a new enterprisewide visibility, discipline, accountability end to end across the whole value chain. And really, it's about a focus on driving lower costs at a total delivered cost, which is a very different approach as what we had in the past and we've been working on it for the last year or so. As you said and we know, we had a strong start to the year on gross productivity. I'll reiterate, this is nonprocurement-related savings, and that's -- this is the 120 million that we talked about in the release and in our prepared remarks. And we also had additional savings that were delivered from the procurement side of the house, and that's embedded in our net input costs, which, again, were, you know, in net not that much of a headwind in the first quarter because of all these efforts. As we think about the cadence and what we expect to have on the 3 billion, we're off to a good start on that number, and we would expect that to be roughly about linear over the next few years as we deliver the whole 3 billion. In terms of the $200 million of SG&A savings, as a reminder, we will go live with our new operating model on October 1st of this year. So, we don't expect much of that 200 million in savings in SG&A to materialize this year. That will really come into play more in 2025 and 2026. But again, really good start to the year in productivity and procurement-related savings. Lauren Lieberman -- Barclays -- Analyst OK. That's awesome. So, just as a follow-up, on the SG&A side of things, what was interesting to see this quarter is that you saw pretty good operating leverage there because in the prepared remarks, also, you've called out a 50-basis-point increase in advertising as a percentage of sales this quarter, which implies some pretty, again, like I said, all solid operating leverage on SG&A, and that's different than what we've seen, I guess, the last couple of years frankly. So, where do you stand, let's call it, on sort of reinvestments? Because one of the things that struck me and in some of my follow-up conversations with people after the Investor Day was a lot of the things you talked about doing going forward. A lot of questions I got from people were like, well, why haven't they been doing it yet? And my thought was perhaps it's been about investing to get the capabilities to be able to do these things going forward. So, is that a reasonable way of thinking about it? Is that reinvestment level kind of now -- I don't want to call it complete, but like where it needs to be such that we should see operating leverage on SG&A ex-advertising even before you start to get some of those -- that $200 million in savings in '25 and '26? Mike Hsu -- Chairman and Chief Executive Officer Yeah. I mean, one, I'll start Lauren, and -- but one, we feel great about our investments in advertising, and, you know, I think we're -- you know, we've made significant progress. I think we're up 200 basis points to 300 basis points since I became -- came into this role. However, you know, I'd say we're probably still underspent relative to our peer set. And so, do we need -- and I think I said this in Investor Day, I don't know that we have to match them, right? But I would like to continue to increase our investment. I think you're exactly right on kind of, hey -- well, there's two factors that kind of caused us to phase our investment. I would say, if you recall back in 2018, 2019, I did not feel like we had all the capability we needed to spend that significantly. And I think you may recall in some sessions we had or some calls, you know, people were asking, why didn't you reset and invest harder? You know, at that point, I wasn't confident in what the advertising was going to do, right? And so, in the last five years, I think we've really built what I would characterize as kind of world-class capability on the commercial fronts through the help of Alison, as you're well aware. And so, we've done that. We've made progress. So, that was one factor, we were building the capability. And right now, our returns on investment on our advertising, particularly on digital -- and we've migrated from not having a whole lot of digital maybe five or 10 years ago to almost being entirely digital, and those returns are significantly higher that we're driving now. So, that's one factor. The other big factor I think that people forget is, you know, we had two years of a super inflation cycle. We had more than -- offset more than, you know, a full year of operating profit in that cycle. And so, we were busy doing -- trying to recover margins as well. And so, there was a lot going on, in addition to all the geopolitical issues that I think, Lauren, you're really well aware of. So, there's a lot of things going on. And so, we're making steps in the right direction. We're not all the way to where we want to be, but we think we can kind of manage the business in the right way to kind of deliver both, you know, a healthy top line, a healthy bottom line while continuing to invest in our business for the long term. Lauren Lieberman -- Barclays -- Analyst OK. Great. Thanks so much. Operator Thank you. Your next question is coming from Nik Modi from RBC Capital Markets. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Hey. Good morning, Nik. Nik Modi -- RBC Capital Markets -- Analyst Thanks. Good morning. Good morning. Just a quick clarification, if you could just provide context on the destocking in terms of where you saw it? And then the actual question is, you know, obviously, the feedback, broadly speaking, has been, you know, the consumer is under pressure. Though your results today, obviously, you know, you seem to have outperformed a lot of that backdrop or commentary. So, just, Mike, would love to get your perspective on kind of category health, consumer health, kind of what you guys are seeing. I sense part of the guide, you know, and not flowing everything through is because maybe there is some uncertainty, but I'd love your thoughts on that. Mike Hsu -- Chairman and Chief Executive Officer Yeah. Thanks, Nik. Yeah. Great questions. Yeah, we did see a retail inventory reduction in the first quarter, as expected, and we were given the heads-up on that. And so, we planned for it. It was about an 80-basis-point headwind to global and about 170 bips of North America sales. And so, you know, I'd say that the behavior is typical. I don't think it's unusual. You know, we tend to see in that December-January time frame, you know, retailers trying to get a little more efficient with how much inventory they're carrying. You know, we tend to be very, very efficient with retailers, and, you know, I think they like our logistic capability. And so, we're kind of generally early adopters of all the new systems that retailers go on to kind of try to manage their inventories better. So, we're kind of on top of it. It's been baked into our outlook for the full year. But I don't know that I expect a whole lot different going forward, but it's -- you know, what we expected in Q1 did, in fact, happen. You know, I think I said earlier, our volume was a little bit stronger than we had anticipated, so, you know, more than fully offset that. So, I think that was the first part. Is that enough -- clear enough on your retail inventory part, Nik? Nik Modi -- RBC Capital Markets -- Analyst Yeah. And, Mike, I just -- what -- any specific categories you can call out? Was it fem care because that's -- P&G called that out, but I was just trying to get category perspective on the destock. Mike Hsu -- Chairman and Chief Executive Officer Yeah. You know, for us, across the board -- and just to note, nothing unusual in our mind. It's like typical for what we see every year. So, I think that's part one. I think your question on the consumer, I guess I would characterize, you know, the consumer environment overall for us globally, but especially in North America, as resilient, still bifurcating, but part of that bifurcating is actually adding a category growth as well. So, the category demand overall remains very, very robust. As you can see, in North America, our categories on average overall were up about 5% or mid-single digit. I think that -- you know, as you all know, we make daily essentials, and so there is low substitution in our categories. And so, I think that's reflected in the overall category demand. Important to note, Nik, is premium continues to grow very, very robustly, especially in developed markets like the U.S., like in China, U.K., South Korea. But what's also -- you know, premium is growing in developing and emerging markets like Brazil. And so, we're continuing to see that demand there. That's -- that all said, you know, clearly, you know, I would say middle- to lower-income households, you know, look like they are -- they're becoming more stretched based on all the economic data we're seeing. So, you know, I would say the bifurcation is I see a limited trade down in a few categories, notably, you know, adult care, some in household towels. But, you know, we have a very, very detailed tracker across every category. I think we're tracking like nine different dimensions. And, you know, I'd say, you know -- so we're very vigilant about, you know, monitoring that. You know, the thing about it is, you know, the trade down is limited at this point, but we really intend to be more valuable to our consumers at every rung of the good, better, best ladder. And so, what that means is, you know -- I think, you know, Anna was asking about, you know, private label, you know, or value tier quality. I mean, we're making all of our products better across the board. And that certainly -- you know, I think the growth driver for us over the long term is by making products better, premiumizing, elevating our categories. But, you know, we want to serve, you know, the value-oriented consumers well, too, and we have big brands like Scott, bath, and Kleenex mainline, Depend mainline that serves those consumers well, too. Nik Modi -- RBC Capital Markets -- Analyst Excellent. Thanks, Mike. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Nik. Operator Thank you. Your next question is coming from Chris Carey from Wells Fargo. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Hey, Chris. Nelson Urdaneta -- Chief Financial Officer Hey, Chris. Chris Carey -- Wells Fargo Securities -- Analyst Hey. Good morning. Just a couple follow-ups, just on China and the U.S., right? So, in China, clearly, good numbers, but I also think one of your peers delivered quite good numbers as well. And I guess the question in a way is, are we seeing the category churn in China, benefits from perhaps Chinese New Year? Or are you both just gaining relative market share? You know, clearly, it's a strong number, so I'm just trying to understand this, you know, like a bit deeper I guess. And then secondly, on the U.S., it's really the same question on relative outperformance to category. And I know you've mentioned it a bit more, and I'm more interested in the China comment, but if you can just expand there because that stood out to me as well. Thanks. Mike Hsu -- Chairman and Chief Executive Officer Yeah. I'll start on China. You know, again, if you kind of saw the Investor Day presentation with, you know, Katie's leadership, our China team is doing a fantastic job there, and they've grown, you know, consistently double digits over the past five years, and it's become, you know, one of our best-performing businesses in the company. I would say the -- I think the driver of performance, there's a couple of factors. Certainly, a strong Chinese New Year execution. But overall, we make a great product. I believe it's the best product in the marketplace. I think consumers are excited about the products that we offer. And then we have really, really strong digital executions that really kind of drive that relationship with consumers. And so, you know, to answer your question, I think it's more of a share pickup. The category itself, based on the data I'm seeing, was still down about 10% in the quarter, consistent with the birthrate trends and everything else we're seeing. So, it's a share pickup. And, you know, I'll point out, you know, we're the market leader in China, we -- but that's predicated we're only at, I would say, a mid to high teens share at this point. And so, we feel very good about our positions, but it's a fragmented category, and so there's a lot of opportunity for us to, you know, drive further share growth in the market. You know, importantly, I think, for us, you know, we're also picking up on, you know, our mainstream business. And, you know, part of the strategy when I say, hey, we want to be great at every tier or every rung of the good, better, best ladder, you know, we want to accelerate innovation at the top end and then cascade that, you know, quickly through our line. And so, we're doing that, and I think, you know, we're seeing that in the results in China, for sure, and, you know, similarly in the U.S. Chris Carey -- Wells Fargo Securities -- Analyst And then if I could, just one follow-up would be, clearly, you know, pulps are on the move. You know, it's a bit more on the front end of the curve than in the back half of year 2025. But this is going to be perhaps the first moment to really kind of show the ability to work through this cycle. Just any thoughts on, you know, the moves that you're seeing and, you know, the types of actions that you might defer to if these, you know, moves proved durable and even accelerate, you know, between pricing, productivity, and whether you see any potential kind of margin issues on the horizon or if this feels very much, you know, manageable at this point. Thanks. Mike Hsu -- Chairman and Chief Executive Officer Well, I'm going to start with -- and Nelson could disagree with me if you want, Nelson, but I would say manageable at this point because here's -- you know, I said, hey, new normal. You know, I think this is, you know, what I'd characterize as a more normal year for a CPG for the first time in the last three or four years for us, which is, hey, a stable input cost environment. It's still not deflationary. At some point, you know, one would hope that it becomes deflationary. But, you know, I'd say, hey, you know, it's slightly inflationary but relatively stable. That's different than the past three or four years for us. And so, you know, I think, for us, you know, we have very good productivity plans. And so, if the costs remain -- input costs remain stable, we can operate very, very well in a stable cost environment and let that productivity drop through. So, that's one part. And then the other part of the normal is, you know, I think with -- there's been a lot of volatility in demand with COVID and everything else over the past few years. You know, I think we're starting to see demand stabilize. And so, with those two factors, you know, I think we can operate well. We're very cognizant. And Nelson will talk about it that we're -- you know, there are some demand signals around different pulp environmental changes, but, you know, we're well aware of that and we think we have that accounted for in our current call. But, Nelson. Nelson Urdaneta -- Chief Financial Officer Sure. So, just to build on what Mike was saying, Chris, so a few things. You know, I'll start with we've built significant capabilities over the last five years in order for us to be able to maneuver through the ups and downs. Obviously, if we have a shock like what we saw two or three years ago, that's a different situation that we'd have to maneuver through. But as Mike said and as we've said back in January, we see the situation as manageable. To reiterate, I mean, when we talked in January, we talked about $200 million to $250 million of net input costs, all in. That included currency, other costs, as well as commodities, which we still see as deflationary for the full year for us. Now, on that range, we're now staring at the high end of that range, which, again, we see as manageable, as Mike said. A couple of things to keep in the back of your mind as you look at the numbers. Core commodities like pulp, resin-based materials, energy in dollar terms, while they're a little bit more unfavorable today versus what we were seeing back in January because we're seeing some upticks, still for the full year, they would remain a tailwind. We continue to see distribution, logistics, and labor costs as inflationary for the year. And then obviously, for non-U.S. operations, currency will be a headwind in costs because they're buying pulp and many of the inputs that they use to manufacture the product is in hard currency. So, on a net basis, that's how we get there. The thing to also keep in mind is that we expect the phasing of our input cost inflation to be more muted in the first half of the year. And this follows the trend that we saw in Q3 and Q4 of 2023 that would carry over pretty much through Q2. And we'll see an uptick of this as we go into the back half of the year. But again, it's all factored into our outlook, and the only difference is, really, we're more at the high end than the range that we had given before. Mike Hsu -- Chairman and Chief Executive Officer Yeah. Chris, just to calibrate you, I think Nelson like -- when we're looking at a couple hundred million of inflationary impact, you know, just to calibrate you, in 2021 and 2022, you know, we took on 1.6 billion and 1.7 billion, respectively. So, you know, I would say that's kind of why we feel like it's -- that's one reason why we feel like it's more manageable. The scale is totally different. And then the other thing is, as Nelson points out, we've changed how we manage the business, in some ways, to try to become a little more predictable, and we have better tools than we had maybe five years ago. And so -- Nelson Urdaneta -- Chief Financial Officer Totally. And just to build on Mike's point on the tools, as a reminder, I mean, we have a very strong pipeline of productivity initiatives. We're looking out three years, and I've been chatting about this for the last few quarters. That pipeline remains strong. You would have seen that nonprocurement-related productivity was very strong getting out of the year, and the team is very confident in our ability to continue to deliver not just in this year but in the following two or three years, which builds on our ability to deliver on the 3 billion commitment of overall productivity -- gross productivity in the next five years or so. So, that's built into how we're looking into cost and inflation for the next few quarters. Chris Carey -- Wells Fargo Securities -- Analyst Thank you very much. Very helpful. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Chris. Operator Thank you. Your next question is coming from Steve Powers from Deutsche Bank. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Steve. Steve Powers -- Deutsche Bank -- Analyst Good morning. Thank you. Hey, two questions if I could. The first one builds on the conversation you're just having with Chris around, you know, commodities and managing it through the cycle. You know, I guess I'm curious as to, you know, the steps you've taken to better maneuver through input cost cycles and essentially better protect this year, you know, does that include, you know, different ways of sourcing and contracting and hedging that, in effect, pushes out, you know, the cost curve as we would typically know it for Kimberly Clark? I guess what I'm thinking about is that, you know, in the past, if we saw reinflation like we have year to date, we'd be thinking about that kind of flowing through and impacting, you know, the latter third, latter quarter of the current fiscal year, kind of a six month -- maybe, you know, six- to nine-month lag. It sounds now like you've got better visibility. I'm wondering on how much of that is just pushed out that reinflation into '25. Mike Hsu -- Chairman and Chief Executive Officer Hey, maybe I'll say a couple things. You know, one, Steve, is, you know, I think the analyst committee -- community and the investor community, I think, made very clear to me when I came into this role that, you know, one of their -- one of the issues they had with our -- with KMB is, you know, the earnings volatility. And so, I've been very cognizant of that fact. And so, we've, over the past five years, kind of worked, you know, significantly -- you know, worked pretty hard to kind of reduce some of the underlying volatility in our business. Nelson, you know, with an outside perspective, has really, you know, worked hard to bring some different kinds of tools into our thinking. And so, we've, you know, been applying that over the last couple of years. And so, you know, we feel very good about that. You know, certainly, you know, there is inherent volatility in our business, certainly in pulp. You know, one would think at some point with the super cycle of inflation that we have on pulp, it's still elevated, and at some point, it needs to come back down. History would say it's going to come back down further. That said, I think we've built the right tools, and, Nelson, you may comment about, you know, what we're doing there. Nelson Urdaneta -- Chief Financial Officer Sure thing. And just to build, I mean, the integrated margin management approach, Steve, that we -- we've been working on for the last year or so really addresses part of this volatility. It is end to end, as we chatted in March 27th. And it looks at all the elements that drive total delivered cost, as well as margins. And it starts with we've been building muscle around revenue growth management, and that's very important. Price pack architectures, what kind of price packs do we have for the different channels and how do we tackle that, including promo, activity, etc., which is very important across all the geographies we work in. Secondly are the tools that Mike was talking about on how do we handle costs. We don't reveal what are the contract structures that we have in place or the hedging activities, but we obviously have gotten into much more proactive risk management to be able to have visibility into costs and give us time to react. And what do we react with? We react with productivity initiatives and elements of revenue growth management. That's the -- that's a big difference on how we were approaching it, you know, five years ago. And we've been building that muscle over time, and that's then drives into this visibility into the productivity element, which, right now, we've split it and we're being very clear of this is the productivity within the four walls, that's the 120 million that we talked about; and then we have productivity in procurement, which is embedded in our net input costs. And that clearly gives accountability across the supply chain on how to drive lower total delivered costs or at least manage through the margins. So, yes, I'd say it's muscle we've been building over the last five years, as Mike said. And obviously, we're not going to be immune to moves in commodities, but the visibility we have today, the ability to react is different than what we had in the past. Steve Powers -- Deutsche Bank -- Analyst Yeah. OK. That's very helpful. And this answer to the next question may be short. If you've already addressed it, you can tell me to just go read the transcript afterwards. I joined late, I apologize. But in the -- Mike Hsu -- Chairman and Chief Executive Officer We would never be that rude, Steve. Steve Powers -- Deutsche Bank -- Analyst In the prepared remarks, you mentioned a private -- you know, plans to exit some private label businesses. I know those plans are still, you know, kind of under construction, but you did make mention of it with some impacts in '25. If you could -- if anything further you can say on that today, that'd be great. Thank you. Mike Hsu -- Chairman and Chief Executive Officer OK. Just to be clear, Steve, that question was not asked. So, it was a great question. Steve Powers -- Deutsche Bank -- Analyst OK. Mike Hsu -- Chairman and Chief Executive Officer All right. Hey, just on that, yeah, I did want to flag that we are -- you know, strategically, let me just tell you, you know, we're focusing on differentiating our brands with proprietary science-based innovation. That was kind of the big theme that we shared with you all at our Investor Day. You know, just to give you some context, today -- or last year, private label production represented about 4% of our global sales. And so, what we announced today, you know, we'll likely cut that in half by the end of 2025. The thing I'll say is -- and it takes two parties to make a decision, so I won't get into any specifics, but I would say, you know, on our end, you know, as you think about what we say is, you know, science is our competitive advantage. The investments we're making in our new personal care core technology that resides in our diapers and our feminine care pads and our adult care, also to get to Natural Forest Free, all that development, that's all going to take some pretty chunky capital. And so, we are making significant technology and capacity investments. And so, we really want to be more choiceful as we go forward about where we spend that capital. And so, that's really kind of, you know, underlying some of that decision-making. You know, these decisions are going to enable us to focus our tech investment on what we see as our greater strategic priorities. And I might note, you know, our exposure to private label, you know, could decrease further over time. Nelson Urdaneta -- Chief Financial Officer And just to add further color on what we would expect from a bottom-line standpoint, Steve, it should be consistent with what you're seeing in the top line. And then obviously, we're working through supply chain transition, repurposing, and related cost opportunities within the context of our whole network optimization initiative, which is one of our three strategies in the supply chain strategy that we unveiled at Investor Day. We will have more to say as we go into 2025 guidance period. Steve Powers -- Deutsche Bank -- Analyst OK. That's good color. Thank you, both. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Steve. Chris Jakubik -- Vice President, Investor Relations If we could take maybe one more question, that'd be great. Operator Certainly. Your next question is coming from Javier Escalante from Evercore. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Javier -- Javier Escalante -- Evercore ISI -- Analyst Hey. Mike Hsu -- Chairman and Chief Executive Officer How are you? Nelson Urdaneta -- Chief Financial Officer Hey, Javier. Javier Escalante -- Evercore ISI -- Analyst Hello. Yeah, good morning, everyone. I do have kind of like a quick clarification to Lauren's questions first because it's in the context of guidance versus what is incremental in terms of the restructuring and whether -- it seems as if to me from the outside is kind of like coming through earlier. So, basically, the $120 million in savings that you flagged, are they part of the 3 billion that you spoke of a month ago or not? And then we can address the other piece if you don't mind. Nelson Urdaneta -- Chief Financial Officer Yeah, the short answer, Javier, is yes, it is part. We said that our new chapter started in Q1 of this year, and that's part of the five years commitment to deliver that. The 120 million is part of that. And then there's an element of procurement savings that we're not disclosing today. We are committed to disclosing the entire savings, including procurement, annually, so that you'd get a perspective of how we're tracking against the 3 billion that we committed to. Javier Escalante -- Evercore ISI -- Analyst So, congratulations on the very early start because I also see that the October -- the new organization is starting in October. I thought that it would be something of 2025. So, if that's all true, right, if savings are coming through earlier, why is it that the guidance -- and the other thing that I get from your transcript prepared remarks is that revenue realization, faster. So, you have faster revenue realizations from forex, right? You have faster savings coming from -- and they are sizable, right, $3 billion coming from the restructuring. So, I understand that you want to be conservative, but, you know, if we take you literally, the numbers for the balance of the year needs to come down. Is that where you want in terms of consensus to look like, very simple? Mike Hsu -- Chairman and Chief Executive Officer Well, I'll just start. You know, Javier, you know, I'd say, hey, we're still early in the year, and we feel really good about our start. We feel very confident in our performance this year. But that said, there's -- as Nelson pointed out in his remarks and in our prepared remarks, there's still a lot of uncertainty out in the world right now, both in terms of the geopolitical situation and the effects that could have on global demand but also, as you've heard just on the last few questions, on the input cost environment. And so, you know, I probably would say, yeah, we're taking a, you know, prudent approach to making our call but certainly, you know, encouraged by our start to the year and, you know, would love to, you know, drive to a very strong result this year. But, Nelson. Nelson Urdaneta -- Chief Financial Officer Yeah. And just to build on Mike's point, Javier, I mean, a couple of things. We're focused obviously on margin trajectory over time. And margins will move quarter to quarter, and they have to do with country and category mix, timing of our innovation pipeline, as well as changes in absolute productivity delivery. Productivity delivery is not linear. I mean, the timing of when projects come online and how quickly we can realize the benefits, we have an estimate, but again, you got to get them through. We have a full outlook for the year, and that's embedded there. And we're very encouraged by how the whole year started, but we have a lot of activities still coming our way, including a very strong innovation pipeline for which we're going to be putting back money into the business. We're going to be stepping up investments at least 50 basis points for the balance of the year. And if we see opportunities to invest more in the business and more in our transformation to accelerate it, we will. So, we're taking all that into account and also take into consideration the sale of our PPE business, which we've built into the forecast, which is about a headwind of $0.08 for the balance of the second half of the year. Javier Escalante -- Evercore ISI -- Analyst Well, I would take it that it's conservative guidance. Thank you very much. OK. Mike Hsu -- Chairman and Chief Executive Officer Thank you, Javier. Nelson Urdaneta -- Chief Financial Officer Thanks, Javier. Chris Jakubik -- Vice President, Investor Relations Great. Well, thank you, everyone, for joining us today. For those of you who have follow-up questions, you know, Aishwarya and myself will certainly be available for follow-ups. So, thanks again, and we look forward to seeing you going forward. Answer:

the Kimberly Clark first quarter 2024 earnings call

Operator Good morning, everyone, and welcome to the Kimberly Clark first quarter 2024 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chris Jakubik. Sir, the floor is yours. Chris Jakubik -- Vice President, Investor Relations Thank you, and hello, everyone. This is Chris Jakubik, head of investor relations at Kimberly Clark, and welcome to our Q&A session for our first quarter 2024 business update. During our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures today, and these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at investor.kimberly clark.com. Before we begin, I'm going to hand it to our chairman and CEO, Mike Hsu, for a few quick opening comments. Mike Hsu -- Chairman and Chief Executive Officer OK. Thank you, Chris. Hey, before we get into the Q&A, I would like to start by saying thank you to all my colleagues at Kimberly Clark who worked really diligently over the past few years to build our strong foundation and to deliver these Q1 results that provide a very good start to our next chapter of growth. Our strategy to elevate our categories with breakthrough innovation and expand our markets is working. We are effectively navigating the ever-changing external dynamics of today's new normal while driving our consumer-centric culture. We are making the company better, stronger, and faster. I'm very, very proud of our progress to date, and I'm confident that we're going to continue to leverage our core strengths to achieve our potential. We are on an exciting path and are well-positioned to deliver durable growth and sustainable shareholder returns. So, with that, I'd like to open it up for your questions. Questions & Answers: Operator Certainly. Everyone, at this time, we'll be conducting a question-and-answer session. [Operator instructions] Your first question is coming from Bonnie Herzog from Goldman Sachs. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Bonnie. Bonnie Herzog -- Goldman Sachs -- Analyst All right. Nelson Urdaneta -- Chief Financial Officer Hi, Bonnie. Bonnie Herzog -- Goldman Sachs -- Analyst Good morning. Hope you're all well. First, I have a quick question on your guidance. You reported a better-than-expected Q1, so curious to hear why you didn't pass through the full Q1 beat. And then also hoping, you know, for a little more color on the better-than-expected volume growth you saw in the quarter. You know, what were the key drivers behind this and, you know, ultimately, how sustainable is this moving forward? And, you know, curious, was there any pull forward, for instance, or should we expect to see continued volume improvements as the year progresses? Thank you. Mike Hsu -- Chairman and Chief Executive Officer Yeah, Bonnie. Maybe I'll start, and Nelson will talk about what we decided to pass through and our logic for that. But really, you know, I'm encouraged with our good start. You know, I think our organization is running very, very well in what we would call internally our new normal, right? And I think this is like the first year in a few that we've had kind of a stable business despite a lot of the geopolitical things that are going on. So, you know, the underlying strength in the quarter was predicated on, you know, couple of good fundamental factors. One, better volume, which you observed, and there was no pull forward. And in fact, it was the opposite. We had an inventory -- retail inventory reduction in the quarter, but kind of -- I think the volume -- the inherent strength in the consumption kind of overshot -- overcompensated for that. And so, I think that was part one. Also, the market shares are moving kind of in the right direction. So, I think we feel very good about the underlying volume momentum in the business. And then on top of that then, with a stable input cost environment, the productivity that was strong in the quarter tends to drop a little bit stronger through the bottom line. And so, that's the underlying kind of driver of our strong Q1. And we feel really great about it. The team has done a great job, you know, operating. You know, there are still a couple wars going on in the world, as you're well aware. Argentina has been very volatile, and our teams are doing a great job there. So, you know, we feel like we're really running well in a new normal environment. Nelson. Nelson Urdaneta -- Chief Financial Officer Yeah. And just to add a few details on what happened in Q1, Bonnie. So, first, obviously, very pleased with the start of the year, and Q1 was particularly strong as we saw a significant benefit in China from our Chinese New Year execution; and particularly in March, I mean, the trends in the business continued. China grew volumes double digit in the quarter. And in North America, in particular, as Mike said, while the trade destock happened as we had projected back in January, and just for perspective, total company, that was around 80 basis points of growth, that still -- we came in March and had a much better consumption in the month in March, which flowed through in the quarter. So, that was the other bit on volume as we thought about what happened and reconciled the numbers for the quarter. Having said that, as we look at what's going to happen in the balance of the year, a couple of things. One, as Mike said, we're cautiously optimistic. A few things that we're all aware of is we still have geopolitical challenges underway and we have begun to see some of our commodities begin to uptick. Just for perspective, in the first quarter, we've seen how pulp and the fiber complex has increased, you know, in the single digits in the first quarter sequentially versus Q4. For perspective, in the full year, we now expect commodities to be -- you know, the net input cost, the total basket to be around $250 million inflationary. So, we are taking that into account. That's within the range that we have provided back in January, but it's still something that we're watching. A couple of other things to keep in mind is that as we head into the back half of the year, we expect to see about an $0.08 headwind from the personal protective equipment divestiture in profit that's built into our outlook, but that is something that we -- that is new news versus the outlook we provided back in January. And the other bit to keep in mind is, you know, we will further step up investments as the year progresses. On a year-over-year basis, our advertising spend increased 50 basis points. That was largely in line with what we had in Q4. And what we said at the beginning of the year is that as our innovation pipeline builds up, and that's starting in Q2, we will further step up investments as the year progresses, and we expect it to be at around another 50 basis points for the balance of the year. Bonnie Herzog -- Goldman Sachs -- Analyst All right. Thank you. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Bonnie. Operator Thank you. Your next question is coming from Anna Lizzul from Bank of America. Your line is live. Anna Lizzul -- Bank of America Merrill Lynch -- Analyst Hi. Good morning and thank you for the question. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Anna. Anna Lizzul -- Bank of America Merrill Lynch -- Analyst I was wondering if you can comment on market share. A competitor mentioned a misstep on their part with a lack of innovation at the lower end of the pricing ladder in toilet paper, which caused some pressure there. So, I was wondering if that helped you to pick up share. And if you can comment on how you're progressing in terms of market share also on a weighted category basis, that would be helpful. And then as a follow-up, volumes were clearly better than expected despite some retail inventory reductions in the quarter that you had anticipated for Q1. So, I was just wondering to what extent this ended up impacting the quarter and how should we be thinking about it for the full year. Thank you. Mike Hsu -- Chairman and Chief Executive Officer OK. Yeah. Anna, thanks for the question. Great question. You know, market share, you know, I'm very encouraged. I think we've made very, very solid progress on overall market share. I expect further improvement in the year -- as the year progresses. You know, overall in the quarter, we were up and even in just under 60% of our market category combinations. Although, I would say also flat on a weighted basis. And we look at share in two ways on both metrics. Importantly, I'd say North America improving. North America was up or even in six of eight categories. You know, we were soft in 2023, as you may recall. A lot of that was predicated on severe supply constraints that we had last year. And so, I think this was like maybe the second quarter that we've had in a row of unconstrained supply, and I think that kind of performance reflects our ability to ship product and kind of restore promotions. Just for reference, Kleenex in the quarter was up 400 basis points on share -- or more than 400 basis points on share. You know, what drove it? Well, we did have a new social media campaign around cold, flu, and allergy season, which, I think, has been very, very good. But the other part is we restored merchandising, which we had been off from for several months. And so, you know, again, I think our merchandising, we still plan -- you know, we're probably still under-indexed versus the overall category, but we're just kind of returning to kind of normalized, you know, merchandising behavior. So, we feel good about our performance overall. And again, market share in other markets like in China, we were up a couple of hundred basis points, and Huggies diapers had a very, very strong Chinese New Year execution. So, you know, volumes were up double-digit against the category that was still down about 10% in China. So, I think, overall, we're feeling, you know, very optimistic about the performance of the business and feel good about the volume delivery of the business. Nelson Urdaneta -- Chief Financial Officer And just to build on Mike's point and to your question on what to expect on volumes for the balance of the year, as we said in January, I mean, 2024 should mainly reflect the pacing of our innovation pipeline and in-market programming. We still have the innovation and a lot of the programming coming into place as we go into Q2 and the second half of the year, hence why, from an overall perspective and volume plans, we don't see any changes versus what we had planned back in January and, you know, taking into account the volume over delivery that we had in Q1. Anna Lizzul -- Bank of America Merrill Lynch -- Analyst Thank you. Very helpful. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Anna. Operator Thank you. Your next question is coming from Lauren Lieberman from Barclays. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Lauren. Nelson Urdaneta -- Chief Financial Officer Hi, Lauren. Lauren Lieberman -- Barclays -- Analyst Hey. Good morning. Hey, guys. So, the first thing I wanted to ask about was the productivity. In the release or in the prepared remarks, you called out 120 million realized this quarter, and I was just curious how to think about that in the context of the 3 billion in productivity and also 200 million of SG&A savings that you articulated at the Investor Day. So, that's just my first question. Mike Hsu -- Chairman and Chief Executive Officer I'll -- Nelson will comment. I will say good start and we're tracking well. Nelson Urdaneta -- Chief Financial Officer Yup. And then just to give a little bit of color on the 3 billion and the 200 million, Lauren. So, you know, overall, first, it's based on the integrated margin management process that we unveiled in our Investor Day at the end of March. This is really giving us a new enterprisewide visibility, discipline, accountability end to end across the whole value chain. And really, it's about a focus on driving lower costs at a total delivered cost, which is a very different approach as what we had in the past and we've been working on it for the last year or so. As you said and we know, we had a strong start to the year on gross productivity. I'll reiterate, this is nonprocurement-related savings, and that's -- this is the 120 million that we talked about in the release and in our prepared remarks. And we also had additional savings that were delivered from the procurement side of the house, and that's embedded in our net input costs, which, again, were, you know, in net not that much of a headwind in the first quarter because of all these efforts. As we think about the cadence and what we expect to have on the 3 billion, we're off to a good start on that number, and we would expect that to be roughly about linear over the next few years as we deliver the whole 3 billion. In terms of the $200 million of SG&A savings, as a reminder, we will go live with our new operating model on October 1st of this year. So, we don't expect much of that 200 million in savings in SG&A to materialize this year. That will really come into play more in 2025 and 2026. But again, really good start to the year in productivity and procurement-related savings. Lauren Lieberman -- Barclays -- Analyst OK. That's awesome. So, just as a follow-up, on the SG&A side of things, what was interesting to see this quarter is that you saw pretty good operating leverage there because in the prepared remarks, also, you've called out a 50-basis-point increase in advertising as a percentage of sales this quarter, which implies some pretty, again, like I said, all solid operating leverage on SG&A, and that's different than what we've seen, I guess, the last couple of years frankly. So, where do you stand, let's call it, on sort of reinvestments? Because one of the things that struck me and in some of my follow-up conversations with people after the Investor Day was a lot of the things you talked about doing going forward. A lot of questions I got from people were like, well, why haven't they been doing it yet? And my thought was perhaps it's been about investing to get the capabilities to be able to do these things going forward. So, is that a reasonable way of thinking about it? Is that reinvestment level kind of now -- I don't want to call it complete, but like where it needs to be such that we should see operating leverage on SG&A ex-advertising even before you start to get some of those -- that $200 million in savings in '25 and '26? Mike Hsu -- Chairman and Chief Executive Officer Yeah. I mean, one, I'll start Lauren, and -- but one, we feel great about our investments in advertising, and, you know, I think we're -- you know, we've made significant progress. I think we're up 200 basis points to 300 basis points since I became -- came into this role. However, you know, I'd say we're probably still underspent relative to our peer set. And so, do we need -- and I think I said this in Investor Day, I don't know that we have to match them, right? But I would like to continue to increase our investment. I think you're exactly right on kind of, hey -- well, there's two factors that kind of caused us to phase our investment. I would say, if you recall back in 2018, 2019, I did not feel like we had all the capability we needed to spend that significantly. And I think you may recall in some sessions we had or some calls, you know, people were asking, why didn't you reset and invest harder? You know, at that point, I wasn't confident in what the advertising was going to do, right? And so, in the last five years, I think we've really built what I would characterize as kind of world-class capability on the commercial fronts through the help of Alison, as you're well aware. And so, we've done that. We've made progress. So, that was one factor, we were building the capability. And right now, our returns on investment on our advertising, particularly on digital -- and we've migrated from not having a whole lot of digital maybe five or 10 years ago to almost being entirely digital, and those returns are significantly higher that we're driving now. So, that's one factor. The other big factor I think that people forget is, you know, we had two years of a super inflation cycle. We had more than -- offset more than, you know, a full year of operating profit in that cycle. And so, we were busy doing -- trying to recover margins as well. And so, there was a lot going on, in addition to all the geopolitical issues that I think, Lauren, you're really well aware of. So, there's a lot of things going on. And so, we're making steps in the right direction. We're not all the way to where we want to be, but we think we can kind of manage the business in the right way to kind of deliver both, you know, a healthy top line, a healthy bottom line while continuing to invest in our business for the long term. Lauren Lieberman -- Barclays -- Analyst OK. Great. Thanks so much. Operator Thank you. Your next question is coming from Nik Modi from RBC Capital Markets. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Hey. Good morning, Nik. Nik Modi -- RBC Capital Markets -- Analyst Thanks. Good morning. Good morning. Just a quick clarification, if you could just provide context on the destocking in terms of where you saw it? And then the actual question is, you know, obviously, the feedback, broadly speaking, has been, you know, the consumer is under pressure. Though your results today, obviously, you know, you seem to have outperformed a lot of that backdrop or commentary. So, just, Mike, would love to get your perspective on kind of category health, consumer health, kind of what you guys are seeing. I sense part of the guide, you know, and not flowing everything through is because maybe there is some uncertainty, but I'd love your thoughts on that. Mike Hsu -- Chairman and Chief Executive Officer Yeah. Thanks, Nik. Yeah. Great questions. Yeah, we did see a retail inventory reduction in the first quarter, as expected, and we were given the heads-up on that. And so, we planned for it. It was about an 80-basis-point headwind to global and about 170 bips of North America sales. And so, you know, I'd say that the behavior is typical. I don't think it's unusual. You know, we tend to see in that December-January time frame, you know, retailers trying to get a little more efficient with how much inventory they're carrying. You know, we tend to be very, very efficient with retailers, and, you know, I think they like our logistic capability. And so, we're kind of generally early adopters of all the new systems that retailers go on to kind of try to manage their inventories better. So, we're kind of on top of it. It's been baked into our outlook for the full year. But I don't know that I expect a whole lot different going forward, but it's -- you know, what we expected in Q1 did, in fact, happen. You know, I think I said earlier, our volume was a little bit stronger than we had anticipated, so, you know, more than fully offset that. So, I think that was the first part. Is that enough -- clear enough on your retail inventory part, Nik? Nik Modi -- RBC Capital Markets -- Analyst Yeah. And, Mike, I just -- what -- any specific categories you can call out? Was it fem care because that's -- P&G called that out, but I was just trying to get category perspective on the destock. Mike Hsu -- Chairman and Chief Executive Officer Yeah. You know, for us, across the board -- and just to note, nothing unusual in our mind. It's like typical for what we see every year. So, I think that's part one. I think your question on the consumer, I guess I would characterize, you know, the consumer environment overall for us globally, but especially in North America, as resilient, still bifurcating, but part of that bifurcating is actually adding a category growth as well. So, the category demand overall remains very, very robust. As you can see, in North America, our categories on average overall were up about 5% or mid-single digit. I think that -- you know, as you all know, we make daily essentials, and so there is low substitution in our categories. And so, I think that's reflected in the overall category demand. Important to note, Nik, is premium continues to grow very, very robustly, especially in developed markets like the U.S., like in China, U.K., South Korea. But what's also -- you know, premium is growing in developing and emerging markets like Brazil. And so, we're continuing to see that demand there. That's -- that all said, you know, clearly, you know, I would say middle- to lower-income households, you know, look like they are -- they're becoming more stretched based on all the economic data we're seeing. So, you know, I would say the bifurcation is I see a limited trade down in a few categories, notably, you know, adult care, some in household towels. But, you know, we have a very, very detailed tracker across every category. I think we're tracking like nine different dimensions. And, you know, I'd say, you know -- so we're very vigilant about, you know, monitoring that. You know, the thing about it is, you know, the trade down is limited at this point, but we really intend to be more valuable to our consumers at every rung of the good, better, best ladder. And so, what that means is, you know -- I think, you know, Anna was asking about, you know, private label, you know, or value tier quality. I mean, we're making all of our products better across the board. And that certainly -- you know, I think the growth driver for us over the long term is by making products better, premiumizing, elevating our categories. But, you know, we want to serve, you know, the value-oriented consumers well, too, and we have big brands like Scott, bath, and Kleenex mainline, Depend mainline that serves those consumers well, too. Nik Modi -- RBC Capital Markets -- Analyst Excellent. Thanks, Mike. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Nik. Operator Thank you. Your next question is coming from Chris Carey from Wells Fargo. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Hey, Chris. Nelson Urdaneta -- Chief Financial Officer Hey, Chris. Chris Carey -- Wells Fargo Securities -- Analyst Hey. Good morning. Just a couple follow-ups, just on China and the U.S., right? So, in China, clearly, good numbers, but I also think one of your peers delivered quite good numbers as well. And I guess the question in a way is, are we seeing the category churn in China, benefits from perhaps Chinese New Year? Or are you both just gaining relative market share? You know, clearly, it's a strong number, so I'm just trying to understand this, you know, like a bit deeper I guess. And then secondly, on the U.S., it's really the same question on relative outperformance to category. And I know you've mentioned it a bit more, and I'm more interested in the China comment, but if you can just expand there because that stood out to me as well. Thanks. Mike Hsu -- Chairman and Chief Executive Officer Yeah. I'll start on China. You know, again, if you kind of saw the Investor Day presentation with, you know, Katie's leadership, our China team is doing a fantastic job there, and they've grown, you know, consistently double digits over the past five years, and it's become, you know, one of our best-performing businesses in the company. I would say the -- I think the driver of performance, there's a couple of factors. Certainly, a strong Chinese New Year execution. But overall, we make a great product. I believe it's the best product in the marketplace. I think consumers are excited about the products that we offer. And then we have really, really strong digital executions that really kind of drive that relationship with consumers. And so, you know, to answer your question, I think it's more of a share pickup. The category itself, based on the data I'm seeing, was still down about 10% in the quarter, consistent with the birthrate trends and everything else we're seeing. So, it's a share pickup. And, you know, I'll point out, you know, we're the market leader in China, we -- but that's predicated we're only at, I would say, a mid to high teens share at this point. And so, we feel very good about our positions, but it's a fragmented category, and so there's a lot of opportunity for us to, you know, drive further share growth in the market. You know, importantly, I think, for us, you know, we're also picking up on, you know, our mainstream business. And, you know, part of the strategy when I say, hey, we want to be great at every tier or every rung of the good, better, best ladder, you know, we want to accelerate innovation at the top end and then cascade that, you know, quickly through our line. And so, we're doing that, and I think, you know, we're seeing that in the results in China, for sure, and, you know, similarly in the U.S. Chris Carey -- Wells Fargo Securities -- Analyst And then if I could, just one follow-up would be, clearly, you know, pulps are on the move. You know, it's a bit more on the front end of the curve than in the back half of year 2025. But this is going to be perhaps the first moment to really kind of show the ability to work through this cycle. Just any thoughts on, you know, the moves that you're seeing and, you know, the types of actions that you might defer to if these, you know, moves proved durable and even accelerate, you know, between pricing, productivity, and whether you see any potential kind of margin issues on the horizon or if this feels very much, you know, manageable at this point. Thanks. Mike Hsu -- Chairman and Chief Executive Officer Well, I'm going to start with -- and Nelson could disagree with me if you want, Nelson, but I would say manageable at this point because here's -- you know, I said, hey, new normal. You know, I think this is, you know, what I'd characterize as a more normal year for a CPG for the first time in the last three or four years for us, which is, hey, a stable input cost environment. It's still not deflationary. At some point, you know, one would hope that it becomes deflationary. But, you know, I'd say, hey, you know, it's slightly inflationary but relatively stable. That's different than the past three or four years for us. And so, you know, I think, for us, you know, we have very good productivity plans. And so, if the costs remain -- input costs remain stable, we can operate very, very well in a stable cost environment and let that productivity drop through. So, that's one part. And then the other part of the normal is, you know, I think with -- there's been a lot of volatility in demand with COVID and everything else over the past few years. You know, I think we're starting to see demand stabilize. And so, with those two factors, you know, I think we can operate well. We're very cognizant. And Nelson will talk about it that we're -- you know, there are some demand signals around different pulp environmental changes, but, you know, we're well aware of that and we think we have that accounted for in our current call. But, Nelson. Nelson Urdaneta -- Chief Financial Officer Sure. So, just to build on what Mike was saying, Chris, so a few things. You know, I'll start with we've built significant capabilities over the last five years in order for us to be able to maneuver through the ups and downs. Obviously, if we have a shock like what we saw two or three years ago, that's a different situation that we'd have to maneuver through. But as Mike said and as we've said back in January, we see the situation as manageable. To reiterate, I mean, when we talked in January, we talked about $200 million to $250 million of net input costs, all in. That included currency, other costs, as well as commodities, which we still see as deflationary for the full year for us. Now, on that range, we're now staring at the high end of that range, which, again, we see as manageable, as Mike said. A couple of things to keep in the back of your mind as you look at the numbers. Core commodities like pulp, resin-based materials, energy in dollar terms, while they're a little bit more unfavorable today versus what we were seeing back in January because we're seeing some upticks, still for the full year, they would remain a tailwind. We continue to see distribution, logistics, and labor costs as inflationary for the year. And then obviously, for non-U.S. operations, currency will be a headwind in costs because they're buying pulp and many of the inputs that they use to manufacture the product is in hard currency. So, on a net basis, that's how we get there. The thing to also keep in mind is that we expect the phasing of our input cost inflation to be more muted in the first half of the year. And this follows the trend that we saw in Q3 and Q4 of 2023 that would carry over pretty much through Q2. And we'll see an uptick of this as we go into the back half of the year. But again, it's all factored into our outlook, and the only difference is, really, we're more at the high end than the range that we had given before. Mike Hsu -- Chairman and Chief Executive Officer Yeah. Chris, just to calibrate you, I think Nelson like -- when we're looking at a couple hundred million of inflationary impact, you know, just to calibrate you, in 2021 and 2022, you know, we took on 1.6 billion and 1.7 billion, respectively. So, you know, I would say that's kind of why we feel like it's -- that's one reason why we feel like it's more manageable. The scale is totally different. And then the other thing is, as Nelson points out, we've changed how we manage the business, in some ways, to try to become a little more predictable, and we have better tools than we had maybe five years ago. And so -- Nelson Urdaneta -- Chief Financial Officer Totally. And just to build on Mike's point on the tools, as a reminder, I mean, we have a very strong pipeline of productivity initiatives. We're looking out three years, and I've been chatting about this for the last few quarters. That pipeline remains strong. You would have seen that nonprocurement-related productivity was very strong getting out of the year, and the team is very confident in our ability to continue to deliver not just in this year but in the following two or three years, which builds on our ability to deliver on the 3 billion commitment of overall productivity -- gross productivity in the next five years or so. So, that's built into how we're looking into cost and inflation for the next few quarters. Chris Carey -- Wells Fargo Securities -- Analyst Thank you very much. Very helpful. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Chris. Operator Thank you. Your next question is coming from Steve Powers from Deutsche Bank. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Good morning, Steve. Steve Powers -- Deutsche Bank -- Analyst Good morning. Thank you. Hey, two questions if I could. The first one builds on the conversation you're just having with Chris around, you know, commodities and managing it through the cycle. You know, I guess I'm curious as to, you know, the steps you've taken to better maneuver through input cost cycles and essentially better protect this year, you know, does that include, you know, different ways of sourcing and contracting and hedging that, in effect, pushes out, you know, the cost curve as we would typically know it for Kimberly Clark? I guess what I'm thinking about is that, you know, in the past, if we saw reinflation like we have year to date, we'd be thinking about that kind of flowing through and impacting, you know, the latter third, latter quarter of the current fiscal year, kind of a six month -- maybe, you know, six- to nine-month lag. It sounds now like you've got better visibility. I'm wondering on how much of that is just pushed out that reinflation into '25. Mike Hsu -- Chairman and Chief Executive Officer Hey, maybe I'll say a couple things. You know, one, Steve, is, you know, I think the analyst committee -- community and the investor community, I think, made very clear to me when I came into this role that, you know, one of their -- one of the issues they had with our -- with KMB is, you know, the earnings volatility. And so, I've been very cognizant of that fact. And so, we've, over the past five years, kind of worked, you know, significantly -- you know, worked pretty hard to kind of reduce some of the underlying volatility in our business. Nelson, you know, with an outside perspective, has really, you know, worked hard to bring some different kinds of tools into our thinking. And so, we've, you know, been applying that over the last couple of years. And so, you know, we feel very good about that. You know, certainly, you know, there is inherent volatility in our business, certainly in pulp. You know, one would think at some point with the super cycle of inflation that we have on pulp, it's still elevated, and at some point, it needs to come back down. History would say it's going to come back down further. That said, I think we've built the right tools, and, Nelson, you may comment about, you know, what we're doing there. Nelson Urdaneta -- Chief Financial Officer Sure thing. And just to build, I mean, the integrated margin management approach, Steve, that we -- we've been working on for the last year or so really addresses part of this volatility. It is end to end, as we chatted in March 27th. And it looks at all the elements that drive total delivered cost, as well as margins. And it starts with we've been building muscle around revenue growth management, and that's very important. Price pack architectures, what kind of price packs do we have for the different channels and how do we tackle that, including promo, activity, etc., which is very important across all the geographies we work in. Secondly are the tools that Mike was talking about on how do we handle costs. We don't reveal what are the contract structures that we have in place or the hedging activities, but we obviously have gotten into much more proactive risk management to be able to have visibility into costs and give us time to react. And what do we react with? We react with productivity initiatives and elements of revenue growth management. That's the -- that's a big difference on how we were approaching it, you know, five years ago. And we've been building that muscle over time, and that's then drives into this visibility into the productivity element, which, right now, we've split it and we're being very clear of this is the productivity within the four walls, that's the 120 million that we talked about; and then we have productivity in procurement, which is embedded in our net input costs. And that clearly gives accountability across the supply chain on how to drive lower total delivered costs or at least manage through the margins. So, yes, I'd say it's muscle we've been building over the last five years, as Mike said. And obviously, we're not going to be immune to moves in commodities, but the visibility we have today, the ability to react is different than what we had in the past. Steve Powers -- Deutsche Bank -- Analyst Yeah. OK. That's very helpful. And this answer to the next question may be short. If you've already addressed it, you can tell me to just go read the transcript afterwards. I joined late, I apologize. But in the -- Mike Hsu -- Chairman and Chief Executive Officer We would never be that rude, Steve. Steve Powers -- Deutsche Bank -- Analyst In the prepared remarks, you mentioned a private -- you know, plans to exit some private label businesses. I know those plans are still, you know, kind of under construction, but you did make mention of it with some impacts in '25. If you could -- if anything further you can say on that today, that'd be great. Thank you. Mike Hsu -- Chairman and Chief Executive Officer OK. Just to be clear, Steve, that question was not asked. So, it was a great question. Steve Powers -- Deutsche Bank -- Analyst OK. Mike Hsu -- Chairman and Chief Executive Officer All right. Hey, just on that, yeah, I did want to flag that we are -- you know, strategically, let me just tell you, you know, we're focusing on differentiating our brands with proprietary science-based innovation. That was kind of the big theme that we shared with you all at our Investor Day. You know, just to give you some context, today -- or last year, private label production represented about 4% of our global sales. And so, what we announced today, you know, we'll likely cut that in half by the end of 2025. The thing I'll say is -- and it takes two parties to make a decision, so I won't get into any specifics, but I would say, you know, on our end, you know, as you think about what we say is, you know, science is our competitive advantage. The investments we're making in our new personal care core technology that resides in our diapers and our feminine care pads and our adult care, also to get to Natural Forest Free, all that development, that's all going to take some pretty chunky capital. And so, we are making significant technology and capacity investments. And so, we really want to be more choiceful as we go forward about where we spend that capital. And so, that's really kind of, you know, underlying some of that decision-making. You know, these decisions are going to enable us to focus our tech investment on what we see as our greater strategic priorities. And I might note, you know, our exposure to private label, you know, could decrease further over time. Nelson Urdaneta -- Chief Financial Officer And just to add further color on what we would expect from a bottom-line standpoint, Steve, it should be consistent with what you're seeing in the top line. And then obviously, we're working through supply chain transition, repurposing, and related cost opportunities within the context of our whole network optimization initiative, which is one of our three strategies in the supply chain strategy that we unveiled at Investor Day. We will have more to say as we go into 2025 guidance period. Steve Powers -- Deutsche Bank -- Analyst OK. That's good color. Thank you, both. Mike Hsu -- Chairman and Chief Executive Officer OK. Thanks, Steve. Chris Jakubik -- Vice President, Investor Relations If we could take maybe one more question, that'd be great. Operator Certainly. Your next question is coming from Javier Escalante from Evercore. Your line is live. Mike Hsu -- Chairman and Chief Executive Officer Javier -- Javier Escalante -- Evercore ISI -- Analyst Hey. Mike Hsu -- Chairman and Chief Executive Officer How are you? Nelson Urdaneta -- Chief Financial Officer Hey, Javier. Javier Escalante -- Evercore ISI -- Analyst Hello. Yeah, good morning, everyone. I do have kind of like a quick clarification to Lauren's questions first because it's in the context of guidance versus what is incremental in terms of the restructuring and whether -- it seems as if to me from the outside is kind of like coming through earlier. So, basically, the $120 million in savings that you flagged, are they part of the 3 billion that you spoke of a month ago or not? And then we can address the other piece if you don't mind. Nelson Urdaneta -- Chief Financial Officer Yeah, the short answer, Javier, is yes, it is part. We said that our new chapter started in Q1 of this year, and that's part of the five years commitment to deliver that. The 120 million is part of that. And then there's an element of procurement savings that we're not disclosing today. We are committed to disclosing the entire savings, including procurement, annually, so that you'd get a perspective of how we're tracking against the 3 billion that we committed to. Javier Escalante -- Evercore ISI -- Analyst So, congratulations on the very early start because I also see that the October -- the new organization is starting in October. I thought that it would be something of 2025. So, if that's all true, right, if savings are coming through earlier, why is it that the guidance -- and the other thing that I get from your transcript prepared remarks is that revenue realization, faster. So, you have faster revenue realizations from forex, right? You have faster savings coming from -- and they are sizable, right, $3 billion coming from the restructuring. So, I understand that you want to be conservative, but, you know, if we take you literally, the numbers for the balance of the year needs to come down. Is that where you want in terms of consensus to look like, very simple? Mike Hsu -- Chairman and Chief Executive Officer Well, I'll just start. You know, Javier, you know, I'd say, hey, we're still early in the year, and we feel really good about our start. We feel very confident in our performance this year. But that said, there's -- as Nelson pointed out in his remarks and in our prepared remarks, there's still a lot of uncertainty out in the world right now, both in terms of the geopolitical situation and the effects that could have on global demand but also, as you've heard just on the last few questions, on the input cost environment. And so, you know, I probably would say, yeah, we're taking a, you know, prudent approach to making our call but certainly, you know, encouraged by our start to the year and, you know, would love to, you know, drive to a very strong result this year. But, Nelson. Nelson Urdaneta -- Chief Financial Officer Yeah. And just to build on Mike's point, Javier, I mean, a couple of things. We're focused obviously on margin trajectory over time. And margins will move quarter to quarter, and they have to do with country and category mix, timing of our innovation pipeline, as well as changes in absolute productivity delivery. Productivity delivery is not linear. I mean, the timing of when projects come online and how quickly we can realize the benefits, we have an estimate, but again, you got to get them through. We have a full outlook for the year, and that's embedded there. And we're very encouraged by how the whole year started, but we have a lot of activities still coming our way, including a very strong innovation pipeline for which we're going to be putting back money into the business. We're going to be stepping up investments at least 50 basis points for the balance of the year. And if we see opportunities to invest more in the business and more in our transformation to accelerate it, we will. So, we're taking all that into account and also take into consideration the sale of our PPE business, which we've built into the forecast, which is about a headwind of $0.08 for the balance of the second half of the year. Javier Escalante -- Evercore ISI -- Analyst Well, I would take it that it's conservative guidance. Thank you very much. OK. Mike Hsu -- Chairman and Chief Executive Officer Thank you, Javier. Nelson Urdaneta -- Chief Financial Officer Thanks, Javier. Chris Jakubik -- Vice President, Investor Relations Great. Well, thank you, everyone, for joining us today. For those of you who have follow-up questions, you know, Aishwarya and myself will certainly be available for follow-ups. So, thanks again, and we look forward to seeing you going forward.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to the quarterly earnings conference call. [Operator instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. I'll now turn the call over to Mr. Rich Kinder, executive chairman of Kinder Morgan. Thank you. You may begin. Rich Kinder -- Executive Chairman Thank you, Ted. As always, before we begin, I'd like to remind you that KMI's earnings release today and this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and of course the Securities and Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosure on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. Before turning the call over to Kim and the team who will report a good quarter at KMI, let me comment on another broader issue. In past quarters, I've talked a lot about the demand for natural gas resulting from this country's LNG export facilities. Today, I want to speak briefly about what I and others in the industry now see as another source of increased demand for our commodity: the tremendous expected growth in the need for electric power. This growth is being driven by a number of factors, most prominently by the increasing demand of new and expanding data centers, especially those required to support AI. One recent survey showed a projected increase in electric demand to power data centers of 13% to 15% compounded annually through 2030. Put another way, data centers used about 2.5% of U.S. electricity in 2022 and are projected to use about 20% by 2030. AI demand alone is projected at about 15% of demand in 2030. If just 40% of that AI demand is served by natural gas, that would result in incremental demand of 7 to 10 BCF a day. Utilities throughout America are sounding the alarm, and one southeast utility announced its expectation that its winter demand would increase by 37% by 2031. PJM Interconnection, which operates the wholesale power market across part of the Midwest and the Northeast, has doubled its 15-year annual forecast for demand growth and estimates that demand in the region by 2029 will increase by about 10 gigawatts. Now to put that in perspective, 10 gigawatts is about twice the power demand of New York City on a typical day. The overriding question is how to handle this increased demand. To answer that question, it's important to understand the nature of the increased demand. It's become increasingly obvious that reliability and affordability are the key factors. The power needed for AI and the massive data centers being built today and planned for the near future require affordable electricity that is available without interruption, 24 hours a day, 365 days a year. This type of need demonstrates that the emphasis on renewables as the only source of power is fatally flawed in terms of meeting the real demands of the market. This is not a knock on renewables. We all know they will play a significant role in the future of electric generation, but it's a reminder to all of us that natural gas and nuclear still have an extremely important role to play in order to provide the uninterrupted power that AI and the data centers will need. The primary user of these data centers is big tech, and I believe they're beginning to recognize the role that natural gas and nuclear must play. They, like the rest of us, realize that the wind doesn't blow all the time. The sun doesn't shine all the time, that the use of batteries to overcome the shortfall is not practically or economically feasible. And finally, that -- unfortunately, adding significant amounts of new nuclear power to the mix is not going to happen in the foreseeable future. In addition to all these factors, the market is now understanding that building transmission lines to connect distant renewables to the grid typically takes years to complete, and that's a time frame inconsistent with the need to place these data centers into service as quickly as possible. All this means that natural gas must play an important role in power generation for years to come. I think acceptance of this hypothesis will become even clearer as power demand increases over the coming months and years, and it will be one more significant driver of growth in the demand for natural gas that will benefit all of us in the midstream sector. And with that, I'll turn it over to Kim. Kim Dang -- President OK. Thanks, Rich. I'm going to make a few overall points, and then I'll turn it over to Tom and David to give you all the details. We had a great quarter. Adjusted EPS increased by 13%. EBITDA was up 7%, and that was driven by strong performance in natural gas and our refined products businesses. This type of growth is tremendous for a stable fee-based set of midstream assets as large as ours. So the balance sheet remains strong. We ended the quarter at 4.1 times debt to EBITDA, and we continue to return significant value to shareholders. Today, our board approved an increase in the dividend of $0.02 per share. This is the seventh year in a row that we've increased the dividend. Our financial outlook of 14% growth in adjusted EPS for the year, as well as the other budget guidance we provided in January, is unchanged. We've seen much lower gas prices than we anticipated this year, but the long-term fundamentals in natural gas remain very strong. Gas demand is expected to grow significantly between now and 2030 with a more than doubling of LNG exports, as well as a 50% increase in exports to Mexico. And that doesn't include the anticipated substantial increase in gas demand from power associated with AI and data centers that Rich just mentioned. Estimates we've seen range anywhere from 3 BCF to over 10 BCF, and we've seen some estimates as high as 16 BCF. With respect to the LNG pause, we do not think it impacts our planned projects or the growth in the LNG market between now and 2030, although it could impact the mix of projects. But we think that is an unwanted -- we think the LNG pause is an unwise decision and bad policy. Our petroleum products business continues to produce very stable cash flow. Volumes are steady, and much of the business has tariff or contract escalators. It will produce nice cash flow for years to come. It's also a capital-efficient business and has some nice growth opportunities around the edges, in product blending, renewable diesel, and other sustainable fuels. Our backlog of projects increased by about $300 million during the quarter due to new natural gas projects added. The backlog on -- the multiple on the backlog remains less than five times. And I also think that we've got significant opportunity to add to the backlog within the next year. In our ETV business, we secured port space in the Houston Ship Channel for CO2 sequestration with capacity to store more than 300 million tons. Significant distance between the emitting source and the sequestration site often challenges CCS economics, and we've secured a very strategically located site. So we had a nice quarter in terms of growth. We continue to expect nice growth for the year. We've got a sound balance sheet. We returned significant value to our shareholders, and we have nice opportunities to invest in the longer term. With that, I'll turn it over to Tom to give you details on the business performance for the quarter. Tom Martin -- President, CO2 and Energy Transition Ventures Thanks, Kim. Starting with the natural gas business unit, transport volumes increased by 2% for the quarter versus the first quarter of 2023, driven primarily by increased flows eastbound on the Rockies interstate pipelines into the Midcontinent Region, the Permian Highway expansion project being placed into service, and increased flows into our -- to our LNG customers in Texas, partially offset by decreased volumes delivered to local distribution companies on the East Coast as we had a warmer winter this quarter compared to the first quarter of 2023. Our natural gas gathering volumes were up 17% for the quarter compared to the first quarter of 2023, driven by the Haynesville and Eagle Ford volumes, which were up 35% and 12%, respectively. Given the low price environment, we are now expecting gathering volumes to average 5% below our 2024 plan but still 7% over 2023, adjusting for asset sales in both cases. We've delayed about 10% of our 2024 budgeted G&P capex spend until supply growth returns, and we view this slight pullback in gathering volumes as temporary given higher production volumes will be necessary to meet the demand growth from LNG expected in early 2025. A quick update on our newly acquired South Texas midstream assets and our Texas intrastate market. The integration of the assets and personnel is going well. We are progressing some of the upside opportunities that we assumed in the acquisition sooner than expected. We feel very good about the long-term earnings expectation and valuation multiple for the acquisition. Our experience in other acquisitions has been that we tend to achieve more value over time than we originally expected from acquiring assets that are highly integrated with our existing network. We are already seeing evidence of that with these assets. In our products pipeline segment, refined product and crude and condensate volumes were down 1% for the quarter versus 2023. Gasoline volumes were down 3%, partially offset by an increase in diesel and jet fuel, 2% and 1% increases, respectively. RD volumes flowing through our assets in California continue to grow. We averaged 37,000 barrels a day for the quarter, and we're exploring opportunities to expand our RD capabilities in the Pacific Northwest. Our terminal segment -- our liquids lease capacity remains high at 95% -- 94%. Utilization at our key hubs at the Houston Ship Channel in the New York Harbor remained very strong, primarily due to favorable blend margins. Our Jones Act tankers are 100% leased through 2024 and 92% leased through 2025, assuming likely options are exercised. The CO2 business segment experienced 4% lower oil production volumes, 9% higher NGL volumes, and 7% lower CO2 volumes in the quarter versus the first quarter of 2023. With that, I'll turn it over to David Michels. David Michels -- Chief Financial Officer OK. Thank you, Tom. So for the first quarter of 2024, we're declaring a dividend of $28.75 per share, which is $1.15 per share annualized, up 2% from 2023. For the quarter, we generated revenues of $3.85 billion, which was down $38 million from Q1 of 2023. Our cost of sales was down $108 million, so our gross margin increased 3%, which explains most of the 2% growth in our operating income. Equity from earnings -- excuse me, earnings from equity investments is up $78 million, but $65 million of that was due to a noncash impairment we took in the first quarter of last year. We saw year-over-year growth from our natural gas, products, and terminals businesses. The main drivers of that growth came from project contributions, growth project contributions placed in service across each of those business units, as well as from additional contributions from our acquired South Texas midstream assets. We also had higher margins on our natural gas storage assets and higher volumes on our natural gas gathering systems. Interest expense was up due to a higher short-term debt balance due, in part, to the South Texas acquisition, and we generated net income attributable to KMI of $746 million and EPS of $0.33, both up 10% from Q1 of last year. On an adjusted net income basis, which excludes certain items, we generated $758 million, up 12% from Q1 of last year, and we generated adjusted EPS of $0.34, up 13% from last year, so nice growth, as Kim mentioned. Our average share count reduced by 27 million shares or 1% due to our share repurchase efforts, and our DCF per share was $0.64, up 5% from last year. Our first quarter DCF was impacted by higher cash taxes and sustaining capex, but that is due to timing of our cash tax payments and maintenance projects. We expect cash taxes to be favorable for the full year and sustaining capital to be in line with our budget for the full year. On our balance sheet, we ended the first quarter with $31.9 billion of net debt, which increased $94 million from the beginning of the year. And here is a high-level reconciliation of that increase. We generated $1.189 billion of cash flow from operations. We paid $630 million in dividends, and we spent about $620 million in total capital, including growth sustaining and contributions to our joint ventures. Finally, as you can see in our press release, we are adjusting our long-term leverage target from around 4.5 times to a range of 3.5 to 4.5 times. We've been operating near the midpoint of that range for several years, and we believe this range is the appropriate long-term guidance for a company like ours that has significant scale and a high-quality business mix, which produces stable cash flows backed by multiyear contracts. And now with that, back to you, Kim. Kim Dang -- President OK. Ted, if you would open it up for Q&A, and we'll take the first question. Questions & Answers: Operator [Operator instructions] The first question is from John Mackay with Goldman Sachs. Your line is open. John Mackay -- Goldman Sachs -- Analyst Hey, good afternoon, everyone. Thank you for the time. Maybe we'll start on the leverage target because I know that's been a focus for a while. Would love just to hear a little bit more on the decision process to bring it down. And then if we're looking forward relative to how you guys have been operating last few years, what are the kind of practical outputs you could say or decisions you'll make internally with this new target? Thanks. David Michels -- Chief Financial Officer Sure. So we started assessing this when our actual operating leverage started gravitating further away from the target leverage of 4.5 times. The budget for 2024 has us at 3.9 times. So that's when we started assessing it. The timing of the change doesn't really have any -- there's no magic to why we're changing it now, except for that slight difference and gravitating away from the 4.5. The practical implications of this change are really -- we're not changing the way that we operate our company. We've always kind of had the leverage target of 4.5 but viewed having some cushion below that 4.5 as valuable. We think that this 3.5 to 4.5 is more reflective of where we've been operating and how we'll continue to operate the company going forward. Kim Dang -- President Well, I would just reiterate what David said. It's just bringing our policy in line with the way that we run the business, and so there is no change to our overall capital allocation philosophy. John Mackay -- Goldman Sachs -- Analyst All right. Appreciate that. And maybe shifting gears, you obviously started on the big demand ramp we're hoping to see on the power gen side. Talk through the -- you guys talk through the macro really Well. Maybe what I wanted to ask on is just tying that to the micro side if we're looking at Kinder over the next couple of years, where do you see the biggest opportunities for you guys specifically? Kim Dang -- President Well, I think it's pretty early in all of this, and so I think Rich laid out really well sort of what we expect to happen in that market. But if you look right now, I think we serve roughly 20% of the power market in the U.S. And so I think we would -- and that's of the overall power market. This will have -- this will primarily be focused, we think, on gas because of what Rich said with respect to -- you need consistent power or it could have some renewable aspect with gas backup. I think nuclear just will take too long to develop given when we expect this demand to happen. So we move 40% of the gas in the U.S., and so we would expect to realize a significant portion of this opportunity. But putting an exact number on that right now is very difficult because we still don't even know exactly how much the demand is going to be, as you can see from the range of numbers that we discussed here earlier. Rich Kinder -- Executive Chairman If you just look at overall demand, we've been talking about for months and years, calibrating the demand for LNG export and how much that adds, this is another leg to the stool, really. And whether it's 5 BCF a day or 10 BCF a day, we don't know. But it's clearly going to be another leg to the stool in terms of natural gas demand. And I think it will tend to be located near reliable electric generation because if you're a Microsoft or a Google, you want that power as close to your facility as possible. Tom Martin -- President, CO2 and Energy Transition Ventures Yeah. I guess one other additional point there, just if you look at the scale of our network across the country, natural gas, I think that gives us a great opportunity to serve this market wherever it develops. And I think our reach is unparalleled in the sector. John Mackay -- Goldman Sachs -- Analyst All right. I appreciate all that. Thank you very much. Operator Next question in the queue is from Michael Blum with Wells Fargo. Your line is open. Michael Blum -- Wells Fargo Securities -- Analyst Thanks. Good afternoon, everybody. I wanted to ask about the Permian West Texas. Obviously, prices have been negative of late. And I'm wondering if you can just remind us uh, if there's a benefit there to you. Is there any negative impact just overall how those uh low prices are impacting you? Rich Kinder -- Executive Chairman Yeah. So just first, the price macro here at this point in time -- or micro is purely a result of that. This warm winter that we had, I wouldn't normally be this way. I'm not trying to predict pricing. That being said, on the intrastate markets, we do share in some of that upside with some of our proprietary storage that we hold. And so that's where we see some of the benefit. It's obviously -- longer term, we've been saying this for some time, there's -- we see a need for another pipe, and I'll just nip it in the bud. While I'm talking to you, we don't have anything to announce today, but we continue to try and work on trying to commercialize another pipe, still having discussions with customers along those fronts, but nothing to report this morning -- this afternoon. Kim Dang -- President We've got a little bit of capacity on PHP and GCX. We've hedged a lot of that for this year, but there's a little bit open. But as you go out in time, more of that capacity is open. So we participate, I'd say, around the margin when those spreads blow out. So that delivers a little bit of benefit to our shareholders. Michael Blum -- Wells Fargo Securities -- Analyst Great. And then maybe if I can just push on that. So you said you're still working on a project, nothing to announce. Is that more likely to be something like Permian Pass? Or do you think something more like GCX expansion could happen or both? Rich Kinder -- Executive Chairman Well, look, we continue to try and commercialize both. As I said the last time, highly competitive. We think there's a need. It's just -- it's a matter of making sure we have the contract to support the investment. Michael Blum -- Wells Fargo Securities -- Analyst Great. Thank you. Operator And the next question in the queue is from Jeremy Tonet with J.P. Morgan. Your line is open. Jeremy Tonet -- J.P. Morgan -- Analyst Hi. Good afternoon. Rich Kinder -- Executive Chairman Hi, Jeremy. Jeremy Tonet -- J.P. Morgan -- Analyst Just want to come back to the gathering volumes as you laid out it seems coming in a bit below budget there. I was wondering if you could dive in a little bit more by basin where you see those volumes coming in softer than budget? Tom Martin -- President, CO2 and Energy Transition Ventures From a budget perspective, yeah, it's slightly below budget in the Eagle Ford and the Bakken those are well -- and even a little bit in the Haynesville overall but still good growth year over year. And like I said earlier, I think this is a temporary blip and development of the production because as demand picks up next year, we're certainly going to need all these volumes and more to meet that demand. Jeremy Tonet -- J.P. Morgan -- Analyst Got it. That's helpful there. And I was just curious, I guess, from a higher-level thought process. We've seen some large-cap peers out there look to kind of separate the business along commodity lines, such as natural gas versus crude oil. And just wondering how Kinder thinks about the business today, be it the natural gas pipes versus the terminals versus the CO2, if you still see the same synergies of having it all under the same roof or how you think about that in the current environment? Kim Dang -- President Sure. I mean, all the businesses that we own and operate, we like. We think they provide stable cash flow and good opportunities. I think that really -- we could simplify it a little bit for you. I mean, if you put products and terminals together since they're both primarily refined products, we'd have essentially three different commodity lines. We have natural gas. We'd have petroleum products, and we have the CO2. I think on CO2, that oil production is going to be needed for a long time. There's going to be incremental opportunities for CO2 flooding in the Permian as you get through all the primary production, and I think that business gives us the expertise that we need to exploit the CCS business. And so the reservoir engineers that we use in that business help us as we go out and talk to customers and talk to them about sequestering their gas and being able to keep it in certain reservoirs. And so the businesses we own and operate, we think, are similar in that they are stable fee-based assets they are – or to the energy infrastructure. And we will continue to operate the asset, somebody coming in and offering to buy them at a great price, in which case, we are highly economic, and we would entertain that. But I think, absent getting a wonderful price for our shareholders, we are happy with the businesses that we own. Jeremy Tonet -- J.P. Morgan -- Analyst Got it. Understood. Thank you. Operator Next question is from Neal Dingmann with Truist Securities. Your line is open. Kim Dang -- President Hi, Neal. Rich Kinder -- Executive Chairman Good afternoon, Neal. Operator Neal, if you're there, please check your mute button. Neal Dingmann -- Truist Securities -- Analyst Sorry about that. Good afternoon, Kim. My question is on shareholder return given the new plan for, I guess, the modified plan, I'd say, for the leverage. Will that change anything with these thoughts toward dividends and buybacks on a go forward? Kim Dang -- President No. It has – and let me say this again so that it is clear to everybody. This change is just bringing our policy in line with the way that we have operated over the last couple of years. There is no -- zero change in our capital allocation philosophy. Neal Dingmann -- Truist Securities -- Analyst Very clear. And then just a quick follow-up on the -- I think I got that one on the -- exit midstream assets, I'm just wondering, is that kind of going as you had thought? Maybe just talk about integration and potentially even maybe more upside than expected. It seems like it's going quite well. Kim Dang -- President South Texas? Tom Martin -- President, CO2 and Energy Transition Ventures Yeah. So I mean, early days, obviously. But yeah, we are seeing some of the commercial and development opportunities that we were contemplating when we made the acquisition. We're seeing those opportunities come together sooner than we originally expected. Some of those were out even several years from now. I think we may see something even sooner than that late this year or next year on some of those opportunities. But yeah, on the other side, we are seeing slightly lower volumes this year to start with, again, given the lower-price environment. But overall, we feel we're going to be on our acquisition model for 2024 and beyond. Neal Dingmann -- Truist Securities -- Analyst Thanks for the detail. Operator And the next question is from Keith Stanley with Wolfe Research. Your line is open. Keith Stanley -- Wollfe Research -- Analyst Hi, good afternoon. Just one question on the backlog. So you increased the $300 million. I think you said you brought on -- added some gas projects, just -- I'm not sure if other projects came into service and maybe it's even more than $300 million. Just give more color on what projects you added. Was there anything notable on that? And then a follow-up, Kim. Kim Dang -- President We added, Keith, about $400 million, and we put $100 million of projects in service to get to the $300 million net additions. And on the projects that we added and gas, we added one interstate projects on TGP. We added an intrastate lateral project on the Texas Intrastate and we added a pipeline Egress project in Altamont, which is on the gathering and processing side. Keith Stanley -- Wollfe Research -- Analyst Got it. That was all from me. Thank you. Operator And the next question in the queue is from Theresa Chen with Barclays. Your line is open. Theresa Chen -- Barclays -- Analyst Good afternoon. Thank you for taking my questions. I'd like to touch on the theme of increased demand for power related to AI and data centers. Just curious if you had any early discussions with customers as far as the steps it would take to commercialize these activities, these potential projects on your system and what that could look like. Sital Mody -- President, Natural Gas Pipelines Yeah. So this is Sital Mody. Just to-I'll give you a micro example of something we're working on in the southeast. We've got data center looking to connect to our system. As Rich alluded to, reliability is very important. Not only are they looking for reliable power supply, the power provider itself is looking for incremental capacity. And on top of that, the data center is looking for incremental storage to backstop the intermittency of their backup power generator to the effect that it's not available. So that's an example of something we're looking at in terms of the broader themes. I think they're looking for access to reliable power. They're looking for access to obviously large populations and land, and then water is important for cooling purposes. So those are kind of some of the themes in our discussions. But specifically, that's a good example of something we're working on in the Southeast. Theresa Chen -- Barclays -- Analyst Thank you, Sital. And, Kim, to your earlier comment about significant opportunities to add to the backlog within the next year or so, is that referring to an Egress solution out of the Permian? Is there more to that comment? If you could help us unpack, that would be great. Kim Dang -- President Sure. So I think it just -- it refers to a broad set of opportunities that we're looking at. And so that is on the supply side. There could be things around Haynesville. We talked about already on this call, coming out of the Permian, there is opportunities coming out of the Eagle Ford as all these basins are going to have to ramp up. Just to get to the 20 BCF of growth that we've been talking about before, you add on top of that, what all the data center and AI demand growth numbers that we talked about. So it is supply to the southeast. It's LNG on the demand side. It's the industrial growth on the demand side. It is LNG potentially on the West Coast. It's market power growth out in the west. It's power growth in Mexico on the West Coast. So I mean, there's a whole bunch of fundamental factors that are driving this, and I think what we're seeing is that the opportunity set has grown. And so -- but we are to the point of commercialization of the opportunity set. We won't get all the things that we're looking at. But I think that once you start looking at larger opportunity sets, over time, we're going to add those to the backlog. And so I think some of these opportunities are going to come to fruition within the next year, and that's really what's behind my comments. Theresa Chen -- Barclays -- Analyst Thank you. Operator And the next question is from Dan Lungo with Bank of America. Your line is open. Dan Lungo -- Bank of America Merrill Lynch -- Analyst Hi, guys. Thank you for taking my question. I just want to turn back to the leverage target real quick. I know nothing changed with capital allocation priorities. I was just wondering if you could comment what type of factors would drive it to the higher end of the range and the lower end of the range outside of, obviously, the right acquisition? Kim Dang -- President Yeah. So I mean, here's what I'd say is if we see an acquisition or there's some huge expansion opportunity that could result in leverage going up for a period of time. If there are periods of time when there's less opportunity. Obviously, we produce tremendous amounts of cash flow, and then you could create capacity on the balance sheet for a period of time until more opportunity came along. And so that's why the range it gives us the flexibility to move up and down inside that range, depending on what the environment looks like. Dan Lungo -- Bank of America Merrill Lynch -- Analyst Thanks. Very clear. And then does this change anything in regards to how the rating agencies view you? Obviously, you've been operating like this for a while. So I don't think it will, but just any comments around what the agencies have said to you guys? David Michels -- Chief Financial Officer I don't want to speak for the agencies, but I do think it matters that 4.5 being our previous target was viewed somewhat by the agencies and certainly by some of our fixed-income investors as where we would like to operate with our leverage over the longer period of time to get up to that 4.5 times. In reality, the way we operated was we operated with some cushion below that, so we think that this leverage target is more in line with the way we've been operating, which is what we've told everyone for a long time. But I think by making this change, I think it will have some impact on the way that the rating agencies view our financial policy, as well as our fixed-income investors. Dan Lungo -- Bank of America Merrill Lynch -- Analyst Thanks. Very clear. Operator And I'm showing no further phone questions at this time. Rich Kinder -- Executive Chairman OK. Well, thank you, all, very much. Have a good evening. Answer:

the quarterly earnings conference call

Operator Welcome to the quarterly earnings conference call. [Operator instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. I'll now turn the call over to Mr. Rich Kinder, executive chairman of Kinder Morgan. Thank you. You may begin. Rich Kinder -- Executive Chairman Thank you, Ted. As always, before we begin, I'd like to remind you that KMI's earnings release today and this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and of course the Securities and Exchange Act of 1934, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosure on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. Before turning the call over to Kim and the team who will report a good quarter at KMI, let me comment on another broader issue. In past quarters, I've talked a lot about the demand for natural gas resulting from this country's LNG export facilities. Today, I want to speak briefly about what I and others in the industry now see as another source of increased demand for our commodity: the tremendous expected growth in the need for electric power. This growth is being driven by a number of factors, most prominently by the increasing demand of new and expanding data centers, especially those required to support AI. One recent survey showed a projected increase in electric demand to power data centers of 13% to 15% compounded annually through 2030. Put another way, data centers used about 2.5% of U.S. electricity in 2022 and are projected to use about 20% by 2030. AI demand alone is projected at about 15% of demand in 2030. If just 40% of that AI demand is served by natural gas, that would result in incremental demand of 7 to 10 BCF a day. Utilities throughout America are sounding the alarm, and one southeast utility announced its expectation that its winter demand would increase by 37% by 2031. PJM Interconnection, which operates the wholesale power market across part of the Midwest and the Northeast, has doubled its 15-year annual forecast for demand growth and estimates that demand in the region by 2029 will increase by about 10 gigawatts. Now to put that in perspective, 10 gigawatts is about twice the power demand of New York City on a typical day. The overriding question is how to handle this increased demand. To answer that question, it's important to understand the nature of the increased demand. It's become increasingly obvious that reliability and affordability are the key factors. The power needed for AI and the massive data centers being built today and planned for the near future require affordable electricity that is available without interruption, 24 hours a day, 365 days a year. This type of need demonstrates that the emphasis on renewables as the only source of power is fatally flawed in terms of meeting the real demands of the market. This is not a knock on renewables. We all know they will play a significant role in the future of electric generation, but it's a reminder to all of us that natural gas and nuclear still have an extremely important role to play in order to provide the uninterrupted power that AI and the data centers will need. The primary user of these data centers is big tech, and I believe they're beginning to recognize the role that natural gas and nuclear must play. They, like the rest of us, realize that the wind doesn't blow all the time. The sun doesn't shine all the time, that the use of batteries to overcome the shortfall is not practically or economically feasible. And finally, that -- unfortunately, adding significant amounts of new nuclear power to the mix is not going to happen in the foreseeable future. In addition to all these factors, the market is now understanding that building transmission lines to connect distant renewables to the grid typically takes years to complete, and that's a time frame inconsistent with the need to place these data centers into service as quickly as possible. All this means that natural gas must play an important role in power generation for years to come. I think acceptance of this hypothesis will become even clearer as power demand increases over the coming months and years, and it will be one more significant driver of growth in the demand for natural gas that will benefit all of us in the midstream sector. And with that, I'll turn it over to Kim. Kim Dang -- President OK. Thanks, Rich. I'm going to make a few overall points, and then I'll turn it over to Tom and David to give you all the details. We had a great quarter. Adjusted EPS increased by 13%. EBITDA was up 7%, and that was driven by strong performance in natural gas and our refined products businesses. This type of growth is tremendous for a stable fee-based set of midstream assets as large as ours. So the balance sheet remains strong. We ended the quarter at 4.1 times debt to EBITDA, and we continue to return significant value to shareholders. Today, our board approved an increase in the dividend of $0.02 per share. This is the seventh year in a row that we've increased the dividend. Our financial outlook of 14% growth in adjusted EPS for the year, as well as the other budget guidance we provided in January, is unchanged. We've seen much lower gas prices than we anticipated this year, but the long-term fundamentals in natural gas remain very strong. Gas demand is expected to grow significantly between now and 2030 with a more than doubling of LNG exports, as well as a 50% increase in exports to Mexico. And that doesn't include the anticipated substantial increase in gas demand from power associated with AI and data centers that Rich just mentioned. Estimates we've seen range anywhere from 3 BCF to over 10 BCF, and we've seen some estimates as high as 16 BCF. With respect to the LNG pause, we do not think it impacts our planned projects or the growth in the LNG market between now and 2030, although it could impact the mix of projects. But we think that is an unwanted -- we think the LNG pause is an unwise decision and bad policy. Our petroleum products business continues to produce very stable cash flow. Volumes are steady, and much of the business has tariff or contract escalators. It will produce nice cash flow for years to come. It's also a capital-efficient business and has some nice growth opportunities around the edges, in product blending, renewable diesel, and other sustainable fuels. Our backlog of projects increased by about $300 million during the quarter due to new natural gas projects added. The backlog on -- the multiple on the backlog remains less than five times. And I also think that we've got significant opportunity to add to the backlog within the next year. In our ETV business, we secured port space in the Houston Ship Channel for CO2 sequestration with capacity to store more than 300 million tons. Significant distance between the emitting source and the sequestration site often challenges CCS economics, and we've secured a very strategically located site. So we had a nice quarter in terms of growth. We continue to expect nice growth for the year. We've got a sound balance sheet. We returned significant value to our shareholders, and we have nice opportunities to invest in the longer term. With that, I'll turn it over to Tom to give you details on the business performance for the quarter. Tom Martin -- President, CO2 and Energy Transition Ventures Thanks, Kim. Starting with the natural gas business unit, transport volumes increased by 2% for the quarter versus the first quarter of 2023, driven primarily by increased flows eastbound on the Rockies interstate pipelines into the Midcontinent Region, the Permian Highway expansion project being placed into service, and increased flows into our -- to our LNG customers in Texas, partially offset by decreased volumes delivered to local distribution companies on the East Coast as we had a warmer winter this quarter compared to the first quarter of 2023. Our natural gas gathering volumes were up 17% for the quarter compared to the first quarter of 2023, driven by the Haynesville and Eagle Ford volumes, which were up 35% and 12%, respectively. Given the low price environment, we are now expecting gathering volumes to average 5% below our 2024 plan but still 7% over 2023, adjusting for asset sales in both cases. We've delayed about 10% of our 2024 budgeted G&P capex spend until supply growth returns, and we view this slight pullback in gathering volumes as temporary given higher production volumes will be necessary to meet the demand growth from LNG expected in early 2025. A quick update on our newly acquired South Texas midstream assets and our Texas intrastate market. The integration of the assets and personnel is going well. We are progressing some of the upside opportunities that we assumed in the acquisition sooner than expected. We feel very good about the long-term earnings expectation and valuation multiple for the acquisition. Our experience in other acquisitions has been that we tend to achieve more value over time than we originally expected from acquiring assets that are highly integrated with our existing network. We are already seeing evidence of that with these assets. In our products pipeline segment, refined product and crude and condensate volumes were down 1% for the quarter versus 2023. Gasoline volumes were down 3%, partially offset by an increase in diesel and jet fuel, 2% and 1% increases, respectively. RD volumes flowing through our assets in California continue to grow. We averaged 37,000 barrels a day for the quarter, and we're exploring opportunities to expand our RD capabilities in the Pacific Northwest. Our terminal segment -- our liquids lease capacity remains high at 95% -- 94%. Utilization at our key hubs at the Houston Ship Channel in the New York Harbor remained very strong, primarily due to favorable blend margins. Our Jones Act tankers are 100% leased through 2024 and 92% leased through 2025, assuming likely options are exercised. The CO2 business segment experienced 4% lower oil production volumes, 9% higher NGL volumes, and 7% lower CO2 volumes in the quarter versus the first quarter of 2023. With that, I'll turn it over to David Michels. David Michels -- Chief Financial Officer OK. Thank you, Tom. So for the first quarter of 2024, we're declaring a dividend of $28.75 per share, which is $1.15 per share annualized, up 2% from 2023. For the quarter, we generated revenues of $3.85 billion, which was down $38 million from Q1 of 2023. Our cost of sales was down $108 million, so our gross margin increased 3%, which explains most of the 2% growth in our operating income. Equity from earnings -- excuse me, earnings from equity investments is up $78 million, but $65 million of that was due to a noncash impairment we took in the first quarter of last year. We saw year-over-year growth from our natural gas, products, and terminals businesses. The main drivers of that growth came from project contributions, growth project contributions placed in service across each of those business units, as well as from additional contributions from our acquired South Texas midstream assets. We also had higher margins on our natural gas storage assets and higher volumes on our natural gas gathering systems. Interest expense was up due to a higher short-term debt balance due, in part, to the South Texas acquisition, and we generated net income attributable to KMI of $746 million and EPS of $0.33, both up 10% from Q1 of last year. On an adjusted net income basis, which excludes certain items, we generated $758 million, up 12% from Q1 of last year, and we generated adjusted EPS of $0.34, up 13% from last year, so nice growth, as Kim mentioned. Our average share count reduced by 27 million shares or 1% due to our share repurchase efforts, and our DCF per share was $0.64, up 5% from last year. Our first quarter DCF was impacted by higher cash taxes and sustaining capex, but that is due to timing of our cash tax payments and maintenance projects. We expect cash taxes to be favorable for the full year and sustaining capital to be in line with our budget for the full year. On our balance sheet, we ended the first quarter with $31.9 billion of net debt, which increased $94 million from the beginning of the year. And here is a high-level reconciliation of that increase. We generated $1.189 billion of cash flow from operations. We paid $630 million in dividends, and we spent about $620 million in total capital, including growth sustaining and contributions to our joint ventures. Finally, as you can see in our press release, we are adjusting our long-term leverage target from around 4.5 times to a range of 3.5 to 4.5 times. We've been operating near the midpoint of that range for several years, and we believe this range is the appropriate long-term guidance for a company like ours that has significant scale and a high-quality business mix, which produces stable cash flows backed by multiyear contracts. And now with that, back to you, Kim. Kim Dang -- President OK. Ted, if you would open it up for Q&A, and we'll take the first question. Questions & Answers: Operator [Operator instructions] The first question is from John Mackay with Goldman Sachs. Your line is open. John Mackay -- Goldman Sachs -- Analyst Hey, good afternoon, everyone. Thank you for the time. Maybe we'll start on the leverage target because I know that's been a focus for a while. Would love just to hear a little bit more on the decision process to bring it down. And then if we're looking forward relative to how you guys have been operating last few years, what are the kind of practical outputs you could say or decisions you'll make internally with this new target? Thanks. David Michels -- Chief Financial Officer Sure. So we started assessing this when our actual operating leverage started gravitating further away from the target leverage of 4.5 times. The budget for 2024 has us at 3.9 times. So that's when we started assessing it. The timing of the change doesn't really have any -- there's no magic to why we're changing it now, except for that slight difference and gravitating away from the 4.5. The practical implications of this change are really -- we're not changing the way that we operate our company. We've always kind of had the leverage target of 4.5 but viewed having some cushion below that 4.5 as valuable. We think that this 3.5 to 4.5 is more reflective of where we've been operating and how we'll continue to operate the company going forward. Kim Dang -- President Well, I would just reiterate what David said. It's just bringing our policy in line with the way that we run the business, and so there is no change to our overall capital allocation philosophy. John Mackay -- Goldman Sachs -- Analyst All right. Appreciate that. And maybe shifting gears, you obviously started on the big demand ramp we're hoping to see on the power gen side. Talk through the -- you guys talk through the macro really Well. Maybe what I wanted to ask on is just tying that to the micro side if we're looking at Kinder over the next couple of years, where do you see the biggest opportunities for you guys specifically? Kim Dang -- President Well, I think it's pretty early in all of this, and so I think Rich laid out really well sort of what we expect to happen in that market. But if you look right now, I think we serve roughly 20% of the power market in the U.S. And so I think we would -- and that's of the overall power market. This will have -- this will primarily be focused, we think, on gas because of what Rich said with respect to -- you need consistent power or it could have some renewable aspect with gas backup. I think nuclear just will take too long to develop given when we expect this demand to happen. So we move 40% of the gas in the U.S., and so we would expect to realize a significant portion of this opportunity. But putting an exact number on that right now is very difficult because we still don't even know exactly how much the demand is going to be, as you can see from the range of numbers that we discussed here earlier. Rich Kinder -- Executive Chairman If you just look at overall demand, we've been talking about for months and years, calibrating the demand for LNG export and how much that adds, this is another leg to the stool, really. And whether it's 5 BCF a day or 10 BCF a day, we don't know. But it's clearly going to be another leg to the stool in terms of natural gas demand. And I think it will tend to be located near reliable electric generation because if you're a Microsoft or a Google, you want that power as close to your facility as possible. Tom Martin -- President, CO2 and Energy Transition Ventures Yeah. I guess one other additional point there, just if you look at the scale of our network across the country, natural gas, I think that gives us a great opportunity to serve this market wherever it develops. And I think our reach is unparalleled in the sector. John Mackay -- Goldman Sachs -- Analyst All right. I appreciate all that. Thank you very much. Operator Next question in the queue is from Michael Blum with Wells Fargo. Your line is open. Michael Blum -- Wells Fargo Securities -- Analyst Thanks. Good afternoon, everybody. I wanted to ask about the Permian West Texas. Obviously, prices have been negative of late. And I'm wondering if you can just remind us uh, if there's a benefit there to you. Is there any negative impact just overall how those uh low prices are impacting you? Rich Kinder -- Executive Chairman Yeah. So just first, the price macro here at this point in time -- or micro is purely a result of that. This warm winter that we had, I wouldn't normally be this way. I'm not trying to predict pricing. That being said, on the intrastate markets, we do share in some of that upside with some of our proprietary storage that we hold. And so that's where we see some of the benefit. It's obviously -- longer term, we've been saying this for some time, there's -- we see a need for another pipe, and I'll just nip it in the bud. While I'm talking to you, we don't have anything to announce today, but we continue to try and work on trying to commercialize another pipe, still having discussions with customers along those fronts, but nothing to report this morning -- this afternoon. Kim Dang -- President We've got a little bit of capacity on PHP and GCX. We've hedged a lot of that for this year, but there's a little bit open. But as you go out in time, more of that capacity is open. So we participate, I'd say, around the margin when those spreads blow out. So that delivers a little bit of benefit to our shareholders. Michael Blum -- Wells Fargo Securities -- Analyst Great. And then maybe if I can just push on that. So you said you're still working on a project, nothing to announce. Is that more likely to be something like Permian Pass? Or do you think something more like GCX expansion could happen or both? Rich Kinder -- Executive Chairman Well, look, we continue to try and commercialize both. As I said the last time, highly competitive. We think there's a need. It's just -- it's a matter of making sure we have the contract to support the investment. Michael Blum -- Wells Fargo Securities -- Analyst Great. Thank you. Operator And the next question in the queue is from Jeremy Tonet with J.P. Morgan. Your line is open. Jeremy Tonet -- J.P. Morgan -- Analyst Hi. Good afternoon. Rich Kinder -- Executive Chairman Hi, Jeremy. Jeremy Tonet -- J.P. Morgan -- Analyst Just want to come back to the gathering volumes as you laid out it seems coming in a bit below budget there. I was wondering if you could dive in a little bit more by basin where you see those volumes coming in softer than budget? Tom Martin -- President, CO2 and Energy Transition Ventures From a budget perspective, yeah, it's slightly below budget in the Eagle Ford and the Bakken those are well -- and even a little bit in the Haynesville overall but still good growth year over year. And like I said earlier, I think this is a temporary blip and development of the production because as demand picks up next year, we're certainly going to need all these volumes and more to meet that demand. Jeremy Tonet -- J.P. Morgan -- Analyst Got it. That's helpful there. And I was just curious, I guess, from a higher-level thought process. We've seen some large-cap peers out there look to kind of separate the business along commodity lines, such as natural gas versus crude oil. And just wondering how Kinder thinks about the business today, be it the natural gas pipes versus the terminals versus the CO2, if you still see the same synergies of having it all under the same roof or how you think about that in the current environment? Kim Dang -- President Sure. I mean, all the businesses that we own and operate, we like. We think they provide stable cash flow and good opportunities. I think that really -- we could simplify it a little bit for you. I mean, if you put products and terminals together since they're both primarily refined products, we'd have essentially three different commodity lines. We have natural gas. We'd have petroleum products, and we have the CO2. I think on CO2, that oil production is going to be needed for a long time. There's going to be incremental opportunities for CO2 flooding in the Permian as you get through all the primary production, and I think that business gives us the expertise that we need to exploit the CCS business. And so the reservoir engineers that we use in that business help us as we go out and talk to customers and talk to them about sequestering their gas and being able to keep it in certain reservoirs. And so the businesses we own and operate, we think, are similar in that they are stable fee-based assets they are – or to the energy infrastructure. And we will continue to operate the asset, somebody coming in and offering to buy them at a great price, in which case, we are highly economic, and we would entertain that. But I think, absent getting a wonderful price for our shareholders, we are happy with the businesses that we own. Jeremy Tonet -- J.P. Morgan -- Analyst Got it. Understood. Thank you. Operator Next question is from Neal Dingmann with Truist Securities. Your line is open. Kim Dang -- President Hi, Neal. Rich Kinder -- Executive Chairman Good afternoon, Neal. Operator Neal, if you're there, please check your mute button. Neal Dingmann -- Truist Securities -- Analyst Sorry about that. Good afternoon, Kim. My question is on shareholder return given the new plan for, I guess, the modified plan, I'd say, for the leverage. Will that change anything with these thoughts toward dividends and buybacks on a go forward? Kim Dang -- President No. It has – and let me say this again so that it is clear to everybody. This change is just bringing our policy in line with the way that we have operated over the last couple of years. There is no -- zero change in our capital allocation philosophy. Neal Dingmann -- Truist Securities -- Analyst Very clear. And then just a quick follow-up on the -- I think I got that one on the -- exit midstream assets, I'm just wondering, is that kind of going as you had thought? Maybe just talk about integration and potentially even maybe more upside than expected. It seems like it's going quite well. Kim Dang -- President South Texas? Tom Martin -- President, CO2 and Energy Transition Ventures Yeah. So I mean, early days, obviously. But yeah, we are seeing some of the commercial and development opportunities that we were contemplating when we made the acquisition. We're seeing those opportunities come together sooner than we originally expected. Some of those were out even several years from now. I think we may see something even sooner than that late this year or next year on some of those opportunities. But yeah, on the other side, we are seeing slightly lower volumes this year to start with, again, given the lower-price environment. But overall, we feel we're going to be on our acquisition model for 2024 and beyond. Neal Dingmann -- Truist Securities -- Analyst Thanks for the detail. Operator And the next question is from Keith Stanley with Wolfe Research. Your line is open. Keith Stanley -- Wollfe Research -- Analyst Hi, good afternoon. Just one question on the backlog. So you increased the $300 million. I think you said you brought on -- added some gas projects, just -- I'm not sure if other projects came into service and maybe it's even more than $300 million. Just give more color on what projects you added. Was there anything notable on that? And then a follow-up, Kim. Kim Dang -- President We added, Keith, about $400 million, and we put $100 million of projects in service to get to the $300 million net additions. And on the projects that we added and gas, we added one interstate projects on TGP. We added an intrastate lateral project on the Texas Intrastate and we added a pipeline Egress project in Altamont, which is on the gathering and processing side. Keith Stanley -- Wollfe Research -- Analyst Got it. That was all from me. Thank you. Operator And the next question in the queue is from Theresa Chen with Barclays. Your line is open. Theresa Chen -- Barclays -- Analyst Good afternoon. Thank you for taking my questions. I'd like to touch on the theme of increased demand for power related to AI and data centers. Just curious if you had any early discussions with customers as far as the steps it would take to commercialize these activities, these potential projects on your system and what that could look like. Sital Mody -- President, Natural Gas Pipelines Yeah. So this is Sital Mody. Just to-I'll give you a micro example of something we're working on in the southeast. We've got data center looking to connect to our system. As Rich alluded to, reliability is very important. Not only are they looking for reliable power supply, the power provider itself is looking for incremental capacity. And on top of that, the data center is looking for incremental storage to backstop the intermittency of their backup power generator to the effect that it's not available. So that's an example of something we're looking at in terms of the broader themes. I think they're looking for access to reliable power. They're looking for access to obviously large populations and land, and then water is important for cooling purposes. So those are kind of some of the themes in our discussions. But specifically, that's a good example of something we're working on in the Southeast. Theresa Chen -- Barclays -- Analyst Thank you, Sital. And, Kim, to your earlier comment about significant opportunities to add to the backlog within the next year or so, is that referring to an Egress solution out of the Permian? Is there more to that comment? If you could help us unpack, that would be great. Kim Dang -- President Sure. So I think it just -- it refers to a broad set of opportunities that we're looking at. And so that is on the supply side. There could be things around Haynesville. We talked about already on this call, coming out of the Permian, there is opportunities coming out of the Eagle Ford as all these basins are going to have to ramp up. Just to get to the 20 BCF of growth that we've been talking about before, you add on top of that, what all the data center and AI demand growth numbers that we talked about. So it is supply to the southeast. It's LNG on the demand side. It's the industrial growth on the demand side. It is LNG potentially on the West Coast. It's market power growth out in the west. It's power growth in Mexico on the West Coast. So I mean, there's a whole bunch of fundamental factors that are driving this, and I think what we're seeing is that the opportunity set has grown. And so -- but we are to the point of commercialization of the opportunity set. We won't get all the things that we're looking at. But I think that once you start looking at larger opportunity sets, over time, we're going to add those to the backlog. And so I think some of these opportunities are going to come to fruition within the next year, and that's really what's behind my comments. Theresa Chen -- Barclays -- Analyst Thank you. Operator And the next question is from Dan Lungo with Bank of America. Your line is open. Dan Lungo -- Bank of America Merrill Lynch -- Analyst Hi, guys. Thank you for taking my question. I just want to turn back to the leverage target real quick. I know nothing changed with capital allocation priorities. I was just wondering if you could comment what type of factors would drive it to the higher end of the range and the lower end of the range outside of, obviously, the right acquisition? Kim Dang -- President Yeah. So I mean, here's what I'd say is if we see an acquisition or there's some huge expansion opportunity that could result in leverage going up for a period of time. If there are periods of time when there's less opportunity. Obviously, we produce tremendous amounts of cash flow, and then you could create capacity on the balance sheet for a period of time until more opportunity came along. And so that's why the range it gives us the flexibility to move up and down inside that range, depending on what the environment looks like. Dan Lungo -- Bank of America Merrill Lynch -- Analyst Thanks. Very clear. And then does this change anything in regards to how the rating agencies view you? Obviously, you've been operating like this for a while. So I don't think it will, but just any comments around what the agencies have said to you guys? David Michels -- Chief Financial Officer I don't want to speak for the agencies, but I do think it matters that 4.5 being our previous target was viewed somewhat by the agencies and certainly by some of our fixed-income investors as where we would like to operate with our leverage over the longer period of time to get up to that 4.5 times. In reality, the way we operated was we operated with some cushion below that, so we think that this leverage target is more in line with the way we've been operating, which is what we've told everyone for a long time. But I think by making this change, I think it will have some impact on the way that the rating agencies view our financial policy, as well as our fixed-income investors. Dan Lungo -- Bank of America Merrill Lynch -- Analyst Thanks. Very clear. Operator And I'm showing no further phone questions at this time. Rich Kinder -- Executive Chairman OK. Well, thank you, all, very much. Have a good evening.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Ladies and gentlemen, thank you for standing by, welcome to the Q4 fiscal year 2024 CarMax earnings release conference call. Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, David Lowenstein, AVP, investor relations. Please go ahead. David Lowenstein -- Assistant Vice President, Investor Relations Thank you, Shelby. Good morning, everyone. Thank you for joining our fiscal 2024 fourth-quarter earnings conference call. I'm here today with Bill Nash, our president and CEO; Enrique Mayor-Mora, our executive vice president and CFO; and Jon Daniels, our senior vice president, CarMax Auto Finance operations. Let me remind you our statements today that are not statements of historical fact, including statements regarding the Company's future business plans, prospects, and financial performance are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our annual report on Form 10-K for the fiscal year ended February 28, 2023, previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804-747-0422 extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill? Bill Nash -- President and Chief Executive Officer Great. Thank you, David. Good morning, everyone, and thanks for joining us. We're encouraged by the performance of our business during the fourth quarter. We're continuing to leverage our strongest assets, our associates, capabilities, experience, and culture to build momentum as we manage through the cycle. While affordability of used cars remains the challenge for consumers, pricing improved during the quarter. We continue to achieve efficiency improvements in our core operations and believe we are well-positioned to drive growth as the market turns. In the fourth quarter, we posted our fifth consecutive quarter of sequential year-over-year retail used unit improvement and reported growth in total used unit sales and comps. We delivered strong retail and wholesale GPUs. We increased used saleable inventory units more than 10%, while holding used total inventory units flat year over year. We continue to actively manage our SG&A and we grew CAF income significantly as we delivered a substantial reduction in the provision for loan losses year over year, while maintaining stable net interest margins sequentially. For the fourth quarter of FY '24, our diversified business model delivered total sales of $5.6 billion, down 2%, compared to last year. This was driven by lower retail and wholesale prices and lower wholesale volume, partially offset by higher retail volume. In our retail business, total unit sales increased 1.3% and used unit comps were up 0.1%. Average selling price declined approximately $600 per unit for 2% year over year. Our market share data indicates that our nationwide share of zero to 10-year-old used vehicles declined from 4% in calendar '22 to 3.7% in 2023 as we prioritized profitability over near-term market share growth. As always, we continue to test price elasticity to validate our decisions. External title data shows that our market share initially accelerated relative to our performance across the second half of 2022, but then came under pressure during multiple periods of steep depreciation. We remain confident in our ability to accelerate market share growth as used vehicle affordability continues to improve and as the volatility of vehicle value stabilizes. Fourth-quarter retail gross profit per used unit was $2,251, relatively consistent with last year's fourth-quarter record of $2,277. Wholesale unit sales were down 4% versus the fourth quarter last year. Average selling prices declined approximately $250 per unit, or 3% year over year. Fourth-quarter wholesale gross profit per unit was $11.20, slightly down from $1,187 a year ago. As a reminder, last year's fourth-quarter wholesale GPU was within $4 of our all-time record and benefited from appreciation and strong dealer demand, particularly at the end of last year's quarter. This prior year appreciation dynamic impacted our year-over-year performance and buys as well. We bought approximately 234,000 vehicles during the quarter, down 11% from last year. Of these vehicles, we purchased approximately 213,000 from consumers, with slightly more than half of those buys coming through our online instant appraisal experience. With the support of our Edmond sales team, we sourced the remaining approximately 21,000 vehicles through dealers up 45% from last year. For our fourth quarter online metrics, approximately 14% of retail unit sales were online consistent with last year. Approximately 55% of retail unit sales were omni sales this quarter, up from 52% in the prior year. All of our fourth-quarter wholesale auctions and sales were virtual and are considered online transactions. This represents 17% of total revenue. Total revenue from online transactions was approximately 30% in line with last year. CarMax Auto Finance or CAF delivered income of $147 million, up 19% from $124 million during the same period last year. John will provide more detail on consumer financing, the loan loss provision, and CAF contribution in a few minutes. But at this point, I'd like to turn the call over to Enrique, who will provide more information on our fourth-quarter financial performance. Enrique? Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in our used unit sales with strong per-unit margins for both used and wholesale and strong CAF contribution growth, while staying focused on managing SG&A. With quarter net earnings per diluted share was $0.32 versus $0.44 a year ago. Last year's quarter benefited from an $0.08 tailwind due to the receipt of Extended Protection Plan, or EPP, profit-sharing revenues, as well as $0.04 from a lower tax rate, compared to a more normalized tax rate this quarter. Total gross profit was $586 million, down 4% from last year's fourth quarter. Used retail margin of $387 million was flat, with higher volume partially offset by a slightly lower per-unit margin. Wholesale vehicle margin decreased by 9% to $129 million, with a decrease in volume and per unit margin, compared to last year. Other gross profit was $69 million, down 15% from a year ago. This decrease was driven primarily by last year's receipt of $16 million in profit-sharing revenues from our EPP partners. As noted on our third-quarter call, we did not expect to receive profit-sharing revenues this year as our partners experienced inflationary pressures and consumers returned to more normalized driving patterns. Partially offsetting this dynamic was the positive impact from price elasticity testing on our extended service product. During the quarter, we tested raising MaxCare margins per contract sold, which resulted in a slight decrease in product penetration, while driving overall profitability. We are encouraged by these results, and we have rolled out the margin increase nationally. Our expectation is that this action will drive approximately $20 per retail unit of incremental EPP margin in FY '25. Service decreased by $4 million, as compared to last year's fourth quarter. This decrease was primarily driven by wage pressures and planned lower production in the quarter as we pre-built inventory in the third quarter, due to holiday timing. For the full-year service improved by $75 million year over year. Our expectation is that we will continue to see significant year-over-year favorability in FY '25. The extent of this improvement will be governed by sales performance given the leverage, de-leverage nature of service. Third-party finance fees were down $3 million from a year ago, driven by higher volume in Tier 3 for which we pay a fee, and lower volume in Tier 2 for which we receive a fee. On the SG&A front, expenses for the fourth quarter were $581 million, up 1% from the prior year's quarter. Our continued discipline in spend and investment levels allowed us to come in flat year over year when excluding share-based compensation. As a reminder, in the fourth quarter, we passed the year mark since initiating our significant cost management efforts. SG&A dollars for the fourth quarter versus last year were mainly impacted by three factors. First, other overhead decreased by $16 million. This decrease was driven primarily from reductions in spend for our technology platforms and from the continued favorability in non-CAF uncollectible receivables. Second, total compensation and benefits increased by $7 million, excluding an $8 million increase in share-based compensation. This increase was mostly driven by a higher corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase as communicated last quarter due primarily to the timing of per unit spend. For full-year FY '24, we strongly outperformed the target we set out at the beginning of the year of requiring low-single-digit gross profit growth to lever SG&A, even when excluding the benefits from this year's legal settlements. Our ability to materially drive SG&A costs down year over year was led by favorability and non-CAF uncollectible receivables that reflects improved execution at our stores, at our corporate offices, and by external partners. Our focus on driving efficiency gains in our stores and CECs, the planned reduction of technology spend and by aligning staffing levels and marketing spend to sales. In FY '25, we expect to require low-single-digit gross profit growth to lever SG&A, when excluding FY '24's favorable legal settlements. This reinforces our pathway back to a lower SG&A leverage ratio with our initial goal of returning to the mid-70% range over time once we see healthier consumer demand. We anticipate that SG&A will be pressured in the first quarter. As a reminder, we received $59 million in illegal settlement during the first quarter of FY '24. Additionally, in this year's first quarter, we expect an approximately $25 million impact due to share-based compensation for certain retirement eligible executives and a lapping of favorable reserve adjustments related to non-CAF uncollectible receivables during last year's first quarter. With regard to marketing going forward, we plan to speak to our spend on a per-total unit basis, inclusive of total retail and wholesale units. We believe this more holistically reflects the impact of our marketing initiatives, which support both vehicle sales and buys. In FY '25, we expect full-year marketing spend on a total unit basis to be similar to FY '24 at approximately $200. Regarding capital structure, during the quarter we repurchased approximately 686,000 shares for a total spend of $49 million. Starting in the first quarter, we intend to modestly accelerate the pace of our share repurchases above the pace that we implemented in our third quarter of fiscal year '24. As of the end of the quarter, we had $2.36 billion of repurchase authorization remaining. For capital expenditures, we anticipate an investment level between $500 million to $550 million, up from the $465 million in FY '24. The year-over-year increase in plan spending is primarily related to the timing of spend for new stores. Like in FY '24, the largest portion of our capex investment remains related to the land and the buildout of facilities for long-term growth capacity and offsite reconditioning and auctions. In FY '25, we plan to open five new store locations. Consistent with our strategy, these new locations will be smaller cross-functional stores that complement our omnichannel strategy and leverage our scale. We also plan to open our second stand-alone reconditioning facility, which will be located in Richmond, Mississippi, as well as one offsite auction location in the Los Angeles metro market. We currently expect to open multiple offsite reconditioning and auction locations in FY '26. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax. Now I'd like to turn the call over to Jon. Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Thanks, Enrique, and good morning everyone. During the fourth quarter, CarMax Auto Finance originated approximately $1.8 billion, resulting in sales penetration of 42.3% net of three-day payoffs, which was down 240 basis points from the same period last year. The weighted average contract rate charged to new customers grew to 11.5%, an increase of 60 basis points from the last year's fourth quarter and 20 basis points sequentially. Tier 2 penetration in the quarter was 18.2%, down from 19.4% observed during last year's fourth quarter. Tier 3 accounted for 8.2% of sales, up 130 basis points from last year, as a partner began to ease previously implemented tightening. Also impacting each of these year-over-year results is CAF's continued decreased percentage in Tier 3, as well as the increased test volume in Tier 2. CAF income for the quarter was $147 million, up $23 million from the same period last year. This improvement was primarily driven by a $26 million year-over-year reduction in the provision for loan losses, slightly offset by a $3 million reduction in total interest margin. Note fair market value adjustments from our hedging strategy accounted for $4 million in expense this quarter versus $1 million of income in last year's fourth quarter. The $72 million provision within the quarter resulted in a reserve balance of $483 million or 2.78% of receivables, compared to 2.92% at the end of the third quarter. This highlights the significant impact that originations under our tightened credit policy are having on the Reserve as they continue to become a larger percentage of the full portfolio. In addition, observed performance within the portfolio aligned closely to our reserve expectations at the end of the third quarter and contributed to the reduction in the reserve. The margin to receivable rate of the portfolio remained steady at 5.9% for the quarter. We remain pleased with our ability to maintain a stable interest margin despite keeping our credit tightening in place. As I noted earlier, CAF continues to test across varying parts of the credit spectrum. Ultimately, CAF is building the capability to scale its participation across all credit Tiers, which will help to capture finance economics, drive sales, and fully complement our valued lending partnerships that are a key foundation of CarMax's best-in-class credit platform. Now I'll turn the call back over to Bill. Bill Nash -- President and Chief Executive Officer Thank you, Jon and Enrique. Fiscal 2024 was a challenging year across the used car industry as vehicle affordability and widespread macro factors continue to pressure sales. In response, we focused on what we could control and took deliberate steps to support our business both the near-term and long run. In addition to achieving the efficiencies across our entire organization that Enrique talked about, I am proud of the progress we've made in further enhancing our omnichannel capabilities as we prioritize projects designed to optimize experiences for our associates and customers and drive operating efficiencies. Some examples include, for retail, we leverage data science, automation, and AI to make it even easier for customers to complete key transaction steps like vehicle transfers on their own. We also enhance digital checkout functionality for appraisal customers, enabling them to submit their documents remotely and unlocking their ability to participate in our 30-minute express drop-off experience. Additionally, we expanded capabilities for Sky, our 24/7 virtual assistant, to include managing finance applications, vehicle transfers, appointment reservations, and appraisal offers. Customer adoption of Sky has been strong, and this has not only created efficiencies, but also widened bandwidth for our associates. For wholesale and vehicle acquisition, we modernized our auction platform to offer new services, including single sign-on across all of our systems, AI-enhanced condition reports, early bidding capabilities, and automated bills of sale. Additionally, we streamline Max offer by rolling out our instant offer experience to all participating dealers. In the credit space, we have now incorporated all of our lenders into our finance-based shopping platform, expanding the breadth and depth of offers available to our customers. We continue to see great adoption with more than 80% of the consumers utilizing the best-in-class pre-qualification product as they begin the credit process. Finally, Edmunds launched a number of research and buy tools in support of its goal to be the leader in EV research. These include range tests, charging efficiencies, VIN-level battery health assessments, and EV tax credit incentive guides. Looking ahead to fiscal 2025, we will build on our progress from last year to further expand our competitive mode. We are confident that the actions we are taking will enable us to grow sales, profitable market share, and buys while also driving additional operational efficiencies as the market turns. Some examples include, for retail we plan to launch an evolved hub within our customers' online shopping accounts that will make it even easier to seamlessly go back and forth between assisted help and self-progression. Customers will be able to see the steps they have taken on their shopping journey, whether on their own or with help from a CEC or store associate. The hub will also guide next steps and promote MaxCare, our extended service plan offering. Additionally, we will continue to digitize work in support of our focus to build a leaner and high-value assistance model for our CECs. This will enable existing resources to support higher transaction volume as we grow traffic and drive stronger conversion. As part of this effort, we will further integrate Sky into key communication channels and prove its ability to serve as the initial point of contact across many points in the customer's shopping journey. Sky will manage next steps on its own or seamlessly transition customers to a CEC associate via the customer's channel of choice. For vehicle acquisition. we'll focus to bring even more vehicles into our ecosystem. A key component of this will be our continued partnership with Edmunds to acquire vehicles from dealers. In the credit space, we plan to further optimize our prequalification product by integrating the customer's instant offer into the application process. As Jon mentioned, we will also continue to test CAFs participation across varying parts of the credit spectrum. As always, we will continue to pursue opportunities that enable us to provide outstanding offers for consumers, while driving sales and economics for the business. In regard to our long-term financial targets, we're maintaining our goal to sell more than 2 million combined retail and wholesale units annually. However, we are extending the timeframe for this goal between fiscal 2026 and fiscal 2030, due to the uncertainty in the timing of the market recovery and as we continue to focus on profitable market share growth. We will adjust the timeframe as we gain greater visibility into the industry's pace of recovery. Given higher average selling prices, we expect to achieve the $33 billion annual revenue target sooner than units. And similarly, we also expect to achieve more than 5% nationwide market share of zero to 10-year-old used vehicles sooner than units. Given the recent volatility in vehicle values, we will provide an updated timeframe for our expected achievement at the end of fiscal year 2025. Before turning to Q&A, I want to recognize two significant milestones. First, CarMax celebrated its 30th anniversary during fiscal 2024. I want to thank and congratulate all of our associates for the work that they do. They are the differentiator and the key to our success. Second, Fortune magazine recently named CarMax as one of the 100 best companies to work for, for the 20th year in a row. I'm incredibly proud of this recognition, particularly as we face a challenging year. It's due to our associates' commitment to supporting each other, our customers, and our communities every day. In closing, I'm proud of the progress we've made on our journey to deliver the most customer-centric experience in the industry. I'm encouraged by the sequentially quarterly improvements. We're driving across our business, and I'm excited about our focuses for fiscal 2025. Our core operations are strong and we are well-positioned to drive growth as macro conditions improve. With that, we'll be happy to take your questions. So Shelby? Questions & Answers: Operator [Operator instructions] And your first question comes from the line as Seth Basham with Wedbush Securities. Your line is open. You may now ask your question. Seth Basham -- Wedbush Securities -- Analyst Thanks a lot. I have one quarterly specific question and one big picture question. On the quarter, it seems like service gross profit was weaker than we anticipated. Can you help us understand how much of that pressure was transitory and how much improvement we should see in the service line in 2025? Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yes. Thanks. Thanks a great question. You know we do believe it was transitory. We did have a couple things from a year-over-year standpoint. The planned lower production that we had communicated. So we did expect some headwinds there in the fourth quarter. We also had some wage pressures. Now that being said, we have undertaken in the fourth quarter, which will carry forward into next year, is even more efficiency initiatives, things and for labor specifically. We've invested in RFID tracking of inventory. We're going to leverage our tech and engineering investments to enhance reporting in our stores. We're focused on driving more MaxCare work to our shops and at the same time we've also taken labor and parts rates up to help offset inflationary pressures. So we do expect to see improvement, significant improvement year over year just like we deliver this year the significant improvement for the year as a whole and we expect that same next year. Now it is also certainly related to sales performance as well given the leverage, deleverage nature of service. Seth Basham -- Wedbush Securities -- Analyst Understood. Thank you for that color. And then secondly Bill, in regards to market share, you indicated on your last call that you started to see an improvement in market share toward the end of the fiscal third quarter. Seems like things slipped a little bit in the fourth quarter. Help us understand why and when should we expect to see market share increases going forward as the cycle turns? Bill Nash -- President and Chief Executive Officer Yeah. Great question Seth, and you're right. Last quarter I talked about October from a year-over-year standpoint actually inflecting positive, but also during the quarter -- third quarter I talked about the steep depreciation. It was going to be interesting to see how competitors reacted. When I step back and think about market share kind of at the highest level. The two things that have been impacting us this year, and really some of it was last year as well, are affordability and then more relevant to this year is the steep depreciation periods that we've seen. So from the affordability standpoint, we've talked about that throughout the year as far as consumers may be trading down, trading into older vehicles, into zero to 10-year-old cars that maybe we don't sell, or just basically standing on the sidelines, because we see that there's demand out there yet people aren't actually pulling the trigger. The other thing that we saw during the year, we saw two very steep depreciation cycles. If I look at last year's calendar year and I talked about it in my prepared remarks. We were growing market share coming out of -- we were improving our market share coming out of last year. And then we ran into a period, let's call it four or five months, of steep depreciation starting in about April, and it was about $3,000. Then it stabilized for a little bit, and then we finished out the year with, again, another steep depreciation, probably the steepest we've seen in the shortest period of time, about another $3,000. And As we've talked about before, when we see the steep depreciation, that's really when we're testing our pricing elasticity, because we know that competitors, for their own reasons and for their business models, may end up taking down prices to move inventory, that kind of thing. And what we've said is we're going to continue to move forward on profitable market share growth. So I think what we saw in the fourth quarter, dealers were trying to figure that out in October, because a year ago, if you remember, we saw steep depreciation. There was a big influx of where we saw dealers letting inventory go. And then what happened in the beginning of the first quarter, they ended up buying a bunch of cars because they had sold through too much and that drove up appreciation. So I think this year, dealers were a little bit delayed, which is why you saw a little bit of an inflection in October. But then we saw a sell-off in November and December. The good news is that the January data we have, we can actually see where we're improving our market share in January. February, we don't have the actual data yet, but we feel good about February. So I think from a market share standpoint, this value volatility can be challenging and we'll continue to work and that's one of the reasons why we want to see how this kind of pans out over this year before we update that target. So hopefully that color is helpful. Operator And we'll take our next question from Sharon Zackfia with William Blair. Your line is open. Please ask your question. Sharon Zackfia -- William Blair and Company -- Analyst Hi. Good morning. I guess two questions and hopefully, you guys will forgive me. But on the improved affordability, can you give us some metrics around that? I mean, it's clear that new car prices are coming down and hopefully rates are toppish. So what was kind of an average loan payment that you originated this quarter versus maybe the third quarter or some historical benchmark just to give us an idea of how that's improving for the customer? And then secondarily, just on that market share dynamic, is there any region or any particular cohort of demographics that you've been more susceptible to this market share loss as some competitors may have been less rational? Thanks. Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Sure, Sharon. It's Jon here. I'll take the first one on the loan payment. So historically, our average used car was $20,000 forever. So that translated typically, depending on the interest rate, $400 monthly payment. I think that's a good round number to think about. With the appreciation, you saw really a peak probably hit in kind of later, at calendar '22 of about $570, $580. That was -- I think we cited that was primarily driven by that financed amount. I mean, rates were on their way up, but that financed amount really was driving that. So that increase we kind of attributed to maybe an 85-15 split on the financed amount versus the interest rate going up. Now as we've cited, clearly the vehicle prices are coming down. The financed amount is coming down to some degree and rates are going in the other direction. So we probably say this quarter we probably saw roughly a $525, $530 payment. Still two-thirds of that driven by that vehicle price still higher. Now the rates are a bigger contributor, but hopefully, that gives you some perspective on how affordability has improved to some degree. Still a bit of a shock to a consumer that's used to a $400 monthly payment coming in at a $530 monthly payment. They're going to have to figure out how they work that into their budget going forward, but that hopefully gives you some context. Bill Nash -- President and Chief Executive Officer And Sharon, on the second part of your question, not necessarily a difference geographically. We talked about before, your Tier 3 customer, obviously, we have a lot less Tier 3 sales than we've had in the past. Our consumers that make less than $3,000 per month in a household. They've basically been cut in half. So certainly that lower finance customer, lower income coming in customers has been impacted. But we also see, and I talked about this the third quarter just from working with one of the credit bureaus of the folks that don't end up buying, that apply for a loan at CarMax, it's not like we're seeing this big degradation where they're going to somebody else. They're just sitting on the sidelines. And I think part of that speaks to what Jon just spoke about. The other thing I would just remind everybody on the market share is, you know, historically we have always grown market share. It's just when there's been unusual events. You know, if you go back to the great financial crisis, if you go to COVID. And I would say, you know, now in this period we've got these very, very steep depreciations. I mean, we saw two this year, we saw one last year, we've just never seen these before. And so I think working through these, we'll get through them and then like always, we'll continue to grow market share. Operator And we'll take our next question from Rajat Gupta with J.P. Morgan. Your line is open. You may ask your question. Rajat Gupta -- JPMorgan Chase and Company -- Analyst Got it. Great. Thanks for taking the question. I wanted to just quickly ask on -- how the first quarter was trending. Given you exited or you had positive comps in the fourth quarter, should we expect that trend to continue here? You know, because seasonality would imply like comp should move lower or negative again in the first quarter, but curious like what you're seeing and any updates you can give us there? And then just a broader question on the long-term target. It's almost like a four-year range, 2026 to 2030. Could you explain the thought process behind such a wide range? And where is the uncertainty really coming from? Is it on the demand side or is it on supply side? Any more color there would be helpful. Thanks. Bill Nash -- President and Chief Executive Officer Yeah. So thanks for the question, Rajat. On the first question, kind of comp cadence, for the quarter, December, January negative comps, February was a positive comp resulting in a positive for the quarter. Since the quarter ended, it's been a little choppy. We've seen some weakness and right now, quarter to date, albeit early, and again choppy. We're seeing about a mid-single-digit negative comp right now, but again, it's early on and it's been choppy the last month and a half. On the second question, the market -- oh, the long-range targets -- well, keep in mind on the market share, we'll come back at the end of this year and update that. On the units one, yes, you're right, it is a wide range. We're going to come back and provide more visibility into that once we just get a better idea of the market recovery. Keep in mind, I think COGS latest numbers had this year finishing up about 35.5 million units, where traditionally we're at 40 million. And so I think their expectation to ours going to be fairly flat, maybe up a little bit in total used units in the zero to 10, it might be flat to even up a little bit less. So I think you're expecting when it comes to total used units, there's probably more growth in the over 10-year-old vehicles in the zero to 10. And so that's something of -- we want to get some visibility into that, especially when it comes to the units. The volatility also plays into it, though, because it also impacts -- vehicle volatility plays into it because it impacts your buy rate, which ultimately can impact your wholesale. So as we get more visibility into this market recovery, we'll come back and narrow that time frame for you. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yeah. The expectation is not to hit the wide end of that range. Really is we're going to provide visibility once there's just a bit more stability in the market like building. Rajat Gupta -- JPMorgan Chase and Company -- Analyst Just to clarify on the zero to 10-year-old comment. I mean if you look at what's happened with like new car sales the last few years and just users originated on them, is there a chance that the zero to 10-year-old market takes another step down in calendar '25 before turning positive? Because that should be fairly visible, right, given what we know that's happened over the last three, four years? Bill Nash -- President and Chief Executive Officer Yeah. I think the zero -- again, I think the zero to 10, what the estimates are out there is it's going to be flat to up a little bit. So we'll see where that actually pans out. I mean the -- keep in mind, there is a new car dynamic here where less cars were sold a couple of years ago. But again, I would also look back to -- we saw bigger declines back in the great financial crisis. So we'll see estimates are that it's going to be flat to up a little bit. Rajat Gupta -- JPMorgan Chase and Company -- Analyst Great. Thanks for all the color. Bill Nash -- President and Chief Executive Officer Thank you. Operator We'll take our next question from Brian Nagel with Oppenheimer. Your line is open. You may ask your question. Brian Nagel -- Oppenheimer and Company -- Analyst Hey, guys. Good morning. Bill Nash -- President and Chief Executive Officer Good morning, Brian. Brian Nagel -- Oppenheimer and Company -- Analyst This is my first question. With regard to used sales, and maybe a bit bigger picture. But I guess it's much in the business. Look, you got the positive comp, albeit slightly. You got positive used car unit comp here in Q4. And then in response to the prior question, you talked about maybe some incremental weakness here in early Q1? But the question I have is as you're looking at this business, recognizing that you don't give guidance, there's a lot of moving parts out there. What has to happen? Because it seems like a lot of the key factors are starting to turn more favorable for CarMax, whether it be used car pricing moderating, rate stabilization, we're seeing the data, a better tax refund season. So I guess as you look, what's the kind of the equation, if you will, to get back to that normalized used car unit comp? Bill Nash -- President and Chief Executive Officer Yeah. I think we've hit on a couple of the major issues. The affordability has to continue to move down. I was encouraged, I mean this quarter was the first time we've been under a $26,000 average selling price in like two years. So that's a step in the right direction. I think there's a lot of positives out there you referred to like interest -- hopefully interest rates at least stable. And once they start coming down, I think that's certainly a good guide as well. I think building on some of the stuff that we've been working on, the efficiencies that we're working on that we've talked about is the fact that we've got sequential improvement. Jon talked about CAF becoming more of a full-credit spectrum lender. There's opportunity there. I think there's opportunity in omni. I mean we've got a lot of good things that are positive, but we do need a little help on the affordability. And I think we also -- just that volatility, don't underestimate. I mean, when you have a year where you see depreciation of $6,000, keep in mind, we saw some appreciation at the beginning so it offset some of that. But $6,000 really in two different time periods. We just haven't seen that. And we had another of those last year, I would call them, their price corrections. And I think having some visibility into that and stabilizing that. If you get a -- we've shown like continued market share growth over the years, whether it's been appreciation, whether it's been normal depreciation, keep in mind, normally in the end of the year, there is depreciation. It's probably $1,500, $1,600 a year. We've been able to take market share in all those environments. So I think those are the two big factors for us. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer I think a couple of other just demand signals that we've seen. Web traffic was up again this quarter, year over year. Finance applications were up again this quarter. So there's demand signals that we're seeing out there just boils down to like we've been talking about really to the affordability question. Brian Nagel -- Oppenheimer and Company -- Analyst That's very helpful. If I could ask just one follow-up. You've talked now -- forget about tightening lending standard. We're seeing -- we're clearly seeing the benefits of that in the CAF data and particularly, I guess, the loan loss provision. I guess the question I have is to what extent is -- are your -- what potential is that, your tighter lending now impacting demand for used cars at CarMax? Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Yeah. Appreciate the question. I mean, certainly, I think that's the benefit of our platform, right? CAF is able to tighten, and it's able to slow down to partners that are willing to -- maybe they're going to ask for a little more money down, it's going to be a little bit higher rate. But they are going to have the option to buy, and we see people get picked up down the line. We're very careful when we test rates. And we do any underwriting adjustments. We watch it very carefully. We test it. We know what's going to get picked up, and we're very thoughtful about the sales impact and any decision we make, whether it'd be pricing or underwriting. So certainly, there's going to be a few people that might not choose that higher rate that more down payment from our lenders down the line. But we believe, generally, they are very excited, Tier 2 partners are, when CAF passes on stuff, and they can go pick it up. Bill Nash -- President and Chief Executive Officer Yeah. But Brian, it's definitely a headwind. I mean we're tightening. We've got great partners and picking up some of that, but they don't pick it all up. And then it goes down to Tier 3, and you've seen where our Tier 3 volume just is in general. So there's no doubt that the tightening in general of the industry is having an impact. Brian Nagel -- Oppenheimer and Company -- Analyst Got it. I appreciate it. Thank you. Bill Nash -- President and Chief Executive Officer Thank you, Brian. Operator And we'll take our next question from Craig Kennison with Baird. Your line is open. You may ask your question. Craig Kennison -- Robert W. Baird and Company -- Analyst Hey. Good morning. Thanks for taking my question. I wanted to ask about sourcing, Bill. You bought 11% fewer cars. I know depreciation is a headwind, but you also have these innovative new tools like instant offer and Max offer that I thought might provide like a secular lift. So I'm wondering on instant offer, can you shed any light on just overall appraisal activity and buy rates to give us a feel for the kind of traction you have with that tool? And then on Max offer, how much of that 45% growth, albeit from a small base, is attributable to adding new dealers versus momentum with the existing dealers? Bill Nash -- President and Chief Executive Officer Yeah. Thanks for the question, Craig. On the -- from consumers, again, I think it's more -- I think when you're talking about the decline, it's more of a year-over-year dynamic. Buy rate this year was down a little bit versus last year. But keep in mind, last year, I think in the fourth quarter, we saw about $2,000 of appreciation. We didn't see that this quarter. It was much, much less than that by the end of the quarter. That has an impact because consumers always think their cars are worth more money. When you can put more on it, that helps buy. On the Max offer, the increase there is really -- well, we've increased the overall number of deals. The way we think about it, how many active dealers do you have. And of the deals we have, we saw about a 50% increase in active dealers actually using the tools. So we're encouraged by that. We haven't expanded to other areas. We think there's a lot of opportunity to continue to move this along, which is what I said earlier in my prepared remarks. It's going to be a focus for us. Craig Kennison -- Robert W. Baird and Company -- Analyst Thank you. Bill Nash -- President and Chief Executive Officer Thank you. Operator And we'll take our next question from Michael Montani with Evercore ISI. Your line is open. You may ask your question. Michael Montani -- Evercore ISI -- Analyst Hey guys. Good morning. Thanks for taking the question. Just wanted to ask to start off. If you think about this year, is there any reason that this wouldn't be another year for CarMax to take market share? And then is there a need at all to either sacrifice gross profit per unit or potentially loosen credit standards to take share? Bill Nash -- President and Chief Executive Officer Yeah. I mean, look, you could -- if you lowered your prices, you could absolutely sell some more cars. But I'll go back to what I said earlier. I mean we're focused on profitable market share. And look, you can see it with the publicly traded auto retailers, they're swapping it off, sometimes units for GPU. And when you look at total comp GPU, it just -- it hasn't been necessarily a good decision. So we'll continue to test the elasticity. Our goal, obviously, every year is to gain market share. I am hopeful just looking at kind of depreciation trends, I'm hoping that this year will be a more normal depreciation and depreciation cycles, but we'll see. And I think that's going to be a factor. And again, I always couch it with we'll always test the elasticity to see if it makes sense to lower margins in order to get more units and more total gross profit. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer And as far as the CAF lending standards, I mean, I think that's one of the things that we're optimistic about. We've tightened. We've tightened for a very for very purposeful reason. Obviously, we have partners down the line. But as Bill mentioned, yes, you do lose sales when CAF tightens. But we believe that the cycle will turn. The consumer will get healthier. And we're excited to go after more market share up and down the credit spectrum. So I think it absolutely is an opportunity on the other side of this. Bill Nash -- President and Chief Executive Officer Yeah. I'm optimistic with CAF. And I know the Fed is -- there's a decision on when they're going to cut rates. I mean it stabilizes and doesn't sound like it's going to go up. I'm going to knock on wood right now. But as that comes down, that's a tailwind for us for sure on a couple of different fronts from a CAF standpoint, margin standpoint but also from a sales standpoint. Michael Montani -- Evercore ISI -- Analyst Just how to think about the mid-70s SG&A ratio target as well. Is that feasible for this year? Or how should we think about that? Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yeah. I think the mid-70s SG&A as we've talked about, that is absolutely our next step in our progress. I think in terms of this coming year, we're going to need strong consumer demand also return. There's, obviously two variables in that equation, right? You have SG&A, which I feel we've made a lot of strides this past year, and we'll continue to focus on. But we really need that gross profit number to accelerate in order to hit that mid-70%. I think you hit it in FY '25 would really be a tough putt, just given the level -- the volumes of our unit sales over the past couple of years here. Bill Nash -- President and Chief Executive Officer Well -- and I think also just given that they think that the market is overall going to be fairly flat. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yes. Exactly. Michael Montani -- Evercore ISI -- Analyst Got it. Thank you. Bill Nash -- President and Chief Executive Officer Thank you. Operator We'll take our next question from John Healy with Northcoast Research. Your line is open. You may now ask your question. John Healy -- Northcoast Research -- Analyst Thank you. Just wanted to ask a bit about the wholesale business. It's a nice position where we kind of ended the year in terms of GPUs on wholesale. I was kind of curious kind of how you see that business from a GPU performing in '25, just given the expected, kind of, the sending of the used car market in terms of values with improving supply. Do you think we can hold at this kind of $1,000 level for a while? And can you talk a little bit about what you're doing with the auction side of the business? I think in your prepared remarks, you mentioned that you're going to build a stand-alone auction facility, which I believe would be the first one for the company, maybe where you're going with that business and does that decoupling of auctions from the retail location potentially market new business line that you're getting into, not only from a self-sufficiency standpoint but maybe from a revenue standpoint? Bill Nash -- President and Chief Executive Officer Yeah. Good morning, John. Thank you for the questions. On the wholesale margin, yes, I was especially pleased with the wholesale margin. Just given some of the year-over-year dynamics, the team did a phenomenal job. And I think it speaks to just some of the improvements we made in our overall auction process with technology, that kind of thing. I think you're thinking about it the right way. If you look at it on a yearly basis, I think a good target, give or take a little bit, is similar to what we ran for the year this year on wholesale margins. So I think you're thinking about that the right way. And I think it speaks to a lot of the improvements that we've made in the business. As far as the stand-alone auction facility, it is -- it's interesting because we actually have a couple of stand-alone auction facilities that we've built over time, just that are generally located right close to one of the stores from a extra capacity. But this -- you're right, this will be the first time that we've gone out and really kind of built the facility with the intention of it having to be an auction facility. I think going forward, you're going to see some of the stand-alone auction/production. The one that we're talking about for next year is just an auction facility. We may run some logistics hub out there. But right now, it's an auction facility. And it's really going to help us in a couple of different ways. The facility will be close to existing stores. And we'll be able to take wholesale vehicles out of existing stores, allow them to leverage the lots more from a service standpoint, more from a sales standpoint. We're ending up moving a lot of cars anyway from satellite and XF stores. And now taking them to this location will just help us continue to make benefits or improvements at stand-alone facilities, and I think they'll pan out well for us going forward. So our intention as we go forward is to build more of these things, get more of some of the wholesale sales out of the stores to free up space, free up capacity that we think will have other benefits to the business, whether it's, hey, you can do a little bit more MaxCare retail service. There's a lot of benefits to that, plus just the standardization of having these bigger locations in closed proximity to stores will also help us to innovate even quicker than what we've been able to do. John Healy -- Northcoast Research -- Analyst Thank you, guys. Bill Nash -- President and Chief Executive Officer Thanks, John. Operator We'll take our next question from Scot Ciccarelli with Truist Securities. Your line is open. You may ask your question. Scot Ciccarelli -- Truist Securities -- Analyst Good morning, guys. Another market share follow-up, I guess. Bill, why do you think you lose share in disruptive periods? I mean historically, industry leaders in various retail verticals actually accelerate share gains during disruptive periods. What is different about the CarMax model why that may not follow a similar pattern? Bill Nash -- President and Chief Executive Officer Well, when you say disruptive periods, I mean, the three periods, and I think Great Recession, if I think about COVID, I think what we're doing -- what's going on a little bit different. I mean here more recently, it's this vehicle volatility that I talked about earlier. And when there are shocks to the system of large depreciation over a short amount of time, you know how we run the model. We're like, OK, should we lower our prices? And is it overall better from a profitability standpoint? And what we've seen is it just doesn't pan out that way, which is why we hold the margins steady. Now there's lots of competitors don't do that. And they do what's right for their business. They've got different demands. They've got credit lines, things like that. So they have to do what's right for their business, and we have to do what's right for our business. So you will see -- we've seen this year when we hold the prices and others are liquidating inventory for various reasons. We -- trying to give up market share. Scot Ciccarelli -- Truist Securities -- Analyst So just philosophically, like is that the right decision over time? Like I understand like you can capture more profit. But if you want to be a growth vehicle and you have been for 20-plus years, I think you said 38, right? Is that the right decision to kind of hold the line on price and protect profit? Or should you be seeking market share? I'm just wondering philosophically how you guys are thinking about that? Thanks. Bill Nash -- President and Chief Executive Officer Yeah. No, I mean, it's a good question. And obviously, we think philosophically, look, the buying cycle is every five years. And who -- if you had asked me at the beginning of this year, do you think there might be a price correction? I would say maybe, yes, probably another price correction coming out of last year. I didn't expect there to be two price corrections. I don't see this type of environment being able to replicate itself year after year. I think these are very unusual circumstances. So I do think that here in the short term, it is the right thing to do. It's not like this is going to be continuing to repeat. If it was, then we would look at the business model. But I think we believe that this is the right move. Scot Ciccarelli -- Truist Securities -- Analyst Got it. Thank you very much. Bill Nash -- President and Chief Executive Officer Thanks, Scot. Operator And we'll take our next question from Christopher Bottiglieri from BNP Paribas Exane. Your line is open. You may ask your question. Ian Davis -- Exane BNP Paribas -- Analyst Hey, everyone. This is Ian Davis on for Chris. Thanks for the question. It seems you've been a bit more reliant on warehouse facilities than ABS in recent years ex the Tier 2 and Tier 3 pilot. So wondering if you could elaborate a little bit on how average FICO expected losses of loans in these warehouse facilities compares to maybe what you see in the -- similarly loans and ABS facilities? Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Sure. Yes, I can take that one, Ian. Yes, I mean, I think you said excluding Tier 2 and Tier 3, so we're talking focused on the Tier 1 business. Yes, I mean, our focus is generally to bring in all the volume from Tier 1 into our warehouse facilities, and our goal would be to get it all into the ABS market. Now fundamentally, there are things that you need to pare back. There are certain criteria they need to meet. You need to have a title, they need to have made the first payment, etc. So you're going to have some higher-risk stuff fall out. It's always going to happen. But our goal is to move all that volume from originations through the warehouse into ABS. Inherently because of those exclusions, you're going to have probably a little bit higher FICO in the ABS deals. If you look at deal over deal over deal, that change in FICO is coming from us changing what we're originating and that ultimately flowing through. Remember, it's going to take six, seven months to get into an ABS deal for when we originate it. But that movement over time in ABS is really what we're underwriting, probably less so what we're holding out into in a warehouse line. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer And from a total capacity standpoint, where we certainly leverage the ABS market is the most efficient way to fund the business. We also -- as you've noted, we've also grown our kind of non-ABS funding with our banking partners. We have tremendous banking partners, and we've built out some facilities, additional facilities there. And we talked about that several years ago about just bridging out and having alternative finance options as we continue to grow the business. And that's what we've done. Ian Davis -- Exane BNP Paribas -- Analyst Got it. That's helpful. And if I could just slip another question in. We had read that CarMax may be removing the 30-day return policy. Is there any truth for this? And if there is, could you contextualize maybe how material abandoning the policy would be to earnings? And perhaps any other context in terms of customers valuing it or maybe using it, any context there would be helpful. Bill Nash -- President and Chief Executive Officer Yeah. So what you're referring to is the 30-day money-back guarantee. And we're modifying it to 10 days money back, which is still industry-leading. And that's really due to really some experiential headwind, both for customers and associates, which also add increased expenses when you're talking about most of our customers -- a lot of our customers take advantage of it well before the 30 days. You get past the 10, some people are just working the system. Others, what we run into is some headwinds with DMVs and municipalities getting title work squared away, checks back, taxes back, that kind of thing. So I think that's what you're referring to. Ian Davis -- Exane BNP Paribas -- Analyst Yeah. That's right. Yeah. That's helpful. Thank you. Bill Nash -- President and Chief Executive Officer Yep. Operator And we'll take our next question from Chris Pierce with Needham. Your line is open. You may ask your question. Chris Pierce -- Needham and Company -- Analyst Hey. Good morning. I just wanted to ask, are we set up for another period of excessive depreciation in the wholesale market because as we get the tax refund season, which we're sort of already through in the wholesale market, there's going to be normal depreciation. But like are we set for further excessive depreciation and what would limit excessive depreciation? Because as far as I can tell, dealers are already carrying lower inventories versus normal. So how -- is there anything that the industry can do to combat that? Or is it just we need to see that excessive depreciation because we need to get back to a $22,000 average used car? Bill Nash -- President and Chief Executive Officer Yeah. Chris, I'm not necessarily seeing what you're calling excessive depreciation. I'm really seeing more depreciation that's more in line with kind of what you would see between 2015 and 2019. It's actually, if look at it, appreciate a little bit more. But again, your average sales price is up higher. Just recently have we started to see some depreciation. So I haven't seen what you're referring to as far as excessive depreciation. And I think we may see more of a historical type of appreciation, depreciation throughout the year, but we'll see. Chris Pierce -- Needham and Company -- Analyst And is that because of lower dealer volumes or inventories? Or is that what gives you confidence that you think you'll see that -- you won't see abnormal depreciation this year like you saw last year? Bill Nash -- President and Chief Executive Officer Well, I'm just going off of what I've seen so far kind of calendar year to date and comparing it to historical averages. The last two, three years, it's kind of been all over the board from an appreciation standpoint and a depreciation standpoint. If you kind of take those years out and look more historical like 2015 to 2019, what does the depreciation curve look like? What does the NAAA data look like? I would say this year, calendar year to date is falling more in line with kind of what those cycles look like. So that's what I'm referring to. Chris Pierce -- Needham and Company -- Analyst OK. Appreciate it. Thank you. Bill Nash -- President and Chief Executive Officer Thank you, Chris. Operator And we'll take our next question from John Murphy with Bank of America. Your line is open. You may ask your question. John Murphy -- Bank of America Merrill Lynch -- Analyst Good morning, guys. I just wanted to see if you could talk about sort of the split of the zero to six and the seven to 10-year-old vehicle sold in the quarter and maybe on a year-over-year basis. And as we think about this, unless there's some massive economic boom that is not really expected, seems like through '24 and '25, the zero to six-year-old car population will continue to shrink, which is a supply issue for you guys, unless you shift a little bit more to the seven to 10-year-old bucket but also would help you out a lot on affordability. So it just seems like it could be a small strategy shift here that could alleviate some of the issues that we're facing. Just curious if you could comment on that as well. So mix and then potentially pushing a little bit more to seven to 10s. Bill Nash -- President and Chief Executive Officer Yeah. So I think looking at the quarter, if I look at zero to four versus, let's call it five plus, we were similar to last year. We were a little bit older than the third quarter. So I think our mix is -- it's interesting. It's almost 50-50 when you look at zero to four and the five plus. When I look at zero to six maybe versus the seven plus, it's -- for last year, it's very similar. Let's call it a 70-30 split, zero to six-year-old 70%, seven-plus 30% for us. Last quarter was a little bit -- and I made the remark last quarter that we had a little bit shift in some newer cars. So last quarter was a little bit more in the zero to six than this quarter. And I think, look, as we move forward, and I mentioned this earlier, you're right, as far as new cars, a year or two year ago, weren't as many new cars sold. But again, I would just point to you're still in the ballpark of 15-plus million SAAR run rate, which is much higher than what we saw coming out of the great financial crisis. And the other thing I would point to is that our self-sufficiency now for a couple of years on a yearly basis continues to be over 70%, which we didn't have prior, and we think that's a great tailwind. So for us, the supply hasn't really been the issue, it's the price. Now you could say, well, supply of just overall vehicles out there is causing price to go up, but our ability to acquire inventory has not been the issue. It's more the price. John Murphy -- Bank of America Merrill Lynch -- Analyst Got it. And then just one follow-up on the sourcing side that you just talked about. You said dealer sourcing was up 21,000 units, about 45% on a year-over-year basis in the quarter. Is that something you think could increase? I mean, I think there's some concern that vehicles, late-model vehicles get caught further up funnel as openly, Manheim and ATB all kind of help with their virtual auctions to keep vehicles further up funnel. But it sounds like you actually kind of refute that with the increase in dealer sourcing. How much of an opportunity do you think dealer sourcing could be over time or maybe a risk as they hold on to more vehicles? Bill Nash -- President and Chief Executive Officer Yeah. Look, I'm pleased with the max offer. I mean we're continuing to buy more vehicles to that. We think it's a great product that's really resonating with dealers. And when you look at the mix of vehicles we're buying, it's actually skewed more retail than wholesale, which is a huge benefit. I think it's a very competitive product. And like I said, we've got a lot of dealers that are actively using it, and we plan to continue to push that. And when we talked about -- we've historically talked about self-sufficiency. We've always talked about it from a standpoint of just the consumers. Well, it really should start adding in this bucket as well, which, again, just helps keep our self-sufficiency very high. John Murphy -- Bank of America Merrill Lynch -- Analyst Great. Thank you very much. Bill Nash -- President and Chief Executive Officer Thank you, John. Operator We'll take our next question from David Bellinger with Mizuho. Your line is open. You may ask your question. David Bellinger -- Mizuho Securities -- Analyst Hey. Thanks for the questions. Maybe just a follow-up on that last one and acquiring cars directly from consumers. Can you talk through just the quality of those vehicles? Are there any material differences versus those at the auction? And just overall, is there enough inventory out there from consumers in that $20,000 to $25,000 range right now? Or is that more of a limited opportunity? Bill Nash -- President and Chief Executive Officer Yeah. Actually, from a -- I was encouraged because this quarter, if you look at our sales are less than 20% -- or less than $20,000 vehicles, while year over year, it was similar. It actually was better than the third quarter. So we had more less than $20,000 cars. I think as far as what do the vehicles look like for consumers, buying vehicles from consumers is just a huge benefit. I mean you're buying vehicles that people in that area generally like. And the reason why it's important is to self-sufficiency is because those are more profitable than having to go off-site. And if you're having to go and secure all your vehicles off-site, that's an expensive channel to go through. And we have the luxury of having such a high self-sufficiency that we have to really kind of go out and obtain vehicles off-site on a limited basis. David Bellinger -- Mizuho Securities -- Analyst Got it. And if I could just follow up one more on your quarter-to-date comment down mid-single digit. Is there anything that's really changed to explain that shift from positive comps in February, maybe some of the tax refund flows that might have impacted, but also, is there potentially just some pause on the part of the consumer with steeper price depreciation lately? And if that's the case, how long could that last? Bill Nash -- President and Chief Executive Officer Yeah. I think it just -- it's probably more just speaks to consumer. I think the consumer is still in a tough spot. The tax season -- I think overall, the tax season this year has been a little softer, although refunds are higher, the actual -- the refund dollar amounts are higher, the actual number of refunds is behind where it was last year. And while prices have gone down, obviously, interest rates are higher than a year ago. I think you still have the pressure of the consumers on everything else that they're basically buying food and housing, get inflationary pressure there. So I think it speaks more to the consumer mindset at this point. And like I said, it's been choppy. I mean there's been a -- we've had some weather things going on. It's just -- there's been a lot going on. So we'll continue to monitor and make adjustments as we can as we go through. David Bellinger -- Mizuho Securities -- Analyst Got it. Thanks, Bill. Bill Nash -- President and Chief Executive Officer OK. Thank you, David. Operator And we'll take our last question from David Whiston with Morningstar. Your line is open. You may ask your question. David Whiston -- Morningstar -- Analyst Thanks. Good morning. Just a two-part question on affordability. You mentioned ASPs are continuing to fall, which is good. But are consumers even noticing the lower ASPs at this point? Are they entirely focused on unfavorable monthly payment due to interest rates? And also on that trading trade-off scenario for affordability, is the consumer moving into cars away from light trucks? Or is it more just shifting into older than five-year-old vehicles? Bill Nash -- President and Chief Executive Officer Yeah. Well, I think it's always been about the monthly payment for the consumers. And the prices are coming down. And as Jon said, the actual monthly payment is coming down, but it's still over $100 more than what it used to be. And so when a consumer is thinking about buying a car, let's say they're in a car right now. Well, they're making a certain monthly payment. And all of a sudden, they look and say, OK, well, I'm ready to swap out. They're like, oh my gosh, I'd have to pay another $100. That's where we're seeing it. And again, there's lots of data points to say consumers are just waiting on the sidelines right now and either for the monthly payments to come down or to figure out a way to work it into their budget with all the other expenses. So I think that's what you're seeing. Was there another part of your question? David Whiston -- Morningstar -- Analyst Yes. Are they also moving away from light trucks into cars? Or are they just focused on an older vehicle to try to -- Bill Nash -- President and Chief Executive Officer It's interesting. If you look at the numbers for the quarter, from a class standpoint, we actually sold more like from a mix standpoint, more larger SUVs, more expensive type of cars. Now the average age, both of our wholesale and retail is up on what you've sold. But it's not like they're choosing to go compact versus larger SUV types, at least not for the quarter. David Whiston -- Morningstar -- Analyst OK. Are you worried about the off-lease shortage ramping up with the anniversary of the start of the chip shortage? Bill Nash -- President and Chief Executive Officer Yeah. Look, leased vehicles have never been a big piece of our inventory strategy. I mean -- and we've been through cycles before where there's been leased cars, and we've been through cycles where there haven't been leased cars. I think we've been in a cycle where there really haven't been leased cars because a lot of the manufacturers are requiring lease customers to take it back to the franchise dealer. We have customers wanting to sell it to lease vehicle, and we can't buy them because of those restrictions. And quite honestly, it's -- I think it's been a nice benefit for the franchise dealers, because they're able to get these things at a good rate base off of leases that were basically done a while ago. That will play out and not become such a benefit as we go into the future. But it just hasn't been a big source of inventory for us historically. David Whiston -- Morningstar -- Analyst OK. Thank you. Bill Nash -- President and Chief Executive Officer Thank you. Operator Thank you. We don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks. Bill Nash -- President and Chief Executive Officer Great. Well, listen, I want to thank everybody for joining the call today. Obviously, we've got lots going on. And we appreciate your questions and your support. Before I close, again, I just want to congratulate all of our associates for being named as a Great Place to Work for the 20th year in a row. We're all very proud of that and really speaks to our folks and the culture that they've really enhanced here and implemented here at CarMax. So thanks for your time today, and we'll talk again next quarter. Answer:

the Q4 fiscal year 2024 CarMax earnings release conference call

Operator Ladies and gentlemen, thank you for standing by, welcome to the Q4 fiscal year 2024 CarMax earnings release conference call. Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, David Lowenstein, AVP, investor relations. Please go ahead. David Lowenstein -- Assistant Vice President, Investor Relations Thank you, Shelby. Good morning, everyone. Thank you for joining our fiscal 2024 fourth-quarter earnings conference call. I'm here today with Bill Nash, our president and CEO; Enrique Mayor-Mora, our executive vice president and CFO; and Jon Daniels, our senior vice president, CarMax Auto Finance operations. Let me remind you our statements today that are not statements of historical fact, including statements regarding the Company's future business plans, prospects, and financial performance are forward-looking statements we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our current knowledge, expectations, and assumptions and are subject to substantial risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, we disclaim any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 8-K filed with the SEC this morning and our annual report on Form 10-K for the fiscal year ended February 28, 2023, previously filed with the SEC. Should you have any follow-up questions after the call, please feel free to contact our Investor Relations department at 804-747-0422 extension 7865. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Bill? Bill Nash -- President and Chief Executive Officer Great. Thank you, David. Good morning, everyone, and thanks for joining us. We're encouraged by the performance of our business during the fourth quarter. We're continuing to leverage our strongest assets, our associates, capabilities, experience, and culture to build momentum as we manage through the cycle. While affordability of used cars remains the challenge for consumers, pricing improved during the quarter. We continue to achieve efficiency improvements in our core operations and believe we are well-positioned to drive growth as the market turns. In the fourth quarter, we posted our fifth consecutive quarter of sequential year-over-year retail used unit improvement and reported growth in total used unit sales and comps. We delivered strong retail and wholesale GPUs. We increased used saleable inventory units more than 10%, while holding used total inventory units flat year over year. We continue to actively manage our SG&A and we grew CAF income significantly as we delivered a substantial reduction in the provision for loan losses year over year, while maintaining stable net interest margins sequentially. For the fourth quarter of FY '24, our diversified business model delivered total sales of $5.6 billion, down 2%, compared to last year. This was driven by lower retail and wholesale prices and lower wholesale volume, partially offset by higher retail volume. In our retail business, total unit sales increased 1.3% and used unit comps were up 0.1%. Average selling price declined approximately $600 per unit for 2% year over year. Our market share data indicates that our nationwide share of zero to 10-year-old used vehicles declined from 4% in calendar '22 to 3.7% in 2023 as we prioritized profitability over near-term market share growth. As always, we continue to test price elasticity to validate our decisions. External title data shows that our market share initially accelerated relative to our performance across the second half of 2022, but then came under pressure during multiple periods of steep depreciation. We remain confident in our ability to accelerate market share growth as used vehicle affordability continues to improve and as the volatility of vehicle value stabilizes. Fourth-quarter retail gross profit per used unit was $2,251, relatively consistent with last year's fourth-quarter record of $2,277. Wholesale unit sales were down 4% versus the fourth quarter last year. Average selling prices declined approximately $250 per unit, or 3% year over year. Fourth-quarter wholesale gross profit per unit was $11.20, slightly down from $1,187 a year ago. As a reminder, last year's fourth-quarter wholesale GPU was within $4 of our all-time record and benefited from appreciation and strong dealer demand, particularly at the end of last year's quarter. This prior year appreciation dynamic impacted our year-over-year performance and buys as well. We bought approximately 234,000 vehicles during the quarter, down 11% from last year. Of these vehicles, we purchased approximately 213,000 from consumers, with slightly more than half of those buys coming through our online instant appraisal experience. With the support of our Edmond sales team, we sourced the remaining approximately 21,000 vehicles through dealers up 45% from last year. For our fourth quarter online metrics, approximately 14% of retail unit sales were online consistent with last year. Approximately 55% of retail unit sales were omni sales this quarter, up from 52% in the prior year. All of our fourth-quarter wholesale auctions and sales were virtual and are considered online transactions. This represents 17% of total revenue. Total revenue from online transactions was approximately 30% in line with last year. CarMax Auto Finance or CAF delivered income of $147 million, up 19% from $124 million during the same period last year. John will provide more detail on consumer financing, the loan loss provision, and CAF contribution in a few minutes. But at this point, I'd like to turn the call over to Enrique, who will provide more information on our fourth-quarter financial performance. Enrique? Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Thanks, Bill, and good morning, everyone. As Bill noted, we drove another quarter of sequential improvement in our used unit sales with strong per-unit margins for both used and wholesale and strong CAF contribution growth, while staying focused on managing SG&A. With quarter net earnings per diluted share was $0.32 versus $0.44 a year ago. Last year's quarter benefited from an $0.08 tailwind due to the receipt of Extended Protection Plan, or EPP, profit-sharing revenues, as well as $0.04 from a lower tax rate, compared to a more normalized tax rate this quarter. Total gross profit was $586 million, down 4% from last year's fourth quarter. Used retail margin of $387 million was flat, with higher volume partially offset by a slightly lower per-unit margin. Wholesale vehicle margin decreased by 9% to $129 million, with a decrease in volume and per unit margin, compared to last year. Other gross profit was $69 million, down 15% from a year ago. This decrease was driven primarily by last year's receipt of $16 million in profit-sharing revenues from our EPP partners. As noted on our third-quarter call, we did not expect to receive profit-sharing revenues this year as our partners experienced inflationary pressures and consumers returned to more normalized driving patterns. Partially offsetting this dynamic was the positive impact from price elasticity testing on our extended service product. During the quarter, we tested raising MaxCare margins per contract sold, which resulted in a slight decrease in product penetration, while driving overall profitability. We are encouraged by these results, and we have rolled out the margin increase nationally. Our expectation is that this action will drive approximately $20 per retail unit of incremental EPP margin in FY '25. Service decreased by $4 million, as compared to last year's fourth quarter. This decrease was primarily driven by wage pressures and planned lower production in the quarter as we pre-built inventory in the third quarter, due to holiday timing. For the full-year service improved by $75 million year over year. Our expectation is that we will continue to see significant year-over-year favorability in FY '25. The extent of this improvement will be governed by sales performance given the leverage, de-leverage nature of service. Third-party finance fees were down $3 million from a year ago, driven by higher volume in Tier 3 for which we pay a fee, and lower volume in Tier 2 for which we receive a fee. On the SG&A front, expenses for the fourth quarter were $581 million, up 1% from the prior year's quarter. Our continued discipline in spend and investment levels allowed us to come in flat year over year when excluding share-based compensation. As a reminder, in the fourth quarter, we passed the year mark since initiating our significant cost management efforts. SG&A dollars for the fourth quarter versus last year were mainly impacted by three factors. First, other overhead decreased by $16 million. This decrease was driven primarily from reductions in spend for our technology platforms and from the continued favorability in non-CAF uncollectible receivables. Second, total compensation and benefits increased by $7 million, excluding an $8 million increase in share-based compensation. This increase was mostly driven by a higher corporate bonus accrual in the quarter. Third, advertising increased by $5 million. This reflects an increase as communicated last quarter due primarily to the timing of per unit spend. For full-year FY '24, we strongly outperformed the target we set out at the beginning of the year of requiring low-single-digit gross profit growth to lever SG&A, even when excluding the benefits from this year's legal settlements. Our ability to materially drive SG&A costs down year over year was led by favorability and non-CAF uncollectible receivables that reflects improved execution at our stores, at our corporate offices, and by external partners. Our focus on driving efficiency gains in our stores and CECs, the planned reduction of technology spend and by aligning staffing levels and marketing spend to sales. In FY '25, we expect to require low-single-digit gross profit growth to lever SG&A, when excluding FY '24's favorable legal settlements. This reinforces our pathway back to a lower SG&A leverage ratio with our initial goal of returning to the mid-70% range over time once we see healthier consumer demand. We anticipate that SG&A will be pressured in the first quarter. As a reminder, we received $59 million in illegal settlement during the first quarter of FY '24. Additionally, in this year's first quarter, we expect an approximately $25 million impact due to share-based compensation for certain retirement eligible executives and a lapping of favorable reserve adjustments related to non-CAF uncollectible receivables during last year's first quarter. With regard to marketing going forward, we plan to speak to our spend on a per-total unit basis, inclusive of total retail and wholesale units. We believe this more holistically reflects the impact of our marketing initiatives, which support both vehicle sales and buys. In FY '25, we expect full-year marketing spend on a total unit basis to be similar to FY '24 at approximately $200. Regarding capital structure, during the quarter we repurchased approximately 686,000 shares for a total spend of $49 million. Starting in the first quarter, we intend to modestly accelerate the pace of our share repurchases above the pace that we implemented in our third quarter of fiscal year '24. As of the end of the quarter, we had $2.36 billion of repurchase authorization remaining. For capital expenditures, we anticipate an investment level between $500 million to $550 million, up from the $465 million in FY '24. The year-over-year increase in plan spending is primarily related to the timing of spend for new stores. Like in FY '24, the largest portion of our capex investment remains related to the land and the buildout of facilities for long-term growth capacity and offsite reconditioning and auctions. In FY '25, we plan to open five new store locations. Consistent with our strategy, these new locations will be smaller cross-functional stores that complement our omnichannel strategy and leverage our scale. We also plan to open our second stand-alone reconditioning facility, which will be located in Richmond, Mississippi, as well as one offsite auction location in the Los Angeles metro market. We currently expect to open multiple offsite reconditioning and auction locations in FY '26. Our extensive nationwide footprint and logistics network continue to be a competitive advantage for CarMax. Now I'd like to turn the call over to Jon. Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Thanks, Enrique, and good morning everyone. During the fourth quarter, CarMax Auto Finance originated approximately $1.8 billion, resulting in sales penetration of 42.3% net of three-day payoffs, which was down 240 basis points from the same period last year. The weighted average contract rate charged to new customers grew to 11.5%, an increase of 60 basis points from the last year's fourth quarter and 20 basis points sequentially. Tier 2 penetration in the quarter was 18.2%, down from 19.4% observed during last year's fourth quarter. Tier 3 accounted for 8.2% of sales, up 130 basis points from last year, as a partner began to ease previously implemented tightening. Also impacting each of these year-over-year results is CAF's continued decreased percentage in Tier 3, as well as the increased test volume in Tier 2. CAF income for the quarter was $147 million, up $23 million from the same period last year. This improvement was primarily driven by a $26 million year-over-year reduction in the provision for loan losses, slightly offset by a $3 million reduction in total interest margin. Note fair market value adjustments from our hedging strategy accounted for $4 million in expense this quarter versus $1 million of income in last year's fourth quarter. The $72 million provision within the quarter resulted in a reserve balance of $483 million or 2.78% of receivables, compared to 2.92% at the end of the third quarter. This highlights the significant impact that originations under our tightened credit policy are having on the Reserve as they continue to become a larger percentage of the full portfolio. In addition, observed performance within the portfolio aligned closely to our reserve expectations at the end of the third quarter and contributed to the reduction in the reserve. The margin to receivable rate of the portfolio remained steady at 5.9% for the quarter. We remain pleased with our ability to maintain a stable interest margin despite keeping our credit tightening in place. As I noted earlier, CAF continues to test across varying parts of the credit spectrum. Ultimately, CAF is building the capability to scale its participation across all credit Tiers, which will help to capture finance economics, drive sales, and fully complement our valued lending partnerships that are a key foundation of CarMax's best-in-class credit platform. Now I'll turn the call back over to Bill. Bill Nash -- President and Chief Executive Officer Thank you, Jon and Enrique. Fiscal 2024 was a challenging year across the used car industry as vehicle affordability and widespread macro factors continue to pressure sales. In response, we focused on what we could control and took deliberate steps to support our business both the near-term and long run. In addition to achieving the efficiencies across our entire organization that Enrique talked about, I am proud of the progress we've made in further enhancing our omnichannel capabilities as we prioritize projects designed to optimize experiences for our associates and customers and drive operating efficiencies. Some examples include, for retail, we leverage data science, automation, and AI to make it even easier for customers to complete key transaction steps like vehicle transfers on their own. We also enhance digital checkout functionality for appraisal customers, enabling them to submit their documents remotely and unlocking their ability to participate in our 30-minute express drop-off experience. Additionally, we expanded capabilities for Sky, our 24/7 virtual assistant, to include managing finance applications, vehicle transfers, appointment reservations, and appraisal offers. Customer adoption of Sky has been strong, and this has not only created efficiencies, but also widened bandwidth for our associates. For wholesale and vehicle acquisition, we modernized our auction platform to offer new services, including single sign-on across all of our systems, AI-enhanced condition reports, early bidding capabilities, and automated bills of sale. Additionally, we streamline Max offer by rolling out our instant offer experience to all participating dealers. In the credit space, we have now incorporated all of our lenders into our finance-based shopping platform, expanding the breadth and depth of offers available to our customers. We continue to see great adoption with more than 80% of the consumers utilizing the best-in-class pre-qualification product as they begin the credit process. Finally, Edmunds launched a number of research and buy tools in support of its goal to be the leader in EV research. These include range tests, charging efficiencies, VIN-level battery health assessments, and EV tax credit incentive guides. Looking ahead to fiscal 2025, we will build on our progress from last year to further expand our competitive mode. We are confident that the actions we are taking will enable us to grow sales, profitable market share, and buys while also driving additional operational efficiencies as the market turns. Some examples include, for retail we plan to launch an evolved hub within our customers' online shopping accounts that will make it even easier to seamlessly go back and forth between assisted help and self-progression. Customers will be able to see the steps they have taken on their shopping journey, whether on their own or with help from a CEC or store associate. The hub will also guide next steps and promote MaxCare, our extended service plan offering. Additionally, we will continue to digitize work in support of our focus to build a leaner and high-value assistance model for our CECs. This will enable existing resources to support higher transaction volume as we grow traffic and drive stronger conversion. As part of this effort, we will further integrate Sky into key communication channels and prove its ability to serve as the initial point of contact across many points in the customer's shopping journey. Sky will manage next steps on its own or seamlessly transition customers to a CEC associate via the customer's channel of choice. For vehicle acquisition. we'll focus to bring even more vehicles into our ecosystem. A key component of this will be our continued partnership with Edmunds to acquire vehicles from dealers. In the credit space, we plan to further optimize our prequalification product by integrating the customer's instant offer into the application process. As Jon mentioned, we will also continue to test CAFs participation across varying parts of the credit spectrum. As always, we will continue to pursue opportunities that enable us to provide outstanding offers for consumers, while driving sales and economics for the business. In regard to our long-term financial targets, we're maintaining our goal to sell more than 2 million combined retail and wholesale units annually. However, we are extending the timeframe for this goal between fiscal 2026 and fiscal 2030, due to the uncertainty in the timing of the market recovery and as we continue to focus on profitable market share growth. We will adjust the timeframe as we gain greater visibility into the industry's pace of recovery. Given higher average selling prices, we expect to achieve the $33 billion annual revenue target sooner than units. And similarly, we also expect to achieve more than 5% nationwide market share of zero to 10-year-old used vehicles sooner than units. Given the recent volatility in vehicle values, we will provide an updated timeframe for our expected achievement at the end of fiscal year 2025. Before turning to Q&A, I want to recognize two significant milestones. First, CarMax celebrated its 30th anniversary during fiscal 2024. I want to thank and congratulate all of our associates for the work that they do. They are the differentiator and the key to our success. Second, Fortune magazine recently named CarMax as one of the 100 best companies to work for, for the 20th year in a row. I'm incredibly proud of this recognition, particularly as we face a challenging year. It's due to our associates' commitment to supporting each other, our customers, and our communities every day. In closing, I'm proud of the progress we've made on our journey to deliver the most customer-centric experience in the industry. I'm encouraged by the sequentially quarterly improvements. We're driving across our business, and I'm excited about our focuses for fiscal 2025. Our core operations are strong and we are well-positioned to drive growth as macro conditions improve. With that, we'll be happy to take your questions. So Shelby? Questions & Answers: Operator [Operator instructions] And your first question comes from the line as Seth Basham with Wedbush Securities. Your line is open. You may now ask your question. Seth Basham -- Wedbush Securities -- Analyst Thanks a lot. I have one quarterly specific question and one big picture question. On the quarter, it seems like service gross profit was weaker than we anticipated. Can you help us understand how much of that pressure was transitory and how much improvement we should see in the service line in 2025? Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yes. Thanks. Thanks a great question. You know we do believe it was transitory. We did have a couple things from a year-over-year standpoint. The planned lower production that we had communicated. So we did expect some headwinds there in the fourth quarter. We also had some wage pressures. Now that being said, we have undertaken in the fourth quarter, which will carry forward into next year, is even more efficiency initiatives, things and for labor specifically. We've invested in RFID tracking of inventory. We're going to leverage our tech and engineering investments to enhance reporting in our stores. We're focused on driving more MaxCare work to our shops and at the same time we've also taken labor and parts rates up to help offset inflationary pressures. So we do expect to see improvement, significant improvement year over year just like we deliver this year the significant improvement for the year as a whole and we expect that same next year. Now it is also certainly related to sales performance as well given the leverage, deleverage nature of service. Seth Basham -- Wedbush Securities -- Analyst Understood. Thank you for that color. And then secondly Bill, in regards to market share, you indicated on your last call that you started to see an improvement in market share toward the end of the fiscal third quarter. Seems like things slipped a little bit in the fourth quarter. Help us understand why and when should we expect to see market share increases going forward as the cycle turns? Bill Nash -- President and Chief Executive Officer Yeah. Great question Seth, and you're right. Last quarter I talked about October from a year-over-year standpoint actually inflecting positive, but also during the quarter -- third quarter I talked about the steep depreciation. It was going to be interesting to see how competitors reacted. When I step back and think about market share kind of at the highest level. The two things that have been impacting us this year, and really some of it was last year as well, are affordability and then more relevant to this year is the steep depreciation periods that we've seen. So from the affordability standpoint, we've talked about that throughout the year as far as consumers may be trading down, trading into older vehicles, into zero to 10-year-old cars that maybe we don't sell, or just basically standing on the sidelines, because we see that there's demand out there yet people aren't actually pulling the trigger. The other thing that we saw during the year, we saw two very steep depreciation cycles. If I look at last year's calendar year and I talked about it in my prepared remarks. We were growing market share coming out of -- we were improving our market share coming out of last year. And then we ran into a period, let's call it four or five months, of steep depreciation starting in about April, and it was about $3,000. Then it stabilized for a little bit, and then we finished out the year with, again, another steep depreciation, probably the steepest we've seen in the shortest period of time, about another $3,000. And As we've talked about before, when we see the steep depreciation, that's really when we're testing our pricing elasticity, because we know that competitors, for their own reasons and for their business models, may end up taking down prices to move inventory, that kind of thing. And what we've said is we're going to continue to move forward on profitable market share growth. So I think what we saw in the fourth quarter, dealers were trying to figure that out in October, because a year ago, if you remember, we saw steep depreciation. There was a big influx of where we saw dealers letting inventory go. And then what happened in the beginning of the first quarter, they ended up buying a bunch of cars because they had sold through too much and that drove up appreciation. So I think this year, dealers were a little bit delayed, which is why you saw a little bit of an inflection in October. But then we saw a sell-off in November and December. The good news is that the January data we have, we can actually see where we're improving our market share in January. February, we don't have the actual data yet, but we feel good about February. So I think from a market share standpoint, this value volatility can be challenging and we'll continue to work and that's one of the reasons why we want to see how this kind of pans out over this year before we update that target. So hopefully that color is helpful. Operator And we'll take our next question from Sharon Zackfia with William Blair. Your line is open. Please ask your question. Sharon Zackfia -- William Blair and Company -- Analyst Hi. Good morning. I guess two questions and hopefully, you guys will forgive me. But on the improved affordability, can you give us some metrics around that? I mean, it's clear that new car prices are coming down and hopefully rates are toppish. So what was kind of an average loan payment that you originated this quarter versus maybe the third quarter or some historical benchmark just to give us an idea of how that's improving for the customer? And then secondarily, just on that market share dynamic, is there any region or any particular cohort of demographics that you've been more susceptible to this market share loss as some competitors may have been less rational? Thanks. Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Sure, Sharon. It's Jon here. I'll take the first one on the loan payment. So historically, our average used car was $20,000 forever. So that translated typically, depending on the interest rate, $400 monthly payment. I think that's a good round number to think about. With the appreciation, you saw really a peak probably hit in kind of later, at calendar '22 of about $570, $580. That was -- I think we cited that was primarily driven by that financed amount. I mean, rates were on their way up, but that financed amount really was driving that. So that increase we kind of attributed to maybe an 85-15 split on the financed amount versus the interest rate going up. Now as we've cited, clearly the vehicle prices are coming down. The financed amount is coming down to some degree and rates are going in the other direction. So we probably say this quarter we probably saw roughly a $525, $530 payment. Still two-thirds of that driven by that vehicle price still higher. Now the rates are a bigger contributor, but hopefully, that gives you some perspective on how affordability has improved to some degree. Still a bit of a shock to a consumer that's used to a $400 monthly payment coming in at a $530 monthly payment. They're going to have to figure out how they work that into their budget going forward, but that hopefully gives you some context. Bill Nash -- President and Chief Executive Officer And Sharon, on the second part of your question, not necessarily a difference geographically. We talked about before, your Tier 3 customer, obviously, we have a lot less Tier 3 sales than we've had in the past. Our consumers that make less than $3,000 per month in a household. They've basically been cut in half. So certainly that lower finance customer, lower income coming in customers has been impacted. But we also see, and I talked about this the third quarter just from working with one of the credit bureaus of the folks that don't end up buying, that apply for a loan at CarMax, it's not like we're seeing this big degradation where they're going to somebody else. They're just sitting on the sidelines. And I think part of that speaks to what Jon just spoke about. The other thing I would just remind everybody on the market share is, you know, historically we have always grown market share. It's just when there's been unusual events. You know, if you go back to the great financial crisis, if you go to COVID. And I would say, you know, now in this period we've got these very, very steep depreciations. I mean, we saw two this year, we saw one last year, we've just never seen these before. And so I think working through these, we'll get through them and then like always, we'll continue to grow market share. Operator And we'll take our next question from Rajat Gupta with J.P. Morgan. Your line is open. You may ask your question. Rajat Gupta -- JPMorgan Chase and Company -- Analyst Got it. Great. Thanks for taking the question. I wanted to just quickly ask on -- how the first quarter was trending. Given you exited or you had positive comps in the fourth quarter, should we expect that trend to continue here? You know, because seasonality would imply like comp should move lower or negative again in the first quarter, but curious like what you're seeing and any updates you can give us there? And then just a broader question on the long-term target. It's almost like a four-year range, 2026 to 2030. Could you explain the thought process behind such a wide range? And where is the uncertainty really coming from? Is it on the demand side or is it on supply side? Any more color there would be helpful. Thanks. Bill Nash -- President and Chief Executive Officer Yeah. So thanks for the question, Rajat. On the first question, kind of comp cadence, for the quarter, December, January negative comps, February was a positive comp resulting in a positive for the quarter. Since the quarter ended, it's been a little choppy. We've seen some weakness and right now, quarter to date, albeit early, and again choppy. We're seeing about a mid-single-digit negative comp right now, but again, it's early on and it's been choppy the last month and a half. On the second question, the market -- oh, the long-range targets -- well, keep in mind on the market share, we'll come back at the end of this year and update that. On the units one, yes, you're right, it is a wide range. We're going to come back and provide more visibility into that once we just get a better idea of the market recovery. Keep in mind, I think COGS latest numbers had this year finishing up about 35.5 million units, where traditionally we're at 40 million. And so I think their expectation to ours going to be fairly flat, maybe up a little bit in total used units in the zero to 10, it might be flat to even up a little bit less. So I think you're expecting when it comes to total used units, there's probably more growth in the over 10-year-old vehicles in the zero to 10. And so that's something of -- we want to get some visibility into that, especially when it comes to the units. The volatility also plays into it, though, because it also impacts -- vehicle volatility plays into it because it impacts your buy rate, which ultimately can impact your wholesale. So as we get more visibility into this market recovery, we'll come back and narrow that time frame for you. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yeah. The expectation is not to hit the wide end of that range. Really is we're going to provide visibility once there's just a bit more stability in the market like building. Rajat Gupta -- JPMorgan Chase and Company -- Analyst Just to clarify on the zero to 10-year-old comment. I mean if you look at what's happened with like new car sales the last few years and just users originated on them, is there a chance that the zero to 10-year-old market takes another step down in calendar '25 before turning positive? Because that should be fairly visible, right, given what we know that's happened over the last three, four years? Bill Nash -- President and Chief Executive Officer Yeah. I think the zero -- again, I think the zero to 10, what the estimates are out there is it's going to be flat to up a little bit. So we'll see where that actually pans out. I mean the -- keep in mind, there is a new car dynamic here where less cars were sold a couple of years ago. But again, I would also look back to -- we saw bigger declines back in the great financial crisis. So we'll see estimates are that it's going to be flat to up a little bit. Rajat Gupta -- JPMorgan Chase and Company -- Analyst Great. Thanks for all the color. Bill Nash -- President and Chief Executive Officer Thank you. Operator We'll take our next question from Brian Nagel with Oppenheimer. Your line is open. You may ask your question. Brian Nagel -- Oppenheimer and Company -- Analyst Hey, guys. Good morning. Bill Nash -- President and Chief Executive Officer Good morning, Brian. Brian Nagel -- Oppenheimer and Company -- Analyst This is my first question. With regard to used sales, and maybe a bit bigger picture. But I guess it's much in the business. Look, you got the positive comp, albeit slightly. You got positive used car unit comp here in Q4. And then in response to the prior question, you talked about maybe some incremental weakness here in early Q1? But the question I have is as you're looking at this business, recognizing that you don't give guidance, there's a lot of moving parts out there. What has to happen? Because it seems like a lot of the key factors are starting to turn more favorable for CarMax, whether it be used car pricing moderating, rate stabilization, we're seeing the data, a better tax refund season. So I guess as you look, what's the kind of the equation, if you will, to get back to that normalized used car unit comp? Bill Nash -- President and Chief Executive Officer Yeah. I think we've hit on a couple of the major issues. The affordability has to continue to move down. I was encouraged, I mean this quarter was the first time we've been under a $26,000 average selling price in like two years. So that's a step in the right direction. I think there's a lot of positives out there you referred to like interest -- hopefully interest rates at least stable. And once they start coming down, I think that's certainly a good guide as well. I think building on some of the stuff that we've been working on, the efficiencies that we're working on that we've talked about is the fact that we've got sequential improvement. Jon talked about CAF becoming more of a full-credit spectrum lender. There's opportunity there. I think there's opportunity in omni. I mean we've got a lot of good things that are positive, but we do need a little help on the affordability. And I think we also -- just that volatility, don't underestimate. I mean, when you have a year where you see depreciation of $6,000, keep in mind, we saw some appreciation at the beginning so it offset some of that. But $6,000 really in two different time periods. We just haven't seen that. And we had another of those last year, I would call them, their price corrections. And I think having some visibility into that and stabilizing that. If you get a -- we've shown like continued market share growth over the years, whether it's been appreciation, whether it's been normal depreciation, keep in mind, normally in the end of the year, there is depreciation. It's probably $1,500, $1,600 a year. We've been able to take market share in all those environments. So I think those are the two big factors for us. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer I think a couple of other just demand signals that we've seen. Web traffic was up again this quarter, year over year. Finance applications were up again this quarter. So there's demand signals that we're seeing out there just boils down to like we've been talking about really to the affordability question. Brian Nagel -- Oppenheimer and Company -- Analyst That's very helpful. If I could ask just one follow-up. You've talked now -- forget about tightening lending standard. We're seeing -- we're clearly seeing the benefits of that in the CAF data and particularly, I guess, the loan loss provision. I guess the question I have is to what extent is -- are your -- what potential is that, your tighter lending now impacting demand for used cars at CarMax? Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Yeah. Appreciate the question. I mean, certainly, I think that's the benefit of our platform, right? CAF is able to tighten, and it's able to slow down to partners that are willing to -- maybe they're going to ask for a little more money down, it's going to be a little bit higher rate. But they are going to have the option to buy, and we see people get picked up down the line. We're very careful when we test rates. And we do any underwriting adjustments. We watch it very carefully. We test it. We know what's going to get picked up, and we're very thoughtful about the sales impact and any decision we make, whether it'd be pricing or underwriting. So certainly, there's going to be a few people that might not choose that higher rate that more down payment from our lenders down the line. But we believe, generally, they are very excited, Tier 2 partners are, when CAF passes on stuff, and they can go pick it up. Bill Nash -- President and Chief Executive Officer Yeah. But Brian, it's definitely a headwind. I mean we're tightening. We've got great partners and picking up some of that, but they don't pick it all up. And then it goes down to Tier 3, and you've seen where our Tier 3 volume just is in general. So there's no doubt that the tightening in general of the industry is having an impact. Brian Nagel -- Oppenheimer and Company -- Analyst Got it. I appreciate it. Thank you. Bill Nash -- President and Chief Executive Officer Thank you, Brian. Operator And we'll take our next question from Craig Kennison with Baird. Your line is open. You may ask your question. Craig Kennison -- Robert W. Baird and Company -- Analyst Hey. Good morning. Thanks for taking my question. I wanted to ask about sourcing, Bill. You bought 11% fewer cars. I know depreciation is a headwind, but you also have these innovative new tools like instant offer and Max offer that I thought might provide like a secular lift. So I'm wondering on instant offer, can you shed any light on just overall appraisal activity and buy rates to give us a feel for the kind of traction you have with that tool? And then on Max offer, how much of that 45% growth, albeit from a small base, is attributable to adding new dealers versus momentum with the existing dealers? Bill Nash -- President and Chief Executive Officer Yeah. Thanks for the question, Craig. On the -- from consumers, again, I think it's more -- I think when you're talking about the decline, it's more of a year-over-year dynamic. Buy rate this year was down a little bit versus last year. But keep in mind, last year, I think in the fourth quarter, we saw about $2,000 of appreciation. We didn't see that this quarter. It was much, much less than that by the end of the quarter. That has an impact because consumers always think their cars are worth more money. When you can put more on it, that helps buy. On the Max offer, the increase there is really -- well, we've increased the overall number of deals. The way we think about it, how many active dealers do you have. And of the deals we have, we saw about a 50% increase in active dealers actually using the tools. So we're encouraged by that. We haven't expanded to other areas. We think there's a lot of opportunity to continue to move this along, which is what I said earlier in my prepared remarks. It's going to be a focus for us. Craig Kennison -- Robert W. Baird and Company -- Analyst Thank you. Bill Nash -- President and Chief Executive Officer Thank you. Operator And we'll take our next question from Michael Montani with Evercore ISI. Your line is open. You may ask your question. Michael Montani -- Evercore ISI -- Analyst Hey guys. Good morning. Thanks for taking the question. Just wanted to ask to start off. If you think about this year, is there any reason that this wouldn't be another year for CarMax to take market share? And then is there a need at all to either sacrifice gross profit per unit or potentially loosen credit standards to take share? Bill Nash -- President and Chief Executive Officer Yeah. I mean, look, you could -- if you lowered your prices, you could absolutely sell some more cars. But I'll go back to what I said earlier. I mean we're focused on profitable market share. And look, you can see it with the publicly traded auto retailers, they're swapping it off, sometimes units for GPU. And when you look at total comp GPU, it just -- it hasn't been necessarily a good decision. So we'll continue to test the elasticity. Our goal, obviously, every year is to gain market share. I am hopeful just looking at kind of depreciation trends, I'm hoping that this year will be a more normal depreciation and depreciation cycles, but we'll see. And I think that's going to be a factor. And again, I always couch it with we'll always test the elasticity to see if it makes sense to lower margins in order to get more units and more total gross profit. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer And as far as the CAF lending standards, I mean, I think that's one of the things that we're optimistic about. We've tightened. We've tightened for a very for very purposeful reason. Obviously, we have partners down the line. But as Bill mentioned, yes, you do lose sales when CAF tightens. But we believe that the cycle will turn. The consumer will get healthier. And we're excited to go after more market share up and down the credit spectrum. So I think it absolutely is an opportunity on the other side of this. Bill Nash -- President and Chief Executive Officer Yeah. I'm optimistic with CAF. And I know the Fed is -- there's a decision on when they're going to cut rates. I mean it stabilizes and doesn't sound like it's going to go up. I'm going to knock on wood right now. But as that comes down, that's a tailwind for us for sure on a couple of different fronts from a CAF standpoint, margin standpoint but also from a sales standpoint. Michael Montani -- Evercore ISI -- Analyst Just how to think about the mid-70s SG&A ratio target as well. Is that feasible for this year? Or how should we think about that? Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yeah. I think the mid-70s SG&A as we've talked about, that is absolutely our next step in our progress. I think in terms of this coming year, we're going to need strong consumer demand also return. There's, obviously two variables in that equation, right? You have SG&A, which I feel we've made a lot of strides this past year, and we'll continue to focus on. But we really need that gross profit number to accelerate in order to hit that mid-70%. I think you hit it in FY '25 would really be a tough putt, just given the level -- the volumes of our unit sales over the past couple of years here. Bill Nash -- President and Chief Executive Officer Well -- and I think also just given that they think that the market is overall going to be fairly flat. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer Yes. Exactly. Michael Montani -- Evercore ISI -- Analyst Got it. Thank you. Bill Nash -- President and Chief Executive Officer Thank you. Operator We'll take our next question from John Healy with Northcoast Research. Your line is open. You may now ask your question. John Healy -- Northcoast Research -- Analyst Thank you. Just wanted to ask a bit about the wholesale business. It's a nice position where we kind of ended the year in terms of GPUs on wholesale. I was kind of curious kind of how you see that business from a GPU performing in '25, just given the expected, kind of, the sending of the used car market in terms of values with improving supply. Do you think we can hold at this kind of $1,000 level for a while? And can you talk a little bit about what you're doing with the auction side of the business? I think in your prepared remarks, you mentioned that you're going to build a stand-alone auction facility, which I believe would be the first one for the company, maybe where you're going with that business and does that decoupling of auctions from the retail location potentially market new business line that you're getting into, not only from a self-sufficiency standpoint but maybe from a revenue standpoint? Bill Nash -- President and Chief Executive Officer Yeah. Good morning, John. Thank you for the questions. On the wholesale margin, yes, I was especially pleased with the wholesale margin. Just given some of the year-over-year dynamics, the team did a phenomenal job. And I think it speaks to just some of the improvements we made in our overall auction process with technology, that kind of thing. I think you're thinking about it the right way. If you look at it on a yearly basis, I think a good target, give or take a little bit, is similar to what we ran for the year this year on wholesale margins. So I think you're thinking about that the right way. And I think it speaks to a lot of the improvements that we've made in the business. As far as the stand-alone auction facility, it is -- it's interesting because we actually have a couple of stand-alone auction facilities that we've built over time, just that are generally located right close to one of the stores from a extra capacity. But this -- you're right, this will be the first time that we've gone out and really kind of built the facility with the intention of it having to be an auction facility. I think going forward, you're going to see some of the stand-alone auction/production. The one that we're talking about for next year is just an auction facility. We may run some logistics hub out there. But right now, it's an auction facility. And it's really going to help us in a couple of different ways. The facility will be close to existing stores. And we'll be able to take wholesale vehicles out of existing stores, allow them to leverage the lots more from a service standpoint, more from a sales standpoint. We're ending up moving a lot of cars anyway from satellite and XF stores. And now taking them to this location will just help us continue to make benefits or improvements at stand-alone facilities, and I think they'll pan out well for us going forward. So our intention as we go forward is to build more of these things, get more of some of the wholesale sales out of the stores to free up space, free up capacity that we think will have other benefits to the business, whether it's, hey, you can do a little bit more MaxCare retail service. There's a lot of benefits to that, plus just the standardization of having these bigger locations in closed proximity to stores will also help us to innovate even quicker than what we've been able to do. John Healy -- Northcoast Research -- Analyst Thank you, guys. Bill Nash -- President and Chief Executive Officer Thanks, John. Operator We'll take our next question from Scot Ciccarelli with Truist Securities. Your line is open. You may ask your question. Scot Ciccarelli -- Truist Securities -- Analyst Good morning, guys. Another market share follow-up, I guess. Bill, why do you think you lose share in disruptive periods? I mean historically, industry leaders in various retail verticals actually accelerate share gains during disruptive periods. What is different about the CarMax model why that may not follow a similar pattern? Bill Nash -- President and Chief Executive Officer Well, when you say disruptive periods, I mean, the three periods, and I think Great Recession, if I think about COVID, I think what we're doing -- what's going on a little bit different. I mean here more recently, it's this vehicle volatility that I talked about earlier. And when there are shocks to the system of large depreciation over a short amount of time, you know how we run the model. We're like, OK, should we lower our prices? And is it overall better from a profitability standpoint? And what we've seen is it just doesn't pan out that way, which is why we hold the margins steady. Now there's lots of competitors don't do that. And they do what's right for their business. They've got different demands. They've got credit lines, things like that. So they have to do what's right for their business, and we have to do what's right for our business. So you will see -- we've seen this year when we hold the prices and others are liquidating inventory for various reasons. We -- trying to give up market share. Scot Ciccarelli -- Truist Securities -- Analyst So just philosophically, like is that the right decision over time? Like I understand like you can capture more profit. But if you want to be a growth vehicle and you have been for 20-plus years, I think you said 38, right? Is that the right decision to kind of hold the line on price and protect profit? Or should you be seeking market share? I'm just wondering philosophically how you guys are thinking about that? Thanks. Bill Nash -- President and Chief Executive Officer Yeah. No, I mean, it's a good question. And obviously, we think philosophically, look, the buying cycle is every five years. And who -- if you had asked me at the beginning of this year, do you think there might be a price correction? I would say maybe, yes, probably another price correction coming out of last year. I didn't expect there to be two price corrections. I don't see this type of environment being able to replicate itself year after year. I think these are very unusual circumstances. So I do think that here in the short term, it is the right thing to do. It's not like this is going to be continuing to repeat. If it was, then we would look at the business model. But I think we believe that this is the right move. Scot Ciccarelli -- Truist Securities -- Analyst Got it. Thank you very much. Bill Nash -- President and Chief Executive Officer Thanks, Scot. Operator And we'll take our next question from Christopher Bottiglieri from BNP Paribas Exane. Your line is open. You may ask your question. Ian Davis -- Exane BNP Paribas -- Analyst Hey, everyone. This is Ian Davis on for Chris. Thanks for the question. It seems you've been a bit more reliant on warehouse facilities than ABS in recent years ex the Tier 2 and Tier 3 pilot. So wondering if you could elaborate a little bit on how average FICO expected losses of loans in these warehouse facilities compares to maybe what you see in the -- similarly loans and ABS facilities? Jon Daniels -- Senior Vice President, CarMax Auto Finance Operations Sure. Yes, I can take that one, Ian. Yes, I mean, I think you said excluding Tier 2 and Tier 3, so we're talking focused on the Tier 1 business. Yes, I mean, our focus is generally to bring in all the volume from Tier 1 into our warehouse facilities, and our goal would be to get it all into the ABS market. Now fundamentally, there are things that you need to pare back. There are certain criteria they need to meet. You need to have a title, they need to have made the first payment, etc. So you're going to have some higher-risk stuff fall out. It's always going to happen. But our goal is to move all that volume from originations through the warehouse into ABS. Inherently because of those exclusions, you're going to have probably a little bit higher FICO in the ABS deals. If you look at deal over deal over deal, that change in FICO is coming from us changing what we're originating and that ultimately flowing through. Remember, it's going to take six, seven months to get into an ABS deal for when we originate it. But that movement over time in ABS is really what we're underwriting, probably less so what we're holding out into in a warehouse line. Enrique Mayor-Mora -- Executive Vice President, Chief Financial Officer And from a total capacity standpoint, where we certainly leverage the ABS market is the most efficient way to fund the business. We also -- as you've noted, we've also grown our kind of non-ABS funding with our banking partners. We have tremendous banking partners, and we've built out some facilities, additional facilities there. And we talked about that several years ago about just bridging out and having alternative finance options as we continue to grow the business. And that's what we've done. Ian Davis -- Exane BNP Paribas -- Analyst Got it. That's helpful. And if I could just slip another question in. We had read that CarMax may be removing the 30-day return policy. Is there any truth for this? And if there is, could you contextualize maybe how material abandoning the policy would be to earnings? And perhaps any other context in terms of customers valuing it or maybe using it, any context there would be helpful. Bill Nash -- President and Chief Executive Officer Yeah. So what you're referring to is the 30-day money-back guarantee. And we're modifying it to 10 days money back, which is still industry-leading. And that's really due to really some experiential headwind, both for customers and associates, which also add increased expenses when you're talking about most of our customers -- a lot of our customers take advantage of it well before the 30 days. You get past the 10, some people are just working the system. Others, what we run into is some headwinds with DMVs and municipalities getting title work squared away, checks back, taxes back, that kind of thing. So I think that's what you're referring to. Ian Davis -- Exane BNP Paribas -- Analyst Yeah. That's right. Yeah. That's helpful. Thank you. Bill Nash -- President and Chief Executive Officer Yep. Operator And we'll take our next question from Chris Pierce with Needham. Your line is open. You may ask your question. Chris Pierce -- Needham and Company -- Analyst Hey. Good morning. I just wanted to ask, are we set up for another period of excessive depreciation in the wholesale market because as we get the tax refund season, which we're sort of already through in the wholesale market, there's going to be normal depreciation. But like are we set for further excessive depreciation and what would limit excessive depreciation? Because as far as I can tell, dealers are already carrying lower inventories versus normal. So how -- is there anything that the industry can do to combat that? Or is it just we need to see that excessive depreciation because we need to get back to a $22,000 average used car? Bill Nash -- President and Chief Executive Officer Yeah. Chris, I'm not necessarily seeing what you're calling excessive depreciation. I'm really seeing more depreciation that's more in line with kind of what you would see between 2015 and 2019. It's actually, if look at it, appreciate a little bit more. But again, your average sales price is up higher. Just recently have we started to see some depreciation. So I haven't seen what you're referring to as far as excessive depreciation. And I think we may see more of a historical type of appreciation, depreciation throughout the year, but we'll see. Chris Pierce -- Needham and Company -- Analyst And is that because of lower dealer volumes or inventories? Or is that what gives you confidence that you think you'll see that -- you won't see abnormal depreciation this year like you saw last year? Bill Nash -- President and Chief Executive Officer Well, I'm just going off of what I've seen so far kind of calendar year to date and comparing it to historical averages. The last two, three years, it's kind of been all over the board from an appreciation standpoint and a depreciation standpoint. If you kind of take those years out and look more historical like 2015 to 2019, what does the depreciation curve look like? What does the NAAA data look like? I would say this year, calendar year to date is falling more in line with kind of what those cycles look like. So that's what I'm referring to. Chris Pierce -- Needham and Company -- Analyst OK. Appreciate it. Thank you. Bill Nash -- President and Chief Executive Officer Thank you, Chris. Operator And we'll take our next question from John Murphy with Bank of America. Your line is open. You may ask your question. John Murphy -- Bank of America Merrill Lynch -- Analyst Good morning, guys. I just wanted to see if you could talk about sort of the split of the zero to six and the seven to 10-year-old vehicle sold in the quarter and maybe on a year-over-year basis. And as we think about this, unless there's some massive economic boom that is not really expected, seems like through '24 and '25, the zero to six-year-old car population will continue to shrink, which is a supply issue for you guys, unless you shift a little bit more to the seven to 10-year-old bucket but also would help you out a lot on affordability. So it just seems like it could be a small strategy shift here that could alleviate some of the issues that we're facing. Just curious if you could comment on that as well. So mix and then potentially pushing a little bit more to seven to 10s. Bill Nash -- President and Chief Executive Officer Yeah. So I think looking at the quarter, if I look at zero to four versus, let's call it five plus, we were similar to last year. We were a little bit older than the third quarter. So I think our mix is -- it's interesting. It's almost 50-50 when you look at zero to four and the five plus. When I look at zero to six maybe versus the seven plus, it's -- for last year, it's very similar. Let's call it a 70-30 split, zero to six-year-old 70%, seven-plus 30% for us. Last quarter was a little bit -- and I made the remark last quarter that we had a little bit shift in some newer cars. So last quarter was a little bit more in the zero to six than this quarter. And I think, look, as we move forward, and I mentioned this earlier, you're right, as far as new cars, a year or two year ago, weren't as many new cars sold. But again, I would just point to you're still in the ballpark of 15-plus million SAAR run rate, which is much higher than what we saw coming out of the great financial crisis. And the other thing I would point to is that our self-sufficiency now for a couple of years on a yearly basis continues to be over 70%, which we didn't have prior, and we think that's a great tailwind. So for us, the supply hasn't really been the issue, it's the price. Now you could say, well, supply of just overall vehicles out there is causing price to go up, but our ability to acquire inventory has not been the issue. It's more the price. John Murphy -- Bank of America Merrill Lynch -- Analyst Got it. And then just one follow-up on the sourcing side that you just talked about. You said dealer sourcing was up 21,000 units, about 45% on a year-over-year basis in the quarter. Is that something you think could increase? I mean, I think there's some concern that vehicles, late-model vehicles get caught further up funnel as openly, Manheim and ATB all kind of help with their virtual auctions to keep vehicles further up funnel. But it sounds like you actually kind of refute that with the increase in dealer sourcing. How much of an opportunity do you think dealer sourcing could be over time or maybe a risk as they hold on to more vehicles? Bill Nash -- President and Chief Executive Officer Yeah. Look, I'm pleased with the max offer. I mean we're continuing to buy more vehicles to that. We think it's a great product that's really resonating with dealers. And when you look at the mix of vehicles we're buying, it's actually skewed more retail than wholesale, which is a huge benefit. I think it's a very competitive product. And like I said, we've got a lot of dealers that are actively using it, and we plan to continue to push that. And when we talked about -- we've historically talked about self-sufficiency. We've always talked about it from a standpoint of just the consumers. Well, it really should start adding in this bucket as well, which, again, just helps keep our self-sufficiency very high. John Murphy -- Bank of America Merrill Lynch -- Analyst Great. Thank you very much. Bill Nash -- President and Chief Executive Officer Thank you, John. Operator We'll take our next question from David Bellinger with Mizuho. Your line is open. You may ask your question. David Bellinger -- Mizuho Securities -- Analyst Hey. Thanks for the questions. Maybe just a follow-up on that last one and acquiring cars directly from consumers. Can you talk through just the quality of those vehicles? Are there any material differences versus those at the auction? And just overall, is there enough inventory out there from consumers in that $20,000 to $25,000 range right now? Or is that more of a limited opportunity? Bill Nash -- President and Chief Executive Officer Yeah. Actually, from a -- I was encouraged because this quarter, if you look at our sales are less than 20% -- or less than $20,000 vehicles, while year over year, it was similar. It actually was better than the third quarter. So we had more less than $20,000 cars. I think as far as what do the vehicles look like for consumers, buying vehicles from consumers is just a huge benefit. I mean you're buying vehicles that people in that area generally like. And the reason why it's important is to self-sufficiency is because those are more profitable than having to go off-site. And if you're having to go and secure all your vehicles off-site, that's an expensive channel to go through. And we have the luxury of having such a high self-sufficiency that we have to really kind of go out and obtain vehicles off-site on a limited basis. David Bellinger -- Mizuho Securities -- Analyst Got it. And if I could just follow up one more on your quarter-to-date comment down mid-single digit. Is there anything that's really changed to explain that shift from positive comps in February, maybe some of the tax refund flows that might have impacted, but also, is there potentially just some pause on the part of the consumer with steeper price depreciation lately? And if that's the case, how long could that last? Bill Nash -- President and Chief Executive Officer Yeah. I think it just -- it's probably more just speaks to consumer. I think the consumer is still in a tough spot. The tax season -- I think overall, the tax season this year has been a little softer, although refunds are higher, the actual -- the refund dollar amounts are higher, the actual number of refunds is behind where it was last year. And while prices have gone down, obviously, interest rates are higher than a year ago. I think you still have the pressure of the consumers on everything else that they're basically buying food and housing, get inflationary pressure there. So I think it speaks more to the consumer mindset at this point. And like I said, it's been choppy. I mean there's been a -- we've had some weather things going on. It's just -- there's been a lot going on. So we'll continue to monitor and make adjustments as we can as we go through. David Bellinger -- Mizuho Securities -- Analyst Got it. Thanks, Bill. Bill Nash -- President and Chief Executive Officer OK. Thank you, David. Operator And we'll take our last question from David Whiston with Morningstar. Your line is open. You may ask your question. David Whiston -- Morningstar -- Analyst Thanks. Good morning. Just a two-part question on affordability. You mentioned ASPs are continuing to fall, which is good. But are consumers even noticing the lower ASPs at this point? Are they entirely focused on unfavorable monthly payment due to interest rates? And also on that trading trade-off scenario for affordability, is the consumer moving into cars away from light trucks? Or is it more just shifting into older than five-year-old vehicles? Bill Nash -- President and Chief Executive Officer Yeah. Well, I think it's always been about the monthly payment for the consumers. And the prices are coming down. And as Jon said, the actual monthly payment is coming down, but it's still over $100 more than what it used to be. And so when a consumer is thinking about buying a car, let's say they're in a car right now. Well, they're making a certain monthly payment. And all of a sudden, they look and say, OK, well, I'm ready to swap out. They're like, oh my gosh, I'd have to pay another $100. That's where we're seeing it. And again, there's lots of data points to say consumers are just waiting on the sidelines right now and either for the monthly payments to come down or to figure out a way to work it into their budget with all the other expenses. So I think that's what you're seeing. Was there another part of your question? David Whiston -- Morningstar -- Analyst Yes. Are they also moving away from light trucks into cars? Or are they just focused on an older vehicle to try to -- Bill Nash -- President and Chief Executive Officer It's interesting. If you look at the numbers for the quarter, from a class standpoint, we actually sold more like from a mix standpoint, more larger SUVs, more expensive type of cars. Now the average age, both of our wholesale and retail is up on what you've sold. But it's not like they're choosing to go compact versus larger SUV types, at least not for the quarter. David Whiston -- Morningstar -- Analyst OK. Are you worried about the off-lease shortage ramping up with the anniversary of the start of the chip shortage? Bill Nash -- President and Chief Executive Officer Yeah. Look, leased vehicles have never been a big piece of our inventory strategy. I mean -- and we've been through cycles before where there's been leased cars, and we've been through cycles where there haven't been leased cars. I think we've been in a cycle where there really haven't been leased cars because a lot of the manufacturers are requiring lease customers to take it back to the franchise dealer. We have customers wanting to sell it to lease vehicle, and we can't buy them because of those restrictions. And quite honestly, it's -- I think it's been a nice benefit for the franchise dealers, because they're able to get these things at a good rate base off of leases that were basically done a while ago. That will play out and not become such a benefit as we go into the future. But it just hasn't been a big source of inventory for us historically. David Whiston -- Morningstar -- Analyst OK. Thank you. Bill Nash -- President and Chief Executive Officer Thank you. Operator Thank you. We don't have any further questions at this time. I'll hand the call back to Bill for any closing remarks. Bill Nash -- President and Chief Executive Officer Great. Well, listen, I want to thank everybody for joining the call today. Obviously, we've got lots going on. And we appreciate your questions and your support. Before I close, again, I just want to congratulate all of our associates for being named as a Great Place to Work for the 20th year in a row. We're all very proud of that and really speaks to our folks and the culture that they've really enhanced here and implemented here at CarMax. So thanks for your time today, and we'll talk again next quarter.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and welcome, everyone, to the Lockheed Martin first quarter 2024 earnings results conference call. Today's call is being recorded. [Operator instructions] At this time, for opening remarks and introduction, I would like to turn the call over to Maria Ricciardone, vice president, treasurer, and investor relations. Please go ahead. Maria Ricciardone -- Vice President, Investor Relations Thank you, Lois, and good morning. I'd like to welcome everyone to our first quarter 2024 earnings conference call. Joining me today on the call are Jim Taiclet, our chairman, president, and chief executive officer; and Jay Malave, our chief financial officer. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com, and click on the investor relations link to view and follow the charts. With that, I'd like to turn the call over to Jim. Jim Taiclet -- Chairman, President, and Chief Executive Officer Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2024 earnings call. I'd like to begin today's discussion with a brief overview of our quarterly financial results, the state of the U.S. Department of Defense budget, status updates on some key programs and recent advancements made to support our vision of 21st Century Security that integrates the latest digital technologies. Then Jay and Maria will provide more detailed information about quarterly highlights and financials. The increasingly unstable geopolitical environment in the world today makes it essential for industry and government to strengthen our nation's capabilities to deter and defend against further aggressive behavior against the U.S. and our allies. We here at Lockheed Martin are continuing to invest heavily to improve our design and production capabilities while actively partnering with leading companies inside and outside the A&D industry to incorporate a wide range of technologies. As a result, we delivered robust revenue growth across the company. And we maintained a robust backlog of $159 billion, reflecting alignment between our advanced technology solutions and our customers' key missions and priorities. These first quarter results reinforce our confidence in our ability to achieve the full year financial expectations we shared in the most recent earnings call. Moreover, the approved FY '24 defense budget reflected many positives for Lockheed Martin, consistent with National Defense Strategy priorities, too. Highlights include robust funding for munitions multiyear procurement, continued investment in hypersonics and classified activities, and ongoing support for programs such as Black Hawk, CH-53K heavy-lift helicopter, the fleet ballistic missile, C-130, and F-35. There are also additions to the original budget submission, including F-35 aircraft, C-130s, and combat rescue helicopters. The initial budget request for FY '25, while still very early in the process, continued support of many of these same major programs, including the F-35, CH-53K, UH-60M and others in addition to emphasis on advanced munitions programs such as JASSM and LRASM, PrSM, Javelin, GMLRS and PAC-3 as well as hypersonic conventional prompt strike and the long-range hypersonic weapon. In addition to that, the next-generation interceptor is getting support, which I'll address more in a moment. In this week, funding of $95 billion for Ukraine, Israel, and Indo-Pacific security supplementals passed the House and is currently under consideration in the Senate. We expect FY '25 presidential budget requests and additive supplemental funding will provide a strong underpinning for future growth over the next several years for our company, giving us further confidence in our long-range plan. While demand for these key programs remains elevated, it is also essential that our program performance in terms of quality, safety, cost and schedule gets and stays at the highest level. On our most significant programs, I, Jay and my senior executive team are personally and directly involved. On the F-35, we remain focused on program execution in terms of concurrent development, production and sustainment. And we are bringing all relevant resources across our company and collaborating closely with our customers and suppliers to fully implement the TR-3 capabilities that everybody is looking forward to getting. These capabilities based on the new core processor, data storage unit and pilot display will ensure that the F-35 is not only the most capable and effective fighter aircraft in the world, but that they will also further advance its abilities to act as the air domain quarterback of Joint All Domain Operations for the U.S. and its allies. We're encouraged by the solid progress made over the last few months toward resuming deliveries, including improvement in aircraft mission system capabilities and system stability as we advance from prior software versions toward the combat training capable configuration. Flight testing of this configuration is now underway, and we're on a path we expect to be on with regard to maturing the system with approximately 95% of TR-3 capabilities in this flight test program. The test results to date support our expected timeline of delivering the first TR-3 combat training-capable aircraft in the third quarter and then transition to a fully combat-capable aircraft in 2025. As planned, there will be continual software updates to support further capability insertions over the Block 4 program and beyond. While there were no final deliveries of F-35 jets in the first quarter, we're maintaining our production rate and continue to expect an aircraft delivery range for 2024 between 75 and 110, which requires timely receipt of the necessary hardware from TR-3 suppliers along the way. The F-35's advanced combat and interoperability capabilities continue to create strong demand for the aircraft internationally, too. In the quarter, the Czech Republic became the 18th nation to join the F-35 global team with a signed letter of offer and acceptance, making it official its intent to procure 24 F-35s. In addition, the U.S. State Department approved a potential foreign military sale to Greece for up to 40 F-35s. And Singapore announced its intent to purchase 8 F-35As to complement the 12 F-35Bs to which it has already previously committed. Also in the lower air domain, while we're disappointed in the cancellation of the future attack reconnaissance aircraft program, or FARA, Sikorsky remains committed to delivering innovative and reliable aviation capabilities to our domestic and global customers. With a strong foundation of more than $20 billion in backlog, bolstered by expected and funded growth in the heavy lift CH-53K helicopter program, Sikorsky's multiyear outlook is stable. We're also encouraged by the Army's renewed commitment to Black Hawk production and modernization as well as our ability to address mission gaps with capability upgrades that leverage Lockheed Martin's broad portfolio of solutions in the lower air domain, things such as autonomy, AI, etc. Turning now to missile defense missions which, given recent world events, are becoming more critical than ever. We continue to lead the industry. Last week, the Missile Defense Agency, or MDA, selected Lockheed Martin to deliver the new homeland missile defense capability for the United States, which is called the next-generation interceptor or NGI. As the MDA's NGI prime contractor, Lockheed Martin will provide the most modern, reliable, and technically advanced Interceptor in the history of this system. This program was a 1LMX, that's our digital transformation born digital program, meaning we embrace model-based engineering, digital tools, processes, and technologies from the very, very start of this program. Now as it continues on its path to the critical design review, integration with broader weapons system and flight tests, I'm proud of the Lockheed Martin team that enabled all of this. We were MDA's early down select before it was even on their schedule because we're so far in front to get this essential homeland defense capability off to a fast start. Earlier this quarter, the long-range discrimination radar, or LRDR, completed final acceptance and was officially handed over to the Missile Defense Agency in preparation for an operational capability baseline decision. And what that means is final transition to active service for that radar to help defend the country. The LRDR is a cutting-edge national asset providing the benefits of both low- and high-frequency radars to search, track and discriminate incoming missiles with an open system approach, enabling the customer to add incremental capabilities such as hypersonic defense. This is located up in Alaska and the prime location where we can sense early what any attack might look like and respond to it. What that really does though is create an elevated deterrent to any kind of attack like that. So it's really great that LRDR about ready to go online. Now both NGI and LRDR will be critical elements within the overall Homeland Defense mission. And they're going to be integrated into the broader defense architecture with a battle management system that we call command control battle management and communications or as the military calls it C2BMC. So that's the system that's going to be used to integrate the radars, the missiles and allow us to defend the country. In April, Lockheed Martin was selected for a potential 10-year, $4 billion follow-on C2BMC next-generation contract with the MDA, demonstrating, again, our leadership position in battle management systems for homeland defense. Under this contract, we'll continue to modernize and expand the system's capabilities to enhance global integration, improve space domain awareness and optimize sensor connectivity and data fusion to levels never done before, all of which will create the most complete picture of these incoming threats as I just spoke about a minute ago. Separately, we also continue to advance our 21st Century Security solution through collaboration with strategic commercial partners across the tech, telecom, microprocessor, and other industries to support the national defense. Citing just one example, we announced Lockheed Martin will work with Intel to support the simulated transition for advanced microelectronics packaging or staff program for the Office of the Undersecretary of Defense for Research and Engineering. This chip SAC-related collaboration will provide a revolutionary leap in defense systems' capabilities using high-performance, U.S.-built semiconductors. Over the next 18 months, we'll integrate our latest sensor open system architecture technology with Intel semiconductors with the intent to ultimately implement, test and complete production through the U.S. Navy's Lockheed Martin MH-60 Romeo helicopter program. I'll now turn it over to Jay for more highlights and some additional commentary on our financial results. Jay? Jay Malave -- Chief Financial Officer Thanks, Jim. I'll cover the consolidated results and touch on some additional highlights before handing it off to Maria, who will discuss the quarterly financials by business area. And then I'll come back to discuss the outlook and close out the remarks. Starting with Chart 4. We had a strong start to the year. First quarter sales of $17.2 billion increased 14% year-over-year led by MFC and RMS. While the results benefited from an extra calendar week compared to 2023, normalized year-over-year sales growth was a solid 5%. We saw strong labor and material throughput, indicative of an improving supply chain. We continue to work closely with our supply chain partners to enhance quality and performance proactively and as needed, expand the breadth and depth of our engagement at supplier locations. Segment operating profit of $1.7 billion was up 4% year-over-year, with margins up 10.1% and included the anticipated $100 million reach forward loss associated with the classified missile program at MFC. Excluding this charge, Lockheed Martin segment margins were 10.7% primarily reflecting year-over-year lower profit adjustments. GAAP earnings per share of $6.39 were down 3% as year-over-year benefits from higher profit and lower share count were more than offset by higher interest expense, lower pension income and mark-to-market gains. Book-to-bill in the first quarter was just below one. Notably, Space booked several large national security orders in the quarter, including SDA tracking layer and other significant classified awards, contributing to a book-to-bill ratio of 1.8 and record backlog of $33 billion at space. We generated $1.3 billion of free cash flow in the quarter after investing $360 million in research and development and $380 million in capital expenditures. Share repurchases were $1 billion, and we returned $780 million through our dividend. Shifting over to additional highlights in the quarter. We are pleased with the progress we are making on the F-16 program. The first three F-16 Block 70 jets varied from Greenville, South Carolina to Bahrain in March. To date, Lockheed Martin has produced five F-16 Block 70 jets for Bahrain with additional 11 in various stages of production and testing. We also presented the first two F-16 Block 70 aircraft to Slovakia's deputy prime minister and minister of defense, underscoring the deepening partnership between the two countries. In addition, the State Department notified Congress of authorization of the sale of 40 F-16s and related upgrades and support to Turkiye. The latest deal builds on our long relationship and history with Turkish Air Force. We are confident the F-16 Block 70 and Viper upgrade package provide advanced 21st Century Security capabilities with affordable operating and life cycle costs for Turkiye. We also continue to upgrade our weapon systems for longer range standoff capability. In February, in the U.S., the extended range ER variant of GMLRS, guided multiple launch rocket system, achieved success in its first operational test. The U.S. Army fired two unitary warhead ER GMLRS variants with a HIMARS launcher, demonstrating precision and advanced capability closer to production. The U.S. Army also awarded Lockheed Martin the fourth production contract for early operating capability Precision Strike Missiles, known as PrSM. This award will allow for a significant increase in production quantities to meet Army demand for long-range surface missiles. And hypersonics. Following the recent end-to-end flight test, we completed the test program of the Air-Launched Rapid Response Weapon, or ARRW, with full confidence in its revolutionary capabilities. We have demonstrated successful all up around end-to-end performance on multiple occasions. ARRW provides the U.S. with the earliest air-launched, fully qualified, production-ready supersonic solution -- hypersonic solution, I'm sorry. And Lockheed Martin is prepared to quickly deliver additional tactical, operational and lead behind hypersonic strike assets that can be rapidly deployed to the U.S. military. We also continue to advance hypersonic strike capability in the land and sea domains through the long-range hypersonic weapon and conventional prompt strike programs. Both solutions have a full year milestones ahead as we progress toward operational capability. Shifting to integrated air and missile defense arena, the Aegis Weapon System successfully executed one of the most complicated ballistic missile defense test in the first quarter when the system tracked and intercepted a medium-range ballistic missile amid multiple decoys. The test employed the latest updates to the system and demonstrates the reliability of Aegis to operate in a dynamic threat environment, and we're constantly evolving the Aegis system. This quarter, we made further progress on our efforts to integrate with PAC-3 to enable an affordable combat-proven IAMD capability for maritime engagements and expand the mission capability of our systems. I'll pause here, and let me turn it over to Maria to cover the business areas. Maria Ricciardone -- Vice President, Investor Relations OK. Thanks, Jay. Today, I will discuss first quarter year-over-year results for the business areas, starting with aeronautics on Chart 5. First quarter sales at aero were over $6.8 billion, up 9% year-over-year, and that's 1% normalized for the extra week in 2024. The increase was primarily due to higher volumes across F-35 and Skunk Works and the continued production ramp on the F-16 program. Segment operating profit is comparable year-over-year with higher volume being offset by lower margin development contract mix and lower net profit adjustments mainly on the F-35. Aeronautics backlog remains at a healthy $57 billion, which includes 373 F-35s, 80 C-130Js, and 132 F-16s, supporting growth into 2025 and beyond. Turning to missiles and fire control on Chart 6. Sales increased 25% from the prior year, 16% normalized for the extra week driven by production ramps on tactical and strike missile programs, primarily GMLRS, HIMARS, and JASSM and LRASM. Integrated air and missile defense also saw higher volume on PAC-3 and THAAD. As expected, segment operating profit decreased 18% year-over-year primarily due to the $100 million loss on the classified program Jay mentioned previously. Normalizing for the loss, MFC's margins would have been 13.7%. Now I'd like to provide a quick update on our annual production capacity plans for key programs. PAC-3 is currently at 500 missiles, growing to 550 in 2025 and 650 by '27. GMLRS currently is at 10,000 missiles, growing to 14,000 by 2025. JASSM and LRASM currently at about 650 missiles, growing to 1,100 by 2026. And HIMARS currently at 72 launchers, growing to 96 next year. Shifting to rotary and mission systems on Chart 7. Sales increased 16% in the quarter, 8% normalized for the extra week driven by higher volume across the entire portfolio, including radar and laser programs within integrated warfare systems and sensors various programs within C6ISR and the CH-53K and SEAHAWK programs within Sikorsky. Operating profit increased 23% due to higher volume and favorable contract mix, partially offset by lower profit adjustments. Finally, with space on Chart 8. Sales increased 10% year-over-year, 2% normalized for the extra week to approximately $3.3 billion. The growth was driven by higher volume on the fleet ballistic missile program and ramp-ups on hypersonic and next-generation Interceptor programs within strategic and missile defense as well as higher volume on space development agency transport and tracking layer programs within national security space. Operating profit increased 16% compared to Q1 2023 driven by higher volume and ULA equity earnings, partially offset by lower net profit adjustments primarily on the next-gen OPIR program. Now I'll turn it back to Jay to wrap up our prepared remarks. Jay Malave -- Chief Financial Officer Thanks, Maria. Let's turn to the outlook on Chart 9. Our expectations for Lockheed Martin's 2024 financial outlook remain unchanged from what we said in January with the strong first quarter results positioning us well to achieve the consolidated full year outlook. We continue to expect free cash flow to be in the range of $6 billion to $6.3 billion, including over $3 billion of independent research and development and capital investments while the dividend, along with the expected $4 billion of share repurchases, support our return to shareholders, targeting a mid-single-digit free cash flow per share growth over the longer term. All right, to close out and summarize on Chart 10. We're off to a solid start in 2024 and remain laser-focused on execution to our customer and programmatic commitments while building momentum toward delivering our full year guidance. Through our 1LMX transformation, we are reengineering our internal processes by providing the automations and capabilities needed to drive efficiency, increase velocity, and enhance key captures and programs. 1LMX will enable us to combine the depth and breadth of our portfolio with the expertise and dedication of our people to drive 21st Century Security solutions for our customers and continue to create value for our shareholders. With that, Lois, let's open up the call for Q&A. Questions & Answers: Operator [Operator instructions] Our first question is from the line of Doug Harned from Bernstein. Please go ahead. Doug Harned -- AllianceBernstein -- Analyst Great. Thank you. Good morning. I'd like to start to make sure we have a good understanding of the F-35 right now with TR-3. As you said, the Air Force has talked about this as well, and it looks like that timeline's moved back to some point in Q3. And there's just been a great deal of slippage in the timeline over the last few years. Block 4 has been delayed, and the new budget has cut deliveries in 2025 and '26 extensively to avoid having to do later Block 4 upgrades. Now I mean, you've been able to keep production and revenues up, although deliveries and cash payments are off. But how can we get confident in the trajectory? And perhaps, Jim, maybe you could talk about what a positive or more negative scenario might look like for production and deliveries over the next two years and what it would mean for the revenue and cash trajectory. Jim Taiclet -- Chairman, President, and Chief Executive Officer Sure, Doug. So I think it's important to understand that we're doing, as I said earlier, concurrent development and production and then advancing the sustainment capability as well all at the same time. Most of these complex programs go through a period of development and then a production run largely off of that design base or that engineered base of what the aircraft is supposed to look like and how it's going to perform. The F-35 is different in a sense that development has been going on since the day the program started years and years ago, and it's going on today. Now the good news about that is you have step function increases and capability every few years. And as a result of the F-35's capacity to do that, the government just came out and extended the expected service life of the aircraft another decade or two, I think it was. So this is a good thing, but it's also an extremely difficult thing to do and even to predict schedule, right? It's our responsibility to hold cost and schedule. But we're -- we don't control all the variables, let me just say, and that's OK. We're still the OEM, and we're still responsible. And so what we run into on TR-3 is just a level of complexity and executing the step function increase that's pretty, I'd say, novel or dramatic. What the team is doing at our company is we're integrating a series of components, devices, software and managing and integrating all of that. And so what's happening now is we are ringing out all the software through all of the new hardware and integrating it into all the aircraft other systems. And that's taken longer than our team predicted. The way we're going to get at that is if you think of it as a Release 1 and a Release 2, and we've got a lot of confidence in this stage, Doug. Release one, if you think of it that way, is what we're calling, along with the U.S. government, a combat training-capable aircraft, meaning we can get these jets in the hands of squadron, wing and regional commanders so that they can start training their pilots on them and training their maintenance organizations and also getting their bases and infrastructure, spare parts pools and everything else sort of in operational shape, if you will. Once we get the final software load for the fully combat-capable version of TR-3 sometime in the next few months, then those aircraft could be deployed into actual combat operations. And you'll have the training, the maintenance. They're bringing out the operational patterns and procedures on how to actually fly the jet in combat. So we'd like to be able to do it sooner, but this is the schedule we're on. And I'd say for the combat training-capable aircraft, we're highly confident based on the test results so far that those will be deliverable in the third quarter. Jay, do you want to say anything else about cash flow and -- Jay Malave -- Chief Financial Officer Yes, sure. Doug, I'll just add. As Jim mentioned, this combat training capability and configuration, as Jim mentioned, supports the training of the squadron standing up to new squadrons and decreasing the amount of time that the aircraft are parked. All that -- what that does is really avoids any type of significant disruption. And so what this does is really keep our production on track here in 2024 and then beyond as well. As Jim mentioned, in 2025, we'll have further capability inserted. And we'll actually start delivering and inserting Block 4 type of capability as well. And you may have heard, you referenced comments made from the U.S. military, and they've discussed a Block 4 reimagined. And what that would entail is an insertion schedule that's really tied to an executable plan that can be provided by industry so we can avoid these types of disruptions. And so when you look at it in the short term, could there be pressure on the Lot 15 through 17 contract profitability and potential movement around in cash flow? Yes. But I think over the longer term and the medium term, think we're working in coordination with our customer to make sure that we can deliver the capabilities the customer wants but on an executable schedule. And if we're able to do that, then we should be able to keep the program on track from a production standpoint. Operator Our next question is from Peter Strauss from Barclays -- I'm sorry, David Strauss from Barclays. David Strauss -- Barclays -- Analyst Good morning. Thanks for taking the question. So since Q4, we have a '24 budget. It looks like we're going to get a very large supplemental. You won NGI. How might all those things together change how you're thinking about where you kind of fall in the revenue guide this year and the potential for revenue growth in '25 to accelerate kind of off this low single-digit level? Jay Malave -- Chief Financial Officer Well, David, as we mentioned for this quarter, we started off pretty solid, just on an apples-to-apples basis, 5% growth in the first quarter lines up pretty well with a midpoint guidance range, which is 2% to 2.5% and the high end of that range being, say, around 3.5%. So we're well positioned to deliver on that expectation. It is possible similar to last year that we could see some upside toward the higher end of the sales guide range there. So again, really good start that enables that. As we think about 2025, what you saw in the budget, what we're seeing here in the supplemental gives us higher confidence that we'll continue to grow. We talked about growth in -- starting in 2023, a year earlier than we had originally anticipated, accelerating in 2024 and then giving us more confidence that we'll see at least the same, if not more, growth in 2025. We'll give you -- later in the year, we'll give you a much better update in terms of what we're seeing. But right now, all this bodes well to our sustained growth in terms of what we've been driving to, not only in '25, but beyond '25 as well. Operator The next question is from the line of Peter Arment from Baird. Please go ahead. Peter Arment -- Robert W. Baird and Company -- Analyst Yes, thanks. Good morning, Jim and Jay. On missiles and fire control, can you talk maybe about the confidence in your margin guidance for the year, just given the 1Q margin performance was certainly the lowest that we've seen in many years. And we know the classified losses are supposed to expected to continue. But you've got kind of this inflecting top line. I think Maria called out all the production increases and just -- do the losses just get smaller in the classified? Or are we going to see some offsets just because of the higher volume? Maybe if you could just give more color on kind of your expectations on the market performance profile going forward. Thanks. Jay Malave -- Chief Financial Officer Sure, Peter. MFC was a little light because of two factors. First, as we mentioned, we did have the $100 million loss provision that we recorded. In addition to that, their profit adjustments were lighter year-over-year by about $20 million. And so that's a function really of calendarization. We'll see profit adjustments in the -- throughout the rest of the year improve and so getting us back to what we had guided to. Just as a reminder, we're anticipating -- and that was fully anticipated in our guidance for MFC that we would have additional -- or could have additional losses in the back half of the year associated with this classified program. And so what our guide, what it implies from where we are today, we recorded $100 million, is in the range of another $225 million in the back half of the year, which would be provided for in this expectation. Now going beyond that, we've talked about this, and I'll just deal with the question upfront in terms of can timing change. And it's possible that we could record additional losses here in 2024 depending on other factors as the year goes on. There's factors such as technical milestone achievement through the balance of the year, discussions with our customers, visibility to the funding -- so visibility to funding. So all of those factors go into the determination and whether you have to recognize a loss earlier. You'll see coming out in our 10-Q that we've actually ranged the potential losses on this program, which would be in excess -- additional losses in excess of $1 billion. So at least you can have an opportunity to size it. The timing of which is still to be determined, and we've got about $225 million at least embedded in our guide for the balance of the year. What -- going back to MFC for the year, if you really take apart their expectation, the impact of this at $325 million of losses in the year anticipated, they're offsetting a fair amount of that in their guide. I mean, the impact of that is 270 basis points alone. And their total full year guide is down about 210. And so you're seeing offsetting improvement within MFC. It's not entirely one-for-one, but their underlying performance has been solid, and we expect that to continue. Jim Taiclet -- Chairman, President, and Chief Executive Officer And, Peter, it's Jim. I used to fly these aircraft for the USAF, and I can assure you that the capability that's being developed here at MFC and a classified program will have very, very long legs. There's going to be many, many years, we believe, of orders to follow. So yes, for a quarter, for the year, maybe for a couple of years, we're going to absorb the loss provisions that Jay described. But I think if you look in the area under the curve for the life cycle, it's going to be significantly positive. And so we want to get there as efficiently as we can. This is a long run franchise program that I think the U.S. government is going to support for a very long time. Jay Malave -- Chief Financial Officer Right. I think it's important to keep that in mind. We spent a lot of time talking about timing of losses and things like that and the magnitude of it. But we also spend a lot of time internally going through just where we are in the progress of the program as well as the business case. And I can assure you the business case is accretive to it at a -- above our cost of capital. And as Jim mentioned, it's going to provide strong returns for many years to come. Operator Our next question is from Matt Akers from Wells Fargo. Please go ahead. Matt Akers -- Wells Fargo Securities -- Analyst Good morning. Thanks for the question. I wanted to ask a couple on the next-gen interceptor win. I guess one, just how you were able to win, I think, ahead of when the original down select was expected. And then also whenever there's sort of a big contract like this, we always get questions on potential charges because we've seen some of that happen in the industry. So just your confidence that you've got the cost there sort of sized correctly. Jim Taiclet -- Chairman, President, and Chief Executive Officer So the company made a bet about three years ago and say, OK, we've got a digital transformation program that is going to take the whole company to this model-based engineering system. And that's all the way from requirements, acceptance from the government to sustainment years and years down the road. And we scoped this before. It's about a $6 billion, eight- to 10-year program to convert the entire company to a model-based engineering, production and sustainment operation. NGI was one of the pathfinder programs picked to implement this because there's no legacy to convert, right? There's no old blueprints to try to figure out how to make three-dimensional, which is something, by the way, we are doing for C-130 and other programs right now. But we could get off to the fast start on NGI because it was in this born digital category. Right from the proposal, we were using these digital technologies, 3D, CAD, and everything else and sharing data with the government in that fashion, and they were able to receive it. And we could thereby accelerate the schedule and contain the cost of the development and ultimately, the production, too, by using these tools. There were thee original players in this. One dropped out fairly early. The second was in kind of this final phase, if you will, of down select. And we're just ready to go and provided our proposal ahead of schedule. The other player, to my knowledge, provided a proposal also. And then the government was able to make a decision based on that. But I think because of our speed and our ability to demonstrate manageable costs over time, we won and kind of won early, if you will. I'll let Jay talk more about financials, but what I can assure you is the process of this bid did not require us to dive to the bottom on cost. So Jay, do you want to take it from there? Jay Malave -- Chief Financial Officer Sure. We're currently performing already under a contract, and that contract will continue. We've talked about this before. We've completed a preliminary design review in September of 2023. And we're on track for critical design review in 2025 and under the current contract as well as building test assets. So that will just continue under this down select. As far as pricing and costs, the current contract, because of development contracts, cost plus contract, it's low margin as you would expect, but nothing again abnormal. As far as future bidding that we provided for future types of contracts, there were various elements or different types of contract structures that the customer asked for. We provided those to the customer, none of which was based on aggressive pricing or bidding, as Jim mentioned. We've talked about this in the past, and we've taken a middle-of-the-road approach to our pricing, and this is no different. Operator Thank you. The next question is from Ron Epstein from Bank of America. Please go ahead. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Good morning, guys. Jim Taiclet -- Chairman, President, and Chief Executive Officer Good morning. Ron Epstein -- Bank of America Merrill Lynch -- Analyst With FARA off the table, and it looks like the flyer program has decent support, how are you thinking about the outlook for the vertical lift business? Where could we see some upside? What other competitions are out there? And how should we think about that? Jim Taiclet -- Chairman, President, and Chief Executive Officer Yes. So Ron, this is Jim here. As we kind of roll into the 21st century, what our company is trying to do is not just look at things through the programmatic lens or I'll call it vertical kind of column but also horizontally through the actual mission and figure out what technologies can accomplish the mission that will enable our core basic platforms to be successful as well. And that's how we're looking at the rotary business. It's not just at Sikorsky anymore. It is Sikorsky plus all of Lockheed Martin, right? And that's one of the reasons we're able to work with U.S. Army, Congress, and the broader U.S. government to increase support for, let's say, Black Hawk, for example, in spite of the fact that FARA is being canceled and there's another vertical lift program in the form of FLRAA, which is going to be a tiltrotor. So there are missions that the Black Hawk will be extremely well suited for in the rotary lower -- it's really the lower air domain. It's not just for rotorcraft. So how do we pair those rotorcraft, a traditional Black Hawk, let's call it, by modernizing the Black Hawk with digital technology to do what the Air Force would call collaborative combat aircraft, meaning you can in the lower air domain tie drones and unmanned, uncrewed aircraft to a Black Hawk using digital technology, and we've demonstrated that already. You can actually make the Black Hawk itself autonomous with no pilots in it being flown from a command center to do high-risk missions. So we're looking at the mission and saying, what can we do all across Lockheed Martin, whether it's through sensor fusion, AI, 5G, space-based sensor assets to make the Black Hawk, for example, a much longer live platform, a much more relevant platform and actually a very efficient platform compared to, say, the FLRAA aircraft that won't be able to do some of the missions anyway. So we have a strong confidence then in Sikorsky itself and the platforms that it does produce. And that includes CH-53K, which I mentioned the SEAHAWK, which is a Black Hawk that's configured for maritime operations that is pretty high tech as well. And so we feel really solid, as I think Jay said in his remarks, on Sikorsky's future with a backlog of $20 billion and the ability to modernize these really reliable in production aircraft to do new things and with missions in digital technology and other -- and integrate with other parts of LM and our partners to make those platforms relevant in the future. So I'll stop there. Jay, you have anything else you want to say? Jay Malave -- Chief Financial Officer Sure. Just a couple of things, as Jim mentioned. A stable outlook is the best way to describe it. As Jim mentioned, CH-53K is really the pillar. And those revenues between now and 2027 and 2028 are going to double. And so while we will see declines in other programs such as combat rescue helicopter, some declines on Black Hawk and others, the CH-53K will really offset all of those declines. We do have to go through a rebalance, a little bit of a rebalance of the workforce because the mix of development work versus production work is different than what we had originally anticipated. So we'll go through that. But I think the business, as I mentioned, will be -- is pretty stable. We're also, as Jim mentioned, continue to have dialogue and just investments in Black Hawk modernization, which will maintain its relevancy particularly in the JADC2 environment. And so, of course, you continue to see opportunities for not only the base missions that Black Hawk performs but other missions as well. Those dialogues are ongoing with the Army to determine what would be the best fit for those. And so as I mentioned, from a revenue standpoint over the next five years, it will actually go up over the next few years a little bit, come back down, but pretty much flat to where it is today. And so stability, I think, is the best way to describe it. Operator Our next question is from Rob Spingarn from Melius Research. Please go ahead. Rob Spingarn -- Melius Research -- Analyst Thank you. Good morning. Jim, if we put the impact of TR-3 to the side, on the last call, you underscored the importance of the supply chain in producing F-35s at a rate of 156. And one of the things that's made the F-35 program so well supported by Congress and international countries is the breadth of the supply chain. But is the complexity and scale of the supply chain limiting the potential and affordability of the program? And on future fighter aircraft programs, whether it be NGAD or F/A-XX, might we expect Lockheed to do more of the work in-house, the production work in-house when compared to F-35? Jim Taiclet -- Chairman, President, and Chief Executive Officer So it's a great topic, Rob. And so let's start with the origination of the F-35 program. It was intended, as you said, to be a wide-based allied program. I think it was seven literally partners, essentially treaty partners that were going to all get together and contribute their industrial capacity and their financial capacity to this program, given its importance and complexity and the scale that people are contemplating. So yes, we have a pretty broad supply chain. There were a couple of times when that's gotten a little tough for the program. COVID was one of those. So we had delayed deliveries out of the U.K. because the factories there weren't open, although ours were. So we will be mitigating any future programs that we have. And we're eager to have international production and sustainment partners, and we're going to expand that. But we're also going to apply some anti-fragility methodologies to those initiatives going forward. No one really thought of COVID, of course. But now that we've had that example, we need to know -- we know we need to have second and maybe third sources. And geographic diversity would be a positive thing from that perspective. So we'll just be a little more broadly thoughtful about how we do this. Having single sources outside the U.S. is probably not the best idea. There's an affordability issue around that, too. So we're just going to have to balance everything out. So based on its origination and essentially the commitment of the countries to the program, we do have that sort of spread out supply chain with a couple of weak spots in it. Look, another weak spot's canopies, right? How hard is it to make a glass canopy? Well, with this kind of stress and the kind of precision that's needed and put in an F-35 canopy together versus an F-4, which I used to look out a little bit. highly complex, hard to produce, single source, one of the big degraders that we have. So again, we're going to learn from that, whether it's a domestic or an international supplier going forward. In addition, as you pointed out, we are heavily insourcing when we can, and Lockheed Martin has the best technology. We're looking hard at making sure that we can control as much of the supply chain that is feasible and reasonable based on whatever program it is. And so, for example, on NGI, that was an MFC, Lockheed Martin Space collaboration to make sure that the most critical sensor components that we could produce in the company effectively and efficiently were the ones that were selected, OK? And so your topic is a really great one. We intend to actually geographically further diversify supply chain but really based on this anti-fragility concept of having two or three sources, either different parts of the world, different companies, different logistical chains, things like that where we won't run into some supply chain issues as much as we have on some prior programs, including F-35, honestly. Operator Next question is from Rob Stallard from Vertical Research. Please go ahead. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Jim Taiclet -- Chairman, President, and Chief Executive Officer Good morning. Rob Stallard -- Vertical Research Partners -- Analyst Jim, last quarter, you had some comments on contract structures and the way perhaps your customers have been dealing with defense industry in recent years. I was wondering if there's been any sort of resonance from your commentary and any willingness, early willingness from the customer to look at this in a fresh way. Jim Taiclet -- Chairman, President, and Chief Executive Officer So let me focus on digital service contracting because I think that's a really ripe opportunity area for the DoD to work with industry, not just the traditional defense fronts, if you will, but broader industry, too. We want to play on subscription basis ourselves. We want to bring in partners that will only be our suppliers on a subscription basis. So in terms of, say, 5G, connectivity services, backhaul, those kinds of things, AI, which needs constant refreshing and modeling. We will do a lot of the AI in-house, but we're not going to be possible to do all of it. We want to bring in partners. We announced a couple of them like NVIDIA and IBM. They want to work with us. So I do think we're starting to get interest inside government on how to do this. We proposed, frankly, ourselves, which will open up opportunity for a lot of other companies in different sectors an adjacent acquisition process within the DoD for digital services alongside the traditional DoD acquisition process for largely physical goods like aircraft, ships, etc. There's interest in that. We haven't gotten it over the line, so to speak. But I think there's a lot of advocacy across broad industry to do that and starting to be in Congress and other places in DoD as well. Along with that, we want to drive an open architecture system so that U.S. government has a lot of diversity in its potential suppliers because we're all working off of the same standards base as far as APIs, interfaces, frequencies, use and those kinds of things and synchronize that as much as we can with commercial industry so we can use more of their IP and more of their resources and more of their people. So I think that there's a lot of opportunity here, and we're getting -- starting to get some traction on it. But it's going to take a little bit of time to get those processes and those standards bodies put in place. But we're actually on it, and we have some partners and teammates agree with those. Jay Malave -- Chief Financial Officer I'll just add, Rob, we have seen some changes where the contract structure is more closely aligned with the capability that's being requested and the assessment of the technology maturation of that capability. And so you're not seeing as many of these kind of high-risk fixed-price development contracts that really don't work well for anybody because they don't optimize a solution, and they typically end up poorly for the contractor. And so we have seen those changes. Again, they're case by case. But I can tell you that at least what we're seeing, particularly in the higher risk, higher technology-type risk arenas, we are seeing a shift in contracting to contracting vehicles that are just more relevant to those circumstances. Jim Taiclet -- Chairman, President, and Chief Executive Officer Yes. And, Rob, maybe to support just another minute what Jay is speaking about in a more direct way here. I have a view, as you may have heard, that having a -- even a cost-based development project or program with a fixed price set of early production options is a tough thing to intellectually get at least my arms around, which is committing to cost and price on an object that really hasn't been fully invented yet. And we're looking really, really hard if that's -- in any opportunity that's presented to us in that context as a company. So that is one area where to, again, highlight what Jay is speaking about, more of an alignment of what can industry deliver on a reasonable risk basis. And so the government can get a successful program out of it, frankly, and not have massive write-offs in industry or cost overruns or long schedule delays. We think it's constructive to get some more of that alignment that Jay described. Operator Our next question is from George Shapiro from Shapiro Research. Please go ahead. George Shapiro -- Shapiro Research -- Analyst Yes. Good morning. A couple of quick ones for you, Jay. If the first quarter normalized growth was 5%, and even at the high end, you're looking for 3.5%. So will this be the fastest-growing quarter? And what slows down and obviously normalizing for the fourth quarter? And then the second question is the guide for other net was $400 million. First quarter is only negative 61. So I was expecting you might lower that number for the year. And so what was the reason why you didn't lower it? Thanks. Jay Malave -- Chief Financial Officer All right, George. On the quarterly profile for sales, as you mentioned, on a normalized basis, 5% growth here in the first quarter. I'd see it will slow down to low single digit in the second and third. And we're thinking that the fourth quarter probably flattish to maybe slightly down. You might recall that the fourth quarter of 2023 ended up being stronger than we were originally expecting. And so our compare in the fourth quarter of this year would be a little bit tougher. And so you're talking in second and third quarters probably 2% to 3% type of growth numbers with a flattish year-over-year in the fourth quarter. As far as other net, George, you got me there. There's probably some opportunity in there. We'll calibrate that, and we'll update the guide in the second quarter for the full year. But it's probably more prudent to just wait till we're halfway through the year and just make an assessment of the entire outlook, and we'll just leave it there. Operator And our next question is from Noah Poponak from Goldman Sachs. Please go ahead. Noah Poponak -- Goldman Sachs -- Analyst Good morning. You talked about Pentagon terms of trade and contract structure here, and you mentioned NGI as cost plus development. But you also mentioned they asked for -- to kind of see multiple contract structures. Curious what they asked to see, where you landed on those maybe interim windows between development and production. And then, Jay, the loss-making classified program in MFC, what year do you expect that to be profitable on an annual basis? And just to confirm, there's one program in that position, correct, not more than one? Jay Malave -- Chief Financial Officer Yes, that's correct, Noah, just one program. And I think right now, our outlook would say probably in -- if you're -- probably 2028 is where we would expect that to flip to positive. Again, it's a question of the timing of the recognition of the losses, but if you assume kind of more linear approach from here on out to be about 2028. As far as NGI, just again, the different contracting vehicles are ranging anywhere from cost plus to fixed price incentive. There is no -- the customer hasn't selected exactly which vehicle wants to pursue. So there's nothing actually under contract for the next phase or phases. Right now, we're going to continue to perform under the current contract, as I mentioned. We got critical design review in 2025. We also, as part of this contract, we have to provide some test assets. And between now and then, I'm sure we'll have discussions in terms of getting future phases on contract. Jim Taiclet -- Chairman, President, and Chief Executive Officer Yes. And Noah, the principle behind what Jay and I are speaking to here is that we want to be agnostic ultimately from a risk-adjusted basis on whatever contract format that the government would like to employ in these matters. So if it's going to be any kind of -- I'll say, a highest risk would be again, fixed price production on something that's not been designed yet. We will put a high-risk premium in the future and have on those kinds of requests of the government. And what's interesting is they're asking for multiple types on NGI. And that's going to give them an opportunity to see what contract risk transfer to industry is now going to cost, at least in Lockheed Martin's case because we will reply on that basis to say, if you want us to have this kind of contract, we have to have a risk premium that's significantly higher than, let's just say, a pure cost-based contract to give you the greatest contrast. And that's just the principle we're going to use from now on. So if you want a certain price point as government, we will provide you a contract format that will get you that price. But if you want to shift more risk to industry, you'll see a higher risk premium come back in our proposal, if you will. So that's the principle we're using and that we'll continue to use. Maria Ricciardone -- Vice President, Investor Relations Lois, I think we have time for one more question since we're close to the top of the hour. So let's take one more, and then we'll be done. Operator Thank you. And that question will come from Rich Safran from Seaport Research Partners. Please go ahead. Rich Safran -- Seaport Research Partners -- Analyst Good morning. Thanks. Two-part question on C2BMC. I want to know if you could discuss the P&L impact in terms of timing and margins. Second and more broadly, I thought you might discuss a bit about how this fits with your strategy for pulling in mission-centric programs and what the opportunity set there is? Jay Malave -- Chief Financial Officer OK. For timing, we've been under contract. This is a follow-on for us. And what I could do, Rich, is I don't recall offhand exactly what the annual revenues are, but I got Maria follow up on you. But this is, again, just a continuation of those activities there. And so no significant change I don't think from a revenue standpoint or margin expectation at RMS for this. Jim Taiclet -- Chairman, President, and Chief Executive Officer And so from the mission-centric approach, this is actually a pretty good example of that, Rich, in pulling through or extending existing programs, right? And so we're trying to show is that you can map data flows through a full mission, right, which generally includes and now cyber, by the way, upfront. So you have a cyber track, then you have to have a sensing capability. You then have to have a way to get sensor data, whether it comes from a satellite or a submarine back into the command and control system. Along with that, you have to have targeting and tracking quality data that comes from beyond just the sensing of an object that's a target. You have to be able to track the target in a way that you can then guide a projectile to it and take it out or put a cyber attack against it or laser or whatever the effector will be. And so the term of art for that is not pretty. It's called a kill chain. We want to put these chains together in diverse ways that are, again, anti-fragile, which means if you take out one link in that chain, you don't eliminate your ability to complete the mission. And so that's where we're looking at data flows in addition to physical flows, if you will, right? And if we can help create an open architecture system that can provide multiple routes of data flows that can affect missions, then we will be able to have kind of a head start on our platforms and designing to those. And that's what we're doing with Black Hawk for example. That's what we're doing using the C2BMC system. The LRDR radar and ultimately, the NGI missile will be based on a similar architecture. We'd like that architecture to be common outside of Lockheed Martin as well as inside because that will open up more suppliers to us and also provide the government more competitive options. So this is all coming together, and I'm kind of glad you asked the question here at the end because it's very intentional. OK. Thanks, Maria. Thanks, everybody, on the call. I want to also express my appreciation to everybody at Lockheed Martin for their relentless focus on this operational execution I mentioned, driving innovation and excellence. And we're all doing this in support of our customers. That's the reason. We have a vision for 21st Century Security that we think will keep deterrence high in an increasingly complex and threatening global environment. As a company, we have a strong backlog, as you heard. We're driving operating discipline across the whole organization and this continuous improvement mindset we have. So all that's designed to position our company for you as shareholders for future growth and attractive and reliable returns to shareholders over a long period of time. So thank you all again for joining us today, and we look forward to speaking with you on our next earnings call in July. Lois, that concludes our call. Thanks. Answer:

the Lockheed Martin first quarter 2024 earnings results conference call

Operator Good day, and welcome, everyone, to the Lockheed Martin first quarter 2024 earnings results conference call. Today's call is being recorded. [Operator instructions] At this time, for opening remarks and introduction, I would like to turn the call over to Maria Ricciardone, vice president, treasurer, and investor relations. Please go ahead. Maria Ricciardone -- Vice President, Investor Relations Thank you, Lois, and good morning. I'd like to welcome everyone to our first quarter 2024 earnings conference call. Joining me today on the call are Jim Taiclet, our chairman, president, and chief executive officer; and Jay Malave, our chief financial officer. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com, and click on the investor relations link to view and follow the charts. With that, I'd like to turn the call over to Jim. Jim Taiclet -- Chairman, President, and Chief Executive Officer Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2024 earnings call. I'd like to begin today's discussion with a brief overview of our quarterly financial results, the state of the U.S. Department of Defense budget, status updates on some key programs and recent advancements made to support our vision of 21st Century Security that integrates the latest digital technologies. Then Jay and Maria will provide more detailed information about quarterly highlights and financials. The increasingly unstable geopolitical environment in the world today makes it essential for industry and government to strengthen our nation's capabilities to deter and defend against further aggressive behavior against the U.S. and our allies. We here at Lockheed Martin are continuing to invest heavily to improve our design and production capabilities while actively partnering with leading companies inside and outside the A&D industry to incorporate a wide range of technologies. As a result, we delivered robust revenue growth across the company. And we maintained a robust backlog of $159 billion, reflecting alignment between our advanced technology solutions and our customers' key missions and priorities. These first quarter results reinforce our confidence in our ability to achieve the full year financial expectations we shared in the most recent earnings call. Moreover, the approved FY '24 defense budget reflected many positives for Lockheed Martin, consistent with National Defense Strategy priorities, too. Highlights include robust funding for munitions multiyear procurement, continued investment in hypersonics and classified activities, and ongoing support for programs such as Black Hawk, CH-53K heavy-lift helicopter, the fleet ballistic missile, C-130, and F-35. There are also additions to the original budget submission, including F-35 aircraft, C-130s, and combat rescue helicopters. The initial budget request for FY '25, while still very early in the process, continued support of many of these same major programs, including the F-35, CH-53K, UH-60M and others in addition to emphasis on advanced munitions programs such as JASSM and LRASM, PrSM, Javelin, GMLRS and PAC-3 as well as hypersonic conventional prompt strike and the long-range hypersonic weapon. In addition to that, the next-generation interceptor is getting support, which I'll address more in a moment. In this week, funding of $95 billion for Ukraine, Israel, and Indo-Pacific security supplementals passed the House and is currently under consideration in the Senate. We expect FY '25 presidential budget requests and additive supplemental funding will provide a strong underpinning for future growth over the next several years for our company, giving us further confidence in our long-range plan. While demand for these key programs remains elevated, it is also essential that our program performance in terms of quality, safety, cost and schedule gets and stays at the highest level. On our most significant programs, I, Jay and my senior executive team are personally and directly involved. On the F-35, we remain focused on program execution in terms of concurrent development, production and sustainment. And we are bringing all relevant resources across our company and collaborating closely with our customers and suppliers to fully implement the TR-3 capabilities that everybody is looking forward to getting. These capabilities based on the new core processor, data storage unit and pilot display will ensure that the F-35 is not only the most capable and effective fighter aircraft in the world, but that they will also further advance its abilities to act as the air domain quarterback of Joint All Domain Operations for the U.S. and its allies. We're encouraged by the solid progress made over the last few months toward resuming deliveries, including improvement in aircraft mission system capabilities and system stability as we advance from prior software versions toward the combat training capable configuration. Flight testing of this configuration is now underway, and we're on a path we expect to be on with regard to maturing the system with approximately 95% of TR-3 capabilities in this flight test program. The test results to date support our expected timeline of delivering the first TR-3 combat training-capable aircraft in the third quarter and then transition to a fully combat-capable aircraft in 2025. As planned, there will be continual software updates to support further capability insertions over the Block 4 program and beyond. While there were no final deliveries of F-35 jets in the first quarter, we're maintaining our production rate and continue to expect an aircraft delivery range for 2024 between 75 and 110, which requires timely receipt of the necessary hardware from TR-3 suppliers along the way. The F-35's advanced combat and interoperability capabilities continue to create strong demand for the aircraft internationally, too. In the quarter, the Czech Republic became the 18th nation to join the F-35 global team with a signed letter of offer and acceptance, making it official its intent to procure 24 F-35s. In addition, the U.S. State Department approved a potential foreign military sale to Greece for up to 40 F-35s. And Singapore announced its intent to purchase 8 F-35As to complement the 12 F-35Bs to which it has already previously committed. Also in the lower air domain, while we're disappointed in the cancellation of the future attack reconnaissance aircraft program, or FARA, Sikorsky remains committed to delivering innovative and reliable aviation capabilities to our domestic and global customers. With a strong foundation of more than $20 billion in backlog, bolstered by expected and funded growth in the heavy lift CH-53K helicopter program, Sikorsky's multiyear outlook is stable. We're also encouraged by the Army's renewed commitment to Black Hawk production and modernization as well as our ability to address mission gaps with capability upgrades that leverage Lockheed Martin's broad portfolio of solutions in the lower air domain, things such as autonomy, AI, etc. Turning now to missile defense missions which, given recent world events, are becoming more critical than ever. We continue to lead the industry. Last week, the Missile Defense Agency, or MDA, selected Lockheed Martin to deliver the new homeland missile defense capability for the United States, which is called the next-generation interceptor or NGI. As the MDA's NGI prime contractor, Lockheed Martin will provide the most modern, reliable, and technically advanced Interceptor in the history of this system. This program was a 1LMX, that's our digital transformation born digital program, meaning we embrace model-based engineering, digital tools, processes, and technologies from the very, very start of this program. Now as it continues on its path to the critical design review, integration with broader weapons system and flight tests, I'm proud of the Lockheed Martin team that enabled all of this. We were MDA's early down select before it was even on their schedule because we're so far in front to get this essential homeland defense capability off to a fast start. Earlier this quarter, the long-range discrimination radar, or LRDR, completed final acceptance and was officially handed over to the Missile Defense Agency in preparation for an operational capability baseline decision. And what that means is final transition to active service for that radar to help defend the country. The LRDR is a cutting-edge national asset providing the benefits of both low- and high-frequency radars to search, track and discriminate incoming missiles with an open system approach, enabling the customer to add incremental capabilities such as hypersonic defense. This is located up in Alaska and the prime location where we can sense early what any attack might look like and respond to it. What that really does though is create an elevated deterrent to any kind of attack like that. So it's really great that LRDR about ready to go online. Now both NGI and LRDR will be critical elements within the overall Homeland Defense mission. And they're going to be integrated into the broader defense architecture with a battle management system that we call command control battle management and communications or as the military calls it C2BMC. So that's the system that's going to be used to integrate the radars, the missiles and allow us to defend the country. In April, Lockheed Martin was selected for a potential 10-year, $4 billion follow-on C2BMC next-generation contract with the MDA, demonstrating, again, our leadership position in battle management systems for homeland defense. Under this contract, we'll continue to modernize and expand the system's capabilities to enhance global integration, improve space domain awareness and optimize sensor connectivity and data fusion to levels never done before, all of which will create the most complete picture of these incoming threats as I just spoke about a minute ago. Separately, we also continue to advance our 21st Century Security solution through collaboration with strategic commercial partners across the tech, telecom, microprocessor, and other industries to support the national defense. Citing just one example, we announced Lockheed Martin will work with Intel to support the simulated transition for advanced microelectronics packaging or staff program for the Office of the Undersecretary of Defense for Research and Engineering. This chip SAC-related collaboration will provide a revolutionary leap in defense systems' capabilities using high-performance, U.S.-built semiconductors. Over the next 18 months, we'll integrate our latest sensor open system architecture technology with Intel semiconductors with the intent to ultimately implement, test and complete production through the U.S. Navy's Lockheed Martin MH-60 Romeo helicopter program. I'll now turn it over to Jay for more highlights and some additional commentary on our financial results. Jay? Jay Malave -- Chief Financial Officer Thanks, Jim. I'll cover the consolidated results and touch on some additional highlights before handing it off to Maria, who will discuss the quarterly financials by business area. And then I'll come back to discuss the outlook and close out the remarks. Starting with Chart 4. We had a strong start to the year. First quarter sales of $17.2 billion increased 14% year-over-year led by MFC and RMS. While the results benefited from an extra calendar week compared to 2023, normalized year-over-year sales growth was a solid 5%. We saw strong labor and material throughput, indicative of an improving supply chain. We continue to work closely with our supply chain partners to enhance quality and performance proactively and as needed, expand the breadth and depth of our engagement at supplier locations. Segment operating profit of $1.7 billion was up 4% year-over-year, with margins up 10.1% and included the anticipated $100 million reach forward loss associated with the classified missile program at MFC. Excluding this charge, Lockheed Martin segment margins were 10.7% primarily reflecting year-over-year lower profit adjustments. GAAP earnings per share of $6.39 were down 3% as year-over-year benefits from higher profit and lower share count were more than offset by higher interest expense, lower pension income and mark-to-market gains. Book-to-bill in the first quarter was just below one. Notably, Space booked several large national security orders in the quarter, including SDA tracking layer and other significant classified awards, contributing to a book-to-bill ratio of 1.8 and record backlog of $33 billion at space. We generated $1.3 billion of free cash flow in the quarter after investing $360 million in research and development and $380 million in capital expenditures. Share repurchases were $1 billion, and we returned $780 million through our dividend. Shifting over to additional highlights in the quarter. We are pleased with the progress we are making on the F-16 program. The first three F-16 Block 70 jets varied from Greenville, South Carolina to Bahrain in March. To date, Lockheed Martin has produced five F-16 Block 70 jets for Bahrain with additional 11 in various stages of production and testing. We also presented the first two F-16 Block 70 aircraft to Slovakia's deputy prime minister and minister of defense, underscoring the deepening partnership between the two countries. In addition, the State Department notified Congress of authorization of the sale of 40 F-16s and related upgrades and support to Turkiye. The latest deal builds on our long relationship and history with Turkish Air Force. We are confident the F-16 Block 70 and Viper upgrade package provide advanced 21st Century Security capabilities with affordable operating and life cycle costs for Turkiye. We also continue to upgrade our weapon systems for longer range standoff capability. In February, in the U.S., the extended range ER variant of GMLRS, guided multiple launch rocket system, achieved success in its first operational test. The U.S. Army fired two unitary warhead ER GMLRS variants with a HIMARS launcher, demonstrating precision and advanced capability closer to production. The U.S. Army also awarded Lockheed Martin the fourth production contract for early operating capability Precision Strike Missiles, known as PrSM. This award will allow for a significant increase in production quantities to meet Army demand for long-range surface missiles. And hypersonics. Following the recent end-to-end flight test, we completed the test program of the Air-Launched Rapid Response Weapon, or ARRW, with full confidence in its revolutionary capabilities. We have demonstrated successful all up around end-to-end performance on multiple occasions. ARRW provides the U.S. with the earliest air-launched, fully qualified, production-ready supersonic solution -- hypersonic solution, I'm sorry. And Lockheed Martin is prepared to quickly deliver additional tactical, operational and lead behind hypersonic strike assets that can be rapidly deployed to the U.S. military. We also continue to advance hypersonic strike capability in the land and sea domains through the long-range hypersonic weapon and conventional prompt strike programs. Both solutions have a full year milestones ahead as we progress toward operational capability. Shifting to integrated air and missile defense arena, the Aegis Weapon System successfully executed one of the most complicated ballistic missile defense test in the first quarter when the system tracked and intercepted a medium-range ballistic missile amid multiple decoys. The test employed the latest updates to the system and demonstrates the reliability of Aegis to operate in a dynamic threat environment, and we're constantly evolving the Aegis system. This quarter, we made further progress on our efforts to integrate with PAC-3 to enable an affordable combat-proven IAMD capability for maritime engagements and expand the mission capability of our systems. I'll pause here, and let me turn it over to Maria to cover the business areas. Maria Ricciardone -- Vice President, Investor Relations OK. Thanks, Jay. Today, I will discuss first quarter year-over-year results for the business areas, starting with aeronautics on Chart 5. First quarter sales at aero were over $6.8 billion, up 9% year-over-year, and that's 1% normalized for the extra week in 2024. The increase was primarily due to higher volumes across F-35 and Skunk Works and the continued production ramp on the F-16 program. Segment operating profit is comparable year-over-year with higher volume being offset by lower margin development contract mix and lower net profit adjustments mainly on the F-35. Aeronautics backlog remains at a healthy $57 billion, which includes 373 F-35s, 80 C-130Js, and 132 F-16s, supporting growth into 2025 and beyond. Turning to missiles and fire control on Chart 6. Sales increased 25% from the prior year, 16% normalized for the extra week driven by production ramps on tactical and strike missile programs, primarily GMLRS, HIMARS, and JASSM and LRASM. Integrated air and missile defense also saw higher volume on PAC-3 and THAAD. As expected, segment operating profit decreased 18% year-over-year primarily due to the $100 million loss on the classified program Jay mentioned previously. Normalizing for the loss, MFC's margins would have been 13.7%. Now I'd like to provide a quick update on our annual production capacity plans for key programs. PAC-3 is currently at 500 missiles, growing to 550 in 2025 and 650 by '27. GMLRS currently is at 10,000 missiles, growing to 14,000 by 2025. JASSM and LRASM currently at about 650 missiles, growing to 1,100 by 2026. And HIMARS currently at 72 launchers, growing to 96 next year. Shifting to rotary and mission systems on Chart 7. Sales increased 16% in the quarter, 8% normalized for the extra week driven by higher volume across the entire portfolio, including radar and laser programs within integrated warfare systems and sensors various programs within C6ISR and the CH-53K and SEAHAWK programs within Sikorsky. Operating profit increased 23% due to higher volume and favorable contract mix, partially offset by lower profit adjustments. Finally, with space on Chart 8. Sales increased 10% year-over-year, 2% normalized for the extra week to approximately $3.3 billion. The growth was driven by higher volume on the fleet ballistic missile program and ramp-ups on hypersonic and next-generation Interceptor programs within strategic and missile defense as well as higher volume on space development agency transport and tracking layer programs within national security space. Operating profit increased 16% compared to Q1 2023 driven by higher volume and ULA equity earnings, partially offset by lower net profit adjustments primarily on the next-gen OPIR program. Now I'll turn it back to Jay to wrap up our prepared remarks. Jay Malave -- Chief Financial Officer Thanks, Maria. Let's turn to the outlook on Chart 9. Our expectations for Lockheed Martin's 2024 financial outlook remain unchanged from what we said in January with the strong first quarter results positioning us well to achieve the consolidated full year outlook. We continue to expect free cash flow to be in the range of $6 billion to $6.3 billion, including over $3 billion of independent research and development and capital investments while the dividend, along with the expected $4 billion of share repurchases, support our return to shareholders, targeting a mid-single-digit free cash flow per share growth over the longer term. All right, to close out and summarize on Chart 10. We're off to a solid start in 2024 and remain laser-focused on execution to our customer and programmatic commitments while building momentum toward delivering our full year guidance. Through our 1LMX transformation, we are reengineering our internal processes by providing the automations and capabilities needed to drive efficiency, increase velocity, and enhance key captures and programs. 1LMX will enable us to combine the depth and breadth of our portfolio with the expertise and dedication of our people to drive 21st Century Security solutions for our customers and continue to create value for our shareholders. With that, Lois, let's open up the call for Q&A. Questions & Answers: Operator [Operator instructions] Our first question is from the line of Doug Harned from Bernstein. Please go ahead. Doug Harned -- AllianceBernstein -- Analyst Great. Thank you. Good morning. I'd like to start to make sure we have a good understanding of the F-35 right now with TR-3. As you said, the Air Force has talked about this as well, and it looks like that timeline's moved back to some point in Q3. And there's just been a great deal of slippage in the timeline over the last few years. Block 4 has been delayed, and the new budget has cut deliveries in 2025 and '26 extensively to avoid having to do later Block 4 upgrades. Now I mean, you've been able to keep production and revenues up, although deliveries and cash payments are off. But how can we get confident in the trajectory? And perhaps, Jim, maybe you could talk about what a positive or more negative scenario might look like for production and deliveries over the next two years and what it would mean for the revenue and cash trajectory. Jim Taiclet -- Chairman, President, and Chief Executive Officer Sure, Doug. So I think it's important to understand that we're doing, as I said earlier, concurrent development and production and then advancing the sustainment capability as well all at the same time. Most of these complex programs go through a period of development and then a production run largely off of that design base or that engineered base of what the aircraft is supposed to look like and how it's going to perform. The F-35 is different in a sense that development has been going on since the day the program started years and years ago, and it's going on today. Now the good news about that is you have step function increases and capability every few years. And as a result of the F-35's capacity to do that, the government just came out and extended the expected service life of the aircraft another decade or two, I think it was. So this is a good thing, but it's also an extremely difficult thing to do and even to predict schedule, right? It's our responsibility to hold cost and schedule. But we're -- we don't control all the variables, let me just say, and that's OK. We're still the OEM, and we're still responsible. And so what we run into on TR-3 is just a level of complexity and executing the step function increase that's pretty, I'd say, novel or dramatic. What the team is doing at our company is we're integrating a series of components, devices, software and managing and integrating all of that. And so what's happening now is we are ringing out all the software through all of the new hardware and integrating it into all the aircraft other systems. And that's taken longer than our team predicted. The way we're going to get at that is if you think of it as a Release 1 and a Release 2, and we've got a lot of confidence in this stage, Doug. Release one, if you think of it that way, is what we're calling, along with the U.S. government, a combat training-capable aircraft, meaning we can get these jets in the hands of squadron, wing and regional commanders so that they can start training their pilots on them and training their maintenance organizations and also getting their bases and infrastructure, spare parts pools and everything else sort of in operational shape, if you will. Once we get the final software load for the fully combat-capable version of TR-3 sometime in the next few months, then those aircraft could be deployed into actual combat operations. And you'll have the training, the maintenance. They're bringing out the operational patterns and procedures on how to actually fly the jet in combat. So we'd like to be able to do it sooner, but this is the schedule we're on. And I'd say for the combat training-capable aircraft, we're highly confident based on the test results so far that those will be deliverable in the third quarter. Jay, do you want to say anything else about cash flow and -- Jay Malave -- Chief Financial Officer Yes, sure. Doug, I'll just add. As Jim mentioned, this combat training capability and configuration, as Jim mentioned, supports the training of the squadron standing up to new squadrons and decreasing the amount of time that the aircraft are parked. All that -- what that does is really avoids any type of significant disruption. And so what this does is really keep our production on track here in 2024 and then beyond as well. As Jim mentioned, in 2025, we'll have further capability inserted. And we'll actually start delivering and inserting Block 4 type of capability as well. And you may have heard, you referenced comments made from the U.S. military, and they've discussed a Block 4 reimagined. And what that would entail is an insertion schedule that's really tied to an executable plan that can be provided by industry so we can avoid these types of disruptions. And so when you look at it in the short term, could there be pressure on the Lot 15 through 17 contract profitability and potential movement around in cash flow? Yes. But I think over the longer term and the medium term, think we're working in coordination with our customer to make sure that we can deliver the capabilities the customer wants but on an executable schedule. And if we're able to do that, then we should be able to keep the program on track from a production standpoint. Operator Our next question is from Peter Strauss from Barclays -- I'm sorry, David Strauss from Barclays. David Strauss -- Barclays -- Analyst Good morning. Thanks for taking the question. So since Q4, we have a '24 budget. It looks like we're going to get a very large supplemental. You won NGI. How might all those things together change how you're thinking about where you kind of fall in the revenue guide this year and the potential for revenue growth in '25 to accelerate kind of off this low single-digit level? Jay Malave -- Chief Financial Officer Well, David, as we mentioned for this quarter, we started off pretty solid, just on an apples-to-apples basis, 5% growth in the first quarter lines up pretty well with a midpoint guidance range, which is 2% to 2.5% and the high end of that range being, say, around 3.5%. So we're well positioned to deliver on that expectation. It is possible similar to last year that we could see some upside toward the higher end of the sales guide range there. So again, really good start that enables that. As we think about 2025, what you saw in the budget, what we're seeing here in the supplemental gives us higher confidence that we'll continue to grow. We talked about growth in -- starting in 2023, a year earlier than we had originally anticipated, accelerating in 2024 and then giving us more confidence that we'll see at least the same, if not more, growth in 2025. We'll give you -- later in the year, we'll give you a much better update in terms of what we're seeing. But right now, all this bodes well to our sustained growth in terms of what we've been driving to, not only in '25, but beyond '25 as well. Operator The next question is from the line of Peter Arment from Baird. Please go ahead. Peter Arment -- Robert W. Baird and Company -- Analyst Yes, thanks. Good morning, Jim and Jay. On missiles and fire control, can you talk maybe about the confidence in your margin guidance for the year, just given the 1Q margin performance was certainly the lowest that we've seen in many years. And we know the classified losses are supposed to expected to continue. But you've got kind of this inflecting top line. I think Maria called out all the production increases and just -- do the losses just get smaller in the classified? Or are we going to see some offsets just because of the higher volume? Maybe if you could just give more color on kind of your expectations on the market performance profile going forward. Thanks. Jay Malave -- Chief Financial Officer Sure, Peter. MFC was a little light because of two factors. First, as we mentioned, we did have the $100 million loss provision that we recorded. In addition to that, their profit adjustments were lighter year-over-year by about $20 million. And so that's a function really of calendarization. We'll see profit adjustments in the -- throughout the rest of the year improve and so getting us back to what we had guided to. Just as a reminder, we're anticipating -- and that was fully anticipated in our guidance for MFC that we would have additional -- or could have additional losses in the back half of the year associated with this classified program. And so what our guide, what it implies from where we are today, we recorded $100 million, is in the range of another $225 million in the back half of the year, which would be provided for in this expectation. Now going beyond that, we've talked about this, and I'll just deal with the question upfront in terms of can timing change. And it's possible that we could record additional losses here in 2024 depending on other factors as the year goes on. There's factors such as technical milestone achievement through the balance of the year, discussions with our customers, visibility to the funding -- so visibility to funding. So all of those factors go into the determination and whether you have to recognize a loss earlier. You'll see coming out in our 10-Q that we've actually ranged the potential losses on this program, which would be in excess -- additional losses in excess of $1 billion. So at least you can have an opportunity to size it. The timing of which is still to be determined, and we've got about $225 million at least embedded in our guide for the balance of the year. What -- going back to MFC for the year, if you really take apart their expectation, the impact of this at $325 million of losses in the year anticipated, they're offsetting a fair amount of that in their guide. I mean, the impact of that is 270 basis points alone. And their total full year guide is down about 210. And so you're seeing offsetting improvement within MFC. It's not entirely one-for-one, but their underlying performance has been solid, and we expect that to continue. Jim Taiclet -- Chairman, President, and Chief Executive Officer And, Peter, it's Jim. I used to fly these aircraft for the USAF, and I can assure you that the capability that's being developed here at MFC and a classified program will have very, very long legs. There's going to be many, many years, we believe, of orders to follow. So yes, for a quarter, for the year, maybe for a couple of years, we're going to absorb the loss provisions that Jay described. But I think if you look in the area under the curve for the life cycle, it's going to be significantly positive. And so we want to get there as efficiently as we can. This is a long run franchise program that I think the U.S. government is going to support for a very long time. Jay Malave -- Chief Financial Officer Right. I think it's important to keep that in mind. We spent a lot of time talking about timing of losses and things like that and the magnitude of it. But we also spend a lot of time internally going through just where we are in the progress of the program as well as the business case. And I can assure you the business case is accretive to it at a -- above our cost of capital. And as Jim mentioned, it's going to provide strong returns for many years to come. Operator Our next question is from Matt Akers from Wells Fargo. Please go ahead. Matt Akers -- Wells Fargo Securities -- Analyst Good morning. Thanks for the question. I wanted to ask a couple on the next-gen interceptor win. I guess one, just how you were able to win, I think, ahead of when the original down select was expected. And then also whenever there's sort of a big contract like this, we always get questions on potential charges because we've seen some of that happen in the industry. So just your confidence that you've got the cost there sort of sized correctly. Jim Taiclet -- Chairman, President, and Chief Executive Officer So the company made a bet about three years ago and say, OK, we've got a digital transformation program that is going to take the whole company to this model-based engineering system. And that's all the way from requirements, acceptance from the government to sustainment years and years down the road. And we scoped this before. It's about a $6 billion, eight- to 10-year program to convert the entire company to a model-based engineering, production and sustainment operation. NGI was one of the pathfinder programs picked to implement this because there's no legacy to convert, right? There's no old blueprints to try to figure out how to make three-dimensional, which is something, by the way, we are doing for C-130 and other programs right now. But we could get off to the fast start on NGI because it was in this born digital category. Right from the proposal, we were using these digital technologies, 3D, CAD, and everything else and sharing data with the government in that fashion, and they were able to receive it. And we could thereby accelerate the schedule and contain the cost of the development and ultimately, the production, too, by using these tools. There were thee original players in this. One dropped out fairly early. The second was in kind of this final phase, if you will, of down select. And we're just ready to go and provided our proposal ahead of schedule. The other player, to my knowledge, provided a proposal also. And then the government was able to make a decision based on that. But I think because of our speed and our ability to demonstrate manageable costs over time, we won and kind of won early, if you will. I'll let Jay talk more about financials, but what I can assure you is the process of this bid did not require us to dive to the bottom on cost. So Jay, do you want to take it from there? Jay Malave -- Chief Financial Officer Sure. We're currently performing already under a contract, and that contract will continue. We've talked about this before. We've completed a preliminary design review in September of 2023. And we're on track for critical design review in 2025 and under the current contract as well as building test assets. So that will just continue under this down select. As far as pricing and costs, the current contract, because of development contracts, cost plus contract, it's low margin as you would expect, but nothing again abnormal. As far as future bidding that we provided for future types of contracts, there were various elements or different types of contract structures that the customer asked for. We provided those to the customer, none of which was based on aggressive pricing or bidding, as Jim mentioned. We've talked about this in the past, and we've taken a middle-of-the-road approach to our pricing, and this is no different. Operator Thank you. The next question is from Ron Epstein from Bank of America. Please go ahead. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Good morning, guys. Jim Taiclet -- Chairman, President, and Chief Executive Officer Good morning. Ron Epstein -- Bank of America Merrill Lynch -- Analyst With FARA off the table, and it looks like the flyer program has decent support, how are you thinking about the outlook for the vertical lift business? Where could we see some upside? What other competitions are out there? And how should we think about that? Jim Taiclet -- Chairman, President, and Chief Executive Officer Yes. So Ron, this is Jim here. As we kind of roll into the 21st century, what our company is trying to do is not just look at things through the programmatic lens or I'll call it vertical kind of column but also horizontally through the actual mission and figure out what technologies can accomplish the mission that will enable our core basic platforms to be successful as well. And that's how we're looking at the rotary business. It's not just at Sikorsky anymore. It is Sikorsky plus all of Lockheed Martin, right? And that's one of the reasons we're able to work with U.S. Army, Congress, and the broader U.S. government to increase support for, let's say, Black Hawk, for example, in spite of the fact that FARA is being canceled and there's another vertical lift program in the form of FLRAA, which is going to be a tiltrotor. So there are missions that the Black Hawk will be extremely well suited for in the rotary lower -- it's really the lower air domain. It's not just for rotorcraft. So how do we pair those rotorcraft, a traditional Black Hawk, let's call it, by modernizing the Black Hawk with digital technology to do what the Air Force would call collaborative combat aircraft, meaning you can in the lower air domain tie drones and unmanned, uncrewed aircraft to a Black Hawk using digital technology, and we've demonstrated that already. You can actually make the Black Hawk itself autonomous with no pilots in it being flown from a command center to do high-risk missions. So we're looking at the mission and saying, what can we do all across Lockheed Martin, whether it's through sensor fusion, AI, 5G, space-based sensor assets to make the Black Hawk, for example, a much longer live platform, a much more relevant platform and actually a very efficient platform compared to, say, the FLRAA aircraft that won't be able to do some of the missions anyway. So we have a strong confidence then in Sikorsky itself and the platforms that it does produce. And that includes CH-53K, which I mentioned the SEAHAWK, which is a Black Hawk that's configured for maritime operations that is pretty high tech as well. And so we feel really solid, as I think Jay said in his remarks, on Sikorsky's future with a backlog of $20 billion and the ability to modernize these really reliable in production aircraft to do new things and with missions in digital technology and other -- and integrate with other parts of LM and our partners to make those platforms relevant in the future. So I'll stop there. Jay, you have anything else you want to say? Jay Malave -- Chief Financial Officer Sure. Just a couple of things, as Jim mentioned. A stable outlook is the best way to describe it. As Jim mentioned, CH-53K is really the pillar. And those revenues between now and 2027 and 2028 are going to double. And so while we will see declines in other programs such as combat rescue helicopter, some declines on Black Hawk and others, the CH-53K will really offset all of those declines. We do have to go through a rebalance, a little bit of a rebalance of the workforce because the mix of development work versus production work is different than what we had originally anticipated. So we'll go through that. But I think the business, as I mentioned, will be -- is pretty stable. We're also, as Jim mentioned, continue to have dialogue and just investments in Black Hawk modernization, which will maintain its relevancy particularly in the JADC2 environment. And so, of course, you continue to see opportunities for not only the base missions that Black Hawk performs but other missions as well. Those dialogues are ongoing with the Army to determine what would be the best fit for those. And so as I mentioned, from a revenue standpoint over the next five years, it will actually go up over the next few years a little bit, come back down, but pretty much flat to where it is today. And so stability, I think, is the best way to describe it. Operator Our next question is from Rob Spingarn from Melius Research. Please go ahead. Rob Spingarn -- Melius Research -- Analyst Thank you. Good morning. Jim, if we put the impact of TR-3 to the side, on the last call, you underscored the importance of the supply chain in producing F-35s at a rate of 156. And one of the things that's made the F-35 program so well supported by Congress and international countries is the breadth of the supply chain. But is the complexity and scale of the supply chain limiting the potential and affordability of the program? And on future fighter aircraft programs, whether it be NGAD or F/A-XX, might we expect Lockheed to do more of the work in-house, the production work in-house when compared to F-35? Jim Taiclet -- Chairman, President, and Chief Executive Officer So it's a great topic, Rob. And so let's start with the origination of the F-35 program. It was intended, as you said, to be a wide-based allied program. I think it was seven literally partners, essentially treaty partners that were going to all get together and contribute their industrial capacity and their financial capacity to this program, given its importance and complexity and the scale that people are contemplating. So yes, we have a pretty broad supply chain. There were a couple of times when that's gotten a little tough for the program. COVID was one of those. So we had delayed deliveries out of the U.K. because the factories there weren't open, although ours were. So we will be mitigating any future programs that we have. And we're eager to have international production and sustainment partners, and we're going to expand that. But we're also going to apply some anti-fragility methodologies to those initiatives going forward. No one really thought of COVID, of course. But now that we've had that example, we need to know -- we know we need to have second and maybe third sources. And geographic diversity would be a positive thing from that perspective. So we'll just be a little more broadly thoughtful about how we do this. Having single sources outside the U.S. is probably not the best idea. There's an affordability issue around that, too. So we're just going to have to balance everything out. So based on its origination and essentially the commitment of the countries to the program, we do have that sort of spread out supply chain with a couple of weak spots in it. Look, another weak spot's canopies, right? How hard is it to make a glass canopy? Well, with this kind of stress and the kind of precision that's needed and put in an F-35 canopy together versus an F-4, which I used to look out a little bit. highly complex, hard to produce, single source, one of the big degraders that we have. So again, we're going to learn from that, whether it's a domestic or an international supplier going forward. In addition, as you pointed out, we are heavily insourcing when we can, and Lockheed Martin has the best technology. We're looking hard at making sure that we can control as much of the supply chain that is feasible and reasonable based on whatever program it is. And so, for example, on NGI, that was an MFC, Lockheed Martin Space collaboration to make sure that the most critical sensor components that we could produce in the company effectively and efficiently were the ones that were selected, OK? And so your topic is a really great one. We intend to actually geographically further diversify supply chain but really based on this anti-fragility concept of having two or three sources, either different parts of the world, different companies, different logistical chains, things like that where we won't run into some supply chain issues as much as we have on some prior programs, including F-35, honestly. Operator Next question is from Rob Stallard from Vertical Research. Please go ahead. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Jim Taiclet -- Chairman, President, and Chief Executive Officer Good morning. Rob Stallard -- Vertical Research Partners -- Analyst Jim, last quarter, you had some comments on contract structures and the way perhaps your customers have been dealing with defense industry in recent years. I was wondering if there's been any sort of resonance from your commentary and any willingness, early willingness from the customer to look at this in a fresh way. Jim Taiclet -- Chairman, President, and Chief Executive Officer So let me focus on digital service contracting because I think that's a really ripe opportunity area for the DoD to work with industry, not just the traditional defense fronts, if you will, but broader industry, too. We want to play on subscription basis ourselves. We want to bring in partners that will only be our suppliers on a subscription basis. So in terms of, say, 5G, connectivity services, backhaul, those kinds of things, AI, which needs constant refreshing and modeling. We will do a lot of the AI in-house, but we're not going to be possible to do all of it. We want to bring in partners. We announced a couple of them like NVIDIA and IBM. They want to work with us. So I do think we're starting to get interest inside government on how to do this. We proposed, frankly, ourselves, which will open up opportunity for a lot of other companies in different sectors an adjacent acquisition process within the DoD for digital services alongside the traditional DoD acquisition process for largely physical goods like aircraft, ships, etc. There's interest in that. We haven't gotten it over the line, so to speak. But I think there's a lot of advocacy across broad industry to do that and starting to be in Congress and other places in DoD as well. Along with that, we want to drive an open architecture system so that U.S. government has a lot of diversity in its potential suppliers because we're all working off of the same standards base as far as APIs, interfaces, frequencies, use and those kinds of things and synchronize that as much as we can with commercial industry so we can use more of their IP and more of their resources and more of their people. So I think that there's a lot of opportunity here, and we're getting -- starting to get some traction on it. But it's going to take a little bit of time to get those processes and those standards bodies put in place. But we're actually on it, and we have some partners and teammates agree with those. Jay Malave -- Chief Financial Officer I'll just add, Rob, we have seen some changes where the contract structure is more closely aligned with the capability that's being requested and the assessment of the technology maturation of that capability. And so you're not seeing as many of these kind of high-risk fixed-price development contracts that really don't work well for anybody because they don't optimize a solution, and they typically end up poorly for the contractor. And so we have seen those changes. Again, they're case by case. But I can tell you that at least what we're seeing, particularly in the higher risk, higher technology-type risk arenas, we are seeing a shift in contracting to contracting vehicles that are just more relevant to those circumstances. Jim Taiclet -- Chairman, President, and Chief Executive Officer Yes. And, Rob, maybe to support just another minute what Jay is speaking about in a more direct way here. I have a view, as you may have heard, that having a -- even a cost-based development project or program with a fixed price set of early production options is a tough thing to intellectually get at least my arms around, which is committing to cost and price on an object that really hasn't been fully invented yet. And we're looking really, really hard if that's -- in any opportunity that's presented to us in that context as a company. So that is one area where to, again, highlight what Jay is speaking about, more of an alignment of what can industry deliver on a reasonable risk basis. And so the government can get a successful program out of it, frankly, and not have massive write-offs in industry or cost overruns or long schedule delays. We think it's constructive to get some more of that alignment that Jay described. Operator Our next question is from George Shapiro from Shapiro Research. Please go ahead. George Shapiro -- Shapiro Research -- Analyst Yes. Good morning. A couple of quick ones for you, Jay. If the first quarter normalized growth was 5%, and even at the high end, you're looking for 3.5%. So will this be the fastest-growing quarter? And what slows down and obviously normalizing for the fourth quarter? And then the second question is the guide for other net was $400 million. First quarter is only negative 61. So I was expecting you might lower that number for the year. And so what was the reason why you didn't lower it? Thanks. Jay Malave -- Chief Financial Officer All right, George. On the quarterly profile for sales, as you mentioned, on a normalized basis, 5% growth here in the first quarter. I'd see it will slow down to low single digit in the second and third. And we're thinking that the fourth quarter probably flattish to maybe slightly down. You might recall that the fourth quarter of 2023 ended up being stronger than we were originally expecting. And so our compare in the fourth quarter of this year would be a little bit tougher. And so you're talking in second and third quarters probably 2% to 3% type of growth numbers with a flattish year-over-year in the fourth quarter. As far as other net, George, you got me there. There's probably some opportunity in there. We'll calibrate that, and we'll update the guide in the second quarter for the full year. But it's probably more prudent to just wait till we're halfway through the year and just make an assessment of the entire outlook, and we'll just leave it there. Operator And our next question is from Noah Poponak from Goldman Sachs. Please go ahead. Noah Poponak -- Goldman Sachs -- Analyst Good morning. You talked about Pentagon terms of trade and contract structure here, and you mentioned NGI as cost plus development. But you also mentioned they asked for -- to kind of see multiple contract structures. Curious what they asked to see, where you landed on those maybe interim windows between development and production. And then, Jay, the loss-making classified program in MFC, what year do you expect that to be profitable on an annual basis? And just to confirm, there's one program in that position, correct, not more than one? Jay Malave -- Chief Financial Officer Yes, that's correct, Noah, just one program. And I think right now, our outlook would say probably in -- if you're -- probably 2028 is where we would expect that to flip to positive. Again, it's a question of the timing of the recognition of the losses, but if you assume kind of more linear approach from here on out to be about 2028. As far as NGI, just again, the different contracting vehicles are ranging anywhere from cost plus to fixed price incentive. There is no -- the customer hasn't selected exactly which vehicle wants to pursue. So there's nothing actually under contract for the next phase or phases. Right now, we're going to continue to perform under the current contract, as I mentioned. We got critical design review in 2025. We also, as part of this contract, we have to provide some test assets. And between now and then, I'm sure we'll have discussions in terms of getting future phases on contract. Jim Taiclet -- Chairman, President, and Chief Executive Officer Yes. And Noah, the principle behind what Jay and I are speaking to here is that we want to be agnostic ultimately from a risk-adjusted basis on whatever contract format that the government would like to employ in these matters. So if it's going to be any kind of -- I'll say, a highest risk would be again, fixed price production on something that's not been designed yet. We will put a high-risk premium in the future and have on those kinds of requests of the government. And what's interesting is they're asking for multiple types on NGI. And that's going to give them an opportunity to see what contract risk transfer to industry is now going to cost, at least in Lockheed Martin's case because we will reply on that basis to say, if you want us to have this kind of contract, we have to have a risk premium that's significantly higher than, let's just say, a pure cost-based contract to give you the greatest contrast. And that's just the principle we're going to use from now on. So if you want a certain price point as government, we will provide you a contract format that will get you that price. But if you want to shift more risk to industry, you'll see a higher risk premium come back in our proposal, if you will. So that's the principle we're using and that we'll continue to use. Maria Ricciardone -- Vice President, Investor Relations Lois, I think we have time for one more question since we're close to the top of the hour. So let's take one more, and then we'll be done. Operator Thank you. And that question will come from Rich Safran from Seaport Research Partners. Please go ahead. Rich Safran -- Seaport Research Partners -- Analyst Good morning. Thanks. Two-part question on C2BMC. I want to know if you could discuss the P&L impact in terms of timing and margins. Second and more broadly, I thought you might discuss a bit about how this fits with your strategy for pulling in mission-centric programs and what the opportunity set there is? Jay Malave -- Chief Financial Officer OK. For timing, we've been under contract. This is a follow-on for us. And what I could do, Rich, is I don't recall offhand exactly what the annual revenues are, but I got Maria follow up on you. But this is, again, just a continuation of those activities there. And so no significant change I don't think from a revenue standpoint or margin expectation at RMS for this. Jim Taiclet -- Chairman, President, and Chief Executive Officer And so from the mission-centric approach, this is actually a pretty good example of that, Rich, in pulling through or extending existing programs, right? And so we're trying to show is that you can map data flows through a full mission, right, which generally includes and now cyber, by the way, upfront. So you have a cyber track, then you have to have a sensing capability. You then have to have a way to get sensor data, whether it comes from a satellite or a submarine back into the command and control system. Along with that, you have to have targeting and tracking quality data that comes from beyond just the sensing of an object that's a target. You have to be able to track the target in a way that you can then guide a projectile to it and take it out or put a cyber attack against it or laser or whatever the effector will be. And so the term of art for that is not pretty. It's called a kill chain. We want to put these chains together in diverse ways that are, again, anti-fragile, which means if you take out one link in that chain, you don't eliminate your ability to complete the mission. And so that's where we're looking at data flows in addition to physical flows, if you will, right? And if we can help create an open architecture system that can provide multiple routes of data flows that can affect missions, then we will be able to have kind of a head start on our platforms and designing to those. And that's what we're doing with Black Hawk for example. That's what we're doing using the C2BMC system. The LRDR radar and ultimately, the NGI missile will be based on a similar architecture. We'd like that architecture to be common outside of Lockheed Martin as well as inside because that will open up more suppliers to us and also provide the government more competitive options. So this is all coming together, and I'm kind of glad you asked the question here at the end because it's very intentional. OK. Thanks, Maria. Thanks, everybody, on the call. I want to also express my appreciation to everybody at Lockheed Martin for their relentless focus on this operational execution I mentioned, driving innovation and excellence. And we're all doing this in support of our customers. That's the reason. We have a vision for 21st Century Security that we think will keep deterrence high in an increasingly complex and threatening global environment. As a company, we have a strong backlog, as you heard. We're driving operating discipline across the whole organization and this continuous improvement mindset we have. So all that's designed to position our company for you as shareholders for future growth and attractive and reliable returns to shareholders over a long period of time. So thank you all again for joining us today, and we look forward to speaking with you on our next earnings call in July. Lois, that concludes our call. Thanks.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings, and welcome to the Skechers' first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers. Thank you. You may begin. Karen Lozano -- General Manager Good afternoon, everyone. My name is Karen Lozano. I'm the general manager of Store 2 in Gardena, California, and I've been on the Skechers team for an exciting 11 years. Thank you for joining our Skechers conference call today. I will now read the safe harbor statement. Certain statements contained herein including, without limitation, statements addressing the beliefs, plans, objectives, estimates, or expectations of the Company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, including but not limited to global, national, and local economic business and market conditions, including the impact of inflation, foreign currency fluctuations, challenging consumer retail markets in the United States, wars, acts of wars and other conflicts around the world and supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results, performance, or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for description of all other significant risk factors that may affect the Company's business, financial conditions, cash flows and results of operations. With that, I would like to turn the call over to Skechers' chief operating officer, David Weinberg; and chief financial officer, John Vandemore. David? David Weinberg -- Chief Financial Officer Good afternoon, and thank you for joining us today for our first quarter 2024 conference call, which marks our 100th as a public company. We started the year with a new quarterly sales record of $2.25 billion, an increase of 12.5% or $250 million compared to last year, and an adjusted diluted earnings per share record of $1.33. Additionally, we achieved gross margins of 52.5% and an operating margin of 13.3%. These impressive results were driven by growth in both our reportable segments, direct-to-consumer, and wholesale as well as across all regions of the world. The strong global demand for our brand was due to fresh innovations in our proven styles, a more robust offering of our many comfort technologies, and the expansion of our performance and lifestyle divisions into new categories and collections. These newer offerings include our partnership with Snoop Dogg and the Skechers football and basketball lines. As the comfort technology company, we focus first on delivering the ultimate and innovative comfort and style across our product lines, so that every pair looks and feels exceptional. This includes our machine washable footwear for kids, durable outdoor styles and sport styles and our street and court fashion collections. For our performance division, great attention and detail is paid to elevating the fit and comfort while meeting the needs of elite athletes and enthusiasts of football, basketball, golf, and pickleball as well as running and walking. Top professional athletes like Harry Kane, Oleksandr Zinchenko, Julius Randle, Terence Mann, Brooke Henderson, Matt Fitzpatrick, Catherine Parenteau, and many others around the world are competing in Skechers and embracing our comfort that performs. This enthusiasm from those at the top of their game is also resonating with consumers and the media, including Shape Magazine, which just named Skechers Viper Court the best pickleball shoe in their 2024 report, and Sports Illustrated Germany, which featured Harry Kane on the cover wearing our SKX 01 football boots and Skechers performance apparel. The brand and each of these product initiatives are supported by impact for marketing initiatives. This year's commercial for the Super Bowl with Mr. T and Tony Romo to our first basketball campaigns with Julius and Terence. In the quarter, we launched new Spots for kids, BOBS, Max Cushioning and Work all with Skechers Hands Free Slip-ins. And just last week, we added a new lineup of commercials that includes Skechers UNO with actress Ashley Park and GO WALK Slip-ins and Apparel with TV host Amanda Kloots. Along with these on-air campaigns, we employ a 360-degree marketing approach reaching consumers at multiple touch points. To achieve the notable growth that we have this quarter and to continue to meet the needs of consumers around the world, it takes the effort and dedication of the entire global Skechers team, our designers, and supply chain partners who ensure our product is of the highest quality and our third-party retailers whom we have valuable relationships with. We thank each associate, employee, and colleague for working together for our continued success. Looking at our first quarter results. Sales increased 12.5% to $2.25 billion. International sales increased 15%, representing approximately 65% of our total sales in the first quarter and domestic sales increased 7.8%. By region, EMEA increased 17%, APAC by 16% and the Americas by 7.8%. Additionally, both wholesale and direct-to-consumer grew nicely in the quarter. Our wholesale sales increased 9.8% reflecting a return to growth in both international at 11% and domestic at 7.7%. Internationally, the increase was due in part to improved inventory position at certain partners, the growth of our distributors across geographies, and particularly strong sales in China, Germany, and the U.K. For domestic, the return to growth was a result of significant improvement in the flow of orders with both improved ASPs and volume. Skechers is in demand by many of our customers around the world as is evidenced by our strong sales. Direct-to-consumer, which increased 17%, continues to be an important segment of our business and an indicator of positive consumer appetite for our brand. With growth in nearly every market for both our brick-and-mortar and e-commerce stores, we saw a 24% increase internationally and an 8% increase domestically. We ended the quarter with 5,203 Skechers branded stores worldwide of which 1,671 are company-owned locations including 565 in the United States. We opened 52 company-owned stores in the quarter including 22 in China, 10 in the United States, five in Colombia, and two in both India and Korea. We closed 29 stores in the quarter. Also in the period, 95 third-party stores opened including 54 in China, nine in Indonesia, and three each in Australia, the Philippines, and Turkey. This brings our third-party store count at quarter end to 3,532. In the second quarter to date, we've opened 15 stores including three company-owned stores in both China and the United States. We expect to open 155 to 170 company-owned stores worldwide over the remainder of 2024. Our record sales in the quarter along with our efforts to manage inventory levels resulted in a 9.4% reduction year over year and an 11% reduction from December 31, 2023. We believe our inventory levels are healthy and comprised largely of proven sellers, fresh innovations, and new product categories. To efficiently manage our inventory flow, we continue to invest in our logistic capabilities, including our new distribution center in Panama, which is expected to be operational in the second quarter as well as a new company-operated DC in Colombia, which we plan to move into later this year. To efficiently grow our business worldwide and meet the needs of consumers seeking the ultimate in comfort technology, we continue to invest in our operations, product, and marketing. With our numerous accomplishments over the past quarter, we look forward to strategically growing our business in the coming year as well as in the years ahead. And now, I'd like to turn the call over to John, for more details on our financial results. John Vandemore -- Chief Financial Officer Thank you, David, and good afternoon, everyone. Skechers delivered another strong quarter of record financial performance, exceeding both our top and bottom-line expectations. Our diverse portfolio of high-quality products combined with our commitment to delivering these products at a reasonable price clearly resonates with today's consumer. We achieved record sales of $2.25 billion growing 12.5% and earnings per share of $1.33 growing 30% year over year. On a constant-currency basis, sales were $2.27 billion and earnings per share were $1.37. These results were driven by a healthy recovery in our wholesale segment, particularly in the United States and Europe, and continued momentum in our direct-to-consumer segment. Despite persistent economic headwinds, our performance this quarter underscores the strength of the Skechers brand worldwide and the consumer demand for our innovative products together driving us toward our goal of achieving $10 billion in sales by 2026. Consumers understand that comfort is no longer a luxury but a requirement that shouldn't come at a cost. Skechers excels where comfort and value intersect as evidenced by the strength of our global direct-to-consumer business, which grew 17% year over year to $829.9 million. These results were driven by double-digit growth in our e-commerce and brick-and-mortar stores and increases of 24% internationally and 8% domestically. Our commitment to prioritizing innovation and supporting this with effective marketing powered these results. We remain excited about our omnichannel growth opportunities, and we'll continue to deliver on our strategy to expand our direct-to-consumer presence worldwide. In wholesale, sales increased 9.8% year over year to $1.42 billion with growth across all regions. As expected, we are seeing a recovery in domestic wholesale with sales increasing 7.7% versus the prior year. Notably, we experienced a significant improvement in the flow of orders including customers taking goods earlier within their shipping windows. International wholesale sales also returned to growth increasing 11% as the inventory congestion impacting certain partners, particularly in Europe abated. We remain encouraged by our wholesale segment, both domestically and internationally, and continue to expect year-over-year growth as we move through the balance of the year. Now, turning to our regional sales. In the Americas, sales for the first quarter increased 7.8% year over year to $1.02 billion reflective of the improvements in our domestic wholesale business, which accounted for nearly half of the growth and the continued strength of our direct-to-consumer segment. In particular, our domestic direct-to-consumer business grew at 8%. Although this represents a step down from the robust growth of the prior year, on a two-year basis, this reflects a remarkable 35% increase in sales. In EMEA, sales increased 17% year over year to $627.7 million driven by double-digit growth in both segments with broad strength in nearly every country. Our investments to enhance our distribution infrastructure direct-to-consumer experience coupled with our strong wholesale partnerships are producing outstanding results for our EMEA business. We also saw notable performance in our direct-to-consumer channels with impressive growth across genders and categories ranging from athletic to lifestyle and seasonal products. In Asia Pacific, sales increased 16% year over year to $604.5 million led by double-digit growth in most markets. In China, sales grew 13% driven by double-digit growth in both our direct-to-consumer and wholesale segments. In India, sales were up slightly as we resolved logistical challenges with our new distribution center. While the regulatory environment in the market is uncertain in the near term, we continue to be confident in the growth opportunities for our brand long-term. Gross margin was 52.5% up 360 basis points compared to the prior year. The improvement was driven by lower freight costs and a favorable product mix as consumers sought out our higher-margin technology-infused products. Operating expenses increased 150 basis points as a percentage of sales year over year to 39.2%. Selling expenses increased 50 basis points as a percentage of sales versus last year to 7%, primarily due to increased marketing globally including investments focused on brand building and driving consumer awareness for our comfort technology products and newly launched categories. General and administrative expenses increased 100 basis points as a percentage of sales to 32.3% primarily due to higher labor and distribution costs to support growth in our direct-to-consumer segment and compensation-related costs, partially offset by cost efficiencies realized in our U.S. and Europe distribution centers. Earnings from operations were $298.8 million, a 34% increase compared to the prior year, and our operating margin for the quarter was 13.3% compared to 11.2% last year. Our effective tax rate for the first quarter was 19% compared to 18.5% in the prior year. Earnings per share were $1.33 per diluted share, a 30% increase on $155.1 million weighted average diluted shares outstanding. And now, turning to our balance sheet. We ended the quarter with $1.25 billion in cash, cash equivalents, and investments, an increase of $322.2 million versus the prior year primarily from improved working capital management and operating efficiency. Inventory was $1.36 billion, a decrease of 9.4% or $141.6 million compared to the prior year. Notably, we lowered inventory levels in the Americas by 18% and EMEA by 6.9% compared to the prior year. We believe our current inventory levels are healthy and well-positioned to support demand in 2024. Accounts receivable at quarter-end were $1.16 billion, an increase of $105.7 million compared to the prior year reflecting higher wholesale sales. Capital expenditures for the quarter were $57.1 million of which $24.3 million related to investments in new store openings and direct-to-consumer technologies, $15.6 million related to the expansion of our distribution infrastructure, and $7.4 million related to the construction of our new corporate offices. Our capital investments are focused on supporting our strategic priorities, which include growing our direct-to-consumer segment and expanding our brand presence globally. During the first quarter, we repurchased nearly 1 million shares of our Class A common stock at a cost of $60 million. We continue to deploy our capital consistent with our stated philosophy while maintaining a durable balance sheet and ample liquidity. Now, turning to guidance. For the full year 2024, we expect sales in the range of $8.725 billion to $8.875 billion and net earnings per share in the range of $3.95 to $4.10 representing annual growth of 10% and 15% respectively at the midpoint. For the second quarter, we expect sales in the range of $2.175 billion to $2.225 billion and net earnings per share in the range of $0.85 to $0.90. Earnings per share will be down slightly in the quarter due primarily to the timing of demand creation spending, which is typically highest during the second quarter as we amplify consumer awareness for our product portfolio and position our brand for a successful summer and back-to-school periods. We believe this investment is critical to driving growth on a full-year basis and one of the reasons why we are fully incorporating this quarter's outperformance into our full-year guidance. Our effective tax rate for the year is expected to be between 19% and 20% and minority interest is expected to grow in line with total sales. Capital expenditures are anticipated to be between $325 million and $375 million as we continue to invest in our strategic priorities, including opening additional stores, expanding our omnichannel capabilities, and adding incremental distribution capacity in key markets, including constructing our second distribution center in China, a 2 million square foot facility, which will likely elevate our capital expenditures this year and next. We remain confident in our objective of achieving $10 billion in sales by 2026 and are well-positioned to drive long-term earnings growth. We thank you all for your time today and look forward to updating you on our second financial results, which we expect to release on Thursday, July 25. With that, I will now turn the call over to, David for closing remarks. David Weinberg -- Chief Financial Officer Thank you, John. We started the year on a high note by setting new quarterly sales and adjusted diluted earnings per share records with strong gross and operating margins. We delivered results above expectations and further expanded globally with a growing presence in the technical performance space and our innovative comfort footwear continuing to be a must-have for shoppers around the world. Skechers is delivering on its fundamental design tenets of style, comfort, innovation, and quality at a reasonable price, which is resonating with shoppers from all walks of life. We believe comfort is a top priority and that casual and athletic are in high demand, while e-commerce continues to exhibit strength, people are also looking to engage and shop in our physical stores. We are committed to delivering high-performance comfort technical footwear while broadening our offering of Skechers Hands Free Slip-ins, developing new looks in our sport, street, and casual divisions, enhancing the Skechers shopping experience at all touch points, and operating in an increasingly efficient manner. Our extensive product offering, best-in-class partnerships with our distribution network, and strong global demand give us confidence that we will have another record-breaking year as we continue to evolve and innovate and move toward our goal of $10 billion in annual sales by 2026. We again want to thank our entire supply chain and the Skechers' team for delivering another successful quarter. I'd like to take a moment to thank all involved for their continued efforts assisting in delivering these results as we mark our 100th call. Now, I would like to turn the call over to the operator for questions. John Vandemore -- Chief Financial Officer Actually, before turning to the operator, I want to take a moment to commemorate this, our 100th earnings call as a public company. Skechers began trading on June 9, 1999. Many of the employees present that day continue to be deeply involved in the company, including our management team. However, only one person has been on each and every one of our earnings calls since going public. As we celebrate today's milestone of our 100th earnings call, we want to take a moment to acknowledge and honor the remarkable commitment of David Weinberg, our chief operating officer. For over 30 years, he has been integral to Skechers' success and his dedication has been unwavering. So, on behalf of Skechers Board of Directors, Senior Management team, and employees worldwide, I would like to sincerely thank Mr. David Weinberg. I also want to extend heartfelt gratitude to the many other key contributors to the earnings process, including Jennifer Clay, our vice president of corporate communications, as well as our dedicated finance, accounting, investor relations, and legal departments, all of whom have contributed to our journey of growth and success as a public company. With that said, I will now turn the call over to the operator. Questions & Answers: Operator Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] And our first question comes from the line of Jay Sole with UBS. Please proceed with your question. Jay Sole -- UBS -- Analyst Great. Thank you so much. My question is just there's so many positives in Q1, really strong guidance raised for the full year. If you could boil down really what was above your expectations and what really drove the strong results in Q1 to one or two things, what would you say? David Weinberg -- Chief Financial Officer Product, don't we always? John Vandemore -- Chief Financial Officer Yes, I think it's the success of the product. It's manifest in a stronger domestic wholesale rebound than we had originally anticipated for the quarter, continued strength on the domestic and international direct-to-consumer front. In a lot of ways, the quarter came out how we hoped it would when we started the year. We just didn't have all the data yet that would suggest we'd get fully there. And I think what you're seeing in the results, which are, we would argue some of the broadest, strongest results we've seen in a while, it's a reflection of the success of the product across the board. Jay Sole -- UBS -- Analyst OK. And maybe, John, if I can follow up on that. Just there's a lot of talk in the industry about a lot of brands getting more focused on the wholesale channel and potentially what the impact of that is on Skechers. Can you just give us a sense of what you see in your order book as you look out through Q2 and to the extent you have visibility through the rest of the year and how you see the wholesale business developing obviously after a very strong quarter? John Vandemore -- Chief Financial Officer Well, if you remember, as we began the year, we expressed optimism in what we were seeing in our early bookings. You see in the domestic wholesale rebound in particular and the returns in Europe, that came through. I think it's only gotten stronger since then. So, I would say, again, kind of echoing David's original comment on the back of the product that we're delivering, the innovation that we're bringing to the market as well as entry into some newer categories for us, we continue to see really healthy signs on the wholesale front. We expect that to then carry throughout the year. And so, that, I think, again speaks to the broad strength in the brand right now. Jay Sole -- UBS -- Analyst OK. Thank you so much. John Vandemore -- Chief Financial Officer Thanks, Jay. Operator Thank you. Our next question comes from the line of Laurent Vasilescu with BNP Paribas. Please proceed with your question. Laurent Vasilescu -- Exane BNP Paribas -- Analyst Good afternoon. Thank you very much for taking my question. And congrats on the beat, the raise, and David for your 100th call and to many more calls together. John, I wanted to ask, last quarter, I think you kind of called out that wholesale should grow high-single-digits for the year. Should we assume that grows low-double digits now? And, if that's the case, can you maybe parse that how do we think about domestic versus international wholesale for the year? John Vandemore -- Chief Financial Officer Right now, we're anticipating that the wholesale segment will grow kind of mid-to-high single digits. Again, we're seeing really encouraging signs in our wholesale activity, our order book as well as just the sell-through that we're seeing. We're seeing also some really good success with partners who have come to fully embrace our comfort technology product suite. And so, I would suggest to you that we're likely to see something between mid-to-high single digits. I do think the power for that is going to come from the international side of the business, but we're incredibly pleased with what we saw in domestic wholesale. We said at the beginning of the year, we are confident we would see some rebound in the first half of the year. We've seen it in the first quarter at about 8%. I expect that we will see some in the second quarter as well. And, then beyond the current booking window, we're starting to receive orders and they all continue to suggest that the things will continue to grow, which is a great position for the brand to be in. Laurent Vasilescu -- Exane BNP Paribas -- Analyst Fantastic. Good to hear. John, your 10-K calls out that you are going to embark on a multiyear ERP implementation. For the audience, can you maybe talk about the opex and capex investments embedded in your guide for this year's ERP? I know it's the first year. And then longer term, once you complete this ERP, where do you think the opportunity is for the operating margin for the company? John Vandemore -- Chief Financial Officer Well, taking your last bit of the question first, nothing has diminished our enthusiasm for our opportunity to get first into the double-digits, those double-digits that we have spoken about. Obviously, a 13% operating margin this quarter was exceptional. We are incredibly pleased with that, still working for this year to get into the double digits. I would say, the implementation for the ERP as well as a lot of other things we're doing in the company speak to our intent to continue to grow this brand to that $10 billion and beyond. It's one of many investments we are making regularly to improve the opportunity that extends from everything in the stores, the distribution functionality. So, I would consider it all part of a suite of investments we're making across the globe to continue to drive this business because we believe, again, as we've said before, $10 billion is a waypoint, not the ending point. We will continue to grow this brand beyond that. I would say from a capital, from an opex perspective, it's all embedded in what we've given you and what we will give you going forward so that we don't have to talk about these irregular items as adjustments. We'd rather just embed them into the guidance and they're fully encapsulated in what we've given you. Laurent Vasilescu -- Exane BNP Paribas -- Analyst That's great. And, then just as a final question, you talked about it's about product. In today's press release, you talked about signing up three MLB players. You've entered basketball. You've entered global football. Should we assume that you're going to enter the baseball category? And I don't know if you can comment anything about indeed wearing Skechers shoes as of late. That would be great. Thank you very much. David Weinberg -- Chief Financial Officer Yes, we're going to continue. Obviously, it's a great starting point for us and it's part of what we believe will take us out further in the next couple of years for both the brand and the additional category. We think it's great that Joel is wearing his shoes. He's trying them out. He's testing them out. We've had a great relationship with him. We have nothing to announce today, but we will, I believe shortly as he works through this, but that's coming. He is obviously more involved right now in the playoffs. And sure, he's worrying about tonight's game more than he's worried about any announcements or anything like that. But right now, he seems very comfortable in the shoes. It's great that he's wearing them, but we've got great results from Julius Randle, who we're sorry he is missing because it would have been great in the playoffs. He was playing great. Terence is playing great in his shoes. There's other people we're talking to. Our football business continues to grow. We've actually signed a cricket player as we move forward in sponsoring the Mumbai Indians as we go forward as a team. So, we're moving into a lot of sports, a lot of categories, baseball as you mentioned. We think it's all positive for the brand, for people's understanding of the quality and intensity we develop shoes with and how comfortable they are even though they are made very, very well and compete at the highest level. So, we think that's all positive for the brand. But right now, that's just building for the future. The success today comes from what exists today, what we continue to bring forward, our styling. We continue to invest in the product more so than I believe anybody else in our industry. It shows. It's part of the answers you'll get about wholesale and direct-to-consumer. It's all about product, brand identity, and all those things are fitting together and feels very, very good right now. Laurent Vasilescu -- Exane BNP Paribas -- Analyst That's great to hear. Thank you so much. Operator Thank you. Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question. Jim Duffy -- Stifel Financial Corp. -- Analyst Thank you. Great job to the Skechers team. Very clear evidence of share gain in an otherwise difficult market. And, David, that that's a phenomenal run. 100 earnings calls. That's a lot of time dealing with the sell side. My sympathies are with you for that. Let me just start on China. I want to ask a question about distribution center capacity there. It only began to ramp the prior China DC in 2021. I'm guessing growth in China since then it has been below what you might have forecast. I'm curious where this additional China DC takes your capacity and how you've thought about that. David Weinberg -- Chief Financial Officer Well, originally, the first distribution center was not to take care of all the volumes. So, we knew we were underutilized when it was finished. We use a lot of third parties, logistics people in China because it's spread out and done. We are now taking a bigger piece of that distribution facility for our own use. So, we think when this new facility is done, we will have some excess capacity, but we'll use it throughout the big holidays because it was never meant to do a complete job on Singles Day, which is an outsize. So, we'll do bigger percentages and gain more efficiencies as we move through and grow into the second building. And I think it should set us up very, very well to be significantly more efficient with our online and direct-to-consumer businesses in China. Jim Duffy -- Stifel Financial Corp. -- Analyst Great. Thanks. And John, can you speak to the P&L impact from that investment? Should we expect a delevering contribution as you begin investments there ahead of scaling the capacity? John Vandemore -- Chief Financial Officer Well, that won't really hit until, at the earliest 2025, potentially 2026. We're just starting, so the current spend is largely capital in nature. I would echo David's comment though. What we've seen in China from the first distribution center pretty similar to what we see across the globe in that. Once the capacity is installed, we get more and more efficient as we utilize the capacity, as we learn to utilize it better as we adapt to the market. One of the benefits of a little bit of the slowdown post COVID in China was it actually allowed us to absorb more of that third-party serviced demand into our own DC. So, we actually saw a little bit of an acceleration in the efficiency gain in China than would otherwise have been the case because we had the ability to absorb more of that capacity internally. But I would say it's largely going to be a 25%, 26% event before we see any of those start-up costs come into play. But even when we had that with the existing distribution center, it wasn't really extraordinary. If you recall, we didn't talk about it a lot because it didn't really factor sizably into our results. And that's our current expectation. Although as we get closer, we'll refine that and provide perspective as needed. Jim Duffy -- Stifel Financial Corp. -- Analyst Very good. Then just a quick modeling detail question. You spoke to elevated demand creation in the Q2. Should that be a giveback in this back half of the year? Is that simply timing of demand creation relative to the prior year? John Vandemore -- Chief Financial Officer It's a little bit of both, to be honest. As we mentioned, I think, about the midpoint of last year, we feel it's incredibly important for our message of innovation, particularly around our comfort technologies to be out in the marketplace. And one of those we're leading with and as a result, supporting with a lot of marketing is the Skechers Hands Free Slip-in technology, of which we're seeing a lot of copycat work today. So, we want to make sure we get out ahead of that and firmly brand that technology as Skechers. So, I would argue a little bit of it is timing as Q2 is always our most intense period. A little bit of it is incremental investment to make sure within the consumer's perception of that technology, it's solidly understood that it's a Skechers comfort technology and not one that can be easily replicated elsewhere. Jim Duffy -- Stifel Financial Corp. -- Analyst Very good. Thank you, John. Thank you, David. John Vandemore -- Chief Financial Officer Thanks, Jim. Operator Thank you. Our next question comes from the line of John Kernan with TD Cowen. Please proceed with your question. Krista Zuber -- TD Cowen -- Analyst Good afternoon. This is Krista Zuber on for John and congrats David. Just two questions for us. Thanks. First on, really just ASPs and kind of the expectation for the balance of this year. You know, you're lapping some, easier wholesale ASPs in Q2 and Q3, but a little bit more challenging on the DTC side of things. So, just kind of how you're expecting that to play out for the balance of the year? And then I just have one follow-up on the slip-ins. Thank you. John Vandemore -- Chief Financial Officer Yes. I would say this year is going to be more about volume than price. We will see and expect some elevation in ASPs, although not nearly what we've seen over the last couple of years. That's largely going to stem from product mix. We continue to see consumers choosing within our portfolio the higher value comfort technology latent products, and that's actually driving ASPs apart from anything we're doing from a pricing perspective. So, I would expect that much more of this year's drive in sales is going to come from units. We will again, we'll see a little bit of ASP in there but not a ton. Krista Zuber -- TD Cowen -- Analyst OK. Great. And then just on the slip-ins technology, you've mentioned in the past that there's an opportunity here to think about category expansion with this technology. And just kind of any sort of framing that you can give around them sort of the margin profile from this innovation that it that kind of affords you from the comfort technology, be it slip-ins, Archfit, etc., and how that's kind of playing out within the total product line at this point? Thank you. John Vandemore -- Chief Financial Officer Yes. I think you're largely seeing that now. I mean, it's been coincident with some reductions in landed costs stemming from freight rates coming back to normal, but also evidenced in the gross margin performance we've delivered over the last couple of years is that higher value, again, technology-laden product. I expect you'll continue to see a little bit of gravitation up on the gross margin coming from product and business mix as DTC grows faster than wholesale, you see some benefit from that. So, I think that's largely kind of in both what you've seen recently and what you'll continue to see. We will begin to lap that, so there won't be as pronounced a lift coming just from product. I would also say, I think the design team continues to certainly exceed everybody's expectations with how widely and deeply they've been able to install that technology and products you would never even dream of benefiting from some of that technology. It's becoming quite prevalent. And then kind of the second iteration design manifestation of the technology is it just keeps getting better. And so, I think it's one of the reasons why we believe this is a technology, really a feature that can be employed broadly across the spectrum of our product portfolio that will endure for a very long time. Krista Zuber -- TD Cowen -- Analyst Thank you. Best of luck. Operator Our next question comes from the line of Rick Patel with Raymond James. Please proceed with your question. Rick Patel -- Raymond James -- Analyst Thank you. Good afternoon and congrats on the strong performance and the super impressive milestone, David. Can you unpack the performance of domestic wholesale being up 7.7% a little bit further? What are you seeing -- what do you see as being the primary driver of that rebound? Is it higher volume within the same accounts? Are you broadening accounts as you launch new products? And secondly, you alluded to orders coming in a little bit earlier than you expected. Does that mean that we should be modeling a slower growth rate in the second quarter? Just some color on the shape of growth for this year would be great as we think about wholesale growing mid to high single digits for the year. David Weinberg -- Chief Financial Officer I think the biggest factor most immediately was we've seen more wholesale customers embrace the technology. It was this time last year, as we really started to proliferate some of our comfort technologies in our own stores. Not everybody in the wholesale world was equipped or poised to be able to take advantage of that. And I think what you're really seeing is post a pretty decent holiday, they were open to buying in and then also supporting with marketing and price those technologies and they've sold through really well. So, really what I think we saw more than anything else was not new orders as much as an acceleration of existing orders, customers wanting products sooner to fulfill what it sold out. As we said all of last year, we always saw really good price sustainability, we saw good margins, inventories were lean. I think we're starting to finally see the benefit of that as some of the partners out there cleanse themselves of some of the inventory issues they were suffering from last year. And so, I think that will continue. As we said at the beginning of the year, we knew the first half of the year would grow. I think you can probably expect at this point a similar level of growth on the second quarter in domestic wholesale. We'll see it always boils down in the second quarter, particularly to the timing of shipments toward the end as accounts start to stock up for back-to-school. But right now, I'd say again, we continue to see optimistic signals and that would lead us to expect in the second quarter a pretty similar level of growth. John Vandemore -- Chief Financial Officer I think it's important to remember that all of this happens primarily based on sell-through performance of the product that they're seeing now. So, you go back to the original piece is all the good things happen when the consumer likes the product and comes in and shops and moves through it. So, it starts from sell-throughs, sell-throughs against available inventory, sell-throughs against what you have purchased already, where you're open to buy sits and manipulation of and we're seeing all positive pieces of that around. Rick Patel -- Raymond James -- Analyst Can you also help us with the puts and takes of gross margins going forward? Aside from the DTC outperformance, what's the right way to think about freight? Does that remain a benefit in the second quarter? And how do you expect to exit the year on freight just given the volatility we've seen in the freight rates? David Weinberg -- Chief Financial Officer Yes. We don't expect a lot further from this. I think we'd always said that Q1 was the last quarter where you'd see a significant contribution from freight. If anything, right now, as you look forward, although freight rates are stable generally, certainly, there's some impact observed in kind of European routes because of the Red Sea situation. We don't think that will be a big impact, but I think it speaks to the fact that rates have kind of returned to normal now. We don't expect that to be a significant driver either of a positive or a negative influence on gross margin. I think what you're going to continue to see us benefit from is that channel mix as well as product mix. Rick Patel -- Raymond James -- Analyst Very helpful. Thanks very much. David Weinberg -- Chief Financial Officer Thanks, Rick. Operator Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question. Adrienne Yih -- Barclays -- Analyst Great. Thank you very much. And let me add my congratulations, fabulous start to the year. My first question is, similar on the input cost. So, freight sort of starts to expire, but I'm wondering if you have visibility on your non-freight input costs and through the year-end? And then my second question is on the demand creation spend, how should we think about dollar growth in 2Q relative to 3Q and 4Q? But more importantly, it sounds like it's a brand awareness and owning the technology. Have you baked in within that midpoint of 10% sales growth, have you baked in more sales growth from the incremental ad spend? Or is this more sort of owning that technology, brand awareness and if there is any upside, it's on top of that? Thank you so much. John Vandemore -- Chief Financial Officer In terms of input costs, we don't see anything that's quite frankly worth commenting on with regards to our projections. So, the honest answer is nothing really worth discussing. There's always movement here and there with input costs, FX, etc. But at this juncture, we don't see any of that having a material impact on our either product level margins or overall gross margins. I would say on the marketing, it is the quarter in which we lean in. It typically is a couple of 100 basis points higher than average. I think that's kind of the quantum you can expect. In terms of sales, I would say it certainly factors into our projection, but it's really a spend that benefits the entirety of the year. So, it's not really just about aligning Q2 sales with the marketing. As we said on the call, one of the reasons we flow through the upside that we did to the full-year guide is the marketing is out there, it's working. We continue to excel in this category of comfort technology in general and our Hands Free Slip-ins, in particular. And so, the spend in the quarter will benefit the entirety of the balance of the year. So, there's not really a one-to-one correlation. That being said, we always try to construct our guidance such that there's a more likely than not chance we can meet or exceed that. Q2 does depend highly on the timing of shipments out of the back end as accounts take stock of where they need to be for back-to-school. So, I would say if anything, I'm probably slightly more optimistic about what we can do in the quarter, but we want to see the little bit more of the quarter materialize before we make any decided calls on that. David Weinberg -- Chief Financial Officer Yes. I should point out, from my perspective, it's the advertising spend is definitely anticipatory. We try to anticipate where we have potential significant growth in those territories that are growing to try to feel them. We usually try to take it from those places that are flattening out or showing some deterioration for whatever reason, but we have no deteriorating marketplaces now that we need to go into. So, when we anticipate around the world for our growth and we have a lot of white space, we're investing upfront and we do anticipate that it comes back at a later time. It may be third quarter, fourth quarter beyond, but that's what drives our international business. So, it is a reflection of what we see out there, the demand, the white space, and what space we think we can continue to absorb. So, it does reflect our thought process on going forward on what it will do for sales. Adrienne Yih -- Barclays -- Analyst It's great to see a company playing offense these days. So, congrats. Operator Thank you. Our next question comes from the line of Tom Nikic with Wedbush Securities. Please proceed with your question. Tom Nikic -- Wedbush Securities -- Analyst Hey, guys. Thanks for taking my question. And, David, congratulations on hitting 100 earnings calls. Hopefully, we hear you on a on a 100 more. So, hopefully. David Weinberg -- Chief Financial Officer I'll let my doctor really say that. Tom Nikic -- Wedbush Securities -- Analyst I wanted to ask about China. So, obviously, China has been pretty solid the rest of the quarter and I think you've had four straight quarters of double-digit growth. The compares get more difficult in China and some of them macro headlines coming out of China some of them mixed. How should we think about the growth opportunities in China for the rest of the year? John Vandemore -- Chief Financial Officer Well, first, I'd start off by reiterating what you implied, which is the China story for us continues to be one of a pretty strong recovery, all things considered. We're incredibly pleased with what we saw in China this quarter and reflects a lot of work by our team there to succeed despite some of the challenges that persist. As we look at the balance of the year, we remain cautiously optimistic that we'll continue to see more of that recovery. Keep in mind, China is a growth market. We think it has a lot of opportunity long-term for the brand, and so, when you look and compare there's not as much of the story as it would be in a moment, share market because the brand has a lot of runway. Some of the product that's just getting introduced into China has a long runway. So, we remain cautiously optimistic. We do acknowledge the fact that it's a market in recovery and still has some work to do to kind of fully flush out some of the issues. But, I would also remark that despite that over the last year, year and a half, we've continued to see really good growth. And, so we remain optimistic, albeit cautiously, about the future. Tom Nikic -- Wedbush Securities -- Analyst Understood. And, if I could just ask a little bit of modeling minutiae. John, I think you gave the store opening plans earlier. Can you give us how many stores you plan to close this year so we can get to sort of a next store openings for the year? John Vandemore -- Chief Financial Officer Yes. We don't give that out specifically. I mean, my objective would be to not close any stores because we'd like them all to be continuing to contribute. I would say when we put together that guidance, we do incorporate some expectations. So, the number we give is attempting to get to a net number. Again, keep in mind, when we're talking about stores, it's much more important for us to open the right store and not just a store.So, we'll always want to continue to exercise the discipline about making sure we're opening the right store for us, and that's something we'll continue to do. Tom Nikic -- Wedbush Securities -- Analyst Understood. All right. Thanks very much and best of luck for the rest of the year. John Vandemore -- Chief Financial Officer Thanks, Tom. Operator Thank you. Our next question comes from the line of Jesalyn Wong with Evercore. Please proceed with your question. Jesalyn Wong -- Evercore ISI -- Analyst Hi, David. Hi, John. Congrats on a good set of quarter. I'm just wanting to dig a little bit more into Rick's question earlier. Domestic wholesale orders up 8% this quarter, seems to be a positive surprise there, but yet we're only guiding to mid-single digit to up high single digits. How conservative are there in terms of our estimates? And the other part, it's on the operating margins. Last quarter, you called out operating margins for this year to be guidepost of 200 basis points away from long-term target. But given such a strong first quarter, how should we be thinking about operating margins for this year? John Vandemore -- Chief Financial Officer Yes. On the wholesale front, again, the timing comes into play pretty significantly in the second quarter. So, I think that's part of why you'll see that range in our incorporated guidance. Again, I would also acknowledge the first quarter came in stronger than we originally thought, so that was a good surprise. If that trend continues, we'll definitely be toward the higher end of that range. But, again, we got to be cognizant of the fact that when you get into kind of the end of June, it could be just a timing difference between Q2 and Q3. So, we like to put a range on it to keep things realistic given what we've seen, but we are seeing really good trends. And again, beyond Q2, we're seeing good trends for the balance of the year as well. In terms of the operating margin, again, look, our goal has been to get back into the double digits. We've said that's our goal. I would say certainly this quarter gives us more optimism about our ability to achieve that for the year. It's still our objective. We still have a lot of levers to pull and actions to take to help drive that. And there really isn't anything out there that gives us pause for concern, but I don't want to declare victory until we're closer to the year, but we're certainly optimistic about that progression. Jesalyn Wong -- Evercore ISI -- Analyst All right. Maybe just a last question on EMEA. EMEA seems to be holding out very well. Any additional color on exit trends there, with the strength that we have seen even throughout the quarter? And how should we think about second quarter and second half into the year? John Vandemore -- Chief Financial Officer Yes. EMEA was great. Probably the most significant surprise for us was the continued strength on the direct-to-consumer side in Europe. So, the side of our business that's closest to the consumer in that market, which certainly has had its share of challenges over the course of last two years, performed exceptionally well for us, strong demand for the products, strong demand for our comfort technologies. We recognize it's a dynamic environment. We're watching the consumer just as carefully as everybody else. But, what we saw in the quarter was highly encouraging relative to our business in that market, and we're certainly expecting continued growth there. I think if we're going to see kind of an outsized growth element to the remainder of the year, it's probably going to come from the international DTC side of things, and we expect Europe to be a contributor to that. Jesalyn Wong -- Evercore ISI -- Analyst All right. Thank you. Operator Thank you. Our next question comes from the line of Chris Nardone with Bank of America. Please proceed with your question. Chris Nardone -- Bank of America Merrill Lynch -- Analyst Thanks guys. Good afternoon. I was wondering if you can provide an update on the trends you're seeing in your India business given some of the recent regulation uncertainty in the market. If you can comment maybe how large your business is today and what your manufacturing capacity looks like relative to the demand you're seeing. John Vandemore -- Chief Financial Officer Yes. We don't size markets but I would say in India, certainly one of our bigger international markets is kind of a stand-alone country. And more importantly, we think one of the bigger opportunities long term. The regulatory environment, it is what it is in the marketplace. We did see a short-term relaxation of some of the recently enacted regulatory limitations on importation. It's not long-term though, so it continues to be an issue we deal with. We have objectives to continue to manufacture more and more product in India. The issue in the short term is simply the capacity of that market to bear it. And, that's not a Skechers issue in all honesty. That's an industrywide issue, and that's something we continue to work on with our manufacturing partners. So, it's something we'll continue to watch. I was pleased that India came up a little bit in the quarter because it's also had some influences from macro concerns and now they're involved with the world's largest election, which takes an awful long time to get done. And so, we're cautiously optimistic about what we'll see over the balance of the year, but the regulatory scheme is ultimately going to need to be resolved for the benefit of Skechers and the broader community of footwear and apparel providers before we have, I think, full clarity in kind of the near-term runway. But again, long term, a great market we continue to be enthusiastic about and we'll be visiting in a month. Chris Nardone -- Bank of America Merrill Lynch -- Analyst Thanks, John. That's very helpful. And then just quick follow-up on your international business more broadly. Can you help frame what inning we're in, in terms of rolling out your slip-in technology across markets? John Vandemore -- Chief Financial Officer Are we talking baseball or cricket or -- Chris Nardone -- Bank of America Merrill Lynch -- Analyst We're talking -- John Vandemore -- Chief Financial Officer I'm joking. Look, I think it's early, but I would argue it may even be early for the United States. We don't, this is a fantastic technology that's resonating with consumers, has a lot of runway. We're incorporating it into more and more products, I think in a unique way that will appeal to consumers. And so I would say whichever measure you choose to use, it's early stages. I would also, though, mention, Chris, that it's not just about Skechers Hands Free Slip-ins. This isn't in isolation. It's the portfolio of technologies we're bringing forward. It's our Max cushioning, our Arch Fit. It's our concentration on wide widths for individuals who have that need, our Hyperburst technology. I mean, there's a lot to it and I would say we're continuing to press those advantages and develop more for both the domestic as well as the international markets. Definitely more room to go on the international side just due to the timing of the rollouts, but it's hard to call a specific percentage complete at this juncture because we're continuing to surprise ourselves sometimes on how that technology can be deployed in different products and in different ways. David Weinberg -- Chief Financial Officer And, it's important to remember that it's only a feature and more as importantly or more importantly is the whole brand identity. All the categories we compete in and all the product we bring forward that we continue to showcase and move into new categories with it's, we're going into technical athletics that may or may not have a piece that it will use some of the features and not others. But all of our comfort features go into a myriad of product and it's important to keep expanding the brand, expanding the categories, expanding our design capacities to be available for everyone and use all not a specific, but all of this technology is available to us and all the technologies we continue to invent for lack of a better word or bring to the marketplace to enhance our comfort in something that's stylish and that everybody wants to wear. Operator Thank you. Our next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question. Alex Straton -- Morgan Stanley -- Analyst Great. Thanks so much and congrats again on nice quarter. I wanted to zoom in on the first quarter gross margin. It looks like a lot of that expansion came from wholesale up over 500 basis points. So, can you just talk through why that part of the business is hitting highs and how to think about the right kind of gross margin level for it going forward? John Vandemore -- Chief Financial Officer Yes. I think, Alex, we talked about the disparity between kind of this year and last year relative to the impact of a lot of our comfort technologies. It was just earlier, and so there weren't as many, and that's why we disproportionately benefited in the wholesale side of things, on the domestic and international DTC side of things. We're able to put that product into play earlier, and obviously, it did quite well. The other way to think about it is the DTC, because it's under our total control, is almost always the leading edge for us. And, so we're able to impact that business much more quickly than our wholesale side of things, be it pricing, be it any other aspect of the business seating. So, we saw that benefit DTC in a more pronounced way last year, and we're seeing kind of wholesale catch-up, particularly this quarter. Alex Straton -- Morgan Stanley -- Analyst Great. And, then maybe just bigger picture on gross margin since they've stepped up so much from pre-COVID levels. Maybe where you think that kind of settles over time? Is this the new kind of right level or has it come down from here? John Vandemore -- Chief Financial Officer Well, we'll continue to look for opportunities to drive gross margin. I think on a year-over-year basis, clearly, there'll be some uplift because we had more of the freight in play in the Q1 last year. So, that was naturally accrete. But also as we grow our direct-to-consumer business at an outsized pace relative to our wholesale, that allows for continued accretion. And, so I think over the near-term, we would expect it to continue to go up, albeit not at the leaps and bounds we've seen over the last couple of years at a more modest pace as it's about the mix of business, mix of product rather than influences from freight or other major input costs unless something changes. Alex Straton -- Morgan Stanley -- Analyst Thanks so much. Good luck, guys. John Vandemore -- Chief Financial Officer Thanks, Alex. Operator Thank you. And our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question. Sam Poser -- Williams Trading -- Analyst Hey, guys. Thank you very much. David, we've known each other a long time. So, just let me just follow up on the gross margin. I mean, how should we think I mean, can you give us like a neighborhood of how you're thinking about gross margin for this year? And that can be up 360 bps, but I mean, what can you give us a range of what we're looking for the year? John Vandemore -- Chief Financial Officer Again, I'd say, if we're going to continue to drive it north, this year, this quarter was higher definitely than we expect over the balance of the year. I think we'd love to see it up 100 basis points to 150 basis points, but there's a lot of mix that can come into play there. So, it's kind of the range of the neighborhood I'd start out with. But keep in mind, as we see the business unfold, as we see the business balance out over the rest of the year, that may change. I mean, one of the things I'm always cautious of, as you know, Sam, is we have tremendous success in our distributor business, which is a great operating margin business. It could have an effect of dragging down gross margins a bit. But again, that's an incredibly lucrative operating margin business. So, we're not really intent on playing the gross margin game per se overall. We really focus on what kind of constructive margins are we getting out of the product and out of the accounts and then let the business kind of blend into the increased margin. But if I had to give a number, it would be that 100 to 150 basis point range at this point. Sam Poser -- Williams Trading -- Analyst Thank you. And then, you talked about the timing of the year, and this is a peculiar year because many of your big wholesale accounts had their 53rd week last year, which means that one of the biggest weeks of back to school actually falls into their second quarter where it fell into the third quarter last year, which makes them a little more like, we need goods earlier than later kind of situation to make sure that that they get set up properly for back to school. Is that included in your number? I know, you know, June 20 June 30th versus July 1st switches everything. But I mean, as far as I'm concerned, it looks a little less likely this year that like, it seems more likely that one good's earlier than later for back-to-school? John Vandemore -- Chief Financial Officer Yes. That's just a really tough decision to call for someone. So, what we've given is our current expectation based on the way the shipping windows are set up in the order flow. Again, I would comment, we saw improvements this quarter from earlier deliveries, certainly feasible that we see that in the second quarter but not certain. And until we start to see some action on actually adjusting shipping windows, we're not going to incorporate that fully into the guidance. But Q2, Q3 is always a, I know you all care about it a lot. We really don't care too much as long as the shipment goes out at one point or another and we get it in the hands of our customers who can get it to our consumers and it can sell through because that's to David's point earlier, that's the ultimate arbiter of how much business we'll be able to do, and we continue to see really strong sell-throughs. Sam Poser -- Williams Trading -- Analyst Thanks. And, then one last thing, the gross margin that you've been running, especially on the wholesale side, but in general, to me it looks like can you talk a little bit about how over the years I think you've improved in sort of measuring demand, your inventory is in good shape, and it -- I mean, how much of that has played a part outside of mix and currency and various other things? How much is sort of this sort of internal processes, the evolution of the internal processes changed and where is that going? John Vandemore -- Chief Financial Officer Yes. I think you're seeing the results of a lot of work on margin, not just at the product level, although the product team has been integral to that as well. It's about making sure your promotional strategy is properly applied, that your discount structures are properly arranged. And for us, because we're operating our direct-to-consumer business alongside with many of the similar styles and products, that we're maintaining price integrity in that channel. So, it's not just one thing, it's a lot of concerted effort to make sure that we're getting the right merchandise margin for our product. But it's also the innovation. The innovation is certainly something we've seen payoff at consumer level. I mean, the consumer is willing to contribute more to get the value of that comfort technology. So, it's a combination of a lot of factors. You're right to point out it's not just one thing, but it's a lot of effort internally to align every aspect of our business around driving increasingly better profitability. Sam Poser -- Williams Trading -- Analyst Thanks very much. Continued success. John Vandemore -- Chief Financial Officer Thanks, Sam. Operator Thank you. And, we have reached the end of the question-and-answer session, and therefore, this also does conclude today's conference. Answer:

the Skechers' first quarter 2024 earnings conference call

Operator Greetings, and welcome to the Skechers' first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers. Thank you. You may begin. Karen Lozano -- General Manager Good afternoon, everyone. My name is Karen Lozano. I'm the general manager of Store 2 in Gardena, California, and I've been on the Skechers team for an exciting 11 years. Thank you for joining our Skechers conference call today. I will now read the safe harbor statement. Certain statements contained herein including, without limitation, statements addressing the beliefs, plans, objectives, estimates, or expectations of the Company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, including but not limited to global, national, and local economic business and market conditions, including the impact of inflation, foreign currency fluctuations, challenging consumer retail markets in the United States, wars, acts of wars and other conflicts around the world and supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results, performance, or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for description of all other significant risk factors that may affect the Company's business, financial conditions, cash flows and results of operations. With that, I would like to turn the call over to Skechers' chief operating officer, David Weinberg; and chief financial officer, John Vandemore. David? David Weinberg -- Chief Financial Officer Good afternoon, and thank you for joining us today for our first quarter 2024 conference call, which marks our 100th as a public company. We started the year with a new quarterly sales record of $2.25 billion, an increase of 12.5% or $250 million compared to last year, and an adjusted diluted earnings per share record of $1.33. Additionally, we achieved gross margins of 52.5% and an operating margin of 13.3%. These impressive results were driven by growth in both our reportable segments, direct-to-consumer, and wholesale as well as across all regions of the world. The strong global demand for our brand was due to fresh innovations in our proven styles, a more robust offering of our many comfort technologies, and the expansion of our performance and lifestyle divisions into new categories and collections. These newer offerings include our partnership with Snoop Dogg and the Skechers football and basketball lines. As the comfort technology company, we focus first on delivering the ultimate and innovative comfort and style across our product lines, so that every pair looks and feels exceptional. This includes our machine washable footwear for kids, durable outdoor styles and sport styles and our street and court fashion collections. For our performance division, great attention and detail is paid to elevating the fit and comfort while meeting the needs of elite athletes and enthusiasts of football, basketball, golf, and pickleball as well as running and walking. Top professional athletes like Harry Kane, Oleksandr Zinchenko, Julius Randle, Terence Mann, Brooke Henderson, Matt Fitzpatrick, Catherine Parenteau, and many others around the world are competing in Skechers and embracing our comfort that performs. This enthusiasm from those at the top of their game is also resonating with consumers and the media, including Shape Magazine, which just named Skechers Viper Court the best pickleball shoe in their 2024 report, and Sports Illustrated Germany, which featured Harry Kane on the cover wearing our SKX 01 football boots and Skechers performance apparel. The brand and each of these product initiatives are supported by impact for marketing initiatives. This year's commercial for the Super Bowl with Mr. T and Tony Romo to our first basketball campaigns with Julius and Terence. In the quarter, we launched new Spots for kids, BOBS, Max Cushioning and Work all with Skechers Hands Free Slip-ins. And just last week, we added a new lineup of commercials that includes Skechers UNO with actress Ashley Park and GO WALK Slip-ins and Apparel with TV host Amanda Kloots. Along with these on-air campaigns, we employ a 360-degree marketing approach reaching consumers at multiple touch points. To achieve the notable growth that we have this quarter and to continue to meet the needs of consumers around the world, it takes the effort and dedication of the entire global Skechers team, our designers, and supply chain partners who ensure our product is of the highest quality and our third-party retailers whom we have valuable relationships with. We thank each associate, employee, and colleague for working together for our continued success. Looking at our first quarter results. Sales increased 12.5% to $2.25 billion. International sales increased 15%, representing approximately 65% of our total sales in the first quarter and domestic sales increased 7.8%. By region, EMEA increased 17%, APAC by 16% and the Americas by 7.8%. Additionally, both wholesale and direct-to-consumer grew nicely in the quarter. Our wholesale sales increased 9.8% reflecting a return to growth in both international at 11% and domestic at 7.7%. Internationally, the increase was due in part to improved inventory position at certain partners, the growth of our distributors across geographies, and particularly strong sales in China, Germany, and the U.K. For domestic, the return to growth was a result of significant improvement in the flow of orders with both improved ASPs and volume. Skechers is in demand by many of our customers around the world as is evidenced by our strong sales. Direct-to-consumer, which increased 17%, continues to be an important segment of our business and an indicator of positive consumer appetite for our brand. With growth in nearly every market for both our brick-and-mortar and e-commerce stores, we saw a 24% increase internationally and an 8% increase domestically. We ended the quarter with 5,203 Skechers branded stores worldwide of which 1,671 are company-owned locations including 565 in the United States. We opened 52 company-owned stores in the quarter including 22 in China, 10 in the United States, five in Colombia, and two in both India and Korea. We closed 29 stores in the quarter. Also in the period, 95 third-party stores opened including 54 in China, nine in Indonesia, and three each in Australia, the Philippines, and Turkey. This brings our third-party store count at quarter end to 3,532. In the second quarter to date, we've opened 15 stores including three company-owned stores in both China and the United States. We expect to open 155 to 170 company-owned stores worldwide over the remainder of 2024. Our record sales in the quarter along with our efforts to manage inventory levels resulted in a 9.4% reduction year over year and an 11% reduction from December 31, 2023. We believe our inventory levels are healthy and comprised largely of proven sellers, fresh innovations, and new product categories. To efficiently manage our inventory flow, we continue to invest in our logistic capabilities, including our new distribution center in Panama, which is expected to be operational in the second quarter as well as a new company-operated DC in Colombia, which we plan to move into later this year. To efficiently grow our business worldwide and meet the needs of consumers seeking the ultimate in comfort technology, we continue to invest in our operations, product, and marketing. With our numerous accomplishments over the past quarter, we look forward to strategically growing our business in the coming year as well as in the years ahead. And now, I'd like to turn the call over to John, for more details on our financial results. John Vandemore -- Chief Financial Officer Thank you, David, and good afternoon, everyone. Skechers delivered another strong quarter of record financial performance, exceeding both our top and bottom-line expectations. Our diverse portfolio of high-quality products combined with our commitment to delivering these products at a reasonable price clearly resonates with today's consumer. We achieved record sales of $2.25 billion growing 12.5% and earnings per share of $1.33 growing 30% year over year. On a constant-currency basis, sales were $2.27 billion and earnings per share were $1.37. These results were driven by a healthy recovery in our wholesale segment, particularly in the United States and Europe, and continued momentum in our direct-to-consumer segment. Despite persistent economic headwinds, our performance this quarter underscores the strength of the Skechers brand worldwide and the consumer demand for our innovative products together driving us toward our goal of achieving $10 billion in sales by 2026. Consumers understand that comfort is no longer a luxury but a requirement that shouldn't come at a cost. Skechers excels where comfort and value intersect as evidenced by the strength of our global direct-to-consumer business, which grew 17% year over year to $829.9 million. These results were driven by double-digit growth in our e-commerce and brick-and-mortar stores and increases of 24% internationally and 8% domestically. Our commitment to prioritizing innovation and supporting this with effective marketing powered these results. We remain excited about our omnichannel growth opportunities, and we'll continue to deliver on our strategy to expand our direct-to-consumer presence worldwide. In wholesale, sales increased 9.8% year over year to $1.42 billion with growth across all regions. As expected, we are seeing a recovery in domestic wholesale with sales increasing 7.7% versus the prior year. Notably, we experienced a significant improvement in the flow of orders including customers taking goods earlier within their shipping windows. International wholesale sales also returned to growth increasing 11% as the inventory congestion impacting certain partners, particularly in Europe abated. We remain encouraged by our wholesale segment, both domestically and internationally, and continue to expect year-over-year growth as we move through the balance of the year. Now, turning to our regional sales. In the Americas, sales for the first quarter increased 7.8% year over year to $1.02 billion reflective of the improvements in our domestic wholesale business, which accounted for nearly half of the growth and the continued strength of our direct-to-consumer segment. In particular, our domestic direct-to-consumer business grew at 8%. Although this represents a step down from the robust growth of the prior year, on a two-year basis, this reflects a remarkable 35% increase in sales. In EMEA, sales increased 17% year over year to $627.7 million driven by double-digit growth in both segments with broad strength in nearly every country. Our investments to enhance our distribution infrastructure direct-to-consumer experience coupled with our strong wholesale partnerships are producing outstanding results for our EMEA business. We also saw notable performance in our direct-to-consumer channels with impressive growth across genders and categories ranging from athletic to lifestyle and seasonal products. In Asia Pacific, sales increased 16% year over year to $604.5 million led by double-digit growth in most markets. In China, sales grew 13% driven by double-digit growth in both our direct-to-consumer and wholesale segments. In India, sales were up slightly as we resolved logistical challenges with our new distribution center. While the regulatory environment in the market is uncertain in the near term, we continue to be confident in the growth opportunities for our brand long-term. Gross margin was 52.5% up 360 basis points compared to the prior year. The improvement was driven by lower freight costs and a favorable product mix as consumers sought out our higher-margin technology-infused products. Operating expenses increased 150 basis points as a percentage of sales year over year to 39.2%. Selling expenses increased 50 basis points as a percentage of sales versus last year to 7%, primarily due to increased marketing globally including investments focused on brand building and driving consumer awareness for our comfort technology products and newly launched categories. General and administrative expenses increased 100 basis points as a percentage of sales to 32.3% primarily due to higher labor and distribution costs to support growth in our direct-to-consumer segment and compensation-related costs, partially offset by cost efficiencies realized in our U.S. and Europe distribution centers. Earnings from operations were $298.8 million, a 34% increase compared to the prior year, and our operating margin for the quarter was 13.3% compared to 11.2% last year. Our effective tax rate for the first quarter was 19% compared to 18.5% in the prior year. Earnings per share were $1.33 per diluted share, a 30% increase on $155.1 million weighted average diluted shares outstanding. And now, turning to our balance sheet. We ended the quarter with $1.25 billion in cash, cash equivalents, and investments, an increase of $322.2 million versus the prior year primarily from improved working capital management and operating efficiency. Inventory was $1.36 billion, a decrease of 9.4% or $141.6 million compared to the prior year. Notably, we lowered inventory levels in the Americas by 18% and EMEA by 6.9% compared to the prior year. We believe our current inventory levels are healthy and well-positioned to support demand in 2024. Accounts receivable at quarter-end were $1.16 billion, an increase of $105.7 million compared to the prior year reflecting higher wholesale sales. Capital expenditures for the quarter were $57.1 million of which $24.3 million related to investments in new store openings and direct-to-consumer technologies, $15.6 million related to the expansion of our distribution infrastructure, and $7.4 million related to the construction of our new corporate offices. Our capital investments are focused on supporting our strategic priorities, which include growing our direct-to-consumer segment and expanding our brand presence globally. During the first quarter, we repurchased nearly 1 million shares of our Class A common stock at a cost of $60 million. We continue to deploy our capital consistent with our stated philosophy while maintaining a durable balance sheet and ample liquidity. Now, turning to guidance. For the full year 2024, we expect sales in the range of $8.725 billion to $8.875 billion and net earnings per share in the range of $3.95 to $4.10 representing annual growth of 10% and 15% respectively at the midpoint. For the second quarter, we expect sales in the range of $2.175 billion to $2.225 billion and net earnings per share in the range of $0.85 to $0.90. Earnings per share will be down slightly in the quarter due primarily to the timing of demand creation spending, which is typically highest during the second quarter as we amplify consumer awareness for our product portfolio and position our brand for a successful summer and back-to-school periods. We believe this investment is critical to driving growth on a full-year basis and one of the reasons why we are fully incorporating this quarter's outperformance into our full-year guidance. Our effective tax rate for the year is expected to be between 19% and 20% and minority interest is expected to grow in line with total sales. Capital expenditures are anticipated to be between $325 million and $375 million as we continue to invest in our strategic priorities, including opening additional stores, expanding our omnichannel capabilities, and adding incremental distribution capacity in key markets, including constructing our second distribution center in China, a 2 million square foot facility, which will likely elevate our capital expenditures this year and next. We remain confident in our objective of achieving $10 billion in sales by 2026 and are well-positioned to drive long-term earnings growth. We thank you all for your time today and look forward to updating you on our second financial results, which we expect to release on Thursday, July 25. With that, I will now turn the call over to, David for closing remarks. David Weinberg -- Chief Financial Officer Thank you, John. We started the year on a high note by setting new quarterly sales and adjusted diluted earnings per share records with strong gross and operating margins. We delivered results above expectations and further expanded globally with a growing presence in the technical performance space and our innovative comfort footwear continuing to be a must-have for shoppers around the world. Skechers is delivering on its fundamental design tenets of style, comfort, innovation, and quality at a reasonable price, which is resonating with shoppers from all walks of life. We believe comfort is a top priority and that casual and athletic are in high demand, while e-commerce continues to exhibit strength, people are also looking to engage and shop in our physical stores. We are committed to delivering high-performance comfort technical footwear while broadening our offering of Skechers Hands Free Slip-ins, developing new looks in our sport, street, and casual divisions, enhancing the Skechers shopping experience at all touch points, and operating in an increasingly efficient manner. Our extensive product offering, best-in-class partnerships with our distribution network, and strong global demand give us confidence that we will have another record-breaking year as we continue to evolve and innovate and move toward our goal of $10 billion in annual sales by 2026. We again want to thank our entire supply chain and the Skechers' team for delivering another successful quarter. I'd like to take a moment to thank all involved for their continued efforts assisting in delivering these results as we mark our 100th call. Now, I would like to turn the call over to the operator for questions. John Vandemore -- Chief Financial Officer Actually, before turning to the operator, I want to take a moment to commemorate this, our 100th earnings call as a public company. Skechers began trading on June 9, 1999. Many of the employees present that day continue to be deeply involved in the company, including our management team. However, only one person has been on each and every one of our earnings calls since going public. As we celebrate today's milestone of our 100th earnings call, we want to take a moment to acknowledge and honor the remarkable commitment of David Weinberg, our chief operating officer. For over 30 years, he has been integral to Skechers' success and his dedication has been unwavering. So, on behalf of Skechers Board of Directors, Senior Management team, and employees worldwide, I would like to sincerely thank Mr. David Weinberg. I also want to extend heartfelt gratitude to the many other key contributors to the earnings process, including Jennifer Clay, our vice president of corporate communications, as well as our dedicated finance, accounting, investor relations, and legal departments, all of whom have contributed to our journey of growth and success as a public company. With that said, I will now turn the call over to the operator. Questions & Answers: Operator Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] And our first question comes from the line of Jay Sole with UBS. Please proceed with your question. Jay Sole -- UBS -- Analyst Great. Thank you so much. My question is just there's so many positives in Q1, really strong guidance raised for the full year. If you could boil down really what was above your expectations and what really drove the strong results in Q1 to one or two things, what would you say? David Weinberg -- Chief Financial Officer Product, don't we always? John Vandemore -- Chief Financial Officer Yes, I think it's the success of the product. It's manifest in a stronger domestic wholesale rebound than we had originally anticipated for the quarter, continued strength on the domestic and international direct-to-consumer front. In a lot of ways, the quarter came out how we hoped it would when we started the year. We just didn't have all the data yet that would suggest we'd get fully there. And I think what you're seeing in the results, which are, we would argue some of the broadest, strongest results we've seen in a while, it's a reflection of the success of the product across the board. Jay Sole -- UBS -- Analyst OK. And maybe, John, if I can follow up on that. Just there's a lot of talk in the industry about a lot of brands getting more focused on the wholesale channel and potentially what the impact of that is on Skechers. Can you just give us a sense of what you see in your order book as you look out through Q2 and to the extent you have visibility through the rest of the year and how you see the wholesale business developing obviously after a very strong quarter? John Vandemore -- Chief Financial Officer Well, if you remember, as we began the year, we expressed optimism in what we were seeing in our early bookings. You see in the domestic wholesale rebound in particular and the returns in Europe, that came through. I think it's only gotten stronger since then. So, I would say, again, kind of echoing David's original comment on the back of the product that we're delivering, the innovation that we're bringing to the market as well as entry into some newer categories for us, we continue to see really healthy signs on the wholesale front. We expect that to then carry throughout the year. And so, that, I think, again speaks to the broad strength in the brand right now. Jay Sole -- UBS -- Analyst OK. Thank you so much. John Vandemore -- Chief Financial Officer Thanks, Jay. Operator Thank you. Our next question comes from the line of Laurent Vasilescu with BNP Paribas. Please proceed with your question. Laurent Vasilescu -- Exane BNP Paribas -- Analyst Good afternoon. Thank you very much for taking my question. And congrats on the beat, the raise, and David for your 100th call and to many more calls together. John, I wanted to ask, last quarter, I think you kind of called out that wholesale should grow high-single-digits for the year. Should we assume that grows low-double digits now? And, if that's the case, can you maybe parse that how do we think about domestic versus international wholesale for the year? John Vandemore -- Chief Financial Officer Right now, we're anticipating that the wholesale segment will grow kind of mid-to-high single digits. Again, we're seeing really encouraging signs in our wholesale activity, our order book as well as just the sell-through that we're seeing. We're seeing also some really good success with partners who have come to fully embrace our comfort technology product suite. And so, I would suggest to you that we're likely to see something between mid-to-high single digits. I do think the power for that is going to come from the international side of the business, but we're incredibly pleased with what we saw in domestic wholesale. We said at the beginning of the year, we are confident we would see some rebound in the first half of the year. We've seen it in the first quarter at about 8%. I expect that we will see some in the second quarter as well. And, then beyond the current booking window, we're starting to receive orders and they all continue to suggest that the things will continue to grow, which is a great position for the brand to be in. Laurent Vasilescu -- Exane BNP Paribas -- Analyst Fantastic. Good to hear. John, your 10-K calls out that you are going to embark on a multiyear ERP implementation. For the audience, can you maybe talk about the opex and capex investments embedded in your guide for this year's ERP? I know it's the first year. And then longer term, once you complete this ERP, where do you think the opportunity is for the operating margin for the company? John Vandemore -- Chief Financial Officer Well, taking your last bit of the question first, nothing has diminished our enthusiasm for our opportunity to get first into the double-digits, those double-digits that we have spoken about. Obviously, a 13% operating margin this quarter was exceptional. We are incredibly pleased with that, still working for this year to get into the double digits. I would say, the implementation for the ERP as well as a lot of other things we're doing in the company speak to our intent to continue to grow this brand to that $10 billion and beyond. It's one of many investments we are making regularly to improve the opportunity that extends from everything in the stores, the distribution functionality. So, I would consider it all part of a suite of investments we're making across the globe to continue to drive this business because we believe, again, as we've said before, $10 billion is a waypoint, not the ending point. We will continue to grow this brand beyond that. I would say from a capital, from an opex perspective, it's all embedded in what we've given you and what we will give you going forward so that we don't have to talk about these irregular items as adjustments. We'd rather just embed them into the guidance and they're fully encapsulated in what we've given you. Laurent Vasilescu -- Exane BNP Paribas -- Analyst That's great. And, then just as a final question, you talked about it's about product. In today's press release, you talked about signing up three MLB players. You've entered basketball. You've entered global football. Should we assume that you're going to enter the baseball category? And I don't know if you can comment anything about indeed wearing Skechers shoes as of late. That would be great. Thank you very much. David Weinberg -- Chief Financial Officer Yes, we're going to continue. Obviously, it's a great starting point for us and it's part of what we believe will take us out further in the next couple of years for both the brand and the additional category. We think it's great that Joel is wearing his shoes. He's trying them out. He's testing them out. We've had a great relationship with him. We have nothing to announce today, but we will, I believe shortly as he works through this, but that's coming. He is obviously more involved right now in the playoffs. And sure, he's worrying about tonight's game more than he's worried about any announcements or anything like that. But right now, he seems very comfortable in the shoes. It's great that he's wearing them, but we've got great results from Julius Randle, who we're sorry he is missing because it would have been great in the playoffs. He was playing great. Terence is playing great in his shoes. There's other people we're talking to. Our football business continues to grow. We've actually signed a cricket player as we move forward in sponsoring the Mumbai Indians as we go forward as a team. So, we're moving into a lot of sports, a lot of categories, baseball as you mentioned. We think it's all positive for the brand, for people's understanding of the quality and intensity we develop shoes with and how comfortable they are even though they are made very, very well and compete at the highest level. So, we think that's all positive for the brand. But right now, that's just building for the future. The success today comes from what exists today, what we continue to bring forward, our styling. We continue to invest in the product more so than I believe anybody else in our industry. It shows. It's part of the answers you'll get about wholesale and direct-to-consumer. It's all about product, brand identity, and all those things are fitting together and feels very, very good right now. Laurent Vasilescu -- Exane BNP Paribas -- Analyst That's great to hear. Thank you so much. Operator Thank you. Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question. Jim Duffy -- Stifel Financial Corp. -- Analyst Thank you. Great job to the Skechers team. Very clear evidence of share gain in an otherwise difficult market. And, David, that that's a phenomenal run. 100 earnings calls. That's a lot of time dealing with the sell side. My sympathies are with you for that. Let me just start on China. I want to ask a question about distribution center capacity there. It only began to ramp the prior China DC in 2021. I'm guessing growth in China since then it has been below what you might have forecast. I'm curious where this additional China DC takes your capacity and how you've thought about that. David Weinberg -- Chief Financial Officer Well, originally, the first distribution center was not to take care of all the volumes. So, we knew we were underutilized when it was finished. We use a lot of third parties, logistics people in China because it's spread out and done. We are now taking a bigger piece of that distribution facility for our own use. So, we think when this new facility is done, we will have some excess capacity, but we'll use it throughout the big holidays because it was never meant to do a complete job on Singles Day, which is an outsize. So, we'll do bigger percentages and gain more efficiencies as we move through and grow into the second building. And I think it should set us up very, very well to be significantly more efficient with our online and direct-to-consumer businesses in China. Jim Duffy -- Stifel Financial Corp. -- Analyst Great. Thanks. And John, can you speak to the P&L impact from that investment? Should we expect a delevering contribution as you begin investments there ahead of scaling the capacity? John Vandemore -- Chief Financial Officer Well, that won't really hit until, at the earliest 2025, potentially 2026. We're just starting, so the current spend is largely capital in nature. I would echo David's comment though. What we've seen in China from the first distribution center pretty similar to what we see across the globe in that. Once the capacity is installed, we get more and more efficient as we utilize the capacity, as we learn to utilize it better as we adapt to the market. One of the benefits of a little bit of the slowdown post COVID in China was it actually allowed us to absorb more of that third-party serviced demand into our own DC. So, we actually saw a little bit of an acceleration in the efficiency gain in China than would otherwise have been the case because we had the ability to absorb more of that capacity internally. But I would say it's largely going to be a 25%, 26% event before we see any of those start-up costs come into play. But even when we had that with the existing distribution center, it wasn't really extraordinary. If you recall, we didn't talk about it a lot because it didn't really factor sizably into our results. And that's our current expectation. Although as we get closer, we'll refine that and provide perspective as needed. Jim Duffy -- Stifel Financial Corp. -- Analyst Very good. Then just a quick modeling detail question. You spoke to elevated demand creation in the Q2. Should that be a giveback in this back half of the year? Is that simply timing of demand creation relative to the prior year? John Vandemore -- Chief Financial Officer It's a little bit of both, to be honest. As we mentioned, I think, about the midpoint of last year, we feel it's incredibly important for our message of innovation, particularly around our comfort technologies to be out in the marketplace. And one of those we're leading with and as a result, supporting with a lot of marketing is the Skechers Hands Free Slip-in technology, of which we're seeing a lot of copycat work today. So, we want to make sure we get out ahead of that and firmly brand that technology as Skechers. So, I would argue a little bit of it is timing as Q2 is always our most intense period. A little bit of it is incremental investment to make sure within the consumer's perception of that technology, it's solidly understood that it's a Skechers comfort technology and not one that can be easily replicated elsewhere. Jim Duffy -- Stifel Financial Corp. -- Analyst Very good. Thank you, John. Thank you, David. John Vandemore -- Chief Financial Officer Thanks, Jim. Operator Thank you. Our next question comes from the line of John Kernan with TD Cowen. Please proceed with your question. Krista Zuber -- TD Cowen -- Analyst Good afternoon. This is Krista Zuber on for John and congrats David. Just two questions for us. Thanks. First on, really just ASPs and kind of the expectation for the balance of this year. You know, you're lapping some, easier wholesale ASPs in Q2 and Q3, but a little bit more challenging on the DTC side of things. So, just kind of how you're expecting that to play out for the balance of the year? And then I just have one follow-up on the slip-ins. Thank you. John Vandemore -- Chief Financial Officer Yes. I would say this year is going to be more about volume than price. We will see and expect some elevation in ASPs, although not nearly what we've seen over the last couple of years. That's largely going to stem from product mix. We continue to see consumers choosing within our portfolio the higher value comfort technology latent products, and that's actually driving ASPs apart from anything we're doing from a pricing perspective. So, I would expect that much more of this year's drive in sales is going to come from units. We will again, we'll see a little bit of ASP in there but not a ton. Krista Zuber -- TD Cowen -- Analyst OK. Great. And then just on the slip-ins technology, you've mentioned in the past that there's an opportunity here to think about category expansion with this technology. And just kind of any sort of framing that you can give around them sort of the margin profile from this innovation that it that kind of affords you from the comfort technology, be it slip-ins, Archfit, etc., and how that's kind of playing out within the total product line at this point? Thank you. John Vandemore -- Chief Financial Officer Yes. I think you're largely seeing that now. I mean, it's been coincident with some reductions in landed costs stemming from freight rates coming back to normal, but also evidenced in the gross margin performance we've delivered over the last couple of years is that higher value, again, technology-laden product. I expect you'll continue to see a little bit of gravitation up on the gross margin coming from product and business mix as DTC grows faster than wholesale, you see some benefit from that. So, I think that's largely kind of in both what you've seen recently and what you'll continue to see. We will begin to lap that, so there won't be as pronounced a lift coming just from product. I would also say, I think the design team continues to certainly exceed everybody's expectations with how widely and deeply they've been able to install that technology and products you would never even dream of benefiting from some of that technology. It's becoming quite prevalent. And then kind of the second iteration design manifestation of the technology is it just keeps getting better. And so, I think it's one of the reasons why we believe this is a technology, really a feature that can be employed broadly across the spectrum of our product portfolio that will endure for a very long time. Krista Zuber -- TD Cowen -- Analyst Thank you. Best of luck. Operator Our next question comes from the line of Rick Patel with Raymond James. Please proceed with your question. Rick Patel -- Raymond James -- Analyst Thank you. Good afternoon and congrats on the strong performance and the super impressive milestone, David. Can you unpack the performance of domestic wholesale being up 7.7% a little bit further? What are you seeing -- what do you see as being the primary driver of that rebound? Is it higher volume within the same accounts? Are you broadening accounts as you launch new products? And secondly, you alluded to orders coming in a little bit earlier than you expected. Does that mean that we should be modeling a slower growth rate in the second quarter? Just some color on the shape of growth for this year would be great as we think about wholesale growing mid to high single digits for the year. David Weinberg -- Chief Financial Officer I think the biggest factor most immediately was we've seen more wholesale customers embrace the technology. It was this time last year, as we really started to proliferate some of our comfort technologies in our own stores. Not everybody in the wholesale world was equipped or poised to be able to take advantage of that. And I think what you're really seeing is post a pretty decent holiday, they were open to buying in and then also supporting with marketing and price those technologies and they've sold through really well. So, really what I think we saw more than anything else was not new orders as much as an acceleration of existing orders, customers wanting products sooner to fulfill what it sold out. As we said all of last year, we always saw really good price sustainability, we saw good margins, inventories were lean. I think we're starting to finally see the benefit of that as some of the partners out there cleanse themselves of some of the inventory issues they were suffering from last year. And so, I think that will continue. As we said at the beginning of the year, we knew the first half of the year would grow. I think you can probably expect at this point a similar level of growth on the second quarter in domestic wholesale. We'll see it always boils down in the second quarter, particularly to the timing of shipments toward the end as accounts start to stock up for back-to-school. But right now, I'd say again, we continue to see optimistic signals and that would lead us to expect in the second quarter a pretty similar level of growth. John Vandemore -- Chief Financial Officer I think it's important to remember that all of this happens primarily based on sell-through performance of the product that they're seeing now. So, you go back to the original piece is all the good things happen when the consumer likes the product and comes in and shops and moves through it. So, it starts from sell-throughs, sell-throughs against available inventory, sell-throughs against what you have purchased already, where you're open to buy sits and manipulation of and we're seeing all positive pieces of that around. Rick Patel -- Raymond James -- Analyst Can you also help us with the puts and takes of gross margins going forward? Aside from the DTC outperformance, what's the right way to think about freight? Does that remain a benefit in the second quarter? And how do you expect to exit the year on freight just given the volatility we've seen in the freight rates? David Weinberg -- Chief Financial Officer Yes. We don't expect a lot further from this. I think we'd always said that Q1 was the last quarter where you'd see a significant contribution from freight. If anything, right now, as you look forward, although freight rates are stable generally, certainly, there's some impact observed in kind of European routes because of the Red Sea situation. We don't think that will be a big impact, but I think it speaks to the fact that rates have kind of returned to normal now. We don't expect that to be a significant driver either of a positive or a negative influence on gross margin. I think what you're going to continue to see us benefit from is that channel mix as well as product mix. Rick Patel -- Raymond James -- Analyst Very helpful. Thanks very much. David Weinberg -- Chief Financial Officer Thanks, Rick. Operator Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question. Adrienne Yih -- Barclays -- Analyst Great. Thank you very much. And let me add my congratulations, fabulous start to the year. My first question is, similar on the input cost. So, freight sort of starts to expire, but I'm wondering if you have visibility on your non-freight input costs and through the year-end? And then my second question is on the demand creation spend, how should we think about dollar growth in 2Q relative to 3Q and 4Q? But more importantly, it sounds like it's a brand awareness and owning the technology. Have you baked in within that midpoint of 10% sales growth, have you baked in more sales growth from the incremental ad spend? Or is this more sort of owning that technology, brand awareness and if there is any upside, it's on top of that? Thank you so much. John Vandemore -- Chief Financial Officer In terms of input costs, we don't see anything that's quite frankly worth commenting on with regards to our projections. So, the honest answer is nothing really worth discussing. There's always movement here and there with input costs, FX, etc. But at this juncture, we don't see any of that having a material impact on our either product level margins or overall gross margins. I would say on the marketing, it is the quarter in which we lean in. It typically is a couple of 100 basis points higher than average. I think that's kind of the quantum you can expect. In terms of sales, I would say it certainly factors into our projection, but it's really a spend that benefits the entirety of the year. So, it's not really just about aligning Q2 sales with the marketing. As we said on the call, one of the reasons we flow through the upside that we did to the full-year guide is the marketing is out there, it's working. We continue to excel in this category of comfort technology in general and our Hands Free Slip-ins, in particular. And so, the spend in the quarter will benefit the entirety of the balance of the year. So, there's not really a one-to-one correlation. That being said, we always try to construct our guidance such that there's a more likely than not chance we can meet or exceed that. Q2 does depend highly on the timing of shipments out of the back end as accounts take stock of where they need to be for back-to-school. So, I would say if anything, I'm probably slightly more optimistic about what we can do in the quarter, but we want to see the little bit more of the quarter materialize before we make any decided calls on that. David Weinberg -- Chief Financial Officer Yes. I should point out, from my perspective, it's the advertising spend is definitely anticipatory. We try to anticipate where we have potential significant growth in those territories that are growing to try to feel them. We usually try to take it from those places that are flattening out or showing some deterioration for whatever reason, but we have no deteriorating marketplaces now that we need to go into. So, when we anticipate around the world for our growth and we have a lot of white space, we're investing upfront and we do anticipate that it comes back at a later time. It may be third quarter, fourth quarter beyond, but that's what drives our international business. So, it is a reflection of what we see out there, the demand, the white space, and what space we think we can continue to absorb. So, it does reflect our thought process on going forward on what it will do for sales. Adrienne Yih -- Barclays -- Analyst It's great to see a company playing offense these days. So, congrats. Operator Thank you. Our next question comes from the line of Tom Nikic with Wedbush Securities. Please proceed with your question. Tom Nikic -- Wedbush Securities -- Analyst Hey, guys. Thanks for taking my question. And, David, congratulations on hitting 100 earnings calls. Hopefully, we hear you on a on a 100 more. So, hopefully. David Weinberg -- Chief Financial Officer I'll let my doctor really say that. Tom Nikic -- Wedbush Securities -- Analyst I wanted to ask about China. So, obviously, China has been pretty solid the rest of the quarter and I think you've had four straight quarters of double-digit growth. The compares get more difficult in China and some of them macro headlines coming out of China some of them mixed. How should we think about the growth opportunities in China for the rest of the year? John Vandemore -- Chief Financial Officer Well, first, I'd start off by reiterating what you implied, which is the China story for us continues to be one of a pretty strong recovery, all things considered. We're incredibly pleased with what we saw in China this quarter and reflects a lot of work by our team there to succeed despite some of the challenges that persist. As we look at the balance of the year, we remain cautiously optimistic that we'll continue to see more of that recovery. Keep in mind, China is a growth market. We think it has a lot of opportunity long-term for the brand, and so, when you look and compare there's not as much of the story as it would be in a moment, share market because the brand has a lot of runway. Some of the product that's just getting introduced into China has a long runway. So, we remain cautiously optimistic. We do acknowledge the fact that it's a market in recovery and still has some work to do to kind of fully flush out some of the issues. But, I would also remark that despite that over the last year, year and a half, we've continued to see really good growth. And, so we remain optimistic, albeit cautiously, about the future. Tom Nikic -- Wedbush Securities -- Analyst Understood. And, if I could just ask a little bit of modeling minutiae. John, I think you gave the store opening plans earlier. Can you give us how many stores you plan to close this year so we can get to sort of a next store openings for the year? John Vandemore -- Chief Financial Officer Yes. We don't give that out specifically. I mean, my objective would be to not close any stores because we'd like them all to be continuing to contribute. I would say when we put together that guidance, we do incorporate some expectations. So, the number we give is attempting to get to a net number. Again, keep in mind, when we're talking about stores, it's much more important for us to open the right store and not just a store.So, we'll always want to continue to exercise the discipline about making sure we're opening the right store for us, and that's something we'll continue to do. Tom Nikic -- Wedbush Securities -- Analyst Understood. All right. Thanks very much and best of luck for the rest of the year. John Vandemore -- Chief Financial Officer Thanks, Tom. Operator Thank you. Our next question comes from the line of Jesalyn Wong with Evercore. Please proceed with your question. Jesalyn Wong -- Evercore ISI -- Analyst Hi, David. Hi, John. Congrats on a good set of quarter. I'm just wanting to dig a little bit more into Rick's question earlier. Domestic wholesale orders up 8% this quarter, seems to be a positive surprise there, but yet we're only guiding to mid-single digit to up high single digits. How conservative are there in terms of our estimates? And the other part, it's on the operating margins. Last quarter, you called out operating margins for this year to be guidepost of 200 basis points away from long-term target. But given such a strong first quarter, how should we be thinking about operating margins for this year? John Vandemore -- Chief Financial Officer Yes. On the wholesale front, again, the timing comes into play pretty significantly in the second quarter. So, I think that's part of why you'll see that range in our incorporated guidance. Again, I would also acknowledge the first quarter came in stronger than we originally thought, so that was a good surprise. If that trend continues, we'll definitely be toward the higher end of that range. But, again, we got to be cognizant of the fact that when you get into kind of the end of June, it could be just a timing difference between Q2 and Q3. So, we like to put a range on it to keep things realistic given what we've seen, but we are seeing really good trends. And again, beyond Q2, we're seeing good trends for the balance of the year as well. In terms of the operating margin, again, look, our goal has been to get back into the double digits. We've said that's our goal. I would say certainly this quarter gives us more optimism about our ability to achieve that for the year. It's still our objective. We still have a lot of levers to pull and actions to take to help drive that. And there really isn't anything out there that gives us pause for concern, but I don't want to declare victory until we're closer to the year, but we're certainly optimistic about that progression. Jesalyn Wong -- Evercore ISI -- Analyst All right. Maybe just a last question on EMEA. EMEA seems to be holding out very well. Any additional color on exit trends there, with the strength that we have seen even throughout the quarter? And how should we think about second quarter and second half into the year? John Vandemore -- Chief Financial Officer Yes. EMEA was great. Probably the most significant surprise for us was the continued strength on the direct-to-consumer side in Europe. So, the side of our business that's closest to the consumer in that market, which certainly has had its share of challenges over the course of last two years, performed exceptionally well for us, strong demand for the products, strong demand for our comfort technologies. We recognize it's a dynamic environment. We're watching the consumer just as carefully as everybody else. But, what we saw in the quarter was highly encouraging relative to our business in that market, and we're certainly expecting continued growth there. I think if we're going to see kind of an outsized growth element to the remainder of the year, it's probably going to come from the international DTC side of things, and we expect Europe to be a contributor to that. Jesalyn Wong -- Evercore ISI -- Analyst All right. Thank you. Operator Thank you. Our next question comes from the line of Chris Nardone with Bank of America. Please proceed with your question. Chris Nardone -- Bank of America Merrill Lynch -- Analyst Thanks guys. Good afternoon. I was wondering if you can provide an update on the trends you're seeing in your India business given some of the recent regulation uncertainty in the market. If you can comment maybe how large your business is today and what your manufacturing capacity looks like relative to the demand you're seeing. John Vandemore -- Chief Financial Officer Yes. We don't size markets but I would say in India, certainly one of our bigger international markets is kind of a stand-alone country. And more importantly, we think one of the bigger opportunities long term. The regulatory environment, it is what it is in the marketplace. We did see a short-term relaxation of some of the recently enacted regulatory limitations on importation. It's not long-term though, so it continues to be an issue we deal with. We have objectives to continue to manufacture more and more product in India. The issue in the short term is simply the capacity of that market to bear it. And, that's not a Skechers issue in all honesty. That's an industrywide issue, and that's something we continue to work on with our manufacturing partners. So, it's something we'll continue to watch. I was pleased that India came up a little bit in the quarter because it's also had some influences from macro concerns and now they're involved with the world's largest election, which takes an awful long time to get done. And so, we're cautiously optimistic about what we'll see over the balance of the year, but the regulatory scheme is ultimately going to need to be resolved for the benefit of Skechers and the broader community of footwear and apparel providers before we have, I think, full clarity in kind of the near-term runway. But again, long term, a great market we continue to be enthusiastic about and we'll be visiting in a month. Chris Nardone -- Bank of America Merrill Lynch -- Analyst Thanks, John. That's very helpful. And then just quick follow-up on your international business more broadly. Can you help frame what inning we're in, in terms of rolling out your slip-in technology across markets? John Vandemore -- Chief Financial Officer Are we talking baseball or cricket or -- Chris Nardone -- Bank of America Merrill Lynch -- Analyst We're talking -- John Vandemore -- Chief Financial Officer I'm joking. Look, I think it's early, but I would argue it may even be early for the United States. We don't, this is a fantastic technology that's resonating with consumers, has a lot of runway. We're incorporating it into more and more products, I think in a unique way that will appeal to consumers. And so I would say whichever measure you choose to use, it's early stages. I would also, though, mention, Chris, that it's not just about Skechers Hands Free Slip-ins. This isn't in isolation. It's the portfolio of technologies we're bringing forward. It's our Max cushioning, our Arch Fit. It's our concentration on wide widths for individuals who have that need, our Hyperburst technology. I mean, there's a lot to it and I would say we're continuing to press those advantages and develop more for both the domestic as well as the international markets. Definitely more room to go on the international side just due to the timing of the rollouts, but it's hard to call a specific percentage complete at this juncture because we're continuing to surprise ourselves sometimes on how that technology can be deployed in different products and in different ways. David Weinberg -- Chief Financial Officer And, it's important to remember that it's only a feature and more as importantly or more importantly is the whole brand identity. All the categories we compete in and all the product we bring forward that we continue to showcase and move into new categories with it's, we're going into technical athletics that may or may not have a piece that it will use some of the features and not others. But all of our comfort features go into a myriad of product and it's important to keep expanding the brand, expanding the categories, expanding our design capacities to be available for everyone and use all not a specific, but all of this technology is available to us and all the technologies we continue to invent for lack of a better word or bring to the marketplace to enhance our comfort in something that's stylish and that everybody wants to wear. Operator Thank you. Our next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question. Alex Straton -- Morgan Stanley -- Analyst Great. Thanks so much and congrats again on nice quarter. I wanted to zoom in on the first quarter gross margin. It looks like a lot of that expansion came from wholesale up over 500 basis points. So, can you just talk through why that part of the business is hitting highs and how to think about the right kind of gross margin level for it going forward? John Vandemore -- Chief Financial Officer Yes. I think, Alex, we talked about the disparity between kind of this year and last year relative to the impact of a lot of our comfort technologies. It was just earlier, and so there weren't as many, and that's why we disproportionately benefited in the wholesale side of things, on the domestic and international DTC side of things. We're able to put that product into play earlier, and obviously, it did quite well. The other way to think about it is the DTC, because it's under our total control, is almost always the leading edge for us. And, so we're able to impact that business much more quickly than our wholesale side of things, be it pricing, be it any other aspect of the business seating. So, we saw that benefit DTC in a more pronounced way last year, and we're seeing kind of wholesale catch-up, particularly this quarter. Alex Straton -- Morgan Stanley -- Analyst Great. And, then maybe just bigger picture on gross margin since they've stepped up so much from pre-COVID levels. Maybe where you think that kind of settles over time? Is this the new kind of right level or has it come down from here? John Vandemore -- Chief Financial Officer Well, we'll continue to look for opportunities to drive gross margin. I think on a year-over-year basis, clearly, there'll be some uplift because we had more of the freight in play in the Q1 last year. So, that was naturally accrete. But also as we grow our direct-to-consumer business at an outsized pace relative to our wholesale, that allows for continued accretion. And, so I think over the near-term, we would expect it to continue to go up, albeit not at the leaps and bounds we've seen over the last couple of years at a more modest pace as it's about the mix of business, mix of product rather than influences from freight or other major input costs unless something changes. Alex Straton -- Morgan Stanley -- Analyst Thanks so much. Good luck, guys. John Vandemore -- Chief Financial Officer Thanks, Alex. Operator Thank you. And our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question. Sam Poser -- Williams Trading -- Analyst Hey, guys. Thank you very much. David, we've known each other a long time. So, just let me just follow up on the gross margin. I mean, how should we think I mean, can you give us like a neighborhood of how you're thinking about gross margin for this year? And that can be up 360 bps, but I mean, what can you give us a range of what we're looking for the year? John Vandemore -- Chief Financial Officer Again, I'd say, if we're going to continue to drive it north, this year, this quarter was higher definitely than we expect over the balance of the year. I think we'd love to see it up 100 basis points to 150 basis points, but there's a lot of mix that can come into play there. So, it's kind of the range of the neighborhood I'd start out with. But keep in mind, as we see the business unfold, as we see the business balance out over the rest of the year, that may change. I mean, one of the things I'm always cautious of, as you know, Sam, is we have tremendous success in our distributor business, which is a great operating margin business. It could have an effect of dragging down gross margins a bit. But again, that's an incredibly lucrative operating margin business. So, we're not really intent on playing the gross margin game per se overall. We really focus on what kind of constructive margins are we getting out of the product and out of the accounts and then let the business kind of blend into the increased margin. But if I had to give a number, it would be that 100 to 150 basis point range at this point. Sam Poser -- Williams Trading -- Analyst Thank you. And then, you talked about the timing of the year, and this is a peculiar year because many of your big wholesale accounts had their 53rd week last year, which means that one of the biggest weeks of back to school actually falls into their second quarter where it fell into the third quarter last year, which makes them a little more like, we need goods earlier than later kind of situation to make sure that that they get set up properly for back to school. Is that included in your number? I know, you know, June 20 June 30th versus July 1st switches everything. But I mean, as far as I'm concerned, it looks a little less likely this year that like, it seems more likely that one good's earlier than later for back-to-school? John Vandemore -- Chief Financial Officer Yes. That's just a really tough decision to call for someone. So, what we've given is our current expectation based on the way the shipping windows are set up in the order flow. Again, I would comment, we saw improvements this quarter from earlier deliveries, certainly feasible that we see that in the second quarter but not certain. And until we start to see some action on actually adjusting shipping windows, we're not going to incorporate that fully into the guidance. But Q2, Q3 is always a, I know you all care about it a lot. We really don't care too much as long as the shipment goes out at one point or another and we get it in the hands of our customers who can get it to our consumers and it can sell through because that's to David's point earlier, that's the ultimate arbiter of how much business we'll be able to do, and we continue to see really strong sell-throughs. Sam Poser -- Williams Trading -- Analyst Thanks. And, then one last thing, the gross margin that you've been running, especially on the wholesale side, but in general, to me it looks like can you talk a little bit about how over the years I think you've improved in sort of measuring demand, your inventory is in good shape, and it -- I mean, how much of that has played a part outside of mix and currency and various other things? How much is sort of this sort of internal processes, the evolution of the internal processes changed and where is that going? John Vandemore -- Chief Financial Officer Yes. I think you're seeing the results of a lot of work on margin, not just at the product level, although the product team has been integral to that as well. It's about making sure your promotional strategy is properly applied, that your discount structures are properly arranged. And for us, because we're operating our direct-to-consumer business alongside with many of the similar styles and products, that we're maintaining price integrity in that channel. So, it's not just one thing, it's a lot of concerted effort to make sure that we're getting the right merchandise margin for our product. But it's also the innovation. The innovation is certainly something we've seen payoff at consumer level. I mean, the consumer is willing to contribute more to get the value of that comfort technology. So, it's a combination of a lot of factors. You're right to point out it's not just one thing, but it's a lot of effort internally to align every aspect of our business around driving increasingly better profitability. Sam Poser -- Williams Trading -- Analyst Thanks very much. Continued success. John Vandemore -- Chief Financial Officer Thanks, Sam. Operator Thank you. And, we have reached the end of the question-and-answer session, and therefore, this also does conclude today's conference.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to S& P Global's first quarter 2024 earnings conference call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen-only mode. We will open the conference to questions and answers after the presentation and instruction will follow at that time. To access the webcast and slides, go to investor.spglobal.com. [Operator instructions] I would now like to introduce Mr. Mark Grant, senior vice president of investor relations for S&P Global. Sir, you may begin. Mark Grant -- Senior Vice President, Investor Relations Good morning and thank you for joining today's S&P Global first quarter 2024 earnings call. Presenting on today's call are Doug Peterson, president and chief executive officer; and Chris Craig, interim chief financial officer. For the Q&A portion of today's call, we will also be joined by Adam Kansler, president of S&P Global Market Intelligence; and Martina Cheung, president of S&P Global Ratings. We issued a press release with our results earlier today. In addition, we have posted a supplemental slide deck with additional information on our results and guidance. If you need a copy of the release and financial schedules, or the supplemental deck, they can be downloaded at investor.spglobal.com. The matters discussed in today's conference call, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our Forms 10-K and 10-Q filed with the US Securities and Exchange Commission. In today's earnings release and during the conference call, we're providing non-GAAP adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management. The earnings release contains financial measures calculated in accordance with GAAP that corresponds to the non-GAAP measures we're providing and contains reconciliations of such GAAP and non-GAAP measures. The financial metrics we'll be discussing today refer to non-GAAP adjusted metrics unless explicitly noted otherwise. I would also like to call your attention to certain European regulations. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should contact investor relations to better understand the potential impact of this legislation on the investor and the company. We are aware that we have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to our media relations team whose contact information can be found in the release. At this time, I would like to turn the call over to Doug Peterson. Doug? Doug Peterson -- President and Chief Executive Officer Thank you, Mark. S&P Global is off to a tremendous start for 2024. Total revenue increased 14%, excluding the divestiture of engineering solutions. Transaction revenue in our Ratings Division drove much of the upside, but importantly, subscription revenue across the entire company increased 8% year over year as well. Strong growth across the enterprise contributed to quarterly revenue of nearly $3.5 billion, representing the highest quarterly revenue we've ever generated in the history of our company. Execution was a theme in the first quarter, and our efforts to capture market opportunities, combined with discipline on the expense side, led to more than 350 basis points of adjusted operating margin expansion year over year, and adjusted EPS growth of 27%. In addition to the stellar financial results in the first quarter, we continued to demonstrate our leadership across global markets. Capital markets were vibrant in the first quarter, and customers turned to S&P Global to help power their investment, funding, and trading activities. Equity markets saw strong volumes from both IPOs and M&A, and we saw the highest level of debt issuance since 2021. As the globe grapples with the future of energy security and energy transition, it's no coincidence that this conversation took place on the stage of S&P Global's CERAWeek Conference and other S&P events around the world. As we power global markets in equity, fixed income, commodities, derivatives, and in many industrial verticals, our innovation drives customer value. We'll continue to innovate and invest in our leading data technology and workflow tools to drive growth. And we'll highlight some of that innovation today. As we look to the five strategic pillars we outlined for you in our investor day, we're pleased with the progress we've made across the board. While that fifth pillar of execute and deliver is on full display this quarter with the strength of our financial results, we continue to invest in customer relationships, innovation, technology, and our people. Beginning with our customers, we saw nearly $1 trillion of billed issuance in the first quarter. This represents the dollar value of debt issued by our customers, for which they actively sought out a rating from S&P Global. Issuers know that an S&P Global rating provides a credible, trusted, and objective measure of their credit risk. And they know that we have the capacity, even in a very active market, to fully meet their needs. When we look at the broader financial services landscape, we're certainly not back to what we would consider normal levels in the capital markets overall, but we did see improvement. With the macro and geopolitical uncertainties still facing our customers through this year, we continue to hear some concern about the back half, and many market participants are still carefully evaluating expenses for 2024. All of this is consistent with what we shared in February regarding our expectation that ratings would see a stronger first half than second half, while market intelligence would likely start to see improvements in the growth rates in the back half. Energy customers from all of our divisions and from around the globe converged once again in Houston, Texas for our Annual CERAWeek Conference. We're thrilled that customers, partners, regulators, government officials, and global thought leaders view S&P Global CERAWeek as the premier event of the year. Customer engagement remains vital for S&P Global, and in the first quarter, we had well over 100,000 calls and meetings with customers, in addition to the thousands of meaningful interactions our ratings colleagues had with fixed income investors. Build issuance increased 45% year over year in the first quarter. Tight spreads and stabilizing risk appetite in the market created favorable conditions for issuers. We saw investment grade, high yield, and bank loan volumes all increase as issuers took full advantage to raise debt early in the year. We do expect much of this strength was pulled forward from later in 2024, reinforcing our continued view of a stronger first half than second half in issuance volumes. The strength in build issuance in the quarter also underscored the importance and advantages of a robust public debt market. We saw tremendous growth over the last two years in private debt markets, but we began to see early signs of some of that debt being refinanced in the public markets in the first quarter. While this private to public refinancing activity only represented a low single digit percent of build issuance, we've heard from customers that they're saving up to 150 to 200 basis points in their interest rates by refinancing the public markets. We expect the private markets to play an important role going forward as well. We're working with major private debt partners to deliver risk analytical solutions. Private markets revenue in our ratings division increased 30% year over year in the first quarter. Turning to Vitality. We're pleased to see that our Vitality Index continues to account for 10% of our total revenue, despite the fact that several strong and fast growing products matured out of Vitality Index at the end of 2023. As we've called out in the past, this index is meant to highlight the contributions from new or enhanced products. So as products mature, they will no longer be part of the Vitality Index, even if they continue to grow rapidly. Key contributors from our pricing, valuations and reference data, as well as several thematic and factor-based indices matured out of the Vitality Index at the end of the year. We remain committed to that 10% target as a steady stream of new innovation takes the place of any products that graduate from the index. That was the case this quarter as products that contributed roughly $80 million of revenue to the Vitality Index in the first quarter of 2023 were no longer in the Vitality Index this quarter. We expect the Vitality Index to increase as a percent of total revenue as we progress through the remainder of the year. Turning to some examples of that innovation. In the first quarter, our commodity insights team launched a new food and agriculture commodities dashboard, providing a comprehensive view on commodity data, as well as new reports and research on energy. Additionally, we launched new price assessments for renewable energy, as well as new benchmark prices for the Middle East and Asia. Our energy transition and climate products continue to show rapid growth, nearly 30% year over year in the first quarter, supported by the continued innovation and price assessments, new and enhanced datasets and crucial insight solutions. We also introduced an exciting innovation in market intelligence. We've spoken at length about the tools and datasets available through our market intelligence marketplace. But in the first quarter, we introduced what we are calling blueprints. These blueprints are packages of datasets and tools combined based on specific customer personas and workflows, such as private markets performance analytics. We introduced the first five blueprints in the first quarter, with plans to add more in the coming months. These intuitive combinations allow customers to easily discover how our data and tools can work together to facilitate analytics and workflows in new ways. We're also pleased to see early results from the enterprise AI initiatives we outlined for you last quarter. By elevating artificial intelligence to a position of enterprise wide strategic focus, we're accelerating the development of new tools, deploying common capabilities across multiple divisions and increasing the value we create for our customers and our shareholders. With our in-house expertise, we've developed tools to help market participants benchmark performance of large language models, specifically for business and finance use cases. The S&P AI Benchmarks by Kensho is a project informed by our world-class data and industry expertise. The questions in our benchmark are designed to assess the ability of large language models to understand and solve realistic finance problems, and each question has been verified by an experienced domain expert. Lastly, we introduced a remarkable tool we call S&P SPARK Assist. This is a co-pilot platform developed jointly between Kensho and our other internal technology teams. We're deploying this platform throughout the organization to improve productivity, facilitate more rapid innovation and reduce the time necessary to accomplish many routine tasks. Because of our proprietary data, the tools and expertise developed through Kensho and the remarkable technologists we have working throughout S&P Global, we were able to develop S&P SPARK Assist chat interface without relying on a third party vendor. As a result, we're delivering the power of generative AI to our people in an easy to use platform at the cost of less than $1 per user per month. We're incredibly excited about what this tool can do for our people, and we'll provide more details around use cases and productivity as we progress through the year. Turning to our financial results, Chris will walk through the first quarter results in more detail in a moment, but we have had an incredible start to 2024. With strong growth across every division, we continue to balance the need to invest for future growth with the opportunity to deliver margin expansion and earnings growth this year. Revenue grew double digits as reported, but excluding the impact from the engineering solutions divestiture, revenue increased an impressive 14%. Trailing 12 month margins improved 170 basis points to nearly 47%. Now, we'll turn to Chris Craig, our interim CFO to review the financial results. Chris, welcome to the call, over to you. Chris Craig -- Interim Chief Financial Officer Thank you, Doug. 2024 got off to a strong start as we saw three of five divisions achieve double digit growth. As Doug mentioned, reported revenue grew 10% in the first quarter, and excluding the impact of the engineering solutions divestiture, revenue growth was 14%. Adjusted expenses grew by only 3% year over year as we continue to focus on disciplined execution and benefiting from the engineering solutions divestiture. Strong growth and solid execution combined to deliver more than 350 basis points of adjusted margin expansion in the quarter. With our commitment to capital returns over the last 12 months, we've reduced the fully diluted share count by 3% year over year. This led to adjusted earnings per share increasing by 27% year over year to $4.01. Now, turning to strategic investment areas. Sustainability and energy transition revenue grew 15% to $78 million in the quarter, driven by strong demand for commodity insights energy transition products and benchmark offerings, as well as EV transition related consulting in mobility. We are continuing to invest in our energy transition offerings where we see opportunities across our divisions. Moving to private market solutions, revenue increased by 16% year over year to $116 million. Growth was driven by debt and bank loan ratings, as well as continued strength in I-level and other private market solutions within market intelligence. We continue to build momentum in our revenue synergies and are ahead of schedule toward our $350 million target. We exited the first quarter with an annualized run rate of $184 million. During the first quarter alone, we recognized $56 million in revenue synergies. While the majority of this was from cross-sell initiatives, we are beginning to gain traction with new products as well. As of the end of Q1, we have launched 25 new products through our revenue synergy initiatives, and we plan to launch more than 15 additional synergy products by the end of 2024. Turning to our divisions, market intelligence revenue increased 7% in the first quarter, with all business lines growing in the mid-to-high single digit range. Desktop grew 5% as we continued to focus on speed, performance improvements, and the introduction of new content and capabilities, including the expansion of our collection of premium broker research providers with in after market research. Data advisory solutions grew 7% driven by expanded coverage and continued investment in high growth areas of our company information and analytics, and market data and valuation product offerings. Enterprise solutions benefited from an increase in issuance volumes in the debt and equity capital markets and grew over 8% in the quarter. Credit and risk solutions grew 6%, supported by strong new sales and price realization, particularly for Ratings Express Subscriptions. We saw solid growth in market intelligence in Q1, that was in line with our expectations and consistent with what we signaled on our fourth quarter earnings call. Adjusted expenses increased 6% year over year, primarily due to an increase in compensation expense, cloud costs, and royalties, partially offset by reduction in outside services expense. Operating profit increased 9% and the operating margin increased 70 basis points to 32.7%. Trailing 12-month margins expanded 50 basis points to 33.1%. Now, turning to ratings. As Doug mentioned earlier, we saw issuers take advantage of favorable financing conditions, which led to strong refinancing and opportunistic issuance in the first quarter. Ratings revenue increased 29% year over year, exceeding our internal expectations. Transaction revenue grew by 54% in the first quarter, as heightened refinancing activity increased bank loan and high yield issuance. Non-transaction revenue increased 8%, primarily due to an increase in annual fee revenue and strong demand for our rating and valuation service and issuer credit rating products. Adjusted expenses increased 9%, driven by higher compensation, including incentives, as well as increased T&E expense, as our commercial and analytical teams were actively meeting with issuers to help drive the strong growth we saw in the quarter. This resulted in a 43% increase in operating profit and a 640 basis point increase in operating margin to 64.7%. For the trailing 12 months, Ratings margins expanded 290 basis points to 58.5%. And now, turning to Commodity Insights. Revenue increased 10% following the fourth consecutive quarter of double-digit growth in both Price Assessments and Energy and Resources Data and Insights. Price Assessments and Energy and Resources Data and Insights grew 14% and 12% respectively. We continue to see commercial momentum across both business lines, as our established benchmark data and insights products have driven customer conversations about our emerging offerings. Advisory and Transactional services revenue grew 10%, driven by strong trading volumes across key sectors in Global Trading Services and an excellent turnout at our Premier Global Energy Conference, CERAWeek. Upstream data and insights revenue grew by 2% year over year, benefiting from demand for our carbon emissions monitoring offerings, as well as improvement in retention rate. The business line continues to prioritize growth in its subscription base. Adjusted expenses increased 7% due to higher compensation costs and ongoing investment in growth initiative. Operating profit for commodity insights increased 13% and operating margin improved by 110 basis points to 47.2%. The trailing 12-month margin increased by 120 basis points to 46.4%. Now, turning to mobility, revenue increased 8% year over year. The dealer segment marked its fifth consecutive quarter of double-digit growth, and we also saw solid performance from our financials and other business lines. Dealer revenue increased 12% year over year, driven by new business growth in products such as new car listings and CARFAX for Life, as well as the addition of market scan. Manufacturing declined by 3%, driven by a decrease in one-time transactional revenue, particularly in our recall and marketing businesses, which was partially offset by growth in subscription sales. It's important to understand that revenue from Recall products will fluctuate based on the level of activity in any given period. Financials and other increased 12% as the business line benefited from strong underwriting volumes and price increases. Adjusted expenses increased 10% due to both planned investments and strategic growth initiatives and the full quarter impact of the Market Scan acquisition. While this resulted in 100 basis points of margin contraction to 38.1% for the quarter and a 70 basis point reduction to 38.6% for the trailing 12 months, operating profit for mobility increased by 5% year over year. Now, turning to S&P Dow Jones Indices, revenue increased 14% primarily due to strong growth in asset-linked fees, which benefited from higher AUM and continued strength in Exchange Traded derivative revenue. Revenue associated with asset-linked fees was up an impressive 16% in the first quarter. This was driven by higher ETF and mutual fund AUM benefiting from both market appreciation and net inflows. We also saw an increase in revenue for OTC products. Exchange Traded derivatives revenue grew 12%, primarily driven by strong volumes in SPX products and price realization. Data and custom subscriptions increased 6% year over year driven by new business growth in end-of-day contracts. Expenses increased 9% year over year primarily due to increased investments in strategic growth initiatives, as well as an increase in compensation expense. Indices operating profit increased 15% and operating margin expanded 110 basis points to 72.9%. On a trailing 12-month basis, margins expanded by 30 basis points to 69.3%. In the aggregate, our businesses demonstrated exceptional revenue and margin growth while at the same time permitting us to invest in our strategic growth initiatives during the quarter, giving us a strong start to 2024. And with that, I will now turn it back to Doug to discuss our outlook for the remainder of the year. Doug? Doug Peterson -- President and Chief Executive Officer Thank you, Chris. We've updated our outlook reflecting our economist view of the most important economic and market factors that will impact 2024, as well as the outperformance against our internal estimates during the first quarter. Our financial guidance assumes global GDP growth of 3.2%, U.S. inflation of 2.8%, and an average price for Brent crude of $85 per barrel. All three of these figures are slightly higher than we originally assumed in our outlook in February. Additionally, our original macroeconomic view included the base case assumption for three rate cuts by the U.S. Fed, beginning no earlier than June. As we've seen over the last three months, market expectations around interest rates have shifted. And while our economists have not formally updated the number of rate cuts in their base case scenario, our financial guidance now assumes fewer than three rate cuts in 2024. We're increasing our billed issuance forecast for 2024 by approximately three percentage points, to a range of 6% to 10%. As we noted last quarter, our initial outlook for 2024 assumed a stronger first half of the year for issuance. Even with that assumption, the first quarter outperformed our expectations, though we believe much of that outperformance is pull forward as issuers look to take advantage of very favorable market conditions. All of these factors impact our new full year guidance calling for higher growth and stronger margins. This slide illustrates our current guidance or GAAP results. For our adjusted guidance, we're now expecting revenue growth in the range of 6% to 8%, reflecting the outperformance in Ratings and Indices in the first quarter, partially offset by slightly softer expectations for issuance in the second half of the year. Excluding the impact of 2023 divestitures, we expect revenue growth to be slightly more than 1 percentage point higher than reported revenue growth. We also now expect to deliver stronger margins in 2024 with margin expansion in the range of 100 to 150 basis points compared to our prior guidance of approximately 100 basis points. We're taking a balanced approach to reinvesting for future growth while still expanding margins and remain on track to achieve the investor day targets from 2022. We now expect to deliver adjusted EPS for the full year in the range of $13.85 to $14.10, which represents 11% growth at the midpoint. This represents a $0.10 increase from our prior range driven by the increased revenue and profitability outlook for the year. We're also increasing our outlook for adjusted free cash flow, excluding certain items, by $100 million despite modestly higher expected capex. Higher expected net income and disciplined management of working capital both contribute to the higher expected cash flow for the year. Moving to our division outlook. We're reiterating our revenue growth expectations for Market Intelligence, Commodity Insights and Mobility. And we're increasing the growth outlook for Ratings and Indices based on the strength in the first quarter. We're also raising the margin outlook for Indices to reflect the very strong performance year-to-date. While margins were also very strong in our Ratings division in the first quarter, we're reiterating the range for full year margins, which implies approximately 150 basis points of margin expansion at the midpoint. Since much of the revenue outperformance in Q1 likely came from pull forward, our full year guidance assumes year over year declines in Ratings transaction revenue in the fourth quarter as we begin to lap much stronger comps from last year. As a result, we expect margins to be softer in the back half of the year than in the first half in Ratings. With that, I'd like to invite Adam Kansler, president of S&P Global Market Intelligence; and Martina Cheung, president of S&P Global Ratings and executive lead for Sustainable1 to join us. I'll turn the call back over to Mark for your questions. Thank you. Mark Grant -- Senior Vice President, Investor Relations Thank you, Doug. [Operator instructions] Operator, we will now take our first question. Questions & Answers: Operator Our first question comes from Toni Kaplan with Morgan Stanley. You may proceed. Toni Kaplan -- Morgan Stanley -- Analyst Thank you so much. I wanted to focus on Market Intelligence. We've heard some negative commentary from others in the market, which made it sound like this past quarter was particularly challenging. So I wanted to see if that was your experience as well? And also if the large investment bank consolidation impact was in this quarter or if it hasn't hit yet. And then, I know you're talking about Market Intelligence being better in the back half. And so, wanted to just flesh out what gives you the confidence that that happens. Adam Kansler -- President, S&P Global Market Intelligence Toni, it's Adam. Thank you for the question. So yes, we're seeing many of the things that others are seeing in our markets, particularly for our financial services customers. We're seeing that particularly in the smallest of those customers, and that's probably comparable to what some others are seeing. But for us, that's really where the concentrations are. The specific consolidation that you're talking about in terms of the overall scale of our division, it's not something that impacts us in a material way. That -- some of that has already been absorbed. Some will continue to come. But all of that has been anticipated by us in the guidance and the view that we've given you forward. We do view what's going on in the market today is very much a cyclical headwind. But the secular tailwinds that we see in our businesses, particularly in our core areas of focus like private markets, the expansion of our Desktop, you see some of the improvements in the investment we've made over the last two years. That gives us a lot of confidence in achieving our long-term goals and the continued growth of the business, confidence in what we've explained we expect to do for the current year and in delivering against the longer-range investor day targets that we set out in 2022. Doug Peterson -- President and Chief Executive Officer Thank you, Toni. Operator Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is open. Manav Patnaik -- Barclays -- Analyst Thank you. I just wanted to ask on Market Intelligence as well. Just in terms of the strategy going forward, obviously, tough budget environment. Competitors are probably sharpening their pencils too. Just can you help us with the strategy there? And also kind of tied to that is the -- when does Visible Alpha close? How should we think about the contribution and also the divestiture that you were planning? Like what else is in there? Adam Kansler -- President, S&P Global Market Intelligence OK. Thanks, Manav, and thank you for the question. Let me just start with the last piece, Visible Alpha. We do expect that transaction to close here in the second quarter. We're quite excited about it. I think it's an important part of one of our strategic areas, which is the continued expansion and improvement in quality of the Cap IQ Pro set of solutions that we offer to the market. As we highlighted, I think really as far back as investor day, we have a few core areas of focus that we do think we'll continue to grow. And that really shapes our strategic focus. Those are in areas like private markets, sustainability of the supply chain, the expansion of our Desktop, the ability to deliver our data and solutions to customer in as easy a way as possible. These are things that our largest customers are looking for as they go through consolidations of vendors. That's where the scale and breadth of services that we're able to offer through Market Intelligence and of course, across the broader S&P Global enterprise really has impact. We'll be laser-focused on that strategy. And as you've seen when we announced at our last call, we'll look at those businesses where we see underperformance or lack of strategic fit, and we'll make decisions on those. And where we see opportunities to acquire unique assets that are high growth or have particular proprietary value companies like Visible Alpha, the one you mentioned, quite excited to get that integrated. We're going to take advantage of our position and our opportunity to bring them into the business. So thanks again, Manav. Doug Peterson -- President and Chief Executive Officer Thanks, Manav. Operator Thank you. Our next question comes from Heather Balsky with Bank of America. Your line is open. Heather Balsky -- Bank of America Merrill Lynch -- Analyst Hi. Thank you for taking my question. I'd love to hear more about how -- you talked about a pull forward in issuance into the first quarter. Can you just talk a little bit about, on a regular basis, how much visibility do you have as you look three quarters out? And how do you think about taking some level of conservatism, given we're in an election year, there's an uncertain rate environment. Just how are you positioning yourself with regards to the guidance, given what you saw in the first quarter? Thanks. Martina Cheung -- President, S&P Global Ratings Heather, it's Martina. Thanks very much for the question. So we look at a variety of factors to give us a good sense for the issuance pipeline in the immediate time frame. Typically, we would look at 180-day pipelines, for example, as well as more near term, but also throughout as much as we can, next nine to 12 months. Those factors, macro factors, GDP inflation rates, geopolitical factors, which, of course, is something we're paying very close attention to this year. But we also look, as we've mentioned in the past, obviously, at maturity walls, the pace of refinancing, as well as growth and investor interest in different asset classes such as private markets, sustainable finance, structured finance, infrastructure, etc. So the -- those factors give us a very good sense at any point in time for where we are with respect to the year. If you look at what we saw in Q1 of this year in terms of billed issuance, we saw a very high volume of refinancing of maturity walls in high-yield and bank loan. About two thirds overall the issuance activity that we saw was related to refinancing. That was a combination of heavy refinancing at '24, but we also saw some '25 and '26 refinancing quarter as well. So that's really the key area of outperformance from an issuance standpoint in Q1. And we would expect that activity to continue in bank loan and high yield through the second quarter and then taper off a little bit, largely because we've been hearing consistently even since before our last call that high yield and bank loan issuers, as well as, to some extent, investment-grade issuers are wanting to really get ahead of any volatility you see in the back half of the year and take advantage of the relative market stability and favorable spreads that we're seeing at this time. Now, in investment grade, a very strong quarter, but we think a lot of that investment-grade issuance is pulled forward in the second half of the year. There were a handful of several large M&A deals there as well but not enough volume for us to really change our view for investment-grade issuance for the rest of the year. So I hope that helps. And happy to take any more questions on issuance. Doug Peterson -- President and Chief Executive Officer Thank you, Heather. Operator Thank you. Our next question comes from Faiza Alwy with Deutsche Bank. Your line is open. Faiza Alwy -- Deutsche Bank -- Analyst Yes. Hi. Good morning. Thank you so much. Wanted to follow up on the Ratings and maybe more on the margin front. So while you're increasing the revenue outlook, margins -- you haven't increased margins. So I'm curious if it's mix of business or any investment sort of how we should think about the margin performance through the rest of the year? Martina Cheung -- President, S&P Global Ratings Thanks for the question. Well, as you know, we've said numerous times in the past, we're solving for long-term sustainable margin in the Ratings business. And we are a very disciplined steward of capital in the business. So our guidance for the year, which we reiterated at 57.5 to 58.5, as Doug said in his remarks, at the midpoint represents about 150 basis points of margin expansion year over year. We can do a lot with the base that we have. So the reason why I say that is because we have this incredible blockbuster quarter from an issuance standpoint without having to add tremendous amounts of additional staff to meet that need. And that is really, I think, reinforcement of the capacity preservation strategy that we initiated a couple of years ago. So we're very pleased with how we're operating from an expense management, capacity management standpoint and very comfortable with the margin range that we have right now as we -- as it relates to the full year. Doug Peterson -- President and Chief Executive Officer Thank you, Faiza. Operator Thank you. Our next question comes from Andrew Steinerman with J.P. Morgan. Your line is open. Andrew Steinerman -- JPMorgan Chase and Company -- Analyst Hi, Martina, it's Andrew. I just wanted to ask you a little bit about issuance pull forward. Just you're talking so much about it intra-year kind of second half pull forward to first half. Just broadly, aren't we still in the midst of a pretty large issuance recovery after the big declines of '22? Martina Cheung -- President, S&P Global Ratings Andrew, thanks very much for the question. I would say a couple of things. So the context on a lot of my commentary on intra-year I would say I'd lean more on the investment-grade side, where we think we saw a 2H pull forward. I think we did see pull forward of '25 and '26 maturities, for example, on the refinancing front for high yield and bank loans. So a little bit of a mix there between the spec-grade asset class and investment-grade asset class. I think to your broader point, yes, we are and continue to be in midst of recovery, notwithstanding the very steep growth rates, for example, in high yield and investment grade. We're still not seeing the issuance volumes back to anything close to what we might have characterized as market highs for example, in the past, or even market averages that we might have seen in the past. So there's still room to go here throughout the next several years. This is something that we've commented on since '22, believing that it was going to take some years to come back to it. But of course, the maturity walls themselves are quite a large factor here. And on the spec-grade asset classes, high-yield and BLR, jointly, we've got about $1.1 trillion in maturities still outstanding for us in '25 and '26. So we're monitoring very, very closely and tightly the indicators that would give us a sense for the pace and timing of those maturities. Doug Peterson -- President and Chief Executive Officer Thank you, Andrew. Operator Thank you. Our next question comes from Alex Kramm with UBS. Your line is open. Alex Kramm -- UBS -- Analyst Yes. Hi. Good morning, everyone. Just another one on the margin actually, but more on the outlook for the full company and nice to see the margin outlook being raised. But just wondering, is this just a business mix driven upside? Or is there anything else going on, and I'm asking particularly since you mentioned execution in your prepared remarks. So just wondering, is this just execution on the sales and revenue side or following last year's, I guess, disappointments a couple of times, if you take a little bit of a harder look at the cost base and where you can be more efficient. Doug Peterson -- President and Chief Executive Officer Thank you, Alex. Well, as you know, we run the company with an approach to budgeting and management, where we always start the year with a positive jaw. That's just our philosophy. We look and see how we're going to do in our core businesses. We go out to see our customers. We understand what we can build as a forward-looking pipeline, forward-looking expectations for the market. We then ourselves say, what would be the expense level that we want to have to support that growth. On top of that, we then come back and say, how much can we afford to invest. As you saw in this quarter, our expenses grew 3%. That's a result of very, very strong execution coming out of 2023. We're ensuring that we can have very clear tracking of all of our expenses. It's just part of our philosophy of how we run the company. Going forward for the rest of the year, you see that we're going to continue that approach. But we think that this is part of the way we manage the company. We're always looking at being very tight on understanding our revenue sources and then moving forward to have a tight approach to our expenses. Thanks, Alex. Operator Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open. Ashish Sabadra -- RBC Capital Markets -- Analyst Thanks for taking my question. I just wanted to drill down further on Market Intelligence, both the recurring variable and the subscription growth. We've seen some really strong 13% growth in recurring variable last two quarters. How should we think about those tailwinds there? And is that mostly contributed from IP and WSO going forward? And then, on the subscription side, the 6% growth, that moderated a bit. But how should we think about those momentum as we get -- go through the year? Adam Kansler -- President, S&P Global Market Intelligence Thanks, Ashish, for the question. So we watch our recurring revenue growth very carefully in this quarter, more than 7% growth in our recurring revenue. Some of that comes from volumes in our businesses that are affected by capital markets volumes. Over the years, we've sought to actually temper that a bit using more fixed contracts. Our customers in most of those markets prefer it. And for us, it adds a little bit more stability and regular growth to the business. Quarter to quarter, we'll see some variation in those numbers, but we do expect our recurring revenue, our subscription revenue to continue to grow in line with our full year guidance for the division. Thanks again. Doug Peterson -- President and Chief Executive Officer Thanks, Ashish. Operator Thank you. Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open. Jeff Silber -- BMO Capital Markets -- Analyst Thank you so much. I just wanted to continue with the Ratings question. I think you said that billed issuance was up 45% year over year in the quarter, but Ratings revenue was only up 29%. I know in prior quarters, they've been much tighter in terms of the correlation. Can you explain what happened this quarter, why the difference? Martina Cheung -- President, S&P Global Ratings Jeff, it's Martina. Thanks for the question. So to your point, billed issuance was up 54 -- sorry, 45%. But transaction revenue, which is the revenue portion or revenue category that is most closely correlated to billed issuance was up 54%. So we grew faster than billed issuance in the quarter. Overall revenue growth of 29% represented both the transaction revenue growth of 54 and the non-transaction revenue growth of 8%. So really just the evening out of the performance across those to get to the 29% growth. Perhaps I will just comment briefly on the non-transaction growth drivers. We were quite pleased with the performance in the quarter. We had continued strength in RES with a lot of companies looking for scenarios around their capital stacks. We saw some new ICR issuance in the quarter and had strong performance on the surveillance book and fee programs. Thanks for the question. Doug Peterson -- President and Chief Executive Officer Thanks, Jeff. Operator Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open. Scott Wurtzel -- Wolfe Research -- Analyst Hey. Good morning, guys. I wanted to ask just on the revenue synergies here. I mean, it looks like it was a pretty strong quarter, recognizing $56 million and then the run rate being pretty impressive here. And in the context of you guys talking about recognizing 45% of synergies in 2024, wondering how we should think about that number now that we seem to be tracking ahead there? And also just kind of wondering what's really resonating on the synergy side here. Doug Peterson -- President and Chief Executive Officer Thanks, Scott. Let me start, and then I'm going to hand it over to Adam. When it comes to our tracking of the revenue synergies, it's something that we look at every quarter. We look at them. We actually looked at it on our Executive Committee earlier this week. We have a combination of cross-sell, as well as new products. We've been quite successful with cross-sell. It's been our most important aspect of what we've been doing. As you know, we have a target of $350 million into the '25, '26. And we're already running ahead of our expectations for that, especially because of cross-sell. When it comes to new products, we've been successful with many right out of the box with Indices with, for example, fixed income indices, we have a fixed income VIX that we've come up with. We have a set of fixed income products that we build around ESG. We've also had multi-asset class products. But I think in Market Intelligence, we've also seen a lot of really, really strong synergies. So let me ask Adam to supplement the answer. Adam Kansler -- President, S&P Global Market Intelligence Thanks, Doug, and thanks, Scott. It's Adam. We're very excited about our synergy progress. We've got 15 more new products that will come to market in 2024. The combination of businesses, the strength that we have in the marketplace, the receptivity of our customers to what a combined offering can do, that's all been a tremendous uplift. I think it's given us the path to achieve the revenue synergy targets that we outlined. I think what's most exciting for me and most exciting for our customers are the new products, right, where we're able to integrate new data sets into workflow solutions or give customers in private markets the ability to immediately look at public company comparables, the ability to put our fixed income capabilities into our Desktop. These are all things that roll out over the course of 2024. As Doug mentioned, the cross-sell has given us such early wind in ourselves to achieve the synergy targets we set out. As we start to roll out new products into the back half of this year, we're even more excited about what that will look like as we exit the year. Doug Peterson -- President and Chief Executive Officer Thanks, Scott. Operator Thank you. Our next question comes from Shlomo Rosenbaum with Stifel. Your line is open. Shlomo Rosenbaum -- Stifel Financial Corp. -- Analyst Hi. Thank you very much for taking the question. Doug, maybe you could talk a little bit about -- touch on both Market Intelligence and Mobility. Just talk about the sales cycles which you're hearing from your on-the-ground guys sequentially from last quarter and then also year over year? And has there been any change in the competitive landscape with some of the new products you've put in there? If you can kind of touch on those ideas, I'd appreciate it. Doug Peterson -- President and Chief Executive Officer OK. Great. Well, first of all, we've been out seeing our customers, as we mentioned in the prepared remarks. We've been out seeing customers everywhere we can. We've been around the globe. I myself have been traveling extensively this year seeing customers. As you know, in the financial services market, there's been a little bit of a slowdown in sales cycles. We've talked about that in the past, which we've seen. It just takes a little bit longer to close some transactions. You've heard about that from us before. In the Mobility business, there is a massive transformation taking place in the entire industry. If you think about it, you see that there's this electric vehicle transformation that's taking place. And what we've seen is that for -- whether you're an OEM, you're a supplier, you're a dealer, you need data and analytics to understand what is happening in the market. And we provide that no matter what the sales cycle is, no matter what's happening in the industry. In addition to that, we're providing new products for dealers, for OEMs for them to be able to make much more informed decisions. So as you've seen, the amount of EVs have started to stack up in ports and on dealers' lots. It's something that we can provide them much more information. The manufacturers can use that information to make decisions about how they're going to look at incentives going forward. So it's a very close dialogue, very good relationship with all sets of clients in every industry around the globe. And we're able to pivot very quickly to provide them the kind of data and analytics they need to make decisions. Thanks, Shlomo. Operator Thank you. Our next question comes from Craig Huber with Huber Research Partners. Your line is open. Craig Huber -- Huber Research Partners -- Analyst Great. Thank you. On your AI investments, obviously, you do not enhance the products you have but also improve the ongoing efficiency of the company, which is already at a high level and stuff. I'm curious, as you guys think out over the next couple of years, your internal investment spending behind AI, you've been able to do it so far within your technology budget, not a huge increase or it puts downward pressure on your margins near term. I'm just curious, do you think you can continue to hit going forward here? Doug Peterson -- President and Chief Executive Officer Thank you, Craig. As you know, when we've been looking at our artificial intelligence road map, it's something that we've been very explicit about going back many, many years. This isn't something new for us. It started with our acquisition of Kensho six years ago. We since then have come up with a very structured approach to AI, which starts with a vision and a strategy. We've recently set in place a leadership team that's led by chief digital solutions officer and a chief artificial intelligence officer for the entire organization. We have governance over that, and the governance includes looking very cautiously and carefully at budget. We've already been absorbing AI expenses in our budget for the last six years. We're very conscious that rolling out an AI program is not inexpensive. It requires us to have that kind of discipline. And we're also tracking our successes. And we've had a lot of successes when it comes to new products, which we're starting getting -- we're getting ready to roll out. We're looking at how we can have more productivity. We hope that over time, the productivity can be returned partially through margin but also be using as a way to reinvest in innovation and growth. So overall, I think the message you should take is that we have a very structured approach to AI. It's an open ecosystem. We can take advantage of all of the AI developments happening anywhere with any large language models coming out from anybody. And we're also protecting our data in a way that we can ensure that our intellectual property is not being used by others to build great AI products that we're going to do that ourselves. So overall, we're very pleased with our progress so far, and we really appreciate -- we'll continue to bring you a lot of our progress over time. So thanks, Craig. Thanks for that. Operator Thank you. Our next question comes from Jeff Meuler with Baird. Your line is open. Jeff Meuler -- Robert W. Baird and Company -- Analyst Yes. Thank you. So questions on Market Intelligence. I think, you kind of heard the angst coming into the quarter from investors, given the peer results. Adam, I was just hoping you can maybe highlight some of the MI businesses that are maybe more unique to S&P and how they're doing or maybe highlight any businesses that have already gone through some pretty significant cyclical headwinds like the Ipreo Book building Business or whatever. They just help with investor confidence regarding what's assumed over the remainder of the year through the cyclical channel launches. Thanks. Adam Kansler -- President, S&P Global Market Intelligence Yes. Thanks, Jeff. Appreciate the question. We do have a number of unique solutions and a pretty diversified set of solutions to the marketplace. So you do see dislocations in the market or volatility affecting parts of our business differently than other parts of the business. You mentioned some of our capital markets platforms. Obviously, in the last quarter, those saw quite a lot of resilience. We saw very strong markets, particularly in credit and debt markets. Equity markets, I think, are still a little bit slower to recover, and we'll see what happens through the balance of the year. Some of our unique offerings really are around alternative assets in the loan marketplace in private markets. These are places where our workflow solutions, our valuations capability, reference data, we saw that across the firm in other divisions as well. Those are areas that continue to build and areas where we see large secular growth. Those are somewhat unique offerings for us, given our market position in some of those businesses. Across our data and reference data, pricing, valuations, those are in pretty steady demand. So they're less subject to the activity in the marketplace quarter to quarter. And that's where we see some of the stability and the general growth. What's really unique about the S&P Global offering is the scale and breadth that we can deliver to a customer. It's really being able to service them across the portfolio from discovery and research for an investment to processing the investment, monitoring it, valuing it, keeping it in a workflow tool. That set of solutions and the efficiencies we can drive through it, I think that's the biggest part of our value proposition and particularly our larger customers as they look to consolidate relationships. That gives us a bit of an advantage there. Thanks again for the question, Jeff. Doug Peterson -- President and Chief Executive Officer Thanks, Jeff. Operator Thank you. Our next question comes from Russell Quelch with Redburn Atlantic. Your line is open. Russell Quelch -- Redburn Atlantic -- Analyst Yes. Hi, Doug. Another really good quarter in Commodity Insights. So I was wondering if you could share what drove the 14% growth in Price Assessments in the first quarter. Is that maybe new product related? Any early feedback on Platts Connect? Is that helping drive more cross-selling? And perhaps is there upside risk to guidance here? I mean, obviously, you've upgraded guidance on some of the sort of transactional base revenue segments, but this is maybe a higher-quality revenue line. So is there upside risk here? Doug Peterson -- President and Chief Executive Officer Yes. Thank you for that, Russell. When you look at Commodity Insights, we've continued to advance incredibly well. We've had this is one of the home runs when it comes to the integration of the E&R business and the Platts business. We very quickly been able to bring together products like Price Assessments. Cross-sell has been strong if you think about being able to sell in E&R products to Platts clients, as well as selling Platts clients to E&R clients. So that was right out of the gate, a very strong approach. But we've also seen a demand -- high demand for energy transition, and we're at the sweet spot of energy transition. This relates to products like Oil and Gas, what are all of the different substitutes. It's also carbon intensity of Oil and Gas products. It goes into renewables, looking at what's happening with the renewable space. We also have a whole set of new Clean Energy and alternative energy products and services. As we've been launching an additional set of products related to metals and mining, as well as ag. So across the board, we've seen very strong results. We also had a strong quarter for CERAWeek, which is CERAWeek is a conference that took place in Houston a few weeks ago. It's the place to be for anybody that wants to understand what's happening in the energy space. So across the board, it's just been very, very strong this year. We do expect that later in the year, we're going to have tougher comps. So we looked at that very carefully as we were setting our guidance. Last year, our third and fourth quarter, especially our fourth quarter, was quite strong. So we do get toward the end of the year, and we do have a tougher comp. But overall, the Commodity Insights business is doing incredibly well. It's a broad-based business. And then, something like what you mentioned, Platts Connect has been one of the examples of a really early win and something that we're very pleased with. And you'll see more coming from Platts Connect over the next few quarters. Thanks, Russell. Thanks for the question. Operator Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open. George Tong -- Goldman Sachs -- Analyst Hi. Thanks. Good morning. In your updated Indices guidance, can you talk about how much of the growth comes from flows versus market performance, and what you're seeing from a pricing and mix perspective from customers? Mark Grant -- Senior Vice President, Investor Relations Hi. George, this is Mark. The updated guidance on Indices is really driven just by strength across that business. But just giving you the underlying assumptions for the full year guide, we're expecting the S&P 500 to be essentially flat from 3/31 through the end of the year. The guidance assumes modest growth in the ETD volumes. And then, we are expecting that subscription line to accelerate a little bit as we progress through the full year. Doug Peterson -- President and Chief Executive Officer Thanks, George. Operator Thank you. Our last question comes from Owen Lau with Oppenheimer. Your line is open. Owen Lau -- Oppenheimer and Company -- Analyst Good morning, and thank you for taking my question. So just a quick follow-up on Commodity Insights, and there are lots of conversation about commodities trading, growing our U.S. customers and the prices go and things like that. How much does this volatility contribute to your business this year? And if this kind of volatility subside, how do you see the sustainability of your growth? Thanks. Doug Peterson -- President and Chief Executive Officer Thanks, Owen. Yes, we think that that volatility is something that helps drive more people to try to understand what's happening in the markets. But as we've seen over time, the volatility doesn't seem to go away. There's always something else that comes up to create interest in the area. We do think that there are some very important long-term secular trends related to the business, which are energy transition I mentioned earlier. Energy transition is a topic that is on everybody's minds, especially when you go outside of the United States. I've been traveling this year, and I can't have a conversation anywhere I go without having a discussion about energy transition. And what are not just the impacts that we see the benefit the Commodity Insights business, but also those that benefit businesses like the Ratings business and Market Intelligence because those are moving also over into how do you finance energy transition question as well, which crosses into our other divisions. Finally, with Commodity Insights, you can recall that this business is principally a subscription-based business. And so, we can see over time the subscription flow, where we're seeing the growth coming from the new customers coming into the portfolio. There's something that I say all the time that every single company is an energy company. It doesn't matter what you do, energy company. And so, we also see an expanding set of new clients that aren't necessary traditional energy companies that are needing the solutions we have so they can manage their own energy footprint. So Owen, thank you very much for that. And I think you were the last call. So let me give a couple of closing remarks. I really want to thank everyone today for being on this call and for your excellent questions as usual. This was a great quarter, and we're really pleased with the results. And we think this validates our strategy, but it also showcases our execution. As I mentioned, I've been very busy traveling around the world this year, speaking with customers across all of our businesses and from every industry. And in those meetings, we're hearing that the themes that we have, that we have the strength in this franchise are those that the customers need going forward. And that includes things like energy transition and private markets and supply chain and credit and risk. But it also includes artificial intelligence, and I'm pleased that we've been able to roll out in our road map many, many new capabilities and products and services to protect our IP, but also to take a leadership position in AI. I want to thank Martina and Adam for providing their perspectives today on this call. And I also want to thank our people across the company as usual for a fantastic quarter. And again, thank all of you for joining the call today, and hope you have a great day. Thank you very much. Operator That concludes this morning's call. A PDF version of the presenter slides is available for downloading from investor.spglobal.com. Replays of the entire call will be available in about two hours. The webcast with audio and slides will be maintained on S&P Global's website for one year. The audio-only telephone replay will be maintained for one month. On behalf of S&P Global, we thank you for participating, and wish you a good day. Answer:

S& P Global's first quarter 2024 earnings conference call

Operator Good morning, and welcome to S& P Global's first quarter 2024 earnings conference call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen-only mode. We will open the conference to questions and answers after the presentation and instruction will follow at that time. To access the webcast and slides, go to investor.spglobal.com. [Operator instructions] I would now like to introduce Mr. Mark Grant, senior vice president of investor relations for S&P Global. Sir, you may begin. Mark Grant -- Senior Vice President, Investor Relations Good morning and thank you for joining today's S&P Global first quarter 2024 earnings call. Presenting on today's call are Doug Peterson, president and chief executive officer; and Chris Craig, interim chief financial officer. For the Q&A portion of today's call, we will also be joined by Adam Kansler, president of S&P Global Market Intelligence; and Martina Cheung, president of S&P Global Ratings. We issued a press release with our results earlier today. In addition, we have posted a supplemental slide deck with additional information on our results and guidance. If you need a copy of the release and financial schedules, or the supplemental deck, they can be downloaded at investor.spglobal.com. The matters discussed in today's conference call, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our Forms 10-K and 10-Q filed with the US Securities and Exchange Commission. In today's earnings release and during the conference call, we're providing non-GAAP adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management. The earnings release contains financial measures calculated in accordance with GAAP that corresponds to the non-GAAP measures we're providing and contains reconciliations of such GAAP and non-GAAP measures. The financial metrics we'll be discussing today refer to non-GAAP adjusted metrics unless explicitly noted otherwise. I would also like to call your attention to certain European regulations. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should contact investor relations to better understand the potential impact of this legislation on the investor and the company. We are aware that we have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to our media relations team whose contact information can be found in the release. At this time, I would like to turn the call over to Doug Peterson. Doug? Doug Peterson -- President and Chief Executive Officer Thank you, Mark. S&P Global is off to a tremendous start for 2024. Total revenue increased 14%, excluding the divestiture of engineering solutions. Transaction revenue in our Ratings Division drove much of the upside, but importantly, subscription revenue across the entire company increased 8% year over year as well. Strong growth across the enterprise contributed to quarterly revenue of nearly $3.5 billion, representing the highest quarterly revenue we've ever generated in the history of our company. Execution was a theme in the first quarter, and our efforts to capture market opportunities, combined with discipline on the expense side, led to more than 350 basis points of adjusted operating margin expansion year over year, and adjusted EPS growth of 27%. In addition to the stellar financial results in the first quarter, we continued to demonstrate our leadership across global markets. Capital markets were vibrant in the first quarter, and customers turned to S&P Global to help power their investment, funding, and trading activities. Equity markets saw strong volumes from both IPOs and M&A, and we saw the highest level of debt issuance since 2021. As the globe grapples with the future of energy security and energy transition, it's no coincidence that this conversation took place on the stage of S&P Global's CERAWeek Conference and other S&P events around the world. As we power global markets in equity, fixed income, commodities, derivatives, and in many industrial verticals, our innovation drives customer value. We'll continue to innovate and invest in our leading data technology and workflow tools to drive growth. And we'll highlight some of that innovation today. As we look to the five strategic pillars we outlined for you in our investor day, we're pleased with the progress we've made across the board. While that fifth pillar of execute and deliver is on full display this quarter with the strength of our financial results, we continue to invest in customer relationships, innovation, technology, and our people. Beginning with our customers, we saw nearly $1 trillion of billed issuance in the first quarter. This represents the dollar value of debt issued by our customers, for which they actively sought out a rating from S&P Global. Issuers know that an S&P Global rating provides a credible, trusted, and objective measure of their credit risk. And they know that we have the capacity, even in a very active market, to fully meet their needs. When we look at the broader financial services landscape, we're certainly not back to what we would consider normal levels in the capital markets overall, but we did see improvement. With the macro and geopolitical uncertainties still facing our customers through this year, we continue to hear some concern about the back half, and many market participants are still carefully evaluating expenses for 2024. All of this is consistent with what we shared in February regarding our expectation that ratings would see a stronger first half than second half, while market intelligence would likely start to see improvements in the growth rates in the back half. Energy customers from all of our divisions and from around the globe converged once again in Houston, Texas for our Annual CERAWeek Conference. We're thrilled that customers, partners, regulators, government officials, and global thought leaders view S&P Global CERAWeek as the premier event of the year. Customer engagement remains vital for S&P Global, and in the first quarter, we had well over 100,000 calls and meetings with customers, in addition to the thousands of meaningful interactions our ratings colleagues had with fixed income investors. Build issuance increased 45% year over year in the first quarter. Tight spreads and stabilizing risk appetite in the market created favorable conditions for issuers. We saw investment grade, high yield, and bank loan volumes all increase as issuers took full advantage to raise debt early in the year. We do expect much of this strength was pulled forward from later in 2024, reinforcing our continued view of a stronger first half than second half in issuance volumes. The strength in build issuance in the quarter also underscored the importance and advantages of a robust public debt market. We saw tremendous growth over the last two years in private debt markets, but we began to see early signs of some of that debt being refinanced in the public markets in the first quarter. While this private to public refinancing activity only represented a low single digit percent of build issuance, we've heard from customers that they're saving up to 150 to 200 basis points in their interest rates by refinancing the public markets. We expect the private markets to play an important role going forward as well. We're working with major private debt partners to deliver risk analytical solutions. Private markets revenue in our ratings division increased 30% year over year in the first quarter. Turning to Vitality. We're pleased to see that our Vitality Index continues to account for 10% of our total revenue, despite the fact that several strong and fast growing products matured out of Vitality Index at the end of 2023. As we've called out in the past, this index is meant to highlight the contributions from new or enhanced products. So as products mature, they will no longer be part of the Vitality Index, even if they continue to grow rapidly. Key contributors from our pricing, valuations and reference data, as well as several thematic and factor-based indices matured out of the Vitality Index at the end of the year. We remain committed to that 10% target as a steady stream of new innovation takes the place of any products that graduate from the index. That was the case this quarter as products that contributed roughly $80 million of revenue to the Vitality Index in the first quarter of 2023 were no longer in the Vitality Index this quarter. We expect the Vitality Index to increase as a percent of total revenue as we progress through the remainder of the year. Turning to some examples of that innovation. In the first quarter, our commodity insights team launched a new food and agriculture commodities dashboard, providing a comprehensive view on commodity data, as well as new reports and research on energy. Additionally, we launched new price assessments for renewable energy, as well as new benchmark prices for the Middle East and Asia. Our energy transition and climate products continue to show rapid growth, nearly 30% year over year in the first quarter, supported by the continued innovation and price assessments, new and enhanced datasets and crucial insight solutions. We also introduced an exciting innovation in market intelligence. We've spoken at length about the tools and datasets available through our market intelligence marketplace. But in the first quarter, we introduced what we are calling blueprints. These blueprints are packages of datasets and tools combined based on specific customer personas and workflows, such as private markets performance analytics. We introduced the first five blueprints in the first quarter, with plans to add more in the coming months. These intuitive combinations allow customers to easily discover how our data and tools can work together to facilitate analytics and workflows in new ways. We're also pleased to see early results from the enterprise AI initiatives we outlined for you last quarter. By elevating artificial intelligence to a position of enterprise wide strategic focus, we're accelerating the development of new tools, deploying common capabilities across multiple divisions and increasing the value we create for our customers and our shareholders. With our in-house expertise, we've developed tools to help market participants benchmark performance of large language models, specifically for business and finance use cases. The S&P AI Benchmarks by Kensho is a project informed by our world-class data and industry expertise. The questions in our benchmark are designed to assess the ability of large language models to understand and solve realistic finance problems, and each question has been verified by an experienced domain expert. Lastly, we introduced a remarkable tool we call S&P SPARK Assist. This is a co-pilot platform developed jointly between Kensho and our other internal technology teams. We're deploying this platform throughout the organization to improve productivity, facilitate more rapid innovation and reduce the time necessary to accomplish many routine tasks. Because of our proprietary data, the tools and expertise developed through Kensho and the remarkable technologists we have working throughout S&P Global, we were able to develop S&P SPARK Assist chat interface without relying on a third party vendor. As a result, we're delivering the power of generative AI to our people in an easy to use platform at the cost of less than $1 per user per month. We're incredibly excited about what this tool can do for our people, and we'll provide more details around use cases and productivity as we progress through the year. Turning to our financial results, Chris will walk through the first quarter results in more detail in a moment, but we have had an incredible start to 2024. With strong growth across every division, we continue to balance the need to invest for future growth with the opportunity to deliver margin expansion and earnings growth this year. Revenue grew double digits as reported, but excluding the impact from the engineering solutions divestiture, revenue increased an impressive 14%. Trailing 12 month margins improved 170 basis points to nearly 47%. Now, we'll turn to Chris Craig, our interim CFO to review the financial results. Chris, welcome to the call, over to you. Chris Craig -- Interim Chief Financial Officer Thank you, Doug. 2024 got off to a strong start as we saw three of five divisions achieve double digit growth. As Doug mentioned, reported revenue grew 10% in the first quarter, and excluding the impact of the engineering solutions divestiture, revenue growth was 14%. Adjusted expenses grew by only 3% year over year as we continue to focus on disciplined execution and benefiting from the engineering solutions divestiture. Strong growth and solid execution combined to deliver more than 350 basis points of adjusted margin expansion in the quarter. With our commitment to capital returns over the last 12 months, we've reduced the fully diluted share count by 3% year over year. This led to adjusted earnings per share increasing by 27% year over year to $4.01. Now, turning to strategic investment areas. Sustainability and energy transition revenue grew 15% to $78 million in the quarter, driven by strong demand for commodity insights energy transition products and benchmark offerings, as well as EV transition related consulting in mobility. We are continuing to invest in our energy transition offerings where we see opportunities across our divisions. Moving to private market solutions, revenue increased by 16% year over year to $116 million. Growth was driven by debt and bank loan ratings, as well as continued strength in I-level and other private market solutions within market intelligence. We continue to build momentum in our revenue synergies and are ahead of schedule toward our $350 million target. We exited the first quarter with an annualized run rate of $184 million. During the first quarter alone, we recognized $56 million in revenue synergies. While the majority of this was from cross-sell initiatives, we are beginning to gain traction with new products as well. As of the end of Q1, we have launched 25 new products through our revenue synergy initiatives, and we plan to launch more than 15 additional synergy products by the end of 2024. Turning to our divisions, market intelligence revenue increased 7% in the first quarter, with all business lines growing in the mid-to-high single digit range. Desktop grew 5% as we continued to focus on speed, performance improvements, and the introduction of new content and capabilities, including the expansion of our collection of premium broker research providers with in after market research. Data advisory solutions grew 7% driven by expanded coverage and continued investment in high growth areas of our company information and analytics, and market data and valuation product offerings. Enterprise solutions benefited from an increase in issuance volumes in the debt and equity capital markets and grew over 8% in the quarter. Credit and risk solutions grew 6%, supported by strong new sales and price realization, particularly for Ratings Express Subscriptions. We saw solid growth in market intelligence in Q1, that was in line with our expectations and consistent with what we signaled on our fourth quarter earnings call. Adjusted expenses increased 6% year over year, primarily due to an increase in compensation expense, cloud costs, and royalties, partially offset by reduction in outside services expense. Operating profit increased 9% and the operating margin increased 70 basis points to 32.7%. Trailing 12-month margins expanded 50 basis points to 33.1%. Now, turning to ratings. As Doug mentioned earlier, we saw issuers take advantage of favorable financing conditions, which led to strong refinancing and opportunistic issuance in the first quarter. Ratings revenue increased 29% year over year, exceeding our internal expectations. Transaction revenue grew by 54% in the first quarter, as heightened refinancing activity increased bank loan and high yield issuance. Non-transaction revenue increased 8%, primarily due to an increase in annual fee revenue and strong demand for our rating and valuation service and issuer credit rating products. Adjusted expenses increased 9%, driven by higher compensation, including incentives, as well as increased T&E expense, as our commercial and analytical teams were actively meeting with issuers to help drive the strong growth we saw in the quarter. This resulted in a 43% increase in operating profit and a 640 basis point increase in operating margin to 64.7%. For the trailing 12 months, Ratings margins expanded 290 basis points to 58.5%. And now, turning to Commodity Insights. Revenue increased 10% following the fourth consecutive quarter of double-digit growth in both Price Assessments and Energy and Resources Data and Insights. Price Assessments and Energy and Resources Data and Insights grew 14% and 12% respectively. We continue to see commercial momentum across both business lines, as our established benchmark data and insights products have driven customer conversations about our emerging offerings. Advisory and Transactional services revenue grew 10%, driven by strong trading volumes across key sectors in Global Trading Services and an excellent turnout at our Premier Global Energy Conference, CERAWeek. Upstream data and insights revenue grew by 2% year over year, benefiting from demand for our carbon emissions monitoring offerings, as well as improvement in retention rate. The business line continues to prioritize growth in its subscription base. Adjusted expenses increased 7% due to higher compensation costs and ongoing investment in growth initiative. Operating profit for commodity insights increased 13% and operating margin improved by 110 basis points to 47.2%. The trailing 12-month margin increased by 120 basis points to 46.4%. Now, turning to mobility, revenue increased 8% year over year. The dealer segment marked its fifth consecutive quarter of double-digit growth, and we also saw solid performance from our financials and other business lines. Dealer revenue increased 12% year over year, driven by new business growth in products such as new car listings and CARFAX for Life, as well as the addition of market scan. Manufacturing declined by 3%, driven by a decrease in one-time transactional revenue, particularly in our recall and marketing businesses, which was partially offset by growth in subscription sales. It's important to understand that revenue from Recall products will fluctuate based on the level of activity in any given period. Financials and other increased 12% as the business line benefited from strong underwriting volumes and price increases. Adjusted expenses increased 10% due to both planned investments and strategic growth initiatives and the full quarter impact of the Market Scan acquisition. While this resulted in 100 basis points of margin contraction to 38.1% for the quarter and a 70 basis point reduction to 38.6% for the trailing 12 months, operating profit for mobility increased by 5% year over year. Now, turning to S&P Dow Jones Indices, revenue increased 14% primarily due to strong growth in asset-linked fees, which benefited from higher AUM and continued strength in Exchange Traded derivative revenue. Revenue associated with asset-linked fees was up an impressive 16% in the first quarter. This was driven by higher ETF and mutual fund AUM benefiting from both market appreciation and net inflows. We also saw an increase in revenue for OTC products. Exchange Traded derivatives revenue grew 12%, primarily driven by strong volumes in SPX products and price realization. Data and custom subscriptions increased 6% year over year driven by new business growth in end-of-day contracts. Expenses increased 9% year over year primarily due to increased investments in strategic growth initiatives, as well as an increase in compensation expense. Indices operating profit increased 15% and operating margin expanded 110 basis points to 72.9%. On a trailing 12-month basis, margins expanded by 30 basis points to 69.3%. In the aggregate, our businesses demonstrated exceptional revenue and margin growth while at the same time permitting us to invest in our strategic growth initiatives during the quarter, giving us a strong start to 2024. And with that, I will now turn it back to Doug to discuss our outlook for the remainder of the year. Doug? Doug Peterson -- President and Chief Executive Officer Thank you, Chris. We've updated our outlook reflecting our economist view of the most important economic and market factors that will impact 2024, as well as the outperformance against our internal estimates during the first quarter. Our financial guidance assumes global GDP growth of 3.2%, U.S. inflation of 2.8%, and an average price for Brent crude of $85 per barrel. All three of these figures are slightly higher than we originally assumed in our outlook in February. Additionally, our original macroeconomic view included the base case assumption for three rate cuts by the U.S. Fed, beginning no earlier than June. As we've seen over the last three months, market expectations around interest rates have shifted. And while our economists have not formally updated the number of rate cuts in their base case scenario, our financial guidance now assumes fewer than three rate cuts in 2024. We're increasing our billed issuance forecast for 2024 by approximately three percentage points, to a range of 6% to 10%. As we noted last quarter, our initial outlook for 2024 assumed a stronger first half of the year for issuance. Even with that assumption, the first quarter outperformed our expectations, though we believe much of that outperformance is pull forward as issuers look to take advantage of very favorable market conditions. All of these factors impact our new full year guidance calling for higher growth and stronger margins. This slide illustrates our current guidance or GAAP results. For our adjusted guidance, we're now expecting revenue growth in the range of 6% to 8%, reflecting the outperformance in Ratings and Indices in the first quarter, partially offset by slightly softer expectations for issuance in the second half of the year. Excluding the impact of 2023 divestitures, we expect revenue growth to be slightly more than 1 percentage point higher than reported revenue growth. We also now expect to deliver stronger margins in 2024 with margin expansion in the range of 100 to 150 basis points compared to our prior guidance of approximately 100 basis points. We're taking a balanced approach to reinvesting for future growth while still expanding margins and remain on track to achieve the investor day targets from 2022. We now expect to deliver adjusted EPS for the full year in the range of $13.85 to $14.10, which represents 11% growth at the midpoint. This represents a $0.10 increase from our prior range driven by the increased revenue and profitability outlook for the year. We're also increasing our outlook for adjusted free cash flow, excluding certain items, by $100 million despite modestly higher expected capex. Higher expected net income and disciplined management of working capital both contribute to the higher expected cash flow for the year. Moving to our division outlook. We're reiterating our revenue growth expectations for Market Intelligence, Commodity Insights and Mobility. And we're increasing the growth outlook for Ratings and Indices based on the strength in the first quarter. We're also raising the margin outlook for Indices to reflect the very strong performance year-to-date. While margins were also very strong in our Ratings division in the first quarter, we're reiterating the range for full year margins, which implies approximately 150 basis points of margin expansion at the midpoint. Since much of the revenue outperformance in Q1 likely came from pull forward, our full year guidance assumes year over year declines in Ratings transaction revenue in the fourth quarter as we begin to lap much stronger comps from last year. As a result, we expect margins to be softer in the back half of the year than in the first half in Ratings. With that, I'd like to invite Adam Kansler, president of S&P Global Market Intelligence; and Martina Cheung, president of S&P Global Ratings and executive lead for Sustainable1 to join us. I'll turn the call back over to Mark for your questions. Thank you. Mark Grant -- Senior Vice President, Investor Relations Thank you, Doug. [Operator instructions] Operator, we will now take our first question. Questions & Answers: Operator Our first question comes from Toni Kaplan with Morgan Stanley. You may proceed. Toni Kaplan -- Morgan Stanley -- Analyst Thank you so much. I wanted to focus on Market Intelligence. We've heard some negative commentary from others in the market, which made it sound like this past quarter was particularly challenging. So I wanted to see if that was your experience as well? And also if the large investment bank consolidation impact was in this quarter or if it hasn't hit yet. And then, I know you're talking about Market Intelligence being better in the back half. And so, wanted to just flesh out what gives you the confidence that that happens. Adam Kansler -- President, S&P Global Market Intelligence Toni, it's Adam. Thank you for the question. So yes, we're seeing many of the things that others are seeing in our markets, particularly for our financial services customers. We're seeing that particularly in the smallest of those customers, and that's probably comparable to what some others are seeing. But for us, that's really where the concentrations are. The specific consolidation that you're talking about in terms of the overall scale of our division, it's not something that impacts us in a material way. That -- some of that has already been absorbed. Some will continue to come. But all of that has been anticipated by us in the guidance and the view that we've given you forward. We do view what's going on in the market today is very much a cyclical headwind. But the secular tailwinds that we see in our businesses, particularly in our core areas of focus like private markets, the expansion of our Desktop, you see some of the improvements in the investment we've made over the last two years. That gives us a lot of confidence in achieving our long-term goals and the continued growth of the business, confidence in what we've explained we expect to do for the current year and in delivering against the longer-range investor day targets that we set out in 2022. Doug Peterson -- President and Chief Executive Officer Thank you, Toni. Operator Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is open. Manav Patnaik -- Barclays -- Analyst Thank you. I just wanted to ask on Market Intelligence as well. Just in terms of the strategy going forward, obviously, tough budget environment. Competitors are probably sharpening their pencils too. Just can you help us with the strategy there? And also kind of tied to that is the -- when does Visible Alpha close? How should we think about the contribution and also the divestiture that you were planning? Like what else is in there? Adam Kansler -- President, S&P Global Market Intelligence OK. Thanks, Manav, and thank you for the question. Let me just start with the last piece, Visible Alpha. We do expect that transaction to close here in the second quarter. We're quite excited about it. I think it's an important part of one of our strategic areas, which is the continued expansion and improvement in quality of the Cap IQ Pro set of solutions that we offer to the market. As we highlighted, I think really as far back as investor day, we have a few core areas of focus that we do think we'll continue to grow. And that really shapes our strategic focus. Those are in areas like private markets, sustainability of the supply chain, the expansion of our Desktop, the ability to deliver our data and solutions to customer in as easy a way as possible. These are things that our largest customers are looking for as they go through consolidations of vendors. That's where the scale and breadth of services that we're able to offer through Market Intelligence and of course, across the broader S&P Global enterprise really has impact. We'll be laser-focused on that strategy. And as you've seen when we announced at our last call, we'll look at those businesses where we see underperformance or lack of strategic fit, and we'll make decisions on those. And where we see opportunities to acquire unique assets that are high growth or have particular proprietary value companies like Visible Alpha, the one you mentioned, quite excited to get that integrated. We're going to take advantage of our position and our opportunity to bring them into the business. So thanks again, Manav. Doug Peterson -- President and Chief Executive Officer Thanks, Manav. Operator Thank you. Our next question comes from Heather Balsky with Bank of America. Your line is open. Heather Balsky -- Bank of America Merrill Lynch -- Analyst Hi. Thank you for taking my question. I'd love to hear more about how -- you talked about a pull forward in issuance into the first quarter. Can you just talk a little bit about, on a regular basis, how much visibility do you have as you look three quarters out? And how do you think about taking some level of conservatism, given we're in an election year, there's an uncertain rate environment. Just how are you positioning yourself with regards to the guidance, given what you saw in the first quarter? Thanks. Martina Cheung -- President, S&P Global Ratings Heather, it's Martina. Thanks very much for the question. So we look at a variety of factors to give us a good sense for the issuance pipeline in the immediate time frame. Typically, we would look at 180-day pipelines, for example, as well as more near term, but also throughout as much as we can, next nine to 12 months. Those factors, macro factors, GDP inflation rates, geopolitical factors, which, of course, is something we're paying very close attention to this year. But we also look, as we've mentioned in the past, obviously, at maturity walls, the pace of refinancing, as well as growth and investor interest in different asset classes such as private markets, sustainable finance, structured finance, infrastructure, etc. So the -- those factors give us a very good sense at any point in time for where we are with respect to the year. If you look at what we saw in Q1 of this year in terms of billed issuance, we saw a very high volume of refinancing of maturity walls in high-yield and bank loan. About two thirds overall the issuance activity that we saw was related to refinancing. That was a combination of heavy refinancing at '24, but we also saw some '25 and '26 refinancing quarter as well. So that's really the key area of outperformance from an issuance standpoint in Q1. And we would expect that activity to continue in bank loan and high yield through the second quarter and then taper off a little bit, largely because we've been hearing consistently even since before our last call that high yield and bank loan issuers, as well as, to some extent, investment-grade issuers are wanting to really get ahead of any volatility you see in the back half of the year and take advantage of the relative market stability and favorable spreads that we're seeing at this time. Now, in investment grade, a very strong quarter, but we think a lot of that investment-grade issuance is pulled forward in the second half of the year. There were a handful of several large M&A deals there as well but not enough volume for us to really change our view for investment-grade issuance for the rest of the year. So I hope that helps. And happy to take any more questions on issuance. Doug Peterson -- President and Chief Executive Officer Thank you, Heather. Operator Thank you. Our next question comes from Faiza Alwy with Deutsche Bank. Your line is open. Faiza Alwy -- Deutsche Bank -- Analyst Yes. Hi. Good morning. Thank you so much. Wanted to follow up on the Ratings and maybe more on the margin front. So while you're increasing the revenue outlook, margins -- you haven't increased margins. So I'm curious if it's mix of business or any investment sort of how we should think about the margin performance through the rest of the year? Martina Cheung -- President, S&P Global Ratings Thanks for the question. Well, as you know, we've said numerous times in the past, we're solving for long-term sustainable margin in the Ratings business. And we are a very disciplined steward of capital in the business. So our guidance for the year, which we reiterated at 57.5 to 58.5, as Doug said in his remarks, at the midpoint represents about 150 basis points of margin expansion year over year. We can do a lot with the base that we have. So the reason why I say that is because we have this incredible blockbuster quarter from an issuance standpoint without having to add tremendous amounts of additional staff to meet that need. And that is really, I think, reinforcement of the capacity preservation strategy that we initiated a couple of years ago. So we're very pleased with how we're operating from an expense management, capacity management standpoint and very comfortable with the margin range that we have right now as we -- as it relates to the full year. Doug Peterson -- President and Chief Executive Officer Thank you, Faiza. Operator Thank you. Our next question comes from Andrew Steinerman with J.P. Morgan. Your line is open. Andrew Steinerman -- JPMorgan Chase and Company -- Analyst Hi, Martina, it's Andrew. I just wanted to ask you a little bit about issuance pull forward. Just you're talking so much about it intra-year kind of second half pull forward to first half. Just broadly, aren't we still in the midst of a pretty large issuance recovery after the big declines of '22? Martina Cheung -- President, S&P Global Ratings Andrew, thanks very much for the question. I would say a couple of things. So the context on a lot of my commentary on intra-year I would say I'd lean more on the investment-grade side, where we think we saw a 2H pull forward. I think we did see pull forward of '25 and '26 maturities, for example, on the refinancing front for high yield and bank loans. So a little bit of a mix there between the spec-grade asset class and investment-grade asset class. I think to your broader point, yes, we are and continue to be in midst of recovery, notwithstanding the very steep growth rates, for example, in high yield and investment grade. We're still not seeing the issuance volumes back to anything close to what we might have characterized as market highs for example, in the past, or even market averages that we might have seen in the past. So there's still room to go here throughout the next several years. This is something that we've commented on since '22, believing that it was going to take some years to come back to it. But of course, the maturity walls themselves are quite a large factor here. And on the spec-grade asset classes, high-yield and BLR, jointly, we've got about $1.1 trillion in maturities still outstanding for us in '25 and '26. So we're monitoring very, very closely and tightly the indicators that would give us a sense for the pace and timing of those maturities. Doug Peterson -- President and Chief Executive Officer Thank you, Andrew. Operator Thank you. Our next question comes from Alex Kramm with UBS. Your line is open. Alex Kramm -- UBS -- Analyst Yes. Hi. Good morning, everyone. Just another one on the margin actually, but more on the outlook for the full company and nice to see the margin outlook being raised. But just wondering, is this just a business mix driven upside? Or is there anything else going on, and I'm asking particularly since you mentioned execution in your prepared remarks. So just wondering, is this just execution on the sales and revenue side or following last year's, I guess, disappointments a couple of times, if you take a little bit of a harder look at the cost base and where you can be more efficient. Doug Peterson -- President and Chief Executive Officer Thank you, Alex. Well, as you know, we run the company with an approach to budgeting and management, where we always start the year with a positive jaw. That's just our philosophy. We look and see how we're going to do in our core businesses. We go out to see our customers. We understand what we can build as a forward-looking pipeline, forward-looking expectations for the market. We then ourselves say, what would be the expense level that we want to have to support that growth. On top of that, we then come back and say, how much can we afford to invest. As you saw in this quarter, our expenses grew 3%. That's a result of very, very strong execution coming out of 2023. We're ensuring that we can have very clear tracking of all of our expenses. It's just part of our philosophy of how we run the company. Going forward for the rest of the year, you see that we're going to continue that approach. But we think that this is part of the way we manage the company. We're always looking at being very tight on understanding our revenue sources and then moving forward to have a tight approach to our expenses. Thanks, Alex. Operator Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open. Ashish Sabadra -- RBC Capital Markets -- Analyst Thanks for taking my question. I just wanted to drill down further on Market Intelligence, both the recurring variable and the subscription growth. We've seen some really strong 13% growth in recurring variable last two quarters. How should we think about those tailwinds there? And is that mostly contributed from IP and WSO going forward? And then, on the subscription side, the 6% growth, that moderated a bit. But how should we think about those momentum as we get -- go through the year? Adam Kansler -- President, S&P Global Market Intelligence Thanks, Ashish, for the question. So we watch our recurring revenue growth very carefully in this quarter, more than 7% growth in our recurring revenue. Some of that comes from volumes in our businesses that are affected by capital markets volumes. Over the years, we've sought to actually temper that a bit using more fixed contracts. Our customers in most of those markets prefer it. And for us, it adds a little bit more stability and regular growth to the business. Quarter to quarter, we'll see some variation in those numbers, but we do expect our recurring revenue, our subscription revenue to continue to grow in line with our full year guidance for the division. Thanks again. Doug Peterson -- President and Chief Executive Officer Thanks, Ashish. Operator Thank you. Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open. Jeff Silber -- BMO Capital Markets -- Analyst Thank you so much. I just wanted to continue with the Ratings question. I think you said that billed issuance was up 45% year over year in the quarter, but Ratings revenue was only up 29%. I know in prior quarters, they've been much tighter in terms of the correlation. Can you explain what happened this quarter, why the difference? Martina Cheung -- President, S&P Global Ratings Jeff, it's Martina. Thanks for the question. So to your point, billed issuance was up 54 -- sorry, 45%. But transaction revenue, which is the revenue portion or revenue category that is most closely correlated to billed issuance was up 54%. So we grew faster than billed issuance in the quarter. Overall revenue growth of 29% represented both the transaction revenue growth of 54 and the non-transaction revenue growth of 8%. So really just the evening out of the performance across those to get to the 29% growth. Perhaps I will just comment briefly on the non-transaction growth drivers. We were quite pleased with the performance in the quarter. We had continued strength in RES with a lot of companies looking for scenarios around their capital stacks. We saw some new ICR issuance in the quarter and had strong performance on the surveillance book and fee programs. Thanks for the question. Doug Peterson -- President and Chief Executive Officer Thanks, Jeff. Operator Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open. Scott Wurtzel -- Wolfe Research -- Analyst Hey. Good morning, guys. I wanted to ask just on the revenue synergies here. I mean, it looks like it was a pretty strong quarter, recognizing $56 million and then the run rate being pretty impressive here. And in the context of you guys talking about recognizing 45% of synergies in 2024, wondering how we should think about that number now that we seem to be tracking ahead there? And also just kind of wondering what's really resonating on the synergy side here. Doug Peterson -- President and Chief Executive Officer Thanks, Scott. Let me start, and then I'm going to hand it over to Adam. When it comes to our tracking of the revenue synergies, it's something that we look at every quarter. We look at them. We actually looked at it on our Executive Committee earlier this week. We have a combination of cross-sell, as well as new products. We've been quite successful with cross-sell. It's been our most important aspect of what we've been doing. As you know, we have a target of $350 million into the '25, '26. And we're already running ahead of our expectations for that, especially because of cross-sell. When it comes to new products, we've been successful with many right out of the box with Indices with, for example, fixed income indices, we have a fixed income VIX that we've come up with. We have a set of fixed income products that we build around ESG. We've also had multi-asset class products. But I think in Market Intelligence, we've also seen a lot of really, really strong synergies. So let me ask Adam to supplement the answer. Adam Kansler -- President, S&P Global Market Intelligence Thanks, Doug, and thanks, Scott. It's Adam. We're very excited about our synergy progress. We've got 15 more new products that will come to market in 2024. The combination of businesses, the strength that we have in the marketplace, the receptivity of our customers to what a combined offering can do, that's all been a tremendous uplift. I think it's given us the path to achieve the revenue synergy targets that we outlined. I think what's most exciting for me and most exciting for our customers are the new products, right, where we're able to integrate new data sets into workflow solutions or give customers in private markets the ability to immediately look at public company comparables, the ability to put our fixed income capabilities into our Desktop. These are all things that roll out over the course of 2024. As Doug mentioned, the cross-sell has given us such early wind in ourselves to achieve the synergy targets we set out. As we start to roll out new products into the back half of this year, we're even more excited about what that will look like as we exit the year. Doug Peterson -- President and Chief Executive Officer Thanks, Scott. Operator Thank you. Our next question comes from Shlomo Rosenbaum with Stifel. Your line is open. Shlomo Rosenbaum -- Stifel Financial Corp. -- Analyst Hi. Thank you very much for taking the question. Doug, maybe you could talk a little bit about -- touch on both Market Intelligence and Mobility. Just talk about the sales cycles which you're hearing from your on-the-ground guys sequentially from last quarter and then also year over year? And has there been any change in the competitive landscape with some of the new products you've put in there? If you can kind of touch on those ideas, I'd appreciate it. Doug Peterson -- President and Chief Executive Officer OK. Great. Well, first of all, we've been out seeing our customers, as we mentioned in the prepared remarks. We've been out seeing customers everywhere we can. We've been around the globe. I myself have been traveling extensively this year seeing customers. As you know, in the financial services market, there's been a little bit of a slowdown in sales cycles. We've talked about that in the past, which we've seen. It just takes a little bit longer to close some transactions. You've heard about that from us before. In the Mobility business, there is a massive transformation taking place in the entire industry. If you think about it, you see that there's this electric vehicle transformation that's taking place. And what we've seen is that for -- whether you're an OEM, you're a supplier, you're a dealer, you need data and analytics to understand what is happening in the market. And we provide that no matter what the sales cycle is, no matter what's happening in the industry. In addition to that, we're providing new products for dealers, for OEMs for them to be able to make much more informed decisions. So as you've seen, the amount of EVs have started to stack up in ports and on dealers' lots. It's something that we can provide them much more information. The manufacturers can use that information to make decisions about how they're going to look at incentives going forward. So it's a very close dialogue, very good relationship with all sets of clients in every industry around the globe. And we're able to pivot very quickly to provide them the kind of data and analytics they need to make decisions. Thanks, Shlomo. Operator Thank you. Our next question comes from Craig Huber with Huber Research Partners. Your line is open. Craig Huber -- Huber Research Partners -- Analyst Great. Thank you. On your AI investments, obviously, you do not enhance the products you have but also improve the ongoing efficiency of the company, which is already at a high level and stuff. I'm curious, as you guys think out over the next couple of years, your internal investment spending behind AI, you've been able to do it so far within your technology budget, not a huge increase or it puts downward pressure on your margins near term. I'm just curious, do you think you can continue to hit going forward here? Doug Peterson -- President and Chief Executive Officer Thank you, Craig. As you know, when we've been looking at our artificial intelligence road map, it's something that we've been very explicit about going back many, many years. This isn't something new for us. It started with our acquisition of Kensho six years ago. We since then have come up with a very structured approach to AI, which starts with a vision and a strategy. We've recently set in place a leadership team that's led by chief digital solutions officer and a chief artificial intelligence officer for the entire organization. We have governance over that, and the governance includes looking very cautiously and carefully at budget. We've already been absorbing AI expenses in our budget for the last six years. We're very conscious that rolling out an AI program is not inexpensive. It requires us to have that kind of discipline. And we're also tracking our successes. And we've had a lot of successes when it comes to new products, which we're starting getting -- we're getting ready to roll out. We're looking at how we can have more productivity. We hope that over time, the productivity can be returned partially through margin but also be using as a way to reinvest in innovation and growth. So overall, I think the message you should take is that we have a very structured approach to AI. It's an open ecosystem. We can take advantage of all of the AI developments happening anywhere with any large language models coming out from anybody. And we're also protecting our data in a way that we can ensure that our intellectual property is not being used by others to build great AI products that we're going to do that ourselves. So overall, we're very pleased with our progress so far, and we really appreciate -- we'll continue to bring you a lot of our progress over time. So thanks, Craig. Thanks for that. Operator Thank you. Our next question comes from Jeff Meuler with Baird. Your line is open. Jeff Meuler -- Robert W. Baird and Company -- Analyst Yes. Thank you. So questions on Market Intelligence. I think, you kind of heard the angst coming into the quarter from investors, given the peer results. Adam, I was just hoping you can maybe highlight some of the MI businesses that are maybe more unique to S&P and how they're doing or maybe highlight any businesses that have already gone through some pretty significant cyclical headwinds like the Ipreo Book building Business or whatever. They just help with investor confidence regarding what's assumed over the remainder of the year through the cyclical channel launches. Thanks. Adam Kansler -- President, S&P Global Market Intelligence Yes. Thanks, Jeff. Appreciate the question. We do have a number of unique solutions and a pretty diversified set of solutions to the marketplace. So you do see dislocations in the market or volatility affecting parts of our business differently than other parts of the business. You mentioned some of our capital markets platforms. Obviously, in the last quarter, those saw quite a lot of resilience. We saw very strong markets, particularly in credit and debt markets. Equity markets, I think, are still a little bit slower to recover, and we'll see what happens through the balance of the year. Some of our unique offerings really are around alternative assets in the loan marketplace in private markets. These are places where our workflow solutions, our valuations capability, reference data, we saw that across the firm in other divisions as well. Those are areas that continue to build and areas where we see large secular growth. Those are somewhat unique offerings for us, given our market position in some of those businesses. Across our data and reference data, pricing, valuations, those are in pretty steady demand. So they're less subject to the activity in the marketplace quarter to quarter. And that's where we see some of the stability and the general growth. What's really unique about the S&P Global offering is the scale and breadth that we can deliver to a customer. It's really being able to service them across the portfolio from discovery and research for an investment to processing the investment, monitoring it, valuing it, keeping it in a workflow tool. That set of solutions and the efficiencies we can drive through it, I think that's the biggest part of our value proposition and particularly our larger customers as they look to consolidate relationships. That gives us a bit of an advantage there. Thanks again for the question, Jeff. Doug Peterson -- President and Chief Executive Officer Thanks, Jeff. Operator Thank you. Our next question comes from Russell Quelch with Redburn Atlantic. Your line is open. Russell Quelch -- Redburn Atlantic -- Analyst Yes. Hi, Doug. Another really good quarter in Commodity Insights. So I was wondering if you could share what drove the 14% growth in Price Assessments in the first quarter. Is that maybe new product related? Any early feedback on Platts Connect? Is that helping drive more cross-selling? And perhaps is there upside risk to guidance here? I mean, obviously, you've upgraded guidance on some of the sort of transactional base revenue segments, but this is maybe a higher-quality revenue line. So is there upside risk here? Doug Peterson -- President and Chief Executive Officer Yes. Thank you for that, Russell. When you look at Commodity Insights, we've continued to advance incredibly well. We've had this is one of the home runs when it comes to the integration of the E&R business and the Platts business. We very quickly been able to bring together products like Price Assessments. Cross-sell has been strong if you think about being able to sell in E&R products to Platts clients, as well as selling Platts clients to E&R clients. So that was right out of the gate, a very strong approach. But we've also seen a demand -- high demand for energy transition, and we're at the sweet spot of energy transition. This relates to products like Oil and Gas, what are all of the different substitutes. It's also carbon intensity of Oil and Gas products. It goes into renewables, looking at what's happening with the renewable space. We also have a whole set of new Clean Energy and alternative energy products and services. As we've been launching an additional set of products related to metals and mining, as well as ag. So across the board, we've seen very strong results. We also had a strong quarter for CERAWeek, which is CERAWeek is a conference that took place in Houston a few weeks ago. It's the place to be for anybody that wants to understand what's happening in the energy space. So across the board, it's just been very, very strong this year. We do expect that later in the year, we're going to have tougher comps. So we looked at that very carefully as we were setting our guidance. Last year, our third and fourth quarter, especially our fourth quarter, was quite strong. So we do get toward the end of the year, and we do have a tougher comp. But overall, the Commodity Insights business is doing incredibly well. It's a broad-based business. And then, something like what you mentioned, Platts Connect has been one of the examples of a really early win and something that we're very pleased with. And you'll see more coming from Platts Connect over the next few quarters. Thanks, Russell. Thanks for the question. Operator Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open. George Tong -- Goldman Sachs -- Analyst Hi. Thanks. Good morning. In your updated Indices guidance, can you talk about how much of the growth comes from flows versus market performance, and what you're seeing from a pricing and mix perspective from customers? Mark Grant -- Senior Vice President, Investor Relations Hi. George, this is Mark. The updated guidance on Indices is really driven just by strength across that business. But just giving you the underlying assumptions for the full year guide, we're expecting the S&P 500 to be essentially flat from 3/31 through the end of the year. The guidance assumes modest growth in the ETD volumes. And then, we are expecting that subscription line to accelerate a little bit as we progress through the full year. Doug Peterson -- President and Chief Executive Officer Thanks, George. Operator Thank you. Our last question comes from Owen Lau with Oppenheimer. Your line is open. Owen Lau -- Oppenheimer and Company -- Analyst Good morning, and thank you for taking my question. So just a quick follow-up on Commodity Insights, and there are lots of conversation about commodities trading, growing our U.S. customers and the prices go and things like that. How much does this volatility contribute to your business this year? And if this kind of volatility subside, how do you see the sustainability of your growth? Thanks. Doug Peterson -- President and Chief Executive Officer Thanks, Owen. Yes, we think that that volatility is something that helps drive more people to try to understand what's happening in the markets. But as we've seen over time, the volatility doesn't seem to go away. There's always something else that comes up to create interest in the area. We do think that there are some very important long-term secular trends related to the business, which are energy transition I mentioned earlier. Energy transition is a topic that is on everybody's minds, especially when you go outside of the United States. I've been traveling this year, and I can't have a conversation anywhere I go without having a discussion about energy transition. And what are not just the impacts that we see the benefit the Commodity Insights business, but also those that benefit businesses like the Ratings business and Market Intelligence because those are moving also over into how do you finance energy transition question as well, which crosses into our other divisions. Finally, with Commodity Insights, you can recall that this business is principally a subscription-based business. And so, we can see over time the subscription flow, where we're seeing the growth coming from the new customers coming into the portfolio. There's something that I say all the time that every single company is an energy company. It doesn't matter what you do, energy company. And so, we also see an expanding set of new clients that aren't necessary traditional energy companies that are needing the solutions we have so they can manage their own energy footprint. So Owen, thank you very much for that. And I think you were the last call. So let me give a couple of closing remarks. I really want to thank everyone today for being on this call and for your excellent questions as usual. This was a great quarter, and we're really pleased with the results. And we think this validates our strategy, but it also showcases our execution. As I mentioned, I've been very busy traveling around the world this year, speaking with customers across all of our businesses and from every industry. And in those meetings, we're hearing that the themes that we have, that we have the strength in this franchise are those that the customers need going forward. And that includes things like energy transition and private markets and supply chain and credit and risk. But it also includes artificial intelligence, and I'm pleased that we've been able to roll out in our road map many, many new capabilities and products and services to protect our IP, but also to take a leadership position in AI. I want to thank Martina and Adam for providing their perspectives today on this call. And I also want to thank our people across the company as usual for a fantastic quarter. And again, thank all of you for joining the call today, and hope you have a great day. Thank you very much. Operator That concludes this morning's call. A PDF version of the presenter slides is available for downloading from investor.spglobal.com. Replays of the entire call will be available in about two hours. The webcast with audio and slides will be maintained on S&P Global's website for one year. The audio-only telephone replay will be maintained for one month. On behalf of S&P Global, we thank you for participating, and wish you a good day.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to the Seagate Technology Fiscal Third Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, senior vice president, investor relations. Please go ahead. Shanye Hudson -- Senior Vice President, Investor Relations and Treasury Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's chief executive officer, and Gianluca Romano, our chief financial officer. We've posted our earnings press release and the detailed supplemental information for our March quarter results on the Investors section of our website. During today's call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our Form 8-K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they are subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties, and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. I'll now hand the call over to you, Dave. Dave Mosley -- Chief Executive Officer Thank you, Shanye, and hello, everyone. Seagate is delivering solid financial results in an improving demand environment. In the March quarter, we grew revenue 6%, expanded non-GAAP gross profit 18%, and more than doubled non-GAAP earnings per share compared with the prior quarter. Our performance is a function of both improving end-market demand and the decisive actions we implemented throughout the downturn to strengthen our financial profile heading into the recovery. Nearline cloud demand trends are increasingly positive across both US and China customers, and we also saw a sequential improvement in the enterprise OEM markets in the March quarter. On the execution side, the quarter-on-quarter margin expansion reflects our pricing initiatives taking hold, as well as favorable mix, resulting in revenue growth in the quarter outpacing exabyte growth. Pricing strategy is just one key piece of our broader focus on profitability, which also includes maintaining a healthy supply demand balance, introducing new technologies to enhance value for our customers, and maintaining tight expense controls with an emphasis on generating cash. Looking at the near-term end-market dynamics, cloud continues to lead the demand recovery. For a second consecutive quarter, we realized strong double-digit revenue growth from sales to cloud customers, with improvement across both US and global cloud names. We believe the long-running cloud customer inventory correction is mostly complete and their end demand is also improving. Based on our customer interactions, we currently expect healthy nearline demand growth to continue through the rest of calendar 2024. Within the enterprise OEM markets, demand stabilized in the second half of calendar 2023 and we observed incremental improvement in the March quarter. Historically, enterprise nearline demand has correlated well with traditional server growth, which is projected to modestly increase in calendar 2024. As a result, we expect enterprise OEM revenue to improve as server growth resumes. In the VIA markets, revenue was seasonally lower in the March quarter and we expect demand to trend higher through the calendar year. Smart cities remain the largest end-market opportunity for VIA products. However, new applications continue to emerge that use AI analytics to form actionable insights from data at the edge, where an estimated 80% of data resides. One such use case centers on smart energy and utility management that aims to use imaging data to drive energy efficiency and conservation. Analysts place this among the fastest-growing sectors for VIA applications worldwide. Within China, the pace and magnitude of demand improvement in VIA and other HDD markets will be shaped by economic recovery in the region. We continue to monitor the government's efforts to spur economic growth, including stimulus plans aimed at digital transformation and infrastructure spend. Recent economic indicators show signs of progress. However, it will take time for the benefits of these programs to take hold. Overall, we believe these constructive market trends support steady revenue growth throughout the calendar year. Our ability to deliver that growth is enhanced by our build-to-order initiative that is now in place with the majority of large mass-capacity customers. These plans afford Seagate better demand visibility and greater predictability for capacity planning, while our customers find value in the assurance of supply that meets their volume and timing needs. Importantly, the improving overall outlook for HDD demand is unfolding as we execute on our product and technology roadmap. Today, we are simultaneously driving qualification and ramp plans for two high-capacity product families. Our last PMR product delivering up to 28 terabytes per drive, as well as our first HAMR-based Mozaic product on three-plus terabytes per disk. This is rare for our industry, and I want to acknowledge our product teams at Seagate, who are doing a phenomenal job supporting customers as we work together to advance our industry-leading products and technologies through the various customer qualifications. These two product families share about 95% commonality in components and leverage the same assembly processes and test processes. This enables efficiencies across areas such as procurement, manufacturing, capital investments, and customer qualifications. The 24, 28-terabyte PMR drives are in qualification at most of our global cloud and enterprise customers. We have already completed qualification with one major enterprise customer, some global Tier 2 customers, and with our enterprise systems business. We currently expect to begin shipping significant volumes in the first half of fiscal 2025. Relative to HAMR technology, we continue to progress toward completing our first large CSP customer qualification, though we experienced a temporary slowdown in recent weeks. We determined a mechanical component unrelated to the HAMR recording subsystem and some of our drives was not performing as expected. We identified and rapidly implemented the solution with full support from our customers. Verification tests are underway and these tests should be completed in the June quarter. Every other aspect of the qualification process has gone as expected. With this shift in timing, we now expect to ship a few hundred thousand HAMR-based Mozaic drives in the June quarter and meet the remainder of our customer's exabyte demand through other already qualified products. As we gradually ramp HAMR products with our lead hyperscale customer in the second half of the calendar year, we remain focused on broadening the number of customers qualified on Mozaic products. Customer feedback reaffirms strong interest in HAMR technology and that is further reflected in the successful completion of our first qualification with a top non-cloud customer a few weeks ago. We've laid out a Mozaic roadmap with a clear path to at least 50 terabyte drives that offer customers TCO and sustainability benefits, including lower power consumption and less required floor space on a per terabyte basis. We are scaling drive capacity through aerial density gains rather than adding heads and disks. As we execute on our product roadmap to 50 terabytes and beyond, we expect to incur minimal changes to our bill of material costs and maintain low capital intensity of between 4% and 6% of revenue. As a result, we believe HAMR provides the path for achieving margin performance beyond our current target range as production scales and also positions Seagate well to continue capitalizing on megatrends like AI and machine-learning, which drive long-term demand for cost-efficient mass storage. As we've discussed in the past, the initial phase of GenAI has focused on building out the compute-intensive infrastructure required to develop and train large language models. As development shifts to the deployment phase, enterprises will begin to leverage these trained AI models to transform data with value-enhancing applications and generate data-rich content. Customers expect HDD demand to increase as this phase takes hold. Over the next several years, the volume of AI-generated content is expected to increase and also shift toward more imagery and videos, which can be up to 1,000 times larger than text. These trends bode well for HDD demand over the long term, as HDDs remain the most cost-effective means to house and subsequently use mass capacity data. To summarize, the combination of more favorable demand trends, strong operating discipline, and product and technology leadership, provide the foundation for driving further financial performance gains. This combination reinforces our confidence in returning to our long-term target margin ranges and potentially exceed those ranges over time as HAMR-based products proliferate in the marketplace. With that, Gianluca will now cover our financial performance and outlook. Gianluca Romano -- Executive Vice President, Chief Financial Officer Thank you, Dave. Seagate delivered solid financial performance in the March quarter with sequential improvement across every key financial metric. Revenue was $1.66 billion, up 6% quarter over quarter. Non-GAAP operating income was up 44% sequentially to $183 million, leading to a non-GAAP operating margin of 11% of revenue, expanding nearly 300 basis points quarter over quarter, and our non-GAAP EPS was $0.33, increasing $0.21 sequentially and above the midpoint of our guidance range, reflecting the improving demand trends and continued cost discipline. Within our hard disk drive business, exabyte shipments grew 4% sequentially to 99-exabyte, while revenue increased 7% to $1.5 billion. Revenue performance was mainly driven by the expected improvement in the nearline cloud market, as well as favorable pricing actions. Within the mass capacity market, revenue outpaced exabyte growth, increasing 11% sequentially to $1.2 billion with nearline cloud demand more than offsetting the slight decline in the VIA market. Mass capacity shipment totaled 89-exabyte compared with 83-exabyte in the December quarter. Mass capacity shipment as a percentage of total HDD exabyte was 89%, reflecting the continued long-term secular growth for mass capacity demand. For nearline products, shipment of 72 exabytes were up quarter over quarter from 65 exabytes. We believe that inventory among most CSP customers has decreased and anticipate continued nearline demand improvement in the June quarter and beyond. In the VIA market, we believe the March quarter will prove to be a low point of the calendar year with demand returning to more typical seasonal patterns moving forward. Legacy product revenue was $297 million, down from $324 million in the prior quarter, primarily driven by lower seasonal demand in the consumer market. Finally, revenue for our non-HDD business was $178 million, essentially flat quarter over quarter. We expect both the legacy and non-HDD market to remain at a similar level in the June quarter. Moving on to the rest of the income statement. Non-GAAP gross profit increased sequentially by $65 million in the March quarter to $432 million. Non-GAAP gross margin improved for a fourth consecutive quarter to 26.1% and expanded approximately 250 basis points compared to the previous quarter. Continued pricing adjustment and favorable mix shift toward mass capacity products offset margin headwinds from underutilization costs, which were about $43 million. Non-GAAP gross margin for the HDD business expanded much faster than overall company gross margin. Looking ahead, we expect underutilization costs to decrease in the June quarter and abate in the second half of the calendar year as our overall build volume improves to support incremental demand in the nearline market. We believe these factors along with ongoing expense discipline and product execution support the return to the 30% minimum margin benchmark in the current calendar year. Non-GAAP operating expenses totaled $249 million, up 4% quarter over quarter, but slightly better than our guidance, reflecting the timing of certain R&D spending and continued cost control efforts. Adjusted EBITDA continues to improve and was up 29% sequentially in the March quarter to $278 million. Non-GAAP net income was $71 million, nearly tripling quarter over quarter, resulting in non-GAAP EPS of $0.33 per share based on diluted share count of approximately 212 million shares and a tax expense of $27 million. Moving on to cash flow and the balance sheet. In the March quarter, we increased free cash flow generation to $128 million. Capital expenditures were down sequentially to $60 million as the majority of planned capital expenditures were completed in the first half of fiscal '24. We expect fiscal '24 capex to be at or below the low end of our long-term target range of 4% to 6% of revenue. We returned $147 million to shareholders through the quarterly dividend, exiting the quarter with 210 million shares outstanding. We closed the March quarter with $2.3 billion in available liquidity, including our undrawn revolver credit facilities. Today, we announced that Broadcom has acquired our ASIC assets, including development engineering and related IP for $600 million in cash. The cash inlay will be reflected on our balance sheet in the June quarter and Seagate expects to use a portion of the net proceeds to support our supply chain as we begin to ramp new product builds, as well as pay down debt over time. Additionally, we expect to realize annualized opex savings of approximately $40 million starting in fiscal 2025, but there is no expected impact to revenue. Inventory increased to $1.2 billion as we staged material to support the continued mass capacity demand recovery, along with our concurrent ramp of our last PMR-based product and the initial Mozaic-based product ramp. Our debt balance was $5.7 billion at the end of March quarter, with more than 90% of our long-term debt obligation maturing beyond three years. Interest expense were $82 million and we project interest expense to be between $83 million and $85 million in the June quarter. Turning to our outlook, we expect continued improvement in our mass capacity markets, led by ongoing demand for our nearline cloud products, as well as modest improvement in both the nearline enterprise and VIA markets. Legacy and non-HDD revenue are expected to remain relatively flat sequentially. With that as context, June quarter revenue is expected to be in the range of $1.85 billion, plus or minus $150 million, an increase of 12% sequentially and 16% year on year at the midpoint. We are planning non-GAAP operating expenses of approximately $260 million. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to improve into the low-teens percentage range, including underutilization cost of approximately $20 million. We expect our non-GAAP EPS to be $0.70 plus or minus $0.20, based on a diluted share count of approximately 212 million shares and a non-GAAP tax expense of $25 million. Our strong expense management and supply discipline are contributing to the year-over-year profitability expansion that you are seeing in our results and outlook. Our balance sheet and healthy free cash flow generation position us well to continue supporting our capital return commitments. I will now turn the call back to Dave for final comments. Dave Mosley -- Chief Executive Officer Thanks, Gianluca. Seagate is demonstrating strong operational execution and supply discipline amid an improving demand environment, which sets us up well to grow revenue and further expand margins throughout calendar year 2024. Our product portfolio, anchored by industry-leading HAMR technology, offers compelling economics for our customers and for Seagate. As we proliferate these new products, we expect to drive further financial leverage over time. I'm confident that our product strategy offers customers the most compelling TCO proposition and positions Seagate well to capitalize on long-term demand for cost-effective mass capacity storage. We believe that the Mozaic platform delivers TCO advantages for data center operators and supports their increasing focus on conserving power and space. This week, Seagate published our 18th Annual ESG Report outlining the progress we've made toward our own sustainability goals, including our product circularity program. We are collaborating with customers and recovering drives from our own operations to extend these products' life cycles and conserve the planet's limited resources. Since launching this program in 2020, we've recovered and shipped nearly 4 million drives back into the market. Finally, I want to thank our global team members for their hard work and dedication and recognize our suppliers, customers, and shareholders for your ongoing support of Seagate. Gary, we're ready to open up the call for questions. Questions & Answers: Operator We will now begin the question-and-answer session. [Operator instructions] Our first question today is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring -- Morgan Stanley -- Analyst Great. Thank you so much for taking my question. I'll combine this into a two-part question. So, Dave, I appreciate your comments on HAMR in the prepared remarks, really just wanted to get clarification on two points, if I may. First is, have you replaced the mechanical component that was giving you an issue and then proceeded to do testing such that you won't have any further delays on HAMR and now you're just going through kind of the final testing phase with your lead CSP customer? And then second, I believe you've talked in the past about a goal of onboarding the remaining large CSPs by the end of calendar year '24. Does this hiccup impact that timing at all, or have you started the call process with these customers? Just any clarification on those two points would be super helpful. And that's it from me. Thank you. Dave Mosley -- Chief Executive Officer Thanks, Erik. Yeah, appreciate the question. So, relative to the mechanical component in question, we do have other sources and we had those other sources running in parallel, so we were able to segregate the material and then get the test beds back up with the right material, I'll say it that way, and repopulate all those test beds and we recovered the schedule quite quickly because of that. So, we're not happy that we had this issue, but obviously, I think we can move on from here and that's why we're expressing the confidence that we did in the script about completing the qualification this quarter and shipping the units. Relative to big picture of the program and these kinds of things happen when you start to integrate high-volume from all your suppliers, sometimes you see interactions that you didn't use and foresee, and long term, this isn't going to slow us down at all and it shouldn't impact the other qualifications either. To the second point of your question, we are always reevaluating exactly where we are involved but we want to also ramp HAMR as fast as we possibly can and get not only the three terabytes per platter but four terabytes per platter as well. So, still very optimistic on that front. Erik Woodring -- Morgan Stanley -- Analyst Great. Thank you so much. Operator The next question is from Amit Daryanani with Evercore ISI. Please go ahead. Amit Daryanani -- Evercore ISI -- Analyst Good afternoon. Thanks for taking my question. I guess, Dave, I just want to focus on the cloud recovery part. In the past, I think you've talked about this being potentially a bit more gradual in nature, but certainly looking at your March numbers and the June guide, it would suggest perhaps the recovery is a bit more steeper. So, I'm hoping when you talk to -- to get a sense of when you talk to these cloud customers, how do you think about the pace and the durability of demand recovery on the cloud side? And related to that, I think you folks shipped close to 100 exabytes of capacity this quarter, what is the total available capacity that you have right now? And what triggered the decision to potentially add more capacity down the road? Thank you. Dave Mosley -- Chief Executive Officer Yeah, thanks, Amit. It's been a remarkable journey, I think over the last year and a half, two years because the demand was so low relative to the supply that we had, that the industry had and we all took, I think, some supply offline, and we started this build-to-order in earnest at least nine months ago, telling people that, hey, in order for us to actually trigger the builds, we're going to -- we need some predictability out of the business and we're quite happy with how that's proceeded. What's different in the next nine -- in the last 90 days is that the demand really is coming back. And so, when we see the exabyte growth last quarter being outstripped by the revenue growth and then we see even more exabyte growth now, then we're fairly optimistic about it. We are still not full though to your point. We still have underutilization charges, if you will, costs, and we also have factory capacity that's not fully utilized yet. So, we're going to stick to the plan I think. The main point for us is we don't want to overbuild or build product based on speculation. We really want predictability long-term financial health and so on. We're happy with the improvements that have been made, but we're not quite there yet, and so we'll continue to drive this. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yeah, let me add on the underutilization charges, we said in the prepared remarks we do not expect underutilization charges in the fiscal year '25, so fairly soon we will not have that additional cost. Dave Mosley -- Chief Executive Officer Thanks, Amit. Operator The next question is from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers -- Wells Fargo Securities -- Analyst Yeah, thanks for taking the question. I know, Gianluca, you just kind of highlighted the underutilization costs, but I guess as we think about the model and you think about the recovery that you're seeing, I'm curious if we adjust for underutilization, it looks to me like you're guiding maybe a 70-basis point, again ex-underutilization gross margin expansion this quarter at the midpoint of the guidance. How would you characterize the company's ability to price up in this environment, especially looking at the results, it looks like your mass capacity dollar per terabyte was up about 5% sequentially. Where are you at in that journey and how much more do you think pricing could turn favorably for the company? And really what I'm getting at is the continued driver from pricing to gross margin. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yes. Well, I would say in the last several quarters, now we had some success in improving our pricing and we are continuing to do that, so part of this increase in gross margin that you are estimating for the June quarter is, of course coming from pricing. As you know, in the March quarter, we were very high in mix for the mass capacity, then when we go through the rest of the calendar year, you have other parts of the business that will grow. So, the mix will not be maybe as good as we had in March, but pricing is going up, and our cost, of course, is always trending in the right direction. Of course, we have a ramp of new products, but overall, we are very happy with the pricing action and where the mix is today. So, we see further improvement through the calendar year. Operator The next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Yes, thank you so much. Dave, if I could just go back to the qualification, any color you can share on the differences between these two qualifications at your CSP and non-CSP customer? And is there a meaningful difference in the product itself between the CSP and non-CSP customer? And if I could for Gianluca, with this Broadcom deal that you also announced, how should we think about both the opex trajectory and would this impact your gross margins, so should we expect your gross margins to go down because of this slightly and then opex also to go down, or what the dynamics -- what dynamic should we expect? Thank you. Dave Mosley -- Chief Executive Officer Thanks, Wamsi. To your first question, there's no significant difference in the hardware. The qualification for cloud versus non-cloud, it's not usually that much different. There can be some software features depending on which cloud service provider you're talking about, that complicate the qualification, and especially different customers, whether it's cloud or non-cloud, might be going through other types of architectural transitions at the time, so we have to make sure we get that right. But by and large, it's the same drive. I think that was your question. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Right, yes. Gianluca Romano -- Executive Vice President, Chief Financial Officer So, on the financial impact for the transaction with Broadcom, the major difference will be in opex where we expect a decline of about $40 million for fiscal '25. Now, we have a very good collaboration with our partner, so we don't expect basically any other change from the -- from operations. So, it's mainly a reduction in opex due to the transfer of asset and people to our partner. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst OK, got it. Thank you so much. Dave Mosley -- Chief Executive Officer Thanks, Wamsi. Operator The next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar -- TD Cowen -- Analyst Yeah, hi, thanks for taking my question. I have a question for Dave or Gianluca. A two-part HAMR question. Dave, you mentioned you might ship a few hundred thousand units of HAMR this quarter, kind of curious how to think about the HAMR unit shipment in the second half of this year or exiting 2024, how many units do you think you can ship? And just as a follow-up to that is, you mentioned about the gross margin exceeding the range longer-term, I'm kind of curious, as HAMR drives become more mainstream, say, a couple of years from now, do you think your gross margin can be over 40%? Thank you. Dave Mosley -- Chief Executive Officer Yeah, thanks. We will continue to ship aggressively and go through the HAMR transition largely because we think it provides better value to our customers. Higher and higher capacity points, and then ultimately over time it allows us to get components out of the chain, which saves cost against these platforms as well. I mean, we're in an interesting position right now because, say, six months ago, I think supply was ahead of demand and now supply is lagging demand, some of that's just lead times on the product. So, balancing all these things is very important, I think, in today's market, but we're still going to drive very aggressively through the transition and we do believe that this is the way to get more margin into our business as well. So, I won't go into specific numbers as we qualify customers, because right now, customers are seeking any kind of product that we can actually make, which then we may actually turn -- our turnover to some products that are already qualified versus prior plans we were driving, but I view that as a good thing because now we actually have demand that's helping our factories that's getting us focused and so I'm very optimistic about that. So, just we all are very clear, we're going to continue to drive the transitions very aggressively. Gianluca Romano -- Executive Vice President, Chief Financial Officer On the gross margin trajectory, we said before, we expect to be at 30% or higher during this calendar year. And as you know, there is only a part of the ramp of HAMR. So, for sure, when we move higher-volume of HAMR, we expect to be now in the high part of the range or even higher, we will see as a point in that point of the ramp. But, yes, even without HAMR we can be into the 30% to 33% range that we discussed as our target in the past. Krish Sankar -- TD Cowen -- Analyst Thank you. Operator The next question is from Steven Fox with Fox Advisors. Please go ahead. Steven Fox -- Fox Advisors -- Analyst Hi, good afternoon. Dave, I was wondering if there's any more color you can provide on your experience with talking to customers about build-to-order plans for, say, the next 12, or 24 months. I mean, it sounds to me like you have accelerating demand on the cloud side, Legacy, and VIA sort of recovering on a seasonal type of basis, and then you have channel partners that are going to need inventory in order to help even things out. So, how are you balancing all that? What is going to be different do you think that we should consider if we're looking out over the next few quarters with how you're going to be doing business? Thanks. Dave Mosley -- Chief Executive Officer Yeah, Steven, I think it's a really good question because I think it goes back to what we've just been through -- living through this downturn, one of the key lessons was just the sheer amount of supply chain inertia that we had can create problems when the demand stops so quickly, and so we need to be a lot more diligent. I mean, we can't have volume shipments -- exabyte volume shipments that where the revenues far under-running the exabytes. And I think part of what we can control is control the builds and make sure we don't overbuild and make sure we're not trying to push stuff into the market, especially when the market's soft. Now that it's a little bit stronger, exactly to your point, which is a nice trend in the last 90 days that we're really encouraged about, then we can go back and say, OK, which ones will we actually build more for and we're having those conversations with the customers. But again, we want to come back to predictability as the overarching objective here and we'll also reward customers who give us that predictability with the best financial outcome for themselves as well. So, having those negotiations is giving us pretty good visibility into what's coming over the next three or four quarters, and I'm happy with that. Steven Fox -- Fox Advisors -- Analyst That's helpful. Thank you. Operator The next question is from Timothy Arcuri with UBS Securities. Please go ahead. Timothy Arcuri -- UBS -- Analyst Thanks a lot. I wanted to ask about this million HAMR unit that you had guided for the first half of the year, mostly was going to be 30 key drives. So, you're going to make up, it sounds like 700,000, 800,000 drives with other stuff beyond HAMR, but I had kind of two questions. One, you probably have to rework some of the HAMR WIPs, so that would be a negative, but it did seem like HAMR was going to be dilutive initially. So, is that all kind of a net positive trade for June quarter gross margin? And then because you gave us this -- sorry, go ahead. Dave Mosley -- Chief Executive Officer No, you go ahead and finish your question, Tim. Timothy Arcuri -- UBS -- Analyst Yeah, so I just was going to ask, since you gave us that million unit number, I'm curious if you can give us some indication of what you think units will be in the back half of the year for HAMR? Thanks. Dave Mosley -- Chief Executive Officer Yeah, there's two aspects of this. One is the completion of the time -- the timing of the qualification and then the other is the total amount of material. And remember, we said we have other sources for the particular component, so we don't have to segregate the entire WIP. There's parts of the WIP that are still moving, right? But I think the timing of the qualification is really the issue there. We're not going to get into how many we're forecasting for the back half of the year because a lot of that will depend on specifics of demand from customers and when the rest of the qualifications time-out. But from my perspective, once we get that material segregated, yeah, is there some rework or scrap to do? Yeah, but I think we can take that. And keep in mind that all of these products are common with one another. So, we have homes for other products -- other materials if we want to. It can be pivoted from the 24 to 28 family up to the Mozaic family as well. So, I think we have a lot of flexibility there. Gianluca Romano -- Executive Vice President, Chief Financial Officer And just a clarification, Tim, on the HAMR gross margin, we never said that HAMR was dilutive to gross margin. We said that HAMR gross margin will for sure improve in the second part of the ramp or the first part of the ramp as, of course, a little bit more cost, but we never said it was dilutive to our overall gross margin. Timothy Arcuri -- UBS -- Analyst Right. OK. Thank you, Gianluca. Operator The next question is from Karl Ackerman with BNP Paribas. Please go ahead. Karl Ackerman -- Exane BNP Paribas -- Analyst Yeah, thank you. I wanted to get a better understanding of the demand impact of both the ramp of 28-terabyte SMR and the simultaneous ramp of 32-terabyte HAMR, which might be 34, 35-terabyte SMR. I'm curious whether you see that as perhaps somewhat cannibalistic to your early deployments of HAMR. If you could just discuss that, that would be great. Thank you. Dave Mosley -- Chief Executive Officer Yeah, thanks, Karl. Different customers have different requirements and different feature sets, how they use the drive, and so I don't think there's a one-to-one swap. I mean, the good news for us is we have a lot of commonality and so we can react fairly quickly as to whether more people want one family or the other. But we're working with a lot of people on, as I said in the prepared remarks, on two different qualifications at the same time. And as far as I'm concerned, the qualifications are going well. We're staying very communicative with the customers. And against a demand environment that's improving, I think that's why they should value our predictability even more as we show them what we have and what we're willing to build. Operator The next question is from Ananda Baruah with Loop Capital. Please go ahead. Ananda Baruah -- Loop Capital Markets -- Analyst Yeah, good afternoon, guys. Thanks for taking the question. I guess just one on gross margin. In the past when you had dynamics similar to these demand ramp and price increases, and then Dave, supply demand tightness, there's typically been a quarter or so where you can get pretty pronounced step-ups in gross margin. And just wondering if there is anything that will preclude this cycle at some point from having the same type of dynamics. And then just to sort of sneak one in there real quick. Gianluca, any updated metrics -- you've given metrics in the past about revenue to gross margin, kind of scale ratios, do those still hold the ones that you've been giving, or does the pricing dynamics here change that at all? Thanks, guys. Dave Mosley -- Chief Executive Officer Thanks, Ananda. I'll let Gianluca answer his part, but I guess what I'd say, at a very high level is that we're going to continue to push aggressively through product transitions because we think that's the best way to continue to add value to our customers and margin for ourselves. Some of the margin uplift that we're seeing right now is obviously because of the factories being -- they're filling up, they're not completely full yet, but they're filling up and that's a good sign. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yeah, on the trajectory, especially on the gross margin, but with the business in general, every cycle is a bit different. We are saying today we see a good recovery from the cloud part of the business. Of course, it's not all the business increasing in the same way. So, we still need to wait for other segments to start having the same kind of recovery before we can see a strong upcycle. But, no, we are very positive. We said earlier, we see that gross margin improving quarter over quarter and to be in the target range during this calendar year. I would say, every quarter, we have a little bit better pricing, a little bit better cost. So, the opportunity for us to achieve that target range at an even lower level of revenue is for sure a reality. Ananda Baruah -- Loop Capital Markets -- Analyst Cool. That's super helpful. Thanks, guys. Dave Mosley -- Chief Executive Officer Thanks, Ananda. Operator The next question is from Mehdi Hosseini with SIG. Please go ahead. Mehdi Hosseini -- Susquehanna International Group -- Analyst Yes, a couple of follow-ups for me. I was under the impression that for most of your components, you have gone in-source, so what is it with HAMR that has made you rely on external vendors, and how you're switching these vendors? And one follow-up for Dave. What is your most updated exabyte -- overall exabyte growth looking forward as the cycle gains momentum? Thank you. Dave Mosley -- Chief Executive Officer Yeah, Thanks, Mehdi. For our critical components, we are largely in-sourced, but again this is a mechanical piece part that is not something that we make ourselves, it's something that we source from the outside and it's very common in all product families, so just for that clarification. And, Gianluca, you want to take the second part? Gianluca Romano -- Executive Vice President, Chief Financial Officer No, I was just thinking about the components, but there are many components that we source externally, actually now the ads and media, of course, we produce internally. Those are the most critical components, but there are many other components that we get from external suppliers. And on that particular component, we have multiple sources, so we can switch from one to the other. Dave Mosley -- Chief Executive Officer Yeah, and then on exabyte growth, Mehdi, I think it's a good question because we come out of negative and we know that that's not real. The negative was the first time in the history of the industry that we've ever seen something like that. So, I do expect things to start expanding. We get into this discussion about whether we like 35% or 25%, we back down to 25%, maybe near-term we're going to see something a little bit more expansive. It's still early in this demand cycle, but we're fairly encouraged by what we're seeing. And I think also our ability to go answer that with these new products, which provide more exabytes may actually drive even more exabyte expansion. The key point right now is we want to make sure that we reestablish the financial predictability of our industry because the industry has been so damaged of late, I think as we grow back, we have to make sure we're not giving this stuff away that we're doing it in a way that's very measured, and the only way we can do that right now and it's the only way that makes any financial sense too is to make sure we control supply very tightly. Mehdi Hosseini -- Susquehanna International Group -- Analyst Thank you. Operator The next question is from C.J. Muse with Cantor Fitzgerald. Please go ahead. C.J. Muse -- Cantor Fitzgerald -- Analyst Yeah, good afternoon. Thank you for taking the question. I know you talked about the qualification just being a three-month delay in qualifications elsewhere on track, but if things do push out a bit, how do you, I guess, expect to maybe impact your planned utilization elsewhere, your thoughts around pricing and mix, and what kind of impact could that have? I would think positively on gross margin in the back half, would love your thoughts there. Dave Mosley -- Chief Executive Officer Yeah, thanks, C.J. The interesting thing is, as demand comes back, we have much more flexibility than we did, say, six months or a year ago. In this build-to-order process, we've basically told people what we're going to build and then they've said, OK, I understand the economics, as more demand comes, we can now have a new discussion with them and say, which product is qualified, which one do you want to hurry up and qualify, and so I think we have a lot of options there. I mean, we've been focused on operating profit and free cash flow and we're finally back in double-digits on operating profit and ROIC is finally turning back up. So, all of this is just reinforcing the strategy to keep running the business for long-term predictability. This build-to-order thing is working and I think we're going to stay on it. C.J. Muse -- Cantor Fitzgerald -- Analyst Thank you. Operator The next question is from Toshiya Hari with Goldman Sachs. Please go ahead. Toshiya Hari -- Goldman Sachs -- Analyst Hi, thanks for taking the question. Dave, in your prepared remarks, you talked a little bit about AI. I realize you don't have perfect visibility into what's driving customer demand, but I'm curious based on your conversations with your customers, to what extent is AI having impact on your business? I know it's nascent, but if you can comment on that, that would be great. And then related to that, I was hoping you could opine on your ability and the broader ACD industry's ability to compete with Flash in AI. I think based on recent conversations, some of the concerns that investors seem to have is that hard disk drives, you're very cost-competitive, but when you take into consideration things like read-write capability, space, and power consumption, it might be a little bit more competitive vis-a-vis what you're shipping today. So, curious if you can opine on that. Thank you. Dave Mosley -- Chief Executive Officer Thanks, Toshiya. So, yeah, AI is a big question and I know it's confusing for a lot of people because there's so much marketing around it. I do think that the cloud service providers, even the enterprise OEM customers that we have, they have many different types of applications, and some of those application spaces continue to grow. Some of those applications are being dramatically transformed right now by the new compute capabilities that people have and so on. And what I would say in general, is that there are applications that are definitely, I'll call it, cold storage, colder storage, or big data applications that are coming, video applications, for example, that we are very encouraged by, and we are seeing purchase orders now from cloud service providers and so on that actually say AI on them, which is -- it wasn't true six months ago, but given all the creativity in this application space, I'm really excited about it. I think there's a lot of opportunity there for us. Relative to our ability to kind of pivot for where we need to go, I think we're going to keep driving mass capacity for sure. We are working a little bit on performance in our tiers, and then Flash, I'm going to say, I usually don't opine on this very much, but I don't have very much bad to say about Flash. I think it's a great technology. I think it's going to be critical for Flash to execute in their layers to enable their application. Some of those applications may have nothing to do with mass capacity, but this idea of mass capacity being in conflict with Flash, I don't think is right. I don't think that's the way architects think about it in data centers. I don't think that economically it makes sense. And even when you get into things like power and space, I think hard drives are going to stay very, very competitive on the workloads that they offer. So, from my perspective, the new application space is exploding is a good, good thing and it should benefit a lot of hardware providers over time. We've all been through a pretty rough patch of late and we've got to make sure that we watch our supply into it because we can't tolerate another dramatic downturn like we just saw. So, we've got to be very careful. Toshiya Hari -- Goldman Sachs -- Analyst Thank you. Operator The next question is from Thomas O'Malley with Barclays. Please go ahead. Thomas O'Malley -- Barclays -- Analyst Hey, guys. Thanks for taking my question. I just want to understand the ramp with your largest customer in HAMR. You talked about this subcomponent and you were replacing that subcomponent, is that -- you're saying multiple vendors are getting qualified at the same time, so if you look at what a step back traditionally takes in terms of having a customer qualify a product, is that several weeks? Is that several months? I guess, what gives you the confidence that with this setback that you'll be able to not only qualify but then ship these drives within the quarter? Thank you. Dave Mosley -- Chief Executive Officer Yeah, so Tom, we already said that there's multiple sources for this, and so we segregate the parts that were affected and then we push the other ones on their merry way. We've already repopulated those test beds that are running well, so that's why we have confidence. Thomas O'Malley -- Barclays -- Analyst OK. So, in the future, you will just not use that supplier anymore or you would just rely more heavily on the others? Dave Mosley -- Chief Executive Officer No, no, no, I wouldn't say it like that. I mean, we'll go work with everybody. Everybody has got a tough challenge. They have issues and we'll go work with them, yeah. Thomas O'Malley -- Barclays -- Analyst Helpful. Thank you. Dave Mosley -- Chief Executive Officer Thanks. Operator This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Dave Mosley -- Chief Executive Officer Thanks, Gary. As you heard today, Seagate is well-positioned to drive improved financial performance in a recovering demand environment through ongoing operating discipline, keen focus on supply demand balance, which is a big deal, and ramping our latest CMR, SMR, and HAMR-based products. I'm confident in our product strategy. I think it's serving us well, and in our HAMR technology, which positions Seagate well to capitalize on long-term demand for cost-effective mass capacity storage. I'd just close by thanking our stakeholders for their ongoing support. Thanks for joining us today, and we look forward to speaking with you during the quarter. Answer:

the Seagate Technology Fiscal Third Quarter 2024 Conference Call

Operator Welcome to the Seagate Technology Fiscal Third Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shanye Hudson, senior vice president, investor relations. Please go ahead. Shanye Hudson -- Senior Vice President, Investor Relations and Treasury Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's chief executive officer, and Gianluca Romano, our chief financial officer. We've posted our earnings press release and the detailed supplemental information for our March quarter results on the Investors section of our website. During today's call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our Form 8-K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, a reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they are subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties, and other factors that may affect our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. I'll now hand the call over to you, Dave. Dave Mosley -- Chief Executive Officer Thank you, Shanye, and hello, everyone. Seagate is delivering solid financial results in an improving demand environment. In the March quarter, we grew revenue 6%, expanded non-GAAP gross profit 18%, and more than doubled non-GAAP earnings per share compared with the prior quarter. Our performance is a function of both improving end-market demand and the decisive actions we implemented throughout the downturn to strengthen our financial profile heading into the recovery. Nearline cloud demand trends are increasingly positive across both US and China customers, and we also saw a sequential improvement in the enterprise OEM markets in the March quarter. On the execution side, the quarter-on-quarter margin expansion reflects our pricing initiatives taking hold, as well as favorable mix, resulting in revenue growth in the quarter outpacing exabyte growth. Pricing strategy is just one key piece of our broader focus on profitability, which also includes maintaining a healthy supply demand balance, introducing new technologies to enhance value for our customers, and maintaining tight expense controls with an emphasis on generating cash. Looking at the near-term end-market dynamics, cloud continues to lead the demand recovery. For a second consecutive quarter, we realized strong double-digit revenue growth from sales to cloud customers, with improvement across both US and global cloud names. We believe the long-running cloud customer inventory correction is mostly complete and their end demand is also improving. Based on our customer interactions, we currently expect healthy nearline demand growth to continue through the rest of calendar 2024. Within the enterprise OEM markets, demand stabilized in the second half of calendar 2023 and we observed incremental improvement in the March quarter. Historically, enterprise nearline demand has correlated well with traditional server growth, which is projected to modestly increase in calendar 2024. As a result, we expect enterprise OEM revenue to improve as server growth resumes. In the VIA markets, revenue was seasonally lower in the March quarter and we expect demand to trend higher through the calendar year. Smart cities remain the largest end-market opportunity for VIA products. However, new applications continue to emerge that use AI analytics to form actionable insights from data at the edge, where an estimated 80% of data resides. One such use case centers on smart energy and utility management that aims to use imaging data to drive energy efficiency and conservation. Analysts place this among the fastest-growing sectors for VIA applications worldwide. Within China, the pace and magnitude of demand improvement in VIA and other HDD markets will be shaped by economic recovery in the region. We continue to monitor the government's efforts to spur economic growth, including stimulus plans aimed at digital transformation and infrastructure spend. Recent economic indicators show signs of progress. However, it will take time for the benefits of these programs to take hold. Overall, we believe these constructive market trends support steady revenue growth throughout the calendar year. Our ability to deliver that growth is enhanced by our build-to-order initiative that is now in place with the majority of large mass-capacity customers. These plans afford Seagate better demand visibility and greater predictability for capacity planning, while our customers find value in the assurance of supply that meets their volume and timing needs. Importantly, the improving overall outlook for HDD demand is unfolding as we execute on our product and technology roadmap. Today, we are simultaneously driving qualification and ramp plans for two high-capacity product families. Our last PMR product delivering up to 28 terabytes per drive, as well as our first HAMR-based Mozaic product on three-plus terabytes per disk. This is rare for our industry, and I want to acknowledge our product teams at Seagate, who are doing a phenomenal job supporting customers as we work together to advance our industry-leading products and technologies through the various customer qualifications. These two product families share about 95% commonality in components and leverage the same assembly processes and test processes. This enables efficiencies across areas such as procurement, manufacturing, capital investments, and customer qualifications. The 24, 28-terabyte PMR drives are in qualification at most of our global cloud and enterprise customers. We have already completed qualification with one major enterprise customer, some global Tier 2 customers, and with our enterprise systems business. We currently expect to begin shipping significant volumes in the first half of fiscal 2025. Relative to HAMR technology, we continue to progress toward completing our first large CSP customer qualification, though we experienced a temporary slowdown in recent weeks. We determined a mechanical component unrelated to the HAMR recording subsystem and some of our drives was not performing as expected. We identified and rapidly implemented the solution with full support from our customers. Verification tests are underway and these tests should be completed in the June quarter. Every other aspect of the qualification process has gone as expected. With this shift in timing, we now expect to ship a few hundred thousand HAMR-based Mozaic drives in the June quarter and meet the remainder of our customer's exabyte demand through other already qualified products. As we gradually ramp HAMR products with our lead hyperscale customer in the second half of the calendar year, we remain focused on broadening the number of customers qualified on Mozaic products. Customer feedback reaffirms strong interest in HAMR technology and that is further reflected in the successful completion of our first qualification with a top non-cloud customer a few weeks ago. We've laid out a Mozaic roadmap with a clear path to at least 50 terabyte drives that offer customers TCO and sustainability benefits, including lower power consumption and less required floor space on a per terabyte basis. We are scaling drive capacity through aerial density gains rather than adding heads and disks. As we execute on our product roadmap to 50 terabytes and beyond, we expect to incur minimal changes to our bill of material costs and maintain low capital intensity of between 4% and 6% of revenue. As a result, we believe HAMR provides the path for achieving margin performance beyond our current target range as production scales and also positions Seagate well to continue capitalizing on megatrends like AI and machine-learning, which drive long-term demand for cost-efficient mass storage. As we've discussed in the past, the initial phase of GenAI has focused on building out the compute-intensive infrastructure required to develop and train large language models. As development shifts to the deployment phase, enterprises will begin to leverage these trained AI models to transform data with value-enhancing applications and generate data-rich content. Customers expect HDD demand to increase as this phase takes hold. Over the next several years, the volume of AI-generated content is expected to increase and also shift toward more imagery and videos, which can be up to 1,000 times larger than text. These trends bode well for HDD demand over the long term, as HDDs remain the most cost-effective means to house and subsequently use mass capacity data. To summarize, the combination of more favorable demand trends, strong operating discipline, and product and technology leadership, provide the foundation for driving further financial performance gains. This combination reinforces our confidence in returning to our long-term target margin ranges and potentially exceed those ranges over time as HAMR-based products proliferate in the marketplace. With that, Gianluca will now cover our financial performance and outlook. Gianluca Romano -- Executive Vice President, Chief Financial Officer Thank you, Dave. Seagate delivered solid financial performance in the March quarter with sequential improvement across every key financial metric. Revenue was $1.66 billion, up 6% quarter over quarter. Non-GAAP operating income was up 44% sequentially to $183 million, leading to a non-GAAP operating margin of 11% of revenue, expanding nearly 300 basis points quarter over quarter, and our non-GAAP EPS was $0.33, increasing $0.21 sequentially and above the midpoint of our guidance range, reflecting the improving demand trends and continued cost discipline. Within our hard disk drive business, exabyte shipments grew 4% sequentially to 99-exabyte, while revenue increased 7% to $1.5 billion. Revenue performance was mainly driven by the expected improvement in the nearline cloud market, as well as favorable pricing actions. Within the mass capacity market, revenue outpaced exabyte growth, increasing 11% sequentially to $1.2 billion with nearline cloud demand more than offsetting the slight decline in the VIA market. Mass capacity shipment totaled 89-exabyte compared with 83-exabyte in the December quarter. Mass capacity shipment as a percentage of total HDD exabyte was 89%, reflecting the continued long-term secular growth for mass capacity demand. For nearline products, shipment of 72 exabytes were up quarter over quarter from 65 exabytes. We believe that inventory among most CSP customers has decreased and anticipate continued nearline demand improvement in the June quarter and beyond. In the VIA market, we believe the March quarter will prove to be a low point of the calendar year with demand returning to more typical seasonal patterns moving forward. Legacy product revenue was $297 million, down from $324 million in the prior quarter, primarily driven by lower seasonal demand in the consumer market. Finally, revenue for our non-HDD business was $178 million, essentially flat quarter over quarter. We expect both the legacy and non-HDD market to remain at a similar level in the June quarter. Moving on to the rest of the income statement. Non-GAAP gross profit increased sequentially by $65 million in the March quarter to $432 million. Non-GAAP gross margin improved for a fourth consecutive quarter to 26.1% and expanded approximately 250 basis points compared to the previous quarter. Continued pricing adjustment and favorable mix shift toward mass capacity products offset margin headwinds from underutilization costs, which were about $43 million. Non-GAAP gross margin for the HDD business expanded much faster than overall company gross margin. Looking ahead, we expect underutilization costs to decrease in the June quarter and abate in the second half of the calendar year as our overall build volume improves to support incremental demand in the nearline market. We believe these factors along with ongoing expense discipline and product execution support the return to the 30% minimum margin benchmark in the current calendar year. Non-GAAP operating expenses totaled $249 million, up 4% quarter over quarter, but slightly better than our guidance, reflecting the timing of certain R&D spending and continued cost control efforts. Adjusted EBITDA continues to improve and was up 29% sequentially in the March quarter to $278 million. Non-GAAP net income was $71 million, nearly tripling quarter over quarter, resulting in non-GAAP EPS of $0.33 per share based on diluted share count of approximately 212 million shares and a tax expense of $27 million. Moving on to cash flow and the balance sheet. In the March quarter, we increased free cash flow generation to $128 million. Capital expenditures were down sequentially to $60 million as the majority of planned capital expenditures were completed in the first half of fiscal '24. We expect fiscal '24 capex to be at or below the low end of our long-term target range of 4% to 6% of revenue. We returned $147 million to shareholders through the quarterly dividend, exiting the quarter with 210 million shares outstanding. We closed the March quarter with $2.3 billion in available liquidity, including our undrawn revolver credit facilities. Today, we announced that Broadcom has acquired our ASIC assets, including development engineering and related IP for $600 million in cash. The cash inlay will be reflected on our balance sheet in the June quarter and Seagate expects to use a portion of the net proceeds to support our supply chain as we begin to ramp new product builds, as well as pay down debt over time. Additionally, we expect to realize annualized opex savings of approximately $40 million starting in fiscal 2025, but there is no expected impact to revenue. Inventory increased to $1.2 billion as we staged material to support the continued mass capacity demand recovery, along with our concurrent ramp of our last PMR-based product and the initial Mozaic-based product ramp. Our debt balance was $5.7 billion at the end of March quarter, with more than 90% of our long-term debt obligation maturing beyond three years. Interest expense were $82 million and we project interest expense to be between $83 million and $85 million in the June quarter. Turning to our outlook, we expect continued improvement in our mass capacity markets, led by ongoing demand for our nearline cloud products, as well as modest improvement in both the nearline enterprise and VIA markets. Legacy and non-HDD revenue are expected to remain relatively flat sequentially. With that as context, June quarter revenue is expected to be in the range of $1.85 billion, plus or minus $150 million, an increase of 12% sequentially and 16% year on year at the midpoint. We are planning non-GAAP operating expenses of approximately $260 million. At the midpoint of our revenue guidance, we expect non-GAAP operating margin to improve into the low-teens percentage range, including underutilization cost of approximately $20 million. We expect our non-GAAP EPS to be $0.70 plus or minus $0.20, based on a diluted share count of approximately 212 million shares and a non-GAAP tax expense of $25 million. Our strong expense management and supply discipline are contributing to the year-over-year profitability expansion that you are seeing in our results and outlook. Our balance sheet and healthy free cash flow generation position us well to continue supporting our capital return commitments. I will now turn the call back to Dave for final comments. Dave Mosley -- Chief Executive Officer Thanks, Gianluca. Seagate is demonstrating strong operational execution and supply discipline amid an improving demand environment, which sets us up well to grow revenue and further expand margins throughout calendar year 2024. Our product portfolio, anchored by industry-leading HAMR technology, offers compelling economics for our customers and for Seagate. As we proliferate these new products, we expect to drive further financial leverage over time. I'm confident that our product strategy offers customers the most compelling TCO proposition and positions Seagate well to capitalize on long-term demand for cost-effective mass capacity storage. We believe that the Mozaic platform delivers TCO advantages for data center operators and supports their increasing focus on conserving power and space. This week, Seagate published our 18th Annual ESG Report outlining the progress we've made toward our own sustainability goals, including our product circularity program. We are collaborating with customers and recovering drives from our own operations to extend these products' life cycles and conserve the planet's limited resources. Since launching this program in 2020, we've recovered and shipped nearly 4 million drives back into the market. Finally, I want to thank our global team members for their hard work and dedication and recognize our suppliers, customers, and shareholders for your ongoing support of Seagate. Gary, we're ready to open up the call for questions. Questions & Answers: Operator We will now begin the question-and-answer session. [Operator instructions] Our first question today is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring -- Morgan Stanley -- Analyst Great. Thank you so much for taking my question. I'll combine this into a two-part question. So, Dave, I appreciate your comments on HAMR in the prepared remarks, really just wanted to get clarification on two points, if I may. First is, have you replaced the mechanical component that was giving you an issue and then proceeded to do testing such that you won't have any further delays on HAMR and now you're just going through kind of the final testing phase with your lead CSP customer? And then second, I believe you've talked in the past about a goal of onboarding the remaining large CSPs by the end of calendar year '24. Does this hiccup impact that timing at all, or have you started the call process with these customers? Just any clarification on those two points would be super helpful. And that's it from me. Thank you. Dave Mosley -- Chief Executive Officer Thanks, Erik. Yeah, appreciate the question. So, relative to the mechanical component in question, we do have other sources and we had those other sources running in parallel, so we were able to segregate the material and then get the test beds back up with the right material, I'll say it that way, and repopulate all those test beds and we recovered the schedule quite quickly because of that. So, we're not happy that we had this issue, but obviously, I think we can move on from here and that's why we're expressing the confidence that we did in the script about completing the qualification this quarter and shipping the units. Relative to big picture of the program and these kinds of things happen when you start to integrate high-volume from all your suppliers, sometimes you see interactions that you didn't use and foresee, and long term, this isn't going to slow us down at all and it shouldn't impact the other qualifications either. To the second point of your question, we are always reevaluating exactly where we are involved but we want to also ramp HAMR as fast as we possibly can and get not only the three terabytes per platter but four terabytes per platter as well. So, still very optimistic on that front. Erik Woodring -- Morgan Stanley -- Analyst Great. Thank you so much. Operator The next question is from Amit Daryanani with Evercore ISI. Please go ahead. Amit Daryanani -- Evercore ISI -- Analyst Good afternoon. Thanks for taking my question. I guess, Dave, I just want to focus on the cloud recovery part. In the past, I think you've talked about this being potentially a bit more gradual in nature, but certainly looking at your March numbers and the June guide, it would suggest perhaps the recovery is a bit more steeper. So, I'm hoping when you talk to -- to get a sense of when you talk to these cloud customers, how do you think about the pace and the durability of demand recovery on the cloud side? And related to that, I think you folks shipped close to 100 exabytes of capacity this quarter, what is the total available capacity that you have right now? And what triggered the decision to potentially add more capacity down the road? Thank you. Dave Mosley -- Chief Executive Officer Yeah, thanks, Amit. It's been a remarkable journey, I think over the last year and a half, two years because the demand was so low relative to the supply that we had, that the industry had and we all took, I think, some supply offline, and we started this build-to-order in earnest at least nine months ago, telling people that, hey, in order for us to actually trigger the builds, we're going to -- we need some predictability out of the business and we're quite happy with how that's proceeded. What's different in the next nine -- in the last 90 days is that the demand really is coming back. And so, when we see the exabyte growth last quarter being outstripped by the revenue growth and then we see even more exabyte growth now, then we're fairly optimistic about it. We are still not full though to your point. We still have underutilization charges, if you will, costs, and we also have factory capacity that's not fully utilized yet. So, we're going to stick to the plan I think. The main point for us is we don't want to overbuild or build product based on speculation. We really want predictability long-term financial health and so on. We're happy with the improvements that have been made, but we're not quite there yet, and so we'll continue to drive this. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yeah, let me add on the underutilization charges, we said in the prepared remarks we do not expect underutilization charges in the fiscal year '25, so fairly soon we will not have that additional cost. Dave Mosley -- Chief Executive Officer Thanks, Amit. Operator The next question is from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers -- Wells Fargo Securities -- Analyst Yeah, thanks for taking the question. I know, Gianluca, you just kind of highlighted the underutilization costs, but I guess as we think about the model and you think about the recovery that you're seeing, I'm curious if we adjust for underutilization, it looks to me like you're guiding maybe a 70-basis point, again ex-underutilization gross margin expansion this quarter at the midpoint of the guidance. How would you characterize the company's ability to price up in this environment, especially looking at the results, it looks like your mass capacity dollar per terabyte was up about 5% sequentially. Where are you at in that journey and how much more do you think pricing could turn favorably for the company? And really what I'm getting at is the continued driver from pricing to gross margin. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yes. Well, I would say in the last several quarters, now we had some success in improving our pricing and we are continuing to do that, so part of this increase in gross margin that you are estimating for the June quarter is, of course coming from pricing. As you know, in the March quarter, we were very high in mix for the mass capacity, then when we go through the rest of the calendar year, you have other parts of the business that will grow. So, the mix will not be maybe as good as we had in March, but pricing is going up, and our cost, of course, is always trending in the right direction. Of course, we have a ramp of new products, but overall, we are very happy with the pricing action and where the mix is today. So, we see further improvement through the calendar year. Operator The next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Yes, thank you so much. Dave, if I could just go back to the qualification, any color you can share on the differences between these two qualifications at your CSP and non-CSP customer? And is there a meaningful difference in the product itself between the CSP and non-CSP customer? And if I could for Gianluca, with this Broadcom deal that you also announced, how should we think about both the opex trajectory and would this impact your gross margins, so should we expect your gross margins to go down because of this slightly and then opex also to go down, or what the dynamics -- what dynamic should we expect? Thank you. Dave Mosley -- Chief Executive Officer Thanks, Wamsi. To your first question, there's no significant difference in the hardware. The qualification for cloud versus non-cloud, it's not usually that much different. There can be some software features depending on which cloud service provider you're talking about, that complicate the qualification, and especially different customers, whether it's cloud or non-cloud, might be going through other types of architectural transitions at the time, so we have to make sure we get that right. But by and large, it's the same drive. I think that was your question. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Right, yes. Gianluca Romano -- Executive Vice President, Chief Financial Officer So, on the financial impact for the transaction with Broadcom, the major difference will be in opex where we expect a decline of about $40 million for fiscal '25. Now, we have a very good collaboration with our partner, so we don't expect basically any other change from the -- from operations. So, it's mainly a reduction in opex due to the transfer of asset and people to our partner. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst OK, got it. Thank you so much. Dave Mosley -- Chief Executive Officer Thanks, Wamsi. Operator The next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar -- TD Cowen -- Analyst Yeah, hi, thanks for taking my question. I have a question for Dave or Gianluca. A two-part HAMR question. Dave, you mentioned you might ship a few hundred thousand units of HAMR this quarter, kind of curious how to think about the HAMR unit shipment in the second half of this year or exiting 2024, how many units do you think you can ship? And just as a follow-up to that is, you mentioned about the gross margin exceeding the range longer-term, I'm kind of curious, as HAMR drives become more mainstream, say, a couple of years from now, do you think your gross margin can be over 40%? Thank you. Dave Mosley -- Chief Executive Officer Yeah, thanks. We will continue to ship aggressively and go through the HAMR transition largely because we think it provides better value to our customers. Higher and higher capacity points, and then ultimately over time it allows us to get components out of the chain, which saves cost against these platforms as well. I mean, we're in an interesting position right now because, say, six months ago, I think supply was ahead of demand and now supply is lagging demand, some of that's just lead times on the product. So, balancing all these things is very important, I think, in today's market, but we're still going to drive very aggressively through the transition and we do believe that this is the way to get more margin into our business as well. So, I won't go into specific numbers as we qualify customers, because right now, customers are seeking any kind of product that we can actually make, which then we may actually turn -- our turnover to some products that are already qualified versus prior plans we were driving, but I view that as a good thing because now we actually have demand that's helping our factories that's getting us focused and so I'm very optimistic about that. So, just we all are very clear, we're going to continue to drive the transitions very aggressively. Gianluca Romano -- Executive Vice President, Chief Financial Officer On the gross margin trajectory, we said before, we expect to be at 30% or higher during this calendar year. And as you know, there is only a part of the ramp of HAMR. So, for sure, when we move higher-volume of HAMR, we expect to be now in the high part of the range or even higher, we will see as a point in that point of the ramp. But, yes, even without HAMR we can be into the 30% to 33% range that we discussed as our target in the past. Krish Sankar -- TD Cowen -- Analyst Thank you. Operator The next question is from Steven Fox with Fox Advisors. Please go ahead. Steven Fox -- Fox Advisors -- Analyst Hi, good afternoon. Dave, I was wondering if there's any more color you can provide on your experience with talking to customers about build-to-order plans for, say, the next 12, or 24 months. I mean, it sounds to me like you have accelerating demand on the cloud side, Legacy, and VIA sort of recovering on a seasonal type of basis, and then you have channel partners that are going to need inventory in order to help even things out. So, how are you balancing all that? What is going to be different do you think that we should consider if we're looking out over the next few quarters with how you're going to be doing business? Thanks. Dave Mosley -- Chief Executive Officer Yeah, Steven, I think it's a really good question because I think it goes back to what we've just been through -- living through this downturn, one of the key lessons was just the sheer amount of supply chain inertia that we had can create problems when the demand stops so quickly, and so we need to be a lot more diligent. I mean, we can't have volume shipments -- exabyte volume shipments that where the revenues far under-running the exabytes. And I think part of what we can control is control the builds and make sure we don't overbuild and make sure we're not trying to push stuff into the market, especially when the market's soft. Now that it's a little bit stronger, exactly to your point, which is a nice trend in the last 90 days that we're really encouraged about, then we can go back and say, OK, which ones will we actually build more for and we're having those conversations with the customers. But again, we want to come back to predictability as the overarching objective here and we'll also reward customers who give us that predictability with the best financial outcome for themselves as well. So, having those negotiations is giving us pretty good visibility into what's coming over the next three or four quarters, and I'm happy with that. Steven Fox -- Fox Advisors -- Analyst That's helpful. Thank you. Operator The next question is from Timothy Arcuri with UBS Securities. Please go ahead. Timothy Arcuri -- UBS -- Analyst Thanks a lot. I wanted to ask about this million HAMR unit that you had guided for the first half of the year, mostly was going to be 30 key drives. So, you're going to make up, it sounds like 700,000, 800,000 drives with other stuff beyond HAMR, but I had kind of two questions. One, you probably have to rework some of the HAMR WIPs, so that would be a negative, but it did seem like HAMR was going to be dilutive initially. So, is that all kind of a net positive trade for June quarter gross margin? And then because you gave us this -- sorry, go ahead. Dave Mosley -- Chief Executive Officer No, you go ahead and finish your question, Tim. Timothy Arcuri -- UBS -- Analyst Yeah, so I just was going to ask, since you gave us that million unit number, I'm curious if you can give us some indication of what you think units will be in the back half of the year for HAMR? Thanks. Dave Mosley -- Chief Executive Officer Yeah, there's two aspects of this. One is the completion of the time -- the timing of the qualification and then the other is the total amount of material. And remember, we said we have other sources for the particular component, so we don't have to segregate the entire WIP. There's parts of the WIP that are still moving, right? But I think the timing of the qualification is really the issue there. We're not going to get into how many we're forecasting for the back half of the year because a lot of that will depend on specifics of demand from customers and when the rest of the qualifications time-out. But from my perspective, once we get that material segregated, yeah, is there some rework or scrap to do? Yeah, but I think we can take that. And keep in mind that all of these products are common with one another. So, we have homes for other products -- other materials if we want to. It can be pivoted from the 24 to 28 family up to the Mozaic family as well. So, I think we have a lot of flexibility there. Gianluca Romano -- Executive Vice President, Chief Financial Officer And just a clarification, Tim, on the HAMR gross margin, we never said that HAMR was dilutive to gross margin. We said that HAMR gross margin will for sure improve in the second part of the ramp or the first part of the ramp as, of course, a little bit more cost, but we never said it was dilutive to our overall gross margin. Timothy Arcuri -- UBS -- Analyst Right. OK. Thank you, Gianluca. Operator The next question is from Karl Ackerman with BNP Paribas. Please go ahead. Karl Ackerman -- Exane BNP Paribas -- Analyst Yeah, thank you. I wanted to get a better understanding of the demand impact of both the ramp of 28-terabyte SMR and the simultaneous ramp of 32-terabyte HAMR, which might be 34, 35-terabyte SMR. I'm curious whether you see that as perhaps somewhat cannibalistic to your early deployments of HAMR. If you could just discuss that, that would be great. Thank you. Dave Mosley -- Chief Executive Officer Yeah, thanks, Karl. Different customers have different requirements and different feature sets, how they use the drive, and so I don't think there's a one-to-one swap. I mean, the good news for us is we have a lot of commonality and so we can react fairly quickly as to whether more people want one family or the other. But we're working with a lot of people on, as I said in the prepared remarks, on two different qualifications at the same time. And as far as I'm concerned, the qualifications are going well. We're staying very communicative with the customers. And against a demand environment that's improving, I think that's why they should value our predictability even more as we show them what we have and what we're willing to build. Operator The next question is from Ananda Baruah with Loop Capital. Please go ahead. Ananda Baruah -- Loop Capital Markets -- Analyst Yeah, good afternoon, guys. Thanks for taking the question. I guess just one on gross margin. In the past when you had dynamics similar to these demand ramp and price increases, and then Dave, supply demand tightness, there's typically been a quarter or so where you can get pretty pronounced step-ups in gross margin. And just wondering if there is anything that will preclude this cycle at some point from having the same type of dynamics. And then just to sort of sneak one in there real quick. Gianluca, any updated metrics -- you've given metrics in the past about revenue to gross margin, kind of scale ratios, do those still hold the ones that you've been giving, or does the pricing dynamics here change that at all? Thanks, guys. Dave Mosley -- Chief Executive Officer Thanks, Ananda. I'll let Gianluca answer his part, but I guess what I'd say, at a very high level is that we're going to continue to push aggressively through product transitions because we think that's the best way to continue to add value to our customers and margin for ourselves. Some of the margin uplift that we're seeing right now is obviously because of the factories being -- they're filling up, they're not completely full yet, but they're filling up and that's a good sign. Gianluca Romano -- Executive Vice President, Chief Financial Officer Yeah, on the trajectory, especially on the gross margin, but with the business in general, every cycle is a bit different. We are saying today we see a good recovery from the cloud part of the business. Of course, it's not all the business increasing in the same way. So, we still need to wait for other segments to start having the same kind of recovery before we can see a strong upcycle. But, no, we are very positive. We said earlier, we see that gross margin improving quarter over quarter and to be in the target range during this calendar year. I would say, every quarter, we have a little bit better pricing, a little bit better cost. So, the opportunity for us to achieve that target range at an even lower level of revenue is for sure a reality. Ananda Baruah -- Loop Capital Markets -- Analyst Cool. That's super helpful. Thanks, guys. Dave Mosley -- Chief Executive Officer Thanks, Ananda. Operator The next question is from Mehdi Hosseini with SIG. Please go ahead. Mehdi Hosseini -- Susquehanna International Group -- Analyst Yes, a couple of follow-ups for me. I was under the impression that for most of your components, you have gone in-source, so what is it with HAMR that has made you rely on external vendors, and how you're switching these vendors? And one follow-up for Dave. What is your most updated exabyte -- overall exabyte growth looking forward as the cycle gains momentum? Thank you. Dave Mosley -- Chief Executive Officer Yeah, Thanks, Mehdi. For our critical components, we are largely in-sourced, but again this is a mechanical piece part that is not something that we make ourselves, it's something that we source from the outside and it's very common in all product families, so just for that clarification. And, Gianluca, you want to take the second part? Gianluca Romano -- Executive Vice President, Chief Financial Officer No, I was just thinking about the components, but there are many components that we source externally, actually now the ads and media, of course, we produce internally. Those are the most critical components, but there are many other components that we get from external suppliers. And on that particular component, we have multiple sources, so we can switch from one to the other. Dave Mosley -- Chief Executive Officer Yeah, and then on exabyte growth, Mehdi, I think it's a good question because we come out of negative and we know that that's not real. The negative was the first time in the history of the industry that we've ever seen something like that. So, I do expect things to start expanding. We get into this discussion about whether we like 35% or 25%, we back down to 25%, maybe near-term we're going to see something a little bit more expansive. It's still early in this demand cycle, but we're fairly encouraged by what we're seeing. And I think also our ability to go answer that with these new products, which provide more exabytes may actually drive even more exabyte expansion. The key point right now is we want to make sure that we reestablish the financial predictability of our industry because the industry has been so damaged of late, I think as we grow back, we have to make sure we're not giving this stuff away that we're doing it in a way that's very measured, and the only way we can do that right now and it's the only way that makes any financial sense too is to make sure we control supply very tightly. Mehdi Hosseini -- Susquehanna International Group -- Analyst Thank you. Operator The next question is from C.J. Muse with Cantor Fitzgerald. Please go ahead. C.J. Muse -- Cantor Fitzgerald -- Analyst Yeah, good afternoon. Thank you for taking the question. I know you talked about the qualification just being a three-month delay in qualifications elsewhere on track, but if things do push out a bit, how do you, I guess, expect to maybe impact your planned utilization elsewhere, your thoughts around pricing and mix, and what kind of impact could that have? I would think positively on gross margin in the back half, would love your thoughts there. Dave Mosley -- Chief Executive Officer Yeah, thanks, C.J. The interesting thing is, as demand comes back, we have much more flexibility than we did, say, six months or a year ago. In this build-to-order process, we've basically told people what we're going to build and then they've said, OK, I understand the economics, as more demand comes, we can now have a new discussion with them and say, which product is qualified, which one do you want to hurry up and qualify, and so I think we have a lot of options there. I mean, we've been focused on operating profit and free cash flow and we're finally back in double-digits on operating profit and ROIC is finally turning back up. So, all of this is just reinforcing the strategy to keep running the business for long-term predictability. This build-to-order thing is working and I think we're going to stay on it. C.J. Muse -- Cantor Fitzgerald -- Analyst Thank you. Operator The next question is from Toshiya Hari with Goldman Sachs. Please go ahead. Toshiya Hari -- Goldman Sachs -- Analyst Hi, thanks for taking the question. Dave, in your prepared remarks, you talked a little bit about AI. I realize you don't have perfect visibility into what's driving customer demand, but I'm curious based on your conversations with your customers, to what extent is AI having impact on your business? I know it's nascent, but if you can comment on that, that would be great. And then related to that, I was hoping you could opine on your ability and the broader ACD industry's ability to compete with Flash in AI. I think based on recent conversations, some of the concerns that investors seem to have is that hard disk drives, you're very cost-competitive, but when you take into consideration things like read-write capability, space, and power consumption, it might be a little bit more competitive vis-a-vis what you're shipping today. So, curious if you can opine on that. Thank you. Dave Mosley -- Chief Executive Officer Thanks, Toshiya. So, yeah, AI is a big question and I know it's confusing for a lot of people because there's so much marketing around it. I do think that the cloud service providers, even the enterprise OEM customers that we have, they have many different types of applications, and some of those application spaces continue to grow. Some of those applications are being dramatically transformed right now by the new compute capabilities that people have and so on. And what I would say in general, is that there are applications that are definitely, I'll call it, cold storage, colder storage, or big data applications that are coming, video applications, for example, that we are very encouraged by, and we are seeing purchase orders now from cloud service providers and so on that actually say AI on them, which is -- it wasn't true six months ago, but given all the creativity in this application space, I'm really excited about it. I think there's a lot of opportunity there for us. Relative to our ability to kind of pivot for where we need to go, I think we're going to keep driving mass capacity for sure. We are working a little bit on performance in our tiers, and then Flash, I'm going to say, I usually don't opine on this very much, but I don't have very much bad to say about Flash. I think it's a great technology. I think it's going to be critical for Flash to execute in their layers to enable their application. Some of those applications may have nothing to do with mass capacity, but this idea of mass capacity being in conflict with Flash, I don't think is right. I don't think that's the way architects think about it in data centers. I don't think that economically it makes sense. And even when you get into things like power and space, I think hard drives are going to stay very, very competitive on the workloads that they offer. So, from my perspective, the new application space is exploding is a good, good thing and it should benefit a lot of hardware providers over time. We've all been through a pretty rough patch of late and we've got to make sure that we watch our supply into it because we can't tolerate another dramatic downturn like we just saw. So, we've got to be very careful. Toshiya Hari -- Goldman Sachs -- Analyst Thank you. Operator The next question is from Thomas O'Malley with Barclays. Please go ahead. Thomas O'Malley -- Barclays -- Analyst Hey, guys. Thanks for taking my question. I just want to understand the ramp with your largest customer in HAMR. You talked about this subcomponent and you were replacing that subcomponent, is that -- you're saying multiple vendors are getting qualified at the same time, so if you look at what a step back traditionally takes in terms of having a customer qualify a product, is that several weeks? Is that several months? I guess, what gives you the confidence that with this setback that you'll be able to not only qualify but then ship these drives within the quarter? Thank you. Dave Mosley -- Chief Executive Officer Yeah, so Tom, we already said that there's multiple sources for this, and so we segregate the parts that were affected and then we push the other ones on their merry way. We've already repopulated those test beds that are running well, so that's why we have confidence. Thomas O'Malley -- Barclays -- Analyst OK. So, in the future, you will just not use that supplier anymore or you would just rely more heavily on the others? Dave Mosley -- Chief Executive Officer No, no, no, I wouldn't say it like that. I mean, we'll go work with everybody. Everybody has got a tough challenge. They have issues and we'll go work with them, yeah. Thomas O'Malley -- Barclays -- Analyst Helpful. Thank you. Dave Mosley -- Chief Executive Officer Thanks. Operator This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Dave Mosley -- Chief Executive Officer Thanks, Gary. As you heard today, Seagate is well-positioned to drive improved financial performance in a recovering demand environment through ongoing operating discipline, keen focus on supply demand balance, which is a big deal, and ramping our latest CMR, SMR, and HAMR-based products. I'm confident in our product strategy. I think it's serving us well, and in our HAMR technology, which positions Seagate well to capitalize on long-term demand for cost-effective mass capacity storage. I'd just close by thanking our stakeholders for their ongoing support. Thanks for joining us today, and we look forward to speaking with you during the quarter.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and welcome to the Constellation Brands fiscal-year 2024 fourth quarter full-year earnings call. [Operator instructions] As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Snehal Shah, director of investor relations. Mr. Shah, you may now begin. Snehal Shah -- Director, Investor Relations Thank you, Rob. Good morning, all, and welcome to Constellation Brands' year-end fiscal 2024 earnings conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in today's news release or otherwise available on the company's website at www.cbrands.com. Please note, when we discuss comparable earnings per share figures for fiscal 2024 and prior fiscal years, we are referring to earnings per share on a comparable basis, excluding Canopy equity and earnings, unless otherwise noted. Please refer to the news release and Constellation's SEC filings for risk factors which may impact forward-looking statements made on this call. Following the call, we will also be making available in the Investors section of our company's website a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time today. Thanks in advance, and now here's Bill. Bill Newlands -- Chief Executive Officer Thanks, Snehal, and good morning, everyone. Welcome to our fiscal '24 year-end earnings call. As usual, I'd like to start with a few headlines from this past fiscal year. First, I'm pleased to report that we delivered another year of strong performance in fiscal '24. We drove comparable earnings-per-share growth of nearly 9% and remain focused on achieving our stated medium-term target of low double-digit comparable EPS growth moving forward. This growth was supported by a net sales increase of 5% at an enterprise level and solid operating leverage that resulted in an increase of 7% in comparable operating income, representing an enterprise-comparable operating margin of nearly 33%. This performance once again yielded recognition for Constellation Brands as the No. 1 growth leader among large CPG companies by Circana in calendar year '23 as we have been five of the last seven years. We are the only CPG company of scale to make their top 10 ranking for 11 consecutive years. Our continued strong performance and momentum heading into fiscal '25 reinforces our confidence in our ability to deliver against the following targets outlined at our investor day this past November, maintaining 6% to 8% enterprise net sales growth, delivering 33% to 35% enterprise comparable operating income margin and generating low double-digit comparable earnings-per-share growth, all of which we intend to achieve in fiscal '25. Second, from a segment perspective, our fiscal '24 results were largely driven by our beer business, which delivered net sales and operating income growth above 9% and 8%, respectively, both exceeding our expectations from the beginning of the year. This strong performance drove our largest dollar share gain ever for a full fiscal year, adding an impressive 2 points of dollar share within the U.S. beer category. And we achieved a significant milestone this year as Modelo Especial became the No. 1 beer in U.S. dollar sales. Furthermore, across all beverage alcohol, our beer business was the No. 1 dollar share gainer, capturing 1.1 points of share and driving nearly 70% of the total dollar growth in the sector. This was truly a remarkable achievement by our entire beer team working in concert with our distributor and retail partners as they delivered volume growth for the 14th consecutive year which is certainly another incredible differentiator among CPG companies. In our wine and spirits business, we faced a series of near-term category headwinds throughout fiscal '24 but remain confident that our strategy is sound. We recently promoted Sam Glaetzer to serve as our new president of wine and spirits. He is a well-rounded and accomplished industry veteran with nearly 30 years of experience in the wine and spirits category and a successful track record of driving commercial and operational efficiency and effectiveness. Sam also played an integral role in the implementation of the business transformation over the last few years, leading our global end-to-end supply chain optimization initiatives and building a world-class farming, winemaking, and distilling network, aligned to consumer preferences while developing a focused international route to market to deliver incremental growth for the business in the medium term. Now with the strategic transformation of our wine and spirits portfolio is largely complete, Sam is well-positioned to lead our team in driving enhanced focus on execution, and the delivery of growth and improved profitability. To that end, our wine and spirits team has identified several immediate actions to help drive improvement in our year-over-year top-line performance, which I'll discuss in more detail shortly. Third, we continue to achieve superior cash flow generation and deployed that cash in a disciplined and balanced manner underpinned by our consistent capital allocation priorities. For fiscal '24, we generated $2.8 billion in operating cash flow, and we're able to reduce our net leverage ratio by nearly 0.5 point while returning over $900 million back to our shareholders through quarterly dividends and share repurchases. We also continue to prudently invest to support the ongoing growth with total capital expenditures of nearly $1.3 billion in fiscal '24, most of which was focused on capacity additions to our beer brewing operations. And fourth, we continued to deliver against our environmental, social, and governance objectives, which I'll discuss in more detail shortly. With that as a backdrop, let's turn to a more detailed discussion of our fiscal '24 performance, starting with our beer business, which despite some challenging weather in our fourth quarter, grew depletions by 9%, resulting in our 56th consecutive quarter of depletions growth. For the full year, we continue to extend our lead as the No. 1 high-end beer supplier in the U.S., delivering top share gains across the total beer category underpinned by a nearly 14% increase in dollar sales and nearly 11% volume growth across tracked channels. And in line with our expectations, we captured low double-digit percent incremental shelf space this spring while adding another 21,000 resets through our shopper-first shelf program in fiscal '24. These factors all played a significant role in driving the growth of our beer business paired with the strength of our portfolio's iconic brands starting with Modelo Especial, which grew depletions by nearly 10% and maintained its leading position as the top share gainer, and as noted earlier, the No. 1 overall beer brand in U.S. tracked channels. Corona Extra increased depletions nearly 1% and maintained its position as the No. 3 high-end beer brand in the U.S. and Pacifico delivered depletion growth over 17% as it reached the 20 million case sold milestone and remained a top 10 share gainer across the total beer category and the No. 4 share gainer in the high end. While we continue to build on the success of our iconic brands, we are also building good traction with our focused innovations aligned with consumer-led trends of premiumization, flavor, and betterment. Our Modelo Chelada brands delivered an increase of 30% in depletions also surpassing 20 million cases sold and remained the No. 1 Chelada in the category supported by the launch of our new flavor, Sandía Picante, and new pack size offerings. We are excited to continue to build on that momentum in fiscal '25 with two new flavors, Fresa Picante and Negra con Chile. Modelo Oro's national launch established a strong foundation for the brand as it rose to become a top five share gainer across the total beer category and the No. 3 share gainer in the high end with just two SKUs. Given that strong reception and ongoing consumer demand for betterment products, we are launching two more Modelo Oro SKUs in fiscal '25, an 18 pack and a 24 pack. Staying within the Modelo brand family, our new Aguas Frescas variety pack secured the No. 1 new FMB spot in its test market of Nevada. So on fiscal '25, we will be expanding its rollout to another 20 markets for this authentic liquid aligned with consumer-led flavor trends and featuring our project, our nitro technology. In our Corona brand family, we introduced Corona nonalcoholic, which is the leading dollar share gainer in the fast-growing nonalcoholic beer segment. As for fiscal '25, we are testing Corona Sunbrew in select Eastern markets. This new refreshing beer is brewed with real citrus peels and a splash of real citrus juice. The strong execution of our beer business in fiscal '24 was also reflected in our ability to maintain best-in-class margins by combating trailing inflation headwinds with cost savings and efficiency initiatives. We also continued to invest in our beer business in fiscal '24, deploying approximately $950 million in capital expenditures, supporting our ability to meet the continued robust demand we see for our brands through the expansion of our beer brewing capacity at Nava and Obregon and the ongoing work at our new Veracruz site. Looking ahead to fiscal '25 and in line with the plan we laid out at our investor day in November, we expect our beer business to remain within our net sales growth algorithm of 7% to 9% and for operating margins to gradually improve, supported by our operating income growth of 10% to 12%. Moving on to wine and spirits. Due largely to the challenging market dynamics referenced earlier, our wine and spirits business saw declines of approximately 8% for both organic net sales and operating income but still landed within our revised guidance range. While we do not expect ongoing challenges in the wine and spirits category to immediately subside, particularly in the mainstream and premium price segments, we have identified several areas to improve the performance of our wine and spirits business in fiscal '25, including, but not limited to, refocusing our efforts within our premium and above brands to more consistently drive growth in our most scaled and central offerings, notably in Crawford, Meiomi, The Prisoner, High West, and Mi Campo while accelerating additional tactical investments to revitalize the equity and support demand for our largest mainstream brand, Woodbridge, and ensuring that we continue to support the transformation of other significant brands in our portfolio, such as SVEDKA, Vint by Robert Mondavi, Ruffino, and Lumina. Note that these 11 brands represent three-quarters of net sales and over 80% of volumes for our wine and spirits business in fiscal '24, which is why we plan to provide more focus and investment for them. Another key area we are focused on is aligning with our U.S. wholesale distributor partners on clear priorities to help enhance our performance in our largest markets and channels. As noted in our prior call, these priorities include enhanced focus on improving mix, inventory, and sales execution. We will also be making additional investments in media spend and price promotions, as well as adjustments in our own sales capabilities, to better support the execution and go-to-market efforts of our distributor partners. And similar to our beer business, we will continue to focus more broadly on efficiency opportunities to drive operational and sales excellence across our wine and spirits segment. This will include the operational and supply chain initiatives highlighted at our investor day, as well as enhancements to the business's organizational structure to enable a more effective and competitive operating model. Looking forward to fiscal '25, we expect our wine and spirits business net sales to be relatively stable and operating income to be down 9% to 11%. While we believe the focus on sales execution I just outlined will help stabilize the top-line growth for wine and spirits, our operating income guidance reflects incremental investments in additional media spend price promotions and sales capabilities, as well as continued inflationary pressures on some cost of goods sold and lapping of distributor contractual payments and reduced incentive compensation that occurred in fiscal '24. As we noted, we remain committed to continuing to advance this business over the coming years toward the medium-term targets shared at our investor day. Moving on to capital allocation. we continue to deliver against our stated priorities and targets in fiscal '24. As noted earlier, we further strengthened our balance sheet with a reduction in our net leverage ratio, supported by our strong earnings performance and our disciplined debt management. We returned cash to shareholders and deployed most of our capital investments to brewery expansions to support the growth of our beer business, and we continue to conduct tuck-in gap-filling acquisitions that are aligned with consumer-led trends and complemented our portfolio. We also made notable progress in regards to our environmental, social, and governance ambitions in fiscal '24. From a governance perspective, our board undertook refreshment actions that resulted in the appointment of two new independent directors, each with strong financial backgrounds. We also recently announced the election of a new independent board chair, Chris Baldwin, who brings a wealth of senior leadership experience from the CPG sector. In addition, in line with our commitment to be good stewards of the environment, since we had surpassed our initial water restoration target in fiscal '23, we established a new goal of restoring more than 5 billion gallons of water to key water sheds near our operations between the time frame covering fiscal '23 and '25. This goal is designed to ensure local residents and businesses have ample supply and access to water, which is the key to building sustainable and thriving communities. Finally, we announced two new environmental commitments in fiscal '24 to reduce waste within our key operating facilities and to enhance circular packaging. So in summary, we once again achieved another strong year of performance and significant progress across our strategic initiatives in fiscal '24, and we fully expect to build on this momentum in fiscal '25. We are confident in our ability to continue to create shareholder value and deliver on our commitments, including achieving low double-digit comparable EPS growth by generating high single-digit net sales growth and delivering best-in-class margins for our beer business, managing category challenges and improving the growth trajectory of our wine and spirits business with enhanced execution and maintaining our capital allocation discipline and commitment to operate in a way that is good for business and good for the world. As I wrap up, I want to once again thank all of our colleagues across Constellation, as well as our trade partners, for their hard work and dedication in helping us deliver another year of industry-leading performance, and I believe we are well-positioned to keep that momentum going in fiscal '25. And with that, I will turn the call over to Garth, who will give more details on our financial results and outlook. Garth Hankinson -- Chief Financial Officer Thank you, Bill, and good morning, everyone. As usual, my discussion will focus mainly on our comparable P&L results, starting at an enterprise level followed by business segment detail for fiscal '24. I will then discuss our fiscal '25 outlook and expectations in the same matter. Starting with net sales. As an enterprise, we delivered growth of over 5% slightly exceeding our fiscal '24 guidance range of 4% to 5%. This was driven by the strong performance of our beer business, which grew net sales over 9%, exceeding our guidance of 8% to 9%. As Bill mentioned, our beer business had another strong year of depletion growth, a 7.5% increase as the strength of our portfolio carried throughout the entire year. Off-premise depletions grew by over 8%, which represent nearly 89% of our total depletion volume. The on-premise accounts for the balance of our depletions and grew by over 1%. We expect to build on our momentum in off-premise channels, supported by the low double-digit incremental shelf space that we captured this spring, which we foreshadowed at our investor day last November. And we continue to see opportunity to drive growth in the on-premise with new draft handles particularly from Modelo Especial and Pacifico in the coming fiscal year. I will elaborate on fiscal '25 shortly. Shipment volumes for our beer business in fiscal '24 grew 7.4%, and we achieved favorable pricing of 2%. These volume and pricing increases were partially offset by the divestiture of our craft beer business and an unfavorable shift in product mix. In aggregate, the volume, price and mix changes amounted to a nearly $700 million increase in beer net sales for fiscal '24. In regards to selling days, we had one extra sell day in the year, which occurred in Q4. This had a minimal impact on our volumes as shipments and depletions on an absolute basis were over 99% aligned for the year. For our wine and spirits business, net sales declined 9% and 8% on a reported and organic basis, respectively. The change in organic net sales for our wine and spirits business was within our lowered guidance range of a 7% to 9% decline. This decline was largely driven by unfavorable U.S. wholesale performance, particularly across our mainstream and premium brands. As Bill noted, we are working with our U.S. wholesale distributor partners to enhance performance in our largest markets and channels in fiscal '25. Additionally, in our international markets, net sales for fiscal '24 were down 7% by destocking, particularly in Canada, our largest export market. More recently, in Q4, net sales from our international markets grew 14%, largely driven by the Canadian market where inventory levels have begun to normalize. The net sales decline in our U.S. wholesale and international markets were partially offset by 10% net sales growth in our direct-to-consumer channel. Moving on to our operating income and margin. At an enterprisewide level, we delivered a 7% increase in comparable operating income at the upper end of our 6% to 7% guidance resulting in a 50-basis-point increase in comparable operating margin to 32.6%. This was driven by the strong performance of our beer business, which grew operating income by just over 8% and delivered an operating margin of 37.9%. Enterprisewide operating margins also benefited from an 11% reduction or $30 million decrease in corporate expense driven mainly by reduced third-party consulting fees related to our DBA project spend. This solid performance was partially offset by our wine and spirits results, as operating income, excluding the gross profit, less marketing of the brands that are no longer part of the business following their divestiture, declined by 8%. This decline was within our lowered guidance range of a 6% to 8% decline, resulting in a flat year-over-year operating margin of 22.2%. Elaborating on the margin puts and takes in more detail, starting with the beer business. The increase in operating income and slight 40-basis-point decrease in operating margin were reflective of an absolute increase of approximately 12% in overall COGS. This increase in COGS includes the impact of increased volume and the nearly $205 million from cost savings initiatives realized in fiscal '24. By COGS component and on an absolute basis, inclusive of both volume growth and cost savings, year-over-year changes were as follows: Raw materials and packaging represented the midpoint of 55% to 60% of total COGS and had an absolute increase of 16%; Logistics, making up just over 20% of total COGS, increased 3% as a large portion of the benefits from our cost savings agenda came from this area; Labor and overhead landed at just under 15% of total COGS and increased 19% attributable to the construction activities at our Veracruz brewery; and the remaining portion of total COGS depreciation increased approximately $37 million, representing the incremental capacity that was brought online in fiscal '24. Moving on to marketing. Our dollar spend increased by approximately 2% year over year. As a percent of fiscal '24 net sales, marketing was approximately 8.5%, coming in slightly below our medium-term 9% algorithm, partly driven by the divestiture of our craft beer brands and efficiencies from the transition to our new media agency. Lastly, SG&A, which represented approximately 5% of net sales increased approximately 8%, driven by the unfavorable impact of foreign currency and increased compensation and benefits. These increases were partially offset by benefits from the craft beer divestiture and lower legal fees. Moving on. Our wine and spirits business operating income margin, excluding the gross profit, less marketing of the brands that are no longer part of the business following last year's divestiture remained flat year over year as the volume decline and unfavorable channel mix were offset by favorability in our COGS, driven by nearly $40 million coming from our cost savings initiatives, favorable pricing, reduced other SG&A expenses and a reduction in marketing expense. Interest expense for fiscal '24 was about $435 million, a 9% increase from prior year, driven by higher average borrowings and weighted average interest rates. We ended fiscal '24 with our comparable net leverage ratio, excluding Canopy equity and earnings of 3.2 times, leaving us well-positioned to achieve our target of approximately three times in fiscal '25. Our comparable effective tax rate, excluding Canopy equity and earnings, was 18.5% versus 19.2% last year. Comparable EPS for fiscal '24, excluding Canopy equity and earnings, grew nearly 9% year over year to $12.38 and came in above our guidance range of $12 to $12.20. Moving to fiscal '24 free cash flow, which we define as net cash provided by operating activities less capex. We generated free cash flow slightly over $1.5 billion, exceeding our $1.4 billion to $1.5 billion guidance range. Free cash flow decreased 12% year over year, driven by a 23% increase in capex investments attributable to our expansions at our existing facilities and the ongoing construction of our new brewery in Veracruz. In fiscal '24, we increased our total nominal capacity from our Mexico brewery operations from 42 million hectoliters to approximately 48 million hectoliters as a result of the modular expansions brought online over the summer that were fully ramped by year end, along with unlocked incremental capacity through our optimization initiatives. Consistent with our capital allocation priorities, we once again delivered cash returns to our shareholders with over $900 million of expenditures in dividends and share repurchases. In addition, we executed portfolio gap filling transactions, encompassing both a tuck-in acquisition of a female and Black-founded luxury wine brand with a successful track record and a venture investment in the high-growth nonalcoholic space in fiscal '24. With that, let me now step through our outlook for fiscal '25, starting with net sales. We are targeting our enterprisewide net sales to grow 6% to 7%, inclusive of a 7% to 9% growth target for our beer business and a 0.5% decline to 0.5% growth in net sales for our wine and spirits business. The beer top-line outlook is expected to be primarily achieved by continued strong volume growth of our portfolio. Again, we expect this to come from distribution of our largest brands bolstered by spring shelf reset gains, the health and continued support of our consumers and innovation in the form of brand extensions, new-to-world products, and new pack sizes. Regarding beer volumes. We anticipate fiscal '25 shipments and depletions to track closely on an absolute basis, consistent with prior years. Similarly, we expect the cadence of our shipments and depletions in terms of share of annual volumes from a quarter and a half year perspective to be fairly in line with fiscal '24. For wine and spirits net sales, we expect to largely offset ongoing category headwinds as we drive the sales and marketing execution initiatives described by Bill earlier. Additionally, we expect mix-related benefits due to the better performance in our higher-end brands. That said, we continue to anticipate overall volume growth to remain challenged, particularly due to demand headwinds in the mainstream and premium price segments, which account for a major part of our volumes. Furthermore, from a net sales perspective, we are expecting unfavorable lapping of bulk sales through fiscal '24. From a cadence perspective, we also expect quarterly and half-yearly shipments and depletion shares of the full-year total to be fairly aligned with fiscal '24. For fiscal '25 operating income, we expect comparable enterprisewide growth between 8% and 10%, reflecting 10% to 12% operating income growth for our beer business, a 9% to 11% operating income decline for our wine and spirits business and a slight increase in corporate expense to approximately $260 million. For our beer business, we anticipate operating income tailwinds from volume growth and favorable pricing. We expect these tailwinds will be partially offset by continued input cost inflation with an absolute increase in COGS, inclusive of volume growth, cost savings initiatives and our multiyear hedging actions in the high single digits. We expect the following percent of total COGS and absolute increases across each component. For packaging and raw materials to account for 55% to 60% and increase mid- to high single digits. Logistics to make up approximately 20% and increased mid-single digits. Labor and overhead to be approximately 15%, an increase in the high teens primarily driven by merit salary increases given the strong operational performance from the business and incremental headcount, primarily at our Veracruz brewery as we continue with construction. And the remainder of COGS depreciation with a mid-single-digit increase, which approximately equates to a $20 million step-up which is slightly lower than recent years given prior depreciation of the packaging line of the ABA facility that was operational throughout all of fiscal '24. Outside of COGS, we expect marketing expense as a percent of net sales to be approximately 8.5%, which is lower than our unchanged medium-term algorithm of 9%. The change of marketing expense as a percent of net sales for fiscal '25 is driven by a shift in our marketing investment allocation with an overall focus on maximizing value. The investment shift is geared toward prioritizing our largest brands to support their continued momentum followed by our high-growth potential next wave brands and then thoughtful and deliberate investments to support our innovation pipeline. And savings driven by efficiencies from our new media agency partnership announced in Q3 of fiscal '24. Rounding out beer operating margin drivers, we anticipate SG&A as a percent of net sales to be approximately 5%, in line with the medium-term algorithm we provided during our investor day. All in, this implies beer operating margins of approximately 39% as our beer business continues to generate best-in-class operating margins and year-over-year improvement as we close in on our medium-term targets. For our wine and spirits business, operating income, we anticipate an overall COGS increase of mid- to high single digits, driven by less favorable fixed cost absorption as a result of lower volumes and higher seller overhead and blend costs partially offset by favorability in logistics and packaging costs as part of our cost savings initiatives. For marketing and other SG&A expense as a percent of net sales, we anticipate 9% and 10%, respectively, each slightly above our medium-term outlook, driven by the adjustments to our marketing, pricing, and sales investments to drive top-line growth and partially offset by organizational structure changes, both points previously referenced by Bill. In addition, we expect to face headwinds from unfavorable lapping of contractual distributor payments and lower compensation and benefits in FY '24. That said, this implies wine and spirits operating margins to contract to approximately 20% in fiscal '25 as we continue to navigate category headwinds and reset investment in certain marketing and sales activities. We believe our enhanced focus on execution and planned cost savings can provide margin improvement over the medium term toward the targets outlined at our investor day in November. Corporate expense is anticipated to increase slightly as we continue to invest in the business while reducing third-party fees more broadly. We expect interest expense to be approximately $445 million to $455 million, driven by higher weighted average interest rates, and we expect our comparable effective tax rate to remain unchanged coming in at approximately 18.5%. We expect noncontrolling interest to be about $35 million and anticipated weighted average diluted shares outstanding for fiscal '25 to be around 183 million, inclusive of share repurchase activity. Based on these assumptions, we expect our reported EPS to be between $13.40 and $13.70 and our comparable EPS to be between $13.50 and $13.80, representing a 10% midpoint increase year over year. From a cash flow perspective, we expect our free cash flow in fiscal '25 to be between $1.4 billion and $1.5 billion, reflective of $2.8 billion to $3 billion of operating cash flow net of capex spend of $1.4 billion to $1.5 billion, driven primarily by the expansions of our existing breweries and the ongoing construction in Veracruz. We anticipate approximately $3 billion of remaining capex spend from fiscal '25 to fiscal '28 with fiscal '25 expected to be the peak spend year as we progress with the construction of our greenfield site in Veracruz. Consistent with our investor day messaging, we expect a step-up in free cash flow that should yield cumulatively between $7 billion to $9 billion from fiscal '26 to fiscal '28. To conclude, we ended fiscal '24 with strong results driven by continued outstanding growth in our beer business as its core brands reached new milestones in cases sold and market share. Our wine and spirits business faced difficult market conditions in FY '24, but we've identified key actions to improve execution and performance. As we look ahead to fiscal '25, we are confident that we can deliver against our plan with strong enterprise results aligned with our medium-term targets, execute our capital allocation priorities, and seek to create value for our shareholders. We thank you for your ongoing support throughout fiscal '24 and look forward to updating you on our progress and success in fiscal '25. With that, Bill and I are happy to answer your questions. Questions & Answers: Operator Thank you. [Operator instructions] Our first question today comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question. So we lost that questioner.Moving on to our next questioner is coming from Nik Modi with RBC Capital Markets. Please proceed with your question. Nik Modi -- RBC Capital Markets -- Analyst Thanks. Good morning, everyone. Just two quick ones for me. Just been getting a lot of questions about gross margin and wanted to get any perspective on if there's any one-time issues that might have affected the gross margin this quarter for beer. And then the second part of that is just -- when you think about the shipments this quarter, can you give us any context on how much might have been attributable to some -- whether it be the Aguas Frescas launch into wholesale or preparing for some of the shelf easements, that would be helpful. Thank you. Garth Hankinson -- Chief Financial Officer Yeah, Nik. I'll try to address both of those. First, on the gross margins. As we laid out in our press release, we did have a bit of a write-off of a bad accrual as it relates to bad receivables in Q4. That impacted our Q4 operating margin by about 100 basis points. Obviously, that would have hit gross margin as well, and that impacted the full year by about 30 basis points, again, at the operating profit margin -- as it relates to Q4 impact of Aguas Frescas launch, very, very minimal impact, really just the strength of the portfolio more broadly is what drove Q4. Operator Thank you. The next question is come from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question. Dara Mohsenian -- Morgan Stanley -- Analyst Hey, guys. Can you hear me? Garth Hankinson -- Chief Financial Officer Second time's a charm, Dara. Dara Mohsenian -- Morgan Stanley -- Analyst OK, great. So I wanted to touch on beer depletions, the near 7% result in the quarter ex the extra day is a pretty solid result considering the weather. Can you just give us any sense for momentum so far in March and April when the weather normalized or maybe how big a drag January was in Q4? Just give us sort of a sense of underlying trends. And just on market share, you mentioned the shelf space gains being disproportionate this year post-Bud Light struggles. How much of a positive impact are you expecting from that? And can you juxtapose that versus the risk that Bud Light trends get better and you see some direct impact on your brands from that? Thanks. Bill Newlands -- Chief Executive Officer Sure. We obviously take into account our March results with our overall expectations for the year. But I'd say March was very consistent with what our expectations were. Everyone sjSKU in dollar return. And it certainly is reflective of what I'm sure all retailers are seeing and that our brands are driving the growth in the category. Operator Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question. Bryan Spillane -- Bank of America Merrill Lynch -- Analyst Good morning. So I guess just stepping back, we had this question a couple of times this morning and maybe the underlying question is just, at an enterprise level, we get back to being basically on algorithm for the year, but in a year where wine and spirits underdelivers beer -- at least in terms of growth rate on operating profit, maybe a little faster than normal, a little help from below the line on interest expense. So just is it a coincidence, right, that basically, there can be a hole with wine and spirits under delivering but there were other offsets. Or was this more a function of you all maybe making some adjustments to get to that place, whether it's pulling some savings forward or using some tax credits. So I think people are just trying to understand how much manipulation or how much work you had to do to sort of make up the difference or whether this was just a coincidence. Bill Newlands -- Chief Executive Officer No, Bryan. We don't play with the numbers. The numbers reflected very strong results in our beer business. As we've said, we've had some challenges in our wine and spirits business. As you know, we just installed a new president of our wine and spirits business whose focus will be on execution. We have a number of things in this coming year that will cause it to be a bit of a reset year at the bottom line because we're lapping a number of one-time issues, but that isn't going to stop us from delivering on the enterprisewide results that we committed to in New York and that we are reiterating today. We expect to continue to show best-in-class results. As you heard in my remarks, last year, we again were the No. 1 growth company in Circana large companies as we have been five of the last seven years, and that is what's really driving the success of our business, not anything else. Operator Our next question is from the line of Lauren Lieberman with Barclays. Please proceed with your question. Lauren Lieberman -- Barclays -- Analyst Great. Thanks. Good morning. I was just curious, you gave a lot of help and color on the wine and spirits. But I was just curious, we've heard in the industry more about -- you spoke last quarter about promotional pressures. Other manufacturers have talked about retailer destocking, seeing more inventory management at the distributor level. Just curious to hear your take on kind of the promotional environment and kind of state of the union on inventory levels within the system, knowing it's tough to have visibility within 3 tier but just curious your view on inventory in the system online. Bill Newlands -- Chief Executive Officer Yes, you bet. We did see some inventory reduction this past fiscal year, particularly in Canada. There was quite a bit of inventory realignment in Canada. And certainly, there has been some that we've seen in the U.S. as well. The thing that I think is important for us to continue to focus on is we've made a number of changes. We're going to focus on those 11 brands that are really the biggest drivers of our success. That's a bit of a change. Frankly, we'd probably peanut buttered our efforts a little too broadly in the past, and we're going to focus on those brands that we believe have real growth potential for the long term. We're also going to do a bit more promotional spend than we have in the past, particularly on brands like Woodbridge, where that's an important part of the consumer dynamic. A lot of work and research has been done in the last few months to make sure that we understand all of the consumer dynamics around our critical brands, and we will execute against those dynamics in this coming year. And I think that's reflective of an improved pipeline that you see this year, acknowledging there'll be a bit of a reset at the bottom line. Operator Next question is from the line of Chris Carey with Wells Fargo Securities. Please proceed with your question Chris Carey -- Wells Fargo Securities -- Analyst Hi. Good morning, everyone. So Garth, thank you for all the perspective on expectations around your margins for the full year. Can you just perhaps expand a little bit on what specifically is driving the commodity input inflation, number one? And then secondly, if I put all this together, it does feel like maybe there's a little bit of top-line leverage you're expecting or you need a little bit more savings on the G&A line to get to the low double-digit number for the full year in the division. So maybe just help provide any context on that. So thanks on the commodities and maybe just some of the assumptions on how you're getting to the operating profit number for the full year. Thanks so much. Garth Hankinson -- Chief Financial Officer Yeah. So just as it relates to margins for beer, I think that -- first of all, I think we have to acknowledge that if you look at the past two years and you look at the disruption we saw to global supply chains and then the elevated inflation environment that we've been dealing with that the improved margins starting in the back half of our fiscal '24 and then moving forward with significant margin expansion in FY '25 to get near the low end of our target range, I think that that's no small feat. As we look forward to FY '25, we're going to face similar tailwinds and headwinds that we have for the last several years. The tailwinds, again, will be volumetric growth given the strength of our brands, as well as the -- our typical pricing algorithm. Some of the issues that we'll face or headwinds that we'll face is that while commodity prices have certainly abated from their highs, they're certainly sort of higher still than their historical norms or near-term historical norms. And there have been a couple of commodities that have been a bit resilient in their strength, if you will, or haven't come down nearly as much as we would have hoped. So we still face those. In addition, we have the strength of the peso, which is something that we're going to continue to manage through. Fortunately, we're hedged as we enter the year against the peso at about 80%. So we're going to manage that effectively. And as you've heard us talk about extensively, both on this call and investor day, we have this year as well as have had last year an aggressive set of cost savings initiatives that will help benefit the business. So all in, I mean, we think that there is fairly significant margin expansion here, margin growth in FY '25 as we move toward getting closer to our midterm growth algorithm -- or midterm margin algorithm. Operator Our next question is from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question Kaumil Gajrawala -- Jefferies -- Analyst Just one quick follow-up on the shelf space question. You've gained a lot of shelf space already. Can you maybe just give us a sense of how much incremental space do you expect as we think about this spring? And then secondly, it looks like the strategic or I guess the valuation on wine and spirits is complete. To what degree did you consider divestments as part of it, either for pieces of that business or maybe even for the whole thing? Bill Newlands -- Chief Executive Officer Sure. As I stated, Kaumil in my primary remarks, low double-digit shelf space is what we expected to get, and that's, in fact, what we are getting in spring resets. Obviously, it varies all over the map depending, but that's roughly what the total number is in the aggregate. And again, that's at least as much as we expected. We're very pleased with where that landed. Relative to the wine and spirits business, we've made this comment a number of times. The person that drinks across all three categories, beer, wine, and spirits spend six times as much as an individual that drinks only in one of those three categories. Therefore, we continue to feel that that's important that we are accessing significant additional consumer occasions and consumer spending by being able to play in all three of those categories. Operator Our next question is from the line of Nadine Sarwat with Bernstein. Please proceed with your question. Nadine Sarwat -- AllianceBernstein -- Analyst Two interrelated questions from me. First, you obviously posted very robust beer volume growth this quarter. What are you seeing in terms of the health of the U.S. consumer today? Any signs of down trading or shift in behavior? And then the second question also on the consumer. Some of your industry peers have highlighted dry January being more meaningful headwind this year. Other commentators are calling out different drinking patterns among younger legal drinking age consumers. So I'd be really curious to hear what you are observing when it comes to these trends, any changes in behavior from the consumer. Bill Newlands -- Chief Executive Officer Sure, Nadine. We're very pleased with the health of our consumer. We've said many, many times, the brand loyalty that we have within our franchise is superb. And I think that's really important. I think when you put that together with the fact that -- and Garth has mentioned this on a number of occasions, we've been judicious in our pricing strategy over the last few years which is a little bit different from what some other people have done in CPG industries. But we think that's important to maintain that consumer base given the very strong loyalty that we have within our franchises. It's also important to note that the high end, which is the only place where we compete in beer continues to see an increase in buy rate. So that again speaks to the fact that the consumer continues to premiumize, and we're in the perfect position to take advantage of that particular point. Relative to any consumer changes in January and so on, one of the things that we've noted a couple of times is betterment. We've done a number of things in our wine business to bring out light or lighter products like Illuminate and Kim Crawford, and Bright in Meiomi. Similarly, our Corona nonalcoholic had a great start. It was the No. 1 share gainer in the nonalcoholic segment. And I think that does reflect some change in consumer behavior or people that are concerned about being the designated driver but still want to enjoy an outstanding tasting beer. We're going to continue to emphasize the betterment trends as we go forward with a number of our product offerings and certainly expect Corona nonalcoholic to continue to grow here in this coming fiscal year as well. Operator Our next question is from the line of Andrea Teixeira with J.P. Morgan. Please proceed with your question. Drew Levine -- JPMorgan Chase and Company -- Analyst Hey, good morning. This is Drew Levine on for Andrea. So just two for us, if we may. Just going back to one of the earlier questions, Bill, if you can comment maybe on depletion trends outside of California versus inside California during the quarter and how those progressed throughout the quarter? And then one for Garth, I think you mentioned roughly $200 million of cost savings for beer in fiscal '24. I think that implies a pretty meaningful step up in the fourth quarter. So if you could just talk about maybe some of the projects where you saw a benefit and how we should be thinking about cost savings for fiscal '25. Thank you. Bill Newlands -- Chief Executive Officer Andrea, your voice got a lot lower since the last time you asked the question. All joking aside, our trends were very, very strong, really across the country. A significant place -- let me use Pacifico, as an example, the depletions across that brand for the year were up 17%. And obviously, the big stronghold is California. Modelo Especial continues to be the No. 1 brand in the state of California. But we're also seeing really good success across the country, places like Texas and Florida. And secondary markets, we've always said secondary markets are going to be an important element for us and many, many, many of those showed double-digit increases over this past year. So we were very pleased to see a broad-based growth profile for our business as we closed out the year, and we think we're in a position to continue to do that here in fiscal '25. Garth, I think the second one is for you. Garth Hankinson -- Chief Financial Officer Just on the roughly $25 million of cost savings that came out of the beer business throughout the year, yes, that ramped up throughout the year. We started right out of the gate very strong in Q1. And again, that ramped up as we went through the year. The ramp up as we went through the year really based on two factors. One is we identified or put in place new initiatives throughout the year, but then you also benefited from almost from a compounding perspective for those things that started earlier in the year as well. The kinds of initiatives that we undertook last year were procurement-related in terms of various RFPs around raw materials where we're able to address some of the outsized increases that we saw over the last two years due to global supply chain disruptions, as well as the inflationary environment. There was a number of logistics initiatives in terms of railcars and double stacking and also a number of operational initiatives that were underway. Operator Thank you. Our next question is from the line of Rob Ottenstein with Evercore. Please proceed with your question. Rob Ottenstein -- Evercore ISI -- Analyst Great. Thank you very much. First, could you please just remind us what your gross dollar amount of expenses that are peso-denominated are? So that would be great. And then second, looking at the scanner data, and this is Circana, your price mix has been well below the beer category over the last four, 12 weeks or so. So I'm trying to understand why that's the case. And most of the other players took pricing kind of before or after the Super Bowl. And what is the timing on your price increases this year? And again, why is your apparent realization in the scanner data less than the market and most of the other big brands. Garth Hankinson -- Chief Financial Officer Yes. So on the first one, in terms of the amount of costs that are peso-denominated for our beer business is about 20% to 25% of our costs are peso-denominated. And as I said, as we enter this year, we're hedged at about 80%. Bill Newlands -- Chief Executive Officer And relative to price realization, as you know, a lot of what you see in these types of things depends on when pricing increases or pricing actions were taken. We consistently have said 1% to 2% is our pricing algorithm. And over the course of the whole year, we're still expecting to see 1% to 2% pricing actions. As you also know, Robert, we do that on a SKU-by-SKU market-by-market basis, and therefore, you have reflections in different time frames across the year as to when that actually shows up. I don't think that's anything that we are concerned about or any kind of an ongoing trend. And as we said, over the course of the year, we'll expect to get 1% to 2% as we've communicated we would. Operator Our next question is from the line of Filippo Falorni with Citi. Please proceed with your question. Filippo Falorni -- Citi -- Analyst Hey, good morning, everyone. I had a question on the overall beer industry and your thoughts as we are about to cycle the big market share shift with the controversy around Bud Light in April of last year. Clearly, your business was growing at this rate well above before this controversy, but there are some concerns that you might have benefited from the market share shift. So maybe you can address some of the impact that you see on your business and how you're thinking about it as we start to cycle those impacts? Thank you. Bill Newlands -- Chief Executive Officer Well, as we've said right along, we probably were not the single biggest gainer as it related to the controversy that you know. But I'd also, again, continue to point out something I said earlier, which is we've got extraordinarily strong brand loyalty and we only play in the high end. The high end is where the growth in the category is at the moment. And we're fortunate that that's exactly where we play. When you add in the fact that we've seen a significant increase in our share growth in our shelf presence here during this spring reset program, we think we're in a great position, recognized we are coming off the single biggest share gain in the history of Constellation Brands beer business, 2 points an all total beer and 2.6 points in the high end. It's an unprecedented gain, and I think it reflects the sheer strength of our brands. Operator Thank you. The next question is from the line of Gerald Pascarelli with Wedbush Securities. Please proceed with your question. Gerald Pascarelli -- Wedbush Securities -- Analyst Great. Thanks very much. Just going back to wine, Bill, the drivers you laid out in your prepared remarks were very helpful. But based on current trends, I think the outlook for the year came in above expectations, definitely above our expectations. So I guess in the context of 2 guide downs last year, if you could maybe provide some more commentary just on your level of confidence this early in the fiscal year in achieving flat revenue performance, that would be great. And then does your outlook embed the assumption that the wine category will ultimately start to improve from current levels this year? Bill Newlands -- Chief Executive Officer I think, obviously, Garth and I spent a lot of time with our wine colleagues over the last few months, looking carefully at what we thought was critically important. The reflection of an improved performance has several variables involved. One, we're going to work much more closely and enhance our sales capabilities to support our distributor network. I think we've gotten much more aligned as to what our intentions and expectations are, both from distributor to us and us to distributors than where we had been as we came out of last year. Second, we've refocused our priorities. There are 11 or so critical brands that did not probably have the right amount of prioritization within our overall portfolio, and we have radically addressed that. Third, we're going after efficiencies within the business, and we think there are those to be had. As you know, that was a tremendous success last year in our Beer business. And we're putting some of the same resources against our wine and spirits business that helped generate that very strong result last year. So there's a number of elements that we are putting in place, recognizing this is going to be a bit of a reset year, particularly at the bottom line for the wine business. However, again, we've said we think the strategy is sound. It's right. It's going to get us to our medium-term algorithms as we go forward. And at this point, it's all about execution. And I think Sam Glaetzer and the rest of the team are going to be crystal-focused on execution against our strategy. Operator Our next question is from the line of Carlos Laboy with HSBC. Please proceed with your question. Carlos Laboy -- HSBC -- Analyst Yes, good morning, everyone. Can you please expand further on the state of on-premise activity that you saw toward your end and more important currently? Bill Newlands -- Chief Executive Officer I think you saw some interesting volatility, depends on the particular time frame. And we saw some of that. We had an issue for a brief period during this year where we had some issues with kegs, which is now fully behind us. We're continuing to see strong development in the on-premise, and we're particularly excited about it heading into Cinco, which is obviously the next big time frame for us and a time frame when we historically have done very well and made significant share gains both in the retail and in the on-premise environment. So we're very optimistic that the on-premise is going to be an important part of what our results are this year. Both Modelo, Corona Extra, and Pacifico are all growing share in that channel, and we expect that that continued share growth is going to continue in this fiscal year. Operator Thank you. At this time, we've reached the end of the question-and-answer session, and I'll hand the floor back to Bill Newlands for closing remarks. Bill Newlands -- Chief Executive Officer Thank you, Rob, and thank you to all who joined today's call. As we wrap up, I want to once again thank our colleagues across Constellation, as well as our trade partners for delivering another strong year of performance in fiscal '24. Your continued focus and discipline has made Constellation a top-performing growth leader among CPG companies for 11 consecutive years. No other company in recent times can say that, and we're extremely proud of this achievement. As we head into fiscal '25, we're confident in our ability to further build on our momentum and to create additional shareholder value by delivering low double-digit EPS growth fueled primarily by our beer business, which we expect to generate high single-digit net sales growth and best-in-class operating margins, heightened focus on our commercial and operational execution in our wine and spirits business while maintaining our disciplined approach to capital allocation and continuing to serve as good stewards of our environment and the communities where we operate. As we approach the key summer selling season, we invite you to enjoy some of our great-tasting products as part of your festivities, and we look forward to speaking with you again on our next quarterly call. Thank you very much, and have a good day, everybody. Answer:

the Constellation Brands fiscal-year 2024 fourth quarter full-year earnings call

Operator Good day, and welcome to the Constellation Brands fiscal-year 2024 fourth quarter full-year earnings call. [Operator instructions] As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Snehal Shah, director of investor relations. Mr. Shah, you may now begin. Snehal Shah -- Director, Investor Relations Thank you, Rob. Good morning, all, and welcome to Constellation Brands' year-end fiscal 2024 earnings conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in today's news release or otherwise available on the company's website at www.cbrands.com. Please note, when we discuss comparable earnings per share figures for fiscal 2024 and prior fiscal years, we are referring to earnings per share on a comparable basis, excluding Canopy equity and earnings, unless otherwise noted. Please refer to the news release and Constellation's SEC filings for risk factors which may impact forward-looking statements made on this call. Following the call, we will also be making available in the Investors section of our company's website a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time today. Thanks in advance, and now here's Bill. Bill Newlands -- Chief Executive Officer Thanks, Snehal, and good morning, everyone. Welcome to our fiscal '24 year-end earnings call. As usual, I'd like to start with a few headlines from this past fiscal year. First, I'm pleased to report that we delivered another year of strong performance in fiscal '24. We drove comparable earnings-per-share growth of nearly 9% and remain focused on achieving our stated medium-term target of low double-digit comparable EPS growth moving forward. This growth was supported by a net sales increase of 5% at an enterprise level and solid operating leverage that resulted in an increase of 7% in comparable operating income, representing an enterprise-comparable operating margin of nearly 33%. This performance once again yielded recognition for Constellation Brands as the No. 1 growth leader among large CPG companies by Circana in calendar year '23 as we have been five of the last seven years. We are the only CPG company of scale to make their top 10 ranking for 11 consecutive years. Our continued strong performance and momentum heading into fiscal '25 reinforces our confidence in our ability to deliver against the following targets outlined at our investor day this past November, maintaining 6% to 8% enterprise net sales growth, delivering 33% to 35% enterprise comparable operating income margin and generating low double-digit comparable earnings-per-share growth, all of which we intend to achieve in fiscal '25. Second, from a segment perspective, our fiscal '24 results were largely driven by our beer business, which delivered net sales and operating income growth above 9% and 8%, respectively, both exceeding our expectations from the beginning of the year. This strong performance drove our largest dollar share gain ever for a full fiscal year, adding an impressive 2 points of dollar share within the U.S. beer category. And we achieved a significant milestone this year as Modelo Especial became the No. 1 beer in U.S. dollar sales. Furthermore, across all beverage alcohol, our beer business was the No. 1 dollar share gainer, capturing 1.1 points of share and driving nearly 70% of the total dollar growth in the sector. This was truly a remarkable achievement by our entire beer team working in concert with our distributor and retail partners as they delivered volume growth for the 14th consecutive year which is certainly another incredible differentiator among CPG companies. In our wine and spirits business, we faced a series of near-term category headwinds throughout fiscal '24 but remain confident that our strategy is sound. We recently promoted Sam Glaetzer to serve as our new president of wine and spirits. He is a well-rounded and accomplished industry veteran with nearly 30 years of experience in the wine and spirits category and a successful track record of driving commercial and operational efficiency and effectiveness. Sam also played an integral role in the implementation of the business transformation over the last few years, leading our global end-to-end supply chain optimization initiatives and building a world-class farming, winemaking, and distilling network, aligned to consumer preferences while developing a focused international route to market to deliver incremental growth for the business in the medium term. Now with the strategic transformation of our wine and spirits portfolio is largely complete, Sam is well-positioned to lead our team in driving enhanced focus on execution, and the delivery of growth and improved profitability. To that end, our wine and spirits team has identified several immediate actions to help drive improvement in our year-over-year top-line performance, which I'll discuss in more detail shortly. Third, we continue to achieve superior cash flow generation and deployed that cash in a disciplined and balanced manner underpinned by our consistent capital allocation priorities. For fiscal '24, we generated $2.8 billion in operating cash flow, and we're able to reduce our net leverage ratio by nearly 0.5 point while returning over $900 million back to our shareholders through quarterly dividends and share repurchases. We also continue to prudently invest to support the ongoing growth with total capital expenditures of nearly $1.3 billion in fiscal '24, most of which was focused on capacity additions to our beer brewing operations. And fourth, we continued to deliver against our environmental, social, and governance objectives, which I'll discuss in more detail shortly. With that as a backdrop, let's turn to a more detailed discussion of our fiscal '24 performance, starting with our beer business, which despite some challenging weather in our fourth quarter, grew depletions by 9%, resulting in our 56th consecutive quarter of depletions growth. For the full year, we continue to extend our lead as the No. 1 high-end beer supplier in the U.S., delivering top share gains across the total beer category underpinned by a nearly 14% increase in dollar sales and nearly 11% volume growth across tracked channels. And in line with our expectations, we captured low double-digit percent incremental shelf space this spring while adding another 21,000 resets through our shopper-first shelf program in fiscal '24. These factors all played a significant role in driving the growth of our beer business paired with the strength of our portfolio's iconic brands starting with Modelo Especial, which grew depletions by nearly 10% and maintained its leading position as the top share gainer, and as noted earlier, the No. 1 overall beer brand in U.S. tracked channels. Corona Extra increased depletions nearly 1% and maintained its position as the No. 3 high-end beer brand in the U.S. and Pacifico delivered depletion growth over 17% as it reached the 20 million case sold milestone and remained a top 10 share gainer across the total beer category and the No. 4 share gainer in the high end. While we continue to build on the success of our iconic brands, we are also building good traction with our focused innovations aligned with consumer-led trends of premiumization, flavor, and betterment. Our Modelo Chelada brands delivered an increase of 30% in depletions also surpassing 20 million cases sold and remained the No. 1 Chelada in the category supported by the launch of our new flavor, Sandía Picante, and new pack size offerings. We are excited to continue to build on that momentum in fiscal '25 with two new flavors, Fresa Picante and Negra con Chile. Modelo Oro's national launch established a strong foundation for the brand as it rose to become a top five share gainer across the total beer category and the No. 3 share gainer in the high end with just two SKUs. Given that strong reception and ongoing consumer demand for betterment products, we are launching two more Modelo Oro SKUs in fiscal '25, an 18 pack and a 24 pack. Staying within the Modelo brand family, our new Aguas Frescas variety pack secured the No. 1 new FMB spot in its test market of Nevada. So on fiscal '25, we will be expanding its rollout to another 20 markets for this authentic liquid aligned with consumer-led flavor trends and featuring our project, our nitro technology. In our Corona brand family, we introduced Corona nonalcoholic, which is the leading dollar share gainer in the fast-growing nonalcoholic beer segment. As for fiscal '25, we are testing Corona Sunbrew in select Eastern markets. This new refreshing beer is brewed with real citrus peels and a splash of real citrus juice. The strong execution of our beer business in fiscal '24 was also reflected in our ability to maintain best-in-class margins by combating trailing inflation headwinds with cost savings and efficiency initiatives. We also continued to invest in our beer business in fiscal '24, deploying approximately $950 million in capital expenditures, supporting our ability to meet the continued robust demand we see for our brands through the expansion of our beer brewing capacity at Nava and Obregon and the ongoing work at our new Veracruz site. Looking ahead to fiscal '25 and in line with the plan we laid out at our investor day in November, we expect our beer business to remain within our net sales growth algorithm of 7% to 9% and for operating margins to gradually improve, supported by our operating income growth of 10% to 12%. Moving on to wine and spirits. Due largely to the challenging market dynamics referenced earlier, our wine and spirits business saw declines of approximately 8% for both organic net sales and operating income but still landed within our revised guidance range. While we do not expect ongoing challenges in the wine and spirits category to immediately subside, particularly in the mainstream and premium price segments, we have identified several areas to improve the performance of our wine and spirits business in fiscal '25, including, but not limited to, refocusing our efforts within our premium and above brands to more consistently drive growth in our most scaled and central offerings, notably in Crawford, Meiomi, The Prisoner, High West, and Mi Campo while accelerating additional tactical investments to revitalize the equity and support demand for our largest mainstream brand, Woodbridge, and ensuring that we continue to support the transformation of other significant brands in our portfolio, such as SVEDKA, Vint by Robert Mondavi, Ruffino, and Lumina. Note that these 11 brands represent three-quarters of net sales and over 80% of volumes for our wine and spirits business in fiscal '24, which is why we plan to provide more focus and investment for them. Another key area we are focused on is aligning with our U.S. wholesale distributor partners on clear priorities to help enhance our performance in our largest markets and channels. As noted in our prior call, these priorities include enhanced focus on improving mix, inventory, and sales execution. We will also be making additional investments in media spend and price promotions, as well as adjustments in our own sales capabilities, to better support the execution and go-to-market efforts of our distributor partners. And similar to our beer business, we will continue to focus more broadly on efficiency opportunities to drive operational and sales excellence across our wine and spirits segment. This will include the operational and supply chain initiatives highlighted at our investor day, as well as enhancements to the business's organizational structure to enable a more effective and competitive operating model. Looking forward to fiscal '25, we expect our wine and spirits business net sales to be relatively stable and operating income to be down 9% to 11%. While we believe the focus on sales execution I just outlined will help stabilize the top-line growth for wine and spirits, our operating income guidance reflects incremental investments in additional media spend price promotions and sales capabilities, as well as continued inflationary pressures on some cost of goods sold and lapping of distributor contractual payments and reduced incentive compensation that occurred in fiscal '24. As we noted, we remain committed to continuing to advance this business over the coming years toward the medium-term targets shared at our investor day. Moving on to capital allocation. we continue to deliver against our stated priorities and targets in fiscal '24. As noted earlier, we further strengthened our balance sheet with a reduction in our net leverage ratio, supported by our strong earnings performance and our disciplined debt management. We returned cash to shareholders and deployed most of our capital investments to brewery expansions to support the growth of our beer business, and we continue to conduct tuck-in gap-filling acquisitions that are aligned with consumer-led trends and complemented our portfolio. We also made notable progress in regards to our environmental, social, and governance ambitions in fiscal '24. From a governance perspective, our board undertook refreshment actions that resulted in the appointment of two new independent directors, each with strong financial backgrounds. We also recently announced the election of a new independent board chair, Chris Baldwin, who brings a wealth of senior leadership experience from the CPG sector. In addition, in line with our commitment to be good stewards of the environment, since we had surpassed our initial water restoration target in fiscal '23, we established a new goal of restoring more than 5 billion gallons of water to key water sheds near our operations between the time frame covering fiscal '23 and '25. This goal is designed to ensure local residents and businesses have ample supply and access to water, which is the key to building sustainable and thriving communities. Finally, we announced two new environmental commitments in fiscal '24 to reduce waste within our key operating facilities and to enhance circular packaging. So in summary, we once again achieved another strong year of performance and significant progress across our strategic initiatives in fiscal '24, and we fully expect to build on this momentum in fiscal '25. We are confident in our ability to continue to create shareholder value and deliver on our commitments, including achieving low double-digit comparable EPS growth by generating high single-digit net sales growth and delivering best-in-class margins for our beer business, managing category challenges and improving the growth trajectory of our wine and spirits business with enhanced execution and maintaining our capital allocation discipline and commitment to operate in a way that is good for business and good for the world. As I wrap up, I want to once again thank all of our colleagues across Constellation, as well as our trade partners, for their hard work and dedication in helping us deliver another year of industry-leading performance, and I believe we are well-positioned to keep that momentum going in fiscal '25. And with that, I will turn the call over to Garth, who will give more details on our financial results and outlook. Garth Hankinson -- Chief Financial Officer Thank you, Bill, and good morning, everyone. As usual, my discussion will focus mainly on our comparable P&L results, starting at an enterprise level followed by business segment detail for fiscal '24. I will then discuss our fiscal '25 outlook and expectations in the same matter. Starting with net sales. As an enterprise, we delivered growth of over 5% slightly exceeding our fiscal '24 guidance range of 4% to 5%. This was driven by the strong performance of our beer business, which grew net sales over 9%, exceeding our guidance of 8% to 9%. As Bill mentioned, our beer business had another strong year of depletion growth, a 7.5% increase as the strength of our portfolio carried throughout the entire year. Off-premise depletions grew by over 8%, which represent nearly 89% of our total depletion volume. The on-premise accounts for the balance of our depletions and grew by over 1%. We expect to build on our momentum in off-premise channels, supported by the low double-digit incremental shelf space that we captured this spring, which we foreshadowed at our investor day last November. And we continue to see opportunity to drive growth in the on-premise with new draft handles particularly from Modelo Especial and Pacifico in the coming fiscal year. I will elaborate on fiscal '25 shortly. Shipment volumes for our beer business in fiscal '24 grew 7.4%, and we achieved favorable pricing of 2%. These volume and pricing increases were partially offset by the divestiture of our craft beer business and an unfavorable shift in product mix. In aggregate, the volume, price and mix changes amounted to a nearly $700 million increase in beer net sales for fiscal '24. In regards to selling days, we had one extra sell day in the year, which occurred in Q4. This had a minimal impact on our volumes as shipments and depletions on an absolute basis were over 99% aligned for the year. For our wine and spirits business, net sales declined 9% and 8% on a reported and organic basis, respectively. The change in organic net sales for our wine and spirits business was within our lowered guidance range of a 7% to 9% decline. This decline was largely driven by unfavorable U.S. wholesale performance, particularly across our mainstream and premium brands. As Bill noted, we are working with our U.S. wholesale distributor partners to enhance performance in our largest markets and channels in fiscal '25. Additionally, in our international markets, net sales for fiscal '24 were down 7% by destocking, particularly in Canada, our largest export market. More recently, in Q4, net sales from our international markets grew 14%, largely driven by the Canadian market where inventory levels have begun to normalize. The net sales decline in our U.S. wholesale and international markets were partially offset by 10% net sales growth in our direct-to-consumer channel. Moving on to our operating income and margin. At an enterprisewide level, we delivered a 7% increase in comparable operating income at the upper end of our 6% to 7% guidance resulting in a 50-basis-point increase in comparable operating margin to 32.6%. This was driven by the strong performance of our beer business, which grew operating income by just over 8% and delivered an operating margin of 37.9%. Enterprisewide operating margins also benefited from an 11% reduction or $30 million decrease in corporate expense driven mainly by reduced third-party consulting fees related to our DBA project spend. This solid performance was partially offset by our wine and spirits results, as operating income, excluding the gross profit, less marketing of the brands that are no longer part of the business following their divestiture, declined by 8%. This decline was within our lowered guidance range of a 6% to 8% decline, resulting in a flat year-over-year operating margin of 22.2%. Elaborating on the margin puts and takes in more detail, starting with the beer business. The increase in operating income and slight 40-basis-point decrease in operating margin were reflective of an absolute increase of approximately 12% in overall COGS. This increase in COGS includes the impact of increased volume and the nearly $205 million from cost savings initiatives realized in fiscal '24. By COGS component and on an absolute basis, inclusive of both volume growth and cost savings, year-over-year changes were as follows: Raw materials and packaging represented the midpoint of 55% to 60% of total COGS and had an absolute increase of 16%; Logistics, making up just over 20% of total COGS, increased 3% as a large portion of the benefits from our cost savings agenda came from this area; Labor and overhead landed at just under 15% of total COGS and increased 19% attributable to the construction activities at our Veracruz brewery; and the remaining portion of total COGS depreciation increased approximately $37 million, representing the incremental capacity that was brought online in fiscal '24. Moving on to marketing. Our dollar spend increased by approximately 2% year over year. As a percent of fiscal '24 net sales, marketing was approximately 8.5%, coming in slightly below our medium-term 9% algorithm, partly driven by the divestiture of our craft beer brands and efficiencies from the transition to our new media agency. Lastly, SG&A, which represented approximately 5% of net sales increased approximately 8%, driven by the unfavorable impact of foreign currency and increased compensation and benefits. These increases were partially offset by benefits from the craft beer divestiture and lower legal fees. Moving on. Our wine and spirits business operating income margin, excluding the gross profit, less marketing of the brands that are no longer part of the business following last year's divestiture remained flat year over year as the volume decline and unfavorable channel mix were offset by favorability in our COGS, driven by nearly $40 million coming from our cost savings initiatives, favorable pricing, reduced other SG&A expenses and a reduction in marketing expense. Interest expense for fiscal '24 was about $435 million, a 9% increase from prior year, driven by higher average borrowings and weighted average interest rates. We ended fiscal '24 with our comparable net leverage ratio, excluding Canopy equity and earnings of 3.2 times, leaving us well-positioned to achieve our target of approximately three times in fiscal '25. Our comparable effective tax rate, excluding Canopy equity and earnings, was 18.5% versus 19.2% last year. Comparable EPS for fiscal '24, excluding Canopy equity and earnings, grew nearly 9% year over year to $12.38 and came in above our guidance range of $12 to $12.20. Moving to fiscal '24 free cash flow, which we define as net cash provided by operating activities less capex. We generated free cash flow slightly over $1.5 billion, exceeding our $1.4 billion to $1.5 billion guidance range. Free cash flow decreased 12% year over year, driven by a 23% increase in capex investments attributable to our expansions at our existing facilities and the ongoing construction of our new brewery in Veracruz. In fiscal '24, we increased our total nominal capacity from our Mexico brewery operations from 42 million hectoliters to approximately 48 million hectoliters as a result of the modular expansions brought online over the summer that were fully ramped by year end, along with unlocked incremental capacity through our optimization initiatives. Consistent with our capital allocation priorities, we once again delivered cash returns to our shareholders with over $900 million of expenditures in dividends and share repurchases. In addition, we executed portfolio gap filling transactions, encompassing both a tuck-in acquisition of a female and Black-founded luxury wine brand with a successful track record and a venture investment in the high-growth nonalcoholic space in fiscal '24. With that, let me now step through our outlook for fiscal '25, starting with net sales. We are targeting our enterprisewide net sales to grow 6% to 7%, inclusive of a 7% to 9% growth target for our beer business and a 0.5% decline to 0.5% growth in net sales for our wine and spirits business. The beer top-line outlook is expected to be primarily achieved by continued strong volume growth of our portfolio. Again, we expect this to come from distribution of our largest brands bolstered by spring shelf reset gains, the health and continued support of our consumers and innovation in the form of brand extensions, new-to-world products, and new pack sizes. Regarding beer volumes. We anticipate fiscal '25 shipments and depletions to track closely on an absolute basis, consistent with prior years. Similarly, we expect the cadence of our shipments and depletions in terms of share of annual volumes from a quarter and a half year perspective to be fairly in line with fiscal '24. For wine and spirits net sales, we expect to largely offset ongoing category headwinds as we drive the sales and marketing execution initiatives described by Bill earlier. Additionally, we expect mix-related benefits due to the better performance in our higher-end brands. That said, we continue to anticipate overall volume growth to remain challenged, particularly due to demand headwinds in the mainstream and premium price segments, which account for a major part of our volumes. Furthermore, from a net sales perspective, we are expecting unfavorable lapping of bulk sales through fiscal '24. From a cadence perspective, we also expect quarterly and half-yearly shipments and depletion shares of the full-year total to be fairly aligned with fiscal '24. For fiscal '25 operating income, we expect comparable enterprisewide growth between 8% and 10%, reflecting 10% to 12% operating income growth for our beer business, a 9% to 11% operating income decline for our wine and spirits business and a slight increase in corporate expense to approximately $260 million. For our beer business, we anticipate operating income tailwinds from volume growth and favorable pricing. We expect these tailwinds will be partially offset by continued input cost inflation with an absolute increase in COGS, inclusive of volume growth, cost savings initiatives and our multiyear hedging actions in the high single digits. We expect the following percent of total COGS and absolute increases across each component. For packaging and raw materials to account for 55% to 60% and increase mid- to high single digits. Logistics to make up approximately 20% and increased mid-single digits. Labor and overhead to be approximately 15%, an increase in the high teens primarily driven by merit salary increases given the strong operational performance from the business and incremental headcount, primarily at our Veracruz brewery as we continue with construction. And the remainder of COGS depreciation with a mid-single-digit increase, which approximately equates to a $20 million step-up which is slightly lower than recent years given prior depreciation of the packaging line of the ABA facility that was operational throughout all of fiscal '24. Outside of COGS, we expect marketing expense as a percent of net sales to be approximately 8.5%, which is lower than our unchanged medium-term algorithm of 9%. The change of marketing expense as a percent of net sales for fiscal '25 is driven by a shift in our marketing investment allocation with an overall focus on maximizing value. The investment shift is geared toward prioritizing our largest brands to support their continued momentum followed by our high-growth potential next wave brands and then thoughtful and deliberate investments to support our innovation pipeline. And savings driven by efficiencies from our new media agency partnership announced in Q3 of fiscal '24. Rounding out beer operating margin drivers, we anticipate SG&A as a percent of net sales to be approximately 5%, in line with the medium-term algorithm we provided during our investor day. All in, this implies beer operating margins of approximately 39% as our beer business continues to generate best-in-class operating margins and year-over-year improvement as we close in on our medium-term targets. For our wine and spirits business, operating income, we anticipate an overall COGS increase of mid- to high single digits, driven by less favorable fixed cost absorption as a result of lower volumes and higher seller overhead and blend costs partially offset by favorability in logistics and packaging costs as part of our cost savings initiatives. For marketing and other SG&A expense as a percent of net sales, we anticipate 9% and 10%, respectively, each slightly above our medium-term outlook, driven by the adjustments to our marketing, pricing, and sales investments to drive top-line growth and partially offset by organizational structure changes, both points previously referenced by Bill. In addition, we expect to face headwinds from unfavorable lapping of contractual distributor payments and lower compensation and benefits in FY '24. That said, this implies wine and spirits operating margins to contract to approximately 20% in fiscal '25 as we continue to navigate category headwinds and reset investment in certain marketing and sales activities. We believe our enhanced focus on execution and planned cost savings can provide margin improvement over the medium term toward the targets outlined at our investor day in November. Corporate expense is anticipated to increase slightly as we continue to invest in the business while reducing third-party fees more broadly. We expect interest expense to be approximately $445 million to $455 million, driven by higher weighted average interest rates, and we expect our comparable effective tax rate to remain unchanged coming in at approximately 18.5%. We expect noncontrolling interest to be about $35 million and anticipated weighted average diluted shares outstanding for fiscal '25 to be around 183 million, inclusive of share repurchase activity. Based on these assumptions, we expect our reported EPS to be between $13.40 and $13.70 and our comparable EPS to be between $13.50 and $13.80, representing a 10% midpoint increase year over year. From a cash flow perspective, we expect our free cash flow in fiscal '25 to be between $1.4 billion and $1.5 billion, reflective of $2.8 billion to $3 billion of operating cash flow net of capex spend of $1.4 billion to $1.5 billion, driven primarily by the expansions of our existing breweries and the ongoing construction in Veracruz. We anticipate approximately $3 billion of remaining capex spend from fiscal '25 to fiscal '28 with fiscal '25 expected to be the peak spend year as we progress with the construction of our greenfield site in Veracruz. Consistent with our investor day messaging, we expect a step-up in free cash flow that should yield cumulatively between $7 billion to $9 billion from fiscal '26 to fiscal '28. To conclude, we ended fiscal '24 with strong results driven by continued outstanding growth in our beer business as its core brands reached new milestones in cases sold and market share. Our wine and spirits business faced difficult market conditions in FY '24, but we've identified key actions to improve execution and performance. As we look ahead to fiscal '25, we are confident that we can deliver against our plan with strong enterprise results aligned with our medium-term targets, execute our capital allocation priorities, and seek to create value for our shareholders. We thank you for your ongoing support throughout fiscal '24 and look forward to updating you on our progress and success in fiscal '25. With that, Bill and I are happy to answer your questions. Questions & Answers: Operator Thank you. [Operator instructions] Our first question today comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question. So we lost that questioner.Moving on to our next questioner is coming from Nik Modi with RBC Capital Markets. Please proceed with your question. Nik Modi -- RBC Capital Markets -- Analyst Thanks. Good morning, everyone. Just two quick ones for me. Just been getting a lot of questions about gross margin and wanted to get any perspective on if there's any one-time issues that might have affected the gross margin this quarter for beer. And then the second part of that is just -- when you think about the shipments this quarter, can you give us any context on how much might have been attributable to some -- whether it be the Aguas Frescas launch into wholesale or preparing for some of the shelf easements, that would be helpful. Thank you. Garth Hankinson -- Chief Financial Officer Yeah, Nik. I'll try to address both of those. First, on the gross margins. As we laid out in our press release, we did have a bit of a write-off of a bad accrual as it relates to bad receivables in Q4. That impacted our Q4 operating margin by about 100 basis points. Obviously, that would have hit gross margin as well, and that impacted the full year by about 30 basis points, again, at the operating profit margin -- as it relates to Q4 impact of Aguas Frescas launch, very, very minimal impact, really just the strength of the portfolio more broadly is what drove Q4. Operator Thank you. The next question is come from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question. Dara Mohsenian -- Morgan Stanley -- Analyst Hey, guys. Can you hear me? Garth Hankinson -- Chief Financial Officer Second time's a charm, Dara. Dara Mohsenian -- Morgan Stanley -- Analyst OK, great. So I wanted to touch on beer depletions, the near 7% result in the quarter ex the extra day is a pretty solid result considering the weather. Can you just give us any sense for momentum so far in March and April when the weather normalized or maybe how big a drag January was in Q4? Just give us sort of a sense of underlying trends. And just on market share, you mentioned the shelf space gains being disproportionate this year post-Bud Light struggles. How much of a positive impact are you expecting from that? And can you juxtapose that versus the risk that Bud Light trends get better and you see some direct impact on your brands from that? Thanks. Bill Newlands -- Chief Executive Officer Sure. We obviously take into account our March results with our overall expectations for the year. But I'd say March was very consistent with what our expectations were. Everyone sjSKU in dollar return. And it certainly is reflective of what I'm sure all retailers are seeing and that our brands are driving the growth in the category. Operator Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question. Bryan Spillane -- Bank of America Merrill Lynch -- Analyst Good morning. So I guess just stepping back, we had this question a couple of times this morning and maybe the underlying question is just, at an enterprise level, we get back to being basically on algorithm for the year, but in a year where wine and spirits underdelivers beer -- at least in terms of growth rate on operating profit, maybe a little faster than normal, a little help from below the line on interest expense. So just is it a coincidence, right, that basically, there can be a hole with wine and spirits under delivering but there were other offsets. Or was this more a function of you all maybe making some adjustments to get to that place, whether it's pulling some savings forward or using some tax credits. So I think people are just trying to understand how much manipulation or how much work you had to do to sort of make up the difference or whether this was just a coincidence. Bill Newlands -- Chief Executive Officer No, Bryan. We don't play with the numbers. The numbers reflected very strong results in our beer business. As we've said, we've had some challenges in our wine and spirits business. As you know, we just installed a new president of our wine and spirits business whose focus will be on execution. We have a number of things in this coming year that will cause it to be a bit of a reset year at the bottom line because we're lapping a number of one-time issues, but that isn't going to stop us from delivering on the enterprisewide results that we committed to in New York and that we are reiterating today. We expect to continue to show best-in-class results. As you heard in my remarks, last year, we again were the No. 1 growth company in Circana large companies as we have been five of the last seven years, and that is what's really driving the success of our business, not anything else. Operator Our next question is from the line of Lauren Lieberman with Barclays. Please proceed with your question. Lauren Lieberman -- Barclays -- Analyst Great. Thanks. Good morning. I was just curious, you gave a lot of help and color on the wine and spirits. But I was just curious, we've heard in the industry more about -- you spoke last quarter about promotional pressures. Other manufacturers have talked about retailer destocking, seeing more inventory management at the distributor level. Just curious to hear your take on kind of the promotional environment and kind of state of the union on inventory levels within the system, knowing it's tough to have visibility within 3 tier but just curious your view on inventory in the system online. Bill Newlands -- Chief Executive Officer Yes, you bet. We did see some inventory reduction this past fiscal year, particularly in Canada. There was quite a bit of inventory realignment in Canada. And certainly, there has been some that we've seen in the U.S. as well. The thing that I think is important for us to continue to focus on is we've made a number of changes. We're going to focus on those 11 brands that are really the biggest drivers of our success. That's a bit of a change. Frankly, we'd probably peanut buttered our efforts a little too broadly in the past, and we're going to focus on those brands that we believe have real growth potential for the long term. We're also going to do a bit more promotional spend than we have in the past, particularly on brands like Woodbridge, where that's an important part of the consumer dynamic. A lot of work and research has been done in the last few months to make sure that we understand all of the consumer dynamics around our critical brands, and we will execute against those dynamics in this coming year. And I think that's reflective of an improved pipeline that you see this year, acknowledging there'll be a bit of a reset at the bottom line. Operator Next question is from the line of Chris Carey with Wells Fargo Securities. Please proceed with your question Chris Carey -- Wells Fargo Securities -- Analyst Hi. Good morning, everyone. So Garth, thank you for all the perspective on expectations around your margins for the full year. Can you just perhaps expand a little bit on what specifically is driving the commodity input inflation, number one? And then secondly, if I put all this together, it does feel like maybe there's a little bit of top-line leverage you're expecting or you need a little bit more savings on the G&A line to get to the low double-digit number for the full year in the division. So maybe just help provide any context on that. So thanks on the commodities and maybe just some of the assumptions on how you're getting to the operating profit number for the full year. Thanks so much. Garth Hankinson -- Chief Financial Officer Yeah. So just as it relates to margins for beer, I think that -- first of all, I think we have to acknowledge that if you look at the past two years and you look at the disruption we saw to global supply chains and then the elevated inflation environment that we've been dealing with that the improved margins starting in the back half of our fiscal '24 and then moving forward with significant margin expansion in FY '25 to get near the low end of our target range, I think that that's no small feat. As we look forward to FY '25, we're going to face similar tailwinds and headwinds that we have for the last several years. The tailwinds, again, will be volumetric growth given the strength of our brands, as well as the -- our typical pricing algorithm. Some of the issues that we'll face or headwinds that we'll face is that while commodity prices have certainly abated from their highs, they're certainly sort of higher still than their historical norms or near-term historical norms. And there have been a couple of commodities that have been a bit resilient in their strength, if you will, or haven't come down nearly as much as we would have hoped. So we still face those. In addition, we have the strength of the peso, which is something that we're going to continue to manage through. Fortunately, we're hedged as we enter the year against the peso at about 80%. So we're going to manage that effectively. And as you've heard us talk about extensively, both on this call and investor day, we have this year as well as have had last year an aggressive set of cost savings initiatives that will help benefit the business. So all in, I mean, we think that there is fairly significant margin expansion here, margin growth in FY '25 as we move toward getting closer to our midterm growth algorithm -- or midterm margin algorithm. Operator Our next question is from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question Kaumil Gajrawala -- Jefferies -- Analyst Just one quick follow-up on the shelf space question. You've gained a lot of shelf space already. Can you maybe just give us a sense of how much incremental space do you expect as we think about this spring? And then secondly, it looks like the strategic or I guess the valuation on wine and spirits is complete. To what degree did you consider divestments as part of it, either for pieces of that business or maybe even for the whole thing? Bill Newlands -- Chief Executive Officer Sure. As I stated, Kaumil in my primary remarks, low double-digit shelf space is what we expected to get, and that's, in fact, what we are getting in spring resets. Obviously, it varies all over the map depending, but that's roughly what the total number is in the aggregate. And again, that's at least as much as we expected. We're very pleased with where that landed. Relative to the wine and spirits business, we've made this comment a number of times. The person that drinks across all three categories, beer, wine, and spirits spend six times as much as an individual that drinks only in one of those three categories. Therefore, we continue to feel that that's important that we are accessing significant additional consumer occasions and consumer spending by being able to play in all three of those categories. Operator Our next question is from the line of Nadine Sarwat with Bernstein. Please proceed with your question. Nadine Sarwat -- AllianceBernstein -- Analyst Two interrelated questions from me. First, you obviously posted very robust beer volume growth this quarter. What are you seeing in terms of the health of the U.S. consumer today? Any signs of down trading or shift in behavior? And then the second question also on the consumer. Some of your industry peers have highlighted dry January being more meaningful headwind this year. Other commentators are calling out different drinking patterns among younger legal drinking age consumers. So I'd be really curious to hear what you are observing when it comes to these trends, any changes in behavior from the consumer. Bill Newlands -- Chief Executive Officer Sure, Nadine. We're very pleased with the health of our consumer. We've said many, many times, the brand loyalty that we have within our franchise is superb. And I think that's really important. I think when you put that together with the fact that -- and Garth has mentioned this on a number of occasions, we've been judicious in our pricing strategy over the last few years which is a little bit different from what some other people have done in CPG industries. But we think that's important to maintain that consumer base given the very strong loyalty that we have within our franchises. It's also important to note that the high end, which is the only place where we compete in beer continues to see an increase in buy rate. So that again speaks to the fact that the consumer continues to premiumize, and we're in the perfect position to take advantage of that particular point. Relative to any consumer changes in January and so on, one of the things that we've noted a couple of times is betterment. We've done a number of things in our wine business to bring out light or lighter products like Illuminate and Kim Crawford, and Bright in Meiomi. Similarly, our Corona nonalcoholic had a great start. It was the No. 1 share gainer in the nonalcoholic segment. And I think that does reflect some change in consumer behavior or people that are concerned about being the designated driver but still want to enjoy an outstanding tasting beer. We're going to continue to emphasize the betterment trends as we go forward with a number of our product offerings and certainly expect Corona nonalcoholic to continue to grow here in this coming fiscal year as well. Operator Our next question is from the line of Andrea Teixeira with J.P. Morgan. Please proceed with your question. Drew Levine -- JPMorgan Chase and Company -- Analyst Hey, good morning. This is Drew Levine on for Andrea. So just two for us, if we may. Just going back to one of the earlier questions, Bill, if you can comment maybe on depletion trends outside of California versus inside California during the quarter and how those progressed throughout the quarter? And then one for Garth, I think you mentioned roughly $200 million of cost savings for beer in fiscal '24. I think that implies a pretty meaningful step up in the fourth quarter. So if you could just talk about maybe some of the projects where you saw a benefit and how we should be thinking about cost savings for fiscal '25. Thank you. Bill Newlands -- Chief Executive Officer Andrea, your voice got a lot lower since the last time you asked the question. All joking aside, our trends were very, very strong, really across the country. A significant place -- let me use Pacifico, as an example, the depletions across that brand for the year were up 17%. And obviously, the big stronghold is California. Modelo Especial continues to be the No. 1 brand in the state of California. But we're also seeing really good success across the country, places like Texas and Florida. And secondary markets, we've always said secondary markets are going to be an important element for us and many, many, many of those showed double-digit increases over this past year. So we were very pleased to see a broad-based growth profile for our business as we closed out the year, and we think we're in a position to continue to do that here in fiscal '25. Garth, I think the second one is for you. Garth Hankinson -- Chief Financial Officer Just on the roughly $25 million of cost savings that came out of the beer business throughout the year, yes, that ramped up throughout the year. We started right out of the gate very strong in Q1. And again, that ramped up as we went through the year. The ramp up as we went through the year really based on two factors. One is we identified or put in place new initiatives throughout the year, but then you also benefited from almost from a compounding perspective for those things that started earlier in the year as well. The kinds of initiatives that we undertook last year were procurement-related in terms of various RFPs around raw materials where we're able to address some of the outsized increases that we saw over the last two years due to global supply chain disruptions, as well as the inflationary environment. There was a number of logistics initiatives in terms of railcars and double stacking and also a number of operational initiatives that were underway. Operator Thank you. Our next question is from the line of Rob Ottenstein with Evercore. Please proceed with your question. Rob Ottenstein -- Evercore ISI -- Analyst Great. Thank you very much. First, could you please just remind us what your gross dollar amount of expenses that are peso-denominated are? So that would be great. And then second, looking at the scanner data, and this is Circana, your price mix has been well below the beer category over the last four, 12 weeks or so. So I'm trying to understand why that's the case. And most of the other players took pricing kind of before or after the Super Bowl. And what is the timing on your price increases this year? And again, why is your apparent realization in the scanner data less than the market and most of the other big brands. Garth Hankinson -- Chief Financial Officer Yes. So on the first one, in terms of the amount of costs that are peso-denominated for our beer business is about 20% to 25% of our costs are peso-denominated. And as I said, as we enter this year, we're hedged at about 80%. Bill Newlands -- Chief Executive Officer And relative to price realization, as you know, a lot of what you see in these types of things depends on when pricing increases or pricing actions were taken. We consistently have said 1% to 2% is our pricing algorithm. And over the course of the whole year, we're still expecting to see 1% to 2% pricing actions. As you also know, Robert, we do that on a SKU-by-SKU market-by-market basis, and therefore, you have reflections in different time frames across the year as to when that actually shows up. I don't think that's anything that we are concerned about or any kind of an ongoing trend. And as we said, over the course of the year, we'll expect to get 1% to 2% as we've communicated we would. Operator Our next question is from the line of Filippo Falorni with Citi. Please proceed with your question. Filippo Falorni -- Citi -- Analyst Hey, good morning, everyone. I had a question on the overall beer industry and your thoughts as we are about to cycle the big market share shift with the controversy around Bud Light in April of last year. Clearly, your business was growing at this rate well above before this controversy, but there are some concerns that you might have benefited from the market share shift. So maybe you can address some of the impact that you see on your business and how you're thinking about it as we start to cycle those impacts? Thank you. Bill Newlands -- Chief Executive Officer Well, as we've said right along, we probably were not the single biggest gainer as it related to the controversy that you know. But I'd also, again, continue to point out something I said earlier, which is we've got extraordinarily strong brand loyalty and we only play in the high end. The high end is where the growth in the category is at the moment. And we're fortunate that that's exactly where we play. When you add in the fact that we've seen a significant increase in our share growth in our shelf presence here during this spring reset program, we think we're in a great position, recognized we are coming off the single biggest share gain in the history of Constellation Brands beer business, 2 points an all total beer and 2.6 points in the high end. It's an unprecedented gain, and I think it reflects the sheer strength of our brands. Operator Thank you. The next question is from the line of Gerald Pascarelli with Wedbush Securities. Please proceed with your question. Gerald Pascarelli -- Wedbush Securities -- Analyst Great. Thanks very much. Just going back to wine, Bill, the drivers you laid out in your prepared remarks were very helpful. But based on current trends, I think the outlook for the year came in above expectations, definitely above our expectations. So I guess in the context of 2 guide downs last year, if you could maybe provide some more commentary just on your level of confidence this early in the fiscal year in achieving flat revenue performance, that would be great. And then does your outlook embed the assumption that the wine category will ultimately start to improve from current levels this year? Bill Newlands -- Chief Executive Officer I think, obviously, Garth and I spent a lot of time with our wine colleagues over the last few months, looking carefully at what we thought was critically important. The reflection of an improved performance has several variables involved. One, we're going to work much more closely and enhance our sales capabilities to support our distributor network. I think we've gotten much more aligned as to what our intentions and expectations are, both from distributor to us and us to distributors than where we had been as we came out of last year. Second, we've refocused our priorities. There are 11 or so critical brands that did not probably have the right amount of prioritization within our overall portfolio, and we have radically addressed that. Third, we're going after efficiencies within the business, and we think there are those to be had. As you know, that was a tremendous success last year in our Beer business. And we're putting some of the same resources against our wine and spirits business that helped generate that very strong result last year. So there's a number of elements that we are putting in place, recognizing this is going to be a bit of a reset year, particularly at the bottom line for the wine business. However, again, we've said we think the strategy is sound. It's right. It's going to get us to our medium-term algorithms as we go forward. And at this point, it's all about execution. And I think Sam Glaetzer and the rest of the team are going to be crystal-focused on execution against our strategy. Operator Our next question is from the line of Carlos Laboy with HSBC. Please proceed with your question. Carlos Laboy -- HSBC -- Analyst Yes, good morning, everyone. Can you please expand further on the state of on-premise activity that you saw toward your end and more important currently? Bill Newlands -- Chief Executive Officer I think you saw some interesting volatility, depends on the particular time frame. And we saw some of that. We had an issue for a brief period during this year where we had some issues with kegs, which is now fully behind us. We're continuing to see strong development in the on-premise, and we're particularly excited about it heading into Cinco, which is obviously the next big time frame for us and a time frame when we historically have done very well and made significant share gains both in the retail and in the on-premise environment. So we're very optimistic that the on-premise is going to be an important part of what our results are this year. Both Modelo, Corona Extra, and Pacifico are all growing share in that channel, and we expect that that continued share growth is going to continue in this fiscal year. Operator Thank you. At this time, we've reached the end of the question-and-answer session, and I'll hand the floor back to Bill Newlands for closing remarks. Bill Newlands -- Chief Executive Officer Thank you, Rob, and thank you to all who joined today's call. As we wrap up, I want to once again thank our colleagues across Constellation, as well as our trade partners for delivering another strong year of performance in fiscal '24. Your continued focus and discipline has made Constellation a top-performing growth leader among CPG companies for 11 consecutive years. No other company in recent times can say that, and we're extremely proud of this achievement. As we head into fiscal '25, we're confident in our ability to further build on our momentum and to create additional shareholder value by delivering low double-digit EPS growth fueled primarily by our beer business, which we expect to generate high single-digit net sales growth and best-in-class operating margins, heightened focus on our commercial and operational execution in our wine and spirits business while maintaining our disciplined approach to capital allocation and continuing to serve as good stewards of our environment and the communities where we operate. As we approach the key summer selling season, we invite you to enjoy some of our great-tasting products as part of your festivities, and we look forward to speaking with you again on our next quarterly call. Thank you very much, and have a good day, everybody.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to the Synchrony Financial first quarter 2024 earnings conference call. Please refer to the company's investor relations website for access to their earnings materials. Please be advised that today's conference call is being recorded. Currently, all callers have been placed in a listen-only mode. There will be open questions following the conclusion of the management's prepared remarks. [Operator instructions] I will now turn the call over to Kathryn Miller, senior vice president of investor relations. Thank you. You may begin. Kathryn Miller -- Senior Vice President, Investor Relations Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast are located on our website. On the call this morning are Brian Doubles, Synchrony's president and chief executive officer; and Brian Wenzel, executive vice president and chief financial officer. I will now turn the call over to Brian Doubles. Brian Doubles -- President and Chief Executive Officer Thanks Kathryn, and good morning, everyone. Today's Synchrony reported strong first quarter results, including the successful completion of two previously announced transactions, the sale of our Pets Best insurance business, which generated an $802 million after-tax gain in the quarter and will extend our reach in the rapidly growing pet industry through a minority interest in international pet holdings we received as part of that sale and the acquisition of Ally Lending's $2.2 billion point-of-sale financing business, which will augment the existing offerings in our home and auto and health and wellness sales platforms. Together, these transactions expand Synchrony's differentiated offerings in the market and strengthen our position as the partner of choice as we drive long-term value for our many stakeholders. Excluding the impact of the Pets Best gain on sale, Synchrony delivered adjusted first quarter net earnings of $491 million or $1.18 per diluted share, a return on average assets of 1.7% and a return on tangible common equity of 16.8%. This performance highlights the resiliency of Synchrony's earnings power over time as we deliver results while positioning the business for strong risk-adjusted growth ahead. Our differentiated model enables us to assess and react quickly through cycles and environments as our broad product suite, compelling value proposition, and innovative technology continue to resonate with both our consumers and partners. We opened 4.8 million new accounts in the first quarter and grew average active accounts by 3%. Our products and value propositions drove $42 billion in first quarter purchase volume, 2% above the prior year and our highest ever first quarter performance. Health and wellness purchase volume increased 8%, led by pet, dental, and cosmetic and reflecting broad-based growth in active accounts. In diversifying value, purchase volume increased 4% driven by spend both at our partners and outside of our partners. Digital purchase volume increased 3%, reflecting continued consumer engagement through growth in average active accounts. In home and auto, purchase volume decreased 3% as the strong growth in home specialty and auto network and the impact of the Ally Lending acquisition was offset by a combination of lower customer traffic, fewer large ticket purchases, and lower gas prices. and lifestyle purchase volume decreased 4%, reflecting the impact of lower transaction values. Dual and co-branded cards accounted for 42% of total purchase volume for the quarter and increased 6% as our value propositions continue to drive increased engagement and growth. Synchrony's out of partner spend reflects a comprehensive range of categories, industries and products and offers a deeper view into consumer behavior throughout the quarter. Spending in January was impacted by challenging weather conditions as average transaction frequencies declined 4% versus the prior year. In February and March, however, we saw a rebound, particularly in nondiscretionary categories. Overall, consumers focused on more nondiscretionary spend in the quarter and shifted out of certain discretionary categories like home furnishings, travel and entertainment. Despite the change in mix over, we continue to see broad-based growth in many discretionary and nondiscretionary categories. Across the business, Synchrony continues to see indications that nonprime borrower spend has slowed, and our portfolio's purchase volume growth continues to be driven by higher credit grade consumers. Average transaction values among super prime borrowers continue to increase. And similarly, we see average transaction frequency growth from our prime and super prime segments. The relative adjustments in consumer spend behavior generally reflect a financially healthy consumer who is continuing to become more selective in their purchases and align their cash flows. A trend which has also continued to take shape in Synchrony's credit performance. Portfolio payment rates continue to moderate and reached 15.8% for the first quarter, about 90 basis points lower than last year and about 60 basis points higher than the average payment rate level across our first quarters from 2015 to 2019. The relative pace of payment rate moderation has continued to slow from both a generational and credit grade perspective, which when combined with the spending trends we've observed reinforces our view that borrowers are generally reverting to spending and payment behaviors that are more consistent with pre-pandemic norms. These trends are also supported by a number of our other consumer financial health indicators, including a strong labor market and external deposit data that has shown relative stability across industry savings account balances. Taken together, these dynamics are contributing to Synchrony's recent delinquency performance highlighted on Slide 11, where the year-over-year rate of change has slowed as our portfolio has reached pre-pandemic ranges. The normalization and recent stabilization of our delinquency performance has occurred at a more gradual pace than the majority of our industry peers, underscoring the powerful combination of our disciplined underwriting, advanced analytics and sophisticated credit management tools. We're encouraged by these trends and continue to expect our portfolios net charge-offs to peak in the first half of this year. We continually monitor indicators across our portfolio, along with the broader industry's credit performance and continue to take credit actions to optimize our portfolio's positioning for 2024 and beyond. Synchrony utilizes a broad range of proprietary and external data, including payment behavior characteristics, billions of transactions, and credit bureau alerts to deliver actionable insights that inform our underwriting, product, and credit management strategies across the account, channel, and port levels. Our ability to leverage these insights and deliver optimized financing solutions and experiences for our customers and partners even as needs evolve and market conditions shift is what enables Synchrony to consistently deliver the outcomes that matter most for our many stakeholders and increasingly positions us as the partner of choice. To that end, Synchrony added or renewed more than 25 partners in the first quarter, including BRP and added two new technology partnerships with Adit practice management software and ServiceTitan. We are excited about our new partnership with BRP, a global leader in powersports and marine products which will enable their U.S. dealers to offer secured installment loan products for their well-known line of power sports products, including the Ski-Doo, Sea-Doo, and Can-Am on and off-road vehicles. Synchrony will deliver our financing offers with flexible terms through their online or in dealership application process, highlighting our ability to address the diverse needs and preferences of our customers. And Synchrony's strategic technology partnerships Adit practice management software and ServiceTitan each represent opportunities to drive seamless customer experiences while also expanding access to our diversified suite of financial solutions and services. Synchrony's partnership with Adit, an industry-leading dental practice management software provider will expand CareCredit access to dental practices nationwide and includes integration with Adit Tech for patients, enabling a seamless and easy-to-use experience for both patients and practitioners. Connecting patients to payment solutions at their dentist office is an essential part of ensuring their care journey is as smooth as possible and dental practices benefit from more timely and effective revenue cycle management. Similarly, Synchrony will integrate with ServiceTitan, a leading software platform built to power trades businesses, enabling contractors to offer their home improvement financing through our direct-to-device application process. By providing access to flexible financing at their fingertips, customers are empowered to make a choice that gets them closer to their goal while their contractors benefit from a frictionless sales experience. So whether we are building new relationships, or supporting and enhancing existing ones. Synchrony deeply understands what our customers need and expect and what our partners, merchants, and providers are seeking to achieve. Our ability to deliver for these stakeholders and consistently achieved strong outcomes through varying conditions demonstrates the strength of Synchrony's business model and commitment of our incredible team. And speaking of our team, in today's world, it has never been more important for us to attract and retain the best talent, which we do to our unwavering commitment to our employees and our culture. So I'm proud to share that we've been named among the top best companies to work for in the U.S. by Fortune magazine and Great Places to Work. Synchrony moved up 15 positions to No. 5 in the 2024 rankings, reflecting our unique and special culture and our relentless focus on putting people first, as we continuously strive to achieve best-in-class experiences for our many stakeholders. And with that, I'll turn the call over to Brian to discuss our financial performance in greater detail. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Brian, and good morning, everyone. Synchrony's first quarter results reflected the combination of our differentiated business model and a resilient consumer in an evolving macroeconomic environment. We generated $1.3 billion in net earnings or $3.14 per diluted share on a reported basis. Excluding the $802 million after-tax gain from the sale of our Pets Best business, we generated $491 million in net earnings or $1.18 per diluted share. Lending loan receivables grew 12% to $102 billion. This growth reflected the impacts of the continued purchase volume growth, an approximate 90-basis-point decrease in payment rate and the completion of our Ally Lending acquisition. Net revenue increased $1.6 billion or 50%, driven by the Pets Best gain on sale of approximately $1.1 billion, which was reported through other income. Excluding the Pets Best gain on sale, net revenue increased $530 million or 17%. Net interest income increased 9% to $4.4 billion, driven by 50% higher interest and fees. This growth in interest and fees reflected the combined impacts of higher loan receivables, a lower payment rate and higher benchmark rates and was partially offset by higher interest expense from benchmark rates. Partly of $764 million in the quarter were 3.04% of average loan receivables, a reduction of $153 million versus the prior year, driven by higher net charge-offs, partially offset by higher net interest income. Provision for credit losses increased to $1.9 billion, reflecting higher net charge-offs and a $299 million reserve build, which included a $190 million bill related to the acquisition of Ally Lending. Other expenses grew 8% to $1.2 billion, primarily driven by higher employee costs in support of growth and our continued investment in technology. Our efficiency ratio for the quarter excluding the impact of the gain on sale was 32.3%, an improvement of approximately 270 basis points versus last year. Next, I'll cover our key credit trends on Slide 10. At quarter end, our 30-plus frequency rate was 4.74%, compared to 3.81% in the prior year and 18 basis points above our average for the first quarter of 2017 to 2019. Our 90-plus delinquency rate was 2.42% versus 1.87% last year and 14 basis points above our average for the first quarter of 2017 to 2019. Our net charge-off rate was 6.31% in the first quarter, compared to 4.49% in the prior year, an average of 5.84% in the first quarters of 2017 to 2019. Our allowance for credit losses as a percent of loan receivables was 10.72%, up 46 basis points from the 10.26% in the fourth quarter, primarily reflecting the impact of seasonal trends. The reserve build in the quarter largely reflected the addition of the Ally Lending portfolio. As Brian discussed, Synchrony's credit performance has been consistent with our expectations. Given that Synchrony shares the consumer with our broader industry peers, we continue to monitor our portfolio and the broader industry's credit performance as we've done periodically since mid-2023, we've been taking incremental credit actions starting in March. Across specific segments of our portfolio that should reinforce our portfolio's performance for 2024 and beyond. As Slide 4 demonstrates, Synchrony has built a track record of achieving consistent, attractive risk-adjusted returns through changing market conditions. This performance has been enabled by the combination of our disciplined underwriting, which targets a 5.5% to 6% loss rate on average and RSA, which aligns program and portfolio performance. We will continue to leverage our deep consumer lending experience, our diversified product suite, sales platforms and verticals and our sophisticated data analytics and technology to further deliver on that priority. Turning to Slide 12. Synchrony's funding, capital, and liquidity continue to provide a strong foundation for our business. Our consumer bank offerings continue to resonate with our consumers as we grew deposits $2.4 billion in the first quarter. Deposits represented 84% of our total funding at quarter end, and are complemented by our securitized debt and unsecured funding strategies, which each represent 8% of our total funding. During the quarter, we issued $750 million of secured funding included a preferred stock issuance of $500 million which served to more fully optimize our capital structure. Total liquid assets and undrawn credit facilities were $24.9 billion, up $3.2 billion from last year and at quarter end represented 20.5% of total assets, up 38 basis points from last year. Moving on to our capital ratios. As a reminder, we elected to take the benefit of CECL transition rules issued by the joint federal banking agencies. Synchrony will continue to make its annual transition adjustment to our regulatory capital metrics of approximately 50 basis points each January through 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Under the CECL transition rules, we ended the first quarter with CET1 ratio of 12.6%, 40 basis points lower than last year's 13%. The net capital impact of our Pets Best sale and Ally Lending acquisition added approximately 40 basis points to our CET1 ratio. Our Tier 1 capital ratio was 13.8%, unchanged compared to last year. Our total capital ratio decreased 10 basis points to 15.8%, and our Tier 1 capital plus reserve ratio on a fully phased-in basis increased to 23.8%, compared to 23% last year. During the first quarter, we returned $402 million to shareholders, consisting of $300 million of share repurchases and $102 million of common stock dividends. As of March 31, 2024, we had $300 million remaining in our share repurchase authorization. As part of our capital planning approved by the board of directors, our share repurchase authorization was increased by $1 billion, bringing our total authorization to $1.3 billion for the period ending June 30, 2025. Furthermore, the board intends to maintain our current quarterly dividend of $0.25 per share. Synchrony remains well positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan. Turning to Slide 13 for a review of our 2024 business trends. As a reminder, Synchrony previously filed an 8-K on March 5, 2024, with a revised financial outlook, including EPS guidance for the full year 2024, specifically related to the framework around the pending late fee rule change and our product, policy, and pricing changes, there continues to be uncertainty regarding the timing and outcome of the late fee related litigation that was filed in March, the potential changes in consumer behavior that could occur as a result of late fee rule changes and any potential changes in consumer behavior in response to the product, policy, and pricing changes we implement as a result of the new rule. Outcomes and actual performance related to any of these uncertainties could impact the EPS outlook. Looking at the remainder of the year. Synchrony will continue to execute across our key strategic priorities and prepare our business as we navigate an evolving operating environment. We have commenced the implementation of our product, policy, and pricing changes the majority of which will be completed over the next two to three months, and we anticipate having greater clarity on the impacts of these changes likely in the second half of the year. In the meantime, we continue to expect our business to demonstrate typical season patterns in many of our key metrics. We expect net charge-offs to peak in the first half of the year and that the reserve coverage at year-end should be lower than the year-end 2023 rate. Finally, we expect that the RSA will continue to align program performance and continue to function as designed. In closing, Synchrony is focused on leveraging our core strengths to optimize our business position and build our long history of delivering steady, growth, and strong risk-adjusted returns. Our depth of consumer lending experience informs our go-to-market and product strategies. Our investment in sophisticated credit management tools empower our agility and our RSA supports our financial resilience. Together, our differentiated model continues to consistently deliver value to each of our stakeholders through changing environments. I will now turn the call back over to Brian for his closing thoughts. Brian Doubles -- President and Chief Executive Officer Thanks, Brian. Synchrony's first quarter results were driven by our differentiated business model and our commitment to delivering sustainable, strong results for our customers, partners and stakeholders. We are leveraging our proprietary industry and consumer insights, our diversified products and platforms and our advanced data analytics to consistently provide access to responsible financing solutions for our customers, sales and loyalty for our partners, and sustainable growth as strong risk-adjusted returns for our stakeholders. We're confident that Synchrony is operating from a position of strength as we navigate the year ahead. We're excited about the opportunities we see to drive still greater long-term value as we continue to partner with hundreds of thousands of small and midsized businesses and health providers to provide access to credit to our more than 70 million customers for their everyday needs and wants. And with that, I'll turn the call back to Kathryn to open the Q&A. Kathryn Miller -- Senior Vice President, Investor Relations That concludes our prepared remarks. We will now begin the Q&A session. So that we can accommodate as many of you as possible. I'd like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the investor relations team will be available after the call. Operator, please start the Q&A session. Questions & Answers: Operator [Operator instructions]. We'll take our first question from Ryan Nash with Goldman Sachs. Please go ahead. Ryan Nash -- Goldman Sachs -- Analyst Hey, good morning, guys. Brian Doubles -- President and Chief Executive Officer Good morning, Ryan. Ryan Nash -- Goldman Sachs -- Analyst So it seems like charge-offs are coming in a little bit higher than expected, but we've now seen delinquencies potentially inflect and starting to follow seasonal patterns. So can you maybe talk about what this means for the full year loss rate? And where do you see losses in the allowance settling out over the intermediate time frame if your forward view proves accurate? Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Thanks for the question, Ryan. So again, I think we have been somewhat clear that we believe charge-offs when you look at the delinquency trend as we entered into 2024 that charge-offs will peak in the first half of the year and decline. I think you see that, well, certainly in the end in the first quarter. I think when you see the results in April when we put out a rate, you will see delinquencies down on both a 30-plus and 90-plus basis relative to what we just reported here today. So I think when you start looking at that, you look at the seasoning of the credit actions that we took really in the second and third quarter of last year. We feel good that the charge-off rate will decline in the back half of the year. And certainly, we haven't changed our underwriting targets to be in the 5.5% to 6% range, generally speaking. So we feel good about that, which leads us to the belief that if you see that lower net charge-off rate in the back half of the year and you project that forward into 2025 that the reserve coverage rate should be below the 10.26 rate that we had really at the end of last year and really the increase in the first quarter here was reflective more of the seasonal patterns than anything else. Ryan Nash -- Goldman Sachs -- Analyst Got it. And then maybe as a follow-up. So the RSA has beaten several quarters in a row. 1Q was well below that $3.50 to $3.75, I think you had outlined in the prior guidance. So maybe just talk a little bit about how you're thinking about the RSA for '24. This is, of course, excellent fees. And do you think the new normal for this is below that 4% to 4.25%, 4.5% you've outlined in the past? Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes, Ryan, as I look the RSA trend, the first quarter was it that clearly, when you look at year-over-year on the higher net charge-offs, which was a substantial amount of the decrease in the RSA partially offset about a third of it offset by really NII growth. And the NII was a little bit suppressed because you had the last full impact on your interest-bearing liabilities. If I take a step back for a second and think about the core business, Ryan, I believe we're at a point where we have peaked on assuming no rate increases and peaked on our interest-bearing liability costs as I talked about the net charge-off rate taking in the first half, you should see an upward bias than in the RSA as we step through the remaining quarters of the year, the other variable will be volume. So even if you looked on a linked quarter basis, volume being down and being down a little bit year-over-year for some of the RSA clients will play a factor, but it should trend upwards as we step through, given the peaking nature of the interest-bearing liability costs and charge-offs. Ryan Nash -- Goldman Sachs -- Analyst Thanks for the color, Brian. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Ryan. Operator Thank you. We'll take our next question from Sanjay Sakhrani with KBW. Please go ahead. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Good morning. I guess my first question on purchase volume. Obviously, that continues to remain weak. Could we just talk about sort of how we get it back to a baseline that accelerates? I know inflation is sort of weighing in on the consumer. But maybe just talk about what's driving that and how and when we get it back to a baseline that's higher. Brian Doubles -- President and Chief Executive Officer Yes, Sanjay, maybe I'll start on this and then pass it to Brian. I mean, look, I think generally, we're pretty pleased with the growth that we're seeing in the business. I think the consumer is still in good shape. Obviously, the job market is very strong, that's helping. But you are seeing a lot of that spend being driven by the higher end consumer -- the higher income consumer. And that's actually not a bad thing. I think they're benefiting obviously job market, house prices are up, stock prices are up. On the lower end, that's where you're seeing some of the slowdown. And from a credit perspective, that's not the worst thing. I think we see people being prudent. I think they're managing to a budget, they're managing to their cash flows. They're not overextending. So I think there's a positive read-through from a credit perspective on that. I don't know, Brian, if you want to add. Brian Wenzel -- Executive Vice President, Chief Financial Officer The first thing, Sanjay, I want to remind people, we're comping off of what I'd say is a really strong quarter last year. So when you look at a 2% up, that is very strong. It's a record for our company for the first quarter. Brian highlighted some of the differences, I think you're plus 8% on the higher freight cost is down a little bit year-over-year in lower freight cost. We are seeing most certainly the consumer step back in certain bigger ticket areas, right, either going down in transaction values, which I think you see reflected in the home and auto purchase line being down and really in lifestyle. But what you see strengths in those pockets. Our home specialty business is up in double digits or our outdoor business is up. So it's selected. The consumer is just being more prudent with the dollars. Again, we see transaction frequency up even though transaction values are down. So the consumer, I'd say, is managing through this period. So I wouldn't necessarily read too much into it that there's a big change in the consumer profile and what they're doing. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst OK. Very helpful. Thank you. And I couldn't let you guys get away without a late fee question. So maybe just as we're waiting here on the courts at this point. Maybe you can just talk about how you're planning for a mid-May implementation and how much flexibility you have if there's an injunction after the current planned implementation period? And any early observations on the PPPC behavior changes? I know most of that will be in the second half. Thank you. Brian Doubles -- President and Chief Executive Officer Yes, Sanjay. So we're not surprised this was the second question, we thought it might be the first. Obviously, we are waiting on the outcome of litigation that is uncertain but we're executing our plan. We said from the beginning that we weren't going to wait for the outcome on litigation, just given the uncertainty. So we began the implementation of our changes in December. We're already over 60% done with those. We've got to send out the changes in terms, etc. The vast majority of those will be done in the next two months. So look, we're executing the plan. In terms of timing, our basis was October 1 that assumed an injunction. With that said, it will be extremely operationally challenging to get this implemented in May, but we're preparing for that as well as a scenario. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Brian Doubles -- President and Chief Executive Officer Thanks, Sanjay. Operator Thank you. We'll take our next question from Terry Ma with Barclays. Please go ahead. Terry Ma -- Barclays -- Analyst Thanks. Good morning. I just wanted to follow up on the product policy and pricing changes. Is there any way we should think about how those benefits sort of materialize once it's kind of fully phased in? Is there a way to think about whether or not it's a slower ramp through the year, a step up or kind of like a quicker ramp? Brian Wenzel -- Executive Vice President, Chief Financial Officer I'll take this and see if Brian has a follow-on. I think what you should expect to see is beginning an impact in a little bit in the second quarter, more in the third quarter with regard to the mitigants and then it continues to build from there. I've gotten the question in the past, and we really hadn't talked very much about it. When you think about how the APR phases in for the consumer. So when the APR becomes effective, which again, think about that as 60 days after notice, you'll begin to feel the effects of that, I'd say 50% in the first 12 months if you roll that out, 75% of 24 months. So you begin to fill that out. Now some of the other fees that come in and some of the other policy changes, they are more immediate. When it comes through year now, we'll certainly will see, as that flows through, there will be some adoption really relating to going with the e-statements and things like that, but it flow through different parts of the P&L that we expect. So again, I think you begin to see a ramp with some of the things that are more immediate and it gives you a sense on how the APR comes in. But that's why there was a blend in order to kind of get to that neutrality point a little bit sooner than just relying upon APRs. Terry Ma -- Barclays -- Analyst Got it. That's helpful. And then for my follow-up, I just had a question on your cash balances. It looked quite elevated this quarter relative to last year. Any color you can provide there on how we should think about that going forward? Brian Wenzel -- Executive Vice President, Chief Financial Officer Terry, to be honest with you, we have excess liquidity this quarter. I go back and attribute that really to the strength of our deposit franchise. I think when you just look at the core retail deposits were up $3.4 billion from the end of last year. And then you put the seasonal nature of the cash that kind of comes in, it served us well as we purchased Ally for $2 million, but we also got $600 million coming in from the sale of the Pets Best franchise. So I'd say liquidity is kind of peaking. So I think if you think about margin and the effects on margins, you step through, net interest margin is probably at a low point for the year in the first quarter, given all that excess liquidity. And listen, I think we've heard other lenders over the last week or two talk about balances being down, flatter balance sheets. That's not what we're expecting. So clearly, we're still in deposit gathering mode. We haven't really done anything to significantly track new deposits. It's just the strength and attractiveness of our digital franchise. Terry Ma -- Barclays -- Analyst OK. Great. Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Terry. Operator We'll take our next question from John Hecht with Jefferies. Please go ahead. John Hecht -- Jefferies -- Analyst Yes, guys. Good morning. Thanks for taking my question. I guess just a little bit more on the net interest margin, Brian, I know there's always a seasonal impact in Q1 as you gather deposits to kind of prefund for growth later in the year. And then you mentioned the PetSmart kind of causing incremental cash balances. But maybe could you give us some sense for like the -- parse out the -- what drove the margin decline this quarter relative to, say, 1Q '23? And then maybe talk about marginal deposit pricing and where you're kind of in the CD markets and the savings account markets and when deposit costs should level out. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks for the question, John. So when I think about year-over-year net interest margin, right, it's down 67 basis points. The biggest driver of that if I do net funding costs, so think about your interest-bearing liability costs offset by your income coming off the investment portfolio, that's about 88 points of decline that came off of that. There's another 19 basis points decline of having a higher -- at a higher liquidity portfolio year-over-year. That's been offset by the interest of fee yield, which is plus 40. Again, as we think about how that develops for the year, the asset -- the ALR kind of mix will neutralize back out. We believe we peaked on interest-bearing liability costs from here. So in theory, as you step through, net interest margin should really improve as you move throughout the year. To your second question around pricing, really, when you think about the various tenors. If you looked at our 12-month CD rate, we're down 50 basis points from the end of the year 4Q '23 down to 48 days. We followed our people down which is generally flat to the second quarter of 2023. All issuers or all digital banks do have promo rates. So we have one promo rate still over 5%, which is our lever 15-month, and that's really to manage at the end of the day, our retention on CDs and be competitive with other people, which have kind of off tenor. I would expect, as we see people who are trying to manage their balancing, their liquidity down, we'll follow the market down here. We generally lag the brick-and-mortar banks, but we will follow the digital banks down as we move throughout the year. The final piece I'd say, John, is we still have three rate cuts in, but we didn't really have them coming into September, so there's no real impact unless something was more significant and moved sooner in the year from the Fed. John Hecht -- Jefferies -- Analyst OK. And then maybe this is a little sticky of a question, but if -- and I know you've pulled EPS guidance, but ex rate fees with the -- your original $5.75 to $6 EPS still hold? Or are there other changes that we should consider reflective of kind of just the trend changes that we want to consider in terms of modeling? Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. So just to be clear, John, we put out the 8-K on March 5 that had the EPA guidance, we have not pulled that guidance. We just didn't reiterate it because it's only 45 days ago, so we did put it on the page this morning. If I think about that core business, what I'd say, Brian and I would probably tell you is that we're ahead of what we thought we're going to be. I think it's just bearing liability costs are up were better than our expectations. Charge drops generally in line with our expectations. And then when you start to think about some of the things I've highlighted about. Number one, your interest-bearing liabilities cost peaking; number two, charge-offs peaking in the second half. And I mentioned on this call that you're going to see a sequential decline in delinquencies. That's in line I think when you then think about the reserve rate being lower than 10, 26, I think that sets up and is consistent with the guidance we provided out in March 5. But again, it's only 45 days or so ago. John Hecht -- Jefferies -- Analyst That's great color. Thanks so much. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, John. Operator Thank you. We'll take our next question from Jeff Adelson with Morgan Stanley. Please go ahead. Jeff Adelson -- Morgan Stanley -- Analyst Good morning, guys. Thanks for taking my questions. Just on the credit outlook, I wanted to dig in a little bit more on the mid-'24 versus first half '24. Just given the nice delinquency formation improvement you've been seeing and your second quarter tends to be the seasonally best for NCO. Just wanted to help understand what mid-2024 looks like here. Is that more of a seasonally adjusted peak year-over-year growth peak? Or -- and maybe just help us understand what you're thinking about there. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Maybe I'll try to simplify this, Jeff, but thanks for the question. Everything is seasonally adjusted. So we built our plan. It has a seasonal overlays, which have been muted the last couple of years, given the normalization to happen as we move back to the pre-pandemic levels of delinquency. I would think about it in this way and just fairly simple. First half losses will be higher than second half losses and I think if you just kind of rolled most certainly are 30-plus and 90-plus out, you can kind of see how that will play through if you believe that you're going to get a band here in April, further than in dollars. You can see how it flows out. So I just think about it in half to simplify versus trying to get to an exact date when it peaks. Jeff Adelson -- Morgan Stanley -- Analyst Got it. And again, on the late fee I think you mentioned how difficult it would be to implement operationally in May. Could you just talk about what that specifically might look like for you? And how we maybe can think about the $0.15 to $0.25 impact you made out previously, if that does happen? And kind of as part of the question as well, I know you mentioned 60% of the changes are out. Can you just talk a little bit about the consumer behavior, response rate in terms of how they're reacting to those changes so far? Brian Doubles -- President and Chief Executive Officer Yes, I'll take the first part of that. So operationally, it's very challenging from a number of different angles. And obviously, it's for the issuer, but also the vendors that the issuers rely on. I think it's important to note, too, that this is across the industry. It's not specific to us. Everybody has got the same challenges. If any event we do have to implement this on May 14. I think we were prepared to make the systematic changes and things like that. The real challenges come around terms changes and updating collateral and things like that. So that's where a lot of the operational complexity is. And I'll turn it over to Brian. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. So to try to provide a dimension, really more a framework to think about it, Jeff. Our base case assumption as we walked in was an October implementation day, we thought that's going to be the case. There are a lot of scenarios between here and when the courts will take action on the pending litigation and the injunction. So it's difficult to speculate on any particular scenario because it's just so uncertain. I think everyone would have thought something different, at least everyone on this call would have had a different opinion. That being said, if you want to think about a framework for one second. Number one, I'd say this doesn't impact where you exit out of 2025 from projective whether it's October or earlier than October, that exit point is exactly the same, number one. Number two, it doesn't really impact the stability of our business and what we're doing from our PPPC changes. As Brian talked about how much we've rolled out. So that -- those two things fundamentally don't change. That being said, if you think about an implementation date, there's a much larger impact in 2024 on EPS. But then as you think about 2025, that EPS generally then would be higher than either the October scenario or significantly higher on an actual '24 to '25 basis as you look at it. So once we have greater clarity with regard to when the actual implementation date happens or occurs or will occur. We'll then when it provide incremental transparency relative to the financial implications, both on '24 and try to dimensionalize '25 for people as well. But I think it's important to understand those frameworks about how we exit '25 and then any incremental detriment in '24 in theory get a benefit in '25. Brian Doubles -- President and Chief Executive Officer And then just on your last question on consumer behavior and impact. I'd say we haven't seen anything yet that's different than our expectations. I'd say it's largely in line. But the only caution I would have is it's very early. There's a bleed in period for a lot of these terms changes. But so far, what we're seeing from the consumer side is generally in line with what we expected. Jeff Adelson -- Morgan Stanley -- Analyst Great. Thank you. Brian Doubles -- President and Chief Executive Officer Thanks, Jeff. Operator Thank you. We will take our next question from Saul Martinez with HSBC. Please go ahead. Saul Martinez -- HSBC -- Analyst Thank you. Good morning. Thanks for taking my question. So just a follow up on the response to the last question on the PPPC impact. So as I hear you right, the March 5 8-K, the guidance that -- or the estimates that you gave there of the offsets ranging from $650 million to $700 million pre-tax, which does imply a pretty significant ramp given the time rises gave into the fourth quarter. We should assume -- those are still good benchmarks to use and -- because it obviously does imply a pretty significant ramp in the back end of the year in terms of NII. That's the other late fee impact. So I just want to make sure that those numbers are still applicable or am I missing something there? Brian Wenzel -- Executive Vice President, Chief Financial Officer Well, let me just start with. That's based off on October implementation date. And the way to think about it is you begin to have some of the PPPC changes happen in the second and third quarters, partially offset by RSA, then you come into the fourth quarter, you would have the detriment from the late fee going away, but a higher RSA offset in that quarter. Obviously, that all shifts if you went to an earlier implementation date. So that range will change materially in a situation where you had a potential implementation day prior to October. Again, I think if that does happen, we'll come back and provide greater clarity on the impact on the late fees as well as the impact on the changes that we're doing. Saul Martinez -- HSBC -- Analyst OK. OK. That's helpful. And I guess just a broader question. You did in your presentation reiterate the long-term target, 2.5-plus percent ROA, 28-plus percent RPC. I get the offsets and you guys are working to fully offset that. But it is a pretty significant -- if it gets implemented, it is a pretty significant reduction or the source of revenue that effectively goes away and we'll see what happens with Basel III, but at least maybe it's not going to be an impact. But the direction of travel at least on capital is moving higher. I'm just curious like how you're thinking about the long-term targets for profitability going forward, your degree of confidence in how you -- where you think those are still applicable targets? Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Obviously, we look at it and Brian and I have been very clear that the organization, our goal is to be ROA neutral at the end of the impact of the late fee rule change. And we -- again, when we get better clarity with regard to the implementation date, we could talk a little bit about that timing. So the goal is to get back to ROA neutral. And that's the plan that we are rolling out and beginning to execute today. Understand there are a lot of assumptions with regard to consumer behavior that are in there and other things that can impact it. That being said, if you think about a more normalized environment, right? So I think 5.5% interest rates are not normalized. When you think about an inflation rate that's evolving when they normalize, you should be able to come back to that ROA profile that's -- and that's one of the strengths of the RSA itself that kind of helps us get back to that. From a capital standpoint, I can't really forecast and I'm not sure other people can, where exactly the Fed may or may not go with regard to Basel III. I mean certainly, there has not been a lot of support around that. So we'll see what those changes are. That being said, we actually have excess capital, and we're going to continue to move down toward our target, which helps us get to the ROTCE. So again, the focus on being ROA neutral through the rule team, number one, deploying our excess capital, whether that being to our RWA, that's accretive to earnings in ROA or when we turn it back to shareholders. Our goal is to get back to those medium to long-term targets we put out a couple of years ago. Saul Martinez -- HSBC -- Analyst OK. Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thank you. Have a good day. Operator Thank you. We will take our next question from Don Fandetti with Wells Fargo. Please go ahead. Don Fandetti -- Wells Fargo Securities -- Analyst Good morning. Your capital position is still pretty strong. I was just curious if you thought the CFPB changes could lead to some portfolio movements over the next year or two? And do you see any more opportunistic deals like Ally? Brian Doubles -- President and Chief Executive Officer Yes. Look, we're always on the lookout for potential acquisitions or new programs, Ally fit our business model perfectly. It's exactly the type of acquisition that we look for. It's in industries that we know really well. We understand the products, a great cultural fit, like it just -- it checked all the boxes. So we have excess capital today. We generate a lot of capital over the calendar year. And if we have the opportunity to do something opportunistic, we certainly have the financial resources to do it. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. The only thing I'd add on to that, just to dimensionalize it for you, if you look at Page 12 of our earnings deck, we showed that the earnings power of this business does generate that capital, you look year-over-year, last 12 months, we generated 2.5% CET1 just from the net earnings of the business. So really positive effects that you can look at and lean into plus you have the excess capital that weigh between there and our target level of the CET1. Brian Doubles -- President and Chief Executive Officer Yes. The only other point I'd make on this is we are very disciplined when it comes to accretive acquisitions that have a really good strategic fit. I mean, I think you've seen that discipline over the years. We haven't done really large-scale M&A. We've been very thoughtful about finding things that are relatively modest from a capital outlay perspective, but our businesses that we can grow really well. That's a great example of that, a perfect example of that, a leg row I think Ally is going to be a home run for us. So we are very disciplined in terms of what we look for. Don Fandetti -- Wells Fargo Securities -- Analyst Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Don. Operator Thank you. We'll take the next question Rick Shane with J.P. Morgan. Please go ahead. Rick Shane -- JPMorgan Chase and Company -- Analyst Hi, guys. Two questions this morning. First, on the CFPB, one of the consequences that the industry has raised in terms of the rule changes, the loss of deterrents, would suggest that DQs will be higher. I'm curious if you guys have had discussions with your accountants related to how you will treat reserve policies if you have higher delinquencies but potentially assume lower pull-throughs? Brian Wenzel -- Executive Vice President, Chief Financial Officer Rick, thanks for the question. Well, certainly, we've had internal conversations about the effects of deterrents and it's really going to be how we model any potential change in delinquency. And again, what you're looking at here are individuals who are making a choice not to pay, those who lost their job or had a health event, and roll in delinquency, you're not going to rehabilitate that this wasn't a deterrent for them. They're going to roll to loss or roll the settlement, etc. This is people who made an active decision to -- they prioritize one payment over another payment. We would have to model that out and then we'll certainly get the accounts comfortable with how it is. But again, we'll have to see because no one really did a lot of testing control at this level of the turn. Most certainly, there's things done back in the CARD Act that demonstrated deterrence, but we'll have to see how it plays out, Rick. Rick Shane -- JPMorgan Chase and Company -- Analyst Got it. Thank you. And then in terms of the concept of charge-off peak in the middle of the year, seasonality works in your favor really steadily over the next six months and then starts to reverse in the fourth quarter. When you're talking about a peak, are you suggesting that as we move into the fourth quarter, charge-offs will continue to decline or that they will normally seasonally rebound but perhaps not quite as much as they have in the past. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Thanks for the question again, Rick. We haven't given quarterly guidance. Again, I'm just going to give you the framework. We applied seasonal patterns to how the loss rate works again. We believe we're more normalized and back to the pre-pandemic levels. And I think as you begin to see, you will see, again, in April, dollar declines in 30 plus and 90 plus, which have a flow-through effect both on the third quarter and the fourth quarter as they kind of come through. So we're not going to get into specific quarter guidance now. But again, the rates in the first half of the year will be higher than the rates in the second half of the year. Rick Shane -- JPMorgan Chase and Company -- Analyst Got it. Brian, thank you very much. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks for coming. Good day. Operator We'll take our next question from Brian Foran with Autonomous Research. Please go ahead. Brian Foran -- Autonomous Research -- Analyst HI. I was wondering if you could just speak to your annual internal stress testing process. And it's a little screwy, I guess, in this two-year window because you've got the late fee folding in, but then you would already weakened the business with peak losses. Does that become a constraint at all for capital considerations? Or do you feel like you have enough excess capital and enough line of sight to this ROA neutrality that you can kind of look through that maybe a temporarily elevated stress test result. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Brian. So first, let me just be clear. We have submitted our capital plan to the -- that they were part of the horizontals, were part of the CCAR group, albeit we do not get a stress capital buffer until 2026. So the process remains somewhat the same as in prior years other than will engage a little bit differently with the Fed than we have in the past. But again, the stress capital buffer comes in 2026. When you specifically look at the capital plan that our board just approved and management presented to them, there were scenarios or scenario in there around late fees and the impact of late fees that put it there. That doesn't -- that informed our overall capital decision, but doesn't necessarily restrict the plans that we had. Even if I came back and said I had an earlier implementation date, which we talked a little bit on this call, that would not necessarily interfere with our capital targets and our plans. Again, all that's subject to the normal things we'd say is the market conditions and everything else, Brian. But the impact of the late fee roll doesn't necessarily impact the capital plan that we announced this morning. Brian Foran -- Autonomous Research -- Analyst That's very helpful. And maybe if I could sneak in on competition. Are you generally seeing competitors in the market respond in common ways on these kind of PPPC efforts? Is there any evidence of any putting to big divergence or people breaking from the pack? Or is kind of everyone doing different combinations of similar things. Brian Doubles -- President and Chief Executive Officer We only see what's out there in terms of public changes in terms. But I would tell you, my expectation is that everybody is going to do a combination of the same things that we're doing. It's a pretty -- it's a relatively standard playbook. You might see some issuers do a couple of things differently. But I think on the whole, it's going to be the APR increases, different types of fees, etc., to offset this. And it's important that we do. Our goal from the beginning has been to protect our partners and continue to provide credit to the customers that we do today. And unfortunately, that's impossible to do without these offsets. Brian Wenzel -- Executive Vice President, Chief Financial Officer The only thing I'd add, Brian, I do think the one thing you will see we probably have been a little bit more -- or surprise showed a little bit more sense of urgency and gotten out ahead of this based upon discussions with our partners. So that may pay a little bit, but I think Brian is right over the medium term here. That's where you're going to see the convergence. Brian Foran -- Autonomous Research -- Analyst Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Brian. Have a good day. Operator We'll take our next question from John Pancari with Evercore. Please go ahead. John Pancari -- Evercore ISI -- Analyst Good morning. Some of your -- on that very last point, they just brought up some of the peer card vendors that have somewhat smaller private label and co-brand card businesses that have begun to indicate maybe a willingness to absorb the late fee -- the foregone late fees as a result of the rule change. Can you talk about if we do see that happen at some players where late fees are a smaller piece of their overall revenue, but they're in the private label in co-brand business, do you view that as a competitive threat? They do absorb the impact? Brian Doubles -- President and Chief Executive Officer I don't see it as a competitive threat today. I think in our space, in the vast majority of our business, I think you're going to see issuers do the same types of things that we're doing. I think it's going to be really important in terms of the economic sharing with the partners. I think we're obviously focused on providing credit to the customers that we do today. And fortunately, you need to do some of these things in order to protect that and protect our partners. So I do think you'll start to see -- and we're starting to see this now. You'll start to see some issuers. We're building this into pricing models as we look at new business. We're starting to build it as we bring on portfolios from our competitors you've got to contemplate an $8 late fee. You have to assume that while we're hoping for a better outcome on the litigation, obviously, you got to build in scenarios where we have a much lower late fee. So I think it will even out over time across the industry, primarily in the space that we operate in today. Brian Wenzel -- Executive Vice President, Chief Financial Officer The one thing, John, you just took it up a level for a second. So if you had a theoretical case where someone who has a smaller business than ours decides to absorb some of that late fee, what you end up into is a suboptimal return profile. And inside a large institutionwide may be immaterial. The question would be, does it attract capital? And how long can you sustain that? And we've seen over history, businesses come out of flavor in certain larger institutions where this is a small part. This is what we do in the same way that we look inside our businesses, our platforms and allocate capital to some of our better performing, higher returning portions of the portfolio that, I think, over time will have to happen to these institutions. So I'm not sure that that's a long-term viable strategy if someone wants to do that. But again, it's very theoretical your question. John Pancari -- Evercore ISI -- Analyst Got it. No, that makes sense. Thanks for that. And then separately, back to the EPS, sorry to believe that, but the -- I know you're not reiterating that $5.70 to $6 guide. And I just want to understand, it's just because it was only 45 days ago, and the underlying components that you had baked in at that point in March have not changed materially enough to change how you're thinking about your underlying trends? I know we've had moves in rates, had some development on the late fee dynamics. But I just want to make sure that the core expectations that were part of that $5.7 to $6 have not changed at all. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Again, I'm going to just say it again, we put that guidance up 45 days ago. I didn't feel a need to -- or I think Brian feel the need to put it back on this page or two kind of update again, what I've said is the quarter and the points I raised about net interest margin, losses, reserves, positive on expenses, I think should be viewed favorably relative to that kind of base based BAU performance of the business. So we're very pleased on how we're exiting out of the first quarter and moving in on a core BAU basis. John Pancari -- Evercore ISI -- Analyst OK, Brian. Thanks a lot. [Inaudible] Brian Wenzel -- Executive Vice President, Chief Financial Officer Great. Thanks. Have a good day. Operator And we are almost at our allotted time. We will take one final question from Mihir Bhatia with Bank of America. Please go ahead. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Hi. Thanks for squeezing me in, and good morning. Just wanted to -- two big picture questions. Maybe to start first just on the competitive situation. And really more -- not so much necessarily on the new programs, but just in terms of the financing offers that are already out there for consumers. How is the purchase volume being impacted at all by consumers just having more choices today? Are there any market share or penetration with sophisticating share in terms of how often consumers turning to Symphony versus others? As a percent of your retail partner sales or anything like that? I'm sure you track it. Brian Doubles -- President and Chief Executive Officer Yes, we do track it by partner. We look at the penetration rate, sales on our card versus other products. I'll tell you, generally, we're very pleased that inside of the majority of our partner programs that we're gaining share. I think one of the things that helps us do that as we think about a multiproduct strategy, we see our partners engaging more on being able to offer a revolving product, maybe a secured card, buy now pay later. And I think that's helping us gain share. If you stick to a one product strategy, I think over time, that's a losing strategy and I think you will lose share, which is why we think the multiproduct strategy over time is a winning one. So we feel really good about our ability to continue to take share inside of our partner programs, but also just more generally and even some of the smaller to midsized space. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. And then, Brian, just last question. In terms of your -- in the prepared remarks, I think in the press release today, you highlighted the partnership with small- and medium-sized businesses as well as health providers. I think the emphasis is a little bit of a new emphasis on the small- and medium-sized businesses relative to the old one. So I was just curious, is the growth focus that Synchrony switching a little bit to smaller or maybe the more proprietary programs versus maybe a historical focus on just being the partner of choice for large retailers. Brian Doubles -- President and Chief Executive Officer Well, I definitely think that's an underappreciated part of our business model. I think people tend to focus on the large partner programs, but we serve hundreds of thousands of providers and small- to medium-sized businesses. And sometimes that gets lost a little bit. So we're definitely leaning in more there. I'd say we've shifted investment dollars into the health and wellness space, you see that paying off when you look at the health and wellness numbers, I think receivables were up 20%, like we're really reaping the benefits of those investments. So that's a very attractive space for us. The large partner space is still very attractive as well, but I think that part of the business always gets a lot of attention. We're trying to make sure that we talk enough about all the small- to medium-sized businesses and the hundreds of thousands of dentists and pet care specialists across the country that we serve. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Mihir. Have a good day. Answer:

the Synchrony Financial first quarter 2024 earnings conference call

Operator Good morning, and welcome to the Synchrony Financial first quarter 2024 earnings conference call. Please refer to the company's investor relations website for access to their earnings materials. Please be advised that today's conference call is being recorded. Currently, all callers have been placed in a listen-only mode. There will be open questions following the conclusion of the management's prepared remarks. [Operator instructions] I will now turn the call over to Kathryn Miller, senior vice president of investor relations. Thank you. You may begin. Kathryn Miller -- Senior Vice President, Investor Relations Thank you, and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast are located on our website. On the call this morning are Brian Doubles, Synchrony's president and chief executive officer; and Brian Wenzel, executive vice president and chief financial officer. I will now turn the call over to Brian Doubles. Brian Doubles -- President and Chief Executive Officer Thanks Kathryn, and good morning, everyone. Today's Synchrony reported strong first quarter results, including the successful completion of two previously announced transactions, the sale of our Pets Best insurance business, which generated an $802 million after-tax gain in the quarter and will extend our reach in the rapidly growing pet industry through a minority interest in international pet holdings we received as part of that sale and the acquisition of Ally Lending's $2.2 billion point-of-sale financing business, which will augment the existing offerings in our home and auto and health and wellness sales platforms. Together, these transactions expand Synchrony's differentiated offerings in the market and strengthen our position as the partner of choice as we drive long-term value for our many stakeholders. Excluding the impact of the Pets Best gain on sale, Synchrony delivered adjusted first quarter net earnings of $491 million or $1.18 per diluted share, a return on average assets of 1.7% and a return on tangible common equity of 16.8%. This performance highlights the resiliency of Synchrony's earnings power over time as we deliver results while positioning the business for strong risk-adjusted growth ahead. Our differentiated model enables us to assess and react quickly through cycles and environments as our broad product suite, compelling value proposition, and innovative technology continue to resonate with both our consumers and partners. We opened 4.8 million new accounts in the first quarter and grew average active accounts by 3%. Our products and value propositions drove $42 billion in first quarter purchase volume, 2% above the prior year and our highest ever first quarter performance. Health and wellness purchase volume increased 8%, led by pet, dental, and cosmetic and reflecting broad-based growth in active accounts. In diversifying value, purchase volume increased 4% driven by spend both at our partners and outside of our partners. Digital purchase volume increased 3%, reflecting continued consumer engagement through growth in average active accounts. In home and auto, purchase volume decreased 3% as the strong growth in home specialty and auto network and the impact of the Ally Lending acquisition was offset by a combination of lower customer traffic, fewer large ticket purchases, and lower gas prices. and lifestyle purchase volume decreased 4%, reflecting the impact of lower transaction values. Dual and co-branded cards accounted for 42% of total purchase volume for the quarter and increased 6% as our value propositions continue to drive increased engagement and growth. Synchrony's out of partner spend reflects a comprehensive range of categories, industries and products and offers a deeper view into consumer behavior throughout the quarter. Spending in January was impacted by challenging weather conditions as average transaction frequencies declined 4% versus the prior year. In February and March, however, we saw a rebound, particularly in nondiscretionary categories. Overall, consumers focused on more nondiscretionary spend in the quarter and shifted out of certain discretionary categories like home furnishings, travel and entertainment. Despite the change in mix over, we continue to see broad-based growth in many discretionary and nondiscretionary categories. Across the business, Synchrony continues to see indications that nonprime borrower spend has slowed, and our portfolio's purchase volume growth continues to be driven by higher credit grade consumers. Average transaction values among super prime borrowers continue to increase. And similarly, we see average transaction frequency growth from our prime and super prime segments. The relative adjustments in consumer spend behavior generally reflect a financially healthy consumer who is continuing to become more selective in their purchases and align their cash flows. A trend which has also continued to take shape in Synchrony's credit performance. Portfolio payment rates continue to moderate and reached 15.8% for the first quarter, about 90 basis points lower than last year and about 60 basis points higher than the average payment rate level across our first quarters from 2015 to 2019. The relative pace of payment rate moderation has continued to slow from both a generational and credit grade perspective, which when combined with the spending trends we've observed reinforces our view that borrowers are generally reverting to spending and payment behaviors that are more consistent with pre-pandemic norms. These trends are also supported by a number of our other consumer financial health indicators, including a strong labor market and external deposit data that has shown relative stability across industry savings account balances. Taken together, these dynamics are contributing to Synchrony's recent delinquency performance highlighted on Slide 11, where the year-over-year rate of change has slowed as our portfolio has reached pre-pandemic ranges. The normalization and recent stabilization of our delinquency performance has occurred at a more gradual pace than the majority of our industry peers, underscoring the powerful combination of our disciplined underwriting, advanced analytics and sophisticated credit management tools. We're encouraged by these trends and continue to expect our portfolios net charge-offs to peak in the first half of this year. We continually monitor indicators across our portfolio, along with the broader industry's credit performance and continue to take credit actions to optimize our portfolio's positioning for 2024 and beyond. Synchrony utilizes a broad range of proprietary and external data, including payment behavior characteristics, billions of transactions, and credit bureau alerts to deliver actionable insights that inform our underwriting, product, and credit management strategies across the account, channel, and port levels. Our ability to leverage these insights and deliver optimized financing solutions and experiences for our customers and partners even as needs evolve and market conditions shift is what enables Synchrony to consistently deliver the outcomes that matter most for our many stakeholders and increasingly positions us as the partner of choice. To that end, Synchrony added or renewed more than 25 partners in the first quarter, including BRP and added two new technology partnerships with Adit practice management software and ServiceTitan. We are excited about our new partnership with BRP, a global leader in powersports and marine products which will enable their U.S. dealers to offer secured installment loan products for their well-known line of power sports products, including the Ski-Doo, Sea-Doo, and Can-Am on and off-road vehicles. Synchrony will deliver our financing offers with flexible terms through their online or in dealership application process, highlighting our ability to address the diverse needs and preferences of our customers. And Synchrony's strategic technology partnerships Adit practice management software and ServiceTitan each represent opportunities to drive seamless customer experiences while also expanding access to our diversified suite of financial solutions and services. Synchrony's partnership with Adit, an industry-leading dental practice management software provider will expand CareCredit access to dental practices nationwide and includes integration with Adit Tech for patients, enabling a seamless and easy-to-use experience for both patients and practitioners. Connecting patients to payment solutions at their dentist office is an essential part of ensuring their care journey is as smooth as possible and dental practices benefit from more timely and effective revenue cycle management. Similarly, Synchrony will integrate with ServiceTitan, a leading software platform built to power trades businesses, enabling contractors to offer their home improvement financing through our direct-to-device application process. By providing access to flexible financing at their fingertips, customers are empowered to make a choice that gets them closer to their goal while their contractors benefit from a frictionless sales experience. So whether we are building new relationships, or supporting and enhancing existing ones. Synchrony deeply understands what our customers need and expect and what our partners, merchants, and providers are seeking to achieve. Our ability to deliver for these stakeholders and consistently achieved strong outcomes through varying conditions demonstrates the strength of Synchrony's business model and commitment of our incredible team. And speaking of our team, in today's world, it has never been more important for us to attract and retain the best talent, which we do to our unwavering commitment to our employees and our culture. So I'm proud to share that we've been named among the top best companies to work for in the U.S. by Fortune magazine and Great Places to Work. Synchrony moved up 15 positions to No. 5 in the 2024 rankings, reflecting our unique and special culture and our relentless focus on putting people first, as we continuously strive to achieve best-in-class experiences for our many stakeholders. And with that, I'll turn the call over to Brian to discuss our financial performance in greater detail. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Brian, and good morning, everyone. Synchrony's first quarter results reflected the combination of our differentiated business model and a resilient consumer in an evolving macroeconomic environment. We generated $1.3 billion in net earnings or $3.14 per diluted share on a reported basis. Excluding the $802 million after-tax gain from the sale of our Pets Best business, we generated $491 million in net earnings or $1.18 per diluted share. Lending loan receivables grew 12% to $102 billion. This growth reflected the impacts of the continued purchase volume growth, an approximate 90-basis-point decrease in payment rate and the completion of our Ally Lending acquisition. Net revenue increased $1.6 billion or 50%, driven by the Pets Best gain on sale of approximately $1.1 billion, which was reported through other income. Excluding the Pets Best gain on sale, net revenue increased $530 million or 17%. Net interest income increased 9% to $4.4 billion, driven by 50% higher interest and fees. This growth in interest and fees reflected the combined impacts of higher loan receivables, a lower payment rate and higher benchmark rates and was partially offset by higher interest expense from benchmark rates. Partly of $764 million in the quarter were 3.04% of average loan receivables, a reduction of $153 million versus the prior year, driven by higher net charge-offs, partially offset by higher net interest income. Provision for credit losses increased to $1.9 billion, reflecting higher net charge-offs and a $299 million reserve build, which included a $190 million bill related to the acquisition of Ally Lending. Other expenses grew 8% to $1.2 billion, primarily driven by higher employee costs in support of growth and our continued investment in technology. Our efficiency ratio for the quarter excluding the impact of the gain on sale was 32.3%, an improvement of approximately 270 basis points versus last year. Next, I'll cover our key credit trends on Slide 10. At quarter end, our 30-plus frequency rate was 4.74%, compared to 3.81% in the prior year and 18 basis points above our average for the first quarter of 2017 to 2019. Our 90-plus delinquency rate was 2.42% versus 1.87% last year and 14 basis points above our average for the first quarter of 2017 to 2019. Our net charge-off rate was 6.31% in the first quarter, compared to 4.49% in the prior year, an average of 5.84% in the first quarters of 2017 to 2019. Our allowance for credit losses as a percent of loan receivables was 10.72%, up 46 basis points from the 10.26% in the fourth quarter, primarily reflecting the impact of seasonal trends. The reserve build in the quarter largely reflected the addition of the Ally Lending portfolio. As Brian discussed, Synchrony's credit performance has been consistent with our expectations. Given that Synchrony shares the consumer with our broader industry peers, we continue to monitor our portfolio and the broader industry's credit performance as we've done periodically since mid-2023, we've been taking incremental credit actions starting in March. Across specific segments of our portfolio that should reinforce our portfolio's performance for 2024 and beyond. As Slide 4 demonstrates, Synchrony has built a track record of achieving consistent, attractive risk-adjusted returns through changing market conditions. This performance has been enabled by the combination of our disciplined underwriting, which targets a 5.5% to 6% loss rate on average and RSA, which aligns program and portfolio performance. We will continue to leverage our deep consumer lending experience, our diversified product suite, sales platforms and verticals and our sophisticated data analytics and technology to further deliver on that priority. Turning to Slide 12. Synchrony's funding, capital, and liquidity continue to provide a strong foundation for our business. Our consumer bank offerings continue to resonate with our consumers as we grew deposits $2.4 billion in the first quarter. Deposits represented 84% of our total funding at quarter end, and are complemented by our securitized debt and unsecured funding strategies, which each represent 8% of our total funding. During the quarter, we issued $750 million of secured funding included a preferred stock issuance of $500 million which served to more fully optimize our capital structure. Total liquid assets and undrawn credit facilities were $24.9 billion, up $3.2 billion from last year and at quarter end represented 20.5% of total assets, up 38 basis points from last year. Moving on to our capital ratios. As a reminder, we elected to take the benefit of CECL transition rules issued by the joint federal banking agencies. Synchrony will continue to make its annual transition adjustment to our regulatory capital metrics of approximately 50 basis points each January through 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Under the CECL transition rules, we ended the first quarter with CET1 ratio of 12.6%, 40 basis points lower than last year's 13%. The net capital impact of our Pets Best sale and Ally Lending acquisition added approximately 40 basis points to our CET1 ratio. Our Tier 1 capital ratio was 13.8%, unchanged compared to last year. Our total capital ratio decreased 10 basis points to 15.8%, and our Tier 1 capital plus reserve ratio on a fully phased-in basis increased to 23.8%, compared to 23% last year. During the first quarter, we returned $402 million to shareholders, consisting of $300 million of share repurchases and $102 million of common stock dividends. As of March 31, 2024, we had $300 million remaining in our share repurchase authorization. As part of our capital planning approved by the board of directors, our share repurchase authorization was increased by $1 billion, bringing our total authorization to $1.3 billion for the period ending June 30, 2025. Furthermore, the board intends to maintain our current quarterly dividend of $0.25 per share. Synchrony remains well positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan. Turning to Slide 13 for a review of our 2024 business trends. As a reminder, Synchrony previously filed an 8-K on March 5, 2024, with a revised financial outlook, including EPS guidance for the full year 2024, specifically related to the framework around the pending late fee rule change and our product, policy, and pricing changes, there continues to be uncertainty regarding the timing and outcome of the late fee related litigation that was filed in March, the potential changes in consumer behavior that could occur as a result of late fee rule changes and any potential changes in consumer behavior in response to the product, policy, and pricing changes we implement as a result of the new rule. Outcomes and actual performance related to any of these uncertainties could impact the EPS outlook. Looking at the remainder of the year. Synchrony will continue to execute across our key strategic priorities and prepare our business as we navigate an evolving operating environment. We have commenced the implementation of our product, policy, and pricing changes the majority of which will be completed over the next two to three months, and we anticipate having greater clarity on the impacts of these changes likely in the second half of the year. In the meantime, we continue to expect our business to demonstrate typical season patterns in many of our key metrics. We expect net charge-offs to peak in the first half of the year and that the reserve coverage at year-end should be lower than the year-end 2023 rate. Finally, we expect that the RSA will continue to align program performance and continue to function as designed. In closing, Synchrony is focused on leveraging our core strengths to optimize our business position and build our long history of delivering steady, growth, and strong risk-adjusted returns. Our depth of consumer lending experience informs our go-to-market and product strategies. Our investment in sophisticated credit management tools empower our agility and our RSA supports our financial resilience. Together, our differentiated model continues to consistently deliver value to each of our stakeholders through changing environments. I will now turn the call back over to Brian for his closing thoughts. Brian Doubles -- President and Chief Executive Officer Thanks, Brian. Synchrony's first quarter results were driven by our differentiated business model and our commitment to delivering sustainable, strong results for our customers, partners and stakeholders. We are leveraging our proprietary industry and consumer insights, our diversified products and platforms and our advanced data analytics to consistently provide access to responsible financing solutions for our customers, sales and loyalty for our partners, and sustainable growth as strong risk-adjusted returns for our stakeholders. We're confident that Synchrony is operating from a position of strength as we navigate the year ahead. We're excited about the opportunities we see to drive still greater long-term value as we continue to partner with hundreds of thousands of small and midsized businesses and health providers to provide access to credit to our more than 70 million customers for their everyday needs and wants. And with that, I'll turn the call back to Kathryn to open the Q&A. Kathryn Miller -- Senior Vice President, Investor Relations That concludes our prepared remarks. We will now begin the Q&A session. So that we can accommodate as many of you as possible. I'd like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the investor relations team will be available after the call. Operator, please start the Q&A session. Questions & Answers: Operator [Operator instructions]. We'll take our first question from Ryan Nash with Goldman Sachs. Please go ahead. Ryan Nash -- Goldman Sachs -- Analyst Hey, good morning, guys. Brian Doubles -- President and Chief Executive Officer Good morning, Ryan. Ryan Nash -- Goldman Sachs -- Analyst So it seems like charge-offs are coming in a little bit higher than expected, but we've now seen delinquencies potentially inflect and starting to follow seasonal patterns. So can you maybe talk about what this means for the full year loss rate? And where do you see losses in the allowance settling out over the intermediate time frame if your forward view proves accurate? Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Thanks for the question, Ryan. So again, I think we have been somewhat clear that we believe charge-offs when you look at the delinquency trend as we entered into 2024 that charge-offs will peak in the first half of the year and decline. I think you see that, well, certainly in the end in the first quarter. I think when you see the results in April when we put out a rate, you will see delinquencies down on both a 30-plus and 90-plus basis relative to what we just reported here today. So I think when you start looking at that, you look at the seasoning of the credit actions that we took really in the second and third quarter of last year. We feel good that the charge-off rate will decline in the back half of the year. And certainly, we haven't changed our underwriting targets to be in the 5.5% to 6% range, generally speaking. So we feel good about that, which leads us to the belief that if you see that lower net charge-off rate in the back half of the year and you project that forward into 2025 that the reserve coverage rate should be below the 10.26 rate that we had really at the end of last year and really the increase in the first quarter here was reflective more of the seasonal patterns than anything else. Ryan Nash -- Goldman Sachs -- Analyst Got it. And then maybe as a follow-up. So the RSA has beaten several quarters in a row. 1Q was well below that $3.50 to $3.75, I think you had outlined in the prior guidance. So maybe just talk a little bit about how you're thinking about the RSA for '24. This is, of course, excellent fees. And do you think the new normal for this is below that 4% to 4.25%, 4.5% you've outlined in the past? Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes, Ryan, as I look the RSA trend, the first quarter was it that clearly, when you look at year-over-year on the higher net charge-offs, which was a substantial amount of the decrease in the RSA partially offset about a third of it offset by really NII growth. And the NII was a little bit suppressed because you had the last full impact on your interest-bearing liabilities. If I take a step back for a second and think about the core business, Ryan, I believe we're at a point where we have peaked on assuming no rate increases and peaked on our interest-bearing liability costs as I talked about the net charge-off rate taking in the first half, you should see an upward bias than in the RSA as we step through the remaining quarters of the year, the other variable will be volume. So even if you looked on a linked quarter basis, volume being down and being down a little bit year-over-year for some of the RSA clients will play a factor, but it should trend upwards as we step through, given the peaking nature of the interest-bearing liability costs and charge-offs. Ryan Nash -- Goldman Sachs -- Analyst Thanks for the color, Brian. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Ryan. Operator Thank you. We'll take our next question from Sanjay Sakhrani with KBW. Please go ahead. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Good morning. I guess my first question on purchase volume. Obviously, that continues to remain weak. Could we just talk about sort of how we get it back to a baseline that accelerates? I know inflation is sort of weighing in on the consumer. But maybe just talk about what's driving that and how and when we get it back to a baseline that's higher. Brian Doubles -- President and Chief Executive Officer Yes, Sanjay, maybe I'll start on this and then pass it to Brian. I mean, look, I think generally, we're pretty pleased with the growth that we're seeing in the business. I think the consumer is still in good shape. Obviously, the job market is very strong, that's helping. But you are seeing a lot of that spend being driven by the higher end consumer -- the higher income consumer. And that's actually not a bad thing. I think they're benefiting obviously job market, house prices are up, stock prices are up. On the lower end, that's where you're seeing some of the slowdown. And from a credit perspective, that's not the worst thing. I think we see people being prudent. I think they're managing to a budget, they're managing to their cash flows. They're not overextending. So I think there's a positive read-through from a credit perspective on that. I don't know, Brian, if you want to add. Brian Wenzel -- Executive Vice President, Chief Financial Officer The first thing, Sanjay, I want to remind people, we're comping off of what I'd say is a really strong quarter last year. So when you look at a 2% up, that is very strong. It's a record for our company for the first quarter. Brian highlighted some of the differences, I think you're plus 8% on the higher freight cost is down a little bit year-over-year in lower freight cost. We are seeing most certainly the consumer step back in certain bigger ticket areas, right, either going down in transaction values, which I think you see reflected in the home and auto purchase line being down and really in lifestyle. But what you see strengths in those pockets. Our home specialty business is up in double digits or our outdoor business is up. So it's selected. The consumer is just being more prudent with the dollars. Again, we see transaction frequency up even though transaction values are down. So the consumer, I'd say, is managing through this period. So I wouldn't necessarily read too much into it that there's a big change in the consumer profile and what they're doing. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst OK. Very helpful. Thank you. And I couldn't let you guys get away without a late fee question. So maybe just as we're waiting here on the courts at this point. Maybe you can just talk about how you're planning for a mid-May implementation and how much flexibility you have if there's an injunction after the current planned implementation period? And any early observations on the PPPC behavior changes? I know most of that will be in the second half. Thank you. Brian Doubles -- President and Chief Executive Officer Yes, Sanjay. So we're not surprised this was the second question, we thought it might be the first. Obviously, we are waiting on the outcome of litigation that is uncertain but we're executing our plan. We said from the beginning that we weren't going to wait for the outcome on litigation, just given the uncertainty. So we began the implementation of our changes in December. We're already over 60% done with those. We've got to send out the changes in terms, etc. The vast majority of those will be done in the next two months. So look, we're executing the plan. In terms of timing, our basis was October 1 that assumed an injunction. With that said, it will be extremely operationally challenging to get this implemented in May, but we're preparing for that as well as a scenario. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Brian Doubles -- President and Chief Executive Officer Thanks, Sanjay. Operator Thank you. We'll take our next question from Terry Ma with Barclays. Please go ahead. Terry Ma -- Barclays -- Analyst Thanks. Good morning. I just wanted to follow up on the product policy and pricing changes. Is there any way we should think about how those benefits sort of materialize once it's kind of fully phased in? Is there a way to think about whether or not it's a slower ramp through the year, a step up or kind of like a quicker ramp? Brian Wenzel -- Executive Vice President, Chief Financial Officer I'll take this and see if Brian has a follow-on. I think what you should expect to see is beginning an impact in a little bit in the second quarter, more in the third quarter with regard to the mitigants and then it continues to build from there. I've gotten the question in the past, and we really hadn't talked very much about it. When you think about how the APR phases in for the consumer. So when the APR becomes effective, which again, think about that as 60 days after notice, you'll begin to feel the effects of that, I'd say 50% in the first 12 months if you roll that out, 75% of 24 months. So you begin to fill that out. Now some of the other fees that come in and some of the other policy changes, they are more immediate. When it comes through year now, we'll certainly will see, as that flows through, there will be some adoption really relating to going with the e-statements and things like that, but it flow through different parts of the P&L that we expect. So again, I think you begin to see a ramp with some of the things that are more immediate and it gives you a sense on how the APR comes in. But that's why there was a blend in order to kind of get to that neutrality point a little bit sooner than just relying upon APRs. Terry Ma -- Barclays -- Analyst Got it. That's helpful. And then for my follow-up, I just had a question on your cash balances. It looked quite elevated this quarter relative to last year. Any color you can provide there on how we should think about that going forward? Brian Wenzel -- Executive Vice President, Chief Financial Officer Terry, to be honest with you, we have excess liquidity this quarter. I go back and attribute that really to the strength of our deposit franchise. I think when you just look at the core retail deposits were up $3.4 billion from the end of last year. And then you put the seasonal nature of the cash that kind of comes in, it served us well as we purchased Ally for $2 million, but we also got $600 million coming in from the sale of the Pets Best franchise. So I'd say liquidity is kind of peaking. So I think if you think about margin and the effects on margins, you step through, net interest margin is probably at a low point for the year in the first quarter, given all that excess liquidity. And listen, I think we've heard other lenders over the last week or two talk about balances being down, flatter balance sheets. That's not what we're expecting. So clearly, we're still in deposit gathering mode. We haven't really done anything to significantly track new deposits. It's just the strength and attractiveness of our digital franchise. Terry Ma -- Barclays -- Analyst OK. Great. Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Terry. Operator We'll take our next question from John Hecht with Jefferies. Please go ahead. John Hecht -- Jefferies -- Analyst Yes, guys. Good morning. Thanks for taking my question. I guess just a little bit more on the net interest margin, Brian, I know there's always a seasonal impact in Q1 as you gather deposits to kind of prefund for growth later in the year. And then you mentioned the PetSmart kind of causing incremental cash balances. But maybe could you give us some sense for like the -- parse out the -- what drove the margin decline this quarter relative to, say, 1Q '23? And then maybe talk about marginal deposit pricing and where you're kind of in the CD markets and the savings account markets and when deposit costs should level out. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks for the question, John. So when I think about year-over-year net interest margin, right, it's down 67 basis points. The biggest driver of that if I do net funding costs, so think about your interest-bearing liability costs offset by your income coming off the investment portfolio, that's about 88 points of decline that came off of that. There's another 19 basis points decline of having a higher -- at a higher liquidity portfolio year-over-year. That's been offset by the interest of fee yield, which is plus 40. Again, as we think about how that develops for the year, the asset -- the ALR kind of mix will neutralize back out. We believe we peaked on interest-bearing liability costs from here. So in theory, as you step through, net interest margin should really improve as you move throughout the year. To your second question around pricing, really, when you think about the various tenors. If you looked at our 12-month CD rate, we're down 50 basis points from the end of the year 4Q '23 down to 48 days. We followed our people down which is generally flat to the second quarter of 2023. All issuers or all digital banks do have promo rates. So we have one promo rate still over 5%, which is our lever 15-month, and that's really to manage at the end of the day, our retention on CDs and be competitive with other people, which have kind of off tenor. I would expect, as we see people who are trying to manage their balancing, their liquidity down, we'll follow the market down here. We generally lag the brick-and-mortar banks, but we will follow the digital banks down as we move throughout the year. The final piece I'd say, John, is we still have three rate cuts in, but we didn't really have them coming into September, so there's no real impact unless something was more significant and moved sooner in the year from the Fed. John Hecht -- Jefferies -- Analyst OK. And then maybe this is a little sticky of a question, but if -- and I know you've pulled EPS guidance, but ex rate fees with the -- your original $5.75 to $6 EPS still hold? Or are there other changes that we should consider reflective of kind of just the trend changes that we want to consider in terms of modeling? Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. So just to be clear, John, we put out the 8-K on March 5 that had the EPA guidance, we have not pulled that guidance. We just didn't reiterate it because it's only 45 days ago, so we did put it on the page this morning. If I think about that core business, what I'd say, Brian and I would probably tell you is that we're ahead of what we thought we're going to be. I think it's just bearing liability costs are up were better than our expectations. Charge drops generally in line with our expectations. And then when you start to think about some of the things I've highlighted about. Number one, your interest-bearing liabilities cost peaking; number two, charge-offs peaking in the second half. And I mentioned on this call that you're going to see a sequential decline in delinquencies. That's in line I think when you then think about the reserve rate being lower than 10, 26, I think that sets up and is consistent with the guidance we provided out in March 5. But again, it's only 45 days or so ago. John Hecht -- Jefferies -- Analyst That's great color. Thanks so much. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, John. Operator Thank you. We'll take our next question from Jeff Adelson with Morgan Stanley. Please go ahead. Jeff Adelson -- Morgan Stanley -- Analyst Good morning, guys. Thanks for taking my questions. Just on the credit outlook, I wanted to dig in a little bit more on the mid-'24 versus first half '24. Just given the nice delinquency formation improvement you've been seeing and your second quarter tends to be the seasonally best for NCO. Just wanted to help understand what mid-2024 looks like here. Is that more of a seasonally adjusted peak year-over-year growth peak? Or -- and maybe just help us understand what you're thinking about there. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Maybe I'll try to simplify this, Jeff, but thanks for the question. Everything is seasonally adjusted. So we built our plan. It has a seasonal overlays, which have been muted the last couple of years, given the normalization to happen as we move back to the pre-pandemic levels of delinquency. I would think about it in this way and just fairly simple. First half losses will be higher than second half losses and I think if you just kind of rolled most certainly are 30-plus and 90-plus out, you can kind of see how that will play through if you believe that you're going to get a band here in April, further than in dollars. You can see how it flows out. So I just think about it in half to simplify versus trying to get to an exact date when it peaks. Jeff Adelson -- Morgan Stanley -- Analyst Got it. And again, on the late fee I think you mentioned how difficult it would be to implement operationally in May. Could you just talk about what that specifically might look like for you? And how we maybe can think about the $0.15 to $0.25 impact you made out previously, if that does happen? And kind of as part of the question as well, I know you mentioned 60% of the changes are out. Can you just talk a little bit about the consumer behavior, response rate in terms of how they're reacting to those changes so far? Brian Doubles -- President and Chief Executive Officer Yes, I'll take the first part of that. So operationally, it's very challenging from a number of different angles. And obviously, it's for the issuer, but also the vendors that the issuers rely on. I think it's important to note, too, that this is across the industry. It's not specific to us. Everybody has got the same challenges. If any event we do have to implement this on May 14. I think we were prepared to make the systematic changes and things like that. The real challenges come around terms changes and updating collateral and things like that. So that's where a lot of the operational complexity is. And I'll turn it over to Brian. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. So to try to provide a dimension, really more a framework to think about it, Jeff. Our base case assumption as we walked in was an October implementation day, we thought that's going to be the case. There are a lot of scenarios between here and when the courts will take action on the pending litigation and the injunction. So it's difficult to speculate on any particular scenario because it's just so uncertain. I think everyone would have thought something different, at least everyone on this call would have had a different opinion. That being said, if you want to think about a framework for one second. Number one, I'd say this doesn't impact where you exit out of 2025 from projective whether it's October or earlier than October, that exit point is exactly the same, number one. Number two, it doesn't really impact the stability of our business and what we're doing from our PPPC changes. As Brian talked about how much we've rolled out. So that -- those two things fundamentally don't change. That being said, if you think about an implementation date, there's a much larger impact in 2024 on EPS. But then as you think about 2025, that EPS generally then would be higher than either the October scenario or significantly higher on an actual '24 to '25 basis as you look at it. So once we have greater clarity with regard to when the actual implementation date happens or occurs or will occur. We'll then when it provide incremental transparency relative to the financial implications, both on '24 and try to dimensionalize '25 for people as well. But I think it's important to understand those frameworks about how we exit '25 and then any incremental detriment in '24 in theory get a benefit in '25. Brian Doubles -- President and Chief Executive Officer And then just on your last question on consumer behavior and impact. I'd say we haven't seen anything yet that's different than our expectations. I'd say it's largely in line. But the only caution I would have is it's very early. There's a bleed in period for a lot of these terms changes. But so far, what we're seeing from the consumer side is generally in line with what we expected. Jeff Adelson -- Morgan Stanley -- Analyst Great. Thank you. Brian Doubles -- President and Chief Executive Officer Thanks, Jeff. Operator Thank you. We will take our next question from Saul Martinez with HSBC. Please go ahead. Saul Martinez -- HSBC -- Analyst Thank you. Good morning. Thanks for taking my question. So just a follow up on the response to the last question on the PPPC impact. So as I hear you right, the March 5 8-K, the guidance that -- or the estimates that you gave there of the offsets ranging from $650 million to $700 million pre-tax, which does imply a pretty significant ramp given the time rises gave into the fourth quarter. We should assume -- those are still good benchmarks to use and -- because it obviously does imply a pretty significant ramp in the back end of the year in terms of NII. That's the other late fee impact. So I just want to make sure that those numbers are still applicable or am I missing something there? Brian Wenzel -- Executive Vice President, Chief Financial Officer Well, let me just start with. That's based off on October implementation date. And the way to think about it is you begin to have some of the PPPC changes happen in the second and third quarters, partially offset by RSA, then you come into the fourth quarter, you would have the detriment from the late fee going away, but a higher RSA offset in that quarter. Obviously, that all shifts if you went to an earlier implementation date. So that range will change materially in a situation where you had a potential implementation day prior to October. Again, I think if that does happen, we'll come back and provide greater clarity on the impact on the late fees as well as the impact on the changes that we're doing. Saul Martinez -- HSBC -- Analyst OK. OK. That's helpful. And I guess just a broader question. You did in your presentation reiterate the long-term target, 2.5-plus percent ROA, 28-plus percent RPC. I get the offsets and you guys are working to fully offset that. But it is a pretty significant -- if it gets implemented, it is a pretty significant reduction or the source of revenue that effectively goes away and we'll see what happens with Basel III, but at least maybe it's not going to be an impact. But the direction of travel at least on capital is moving higher. I'm just curious like how you're thinking about the long-term targets for profitability going forward, your degree of confidence in how you -- where you think those are still applicable targets? Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Obviously, we look at it and Brian and I have been very clear that the organization, our goal is to be ROA neutral at the end of the impact of the late fee rule change. And we -- again, when we get better clarity with regard to the implementation date, we could talk a little bit about that timing. So the goal is to get back to ROA neutral. And that's the plan that we are rolling out and beginning to execute today. Understand there are a lot of assumptions with regard to consumer behavior that are in there and other things that can impact it. That being said, if you think about a more normalized environment, right? So I think 5.5% interest rates are not normalized. When you think about an inflation rate that's evolving when they normalize, you should be able to come back to that ROA profile that's -- and that's one of the strengths of the RSA itself that kind of helps us get back to that. From a capital standpoint, I can't really forecast and I'm not sure other people can, where exactly the Fed may or may not go with regard to Basel III. I mean certainly, there has not been a lot of support around that. So we'll see what those changes are. That being said, we actually have excess capital, and we're going to continue to move down toward our target, which helps us get to the ROTCE. So again, the focus on being ROA neutral through the rule team, number one, deploying our excess capital, whether that being to our RWA, that's accretive to earnings in ROA or when we turn it back to shareholders. Our goal is to get back to those medium to long-term targets we put out a couple of years ago. Saul Martinez -- HSBC -- Analyst OK. Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thank you. Have a good day. Operator Thank you. We will take our next question from Don Fandetti with Wells Fargo. Please go ahead. Don Fandetti -- Wells Fargo Securities -- Analyst Good morning. Your capital position is still pretty strong. I was just curious if you thought the CFPB changes could lead to some portfolio movements over the next year or two? And do you see any more opportunistic deals like Ally? Brian Doubles -- President and Chief Executive Officer Yes. Look, we're always on the lookout for potential acquisitions or new programs, Ally fit our business model perfectly. It's exactly the type of acquisition that we look for. It's in industries that we know really well. We understand the products, a great cultural fit, like it just -- it checked all the boxes. So we have excess capital today. We generate a lot of capital over the calendar year. And if we have the opportunity to do something opportunistic, we certainly have the financial resources to do it. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. The only thing I'd add on to that, just to dimensionalize it for you, if you look at Page 12 of our earnings deck, we showed that the earnings power of this business does generate that capital, you look year-over-year, last 12 months, we generated 2.5% CET1 just from the net earnings of the business. So really positive effects that you can look at and lean into plus you have the excess capital that weigh between there and our target level of the CET1. Brian Doubles -- President and Chief Executive Officer Yes. The only other point I'd make on this is we are very disciplined when it comes to accretive acquisitions that have a really good strategic fit. I mean, I think you've seen that discipline over the years. We haven't done really large-scale M&A. We've been very thoughtful about finding things that are relatively modest from a capital outlay perspective, but our businesses that we can grow really well. That's a great example of that, a perfect example of that, a leg row I think Ally is going to be a home run for us. So we are very disciplined in terms of what we look for. Don Fandetti -- Wells Fargo Securities -- Analyst Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Don. Operator Thank you. We'll take the next question Rick Shane with J.P. Morgan. Please go ahead. Rick Shane -- JPMorgan Chase and Company -- Analyst Hi, guys. Two questions this morning. First, on the CFPB, one of the consequences that the industry has raised in terms of the rule changes, the loss of deterrents, would suggest that DQs will be higher. I'm curious if you guys have had discussions with your accountants related to how you will treat reserve policies if you have higher delinquencies but potentially assume lower pull-throughs? Brian Wenzel -- Executive Vice President, Chief Financial Officer Rick, thanks for the question. Well, certainly, we've had internal conversations about the effects of deterrents and it's really going to be how we model any potential change in delinquency. And again, what you're looking at here are individuals who are making a choice not to pay, those who lost their job or had a health event, and roll in delinquency, you're not going to rehabilitate that this wasn't a deterrent for them. They're going to roll to loss or roll the settlement, etc. This is people who made an active decision to -- they prioritize one payment over another payment. We would have to model that out and then we'll certainly get the accounts comfortable with how it is. But again, we'll have to see because no one really did a lot of testing control at this level of the turn. Most certainly, there's things done back in the CARD Act that demonstrated deterrence, but we'll have to see how it plays out, Rick. Rick Shane -- JPMorgan Chase and Company -- Analyst Got it. Thank you. And then in terms of the concept of charge-off peak in the middle of the year, seasonality works in your favor really steadily over the next six months and then starts to reverse in the fourth quarter. When you're talking about a peak, are you suggesting that as we move into the fourth quarter, charge-offs will continue to decline or that they will normally seasonally rebound but perhaps not quite as much as they have in the past. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Thanks for the question again, Rick. We haven't given quarterly guidance. Again, I'm just going to give you the framework. We applied seasonal patterns to how the loss rate works again. We believe we're more normalized and back to the pre-pandemic levels. And I think as you begin to see, you will see, again, in April, dollar declines in 30 plus and 90 plus, which have a flow-through effect both on the third quarter and the fourth quarter as they kind of come through. So we're not going to get into specific quarter guidance now. But again, the rates in the first half of the year will be higher than the rates in the second half of the year. Rick Shane -- JPMorgan Chase and Company -- Analyst Got it. Brian, thank you very much. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks for coming. Good day. Operator We'll take our next question from Brian Foran with Autonomous Research. Please go ahead. Brian Foran -- Autonomous Research -- Analyst HI. I was wondering if you could just speak to your annual internal stress testing process. And it's a little screwy, I guess, in this two-year window because you've got the late fee folding in, but then you would already weakened the business with peak losses. Does that become a constraint at all for capital considerations? Or do you feel like you have enough excess capital and enough line of sight to this ROA neutrality that you can kind of look through that maybe a temporarily elevated stress test result. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Brian. So first, let me just be clear. We have submitted our capital plan to the -- that they were part of the horizontals, were part of the CCAR group, albeit we do not get a stress capital buffer until 2026. So the process remains somewhat the same as in prior years other than will engage a little bit differently with the Fed than we have in the past. But again, the stress capital buffer comes in 2026. When you specifically look at the capital plan that our board just approved and management presented to them, there were scenarios or scenario in there around late fees and the impact of late fees that put it there. That doesn't -- that informed our overall capital decision, but doesn't necessarily restrict the plans that we had. Even if I came back and said I had an earlier implementation date, which we talked a little bit on this call, that would not necessarily interfere with our capital targets and our plans. Again, all that's subject to the normal things we'd say is the market conditions and everything else, Brian. But the impact of the late fee roll doesn't necessarily impact the capital plan that we announced this morning. Brian Foran -- Autonomous Research -- Analyst That's very helpful. And maybe if I could sneak in on competition. Are you generally seeing competitors in the market respond in common ways on these kind of PPPC efforts? Is there any evidence of any putting to big divergence or people breaking from the pack? Or is kind of everyone doing different combinations of similar things. Brian Doubles -- President and Chief Executive Officer We only see what's out there in terms of public changes in terms. But I would tell you, my expectation is that everybody is going to do a combination of the same things that we're doing. It's a pretty -- it's a relatively standard playbook. You might see some issuers do a couple of things differently. But I think on the whole, it's going to be the APR increases, different types of fees, etc., to offset this. And it's important that we do. Our goal from the beginning has been to protect our partners and continue to provide credit to the customers that we do today. And unfortunately, that's impossible to do without these offsets. Brian Wenzel -- Executive Vice President, Chief Financial Officer The only thing I'd add, Brian, I do think the one thing you will see we probably have been a little bit more -- or surprise showed a little bit more sense of urgency and gotten out ahead of this based upon discussions with our partners. So that may pay a little bit, but I think Brian is right over the medium term here. That's where you're going to see the convergence. Brian Foran -- Autonomous Research -- Analyst Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Brian. Have a good day. Operator We'll take our next question from John Pancari with Evercore. Please go ahead. John Pancari -- Evercore ISI -- Analyst Good morning. Some of your -- on that very last point, they just brought up some of the peer card vendors that have somewhat smaller private label and co-brand card businesses that have begun to indicate maybe a willingness to absorb the late fee -- the foregone late fees as a result of the rule change. Can you talk about if we do see that happen at some players where late fees are a smaller piece of their overall revenue, but they're in the private label in co-brand business, do you view that as a competitive threat? They do absorb the impact? Brian Doubles -- President and Chief Executive Officer I don't see it as a competitive threat today. I think in our space, in the vast majority of our business, I think you're going to see issuers do the same types of things that we're doing. I think it's going to be really important in terms of the economic sharing with the partners. I think we're obviously focused on providing credit to the customers that we do today. And fortunately, you need to do some of these things in order to protect that and protect our partners. So I do think you'll start to see -- and we're starting to see this now. You'll start to see some issuers. We're building this into pricing models as we look at new business. We're starting to build it as we bring on portfolios from our competitors you've got to contemplate an $8 late fee. You have to assume that while we're hoping for a better outcome on the litigation, obviously, you got to build in scenarios where we have a much lower late fee. So I think it will even out over time across the industry, primarily in the space that we operate in today. Brian Wenzel -- Executive Vice President, Chief Financial Officer The one thing, John, you just took it up a level for a second. So if you had a theoretical case where someone who has a smaller business than ours decides to absorb some of that late fee, what you end up into is a suboptimal return profile. And inside a large institutionwide may be immaterial. The question would be, does it attract capital? And how long can you sustain that? And we've seen over history, businesses come out of flavor in certain larger institutions where this is a small part. This is what we do in the same way that we look inside our businesses, our platforms and allocate capital to some of our better performing, higher returning portions of the portfolio that, I think, over time will have to happen to these institutions. So I'm not sure that that's a long-term viable strategy if someone wants to do that. But again, it's very theoretical your question. John Pancari -- Evercore ISI -- Analyst Got it. No, that makes sense. Thanks for that. And then separately, back to the EPS, sorry to believe that, but the -- I know you're not reiterating that $5.70 to $6 guide. And I just want to understand, it's just because it was only 45 days ago, and the underlying components that you had baked in at that point in March have not changed materially enough to change how you're thinking about your underlying trends? I know we've had moves in rates, had some development on the late fee dynamics. But I just want to make sure that the core expectations that were part of that $5.7 to $6 have not changed at all. Brian Wenzel -- Executive Vice President, Chief Financial Officer Yes. Again, I'm going to just say it again, we put that guidance up 45 days ago. I didn't feel a need to -- or I think Brian feel the need to put it back on this page or two kind of update again, what I've said is the quarter and the points I raised about net interest margin, losses, reserves, positive on expenses, I think should be viewed favorably relative to that kind of base based BAU performance of the business. So we're very pleased on how we're exiting out of the first quarter and moving in on a core BAU basis. John Pancari -- Evercore ISI -- Analyst OK, Brian. Thanks a lot. [Inaudible] Brian Wenzel -- Executive Vice President, Chief Financial Officer Great. Thanks. Have a good day. Operator And we are almost at our allotted time. We will take one final question from Mihir Bhatia with Bank of America. Please go ahead. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Hi. Thanks for squeezing me in, and good morning. Just wanted to -- two big picture questions. Maybe to start first just on the competitive situation. And really more -- not so much necessarily on the new programs, but just in terms of the financing offers that are already out there for consumers. How is the purchase volume being impacted at all by consumers just having more choices today? Are there any market share or penetration with sophisticating share in terms of how often consumers turning to Symphony versus others? As a percent of your retail partner sales or anything like that? I'm sure you track it. Brian Doubles -- President and Chief Executive Officer Yes, we do track it by partner. We look at the penetration rate, sales on our card versus other products. I'll tell you, generally, we're very pleased that inside of the majority of our partner programs that we're gaining share. I think one of the things that helps us do that as we think about a multiproduct strategy, we see our partners engaging more on being able to offer a revolving product, maybe a secured card, buy now pay later. And I think that's helping us gain share. If you stick to a one product strategy, I think over time, that's a losing strategy and I think you will lose share, which is why we think the multiproduct strategy over time is a winning one. So we feel really good about our ability to continue to take share inside of our partner programs, but also just more generally and even some of the smaller to midsized space. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. And then, Brian, just last question. In terms of your -- in the prepared remarks, I think in the press release today, you highlighted the partnership with small- and medium-sized businesses as well as health providers. I think the emphasis is a little bit of a new emphasis on the small- and medium-sized businesses relative to the old one. So I was just curious, is the growth focus that Synchrony switching a little bit to smaller or maybe the more proprietary programs versus maybe a historical focus on just being the partner of choice for large retailers. Brian Doubles -- President and Chief Executive Officer Well, I definitely think that's an underappreciated part of our business model. I think people tend to focus on the large partner programs, but we serve hundreds of thousands of providers and small- to medium-sized businesses. And sometimes that gets lost a little bit. So we're definitely leaning in more there. I'd say we've shifted investment dollars into the health and wellness space, you see that paying off when you look at the health and wellness numbers, I think receivables were up 20%, like we're really reaping the benefits of those investments. So that's a very attractive space for us. The large partner space is still very attractive as well, but I think that part of the business always gets a lot of attention. We're trying to make sure that we talk enough about all the small- to medium-sized businesses and the hundreds of thousands of dentists and pet care specialists across the country that we serve. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Thank you. Brian Wenzel -- Executive Vice President, Chief Financial Officer Thanks, Mihir. Have a good day.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good afternoon. Thank you for attending the Teladoc Health Q1 2024 earnings call. My name is Matt, and I'll be your moderator for today's call. All lines have been muted during the presentation portion of the call. There'll be some opportunity for questions and answers at the end. [Operator instructions] I would like to pass the conference over to our host, Adam Vandervoort, chief legal officer, Teladoc. Adam, please go ahead. Adam Vandervoort -- Chief Legal Officer Thank you and good afternoon. Today, after the market closed, we issued a press release announcing our first quarter 2024 financial results. This press release and the accompanying slide presentation are available in the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Mala Murthy, our acting chief executive officer and chief financial officer; and Laizer Kornwasser, our president of enterprise growth and global markets. During this call, we will also discuss our outlook. And our prepared remarks will be followed by a question-and-answer session. Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating Teladoc Health's performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our website. I would now like to turn the call over to Mala. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Thank you, Adam, and thanks, everyone, for joining us today. Before we begin, I'd like to take a moment to reflect on the recent leadership changes at Teladoc Health. First off, on behalf of Teladoc's more than 5,000 employees, board of directors, and executive leadership team, I would like to extend our deepest gratitude to Jason Gorevic for his accomplishments over the past 15 years. Jason leaves a tremendous legacy, having firmly established Teladoc as the industry leader in whole-person virtual care. As we mentioned in our February earnings call, Teladoc is in a time of transition. And as part of this evolution, the Board of Directors decided that it was time to look for a new leader for our company, someone to help us write the next chapter in our growth story. The board's search for a successor is well underway and our permanent CEO is expected to be named later this year. The Board has appointed me to serve as CEO, while they conduct the search, and I'm honored to play this role for a company whose work I believe in so deeply. In the meantime, however, we are wasting no time in identifying and seizing opportunities to leverage our significant assets and capabilities. As an organization, our focus is on accelerating growth on both the top and bottom lines over the medium and longer term. And my focus as acting CEO is to ensure that our strategy continues to be supported by the appropriate level of investment that our leadership team is executing on our priorities and that we are accelerating the pace of change and innovation across our business. With that, turning now to a review of our first quarter performance. I'm pleased to report a solid start to the year across the business, exceeding our financial and operating guidance for both consolidated revenue and adjusted EBITDA in the first quarter. Our team remains laser-focused on our key initiatives, which include, building upon our market leadership position, driving increased product penetration through our large installed base of over 90 million virtual care members, and accelerating our bottom-line performance. This focus is evident in our first quarter results. In the integrated care segment, we are pleased to see continued strong interest in our whole-person care suite of products. First quarter integrated care revenue grew 7.8% year over year to $377 million, benefiting from high single-digit growth in our chronic care book of business, as well as strong visit revenues, driven by increased infectious disease activity, as well as an 8% increase in membership year over year. Chronic care enrollment remains strong, up 9% year over year in the first quarter. BetterHelp revenue of $269 million declined 3.7% versus a difficult comparison in the first quarter of last year. BetterHelp also generated modestly lower revenue on a sequential basis, driven in part by a decline in paying users following our typical pullback in ad spend in the fourth quarter, which is the most expensive time of the year in our marketing channels. Additionally, as expected, the lower returns on our social media advertising spend we experienced in the second half of 2023 persisted in the first quarter and are impacting our year-over-year growth rates in the first half of this year. We are making progress to improve our yield on advertising spend, which contemplates not only cost per acquisition but also retention and other factors as well. I will speak to our efforts to reinvigorate growth in our BetterHelp business later in the call. We continue to make progress on our bottom-line performance with first quarter consolidated adjusted EBITDA margin of 9.8% improving 140 basis points year over year and adjusted EBITDA of $63 million growing nearly 20% year over year. We are executing against our cost-saving and productivity initiatives and we remain on track to deliver $43 million in cost savings on a GAAP basis for our business in 2024, and a total of $85 million in 2025. The breadth of our product portfolio continues to drive productive conversations with both prospective and existing clients. Two-thirds of our bookings in the quarter came from cross-selling into our existing book of business with the remaining third coming from new clients, reflecting a continuation of our cross-selling momentum over the past several quarters along with an acceleration in bookings from new business. Both existing and prospective clients are demonstrating increased interest in our chronic care plus bundle solutions, and we remain optimistic about our ability to drive increased product penetration through our install base of nearly 92 million members over the next several years. In Q1, we saw another example of our land and expand strategy playing out as we added our diabetes program into a large health benefits provider, a client who had previously only purchased our telehealth solutions. We are also seeing growing interest in our weight management solution from employers, who are grappling with rising costs for GLP-1s and employee demand for these products. The addition of approximately 2.2 million members on a sequential basis since Q4 represents an additional Greenfield opportunity for future cross-sell and product penetration. And with more than $1 billion in cash and cash equivalents on our balance sheet, our financial strength continues to be another differentiator for our company and provides us with significant capacity and flexibility to invest and innovate in our business. We also continue to see growing benefits from our early and ongoing commitment to data and artificial intelligence with AI models now integrated across nearly all aspects of our business. From provider matching to enrollment optimization to member engagement, this automation is helping us not only reach our revenue and profitability goals but also achieve our mission of improving health by reaching more consumers. One exciting example is our use of generative AI in member engagement to create hyper-personalized content for individuals, to get them signed up for Teladoc services they need, and then to keep them on track. Our pilots with this AI use case, while still being carefully studied, are already delivering significant improvement in member engagement over prior approaches. I would now like to spend a few minutes reviewing our first quarter financial results in detail. First quarter consolidated revenue increased 3% year over year to $646 million, while first quarter adjusted EBITDA was $63 million, representing a margin of 9.8%. First quarter financial performance benefited from higher revenues in our Integrated Care segment and improved expense control. Turning to segment results, integrated care revenue increased 8% year over year to $377 million in the quarter, with growth relatively balanced across the portfolio. First quarter integrated care adjusted EBITDA was $47.7 million, representing a 260-basis-point expansion in margins to 12.6%. The margin outperformance relative to guidance was largely driven by strong chronic care program enrollment during the first quarter, which, combined with better expense control, helped deliver improved gross margins and bottom-line performance. Total chronic care program enrollment was $1.12 million at the end of the first quarter, representing growth of 9% year over year. Total US integrated care members grew $6.9 million over the prior year, representing 8% growth, and grew by $2.2 million sequentially to $91.8 million. Average integrated care revenue per US member of $1.38 was down $0.01 over the prior year's first quarter, reflecting the timing of new clients' onboarding and enrollment ramp. The onboarding of large populations and our expanding membership base represents a long runway for continued cross-selling of our chronic care and other B2B products as we execute against our land and expand strategy. First quarter BetterHelp segment revenue decreased 4% year over year to $269 million, driven by an 11% decrease in paying users. First quarter BetterHelp adjusted EBITDA was $15.5 million, representing a margin of 5.7%. As we have discussed previously, the first quarter is typically the seasonally weakest quarter from a margin perspective for our BetterHelp business as marketing expense ramps up following the fourth-quarter holiday season. As such, we continue to expect the first quarter to be the low point of the year for BetterHelp segment margins, and we expect consistent quarter-over-quarter margin improvement through the course of 2024. Consolidated net loss per share in the first quarter was $0.49, compared to a net loss per share of $0.42 in the first quarter of 2023. Net loss per share in the first quarter includes stock-based compensation of $42.3 million, or $0.25 per share restructuring charges, primarily related to severance of $9.7 million, or $0.06 per share, and amortization of acquired intangibles of $64.2 million, or $0.38 per share. During the first quarter, free cash flow was a net outflow of $27 million compared to a net outflow of $32 million in the first quarter of 2023. As a reminder, the first quarter is our seasonally lowest cash flow quarter given the payment of annual incentive compensation. We ended the quarter with $1.1 billion in cash and cash equivalents on the balance sheet. Turning now to forward guidance beginning with our integrated care segment. We expect integrated care revenue in the second quarter to be between 2% and 5% versus the prior-year period. As a reminder, in our first quarter call, we called out a delay in launching our B2B consumer engagement efforts due to a technical issue in mapping new client populations with an expected cumulative negative impact of $20 million for the full year, particularly in the second and third quarters. The impact of this delay, coupled with strong year-over-year first quarter chronic care results and the seasonal falloff of infectious disease-driven visit revenues versus the first quarter is expected to result in a lower year-over-year second quarter growth rate compared to our first quarter results. For the full year, as previously guided, we expect Integrated Care revenues to be in the low- to mid-single-digits, reflecting higher revenues in the second half versus the first half of the year, due primarily to the enrollment ramp in Chronic care and a growing contribution from the nearly 6 million new integrated care members we have added since the second quarter of last year. From an adjusted EBITDA perspective, we expect a 12% to 14% margin in the second quarter and we continue to expect 150 to 250 basis points of margin expansion for the full year, reflecting revenue-driven operating leverage and the impact of our cost-saving initiatives. As it relates to US integrated care membership, we expect 92 million to 93 million members for the second quarter and 92 million to 94 million members for the full year, an increase from previous guidance after adding 2 million members in the first quarter. Turning now to our BetterHelp segment. For the second quarter, we expect BetterHelp revenues to be in the range of a negative 8% to negative 4% over the prior-year period. Our second quarter guidance reflects challenging cost per acquisition through early Q1, which caused us to pull back on our advertising dollars in the quarter in keeping with our goal of balancing growth and margin. These factors led to a decline in users in Q1, which is impacting our Q2 revenue growth rate on top of a difficult comparison relative to the second quarter of 2023. However, we are seeing signs of stabilization in our cost per acquisition in more recent weeks, which gives us increased confidence in the back half of the year for our BetterHelp business, something I will speak to momentarily. For the full year, we continue to expect flat to low single-digit revenue growth in BetterHelp. We do expect BetterHelp's growth to accelerate in the second half of the year. I'd like to take a moment to discuss what's giving us increased confidence in the future of our BetterHelp business, which has been challenged in recent quarters. Late last year, we brought in new leadership for BetterHelp, who have helped inject a broader and more global perspective on growth levers for this business. We are seeing improvements in retention and in our international business, which are helping offset some of the impact from higher CPAs in the US by improving our overall yield on advertising spend. The success we are starting to see with these levers, along with the efforts in select international geographies that we expect to ramp up in the second half of the year, give us confidence in our second-half BetterHelp outlook. We expect these initiatives to lead to meaningfully higher membership growth and improved customer retention versus the first half. We are excited about the international opportunity, particularly in selected English-speaking geographies that are relatively underpenetrated compared to the US market, which will allow us to reallocate some advertising and marketing dollars at a higher marginal return as we continue to build out our infrastructure in those markets. Given these dynamics throughout the year, we expect that to help revenue growth for the full year to be in the flat to low-single-digits range as previously guided despite our lower first-half growth. I would also note that we have thoroughly pressure-tested the assumptions that underpin our BetterHelp guidance for the rest of the year. We take several factors into account when developing both the low-end and the high-end of the range, including recent trends in advertising yields, channel dynamics, consumer sentiment, and other macro factors, and we have taken a close look at each one of these. That said, the impact of difficult-to-predict macro events creates unknowns as it pertains to our yield on advertising in the second half of the year, and we will continue to provide updates on the trends that we are seeing in upcoming earnings calls. From a margin perspective, we expect BetterHelp adjusted EBITDA margins to be in the 9% to 10% range in the second quarter, and continue to expect margins to be flat plus or minus 50 basis points for the full year. The sequential margin improvements that we expect to see over the course of the year, primarily reflect the cumulative effect of new members added over the course of the year, the cadence of advertising spending, including the typical seasonal pullback in the fourth quarter, and innovation-driven improvements in our yield on advertising spend. On a consolidated basis, we expect second quarter revenue of $635 million to $660 million and adjusted EBITDA of $70 million to $80 million. Our full year guidance remains unchanged with the exception of the increase to our US Integrated Care membership that I've mentioned previously. We continue to expect consolidated revenue to be in the range of $2.635 billion to $2.735 billion for the full year, representing revenue growth of 1% to 5%, along with consolidated adjusted EBITDA of $350 million to $390 million, representing growth of 7% to 19% on a year-over-year basis. We expect full year free cash flow of $210 million to $240 million, driven by both the growth in adjusted EBITDA and an expected decline in capitalized software development costs. We are also maintaining our prior EPS guidance for the full year. Lastly, we are reiterating the three-year outlook that we provided you on our earnings call in February. In closing, I want to recognize my executive team and our broader leadership team for leaning in during this time of change. I've been incredibly pleased with their continued focus on living our values and delivering for our members and clients this year, especially over the past several weeks. We've had a solid start to the year, and are poised to deliver significant growth in the second half of 2024. I remain focused on our strategy, our execution, and on our people. With that, we will open it up for questions. Operator? Questions & Answers: Operator [Operator instructions] We ask that you please limit yourself to one question. We will pause here briefly as questions are registered. First question is from the line of Stephanie Davis with Barclays. Your line is now open. Stephanie Davis -- Barclays -- Analyst Hey, Mala. Thank you for taking my question and for wearing all of the hats right now. I was hoping you could talk a little bit about some early color on the international strategy and timing for BetterHelp. Can you talk to us about the rollouts, how we should be thinking about the cadence of that? And maybe if -- have you seen some of that come through already, which is giving you that confidence in that second-half growth rate? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Thank you, Stephanie. Yes, I'm wearing many hats. Happy to be here. So, in terms of the growth in international, as we had said on our last call, last year, International as a percentage of our total BetterHelp business was in the mid-teens. It is certainly contributing to the second-half ramp of revenue this year. Remember, it's not as if we are going into international de novo, we are already in a few markets. Several of them are English-speaking markets such as the UK, Canada, Australia. And the plan we have is for us to continue penetrating into those markets first. And that is what is driving our confidence in the second half ramp because we have been in these markets, we know the dynamics of the BetterHelp business in these markets. Based on our experience, we have knowledge of the economics of being in these markets. Obviously, as we penetrate these markets and invest more in these markets, we hope to continue to see the return on ad spend, as well as the revenue growth for the balance of both top-line growth and bottom-line growth that I expect to see. Stephanie Davis -- Barclays -- Analyst And for like a mini follow-up, is there any way to compare the kind of rollout you're seeing on those international markets where you're already in them versus what we're seeing in the US? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Here's what I would say. I expect International to grow faster than the US. Certainly, that is something that we saw last year. And I do expect that to continue. From a rollout perspective, Stephanie, I would say, we are going to start in the second half and roll out as we, you know, do our ad spending in these markets as we go through the second half. The one thing I will remind you is, Q4 typically in the US is always the seasonally weakest quarter from an ad spending perspective is the quarter where we will typically pull back our ad spend. And I would say that dynamic is in the US. We will evaluate and assess how much of that dynamic also plays out in the international markets. Operator Thank you for your question. The next question is from the line of Lisa Gill with J.P. Morgan. Your line is now open. Lisa Gill -- J.P. Morgan -- Analyst Hi, Mala. Just trying to understand two things. One, clearly understand the change in leadership and what the Board is going through. But just also curious if you're looking at any strategic changes to the business. And once again, under pressure on the BetterHelp side, I just heard you talk about international. But are there things that the board is reviewing, would be my first question. And then secondly, just really want to understand the opportunity around that 8% membership growth, which was really strong in the quarter. We didn't see an increase in either revenue or adjusted EBITDA. Is that just timing? Is there an opportunity for cross-sell? So, just really understanding how that's going to play into the numbers. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Lisa. Great questions. So, from an overall Board perspective, and what might that imply for changes, obviously, as I said in our prepared remarks, right now, the focus of the leadership team, my focus, and I would say the focus of the Board as well is for us to be laser-heads down focused on implementing our plans, our investments, our priorities, and frankly leading our employee base, the 5,000 plus employees we have through this period of transition and change. I would say also that I'm pleased with the solid start we have to the year. Hopefully, we have given you enough transparency and color as in our prepared remarks on what is really driving our confidence in our growth, both from a top-line perspective and our bottom-line perspective as we roll through the year. We've kept our overall 2024 guidance as is from a revenue-adjusted EBITDA and a cash flow perspective. We continue to make progress on our cost initiatives that we have talked about in February. So, all of those are things that require execution and I would say we are laser-focused on that. Beyond that, look, we are always looking at different parts of our business. We are looking at what top-line growth they bring in and what bottom-line growth they bring in. Certainly, as we said in our prepared remarks, the BetterHelp business has been challenged in recent quarters. And I would say, I am focused on the execution of the various initiatives that we talked about that will give us that second half ramp, whether it'd be improved retention, whether it'd be the fact that we are driving growth in international markets and the growth in the much smaller part of BetterHelp, the better sleep part of that business, which is also growing nicely. All of these require execution. On the integrated care side, I would say I'm pleased with the strong enrollment that we have started out with. Obviously, you know this, the enrollment ramps through the year, and we are certainly working through that. And that is going to drive our revenue growth and our profit, our margin expansion on the integrated care side as we go through the year. So, the answer to your question in terms of what we are evaluating and assessing is, we are executing. We are focused on driving our plans for this year. And we continue to assess how the various parts of our business are doing, and whether they are driving both the top line and the bottom line we see. Beyond that, I would say there isn't really more to comment on it at this time. On the second question you had around membership, here's what I would say. We certainly are pleased with the two million plus member ads that we had in the quarter. Remember, the benefit we have of the membership ads is always the fact that it is the underpinning of our land and expand strategy. So, it gives us fertile ground to continue to penetrate cross-sell upsell once we get these members into our fold. And as we sell in additional products, we expect to see the revenue accretion from that in the quarters ahead. Operator Thank you for your question. The next question is from the line of Jailendra Singh with Truist. Your line is now open. Jailendra Singh -- Truist Securities -- Analyst Thank you and thanks for taking my questions. I wanted to ask about chronic care program enrollment metrics. I understand it was up year over year, but it actually declined a little over 3% sequentially. Typically, we see a pickup from Q4 to Q1 due to new contract starts and enrollment increases in a new calendar year. So, can you provide some color there, Mala? And then what are your expectations around that metric as the year progresses? And more broadly, anything you can share about how you're focused on improving the positioning of the business in chronic care longer term in market, which seems to be getting very competitive. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. So, look, I would say I expect the enrollment to ramp through the year. That is typically always the case in a traditional year, and this year would be no different. Now, the one thing I would also say is, remember we had talked about the marketing pause in the last earnings call. We had talked about $20 million of revenue impact for this year. I would expect most of the impact of that marketing pause to be in the second and third quarters. But despite that, I would expect for our chronic care program enrollment to ramp up through the year just like in prior years. Laizer, do you want to handle the Jailendra's question on competition? Laizer Kornwasser -- President of Enterprise Growth and Global Markets Sure. When you look at what our customers and our clients are looking for, we are happy with where we are in the selling season. We're having productive conversations with both new and existing accounts. As Mala mentioned in her earlier remarks, for the quarter, two-thirds of our existing clients, two-thirds of our growth in bookings came from existing clients and one-third came from new clients. I want to make sure that we highlight that we're happy with the growth in bookings, not just in our domestic business, but also in our international business. And what are our clients looking for? Our clients are looking for value. They're looking for a scalable, reputable vendor that they can partner with that has a strong balance sheet that they can continue to partner with to drive value for them and for their consumers. And that hasn't changed. And I think that is feeding into our conversations with respect to our bookings. Mala Murthy -- Chief Executive Officer and Chief Financial Officer And then, Jailendra, just finishing up on your question around the chronic care enrollment. Look, this is a function of the fact that typically when we start off the year, you know, we onboard a number of lives and we also, at the same time, in Q1, is typically the time we would also see, you know, enrollees come on and enrollees roll off. And the net impact of that is what you're seeing. I would expect, as we ramp up the year, despite the marketing pause, I would expect that to continue to go on into the rest of the year. Operator Thank you for your question. The next question is from the line of Jessica Tassan with Piper Sandler. Your line is now open. Jessica Tassan -- Piper Sandler -- Analyst Hi, Mala. Thank you so much for the question and congrats on the good quarter and guide. I wanted to ask about the three-year outlook that you all issued on the fourth quarter call and then reiterated today. So, the low- to mid-single-digit annual consolidated revenue growth, mid-single integrated care, low-single BetterHelp, is that target achievable on an organic basis? And just maybe from an integrated care perspective, should we think about that growth continuing to be led by chronic care? And does it anticipate any new product launches? Just hoping for color around that three-year guide. Thank you. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Jess, for the question. Look, when we put that outlook out there in February, we had thought about the building blocks to those numbers that trajectory both on the integrated care side and the BetterHelp side. So, let me sort of comment on it one by one. On the integrated care side, I would say, as we had stated previously, think of it as a combination of low-single-digit growth on the much more well-penetrated telehealth side, and I would say mid to high-single-digit growth in chronic care. So, yes, we do expect chronic care momentum to help us achieve the overall mid-single-digit revenue growth for integrated care. On the BetterHelp side, from a revenue growth perspective, we had said low single digit. Look, here's what I would say on the BetterHelp side. The second half ramp that we have talked about, the initiatives that we have going to help us achieve that second half ramp, again, it's whether it'd be retention international continued momentum on better sleep. These are the inputs into the low-single-digit revenue growth for BetterHelp. And I would say, we will continue to execute against it. And we will continue to monitor it again, assuming that we don't have something very, very unfavorable happen from a cost-per-acquisition perspective, which will impact our advertising yields. So, assuming that we see CPAs in a reasonable range, I would say the building blocks that will help us grow in the second half will continue to be contributors into the low-single-digit revenue growth for BetterHelp. When it comes to margins, I would say the cost initiative programs that we have that will help us with opex leverage along with the revenue growth that we will see on the top line, particularly on the chronic care side, will certainly be contributors into our margin expansion that we have put out there. So, what I would say in summary is we have thought of the building blocks that go into the long-term outlook. And we will continue to assess, you know, how they perform. And as I said, this year and especially in the second half, BetterHelp will give us a lot more information on that. Operator Thank you for your question. Next question is from the line of Sean Dodge with RBC. Your line is now open. Sean Dodge -- RBC Capital Markets --- Analyst Yeah, thanks. Mala, you mentioned in BetterHelp with the new leadership team having seen some improvement in subscriber retention. Can you give us a sense of how long you're retaining BetterHelp users now on average? How much has that changed over the last couple of years? And then how much room and what kind of levers do you have to continue to drive improvements in that? What can you do to lengthen that? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. So, we haven't given out KPIs metrics, etc., specifically on retention, Sean. So, I don't want to go into specific retention metrics. What I will say is the following. We are seeing improved member retention primarily because of the innovation that we are driving in the platform, in our user experience, frankly, with the help of AI models that are continually improving our matching of consumers with their various needs with providers. So, it's never one thing that is driving this improvement in retention. It is many things that are driving this improvement in retention. And I would say that, you know, when I talk about the new leadership at BetterHelp, one of the important things to highlight is we are looking now at pressing on more than one lever in the BetterHelp business. We are looking to beyond the traditional focus on CAC. As we've talked about, we're looking at additional geographies, how can we continue to innovate in the user experience. In some instances, and we have talked about this in the past, we are looking at small surgical targeted pricing changes. All of which, in my view, are things that will improve on our revenue growth. And it's the innovation that is helping on our member -- improve member retention, the user retention. Laizer, is there anything you would like to add to that? Laizer Kornwasser -- President of Enterprise Growth and Global Markets Yeah, I guess the only thing I would add is historically at BetterHelp we've been very focused on the innovation on patient acquisition. And what I would tell you is we are balancing spending time on increasing the value of that member. And I would say there's not one specific thing other than being very innovative and testing out little things that are driving value so that our return on our advertising dollars increases. Operator Thank you for your question. Next question is from the line of Allen Lutz with Bank of America. Your line is now open. Allen Lutz -- Bank of America Merrill Lynch -- Analyst Good afternoon and thanks for taking the questions. Another one on BetterHelp. Mala, have you considered at all moving from just cash pay to participating in health plan networks as a way to drive growth? Is that something that you've considered and can you kind of talk about the pros and cons of making a move like that? Thanks. Mala Murthy -- Chief Executive Officer and Chief Financial Officer So, I would say, look, we assess various initiatives to continually innovate to drive growth, both on the top line and the bottom line. At this point in time, with the scale that BetterHelp has, you know, over $1 billion in revenue, it is by far one of the largest DTC players. And look, there are other competitors in the market, who have done, tried DTC, moved away to B2B. We have built scale in DTC. And I would say we will continue to focus on DTC. Having said that, I would also say we are looking for ways to improve and accelerate our growth in different ways. I don't want to comment much more on specifics at this point. To the extent that there is anything relevant to update, we will absolutely do so. But we are looking at various ways to drive top-line to accelerate our top-line growth in BetterHelp. Operator Thank you for your question. Next question is from the line of Sarah James with Cantor Fitzgerald. Your line is now open. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. Mala, I was hoping you could help us a little bit with the pacing of this year. So, specifically, thinking of the items that you have control over, like some of the savings initiatives to get to that run rate of 43 at the end of the year and then the advertising spend, can you help us pace through how the savings initiatives are going to play out? And then on the ad spend, is there any pull forward of that into 2Q versus your normal cadence? And are you thinking about because of the increased efficiency, just lower overall need for ad spend for the year? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Sarah, for the question. So, from a pacing perspective, we would be looking for the cost initiatives. And if you think about what are underpinning those cost initiatives, things like offshoring, things like automation, you know, savings from our third-party supplier spend. Several of those are initiatives that are evenly paced through the year. Now, obviously, if you think about something like offshoring and as we offshore, you will get the incremental impact, the full impact of the offshoring as we go later into the year. But I would say to you, several of the others, like third-party supplier spend, etc., you will see sort of evenly pave through the year. On your question on ad spend, the way I would think about it is as follows. In Q1, and especially early in Q1, we did see pressure on our advertising yield. We did see pressure on our cost per acquisition. And we did pull back on our ad spend as we sort of rolled through Q1. And I would say as we went later into Q1 and into Q2, we are seeing more stable yield on our ad spend. When I say stable, it's the CPAs still remain elevated relative to the back half of the -- similar to the back half of last year. But I would say to you that they are, you know, they have stabilized relative to the early part of Q1. Having said that, I am not satisfied with our BetterHelp segment margins in the first half -- in the first quarter. And so, one of the things we are assessing is how do we manage the ad spend in Q2, so that we are getting the balance of top line and bottom line that we are seeking. And we have said this before. That is something that is very dynamic, right? Because we manage the BetterHelp business based on ROIs. We want to make sure that the marginal return on every dollar of spend is getting to the efficiencies we speak. And sort of we, you know, we toggle that to get to the balance of top line and bottom line. If I think about the second half, I would say, we are looking to pull back in Q4 as we typically do. And we would be looking to spend a little bit more on ad spend relative to the second quarter, provided, again, that we get to the efficiencies we seek. And then the last point I would make is, remember, International typically is slightly more efficient from an ad-yield perspective. So, as we roll out international in the second half, I would expect to see that spend on international markets being more efficient. Operator Thank you for your question. Next question is from the line of Kevin Caliendo with UBS. Your line is now open. Unknown speaker -- UBS -- Analyst Thank you, Mala. This is Dylan on for Kevin Caliendo. Earlier this week, one of your competitors announced that they were winding down their telehealth business. Could you maybe speak to whether or not the guidance today contemplates any tailwinds from a competitive perspective? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Laizer, would you like to address that? Laizer Kornwasser -- President of Enterprise Growth and Global Markets Sure, Mala. So, clearly, there's been some noise in the marketplace, and we're really not going to comment on the specifics. And we would refer you to that partner of ours that made that comment. But what I do want to highlight is we have a very strong relationship partnership. And we value the relationship that we have with UnitedHealthcare, and we foresee that strong relationship continuing. Operator Thank you for your question. Next question is from the line of George Hill with Deutsche Bank. Your line is now open. George Hill -- Deutsche Bank -- Analyst Yeah. Good afternoon, guys, and thanks for taking the question. Mala, I do like to kind of come back to Lisa's topic, which is, I guess, can you talk about the degree to which the current management team kind of feels empowered to make change at the company as it either relates to margins or growth or strategic direction? And then, because, I know we're trying to keep people to one question, if I can sneak in a second one. If there's any way you can kind of quantify the success you're seeing in BetterHelp and what metrics you guys are looking at internally, I think we find that helpful. Thank you. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Your question on whether the leadership team is empowered to act? I would say absolutely unhesitatingly, a big yes. As I said in our prepared remarks, we are not waiting. We have a plan to deliver. We have investments to execute, and that is absolutely our focus. We are also reiterating our longer-term outlook that is certainly going to require us to, as a leadership team, as we do every single year, look at our strategy, look at various aspects of that strategy, and think about how do we want to stack our investments against those, what's working, what's not working. Again, that is part of what we do every single year. And we will absolutely continue to drive that. So, the answer to your question is we are -- I am empowered to drive this business forward. And we, as a leadership team, as I said in our prepared remarks, are all in. We are leaning in and we are focusing on driving this business forward. In terms of BetterHelp metrics, the things that we typically will look at from an internal operating perspective is, we will look at, obviously, the CAC and where it is. We will look at the ROIs of our ad spend. We will look at retention, churn, the lifetime value of the CAC that we are placing, and we will also look at the users that we are attracting to the platform. Those are things that we look at. And besides that, we look at a number of other things that inform the user experience, as well as the provider experience, the provider NPS, the user NPS, all of which, by the way, continue to remain very strong because of the strong experience that people have on the platform. So, those are the typical metrics that we would be looking at. Operator Thank you for your question. Next question is from the line of Ryan Daniels with William Blair. Your line is now open. Unknown speaker -- UBS -- Analyst Hey, this is Zack for Ryan Daniels. Thanks for taking the question. I think in your prepared remarks you mentioned reallocating some of the dollars in the second half as the international penetration ramps up. So, first, did I get that right? And then two, can you just talk a bit more about where you plan to reallocate these dollars? Was it just reallocating dollars to ramp up the international portion? Or is there something else? Just curious if you can dive deeper into this. Thanks. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. So, we've been talking over the last two calls about the fact that we do expect international in BetterHelp to ramp, where we are placing our ad spend dollars internationally in BetterHelp is in the markets that we already have a presence in. Those are largely English-speaking markets like UK, Canada, Australia. So, these are the markets where we would be putting our ad spend dollars in. Operator Thank you for your question. Next question is from the line of Elizabeth Anderson with Evercore. Your line is now open. Elizabeth Anderson -- Evercore ISI -- Analyst Hi, guys. Thanks so much for the question. Mala, can we think about the longer-term growth? I appreciate your commentary. But with sort of other changes in the international focus, etc., how do we think about the component that pricing plays in both the integrated care outlook, as well as BetterHelp? Thanks. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Great question, Elizabeth. So, I think about the pricing lever we have on both sides in a couple of different ways. First, if you think about our integrated care side and think about chronic care and the momentum that we are seeing in chronic care. We've spoken about this dynamic in the past couple of calls. Firstly, we are seeing nice momentum in chronic care bookings. And if you think about the momentum we are seeing in chronic care bookings, part of what's driving that is the fact that we are selling more chronic care bundles. And if you think about the pricing that with these bundles. It is accretive on a per-client basis from a revenue perspective. And that is certainly something that as we increasingly gain traction on our land and expand, the fact that we have added over 2 million members in the first quarter. Again, that gives us fertile ground for us to cross-sell more of our Chronic care products into that population. The fact that Chronic care at the end of the day is still relatively underpenetrated, right? If you think of our overall 90-plus million base, it is still 16% of our overall telehealth base. And so, if things like that, that will allow us to get more revenue accretion. And that certainly is something that we are focused on. On the BetterHelp side, you know, when I think about pricing, I would say it really is us thinking more broadly about how we can do more of targeted surgical pricing. You know, as we think about the different -- whether it'd be BetterHelp and BetterSleep. And when I say targeted and surgical, it could be by geography, it could be in other ways. And by the way, that is something that we are doing constantly, continuously, right? This is a business that is dynamic in multiple ways, including in pricing. Operator Thank you for your question. Next question is from the line of Daniel Grosslight with Citi. Your line is now open. Daniel Grosslight -- Citi -- Analyst Hi, Mala. Thanks for taking the question. There's noise out in the market questioning the cost and efficacy of some digital diabetes management programs. I know it's still pretty early in the selling season for you guys. But I was curious if that report is having any impact on what you're seeing out there in the market. And maybe if you can comment a little bit on where you're currently seeing the greatest uptick from a new sales perspective in terms of indications, that would be great. Thank you. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Daniel, for the question. Let me start and then I will turn it over to Laizer for more comments. Look, if I think about the momentum that we are seeing in the market, the things that we are seeing traction on is a few. The first is, obviously I've talked about our land and expand. The second is when we talk to our clients about both the breadth of our products and solutions. And second, the fact that we are able to show value and ROI. That is certainly resonating in the marketplace. And the last is, as I've said before, the strength of our balance sheet relative to many of the other competitors in our market. And the strength of the balance sheet certainly is compelling if you think about our ability to bring innovation into our products, into all our products, including chronic care. So, those are broadly the trends that we are seeing in the market as we sell. Let me turn it over to Laizer to address your specific question. Laizer Kornwasser -- President of Enterprise Growth and Global Markets Yeah. So, with respect to that specific study, I would say, we haven't seen any impact from that study on our business. What I will tell you is just some caveats to keep in mind. The first is that the report was a review of limited selected secondary research, and the party did not conduct any original testing or any primary analysis of patient data. And I just want to highlight that based on our studies and those of third parties, we believe that our Chronic care programs provide a clear ROI for our customers. Our programs have demonstrated meaningful reductions in A1C over a sustained period of time. But it's more than just A1Cs, we also have shown improvements in blood pressure and in weight. And the whole concept of value is one that we are having good conversations with our clients about. Our members in our diabetes programs also demonstrate a higher adherence to their diabetes-related drugs. And so, it's really important that you understand what's based in the research, what's included. But what I would tell you is, we aren't seeing an impact, but we are having good conversations with our clients related to the ROI and the value of our products. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. And just to wrap up on that, Daniel, what I would say is, look, we continue to see strength and momentum in chronic care. I would say, as I think about our guidance this year, integrated care is off to a solid start. I expect integrated care both from a revenue growth perspective, as well as a margin expansion perspective, as indicated in our guidance, to continue its momentum. I would say certainly, if you think about the BetterHelp business, we have had a couple of challenging quarters and we have the set of drivers that are driving the back half of the year ramp. So, I would say, certainly, on the integrated care side, we are continuing to drive, get traction, especially on our chronic care book. Answer:

the Teladoc Health Q1 2024 earnings call

Operator Good afternoon. Thank you for attending the Teladoc Health Q1 2024 earnings call. My name is Matt, and I'll be your moderator for today's call. All lines have been muted during the presentation portion of the call. There'll be some opportunity for questions and answers at the end. [Operator instructions] I would like to pass the conference over to our host, Adam Vandervoort, chief legal officer, Teladoc. Adam, please go ahead. Adam Vandervoort -- Chief Legal Officer Thank you and good afternoon. Today, after the market closed, we issued a press release announcing our first quarter 2024 financial results. This press release and the accompanying slide presentation are available in the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Mala Murthy, our acting chief executive officer and chief financial officer; and Laizer Kornwasser, our president of enterprise growth and global markets. During this call, we will also discuss our outlook. And our prepared remarks will be followed by a question-and-answer session. Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating Teladoc Health's performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our website. I would now like to turn the call over to Mala. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Thank you, Adam, and thanks, everyone, for joining us today. Before we begin, I'd like to take a moment to reflect on the recent leadership changes at Teladoc Health. First off, on behalf of Teladoc's more than 5,000 employees, board of directors, and executive leadership team, I would like to extend our deepest gratitude to Jason Gorevic for his accomplishments over the past 15 years. Jason leaves a tremendous legacy, having firmly established Teladoc as the industry leader in whole-person virtual care. As we mentioned in our February earnings call, Teladoc is in a time of transition. And as part of this evolution, the Board of Directors decided that it was time to look for a new leader for our company, someone to help us write the next chapter in our growth story. The board's search for a successor is well underway and our permanent CEO is expected to be named later this year. The Board has appointed me to serve as CEO, while they conduct the search, and I'm honored to play this role for a company whose work I believe in so deeply. In the meantime, however, we are wasting no time in identifying and seizing opportunities to leverage our significant assets and capabilities. As an organization, our focus is on accelerating growth on both the top and bottom lines over the medium and longer term. And my focus as acting CEO is to ensure that our strategy continues to be supported by the appropriate level of investment that our leadership team is executing on our priorities and that we are accelerating the pace of change and innovation across our business. With that, turning now to a review of our first quarter performance. I'm pleased to report a solid start to the year across the business, exceeding our financial and operating guidance for both consolidated revenue and adjusted EBITDA in the first quarter. Our team remains laser-focused on our key initiatives, which include, building upon our market leadership position, driving increased product penetration through our large installed base of over 90 million virtual care members, and accelerating our bottom-line performance. This focus is evident in our first quarter results. In the integrated care segment, we are pleased to see continued strong interest in our whole-person care suite of products. First quarter integrated care revenue grew 7.8% year over year to $377 million, benefiting from high single-digit growth in our chronic care book of business, as well as strong visit revenues, driven by increased infectious disease activity, as well as an 8% increase in membership year over year. Chronic care enrollment remains strong, up 9% year over year in the first quarter. BetterHelp revenue of $269 million declined 3.7% versus a difficult comparison in the first quarter of last year. BetterHelp also generated modestly lower revenue on a sequential basis, driven in part by a decline in paying users following our typical pullback in ad spend in the fourth quarter, which is the most expensive time of the year in our marketing channels. Additionally, as expected, the lower returns on our social media advertising spend we experienced in the second half of 2023 persisted in the first quarter and are impacting our year-over-year growth rates in the first half of this year. We are making progress to improve our yield on advertising spend, which contemplates not only cost per acquisition but also retention and other factors as well. I will speak to our efforts to reinvigorate growth in our BetterHelp business later in the call. We continue to make progress on our bottom-line performance with first quarter consolidated adjusted EBITDA margin of 9.8% improving 140 basis points year over year and adjusted EBITDA of $63 million growing nearly 20% year over year. We are executing against our cost-saving and productivity initiatives and we remain on track to deliver $43 million in cost savings on a GAAP basis for our business in 2024, and a total of $85 million in 2025. The breadth of our product portfolio continues to drive productive conversations with both prospective and existing clients. Two-thirds of our bookings in the quarter came from cross-selling into our existing book of business with the remaining third coming from new clients, reflecting a continuation of our cross-selling momentum over the past several quarters along with an acceleration in bookings from new business. Both existing and prospective clients are demonstrating increased interest in our chronic care plus bundle solutions, and we remain optimistic about our ability to drive increased product penetration through our install base of nearly 92 million members over the next several years. In Q1, we saw another example of our land and expand strategy playing out as we added our diabetes program into a large health benefits provider, a client who had previously only purchased our telehealth solutions. We are also seeing growing interest in our weight management solution from employers, who are grappling with rising costs for GLP-1s and employee demand for these products. The addition of approximately 2.2 million members on a sequential basis since Q4 represents an additional Greenfield opportunity for future cross-sell and product penetration. And with more than $1 billion in cash and cash equivalents on our balance sheet, our financial strength continues to be another differentiator for our company and provides us with significant capacity and flexibility to invest and innovate in our business. We also continue to see growing benefits from our early and ongoing commitment to data and artificial intelligence with AI models now integrated across nearly all aspects of our business. From provider matching to enrollment optimization to member engagement, this automation is helping us not only reach our revenue and profitability goals but also achieve our mission of improving health by reaching more consumers. One exciting example is our use of generative AI in member engagement to create hyper-personalized content for individuals, to get them signed up for Teladoc services they need, and then to keep them on track. Our pilots with this AI use case, while still being carefully studied, are already delivering significant improvement in member engagement over prior approaches. I would now like to spend a few minutes reviewing our first quarter financial results in detail. First quarter consolidated revenue increased 3% year over year to $646 million, while first quarter adjusted EBITDA was $63 million, representing a margin of 9.8%. First quarter financial performance benefited from higher revenues in our Integrated Care segment and improved expense control. Turning to segment results, integrated care revenue increased 8% year over year to $377 million in the quarter, with growth relatively balanced across the portfolio. First quarter integrated care adjusted EBITDA was $47.7 million, representing a 260-basis-point expansion in margins to 12.6%. The margin outperformance relative to guidance was largely driven by strong chronic care program enrollment during the first quarter, which, combined with better expense control, helped deliver improved gross margins and bottom-line performance. Total chronic care program enrollment was $1.12 million at the end of the first quarter, representing growth of 9% year over year. Total US integrated care members grew $6.9 million over the prior year, representing 8% growth, and grew by $2.2 million sequentially to $91.8 million. Average integrated care revenue per US member of $1.38 was down $0.01 over the prior year's first quarter, reflecting the timing of new clients' onboarding and enrollment ramp. The onboarding of large populations and our expanding membership base represents a long runway for continued cross-selling of our chronic care and other B2B products as we execute against our land and expand strategy. First quarter BetterHelp segment revenue decreased 4% year over year to $269 million, driven by an 11% decrease in paying users. First quarter BetterHelp adjusted EBITDA was $15.5 million, representing a margin of 5.7%. As we have discussed previously, the first quarter is typically the seasonally weakest quarter from a margin perspective for our BetterHelp business as marketing expense ramps up following the fourth-quarter holiday season. As such, we continue to expect the first quarter to be the low point of the year for BetterHelp segment margins, and we expect consistent quarter-over-quarter margin improvement through the course of 2024. Consolidated net loss per share in the first quarter was $0.49, compared to a net loss per share of $0.42 in the first quarter of 2023. Net loss per share in the first quarter includes stock-based compensation of $42.3 million, or $0.25 per share restructuring charges, primarily related to severance of $9.7 million, or $0.06 per share, and amortization of acquired intangibles of $64.2 million, or $0.38 per share. During the first quarter, free cash flow was a net outflow of $27 million compared to a net outflow of $32 million in the first quarter of 2023. As a reminder, the first quarter is our seasonally lowest cash flow quarter given the payment of annual incentive compensation. We ended the quarter with $1.1 billion in cash and cash equivalents on the balance sheet. Turning now to forward guidance beginning with our integrated care segment. We expect integrated care revenue in the second quarter to be between 2% and 5% versus the prior-year period. As a reminder, in our first quarter call, we called out a delay in launching our B2B consumer engagement efforts due to a technical issue in mapping new client populations with an expected cumulative negative impact of $20 million for the full year, particularly in the second and third quarters. The impact of this delay, coupled with strong year-over-year first quarter chronic care results and the seasonal falloff of infectious disease-driven visit revenues versus the first quarter is expected to result in a lower year-over-year second quarter growth rate compared to our first quarter results. For the full year, as previously guided, we expect Integrated Care revenues to be in the low- to mid-single-digits, reflecting higher revenues in the second half versus the first half of the year, due primarily to the enrollment ramp in Chronic care and a growing contribution from the nearly 6 million new integrated care members we have added since the second quarter of last year. From an adjusted EBITDA perspective, we expect a 12% to 14% margin in the second quarter and we continue to expect 150 to 250 basis points of margin expansion for the full year, reflecting revenue-driven operating leverage and the impact of our cost-saving initiatives. As it relates to US integrated care membership, we expect 92 million to 93 million members for the second quarter and 92 million to 94 million members for the full year, an increase from previous guidance after adding 2 million members in the first quarter. Turning now to our BetterHelp segment. For the second quarter, we expect BetterHelp revenues to be in the range of a negative 8% to negative 4% over the prior-year period. Our second quarter guidance reflects challenging cost per acquisition through early Q1, which caused us to pull back on our advertising dollars in the quarter in keeping with our goal of balancing growth and margin. These factors led to a decline in users in Q1, which is impacting our Q2 revenue growth rate on top of a difficult comparison relative to the second quarter of 2023. However, we are seeing signs of stabilization in our cost per acquisition in more recent weeks, which gives us increased confidence in the back half of the year for our BetterHelp business, something I will speak to momentarily. For the full year, we continue to expect flat to low single-digit revenue growth in BetterHelp. We do expect BetterHelp's growth to accelerate in the second half of the year. I'd like to take a moment to discuss what's giving us increased confidence in the future of our BetterHelp business, which has been challenged in recent quarters. Late last year, we brought in new leadership for BetterHelp, who have helped inject a broader and more global perspective on growth levers for this business. We are seeing improvements in retention and in our international business, which are helping offset some of the impact from higher CPAs in the US by improving our overall yield on advertising spend. The success we are starting to see with these levers, along with the efforts in select international geographies that we expect to ramp up in the second half of the year, give us confidence in our second-half BetterHelp outlook. We expect these initiatives to lead to meaningfully higher membership growth and improved customer retention versus the first half. We are excited about the international opportunity, particularly in selected English-speaking geographies that are relatively underpenetrated compared to the US market, which will allow us to reallocate some advertising and marketing dollars at a higher marginal return as we continue to build out our infrastructure in those markets. Given these dynamics throughout the year, we expect that to help revenue growth for the full year to be in the flat to low-single-digits range as previously guided despite our lower first-half growth. I would also note that we have thoroughly pressure-tested the assumptions that underpin our BetterHelp guidance for the rest of the year. We take several factors into account when developing both the low-end and the high-end of the range, including recent trends in advertising yields, channel dynamics, consumer sentiment, and other macro factors, and we have taken a close look at each one of these. That said, the impact of difficult-to-predict macro events creates unknowns as it pertains to our yield on advertising in the second half of the year, and we will continue to provide updates on the trends that we are seeing in upcoming earnings calls. From a margin perspective, we expect BetterHelp adjusted EBITDA margins to be in the 9% to 10% range in the second quarter, and continue to expect margins to be flat plus or minus 50 basis points for the full year. The sequential margin improvements that we expect to see over the course of the year, primarily reflect the cumulative effect of new members added over the course of the year, the cadence of advertising spending, including the typical seasonal pullback in the fourth quarter, and innovation-driven improvements in our yield on advertising spend. On a consolidated basis, we expect second quarter revenue of $635 million to $660 million and adjusted EBITDA of $70 million to $80 million. Our full year guidance remains unchanged with the exception of the increase to our US Integrated Care membership that I've mentioned previously. We continue to expect consolidated revenue to be in the range of $2.635 billion to $2.735 billion for the full year, representing revenue growth of 1% to 5%, along with consolidated adjusted EBITDA of $350 million to $390 million, representing growth of 7% to 19% on a year-over-year basis. We expect full year free cash flow of $210 million to $240 million, driven by both the growth in adjusted EBITDA and an expected decline in capitalized software development costs. We are also maintaining our prior EPS guidance for the full year. Lastly, we are reiterating the three-year outlook that we provided you on our earnings call in February. In closing, I want to recognize my executive team and our broader leadership team for leaning in during this time of change. I've been incredibly pleased with their continued focus on living our values and delivering for our members and clients this year, especially over the past several weeks. We've had a solid start to the year, and are poised to deliver significant growth in the second half of 2024. I remain focused on our strategy, our execution, and on our people. With that, we will open it up for questions. Operator? Questions & Answers: Operator [Operator instructions] We ask that you please limit yourself to one question. We will pause here briefly as questions are registered. First question is from the line of Stephanie Davis with Barclays. Your line is now open. Stephanie Davis -- Barclays -- Analyst Hey, Mala. Thank you for taking my question and for wearing all of the hats right now. I was hoping you could talk a little bit about some early color on the international strategy and timing for BetterHelp. Can you talk to us about the rollouts, how we should be thinking about the cadence of that? And maybe if -- have you seen some of that come through already, which is giving you that confidence in that second-half growth rate? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Thank you, Stephanie. Yes, I'm wearing many hats. Happy to be here. So, in terms of the growth in international, as we had said on our last call, last year, International as a percentage of our total BetterHelp business was in the mid-teens. It is certainly contributing to the second-half ramp of revenue this year. Remember, it's not as if we are going into international de novo, we are already in a few markets. Several of them are English-speaking markets such as the UK, Canada, Australia. And the plan we have is for us to continue penetrating into those markets first. And that is what is driving our confidence in the second half ramp because we have been in these markets, we know the dynamics of the BetterHelp business in these markets. Based on our experience, we have knowledge of the economics of being in these markets. Obviously, as we penetrate these markets and invest more in these markets, we hope to continue to see the return on ad spend, as well as the revenue growth for the balance of both top-line growth and bottom-line growth that I expect to see. Stephanie Davis -- Barclays -- Analyst And for like a mini follow-up, is there any way to compare the kind of rollout you're seeing on those international markets where you're already in them versus what we're seeing in the US? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Here's what I would say. I expect International to grow faster than the US. Certainly, that is something that we saw last year. And I do expect that to continue. From a rollout perspective, Stephanie, I would say, we are going to start in the second half and roll out as we, you know, do our ad spending in these markets as we go through the second half. The one thing I will remind you is, Q4 typically in the US is always the seasonally weakest quarter from an ad spending perspective is the quarter where we will typically pull back our ad spend. And I would say that dynamic is in the US. We will evaluate and assess how much of that dynamic also plays out in the international markets. Operator Thank you for your question. The next question is from the line of Lisa Gill with J.P. Morgan. Your line is now open. Lisa Gill -- J.P. Morgan -- Analyst Hi, Mala. Just trying to understand two things. One, clearly understand the change in leadership and what the Board is going through. But just also curious if you're looking at any strategic changes to the business. And once again, under pressure on the BetterHelp side, I just heard you talk about international. But are there things that the board is reviewing, would be my first question. And then secondly, just really want to understand the opportunity around that 8% membership growth, which was really strong in the quarter. We didn't see an increase in either revenue or adjusted EBITDA. Is that just timing? Is there an opportunity for cross-sell? So, just really understanding how that's going to play into the numbers. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Lisa. Great questions. So, from an overall Board perspective, and what might that imply for changes, obviously, as I said in our prepared remarks, right now, the focus of the leadership team, my focus, and I would say the focus of the Board as well is for us to be laser-heads down focused on implementing our plans, our investments, our priorities, and frankly leading our employee base, the 5,000 plus employees we have through this period of transition and change. I would say also that I'm pleased with the solid start we have to the year. Hopefully, we have given you enough transparency and color as in our prepared remarks on what is really driving our confidence in our growth, both from a top-line perspective and our bottom-line perspective as we roll through the year. We've kept our overall 2024 guidance as is from a revenue-adjusted EBITDA and a cash flow perspective. We continue to make progress on our cost initiatives that we have talked about in February. So, all of those are things that require execution and I would say we are laser-focused on that. Beyond that, look, we are always looking at different parts of our business. We are looking at what top-line growth they bring in and what bottom-line growth they bring in. Certainly, as we said in our prepared remarks, the BetterHelp business has been challenged in recent quarters. And I would say, I am focused on the execution of the various initiatives that we talked about that will give us that second half ramp, whether it'd be improved retention, whether it'd be the fact that we are driving growth in international markets and the growth in the much smaller part of BetterHelp, the better sleep part of that business, which is also growing nicely. All of these require execution. On the integrated care side, I would say I'm pleased with the strong enrollment that we have started out with. Obviously, you know this, the enrollment ramps through the year, and we are certainly working through that. And that is going to drive our revenue growth and our profit, our margin expansion on the integrated care side as we go through the year. So, the answer to your question in terms of what we are evaluating and assessing is, we are executing. We are focused on driving our plans for this year. And we continue to assess how the various parts of our business are doing, and whether they are driving both the top line and the bottom line we see. Beyond that, I would say there isn't really more to comment on it at this time. On the second question you had around membership, here's what I would say. We certainly are pleased with the two million plus member ads that we had in the quarter. Remember, the benefit we have of the membership ads is always the fact that it is the underpinning of our land and expand strategy. So, it gives us fertile ground to continue to penetrate cross-sell upsell once we get these members into our fold. And as we sell in additional products, we expect to see the revenue accretion from that in the quarters ahead. Operator Thank you for your question. The next question is from the line of Jailendra Singh with Truist. Your line is now open. Jailendra Singh -- Truist Securities -- Analyst Thank you and thanks for taking my questions. I wanted to ask about chronic care program enrollment metrics. I understand it was up year over year, but it actually declined a little over 3% sequentially. Typically, we see a pickup from Q4 to Q1 due to new contract starts and enrollment increases in a new calendar year. So, can you provide some color there, Mala? And then what are your expectations around that metric as the year progresses? And more broadly, anything you can share about how you're focused on improving the positioning of the business in chronic care longer term in market, which seems to be getting very competitive. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. So, look, I would say I expect the enrollment to ramp through the year. That is typically always the case in a traditional year, and this year would be no different. Now, the one thing I would also say is, remember we had talked about the marketing pause in the last earnings call. We had talked about $20 million of revenue impact for this year. I would expect most of the impact of that marketing pause to be in the second and third quarters. But despite that, I would expect for our chronic care program enrollment to ramp up through the year just like in prior years. Laizer, do you want to handle the Jailendra's question on competition? Laizer Kornwasser -- President of Enterprise Growth and Global Markets Sure. When you look at what our customers and our clients are looking for, we are happy with where we are in the selling season. We're having productive conversations with both new and existing accounts. As Mala mentioned in her earlier remarks, for the quarter, two-thirds of our existing clients, two-thirds of our growth in bookings came from existing clients and one-third came from new clients. I want to make sure that we highlight that we're happy with the growth in bookings, not just in our domestic business, but also in our international business. And what are our clients looking for? Our clients are looking for value. They're looking for a scalable, reputable vendor that they can partner with that has a strong balance sheet that they can continue to partner with to drive value for them and for their consumers. And that hasn't changed. And I think that is feeding into our conversations with respect to our bookings. Mala Murthy -- Chief Executive Officer and Chief Financial Officer And then, Jailendra, just finishing up on your question around the chronic care enrollment. Look, this is a function of the fact that typically when we start off the year, you know, we onboard a number of lives and we also, at the same time, in Q1, is typically the time we would also see, you know, enrollees come on and enrollees roll off. And the net impact of that is what you're seeing. I would expect, as we ramp up the year, despite the marketing pause, I would expect that to continue to go on into the rest of the year. Operator Thank you for your question. The next question is from the line of Jessica Tassan with Piper Sandler. Your line is now open. Jessica Tassan -- Piper Sandler -- Analyst Hi, Mala. Thank you so much for the question and congrats on the good quarter and guide. I wanted to ask about the three-year outlook that you all issued on the fourth quarter call and then reiterated today. So, the low- to mid-single-digit annual consolidated revenue growth, mid-single integrated care, low-single BetterHelp, is that target achievable on an organic basis? And just maybe from an integrated care perspective, should we think about that growth continuing to be led by chronic care? And does it anticipate any new product launches? Just hoping for color around that three-year guide. Thank you. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Jess, for the question. Look, when we put that outlook out there in February, we had thought about the building blocks to those numbers that trajectory both on the integrated care side and the BetterHelp side. So, let me sort of comment on it one by one. On the integrated care side, I would say, as we had stated previously, think of it as a combination of low-single-digit growth on the much more well-penetrated telehealth side, and I would say mid to high-single-digit growth in chronic care. So, yes, we do expect chronic care momentum to help us achieve the overall mid-single-digit revenue growth for integrated care. On the BetterHelp side, from a revenue growth perspective, we had said low single digit. Look, here's what I would say on the BetterHelp side. The second half ramp that we have talked about, the initiatives that we have going to help us achieve that second half ramp, again, it's whether it'd be retention international continued momentum on better sleep. These are the inputs into the low-single-digit revenue growth for BetterHelp. And I would say, we will continue to execute against it. And we will continue to monitor it again, assuming that we don't have something very, very unfavorable happen from a cost-per-acquisition perspective, which will impact our advertising yields. So, assuming that we see CPAs in a reasonable range, I would say the building blocks that will help us grow in the second half will continue to be contributors into the low-single-digit revenue growth for BetterHelp. When it comes to margins, I would say the cost initiative programs that we have that will help us with opex leverage along with the revenue growth that we will see on the top line, particularly on the chronic care side, will certainly be contributors into our margin expansion that we have put out there. So, what I would say in summary is we have thought of the building blocks that go into the long-term outlook. And we will continue to assess, you know, how they perform. And as I said, this year and especially in the second half, BetterHelp will give us a lot more information on that. Operator Thank you for your question. Next question is from the line of Sean Dodge with RBC. Your line is now open. Sean Dodge -- RBC Capital Markets --- Analyst Yeah, thanks. Mala, you mentioned in BetterHelp with the new leadership team having seen some improvement in subscriber retention. Can you give us a sense of how long you're retaining BetterHelp users now on average? How much has that changed over the last couple of years? And then how much room and what kind of levers do you have to continue to drive improvements in that? What can you do to lengthen that? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. So, we haven't given out KPIs metrics, etc., specifically on retention, Sean. So, I don't want to go into specific retention metrics. What I will say is the following. We are seeing improved member retention primarily because of the innovation that we are driving in the platform, in our user experience, frankly, with the help of AI models that are continually improving our matching of consumers with their various needs with providers. So, it's never one thing that is driving this improvement in retention. It is many things that are driving this improvement in retention. And I would say that, you know, when I talk about the new leadership at BetterHelp, one of the important things to highlight is we are looking now at pressing on more than one lever in the BetterHelp business. We are looking to beyond the traditional focus on CAC. As we've talked about, we're looking at additional geographies, how can we continue to innovate in the user experience. In some instances, and we have talked about this in the past, we are looking at small surgical targeted pricing changes. All of which, in my view, are things that will improve on our revenue growth. And it's the innovation that is helping on our member -- improve member retention, the user retention. Laizer, is there anything you would like to add to that? Laizer Kornwasser -- President of Enterprise Growth and Global Markets Yeah, I guess the only thing I would add is historically at BetterHelp we've been very focused on the innovation on patient acquisition. And what I would tell you is we are balancing spending time on increasing the value of that member. And I would say there's not one specific thing other than being very innovative and testing out little things that are driving value so that our return on our advertising dollars increases. Operator Thank you for your question. Next question is from the line of Allen Lutz with Bank of America. Your line is now open. Allen Lutz -- Bank of America Merrill Lynch -- Analyst Good afternoon and thanks for taking the questions. Another one on BetterHelp. Mala, have you considered at all moving from just cash pay to participating in health plan networks as a way to drive growth? Is that something that you've considered and can you kind of talk about the pros and cons of making a move like that? Thanks. Mala Murthy -- Chief Executive Officer and Chief Financial Officer So, I would say, look, we assess various initiatives to continually innovate to drive growth, both on the top line and the bottom line. At this point in time, with the scale that BetterHelp has, you know, over $1 billion in revenue, it is by far one of the largest DTC players. And look, there are other competitors in the market, who have done, tried DTC, moved away to B2B. We have built scale in DTC. And I would say we will continue to focus on DTC. Having said that, I would also say we are looking for ways to improve and accelerate our growth in different ways. I don't want to comment much more on specifics at this point. To the extent that there is anything relevant to update, we will absolutely do so. But we are looking at various ways to drive top-line to accelerate our top-line growth in BetterHelp. Operator Thank you for your question. Next question is from the line of Sarah James with Cantor Fitzgerald. Your line is now open. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. Mala, I was hoping you could help us a little bit with the pacing of this year. So, specifically, thinking of the items that you have control over, like some of the savings initiatives to get to that run rate of 43 at the end of the year and then the advertising spend, can you help us pace through how the savings initiatives are going to play out? And then on the ad spend, is there any pull forward of that into 2Q versus your normal cadence? And are you thinking about because of the increased efficiency, just lower overall need for ad spend for the year? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Sarah, for the question. So, from a pacing perspective, we would be looking for the cost initiatives. And if you think about what are underpinning those cost initiatives, things like offshoring, things like automation, you know, savings from our third-party supplier spend. Several of those are initiatives that are evenly paced through the year. Now, obviously, if you think about something like offshoring and as we offshore, you will get the incremental impact, the full impact of the offshoring as we go later into the year. But I would say to you, several of the others, like third-party supplier spend, etc., you will see sort of evenly pave through the year. On your question on ad spend, the way I would think about it is as follows. In Q1, and especially early in Q1, we did see pressure on our advertising yield. We did see pressure on our cost per acquisition. And we did pull back on our ad spend as we sort of rolled through Q1. And I would say as we went later into Q1 and into Q2, we are seeing more stable yield on our ad spend. When I say stable, it's the CPAs still remain elevated relative to the back half of the -- similar to the back half of last year. But I would say to you that they are, you know, they have stabilized relative to the early part of Q1. Having said that, I am not satisfied with our BetterHelp segment margins in the first half -- in the first quarter. And so, one of the things we are assessing is how do we manage the ad spend in Q2, so that we are getting the balance of top line and bottom line that we are seeking. And we have said this before. That is something that is very dynamic, right? Because we manage the BetterHelp business based on ROIs. We want to make sure that the marginal return on every dollar of spend is getting to the efficiencies we speak. And sort of we, you know, we toggle that to get to the balance of top line and bottom line. If I think about the second half, I would say, we are looking to pull back in Q4 as we typically do. And we would be looking to spend a little bit more on ad spend relative to the second quarter, provided, again, that we get to the efficiencies we seek. And then the last point I would make is, remember, International typically is slightly more efficient from an ad-yield perspective. So, as we roll out international in the second half, I would expect to see that spend on international markets being more efficient. Operator Thank you for your question. Next question is from the line of Kevin Caliendo with UBS. Your line is now open. Unknown speaker -- UBS -- Analyst Thank you, Mala. This is Dylan on for Kevin Caliendo. Earlier this week, one of your competitors announced that they were winding down their telehealth business. Could you maybe speak to whether or not the guidance today contemplates any tailwinds from a competitive perspective? Mala Murthy -- Chief Executive Officer and Chief Financial Officer Laizer, would you like to address that? Laizer Kornwasser -- President of Enterprise Growth and Global Markets Sure, Mala. So, clearly, there's been some noise in the marketplace, and we're really not going to comment on the specifics. And we would refer you to that partner of ours that made that comment. But what I do want to highlight is we have a very strong relationship partnership. And we value the relationship that we have with UnitedHealthcare, and we foresee that strong relationship continuing. Operator Thank you for your question. Next question is from the line of George Hill with Deutsche Bank. Your line is now open. George Hill -- Deutsche Bank -- Analyst Yeah. Good afternoon, guys, and thanks for taking the question. Mala, I do like to kind of come back to Lisa's topic, which is, I guess, can you talk about the degree to which the current management team kind of feels empowered to make change at the company as it either relates to margins or growth or strategic direction? And then, because, I know we're trying to keep people to one question, if I can sneak in a second one. If there's any way you can kind of quantify the success you're seeing in BetterHelp and what metrics you guys are looking at internally, I think we find that helpful. Thank you. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Your question on whether the leadership team is empowered to act? I would say absolutely unhesitatingly, a big yes. As I said in our prepared remarks, we are not waiting. We have a plan to deliver. We have investments to execute, and that is absolutely our focus. We are also reiterating our longer-term outlook that is certainly going to require us to, as a leadership team, as we do every single year, look at our strategy, look at various aspects of that strategy, and think about how do we want to stack our investments against those, what's working, what's not working. Again, that is part of what we do every single year. And we will absolutely continue to drive that. So, the answer to your question is we are -- I am empowered to drive this business forward. And we, as a leadership team, as I said in our prepared remarks, are all in. We are leaning in and we are focusing on driving this business forward. In terms of BetterHelp metrics, the things that we typically will look at from an internal operating perspective is, we will look at, obviously, the CAC and where it is. We will look at the ROIs of our ad spend. We will look at retention, churn, the lifetime value of the CAC that we are placing, and we will also look at the users that we are attracting to the platform. Those are things that we look at. And besides that, we look at a number of other things that inform the user experience, as well as the provider experience, the provider NPS, the user NPS, all of which, by the way, continue to remain very strong because of the strong experience that people have on the platform. So, those are the typical metrics that we would be looking at. Operator Thank you for your question. Next question is from the line of Ryan Daniels with William Blair. Your line is now open. Unknown speaker -- UBS -- Analyst Hey, this is Zack for Ryan Daniels. Thanks for taking the question. I think in your prepared remarks you mentioned reallocating some of the dollars in the second half as the international penetration ramps up. So, first, did I get that right? And then two, can you just talk a bit more about where you plan to reallocate these dollars? Was it just reallocating dollars to ramp up the international portion? Or is there something else? Just curious if you can dive deeper into this. Thanks. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. So, we've been talking over the last two calls about the fact that we do expect international in BetterHelp to ramp, where we are placing our ad spend dollars internationally in BetterHelp is in the markets that we already have a presence in. Those are largely English-speaking markets like UK, Canada, Australia. So, these are the markets where we would be putting our ad spend dollars in. Operator Thank you for your question. Next question is from the line of Elizabeth Anderson with Evercore. Your line is now open. Elizabeth Anderson -- Evercore ISI -- Analyst Hi, guys. Thanks so much for the question. Mala, can we think about the longer-term growth? I appreciate your commentary. But with sort of other changes in the international focus, etc., how do we think about the component that pricing plays in both the integrated care outlook, as well as BetterHelp? Thanks. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Great question, Elizabeth. So, I think about the pricing lever we have on both sides in a couple of different ways. First, if you think about our integrated care side and think about chronic care and the momentum that we are seeing in chronic care. We've spoken about this dynamic in the past couple of calls. Firstly, we are seeing nice momentum in chronic care bookings. And if you think about the momentum we are seeing in chronic care bookings, part of what's driving that is the fact that we are selling more chronic care bundles. And if you think about the pricing that with these bundles. It is accretive on a per-client basis from a revenue perspective. And that is certainly something that as we increasingly gain traction on our land and expand, the fact that we have added over 2 million members in the first quarter. Again, that gives us fertile ground for us to cross-sell more of our Chronic care products into that population. The fact that Chronic care at the end of the day is still relatively underpenetrated, right? If you think of our overall 90-plus million base, it is still 16% of our overall telehealth base. And so, if things like that, that will allow us to get more revenue accretion. And that certainly is something that we are focused on. On the BetterHelp side, you know, when I think about pricing, I would say it really is us thinking more broadly about how we can do more of targeted surgical pricing. You know, as we think about the different -- whether it'd be BetterHelp and BetterSleep. And when I say targeted and surgical, it could be by geography, it could be in other ways. And by the way, that is something that we are doing constantly, continuously, right? This is a business that is dynamic in multiple ways, including in pricing. Operator Thank you for your question. Next question is from the line of Daniel Grosslight with Citi. Your line is now open. Daniel Grosslight -- Citi -- Analyst Hi, Mala. Thanks for taking the question. There's noise out in the market questioning the cost and efficacy of some digital diabetes management programs. I know it's still pretty early in the selling season for you guys. But I was curious if that report is having any impact on what you're seeing out there in the market. And maybe if you can comment a little bit on where you're currently seeing the greatest uptick from a new sales perspective in terms of indications, that would be great. Thank you. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. Thanks, Daniel, for the question. Let me start and then I will turn it over to Laizer for more comments. Look, if I think about the momentum that we are seeing in the market, the things that we are seeing traction on is a few. The first is, obviously I've talked about our land and expand. The second is when we talk to our clients about both the breadth of our products and solutions. And second, the fact that we are able to show value and ROI. That is certainly resonating in the marketplace. And the last is, as I've said before, the strength of our balance sheet relative to many of the other competitors in our market. And the strength of the balance sheet certainly is compelling if you think about our ability to bring innovation into our products, into all our products, including chronic care. So, those are broadly the trends that we are seeing in the market as we sell. Let me turn it over to Laizer to address your specific question. Laizer Kornwasser -- President of Enterprise Growth and Global Markets Yeah. So, with respect to that specific study, I would say, we haven't seen any impact from that study on our business. What I will tell you is just some caveats to keep in mind. The first is that the report was a review of limited selected secondary research, and the party did not conduct any original testing or any primary analysis of patient data. And I just want to highlight that based on our studies and those of third parties, we believe that our Chronic care programs provide a clear ROI for our customers. Our programs have demonstrated meaningful reductions in A1C over a sustained period of time. But it's more than just A1Cs, we also have shown improvements in blood pressure and in weight. And the whole concept of value is one that we are having good conversations with our clients about. Our members in our diabetes programs also demonstrate a higher adherence to their diabetes-related drugs. And so, it's really important that you understand what's based in the research, what's included. But what I would tell you is, we aren't seeing an impact, but we are having good conversations with our clients related to the ROI and the value of our products. Mala Murthy -- Chief Executive Officer and Chief Financial Officer Yeah. And just to wrap up on that, Daniel, what I would say is, look, we continue to see strength and momentum in chronic care. I would say, as I think about our guidance this year, integrated care is off to a solid start. I expect integrated care both from a revenue growth perspective, as well as a margin expansion perspective, as indicated in our guidance, to continue its momentum. I would say certainly, if you think about the BetterHelp business, we have had a couple of challenging quarters and we have the set of drivers that are driving the back half of the year ramp. So, I would say, certainly, on the integrated care side, we are continuing to drive, get traction, especially on our chronic care book.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good afternoon, and thank you for joining Atlassian's earnings conference call for the third quarter of fiscal year 2024. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations. Martin Lam -- Head of Investor Relations Welcome to Atlassian's third quarter of fiscal year 2024 earnings call. Thank you for joining us today. Joining me on the call today, we have Atlassian's co-founders and co-CEOs, Scott Farquhar and Mike Cannon-Brookes; and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our third quarter of fiscal year 2024. Shareholder letter is available on Atlassian's work-life blog and the Investor Relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor datasheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. Any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recently filed quarterly reports. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financials are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release, investor data sheet on the Investor Relations section of our website. I'd like to allow as many of you to participate in Q&A as possible. Out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Scott for opening remarks. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Thank you for joining us today. As we've already read in our shareholder letter, Q3 was truly a milestone quarter for last June. Today, Atlassian is a cloud-majority company. We have over 300,000 customers using our cloud products, a 3 times increase in paid fees in the cloud since we announced the winding down of support for server 3.5 years ago. And while this is just one significant moment among many across our multiyear cloud journey, we are thrilled with what we've achieved to date. We migrated more paid seats to cloud than we had initially projected, and our churn has been consistently lower than expected from our server base. This speak volumes about the mission-critical role our products play, the value they deliver, and our customers' desire to realize the innovation in our cloud products. We now have an even large opportunity in cloud than originally believed. You'll see us continue to execute against our roadmap and we have more innovation to pave the path for these data center customers to move to cloud in the coming years, drive, durable future growth. We're also announcing that I'll be stepping down as Co-CEO of Atlassian on the 31st of August this year. It's been a difficult decision, but after 23 years, it's time to pursue some other passions I have, specifically philanthropy, investing, and to help grow and build the global technology industry. And while there is never a perfect time to step away, I'm supremely confident of where Atlassian is at. We've got one of the best cloud platforms in the industry. Our .8 new products are gaining real traction with customers and revenue, AI is providing new and exciting opportunities, and our customers are increasingly choosing to consolidate around Atlassian. And I'm proud to say we have the most experienced leadership team in our history. I will remain an active Board member and assume a special advisor role with Mike continuing on as CEO. I have complete trust in Mike leading the way to harness the incredible opportunities that we have ahead of us. I'll turn it over to you, Mike. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Thanks, Scott. Yes, milestone quarter for a number of reasons. Now there'll be plenty of time for celebrations and farewells as this is not Scott's last earnings call, but I do want to touch on his news briefly. As you all know, Scott and I have known each other for nearly three decades and have experienced every major life milestone together. This company simply would not be Atlassian without Scott, and I'm truly thankful to have had him by my side every day for the last 23 years. In this next chapter, I'm sure we will remain great mates and trusted partners, and I'm glad that I can support him through this both personally and professionally as I continue to lead Atlassian forward as CEO. Atlassian has always been my #1 professional priority and focus. Scott and I have both won every hat over the last two decades, so I'm confident in taking over full responsibility of the company. I'm incredibly excited about the massive opportunities that we have in front of us across our three markets in work management, software development, and service management. We have such huge opportunities ahead of us in both the enterprise transition and AI, where our unique team data and insights allow us to offer unique capabilities and unleash our customers' potential. As we continue to attack our opportunities, I want to reiterate the commitments that we've made to continue to grow over the long term, while returning to our historical margin levels. We have a thoughtful plan in place to continue to drive durable revenue growth, and we feel really good about our agile approach to prioritizing resources behind key strategic areas like enterprise NII while driving leverage as we scale, and we couldn't be more excited about the future. With that, I'll pass the call to the operator for Q&A. Questions & Answers: Operator [Operator instructions]. Your first question comes from Ryan MacWilliams from Barclays. Please go ahead. Ryan MacWilliams -- Barclays -- Analyst Hey, thanks for taking the question. Just like to hear about the overall macro trends at this point or develop for hiring. Like have you noticed any trends around the green shoots of growth for IT budgets or powering developers? And then separately, just one quick housekeeping item for Joe. What was the contribution to cloud revenue growth in the third quarter? And maybe how you're thinking about its contribution to the fourth quarter? Thank you. Joe Binz -- Chief Financial Officer Yeah. Thanks, Ryan. I'll start. From a macro perspective, macro trends were very much in line with what we saw in Q2 and in line with our expectations. Enterprise was healthy across both cloud and data center, and that drove the record billings, strong growth in annual multiyear agreements, strong migration and good momentum in sales of premium and enterprise additions of our products that you see rolling through our revenue results. The macro impact on SMB, on the other hand, continued to be challenging, although also in line with expectations. And that macro headwind in SMB lands primarily in cloud, given SMB makes up a significant part of that business. And within cloud, it lands primarily in paid seat expansion. So stepping back more broadly within cloud, the trends in Q3 were very consistent with Q2 as well as our expectations coming into the quarter. And then paid seat expansion rates remained well below prior-year levels, but the decelerating trend quarter-to-quarter did continue to moderate from Q2, so that's a positive sign. All of the other growth drivers, migrations, cross-sell, upsell, new customers, monthly active usage, churn, etc., those were all in line with our expectations and stable overall. And then in terms of Loom, we -- basically, from a quarter perspective, we're not going to provide specifics on Loom's revenue or growth rate. We were pleased with the growth we're seeing and excited by the customer reaction to the recent AI innovations we've been introducing into Loom's product line. In terms of performance in the quarter, Loom revenue in Q3 was squarely in line with our expectations. And in terms of our fiscal-year guidance, in terms of our overall revenue and operating margin guidance for the year, we continue to expect Loom to have about 1.5 points of impact on FY '24 cloud revenue growth for the year and for Loom to be slightly dilutive to FY '24 and FY '25 operating margins. Operator The next question comes from Fred Havemeyer from Macquarie. Please go ahead. Fred Havemeyer -- Macquarie Group -- Analyst Thank you very much. Scott, we know you're not leaving immediately, but certainly will be quite missed on these calls. I wanted to ask, with respect to those -- the super migration at this point, it's very encouraging to hear that churn was looking much lower than expected, and primarily the customers have transitioned on to data center. But are there any customers that are left over at this point in time that might make a future transition after limping along for some period of time here? Joe Binz -- Chief Financial Officer Fred, this is Joe. It's difficult to know exactly how many server customers remain running unsupported at this point. We believe it's a small number and certainly smaller than we thought it would be entering the quarter. We're not assuming any material contribution to either data center or cloud revenue growth from this cohort of customers moving forward in the guidance. And operationally, our focus now is squarely on enabling our data center customers to move to the cloud. Fred Havemeyer -- Macquarie Group -- Analyst Thank you. Operator The next question comes from Keith Weiss from Morgan Stanley. Please go ahead, Keith. Sanjit Singh -- Morgan Stanley -- Analyst Yeah. This is Sanjit Singh on for Keith. Thank you for taking the questions. I actually want to ask a question about customer call-out that you had in the shareholder letter. You guys mentioned that FanDuel was able to cut tickets that require human interventions by 85%, which is a pretty fantastic result for Fanduel. In terms of that customer, are you pricing that Fanduel contract on a seat basis? And how would you think about when they achieve those types of efficiency gains? How do you think about the revenue opportunity with some of the efficiency gains they are seeing with the Atlassian products? Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Yes. That's a great question, Sanjit, and I think one on people's minds is AI increasingly helps produce these incredible ROI experiences that we're seeing across our customer base. And at the moment, we have historically priced our -- almost all of our products on some sort of seat basis with some usage basis that has happened in certain areas of the product such as BitBucket pipelines that we've charged for units to build and stuff like that. We are experimenting going forward with more usage-based private seats. So it's -- I don't want to get into one specific customer, but we think that there is a world in the future where we do have some sort of usage back pricing around these interactions with the ROI that we're getting from customers. And so we'll see more experimentation with that going forward, but that's something we're experimenting with at the moment. Sanjit Singh -- Morgan Stanley -- Analyst Appreciate the thoughts. Thank you. Operator Your next question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead. Gregg Moskowitz -- Mizuho Securities -- Analyst Thank you very much for taking the question. And Scott, all the best in your future endeavors, even though I know, as Mike said, you'll be with us for a little while longer, fortunately. So my question is, obviously, this is a significant upside quarter. Having said that, I think the big question is one of sustainability. The cloud revenue in the quarter will still be in line with guidance with all of the upside coming from data center and marketplace, and marketplace itself is tied to the data center as well. But we're never going to have another quarter of server migrations. And clearly, there was also a decent amount of pull forward given the recent data center price increase. And so as we look ahead into next year and beyond, the question is, can it last, and in fact, continue to show good growth? Thank you. Joe Binz -- Chief Financial Officer Yeah. Great question, Gregg. Thanks for asking. Let me try and share a little bit of perspective on that without giving specific numbers for FY '25. At the highest level, the long-term revenue growth of the company is really driven by the opportunities we have in our three large high-growth markets that Mike touched on at the top of the call, and secular trends around things like digital transformation and software is a critical factor to the success of every company. From there, there are several growth drivers across cloud and data center. In terms of cloud, given the size of the data center installed base, we do continue to expect migrations to be a key driver of cloud revenue growth over several years, although we do expect that impact to wane gradually over time. Now to drive migrations, we're delivering a cloud platform that provides the best customer experience and value with analytics, and automation, and AI as well as better TCO for the customer. And those factors will only improve and grow stronger over time. As part of that, we are investing in new and highly valuable product innovation as well, and much of that is only currently available on premium enterprise additions of our products, our cloud products. And we are working to unblock and help customers migrate and deploy on our cloud and making good progress on scalability and certifications, and app integration and extensibility, all of which are very relevant to our largest customers in data centers. So we have a lot of confidence in the migration space. From there, as you know, there are multiple growth drivers in the cloud we've discussed in the past, things like paid seat expansion within our existing customer base, our opportunity to cross-sell additional products to our over 300,000 customers, upselling to premium and enterprise additions of our products. And then with the smaller impact today but growing over time are other drivers like new customer adds and new high-growth proms, Jira product discovery and Loom. And of course, pricing is the final lever in the cloud model. In terms of data center, we expect organic expansion and pricing to be durable, long-term drivers given the high renewal rates on data center agreements and the enterprise nature of that customer base. And with AI, we are well-positioned with the unique data graphs around high-value workloads, and there's a lot of opportunity in that space as well. And we're off to a solid start with Atlassian intelligence with more AI innovation on the way. And then finally, add on significant opportunity we have for further penetration enterprise, where we've had great signal and momentum over the last year. And overall, all up, we feel confident in our ability to invest behind and deliver healthy revenue growth over a multi-year period as a result of that. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Hey, Gregg, I just wanted to chime in at a high level. I think Joe has given a very fantastic and comprehensive answer there. I think we should remember that any upside in data center is long-term upside for the cloud in terms of the destination for those customers over the long arc of time. I think our end of server journey, as you mentioned, from a migration point of view, overall, it's been a huge success, right? Over the last 4 years, we beat our original expectations for the number of paid seats that we migrate to cloud. We ended with less churn overall than we thought we would have over that 3- or 4-year period. We've tripled the number of paid seats in cloud during that period since we -- in fact, since we announced the end of service 3 and a bit years ago. I think the way I would zoom out and see that is, that is an example of Atlassian executing against the long-term goal as a team and as a company, and we can do hard things. We say this all the time internally. Data center customers moving to hybrid deployments, which is generally the way they go through in the middle and then to cloud, it's a different journey, right? these are our largest and most complex customers. They have different requirements, different things, but we will get them there. We will execute against that mission over the next few years in the same way that we executed against the last mission. I have confidence in Atlassian to do that. And if you want a singular statistic of how that's going, again, the data center to cloud migrations over the first 3 quarters of this year were up 90%, 9-0, on the first 3 quarters of last year on a year-on-year basis. So we are already migrating data center customers to the cloud. So that overperformance is a long-term good sign for us. Gregg Moskowitz -- Mizuho Securities -- Analyst That's extremely helpful. Thank you both. Operator Your next question comes from Michael Turrin from Wells Fargo Securities. Please go ahead. Michael Turrin -- Wells Fargo Securities -- Analyst Hey. Great. Thanks. Appreciate you taking the questions. Results were quite strong in a still tough environment. I think the stock is initially reacting more to the surprise news from Scott. So maybe you can both, Scott and Mike, give us a peek behind the scenes around how you have historically divided the CEO role. And Mike, would be helpful to hear more around is becoming sole CEO at all changes, the role or key points of focus on your end from a product or a strategic perspective. I think just any detail there is useful. Thanks very much. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Thanks, Scott here. I'll take the first thing at that. Look, Mike and I have worked together for 23 years. We used to take turns taking the bins out in our first office. So we've kind of done every job equally over that period of time. Mike's run go-to-market for well over half that time. I've run actual little less than that. I've run engineering. Mike runs engineering products. So we've kind of done everything together over that period of time. And I think that's relatively unique actually, I mean, ourselves unique actually kind of shared and divvy those responsibilities and change them over time. I think it's also extremely unique there. And so I don't think there's anything that Mike hasn't done before that he'll be picking up and even philosophies around how we run finances and how we think about the growth of business and investments. Like we've spent a lot of time together over the years, doing. And though Joe and finance have been reporting to me for the last half a dozen years or so, Mike and I spent a lot of time together looking at where we want to grow the business and what our investment profile is. So Mike, do you want to add anything? Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Yeah. Thanks, Scott. Thanks, Michael. Look, other than Scott being clearly better than I was at taking the bins out. We'll work on that going forward. But I want to say from a long-term point of view, I would echo Scott's last point, right? Our philosophies as a company, our values, our mission to unleash the potential of every team and the culture. This has been a constant of the company for the last 23 years, and it's going to continue to be a constant going forward, we hope for a very long time. We're a very long-term thinking company. We have certain ways of being that we don't expect to change, nor do I think Scott would want them to change, or nor do I think that should change. Now we live in a highly changing environment, so we can't say nothing's going to change. What we can say is in the short to medium term, sort of the closer focus, we're very clear on our strategies and our execution. As Scott mentioned, we have the most experienced executive team we've ever had. I'm super lucky to get to work alongside them all every single day, even executing through this mini project, if you like. From a strategy point of view, look, we're very clear. We're clear with our investors, our shareholders, our customers what our focuses are in terms of the opportunities we have in the enterprise and with migrations in terms of the ITSM and ESM market and continue to invest strongly there and seeing strong results. And then in the AI era, we have some fantastic opportunities. So those are the current priorities as we said. That doesn't change from yesterday to today, and we'll keep you updated as we move forward. Michael Turrin -- Wells Fargo Securities -- Analyst Maybe Scott can take the bins out one last time. Thanks, guys. Operator Your next question comes from Alex Zukin from Wolfe Research. Please go ahead. Alex Zukin -- Wolfe Research -- Analyst Hey, guys. Thanks for taking my questions. Maybe mine is tied to the data center to cloud journey that you've seen both over the first 3 quarters of this year in the context of some customers kind of signing more longer-term deals and in the construct of kind of this notion that the end of server life unblocks the company's ability to focus on a lot more things. What does that mean for data center to cloud migration trends in terms of both from a financial perspective, maybe next quarter and next year, that then points compared to what you maybe previously thought, and then just beyond, if you look at the activity of where those customers are migrating in terms of a tier basis and what that's doing to ARR or ACV growth? Joe Binz -- Chief Financial Officer Yeah. Thanks, Alex. A lot of questions there, so if I don't hit them all, bring me back. So I'll start with migrations. We do continue to expect migrations to be a key driver of cloud revenue growth in Q4 and FY '25. Despite a few if any server migrations post into support, this is due to the significant size of the data center installed base and the opportunity we have to enable those customers, some of our very largest customers to move to the cloud. And that opportunity today is even bigger than we expected it to be 3 months ago, given the strong customer retention and migrations from server to data center this quarter. Having said that, we also expect the migration benefit to cloud revenue growth to gradually decline over time from the approximately 10-point benefit in FY '24, given the lack of server migrations. Now to drive these migrations, I talked earlier about the things we're doing. So we have a lot of confidence in our ability to execute on that and to drive it. So that's how we think about the growth impact to cloud from migrations going forward. In terms of the deal structure, if you look at our overall deal volume this quarter, even though we had a large number of absolute deals, the mix between annual and multiyear were very consistent and similar to past quarters. So think of the overall volume growing, and within that volume, the mix between multiyear and annual being the same. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer I just had a few small points to that, Alex. Firstly, in terms of deals, like you're seeing a lot more hybrid deals, obviously, from the data center type customer. One of the points that we like to make clear is the larger and more complex customers moving to the cloud is not a sort of a 1-day single button click event like changing an app on your phone, right? They have complex deployments with lots of integrations, and they're enmeshed into deep customer workflows. This is fantastic for Atlassian. This shows how much value we have in our products. It means the migration journey is more of a gradual overtime series of events. And that shows up in their hybrid both in terms of their deployment environment, topology, and their deal construct. I will say, we continue to be agile with our resources at Atlassian. We pride ourselves in our ability to move R&D around to where we need it to be. Obviously, with the end of server, we can move slightly more R&D toward the cloud, but we maintain a strong commitment to the data center business and continuing to move that forward. And there's still lots of work to do, right? We're incredibly proud of the work we've done in performance and scale, in governance and data residency. We rolled out seven new regions this quarter and an extensibility and all the things that our largest customers need, and you'll see us continuing to invest in those over the coming year as part of the journey. Alex Zukin -- Wolfe Research -- Analyst Perfect. Thank you, guys. Joe Binz -- Chief Financial Officer Thanks, Alex. Operator Your next question, Keith Bachman from BMO Capital Markets. Please go ahead. Keith Bachman -- BMO Capital Markets -- Analyst Yes. Many thanks for taking the call. Joe, I think this is for you as well, but I wanted to talk about data center growth. So the guidance that you've given for Q4 of, call it, 40 to 42 with 15 points of help, even net of help, it would have -- keenly stronger than I would have anticipated. And so if we look out over the horizon, is there any puts and takes that you can give us on how to construct or think about data center growth specifically? And just to even take a step back, as we look at analyst day next week or the analyst event, I should say, at your event, which I'm very much looking forward to, will management provide some longer-term model frameworks, either the top line or margin construct? Thanks very much. Joe Binz -- Chief Financial Officer Yeah. Great question, Keith. Thanks. Let me start with the data center question and frame it in terms of long-term growth drivers on that model. We expect data center growth rates will decelerate through FY '25 just given the migration dynamics into and out of data center and the challenging comparables are going to have to FY '24. To the question earlier, we're not going to have another server and to support moment in FY '25. Having said that, in FY '24 data center revenue growth benefited from migration flows from server net the headwind from data center migration to cloud. And with server and the support, we do expect that benefit to wane over the course of the next year to 18 months given limited, if any, new migrations from unsupported server customers and accelerating data center migrations from cloud. We should see a much more pronounced decrease in that benefit in H2 FY '25 and into FY '26 as we lap the strong migrations from server in this quarter, at which point we'll likely have a net headwind to data center revenue growth driven by migration to the cloud. So that's sort of the migration stories. I think it's also important to keep in mind as you think about long-term data center growth rates, our customer base here is predominantly enterprise with very high renewal rates. And price increases and expansion are the other key drivers beyond those migration dynamics, and we do expect those to remain healthy contributors to growth going forward. In terms of analyst day, I appreciate the interest in that, really looking forward to seeing you and many of your colleagues next week. I'm not going to share a whole lot today other than to say we plan to share our optimism around the long-term opportunities we have, how we think about the drivers of durable growth and the key areas of investment we'll be making that will enable us to deliver on that, and I'll share the rest next week when we get together. Keith Bachman -- BMO Capital Markets -- Analyst All right. Many thanks. I look forward to it. Operator Next question comes from Brent Thill from Jefferies. Please go ahead, Brent. Brent Thill -- Jefferies -- Analyst Thanks. Joe, I think many on the buy side are still hung up on why cloud isn't growing faster right now, and I know you're expecting to accelerate going forward. But what is I mean when you think about the differential of kind of the expectation versus what you're seeing, what has been holding cloud back as much? Is it just DC was easier to make the migration? Is there something else that's going on? Because I think most felt like this would actually move a little faster, and we know it's going to accelerate going forward for your guide. But just curious to get your thoughts on what you think maybe can restrain some of the growth or maybe our expectations are just too big. Joe Binz -- Chief Financial Officer Yeah. With respect to the server and to support, Brent, you'll recall that we did talk about the fact that of the server customers that were there at end of support, we expected the vast majority, if not all, of those customers to migrate to data center, right, because those are large customers with very complex environments. And it's a much easier migration path to data center than cloud. And most of those customers need a little more time. So I would say migration as part of the model has performed in line or better than what we expected all year, and it's held up really well. Stepping back at the overall cloud business, I think the main pain point has been around paid seat expansion and weakness. Everything else in the model has performed in line with what we expected entering the year and continues to hold up really well in what has been a really mixed, if not, difficult macroeconomic environment. In terms of paid seat expansion, our rate of paid seat expansion in the quarter overall remained below prior year levels, as I mentioned earlier. But I talked about the fact that trend quarter-to-quarter is improving and beginning to moderate from prior quarters. Within that trend, seat expansion rates in SMB continue to be particularly challenged. And so that's been -- if you want to center the pain point there and the expectation delta that could be an aspect of it. Our enterprise rates remain very stable, and so we continue to believe a big driver of this trend is macro as customers tightly managed headcount growth and costs and where we see SMB more impacted, broadly speaking, than enterprise. So from our perspective, that's been the primary pain point and the headwind on the business from a cloud perspective. The remaining drivers, whether it's migration or cross-sell or upsell to premium additions, even new customers are coming back in line, all of those aspects continue to perform well and in line with our expectations. So that's -- from our perspective, that's been the biggest expectation delta. Brent Thill -- Jefferies -- Analyst Great. Thank you. Operator Our next question comes from Nick Altmann from Scotiabank. Please go ahead. Nick Altmann -- Scotiabank -- Analyst Awesome. Thanks, guys. Wanted to build on the last question a little bit. But just in your prepared remarks, you guys talked about how the opportunity around cloud today is much larger versus your initial expectations. And I was just wondering if you guys could impact that a bit. I mean you guys talked about seat counts on cloud or higher churn sort of was above expectations. But maybe just talk about why you see the opportunity more significant today than you did several years ago. What's sort of driving that heightened optimism? And just any other color you can provide around what you guys are seeing with your current cloud customers that's driving the upside versus sort of your initial expectations. Thanks. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Thanks, Nick. It's Scott here. A couple of reasons. One is let's just take the migration aspect first, which is that in our migration models, everything has performed as expected in terms of how many people we expect to migrate from server to cloud, and what we found was less people turned down, and I think it's pointed to the stickiness of our overall offering to our customers. These are the times when you would expect competitors or alternatives to be researched out there in the market, and we haven't seen that. We've seen people really stick with and double down on investment in Atlassian's products. And so they may not have made the first step to cloud. They've made the first by data center. But I can tell you with every one of those customers I speak to, large or small, cloud is in their future. And it's really, OK, they're either a feature from us or they want a particular data residency or a particular compliance that we're already working on, or they just got a project internally that they're trying to schedule when they want to get the migration done. And so I have a huge kind of excitement around what that holds purely on migrations. If we take down just the market size and opportunity, we get to share some next week around that. But I'm super excited by what that shows, bottoms up of just the opportunity inside our customer base. And that is getting larger for a couple of reasons. One is that we've got new products that are coming to market. Our point products are gaining real customer usage and sort of early in the revenue on the usage that they're growing pretty fast. And we know that those new products can then be sold across our entire customer base. Two is the consolidation motion we are seeing across the industry. And in times like this, our customers are looking to deal with less vendors, and they are looking for a single system of work across their entire organization to make sure that work can move across every department. And so we are seeing competitive switch-outs of products to consolidate on Atlassian, and so that is really exciting. And lastly, with AI and what we can do there, there's a couple of things. One is, I firmly believe that more software is going to get built on the far side of this, and so the market for people who want to use our tools and products and so forth to broadly help build software is going to increase. And the ROI or the dollars you can charge for our customers over time is changing, whether that's usage-based or some other business model, but we're now providing so much more value for our customers than we were before the AI revolution came over the last 1.5 years that our opportunities there are alive. So I can go on and on. I don't know if Mike or Joe want to add anything to that. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Yeah. The only thing I would add, Scott covered all of the basics. And obviously, we're incredibly bullish about AI. We got some exciting stuff coming up next week. We hope to see you all there at 1024. The Atlassian platform is probably one of the areas that I always think is underestimated in terms of durable growth and in terms of long-term advantage, right? Again, Atlassian is a company that thinks very long term and very strategically and thoughtfully as we go through equinox and solstice and equinox and solstice and equinox and solstice. The world goes around and around, and we try to think about that across more than just a singular quarter. In terms of engineering, you see we have significant R&D investments, right? That is a part of how we think about the world. And in the cloud, a large amount of that goes into the Atlassian platform. Building out the platform to scale across our products is a unique, competitive advantage. It is increasingly resonant with customers as a differentiator and as a moat that allows them to choose multiple products, allows them to adopt our products more seamlessly, more quickly. You get automation across those products, get analytics across those products, and build out the teamwork graph that underpins a lot of our Atlassian intelligence and other future capabilities. That is a super unique advantage that comes only from our large R&D investments and our long-term thinking and our ability to, in a capital-efficient way, fund that build-out over a many, many year period, and it will continue to be so over the future periods. Nick Altmann -- Scotiabank -- Analyst Awesome. Thanks, guys. Operator Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead. Kash Rangan -- Goldman Sachs -- Analyst Yeah. Toggling from one call to the other. Thanks so much for the time here. My question is, it looks like given the continued strength in the data center product, this is going to be here to stay for quite a while. So I'm curious, when you look at the product roadmap ahead, how much of an emphasis is being placed on the development side on the cloud, particularly with respect to the functionality? And when are we going to start to see a divergence by design, by intention between the cloud and the surviving entity? And what new incentives are we going to see in the fiscal years ahead and also migrations? Are we going to make those migrations easier going forward? Thank you so much. Appreciate it. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Sure, Kash, I can take that. Look, I would say from our customers' point of view, it's well understood that the cloud is our future, and our customers know that. As Scott mentioned earlier, 5 years ago, you had a lot of customers that said I'm not going to the cloud. Now it is a when, not an if, right? I do not run into customers who say they will not go to the cloud. I run into customers who say we can't go now because of this reason or that reason, either internal reasons or Atlassian-related reasons. The divergence of features to some extent has already happened because of the nature of the cloud. So you need to look no further than Atlassian Intelligence, right? AI and LLM-driven features with large-scale foundational models requiring teamwork graph in the Atlassian cloud platform, it's not something that we can bring to a data center customer, and they understand that. It's a completely logical reason, and hence, an extra reason or incentive for them to migrate. Now we are building continually hybrid-supporting features in things like our migration tooling and in other areas as those customers move parts of their workload to the cloud if you think about it that way, and that is helpful to those customers over time. Beyond that, we do continue to invest in the capabilities of data center for those customers, right, in terms of security, in terms of their scale and compliance, and in terms of features where we can take certain features, which makes sense to build in data center and in the cloud simultaneously. So I think the customers understand that. In terms of additional incentives for DC customers to move from a financial and other point of view, we continue to work with our customers and our partners as to the best way to do that. Often, it's not financially driven, right? It can be as much about compliance and data residency, and Fed ramp, and enterprise scale, and all the things that we are continuing to work on with those customers. Operator Your next question comes from Fatima Boolani from Citi. Please go ahead. Fatima Boolani -- Citi -- Analyst Good afternoon. Thank you for taking my questions. And Scott, congratulations to you for absolutely legendary run. Just on the point of the carats or the incentives for your existing data center customers to move to the cloud. I wanted to ask you the question in a different way. You always make substantial progress in solving for data residency demands and other compliance and security blockers for some of your most regulated and complex customers. So I'm curious, what is left to address or alleviate from a "cloud" blockers standpoint? And what type of investment should we expect that will entail in the medium term? And the reason I ask this is because the expectation is that your data center migrations to cloud are going to accelerate. Presumably, most of those blockers have been renewed. So I would just love a little bit more color on that front. Thank you. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Sure, Fatima. I can take some part of that. Look, I think, at the highest level, it's a pretty big test enterprise maturity that 3/4 of our enterprise customers in regulated industries have a cloud footprint today. So you talked about our achievements. And thank you for noticing that, by the way. That's very gratifying. We have been working incredibly hard on those areas, and it is resonating with customers, and that's an important place to start. Second, I would say these customers, we call them our largest, the most complex, most enmeshed customers. That is one of the things that just takes time for them to move. Like for a lot of these customers, a 3, 5-year roadmap they're running in these large complex IT organizations. That's not about -- I think you referred to them as cloud blockers. That is just about that company saying, yes, I get it. I have these projects going on. It's going to take me a year, 2 years, 3 years. I'm going to move this piece first, then this piece second. Some of that's the natural progression pace of those customers. There are certainly things we can do, improving migration tooling and lots of other things that we are working on. But some part of the paces were in terms of the customers. And there's no doubt, we will continue to work on governance. As we mentioned, we're in process with FedRAMP Moderate, and we continue to work on things like that for governmental customers. We have more data residency regions we'd love to roll to for sure. There is always more performance and scale that we can kick out for our largest customers. So there are a lot of things that we have to continue to work on. In the app and extensibility area, we continue to ship improvements every single quarter. Now the other thing is building customer trust. We see our relationship with the customers, especially in the subscription environments like data center and cloud. That's about demonstrating continued trust over time. They are subscribing to get our future offerings. We can see that in the last 2 quarters, we've hit 100% of our cloud roadmap in R&D in terms of delivery. So when these customers are making a multiyear or even decade-long commitment to Atlassian as a partner, they want to see that we're going to deliver on the things that we tell them we're going to deliver on, which is certainly what we've done over the last period of time. That said, having customer conversations, they acknowledge they are clear and they see that we are continuing to remove the, as you call them, cloud blockers over time. So that trust is going up when you talk to customers. They are seeing our progress just as you are. So I hope that's helpful. Fatima Boolani -- Citi -- Analyst Very. Thank you so much. Operator Your next question comes from Arjun Bhatia from William Blair. Please go ahead. Arjun Bhatia -- William Blair and Company -- Analyst Perfect. Thank you. Maybe one for Mike or Scott, I just wanted to touch on the AI landscape, but maybe more from the sense of what it means for the role of the developer, right? We're hearing a lot more about text-to-code capabilities and how that's automating a lot of the workflow for the developer role, and you have companies popping up that are addressing these start-ups that are doing this more and more. But from your perspective, how do you see the role of the developer changing? And maybe what does it mean from an Atlassian perspective? What does it mean about how Jira might need to change or evolve to manage the agile process overall? Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Yeah. Thanks, man. I can certainly take that one. Lots of thoughts here. Firstly, AI is awesome for software development in the broadest sense, right? Large language models, their ability to generate code, their ability to understand code, which is arguably more important, is phenomenal for the world. It -- we take the position that the world has a supply constraint in the number of engineers, not a demand constraint in the amount of ideas we have for software that we would like to be built. What AI does is loosens that supply constraint. We're not going to hit demand ceiling. So people will be able to do more with the number of engineers that they have is the way we think of it. That is good for us for a number of reasons. Firstly, most developer time is not spent on coding. It's spent on coordination activities. It's spent on how developers work with product managers and marketing teams, and service teams, how they support and operate the software and services that they've built rather than just the sort of classical view of coding a piece of software and then delivering it. That is a collaboration activity. That is a difficult, hard problem that we spent 20-plus years working on, and I suspect to spend most of the next 20 years continuing to work on. Secondly, AI, we believe, will generate far more software, far more services and apps and tools, and that is a great thing for us, especially for things like Compass, which are about managing developer experience, managing your software sprawl. Again, resonating extremely well with customers only a few months into GA, but obviously -- but already taking off on a pretty strong growth path and well ahead of our expectations. So Compass and AI is a great thing that have more software. And thirdly and lastly, the ability of AI to allow nondevelopers to "write" code in some sort of a form, to do more programmatic capabilities is quite fantastic. You can see this in Atlassian analytics, where the ability to use natural language to turn into SQL and then chart and dashboards. It's kind of a developer like activity but allows a democratization at analytics to get to your data to understand it. I think there'll be many, many more things like that that allow these AI capabilities to democratize we used to think of as software development. Maybe that's the way to say it. So Scott, I don't know if you have any follow-ons. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Just to be like the first point to make to consider, I think for people that don't write software, I think it may be not well-known how little time people actually spend hands on keyboard writing code. A lot of software is working at the requirements and what success looks like and how do we want to build things and where is data going to come from. And so you can make huge differences in how much time developer spends his hands on keyboard. But percentage-wise, it actually doesn't change their week that much because they spend a lot of their time in Jira, in Confluence, in like talking to customers, gathering requirements. And you look at the way our products touch our customers, that's a way larger percentage of a customer's week than a developer's week than writing an IDE. And so the opportunity for us to say same time for these hands-on keyboard software developers is immense because like 36 out of -- I don't know it's kind of the day spent coding, the time there, it's a huge difference. And so I just want to echo that because it's not particularly well-known if you're not a software developer. Arjun Bhatia -- William Blair and Company -- Analyst All right. Appreciate the thought. Thank you. Operator Thank you. And that concludes our question-and-answer session. I will now turn the call over to Mike for closing remarks. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Thank you, everyone, for joining our call today. As always, we appreciate your thoughtful questions and continued support. We're incredibly excited for TEAM '24, our flagship customer conference next week in Las Vegas. We've got some incredible speakers, fantastic customers, and some, hopefully, mind-blowing announcements that we can't wait to share with you. We'll also be hosting our Investor Day at TEAM '24, so we really hope to see you there. And with that, have a fantastic weekend. Answer:

Atlassian's earnings conference call for the third quarter of fiscal year 2024

Operator Good afternoon, and thank you for joining Atlassian's earnings conference call for the third quarter of fiscal year 2024. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations. Martin Lam -- Head of Investor Relations Welcome to Atlassian's third quarter of fiscal year 2024 earnings call. Thank you for joining us today. Joining me on the call today, we have Atlassian's co-founders and co-CEOs, Scott Farquhar and Mike Cannon-Brookes; and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our third quarter of fiscal year 2024. Shareholder letter is available on Atlassian's work-life blog and the Investor Relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor datasheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. Any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recently filed quarterly reports. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financials are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release, investor data sheet on the Investor Relations section of our website. I'd like to allow as many of you to participate in Q&A as possible. Out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Scott for opening remarks. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Thank you for joining us today. As we've already read in our shareholder letter, Q3 was truly a milestone quarter for last June. Today, Atlassian is a cloud-majority company. We have over 300,000 customers using our cloud products, a 3 times increase in paid fees in the cloud since we announced the winding down of support for server 3.5 years ago. And while this is just one significant moment among many across our multiyear cloud journey, we are thrilled with what we've achieved to date. We migrated more paid seats to cloud than we had initially projected, and our churn has been consistently lower than expected from our server base. This speak volumes about the mission-critical role our products play, the value they deliver, and our customers' desire to realize the innovation in our cloud products. We now have an even large opportunity in cloud than originally believed. You'll see us continue to execute against our roadmap and we have more innovation to pave the path for these data center customers to move to cloud in the coming years, drive, durable future growth. We're also announcing that I'll be stepping down as Co-CEO of Atlassian on the 31st of August this year. It's been a difficult decision, but after 23 years, it's time to pursue some other passions I have, specifically philanthropy, investing, and to help grow and build the global technology industry. And while there is never a perfect time to step away, I'm supremely confident of where Atlassian is at. We've got one of the best cloud platforms in the industry. Our .8 new products are gaining real traction with customers and revenue, AI is providing new and exciting opportunities, and our customers are increasingly choosing to consolidate around Atlassian. And I'm proud to say we have the most experienced leadership team in our history. I will remain an active Board member and assume a special advisor role with Mike continuing on as CEO. I have complete trust in Mike leading the way to harness the incredible opportunities that we have ahead of us. I'll turn it over to you, Mike. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Thanks, Scott. Yes, milestone quarter for a number of reasons. Now there'll be plenty of time for celebrations and farewells as this is not Scott's last earnings call, but I do want to touch on his news briefly. As you all know, Scott and I have known each other for nearly three decades and have experienced every major life milestone together. This company simply would not be Atlassian without Scott, and I'm truly thankful to have had him by my side every day for the last 23 years. In this next chapter, I'm sure we will remain great mates and trusted partners, and I'm glad that I can support him through this both personally and professionally as I continue to lead Atlassian forward as CEO. Atlassian has always been my #1 professional priority and focus. Scott and I have both won every hat over the last two decades, so I'm confident in taking over full responsibility of the company. I'm incredibly excited about the massive opportunities that we have in front of us across our three markets in work management, software development, and service management. We have such huge opportunities ahead of us in both the enterprise transition and AI, where our unique team data and insights allow us to offer unique capabilities and unleash our customers' potential. As we continue to attack our opportunities, I want to reiterate the commitments that we've made to continue to grow over the long term, while returning to our historical margin levels. We have a thoughtful plan in place to continue to drive durable revenue growth, and we feel really good about our agile approach to prioritizing resources behind key strategic areas like enterprise NII while driving leverage as we scale, and we couldn't be more excited about the future. With that, I'll pass the call to the operator for Q&A. Questions & Answers: Operator [Operator instructions]. Your first question comes from Ryan MacWilliams from Barclays. Please go ahead. Ryan MacWilliams -- Barclays -- Analyst Hey, thanks for taking the question. Just like to hear about the overall macro trends at this point or develop for hiring. Like have you noticed any trends around the green shoots of growth for IT budgets or powering developers? And then separately, just one quick housekeeping item for Joe. What was the contribution to cloud revenue growth in the third quarter? And maybe how you're thinking about its contribution to the fourth quarter? Thank you. Joe Binz -- Chief Financial Officer Yeah. Thanks, Ryan. I'll start. From a macro perspective, macro trends were very much in line with what we saw in Q2 and in line with our expectations. Enterprise was healthy across both cloud and data center, and that drove the record billings, strong growth in annual multiyear agreements, strong migration and good momentum in sales of premium and enterprise additions of our products that you see rolling through our revenue results. The macro impact on SMB, on the other hand, continued to be challenging, although also in line with expectations. And that macro headwind in SMB lands primarily in cloud, given SMB makes up a significant part of that business. And within cloud, it lands primarily in paid seat expansion. So stepping back more broadly within cloud, the trends in Q3 were very consistent with Q2 as well as our expectations coming into the quarter. And then paid seat expansion rates remained well below prior-year levels, but the decelerating trend quarter-to-quarter did continue to moderate from Q2, so that's a positive sign. All of the other growth drivers, migrations, cross-sell, upsell, new customers, monthly active usage, churn, etc., those were all in line with our expectations and stable overall. And then in terms of Loom, we -- basically, from a quarter perspective, we're not going to provide specifics on Loom's revenue or growth rate. We were pleased with the growth we're seeing and excited by the customer reaction to the recent AI innovations we've been introducing into Loom's product line. In terms of performance in the quarter, Loom revenue in Q3 was squarely in line with our expectations. And in terms of our fiscal-year guidance, in terms of our overall revenue and operating margin guidance for the year, we continue to expect Loom to have about 1.5 points of impact on FY '24 cloud revenue growth for the year and for Loom to be slightly dilutive to FY '24 and FY '25 operating margins. Operator The next question comes from Fred Havemeyer from Macquarie. Please go ahead. Fred Havemeyer -- Macquarie Group -- Analyst Thank you very much. Scott, we know you're not leaving immediately, but certainly will be quite missed on these calls. I wanted to ask, with respect to those -- the super migration at this point, it's very encouraging to hear that churn was looking much lower than expected, and primarily the customers have transitioned on to data center. But are there any customers that are left over at this point in time that might make a future transition after limping along for some period of time here? Joe Binz -- Chief Financial Officer Fred, this is Joe. It's difficult to know exactly how many server customers remain running unsupported at this point. We believe it's a small number and certainly smaller than we thought it would be entering the quarter. We're not assuming any material contribution to either data center or cloud revenue growth from this cohort of customers moving forward in the guidance. And operationally, our focus now is squarely on enabling our data center customers to move to the cloud. Fred Havemeyer -- Macquarie Group -- Analyst Thank you. Operator The next question comes from Keith Weiss from Morgan Stanley. Please go ahead, Keith. Sanjit Singh -- Morgan Stanley -- Analyst Yeah. This is Sanjit Singh on for Keith. Thank you for taking the questions. I actually want to ask a question about customer call-out that you had in the shareholder letter. You guys mentioned that FanDuel was able to cut tickets that require human interventions by 85%, which is a pretty fantastic result for Fanduel. In terms of that customer, are you pricing that Fanduel contract on a seat basis? And how would you think about when they achieve those types of efficiency gains? How do you think about the revenue opportunity with some of the efficiency gains they are seeing with the Atlassian products? Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Yes. That's a great question, Sanjit, and I think one on people's minds is AI increasingly helps produce these incredible ROI experiences that we're seeing across our customer base. And at the moment, we have historically priced our -- almost all of our products on some sort of seat basis with some usage basis that has happened in certain areas of the product such as BitBucket pipelines that we've charged for units to build and stuff like that. We are experimenting going forward with more usage-based private seats. So it's -- I don't want to get into one specific customer, but we think that there is a world in the future where we do have some sort of usage back pricing around these interactions with the ROI that we're getting from customers. And so we'll see more experimentation with that going forward, but that's something we're experimenting with at the moment. Sanjit Singh -- Morgan Stanley -- Analyst Appreciate the thoughts. Thank you. Operator Your next question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead. Gregg Moskowitz -- Mizuho Securities -- Analyst Thank you very much for taking the question. And Scott, all the best in your future endeavors, even though I know, as Mike said, you'll be with us for a little while longer, fortunately. So my question is, obviously, this is a significant upside quarter. Having said that, I think the big question is one of sustainability. The cloud revenue in the quarter will still be in line with guidance with all of the upside coming from data center and marketplace, and marketplace itself is tied to the data center as well. But we're never going to have another quarter of server migrations. And clearly, there was also a decent amount of pull forward given the recent data center price increase. And so as we look ahead into next year and beyond, the question is, can it last, and in fact, continue to show good growth? Thank you. Joe Binz -- Chief Financial Officer Yeah. Great question, Gregg. Thanks for asking. Let me try and share a little bit of perspective on that without giving specific numbers for FY '25. At the highest level, the long-term revenue growth of the company is really driven by the opportunities we have in our three large high-growth markets that Mike touched on at the top of the call, and secular trends around things like digital transformation and software is a critical factor to the success of every company. From there, there are several growth drivers across cloud and data center. In terms of cloud, given the size of the data center installed base, we do continue to expect migrations to be a key driver of cloud revenue growth over several years, although we do expect that impact to wane gradually over time. Now to drive migrations, we're delivering a cloud platform that provides the best customer experience and value with analytics, and automation, and AI as well as better TCO for the customer. And those factors will only improve and grow stronger over time. As part of that, we are investing in new and highly valuable product innovation as well, and much of that is only currently available on premium enterprise additions of our products, our cloud products. And we are working to unblock and help customers migrate and deploy on our cloud and making good progress on scalability and certifications, and app integration and extensibility, all of which are very relevant to our largest customers in data centers. So we have a lot of confidence in the migration space. From there, as you know, there are multiple growth drivers in the cloud we've discussed in the past, things like paid seat expansion within our existing customer base, our opportunity to cross-sell additional products to our over 300,000 customers, upselling to premium and enterprise additions of our products. And then with the smaller impact today but growing over time are other drivers like new customer adds and new high-growth proms, Jira product discovery and Loom. And of course, pricing is the final lever in the cloud model. In terms of data center, we expect organic expansion and pricing to be durable, long-term drivers given the high renewal rates on data center agreements and the enterprise nature of that customer base. And with AI, we are well-positioned with the unique data graphs around high-value workloads, and there's a lot of opportunity in that space as well. And we're off to a solid start with Atlassian intelligence with more AI innovation on the way. And then finally, add on significant opportunity we have for further penetration enterprise, where we've had great signal and momentum over the last year. And overall, all up, we feel confident in our ability to invest behind and deliver healthy revenue growth over a multi-year period as a result of that. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Hey, Gregg, I just wanted to chime in at a high level. I think Joe has given a very fantastic and comprehensive answer there. I think we should remember that any upside in data center is long-term upside for the cloud in terms of the destination for those customers over the long arc of time. I think our end of server journey, as you mentioned, from a migration point of view, overall, it's been a huge success, right? Over the last 4 years, we beat our original expectations for the number of paid seats that we migrate to cloud. We ended with less churn overall than we thought we would have over that 3- or 4-year period. We've tripled the number of paid seats in cloud during that period since we -- in fact, since we announced the end of service 3 and a bit years ago. I think the way I would zoom out and see that is, that is an example of Atlassian executing against the long-term goal as a team and as a company, and we can do hard things. We say this all the time internally. Data center customers moving to hybrid deployments, which is generally the way they go through in the middle and then to cloud, it's a different journey, right? these are our largest and most complex customers. They have different requirements, different things, but we will get them there. We will execute against that mission over the next few years in the same way that we executed against the last mission. I have confidence in Atlassian to do that. And if you want a singular statistic of how that's going, again, the data center to cloud migrations over the first 3 quarters of this year were up 90%, 9-0, on the first 3 quarters of last year on a year-on-year basis. So we are already migrating data center customers to the cloud. So that overperformance is a long-term good sign for us. Gregg Moskowitz -- Mizuho Securities -- Analyst That's extremely helpful. Thank you both. Operator Your next question comes from Michael Turrin from Wells Fargo Securities. Please go ahead. Michael Turrin -- Wells Fargo Securities -- Analyst Hey. Great. Thanks. Appreciate you taking the questions. Results were quite strong in a still tough environment. I think the stock is initially reacting more to the surprise news from Scott. So maybe you can both, Scott and Mike, give us a peek behind the scenes around how you have historically divided the CEO role. And Mike, would be helpful to hear more around is becoming sole CEO at all changes, the role or key points of focus on your end from a product or a strategic perspective. I think just any detail there is useful. Thanks very much. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Thanks, Scott here. I'll take the first thing at that. Look, Mike and I have worked together for 23 years. We used to take turns taking the bins out in our first office. So we've kind of done every job equally over that period of time. Mike's run go-to-market for well over half that time. I've run actual little less than that. I've run engineering. Mike runs engineering products. So we've kind of done everything together over that period of time. And I think that's relatively unique actually, I mean, ourselves unique actually kind of shared and divvy those responsibilities and change them over time. I think it's also extremely unique there. And so I don't think there's anything that Mike hasn't done before that he'll be picking up and even philosophies around how we run finances and how we think about the growth of business and investments. Like we've spent a lot of time together over the years, doing. And though Joe and finance have been reporting to me for the last half a dozen years or so, Mike and I spent a lot of time together looking at where we want to grow the business and what our investment profile is. So Mike, do you want to add anything? Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Yeah. Thanks, Scott. Thanks, Michael. Look, other than Scott being clearly better than I was at taking the bins out. We'll work on that going forward. But I want to say from a long-term point of view, I would echo Scott's last point, right? Our philosophies as a company, our values, our mission to unleash the potential of every team and the culture. This has been a constant of the company for the last 23 years, and it's going to continue to be a constant going forward, we hope for a very long time. We're a very long-term thinking company. We have certain ways of being that we don't expect to change, nor do I think Scott would want them to change, or nor do I think that should change. Now we live in a highly changing environment, so we can't say nothing's going to change. What we can say is in the short to medium term, sort of the closer focus, we're very clear on our strategies and our execution. As Scott mentioned, we have the most experienced executive team we've ever had. I'm super lucky to get to work alongside them all every single day, even executing through this mini project, if you like. From a strategy point of view, look, we're very clear. We're clear with our investors, our shareholders, our customers what our focuses are in terms of the opportunities we have in the enterprise and with migrations in terms of the ITSM and ESM market and continue to invest strongly there and seeing strong results. And then in the AI era, we have some fantastic opportunities. So those are the current priorities as we said. That doesn't change from yesterday to today, and we'll keep you updated as we move forward. Michael Turrin -- Wells Fargo Securities -- Analyst Maybe Scott can take the bins out one last time. Thanks, guys. Operator Your next question comes from Alex Zukin from Wolfe Research. Please go ahead. Alex Zukin -- Wolfe Research -- Analyst Hey, guys. Thanks for taking my questions. Maybe mine is tied to the data center to cloud journey that you've seen both over the first 3 quarters of this year in the context of some customers kind of signing more longer-term deals and in the construct of kind of this notion that the end of server life unblocks the company's ability to focus on a lot more things. What does that mean for data center to cloud migration trends in terms of both from a financial perspective, maybe next quarter and next year, that then points compared to what you maybe previously thought, and then just beyond, if you look at the activity of where those customers are migrating in terms of a tier basis and what that's doing to ARR or ACV growth? Joe Binz -- Chief Financial Officer Yeah. Thanks, Alex. A lot of questions there, so if I don't hit them all, bring me back. So I'll start with migrations. We do continue to expect migrations to be a key driver of cloud revenue growth in Q4 and FY '25. Despite a few if any server migrations post into support, this is due to the significant size of the data center installed base and the opportunity we have to enable those customers, some of our very largest customers to move to the cloud. And that opportunity today is even bigger than we expected it to be 3 months ago, given the strong customer retention and migrations from server to data center this quarter. Having said that, we also expect the migration benefit to cloud revenue growth to gradually decline over time from the approximately 10-point benefit in FY '24, given the lack of server migrations. Now to drive these migrations, I talked earlier about the things we're doing. So we have a lot of confidence in our ability to execute on that and to drive it. So that's how we think about the growth impact to cloud from migrations going forward. In terms of the deal structure, if you look at our overall deal volume this quarter, even though we had a large number of absolute deals, the mix between annual and multiyear were very consistent and similar to past quarters. So think of the overall volume growing, and within that volume, the mix between multiyear and annual being the same. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer I just had a few small points to that, Alex. Firstly, in terms of deals, like you're seeing a lot more hybrid deals, obviously, from the data center type customer. One of the points that we like to make clear is the larger and more complex customers moving to the cloud is not a sort of a 1-day single button click event like changing an app on your phone, right? They have complex deployments with lots of integrations, and they're enmeshed into deep customer workflows. This is fantastic for Atlassian. This shows how much value we have in our products. It means the migration journey is more of a gradual overtime series of events. And that shows up in their hybrid both in terms of their deployment environment, topology, and their deal construct. I will say, we continue to be agile with our resources at Atlassian. We pride ourselves in our ability to move R&D around to where we need it to be. Obviously, with the end of server, we can move slightly more R&D toward the cloud, but we maintain a strong commitment to the data center business and continuing to move that forward. And there's still lots of work to do, right? We're incredibly proud of the work we've done in performance and scale, in governance and data residency. We rolled out seven new regions this quarter and an extensibility and all the things that our largest customers need, and you'll see us continuing to invest in those over the coming year as part of the journey. Alex Zukin -- Wolfe Research -- Analyst Perfect. Thank you, guys. Joe Binz -- Chief Financial Officer Thanks, Alex. Operator Your next question, Keith Bachman from BMO Capital Markets. Please go ahead. Keith Bachman -- BMO Capital Markets -- Analyst Yes. Many thanks for taking the call. Joe, I think this is for you as well, but I wanted to talk about data center growth. So the guidance that you've given for Q4 of, call it, 40 to 42 with 15 points of help, even net of help, it would have -- keenly stronger than I would have anticipated. And so if we look out over the horizon, is there any puts and takes that you can give us on how to construct or think about data center growth specifically? And just to even take a step back, as we look at analyst day next week or the analyst event, I should say, at your event, which I'm very much looking forward to, will management provide some longer-term model frameworks, either the top line or margin construct? Thanks very much. Joe Binz -- Chief Financial Officer Yeah. Great question, Keith. Thanks. Let me start with the data center question and frame it in terms of long-term growth drivers on that model. We expect data center growth rates will decelerate through FY '25 just given the migration dynamics into and out of data center and the challenging comparables are going to have to FY '24. To the question earlier, we're not going to have another server and to support moment in FY '25. Having said that, in FY '24 data center revenue growth benefited from migration flows from server net the headwind from data center migration to cloud. And with server and the support, we do expect that benefit to wane over the course of the next year to 18 months given limited, if any, new migrations from unsupported server customers and accelerating data center migrations from cloud. We should see a much more pronounced decrease in that benefit in H2 FY '25 and into FY '26 as we lap the strong migrations from server in this quarter, at which point we'll likely have a net headwind to data center revenue growth driven by migration to the cloud. So that's sort of the migration stories. I think it's also important to keep in mind as you think about long-term data center growth rates, our customer base here is predominantly enterprise with very high renewal rates. And price increases and expansion are the other key drivers beyond those migration dynamics, and we do expect those to remain healthy contributors to growth going forward. In terms of analyst day, I appreciate the interest in that, really looking forward to seeing you and many of your colleagues next week. I'm not going to share a whole lot today other than to say we plan to share our optimism around the long-term opportunities we have, how we think about the drivers of durable growth and the key areas of investment we'll be making that will enable us to deliver on that, and I'll share the rest next week when we get together. Keith Bachman -- BMO Capital Markets -- Analyst All right. Many thanks. I look forward to it. Operator Next question comes from Brent Thill from Jefferies. Please go ahead, Brent. Brent Thill -- Jefferies -- Analyst Thanks. Joe, I think many on the buy side are still hung up on why cloud isn't growing faster right now, and I know you're expecting to accelerate going forward. But what is I mean when you think about the differential of kind of the expectation versus what you're seeing, what has been holding cloud back as much? Is it just DC was easier to make the migration? Is there something else that's going on? Because I think most felt like this would actually move a little faster, and we know it's going to accelerate going forward for your guide. But just curious to get your thoughts on what you think maybe can restrain some of the growth or maybe our expectations are just too big. Joe Binz -- Chief Financial Officer Yeah. With respect to the server and to support, Brent, you'll recall that we did talk about the fact that of the server customers that were there at end of support, we expected the vast majority, if not all, of those customers to migrate to data center, right, because those are large customers with very complex environments. And it's a much easier migration path to data center than cloud. And most of those customers need a little more time. So I would say migration as part of the model has performed in line or better than what we expected all year, and it's held up really well. Stepping back at the overall cloud business, I think the main pain point has been around paid seat expansion and weakness. Everything else in the model has performed in line with what we expected entering the year and continues to hold up really well in what has been a really mixed, if not, difficult macroeconomic environment. In terms of paid seat expansion, our rate of paid seat expansion in the quarter overall remained below prior year levels, as I mentioned earlier. But I talked about the fact that trend quarter-to-quarter is improving and beginning to moderate from prior quarters. Within that trend, seat expansion rates in SMB continue to be particularly challenged. And so that's been -- if you want to center the pain point there and the expectation delta that could be an aspect of it. Our enterprise rates remain very stable, and so we continue to believe a big driver of this trend is macro as customers tightly managed headcount growth and costs and where we see SMB more impacted, broadly speaking, than enterprise. So from our perspective, that's been the primary pain point and the headwind on the business from a cloud perspective. The remaining drivers, whether it's migration or cross-sell or upsell to premium additions, even new customers are coming back in line, all of those aspects continue to perform well and in line with our expectations. So that's -- from our perspective, that's been the biggest expectation delta. Brent Thill -- Jefferies -- Analyst Great. Thank you. Operator Our next question comes from Nick Altmann from Scotiabank. Please go ahead. Nick Altmann -- Scotiabank -- Analyst Awesome. Thanks, guys. Wanted to build on the last question a little bit. But just in your prepared remarks, you guys talked about how the opportunity around cloud today is much larger versus your initial expectations. And I was just wondering if you guys could impact that a bit. I mean you guys talked about seat counts on cloud or higher churn sort of was above expectations. But maybe just talk about why you see the opportunity more significant today than you did several years ago. What's sort of driving that heightened optimism? And just any other color you can provide around what you guys are seeing with your current cloud customers that's driving the upside versus sort of your initial expectations. Thanks. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Thanks, Nick. It's Scott here. A couple of reasons. One is let's just take the migration aspect first, which is that in our migration models, everything has performed as expected in terms of how many people we expect to migrate from server to cloud, and what we found was less people turned down, and I think it's pointed to the stickiness of our overall offering to our customers. These are the times when you would expect competitors or alternatives to be researched out there in the market, and we haven't seen that. We've seen people really stick with and double down on investment in Atlassian's products. And so they may not have made the first step to cloud. They've made the first by data center. But I can tell you with every one of those customers I speak to, large or small, cloud is in their future. And it's really, OK, they're either a feature from us or they want a particular data residency or a particular compliance that we're already working on, or they just got a project internally that they're trying to schedule when they want to get the migration done. And so I have a huge kind of excitement around what that holds purely on migrations. If we take down just the market size and opportunity, we get to share some next week around that. But I'm super excited by what that shows, bottoms up of just the opportunity inside our customer base. And that is getting larger for a couple of reasons. One is that we've got new products that are coming to market. Our point products are gaining real customer usage and sort of early in the revenue on the usage that they're growing pretty fast. And we know that those new products can then be sold across our entire customer base. Two is the consolidation motion we are seeing across the industry. And in times like this, our customers are looking to deal with less vendors, and they are looking for a single system of work across their entire organization to make sure that work can move across every department. And so we are seeing competitive switch-outs of products to consolidate on Atlassian, and so that is really exciting. And lastly, with AI and what we can do there, there's a couple of things. One is, I firmly believe that more software is going to get built on the far side of this, and so the market for people who want to use our tools and products and so forth to broadly help build software is going to increase. And the ROI or the dollars you can charge for our customers over time is changing, whether that's usage-based or some other business model, but we're now providing so much more value for our customers than we were before the AI revolution came over the last 1.5 years that our opportunities there are alive. So I can go on and on. I don't know if Mike or Joe want to add anything to that. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Yeah. The only thing I would add, Scott covered all of the basics. And obviously, we're incredibly bullish about AI. We got some exciting stuff coming up next week. We hope to see you all there at 1024. The Atlassian platform is probably one of the areas that I always think is underestimated in terms of durable growth and in terms of long-term advantage, right? Again, Atlassian is a company that thinks very long term and very strategically and thoughtfully as we go through equinox and solstice and equinox and solstice and equinox and solstice. The world goes around and around, and we try to think about that across more than just a singular quarter. In terms of engineering, you see we have significant R&D investments, right? That is a part of how we think about the world. And in the cloud, a large amount of that goes into the Atlassian platform. Building out the platform to scale across our products is a unique, competitive advantage. It is increasingly resonant with customers as a differentiator and as a moat that allows them to choose multiple products, allows them to adopt our products more seamlessly, more quickly. You get automation across those products, get analytics across those products, and build out the teamwork graph that underpins a lot of our Atlassian intelligence and other future capabilities. That is a super unique advantage that comes only from our large R&D investments and our long-term thinking and our ability to, in a capital-efficient way, fund that build-out over a many, many year period, and it will continue to be so over the future periods. Nick Altmann -- Scotiabank -- Analyst Awesome. Thanks, guys. Operator Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead. Kash Rangan -- Goldman Sachs -- Analyst Yeah. Toggling from one call to the other. Thanks so much for the time here. My question is, it looks like given the continued strength in the data center product, this is going to be here to stay for quite a while. So I'm curious, when you look at the product roadmap ahead, how much of an emphasis is being placed on the development side on the cloud, particularly with respect to the functionality? And when are we going to start to see a divergence by design, by intention between the cloud and the surviving entity? And what new incentives are we going to see in the fiscal years ahead and also migrations? Are we going to make those migrations easier going forward? Thank you so much. Appreciate it. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Sure, Kash, I can take that. Look, I would say from our customers' point of view, it's well understood that the cloud is our future, and our customers know that. As Scott mentioned earlier, 5 years ago, you had a lot of customers that said I'm not going to the cloud. Now it is a when, not an if, right? I do not run into customers who say they will not go to the cloud. I run into customers who say we can't go now because of this reason or that reason, either internal reasons or Atlassian-related reasons. The divergence of features to some extent has already happened because of the nature of the cloud. So you need to look no further than Atlassian Intelligence, right? AI and LLM-driven features with large-scale foundational models requiring teamwork graph in the Atlassian cloud platform, it's not something that we can bring to a data center customer, and they understand that. It's a completely logical reason, and hence, an extra reason or incentive for them to migrate. Now we are building continually hybrid-supporting features in things like our migration tooling and in other areas as those customers move parts of their workload to the cloud if you think about it that way, and that is helpful to those customers over time. Beyond that, we do continue to invest in the capabilities of data center for those customers, right, in terms of security, in terms of their scale and compliance, and in terms of features where we can take certain features, which makes sense to build in data center and in the cloud simultaneously. So I think the customers understand that. In terms of additional incentives for DC customers to move from a financial and other point of view, we continue to work with our customers and our partners as to the best way to do that. Often, it's not financially driven, right? It can be as much about compliance and data residency, and Fed ramp, and enterprise scale, and all the things that we are continuing to work on with those customers. Operator Your next question comes from Fatima Boolani from Citi. Please go ahead. Fatima Boolani -- Citi -- Analyst Good afternoon. Thank you for taking my questions. And Scott, congratulations to you for absolutely legendary run. Just on the point of the carats or the incentives for your existing data center customers to move to the cloud. I wanted to ask you the question in a different way. You always make substantial progress in solving for data residency demands and other compliance and security blockers for some of your most regulated and complex customers. So I'm curious, what is left to address or alleviate from a "cloud" blockers standpoint? And what type of investment should we expect that will entail in the medium term? And the reason I ask this is because the expectation is that your data center migrations to cloud are going to accelerate. Presumably, most of those blockers have been renewed. So I would just love a little bit more color on that front. Thank you. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Sure, Fatima. I can take some part of that. Look, I think, at the highest level, it's a pretty big test enterprise maturity that 3/4 of our enterprise customers in regulated industries have a cloud footprint today. So you talked about our achievements. And thank you for noticing that, by the way. That's very gratifying. We have been working incredibly hard on those areas, and it is resonating with customers, and that's an important place to start. Second, I would say these customers, we call them our largest, the most complex, most enmeshed customers. That is one of the things that just takes time for them to move. Like for a lot of these customers, a 3, 5-year roadmap they're running in these large complex IT organizations. That's not about -- I think you referred to them as cloud blockers. That is just about that company saying, yes, I get it. I have these projects going on. It's going to take me a year, 2 years, 3 years. I'm going to move this piece first, then this piece second. Some of that's the natural progression pace of those customers. There are certainly things we can do, improving migration tooling and lots of other things that we are working on. But some part of the paces were in terms of the customers. And there's no doubt, we will continue to work on governance. As we mentioned, we're in process with FedRAMP Moderate, and we continue to work on things like that for governmental customers. We have more data residency regions we'd love to roll to for sure. There is always more performance and scale that we can kick out for our largest customers. So there are a lot of things that we have to continue to work on. In the app and extensibility area, we continue to ship improvements every single quarter. Now the other thing is building customer trust. We see our relationship with the customers, especially in the subscription environments like data center and cloud. That's about demonstrating continued trust over time. They are subscribing to get our future offerings. We can see that in the last 2 quarters, we've hit 100% of our cloud roadmap in R&D in terms of delivery. So when these customers are making a multiyear or even decade-long commitment to Atlassian as a partner, they want to see that we're going to deliver on the things that we tell them we're going to deliver on, which is certainly what we've done over the last period of time. That said, having customer conversations, they acknowledge they are clear and they see that we are continuing to remove the, as you call them, cloud blockers over time. So that trust is going up when you talk to customers. They are seeing our progress just as you are. So I hope that's helpful. Fatima Boolani -- Citi -- Analyst Very. Thank you so much. Operator Your next question comes from Arjun Bhatia from William Blair. Please go ahead. Arjun Bhatia -- William Blair and Company -- Analyst Perfect. Thank you. Maybe one for Mike or Scott, I just wanted to touch on the AI landscape, but maybe more from the sense of what it means for the role of the developer, right? We're hearing a lot more about text-to-code capabilities and how that's automating a lot of the workflow for the developer role, and you have companies popping up that are addressing these start-ups that are doing this more and more. But from your perspective, how do you see the role of the developer changing? And maybe what does it mean from an Atlassian perspective? What does it mean about how Jira might need to change or evolve to manage the agile process overall? Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Yeah. Thanks, man. I can certainly take that one. Lots of thoughts here. Firstly, AI is awesome for software development in the broadest sense, right? Large language models, their ability to generate code, their ability to understand code, which is arguably more important, is phenomenal for the world. It -- we take the position that the world has a supply constraint in the number of engineers, not a demand constraint in the amount of ideas we have for software that we would like to be built. What AI does is loosens that supply constraint. We're not going to hit demand ceiling. So people will be able to do more with the number of engineers that they have is the way we think of it. That is good for us for a number of reasons. Firstly, most developer time is not spent on coding. It's spent on coordination activities. It's spent on how developers work with product managers and marketing teams, and service teams, how they support and operate the software and services that they've built rather than just the sort of classical view of coding a piece of software and then delivering it. That is a collaboration activity. That is a difficult, hard problem that we spent 20-plus years working on, and I suspect to spend most of the next 20 years continuing to work on. Secondly, AI, we believe, will generate far more software, far more services and apps and tools, and that is a great thing for us, especially for things like Compass, which are about managing developer experience, managing your software sprawl. Again, resonating extremely well with customers only a few months into GA, but obviously -- but already taking off on a pretty strong growth path and well ahead of our expectations. So Compass and AI is a great thing that have more software. And thirdly and lastly, the ability of AI to allow nondevelopers to "write" code in some sort of a form, to do more programmatic capabilities is quite fantastic. You can see this in Atlassian analytics, where the ability to use natural language to turn into SQL and then chart and dashboards. It's kind of a developer like activity but allows a democratization at analytics to get to your data to understand it. I think there'll be many, many more things like that that allow these AI capabilities to democratize we used to think of as software development. Maybe that's the way to say it. So Scott, I don't know if you have any follow-ons. Scott Farquhar -- Co-Founder and Co-Chief Executive Officer Just to be like the first point to make to consider, I think for people that don't write software, I think it may be not well-known how little time people actually spend hands on keyboard writing code. A lot of software is working at the requirements and what success looks like and how do we want to build things and where is data going to come from. And so you can make huge differences in how much time developer spends his hands on keyboard. But percentage-wise, it actually doesn't change their week that much because they spend a lot of their time in Jira, in Confluence, in like talking to customers, gathering requirements. And you look at the way our products touch our customers, that's a way larger percentage of a customer's week than a developer's week than writing an IDE. And so the opportunity for us to say same time for these hands-on keyboard software developers is immense because like 36 out of -- I don't know it's kind of the day spent coding, the time there, it's a huge difference. And so I just want to echo that because it's not particularly well-known if you're not a software developer. Arjun Bhatia -- William Blair and Company -- Analyst All right. Appreciate the thought. Thank you. Operator Thank you. And that concludes our question-and-answer session. I will now turn the call over to Mike for closing remarks. Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer Thank you, everyone, for joining our call today. As always, we appreciate your thoughtful questions and continued support. We're incredibly excited for TEAM '24, our flagship customer conference next week in Las Vegas. We've got some incredible speakers, fantastic customers, and some, hopefully, mind-blowing announcements that we can't wait to share with you. We'll also be hosting our Investor Day at TEAM '24, so we really hope to see you there. And with that, have a fantastic weekend.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Mike Bishop Hello, everyone, and welcome to Atomera's first quarter fiscal year 2024 update call. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available on Atomera's IR website for one year. I am Mike Bishop with the company's investor relations. As in prior quarters, we are using Zoom and we will follow a similar presentation format with participants in a listen-only mode. We will open with prepared remarks from Scott Bibaud, Atomera's president and CEO, and Frank Laurencio, Atomera's CFO. Then we will open the call to questions. If you are joining by telephone, you may follow a slide presentation to accompany our remarks on the events and presentations section of our investor relations page on our website. Before we begin, I'd like to remind everyone that during today's call, we will make forward-looking statements. These forward-looking statements whether in prepared remarks or during the Q&A session, are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of our filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 10-K filed with the SEC on February 15th, 2024. Except as otherwise required by federal securities laws, Atomera disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions and circumstances. Also, please note that during this call, we will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is also posted to our website. Now, I would like to turn the call over to our president and CEO, Scott Bibaud. Scott, go ahead. Scott Bibaud -- President and Chief Executive Officer Good afternoon and welcome to Atomera's update call covering the first quarter of 2024. The past three months have seen more customer activity progressing to the proposal stage than any in our history. This unprecedented level of interest in our technology as a result of announced customer commercialization, widespread recognition of the efficacy of our MSC technology, and detailed solutions to these issues faced in today's complex transistors. I will talk more about customer progress after a short comment on the semiconductor market. This year, we see the semiconductor industry modestly growing led by companies executing in the AI space. The pressure on leading-edge logic fabs to advance their latest nodes with high performance per watt is intense. Most of the growth in the industry is happening here, as well as in DRAM, which is snapping back strongly after contracting throughout 2023. In addition, consumer cellular is expected to show modest growth. Automotive with its associated power and analog component companies have softened as they work through inventory and see new competition from China, although the consensus seems to be that the outlook for the second half of the year is better. What does all this mean for Atomera? We are a company that benefits from modest capacity utilization at our IDM and foundry customers, so they can run R&D wafers. We continue to see this favorable environment for the medium term, except in the bleeding edge where capacity is tight, offset by a strong desire to improve performance yield and cost of those new manufacturing processes. Right now, industry dynamics and customer interest indicate a strong willingness to invest. Now, let's review customer activity. As you know, our first announced customer on track toward production is STMicroelectronics, who are currently incorporating MST into the design of the next-generation smart power products. We continue to work closely with them on this effort and their development progress is on track to a production release, which will result in royalty revenue for Atomera. Smart Power products belong to the analog, power, and discrete MEMS and sensors, or APMS Group, which ST reports publicly. In their recent earnings announcement, ST reported $2.2 billion in APMS revenue for the first quarter of this year. So, the potential of this business is very large. As I've made clear, our first priority as a company is to help ST get the highest possible performance out of MST and to get it into production as quickly as possible. Our next priority is to put other customers under that same path to production and I believe we are making long strides in that direction. In the last three months, we have submitted a historically high number of proposals for licenses and JDAs and these have been for both Phase 1 and Phase 3 customers. Although none of them have closed yet or they would have been announced, we are currently taking a lot more shots on goal than has historically been the case. That said we still haven't found our way into JDA1's net. We have proven and they acknowledge that MST can overcome every challenge they've given us. From past experience, we know the decision by a BU to move forward with MST is often a matter of intersecting with the customers' move to a new process or node. So, I believe that our continued discussions with JDA1 will ultimately bear fruit. With JDA2, we have gotten our first peak at data, and it looks good. Although the full battery of testing has not been completed yet, early results look promising, with Atomera providing significant improvements in some of the customers most critical requirements. If the final results, including a much wider set of specs look equally good, we hope to put a license in place and start development toward production. Likewise, at our previously announced fabless licensee, DOE planning and wafer starts are ramping up to determine if MST will be included in their next-generation RF products. If so, this would be another large license and royalty opportunity for Atomera, and we believe it would influence other RF-SOI customers to license MST. Our foundry licensee just completed a new round of MST CAD and is interested in the possible incorporation into one of their next-generation process nodes as well. They're seeking approval to start a new set of wafers as we speak. As you can tell, each of our licensees is making an effort to incorporate MST into their upcoming technology releases but we also have proposals out with multiple companies that are not yet licensees. The proposals fall into our four focus areas, except one, which is an entirely new high-potential area. During the last quarter, we've had substantive discussions about working together with almost all the major companies in the advanced node and memory area. In the advanced node segment, we are offering a variety of solutions to the challenges of making the incredibly complex gate-all-around structures used at the bleeding edge. The silicon data and TCAD simulations we are using to validate these solutions are constantly being refined to provide more detail, which is critical to winning these customers. In addition, we continue to secure patents around structures in this quickly evolving area. As an example, just this week, we were notified that our patent titled Gate-All-Around device, including a superlattice has been allowed and will formally issue next month. In memory, we are focusing on providing performance upgrades to DRAM to meet the needs of AI, while still delivering on the cost requirements that dominate this segment. It's a tricky balance, but in memory, MST not only improves performance, but it also can lower the cost of the chip itself, making the cost-benefit analysis very favorable. In the RF-SOI segment, we have customers who are running, or planning to run wafers at most of the largest manufacturers, and our collaborations with major players in the power semiconductor space also continue. I do understand investors' frustration that all the good work happening inside is not generating business announcements on the outside. We believe that will happen in time. Our focus has been on making these proposals turn into revenue, and I think we're making good progress. We expect to make announcements in the coming quarters in several of these areas. Before I bring this presentation to a close, I want to let you know about a market segment that represents an entirely new source of IP-protected potential revenue for Atomera beyond our main channel of business. As part of our ongoing R&D, we have developed new variations of our silicon lattice films, which have opened additional potential for us in the fast-growing sector of compound semiconductors. We are exploring a number of potential applications, including those involving silicon carbide, gallium nitride, silicon germanium, and other compounds that could have applications in enhancing AI chips and quantum computing. I will highlight just one we are working on. Gallium nitride or GaN, is a wide band gap material that can be used to produce devices capable of operating at higher temperatures, frequencies, and voltages than those based on pure silicon. The market for GaN and power electronics is growing rapidly, dominated by mobile and consumer applications, and with a very bright future in automotive. Many of you may recently have switched to a much smaller, faster wall charger and that was likely enabled by GaN. Our recent report by the Yield Group said that the Power GaN market grew by 41% in 2023 and will likely increase at a CAGR of 46% over the next five years, potentially exceeding $2 billion per year by 2028. Compound semiconductor materials have traditionally been difficult to manufacture due to crystal defects, some of which can be caused by a mismatch with nonnative substrates. The mismatch creates stresses at the interface, which propagate through the wafer causing cracks and other defects that have limited both the size and the yield of wafers, making economical manufacturing difficult. Atomera's MST film can relax or de-strain the interface between two different crystal latices, and we've been filing a number of patents over the years related to this effect. Recently, we began working with one of the world's leading authorities in compound semiconductor fabrication, Professor Edwin Pinar at Texas State University to investigate how MST could help solve this whole manufacturing problem. A material which can significantly improve the quality of GaN wafers and potentially enable them to be manufactured at a larger size is a game changer that the industry is currently seeking. Early experiments growing GaN wafers using MST have shown very promising results. While we still have work to do, if our current trajectory continues, we should be able to enter the market and generate revenue much more quickly than in our traditional engagements with semiconductor customers, potentially even before the end of this year. There's a lot happening at Atomera these days. In addition to all the customer commercial activity and the potential expansion into the compound semiconductor space, we have been evaluating a large number of potential R&D foundry partners, recruiting new marketing talent, working on some critical partnerships and becoming more active in the CHIPS and Science Act. We are very optimistic about the prospects opening before us, any one of which could take us over the top as a company. Our ST engagement has the potential to form the base of revenue for our company, and each of the areas I've outlined can grow on top of that base. Compound semiconductors would represent a new segment for us, one with much faster time to revenues, while our traditional business continues to have a massive TAM rich with opportunities for MST. Although we're advancing on many fronts, our team remains laser-focused on converting these excellent prospects into licenses that will make Atomera into a profitable and diversified technology leader in the semiconductor industry. Thanks for taking the journey with us. Now Frank will review our financials. Frank Laurencio -- Chief Financial Officer Thank you, Scott. At the close of the market today, we issued a press release announcing our results for the first quarter of 2024 and this slide shows our summary financials. Our GAAP net loss for the three months ended March 31st, 2024, was $4.8 million or $0.19 per share compared to a net loss of $5 million or $0.21 per share in the first quarter of 2023. In Q4 of 2023, our GAAP net loss was $4.6 million, which was $0.18 per share. Revenues were $18,000 in Q1 of 2024 compared to $550,000 in Q4 and $0 in Q1 of 2023. GAAP operating expenses were $5 million in Q1 of 2024, which was a decrease of approximately $148,000 from $5.2 million of opex in Q1 2023. This decrease in operating expenses was mainly due to a $178,000 decline in R&D expenses, reflecting the closure of our outsourced foundry TSI semiconductor at the end of January. General and administrative expenses increased by $69,000 and sales and marketing expense decreased by $39,000. Sequentially, our GAAP operating expenses decreased by $300,000 from Q4 2023 to $5 million in Q1, reflecting a $134,000 decrease in R&D expenses also due to the R&D -- also due to the TSI closure, a decline of $102,000 in sales and marketing expense due to lower headcount and G&A expense declining by $64,000. Non-GAAP net loss in Q1 2024 was $4 million and compares to a loss of $4.2 million in Q1 2023. And as with our GAAP results this was primarily due to lower R&D expenses. Sequentially, non-GAAP net loss increased by $228,000 from $3.8 million in Q4 as lower revenues were partly offset by the decline in operating expenses. The differences between GAAP and non-GAAP operating expenses in all periods presented are primarily due to non-cash stock compensation expenses, which were approximately $1 million in both Q1 of 2024 and in Q4 2023 and compares to $927,000 in Q1 of 2023. Our balance of cash, cash equivalents, and short-term investments on March 31st, 2024, was $19.3 million compared to $19.5 million at the end of 2023. During Q1 2024, we used $4.1 million of cash in operating activities, and we sold approximately 510,000 shares under our ATM facility at an average price per share of $8.06, resulting in net proceeds of approximately $4 million. First quarter operating cash flow includes the collection of $550,000 of fees invoiced after meeting a key milestone in Q4 under our commercial license. As of March 31, 2024, we had 26.9 million shares outstanding. Revenue in Q1 was approximately $18,000 and consisted of recognizing 3 months of revenue under the MST CAD license to a large semiconductor manufacturer that we announced last quarter. We expect to recognize approximately that same $18,000 of MST CAD license revenue from this customer for the remainder of 2024. For Q2, we expect our total revenue will be approximately $50,000 consisting of the MST CAD license and engineering services. As I stated in our call last quarter, the next major revenue milestone under our agreement with ST will be the grant of the distribution license upon completion of the qualification process, which is largely under ST's control, so I cannot provide guidance on the timing for recognizing that revenue. Moving to our expense guidance. Given the lower operating expenses in Q1 due to the lower outsourced R&D spending, which will not ramp back up until we have a replacement for TSI by reducing our full year guidance for non-GAAP operating expenses to a range of $16.5 million to $17.25 million. We also expect to add several headcount this year in sales and marketing and engineering, and our expense guidance reflects the impact of those planned new hires. With that, I'll turn the call back over to Scott for a few summary remarks before we open up the call to questions. Scott? Scott Bibaud -- President and Chief Executive Officer Thank you, Frank. I'm proud of the progress we've made in the last quarter, and I hope you get a sense of the momentum we have underway both in development and in new production opportunities. Our team is confident that it's only a matter of time before we can announce license deals that will further solidify the potential of Atomera's business for the future. In addition, it is great to give you a peek at our early compound semiconductor work, which could form a whole new revenue stream for the company. We are doing everything in our power to get ST to production quickly, while simultaneously building a diversified, sustained business around that first deal. Thanks, as always, for your support. Mike, we can now take questions. Mike Bishop OK. Thank you, Scott. [Operator instructions] And right now, our first question comes from Richard Shannon of Craig-Hallum. Richard, if you would kindly unmute and turn on your camera. It's already on. Great. You may begin. Richard Shannon -- Craig-Hallum Capital Group -- Analyst All right. Mike, can you hear me? Mike Bishop Yes. Richard Shannon -- Craig-Hallum Capital Group -- Analyst Excellent. Hi, Scott and Frank, thanks for taking my questions. I guess maybe I'll ask the first one here on kind of a new -- I know new language you've been using here, and you put it in your press release as well but regarding proposals, record number of proposals this quarter versus last. I guess, just to understand the significance of this. To what degree of these proposals, kind of a push mechanism for you versus a pull mechanism from your customers to kind of get an understanding of true demand here and interest? How do we take that? Scott Bibaud -- President and Chief Executive Officer Yeah, Mike, I'm glad you asked that question because it's important to understand, we don't push proposals out. We don't just generate proposals and send them to people. The only time we make a proposal is when we've gone far enough down the road with a customer in our work that they are interested in receiving a proposal from us. Of course, we share budgetary ideas about what doing business with us will be from the very first day. But creating a proposal, a term sheet, and everything around that is a lot of work. And what we're talking about is that type of proposal, not just a speculative send it out and hope they respond to a type of thing. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. That's helpful. I just want to make sure on that. And then any kind of sweet spot of technology areas that are -- where these proposals are going out on? Is it a different mix than what you've had in the past? Obviously, we talked a lot about RF-SOI and power. Scott Bibaud -- President and Chief Executive Officer No, I think I talked a little bit about it in my script, but the proposals are going out in almost all of our focused areas. Yes, I would say, all of our focused areas. And in addition, one other area that we haven't talked about before isn't something we've done a lot of work on so far, but it's something that we have been hoping to enter for some time. So, it's good potential. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. That's helpful. Let's see a question or two on STMicro here. You talked about, I think, the last couple of quarters about -- and one of the next major steps here is getting a PDK frozen. Is this something you have visibility into from STMicro and have any expectations on timing for that? Scott Bibaud -- President and Chief Executive Officer Yes. We definitely have a view into their development process. We don't have a very clear view of their exact schedule. And if we did, they've asked us not to share that publicly, so we won't be able to provide guidance on exactly when those things get done. But I can tell you that we're on track. When we shared in prior presentations, kind of a timeline and the process, like we had some graphics that we're showing the process; that's a standard process that people would use in the industry kind of a standard timeline. I still think that that's very reasonable. And one thing that both we and ST have agreed that we can say is that we're on track to that process. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. All right. Fair enough then. Scott, I probably missed writing down the exact language you had on the topic of RF-SOI, but I think you said something along the lines of you're running wafers at most of the manufacturers out there. Maybe if you can repeat that passage and then help us understand the point of that comment, please. Scott Bibaud -- President and Chief Executive Officer Yeah. So, the RF-SOI market has a certain amount of manufacturers that really constitute the bulk of the capacity that's available in the industry. And today, we're working with the vast majority of them and starting wafers with a lot of them. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. OK. Fair enough then. Let's jump over to the large analog player for which you've got a license for MSTcad here. I guess just what do you kind of see as the outcome of this work? I think Frank mentioned effecting a license -- to generate license revenues throughout this year. I'm not sure if that implies stopping after that point. But what do you expect to be the outcome or hope to outcome here? And when will that happen? And does Frank's comment about revenues lasting through this year imply it's not going into next year? And is that an end point of the work, or just want to correlate those two comments and understand the dynamics there? Scott Bibaud -- President and Chief Executive Officer Yes. OK. I apologize if that was a little confusing. So, just our MSTcad tools, we licensed to customers just like Cadence or Synopsys, would license their tools to customers. In this case, we have a customer who has signed up for a one-year license with it. It doesn't mean they're going to stop at the end of the year. It just means that that is a contract that we have in place that would be extended as we got closer, just like most simulation model licenses. And what does that mean? Well, what it means is this large customer is doing work on their next-generation process, and they're adding MST in to see if that makes sense for them. And they're adding it in at the simulation level and so then it's easy for them to try a bunch of different things. We can give them advice on different ways of integrating to get different levels of performance improvement. And when they have seen results that they think they like then our next goal would be to get them to take an installation -- a manufacturing license and install it in their fab and actually start running wafers inside their own fab. They could actually do demos with us where they send us wafers and then they run wafers in their fab, but we'd be really encouraging them to install. So, that TCAD license is kind of a first step in that direction. Richard Shannon -- Craig-Hallum Capital Group -- Analyst Got it. OK. That's helpful. Maybe moving over to the first JDA partner here. It's obviously been in place for, I can't remember how many years, like two or three years now. And I think last quarter, you talked about some strong engagement that was slowed down by the holidays, and you seem to -- I can't remember the exact language you're looking at my notes here. It sounds like there's some strong interest from business units here, but no decision made. Maybe you can give us some sense here of some back and forth in more iterations happening that you weren't expecting? Or maybe just kind of help us out relative to what sounded like you were getting fairly close to a next step several months ago? Scott Bibaud -- President and Chief Executive Officer Yeah. I think it's a very frustrating situation. We did a JDA with these guys a couple of years ago. They gave us a set of specifications. We met all of those specifications. And so, then they said, OK, we're going to present this to our business units to consider adopting. We have been working with a number of their business units. And last year, they gave us a whole bunch of other tests and specs that they wanted us to run wafers for and do simulations to prove that we could solve them, and we did by the end of last year. We pretty much provided all of that test data. They reviewed, they agreed that we had met all of it. And so, now we're in this very frustrating phase where they're saying, yes, your stuff seems to work well but until we kind of identify this timing when we're going to make a change to that particular area, then we'll decide whether we're going to adopt it or not and do a license. And so, we've been going back and forth with them on this for months. I think there may be an impression because we can't give many updates on it that we're not doing, but we literally are talking to these guys constantly. And right now, we just haven't gotten to the point where we can announce that we have an agreement. So, yes, it's frustrating for us, and I'm sure it's very frustrating for investors. It looks like we're not doing anything. We're doing a lot. We just haven't gotten it over the finish line. And I don't think it's that unusual. If you look back at our STMicro engagement, we really by, I think 2020, we had shown them all the data that they needed to do an installation and get started, and it wasn't until 2023 that they finally did a license with us and got started on that. So, to a certain extent, you have to be prepared and sitting on the shelf when they're ready to grab something off the shelf and put it into place. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. Fair enough. Scott Bibaud -- President and Chief Executive Officer Typically, when we do a license with a customer, we ask them to pay an upfront license fee when we sign. So, if you're going to need to use the technology in a year, why would you do a license right away, right? So, that might be a little bit of a holdup as well. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. OK. Fair enough. I will jump out of line here, but probably come back in, but thanks for all the details, Scott. Scott Bibaud -- President and Chief Executive Officer OK. Mike Bishop OK, Richard, thank you. Looking at some of the questions coming in on the Q&A chat, the first one regards STMicro, which is when ST makes the next milestone, what will the scale of fees that Atomera will receive? Frank Laurencio -- Chief Financial Officer Happy to take that one. We've said since the time that we signed the -- and announced the signature of the deal that it was consistent with our model for licensing to customers, and we expect the total fees to be in the neighborhood of $3 million for all stages of licensing. And this is consistent with that. So, you can do the math based on the revenue recognized already, which was $550,000 last quarter and $150,000 that we had recognized originally when we did the integration license with them several years ago. So, this is pretty significant in terms of revenue. And when I talked about the inability to give revenue guidance, it wasn't -- I wasn't implying we didn't know how much it would be, but rather it's not something that I can give guidance on the timing of when it's going to be recognized because we -- our policy has always been to guide only for the next quarter until we have solid visibility beyond that. And we don't have that kind of visibility yet. But when we get closer, we will, as long as it's consistent with our confidentiality with them, we will give guidance when we get closer. Mike Bishop OK. That answered the next question about timing for ST. You answered that quite well. So, another question that came in. Are the record number of commercial proposals for manufacturing and production licenses, are they for manufacturing and production or just integration licenses? Scott Bibaud -- President and Chief Executive Officer Yeah, I will take that. For the most part, we are trying to push customers to install, and they are -- most of our customers are used to working with the big tool manufacturers. And typically, if a tool manufacturer comes in and says, hey, I have got a new tool that will solve some problems for you. The way that works is they usually ask the tool manufacturer to do a number of demos for them first. So, they -- the tool manufacturer will do demos back at their fab and send them wafers. Some of them have that mindset with us. And for them, we would have to do, try to do, an integration license before we get to manufacturing. But our goal is to try to get people to install and put it in their fab and start manufacturing those wafers as soon as possible. So, I think all of our proposals that are outstanding right now include are for manufacturing licenses, but I won't preclude the fact that we might have to do some demos before we get there. Mike Bishop OK. Have there been serious talks with wafer suppliers about a deal for a blanket MST wafer on RF-SOI? Scott Bibaud -- President and Chief Executive Officer Yeah. The answer is yes. That's something that we have been talking about with various wafer suppliers for some time. And I think we don't have anything to announce on that just yet, but we do believe that when we are in a position where one of our RF-SOI customers is ready to make a decision to go to production, I mean which means there will probably be another year or a year and a half at least before they go to production, we will be able to arrange for a wafer supplier to deliver MST RF-SOI wafers to them if that's the path they want to go down. So, that is definitely -- we have done the pre-work for that, and I think we could put that together. Just to be clear, we also make it available to our RF-SOI customers that they can buy RF-SOI wafers and deposit MST on them themselves, and then they license that from us. So, there is lots of ways in which it can work. Mike Bishop OK. And a question, maybe you can comment on the replacement for TSI. I think you addressed it a little bit in the prepared comments, but has a replacement for TSI been signed? Scott Bibaud -- President and Chief Executive Officer Yes. I would say we have spoken to almost a dozen companies, maybe less than that, but a lot of companies. And it seems very clear that we have a lot of good options. We have customers who -- I mean possible suppliers that are much better process technology that they used to have at TSI, and we have ones with more specialty processes that we want. So, I think we are getting very close to starting working with one or more of them, and I don't have any doubt that we will end up working with multiple suppliers, not just one, but I think we will get started with the first one very soon. So, yes, I think the replacement for TSI is well on its way. Mike Bishop OK. Great. And then Richard Shannon had a follow-up question. Richard, if you would un-mute and turn on your camera. Richard Shannon -- Craig-Hallum Capital Group -- Analyst Mike, it will not let me turn on my camera, but can you hear me? Mike Bishop Yeah, we can hear you. Go ahead. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. It's not allowing me to, oh, there we go. Now, we can do this maybe. Yes. There we go. Scott, I wanted to follow up on one of your responses to my earlier questions here related to STMicro. You said you basically showed them all the data that they had requested back in 2020, but they didn't start until 2023 when they pulled it off the shelf. So, I guess kind of applying this to your other set of customers' engagements, how many other customers have you essentially satisfied all of the data that they have asked for and are sitting around? And do you think it's reasonable to think about a delay between having the technology like satisfying all the specs, and then waiting x number of years? In STMicro's case, three years before you get to production. Is that something that you expect, or is that an extraordinarily long time? How would you relate this to your experiences with other customers that we haven't gotten to that point, but seem like you have made some good progress? Scott Bibaud -- President and Chief Executive Officer Yeah. It's a tricky one to answer, Richard. To be honest, ST surprised me. I think surprised all of us. We gave them the results. They were very happy with them. They just never went off the dime. We kept in conversation with them all the time, like every few months, we would meet with them, and they would say, yes, keep waiting. I don't think that we -- so we have a number of other customers that we have run wafers with, and they have seen good results, and they are not currently in the process of going to production. But I couldn't say exactly how many or whether I think that's going to be typical that they pull it off the shelf. I can say there are a lot of customers who we -- yes, that we have shown good results to, and we keep talking to them and they keep kind of pushing it off a little, but we do think that we will engage with them sometime soon and JDA1 is a good example, but we have other examples like that. Actually, we have a lot of examples like that. So, yes, the frustrating thing is if they could just see the results and pull the trigger, that would be great. And that's what -- normally in a business like ours, a customer puts out an RFQ, they need a certain type of product, and you go and pitch your product and when they decide yours is the best you win it. That's what my experience in semiconductors has been my whole career. But this business we have is a little bit different. We are going out and proactively telling them, hey, if you used our technology, we can make your product a little bit better. And for the most part, we are kind of putting that into their minds. So, even after we have convinced them, and that's the case, we sometimes have to wait until the planned change of that process or node is happening for them to implement it. But I can't say whether that would take a long time or a short time, we haven't had enough experience in it. Richard Shannon -- Craig-Hallum Capital Group -- Analyst It seems like in all the conversations we have had on these conference calls and offline as well, it just smells like RF-SOI kind of is mirroring STMicro in a way where it seems like you have suggested or outright told us that you satisfied the requirements. And I think once or more than once you have even talked about some requirements to changing at some point. But it seems like RF-SOI mirrors a lot of what you described with STMicro, is that a fair comparison? Scott Bibaud -- President and Chief Executive Officer Yes. And let me just -- so, let's say we have a customer, and we don't engage with them and we engage with them as soon as we can, right, as soon as we can get them interested enough to start testing out our technology. And that customer had a plan for some process to bring out a new version of it in two years. And so, they are working on that new process. And simultaneously, we are trying to show them that our technology is good. And maybe even with only one year left, they say, wow, your technology is really good. But it's too late to implement it into our other process. We have already been working for it for more than two years. And so, you kind of missed the bus on that one. Now, we have to wait for that one to go to production and then be in production for a few years before they make a new version of it. And so, sometimes that's just what we face. But like I say, if we have enough shots on net, we are going to hit the right timing with some of them and the other ones will come back around. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. Fair enough perspective. One last question for me, Scott, just touching on the topic of leading edge, and I think I have even asked this in past calls here, but it sounds like you have had some long period of engagement with multiple players at leading edge. I guess my essential question here is, do you think that work is mature enough here that you have the possibility of intersecting with the first generation of a new technology coming out? You are talking about nanosheet or gate-all-around here, which I think it's being implemented first on the two-nanometer node with one or more guys out there. Do you think you are going to be early enough to do that, or does that seem like it might be more of a follow-on derivative process later in the time frame? Scott Bibaud -- President and Chief Executive Officer Hard to say. I can say that the leading-edge guys know about our technology, and they know how it could help them. And so, obviously, if one of them had decided they were definitely going to do that, they certainly would have had to do a license with us. One of the things about gate-all-around and the new nodes, they are so hard to make. They are so complicated that they can't just -- what we call a demo in the industry is when they run some wafers, and they send them to us and then we put our technology on and then we send them back. But for gate-all-around, it's so complicated to make these things that we can't do that. We really have to install at the customer site. And so, when we do that, they have to sign a license. When they do a license, we definitely will announce it. And obviously, we haven't announced it yet. I think we are well-positioned to get into one of those. I also think the gate-all-around and even the most advanced FinFET nodes still are running at relatively low yields compared to like more mature nodes. And there is room for us to be even incorporated to improve yield in those designs. So, fingers crossed that we will get that done. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. Fair enough. That's all my questions again, Scott. Thank you. Scott Bibaud -- President and Chief Executive Officer Sure. Thanks, Richard. Mike Bishop OK. And just one last question here from the Q&A line and that is, could you describe how the business model for entering the GaN market would be different from your approach to license -- approach to-date to licensing of MST? Scott Bibaud -- President and Chief Executive Officer Yes. So, the GaN market is very interesting. Actually, this whole compound semiconductor, it's an area that we have been doing research on for a few years. So, although this is our first announcement, it isn't something we just started thinking about. So, there are multiple ways that our business model can be used for GaN. We can just license our MST technology, just like we do today with regular semiconductor makers to adopt MST on wafers and then build GaN wafers on top of that. That's one way that we could do it. We will probably license our GaN technology separately from the rest of our licensed technology because it may have very high value. The second thing we could do is maybe we could become a manufacturer of GaN wafers at least in modest volumes, and that would allow us to generate revenue. And if it was a very high-value technology, maybe we could make a very nice-looking gross margin there and help to subsidize the rest of our business. We don't have a decision to do that yet. I mean we have a very strong philosophy about making a business model that's got a lot of leverage to the bottom line. And so, if we were to become a manufacturer, obviously, we would have to have a lot more capex, which might not work well with that. But we could do something on the smaller volume manufacturing side. And -- but I think for our customers who would go into high-volume manufacturing, it's most likely that we have licensed directly to them. So, we have been looking at the GaN market for a while. We have had a lot of marketing studies going on about how to approach it, but we haven't got a final determination about what we do. I can tell you, I think it would be a much faster time to market. And I am pretty excited about the prospects of MST there and the prospects in a few other areas in the compound semiconductor market. Mike Bishop Great. OK. Scott, why don't -- that concludes the Q&A session, if you could proceed with any closing comments. Scott Bibaud -- President and Chief Executive Officer OK. Sure. Well, I hope today we have given you a good picture of the compelling prospects which Atomera is pursuing. We will be at the Oppenheimer 9th Annual Emerging Growth one-on-one conference on May 9th. If you are planning to attend, I would welcome the opportunity to meet. Please continue to look for our news, articles, and blog posts, which are available, along with investor alerts on our website, atomera.com. Should you have additional questions, please contact Mike Bishop, who will be happy to follow up. Thank you again for your support and we look forward to our next update call. Mike Bishop Great. Thanks, Scott. Answer:

Atomera's first quarter fiscal year 2024 update call

Mike Bishop Hello, everyone, and welcome to Atomera's first quarter fiscal year 2024 update call. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available on Atomera's IR website for one year. I am Mike Bishop with the company's investor relations. As in prior quarters, we are using Zoom and we will follow a similar presentation format with participants in a listen-only mode. We will open with prepared remarks from Scott Bibaud, Atomera's president and CEO, and Frank Laurencio, Atomera's CFO. Then we will open the call to questions. If you are joining by telephone, you may follow a slide presentation to accompany our remarks on the events and presentations section of our investor relations page on our website. Before we begin, I'd like to remind everyone that during today's call, we will make forward-looking statements. These forward-looking statements whether in prepared remarks or during the Q&A session, are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of our filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 10-K filed with the SEC on February 15th, 2024. Except as otherwise required by federal securities laws, Atomera disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions and circumstances. Also, please note that during this call, we will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is also posted to our website. Now, I would like to turn the call over to our president and CEO, Scott Bibaud. Scott, go ahead. Scott Bibaud -- President and Chief Executive Officer Good afternoon and welcome to Atomera's update call covering the first quarter of 2024. The past three months have seen more customer activity progressing to the proposal stage than any in our history. This unprecedented level of interest in our technology as a result of announced customer commercialization, widespread recognition of the efficacy of our MSC technology, and detailed solutions to these issues faced in today's complex transistors. I will talk more about customer progress after a short comment on the semiconductor market. This year, we see the semiconductor industry modestly growing led by companies executing in the AI space. The pressure on leading-edge logic fabs to advance their latest nodes with high performance per watt is intense. Most of the growth in the industry is happening here, as well as in DRAM, which is snapping back strongly after contracting throughout 2023. In addition, consumer cellular is expected to show modest growth. Automotive with its associated power and analog component companies have softened as they work through inventory and see new competition from China, although the consensus seems to be that the outlook for the second half of the year is better. What does all this mean for Atomera? We are a company that benefits from modest capacity utilization at our IDM and foundry customers, so they can run R&D wafers. We continue to see this favorable environment for the medium term, except in the bleeding edge where capacity is tight, offset by a strong desire to improve performance yield and cost of those new manufacturing processes. Right now, industry dynamics and customer interest indicate a strong willingness to invest. Now, let's review customer activity. As you know, our first announced customer on track toward production is STMicroelectronics, who are currently incorporating MST into the design of the next-generation smart power products. We continue to work closely with them on this effort and their development progress is on track to a production release, which will result in royalty revenue for Atomera. Smart Power products belong to the analog, power, and discrete MEMS and sensors, or APMS Group, which ST reports publicly. In their recent earnings announcement, ST reported $2.2 billion in APMS revenue for the first quarter of this year. So, the potential of this business is very large. As I've made clear, our first priority as a company is to help ST get the highest possible performance out of MST and to get it into production as quickly as possible. Our next priority is to put other customers under that same path to production and I believe we are making long strides in that direction. In the last three months, we have submitted a historically high number of proposals for licenses and JDAs and these have been for both Phase 1 and Phase 3 customers. Although none of them have closed yet or they would have been announced, we are currently taking a lot more shots on goal than has historically been the case. That said we still haven't found our way into JDA1's net. We have proven and they acknowledge that MST can overcome every challenge they've given us. From past experience, we know the decision by a BU to move forward with MST is often a matter of intersecting with the customers' move to a new process or node. So, I believe that our continued discussions with JDA1 will ultimately bear fruit. With JDA2, we have gotten our first peak at data, and it looks good. Although the full battery of testing has not been completed yet, early results look promising, with Atomera providing significant improvements in some of the customers most critical requirements. If the final results, including a much wider set of specs look equally good, we hope to put a license in place and start development toward production. Likewise, at our previously announced fabless licensee, DOE planning and wafer starts are ramping up to determine if MST will be included in their next-generation RF products. If so, this would be another large license and royalty opportunity for Atomera, and we believe it would influence other RF-SOI customers to license MST. Our foundry licensee just completed a new round of MST CAD and is interested in the possible incorporation into one of their next-generation process nodes as well. They're seeking approval to start a new set of wafers as we speak. As you can tell, each of our licensees is making an effort to incorporate MST into their upcoming technology releases but we also have proposals out with multiple companies that are not yet licensees. The proposals fall into our four focus areas, except one, which is an entirely new high-potential area. During the last quarter, we've had substantive discussions about working together with almost all the major companies in the advanced node and memory area. In the advanced node segment, we are offering a variety of solutions to the challenges of making the incredibly complex gate-all-around structures used at the bleeding edge. The silicon data and TCAD simulations we are using to validate these solutions are constantly being refined to provide more detail, which is critical to winning these customers. In addition, we continue to secure patents around structures in this quickly evolving area. As an example, just this week, we were notified that our patent titled Gate-All-Around device, including a superlattice has been allowed and will formally issue next month. In memory, we are focusing on providing performance upgrades to DRAM to meet the needs of AI, while still delivering on the cost requirements that dominate this segment. It's a tricky balance, but in memory, MST not only improves performance, but it also can lower the cost of the chip itself, making the cost-benefit analysis very favorable. In the RF-SOI segment, we have customers who are running, or planning to run wafers at most of the largest manufacturers, and our collaborations with major players in the power semiconductor space also continue. I do understand investors' frustration that all the good work happening inside is not generating business announcements on the outside. We believe that will happen in time. Our focus has been on making these proposals turn into revenue, and I think we're making good progress. We expect to make announcements in the coming quarters in several of these areas. Before I bring this presentation to a close, I want to let you know about a market segment that represents an entirely new source of IP-protected potential revenue for Atomera beyond our main channel of business. As part of our ongoing R&D, we have developed new variations of our silicon lattice films, which have opened additional potential for us in the fast-growing sector of compound semiconductors. We are exploring a number of potential applications, including those involving silicon carbide, gallium nitride, silicon germanium, and other compounds that could have applications in enhancing AI chips and quantum computing. I will highlight just one we are working on. Gallium nitride or GaN, is a wide band gap material that can be used to produce devices capable of operating at higher temperatures, frequencies, and voltages than those based on pure silicon. The market for GaN and power electronics is growing rapidly, dominated by mobile and consumer applications, and with a very bright future in automotive. Many of you may recently have switched to a much smaller, faster wall charger and that was likely enabled by GaN. Our recent report by the Yield Group said that the Power GaN market grew by 41% in 2023 and will likely increase at a CAGR of 46% over the next five years, potentially exceeding $2 billion per year by 2028. Compound semiconductor materials have traditionally been difficult to manufacture due to crystal defects, some of which can be caused by a mismatch with nonnative substrates. The mismatch creates stresses at the interface, which propagate through the wafer causing cracks and other defects that have limited both the size and the yield of wafers, making economical manufacturing difficult. Atomera's MST film can relax or de-strain the interface between two different crystal latices, and we've been filing a number of patents over the years related to this effect. Recently, we began working with one of the world's leading authorities in compound semiconductor fabrication, Professor Edwin Pinar at Texas State University to investigate how MST could help solve this whole manufacturing problem. A material which can significantly improve the quality of GaN wafers and potentially enable them to be manufactured at a larger size is a game changer that the industry is currently seeking. Early experiments growing GaN wafers using MST have shown very promising results. While we still have work to do, if our current trajectory continues, we should be able to enter the market and generate revenue much more quickly than in our traditional engagements with semiconductor customers, potentially even before the end of this year. There's a lot happening at Atomera these days. In addition to all the customer commercial activity and the potential expansion into the compound semiconductor space, we have been evaluating a large number of potential R&D foundry partners, recruiting new marketing talent, working on some critical partnerships and becoming more active in the CHIPS and Science Act. We are very optimistic about the prospects opening before us, any one of which could take us over the top as a company. Our ST engagement has the potential to form the base of revenue for our company, and each of the areas I've outlined can grow on top of that base. Compound semiconductors would represent a new segment for us, one with much faster time to revenues, while our traditional business continues to have a massive TAM rich with opportunities for MST. Although we're advancing on many fronts, our team remains laser-focused on converting these excellent prospects into licenses that will make Atomera into a profitable and diversified technology leader in the semiconductor industry. Thanks for taking the journey with us. Now Frank will review our financials. Frank Laurencio -- Chief Financial Officer Thank you, Scott. At the close of the market today, we issued a press release announcing our results for the first quarter of 2024 and this slide shows our summary financials. Our GAAP net loss for the three months ended March 31st, 2024, was $4.8 million or $0.19 per share compared to a net loss of $5 million or $0.21 per share in the first quarter of 2023. In Q4 of 2023, our GAAP net loss was $4.6 million, which was $0.18 per share. Revenues were $18,000 in Q1 of 2024 compared to $550,000 in Q4 and $0 in Q1 of 2023. GAAP operating expenses were $5 million in Q1 of 2024, which was a decrease of approximately $148,000 from $5.2 million of opex in Q1 2023. This decrease in operating expenses was mainly due to a $178,000 decline in R&D expenses, reflecting the closure of our outsourced foundry TSI semiconductor at the end of January. General and administrative expenses increased by $69,000 and sales and marketing expense decreased by $39,000. Sequentially, our GAAP operating expenses decreased by $300,000 from Q4 2023 to $5 million in Q1, reflecting a $134,000 decrease in R&D expenses also due to the R&D -- also due to the TSI closure, a decline of $102,000 in sales and marketing expense due to lower headcount and G&A expense declining by $64,000. Non-GAAP net loss in Q1 2024 was $4 million and compares to a loss of $4.2 million in Q1 2023. And as with our GAAP results this was primarily due to lower R&D expenses. Sequentially, non-GAAP net loss increased by $228,000 from $3.8 million in Q4 as lower revenues were partly offset by the decline in operating expenses. The differences between GAAP and non-GAAP operating expenses in all periods presented are primarily due to non-cash stock compensation expenses, which were approximately $1 million in both Q1 of 2024 and in Q4 2023 and compares to $927,000 in Q1 of 2023. Our balance of cash, cash equivalents, and short-term investments on March 31st, 2024, was $19.3 million compared to $19.5 million at the end of 2023. During Q1 2024, we used $4.1 million of cash in operating activities, and we sold approximately 510,000 shares under our ATM facility at an average price per share of $8.06, resulting in net proceeds of approximately $4 million. First quarter operating cash flow includes the collection of $550,000 of fees invoiced after meeting a key milestone in Q4 under our commercial license. As of March 31, 2024, we had 26.9 million shares outstanding. Revenue in Q1 was approximately $18,000 and consisted of recognizing 3 months of revenue under the MST CAD license to a large semiconductor manufacturer that we announced last quarter. We expect to recognize approximately that same $18,000 of MST CAD license revenue from this customer for the remainder of 2024. For Q2, we expect our total revenue will be approximately $50,000 consisting of the MST CAD license and engineering services. As I stated in our call last quarter, the next major revenue milestone under our agreement with ST will be the grant of the distribution license upon completion of the qualification process, which is largely under ST's control, so I cannot provide guidance on the timing for recognizing that revenue. Moving to our expense guidance. Given the lower operating expenses in Q1 due to the lower outsourced R&D spending, which will not ramp back up until we have a replacement for TSI by reducing our full year guidance for non-GAAP operating expenses to a range of $16.5 million to $17.25 million. We also expect to add several headcount this year in sales and marketing and engineering, and our expense guidance reflects the impact of those planned new hires. With that, I'll turn the call back over to Scott for a few summary remarks before we open up the call to questions. Scott? Scott Bibaud -- President and Chief Executive Officer Thank you, Frank. I'm proud of the progress we've made in the last quarter, and I hope you get a sense of the momentum we have underway both in development and in new production opportunities. Our team is confident that it's only a matter of time before we can announce license deals that will further solidify the potential of Atomera's business for the future. In addition, it is great to give you a peek at our early compound semiconductor work, which could form a whole new revenue stream for the company. We are doing everything in our power to get ST to production quickly, while simultaneously building a diversified, sustained business around that first deal. Thanks, as always, for your support. Mike, we can now take questions. Mike Bishop OK. Thank you, Scott. [Operator instructions] And right now, our first question comes from Richard Shannon of Craig-Hallum. Richard, if you would kindly unmute and turn on your camera. It's already on. Great. You may begin. Richard Shannon -- Craig-Hallum Capital Group -- Analyst All right. Mike, can you hear me? Mike Bishop Yes. Richard Shannon -- Craig-Hallum Capital Group -- Analyst Excellent. Hi, Scott and Frank, thanks for taking my questions. I guess maybe I'll ask the first one here on kind of a new -- I know new language you've been using here, and you put it in your press release as well but regarding proposals, record number of proposals this quarter versus last. I guess, just to understand the significance of this. To what degree of these proposals, kind of a push mechanism for you versus a pull mechanism from your customers to kind of get an understanding of true demand here and interest? How do we take that? Scott Bibaud -- President and Chief Executive Officer Yeah, Mike, I'm glad you asked that question because it's important to understand, we don't push proposals out. We don't just generate proposals and send them to people. The only time we make a proposal is when we've gone far enough down the road with a customer in our work that they are interested in receiving a proposal from us. Of course, we share budgetary ideas about what doing business with us will be from the very first day. But creating a proposal, a term sheet, and everything around that is a lot of work. And what we're talking about is that type of proposal, not just a speculative send it out and hope they respond to a type of thing. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. That's helpful. I just want to make sure on that. And then any kind of sweet spot of technology areas that are -- where these proposals are going out on? Is it a different mix than what you've had in the past? Obviously, we talked a lot about RF-SOI and power. Scott Bibaud -- President and Chief Executive Officer No, I think I talked a little bit about it in my script, but the proposals are going out in almost all of our focused areas. Yes, I would say, all of our focused areas. And in addition, one other area that we haven't talked about before isn't something we've done a lot of work on so far, but it's something that we have been hoping to enter for some time. So, it's good potential. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. That's helpful. Let's see a question or two on STMicro here. You talked about, I think, the last couple of quarters about -- and one of the next major steps here is getting a PDK frozen. Is this something you have visibility into from STMicro and have any expectations on timing for that? Scott Bibaud -- President and Chief Executive Officer Yes. We definitely have a view into their development process. We don't have a very clear view of their exact schedule. And if we did, they've asked us not to share that publicly, so we won't be able to provide guidance on exactly when those things get done. But I can tell you that we're on track. When we shared in prior presentations, kind of a timeline and the process, like we had some graphics that we're showing the process; that's a standard process that people would use in the industry kind of a standard timeline. I still think that that's very reasonable. And one thing that both we and ST have agreed that we can say is that we're on track to that process. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. All right. Fair enough then. Scott, I probably missed writing down the exact language you had on the topic of RF-SOI, but I think you said something along the lines of you're running wafers at most of the manufacturers out there. Maybe if you can repeat that passage and then help us understand the point of that comment, please. Scott Bibaud -- President and Chief Executive Officer Yeah. So, the RF-SOI market has a certain amount of manufacturers that really constitute the bulk of the capacity that's available in the industry. And today, we're working with the vast majority of them and starting wafers with a lot of them. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. OK. Fair enough then. Let's jump over to the large analog player for which you've got a license for MSTcad here. I guess just what do you kind of see as the outcome of this work? I think Frank mentioned effecting a license -- to generate license revenues throughout this year. I'm not sure if that implies stopping after that point. But what do you expect to be the outcome or hope to outcome here? And when will that happen? And does Frank's comment about revenues lasting through this year imply it's not going into next year? And is that an end point of the work, or just want to correlate those two comments and understand the dynamics there? Scott Bibaud -- President and Chief Executive Officer Yes. OK. I apologize if that was a little confusing. So, just our MSTcad tools, we licensed to customers just like Cadence or Synopsys, would license their tools to customers. In this case, we have a customer who has signed up for a one-year license with it. It doesn't mean they're going to stop at the end of the year. It just means that that is a contract that we have in place that would be extended as we got closer, just like most simulation model licenses. And what does that mean? Well, what it means is this large customer is doing work on their next-generation process, and they're adding MST in to see if that makes sense for them. And they're adding it in at the simulation level and so then it's easy for them to try a bunch of different things. We can give them advice on different ways of integrating to get different levels of performance improvement. And when they have seen results that they think they like then our next goal would be to get them to take an installation -- a manufacturing license and install it in their fab and actually start running wafers inside their own fab. They could actually do demos with us where they send us wafers and then they run wafers in their fab, but we'd be really encouraging them to install. So, that TCAD license is kind of a first step in that direction. Richard Shannon -- Craig-Hallum Capital Group -- Analyst Got it. OK. That's helpful. Maybe moving over to the first JDA partner here. It's obviously been in place for, I can't remember how many years, like two or three years now. And I think last quarter, you talked about some strong engagement that was slowed down by the holidays, and you seem to -- I can't remember the exact language you're looking at my notes here. It sounds like there's some strong interest from business units here, but no decision made. Maybe you can give us some sense here of some back and forth in more iterations happening that you weren't expecting? Or maybe just kind of help us out relative to what sounded like you were getting fairly close to a next step several months ago? Scott Bibaud -- President and Chief Executive Officer Yeah. I think it's a very frustrating situation. We did a JDA with these guys a couple of years ago. They gave us a set of specifications. We met all of those specifications. And so, then they said, OK, we're going to present this to our business units to consider adopting. We have been working with a number of their business units. And last year, they gave us a whole bunch of other tests and specs that they wanted us to run wafers for and do simulations to prove that we could solve them, and we did by the end of last year. We pretty much provided all of that test data. They reviewed, they agreed that we had met all of it. And so, now we're in this very frustrating phase where they're saying, yes, your stuff seems to work well but until we kind of identify this timing when we're going to make a change to that particular area, then we'll decide whether we're going to adopt it or not and do a license. And so, we've been going back and forth with them on this for months. I think there may be an impression because we can't give many updates on it that we're not doing, but we literally are talking to these guys constantly. And right now, we just haven't gotten to the point where we can announce that we have an agreement. So, yes, it's frustrating for us, and I'm sure it's very frustrating for investors. It looks like we're not doing anything. We're doing a lot. We just haven't gotten it over the finish line. And I don't think it's that unusual. If you look back at our STMicro engagement, we really by, I think 2020, we had shown them all the data that they needed to do an installation and get started, and it wasn't until 2023 that they finally did a license with us and got started on that. So, to a certain extent, you have to be prepared and sitting on the shelf when they're ready to grab something off the shelf and put it into place. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. Fair enough. Scott Bibaud -- President and Chief Executive Officer Typically, when we do a license with a customer, we ask them to pay an upfront license fee when we sign. So, if you're going to need to use the technology in a year, why would you do a license right away, right? So, that might be a little bit of a holdup as well. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. OK. Fair enough. I will jump out of line here, but probably come back in, but thanks for all the details, Scott. Scott Bibaud -- President and Chief Executive Officer OK. Mike Bishop OK, Richard, thank you. Looking at some of the questions coming in on the Q&A chat, the first one regards STMicro, which is when ST makes the next milestone, what will the scale of fees that Atomera will receive? Frank Laurencio -- Chief Financial Officer Happy to take that one. We've said since the time that we signed the -- and announced the signature of the deal that it was consistent with our model for licensing to customers, and we expect the total fees to be in the neighborhood of $3 million for all stages of licensing. And this is consistent with that. So, you can do the math based on the revenue recognized already, which was $550,000 last quarter and $150,000 that we had recognized originally when we did the integration license with them several years ago. So, this is pretty significant in terms of revenue. And when I talked about the inability to give revenue guidance, it wasn't -- I wasn't implying we didn't know how much it would be, but rather it's not something that I can give guidance on the timing of when it's going to be recognized because we -- our policy has always been to guide only for the next quarter until we have solid visibility beyond that. And we don't have that kind of visibility yet. But when we get closer, we will, as long as it's consistent with our confidentiality with them, we will give guidance when we get closer. Mike Bishop OK. That answered the next question about timing for ST. You answered that quite well. So, another question that came in. Are the record number of commercial proposals for manufacturing and production licenses, are they for manufacturing and production or just integration licenses? Scott Bibaud -- President and Chief Executive Officer Yeah, I will take that. For the most part, we are trying to push customers to install, and they are -- most of our customers are used to working with the big tool manufacturers. And typically, if a tool manufacturer comes in and says, hey, I have got a new tool that will solve some problems for you. The way that works is they usually ask the tool manufacturer to do a number of demos for them first. So, they -- the tool manufacturer will do demos back at their fab and send them wafers. Some of them have that mindset with us. And for them, we would have to do, try to do, an integration license before we get to manufacturing. But our goal is to try to get people to install and put it in their fab and start manufacturing those wafers as soon as possible. So, I think all of our proposals that are outstanding right now include are for manufacturing licenses, but I won't preclude the fact that we might have to do some demos before we get there. Mike Bishop OK. Have there been serious talks with wafer suppliers about a deal for a blanket MST wafer on RF-SOI? Scott Bibaud -- President and Chief Executive Officer Yeah. The answer is yes. That's something that we have been talking about with various wafer suppliers for some time. And I think we don't have anything to announce on that just yet, but we do believe that when we are in a position where one of our RF-SOI customers is ready to make a decision to go to production, I mean which means there will probably be another year or a year and a half at least before they go to production, we will be able to arrange for a wafer supplier to deliver MST RF-SOI wafers to them if that's the path they want to go down. So, that is definitely -- we have done the pre-work for that, and I think we could put that together. Just to be clear, we also make it available to our RF-SOI customers that they can buy RF-SOI wafers and deposit MST on them themselves, and then they license that from us. So, there is lots of ways in which it can work. Mike Bishop OK. And a question, maybe you can comment on the replacement for TSI. I think you addressed it a little bit in the prepared comments, but has a replacement for TSI been signed? Scott Bibaud -- President and Chief Executive Officer Yes. I would say we have spoken to almost a dozen companies, maybe less than that, but a lot of companies. And it seems very clear that we have a lot of good options. We have customers who -- I mean possible suppliers that are much better process technology that they used to have at TSI, and we have ones with more specialty processes that we want. So, I think we are getting very close to starting working with one or more of them, and I don't have any doubt that we will end up working with multiple suppliers, not just one, but I think we will get started with the first one very soon. So, yes, I think the replacement for TSI is well on its way. Mike Bishop OK. Great. And then Richard Shannon had a follow-up question. Richard, if you would un-mute and turn on your camera. Richard Shannon -- Craig-Hallum Capital Group -- Analyst Mike, it will not let me turn on my camera, but can you hear me? Mike Bishop Yeah, we can hear you. Go ahead. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. It's not allowing me to, oh, there we go. Now, we can do this maybe. Yes. There we go. Scott, I wanted to follow up on one of your responses to my earlier questions here related to STMicro. You said you basically showed them all the data that they had requested back in 2020, but they didn't start until 2023 when they pulled it off the shelf. So, I guess kind of applying this to your other set of customers' engagements, how many other customers have you essentially satisfied all of the data that they have asked for and are sitting around? And do you think it's reasonable to think about a delay between having the technology like satisfying all the specs, and then waiting x number of years? In STMicro's case, three years before you get to production. Is that something that you expect, or is that an extraordinarily long time? How would you relate this to your experiences with other customers that we haven't gotten to that point, but seem like you have made some good progress? Scott Bibaud -- President and Chief Executive Officer Yeah. It's a tricky one to answer, Richard. To be honest, ST surprised me. I think surprised all of us. We gave them the results. They were very happy with them. They just never went off the dime. We kept in conversation with them all the time, like every few months, we would meet with them, and they would say, yes, keep waiting. I don't think that we -- so we have a number of other customers that we have run wafers with, and they have seen good results, and they are not currently in the process of going to production. But I couldn't say exactly how many or whether I think that's going to be typical that they pull it off the shelf. I can say there are a lot of customers who we -- yes, that we have shown good results to, and we keep talking to them and they keep kind of pushing it off a little, but we do think that we will engage with them sometime soon and JDA1 is a good example, but we have other examples like that. Actually, we have a lot of examples like that. So, yes, the frustrating thing is if they could just see the results and pull the trigger, that would be great. And that's what -- normally in a business like ours, a customer puts out an RFQ, they need a certain type of product, and you go and pitch your product and when they decide yours is the best you win it. That's what my experience in semiconductors has been my whole career. But this business we have is a little bit different. We are going out and proactively telling them, hey, if you used our technology, we can make your product a little bit better. And for the most part, we are kind of putting that into their minds. So, even after we have convinced them, and that's the case, we sometimes have to wait until the planned change of that process or node is happening for them to implement it. But I can't say whether that would take a long time or a short time, we haven't had enough experience in it. Richard Shannon -- Craig-Hallum Capital Group -- Analyst It seems like in all the conversations we have had on these conference calls and offline as well, it just smells like RF-SOI kind of is mirroring STMicro in a way where it seems like you have suggested or outright told us that you satisfied the requirements. And I think once or more than once you have even talked about some requirements to changing at some point. But it seems like RF-SOI mirrors a lot of what you described with STMicro, is that a fair comparison? Scott Bibaud -- President and Chief Executive Officer Yes. And let me just -- so, let's say we have a customer, and we don't engage with them and we engage with them as soon as we can, right, as soon as we can get them interested enough to start testing out our technology. And that customer had a plan for some process to bring out a new version of it in two years. And so, they are working on that new process. And simultaneously, we are trying to show them that our technology is good. And maybe even with only one year left, they say, wow, your technology is really good. But it's too late to implement it into our other process. We have already been working for it for more than two years. And so, you kind of missed the bus on that one. Now, we have to wait for that one to go to production and then be in production for a few years before they make a new version of it. And so, sometimes that's just what we face. But like I say, if we have enough shots on net, we are going to hit the right timing with some of them and the other ones will come back around. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. Fair enough perspective. One last question for me, Scott, just touching on the topic of leading edge, and I think I have even asked this in past calls here, but it sounds like you have had some long period of engagement with multiple players at leading edge. I guess my essential question here is, do you think that work is mature enough here that you have the possibility of intersecting with the first generation of a new technology coming out? You are talking about nanosheet or gate-all-around here, which I think it's being implemented first on the two-nanometer node with one or more guys out there. Do you think you are going to be early enough to do that, or does that seem like it might be more of a follow-on derivative process later in the time frame? Scott Bibaud -- President and Chief Executive Officer Hard to say. I can say that the leading-edge guys know about our technology, and they know how it could help them. And so, obviously, if one of them had decided they were definitely going to do that, they certainly would have had to do a license with us. One of the things about gate-all-around and the new nodes, they are so hard to make. They are so complicated that they can't just -- what we call a demo in the industry is when they run some wafers, and they send them to us and then we put our technology on and then we send them back. But for gate-all-around, it's so complicated to make these things that we can't do that. We really have to install at the customer site. And so, when we do that, they have to sign a license. When they do a license, we definitely will announce it. And obviously, we haven't announced it yet. I think we are well-positioned to get into one of those. I also think the gate-all-around and even the most advanced FinFET nodes still are running at relatively low yields compared to like more mature nodes. And there is room for us to be even incorporated to improve yield in those designs. So, fingers crossed that we will get that done. Richard Shannon -- Craig-Hallum Capital Group -- Analyst OK. Fair enough. That's all my questions again, Scott. Thank you. Scott Bibaud -- President and Chief Executive Officer Sure. Thanks, Richard. Mike Bishop OK. And just one last question here from the Q&A line and that is, could you describe how the business model for entering the GaN market would be different from your approach to license -- approach to-date to licensing of MST? Scott Bibaud -- President and Chief Executive Officer Yes. So, the GaN market is very interesting. Actually, this whole compound semiconductor, it's an area that we have been doing research on for a few years. So, although this is our first announcement, it isn't something we just started thinking about. So, there are multiple ways that our business model can be used for GaN. We can just license our MST technology, just like we do today with regular semiconductor makers to adopt MST on wafers and then build GaN wafers on top of that. That's one way that we could do it. We will probably license our GaN technology separately from the rest of our licensed technology because it may have very high value. The second thing we could do is maybe we could become a manufacturer of GaN wafers at least in modest volumes, and that would allow us to generate revenue. And if it was a very high-value technology, maybe we could make a very nice-looking gross margin there and help to subsidize the rest of our business. We don't have a decision to do that yet. I mean we have a very strong philosophy about making a business model that's got a lot of leverage to the bottom line. And so, if we were to become a manufacturer, obviously, we would have to have a lot more capex, which might not work well with that. But we could do something on the smaller volume manufacturing side. And -- but I think for our customers who would go into high-volume manufacturing, it's most likely that we have licensed directly to them. So, we have been looking at the GaN market for a while. We have had a lot of marketing studies going on about how to approach it, but we haven't got a final determination about what we do. I can tell you, I think it would be a much faster time to market. And I am pretty excited about the prospects of MST there and the prospects in a few other areas in the compound semiconductor market. Mike Bishop Great. OK. Scott, why don't -- that concludes the Q&A session, if you could proceed with any closing comments. Scott Bibaud -- President and Chief Executive Officer OK. Sure. Well, I hope today we have given you a good picture of the compelling prospects which Atomera is pursuing. We will be at the Oppenheimer 9th Annual Emerging Growth one-on-one conference on May 9th. If you are planning to attend, I would welcome the opportunity to meet. Please continue to look for our news, articles, and blog posts, which are available, along with investor alerts on our website, atomera.com. Should you have additional questions, please contact Mike Bishop, who will be happy to follow up. Thank you again for your support and we look forward to our next update call. Mike Bishop Great. Thanks, Scott.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q1 2024 earnings call. [Operator instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, head of investor relations, Mr. Kartik Ramachandran. Please go ahead. Kartik Ramachandran -- Head of Investor Relations Thank you, Daryl, and thank you all for joining today's call. As a reminder, before we begin, today's discussion contains forward-looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, as well as the earnings materials for the prior periods we discuss. All of these are posted on our website at ir.americanexpress.com. We will begin today with Steve Squeri, chairman and CEO who will start with some remarks about the Company's progress and results, and then Christophe Le Caillec, chief financial officer will provide a more detailed review of our financial performance. After that, we'll move to a Q&A session on the results with both Steve and Christophe. With that, let me turn it over to Steve. Steve Squeri -- Chairman and Chief Executive Officer Thank you. Q1 was another strong quarter with revenues up 11% year over year to $15.8 billion and EPS up 39% to $3.33. The trends we've seen for the past several years continued through the first quarter of 2024. Our double-digit revenue increase was driven by strong spending growth, up 7% overall on an FX-adjusted basis, with U.S. consumer card spending up 8% in the quarter and spending from international card members up 13% on an FX-adjusted basis. Spending by U.S. SME card members continued to be soft, but new customer acquisitions, retention, and credit on our small business products all continue to be strong. Fee revenues again grew by double-digits, up 16% on an FX-adjusted basis. We continue to attract high spending, high credit quality customers to the franchise with new card acquisitions accelerating quarter over quarter, adding 3.4 million new cards in the quarter. Our fee-based products accounted for approximately 70% of the new account acquisitions globally and we continue to see strong demand from Millennial and Gen Z consumers, who accounted for over 60% of the new consumer account acquisitions globally. Finally, our credit metrics continue to be best-in-class. The ongoing momentum in our business is a result of the great work of our colleagues across the company and the loyalty and engagement of our premium customers around the world. Based on our performance and the trends we've seen through the first quarter, we are reaffirming our full-year guidance of 9% to 11% revenue growth and EPS of $12.65 to $13.15. Our first-quarter results continue to show that our strategy is working and we feel good about where we are and where we are heading. In 10 days, we'll be hosting our 2024 Investor Day. At that session, we'll have a series of presentations from our senior business leaders that, taken together, will demonstrate why we are confident that our long-term growth aspiration is the right one. We will discuss our strategy for growing our premium consumer base in the U.S. through our membership model, our plans for winning the recovery in the U.S. small business space, our runway for growth in international, our progress in expanding merchant coverage and enhancing our network capabilities globally, how we are driving efficiency, growth, and service through technology, and how it all comes together from a financial perspective. We'll end our Investor Day with a Q&A session. Christophe will now take you through a detailed look at Q1 performance. Christophe Le Caillec -- Chief Financial Officer Thank you, Steve, and good morning, everyone. It's good to be here to talk about the first-quarter results, which reflect another quarter of strong results and are tracking in line with the guidance we gave for the full year. Starting with our summary financials on Slide 2. First-quarter revenues were $15.8 billion and grew 11% year over year. This revenue momentum drove reported net income of $2.4 billion and earnings per share of $3.33. On Slide 3, billed business grew 7% versus last year in the first quarter on an FX-adjusted basis, in line with the overall spend environment we have seen in the past few quarters as we expected. Looking by category, we saw 6% growth in goods and services spending and 8% growth in travel and entertainment spending. There are a few other key points to take away as we then break down our spending trends across our businesses. Starting with our largest segment on Slide 4, U.S. Consumer grew billings at 8% this quarter, with growth across all generations and age cohorts. Millennial and Gen Z customers grew their spending 15% and continued to drive our highest billed business growth within this segment. In fact, we see that younger customers use their cards more overall and this is even more pronounced in certain spend categories. For example, customers aged 35 and under use their cards at restaurants over 70% more on average than other customers in this segment. Looking at Commercial Services on Slide 5, overall growth came in at 2% this quarter. Spending growth from our U.S. small and medium-sized enterprise customers remain modest, given unique dynamics seen by small businesses. Lastly, on Slide 6, you see our highest growth again this quarter in International Card Services, up 13%. We continue to see double-digit growth in spending from international consumers and from international SME and large corporate customers, as well as strong growth across our geographies. Overall, while we do continue to see a softer spend environment, our spending volumes are tracking in line with our expectations to support our revenue guidance for the full year and we are pleased with the continued strong engagement of our customers as the number of transactions from our card members continued to grow double-digits this quarter. Now moving on to loans and Card Member receivables on Slide 7. We saw year-over-year growth at 12%. As we progress through 2024, we continue to expect this growth to moderate, but to still grow modestly faster than billings. Turning next to credit and provision on Slide 8 through 10. First, and most importantly, we continue to see strong and best-in-class credit metrics. We attribute this performance to the high credit quality of our customer base, our robust risk management practices and our disciplined growth strategy. As we expected, our write-off and delinquency rates ticked up a bit, increasing very modestly quarter over quarter. Going forward, we expect to see these delinquency and write-off rates remain strong with some continued modest increase in 2024. Turning now to the accounting of this credit performance on Slide 9. The quarter-over-quarter growth in our loan balances combined with a modest increase in our Card Member loans and receivables delinquency rate resulted in a $148 million reserve build. This reserve build combined with net write-offs drove $1.3 billion of provision expense in the first quarter. As you see on Slide 10, we ended the first quarter with $5.6 billion in reserves, representing 2.9% of our total loans and Card Member receivables. We continue to expect this reserve rate to increase a bit as we move through 2024, similar to the modest increases we've seen over the past few quarters. Moving next to revenue on Slide 11. Total revenues were up 11% year over year in the first quarter. Our largest revenue line, discount revenue, grew 6% year over year in Q1 on an FX-adjusted basis as you can see on Slide 12. This growth is mostly driven by the spending trends we discussed earlier. Net card fees revenues were up 16% year over year in the first quarter on an FX-adjusted basis as you can see on Slide 13. We are pleased with this growth and continue to expect to exit the year with some further momentum reflecting our cycle of product refreshes. In the quarter, we acquired 3.4 million new cards, demonstrating the demand we are seeing for our products and the investments we've made. Importantly, acquisition of our premium fee-based products accounted for around 70% of new accounts and the spend revenue and credit profiles of our new card members continue to look strong. Moving on to Slide 14. You can see that net interest income was up 26% year over year in Q1. This growth is driven by the increase in our revolving loan balances and also by continued net yield expansion versus last year. We do expect this growth to continue to moderate as we move through the year. And I would remind you that, for our business model, we would not expect to see a meaningful impact from a lower interest rate environment this year. To sum up, revenues on Slide 15. The power of our diversified model continues to drive strong revenue growth momentum. I would note, as you think about the CFPB late fee rule, that late fees from our U.S. consumer segment make up a small portion, less than 1% of our overall revenue. While we have no specific plans to mitigate as of now, we are always looking at our pricing and policies in the ordinary course of business. Moving to expenses on Slide 16. Starting at the top of the page, variable customer engagement expenses came in at 40% of total revenues for the first quarter. As you look at these costs, I would note that Card Member rewards included a $196 million benefit as a result of enhancements to our remodels for estimating future membership rewards redemptions, some of which we reinvested for growth in our marketing line. Looking forward, I still expect our variable customer engagement expenses to grow slightly higher than our revenue on a full-year basis as we continue to focus on our premium products and drive engagement from our Card Members. On the marketing line, we increased investments to $1.5 billion in the first quarter. We continue to be pleased with the strong, high-quality customer acquisition and engagement we see as a result of these actions, and we are on track to increase marketing spend in 2024 versus last year. Moving to the bottom of Slide 16 brings us to operating expenses, which were $3.6 billion in the first quarter flat to last year's expense and in line with our expectations for the year. When you look at the components of our operating expenses, salaries and benefit grew modestly versus last year compared to the growth we've seen in this line over the past years. This reflect the discipline with which we manage our expenses and is a great example of how we're able to drive efficiency while continuing to grow our business. We continue to see opex as a key source of leverage and are focused on delivering low levels of growth as we have historically done. Turning next to capital on slide 17, we returned $1.6 billion of capital to our shareholders in the first quarter on the back of strong earnings generation. Our CET1 ratio was 10.6% at the end of the first quarter, within our target range of 10% to 11%. We plan to continue to return to shareholders the excess capital we generate while supporting our balance sheet growth. We do not expect any material near-term changes to our capital management approach. That brings me to our 2024 guidance on Slide 18. We feel really good about our first-quarter results, which are tracking in line with our expectations for the year. These results continue to reinforce that our strategy is working and we plan to continue to invest to support our momentum. As Steve discussed, for the full year 2024, we are reaffirming our guidance of having revenue growth of 9% to 11% and earnings per share between $12.65 and $13.15 and we remain committed to running the business for the long term. As a reminder, this guidance and the items related to the full year 2024 that I just walked through do not include the potential impact from the sale of our certified business that we previously announced. We expect to realize a sizable gain on the sale and to reinvest a substantial portion of the gain back into our business, as we've done with similar transactions in the past. We still expect the deal to close in the second quarter and plan to provide more detail then. With that I'll turn the call back over to Kartik to open up the call for your questions. Kartik Ramachandran -- Head of Investor Relations Thank you, Christophe. [Operator instructions] And with that, the operator will now open up the line for questions. Operator? Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Good morning. I guess question for both Steve and Christophe. Christophe, you said that you guys are seeing a softer spending environment. I'm just curious, when you look at the data, what's driving that? Is it inflation? Is it just a bit of tapering off after the post-pandemic spending? And I'm just curious, as we think about what gets that going again, what is it? Obviously, the comparisons get easier as well, so that should help. But maybe you could just walk through that. Thank you. Steve Squeri -- Chairman and Chief Executive Officer Yeah. Let me start and then Christophe can jump in. But when you look at overall spending, our overall spending is 7%, but consumer spending is 8%. And I think consumer spending is relatively strong. And when you look at international, international consumer spending is up 14%. And overall, international is up 13%. Where you're seeing some softness is in SME. And so SME is up approximately 1%. And so I think as SME comes back, which we look as an opportunity down the road, as SME comes back, that will drive some stronger spending. And I think the good things that we see from an SME perspective is that we are still acquiring cards, credit looks really good. And even though organic has come down, organic transactions have gone up. So I think in aggregate, we see softness. And I think a lot of that softness is driven from a commercial perspective, but 8% consumer growth in the U.S. is not too bad. Operator Thank you. Our next question comes from the line of Mihir Bhatia with Bank of America. Please proceed with your question. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Hi. Thanks for taking my question. I wanted to ask about the membership rewards expense. It looks like there's a little bit of a change there with model enhancements and stuff. Can you just talk about that a little more? Did the estimate for the URR, the redemption rate change from the 96% at year-end? Like, should we think of this $196 million benefit as a one-time thing? Or is that going to be continuous? Christophe Le Caillec -- Chief Financial Officer Hey, Mihir. Thank you for the question. So you should think about it as a one-time thing. And the URR is 96%. It's still at 96%. What we do is, because it's such an important model for us, we, on a regular basis, redevelop the model. And every time we redevelop the model, we try to enhance the model. So we feed the model with more data and try to refine their URR calculation. That's exactly what happened. And when we did that in Q1, we came back with a little bit of a benefit. I say a little bit because you have to remember that the entire membership rewards bank is about $14 billion. It's a bit less than $14 billion. So $196 million is very small compared to the size of the balance sheet. And so it's a one-off, and we don't expect something similar anytime soon. Operator Thank you. Our next question comes from the line of Mark DeVries with Deutsche Bank. Please proceed with your question. Mark DeVries -- Deutsche Bank -- Analyst Yeah. Thanks. Could you discuss what drove the reacceleration in the new card growth this quarter? Steve Squeri -- Chairman and Chief Executive Officer Yeah. I mean, so we invested more. And I think when you go back and you look at the first quarter of last year, we had 3.4 billion -- 3.4 million, excuse me, 3.4 billion would be a pretty sizable amount of cards to acquire in a quarter. 3.4 million cards acquired. And if you remember at that time, you had the SVB situation. And so there was a pullback. There was not only a pullback on our side, there was a little bit of a pullback in the industry. And I think there was some consumer trepidation as well. And so as the year went on, we started to build up, and it culminated this year with -- in the first quarter of 3.4 million cards. We invested more in marketing, as we said we were going to do. But I'd also like to highlight that a key driver of that acceleration is the product refreshes that we do. We've talked a lot how product refreshes really stimulate demand and how it makes our marketing dollars work a lot harder. And so we had the delta product refreshes. We had a product refresh in Japan. We had a Hilton small business card. We had a British Airways card. And we're on our way to those 40 product refreshes that we talked about. And what product refreshes do, they do stimulate demand, and it stimulates upgrades and so forth. So that's really what's behind the increase sequentially of cards quarter-over-quarter. But we are sort of back to where we were at this time last year. Christophe Le Caillec -- Chief Financial Officer The only thing I would add, Mark, is as we increase the NCA, the percentage of new cards that are coming at a fee-paying product remains stable, about 70%, right? So it talks about the quality of this 3.4 million new cards. Operator Thank you. Our next question comes from the line of Craig Maurer with FT Partners. Please proceed with your questions. Craig Maurer -- Financial Technology Partners -- Analyst Yeah. Good morning. Thank you. So I wanted to ask about your assumptions on Page 23 of the deck. It looks like for quarters, the second and third quarter, you are assuming a better macro scenario in the U.S. So just curious within combination of the rewards. Kartik Ramachandran -- Head of Investor Relations Please stand by. We are waiting for our operator. Craig Maurer -- Financial Technology Partners -- Analyst Sorry. Were you guys hearing me or? Operator I'm here. Craig Maurer -- Financial Technology Partners -- Analyst OK, sorry. So what I was saying was with the what seems to be firmer macro assumptions for quarters, second quarter -- second and third quarter, and the rewards benefit, how come EPS guide was held flat? I'm assuming there's probably a bigger buffer in there. And second, if you could comment on what the trends have been in your loan workout program? Have you been seeing higher lower additions to that program? And how's progress been in terms of getting consumers on good payment plans and maintaining them? Thanks. Operator American Express speaker line, are you guys there? Kartik Ramachandran -- Head of Investor Relations Operator, can you confirm if you can hear us in the room? Operator I can hear you. [Technical Difficulty] Ladies and gentlemen please stand by. We'll continue with the next question in just a moment. Steve Squeri -- Chairman and Chief Executive Officer Hello. Can you hear us? Hello. Operator Hi. I can hear you. Can you hear me? Kartik Ramachandran -- Head of Investor Relations Operator, can you confirm if you can hear us now? Steve Squeri -- Chairman and Chief Executive Officer I can hear you. Daryl, do you hear them? Operator Hi. This is -- I can hear everyone. I'm not sure. Please stand by while we check. We're experiencing some technical difficulties. Kartik Ramachandran -- Head of Investor Relations For folks attending the call, we are going to dial back in. So please stay on the line. Or if the call does drop, we ask you to dial back in. Thank you. Operator Ladies and gentlemen, please remain on the line. We will -- call will resume momentarily. Thank you. You guys are back. Are you able to hear me? Kartik Ramachandran -- Head of Investor Relations Yes, operator. Thank you. Please go ahead. Operator OK. So that last question was from the line of Craig Maurer with FT Partners. Craig, you may have to ask your question again. Steve Squeri -- Chairman and Chief Executive Officer Yeah. We didn't hear it. Craig Maurer -- Financial Technology Partners -- Analyst No problem. Thanks and good morning again. Steve Squeri -- Chairman and Chief Executive Officer Morning. Craig Maurer -- Financial Technology Partners -- Analyst So wanted to ask about the assumptions later in the deck. It looks like you're assuming a firmer economic environment for quarters two and three. So taking that with the benefit on rewards, should we assume there's a larger buffer built into your guide because you didn't raise EPS guide? And second, along the same lines, I wanted to ask about your loan workout program. Are you seeing any change in terms of the pace of loans being added or loans being worked out and how loans are progressing through that program? Thanks. Christophe Le Caillec -- Chief Financial Officer OK. Hey. Good morning, Craig. Under how we think about the balance of your so -- we -- as I say, we are going to stick to our EPS guidance, not going to change that range at this point in time. There are still a lot of things that need to play out in the balance of year end. We think that that guidance best represent what we expect at this point in time. Specifically about how to think about that URR benefit, as I said in my prepared remark, I would say that a significant portion of that benefit was reinvested on the marketing line. We knew -- we saw that benefit coming in the quarter, and we took advantage of that as well to dial up the marketing. So all-in-all, it doesn't have a meaningful impact on EPS for the full year. When it comes to their -- what we call their financial relief program and the modified loans, so this is an important program for us. We have -- within one of their best program in the industry, we have innovative. For instance, we have a short-term program. We are also, in that short-term program, enabling the card members to retain some spend capacity and usage of the product. So we really think that it's a differentiator to help the card members that are experiencing stress. So that program is working really well for us. It's very effective. And what I can say is that the enrollment in the program has moderated in Q1, and that the performance of the card members within this program is very, very strong. We have a ton of metrics. We -- one of the metrics we talked about in the past was we are looking at payment loyalty and how much the card members who are either in delinquent status or paying us versus paying our peers. And we like what we're saying, right? We're typically front of their wallet in terms of repayments, and it's definitely contributing to the strong credit metrics that you've seen. We think it's also consistent with our brand in terms of being there for our card members and having their back. So that program is working well. But just to be specific on your question, the enrollment in this program is moderating in Q1. Operator Thank you. Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question. John Hecht -- Jefferies -- Analyst Good morning, guys. Most of my questions have been asked. So I guess I'm going to ask about the Visa and Mastercard settlement, a reduction in interchange rates, and then some steering mechanisms. And I know historically, given your premium brand and so forth, those actions haven't had any impact on the business. But we haven't talked about that for a while. So I'm wondering if you guys just have some updated thoughts about that. Steve Squeri -- Chairman and Chief Executive Officer Yeah. Well, it's really hard to say how it's going to play out over time. I mean, this has been going on probably close to 20 years, and it still has to be approved by the courts and we'll see. But what I would say is it really doesn't change sort of our strategy in any way. I mean, we are still focused on premium customers. Our customers still engage with the products. We'll demand to use the products. And we'll still maintain our virtual parity. So we'll see how it all plays out, but we are going to continue to focus on what we control. And the only other thing I would say is that our pricing is policies and structures are fundamentally different than the networks. Kartik Ramachandran -- Head of Investor Relations Operator? [Technical Difficulty] screw around dialing. Operator Ladies and gentlemen, thank you for your patience and standing by. Our conference will resume momentarily. We are experiencing technical difficulties. Please remain on the line. And once again, your conference will begin shortly. Thank you so much for joining us. OK. You are back in. Kartik Ramachandran -- Head of Investor Relations Operator, we can hear you. Can you go ahead and ask for the next question, please? Operator Sure. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Please proceed with your question. Jeff Adelson -- Morgan Stanley -- Analyst Hey. Good morning, guys Can you hear me, OK? Steve Squeri -- Chairman and Chief Executive Officer Yeah, we can. Jeff Adelson -- Morgan Stanley -- Analyst OK. Good. Yeah, I just wanted to ask on the prior combination you did last quarter about the card refresh plans for this year, 40 card products. I think from a quick count on our end, it seems like you've done eight so far this year with Delta, Hilton, and maybe a card on India. Is that right? And maybe you could just talk a little bit about trajectory over the rest of the year, cadence over the rest of the year and what the response has been to some of those refreshes so far. I think more notably, the delta, the big delta one you did earlier this year, would be interested to hear the response you've seen from customers so far on that. Thank you. Christophe Le Caillec -- Chief Financial Officer So the product refreshes will go out through the year. We don't really talk about exactly when they're going to be released. But you can rest assured all 40 will or approximately 40 will be done. It's a little early to tell on the refreshes as it's still in the early stages here. But what I would say, from a delta reserve perspective, it has really, really gone well probably beyond our expectations. So that is a -- it's a great product. It's a -- we raised the fee $100 and added over $500 worth of -- $560 worth of value. So that's going well. And as I said, the proof will be in the pudding because refreshes really do help to drive demand. It drives awareness. It not only -- and it drives more engagement with existing cardholders. And it's been a strategy that has worked very, very well for us over the last number of years, and it's one that we are committed to on a go-forward basis because it's not only important to again drive demand, but you really you want to reignite and reengage with the base. And what we really do is we look at what our customers really want and make sure that we are adding that value that makes the most sense to them. Operator Thank you. Our next question comes from the line of Rick Shane with J.P. Morgan. Please proceed with your question. Rick Shane -- JPMorgan Chase and Company -- Analyst Hey, guys. Thanks for taking my question. And Steve, it ties in with what you're just talking about, when we think about the life cycle of a customer, it's acquisition, it's engagement, and then ultimately, it's loyalty and retention. And I think the real strength of American Express is on the loyalty retention side. When you talk about refresh, that's acquisition and engagement, can you talk about what you're doing investing on the back office side as the portfolio is growing so quickly to make sure that you maintain the loyalty and retention aspect of the business as well. Steve Squeri -- Chairman and Chief Executive Officer Well, I think it truly is a virtuous cycle. And I think you've got it right. It's important to obviously acquire cards. And then as you acquire a card, you really want to engage them and get those cardholders spending in as many areas as they can. And so you look at this ramp-up period over maybe a zero to 24-month period. And then at that point in time, what's important is that we are engaging with the customer as a customer who is embedded within the franchise. And part of our marketing dollars not only goes to acquiring new customers -- but we look at how people are spending, we look at how they're spending relative to other people like them, and that's where you'll see offers to either upgrade cards, line increases, other products that we have. And so it's that constant engagement, it's the analytics that go behind it. That really leads to the retention. What you cannot do is once you have somebody, you just can't let them be stagnant. And so -- and there's a lot of learnings out of our commercial business and out of our merchant business where we have tremendous account managers that work with our clients on a daily basis, weekly basis to help them grow their spend. Now obviously, with tens of millions of consumer card members, you can't do that necessarily personally all the time, but you can do that through communicating through the channels that we have. And another big part of our value proposition and our service proposition is when people do call into us our customer care professionals are able to look at their spending, look at how they're doing and offer them other opportunities to really to grow with us, either from a -- again from a lending perspective or from a card upgrade perspective. So I think it's really important what happens on that back office as that continues to fuel that virtuous cycle. Operator Thank you. Our next question comes from the line of Bill Carcache with Wolfe Research. Please proceed with your question. Bill Carcache -- Wolfe Research -- Analyst Thanks. Good morning. Steve and Christophe. Although you mentioned, Christophe, that the rewards benefit was one-off, are you seeing any evidence of customers deriving greater value from experiential and partner funded rewards. I'm just wondering if there's a possibility that pressure on the rewards rate could potentially abate in a sustained way as customers generate greater value in other ways? Steve Squeri -- Chairman and Chief Executive Officer So let Christophe and get a little bit more into the detail. But I think you've hit on a really good a good point and one that really is part of our value proposition, whether it's embedded value that we get from our partners that's embedded in the value proposition and we're seeing that increase over time. And that's also, as you look at refreshes, you see that within the refreshes, but it's also the Amex offers and how we continue to work with our merchant partners to provide more benefits to our card members on an ongoing basis. So I think when you take that entire portfolio of the rewards opportunities that we have, the embedded value that comes within the value proposition and Amex offers all of that together, and it gets back to what Rick's point was, all of that together leads to more loyalty and more retention. Christophe Le Caillec -- Chief Financial Officer And to build that a little bit on the rewards side, we are constantly trying to innovate on the MR side. On the number of partners engaged in the program, the ease of redemption as well one of their later innovation that is actually very successful in terms of how many card members are using it is the ability just to select the transaction on your statement, your digital statement and actually using more points to pay for that specific transactions. And we're seeing a lot of card members using that. So we're constantly trying to make it easier and better for our card members to redeem to make the product the MR program competitive and more and more economic as well for us. So it's definitely a pace of innovation that is a very dynamic place. Operator Thank you. Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question. Don Fandetti -- Wells Fargo Securities -- Analyst Yes. Christophe, your international billed business growth continues to be very strong. Do you build that into your guidance at this level for '24 revenue growth? And can you give us an update on how your acceptance initiatives are going? Christophe Le Caillec -- Chief Financial Officer Yes. So we are -- we -- ICS and International was the fastest-growing segment of American Express pre-COVID and has been for several quarters now as well. The opportunity is just much bigger for us in international. We have either -- we're also investing everything else being equal, proportionately a bit more in international, their brand out in international, it's probably a bit more premium as well than it is in the US. So there's definitely a massive opportunity for us, and we're going after it. and that's baked in our guidance for this year. It's also factored in as we think about our long-term aspiration. Part of -- part of the things that we're going to do to deliver on that guidance for this year and that long-term aspiration is actually to grow at a faster pace in international. It's a great opportunity for us for sure. Steve Squeri -- Chairman and Chief Executive Officer So we're going to talk more about international at Investor Day. We'll have a separate segment on that. But we're also going to talk about how we continue to grow international coverage. And if you remember, a number of years ago, we talked about our international city strategy. We talked about industries we're going after. And so we'll provide some updates on that. But the top line is international acceptance continues to grow and continues to improve. And when you look at the international business growing at the rate it's growing and coverage continuing to grow, we see that as a long runway for future growth. Operator Thank you. Our next question comes from the line of Gus Gala with Monness, Crespi, Hardt. Please proceed with your question. Gus Gala -- Monness, Crespi, Hardt, and Company -- Analyst Hi, guys. Good morning. Thank you for taking my question. I wanted to dig in and ask, can we talk about the opportunities to lower cost of funding? And similar line of thought here. Can you talk a little bit about the pay overtime feature? Thanks. Christophe Le Caillec -- Chief Financial Officer Yes. So the pay over time, you mean like how it's performing, how it's growing pay over time? Gus Gala -- Monness, Crespi, Hardt, and Company -- Analyst Yes. Let's talk about the performance and the unit economics if we can. Christophe Le Caillec -- Chief Financial Officer Yes. So pay over time is a facility that is available on our charge product. It's a service that a lot of card members are taking advantage of. It's the opportunity for them to revolve some of their transactions or part of their balance, their performance is very strong. It's actually the segment of our balances that is the fastest growing. And from -- I would say from a performance standpoint, because that product, but that service is attached to our charge card products, so typically premium card members the credit performance is also the best that we have in our lending products. So it's a very efficient way for us to grow balances by extending credit to premium card members. And the first question, I forgot was funding? And so the funding mix is still -- it's still evolving toward more deposits -- and as you know, deposits is, for us, they're the most effective and the most economical source of fund. And it's a very stable source of fund as well for us. I think we are -- we are at about 92% of our deposit. Direct deposit balances are below the FDIC cap. So it's a stable, resilient growing source of funding for us, and it's generating a lot of good things for us, including supporting our growth and growth plan and growth aspiration. And when you look at the yield that I had on the lending slide, one of the drivers behind the yield expansion year over year is actually a more effective cost of fund. And it's not a one-off, right, that has been a trend for several years now, and there is more to come. Operator Thank you. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Please proceed with your question. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks so much. If you look at your commercial spending, particularly SME growth, it's been particularly weak the last couple of quarters, and you're noticing on Slide 5, the goods and services basically been flat to down for a couple of quarters. And you mentioned things that are unique to small business. But maybe could you expand that a little more and talk about what things we might see that would cause that to start to turn? And how long you can kind of maintain the kind of teens growth in loans while that is kind of flattish. Could you talk about those things? Thank you. Christophe Le Caillec -- Chief Financial Officer All right. Let me start and I'm sure Steve will add up to this. So you're right. I mean the SME billed business has been in that 1%, 2% range for a year now. We think that this is macro driven and we have a ton of data that confirms that it's not specific to American Express, and the rest of the industry is experiencing similar trends. I will note, as I think, we said in the prepared remarks that on the acquisition side, it's going very strongly. So the demand for the product is there. Their quality of the applicant is there as well. And as we've said in the past, it's the -- I would say, the 10-year base that is moderating their spend. We'll see how it goes, those card members, the SME, as we've said in the past, have been going through a lot. They're certainly experiencing as well their compound effect of funding costs for several years now. And they are very careful in terms of how they're managing their cash flows and how they're spending. This being said, we are very focused at working with them, as I said, engaging with them. And we're confident that we have what it takes to win them back when they are ready to spend more. Steve Squeri -- Chairman and Chief Executive Officer Yes. I think that, Moshe, when you look at this, the SME has been -- this entire space has been sort of disrupted over the last four years or so maybe five years with COVID, where it took a tremendous drop for 18 months or so. And then all of a sudden, you had unbelievable unsustainable organic growth of like 19% and 20% in given years. It was crazy growth in '21 and '22. And we saw last year after the first quarter, it really started to wane. And again, a couple -- I think there's, again, a few reasons for that. I think there was a tremendous buildup in inventories. I think interest rates going up did not help from a small business perspective, especially as they thought about purchasing goods and services and buying those goods and services and stocking them in anticipation of another supply chain sort of malady or meltdown. And what we do like is that our acquisition is still very strong. The transactions, even within the tenured base, continue to go up, it's the larger transactions that we've really seen the organic decline on and a lot of that can be industry-specific construction, a lot of that can also be not buying -- not buying big inventories upfront. So I think what's important for us to focus on right now is to continue to acquire, continue to work with them and engaging with them. And then when they're ready to come back, we're there for them as they want to spend even more. As far as -- and I started the conversation with this, as far as overall spending, that's what makes me feel really good about our overall spending because we're able to grow 7% with our commercial business growing very low and small business is only growing at 1% and it's an important part of the franchise, and that's why we feel good because of the credit and of the new acquisition. Operator Thank you. Our final question will come from the line of Ryan Nash with Goldman Sachs. Please proceed with your question. Ryan Nash -- Goldman Sachs -- Analyst Hey. Good morning, guys. Steve Squeri -- Chairman and Chief Executive Officer Good morning. Christophe Le Caillec -- Chief Financial Officer Good morning. Ryan Nash -- Goldman Sachs -- Analyst So maybe to bring together some of the pieces of revenue growth. I think you were on the high end of the first quarter, and I think Christophe, you said the expectation that NII was going to slow. Maybe just talk a little bit about how you think about the trajectory of the revenue growth do we need to see spend stabilize to remain in the range? Or can we see the impact of refreshes and card acquisitions be enough to stabilize revenue growth within the range on a quarterly basis? Thank you. Christophe Le Caillec -- Chief Financial Officer Yes. So things are in Q1 played out as we were expecting, right? We -- billed business came in similar to what we had experienced in the previous quarters. Card fee is moderating slightly from 17% to 16% FX-adjusted growth rate. And we're still expecting that it will pick up a little bit in the balance of your on the back of the things that you said, including the card refreshes and acquiring a lot of premium cards. And NII at 26% is going to keep moderating because balances are moderating. So the guidance for the full year is still to be between 9% and 11%. We'll see exactly how things play out. There are still a lot of things to find out how the late payment charges are going to come in, what's going to happen with the interest rates. So best at this stage, I think, is to stick to the full-year guidance of 9% to 11%. And -- but I would say it's Q1 validated the trends and the guidance that we gave at the beginning of the year. Kartik Ramachandran -- Head of Investor Relations With that, we will bring the call to an end. Thank you again for joining today's call and for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you. Operator Ladies and gentlemen, the webcast replay will be available on our Investor Relations website at ir.americanexpress.com shortly after the call. You can access a digital replay of the call at 877-660-6853 or 201-612-7415 access code 13745493 after 1 PM Eastern time on April 19th through April 26th. Answer:

the American Express Q1 2024 earnings call

Operator Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q1 2024 earnings call. [Operator instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, head of investor relations, Mr. Kartik Ramachandran. Please go ahead. Kartik Ramachandran -- Head of Investor Relations Thank you, Daryl, and thank you all for joining today's call. As a reminder, before we begin, today's discussion contains forward-looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, as well as the earnings materials for the prior periods we discuss. All of these are posted on our website at ir.americanexpress.com. We will begin today with Steve Squeri, chairman and CEO who will start with some remarks about the Company's progress and results, and then Christophe Le Caillec, chief financial officer will provide a more detailed review of our financial performance. After that, we'll move to a Q&A session on the results with both Steve and Christophe. With that, let me turn it over to Steve. Steve Squeri -- Chairman and Chief Executive Officer Thank you. Q1 was another strong quarter with revenues up 11% year over year to $15.8 billion and EPS up 39% to $3.33. The trends we've seen for the past several years continued through the first quarter of 2024. Our double-digit revenue increase was driven by strong spending growth, up 7% overall on an FX-adjusted basis, with U.S. consumer card spending up 8% in the quarter and spending from international card members up 13% on an FX-adjusted basis. Spending by U.S. SME card members continued to be soft, but new customer acquisitions, retention, and credit on our small business products all continue to be strong. Fee revenues again grew by double-digits, up 16% on an FX-adjusted basis. We continue to attract high spending, high credit quality customers to the franchise with new card acquisitions accelerating quarter over quarter, adding 3.4 million new cards in the quarter. Our fee-based products accounted for approximately 70% of the new account acquisitions globally and we continue to see strong demand from Millennial and Gen Z consumers, who accounted for over 60% of the new consumer account acquisitions globally. Finally, our credit metrics continue to be best-in-class. The ongoing momentum in our business is a result of the great work of our colleagues across the company and the loyalty and engagement of our premium customers around the world. Based on our performance and the trends we've seen through the first quarter, we are reaffirming our full-year guidance of 9% to 11% revenue growth and EPS of $12.65 to $13.15. Our first-quarter results continue to show that our strategy is working and we feel good about where we are and where we are heading. In 10 days, we'll be hosting our 2024 Investor Day. At that session, we'll have a series of presentations from our senior business leaders that, taken together, will demonstrate why we are confident that our long-term growth aspiration is the right one. We will discuss our strategy for growing our premium consumer base in the U.S. through our membership model, our plans for winning the recovery in the U.S. small business space, our runway for growth in international, our progress in expanding merchant coverage and enhancing our network capabilities globally, how we are driving efficiency, growth, and service through technology, and how it all comes together from a financial perspective. We'll end our Investor Day with a Q&A session. Christophe will now take you through a detailed look at Q1 performance. Christophe Le Caillec -- Chief Financial Officer Thank you, Steve, and good morning, everyone. It's good to be here to talk about the first-quarter results, which reflect another quarter of strong results and are tracking in line with the guidance we gave for the full year. Starting with our summary financials on Slide 2. First-quarter revenues were $15.8 billion and grew 11% year over year. This revenue momentum drove reported net income of $2.4 billion and earnings per share of $3.33. On Slide 3, billed business grew 7% versus last year in the first quarter on an FX-adjusted basis, in line with the overall spend environment we have seen in the past few quarters as we expected. Looking by category, we saw 6% growth in goods and services spending and 8% growth in travel and entertainment spending. There are a few other key points to take away as we then break down our spending trends across our businesses. Starting with our largest segment on Slide 4, U.S. Consumer grew billings at 8% this quarter, with growth across all generations and age cohorts. Millennial and Gen Z customers grew their spending 15% and continued to drive our highest billed business growth within this segment. In fact, we see that younger customers use their cards more overall and this is even more pronounced in certain spend categories. For example, customers aged 35 and under use their cards at restaurants over 70% more on average than other customers in this segment. Looking at Commercial Services on Slide 5, overall growth came in at 2% this quarter. Spending growth from our U.S. small and medium-sized enterprise customers remain modest, given unique dynamics seen by small businesses. Lastly, on Slide 6, you see our highest growth again this quarter in International Card Services, up 13%. We continue to see double-digit growth in spending from international consumers and from international SME and large corporate customers, as well as strong growth across our geographies. Overall, while we do continue to see a softer spend environment, our spending volumes are tracking in line with our expectations to support our revenue guidance for the full year and we are pleased with the continued strong engagement of our customers as the number of transactions from our card members continued to grow double-digits this quarter. Now moving on to loans and Card Member receivables on Slide 7. We saw year-over-year growth at 12%. As we progress through 2024, we continue to expect this growth to moderate, but to still grow modestly faster than billings. Turning next to credit and provision on Slide 8 through 10. First, and most importantly, we continue to see strong and best-in-class credit metrics. We attribute this performance to the high credit quality of our customer base, our robust risk management practices and our disciplined growth strategy. As we expected, our write-off and delinquency rates ticked up a bit, increasing very modestly quarter over quarter. Going forward, we expect to see these delinquency and write-off rates remain strong with some continued modest increase in 2024. Turning now to the accounting of this credit performance on Slide 9. The quarter-over-quarter growth in our loan balances combined with a modest increase in our Card Member loans and receivables delinquency rate resulted in a $148 million reserve build. This reserve build combined with net write-offs drove $1.3 billion of provision expense in the first quarter. As you see on Slide 10, we ended the first quarter with $5.6 billion in reserves, representing 2.9% of our total loans and Card Member receivables. We continue to expect this reserve rate to increase a bit as we move through 2024, similar to the modest increases we've seen over the past few quarters. Moving next to revenue on Slide 11. Total revenues were up 11% year over year in the first quarter. Our largest revenue line, discount revenue, grew 6% year over year in Q1 on an FX-adjusted basis as you can see on Slide 12. This growth is mostly driven by the spending trends we discussed earlier. Net card fees revenues were up 16% year over year in the first quarter on an FX-adjusted basis as you can see on Slide 13. We are pleased with this growth and continue to expect to exit the year with some further momentum reflecting our cycle of product refreshes. In the quarter, we acquired 3.4 million new cards, demonstrating the demand we are seeing for our products and the investments we've made. Importantly, acquisition of our premium fee-based products accounted for around 70% of new accounts and the spend revenue and credit profiles of our new card members continue to look strong. Moving on to Slide 14. You can see that net interest income was up 26% year over year in Q1. This growth is driven by the increase in our revolving loan balances and also by continued net yield expansion versus last year. We do expect this growth to continue to moderate as we move through the year. And I would remind you that, for our business model, we would not expect to see a meaningful impact from a lower interest rate environment this year. To sum up, revenues on Slide 15. The power of our diversified model continues to drive strong revenue growth momentum. I would note, as you think about the CFPB late fee rule, that late fees from our U.S. consumer segment make up a small portion, less than 1% of our overall revenue. While we have no specific plans to mitigate as of now, we are always looking at our pricing and policies in the ordinary course of business. Moving to expenses on Slide 16. Starting at the top of the page, variable customer engagement expenses came in at 40% of total revenues for the first quarter. As you look at these costs, I would note that Card Member rewards included a $196 million benefit as a result of enhancements to our remodels for estimating future membership rewards redemptions, some of which we reinvested for growth in our marketing line. Looking forward, I still expect our variable customer engagement expenses to grow slightly higher than our revenue on a full-year basis as we continue to focus on our premium products and drive engagement from our Card Members. On the marketing line, we increased investments to $1.5 billion in the first quarter. We continue to be pleased with the strong, high-quality customer acquisition and engagement we see as a result of these actions, and we are on track to increase marketing spend in 2024 versus last year. Moving to the bottom of Slide 16 brings us to operating expenses, which were $3.6 billion in the first quarter flat to last year's expense and in line with our expectations for the year. When you look at the components of our operating expenses, salaries and benefit grew modestly versus last year compared to the growth we've seen in this line over the past years. This reflect the discipline with which we manage our expenses and is a great example of how we're able to drive efficiency while continuing to grow our business. We continue to see opex as a key source of leverage and are focused on delivering low levels of growth as we have historically done. Turning next to capital on slide 17, we returned $1.6 billion of capital to our shareholders in the first quarter on the back of strong earnings generation. Our CET1 ratio was 10.6% at the end of the first quarter, within our target range of 10% to 11%. We plan to continue to return to shareholders the excess capital we generate while supporting our balance sheet growth. We do not expect any material near-term changes to our capital management approach. That brings me to our 2024 guidance on Slide 18. We feel really good about our first-quarter results, which are tracking in line with our expectations for the year. These results continue to reinforce that our strategy is working and we plan to continue to invest to support our momentum. As Steve discussed, for the full year 2024, we are reaffirming our guidance of having revenue growth of 9% to 11% and earnings per share between $12.65 and $13.15 and we remain committed to running the business for the long term. As a reminder, this guidance and the items related to the full year 2024 that I just walked through do not include the potential impact from the sale of our certified business that we previously announced. We expect to realize a sizable gain on the sale and to reinvest a substantial portion of the gain back into our business, as we've done with similar transactions in the past. We still expect the deal to close in the second quarter and plan to provide more detail then. With that I'll turn the call back over to Kartik to open up the call for your questions. Kartik Ramachandran -- Head of Investor Relations Thank you, Christophe. [Operator instructions] And with that, the operator will now open up the line for questions. Operator? Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question. Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst Thank you. Good morning. I guess question for both Steve and Christophe. Christophe, you said that you guys are seeing a softer spending environment. I'm just curious, when you look at the data, what's driving that? Is it inflation? Is it just a bit of tapering off after the post-pandemic spending? And I'm just curious, as we think about what gets that going again, what is it? Obviously, the comparisons get easier as well, so that should help. But maybe you could just walk through that. Thank you. Steve Squeri -- Chairman and Chief Executive Officer Yeah. Let me start and then Christophe can jump in. But when you look at overall spending, our overall spending is 7%, but consumer spending is 8%. And I think consumer spending is relatively strong. And when you look at international, international consumer spending is up 14%. And overall, international is up 13%. Where you're seeing some softness is in SME. And so SME is up approximately 1%. And so I think as SME comes back, which we look as an opportunity down the road, as SME comes back, that will drive some stronger spending. And I think the good things that we see from an SME perspective is that we are still acquiring cards, credit looks really good. And even though organic has come down, organic transactions have gone up. So I think in aggregate, we see softness. And I think a lot of that softness is driven from a commercial perspective, but 8% consumer growth in the U.S. is not too bad. Operator Thank you. Our next question comes from the line of Mihir Bhatia with Bank of America. Please proceed with your question. Mihir Bhatia -- Bank of America Merrill Lynch -- Analyst Hi. Thanks for taking my question. I wanted to ask about the membership rewards expense. It looks like there's a little bit of a change there with model enhancements and stuff. Can you just talk about that a little more? Did the estimate for the URR, the redemption rate change from the 96% at year-end? Like, should we think of this $196 million benefit as a one-time thing? Or is that going to be continuous? Christophe Le Caillec -- Chief Financial Officer Hey, Mihir. Thank you for the question. So you should think about it as a one-time thing. And the URR is 96%. It's still at 96%. What we do is, because it's such an important model for us, we, on a regular basis, redevelop the model. And every time we redevelop the model, we try to enhance the model. So we feed the model with more data and try to refine their URR calculation. That's exactly what happened. And when we did that in Q1, we came back with a little bit of a benefit. I say a little bit because you have to remember that the entire membership rewards bank is about $14 billion. It's a bit less than $14 billion. So $196 million is very small compared to the size of the balance sheet. And so it's a one-off, and we don't expect something similar anytime soon. Operator Thank you. Our next question comes from the line of Mark DeVries with Deutsche Bank. Please proceed with your question. Mark DeVries -- Deutsche Bank -- Analyst Yeah. Thanks. Could you discuss what drove the reacceleration in the new card growth this quarter? Steve Squeri -- Chairman and Chief Executive Officer Yeah. I mean, so we invested more. And I think when you go back and you look at the first quarter of last year, we had 3.4 billion -- 3.4 million, excuse me, 3.4 billion would be a pretty sizable amount of cards to acquire in a quarter. 3.4 million cards acquired. And if you remember at that time, you had the SVB situation. And so there was a pullback. There was not only a pullback on our side, there was a little bit of a pullback in the industry. And I think there was some consumer trepidation as well. And so as the year went on, we started to build up, and it culminated this year with -- in the first quarter of 3.4 million cards. We invested more in marketing, as we said we were going to do. But I'd also like to highlight that a key driver of that acceleration is the product refreshes that we do. We've talked a lot how product refreshes really stimulate demand and how it makes our marketing dollars work a lot harder. And so we had the delta product refreshes. We had a product refresh in Japan. We had a Hilton small business card. We had a British Airways card. And we're on our way to those 40 product refreshes that we talked about. And what product refreshes do, they do stimulate demand, and it stimulates upgrades and so forth. So that's really what's behind the increase sequentially of cards quarter-over-quarter. But we are sort of back to where we were at this time last year. Christophe Le Caillec -- Chief Financial Officer The only thing I would add, Mark, is as we increase the NCA, the percentage of new cards that are coming at a fee-paying product remains stable, about 70%, right? So it talks about the quality of this 3.4 million new cards. Operator Thank you. Our next question comes from the line of Craig Maurer with FT Partners. Please proceed with your questions. Craig Maurer -- Financial Technology Partners -- Analyst Yeah. Good morning. Thank you. So I wanted to ask about your assumptions on Page 23 of the deck. It looks like for quarters, the second and third quarter, you are assuming a better macro scenario in the U.S. So just curious within combination of the rewards. Kartik Ramachandran -- Head of Investor Relations Please stand by. We are waiting for our operator. Craig Maurer -- Financial Technology Partners -- Analyst Sorry. Were you guys hearing me or? Operator I'm here. Craig Maurer -- Financial Technology Partners -- Analyst OK, sorry. So what I was saying was with the what seems to be firmer macro assumptions for quarters, second quarter -- second and third quarter, and the rewards benefit, how come EPS guide was held flat? I'm assuming there's probably a bigger buffer in there. And second, if you could comment on what the trends have been in your loan workout program? Have you been seeing higher lower additions to that program? And how's progress been in terms of getting consumers on good payment plans and maintaining them? Thanks. Operator American Express speaker line, are you guys there? Kartik Ramachandran -- Head of Investor Relations Operator, can you confirm if you can hear us in the room? Operator I can hear you. [Technical Difficulty] Ladies and gentlemen please stand by. We'll continue with the next question in just a moment. Steve Squeri -- Chairman and Chief Executive Officer Hello. Can you hear us? Hello. Operator Hi. I can hear you. Can you hear me? Kartik Ramachandran -- Head of Investor Relations Operator, can you confirm if you can hear us now? Steve Squeri -- Chairman and Chief Executive Officer I can hear you. Daryl, do you hear them? Operator Hi. This is -- I can hear everyone. I'm not sure. Please stand by while we check. We're experiencing some technical difficulties. Kartik Ramachandran -- Head of Investor Relations For folks attending the call, we are going to dial back in. So please stay on the line. Or if the call does drop, we ask you to dial back in. Thank you. Operator Ladies and gentlemen, please remain on the line. We will -- call will resume momentarily. Thank you. You guys are back. Are you able to hear me? Kartik Ramachandran -- Head of Investor Relations Yes, operator. Thank you. Please go ahead. Operator OK. So that last question was from the line of Craig Maurer with FT Partners. Craig, you may have to ask your question again. Steve Squeri -- Chairman and Chief Executive Officer Yeah. We didn't hear it. Craig Maurer -- Financial Technology Partners -- Analyst No problem. Thanks and good morning again. Steve Squeri -- Chairman and Chief Executive Officer Morning. Craig Maurer -- Financial Technology Partners -- Analyst So wanted to ask about the assumptions later in the deck. It looks like you're assuming a firmer economic environment for quarters two and three. So taking that with the benefit on rewards, should we assume there's a larger buffer built into your guide because you didn't raise EPS guide? And second, along the same lines, I wanted to ask about your loan workout program. Are you seeing any change in terms of the pace of loans being added or loans being worked out and how loans are progressing through that program? Thanks. Christophe Le Caillec -- Chief Financial Officer OK. Hey. Good morning, Craig. Under how we think about the balance of your so -- we -- as I say, we are going to stick to our EPS guidance, not going to change that range at this point in time. There are still a lot of things that need to play out in the balance of year end. We think that that guidance best represent what we expect at this point in time. Specifically about how to think about that URR benefit, as I said in my prepared remark, I would say that a significant portion of that benefit was reinvested on the marketing line. We knew -- we saw that benefit coming in the quarter, and we took advantage of that as well to dial up the marketing. So all-in-all, it doesn't have a meaningful impact on EPS for the full year. When it comes to their -- what we call their financial relief program and the modified loans, so this is an important program for us. We have -- within one of their best program in the industry, we have innovative. For instance, we have a short-term program. We are also, in that short-term program, enabling the card members to retain some spend capacity and usage of the product. So we really think that it's a differentiator to help the card members that are experiencing stress. So that program is working really well for us. It's very effective. And what I can say is that the enrollment in the program has moderated in Q1, and that the performance of the card members within this program is very, very strong. We have a ton of metrics. We -- one of the metrics we talked about in the past was we are looking at payment loyalty and how much the card members who are either in delinquent status or paying us versus paying our peers. And we like what we're saying, right? We're typically front of their wallet in terms of repayments, and it's definitely contributing to the strong credit metrics that you've seen. We think it's also consistent with our brand in terms of being there for our card members and having their back. So that program is working well. But just to be specific on your question, the enrollment in this program is moderating in Q1. Operator Thank you. Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question. John Hecht -- Jefferies -- Analyst Good morning, guys. Most of my questions have been asked. So I guess I'm going to ask about the Visa and Mastercard settlement, a reduction in interchange rates, and then some steering mechanisms. And I know historically, given your premium brand and so forth, those actions haven't had any impact on the business. But we haven't talked about that for a while. So I'm wondering if you guys just have some updated thoughts about that. Steve Squeri -- Chairman and Chief Executive Officer Yeah. Well, it's really hard to say how it's going to play out over time. I mean, this has been going on probably close to 20 years, and it still has to be approved by the courts and we'll see. But what I would say is it really doesn't change sort of our strategy in any way. I mean, we are still focused on premium customers. Our customers still engage with the products. We'll demand to use the products. And we'll still maintain our virtual parity. So we'll see how it all plays out, but we are going to continue to focus on what we control. And the only other thing I would say is that our pricing is policies and structures are fundamentally different than the networks. Kartik Ramachandran -- Head of Investor Relations Operator? [Technical Difficulty] screw around dialing. Operator Ladies and gentlemen, thank you for your patience and standing by. Our conference will resume momentarily. We are experiencing technical difficulties. Please remain on the line. And once again, your conference will begin shortly. Thank you so much for joining us. OK. You are back in. Kartik Ramachandran -- Head of Investor Relations Operator, we can hear you. Can you go ahead and ask for the next question, please? Operator Sure. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Please proceed with your question. Jeff Adelson -- Morgan Stanley -- Analyst Hey. Good morning, guys Can you hear me, OK? Steve Squeri -- Chairman and Chief Executive Officer Yeah, we can. Jeff Adelson -- Morgan Stanley -- Analyst OK. Good. Yeah, I just wanted to ask on the prior combination you did last quarter about the card refresh plans for this year, 40 card products. I think from a quick count on our end, it seems like you've done eight so far this year with Delta, Hilton, and maybe a card on India. Is that right? And maybe you could just talk a little bit about trajectory over the rest of the year, cadence over the rest of the year and what the response has been to some of those refreshes so far. I think more notably, the delta, the big delta one you did earlier this year, would be interested to hear the response you've seen from customers so far on that. Thank you. Christophe Le Caillec -- Chief Financial Officer So the product refreshes will go out through the year. We don't really talk about exactly when they're going to be released. But you can rest assured all 40 will or approximately 40 will be done. It's a little early to tell on the refreshes as it's still in the early stages here. But what I would say, from a delta reserve perspective, it has really, really gone well probably beyond our expectations. So that is a -- it's a great product. It's a -- we raised the fee $100 and added over $500 worth of -- $560 worth of value. So that's going well. And as I said, the proof will be in the pudding because refreshes really do help to drive demand. It drives awareness. It not only -- and it drives more engagement with existing cardholders. And it's been a strategy that has worked very, very well for us over the last number of years, and it's one that we are committed to on a go-forward basis because it's not only important to again drive demand, but you really you want to reignite and reengage with the base. And what we really do is we look at what our customers really want and make sure that we are adding that value that makes the most sense to them. Operator Thank you. Our next question comes from the line of Rick Shane with J.P. Morgan. Please proceed with your question. Rick Shane -- JPMorgan Chase and Company -- Analyst Hey, guys. Thanks for taking my question. And Steve, it ties in with what you're just talking about, when we think about the life cycle of a customer, it's acquisition, it's engagement, and then ultimately, it's loyalty and retention. And I think the real strength of American Express is on the loyalty retention side. When you talk about refresh, that's acquisition and engagement, can you talk about what you're doing investing on the back office side as the portfolio is growing so quickly to make sure that you maintain the loyalty and retention aspect of the business as well. Steve Squeri -- Chairman and Chief Executive Officer Well, I think it truly is a virtuous cycle. And I think you've got it right. It's important to obviously acquire cards. And then as you acquire a card, you really want to engage them and get those cardholders spending in as many areas as they can. And so you look at this ramp-up period over maybe a zero to 24-month period. And then at that point in time, what's important is that we are engaging with the customer as a customer who is embedded within the franchise. And part of our marketing dollars not only goes to acquiring new customers -- but we look at how people are spending, we look at how they're spending relative to other people like them, and that's where you'll see offers to either upgrade cards, line increases, other products that we have. And so it's that constant engagement, it's the analytics that go behind it. That really leads to the retention. What you cannot do is once you have somebody, you just can't let them be stagnant. And so -- and there's a lot of learnings out of our commercial business and out of our merchant business where we have tremendous account managers that work with our clients on a daily basis, weekly basis to help them grow their spend. Now obviously, with tens of millions of consumer card members, you can't do that necessarily personally all the time, but you can do that through communicating through the channels that we have. And another big part of our value proposition and our service proposition is when people do call into us our customer care professionals are able to look at their spending, look at how they're doing and offer them other opportunities to really to grow with us, either from a -- again from a lending perspective or from a card upgrade perspective. So I think it's really important what happens on that back office as that continues to fuel that virtuous cycle. Operator Thank you. Our next question comes from the line of Bill Carcache with Wolfe Research. Please proceed with your question. Bill Carcache -- Wolfe Research -- Analyst Thanks. Good morning. Steve and Christophe. Although you mentioned, Christophe, that the rewards benefit was one-off, are you seeing any evidence of customers deriving greater value from experiential and partner funded rewards. I'm just wondering if there's a possibility that pressure on the rewards rate could potentially abate in a sustained way as customers generate greater value in other ways? Steve Squeri -- Chairman and Chief Executive Officer So let Christophe and get a little bit more into the detail. But I think you've hit on a really good a good point and one that really is part of our value proposition, whether it's embedded value that we get from our partners that's embedded in the value proposition and we're seeing that increase over time. And that's also, as you look at refreshes, you see that within the refreshes, but it's also the Amex offers and how we continue to work with our merchant partners to provide more benefits to our card members on an ongoing basis. So I think when you take that entire portfolio of the rewards opportunities that we have, the embedded value that comes within the value proposition and Amex offers all of that together, and it gets back to what Rick's point was, all of that together leads to more loyalty and more retention. Christophe Le Caillec -- Chief Financial Officer And to build that a little bit on the rewards side, we are constantly trying to innovate on the MR side. On the number of partners engaged in the program, the ease of redemption as well one of their later innovation that is actually very successful in terms of how many card members are using it is the ability just to select the transaction on your statement, your digital statement and actually using more points to pay for that specific transactions. And we're seeing a lot of card members using that. So we're constantly trying to make it easier and better for our card members to redeem to make the product the MR program competitive and more and more economic as well for us. So it's definitely a pace of innovation that is a very dynamic place. Operator Thank you. Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question. Don Fandetti -- Wells Fargo Securities -- Analyst Yes. Christophe, your international billed business growth continues to be very strong. Do you build that into your guidance at this level for '24 revenue growth? And can you give us an update on how your acceptance initiatives are going? Christophe Le Caillec -- Chief Financial Officer Yes. So we are -- we -- ICS and International was the fastest-growing segment of American Express pre-COVID and has been for several quarters now as well. The opportunity is just much bigger for us in international. We have either -- we're also investing everything else being equal, proportionately a bit more in international, their brand out in international, it's probably a bit more premium as well than it is in the US. So there's definitely a massive opportunity for us, and we're going after it. and that's baked in our guidance for this year. It's also factored in as we think about our long-term aspiration. Part of -- part of the things that we're going to do to deliver on that guidance for this year and that long-term aspiration is actually to grow at a faster pace in international. It's a great opportunity for us for sure. Steve Squeri -- Chairman and Chief Executive Officer So we're going to talk more about international at Investor Day. We'll have a separate segment on that. But we're also going to talk about how we continue to grow international coverage. And if you remember, a number of years ago, we talked about our international city strategy. We talked about industries we're going after. And so we'll provide some updates on that. But the top line is international acceptance continues to grow and continues to improve. And when you look at the international business growing at the rate it's growing and coverage continuing to grow, we see that as a long runway for future growth. Operator Thank you. Our next question comes from the line of Gus Gala with Monness, Crespi, Hardt. Please proceed with your question. Gus Gala -- Monness, Crespi, Hardt, and Company -- Analyst Hi, guys. Good morning. Thank you for taking my question. I wanted to dig in and ask, can we talk about the opportunities to lower cost of funding? And similar line of thought here. Can you talk a little bit about the pay overtime feature? Thanks. Christophe Le Caillec -- Chief Financial Officer Yes. So the pay over time, you mean like how it's performing, how it's growing pay over time? Gus Gala -- Monness, Crespi, Hardt, and Company -- Analyst Yes. Let's talk about the performance and the unit economics if we can. Christophe Le Caillec -- Chief Financial Officer Yes. So pay over time is a facility that is available on our charge product. It's a service that a lot of card members are taking advantage of. It's the opportunity for them to revolve some of their transactions or part of their balance, their performance is very strong. It's actually the segment of our balances that is the fastest growing. And from -- I would say from a performance standpoint, because that product, but that service is attached to our charge card products, so typically premium card members the credit performance is also the best that we have in our lending products. So it's a very efficient way for us to grow balances by extending credit to premium card members. And the first question, I forgot was funding? And so the funding mix is still -- it's still evolving toward more deposits -- and as you know, deposits is, for us, they're the most effective and the most economical source of fund. And it's a very stable source of fund as well for us. I think we are -- we are at about 92% of our deposit. Direct deposit balances are below the FDIC cap. So it's a stable, resilient growing source of funding for us, and it's generating a lot of good things for us, including supporting our growth and growth plan and growth aspiration. And when you look at the yield that I had on the lending slide, one of the drivers behind the yield expansion year over year is actually a more effective cost of fund. And it's not a one-off, right, that has been a trend for several years now, and there is more to come. Operator Thank you. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Please proceed with your question. Moshe Orenbuch -- TD Cowen -- Analyst Great. Thanks so much. If you look at your commercial spending, particularly SME growth, it's been particularly weak the last couple of quarters, and you're noticing on Slide 5, the goods and services basically been flat to down for a couple of quarters. And you mentioned things that are unique to small business. But maybe could you expand that a little more and talk about what things we might see that would cause that to start to turn? And how long you can kind of maintain the kind of teens growth in loans while that is kind of flattish. Could you talk about those things? Thank you. Christophe Le Caillec -- Chief Financial Officer All right. Let me start and I'm sure Steve will add up to this. So you're right. I mean the SME billed business has been in that 1%, 2% range for a year now. We think that this is macro driven and we have a ton of data that confirms that it's not specific to American Express, and the rest of the industry is experiencing similar trends. I will note, as I think, we said in the prepared remarks that on the acquisition side, it's going very strongly. So the demand for the product is there. Their quality of the applicant is there as well. And as we've said in the past, it's the -- I would say, the 10-year base that is moderating their spend. We'll see how it goes, those card members, the SME, as we've said in the past, have been going through a lot. They're certainly experiencing as well their compound effect of funding costs for several years now. And they are very careful in terms of how they're managing their cash flows and how they're spending. This being said, we are very focused at working with them, as I said, engaging with them. And we're confident that we have what it takes to win them back when they are ready to spend more. Steve Squeri -- Chairman and Chief Executive Officer Yes. I think that, Moshe, when you look at this, the SME has been -- this entire space has been sort of disrupted over the last four years or so maybe five years with COVID, where it took a tremendous drop for 18 months or so. And then all of a sudden, you had unbelievable unsustainable organic growth of like 19% and 20% in given years. It was crazy growth in '21 and '22. And we saw last year after the first quarter, it really started to wane. And again, a couple -- I think there's, again, a few reasons for that. I think there was a tremendous buildup in inventories. I think interest rates going up did not help from a small business perspective, especially as they thought about purchasing goods and services and buying those goods and services and stocking them in anticipation of another supply chain sort of malady or meltdown. And what we do like is that our acquisition is still very strong. The transactions, even within the tenured base, continue to go up, it's the larger transactions that we've really seen the organic decline on and a lot of that can be industry-specific construction, a lot of that can also be not buying -- not buying big inventories upfront. So I think what's important for us to focus on right now is to continue to acquire, continue to work with them and engaging with them. And then when they're ready to come back, we're there for them as they want to spend even more. As far as -- and I started the conversation with this, as far as overall spending, that's what makes me feel really good about our overall spending because we're able to grow 7% with our commercial business growing very low and small business is only growing at 1% and it's an important part of the franchise, and that's why we feel good because of the credit and of the new acquisition. Operator Thank you. Our final question will come from the line of Ryan Nash with Goldman Sachs. Please proceed with your question. Ryan Nash -- Goldman Sachs -- Analyst Hey. Good morning, guys. Steve Squeri -- Chairman and Chief Executive Officer Good morning. Christophe Le Caillec -- Chief Financial Officer Good morning. Ryan Nash -- Goldman Sachs -- Analyst So maybe to bring together some of the pieces of revenue growth. I think you were on the high end of the first quarter, and I think Christophe, you said the expectation that NII was going to slow. Maybe just talk a little bit about how you think about the trajectory of the revenue growth do we need to see spend stabilize to remain in the range? Or can we see the impact of refreshes and card acquisitions be enough to stabilize revenue growth within the range on a quarterly basis? Thank you. Christophe Le Caillec -- Chief Financial Officer Yes. So things are in Q1 played out as we were expecting, right? We -- billed business came in similar to what we had experienced in the previous quarters. Card fee is moderating slightly from 17% to 16% FX-adjusted growth rate. And we're still expecting that it will pick up a little bit in the balance of your on the back of the things that you said, including the card refreshes and acquiring a lot of premium cards. And NII at 26% is going to keep moderating because balances are moderating. So the guidance for the full year is still to be between 9% and 11%. We'll see exactly how things play out. There are still a lot of things to find out how the late payment charges are going to come in, what's going to happen with the interest rates. So best at this stage, I think, is to stick to the full-year guidance of 9% to 11%. And -- but I would say it's Q1 validated the trends and the guidance that we gave at the beginning of the year. Kartik Ramachandran -- Head of Investor Relations With that, we will bring the call to an end. Thank you again for joining today's call and for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you. Operator Ladies and gentlemen, the webcast replay will be available on our Investor Relations website at ir.americanexpress.com shortly after the call. You can access a digital replay of the call at 877-660-6853 or 201-612-7415 access code 13745493 after 1 PM Eastern time on April 19th through April 26th.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning to those joining from the U.K. and the U.S. Good afternoon to those in Central Europe, and good evening to those listening in Asia. Welcome, ladies and gentlemen, to AstraZeneca's first-quarter results 2024 webinar for investors and analysts. Before I hand over to AstraZeneca, I'd like to read the safe harbor statement. The company intends to utilize the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to the operations and financial performance of AstraZeneca. Although we believe our expectations are based on reasonable assumptions, by their very nature, forward-looking statements involve risks and uncertainties and may be influenced by factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Any forward-looking statements made on this call reflect the knowledge and information available at the time of this call. The company undertakes no obligation to update forward-looking statements. Please also carefully review the forward-looking statements disclaimer in the slide deck that accompanies this presentation and webinar. [Operator instructions] And with that, I'll now hand you over to the company. Andy Barnett -- Head of Investor Relations A warm welcome to AstraZeneca's first-quarter 2024 presentation conference call and webcast. I'm Andy Barnett, head of investor relations at AstraZeneca. And before I hand over to Pascal and other members of the executive team, I would like to cover some important housekeeping points. Firstly, all of the materials presented today are available on our website. This slide contains our safe harbor statement, which I'd encourage you to take the time to read. We will be making comments on our performance using constant exchange rates, or CER, core financial numbers, and other non-GAAP measures. A non-GAAP to GAAP reconciliation is contained within the results announcement. All numbers quoted are in millions of U.S. dollars, unless otherwise stated. This shows the agenda for today's call. And following our prepared remarks, we will open the line for questions. As usual, we will try and address as many questions as we can during the allotted time, although I would ask participants to limit the number of questions you ask to allow others a fair chance participate in the Q&A. And with that, Pascal, I'll hand over to you. Pascal Soriot -- Chief Executive Officer Thank you, Andy. Good day, everybody. I'm pleased to report that we have made a very strong start in 2024. Total revenue grew by 19% in the first quarter, reflecting continued strong demand. And core earnings per share rose by 20 -- 13%, sorry. Recall the first quarter of 2023 benefited from a $240? Million gain in other operating income following the divestment of Pulmicort Flexator in the U.S. Collaboration revenue and other operating income were minimal this quarter, which makes the EPS year-over-year growth all the more impressive. We are also pleased to announce an increase in the annual dividend of 7% at the Annual General Meeting earlier this month. This increase is in line with our progressive dividend policy and reflects the continuing strength of AstraZeneca's investment proposition for shareholders. Please advance to the next slide. We saw strong double-digit growth across our therapy areas in the first quarter. This is also the first quarter where quarterly revenue from our oncology and BioPharma businesses exceeded $5 billion, and where this has exceeded $2 billion, reflecting the value our medicines bring to patients globally. We saw 19% growth in both the U.S. and Europe this quarter, driven by strong demand. Our business grew substantially in the emerging markets and growth was announced -- especially pronounced outside of China, driven by our sustained presence and commitment to this market. Next slide, please. Our strong pipeline momentum has continued into 2024, we announced positive trial results for LAURA and ADRIATIC, both of which have been selected presentation during the ASCO plenary, reflecting the important benefits seen for lung cancer patients. As a reminder, there are five presentations at the plenary, so two out of five is a very unusual result. We saw a number of exciting new approvals in the first quarter. The approval of Tagrisso in combination with chemotherapy establishes a new benchmark for efficacy in frontline EGFR-mutated non-small cell lung cancer. The approval of a HER2 in previously treated HER2 positive cancers is the first tumor-agnostic approval for HER2-directed therapy and offers new hope for patients with the right range of cancers. And finally, Ultomiris was approved in NMOSD, and we are now working on establishing Ultomiris as the new standard of care for this debilitating disease. This approval is further build on the momentum we are seeing from other recent approval listed here, and we're investing to ensure that each of these new opportunities reach full commercial potential. ADRIATIC and LAURA, if approved, coupled with the three approvals I've just described,and ongoing launches, have the potential to deliver several billion dollars in total revenue -- additional revenue in 2030. And this is what our pipeline is delivering in the first quarter of 2024. With that, please advance to the next slide, and I will hand over to Aradhana, who will take you through our first quarter financials. Aradhana Sarin -- Chief Financial Officer Thank you, Pascal. And as usual, I will start with our reported P&L. Please turn to the next slide. Total revenue in the first quarter increased by 19% to $12.7 billion, predominantly resulting from strong product sales, which grew by 18%. The underlying demand for our medicines across the board was very strong in the quarter across both brands and across geographies. Enhertu and Tezpire continued their strong growth trajectory, and as a result, Alliance revenue increased by 59% to $457 million, driven by profit shares in regions where our partner booked product sales. Please turn to the next slide, which shows our core P&L. The product sales gross margin was 82% in the quarter. As previously stated, we still expect gross margin for the year to be slightly lower than last year due to strong growth for partner medicines, including in Enhertu and Tezpire as well as increased product supply to Sanofi for Beyfortus into the 2024-25 RSV season. In the second half, we see additional impact from usual seasonal impact from medicines such as FluMist. Total operating expense increased by 15% in the quarter. R&D spend increased by 18%, partly driven by the phase 3 trial starts, including dapa combinations with baxrostat and veltinerone. We continue to anticipate R&D spend will remain in the low 20s percentage of total revenue, inclusive of investments we are making to maximize the potential medicines acquired in recent business development transactions. We continue to show operating leverage. Supporting the 19% revenue growth, SG&A increased by 13% in the quarter. We have seen strong initial uptake supra, Truqap and Wainua in the U.S., and we're investing behind this revenue growth as well as behind our existing brands, such as Breztri free and Farxiga. We're also increasing our promotional efforts behind our rare disease medicines to support continued growth. We anticipate quarterly variations in our operating expenses given the nature of our business. Despite limited contribution from other operating income this quarter, we saw core operating profit growth of 15% and core EPS of $2.06. Please turn to the next slide. In the first quarter, cash flow from operations was $2.5 billion. We saw capex of $417 million in the quarter, and we continue to anticipate capex to increase by approximately 50% on a full year basis to support increased manufacturing capacity and support our growth. We had deal payments of $2.9 billion, including upfront payments for icosovax and grace acquisition, both of which closed during the first quarter. We also paid the third and final payment for shareholders of Acerta. Lastly, we paid the second interim dividend for 2023. At the end of our Q1, our net debt-to-EBITDA ratio was 1.9 times. We anticipate the announced Fusion and Amylin transactions to close in the coming months strengthening our radiopharmaceutical capabilities and expanding our presence in rare endocrinology. As a result of recent business development and debt refinancing, we expect finance expenses to grow compared to prior year. Reflecting the strength of our business, we are reiterating our full year guidance for both total revenue and core EPS at constant exchange rates. With that, please advance the next slide, and I will hand over to Dave, who will take you through our Oncology performance. Dave Fredrickson -- Executive Vice President, Oncology Business Thank you, Aradhana. Next slide, please. Oncology revenues grew 26% to $5.1 billion in the first quarter, driven both by deal digit growth across all regions and strong demand for our key medicines. Tagrisso global revenues grew 15% in the quarter, reflecting continued global demand for ADAURA and FLAURA. Following U.S. approval in February, we've seen strong interest and early uptake for FLAURA2 in the frontline setting, with oncologists particularly focused on patients with L858R mutations and CNS metastases at baseline. Lynparza delivered product sales growth of 11% in the first quarter and remains the leading PARP inhibitor globally across all tumor types. Imfinzi total revenues grew 33% on continued strength in biliary tract cancer with TOPAZ-1, which is now approaching peak market share penetration in the U.S., Japan and Europe. Launches continue at pace across emerging markets, where biliary tract incidence and prevalence is high. And as previously communicated, we recognized a 25% mandatory price reduction in Japan effective from February 1st, and anticipate a second mandatory price discount later this year. For the first time, we have split out Imjudo in our reporting and are please with its launch trajectory. We've established a strong foundation in hepatocellular carcinoma with HIMALAYA and see continued growth in non-small cell lung cancer with POSEIDON. Calquence total revenues increased 35% in the first quarter, driven by sustained BTK inhibitor leadership in frontline CLL across the U.S. and Europe. Enhertu total revenues increased 79% in the first quarter. Again, we drove sequential market share growth in second-line HER2-positive breast cancer in the U.S. and Europe, where considerable growth remains. We see continued adoption in HER2 low across many global markets and eagerly await the DESTINY Breast-06 readout, which brings the potential for further expansion, moving Enhertu one line earlier. Following approval in November last year, we are pleased with the strong Truqap adoption in the biomarker altered population, achieving $50 million in the first quarter total revenues. Looking forward, we anticipate further expansion of Tagrisso with the approval of FLAURA2 in frontline non-small cell lung cancer and maximizing the U.S. launch of Enhertu across HER2-expressing tumors. Lastly, we're excited that both ADRIATIC in limited stage and LAURA in stage 3 unresectable cancer have been selected for the ASCO plenary session. Each of these represents substantial growth opportunities in the near future and beyond, as Pascal has already outlined. With that, please advance to the next slide, and I'll hand over to Susan to cover key R&D highlights in the quarter. Susan Galbraith -- Executive Vice President, Oncology Research and Development Thank you, Dave. We've had an exciting start to the year with a number of key presentations, including data for our new generation PARP inhibitor, sereparib, in advanced solid tumors presented at this year's AACR. This quarter, we announced the proposed acquisition of Fusion Pharmaceuticals, furthering our ambition to redefine the backbone of current cancer treatment. Along with chemotherapy, radiotherapy has been a mainstay of cancer treatment for decades. In fact, 30% to 50% of all patients receive radiotherapy. Whilst this treatment is effective, there's also a toxic off-target effects. Fusion has developed a clinical stage portfolio of radio conjugates that are designed to deliver radiation therapy to tumor cells in a more targeted manner than external beam radiation. As we've discussed already, we believe the future of cancer care is in combinations and there's immense potential to combine radio conjugates with other modalities in our pipeline, including next-generation IO bispecifics, cell therapy, T-cell engagers and our DNA damage response agents. Importantly, the planned acquisition of Fusion accelerates our radiopharmaceutical manufacturing to commercial scale capabilities by over three years and offers additional security in actinium supply, with multi-source supply agreements in place. The lead pipeline candidate, FPI-2265, has potential to be the first actinium-based PSMA-targeted radiotherapy approved for the treatment of postletetium metastatic gastric-resistant prostate cancer. FPI-2265 is differentiated and has potential to be both more potent and tolerable than currently approved B2moedia conjugates. Data presented earlier this month at AACR demonstrated further valuation of FPI-2265's efficacy and tolerability. PSA50 response was achieved in 50% of patients overall and 43% of the lutetium-treated patient population and 54% Otsium-naive population. Furthermore, there were zero discontinuations related to Xerostomia, a common toxicity. We believe that our proven expertise in targeted delivery, together with Fusion's clinical stage portfolio and manufacturing capabilities, presents an opportunity for clear leadership in the radio conjugate space. And with that, please advance to the next slide, and I'll pass over to Ruud to cover BioPharmaceuticals performance. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Thank you, Susan. Next slide, please. BioPharmaceuticals delivered total revenue of $5.2 billion in the first quarter of 2024, representing growth of 16%. Our key underlying growth drivers remain in place, including the continued growth of the largest cardiorenal medicine on the market, Farxiga. The increased uptake of medicines of our biologic medicines in severe asthma, and the ongoing momentum behind Breztri, our inhaled COPD medicine. In the United States, demand for Farxiga were strong in the quarter and benefited from the launch of a North Generic. We saw solid growth in emerging markets despite entry of generic competition in some countries. Presently, we still anticipate Farxiga may be included in China VBP in the second half of 2024. Additionally, we saw a strong Symbicort performance in the first quarter despite generic pressures. This was particularly evident in emerging markets, where we saw strong underlying demand in both China and ex China markets, strengthening its position as market leader in the region. Awareness of Airsupra continues to grow, and more than 18,000 healthcare practitioners have prescribed this new medicine, translating into 65,000 prescriptions in the quarter. The performance has been particularly strong among specialists. Airsupra already has over 50% of new share prescriptions by allergist and over 10% share of prescriptions from pulmonologists. As Airsupra is still in the first few months of launch, our revenues in Quarter 1 did not reflect the full extent of initial demand due to introductory discounts. These introductory discounts will fade through the year as we continue to expand access. Awareness is also building for Wainua, and we are very pleased to report our first revenues this quarter, following its recent approval for ATTR polyneuropathy in the United States. Wainua has only been available for a few weeks, but we are seeing good uptake among patients including some who are new to the class of medicine and some that have switched from other brands. Finally, we saw continued sales from Beyfortus in Quarter 1, albeit with the expected seasonal drop versus Quarter 4. We were particularly pleased to see the real-world data coming out of the U.S. with the center of disease control reporting that Beyfortus was 90% effective at preventing infants from being hospitalized with RSV. Next slide, please. I will now hand over to Sharon to discuss our ongoing development program for Wainua, TTTR CardioM, where we have the potential to reach up to 0.5 million patients globally. Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Thanks, Ruud. I wanted to take the opportunity to highlight results from a 66-week analysis of exploratory cardiac endpoint in the phase 3 NEURO-TTRansform study of Wainua in hereditary ATTR polyneuropathy. In a predefined cardiac subgroup of hereditary ATTR polyneuropathy patients, treatment with oplontresin showed stabilization or improvement in cardiac function and structure relative to external placebo, including levels of NT-proBNP, a measure of cardiac stress; and a trend toward improvement in echocardiographic parameters such as left ventricular wall thickness, diastolic and stroke volume. These results provide confidence in our phase 3 CARDIO-TTRansform trial in ETR cardiomyopathy. ATTR cardiomyopathy is a systemic, progressive and fatal condition that typically leads to progressive heart failure and often death within 3 to 5 years from disease onset. With more than 1,400 patients enrolled, CARDIO-TTRansform is the largest, most comprehensive ATTR cardiomyopathy study and, importantly, includes cardiovascular outcome endpoints. In other key programs, we continue to maximize the opportunity for our best-in-class SGLT2 inhibitor, Farxiga. We have the potential to manage cardiorenal disease through 3 distinct mechanisms, complementary dual mechanisms combined dapagliflozin with boltinrenon, baxtat or zibotentan, I am delighted to announce that all three combinations are now in phase 2. Please move to the next slide, and I will now hand over to Marc, who will cover our Rare Disease portfolio. Marc Dunoyer -- Chief Executive Officer, Alexion, and Chief Strategy Officer, AstraZeneca Thank you, Sharon. Can I get the next slide, please. I'm delighted to report Rare Disease delivered our first $2 billion total revenue quarter, up 16% year on year. The growth rate here includes a small benefit from countries with high inflation. Growth was driven by neurology indication, increased patient demand and launches in new markets. In the quarter, Ultomiris revenue grew 34%, with the vast majority of growth coming from generalized mastenagravhis. GMG patients grew by 41% driven by demand in Europe and established rest of the world. In the U.S., with the highest number of new-to-brand patients in the quarter, supported by our increased promotional activities. During the quarter, we received U.S. approval of Ultomiris in NMOSD. In the phase 3 CHAMPION-NMOSD trial, Ultomiris relapses over 138 weeks. Given the strength of this data, we expect Ultomiris to be the treatment of choice for relapsing patients naive to biologics. We expect patient and Soliris convert to Ultomiris over the short term. Following approval in U.S. and EU, Voydeya and add-on therapy, ensure that PNH patients who experienced clinically significant extravascular hemolysis are able to continue on standard of care, Ultomiris or Soliris. Beyond complement, both Strensiq and Koselugo grew 21% and 18%, respectively, driven by content patient demand as well as order timing in certain tender markets. Please advance to the next slide. During the quarter, we announced our plans to acquire Amolyt Pharma, which includes a phase 3 asset in eneboparatide for patients with hypoparathyroidism. Hypoparathyroidism is characterized by deficiency in parathyroid hormone production, which results in significant disregulation of calcium and phosphate leading to life-altering symptoms and complications, potentially including chronic kinesis. It is one of the largest known rare diseases. Phase 2a data from eneboparatide showed a normalization of serum consume level and a reduction in dependence on daily calcium and vitamin D supplements, both clinical priorities for treating patients. Data also suggested that eneboparatide has a potential to restore normal bone turnover and preserve bone mineral density. We believe eneboparatide has blockbuster potential and anticipate data from the phase 3 CALYPSO trial in 2025. With that, please advance to the next slide, and I will hand back to Pascal for closing remarks. Pascal Soriot -- Chief Executive Officer Thanks, Marc. Can I have the next slide, please? As you have heard, our company has made a very strong start to 2024 with demand for our medicines continuing to grow. Looking ahead, we are once again anticipating multiple pivotal trials throughout the remainder of the year. Several important potential catalysts are shown here as well, as DESTINY Breast-06, which Dave spoke about earlier, I would like to highlight CAPItello-281, which will be the first registrational study of Truqap in prostate cancer, an important potential new growth driver for this medicine. Since our full-year 2023 update, we have initiated the eight pivotal trial shown here, all of are potentially transformative for patients and could meaningfully accelerate our growth. In addition to the exceptional delivery from our internal pipeline, we've also been directive with business development, building capabilities and adding new platforms to strengthen our R&D efforts in areas, which we believe have the potential to radically improve patient outcomes, including radio conjugates, gene therapies and cell therapies. We're very much looking forward to share more details about our pipeline and the long-term outlook for our company at upcoming Investor Day on the 21st of May. Please advance to the neck lie, and we will go to the Q&A. [Operator instructions] And with that, let's move to the first question, which is from James Gordon of JPM. Over to you, James. James Gordon -- JPMorgan Chase and Company -- Analyst Hello. James Gordon, J.P. Morgan. First question is on '24 guidance. So it's a very strong revenue growth, 19%. In order not to grow revenues at teens for the year, it looks like you need to only grow at about 10% for the rest of the year. So in terms of headwinds, we should be mindful of that would drive 9 percentage points of deceleration. And I heard a comment on maybe for Farxiga BBP and Imfinzi price in Japan, but anything else and in particular, for Farxiga, Symbicort and Tagrisso that were very strong this quarter? Are there things through that we need to watch out for? Or does that look quite sustainable? And also on '24 guidance, just on opex, the ratio is a little bit good to say, but this is with the strong top line before the two deals. So if revenue is a little slower through the year,and you consolidate these deals, do we need to be careful on those ratios? Or can you still keep a pretty high margin? And if I could squeeze in a quick second question, just Ecogen and the oral G1. So I believe you've expanded the trial and maybe taking dosing higher. So on that, what is the latest thinking in terms of where we might see the data? I didn't see a reference to ADA. And how are you now thinking about how competitive this product might look in terms of the weight loss and other aspects versus some other recent readouts from competitors? Pascal Soriot -- Chief Executive Officer Thank you, James. Just sorry, Aradhana, maybe you can take the first one. And Sharon, would you take the second one? Aradhana Sarin -- Chief Financial Officer Great. Thank you, James, for the question. it is obviously early in the year. And as you know, generally, we don't update or provide more color on the guidance in first quarter. You've seen from the reported results, the underlying trend in our revenue product sales is very, very strong across the board. You've also mentioned some of the uncertainties that Rue also mentioned as well as Dave. So those uncertainties are there for the remainder of the year. However, if our momentum continues the way it has been in the first quarter and some of these uncertainties on VBP pricing, etc., are in our favor, you can think about our product revenues, our product sales and alliance revenues could be at the upper end of our range or higher. So -- but again, we're not updating our guidance at this point. We will continue to invest in our R&D for the long term, including the acquired product and continue to invest in SG&A to drive the top line momentum that you've seen. Operating leverage continues to be a focus for us. Again, you've seen this quarter as well, 19% revenue growth and 13% SG&A growth. And we will try to maintain stronger revenue growth than expense growth in the coming quarters as well. With that, maybe Sharon? Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. So thank you for the question about AZD5004 oral GLP-1 receptor agonist. We're really excited about this molecule and its potential to treat the interrelatedness of cardiometabolic and cardioredisease. You asked specifically about the phase 1 study. And as I'm sure you're aware, we completed, together with Ecogene, a highly controlled inpatient phase 1 earlier this year. We have the data in hand and look forward to presenting that at an upcoming medical conference later this year. You also asked about how we view the competitive position of this molecule. And recognizing that it is a highly competitive field, we do feel very optimistic about the potential for this molecule as a stand-alone as well as in combination. So when we think about how we're treating obesity and metabolic health, I think we honestly do ourselves a disservice by referring to this as obesity. What I'd like us to do is think about this more clearly is treating the interconnectedness of disease. And to that end, we are uniquely well positioned to combine this orally available molecule with other molecules in our portfolio that help address those interrelated diseases. As an example, combining 5004 with our SGLT2 inhibitor. So when we think about this, we can imagine that at a fixed dose, we may want one dose that would be compatible for fixed-dose combinations and another dose that would be more compatible for additional weight loss in obesity indications. And we'll keep that in mind as we continue to design our clinical development program. Moving forward, we have publicly stated that we will be launching two phase 2b studies later this year, one in obesity and one in type 2 diabetes. Pascal Soriot -- Chief Executive Officer Thank you, Sharon. And James, you asked the question of the doors, but you got to remember that not everybody needs to lose the same amount of weight. And so as you target higher weight losses, Sharon was talking about in the obesity segment, you would expect to have to go through a titration regimen and get to a higher dose. So it's not surprising that we would explore the doses depending on what loss patients are needing. The next question is Seamus Fernandez, Guggenheim. Over to you, Seamus. Seamus Fernandez -- Guggenheim Partners -- Analyst Great. Thanks for the question. So I guess as, Pascal, a little bit of a preview of the upcoming analyst event. Just hoping that you could provide us with a little bit of color on how you're thinking about potential for updated guidance. Is the most important factor of the meeting really giving and helping us understand long-term visibility around revenue? Or is it more on a margin or a little bit of both? And then just a second question. As we think about the three products that you've highlighted on the BioPharma side of the business, the oral PCSK9, the GLP-1 and the long-acting amylin, just hoping you could help us or help provide some context around the which you're most excited about and perhaps when we might see data on all three. Pascal Soriot -- Chief Executive Officer Thanks, James. So the first question about the Investor Day, I guess I would like to invite you to join us in a beautiful Cambridge to see more of the details of what we're going to present. But the answer to your question is a little bit of both. Essentially, what we want to do is show people how we are looking at what I call today, tomorrow and the day after. Today is what do we intend to deliver in terms of our financial progression in '24, '25, '26. Tomorrow is what are the products we are going to launch that will drive our growth between 2025 and 2030, and what is our strategy there, what do we intend to do with our pipeline, and what other products we believe are growth drivers to 2030. And the day after tomorrow is really the sort of post-2030 period. And what are -- what do we believe are the technologies that will shape the future of medicine in oncology and beyond, and how are we building some of those platforms that will help us shape -- participate in shaping the future of medicine in the therapy areas where we are. So that's really what we want to do at the Investor Day. And we also offer, for those of you who are early risers and will be physically on site, we'll also give you a chance to look around our site and experience a little bit what we have on site. The second question, let me give you a couple of comments and then maybe Ruud and Sharon could add. We are always more excited about products for which we have more advanced data. Those three products are, of course, exciting, but we have more data for the PCSK9, which is a very exciting product. And also more data for the oral group GLP-1. Long-acting amylin is technically interesting. We need more data, but it certainly so far looks pretty good. And we think we can actually, as Sharon said, with the combination of the GLP-1 and the rest of our pipeline, not only PCSK9, but also dapa and also potentially Boxplot , he can make a difference in this segment of patients who need to lose weight but also manage their cardiovascular risk factors. And in the obese segment, where people need to lose 20%, 25% of their weight, then we can look at combining our overall GLP-1 with the long-acting amylin and some other mechanisms. Sharon, if you want to maybe also add a little bit on how you see this pipeline. Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. So I'll jump in on both. People often ask about which molecule I'm more excited about. And I find that very difficult to answer because, obviously, I'm very invested in all of them. But the first one that you asked about was our oral PCSK9 inhibitor, and we are extremely excited about the potential for this molecule. We will be releasing phase 1 data at an upcoming condom the very near future. But I think it's safe to say that set ourselves a very high bar with this molecule, but we asked that it be able to meet a major unmet medical need. We know that despite high-intensity statins, about half the patients with cardiovascular disease are not hitting their LDL targets. And so we asked this molecule to be able to offer substantial lowering on top of statins, and we're very encouraged by the data that we see. So we are actively moving forward with this molecule in clinical development and thrilled to be sharing the data at an upcoming conference. Relatedly, you asked about our obesity portfolio. And again, I think I would really think of it more as our optimal weight management portfolio, in which we are exploring both incretin and non-incretin pathways as multiple mechanisms to manage both weight and interrelated cardiometabolic and cardiorenal disease. So we are positioned to go beyond short-term weight loss and to deliver long-term weight management and healthy lean mass management, addressing cardiometabolic risk and also organ protection. And we think that we'll be able to achieve this by driving forward with multiple mechanisms in combination. Thinking about both the incretin pathways, as we've discussed earlier with 5004, and non-incretin pathways, for example, with long-acting Amylin. Long-acting amylin, as you can imagine, is a different route of administration and we think could offer some additive benefits outside of that, that we're already seeing in the incretin pathway. So we are accelerating several assets through phase 1. We spoke earlier about 5004, AZD-6234 is our long-acting amylin, ACD-9550 is our dual receptor agonist. And both of those added 2 molecules are progressing through phase 1. We look forward to sharing it with you when ready. Pascal Soriot -- Chief Executive Officer Thanks, Sharon. Ruud, anything you want to add? Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals No. Pascal Soriot -- Chief Executive Officer Cool. So let's move to the next question, Sachin Jain at Bank of America. Sachin over to you. Sachin Jain -- Bank of America Merrill Lynch -- Analyst Hi there. Thanks for taking my questions. Sachin Jain, Bank of America. First one today for Truqap. Strong first quarter, just any initial launch feedback. And then I'm going to try and go to Roche talked to $2 billion for their PI3K yesterday. I wonder if you could talk about the relative profile of your asset related to this and whether you'd go big, $2 billion in breast and size, the prostate opportunity that Pascal specifically called out? Second question is for Susan. AVANZAR is due in '25. When do we see the data that informs on your confidence? And what I'm after there is timing of any TROP2 biomarker data? And what should we focus on from TLO2 at ASCO? But I think Daiichi have commented to. And then last quick question for Sharon, statinnow 25 plus. Do you still plan an interim next year? Pascal Soriot -- Chief Executive Officer Dave, do you want to start? Dave Fredrickson -- Executive Vice President, Oncology Business Sure. Thanks, Sachin, for the questions. So on Truqap, we are really pleased with the launch and following what was a real positive reception to the presentation of the data we've seen that the uptake is really moving quite nicely. And I think that uptake in the biomarker population really speaks to the need to extend endocrine-based therapies. We see testing rates are well established by NGS in the U.S. So we've got over 60% on that. And while there was a previous standard of care with PI3K, we're seeing that rapidly get displaced, there still plenty of opportunity to continue to grow within that segment. So demand is off to a very good start, though I think that there is certainly much more opportunity for us to continue to grow. There's some late line bolus that we're probably seeing within the numbers as well. But again, I think that underlying demand and the indication that we got is very, very strong. On your specific question also around comparison to the ANOVA 120 data, from my and our understanding, I think that you first have to take a look at the inclusion criteria. The inclusion criteria are certainly different between that study and 291. In that study, the inclusion criteria only include patients who have progressed during or within 12 months of adjuvant ET completion. It's also limited to the PIK3CA patient population. So if you take a look at 291 within that context, we really have the de novo and the nonearly relapsers in the second line post CDK4/6 plus AI setting in addition to the fast progressors. And I see more like three-quarters of the patients falling into this de novo nonearly relapser population. So I'm enthusiastic about the opportunity in breast cancer. I'm enthusiastic about the opportunity also in prostate cancer. And I think you put these two together, and we've got the potential for Truqap to be a multi blockbuster. Susan Galbraith -- Executive Vice President, Oncology Research and Development OK. Thanks, Dave. So for AVANZAR, again, yes, as I said, the trial is going well. But the TROP2 biomarker data, I expect that we would be able to share those data at the congress within the next 12 months certainly. And as far as ASCO goes, one thing beyond the lung cancer data that I would encourage you to take a look at is the I-SPY 2 data, which is a neoadjuvant study in breast cancer. Again, looking at the combination of dapa and Imfinzi in that setting. So I think we continue to be happy with the profile that we're seeing for data plus IO across the first-line settings in lung cancer. The safety is looking very reasonable because we've got many patients now enrolled into those first-line settings. And again, as we move this combination into the earlier lines, like the new adjuvant setting, I think both the safety and the efficacy profile look encouraging. So that's what I would point you to ASCO. Pascal Soriot -- Chief Executive Officer Thanks, Susan. Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development And then your last question, I believe, was about the plantersen cardio transform trial and our expected time line for readout on that one. So as I mentioned earlier today, we remain extremely optimistic and excited about the potential for this molecule. And I showed you some early data that came from our NEURO-TTRansform study, which demonstrated a benefit on cardiac structure and function, which gives us additional confidence in the potential for the molecule as we walk through the CARDIO-TTRansform study. This molecule has the potential to be a best-in-class and transform care for patients with amyloidosis. So to that end, we would like to give this trial the best chance for success and to be able to read the full trial at the 140-week time point. that in mind, we'll continue to scan the competitive landscape and make the appropriate decisions as we move forward. Pascal Soriot -- Chief Executive Officer Thank you, Sharon. And touching on part of your question, we never comment, as you know, on interim analysis. So of course, we will not do any -- we will not do it here either. Next question is Tim Anderson at Wolfe. Tim, over to you. Tim Anderson -- Wolfe Research -- Analyst Hi. Thanks. Hopeful of questions. On data, just an update on your thinking on the lung filing in the U.S., if the overall survival data only continues to be directionally supportive and doesn't fall a little bit upper-end threshold of one. Is that enough to get U.S. approval? And then what would that mean for ex-U.S. approval? And when is that next survival look going to incur? And then the second question is just emerging markets. China, obviously, has slowed from years ago for lots of companies. What really stands out in your results is that non-China emerging market segment, which is substantial now, continuing to grow. But it's just not clear to me what the drivers of that are in terms of geographies and products, and therefore, what the future growth expectations should be in those non-China markets. So if you could add some commentary, that would be helpful. Pascal Soriot -- Chief Executive Officer Thank you. So maybe, Susan, you could take the first one. Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. So for TROPION-Lung01 study, Obviously, we've announced that we have filed, obviously, for all regulatory authorities OS in lung cancer is an important component that they want to look at. We said that the timing of the OS data cut is around the middle of the year. As you know already that we saw an overall trend in favor of OS on the data arm in the ITT, but what we also saw is in the non-squamous group a more positive trend with the upper end of the comp interval just crossing one. So looking -- I'm hoping that we'll see both of those continue or improve. And I think that will be an important piece for the regulatory authorities to look at. Thank you. Pascal Soriot -- Chief Executive Officer Thank, Susan. And the second one, maybe Leon, who is online, I believe, Leon, can you actually comment on that one? Leon Wang -- Executive Vice President, International Yes. I think actually, across all geographic AstraZeneca emerging market has been growing rapidly and almost no exception. And of course, there is some currency depreciation in certain countries. But overall, still very, very strong growth. And we are also in line with the global new product launch. I think Tagrisso, Farxiga, these oncology brands, and also rare disease as a new growth driver and is also doing very well across the emerging markets. All in all, on top of that, the LOE post patented products, the legacy products, that are still quite we spend very little resource and also growing nicely to support as a cash cow, our new launches. And also across the region, we are speeding up approval in many emerging markets. So we launched new products much earlier than before. Pascal Soriot -- Chief Executive Officer Thanks, Leon. So net-net, Tim, you have really two factors. One is we have a very strong commercial footprint in those countries. Now we are actually the No. 1 pharma company in the international region. And so we are leveraging this strong commercial footprint across all subregions. The second factor is we actually, a couple of years ago, invested more resources into a specific international region, regulatory team. And that team has been fast tracking, filing and approvals of new products in those countries who historically were falling behind the priority geographies. And now we still launch after the U.S. and Europe or Japan in those countries, but not that much later, and we are still working on accelerating this. So those two factors are really the most important growth drivers. The next question, I think, is Mattias Haggblom at Handelsbanken. Mathias, over to you. Mattias Haggblom -- Handelsbanken Capital Markets -- Analyst Mattias Haggblom, Handelsbank. Two questions, please. So firstly, on data DXd, you initiated a couple of additional phase 3 programs during the quarter with your partner. So what makes you so confident to continue to invest into these programs? Or asked perhaps differently, with investor communities still skeptical today to the what in particular is it you see that investors may miss? And then secondly, as one of few companies with both bispecific antibodies as well as cell therapy capabilities in-house. can you talk about how you think about engaging these tools into autoimmune disease, whether it's emerging early data from both sets of technologies that looks promising? Pascal Soriot -- Chief Executive Officer The first question, I think would go to Susan. And the second, Sharon, you'll take that one. OK. Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. So thanks for asking the question about Data DXd. So yes, we have announced that we've -- we're starting TROPION-Lung01, which is a combination with rilvegostomig, our PD-1 TIGIT bispecific and data, compared to pembro in locally advanced first-line non-small cell lung cancer. And again, that is a program where we're going to be looking at this activity in a biomarker selected group as well. But it also includes the ability to compare rilvegostomig directly with pembro in that setting. So I think what underpins our confidence there is both the combinability with IO that we have seen in different settings, the potential for the -- some added efficacy for the addition of the TIGIT mechanism of action as part of this bispecific within the PD-L1 greater than 50% patient population as well. And we think that this can be a winning combination in that setting. The other important study that I draw your attention to is the TROPION-Lung14 study, this is a combination of data DXd and Tagrisso in the first-line nonsquamous EGFR-mutant non-small cell lung cancer. And again, this builds on both safety and efficacy data that we've seen from the Orchard platform that we have in a post generation EGFR inhibitor patient population in the EGFR mutant, and also the safety and combinability for that combination. So that's what gives us confidence. As you may have seen in the TROPION-Lung05 data that was published is actually really good activity for data DXd within the EGFR mutant population. And given the FLAURA2 data, which we've also seen I think that, that also builds confidence in the ability to combine Tagrisso with chemotherapy and directed agents. And so I think this has the opportunity to further build on the data that we had from FLAURA2 and the data from Orchard and really have a winning combination in the first-line setting for EGFR-mutant non-small cell lung cancer. Pascal Soriot -- Chief Executive Officer Thank you, Susan. Sharon? Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. So thank you very much for the question about cell therapy and bispecifics in autoimmune disease because I think it's a really interesting topic that has become a key focus for us. As we think about how we manage diseases of immune disregulation, we are moving from managing symptoms modifying disease by adding the causality of disease. And the mechanisms that you mentioned, cell therapy and bispecific molecules, are two excellent realities that allow us to really address the causality disease. So to that end, we have invested in internal capabilities but also accelerated our ambition with recent acquisitions. As you saw, we very recently closed an acquisition of Grace which brought to us some, I think, leading capabilities that allow us really accelerate our ambitions in cell therapy for patients with autoimmune disease. And specifically, gray cell has a biCAR T which they have used to complete an investigator-initiated trial in China for patients with systemic lupus arithemedosis, or SLE. And we look forward to share this data at an upcoming medical conference. But I think it's safe to say that the data that we have seen across the patients treated is at least as compelling as anything that we in the published literature and gives us a lot of excitement and optimism about how we may be able to address SLE for patients moving forward. At the same time, we're also investing in our internal platforms for creating T cell engagers, which we think also could be a very powerful modality in the autoimmune space. Pascal Soriot -- Chief Executive Officer Thank you, Sharon. Mark Purcell at Morgan Stanley, Mark, over to you. Mark Purcell -- Morgan Stanley -- Analyst Yeah. Thank you very much. Two questions. The first one, the U.S. oral oncology products, the product sales there were very strong in the quarter. Could you help us understand the impact of treatment initiation dynamics and potential changes in affordability? And then secondly, on the Fusion Pharmaceuticals platform, for FPI-2265, can you help us understand your plans for moving into sort of pre-taxane setting? Would you do a head-to-head trial there versus Pluvicto potentially combined with PARP-1? Obviously, understanding that the post Pluvicto opportunity itself has blockbuster potential anyway. Dave Fredrickson -- Executive Vice President, Oncology Business So, Mark, thanks. I'll take the first question, probably Susan on the second. I mean I think the first important piece is that within the quarter on our oral oncolytics, particularly with Calquence and Tagrisso, we saw strong market share performance. Calquence remaining the leading BTKI in frontline CLL, and strong continued demand growth for Tagrisso in adjuvant in frontline and encouraging early FLAURA2 launch. With that said, also, we do see early encouraging trends of lower abandonment and improved access due to affordability, though it really is too early to quantify. And of course, recall, Mark, that in 2024, there's no added liability associated with Part D, whereas it comes in, in '25. But we'll continue to keep updated on how those dynamics on affordability evolve over the course of the year. Pascal Soriot -- Chief Executive Officer And Mark, on your second question, the deal hasn't closed and so we are not able to comment at this point in time. Sorry about this, and hopefully, we can give you an answer soon. Richard Parkes at Exane. Richard, over to you. Richard Parkes -- Exane BNP Paribas -- Analyst Hi. Thanks for taking my questions. Firstly, sometimes when speaking to investors, I get the perception, the feeling that AstraZeneca is spreading it sells too thinly with expansion into vaccine cell therapy, radioligand. Just wondering how you respond to that and whether you see any risk of the organization losing focus, and how you're thinking about some of those investments in new platforms? It feels to me like there's more you're just thinking about that the day after tomorrow. So that would be very helpful. And then on Airsupra, could you just talk a little bit more about the opportunity you're seeing? Obviously, we're seeing some very large drugs in that category in the past. Just thinking about how you're thinking has evolved on the opportunity since the launch. Pascal Soriot -- Chief Executive Officer Thanks, Richard. Let me try the first question. And maybe Ruud, you could cover the second one. So the first question, I think first point is, I'm sure you've realized, we have a very, very strong team and people are very focused on oncology, BioPharma, Rare Disease and managing their folios. Second point is we are now kind of a $50 billion company. So you really need a portfolio to continue growing. And I think this is one of our strengths. We're not depending on two or three products, we have a portfolio of products that are driving our growth. And we can actually highlight that better to you at the Investor Day very soon. Third point I would make is that actually, this portfolio actually gives us the opportunity to combine. And again, that's what we want to highlight during the Investor Day. We're in a unique position to combine in oncology across ADC, bispecific, potentially -- bispecific IO potentially in the long run, take an approach to solid tumors to address the tumor with a combination of ADCs and bispecific and follow this with TCEs or cell therapy. In the cardiovascular space, Sharon has covered it, we can combined across the GLP-1 and PCSK9 or the other agents, the PARP, of course. So I think these are the things that actually help us. On the vaccine front, I think there's sometimes a misperception of what we're trying to do. We're not trying to build a vaccine business like vaccine companies have. We are actually targeting vaccines that will be synergistic, strategic to our vaccine -- and antibodies, by the way, that are synergistic to oncology or respiratory disease products that will protect patients from exacerbations of COPD or asthma, products that would protect patients from COVID or flu infections. If there are, say, cancer patients, blood cancers in particular. So this is really what we're trying to do, always try to be implementing a sort of a strategic synergy across our portfolio and leverage our expertise and our strengths in various places. So I don't think we are too thin. And then -- too thin spread. The challenge and the opportunity in our industry is always to be able to think about today, but also the long term. It would be very easy, quite frankly, or easier to focus on the next four, five years. But we also have to think about what is going to shape the medicine in five to 10 years. So that this company remains a growth organization, not only in the next few years, but in the long run. And so that's always the challenge is really to manage our near-term long term, but also it's an opportunity. If we do that well and if we play our hands very well, we can be very differentiated as a company. So Ruud, over to you. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Yes, of course. And thank you so much for the question, Richard. So first of all, Airsupra is a unique product in the United States because it's the first rescue therapy for asthma patients above years of age. It's a very substantial market. The short-acting beta agonist market. Just to give you a little bit of context, roughly 35 million inhalers are prescribed every year for the 18-plus population in the United States. So the volumes are very, very substantial. And we do believe with that, we have a product in place which can change the treatment paradigm of as needed rescue medication in the U.S. Of course, it's still early days, but the fact that we already see a very substantial number of scripts every week, plus that more and more physicians are prescribing it, I truly believe that over the next few years that this product will become a blockbuster molecule. And equally, we're also looking for other opportunities in other geographies in the world. Especially in the Middle East, we see good opportunities to launch the product there as well in the next few months. So all in all, very bullish regarding the forecast and the potential of this product moving forward. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. The next question is from Christopher Uhde at SEB. Christopher, over to you. Christopher Uhde -- Skandinaviska Enskilda Banken -- Analyst Can you hear me? Pascal Soriot -- Chief Executive Officer Yes. Christopher Uhde -- Skandinaviska Enskilda Banken -- Analyst Good. So yes, I guess, first question is a lot of the key sort of Part D products, and I guess the U.S. in general, had really strong performance. Can you quantify how big a headwind the typical U.S. coverage resets amounted to? And what factors beyond strong demand, help explain why Q1 was so strong? And roughly, how much did they selectively contribute then to top line growth? Noting that, for example, Farxiga was one of those factors was the authorized generic. And then my second question, which pipeline events for the rest of 2024 do you get most excited about? And which do you think the Street might be underappreciating and what are we missing if so? And if I could sneak in the last one. You said M&A will slow down earlier today. As you've got most of what you need. I know you don't have a KRAS though, perhaps you could tell us what your thoughts are around KRAS and why that isn't in your portfolio? Pascal Soriot -- Chief Executive Officer Thanks, Christopher. So maybe, Ruud, you could take the first one, and I'll try to address the others. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Yes. Yes, an excellent question. We have seen very strong growth in the United States for both Farxiga and Symbicort. It's driven by two different factors. First of all, we have launched an authorized generic Farxiga in the United States. The option for patients to have a lower cost option as well. And so far, we are very pleased with that introduction of this new -- not new medicine, but this new offer to patients. And of course, we will not know until, let's say, a few quarters more how the products will be perform. But so far, the feedback has been extremely strong. Equally, I think it's important that looking at Farxiga in totality, that the growth across the world is extremely strong on the basis of the CKD and heart failure indications. And there's no reason to believe that, that will slow down anytime soon. So that's good news. Symbicort, we have closed our list price, the so-called reg price in the United States, like other competitors have done as well. So we need to see how that will evolve in the next few quarters. So it's a little bit of a new dynamic in Part D, let's say, in Quarter 1 for products. But all in all, a very nice first few months, and we will monitor it very closely, of course, moving forward. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. I mean, try the other two questions quickly in the interest of time, is the pipeline and what is more exciting until 2030, Christopher, I would again invite you to join us in Cambridge. We are offering free tickets, a visit to if Cambridge. And I'm sure we'll find a way to give you a nice lunch, too. On the M&A, I said it will slow down. It doesn't mean it will be 0. What I meant to say earlier in terms of slowing down is from a technology, from a platform viewpoint, I think we have acquired and built most of what we need for now and we need to execute on what we've got. But it doesn't mean, of course, BD will come down to zero. And in terms of the specific question, concern, I want to answer this one. But we have our own internal program, and we can discuss some of those things again in Cambridge. So I'll move to Eric Le Berrigaud at Stifel. Over to you, Eric. Eric Le Berrigaud -- Stifel Financial Corp. -- Analyst Next question to come back on Farxiga and Symbicort in the U.S. Maybe more specifically on Farxiga, is there any way we can get any idea about the one-off could be into the Q1 numbers with the inventory buildup for the authorized generic. And on Symbicort, in the context of the drug being genericized in the U.S., we're expecting sales to go down. It was up 28% in Q1. What could be the dynamic for U.S. Symbicort for the full year '24? And then a more general question. We see more and more companies simplifying, streamlining the organization by combining the different divisions in one single like vaccine with pharma or onco with the rest of pharma. And you're still operating with different entities like onco, BioPharma, Alexion, D&I. Could you maybe summarize maybe you're thinking about doing things differently, but the benefit of doing the way you do and benefit versus risk and complexity? Pascal Soriot -- Chief Executive Officer Yes. So let me start with this question, and Ruud can cover Farxiga and Symbicort in the U.S. It's not still, it's actually we moved to that structure not that long ago, a few years, of course. But in our industry two, three years is not a long -- or four years is not a long time. I truly believe in the in the importance of being focused, on the one hand, people say you have too much; on the other hand, we say, well, put everything together. So I think the reason why we can succeed with our portfolio and leverage that portfolio is because, indeed, we are focused. We're focused on oncology, biopharm and rare disease. And anybody who's operated in oncology I think would, hopefully, was made that oncology is very specific. This is very specific and just the same as cardiovascular, you need to build capabilities. And you can do this if you do two things. First of all, recruit the right talent to understand the environment they are in. And secondly, create a culture and in a community where people feel they work together to the same goal. In the case of cancer, the goal is eliminate cancer as a cause of death. And every immunity in the company has this total focus, that share purpose, and that's what drives people. People come to work to make a difference and make a difference in the field they are in and the field they love typically. So I think this is really the reason why we can actually succeed, and we'll intend to keep that structure as it is. Ruud, over to you. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Yes. Thank you, once again, Eric, for the two questions. First of all, once again, let me remind you about the U.S. is a very important market for Farxiga, there's no doubt, but it only represents less than 25% of our global sales. And we are very pleased to see that the brand is growing extremely fast, not only in the United States but across all the other geographies. Specifically to your question, can you provide a split between the authorized generic and the brands, the short answer is we're not going to do that. But equally, of course, you can look at the script volume, if you analyze the script volume of Farxiga, is the Farxiga brand as well as the authorized generic. Now whether the strong initial growth will continue moving forward. We need to see that. We simply don't know. Equally for Symbicort, Symbicort it's quite amazing that after 20 -- more than 20 years of initial launch, that Symbicort is still annualizing more than $2 billion a year. Very fast growth again in the emerging markets, but also equally this year so far in the United States. And it's heavily driven by the fact that we have an authorized generic available as well as we have also lowered our WAC, the so-called list price, in the United States. So it becomes more affordable for many patients. And once again, whether that will continue during the course of the year needs to be seen. But so far, it's very pleasing to see that both brands are off of a very strong start in the United States as well as outside of the United States. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. Maybe I would add that everybody talks about one-offs. And to be honest, I'm not sure why there's such a focus on one-offs. If you look at Farxiga in the U.S., Q4 sales were $450 million, Q1 sales are $470 million. And if you look at the trends over the last few quarters, we've had a very strong trend. And if you may be combine this with the prescription trend was talking about, they sell a little bit of stock up. But it is not really what drives the trend for Farxiga, it's a very strong trend, not only in the U.S. but across the world. So every country is behaving the same way. We have very strong uptake in disease, heart disease, diabetes, etc. The next one is Steve Scala at Cowen. Over to you, Steve. Steve Scala -- TD Cowen -- Analyst Thank you so much. I have two questions. First, DBO6 hit its primary completion in March. -- is the data in-house? And is that underpinning your confidence? And second, why is there, what seems to be a long delay in presenting the oral GLP-1 and oral PCSK9 data? I could think of 4 possible reasons. One, there's a lack of appropriate venues. Two, AstraZeneca is strategizing on next steps on how to approach the market and wants to figure this out first. Three, there's some issue with the molecules or data that you're working through, perhaps it is underwhelming. Or four, we're just being too optimistic on how long this all takes. So any thoughts would be appreciated. Pascal Soriot -- Chief Executive Officer Thanks, Steve. So let me just address the last onen quickly, and then we could talk about DBO6. And you forgot one option which is our policy, and our policy is to present data at medical congresses and that's what we have decided to do, we stick to this. But maybe your second option is also part of it. For sure, we are, in the meantime, strategizing what we're going to do with our portfolio and how we develop this product. But really, the driving force is simply we debated it internally because you raised a good point, but we concluded we didn't want to do -- to come up with an exception here. And so you'll have to wait for the next potential option as a medical congress. We are, by the way, I have said, I think I can confirm, we're starting phase 2 this year. So we are on track, and we will not be preparing phase 2 if we were not confident with the oral group 1. DBO6, Susan, do you want to cover that? Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes, sure. So DESTINY Breast-06 is obviously a setting earlier than DESTINY-Breast04. It includes the IHC 1+ and 2+ as well as a group -- the ultra-low group. And the confidence in DESTINY Breast-06 is really built from the DESTINY-Breast04, which we obviously presented some time ago. So we are looking forward to the data. We said it's first half of this year. So hopefully, you don't have to wait too long for getting those data, and we're eager to share the with you. Again, just as a reminder, the primary endpoint is PFS in the HER2 low -- so at the IHC 1+ and 2+, and then there'll be descriptive analysis of the HER2 ultra-low patient population as well. And as a reminder, further, even though these patients are below the 1+ category, they still have a higher number of HER2 receptors on the cell surface than normal epithelium. So just to put numbers on that. Normal epithelium for HER2 is about 20,000 receptors per cell. At the 1-plus to 2-plus ranges between 100,000 and 200,000. So in that ultra-low group, you've got somewhere between 20,000 and 100,000 receptors per cell. So you can see that there's probably a significant proportion of that group that will have higher expression level of HER2 on the cell surface than normal epithelium would. And that's one of the reasons why we think there's a potential to go beyond the 1+ group into that ultra-low group and see benefit over the current standard of care chemotherapies. Pascal Soriot -- Chief Executive Officer Thanks, Susan. Next question is from Simon Baker at Redburn. Over to you, Simon. Simon Baker -- Redburn Partners -- Analyst Thank you. Pascal, for taking my questions. Two, if I may, please. Firstly, going back to Farxiga. I just wonder if you could talk us through the rationale for the timing of the authorized generic now. I maybe missing something, but the compensation pattern goes in October 25th. So some thoughts there would be helpful. Alongside also the FDA issuing a request for pediatric studies in March 2019, that hasn't yet been reflected in the orange book. So I just wondered what the state of that was. And then secondly, on TROPION-Lung10, you've moved forward with one of the combinations, which is in the TROPION-Lung04 study, obviously, on high confidence. I just wondered where that -- where your confidence rests with the combination with Volusomig and Sebestemic? Pascal Soriot -- Chief Executive Officer Thank you, Simon. So Ruud, in the past, you were complaining not enough questions to BioPharma. You're now going to claim too many questions. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals No, it could be less. But no, it's It's a great question, Simon. So why now, it's relatively straightforward. First of all, we have a huge opportunity still in CKD and heart failure. And it is clear from all the analytics we have done that a lower-cost option for some of those patients are very important in order to capture even more volume. The second one is also true, to that extent, it also mitigates the impact of a potential MCAP. So the inflation penalty in the United States as well. So those two factors were important regarding the timing. Regarding the pediatric indication, it's not yet in the orange book, so that's a very good observation. But equally, we feel comfortable that the FDA will grant us the pediatric indication. And hence, our base assumption is still that the pattern will stay in place till April 2026, which we have signaled multiple times. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. Susan, do you want to cover the second question? Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. In the TROPION-Lung10 study, as I mentioned before, is the combination with rilvegostomig and data in a patient population that's greater than 50%. As we said before, what we see in terms of the evolution of the IO checkpoint inhibitor landscape is a segmentation. And our two bispecifics, we see the rilvegostomig PD-1 TIGIT as being focused on the IO sensitive or highly expressing PD-L1 part of the population, and that's in line with what you see in terms of the patient population in TROPION-Lung10. Rilvegostomig, we're focusing that on the tumor types where CTLA-4 sensitivity has been demonstrated and can add extra efficacy. Obviously, with rilvegostomig, it is designed to be better tolerated than the combination of CTLA-4 and PD-1 separately because it only binds CTLA-4 in the presence of PD-1. And we have shown an improved safety profile, but it still does have more side effects than you get with a PD-1 agent on its own or with rilvegostomig. So we will select that drug where it will make the biggest difference. And you'll see that as the -- you see the evolution of the EVOLVE studies with rilvegostomig. Pascal Soriot -- Chief Executive Officer Thanks, Susan. Next question is from Andrew Berens at Leerink. Over to you, Andrew. Andrew Berens -- Leerink Partners -- Analyst Thanks. Congrats on the strong quarter. Kind of a big picture question on the AKT class given the results of Truqap. Just wondering how you see it integrating the evolving paradigms. It's obviously incredibly dynamic. And specifically, I don't know how you guys see the AKT class integrating with CDK2 agents, CDK4 selective drugs, the oral [Inaudible], to graders, and also the ADCs that are starting to spread their wings into a number of these areas. Pascal Soriot -- Chief Executive Officer OK. Andrew, thank you. Thank you for asking one question. Actually, Susan, over to yo? Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. So thanks for the question. So AKT is obviously part of the PI3 kinase AKT pathway, which is the most commonly mutated or aberrant pathway in cancer. So we think this is a very important mechanism. And we are looking at combinations of capivasertib with our camizestrant, our oral SERG drug that's already in multiple phase 3 trials as well. So I think there's potential for it to be further expanded beyond the current set of trials that we've already got in development. And I do think there are data that it can be a potential combination agent with a number of the other things that you raised. We do have a CDK2 inhibitor, a highly selective CDK2 inhibitor, which we profiled at the AACR meeting that was in San Diego earlier this month. We think that's a very exciting molecule that will address the resistance mechanisms to the CDK4/6 inhibitors. And so I do think that this cost of agents can be combined with the emerging both new endocrine backbone agents and the newer versions of things to address the mechanism and the resistance to CDK4, which typically is represented by sensitivity to CDK2 inhibition. Dave Fredrickson -- Executive Vice President, Oncology Business Just maybe to also build on to Susan's answer, and I think what's important and great about this is we're talking about leadership in breast cancer. And as part of that leadership in breast cancer, we're really looking to build and improve upon the two existing pillars in the treatment of metastatic disease and then adding a third. And the existing treatments and existing pillars are ET plus or minus CDK4/6 and then obviously chemotherapy. I think what's important about the AKT class is it gives an opportunity for patients to continue to stay on ET-based therapies, which has a lot of benefits associated with it. We also know, though, that at some point, ET therapies are no longer effective and that it's a time to start to switch toward chemotherapy. And within that, that's where the ADCs now create a third new pillar that sits in between classical chemotherapy and ET-based approaches. We hope that DBO6 will provide even a further therapy option that sits within this. But you start to see the opportunity to begin to offer to physicians more options for how they can think about treating their patients as the disease progresses. And we've got best-in-class therapies to go into each of those pillars and then gives us an opportunity to look at combinations down the road. Pascal Soriot -- Chief Executive Officer Thanks, Dave. Actually, this discussion gives me chance to go back to, I think, the question Richard asked earlier about the pipeline. I mentioned combinations, but also this pipeline enables us to actually shape the treatment algorithm, as Dave was suggesting a minute ago, in breast cancer or lung cancer. And it also enables us to better partner with lung cancer oncologists or breast cancer oncologists and really truly be part of the way breast or lung cancer or other cancers are treated. And it's true for cardiologists, not only managing cardiovascular risk, but also if you look at amyloidosis, we have 2220, which is an amyloid depleter, we also have a [Inaudible]. So Again, all of those things will give us a great chance to not only work with key physicians, but also leverage our portfolio to shape treatment algorithms and look at combinations. Emily Field of Barclays. Emily, over to you. Emily Field -- Barclays -- Analyst Hi. Thanks for taking my questions. Just two on respiratory. A lot of excitement about the tezepelumab COPD data to be presented at ATS. Given what we've seen so far, is it your expectation that this would be taken in late-stage development in a broader eosinophil population, i.e., over 150s and over 300s? And then on the back of that, similar to the obesity question that was asked earlier. You have so many assets in late-stage development in COPD. Maybe asking from our side, what should we be focusing on in terms of just all of the late-stage COPD programs that you have? Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. Thanks so much for the question. So I'll start with your first one which is about tezepelumab in our phase 2 core study, and then I will speak more broadly about this COPD portfolio. So you touched on HSI in our recent phase 2 trial completion, and we look forward to presenting those data at ATS in the very near future. As I'm sure you know, TESI is a monoclonal antibody directed against T-slip. It is the only biologic approved first here severe asthma with no phenotype, and we see tremendous potential for this molecule in COPD. The course phase 2 study was specifically designed to look at a broader population of patients. So it included patients irrespective of inflammatory drivers, eosinophil levels, emphysema, chronic bronchitis and smoking status, while other trials were more limited. And this included a prespecified subgroup analysis in populations with different eosinophilic levels, so including below 150, above 150 and above 300. We will present the data that we fully analyzed at the upcoming ATS meeting. But I will only venture to say that we are excited about the possibility of Tez in a broader population. It's worth noting that other molecules in this class are playing in the high eosinophilic levels, at more than 300 and eosinophils per microliter. And that's only about 35% of the population that's eligible for biologics. But those above 150 eosinophils per microliter are about 65% of the biologics eligible population in COPD. So we think that's a really important differentiator for this molecule. Now you also mentioned -- I think you also asked us about our plans to go forward together with our collaborators at Amgen. We are actively planning the next stage of development. You asked about our overall portfolio in COPD. And I think it's worth mentioning here that COPD is a very heterogeneous disease with multiple drivers. And to that end, we think that there are multiple mechanisms that may have substantial clinical benefit. So we are testing multiple mechanisms, and we are testing them in populations that allow us to differentiate them from each other. Tozorakimab, as we have previously described, is a differentiated IL-33 monoclonal antibody because it can bind and block both ST2 and RAGE/EGFR signaling. We think that's really important in this disease because it not only blocks the inflammatory pathways, but it can also block mucus production and epithelial remodeling through RAGE/EGFR. So we view that as a differentiated mechanism, which we think may also have very broad utility in the COP population. So early days, we are reading into our phase 2 data and thinking about our phase 3 plans going forward, but I think that we have the potential to be really paradigm shifting for people living with COP? Pascal Soriot -- Chief Executive Officer Thank you, Sharon. Luisa Hector at Berenberg. Luisa? Luisa Hector -- Berenberg Capital Markets -- Analyst Thanks, Pascal. Perhaps I could touch on capital allocation. So your high burden of deal-related payments will start to ease at the end of this year, so that improves your cash flow outlook. So will this lead to a change in the nature of deals which you can do? And perhaps you could remind us of your dividend policy given a slightly unusual announcement of the 2024 dividend recently. Pascal Soriot -- Chief Executive Officer Thanks, Luisa. Aradhana, your favorite question. Aradhana Sarin -- Chief Financial Officer Thank you, Luisa. So our capital allocation priorities remain unchanged. As you've seen, we've been very active on the BD front, but we also now sort of need to create value actually from the acquisitions and the partnership transactions we've done. So we need to focus on execution of those transactions. We did announce a 7% dividend increase in line with our progressive dividend policy, but also recall that we did not increase dividends in 2022. And so the Board takes a decision on when and how they can increase dividend based on our overall capital allocation priorities. But the capital allocation remains unchanged. Pascal Soriot -- Chief Executive Officer Thank you, Aradhana. So thank you very much for all your great questions. I think it is time for us to respect your time and close this call. Again, thank you so much for all your great questions and your interest in AstraZeneca, and have a good rest of the day. Answer:

AstraZeneca's first-quarter results 2024 webinar for investors and analysts

Operator Good morning to those joining from the U.K. and the U.S. Good afternoon to those in Central Europe, and good evening to those listening in Asia. Welcome, ladies and gentlemen, to AstraZeneca's first-quarter results 2024 webinar for investors and analysts. Before I hand over to AstraZeneca, I'd like to read the safe harbor statement. The company intends to utilize the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to the operations and financial performance of AstraZeneca. Although we believe our expectations are based on reasonable assumptions, by their very nature, forward-looking statements involve risks and uncertainties and may be influenced by factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Any forward-looking statements made on this call reflect the knowledge and information available at the time of this call. The company undertakes no obligation to update forward-looking statements. Please also carefully review the forward-looking statements disclaimer in the slide deck that accompanies this presentation and webinar. [Operator instructions] And with that, I'll now hand you over to the company. Andy Barnett -- Head of Investor Relations A warm welcome to AstraZeneca's first-quarter 2024 presentation conference call and webcast. I'm Andy Barnett, head of investor relations at AstraZeneca. And before I hand over to Pascal and other members of the executive team, I would like to cover some important housekeeping points. Firstly, all of the materials presented today are available on our website. This slide contains our safe harbor statement, which I'd encourage you to take the time to read. We will be making comments on our performance using constant exchange rates, or CER, core financial numbers, and other non-GAAP measures. A non-GAAP to GAAP reconciliation is contained within the results announcement. All numbers quoted are in millions of U.S. dollars, unless otherwise stated. This shows the agenda for today's call. And following our prepared remarks, we will open the line for questions. As usual, we will try and address as many questions as we can during the allotted time, although I would ask participants to limit the number of questions you ask to allow others a fair chance participate in the Q&A. And with that, Pascal, I'll hand over to you. Pascal Soriot -- Chief Executive Officer Thank you, Andy. Good day, everybody. I'm pleased to report that we have made a very strong start in 2024. Total revenue grew by 19% in the first quarter, reflecting continued strong demand. And core earnings per share rose by 20 -- 13%, sorry. Recall the first quarter of 2023 benefited from a $240? Million gain in other operating income following the divestment of Pulmicort Flexator in the U.S. Collaboration revenue and other operating income were minimal this quarter, which makes the EPS year-over-year growth all the more impressive. We are also pleased to announce an increase in the annual dividend of 7% at the Annual General Meeting earlier this month. This increase is in line with our progressive dividend policy and reflects the continuing strength of AstraZeneca's investment proposition for shareholders. Please advance to the next slide. We saw strong double-digit growth across our therapy areas in the first quarter. This is also the first quarter where quarterly revenue from our oncology and BioPharma businesses exceeded $5 billion, and where this has exceeded $2 billion, reflecting the value our medicines bring to patients globally. We saw 19% growth in both the U.S. and Europe this quarter, driven by strong demand. Our business grew substantially in the emerging markets and growth was announced -- especially pronounced outside of China, driven by our sustained presence and commitment to this market. Next slide, please. Our strong pipeline momentum has continued into 2024, we announced positive trial results for LAURA and ADRIATIC, both of which have been selected presentation during the ASCO plenary, reflecting the important benefits seen for lung cancer patients. As a reminder, there are five presentations at the plenary, so two out of five is a very unusual result. We saw a number of exciting new approvals in the first quarter. The approval of Tagrisso in combination with chemotherapy establishes a new benchmark for efficacy in frontline EGFR-mutated non-small cell lung cancer. The approval of a HER2 in previously treated HER2 positive cancers is the first tumor-agnostic approval for HER2-directed therapy and offers new hope for patients with the right range of cancers. And finally, Ultomiris was approved in NMOSD, and we are now working on establishing Ultomiris as the new standard of care for this debilitating disease. This approval is further build on the momentum we are seeing from other recent approval listed here, and we're investing to ensure that each of these new opportunities reach full commercial potential. ADRIATIC and LAURA, if approved, coupled with the three approvals I've just described,and ongoing launches, have the potential to deliver several billion dollars in total revenue -- additional revenue in 2030. And this is what our pipeline is delivering in the first quarter of 2024. With that, please advance to the next slide, and I will hand over to Aradhana, who will take you through our first quarter financials. Aradhana Sarin -- Chief Financial Officer Thank you, Pascal. And as usual, I will start with our reported P&L. Please turn to the next slide. Total revenue in the first quarter increased by 19% to $12.7 billion, predominantly resulting from strong product sales, which grew by 18%. The underlying demand for our medicines across the board was very strong in the quarter across both brands and across geographies. Enhertu and Tezpire continued their strong growth trajectory, and as a result, Alliance revenue increased by 59% to $457 million, driven by profit shares in regions where our partner booked product sales. Please turn to the next slide, which shows our core P&L. The product sales gross margin was 82% in the quarter. As previously stated, we still expect gross margin for the year to be slightly lower than last year due to strong growth for partner medicines, including in Enhertu and Tezpire as well as increased product supply to Sanofi for Beyfortus into the 2024-25 RSV season. In the second half, we see additional impact from usual seasonal impact from medicines such as FluMist. Total operating expense increased by 15% in the quarter. R&D spend increased by 18%, partly driven by the phase 3 trial starts, including dapa combinations with baxrostat and veltinerone. We continue to anticipate R&D spend will remain in the low 20s percentage of total revenue, inclusive of investments we are making to maximize the potential medicines acquired in recent business development transactions. We continue to show operating leverage. Supporting the 19% revenue growth, SG&A increased by 13% in the quarter. We have seen strong initial uptake supra, Truqap and Wainua in the U.S., and we're investing behind this revenue growth as well as behind our existing brands, such as Breztri free and Farxiga. We're also increasing our promotional efforts behind our rare disease medicines to support continued growth. We anticipate quarterly variations in our operating expenses given the nature of our business. Despite limited contribution from other operating income this quarter, we saw core operating profit growth of 15% and core EPS of $2.06. Please turn to the next slide. In the first quarter, cash flow from operations was $2.5 billion. We saw capex of $417 million in the quarter, and we continue to anticipate capex to increase by approximately 50% on a full year basis to support increased manufacturing capacity and support our growth. We had deal payments of $2.9 billion, including upfront payments for icosovax and grace acquisition, both of which closed during the first quarter. We also paid the third and final payment for shareholders of Acerta. Lastly, we paid the second interim dividend for 2023. At the end of our Q1, our net debt-to-EBITDA ratio was 1.9 times. We anticipate the announced Fusion and Amylin transactions to close in the coming months strengthening our radiopharmaceutical capabilities and expanding our presence in rare endocrinology. As a result of recent business development and debt refinancing, we expect finance expenses to grow compared to prior year. Reflecting the strength of our business, we are reiterating our full year guidance for both total revenue and core EPS at constant exchange rates. With that, please advance the next slide, and I will hand over to Dave, who will take you through our Oncology performance. Dave Fredrickson -- Executive Vice President, Oncology Business Thank you, Aradhana. Next slide, please. Oncology revenues grew 26% to $5.1 billion in the first quarter, driven both by deal digit growth across all regions and strong demand for our key medicines. Tagrisso global revenues grew 15% in the quarter, reflecting continued global demand for ADAURA and FLAURA. Following U.S. approval in February, we've seen strong interest and early uptake for FLAURA2 in the frontline setting, with oncologists particularly focused on patients with L858R mutations and CNS metastases at baseline. Lynparza delivered product sales growth of 11% in the first quarter and remains the leading PARP inhibitor globally across all tumor types. Imfinzi total revenues grew 33% on continued strength in biliary tract cancer with TOPAZ-1, which is now approaching peak market share penetration in the U.S., Japan and Europe. Launches continue at pace across emerging markets, where biliary tract incidence and prevalence is high. And as previously communicated, we recognized a 25% mandatory price reduction in Japan effective from February 1st, and anticipate a second mandatory price discount later this year. For the first time, we have split out Imjudo in our reporting and are please with its launch trajectory. We've established a strong foundation in hepatocellular carcinoma with HIMALAYA and see continued growth in non-small cell lung cancer with POSEIDON. Calquence total revenues increased 35% in the first quarter, driven by sustained BTK inhibitor leadership in frontline CLL across the U.S. and Europe. Enhertu total revenues increased 79% in the first quarter. Again, we drove sequential market share growth in second-line HER2-positive breast cancer in the U.S. and Europe, where considerable growth remains. We see continued adoption in HER2 low across many global markets and eagerly await the DESTINY Breast-06 readout, which brings the potential for further expansion, moving Enhertu one line earlier. Following approval in November last year, we are pleased with the strong Truqap adoption in the biomarker altered population, achieving $50 million in the first quarter total revenues. Looking forward, we anticipate further expansion of Tagrisso with the approval of FLAURA2 in frontline non-small cell lung cancer and maximizing the U.S. launch of Enhertu across HER2-expressing tumors. Lastly, we're excited that both ADRIATIC in limited stage and LAURA in stage 3 unresectable cancer have been selected for the ASCO plenary session. Each of these represents substantial growth opportunities in the near future and beyond, as Pascal has already outlined. With that, please advance to the next slide, and I'll hand over to Susan to cover key R&D highlights in the quarter. Susan Galbraith -- Executive Vice President, Oncology Research and Development Thank you, Dave. We've had an exciting start to the year with a number of key presentations, including data for our new generation PARP inhibitor, sereparib, in advanced solid tumors presented at this year's AACR. This quarter, we announced the proposed acquisition of Fusion Pharmaceuticals, furthering our ambition to redefine the backbone of current cancer treatment. Along with chemotherapy, radiotherapy has been a mainstay of cancer treatment for decades. In fact, 30% to 50% of all patients receive radiotherapy. Whilst this treatment is effective, there's also a toxic off-target effects. Fusion has developed a clinical stage portfolio of radio conjugates that are designed to deliver radiation therapy to tumor cells in a more targeted manner than external beam radiation. As we've discussed already, we believe the future of cancer care is in combinations and there's immense potential to combine radio conjugates with other modalities in our pipeline, including next-generation IO bispecifics, cell therapy, T-cell engagers and our DNA damage response agents. Importantly, the planned acquisition of Fusion accelerates our radiopharmaceutical manufacturing to commercial scale capabilities by over three years and offers additional security in actinium supply, with multi-source supply agreements in place. The lead pipeline candidate, FPI-2265, has potential to be the first actinium-based PSMA-targeted radiotherapy approved for the treatment of postletetium metastatic gastric-resistant prostate cancer. FPI-2265 is differentiated and has potential to be both more potent and tolerable than currently approved B2moedia conjugates. Data presented earlier this month at AACR demonstrated further valuation of FPI-2265's efficacy and tolerability. PSA50 response was achieved in 50% of patients overall and 43% of the lutetium-treated patient population and 54% Otsium-naive population. Furthermore, there were zero discontinuations related to Xerostomia, a common toxicity. We believe that our proven expertise in targeted delivery, together with Fusion's clinical stage portfolio and manufacturing capabilities, presents an opportunity for clear leadership in the radio conjugate space. And with that, please advance to the next slide, and I'll pass over to Ruud to cover BioPharmaceuticals performance. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Thank you, Susan. Next slide, please. BioPharmaceuticals delivered total revenue of $5.2 billion in the first quarter of 2024, representing growth of 16%. Our key underlying growth drivers remain in place, including the continued growth of the largest cardiorenal medicine on the market, Farxiga. The increased uptake of medicines of our biologic medicines in severe asthma, and the ongoing momentum behind Breztri, our inhaled COPD medicine. In the United States, demand for Farxiga were strong in the quarter and benefited from the launch of a North Generic. We saw solid growth in emerging markets despite entry of generic competition in some countries. Presently, we still anticipate Farxiga may be included in China VBP in the second half of 2024. Additionally, we saw a strong Symbicort performance in the first quarter despite generic pressures. This was particularly evident in emerging markets, where we saw strong underlying demand in both China and ex China markets, strengthening its position as market leader in the region. Awareness of Airsupra continues to grow, and more than 18,000 healthcare practitioners have prescribed this new medicine, translating into 65,000 prescriptions in the quarter. The performance has been particularly strong among specialists. Airsupra already has over 50% of new share prescriptions by allergist and over 10% share of prescriptions from pulmonologists. As Airsupra is still in the first few months of launch, our revenues in Quarter 1 did not reflect the full extent of initial demand due to introductory discounts. These introductory discounts will fade through the year as we continue to expand access. Awareness is also building for Wainua, and we are very pleased to report our first revenues this quarter, following its recent approval for ATTR polyneuropathy in the United States. Wainua has only been available for a few weeks, but we are seeing good uptake among patients including some who are new to the class of medicine and some that have switched from other brands. Finally, we saw continued sales from Beyfortus in Quarter 1, albeit with the expected seasonal drop versus Quarter 4. We were particularly pleased to see the real-world data coming out of the U.S. with the center of disease control reporting that Beyfortus was 90% effective at preventing infants from being hospitalized with RSV. Next slide, please. I will now hand over to Sharon to discuss our ongoing development program for Wainua, TTTR CardioM, where we have the potential to reach up to 0.5 million patients globally. Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Thanks, Ruud. I wanted to take the opportunity to highlight results from a 66-week analysis of exploratory cardiac endpoint in the phase 3 NEURO-TTRansform study of Wainua in hereditary ATTR polyneuropathy. In a predefined cardiac subgroup of hereditary ATTR polyneuropathy patients, treatment with oplontresin showed stabilization or improvement in cardiac function and structure relative to external placebo, including levels of NT-proBNP, a measure of cardiac stress; and a trend toward improvement in echocardiographic parameters such as left ventricular wall thickness, diastolic and stroke volume. These results provide confidence in our phase 3 CARDIO-TTRansform trial in ETR cardiomyopathy. ATTR cardiomyopathy is a systemic, progressive and fatal condition that typically leads to progressive heart failure and often death within 3 to 5 years from disease onset. With more than 1,400 patients enrolled, CARDIO-TTRansform is the largest, most comprehensive ATTR cardiomyopathy study and, importantly, includes cardiovascular outcome endpoints. In other key programs, we continue to maximize the opportunity for our best-in-class SGLT2 inhibitor, Farxiga. We have the potential to manage cardiorenal disease through 3 distinct mechanisms, complementary dual mechanisms combined dapagliflozin with boltinrenon, baxtat or zibotentan, I am delighted to announce that all three combinations are now in phase 2. Please move to the next slide, and I will now hand over to Marc, who will cover our Rare Disease portfolio. Marc Dunoyer -- Chief Executive Officer, Alexion, and Chief Strategy Officer, AstraZeneca Thank you, Sharon. Can I get the next slide, please. I'm delighted to report Rare Disease delivered our first $2 billion total revenue quarter, up 16% year on year. The growth rate here includes a small benefit from countries with high inflation. Growth was driven by neurology indication, increased patient demand and launches in new markets. In the quarter, Ultomiris revenue grew 34%, with the vast majority of growth coming from generalized mastenagravhis. GMG patients grew by 41% driven by demand in Europe and established rest of the world. In the U.S., with the highest number of new-to-brand patients in the quarter, supported by our increased promotional activities. During the quarter, we received U.S. approval of Ultomiris in NMOSD. In the phase 3 CHAMPION-NMOSD trial, Ultomiris relapses over 138 weeks. Given the strength of this data, we expect Ultomiris to be the treatment of choice for relapsing patients naive to biologics. We expect patient and Soliris convert to Ultomiris over the short term. Following approval in U.S. and EU, Voydeya and add-on therapy, ensure that PNH patients who experienced clinically significant extravascular hemolysis are able to continue on standard of care, Ultomiris or Soliris. Beyond complement, both Strensiq and Koselugo grew 21% and 18%, respectively, driven by content patient demand as well as order timing in certain tender markets. Please advance to the next slide. During the quarter, we announced our plans to acquire Amolyt Pharma, which includes a phase 3 asset in eneboparatide for patients with hypoparathyroidism. Hypoparathyroidism is characterized by deficiency in parathyroid hormone production, which results in significant disregulation of calcium and phosphate leading to life-altering symptoms and complications, potentially including chronic kinesis. It is one of the largest known rare diseases. Phase 2a data from eneboparatide showed a normalization of serum consume level and a reduction in dependence on daily calcium and vitamin D supplements, both clinical priorities for treating patients. Data also suggested that eneboparatide has a potential to restore normal bone turnover and preserve bone mineral density. We believe eneboparatide has blockbuster potential and anticipate data from the phase 3 CALYPSO trial in 2025. With that, please advance to the next slide, and I will hand back to Pascal for closing remarks. Pascal Soriot -- Chief Executive Officer Thanks, Marc. Can I have the next slide, please? As you have heard, our company has made a very strong start to 2024 with demand for our medicines continuing to grow. Looking ahead, we are once again anticipating multiple pivotal trials throughout the remainder of the year. Several important potential catalysts are shown here as well, as DESTINY Breast-06, which Dave spoke about earlier, I would like to highlight CAPItello-281, which will be the first registrational study of Truqap in prostate cancer, an important potential new growth driver for this medicine. Since our full-year 2023 update, we have initiated the eight pivotal trial shown here, all of are potentially transformative for patients and could meaningfully accelerate our growth. In addition to the exceptional delivery from our internal pipeline, we've also been directive with business development, building capabilities and adding new platforms to strengthen our R&D efforts in areas, which we believe have the potential to radically improve patient outcomes, including radio conjugates, gene therapies and cell therapies. We're very much looking forward to share more details about our pipeline and the long-term outlook for our company at upcoming Investor Day on the 21st of May. Please advance to the neck lie, and we will go to the Q&A. [Operator instructions] And with that, let's move to the first question, which is from James Gordon of JPM. Over to you, James. James Gordon -- JPMorgan Chase and Company -- Analyst Hello. James Gordon, J.P. Morgan. First question is on '24 guidance. So it's a very strong revenue growth, 19%. In order not to grow revenues at teens for the year, it looks like you need to only grow at about 10% for the rest of the year. So in terms of headwinds, we should be mindful of that would drive 9 percentage points of deceleration. And I heard a comment on maybe for Farxiga BBP and Imfinzi price in Japan, but anything else and in particular, for Farxiga, Symbicort and Tagrisso that were very strong this quarter? Are there things through that we need to watch out for? Or does that look quite sustainable? And also on '24 guidance, just on opex, the ratio is a little bit good to say, but this is with the strong top line before the two deals. So if revenue is a little slower through the year,and you consolidate these deals, do we need to be careful on those ratios? Or can you still keep a pretty high margin? And if I could squeeze in a quick second question, just Ecogen and the oral G1. So I believe you've expanded the trial and maybe taking dosing higher. So on that, what is the latest thinking in terms of where we might see the data? I didn't see a reference to ADA. And how are you now thinking about how competitive this product might look in terms of the weight loss and other aspects versus some other recent readouts from competitors? Pascal Soriot -- Chief Executive Officer Thank you, James. Just sorry, Aradhana, maybe you can take the first one. And Sharon, would you take the second one? Aradhana Sarin -- Chief Financial Officer Great. Thank you, James, for the question. it is obviously early in the year. And as you know, generally, we don't update or provide more color on the guidance in first quarter. You've seen from the reported results, the underlying trend in our revenue product sales is very, very strong across the board. You've also mentioned some of the uncertainties that Rue also mentioned as well as Dave. So those uncertainties are there for the remainder of the year. However, if our momentum continues the way it has been in the first quarter and some of these uncertainties on VBP pricing, etc., are in our favor, you can think about our product revenues, our product sales and alliance revenues could be at the upper end of our range or higher. So -- but again, we're not updating our guidance at this point. We will continue to invest in our R&D for the long term, including the acquired product and continue to invest in SG&A to drive the top line momentum that you've seen. Operating leverage continues to be a focus for us. Again, you've seen this quarter as well, 19% revenue growth and 13% SG&A growth. And we will try to maintain stronger revenue growth than expense growth in the coming quarters as well. With that, maybe Sharon? Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. So thank you for the question about AZD5004 oral GLP-1 receptor agonist. We're really excited about this molecule and its potential to treat the interrelatedness of cardiometabolic and cardioredisease. You asked specifically about the phase 1 study. And as I'm sure you're aware, we completed, together with Ecogene, a highly controlled inpatient phase 1 earlier this year. We have the data in hand and look forward to presenting that at an upcoming medical conference later this year. You also asked about how we view the competitive position of this molecule. And recognizing that it is a highly competitive field, we do feel very optimistic about the potential for this molecule as a stand-alone as well as in combination. So when we think about how we're treating obesity and metabolic health, I think we honestly do ourselves a disservice by referring to this as obesity. What I'd like us to do is think about this more clearly is treating the interconnectedness of disease. And to that end, we are uniquely well positioned to combine this orally available molecule with other molecules in our portfolio that help address those interrelated diseases. As an example, combining 5004 with our SGLT2 inhibitor. So when we think about this, we can imagine that at a fixed dose, we may want one dose that would be compatible for fixed-dose combinations and another dose that would be more compatible for additional weight loss in obesity indications. And we'll keep that in mind as we continue to design our clinical development program. Moving forward, we have publicly stated that we will be launching two phase 2b studies later this year, one in obesity and one in type 2 diabetes. Pascal Soriot -- Chief Executive Officer Thank you, Sharon. And James, you asked the question of the doors, but you got to remember that not everybody needs to lose the same amount of weight. And so as you target higher weight losses, Sharon was talking about in the obesity segment, you would expect to have to go through a titration regimen and get to a higher dose. So it's not surprising that we would explore the doses depending on what loss patients are needing. The next question is Seamus Fernandez, Guggenheim. Over to you, Seamus. Seamus Fernandez -- Guggenheim Partners -- Analyst Great. Thanks for the question. So I guess as, Pascal, a little bit of a preview of the upcoming analyst event. Just hoping that you could provide us with a little bit of color on how you're thinking about potential for updated guidance. Is the most important factor of the meeting really giving and helping us understand long-term visibility around revenue? Or is it more on a margin or a little bit of both? And then just a second question. As we think about the three products that you've highlighted on the BioPharma side of the business, the oral PCSK9, the GLP-1 and the long-acting amylin, just hoping you could help us or help provide some context around the which you're most excited about and perhaps when we might see data on all three. Pascal Soriot -- Chief Executive Officer Thanks, James. So the first question about the Investor Day, I guess I would like to invite you to join us in a beautiful Cambridge to see more of the details of what we're going to present. But the answer to your question is a little bit of both. Essentially, what we want to do is show people how we are looking at what I call today, tomorrow and the day after. Today is what do we intend to deliver in terms of our financial progression in '24, '25, '26. Tomorrow is what are the products we are going to launch that will drive our growth between 2025 and 2030, and what is our strategy there, what do we intend to do with our pipeline, and what other products we believe are growth drivers to 2030. And the day after tomorrow is really the sort of post-2030 period. And what are -- what do we believe are the technologies that will shape the future of medicine in oncology and beyond, and how are we building some of those platforms that will help us shape -- participate in shaping the future of medicine in the therapy areas where we are. So that's really what we want to do at the Investor Day. And we also offer, for those of you who are early risers and will be physically on site, we'll also give you a chance to look around our site and experience a little bit what we have on site. The second question, let me give you a couple of comments and then maybe Ruud and Sharon could add. We are always more excited about products for which we have more advanced data. Those three products are, of course, exciting, but we have more data for the PCSK9, which is a very exciting product. And also more data for the oral group GLP-1. Long-acting amylin is technically interesting. We need more data, but it certainly so far looks pretty good. And we think we can actually, as Sharon said, with the combination of the GLP-1 and the rest of our pipeline, not only PCSK9, but also dapa and also potentially Boxplot , he can make a difference in this segment of patients who need to lose weight but also manage their cardiovascular risk factors. And in the obese segment, where people need to lose 20%, 25% of their weight, then we can look at combining our overall GLP-1 with the long-acting amylin and some other mechanisms. Sharon, if you want to maybe also add a little bit on how you see this pipeline. Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. So I'll jump in on both. People often ask about which molecule I'm more excited about. And I find that very difficult to answer because, obviously, I'm very invested in all of them. But the first one that you asked about was our oral PCSK9 inhibitor, and we are extremely excited about the potential for this molecule. We will be releasing phase 1 data at an upcoming condom the very near future. But I think it's safe to say that set ourselves a very high bar with this molecule, but we asked that it be able to meet a major unmet medical need. We know that despite high-intensity statins, about half the patients with cardiovascular disease are not hitting their LDL targets. And so we asked this molecule to be able to offer substantial lowering on top of statins, and we're very encouraged by the data that we see. So we are actively moving forward with this molecule in clinical development and thrilled to be sharing the data at an upcoming conference. Relatedly, you asked about our obesity portfolio. And again, I think I would really think of it more as our optimal weight management portfolio, in which we are exploring both incretin and non-incretin pathways as multiple mechanisms to manage both weight and interrelated cardiometabolic and cardiorenal disease. So we are positioned to go beyond short-term weight loss and to deliver long-term weight management and healthy lean mass management, addressing cardiometabolic risk and also organ protection. And we think that we'll be able to achieve this by driving forward with multiple mechanisms in combination. Thinking about both the incretin pathways, as we've discussed earlier with 5004, and non-incretin pathways, for example, with long-acting Amylin. Long-acting amylin, as you can imagine, is a different route of administration and we think could offer some additive benefits outside of that, that we're already seeing in the incretin pathway. So we are accelerating several assets through phase 1. We spoke earlier about 5004, AZD-6234 is our long-acting amylin, ACD-9550 is our dual receptor agonist. And both of those added 2 molecules are progressing through phase 1. We look forward to sharing it with you when ready. Pascal Soriot -- Chief Executive Officer Thanks, Sharon. Ruud, anything you want to add? Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals No. Pascal Soriot -- Chief Executive Officer Cool. So let's move to the next question, Sachin Jain at Bank of America. Sachin over to you. Sachin Jain -- Bank of America Merrill Lynch -- Analyst Hi there. Thanks for taking my questions. Sachin Jain, Bank of America. First one today for Truqap. Strong first quarter, just any initial launch feedback. And then I'm going to try and go to Roche talked to $2 billion for their PI3K yesterday. I wonder if you could talk about the relative profile of your asset related to this and whether you'd go big, $2 billion in breast and size, the prostate opportunity that Pascal specifically called out? Second question is for Susan. AVANZAR is due in '25. When do we see the data that informs on your confidence? And what I'm after there is timing of any TROP2 biomarker data? And what should we focus on from TLO2 at ASCO? But I think Daiichi have commented to. And then last quick question for Sharon, statinnow 25 plus. Do you still plan an interim next year? Pascal Soriot -- Chief Executive Officer Dave, do you want to start? Dave Fredrickson -- Executive Vice President, Oncology Business Sure. Thanks, Sachin, for the questions. So on Truqap, we are really pleased with the launch and following what was a real positive reception to the presentation of the data we've seen that the uptake is really moving quite nicely. And I think that uptake in the biomarker population really speaks to the need to extend endocrine-based therapies. We see testing rates are well established by NGS in the U.S. So we've got over 60% on that. And while there was a previous standard of care with PI3K, we're seeing that rapidly get displaced, there still plenty of opportunity to continue to grow within that segment. So demand is off to a very good start, though I think that there is certainly much more opportunity for us to continue to grow. There's some late line bolus that we're probably seeing within the numbers as well. But again, I think that underlying demand and the indication that we got is very, very strong. On your specific question also around comparison to the ANOVA 120 data, from my and our understanding, I think that you first have to take a look at the inclusion criteria. The inclusion criteria are certainly different between that study and 291. In that study, the inclusion criteria only include patients who have progressed during or within 12 months of adjuvant ET completion. It's also limited to the PIK3CA patient population. So if you take a look at 291 within that context, we really have the de novo and the nonearly relapsers in the second line post CDK4/6 plus AI setting in addition to the fast progressors. And I see more like three-quarters of the patients falling into this de novo nonearly relapser population. So I'm enthusiastic about the opportunity in breast cancer. I'm enthusiastic about the opportunity also in prostate cancer. And I think you put these two together, and we've got the potential for Truqap to be a multi blockbuster. Susan Galbraith -- Executive Vice President, Oncology Research and Development OK. Thanks, Dave. So for AVANZAR, again, yes, as I said, the trial is going well. But the TROP2 biomarker data, I expect that we would be able to share those data at the congress within the next 12 months certainly. And as far as ASCO goes, one thing beyond the lung cancer data that I would encourage you to take a look at is the I-SPY 2 data, which is a neoadjuvant study in breast cancer. Again, looking at the combination of dapa and Imfinzi in that setting. So I think we continue to be happy with the profile that we're seeing for data plus IO across the first-line settings in lung cancer. The safety is looking very reasonable because we've got many patients now enrolled into those first-line settings. And again, as we move this combination into the earlier lines, like the new adjuvant setting, I think both the safety and the efficacy profile look encouraging. So that's what I would point you to ASCO. Pascal Soriot -- Chief Executive Officer Thanks, Susan. Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development And then your last question, I believe, was about the plantersen cardio transform trial and our expected time line for readout on that one. So as I mentioned earlier today, we remain extremely optimistic and excited about the potential for this molecule. And I showed you some early data that came from our NEURO-TTRansform study, which demonstrated a benefit on cardiac structure and function, which gives us additional confidence in the potential for the molecule as we walk through the CARDIO-TTRansform study. This molecule has the potential to be a best-in-class and transform care for patients with amyloidosis. So to that end, we would like to give this trial the best chance for success and to be able to read the full trial at the 140-week time point. that in mind, we'll continue to scan the competitive landscape and make the appropriate decisions as we move forward. Pascal Soriot -- Chief Executive Officer Thank you, Sharon. And touching on part of your question, we never comment, as you know, on interim analysis. So of course, we will not do any -- we will not do it here either. Next question is Tim Anderson at Wolfe. Tim, over to you. Tim Anderson -- Wolfe Research -- Analyst Hi. Thanks. Hopeful of questions. On data, just an update on your thinking on the lung filing in the U.S., if the overall survival data only continues to be directionally supportive and doesn't fall a little bit upper-end threshold of one. Is that enough to get U.S. approval? And then what would that mean for ex-U.S. approval? And when is that next survival look going to incur? And then the second question is just emerging markets. China, obviously, has slowed from years ago for lots of companies. What really stands out in your results is that non-China emerging market segment, which is substantial now, continuing to grow. But it's just not clear to me what the drivers of that are in terms of geographies and products, and therefore, what the future growth expectations should be in those non-China markets. So if you could add some commentary, that would be helpful. Pascal Soriot -- Chief Executive Officer Thank you. So maybe, Susan, you could take the first one. Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. So for TROPION-Lung01 study, Obviously, we've announced that we have filed, obviously, for all regulatory authorities OS in lung cancer is an important component that they want to look at. We said that the timing of the OS data cut is around the middle of the year. As you know already that we saw an overall trend in favor of OS on the data arm in the ITT, but what we also saw is in the non-squamous group a more positive trend with the upper end of the comp interval just crossing one. So looking -- I'm hoping that we'll see both of those continue or improve. And I think that will be an important piece for the regulatory authorities to look at. Thank you. Pascal Soriot -- Chief Executive Officer Thank, Susan. And the second one, maybe Leon, who is online, I believe, Leon, can you actually comment on that one? Leon Wang -- Executive Vice President, International Yes. I think actually, across all geographic AstraZeneca emerging market has been growing rapidly and almost no exception. And of course, there is some currency depreciation in certain countries. But overall, still very, very strong growth. And we are also in line with the global new product launch. I think Tagrisso, Farxiga, these oncology brands, and also rare disease as a new growth driver and is also doing very well across the emerging markets. All in all, on top of that, the LOE post patented products, the legacy products, that are still quite we spend very little resource and also growing nicely to support as a cash cow, our new launches. And also across the region, we are speeding up approval in many emerging markets. So we launched new products much earlier than before. Pascal Soriot -- Chief Executive Officer Thanks, Leon. So net-net, Tim, you have really two factors. One is we have a very strong commercial footprint in those countries. Now we are actually the No. 1 pharma company in the international region. And so we are leveraging this strong commercial footprint across all subregions. The second factor is we actually, a couple of years ago, invested more resources into a specific international region, regulatory team. And that team has been fast tracking, filing and approvals of new products in those countries who historically were falling behind the priority geographies. And now we still launch after the U.S. and Europe or Japan in those countries, but not that much later, and we are still working on accelerating this. So those two factors are really the most important growth drivers. The next question, I think, is Mattias Haggblom at Handelsbanken. Mathias, over to you. Mattias Haggblom -- Handelsbanken Capital Markets -- Analyst Mattias Haggblom, Handelsbank. Two questions, please. So firstly, on data DXd, you initiated a couple of additional phase 3 programs during the quarter with your partner. So what makes you so confident to continue to invest into these programs? Or asked perhaps differently, with investor communities still skeptical today to the what in particular is it you see that investors may miss? And then secondly, as one of few companies with both bispecific antibodies as well as cell therapy capabilities in-house. can you talk about how you think about engaging these tools into autoimmune disease, whether it's emerging early data from both sets of technologies that looks promising? Pascal Soriot -- Chief Executive Officer The first question, I think would go to Susan. And the second, Sharon, you'll take that one. OK. Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. So thanks for asking the question about Data DXd. So yes, we have announced that we've -- we're starting TROPION-Lung01, which is a combination with rilvegostomig, our PD-1 TIGIT bispecific and data, compared to pembro in locally advanced first-line non-small cell lung cancer. And again, that is a program where we're going to be looking at this activity in a biomarker selected group as well. But it also includes the ability to compare rilvegostomig directly with pembro in that setting. So I think what underpins our confidence there is both the combinability with IO that we have seen in different settings, the potential for the -- some added efficacy for the addition of the TIGIT mechanism of action as part of this bispecific within the PD-L1 greater than 50% patient population as well. And we think that this can be a winning combination in that setting. The other important study that I draw your attention to is the TROPION-Lung14 study, this is a combination of data DXd and Tagrisso in the first-line nonsquamous EGFR-mutant non-small cell lung cancer. And again, this builds on both safety and efficacy data that we've seen from the Orchard platform that we have in a post generation EGFR inhibitor patient population in the EGFR mutant, and also the safety and combinability for that combination. So that's what gives us confidence. As you may have seen in the TROPION-Lung05 data that was published is actually really good activity for data DXd within the EGFR mutant population. And given the FLAURA2 data, which we've also seen I think that, that also builds confidence in the ability to combine Tagrisso with chemotherapy and directed agents. And so I think this has the opportunity to further build on the data that we had from FLAURA2 and the data from Orchard and really have a winning combination in the first-line setting for EGFR-mutant non-small cell lung cancer. Pascal Soriot -- Chief Executive Officer Thank you, Susan. Sharon? Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. So thank you very much for the question about cell therapy and bispecifics in autoimmune disease because I think it's a really interesting topic that has become a key focus for us. As we think about how we manage diseases of immune disregulation, we are moving from managing symptoms modifying disease by adding the causality of disease. And the mechanisms that you mentioned, cell therapy and bispecific molecules, are two excellent realities that allow us to really address the causality disease. So to that end, we have invested in internal capabilities but also accelerated our ambition with recent acquisitions. As you saw, we very recently closed an acquisition of Grace which brought to us some, I think, leading capabilities that allow us really accelerate our ambitions in cell therapy for patients with autoimmune disease. And specifically, gray cell has a biCAR T which they have used to complete an investigator-initiated trial in China for patients with systemic lupus arithemedosis, or SLE. And we look forward to share this data at an upcoming medical conference. But I think it's safe to say that the data that we have seen across the patients treated is at least as compelling as anything that we in the published literature and gives us a lot of excitement and optimism about how we may be able to address SLE for patients moving forward. At the same time, we're also investing in our internal platforms for creating T cell engagers, which we think also could be a very powerful modality in the autoimmune space. Pascal Soriot -- Chief Executive Officer Thank you, Sharon. Mark Purcell at Morgan Stanley, Mark, over to you. Mark Purcell -- Morgan Stanley -- Analyst Yeah. Thank you very much. Two questions. The first one, the U.S. oral oncology products, the product sales there were very strong in the quarter. Could you help us understand the impact of treatment initiation dynamics and potential changes in affordability? And then secondly, on the Fusion Pharmaceuticals platform, for FPI-2265, can you help us understand your plans for moving into sort of pre-taxane setting? Would you do a head-to-head trial there versus Pluvicto potentially combined with PARP-1? Obviously, understanding that the post Pluvicto opportunity itself has blockbuster potential anyway. Dave Fredrickson -- Executive Vice President, Oncology Business So, Mark, thanks. I'll take the first question, probably Susan on the second. I mean I think the first important piece is that within the quarter on our oral oncolytics, particularly with Calquence and Tagrisso, we saw strong market share performance. Calquence remaining the leading BTKI in frontline CLL, and strong continued demand growth for Tagrisso in adjuvant in frontline and encouraging early FLAURA2 launch. With that said, also, we do see early encouraging trends of lower abandonment and improved access due to affordability, though it really is too early to quantify. And of course, recall, Mark, that in 2024, there's no added liability associated with Part D, whereas it comes in, in '25. But we'll continue to keep updated on how those dynamics on affordability evolve over the course of the year. Pascal Soriot -- Chief Executive Officer And Mark, on your second question, the deal hasn't closed and so we are not able to comment at this point in time. Sorry about this, and hopefully, we can give you an answer soon. Richard Parkes at Exane. Richard, over to you. Richard Parkes -- Exane BNP Paribas -- Analyst Hi. Thanks for taking my questions. Firstly, sometimes when speaking to investors, I get the perception, the feeling that AstraZeneca is spreading it sells too thinly with expansion into vaccine cell therapy, radioligand. Just wondering how you respond to that and whether you see any risk of the organization losing focus, and how you're thinking about some of those investments in new platforms? It feels to me like there's more you're just thinking about that the day after tomorrow. So that would be very helpful. And then on Airsupra, could you just talk a little bit more about the opportunity you're seeing? Obviously, we're seeing some very large drugs in that category in the past. Just thinking about how you're thinking has evolved on the opportunity since the launch. Pascal Soriot -- Chief Executive Officer Thanks, Richard. Let me try the first question. And maybe Ruud, you could cover the second one. So the first question, I think first point is, I'm sure you've realized, we have a very, very strong team and people are very focused on oncology, BioPharma, Rare Disease and managing their folios. Second point is we are now kind of a $50 billion company. So you really need a portfolio to continue growing. And I think this is one of our strengths. We're not depending on two or three products, we have a portfolio of products that are driving our growth. And we can actually highlight that better to you at the Investor Day very soon. Third point I would make is that actually, this portfolio actually gives us the opportunity to combine. And again, that's what we want to highlight during the Investor Day. We're in a unique position to combine in oncology across ADC, bispecific, potentially -- bispecific IO potentially in the long run, take an approach to solid tumors to address the tumor with a combination of ADCs and bispecific and follow this with TCEs or cell therapy. In the cardiovascular space, Sharon has covered it, we can combined across the GLP-1 and PCSK9 or the other agents, the PARP, of course. So I think these are the things that actually help us. On the vaccine front, I think there's sometimes a misperception of what we're trying to do. We're not trying to build a vaccine business like vaccine companies have. We are actually targeting vaccines that will be synergistic, strategic to our vaccine -- and antibodies, by the way, that are synergistic to oncology or respiratory disease products that will protect patients from exacerbations of COPD or asthma, products that would protect patients from COVID or flu infections. If there are, say, cancer patients, blood cancers in particular. So this is really what we're trying to do, always try to be implementing a sort of a strategic synergy across our portfolio and leverage our expertise and our strengths in various places. So I don't think we are too thin. And then -- too thin spread. The challenge and the opportunity in our industry is always to be able to think about today, but also the long term. It would be very easy, quite frankly, or easier to focus on the next four, five years. But we also have to think about what is going to shape the medicine in five to 10 years. So that this company remains a growth organization, not only in the next few years, but in the long run. And so that's always the challenge is really to manage our near-term long term, but also it's an opportunity. If we do that well and if we play our hands very well, we can be very differentiated as a company. So Ruud, over to you. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Yes, of course. And thank you so much for the question, Richard. So first of all, Airsupra is a unique product in the United States because it's the first rescue therapy for asthma patients above years of age. It's a very substantial market. The short-acting beta agonist market. Just to give you a little bit of context, roughly 35 million inhalers are prescribed every year for the 18-plus population in the United States. So the volumes are very, very substantial. And we do believe with that, we have a product in place which can change the treatment paradigm of as needed rescue medication in the U.S. Of course, it's still early days, but the fact that we already see a very substantial number of scripts every week, plus that more and more physicians are prescribing it, I truly believe that over the next few years that this product will become a blockbuster molecule. And equally, we're also looking for other opportunities in other geographies in the world. Especially in the Middle East, we see good opportunities to launch the product there as well in the next few months. So all in all, very bullish regarding the forecast and the potential of this product moving forward. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. The next question is from Christopher Uhde at SEB. Christopher, over to you. Christopher Uhde -- Skandinaviska Enskilda Banken -- Analyst Can you hear me? Pascal Soriot -- Chief Executive Officer Yes. Christopher Uhde -- Skandinaviska Enskilda Banken -- Analyst Good. So yes, I guess, first question is a lot of the key sort of Part D products, and I guess the U.S. in general, had really strong performance. Can you quantify how big a headwind the typical U.S. coverage resets amounted to? And what factors beyond strong demand, help explain why Q1 was so strong? And roughly, how much did they selectively contribute then to top line growth? Noting that, for example, Farxiga was one of those factors was the authorized generic. And then my second question, which pipeline events for the rest of 2024 do you get most excited about? And which do you think the Street might be underappreciating and what are we missing if so? And if I could sneak in the last one. You said M&A will slow down earlier today. As you've got most of what you need. I know you don't have a KRAS though, perhaps you could tell us what your thoughts are around KRAS and why that isn't in your portfolio? Pascal Soriot -- Chief Executive Officer Thanks, Christopher. So maybe, Ruud, you could take the first one, and I'll try to address the others. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Yes. Yes, an excellent question. We have seen very strong growth in the United States for both Farxiga and Symbicort. It's driven by two different factors. First of all, we have launched an authorized generic Farxiga in the United States. The option for patients to have a lower cost option as well. And so far, we are very pleased with that introduction of this new -- not new medicine, but this new offer to patients. And of course, we will not know until, let's say, a few quarters more how the products will be perform. But so far, the feedback has been extremely strong. Equally, I think it's important that looking at Farxiga in totality, that the growth across the world is extremely strong on the basis of the CKD and heart failure indications. And there's no reason to believe that, that will slow down anytime soon. So that's good news. Symbicort, we have closed our list price, the so-called reg price in the United States, like other competitors have done as well. So we need to see how that will evolve in the next few quarters. So it's a little bit of a new dynamic in Part D, let's say, in Quarter 1 for products. But all in all, a very nice first few months, and we will monitor it very closely, of course, moving forward. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. I mean, try the other two questions quickly in the interest of time, is the pipeline and what is more exciting until 2030, Christopher, I would again invite you to join us in Cambridge. We are offering free tickets, a visit to if Cambridge. And I'm sure we'll find a way to give you a nice lunch, too. On the M&A, I said it will slow down. It doesn't mean it will be 0. What I meant to say earlier in terms of slowing down is from a technology, from a platform viewpoint, I think we have acquired and built most of what we need for now and we need to execute on what we've got. But it doesn't mean, of course, BD will come down to zero. And in terms of the specific question, concern, I want to answer this one. But we have our own internal program, and we can discuss some of those things again in Cambridge. So I'll move to Eric Le Berrigaud at Stifel. Over to you, Eric. Eric Le Berrigaud -- Stifel Financial Corp. -- Analyst Next question to come back on Farxiga and Symbicort in the U.S. Maybe more specifically on Farxiga, is there any way we can get any idea about the one-off could be into the Q1 numbers with the inventory buildup for the authorized generic. And on Symbicort, in the context of the drug being genericized in the U.S., we're expecting sales to go down. It was up 28% in Q1. What could be the dynamic for U.S. Symbicort for the full year '24? And then a more general question. We see more and more companies simplifying, streamlining the organization by combining the different divisions in one single like vaccine with pharma or onco with the rest of pharma. And you're still operating with different entities like onco, BioPharma, Alexion, D&I. Could you maybe summarize maybe you're thinking about doing things differently, but the benefit of doing the way you do and benefit versus risk and complexity? Pascal Soriot -- Chief Executive Officer Yes. So let me start with this question, and Ruud can cover Farxiga and Symbicort in the U.S. It's not still, it's actually we moved to that structure not that long ago, a few years, of course. But in our industry two, three years is not a long -- or four years is not a long time. I truly believe in the in the importance of being focused, on the one hand, people say you have too much; on the other hand, we say, well, put everything together. So I think the reason why we can succeed with our portfolio and leverage that portfolio is because, indeed, we are focused. We're focused on oncology, biopharm and rare disease. And anybody who's operated in oncology I think would, hopefully, was made that oncology is very specific. This is very specific and just the same as cardiovascular, you need to build capabilities. And you can do this if you do two things. First of all, recruit the right talent to understand the environment they are in. And secondly, create a culture and in a community where people feel they work together to the same goal. In the case of cancer, the goal is eliminate cancer as a cause of death. And every immunity in the company has this total focus, that share purpose, and that's what drives people. People come to work to make a difference and make a difference in the field they are in and the field they love typically. So I think this is really the reason why we can actually succeed, and we'll intend to keep that structure as it is. Ruud, over to you. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals Yes. Thank you, once again, Eric, for the two questions. First of all, once again, let me remind you about the U.S. is a very important market for Farxiga, there's no doubt, but it only represents less than 25% of our global sales. And we are very pleased to see that the brand is growing extremely fast, not only in the United States but across all the other geographies. Specifically to your question, can you provide a split between the authorized generic and the brands, the short answer is we're not going to do that. But equally, of course, you can look at the script volume, if you analyze the script volume of Farxiga, is the Farxiga brand as well as the authorized generic. Now whether the strong initial growth will continue moving forward. We need to see that. We simply don't know. Equally for Symbicort, Symbicort it's quite amazing that after 20 -- more than 20 years of initial launch, that Symbicort is still annualizing more than $2 billion a year. Very fast growth again in the emerging markets, but also equally this year so far in the United States. And it's heavily driven by the fact that we have an authorized generic available as well as we have also lowered our WAC, the so-called list price, in the United States. So it becomes more affordable for many patients. And once again, whether that will continue during the course of the year needs to be seen. But so far, it's very pleasing to see that both brands are off of a very strong start in the United States as well as outside of the United States. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. Maybe I would add that everybody talks about one-offs. And to be honest, I'm not sure why there's such a focus on one-offs. If you look at Farxiga in the U.S., Q4 sales were $450 million, Q1 sales are $470 million. And if you look at the trends over the last few quarters, we've had a very strong trend. And if you may be combine this with the prescription trend was talking about, they sell a little bit of stock up. But it is not really what drives the trend for Farxiga, it's a very strong trend, not only in the U.S. but across the world. So every country is behaving the same way. We have very strong uptake in disease, heart disease, diabetes, etc. The next one is Steve Scala at Cowen. Over to you, Steve. Steve Scala -- TD Cowen -- Analyst Thank you so much. I have two questions. First, DBO6 hit its primary completion in March. -- is the data in-house? And is that underpinning your confidence? And second, why is there, what seems to be a long delay in presenting the oral GLP-1 and oral PCSK9 data? I could think of 4 possible reasons. One, there's a lack of appropriate venues. Two, AstraZeneca is strategizing on next steps on how to approach the market and wants to figure this out first. Three, there's some issue with the molecules or data that you're working through, perhaps it is underwhelming. Or four, we're just being too optimistic on how long this all takes. So any thoughts would be appreciated. Pascal Soriot -- Chief Executive Officer Thanks, Steve. So let me just address the last onen quickly, and then we could talk about DBO6. And you forgot one option which is our policy, and our policy is to present data at medical congresses and that's what we have decided to do, we stick to this. But maybe your second option is also part of it. For sure, we are, in the meantime, strategizing what we're going to do with our portfolio and how we develop this product. But really, the driving force is simply we debated it internally because you raised a good point, but we concluded we didn't want to do -- to come up with an exception here. And so you'll have to wait for the next potential option as a medical congress. We are, by the way, I have said, I think I can confirm, we're starting phase 2 this year. So we are on track, and we will not be preparing phase 2 if we were not confident with the oral group 1. DBO6, Susan, do you want to cover that? Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes, sure. So DESTINY Breast-06 is obviously a setting earlier than DESTINY-Breast04. It includes the IHC 1+ and 2+ as well as a group -- the ultra-low group. And the confidence in DESTINY Breast-06 is really built from the DESTINY-Breast04, which we obviously presented some time ago. So we are looking forward to the data. We said it's first half of this year. So hopefully, you don't have to wait too long for getting those data, and we're eager to share the with you. Again, just as a reminder, the primary endpoint is PFS in the HER2 low -- so at the IHC 1+ and 2+, and then there'll be descriptive analysis of the HER2 ultra-low patient population as well. And as a reminder, further, even though these patients are below the 1+ category, they still have a higher number of HER2 receptors on the cell surface than normal epithelium. So just to put numbers on that. Normal epithelium for HER2 is about 20,000 receptors per cell. At the 1-plus to 2-plus ranges between 100,000 and 200,000. So in that ultra-low group, you've got somewhere between 20,000 and 100,000 receptors per cell. So you can see that there's probably a significant proportion of that group that will have higher expression level of HER2 on the cell surface than normal epithelium would. And that's one of the reasons why we think there's a potential to go beyond the 1+ group into that ultra-low group and see benefit over the current standard of care chemotherapies. Pascal Soriot -- Chief Executive Officer Thanks, Susan. Next question is from Simon Baker at Redburn. Over to you, Simon. Simon Baker -- Redburn Partners -- Analyst Thank you. Pascal, for taking my questions. Two, if I may, please. Firstly, going back to Farxiga. I just wonder if you could talk us through the rationale for the timing of the authorized generic now. I maybe missing something, but the compensation pattern goes in October 25th. So some thoughts there would be helpful. Alongside also the FDA issuing a request for pediatric studies in March 2019, that hasn't yet been reflected in the orange book. So I just wondered what the state of that was. And then secondly, on TROPION-Lung10, you've moved forward with one of the combinations, which is in the TROPION-Lung04 study, obviously, on high confidence. I just wondered where that -- where your confidence rests with the combination with Volusomig and Sebestemic? Pascal Soriot -- Chief Executive Officer Thank you, Simon. So Ruud, in the past, you were complaining not enough questions to BioPharma. You're now going to claim too many questions. Ruud Dobber -- Executive Vice President and President, BioPharmaceuticals No, it could be less. But no, it's It's a great question, Simon. So why now, it's relatively straightforward. First of all, we have a huge opportunity still in CKD and heart failure. And it is clear from all the analytics we have done that a lower-cost option for some of those patients are very important in order to capture even more volume. The second one is also true, to that extent, it also mitigates the impact of a potential MCAP. So the inflation penalty in the United States as well. So those two factors were important regarding the timing. Regarding the pediatric indication, it's not yet in the orange book, so that's a very good observation. But equally, we feel comfortable that the FDA will grant us the pediatric indication. And hence, our base assumption is still that the pattern will stay in place till April 2026, which we have signaled multiple times. Pascal Soriot -- Chief Executive Officer Thanks, Ruud. Susan, do you want to cover the second question? Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. In the TROPION-Lung10 study, as I mentioned before, is the combination with rilvegostomig and data in a patient population that's greater than 50%. As we said before, what we see in terms of the evolution of the IO checkpoint inhibitor landscape is a segmentation. And our two bispecifics, we see the rilvegostomig PD-1 TIGIT as being focused on the IO sensitive or highly expressing PD-L1 part of the population, and that's in line with what you see in terms of the patient population in TROPION-Lung10. Rilvegostomig, we're focusing that on the tumor types where CTLA-4 sensitivity has been demonstrated and can add extra efficacy. Obviously, with rilvegostomig, it is designed to be better tolerated than the combination of CTLA-4 and PD-1 separately because it only binds CTLA-4 in the presence of PD-1. And we have shown an improved safety profile, but it still does have more side effects than you get with a PD-1 agent on its own or with rilvegostomig. So we will select that drug where it will make the biggest difference. And you'll see that as the -- you see the evolution of the EVOLVE studies with rilvegostomig. Pascal Soriot -- Chief Executive Officer Thanks, Susan. Next question is from Andrew Berens at Leerink. Over to you, Andrew. Andrew Berens -- Leerink Partners -- Analyst Thanks. Congrats on the strong quarter. Kind of a big picture question on the AKT class given the results of Truqap. Just wondering how you see it integrating the evolving paradigms. It's obviously incredibly dynamic. And specifically, I don't know how you guys see the AKT class integrating with CDK2 agents, CDK4 selective drugs, the oral [Inaudible], to graders, and also the ADCs that are starting to spread their wings into a number of these areas. Pascal Soriot -- Chief Executive Officer OK. Andrew, thank you. Thank you for asking one question. Actually, Susan, over to yo? Susan Galbraith -- Executive Vice President, Oncology Research and Development Yes. So thanks for the question. So AKT is obviously part of the PI3 kinase AKT pathway, which is the most commonly mutated or aberrant pathway in cancer. So we think this is a very important mechanism. And we are looking at combinations of capivasertib with our camizestrant, our oral SERG drug that's already in multiple phase 3 trials as well. So I think there's potential for it to be further expanded beyond the current set of trials that we've already got in development. And I do think there are data that it can be a potential combination agent with a number of the other things that you raised. We do have a CDK2 inhibitor, a highly selective CDK2 inhibitor, which we profiled at the AACR meeting that was in San Diego earlier this month. We think that's a very exciting molecule that will address the resistance mechanisms to the CDK4/6 inhibitors. And so I do think that this cost of agents can be combined with the emerging both new endocrine backbone agents and the newer versions of things to address the mechanism and the resistance to CDK4, which typically is represented by sensitivity to CDK2 inhibition. Dave Fredrickson -- Executive Vice President, Oncology Business Just maybe to also build on to Susan's answer, and I think what's important and great about this is we're talking about leadership in breast cancer. And as part of that leadership in breast cancer, we're really looking to build and improve upon the two existing pillars in the treatment of metastatic disease and then adding a third. And the existing treatments and existing pillars are ET plus or minus CDK4/6 and then obviously chemotherapy. I think what's important about the AKT class is it gives an opportunity for patients to continue to stay on ET-based therapies, which has a lot of benefits associated with it. We also know, though, that at some point, ET therapies are no longer effective and that it's a time to start to switch toward chemotherapy. And within that, that's where the ADCs now create a third new pillar that sits in between classical chemotherapy and ET-based approaches. We hope that DBO6 will provide even a further therapy option that sits within this. But you start to see the opportunity to begin to offer to physicians more options for how they can think about treating their patients as the disease progresses. And we've got best-in-class therapies to go into each of those pillars and then gives us an opportunity to look at combinations down the road. Pascal Soriot -- Chief Executive Officer Thanks, Dave. Actually, this discussion gives me chance to go back to, I think, the question Richard asked earlier about the pipeline. I mentioned combinations, but also this pipeline enables us to actually shape the treatment algorithm, as Dave was suggesting a minute ago, in breast cancer or lung cancer. And it also enables us to better partner with lung cancer oncologists or breast cancer oncologists and really truly be part of the way breast or lung cancer or other cancers are treated. And it's true for cardiologists, not only managing cardiovascular risk, but also if you look at amyloidosis, we have 2220, which is an amyloid depleter, we also have a [Inaudible]. So Again, all of those things will give us a great chance to not only work with key physicians, but also leverage our portfolio to shape treatment algorithms and look at combinations. Emily Field of Barclays. Emily, over to you. Emily Field -- Barclays -- Analyst Hi. Thanks for taking my questions. Just two on respiratory. A lot of excitement about the tezepelumab COPD data to be presented at ATS. Given what we've seen so far, is it your expectation that this would be taken in late-stage development in a broader eosinophil population, i.e., over 150s and over 300s? And then on the back of that, similar to the obesity question that was asked earlier. You have so many assets in late-stage development in COPD. Maybe asking from our side, what should we be focusing on in terms of just all of the late-stage COPD programs that you have? Sharon Barr -- Executive Vice President, BioPharmaceuticals Research and Development Sure. Thanks so much for the question. So I'll start with your first one which is about tezepelumab in our phase 2 core study, and then I will speak more broadly about this COPD portfolio. So you touched on HSI in our recent phase 2 trial completion, and we look forward to presenting those data at ATS in the very near future. As I'm sure you know, TESI is a monoclonal antibody directed against T-slip. It is the only biologic approved first here severe asthma with no phenotype, and we see tremendous potential for this molecule in COPD. The course phase 2 study was specifically designed to look at a broader population of patients. So it included patients irrespective of inflammatory drivers, eosinophil levels, emphysema, chronic bronchitis and smoking status, while other trials were more limited. And this included a prespecified subgroup analysis in populations with different eosinophilic levels, so including below 150, above 150 and above 300. We will present the data that we fully analyzed at the upcoming ATS meeting. But I will only venture to say that we are excited about the possibility of Tez in a broader population. It's worth noting that other molecules in this class are playing in the high eosinophilic levels, at more than 300 and eosinophils per microliter. And that's only about 35% of the population that's eligible for biologics. But those above 150 eosinophils per microliter are about 65% of the biologics eligible population in COPD. So we think that's a really important differentiator for this molecule. Now you also mentioned -- I think you also asked us about our plans to go forward together with our collaborators at Amgen. We are actively planning the next stage of development. You asked about our overall portfolio in COPD. And I think it's worth mentioning here that COPD is a very heterogeneous disease with multiple drivers. And to that end, we think that there are multiple mechanisms that may have substantial clinical benefit. So we are testing multiple mechanisms, and we are testing them in populations that allow us to differentiate them from each other. Tozorakimab, as we have previously described, is a differentiated IL-33 monoclonal antibody because it can bind and block both ST2 and RAGE/EGFR signaling. We think that's really important in this disease because it not only blocks the inflammatory pathways, but it can also block mucus production and epithelial remodeling through RAGE/EGFR. So we view that as a differentiated mechanism, which we think may also have very broad utility in the COP population. So early days, we are reading into our phase 2 data and thinking about our phase 3 plans going forward, but I think that we have the potential to be really paradigm shifting for people living with COP? Pascal Soriot -- Chief Executive Officer Thank you, Sharon. Luisa Hector at Berenberg. Luisa? Luisa Hector -- Berenberg Capital Markets -- Analyst Thanks, Pascal. Perhaps I could touch on capital allocation. So your high burden of deal-related payments will start to ease at the end of this year, so that improves your cash flow outlook. So will this lead to a change in the nature of deals which you can do? And perhaps you could remind us of your dividend policy given a slightly unusual announcement of the 2024 dividend recently. Pascal Soriot -- Chief Executive Officer Thanks, Luisa. Aradhana, your favorite question. Aradhana Sarin -- Chief Financial Officer Thank you, Luisa. So our capital allocation priorities remain unchanged. As you've seen, we've been very active on the BD front, but we also now sort of need to create value actually from the acquisitions and the partnership transactions we've done. So we need to focus on execution of those transactions. We did announce a 7% dividend increase in line with our progressive dividend policy, but also recall that we did not increase dividends in 2022. And so the Board takes a decision on when and how they can increase dividend based on our overall capital allocation priorities. But the capital allocation remains unchanged. Pascal Soriot -- Chief Executive Officer Thank you, Aradhana. So thank you very much for all your great questions. I think it is time for us to respect your time and close this call. Again, thank you so much for all your great questions and your interest in AstraZeneca, and have a good rest of the day.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to the HCA Healthcare first quarter 2024 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to vice president of investor relations, Mr. Frank Morgan. Please go ahead, sir. Frank Morgan -- Vice President, Investor Relations Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements that are based on management's current expectations, numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare is included in today's release. This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Sam. Sam Hazen -- Chief Executive Officer All right. Frank, thank you. Good morning to everybody, and thank you for joining the call. The positive fundamentals we saw in our business this past year continued into the first quarter of 2024. This momentum generated strong financial results that were driven by broad-based volume growth, improved payer mix and solid operating margins. As we look to the rest of the year, we remain encouraged by our performance, the overall backdrop of growing demand for our services and our enhanced stability across our networks to serve our communities. The people of HCA Healthcare continue to deliver for our patients with improvements in key nonfinancial metrics, including improved quality outcomes, more efficient process measures in emergency room services, which have accelerated time to discharge and increased satisfaction, and finally, better inpatient capacity management with reduced length of stay and increased acceptance of patients who needed to be transferred to our hospitals. As compared to the prior year, diluted earnings per share as adjusted increased almost 9% in the first quarter to $5.36. Same-facility volumes were favorable across the company. Inpatient admissions grew 6% year-over-year, inpatient surgeries were up almost 2%, equivalent admissions grew 5% and emergency room visits increased 7%. Most of our other volume categories, including cardiac procedures and rehab admissions, also had solid growth metrics in the quarter. While outpatient surgery revenue increased year-over-year due primarily to favorable payer mix, total cases declined 2%. We attribute most of this decrease to the effect of the calendar and the redetermination process, which drove a considerable decline in Medicaid volume. All the domestic divisions had growth in inpatient admissions and equivalent admissions. And finally, payer mix and acuity levels improved as compared to the prior year. Commercial volumes represented approximately 36% of equivalent admissions. Last year, they were 34% of the total. The case mix for our inpatient business increased slightly, continuing the upward trend we have seen over the past few years. Same-facility revenue grew almost 9% as a result of these volume metrics, coupled with 3.5% higher reimbursement per equivalent admission. We continue to make progress on our cost agenda. Operating costs across most categories were in line with our expectations. As part of our capital spending plan, the number of facilities or sites for care increased by almost 5% to around 2,600. And we added approximately 2% to our inpatient bed capacity. As we move through the remainder of the year, we will maintain a disciplined approach to our operations while continuing to invest appropriately in our strategic agenda, which we believe should position the company favorably to meet our long-term objectives. With that, I will turn the call to Bill for his last earnings call. I want to congratulate him again on his tremendous career with the company. It's been my privilege to work with him over these years, and I want to thank him for a job well done. Bill Rutherford -- Chief Financial Officer Great. Good morning, everyone. And thank you, Sam, appreciate that. We believe our first quarter performance represents a strong start to the year, and we continue to combine solid operational performance with a disciplined and balanced allocation of capital to generate value over time. We had strong top line growth with revenues growing 11.2% over the prior year in the quarter. Sam highlighted the same-facility volume, acuity and mix metrics that drove our almost 9% same-facility revenue growth in the quarter. So let me highlight a few points on our operating costs. Overall, operating costs were managed well. Adjusted EBITDA margin was 19.3% in the quarter. Labor results were solid with as-reported labor cost as a percent of revenue improving 100 basis points from the prior year. We continue to see good trends on contract labor, which improved 21.7% from the prior year and represented 5.1% of total labor cost. Supply cost as a percent of revenues improved 10 basis points from the prior year. While other operating costs as a percent of revenue has grown compared to the prior year, it has remained relatively consistent for the past three quarters. The sequential growth of professional fee expense contributed -- continued to moderate and performed in line with our expectations. In addition, the Valesco operations performed better than our expectations in the quarter. Adjusted EBITDA was $3.35 billion in the quarter, which represented a 5.7% increase over prior year. I will mention, as a reminder, we recorded a $145 million favorable settlement in the first quarter of last year. So we are pleased with the operational performance for the company during the first quarter. Next, let me speak to capital allocation as we continue to employ a balanced allocation of capital. Cash flow from operations was just under $2.5 billion in the quarter. Capital expenditures totaled $1.1 billion. And we repurchased just under $1.2 billion of our outstanding shares during the quarter. Our debt to adjusted EBITDA leverage remains near the low end of our stated guidance range. And we believe we are well positioned from a balance sheet perspective. And finally, in our release this morning, we are reaffirming our full year 2024 guidance ranges. So with that, I'll turn the call over to Frank and open it up for Q&A, and we look forward to your questions. Frank Morgan -- Vice President, Investor Relations Thank you, Bill. As a reminder, please limit yourself to one question so we might get as many possible in the queue an opportunity to ask questions. Operator, you may now give instructions for those who'd like to ask a question. Questions & Answers: Operator [Operator instructions] And your first question comes from the line of A.J. Rice from Credit Suisse. Please go ahead. A.J. Rice -- Credit Suisse -- Analyst Hi. Thanks, everyone. Obviously, the inpatient side of the business was quite strong. I wondered if there were service areas that were particularly strong. Or was there anything else that you can highlight? I know at one point, as you talked about laying out the year, you thought maybe the first half comparisons would be stronger than the back half. I don't know if that's still your view. Any comment along those lines would be interesting as well. Sam Hazen -- Chief Executive Officer A.J., it's Sam. As I mentioned, we had broad-based volume growth across the company. Every division had growth in inpatient admissions. Actually, we had the best portfolio performance, I think, I've seen in my experience in the company with 56 of our hospitals growing greater than 10%. So almost a third of our portfolio grew by greater than 10%. We had another one-quarter of our portfolio grow greater than 5%, so really strong volume across the company broadly. When you look not only at the divisions in the aggregate but when you disaggregate the divisions, within our hospital portfolio, you see similar performance metrics. As far as services, the service line volume growth on the inpatient side was strong across the board. Even in obstetrics, we saw births grow on a year-over-year basis. And that's been down a little bit, so very broad-based from a service line standpoint as well. And then on the outpatient side, with the exception of outpatient surgery, and it's known to everybody that the calendar effects were not necessarily favorable, that influenced the outcomes on the outpatient surgery. But underneath our volumes on the outpatient surgery, as I mentioned, it was mostly Medicaid volume which we lost. And we think again that's due to the redetermination process. A working theory that we have is that some of those patients have migrated to the exchange or to an employer. And with co-pays and deductibles, maybe those cases are actually deferred because of that for some period of time. We just don't know at this point. But our overall profitability and revenue within our outpatient surgery business was up. So at the end of the day, the metric may look challenged, but the result was positive. So I would say that, as far as volumes, as we look toward the rest of the year, we do anticipate that the volume comparisons will be slightly more difficult. But we expect, as I mentioned in my comments, that the demand for healthcare over the course of the year will continue to be strong, and we will be able to sustain growth. It may not be at this particular level, but we're pretty encouraged by where we are from an overall competitive positioning standpoint as well as what we see as the backdrop of demand. A.J. Rice -- Credit Suisse -- Analyst OK. Thanks a lot. Operator Your next question comes from the line of Ann Hynes from Mizuho. Your line is now open. Ann Hynes -- Mizuho Securities -- Analyst Great. Thank you so much. So I know, I think, in your prepared remarks, you talked about how Medicaid redeterminations was having a negative impact on volumes. Can you just quantify what you think the impact was? And then secondly, do you think you had a revenue benefit from the two-midnight rule in the quarter? Thanks. Bill Rutherford -- Chief Financial Officer Yeah. Ann, this is Bill. It's hard to quantify. Regarding Medicaid redeterminations, we are doing our best to track that. We're seeing, just as we saw toward the end of last year, a large percentage of those people maintaining coverage, which I think is positive. Perhaps 20% of those we previously saw are not. And we're seeing a large portion of those end up in either HICS or employer-sponsored coverage. So we believe there is a small positive benefit here. And we're going to continue to monitor that over time on Medicaid redeterminations. On the two-midnight rule, I'd say it's still early. We are starting to see some encouraging signs. We do believe it's providing a modest benefit. We're seeing some of our two-midnight inpatient volume grow. And we think that's due to statusing in accordance with the new rules. But I'll emphasize it's still early and not all claims have completed the adjudication processes. But at this point, we still believe there's going to be a modest benefit from the two-midnight rule. Ann Hynes -- Mizuho Securities -- Analyst Great. Thanks. Operator Your next question comes from the line of Pito Chickering from Deutsche Bank. Please go ahead. Pito Chickering -- Deutsche Bank -- Analyst Hey. Good morning. Can you talk about the opex pressure that you're seeing? Is there any else besides business expenses sort of going in there? And how should we think about opex as a percent of revenues using the first quarter as a launchpad? Does that continue to see pressure in 2Q? Does it level off at the back half of the year? And then any quantification of how Valesco is tracking better than expectations? Thanks. Bill Rutherford -- Chief Financial Officer Yeah, Pito. This is Bill. Let me start. So I think there's two primary factors that are influencing the year-over-year comparisons in other operating costs. I'll emphasize it's been very consistent over the past three quarters though. And I think, first, as you know and recall from others that we began to see the pro fee pressures mostly in the second quarter of last year. So we're still looking at some year-over-year effect of that. We're pleased that we're at least seeing the sequential growth in pro fees begin to moderate as we have for the past several quarters. And I think the second contributor is just the expected increase in provider taxes related to the supplemental payment programs that we participate in. So those are really the two primary year-over-year contributors. And I think mostly, it was in line with our expectations. As we go forward, again I think for the past three quarters, the opex percent of revenue are relatively consistent and hopefully that will continue through the balance of the year. Pito Chickering -- Deutsche Bank -- Analyst Thank you. Operator Your next question comes from the line of Whit Mayo from Leerink Partners. Your line is now open. Whit Mayo -- Leerink Partners -- Analyst Hey. Thanks. Good morning. It looks like there's about almost $500 million of revenue that's not in the same-store segment this quarter. You did modest M&A this quarter, less than $100 million, you spent. I mean, is the entirety of the almost $500 million the campuses that you acquired last quarter? Anything I'm missing? I'm just trying to figure out maybe the impact on margins. Because if those don't really have any earnings, that could be maybe like a 60, 70 basis point drag. So if you could help me out there, Bill, that would be helpful. Bill Rutherford -- Chief Financial Officer Yeah. Well, I think there's probably two. One, the Valesco operations would be in the non-same-store. And then we did acquire the Wise Health System in the last year. And that would be probably the other entity that's the difference between same-store and consolidated. Whit Mayo -- Leerink Partners -- Analyst OK, thanks. Operator Your next question comes from the line of Brian Tanquilut from Jefferies. Please go ahead. Brian Tanquilut -- Jefferies -- Analyst Hey. Good morning. Bill, thanks for all the help over the years and congrats on the retirement again. Just my question on labor, you touched on Valesco a little bit. Any quantification you can share with us or expectation for further improvement both in Valesco and nurse staffing on temp labor? Thanks. Bill Rutherford -- Chief Financial Officer Let me start with Valesco. So as we've said in our year-end call, we anticipate the Valesco operations to kind of generate the same amount that we had in '23. But in '23, we had them for three quarters. Obviously, we'll have them for four quarters in '24. So again, I think that's resulting in some sequential improvement. But I think that's still good guidance for us is to basically be flagged on a full year basis. On the labor cost, we continue to be pleased with the trends in contract labor. The teams have a number of initiatives as we've seen. Turnover has stabilized, recruiting and hiring, still up. As I mentioned, our contract labor is down still 20% year over year. We think there's still more room to go as we go forward. So again, I think we're pleased and we're again in a good position in overall labor trends. Brian Tanquilut -- Jefferies -- Analyst All right. Thank you. Operator Your next question is from the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix -- RBC Capital Markets -- Analyst Thank you very much, and congratulations, Bill. Wanted to follow up on some of the mix commentary. You said you had some really strong commercial mix. I wanted to see kind of more detail on how exchange volume fits into that. I know you've talked about redetermination in Medicaid losses being offset, one pickup on exchange could offset three Medicaid losses. So just wondering kind of where we are on that recapture. And are we still on a lull or are we seeing enough exchange volume to kind of offset that? Thanks. Bill Rutherford -- Chief Financial Officer Yeah, Bill. Let me start with that one. We are very pleased with the mix. We're seeing our overall managed care increase in the 12%, 13% range. That is fueled by health insurance exchanges. Our exchange volume was up close to 50% in the first quarter. The data we see, perhaps enrollment in our markets is up a little north of 30%. So our volume is a little higher than that. And I think that is probably attributable to redeterminations, at least a big chunk of that delta, as we are seeing some people who are redetermined off Medicaid landing in both employer-sponsored coverage as well as the HICS volume. Remind you, it's still roughly 6% or so of our borrowing. But we have seen really good growth in that. And so we're pleased with that. Hard to tell where we are in that cycle. I think we may be there in the end, at least to the state's redetermination process. But we're very pleased with the trends we're seeing so far. On the Medicaid redeterminations, as I said before, I think it has provided some benefit for us. We continue to track individuals that are presenting what their previous coverage was. And we're seeing the people who are being redetermined of landing in either employer-sponsored or HICS coverage. Ben Hendrix -- RBC Capital Markets -- Analyst Thank you. Operator Your next question is from the line of Gary Taylor from TD Cowen. Please go ahead. Gary Taylor -- TD Cowen -- Analyst Hey. Bill, you'll be missed, so congrats. My two -- there were two numbers that really jumped out at me, so I just want to get your comment on those. The first is, I think, the occupancy number is all-time high you've reported or at least in the last decade. And I just want to think through, I mean, does that mean, I mean, we're peaking in terms of operating leverage on labor and other operating expense outside of professional fees? Could there still be more room on leverage? And then the other would just be same-store ER visits is up 7% versus a plus 10% comp. And we had a similar phenomenon last year, where we're up huge against a very tough comp in the first quarter and then that kind of moderated. And I'm just trying to think through if there's anything around ER seasonality that's new with redeterminations or ACA, SEPs or anything that numbers like that brings to mind for you. Sam Hazen -- Chief Executive Officer Gary, it's Sam. I think we're actually pretty pleased with the occupancy levels. When you look at our operating agenda, our operating agenda is making sure, number one, that we have the staffing supply necessary in order to accommodate what we believe to be again a positive demand backdrop. And we've made solid improvements over the last 18 months in recruitment, retention, enhanced care models that really create a better environment for our patients. The second aspect to our capacity management and meeting the demand in the market is around our case management efforts. And our teams again have executed as normal inside of our company around whatever our imperatives are at a really high level. And we actually had acuity grow, as we mentioned, but length of stay went down. That allowed us to open up more beds, receive more patients in through our transfer centers and our emergency rooms and so forth. And that's not necessarily compromising our operating leverage. One quarter over one quarter is never a perfect proxy for the business. And so we're looking at the business sort of over a longer run. And with the exception of pro fees, which we believe will moderate over time, we will continue to see operating leverage in most scenarios when we have incremental volume because we have fixed cost in our labor platform, we have other fixed costs inside of our other operating expenses. So we are investing to add inpatient bed capacity. We had, I think, a little over 2% come online this year versus last year. We have a significant pipeline of capital that will help deliver more inpatient capacity over the next two to two and a half years. So that's, that question. On the emergency room, when you look at the emergency room and look underneath the emergency room, our commercial emergency room visits were up 20% on a year-over-year basis. That is a really strong metric. We're down 10% in Medicaid, up slightly in self-pay, which speaks to the point Bill was making around redeterminations, finding a different level within the mix of our business. And so our emergency room business, obviously, we had one extra day, so we see the same level of emergency room business inside of the leap year dynamic this year. So that would pull it back in normal quarters. But we're encouraged about what's going on in our emergency rooms. We have a robust agenda there to revitalize the service levels because we've had a lot of dynamics coming out of COVID. And as I mentioned in my prepared comments, our service levels have improved. The process time for a patient to be seen as well as the process time for a patient to be discharged or admitted to the floor has improved markedly. Our patient satisfaction continues to improve on a year-over-year basis in our emergency rooms and also on a sequential basis. Additionally, we're investing in our emergency room platform both on-campus and off-campus. And those efforts are proving to be important to that particular service line as well. So the emergency room and our urgent care platform play a huge role in our overall network model. And we continue to be encouraged by what's going on in both areas. Operator Your next question comes from the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake -- Wolfe Research -- Analyst Thanks. Good morning. Let me add my congrats to Bill on his retirement, really appreciate all your help over the years, bud. Bill Rutherford -- Chief Financial Officer Thanks, Justin. Justin Lake -- Wolfe Research -- Analyst So my question was trying to get an update on your expectations for Medicaid, DPP and DSH. You reported the benefit here at $3.9 billion in 2023. I shouldn't say benefit, that's a gross number, I believe. Appreciate the increased transparency, was hoping you could give us an update on what you're expecting for 2024 on this metric relative to 2023. Maybe how much of that's a gross number again. How much should we think of as kind of the net benefit there? And then can you go back, if you have the number handy, to 2019, pre COVID, pre kind of the big increase in some of these programs and tell us what the number looked like back then? Thanks. Bill Rutherford -- Chief Financial Officer Yes. Justin, let me try. And I think we'll have to get back to you on the '19, I don't have that upfront. But if I reflect back to our year-end discussion, that's still our belief today. First, just level set, these DPP programs are really fundamentally part of our Medicaid reimbursement. There's a lot of them. We have 18 or 19 states have these programs. But a lot of them have some complexity with a lot of variables associated. So use that as a backdrop. But we still believe when we look at the full year, there's going to be a modest headwind in the revenue to these programs, '24 versus '23, largely because of some settlements that we realized in '23, we do not expect to reoccur going forward. And so that's still our belief. In any one quarter, there may be factors that influence quarter-by-quarterly trends. But for the full year, we think there's still going to be a modest headwind on the revenue component that we have. Each state has a little bit different in terms of whether they're tax-based or contribution-based. So there are clearly operating expenses associated with the revenue number that you quoted that we disclosed within our 10-K. But the ratios have remained relatively consistent. And we'll have to maybe get back to you on the '19 levels, I don't have that handy. Justin Lake -- Wolfe Research -- Analyst Thanks. Operator [Operator instructions] Your next question comes from the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok -- Barclays -- Analyst Hi. Good morning. Thanks for the question. I just wanted to echo congratulations to Bill. I just wanted to follow up on the comments you made on other opex. I think the year-over-year comparisons all make sense, given the timing of Valesco. But I'm still confused on the sequential progression from Q4. Because it sounds like Valesco performed better, physician fees moderated. And it was my understanding that supplemental payments would actually step down a bit from elevated Q4 levels. So I'm just trying to understand why we didn't see a larger decrease or more leverage on the other opex line, given those trends. Is there something that we don't understand or some other unexpected kind of item in that other opex line? Thanks. Bill Rutherford -- Chief Financial Officer No. I'd say we did have growth in our state supplemental payment expense quarter by quarter. As I said in Justin's response, there are certain variables that come on the timing of those. So sequentially, that was up. And the pro fees were up sequentially, it just was up small on there. So those are the two main factors to call out in the other operating is pro fees and the state supplemental payment. And I think when you look at sequentially, it makes sense, pretty much the trends were in line with our expectations, but nothing else there that I'd highlight. Andrew Mok -- Barclays -- Analyst Got it. Thank you. Operator Your next question comes from the line of Kevin Fischbeck, Bank of America. Please go ahead. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Hey. Thanks. So maybe two questions. I guess, one question, I guess, just about the guidance, I guess, there's been a lot of talk about how you guys are thinking about providing guidance. And you reaffirmed guidance in the quarter. I wasn't sure if that was trying to move away from providing an update every Q1 or whether that was -- you're actually reaffirming guidance because everything is exactly in line, so you're changing your communication around that without giving an update on that. But then second, just really about the volumes. Obviously, 3% to 4% volume for the year. You're above 5% to start. So does that imply that you're going to end the year more like 2%? And what we're seeing this year is 3% to 4%. How do you think about where volume will be in 2024 relative to that long-term trend line with the demand that you see in your markets? Are we maybe more or less back to that long-term trend line in 2024 or is there still some room for that to kind of move up toward a longer-term trend line? Thanks. Bill Rutherford -- Chief Financial Officer Kevin, this is Bill. Let me start and I'll ask Sam to add in. On the guidance, we typically would not adjust guidance in Q1 in normal years. But as we talked in our year-end call and as we've tried to set the guidance ranges, I believe the ranges are wide enough to accommodate a range of outcomes. And so we want to get out of the trend, if you will, of trying to reset guidance every quarter by quarter. I think the long-term business trends that we've highlighted over the years and we highlighted in our investor day last year, we believe, are solid. They're kind of durable. And they've been pretty predictable over time. And our overall guidance is based on that. So we're not planning to adjust quarter by quarter unless there's material circumstances to warrant on either side of that. And on the volume trends, again, Sam can comment on here. As we've said, we're very pleased, very strong volume, very strong demand. And perhaps we do end up on the high side of our overall annual guidance. We'll remind you as we get into kind of the second half year-over-year comparisons, we started to see some volume -- positive volume trends in the third and fourth quarter last year. So the year-over-year comps will adjust a little bit. But we're very pleased where the volume trends are. And with these efforts, hopefully, we will end up on the high side. Sam Hazen -- Chief Executive Officer Nothing else to add. Thank you. Operator Your next question comes from the line of Stephen Baxter, Wells Fargo. Please go ahead. Stephen Baxter -- Wells Fargo Securities -- Analyst Yeah. Hi, thanks. Just to hopefully put a bow on the Medicaid state-directed payment question, can you just remind us, are we at the point now that you're accruing these evenly each quarter in 2024? Is there any lumpiness to kind of keep in mind about the first quarter or the rest of the year? And then just to tie on to that, the final rule that got published earlier this week around this issue, do you feel optimistic that maybe more of your states kind of have more to do here? Or do you think maybe your states are doing a better job of proactively seeking these programs out? Thank you. Bill Rutherford -- Chief Financial Officer Yeah, let me. There is some variability in the timing of when we recognize these. For the most part, programs we've had under a while were on an accrual basis. With new programs, we would typically wait until we get some established history and actually funds starting to flow. So it's a little bit of a mix. But there is some variability that we see as we go year-by-year. Remind people, previous to this year, we were recognizing Florida on an annual lump sum basis. We started accruing. We started a little bit, but we tried to accrue those as much as we can as we got some historical practices. Relative to the rule that was released earlier this week, it's still early. We're working our way through the assessment. But generally, we review it as positive. It removes the potential for some capping add-on payments. And there's a potential for changes in terms of how providers receive payments. It will take a little bit of time for states to work through those and implement it. But generally, we view that as a positive development for us. Operator Your next question comes from the line of Jason Cassorla from Citi. Please go ahead. Jason Cassorla -- Citi -- Analyst Great. Thanks. Good morning. I just want to follow up on labor. I know you're benefiting from reduced contract labor spend and the like. When we think about the first quarter SWB per just a patient day of about 3%, can you give us a sense of how wage growth trended in the quarter and then offsets on the productivity front that you're seeing and if there's anything within the first quarter that gives you confidence on your labor agenda kind of for the balance of the year? Thanks. Bill Rutherford -- Chief Financial Officer Yes, I mean, obviously, as we've talked about over the past year, we've got a lot of initiatives on labor and our teams are executing very well from turnover reductions to recruitment and retention efforts on there. And our core labor trends are in line with our expectations. We said we anticipate wage inflation in that 2.5% to 3% level. And we're starting to -- and we are seeing that. And that's helping to offset, and we continue to be pleased with the contract labor trends. So I would say the core labor trends that we are seeing this year are right in line with our expectations. And the initiatives that we have continue to be underway. Operator Your next question comes from the line of Lance Wilkes, Bernstein. Your line is now open. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks. One follow-up on the labor question. And that's just if you could give any comment on hiring pipeline and if there are any categories where you're seeing either more appetite out there or any sort of constraints. And then my real question was on your comment on folks getting shifted over due to redeterminations and maybe that impacting outpatient surgeries. I was wondering if you're seeing any impacts of that sort of stuff on bad debt or any other things where perhaps the overall backdrop is impacting consumers here. Bill Rutherford -- Chief Financial Officer Yeah, let me attempt on that. Relative to the pipeline of labor, I don't know if there's any specific things I'd call out. I mean, obviously, we have diversity of geography, diversity of different employer cohorts. And labor teams are doing a great job. Our nurse hiring is up. And so I don't think there's anything unique I would call on that. And Sam or others can add in on that. And relative to the redeterminations and perhaps that influencing our outpatient surgery, I think both the combination of the HICS volume growth that we spoke about earlier, some of that due to the Medicaid redetermination, it is just a working thesis that perhaps there's a little bit more sensitivity on some of those elective procedures early in the year relative to deductible and co-pays. As Sam mentioned in his comments, almost all of our drop in outpatient surgeries was in Medicaid and self-pay levels. So we'll need a little bit more time to see how that plays out. And perhaps there will be some rebound on that as that begins to kind of normalize throughout the year. And on your question relative to the impact of that on bad debts, we're saying, no, I can't say we've seen any impact on that right now. There's still some of our self-pay growth are individuals that are in what we call a pending Medicaid status as we're pursuing eligibility efforts on there. But it has not yet resulted in any material change in our collectibility or bad debts at this stage. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks. Operator Your next question is from the line of Joshua Raskin from Nephron Research. Please go ahead. Josh Raskin -- Nephron Research -- Analyst Hi. Thanks. Good morning. Bill, I'll also add my congrats, and thanks for all the help. My question is just on capex. Could you speak to the capex and sort of the deployment in the quarter. It was down a tiny bit, so let's call it flattish year-over-year, but generally been trending higher in recent years. I guess, maybe there's obviously a lot of timing. And then any new capacity specifically to call out in the next 12 months? I know you've got a bunch of projects over the next sort of two, two and a half years as well. Sam Hazen -- Chief Executive Officer This is Sam. The amount for the quarter is flattish, to your point. And it is timing. We haven't slowed anything down. Some of our construction projects move at different paces than we anticipate at some level. But we expect for the year to be somewhere close to the number that we guided to last quarter, which is somewhere around $5.2 billion or so. So we're investing more in the business than we've ever invested because of the capacity that we need in the network development that we want. And so those efforts continue as we go through the course of this year. As far as any particular capacity that I would call out, I would tell you we have a new hospital in San Antonio, Texas that will open up later this year on the west side of that community. We're excited about that. We have other major projects on a host of campuses that will come online over the year. I think our bed capacity, when we conclude the year, will be somewhere similar to the growth that we experienced this year, which is maybe another 2% or so. As I mentioned previously, our emergency room capacity is also growing as we invest in new units or as we expand existing units. I don't have the number in front of me as to exactly how much we're anticipating there. But we're investing consistently as far as in the areas of our business. But we're investing more inside of those as a reflection of our overall spending. We also continue to invest in basic infrastructure in our facilities. Whether it's capabilities and technology for our nurses or surgical equipment and so forth, those investments continue again at elevated levels to improve the offerings for our physicians and patients. And so we have some increases embedded in that as well. So we're really excited about what we're spending our money on. And our patterns have proven that we can generate very positive returns. And we continue to believe that's the case. Operator Your next question is from the line of Sarah James, Cantor Fitzgerald. Please go ahead. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. I was wondering if you could give us what the commercial outpatient surgeries were. Just with the moving pieces, I think we're all just trying to understand if that piece was where you expected it to be. I know it's coming off of a tough comp last year. But was it still positive like it was the last few quarters? And then Galen, I think, you guys are within a few weeks of your first graduating class. So just wondering strategically, how has that panned out? Did you get your share or better of the work commitments of the graduating class? Sam Hazen -- Chief Executive Officer This is Sam. On the commercial side of outpatient surgery, I would say it's generally flat, so it performed better than the aggregate as a whole. Again, the calendar effects affected outpatient surgery in general. Specifically, it had a more dramatic effect on Medicaid, as we mentioned. But we aren't anticipating or seeing anything that's structural with our outpatient surgery business. And as I just mentioned, our capital spending has investments in our outpatient surgery platform as well. With respect to Galen, we have had graduating classes in the past. We continue to have larger ones as we expand that component of our organization. And one of our priorities within our facilities and within our nursing agenda is to integrate the Galen campuses into sort of the organization more effectively. And we are seeing incremental improvement in retaining those graduates within our company. And we continue to see opportunities for improvement there. It's really early to say it's completely solidified. We have numerous campuses that are in early stages of development. We will have again somewhere around 30 campuses by the end of 2027 with roughly 30,000 students across those campuses graduating somewhere between 7,000 or 8,000 per year, allowing us to pipeline and hopefully create a really good student experience, integrate them into the system through clinical integration and retain them when they graduate. So that's our strategy. And we're still early in seeing the effects of that. But we're encouraged by the efforts. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. Operator Your next question is from the line of Cal Sternick from J.P. Morgan. Please go ahead. Calvin Sternick -- JPMorgan Chase and Company -- Analyst Thanks for the question. We've heard commentary from some others that January and February were strong from a volume perspective with some softening of demand in March. Can you talk about what you saw in the quarter? And then if you're seeing the expected rebound volumes into April? And if I could also just ask one clarification on the Medicaid supplemental payments, do you have any visibility right now into any retro programs that could come through in the second quarter? Bill Rutherford -- Chief Financial Officer This is Bill, I'll answer the last one. No, we don't have specific visibility. There's always timing differences of certain aspects, but no specific visibility, no. Sam Hazen -- Chief Executive Officer As far as the volumes, every quarter has calendar effects. And again, as I mentioned previously, we judge the business over a longer period of time to really understand what's working and what's not working. March was a difficult calendar for purposes of elective outpatient business and elective inpatient business simply because we had less working days, business days, and we had the Easter holidays during that time period. So it was clearly softer. We actually grew our inpatient admissions, however, in March. But our outpatient activity was soft and influenced sort of the aggregate for the quarter. We don't give guidance with respect to one month into the next quarter. I will tell you, as I mentioned in my prepared comments, that we're encouraged by the overall backdrop of demand in our markets. Operator And this concludes our Q&A session for today. And I would like to turn the call back over to Frank Morgan for closing remarks. Frank Morgan -- Vice President, Investor Relations Thank you for your help today, and thanks, everyone, for joining our call. We hope you have a nice weekend. I'm around this afternoon if you have additional questions. Give us a call. Have a good day. Answer:

the HCA Healthcare first quarter 2024 earnings conference call

Operator Welcome to the HCA Healthcare first quarter 2024 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to vice president of investor relations, Mr. Frank Morgan. Please go ahead, sir. Frank Morgan -- Vice President, Investor Relations Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements that are based on management's current expectations, numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare is included in today's release. This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Sam. Sam Hazen -- Chief Executive Officer All right. Frank, thank you. Good morning to everybody, and thank you for joining the call. The positive fundamentals we saw in our business this past year continued into the first quarter of 2024. This momentum generated strong financial results that were driven by broad-based volume growth, improved payer mix and solid operating margins. As we look to the rest of the year, we remain encouraged by our performance, the overall backdrop of growing demand for our services and our enhanced stability across our networks to serve our communities. The people of HCA Healthcare continue to deliver for our patients with improvements in key nonfinancial metrics, including improved quality outcomes, more efficient process measures in emergency room services, which have accelerated time to discharge and increased satisfaction, and finally, better inpatient capacity management with reduced length of stay and increased acceptance of patients who needed to be transferred to our hospitals. As compared to the prior year, diluted earnings per share as adjusted increased almost 9% in the first quarter to $5.36. Same-facility volumes were favorable across the company. Inpatient admissions grew 6% year-over-year, inpatient surgeries were up almost 2%, equivalent admissions grew 5% and emergency room visits increased 7%. Most of our other volume categories, including cardiac procedures and rehab admissions, also had solid growth metrics in the quarter. While outpatient surgery revenue increased year-over-year due primarily to favorable payer mix, total cases declined 2%. We attribute most of this decrease to the effect of the calendar and the redetermination process, which drove a considerable decline in Medicaid volume. All the domestic divisions had growth in inpatient admissions and equivalent admissions. And finally, payer mix and acuity levels improved as compared to the prior year. Commercial volumes represented approximately 36% of equivalent admissions. Last year, they were 34% of the total. The case mix for our inpatient business increased slightly, continuing the upward trend we have seen over the past few years. Same-facility revenue grew almost 9% as a result of these volume metrics, coupled with 3.5% higher reimbursement per equivalent admission. We continue to make progress on our cost agenda. Operating costs across most categories were in line with our expectations. As part of our capital spending plan, the number of facilities or sites for care increased by almost 5% to around 2,600. And we added approximately 2% to our inpatient bed capacity. As we move through the remainder of the year, we will maintain a disciplined approach to our operations while continuing to invest appropriately in our strategic agenda, which we believe should position the company favorably to meet our long-term objectives. With that, I will turn the call to Bill for his last earnings call. I want to congratulate him again on his tremendous career with the company. It's been my privilege to work with him over these years, and I want to thank him for a job well done. Bill Rutherford -- Chief Financial Officer Great. Good morning, everyone. And thank you, Sam, appreciate that. We believe our first quarter performance represents a strong start to the year, and we continue to combine solid operational performance with a disciplined and balanced allocation of capital to generate value over time. We had strong top line growth with revenues growing 11.2% over the prior year in the quarter. Sam highlighted the same-facility volume, acuity and mix metrics that drove our almost 9% same-facility revenue growth in the quarter. So let me highlight a few points on our operating costs. Overall, operating costs were managed well. Adjusted EBITDA margin was 19.3% in the quarter. Labor results were solid with as-reported labor cost as a percent of revenue improving 100 basis points from the prior year. We continue to see good trends on contract labor, which improved 21.7% from the prior year and represented 5.1% of total labor cost. Supply cost as a percent of revenues improved 10 basis points from the prior year. While other operating costs as a percent of revenue has grown compared to the prior year, it has remained relatively consistent for the past three quarters. The sequential growth of professional fee expense contributed -- continued to moderate and performed in line with our expectations. In addition, the Valesco operations performed better than our expectations in the quarter. Adjusted EBITDA was $3.35 billion in the quarter, which represented a 5.7% increase over prior year. I will mention, as a reminder, we recorded a $145 million favorable settlement in the first quarter of last year. So we are pleased with the operational performance for the company during the first quarter. Next, let me speak to capital allocation as we continue to employ a balanced allocation of capital. Cash flow from operations was just under $2.5 billion in the quarter. Capital expenditures totaled $1.1 billion. And we repurchased just under $1.2 billion of our outstanding shares during the quarter. Our debt to adjusted EBITDA leverage remains near the low end of our stated guidance range. And we believe we are well positioned from a balance sheet perspective. And finally, in our release this morning, we are reaffirming our full year 2024 guidance ranges. So with that, I'll turn the call over to Frank and open it up for Q&A, and we look forward to your questions. Frank Morgan -- Vice President, Investor Relations Thank you, Bill. As a reminder, please limit yourself to one question so we might get as many possible in the queue an opportunity to ask questions. Operator, you may now give instructions for those who'd like to ask a question. Questions & Answers: Operator [Operator instructions] And your first question comes from the line of A.J. Rice from Credit Suisse. Please go ahead. A.J. Rice -- Credit Suisse -- Analyst Hi. Thanks, everyone. Obviously, the inpatient side of the business was quite strong. I wondered if there were service areas that were particularly strong. Or was there anything else that you can highlight? I know at one point, as you talked about laying out the year, you thought maybe the first half comparisons would be stronger than the back half. I don't know if that's still your view. Any comment along those lines would be interesting as well. Sam Hazen -- Chief Executive Officer A.J., it's Sam. As I mentioned, we had broad-based volume growth across the company. Every division had growth in inpatient admissions. Actually, we had the best portfolio performance, I think, I've seen in my experience in the company with 56 of our hospitals growing greater than 10%. So almost a third of our portfolio grew by greater than 10%. We had another one-quarter of our portfolio grow greater than 5%, so really strong volume across the company broadly. When you look not only at the divisions in the aggregate but when you disaggregate the divisions, within our hospital portfolio, you see similar performance metrics. As far as services, the service line volume growth on the inpatient side was strong across the board. Even in obstetrics, we saw births grow on a year-over-year basis. And that's been down a little bit, so very broad-based from a service line standpoint as well. And then on the outpatient side, with the exception of outpatient surgery, and it's known to everybody that the calendar effects were not necessarily favorable, that influenced the outcomes on the outpatient surgery. But underneath our volumes on the outpatient surgery, as I mentioned, it was mostly Medicaid volume which we lost. And we think again that's due to the redetermination process. A working theory that we have is that some of those patients have migrated to the exchange or to an employer. And with co-pays and deductibles, maybe those cases are actually deferred because of that for some period of time. We just don't know at this point. But our overall profitability and revenue within our outpatient surgery business was up. So at the end of the day, the metric may look challenged, but the result was positive. So I would say that, as far as volumes, as we look toward the rest of the year, we do anticipate that the volume comparisons will be slightly more difficult. But we expect, as I mentioned in my comments, that the demand for healthcare over the course of the year will continue to be strong, and we will be able to sustain growth. It may not be at this particular level, but we're pretty encouraged by where we are from an overall competitive positioning standpoint as well as what we see as the backdrop of demand. A.J. Rice -- Credit Suisse -- Analyst OK. Thanks a lot. Operator Your next question comes from the line of Ann Hynes from Mizuho. Your line is now open. Ann Hynes -- Mizuho Securities -- Analyst Great. Thank you so much. So I know, I think, in your prepared remarks, you talked about how Medicaid redeterminations was having a negative impact on volumes. Can you just quantify what you think the impact was? And then secondly, do you think you had a revenue benefit from the two-midnight rule in the quarter? Thanks. Bill Rutherford -- Chief Financial Officer Yeah. Ann, this is Bill. It's hard to quantify. Regarding Medicaid redeterminations, we are doing our best to track that. We're seeing, just as we saw toward the end of last year, a large percentage of those people maintaining coverage, which I think is positive. Perhaps 20% of those we previously saw are not. And we're seeing a large portion of those end up in either HICS or employer-sponsored coverage. So we believe there is a small positive benefit here. And we're going to continue to monitor that over time on Medicaid redeterminations. On the two-midnight rule, I'd say it's still early. We are starting to see some encouraging signs. We do believe it's providing a modest benefit. We're seeing some of our two-midnight inpatient volume grow. And we think that's due to statusing in accordance with the new rules. But I'll emphasize it's still early and not all claims have completed the adjudication processes. But at this point, we still believe there's going to be a modest benefit from the two-midnight rule. Ann Hynes -- Mizuho Securities -- Analyst Great. Thanks. Operator Your next question comes from the line of Pito Chickering from Deutsche Bank. Please go ahead. Pito Chickering -- Deutsche Bank -- Analyst Hey. Good morning. Can you talk about the opex pressure that you're seeing? Is there any else besides business expenses sort of going in there? And how should we think about opex as a percent of revenues using the first quarter as a launchpad? Does that continue to see pressure in 2Q? Does it level off at the back half of the year? And then any quantification of how Valesco is tracking better than expectations? Thanks. Bill Rutherford -- Chief Financial Officer Yeah, Pito. This is Bill. Let me start. So I think there's two primary factors that are influencing the year-over-year comparisons in other operating costs. I'll emphasize it's been very consistent over the past three quarters though. And I think, first, as you know and recall from others that we began to see the pro fee pressures mostly in the second quarter of last year. So we're still looking at some year-over-year effect of that. We're pleased that we're at least seeing the sequential growth in pro fees begin to moderate as we have for the past several quarters. And I think the second contributor is just the expected increase in provider taxes related to the supplemental payment programs that we participate in. So those are really the two primary year-over-year contributors. And I think mostly, it was in line with our expectations. As we go forward, again I think for the past three quarters, the opex percent of revenue are relatively consistent and hopefully that will continue through the balance of the year. Pito Chickering -- Deutsche Bank -- Analyst Thank you. Operator Your next question comes from the line of Whit Mayo from Leerink Partners. Your line is now open. Whit Mayo -- Leerink Partners -- Analyst Hey. Thanks. Good morning. It looks like there's about almost $500 million of revenue that's not in the same-store segment this quarter. You did modest M&A this quarter, less than $100 million, you spent. I mean, is the entirety of the almost $500 million the campuses that you acquired last quarter? Anything I'm missing? I'm just trying to figure out maybe the impact on margins. Because if those don't really have any earnings, that could be maybe like a 60, 70 basis point drag. So if you could help me out there, Bill, that would be helpful. Bill Rutherford -- Chief Financial Officer Yeah. Well, I think there's probably two. One, the Valesco operations would be in the non-same-store. And then we did acquire the Wise Health System in the last year. And that would be probably the other entity that's the difference between same-store and consolidated. Whit Mayo -- Leerink Partners -- Analyst OK, thanks. Operator Your next question comes from the line of Brian Tanquilut from Jefferies. Please go ahead. Brian Tanquilut -- Jefferies -- Analyst Hey. Good morning. Bill, thanks for all the help over the years and congrats on the retirement again. Just my question on labor, you touched on Valesco a little bit. Any quantification you can share with us or expectation for further improvement both in Valesco and nurse staffing on temp labor? Thanks. Bill Rutherford -- Chief Financial Officer Let me start with Valesco. So as we've said in our year-end call, we anticipate the Valesco operations to kind of generate the same amount that we had in '23. But in '23, we had them for three quarters. Obviously, we'll have them for four quarters in '24. So again, I think that's resulting in some sequential improvement. But I think that's still good guidance for us is to basically be flagged on a full year basis. On the labor cost, we continue to be pleased with the trends in contract labor. The teams have a number of initiatives as we've seen. Turnover has stabilized, recruiting and hiring, still up. As I mentioned, our contract labor is down still 20% year over year. We think there's still more room to go as we go forward. So again, I think we're pleased and we're again in a good position in overall labor trends. Brian Tanquilut -- Jefferies -- Analyst All right. Thank you. Operator Your next question is from the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix -- RBC Capital Markets -- Analyst Thank you very much, and congratulations, Bill. Wanted to follow up on some of the mix commentary. You said you had some really strong commercial mix. I wanted to see kind of more detail on how exchange volume fits into that. I know you've talked about redetermination in Medicaid losses being offset, one pickup on exchange could offset three Medicaid losses. So just wondering kind of where we are on that recapture. And are we still on a lull or are we seeing enough exchange volume to kind of offset that? Thanks. Bill Rutherford -- Chief Financial Officer Yeah, Bill. Let me start with that one. We are very pleased with the mix. We're seeing our overall managed care increase in the 12%, 13% range. That is fueled by health insurance exchanges. Our exchange volume was up close to 50% in the first quarter. The data we see, perhaps enrollment in our markets is up a little north of 30%. So our volume is a little higher than that. And I think that is probably attributable to redeterminations, at least a big chunk of that delta, as we are seeing some people who are redetermined off Medicaid landing in both employer-sponsored coverage as well as the HICS volume. Remind you, it's still roughly 6% or so of our borrowing. But we have seen really good growth in that. And so we're pleased with that. Hard to tell where we are in that cycle. I think we may be there in the end, at least to the state's redetermination process. But we're very pleased with the trends we're seeing so far. On the Medicaid redeterminations, as I said before, I think it has provided some benefit for us. We continue to track individuals that are presenting what their previous coverage was. And we're seeing the people who are being redetermined of landing in either employer-sponsored or HICS coverage. Ben Hendrix -- RBC Capital Markets -- Analyst Thank you. Operator Your next question is from the line of Gary Taylor from TD Cowen. Please go ahead. Gary Taylor -- TD Cowen -- Analyst Hey. Bill, you'll be missed, so congrats. My two -- there were two numbers that really jumped out at me, so I just want to get your comment on those. The first is, I think, the occupancy number is all-time high you've reported or at least in the last decade. And I just want to think through, I mean, does that mean, I mean, we're peaking in terms of operating leverage on labor and other operating expense outside of professional fees? Could there still be more room on leverage? And then the other would just be same-store ER visits is up 7% versus a plus 10% comp. And we had a similar phenomenon last year, where we're up huge against a very tough comp in the first quarter and then that kind of moderated. And I'm just trying to think through if there's anything around ER seasonality that's new with redeterminations or ACA, SEPs or anything that numbers like that brings to mind for you. Sam Hazen -- Chief Executive Officer Gary, it's Sam. I think we're actually pretty pleased with the occupancy levels. When you look at our operating agenda, our operating agenda is making sure, number one, that we have the staffing supply necessary in order to accommodate what we believe to be again a positive demand backdrop. And we've made solid improvements over the last 18 months in recruitment, retention, enhanced care models that really create a better environment for our patients. The second aspect to our capacity management and meeting the demand in the market is around our case management efforts. And our teams again have executed as normal inside of our company around whatever our imperatives are at a really high level. And we actually had acuity grow, as we mentioned, but length of stay went down. That allowed us to open up more beds, receive more patients in through our transfer centers and our emergency rooms and so forth. And that's not necessarily compromising our operating leverage. One quarter over one quarter is never a perfect proxy for the business. And so we're looking at the business sort of over a longer run. And with the exception of pro fees, which we believe will moderate over time, we will continue to see operating leverage in most scenarios when we have incremental volume because we have fixed cost in our labor platform, we have other fixed costs inside of our other operating expenses. So we are investing to add inpatient bed capacity. We had, I think, a little over 2% come online this year versus last year. We have a significant pipeline of capital that will help deliver more inpatient capacity over the next two to two and a half years. So that's, that question. On the emergency room, when you look at the emergency room and look underneath the emergency room, our commercial emergency room visits were up 20% on a year-over-year basis. That is a really strong metric. We're down 10% in Medicaid, up slightly in self-pay, which speaks to the point Bill was making around redeterminations, finding a different level within the mix of our business. And so our emergency room business, obviously, we had one extra day, so we see the same level of emergency room business inside of the leap year dynamic this year. So that would pull it back in normal quarters. But we're encouraged about what's going on in our emergency rooms. We have a robust agenda there to revitalize the service levels because we've had a lot of dynamics coming out of COVID. And as I mentioned in my prepared comments, our service levels have improved. The process time for a patient to be seen as well as the process time for a patient to be discharged or admitted to the floor has improved markedly. Our patient satisfaction continues to improve on a year-over-year basis in our emergency rooms and also on a sequential basis. Additionally, we're investing in our emergency room platform both on-campus and off-campus. And those efforts are proving to be important to that particular service line as well. So the emergency room and our urgent care platform play a huge role in our overall network model. And we continue to be encouraged by what's going on in both areas. Operator Your next question comes from the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake -- Wolfe Research -- Analyst Thanks. Good morning. Let me add my congrats to Bill on his retirement, really appreciate all your help over the years, bud. Bill Rutherford -- Chief Financial Officer Thanks, Justin. Justin Lake -- Wolfe Research -- Analyst So my question was trying to get an update on your expectations for Medicaid, DPP and DSH. You reported the benefit here at $3.9 billion in 2023. I shouldn't say benefit, that's a gross number, I believe. Appreciate the increased transparency, was hoping you could give us an update on what you're expecting for 2024 on this metric relative to 2023. Maybe how much of that's a gross number again. How much should we think of as kind of the net benefit there? And then can you go back, if you have the number handy, to 2019, pre COVID, pre kind of the big increase in some of these programs and tell us what the number looked like back then? Thanks. Bill Rutherford -- Chief Financial Officer Yes. Justin, let me try. And I think we'll have to get back to you on the '19, I don't have that upfront. But if I reflect back to our year-end discussion, that's still our belief today. First, just level set, these DPP programs are really fundamentally part of our Medicaid reimbursement. There's a lot of them. We have 18 or 19 states have these programs. But a lot of them have some complexity with a lot of variables associated. So use that as a backdrop. But we still believe when we look at the full year, there's going to be a modest headwind in the revenue to these programs, '24 versus '23, largely because of some settlements that we realized in '23, we do not expect to reoccur going forward. And so that's still our belief. In any one quarter, there may be factors that influence quarter-by-quarterly trends. But for the full year, we think there's still going to be a modest headwind on the revenue component that we have. Each state has a little bit different in terms of whether they're tax-based or contribution-based. So there are clearly operating expenses associated with the revenue number that you quoted that we disclosed within our 10-K. But the ratios have remained relatively consistent. And we'll have to maybe get back to you on the '19 levels, I don't have that handy. Justin Lake -- Wolfe Research -- Analyst Thanks. Operator [Operator instructions] Your next question comes from the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok -- Barclays -- Analyst Hi. Good morning. Thanks for the question. I just wanted to echo congratulations to Bill. I just wanted to follow up on the comments you made on other opex. I think the year-over-year comparisons all make sense, given the timing of Valesco. But I'm still confused on the sequential progression from Q4. Because it sounds like Valesco performed better, physician fees moderated. And it was my understanding that supplemental payments would actually step down a bit from elevated Q4 levels. So I'm just trying to understand why we didn't see a larger decrease or more leverage on the other opex line, given those trends. Is there something that we don't understand or some other unexpected kind of item in that other opex line? Thanks. Bill Rutherford -- Chief Financial Officer No. I'd say we did have growth in our state supplemental payment expense quarter by quarter. As I said in Justin's response, there are certain variables that come on the timing of those. So sequentially, that was up. And the pro fees were up sequentially, it just was up small on there. So those are the two main factors to call out in the other operating is pro fees and the state supplemental payment. And I think when you look at sequentially, it makes sense, pretty much the trends were in line with our expectations, but nothing else there that I'd highlight. Andrew Mok -- Barclays -- Analyst Got it. Thank you. Operator Your next question comes from the line of Kevin Fischbeck, Bank of America. Please go ahead. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Hey. Thanks. So maybe two questions. I guess, one question, I guess, just about the guidance, I guess, there's been a lot of talk about how you guys are thinking about providing guidance. And you reaffirmed guidance in the quarter. I wasn't sure if that was trying to move away from providing an update every Q1 or whether that was -- you're actually reaffirming guidance because everything is exactly in line, so you're changing your communication around that without giving an update on that. But then second, just really about the volumes. Obviously, 3% to 4% volume for the year. You're above 5% to start. So does that imply that you're going to end the year more like 2%? And what we're seeing this year is 3% to 4%. How do you think about where volume will be in 2024 relative to that long-term trend line with the demand that you see in your markets? Are we maybe more or less back to that long-term trend line in 2024 or is there still some room for that to kind of move up toward a longer-term trend line? Thanks. Bill Rutherford -- Chief Financial Officer Kevin, this is Bill. Let me start and I'll ask Sam to add in. On the guidance, we typically would not adjust guidance in Q1 in normal years. But as we talked in our year-end call and as we've tried to set the guidance ranges, I believe the ranges are wide enough to accommodate a range of outcomes. And so we want to get out of the trend, if you will, of trying to reset guidance every quarter by quarter. I think the long-term business trends that we've highlighted over the years and we highlighted in our investor day last year, we believe, are solid. They're kind of durable. And they've been pretty predictable over time. And our overall guidance is based on that. So we're not planning to adjust quarter by quarter unless there's material circumstances to warrant on either side of that. And on the volume trends, again, Sam can comment on here. As we've said, we're very pleased, very strong volume, very strong demand. And perhaps we do end up on the high side of our overall annual guidance. We'll remind you as we get into kind of the second half year-over-year comparisons, we started to see some volume -- positive volume trends in the third and fourth quarter last year. So the year-over-year comps will adjust a little bit. But we're very pleased where the volume trends are. And with these efforts, hopefully, we will end up on the high side. Sam Hazen -- Chief Executive Officer Nothing else to add. Thank you. Operator Your next question comes from the line of Stephen Baxter, Wells Fargo. Please go ahead. Stephen Baxter -- Wells Fargo Securities -- Analyst Yeah. Hi, thanks. Just to hopefully put a bow on the Medicaid state-directed payment question, can you just remind us, are we at the point now that you're accruing these evenly each quarter in 2024? Is there any lumpiness to kind of keep in mind about the first quarter or the rest of the year? And then just to tie on to that, the final rule that got published earlier this week around this issue, do you feel optimistic that maybe more of your states kind of have more to do here? Or do you think maybe your states are doing a better job of proactively seeking these programs out? Thank you. Bill Rutherford -- Chief Financial Officer Yeah, let me. There is some variability in the timing of when we recognize these. For the most part, programs we've had under a while were on an accrual basis. With new programs, we would typically wait until we get some established history and actually funds starting to flow. So it's a little bit of a mix. But there is some variability that we see as we go year-by-year. Remind people, previous to this year, we were recognizing Florida on an annual lump sum basis. We started accruing. We started a little bit, but we tried to accrue those as much as we can as we got some historical practices. Relative to the rule that was released earlier this week, it's still early. We're working our way through the assessment. But generally, we review it as positive. It removes the potential for some capping add-on payments. And there's a potential for changes in terms of how providers receive payments. It will take a little bit of time for states to work through those and implement it. But generally, we view that as a positive development for us. Operator Your next question comes from the line of Jason Cassorla from Citi. Please go ahead. Jason Cassorla -- Citi -- Analyst Great. Thanks. Good morning. I just want to follow up on labor. I know you're benefiting from reduced contract labor spend and the like. When we think about the first quarter SWB per just a patient day of about 3%, can you give us a sense of how wage growth trended in the quarter and then offsets on the productivity front that you're seeing and if there's anything within the first quarter that gives you confidence on your labor agenda kind of for the balance of the year? Thanks. Bill Rutherford -- Chief Financial Officer Yes, I mean, obviously, as we've talked about over the past year, we've got a lot of initiatives on labor and our teams are executing very well from turnover reductions to recruitment and retention efforts on there. And our core labor trends are in line with our expectations. We said we anticipate wage inflation in that 2.5% to 3% level. And we're starting to -- and we are seeing that. And that's helping to offset, and we continue to be pleased with the contract labor trends. So I would say the core labor trends that we are seeing this year are right in line with our expectations. And the initiatives that we have continue to be underway. Operator Your next question comes from the line of Lance Wilkes, Bernstein. Your line is now open. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks. One follow-up on the labor question. And that's just if you could give any comment on hiring pipeline and if there are any categories where you're seeing either more appetite out there or any sort of constraints. And then my real question was on your comment on folks getting shifted over due to redeterminations and maybe that impacting outpatient surgeries. I was wondering if you're seeing any impacts of that sort of stuff on bad debt or any other things where perhaps the overall backdrop is impacting consumers here. Bill Rutherford -- Chief Financial Officer Yeah, let me attempt on that. Relative to the pipeline of labor, I don't know if there's any specific things I'd call out. I mean, obviously, we have diversity of geography, diversity of different employer cohorts. And labor teams are doing a great job. Our nurse hiring is up. And so I don't think there's anything unique I would call on that. And Sam or others can add in on that. And relative to the redeterminations and perhaps that influencing our outpatient surgery, I think both the combination of the HICS volume growth that we spoke about earlier, some of that due to the Medicaid redetermination, it is just a working thesis that perhaps there's a little bit more sensitivity on some of those elective procedures early in the year relative to deductible and co-pays. As Sam mentioned in his comments, almost all of our drop in outpatient surgeries was in Medicaid and self-pay levels. So we'll need a little bit more time to see how that plays out. And perhaps there will be some rebound on that as that begins to kind of normalize throughout the year. And on your question relative to the impact of that on bad debts, we're saying, no, I can't say we've seen any impact on that right now. There's still some of our self-pay growth are individuals that are in what we call a pending Medicaid status as we're pursuing eligibility efforts on there. But it has not yet resulted in any material change in our collectibility or bad debts at this stage. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks. Operator Your next question is from the line of Joshua Raskin from Nephron Research. Please go ahead. Josh Raskin -- Nephron Research -- Analyst Hi. Thanks. Good morning. Bill, I'll also add my congrats, and thanks for all the help. My question is just on capex. Could you speak to the capex and sort of the deployment in the quarter. It was down a tiny bit, so let's call it flattish year-over-year, but generally been trending higher in recent years. I guess, maybe there's obviously a lot of timing. And then any new capacity specifically to call out in the next 12 months? I know you've got a bunch of projects over the next sort of two, two and a half years as well. Sam Hazen -- Chief Executive Officer This is Sam. The amount for the quarter is flattish, to your point. And it is timing. We haven't slowed anything down. Some of our construction projects move at different paces than we anticipate at some level. But we expect for the year to be somewhere close to the number that we guided to last quarter, which is somewhere around $5.2 billion or so. So we're investing more in the business than we've ever invested because of the capacity that we need in the network development that we want. And so those efforts continue as we go through the course of this year. As far as any particular capacity that I would call out, I would tell you we have a new hospital in San Antonio, Texas that will open up later this year on the west side of that community. We're excited about that. We have other major projects on a host of campuses that will come online over the year. I think our bed capacity, when we conclude the year, will be somewhere similar to the growth that we experienced this year, which is maybe another 2% or so. As I mentioned previously, our emergency room capacity is also growing as we invest in new units or as we expand existing units. I don't have the number in front of me as to exactly how much we're anticipating there. But we're investing consistently as far as in the areas of our business. But we're investing more inside of those as a reflection of our overall spending. We also continue to invest in basic infrastructure in our facilities. Whether it's capabilities and technology for our nurses or surgical equipment and so forth, those investments continue again at elevated levels to improve the offerings for our physicians and patients. And so we have some increases embedded in that as well. So we're really excited about what we're spending our money on. And our patterns have proven that we can generate very positive returns. And we continue to believe that's the case. Operator Your next question is from the line of Sarah James, Cantor Fitzgerald. Please go ahead. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. I was wondering if you could give us what the commercial outpatient surgeries were. Just with the moving pieces, I think we're all just trying to understand if that piece was where you expected it to be. I know it's coming off of a tough comp last year. But was it still positive like it was the last few quarters? And then Galen, I think, you guys are within a few weeks of your first graduating class. So just wondering strategically, how has that panned out? Did you get your share or better of the work commitments of the graduating class? Sam Hazen -- Chief Executive Officer This is Sam. On the commercial side of outpatient surgery, I would say it's generally flat, so it performed better than the aggregate as a whole. Again, the calendar effects affected outpatient surgery in general. Specifically, it had a more dramatic effect on Medicaid, as we mentioned. But we aren't anticipating or seeing anything that's structural with our outpatient surgery business. And as I just mentioned, our capital spending has investments in our outpatient surgery platform as well. With respect to Galen, we have had graduating classes in the past. We continue to have larger ones as we expand that component of our organization. And one of our priorities within our facilities and within our nursing agenda is to integrate the Galen campuses into sort of the organization more effectively. And we are seeing incremental improvement in retaining those graduates within our company. And we continue to see opportunities for improvement there. It's really early to say it's completely solidified. We have numerous campuses that are in early stages of development. We will have again somewhere around 30 campuses by the end of 2027 with roughly 30,000 students across those campuses graduating somewhere between 7,000 or 8,000 per year, allowing us to pipeline and hopefully create a really good student experience, integrate them into the system through clinical integration and retain them when they graduate. So that's our strategy. And we're still early in seeing the effects of that. But we're encouraged by the efforts. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. Operator Your next question is from the line of Cal Sternick from J.P. Morgan. Please go ahead. Calvin Sternick -- JPMorgan Chase and Company -- Analyst Thanks for the question. We've heard commentary from some others that January and February were strong from a volume perspective with some softening of demand in March. Can you talk about what you saw in the quarter? And then if you're seeing the expected rebound volumes into April? And if I could also just ask one clarification on the Medicaid supplemental payments, do you have any visibility right now into any retro programs that could come through in the second quarter? Bill Rutherford -- Chief Financial Officer This is Bill, I'll answer the last one. No, we don't have specific visibility. There's always timing differences of certain aspects, but no specific visibility, no. Sam Hazen -- Chief Executive Officer As far as the volumes, every quarter has calendar effects. And again, as I mentioned previously, we judge the business over a longer period of time to really understand what's working and what's not working. March was a difficult calendar for purposes of elective outpatient business and elective inpatient business simply because we had less working days, business days, and we had the Easter holidays during that time period. So it was clearly softer. We actually grew our inpatient admissions, however, in March. But our outpatient activity was soft and influenced sort of the aggregate for the quarter. We don't give guidance with respect to one month into the next quarter. I will tell you, as I mentioned in my prepared comments, that we're encouraged by the overall backdrop of demand in our markets. Operator And this concludes our Q&A session for today. And I would like to turn the call back over to Frank Morgan for closing remarks. Frank Morgan -- Vice President, Investor Relations Thank you for your help today, and thanks, everyone, for joining our call. We hope you have a nice weekend. I'm around this afternoon if you have additional questions. Give us a call. Have a good day.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you all for joining. I would like to welcome you all to the Highwoods Properties Q1 2024 earnings call. My name is Brika and I will be your moderator for today. All lines are on mute for the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator instructions] Thank you. And now I would like to pass the conference over to your host Hannah True, manager of corporate finance and strategy to begin. So, Hannah, please go ahead. Hannah True -- Manager of Finance and Coporate Strategy Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our chief executive officer; Brian Leary, our chief operating officer; and Brendan Maiorana, our chief financial officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they are both available on the investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDA. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases, as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements and the company does not undertake a duty to update any forward-looking statements. With that, I'll turn the call over to Ted. Ted Klinck -- Chief Executive Officer Thanks, Hannah, and good morning, everyone. We had an excellent quarter executing on our key priorities and delivering solid financial results. First, we signed 922,000 square feet of second gen leases, including over 400,000 square feet of new leases and 36,000 square feet of net expansions. This volume of work will benefit us in future periods as the new leases commence. Second, we signed 157,000 square feet of first gen leases in our development pipeline. We continue to see solid interest in these best-in-class projects, which will provide approximately $40 million of incremental NOI upon stabilization and be a significant growth driver for our cash flows. Third, we delivered Four Morrocroft, an 18,000 square foot, $12 million build-to-suit that we developed at our Morrocroft property in the South Park BBD of Charlotte. As you may recall, this creative office development is situated on a surface parking lot with zero basis. While Four Morrocroft is one of our smaller developments, it demonstrates our resourcefulness in cultivating and generating attractive risk-adjusted returns for our shareholders. Finally, we sold nearly $80 million of non-core properties in Raleigh, including over $60 million that closed early in the second quarter. These sales improve our portfolio quality, increase our long-term cash flow growth and further strengthen our liquidity and already strong balance sheet. We expect our solid leasing momentum to continue as our markets generate outsized population and job growth given their high quality of life and business friendly environments. Simply put, our markets and our BBDs are where people and companies want to live, work and play. This is why our portfolio has outperformed the national average, our markets and our submarkets, all because customers and prospects are attracted to our commute-worthy buildings. Plus, being a long-term landlord with a strong balance sheet that can fund tenant improvements and leasing commissions and care for our best-in-class properties is proving to be a clear competitive advantage for us. Contrary to popular opinion, we're seeing strong demand across our portfolio, whether they be brand new trophy assets or well-located second gen properties and whether they be suburban or urban. We believe financially capable landlords who provide value to customers and prospects will see healthy demand across a wide variety of price points. Turning to our quarterly results, we delivered FFO of $0.89 per share and same property cash NOI growth of positive 0.3%. As expected, our occupancy dipped modestly to 88.5%. Our 2024 FFO outlook is a penny and a half lower at the midpoint due to higher-than-expected interest rates and the dilutive impact of non-core asset sales already completed, neither of which were factored into our initial outlook. These items are partially offset by higher projected NOI. The strong leasing start to the year modestly helps 2024, but most of the new leasing will drive upside in 2025 and beyond. We've also had a successful start to the year with non-core asset sales, and we're prepping additional properties for potential disposition. We now expect to sell up to an additional $150 million during the remainder of the year. The volume and timing of dispositions will depend on how conditions are in the investment sales market, but we've been encouraged by the response we've seen in recent quarters to our marketing efforts and the modest improvement in the capital markets for prospective buyers. While we don't have any acquisitions included in our 2024 outlook, we continue to build the foundation for future investment opportunities. Similar to the first few years coming out of the Global Financial Crisis, we believe compelling investment opportunities will arise, but these will take time to play out. We're comfortable being patient as we continue to have conversations with owners and lenders of wish list properties in our markets. Our development pipeline is now $506 million following the delivery of the 100% leased Four Morrocroft building in Charlotte. With 157,000 square feet of first gen leases signed during the quarter, our pipeline is now 41% leased. A big chunk of the activity was at our 642,000 square foot, $460 million, 23Springs project in Uptown Dallas that we are developing in a 50/50 joint venture with Granite. 23Springs is now 54% pre-leased a year prior to scheduled completion and four years before the estimated stabilization. The largest lease signed was a current law firm customer at our 98% occupied McKinney & Olive property just a couple of blocks away who needs to expand by nearly 50%. Given we couldn't accommodate their growth at McKinney & Olive, we were able to accommodate their growth at 23Springs. We already have excellent activity to backfill their space at McKinney & Olive more than two years before their scheduled move to 23Springs. We made modest leasing progress at Granite Park Six in Dallas and GlenLake III in Raleigh. Both of these developments delivered late last year and are projected to stabilize in 2026. These buildings are best-in-class in their respective BBDs and prospect activity is accelerating. We're confident in the long-term outlook and expect these developments to drive solid cash flow growth for us in future years. Midtown East in Tampa, our 143,000 square foot, $83 million project that we are developing in a 50/50 joint venture with Bromley in the Westshore BBD, is seeing strong interest from prospects given we're the only office project currently under construction in the entire market. We're 16% pre-leased and are very encouraged by the strong interest more than two years before scheduled stabilization. We don't expect to announce any new development projects during the year. Obviously, this isn't unique to Highwoods. It's very difficult for new starts to pencil in the current environment. We're not seeing meaningful reductions in hard costs and interest rates continue to be elevated. Plus, for other developers who are capital-constrained, securing capital for new office construction is very challenging. As a result, new starts have plummeted and with current development pipelines that will largely be delivered across our markets over the next few quarters, the lack of new supply in future periods will play to our advantage as users seek high-quality properties from landlords with strong financial resources. In conclusion, as we have for the past few years, we acknowledge the headwinds in the office sector, yet we're bullish about the future for Highwoods. First, our portfolio has never been better, and it will continue to improve as we sell additional non-core properties and deliver our $500 million development pipeline. Second, we have significant organic growth potential within our operating portfolio where we've already leased some of our existing vacancy and have solid interest on expected future vacancy. Third, our balance sheet is in excellent shape and will enable us to capitalize on future growth opportunities. And finally even with higher interest rates, our underlying cash flows remain strong, which allows us to keep investing Highwoodtizing capital to generate higher returns on our existing portfolio. Brian? Brian Leary -- Chief Operating Officer Thank you, Ted, and good morning, all. As we mentioned on last quarter's call, our leasing teams got off to a strong start in 2024. We maintained our positive momentum through the end of the first quarter and signed 97 deals and exceeded our five quarter average with 922,000 square feet signed. New leasing volume of 422,000 square feet was the second highest quarterly total since 2014. Average term was also strong at nearly seven years, one year longer than our prior five quarter average. Tampa, Atlanta and Raleigh signed nearly three-fourths of this quarter's total volume with average terms of seven and a half years. Expansions outpaced contractions two-to-one and while lease economics reflect a highly competitive market, we will prioritize occupancy as needed over pushing rental rates to lean on our strengths as a long-term owner while strengthening our long-term cash flows. In addition, we are seeing strong activity across our $500 million development pipeline. As Ted mentioned, we signed 157,000 square feet of first gen leases, including 129,000 at 23Springs, our JV development in Uptown Dallas. The 129,000 square feet of preleasing at 23Springs follows the 105,000 square foot lease we announced last quarter. 23Springs is now 54% preleased, one year before completion and four years before our estimated stabilization in the first quarter of 2028. The quality of our portfolio, our sponsorship and the commute-worthy lifestyle office experience we provide our customers is giving us a clear edge in today's leasing environment. We're seeing strong demand at various price points across our portfolio. As demonstrated by strong leasing volume in our development pipeline, the top of the market is doing well, but we continue to see the most demand for our well located second gen assets. This is because a large segment of customers and prospects prioritize a premier office experience at rents that are more affordable than a trophy price point. Moving to our markets, Tampa recorded the most volume in the quarter with 267,000 square feet signed. Our 16% pre-leased Midtown East development is the only Class A office development under construction in Tampa and is on-time and on-budget for a Q1 2025 delivery. Solid inbound interest continues as the building advances toward completion. According to Cushman & Wakefield, Midtown East's Westshore BBD was the most active submarket in Tampa during the quarter capturing nearly one-third of all leasing activity. Further, CBRE is currently tracking several large users in the market and over 2.6 million square feet of demand. We leased a lot of our vacancy earlier this year at Tampa Bay Park, and we're now working to fill pockets of vacancy at Meridian where we have solid traction. Moving to Atlanta, the MSA recently passed Philadelphia and Washington, DC as the nation's sixth largest and is the second largest metropolitan area on the East Coast per the latest population estimates from the US Census Bureau. Our Atlanta team signed 199,000 square feet for the quarter, of which 160,000 was new. This represents the greatest share of new leasing across the portfolio. Further north in Raleigh, which was recently ranked No. 2 in the Milken Institute's annual Best Performing Cities report, our team signed 201,000 square feet in the quarter. We averaged close to eight years of lease term and over half of this leasing activity was new. Raleigh is joined by Nashville, Dallas and Charlotte in Milken's top ten best performing cities list. In summary, our leasing pipeline is healthy and we are pleased by the flow of inbound proposal and tour requests across our portfolio. We believe this is emblematic of our simple and straightforward strategy of creating commute-worthy experiences in the SunBelt's best business districts. Brendan? Brendan Maiorana -- Chief Financial Officer Thanks, Brian. In the fourth quarter, we delivered net income of $26.1 million or $0.25 per share and FFO of $96 million or $0.89 per share. There were no unusual items in the quarter. We are pleased with the quarterly results, which demonstrate the resiliency of our operations and continued strong cash flows. Rolling forward from the fourth quarter and excluding the $0.08 per share of unusual items in Q4, FFO per share was $0.02 lower in the first quarter. Higher G&A, which we incur every year during the first quarter due to the expensing of equity grants for certain employees and the full quarter impact of November's bond issuance reduced FFO by $0.04 per share. These headwinds were partially offset by $0.02 per share of higher NOI, which nets to the $0.02 sequential reduction. Our balance sheet remains in excellent shape. At March 31st, we had $850 million of available liquidity, which has increased to $915 million following the non-core dispositions we closed in early April. We have a little over $200 million left to fund on our development pipeline and no consolidated debt maturities until May of 2026. We do have one mortgage that matures in the third quarter of this year at our unconsolidated McKinney & Olive joint venture. This is a low leverage loan and we're reviewing financing options with Granite Properties, our partner. We may ultimately decide to jointly repay this loan upon maturity and seek longer term financing when the lending environment is more attractive. Given our ample liquidity, we have many options available. This also demonstrates the strategic value of having such a financially capable joint venture partner in Granite. As Ted mentioned, we have updated our 2024 FFO outlook to $3.46 per share to $3.61 per share, which implies a $0.015 reduction at the mid-point. The reduction is driven by the $0.03 dilutive impact from the asset sales completed since our outlook was provided in February and higher than anticipated interest rates for the remainder of 2024, partially offset by $0.015 of higher anticipated NOI. It's still early in the year and therefore our range remains wide with several variables, most around projected property tax savings which aren't assured yet. We're pleased with the non-core property sales completed thus far. While modestly dilutive to near-term FFO, as we have long stated, our capital recycling program has been accretive to our cash flows while also improving our long-term growth rate. We've increased the midpoint of our same property cash NOI outlook and moved the high end of our total dispositions to $230 million including the $80 million we've closed so far. All other items in our outlook remain unchanged. As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume. Many of the new leases signed in the quarter won't commence until late this year or next year, and therefore will not have a meaningful financial impact on 2024 results. This volume of work will obviously bolster our results in future years. As you know, we try to be as open and transparent as possible with our stakeholders and we've stated for quite some time that we expect occupancy will trough in the first half of next year. We still expect this to be the case, but if we can continue to post strong leasing volumes, we believe our trough occupancy level will be higher than our original expectations and our recovery will be faster. You may have seen in our supplemental package that we have made some adjustments to how we present property-level operational information. Starting this quarter and going forward, we are now including in-service properties owned by consolidated and unconsolidated joint ventures at our share. We are doing the same thing with respect to the presentation of our same property operational results in the supplemental. For those of you who would rather see same property results on a consolidated basis only, all of the ingredients are itemized in the same property reconciliation table in the back of the earnings release. These changes have a relatively modest impact on our property-level metrics this quarter as JVs today comprise less than 3% of our business but will increase to around 8% as our development properties are placed in service. To wrap up, we're very encouraged about the future for Highwoods. Our high-quality SunBelt portfolio is located in the BBDs where talent wants to be, which is clearly demonstrated by our performance this quarter. We have strong embedded growth potential within our operating portfolio and approximately $40 million of future NOI as our development pipeline stabilizes. Our balance sheet is in excellent shape, and our cash flows continue to be resilient. Operator, we are now ready for questions. Questions & Answers: Operator Thank you. [Operator instructions] We have our first question from the phone line from Camille Bonnel of Bank of America. Your line is open. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Good morning. Great to see the pickup in leasing this quarter. I'd like to start with some questions around guidance. As you clearly laid out the puts and takes for bringing the top end of FFO down. Can you explain the drivers behind raising the low end of your same-store guide? And how confident are you in the bottom range here if there is a pullback in decision-making? Brendan Maiorana -- Chief Financial Officer Camille. Hi. It's Brendan. I'll start. So I think in terms of the components of the driver of the higher NOI outlook that we talked about, both in terms of the same property growth and what we said is just overall better NOI with respect to the FFO outlook. I would say that it's roughly evenly split between better revenue and some expense savings. So that better revenue is driven by probably what I would characterize as modestly higher average occupancy. We didn't change the average occupancy range, but it is modestly higher overall. So it's a combination of top line and expense savings. And then, in terms of how much spec leasing is in the forecast, we still have spec leasing that is there. I think if things really slowed down in for the remainder of the year, it probably doesn't have a very large impact in terms of the financial performance for 2024 as most of the spec leasing that we have slated to come in this year would be later in the year and therefore, not have a big impact on '24 results. But obviously that's going to carry more impactful to 2025 and future years. But I think we feel good about kind of where our leasing activity has been through the first almost four months of the year and are optimistic that that will continue as we go forward. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst To clarify, is the spec leasing the same as new leasing activity that you report? Brendan Maiorana -- Chief Financial Officer We have -- within our spec outlook for the business plan for the year, there's a combination of that between both new and renewal. So it's with both. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Got it. OK. Well, if we look back, it seems like you were able to improve your occupancy when new leasing volumes were above 1 million square feet. So are you able to expand a bit more on that specific assumption baked into guidance this year? And do you think you can sustain the pace of new leasing throughout the year? Or was the first quarter? How did that track compared to your budget? Brendan Maiorana -- Chief Financial Officer Yes. Maybe I'll start and then I'll let Ted and Brian provide more color on specifics. But I think, certainly, new leasing volume of 423,000 square feet, we don't expect that to continue. That was, I think, the second highest quarter that we've had over the past 10 years. So that's certainly above expectations. And the volumes are going to bounce from quarter to quarter. But I think if we could average around 300,000 square feet of new per quarter for the year, so call it, 1.2 million square feet of new during the year. I think that would place us in a good position to kind of build occupancy as we get through some of the large known expirations. And what I mentioned in the prepared remarks, we certainly expect to trough occupancy early in 2025 and then build from there. But I think if we're able to sustain good new leasing volume and manage reasonable levels of renewals then I think that puts us in position to build kind of from the base. And as we stated earlier, trough at a higher level than what we previously expected and then recover faster. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Just one final question. If we were to dive deeper into your portfolio, are you seeing any areas where vacancy has been concentrated, whether that be by location like suburban, urban, infill or lease size? Thank you. Ted Klinck -- Chief Executive Officer Hey, Camille, it's Ted. I don't think so. I think we've seen pretty good demand across the portfolio. Our biggest vacancies as a company are the well-known Tivity move out. That building is still largely vacant, so that's 260 or so thousand feet. And then, the CDC vacated building in Atlanta and that is leased, but it's vacant right now. So combine those two, that's about 100, if I remember right, it's about 130 basis points of occupancy. But other than those two big holes, it's really not concentrated anywhere. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Thanks for taking my question. Operator Your next question comes from Vikram Malhotra from Mizuho. Georgi Dinkov -- Mizuho Securities -- Analyst Hey, this is Georgi Dinkov on for Vikram. Can you just walk us through any known move-outs and the occupancy trajectory in 2024? Ted Klinck -- Chief Executive Officer Yes. Maybe I'll take the first part and Brendan can jump in on the trajectory on the occupancy. So look, the known move-outs, we've talked about these for several quarters. I'm going to hit it just at a high level. We're seeing some good activity on the Novelis space in Atlanta. It's 168,000 square feet. And so, we're seeing really good activity there. We're seeing good activity actually in Pittsburgh. Now, as we're getting closer to the EQT expiration later this fall. As you know we -- I think last quarter, we indicated we went direct with one customer and we've got strong prospects for another 50,000 feet and over 100,000 square feet of proposals that are out. So we feel good about the activity we're getting there. We'll see where that goes. In Nashville, Bass, Berry moves out next February, and still a little bit early there, but we're well on our way on Highwoodtizing plans for the project that will be getting underway really the day they move out. So we're excited about our plans there. Activity is a little slower there just because we're still 10 months away from them vacating. And then, really the other big one is the Department of Revenue at the end of this year, 1800 Century Center. They're the ones consolidating and downsizing to another one of our buildings in that same park. We're still evaluating our plans for that building, whether it be office lease-up or potential residential conversion. So we're well underway. We've been analyzing that for a while. And hopefully, we'll know more in the next couple of months with respect to what our plans are with that. Brendan Maiorana -- Chief Financial Officer And Georgi, it's Brendan. Just in terms of the trajectory as we move throughout the year. So we'll probably dip a little bit in Qs two and three. So maybe around that average for the year around 88% or so. There's just a little bit of movement within the portfolio. There are some spaces that we're proactively taking back early in the second quarter that we have then backfilled and expect to move the new users in by year-end. And then, as we've stated, we think year-end will be the low point for us for this year, given what Ted talked about, which is principally the EQT expiration in the fourth quarter. But we do think that we're going to end the year at a higher level than what we had previously expected when we provided our original outlook in February. So we think we're tracking well. But certainly the year-end will be -- should expect to have the low point in terms of occupancy for the year. Georgi Dinkov -- Mizuho Securities -- Analyst And just a second question for me. We've noticed occupancy decline in Tampa and Orlando quarter over quarter, can you just comment on what was the driver? And is this a sign of challenges in these specific markets? And I guess, can you just comment on your markets, which ones are performing better and which one are kind of like lagging behind? Brian Leary -- Chief Operating Officer Georgi, this is Brian. I'll take a couple of things. First, you mentioned Orlando and Tampa specifically. Last quarter, Orlando really hit a high watermark in terms of their occupancy over a great period of time. They're doing a fantastic job. Nothing is under construction in Orlando. They have the best buildings in Downtown. So they're doing a good job there. We feel good about the long-term maintenance of occupancy within a bandwidth of the high watermark last quarter and where they are this year. So I think nothing to really expound upon more with regard to Orlando. Tampa is a dynamic market. We have multiple parks kind of within the Westshore BBD. And so, you're seeing ebbs and flows across there. Nothing to highlight anything specifically. We're very happy with the movement in Tampa, the folks continuing to grow there. Now, globally, in terms of the other markets, they're all our favorite children, so there's none that are favorite. But look, Nashville continues to be a place people want to be, it posted as an overall market, positive quarterly absorption last quarter, which stood out nationally for the year of 2023. It was four in the country for positive absorption. Some of you may have noticed just yesterday Larry Ellison was getting interviewed by Bill Frist in Nashville and reference that Nashville will become Oracle's global headquarters at some point in the future, which supports the story that CBRE put out there that Nashville is top five in the country for new headquarters. So Nashville is in a good place. Charlotte, well, in some ways, it's a tale of two cities. In some cases, there's a clear delineation in separation between location, lineage and landlord in terms of who's winning and who's not in Charlotte. We're sitting here at 96.2% occupied. We feel really good about our assets. Charlotte continues to grow lots of interesting things going on there. Dallas, Dallas will soon, they say in the next five years past Chicago in terms of population. It's the fourth largest metro right now led the US in 23 population growth. We couldn't be happier with our partnership there in the Granite, happy with the existing McKinney & Olive asset in Uptown the leasing momentum at 23Springs and leasing that's picking up an interest in inbounds and tours at GP Six. So I think that sort of kind of gives you a little bit of color of the spectrum of markets. I don't know if Ted has anything else to add? Georgi Dinkov -- Mizuho Securities -- Analyst Great. Thank you for taking my questions. Operator Thank you. We now have Blaine Heck from Wells Fargo on the line. Blaine Heck -- Wells Fargo Securities -- Analyst Ted, you mentioned this in your prepared remarks, but recently, we've been hearing a lot about the flight to capital or tenants looking for landlords that are willing and able to fund TIs on new leases. I guess can you just give a little bit more color on that trend broadly? And then, maybe comment on how much of the market vacancy might be attributable to space that's owned by a landlord that's unwilling to fund TI? And then, lastly, I'm just wondering whether there are any specific instances you can cite where you think you've won out on a deal because of that ability that you guys have to fund TIs? Ted Klinck -- Chief Executive Officer Sure. A lot to unpack there. Remind me if I don't hit all parts of that. So in general, it's exactly what you said. We're seeing a -- there's a bifurcation of assets and ownership that there are some cases we've heard that landlords or brokers aren't showing space, if they understand the capital stack. The capital stack is upside down or there's just risk of the building just effectively become a zombie-type building. So there's many instances out there, one in particular here in Raleigh, we got a full floor user from a building that was in distress and it was really from a cold call. And this was very similar to what all of our leasing reps are doing. It's -- all the buildings that have got maturing debt that we're targeting those buildings because of the capital that we can invest in the TIs and commissions that we can pay. So this was a direct result of cold call that we got. We got a full floor user. The user didn't want to stay in the building because they couldn't get enough money to recap to redo their space. So it was a great win for our team and it shows that just the resourcefulness of our team and that we're seeing that in other markets as well. In terms of the number of -- the amount of vacancy, it's concentrated. It's really the vacancy is concentrated in B and C buildings in general. It's concentrated in less desirable submarkets and then it's concentrated in the buildings that have been really in distress for the last call it two or three years. As we all know, the lenders have been kicking the can. Lenders don't want to take a lot of these assets back. A lot of the owners don't have the money or the ability or in some cases even the desire to keep remain in the ownership. So those buildings are going to be starved for capital. Occupancy is going to be under pressure. So and those occupancies are declining. So I think it's those three areas. Did I hit all parts of your question? Blaine Heck -- Wells Fargo Securities -- Analyst Yes, I think so. That's really helpful color. I really appreciate that. Just switching gears for the second question. I guess how are you thinking about the Pittsburgh portfolio the near to midterm? Do you think dispositions are still likely off the table in the near term? Are you seeing any kind of signs that the transaction market might be returning there? I guess, are there any of those properties in the potential of $150 million of dispositions that you're forecasting for the rest of the year? And then, just generally maybe how do you think about the balance between waiting for a decent price to exit versus maybe selling sooner wherever market pricing is, but likely saving some capital needed for lease-up and any renovation or refreshing projects that you might have? Ted Klinck -- Chief Executive Officer Sure. So with regard to Pittsburgh, it's going to be a tough sell. My gut is and we don't have our next wave totally identified yet. Clearly, when we announced we were exiting Pittsburgh in the fall of 2022. It's not unlike what we did getting out of Memphis and Greensboro. It took us about three years to get out. I think the timing, the capital markets still aren't back in my view. I think there we've had a lot of success selling small and medium-sized assets sort of bite-sized transactions that are easier to finance. But to sell a big transaction like a PPG, it's a very difficult debt market today. So my gut is, we're going to just keep focused on blocking and tackling, leasing space, and wait for the capital markets to recover. So I wouldn't expect Pittsburgh to be in that next 150. But certainly, it's our desire to get out when the timing is right. And we are trying to balance do you sell it now versus waiting. But I don't think there's a market for that asset today. So in terms of what we do want to sell the next 150, I think it's going to be a lot like what we've sold the last couple of years is going to be smaller assets that we think have liquidity in the market. And we've been successful selling both value-add and core assets over the last couple of years. And there's local banks. There's high net worth individuals got relationships that can finance these type of assets. So my gut is the next 150 is going to be multiple buildings. They're going to look a lot like what we sold the last year or two. And then, we can use those proceeds, plow that back into the renovation capital and to use throughout the portfolio. Blaine Heck -- Wells Fargo Securities -- Analyst Great. Thanks so much, Ted. Ted Klinck -- Chief Executive Officer Thanks, Blaine. Operator Thank you. Your next question comes from Michael Griffin of Citi. Michael Griffin -- Citi -- Analyst Great. Thanks. Just curious on the renewal leasing. What are you seeing in terms of retention rates and whether or not most firms are upsizing, downsizing or keeping the same space? And is the average lease signed by size changed at all? Ted Klinck -- Chief Executive Officer Hey, Michael, I'll start out and if Brendan or Brian have anything to add. Look, our retention ratio the last couple of years has, in fact, gone down, right? But it's not atypical of what we see in any economic downturn. Certainly, there's been some, obviously, work-from-home, so that's hurt. But then just the cyclical downturn as well. Companies are closing up regional shops or combining local offices or what have you. So our retention has, in fact, gone down. But if you look at our overall portfolio, we've had many, many quarters where our expansions are outweighing contractions. I think this quarter, we had 10 expansions, five contractions for a net positive 36,000 feet, expansions were 63,000 less 26,000 square feet of contractions. And that's if you look back just since the beginning of 2023, we've had 55 customers expand 21 contract over the last five quarters. So it's a lot of the small, the larger customers are the ones contracting. Thankfully, our average-sized customer is about 13,000 or 14,000 feet. Those are the customers that A, they're making the decisions, B, they're the ones that are still growing. So we're seeing a lot of expansions. And these expansions are maybe 2,000 feet, 3,000 feet and the contractions, again, the contractions we've had have been a little bit bigger, it might be a floor or half a floor, but it's been slow and steady for us of expansions outweighing contractions. In terms of lease size, again, our bread and butter is at 5,000 to 15,000 feet. And that's -- again that's -- most of our activity this quarter, we had a couple of larger deals. But in general, our normal is at five to 15. We're signing a lot of them. I think we did almost 100 again this quarter. So in and out, we're signing about 100 a quarter. Michael Griffin -- Citi -- Analyst Great. And then, I was curious if you could just give some color on the development leasing in Dallas. It seems like Sidley Austin is moving from MNO to 23Springs. Was that always the plan when you bought the property and announced when you started the development? Or did that come about relatively recently? And what are you tracking in terms of demand on that space? Is it going to be a single user? Could it be -- could you multi-tenant that space that they have there? Just maybe some more color around that would be helpful. Ted Klinck -- Chief Executive Officer Sure. Certainly, when we bought MNO, that was not the business plan. Sidley Austin, I think their leases going until 2028 or so. But as we got into it, their growth needs we are just thrilled that we were able to accommodate their growth needs. They loved McKinney & Olive and would love to stay, but we couldn't accommodate them. The building is full, and everybody seems pleased with the buildings. So we just -- we weren't able to accommodate their growth. So it just is very fortunate that we have the space down the street. In terms of the other activity in the building or just our development pipeline in general, obviously, we signed 157,000 square feet in the first quarter. We've got another, I'd call it, 125,000 square feet of prospects, strong prospects that we've either agreed and we're papering or we're close to agreeing to. It's throughout our development pipeline. Of that 125, virtually every one of our development projects has a prospect -- strong prospect. So we're looking forward to moving the needle a little bit more there. And then, we've got over 800,000 square feet of recent tour activity. That's on top of the 125,000 square feet of strong prospects. So activity seems to be picking up. We have a lot of work to do to get those over the goal line and get done. But we couldn't be more thrilled with really the activity. Certainly, we're getting a lot of deals signed at 23Springs. But across our development pipeline, the activity seems to be picking up. Operator Thank you. We have the next question from Rob Stevenson with Janney. Rob Stevenson -- Janney Montgomery Scott -- Analyst Good morning, guys. Ted, how much of that up to an additional $150 million of dispositions is somewhat dependent on redeployment opportunities. I mean, would you sell $225 million and just either pay down debt or sit on the cash and fund the development pipeline if needed? Ted Klinck -- Chief Executive Officer Yes, Peter. I think we would. It's not dependent on redeploying into acquisitions or development. This is just doing our normal cadence and sell them like we have, I'm sorry, yes, Rob. So really it's not, it's just identifying assets to create some liquidity to get our dry powder ready to take advantage of opportunities at the time. But it's not going to be dependent on us buying something. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then, your commentary about lack of acquisitions, is that due to assets -- the assets available right now aren't of the right quality or location? Or is it mostly the pricing is still too high or some combination? What's the thing that's sort of making the acquisition environment not advantageous to you right now? Ted Klinck -- Chief Executive Officer I think it's a combination of all three of those, right? So the assets that have sold don't meet the quality. There are several out there now, I'd say, a handful of assets that are sort of going through a pricing exercise and so we're going to be patient. We're doing a lot of practice underwriting and all that. But it's certainly got to be the quality. Most importantly, it's got to be the location and certainly pricing as well. So we continue to monitor. We're hanging around the hoop and we'll see where it plays out. But certainly, there's nothing imminent by any stretch. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then, if a Dallas acquisition or development opportunity came up over the next year, would that still likely be in a JV? Or are you comfortable at this point able to be going solo on a deal in that market? Ted Klinck -- Chief Executive Officer Yes. Well, first, I'd tell you, I think it's -- our entry into Dallas could not have gone better. I think we picked the right partner and it's in and out every day. In fact, we had our board meeting in Dallas last week, and the Granite guys joined us for dinner and tours and this like-minded of a JV partners Highwoods is probably ever have. So we're thrilled with our partnership. Now, having said that, our goal is to continue to grow Dallas, and it's with Granite great. But I can certainly see an opportunity that we may -- they may not be interested in that we would go ahead and do on our own. We feel very comfortable with that market now. Rob Stevenson -- Janney Montgomery Scott -- Analyst All right. And then, last one for me. Brendan, what is the -- when do you expect to know the outcome of the bulk of the property tax savings potentially? And what's the magnitude of the swing there in that range? How much should we talk about how material is that? Brendan Maiorana -- Chief Financial Officer Yes, Rob, it's a good question. It's meaningful, there's no doubt about that. I would say that I think we will have more clarity in Q2 and then even more clarity as we get into Q3. But I mean, there's certainly a possibility in terms of challenging some of the assessments that these could drag on beyond 2024. So we will see where that is. But it could certainly swing us a few pennies in either direction, depending on what the ultimate resolution of these assessments are. Rob Stevenson -- Janney Montgomery Scott -- Analyst And where did you -- are you just in the middle in terms of the guidance? How is that impacted into the guidance? Brendan Maiorana -- Chief Financial Officer Yes. We have assumed savings within the guidance. We haven't assumed at the top end of what is possible. So I think that it is roughly in the middle in terms of kind of the high end and the low end in terms of what we have factored in or I would say more than what's in the middle, I think it's really where we think the most likely outcome is going to be. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. That's helpful. Thanks, guys. I appreciate the time. Operator Thank you, Rob. We now have Michael Lewis from Truist. Michael Lewis -- Truist Securities -- Analyst Great. Thank you. You talked about kind of the characteristics of some of the potential noncore dispositions. As far as the ones you've already done, right, I'm looking at $79 million with $6 million of NOI. That's about a mid-7 cap rate. Is it fair to look at this and say, Highwoods is selling some of their assets that are noncore that are not their best assets at a mid-7 in the stock, even though it's been a big outperformer recently, we still have it at like a 10 implied cap rate. Am I comparing apples and oranges? Or is it fair to kind of look at -- you closed some sales, you proved out some pricing and we can read through into the rest of your portfolio a little. Ted Klinck -- Chief Executive Officer Maybe I can start and if anybody else wants to jump in. Look, I think if you look at the assets we did sell, we're thrilled with the mid-7 cap rate. Now, look, they were incredible location, which very similar to most of our assets in our portfolio. They are -- they do have some medical components, right? And I think there's a very liquid market on the MOB stuff. But certainly, we're pleased with the mid-7 cap rate. And I think it was certainly by selling them enhanced our overall portfolio quality as well. So I think the rest of our portfolio is higher quality or a vast majority of these assets. So certainly trading at a 10% cap rate, we think, is way too high. And I think we've proven out over the last two or three years, we've had multiple sales that have been well below those cap rates over the last two or three years. So I think it's just indicative of the assets we own. Michael Lewis -- Truist Securities -- Analyst OK. Good answer. Thanks. Second, you talked a lot on this call about the timing of the trough occupancy and Brendan kind of laid out how 2024 might go in terms of cadence. Could you just remind us or have you said what you think that trough occupancy will be in early next year? And how much is better now or you talked about trending better than that. So maybe you could answer both parts of that or one part of it. Just trying to figure out kind of where this bottoms and how much better you might be doing than you first expected? Brendan Maiorana -- Chief Financial Officer Yes. Hey, Mike, it's Brendan. So we're obviously not in a position to kind of give '25 guidance and outlook on this call. But what I can do is maybe provide some ingredients that will help you think through that question, which is a good one. So for year-end '24, which we switched to give average guidance, which we think is a more meaningful metric, I think we're probably, originally embedded sort of within that outlook was probably ending the year at around, call it, between 86% and 87%. I think we are trending toward the high end of that range and potentially could be even a little bit above the upper end of that range. So that's better call it, 50 basis points better by year-end than previously what we thought. And then, we've talked about some of the big expirations that we have kind of in early '25 principally in Nashville, but some of the leasing activity that we have done so far this year and some other prospect activity that we have are leases that will commence in '25. So that will offset some of that. So I think that that just puts us in better position. And then, the longer that we go on with having additional quarters of good leasing volume, that really builds the base to kind of get the recovery post the trough number. So I think as we go on and what we're paying attention to and what I think you and others will pay attention to in terms of our performance is if we continue to lease well as we go progress throughout '24, that's really going to a nerve to our benefit in '25 and thereafter. Michael Lewis -- Truist Securities -- Analyst OK. That's a perfect lead into my last question, which do we know why the pickup in leasing over the last four, five or six months? And I'm asking the why because maybe that's important to understanding whether this is sustainable or not. Or has this just been surprising to you as well, I don't know? Ted Klinck -- Chief Executive Officer Yes. Good question, Michael. Look, I think it might be a few things. A couple of years ago, there were a lot of companies that were sort of kicking the can and doing short-term renewals. And I don't think landlords and companies are doing that anymore. Landlords don't want them to and companies are getting closer to making their return to work decisions and seeing how their layouts are going to be. So I just think there was a wall of maturities that got lease maturities that got pushed out, they're now having to be dealt with. And then, I also think, look, I do think the distress is also increasing from the last couple of years. And some of those customers are also having to make those decisions that they're going to stay in that -- in a building or move. I do think the other thing I do think is from in-migration is starting to pick up a little bit in our markets. I mean, we've been chasing a couple of customers. We just -- Raleigh just won one from Dallas. We were chasing them both in Raleigh and Dallas our corporate relocation, which is sort of fun to see those. If you talk to the economic development folks for the last couple of years has largely been manufacturing and industrial users. We're now starting to see there's more office using customers come in. Just this quarter, we did 10 leases to new-to-market customers. Now, they are largely small regional offices. The largest was 27,000 feet and then about a 17,000 footer and that goes down to 2,000 or 3,000 feet is over 60,000 feet of in-migration companies that are moving and open up new offices, largely just opening up new offices in our market. So I just think the things just we're starting to just see it open up a little bit. Michael Lewis -- Truist Securities -- Analyst Great. Thank you. Operator Thank you. We now have Tayo Okusanya from Deutsche Bank. Tayo Okusanya -- Deutsche Bank -- Analyst Hi. Yes. Good morning. Just a quick one from me. In terms of just overall demand, could you talk a little bit about demand for some of the recently vacated space like activity space in the CDC space? I think you already gave color about some of the upcoming vacancies. We're curious about those two spaces, in particular, and if any of the new leasing this particular quarter was related to backfilling any kind of recent vacancies? Ted Klinck -- Chief Executive Officer Yes, Tayo, I think specifically on the Tivity, as you know, we redid the landmark lease earlier this quarter. I think earlier last quarter, the -- we took back about 110,000 feet. We have really good activity, multiple prospects on it. So we did a big Highwoodtizing project a couple of years ago or a year or so ago and it finished and it's really generated demand. It's been very well received in the market. So that's about 110,000 feet and we've got prospects, I'd say, prospects either agreed to or strong prospects that we're trading paper with for about 80,000 feet or so. I don't know if we'll make all those, but we feel pretty good about a lot of those. So we feel really good about that. I don't think much of the leasing activity this quarter was really backfilling anything other than maybe one or two of the Tivity spaces that we've signed. Tayo Okusanya -- Deutsche Bank -- Analyst Great. Thank you. Operator Thank you. We now have Peter Abramowitz of Jefferies. Peter Abramowitz -- Jefferies -- Analyst Hi. Thank you. Yes. So just kind of want to dive into some of the comments around potential kind of future growth opportunities some of the underwriting you're doing. I guess we have a decent sense from whether it be noncore asset sales or the unsecured bond deal that you did last year where your cost of capital might be today. So I was just wondering if you could talk about from a pricing perspective, whether initial yields or IRR relative to that cost of capital kind of what you're hopeful for? What's realistic when deals do finally kind of6 start to come back to market and start to pencil like where are your expectations for where those would be from an underwriting perspective? Ted Klinck -- Chief Executive Officer Sure. Peter, as you know, I mean, look, we're interested in growing the business and improving the quality of the portfolio, both core and value-add acquisitions. Coming out of the GFC, we primarily did value-add acquisitions. We want to own quality assets, the best business districts of our markets. And we're looking to create where we can improve our cash flow growth over time as well. And I think coming out of GFC, we were able to do that very successfully. So where are we now in terms of the underwriting? I think, obviously, we look for a discount to replacement cost and a lot of different metrics. IRR, we're sort of underwriting to a double-digit, low double-digit unlevered IRR, Peter, is sort of what we're doing today. And again, there's a handful of deals out there that we're seeing where they're going to price, but we'll see. But it's those type of metrics, if we can get a stabilized cap rates in the high-single-digit, low-double-digit with an 11% or low-double-digit unlevered IRR, those feel pretty good for us that we can improve the quality of the portfolio. If we can get acquisitions under our belt that are like that. Peter Abramowitz -- Jefferies -- Analyst That's helpful. Thank you, Ted. And then, one on the leasing market. Could you just comment on sort of the length of deal cycles? I know that was both for you guys and for office overall became more of a challenge last year that tenant decision-making was just a little bit slower. Could you talk about kind of that dynamic and where that's at in the first couple of months to start the year? Ted Klinck -- Chief Executive Officer Yes. Certainly, that's been the frustrating part. It's definitely taking longer to get deals done. Bigger was really taking longer. I mean, some are -- we think we're going to get it done. It may get pushed a quarter, two quarters, in some cases, even three quarters. It's taken a long time. So the bigger the deal, the longer it takes, in general, just whether it has to go up through the corporate real estate department up to the CEO. And a lot of it is based on the CEO's confidence level in the economy as well. I think interest rates plays into that as well. So longer -- bigger deal takes longer. Smaller deals, our bread and butter, we're still getting a lot of those done. Those are even taking longer, but not nearly as long as, call it, the 100,000 square foot users and above. The nice thing we've seen in the last, I'd say, quarter or two, is we've seen full floor, more full floor users, more two-floor users. So that's sort of mid-size type user, we're seeing a lot more of those and some of the decisions getting made with those sized customers. Does that make sense? Peter Abramowitz -- Jefferies -- Analyst That does. Thank you. Brian Leary -- Chief Operating Officer Peter, hey, it's Brian. I'll add to that real quick. Other thing that's taken a little while, people are continuing to price and price work. We don't have a punchline yet on that, but the -- it seems like escalations have stopped or leveled out or plateaued on build-outs. And so, there is potential visibility into maybe getting a better price. So people kind of are holding on to see some of that TI that build out that cost of moving into new space come down. Peter Abramowitz -- Jefferies -- Analyst That's helpful. Thank you. And one last one, if I could. Just trying to think through from a modeling aspect, the earnings impact of any potential disposition through the rest of the year? I mean, are the deals that you've done so far in Raleigh is that kind of a good barometer of what we should expect pricing-wise? Brendan Maiorana -- Chief Financial Officer Peter, it's Brendan. So first, what I would say is while the dispositions that we did so far this year are dilutive to FFO, I think to your first question, they are accretive to our cash flow. So I think we would expect comparable dynamics in terms of any future dispositions that we may do this year or on a go-forward basis. Where the cap rates shake out, it depends. Every deal is unique. So it depends on the particular circumstances for that particular deal. I think it's -- we'll see where they, where cap rates shake out. I would say the bias is maybe a little bit higher than the cap rates that we transacted at early this year, but we'll see. But I think in general, the capital recycling activity that we do, what you ought to see is an improved cash flow outlook for the company and improved portfolio quality and therefore, a lower risk overall for us as an enterprise. Peter Abramowitz -- Jefferies -- Analyst That's helpful. Thanks, Brendan. Thank you, team. Operator We now have Ronald Kamdem of Morgan Stanley. You may proceed with your question. Ronald Kamdem -- Morgan Stanley -- Analyst Hey. Good afternoon, guys. Just the first question, you guys talked about some of the expirations through the year and how that might be a headwind to occupancy. Maybe just give us a picture of what retention would look like in '24 if we were to exclude those move-outs. So just the retention on everything else outside of the known move-outs? Brendan Maiorana -- Chief Financial Officer Yes. Hey, Ron, it's Brendan. I'll take that. So retention, we always struggle with this answer and question that we get often because we do so much early renewals that it depends on the date that you start kind of counting retention. So prior to coming into this year, we had already renewed 1 million square feet of original 2024 expirations that are pushed out into future years. So when you look at what's left over, as you kind of come into the year, you have adverse selection bias there. And clearly, like that's where the retention level on the remainder is low. So that number probably for kind of what we had left in the year, including the known move-outs, was probably, call it, in round numbers, around 40%. We talked about some of the large known expirations that are there. So that number would be a little bit -- would be 10 plus percentage points higher if you excluded those from kind of the numerator and denominator. But that gives you a sense of kind of where we are. Ronald Kamdem -- Morgan Stanley -- Analyst Got it. And the second one on McKinney & Olive. You guys talked about paying down that loan potentially. I guess, what the sales you guys have executed on and potential additional $150 million to come. Should we take that to mean you're just going to use existing corporate liquidity or could we potentially see you guys tap the unsecured market to get here? Brendan Maiorana -- Chief Financial Officer Yes. No, no plans to -- for capital raising for this year. So I mean, I think as we sit here right now, we have almost nothing drawn on the line. So have that full $750 million that's available, certainly have construction loans in place for the two Dallas development projects. So that would satisfy the bulk of the remainder of spend there. So we really have plenty of liquidity. And I think to your point, with potential dispositions that are on the horizon. I think it's more of a challenge in terms of deciding what capital we want to pay off with any disposition proceeds that come in the door rather than thinking about capital raising. Ronald Kamdem -- Morgan Stanley -- Analyst Got it. And then, I think you guys talked about Pittsburgh and Bass, Berry. Maybe just an update on Novelis as well would be helpful. Ted Klinck -- Chief Executive Officer Yes. So on Novelis, again, we like the prospect activity. As you all know, we went direct with one of the sublease customers and we've got over 200,000 square feet of prospects to backfill the remaining, call it, 100 or so thousand feet, maybe a little more than 100. So we feel pretty good about the prospect activity, a lot of tours. Ronald Kamdem -- Morgan Stanley -- Analyst Got it. Thank you, guys. Ted Klinck -- Chief Executive Officer Thank you. Operator Thank you. We now have Dylan Burzinski from Green Street. Dylan Burzinski -- Green Street Advisors -- Analyst Hi, guys. Most of my questions have been asked. But I guess, Brian, going back to your comments on focusing on occupancy over rental growth. I mean, is it your expectation that we'll continue to see some degradation in net effective rents across the portfolio? Or how should we be thinking about that? Brian Leary -- Chief Operating Officer Dylan, I'm accused among the three around this table to be the eternal optimist. So I'll lean into that a little bit. Now, look, obviously, headwinds, I think tenants feel like it's a tenant's market and it is. But I do feel constructive on our ability to hold kind of where we're at based on the quality of the assets, based on the seven different things Ted highlighted why maybe our leasing momentum is maybe more than previous averages with regard to flight to quality, flight to capital. I don't see it greatly improving anytime soon, maybe as costs come down to fit up. But in general I feel like. I feel pretty optimistic about where we're at. Brendan? Brendan Maiorana -- Chief Financial Officer Dylan, what I would just add to that is, I think given the kind of competitive dynamics that are in the leasing environment as it stands now, our ability to fund TIs is a benefit to us. But what we're looking for in terms of customers and prospects to get in consideration for that is higher face rates and longer term. So I think what that's going to do is drive -- is going to keep net effectives holding up reasonably well, which is what we've seen generally happen. Now, that might mean that there's a little bit more upfront capital, but that secures longer lease term at attractive rate. So I don't think you're likely to see significant degradation in terms of net effectives, but it might mean there's a little bit more upfront capital. Dylan Burzinski -- Green Street Advisors -- Analyst Great. Thanks, guys. Operator Thank you. We have no further questions on line. So I'd like to hand it back to Ted Klinck for some final remarks. Ted Klinck -- Chief Executive Officer Thank you for everybody for joining us on the call today and thank you for your interest in Highwoods. And we look forward to talking to you next quarter, if not before. Have a great day. Answer:

the Highwoods Properties Q1 2024 earnings call

Operator Thank you all for joining. I would like to welcome you all to the Highwoods Properties Q1 2024 earnings call. My name is Brika and I will be your moderator for today. All lines are on mute for the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator instructions] Thank you. And now I would like to pass the conference over to your host Hannah True, manager of corporate finance and strategy to begin. So, Hannah, please go ahead. Hannah True -- Manager of Finance and Coporate Strategy Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our chief executive officer; Brian Leary, our chief operating officer; and Brendan Maiorana, our chief financial officer. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they are both available on the investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDA. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases, as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements and the company does not undertake a duty to update any forward-looking statements. With that, I'll turn the call over to Ted. Ted Klinck -- Chief Executive Officer Thanks, Hannah, and good morning, everyone. We had an excellent quarter executing on our key priorities and delivering solid financial results. First, we signed 922,000 square feet of second gen leases, including over 400,000 square feet of new leases and 36,000 square feet of net expansions. This volume of work will benefit us in future periods as the new leases commence. Second, we signed 157,000 square feet of first gen leases in our development pipeline. We continue to see solid interest in these best-in-class projects, which will provide approximately $40 million of incremental NOI upon stabilization and be a significant growth driver for our cash flows. Third, we delivered Four Morrocroft, an 18,000 square foot, $12 million build-to-suit that we developed at our Morrocroft property in the South Park BBD of Charlotte. As you may recall, this creative office development is situated on a surface parking lot with zero basis. While Four Morrocroft is one of our smaller developments, it demonstrates our resourcefulness in cultivating and generating attractive risk-adjusted returns for our shareholders. Finally, we sold nearly $80 million of non-core properties in Raleigh, including over $60 million that closed early in the second quarter. These sales improve our portfolio quality, increase our long-term cash flow growth and further strengthen our liquidity and already strong balance sheet. We expect our solid leasing momentum to continue as our markets generate outsized population and job growth given their high quality of life and business friendly environments. Simply put, our markets and our BBDs are where people and companies want to live, work and play. This is why our portfolio has outperformed the national average, our markets and our submarkets, all because customers and prospects are attracted to our commute-worthy buildings. Plus, being a long-term landlord with a strong balance sheet that can fund tenant improvements and leasing commissions and care for our best-in-class properties is proving to be a clear competitive advantage for us. Contrary to popular opinion, we're seeing strong demand across our portfolio, whether they be brand new trophy assets or well-located second gen properties and whether they be suburban or urban. We believe financially capable landlords who provide value to customers and prospects will see healthy demand across a wide variety of price points. Turning to our quarterly results, we delivered FFO of $0.89 per share and same property cash NOI growth of positive 0.3%. As expected, our occupancy dipped modestly to 88.5%. Our 2024 FFO outlook is a penny and a half lower at the midpoint due to higher-than-expected interest rates and the dilutive impact of non-core asset sales already completed, neither of which were factored into our initial outlook. These items are partially offset by higher projected NOI. The strong leasing start to the year modestly helps 2024, but most of the new leasing will drive upside in 2025 and beyond. We've also had a successful start to the year with non-core asset sales, and we're prepping additional properties for potential disposition. We now expect to sell up to an additional $150 million during the remainder of the year. The volume and timing of dispositions will depend on how conditions are in the investment sales market, but we've been encouraged by the response we've seen in recent quarters to our marketing efforts and the modest improvement in the capital markets for prospective buyers. While we don't have any acquisitions included in our 2024 outlook, we continue to build the foundation for future investment opportunities. Similar to the first few years coming out of the Global Financial Crisis, we believe compelling investment opportunities will arise, but these will take time to play out. We're comfortable being patient as we continue to have conversations with owners and lenders of wish list properties in our markets. Our development pipeline is now $506 million following the delivery of the 100% leased Four Morrocroft building in Charlotte. With 157,000 square feet of first gen leases signed during the quarter, our pipeline is now 41% leased. A big chunk of the activity was at our 642,000 square foot, $460 million, 23Springs project in Uptown Dallas that we are developing in a 50/50 joint venture with Granite. 23Springs is now 54% pre-leased a year prior to scheduled completion and four years before the estimated stabilization. The largest lease signed was a current law firm customer at our 98% occupied McKinney & Olive property just a couple of blocks away who needs to expand by nearly 50%. Given we couldn't accommodate their growth at McKinney & Olive, we were able to accommodate their growth at 23Springs. We already have excellent activity to backfill their space at McKinney & Olive more than two years before their scheduled move to 23Springs. We made modest leasing progress at Granite Park Six in Dallas and GlenLake III in Raleigh. Both of these developments delivered late last year and are projected to stabilize in 2026. These buildings are best-in-class in their respective BBDs and prospect activity is accelerating. We're confident in the long-term outlook and expect these developments to drive solid cash flow growth for us in future years. Midtown East in Tampa, our 143,000 square foot, $83 million project that we are developing in a 50/50 joint venture with Bromley in the Westshore BBD, is seeing strong interest from prospects given we're the only office project currently under construction in the entire market. We're 16% pre-leased and are very encouraged by the strong interest more than two years before scheduled stabilization. We don't expect to announce any new development projects during the year. Obviously, this isn't unique to Highwoods. It's very difficult for new starts to pencil in the current environment. We're not seeing meaningful reductions in hard costs and interest rates continue to be elevated. Plus, for other developers who are capital-constrained, securing capital for new office construction is very challenging. As a result, new starts have plummeted and with current development pipelines that will largely be delivered across our markets over the next few quarters, the lack of new supply in future periods will play to our advantage as users seek high-quality properties from landlords with strong financial resources. In conclusion, as we have for the past few years, we acknowledge the headwinds in the office sector, yet we're bullish about the future for Highwoods. First, our portfolio has never been better, and it will continue to improve as we sell additional non-core properties and deliver our $500 million development pipeline. Second, we have significant organic growth potential within our operating portfolio where we've already leased some of our existing vacancy and have solid interest on expected future vacancy. Third, our balance sheet is in excellent shape and will enable us to capitalize on future growth opportunities. And finally even with higher interest rates, our underlying cash flows remain strong, which allows us to keep investing Highwoodtizing capital to generate higher returns on our existing portfolio. Brian? Brian Leary -- Chief Operating Officer Thank you, Ted, and good morning, all. As we mentioned on last quarter's call, our leasing teams got off to a strong start in 2024. We maintained our positive momentum through the end of the first quarter and signed 97 deals and exceeded our five quarter average with 922,000 square feet signed. New leasing volume of 422,000 square feet was the second highest quarterly total since 2014. Average term was also strong at nearly seven years, one year longer than our prior five quarter average. Tampa, Atlanta and Raleigh signed nearly three-fourths of this quarter's total volume with average terms of seven and a half years. Expansions outpaced contractions two-to-one and while lease economics reflect a highly competitive market, we will prioritize occupancy as needed over pushing rental rates to lean on our strengths as a long-term owner while strengthening our long-term cash flows. In addition, we are seeing strong activity across our $500 million development pipeline. As Ted mentioned, we signed 157,000 square feet of first gen leases, including 129,000 at 23Springs, our JV development in Uptown Dallas. The 129,000 square feet of preleasing at 23Springs follows the 105,000 square foot lease we announced last quarter. 23Springs is now 54% preleased, one year before completion and four years before our estimated stabilization in the first quarter of 2028. The quality of our portfolio, our sponsorship and the commute-worthy lifestyle office experience we provide our customers is giving us a clear edge in today's leasing environment. We're seeing strong demand at various price points across our portfolio. As demonstrated by strong leasing volume in our development pipeline, the top of the market is doing well, but we continue to see the most demand for our well located second gen assets. This is because a large segment of customers and prospects prioritize a premier office experience at rents that are more affordable than a trophy price point. Moving to our markets, Tampa recorded the most volume in the quarter with 267,000 square feet signed. Our 16% pre-leased Midtown East development is the only Class A office development under construction in Tampa and is on-time and on-budget for a Q1 2025 delivery. Solid inbound interest continues as the building advances toward completion. According to Cushman & Wakefield, Midtown East's Westshore BBD was the most active submarket in Tampa during the quarter capturing nearly one-third of all leasing activity. Further, CBRE is currently tracking several large users in the market and over 2.6 million square feet of demand. We leased a lot of our vacancy earlier this year at Tampa Bay Park, and we're now working to fill pockets of vacancy at Meridian where we have solid traction. Moving to Atlanta, the MSA recently passed Philadelphia and Washington, DC as the nation's sixth largest and is the second largest metropolitan area on the East Coast per the latest population estimates from the US Census Bureau. Our Atlanta team signed 199,000 square feet for the quarter, of which 160,000 was new. This represents the greatest share of new leasing across the portfolio. Further north in Raleigh, which was recently ranked No. 2 in the Milken Institute's annual Best Performing Cities report, our team signed 201,000 square feet in the quarter. We averaged close to eight years of lease term and over half of this leasing activity was new. Raleigh is joined by Nashville, Dallas and Charlotte in Milken's top ten best performing cities list. In summary, our leasing pipeline is healthy and we are pleased by the flow of inbound proposal and tour requests across our portfolio. We believe this is emblematic of our simple and straightforward strategy of creating commute-worthy experiences in the SunBelt's best business districts. Brendan? Brendan Maiorana -- Chief Financial Officer Thanks, Brian. In the fourth quarter, we delivered net income of $26.1 million or $0.25 per share and FFO of $96 million or $0.89 per share. There were no unusual items in the quarter. We are pleased with the quarterly results, which demonstrate the resiliency of our operations and continued strong cash flows. Rolling forward from the fourth quarter and excluding the $0.08 per share of unusual items in Q4, FFO per share was $0.02 lower in the first quarter. Higher G&A, which we incur every year during the first quarter due to the expensing of equity grants for certain employees and the full quarter impact of November's bond issuance reduced FFO by $0.04 per share. These headwinds were partially offset by $0.02 per share of higher NOI, which nets to the $0.02 sequential reduction. Our balance sheet remains in excellent shape. At March 31st, we had $850 million of available liquidity, which has increased to $915 million following the non-core dispositions we closed in early April. We have a little over $200 million left to fund on our development pipeline and no consolidated debt maturities until May of 2026. We do have one mortgage that matures in the third quarter of this year at our unconsolidated McKinney & Olive joint venture. This is a low leverage loan and we're reviewing financing options with Granite Properties, our partner. We may ultimately decide to jointly repay this loan upon maturity and seek longer term financing when the lending environment is more attractive. Given our ample liquidity, we have many options available. This also demonstrates the strategic value of having such a financially capable joint venture partner in Granite. As Ted mentioned, we have updated our 2024 FFO outlook to $3.46 per share to $3.61 per share, which implies a $0.015 reduction at the mid-point. The reduction is driven by the $0.03 dilutive impact from the asset sales completed since our outlook was provided in February and higher than anticipated interest rates for the remainder of 2024, partially offset by $0.015 of higher anticipated NOI. It's still early in the year and therefore our range remains wide with several variables, most around projected property tax savings which aren't assured yet. We're pleased with the non-core property sales completed thus far. While modestly dilutive to near-term FFO, as we have long stated, our capital recycling program has been accretive to our cash flows while also improving our long-term growth rate. We've increased the midpoint of our same property cash NOI outlook and moved the high end of our total dispositions to $230 million including the $80 million we've closed so far. All other items in our outlook remain unchanged. As Ted and Brian mentioned, we had a strong leasing quarter, especially new leasing volume. Many of the new leases signed in the quarter won't commence until late this year or next year, and therefore will not have a meaningful financial impact on 2024 results. This volume of work will obviously bolster our results in future years. As you know, we try to be as open and transparent as possible with our stakeholders and we've stated for quite some time that we expect occupancy will trough in the first half of next year. We still expect this to be the case, but if we can continue to post strong leasing volumes, we believe our trough occupancy level will be higher than our original expectations and our recovery will be faster. You may have seen in our supplemental package that we have made some adjustments to how we present property-level operational information. Starting this quarter and going forward, we are now including in-service properties owned by consolidated and unconsolidated joint ventures at our share. We are doing the same thing with respect to the presentation of our same property operational results in the supplemental. For those of you who would rather see same property results on a consolidated basis only, all of the ingredients are itemized in the same property reconciliation table in the back of the earnings release. These changes have a relatively modest impact on our property-level metrics this quarter as JVs today comprise less than 3% of our business but will increase to around 8% as our development properties are placed in service. To wrap up, we're very encouraged about the future for Highwoods. Our high-quality SunBelt portfolio is located in the BBDs where talent wants to be, which is clearly demonstrated by our performance this quarter. We have strong embedded growth potential within our operating portfolio and approximately $40 million of future NOI as our development pipeline stabilizes. Our balance sheet is in excellent shape, and our cash flows continue to be resilient. Operator, we are now ready for questions. Questions & Answers: Operator Thank you. [Operator instructions] We have our first question from the phone line from Camille Bonnel of Bank of America. Your line is open. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Good morning. Great to see the pickup in leasing this quarter. I'd like to start with some questions around guidance. As you clearly laid out the puts and takes for bringing the top end of FFO down. Can you explain the drivers behind raising the low end of your same-store guide? And how confident are you in the bottom range here if there is a pullback in decision-making? Brendan Maiorana -- Chief Financial Officer Camille. Hi. It's Brendan. I'll start. So I think in terms of the components of the driver of the higher NOI outlook that we talked about, both in terms of the same property growth and what we said is just overall better NOI with respect to the FFO outlook. I would say that it's roughly evenly split between better revenue and some expense savings. So that better revenue is driven by probably what I would characterize as modestly higher average occupancy. We didn't change the average occupancy range, but it is modestly higher overall. So it's a combination of top line and expense savings. And then, in terms of how much spec leasing is in the forecast, we still have spec leasing that is there. I think if things really slowed down in for the remainder of the year, it probably doesn't have a very large impact in terms of the financial performance for 2024 as most of the spec leasing that we have slated to come in this year would be later in the year and therefore, not have a big impact on '24 results. But obviously that's going to carry more impactful to 2025 and future years. But I think we feel good about kind of where our leasing activity has been through the first almost four months of the year and are optimistic that that will continue as we go forward. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst To clarify, is the spec leasing the same as new leasing activity that you report? Brendan Maiorana -- Chief Financial Officer We have -- within our spec outlook for the business plan for the year, there's a combination of that between both new and renewal. So it's with both. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Got it. OK. Well, if we look back, it seems like you were able to improve your occupancy when new leasing volumes were above 1 million square feet. So are you able to expand a bit more on that specific assumption baked into guidance this year? And do you think you can sustain the pace of new leasing throughout the year? Or was the first quarter? How did that track compared to your budget? Brendan Maiorana -- Chief Financial Officer Yes. Maybe I'll start and then I'll let Ted and Brian provide more color on specifics. But I think, certainly, new leasing volume of 423,000 square feet, we don't expect that to continue. That was, I think, the second highest quarter that we've had over the past 10 years. So that's certainly above expectations. And the volumes are going to bounce from quarter to quarter. But I think if we could average around 300,000 square feet of new per quarter for the year, so call it, 1.2 million square feet of new during the year. I think that would place us in a good position to kind of build occupancy as we get through some of the large known expirations. And what I mentioned in the prepared remarks, we certainly expect to trough occupancy early in 2025 and then build from there. But I think if we're able to sustain good new leasing volume and manage reasonable levels of renewals then I think that puts us in position to build kind of from the base. And as we stated earlier, trough at a higher level than what we previously expected and then recover faster. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Just one final question. If we were to dive deeper into your portfolio, are you seeing any areas where vacancy has been concentrated, whether that be by location like suburban, urban, infill or lease size? Thank you. Ted Klinck -- Chief Executive Officer Hey, Camille, it's Ted. I don't think so. I think we've seen pretty good demand across the portfolio. Our biggest vacancies as a company are the well-known Tivity move out. That building is still largely vacant, so that's 260 or so thousand feet. And then, the CDC vacated building in Atlanta and that is leased, but it's vacant right now. So combine those two, that's about 100, if I remember right, it's about 130 basis points of occupancy. But other than those two big holes, it's really not concentrated anywhere. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Thanks for taking my question. Operator Your next question comes from Vikram Malhotra from Mizuho. Georgi Dinkov -- Mizuho Securities -- Analyst Hey, this is Georgi Dinkov on for Vikram. Can you just walk us through any known move-outs and the occupancy trajectory in 2024? Ted Klinck -- Chief Executive Officer Yes. Maybe I'll take the first part and Brendan can jump in on the trajectory on the occupancy. So look, the known move-outs, we've talked about these for several quarters. I'm going to hit it just at a high level. We're seeing some good activity on the Novelis space in Atlanta. It's 168,000 square feet. And so, we're seeing really good activity there. We're seeing good activity actually in Pittsburgh. Now, as we're getting closer to the EQT expiration later this fall. As you know we -- I think last quarter, we indicated we went direct with one customer and we've got strong prospects for another 50,000 feet and over 100,000 square feet of proposals that are out. So we feel good about the activity we're getting there. We'll see where that goes. In Nashville, Bass, Berry moves out next February, and still a little bit early there, but we're well on our way on Highwoodtizing plans for the project that will be getting underway really the day they move out. So we're excited about our plans there. Activity is a little slower there just because we're still 10 months away from them vacating. And then, really the other big one is the Department of Revenue at the end of this year, 1800 Century Center. They're the ones consolidating and downsizing to another one of our buildings in that same park. We're still evaluating our plans for that building, whether it be office lease-up or potential residential conversion. So we're well underway. We've been analyzing that for a while. And hopefully, we'll know more in the next couple of months with respect to what our plans are with that. Brendan Maiorana -- Chief Financial Officer And Georgi, it's Brendan. Just in terms of the trajectory as we move throughout the year. So we'll probably dip a little bit in Qs two and three. So maybe around that average for the year around 88% or so. There's just a little bit of movement within the portfolio. There are some spaces that we're proactively taking back early in the second quarter that we have then backfilled and expect to move the new users in by year-end. And then, as we've stated, we think year-end will be the low point for us for this year, given what Ted talked about, which is principally the EQT expiration in the fourth quarter. But we do think that we're going to end the year at a higher level than what we had previously expected when we provided our original outlook in February. So we think we're tracking well. But certainly the year-end will be -- should expect to have the low point in terms of occupancy for the year. Georgi Dinkov -- Mizuho Securities -- Analyst And just a second question for me. We've noticed occupancy decline in Tampa and Orlando quarter over quarter, can you just comment on what was the driver? And is this a sign of challenges in these specific markets? And I guess, can you just comment on your markets, which ones are performing better and which one are kind of like lagging behind? Brian Leary -- Chief Operating Officer Georgi, this is Brian. I'll take a couple of things. First, you mentioned Orlando and Tampa specifically. Last quarter, Orlando really hit a high watermark in terms of their occupancy over a great period of time. They're doing a fantastic job. Nothing is under construction in Orlando. They have the best buildings in Downtown. So they're doing a good job there. We feel good about the long-term maintenance of occupancy within a bandwidth of the high watermark last quarter and where they are this year. So I think nothing to really expound upon more with regard to Orlando. Tampa is a dynamic market. We have multiple parks kind of within the Westshore BBD. And so, you're seeing ebbs and flows across there. Nothing to highlight anything specifically. We're very happy with the movement in Tampa, the folks continuing to grow there. Now, globally, in terms of the other markets, they're all our favorite children, so there's none that are favorite. But look, Nashville continues to be a place people want to be, it posted as an overall market, positive quarterly absorption last quarter, which stood out nationally for the year of 2023. It was four in the country for positive absorption. Some of you may have noticed just yesterday Larry Ellison was getting interviewed by Bill Frist in Nashville and reference that Nashville will become Oracle's global headquarters at some point in the future, which supports the story that CBRE put out there that Nashville is top five in the country for new headquarters. So Nashville is in a good place. Charlotte, well, in some ways, it's a tale of two cities. In some cases, there's a clear delineation in separation between location, lineage and landlord in terms of who's winning and who's not in Charlotte. We're sitting here at 96.2% occupied. We feel really good about our assets. Charlotte continues to grow lots of interesting things going on there. Dallas, Dallas will soon, they say in the next five years past Chicago in terms of population. It's the fourth largest metro right now led the US in 23 population growth. We couldn't be happier with our partnership there in the Granite, happy with the existing McKinney & Olive asset in Uptown the leasing momentum at 23Springs and leasing that's picking up an interest in inbounds and tours at GP Six. So I think that sort of kind of gives you a little bit of color of the spectrum of markets. I don't know if Ted has anything else to add? Georgi Dinkov -- Mizuho Securities -- Analyst Great. Thank you for taking my questions. Operator Thank you. We now have Blaine Heck from Wells Fargo on the line. Blaine Heck -- Wells Fargo Securities -- Analyst Ted, you mentioned this in your prepared remarks, but recently, we've been hearing a lot about the flight to capital or tenants looking for landlords that are willing and able to fund TIs on new leases. I guess can you just give a little bit more color on that trend broadly? And then, maybe comment on how much of the market vacancy might be attributable to space that's owned by a landlord that's unwilling to fund TI? And then, lastly, I'm just wondering whether there are any specific instances you can cite where you think you've won out on a deal because of that ability that you guys have to fund TIs? Ted Klinck -- Chief Executive Officer Sure. A lot to unpack there. Remind me if I don't hit all parts of that. So in general, it's exactly what you said. We're seeing a -- there's a bifurcation of assets and ownership that there are some cases we've heard that landlords or brokers aren't showing space, if they understand the capital stack. The capital stack is upside down or there's just risk of the building just effectively become a zombie-type building. So there's many instances out there, one in particular here in Raleigh, we got a full floor user from a building that was in distress and it was really from a cold call. And this was very similar to what all of our leasing reps are doing. It's -- all the buildings that have got maturing debt that we're targeting those buildings because of the capital that we can invest in the TIs and commissions that we can pay. So this was a direct result of cold call that we got. We got a full floor user. The user didn't want to stay in the building because they couldn't get enough money to recap to redo their space. So it was a great win for our team and it shows that just the resourcefulness of our team and that we're seeing that in other markets as well. In terms of the number of -- the amount of vacancy, it's concentrated. It's really the vacancy is concentrated in B and C buildings in general. It's concentrated in less desirable submarkets and then it's concentrated in the buildings that have been really in distress for the last call it two or three years. As we all know, the lenders have been kicking the can. Lenders don't want to take a lot of these assets back. A lot of the owners don't have the money or the ability or in some cases even the desire to keep remain in the ownership. So those buildings are going to be starved for capital. Occupancy is going to be under pressure. So and those occupancies are declining. So I think it's those three areas. Did I hit all parts of your question? Blaine Heck -- Wells Fargo Securities -- Analyst Yes, I think so. That's really helpful color. I really appreciate that. Just switching gears for the second question. I guess how are you thinking about the Pittsburgh portfolio the near to midterm? Do you think dispositions are still likely off the table in the near term? Are you seeing any kind of signs that the transaction market might be returning there? I guess, are there any of those properties in the potential of $150 million of dispositions that you're forecasting for the rest of the year? And then, just generally maybe how do you think about the balance between waiting for a decent price to exit versus maybe selling sooner wherever market pricing is, but likely saving some capital needed for lease-up and any renovation or refreshing projects that you might have? Ted Klinck -- Chief Executive Officer Sure. So with regard to Pittsburgh, it's going to be a tough sell. My gut is and we don't have our next wave totally identified yet. Clearly, when we announced we were exiting Pittsburgh in the fall of 2022. It's not unlike what we did getting out of Memphis and Greensboro. It took us about three years to get out. I think the timing, the capital markets still aren't back in my view. I think there we've had a lot of success selling small and medium-sized assets sort of bite-sized transactions that are easier to finance. But to sell a big transaction like a PPG, it's a very difficult debt market today. So my gut is, we're going to just keep focused on blocking and tackling, leasing space, and wait for the capital markets to recover. So I wouldn't expect Pittsburgh to be in that next 150. But certainly, it's our desire to get out when the timing is right. And we are trying to balance do you sell it now versus waiting. But I don't think there's a market for that asset today. So in terms of what we do want to sell the next 150, I think it's going to be a lot like what we've sold the last couple of years is going to be smaller assets that we think have liquidity in the market. And we've been successful selling both value-add and core assets over the last couple of years. And there's local banks. There's high net worth individuals got relationships that can finance these type of assets. So my gut is the next 150 is going to be multiple buildings. They're going to look a lot like what we sold the last year or two. And then, we can use those proceeds, plow that back into the renovation capital and to use throughout the portfolio. Blaine Heck -- Wells Fargo Securities -- Analyst Great. Thanks so much, Ted. Ted Klinck -- Chief Executive Officer Thanks, Blaine. Operator Thank you. Your next question comes from Michael Griffin of Citi. Michael Griffin -- Citi -- Analyst Great. Thanks. Just curious on the renewal leasing. What are you seeing in terms of retention rates and whether or not most firms are upsizing, downsizing or keeping the same space? And is the average lease signed by size changed at all? Ted Klinck -- Chief Executive Officer Hey, Michael, I'll start out and if Brendan or Brian have anything to add. Look, our retention ratio the last couple of years has, in fact, gone down, right? But it's not atypical of what we see in any economic downturn. Certainly, there's been some, obviously, work-from-home, so that's hurt. But then just the cyclical downturn as well. Companies are closing up regional shops or combining local offices or what have you. So our retention has, in fact, gone down. But if you look at our overall portfolio, we've had many, many quarters where our expansions are outweighing contractions. I think this quarter, we had 10 expansions, five contractions for a net positive 36,000 feet, expansions were 63,000 less 26,000 square feet of contractions. And that's if you look back just since the beginning of 2023, we've had 55 customers expand 21 contract over the last five quarters. So it's a lot of the small, the larger customers are the ones contracting. Thankfully, our average-sized customer is about 13,000 or 14,000 feet. Those are the customers that A, they're making the decisions, B, they're the ones that are still growing. So we're seeing a lot of expansions. And these expansions are maybe 2,000 feet, 3,000 feet and the contractions, again, the contractions we've had have been a little bit bigger, it might be a floor or half a floor, but it's been slow and steady for us of expansions outweighing contractions. In terms of lease size, again, our bread and butter is at 5,000 to 15,000 feet. And that's -- again that's -- most of our activity this quarter, we had a couple of larger deals. But in general, our normal is at five to 15. We're signing a lot of them. I think we did almost 100 again this quarter. So in and out, we're signing about 100 a quarter. Michael Griffin -- Citi -- Analyst Great. And then, I was curious if you could just give some color on the development leasing in Dallas. It seems like Sidley Austin is moving from MNO to 23Springs. Was that always the plan when you bought the property and announced when you started the development? Or did that come about relatively recently? And what are you tracking in terms of demand on that space? Is it going to be a single user? Could it be -- could you multi-tenant that space that they have there? Just maybe some more color around that would be helpful. Ted Klinck -- Chief Executive Officer Sure. Certainly, when we bought MNO, that was not the business plan. Sidley Austin, I think their leases going until 2028 or so. But as we got into it, their growth needs we are just thrilled that we were able to accommodate their growth needs. They loved McKinney & Olive and would love to stay, but we couldn't accommodate them. The building is full, and everybody seems pleased with the buildings. So we just -- we weren't able to accommodate their growth. So it just is very fortunate that we have the space down the street. In terms of the other activity in the building or just our development pipeline in general, obviously, we signed 157,000 square feet in the first quarter. We've got another, I'd call it, 125,000 square feet of prospects, strong prospects that we've either agreed and we're papering or we're close to agreeing to. It's throughout our development pipeline. Of that 125, virtually every one of our development projects has a prospect -- strong prospect. So we're looking forward to moving the needle a little bit more there. And then, we've got over 800,000 square feet of recent tour activity. That's on top of the 125,000 square feet of strong prospects. So activity seems to be picking up. We have a lot of work to do to get those over the goal line and get done. But we couldn't be more thrilled with really the activity. Certainly, we're getting a lot of deals signed at 23Springs. But across our development pipeline, the activity seems to be picking up. Operator Thank you. We have the next question from Rob Stevenson with Janney. Rob Stevenson -- Janney Montgomery Scott -- Analyst Good morning, guys. Ted, how much of that up to an additional $150 million of dispositions is somewhat dependent on redeployment opportunities. I mean, would you sell $225 million and just either pay down debt or sit on the cash and fund the development pipeline if needed? Ted Klinck -- Chief Executive Officer Yes, Peter. I think we would. It's not dependent on redeploying into acquisitions or development. This is just doing our normal cadence and sell them like we have, I'm sorry, yes, Rob. So really it's not, it's just identifying assets to create some liquidity to get our dry powder ready to take advantage of opportunities at the time. But it's not going to be dependent on us buying something. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then, your commentary about lack of acquisitions, is that due to assets -- the assets available right now aren't of the right quality or location? Or is it mostly the pricing is still too high or some combination? What's the thing that's sort of making the acquisition environment not advantageous to you right now? Ted Klinck -- Chief Executive Officer I think it's a combination of all three of those, right? So the assets that have sold don't meet the quality. There are several out there now, I'd say, a handful of assets that are sort of going through a pricing exercise and so we're going to be patient. We're doing a lot of practice underwriting and all that. But it's certainly got to be the quality. Most importantly, it's got to be the location and certainly pricing as well. So we continue to monitor. We're hanging around the hoop and we'll see where it plays out. But certainly, there's nothing imminent by any stretch. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. And then, if a Dallas acquisition or development opportunity came up over the next year, would that still likely be in a JV? Or are you comfortable at this point able to be going solo on a deal in that market? Ted Klinck -- Chief Executive Officer Yes. Well, first, I'd tell you, I think it's -- our entry into Dallas could not have gone better. I think we picked the right partner and it's in and out every day. In fact, we had our board meeting in Dallas last week, and the Granite guys joined us for dinner and tours and this like-minded of a JV partners Highwoods is probably ever have. So we're thrilled with our partnership. Now, having said that, our goal is to continue to grow Dallas, and it's with Granite great. But I can certainly see an opportunity that we may -- they may not be interested in that we would go ahead and do on our own. We feel very comfortable with that market now. Rob Stevenson -- Janney Montgomery Scott -- Analyst All right. And then, last one for me. Brendan, what is the -- when do you expect to know the outcome of the bulk of the property tax savings potentially? And what's the magnitude of the swing there in that range? How much should we talk about how material is that? Brendan Maiorana -- Chief Financial Officer Yes, Rob, it's a good question. It's meaningful, there's no doubt about that. I would say that I think we will have more clarity in Q2 and then even more clarity as we get into Q3. But I mean, there's certainly a possibility in terms of challenging some of the assessments that these could drag on beyond 2024. So we will see where that is. But it could certainly swing us a few pennies in either direction, depending on what the ultimate resolution of these assessments are. Rob Stevenson -- Janney Montgomery Scott -- Analyst And where did you -- are you just in the middle in terms of the guidance? How is that impacted into the guidance? Brendan Maiorana -- Chief Financial Officer Yes. We have assumed savings within the guidance. We haven't assumed at the top end of what is possible. So I think that it is roughly in the middle in terms of kind of the high end and the low end in terms of what we have factored in or I would say more than what's in the middle, I think it's really where we think the most likely outcome is going to be. Rob Stevenson -- Janney Montgomery Scott -- Analyst OK. That's helpful. Thanks, guys. I appreciate the time. Operator Thank you, Rob. We now have Michael Lewis from Truist. Michael Lewis -- Truist Securities -- Analyst Great. Thank you. You talked about kind of the characteristics of some of the potential noncore dispositions. As far as the ones you've already done, right, I'm looking at $79 million with $6 million of NOI. That's about a mid-7 cap rate. Is it fair to look at this and say, Highwoods is selling some of their assets that are noncore that are not their best assets at a mid-7 in the stock, even though it's been a big outperformer recently, we still have it at like a 10 implied cap rate. Am I comparing apples and oranges? Or is it fair to kind of look at -- you closed some sales, you proved out some pricing and we can read through into the rest of your portfolio a little. Ted Klinck -- Chief Executive Officer Maybe I can start and if anybody else wants to jump in. Look, I think if you look at the assets we did sell, we're thrilled with the mid-7 cap rate. Now, look, they were incredible location, which very similar to most of our assets in our portfolio. They are -- they do have some medical components, right? And I think there's a very liquid market on the MOB stuff. But certainly, we're pleased with the mid-7 cap rate. And I think it was certainly by selling them enhanced our overall portfolio quality as well. So I think the rest of our portfolio is higher quality or a vast majority of these assets. So certainly trading at a 10% cap rate, we think, is way too high. And I think we've proven out over the last two or three years, we've had multiple sales that have been well below those cap rates over the last two or three years. So I think it's just indicative of the assets we own. Michael Lewis -- Truist Securities -- Analyst OK. Good answer. Thanks. Second, you talked a lot on this call about the timing of the trough occupancy and Brendan kind of laid out how 2024 might go in terms of cadence. Could you just remind us or have you said what you think that trough occupancy will be in early next year? And how much is better now or you talked about trending better than that. So maybe you could answer both parts of that or one part of it. Just trying to figure out kind of where this bottoms and how much better you might be doing than you first expected? Brendan Maiorana -- Chief Financial Officer Yes. Hey, Mike, it's Brendan. So we're obviously not in a position to kind of give '25 guidance and outlook on this call. But what I can do is maybe provide some ingredients that will help you think through that question, which is a good one. So for year-end '24, which we switched to give average guidance, which we think is a more meaningful metric, I think we're probably, originally embedded sort of within that outlook was probably ending the year at around, call it, between 86% and 87%. I think we are trending toward the high end of that range and potentially could be even a little bit above the upper end of that range. So that's better call it, 50 basis points better by year-end than previously what we thought. And then, we've talked about some of the big expirations that we have kind of in early '25 principally in Nashville, but some of the leasing activity that we have done so far this year and some other prospect activity that we have are leases that will commence in '25. So that will offset some of that. So I think that that just puts us in better position. And then, the longer that we go on with having additional quarters of good leasing volume, that really builds the base to kind of get the recovery post the trough number. So I think as we go on and what we're paying attention to and what I think you and others will pay attention to in terms of our performance is if we continue to lease well as we go progress throughout '24, that's really going to a nerve to our benefit in '25 and thereafter. Michael Lewis -- Truist Securities -- Analyst OK. That's a perfect lead into my last question, which do we know why the pickup in leasing over the last four, five or six months? And I'm asking the why because maybe that's important to understanding whether this is sustainable or not. Or has this just been surprising to you as well, I don't know? Ted Klinck -- Chief Executive Officer Yes. Good question, Michael. Look, I think it might be a few things. A couple of years ago, there were a lot of companies that were sort of kicking the can and doing short-term renewals. And I don't think landlords and companies are doing that anymore. Landlords don't want them to and companies are getting closer to making their return to work decisions and seeing how their layouts are going to be. So I just think there was a wall of maturities that got lease maturities that got pushed out, they're now having to be dealt with. And then, I also think, look, I do think the distress is also increasing from the last couple of years. And some of those customers are also having to make those decisions that they're going to stay in that -- in a building or move. I do think the other thing I do think is from in-migration is starting to pick up a little bit in our markets. I mean, we've been chasing a couple of customers. We just -- Raleigh just won one from Dallas. We were chasing them both in Raleigh and Dallas our corporate relocation, which is sort of fun to see those. If you talk to the economic development folks for the last couple of years has largely been manufacturing and industrial users. We're now starting to see there's more office using customers come in. Just this quarter, we did 10 leases to new-to-market customers. Now, they are largely small regional offices. The largest was 27,000 feet and then about a 17,000 footer and that goes down to 2,000 or 3,000 feet is over 60,000 feet of in-migration companies that are moving and open up new offices, largely just opening up new offices in our market. So I just think the things just we're starting to just see it open up a little bit. Michael Lewis -- Truist Securities -- Analyst Great. Thank you. Operator Thank you. We now have Tayo Okusanya from Deutsche Bank. Tayo Okusanya -- Deutsche Bank -- Analyst Hi. Yes. Good morning. Just a quick one from me. In terms of just overall demand, could you talk a little bit about demand for some of the recently vacated space like activity space in the CDC space? I think you already gave color about some of the upcoming vacancies. We're curious about those two spaces, in particular, and if any of the new leasing this particular quarter was related to backfilling any kind of recent vacancies? Ted Klinck -- Chief Executive Officer Yes, Tayo, I think specifically on the Tivity, as you know, we redid the landmark lease earlier this quarter. I think earlier last quarter, the -- we took back about 110,000 feet. We have really good activity, multiple prospects on it. So we did a big Highwoodtizing project a couple of years ago or a year or so ago and it finished and it's really generated demand. It's been very well received in the market. So that's about 110,000 feet and we've got prospects, I'd say, prospects either agreed to or strong prospects that we're trading paper with for about 80,000 feet or so. I don't know if we'll make all those, but we feel pretty good about a lot of those. So we feel really good about that. I don't think much of the leasing activity this quarter was really backfilling anything other than maybe one or two of the Tivity spaces that we've signed. Tayo Okusanya -- Deutsche Bank -- Analyst Great. Thank you. Operator Thank you. We now have Peter Abramowitz of Jefferies. Peter Abramowitz -- Jefferies -- Analyst Hi. Thank you. Yes. So just kind of want to dive into some of the comments around potential kind of future growth opportunities some of the underwriting you're doing. I guess we have a decent sense from whether it be noncore asset sales or the unsecured bond deal that you did last year where your cost of capital might be today. So I was just wondering if you could talk about from a pricing perspective, whether initial yields or IRR relative to that cost of capital kind of what you're hopeful for? What's realistic when deals do finally kind of6 start to come back to market and start to pencil like where are your expectations for where those would be from an underwriting perspective? Ted Klinck -- Chief Executive Officer Sure. Peter, as you know, I mean, look, we're interested in growing the business and improving the quality of the portfolio, both core and value-add acquisitions. Coming out of the GFC, we primarily did value-add acquisitions. We want to own quality assets, the best business districts of our markets. And we're looking to create where we can improve our cash flow growth over time as well. And I think coming out of GFC, we were able to do that very successfully. So where are we now in terms of the underwriting? I think, obviously, we look for a discount to replacement cost and a lot of different metrics. IRR, we're sort of underwriting to a double-digit, low double-digit unlevered IRR, Peter, is sort of what we're doing today. And again, there's a handful of deals out there that we're seeing where they're going to price, but we'll see. But it's those type of metrics, if we can get a stabilized cap rates in the high-single-digit, low-double-digit with an 11% or low-double-digit unlevered IRR, those feel pretty good for us that we can improve the quality of the portfolio. If we can get acquisitions under our belt that are like that. Peter Abramowitz -- Jefferies -- Analyst That's helpful. Thank you, Ted. And then, one on the leasing market. Could you just comment on sort of the length of deal cycles? I know that was both for you guys and for office overall became more of a challenge last year that tenant decision-making was just a little bit slower. Could you talk about kind of that dynamic and where that's at in the first couple of months to start the year? Ted Klinck -- Chief Executive Officer Yes. Certainly, that's been the frustrating part. It's definitely taking longer to get deals done. Bigger was really taking longer. I mean, some are -- we think we're going to get it done. It may get pushed a quarter, two quarters, in some cases, even three quarters. It's taken a long time. So the bigger the deal, the longer it takes, in general, just whether it has to go up through the corporate real estate department up to the CEO. And a lot of it is based on the CEO's confidence level in the economy as well. I think interest rates plays into that as well. So longer -- bigger deal takes longer. Smaller deals, our bread and butter, we're still getting a lot of those done. Those are even taking longer, but not nearly as long as, call it, the 100,000 square foot users and above. The nice thing we've seen in the last, I'd say, quarter or two, is we've seen full floor, more full floor users, more two-floor users. So that's sort of mid-size type user, we're seeing a lot more of those and some of the decisions getting made with those sized customers. Does that make sense? Peter Abramowitz -- Jefferies -- Analyst That does. Thank you. Brian Leary -- Chief Operating Officer Peter, hey, it's Brian. I'll add to that real quick. Other thing that's taken a little while, people are continuing to price and price work. We don't have a punchline yet on that, but the -- it seems like escalations have stopped or leveled out or plateaued on build-outs. And so, there is potential visibility into maybe getting a better price. So people kind of are holding on to see some of that TI that build out that cost of moving into new space come down. Peter Abramowitz -- Jefferies -- Analyst That's helpful. Thank you. And one last one, if I could. Just trying to think through from a modeling aspect, the earnings impact of any potential disposition through the rest of the year? I mean, are the deals that you've done so far in Raleigh is that kind of a good barometer of what we should expect pricing-wise? Brendan Maiorana -- Chief Financial Officer Peter, it's Brendan. So first, what I would say is while the dispositions that we did so far this year are dilutive to FFO, I think to your first question, they are accretive to our cash flow. So I think we would expect comparable dynamics in terms of any future dispositions that we may do this year or on a go-forward basis. Where the cap rates shake out, it depends. Every deal is unique. So it depends on the particular circumstances for that particular deal. I think it's -- we'll see where they, where cap rates shake out. I would say the bias is maybe a little bit higher than the cap rates that we transacted at early this year, but we'll see. But I think in general, the capital recycling activity that we do, what you ought to see is an improved cash flow outlook for the company and improved portfolio quality and therefore, a lower risk overall for us as an enterprise. Peter Abramowitz -- Jefferies -- Analyst That's helpful. Thanks, Brendan. Thank you, team. Operator We now have Ronald Kamdem of Morgan Stanley. You may proceed with your question. Ronald Kamdem -- Morgan Stanley -- Analyst Hey. Good afternoon, guys. Just the first question, you guys talked about some of the expirations through the year and how that might be a headwind to occupancy. Maybe just give us a picture of what retention would look like in '24 if we were to exclude those move-outs. So just the retention on everything else outside of the known move-outs? Brendan Maiorana -- Chief Financial Officer Yes. Hey, Ron, it's Brendan. I'll take that. So retention, we always struggle with this answer and question that we get often because we do so much early renewals that it depends on the date that you start kind of counting retention. So prior to coming into this year, we had already renewed 1 million square feet of original 2024 expirations that are pushed out into future years. So when you look at what's left over, as you kind of come into the year, you have adverse selection bias there. And clearly, like that's where the retention level on the remainder is low. So that number probably for kind of what we had left in the year, including the known move-outs, was probably, call it, in round numbers, around 40%. We talked about some of the large known expirations that are there. So that number would be a little bit -- would be 10 plus percentage points higher if you excluded those from kind of the numerator and denominator. But that gives you a sense of kind of where we are. Ronald Kamdem -- Morgan Stanley -- Analyst Got it. And the second one on McKinney & Olive. You guys talked about paying down that loan potentially. I guess, what the sales you guys have executed on and potential additional $150 million to come. Should we take that to mean you're just going to use existing corporate liquidity or could we potentially see you guys tap the unsecured market to get here? Brendan Maiorana -- Chief Financial Officer Yes. No, no plans to -- for capital raising for this year. So I mean, I think as we sit here right now, we have almost nothing drawn on the line. So have that full $750 million that's available, certainly have construction loans in place for the two Dallas development projects. So that would satisfy the bulk of the remainder of spend there. So we really have plenty of liquidity. And I think to your point, with potential dispositions that are on the horizon. I think it's more of a challenge in terms of deciding what capital we want to pay off with any disposition proceeds that come in the door rather than thinking about capital raising. Ronald Kamdem -- Morgan Stanley -- Analyst Got it. And then, I think you guys talked about Pittsburgh and Bass, Berry. Maybe just an update on Novelis as well would be helpful. Ted Klinck -- Chief Executive Officer Yes. So on Novelis, again, we like the prospect activity. As you all know, we went direct with one of the sublease customers and we've got over 200,000 square feet of prospects to backfill the remaining, call it, 100 or so thousand feet, maybe a little more than 100. So we feel pretty good about the prospect activity, a lot of tours. Ronald Kamdem -- Morgan Stanley -- Analyst Got it. Thank you, guys. Ted Klinck -- Chief Executive Officer Thank you. Operator Thank you. We now have Dylan Burzinski from Green Street. Dylan Burzinski -- Green Street Advisors -- Analyst Hi, guys. Most of my questions have been asked. But I guess, Brian, going back to your comments on focusing on occupancy over rental growth. I mean, is it your expectation that we'll continue to see some degradation in net effective rents across the portfolio? Or how should we be thinking about that? Brian Leary -- Chief Operating Officer Dylan, I'm accused among the three around this table to be the eternal optimist. So I'll lean into that a little bit. Now, look, obviously, headwinds, I think tenants feel like it's a tenant's market and it is. But I do feel constructive on our ability to hold kind of where we're at based on the quality of the assets, based on the seven different things Ted highlighted why maybe our leasing momentum is maybe more than previous averages with regard to flight to quality, flight to capital. I don't see it greatly improving anytime soon, maybe as costs come down to fit up. But in general I feel like. I feel pretty optimistic about where we're at. Brendan? Brendan Maiorana -- Chief Financial Officer Dylan, what I would just add to that is, I think given the kind of competitive dynamics that are in the leasing environment as it stands now, our ability to fund TIs is a benefit to us. But what we're looking for in terms of customers and prospects to get in consideration for that is higher face rates and longer term. So I think what that's going to do is drive -- is going to keep net effectives holding up reasonably well, which is what we've seen generally happen. Now, that might mean that there's a little bit more upfront capital, but that secures longer lease term at attractive rate. So I don't think you're likely to see significant degradation in terms of net effectives, but it might mean there's a little bit more upfront capital. Dylan Burzinski -- Green Street Advisors -- Analyst Great. Thanks, guys. Operator Thank you. We have no further questions on line. So I'd like to hand it back to Ted Klinck for some final remarks. Ted Klinck -- Chief Executive Officer Thank you for everybody for joining us on the call today and thank you for your interest in Highwoods. And we look forward to talking to you next quarter, if not before. Have a great day.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you for standing by and welcome to the Harley-Davidson first-quarter 2024 conference call. Please be advised that today's conference is being recorded. I would now like to turn the call over to Shawn Collins. Mr. Collins, please go ahead. Shawn Collins -- Director, Investor Relations Thank you. Good morning. This is Shawn Collins, the director of investor relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include among others, matters we have noted in today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are, Harley-Davidson chief executive officer, Jochen Zeitz; also chief financial officer, Jonathan Root and we have LiveWire's chief executive officer, Karim Donnez. With that let me turn it over to our CEO, Jochen Zeitz. Jochen? Jochen Zeitz -- Chairman, President, and Chief Executive Officer Thank you, Shawn, and good morning everyone. Thank you for joining us for our Q1 2024 results. Harley-Davidson delivered a good start to the year in line with our expectations. Looking at retail for the quarter, we are pleased with our delivery of 6% growth in North America, our largest and most important region. In Q1 we continue to see the impacts of the high interest rate environment on both consumer confidence and affordability. However, it is positive to seek customer enthusiasm for our motorcycles despite this challenging environment. Outside of North America, both the Europe and APAC regions were soft, mainly due to regional macroeconomic conditions. However, it is also worth noting that our 2024 product only started to arrive in the international regions in March and is just now making its way into most international markets. And as the riding season is starting to get into gear, we're excited for our riders and fans both inside and outside of North America to get to experience the next era of Harley-Davidson Touring motorcycles. As usual, I will now briefly address select Hardwire strategic pillars and our delivery of them, starting with pillar one, profit focus. When we announced our Hardwire strategy back in 2021, we made a commitment to invest in our core categories and building on that commitment this year we ushered in a new area of motorcycle Touring by reimagining two of the most iconic motorcycles in history, the Harley-Davidson Street and Road Glide, with the most comprehensive product redevelopment in well over 10 years. Overall, we are very pleased with our new model year launch and in particular, our newer Touring lineup, which is being received very positively by customers, dealers, and media alike. One outlet summarized the launch particularly well. The Motor Company took the motorcycling world by surprise with the release of the revamped versions of the Road Glide and Street Glide, completely different from their predecessors, a more modernized approach that made them superior to the previous generation in nearly every facet. The all-new Street Glide and Road Glide models have set a new standard for the industry and the future of touring and adventure on two wheels with exceptional performance, cutting edge innovation, and bold new design, representing the largest investment made by the Motor Company into a single platform. We believe that by elevating every aspect of performance, technology, comfort and style, we have without question created the most enticing touring motorcycles ever offered by Harley-Davidson. We continue to see significant positivity for the product across the network and are excited for our riders to have full access to the lineup as the riding season gets underway. Included in our 2024 launch and designed to celebrate 25 years of custom vehicle operations, our CVO lineup expanded with the introduction of the all-new CVO Road Glide ST, representing the pinnacle of Becker performance and the CVO Pan America fully kitted out for extraordinary adventures. The CVO Road Glide ST is the lightest, fastest, and most sophisticated performance bagger ever produced by Harley-Davidson. Taking from our popular Low Rider ST offering, the CVO Road Glide ST combines West Coast custom style and performance trend that we've been fueling with the King of the Baggers Racing Series. To quote another outlet, the CVO ST is the best motorcycle Harley-Davidson has ever put out. For 2024 we also reprised both the CVO Street and Road Glide models that we introduced during Homecoming last year in exciting new color options. The CVO Pan America is another new vehicle and the CVO program's first adventure touring motorcycle. All of the features that have made the Pan America 1250 special a leading choice among discerning global adventure touring riders have been retained, with the CVO Pan America being kitted out with an additional host of rugged accessories selected to enhance the journey. With the Hardwire, we also made a commitment to introduce a series of motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley-Davidson. With that in mind, this February during Daytona Bike Week, we revealed the latest additions to our limited edition Harley-Davidson Icons and the limited run Enthusiast Collection. For the 2024 Icons models this year, we launched a Hydra-Glide Revival celebrating the 75th year of this iconic motorcycle. The release was inspired by the look of the motorcycles ridden in the area of the upcoming film, The Bikeriders, which follows the rise of a Midwestern motorcycle club as seen through the lives of its members. Coming to your screens this summer, the film is scheduled to be released in the United States on June 21st. For the 2024 Enthusiast offering, we celebrated both music and motorcycles with the release of the Tobacco Fade Enthusiast Motorcycle Collection, available across three models, the Low Rider ST, the Ultra Limit, and the Tri Glide Ultra. Again, we've seen a very positive response from customers to these offerings just in time for the rising season to get well underway. Pillar 3 leading in electric. LiveWire continued to pioneer the EV segment with the launch of the S2 Mulholland all-new electric cruiser, the second bike on the S2 platform. The bike has been met with a very positive response in the industry, as Karim will detail shortly. We're also very pleased that LiveWire has become the market leader for on-road EV motorcycles in the U.S. this past quarter. And with the company increasing its focus on vehicle and operational costs, it will also consolidate its operations in Milwaukee at Harley-Davidson's historic headquarters at Juneau Avenue. Turning to Pillar 4 growth beyond bikes. In February, through HDFS, we launched Harley-Davidson Flex Financing. For the first time in our history this innovative loan option provides an alternate way to purchase a Harley-Davidson motorcycle. By combining the benefits of attractive monthly payments, shorter terms, and greater flexibility throughout the loan period, the product offers customers the ability to return the motorcycle at the end of the term, ready to replace or upgrade into their next Harley-Davidson purchase. We are committed to putting customers at the forefront of our products and experiences. H-D Flex does just that, while providing them with another innovative financing option to make Harley-Davidson motorcycle ownership fit the individual budget and lifestyle. Pillar 5 customer experience. We are just under 100 days to go. Our second Annual Homecoming event will be taking place July 25 to 28. And last week we announced the full roster of performance with headliners including the Red Hot Chili Peppers, Jelly Roll, and Hardy. Tickets are now on sale and we look forward to coming together with our community of fans, riders, and their families to celebrate our brand of moto-culture and music and I hope to see many of you there. And lastly, on Pillar 6 inclusive stakeholder management, we are looking forward to formally unveiling the new community park at our Juneau Avenue headquarters on June 24th. The project, which has been pioneered by the Harley-Davidson Foundation, will look to further connect the company, our brand and our employees to the local community, reinforcing our commitment to our hometown, Milwaukee. We could not be more excited to show you our neighborhood on the near West Side. Before I hand over to Karim to cover LiveWire, I would like to cover our outlook for the rest of the year. As we said earlier in the year, for HDMC, we expect retail units to be flat to up 9%. From an inventory point of view, we believe dealers are appropriately positioned with the riding season getting into swing and we continue to expect that wholesale unit shipments will move together with dealer retail sales on a balanced basis by the end of 2024. This range would equate to wholesale unit shipments being down between 1% and 10% versus prior year. This would result in HDMC revenue coming in flat to down 9%. We expect HDMC operating income margin of 12.6% to 13.6%. This is flat to down 100 basis points from the 2023 level. Let me mention the specific drivers of this again. Negative operating leverage due to lower wholesale volumes, foreign currency which we expect to be a headwind, mix which we expect to be slightly favorable, pricing which we expect to be slightly down as we eliminated the surcharge and fine-tuned our pricing strategy and lastly, we expect some additional manufacturing costs as we realign factory processes in the initial year of production of the new Street Glide and Road Glide motorcycles. At HDFS, we expect operating income to be flat to up 5%, reflecting retail and wholesale portfolios and customers settling into the existing macroeconomic backdrop. As you will hear from Karim now, for the full year Livewire is revising its operating loss guidance and now expects an improved operating loss of $105 million to $115 million from previous guidance of an operating loss of $115 million to $125 million. Lastly, I would like to reinforce our commitment to returning excess free cash flow to our shareholders. We plan to continue to optimize our returns through share repurchases and appropriate dividend payments. You can see our commitment to capital returns since 2022 on Page 15. Since the beginning of 2022 and through Q1 2024, we've bought back $773 million in shares and paid out $214 million in dividends. This equates to almost $1 billion in capital return to shareholders since 2022 and a share buyback amounting to 14% of our outstanding shares. We are planning to remain on a similar trajectory to this annualized rate throughout 2024. Thank you and now I'll hand it over to Karim. Karim Donnez -- Chief Executive Officer, LiveWire Thank you, Jochen. Good morning everyone. We are happy to report on a successful launch of the S2 Mulholland in both the United States and Canada. This is the second motorcycle built on the LiveWire developed S2 platform following the S2 Del Mar. This brings our lineup to three bikes, expanding the choices available to LiveWire riders. The response from the market has been positive with riders, retailers, and media responding to the Mulholland styling and the option to choose a bike with a lower riding position. In the third quarter, Livewire reported sales of 117 units, an 86% increase over the first quarter of 2023. Our retail sales outpaced wholesale as Del Mar made its way into the channel, making, as Johann mentioned, LiveWire the number one on-road electric motorcycle in the U.S. In Europe, we began shipping S2 Del Mar to our four priority countries at the end of the quarter, with products now available across our network in the region. We have similar plans for STACYC with the first bike being shipped to Europe as we speak. While we plan to expand our market leadership, our teams are working on design, engineering and sourcing initiatives to reduce the cost of our product. We are also planning to reduce spend and closely manage cash across the operation to get the most out of our strategic investments. To that effect, we will centralize all of our operations in Juneau Avenue in Milwaukee, including the relocation of LiveWire lab operations from California to enable synergies and efficiency. We will take this opportunity to streamline and revisit the organization's structure to achieve simplicity in everything we do. While we maintain the outlook for the revenue units, we now expect a $10 million improvement in operating loss while continuing to focus the larger portion of expenses on product innovation and market development. LiveWire is fully committed to the electrification of the sports by building the best product and delivering an unmatched customer experience. Thank you and now I'll hand it over to Jonathan. Jonathan Root -- Chief Financial Officer Thank you, Karim, and good morning to all. I plan to start on Page 5 of the presentation where I will briefly summarize the consolidated financial results for the first quarter of 2024, and subsequently I will go into further detail on each business segment. Consolidated revenue in the first quarter was down 3%, driven HDMC revenue decrease of 5%, which was partially offset by HDFS revenue growth of 12%. Consolidated operating income in the first quarter performed in line with our expectations and was down 29%, driven by a decline of 29% of HDMC, a decline of 8% at HDFS, and an operating loss of $29 million in the LiveWire segment. Consolidated operating income margin in the first quarter was 15.2%, representing a 545 basis point decline versus Q1 of 2024. The lower consolidated margin is largely due to a lower Q1 margin at HDMC, driven by lower volumes, pricing, and associated throughput. I plan to go into further detail on each business segment's profit and loss drivers in the next section. First-quarter earnings per share was $1.72. In Q1 global retail sales of new motorcycles were flat versus the prior year. In North America Q1 retail sales were up 6%, driven primarily by the redesigned and all-new Street Glide and Road Glide Touring motorcycles which were introduced at the end of January. In EMEA, Q1 retail sales declined by 11% due to weakness in Germany and France. Overall, EMEA continues to be adversely impacted by macroeconomic conditions and geopolitical uncertainty, which has led to sluggish economic growth. In Asia Pacific, Q1 retail sales declined by 12%, driven by weakness primarily in China. This is the third quarter in a row where we have experienced declines in the region after six sequential quarters of solid year-over-year growth in Asia Pacific. In Latin America, Q1 retail sales experienced modest growth in both Mexico and Brazil. Dealer inventory at the end of Q1 was up approximately 26% as compared to the end of Q1 in 2023. We believe current dealer inventory and product availability are in healthy positions overall as we approach the spring 2024 riding season. This is important with the recent launch of new model year 2024 motorcycles, especially with the positive reception to our new Street Glide and Road Glide Touring models. Looking at revenue, HDMC revenue decreased by 5% in Q1. Focusing on the key drivers for the quarter, 7 points of decline came from decreased wholesale volume at HDMC, largely due to the fact dealers were rebuilding dealer inventory in Q1 2023 after the lows they experienced following the pandemic. Motorcycle shipments in the quarter, while below prior year, were slightly ahead of 2021 and 2022 levels. Three points of decline came from pricing, which includes the impacts of the pricing surcharge elimination, other pricing actions on 2024 model year, and sales incentives. Mix contributed 4 points of growth as we continued to prioritize our most profitable models and markets. And finally, foreign exchange was flat to q1 prior year. In Q1 HDMC gross margin was 31.2%, which compares to 35.8% in the prior year. The decrease of 450 basis points was driven by lower operating leverage and the revenue factors I just spoke about, as well as continued modest cost inflation of 1% to 2%. The majority of the units shipped in the first quarters of 2024 and 2023 were produced in the preceding fourth quarters in advance of the new model year launch. Production volumes were down 24% in the fourth quarter of 2023 compared to the fourth quarter of 2022, which resulted in a higher fixed cost per unit on motorcycles shipped in Q1 of 2024 compared to Q1 of 2023. The unfavorable impact of lower operating leverage was offset by other productivity savings related primarily to logistics during the quarter. HDMC operating margin came in at 16.2%, which is above our full-year expectations and in line with expectations for the quarter. At Harley-Davidson Financial Services, Q1 revenue increased by $26 million or 12%, driven by higher retail and commercial finance receivables, as well as higher average yields as the portfolio resets over time due to higher base rates which are driving higher interest income. HDFS operating income was $54 million, down $5 million or 8% compared to last year. The Q1 decline was driven by higher borrowing costs, a higher provision for credit losses, and higher operating expenses. These increased costs were partially offset by higher interest income. Total interest expense was up $15 million or 21% versus the prior year. The increase was driven by a higher cost of funds as lower interest rate debt matured and was replaced with current market rate debt. In Q1 HDFS' annualized retail credit loss ratio was 3.7%, which compares to an annualized retail credit loss ratio of 3.2% in Q1 of 2023. The increase in credit losses was driven by several factors relating to the current macroeconomic environment and the related customer and industry dynamics. In addition, the retail allowance for credit losses for the first quarter remained flat at 5.4% from Q4 of 2023. Total retail loan originations in Q1 were up 2%, while commercial financing activities were up 22% to $1.5 billion. Total quarter end net financing receivables, including both retail loans and commercial financing was $7.9 billion, which was up 4% versus prior year. For the LiveWire segment, electric motorcycles revenue decreased in the first quarter of 2024 compared to the prior year period despite higher unit sales in the quarter. The lower revenue was due primarily to product mix and a one-time adjustment relating to a change in their retail partner strategy. Selling, engineering and administrative expenses remained relatively flat compared to the prior year. As expected, basic revenue was down compared to Q1 of 2023, primarily due to a reduction in third-party branded distributor volumes. LiveWire operating loss of $29 million was in line with our expectations as Livewire continued to invest in new motorcycle models and action initiatives to reduce EV costs. In addition, SG&A was flat to prior year. Wrapping up with consolidated Harley-Davidson, Inc. full-year financial results, we delivered $104 million of operating cash flow in Q1, which was up from $47 million in the prior period. The increase in operating cash flow was due primarily to lower net cash outflows for wholesale financing and favorable changes in working capital compared to Q1 of 2023. Total cash and cash equivalents ended at $1.5 billion, which was $97 million lower than at the end of Q1 prior year. This consolidated cash number includes $141 million at LiveWire. Additionally, as part of our capital allocation strategy and in line with our commitment to return capital to our shareholders, we bought back 2.5 million shares of our stock at a value of $98 million in Q1 of 2024. As we look to the rest of 2024 we remain excited about our new 2024 motorcycle lineup and as Jochen discussed, we are reaffirming our full-year guidance with the exception of the improvement noted in LiveWire operating loss. I would like to put some unit numbers to our 2024 outlook that Jochen cited earlier, and these are in line with what we said on our last earnings call, which took place in February. At HDMC we expect that retail units sold and wholesale unit shipments will move together on a balanced basis in 2024. We expect 163,000 to 178,000 retail and wholesale units. This results in HDMC revenue coming in flat to down 9% versus prior year. Last, I will touch on a couple of additional items in terms of capital investments and capital allocation. We continue to expect total HDI capital investments in the range of $225 million to $250 million. As we look at capital allocation in 2024, our priorities remain to fund profitable growth of the Hardwire initiatives, which includes the capital expenditures mentioned previously, paying dividends, and continuing to execute discretionary share repurchases. And with that, we will open it up to Q&A. Questions & Answers: Operator [Operator instructions] Our first question comes from Craig Kennison from Baird. Please go ahead. Your line is open. Craig Kennison -- Robert W. Baird and Company -- Analyst OK. Good morning. Thanks for taking my question and congratulations on the touring momentum. I'm wondering if you can speak to the health of the dealer network. We've seen kind of across our Powersports & Marine coverage that dealers have been that dealers have been struggling with too much inventory and skinny margins, and then rates are moving against them as well, which hurts on the floor plan side. Nothing is really unique to Harley-Davidson, but there is a lot of macro stress. I'm just wondering how you feel about the health of the dealer network and whether you're hearing anything different from your new Chief Commercial Officer, Luke Mansfield. Thanks. Jonathan Root -- Chief Financial Officer Hey, Craig. It's Jonathan. Thank you for your question. I'll start. And so I think relative to dealers, if we look at dealers today, certainly from a Harley-Davidson perspective, there's enthusiasm for what's out there, and I think recognition that customers are showing up, taking a look at our new Street Glide and Road Glide motorcycles, and then obviously the other 2024 model years. So as you look at the start to the year, I think we're pretty pleased with what that looks like and I think the dealer sentiment generally goes with that. The one concern that probably is worth being open and honest about is that in an environment where interest rates have moved up a little bit, that certainly has an impact on dealers and dealer health. So from our perspective, we do pay a lot of attention to kind of the position that our dealers are in health of the entire network. We think that's something to be very important to key in on and so from their perspective, a little bit of concern around what they see from a floor plan perspective. For us, as you heard Jochen talk about on some of his introductory comments, we are paying attention to that balance between what we're putting into the channel and retail over the course of 2024. So we are supporting them through paying attention to that. As you know, we do also have some selective interest rate subvention for customers on customer facing programs only for 2023 model year product. At this point that obviously helps drive dealer traffic. That helps attract the more rate sensitive customers and really help them move through their inventory. And then obviously as an organization, we make sure that we have some dealer facing programs that are out there that really support and bolster their overall health. And so from that perspective, I think something that we do stay attuned to, something that we certainly make sure that we take a look at, and something that I think we need to make sure that as an industry, we're sensitive to as we move through 2024. Craig Kennison -- Robert W. Baird and Company -- Analyst Thanks, Jonathan. Just as a quick follow up, do you have any metrics to share on how fresh or current your inventory is compared to prior periods? Jonathan Root -- Chief Financial Officer Sure. So as we take a look at the mix that we have from a unit perspective, it does look a little bit different as you look across the globe, so some different answers. I think that they vary when you look at North America versus EMEA versus Asia Pacific and Latin America. So obviously, as we roll out the new model year, it hits our North American dealers before it sort of touches the international dealers. So if we look at where we were in North America for example, about 35% of dealer inventory was comprised of 2023 model year or non-current model year bikes. As you sort of move around the globe, it looks a little bit different. So from an EMEA perspective, we get the 2024s into market because of shipping times, homologation, etc., a little bit later. So from an EMEA standpoint, it would look more like 70%, same thing with Asia Pacific and Latin America. So they're probably more like 70%, 75% at the end of Q1 that are 2023 or prior. So obviously, there is sort of a cadence that flows around the globe. But probably, if you are talking with North American dealers, as there probably is a little more conversation there, you would see that it's somewhere around a third that are 2023 and older. Craig Kennison -- Robert W. Baird and Company -- Analyst That's great. Thanks, Jonathan. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Yes, Craig. It's Jochen here. Just a little bit more color here. We expect model year 2023 to be more or less gone by the end of the second quarter. The rate with which the 2023s are selling down in the U.S. is as planned. And as Jonathan said, with the new product coming in, the 2023s are reducing nicely. So by the end of the second quarter, we should be pretty much, I don't want to say out of there's always going to be one or two left per dealer, but a significant portion of the 2023s will be gone based on what we are seeing now. And as you look at how we expect wholesale and retail to move, obviously in the first quarter, getting ready for riding season, we shipped more motorcycles than we retailed in advance of the riding season. You should expect Q2 to be more in equilibrium retail, wholesale, and then in the second half we would expect retail to overtake wholesale. So just sort of a little bit of how we expect the year to unfold. Craig Kennison -- Robert W. Baird and Company -- Analyst Thank you. Operator Our next question comes from Joe Altobello from Raymond James. Please go ahead. Your line is open. Joe Altobello -- Raymond James -- Analyst Thanks. Hey, guys. Good morning. Just wanted to follow up on Craig's question. Not so much inventory, but more retail. If I look at North America, the retail growth of 6% you had in the first quarter, could you give us a sense for how that might have broken down between the model year 2023s versus the new model year 2024s? Jonathan Root -- Chief Financial Officer Sure. So thank you, Joe, good question. Obviously, as you look throughout the first quarter and you think about the impact that model year had on sort of sales trajectory and sales path as you started the quarter in January, we were heavily 2023, since we didn't get the 2024s out there until we got partway into Q1. So from a January perspective it was probably in the range of 75%, 80% that were 2023 or prior. And then as we moved through the quarter, that percentage increased to the majority by March were obviously 2024 related. There's also a little bit of a difference as you look at some of those dynamics by family. So as we look within Touring, for example, a somewhat higher percentage of customer interest in North America that was focused on the all-new Street Glide and Road Glide motorcycles. From the commentary that we just talked about, if you look outside of the U.S., it certainly was a significantly smaller percentage of 2024s and then, as you would imagine, we see that increasing meaningfully as we get into Q2 and beyond. Joe Altobello -- Raymond James -- Analyst Very helpful. Thank you. Just to follow up on that, maybe sort of give us a sense for how trends progressed throughout the quarter maybe here in April. I know January was a tough month from a weather perspective, and the model year 2024s haven't launched yet, but what are you seeing so far as the weather is getting warmer? And I guess just to kind of clarify, was flat global retail in Q1 in line with what you guys were expecting going in? Jochen Zeitz -- Chairman, President, and Chief Executive Officer Jochen here. Yes, based on the fact that, as Jonathan and I mentioned earlier, we only get our international 2024 model year into markets starting in March. Some regions, some markets only even got the 2024s at the end of March. So if you now look at the U.S. market or North America, January, the first three weeks were very -- there was very little, actually no new product in market. And overall, it was a poor start to the quarter, as we had already highlighted in our February call. And with the new product flowing into the market, we saw a significant uptick, which continued throughout March and we are expecting that we see positive impact of the new model year now flowing into the international market while recognizing that the Touring segment has, while it's important, is not having the same impact on overall sales as it does in the United States, where it's the dominant category. Looking into April, early days, but I would say, all things considered, overall I would call it so far so good, and certainly a lot better than what we've seen at the beginning of the first quarter. So we are overall positive for the quarter and that's also reflected in our unchanged guidance. Joe Altobello -- Raymond James -- Analyst OK. Great. Thank you, guys. Operator Our next question comes from Fred Wightman from Wolfe Research. Please go ahead. Your line is open. Fred Wightman -- Wolfe Research -- Analyst Hey, guys. Thanks for the question. I just wanted to ask another one about the difference as far as 2023s versus 2024s. I know in the past you guys have targeted sort of plus or minus 2% in terms of MSRP realization. Is what you're seeing for 2024 sort of in line with that so far? Jochen Zeitz -- Chairman, President, and Chief Executive Officer That is correct, yes. Fred Wightman -- Wolfe Research -- Analyst OK. And I know that you guys had made a reserve for dealer support at the end of last year. I think it was $40 million. Is that still something that you think is sufficient to clear through the rest of those 2023s? Jonathan Root -- Chief Financial Officer Yes. So, Fred, this is Jonathan. Good question. So as we take a look at financials relative to support to move through those units at retail, obviously, the majority of the dollars were reserved for in Q4. There were some select segments where we made the offer a little bit more attractive from a rate standpoint. And with that, we took a dollar amount that hit our Q1 financials of about $18 million in Q1 and that's reflected as you take a look at our price walks that we put out there. But overall, we feel like the majority of the dollars, obviously have been reserved. And then from what we talked about in the prior questions, as that inventory sells through and moves down, obviously from our perspective the exposure decreases as the units decrease. Jochen Zeitz -- Chairman, President, and Chief Executive Officer The biggest impact you should expect in the first quarter and the units are now going down. So that is reduced and the majority has been budgeted for in anticipation. Fred Wightman -- Wolfe Research -- Analyst Perfect. Thanks a lot. Operator Our next question comes from Alex Perry from Bank of America. Please go ahead. Your line is open. Alex Perry -- Bank of America Merrill Lynch -- Analyst Yes. Hi. I think may be a follow-up on that last question, but could you just talk about how HDMC gross margins played out versus your expectations when you sort of put all the pieces together? And I guess, as we move through the year, would you expect to start to see year-over-year expansion in HDMC gross margins or how much should we be expecting from pressure from pricing and incentives? Thank you. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Yes, let Jonathan take or explain the details, but overall, first quarter played out the way we've expected it and we held our margin guidance firm. So we feel that the next quarters will go also as expected with improvements in gross profit margin along the line. So overall, there's nothing that surprised us in the first quarter, the way that gross margin played out, and we think we can achieve our targets that we've set in terms of guidance. Jonathan? Jonathan Root -- Chief Financial Officer OK. Thanks, Jochen. Alex, just to add a little bit more color on your question, I think in Q1 gross margin came in at 31.2%, which compares to 35.8% in the prior year. So obviously as you look at that, a decrease of about 450 basis points, that was driven by lower operating leverage and the revenue factors that we walk through on Page 7 in the deck. So we have some more materials on that. We obviously, as we look at the gross margin as we move forward, we do envision modest cost inflation of something that's around 2%. So about where we were last year, maybe up a tiny bit from an inflation standpoint, certainly down pretty meaningfully from 2022. Hang with me here as I explain some of this, but the majority of the units that we shipped in the first quarters, so think about 2024 and 2023, those were produced in the preceding fourth quarters in advance of the new model year launch. As we sort of try to put this into perspective, production volumes in the fourth quarter of 2023 were down about 24% compared to the fourth quarter of 2022 which results in a higher fixed cost per unit on motorcycles that end up getting shipped in the respective quarters. That unfavorable impact of the lower operating leverage is offset through productivity savings that in the latest quarter were primarily related to logistics. There was also a little bit of mixed noise in this quarter between motorcycle P&A and A&L. And so the kind of complexion or makeup between motorcycle P&A and A&L causes some uniqueness as we analyze the dollars, so favorable dollars, and an unfavorable percent that really expresses the additional dollars from the motorcycle mix with a decreasing mix from A&L and P&L, which have typically favorable margins. So good question. I think a unique situation in terms of where we are. And then as Jochen touched on, when we sort of flow that gross margin guidance all the way through to sort of OI margin, and what we envision on that front, we came in at 16.2%, which is above our full-year expectations and as Jochen touched on in line with expectations for the quarter. So hopefully, a little more color probably than you asked for, but hopefully that helps explain where we are. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. That's really helpful. Best of luck going forward. Jonathan Root -- Chief Financial Officer Thank you. Operator Our next question comes from James Hardiman from Citi. Please go ahead. Your line is open. James Hardiman -- Citi -- Analyst Hey. Good morning. I wanted to dig just a little bit more on the retail front and sort of how the first quarter plays into the full year, obviously worldwide retail flat for the first quarter, your full-year guidance is based on 0 to 9. I think a lot of us, or at least the way I thought about it, was that you had a bunch of new products in the first quarter, easy comps there, and then a lot of promotional dollars. So I sort of assumed that the first quarter would be the strongest of the year. Maybe walk us through how you guys think about the quarterly cadence of what retail is ultimately going to look like, what it sort of needs to look like to get to your guide? And do you need any macro help to sort of get to where you think you need to be? Thanks. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Thanks, James. It is always hard to predict retail, but I think one factor in the first quarter to consider is the 2024 is not coming into the international market until very late in the quarter or not at all in some markets, as I mentioned earlier, and that should help pull some of at least the EMEA region out of the negative that we've seen in the first quarter to something that's more balanced going forward, so that's helpful. I think if you look at the Asia market with the weakness in China, although we expect some improvement, I would say that's unlikely to turn significantly positive. We'll have to see how that pans out, but I'm more skeptical about the Asian market. But we've budgeted accordingly. Latin America has been positive. And the U.S., if you look at the second quarter, the comp versus prior year is a little tougher than the back half of the year. So you should possibly expect that the North American market, you know, we don't know if it's going to be positive or how positive is. We feel really confident about the market. But if you just look at comps, the back half is much simpler, easier comps than the second quarter. I hope that helps a little bit to contextualize. But in the first quarter we certainly didn't have any help, with the exception of Latin America, that was positive, albeit in small numbers from the international market. We hope that that changes, at least in EMEA, and we're confident for the, for the rest of the year, which is. But we also have to recognize that we're really just entering the riding season as we speak now. And a lot depends on the second quarter, which is why we have not changed our guidance at this point in time, other than confirming our zero or flat to 9%. But we feel comfortable about that and hopefully, we'll have more to say at the end of the second quarter. James Hardiman -- Citi -- Analyst That's great color. May be just a point of clarification, so is it safe to assume that given the touring focus of the new products, that the U.S. market is going to outperform the rest of the world pretty meaningfully, any way to think through that for the year? Jochen Zeitz -- Chairman, President, and Chief Executive Officer Well, I don't want to predict what the international markets are going to say or are able to deliver, but I would say there's likely some outperformance in North America for the entire year. I think that's realistic to assume. James Hardiman -- Citi -- Analyst Got it. Appreciate the color, Jochen. Operator Our next question comes from Tristan Thomas-Martin from BMO Capital Markets. Please go ahead. Your line is open. Tristan Thomas -- BMO Capital Markets -- Analyst Good morning. Just two questions, one just kind of curious. I know whether it seems like in some dealer checks has had some impact in dealers in some regions, and some regions have had better weather. So anything you can maybe call out there in terms of just kind of overall normalized good weather retail, and also just curious about flex financing. Have you seen any adoption and do you have any targets for that? Thanks. Jonathan Root -- Chief Financial Officer Yes. Good weather retail. I'll put that into my vocabulary. That's a good one. Unfortunately, there's never all good weather retail, I'm afraid. And we've certainly seen some of the bad weather throughout the quarter in all markets. Take California as an example. It's been terrible weather with floods and rains pretty much throughout the quarter. So that hasn't helped to kick California into gear and then sporadically, winter storms and everything haven't had either. But I don't want to sort of play the weatherman here. I would say overall, it's certainly not been supportive, and that's why, now really counts in terms of riding season. We are pleased that overall, where there was good weather, we saw, strong momentum, and we hope that that momentum continues. But overall, I don't think it's been supportive. And when the weather was bad, the numbers were not that great. When the weather was good, the numbers were great. And it certainly played out that way throughout North America in the first quarter. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Yes. And Tristan, I'll take your question on HDFS, flex financing. So from a flex financing perspective, we recognize that as we roll out anything that significant from a product perspective, it does sort of require an entire retraining of the dealer body and the sales process. And so as we think through that, our expectations are fairly, fairly muted in terms of the impact that that would have on 2024. And we really think it will take us 12, 18, even up to 24 months to kind of get the full dealer network, behind it, fully embracing, and then salespeople across the entire United States really understanding how to insert that into the sales process, how to have the right conversation with the customer. So we want to be sensitive to the fact that we don't want to prolong the sales experience for our consumers, but we do want them to understand optionality. I think the good news is that it is a triple-digit number of dealers who have already executed one of those products and kind of sold that through to the consumer. So uptake will take some time, but we're pretty pleased with what we're starting to see and the response that we're getting so far from the dealer body. Tristan Thomas -- BMO Capital Markets -- Analyst Thank you. Operator Our next question comes from Noah Zatzkin from KeyBanc. Please go ahead. Your line is open. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Hi. Thanks for taking my question. Most of my questions have been asked and answered, maybe just one on HDFS. How are you feeling about the health of the book? And then in terms of the annualized retail credit losses during the quarter, any reason to believe retail credit losses wouldn't track with kind of normal seasonality from here and then just anything to consider in terms of the allowance with those losses tracking where they are. Thanks. Jonathan Root -- Chief Financial Officer OK. Thank you. As we take a look at the HDFS business, we certainly recognize the uniqueness of that. The seasonality within our financial services business is certainly a little bit unique. As you look across financial services overall, we actually feel like it's following the curve that we expected that it would from a loss perspective, as we think a little bit about the trying to answer your specific question on what are we thinking by quarter? We do think it's going to look pretty normal from a seasonality perspective. So as you would expect, Q1 being the highest quarter, and then you start to see it come down in Q2, Q3 and then pop back up in Q4. So that sort of normal curve is something that we would expect that we'll end up, that we'll end up seeing throughout the year as you move that across. So what does that mean from an overall loss provision perspective? Certainly, something for us to watch pretty carefully in terms of a number of dynamics. So as we look at that portfolio, we factor in a whole bunch of characteristics, right. As we think about customer delinquency, the percentage of those customers who end up moving through to loss, and some other statistics that surround that. But overall, we feel like that is tracking in the way that we would expect it to, so first quarter looks a little bit more, a little bit higher. As you move into Q2, Q3, you see sort of normalization that follows that period. And then as you flow out of the year, we expect that we're well reserved from an overall loss provision perspective. So we feel confident with that and that sort of helps us inform and hold the guidance that we've provided previously for HDFS. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Thank you. Operator Our next question comes from Megan Alexander from Morgan Stanley. Please go ahead. Your line is open. Megan Alexander -- Morgan Stanley -- Analyst Hi. Good morning. Thanks very much. Similarly, most of my questions had been answered, so maybe just a bit of a housekeeping one. I know you don't guide EPS. You did have some nice favorability below the line versus at least what I think street was expecting. So can you help us at all with just kind of how to think about some of those lines, tax rate, interest income going forward? Is 1Q the right run rate for a lot of those, or was there some timing benefit with any of those? Any help you can give us would be great. Jonathan Root -- Chief Financial Officer OK. I can start. And Megan, welcome. So I think we're pleased to have you beginning to cover us. So welcome to. Welcome to Team Harley-Davidson. As we take a look and we think about the below the line items, we certainly had some tax favorability from a Q1 perspective. So as we think a little bit about what that complexion looked like, a little bit of favorability in Q1, we probably won't run quite that favorable from a tax rate perspective all year, so a little bit of caution around that. I think you saw that that was two to three points below where we were prior year. And then as you look at other items within there, certainly as we think about the assets that we have to support retirement and some of that other sort of thing that ends up in that below the line item, higher interest rates and higher for longer could end up being a little bit more favorable than what we originally budgeted. And so we'll see how that plays out based upon the course of action that the Fed takes. But those are probably the biggest kind of the two biggest drivers within that space. Jochen Zeitz -- Chairman, President, and Chief Executive Officer And Megan, welcome from my side too, and on behalf of Jonathan, I promise that as of next year, we are giving EPS guidance. Megan Alexander -- Morgan Stanley -- Analyst Thank you very much. Maybe just to put a finer point on that, I guess so. Maybe net-net, the impact to 1Q was neutral, and one tax rate is going to move in one direction. Going forward, but the pension stuff might be a little bit more favorable than what you thought. Jonathan Root -- Chief Financial Officer Yes. So we think there could be a little bit of an impact from that standpoint. Yes. Megan Alexander -- Morgan Stanley -- Analyst OK. Thank you so much. Jonathan Root -- Chief Financial Officer You're welcome. Operator Last question will come from Jaime Katz from Morningstar. Please go ahead. Your line is open. Jaime Katz -- Morningstar -- Analyst Hey. Good morning. I'm hoping you guys can give us a little bit of an update on the change in the operating loss expectation from LiveWire. If one key was as expected, what is expected to be better over the rest of the year? Karim Donnez -- Chief Executive Officer, LiveWire Good morning, Jaime. So with the relocation of the lab from California to Milwaukee, we're going to centralize all of the LiveWire operations in Wisconsin and this is going to deliver a fair bit of synergies and efficiencies across the business. So we're anticipating being able to remove about 10% of the headcount and 15% of the cost related to employees. So all of this will essentially support the revised operating loss, which would be improved by $10 million in terms of guidance for the rest of the year. Jaime Katz -- Morningstar -- Analyst OK. And then I know one of the union contracts was just ratified. Is there any information on what we should expect for increased labor costs or anything like that going through the SG&A line over 2024 and ahead? Thank you. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Well, the contract is more or less in line with what we've planned and hoped for. And overall, we are really pleased that this passed on the first round, which shows really broad alignment with our union leadership and workforce. It's a five-year contract, so nothing out of the extraordinary that we didn't anticipate. So we are pleased with the outcome. And with the ratification of our new contract in York last year and this year now with Wisconsin, with Tomahawk and PDC, we are all set for five years. So we're very pleased with that outcome. And again, that this union vote passed on the first pass. We're very pleased with that. But nothing unexpected I think and that really shows broadly alignment with our union leadership in our workforce, which is great. Jaime Katz -- Morningstar -- Analyst Thank you. Answer:

the Harley-Davidson first-quarter 2024 conference call

Operator Thank you for standing by and welcome to the Harley-Davidson first-quarter 2024 conference call. Please be advised that today's conference is being recorded. I would now like to turn the call over to Shawn Collins. Mr. Collins, please go ahead. Shawn Collins -- Director, Investor Relations Thank you. Good morning. This is Shawn Collins, the director of investor relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include among others, matters we have noted in today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are, Harley-Davidson chief executive officer, Jochen Zeitz; also chief financial officer, Jonathan Root and we have LiveWire's chief executive officer, Karim Donnez. With that let me turn it over to our CEO, Jochen Zeitz. Jochen? Jochen Zeitz -- Chairman, President, and Chief Executive Officer Thank you, Shawn, and good morning everyone. Thank you for joining us for our Q1 2024 results. Harley-Davidson delivered a good start to the year in line with our expectations. Looking at retail for the quarter, we are pleased with our delivery of 6% growth in North America, our largest and most important region. In Q1 we continue to see the impacts of the high interest rate environment on both consumer confidence and affordability. However, it is positive to seek customer enthusiasm for our motorcycles despite this challenging environment. Outside of North America, both the Europe and APAC regions were soft, mainly due to regional macroeconomic conditions. However, it is also worth noting that our 2024 product only started to arrive in the international regions in March and is just now making its way into most international markets. And as the riding season is starting to get into gear, we're excited for our riders and fans both inside and outside of North America to get to experience the next era of Harley-Davidson Touring motorcycles. As usual, I will now briefly address select Hardwire strategic pillars and our delivery of them, starting with pillar one, profit focus. When we announced our Hardwire strategy back in 2021, we made a commitment to invest in our core categories and building on that commitment this year we ushered in a new area of motorcycle Touring by reimagining two of the most iconic motorcycles in history, the Harley-Davidson Street and Road Glide, with the most comprehensive product redevelopment in well over 10 years. Overall, we are very pleased with our new model year launch and in particular, our newer Touring lineup, which is being received very positively by customers, dealers, and media alike. One outlet summarized the launch particularly well. The Motor Company took the motorcycling world by surprise with the release of the revamped versions of the Road Glide and Street Glide, completely different from their predecessors, a more modernized approach that made them superior to the previous generation in nearly every facet. The all-new Street Glide and Road Glide models have set a new standard for the industry and the future of touring and adventure on two wheels with exceptional performance, cutting edge innovation, and bold new design, representing the largest investment made by the Motor Company into a single platform. We believe that by elevating every aspect of performance, technology, comfort and style, we have without question created the most enticing touring motorcycles ever offered by Harley-Davidson. We continue to see significant positivity for the product across the network and are excited for our riders to have full access to the lineup as the riding season gets underway. Included in our 2024 launch and designed to celebrate 25 years of custom vehicle operations, our CVO lineup expanded with the introduction of the all-new CVO Road Glide ST, representing the pinnacle of Becker performance and the CVO Pan America fully kitted out for extraordinary adventures. The CVO Road Glide ST is the lightest, fastest, and most sophisticated performance bagger ever produced by Harley-Davidson. Taking from our popular Low Rider ST offering, the CVO Road Glide ST combines West Coast custom style and performance trend that we've been fueling with the King of the Baggers Racing Series. To quote another outlet, the CVO ST is the best motorcycle Harley-Davidson has ever put out. For 2024 we also reprised both the CVO Street and Road Glide models that we introduced during Homecoming last year in exciting new color options. The CVO Pan America is another new vehicle and the CVO program's first adventure touring motorcycle. All of the features that have made the Pan America 1250 special a leading choice among discerning global adventure touring riders have been retained, with the CVO Pan America being kitted out with an additional host of rugged accessories selected to enhance the journey. With the Hardwire, we also made a commitment to introduce a series of motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley-Davidson. With that in mind, this February during Daytona Bike Week, we revealed the latest additions to our limited edition Harley-Davidson Icons and the limited run Enthusiast Collection. For the 2024 Icons models this year, we launched a Hydra-Glide Revival celebrating the 75th year of this iconic motorcycle. The release was inspired by the look of the motorcycles ridden in the area of the upcoming film, The Bikeriders, which follows the rise of a Midwestern motorcycle club as seen through the lives of its members. Coming to your screens this summer, the film is scheduled to be released in the United States on June 21st. For the 2024 Enthusiast offering, we celebrated both music and motorcycles with the release of the Tobacco Fade Enthusiast Motorcycle Collection, available across three models, the Low Rider ST, the Ultra Limit, and the Tri Glide Ultra. Again, we've seen a very positive response from customers to these offerings just in time for the rising season to get well underway. Pillar 3 leading in electric. LiveWire continued to pioneer the EV segment with the launch of the S2 Mulholland all-new electric cruiser, the second bike on the S2 platform. The bike has been met with a very positive response in the industry, as Karim will detail shortly. We're also very pleased that LiveWire has become the market leader for on-road EV motorcycles in the U.S. this past quarter. And with the company increasing its focus on vehicle and operational costs, it will also consolidate its operations in Milwaukee at Harley-Davidson's historic headquarters at Juneau Avenue. Turning to Pillar 4 growth beyond bikes. In February, through HDFS, we launched Harley-Davidson Flex Financing. For the first time in our history this innovative loan option provides an alternate way to purchase a Harley-Davidson motorcycle. By combining the benefits of attractive monthly payments, shorter terms, and greater flexibility throughout the loan period, the product offers customers the ability to return the motorcycle at the end of the term, ready to replace or upgrade into their next Harley-Davidson purchase. We are committed to putting customers at the forefront of our products and experiences. H-D Flex does just that, while providing them with another innovative financing option to make Harley-Davidson motorcycle ownership fit the individual budget and lifestyle. Pillar 5 customer experience. We are just under 100 days to go. Our second Annual Homecoming event will be taking place July 25 to 28. And last week we announced the full roster of performance with headliners including the Red Hot Chili Peppers, Jelly Roll, and Hardy. Tickets are now on sale and we look forward to coming together with our community of fans, riders, and their families to celebrate our brand of moto-culture and music and I hope to see many of you there. And lastly, on Pillar 6 inclusive stakeholder management, we are looking forward to formally unveiling the new community park at our Juneau Avenue headquarters on June 24th. The project, which has been pioneered by the Harley-Davidson Foundation, will look to further connect the company, our brand and our employees to the local community, reinforcing our commitment to our hometown, Milwaukee. We could not be more excited to show you our neighborhood on the near West Side. Before I hand over to Karim to cover LiveWire, I would like to cover our outlook for the rest of the year. As we said earlier in the year, for HDMC, we expect retail units to be flat to up 9%. From an inventory point of view, we believe dealers are appropriately positioned with the riding season getting into swing and we continue to expect that wholesale unit shipments will move together with dealer retail sales on a balanced basis by the end of 2024. This range would equate to wholesale unit shipments being down between 1% and 10% versus prior year. This would result in HDMC revenue coming in flat to down 9%. We expect HDMC operating income margin of 12.6% to 13.6%. This is flat to down 100 basis points from the 2023 level. Let me mention the specific drivers of this again. Negative operating leverage due to lower wholesale volumes, foreign currency which we expect to be a headwind, mix which we expect to be slightly favorable, pricing which we expect to be slightly down as we eliminated the surcharge and fine-tuned our pricing strategy and lastly, we expect some additional manufacturing costs as we realign factory processes in the initial year of production of the new Street Glide and Road Glide motorcycles. At HDFS, we expect operating income to be flat to up 5%, reflecting retail and wholesale portfolios and customers settling into the existing macroeconomic backdrop. As you will hear from Karim now, for the full year Livewire is revising its operating loss guidance and now expects an improved operating loss of $105 million to $115 million from previous guidance of an operating loss of $115 million to $125 million. Lastly, I would like to reinforce our commitment to returning excess free cash flow to our shareholders. We plan to continue to optimize our returns through share repurchases and appropriate dividend payments. You can see our commitment to capital returns since 2022 on Page 15. Since the beginning of 2022 and through Q1 2024, we've bought back $773 million in shares and paid out $214 million in dividends. This equates to almost $1 billion in capital return to shareholders since 2022 and a share buyback amounting to 14% of our outstanding shares. We are planning to remain on a similar trajectory to this annualized rate throughout 2024. Thank you and now I'll hand it over to Karim. Karim Donnez -- Chief Executive Officer, LiveWire Thank you, Jochen. Good morning everyone. We are happy to report on a successful launch of the S2 Mulholland in both the United States and Canada. This is the second motorcycle built on the LiveWire developed S2 platform following the S2 Del Mar. This brings our lineup to three bikes, expanding the choices available to LiveWire riders. The response from the market has been positive with riders, retailers, and media responding to the Mulholland styling and the option to choose a bike with a lower riding position. In the third quarter, Livewire reported sales of 117 units, an 86% increase over the first quarter of 2023. Our retail sales outpaced wholesale as Del Mar made its way into the channel, making, as Johann mentioned, LiveWire the number one on-road electric motorcycle in the U.S. In Europe, we began shipping S2 Del Mar to our four priority countries at the end of the quarter, with products now available across our network in the region. We have similar plans for STACYC with the first bike being shipped to Europe as we speak. While we plan to expand our market leadership, our teams are working on design, engineering and sourcing initiatives to reduce the cost of our product. We are also planning to reduce spend and closely manage cash across the operation to get the most out of our strategic investments. To that effect, we will centralize all of our operations in Juneau Avenue in Milwaukee, including the relocation of LiveWire lab operations from California to enable synergies and efficiency. We will take this opportunity to streamline and revisit the organization's structure to achieve simplicity in everything we do. While we maintain the outlook for the revenue units, we now expect a $10 million improvement in operating loss while continuing to focus the larger portion of expenses on product innovation and market development. LiveWire is fully committed to the electrification of the sports by building the best product and delivering an unmatched customer experience. Thank you and now I'll hand it over to Jonathan. Jonathan Root -- Chief Financial Officer Thank you, Karim, and good morning to all. I plan to start on Page 5 of the presentation where I will briefly summarize the consolidated financial results for the first quarter of 2024, and subsequently I will go into further detail on each business segment. Consolidated revenue in the first quarter was down 3%, driven HDMC revenue decrease of 5%, which was partially offset by HDFS revenue growth of 12%. Consolidated operating income in the first quarter performed in line with our expectations and was down 29%, driven by a decline of 29% of HDMC, a decline of 8% at HDFS, and an operating loss of $29 million in the LiveWire segment. Consolidated operating income margin in the first quarter was 15.2%, representing a 545 basis point decline versus Q1 of 2024. The lower consolidated margin is largely due to a lower Q1 margin at HDMC, driven by lower volumes, pricing, and associated throughput. I plan to go into further detail on each business segment's profit and loss drivers in the next section. First-quarter earnings per share was $1.72. In Q1 global retail sales of new motorcycles were flat versus the prior year. In North America Q1 retail sales were up 6%, driven primarily by the redesigned and all-new Street Glide and Road Glide Touring motorcycles which were introduced at the end of January. In EMEA, Q1 retail sales declined by 11% due to weakness in Germany and France. Overall, EMEA continues to be adversely impacted by macroeconomic conditions and geopolitical uncertainty, which has led to sluggish economic growth. In Asia Pacific, Q1 retail sales declined by 12%, driven by weakness primarily in China. This is the third quarter in a row where we have experienced declines in the region after six sequential quarters of solid year-over-year growth in Asia Pacific. In Latin America, Q1 retail sales experienced modest growth in both Mexico and Brazil. Dealer inventory at the end of Q1 was up approximately 26% as compared to the end of Q1 in 2023. We believe current dealer inventory and product availability are in healthy positions overall as we approach the spring 2024 riding season. This is important with the recent launch of new model year 2024 motorcycles, especially with the positive reception to our new Street Glide and Road Glide Touring models. Looking at revenue, HDMC revenue decreased by 5% in Q1. Focusing on the key drivers for the quarter, 7 points of decline came from decreased wholesale volume at HDMC, largely due to the fact dealers were rebuilding dealer inventory in Q1 2023 after the lows they experienced following the pandemic. Motorcycle shipments in the quarter, while below prior year, were slightly ahead of 2021 and 2022 levels. Three points of decline came from pricing, which includes the impacts of the pricing surcharge elimination, other pricing actions on 2024 model year, and sales incentives. Mix contributed 4 points of growth as we continued to prioritize our most profitable models and markets. And finally, foreign exchange was flat to q1 prior year. In Q1 HDMC gross margin was 31.2%, which compares to 35.8% in the prior year. The decrease of 450 basis points was driven by lower operating leverage and the revenue factors I just spoke about, as well as continued modest cost inflation of 1% to 2%. The majority of the units shipped in the first quarters of 2024 and 2023 were produced in the preceding fourth quarters in advance of the new model year launch. Production volumes were down 24% in the fourth quarter of 2023 compared to the fourth quarter of 2022, which resulted in a higher fixed cost per unit on motorcycles shipped in Q1 of 2024 compared to Q1 of 2023. The unfavorable impact of lower operating leverage was offset by other productivity savings related primarily to logistics during the quarter. HDMC operating margin came in at 16.2%, which is above our full-year expectations and in line with expectations for the quarter. At Harley-Davidson Financial Services, Q1 revenue increased by $26 million or 12%, driven by higher retail and commercial finance receivables, as well as higher average yields as the portfolio resets over time due to higher base rates which are driving higher interest income. HDFS operating income was $54 million, down $5 million or 8% compared to last year. The Q1 decline was driven by higher borrowing costs, a higher provision for credit losses, and higher operating expenses. These increased costs were partially offset by higher interest income. Total interest expense was up $15 million or 21% versus the prior year. The increase was driven by a higher cost of funds as lower interest rate debt matured and was replaced with current market rate debt. In Q1 HDFS' annualized retail credit loss ratio was 3.7%, which compares to an annualized retail credit loss ratio of 3.2% in Q1 of 2023. The increase in credit losses was driven by several factors relating to the current macroeconomic environment and the related customer and industry dynamics. In addition, the retail allowance for credit losses for the first quarter remained flat at 5.4% from Q4 of 2023. Total retail loan originations in Q1 were up 2%, while commercial financing activities were up 22% to $1.5 billion. Total quarter end net financing receivables, including both retail loans and commercial financing was $7.9 billion, which was up 4% versus prior year. For the LiveWire segment, electric motorcycles revenue decreased in the first quarter of 2024 compared to the prior year period despite higher unit sales in the quarter. The lower revenue was due primarily to product mix and a one-time adjustment relating to a change in their retail partner strategy. Selling, engineering and administrative expenses remained relatively flat compared to the prior year. As expected, basic revenue was down compared to Q1 of 2023, primarily due to a reduction in third-party branded distributor volumes. LiveWire operating loss of $29 million was in line with our expectations as Livewire continued to invest in new motorcycle models and action initiatives to reduce EV costs. In addition, SG&A was flat to prior year. Wrapping up with consolidated Harley-Davidson, Inc. full-year financial results, we delivered $104 million of operating cash flow in Q1, which was up from $47 million in the prior period. The increase in operating cash flow was due primarily to lower net cash outflows for wholesale financing and favorable changes in working capital compared to Q1 of 2023. Total cash and cash equivalents ended at $1.5 billion, which was $97 million lower than at the end of Q1 prior year. This consolidated cash number includes $141 million at LiveWire. Additionally, as part of our capital allocation strategy and in line with our commitment to return capital to our shareholders, we bought back 2.5 million shares of our stock at a value of $98 million in Q1 of 2024. As we look to the rest of 2024 we remain excited about our new 2024 motorcycle lineup and as Jochen discussed, we are reaffirming our full-year guidance with the exception of the improvement noted in LiveWire operating loss. I would like to put some unit numbers to our 2024 outlook that Jochen cited earlier, and these are in line with what we said on our last earnings call, which took place in February. At HDMC we expect that retail units sold and wholesale unit shipments will move together on a balanced basis in 2024. We expect 163,000 to 178,000 retail and wholesale units. This results in HDMC revenue coming in flat to down 9% versus prior year. Last, I will touch on a couple of additional items in terms of capital investments and capital allocation. We continue to expect total HDI capital investments in the range of $225 million to $250 million. As we look at capital allocation in 2024, our priorities remain to fund profitable growth of the Hardwire initiatives, which includes the capital expenditures mentioned previously, paying dividends, and continuing to execute discretionary share repurchases. And with that, we will open it up to Q&A. Questions & Answers: Operator [Operator instructions] Our first question comes from Craig Kennison from Baird. Please go ahead. Your line is open. Craig Kennison -- Robert W. Baird and Company -- Analyst OK. Good morning. Thanks for taking my question and congratulations on the touring momentum. I'm wondering if you can speak to the health of the dealer network. We've seen kind of across our Powersports & Marine coverage that dealers have been that dealers have been struggling with too much inventory and skinny margins, and then rates are moving against them as well, which hurts on the floor plan side. Nothing is really unique to Harley-Davidson, but there is a lot of macro stress. I'm just wondering how you feel about the health of the dealer network and whether you're hearing anything different from your new Chief Commercial Officer, Luke Mansfield. Thanks. Jonathan Root -- Chief Financial Officer Hey, Craig. It's Jonathan. Thank you for your question. I'll start. And so I think relative to dealers, if we look at dealers today, certainly from a Harley-Davidson perspective, there's enthusiasm for what's out there, and I think recognition that customers are showing up, taking a look at our new Street Glide and Road Glide motorcycles, and then obviously the other 2024 model years. So as you look at the start to the year, I think we're pretty pleased with what that looks like and I think the dealer sentiment generally goes with that. The one concern that probably is worth being open and honest about is that in an environment where interest rates have moved up a little bit, that certainly has an impact on dealers and dealer health. So from our perspective, we do pay a lot of attention to kind of the position that our dealers are in health of the entire network. We think that's something to be very important to key in on and so from their perspective, a little bit of concern around what they see from a floor plan perspective. For us, as you heard Jochen talk about on some of his introductory comments, we are paying attention to that balance between what we're putting into the channel and retail over the course of 2024. So we are supporting them through paying attention to that. As you know, we do also have some selective interest rate subvention for customers on customer facing programs only for 2023 model year product. At this point that obviously helps drive dealer traffic. That helps attract the more rate sensitive customers and really help them move through their inventory. And then obviously as an organization, we make sure that we have some dealer facing programs that are out there that really support and bolster their overall health. And so from that perspective, I think something that we do stay attuned to, something that we certainly make sure that we take a look at, and something that I think we need to make sure that as an industry, we're sensitive to as we move through 2024. Craig Kennison -- Robert W. Baird and Company -- Analyst Thanks, Jonathan. Just as a quick follow up, do you have any metrics to share on how fresh or current your inventory is compared to prior periods? Jonathan Root -- Chief Financial Officer Sure. So as we take a look at the mix that we have from a unit perspective, it does look a little bit different as you look across the globe, so some different answers. I think that they vary when you look at North America versus EMEA versus Asia Pacific and Latin America. So obviously, as we roll out the new model year, it hits our North American dealers before it sort of touches the international dealers. So if we look at where we were in North America for example, about 35% of dealer inventory was comprised of 2023 model year or non-current model year bikes. As you sort of move around the globe, it looks a little bit different. So from an EMEA perspective, we get the 2024s into market because of shipping times, homologation, etc., a little bit later. So from an EMEA standpoint, it would look more like 70%, same thing with Asia Pacific and Latin America. So they're probably more like 70%, 75% at the end of Q1 that are 2023 or prior. So obviously, there is sort of a cadence that flows around the globe. But probably, if you are talking with North American dealers, as there probably is a little more conversation there, you would see that it's somewhere around a third that are 2023 and older. Craig Kennison -- Robert W. Baird and Company -- Analyst That's great. Thanks, Jonathan. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Yes, Craig. It's Jochen here. Just a little bit more color here. We expect model year 2023 to be more or less gone by the end of the second quarter. The rate with which the 2023s are selling down in the U.S. is as planned. And as Jonathan said, with the new product coming in, the 2023s are reducing nicely. So by the end of the second quarter, we should be pretty much, I don't want to say out of there's always going to be one or two left per dealer, but a significant portion of the 2023s will be gone based on what we are seeing now. And as you look at how we expect wholesale and retail to move, obviously in the first quarter, getting ready for riding season, we shipped more motorcycles than we retailed in advance of the riding season. You should expect Q2 to be more in equilibrium retail, wholesale, and then in the second half we would expect retail to overtake wholesale. So just sort of a little bit of how we expect the year to unfold. Craig Kennison -- Robert W. Baird and Company -- Analyst Thank you. Operator Our next question comes from Joe Altobello from Raymond James. Please go ahead. Your line is open. Joe Altobello -- Raymond James -- Analyst Thanks. Hey, guys. Good morning. Just wanted to follow up on Craig's question. Not so much inventory, but more retail. If I look at North America, the retail growth of 6% you had in the first quarter, could you give us a sense for how that might have broken down between the model year 2023s versus the new model year 2024s? Jonathan Root -- Chief Financial Officer Sure. So thank you, Joe, good question. Obviously, as you look throughout the first quarter and you think about the impact that model year had on sort of sales trajectory and sales path as you started the quarter in January, we were heavily 2023, since we didn't get the 2024s out there until we got partway into Q1. So from a January perspective it was probably in the range of 75%, 80% that were 2023 or prior. And then as we moved through the quarter, that percentage increased to the majority by March were obviously 2024 related. There's also a little bit of a difference as you look at some of those dynamics by family. So as we look within Touring, for example, a somewhat higher percentage of customer interest in North America that was focused on the all-new Street Glide and Road Glide motorcycles. From the commentary that we just talked about, if you look outside of the U.S., it certainly was a significantly smaller percentage of 2024s and then, as you would imagine, we see that increasing meaningfully as we get into Q2 and beyond. Joe Altobello -- Raymond James -- Analyst Very helpful. Thank you. Just to follow up on that, maybe sort of give us a sense for how trends progressed throughout the quarter maybe here in April. I know January was a tough month from a weather perspective, and the model year 2024s haven't launched yet, but what are you seeing so far as the weather is getting warmer? And I guess just to kind of clarify, was flat global retail in Q1 in line with what you guys were expecting going in? Jochen Zeitz -- Chairman, President, and Chief Executive Officer Jochen here. Yes, based on the fact that, as Jonathan and I mentioned earlier, we only get our international 2024 model year into markets starting in March. Some regions, some markets only even got the 2024s at the end of March. So if you now look at the U.S. market or North America, January, the first three weeks were very -- there was very little, actually no new product in market. And overall, it was a poor start to the quarter, as we had already highlighted in our February call. And with the new product flowing into the market, we saw a significant uptick, which continued throughout March and we are expecting that we see positive impact of the new model year now flowing into the international market while recognizing that the Touring segment has, while it's important, is not having the same impact on overall sales as it does in the United States, where it's the dominant category. Looking into April, early days, but I would say, all things considered, overall I would call it so far so good, and certainly a lot better than what we've seen at the beginning of the first quarter. So we are overall positive for the quarter and that's also reflected in our unchanged guidance. Joe Altobello -- Raymond James -- Analyst OK. Great. Thank you, guys. Operator Our next question comes from Fred Wightman from Wolfe Research. Please go ahead. Your line is open. Fred Wightman -- Wolfe Research -- Analyst Hey, guys. Thanks for the question. I just wanted to ask another one about the difference as far as 2023s versus 2024s. I know in the past you guys have targeted sort of plus or minus 2% in terms of MSRP realization. Is what you're seeing for 2024 sort of in line with that so far? Jochen Zeitz -- Chairman, President, and Chief Executive Officer That is correct, yes. Fred Wightman -- Wolfe Research -- Analyst OK. And I know that you guys had made a reserve for dealer support at the end of last year. I think it was $40 million. Is that still something that you think is sufficient to clear through the rest of those 2023s? Jonathan Root -- Chief Financial Officer Yes. So, Fred, this is Jonathan. Good question. So as we take a look at financials relative to support to move through those units at retail, obviously, the majority of the dollars were reserved for in Q4. There were some select segments where we made the offer a little bit more attractive from a rate standpoint. And with that, we took a dollar amount that hit our Q1 financials of about $18 million in Q1 and that's reflected as you take a look at our price walks that we put out there. But overall, we feel like the majority of the dollars, obviously have been reserved. And then from what we talked about in the prior questions, as that inventory sells through and moves down, obviously from our perspective the exposure decreases as the units decrease. Jochen Zeitz -- Chairman, President, and Chief Executive Officer The biggest impact you should expect in the first quarter and the units are now going down. So that is reduced and the majority has been budgeted for in anticipation. Fred Wightman -- Wolfe Research -- Analyst Perfect. Thanks a lot. Operator Our next question comes from Alex Perry from Bank of America. Please go ahead. Your line is open. Alex Perry -- Bank of America Merrill Lynch -- Analyst Yes. Hi. I think may be a follow-up on that last question, but could you just talk about how HDMC gross margins played out versus your expectations when you sort of put all the pieces together? And I guess, as we move through the year, would you expect to start to see year-over-year expansion in HDMC gross margins or how much should we be expecting from pressure from pricing and incentives? Thank you. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Yes, let Jonathan take or explain the details, but overall, first quarter played out the way we've expected it and we held our margin guidance firm. So we feel that the next quarters will go also as expected with improvements in gross profit margin along the line. So overall, there's nothing that surprised us in the first quarter, the way that gross margin played out, and we think we can achieve our targets that we've set in terms of guidance. Jonathan? Jonathan Root -- Chief Financial Officer OK. Thanks, Jochen. Alex, just to add a little bit more color on your question, I think in Q1 gross margin came in at 31.2%, which compares to 35.8% in the prior year. So obviously as you look at that, a decrease of about 450 basis points, that was driven by lower operating leverage and the revenue factors that we walk through on Page 7 in the deck. So we have some more materials on that. We obviously, as we look at the gross margin as we move forward, we do envision modest cost inflation of something that's around 2%. So about where we were last year, maybe up a tiny bit from an inflation standpoint, certainly down pretty meaningfully from 2022. Hang with me here as I explain some of this, but the majority of the units that we shipped in the first quarters, so think about 2024 and 2023, those were produced in the preceding fourth quarters in advance of the new model year launch. As we sort of try to put this into perspective, production volumes in the fourth quarter of 2023 were down about 24% compared to the fourth quarter of 2022 which results in a higher fixed cost per unit on motorcycles that end up getting shipped in the respective quarters. That unfavorable impact of the lower operating leverage is offset through productivity savings that in the latest quarter were primarily related to logistics. There was also a little bit of mixed noise in this quarter between motorcycle P&A and A&L. And so the kind of complexion or makeup between motorcycle P&A and A&L causes some uniqueness as we analyze the dollars, so favorable dollars, and an unfavorable percent that really expresses the additional dollars from the motorcycle mix with a decreasing mix from A&L and P&L, which have typically favorable margins. So good question. I think a unique situation in terms of where we are. And then as Jochen touched on, when we sort of flow that gross margin guidance all the way through to sort of OI margin, and what we envision on that front, we came in at 16.2%, which is above our full-year expectations and as Jochen touched on in line with expectations for the quarter. So hopefully, a little more color probably than you asked for, but hopefully that helps explain where we are. Alex Perry -- Bank of America Merrill Lynch -- Analyst Perfect. That's really helpful. Best of luck going forward. Jonathan Root -- Chief Financial Officer Thank you. Operator Our next question comes from James Hardiman from Citi. Please go ahead. Your line is open. James Hardiman -- Citi -- Analyst Hey. Good morning. I wanted to dig just a little bit more on the retail front and sort of how the first quarter plays into the full year, obviously worldwide retail flat for the first quarter, your full-year guidance is based on 0 to 9. I think a lot of us, or at least the way I thought about it, was that you had a bunch of new products in the first quarter, easy comps there, and then a lot of promotional dollars. So I sort of assumed that the first quarter would be the strongest of the year. Maybe walk us through how you guys think about the quarterly cadence of what retail is ultimately going to look like, what it sort of needs to look like to get to your guide? And do you need any macro help to sort of get to where you think you need to be? Thanks. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Thanks, James. It is always hard to predict retail, but I think one factor in the first quarter to consider is the 2024 is not coming into the international market until very late in the quarter or not at all in some markets, as I mentioned earlier, and that should help pull some of at least the EMEA region out of the negative that we've seen in the first quarter to something that's more balanced going forward, so that's helpful. I think if you look at the Asia market with the weakness in China, although we expect some improvement, I would say that's unlikely to turn significantly positive. We'll have to see how that pans out, but I'm more skeptical about the Asian market. But we've budgeted accordingly. Latin America has been positive. And the U.S., if you look at the second quarter, the comp versus prior year is a little tougher than the back half of the year. So you should possibly expect that the North American market, you know, we don't know if it's going to be positive or how positive is. We feel really confident about the market. But if you just look at comps, the back half is much simpler, easier comps than the second quarter. I hope that helps a little bit to contextualize. But in the first quarter we certainly didn't have any help, with the exception of Latin America, that was positive, albeit in small numbers from the international market. We hope that that changes, at least in EMEA, and we're confident for the, for the rest of the year, which is. But we also have to recognize that we're really just entering the riding season as we speak now. And a lot depends on the second quarter, which is why we have not changed our guidance at this point in time, other than confirming our zero or flat to 9%. But we feel comfortable about that and hopefully, we'll have more to say at the end of the second quarter. James Hardiman -- Citi -- Analyst That's great color. May be just a point of clarification, so is it safe to assume that given the touring focus of the new products, that the U.S. market is going to outperform the rest of the world pretty meaningfully, any way to think through that for the year? Jochen Zeitz -- Chairman, President, and Chief Executive Officer Well, I don't want to predict what the international markets are going to say or are able to deliver, but I would say there's likely some outperformance in North America for the entire year. I think that's realistic to assume. James Hardiman -- Citi -- Analyst Got it. Appreciate the color, Jochen. Operator Our next question comes from Tristan Thomas-Martin from BMO Capital Markets. Please go ahead. Your line is open. Tristan Thomas -- BMO Capital Markets -- Analyst Good morning. Just two questions, one just kind of curious. I know whether it seems like in some dealer checks has had some impact in dealers in some regions, and some regions have had better weather. So anything you can maybe call out there in terms of just kind of overall normalized good weather retail, and also just curious about flex financing. Have you seen any adoption and do you have any targets for that? Thanks. Jonathan Root -- Chief Financial Officer Yes. Good weather retail. I'll put that into my vocabulary. That's a good one. Unfortunately, there's never all good weather retail, I'm afraid. And we've certainly seen some of the bad weather throughout the quarter in all markets. Take California as an example. It's been terrible weather with floods and rains pretty much throughout the quarter. So that hasn't helped to kick California into gear and then sporadically, winter storms and everything haven't had either. But I don't want to sort of play the weatherman here. I would say overall, it's certainly not been supportive, and that's why, now really counts in terms of riding season. We are pleased that overall, where there was good weather, we saw, strong momentum, and we hope that that momentum continues. But overall, I don't think it's been supportive. And when the weather was bad, the numbers were not that great. When the weather was good, the numbers were great. And it certainly played out that way throughout North America in the first quarter. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Yes. And Tristan, I'll take your question on HDFS, flex financing. So from a flex financing perspective, we recognize that as we roll out anything that significant from a product perspective, it does sort of require an entire retraining of the dealer body and the sales process. And so as we think through that, our expectations are fairly, fairly muted in terms of the impact that that would have on 2024. And we really think it will take us 12, 18, even up to 24 months to kind of get the full dealer network, behind it, fully embracing, and then salespeople across the entire United States really understanding how to insert that into the sales process, how to have the right conversation with the customer. So we want to be sensitive to the fact that we don't want to prolong the sales experience for our consumers, but we do want them to understand optionality. I think the good news is that it is a triple-digit number of dealers who have already executed one of those products and kind of sold that through to the consumer. So uptake will take some time, but we're pretty pleased with what we're starting to see and the response that we're getting so far from the dealer body. Tristan Thomas -- BMO Capital Markets -- Analyst Thank you. Operator Our next question comes from Noah Zatzkin from KeyBanc. Please go ahead. Your line is open. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Hi. Thanks for taking my question. Most of my questions have been asked and answered, maybe just one on HDFS. How are you feeling about the health of the book? And then in terms of the annualized retail credit losses during the quarter, any reason to believe retail credit losses wouldn't track with kind of normal seasonality from here and then just anything to consider in terms of the allowance with those losses tracking where they are. Thanks. Jonathan Root -- Chief Financial Officer OK. Thank you. As we take a look at the HDFS business, we certainly recognize the uniqueness of that. The seasonality within our financial services business is certainly a little bit unique. As you look across financial services overall, we actually feel like it's following the curve that we expected that it would from a loss perspective, as we think a little bit about the trying to answer your specific question on what are we thinking by quarter? We do think it's going to look pretty normal from a seasonality perspective. So as you would expect, Q1 being the highest quarter, and then you start to see it come down in Q2, Q3 and then pop back up in Q4. So that sort of normal curve is something that we would expect that we'll end up, that we'll end up seeing throughout the year as you move that across. So what does that mean from an overall loss provision perspective? Certainly, something for us to watch pretty carefully in terms of a number of dynamics. So as we look at that portfolio, we factor in a whole bunch of characteristics, right. As we think about customer delinquency, the percentage of those customers who end up moving through to loss, and some other statistics that surround that. But overall, we feel like that is tracking in the way that we would expect it to, so first quarter looks a little bit more, a little bit higher. As you move into Q2, Q3, you see sort of normalization that follows that period. And then as you flow out of the year, we expect that we're well reserved from an overall loss provision perspective. So we feel confident with that and that sort of helps us inform and hold the guidance that we've provided previously for HDFS. Noah Zatzkin -- KeyBanc Capital Markets -- Analyst Thank you. Operator Our next question comes from Megan Alexander from Morgan Stanley. Please go ahead. Your line is open. Megan Alexander -- Morgan Stanley -- Analyst Hi. Good morning. Thanks very much. Similarly, most of my questions had been answered, so maybe just a bit of a housekeeping one. I know you don't guide EPS. You did have some nice favorability below the line versus at least what I think street was expecting. So can you help us at all with just kind of how to think about some of those lines, tax rate, interest income going forward? Is 1Q the right run rate for a lot of those, or was there some timing benefit with any of those? Any help you can give us would be great. Jonathan Root -- Chief Financial Officer OK. I can start. And Megan, welcome. So I think we're pleased to have you beginning to cover us. So welcome to. Welcome to Team Harley-Davidson. As we take a look and we think about the below the line items, we certainly had some tax favorability from a Q1 perspective. So as we think a little bit about what that complexion looked like, a little bit of favorability in Q1, we probably won't run quite that favorable from a tax rate perspective all year, so a little bit of caution around that. I think you saw that that was two to three points below where we were prior year. And then as you look at other items within there, certainly as we think about the assets that we have to support retirement and some of that other sort of thing that ends up in that below the line item, higher interest rates and higher for longer could end up being a little bit more favorable than what we originally budgeted. And so we'll see how that plays out based upon the course of action that the Fed takes. But those are probably the biggest kind of the two biggest drivers within that space. Jochen Zeitz -- Chairman, President, and Chief Executive Officer And Megan, welcome from my side too, and on behalf of Jonathan, I promise that as of next year, we are giving EPS guidance. Megan Alexander -- Morgan Stanley -- Analyst Thank you very much. Maybe just to put a finer point on that, I guess so. Maybe net-net, the impact to 1Q was neutral, and one tax rate is going to move in one direction. Going forward, but the pension stuff might be a little bit more favorable than what you thought. Jonathan Root -- Chief Financial Officer Yes. So we think there could be a little bit of an impact from that standpoint. Yes. Megan Alexander -- Morgan Stanley -- Analyst OK. Thank you so much. Jonathan Root -- Chief Financial Officer You're welcome. Operator Last question will come from Jaime Katz from Morningstar. Please go ahead. Your line is open. Jaime Katz -- Morningstar -- Analyst Hey. Good morning. I'm hoping you guys can give us a little bit of an update on the change in the operating loss expectation from LiveWire. If one key was as expected, what is expected to be better over the rest of the year? Karim Donnez -- Chief Executive Officer, LiveWire Good morning, Jaime. So with the relocation of the lab from California to Milwaukee, we're going to centralize all of the LiveWire operations in Wisconsin and this is going to deliver a fair bit of synergies and efficiencies across the business. So we're anticipating being able to remove about 10% of the headcount and 15% of the cost related to employees. So all of this will essentially support the revised operating loss, which would be improved by $10 million in terms of guidance for the rest of the year. Jaime Katz -- Morningstar -- Analyst OK. And then I know one of the union contracts was just ratified. Is there any information on what we should expect for increased labor costs or anything like that going through the SG&A line over 2024 and ahead? Thank you. Jochen Zeitz -- Chairman, President, and Chief Executive Officer Well, the contract is more or less in line with what we've planned and hoped for. And overall, we are really pleased that this passed on the first round, which shows really broad alignment with our union leadership and workforce. It's a five-year contract, so nothing out of the extraordinary that we didn't anticipate. So we are pleased with the outcome. And with the ratification of our new contract in York last year and this year now with Wisconsin, with Tomahawk and PDC, we are all set for five years. So we're very pleased with that outcome. And again, that this union vote passed on the first pass. We're very pleased with that. But nothing unexpected I think and that really shows broadly alignment with our union leadership in our workforce, which is great. Jaime Katz -- Morningstar -- Analyst Thank you.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you for standing by, and welcome to the Honeywell first-quarter 2024 earnings conference call. [Operator instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, vice president of investor relations. Please go ahead. Sean Meakim -- Vice President, Investor Relations Thank you. Good morning, and welcome to Honeywell's first-quarter 2024 earnings conference call. On the call with me today are chief executive officer, Vimal Kapur; and senior vice president and chief financial officer, Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our business as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the first quarter, share our guidance for the second quarter, and provide an update on full year 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Vimal Kapur. Vimal Kapur -- President and Chief Operating Officer Thank you, Sean, and good morning, everyone. We delivered a very strong first quarter, exceeding the high end of our first-quarter adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. The disciplined execution of our world-class Accelerator operating system and differentiated portfolio of technologies enabled this strong performance amid a dynamic macroeconomic backdrop. As expected, our long-cycle Aerospace and energy-oriented businesses led the way with healthy organic volume growth. We are starting to see recovery in some areas of our short-cycle portfolio, including consecutive quarters of order growth in productivity solutions and services, while the other short-cycle businesses continue to normalize as the effects of destocking fade consistent with our second-half acceleration framework. Before we get into a more detailed discussion on the first-quarter 2024 results and updates to our full-year 2024 expectation, let me take a minute to revisit my priorities for Honeywell. First, we are keenly focused on accelerating organic sales growth toward the upper end of our long-term target range of 4% to 7%. We are doing this by enhancing our innovation playbook, accelerating sustainability and software offerings, increasing penetration of our installed base, and leveraging our leadership position in high-growth regions. Second, we are evolving Honeywell Accelerator to drive incremental value through deploying global design model across the portfolio to enhance our growth capabilities. Following the great integration inside of Honeywell over the past several years, we are now an integrated operating company that deploys world-class digital supply chain and technology development capabilities at scale, along with multiple growth drivers that benefit the entire enterprise. This includes leveraging generative AI to maximize the potential benefit of our operating system, both for our customers and internally. Of the strong digitally enabled foundation, Accelerator is providing to be a powerful source of profitable growth across all of our businesses and potential addition to our portfolio. Third, we are executing on our portfolio, optimizing goals, upgrading the quality of our business and financial profile by executing on strategic bolt-on acquisitions while divesting noncore lines of business to accelerate value creation. We expect to deliver profitable growth and strong cash generation as we demonstrate progress against these priorities, creating a compelling long-term value proposition for our share owners. In the spirit of that progress, let's turn to Slide 3 to discuss the latest action in our portfolio-shaping goals. Our M&A playbook is yielding positive results. Over the last few years, we have accumulated several quality bolt-ons and tuck-in assets that strategically add to our technological capabilities, enhancing our alignment to compelling megatrends and provide accretive growth that supports Honeywell's overall long-term financial framework. We remain focused on creating a flywheel of bolt-on M&A transaction roughly in the $1 billion to $7 billion purchase price range. We have successfully executed on meaningful deals that add technological adjacencies to our portfolio and are accretive to our growth and margin rate profile with attractive business mix characteristics. The most recent example of this came in the fourth quarter when we announced our intention to acquire Carrier's Global Access Solutions business for nearly $5 billion, enabling Honeywell to become a leader in security solution for the digital age. The transaction further enhances our equipment-agnostic, high-margin product business mix within Building Automation. Last year's acquisition of Compressor Controls Corporation, or CCC, a leading provider of turbomachinery control and optimization solutions that will play a critical role in early transition, aligns with this playbook as well. CCC technologies, including controlled hardware, software, and services bolster Honeywell's high-growth sustainability and digitalization portfolio with new carbon capture control solution. CCC has seamlessly integrated into our Process Solutions business, and we are already seeing meaningful revenue synergies benefit with Honeywell Forge. Second, acquisition is also an important growth lever for us as we continuously evaluate a build, buy or partner approach to add strategically important offering that solve our customers' toughest challenges. Last month, Honeywell announced our intention to acquire Civitanavi Systems for approximately 200 million euro. Civitanavi's technology will reinforce our leading navigation solutions across aerospace, defense, and industrial platform. This acquisition, which is direct concert with Honeywell's alignment to the megatrend of automation and future of aviation, furthers our ability to create value for our customers from nose to tail, whether they are traditional operators seeking to increase the autonomous capability of their existing fleets or new entries in the advanced air mobility space. Last year, we acquired SCADAfence, a business that delivers Internet of Things and operational technology cybersecurity solution for monitoring large-scale network. SCADAfence brought proven technologies in asset recovery, threat detection, and security governance into our SC portfolio, all key components for critical infrastructure and industrial cybersecurity. The acquisition has bolstered our strategic foundation in an attractive market for us to continue to build on both organically and inorganically. With the recent portfolio announcement, including Carrier's Global Access Solutions business and Civitanavi, we are on track to accelerate capital deployment in 2024 and exceed our commitment to deploy at least $25 billion of capital in 2023 through 2025. Our robust balance sheet capacity enable us to allocate capital to opportunistic share repurchases, high-return growth capex, and accretive M&A. As the deal environment remains relatively favorable in 2024, we will build on our already strong pipeline of high-value M&A opportunities, supporting the execution of our portfolio-shaping strategy. Before I hand it over to Greg, let's turn to Slide 4 to review some of our exciting recent wins. Let me take this opportunity to highlight our recent commercial wins and strategic actions we are taking that demonstrate innovation across our portfolio and support alignment of three compelling megatrends: automation, future of aviation, and energy transition, all underpinned by robust digitalization capability and solutions. In the automation space, Honeywell was chosen to provide automation, cybersecurity, and safety solution to a multibillion-dollar plant expansion project for a major energy company in Middle East. We will deploy our flagship distributed control system and safety manager technologies among other solutions. We remain excited about the various automation opportunities across our portfolio. In Aerospace, we will invest more than $80 million to expand our Olathe plant in Kansas. This project will enable the production of next-generation avionics technology and directly create hundreds of jobs at site and in the local economy. This facility upgrade is another example of the resources we are committing to unlock the supply chain and our ongoing investment in the Aerospace Technologies business to drive growth. Finally, Honeywell will be incorporating our hydrocracking technology in the new DG Fuels SAF refinery to convert hydrocarbon liquids into SAF. This technology is a low-capital solution, which facilitates 90% reduction in CO2 intensity versus traditional fossil fuel-based jet fuels by using biomass as a feedstock. When completed, the refinery is expected to produce 600,000 tons of SAF every year. As demonstrated here, Honeywell remains committed to actively solving both our customers and worst, toughest challenges. Now let me turn it over to Greg on Slide 5 to discuss our first-quarter results in more detail as well as provide our views on second-quarter and full-year 2024 guidance. Greg Lewis -- Senior Vice President, Chief Financial Officer Thank you, Vimal, and good morning, everyone. Let me begin on Slide 5. As a reminder, we're now reporting our results using the new segment structure, which went into effect in the first quarter. With that, let's discuss the results. We delivered a very strong first quarter, exceeding the high end of our adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. Despite a dynamic macro backdrop, Honeywell's disciplined execution and differentiated solutions enabled us to deliver on our commitments. First-quarter organic sales growth were up 3% year over year, led by 18% organic growth in Aerospace Technologies. This was the 12th consecutive quarter of double-digit growth in our commercial aerospace business in addition to double-digit growth in Defense & Space. Segment profit grew 4% year over year, and segment margins expanded by 20 basis points to 22.2%, driven by expansion in Aerospace. Improved business mix, our focus on commercial excellence, and benefits from productivity, allowed us to expand margins in line with the high end of our guidance range. Earnings per share for the first quarter was $2.23, up 8% year over year. And adjusted earnings per share was $2.25, up 9% year over year. While tax was a bit lighter relative to our first-quarter guide, our full-year tax expectations have not changed. A bridge for adjusted EPS from 1Q '23 to 1Q '24 can be found in the appendix of this presentation. Orders were $10.2 billion in the quarter, down 1% year-on-year, which supported our backlog growth of 6% to a new record of $32 billion. This was led by quarter-over-quarter growth in aero, Building Automation, and Industrial Automation, including in key short-cycle product businesses, namely productivity solutions and services in IA and fire in BA. This setup gives us confidence in our back half 2024 outlook, which I'll discuss in a few minutes. Free cash flow was approximately $200 million, up $1.2 billion versus the first quarter of 2023, due to the absence of last year's onetime settlement of legacy legal matters that derisked our balance sheet. Excluding the impact of these settlements, net of tax, free cash flow is up approximately $200 million as higher net income was partially offset by a higher working capital due to lower payables. However, we see working capital becoming a tailwind in the coming quarters as we unwind the multiyear buildup of excess inventory. We also continue to execute on our capital deployment strategy, putting our robust balance sheet to work through $1.6 billion, including $700 million in dividends, $700 million in share repurchases, and $200 million in high-return capital expenditures. As you saw in February, we successfully issued $5.8 billion in bonds during the first quarter, including our first-ever four-year maturity, taking advantage of strong demand in both the euro and dollar markets and locking in attractive long-term spreads, while extending our weighted average bond maturity from seven to 10 years. Proceeds will be used primarily to fund our acquisition of the Carrier Global Access Solutions business and to address current debt maturities. This really demonstrates the attractiveness and strength of Honeywell in the capital markets that we have built over time. Now let's spend a few minutes on the first-quarter performance by business. In Aerospace Technologies, sales were up 18% organically year-on-year, matching the third quarter of last year as among our strongest performances in over a decade. Increases in commercial aviation were led by original equipment, which saw over 20% growth in both air transport and Business & General Aviation as supply unlocks and deliveries continue to increase. We also saw significant growth in air transport aftermarket as global flight activity remains strong. In Defense & Space, robust demand and improvements in our supply chain enabled us to grow sales 16% in the quarter. AT had book-to-bill of approximately 1.1 in the quarter as commercial demand and benefits from the impact of an increased global focus on national security support a strong growth trajectory. Supply chain continues to show sustained modest sequential improvement, leading to a 15% increase in output year-on-year, marking the 7th consecutive quarter of double-digit output growth. Segment margin in Aerospace expanded 150 basis points year over year, driven by commercial excellence and volume leverage, partially offset by cost inflation and mix pressures within our original equipment business. For Industrial Automation, sales decreased 13% organically in the quarter, primarily as a result of lower volumes in warehouse and workflow solutions as investments in warehouse automation remains subdued. Our short-cycle sensing and safety technologies and productivity solutions and services sales were stable, but lower year over year with orders in our productivity solutions and services business growing sequentially and year over year for the second consecutive quarter, a positive sign that we're nearing a return to growth in that business. Process Solutions revenue was flat in the first quarter as growth in our aftermarket services business was offset by mega project timing. Segment margin in Industrial Automation contracted 200 basis points to 16.8%, driven by lower volume leverage and cost inflation, partially offset by productivity actions and commercial excellence. Building Automation sales were down 3% organically. We had another strong quarter of growth in our long-cycle building solutions business, while we worked through the volume challenges and the short-cycle building products area. Solutions grew 7% in the quarter, led by double-digit growth in building projects, driven by strong execution of our backlog. On a year-over-year basis, orders and building projects were up double digits with strength in our core business and robust performance in energy and airports. Sequentially, orders for Building Automation improved in the first quarter, highlighted by a seasonal lift in building services and modest improvement in fire, resulting in an overall Building Automation book-to-bill of 1.1. Segment margins contracted 120 basis points to 24%, due to mix headwinds from softer product volumes and cost inflation, partially offset by productivity actions and commercial excellence. Energy and Sustainability Solutions sales grew 5% organically in the first quarter. Advanced materials gained 6%, primarily driven by double-digit growth in flooring products. In UOP, sales were up 3% year over year as robust demand led to a double-digit increase in both petrochemical catalyst shipments and refining equipment more than offset expected challenging year-over-year comps in gas processing equipment projects. ESS book-to-bill was 1.2 in the first quarter, the second consecutive quarter of a book-to-bill above one. Segment margin contracted 70 basis points on a year over year basis to 19.8% as onetime factory restart costs were partially offset by favorable business mix and productivity actions. Growth across our portfolio was supported by another quarter of double-digit sales growth in Honeywell Connected Enterprise, a powerful indicator of our strong software franchise powered by our differentiated Forge AI IoT platform. Our offerings in cyber, life sciences and connected industrials all grew by more than 20% year over year in the quarter. HCE continues to generate not only value for our customers, but accretive growth and profitability for Honeywell. The ongoing tailwinds in our long-cycle end markets and the strength of our backlog give us confidence in our ability to navigate the current operating environment. We continue to execute on our proven value creation framework underpinned by our Accelerator operating system, which will enable us to drive compelling growth in earnings and cash for quarters to come. Now let's turn to Slide 6 and talk about our second quarter and full year guidance. We delivered on our 1Q commitments while maneuvering through known risks. And as we look to the rest of 2024, our original guidance framework continues to be solid. We expect the environment to remain dynamic as we were reminded again by recent geopolitical events. However, our Accelerator operating system that enables us to move quickly and decisively, our exposure to attractive megatrends, and our record backlog will continue to support organic growth for the business. This outlook includes continued progress among our long-cycle portfolio as well as a modest back half recovery in short cycle as markets continue to normalize. Overall, we have a strong setup that will drive growth within our long-term financial framework for sales, margin, earnings, and cash in 2024. Now let's discuss how these dynamics come together for our 2024 guidance. Given the backdrop I just laid out, in total for 2024, we continue to expect sales to be in the range of $38.1 billion to $38.9 billion, which represents overall organic sales growth of 4% to 6% for the year with a greater balance between volume and price. We expect sequential improvement in the second half of 2024 over the first as Aerospace continues to grow its supply capabilities, coupled with a modest short-cycle recovery that should build momentum in the second half of the year, albeit with different rates of improvement for our various end markets. For the second quarter, we anticipate sales in the range of $9.2 billion to $9.5 billion, up 1% to 4% organically. We anticipate our overall segment margin to expand 30 to 60 basis points this year, supported by improving business mix, price/cost discipline, and productivity actions, including our precision focus on reducing raw material costs. Similar to last year, Building Automation margins will lead the group in margin expansion, followed by Industrial Automation and Energy and Sustainability Solutions. For Aerospace, margins should remain relatively comparable to the last few years as volume leverage covers higher sales from the build-out of our original equipment installed base, which is driving robust year-over-year profit growth. For the second quarter, we expect overall segment margin in the range of 22% to 22.4%, roughly flat sequentially, but down 40 basis points to flat year over year, primarily due to volume deleverage in IA and the expiration of the Zebra licensing payments. Importantly, our guidance for both the second quarter and full year 2024 does not consider the planned acquisition of Carrier's Global Access Solutions business. We anticipate the closing of the deal by the end of the third quarter, and we'll update our guidance accordingly at that time. Now let's spend a few minutes on the outlook by business. Looking ahead for Aerospace Technologies, demand remains very encouraging across our end markets. Sales should grow sequentially in the second quarter, particularly in commercial original equipment as shipset deliveries continue to increase. However, we expect these sales to come at a lower margin, driving a sequential and year-over-year decrease in margin rate following the first quarter's strong result. Increased build rates and shipset deliveries will carry on throughout the year, leading commercial OE to be our strongest growth business in 2024. In commercial aftermarket, volume strength and further improvement in wide-body flight hours will support additional growth. We'll continue to work through our healthy order book in defense and space, generating sequential sales improvement throughout the year. Ongoing supply chain improvements will continue to support double-digit output growth in AT throughout 2024. For the year, we still expect Aerospace Technologies to lead organic growth for total Honeywell with sales in the low double-digit range. 2024 segment margin should be relatively comparable to 2022 and 2023, as volume leverage is mostly offset by higher sales of lower-margin products, a dynamic that likely leaves the first quarter at the high point for aero margins this year. In Industrial Automation, the timing of short-cycle recovery will remain an important factor in our 2024 results, leading a back half-weighted year. In the second quarter, IA should be roughly flat sequentially. We expect growth in Process Solutions to be offset by warehouse automation demand that remains near trough levels and the end of the $45 million quarterly license and settlement payments we have received for the past two years in our productivity solutions and services business. For the full year, Process Solutions will grow sequentially each quarter to build on last year's strong performance, driven by the aftermarket services business. Warehouse and workflow solutions will improve as we move through the trough of warehouse automation spending, while also benefiting from easing comps throughout the year. Our sensing and safety technologies business will benefit as the effects of distributor destocking fade throughout the year. Lifecycle solutions and services orders grew sequentially and year over year in the first quarter, and we expect that strength to continue throughout the rest of the year. Two consecutive quarters of orders growth in our Productivity solutions and services business provide confidence in a back half ramp, excluding the impact from the absence of additional Zebra payments. As a result of these dynamics, we continue to see flattish sales growth in 2024 for IA. We still expect segment margin to expand, particularly in the second half as short-cycle recovery leads to positive volume leverage. Moving to Building Automation. We remain confident in the overall outlook and execution of the business. For the second quarter, sales should improve sequentially as the channel further normalizes and our long-cycle businesses continue to benefit from strong backlog and aftermarket services tailwind. The timing of the short-cycle recovery remains one of the key drivers of business performance throughout the year, and our expectation for a more back half-weighted recovery in BA has not changed. As such, we will anticipate our long-cycle businesses to outpace our short-cycle portfolio, as both projects and services benefit from strong demand in backlog. Additionally, high-growth regions remain a core part of the growth strategy for this business, and encouraging signals from regions like India and the Middle East support our full year sales forecast, which remains low single-digit growth for the year. We anticipate BA will be the segment with the largest margin expansion, primarily driven by productivity actions and commercial excellence net of inflation. Finally, in Energy and Sustainability Solutions, the geopolitical environment will remain a key focus as we move through the year. In the second quarter, we expect sales to remain roughly flat year over year and sequentially, as sustained demand in flooring products and catalysts will offset remaining volume headwinds from challenging comps in gas processing equipment. For the full year, strong performance in those businesses is expected to offset volume declines in our legacy stationary products due to well-telegraphed quota reductions within the U.S. In sustainable technology solutions, robust demand will lead to another strong year of growth. We continue to monitor the ongoing short-cycle recovery, particularly from semiconductor fabs, a key component to achieving our unchanged top-line expectation of flat to up low single digits for the year. Margins should improve throughout the year from a 1Q bottom, driven by a combination of commercial excellence and productivity actions. Moving on to other key guidance metrics. Pension income in 2024 will be roughly flat to 2023 at approximately $550 million. We anticipate net below-the-line impact to be between negative $550 million and negative $700 million for the full year and between negative $120 million and negative $180 million in the second quarter. This guidance includes repositioning spend between $200 million and $300 million for the full year and between $25 million and $75 million in the second quarter, as we continue to invest in high-return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 21% for both the full year and the second quarter. We anticipate average share count to be around 656 million shares for the full year, as we execute our commitment to reduce share count by at least 1% per year through opportunistic buybacks. As a result of all these inputs, we are maintaining our previously provided full-year adjusted earnings per share range of $9.80 to $10.10, up 7% to 10% year over year. We anticipate second-quarter earnings per share between $2.25 and $2.35, up 1% to 5% year over year. We also expect free cash flow to grow in line with earnings, excluding the after-tax impact of last year's onetime settlement from derisking our balance sheet. We are progressing on the multiyear unwind of working capital, where our efforts to improve demand planning and optimize production and materials management are yielding some early operational benefits, another indicator of the power of our digitalization capability through Accelerator. In addition, we will continue to fund high-return projects focused on creating uniquely innovative, differentiated technologies. As a result, our free cash flow expectations remain $5.6 billion to $6 billion for the year, up 6% to 13%, excluding the impact of prior year settlements. Our robust balance sheet and strong cash generation will support accretive capital deployment. And while we're happy with our recently announced transactions, we will further build on our active M&A pipeline as we continue to optimize the portfolio. So in summary, we executed a strong first quarter and anticipate delivering a strong second quarter and 2024, benefiting from our alignment to the compelling aerospace, automation and energy transition megatrends. Our record backlog and rigorous operating principles give us confidence in our track record of execution. So let me turn it now back to Vimal on Slide 7. Vimal Kapur -- President and Chief Operating Officer Thank you, Greg. Let's take a minute to zoom out from the near-term dynamics and talk about the tremendous progress Honeywell has demonstrated across our key metrics since 2016. We remain keenly focused on delivering our long-term growth algorithm and remain confident in our ability to accelerate growth, achieve 25%-plus segment margins, expand gross margins to above 40% and generate free cash flow margins to mid-teens plus. This framework will enable us to deliver what matters: consistent, compelling EPS growth. Our annual 4% to 7% organic sales growth rate and 40 to 60 basis points of margin expansion, coupled with 1% to 2% of EPS accretion from both share buyback and consistent M&A execution, is a powerful combination that will allow us to generate double-digit adjusted EPS growth on through a cycle basis. '24 is no different as we continue to make steady, consistent improvement to the quality of Honeywell's financial profile. The organization is aligned to my key priorities of accelerating organic growth, deploying the operational power of Accelerator 3.0, and executing on a robust portfolio optimization strategy, all of which will enable us to achieve our long-term targets. I'm incredibly optimistic about the high-value opportunities we are already surfacing during the next phase of our transformation. We'll continue to track our progression closely as our efforts to drive incremental sales growth, expand margins, and generate more cash faster into our enhanced financial profile. Let's turn to Slide 8 for closing thoughts before we move into question and answers. Our value creation framework is working. While the economic backdrop remains fluid, we are deploying our rigorous operating playbook to effectively manage near-term challenges to meet our performance targets. Record backlog levels, ongoing strength in our biggest end market, aerospace and energy as well as an impeding recovery in our short-cycle businesses will allow us to achieve our strong results as we progress through 2024. This includes our margin expansion guidance, which will benefit from improving business mix, in addition to our continued focus on commercial excellence and productivity. It's no secret, I am excited about the future of Honeywell and believe our company is on track to drive the innovation needed to solve some of the world's most challenging problems and enhance the life of people around the world. As we move to Q&A, I want to take a moment to thank our 95,000 future shapers whose dedication and capabilities enable us to deliver the best of our customers, partners, and communities every day. With that, Sean, let's take questions. Sean Meakim -- Vice President, Investor Relations Thank you, Vimal. Vimal and Greg are now available to answer your questions. [Operator instructions] Operator, please open the line for Q&A. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Scott Davis of Melius Research. Your line is now open. Scott Davis -- Melius Research -- Analyst Hey. Good morning, Vimal, Greg, and Sean. Vimal Kapur -- President and Chief Operating Officer Good morning, Scott. Scott Davis -- Melius Research -- Analyst Guys, in the spirit of kind of looking at the outliers here, warehouse automation is still really a tough spot. What's on the other side of this? Is this just a deeply cyclical business, so we're going to see a big bounce back? Have you structurally changed your cost structure? What's kind of on the other side of this tough period? Vimal Kapur -- President and Chief Operating Officer Yes. So Scott, if I get your question, just that I've missed the front word. Is it -- did you mention industrial automation or warehouse automation? Greg Lewis -- Senior Vice President, Chief Financial Officer Warehouse automation. Vimal Kapur -- President and Chief Operating Officer Warehouse automation. OK. Thank you. Scott Davis -- Melius Research -- Analyst Warehouse. Sorry, Vimal, warehouse. Vimal Kapur -- President and Chief Operating Officer No, I got it. I got it. Look, the need for warehouse automation is strong. There is no doubt that it drives labor productivity. So there is no debate on the basics of it. The interesting part is our pipeline remains strong, but order conversion is weak, specifically in the project side. Another fact which encourages me about the business is the aftermarket continues to grow, which means once the systems are deployed, people use it well and our aftermarket business is in excess of $0.5 billion. We also have rationalized our cost base. All in, I would say the business is in trough right now, and we are waiting for its recovery. But net-net, we remain very optimistic and confident about the business prospects. Scott Davis -- Melius Research -- Analyst OK. I appreciate that, Vimal. And you've been in the seat kind of long enough to have a good sense to, well, at least review the portfolio. Do you anticipate further portfolio actions, Vimal? It's still a relatively complex portfolio. We certainly get that feedback frequently. I'm sure you do as well. But has your view on the portfolio evolved at all since you've taken the role? Vimal Kapur -- President and Chief Operating Officer Scott, I would say it in two parts. I have committed that we will take action on about 10% of our portfolio, which doesn't fit with the three megatrends, and we are absolutely taking action on that. We will make progress one step at a time because that constitutes a few businesses and no one big thing. On a broader basis, I will review with both, as I did last year on a broader Honeywell portfolio, and we will continue to be our own activist. And wherever there's a case to look at things differently, we absolutely will do that. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. And if I just build on that, I would say our pipeline on inbound as well is very healthy. You saw the Civitanavi announcement. You know that the Carrier deal is on its way. So we're on pace to deploy $10 billion this year with just what we know about, and we're not done. Scott Davis -- Melius Research -- Analyst Makes sense. Thanks, Greg. Thanks, Vimal. Good luck, guys. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Stephen Tusa at J.P. Morgan. Your line is now open. Stephen Tusa -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Vimal Kapur -- President and Chief Operating Officer Good morning, Steve.Can you just talk about maybe just sequentially how you see the earnings trajectory in 3 and 4Q? Yes. So I would say the earnings, as we guided here, we gave the guide for Q2 and rest of the year. So I think the headline is that H2 will be stronger than H1, and that's built upon our order spacing. If you see our orders performance in Q1 was on expected lines, our book-to-bill is 1.1, our backlog is up 6%. Long cycle remains strong across the board in Aerospace and building solutions, and we expect the same trend in European Process Solutions. And short cycle is recovering on expected lines. You saw the results of ESS. The chemical business did perform well on the strength of short cycle. We saw a recovery in scanning and mobility business. We saw some early green shoots in fire business. So things are progressing as we expected, and that's the basis of our guide for rest of the year. So the punchline is we're going to have stronger second half versus first half, and that's reflected on our earnings guide for the year. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. And we know that, that's outside of the normal historical comps that you've seen, but that's not really different than the way we've modeled the year so far. And to Vimal's point, we are starting to see some of those short-cycle order patterns. And we said that those were going to be different by end market as the year progresses. So no real change, Steve, to what we outlined in the original guidance. Stephen Tusa -- JPMorgan Chase and Company -- Analyst So I guess just normally, you guys are up, I think, a little bit 2Q to 3Q. You're up like, I think, I don't know, low to mid-singles from 1Q to 2Q. Should we think about like just to kind of frame this, the ramp because it is from a timing perspective, is it 2Q to 3Q? What do you think? Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. So we're going to have a ramp from 2Q to 3Q as opposed to flat, and then the ramp from 3Q to 4Q will be greater than 2Q to 3Q. Stephen Tusa -- JPMorgan Chase and Company -- Analyst Great. Thanks for the color. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open. Julian Mitchell -- Barclays -- Analyst Hi. Good morning. I think a lot of that second-half pickup rests on the IA segment. So maybe just wanted to home in on that for a second. I think you'd guided full-year sales there flattish, so about $10.8 billion. And it sounds like you're doing $2.5 billion a quarter in the first half. So you've got a sort of high teens half-on-half step-up in the second half in IA revenue from sort of $5 billion to $5.8 billion. Maybe help us understand which of the pieces inside IA will lead or lag that delta, and if it's similar to the firmwide where there's some pickup in Q3 and then a steeper one in Q4 sequentially. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. So thanks, Julian. I mean the ramp for the company actually is in IA and in BA, and then we'll get sort of a nice ramp in the fourth quarter in ESS as well. So it really does come back to all the products businesses inside of each of those portfolios. So think about in IA, PSS, the sensing business. In BA, think about fire and the BMS business. And then as Vimal mentioned earlier in ESS, you're going to get a continued step-up in electronics and chemicals as well as our normal sort of fourth-quarter move in our catalyst business. So it's really not all predicated on any one segment overall. And it's going to be -- you've got your numbers approximately right in terms of the IA first half, second half overall. But you're going to see it across the portfolio. It's not going to be concentrated in any one specific business around the portfolio. Vimal Kapur -- President and Chief Operating Officer Only thing I'll add, Julian there, is that in IA, the HPS continues to perform very well. It's going to mirror the performance it had in 2023. So similar growth rates. The bookings remain very strong. Aftermarket is performing extremely strong. And that's the biggest constituents of the newly framed IA business. And the short cycle is recovering. I remain very confident on short-cycle recovery. We have seen that in PSS business, it has two successive quarters of orders growth. We see that in early cycle in other businesses. So net-net, we are going to see strong exit rates in IA business at end of the year. Julian Mitchell -- Barclays -- Analyst That's helpful. And then just my quick follow-up on the buildings division margins. So I think they're guided to be up maybe 100 bps or so for the year, above the firmwide margin expansion. First quarter clearly starting down -- tricky down over 100 bps. So the slope of that, maybe help us understand kind of how do we think about the buildings margins in the second quarter? How quickly we start to see that flip to margin expansion in the rest of the year, please? Greg Lewis -- Senior Vice President, Chief Financial Officer Sure. So again, you're going to see that tie a lot to the product volumes because of the volume leverage that comes with that and the margin rates associated with it are going to be very helpful in that margin ramp as well as the work that we've done on productivity, particularly around direct materials this year. So that's -- our last two quarters were in the same neighborhood, right around 24 points with the lower product mix. And as the year progresses, you're going to see that move up sequentially throughout the remaining three quarters of the year. Julian Mitchell -- Barclays -- Analyst That's great. Thank you. Vimal Kapur -- President and Chief Operating Officer Thanks, Julian. Operator Our next question comes from the line of Andrew Obin with Bank of America. Your line is now open. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Hey, good morning, guys. Good to hear that short cycle is finally starting to move. Vimal Kapur -- President and Chief Operating Officer Absolutely, Andrew. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Just a question on defense and space. That picked up very nicely, nice lever. Can you just talk specifically, and I know there are a lot of programs there. But what is driving that? And what's the outlook specifically for defense and space into the second half because this is a very, very impressive performance there. Vimal Kapur -- President and Chief Operating Officer Yes. Thanks, Andrew. Look, the Q1 performance of defense and space was more linked to the supply chain unlock. That remains the biggest variable in Aerospace even in 2024. We are very pleased with the strong growth in Q1. We expect high single-digit growth in defense and space in the revenue, but order booking will be much stronger. And that's driven by the fact of not only the demand in U.S. but the international demand, which is coming up in this business. And those trends are extremely favorable. So net-net, we do expect to finish the year strong, not only in the revenue side but equally strong on the order side on the defense. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Gotcha. And maybe to -- shifting to ESS. Can you just talk about visibility of UOP? I know you guys were optimistic about some of the green projects coming in. And I think due to regulatory issues, it's just taking time. What does the pipeline look like? And what does the ramp look in this business into the year-end? And how do you balance this visibility on these projects and just the time it takes to get them approved? Vimal Kapur -- President and Chief Operating Officer So very bullish on UOP. I would say this business is headed for a great time ahead. The traditional projects continues to remain active while the new energy project on sustainability, a strong pipeline, and we see decisions now maturing. You saw in one of our exciting wins, we mentioned here new way to make SAF with the biomass now, which is a new technology we have launched. So net-net, with the strength in traditional energy, strength in renewable technologies and catalysts, we are going to have a strong year for UOP, both in orders and revenue. And that's not only 2024. Look ahead for the business remains extremely, extremely positive in the times ahead. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Thank you very much. Vimal Kapur -- President and Chief Operating Officer Thanks, Andrew. Operator Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, Vimal, Greg, and Sean. I wanted to ask about Aerospace. Commercial OE was really strong, up 24% in the quarter. How are you thinking about that for the full year just given slower MAX production we're seeing and the new news of the 787 also slowing down production there? Any top line margin or cash impact that you foresee? And then I just want to clarify the comment about margins for Aerospace. You said it would dampen just given OE mix, but I would think aftermarket would accelerate as we progress through the year. Vimal Kapur -- President and Chief Operating Officer OK. So I think there are three questions there, Sheila, I'll try to pick up. Sheila Kahyaoglu -- Jefferies -- Analyst Sorry about that. Vimal Kapur -- President and Chief Operating Officer No, no problem. So the overall, we do expect commercial OE to grow double digits, both on the -- the commercial OE to grow double digits and aftermarket. So we'll maintain the strong growth trend as is indicated in our guide for the rest of the year. To your comment specifically on 787 MAX, I won't give you a specific input on one particular platform. But I would say that our demand for Boeing hasn't changed. We know that we all heard their earnings call yesterday, and there are different drivers for that. But for Honeywell, we are present in multiple platforms, and the demand for them remains unwavered. I personally talk to Boeing leadership, and I'm very confident that's going to trend that way. On margins, it's a -- Q1 was strong. It's a mixed driver. As the year progresses, we have different product mix and mix between OE and aftermarket. So net-net, we are still guiding flattish margins for the year, and that's what we have given in our guidance. Sheila Kahyaoglu -- Jefferies -- Analyst Great. Thank you. Operator Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open. Joe Ritchie -- Goldman Sachs -- Analyst Hey, guys. Good morning. I just want to really focus my questions on margins. So just making sure that I understood some of the comments already. As you think about the rest of the year, I guess, how much of the margin expansion that you're expecting in both BA and IA is really dependent on short cycle accelerating? And then, Vimal, just a quick clarification on the answer you just gave on the aero side of the business. The OE business was up, I think it was over 24% or something like that in aero. I'm just curious, like what were some of the kind of mix tailwinds you saw this quarter in aero? And again, why doesn't that continue going forward? Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. Joe, I mean, as it relates to the mix, I'm not going to bore you with the details, but it's actually quite deep between the different OEs, the shipsets within each of them and so forth. So that is going to migrate up and down during the course of the year as it goes. So there's not one particular thing happening there. As Vimal mentioned though, we're going to continue to see very strong OE margins -- or excuse me, OE volumes during the year. In fact, I wouldn't be surprised if the growth in OE actually accelerates in the next couple of quarters, not dramatically so, but in terms of its relative mix inside of the overall portfolio. So that's what I would say about aero. And then in terms of the margin rates in IA and BA, both of those businesses are seeing mix down with products softer. And so absolutely mix up with products growth is going to be a driver of those margins. But that also comes with a lot of the work we've been doing on the productivity side, both in direct materials as well as in our continued repositioning of the cost base that we have been doing. So our margin story is going to be a combination of the volume leverage, the product mix, and our productivity actions that we continue to take, as you know, is always a strength for Honeywell. Joe Ritchie -- Goldman Sachs -- Analyst Got it. OK. That's -- that's clear. Thank you, Greg. Greg Lewis -- Senior Vice President, Chief Financial Officer Thank you. Operator Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open. Nigel Coe -- Wolfe Research -- Analyst Great. Thanks for the -- thanks for the question, guys. Sorry to bore you in another -- obviously, aero margins were great. What's the timing of Boeing shipments to customers affected there? Just curious if there's a timing issue there. But mainly my question is around 2Q margin dynamics. And thinking about that drop-off in the Zebra royalty income in the second quarter, are we looking at maybe margins, I don't know, down like 300 basis points year over year in the second quarter for IA? And therefore, the balance of the segment margin performance is actually probably more like on trend? So just any more color on the 2Q margins by segment would be helpful. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. No, we don't expect IA margins to be down 300 basis points in 2Q on a year-over-year basis. We talked about the Zebra impact. Again, it's $45 million a quarter on the revenue side. There is some costs associated with that as we talked about over the last 2 years, as we've had that impact into our P&L. So you guys can do the math on the direct impact of just that item all by itself. But we have other actions in place to continue to offset that. I don't expect margins to necessarily be up year-on-year in IA, but nothing to the degree that we described in terms of 300 basis point drop. Nigel Coe -- Wolfe Research -- Analyst OK. And then any color on aero margins in second quarter? Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. Just that I would expect them to be down sequentially from Q1, that Q1 is going to be the high point. And as we go through the year, again, our overall expectation is flattish on a year-on-year basis, but Q1 will be the high point. Nigel Coe -- Wolfe Research -- Analyst OK. That's helpful. Thanks. Operator Our next question comes from the line of Andy Kaplowitz with Citi. Your line is now open. Andy Kaplowitz -- Citi -- Analyst Hey, good morning, everyone. Vimal Kapur -- President and Chief Operating Officer Hey, Andy. Andy Kaplowitz -- Citi -- Analyst Vimal, maybe can you talk a little bit more about what you're seeing by region? I think you mentioned strength in India. How important is that region becoming? And what are you seeing in China and Europe? Vimal Kapur -- President and Chief Operating Officer Yes. So I would say, if I go around the corner, we continue to see strength in our high-growth regions, specifically in India and Middle East. Those remain strong. China also did well for us. We grew high single digits on the strength of our aero and energy business. So net-net, we do see strong -- continued strong trend in emerging markets. Europe has stabilized. I would say the worst is definitely behind us. We see more recovery and positive trends, specifically in short cycle, we talked about it earlier in Europe. And U.S., of course, is the balance here. So net-net, high-growth region remains a tailwind in overall revenue mix for Honeywell. Andy Kaplowitz -- Citi -- Analyst Great. And I just want to follow up on the process business. I think you mentioned delays. Is it you're seeing more geopolitical uncertainty or election fears, higher rates? I think you still have a good outlook for that business. Maybe talk about it a little bit more. Vimal Kapur -- President and Chief Operating Officer So Process Solutions business, absolutely. Our booking -- we carried a strong backlog, and our booking trends remains strong there. Aftermarket is double-digit growth for several quarters in a row. So that business will, as I mentioned before, will repeat 2023 pattern of high growth. And we expect to do -- continue to do well in that segment, monetizing installed base, aftermarket software, all our strategies are really working. And also diversification into new verticals as the new energy segment are emerging like battery storage, gigafactories, all are becoming attractive growth optionality for us in that business. Andy Kaplowitz -- Citi -- Analyst Appreciate the memo. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Jeff Sprague -- Vertical Research Partners -- Analyst Hey. Thank you. Good morning, everyone. Vimal, just back to kind of the ongoing portfolio review, and you said it could be many things, not one big thing. Can we take that? Or should we take that to mean as we look at kind of your revenue disaggregation, right, there's kind of 11 buckets we track and model to, that none of those entire sleeves would be gone at some point in time in your thought process? Vimal Kapur -- President and Chief Operating Officer Look, whenever we complete any action of addition and substraction, we'll give you an early guide for that. As I mentioned, this is no one step change. So it's not that we're going to take action of a $4 billion type of thing in a single move. But whenever we are ready to communicate, we'll give you a heads up on what's likely coming in. For example, Carrier business will likely come in, Civitanavi will likely come in, and what are the implications on the guide? And then what goes out, if and when this happens, we'll provide you the guide. But what I can share with you is there is not going to be one mega event on divestiture. It's going to be a combination of multiple small events. Jeff Sprague -- Vertical Research Partners -- Analyst And one thing you have been clear on is ultimately, there's a monetization play on Quantinuum. Where are we there? Where's the spending tracking? And can you kind of give us an idea of maybe the time line of a monetization event? Vimal Kapur -- President and Chief Operating Officer So Quantinuum is in, I would say, exciting times. We completed a major event of pre-money. We got valuation in excess of $5 billion, got more people invested there. We talked about that in the last earnings call. We also met another major milestone. I don't know if you read that Honeywell and Microsoft announced a major milestone of testing different scenarios to deliver reliable results. So Microsoft gave, ran 14,000 experiments on H2 quantum computer, and they were able to prove that every time all 14,000 times, we're able to deliver results with accuracy. Why it matters is in quantum, the repeatability or accuracy matters more than the speed at this point. Once we are able to solve the problem solving with accuracy, we can work on the speed part. So that's a major milestone, and that's what matters in quantum business. We continue to hit these milestones one after another, and we score some wins on the commercial side, and that has set us for the next event of the monetization somewhere in 2025. It's contingent upon hitting this, but I remain confident that we are on the right track on that. And by the way, the last comment I'll make there is AI is definitely giving us a lot more momentum. There's a deeper understanding and appreciation why quantum is necessary. And that's going to certainly help us when we are ready for an IPO or something similar in 2025. Jeff Sprague -- Vertical Research Partners -- Analyst Great. Thank you for the color. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Brett Linzey with Mizuho. Your line is now open. Brett Linzey -- Mizuho Securities -- Analyst Hey. Good morning, all. I wanted to come back to ESS. You noted the margin contraction on some of this onetime factory restart cost. Maybe could you quantify that? And then any detail on the nature of just the timing of some of these pressures? Greg Lewis -- Senior Vice President, Chief Financial Officer Sure. So in our clean energy business, we had been operating as in a trading manner, and we had shut down the major facility some number of years ago in that business, and we restarted it. And so as you can imagine, that restart has some fits in it as we go through the course of the year to get to stabilization. And that's really the -- if you look at ESS margins, I'm not going to give you precise numbers. But if you back out the impact of that, we would have been roughly flat, maybe slightly up on a margin rate basis year on year in the first quarter. And so that's going to take some time to get to stability. But the good news is this is a great business. The long-term dynamics for it from a pricing standpoint, a supply standpoint are very favorable. As we exit the year, we're going to have more stable operations internally. And so we're going to have a very nice exit rate going into 2025 with a very strong business. And again, that business is, think about it being around about $400 million on an annual basis. Brett Linzey -- Mizuho Securities -- Analyst All right. Got it. And then just one more on M&A. Just thinking about the velocity there. I know last May, you talked about the pipeline prioritization. I think you had 90 deals looking at within your markets, and that's still at the top 10. I guess how is that 90 compared today? I mean it sounds like the enthusiasm, it sounds a little bit more optimistic about some actionability. But maybe just talk about some of the pipeline and the movement there. Vimal Kapur -- President and Chief Operating Officer Absolutely. I would say the pipeline is very strong as we sit today. Of course, we compete for every target, and we remain very sensitive to both strategic fit and valuation fit. So net-net, we do expect to continue to take some actions on adding new business to our portfolio. And overall, my tone is very positive on that. OK. Just to wrap up here, I want to continue to express my appreciation to our shareholders for your ongoing support and, again, to our Honeywell future shapers, who continue to drive differentiated performance. Our future is bright, and look forward to sharing our progress with you as we continue to execute on our commitments. Thank you for listening, and please stay safe and healthy. Brett Linzey -- Mizuho Securities -- Analyst All right. Great. Best of luck. Answer:

the Honeywell first-quarter 2024 earnings conference call

Operator Thank you for standing by, and welcome to the Honeywell first-quarter 2024 earnings conference call. [Operator instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, vice president of investor relations. Please go ahead. Sean Meakim -- Vice President, Investor Relations Thank you. Good morning, and welcome to Honeywell's first-quarter 2024 earnings conference call. On the call with me today are chief executive officer, Vimal Kapur; and senior vice president and chief financial officer, Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our business as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the first quarter, share our guidance for the second quarter, and provide an update on full year 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Vimal Kapur. Vimal Kapur -- President and Chief Operating Officer Thank you, Sean, and good morning, everyone. We delivered a very strong first quarter, exceeding the high end of our first-quarter adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. The disciplined execution of our world-class Accelerator operating system and differentiated portfolio of technologies enabled this strong performance amid a dynamic macroeconomic backdrop. As expected, our long-cycle Aerospace and energy-oriented businesses led the way with healthy organic volume growth. We are starting to see recovery in some areas of our short-cycle portfolio, including consecutive quarters of order growth in productivity solutions and services, while the other short-cycle businesses continue to normalize as the effects of destocking fade consistent with our second-half acceleration framework. Before we get into a more detailed discussion on the first-quarter 2024 results and updates to our full-year 2024 expectation, let me take a minute to revisit my priorities for Honeywell. First, we are keenly focused on accelerating organic sales growth toward the upper end of our long-term target range of 4% to 7%. We are doing this by enhancing our innovation playbook, accelerating sustainability and software offerings, increasing penetration of our installed base, and leveraging our leadership position in high-growth regions. Second, we are evolving Honeywell Accelerator to drive incremental value through deploying global design model across the portfolio to enhance our growth capabilities. Following the great integration inside of Honeywell over the past several years, we are now an integrated operating company that deploys world-class digital supply chain and technology development capabilities at scale, along with multiple growth drivers that benefit the entire enterprise. This includes leveraging generative AI to maximize the potential benefit of our operating system, both for our customers and internally. Of the strong digitally enabled foundation, Accelerator is providing to be a powerful source of profitable growth across all of our businesses and potential addition to our portfolio. Third, we are executing on our portfolio, optimizing goals, upgrading the quality of our business and financial profile by executing on strategic bolt-on acquisitions while divesting noncore lines of business to accelerate value creation. We expect to deliver profitable growth and strong cash generation as we demonstrate progress against these priorities, creating a compelling long-term value proposition for our share owners. In the spirit of that progress, let's turn to Slide 3 to discuss the latest action in our portfolio-shaping goals. Our M&A playbook is yielding positive results. Over the last few years, we have accumulated several quality bolt-ons and tuck-in assets that strategically add to our technological capabilities, enhancing our alignment to compelling megatrends and provide accretive growth that supports Honeywell's overall long-term financial framework. We remain focused on creating a flywheel of bolt-on M&A transaction roughly in the $1 billion to $7 billion purchase price range. We have successfully executed on meaningful deals that add technological adjacencies to our portfolio and are accretive to our growth and margin rate profile with attractive business mix characteristics. The most recent example of this came in the fourth quarter when we announced our intention to acquire Carrier's Global Access Solutions business for nearly $5 billion, enabling Honeywell to become a leader in security solution for the digital age. The transaction further enhances our equipment-agnostic, high-margin product business mix within Building Automation. Last year's acquisition of Compressor Controls Corporation, or CCC, a leading provider of turbomachinery control and optimization solutions that will play a critical role in early transition, aligns with this playbook as well. CCC technologies, including controlled hardware, software, and services bolster Honeywell's high-growth sustainability and digitalization portfolio with new carbon capture control solution. CCC has seamlessly integrated into our Process Solutions business, and we are already seeing meaningful revenue synergies benefit with Honeywell Forge. Second, acquisition is also an important growth lever for us as we continuously evaluate a build, buy or partner approach to add strategically important offering that solve our customers' toughest challenges. Last month, Honeywell announced our intention to acquire Civitanavi Systems for approximately 200 million euro. Civitanavi's technology will reinforce our leading navigation solutions across aerospace, defense, and industrial platform. This acquisition, which is direct concert with Honeywell's alignment to the megatrend of automation and future of aviation, furthers our ability to create value for our customers from nose to tail, whether they are traditional operators seeking to increase the autonomous capability of their existing fleets or new entries in the advanced air mobility space. Last year, we acquired SCADAfence, a business that delivers Internet of Things and operational technology cybersecurity solution for monitoring large-scale network. SCADAfence brought proven technologies in asset recovery, threat detection, and security governance into our SC portfolio, all key components for critical infrastructure and industrial cybersecurity. The acquisition has bolstered our strategic foundation in an attractive market for us to continue to build on both organically and inorganically. With the recent portfolio announcement, including Carrier's Global Access Solutions business and Civitanavi, we are on track to accelerate capital deployment in 2024 and exceed our commitment to deploy at least $25 billion of capital in 2023 through 2025. Our robust balance sheet capacity enable us to allocate capital to opportunistic share repurchases, high-return growth capex, and accretive M&A. As the deal environment remains relatively favorable in 2024, we will build on our already strong pipeline of high-value M&A opportunities, supporting the execution of our portfolio-shaping strategy. Before I hand it over to Greg, let's turn to Slide 4 to review some of our exciting recent wins. Let me take this opportunity to highlight our recent commercial wins and strategic actions we are taking that demonstrate innovation across our portfolio and support alignment of three compelling megatrends: automation, future of aviation, and energy transition, all underpinned by robust digitalization capability and solutions. In the automation space, Honeywell was chosen to provide automation, cybersecurity, and safety solution to a multibillion-dollar plant expansion project for a major energy company in Middle East. We will deploy our flagship distributed control system and safety manager technologies among other solutions. We remain excited about the various automation opportunities across our portfolio. In Aerospace, we will invest more than $80 million to expand our Olathe plant in Kansas. This project will enable the production of next-generation avionics technology and directly create hundreds of jobs at site and in the local economy. This facility upgrade is another example of the resources we are committing to unlock the supply chain and our ongoing investment in the Aerospace Technologies business to drive growth. Finally, Honeywell will be incorporating our hydrocracking technology in the new DG Fuels SAF refinery to convert hydrocarbon liquids into SAF. This technology is a low-capital solution, which facilitates 90% reduction in CO2 intensity versus traditional fossil fuel-based jet fuels by using biomass as a feedstock. When completed, the refinery is expected to produce 600,000 tons of SAF every year. As demonstrated here, Honeywell remains committed to actively solving both our customers and worst, toughest challenges. Now let me turn it over to Greg on Slide 5 to discuss our first-quarter results in more detail as well as provide our views on second-quarter and full-year 2024 guidance. Greg Lewis -- Senior Vice President, Chief Financial Officer Thank you, Vimal, and good morning, everyone. Let me begin on Slide 5. As a reminder, we're now reporting our results using the new segment structure, which went into effect in the first quarter. With that, let's discuss the results. We delivered a very strong first quarter, exceeding the high end of our adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. Despite a dynamic macro backdrop, Honeywell's disciplined execution and differentiated solutions enabled us to deliver on our commitments. First-quarter organic sales growth were up 3% year over year, led by 18% organic growth in Aerospace Technologies. This was the 12th consecutive quarter of double-digit growth in our commercial aerospace business in addition to double-digit growth in Defense & Space. Segment profit grew 4% year over year, and segment margins expanded by 20 basis points to 22.2%, driven by expansion in Aerospace. Improved business mix, our focus on commercial excellence, and benefits from productivity, allowed us to expand margins in line with the high end of our guidance range. Earnings per share for the first quarter was $2.23, up 8% year over year. And adjusted earnings per share was $2.25, up 9% year over year. While tax was a bit lighter relative to our first-quarter guide, our full-year tax expectations have not changed. A bridge for adjusted EPS from 1Q '23 to 1Q '24 can be found in the appendix of this presentation. Orders were $10.2 billion in the quarter, down 1% year-on-year, which supported our backlog growth of 6% to a new record of $32 billion. This was led by quarter-over-quarter growth in aero, Building Automation, and Industrial Automation, including in key short-cycle product businesses, namely productivity solutions and services in IA and fire in BA. This setup gives us confidence in our back half 2024 outlook, which I'll discuss in a few minutes. Free cash flow was approximately $200 million, up $1.2 billion versus the first quarter of 2023, due to the absence of last year's onetime settlement of legacy legal matters that derisked our balance sheet. Excluding the impact of these settlements, net of tax, free cash flow is up approximately $200 million as higher net income was partially offset by a higher working capital due to lower payables. However, we see working capital becoming a tailwind in the coming quarters as we unwind the multiyear buildup of excess inventory. We also continue to execute on our capital deployment strategy, putting our robust balance sheet to work through $1.6 billion, including $700 million in dividends, $700 million in share repurchases, and $200 million in high-return capital expenditures. As you saw in February, we successfully issued $5.8 billion in bonds during the first quarter, including our first-ever four-year maturity, taking advantage of strong demand in both the euro and dollar markets and locking in attractive long-term spreads, while extending our weighted average bond maturity from seven to 10 years. Proceeds will be used primarily to fund our acquisition of the Carrier Global Access Solutions business and to address current debt maturities. This really demonstrates the attractiveness and strength of Honeywell in the capital markets that we have built over time. Now let's spend a few minutes on the first-quarter performance by business. In Aerospace Technologies, sales were up 18% organically year-on-year, matching the third quarter of last year as among our strongest performances in over a decade. Increases in commercial aviation were led by original equipment, which saw over 20% growth in both air transport and Business & General Aviation as supply unlocks and deliveries continue to increase. We also saw significant growth in air transport aftermarket as global flight activity remains strong. In Defense & Space, robust demand and improvements in our supply chain enabled us to grow sales 16% in the quarter. AT had book-to-bill of approximately 1.1 in the quarter as commercial demand and benefits from the impact of an increased global focus on national security support a strong growth trajectory. Supply chain continues to show sustained modest sequential improvement, leading to a 15% increase in output year-on-year, marking the 7th consecutive quarter of double-digit output growth. Segment margin in Aerospace expanded 150 basis points year over year, driven by commercial excellence and volume leverage, partially offset by cost inflation and mix pressures within our original equipment business. For Industrial Automation, sales decreased 13% organically in the quarter, primarily as a result of lower volumes in warehouse and workflow solutions as investments in warehouse automation remains subdued. Our short-cycle sensing and safety technologies and productivity solutions and services sales were stable, but lower year over year with orders in our productivity solutions and services business growing sequentially and year over year for the second consecutive quarter, a positive sign that we're nearing a return to growth in that business. Process Solutions revenue was flat in the first quarter as growth in our aftermarket services business was offset by mega project timing. Segment margin in Industrial Automation contracted 200 basis points to 16.8%, driven by lower volume leverage and cost inflation, partially offset by productivity actions and commercial excellence. Building Automation sales were down 3% organically. We had another strong quarter of growth in our long-cycle building solutions business, while we worked through the volume challenges and the short-cycle building products area. Solutions grew 7% in the quarter, led by double-digit growth in building projects, driven by strong execution of our backlog. On a year-over-year basis, orders and building projects were up double digits with strength in our core business and robust performance in energy and airports. Sequentially, orders for Building Automation improved in the first quarter, highlighted by a seasonal lift in building services and modest improvement in fire, resulting in an overall Building Automation book-to-bill of 1.1. Segment margins contracted 120 basis points to 24%, due to mix headwinds from softer product volumes and cost inflation, partially offset by productivity actions and commercial excellence. Energy and Sustainability Solutions sales grew 5% organically in the first quarter. Advanced materials gained 6%, primarily driven by double-digit growth in flooring products. In UOP, sales were up 3% year over year as robust demand led to a double-digit increase in both petrochemical catalyst shipments and refining equipment more than offset expected challenging year-over-year comps in gas processing equipment projects. ESS book-to-bill was 1.2 in the first quarter, the second consecutive quarter of a book-to-bill above one. Segment margin contracted 70 basis points on a year over year basis to 19.8% as onetime factory restart costs were partially offset by favorable business mix and productivity actions. Growth across our portfolio was supported by another quarter of double-digit sales growth in Honeywell Connected Enterprise, a powerful indicator of our strong software franchise powered by our differentiated Forge AI IoT platform. Our offerings in cyber, life sciences and connected industrials all grew by more than 20% year over year in the quarter. HCE continues to generate not only value for our customers, but accretive growth and profitability for Honeywell. The ongoing tailwinds in our long-cycle end markets and the strength of our backlog give us confidence in our ability to navigate the current operating environment. We continue to execute on our proven value creation framework underpinned by our Accelerator operating system, which will enable us to drive compelling growth in earnings and cash for quarters to come. Now let's turn to Slide 6 and talk about our second quarter and full year guidance. We delivered on our 1Q commitments while maneuvering through known risks. And as we look to the rest of 2024, our original guidance framework continues to be solid. We expect the environment to remain dynamic as we were reminded again by recent geopolitical events. However, our Accelerator operating system that enables us to move quickly and decisively, our exposure to attractive megatrends, and our record backlog will continue to support organic growth for the business. This outlook includes continued progress among our long-cycle portfolio as well as a modest back half recovery in short cycle as markets continue to normalize. Overall, we have a strong setup that will drive growth within our long-term financial framework for sales, margin, earnings, and cash in 2024. Now let's discuss how these dynamics come together for our 2024 guidance. Given the backdrop I just laid out, in total for 2024, we continue to expect sales to be in the range of $38.1 billion to $38.9 billion, which represents overall organic sales growth of 4% to 6% for the year with a greater balance between volume and price. We expect sequential improvement in the second half of 2024 over the first as Aerospace continues to grow its supply capabilities, coupled with a modest short-cycle recovery that should build momentum in the second half of the year, albeit with different rates of improvement for our various end markets. For the second quarter, we anticipate sales in the range of $9.2 billion to $9.5 billion, up 1% to 4% organically. We anticipate our overall segment margin to expand 30 to 60 basis points this year, supported by improving business mix, price/cost discipline, and productivity actions, including our precision focus on reducing raw material costs. Similar to last year, Building Automation margins will lead the group in margin expansion, followed by Industrial Automation and Energy and Sustainability Solutions. For Aerospace, margins should remain relatively comparable to the last few years as volume leverage covers higher sales from the build-out of our original equipment installed base, which is driving robust year-over-year profit growth. For the second quarter, we expect overall segment margin in the range of 22% to 22.4%, roughly flat sequentially, but down 40 basis points to flat year over year, primarily due to volume deleverage in IA and the expiration of the Zebra licensing payments. Importantly, our guidance for both the second quarter and full year 2024 does not consider the planned acquisition of Carrier's Global Access Solutions business. We anticipate the closing of the deal by the end of the third quarter, and we'll update our guidance accordingly at that time. Now let's spend a few minutes on the outlook by business. Looking ahead for Aerospace Technologies, demand remains very encouraging across our end markets. Sales should grow sequentially in the second quarter, particularly in commercial original equipment as shipset deliveries continue to increase. However, we expect these sales to come at a lower margin, driving a sequential and year-over-year decrease in margin rate following the first quarter's strong result. Increased build rates and shipset deliveries will carry on throughout the year, leading commercial OE to be our strongest growth business in 2024. In commercial aftermarket, volume strength and further improvement in wide-body flight hours will support additional growth. We'll continue to work through our healthy order book in defense and space, generating sequential sales improvement throughout the year. Ongoing supply chain improvements will continue to support double-digit output growth in AT throughout 2024. For the year, we still expect Aerospace Technologies to lead organic growth for total Honeywell with sales in the low double-digit range. 2024 segment margin should be relatively comparable to 2022 and 2023, as volume leverage is mostly offset by higher sales of lower-margin products, a dynamic that likely leaves the first quarter at the high point for aero margins this year. In Industrial Automation, the timing of short-cycle recovery will remain an important factor in our 2024 results, leading a back half-weighted year. In the second quarter, IA should be roughly flat sequentially. We expect growth in Process Solutions to be offset by warehouse automation demand that remains near trough levels and the end of the $45 million quarterly license and settlement payments we have received for the past two years in our productivity solutions and services business. For the full year, Process Solutions will grow sequentially each quarter to build on last year's strong performance, driven by the aftermarket services business. Warehouse and workflow solutions will improve as we move through the trough of warehouse automation spending, while also benefiting from easing comps throughout the year. Our sensing and safety technologies business will benefit as the effects of distributor destocking fade throughout the year. Lifecycle solutions and services orders grew sequentially and year over year in the first quarter, and we expect that strength to continue throughout the rest of the year. Two consecutive quarters of orders growth in our Productivity solutions and services business provide confidence in a back half ramp, excluding the impact from the absence of additional Zebra payments. As a result of these dynamics, we continue to see flattish sales growth in 2024 for IA. We still expect segment margin to expand, particularly in the second half as short-cycle recovery leads to positive volume leverage. Moving to Building Automation. We remain confident in the overall outlook and execution of the business. For the second quarter, sales should improve sequentially as the channel further normalizes and our long-cycle businesses continue to benefit from strong backlog and aftermarket services tailwind. The timing of the short-cycle recovery remains one of the key drivers of business performance throughout the year, and our expectation for a more back half-weighted recovery in BA has not changed. As such, we will anticipate our long-cycle businesses to outpace our short-cycle portfolio, as both projects and services benefit from strong demand in backlog. Additionally, high-growth regions remain a core part of the growth strategy for this business, and encouraging signals from regions like India and the Middle East support our full year sales forecast, which remains low single-digit growth for the year. We anticipate BA will be the segment with the largest margin expansion, primarily driven by productivity actions and commercial excellence net of inflation. Finally, in Energy and Sustainability Solutions, the geopolitical environment will remain a key focus as we move through the year. In the second quarter, we expect sales to remain roughly flat year over year and sequentially, as sustained demand in flooring products and catalysts will offset remaining volume headwinds from challenging comps in gas processing equipment. For the full year, strong performance in those businesses is expected to offset volume declines in our legacy stationary products due to well-telegraphed quota reductions within the U.S. In sustainable technology solutions, robust demand will lead to another strong year of growth. We continue to monitor the ongoing short-cycle recovery, particularly from semiconductor fabs, a key component to achieving our unchanged top-line expectation of flat to up low single digits for the year. Margins should improve throughout the year from a 1Q bottom, driven by a combination of commercial excellence and productivity actions. Moving on to other key guidance metrics. Pension income in 2024 will be roughly flat to 2023 at approximately $550 million. We anticipate net below-the-line impact to be between negative $550 million and negative $700 million for the full year and between negative $120 million and negative $180 million in the second quarter. This guidance includes repositioning spend between $200 million and $300 million for the full year and between $25 million and $75 million in the second quarter, as we continue to invest in high-return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 21% for both the full year and the second quarter. We anticipate average share count to be around 656 million shares for the full year, as we execute our commitment to reduce share count by at least 1% per year through opportunistic buybacks. As a result of all these inputs, we are maintaining our previously provided full-year adjusted earnings per share range of $9.80 to $10.10, up 7% to 10% year over year. We anticipate second-quarter earnings per share between $2.25 and $2.35, up 1% to 5% year over year. We also expect free cash flow to grow in line with earnings, excluding the after-tax impact of last year's onetime settlement from derisking our balance sheet. We are progressing on the multiyear unwind of working capital, where our efforts to improve demand planning and optimize production and materials management are yielding some early operational benefits, another indicator of the power of our digitalization capability through Accelerator. In addition, we will continue to fund high-return projects focused on creating uniquely innovative, differentiated technologies. As a result, our free cash flow expectations remain $5.6 billion to $6 billion for the year, up 6% to 13%, excluding the impact of prior year settlements. Our robust balance sheet and strong cash generation will support accretive capital deployment. And while we're happy with our recently announced transactions, we will further build on our active M&A pipeline as we continue to optimize the portfolio. So in summary, we executed a strong first quarter and anticipate delivering a strong second quarter and 2024, benefiting from our alignment to the compelling aerospace, automation and energy transition megatrends. Our record backlog and rigorous operating principles give us confidence in our track record of execution. So let me turn it now back to Vimal on Slide 7. Vimal Kapur -- President and Chief Operating Officer Thank you, Greg. Let's take a minute to zoom out from the near-term dynamics and talk about the tremendous progress Honeywell has demonstrated across our key metrics since 2016. We remain keenly focused on delivering our long-term growth algorithm and remain confident in our ability to accelerate growth, achieve 25%-plus segment margins, expand gross margins to above 40% and generate free cash flow margins to mid-teens plus. This framework will enable us to deliver what matters: consistent, compelling EPS growth. Our annual 4% to 7% organic sales growth rate and 40 to 60 basis points of margin expansion, coupled with 1% to 2% of EPS accretion from both share buyback and consistent M&A execution, is a powerful combination that will allow us to generate double-digit adjusted EPS growth on through a cycle basis. '24 is no different as we continue to make steady, consistent improvement to the quality of Honeywell's financial profile. The organization is aligned to my key priorities of accelerating organic growth, deploying the operational power of Accelerator 3.0, and executing on a robust portfolio optimization strategy, all of which will enable us to achieve our long-term targets. I'm incredibly optimistic about the high-value opportunities we are already surfacing during the next phase of our transformation. We'll continue to track our progression closely as our efforts to drive incremental sales growth, expand margins, and generate more cash faster into our enhanced financial profile. Let's turn to Slide 8 for closing thoughts before we move into question and answers. Our value creation framework is working. While the economic backdrop remains fluid, we are deploying our rigorous operating playbook to effectively manage near-term challenges to meet our performance targets. Record backlog levels, ongoing strength in our biggest end market, aerospace and energy as well as an impeding recovery in our short-cycle businesses will allow us to achieve our strong results as we progress through 2024. This includes our margin expansion guidance, which will benefit from improving business mix, in addition to our continued focus on commercial excellence and productivity. It's no secret, I am excited about the future of Honeywell and believe our company is on track to drive the innovation needed to solve some of the world's most challenging problems and enhance the life of people around the world. As we move to Q&A, I want to take a moment to thank our 95,000 future shapers whose dedication and capabilities enable us to deliver the best of our customers, partners, and communities every day. With that, Sean, let's take questions. Sean Meakim -- Vice President, Investor Relations Thank you, Vimal. Vimal and Greg are now available to answer your questions. [Operator instructions] Operator, please open the line for Q&A. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Scott Davis of Melius Research. Your line is now open. Scott Davis -- Melius Research -- Analyst Hey. Good morning, Vimal, Greg, and Sean. Vimal Kapur -- President and Chief Operating Officer Good morning, Scott. Scott Davis -- Melius Research -- Analyst Guys, in the spirit of kind of looking at the outliers here, warehouse automation is still really a tough spot. What's on the other side of this? Is this just a deeply cyclical business, so we're going to see a big bounce back? Have you structurally changed your cost structure? What's kind of on the other side of this tough period? Vimal Kapur -- President and Chief Operating Officer Yes. So Scott, if I get your question, just that I've missed the front word. Is it -- did you mention industrial automation or warehouse automation? Greg Lewis -- Senior Vice President, Chief Financial Officer Warehouse automation. Vimal Kapur -- President and Chief Operating Officer Warehouse automation. OK. Thank you. Scott Davis -- Melius Research -- Analyst Warehouse. Sorry, Vimal, warehouse. Vimal Kapur -- President and Chief Operating Officer No, I got it. I got it. Look, the need for warehouse automation is strong. There is no doubt that it drives labor productivity. So there is no debate on the basics of it. The interesting part is our pipeline remains strong, but order conversion is weak, specifically in the project side. Another fact which encourages me about the business is the aftermarket continues to grow, which means once the systems are deployed, people use it well and our aftermarket business is in excess of $0.5 billion. We also have rationalized our cost base. All in, I would say the business is in trough right now, and we are waiting for its recovery. But net-net, we remain very optimistic and confident about the business prospects. Scott Davis -- Melius Research -- Analyst OK. I appreciate that, Vimal. And you've been in the seat kind of long enough to have a good sense to, well, at least review the portfolio. Do you anticipate further portfolio actions, Vimal? It's still a relatively complex portfolio. We certainly get that feedback frequently. I'm sure you do as well. But has your view on the portfolio evolved at all since you've taken the role? Vimal Kapur -- President and Chief Operating Officer Scott, I would say it in two parts. I have committed that we will take action on about 10% of our portfolio, which doesn't fit with the three megatrends, and we are absolutely taking action on that. We will make progress one step at a time because that constitutes a few businesses and no one big thing. On a broader basis, I will review with both, as I did last year on a broader Honeywell portfolio, and we will continue to be our own activist. And wherever there's a case to look at things differently, we absolutely will do that. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. And if I just build on that, I would say our pipeline on inbound as well is very healthy. You saw the Civitanavi announcement. You know that the Carrier deal is on its way. So we're on pace to deploy $10 billion this year with just what we know about, and we're not done. Scott Davis -- Melius Research -- Analyst Makes sense. Thanks, Greg. Thanks, Vimal. Good luck, guys. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Stephen Tusa at J.P. Morgan. Your line is now open. Stephen Tusa -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Vimal Kapur -- President and Chief Operating Officer Good morning, Steve.Can you just talk about maybe just sequentially how you see the earnings trajectory in 3 and 4Q? Yes. So I would say the earnings, as we guided here, we gave the guide for Q2 and rest of the year. So I think the headline is that H2 will be stronger than H1, and that's built upon our order spacing. If you see our orders performance in Q1 was on expected lines, our book-to-bill is 1.1, our backlog is up 6%. Long cycle remains strong across the board in Aerospace and building solutions, and we expect the same trend in European Process Solutions. And short cycle is recovering on expected lines. You saw the results of ESS. The chemical business did perform well on the strength of short cycle. We saw a recovery in scanning and mobility business. We saw some early green shoots in fire business. So things are progressing as we expected, and that's the basis of our guide for rest of the year. So the punchline is we're going to have stronger second half versus first half, and that's reflected on our earnings guide for the year. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. And we know that, that's outside of the normal historical comps that you've seen, but that's not really different than the way we've modeled the year so far. And to Vimal's point, we are starting to see some of those short-cycle order patterns. And we said that those were going to be different by end market as the year progresses. So no real change, Steve, to what we outlined in the original guidance. Stephen Tusa -- JPMorgan Chase and Company -- Analyst So I guess just normally, you guys are up, I think, a little bit 2Q to 3Q. You're up like, I think, I don't know, low to mid-singles from 1Q to 2Q. Should we think about like just to kind of frame this, the ramp because it is from a timing perspective, is it 2Q to 3Q? What do you think? Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. So we're going to have a ramp from 2Q to 3Q as opposed to flat, and then the ramp from 3Q to 4Q will be greater than 2Q to 3Q. Stephen Tusa -- JPMorgan Chase and Company -- Analyst Great. Thanks for the color. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open. Julian Mitchell -- Barclays -- Analyst Hi. Good morning. I think a lot of that second-half pickup rests on the IA segment. So maybe just wanted to home in on that for a second. I think you'd guided full-year sales there flattish, so about $10.8 billion. And it sounds like you're doing $2.5 billion a quarter in the first half. So you've got a sort of high teens half-on-half step-up in the second half in IA revenue from sort of $5 billion to $5.8 billion. Maybe help us understand which of the pieces inside IA will lead or lag that delta, and if it's similar to the firmwide where there's some pickup in Q3 and then a steeper one in Q4 sequentially. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. So thanks, Julian. I mean the ramp for the company actually is in IA and in BA, and then we'll get sort of a nice ramp in the fourth quarter in ESS as well. So it really does come back to all the products businesses inside of each of those portfolios. So think about in IA, PSS, the sensing business. In BA, think about fire and the BMS business. And then as Vimal mentioned earlier in ESS, you're going to get a continued step-up in electronics and chemicals as well as our normal sort of fourth-quarter move in our catalyst business. So it's really not all predicated on any one segment overall. And it's going to be -- you've got your numbers approximately right in terms of the IA first half, second half overall. But you're going to see it across the portfolio. It's not going to be concentrated in any one specific business around the portfolio. Vimal Kapur -- President and Chief Operating Officer Only thing I'll add, Julian there, is that in IA, the HPS continues to perform very well. It's going to mirror the performance it had in 2023. So similar growth rates. The bookings remain very strong. Aftermarket is performing extremely strong. And that's the biggest constituents of the newly framed IA business. And the short cycle is recovering. I remain very confident on short-cycle recovery. We have seen that in PSS business, it has two successive quarters of orders growth. We see that in early cycle in other businesses. So net-net, we are going to see strong exit rates in IA business at end of the year. Julian Mitchell -- Barclays -- Analyst That's helpful. And then just my quick follow-up on the buildings division margins. So I think they're guided to be up maybe 100 bps or so for the year, above the firmwide margin expansion. First quarter clearly starting down -- tricky down over 100 bps. So the slope of that, maybe help us understand kind of how do we think about the buildings margins in the second quarter? How quickly we start to see that flip to margin expansion in the rest of the year, please? Greg Lewis -- Senior Vice President, Chief Financial Officer Sure. So again, you're going to see that tie a lot to the product volumes because of the volume leverage that comes with that and the margin rates associated with it are going to be very helpful in that margin ramp as well as the work that we've done on productivity, particularly around direct materials this year. So that's -- our last two quarters were in the same neighborhood, right around 24 points with the lower product mix. And as the year progresses, you're going to see that move up sequentially throughout the remaining three quarters of the year. Julian Mitchell -- Barclays -- Analyst That's great. Thank you. Vimal Kapur -- President and Chief Operating Officer Thanks, Julian. Operator Our next question comes from the line of Andrew Obin with Bank of America. Your line is now open. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Hey, good morning, guys. Good to hear that short cycle is finally starting to move. Vimal Kapur -- President and Chief Operating Officer Absolutely, Andrew. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Just a question on defense and space. That picked up very nicely, nice lever. Can you just talk specifically, and I know there are a lot of programs there. But what is driving that? And what's the outlook specifically for defense and space into the second half because this is a very, very impressive performance there. Vimal Kapur -- President and Chief Operating Officer Yes. Thanks, Andrew. Look, the Q1 performance of defense and space was more linked to the supply chain unlock. That remains the biggest variable in Aerospace even in 2024. We are very pleased with the strong growth in Q1. We expect high single-digit growth in defense and space in the revenue, but order booking will be much stronger. And that's driven by the fact of not only the demand in U.S. but the international demand, which is coming up in this business. And those trends are extremely favorable. So net-net, we do expect to finish the year strong, not only in the revenue side but equally strong on the order side on the defense. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Gotcha. And maybe to -- shifting to ESS. Can you just talk about visibility of UOP? I know you guys were optimistic about some of the green projects coming in. And I think due to regulatory issues, it's just taking time. What does the pipeline look like? And what does the ramp look in this business into the year-end? And how do you balance this visibility on these projects and just the time it takes to get them approved? Vimal Kapur -- President and Chief Operating Officer So very bullish on UOP. I would say this business is headed for a great time ahead. The traditional projects continues to remain active while the new energy project on sustainability, a strong pipeline, and we see decisions now maturing. You saw in one of our exciting wins, we mentioned here new way to make SAF with the biomass now, which is a new technology we have launched. So net-net, with the strength in traditional energy, strength in renewable technologies and catalysts, we are going to have a strong year for UOP, both in orders and revenue. And that's not only 2024. Look ahead for the business remains extremely, extremely positive in the times ahead. Andrew Obin -- Bank of America Merrill Lynch -- Analyst Thank you very much. Vimal Kapur -- President and Chief Operating Officer Thanks, Andrew. Operator Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, Vimal, Greg, and Sean. I wanted to ask about Aerospace. Commercial OE was really strong, up 24% in the quarter. How are you thinking about that for the full year just given slower MAX production we're seeing and the new news of the 787 also slowing down production there? Any top line margin or cash impact that you foresee? And then I just want to clarify the comment about margins for Aerospace. You said it would dampen just given OE mix, but I would think aftermarket would accelerate as we progress through the year. Vimal Kapur -- President and Chief Operating Officer OK. So I think there are three questions there, Sheila, I'll try to pick up. Sheila Kahyaoglu -- Jefferies -- Analyst Sorry about that. Vimal Kapur -- President and Chief Operating Officer No, no problem. So the overall, we do expect commercial OE to grow double digits, both on the -- the commercial OE to grow double digits and aftermarket. So we'll maintain the strong growth trend as is indicated in our guide for the rest of the year. To your comment specifically on 787 MAX, I won't give you a specific input on one particular platform. But I would say that our demand for Boeing hasn't changed. We know that we all heard their earnings call yesterday, and there are different drivers for that. But for Honeywell, we are present in multiple platforms, and the demand for them remains unwavered. I personally talk to Boeing leadership, and I'm very confident that's going to trend that way. On margins, it's a -- Q1 was strong. It's a mixed driver. As the year progresses, we have different product mix and mix between OE and aftermarket. So net-net, we are still guiding flattish margins for the year, and that's what we have given in our guidance. Sheila Kahyaoglu -- Jefferies -- Analyst Great. Thank you. Operator Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open. Joe Ritchie -- Goldman Sachs -- Analyst Hey, guys. Good morning. I just want to really focus my questions on margins. So just making sure that I understood some of the comments already. As you think about the rest of the year, I guess, how much of the margin expansion that you're expecting in both BA and IA is really dependent on short cycle accelerating? And then, Vimal, just a quick clarification on the answer you just gave on the aero side of the business. The OE business was up, I think it was over 24% or something like that in aero. I'm just curious, like what were some of the kind of mix tailwinds you saw this quarter in aero? And again, why doesn't that continue going forward? Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. Joe, I mean, as it relates to the mix, I'm not going to bore you with the details, but it's actually quite deep between the different OEs, the shipsets within each of them and so forth. So that is going to migrate up and down during the course of the year as it goes. So there's not one particular thing happening there. As Vimal mentioned though, we're going to continue to see very strong OE margins -- or excuse me, OE volumes during the year. In fact, I wouldn't be surprised if the growth in OE actually accelerates in the next couple of quarters, not dramatically so, but in terms of its relative mix inside of the overall portfolio. So that's what I would say about aero. And then in terms of the margin rates in IA and BA, both of those businesses are seeing mix down with products softer. And so absolutely mix up with products growth is going to be a driver of those margins. But that also comes with a lot of the work we've been doing on the productivity side, both in direct materials as well as in our continued repositioning of the cost base that we have been doing. So our margin story is going to be a combination of the volume leverage, the product mix, and our productivity actions that we continue to take, as you know, is always a strength for Honeywell. Joe Ritchie -- Goldman Sachs -- Analyst Got it. OK. That's -- that's clear. Thank you, Greg. Greg Lewis -- Senior Vice President, Chief Financial Officer Thank you. Operator Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open. Nigel Coe -- Wolfe Research -- Analyst Great. Thanks for the -- thanks for the question, guys. Sorry to bore you in another -- obviously, aero margins were great. What's the timing of Boeing shipments to customers affected there? Just curious if there's a timing issue there. But mainly my question is around 2Q margin dynamics. And thinking about that drop-off in the Zebra royalty income in the second quarter, are we looking at maybe margins, I don't know, down like 300 basis points year over year in the second quarter for IA? And therefore, the balance of the segment margin performance is actually probably more like on trend? So just any more color on the 2Q margins by segment would be helpful. Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. No, we don't expect IA margins to be down 300 basis points in 2Q on a year-over-year basis. We talked about the Zebra impact. Again, it's $45 million a quarter on the revenue side. There is some costs associated with that as we talked about over the last 2 years, as we've had that impact into our P&L. So you guys can do the math on the direct impact of just that item all by itself. But we have other actions in place to continue to offset that. I don't expect margins to necessarily be up year-on-year in IA, but nothing to the degree that we described in terms of 300 basis point drop. Nigel Coe -- Wolfe Research -- Analyst OK. And then any color on aero margins in second quarter? Greg Lewis -- Senior Vice President, Chief Financial Officer Yes. Just that I would expect them to be down sequentially from Q1, that Q1 is going to be the high point. And as we go through the year, again, our overall expectation is flattish on a year-on-year basis, but Q1 will be the high point. Nigel Coe -- Wolfe Research -- Analyst OK. That's helpful. Thanks. Operator Our next question comes from the line of Andy Kaplowitz with Citi. Your line is now open. Andy Kaplowitz -- Citi -- Analyst Hey, good morning, everyone. Vimal Kapur -- President and Chief Operating Officer Hey, Andy. Andy Kaplowitz -- Citi -- Analyst Vimal, maybe can you talk a little bit more about what you're seeing by region? I think you mentioned strength in India. How important is that region becoming? And what are you seeing in China and Europe? Vimal Kapur -- President and Chief Operating Officer Yes. So I would say, if I go around the corner, we continue to see strength in our high-growth regions, specifically in India and Middle East. Those remain strong. China also did well for us. We grew high single digits on the strength of our aero and energy business. So net-net, we do see strong -- continued strong trend in emerging markets. Europe has stabilized. I would say the worst is definitely behind us. We see more recovery and positive trends, specifically in short cycle, we talked about it earlier in Europe. And U.S., of course, is the balance here. So net-net, high-growth region remains a tailwind in overall revenue mix for Honeywell. Andy Kaplowitz -- Citi -- Analyst Great. And I just want to follow up on the process business. I think you mentioned delays. Is it you're seeing more geopolitical uncertainty or election fears, higher rates? I think you still have a good outlook for that business. Maybe talk about it a little bit more. Vimal Kapur -- President and Chief Operating Officer So Process Solutions business, absolutely. Our booking -- we carried a strong backlog, and our booking trends remains strong there. Aftermarket is double-digit growth for several quarters in a row. So that business will, as I mentioned before, will repeat 2023 pattern of high growth. And we expect to do -- continue to do well in that segment, monetizing installed base, aftermarket software, all our strategies are really working. And also diversification into new verticals as the new energy segment are emerging like battery storage, gigafactories, all are becoming attractive growth optionality for us in that business. Andy Kaplowitz -- Citi -- Analyst Appreciate the memo. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Jeff Sprague -- Vertical Research Partners -- Analyst Hey. Thank you. Good morning, everyone. Vimal, just back to kind of the ongoing portfolio review, and you said it could be many things, not one big thing. Can we take that? Or should we take that to mean as we look at kind of your revenue disaggregation, right, there's kind of 11 buckets we track and model to, that none of those entire sleeves would be gone at some point in time in your thought process? Vimal Kapur -- President and Chief Operating Officer Look, whenever we complete any action of addition and substraction, we'll give you an early guide for that. As I mentioned, this is no one step change. So it's not that we're going to take action of a $4 billion type of thing in a single move. But whenever we are ready to communicate, we'll give you a heads up on what's likely coming in. For example, Carrier business will likely come in, Civitanavi will likely come in, and what are the implications on the guide? And then what goes out, if and when this happens, we'll provide you the guide. But what I can share with you is there is not going to be one mega event on divestiture. It's going to be a combination of multiple small events. Jeff Sprague -- Vertical Research Partners -- Analyst And one thing you have been clear on is ultimately, there's a monetization play on Quantinuum. Where are we there? Where's the spending tracking? And can you kind of give us an idea of maybe the time line of a monetization event? Vimal Kapur -- President and Chief Operating Officer So Quantinuum is in, I would say, exciting times. We completed a major event of pre-money. We got valuation in excess of $5 billion, got more people invested there. We talked about that in the last earnings call. We also met another major milestone. I don't know if you read that Honeywell and Microsoft announced a major milestone of testing different scenarios to deliver reliable results. So Microsoft gave, ran 14,000 experiments on H2 quantum computer, and they were able to prove that every time all 14,000 times, we're able to deliver results with accuracy. Why it matters is in quantum, the repeatability or accuracy matters more than the speed at this point. Once we are able to solve the problem solving with accuracy, we can work on the speed part. So that's a major milestone, and that's what matters in quantum business. We continue to hit these milestones one after another, and we score some wins on the commercial side, and that has set us for the next event of the monetization somewhere in 2025. It's contingent upon hitting this, but I remain confident that we are on the right track on that. And by the way, the last comment I'll make there is AI is definitely giving us a lot more momentum. There's a deeper understanding and appreciation why quantum is necessary. And that's going to certainly help us when we are ready for an IPO or something similar in 2025. Jeff Sprague -- Vertical Research Partners -- Analyst Great. Thank you for the color. Vimal Kapur -- President and Chief Operating Officer Thank you. Operator Our next question comes from the line of Brett Linzey with Mizuho. Your line is now open. Brett Linzey -- Mizuho Securities -- Analyst Hey. Good morning, all. I wanted to come back to ESS. You noted the margin contraction on some of this onetime factory restart cost. Maybe could you quantify that? And then any detail on the nature of just the timing of some of these pressures? Greg Lewis -- Senior Vice President, Chief Financial Officer Sure. So in our clean energy business, we had been operating as in a trading manner, and we had shut down the major facility some number of years ago in that business, and we restarted it. And so as you can imagine, that restart has some fits in it as we go through the course of the year to get to stabilization. And that's really the -- if you look at ESS margins, I'm not going to give you precise numbers. But if you back out the impact of that, we would have been roughly flat, maybe slightly up on a margin rate basis year on year in the first quarter. And so that's going to take some time to get to stability. But the good news is this is a great business. The long-term dynamics for it from a pricing standpoint, a supply standpoint are very favorable. As we exit the year, we're going to have more stable operations internally. And so we're going to have a very nice exit rate going into 2025 with a very strong business. And again, that business is, think about it being around about $400 million on an annual basis. Brett Linzey -- Mizuho Securities -- Analyst All right. Got it. And then just one more on M&A. Just thinking about the velocity there. I know last May, you talked about the pipeline prioritization. I think you had 90 deals looking at within your markets, and that's still at the top 10. I guess how is that 90 compared today? I mean it sounds like the enthusiasm, it sounds a little bit more optimistic about some actionability. But maybe just talk about some of the pipeline and the movement there. Vimal Kapur -- President and Chief Operating Officer Absolutely. I would say the pipeline is very strong as we sit today. Of course, we compete for every target, and we remain very sensitive to both strategic fit and valuation fit. So net-net, we do expect to continue to take some actions on adding new business to our portfolio. And overall, my tone is very positive on that. OK. Just to wrap up here, I want to continue to express my appreciation to our shareholders for your ongoing support and, again, to our Honeywell future shapers, who continue to drive differentiated performance. Our future is bright, and look forward to sharing our progress with you as we continue to execute on our commitments. Thank you for listening, and please stay safe and healthy. Brett Linzey -- Mizuho Securities -- Analyst All right. Great. Best of luck.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Olympia McNerney, IBM's global head of investor relations. Olympia, you may begin. Olympia McNerney -- Global Head, Investor Relations Thank you. I'd like to welcome you to IBM's first quarter 2024 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's chairman and chief executive officer; and Jim Kavanaugh, IBM's senior vice president and chief financial officer. We'll post today's prepared remarks on the IBM investor website within a couple hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So, with that, I'll turn the call over to Arvind. Arvind Krishna -- Chairman and Chief Executive Officer Thank you for joining us. In the first quarter, we had solid performance across revenue and cash flow. These results are further proof of the quality of our portfolio and our hybrid cloud and AI strategy. We had good performance in software, at the high end of our model; continued strength in infrastructure, above our model; while consulting was below model. On a relative basis, consulting outperformed the market. Our cash flow generation is the strongest first quarter level we have reported in many years. This performance speaks to the strength of our diversified business model. Before we get into more detail on the quarter, let me address the announcement of our agreement to acquire HashiCorp, a company we have partnered with for a long time and believe is a tremendous strategic fit with IBM. Enterprise clients are wrestling with an unprecedented expansion in infrastructure applications across public and private clouds, as well as on-prem environments, making this the ideal time to pursue this acquisition. As generative AI deployment accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic, and complex infrastructure strategies. HashiCorp has a proven track record of helping clients manage the complexity of today's infrastructure by automating, orchestrating, and securing hybrid and multi-cloud environments. HashiCorp is a great strategic addition to our portfolio, extending Red Hat's hybrid cloud capabilities to provide end-to-end automated infrastructure and security lifecycle management. HashiCorp's technology is foundational to enabling the transition to hybrid and multi-cloud. And Terraform is the industry standard for infrastructure automation for these environments. With security top of mind for every enterprise, Vault is a powerful secrets management offering to automate identity security across applications. The combination will also bolster our leading IT automation platform to address the sprawling complexity of AI-driven application and infrastructure growth. HashiCorp's products have wide-scale adoption in the developer community, highlighting the pervasive nature of their technology used by over 85% of the Fortune 500 and downloaded over half a billion times. The acquisition of HashiCorp builds on IBM's commitment to industry collaboration, the developer community, and open-source hybrid cloud and AI innovation. Today's acquisition is consistent with our M&A strategy. We have taken a disciplined approach to M&A, and HashiCorp aligns well across all our key criteria to continue to focus and strengthen our portfolio on hybrid cloud and AI, deliver synergies with the rest of IBM, and be near-term accretive to free cash flow. I will now turn it to Jim to discuss the financial implications. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Thank you, Arvind. Let me start with the details of the transaction. We have agreed to acquire HashiCorp for $6.4 billion in enterprise value to be funded by cash on hand. The transaction was approved by HashiCorp's board of directors. Closing is anticipated by the end of 2024, subject to approval by HashiCorp's shareholders, regulatory approvals, and other customary closing conditions. We have been executing a disciplined capital allocation strategy, and the acquisition of HashiCorp meets all of our criteria, including strategic fit as Arvind just walked through, synergies across IBM, and financial accretion. Let me start by addressing synergies. We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp. Product synergies span across multiple strategic growth areas for IBM, including Red Hat, watsonx, data security, IT automation, and consulting. For example, the powerful combination of Red Hat's Ansible Automation Platform's configuration management and Terraform's automation will simplify provisioning and configuration of applications across hybrid cloud environments. We are well-positioned to drive growth for HashiCorp by leveraging IBM's enterprise incumbency and global reach. With 70% of the revenue today coming from the U.S., the opportunity to scale HashiCorp across IBM's operations in 175 countries is significant. We also believe we can accelerate HashiCorp's adoption with IBM clients. To put this in perspective, only about 20% of the Forbes Global 2000 are HashiCorp customers. And just a quarter of HashiCorp customers result in more than 100,000 annual recurring revenue, underscoring the opportunity to better monetize and upsell their products. Bringing it all together, the acquisition allows us to deliver a more comprehensive hybrid cloud offering to enterprise clients, enhancing IBM's ability to capture global cloud opportunity. This will drive a higher growth profile over time. Finally, we expect to realize operating efficiencies and expect the transaction to be accretive to adjusted EBITDA within the first full year post-close and to free cash flow in year two. Significant near-term cost synergies underpin the financial profile of the transaction, while product synergies represent further upside. We are very comfortable with our strong balance sheet, liquidity profile, and solid investment grade rating, and remain committed to our dividend policy. I'll now turn it back to Arvind. Arvind Krishna -- Chairman and Chief Executive Officer Now, turning back to the quarter, let me start with a few comments on the macroeconomic environment. We expect the global economy to behave similarly to last year, albeit with some uncertainty due to persistently high interest rates. There are reasons to believe technology will be even more important in 2024 as clients focus on productivity improvements and customer experience. AI-driven productivity in particular continues to be a top priority for businesses for both cost reductions and new revenue opportunities. I will now provide some details on the execution of our strategy around hybrid cloud and AI. Enterprise AI continues to gain traction. This year, we anticipate more clients moving from experimenting to deploying AI at scale to unlock productivity. We are pleased with the solid progress of our AI offerings. Each quarter, we are winning more clients, expanding partnerships, and introducing new innovations. Inception to date, our book of business related to watsonx and generative AI is greater than $1 billion with sequential quarter over quarter growth. Similar to last quarter, this remains weighted toward consulting. We believe our comprehensive AI strategy is well-positioned to help clients scale AI. We developed our watsonx platform for clients to build their AI solutions, spanning from foundation model training, to data preparation and governance. This includes both IBM Granite models and third-party models, giving our clients variety, as well as the efficiency and focus on enterprise domains that IBM brings. We have leveraged watsonx to build AI assistance through our software portfolio. Our consultants are helping clients navigate the AI landscape. And finally, we are seeing our infrastructure segment play a larger role as clients leverage their hardware investments in their AI strategies. Let me touch on these infrastructure dynamics briefly. As AI becomes widely adopted, IBM Z is uniquely advantaged. We believe a lot of AI inferencing will happen where the data is for security, efficiency, and latency reasons. Our full stack focus from on-chip AI processing, to AI accelerator cards, to watsonx platform support allows models to be built and trained on any platform and easily deployed on IBM Z. The Telum chip is a unique differentiator, enabling real-time AI inferencing. Generative AI is also driving lift for our storage offerings, where industry-leading performance and scalability is utilized for data curation, model building, and fine-tuning. For enterprises to deploy AI at scale, AI is not a one-size-fits-all proposition. It requires tuned, domain-specific models, trained with quality data to maximize its impact. Clients value the flexibility of our approach. They appreciate having the ability to leverage a combination of AI models, whether they are IBMs, their own models, open-source models, such as Llama from Meta and Mixtral from Mistral. And they can deploy these AI models across multiple environments. The flexibility we offer is resonating as there are use cases for both large and more efficient models. We are committed to an open innovation ecosystem around AI to help our clients maximize flexibility and leverage skills. Let me spend a minute on our progress in this area. We see early parallels to Linux in making open-source AI models performing for enterprise use. We believe that IBM with Red Hat can be a key driver of open-source AI. As you know, we have done a lot of work with AI models and recently released a family of state-of-the-art open-source code models from our Granite series. Red Hat and IBM also recently launched Instruct Lab to evolve and improve AI models through incremental community contributions, much like open-source software. This open strategy is resonating around the world. We recently announced a collaboration with the Spanish government to leverage IBM's investments across the entire AI stack and open source to build the world's leading suite of foundation models proficient in the Spanish language. Enterprise use cases addressing code modernization, customer service, and digital labor remain top of mind for our clients. This quarter, we signed a multi-year contract with Providence Health to reimagine talent and HR workflows with AI from IBM and partners. We're also providing data-driven insights and enabling Spanish language narration for this year's Masters Golf Tournament. Our partner ecosystem remains essential to both AI and hybrid cloud growth. This quarter, we've progressed strategic partnerships with a number of industry leaders, consulting joint forces with NVIDIA to accelerate clients' AI journeys. ServiceNow will embed watsonx AI capabilities into the ServiceNow platform to accelerate enterprise digital transformation. We also expanded our relationship with Adobe around OpenShift and watsonx as it relates to the Adobe Experience platform. We continue to invest in emerging technology as well, bringing new innovations to the market. Since we put the world's first quantum system on the cloud in 2016, we have deployed over 80 quantum systems, and our users have run over 3 trillion programs to date. We just installed the Quantum System One at Rensselaer Polytechnic Institute. This is the first IBM quantum system on a college campus anywhere in the world. This installation will advance research in critical areas, such as energy storage, material science, and financial modeling. As always, focusing our portfolio remains a key priority. We close the sale of The Weather Company in the first quarter and expect to close the announced acquisition of stream sets and web methods from Software AG by mid-year. Overall, we had a positive start to the year, which gives us confidence in our next quarter and full your expectations. Jim will now take you through the details of the quarter. Jim, over to you. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue, $3 billion of adjusted EBITDA, $1.7 billion of operating pre-tax income, and $1.68 operating earnings per share. And we generated free cash flow of $1.9 billion, up approximately $600 million year over year. Our revenue for the quarter was up 3% of constant currency. We saw an impact to our top-line performance from the closing of The Weather Company earlier than expected in the quarter. Software grew by 6%, with growth across hybrid platform and solutions and transaction processing, and continued strength in our recurring revenue base. Consulting was up 2%, reflecting organic growth. We continue to have solid signings performance and a trailing 12-month book-to-bill of over 1.15. Infrastructure had strong performance, delivering growth across all of our hardware offerings. Looking at our profit metrics, we expanded operating gross margin by 100 basis points and operating pre-tax margin by 130 basis points over last year, inclusive of about 100 basis-point currency headwind to pre-tax margin. At the end of January, we closed on the divestiture of The Weather Company, generating a pre-tax gain of $241 million in the quarter. Mitigating that benefit, we took charges of $374 million to address workforce rebalancing. Operating pre-tax margin was up 50 basis points, excluding the year-over-year impacts of workforce rebalancing and divestiture dynamics. We are pleased with this performance, in line with our guidance of roughly 50 basis points of operating pre-tax margin improvement in 2024. Margin expansion was driven by our operating leverage, product mix, and ongoing productivity initiatives. This allowed for continued investments to drive innovation, which you can see in our higher R&D expense. The timing of discrete tax items this quarter resulted in an operating tax rate of about 6%. We are still expecting a full year operating tax rate consistent with last year. Overall, the combination of our revenue and operating margin performance resulted in 7% growth in our adjusted EBITDA. This contributed to our free cash flow performance. For the quarter, we generated $1.9 billion of free cash flow, up $600 million year over year. This growth reflects the performance of our underlying business with adjusted EBITDA up $200 million year over year and about $400 million from timing of balance sheet dynamics and capex. Over the last 12 months, we generated free cash flow of $11.8 billion. This puts us on track to deliver about $12 billion of free cash flow for the year, with the growth largely driven by adjusted EBITDA. Since our acquisition of Red Hat, excluding 2021 when we spun off Kyndryl, our operating net income to free cash flow realization averaged 120%. Two factors drive this. One is stock-based compensation, which today represents 15 points of realization. And two, given the shift in our portfolio to a growing software business, deferred income also contributes to our realization. In terms of cash uses, we return $1.5 billion to shareholders in the form of dividends. From a balance sheet perspective, we have a very strong liquidity position, with cash of $19.3 billion, up from $13.5 billion at year end 2023. Our debt balance at the end of the first quarter was $59.5 billion, including $9.9 billion from our financing business. Turning to the segments, software revenue grew 6%, with good performance across both hybrid platform and solutions and transaction processing. As mentioned in January, the software revenue growth drivers for the year include Red Hat growth, acquisitions, strong recurring revenue, and transaction processing. And this is just how the first quarter played out. Hybrid platform and solutions revenue was up 7%. Let me spend a minute on the various elements. Red Hat revenue grew 9%, reflecting solid performance across the three key solutions, RHEL, OpenShift, and Ansible. Annual bookings growth was again in the midteens, with OpenShift up over 40% this quarter, and RHEL and Ansible each up double digits. Beyond Red Hat, recent acquisitions contributed to the growth profile of hybrid platform and solutions, as did new innovation areas, including watsonx. The combination of Apptio acquired mid last year and our IT automation portfolio has delivered strong results, unlocking the full benefits of a fin ops solution for technology investments across hybrid cloud environments. In fact, just this quarter, we partnered with Microsoft to bring Apptio to Azure and will co-sell to our joint customers. And Microsoft has agreed to adopt Apptio's capabilities in parts of their organization. Our revenue performance continues to reflect growth in our high value recurring revenue base. Our ARR, after removing The Weather Company and security services, is now $13.9 billion, up over 8% since last year. Transaction processing, with its strong base of recurring revenue, delivered revenue growth of 4%. Clients continue to value this portfolio of mission-critical software, supporting growing workloads on our hardware platforms. And there's an increasing interest in generative AI application modernization capabilities, like watsonx Code Assistant for Z. Software segment profit was up 80 basis points, while absorbing both key investments in innovation and about a point of currency impact in the quarter. We continue to deliver operating leverage, driven by our revenue performance this quarter. Our consulting revenue was up 2%. We continue to see clients prioritizing large data and technology transformation projects focused on driving productivity with AI and analytics. These results reflect the organic performance of our business. Solid demand for our offerings led to signings growth of 4%, our highest absolute first quarter signings in recent history, and our trailing 12-month book to bill ratio remains over 1.15. Our overall backlog remains healthy, up 7% year over year, and backlog erosion levels remained stable. At the same time, we saw both a lengthening of backlog duration driven by large-scale digital transformations and a reduced level of revenue realization in the quarter as clients tighten discretionary spending. Contributing to growth across the business this quarter, our strategic partnerships continue to make up over 40% of our consulting revenue with both AWS and Azure practices growing double digits. Additionally, our Red Hat practice grew revenue double digits. Expanding upon our partnerships, we are leveraging Microsoft Copilot to drive productivity for our clients. Just as we quickly ramped a meaningful book of business around Red Hat to address the hybrid cloud opportunity, we are ahead of pace at this stage with our generative AI book of business. Turning to our lines of business, business transformation revenue grew 3%, led by supply chain and finance transformations. Customer experience transformations also contributed to growth. Technology consulting revenue was also up 3%, with double-digit growth in cloud monetization projects. And both strategic partnerships and Red Hat engagements delivered double-digit growth. Application operations revenue declined, reflecting weakness in on-prem custom application management projects, partially offset by strength in cloud-based application management offerings. Moving to consulting profit, we delivered over 8% of segment profit margin, which is flat year to year. Our segment profit margin was impacted by about a point of currency, offsetting improvements in pricing and productivity actions we have taken. Moving to infrastructure, revenue grew, reflecting growth in hybrid infrastructure of 6% and declines in infrastructure support of 7%. Within hybrid infrastructure, growth was broad-based with strong demand from our hardware offerings across IBM Z, power, and storage. In IBM Z, revenue was up 5% in the eighth quarter of z16 product availability. Now two years in, this product cycle continues to resonate with clients and surpass z15 revenue performance. IBM Z is uniquely positioned for AI, with the first processor design with on-chip acceleration for real-time AI inferencing. In fact, we're working with over 100 clients on the application of AI on z16. Use cases range from fraud detection, to anti-money laundering, to anomaly detection. This remains an enduring platform, driving not just hardware adoption, but also related software, storage, and services. Distributed infrastructure delivered 7% revenue growth, which strengthened both power and storage. Power performance was fueled by demand for data-intensive workloads. Storage delivered strong double-digit revenue growth, including demand for high-end storage tied to the z16 cycle. And clients are also looking to our storage offerings for data curation, model building, and fine-tuning in support of generative AI. Looking at infrastructure profit, we deliver both gross profit and segment profit margin expansion. Segment profit margin expanded 20 basis points in the quarter, reflecting benefits from productivity while absorbing about a point of impact from currency. Now, let me bring it back to the IBM level to wrap up. More than two years into our midterm model, we are a more focused business that has delivered sustained revenue and free cash flow growth. Over this time, we've continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem, and drive productivity across our business. Our first quarter performance is another proof point of this progress with constant currency revenue growth, operating gross margin, and operating pre-tax margin expansion, and the strongest first quarter free cash flow in many years. Looking to the full year of 2024, we are holding our view on our two primary metrics, revenue and free cash flow. We see full year constant currency revenue growth in line with our mid single-digit model, still prudently at the low end. And for free cash flow, we expect to generate about $12 billion, driven primarily by growth and adjusted EBITDA. On the segments, in software, we had a solid start to the year and continue to expect growth slightly above the high end of our mid single-digit model. In consulting, we continue to see strong demand for digital transformations, though, as I said, we are seeing some pressure on smaller, more discretionary projects. We now see mid single-digit revenue growth in consulting with acceleration. throughout the year. Given our ongoing productivity initiatives and investment in innovation, we expect to see about a point a segment profit margin expansion in both of these segments. And in infrastructure, given product cycle dynamics, we expect revenue to decline, driving about a half a point impact to our overall growth. Given IBM Z cycle dynamics, we expect segment profit margin to be lower year over year. With these segment dynamics, we continue to expect IBM's operating pre-tax margin to expand by about a half a point year to year, consistent with our view 90 days ago. And we are maintaining our view of operating tax for the year to be consistent with last year in the mid teens range. We took a workforce rebalancing charge this quarter. And as I mentioned 90 days ago, we continue to see the overall amount this year consistent with last year. We expect this to pay back by the end of the year. On currency, given the strengthening of the dollar, we now expect a 150 to 200 basis-point impact to revenue growth for the year, which is about one point worse than 90 days ago. For the second quarter, I expect our constant currency revenue growth rate to be consistent with the full year. Our tax rate is expected to be in the high teens. And for profit, we expect the first half skew of net income will remain a couple of points ahead of the prior year. In closing, we are pleased with our performance to start the quarter. We are positioned to grow revenue, expand operating profit margin, and grow free cash flow for the year. Arvind and I are now happy to take your questions. Olympia, let's get started. Olympia McNerney -- Global Head, Investor Relations Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions. Questions & Answers: Operator Thank you. At this time, we'll begin the question-and-answer session of the conference. [Operator instructions] Our first question comes from Amit Daryanani with Evercore. Please state your question. Amit Daryanani -- Evercore ISI -- Analyst Thanks for taking my question. Good afternoon, everyone. I guess I was hoping you could talk a bit more on the consulting side of the business because revenues did decelerate rather notably in March quarter. But I think on the other side, your AI-centric backlog at over a billion dollars is doing extremely well. So, I'm hoping you could touch on the near-term side. You know, what are you hearing from your customers? What are they telling you on the duration of this pause? Because I think the expectation of mixing with digital growth would imply this business will recover rather quickly. So, I'd just love to get a sense on what are customers saying in consulting in terms of the duration of the pause. And then, longer term, what does the opportunity look like, given the AI-centric backlog appears a lot more robust versus what I think folks would have expected beyond '24? Thank you. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Thanks, Ahmed. I appreciate the question. Let's take a step back, because I think you're seeing some interesting dynamics in the consulting industry overall. And let's bifurcate it between how you ask the question. Let's look at real demand that's being measured in bookings, and then let's talk about what's happening with the revenue realization. On demand, we continue to see and capitalize on solid demand in key areas around digital transformation, application modernization, and gen AI. Our signings in the quarter, up 4%, were the strongest absolute first quarter signings we've had as far back as I can go. We have a strong book-to-bill, over 1.15 on a trailing 12 months. Our backlog dynamic is in a very strong position, 7% overall, with stable erosion. But our duration has been going up the last two quarters. It's been up a couple months. But let's talk about the underpinnings of what's driving demand because I think that's what's most important around the key growth focus areas. You talked about gen AI. Gen AI for IBM, Arvind indicated, inception to date, over a billion-dollar book of business. Consulting in the first quarter, the book of business on gen AI was 2x all of last year. So, I think we're winning in the marketplace. We're taking share. And by the way, we're well above that ramp we saw with regards to Red Hat. Our strategic partnerships still have great velocity. Book-to-bill, well north of 1.2. Our Red Hat book of business is now $2.8 billion ARR around hybrid cloud. And we're seeing very nice acceleration in gen AI and digital transformation around core workflow use case areas of finance, supply chain, HR, and talent. So, I think in the key focus areas, our demand profile still continues to be good. Now, let's translate that to revenue. Revenue, first of all, in the first quarter, as we indicated, was all organic. We wrapped on our acquisitions. We continue to operate a very disciplined M&A process, and we continue to be opportunistic. But that 2% revenue growth was all organic quarter to quarter. Second, in this marketplace, you look at competition, we're taking share still. So, when you look at it, 90 days ago, we talked about the year. We talked about the year was going to play out accelerating throughout the year. Why? Because, one, we knew we had a strong backlog and that backlog realization showed us that it was going to play out throughout the year with sequential improvement. But second, Easter. Easter, we knew calendar was there, was at the end of March. That does impact a human capital-based business on the number of billing days. So, when you looked at first quarter, that backlog duration extending out a couple months, we also saw, though, less revenue backlog yield. And that really played out if you look at our subsegments and application operations. That's centered around custom AMS applications, which, by the way, many of that, as you know quite well, is volume-based business. And that volume, like I said, backlog is stable overall. We're not losing the business. That is moving out to the right. So, with all that said, what are we focused on? We're focused on capturing new client demand in areas around our key growth areas. Two, we're continuing to focus, and we are gaining share in the marketplace. Three, we're driving that economic multiplier of consulting and technology across our hybrid cloud and AI platform. So, in light of all that, that's why you see the mid single-digit growth. I think that's prudent, just given what every other consulting competitors come out with. By the way, that still drives 1.5 points of growth to IBM for the full year. And as I stated earlier, we see an accelerated growth profile as we move through the year. Olympia McNerney -- Global Head, Investor Relations Operator, next question. Operator The next question comes from Wamsi Mohan with Bank of America. Please state your question. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Yes, thank you. Arvind, we'd love to get a little bit more of sort of a macro demand backdrop. I mean, I know Jim mentioned the heightened discretionary spending in some areas. How do you think about the risk of that sort of filtering more broadly as you go through the course of the year, especially given your guidance calls for an accelerating trend here? And if I could quickly, Jim, the synergies relative to HashiCorp on the cost side, is there any way you can dimensionalize that, given that, you know, when you're defining accretion on EBITDA basis? I get that, but can you also help on the net income basis or from a free cash flow, how much it might be dilutive in year one and decretive on year two? Thank you so much. Arvind Krishna -- Chairman and Chief Executive Officer Thanks, Wamsi. Let me address your part about the demand profile globally. Look, if I look at where we are right now and where we project for the rest of the year, demand is actually quite strong. I would put it as very similar to 2023. This is backed up by IMF GDP estimates, which are now north of 3% for the global business. If I look at it by geography, Japan remains very strong. I think that they are taking this opportunity to refresh the technology across their enterprise and government base. We look at South Asia, extremely strong, even the Middle East, UAE, Saudi, very strong. Europe has remained consistent to last year, North and South America. So, on a geography basis, we're seeing very, very strong demand. Now, interest rates are higher than people were expecting. I think we should acknowledge that. That means you get two effects going on. One, there is even stronger demand for software and infrastructure because people believe technology helps you in those environments and helps in an environment of increased labor costs and increased supply chain costs. Then, when you look at the discretionary side, Jim answered this in the previous question, we are seeing a little bit. Not across the board, not in all of the offerings in consulting, but where there is a little bit of discretionary labor, that is where we sense that pressure. What we are going to do is pivot into the areas around helping people become more productive, take more costs out, digital transformation, work with our partners where there is very strong demand in the market. And as you pivot there, we believe that our growth rate in consulting will continue to accelerate. So, I hope, Wamsi, that gave you a flavor on the demand vectors we have, both in software and infrastructure, and in consulting and on a geography basis. Jim, over to you for part two. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer OK. Thank you. Thanks, Wamsi, for the question. As Arvind indicated in the prepared remarks, we couldn't be more excited about the powerful combination of HashiCorp with IBM and Red Hat together. We talked about in the prepared remarks. We've been very disciplined in our set of criteria around M&A. And this fits strategically. It has tremendous synergistic value to our hybrid cloud AI portfolio, and it has an attractive financial return overall. And Hashi meets all three. One, it's a higher revenue growth profile company, so it accelerates IBM's revenue growth over time. Two, to your question, adjusted EBITDA, accretive in the first twelve months. And three, levered free cash flow accretive by the end of year two. We think there are a potential for meaningful synergies overall. And when we look at it significant near-term operating efficiencies, cost energies and put that in perspective, we see this business profile moving from about a mid single-digit free cash flow margin business to about a 30% to 40% free cash flow margin business in a handful of years, free cash flow accretive by the end of year two. Now, the multiple we paid on that, fully supported by, one, the stand-alone revenue growth, and the cost synergies that come out. All of the IBM revenue synergies around Red Hat, around data security, around watsonx, around consulting and IT automation are all upside potential. So, let's talk and conclude on the cost synergy. Cost synergies are where you would fully expect. IBM runs a global operations in 175 countries. We run a very disciplined, G&A efficient structure. We see significant G&A operating efficiencies that we're going to go capitalize on. Second, running the playbook on how we expand it globally, our go-to-market model that we did with Red Hat. And that has both global incumbency, global scale, global breadth, and ecosystem leverage overall. And when you look at that, those significant synergies allow us to invest in product, R&D, innovation, and capability that's built into our case and also deliver our financial returns. So, we feel pretty good about it. Olympia McNerney -- Global Head, Investor Relations Operator, let's go to the next question. Operator Our next question comes from Toni Sacconaghi with Bernstein. Please state your question. Toni Sacconaghi -- AllianceBernstein -- Analyst Yes, thank you and good afternoon. Jim, just to clarify, you've taken down your consulting outlook for the year from six to eight to five. I think that's about 60 basis points to company growth. Is there anything offsetting that, or is that just kind of rounding error in the low single-digit guidance? And then, my question is, maybe you could just elaborate a little bit more on the AI book of business, maybe just help clarify exactly how you define that. I think it's both revenue recognized and your bookings and maybe partner bookings. Maybe you could just help define that. And last quarter, you said it doubled sequentially. This quarter, you just commented that it grew sequentially. Maybe you could add a little color with that double digits or, you know, 20% or 30% or 40%. And at least when I do the math, it sounds like it's less than 5% of your consulting backlog, you know, AI backlog. Could you help dimension that as well? Thank you. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer OK, Toni. Many questions here. Let me see if I can get through them quick. You look at full year. Full year, as Arvind indicated, we're maintaining our guidance on our model, mid single digit. I think prudently just coming out of our first quarter, we've got a lot of work to do in the next three quarters, but I think prudently at the low end of that model. And by the way, that was very consistent with what we said 90 days ago. Now, let's unpack that. When you take a look at full year, first of all, we are dealing with a stronger U.S. dollar. So we've given you a supplemental chart. Now, we've lost basically about a point more of headwind on currency. But let's talk about the underlying fundamentals of our business across our segment because I think that's at the heart of your question. When you take a look at our growth at mid single digit, one, we said software would grow slightly above the high end of our mid single-digit model. We are very pleased with our software performance in the first quarter. We've accelerated growth from fourth quarter to 6% overall. We have a very strong recurring revenue base. We accelerated Red Hat to a very strong 9% with our third consecutive quarter of midteen booking growth, which positions our business extremely well for double-digit growth for the full year. And we're getting nice scale leverage on acquisitions. Software for the year will deliver over three points of that IBM mid single digit by itself based on that Red Hat momentum, acquisitions, solid recurring revenue -- TP, by the way, nice start, up 4%, and new innovation like watsonx. Consulting, we said, for the full year appropriately in light of the market and still gaining share would be mid single digits. That will deliver about a point and a half of growth to IBM. Why did we feel good about that? One, solid book-to-bill, winning in key focus areas, strategic partnerships, gen AI scale overall. But like first quarter, we're going to continue to monitor that backlog realization to see how that plays out. But between software and consulting, over three points in software -- or about a point and a half, now you get the infrastructure. We started out well above what we expected here in the first quarter. Mainframe, eighth quarter in, grew 5%. Our distributed infrastructure, power, and storage, both grew double digits as we're capitalizing on distributed infrastructure and demand requirements for gen AI. Full year, that's a little bit better than what we thought 90 days ago off our first start. So, we expect about a little bit less than a half a point impact to IBM. If we're on top of that, we executed the closure of The Weather Company, that would be about a half a point. So, that's kind of how we build up our full year overall. So, AI book of business, I think you nailed it in your question. It's -- one, on a consulting perspective, it's our signings book of business overall. And on our software, it's our subscription, our SaaS, and perpetual licenses. Again, as you know, we offer clients flexibility on how they want to purchase that overall. And consulting backlog, yes, 5% overall. I would tell you, let's put it in perspective. It's probably mid to high single digits. But we've got, give or take, about a $30 billion book of business on backlog with consulting. So, coming from where we started less than nine months ago, I think that's a very good ramp. And let's put it in perspective. When we drove the hybrid cloud platform-centric play with consulting, which has done extremely well, over the first four quarters, we did a billion book of business. Right now, through less than three quarters, we're very damn close to that billion-dollar book of business, so -- Olympia McNerney -- Global Head, Investor Relations Great. Operator, let's take the next question. Operator Our next question comes from Ben Reitzes with Melius Research. Please state your question. Ben Reitzes -- Melius Research -- Analyst Yeah, hey guys, thanks. I wanted to ask about Red Hat. You accelerated it to 9% in the quarter from 7%. What is your confidence level you get to the midteens, which kind of equals your bookings growth? So -- and then, on Red Hat, the follow-up would be how much can HashiCorp augment that growth rate? And what do you -- can you clarify the synergies a little bit more between Red Hat and Hashi? And, you know, was Hashi needed to help grow Red Hat, or is it a bonus? How do you see that? Thanks very much. Arvind Krishna -- Chairman and Chief Executive Officer Ben, let me take the first part of those questions. We are very, very pleased with Red Hat. If I look at Red Hat now, we have had midteen or better bookings growth for the last three quarters, third quarter, fourth quarter, and first quarter. That, combined with the growth we are seeing in OpenShift, as well as in both Ansible and RHEL, OpenShift growing almost 40% gives us a lot of confidence. So bookings growth plus OpenShift plus what we're seeing in the revenue now at 9% tells us that we should see that Red Hat growth continue or accelerate through the year. Two, let me just address a macro point. Hashi is a nice ad for the Red Hat portfolio, but it's not inside Red Hat. Let's just be clear. So, when we talk about Red Hat growth numbers of nine and accelerating, that is Red Hat as is. Hashi will be measured in software, but in IBM software, not in Red Hat. Where the synergy comes is we believe there will be added demand because of a combined portfolio is more interesting. We think even more clients will talk to us. That is how Hashi will help Red Hat. It's not that the Hashi revenue counts at all for the numbers we just mentioned. So, we kind of want to be clear on that. Hashi to us is an accelerant for IBM strategy and for software strategy. And Hashi helps in being offensive in terms of giving us an overall better portfolio so even more clients want to do business with us in the environments they're going to. That's kind of how it's pitched. And people know Hashi really well for their infrastructure management, but the security pieces of Hashi are also very, very interesting and really important as people navigate these very complex environments with all the worries about people losing secrets and keys. And that's resulting in ransomware or hacking attacks. That's kind of how I would paint the picture on that side. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Yeah, I would just add one other point, Ben, as you and I and many of the investors have talked about since first quarter earnings, you know, we've kind of bifurcated this business when we saw the slowdown happened in second half last year between our subscription-based business within Red Hat versus our consumption-based services and offerings, the former being about 80% of our portfolio, the latter being about 20%. If you look at first quarter, as Arvind indicated, we're very pleased. Coming off of a two-plus point acceleration positions us extremely well, even more confident in that double digit for the year. But the reason why we're even more confident is that 80% of that portfolio, that subscription business, we accelerated 3 points quarter to quarter in revenue, and we were above double digits. On the consumption base, we finally saw stabilization. We didn't see acceleration. We saw stabilization. But remember, we start wrapping on that in the second half, so that provides us a tailwind on the second half. But our subscription business today, the 80%, 3 points acceleration, double digit in the first quarter. All three major lines, broad-based, double-digit bookings, Red Hat, OpenShift, over 40% booking strength, $1.3 billion ARR book of business, grown 25-plus percent, Ansible taking share, we feel even more confident, as I said. Olympia McNerney -- Global Head, Investor Relations Operator, next question, please. Operator Our next question comes from Erik Woodring with Morgan Stanley. Please state your question. Erik Woodring -- Morgan Stanley -- Analyst Great, thank you very much for taking my question. Arvind, maybe this one's for you. If we include the software AG assets and now HashiCorp, -- I think you spent about $16 billion on acquisitions since your 2021 analyst day. You know, back then, you talked about kind of having 20 billion to 25 billion of M&A firepower you could leverage through 2024. Just curious as we sit here today, you know, your willingness or desire to go after more M&A for the rest of this year? Would you be willing to go kind of above and beyond that total that you had laid out almost three years ago? And just as we think about the potential targets in the future, you know, where do you believe you have gaps that you can still fill within your portfolio? Thank you. Arvind Krishna -- Chairman and Chief Executive Officer Erik, let me just maybe address some micro points in it, and I'll let Jim talk to some of the numbers here. We are going to remain incredibly disciplined on our M&A strategy. We kind of said it, but I just want to repeat. We got to find things that meet our strategy. You've got to have some synergy opportunities at IBM, and it has to be financially accretive within the second year. So, if we find things that meet that, and we are committed, I'll say, to both our dividend and our investment grade ratings, then that is kind of the picture we go in. Now, within that, we believe we have some level of flexibility, and that is what we will operate in. So, that gives you a sense there. By the way, one year [Inaudible] two, yet to come. We've got Software AG that we hope to close midyear and HashiCorp which will come near the end of the year. We also have to look at what is our overall internal dynamics of making sure that we can succeed on these businesses as we proceed down the path. We need to build consulting practices. We need to have synergy plays and other parts of the portfolio, we have to enable our sales teams globally. As we say, a big part of our synergy is getting the amplification from our global footprint that is there to clients all around the world. Jim? Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Yeah, Arvind, just building on your point, we are very confident in the capital structure of this company. We are committed to maintain a very solid investment-grade balance sheet. We are focused on debt leverage, obviously, but our primary capital allocation is to invest in our business, both organically, inorganically, and to maintain the attractive return to shareholder program with our dividend policy. So, with all that said, just to reaffirm what Arvin indicated, we will remain in the market, prudently evaluating complementary tuck-in opportunities that fit our M&A strategy. And we got the capability of doing that. Olympia McNerney -- Global Head, Investor Relations Operator, next question, please. Operator Our next question comes from Brent Thill with Jefferies. Please state your question. Brent Thill -- Jefferies -- Analyst Arvind, on the software business, I mean, even ranging somewhere between 3% to 8%, 9% growth, you know, many have asked, it seems like the overall market's growing faster. What's it going to take to unlock this incredible portfolio you've built to effectively maybe monetize at the rate the industry's growing out? Is there something that's causing friction to unlock that true potential of the software business? Are we just being too focused on the short term? What do you think unlocks that value in getting you to your closer TAM of the growth? Arvind Krishna -- Chairman and Chief Executive Officer As you can imagine, we are very, very focused on that question. If I just want to lay out a four-year trajectory, if you'd indulge me for just a minute, we began with a software portfolio that was, let's call it flat, would be a kind we are putting into about five years ago. We've gone from flat to, as we said, some volatility. But we are now seeing that we can be north of 6% for this year, whether you want to call that 6.5% or 7%, and we are very confident in that. And we both do organic innovation and as we do M&A, we will find that that number will keep improving year over year. And I'm pointing to a very consistent four-year trajectory of having achieved that. By the way, within that we do find there are a couple of slow growing pieces, but they're incredibly important to our overall profile, both for in-compensate with clients, and for the cash flow that we produce, we would never expect our mainframe software, the TPS piece, to be growing in the high single digits or in double digits. So, as that mix also changes over time, then we find that we're going to get closer and closer, and we do want to, over time, get software to grow above where we are right now. So, right now we're at the upper end of the mid single-digit model. I think you can conclude what would be the next step we will go at, and then we'll go from there. Olympia McNerney -- Global Head, Investor Relations Great. Operator next question. Operator Thank you. Our next question comes from Brian Essex with JPMorgan. Please state your question. Brian Essex -- JPMorgan Chase and Company -- Analyst Hi. Good afternoon, and thank you for taking the question. Another Red Hat one. Maybe, Arvind, if you could maybe give us a little bit of sense of, you know, what's going on in the pipeline there and whether or not you're seeing a substantial, you know, benefit in the Red Hat pipeline from the VMware acquisition, both on the consulting side as well as the software side. Are you seeing a lot of migration? And how much of an opportunity you think might be there longer term to capture more share of that market? Arvind Krishna -- Chairman and Chief Executive Officer Hi, Brian, great question. So, if we talk to some of the Red Hat dynamics, it's not so much directly related to VMware per se, but clients are all beginning to say -- they're asking the question, which is the platform they want to bet on for the next 10 to 20 years, on which they will write their applications, deploy them both in their own data centers, and on public clouds. We find an incredible amount of interest in that question. And as we have built out the Red Hat portfolio, not just for containers, because many people know OpenShift as a great container platform, but also for virtualization. With both container-native virtualization and with the KVM hypervisor, we're finding a lot of interest around those topics. Then as we layer in, by the end of the year, the HashiCorp advantages of managing the infrastructure across all these environments, we do believe that that will be an accelerant to the Red Hat portfolio. So, first, RHEL has got its place as the primary place that people want to deploy; OpenShift, as a platform for both containers and virtualization; Ansible and HashiCorp are helping increase automation and reduce the complexity, we think all of this plays in. And, Brian, I think the best number is the midteen bookings growth on the subscription side of the business. That speaks to the demand in terms of not only is there demand, but we are realizing that demand in the book of business that we are getting clients to commit to on Red Hat. Olympia McNerney -- Global Head, Investor Relations Great. Operator, let's take one last question. Operator Our next question comes from Matt Swanson with RBC Capital Markets. Please state your question. Matt Swanson -- RBC Capital Markets -- Analyst Yeah, thank you so much for taking our question. I think I might try a qualitative version of an earlier question around gen AI. And I think just we see so much of the news feed being around kind of the hype cycle and obviously growing a billion-dollar book of business shows you're monetizing it. Can you just talk about maybe the pain points that enterprises are looking to address when they first come to you, or when those consulting relationships start? Like how much of a plan is in place versus how much they're looking for you to, you know, kind of hold their hand in terms of this gen AI journey? Arvind Krishna -- Chairman and Chief Executive Officer I think Matt, that's a great question. So, let me maybe take that, and I'll address it from both the consulting side and the software side. If we were 12 months ago, I would say that there was a lot of excitement and there was a lot of experimentation that was starting. And people were not thinking through what does this mean for my overall ROI, what are the economics running gen AI, how do I get the people changes done so that the ROI can actually be realized. What is happening in all of my conversations this year in the first quarter of 2024 is a lot of people have woken up that those issues need to be addressed as well. So, when they talk to our consulting team, they are spending energy on, but can you help my people also do the transformation it takes? What is the change process through which you can recognize those things? They, then go to immediately asking. In these models, how expensive is it to run them? And they begin to do the math, "Wait, if I run this model just for this one business process, the infrastructure cost alone could be $300 million a year. That doesn't close the ROI. Can I do it in a much more cost effective way," but an equally good answer. And that is where you begin to see some of the models that IBM has produced, our Granite series, play very strongly into helping them recognize their ROI by reducing the economics. And then lastly, and this is advice that I give to the C-suite usually and it resonates, is don't pick lots of little experiments. Try to pick a few use cases which can scale. By scale, meaning that they actually do impact a large fraction of the employees or their client customers, and they begin to have a large impact in how business is done by either improving revenue or by making the enterprise significantly more productive. That kind of a conversation shift from simply, oh, this is a neat new tool, let me try it out to see what I can do, not what I should do, but what I can do. And I think that is a big change in terms of helping the organization scale. Let me now wrap up the call. In the first quarter of 2024, we have executed on our strategy to deliver revenue growth and cash generation, allowing us to invest organically and through strategic acquisitions like HashiCorp. As always, we need to execute to capture the opportunity in front of us. I look forward to sharing our progress with you as we move through the rest of the year. Olympia McNerney -- Global Head, Investor Relations Thank you, Arvind. Operator, let me turn it back to you to close out the call. Operator Thank you. Thank you all for participating on today's call. The conference has now ended. Answer:

IBM's first quarter 2024 earnings call

Operator Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Olympia McNerney, IBM's global head of investor relations. Olympia, you may begin. Olympia McNerney -- Global Head, Investor Relations Thank you. I'd like to welcome you to IBM's first quarter 2024 earnings presentation. I'm Olympia McNerney, and I'm here today with Arvind Krishna, IBM's chairman and chief executive officer; and Jim Kavanaugh, IBM's senior vice president and chief financial officer. We'll post today's prepared remarks on the IBM investor website within a couple hours, and a replay will be available by this time tomorrow. To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue and signings growth are at constant currency. We provided reconciliation charts for these and other non-GAP financial measures at the end of the presentation, which is posted to our investor website. Finally, some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company's SEC filings. So, with that, I'll turn the call over to Arvind. Arvind Krishna -- Chairman and Chief Executive Officer Thank you for joining us. In the first quarter, we had solid performance across revenue and cash flow. These results are further proof of the quality of our portfolio and our hybrid cloud and AI strategy. We had good performance in software, at the high end of our model; continued strength in infrastructure, above our model; while consulting was below model. On a relative basis, consulting outperformed the market. Our cash flow generation is the strongest first quarter level we have reported in many years. This performance speaks to the strength of our diversified business model. Before we get into more detail on the quarter, let me address the announcement of our agreement to acquire HashiCorp, a company we have partnered with for a long time and believe is a tremendous strategic fit with IBM. Enterprise clients are wrestling with an unprecedented expansion in infrastructure applications across public and private clouds, as well as on-prem environments, making this the ideal time to pursue this acquisition. As generative AI deployment accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic, and complex infrastructure strategies. HashiCorp has a proven track record of helping clients manage the complexity of today's infrastructure by automating, orchestrating, and securing hybrid and multi-cloud environments. HashiCorp is a great strategic addition to our portfolio, extending Red Hat's hybrid cloud capabilities to provide end-to-end automated infrastructure and security lifecycle management. HashiCorp's technology is foundational to enabling the transition to hybrid and multi-cloud. And Terraform is the industry standard for infrastructure automation for these environments. With security top of mind for every enterprise, Vault is a powerful secrets management offering to automate identity security across applications. The combination will also bolster our leading IT automation platform to address the sprawling complexity of AI-driven application and infrastructure growth. HashiCorp's products have wide-scale adoption in the developer community, highlighting the pervasive nature of their technology used by over 85% of the Fortune 500 and downloaded over half a billion times. The acquisition of HashiCorp builds on IBM's commitment to industry collaboration, the developer community, and open-source hybrid cloud and AI innovation. Today's acquisition is consistent with our M&A strategy. We have taken a disciplined approach to M&A, and HashiCorp aligns well across all our key criteria to continue to focus and strengthen our portfolio on hybrid cloud and AI, deliver synergies with the rest of IBM, and be near-term accretive to free cash flow. I will now turn it to Jim to discuss the financial implications. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Thank you, Arvind. Let me start with the details of the transaction. We have agreed to acquire HashiCorp for $6.4 billion in enterprise value to be funded by cash on hand. The transaction was approved by HashiCorp's board of directors. Closing is anticipated by the end of 2024, subject to approval by HashiCorp's shareholders, regulatory approvals, and other customary closing conditions. We have been executing a disciplined capital allocation strategy, and the acquisition of HashiCorp meets all of our criteria, including strategic fit as Arvind just walked through, synergies across IBM, and financial accretion. Let me start by addressing synergies. We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp. Product synergies span across multiple strategic growth areas for IBM, including Red Hat, watsonx, data security, IT automation, and consulting. For example, the powerful combination of Red Hat's Ansible Automation Platform's configuration management and Terraform's automation will simplify provisioning and configuration of applications across hybrid cloud environments. We are well-positioned to drive growth for HashiCorp by leveraging IBM's enterprise incumbency and global reach. With 70% of the revenue today coming from the U.S., the opportunity to scale HashiCorp across IBM's operations in 175 countries is significant. We also believe we can accelerate HashiCorp's adoption with IBM clients. To put this in perspective, only about 20% of the Forbes Global 2000 are HashiCorp customers. And just a quarter of HashiCorp customers result in more than 100,000 annual recurring revenue, underscoring the opportunity to better monetize and upsell their products. Bringing it all together, the acquisition allows us to deliver a more comprehensive hybrid cloud offering to enterprise clients, enhancing IBM's ability to capture global cloud opportunity. This will drive a higher growth profile over time. Finally, we expect to realize operating efficiencies and expect the transaction to be accretive to adjusted EBITDA within the first full year post-close and to free cash flow in year two. Significant near-term cost synergies underpin the financial profile of the transaction, while product synergies represent further upside. We are very comfortable with our strong balance sheet, liquidity profile, and solid investment grade rating, and remain committed to our dividend policy. I'll now turn it back to Arvind. Arvind Krishna -- Chairman and Chief Executive Officer Now, turning back to the quarter, let me start with a few comments on the macroeconomic environment. We expect the global economy to behave similarly to last year, albeit with some uncertainty due to persistently high interest rates. There are reasons to believe technology will be even more important in 2024 as clients focus on productivity improvements and customer experience. AI-driven productivity in particular continues to be a top priority for businesses for both cost reductions and new revenue opportunities. I will now provide some details on the execution of our strategy around hybrid cloud and AI. Enterprise AI continues to gain traction. This year, we anticipate more clients moving from experimenting to deploying AI at scale to unlock productivity. We are pleased with the solid progress of our AI offerings. Each quarter, we are winning more clients, expanding partnerships, and introducing new innovations. Inception to date, our book of business related to watsonx and generative AI is greater than $1 billion with sequential quarter over quarter growth. Similar to last quarter, this remains weighted toward consulting. We believe our comprehensive AI strategy is well-positioned to help clients scale AI. We developed our watsonx platform for clients to build their AI solutions, spanning from foundation model training, to data preparation and governance. This includes both IBM Granite models and third-party models, giving our clients variety, as well as the efficiency and focus on enterprise domains that IBM brings. We have leveraged watsonx to build AI assistance through our software portfolio. Our consultants are helping clients navigate the AI landscape. And finally, we are seeing our infrastructure segment play a larger role as clients leverage their hardware investments in their AI strategies. Let me touch on these infrastructure dynamics briefly. As AI becomes widely adopted, IBM Z is uniquely advantaged. We believe a lot of AI inferencing will happen where the data is for security, efficiency, and latency reasons. Our full stack focus from on-chip AI processing, to AI accelerator cards, to watsonx platform support allows models to be built and trained on any platform and easily deployed on IBM Z. The Telum chip is a unique differentiator, enabling real-time AI inferencing. Generative AI is also driving lift for our storage offerings, where industry-leading performance and scalability is utilized for data curation, model building, and fine-tuning. For enterprises to deploy AI at scale, AI is not a one-size-fits-all proposition. It requires tuned, domain-specific models, trained with quality data to maximize its impact. Clients value the flexibility of our approach. They appreciate having the ability to leverage a combination of AI models, whether they are IBMs, their own models, open-source models, such as Llama from Meta and Mixtral from Mistral. And they can deploy these AI models across multiple environments. The flexibility we offer is resonating as there are use cases for both large and more efficient models. We are committed to an open innovation ecosystem around AI to help our clients maximize flexibility and leverage skills. Let me spend a minute on our progress in this area. We see early parallels to Linux in making open-source AI models performing for enterprise use. We believe that IBM with Red Hat can be a key driver of open-source AI. As you know, we have done a lot of work with AI models and recently released a family of state-of-the-art open-source code models from our Granite series. Red Hat and IBM also recently launched Instruct Lab to evolve and improve AI models through incremental community contributions, much like open-source software. This open strategy is resonating around the world. We recently announced a collaboration with the Spanish government to leverage IBM's investments across the entire AI stack and open source to build the world's leading suite of foundation models proficient in the Spanish language. Enterprise use cases addressing code modernization, customer service, and digital labor remain top of mind for our clients. This quarter, we signed a multi-year contract with Providence Health to reimagine talent and HR workflows with AI from IBM and partners. We're also providing data-driven insights and enabling Spanish language narration for this year's Masters Golf Tournament. Our partner ecosystem remains essential to both AI and hybrid cloud growth. This quarter, we've progressed strategic partnerships with a number of industry leaders, consulting joint forces with NVIDIA to accelerate clients' AI journeys. ServiceNow will embed watsonx AI capabilities into the ServiceNow platform to accelerate enterprise digital transformation. We also expanded our relationship with Adobe around OpenShift and watsonx as it relates to the Adobe Experience platform. We continue to invest in emerging technology as well, bringing new innovations to the market. Since we put the world's first quantum system on the cloud in 2016, we have deployed over 80 quantum systems, and our users have run over 3 trillion programs to date. We just installed the Quantum System One at Rensselaer Polytechnic Institute. This is the first IBM quantum system on a college campus anywhere in the world. This installation will advance research in critical areas, such as energy storage, material science, and financial modeling. As always, focusing our portfolio remains a key priority. We close the sale of The Weather Company in the first quarter and expect to close the announced acquisition of stream sets and web methods from Software AG by mid-year. Overall, we had a positive start to the year, which gives us confidence in our next quarter and full your expectations. Jim will now take you through the details of the quarter. Jim, over to you. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Thanks, Arvind. In the first quarter, we delivered $14.5 billion in revenue, $3 billion of adjusted EBITDA, $1.7 billion of operating pre-tax income, and $1.68 operating earnings per share. And we generated free cash flow of $1.9 billion, up approximately $600 million year over year. Our revenue for the quarter was up 3% of constant currency. We saw an impact to our top-line performance from the closing of The Weather Company earlier than expected in the quarter. Software grew by 6%, with growth across hybrid platform and solutions and transaction processing, and continued strength in our recurring revenue base. Consulting was up 2%, reflecting organic growth. We continue to have solid signings performance and a trailing 12-month book-to-bill of over 1.15. Infrastructure had strong performance, delivering growth across all of our hardware offerings. Looking at our profit metrics, we expanded operating gross margin by 100 basis points and operating pre-tax margin by 130 basis points over last year, inclusive of about 100 basis-point currency headwind to pre-tax margin. At the end of January, we closed on the divestiture of The Weather Company, generating a pre-tax gain of $241 million in the quarter. Mitigating that benefit, we took charges of $374 million to address workforce rebalancing. Operating pre-tax margin was up 50 basis points, excluding the year-over-year impacts of workforce rebalancing and divestiture dynamics. We are pleased with this performance, in line with our guidance of roughly 50 basis points of operating pre-tax margin improvement in 2024. Margin expansion was driven by our operating leverage, product mix, and ongoing productivity initiatives. This allowed for continued investments to drive innovation, which you can see in our higher R&D expense. The timing of discrete tax items this quarter resulted in an operating tax rate of about 6%. We are still expecting a full year operating tax rate consistent with last year. Overall, the combination of our revenue and operating margin performance resulted in 7% growth in our adjusted EBITDA. This contributed to our free cash flow performance. For the quarter, we generated $1.9 billion of free cash flow, up $600 million year over year. This growth reflects the performance of our underlying business with adjusted EBITDA up $200 million year over year and about $400 million from timing of balance sheet dynamics and capex. Over the last 12 months, we generated free cash flow of $11.8 billion. This puts us on track to deliver about $12 billion of free cash flow for the year, with the growth largely driven by adjusted EBITDA. Since our acquisition of Red Hat, excluding 2021 when we spun off Kyndryl, our operating net income to free cash flow realization averaged 120%. Two factors drive this. One is stock-based compensation, which today represents 15 points of realization. And two, given the shift in our portfolio to a growing software business, deferred income also contributes to our realization. In terms of cash uses, we return $1.5 billion to shareholders in the form of dividends. From a balance sheet perspective, we have a very strong liquidity position, with cash of $19.3 billion, up from $13.5 billion at year end 2023. Our debt balance at the end of the first quarter was $59.5 billion, including $9.9 billion from our financing business. Turning to the segments, software revenue grew 6%, with good performance across both hybrid platform and solutions and transaction processing. As mentioned in January, the software revenue growth drivers for the year include Red Hat growth, acquisitions, strong recurring revenue, and transaction processing. And this is just how the first quarter played out. Hybrid platform and solutions revenue was up 7%. Let me spend a minute on the various elements. Red Hat revenue grew 9%, reflecting solid performance across the three key solutions, RHEL, OpenShift, and Ansible. Annual bookings growth was again in the midteens, with OpenShift up over 40% this quarter, and RHEL and Ansible each up double digits. Beyond Red Hat, recent acquisitions contributed to the growth profile of hybrid platform and solutions, as did new innovation areas, including watsonx. The combination of Apptio acquired mid last year and our IT automation portfolio has delivered strong results, unlocking the full benefits of a fin ops solution for technology investments across hybrid cloud environments. In fact, just this quarter, we partnered with Microsoft to bring Apptio to Azure and will co-sell to our joint customers. And Microsoft has agreed to adopt Apptio's capabilities in parts of their organization. Our revenue performance continues to reflect growth in our high value recurring revenue base. Our ARR, after removing The Weather Company and security services, is now $13.9 billion, up over 8% since last year. Transaction processing, with its strong base of recurring revenue, delivered revenue growth of 4%. Clients continue to value this portfolio of mission-critical software, supporting growing workloads on our hardware platforms. And there's an increasing interest in generative AI application modernization capabilities, like watsonx Code Assistant for Z. Software segment profit was up 80 basis points, while absorbing both key investments in innovation and about a point of currency impact in the quarter. We continue to deliver operating leverage, driven by our revenue performance this quarter. Our consulting revenue was up 2%. We continue to see clients prioritizing large data and technology transformation projects focused on driving productivity with AI and analytics. These results reflect the organic performance of our business. Solid demand for our offerings led to signings growth of 4%, our highest absolute first quarter signings in recent history, and our trailing 12-month book to bill ratio remains over 1.15. Our overall backlog remains healthy, up 7% year over year, and backlog erosion levels remained stable. At the same time, we saw both a lengthening of backlog duration driven by large-scale digital transformations and a reduced level of revenue realization in the quarter as clients tighten discretionary spending. Contributing to growth across the business this quarter, our strategic partnerships continue to make up over 40% of our consulting revenue with both AWS and Azure practices growing double digits. Additionally, our Red Hat practice grew revenue double digits. Expanding upon our partnerships, we are leveraging Microsoft Copilot to drive productivity for our clients. Just as we quickly ramped a meaningful book of business around Red Hat to address the hybrid cloud opportunity, we are ahead of pace at this stage with our generative AI book of business. Turning to our lines of business, business transformation revenue grew 3%, led by supply chain and finance transformations. Customer experience transformations also contributed to growth. Technology consulting revenue was also up 3%, with double-digit growth in cloud monetization projects. And both strategic partnerships and Red Hat engagements delivered double-digit growth. Application operations revenue declined, reflecting weakness in on-prem custom application management projects, partially offset by strength in cloud-based application management offerings. Moving to consulting profit, we delivered over 8% of segment profit margin, which is flat year to year. Our segment profit margin was impacted by about a point of currency, offsetting improvements in pricing and productivity actions we have taken. Moving to infrastructure, revenue grew, reflecting growth in hybrid infrastructure of 6% and declines in infrastructure support of 7%. Within hybrid infrastructure, growth was broad-based with strong demand from our hardware offerings across IBM Z, power, and storage. In IBM Z, revenue was up 5% in the eighth quarter of z16 product availability. Now two years in, this product cycle continues to resonate with clients and surpass z15 revenue performance. IBM Z is uniquely positioned for AI, with the first processor design with on-chip acceleration for real-time AI inferencing. In fact, we're working with over 100 clients on the application of AI on z16. Use cases range from fraud detection, to anti-money laundering, to anomaly detection. This remains an enduring platform, driving not just hardware adoption, but also related software, storage, and services. Distributed infrastructure delivered 7% revenue growth, which strengthened both power and storage. Power performance was fueled by demand for data-intensive workloads. Storage delivered strong double-digit revenue growth, including demand for high-end storage tied to the z16 cycle. And clients are also looking to our storage offerings for data curation, model building, and fine-tuning in support of generative AI. Looking at infrastructure profit, we deliver both gross profit and segment profit margin expansion. Segment profit margin expanded 20 basis points in the quarter, reflecting benefits from productivity while absorbing about a point of impact from currency. Now, let me bring it back to the IBM level to wrap up. More than two years into our midterm model, we are a more focused business that has delivered sustained revenue and free cash flow growth. Over this time, we've continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem, and drive productivity across our business. Our first quarter performance is another proof point of this progress with constant currency revenue growth, operating gross margin, and operating pre-tax margin expansion, and the strongest first quarter free cash flow in many years. Looking to the full year of 2024, we are holding our view on our two primary metrics, revenue and free cash flow. We see full year constant currency revenue growth in line with our mid single-digit model, still prudently at the low end. And for free cash flow, we expect to generate about $12 billion, driven primarily by growth and adjusted EBITDA. On the segments, in software, we had a solid start to the year and continue to expect growth slightly above the high end of our mid single-digit model. In consulting, we continue to see strong demand for digital transformations, though, as I said, we are seeing some pressure on smaller, more discretionary projects. We now see mid single-digit revenue growth in consulting with acceleration. throughout the year. Given our ongoing productivity initiatives and investment in innovation, we expect to see about a point a segment profit margin expansion in both of these segments. And in infrastructure, given product cycle dynamics, we expect revenue to decline, driving about a half a point impact to our overall growth. Given IBM Z cycle dynamics, we expect segment profit margin to be lower year over year. With these segment dynamics, we continue to expect IBM's operating pre-tax margin to expand by about a half a point year to year, consistent with our view 90 days ago. And we are maintaining our view of operating tax for the year to be consistent with last year in the mid teens range. We took a workforce rebalancing charge this quarter. And as I mentioned 90 days ago, we continue to see the overall amount this year consistent with last year. We expect this to pay back by the end of the year. On currency, given the strengthening of the dollar, we now expect a 150 to 200 basis-point impact to revenue growth for the year, which is about one point worse than 90 days ago. For the second quarter, I expect our constant currency revenue growth rate to be consistent with the full year. Our tax rate is expected to be in the high teens. And for profit, we expect the first half skew of net income will remain a couple of points ahead of the prior year. In closing, we are pleased with our performance to start the quarter. We are positioned to grow revenue, expand operating profit margin, and grow free cash flow for the year. Arvind and I are now happy to take your questions. Olympia, let's get started. Olympia McNerney -- Global Head, Investor Relations Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I'd ask you to refrain from multi-part questions. Operator, let's please open it up for questions. Questions & Answers: Operator Thank you. At this time, we'll begin the question-and-answer session of the conference. [Operator instructions] Our first question comes from Amit Daryanani with Evercore. Please state your question. Amit Daryanani -- Evercore ISI -- Analyst Thanks for taking my question. Good afternoon, everyone. I guess I was hoping you could talk a bit more on the consulting side of the business because revenues did decelerate rather notably in March quarter. But I think on the other side, your AI-centric backlog at over a billion dollars is doing extremely well. So, I'm hoping you could touch on the near-term side. You know, what are you hearing from your customers? What are they telling you on the duration of this pause? Because I think the expectation of mixing with digital growth would imply this business will recover rather quickly. So, I'd just love to get a sense on what are customers saying in consulting in terms of the duration of the pause. And then, longer term, what does the opportunity look like, given the AI-centric backlog appears a lot more robust versus what I think folks would have expected beyond '24? Thank you. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Thanks, Ahmed. I appreciate the question. Let's take a step back, because I think you're seeing some interesting dynamics in the consulting industry overall. And let's bifurcate it between how you ask the question. Let's look at real demand that's being measured in bookings, and then let's talk about what's happening with the revenue realization. On demand, we continue to see and capitalize on solid demand in key areas around digital transformation, application modernization, and gen AI. Our signings in the quarter, up 4%, were the strongest absolute first quarter signings we've had as far back as I can go. We have a strong book-to-bill, over 1.15 on a trailing 12 months. Our backlog dynamic is in a very strong position, 7% overall, with stable erosion. But our duration has been going up the last two quarters. It's been up a couple months. But let's talk about the underpinnings of what's driving demand because I think that's what's most important around the key growth focus areas. You talked about gen AI. Gen AI for IBM, Arvind indicated, inception to date, over a billion-dollar book of business. Consulting in the first quarter, the book of business on gen AI was 2x all of last year. So, I think we're winning in the marketplace. We're taking share. And by the way, we're well above that ramp we saw with regards to Red Hat. Our strategic partnerships still have great velocity. Book-to-bill, well north of 1.2. Our Red Hat book of business is now $2.8 billion ARR around hybrid cloud. And we're seeing very nice acceleration in gen AI and digital transformation around core workflow use case areas of finance, supply chain, HR, and talent. So, I think in the key focus areas, our demand profile still continues to be good. Now, let's translate that to revenue. Revenue, first of all, in the first quarter, as we indicated, was all organic. We wrapped on our acquisitions. We continue to operate a very disciplined M&A process, and we continue to be opportunistic. But that 2% revenue growth was all organic quarter to quarter. Second, in this marketplace, you look at competition, we're taking share still. So, when you look at it, 90 days ago, we talked about the year. We talked about the year was going to play out accelerating throughout the year. Why? Because, one, we knew we had a strong backlog and that backlog realization showed us that it was going to play out throughout the year with sequential improvement. But second, Easter. Easter, we knew calendar was there, was at the end of March. That does impact a human capital-based business on the number of billing days. So, when you looked at first quarter, that backlog duration extending out a couple months, we also saw, though, less revenue backlog yield. And that really played out if you look at our subsegments and application operations. That's centered around custom AMS applications, which, by the way, many of that, as you know quite well, is volume-based business. And that volume, like I said, backlog is stable overall. We're not losing the business. That is moving out to the right. So, with all that said, what are we focused on? We're focused on capturing new client demand in areas around our key growth areas. Two, we're continuing to focus, and we are gaining share in the marketplace. Three, we're driving that economic multiplier of consulting and technology across our hybrid cloud and AI platform. So, in light of all that, that's why you see the mid single-digit growth. I think that's prudent, just given what every other consulting competitors come out with. By the way, that still drives 1.5 points of growth to IBM for the full year. And as I stated earlier, we see an accelerated growth profile as we move through the year. Olympia McNerney -- Global Head, Investor Relations Operator, next question. Operator The next question comes from Wamsi Mohan with Bank of America. Please state your question. Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst Yes, thank you. Arvind, we'd love to get a little bit more of sort of a macro demand backdrop. I mean, I know Jim mentioned the heightened discretionary spending in some areas. How do you think about the risk of that sort of filtering more broadly as you go through the course of the year, especially given your guidance calls for an accelerating trend here? And if I could quickly, Jim, the synergies relative to HashiCorp on the cost side, is there any way you can dimensionalize that, given that, you know, when you're defining accretion on EBITDA basis? I get that, but can you also help on the net income basis or from a free cash flow, how much it might be dilutive in year one and decretive on year two? Thank you so much. Arvind Krishna -- Chairman and Chief Executive Officer Thanks, Wamsi. Let me address your part about the demand profile globally. Look, if I look at where we are right now and where we project for the rest of the year, demand is actually quite strong. I would put it as very similar to 2023. This is backed up by IMF GDP estimates, which are now north of 3% for the global business. If I look at it by geography, Japan remains very strong. I think that they are taking this opportunity to refresh the technology across their enterprise and government base. We look at South Asia, extremely strong, even the Middle East, UAE, Saudi, very strong. Europe has remained consistent to last year, North and South America. So, on a geography basis, we're seeing very, very strong demand. Now, interest rates are higher than people were expecting. I think we should acknowledge that. That means you get two effects going on. One, there is even stronger demand for software and infrastructure because people believe technology helps you in those environments and helps in an environment of increased labor costs and increased supply chain costs. Then, when you look at the discretionary side, Jim answered this in the previous question, we are seeing a little bit. Not across the board, not in all of the offerings in consulting, but where there is a little bit of discretionary labor, that is where we sense that pressure. What we are going to do is pivot into the areas around helping people become more productive, take more costs out, digital transformation, work with our partners where there is very strong demand in the market. And as you pivot there, we believe that our growth rate in consulting will continue to accelerate. So, I hope, Wamsi, that gave you a flavor on the demand vectors we have, both in software and infrastructure, and in consulting and on a geography basis. Jim, over to you for part two. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer OK. Thank you. Thanks, Wamsi, for the question. As Arvind indicated in the prepared remarks, we couldn't be more excited about the powerful combination of HashiCorp with IBM and Red Hat together. We talked about in the prepared remarks. We've been very disciplined in our set of criteria around M&A. And this fits strategically. It has tremendous synergistic value to our hybrid cloud AI portfolio, and it has an attractive financial return overall. And Hashi meets all three. One, it's a higher revenue growth profile company, so it accelerates IBM's revenue growth over time. Two, to your question, adjusted EBITDA, accretive in the first twelve months. And three, levered free cash flow accretive by the end of year two. We think there are a potential for meaningful synergies overall. And when we look at it significant near-term operating efficiencies, cost energies and put that in perspective, we see this business profile moving from about a mid single-digit free cash flow margin business to about a 30% to 40% free cash flow margin business in a handful of years, free cash flow accretive by the end of year two. Now, the multiple we paid on that, fully supported by, one, the stand-alone revenue growth, and the cost synergies that come out. All of the IBM revenue synergies around Red Hat, around data security, around watsonx, around consulting and IT automation are all upside potential. So, let's talk and conclude on the cost synergy. Cost synergies are where you would fully expect. IBM runs a global operations in 175 countries. We run a very disciplined, G&A efficient structure. We see significant G&A operating efficiencies that we're going to go capitalize on. Second, running the playbook on how we expand it globally, our go-to-market model that we did with Red Hat. And that has both global incumbency, global scale, global breadth, and ecosystem leverage overall. And when you look at that, those significant synergies allow us to invest in product, R&D, innovation, and capability that's built into our case and also deliver our financial returns. So, we feel pretty good about it. Olympia McNerney -- Global Head, Investor Relations Operator, let's go to the next question. Operator Our next question comes from Toni Sacconaghi with Bernstein. Please state your question. Toni Sacconaghi -- AllianceBernstein -- Analyst Yes, thank you and good afternoon. Jim, just to clarify, you've taken down your consulting outlook for the year from six to eight to five. I think that's about 60 basis points to company growth. Is there anything offsetting that, or is that just kind of rounding error in the low single-digit guidance? And then, my question is, maybe you could just elaborate a little bit more on the AI book of business, maybe just help clarify exactly how you define that. I think it's both revenue recognized and your bookings and maybe partner bookings. Maybe you could just help define that. And last quarter, you said it doubled sequentially. This quarter, you just commented that it grew sequentially. Maybe you could add a little color with that double digits or, you know, 20% or 30% or 40%. And at least when I do the math, it sounds like it's less than 5% of your consulting backlog, you know, AI backlog. Could you help dimension that as well? Thank you. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer OK, Toni. Many questions here. Let me see if I can get through them quick. You look at full year. Full year, as Arvind indicated, we're maintaining our guidance on our model, mid single digit. I think prudently just coming out of our first quarter, we've got a lot of work to do in the next three quarters, but I think prudently at the low end of that model. And by the way, that was very consistent with what we said 90 days ago. Now, let's unpack that. When you take a look at full year, first of all, we are dealing with a stronger U.S. dollar. So we've given you a supplemental chart. Now, we've lost basically about a point more of headwind on currency. But let's talk about the underlying fundamentals of our business across our segment because I think that's at the heart of your question. When you take a look at our growth at mid single digit, one, we said software would grow slightly above the high end of our mid single-digit model. We are very pleased with our software performance in the first quarter. We've accelerated growth from fourth quarter to 6% overall. We have a very strong recurring revenue base. We accelerated Red Hat to a very strong 9% with our third consecutive quarter of midteen booking growth, which positions our business extremely well for double-digit growth for the full year. And we're getting nice scale leverage on acquisitions. Software for the year will deliver over three points of that IBM mid single digit by itself based on that Red Hat momentum, acquisitions, solid recurring revenue -- TP, by the way, nice start, up 4%, and new innovation like watsonx. Consulting, we said, for the full year appropriately in light of the market and still gaining share would be mid single digits. That will deliver about a point and a half of growth to IBM. Why did we feel good about that? One, solid book-to-bill, winning in key focus areas, strategic partnerships, gen AI scale overall. But like first quarter, we're going to continue to monitor that backlog realization to see how that plays out. But between software and consulting, over three points in software -- or about a point and a half, now you get the infrastructure. We started out well above what we expected here in the first quarter. Mainframe, eighth quarter in, grew 5%. Our distributed infrastructure, power, and storage, both grew double digits as we're capitalizing on distributed infrastructure and demand requirements for gen AI. Full year, that's a little bit better than what we thought 90 days ago off our first start. So, we expect about a little bit less than a half a point impact to IBM. If we're on top of that, we executed the closure of The Weather Company, that would be about a half a point. So, that's kind of how we build up our full year overall. So, AI book of business, I think you nailed it in your question. It's -- one, on a consulting perspective, it's our signings book of business overall. And on our software, it's our subscription, our SaaS, and perpetual licenses. Again, as you know, we offer clients flexibility on how they want to purchase that overall. And consulting backlog, yes, 5% overall. I would tell you, let's put it in perspective. It's probably mid to high single digits. But we've got, give or take, about a $30 billion book of business on backlog with consulting. So, coming from where we started less than nine months ago, I think that's a very good ramp. And let's put it in perspective. When we drove the hybrid cloud platform-centric play with consulting, which has done extremely well, over the first four quarters, we did a billion book of business. Right now, through less than three quarters, we're very damn close to that billion-dollar book of business, so -- Olympia McNerney -- Global Head, Investor Relations Great. Operator, let's take the next question. Operator Our next question comes from Ben Reitzes with Melius Research. Please state your question. Ben Reitzes -- Melius Research -- Analyst Yeah, hey guys, thanks. I wanted to ask about Red Hat. You accelerated it to 9% in the quarter from 7%. What is your confidence level you get to the midteens, which kind of equals your bookings growth? So -- and then, on Red Hat, the follow-up would be how much can HashiCorp augment that growth rate? And what do you -- can you clarify the synergies a little bit more between Red Hat and Hashi? And, you know, was Hashi needed to help grow Red Hat, or is it a bonus? How do you see that? Thanks very much. Arvind Krishna -- Chairman and Chief Executive Officer Ben, let me take the first part of those questions. We are very, very pleased with Red Hat. If I look at Red Hat now, we have had midteen or better bookings growth for the last three quarters, third quarter, fourth quarter, and first quarter. That, combined with the growth we are seeing in OpenShift, as well as in both Ansible and RHEL, OpenShift growing almost 40% gives us a lot of confidence. So bookings growth plus OpenShift plus what we're seeing in the revenue now at 9% tells us that we should see that Red Hat growth continue or accelerate through the year. Two, let me just address a macro point. Hashi is a nice ad for the Red Hat portfolio, but it's not inside Red Hat. Let's just be clear. So, when we talk about Red Hat growth numbers of nine and accelerating, that is Red Hat as is. Hashi will be measured in software, but in IBM software, not in Red Hat. Where the synergy comes is we believe there will be added demand because of a combined portfolio is more interesting. We think even more clients will talk to us. That is how Hashi will help Red Hat. It's not that the Hashi revenue counts at all for the numbers we just mentioned. So, we kind of want to be clear on that. Hashi to us is an accelerant for IBM strategy and for software strategy. And Hashi helps in being offensive in terms of giving us an overall better portfolio so even more clients want to do business with us in the environments they're going to. That's kind of how it's pitched. And people know Hashi really well for their infrastructure management, but the security pieces of Hashi are also very, very interesting and really important as people navigate these very complex environments with all the worries about people losing secrets and keys. And that's resulting in ransomware or hacking attacks. That's kind of how I would paint the picture on that side. Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Yeah, I would just add one other point, Ben, as you and I and many of the investors have talked about since first quarter earnings, you know, we've kind of bifurcated this business when we saw the slowdown happened in second half last year between our subscription-based business within Red Hat versus our consumption-based services and offerings, the former being about 80% of our portfolio, the latter being about 20%. If you look at first quarter, as Arvind indicated, we're very pleased. Coming off of a two-plus point acceleration positions us extremely well, even more confident in that double digit for the year. But the reason why we're even more confident is that 80% of that portfolio, that subscription business, we accelerated 3 points quarter to quarter in revenue, and we were above double digits. On the consumption base, we finally saw stabilization. We didn't see acceleration. We saw stabilization. But remember, we start wrapping on that in the second half, so that provides us a tailwind on the second half. But our subscription business today, the 80%, 3 points acceleration, double digit in the first quarter. All three major lines, broad-based, double-digit bookings, Red Hat, OpenShift, over 40% booking strength, $1.3 billion ARR book of business, grown 25-plus percent, Ansible taking share, we feel even more confident, as I said. Olympia McNerney -- Global Head, Investor Relations Operator, next question, please. Operator Our next question comes from Erik Woodring with Morgan Stanley. Please state your question. Erik Woodring -- Morgan Stanley -- Analyst Great, thank you very much for taking my question. Arvind, maybe this one's for you. If we include the software AG assets and now HashiCorp, -- I think you spent about $16 billion on acquisitions since your 2021 analyst day. You know, back then, you talked about kind of having 20 billion to 25 billion of M&A firepower you could leverage through 2024. Just curious as we sit here today, you know, your willingness or desire to go after more M&A for the rest of this year? Would you be willing to go kind of above and beyond that total that you had laid out almost three years ago? And just as we think about the potential targets in the future, you know, where do you believe you have gaps that you can still fill within your portfolio? Thank you. Arvind Krishna -- Chairman and Chief Executive Officer Erik, let me just maybe address some micro points in it, and I'll let Jim talk to some of the numbers here. We are going to remain incredibly disciplined on our M&A strategy. We kind of said it, but I just want to repeat. We got to find things that meet our strategy. You've got to have some synergy opportunities at IBM, and it has to be financially accretive within the second year. So, if we find things that meet that, and we are committed, I'll say, to both our dividend and our investment grade ratings, then that is kind of the picture we go in. Now, within that, we believe we have some level of flexibility, and that is what we will operate in. So, that gives you a sense there. By the way, one year [Inaudible] two, yet to come. We've got Software AG that we hope to close midyear and HashiCorp which will come near the end of the year. We also have to look at what is our overall internal dynamics of making sure that we can succeed on these businesses as we proceed down the path. We need to build consulting practices. We need to have synergy plays and other parts of the portfolio, we have to enable our sales teams globally. As we say, a big part of our synergy is getting the amplification from our global footprint that is there to clients all around the world. Jim? Jim Kavanaugh -- Senior Vice President and Chief Financial Officer Yeah, Arvind, just building on your point, we are very confident in the capital structure of this company. We are committed to maintain a very solid investment-grade balance sheet. We are focused on debt leverage, obviously, but our primary capital allocation is to invest in our business, both organically, inorganically, and to maintain the attractive return to shareholder program with our dividend policy. So, with all that said, just to reaffirm what Arvin indicated, we will remain in the market, prudently evaluating complementary tuck-in opportunities that fit our M&A strategy. And we got the capability of doing that. Olympia McNerney -- Global Head, Investor Relations Operator, next question, please. Operator Our next question comes from Brent Thill with Jefferies. Please state your question. Brent Thill -- Jefferies -- Analyst Arvind, on the software business, I mean, even ranging somewhere between 3% to 8%, 9% growth, you know, many have asked, it seems like the overall market's growing faster. What's it going to take to unlock this incredible portfolio you've built to effectively maybe monetize at the rate the industry's growing out? Is there something that's causing friction to unlock that true potential of the software business? Are we just being too focused on the short term? What do you think unlocks that value in getting you to your closer TAM of the growth? Arvind Krishna -- Chairman and Chief Executive Officer As you can imagine, we are very, very focused on that question. If I just want to lay out a four-year trajectory, if you'd indulge me for just a minute, we began with a software portfolio that was, let's call it flat, would be a kind we are putting into about five years ago. We've gone from flat to, as we said, some volatility. But we are now seeing that we can be north of 6% for this year, whether you want to call that 6.5% or 7%, and we are very confident in that. And we both do organic innovation and as we do M&A, we will find that that number will keep improving year over year. And I'm pointing to a very consistent four-year trajectory of having achieved that. By the way, within that we do find there are a couple of slow growing pieces, but they're incredibly important to our overall profile, both for in-compensate with clients, and for the cash flow that we produce, we would never expect our mainframe software, the TPS piece, to be growing in the high single digits or in double digits. So, as that mix also changes over time, then we find that we're going to get closer and closer, and we do want to, over time, get software to grow above where we are right now. So, right now we're at the upper end of the mid single-digit model. I think you can conclude what would be the next step we will go at, and then we'll go from there. Olympia McNerney -- Global Head, Investor Relations Great. Operator next question. Operator Thank you. Our next question comes from Brian Essex with JPMorgan. Please state your question. Brian Essex -- JPMorgan Chase and Company -- Analyst Hi. Good afternoon, and thank you for taking the question. Another Red Hat one. Maybe, Arvind, if you could maybe give us a little bit of sense of, you know, what's going on in the pipeline there and whether or not you're seeing a substantial, you know, benefit in the Red Hat pipeline from the VMware acquisition, both on the consulting side as well as the software side. Are you seeing a lot of migration? And how much of an opportunity you think might be there longer term to capture more share of that market? Arvind Krishna -- Chairman and Chief Executive Officer Hi, Brian, great question. So, if we talk to some of the Red Hat dynamics, it's not so much directly related to VMware per se, but clients are all beginning to say -- they're asking the question, which is the platform they want to bet on for the next 10 to 20 years, on which they will write their applications, deploy them both in their own data centers, and on public clouds. We find an incredible amount of interest in that question. And as we have built out the Red Hat portfolio, not just for containers, because many people know OpenShift as a great container platform, but also for virtualization. With both container-native virtualization and with the KVM hypervisor, we're finding a lot of interest around those topics. Then as we layer in, by the end of the year, the HashiCorp advantages of managing the infrastructure across all these environments, we do believe that that will be an accelerant to the Red Hat portfolio. So, first, RHEL has got its place as the primary place that people want to deploy; OpenShift, as a platform for both containers and virtualization; Ansible and HashiCorp are helping increase automation and reduce the complexity, we think all of this plays in. And, Brian, I think the best number is the midteen bookings growth on the subscription side of the business. That speaks to the demand in terms of not only is there demand, but we are realizing that demand in the book of business that we are getting clients to commit to on Red Hat. Olympia McNerney -- Global Head, Investor Relations Great. Operator, let's take one last question. Operator Our next question comes from Matt Swanson with RBC Capital Markets. Please state your question. Matt Swanson -- RBC Capital Markets -- Analyst Yeah, thank you so much for taking our question. I think I might try a qualitative version of an earlier question around gen AI. And I think just we see so much of the news feed being around kind of the hype cycle and obviously growing a billion-dollar book of business shows you're monetizing it. Can you just talk about maybe the pain points that enterprises are looking to address when they first come to you, or when those consulting relationships start? Like how much of a plan is in place versus how much they're looking for you to, you know, kind of hold their hand in terms of this gen AI journey? Arvind Krishna -- Chairman and Chief Executive Officer I think Matt, that's a great question. So, let me maybe take that, and I'll address it from both the consulting side and the software side. If we were 12 months ago, I would say that there was a lot of excitement and there was a lot of experimentation that was starting. And people were not thinking through what does this mean for my overall ROI, what are the economics running gen AI, how do I get the people changes done so that the ROI can actually be realized. What is happening in all of my conversations this year in the first quarter of 2024 is a lot of people have woken up that those issues need to be addressed as well. So, when they talk to our consulting team, they are spending energy on, but can you help my people also do the transformation it takes? What is the change process through which you can recognize those things? They, then go to immediately asking. In these models, how expensive is it to run them? And they begin to do the math, "Wait, if I run this model just for this one business process, the infrastructure cost alone could be $300 million a year. That doesn't close the ROI. Can I do it in a much more cost effective way," but an equally good answer. And that is where you begin to see some of the models that IBM has produced, our Granite series, play very strongly into helping them recognize their ROI by reducing the economics. And then lastly, and this is advice that I give to the C-suite usually and it resonates, is don't pick lots of little experiments. Try to pick a few use cases which can scale. By scale, meaning that they actually do impact a large fraction of the employees or their client customers, and they begin to have a large impact in how business is done by either improving revenue or by making the enterprise significantly more productive. That kind of a conversation shift from simply, oh, this is a neat new tool, let me try it out to see what I can do, not what I should do, but what I can do. And I think that is a big change in terms of helping the organization scale. Let me now wrap up the call. In the first quarter of 2024, we have executed on our strategy to deliver revenue growth and cash generation, allowing us to invest organically and through strategic acquisitions like HashiCorp. As always, we need to execute to capture the opportunity in front of us. I look forward to sharing our progress with you as we move through the rest of the year. Olympia McNerney -- Global Head, Investor Relations Thank you, Arvind. Operator, let me turn it back to you to close out the call. Operator Thank you. Thank you all for participating on today's call. The conference has now ended.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings and welcome to the Prologis first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natasha Law, director of investor relations. Thank you, Natasha. You may begin. Natasha Law -- Director, Investor Relations Thanks, John. Good morning, everyone. Welcome to our first quarter 2024 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations. I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or other SEC filings. Additionally, our first quarter earnings press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP. And in accordance with Reg G, we have provided a reconciliation to those measures. I'd like to welcome Tim Arndt, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, our CEO, and our entire executive team are also with us today. With that, I will hand the call over to Tim. Tim Arndt -- Chief Financial Officer Good morning and thank you for joining our call. We've had a good start to the year in terms of our operating and financial results in the first quarter. We delivered strong rent change, drove occupancy slightly ahead of our forecast, raised nearly $5 billion in capital, including $750 million in strategic capital, and made important headway in our Energy business. That said, as we evaluate the market, persistent inflation and high interest rates have kept more customers focused on controlling costs. The resulting delay in decision making, easily observed through the first quarter's below average net absorption, will translate to lower leasing volume within the year. Accordingly, we've opted to adjust our guidance early, getting ahead of what looks like a period of occupancy below our forecast in the near term and its effect on same store in a number of our higher rent markets. This is punctuated, of course, by a more pronounced period of correction still underway in Southern California. New starts, however, continues to be surprisingly disciplined, adding to the expectation for limited new supply in the back half of '24, but also extending deeper into '25. When considered alongside muted demand, we arrive at a view that the operating environment has only changed modestly in aggregate, and that demand is simply pushing out by a few quarters. The outcome of this may simply mean moving toward a long-term occupancy expectation more swiftly this year, which sets up for a better next year. Turning to our results for the quarter. Core FFO, excluding promotes, was $1.31 per share and including net promote expense was $1.28 per share, essentially in line with our forecast. Occupancy in the portfolio ended the quarter at 97%. For context, the US market declined 310 basis points since its peak in the summer of '22, while our portfolio's occupancy has only declined 80 basis points, resulting in vacancy today for Prologis that is less than half of that in our markets and reflective of our portfolio quality. Net effective rent change was 68% based on commencements and 70% based on new signings. Following this in-place increase and changes in market rents, our net effective lease mark-to-market stands at 50%, representing over $2.2 billion of rent to harvest without any additional market rent growth from here. Rent growth captured just for the single quarter was approximately $110 million on an annualized basis and at our share. Our same-store growth on a cash basis was 5.7% and on a net effective basis was 4.1%. The same-store from rent change alone was strong at approximately 9%, but is impacted by a 130 basis point change in year over year vacancy, as well as 150 basis points from fair value lease adjustments with the Duke portfolio's inclusion in our same-store pool. Additionally, there were approximately 175 basis points of items specific to the quarter, including one-time reconciling items from 2023, as well as unfavorable comps from low expenses last year. We started over $270 million of new developments in the quarter, bringing our portfolio to approximately $7.5 billion at our share, with estimated value creation of over $1.7 billion, a number we feel increasingly confident in with value stabilizing. In our Energy business, we've made meaningful progress on this year's deployment, including the signing of 405 megawatts of long-term storage-related contracts with investment-grade utilities. We also delivered the largest EV fleet charging project in the United States, less than 15 miles from both the ports of LA and Long beach. Finally, we raised $4.1 billion of debt across our balance sheet and funds at a weighted average rate of 4.7% and a term of 10 years. Our debt portfolio has an overall in-place rate of just 3.1%, with more than nine years of average remaining life and liquidity at the end of the quarter of over $5.8 billion. Turning to market conditions. Most broad economic data from unemployment to retail sales to the health of the consumer remain very strong. And while our tour proposal and other proprietary metrics are similarly positive, overall leasing activity and net absorption are running below expectations. Net absorption in the US, for example, was very low this quarter at just 27 million square feet. So while the macro landscape and supply chains continue to generate a need for space, we think it's prudent to expect continued headwinds on overall absorption over the next few quarters. The interest rate environment and its associated volatility have weighed on customer decision making, especially as the 10 year has increased 70 basis points from its level just 90 days ago and expectations for Fed rate cuts have moved from potentially six to now possibly zero. In parallel, sublease and space utilization rates highlight that some customers have available capacity, driven in part by the high rate of absorption through the pandemic. This dynamic of available space intersecting with the desire for cost containment is what leads to lower absorption and is playing out at different rates across submarkets and customers. For example, while slow leasing has persisted so far this year for less capitalized customers and 3PLs, we see a handful of large e-commerce and retail customers further along in this process, such as Amazon, who voiced caution two years ago, but is now active in several global markets and has openly discussed plans to commit to significant amounts of new space. The overall leasing slowdown is most felt in only a handful of markets. Southern California and the Inland Empire being the most acute. In fact, rents in most of our US markets are generally flat, several are up, and it is mainly elongated downtime affecting near-term occupancy and NOI. While Southern California leasing has been challenging, it has not slowed the tremendous uplift we realize every single quarter from rent change on rollover, which was 120% for the market in the first quarter, with the Inland Empire at 156%, nearly the highest in our portfolio. In Europe, rents grew overall during the quarter, which we believe will remain the case over the balance of the year. And of course, LATAM continues to impress with very high occupancy and market rent growth that has led the globe in recent quarters. Overall, global market rents declined slightly over 1% in the quarter, driven mostly by Southern California, and would have been slightly positive if excluded. I'd like to spend a moment on Baltimore, where we own over 18 million square feet and has been a dynamic market of ours for decades. Our employees, customers and properties are all safe following the bridge collapse last month and our customers expect to be able to withstand the disruption with little impact to their businesses. Shifting to capital markets. Valuations increased in all of our geographies, except for China, which saw a very small decline. Over the last year and a half, global values have decreased despite increases in cash flow due to cap rate expansion. As cap rates have stabilized, cash flow growth now has the ability to translate to value growth. Even though modest, the value uplift in the US and Europe are important as strategic capital investors have been looking for values to not only bottom, but actually turn upwards before committing new capital. With Europe a bit ahead of the US in this regard, it is indeed where we've seen stronger fund-raising interest in recent quarters. We also had a successful equity raise in FIBRA Prologis, raising over $500 million for deployment into both assets to be contributed from our balance sheet, as well as pursuits of third-party acquisitions. Transaction volumes and activity have ticked up in recent weeks and pricing has certainly improved. As always, we are actively looking at acquisition opportunities across all of our markets, but our focus remains on the development of our land bank, which provides an opportunity for over $38 billion of build out with a return on incremental capital of approximately 8.5%. In terms of guidance, in light of our views on demand and leasing pace in the coming quarters, we are reducing our average occupancy guidance to range between 95.75% and 96.75% of the 75 basis point adjustment from the midpoint. It's important to understand that approximately two-thirds of this change stems from our higher rent markets, meaning they create a disproportionate impact on same store in 2024. Same-store growth on a net effective basis will range between 5.5% and 6.5%, a reduction of 150 basis points, which accounts for the average occupancy decline, slightly lower rent change for the year, as well as 30 basis points of annualized impact from the one-time items in the first quarter mentioned earlier. Our revised range on a cash basis is now 6.25% to 7.25%. We are maintaining our guidance for strategic capital revenue, excluding promotes, to a range of $530 million to $550 million and reducing our G&A guidance to a range of $415 million to $430 million. We are adjusting development start guidance for the year to a revised range of $2.5 billion to $3 billion at our share, reflecting our discipline in speculative starts and the timing impact this has in the calendar year. As we've always said, we don't consider our guidance to be a target internally and each deal ultimately needs to be rational and accretive on its own. In the end, we are forecasting GAAP earnings to range between $3.15 per share and $3.35 per share. Core FFO, including net promote expense, will range between $5.37 per share and $5.47 per share, while core FFO, excluding promotes, will range from $5.45 per share to $5.55 per share. Our updated guidance calls for core earnings growth of nearly 8% at the midpoint. As we close out, I'd like to underscore the message of the call, which is that while we have only a modest change of view in the intermediate term, our confidence in the long term is intact. And putting timing aside, we are encouraged by the outlook for supply in the back half of this year and '25, have tremendous lease mark-to-market to harvest in the interim, and are pleased to see valuations, fundraising and transaction activity all picking up. With that, I'll turn the call over to the operator for your questions. Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] And the first question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question. Caitlin Burrows -- Goldman Sachs -- Analyst Hi. Good morning, everyone. It seems like, I guess, occupancy and maybe pricing are coming in a little lower than you had previously expected. So I was wondering, could you go through how much or what pieces might be more macro driven and how much is certain markets weighing on the outlook? Tim, you did mention how some of the high rent markets are having an outsize impact. So wondering if you could just go through what might be more macro versus market specific. Thanks. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hey, Caitlin. It's Chris Caton. I'll start by saying I think it's a combination of factors. For sure, as Tim described, Southern California and a handful of other high rent markets, the leasing velocity has been subdued and rent growth has been a little bit below expectations. So there is that softness. But we also want to point to a couple of quarters of deferred decision making leading aggregate customer demand across the United States to be a little bit below what we previously expected. Tim Arndt -- Chief Financial Officer The other thing I might add, Caitlin, would be just nominally in the sense of dollars and the impact in same store. We do see about half of our adjustments as coming from SoCal. Operator And the next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question. Steve Sakwa -- Evercore ISI -- Analyst Yeah. Thanks. Good morning out there. I guess, for Tim or Hamid, can you maybe just help kind of flush out sort of maybe the timing of when some of these things became a little bit more evident? I guess I'm thinking back to some of the conferences and the like in March, and my sense was the tone and concern about the business maybe wasn't as acute as it is right now. And I know you have confidence in the long term, but it sort of feels like there's a sea change in your outlook in maybe the last 30, maybe 45 days. So I guess, what is prompting that other than maybe saying hard data? But maybe just help flush out kind of the timing of this. And are there other factors at work here? Hamid Moghadam -- Chief Executive Officer Steve, let me take a stab at that. If you are sensing any acute change in our outlook, you're not reading our call correctly. We have picked a three-year window, I think, in our analyst day to give you our expectations. And the first year of that window has moved around. So our outlook for the back period of second and third year essentially the same and could be even better given how much deferred demand is building up. If our proposals were down, if our tours were down, I would be more concerned. But companies are out looking at this space. And if you think nothing has changed in the last 45 or 90 days with respect to the Fed outlook, you must be reading different newspapers than I am. So I would tell you that people are just scared of pulling the trigger until the Fed gives the all clear sign with the first rate cut. So, yes, we are not instantaneous in our data transmission to us and to you, but I can assure you that you will always hear our views immediately as we form them and as we get them from the marketplace. Operator And the next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question. Michael Goldsmith -- UBS -- Analyst Good morning. Thanks a lot for taking my question. It sounds like demand has been pushed out or the rebound in demand has been pushed out of a few quarters. So I was wondering what evidence do you have that would support that? And then, how do we compare that to some of the proprietary metrics that you put together, which seem to indicate that things are actually pretty positive or accelerating? Thank you. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hi, Michael. Chris Caton. Thanks for the question. As we've kind of covered in the script, and I think we are pointing out here, whether it's consumer resilience as revealed by economic indicators like the labor metrics or retail sales, whether you look at our own customers and supply chain momentum as revealed by our RBI volumes through the ports and our proposal volumes. The broader economy is generating a normal amount of demand. A couple of things to consider though. One is as you can see in utilization data and in sublease space, some customers have spare capacity that they are utilizing to accommodate some of this growth. We also have these leading indicators. We needed to simply see customers convert space requirements into signed leases. So just the simple conversion of investigation into signed leasing. And indeed, we already are seeing the front edge of some leading global e-commerce companies and other retailers begin to make space. It's just not broadly yet occurring across the whole marketplace. Hamid Moghadam -- Chief Executive Officer Yeah. The only thing I would add to that is that the effect is not uniform in all markets. And I think what's going on -- and this is a theory. This is not a fact. It's a theory, but it's based on 40 years of looking at this stuff. Southern California has over 30% share for 3PLs and the rest of the US market has a little under 20% share of 3PLs. 3PLs are serve two purposes. One, they provide outsourcing of for logistic activities, but they also create surge space. In other words, companies use 3PLs as a way of flexing up and down. So markets that have a bigger exposure to 3PLs are likely to feel the impacts of shifts in sentiment sooner than other markets on the way down and on the way up. Also, there are certain customers who have instantaneous access to sales data and activity. And I would say the e-commerce players, the big ones, have the best data on that, because they see the trends on a daily minute-by-minute basis. Those guys were early in terms of curtailing their demand. And I got to tell you, they're out there pretty aggressively and don't listen to what we say, listen to what they say in their own annual reports, in their own interviews with the press. And I think you'll see that they feel pretty confident about their business and they're a bit ahead of the curve. Now, all of this is subject to missiles not flying in the Middle East and the Fed not going crazy and God knows what else can happen in this world. So but as far as we see, the indications are really good. And this certainly does not feel like any of the other downturns that I've been part of. So again the word huge sounds a little bit of an overreaction to me. Operator And the next question comes from the line of Craig Mailman with Citi. Please proceed with your question. Craig Mailman -- Citi -- Analyst Hey, guys. Maybe coming at this from another way, and Hamid, I know you don't like the word acute, but maybe this seems a little bit more pre-emptive, because if you guys are seeing a lot of the metrics in line with your budget, retention was kind of in line with where you guys have been the last couple of quarters. It feels like this is an anticipation of maybe slower takedowns that you're seeing. I mean, is there anything else on the expiration side of the equation that you guys have a couple bigger known move outs now that are going to skew numbers? I'm just trying to get a sense of how much of this is actually what you're seeing real time versus just giving yourself a little bit of cushion so that you don't have to kind of readjust later in the year. And also, just a question on development. How much of this kind of occupancy decline is just developments coming out a little bit less leased than maybe you had thought? A couple of months ago, we noticed your development margins were pretty -- were single-digit this quarter. I don't remember the last time I've seen that. And is that a reflection of this? Or is there something else going on as well? Hamid Moghadam -- Chief Executive Officer OK. Let me start that, and then I'll turn it over to Chris and then to Dan to talk about development margins specifically. We like to be early and thoughtful in outlooks that we share with you, and we've always prided ourselves in doing that. And in some cases in the past, as you know, you've been following us for a long time, we've taken pretty bold statements on the way up and on the way down and actually been proven pretty right about it. So for us to be late on this stuff is not something that we look forward to. So we always try to be on the lookout for trends that may be interesting to our investors and to you, who are looking at our company on a real-time basis. So I'm not smart enough to assign percentages of how much of this is pre-emptive and how much of it is. But I can tell you there's nothing going on in the portfolio. There's not some news embedded deep in our customer behavior or some market that we're not sharing with you. This is just looking at the tone of the marketplace and sharing with you what we see playing out in the next two to three quarters, nothing beyond that. And the outlook for the long term is very much the same as it was before. Dan, do you want to talk about the margins? Dan Letter -- Global Head, Capital Deployment Yeah. The margins this quarter, it's actually an isolated event here. We had about 15, 17 projects stabilized. We had one project that just had a confluence of events take place, whether it be weather, some infrastructure, municipal requirements. And it just came in at a pretty negative margin, weighing down the overall average margin for the quarter. If you pull that out, our margin for the quarter would actually be more reasonable 15%, 16%. Operator And the next question comes from the line of Camille Bonnel with Bank of America. Please proceed with your question. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Hi. Hamid, you mentioned how the company likes to be early on calling things, but I noticed that you only updated your outlook on operations and guidance. So can you help us understand how conservative guidance levels are? Or could we see more downward revisions, for example, if you start to pull back on the capital deployment front? Thank you. Hamid Moghadam -- Chief Executive Officer Well, on capital deployment specifically, you may remember that I'm always saying the only reason we provide guidance is because you ask us. We actually don't have a budget or a plan for deploying capital. We look at every investment opportunity one at a time. So all our elements of our guidance. And this doesn't go for just this period. It goes for any period. I would take that one with a grain of salt. We are not afraid to deploy a lot more or a lot less capital if the market conditions warrant it. With respect to conservatism, I would say, we call it as close to the pin as we can get it with a very slight bit of conservative. Not a lot, just a bit. So that, in the majority of the cases, we are pretty confident of what we are saying, but we are not 100% confident. There could be downside beyond that. But I would say we try to call it as we see it and be careful that we don't -- we don't want to disappoint 50% of the time, which is really calling it right on the pin. We'd like to be a little more conservative than that. Now, we don't always get it right. So let's admit that. Tim Arndt -- Chief Financial Officer And Camille, it's Tim, I might build on your first -- the first part of your question as well, which is that at prevailing cap rates and the cost of debt and everything else, there's very little you could actually do in deployment in the year to affect earnings in year one or two. I find that deployment changes tend to have kind of a push effect on earnings. So you should probably have that in your thinking as you watch our guidance. Operator And the next question comes from the line of Nikita Bely with J.P. Morgan. Please proceed with your question. Nikita Bely -- JPMorgan Chase and Company -- Analyst Good morning, guys. The $150 million of other real estate investments. Curious, what exactly was that on the sales? And maybe also, if you could talk about the reduction in development starts. So any color on that, geographic focus or spec or something else? Tim Arndt -- Chief Financial Officer That's basically -- the $150 million is some non-core assets. And we could not hear the second part of your question. Could you repeat that? Nikita Bely -- JPMorgan Chase and Company -- Analyst Reduction in development starts for this year. Any additional information you could provide on what drove that, whether it was geographic based or asset specific or built-to-suit pullback? Dan Letter -- Global Head, Capital Deployment Yeah. Thanks. This is Dan. I'll -- I got a couple of thoughts on that point there around development starts. We adjusted our guidance on development consistent with the adjustment in the occupancy and the operating pool. So as we see demand shifting out, we just expect that we are going to start fewer buildings. We reduced it by about $0.5 billion. That's about half build-to-suit, half spec. We are raising the bar on spec. As Hamid said earlier, we put that guidance out there because you ask for it. We don't need to start these projects. We own the land. We have $38 billion worth of opportunity embedded in that land bank. We have entitlements. We have the teams. They're all geared up, ready to start. We can literally pull the trigger on $10 billion, $12 billion of that tomorrow. So we just look at that. We are just trying to be consistent and tie it to our overall outlook on demand. And there's no particular location or otherwise that we -- that drag that down. Hamid Moghadam -- Chief Executive Officer Yeah. And the only thing I would add to that is that even though we made the adjustment on both the built-to-suit and the spec part, the bias is greater on the spec part. We actually feel pretty good about our built-to-suit volume going forward. So it's really the spec which is discretionary, and we can, as Dan said, write that at any time. Operator And the next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question. Blaine Heck -- Wells Fargo Securities -- Analyst Great. Thanks. So you've called out Southern California as being soft again. Can you just talk about any specific segments of the market that are particularly weak whether that's by submarket or size? And what makes you confident in the recovery even as it seems it might be delayed kind of relative to your original expectations? And secondly, just curious if you can expand on which other high-rent markets might be weighing on the outlook. Thanks. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hey, Blaine, it's Chris Caton. Thanks for the question. So Southern California is a market that continues to soften, vacancy rates are continuing to rise, yes, after different submarkets. The softest area of Southern California is midsized and smaller units in the Inland Empire. The strongest area is probably Orange County. And Los Angeles, while subdued, has a 4% market vacancy rate, so as demand comes into that marketplace, bear in mind, demand has been negative over the last year, a very rare occurrence, as demand comes back in that marketplace, you're likely to see the vacancy rate make a difference in Los Angeles as well. In terms of other markets where we're watchful, the soft markets in the US include New Jersey, Seattle and Savannah. Hamid Moghadam -- Chief Executive Officer Yes. The other thing I would say about Southern California is that don't discount the effect of the port labor issue that was resolved. That took longer, a lot longer than most people thought. And that affects a lot of the people -- a lot of the users in the South Bay immediately adjacent to the ports and the like. So that market can get tight real quick if that port volume comes back. I think that the small to medium spaces in the Inland Empire are kind of a mismatch. They're, by and large, the older buildings that were built there when the market was not really designed for the big 500,000 million square foot buildings. And those are -- somebody who wants a lot of space has to go to the Inland Empire. Somebody who wants 100,000 to 200,000 feet has more choices. So that's where the softness is in the Inland Empire. Operator And the next question comes from the line of Vince Tibone with Green Street. Please proceed with your question. Vince Tibone -- Green Street Advisors -- Analyst Hi. Good morning. Could you discuss the markets of relative strength in your portfolio in terms of demand and market rents? And also, are you seeing any different levels of demand by building size, more broadly? We noticed that occupancy fell the most on a sequential basis, for buildings less than 100,000 square feet, but actually grew for buildings 250,000 to 500,000. So just curious if those trends on occupancy are kind of a fair representation of the demand profile today. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hi, Vince. It's Chris Caton here. So first, in terms of strength, there is a wide range. And speaking of the benefits of diversity, the strongest markets in the world include Mexico, Texas, parts of the Southeast US, Pennsylvania, but also looking out to the Netherlands, Germany and Brazil, Toronto as well, as a strong market. You also have stable markets, Chicago, Southern Florida, Baltimore, D.C. And then, really at Southern California alone is really the main weak market. So that would be the range. In terms of size categories, what you see -- what you hear in the marketplace in terms of tours and, in fact, some leases that are getting made, is there's a bit more activity, particularly among self-performing e-com and retailers at the larger end of the spectrum. That would be the main, I'd say, new news in the last 90 days. Operator And the next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question. Ki Bin Kim -- Truist Securities -- Analyst Thanks, and good morning. So going back to your comments about the softer environment. I'm curious if you've seen any changes in capex or concessions that might be -- that might not be so apparent in the headline face rents. And second question, going back to your comments on strategic capital. Where do you think cap rates are selling out at for good assets and good markets? And does that change your view on the level of contributions that you might make going forward? Thank you. Tim Arndt -- Chief Financial Officer Hey, Ki Bin, it's Tim. I'll take the front half of your question just on free rent. We have seen an increase in free rent. I think what's important to remember there is we've had exceedingly low amounts of free rent granted in the last few years. And I would say the current rates that we've seen in this last quarter, and what we're bracing forward this year, would still not really be on par with long-term averages. I would say that concession is not fully back to normal. But it is turning up logically in this environment. Hamid Moghadam -- Chief Executive Officer Yes. In terms of where deals are being priced out, I would say nine months ago, a year ago, there was very little activity, and we were pricing deals in good markets in the US in the low nine IRRs, albeit not much was happening at those kinds of return expectations. Today, I would say those are 100 basis points lower and there's a lot more volume in that a lot of transactions happening in the marketplace in the low 8s. Europe, that number -- those numbers would be in the mid-7 IRRs. The reason I'm answering in IRR and not cap rate is that the mark-to-market in different locations is significantly vary. For example, for the same IRR, you would be a lot lower cap rate in Southern California than you would be in a market that is leased at market rents. Operator And the next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question. Tom Catherwood -- BTIG -- Analyst Thank you and good morning, everybody. Hamid, I appreciate your comments on rates and the Fed's actions or inaction serving as the key governor of customer activity and leasing right now. But how are you seeing supply chain disruption, like in Baltimore, and geopolitical risks impacting customer behavior, if at all? Hamid Moghadam -- Chief Executive Officer I don't think Baltimore has been a big deal in terms of its impact on our business. It's obviously been a big deal to the people who died in the accident and the like, but -- and to traffic patterns. But not to the customer. The customers have enough optionality that they can deal with those kinds of disruptions. I do think the geopolitical stuff has people a little wigged out, more -- definitely more than last quarter. And look at the interest rates, I mean, we're up a good 70, 80 basis points since the last time we all met. And I think that didn't happen evenly throughout the quarter. I think in the last month that sentiment has changed pretty dramatically. So I think both of those things are weighing on decisions, particularly if the decisions are discretionary. And people, when there are no choices like they were no choices in Southern California, they always lease more space than they need because they don't want to be held short. And when the opposite is and they have some choices, they take their time because they expect better deals if they wait. And that difference, even if it's minor, even if it's 5% to the upside and 5% to the downside can be a 10% swing, which are sort of the kind of numbers we're talking about here. So that's very much what happens in the short term. In the long term, demand has to match supply and they can't keep doing that forever. So now if you're going to ask me exactly what that point is, I can't really tell you. But we think it's a matter of quarters, not years. Operator And the next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question. Jon Petersen -- Jefferies -- Analyst Great. Thank you. Maybe one more question on the port of Baltimore. I know it's not a big container traffic port, but have you seen any knock-on demand show up in other East Coast markets given the dislocation that's created? And then, also, maybe a part two, but I know SoCal has been weak over the past year, you've talked about that a lot, and the resets already happened. I guess I'm curious if you could help us contextualize, from where we stand today, if you compare the strength of like SoCal versus the East Coast markets like New Jersey and Pennsylvania, like from where we stand today, which one looks the best over the next year? Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hey, Jon, it's Chris Caton. First on Baltimore, you're right. The container traffic there is typically 50,000 TEUs a month. The time horizon of necessary diversions is not thought to be more than a couple of months. By comparison, New York, New Jersey is a 300,000, 350,000 TEU port. And a lot of these diversions have gone to Norfolk. So you've seen some leasing in Norfolk. It's not a market where we operate. So no, there are not knock-on effects. As it relates to Southern California versus the East Coast, the SoCal market remains fluid, and I believe -- we believe it will underperform. This is a six-month, 12-month view. Naturally, New Jersey has a completely different set of factors as it relates to rent growth that it's experienced over the last several years in terms of the level of demand that we see in that marketplace, as well as sublease trends. Now, it's not the moment to get bullish on New Jersey. Let's see the port agreement, the IOI port agreement get made. But over time, both will be very strong performers after this period of fluidity and uncertainty. Hamid Moghadam -- Chief Executive Officer Yes. The way I would answer that question is that if you limit it to the next 12 months, I would go PA, New Jersey, SoCal. And if you ask me for the longer term, I would go SoCal, New Jersey, PA. And I would put all three of them in the upper third of markets across cycles. Maybe the upper 20% of markets across cycles. Operator And the next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question. Ronald Kamdem -- Morgan Stanley -- Analyst Hey. Good morning. Just hoping we could put some numbers on the soft demand that you seem to be messaging. So previously you were forecasting 1.5% of stock of net absorption this year. I'm just wondering what that number has shifted to given what's happened over the past 30 to 45 days. And if you can tie in where you see sort of availability rates and next 12-month market rent growth. Thanks. Hamid Moghadam -- Chief Executive Officer Yes. Let me take -- we have taken demand down for this year internally from 250 million feet in the US to 175 million, and fundamentally have kept demand at the same level going forward. What we debated that we were going to do is whether we add the 75 million that we missed this year into the subsequent two years, and that's where the bid and ask is in our shop. And we're not clairvoyant, so that's -- I'm just giving you the range of how we think about it. Now, you answer the second part of your question, Chris. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Yes. As it relates to market vacancies, we look at vacancies, not availabilities. Availability is a range between 150 and 250 basis points above these figures, depending on the cycle. We have vacancies peaking in the mid-6s later this year. So that's up about 20, 30 basis points versus what we discussed last year. I think what's important to understand in the cycle is the recovery potential in 2025 related to each of the constituent pieces. Hamid walked you through the demand picture. But what's important to recognize is the supply picture. That was a big factor over the last year, 18 months. And the meaningful falloff in supply is marked. It's off 80% from peak. It's off about a third from pre-COVID levels. So we're talking about 35 million square feet of starts in the first quarter. That annualizes to about 160 million, 170 million square feet. So you're going to actually see this snap later this year and into next year, and those vacancy rates moving noticeably down, likely to move noticeably down from mid-6s toward 5% over the course of next year. Hamid Moghadam -- Chief Executive Officer One other thing I would -- your response has triggered this. Vacancy rates do not linearly affect pricing power. I think when you're operating under 5%, you've got a lot of pricing power. Now, whether that's 2% or 3%, doesn't matter. You have a lot of pricing power. And even though you might have two customers that really need the space, four are looking for the space because they just don't want to be cut short down the road. So it just sort of feeds on itself. When the market gets to sort of around 6%, you're at equilibrium. When it gets too much above that, you get into a soft market. And that's a macro analysis, obviously, you've got to apply that market to market in each situation. But that's the way we look at it. We don't think we're getting into those levels of vacancy that we've seen in other cycles, even during the good times. The worst that we're projecting in this period is almost as good as the best we've seen in other cycles. So that's a key distinction. And we've just been spoiled by market in three years where vacancies have been lower than they've ever been. And I think you've heard me say at times that, if the normal range of a market is one to 10, we've been operating in a 12, 13, and more recently, I've said we're in an eight or nine. And today, I would say we're in probably six, five, seven. Operator And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question. John Kim -- BMO Capital Markets -- Analyst Thank you. I just wanted to get some additional color on the weaker net absorption due to tenants becoming more cost conscious. I'm wondering if this test-the-thesis that industrial rent is somewhat inelastic given it's a small portion of the overall transport and logistics costs? And also, where are tenants going in your view? Are they simply not expanding, or are they downsizing or going to less expensive markets or submarkets? Hamid Moghadam -- Chief Executive Officer So we've actually tried to test that theory by looking at whether Southern California's loss has translated into an equal gain in adjacent markets like Vegas and Phoenix. And the answer is, while absorption has increased in those markets, it doesn't fully account for the drop-off in Southern California. So some of that demand has just been deferred. And the question is when will deferred demand convert to real demand. And that's the $64 million question. Is it one quarter? Is it two quarters? Is it three quarters? Don't know. We think it's a couple of quarters. But it will happen. And particularly the port coming back, that part accounts for over 30% of imports in the US, and it's been basically down. So we think it's going to -- that's going to have a dramatic effect. Now, we may have missed it already for this Christmas season, I don't know. But certainly, next year, that market is going to come back absent a recession or some kind of geopolitical blow-up. Tim Arndt -- Chief Financial Officer And John, I might just add, I guess, the way you're putting the equation together, it is what we see that, yes, the rate environment causes this consternation. But as Chris has been highlighting in a number of his answers, as we look at where utilization sits and some of the capacity that's available, it's just the first place that customers can look in terms of finding a way to continue to operate in the short term. That would ostensibly end, and we'll watch for that as utilization rises, and that's what would add to new demand. Operator And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question. Vikram Malhotra -- Mizuho Securities -- Analyst Thanks for taking the question. Just two quick ones. First of all, just on the three-year outlook. So it sounds like you're saying '24 is a bit lower than you predicted, '25 and '26 is similar. Does that essentially mean the three-year outlook is kind of adjusted down somewhat? And then, secondly, just to be -- just to give us some numbers. I think what you were saying is the rest of the market rent growth is now, I guess, flattish, but SoCal is down. Do you mind just putting some more numbers on that? Like just how much is SoCal down Q-over-Q or year over year versus what other markets in the US are doing? Thanks. Tim Arndt -- Chief Financial Officer Hey, Vikram, it's Tim. We're not calling anything on '25 and '26. In my prepared remarks -- or maybe I should say, I think our view would be that our views are upheld. And what I tried to highlight in the opening remarks is that if we get to a little bit lower average occupancy this year, recognizing that our three-year forecast called for a more normalized level of occupancy in the end anyway, that's where this concept of, well, maybe the adjustment to same-store from an occupancy change is coming a bit more this year than it would otherwise next year. But right now, we would hold out our view for '25 and '26 in terms of aggregate NOI and same store. Now, rent change in this very immediate term, I'm sorry, market rent growth is a little bit below expectations. That will have some effect, but that will be relatively muted through same-store over the period. Hamid Moghadam -- Chief Executive Officer Yes. Let's just put some numbers since you asked on it. I think in the analyst day, we talked about a three-year forecast for '24, '25 and '26 rental growth of -- sorry, 4% to 6%. I would say we're at the lower end of that range and maybe a little bit lower than that when you look at it over a three-year period. My number, and this is not the official number, my number would be north of 3% and around 4% probably, just shy of 4%. Chris Caton -- Managing Director, Global Head of Strategy and Analytics And then, just on the detailed question on what's happening in market rent growth in the first quarter. Southern California, down 6%, and US down about 1%, 1.2%. So when you multiply it through, you can see all other markets are flat. Operator And the next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question. Nicholas Yulico -- Scotiabank -- Analyst Yeah. Hi. I was just hoping to get a feel for, again, going back to the occupancy guidance, if there's a way that you can give us a feel for how much decline in new leasing commencements you have been embedded in the number this year. Because it sounds like the retention ratios have been better, so leasing velocity on the new side seems subdued. You talked about that leasing demand forecast being down, I think it was 30% on the numbers you gave, the 250 million to 175 million in the US. How much is like new leasing in the portfolio going to be down this year for the guidance? Tim Arndt -- Chief Financial Officer Well, this is Tim. I'll give it to you in this way. And this might help some of the folks who have struggled looking at the supplemental and some of the stats there, and our messaging. Because what you don't see in the supplemental would be things like, well, how much lease signing occurred in the first quarter. And that was down. Even though you see strong occupancy, that's on commencements, signings were off about 12% in the first quarter. So that's down. You can see that when you look through our pages in our leasing versus occupied statistic where there's only about a 10 basis point difference in those versus a more historical norm of 40 to 50 basis points. So those are the pieces a little bit underneath the surface that are guiding our view that the pre-leasing that we're normally looking for at this point, which is ranging four to six months ahead of commencements is shy and why we think the average occupancy is ultimately going to be lower. Operator And the next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question. Todd Thomas -- KeyBanc Capital Markets -- Analyst Hi. Thanks. Two questions. I guess, first, can you discuss your rent change expectations for the full year and whether anything has changed there as it pertains to the revisions to your outlook? And it looked like rent change on signings was trending in the low 70% range through February, which was higher than the rent change in the quarter. I guess, any thoughts about rent change -- trends relative to this quarter and for the year? And then, my second question, in terms of the occupancy breakout by unit size and your comments about larger and smaller spaces earlier in the call, do you expect a recovery later in the year to be broad-based from a space or unit size? Or do you expect to see more strength or maybe more persistent weakness in either the larger or smaller unit size as conditions tighten up in a few quarters? Tim Arndt -- Chief Financial Officer Hey, Todd, it's Tim. Yes. On rent change, so as mentioned, we had 67% start in the quarter. The signings were 70. So you do get a sense that it can move up and down each quarter. You may also recall, we had very strong rent change on signings in Q4, which may leave you wondering why didn't that show up here in Q1 on the commencements? And that's speaking to just how long this pre-leasing period can be. It can be more than just three months. And for that reason, I expect we'll probably see rent change right now, my view would be it's going to be above Q1, in Q2, and then also higher on the full year, in the low to mid-70s, over 2024 is our current view. Chris Caton -- Managing Director, Global Head of Strategy and Analytics As it relates to the contours, I think I'd first point you to the market color that was given earlier as illustrating the shape of the recovery going forward. As it pertains to different size categories, there is more vacancy and more availability in the over 500,000 category, but that's also where, in the last 90 days, we've seen a little bit of a pickup. So I think we'll see size categories advancing at a similar pace over the course of the year, and there'll be real differentiation across the different markets. Operator And our final question comes from the line of Vince Tibone with Green Street. Please proceed with your question. Vince Tibone -- Green Street Advisors -- Analyst Hi. Thanks for the follow up. I was just curious, are you seeing any other landlords gain to offer more free rent or tenant allowances to try to attract tenants to their vacancies? Hamid Moghadam -- Chief Executive Officer A really interesting question. So this is what has really surprised me from this cycle. We are getting calls from merchant developers that have had financing, have completed projects and are getting panicked. And for us to look at those opportunities. Boy, we're looking at those opportunities. Because that's where a good balance sheet and that's where being on your front foot is all about. I think there were a lot of people in this business that thought, we'll just get some financing at zero cost and throw up some buildings and it will lease. And I think that's what accounted for some of that over-exuberance on the development side. And I think we're going to end up being beneficiaries of that, and I'm seeing that real time. So, yes, I think people who are merchant developers and do not have the financial wherewithal are acting in a somewhat distressed way sooner than I would have guessed. And we're happy about that. So that was the last question, Vince. So with that, I want to thank you for your interest. And this is part of a long story and we'll be there next quarter to tell you about the following chapters of it. Take care. Bye-bye. Answer:

the Prologis first quarter 2024 earnings conference call

Operator Greetings and welcome to the Prologis first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Natasha Law, director of investor relations. Thank you, Natasha. You may begin. Natasha Law -- Director, Investor Relations Thanks, John. Good morning, everyone. Welcome to our first quarter 2024 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations. I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10-K or other SEC filings. Additionally, our first quarter earnings press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP. And in accordance with Reg G, we have provided a reconciliation to those measures. I'd like to welcome Tim Arndt, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, our CEO, and our entire executive team are also with us today. With that, I will hand the call over to Tim. Tim Arndt -- Chief Financial Officer Good morning and thank you for joining our call. We've had a good start to the year in terms of our operating and financial results in the first quarter. We delivered strong rent change, drove occupancy slightly ahead of our forecast, raised nearly $5 billion in capital, including $750 million in strategic capital, and made important headway in our Energy business. That said, as we evaluate the market, persistent inflation and high interest rates have kept more customers focused on controlling costs. The resulting delay in decision making, easily observed through the first quarter's below average net absorption, will translate to lower leasing volume within the year. Accordingly, we've opted to adjust our guidance early, getting ahead of what looks like a period of occupancy below our forecast in the near term and its effect on same store in a number of our higher rent markets. This is punctuated, of course, by a more pronounced period of correction still underway in Southern California. New starts, however, continues to be surprisingly disciplined, adding to the expectation for limited new supply in the back half of '24, but also extending deeper into '25. When considered alongside muted demand, we arrive at a view that the operating environment has only changed modestly in aggregate, and that demand is simply pushing out by a few quarters. The outcome of this may simply mean moving toward a long-term occupancy expectation more swiftly this year, which sets up for a better next year. Turning to our results for the quarter. Core FFO, excluding promotes, was $1.31 per share and including net promote expense was $1.28 per share, essentially in line with our forecast. Occupancy in the portfolio ended the quarter at 97%. For context, the US market declined 310 basis points since its peak in the summer of '22, while our portfolio's occupancy has only declined 80 basis points, resulting in vacancy today for Prologis that is less than half of that in our markets and reflective of our portfolio quality. Net effective rent change was 68% based on commencements and 70% based on new signings. Following this in-place increase and changes in market rents, our net effective lease mark-to-market stands at 50%, representing over $2.2 billion of rent to harvest without any additional market rent growth from here. Rent growth captured just for the single quarter was approximately $110 million on an annualized basis and at our share. Our same-store growth on a cash basis was 5.7% and on a net effective basis was 4.1%. The same-store from rent change alone was strong at approximately 9%, but is impacted by a 130 basis point change in year over year vacancy, as well as 150 basis points from fair value lease adjustments with the Duke portfolio's inclusion in our same-store pool. Additionally, there were approximately 175 basis points of items specific to the quarter, including one-time reconciling items from 2023, as well as unfavorable comps from low expenses last year. We started over $270 million of new developments in the quarter, bringing our portfolio to approximately $7.5 billion at our share, with estimated value creation of over $1.7 billion, a number we feel increasingly confident in with value stabilizing. In our Energy business, we've made meaningful progress on this year's deployment, including the signing of 405 megawatts of long-term storage-related contracts with investment-grade utilities. We also delivered the largest EV fleet charging project in the United States, less than 15 miles from both the ports of LA and Long beach. Finally, we raised $4.1 billion of debt across our balance sheet and funds at a weighted average rate of 4.7% and a term of 10 years. Our debt portfolio has an overall in-place rate of just 3.1%, with more than nine years of average remaining life and liquidity at the end of the quarter of over $5.8 billion. Turning to market conditions. Most broad economic data from unemployment to retail sales to the health of the consumer remain very strong. And while our tour proposal and other proprietary metrics are similarly positive, overall leasing activity and net absorption are running below expectations. Net absorption in the US, for example, was very low this quarter at just 27 million square feet. So while the macro landscape and supply chains continue to generate a need for space, we think it's prudent to expect continued headwinds on overall absorption over the next few quarters. The interest rate environment and its associated volatility have weighed on customer decision making, especially as the 10 year has increased 70 basis points from its level just 90 days ago and expectations for Fed rate cuts have moved from potentially six to now possibly zero. In parallel, sublease and space utilization rates highlight that some customers have available capacity, driven in part by the high rate of absorption through the pandemic. This dynamic of available space intersecting with the desire for cost containment is what leads to lower absorption and is playing out at different rates across submarkets and customers. For example, while slow leasing has persisted so far this year for less capitalized customers and 3PLs, we see a handful of large e-commerce and retail customers further along in this process, such as Amazon, who voiced caution two years ago, but is now active in several global markets and has openly discussed plans to commit to significant amounts of new space. The overall leasing slowdown is most felt in only a handful of markets. Southern California and the Inland Empire being the most acute. In fact, rents in most of our US markets are generally flat, several are up, and it is mainly elongated downtime affecting near-term occupancy and NOI. While Southern California leasing has been challenging, it has not slowed the tremendous uplift we realize every single quarter from rent change on rollover, which was 120% for the market in the first quarter, with the Inland Empire at 156%, nearly the highest in our portfolio. In Europe, rents grew overall during the quarter, which we believe will remain the case over the balance of the year. And of course, LATAM continues to impress with very high occupancy and market rent growth that has led the globe in recent quarters. Overall, global market rents declined slightly over 1% in the quarter, driven mostly by Southern California, and would have been slightly positive if excluded. I'd like to spend a moment on Baltimore, where we own over 18 million square feet and has been a dynamic market of ours for decades. Our employees, customers and properties are all safe following the bridge collapse last month and our customers expect to be able to withstand the disruption with little impact to their businesses. Shifting to capital markets. Valuations increased in all of our geographies, except for China, which saw a very small decline. Over the last year and a half, global values have decreased despite increases in cash flow due to cap rate expansion. As cap rates have stabilized, cash flow growth now has the ability to translate to value growth. Even though modest, the value uplift in the US and Europe are important as strategic capital investors have been looking for values to not only bottom, but actually turn upwards before committing new capital. With Europe a bit ahead of the US in this regard, it is indeed where we've seen stronger fund-raising interest in recent quarters. We also had a successful equity raise in FIBRA Prologis, raising over $500 million for deployment into both assets to be contributed from our balance sheet, as well as pursuits of third-party acquisitions. Transaction volumes and activity have ticked up in recent weeks and pricing has certainly improved. As always, we are actively looking at acquisition opportunities across all of our markets, but our focus remains on the development of our land bank, which provides an opportunity for over $38 billion of build out with a return on incremental capital of approximately 8.5%. In terms of guidance, in light of our views on demand and leasing pace in the coming quarters, we are reducing our average occupancy guidance to range between 95.75% and 96.75% of the 75 basis point adjustment from the midpoint. It's important to understand that approximately two-thirds of this change stems from our higher rent markets, meaning they create a disproportionate impact on same store in 2024. Same-store growth on a net effective basis will range between 5.5% and 6.5%, a reduction of 150 basis points, which accounts for the average occupancy decline, slightly lower rent change for the year, as well as 30 basis points of annualized impact from the one-time items in the first quarter mentioned earlier. Our revised range on a cash basis is now 6.25% to 7.25%. We are maintaining our guidance for strategic capital revenue, excluding promotes, to a range of $530 million to $550 million and reducing our G&A guidance to a range of $415 million to $430 million. We are adjusting development start guidance for the year to a revised range of $2.5 billion to $3 billion at our share, reflecting our discipline in speculative starts and the timing impact this has in the calendar year. As we've always said, we don't consider our guidance to be a target internally and each deal ultimately needs to be rational and accretive on its own. In the end, we are forecasting GAAP earnings to range between $3.15 per share and $3.35 per share. Core FFO, including net promote expense, will range between $5.37 per share and $5.47 per share, while core FFO, excluding promotes, will range from $5.45 per share to $5.55 per share. Our updated guidance calls for core earnings growth of nearly 8% at the midpoint. As we close out, I'd like to underscore the message of the call, which is that while we have only a modest change of view in the intermediate term, our confidence in the long term is intact. And putting timing aside, we are encouraged by the outlook for supply in the back half of this year and '25, have tremendous lease mark-to-market to harvest in the interim, and are pleased to see valuations, fundraising and transaction activity all picking up. With that, I'll turn the call over to the operator for your questions. Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] And the first question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question. Caitlin Burrows -- Goldman Sachs -- Analyst Hi. Good morning, everyone. It seems like, I guess, occupancy and maybe pricing are coming in a little lower than you had previously expected. So I was wondering, could you go through how much or what pieces might be more macro driven and how much is certain markets weighing on the outlook? Tim, you did mention how some of the high rent markets are having an outsize impact. So wondering if you could just go through what might be more macro versus market specific. Thanks. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hey, Caitlin. It's Chris Caton. I'll start by saying I think it's a combination of factors. For sure, as Tim described, Southern California and a handful of other high rent markets, the leasing velocity has been subdued and rent growth has been a little bit below expectations. So there is that softness. But we also want to point to a couple of quarters of deferred decision making leading aggregate customer demand across the United States to be a little bit below what we previously expected. Tim Arndt -- Chief Financial Officer The other thing I might add, Caitlin, would be just nominally in the sense of dollars and the impact in same store. We do see about half of our adjustments as coming from SoCal. Operator And the next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question. Steve Sakwa -- Evercore ISI -- Analyst Yeah. Thanks. Good morning out there. I guess, for Tim or Hamid, can you maybe just help kind of flush out sort of maybe the timing of when some of these things became a little bit more evident? I guess I'm thinking back to some of the conferences and the like in March, and my sense was the tone and concern about the business maybe wasn't as acute as it is right now. And I know you have confidence in the long term, but it sort of feels like there's a sea change in your outlook in maybe the last 30, maybe 45 days. So I guess, what is prompting that other than maybe saying hard data? But maybe just help flush out kind of the timing of this. And are there other factors at work here? Hamid Moghadam -- Chief Executive Officer Steve, let me take a stab at that. If you are sensing any acute change in our outlook, you're not reading our call correctly. We have picked a three-year window, I think, in our analyst day to give you our expectations. And the first year of that window has moved around. So our outlook for the back period of second and third year essentially the same and could be even better given how much deferred demand is building up. If our proposals were down, if our tours were down, I would be more concerned. But companies are out looking at this space. And if you think nothing has changed in the last 45 or 90 days with respect to the Fed outlook, you must be reading different newspapers than I am. So I would tell you that people are just scared of pulling the trigger until the Fed gives the all clear sign with the first rate cut. So, yes, we are not instantaneous in our data transmission to us and to you, but I can assure you that you will always hear our views immediately as we form them and as we get them from the marketplace. Operator And the next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question. Michael Goldsmith -- UBS -- Analyst Good morning. Thanks a lot for taking my question. It sounds like demand has been pushed out or the rebound in demand has been pushed out of a few quarters. So I was wondering what evidence do you have that would support that? And then, how do we compare that to some of the proprietary metrics that you put together, which seem to indicate that things are actually pretty positive or accelerating? Thank you. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hi, Michael. Chris Caton. Thanks for the question. As we've kind of covered in the script, and I think we are pointing out here, whether it's consumer resilience as revealed by economic indicators like the labor metrics or retail sales, whether you look at our own customers and supply chain momentum as revealed by our RBI volumes through the ports and our proposal volumes. The broader economy is generating a normal amount of demand. A couple of things to consider though. One is as you can see in utilization data and in sublease space, some customers have spare capacity that they are utilizing to accommodate some of this growth. We also have these leading indicators. We needed to simply see customers convert space requirements into signed leases. So just the simple conversion of investigation into signed leasing. And indeed, we already are seeing the front edge of some leading global e-commerce companies and other retailers begin to make space. It's just not broadly yet occurring across the whole marketplace. Hamid Moghadam -- Chief Executive Officer Yeah. The only thing I would add to that is that the effect is not uniform in all markets. And I think what's going on -- and this is a theory. This is not a fact. It's a theory, but it's based on 40 years of looking at this stuff. Southern California has over 30% share for 3PLs and the rest of the US market has a little under 20% share of 3PLs. 3PLs are serve two purposes. One, they provide outsourcing of for logistic activities, but they also create surge space. In other words, companies use 3PLs as a way of flexing up and down. So markets that have a bigger exposure to 3PLs are likely to feel the impacts of shifts in sentiment sooner than other markets on the way down and on the way up. Also, there are certain customers who have instantaneous access to sales data and activity. And I would say the e-commerce players, the big ones, have the best data on that, because they see the trends on a daily minute-by-minute basis. Those guys were early in terms of curtailing their demand. And I got to tell you, they're out there pretty aggressively and don't listen to what we say, listen to what they say in their own annual reports, in their own interviews with the press. And I think you'll see that they feel pretty confident about their business and they're a bit ahead of the curve. Now, all of this is subject to missiles not flying in the Middle East and the Fed not going crazy and God knows what else can happen in this world. So but as far as we see, the indications are really good. And this certainly does not feel like any of the other downturns that I've been part of. So again the word huge sounds a little bit of an overreaction to me. Operator And the next question comes from the line of Craig Mailman with Citi. Please proceed with your question. Craig Mailman -- Citi -- Analyst Hey, guys. Maybe coming at this from another way, and Hamid, I know you don't like the word acute, but maybe this seems a little bit more pre-emptive, because if you guys are seeing a lot of the metrics in line with your budget, retention was kind of in line with where you guys have been the last couple of quarters. It feels like this is an anticipation of maybe slower takedowns that you're seeing. I mean, is there anything else on the expiration side of the equation that you guys have a couple bigger known move outs now that are going to skew numbers? I'm just trying to get a sense of how much of this is actually what you're seeing real time versus just giving yourself a little bit of cushion so that you don't have to kind of readjust later in the year. And also, just a question on development. How much of this kind of occupancy decline is just developments coming out a little bit less leased than maybe you had thought? A couple of months ago, we noticed your development margins were pretty -- were single-digit this quarter. I don't remember the last time I've seen that. And is that a reflection of this? Or is there something else going on as well? Hamid Moghadam -- Chief Executive Officer OK. Let me start that, and then I'll turn it over to Chris and then to Dan to talk about development margins specifically. We like to be early and thoughtful in outlooks that we share with you, and we've always prided ourselves in doing that. And in some cases in the past, as you know, you've been following us for a long time, we've taken pretty bold statements on the way up and on the way down and actually been proven pretty right about it. So for us to be late on this stuff is not something that we look forward to. So we always try to be on the lookout for trends that may be interesting to our investors and to you, who are looking at our company on a real-time basis. So I'm not smart enough to assign percentages of how much of this is pre-emptive and how much of it is. But I can tell you there's nothing going on in the portfolio. There's not some news embedded deep in our customer behavior or some market that we're not sharing with you. This is just looking at the tone of the marketplace and sharing with you what we see playing out in the next two to three quarters, nothing beyond that. And the outlook for the long term is very much the same as it was before. Dan, do you want to talk about the margins? Dan Letter -- Global Head, Capital Deployment Yeah. The margins this quarter, it's actually an isolated event here. We had about 15, 17 projects stabilized. We had one project that just had a confluence of events take place, whether it be weather, some infrastructure, municipal requirements. And it just came in at a pretty negative margin, weighing down the overall average margin for the quarter. If you pull that out, our margin for the quarter would actually be more reasonable 15%, 16%. Operator And the next question comes from the line of Camille Bonnel with Bank of America. Please proceed with your question. Camille Bonnel -- Bank of America Merrill Lynch -- Analyst Hi. Hamid, you mentioned how the company likes to be early on calling things, but I noticed that you only updated your outlook on operations and guidance. So can you help us understand how conservative guidance levels are? Or could we see more downward revisions, for example, if you start to pull back on the capital deployment front? Thank you. Hamid Moghadam -- Chief Executive Officer Well, on capital deployment specifically, you may remember that I'm always saying the only reason we provide guidance is because you ask us. We actually don't have a budget or a plan for deploying capital. We look at every investment opportunity one at a time. So all our elements of our guidance. And this doesn't go for just this period. It goes for any period. I would take that one with a grain of salt. We are not afraid to deploy a lot more or a lot less capital if the market conditions warrant it. With respect to conservatism, I would say, we call it as close to the pin as we can get it with a very slight bit of conservative. Not a lot, just a bit. So that, in the majority of the cases, we are pretty confident of what we are saying, but we are not 100% confident. There could be downside beyond that. But I would say we try to call it as we see it and be careful that we don't -- we don't want to disappoint 50% of the time, which is really calling it right on the pin. We'd like to be a little more conservative than that. Now, we don't always get it right. So let's admit that. Tim Arndt -- Chief Financial Officer And Camille, it's Tim, I might build on your first -- the first part of your question as well, which is that at prevailing cap rates and the cost of debt and everything else, there's very little you could actually do in deployment in the year to affect earnings in year one or two. I find that deployment changes tend to have kind of a push effect on earnings. So you should probably have that in your thinking as you watch our guidance. Operator And the next question comes from the line of Nikita Bely with J.P. Morgan. Please proceed with your question. Nikita Bely -- JPMorgan Chase and Company -- Analyst Good morning, guys. The $150 million of other real estate investments. Curious, what exactly was that on the sales? And maybe also, if you could talk about the reduction in development starts. So any color on that, geographic focus or spec or something else? Tim Arndt -- Chief Financial Officer That's basically -- the $150 million is some non-core assets. And we could not hear the second part of your question. Could you repeat that? Nikita Bely -- JPMorgan Chase and Company -- Analyst Reduction in development starts for this year. Any additional information you could provide on what drove that, whether it was geographic based or asset specific or built-to-suit pullback? Dan Letter -- Global Head, Capital Deployment Yeah. Thanks. This is Dan. I'll -- I got a couple of thoughts on that point there around development starts. We adjusted our guidance on development consistent with the adjustment in the occupancy and the operating pool. So as we see demand shifting out, we just expect that we are going to start fewer buildings. We reduced it by about $0.5 billion. That's about half build-to-suit, half spec. We are raising the bar on spec. As Hamid said earlier, we put that guidance out there because you ask for it. We don't need to start these projects. We own the land. We have $38 billion worth of opportunity embedded in that land bank. We have entitlements. We have the teams. They're all geared up, ready to start. We can literally pull the trigger on $10 billion, $12 billion of that tomorrow. So we just look at that. We are just trying to be consistent and tie it to our overall outlook on demand. And there's no particular location or otherwise that we -- that drag that down. Hamid Moghadam -- Chief Executive Officer Yeah. And the only thing I would add to that is that even though we made the adjustment on both the built-to-suit and the spec part, the bias is greater on the spec part. We actually feel pretty good about our built-to-suit volume going forward. So it's really the spec which is discretionary, and we can, as Dan said, write that at any time. Operator And the next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question. Blaine Heck -- Wells Fargo Securities -- Analyst Great. Thanks. So you've called out Southern California as being soft again. Can you just talk about any specific segments of the market that are particularly weak whether that's by submarket or size? And what makes you confident in the recovery even as it seems it might be delayed kind of relative to your original expectations? And secondly, just curious if you can expand on which other high-rent markets might be weighing on the outlook. Thanks. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hey, Blaine, it's Chris Caton. Thanks for the question. So Southern California is a market that continues to soften, vacancy rates are continuing to rise, yes, after different submarkets. The softest area of Southern California is midsized and smaller units in the Inland Empire. The strongest area is probably Orange County. And Los Angeles, while subdued, has a 4% market vacancy rate, so as demand comes into that marketplace, bear in mind, demand has been negative over the last year, a very rare occurrence, as demand comes back in that marketplace, you're likely to see the vacancy rate make a difference in Los Angeles as well. In terms of other markets where we're watchful, the soft markets in the US include New Jersey, Seattle and Savannah. Hamid Moghadam -- Chief Executive Officer Yes. The other thing I would say about Southern California is that don't discount the effect of the port labor issue that was resolved. That took longer, a lot longer than most people thought. And that affects a lot of the people -- a lot of the users in the South Bay immediately adjacent to the ports and the like. So that market can get tight real quick if that port volume comes back. I think that the small to medium spaces in the Inland Empire are kind of a mismatch. They're, by and large, the older buildings that were built there when the market was not really designed for the big 500,000 million square foot buildings. And those are -- somebody who wants a lot of space has to go to the Inland Empire. Somebody who wants 100,000 to 200,000 feet has more choices. So that's where the softness is in the Inland Empire. Operator And the next question comes from the line of Vince Tibone with Green Street. Please proceed with your question. Vince Tibone -- Green Street Advisors -- Analyst Hi. Good morning. Could you discuss the markets of relative strength in your portfolio in terms of demand and market rents? And also, are you seeing any different levels of demand by building size, more broadly? We noticed that occupancy fell the most on a sequential basis, for buildings less than 100,000 square feet, but actually grew for buildings 250,000 to 500,000. So just curious if those trends on occupancy are kind of a fair representation of the demand profile today. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hi, Vince. It's Chris Caton here. So first, in terms of strength, there is a wide range. And speaking of the benefits of diversity, the strongest markets in the world include Mexico, Texas, parts of the Southeast US, Pennsylvania, but also looking out to the Netherlands, Germany and Brazil, Toronto as well, as a strong market. You also have stable markets, Chicago, Southern Florida, Baltimore, D.C. And then, really at Southern California alone is really the main weak market. So that would be the range. In terms of size categories, what you see -- what you hear in the marketplace in terms of tours and, in fact, some leases that are getting made, is there's a bit more activity, particularly among self-performing e-com and retailers at the larger end of the spectrum. That would be the main, I'd say, new news in the last 90 days. Operator And the next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question. Ki Bin Kim -- Truist Securities -- Analyst Thanks, and good morning. So going back to your comments about the softer environment. I'm curious if you've seen any changes in capex or concessions that might be -- that might not be so apparent in the headline face rents. And second question, going back to your comments on strategic capital. Where do you think cap rates are selling out at for good assets and good markets? And does that change your view on the level of contributions that you might make going forward? Thank you. Tim Arndt -- Chief Financial Officer Hey, Ki Bin, it's Tim. I'll take the front half of your question just on free rent. We have seen an increase in free rent. I think what's important to remember there is we've had exceedingly low amounts of free rent granted in the last few years. And I would say the current rates that we've seen in this last quarter, and what we're bracing forward this year, would still not really be on par with long-term averages. I would say that concession is not fully back to normal. But it is turning up logically in this environment. Hamid Moghadam -- Chief Executive Officer Yes. In terms of where deals are being priced out, I would say nine months ago, a year ago, there was very little activity, and we were pricing deals in good markets in the US in the low nine IRRs, albeit not much was happening at those kinds of return expectations. Today, I would say those are 100 basis points lower and there's a lot more volume in that a lot of transactions happening in the marketplace in the low 8s. Europe, that number -- those numbers would be in the mid-7 IRRs. The reason I'm answering in IRR and not cap rate is that the mark-to-market in different locations is significantly vary. For example, for the same IRR, you would be a lot lower cap rate in Southern California than you would be in a market that is leased at market rents. Operator And the next question comes from the line of Tom Catherwood with BTIG. Please proceed with your question. Tom Catherwood -- BTIG -- Analyst Thank you and good morning, everybody. Hamid, I appreciate your comments on rates and the Fed's actions or inaction serving as the key governor of customer activity and leasing right now. But how are you seeing supply chain disruption, like in Baltimore, and geopolitical risks impacting customer behavior, if at all? Hamid Moghadam -- Chief Executive Officer I don't think Baltimore has been a big deal in terms of its impact on our business. It's obviously been a big deal to the people who died in the accident and the like, but -- and to traffic patterns. But not to the customer. The customers have enough optionality that they can deal with those kinds of disruptions. I do think the geopolitical stuff has people a little wigged out, more -- definitely more than last quarter. And look at the interest rates, I mean, we're up a good 70, 80 basis points since the last time we all met. And I think that didn't happen evenly throughout the quarter. I think in the last month that sentiment has changed pretty dramatically. So I think both of those things are weighing on decisions, particularly if the decisions are discretionary. And people, when there are no choices like they were no choices in Southern California, they always lease more space than they need because they don't want to be held short. And when the opposite is and they have some choices, they take their time because they expect better deals if they wait. And that difference, even if it's minor, even if it's 5% to the upside and 5% to the downside can be a 10% swing, which are sort of the kind of numbers we're talking about here. So that's very much what happens in the short term. In the long term, demand has to match supply and they can't keep doing that forever. So now if you're going to ask me exactly what that point is, I can't really tell you. But we think it's a matter of quarters, not years. Operator And the next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question. Jon Petersen -- Jefferies -- Analyst Great. Thank you. Maybe one more question on the port of Baltimore. I know it's not a big container traffic port, but have you seen any knock-on demand show up in other East Coast markets given the dislocation that's created? And then, also, maybe a part two, but I know SoCal has been weak over the past year, you've talked about that a lot, and the resets already happened. I guess I'm curious if you could help us contextualize, from where we stand today, if you compare the strength of like SoCal versus the East Coast markets like New Jersey and Pennsylvania, like from where we stand today, which one looks the best over the next year? Chris Caton -- Managing Director, Global Head of Strategy and Analytics Hey, Jon, it's Chris Caton. First on Baltimore, you're right. The container traffic there is typically 50,000 TEUs a month. The time horizon of necessary diversions is not thought to be more than a couple of months. By comparison, New York, New Jersey is a 300,000, 350,000 TEU port. And a lot of these diversions have gone to Norfolk. So you've seen some leasing in Norfolk. It's not a market where we operate. So no, there are not knock-on effects. As it relates to Southern California versus the East Coast, the SoCal market remains fluid, and I believe -- we believe it will underperform. This is a six-month, 12-month view. Naturally, New Jersey has a completely different set of factors as it relates to rent growth that it's experienced over the last several years in terms of the level of demand that we see in that marketplace, as well as sublease trends. Now, it's not the moment to get bullish on New Jersey. Let's see the port agreement, the IOI port agreement get made. But over time, both will be very strong performers after this period of fluidity and uncertainty. Hamid Moghadam -- Chief Executive Officer Yes. The way I would answer that question is that if you limit it to the next 12 months, I would go PA, New Jersey, SoCal. And if you ask me for the longer term, I would go SoCal, New Jersey, PA. And I would put all three of them in the upper third of markets across cycles. Maybe the upper 20% of markets across cycles. Operator And the next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question. Ronald Kamdem -- Morgan Stanley -- Analyst Hey. Good morning. Just hoping we could put some numbers on the soft demand that you seem to be messaging. So previously you were forecasting 1.5% of stock of net absorption this year. I'm just wondering what that number has shifted to given what's happened over the past 30 to 45 days. And if you can tie in where you see sort of availability rates and next 12-month market rent growth. Thanks. Hamid Moghadam -- Chief Executive Officer Yes. Let me take -- we have taken demand down for this year internally from 250 million feet in the US to 175 million, and fundamentally have kept demand at the same level going forward. What we debated that we were going to do is whether we add the 75 million that we missed this year into the subsequent two years, and that's where the bid and ask is in our shop. And we're not clairvoyant, so that's -- I'm just giving you the range of how we think about it. Now, you answer the second part of your question, Chris. Chris Caton -- Managing Director, Global Head of Strategy and Analytics Yes. As it relates to market vacancies, we look at vacancies, not availabilities. Availability is a range between 150 and 250 basis points above these figures, depending on the cycle. We have vacancies peaking in the mid-6s later this year. So that's up about 20, 30 basis points versus what we discussed last year. I think what's important to understand in the cycle is the recovery potential in 2025 related to each of the constituent pieces. Hamid walked you through the demand picture. But what's important to recognize is the supply picture. That was a big factor over the last year, 18 months. And the meaningful falloff in supply is marked. It's off 80% from peak. It's off about a third from pre-COVID levels. So we're talking about 35 million square feet of starts in the first quarter. That annualizes to about 160 million, 170 million square feet. So you're going to actually see this snap later this year and into next year, and those vacancy rates moving noticeably down, likely to move noticeably down from mid-6s toward 5% over the course of next year. Hamid Moghadam -- Chief Executive Officer One other thing I would -- your response has triggered this. Vacancy rates do not linearly affect pricing power. I think when you're operating under 5%, you've got a lot of pricing power. Now, whether that's 2% or 3%, doesn't matter. You have a lot of pricing power. And even though you might have two customers that really need the space, four are looking for the space because they just don't want to be cut short down the road. So it just sort of feeds on itself. When the market gets to sort of around 6%, you're at equilibrium. When it gets too much above that, you get into a soft market. And that's a macro analysis, obviously, you've got to apply that market to market in each situation. But that's the way we look at it. We don't think we're getting into those levels of vacancy that we've seen in other cycles, even during the good times. The worst that we're projecting in this period is almost as good as the best we've seen in other cycles. So that's a key distinction. And we've just been spoiled by market in three years where vacancies have been lower than they've ever been. And I think you've heard me say at times that, if the normal range of a market is one to 10, we've been operating in a 12, 13, and more recently, I've said we're in an eight or nine. And today, I would say we're in probably six, five, seven. Operator And the next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question. John Kim -- BMO Capital Markets -- Analyst Thank you. I just wanted to get some additional color on the weaker net absorption due to tenants becoming more cost conscious. I'm wondering if this test-the-thesis that industrial rent is somewhat inelastic given it's a small portion of the overall transport and logistics costs? And also, where are tenants going in your view? Are they simply not expanding, or are they downsizing or going to less expensive markets or submarkets? Hamid Moghadam -- Chief Executive Officer So we've actually tried to test that theory by looking at whether Southern California's loss has translated into an equal gain in adjacent markets like Vegas and Phoenix. And the answer is, while absorption has increased in those markets, it doesn't fully account for the drop-off in Southern California. So some of that demand has just been deferred. And the question is when will deferred demand convert to real demand. And that's the $64 million question. Is it one quarter? Is it two quarters? Is it three quarters? Don't know. We think it's a couple of quarters. But it will happen. And particularly the port coming back, that part accounts for over 30% of imports in the US, and it's been basically down. So we think it's going to -- that's going to have a dramatic effect. Now, we may have missed it already for this Christmas season, I don't know. But certainly, next year, that market is going to come back absent a recession or some kind of geopolitical blow-up. Tim Arndt -- Chief Financial Officer And John, I might just add, I guess, the way you're putting the equation together, it is what we see that, yes, the rate environment causes this consternation. But as Chris has been highlighting in a number of his answers, as we look at where utilization sits and some of the capacity that's available, it's just the first place that customers can look in terms of finding a way to continue to operate in the short term. That would ostensibly end, and we'll watch for that as utilization rises, and that's what would add to new demand. Operator And the next question comes from the line of Vikram Malhotra with Mizuho. Please proceed with your question. Vikram Malhotra -- Mizuho Securities -- Analyst Thanks for taking the question. Just two quick ones. First of all, just on the three-year outlook. So it sounds like you're saying '24 is a bit lower than you predicted, '25 and '26 is similar. Does that essentially mean the three-year outlook is kind of adjusted down somewhat? And then, secondly, just to be -- just to give us some numbers. I think what you were saying is the rest of the market rent growth is now, I guess, flattish, but SoCal is down. Do you mind just putting some more numbers on that? Like just how much is SoCal down Q-over-Q or year over year versus what other markets in the US are doing? Thanks. Tim Arndt -- Chief Financial Officer Hey, Vikram, it's Tim. We're not calling anything on '25 and '26. In my prepared remarks -- or maybe I should say, I think our view would be that our views are upheld. And what I tried to highlight in the opening remarks is that if we get to a little bit lower average occupancy this year, recognizing that our three-year forecast called for a more normalized level of occupancy in the end anyway, that's where this concept of, well, maybe the adjustment to same-store from an occupancy change is coming a bit more this year than it would otherwise next year. But right now, we would hold out our view for '25 and '26 in terms of aggregate NOI and same store. Now, rent change in this very immediate term, I'm sorry, market rent growth is a little bit below expectations. That will have some effect, but that will be relatively muted through same-store over the period. Hamid Moghadam -- Chief Executive Officer Yes. Let's just put some numbers since you asked on it. I think in the analyst day, we talked about a three-year forecast for '24, '25 and '26 rental growth of -- sorry, 4% to 6%. I would say we're at the lower end of that range and maybe a little bit lower than that when you look at it over a three-year period. My number, and this is not the official number, my number would be north of 3% and around 4% probably, just shy of 4%. Chris Caton -- Managing Director, Global Head of Strategy and Analytics And then, just on the detailed question on what's happening in market rent growth in the first quarter. Southern California, down 6%, and US down about 1%, 1.2%. So when you multiply it through, you can see all other markets are flat. Operator And the next question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question. Nicholas Yulico -- Scotiabank -- Analyst Yeah. Hi. I was just hoping to get a feel for, again, going back to the occupancy guidance, if there's a way that you can give us a feel for how much decline in new leasing commencements you have been embedded in the number this year. Because it sounds like the retention ratios have been better, so leasing velocity on the new side seems subdued. You talked about that leasing demand forecast being down, I think it was 30% on the numbers you gave, the 250 million to 175 million in the US. How much is like new leasing in the portfolio going to be down this year for the guidance? Tim Arndt -- Chief Financial Officer Well, this is Tim. I'll give it to you in this way. And this might help some of the folks who have struggled looking at the supplemental and some of the stats there, and our messaging. Because what you don't see in the supplemental would be things like, well, how much lease signing occurred in the first quarter. And that was down. Even though you see strong occupancy, that's on commencements, signings were off about 12% in the first quarter. So that's down. You can see that when you look through our pages in our leasing versus occupied statistic where there's only about a 10 basis point difference in those versus a more historical norm of 40 to 50 basis points. So those are the pieces a little bit underneath the surface that are guiding our view that the pre-leasing that we're normally looking for at this point, which is ranging four to six months ahead of commencements is shy and why we think the average occupancy is ultimately going to be lower. Operator And the next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question. Todd Thomas -- KeyBanc Capital Markets -- Analyst Hi. Thanks. Two questions. I guess, first, can you discuss your rent change expectations for the full year and whether anything has changed there as it pertains to the revisions to your outlook? And it looked like rent change on signings was trending in the low 70% range through February, which was higher than the rent change in the quarter. I guess, any thoughts about rent change -- trends relative to this quarter and for the year? And then, my second question, in terms of the occupancy breakout by unit size and your comments about larger and smaller spaces earlier in the call, do you expect a recovery later in the year to be broad-based from a space or unit size? Or do you expect to see more strength or maybe more persistent weakness in either the larger or smaller unit size as conditions tighten up in a few quarters? Tim Arndt -- Chief Financial Officer Hey, Todd, it's Tim. Yes. On rent change, so as mentioned, we had 67% start in the quarter. The signings were 70. So you do get a sense that it can move up and down each quarter. You may also recall, we had very strong rent change on signings in Q4, which may leave you wondering why didn't that show up here in Q1 on the commencements? And that's speaking to just how long this pre-leasing period can be. It can be more than just three months. And for that reason, I expect we'll probably see rent change right now, my view would be it's going to be above Q1, in Q2, and then also higher on the full year, in the low to mid-70s, over 2024 is our current view. Chris Caton -- Managing Director, Global Head of Strategy and Analytics As it relates to the contours, I think I'd first point you to the market color that was given earlier as illustrating the shape of the recovery going forward. As it pertains to different size categories, there is more vacancy and more availability in the over 500,000 category, but that's also where, in the last 90 days, we've seen a little bit of a pickup. So I think we'll see size categories advancing at a similar pace over the course of the year, and there'll be real differentiation across the different markets. Operator And our final question comes from the line of Vince Tibone with Green Street. Please proceed with your question. Vince Tibone -- Green Street Advisors -- Analyst Hi. Thanks for the follow up. I was just curious, are you seeing any other landlords gain to offer more free rent or tenant allowances to try to attract tenants to their vacancies? Hamid Moghadam -- Chief Executive Officer A really interesting question. So this is what has really surprised me from this cycle. We are getting calls from merchant developers that have had financing, have completed projects and are getting panicked. And for us to look at those opportunities. Boy, we're looking at those opportunities. Because that's where a good balance sheet and that's where being on your front foot is all about. I think there were a lot of people in this business that thought, we'll just get some financing at zero cost and throw up some buildings and it will lease. And I think that's what accounted for some of that over-exuberance on the development side. And I think we're going to end up being beneficiaries of that, and I'm seeing that real time. So, yes, I think people who are merchant developers and do not have the financial wherewithal are acting in a somewhat distressed way sooner than I would have guessed. And we're happy about that. So that was the last question, Vince. So with that, I want to thank you for your interest. And this is part of a long story and we'll be there next quarter to tell you about the following chapters of it. Take care. Bye-bye.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, ladies and gentlemen, and welcome to the RTX first quarter 2024 earnings conference call. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, chairman and chief executive officer; Chris Calio, president and chief operating officer; Neil Mitchill, chief financial officer; and Jennifer Reed, vice president of investor relations. This call is being webcast live on the Internet and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding acquisition accounting adjustments and net non-recurring and/or significant items, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward looking statements provided in this call are subject to risks and uncertainties. RTX SEC filings, including its forms 8-K, 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. [Operator instructions] With that, I will turn the call over to Mr. Hayes. Greg Hayes -- Chairman and Chief Executive Officer Thanks, and good morning, everyone. As you all know, next week at our annual shareholders meeting, I'll be stepping down as CEO and turning the reigns over to Chris Calio. For the past two years, Chris has had responsibility for leading our three business units, Pratt & Whitney, Collins and Raytheon. There's no better evidence of his success than our results this quarter with strong sales and operating profit growth and a record backlog of over $200 billion. I'll be back at the conclusion of the call for some final comments, but let me turn it over to Chris right now to give you an overview of the company and our first quarter performance. Chris? Chris Calio -- Chief Operating Officer Thank you, Greg, and good morning, everyone. First, I want to acknowledge and express my appreciation for Greg's leadership. He has created significant value over the last decade as CEO and has shaped RTX into the best portfolio in A&D with our three industry leading businesses leaving a strong foundation for a continued success. Before we discuss our first quarter, I want to spend a few moments on the strength of this foundation and how we plan to build upon it in 2024 and beyond. I know we've highlighted it before, but I think it's worth repeating. Collins is an industry leader, No. 1, or No. 2 on 70% of its product portfolio and has an off-warranty installed base of $100 billion, which will create decades of aftermarket growth. At Pratt, the large commercial engine business has an installed base of 12,000 engines and a backlog of over 10,000 GTFs, which will also drive growth for decades to come. But Pratt is much more than the GTF. Pratt & Whitney Canada remains the premier small engine business with sole source positions on over 200 platforms and 63,000 engines in service, which also comes with long aftermarket tails. And Pratt's military engine business is set to power the F-35 and B-21 bomber well into the future. At Raytheon, our defense franchises are essential to the US and our allies as they confront the threats of today and tomorrow with programs like the Patriot air defense system, GEM-T, NASAMS, SPY-6 radars, AMRAAM, Tomahawk and the Standard Missile family, and future technologies like LTAMDS, hypersonics and LRSO, the long range stand-off cruise missile. So as we move forward, our focus will continue to be transforming RTX from the best portfolio in A&D into the best company in A&D. This means being recognized by our customers as a trusted partner that executes on its commitments, it means leveraging our core operating system to help drive operational excellence in terms of quality and cost, it means being the provider of differentiated technologies that create a competitive advantage, and it means converting all of these attributes into best-in-class financial performance and long-term shareholder value. All right, with that, let me move to the quarter on Slide 2. We've gotten off to a strong start to the year, with organic sales up 12%, segment operating profit up 10%, and free cash flow in line with our expectations. Commercial OE was up 33% across RTX, driven by continued strong demand for new aircraft. The commercial aftermarket was up 11% as we continue to see strong growth in both domestic and international RPKs. So clearly the commercial arrow demand is there. But as you all know, the industry is still working through supply chain constraints and other challenges, which is leading to some OE production rate uncertainty. And this will continue to be a watch item for us for the year. On the defense side, we delivered 7% growth year over year and ended the quarter with a defense book-to-bill of 1.05 and a backlog of $77 billion. We're pleased the fiscal year 2024 spending bills have been enacted and provide $886 billion in defense spending, which is up 3%. But more importantly, the budget supports our key programs and technologies, including next generation propulsion, critical munitions, and upgrades to the F-135, ensuring it remains the only engine powering every variant of the F-35 Joint Strike Fighter. The budget also supports investment in key capabilities to address current and future threats, such as systems that counter unmanned aircraft and hypersonics, where RTX provides leading technologies. And we are encouraged by the progress on the Ukraine supplemental bill, which the DoD will use to further deepen critical US munition stockpiles such as TOW, Javelin, and Excalibur, and provide needed air defense capabilities to the region with NASAMS and Patriot. Internationally, we continue to see heightened demand from US allies. In the quarter, Raytheon was awarded a $1.2 billion contract to supply Germany with additional Patriot air and missile defense systems. OK, let me move beyond the end market dynamics and talk about some of our critical initiatives. And I'll start with an update on the GTF fleet management plan. Continue to stay on track here, and our financial and operational outlook remain consistent with our prior comments. As you may have seen, in March, the GTF airworthiness directives were issued and are consistent with our service bulletins and service instructions. On the technical side, the results from the ultrasonic angle scan inspections have all been in line with our initial expectations and assumptions. With regard to new engine production, as we said in our last call, all GTF engines being delivered to our customers' final assembly lines have full-life HPC and HPT disks. And on the MRO side, we have started the process of incorporating full-life disks into certain engine overhauls. And as we previously said, we expect to progressively ramp this effort throughout the year. In addition, the PW1100 engine shop visits completed in the quarter were in line with our plan and up 50% year over year. With regard to overhauled turnaround time, our average wing-to-wing turnaround time assumptions remain consistent with our prior guidance of roughly 250 to 300 days. With the AD now issued, we are now essentially at our peak AOG level. We continue to expect an average of roughly 350 AOGs from 2024 through 2026. And lastly, we have reached support agreements with nine of our customers. And these are in line with our assumptions. With that, let's turn to Slide 3 and I'll share a bit more on how we're leveraging our core operating system in digital transformation to drive quality, efficiency and productivity. As I said before, our core operating system is all about driving continuous improvements that compound over time to create a significant impact on our business. Let me give you a few recent examples. Our nacelle business within Collins deployed core across seven factories that support the A320neo program, resulting in an 8% improvement in on-time delivery and a 17% improvement in quality. And at Raytheon, on the TPY-2 program, which is a radar designed to detect and intercept ballistic missiles, we leveraged core practices to help double first-pass yield on high-volume circuit cards, resulting in a 40% reduction in manufacturing hours per unit and improved on-time delivery. We also remain committed to enhancing our factories through digitization, automation, and connected equipment. Last year, we connected 20 factories and have another 20 planned to be completed by the end of this year. Once fully connected, these factories will achieve improved overall equipment efficiency, better quality, and ultimately higher output. And lastly, we will continue to invest both directly and indirectly through RTX Ventures and our cross-company technology roadmaps to develop differentiated technologies to fill our product pipeline. These include areas such as advanced materials, electrification, power and thermal management, and microelectronics. This year, we will invest about $3 billion in company funded R&D along with $5 billion in customer funded R&D to develop new technologies and products. We are also expanding our manufacturing capacity in key areas to meet customer demand, a key priority within our $2.5 billion of capital investment in 2024. One of our most significant new products coming to the market is LTAMDS, which is the next generation advanced 360-degree air defense radar that provides significant performance improvement against a range of threats, including UAS and hypersonics. This program recently completed another successful live fire event with representatives from seven countries in attendance. We expect both the first domestic LRIP and international FMS contracts this year. And today, we're announcing $115 million expansion of our Raytheon Redstone Missile Integration Facility in Huntsville, Alabama. When complete, the factory's capacity for integrating and delivering several of our critical munitions programs will increase by more than 50%. So with the best portfolio within A&D, core driving our continuous improvement in operational excellence and ongoing investments in next generation technologies, I'm incredibly confident in RTX's future and our ability to transform into the best company in A&D. With that, let me turn it over to Neil to take you through our first quarter results. Neil? Neil Mitchill -- Chief Financial Officer Thanks, Chris. I'm on Slide 4. As Chris said, we got off to a really good start this year on a number of our key financial metrics across RTX with Collins, Pratt and Raytheon all making progress in line with our expectations. Additionally, we completed the sale of Raytheon cybersecurity business at the end of the first quarter with gross proceeds of $1.3 billion and we've made progress on deleveraging the balance sheet, having paid down over $2 billion of debt since we initiated the ASR last year. RTX sales of $19.3 billion were up 12% organically versus prior year, and that is on top of 10% growth in the first quarter of last year. Demand strength was also reflected in our backlog, which is now $202 billion and up 12% year over year. Segment operating profit growth of 10% was partially offset by expected headwinds from lower pension income and higher interest expense. And our effective tax rate for the quarter included a current period foreign tax benefit. Adjusted earnings per share of $1.34 was up 10% year over year. And on a GAAP basis, EPS from continuing operations was $1.28 and included $0.29 of acquisition accounting adjustments, a $0.21 benefit related to tax audit settlements, an $0.18 net gain related to the cyber business sale, a $0.13 charge related to initiating alternative titanium sources, and $0.03 of restructuring and other nonrecurring items. And finally, free cash flow was an outflow of $125 million in the first quarter, in line with our expectations, and a $1.3 billion year-over-year improvement. As planned, the timing of defense milestones and increase in shop visits, along with inventory build to support our growth drove higher working capital this quarter. OK. Let me turn to our business units and some of the progress we made in the quarter. You heard Chris give a status update on the GTF fleet management plan, so let me touch on our top priorities at Raytheon and Collins. At Raytheon, the business continues to see incredible demand. And as we said on our last call, we're taking actions to advance our key franchises, improve our supply chain, and drive margin expansion. In the quarter, Raytheon saw 50 basis points of sequential margin improvement and 20 basis points on a year-over-year basis. On the material front, we saw a double-digit increase in material receipts in the first quarter versus prior year, the fourth consecutive quarter of growth, which of course is driving the top line, but more importantly, helping to alleviate bottlenecks in the manufacturing processes and burn down overdue sales. Moving over to Collins, our focus remains on driving incremental margins through continued commercial OE and aftermarket growth and the benefit from ongoing structural cost reduction. In the quarter, Collins saw strong sales growth and 90 basis points of margin expansion on both a sequential and year-over-year basis. And we expect future volume increases to drive continued fixed cost absorption benefits across the business this year. On the cost reduction front, we continue to make progress as well. For example, Collins is in the process of shifting 2.7 million manufacturing hours to best cost locations by the end of 2025. To date, over 2 million of those hours have already been moved, with 400,000 more planned for the rest of the year. And finally, we also achieved an incremental $105 million of RTX gross merger cost synergies in the quarter, and we're approaching the $2 billion target we updated last year. So good progress on our top priorities to start the year. With that, based on our first quarter results and strong backlog, we remain on track to deliver our full year outlook, including full year sales of between $78 billion and $79 billion, which translates to between 7% and 8% organic revenue growth. In addition, we continue to see adjusted earnings per share between $5.25 and $5.40 and free cashflow of approximately $5.7 billion. Now, let me hand it over to Jennifer to take you through the segment results. Jennifer? Jennifer Reed -- Vice President, Investor Relations Thanks, Neil. Starting with Collins on Slide 5, sales were $6.7 billion in the quarter, up 9% on both an adjusted and organic basis, driven primarily by continued strength in commercial aftermarket and OE. By channel, commercial aftermarket sales were up 14%, driven by a 17% increase in parts and repair, a 16% increase in provisioning, and a 3% decrease in mods and upgrades. Commercial OE sales for the quarter were up 14% versus the prior year, driven by growth in wide-body, narrow-body and bizjet platforms. And defense sales were up 1%, primarily due to higher volume. Adjusted operating profit of $1.05 billion was up $145 million, or 16% from the prior year, which dropped through on higher commercial aftermarket volume, partially offset by unfavorable OE mix, higher space program costs, and increased R&D expense. Looking ahead, on a full-year basis, we continue to expect Collins sales to grow mid to high single-digits on both an adjusted and organic basis with operating profit growth between $650 million and $725 million versus 2023. Shifting to Pratt & Whitney on Slide 6. Sales of $6.5 billion were up 23% on both an adjusted and organic basis with sales growth across all three channels. Commercial OE sales were up 64% in the quarter and higher engine deliveries and favorable mix in the large commercial engine business. Commercial aftermarket sales were up 9% in the quarter, driven by higher volume within large commercial engines, primarily related to GTF overhaul activity, as well as an increased volume at Pratt Canada. Legacy large commercial engine aftermarket revenues were down slightly versus prior year as a result of increased allocation of material to support the GTF fleet. And in the military engine business, sales were up 21%, primarily driven by higher sustainment volume across the F-135, F-117, and F-100 platforms, and higher development volume, primarily driven by the F-135 engine core upgrade program. Adjusted operating profit of $430 million was flat to prior year. The benefit of favorable commercial OE mix and drop through on higher commercial aftermarket volume was partially offset by headwinds from increased commercial OE deliveries, unfavorable commercial aftermarket mix, and the absence of a favorable $60 million prior contract matter. Higher military volume and favorable mix was more than offset by higher R&D and SG&A expenses. Turning to Pratt's full year outlook, we continue to expect sales to grow low double digits on an adjusted and organic basis and adjusted operating profit to grow between $400 million and $475 million versus 2023, as large commercial engine aftermarket continues to ramp and military volume grows. Now, turning to Raytheon on Slide 7. Sales of $6.7 billion in the quarter were up 6% on both an adjusted and organic basis, primarily driven by higher volume on land and air defense systems and advanced technology programs. The increase in land and air defense system programs reflect higher customer demand for the Patriot, counter-UAS systems, and NASAMS. Adjusted operating profit for the quarter of $630 million was up $46 million versus the prior year, driven primarily by higher volume and improved net productivity, partially offset by unfavorable mix. Also, recall that Q1 2023 net productivity included the exercise of a significant unfavorable contract option that did not repeat in the first quarter of this year. Bookings and backlog remain very strong. In the first quarter, bookings of $8.1 billion resulted in a book-to-bill of 1.23 and a backlog of $53 billion. In addition to the German Patriot award that Chris mentioned earlier, Raytheon also saw significant orders for the GEM-T, NASAMS, and classified work. Looking ahead, we continue to expect Raytheon sales to grow low to mid-single-digits organically, with operating profit up between $100 million and $200 million versus 2023. As a reminder, the profit outlook includes an $80 million year over year headwind from the sale of the cybersecurity business. With that, I'll turn it back to Chris to wrap things up. Chris Calio -- Chief Operating Officer Thanks, Jennifer. I'm on Slide 8. With our portfolio strength and current demand, our overall backlog is at a record $202 billion. And our focus as a team remains on executing this backlog to meet our customer commitments and driving operational performance. And our top priorities for the year remain unchanged. First, at Pratt, it's about continuing to execute the GTF fleet management plan. Second, at Raytheon, it's about delivering the backlog and improved margins. And third, at Collins, it's about generating strong incremental margins. As I discussed, our core operating system underpins our execution on these priorities and drives continuous improvement across RTX. At the same time, we're investing over $10 billion in research and development, modernization, and digital capabilities, continuing to evaluate our portfolio for incremental opportunities to further enhance our focus and prioritize future investments. And as we do this, we remain on track to return $36 billion to $37 billion of capital to shareowners from the date of the merger through next year. So with that, let me turn it over to Neil. Neil Mitchill -- Chief Financial Officer Thanks, Chris. Before we go into Q&A, I want to quickly update everyone on an investor relations team leadership transition. After three years leading the team, Jennifer Reed is moving on to her next opportunity. Jennifer took the helm in an unprecedented environment and worked tirelessly to ensure all of our stakeholders had timely and clear information during the critical post-merger years for RTX. I want to thank Jennifer for her leadership and I also want to introduce Nathan Ware, who is coming over from our Collins business to lead investor relations. Some of you will remember Nathan as he was a member of the UTC IR team leading up to the merger. But since then, Nathan has held a couple of roles at Collins and most recently as CFO of the interiors business. Jennifer and Nathan will work to ensure a smooth transition for all of us and all of you. And with that, we are ready to open the line for our first question. Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Myles Walton of Wolfe Research. Your question please, Myles. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. And thanks for the help, Jennifer, over the years. Can you talk to the Pratt aftermarket first to start and sort of if there is risk to achieving the full year guidance, given the harder comps that play out for the rest of the year, given the 9% in the first quarter and low double digits expected for the full year? Neil Mitchill -- Chief Financial Officer Good morning, Myles. This is Neil. I'll start out, and Chris can add anything here. But a couple of things on the Pratt aftermarket. I think 9% aftermarket growth in the first quarter was largely as we expected. We took the first quarter to make sure that we started off on a strong foot with respect to the GTF aftermarket overhauls, and I'm sure Chris can provide a little more color there. In doing so, there was a little bit lighter material allocation to the V2500s. We're actually down a handful of shop visits year over year in the first quarter, a little bit -- around 175 or so. We still feel confident though that we'll hit 800 shop visit inductions on the V2500 for the full year. And so, what we expect to play out over the remainder of the year is that we will see more and more of those shop visits come in. We'll also see the content on those shop visits increase. So we'll see better drop through on the legacy aftermarket. Back in January, we talked about the PW2000s and PW4000s. There's some puts and takes there. They largely offset for the year. So it's really about seeing that legacy aftermarket continue to grow. So full year, still expect low teens sort of growth in the aftermarket of Pratt and we're confident that we'll see the material flowing to support that. Chris Calio -- Chief Operating Officer Yeah, I mean, I guess the only thing I would add, Myles -- this is Chris -- is to Neil's point, we know we needed to come out of the gate strong on GTF MRO given the situation in the fleet management plan. And so, we were allocating material and resources with that in mind. And I think we saw the fruits of that here in the first quarter. But as Neil said, we continue to see the demand on what we call the mature fleets, the V and others. And that ramp up is calibrated in our number for the year. So still feel confident it's going to deliver the full year shop visits that we need. Myles Walton -- Wolfe Research -- Analyst All right. Thanks. Makes sense. Operator Thank you. Our next question comes from the line of Kristine Liwag of Morgan Stanley. Please go ahead, Kristine. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning, everyone. Chris Calio -- Chief Operating Officer Morning, Kristine. Kristine Liwag -- Morgan Stanley -- Analyst Greg, thank you for your leadership over the years. And, Jennifer, wish you the best in your next endeavor. So, maybe on GTF, Chris, thank you for providing more color in the GTF fleet management plan. And at this point, it seems like everything is progressing well. So as we look forward to understanding the risk retirement, are there other milestones you're monitoring to see if there could be potential risk reduction? Is there a number of specific completed AOGs or more customer agreements to be completed? Any sort of gauge to help us understand risk retirement would be helpful? Chris Calio -- Chief Operating Officer Sure. Thanks, Kristine. Good morning. So look, the GTF fleet management plan is a multiyear process, and we're going to continue to grind through that over the next three years or so. And we've laid out all of the key enablers. We listed them on the call today. We've done it historically. And that's going to be AOG levels. That's going to be turnaround times. And so, again, we've given those sort of ranges on each of those key enablers, and we're going to continue to do everything we can to stay within or move to the lower end of those ranges. And again, the single biggest enabler for us is MRO output. We have a very good first quarter, but we've got a large growth plan here in 2024. And so, for us, it's about material flow, including the new powdered metal parts that we're going to be putting into the engines as we said during the last call and during our comments. We continue to add the full life HPC and HPT in MRO, and it's going to ramp throughout the year. So that will be a key indicator for us. The more output we can get, obviously the more relief we can get the fleet, the less AOG days, and then the less penalties. It's really that simple. So for us, it's all about the MRO enablers, chief among them, continuing to ramp up the powdered metal part production and insertion into MRO [Inaudible]. Kristine Liwag -- Morgan Stanley -- Analyst Great. Thank you very much. Chris Calio -- Chief Operating Officer Yeah. Sorry about that feedback there, Kristine. So hopefully that all came through. Kristine Liwag -- Morgan Stanley -- Analyst Very helpful. Appreciate it. Operator Thank you. Our next question comes from the line of Seth Seifman of J.P. Morgan. Your question please, Seth. Seth Seifman -- JPMorgan Chase and Company -- Analyst Hey. Thanks very much and good morning. Maybe kind of a small picture question here, but it is one that we get a lot. When you think about the trajectory of aircraft on ground, and it seems like we are right around the highest level we'll see here at -- in the 550-ish level, when we think about where that goes from here, do we think of that more as a plateau for the remainder of the year or for a couple of quarters? Or do we start to see some progress there? And when you think about where turnaround times are kind of now and the improvement that you can make over the next few quarters, is there anything that you can kind of lay out for us to gauge that? Chris Calio -- Chief Operating Officer Hey Seth, this is Chris. Thanks for the question. Yeah, so look, we are as we said in our comments essentially at peak AOG. I mean, there'll be some perturbations a little bit above, a little bit below, but we see that as kind of the peak and we're going to start to gradually chip away and move that down. So again, as I said to Kristine's question, the No. 1 enabler of that is our MRO output. And again, strong start to the quarter but we've got a big plan for the year and we're focused on turnaround times and new material. At the end of the day, in terms of our MRO output, it's not so much about capacity. We've got enough shops, we've got enough labor, it's about material flow. The faster that we can flow material, faster we can take turnaround times down, increase output, and then burn down the backlog of those engines waiting for induction. Seth Seifman -- JPMorgan Chase and Company -- Analyst Thank you very much. Operator Thank you. Our next question comes from the line of Ron Epstein of Bank of America. Your question please, Ron. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, guys. Chris Calio -- Chief Operating Officer Good morning, Ron. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Could you speak a little bit to the supplemental that got through the house and how that plays out for your defense business. What goodies are in there for you guys? Chris Calio -- Chief Operating Officer Hey, good morning, Ron. This is Chris. So, as I'm sure you've seen, if you break down sort of the supplemental into its big buckets, it's about $60 billion for Ukraine, another $25 billion or so for Israel, and $10 billion for INDOPACOM. So, when we look at our product portfolio against those big buckets, we look at Ukraine and say about two-thirds of that is addressable with RTX products. Think GEM-T, NASAMS, Patriot, AMRAAM, AIM9X, Israel, we kind of handicapped that as about 30% addressable, stockpile replenishment, Iron Dome, David's Sling procurements, and then INDOPACOM, again, roughly that 30% addressable with the RTX product suite, namely SM-6, Tomahawk, AIM9X. So again, the services will have their specific lists of what they're looking for, but again we think our product portfolio is pretty well positioned to address the needs in each of those theaters. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Great, and if I may, just a quick follow on. You had some challenges with the fixed development -- fixed price development program within missiles. How's that going? Chris Calio -- Chief Operating Officer Yeah, so again, when you look at the productivity story at Raytheon, Ron, that's a big part of the continued margin expansion. And so, in the quarter we saw improvements in productivity, which is really helpful. Again, as you know, our productivity plan for the year is effectively no productivity, but last year, of course, we had some headwinds in the productivity department. So again, overall an improvement for the year. We've still got some classified programs, fixed price that we are continuing to work through. We said that's kind of a 12 to 18 month journey as we work through those. I would say on a number of them, we've made some good progress toward milestones and others we're going to continue to battle our way through during that period. Neil Mitchill -- Chief Financial Officer Chris, I'll just add with respect to the productivity, in the first quarter we saw about a $58 million year over year Q1 to Q1 improvement. Of course, we had the exercise of an option last year, which accounts for maybe, 55% of that improvement. But nonetheless, we're expecting $200 million year over year and continue to expect $200 million year over year. And so, good progress in the first quarter. But there's still three quarters to go, but we are encouraged by the shift that we've seen here in the first quarter so far. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Great. Thank you. Operator Thank you. Our next question comes from the line of Cai Von Rumohr of TD Cowen. Your question please, Cai. Cai Von Rumohr -- TD Cowen -- Analyst Yes. Thanks so much. So you had a 23% gain at Pratt in the first quarter. If we're going to low double digits, call it 11%, 12%, you have to have a sharp deceleration as you go through the year and yet you're still guiding to what, low teens for the aftermarket which would suggest either your total guide is low or we're going to see a flat to down year in commercial or military as we go through the year. Can you give us some color in terms of each of those three parts of Pratt's business and their quarterly sequence as we move through the year? Neil Mitchill -- Chief Financial Officer Sure. Cai, let me start here. I mean, we had a really strong start to Pratt's first quarter. Most of that was on the back of commercial OE deliveries, up 40% almost in the first quarter on a unit basis. So that obviously drove the top line and some good mix there too between installs and spare engines as we look to position the GTF fleet as best we can to start the year. I think some of that's going to moderate clearly as the rest of the year unfolds. So I think we had a good start out of the gate on installs. On the aftermarket side, you're right, we're going to see more of the mid-single-digit type of growth in the next three quarters. So again, that will be fueled by V2500s coming up a little bit. The top line is going to be also bolstered by GTF aftermarket, which of course doesn't come with nearly as much profit, but will certainly help the fleets get healthier. And military also had a really strong first quarter start. The material coming in in the first quarter was positioned to support the aftermarket principally in the military business. And we do see that slowing down a bit in the next part of the year. So those are the key ingredients. Not going to get into the specifics on a quarterly cadence here, but we're just one quarter into the year, but do -- a good start to the year, and we'll see we're kind of holding on to our guidance at this point. Cai Von Rumohr -- TD Cowen -- Analyst Thank you. Operator Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is open, Sheila. Sheila Kahyaoglu -- Jefferies -- Analyst Hey. Good morning, Chris, and Neil. Thank you. And Jennifer, congratulations on your next move. Wishing you all the best and thank you. I wanted to ask one on Collins, maybe Neil or Chris. Just the guidance for the year implies a step up 16.6% margins versus a 15.7% adjustment in the quarter -- adjusted basis in the quarter. Can you maybe talk about what drives that margin expansion as we progress through the year at Collins and if you could give us any more detail on the impairment of $175 million? Neil Mitchill -- Chief Financial Officer All right, let me start, Sheila. As I think about -- first, let's start with the first quarter for Collins. It was a really good quarter. We had about $145 million of profit growth on an adjusted basis. We've talked about the Collins growth trajectory really being driven by the aftermarket. Now, there's still a long ways to go. We put out a range of $650 million to $725 million for the full year. And so, what we're going to see is increased drop-through on the continued cost reduction essentially that Collins embarked upon several years ago. And we're starting to see the cost associated with achieving that cost reduction ease, as well as the benefit from the actions start to drop through in the form of stronger incrementals. So feel like the aftermarket trajectory supports that at this juncture. And that I think is going to really continue to be the key driver for the Collins profit growth for the rest of the year. If I just comment for a minute on the $175 million. As we said in our remarks, that charge related to some procurement of titanium, which I know you all know is an important commodity for the aerospace industry. Given a number of ongoing supply chain dynamics around aerospace-grade titanium in particular, especially as it relates to the titanium that we use in our landing gear manufacturing at Collins, we've taken some steps to secure alternative sources for that supply. And it's taken us some time to do that, frankly. So specific to the charge, we reached an agreement with tow new suppliers during the quarter in connection with those agreements, as well as some sanctions imposed by Canada, which were announced in February. We took a charge to reflect two things. One was the higher purchase commitment cost that came about as a result of these two new agreements. And the second is the impairment of about $75 million of costs that had been previously capitalized on the balance sheet associated with a specific program that are no longer recoverable. So as we talked about since 2022, we've been evaluating our global sourcing strategies to mitigate the potential impact of sanctions and other restrictions. And frankly, we've de-risked that in many areas. And I think this is an important step in putting this issue behind us. So, feel good about the agreements we have, but they're certainly at a higher cost, and so we took a charge to deal with that. Sheila Kahyaoglu -- Jefferies -- Analyst Great. Thank you. Neil Mitchill -- Chief Financial Officer You're welcome. Operator Thank you. Our next question comes from the line of Doug Harned of Bernstein. Please go ahead, Doug. Doug Harned -- AllianceBernstein -- Analyst Yes. Good morning. Thank you. On the defense side, so in Raytheon you made a leadership transition, Wes Kremer retired in Q1. Can you talk about how, if at all, you're thinking about the strategy differently? And I'd say in two areas, one, you mentioned a little bit about this before in terms of bringing margins up to your objectives in 2025, which presumably fixed price contracts play into that, but also the supply chain progress. And then, second, back in Paris, you talked about a need for a new strategy on the space side, to really reinvigorate growth there. Can you comment on how you're thinking about those now with the new leader in place in Phil Jasper? Thanks. Chris Calio -- Chief Operating Officer Yep. You bet, Doug. Good morning. This is Chris. So let's start first on the first part of your question here on the supply chain and Raytheon margins and how we're thinking about that. If you just take a step back for a sec, Doug, it's a tremendous backlog at Raytheon. You saw the increase here in Q1. A big part of that, obviously, is the continued focus on execution, in particular the supply chain. We've had four consecutive quarters of material receipt growth at Raytheon. So feeling like the focus on the supply chain and the health of the supply chain is starting to pay dividends and we're seeing that flow through, again, with some of the margin increases here in Q1. And so, again, Phil and team are incredibly focused on execution, head down and execution on this backlog at the margins that we need. And again, big part of that is supply chain. And we're adding production capacity as well to meet the demands of this ramp. You heard us announce today Huntsville. Last quarter we talked about the expansion in Camden, Arkansas. So again, putting in the production capacity that we need in driving material. So that's where the focus is. On space, we did talk about a bit of a pivot, Doug, from a space prime, if you will, to being more of a component supplier to the space primes. And I think when you look at our strengths in that portfolio, I think that pivot is the right one. We've got historical strength in some of the exquisite space areas. We've got some other strengths in some of the key components that go in to the prime satellites and buses. But again, I think that's where we're going to be shifting away from perhaps being a space prime to being more of a component supplier. Doug Harned -- AllianceBernstein -- Analyst Very good. Thank you. Operator Thank you. Our next question comes from the line of David Strauss of Barclays. Your line is open, David. David Strauss -- Barclays -- Analyst Thanks. Good morning. Best of luck, Greg. I enjoyed working with you. Same thing, Jennifer. Chris, on the GTF plan, I think it's calling for disc replacement, replacement on 3,000 or so engines. Can you just tell us at this point how many have actually seen full replacement actually having been done at this point? That's my first question. Then the second question, you reached an agreement with Spirit Airlines in the quarter that was made public. Is that amount kind of on a per-AOG basis representative of your other customer agreements? Because that would seem to imply a higher compensation number than you've baked into your forecast? Thanks. Chris Calio -- Chief Operating Officer Yep. So on the first question, David, yeah, the disc replacement. So, again, we're at early stages. I told you this was going to be a three-year process. Again, the priority was making sure everything we delivered to our customers' final assembly lines had the full life powder metal parts and that's what's happening today. It was going to be a ramp throughout the year into '25 on insertion of those full life parts into MRO. So I would say today it's early days. And so, there haven't been a ton that have received all of those things. But as we said before, we're working hard to optimize the work scopes there, depending on where the engine is operating, what configuration it has, was it going to come in for another visit within this time frame anyway depending on where it operated. So again, the focus is on output and part of that is optimizing the work scope. But again, early days. As for the customer compensation, we've got about nine agreements under our belt, which represents about a third of the fleet. I think we're close on a number of other significant ones, and the compensation on all those remains within the guidance that we provided on this. Operator Thank you. Our next question comes from the line of Rob Stallard of Vertical Research. Your line is open, Rob. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Chris Calio -- Chief Operating Officer Good morning, Rob. Rob Stallard -- Vertical Research Partners -- Analyst Greg, all the best for the future, and Jennifer, thanks for all your help. It's been interesting times, obviously. Greg Hayes -- Chairman and Chief Executive Officer Obviously. Rob Stallard -- Vertical Research Partners -- Analyst A question for Chris probably. At Collins, there's clearly some things going on with the 737 MAX at the moment. I was wondering what sort of implications they could potentially be for the Collins business and what do you see as the risk of potential de-stocking as this year progresses? Chris Calio -- Chief Operating Officer Yeah. Hey, Rob. Yeah, as you pointed out, significant content at Collins on 737 and 787, so across the main growth platforms there at Boeing. I would say that, I mean, we've kind of mentioned this upfront, we've got some, I guess, some uncertainty around rates today. We think that we've calibrated a lot of that in, but again I know the Boeing company will provide their guidance tomorrow, so we won't get out ahead of them. We're just kind of focused on working with them, supporting them through the dynamics in play, and preparing to take whatever actions we think necessary, depending on the guidance that they provide. But I'll just say that the team has worked very hard to go drive the material and we need to support their rates, and we've got the capacity to do so. Rob Stallard -- Vertical Research Partners -- Analyst OK. Thanks, Chris. Operator Thank you. Our next question comes from the line of Noah Poponak of Goldman Sachs. Please go ahead, Noah. Noah Poponak -- Goldman Sachs -- Analyst Hey. Good morning, everyone. Chris Calio -- Chief Operating Officer Hi, Noah. Noah Poponak -- Goldman Sachs -- Analyst Two follow-ups on topics already asked about, but on the powdered metal process, can you quantify even if roughly how many engines that are off wing are actually in an MRO facility now versus waiting in line to get into one? And then, Neil, on the defense margins, the guidance implies that each quarter, the rest of the year looks roughly similar to the first quarter. You have the framework next year for a decent amount of expansion. I would have thought you would have sort of ramped through this year into that '25 expansion. How do we kind of flip in '25 or do I just have the numbers off there? Neil Mitchill -- Chief Financial Officer No, let me start with defense and I'll hand it off to Chris to hit your first question. But, listen, I think we had a number of headwinds last year. I think you're all well aware of that. And so, as we put together our outlook for this year, we essentially assumed no productivity for the year. Now, as Chris said, and I talked about earlier, that's a significant step-up from what we experienced last year, and largely last year was driven by a handful of fixed price development programs, but we're not out of the woods there. So what I would say is, we took an approach that is not assuming a huge uptick. Remember, this is a business that several years ago was kicking off $300 million, $400 million, and $500 million of positive productivity. There is still positive productivity in the Raytheon business each quarter, but it's been overwhelmed by the negatives. And so, at this point, I think we're really pleased to see a quarter like this to start the year. There's work to do, obviously, to get multiple quarters together that look like this one going forward. And that's what we're focused on. We're really focused on improving the health of the supply chain and moving the material through that you could see has come in, and now we got to get it through the entire manufacturing process to meet these important needs of our customers. And that's really where our focus is. I do think it will step up in '25. One encouraging thing is we had significant orders during the quarter and the margins in that new backlog are very healthy. The mix of those new orders, about 60% foreign sales. So it's a good start, but one quarter at a time. Chris, maybe a couple of comments? Chris Calio -- Chief Operating Officer Yeah, sure. So I'm not going to get into the specific numbers on where things stand in terms of those engines waiting to be inducted. But again, you look at the turnaround times, the extended turnaround times that we've talked about, engines coming off today are going to have to wait a bit before they actually do get inducted and enter into gate one in the MRO process. Suffice it to say, and we kind of alluded to this up front, big step up this year in GTF shop visits. And that's why we've played a little bit of the allocation game, in the last year, early this year, to get off to a strong start there. Again we've got a big ramp on GTF MRO throughout the year in order to support this fleet. Again we think we've got the capacity to do it, the labor to do it, the partners in our MRO shops who are incredibly adept at this, it's about material flow. Noah Poponak -- Goldman Sachs -- Analyst Neil, the fixed price development programs that have been a challenge in Raytheon Defense, when do those end? When do those move out of development? Neil Mitchill -- Chief Financial Officer Yeah, so here's a couple ways to look at it. About 1% of our existing Raytheon backlog today constitutes those programs. And I'd say it's about 12 to 18 months. There's a few of them. So we still have a little ways to go. We are making progress, critical milestones on each program. In the first quarter, we had net unfavorable productivity of about $28 million. Nearly all of that was associated with these programs. So there's still some headwinds that we're encountering as we get additional technical learning and going through testing. But that's the timeframe and that's the magnitude I would put on it. Noah Poponak -- Goldman Sachs -- Analyst OK. Thanks for taking my questions. And, Greg and Jennifer, thanks for all the help over the years. Greg Hayes -- Chairman and Chief Executive Officer Thanks, Noah. Operator Thank you. Our next question comes from the line of Peter Arment of Baird. Peter, please go ahead. Peter Arment -- Robert W. Baird and Company -- Analyst Thanks. Good morning, everyone, and Greg and Jennifer, best of luck. I've enjoyed it over the years. Chris, on Raytheon, Europe continues to be a really strong region for bookings. Maybe you could talk about the outlook there and how should we think about, I guess Neil just touched upon it, the FMS mix kind of ramping and going to benefit margins. Is this -- should we expect the FMS mix to kind of be a multi-year process as it plays out where that shows up favorably on margins, but also just maybe just talk about the outlook on bookings? Thanks. Chris Calio -- Chief Operating Officer Yeah, I think that's right, Peter. I think it is a multi-year process. To your point, if you just think about what's going on out there today, the integrated air missile defense, the demand there is exceptionally strong. Obviously, Patriot, NASAMS and of course, GEM-T and the like, you saw a huge order from NATO at the end of last year for us, and the demand continues to be really strong. To your point, when we look at our margins throughout the year, our margin progression story at Raytheon, we're expecting a tailwind from mix as we increase the international backlog. About 60% of Raytheon's Q1 bookings were international, and so that's provided us a nice tailwind, and we expect that to continue. Peter Arment -- Robert W. Baird and Company -- Analyst Appreciate the color. Thanks, Chris. Operator Thank you. Our next question comes from the line of Matt Akers of Wells Fargo. Please go ahead, Matt. Matt Akers -- Wells Fargo Securities -- Analyst Yeah. Hi. Good morning, everybody. Good luck, Greg, and Jennifer. I had a couple of questions. One, what's the current wing-to-wing turnaround time for GTF full stop visit? Is it close to that 250, 300 days, or is it shorter and it sort of builds as the pipeline of planes waiting gets bigger than, I think you might have said, Pratt aftermarket, mid-single digits, the rest of the quarter. Did I mishear that? Is that actually mid-teens? Chris Calio -- Chief Operating Officer So let me start with the, now with the wing to wing turnaround time. Yeah, it's in that range that we've provided in that 250, 300. Again, a lot of that will continue to be dependent on the mix of work scopes. We're still believing that it's going to be more of a 90% heavy, 10% lighter shop visit. And with that, we'll stay within that range. If we can find a way to come up with medium work scopes and other things that can alleviate the need for new, we'll call it non-powdered metal, material repair development and the like, perhaps we'll be closer to the lower end of that range, but we're in there today, given the shop visit mix that we see and the material flow that we see. Neil Mitchill -- Chief Financial Officer Thanks, Chris. Matt – Matt Akers -- Wells Fargo Securities -- Analyst Great. I guess the aftermarket? Neil Mitchill -- Chief Financial Officer Yeah, sorry. I didn't put my mic on. Just a couple of clarifications. So, When I said mid-single digits, I was referring to the military growth. We had really strong growth, obviously, in the first quarter. On the aftermarket, think about that as low to mid-teens for the rest of the year. Matt Akers -- Wells Fargo Securities -- Analyst Great. Thank you. Neil Mitchill -- Chief Financial Officer Yep. Operator Thank you. Our next question comes from the line of Jason Gursky of Citigroup. Please go ahead, Jason. Jason Gursky -- Citi -- Analyst Yeah. Good morning, everyone. Jennifer, Greg, best of luck with your new roles and ventures, and Nathan, welcome back. Chris, just a quick question for you on Raytheon and the defense side of the business. Solid book-to-bill here in the first quarter. So I'm wondering if you can talk about the pipeline that you see here for the next 12 to 24 months and what you think the book-to-bill is going to look like over that time period. Do we have a prolonged period here of book-to-bills above one that forecast or shadow -- yeah, forecast growth here for multiple years? Thanks. Chris Calio -- Chief Operating Officer Yeah. Hey, Jason. Look, I think, given the threat environment we described and we kind of laid out in the question on the supplemental, we're going to continue to see strong top line growth at Raytheon and strength in bookings. And again, if you just kind of go region by region, it's replenishment in the US, it's the integrated air and missile defense in Europe, it's naval munitions in Asia. So, again, feel like the strength of demand is going to continue to be there. And then, the other thing I'll say, Jason, is we're also thinking through some of the advanced capabilities that we're trying to bring to market as well. LTAMs, which I mentioned up front, the 360-degree radar, the refresh on AMRAAM, SPY-6 radar, which has gone through its initial sea trials, counter-UAS capabilities with our Coyote system, and then things like high-power microwave as you look to sort of the drone swarm threat that continues to build. So again, strong demand for the existing pipeline of products. We continue to invest in that next generation product, which we think meets the emerging threats. Jason Gursky -- Citi -- Analyst And to be clear, you think that leads to a book-to-bill above one here for this year and maybe going into '25? Neil Mitchill -- Chief Financial Officer I was just going to comment on the book-to-bill. I mean, certainly, really strong first quarter With top line sales projected to where we see them, it's obviously going to change the math a little bit on the book-to-bill calculation, but we still expect a book to bill over 1.1 for this year. And I think it's going to be strong next year. But obviously as sales go up too, that'll level off a little bit. But the backlog is going to continue to grow. To put a finer point on some of the awards for this year, we see AMRAAM, we've talked about LTAMDS, both with the US Army and Poland, certainly Patriot, SPY-6, and SM-3. So a good list of potential things. The large international ones can be lumpy. They can come in this year. They could fall into next year. But, we see a lot of demand signals that are really strong there. Jason Gursky -- Citi -- Analyst Great. And thanks for cutting you off before you could get to it, Neil. Appreciate it. Neil Mitchill -- Chief Financial Officer No problem. Thank you. Operator Thank you. Our next question -- our final question comes from the line of Gavin Parson of UBS. Your question please, Gavin. Gavin Parson -- UBS -- Analyst Thanks. Good morning. Chris Calio -- Chief Operating Officer Good morning, Gavin. Gavin Parson -- UBS -- Analyst First, I was wondering if you guys could just give an update on what ratio of GTF customer compensation agreements have actually been completed. And then, second, if you could just give a little more detail on the OE rate uncertainty you talked about. I know we're waiting for Boeing tomorrow, but if you're actually already seeing a lower pull on any of those programs and if that's considered in Collins guidance? Thank you. Chris Calio -- Chief Operating Officer Yep, sure, Gavin, This is Chris. So again, on the GTF customer piece, we've set up front, we got about nine done. We're in the final throes of a few more and those nine that we've got under our belt represent about a third of the GTF fleet total. And then, on the rates again, Boeing will provide the guidance tomorrow. I just think we're very much embedded with them 737, 787. What do we need to do to support a ramp on 787? And then, what do we need to do to help them go wherever they need to on 737? And so, we won't get out ahead of them, but just know that we're working a number of scenarios and we'll take whatever action is necessary based upon what they need. Gavin Parson -- UBS -- Analyst Thank you. Operator Thank you. I would now like to turn the conference back to Greg Hayes for closing remarks. Greg Hayes -- Chairman and Chief Executive Officer OK. Thank you, Latif. I'll keep these comments brief, but as I step back from the day-to-day responsibility as CEO of RTX, I want to take this opportunity to thank our team for their trust and support over this past decade. Any success we have had is the result of the hard work and dedication of the entire team, the senior leadership team, but also the whole 185,000 people that make RTX a great company that it is. I also want to thank our investors. It's been an interesting decade or so in the role. And thank you for your patience as we've transitioned and transformed what was United Technologies, a multi-industry company, into RTX, which is, I believe, the best positioned A&D company in the world today. We've got great products, great portfolio of people and technologies, and a great backlog that I think is going to serve us well into the future. There is, of course, always more to do. We can talk a lot about that. I think Chris is absolutely on the right track, that is focusing on execution, focusing on technology and making sure we have the best team possible. And I can't think of a better leader than Chris to lead RTX for the next decade or so. You should all know that Chris has the full support of the board, but not just the board, the entire senior leadership team and the entire organization. And I look forward to working with Chris in the near term and watching from the sidelines beyond that as he is successful. I also want to thank Jennifer. Jennifer and I have worked together for a decade from Sikorsky's disposition to the integration of Raytheon and UTC and lately for the last three years as head of investor relations, she's been a great resource for the company and a great friend. So, Jennifer, thank you. With that I think that's all. Thanks for listening today. Jennifer, Nathan and team will be available all day to answer whatever questions you have. But thanks for listening and take care. Answer:

the RTX first quarter 2024 earnings conference call

Operator Good day, ladies and gentlemen, and welcome to the RTX first quarter 2024 earnings conference call. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, chairman and chief executive officer; Chris Calio, president and chief operating officer; Neil Mitchill, chief financial officer; and Jennifer Reed, vice president of investor relations. This call is being webcast live on the Internet and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding acquisition accounting adjustments and net non-recurring and/or significant items, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward looking statements provided in this call are subject to risks and uncertainties. RTX SEC filings, including its forms 8-K, 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. [Operator instructions] With that, I will turn the call over to Mr. Hayes. Greg Hayes -- Chairman and Chief Executive Officer Thanks, and good morning, everyone. As you all know, next week at our annual shareholders meeting, I'll be stepping down as CEO and turning the reigns over to Chris Calio. For the past two years, Chris has had responsibility for leading our three business units, Pratt & Whitney, Collins and Raytheon. There's no better evidence of his success than our results this quarter with strong sales and operating profit growth and a record backlog of over $200 billion. I'll be back at the conclusion of the call for some final comments, but let me turn it over to Chris right now to give you an overview of the company and our first quarter performance. Chris? Chris Calio -- Chief Operating Officer Thank you, Greg, and good morning, everyone. First, I want to acknowledge and express my appreciation for Greg's leadership. He has created significant value over the last decade as CEO and has shaped RTX into the best portfolio in A&D with our three industry leading businesses leaving a strong foundation for a continued success. Before we discuss our first quarter, I want to spend a few moments on the strength of this foundation and how we plan to build upon it in 2024 and beyond. I know we've highlighted it before, but I think it's worth repeating. Collins is an industry leader, No. 1, or No. 2 on 70% of its product portfolio and has an off-warranty installed base of $100 billion, which will create decades of aftermarket growth. At Pratt, the large commercial engine business has an installed base of 12,000 engines and a backlog of over 10,000 GTFs, which will also drive growth for decades to come. But Pratt is much more than the GTF. Pratt & Whitney Canada remains the premier small engine business with sole source positions on over 200 platforms and 63,000 engines in service, which also comes with long aftermarket tails. And Pratt's military engine business is set to power the F-35 and B-21 bomber well into the future. At Raytheon, our defense franchises are essential to the US and our allies as they confront the threats of today and tomorrow with programs like the Patriot air defense system, GEM-T, NASAMS, SPY-6 radars, AMRAAM, Tomahawk and the Standard Missile family, and future technologies like LTAMDS, hypersonics and LRSO, the long range stand-off cruise missile. So as we move forward, our focus will continue to be transforming RTX from the best portfolio in A&D into the best company in A&D. This means being recognized by our customers as a trusted partner that executes on its commitments, it means leveraging our core operating system to help drive operational excellence in terms of quality and cost, it means being the provider of differentiated technologies that create a competitive advantage, and it means converting all of these attributes into best-in-class financial performance and long-term shareholder value. All right, with that, let me move to the quarter on Slide 2. We've gotten off to a strong start to the year, with organic sales up 12%, segment operating profit up 10%, and free cash flow in line with our expectations. Commercial OE was up 33% across RTX, driven by continued strong demand for new aircraft. The commercial aftermarket was up 11% as we continue to see strong growth in both domestic and international RPKs. So clearly the commercial arrow demand is there. But as you all know, the industry is still working through supply chain constraints and other challenges, which is leading to some OE production rate uncertainty. And this will continue to be a watch item for us for the year. On the defense side, we delivered 7% growth year over year and ended the quarter with a defense book-to-bill of 1.05 and a backlog of $77 billion. We're pleased the fiscal year 2024 spending bills have been enacted and provide $886 billion in defense spending, which is up 3%. But more importantly, the budget supports our key programs and technologies, including next generation propulsion, critical munitions, and upgrades to the F-135, ensuring it remains the only engine powering every variant of the F-35 Joint Strike Fighter. The budget also supports investment in key capabilities to address current and future threats, such as systems that counter unmanned aircraft and hypersonics, where RTX provides leading technologies. And we are encouraged by the progress on the Ukraine supplemental bill, which the DoD will use to further deepen critical US munition stockpiles such as TOW, Javelin, and Excalibur, and provide needed air defense capabilities to the region with NASAMS and Patriot. Internationally, we continue to see heightened demand from US allies. In the quarter, Raytheon was awarded a $1.2 billion contract to supply Germany with additional Patriot air and missile defense systems. OK, let me move beyond the end market dynamics and talk about some of our critical initiatives. And I'll start with an update on the GTF fleet management plan. Continue to stay on track here, and our financial and operational outlook remain consistent with our prior comments. As you may have seen, in March, the GTF airworthiness directives were issued and are consistent with our service bulletins and service instructions. On the technical side, the results from the ultrasonic angle scan inspections have all been in line with our initial expectations and assumptions. With regard to new engine production, as we said in our last call, all GTF engines being delivered to our customers' final assembly lines have full-life HPC and HPT disks. And on the MRO side, we have started the process of incorporating full-life disks into certain engine overhauls. And as we previously said, we expect to progressively ramp this effort throughout the year. In addition, the PW1100 engine shop visits completed in the quarter were in line with our plan and up 50% year over year. With regard to overhauled turnaround time, our average wing-to-wing turnaround time assumptions remain consistent with our prior guidance of roughly 250 to 300 days. With the AD now issued, we are now essentially at our peak AOG level. We continue to expect an average of roughly 350 AOGs from 2024 through 2026. And lastly, we have reached support agreements with nine of our customers. And these are in line with our assumptions. With that, let's turn to Slide 3 and I'll share a bit more on how we're leveraging our core operating system in digital transformation to drive quality, efficiency and productivity. As I said before, our core operating system is all about driving continuous improvements that compound over time to create a significant impact on our business. Let me give you a few recent examples. Our nacelle business within Collins deployed core across seven factories that support the A320neo program, resulting in an 8% improvement in on-time delivery and a 17% improvement in quality. And at Raytheon, on the TPY-2 program, which is a radar designed to detect and intercept ballistic missiles, we leveraged core practices to help double first-pass yield on high-volume circuit cards, resulting in a 40% reduction in manufacturing hours per unit and improved on-time delivery. We also remain committed to enhancing our factories through digitization, automation, and connected equipment. Last year, we connected 20 factories and have another 20 planned to be completed by the end of this year. Once fully connected, these factories will achieve improved overall equipment efficiency, better quality, and ultimately higher output. And lastly, we will continue to invest both directly and indirectly through RTX Ventures and our cross-company technology roadmaps to develop differentiated technologies to fill our product pipeline. These include areas such as advanced materials, electrification, power and thermal management, and microelectronics. This year, we will invest about $3 billion in company funded R&D along with $5 billion in customer funded R&D to develop new technologies and products. We are also expanding our manufacturing capacity in key areas to meet customer demand, a key priority within our $2.5 billion of capital investment in 2024. One of our most significant new products coming to the market is LTAMDS, which is the next generation advanced 360-degree air defense radar that provides significant performance improvement against a range of threats, including UAS and hypersonics. This program recently completed another successful live fire event with representatives from seven countries in attendance. We expect both the first domestic LRIP and international FMS contracts this year. And today, we're announcing $115 million expansion of our Raytheon Redstone Missile Integration Facility in Huntsville, Alabama. When complete, the factory's capacity for integrating and delivering several of our critical munitions programs will increase by more than 50%. So with the best portfolio within A&D, core driving our continuous improvement in operational excellence and ongoing investments in next generation technologies, I'm incredibly confident in RTX's future and our ability to transform into the best company in A&D. With that, let me turn it over to Neil to take you through our first quarter results. Neil? Neil Mitchill -- Chief Financial Officer Thanks, Chris. I'm on Slide 4. As Chris said, we got off to a really good start this year on a number of our key financial metrics across RTX with Collins, Pratt and Raytheon all making progress in line with our expectations. Additionally, we completed the sale of Raytheon cybersecurity business at the end of the first quarter with gross proceeds of $1.3 billion and we've made progress on deleveraging the balance sheet, having paid down over $2 billion of debt since we initiated the ASR last year. RTX sales of $19.3 billion were up 12% organically versus prior year, and that is on top of 10% growth in the first quarter of last year. Demand strength was also reflected in our backlog, which is now $202 billion and up 12% year over year. Segment operating profit growth of 10% was partially offset by expected headwinds from lower pension income and higher interest expense. And our effective tax rate for the quarter included a current period foreign tax benefit. Adjusted earnings per share of $1.34 was up 10% year over year. And on a GAAP basis, EPS from continuing operations was $1.28 and included $0.29 of acquisition accounting adjustments, a $0.21 benefit related to tax audit settlements, an $0.18 net gain related to the cyber business sale, a $0.13 charge related to initiating alternative titanium sources, and $0.03 of restructuring and other nonrecurring items. And finally, free cash flow was an outflow of $125 million in the first quarter, in line with our expectations, and a $1.3 billion year-over-year improvement. As planned, the timing of defense milestones and increase in shop visits, along with inventory build to support our growth drove higher working capital this quarter. OK. Let me turn to our business units and some of the progress we made in the quarter. You heard Chris give a status update on the GTF fleet management plan, so let me touch on our top priorities at Raytheon and Collins. At Raytheon, the business continues to see incredible demand. And as we said on our last call, we're taking actions to advance our key franchises, improve our supply chain, and drive margin expansion. In the quarter, Raytheon saw 50 basis points of sequential margin improvement and 20 basis points on a year-over-year basis. On the material front, we saw a double-digit increase in material receipts in the first quarter versus prior year, the fourth consecutive quarter of growth, which of course is driving the top line, but more importantly, helping to alleviate bottlenecks in the manufacturing processes and burn down overdue sales. Moving over to Collins, our focus remains on driving incremental margins through continued commercial OE and aftermarket growth and the benefit from ongoing structural cost reduction. In the quarter, Collins saw strong sales growth and 90 basis points of margin expansion on both a sequential and year-over-year basis. And we expect future volume increases to drive continued fixed cost absorption benefits across the business this year. On the cost reduction front, we continue to make progress as well. For example, Collins is in the process of shifting 2.7 million manufacturing hours to best cost locations by the end of 2025. To date, over 2 million of those hours have already been moved, with 400,000 more planned for the rest of the year. And finally, we also achieved an incremental $105 million of RTX gross merger cost synergies in the quarter, and we're approaching the $2 billion target we updated last year. So good progress on our top priorities to start the year. With that, based on our first quarter results and strong backlog, we remain on track to deliver our full year outlook, including full year sales of between $78 billion and $79 billion, which translates to between 7% and 8% organic revenue growth. In addition, we continue to see adjusted earnings per share between $5.25 and $5.40 and free cashflow of approximately $5.7 billion. Now, let me hand it over to Jennifer to take you through the segment results. Jennifer? Jennifer Reed -- Vice President, Investor Relations Thanks, Neil. Starting with Collins on Slide 5, sales were $6.7 billion in the quarter, up 9% on both an adjusted and organic basis, driven primarily by continued strength in commercial aftermarket and OE. By channel, commercial aftermarket sales were up 14%, driven by a 17% increase in parts and repair, a 16% increase in provisioning, and a 3% decrease in mods and upgrades. Commercial OE sales for the quarter were up 14% versus the prior year, driven by growth in wide-body, narrow-body and bizjet platforms. And defense sales were up 1%, primarily due to higher volume. Adjusted operating profit of $1.05 billion was up $145 million, or 16% from the prior year, which dropped through on higher commercial aftermarket volume, partially offset by unfavorable OE mix, higher space program costs, and increased R&D expense. Looking ahead, on a full-year basis, we continue to expect Collins sales to grow mid to high single-digits on both an adjusted and organic basis with operating profit growth between $650 million and $725 million versus 2023. Shifting to Pratt & Whitney on Slide 6. Sales of $6.5 billion were up 23% on both an adjusted and organic basis with sales growth across all three channels. Commercial OE sales were up 64% in the quarter and higher engine deliveries and favorable mix in the large commercial engine business. Commercial aftermarket sales were up 9% in the quarter, driven by higher volume within large commercial engines, primarily related to GTF overhaul activity, as well as an increased volume at Pratt Canada. Legacy large commercial engine aftermarket revenues were down slightly versus prior year as a result of increased allocation of material to support the GTF fleet. And in the military engine business, sales were up 21%, primarily driven by higher sustainment volume across the F-135, F-117, and F-100 platforms, and higher development volume, primarily driven by the F-135 engine core upgrade program. Adjusted operating profit of $430 million was flat to prior year. The benefit of favorable commercial OE mix and drop through on higher commercial aftermarket volume was partially offset by headwinds from increased commercial OE deliveries, unfavorable commercial aftermarket mix, and the absence of a favorable $60 million prior contract matter. Higher military volume and favorable mix was more than offset by higher R&D and SG&A expenses. Turning to Pratt's full year outlook, we continue to expect sales to grow low double digits on an adjusted and organic basis and adjusted operating profit to grow between $400 million and $475 million versus 2023, as large commercial engine aftermarket continues to ramp and military volume grows. Now, turning to Raytheon on Slide 7. Sales of $6.7 billion in the quarter were up 6% on both an adjusted and organic basis, primarily driven by higher volume on land and air defense systems and advanced technology programs. The increase in land and air defense system programs reflect higher customer demand for the Patriot, counter-UAS systems, and NASAMS. Adjusted operating profit for the quarter of $630 million was up $46 million versus the prior year, driven primarily by higher volume and improved net productivity, partially offset by unfavorable mix. Also, recall that Q1 2023 net productivity included the exercise of a significant unfavorable contract option that did not repeat in the first quarter of this year. Bookings and backlog remain very strong. In the first quarter, bookings of $8.1 billion resulted in a book-to-bill of 1.23 and a backlog of $53 billion. In addition to the German Patriot award that Chris mentioned earlier, Raytheon also saw significant orders for the GEM-T, NASAMS, and classified work. Looking ahead, we continue to expect Raytheon sales to grow low to mid-single-digits organically, with operating profit up between $100 million and $200 million versus 2023. As a reminder, the profit outlook includes an $80 million year over year headwind from the sale of the cybersecurity business. With that, I'll turn it back to Chris to wrap things up. Chris Calio -- Chief Operating Officer Thanks, Jennifer. I'm on Slide 8. With our portfolio strength and current demand, our overall backlog is at a record $202 billion. And our focus as a team remains on executing this backlog to meet our customer commitments and driving operational performance. And our top priorities for the year remain unchanged. First, at Pratt, it's about continuing to execute the GTF fleet management plan. Second, at Raytheon, it's about delivering the backlog and improved margins. And third, at Collins, it's about generating strong incremental margins. As I discussed, our core operating system underpins our execution on these priorities and drives continuous improvement across RTX. At the same time, we're investing over $10 billion in research and development, modernization, and digital capabilities, continuing to evaluate our portfolio for incremental opportunities to further enhance our focus and prioritize future investments. And as we do this, we remain on track to return $36 billion to $37 billion of capital to shareowners from the date of the merger through next year. So with that, let me turn it over to Neil. Neil Mitchill -- Chief Financial Officer Thanks, Chris. Before we go into Q&A, I want to quickly update everyone on an investor relations team leadership transition. After three years leading the team, Jennifer Reed is moving on to her next opportunity. Jennifer took the helm in an unprecedented environment and worked tirelessly to ensure all of our stakeholders had timely and clear information during the critical post-merger years for RTX. I want to thank Jennifer for her leadership and I also want to introduce Nathan Ware, who is coming over from our Collins business to lead investor relations. Some of you will remember Nathan as he was a member of the UTC IR team leading up to the merger. But since then, Nathan has held a couple of roles at Collins and most recently as CFO of the interiors business. Jennifer and Nathan will work to ensure a smooth transition for all of us and all of you. And with that, we are ready to open the line for our first question. Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Myles Walton of Wolfe Research. Your question please, Myles. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. And thanks for the help, Jennifer, over the years. Can you talk to the Pratt aftermarket first to start and sort of if there is risk to achieving the full year guidance, given the harder comps that play out for the rest of the year, given the 9% in the first quarter and low double digits expected for the full year? Neil Mitchill -- Chief Financial Officer Good morning, Myles. This is Neil. I'll start out, and Chris can add anything here. But a couple of things on the Pratt aftermarket. I think 9% aftermarket growth in the first quarter was largely as we expected. We took the first quarter to make sure that we started off on a strong foot with respect to the GTF aftermarket overhauls, and I'm sure Chris can provide a little more color there. In doing so, there was a little bit lighter material allocation to the V2500s. We're actually down a handful of shop visits year over year in the first quarter, a little bit -- around 175 or so. We still feel confident though that we'll hit 800 shop visit inductions on the V2500 for the full year. And so, what we expect to play out over the remainder of the year is that we will see more and more of those shop visits come in. We'll also see the content on those shop visits increase. So we'll see better drop through on the legacy aftermarket. Back in January, we talked about the PW2000s and PW4000s. There's some puts and takes there. They largely offset for the year. So it's really about seeing that legacy aftermarket continue to grow. So full year, still expect low teens sort of growth in the aftermarket of Pratt and we're confident that we'll see the material flowing to support that. Chris Calio -- Chief Operating Officer Yeah, I mean, I guess the only thing I would add, Myles -- this is Chris -- is to Neil's point, we know we needed to come out of the gate strong on GTF MRO given the situation in the fleet management plan. And so, we were allocating material and resources with that in mind. And I think we saw the fruits of that here in the first quarter. But as Neil said, we continue to see the demand on what we call the mature fleets, the V and others. And that ramp up is calibrated in our number for the year. So still feel confident it's going to deliver the full year shop visits that we need. Myles Walton -- Wolfe Research -- Analyst All right. Thanks. Makes sense. Operator Thank you. Our next question comes from the line of Kristine Liwag of Morgan Stanley. Please go ahead, Kristine. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning, everyone. Chris Calio -- Chief Operating Officer Morning, Kristine. Kristine Liwag -- Morgan Stanley -- Analyst Greg, thank you for your leadership over the years. And, Jennifer, wish you the best in your next endeavor. So, maybe on GTF, Chris, thank you for providing more color in the GTF fleet management plan. And at this point, it seems like everything is progressing well. So as we look forward to understanding the risk retirement, are there other milestones you're monitoring to see if there could be potential risk reduction? Is there a number of specific completed AOGs or more customer agreements to be completed? Any sort of gauge to help us understand risk retirement would be helpful? Chris Calio -- Chief Operating Officer Sure. Thanks, Kristine. Good morning. So look, the GTF fleet management plan is a multiyear process, and we're going to continue to grind through that over the next three years or so. And we've laid out all of the key enablers. We listed them on the call today. We've done it historically. And that's going to be AOG levels. That's going to be turnaround times. And so, again, we've given those sort of ranges on each of those key enablers, and we're going to continue to do everything we can to stay within or move to the lower end of those ranges. And again, the single biggest enabler for us is MRO output. We have a very good first quarter, but we've got a large growth plan here in 2024. And so, for us, it's about material flow, including the new powdered metal parts that we're going to be putting into the engines as we said during the last call and during our comments. We continue to add the full life HPC and HPT in MRO, and it's going to ramp throughout the year. So that will be a key indicator for us. The more output we can get, obviously the more relief we can get the fleet, the less AOG days, and then the less penalties. It's really that simple. So for us, it's all about the MRO enablers, chief among them, continuing to ramp up the powdered metal part production and insertion into MRO [Inaudible]. Kristine Liwag -- Morgan Stanley -- Analyst Great. Thank you very much. Chris Calio -- Chief Operating Officer Yeah. Sorry about that feedback there, Kristine. So hopefully that all came through. Kristine Liwag -- Morgan Stanley -- Analyst Very helpful. Appreciate it. Operator Thank you. Our next question comes from the line of Seth Seifman of J.P. Morgan. Your question please, Seth. Seth Seifman -- JPMorgan Chase and Company -- Analyst Hey. Thanks very much and good morning. Maybe kind of a small picture question here, but it is one that we get a lot. When you think about the trajectory of aircraft on ground, and it seems like we are right around the highest level we'll see here at -- in the 550-ish level, when we think about where that goes from here, do we think of that more as a plateau for the remainder of the year or for a couple of quarters? Or do we start to see some progress there? And when you think about where turnaround times are kind of now and the improvement that you can make over the next few quarters, is there anything that you can kind of lay out for us to gauge that? Chris Calio -- Chief Operating Officer Hey Seth, this is Chris. Thanks for the question. Yeah, so look, we are as we said in our comments essentially at peak AOG. I mean, there'll be some perturbations a little bit above, a little bit below, but we see that as kind of the peak and we're going to start to gradually chip away and move that down. So again, as I said to Kristine's question, the No. 1 enabler of that is our MRO output. And again, strong start to the quarter but we've got a big plan for the year and we're focused on turnaround times and new material. At the end of the day, in terms of our MRO output, it's not so much about capacity. We've got enough shops, we've got enough labor, it's about material flow. The faster that we can flow material, faster we can take turnaround times down, increase output, and then burn down the backlog of those engines waiting for induction. Seth Seifman -- JPMorgan Chase and Company -- Analyst Thank you very much. Operator Thank you. Our next question comes from the line of Ron Epstein of Bank of America. Your question please, Ron. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, guys. Chris Calio -- Chief Operating Officer Good morning, Ron. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Could you speak a little bit to the supplemental that got through the house and how that plays out for your defense business. What goodies are in there for you guys? Chris Calio -- Chief Operating Officer Hey, good morning, Ron. This is Chris. So, as I'm sure you've seen, if you break down sort of the supplemental into its big buckets, it's about $60 billion for Ukraine, another $25 billion or so for Israel, and $10 billion for INDOPACOM. So, when we look at our product portfolio against those big buckets, we look at Ukraine and say about two-thirds of that is addressable with RTX products. Think GEM-T, NASAMS, Patriot, AMRAAM, AIM9X, Israel, we kind of handicapped that as about 30% addressable, stockpile replenishment, Iron Dome, David's Sling procurements, and then INDOPACOM, again, roughly that 30% addressable with the RTX product suite, namely SM-6, Tomahawk, AIM9X. So again, the services will have their specific lists of what they're looking for, but again we think our product portfolio is pretty well positioned to address the needs in each of those theaters. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Great, and if I may, just a quick follow on. You had some challenges with the fixed development -- fixed price development program within missiles. How's that going? Chris Calio -- Chief Operating Officer Yeah, so again, when you look at the productivity story at Raytheon, Ron, that's a big part of the continued margin expansion. And so, in the quarter we saw improvements in productivity, which is really helpful. Again, as you know, our productivity plan for the year is effectively no productivity, but last year, of course, we had some headwinds in the productivity department. So again, overall an improvement for the year. We've still got some classified programs, fixed price that we are continuing to work through. We said that's kind of a 12 to 18 month journey as we work through those. I would say on a number of them, we've made some good progress toward milestones and others we're going to continue to battle our way through during that period. Neil Mitchill -- Chief Financial Officer Chris, I'll just add with respect to the productivity, in the first quarter we saw about a $58 million year over year Q1 to Q1 improvement. Of course, we had the exercise of an option last year, which accounts for maybe, 55% of that improvement. But nonetheless, we're expecting $200 million year over year and continue to expect $200 million year over year. And so, good progress in the first quarter. But there's still three quarters to go, but we are encouraged by the shift that we've seen here in the first quarter so far. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Great. Thank you. Operator Thank you. Our next question comes from the line of Cai Von Rumohr of TD Cowen. Your question please, Cai. Cai Von Rumohr -- TD Cowen -- Analyst Yes. Thanks so much. So you had a 23% gain at Pratt in the first quarter. If we're going to low double digits, call it 11%, 12%, you have to have a sharp deceleration as you go through the year and yet you're still guiding to what, low teens for the aftermarket which would suggest either your total guide is low or we're going to see a flat to down year in commercial or military as we go through the year. Can you give us some color in terms of each of those three parts of Pratt's business and their quarterly sequence as we move through the year? Neil Mitchill -- Chief Financial Officer Sure. Cai, let me start here. I mean, we had a really strong start to Pratt's first quarter. Most of that was on the back of commercial OE deliveries, up 40% almost in the first quarter on a unit basis. So that obviously drove the top line and some good mix there too between installs and spare engines as we look to position the GTF fleet as best we can to start the year. I think some of that's going to moderate clearly as the rest of the year unfolds. So I think we had a good start out of the gate on installs. On the aftermarket side, you're right, we're going to see more of the mid-single-digit type of growth in the next three quarters. So again, that will be fueled by V2500s coming up a little bit. The top line is going to be also bolstered by GTF aftermarket, which of course doesn't come with nearly as much profit, but will certainly help the fleets get healthier. And military also had a really strong first quarter start. The material coming in in the first quarter was positioned to support the aftermarket principally in the military business. And we do see that slowing down a bit in the next part of the year. So those are the key ingredients. Not going to get into the specifics on a quarterly cadence here, but we're just one quarter into the year, but do -- a good start to the year, and we'll see we're kind of holding on to our guidance at this point. Cai Von Rumohr -- TD Cowen -- Analyst Thank you. Operator Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is open, Sheila. Sheila Kahyaoglu -- Jefferies -- Analyst Hey. Good morning, Chris, and Neil. Thank you. And Jennifer, congratulations on your next move. Wishing you all the best and thank you. I wanted to ask one on Collins, maybe Neil or Chris. Just the guidance for the year implies a step up 16.6% margins versus a 15.7% adjustment in the quarter -- adjusted basis in the quarter. Can you maybe talk about what drives that margin expansion as we progress through the year at Collins and if you could give us any more detail on the impairment of $175 million? Neil Mitchill -- Chief Financial Officer All right, let me start, Sheila. As I think about -- first, let's start with the first quarter for Collins. It was a really good quarter. We had about $145 million of profit growth on an adjusted basis. We've talked about the Collins growth trajectory really being driven by the aftermarket. Now, there's still a long ways to go. We put out a range of $650 million to $725 million for the full year. And so, what we're going to see is increased drop-through on the continued cost reduction essentially that Collins embarked upon several years ago. And we're starting to see the cost associated with achieving that cost reduction ease, as well as the benefit from the actions start to drop through in the form of stronger incrementals. So feel like the aftermarket trajectory supports that at this juncture. And that I think is going to really continue to be the key driver for the Collins profit growth for the rest of the year. If I just comment for a minute on the $175 million. As we said in our remarks, that charge related to some procurement of titanium, which I know you all know is an important commodity for the aerospace industry. Given a number of ongoing supply chain dynamics around aerospace-grade titanium in particular, especially as it relates to the titanium that we use in our landing gear manufacturing at Collins, we've taken some steps to secure alternative sources for that supply. And it's taken us some time to do that, frankly. So specific to the charge, we reached an agreement with tow new suppliers during the quarter in connection with those agreements, as well as some sanctions imposed by Canada, which were announced in February. We took a charge to reflect two things. One was the higher purchase commitment cost that came about as a result of these two new agreements. And the second is the impairment of about $75 million of costs that had been previously capitalized on the balance sheet associated with a specific program that are no longer recoverable. So as we talked about since 2022, we've been evaluating our global sourcing strategies to mitigate the potential impact of sanctions and other restrictions. And frankly, we've de-risked that in many areas. And I think this is an important step in putting this issue behind us. So, feel good about the agreements we have, but they're certainly at a higher cost, and so we took a charge to deal with that. Sheila Kahyaoglu -- Jefferies -- Analyst Great. Thank you. Neil Mitchill -- Chief Financial Officer You're welcome. Operator Thank you. Our next question comes from the line of Doug Harned of Bernstein. Please go ahead, Doug. Doug Harned -- AllianceBernstein -- Analyst Yes. Good morning. Thank you. On the defense side, so in Raytheon you made a leadership transition, Wes Kremer retired in Q1. Can you talk about how, if at all, you're thinking about the strategy differently? And I'd say in two areas, one, you mentioned a little bit about this before in terms of bringing margins up to your objectives in 2025, which presumably fixed price contracts play into that, but also the supply chain progress. And then, second, back in Paris, you talked about a need for a new strategy on the space side, to really reinvigorate growth there. Can you comment on how you're thinking about those now with the new leader in place in Phil Jasper? Thanks. Chris Calio -- Chief Operating Officer Yep. You bet, Doug. Good morning. This is Chris. So let's start first on the first part of your question here on the supply chain and Raytheon margins and how we're thinking about that. If you just take a step back for a sec, Doug, it's a tremendous backlog at Raytheon. You saw the increase here in Q1. A big part of that, obviously, is the continued focus on execution, in particular the supply chain. We've had four consecutive quarters of material receipt growth at Raytheon. So feeling like the focus on the supply chain and the health of the supply chain is starting to pay dividends and we're seeing that flow through, again, with some of the margin increases here in Q1. And so, again, Phil and team are incredibly focused on execution, head down and execution on this backlog at the margins that we need. And again, big part of that is supply chain. And we're adding production capacity as well to meet the demands of this ramp. You heard us announce today Huntsville. Last quarter we talked about the expansion in Camden, Arkansas. So again, putting in the production capacity that we need in driving material. So that's where the focus is. On space, we did talk about a bit of a pivot, Doug, from a space prime, if you will, to being more of a component supplier to the space primes. And I think when you look at our strengths in that portfolio, I think that pivot is the right one. We've got historical strength in some of the exquisite space areas. We've got some other strengths in some of the key components that go in to the prime satellites and buses. But again, I think that's where we're going to be shifting away from perhaps being a space prime to being more of a component supplier. Doug Harned -- AllianceBernstein -- Analyst Very good. Thank you. Operator Thank you. Our next question comes from the line of David Strauss of Barclays. Your line is open, David. David Strauss -- Barclays -- Analyst Thanks. Good morning. Best of luck, Greg. I enjoyed working with you. Same thing, Jennifer. Chris, on the GTF plan, I think it's calling for disc replacement, replacement on 3,000 or so engines. Can you just tell us at this point how many have actually seen full replacement actually having been done at this point? That's my first question. Then the second question, you reached an agreement with Spirit Airlines in the quarter that was made public. Is that amount kind of on a per-AOG basis representative of your other customer agreements? Because that would seem to imply a higher compensation number than you've baked into your forecast? Thanks. Chris Calio -- Chief Operating Officer Yep. So on the first question, David, yeah, the disc replacement. So, again, we're at early stages. I told you this was going to be a three-year process. Again, the priority was making sure everything we delivered to our customers' final assembly lines had the full life powder metal parts and that's what's happening today. It was going to be a ramp throughout the year into '25 on insertion of those full life parts into MRO. So I would say today it's early days. And so, there haven't been a ton that have received all of those things. But as we said before, we're working hard to optimize the work scopes there, depending on where the engine is operating, what configuration it has, was it going to come in for another visit within this time frame anyway depending on where it operated. So again, the focus is on output and part of that is optimizing the work scope. But again, early days. As for the customer compensation, we've got about nine agreements under our belt, which represents about a third of the fleet. I think we're close on a number of other significant ones, and the compensation on all those remains within the guidance that we provided on this. Operator Thank you. Our next question comes from the line of Rob Stallard of Vertical Research. Your line is open, Rob. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Chris Calio -- Chief Operating Officer Good morning, Rob. Rob Stallard -- Vertical Research Partners -- Analyst Greg, all the best for the future, and Jennifer, thanks for all your help. It's been interesting times, obviously. Greg Hayes -- Chairman and Chief Executive Officer Obviously. Rob Stallard -- Vertical Research Partners -- Analyst A question for Chris probably. At Collins, there's clearly some things going on with the 737 MAX at the moment. I was wondering what sort of implications they could potentially be for the Collins business and what do you see as the risk of potential de-stocking as this year progresses? Chris Calio -- Chief Operating Officer Yeah. Hey, Rob. Yeah, as you pointed out, significant content at Collins on 737 and 787, so across the main growth platforms there at Boeing. I would say that, I mean, we've kind of mentioned this upfront, we've got some, I guess, some uncertainty around rates today. We think that we've calibrated a lot of that in, but again I know the Boeing company will provide their guidance tomorrow, so we won't get out ahead of them. We're just kind of focused on working with them, supporting them through the dynamics in play, and preparing to take whatever actions we think necessary, depending on the guidance that they provide. But I'll just say that the team has worked very hard to go drive the material and we need to support their rates, and we've got the capacity to do so. Rob Stallard -- Vertical Research Partners -- Analyst OK. Thanks, Chris. Operator Thank you. Our next question comes from the line of Noah Poponak of Goldman Sachs. Please go ahead, Noah. Noah Poponak -- Goldman Sachs -- Analyst Hey. Good morning, everyone. Chris Calio -- Chief Operating Officer Hi, Noah. Noah Poponak -- Goldman Sachs -- Analyst Two follow-ups on topics already asked about, but on the powdered metal process, can you quantify even if roughly how many engines that are off wing are actually in an MRO facility now versus waiting in line to get into one? And then, Neil, on the defense margins, the guidance implies that each quarter, the rest of the year looks roughly similar to the first quarter. You have the framework next year for a decent amount of expansion. I would have thought you would have sort of ramped through this year into that '25 expansion. How do we kind of flip in '25 or do I just have the numbers off there? Neil Mitchill -- Chief Financial Officer No, let me start with defense and I'll hand it off to Chris to hit your first question. But, listen, I think we had a number of headwinds last year. I think you're all well aware of that. And so, as we put together our outlook for this year, we essentially assumed no productivity for the year. Now, as Chris said, and I talked about earlier, that's a significant step-up from what we experienced last year, and largely last year was driven by a handful of fixed price development programs, but we're not out of the woods there. So what I would say is, we took an approach that is not assuming a huge uptick. Remember, this is a business that several years ago was kicking off $300 million, $400 million, and $500 million of positive productivity. There is still positive productivity in the Raytheon business each quarter, but it's been overwhelmed by the negatives. And so, at this point, I think we're really pleased to see a quarter like this to start the year. There's work to do, obviously, to get multiple quarters together that look like this one going forward. And that's what we're focused on. We're really focused on improving the health of the supply chain and moving the material through that you could see has come in, and now we got to get it through the entire manufacturing process to meet these important needs of our customers. And that's really where our focus is. I do think it will step up in '25. One encouraging thing is we had significant orders during the quarter and the margins in that new backlog are very healthy. The mix of those new orders, about 60% foreign sales. So it's a good start, but one quarter at a time. Chris, maybe a couple of comments? Chris Calio -- Chief Operating Officer Yeah, sure. So I'm not going to get into the specific numbers on where things stand in terms of those engines waiting to be inducted. But again, you look at the turnaround times, the extended turnaround times that we've talked about, engines coming off today are going to have to wait a bit before they actually do get inducted and enter into gate one in the MRO process. Suffice it to say, and we kind of alluded to this up front, big step up this year in GTF shop visits. And that's why we've played a little bit of the allocation game, in the last year, early this year, to get off to a strong start there. Again we've got a big ramp on GTF MRO throughout the year in order to support this fleet. Again we think we've got the capacity to do it, the labor to do it, the partners in our MRO shops who are incredibly adept at this, it's about material flow. Noah Poponak -- Goldman Sachs -- Analyst Neil, the fixed price development programs that have been a challenge in Raytheon Defense, when do those end? When do those move out of development? Neil Mitchill -- Chief Financial Officer Yeah, so here's a couple ways to look at it. About 1% of our existing Raytheon backlog today constitutes those programs. And I'd say it's about 12 to 18 months. There's a few of them. So we still have a little ways to go. We are making progress, critical milestones on each program. In the first quarter, we had net unfavorable productivity of about $28 million. Nearly all of that was associated with these programs. So there's still some headwinds that we're encountering as we get additional technical learning and going through testing. But that's the timeframe and that's the magnitude I would put on it. Noah Poponak -- Goldman Sachs -- Analyst OK. Thanks for taking my questions. And, Greg and Jennifer, thanks for all the help over the years. Greg Hayes -- Chairman and Chief Executive Officer Thanks, Noah. Operator Thank you. Our next question comes from the line of Peter Arment of Baird. Peter, please go ahead. Peter Arment -- Robert W. Baird and Company -- Analyst Thanks. Good morning, everyone, and Greg and Jennifer, best of luck. I've enjoyed it over the years. Chris, on Raytheon, Europe continues to be a really strong region for bookings. Maybe you could talk about the outlook there and how should we think about, I guess Neil just touched upon it, the FMS mix kind of ramping and going to benefit margins. Is this -- should we expect the FMS mix to kind of be a multi-year process as it plays out where that shows up favorably on margins, but also just maybe just talk about the outlook on bookings? Thanks. Chris Calio -- Chief Operating Officer Yeah, I think that's right, Peter. I think it is a multi-year process. To your point, if you just think about what's going on out there today, the integrated air missile defense, the demand there is exceptionally strong. Obviously, Patriot, NASAMS and of course, GEM-T and the like, you saw a huge order from NATO at the end of last year for us, and the demand continues to be really strong. To your point, when we look at our margins throughout the year, our margin progression story at Raytheon, we're expecting a tailwind from mix as we increase the international backlog. About 60% of Raytheon's Q1 bookings were international, and so that's provided us a nice tailwind, and we expect that to continue. Peter Arment -- Robert W. Baird and Company -- Analyst Appreciate the color. Thanks, Chris. Operator Thank you. Our next question comes from the line of Matt Akers of Wells Fargo. Please go ahead, Matt. Matt Akers -- Wells Fargo Securities -- Analyst Yeah. Hi. Good morning, everybody. Good luck, Greg, and Jennifer. I had a couple of questions. One, what's the current wing-to-wing turnaround time for GTF full stop visit? Is it close to that 250, 300 days, or is it shorter and it sort of builds as the pipeline of planes waiting gets bigger than, I think you might have said, Pratt aftermarket, mid-single digits, the rest of the quarter. Did I mishear that? Is that actually mid-teens? Chris Calio -- Chief Operating Officer So let me start with the, now with the wing to wing turnaround time. Yeah, it's in that range that we've provided in that 250, 300. Again, a lot of that will continue to be dependent on the mix of work scopes. We're still believing that it's going to be more of a 90% heavy, 10% lighter shop visit. And with that, we'll stay within that range. If we can find a way to come up with medium work scopes and other things that can alleviate the need for new, we'll call it non-powdered metal, material repair development and the like, perhaps we'll be closer to the lower end of that range, but we're in there today, given the shop visit mix that we see and the material flow that we see. Neil Mitchill -- Chief Financial Officer Thanks, Chris. Matt – Matt Akers -- Wells Fargo Securities -- Analyst Great. I guess the aftermarket? Neil Mitchill -- Chief Financial Officer Yeah, sorry. I didn't put my mic on. Just a couple of clarifications. So, When I said mid-single digits, I was referring to the military growth. We had really strong growth, obviously, in the first quarter. On the aftermarket, think about that as low to mid-teens for the rest of the year. Matt Akers -- Wells Fargo Securities -- Analyst Great. Thank you. Neil Mitchill -- Chief Financial Officer Yep. Operator Thank you. Our next question comes from the line of Jason Gursky of Citigroup. Please go ahead, Jason. Jason Gursky -- Citi -- Analyst Yeah. Good morning, everyone. Jennifer, Greg, best of luck with your new roles and ventures, and Nathan, welcome back. Chris, just a quick question for you on Raytheon and the defense side of the business. Solid book-to-bill here in the first quarter. So I'm wondering if you can talk about the pipeline that you see here for the next 12 to 24 months and what you think the book-to-bill is going to look like over that time period. Do we have a prolonged period here of book-to-bills above one that forecast or shadow -- yeah, forecast growth here for multiple years? Thanks. Chris Calio -- Chief Operating Officer Yeah. Hey, Jason. Look, I think, given the threat environment we described and we kind of laid out in the question on the supplemental, we're going to continue to see strong top line growth at Raytheon and strength in bookings. And again, if you just kind of go region by region, it's replenishment in the US, it's the integrated air and missile defense in Europe, it's naval munitions in Asia. So, again, feel like the strength of demand is going to continue to be there. And then, the other thing I'll say, Jason, is we're also thinking through some of the advanced capabilities that we're trying to bring to market as well. LTAMs, which I mentioned up front, the 360-degree radar, the refresh on AMRAAM, SPY-6 radar, which has gone through its initial sea trials, counter-UAS capabilities with our Coyote system, and then things like high-power microwave as you look to sort of the drone swarm threat that continues to build. So again, strong demand for the existing pipeline of products. We continue to invest in that next generation product, which we think meets the emerging threats. Jason Gursky -- Citi -- Analyst And to be clear, you think that leads to a book-to-bill above one here for this year and maybe going into '25? Neil Mitchill -- Chief Financial Officer I was just going to comment on the book-to-bill. I mean, certainly, really strong first quarter With top line sales projected to where we see them, it's obviously going to change the math a little bit on the book-to-bill calculation, but we still expect a book to bill over 1.1 for this year. And I think it's going to be strong next year. But obviously as sales go up too, that'll level off a little bit. But the backlog is going to continue to grow. To put a finer point on some of the awards for this year, we see AMRAAM, we've talked about LTAMDS, both with the US Army and Poland, certainly Patriot, SPY-6, and SM-3. So a good list of potential things. The large international ones can be lumpy. They can come in this year. They could fall into next year. But, we see a lot of demand signals that are really strong there. Jason Gursky -- Citi -- Analyst Great. And thanks for cutting you off before you could get to it, Neil. Appreciate it. Neil Mitchill -- Chief Financial Officer No problem. Thank you. Operator Thank you. Our next question -- our final question comes from the line of Gavin Parson of UBS. Your question please, Gavin. Gavin Parson -- UBS -- Analyst Thanks. Good morning. Chris Calio -- Chief Operating Officer Good morning, Gavin. Gavin Parson -- UBS -- Analyst First, I was wondering if you guys could just give an update on what ratio of GTF customer compensation agreements have actually been completed. And then, second, if you could just give a little more detail on the OE rate uncertainty you talked about. I know we're waiting for Boeing tomorrow, but if you're actually already seeing a lower pull on any of those programs and if that's considered in Collins guidance? Thank you. Chris Calio -- Chief Operating Officer Yep, sure, Gavin, This is Chris. So again, on the GTF customer piece, we've set up front, we got about nine done. We're in the final throes of a few more and those nine that we've got under our belt represent about a third of the GTF fleet total. And then, on the rates again, Boeing will provide the guidance tomorrow. I just think we're very much embedded with them 737, 787. What do we need to do to support a ramp on 787? And then, what do we need to do to help them go wherever they need to on 737? And so, we won't get out ahead of them, but just know that we're working a number of scenarios and we'll take whatever action is necessary based upon what they need. Gavin Parson -- UBS -- Analyst Thank you. Operator Thank you. I would now like to turn the conference back to Greg Hayes for closing remarks. Greg Hayes -- Chairman and Chief Executive Officer OK. Thank you, Latif. I'll keep these comments brief, but as I step back from the day-to-day responsibility as CEO of RTX, I want to take this opportunity to thank our team for their trust and support over this past decade. Any success we have had is the result of the hard work and dedication of the entire team, the senior leadership team, but also the whole 185,000 people that make RTX a great company that it is. I also want to thank our investors. It's been an interesting decade or so in the role. And thank you for your patience as we've transitioned and transformed what was United Technologies, a multi-industry company, into RTX, which is, I believe, the best positioned A&D company in the world today. We've got great products, great portfolio of people and technologies, and a great backlog that I think is going to serve us well into the future. There is, of course, always more to do. We can talk a lot about that. I think Chris is absolutely on the right track, that is focusing on execution, focusing on technology and making sure we have the best team possible. And I can't think of a better leader than Chris to lead RTX for the next decade or so. You should all know that Chris has the full support of the board, but not just the board, the entire senior leadership team and the entire organization. And I look forward to working with Chris in the near term and watching from the sidelines beyond that as he is successful. I also want to thank Jennifer. Jennifer and I have worked together for a decade from Sikorsky's disposition to the integration of Raytheon and UTC and lately for the last three years as head of investor relations, she's been a great resource for the company and a great friend. So, Jennifer, thank you. With that I think that's all. Thanks for listening today. Jennifer, Nathan and team will be available all day to answer whatever questions you have. But thanks for listening and take care.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the first-quarter PPG earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer section. [Operator instructions] To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question. Thank you. I would now like to turn the conference over to Jonathan Edwards, director of investor relations. Please go ahead, sir. Jonathan Edwards -- Director, Investor Relations Thank you, Angela, and good morning, everyone. This is Jonathan Edwards. We appreciate your continued interest in PPG and welcome you to our first-quarter 2024 financial results conference call. Joining me on the call from PPG are Tim Knavish, chairman and chief executive officer; and Vince Morales, senior vice president and chief financial officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, April 18th, 2024. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Tim will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. And now, let me introduce PPG chairman and CEO, Tim Knavish. Tim Knavish -- Chairman and Chief Executive Officer Thank you, Jonathan, and good morning, everyone. Welcome to our first-quarter 2024 earnings call. I'd like to start by providing a few highlights on our first-quarter 2024 financial performance, and then I'll move to our outlook. The PPG team delivered sales of $4.3 billion, a solid sales performance despite a very challenging macro environment, and we delivered our sixth consecutive quarter of year-over-year segment margin increases. This culminated in first-quarter adjusted earnings per diluted share of $1.86, which is $0.02 above the midpoint of the range that we provided in January. This is also our second-best Q1 adjusted EPS in the company's history following just $0.02 short of the record achieved during the early COVID surge in house paint sales. Our first-quarter adjusted EPS was once again up year over year, with moderating input costs and improving manufacturing performance, mitigated by lower sales volumes and higher wage and benefit costs. As we indicated in January, we had a large customer win last year at Walmart and a significant portion of lower volumes year over year was driven by this prior year $40 million load-in. We're also impacted by lower demand in Europe, including the effect of fewer selling days in March, stemming from an early Easter holiday this year. We also experienced ongoing tepid global industrial production. Adjusting for these year-over-year comparison items, volumes were nearly flat, continuing the underlying positive volume trajectory over the last five quarters. As I'll discuss in our outlook, I fully expect positive sales volumes in Q2. A benefit for us during the quarter was China, where despite a challenging general economy, our portfolio delivered double-digit organic sales growth reflecting our strong mix of well-established businesses in the country. For PPG, India also grew by double digits in the quarter. In addition, our commercial teams executed well and drove solid global organic sales growth in our aerospace, specialty coatings and materials, and protective and marine coatings businesses. Our selling prices were flat with positive pricing in the performance segment, offsetting lower pricing in the industrial segment. First-quarter pricing comparisons include a transitory unfavorable impact from European energy-related pricing indices that were put in place during a period of extremely high energy prices in that region in the first quarter of 2023. We experienced lower energy input costs in the quarter to offset this lower index-based pricing. We expect total company selling prices to be slightly positive overall in 2024 as targeted structural selling price increases have been implemented in several of our performance segment businesses, offsetting some index-based pricing contracts in the industrial segment. Our operations have benefited from further improvement as we experienced stable upstream and downstream supply chains and customer order patterns. From a supply perspective, the vast majority of our suppliers have sufficient or excess capacity as we continue to experience moderating input costs. This is noteworthy as we are just entering the peak buying period due to the overall seasonality of the paint industry. We also increased our growth-related investments, supporting initiatives that will deliver volume gains later this year and going forward. Building off of the full year 310-basis-point improvement in total segment margins in 2023, further margin improvement remains a priority in 2024. This will be driven by stronger sales volumes as the year progresses, improved manufacturing productivity, and moderating input costs from historical highs. Specifically on manufacturing productivity, our improved operating cadence will be more financially impactful during our peak seasonal quarters as we deliver additional volume growth. In the first quarter, we delivered on our margin improvement commitment with the industrial segment margins improving by 100 basis points versus prior year, and the performance coatings businesses margins were also up by about 40 basis points, as favorable pricing and moderating input costs were mitigated by lower volumes and a higher wage inflation. From a cash perspective, we expect another year of excellent cash flow, and our balance sheet remains strong, including lower inventories year over year. We'll continue to follow our legacy of utilizing our strong cash flow and balance sheet to create shareholder value. In the first quarter, we repurchased approximately $150 million of PPG stock, reflecting our commitment to use excess cash to create shareholder value. Additionally, yesterday, our board of directors increased our share buyback authorization by an additional $2.5 billion, bringing our total share repurchase authorization to approximately $3.4 billion. I'm pleased with the progress we've made on our enterprise growth initiatives. We executed strong growth from our -- from selling our innovative products into the mobility space and continue to further utilize our world-class distribution of 5,200 concessionaire locations in Mexico to drive additional non-architectural coatings products into one of the world's fastest-growing economies. In automotive refinish, customer adoption of our industry-leading digital tools increased yielding nearly 400 additional net body shop wins. These digital tools include our LINQ services and MoonWalk mixing machines, both of which are best-in-class and are focused on improving body shop productivity. To date, we've sold over 2,000 MoonWalk mixing machines and approximately 2,700 LINQ subscriptions. We announced strategic reviews of the architectural U.S. and Canada business and the global silica product business in the first quarter. Strategically, we are driving this portfolio optimization with a goal of transforming to a higher-growth, higher-margin company. As an example, excluding the architectural coatings business in the U.S. and Canada, performance coatings segment margins would be an average of 200 to 300 basis points higher than the last several years. We'll communicate the determination of a path forward on these strategic assessments when appropriate with our target of no later than the third quarter. Now, I'll comment on our second-quarter outlook. We expect to deliver adjusted Q2 EPS between $2.42 and $2.52 per share, which is, at midpoint, would be 10% higher than our previous record quarterly EPS. While we anticipate global industrial production to remain at low absolute levels and demand to be uneven by geography, we expect our overall second-quarter sales volumes to be positive by a low single-digit percentage, aided by organic growth in aerospace, protective and marine, and our share gains in packaging coatings. We project continuing solid growth from our businesses in China, our third-largest country for sales led by our automotive OEM business where our strong positioning with electric vehicle OEM producers will drive further sales. Additionally, we expect to deliver further sales growth in Mexico, our second-largest country for sales, leveraging our strong position across many businesses as well as our world-class distribution network. We are confident that PPG's unique geographic profile with strong and growing positions in China, Mexico, and India, along with stabilization and, eventually, modest growth in Europe and the continued improvements in the U.S., will support PPG's consistent sales volume growth as we move forward. We anticipate overall company selling prices to be flat to slightly positive in the second quarter as the impact of index-based contracts in our industrial segment will be offset by selling price increases in our performance coatings segment. There's still some unfavorable pricing impact and offsetting energy input cost benefits from prior-year European energy surcharges, but it's less than the first quarter. With regard to commodity raw materials, supply remains ample, and we will continue to realize benefits from moderating input costs. We expect mid-single-digit percentage raw material deflation in the second quarter following the realization of high single-digit percentage decreases in Q1. We're watching oil price and feedstock volatility, and we will manage any impact accordingly, although we expect that recent oil price increases will be absorbed upstream. Looking at the remainder of 2024, we remain confident that we will deliver positive sales volumes in each remaining quarter in 2024, including our growth in China and India. We'll also execute on our more than 270 million and growing order backlog in aerospace, driving further growth in our well-positioned businesses in Mexico and driving expanded benefits of our key growth initiatives across electric vehicle, auto parts, powder coatings, and various digital solutions. PPG remains focused on our enterprise growth initiatives to drive higher sales volumes and fully capitalize on our technical and service capabilities. We'll drive further improvement of our operating margins aided by sales volume growth leverage and our initiatives to drive manufacturing productivity following several years of supply chain and other disruptions. And we will diligently manage our costs and continue to execute against previously approved restructuring actions. Lastly, we entered the second quarter of 2024 with a strong balance sheet, which provides us with flexibility for further shareholder value creation. Thank you to our more than 50,000 employees around the world who partner with our customers every day to drive mutual success by providing best-in-class paints, coatings, specialty materials, including productivity-enhancing and sustainable solutions. Thank you for your continued confidence in PPG. This concludes our prepared remarks, and now, would you please open the lines for questions. Questions & Answers: Operator Thank you, Tim. [Operator instructions]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ghansham Panjabi from Baird. Your line is open. Ghansham Panjabi -- Robert W. Baird and Company -- Analyst Thank you, operator. Good morning everybody. Tim, I know you have a lot going on across the portfolio by business and also by geography, but your guidance embeds quite a bit of an earnings improvement during the back half of the year on a year-over-year basis. So, I guess just on that, can you just lay out the specifics that underlay your confidence for that dynamic to play out, especially with some of the upstream input costs such as energy trending higher? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Yes, sure, Ghansham. Thanks for the question. I'll tell you how I'm feeling about the full-year guide here. We have a bold 10% EPS growth target off of a strong record year last year and on a very challenging planet. But we've got strong reasons to believe, and we're confident in that. First of all, we've -- we've proven, over the last several quarters, what we can do on margin and cash. That gives us optionality. We believe that our strong volume momentum will continue. We went from a minus 3, minus 2, minus 1, now essentially flat without the one-timers. We're expecting positive volume in the rest of the year. We've -- I'm satisfied with where pricing is. We continue to get pricing performance. We've got some indexing offsets in industrial, but I'm confident in that. We've got manufacturing momentum. We're starting to deliver on the productivity initiatives as well as some incremental volume leverage portfolio, and we're starting from a position of strength in a number of our countries and businesses, aerospace, Mexico, China, India, PMC, automotive. We've got some share gains in the process of being launched across packaging, refinish, industrial coatings. We've got our enterprise growth strategy initiatives, and we do have some optionality, again, with capital deployment. So, we feel good about the ramp between Q1 to Q2 and the second half of the year, Ghansham. Vince Morales -- Senior Vice President, Chief Financial Officer Yes. And Ghansham, this is Vince. Just as we talked, a strong balance sheet in our full-year guide, we don't have any further cash deployment baked in at this point. As we alluded to in our press release, we did purchase about 150 million of shares in the first quarter, but our full-year guide does not assume additional cash deployment at this point in the remainder of the year. We'll make those decisions on a real-time basis. Operator Thank you. The next question comes from the line of John McNulty with BMO. Your line is open. John McNulty -- BMO Capital Markets -- Analyst Yeah, good morning. Thanks for taking my question. So, maybe on the price versus raws dynamic. I guess, can you speak to whether you expect to see your raw material basket down from 1Q to 2Q? And then on the pricing side, if we take out the indexing, which really should be kind of a net neutral, what portion of your business do you expect to see real pricing as we're pushing forward? Because it does sound like you've got a number of initiatives to push further price. So, can you help us to think about those things? Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. Let me just do the math. This is Vince, John. Let me do the math on the pricing. Again, we had in Q1 on a year-over-year basis, European energy surcharge is really reflecting the high cost of natural gas, excuse me, in Europe last year. That was about $15 million on a year-over-year basis. As you alluded to, John, that was completely offset an exact pass-through in our cost of goods sold. But if you're looking myopically at the price line, that's about $15 million. And we have about half of that carryover in Q2. So, $6 million, $7 million in Q2. We still have an energy surcharge impact. Excluding that, I would exclude that as what would be our structural pricing. And Tim is going to answer the raws question. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Hey, John. Thanks for the question. As far as progression from Q1 to Q2, Q1, we did say they were down high single digits, which was better than our forecast of mid-single digits. Q2, we believe, down the mid-single digits. And we're confident enough now to issue full-year guide on raws being down in that low single digits to mid-single digits for full year '24. So, we've got better visibility now into what we believe that price of raws will look like for the rest of the year. Operator Thank you. The next question comes from the line of Michael Sison with Wells Fargo. Your line is open. Mike Sison -- Wells Fargo Securities -- Analyst Hey, guys. Nice start to the year. You talked about being confident in turning the quarter in volume growth in Q2. Maybe give us a little bit of color on how much market growth you need or macro help? And how much really just comes from your execution and maybe just some areas of growth that you're seeing in your end markets? Tim Knavish -- Chairman and Chief Executive Officer Yeah, Mike. First of all, it's based on a number of factors. One is the overall trend of the company, particularly when you adjust for -- you got to take the Walmart load-in out. And when you adjust for that, we've been ramping. So, that's 1 part of it. Second is we are -- we are seeing a number of the share gain wins across some of our businesses from last year starting to launch in Q2 in industrial, in refinish, and in packaging primarily. And we've also -- we're only 16 or whatever days into the month here. And while that's just one-sixth of the quarter, we're comfortable with what we're seeing on orders and shipments thus far in the quarter. So, we're comfortable in saying that we'll be positive volume for Q2. Operator Thank you. The next question comes from the line of Duffy Fischer with Goldman Sachs. Your line is open. Duffy Fischer -- Goldman Sachs -- Analyst Yeah, good morning. Two questions off the buyback. One, I just want to clarify. So, Vince, in the annual guide, you're saying that there's no more buybacks that you're not even rolling through the 150 per quarter into that annual guide number. And then maybe for Tim. If you look at the 150 run rate, then take you over five years to eat through the program that you've now got available, how should we think about that buyback ramping going forward? What level should we put into our models? Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. Duffy, this is Vince. You stated it properly. We obviously purchased 150 million in the first quarter. That will obviously be impactful to the financials. We have nothing further assumed in our full-year guide for the balance of the year. Tim Knavish -- Chairman and Chief Executive Officer The way that I'm thinking about the additional authorization that we got from our board yesterday is really consistent with what we've done and said over the last number of years and quarters. We said that, obviously, we're going to pay our dividend. Obviously, we're going to do what we need to do with the capex to grow our businesses organically. We paid down all of our high-cost debt last year. And we've consistently said that in the absence of shareholder value-creating acquisitions, we're not going to let the cash sit on our balance sheet. And we did that in Q4. We did it in Q1. So, we're really sticking with that mantra. The way to think about magnitude going forward will depend on all of those factors, what's our actual leverage sitting at versus what we see in our acquisition pipeline after we've done those kind of organic things of dividend and capex. Operator Thank you. The next question comes from the line of David Begleiter from Deutsche Bank. Your line is open. Dave Begleiter -- Deutsche Bank -- Analyst Thank you. Good morning. Tim and Vince, in U.S. architectural, have you seen any disruption since your announcement in late February? What's the level of interest in these assets? And what should I think the most likely outcome of this review and process? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Good morning, David. It's Tim. We had a very, very detailed and thoughtful communications plan ahead of making the announcement on February 26th that we executed very shortly after that press release went out and have continued to execute. And we've seen very minimal, if any, disruption. There's chatter, but we've got really good talk plans out there. We're engaging our key customers. We're engaging our key -- obviously, our employees. We're engaging our owners, as you know. So, a very minimal disruption to the business. The second question, we expected strong interest because of the strength of the brands and the strength of the assets in our architectural U.S. and Canada business. I'm pleased to say the interest is even higher than what we expected. So, that's -- we feel good right now about where we are. As far as the -- which likely outcome, David, until numbers start coming across the desk and we can start looking at what's best for long-term shareholder value creation, it's a bit early. But we want to be definitive on our path forward in Q3. So, we'll have a much better view of what this structure might look like in another quarter or so, David. Operator Thank you. The next question comes from the line of Chris Parkinson with Wolfe Research. Your line is open. Chris Parkinson -- Wolfe Research -- Analyst Great, thank you so much. Tim, you've obviously been at the company a long time, and you're making some pretty dramatic moves in the first six quarters. When you take a step back away from the North American architecture and the specialty reviews and you look at your remaining businesses across performance and industrial, just how confident are you versus even -- let's say, a couple of quarters ago, last year, however you want to characterize it, how confident are you that those remaining businesses are the best-in-class R&D innovators and will ultimately render above-market growth in the respective end markets over the next year or two, I mean -- or perhaps even a little longer. Just has your confidence changed in the portfolio positively or negatively? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Hey, Chris. Thanks for your very polite way of saying that I'm old at the beginning there. I feel more comfortable now, than ever, that we are building a portfolio here at PPG that will have a higher growth profile and a higher margin profile. As you alluded to, we did what I would call just pruning last year of some smaller parts of our portfolio that we really did not see being consistent with our enterprise growth strategy and our performance targets. We did that last year. Obviously, Q1 this year, I announced two pretty sizable ones. Going forward, at least today, you shouldn't count on us coming out tomorrow or any time soon with another very sizable divestiture. So, I'm comfortable with what's in the portfolio in -- at a high level. We will continue, however, to prove -- or I'm sorry, to prune on a smaller scale. And one of our mantras going forward is that every business has to earn the right to stay in the portfolio. That means, one, from a performance outlook standpoint, but two, consistent with our very focused enterprise growth strategy. I also want to add that when we talk about portfolio, Chris, it's not just about the pruning and divestitures. But we are also intending to be continued acquirers going forward just on a very focused basis for those things that meet both our performance outlook and our enterprise growth strategy. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. Chris, this is Vince. If you think about the remaining portfolio, the businesses, we have the right to win in the businesses, whether it be on a regional basis or on a global basis. As you alluded to in your question, most of these businesses have strong technology associated with them. We've talked earlier in our comments about the margin profile, if absent these businesses that we're doing a strategic review on, which again would be higher on a pro forma basis. So, again, the right to win, good margins, good customer pull. Those are the things that we're focused on with respect to the portfolio. Operator Thank you. The next question comes from the line of John Roberts with Mizuho. Your line is open. John Roberts -- Mizuho Securities -- Analyst Thank you. Another coatings firm has suggested that you might separate North American architectural into Pro versus DIY and deal with them separately. Could you comment on that? Tim Knavish -- Chairman and Chief Executive Officer Hey, John. There's a lot of theories out there from a lot of different parties. As I mentioned, the interest level that we've seen coming in is very high, higher than we expected. And not all of those parties have the same view of what we should do and what this might look like at the end. So, my only comment would be everyone should be confident that we said we were casting a wide net intentionally. Everybody should be confident that we will look at every option that comes in and weigh them and do what's best for shareholder value, period. It's a little early to go beyond that, again, because nothing -- no numbers have hit our desk yet. Operator Thank you. The next question comes from the line of Patrick Cunningham with Citigroup. Your line is open. Patrick Cunningham -- Citi -- Analyst Hi, good morning. Thanks for taking my question. On the higher capex range for the year, what are the areas you're contemplating additional growth investment? And should we expect this to be a reasonable capex base for the next few years? Vince Morales -- Senior Vice President, Chief Financial Officer Yeah, Patrick. This is Vince. A couple things. One, we did have some capital spending spillover from last year into this year, just things we didn't get to at the tail end of last year. So, our Q1 capital a little higher. We're also looking at additional growth-related capital spending in Mexico and also in India. But if you look, and we said this on our Q1 call or our year-end call as well, we're going to be somewhere in that 2.5% to 3% over the midterm. We still have some additional capital last year, this year that we're catching up from COVID. So, again, we're a little bit higher. We recognized that in our January call. But again, over the midterm, you should expect us to return to our normal range. Operator Thank you. The next question comes from the line of Frank Mitsch with Fermium Research LLC. Your line is open. Frank Mitsch -- Fermium Research -- Analyst The LLC portion is very important. So, I appreciate that. Listen, I know that some of the growth you're expecting in the next three quarters for '24 are tied to higher operating rates, volume improvement, productivity gains. But as you also indicated, you're also spending more money on growth initiatives and so forth. How do we think about the interplay between those two in terms of millions of dollars or EPS, etc.? Any way that you can kind of frame the interplay between those two? Tim Knavish -- Chairman and Chief Executive Officer Yes. Well, Mr. Mitsch, this is Tim. The net-net of the growth that we're expecting versus the investments in growth that we're making, net-net, we're expecting that to deliver, at midpoint, 10% EPS growth for the year. Those investments that -- we didn't just start making those in Q1. We started making those last year, and a number of those will start to actually hit the P&L now coming here in Q2, Q3, and Q4. Beyond that, Vince, I don't know if you want to add any details? Vince Morales -- Senior Vice President, Chief Financial Officer No. These are -- these investments are things such as digital, as Tim alluded to, with respect to our consumer-facing businesses. Also with respect to refinish, we're building out digital tools that increase our customer liaisons. We have other investments in Comex where we're delivering -- we've had multiple quarters of record earnings. Our protective business, we're adding some capacity, strong protective business. We still have some infrastructure spending that has not yet hit the books, but we're building in anticipation of that. And even in aerospace, where we have a backlog that we -- that continues to grow, we're adding some capacity there to try to work at that backlog and get to it in a much more expedient manner. So, those are examples. If you look at our overheads up, that's something where some of the growth spending is a result of that -- overhead a result of that growth spending. Operator Thank you. The next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open. Vincent Andrews -- Morgan Stanley -- Analyst Thanks and good morning, everyone. Can we talk a bit about refinish? And it would be helpful if you just could level set us in terms of where volumes are now versus pre-COVID levels. And I'm just -- what I'm trying to understand on a go-forward basis, you're talking about volume declines for 1Q and 2Q against very difficult comps in the year-ago period. So, is the assessment that we've normalized volumetrically post COVID? And if that's the case, what should the algorithm for refinish be in terms of volume and price on a go-forward basis from here? Tim Knavish -- Chairman and Chief Executive Officer Yeah. Hey, Vincent. Tim here. Thanks for the question. Let me kill the second part of, first, the easy part. Price, you should expect us to continue to execute on price the way we always have in refinish, because the value proposition of the paint inside the can plus all the tools and service outside the can continues to improve. And it's such an important part of the repair, but a fairly low-cost part of the repair. So, we'll continue to execute on price. In volume, Q1 was lower than we expected, and if you saw the claims data for March that just came out for the U.S., in particular, were quite a bit lower than really the industry expected. The whole refinish industry loves an ice storm down in the Southeast U.S. or Southwest U.S., where they're not quite ready to handle with an ice storm. And it was a pretty mild winter, particularly down south. And so, the claims in March were down significantly. That affected Q1. And frankly, we'll also carry, in effect, Q2 which is why we're partly why we're saying mid -- mid-single digits on sales for Q2. The other factor in Q2 is we did have a very strong Q2 last year. That said, I've spoken and Chancey who runs that business for us, has spoken to our key end users here in the last weeks. And they're all saying the same thing about Q1, but we are all expecting, I would say, a return to more normal growth in the second half of 2024. So, we just got to get through Q2. To your question on industry versus 2019, set March aside from a claims standpoint because it's a bit unique. Other than March, we're down low single digits, mid-single digits versus pre-COVID as an industry, but we are seeing things like mouse-driven ticking up. We are seeing more and more return to downtown areas, if you want to call it that. So, long and short of it, down a bit in Q1, down a bit in Q2 because of one-timers here from a weather standpoint and a claims standpoint, confident in the second half of the year and confident for the long-term health of this business. And that's if we don't gain share, but we are continuing to gain share through our digital tools, as I mentioned in my opening remarks. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. And Vincent, this is Vince. Just a point of clarification. The claims data Tim referred to these are industry claims, which are down again low double digits. The current reading was down low double digits for the month of March. So, these are industry collision claims that set the entire industry. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Prior to March, they were down low single digits. Operator Thank you. The next question comes from the line of Stephen Byrne with Bank of America Merrill Lynch. Your line is open. Steve Byrne -- Bank of America Merrill Lynch -- Analyst Yeah, thank you. Tim, I'm trying to get my head around why the U.S. architectural business has been just barely profitable on average for five years. Has that trend been improving? Is there -- has there been any benefit from the Home Depot partnership? I asked because I had one of your store managers tell me you have to match the pricing in Home Depot, which clearly would not be good for his margins. But underlying all that, is it the number of stores? Or is it do you need to move to more of a concessionaire model in this business like Comex and like Ben Moore? Tim Knavish -- Chairman and Chief Executive Officer Thanks, Steve. So, as far as what it's done over the last couple of years, it's been a little ups and downs, but it has been below company average, and we have been investing particularly in the Home Depot model. But why has it been at the low level of profitability over the last several years? A number of things, the macros aren't great. You've got this post-COVID hangover across the whole industry. As I mentioned, we have been investing. And through -- you mentioned our own stores, through our own stores, that's a high fixed cost model. And you need velocity through those stores. And with all the factors in the macro and in the post-COVID, that velocity has decreased. Now, the Home Depot Pro initiative is certainly working and gaining momentum and is positively contributing. But at this point, it's not far enough in that ramp-up curve to offset those macros, particularly what's happening on the DIY side. So, the reason we're doing this now is we do have momentum in this kind of omnichannel model with the combination of the Home Depot, our stores and our independent dealers. And -- but we need a partner to make that go faster to get this to company average profitability. And so, that's why we're open to a number of different scenarios for this business. Operator Thank you. The next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open. Jeff Zekauskas -- JPMorgan Chase and Company -- Analyst Thanks very much. I think in your performance division, in the first quarter of the six categories that you look at, aerospace, refinish, architectural, all of them came in lower than you expected on a sales basis. And my impression is that things weakened in March globally. So, if we forget the second half for a moment, is your expectation now that the second quarter is a little bit weaker than you thought it would be before as you began the year? And then secondly, as far as the share repurchase goes, I think over the past five years, your average purchase price is about 130. And so, how do you evaluate the success? Or what are you trying to achieve in taking 3.4 billion and repurchasing your shares? How will you gauge the success of that allocation of capital? Tim Knavish -- Chairman and Chief Executive Officer OK. Hey, Jeff. Thanks for the question. I'll take the kind of momentum question that you asked, and Vince can take the repo one. But -- so, full transparency, there were a couple of things that were weaker in Q1 than what we expected. We expected the Walmart -- lack of a Walmart load-in, right? So, that's just straight math. We expected some negative Easter timing impact. I would say that was higher than what we expected. And we are actually -- again, it's only halfway through the first month, but we're seeing a bit of post-Easter snapback, OK? So, that was worse than the first quarter, but that will be just shifting to the second quarter. Two other things. Europe was softer than we expected. And industrial production, combined with the launching of some of our share wins, was weaker than we expected. So, if you think about all of those and roll forward to Q2, obviously, the Walmart load-in comp isn't there. I mentioned we're getting an Easter snapback. On Europe, early days, but we're comfortable with what we're seeing in April. So, I'm not saying it's going to have a snapback, but it's -- we don't see it getting worse. And on the industrial side, we are seeing -- we are launching a number of those share gains that we executed throughout the second half of last year in Q2. And then finally, the refinish factor that I just mentioned, refinish, particularly in March, was a bit slower than we expected, but we're expecting a strong second half for refinish. Vince Morales -- Senior Vice President, Chief Financial Officer Yes, Jeff. This is Vince. In terms of share repo, obviously, your numbers are accurate in terms of the last several years. Again, we've gone -- if you look over a longer time horizon, there's been times where we've done minimal share repurchases for consecutive number of years, typically, when we're more active in M&A. There's been times where we've done a large portion of share repurchases over a couple -- a series of years when the M&A market is not as robust and we have excess cash or excess balance sheet capacity. When you look -- we do calculate what we think is our intrinsic value of our stock price. We do feel that with the 10% growth rate we have going forward in our estimates, there are times where it's an imperative for us to look at share repo as an option. As Tim said, we have a prioritized list of cash deployment. And again, dividend, keeping the businesses healthy with capex, we look at M&A and then we look at the intrinsic value of the stock based on our assessment, and that's how we effectuate the cash deployment. Operator Thank you. The next question comes from the line of Kevin McCarthy with VRP. Your line is open. Kevin McCarthy -- Vertical Research Partners -- Analyst Thank you, and good morning. Tim, a few questions for you on the subject of Europe. I think EMEA was 31% of your mix last year. If you do wind up divesting some or all of U.S. and Canada architectural, maybe that number will rise a little bit moving forward. And it sounds like in contrast to China and India, which came in very strong, Europe did come in weaker than you expected. So, a few questions would be, A, what is driving the variance versus your prior expectation in Europe exactly; B, maybe you can provide some color on the consumer-facing businesses that you have there versus industrial? And I'm curious to understand whether rationalization of your customers' capacity is playing a role at all. We were hearing more and more about that from various chemical companies anyway. So, just a little bit more color on the region there and kind of what glide path of volume you need macro-wise to achieve that positive volume growth overall for the company that you alluded to. Tim Knavish -- Chairman and Chief Executive Officer Yes. Thanks, Kevin. I'll take the last one first just to kick it off here. We have not seen any significant -- I can't, frankly, think of any of our customers that have rationalized their capacity to the point that it's affecting our numbers in Europe. In Europe, I'd say the two businesses that probably affected us the most in Q1, one was consumer-facing, and that was deco. That was slower than we expected, mostly in France and in the Nordics. We did see green shoots in the East where we're also quite strong, so that's given us a little optimism looking forward. The second business on the Industrial segment, automotive. Automotive was weaker than we expected for the quarter. So, that gives some insights there. But as we look forward, we do -- again, early days in April, we're seeing a better order book and better shipments. We do see -- we do believe that as we talk to our customers that the deco businesses in those hard-hit countries is bouncing off the bottom. They're not expecting it to get worse. And we do see recoveries beginning to happen in the East. And again, each individually, maybe not the largest deco markets, but when you add them together, they're an important part of our portfolio, places like Poland, places like Romania where we have strong No. 1 positions and growing, places like Hungary and Czech. So, we do see some green shoots there. So, we are not expecting deco to get worse, but we're also not naive enough to say there's going to be a huge V shape, but we are expecting incremental improvements. And if you think about all the cost actions that we've taken on that continent, a little bit of incremental volume delivers really good leverage. Automotive, we're taking a bit of a wait and see. Also, we're not expecting it to get worse. But marginally, it's a similar story, although a very different end customer base. We are expecting modest recovery, but we're watching it closely. And at the end of the day, with Europe, this has been a benign macro environment for a decade, maybe more. But -- and our teams have shown the ability to do what they need to do from a positive mix, a positive price and, importantly, a structural cost standpoint to deliver earnings and cash even in that very benign environment. So, sum it all up, Q1 was worse than we expected in those couple of businesses. We are expecting sequentially incremental improvements, which will give us good leverage. And -- but we are watching it closely. And if we don't see what we need to see, we will take further structural cost actions. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. And Kevin, this is Vince. I'll just add a point on architectural. As Tim mentioned, lower than our expectations in Q1, largely attributed to March. If you look at our performance through the first two months of the year, so Jan, Feb, that business was on our targets. We do feel there was a bigger Easter impact that we're seeing, again, a snapback at least early in April in that business. Operator Thank you. The next question comes from the line of Aleksey Yefremov with KeyCorp. Your line is open. Ryan Weis -- KeyBanc Capital Markets -- Analyst Thank you, and good morning. This is Ryan on for Aleksey. Just wanted to talk a little bit more about the targeted pricing you're doing in performance coatings. Wondering if you can discuss some of the areas other than refinish. And then just wondering if you guys are like having some more success in recent weeks following this uptick in oil. Thanks. Tim Knavish -- Chairman and Chief Executive Officer Yes. So, Ryan, the question on pricing, again, we'll continue to execute as we always have in refinish, as I described. But all across performance, we deliver a value proposition that's far beyond the tin of paint. And that's what enables us to continue to offset things like wage inflation, which are higher than we expected, things that -- offset things like logistics expenses, which are higher than we expected. And that's because we typically supply very advanced technologies in our own products, but then additional services and tools to help the customer beyond what's inside the can of paint. So, we expect to get price in refinish. You'll see incremental price in aerospace. We expect it in parts of PMC where we have some really good, sustainable solutions for our customers that they're very interested in. And so, we really expect it to see almost across the whole portfolio of performance coatings. Operator Thank you. The next question comes from the line of Michael Leithead with Barclays. Your line is open. Mike Leithead -- Barclays -- Analyst Great, thanks. Good morning, guys. Question for Vince on raws and inventory. Can you just talk about where you guys are relative to more normalized raw material buying patterns? It looks like you maybe still have a few extra days of inventory. And then I appreciate you don't give free cash flow guidance. But just given your full year assumptions of raws down low to mid-singles, volume up for the full year, I guess, broadly, should we still expect working capital to be a source of cash this year? Thanks. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. I'll take the end of that, Michael, because our assumption is we're going to continue to work down. We have excess inventory relative to our history. We're going to continue to work that down, especially as we're in this peak production season that Tim alluded to earlier. We're probably carrying four to five days of excess inventory versus history. All of that is in raw materials. And we've made progress. We were at 10 days at one point last year. So, we're about halfway through our journey. We hope to take another bite out of that in Q2, a sizable bite in Q2. And then for the balance of the year, continue to be prudent in our purchases, and that should generate a positive working capital on a year-over-year basis, working capital impact on a year-over-year basis on free cash flow. In terms of our purchases, as I said at the opening -- or as Tim said in the opening remarks, most of our suppliers have excess supply. This is a market that is advantage for us, and we'll continue to push that. But again, our intention is to work down raw materials in concert with the peak season. Operator Thank you. The next question comes from the line of Laurent Favre from BNP Paribas. Your line is open. Laurent Favre -- Exane BNP Paribas -- Analyst Yes. Good morning. I had a question on China. I think you talked about growth in Q1. But presumably, this was still a quarter impacted by COVID. So, I was wondering, when you look into Q2, what kind of momentum are you seeing there on the ground? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Hey, Laurent. Thanks. Sure, there was an impact -- some impact on COVID, but automotive was a big driver. We expect that to continue. We're expecting double-digit, high single-digit kind of growth again in Q2 from automotive. Industrial coatings grew in China for us, and we expect that to continue. Refinish grew in China, and we expect that to continue. So, it's really -- we've been maybe more confident than others on China for the last several quarters, and that is actually playing out as we expected. So, I don't think you're going to see overnight going back to the growth rates of five, 10 years ago, but we remain confident in continuous growth in China. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. And just a couple of other data points. Our aerospace business is doing well there. The Chinese New Year brought about record travel in the country. And again, industrial activity there for our set of products and our set of businesses, we expect to remain strong. Operator Thank you. The next question comes from the line of Arun Viswanathan with RBC. Your line is open. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. Thanks for taking my question. I just wanted to go back to the volume outlook. So, it looks like you're guiding organic sales to be up low single digits in the second quarter and for the full year as well. So, if you look at that second quarter number, it looks like low single digits, you can have some targeted price initiatives. So, should we assume kind of flat volumes for Q2? And then similarly for the full year, how are you thinking about kind of consolidated volume growth? I know you've given out some guidance by segment as well on the slides. But it would look like that you need a kind of ramp to about the low to mid-single digits on volumes in the back half. Am I reading that correctly? Or yes, maybe you can just clarify how you're thinking about volumes, how they should evolve through the year. Tim Knavish -- Chairman and Chief Executive Officer Yes. Thanks, Arun. It's Tim. You're reading the second half, I think, correctly. But Q2, one adjustment, you said price up, volume flat. We're actually expecting more price flat, volume up. Some of that because of what Vince talked about earlier, we still have a little bit of carryover of price negativity from that European energy cost pricing from last year. So, Q2, price flat, volume up. And the rest of the year, I think you described it well, is that we'll see volume growth momentum moving through Q3 and Q4. Operator Thank you. The next question comes from the line of Josh Spector with UBS. Your line is open. Josh Spector -- UBS -- Analyst Yeah, hey, good morning. I wonder if you could just talk about Americas architectural a little bit more. So, excluding the load-in impact, it seems like your volumes are up slightly. Curious just how much of that is Comex continuing to grow versus what you're seeing in the U.S. And if you could help us kind of delineate in the U.S., what's going on with Pro and DIY from a volume perspective in the first half? Thanks. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Josh, actually, it's a little bit flip-flop because Mexico, while it had another great quarter from a kind of sales and earnings standpoint as well as cash, the Easter impact in Mexico was more of an impact than it was up here. It's a really important holiday for our friends in Mexico. And so, we actually had decent performance in our architectural U.S. business versus last year and versus the kind of market. We're confident that we gained share in 2023, and we saw that momentum continuing into Q1, all on the Pro side, though, Josh. DIY remains soft, but we did see a good performance. The way we look at our Pro business now with what we're doing between our own network, our partner, Home Depot, and our many good partners across the private dealer channel, we look at it in totality. And despite all the negative macros, all the negative news as recently as this week on housing, we were up low single digits for the architectural U.S. business -- on the Pro, I'm sorry. That's on the Pro side. Operator Thank you. The next question comes from the line of Mike Harrison with Seaport Research Partners. Your line is open. Mike Harrison -- Seaport Research Partners -- Analyst Hi, good morning. I was wondering if you could give a little more color on what you're seeing in India. Obviously, you gave us some comments on what you're seeing in China. But what are some of the key markets that you're serving in India? What's your current position? And I guess maybe what stage or inning are we in, in terms of the growth potential that you see in India? Tim Knavish -- Chairman and Chief Executive Officer Yeah, Mike. I was just there. I just got back a couple of weeks ago and it was fascinating. I've been going to India for 25 years, and there is always a lot of talk of improvements in infrastructure and public investment and growth. It's happening now. It is actually happening. It's very noticeable. If you go regularly, you will see a big difference there. A lot more cranes, a lot more highways being constructed, trains, airports. We've got a very good position there, mostly on automotive, industrial and refinish, and all of those businesses are growing. And we feel really good about the growth trajectory going forward. Now, it is not in our top five countries today. But the reason that we've started to highlight it is, one, we do have a very good position there. And for the first time in a long time, we see real tangible industrial production and infrastructure growth on the ground. Vince Morales -- Senior Vice President, Chief Financial Officer And, Mike, what's fostering that is we are seeing a significant amount of reshoring in Asia to India. The economy there is growing as robustly as Mexico. And again, that's driving that industrial activity. Operator Thank you. The next question comes from the line of Laurence Alexander with Jefferies. Your line is open. Laurence Alexander -- Jefferies -- Analyst Good morning. Just one quick one. On the proposed or possible exit of the silicas and the restructuring of the North America coatings, how much would that have changed your volatility across your business? And I guess just going forward, I mean, you talked about M&A sort of leading to mostly focusing on higher growth, higher margin. To what degree does the volatility of the businesses you're acquiring factor in? Or just how are you thinking about that, managing that going forward? Tim Knavish -- Chairman and Chief Executive Officer Sure. Thanks, Laurence. The volatility, the cyclicality, the seasonality are factors, of course. But I would say the number one and two factors are, does it improve our overall organic growth profile on a long-term basis for the company? And does it improve our overall margin profile? So, those are our first two factors. And then if we can do it without adding cyclicality and seasonality, even better. To the first part of your question, clearly, architectural U.S.-Canada is one of our more highly seasonal businesses. So, if we do separate entirely from that business, you can visualize the outcome there. And I would say the silicas business does have some cyclicality to it because part of that business is tied to auto OEM production in tires, but only a portion of that business. Other parts of it are tied to automotive aftermarket and tires. Other parts are tied to battery separators, consumer electronics. So, I would say it will have some impact, but not enough that it's going to, I think, affect your modeling of how you might model the company in its entirety from a cyclicality standpoint. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah, Laurence. Vince. Just a reminder, as we said in February, this has a multiple hundred basis point impact on sales volume improvement if you do a pro forma basis. But again, looking at that for a period of time, it's not significant in terms of cyclicality. Operator Thank you. There are no further questions at this time. I will now turn the call back over to Jonathan Edwards. Jonathan Edwards -- Director, Investor Relations OK. Thank you for your continued confidence in PPG. We want to thank you as well for a good operating, so much appreciated. This concludes our prepared remarks and now -- or sorry. We appreciate your interest and confidence in PPG. This concludes our first-quarter earnings call. Answer:

the first-quarter PPG earnings conference call

Operator Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the first-quarter PPG earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer section. [Operator instructions] To allow everyone an opportunity to ask a question, the company requests that each analyst ask only one question. Thank you. I would now like to turn the conference over to Jonathan Edwards, director of investor relations. Please go ahead, sir. Jonathan Edwards -- Director, Investor Relations Thank you, Angela, and good morning, everyone. This is Jonathan Edwards. We appreciate your continued interest in PPG and welcome you to our first-quarter 2024 financial results conference call. Joining me on the call from PPG are Tim Knavish, chairman and chief executive officer; and Vince Morales, senior vice president and chief financial officer. Our comments relate to the financial information released after U.S. equity markets closed on Thursday, April 18th, 2024. We have posted detailed commentary and accompanying presentation slides on the Investor Center of our website, ppg.com. The slides are also available on the webcast site for this call and provide additional support to the opening comments Tim will make shortly. Following management's perspective on the company's results for the quarter, we will move to a Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. And now, let me introduce PPG chairman and CEO, Tim Knavish. Tim Knavish -- Chairman and Chief Executive Officer Thank you, Jonathan, and good morning, everyone. Welcome to our first-quarter 2024 earnings call. I'd like to start by providing a few highlights on our first-quarter 2024 financial performance, and then I'll move to our outlook. The PPG team delivered sales of $4.3 billion, a solid sales performance despite a very challenging macro environment, and we delivered our sixth consecutive quarter of year-over-year segment margin increases. This culminated in first-quarter adjusted earnings per diluted share of $1.86, which is $0.02 above the midpoint of the range that we provided in January. This is also our second-best Q1 adjusted EPS in the company's history following just $0.02 short of the record achieved during the early COVID surge in house paint sales. Our first-quarter adjusted EPS was once again up year over year, with moderating input costs and improving manufacturing performance, mitigated by lower sales volumes and higher wage and benefit costs. As we indicated in January, we had a large customer win last year at Walmart and a significant portion of lower volumes year over year was driven by this prior year $40 million load-in. We're also impacted by lower demand in Europe, including the effect of fewer selling days in March, stemming from an early Easter holiday this year. We also experienced ongoing tepid global industrial production. Adjusting for these year-over-year comparison items, volumes were nearly flat, continuing the underlying positive volume trajectory over the last five quarters. As I'll discuss in our outlook, I fully expect positive sales volumes in Q2. A benefit for us during the quarter was China, where despite a challenging general economy, our portfolio delivered double-digit organic sales growth reflecting our strong mix of well-established businesses in the country. For PPG, India also grew by double digits in the quarter. In addition, our commercial teams executed well and drove solid global organic sales growth in our aerospace, specialty coatings and materials, and protective and marine coatings businesses. Our selling prices were flat with positive pricing in the performance segment, offsetting lower pricing in the industrial segment. First-quarter pricing comparisons include a transitory unfavorable impact from European energy-related pricing indices that were put in place during a period of extremely high energy prices in that region in the first quarter of 2023. We experienced lower energy input costs in the quarter to offset this lower index-based pricing. We expect total company selling prices to be slightly positive overall in 2024 as targeted structural selling price increases have been implemented in several of our performance segment businesses, offsetting some index-based pricing contracts in the industrial segment. Our operations have benefited from further improvement as we experienced stable upstream and downstream supply chains and customer order patterns. From a supply perspective, the vast majority of our suppliers have sufficient or excess capacity as we continue to experience moderating input costs. This is noteworthy as we are just entering the peak buying period due to the overall seasonality of the paint industry. We also increased our growth-related investments, supporting initiatives that will deliver volume gains later this year and going forward. Building off of the full year 310-basis-point improvement in total segment margins in 2023, further margin improvement remains a priority in 2024. This will be driven by stronger sales volumes as the year progresses, improved manufacturing productivity, and moderating input costs from historical highs. Specifically on manufacturing productivity, our improved operating cadence will be more financially impactful during our peak seasonal quarters as we deliver additional volume growth. In the first quarter, we delivered on our margin improvement commitment with the industrial segment margins improving by 100 basis points versus prior year, and the performance coatings businesses margins were also up by about 40 basis points, as favorable pricing and moderating input costs were mitigated by lower volumes and a higher wage inflation. From a cash perspective, we expect another year of excellent cash flow, and our balance sheet remains strong, including lower inventories year over year. We'll continue to follow our legacy of utilizing our strong cash flow and balance sheet to create shareholder value. In the first quarter, we repurchased approximately $150 million of PPG stock, reflecting our commitment to use excess cash to create shareholder value. Additionally, yesterday, our board of directors increased our share buyback authorization by an additional $2.5 billion, bringing our total share repurchase authorization to approximately $3.4 billion. I'm pleased with the progress we've made on our enterprise growth initiatives. We executed strong growth from our -- from selling our innovative products into the mobility space and continue to further utilize our world-class distribution of 5,200 concessionaire locations in Mexico to drive additional non-architectural coatings products into one of the world's fastest-growing economies. In automotive refinish, customer adoption of our industry-leading digital tools increased yielding nearly 400 additional net body shop wins. These digital tools include our LINQ services and MoonWalk mixing machines, both of which are best-in-class and are focused on improving body shop productivity. To date, we've sold over 2,000 MoonWalk mixing machines and approximately 2,700 LINQ subscriptions. We announced strategic reviews of the architectural U.S. and Canada business and the global silica product business in the first quarter. Strategically, we are driving this portfolio optimization with a goal of transforming to a higher-growth, higher-margin company. As an example, excluding the architectural coatings business in the U.S. and Canada, performance coatings segment margins would be an average of 200 to 300 basis points higher than the last several years. We'll communicate the determination of a path forward on these strategic assessments when appropriate with our target of no later than the third quarter. Now, I'll comment on our second-quarter outlook. We expect to deliver adjusted Q2 EPS between $2.42 and $2.52 per share, which is, at midpoint, would be 10% higher than our previous record quarterly EPS. While we anticipate global industrial production to remain at low absolute levels and demand to be uneven by geography, we expect our overall second-quarter sales volumes to be positive by a low single-digit percentage, aided by organic growth in aerospace, protective and marine, and our share gains in packaging coatings. We project continuing solid growth from our businesses in China, our third-largest country for sales led by our automotive OEM business where our strong positioning with electric vehicle OEM producers will drive further sales. Additionally, we expect to deliver further sales growth in Mexico, our second-largest country for sales, leveraging our strong position across many businesses as well as our world-class distribution network. We are confident that PPG's unique geographic profile with strong and growing positions in China, Mexico, and India, along with stabilization and, eventually, modest growth in Europe and the continued improvements in the U.S., will support PPG's consistent sales volume growth as we move forward. We anticipate overall company selling prices to be flat to slightly positive in the second quarter as the impact of index-based contracts in our industrial segment will be offset by selling price increases in our performance coatings segment. There's still some unfavorable pricing impact and offsetting energy input cost benefits from prior-year European energy surcharges, but it's less than the first quarter. With regard to commodity raw materials, supply remains ample, and we will continue to realize benefits from moderating input costs. We expect mid-single-digit percentage raw material deflation in the second quarter following the realization of high single-digit percentage decreases in Q1. We're watching oil price and feedstock volatility, and we will manage any impact accordingly, although we expect that recent oil price increases will be absorbed upstream. Looking at the remainder of 2024, we remain confident that we will deliver positive sales volumes in each remaining quarter in 2024, including our growth in China and India. We'll also execute on our more than 270 million and growing order backlog in aerospace, driving further growth in our well-positioned businesses in Mexico and driving expanded benefits of our key growth initiatives across electric vehicle, auto parts, powder coatings, and various digital solutions. PPG remains focused on our enterprise growth initiatives to drive higher sales volumes and fully capitalize on our technical and service capabilities. We'll drive further improvement of our operating margins aided by sales volume growth leverage and our initiatives to drive manufacturing productivity following several years of supply chain and other disruptions. And we will diligently manage our costs and continue to execute against previously approved restructuring actions. Lastly, we entered the second quarter of 2024 with a strong balance sheet, which provides us with flexibility for further shareholder value creation. Thank you to our more than 50,000 employees around the world who partner with our customers every day to drive mutual success by providing best-in-class paints, coatings, specialty materials, including productivity-enhancing and sustainable solutions. Thank you for your continued confidence in PPG. This concludes our prepared remarks, and now, would you please open the lines for questions. Questions & Answers: Operator Thank you, Tim. [Operator instructions]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ghansham Panjabi from Baird. Your line is open. Ghansham Panjabi -- Robert W. Baird and Company -- Analyst Thank you, operator. Good morning everybody. Tim, I know you have a lot going on across the portfolio by business and also by geography, but your guidance embeds quite a bit of an earnings improvement during the back half of the year on a year-over-year basis. So, I guess just on that, can you just lay out the specifics that underlay your confidence for that dynamic to play out, especially with some of the upstream input costs such as energy trending higher? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Yes, sure, Ghansham. Thanks for the question. I'll tell you how I'm feeling about the full-year guide here. We have a bold 10% EPS growth target off of a strong record year last year and on a very challenging planet. But we've got strong reasons to believe, and we're confident in that. First of all, we've -- we've proven, over the last several quarters, what we can do on margin and cash. That gives us optionality. We believe that our strong volume momentum will continue. We went from a minus 3, minus 2, minus 1, now essentially flat without the one-timers. We're expecting positive volume in the rest of the year. We've -- I'm satisfied with where pricing is. We continue to get pricing performance. We've got some indexing offsets in industrial, but I'm confident in that. We've got manufacturing momentum. We're starting to deliver on the productivity initiatives as well as some incremental volume leverage portfolio, and we're starting from a position of strength in a number of our countries and businesses, aerospace, Mexico, China, India, PMC, automotive. We've got some share gains in the process of being launched across packaging, refinish, industrial coatings. We've got our enterprise growth strategy initiatives, and we do have some optionality, again, with capital deployment. So, we feel good about the ramp between Q1 to Q2 and the second half of the year, Ghansham. Vince Morales -- Senior Vice President, Chief Financial Officer Yes. And Ghansham, this is Vince. Just as we talked, a strong balance sheet in our full-year guide, we don't have any further cash deployment baked in at this point. As we alluded to in our press release, we did purchase about 150 million of shares in the first quarter, but our full-year guide does not assume additional cash deployment at this point in the remainder of the year. We'll make those decisions on a real-time basis. Operator Thank you. The next question comes from the line of John McNulty with BMO. Your line is open. John McNulty -- BMO Capital Markets -- Analyst Yeah, good morning. Thanks for taking my question. So, maybe on the price versus raws dynamic. I guess, can you speak to whether you expect to see your raw material basket down from 1Q to 2Q? And then on the pricing side, if we take out the indexing, which really should be kind of a net neutral, what portion of your business do you expect to see real pricing as we're pushing forward? Because it does sound like you've got a number of initiatives to push further price. So, can you help us to think about those things? Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. Let me just do the math. This is Vince, John. Let me do the math on the pricing. Again, we had in Q1 on a year-over-year basis, European energy surcharge is really reflecting the high cost of natural gas, excuse me, in Europe last year. That was about $15 million on a year-over-year basis. As you alluded to, John, that was completely offset an exact pass-through in our cost of goods sold. But if you're looking myopically at the price line, that's about $15 million. And we have about half of that carryover in Q2. So, $6 million, $7 million in Q2. We still have an energy surcharge impact. Excluding that, I would exclude that as what would be our structural pricing. And Tim is going to answer the raws question. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Hey, John. Thanks for the question. As far as progression from Q1 to Q2, Q1, we did say they were down high single digits, which was better than our forecast of mid-single digits. Q2, we believe, down the mid-single digits. And we're confident enough now to issue full-year guide on raws being down in that low single digits to mid-single digits for full year '24. So, we've got better visibility now into what we believe that price of raws will look like for the rest of the year. Operator Thank you. The next question comes from the line of Michael Sison with Wells Fargo. Your line is open. Mike Sison -- Wells Fargo Securities -- Analyst Hey, guys. Nice start to the year. You talked about being confident in turning the quarter in volume growth in Q2. Maybe give us a little bit of color on how much market growth you need or macro help? And how much really just comes from your execution and maybe just some areas of growth that you're seeing in your end markets? Tim Knavish -- Chairman and Chief Executive Officer Yeah, Mike. First of all, it's based on a number of factors. One is the overall trend of the company, particularly when you adjust for -- you got to take the Walmart load-in out. And when you adjust for that, we've been ramping. So, that's 1 part of it. Second is we are -- we are seeing a number of the share gain wins across some of our businesses from last year starting to launch in Q2 in industrial, in refinish, and in packaging primarily. And we've also -- we're only 16 or whatever days into the month here. And while that's just one-sixth of the quarter, we're comfortable with what we're seeing on orders and shipments thus far in the quarter. So, we're comfortable in saying that we'll be positive volume for Q2. Operator Thank you. The next question comes from the line of Duffy Fischer with Goldman Sachs. Your line is open. Duffy Fischer -- Goldman Sachs -- Analyst Yeah, good morning. Two questions off the buyback. One, I just want to clarify. So, Vince, in the annual guide, you're saying that there's no more buybacks that you're not even rolling through the 150 per quarter into that annual guide number. And then maybe for Tim. If you look at the 150 run rate, then take you over five years to eat through the program that you've now got available, how should we think about that buyback ramping going forward? What level should we put into our models? Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. Duffy, this is Vince. You stated it properly. We obviously purchased 150 million in the first quarter. That will obviously be impactful to the financials. We have nothing further assumed in our full-year guide for the balance of the year. Tim Knavish -- Chairman and Chief Executive Officer The way that I'm thinking about the additional authorization that we got from our board yesterday is really consistent with what we've done and said over the last number of years and quarters. We said that, obviously, we're going to pay our dividend. Obviously, we're going to do what we need to do with the capex to grow our businesses organically. We paid down all of our high-cost debt last year. And we've consistently said that in the absence of shareholder value-creating acquisitions, we're not going to let the cash sit on our balance sheet. And we did that in Q4. We did it in Q1. So, we're really sticking with that mantra. The way to think about magnitude going forward will depend on all of those factors, what's our actual leverage sitting at versus what we see in our acquisition pipeline after we've done those kind of organic things of dividend and capex. Operator Thank you. The next question comes from the line of David Begleiter from Deutsche Bank. Your line is open. Dave Begleiter -- Deutsche Bank -- Analyst Thank you. Good morning. Tim and Vince, in U.S. architectural, have you seen any disruption since your announcement in late February? What's the level of interest in these assets? And what should I think the most likely outcome of this review and process? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Good morning, David. It's Tim. We had a very, very detailed and thoughtful communications plan ahead of making the announcement on February 26th that we executed very shortly after that press release went out and have continued to execute. And we've seen very minimal, if any, disruption. There's chatter, but we've got really good talk plans out there. We're engaging our key customers. We're engaging our key -- obviously, our employees. We're engaging our owners, as you know. So, a very minimal disruption to the business. The second question, we expected strong interest because of the strength of the brands and the strength of the assets in our architectural U.S. and Canada business. I'm pleased to say the interest is even higher than what we expected. So, that's -- we feel good right now about where we are. As far as the -- which likely outcome, David, until numbers start coming across the desk and we can start looking at what's best for long-term shareholder value creation, it's a bit early. But we want to be definitive on our path forward in Q3. So, we'll have a much better view of what this structure might look like in another quarter or so, David. Operator Thank you. The next question comes from the line of Chris Parkinson with Wolfe Research. Your line is open. Chris Parkinson -- Wolfe Research -- Analyst Great, thank you so much. Tim, you've obviously been at the company a long time, and you're making some pretty dramatic moves in the first six quarters. When you take a step back away from the North American architecture and the specialty reviews and you look at your remaining businesses across performance and industrial, just how confident are you versus even -- let's say, a couple of quarters ago, last year, however you want to characterize it, how confident are you that those remaining businesses are the best-in-class R&D innovators and will ultimately render above-market growth in the respective end markets over the next year or two, I mean -- or perhaps even a little longer. Just has your confidence changed in the portfolio positively or negatively? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Hey, Chris. Thanks for your very polite way of saying that I'm old at the beginning there. I feel more comfortable now, than ever, that we are building a portfolio here at PPG that will have a higher growth profile and a higher margin profile. As you alluded to, we did what I would call just pruning last year of some smaller parts of our portfolio that we really did not see being consistent with our enterprise growth strategy and our performance targets. We did that last year. Obviously, Q1 this year, I announced two pretty sizable ones. Going forward, at least today, you shouldn't count on us coming out tomorrow or any time soon with another very sizable divestiture. So, I'm comfortable with what's in the portfolio in -- at a high level. We will continue, however, to prove -- or I'm sorry, to prune on a smaller scale. And one of our mantras going forward is that every business has to earn the right to stay in the portfolio. That means, one, from a performance outlook standpoint, but two, consistent with our very focused enterprise growth strategy. I also want to add that when we talk about portfolio, Chris, it's not just about the pruning and divestitures. But we are also intending to be continued acquirers going forward just on a very focused basis for those things that meet both our performance outlook and our enterprise growth strategy. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. Chris, this is Vince. If you think about the remaining portfolio, the businesses, we have the right to win in the businesses, whether it be on a regional basis or on a global basis. As you alluded to in your question, most of these businesses have strong technology associated with them. We've talked earlier in our comments about the margin profile, if absent these businesses that we're doing a strategic review on, which again would be higher on a pro forma basis. So, again, the right to win, good margins, good customer pull. Those are the things that we're focused on with respect to the portfolio. Operator Thank you. The next question comes from the line of John Roberts with Mizuho. Your line is open. John Roberts -- Mizuho Securities -- Analyst Thank you. Another coatings firm has suggested that you might separate North American architectural into Pro versus DIY and deal with them separately. Could you comment on that? Tim Knavish -- Chairman and Chief Executive Officer Hey, John. There's a lot of theories out there from a lot of different parties. As I mentioned, the interest level that we've seen coming in is very high, higher than we expected. And not all of those parties have the same view of what we should do and what this might look like at the end. So, my only comment would be everyone should be confident that we said we were casting a wide net intentionally. Everybody should be confident that we will look at every option that comes in and weigh them and do what's best for shareholder value, period. It's a little early to go beyond that, again, because nothing -- no numbers have hit our desk yet. Operator Thank you. The next question comes from the line of Patrick Cunningham with Citigroup. Your line is open. Patrick Cunningham -- Citi -- Analyst Hi, good morning. Thanks for taking my question. On the higher capex range for the year, what are the areas you're contemplating additional growth investment? And should we expect this to be a reasonable capex base for the next few years? Vince Morales -- Senior Vice President, Chief Financial Officer Yeah, Patrick. This is Vince. A couple things. One, we did have some capital spending spillover from last year into this year, just things we didn't get to at the tail end of last year. So, our Q1 capital a little higher. We're also looking at additional growth-related capital spending in Mexico and also in India. But if you look, and we said this on our Q1 call or our year-end call as well, we're going to be somewhere in that 2.5% to 3% over the midterm. We still have some additional capital last year, this year that we're catching up from COVID. So, again, we're a little bit higher. We recognized that in our January call. But again, over the midterm, you should expect us to return to our normal range. Operator Thank you. The next question comes from the line of Frank Mitsch with Fermium Research LLC. Your line is open. Frank Mitsch -- Fermium Research -- Analyst The LLC portion is very important. So, I appreciate that. Listen, I know that some of the growth you're expecting in the next three quarters for '24 are tied to higher operating rates, volume improvement, productivity gains. But as you also indicated, you're also spending more money on growth initiatives and so forth. How do we think about the interplay between those two in terms of millions of dollars or EPS, etc.? Any way that you can kind of frame the interplay between those two? Tim Knavish -- Chairman and Chief Executive Officer Yes. Well, Mr. Mitsch, this is Tim. The net-net of the growth that we're expecting versus the investments in growth that we're making, net-net, we're expecting that to deliver, at midpoint, 10% EPS growth for the year. Those investments that -- we didn't just start making those in Q1. We started making those last year, and a number of those will start to actually hit the P&L now coming here in Q2, Q3, and Q4. Beyond that, Vince, I don't know if you want to add any details? Vince Morales -- Senior Vice President, Chief Financial Officer No. These are -- these investments are things such as digital, as Tim alluded to, with respect to our consumer-facing businesses. Also with respect to refinish, we're building out digital tools that increase our customer liaisons. We have other investments in Comex where we're delivering -- we've had multiple quarters of record earnings. Our protective business, we're adding some capacity, strong protective business. We still have some infrastructure spending that has not yet hit the books, but we're building in anticipation of that. And even in aerospace, where we have a backlog that we -- that continues to grow, we're adding some capacity there to try to work at that backlog and get to it in a much more expedient manner. So, those are examples. If you look at our overheads up, that's something where some of the growth spending is a result of that -- overhead a result of that growth spending. Operator Thank you. The next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open. Vincent Andrews -- Morgan Stanley -- Analyst Thanks and good morning, everyone. Can we talk a bit about refinish? And it would be helpful if you just could level set us in terms of where volumes are now versus pre-COVID levels. And I'm just -- what I'm trying to understand on a go-forward basis, you're talking about volume declines for 1Q and 2Q against very difficult comps in the year-ago period. So, is the assessment that we've normalized volumetrically post COVID? And if that's the case, what should the algorithm for refinish be in terms of volume and price on a go-forward basis from here? Tim Knavish -- Chairman and Chief Executive Officer Yeah. Hey, Vincent. Tim here. Thanks for the question. Let me kill the second part of, first, the easy part. Price, you should expect us to continue to execute on price the way we always have in refinish, because the value proposition of the paint inside the can plus all the tools and service outside the can continues to improve. And it's such an important part of the repair, but a fairly low-cost part of the repair. So, we'll continue to execute on price. In volume, Q1 was lower than we expected, and if you saw the claims data for March that just came out for the U.S., in particular, were quite a bit lower than really the industry expected. The whole refinish industry loves an ice storm down in the Southeast U.S. or Southwest U.S., where they're not quite ready to handle with an ice storm. And it was a pretty mild winter, particularly down south. And so, the claims in March were down significantly. That affected Q1. And frankly, we'll also carry, in effect, Q2 which is why we're partly why we're saying mid -- mid-single digits on sales for Q2. The other factor in Q2 is we did have a very strong Q2 last year. That said, I've spoken and Chancey who runs that business for us, has spoken to our key end users here in the last weeks. And they're all saying the same thing about Q1, but we are all expecting, I would say, a return to more normal growth in the second half of 2024. So, we just got to get through Q2. To your question on industry versus 2019, set March aside from a claims standpoint because it's a bit unique. Other than March, we're down low single digits, mid-single digits versus pre-COVID as an industry, but we are seeing things like mouse-driven ticking up. We are seeing more and more return to downtown areas, if you want to call it that. So, long and short of it, down a bit in Q1, down a bit in Q2 because of one-timers here from a weather standpoint and a claims standpoint, confident in the second half of the year and confident for the long-term health of this business. And that's if we don't gain share, but we are continuing to gain share through our digital tools, as I mentioned in my opening remarks. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. And Vincent, this is Vince. Just a point of clarification. The claims data Tim referred to these are industry claims, which are down again low double digits. The current reading was down low double digits for the month of March. So, these are industry collision claims that set the entire industry. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Prior to March, they were down low single digits. Operator Thank you. The next question comes from the line of Stephen Byrne with Bank of America Merrill Lynch. Your line is open. Steve Byrne -- Bank of America Merrill Lynch -- Analyst Yeah, thank you. Tim, I'm trying to get my head around why the U.S. architectural business has been just barely profitable on average for five years. Has that trend been improving? Is there -- has there been any benefit from the Home Depot partnership? I asked because I had one of your store managers tell me you have to match the pricing in Home Depot, which clearly would not be good for his margins. But underlying all that, is it the number of stores? Or is it do you need to move to more of a concessionaire model in this business like Comex and like Ben Moore? Tim Knavish -- Chairman and Chief Executive Officer Thanks, Steve. So, as far as what it's done over the last couple of years, it's been a little ups and downs, but it has been below company average, and we have been investing particularly in the Home Depot model. But why has it been at the low level of profitability over the last several years? A number of things, the macros aren't great. You've got this post-COVID hangover across the whole industry. As I mentioned, we have been investing. And through -- you mentioned our own stores, through our own stores, that's a high fixed cost model. And you need velocity through those stores. And with all the factors in the macro and in the post-COVID, that velocity has decreased. Now, the Home Depot Pro initiative is certainly working and gaining momentum and is positively contributing. But at this point, it's not far enough in that ramp-up curve to offset those macros, particularly what's happening on the DIY side. So, the reason we're doing this now is we do have momentum in this kind of omnichannel model with the combination of the Home Depot, our stores and our independent dealers. And -- but we need a partner to make that go faster to get this to company average profitability. And so, that's why we're open to a number of different scenarios for this business. Operator Thank you. The next question comes from the line of Jeff Zekauskas with JPMorgan. Your line is open. Jeff Zekauskas -- JPMorgan Chase and Company -- Analyst Thanks very much. I think in your performance division, in the first quarter of the six categories that you look at, aerospace, refinish, architectural, all of them came in lower than you expected on a sales basis. And my impression is that things weakened in March globally. So, if we forget the second half for a moment, is your expectation now that the second quarter is a little bit weaker than you thought it would be before as you began the year? And then secondly, as far as the share repurchase goes, I think over the past five years, your average purchase price is about 130. And so, how do you evaluate the success? Or what are you trying to achieve in taking 3.4 billion and repurchasing your shares? How will you gauge the success of that allocation of capital? Tim Knavish -- Chairman and Chief Executive Officer OK. Hey, Jeff. Thanks for the question. I'll take the kind of momentum question that you asked, and Vince can take the repo one. But -- so, full transparency, there were a couple of things that were weaker in Q1 than what we expected. We expected the Walmart -- lack of a Walmart load-in, right? So, that's just straight math. We expected some negative Easter timing impact. I would say that was higher than what we expected. And we are actually -- again, it's only halfway through the first month, but we're seeing a bit of post-Easter snapback, OK? So, that was worse than the first quarter, but that will be just shifting to the second quarter. Two other things. Europe was softer than we expected. And industrial production, combined with the launching of some of our share wins, was weaker than we expected. So, if you think about all of those and roll forward to Q2, obviously, the Walmart load-in comp isn't there. I mentioned we're getting an Easter snapback. On Europe, early days, but we're comfortable with what we're seeing in April. So, I'm not saying it's going to have a snapback, but it's -- we don't see it getting worse. And on the industrial side, we are seeing -- we are launching a number of those share gains that we executed throughout the second half of last year in Q2. And then finally, the refinish factor that I just mentioned, refinish, particularly in March, was a bit slower than we expected, but we're expecting a strong second half for refinish. Vince Morales -- Senior Vice President, Chief Financial Officer Yes, Jeff. This is Vince. In terms of share repo, obviously, your numbers are accurate in terms of the last several years. Again, we've gone -- if you look over a longer time horizon, there's been times where we've done minimal share repurchases for consecutive number of years, typically, when we're more active in M&A. There's been times where we've done a large portion of share repurchases over a couple -- a series of years when the M&A market is not as robust and we have excess cash or excess balance sheet capacity. When you look -- we do calculate what we think is our intrinsic value of our stock price. We do feel that with the 10% growth rate we have going forward in our estimates, there are times where it's an imperative for us to look at share repo as an option. As Tim said, we have a prioritized list of cash deployment. And again, dividend, keeping the businesses healthy with capex, we look at M&A and then we look at the intrinsic value of the stock based on our assessment, and that's how we effectuate the cash deployment. Operator Thank you. The next question comes from the line of Kevin McCarthy with VRP. Your line is open. Kevin McCarthy -- Vertical Research Partners -- Analyst Thank you, and good morning. Tim, a few questions for you on the subject of Europe. I think EMEA was 31% of your mix last year. If you do wind up divesting some or all of U.S. and Canada architectural, maybe that number will rise a little bit moving forward. And it sounds like in contrast to China and India, which came in very strong, Europe did come in weaker than you expected. So, a few questions would be, A, what is driving the variance versus your prior expectation in Europe exactly; B, maybe you can provide some color on the consumer-facing businesses that you have there versus industrial? And I'm curious to understand whether rationalization of your customers' capacity is playing a role at all. We were hearing more and more about that from various chemical companies anyway. So, just a little bit more color on the region there and kind of what glide path of volume you need macro-wise to achieve that positive volume growth overall for the company that you alluded to. Tim Knavish -- Chairman and Chief Executive Officer Yes. Thanks, Kevin. I'll take the last one first just to kick it off here. We have not seen any significant -- I can't, frankly, think of any of our customers that have rationalized their capacity to the point that it's affecting our numbers in Europe. In Europe, I'd say the two businesses that probably affected us the most in Q1, one was consumer-facing, and that was deco. That was slower than we expected, mostly in France and in the Nordics. We did see green shoots in the East where we're also quite strong, so that's given us a little optimism looking forward. The second business on the Industrial segment, automotive. Automotive was weaker than we expected for the quarter. So, that gives some insights there. But as we look forward, we do -- again, early days in April, we're seeing a better order book and better shipments. We do see -- we do believe that as we talk to our customers that the deco businesses in those hard-hit countries is bouncing off the bottom. They're not expecting it to get worse. And we do see recoveries beginning to happen in the East. And again, each individually, maybe not the largest deco markets, but when you add them together, they're an important part of our portfolio, places like Poland, places like Romania where we have strong No. 1 positions and growing, places like Hungary and Czech. So, we do see some green shoots there. So, we are not expecting deco to get worse, but we're also not naive enough to say there's going to be a huge V shape, but we are expecting incremental improvements. And if you think about all the cost actions that we've taken on that continent, a little bit of incremental volume delivers really good leverage. Automotive, we're taking a bit of a wait and see. Also, we're not expecting it to get worse. But marginally, it's a similar story, although a very different end customer base. We are expecting modest recovery, but we're watching it closely. And at the end of the day, with Europe, this has been a benign macro environment for a decade, maybe more. But -- and our teams have shown the ability to do what they need to do from a positive mix, a positive price and, importantly, a structural cost standpoint to deliver earnings and cash even in that very benign environment. So, sum it all up, Q1 was worse than we expected in those couple of businesses. We are expecting sequentially incremental improvements, which will give us good leverage. And -- but we are watching it closely. And if we don't see what we need to see, we will take further structural cost actions. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. And Kevin, this is Vince. I'll just add a point on architectural. As Tim mentioned, lower than our expectations in Q1, largely attributed to March. If you look at our performance through the first two months of the year, so Jan, Feb, that business was on our targets. We do feel there was a bigger Easter impact that we're seeing, again, a snapback at least early in April in that business. Operator Thank you. The next question comes from the line of Aleksey Yefremov with KeyCorp. Your line is open. Ryan Weis -- KeyBanc Capital Markets -- Analyst Thank you, and good morning. This is Ryan on for Aleksey. Just wanted to talk a little bit more about the targeted pricing you're doing in performance coatings. Wondering if you can discuss some of the areas other than refinish. And then just wondering if you guys are like having some more success in recent weeks following this uptick in oil. Thanks. Tim Knavish -- Chairman and Chief Executive Officer Yes. So, Ryan, the question on pricing, again, we'll continue to execute as we always have in refinish, as I described. But all across performance, we deliver a value proposition that's far beyond the tin of paint. And that's what enables us to continue to offset things like wage inflation, which are higher than we expected, things that -- offset things like logistics expenses, which are higher than we expected. And that's because we typically supply very advanced technologies in our own products, but then additional services and tools to help the customer beyond what's inside the can of paint. So, we expect to get price in refinish. You'll see incremental price in aerospace. We expect it in parts of PMC where we have some really good, sustainable solutions for our customers that they're very interested in. And so, we really expect it to see almost across the whole portfolio of performance coatings. Operator Thank you. The next question comes from the line of Michael Leithead with Barclays. Your line is open. Mike Leithead -- Barclays -- Analyst Great, thanks. Good morning, guys. Question for Vince on raws and inventory. Can you just talk about where you guys are relative to more normalized raw material buying patterns? It looks like you maybe still have a few extra days of inventory. And then I appreciate you don't give free cash flow guidance. But just given your full year assumptions of raws down low to mid-singles, volume up for the full year, I guess, broadly, should we still expect working capital to be a source of cash this year? Thanks. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. I'll take the end of that, Michael, because our assumption is we're going to continue to work down. We have excess inventory relative to our history. We're going to continue to work that down, especially as we're in this peak production season that Tim alluded to earlier. We're probably carrying four to five days of excess inventory versus history. All of that is in raw materials. And we've made progress. We were at 10 days at one point last year. So, we're about halfway through our journey. We hope to take another bite out of that in Q2, a sizable bite in Q2. And then for the balance of the year, continue to be prudent in our purchases, and that should generate a positive working capital on a year-over-year basis, working capital impact on a year-over-year basis on free cash flow. In terms of our purchases, as I said at the opening -- or as Tim said in the opening remarks, most of our suppliers have excess supply. This is a market that is advantage for us, and we'll continue to push that. But again, our intention is to work down raw materials in concert with the peak season. Operator Thank you. The next question comes from the line of Laurent Favre from BNP Paribas. Your line is open. Laurent Favre -- Exane BNP Paribas -- Analyst Yes. Good morning. I had a question on China. I think you talked about growth in Q1. But presumably, this was still a quarter impacted by COVID. So, I was wondering, when you look into Q2, what kind of momentum are you seeing there on the ground? Thank you. Tim Knavish -- Chairman and Chief Executive Officer Hey, Laurent. Thanks. Sure, there was an impact -- some impact on COVID, but automotive was a big driver. We expect that to continue. We're expecting double-digit, high single-digit kind of growth again in Q2 from automotive. Industrial coatings grew in China for us, and we expect that to continue. Refinish grew in China, and we expect that to continue. So, it's really -- we've been maybe more confident than others on China for the last several quarters, and that is actually playing out as we expected. So, I don't think you're going to see overnight going back to the growth rates of five, 10 years ago, but we remain confident in continuous growth in China. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah. And just a couple of other data points. Our aerospace business is doing well there. The Chinese New Year brought about record travel in the country. And again, industrial activity there for our set of products and our set of businesses, we expect to remain strong. Operator Thank you. The next question comes from the line of Arun Viswanathan with RBC. Your line is open. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. Thanks for taking my question. I just wanted to go back to the volume outlook. So, it looks like you're guiding organic sales to be up low single digits in the second quarter and for the full year as well. So, if you look at that second quarter number, it looks like low single digits, you can have some targeted price initiatives. So, should we assume kind of flat volumes for Q2? And then similarly for the full year, how are you thinking about kind of consolidated volume growth? I know you've given out some guidance by segment as well on the slides. But it would look like that you need a kind of ramp to about the low to mid-single digits on volumes in the back half. Am I reading that correctly? Or yes, maybe you can just clarify how you're thinking about volumes, how they should evolve through the year. Tim Knavish -- Chairman and Chief Executive Officer Yes. Thanks, Arun. It's Tim. You're reading the second half, I think, correctly. But Q2, one adjustment, you said price up, volume flat. We're actually expecting more price flat, volume up. Some of that because of what Vince talked about earlier, we still have a little bit of carryover of price negativity from that European energy cost pricing from last year. So, Q2, price flat, volume up. And the rest of the year, I think you described it well, is that we'll see volume growth momentum moving through Q3 and Q4. Operator Thank you. The next question comes from the line of Josh Spector with UBS. Your line is open. Josh Spector -- UBS -- Analyst Yeah, hey, good morning. I wonder if you could just talk about Americas architectural a little bit more. So, excluding the load-in impact, it seems like your volumes are up slightly. Curious just how much of that is Comex continuing to grow versus what you're seeing in the U.S. And if you could help us kind of delineate in the U.S., what's going on with Pro and DIY from a volume perspective in the first half? Thanks. Tim Knavish -- Chairman and Chief Executive Officer Yeah. Josh, actually, it's a little bit flip-flop because Mexico, while it had another great quarter from a kind of sales and earnings standpoint as well as cash, the Easter impact in Mexico was more of an impact than it was up here. It's a really important holiday for our friends in Mexico. And so, we actually had decent performance in our architectural U.S. business versus last year and versus the kind of market. We're confident that we gained share in 2023, and we saw that momentum continuing into Q1, all on the Pro side, though, Josh. DIY remains soft, but we did see a good performance. The way we look at our Pro business now with what we're doing between our own network, our partner, Home Depot, and our many good partners across the private dealer channel, we look at it in totality. And despite all the negative macros, all the negative news as recently as this week on housing, we were up low single digits for the architectural U.S. business -- on the Pro, I'm sorry. That's on the Pro side. Operator Thank you. The next question comes from the line of Mike Harrison with Seaport Research Partners. Your line is open. Mike Harrison -- Seaport Research Partners -- Analyst Hi, good morning. I was wondering if you could give a little more color on what you're seeing in India. Obviously, you gave us some comments on what you're seeing in China. But what are some of the key markets that you're serving in India? What's your current position? And I guess maybe what stage or inning are we in, in terms of the growth potential that you see in India? Tim Knavish -- Chairman and Chief Executive Officer Yeah, Mike. I was just there. I just got back a couple of weeks ago and it was fascinating. I've been going to India for 25 years, and there is always a lot of talk of improvements in infrastructure and public investment and growth. It's happening now. It is actually happening. It's very noticeable. If you go regularly, you will see a big difference there. A lot more cranes, a lot more highways being constructed, trains, airports. We've got a very good position there, mostly on automotive, industrial and refinish, and all of those businesses are growing. And we feel really good about the growth trajectory going forward. Now, it is not in our top five countries today. But the reason that we've started to highlight it is, one, we do have a very good position there. And for the first time in a long time, we see real tangible industrial production and infrastructure growth on the ground. Vince Morales -- Senior Vice President, Chief Financial Officer And, Mike, what's fostering that is we are seeing a significant amount of reshoring in Asia to India. The economy there is growing as robustly as Mexico. And again, that's driving that industrial activity. Operator Thank you. The next question comes from the line of Laurence Alexander with Jefferies. Your line is open. Laurence Alexander -- Jefferies -- Analyst Good morning. Just one quick one. On the proposed or possible exit of the silicas and the restructuring of the North America coatings, how much would that have changed your volatility across your business? And I guess just going forward, I mean, you talked about M&A sort of leading to mostly focusing on higher growth, higher margin. To what degree does the volatility of the businesses you're acquiring factor in? Or just how are you thinking about that, managing that going forward? Tim Knavish -- Chairman and Chief Executive Officer Sure. Thanks, Laurence. The volatility, the cyclicality, the seasonality are factors, of course. But I would say the number one and two factors are, does it improve our overall organic growth profile on a long-term basis for the company? And does it improve our overall margin profile? So, those are our first two factors. And then if we can do it without adding cyclicality and seasonality, even better. To the first part of your question, clearly, architectural U.S.-Canada is one of our more highly seasonal businesses. So, if we do separate entirely from that business, you can visualize the outcome there. And I would say the silicas business does have some cyclicality to it because part of that business is tied to auto OEM production in tires, but only a portion of that business. Other parts of it are tied to automotive aftermarket and tires. Other parts are tied to battery separators, consumer electronics. So, I would say it will have some impact, but not enough that it's going to, I think, affect your modeling of how you might model the company in its entirety from a cyclicality standpoint. Vince Morales -- Senior Vice President, Chief Financial Officer Yeah, Laurence. Vince. Just a reminder, as we said in February, this has a multiple hundred basis point impact on sales volume improvement if you do a pro forma basis. But again, looking at that for a period of time, it's not significant in terms of cyclicality. Operator Thank you. There are no further questions at this time. I will now turn the call back over to Jonathan Edwards. Jonathan Edwards -- Director, Investor Relations OK. Thank you for your continued confidence in PPG. We want to thank you as well for a good operating, so much appreciated. This concludes our prepared remarks and now -- or sorry. We appreciate your interest and confidence in PPG. This concludes our first-quarter earnings call.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to the first-quarter 2024 Phillips 66 earnings conference call. My name is Lydia, and I'll be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I'll now turn the call over to Jeff Dietert, vice president, investor relations. Jeff, you may begin. Jeff Dietert -- Vice President, Investor Relations Welcome to Phillips 66 first-quarter earnings conference call. Participants on today's call will include Mark Lashier, president and CEO; Kevin Mitchell, CFO; Tim Roberts, midstream and chemicals; Rich Harbison, refining; and Brian Mandell, marketing and commercial. Today's presentation materials can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark. Mark Lashier -- President and Chief Executive Officer Thanks, Jeff. Welcome, everyone, to our first-quarter earnings call. We continued to progress our strategic priorities and we returned significant cash to our shareholders. While our crude utilization rates were strong during the quarter, our results were affected by maintenance that limited our ability to make higher-value products. We were also impacted by the renewable fuels conversion at Rodeo as well as the effect of rising commodity prices on our inventory hedge positions. Currently, our assets are running near historical highs and we are ready to meet peak summer demand. Before we provide an update on our strategic priorities, we want to recognize our Midstream, Refining, and Chemicals businesses, which have all received honors for their exemplary safety performance in 2023. Our Midstream gathering and processing business received the top 2023 GPA Safety Award in the large operator division. In Refining, the Rodeo and Sweeny facilities both received the AFPM Distinguished Safety Award, which is the highest annual safety award in the industry. This was Sweeny Refinery's third straight year to receive the honor. The Ponca City Refinery earned the Elite Platinum Award, and the Lake Charles Refinery secured the Elite Gold Award. In Chemicals, CPChem received two AFPM Safety Awards. I'm very proud of our employees and the employees of CPChem for their commitment to safety. I would like to congratulate them on a job well done. Today, beginning on Slide 4, we'll highlight the progress we've made on our strategic priorities. Next, we'll discuss our first quarter financial results. Then we look forward to your questions. We previously announced plans to monetize assets that no longer meet our long-term objectives, and we set a target to generate over $3 billion in proceeds. The expected proceeds will support our strategic priorities, including returns to shareholders. This quarter, we launched a process to divest our retail marketing business in Germany and Austria and communicated the plans to employees. Completion of the dispositions is subject to satisfactory market conditions and customary approvals. We have distributed almost $10 billion through share repurchases and dividends since July of 2022. Over the remaining three quarters of 2024, we expect to achieve our $13 billion to $15 billion target. Share repurchases will continue to be an important component of our capital allocation. We're committed to return over 50% of our operating cash flows to shareholders. Recently, we announced a 10% increase in our quarterly dividend, contributing to a 16% compound annual growth rate since 2012. The dividend increase reflects the confidence we have in our growing mid-cycle cash flow generation and our disciplined approach to capital allocation, including a secure, competitive, and growing dividend. In Refining, we continue to run at crude utilization rates above the industry average for the fifth consecutive quarter. We remain focused on improving performance, increasing market capture, and reducing costs to enhance our earnings per barrel. We have achieved over $560 million or more than $0.80 per barrel in run-rate cost reductions from business transformation. We expect to achieve our full $1 per barrel run rate target by the end of the year. In Midstream, our NGL wellhead-to-market business is focused on capturing operating and commercial synergies of over $400 million by year-end 2024. Midstream's estimated 2024 mid-cycle adjusted EBITDA is $3.6 billion, providing stable cash generation that covers the company's top capital priorities, funding sustaining capital and the dividend. During the first quarter, we achieved a major milestone with the start-up of our Rodeo renewable energy complex. Slide 5 summarizes our journey to transform the San Francisco refinery into one of the world's largest renewable fuels facilities. The facility benefits as a superior location to secure renewable feedstocks and market renewable fuels. The project leverages existing assets and is expected to generate strong returns. We began producing renewable diesel from our Unit 250 hydrotreater in April of 2021. We have gained valuable operational experience and market knowledge that positions us for success in our expanding renewable fuels business. Unit 250 continues to exceed expectations and has increased production to approximately 10,000 barrels per day. Our Rodeo renewable energy complex is producing 30,000 barrels per day of renewable fuels. We're on track to increase production capability to full rates of approximately 50,000 barrels per day by the end of the second quarter. Once complete, we'll have the ability to produce renewable jet, a key component of sustainable aviation fuel. We're proud of the team's strong project execution and appreciate their commitment to operating excellence in achieving this significant milestone. The Rodeo renewable energy complex positions Phillips 66 as a world leader in renewable fuels. Slide 6 provides an update on business transformation progress. Our run rate savings were $1.24 billion at the end of the first quarter, comprised of $940 million of cost reductions and $300 million of sustaining capital efficiencies. Through the first quarter, we've achieved $750 million in annualized cost reductions. The majority of these cost reductions relate to refining operating and SG&A expenses as well as benefits to equity earnings and gross margin. We are on track to realize $1 billion of cost reductions in 2024 to sustain higher cash generation. Before I turn the call over to Kevin to review the financial results, I want to stress that the market fundamentals are good, our assets are running well, and we have a clear path to achieving our strategic priorities and growing cash flows. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Thank you, Mark. Slide 7 summarizes our first quarter results. Adjusted earnings were $822 million or $1.90 per share. Operating cash flow, excluding working capital, was $1.2 billion. We received distributions from equity affiliates of $348 million. Capital spending for the quarter was $628 million, including $171 million for a Midstream joint venture debt repayment. We distributed $1.6 billion to shareholders through $1.2 billion of share repurchases and $448 million of dividends. Net debt-to-capital ratio was 38%. Slide 8 highlights the change in results by segment from the fourth quarter to the first quarter. During the period, adjusted earnings decreased $540 million, mostly due to lower results in Refining, Midstream, and Marketing and Specialties, partially offset by improved results in Chemicals. In Midstream, first-quarter adjusted pre-tax income of $613 million was down $141 million from the prior quarter, reflecting lower results in transportation and NGL. Transportation results were down mainly due to a decrease in throughput and deficiency revenues, partially offset by seasonally lower maintenance costs. The NGL business decreased primarily due to a decline in margins as well as lower volumes, reflecting impacts from winter storms. Chemicals adjusted pre-tax income increased $99 million to $205 million in the first quarter. This increase was mostly due to higher polyethylene margins driven by improved sales prices and the decline in feedstock costs as well as lower turnaround costs. Global O&P utilization was 96%. Refining first-quarter adjusted pre-tax income was $228 million, down $569 million from the fourth quarter. The decrease was primarily due to lower realized margins. Our commercial results were less favorable than the previous quarter, in part due to inventory hedging impacts in a rising price environment and less advantageous pipeline ARBs. In addition, realized margins decreased due to lower Gulf Coast clean product realizations. Our Refining results and market capture of 69% were also negatively impacted by maintenance activities on downstream conversion units as well as the renewable fuels conversion at Rodeo. Marketing and Specialties adjusted first-quarter pre-tax income was $345 million, a decrease of $87 million from the previous quarter. The decrease was mainly due to lower domestic marketing and lubricant margins. Our adjusted effective tax rate was 21%. Slide 9 shows the change in cash during the first quarter. We started the quarter with a $3.3 billion cash balance. Cash from operations, excluding working capital, was $1.2 billion. There was a working capital use of $1.4 billion, mainly reflecting a $2.6 billion increase in inventory, partially offset by benefits in accounts payables and receivables, which included the impact of rising commodity prices. Net debt issuances were $802 million. We returned $1.6 billion to shareholders through share repurchases and dividends. Additionally, we funded $628 million of capital spending. Our ending cash balance was $1.6 billion. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items for the second quarter. In Chemicals, we expect the second quarter global O&P utilization rate to be in the mid-90s. In Refining, we expect the second quarter worldwide crude utilization rate to be in the mid-90s. Turnaround expense is expected to be between $100 million and $120 million, excluding Rodeo. We anticipate second-quarter corporate and other costs to come in between $330 million and $350 million, reflecting higher net interest expense. Now we will open the line for questions, after which Mark will make closing comments. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from Neil Mehta of Goldman Sachs. Your line is open, please go ahead. Neil Mehta -- Goldman Sachs -- Analyst Good morning, Mark and team. I guess the first question was just Refining in the quarter. The capture rates were really noisy at 69%. I know you guys target 75%. It looks like a lot of that was on the West Coast because of Rodeo and then also secondary products. So you alluded to some of this in the prepared remarks, but maybe you can just talk a little bit about what happened there and your confidence about the progression as we work our way through the year. Mark Lashier -- President and Chief Executive Officer Yeah. Good morning, Neil. That's a great question. Thank you for asking that. The way I'm looking at this is those first-quarter headwinds that you mentioned in Refining are all related to activities that will position us to deliver medium- and long-term tailwinds in support of our strategic priorities. And so it's some of the fundamental work going on around Rodeo and some of the work around our turnarounds are critically important. And Rich and Kevin can drive into that a little bit more. And including some of the activities in commercial that we underwent over the last several quarters, that will contribute to our long-term success. So, Rich, do you want to dive in? Rich Harbison -- Executive Vice President, Refining Yes, Mark. And Neil, when I reflect back on the quarter, I look at the metrics and we ran pretty well. But the market capture obviously was challenged, and it was primarily driven by activity in the Gulf Coast and the West Coast. We achieved about an 84% clean product yield, which for our assets is pretty good. It's actually 1% higher year-over-year. So it is a sign that our margin projects are actually playing into the bottom line here as we move forward. However, quarter-over-quarter, we were 3% lower than the fourth quarter. 1% of that very clearly is seasonal. It's butane blending related to our conversion as we move toward summer gasoline over the quarter. Another 2% is really related to our turnaround activity, and this was principally focused in the downstream catalytic units across our system, and it was concentrated in the Gulf Coast area. This has really two effects when it comes to market capture and clean product yield. It reduces our ability to produce higher-value products, and it increases our intermediate inventories over the period. Now on the West Coast, we have the conversion of the Rodeo facility, which is a compounding event. Essentially, it effectively had a $180 million loss and adjusted pre-tax income in the quarter as we transformed the business. And if you think about the business, it went from active to idle to reactive across this first quarter. The good news is we're near completion of the Rodeo conversion, and I actually would say we're well into the wind-up phase now. So to summarize, I guess the Rodeo start-up is on schedule, ramping up production. Approximately 50,000 barrels a day of renewable fuels will be achieved out of that facility in the second quarter. And we positioned our units across the system to run full conversion rates with fresh catalysts and ample intermediate inventories for the upcoming driving season. Kevin, did you want to add anything? Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes. Let me just put a couple of numbers to some of these items. So in terms of some commercial impacts that we talk about, on Gulf Coast product pricing differentials, in absolute terms, that was a $50 million headwind in the first quarter. The inventory hedges that I referenced in the earlier comments which primarily impacts Central Corridor, that was a $100 million headwind in the first quarter. These are not variances, these are absolutes in the quarter. And then on the West Coast, Rodeo in overall terms was a $180 million negative or loss for the quarter. So the West Coast results are bearing that drag from the impact of the Rodeo conversion. Mark Lashier -- President and Chief Executive Officer Yes. And I think just to put that in context, we're taking a disadvantaged refinery and converting it into one of the world's largest renewable fuels facilities. And so to bridge to that, we took the heavy lift this quarter, and now we're well-positioned to start delivering value again from the Rodeo facility as we continue to push it to full rates through the second quarter. And then on the Gulf Coast, the way you have to think about that is we're still maximizing our crude utilization throughput, but that crude turned into intermediates instead of clean products by design because of the turnaround work we had underway. So now we've got that inventory of intermediates poised to be converted into clean products as we continue to ramp back up into the summer season. So we're well-positioned going forward. Neil Mehta -- Goldman Sachs -- Analyst Thanks, team. That's a lot of good color. The follow-up is just on balance sheet, Q1 is always a noisy quarter for working capital and that cash flow bridge, Kevin, is really helpful. But just your perspective on where you want to get your net debt to capital over time. What's the path to get there, including potential asset sales? And then how do we think about working capital getting into that equation? So big picture question around that metric. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, Neil, so let me hit on the working capital piece first. So negative $1.4 billion in aggregate, about 2.6 of that is a function of inventory build, and so we did have some partial offsetting benefit in payables and receivables, and that was driven by two items. One, the rising price, the absolute rising price environment generally is positive for net AP/AR. So we saw some benefit there. But we also benefited on receivables by collecting, in the first quarter, cash from fourth-quarter inventory drawdown, and that was several hundred million dollars that showed up in there. But on the inventory build, it's a sizable build and I would say it's really a function of both commercial opportunity inventory as well as some operational-driven inventory. And the way to think about that is the operational barrels will turn into margin at a future point in time like the intermediates that we've talked about. The commercial inventory build, those will generate a return that will be in excess of anything we will realize on cash balances. And fundamentally, it's all still sitting in a liquid asset on the balance sheet. So that kind of talks to the working capital. And consistent with normal practice, you would expect that inventory to come back down in the -- toward the end of the year, and you'll see some of that cash coming back to us. In terms of balance sheet and leverage levels, we are above our targeted range, so 25% to 30% target range. Still comfortable with that target. You'll notice that we've been leaning into the share repurchases quite heavily, and that's a function of our confidence in the business, in the outlook, our growth that we see coming in terms of the $14 billion of mid-cycle adjusted EBITDA. And so it feels like still a pretty compelling opportunity for us to be buying shares back even if in the near term, it's at the expense of that leverage metric. So still expect to get there to that level. That's still our objective. And the other comment I'd make on leverage, the other metric, the other way we look at this is the non -- or the much less commodity sensitive businesses, the Midstream and the Marketing and Specialties business, is our ability for those businesses to basically be able to bear the debt that the company has. So on a combined basis, that's circa $6 billion of EBITDA generation. And you think of a typical leverage multiple for businesses like that, call it, three times, that's $18 billion of net debt, which is roughly where we are. And so that's the other measure we look at. And that keeps the Refining business, avoids that volatility being part of that, the way we look at that debt level. So keeps us very comfortable from a balance sheet standpoint. Neil Mehta -- Goldman Sachs -- Analyst Thanks, Kevin. Operator Our next question comes from Roger Read of Wells Fargo Securities. Your line is open. Roger Read -- Wells Fargo Securities -- Analyst Yeah. Thank you. Good morning, everybody. I'd like to, if we could, maybe look at -- I guess it's a combination of the opex that we're seeing in Refining and, I guess, let's say, juxtaposed against the progress you're making in overall cost reduction, so during the first quarter going from $630 million to $715 million on a cumulative basis. If I look at cash opex, it's kind of stable over the last three quarters. Recognize a lot of stuff's going on, but if you could help us kind of put those two together and maybe where you see the impact on cash opex or maybe if it's embedded in the actual Refining margin. Where we're seeing the cost savings manifest in Refining? Mark Lashier -- President and Chief Executive Officer Yes. I think that certainly, the majority of our business transformation cost impact is showing up in Refining, and we've been out delivering our targets, over-delivering against our targets and certainly continue that into 2024. There's always a lag, and we talk about run rate and then we talk about realized. And we're going to make sure that you keep track to. Run rate is where the speedometer is at this point in time. The realized is what we're actually seeing show up in the numbers. And we've seen good progress in Refining, and we'll continue to see that throughout this year as we rise up to our forecasted $1.1 billion in cost and $300 million in capital synergies, capital savings. And so Rich can drive into those cost numbers for you, Roger, and give you some color around that. Rich Harbison -- Executive Vice President, Refining Yes. So the end of last year, Roger, we, on a run rate basis, passed the $500 million or $0.75, roughly $0.75 a barrel number on run rate last year, and realized about $0.41 of that last year. As we fast forward now into -- through the first quarter here, we see that realized number creeping up to the $500 million, actually slightly over the $500 million number. So it's coming in at that $0.75. And it's roughly that delay that Mark's talking about, roughly a 90-day delay in achieving that. So when we go back and we validate those spends, and remember, those spends are over 900 separate initiatives that we've completed across the organization. We go back and revalidate these. So we are seeing those start flowing to the bottom line for Refining. And if you look at our year-over-year opex, it is noticeably lower even in the face of inflation, pretty heavy inflationary period here that we faced over the period of time. So we're happy with the progress. On a run rate basis at the end of the first quarter, we've achieved $560 million of run rate, which equates to about $0.80. And that's on a trajectory for the year-end of $1 a barrel target that's set for the organization, which is roughly $650 million by the end of the year. So we're well on that pace to achieve that, and the program is pressing forward. And like I had mentioned earlier, it's a seriatim of hundreds, if not thousands of initiatives to execute, and it's really intended to drive work and efficiencies out of our work process. And as that happens, we want to make sure that, that changes how we do our work. It influences how we make decisions, but it should not compromise safety, reliability, or earnings power for the organization. Mark Lashier -- President and Chief Executive Officer Yes, Roger and I really want to drive home what Rich just said, that the cultural impact on the organization has been impressive, particularly out in the field, whether it's Midstream, Refining, wherever you are. And we have a workforce that has bought into it, and it's committed to driving higher levels of performance. They understand right out at the front lines, they understand what our strategic priorities are, and how they can contribute to us getting there. And so they're digging in and they're looking at those opportunities every day. And across the organization, we continue to simplify work, to make work easier for people to get done, so get people the right digital opportunity so they can make better decisions faster, whether it's commercial or whether it's an operator on the front line. And the organization, we're also simplifying and we want to ensure that we've got a streamlined organization that will support sustainable success around both cost and performance, and we're seeing that live as we move forward. Roger Read -- Wells Fargo Securities -- Analyst I appreciate the detail there, everybody. I guess just a follow-up question on the announcement of the potential sale of the European retail assets. How does that affect the partial ownership you have in Refining assets on mainland Europe, MiRO specifically? Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, Roger, it's Kevin. So we're selling the Germany and Austria retail assets, like we said. That's a company-owned dealer-operated model, primarily almost 1,000 sites across those two countries. That's a high-performing business, top-rated many years in a row, 10% of market share in each country. A great business but doesn't really integrate with the sort of core strategic focus areas that we have as a company. So it's a little bit of background as to why those assets. It does not include our ownership in the MiRO Refinery in Germany. And the reason for that is the majority of buyers for those type of retail assets would not be interested in refinery ownership. If there's a buyer that is interested, then that's a separate conversation and we'll handle that separately. But this package right now is focused on those marketing assets. Roger Read -- Wells Fargo Securities -- Analyst Great. Thank you. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Thanks, Roger. Operator The next question comes from Ryan Todd of Piper Sandler. Your line is open. Ryan Todd -- Piper Sandler -- Analyst OK. Sorry. Getting off mute there. Maybe if I could start with one on Rodeo. I mean, congrats on getting the project, the Rodeo Renewed project up and running. You mentioned the loss in the first quarter and I know like early days are challenging these ramp toward full capacity and optimized performance. But can you walk through maybe what to expect over the next few quarters there? When do you anticipate hitting full production capacity? How do you anticipate the feedstock mix to change over the next few quarters as you run more advantaged feeds? And how should we think about that negative $180 million moving toward profitability from a time line point of view as we look over the course of this year? Rich Harbison -- Executive Vice President, Refining Sure, Ryan. I got that. This is Rich here. So maybe first, I'll start with a time line of the Rodeo facility. As you know, we've been ramping this facility down and hit a milestone in February of this year, with a complete shutdown of the facility after 128 years of legacy of running as a crude processing site. That first transition occurred on the first hydrocracker, and they went into renewable fuels feedstock production in March of this year. So that first phase is up and running and that's, that milestone we're talking about here. And that's allowed the facility in complement with the Unit 250 operation that Mark mentioned in the earlier comments with the first hydrocracker to produce about 30,000 barrels a day of renewable fuels. The second hydrocracker and the pretreatment unit will both finish construction in the May time frame, and we will start those up in the June time frame. So by the end of the second quarter, the facility will be at full production rates. Now what does that all mean when it comes to margin? So margin in this business is driven a lot by the carbon intensity of the feedstocks. And Brian's team has been actively engaged in that over the last couple of years on aggregating a number of feedstocks. So the way we see this is, we will start with essentially the pretreated material in the second quarter at a higher CI, roughly 50 CI number. And over the third quarter, we see the carbon intensity of our feedstocks continually ramping down through that third quarter. But by the end of the third quarter, I would expect to see us in the lower to mid CI range of 30s in that range. And that's primarily driven by processing more recycled fats, oils, and greases that are aggregated throughout the world. And then as a supplement to all of that, we're seeing a growing interest in sustainable aviation fuel as well. So we have positioned the facility to begin production of sustainable aviation fuel, which is a key component is the renewable jet that's blended into that. And that production will be capable starting in the third quarter as well. And we do expect to be a prominent supplier in the market on that. So the good news is Rodeo's through that start-up process, that shutdown/start-up process, and now we're in the ramp-up phase, I'll call it. It's online and we're ramping up production right now. Mark Lashier -- President and Chief Executive Officer Yes, Ryan, when we get up to full rates, we'll be able to produce something on the order of 10,000 barrels a day of renewable jet fuel, which gets blended up then to sustainable aviation fuel in the marketplace. And this kit is going to be designed for continuous optimization, whether it's the split between jet and diesel fuel or the feedstocks coming in because of the feed pretreatment unit we'll have, we'll have great flexibility. And so we'll optimize on CI, cost and revenue and as well as the incentives that are out there. So it's going to be an interesting facility to have in our kit, and we're looking forward to getting it fully online and generating cash. Rich Harbison -- Executive Vice President, Refining I think it's supplemented as well by the last-mile strategy that Brian's team has put in place. That prevents leakage of value as we deliver the product to the end user there, and that should play out nicely as we increase production from the facility. Ryan Todd -- Piper Sandler -- Analyst And do you have -- have you signed contracts on the SAF front? Are you in ongoing negotiations there with partners? Brian Mandell -- Executive Vice President, Marketing and Commercial We're concurrently in negotiations with partners. We've seen a lot of interest in SAF. Ryan Todd -- Piper Sandler -- Analyst Great. Maybe just one, changing gears to chems, on the chemical side, the better-than-expected performance of CPChem. Can you talk about kind of the drivers of improvement there? Is it primarily feedstock-related? Are you seeing any signs of underlying improvement in market conditions and maybe how you're looking at the rest of the year? Tim Roberts -- Executive Vice President, Midstream and Chemicals Yes. Ryan, this is Tim Roberts and I'll chat about that. I'll cover three things because I think there'll be other questions around it. First one I wanted to talk about is actually more on the leadership side. I just wanted to recognize Bruce Chen, who was the recently retired CEO at CPChem. He did a really good job there, great leadership, great drive for excellence, and he'll be missed. We have an internal candidate, Steve Prusak, who's assumed the role of CEO. Steve has been very successful in all phases of the chemical business, and we are highly confident in his ability to lead and take CPChem to the next level of industry-leading performance. So that, I want to thank both of those guys. Now on the macro side, let me talk about that and then I'll get specific to CPChem. Macro, clearly, the heavy-light spread with regard to being light feed versus heavy feed, it's really been a boon to those that can crack the light feedstock, especially CPChem, who's well-positioned not only the U.S. Gulf Coast but in the Middle East. And so it's -- the advantage is pretty wide right now. And so they've been able to take advantage of it. In fact, the industry in the U.S., if you're cracking light, you like it. However, I will tell you, we are not at mid-cycle margins. It has come off the bottom, which is good. A lot of that is really related to more about feedstock. So natural gas has come off, it's come down and subsequently, ethane's come down with it as has some propane and butane as well. And so subsequently, that gap has gotten bigger. And then anyway, that's showing up. And then also the lower feedstock and natural gas relative to utility cost. So the combination of those two as well as just a little bit of support on polyethylene pricing, not a lot, but enough to help widen up that chain margin a little bit. So I think that's been good. We still think, though, that although we're off the bottom, we still think it's hard to see us getting to mid-cycle anytime during 2025. But certainly, supply demand fundamentals as destocking goes, we do see that it's sometime after 2025, you can see it rebalance and then get back into a mid-cycle environment. Specifically to CPChem though, I do want to highlight as well with them that they've had a couple of their mid-cap projects that did come onstream late last year, C3 splitter, the 1-hexene unit, and then they also added another furnace to one of the large crackers there. And 1-hexene and C3, they're adding earnings in the first quarter. So they're up, they're running. They have run it higher than nameplate capacity, which has been really good, and again, generating earnings that are showing up at CPChem's results. And we're in really a start-up mode with the furnace. That work is complete. They're starting it up, going through the normal shakedown you will have with those units. And we're hoping in 2Q, you'll see something more material on the earnings side there, too. Mark Lashier -- President and Chief Executive Officer Yes, Ryan, you're seeing live the last almost 25 years of what CPChem has done to position themselves to be able to run flat out at the bottom of the cycle. And they did that and they did that profitably. And you're seeing rationalization of assets in Europe while they're running at flat-out rates. And so that's encouraging from a CPChem perspective. We need to see that in this down cycle to see some of the less competitive assets come out of the system. And that's going to be constructive, and that will help accelerate the industry out of the bottom of the cycle and to greener pastures out in the next couple of years. Tim Roberts -- Executive Vice President, Midstream and Chemicals And Mark, to add on to that point, I think that's a great point. What you're seeing is that a lot of your higher-cost folks, they're running at reduced rates or they're shut down and extending maintenance or running at reduced rates. And we've even seen some facilities, namely in Europe, two announcements of two crackers that will be shutting down from some competition there because they're at the wrong place in the cost curve, whereas CPChem is on the right place in the cost curve. Ryan Todd -- Piper Sandler -- Analyst OK. Thank you very much. Operator Our next question comes from Manav Gupta of UBS. Please go ahead. Your line is open. Manav Gupta -- UBS -- Analyst Hey, guys. You did a good job of explaining the variability in earnings quarter on quarter on Refining. Can we go through some of that in the Midstream? We saw a big variation on the NGL and other side. I mean, transportation wasn't off that much, but help us understand what drove the variability in the second part of that business. Tim Roberts -- Executive Vice President, Midstream and Chemicals Yes. Manav, thanks for the question. This is Tim Roberts again, and let me go ahead and address. I mean, first thing I want to lay out there is that last quarter on the earnings call, I talked about guiding toward $675 million per quarter IBT and we're staying with that. I mean, that still feels good, $3.6 billion to the year. That's where we're at so I just wanted to make sure we were -- that hasn't changed. Now if you look at 4Q and 1Q, 4Q was a strong quarter, OK? That was the first thing. You had some onetime things that showed up in that fourth quarter. And in first quarter, what impacted it and especially the variance, number one, winter storm. So the winter storm, it impacted us and impacted other people, too. And really, the impact was, and I think it's worth noting, were really not to our assets. It was to the producers. So we really weren't seeing the volumes come down the pipe due to freeze-offs and a variety of other different issues. So it took a while for those volumes to get back up and get running again and then subsequently start working their way through the system. So about $30 million impact there. And then also, we had some commercial true-ups from fourth quarter to first quarter, commercial true-ups, accruals and some inventory timing that showed up between fourth quarter to first quarter. And so if you put those two quarters together, you really are getting in somewhere north of that $675 million number where we're at. We think we'll be on a more normalized basis as we go into 2Q. And you'll see some inventory timing issues will show up. It's not big but will show up in the second quarter as a positive. But generally, that's kind of how we look at it. We're still in that $675 million is the right number as we see throughout the year. Manav Gupta -- UBS -- Analyst Perfect. My quick follow-up is on the diesel macro. We have seen some pullback in cracks. Wasn't fully anticipated because we expected Russia volumes to drop, which they did not. So I know Jeff does a lot of detailed work on this, so if you could help us with your crystal ball as to what's going on in the diesel world and do you expect the cracks to get stronger in the year? Brian Mandell -- Executive Vice President, Marketing and Commercial Manav, this is Brian Mandell. I would say that we've had a number of issues. We had a warm northeast U.S. winter, then refineries came back and they were running really well. Prices for diesel are in contango. We have seen about 200,000 barrels a day of Russian distillate off the market. But we are constructive. We do think the market will come back. You're seeing -- starting to see run cuts in Europe and Asia with hydrocracking and hydroskimming margins at breakeven. As we move into driving season, we could see more gasoline mode. In fact, you're seeing gasoline over distillate on the coast in the U.S., East, and West Coast, and that could drive less distillate moving to more jet production from diesel, particularly fixing ahead into China's Labor Day, Golden Week, and we see real strong jet demand and then continue to geopolitical issues. If Russia's hit again, that means that diesel exports as well. So we think that things are going to look better coming out of kind of this trough here. Manav Gupta -- UBS -- Analyst Thank you. Operator Our next question today comes from John Royall of J.P. Morgan. Your line is open. John Royall -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking my question. I had a follow-up on the retail sale in Europe. Are there any other assets on the international marketing side that might be less strategic that could shake out there? And on the U.S. Marketing side, is majority of that business too integrated with the Refining operations to separate? I'm just trying to get a sense of the strategic direction in Marketing in light of this new sales process. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, John. From a Europe standpoint, the other marketing businesses are in Switzerland, where we have a joint venture with Coop and in the U.K. And the two are very different in that the Switzerland business is somewhat of a stand-alone retail business, but it's also in a joint venture structure, and so the dynamics are a little bit different around that. The U.K., that marketing business is very integrated with our Refining in the U.K. So it's much more akin to the U.S. model, where the Marketing business serves to help ensure product placement coming out of the Humber refinery. And that's really the case for the U.S. Marketing business as well. It's very much integrated with the Refining system across the different regions. John Royall -- JPMorgan Chase and Company -- Analyst Great. And then my next question is on the West Coast. And I think Mark sort of alluded to this a little in his response to Neil. But how should we think about the structural capture rate on the West Coast and how it's going to be different now with the Rodeo officially an RD unit and not a refinery? Should we expect it to be higher than what we've seen historically as a result? Rich Harbison -- Executive Vice President, Refining Mark, do you want me to start with that? Mark Lashier -- President and Chief Executive Officer Sure. Rich Harbison -- Executive Vice President, Refining Come over the top. This is Rich Harbison. So there's a reason, John, we've gone to Rodeo and converted it into a renewable fuels stock. It has not been a meaningful contributor to the earnings profile on the West Coast for quite some time now. So that -- we're looking forward to getting that change fully implemented. And we do think that will have a marked change to the West Coast profitability. The Los Angeles and the Ferndale facilities will continue to operate, and they've been good contributors to the West Coast. But I'll say, in general, the West Coast is a challenging market to make money on the Refining side of the business. Our Los Angeles refinery has been challenged with the declining supply of California domestic crudes, which has taken away a lot of the original crude advantage for that facility when it was originally built. Now the TMX pipeline is opening up so there's a change in the crude flow dynamics, which has a potential to have a positive impact on the Los Angeles facility. And we'll see how that dynamic works out here over the next few months as these crude flows change around. But changing and pulling the Rodeo refinery out will have a marked change on the West Coast. Operator Our next question comes from Matthew Blair of Tudor, Pickering, Holt. Please go ahead. Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst Hey. Good morning. Are you able to share the approximate EBITDA contribution of those German and Austrian retail assets up for sale? And then the cash from the sale, would that be earmarked for, like, share buybacks? And if so, would that mean an increase to the $13 billion to $15 billion target? Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, Matt. This is Kevin. The EBITDA, I'll give you the numbers that are on the information that we're providing to the prospective buyers. It's a -- the range is EUR 300 million to EUR 350 million, which the conversion for that is $325 million to $375 million. If you pick the midpoint, $350 million of EBITDA is probably your best number to go with on that. In terms of cash generation, we've previously stated our cash return target of $13 billion to $15 billion was not dependent on proceeds from asset sales. So it does have the potential to increase that. But I would also say we haven't made any definitive decisions on exactly how that cash would be deployed. And also, the timing is still quite uncertain at this point anyway. These processes usually take a while to run through. So that will be something that we will make a determination on near the time when that cash inflow becomes real. Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst That's great. And then the $180 million hit from the Rodeo conversion, I think that's a little bit higher than what we were expecting. What drove that increase? And can you provide any sort of breakout on like how much of that was in gross margins versus opex versus depreciation? And then also, is it fair to assume that the current Rodeo plant is EBITDA negative since it's not running the low CI feeds yet? Kevin Mitchell -- Executive Vice President, Chief Financial Officer So on the first question, we're not going to give that level of asset-specific breakout. And I would say the $180 million does not include -- the absolute loss on a GAAP basis is a bigger number again because we had some impairments related to assets that are taken out of service. So the $180 million is on the -- consistent with the way we report our adjusted earnings. And it does show up in the different areas, but we're not going to provide that level of line item breakout. The second question was around EBITDA while we're in ramp-up mode. My observation and others can supplement this is, clearly, when we're in ramp-up mode, we're running the higher CI feedstocks. We don't yet have the full economies of scale because we're in ramp-up mode. EBITDA generation is going to be challenged in the early phases. But as we go through that series of bringing all the units up, production coming up to the 50,000 barrels per day, the feedstocks migrating to the more -- the lower carbon intensity, we should start to see that transition into positive EBITDA contribution. Rich Harbison -- Executive Vice President, Refining Supported by sustainable aviation fuel. Kevin Mitchell -- Executive Vice President, Chief Financial Officer That's right. It's another uplift. Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst Great. Thanks for your comments. Operator Our next question comes from Paul Cheng of Scotiabank. Please go ahead. Your line is open. Paul Cheng -- Scotiabank -- Analyst Thank you. Hey. Good morning, guys. I have to apologize but I want to go back into the West Coast. Can you share that what is the opex excluding Rodeo? And also what is Rodeo going to look like once it's fully ramped up in terms of the opex? That's the first question. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Opex excluding Rodeo. Yes, Paul, I think the best way to answer that is because we don't give that level of asset level detail out. But we will be providing more reporting transparency on a going-forward basis that will enable you to see the kind of level of information that your -- the questions that you're asking for. In future periods, we will be providing more transparency around the Rodeo renewable fuels business separate from West Coast Refining. And so I would just say, I know that doesn't help you in terms of modeling right now, but just watch this space because we will be providing more transparency around that. Paul Cheng -- Scotiabank -- Analyst Right. Kevin, can I ask that, from the first to the second quarter, I understand there's some onetime opex related with that transition in the first quarter. So the opex, should we assume that it's going to stay at this level as the first quarter or that is actually going to be down? Kevin Mitchell -- Executive Vice President, Chief Financial Officer It's probably down a little. There's still going to be an elevated element of that, and there's some, what we would classify, as turnaround-related costs associated with the conversion as well that will show up at Rodeo. But the trend is downward. We're past the peak spend, I guess, is the way to say it. Operator Our next question comes from Jason Gabelman of Cowen and Company. Your line is open. Jason Gabelman -- TD Cowen -- Analyst Yeah. Thanks for taking my questions. The first one is just on commercial performance. And I think you had discussed a desire to integrate different plans in terms of how you buy crude and sell product and try to maximize profitability across the portfolio rather than at a site level. I'm just wondering if you could provide an update on that journey, and if you've seen any of that earnings benefit come through in the results. And then second, just a quick clarification. Can you remind us what your target cash balance is? Brian Mandell -- Executive Vice President, Marketing and Commercial Jason, it's Brian Mandell. I'll give you some kind of flavor of our journey for commercial. Our commercial supply and trading organization is, as you know, an integrated global business. We have offices in Houston, Calgary, London, and Singapore. And as you mentioned, our focus is now to fully optimize and capture the optionality value embedded in all of the assets and then to capture that kind of integration value between the various business segments to drive additional value for the company. Last year, internally, we announced a reorganization of our commercial group, the goal of reducing our back office costs and continuing to advance our capabilities and value generations. We've made some really strong hires this year. We also have a companion organization that we call value chain optimization group, VCO for short, whose function is to work across the integrated value chain to ensure that we continue to make the best corporate general interest decisions. And ultimately, we're kind of focused on driving increased earnings, maximizing our return on capital employed and increasing the market capture for our Refining segment and doing all this while thinking about continuous improvement and continually growing the business. Kevin Mitchell -- Executive Vice President, Chief Financial Officer And Jason, on the cash number, the target cash balance, the same as we've said in the past, $2 billion to $3 billion. We were slightly below that level at the end of the quarter. I'd also say the first quarter is typically a heavy drain on cash quarter. So as we look ahead, we're still very comfortable with that target level. Jason Gabelman -- TD Cowen -- Analyst Thanks. Operator And our final question today comes from Theresa Chen of Barclays. Your line is open. Theresa Chen -- Barclays -- Analyst Thank you for taking my question. First on the near-term outlook for capture in second quarter and maybe third as well. Just thinking about the different moving parts, you have presumably less noise from the onetime items impacting first quarter, whether it be from turnarounds or Rodeo, but you do have WCS narrowing based on your sensitivity and the magnitude that we've seen to date, that should be a sizable headwind. And then later maybe with TMX ramping online, to be able to bring barrels to PADD 5 indirectly or directly, that should help your West Coast assets. Just help us think about how to reconcile these variables as we look to capture in the near term, please. Mark Lashier -- President and Chief Executive Officer I think at a high level, Theresa, we're laser focused on the things we can control, and that's what we focus on, and that's what Rich and Brian focus on. I think that the things out of our control would be speculative. But I think Rich can talk about what we're doing to -- and what we see over the next couple of quarters with respect to market capture potential, and Brian can chime in from a commercial perspective. Rich Harbison -- Executive Vice President, Refining Yes. So, Theresa, we talked -- this is Rich again. We talked a little bit about some of the headwinds on market capture, which when I think about market capture from a Refining perspective, it's our clean product yield. And then it's the products that we make. Are we moving up the product value chain on that? So first quarter, certainly some headwinds with some downstream conversion unit turnaround activity. Good news is we've refreshed all that catalysts now, and they're ready to run here. Some of that did bleed a little bit into the second quarter. But as we roll into the summer driving season, you'll see our clean product yield and product values in about the best place we can put them. Now we continue to invest in these as well. We've seen over the last two years that we've completed a number of projects on this front and continue that program through this year as well with a target of increasing our market capture by 5% from a mid-cycle basis. Through last year, we put projects in that have raised that bar by 3%, and we expect to close the balance of that out of the five this year with an additional 15 projects that are currently in construction at the sites. So when we think about the market capture this quarter at 69%, I see that as a lower part of our market and something to build on as we move through the rest of the quarter as the facilities come out of turnaround cycle. Brian Mandell -- Executive Vice President, Marketing and Commercial And Theresa, this is Brian Mandell. Just to add some color on the commercial side. I would say we're seeing this year, gasoline and diesel roughly flat to last year in terms of demand. Jet fuel, a little bit stronger this year. I talked about our commercial organization, how kind of moving up that curve to take advantage of the optionality in our assets. We'll continue to do that. And then thinking about WCS, you made a good comment. I would say that WCS will remain volatile. What we have appetite, we can move around different grades so we can run Canadian heavy, we can run Canadian lights as well. We have an integrated system, a big commercial footprint. And if the WCS is unfavorable, particularly on our Gulf Coast plants or West Coast plants, we can switch to other grades such as Latin American grades and AG grade. So a lot of flexibility in our system. Theresa Chen -- Barclays -- Analyst Got it. And if I could ask a follow-up related to Kevin's earlier comments about what the appropriate leverage is for the company and the commentary related to how some of your more cash flows stable businesses can bear more leverage. Can you just share with us what portion of your Midstream business at this point, what portion of the EBITDA is paid by third-party customers and not Phillips Refining fits Midstream? Tim Roberts -- Executive Vice President, Midstream and Chemicals Theresa, I'll verify the number, but we're well into, I would say, it's 65% to 70% third parties. Theresa Chen -- Barclays -- Analyst Thank you. Operator This concludes the question-and-answer session. I'll now turn the call back over to Mark Lashier for closing remarks. Mark Lashier -- President and Chief Executive Officer Thank you, all, for your great questions. The market fundamentals that we're looking at are supportive, and our assets are running strong since the completion of seasonal maintenance activities. Our integrated portfolio is well-positioned to capture market opportunities and to meet the peak summer demand. We've got a clear path forward to achieve our strategic priorities that support $4 billion of growth from our 2022 mid-cycle adjusted EBITDA to our $14 billion target by 2025. We're confident in our ability to grow cash flows and create significant long-term value for shareholders. Thank you for your interest in Phillips 66. If you have questions after today's call, please call Jeff or Owen. Thank you. Answer:

the first-quarter 2024 Phillips 66 earnings conference call

Operator Welcome to the first-quarter 2024 Phillips 66 earnings conference call. My name is Lydia, and I'll be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I'll now turn the call over to Jeff Dietert, vice president, investor relations. Jeff, you may begin. Jeff Dietert -- Vice President, Investor Relations Welcome to Phillips 66 first-quarter earnings conference call. Participants on today's call will include Mark Lashier, president and CEO; Kevin Mitchell, CFO; Tim Roberts, midstream and chemicals; Rich Harbison, refining; and Brian Mandell, marketing and commercial. Today's presentation materials can be found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark. Mark Lashier -- President and Chief Executive Officer Thanks, Jeff. Welcome, everyone, to our first-quarter earnings call. We continued to progress our strategic priorities and we returned significant cash to our shareholders. While our crude utilization rates were strong during the quarter, our results were affected by maintenance that limited our ability to make higher-value products. We were also impacted by the renewable fuels conversion at Rodeo as well as the effect of rising commodity prices on our inventory hedge positions. Currently, our assets are running near historical highs and we are ready to meet peak summer demand. Before we provide an update on our strategic priorities, we want to recognize our Midstream, Refining, and Chemicals businesses, which have all received honors for their exemplary safety performance in 2023. Our Midstream gathering and processing business received the top 2023 GPA Safety Award in the large operator division. In Refining, the Rodeo and Sweeny facilities both received the AFPM Distinguished Safety Award, which is the highest annual safety award in the industry. This was Sweeny Refinery's third straight year to receive the honor. The Ponca City Refinery earned the Elite Platinum Award, and the Lake Charles Refinery secured the Elite Gold Award. In Chemicals, CPChem received two AFPM Safety Awards. I'm very proud of our employees and the employees of CPChem for their commitment to safety. I would like to congratulate them on a job well done. Today, beginning on Slide 4, we'll highlight the progress we've made on our strategic priorities. Next, we'll discuss our first quarter financial results. Then we look forward to your questions. We previously announced plans to monetize assets that no longer meet our long-term objectives, and we set a target to generate over $3 billion in proceeds. The expected proceeds will support our strategic priorities, including returns to shareholders. This quarter, we launched a process to divest our retail marketing business in Germany and Austria and communicated the plans to employees. Completion of the dispositions is subject to satisfactory market conditions and customary approvals. We have distributed almost $10 billion through share repurchases and dividends since July of 2022. Over the remaining three quarters of 2024, we expect to achieve our $13 billion to $15 billion target. Share repurchases will continue to be an important component of our capital allocation. We're committed to return over 50% of our operating cash flows to shareholders. Recently, we announced a 10% increase in our quarterly dividend, contributing to a 16% compound annual growth rate since 2012. The dividend increase reflects the confidence we have in our growing mid-cycle cash flow generation and our disciplined approach to capital allocation, including a secure, competitive, and growing dividend. In Refining, we continue to run at crude utilization rates above the industry average for the fifth consecutive quarter. We remain focused on improving performance, increasing market capture, and reducing costs to enhance our earnings per barrel. We have achieved over $560 million or more than $0.80 per barrel in run-rate cost reductions from business transformation. We expect to achieve our full $1 per barrel run rate target by the end of the year. In Midstream, our NGL wellhead-to-market business is focused on capturing operating and commercial synergies of over $400 million by year-end 2024. Midstream's estimated 2024 mid-cycle adjusted EBITDA is $3.6 billion, providing stable cash generation that covers the company's top capital priorities, funding sustaining capital and the dividend. During the first quarter, we achieved a major milestone with the start-up of our Rodeo renewable energy complex. Slide 5 summarizes our journey to transform the San Francisco refinery into one of the world's largest renewable fuels facilities. The facility benefits as a superior location to secure renewable feedstocks and market renewable fuels. The project leverages existing assets and is expected to generate strong returns. We began producing renewable diesel from our Unit 250 hydrotreater in April of 2021. We have gained valuable operational experience and market knowledge that positions us for success in our expanding renewable fuels business. Unit 250 continues to exceed expectations and has increased production to approximately 10,000 barrels per day. Our Rodeo renewable energy complex is producing 30,000 barrels per day of renewable fuels. We're on track to increase production capability to full rates of approximately 50,000 barrels per day by the end of the second quarter. Once complete, we'll have the ability to produce renewable jet, a key component of sustainable aviation fuel. We're proud of the team's strong project execution and appreciate their commitment to operating excellence in achieving this significant milestone. The Rodeo renewable energy complex positions Phillips 66 as a world leader in renewable fuels. Slide 6 provides an update on business transformation progress. Our run rate savings were $1.24 billion at the end of the first quarter, comprised of $940 million of cost reductions and $300 million of sustaining capital efficiencies. Through the first quarter, we've achieved $750 million in annualized cost reductions. The majority of these cost reductions relate to refining operating and SG&A expenses as well as benefits to equity earnings and gross margin. We are on track to realize $1 billion of cost reductions in 2024 to sustain higher cash generation. Before I turn the call over to Kevin to review the financial results, I want to stress that the market fundamentals are good, our assets are running well, and we have a clear path to achieving our strategic priorities and growing cash flows. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Thank you, Mark. Slide 7 summarizes our first quarter results. Adjusted earnings were $822 million or $1.90 per share. Operating cash flow, excluding working capital, was $1.2 billion. We received distributions from equity affiliates of $348 million. Capital spending for the quarter was $628 million, including $171 million for a Midstream joint venture debt repayment. We distributed $1.6 billion to shareholders through $1.2 billion of share repurchases and $448 million of dividends. Net debt-to-capital ratio was 38%. Slide 8 highlights the change in results by segment from the fourth quarter to the first quarter. During the period, adjusted earnings decreased $540 million, mostly due to lower results in Refining, Midstream, and Marketing and Specialties, partially offset by improved results in Chemicals. In Midstream, first-quarter adjusted pre-tax income of $613 million was down $141 million from the prior quarter, reflecting lower results in transportation and NGL. Transportation results were down mainly due to a decrease in throughput and deficiency revenues, partially offset by seasonally lower maintenance costs. The NGL business decreased primarily due to a decline in margins as well as lower volumes, reflecting impacts from winter storms. Chemicals adjusted pre-tax income increased $99 million to $205 million in the first quarter. This increase was mostly due to higher polyethylene margins driven by improved sales prices and the decline in feedstock costs as well as lower turnaround costs. Global O&P utilization was 96%. Refining first-quarter adjusted pre-tax income was $228 million, down $569 million from the fourth quarter. The decrease was primarily due to lower realized margins. Our commercial results were less favorable than the previous quarter, in part due to inventory hedging impacts in a rising price environment and less advantageous pipeline ARBs. In addition, realized margins decreased due to lower Gulf Coast clean product realizations. Our Refining results and market capture of 69% were also negatively impacted by maintenance activities on downstream conversion units as well as the renewable fuels conversion at Rodeo. Marketing and Specialties adjusted first-quarter pre-tax income was $345 million, a decrease of $87 million from the previous quarter. The decrease was mainly due to lower domestic marketing and lubricant margins. Our adjusted effective tax rate was 21%. Slide 9 shows the change in cash during the first quarter. We started the quarter with a $3.3 billion cash balance. Cash from operations, excluding working capital, was $1.2 billion. There was a working capital use of $1.4 billion, mainly reflecting a $2.6 billion increase in inventory, partially offset by benefits in accounts payables and receivables, which included the impact of rising commodity prices. Net debt issuances were $802 million. We returned $1.6 billion to shareholders through share repurchases and dividends. Additionally, we funded $628 million of capital spending. Our ending cash balance was $1.6 billion. This concludes my review of the financial and operating results. Next, I'll cover a few outlook items for the second quarter. In Chemicals, we expect the second quarter global O&P utilization rate to be in the mid-90s. In Refining, we expect the second quarter worldwide crude utilization rate to be in the mid-90s. Turnaround expense is expected to be between $100 million and $120 million, excluding Rodeo. We anticipate second-quarter corporate and other costs to come in between $330 million and $350 million, reflecting higher net interest expense. Now we will open the line for questions, after which Mark will make closing comments. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from Neil Mehta of Goldman Sachs. Your line is open, please go ahead. Neil Mehta -- Goldman Sachs -- Analyst Good morning, Mark and team. I guess the first question was just Refining in the quarter. The capture rates were really noisy at 69%. I know you guys target 75%. It looks like a lot of that was on the West Coast because of Rodeo and then also secondary products. So you alluded to some of this in the prepared remarks, but maybe you can just talk a little bit about what happened there and your confidence about the progression as we work our way through the year. Mark Lashier -- President and Chief Executive Officer Yeah. Good morning, Neil. That's a great question. Thank you for asking that. The way I'm looking at this is those first-quarter headwinds that you mentioned in Refining are all related to activities that will position us to deliver medium- and long-term tailwinds in support of our strategic priorities. And so it's some of the fundamental work going on around Rodeo and some of the work around our turnarounds are critically important. And Rich and Kevin can drive into that a little bit more. And including some of the activities in commercial that we underwent over the last several quarters, that will contribute to our long-term success. So, Rich, do you want to dive in? Rich Harbison -- Executive Vice President, Refining Yes, Mark. And Neil, when I reflect back on the quarter, I look at the metrics and we ran pretty well. But the market capture obviously was challenged, and it was primarily driven by activity in the Gulf Coast and the West Coast. We achieved about an 84% clean product yield, which for our assets is pretty good. It's actually 1% higher year-over-year. So it is a sign that our margin projects are actually playing into the bottom line here as we move forward. However, quarter-over-quarter, we were 3% lower than the fourth quarter. 1% of that very clearly is seasonal. It's butane blending related to our conversion as we move toward summer gasoline over the quarter. Another 2% is really related to our turnaround activity, and this was principally focused in the downstream catalytic units across our system, and it was concentrated in the Gulf Coast area. This has really two effects when it comes to market capture and clean product yield. It reduces our ability to produce higher-value products, and it increases our intermediate inventories over the period. Now on the West Coast, we have the conversion of the Rodeo facility, which is a compounding event. Essentially, it effectively had a $180 million loss and adjusted pre-tax income in the quarter as we transformed the business. And if you think about the business, it went from active to idle to reactive across this first quarter. The good news is we're near completion of the Rodeo conversion, and I actually would say we're well into the wind-up phase now. So to summarize, I guess the Rodeo start-up is on schedule, ramping up production. Approximately 50,000 barrels a day of renewable fuels will be achieved out of that facility in the second quarter. And we positioned our units across the system to run full conversion rates with fresh catalysts and ample intermediate inventories for the upcoming driving season. Kevin, did you want to add anything? Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes. Let me just put a couple of numbers to some of these items. So in terms of some commercial impacts that we talk about, on Gulf Coast product pricing differentials, in absolute terms, that was a $50 million headwind in the first quarter. The inventory hedges that I referenced in the earlier comments which primarily impacts Central Corridor, that was a $100 million headwind in the first quarter. These are not variances, these are absolutes in the quarter. And then on the West Coast, Rodeo in overall terms was a $180 million negative or loss for the quarter. So the West Coast results are bearing that drag from the impact of the Rodeo conversion. Mark Lashier -- President and Chief Executive Officer Yes. And I think just to put that in context, we're taking a disadvantaged refinery and converting it into one of the world's largest renewable fuels facilities. And so to bridge to that, we took the heavy lift this quarter, and now we're well-positioned to start delivering value again from the Rodeo facility as we continue to push it to full rates through the second quarter. And then on the Gulf Coast, the way you have to think about that is we're still maximizing our crude utilization throughput, but that crude turned into intermediates instead of clean products by design because of the turnaround work we had underway. So now we've got that inventory of intermediates poised to be converted into clean products as we continue to ramp back up into the summer season. So we're well-positioned going forward. Neil Mehta -- Goldman Sachs -- Analyst Thanks, team. That's a lot of good color. The follow-up is just on balance sheet, Q1 is always a noisy quarter for working capital and that cash flow bridge, Kevin, is really helpful. But just your perspective on where you want to get your net debt to capital over time. What's the path to get there, including potential asset sales? And then how do we think about working capital getting into that equation? So big picture question around that metric. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, Neil, so let me hit on the working capital piece first. So negative $1.4 billion in aggregate, about 2.6 of that is a function of inventory build, and so we did have some partial offsetting benefit in payables and receivables, and that was driven by two items. One, the rising price, the absolute rising price environment generally is positive for net AP/AR. So we saw some benefit there. But we also benefited on receivables by collecting, in the first quarter, cash from fourth-quarter inventory drawdown, and that was several hundred million dollars that showed up in there. But on the inventory build, it's a sizable build and I would say it's really a function of both commercial opportunity inventory as well as some operational-driven inventory. And the way to think about that is the operational barrels will turn into margin at a future point in time like the intermediates that we've talked about. The commercial inventory build, those will generate a return that will be in excess of anything we will realize on cash balances. And fundamentally, it's all still sitting in a liquid asset on the balance sheet. So that kind of talks to the working capital. And consistent with normal practice, you would expect that inventory to come back down in the -- toward the end of the year, and you'll see some of that cash coming back to us. In terms of balance sheet and leverage levels, we are above our targeted range, so 25% to 30% target range. Still comfortable with that target. You'll notice that we've been leaning into the share repurchases quite heavily, and that's a function of our confidence in the business, in the outlook, our growth that we see coming in terms of the $14 billion of mid-cycle adjusted EBITDA. And so it feels like still a pretty compelling opportunity for us to be buying shares back even if in the near term, it's at the expense of that leverage metric. So still expect to get there to that level. That's still our objective. And the other comment I'd make on leverage, the other metric, the other way we look at this is the non -- or the much less commodity sensitive businesses, the Midstream and the Marketing and Specialties business, is our ability for those businesses to basically be able to bear the debt that the company has. So on a combined basis, that's circa $6 billion of EBITDA generation. And you think of a typical leverage multiple for businesses like that, call it, three times, that's $18 billion of net debt, which is roughly where we are. And so that's the other measure we look at. And that keeps the Refining business, avoids that volatility being part of that, the way we look at that debt level. So keeps us very comfortable from a balance sheet standpoint. Neil Mehta -- Goldman Sachs -- Analyst Thanks, Kevin. Operator Our next question comes from Roger Read of Wells Fargo Securities. Your line is open. Roger Read -- Wells Fargo Securities -- Analyst Yeah. Thank you. Good morning, everybody. I'd like to, if we could, maybe look at -- I guess it's a combination of the opex that we're seeing in Refining and, I guess, let's say, juxtaposed against the progress you're making in overall cost reduction, so during the first quarter going from $630 million to $715 million on a cumulative basis. If I look at cash opex, it's kind of stable over the last three quarters. Recognize a lot of stuff's going on, but if you could help us kind of put those two together and maybe where you see the impact on cash opex or maybe if it's embedded in the actual Refining margin. Where we're seeing the cost savings manifest in Refining? Mark Lashier -- President and Chief Executive Officer Yes. I think that certainly, the majority of our business transformation cost impact is showing up in Refining, and we've been out delivering our targets, over-delivering against our targets and certainly continue that into 2024. There's always a lag, and we talk about run rate and then we talk about realized. And we're going to make sure that you keep track to. Run rate is where the speedometer is at this point in time. The realized is what we're actually seeing show up in the numbers. And we've seen good progress in Refining, and we'll continue to see that throughout this year as we rise up to our forecasted $1.1 billion in cost and $300 million in capital synergies, capital savings. And so Rich can drive into those cost numbers for you, Roger, and give you some color around that. Rich Harbison -- Executive Vice President, Refining Yes. So the end of last year, Roger, we, on a run rate basis, passed the $500 million or $0.75, roughly $0.75 a barrel number on run rate last year, and realized about $0.41 of that last year. As we fast forward now into -- through the first quarter here, we see that realized number creeping up to the $500 million, actually slightly over the $500 million number. So it's coming in at that $0.75. And it's roughly that delay that Mark's talking about, roughly a 90-day delay in achieving that. So when we go back and we validate those spends, and remember, those spends are over 900 separate initiatives that we've completed across the organization. We go back and revalidate these. So we are seeing those start flowing to the bottom line for Refining. And if you look at our year-over-year opex, it is noticeably lower even in the face of inflation, pretty heavy inflationary period here that we faced over the period of time. So we're happy with the progress. On a run rate basis at the end of the first quarter, we've achieved $560 million of run rate, which equates to about $0.80. And that's on a trajectory for the year-end of $1 a barrel target that's set for the organization, which is roughly $650 million by the end of the year. So we're well on that pace to achieve that, and the program is pressing forward. And like I had mentioned earlier, it's a seriatim of hundreds, if not thousands of initiatives to execute, and it's really intended to drive work and efficiencies out of our work process. And as that happens, we want to make sure that, that changes how we do our work. It influences how we make decisions, but it should not compromise safety, reliability, or earnings power for the organization. Mark Lashier -- President and Chief Executive Officer Yes, Roger and I really want to drive home what Rich just said, that the cultural impact on the organization has been impressive, particularly out in the field, whether it's Midstream, Refining, wherever you are. And we have a workforce that has bought into it, and it's committed to driving higher levels of performance. They understand right out at the front lines, they understand what our strategic priorities are, and how they can contribute to us getting there. And so they're digging in and they're looking at those opportunities every day. And across the organization, we continue to simplify work, to make work easier for people to get done, so get people the right digital opportunity so they can make better decisions faster, whether it's commercial or whether it's an operator on the front line. And the organization, we're also simplifying and we want to ensure that we've got a streamlined organization that will support sustainable success around both cost and performance, and we're seeing that live as we move forward. Roger Read -- Wells Fargo Securities -- Analyst I appreciate the detail there, everybody. I guess just a follow-up question on the announcement of the potential sale of the European retail assets. How does that affect the partial ownership you have in Refining assets on mainland Europe, MiRO specifically? Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, Roger, it's Kevin. So we're selling the Germany and Austria retail assets, like we said. That's a company-owned dealer-operated model, primarily almost 1,000 sites across those two countries. That's a high-performing business, top-rated many years in a row, 10% of market share in each country. A great business but doesn't really integrate with the sort of core strategic focus areas that we have as a company. So it's a little bit of background as to why those assets. It does not include our ownership in the MiRO Refinery in Germany. And the reason for that is the majority of buyers for those type of retail assets would not be interested in refinery ownership. If there's a buyer that is interested, then that's a separate conversation and we'll handle that separately. But this package right now is focused on those marketing assets. Roger Read -- Wells Fargo Securities -- Analyst Great. Thank you. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Thanks, Roger. Operator The next question comes from Ryan Todd of Piper Sandler. Your line is open. Ryan Todd -- Piper Sandler -- Analyst OK. Sorry. Getting off mute there. Maybe if I could start with one on Rodeo. I mean, congrats on getting the project, the Rodeo Renewed project up and running. You mentioned the loss in the first quarter and I know like early days are challenging these ramp toward full capacity and optimized performance. But can you walk through maybe what to expect over the next few quarters there? When do you anticipate hitting full production capacity? How do you anticipate the feedstock mix to change over the next few quarters as you run more advantaged feeds? And how should we think about that negative $180 million moving toward profitability from a time line point of view as we look over the course of this year? Rich Harbison -- Executive Vice President, Refining Sure, Ryan. I got that. This is Rich here. So maybe first, I'll start with a time line of the Rodeo facility. As you know, we've been ramping this facility down and hit a milestone in February of this year, with a complete shutdown of the facility after 128 years of legacy of running as a crude processing site. That first transition occurred on the first hydrocracker, and they went into renewable fuels feedstock production in March of this year. So that first phase is up and running and that's, that milestone we're talking about here. And that's allowed the facility in complement with the Unit 250 operation that Mark mentioned in the earlier comments with the first hydrocracker to produce about 30,000 barrels a day of renewable fuels. The second hydrocracker and the pretreatment unit will both finish construction in the May time frame, and we will start those up in the June time frame. So by the end of the second quarter, the facility will be at full production rates. Now what does that all mean when it comes to margin? So margin in this business is driven a lot by the carbon intensity of the feedstocks. And Brian's team has been actively engaged in that over the last couple of years on aggregating a number of feedstocks. So the way we see this is, we will start with essentially the pretreated material in the second quarter at a higher CI, roughly 50 CI number. And over the third quarter, we see the carbon intensity of our feedstocks continually ramping down through that third quarter. But by the end of the third quarter, I would expect to see us in the lower to mid CI range of 30s in that range. And that's primarily driven by processing more recycled fats, oils, and greases that are aggregated throughout the world. And then as a supplement to all of that, we're seeing a growing interest in sustainable aviation fuel as well. So we have positioned the facility to begin production of sustainable aviation fuel, which is a key component is the renewable jet that's blended into that. And that production will be capable starting in the third quarter as well. And we do expect to be a prominent supplier in the market on that. So the good news is Rodeo's through that start-up process, that shutdown/start-up process, and now we're in the ramp-up phase, I'll call it. It's online and we're ramping up production right now. Mark Lashier -- President and Chief Executive Officer Yes, Ryan, when we get up to full rates, we'll be able to produce something on the order of 10,000 barrels a day of renewable jet fuel, which gets blended up then to sustainable aviation fuel in the marketplace. And this kit is going to be designed for continuous optimization, whether it's the split between jet and diesel fuel or the feedstocks coming in because of the feed pretreatment unit we'll have, we'll have great flexibility. And so we'll optimize on CI, cost and revenue and as well as the incentives that are out there. So it's going to be an interesting facility to have in our kit, and we're looking forward to getting it fully online and generating cash. Rich Harbison -- Executive Vice President, Refining I think it's supplemented as well by the last-mile strategy that Brian's team has put in place. That prevents leakage of value as we deliver the product to the end user there, and that should play out nicely as we increase production from the facility. Ryan Todd -- Piper Sandler -- Analyst And do you have -- have you signed contracts on the SAF front? Are you in ongoing negotiations there with partners? Brian Mandell -- Executive Vice President, Marketing and Commercial We're concurrently in negotiations with partners. We've seen a lot of interest in SAF. Ryan Todd -- Piper Sandler -- Analyst Great. Maybe just one, changing gears to chems, on the chemical side, the better-than-expected performance of CPChem. Can you talk about kind of the drivers of improvement there? Is it primarily feedstock-related? Are you seeing any signs of underlying improvement in market conditions and maybe how you're looking at the rest of the year? Tim Roberts -- Executive Vice President, Midstream and Chemicals Yes. Ryan, this is Tim Roberts and I'll chat about that. I'll cover three things because I think there'll be other questions around it. First one I wanted to talk about is actually more on the leadership side. I just wanted to recognize Bruce Chen, who was the recently retired CEO at CPChem. He did a really good job there, great leadership, great drive for excellence, and he'll be missed. We have an internal candidate, Steve Prusak, who's assumed the role of CEO. Steve has been very successful in all phases of the chemical business, and we are highly confident in his ability to lead and take CPChem to the next level of industry-leading performance. So that, I want to thank both of those guys. Now on the macro side, let me talk about that and then I'll get specific to CPChem. Macro, clearly, the heavy-light spread with regard to being light feed versus heavy feed, it's really been a boon to those that can crack the light feedstock, especially CPChem, who's well-positioned not only the U.S. Gulf Coast but in the Middle East. And so it's -- the advantage is pretty wide right now. And so they've been able to take advantage of it. In fact, the industry in the U.S., if you're cracking light, you like it. However, I will tell you, we are not at mid-cycle margins. It has come off the bottom, which is good. A lot of that is really related to more about feedstock. So natural gas has come off, it's come down and subsequently, ethane's come down with it as has some propane and butane as well. And so subsequently, that gap has gotten bigger. And then anyway, that's showing up. And then also the lower feedstock and natural gas relative to utility cost. So the combination of those two as well as just a little bit of support on polyethylene pricing, not a lot, but enough to help widen up that chain margin a little bit. So I think that's been good. We still think, though, that although we're off the bottom, we still think it's hard to see us getting to mid-cycle anytime during 2025. But certainly, supply demand fundamentals as destocking goes, we do see that it's sometime after 2025, you can see it rebalance and then get back into a mid-cycle environment. Specifically to CPChem though, I do want to highlight as well with them that they've had a couple of their mid-cap projects that did come onstream late last year, C3 splitter, the 1-hexene unit, and then they also added another furnace to one of the large crackers there. And 1-hexene and C3, they're adding earnings in the first quarter. So they're up, they're running. They have run it higher than nameplate capacity, which has been really good, and again, generating earnings that are showing up at CPChem's results. And we're in really a start-up mode with the furnace. That work is complete. They're starting it up, going through the normal shakedown you will have with those units. And we're hoping in 2Q, you'll see something more material on the earnings side there, too. Mark Lashier -- President and Chief Executive Officer Yes, Ryan, you're seeing live the last almost 25 years of what CPChem has done to position themselves to be able to run flat out at the bottom of the cycle. And they did that and they did that profitably. And you're seeing rationalization of assets in Europe while they're running at flat-out rates. And so that's encouraging from a CPChem perspective. We need to see that in this down cycle to see some of the less competitive assets come out of the system. And that's going to be constructive, and that will help accelerate the industry out of the bottom of the cycle and to greener pastures out in the next couple of years. Tim Roberts -- Executive Vice President, Midstream and Chemicals And Mark, to add on to that point, I think that's a great point. What you're seeing is that a lot of your higher-cost folks, they're running at reduced rates or they're shut down and extending maintenance or running at reduced rates. And we've even seen some facilities, namely in Europe, two announcements of two crackers that will be shutting down from some competition there because they're at the wrong place in the cost curve, whereas CPChem is on the right place in the cost curve. Ryan Todd -- Piper Sandler -- Analyst OK. Thank you very much. Operator Our next question comes from Manav Gupta of UBS. Please go ahead. Your line is open. Manav Gupta -- UBS -- Analyst Hey, guys. You did a good job of explaining the variability in earnings quarter on quarter on Refining. Can we go through some of that in the Midstream? We saw a big variation on the NGL and other side. I mean, transportation wasn't off that much, but help us understand what drove the variability in the second part of that business. Tim Roberts -- Executive Vice President, Midstream and Chemicals Yes. Manav, thanks for the question. This is Tim Roberts again, and let me go ahead and address. I mean, first thing I want to lay out there is that last quarter on the earnings call, I talked about guiding toward $675 million per quarter IBT and we're staying with that. I mean, that still feels good, $3.6 billion to the year. That's where we're at so I just wanted to make sure we were -- that hasn't changed. Now if you look at 4Q and 1Q, 4Q was a strong quarter, OK? That was the first thing. You had some onetime things that showed up in that fourth quarter. And in first quarter, what impacted it and especially the variance, number one, winter storm. So the winter storm, it impacted us and impacted other people, too. And really, the impact was, and I think it's worth noting, were really not to our assets. It was to the producers. So we really weren't seeing the volumes come down the pipe due to freeze-offs and a variety of other different issues. So it took a while for those volumes to get back up and get running again and then subsequently start working their way through the system. So about $30 million impact there. And then also, we had some commercial true-ups from fourth quarter to first quarter, commercial true-ups, accruals and some inventory timing that showed up between fourth quarter to first quarter. And so if you put those two quarters together, you really are getting in somewhere north of that $675 million number where we're at. We think we'll be on a more normalized basis as we go into 2Q. And you'll see some inventory timing issues will show up. It's not big but will show up in the second quarter as a positive. But generally, that's kind of how we look at it. We're still in that $675 million is the right number as we see throughout the year. Manav Gupta -- UBS -- Analyst Perfect. My quick follow-up is on the diesel macro. We have seen some pullback in cracks. Wasn't fully anticipated because we expected Russia volumes to drop, which they did not. So I know Jeff does a lot of detailed work on this, so if you could help us with your crystal ball as to what's going on in the diesel world and do you expect the cracks to get stronger in the year? Brian Mandell -- Executive Vice President, Marketing and Commercial Manav, this is Brian Mandell. I would say that we've had a number of issues. We had a warm northeast U.S. winter, then refineries came back and they were running really well. Prices for diesel are in contango. We have seen about 200,000 barrels a day of Russian distillate off the market. But we are constructive. We do think the market will come back. You're seeing -- starting to see run cuts in Europe and Asia with hydrocracking and hydroskimming margins at breakeven. As we move into driving season, we could see more gasoline mode. In fact, you're seeing gasoline over distillate on the coast in the U.S., East, and West Coast, and that could drive less distillate moving to more jet production from diesel, particularly fixing ahead into China's Labor Day, Golden Week, and we see real strong jet demand and then continue to geopolitical issues. If Russia's hit again, that means that diesel exports as well. So we think that things are going to look better coming out of kind of this trough here. Manav Gupta -- UBS -- Analyst Thank you. Operator Our next question today comes from John Royall of J.P. Morgan. Your line is open. John Royall -- JPMorgan Chase and Company -- Analyst Hi. Thanks for taking my question. I had a follow-up on the retail sale in Europe. Are there any other assets on the international marketing side that might be less strategic that could shake out there? And on the U.S. Marketing side, is majority of that business too integrated with the Refining operations to separate? I'm just trying to get a sense of the strategic direction in Marketing in light of this new sales process. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, John. From a Europe standpoint, the other marketing businesses are in Switzerland, where we have a joint venture with Coop and in the U.K. And the two are very different in that the Switzerland business is somewhat of a stand-alone retail business, but it's also in a joint venture structure, and so the dynamics are a little bit different around that. The U.K., that marketing business is very integrated with our Refining in the U.K. So it's much more akin to the U.S. model, where the Marketing business serves to help ensure product placement coming out of the Humber refinery. And that's really the case for the U.S. Marketing business as well. It's very much integrated with the Refining system across the different regions. John Royall -- JPMorgan Chase and Company -- Analyst Great. And then my next question is on the West Coast. And I think Mark sort of alluded to this a little in his response to Neil. But how should we think about the structural capture rate on the West Coast and how it's going to be different now with the Rodeo officially an RD unit and not a refinery? Should we expect it to be higher than what we've seen historically as a result? Rich Harbison -- Executive Vice President, Refining Mark, do you want me to start with that? Mark Lashier -- President and Chief Executive Officer Sure. Rich Harbison -- Executive Vice President, Refining Come over the top. This is Rich Harbison. So there's a reason, John, we've gone to Rodeo and converted it into a renewable fuels stock. It has not been a meaningful contributor to the earnings profile on the West Coast for quite some time now. So that -- we're looking forward to getting that change fully implemented. And we do think that will have a marked change to the West Coast profitability. The Los Angeles and the Ferndale facilities will continue to operate, and they've been good contributors to the West Coast. But I'll say, in general, the West Coast is a challenging market to make money on the Refining side of the business. Our Los Angeles refinery has been challenged with the declining supply of California domestic crudes, which has taken away a lot of the original crude advantage for that facility when it was originally built. Now the TMX pipeline is opening up so there's a change in the crude flow dynamics, which has a potential to have a positive impact on the Los Angeles facility. And we'll see how that dynamic works out here over the next few months as these crude flows change around. But changing and pulling the Rodeo refinery out will have a marked change on the West Coast. Operator Our next question comes from Matthew Blair of Tudor, Pickering, Holt. Please go ahead. Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst Hey. Good morning. Are you able to share the approximate EBITDA contribution of those German and Austrian retail assets up for sale? And then the cash from the sale, would that be earmarked for, like, share buybacks? And if so, would that mean an increase to the $13 billion to $15 billion target? Kevin Mitchell -- Executive Vice President, Chief Financial Officer Yes, Matt. This is Kevin. The EBITDA, I'll give you the numbers that are on the information that we're providing to the prospective buyers. It's a -- the range is EUR 300 million to EUR 350 million, which the conversion for that is $325 million to $375 million. If you pick the midpoint, $350 million of EBITDA is probably your best number to go with on that. In terms of cash generation, we've previously stated our cash return target of $13 billion to $15 billion was not dependent on proceeds from asset sales. So it does have the potential to increase that. But I would also say we haven't made any definitive decisions on exactly how that cash would be deployed. And also, the timing is still quite uncertain at this point anyway. These processes usually take a while to run through. So that will be something that we will make a determination on near the time when that cash inflow becomes real. Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst That's great. And then the $180 million hit from the Rodeo conversion, I think that's a little bit higher than what we were expecting. What drove that increase? And can you provide any sort of breakout on like how much of that was in gross margins versus opex versus depreciation? And then also, is it fair to assume that the current Rodeo plant is EBITDA negative since it's not running the low CI feeds yet? Kevin Mitchell -- Executive Vice President, Chief Financial Officer So on the first question, we're not going to give that level of asset-specific breakout. And I would say the $180 million does not include -- the absolute loss on a GAAP basis is a bigger number again because we had some impairments related to assets that are taken out of service. So the $180 million is on the -- consistent with the way we report our adjusted earnings. And it does show up in the different areas, but we're not going to provide that level of line item breakout. The second question was around EBITDA while we're in ramp-up mode. My observation and others can supplement this is, clearly, when we're in ramp-up mode, we're running the higher CI feedstocks. We don't yet have the full economies of scale because we're in ramp-up mode. EBITDA generation is going to be challenged in the early phases. But as we go through that series of bringing all the units up, production coming up to the 50,000 barrels per day, the feedstocks migrating to the more -- the lower carbon intensity, we should start to see that transition into positive EBITDA contribution. Rich Harbison -- Executive Vice President, Refining Supported by sustainable aviation fuel. Kevin Mitchell -- Executive Vice President, Chief Financial Officer That's right. It's another uplift. Matthew Blair -- Tudor, Pickering, Holt and Company -- Analyst Great. Thanks for your comments. Operator Our next question comes from Paul Cheng of Scotiabank. Please go ahead. Your line is open. Paul Cheng -- Scotiabank -- Analyst Thank you. Hey. Good morning, guys. I have to apologize but I want to go back into the West Coast. Can you share that what is the opex excluding Rodeo? And also what is Rodeo going to look like once it's fully ramped up in terms of the opex? That's the first question. Kevin Mitchell -- Executive Vice President, Chief Financial Officer Opex excluding Rodeo. Yes, Paul, I think the best way to answer that is because we don't give that level of asset level detail out. But we will be providing more reporting transparency on a going-forward basis that will enable you to see the kind of level of information that your -- the questions that you're asking for. In future periods, we will be providing more transparency around the Rodeo renewable fuels business separate from West Coast Refining. And so I would just say, I know that doesn't help you in terms of modeling right now, but just watch this space because we will be providing more transparency around that. Paul Cheng -- Scotiabank -- Analyst Right. Kevin, can I ask that, from the first to the second quarter, I understand there's some onetime opex related with that transition in the first quarter. So the opex, should we assume that it's going to stay at this level as the first quarter or that is actually going to be down? Kevin Mitchell -- Executive Vice President, Chief Financial Officer It's probably down a little. There's still going to be an elevated element of that, and there's some, what we would classify, as turnaround-related costs associated with the conversion as well that will show up at Rodeo. But the trend is downward. We're past the peak spend, I guess, is the way to say it. Operator Our next question comes from Jason Gabelman of Cowen and Company. Your line is open. Jason Gabelman -- TD Cowen -- Analyst Yeah. Thanks for taking my questions. The first one is just on commercial performance. And I think you had discussed a desire to integrate different plans in terms of how you buy crude and sell product and try to maximize profitability across the portfolio rather than at a site level. I'm just wondering if you could provide an update on that journey, and if you've seen any of that earnings benefit come through in the results. And then second, just a quick clarification. Can you remind us what your target cash balance is? Brian Mandell -- Executive Vice President, Marketing and Commercial Jason, it's Brian Mandell. I'll give you some kind of flavor of our journey for commercial. Our commercial supply and trading organization is, as you know, an integrated global business. We have offices in Houston, Calgary, London, and Singapore. And as you mentioned, our focus is now to fully optimize and capture the optionality value embedded in all of the assets and then to capture that kind of integration value between the various business segments to drive additional value for the company. Last year, internally, we announced a reorganization of our commercial group, the goal of reducing our back office costs and continuing to advance our capabilities and value generations. We've made some really strong hires this year. We also have a companion organization that we call value chain optimization group, VCO for short, whose function is to work across the integrated value chain to ensure that we continue to make the best corporate general interest decisions. And ultimately, we're kind of focused on driving increased earnings, maximizing our return on capital employed and increasing the market capture for our Refining segment and doing all this while thinking about continuous improvement and continually growing the business. Kevin Mitchell -- Executive Vice President, Chief Financial Officer And Jason, on the cash number, the target cash balance, the same as we've said in the past, $2 billion to $3 billion. We were slightly below that level at the end of the quarter. I'd also say the first quarter is typically a heavy drain on cash quarter. So as we look ahead, we're still very comfortable with that target level. Jason Gabelman -- TD Cowen -- Analyst Thanks. Operator And our final question today comes from Theresa Chen of Barclays. Your line is open. Theresa Chen -- Barclays -- Analyst Thank you for taking my question. First on the near-term outlook for capture in second quarter and maybe third as well. Just thinking about the different moving parts, you have presumably less noise from the onetime items impacting first quarter, whether it be from turnarounds or Rodeo, but you do have WCS narrowing based on your sensitivity and the magnitude that we've seen to date, that should be a sizable headwind. And then later maybe with TMX ramping online, to be able to bring barrels to PADD 5 indirectly or directly, that should help your West Coast assets. Just help us think about how to reconcile these variables as we look to capture in the near term, please. Mark Lashier -- President and Chief Executive Officer I think at a high level, Theresa, we're laser focused on the things we can control, and that's what we focus on, and that's what Rich and Brian focus on. I think that the things out of our control would be speculative. But I think Rich can talk about what we're doing to -- and what we see over the next couple of quarters with respect to market capture potential, and Brian can chime in from a commercial perspective. Rich Harbison -- Executive Vice President, Refining Yes. So, Theresa, we talked -- this is Rich again. We talked a little bit about some of the headwinds on market capture, which when I think about market capture from a Refining perspective, it's our clean product yield. And then it's the products that we make. Are we moving up the product value chain on that? So first quarter, certainly some headwinds with some downstream conversion unit turnaround activity. Good news is we've refreshed all that catalysts now, and they're ready to run here. Some of that did bleed a little bit into the second quarter. But as we roll into the summer driving season, you'll see our clean product yield and product values in about the best place we can put them. Now we continue to invest in these as well. We've seen over the last two years that we've completed a number of projects on this front and continue that program through this year as well with a target of increasing our market capture by 5% from a mid-cycle basis. Through last year, we put projects in that have raised that bar by 3%, and we expect to close the balance of that out of the five this year with an additional 15 projects that are currently in construction at the sites. So when we think about the market capture this quarter at 69%, I see that as a lower part of our market and something to build on as we move through the rest of the quarter as the facilities come out of turnaround cycle. Brian Mandell -- Executive Vice President, Marketing and Commercial And Theresa, this is Brian Mandell. Just to add some color on the commercial side. I would say we're seeing this year, gasoline and diesel roughly flat to last year in terms of demand. Jet fuel, a little bit stronger this year. I talked about our commercial organization, how kind of moving up that curve to take advantage of the optionality in our assets. We'll continue to do that. And then thinking about WCS, you made a good comment. I would say that WCS will remain volatile. What we have appetite, we can move around different grades so we can run Canadian heavy, we can run Canadian lights as well. We have an integrated system, a big commercial footprint. And if the WCS is unfavorable, particularly on our Gulf Coast plants or West Coast plants, we can switch to other grades such as Latin American grades and AG grade. So a lot of flexibility in our system. Theresa Chen -- Barclays -- Analyst Got it. And if I could ask a follow-up related to Kevin's earlier comments about what the appropriate leverage is for the company and the commentary related to how some of your more cash flows stable businesses can bear more leverage. Can you just share with us what portion of your Midstream business at this point, what portion of the EBITDA is paid by third-party customers and not Phillips Refining fits Midstream? Tim Roberts -- Executive Vice President, Midstream and Chemicals Theresa, I'll verify the number, but we're well into, I would say, it's 65% to 70% third parties. Theresa Chen -- Barclays -- Analyst Thank you. Operator This concludes the question-and-answer session. I'll now turn the call back over to Mark Lashier for closing remarks. Mark Lashier -- President and Chief Executive Officer Thank you, all, for your great questions. The market fundamentals that we're looking at are supportive, and our assets are running strong since the completion of seasonal maintenance activities. Our integrated portfolio is well-positioned to capture market opportunities and to meet the peak summer demand. We've got a clear path forward to achieve our strategic priorities that support $4 billion of growth from our 2022 mid-cycle adjusted EBITDA to our $14 billion target by 2025. We're confident in our ability to grow cash flows and create significant long-term value for shareholders. Thank you for your interest in Phillips 66. If you have questions after today's call, please call Jeff or Owen. Thank you.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, my name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Group first-quarter 2024 earnings call. [Operator instructions] I would now like to introduce Michael McCarthy, vice president of investor relations. Mr. McCarthy, the floor is yours. Michael McCarthy -- Vice President, Investor Relations Good morning, everyone, and thank you for joining us today for our first-quarter 2024 earnings call. Joining me here in Miami are Jason Liberty, our chief executive officer, Naftali Holtz, our chief financial officer, and Michael Bayley, president and CEO of Royal Caribbean International. Before we get started, I would like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning, as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined in a reconciliation of all non-GAAP items can be found on our Investor Relations website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency-adjusted basis. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our first quarter, the current booking environment, and our updated outlook for 2024. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason. Jason Liberty -- Chief Executive Officer Thank you, Michael, and good morning, everyone. I am proud to share our robust first-quarter results and the continued upward trajectory of our business. When we turn the page from an incredible 2023 with a record-booked position for 2024 and numerous tailwinds related to the consumer's desire to vacation with us, we expected this would be another great year. Well, as you saw in the press release this morning, what transpired over the past three months was even better than our already elevated expectations. Our brands are stronger than ever, and demand for our vacation experiences continues to accelerate. We are leading the way in delivering a lifetime of incredible vacations for our guests with our exceptional and leading portfolio of brands, innovative and differentiated ships, exciting and exclusive destination experiences, and leading commercial capabilities. The opportunity is very large and very exciting as we seek to take share from the rapidly growing $1.9 trillion vacation market. Our formula for success remains unchanged. Moderate capacity growth, moderate yield growth, and strong cost controls lead to robust financial performance and long-term shareholder value. Before getting into the details, I want to recognize our incredible teams that are working together day in and day out, delivering the best vacation experiences to our guests and doing so while driving exceptional results. Our business is propelled by our people, and they are the driving force behind our strategic vision for success. I am so grateful for their commitment and passion. Now, moving on to our results. As highlighted on Slide 4, the first quarter was tremendous, sending us well on our path to a year that is significantly better than we expected just a few months back. Wave season combined with a record-breaking introduction of the revolutionary Icon of the Seas resulted in consistently robust bookings at much higher prices than 2023. This strong booking and pricing environment across all key itineraries coupled with continued strength in onboard spend led to higher revenue in the first quarter and a further improvement in full-year yield expectations. In the first quarter, we delivered 2 million memorable vacations and achieved 107% load factor at exceptional guest satisfaction scores. Yields grew 19.3% compared to the first quarter of 2023, almost 400 basis points above our initial guidance. Adjusted earnings per share in the first quarter was considerably higher than our guidance. Strong ticket and onboard revenue and favorable timing of expenses contributed to the better-than-expected earnings performance. The acceleration of demand is also translating into higher revenue and earnings expectations for the balance of the year. As you can see on Page 5, we are increasing full-year yield growth expectations by 50% compared to our initial guidance in early February, and we now expect adjusted earnings per share to grow 60% year over year. The increased outlook for the year is expected to further accelerate our trajectory toward our trifecta goals as we continue to expect to achieve all three goals in 2024, one year earlier than initially expected. Now I'll provide some insight into the robust demand environment and our incredible wave season. Booking is consistently outpaced last year throughout the entire first quarter and through April, even though we have significantly fewer staterooms left to sell, leading to higher pricing for all of our key products. Booking strength has been prevalent on both our existing hardware as well as on our industry-leading new chips. We see strong demand across all products and markets. North America continues to be extremely robust where approximately 80% of this year's guests are sourced. This strength, in combination with the incredible perfect day at CocoCay, has resulted in strong yield growth for our Caribbean sailings. European bookings are outpacing last year's levels at higher prices and Alaska has been performing particularly well with year-over-year yield growth. We are also pleased to return to the high-yielding China market this month with Spectrum of the Seas and to add Ovation of the Seas to Tianjin in 2025 as we rebuild our China business. With our return to China, we are now finally back in all of our key markets, which enables us to capture quality global demand and source from new consumer bases. Customer sentiment remains very positive, bolstered by resilient labor markets, wage growth, stabilizing inflation, and record-high household net worth. Consumer preferences continue to shift toward spend on experiences, particularly priority for travel. This is evident as the year-over-year growth in spend on experience is double that of spend on goods. Despite our ability to narrow the gap to land-based vacations in the last 12 months, cruising still remains an exceptional value proposition. We continue to see excellent engagement from customers who are booking their dream vacations with us across all our products. Guests are buying 10% more onboard experiences per booking than in the first quarter of last year, and they continue to book these onboard activities earlier and at meaningfully higher APDs, translating into higher onboard spend. Looking to the rest of 2024, the year is shaping up to be exceptional with strong yield and earnings growth. We expect to achieve all Trifecta targets in 2024, allowing us to focus on a new era of growth to drive long-term shareholder returns. As I mentioned previously, Trifecta creates the pathway back to what we internally describe as base camp, but our ambitions go well beyond it. As highlighted on Slide 7, we now expect to deliver net yields that are 9% to 10% higher than 2023. Our yield outlook is driven by the performance of new and existing ships, combined with our leading private destinations, a strong pricing environment, continued growth from onboard revenue, and our accelerating commercial apparatus. In the second half of 2024, we expect to deliver mid-single-digit yield growth above our typical moderate yield growth expectations, and on top of an approximately 17% yield increase in the back half of 2023. We also continue to expect the business to deliver higher margins and earnings in 2024, with adjusted earnings per share expected to grow 60% year over year. As we look ahead, we remain focused on executing our proven targets formula for success, moderate capacity growth, moderate yield growth, and strong cost controls that lead to enhanced margins, profitability, and superior financial performance. Our operating platform remains a key differentiator and is bigger and stronger than ever. We remain intensely focused on attracting and keeping guests within our unique portfolio of brands and providing experiences for all of life's moments while delivering long-term value for our shareholders. Our addressable market is expanding, and New to Cruise continues to grow, increasing 16% year over year. These guests are discovering our differentiated vacation experiences and are increasingly returning to us as we see repeat rates over 30% higher compared to 2019. Our brands also continue to attract new and younger customers. Millennials and younger generations have gained 11 percentage points share compared to 2019, and today almost one in two guests are millennials or younger. New hardware has been a great differentiator for us. Since Icon of the Seas joined the fleet a few months ago, it is already exceeding our lofty expectations in both guest satisfaction and financial performance. We are also excited for the arrival later this year of Utopia of the Seas, a ship that is positioned to be another game changer for our short Caribbean product, and Silver Ray, which continues to reimagine the ultra luxury and expedition segments. Demand and pricing for those new ships has been incredibly strong. Also this quarter, we announced an order for a seventh ship and our hugely successful Oasis class that will join the fleet in 2028. Our brands continue to lead their segments and generate quality demand, and we see a very large opportunity to take greater share of the rapidly growing $1.9 trillion vacation market as we continue to grow our fleet and vacation experiences. We are leading the vacation industry in creating exciting new products and experiences, which include private destinations. The newest addition to our growing portfolio of private destinations is the Royal Beach Club in Cozumel, Mexico, that is set to welcome guests in 2026. With a combination of activities for every type of vacationer, Royal Beach Club Cozumel will further enhance our guests' experience, giving guests the ultimate beach day. Earlier this week, we also celebrated another important milestone when we officially broke ground on Royal Beach Club Paradise Island in Nassau, which is scheduled to open next year. Our journey to deepen the relationship with the customers continues this year. We are further enhancing our commerce platform through new technology and AI to continue improving the experience for our different distribution channels, build even more customer loyalty, and lowering our costs to acquire the guests. We are removing friction and unlocking travel planning by investing in a modern digital travel platform, making it easier than ever for guests to book their dream vacations while allowing us to expand wallet share. Our digital experiences delight guests. Our mobile app is consistently adopted by 94% of our guests on board and we continue to enhance its capabilities. Among other features, we introduced cruise booking capabilities in the app last year and recently added the ability to book flights. We also created a loyalty hub so customers can quickly enroll and track their loyalty tiers and benefits. We will continue to enhance those capabilities in 2024 and beyond. Our sustainability ambitions help support our mission to deliver the best vacation experiences responsibly. We recently released our 16th annual sustainability report, which outlines the progress we are making on See the Future, our vision to sustain the planet, energize communities, and accelerate innovation. We are actively making progress toward our journey to net zero emissions, including double-digit carbon intensity reductions, and we are now beyond the halfway mark. Alongside the sustainability report, we published our first community impact report, which delves into how we energize the communities we visit. It highlights long-term projects that inspire future generations and our dedication to empowering local entrepreneurs through business development and micro-grant programs like the Royal Caribbean Kickstarter in the Bahamas. As we make progress, we also know achieving net zero can't be done alone. We'll need strong collaboration across the full marine ecosystem, including operators, suppliers, ports, and technology providers. Our business continues to perform exceptionally well. I'm incredibly thankful and proud of the teams at the Royal Caribbean Group for showing up each and every day to dream and create the best vacation experiences for our guests, allowing us to perform while we transform. The future of the Royal Caribbean Group is exceptionally bright, and I couldn't be more excited about what's ahead. And with that, I'm happy to turn the call over to Naftali. Naf? Naftali Holtz -- Chief Financial Officer Thank you, Jason, and good morning, everyone. I will start by reviewing first-quarter results, which were significantly above our expectations. Adjusted earnings per share were $1.77, 36% higher than the midpoint of our most recent guidance of $1.30. 45% of the outperformance, or $0.21, was driven by better pricing for our vacation experiences, with the remainder driven by federal timing of operating expenses. We finished the quarter with a net yield increase of 19.3% compared to the first quarter of 2023. 385 basis points higher than the midpoint of our initial guidance in early February. While a load factor recovery was a contributor, most of our yield growth was driven by rates that were up by 14% versus 2023. 55% of the outperformance compared to our initial guidance was driven by ticket pricing, with the remainder driven by shipboard revenue strength. Net cruise costs, excluding fuel, increased 4.1% in constant currency, 315 basis points lower than our initial guidance. Favorable timing was a driver that contributed to the better-than-expected results. Adjusted EBITDA margin was 31%, and operating cash flow was $1.3 billion. On our last earnings call, we discussed the record-breaking start-to-wave season and widespread strength in booking, pricing, and onboard revenue. The consistent strength in demand for our brands has led to a further amplification in pricing well beyond the levels we were expecting. Bookings have been outpacing last year by a wide margin on a weekly basis, despite having less inventory remaining for sale. As a result, we continue to be in a record book volume position and our booked per DMs are now even further ahead of 2023 than they were as we entered the year. The Caribbean is our largest product group, representing just over 55% of our deployment this year. Overall, the Caribbean products remain in an extremely strong book position with new hardware and much higher pricing on existing ships, contributing to strong yield growth for the product. Europe accounts for around 15% of our capacity for the full year and close to 25% during the summer. Despite the fact that we had to modify some of our Eastern Mediterranean sailings that were previously expected to call in Israel or sail through the Red Sea, our European itineraries have been performing very well and we are currently booked nicely ahead of last year in both rate and volume. Regarding the situation in the Red Sea, we have rerouted a handful of spring repositioning cruises and we also have contingency plans for a few other sailings that may be impacted in the fall. All these are included in our revised guidance this morning, including the reduction in APCDs. We are all close to the start of our summer Alaska season. This product represents 6% of full-year capacity and 15% in the summer season. We have upgraded our Alaska capacity this year for two of our brands. For the first time, Celebrity will offer incredible Alaska vacations on the Edge class ship, Celebrity Edge, and Silver Sea's new ship, Silver Nova, will also sail in Alaska. Alaska has been one of our strongest-performing itineraries this year and remains in a record-booked position. Asia Pacific itineraries will account for 10% of our capacity this year. Overall, our Asia and Australia itineraries continues to perform well, and we're in a strong booked position for the upcoming winter season. Now let's turn to Slide 7 to talk about our increased guidance expectations for 2024. Our results remain ahead of expectations, and we now expect to meet all our trifecta goals in 2024. Net yields are expected to be up 9% to 10% for the full year, 225 basis point increase from the midpoint of our prior guidance in mid-February. 40 basis points of the increase is due to exceptional first quarter results. The remainder is due to a significantly better business outlook for the rest of the year due to robust demand driving higher pricing and continued strength in onboard revenue. Now moving to costs. Full-year net cruise costs excluding fuel are expected to be up approximately 5.5% and that includes 310 basis points impact from the increased dry dock days and the operations of Hideaway Beach. Our cost metric is up 150 basis points compared to our prior guidance with a quarter of the increase predominantly due to lower APCDs on canceled Red Sea sailings that skewed the metric. The remainder is driven by higher non-cash stock-based compensation. Excluding those items our costs are in line where initial expectation and guidance. We anticipate a fuel expense of $1.18 billion for the year and we are 61% hedged at below-market rates. So based on current fuel prices, currency exchange rates, and interest expense, we expect adjusted earnings per share between $10.70 and $10.90. I want to provide a little more color on the progress of our earnings guidance. As you can see on Page five, we are increasing our earnings guidance by $0.80 for the year. That includes $0.10 headwind from fuel prices and currency exchange rates as well as $0.17 benefit from the refinancing we completed in the first quarter. After accounting for those changes, approximately one-third of the increase in earnings is attributable to first-quarter business outperformance. That excludes $0.26 benefits from favorable timing with the remainder two-thirds driven by better business outlook for the rest of the year. Now turning to Slide 8, I will discuss our second-quarter guidance. We plan to operate 12.2 million APCDs during the second quarter. Net yields are expected to be up 10.2% to 10.7% compared to 2023. Two-thirds of the yield increase are driven by new hardware and load factor catch up with the remainder one-third related to like-for-like pricing. Net cruise costs excluding fuel are expected to be up 7.4% to 7.9% and includes costs related to increased dry dock days and the operations of Hideaway Beach as well as timing of costs shifted from the first quarter. During the second quarter, we will have 8.5x more dry dock days compared to the second quarter of last year, which is weighing on our cost metrics this quarter. Taking all this into account, we expect adjusted earnings per share for the quarter to be $2.65 to $2.75. Turning to our balance sheet, we ended the quarter with $3.7 billion in liquidity. We continue to make significant progress in strengthening the balance sheet and reaching our trifecta goals of investment grade metrics. During the first quarter, we refinanced $1.25 billion of our most expensive bonds with a new unsecured note at six and a quarter that allowed us to save over 500 basis points or $56 million of annual interest expense while also realizing some savings in 2024. We will continue to proactively pay down debt and pursue opportunistic refinancing and expect to further reduce leverage to just below mid three times by the end of 2024. Also in the first quarter, S&P upgraded our credit rating to BB+ with a stable outlook, and Moody's upgraded the company's credit rating to BA2 with a positive outlook. We are very pleased with the rating agency's acknowledgement of the strong trajectory of the business and our commitment to strengthening the balance sheet. Our priorities to address debt remain unchanged, managing debt maturities, reducing interest expense, and removing remaining restrictions on capital allocation and toward a fully unsecured balance sheet. In closing, we remain committed and focused on executing our strategy and delivering our mission while achieving our trifecta goals. Our strong book position and an accelerating demand environment position us for another strong year of yield growth and a step change in earnings growth. With that, I will ask our operator to open the call for a question-and-answer session. Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Steven Wieczynski with Stifel. Please go ahead. Steve Wieczynski -- Stifel Financial Corp. -- Analyst Yeah, guys. Good morning. Congratulations on the solid results and outlook. So, Jason and Naf, you obviously gave a lot of color around how bookings are shaping up for the rest of this year. But look, if we think about bookings for next year, I'm sure that's where a lot of investor interest levels are going to go to pretty surely. So you're just wondering what kind of color you can give us for 2025 at this point and wondering if the booking and pricing strength that you're seeing today is being transferred so far into 2025. Jason Liberty -- Chief Executive Officer Well, good morning, Steve. Thanks for the question. So one, I mean, all of our commentary around our bookings, the strength that we're seeing, but not only relates to 2024, but also to 2025. And we're getting close to the point where we'll soon be taking more bookings for '25 than we are for 2024. And so when we look into the booking behavior, one, the booking window continues to extend. So guests are making their decisions much further out. When we look at the repeat rates that are going on and the dreaming that our guests are doing to make sure that they're getting the vacation experience that they want is really all leading to very, very strong demand trends for 2024 as well as 2025. And by the way, we're also taking bookings into 2026. We're also seeing very strong booking behavior pre-cruise. And again, making sure that our guests are, have the ability to get their first day of their vacation back by planning their onboard activities and shore excursion activities well in advance. And that's also not only helping our ability to yield manage on the onboard experience, but it's also improving our customer deposits, which is also rising due to that. So all-in-all, things just continue to accelerate and the thirst or hunger for our brands and their experiences just continues to grow. And you see that not in just the booking behavior, but also all of our survey data around one propensity to cruise, but also propensity to cruise with us. Steve Wieczynski -- Stifel Financial Corp. -- Analyst OK. Gotcha. Thanks for that, Jason. And then second question, probably a bigger picture question, but look, if I remember correctly before the pandemic, you guys were always targeting, I think it was $20 a share in earnings by 2025. And look, obviously, you aren't prepared to give another long-term set of financial targets today. But I mean, look, if we start to think about your capacity yield cost algorithm, are we crazy to think that getting back to $20, even with the dilution and the higher interest costs that you guys took on during COVID? I mean, it seems like that's probably back on the horizon again. Are we kind of crazy to think that way? Jason Liberty -- Chief Executive Officer Well, I won't get into how crazy you are, Steve, because that could take the balance of the call. But I think as you pointed out, which I think is an important component is, we have a business that has really strong operating leverage. And what we have talked about is our formula for success, which is moderate yield growth, which clearly we haven't seen this year. We didn't see that last year. We've seen elevated yield growth. Moderate yield growth, good cost control, moderately grow your business, bring on new destinations, drives really very tremendous earnings power. You think about a 1% change in our yields is $120 million this year. A 1% change in our cost is about half of that. So grow your yields faster than your costs, bring in really strong, high yielding capacity that has great inventory mix. You bring in new destinations like more like, we did this year with Hideaway, bringing in the Beach Club and Nassau, bringing in the Beach Club in Mexico, etc. These are all things that are driving very high margins for us and is improving our return profile as well as our earning profile. And of course, none of that, takes into account, I mean, Naf and team have done an exceptional job already on the balance sheet. There'll be more opportunity to continue to lower the negative carry. And of course, none of this contemplates capital returns, which is one thing that we were doing pre-COVID. So it's something that we think as we look at how do we continue to improve your shareholder return? Those are things that could also improve our earnings outlook is by considering the dilution that occurred and return capital to shareholders. All of this are things in which we will begin to address once we get to our trifecta goals, which as you know, we described as base camp. Steve Wieczynski -- Stifel Financial Corp. -- Analyst That's great color. Thank you, guys. Appreciate it. Operator Your next question comes from the line of Ben Chaiken with Mizuho. Please go ahead. Ben Chaiken -- Mizuho Securities -- Analyst Hey. Good morning. Sounds like demand accelerating. Would be great to hear any color on demand for Paradise Island and then I guess related. Can you talk to us how you're differentiating the destinations from a marketing perspective of CocoCay and Paradise Island and Cozumel or maybe my ship class? Just any nuances you would call out. Like is this a CocoCay returning customer or a different person? That'd be great. Thanks. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International Hi, Ben. It's Michael. I mean, when we think of the Beach Club portfolio that we're planning on developing, along with Perfect Day, they're incredibly complementary destination experiences and they fit really in the sweet spot of our demographics and really in terms of what our guests are seeking, looking for when they go on a Caribbean cruise, they really knock it out of the park in terms of satisfying that demand, that need. So very similar type of product, different vibe. Perfect Day is the full day for thrill and chill and the Beach Club is, as you imagine, just an incredible day at the beach, which is what most guests are seeking in the Caribbean. And it's curated by Royal Caribbean. It's a stunning experience. And of course, it's very authentically connected to the culture, for example, in the Bahamas or Mexico. And it really is a huge demand driver. When we look at the demand that we've seen for Perfect Day, this year we'll take 3.2 million guests to Perfect Day. Last year it was 2.6 million. And it really is a demand driver. People want to sail on the ships that go to Perfect Day and they want to sail on the ships that go to the Beach Club. And I think it's proven to be incredibly successful. When you wrap that up with the kind of hardware we've introduced, for example, Icon, which has been an unbelievable success. I mean, beyond our wildest dreams success. And you add on Utopia, which is a brand new Oasis class ship, which was going straight into the short product market out of Port Canaveral. The demand we've seen for, for example, Utopia sailing to Perfect Day has been extraordinary. So we think we've got the formula figured out. And our plan is to continue to evolve and develop that formula over the coming years. Jason Liberty -- Chief Executive Officer Yes. And Ben, I just want to add and I had it in my remarks. I think one of the incredible things that we're seeing out of destinations like Perfect Day, and we'll see this in the World Beach Club and Nassau, is how it's drawing in new to cruise and millennials. So my comment that one and two of our guests, one out of two of our guests are millennial or younger, to me is a very powerful statement. The increase, we have an 11-point increase in new to cruise. And so, and what we know is when they sail with us, they're five times more likely to sail with us again. And the repeat rates that we're seeing are exceptional. And it's a lot because not only are we bringing that full incredible experience that our crew delivers on our ships, but we're enhancing the experience in the destinations. And I think that combination with where Michael and his team have really the dreaming and innovating and delivery on Perfect Day and how there's 25,000 guests a day that come into Nassau. And we're going to take some of those guests and we're going to bring them over to the Beach Club, which is great economically for us as well as it is for the Bahamas, and deliver an incredible experience that's going to drive probably 90 plus NPS scores. And that's what people are seeking. They want those experiences that they can walk away from and it's attracting a high level of demand. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International And Ben, not to continue on this, but to add to Jason's comments, Utopia is not by accident, Utopia is sailing out of Port Canaveral. It'll be going to Perfect Day. It really is another product that's squarely in this competitive space of land-based vacations and we're seeing huge demand coming for this product. And you think about the combination of a three, four-day product like Utopia going to Perfect Day, and then in 25, it'll go to Perfect Day and the Beach Club. That's really a phenomenal game changer. And it really is drawing in a huge amount of new to crews and it's beautifully positioned in Canaveral, right fundamentally in Orlando. Ben Chaiken -- Mizuho Securities -- Analyst Gotcha. Just a very quick follow-up on Paradise. I think, Jason, you mentioned 25,000 guests to Nassau. Am I interpreting that correct, that this could be a kind of like a revenue generator for not just your cruise guests, but also other people who are going to Nassau? Or is that the wrong reason? Jason Liberty -- Chief Executive Officer No. It's primarily for the Royal Caribbean brand. Our other brands will have access to it, but the broader cruise market would not have access to the Beach Club. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International But the beautiful thing is, is that the Royal Beach Club in Paradise Island is positioned pretty much at the entrance to Nassau. I think the point is, is that on a given day, there's 25,000 to 30,000 cruise guests coming in on multiple different cruise brands. And of course, when they sail into Nassau, the only thing they're going to see is the Royal Caribbean Royal Beach Club, which is going to be absolutely stunning. And they will be unbelievably jealous knowing that they can't go there. Ben Chaiken -- Mizuho Securities -- Analyst That's a great point. Thanks. Operator Your next question comes from the line of Matthew Boss with J.P. Morgan. Please go ahead. Matt Boss -- JPMorgan Chase and Company -- Analyst Great. Thanks. And congrats on another nice quarter. So Jason, coming off strongest wave season in history, could you elaborate on the continued near-term strength cited in April, both from demand and pricing, maybe, if anything, by region? And to your comments earlier, how best to think about your market share opportunity in this 1.9 trillion growing global vacation market? And then just for Naftali, just as we think about the underlying guidance rate, where are you more confident today as we think about the back half, maybe relative to three months ago? Jason Liberty -- Chief Executive Officer Sure. Well, thanks for the question, Matt. First off, I think just -- I mean wave was absolutely exceptional. It's kind of mid-teens better than what we saw on the previous year. Interesting enough, though, April was almost double that in terms of the level of demand that we were seeing. So that's why when I talk about demand is accelerating, it's not just what we saw when we last spoke to everybody in early February. It's not just when we updated at the end of February. But that acceleration has picked up speed. And of course, at this point, we only have about 12% load factors left to build for the year. And so that will provide opportunity for us to a degree this year. But what that I think means in terms of the opportunity into 2025 and beyond is very appealing. I think when you frame that the $1.9 trillion of travel space, and of course, that's a growing number, cruises $65 billion of that $1.9 trillion. So we're a very, very small fraction. And I think something we've talked about before is a 1% shift is worth 11 Oasis-class ships to us. And so for us, when you look at things like Perfect Day, when you look at things like the Royal Beach Club, when you look at things like Utopia, you look at things like what we're doing on Edge and Nova, it's very purposeful, less about what's happening with other cruise operators. It's more, how do we take further share? How do we compete with Orlando? How do we compete with Las Vegas? How do we compete with other land-based alternatives to grab that share, where as we know today, currently trades at least at a 25% or 30% premium to what we're getting. So that value, we want to close that gap to land-based vacation, and we want to take share. And we believe by waking up and being just obsessed at delivering the best vacation experiences in the world puts us in a position to win. Naftali Holtz -- Chief Financial Officer Hey, Matt. It's Naf. Just to add one other thing to Jason. Also, if you kind of look at 19 versus where we are today, we have been taking share. Again, you don't have to believe much. And as Jason said, 1% is 11 Oasis-class ships. That's a pretty significant rise. But we've continued to focus on it and make progress there. I think just in terms of the strength, as you kind of heard in our prepared remarks, the strength is across all our key itineraries. And, of course, the Caribbean continues to be performing very well. But as much as others, Alaska, Europe, and obviously we're coming back to China. So we feel pretty good of where we are standing today. When our book position, where the pricing is for the rest of the year. Matt Boss -- JPMorgan Chase and Company -- Analyst Great. Congrats. Best of luck. Operator Your next question comes from the line of Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia -- William Blair and Company -- Analyst Hi. Good morning. I think on the last call, you had talked about 80% of passengers being North American this year. I'm just wondering if there's any update on that, if there's any change. And then as we think about next year, kind of where would you expect, North America to go? It's kind of been unusually large the last few years. And if we see kind of China or Europe ramp up in the passenger base, how do we think about that impact on onboard revenue? Jason Liberty -- Chief Executive Officer Yes. Well, thanks for the question, Sharon. I hope you're doing well. So I think just starting off, we need to just frame that, we have global brands, not nationalistic brands. And these global brands are supported by a very significant commercial apparatus, with leading yield management tools and teams around the world. And so the sourcing is really a reflection of the demand patterns that we see to optimize our ultimate revenue. More China next year, as we add that second ship into China, can move this number a little bit to be less North American centric. But we're going to follow the demand patterns. And that is how we've done it for a very, very long period of time. And of course, that could potentially shift the mix of onboard and ticket. I don't think it's going to materially shift it because I do think that we'll probably be relatively close to the sourcing that we saw this year. Maybe it moves a little bit, but it's not going to move a lot. But we're focused on optimizing our revenue. And so if we're getting more in ticket from a customer and a little bit less on onboard, we're perfectly OK with that. As long as the answer is higher yield profile and higher margin profile for us. And that's how we've run the business for a very long time. And I think we're very fortunate to have thought long time ago to make sure that our brands are positioned to be globally desirable in sourcing from many different markets. Sharon Zackfia -- William Blair and Company -- Analyst Jason, can I ask a follow-up? The one or two passengers being millennials at this point, do you find that that customer is more inclined to pre-book onboard versus kind of their elders like me? Or, is it, are you seeing pre-booking success kind of across the demographic gamut? Jason Liberty -- Chief Executive Officer Yes. I mean, it skews a little bit younger, but I think, Sharon, one, if we can pick any, positiveness out of COVID, was that the consumer, a young or middle-aged, etc., got very used to booking or buying things online. We also really improved our ability to take friction out of the booking experience for a ticket price, as well as the booking experience for onboard, by curating, taking a lot of steps out of the process, etc. And that's really what is driving that better behavior. The installation of a proper commerce system that we can yield manage, that we can curate, which we're still very in the early innings on, is really what's benefiting that. And you just think about just shopping behavior. In the first quarter, we had 100 million visits to our websites, 100 million. That's twice what we had pre-COVID. And so, we have really upped our game, not just on a marketing basis, but also to make that our websites helped our customers dream about what they want to do and help them get to the experience that they're looking for. And then making sure that they have all the onboard experiences that they want to have and being able to resolve all that well in advance of them getting on the ship. Sharon Zackfia -- William Blair and Company -- Analyst Thank you so much. Operator Thanks, Sharon. Your next question comes from the line of Brandt Montour with Barclays. Please go ahead. Brandt Montour -- Barclays -- Analyst Hey, everybody. Thanks for taking my question. So maybe for Michael, China restarted this month. Wondering if you could give us maybe even qualitatively a sense of sort of initial load factors, initial pricing or initial expected onboard spend. Obviously, you can't give us that specifically, but just sort of better or worse than you were forecasting. And clearly, the follow-up is, you decided to take Ovation there next year. That's obviously a good sign. But why Ovation? I think that comes out of Alaska and Australia. Why that ship? And why not a ship necessarily out of the Caribbean or somewhere else? Thank you. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International Brandt, yes, good question. I think, the fact that we've already deployed a second ship into the China market gives you an indication of how well the first ship is doing in the China market. So we're pleased with the spectrum bookings. Our comparison, of course, is back in 2019, which we've used a lot over the last couple of years. Overall volume and rate for the China product in '24 is significantly higher in both volume and rate from '19, which is a great indicator of the kind of demand that we're seeing for the product. And we feel good about '24 going into '25. That's why we've got the second ship. Both quantum class, both have done very well in the China market. They seem to be really well suited for that market. And of course, Ovation, both in Alaska and Australia, is perfectly suited for the China market in terms of its geographical positioning. One will be in Tianjin, which we've operated out of many years before the pandemic. And of course, Shanghai, both great markets for us. The onboard spend, obviously, it's only the couple of days into the season, but it's looking really positive. We have high expectations and I think they're going to be realized. The other thing that's changed quite a lot in terms of the market dynamics in China is the change in our direct business versus the traditional trade business. There was quite a transformation during the pandemic in terms of a lot of the retailers that dropped out of business. Fortunately, pre-pandemic, we started to invest significantly in resources, technology, people to develop that direct business. And we continued through the pandemic and we accelerated when we came out of the pandemic. And it's proving to be very productive for us. So overall, our distribution strategy is proving to be successful. Demand seems very, very strong. Of course, Korea opened up, which is great. So that gives us a better itinerary product to offer to our guests. And we're feeling good about how this will play out. Of course, we've been in China for a decade before. So we've all been through the ups and downs, but currently it's looking pretty positive. Brandt Montour -- Barclays -- Analyst OK. That's really helpful. And then maybe one for Naf. The higher guidance for the year helps bring credit metrics, at least in our model, perhaps a little closer to IG, perhaps a little earlier than we had before. And so I guess, maybe it's worth you refreshing us on what you think the board needs to see to reestablish capital returns. And if today's report maybe helped that picture at all. And that's it for me. Naftali Holtz -- Chief Financial Officer Yes. So just on the balance sheet. So you're right, obviously, with the acceleration of performance, we're focused on basically three things, right? We're focused on reducing leverage. And I said in my prepared remarks, we will -- we expect to get to below the three and a half times leverage by the end of the year. So that's very positive. Obviously, we continue to pay down debt. EBITDA, increases are helping with that leverage. So we're feeling pretty good about that. And then reducing cost of capital, you saw us take an action this quarter reducing on one bond more than 500 basis points or almost $60 million of annual interest expense. And we'll continue to find those opportunities to lower the cost of capital and use both cash and opportunistic refinancing. I think there's much more to do there. And lastly, it's just an unsecured balance sheet. We want to get back that capacity on the balance sheet like we had pre-COVID. And we basically have three bonds left that if we pay them back or we refinance them, the whole structure collapses and we're back to unsecured balance sheet. So that's our focus. We'll continue to execute on that. Our focus is on metrics, not ratings. We were very pleased with the upgrades that we got from the rating agencies, but our focus in our getting to the balance sheet. Brandt Montour -- Barclays -- Analyst Thanks, everyone. Congrats on the quarter. Jason Liberty -- Chief Executive Officer No, no. I was just going to say obviously you're getting to base camp and getting to those metrics is an important line for us and as well as for our board in terms of consideration of capital returns. But I would just point to that pre-COVID. We certainly, that was very much part of our formula was having a competitive dividend and also buying back shares opportunistically. Brandt Montour -- Barclays -- Analyst Thanks, everyone. Operator Your next question will come from the line of Robin Farley with UBS. Please go ahead. Robin Farley -- UBS -- Analyst Great. Thanks. One clarification on your really excellent guidance. It sounded like you were suggesting that there were some fall Red Sea cruises that are still on your schedule, but did I understand your comment to mean that if they were to change, that's already factored into your guidance? So if we see that, see any changes in those, it wouldn't change your guidance. I just want to make sure I understood that part of your commentary, right? Naftali Holtz -- Chief Financial Officer Yes, Robin. That's correct. Robin Farley -- UBS -- Analyst OK. Great. Thank you. And then just my other question is on capacity and capacity growth. And you mentioned that moderate capacity growth has been your goal. Others out there, some have been more aggressive lately with ordering ships out into the future. And I wonder if you could just give us your thoughts on whether you feel that that changes anything with availability of slotted shipyards or if that changes in any way what you have been thinking about capacity or would think about needing to do in the future. Thanks. Jason Liberty -- Chief Executive Officer Sure. Hi, Robin. So first, I think it's important that when we talk about our order book, these are ships that are actually on order. We're not talking about options. We're not talking about slot reservations. We're talking about things on order. And of course, we don't have any orders going out to I think 2035 or 2036, at this point in time. What we do subscribe to is that we believe that we are in segments that have a lot of growth potential to them. We believe we have the right brands in those segments. And we believe that we should be moderately growing our brands over time. And so that's kind of what we're committed to. And I think we feel very good not only about our current order book and about the potential of that order book to grow moderately, but also our access to build those ships over an extended period of time. So I think we feel very good about it all around. And I think we're showing that the investments we're making in our brands, what the investments we're making in the destinations are yielding very high returns for our shareholders and continuing to expand our margins. Robin Farley -- UBS -- Analyst I guess maybe to clarify, do you feel that you would need to order ships more than five years in advance in the current environment? Or is that sort of five to six years out, I would say something five? Jason Liberty -- Chief Executive Officer Yes. I think it depends on the circumstances. We've ordered, Icon was being designed and dreamt of obviously COVID delayed some of those orders, but somewhere typically in that kind of five-to-six-year range is where you make those orders. But keep in mind, and that's what I think my comment is, that doesn't mean you don't have options and you don't have slot reservations and so forth that you could also, which is why we typically order in that kind of five-to-six-year type of range. We don't announce things unless they are fully contracted and we know the price and we have the financing in place. Robin Farley -- UBS -- Analyst OK. Great. Thank you. Michael McCarthy -- Vice President, Investor Relations We have time for one more question. Operator Our final question will come from the line of Vince Ciepiel with Cleveland Research. Please go ahead. Vince Ciepiel -- Cleveland Research Company -- Analyst Great. Thanks. Earlier in the call, there was some commentary on loyalty and I just wanted to get your sense for what you're seeing within that across your brands and varying products, what you see in terms of overlap of customers and then maybe finally within that, have you ever thought about getting into river cruising, thoughts on that segment of the market and is there much overlap with your current customer base? Jason Liberty -- Chief Executive Officer Yes. Well, first just to kind of build off of what I had said earlier is, we have been very thoughtful about having the right brands and the right segments. And we have done such an incredible job at delivering a vacation of a lifetime and we're focused on making sure we're set up to deliver a lifetime of vacations. And our guests, there is overlap between Royal and Celebrity and Royal and Silversea and vice versa because you could have a set of grandparents on Silversea that next month are going on a cruise with their kids and grandkids on the Royal Caribbean brand. That happens all the time. And one of our ultimate goals here is to make sure that we keep our customer in our ecosystem. And so we do that whether that's through awareness of our brands, whether that's through loyalty programs, whether that's through cross-selling, etc. And those are things that we have an opportunity to get better and better at, especially as our travel platform technology-wise is more flexible. The comment on river or other experiences, we're always evaluating opportunities. River is an area where we do see some overlap, not a lot of overlap, but we do see some overlap occurring and that could be something that we would consider at some point in the future. But at this point in time, we're very focused on excelling in our core, growing our core and also further building out our destination platform. All of that, as we're clearly seeing, is working to deliver a very high ROIC profile and producing strong shareholder returns. Vince Ciepiel -- Cleveland Research Company -- Analyst Great. Thank you. Operator I will now turn the conference back over to Naftali Holtz, CFO, for closing remarks. Naftali Holtz -- Chief Financial Officer We thank you all for your participation and interest. Michael will be available for any follow-up. We wish you all a great day. Answer:

the Royal Caribbean Group first-quarter 2024 earnings call

Operator Good morning, my name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Group first-quarter 2024 earnings call. [Operator instructions] I would now like to introduce Michael McCarthy, vice president of investor relations. Mr. McCarthy, the floor is yours. Michael McCarthy -- Vice President, Investor Relations Good morning, everyone, and thank you for joining us today for our first-quarter 2024 earnings call. Joining me here in Miami are Jason Liberty, our chief executive officer, Naftali Holtz, our chief financial officer, and Michael Bayley, president and CEO of Royal Caribbean International. Before we get started, I would like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning, as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined in a reconciliation of all non-GAAP items can be found on our Investor Relations website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency-adjusted basis. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our first quarter, the current booking environment, and our updated outlook for 2024. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason. Jason Liberty -- Chief Executive Officer Thank you, Michael, and good morning, everyone. I am proud to share our robust first-quarter results and the continued upward trajectory of our business. When we turn the page from an incredible 2023 with a record-booked position for 2024 and numerous tailwinds related to the consumer's desire to vacation with us, we expected this would be another great year. Well, as you saw in the press release this morning, what transpired over the past three months was even better than our already elevated expectations. Our brands are stronger than ever, and demand for our vacation experiences continues to accelerate. We are leading the way in delivering a lifetime of incredible vacations for our guests with our exceptional and leading portfolio of brands, innovative and differentiated ships, exciting and exclusive destination experiences, and leading commercial capabilities. The opportunity is very large and very exciting as we seek to take share from the rapidly growing $1.9 trillion vacation market. Our formula for success remains unchanged. Moderate capacity growth, moderate yield growth, and strong cost controls lead to robust financial performance and long-term shareholder value. Before getting into the details, I want to recognize our incredible teams that are working together day in and day out, delivering the best vacation experiences to our guests and doing so while driving exceptional results. Our business is propelled by our people, and they are the driving force behind our strategic vision for success. I am so grateful for their commitment and passion. Now, moving on to our results. As highlighted on Slide 4, the first quarter was tremendous, sending us well on our path to a year that is significantly better than we expected just a few months back. Wave season combined with a record-breaking introduction of the revolutionary Icon of the Seas resulted in consistently robust bookings at much higher prices than 2023. This strong booking and pricing environment across all key itineraries coupled with continued strength in onboard spend led to higher revenue in the first quarter and a further improvement in full-year yield expectations. In the first quarter, we delivered 2 million memorable vacations and achieved 107% load factor at exceptional guest satisfaction scores. Yields grew 19.3% compared to the first quarter of 2023, almost 400 basis points above our initial guidance. Adjusted earnings per share in the first quarter was considerably higher than our guidance. Strong ticket and onboard revenue and favorable timing of expenses contributed to the better-than-expected earnings performance. The acceleration of demand is also translating into higher revenue and earnings expectations for the balance of the year. As you can see on Page 5, we are increasing full-year yield growth expectations by 50% compared to our initial guidance in early February, and we now expect adjusted earnings per share to grow 60% year over year. The increased outlook for the year is expected to further accelerate our trajectory toward our trifecta goals as we continue to expect to achieve all three goals in 2024, one year earlier than initially expected. Now I'll provide some insight into the robust demand environment and our incredible wave season. Booking is consistently outpaced last year throughout the entire first quarter and through April, even though we have significantly fewer staterooms left to sell, leading to higher pricing for all of our key products. Booking strength has been prevalent on both our existing hardware as well as on our industry-leading new chips. We see strong demand across all products and markets. North America continues to be extremely robust where approximately 80% of this year's guests are sourced. This strength, in combination with the incredible perfect day at CocoCay, has resulted in strong yield growth for our Caribbean sailings. European bookings are outpacing last year's levels at higher prices and Alaska has been performing particularly well with year-over-year yield growth. We are also pleased to return to the high-yielding China market this month with Spectrum of the Seas and to add Ovation of the Seas to Tianjin in 2025 as we rebuild our China business. With our return to China, we are now finally back in all of our key markets, which enables us to capture quality global demand and source from new consumer bases. Customer sentiment remains very positive, bolstered by resilient labor markets, wage growth, stabilizing inflation, and record-high household net worth. Consumer preferences continue to shift toward spend on experiences, particularly priority for travel. This is evident as the year-over-year growth in spend on experience is double that of spend on goods. Despite our ability to narrow the gap to land-based vacations in the last 12 months, cruising still remains an exceptional value proposition. We continue to see excellent engagement from customers who are booking their dream vacations with us across all our products. Guests are buying 10% more onboard experiences per booking than in the first quarter of last year, and they continue to book these onboard activities earlier and at meaningfully higher APDs, translating into higher onboard spend. Looking to the rest of 2024, the year is shaping up to be exceptional with strong yield and earnings growth. We expect to achieve all Trifecta targets in 2024, allowing us to focus on a new era of growth to drive long-term shareholder returns. As I mentioned previously, Trifecta creates the pathway back to what we internally describe as base camp, but our ambitions go well beyond it. As highlighted on Slide 7, we now expect to deliver net yields that are 9% to 10% higher than 2023. Our yield outlook is driven by the performance of new and existing ships, combined with our leading private destinations, a strong pricing environment, continued growth from onboard revenue, and our accelerating commercial apparatus. In the second half of 2024, we expect to deliver mid-single-digit yield growth above our typical moderate yield growth expectations, and on top of an approximately 17% yield increase in the back half of 2023. We also continue to expect the business to deliver higher margins and earnings in 2024, with adjusted earnings per share expected to grow 60% year over year. As we look ahead, we remain focused on executing our proven targets formula for success, moderate capacity growth, moderate yield growth, and strong cost controls that lead to enhanced margins, profitability, and superior financial performance. Our operating platform remains a key differentiator and is bigger and stronger than ever. We remain intensely focused on attracting and keeping guests within our unique portfolio of brands and providing experiences for all of life's moments while delivering long-term value for our shareholders. Our addressable market is expanding, and New to Cruise continues to grow, increasing 16% year over year. These guests are discovering our differentiated vacation experiences and are increasingly returning to us as we see repeat rates over 30% higher compared to 2019. Our brands also continue to attract new and younger customers. Millennials and younger generations have gained 11 percentage points share compared to 2019, and today almost one in two guests are millennials or younger. New hardware has been a great differentiator for us. Since Icon of the Seas joined the fleet a few months ago, it is already exceeding our lofty expectations in both guest satisfaction and financial performance. We are also excited for the arrival later this year of Utopia of the Seas, a ship that is positioned to be another game changer for our short Caribbean product, and Silver Ray, which continues to reimagine the ultra luxury and expedition segments. Demand and pricing for those new ships has been incredibly strong. Also this quarter, we announced an order for a seventh ship and our hugely successful Oasis class that will join the fleet in 2028. Our brands continue to lead their segments and generate quality demand, and we see a very large opportunity to take greater share of the rapidly growing $1.9 trillion vacation market as we continue to grow our fleet and vacation experiences. We are leading the vacation industry in creating exciting new products and experiences, which include private destinations. The newest addition to our growing portfolio of private destinations is the Royal Beach Club in Cozumel, Mexico, that is set to welcome guests in 2026. With a combination of activities for every type of vacationer, Royal Beach Club Cozumel will further enhance our guests' experience, giving guests the ultimate beach day. Earlier this week, we also celebrated another important milestone when we officially broke ground on Royal Beach Club Paradise Island in Nassau, which is scheduled to open next year. Our journey to deepen the relationship with the customers continues this year. We are further enhancing our commerce platform through new technology and AI to continue improving the experience for our different distribution channels, build even more customer loyalty, and lowering our costs to acquire the guests. We are removing friction and unlocking travel planning by investing in a modern digital travel platform, making it easier than ever for guests to book their dream vacations while allowing us to expand wallet share. Our digital experiences delight guests. Our mobile app is consistently adopted by 94% of our guests on board and we continue to enhance its capabilities. Among other features, we introduced cruise booking capabilities in the app last year and recently added the ability to book flights. We also created a loyalty hub so customers can quickly enroll and track their loyalty tiers and benefits. We will continue to enhance those capabilities in 2024 and beyond. Our sustainability ambitions help support our mission to deliver the best vacation experiences responsibly. We recently released our 16th annual sustainability report, which outlines the progress we are making on See the Future, our vision to sustain the planet, energize communities, and accelerate innovation. We are actively making progress toward our journey to net zero emissions, including double-digit carbon intensity reductions, and we are now beyond the halfway mark. Alongside the sustainability report, we published our first community impact report, which delves into how we energize the communities we visit. It highlights long-term projects that inspire future generations and our dedication to empowering local entrepreneurs through business development and micro-grant programs like the Royal Caribbean Kickstarter in the Bahamas. As we make progress, we also know achieving net zero can't be done alone. We'll need strong collaboration across the full marine ecosystem, including operators, suppliers, ports, and technology providers. Our business continues to perform exceptionally well. I'm incredibly thankful and proud of the teams at the Royal Caribbean Group for showing up each and every day to dream and create the best vacation experiences for our guests, allowing us to perform while we transform. The future of the Royal Caribbean Group is exceptionally bright, and I couldn't be more excited about what's ahead. And with that, I'm happy to turn the call over to Naftali. Naf? Naftali Holtz -- Chief Financial Officer Thank you, Jason, and good morning, everyone. I will start by reviewing first-quarter results, which were significantly above our expectations. Adjusted earnings per share were $1.77, 36% higher than the midpoint of our most recent guidance of $1.30. 45% of the outperformance, or $0.21, was driven by better pricing for our vacation experiences, with the remainder driven by federal timing of operating expenses. We finished the quarter with a net yield increase of 19.3% compared to the first quarter of 2023. 385 basis points higher than the midpoint of our initial guidance in early February. While a load factor recovery was a contributor, most of our yield growth was driven by rates that were up by 14% versus 2023. 55% of the outperformance compared to our initial guidance was driven by ticket pricing, with the remainder driven by shipboard revenue strength. Net cruise costs, excluding fuel, increased 4.1% in constant currency, 315 basis points lower than our initial guidance. Favorable timing was a driver that contributed to the better-than-expected results. Adjusted EBITDA margin was 31%, and operating cash flow was $1.3 billion. On our last earnings call, we discussed the record-breaking start-to-wave season and widespread strength in booking, pricing, and onboard revenue. The consistent strength in demand for our brands has led to a further amplification in pricing well beyond the levels we were expecting. Bookings have been outpacing last year by a wide margin on a weekly basis, despite having less inventory remaining for sale. As a result, we continue to be in a record book volume position and our booked per DMs are now even further ahead of 2023 than they were as we entered the year. The Caribbean is our largest product group, representing just over 55% of our deployment this year. Overall, the Caribbean products remain in an extremely strong book position with new hardware and much higher pricing on existing ships, contributing to strong yield growth for the product. Europe accounts for around 15% of our capacity for the full year and close to 25% during the summer. Despite the fact that we had to modify some of our Eastern Mediterranean sailings that were previously expected to call in Israel or sail through the Red Sea, our European itineraries have been performing very well and we are currently booked nicely ahead of last year in both rate and volume. Regarding the situation in the Red Sea, we have rerouted a handful of spring repositioning cruises and we also have contingency plans for a few other sailings that may be impacted in the fall. All these are included in our revised guidance this morning, including the reduction in APCDs. We are all close to the start of our summer Alaska season. This product represents 6% of full-year capacity and 15% in the summer season. We have upgraded our Alaska capacity this year for two of our brands. For the first time, Celebrity will offer incredible Alaska vacations on the Edge class ship, Celebrity Edge, and Silver Sea's new ship, Silver Nova, will also sail in Alaska. Alaska has been one of our strongest-performing itineraries this year and remains in a record-booked position. Asia Pacific itineraries will account for 10% of our capacity this year. Overall, our Asia and Australia itineraries continues to perform well, and we're in a strong booked position for the upcoming winter season. Now let's turn to Slide 7 to talk about our increased guidance expectations for 2024. Our results remain ahead of expectations, and we now expect to meet all our trifecta goals in 2024. Net yields are expected to be up 9% to 10% for the full year, 225 basis point increase from the midpoint of our prior guidance in mid-February. 40 basis points of the increase is due to exceptional first quarter results. The remainder is due to a significantly better business outlook for the rest of the year due to robust demand driving higher pricing and continued strength in onboard revenue. Now moving to costs. Full-year net cruise costs excluding fuel are expected to be up approximately 5.5% and that includes 310 basis points impact from the increased dry dock days and the operations of Hideaway Beach. Our cost metric is up 150 basis points compared to our prior guidance with a quarter of the increase predominantly due to lower APCDs on canceled Red Sea sailings that skewed the metric. The remainder is driven by higher non-cash stock-based compensation. Excluding those items our costs are in line where initial expectation and guidance. We anticipate a fuel expense of $1.18 billion for the year and we are 61% hedged at below-market rates. So based on current fuel prices, currency exchange rates, and interest expense, we expect adjusted earnings per share between $10.70 and $10.90. I want to provide a little more color on the progress of our earnings guidance. As you can see on Page five, we are increasing our earnings guidance by $0.80 for the year. That includes $0.10 headwind from fuel prices and currency exchange rates as well as $0.17 benefit from the refinancing we completed in the first quarter. After accounting for those changes, approximately one-third of the increase in earnings is attributable to first-quarter business outperformance. That excludes $0.26 benefits from favorable timing with the remainder two-thirds driven by better business outlook for the rest of the year. Now turning to Slide 8, I will discuss our second-quarter guidance. We plan to operate 12.2 million APCDs during the second quarter. Net yields are expected to be up 10.2% to 10.7% compared to 2023. Two-thirds of the yield increase are driven by new hardware and load factor catch up with the remainder one-third related to like-for-like pricing. Net cruise costs excluding fuel are expected to be up 7.4% to 7.9% and includes costs related to increased dry dock days and the operations of Hideaway Beach as well as timing of costs shifted from the first quarter. During the second quarter, we will have 8.5x more dry dock days compared to the second quarter of last year, which is weighing on our cost metrics this quarter. Taking all this into account, we expect adjusted earnings per share for the quarter to be $2.65 to $2.75. Turning to our balance sheet, we ended the quarter with $3.7 billion in liquidity. We continue to make significant progress in strengthening the balance sheet and reaching our trifecta goals of investment grade metrics. During the first quarter, we refinanced $1.25 billion of our most expensive bonds with a new unsecured note at six and a quarter that allowed us to save over 500 basis points or $56 million of annual interest expense while also realizing some savings in 2024. We will continue to proactively pay down debt and pursue opportunistic refinancing and expect to further reduce leverage to just below mid three times by the end of 2024. Also in the first quarter, S&P upgraded our credit rating to BB+ with a stable outlook, and Moody's upgraded the company's credit rating to BA2 with a positive outlook. We are very pleased with the rating agency's acknowledgement of the strong trajectory of the business and our commitment to strengthening the balance sheet. Our priorities to address debt remain unchanged, managing debt maturities, reducing interest expense, and removing remaining restrictions on capital allocation and toward a fully unsecured balance sheet. In closing, we remain committed and focused on executing our strategy and delivering our mission while achieving our trifecta goals. Our strong book position and an accelerating demand environment position us for another strong year of yield growth and a step change in earnings growth. With that, I will ask our operator to open the call for a question-and-answer session. Questions & Answers: Operator [Operator instructions] Our first question will come from the line of Steven Wieczynski with Stifel. Please go ahead. Steve Wieczynski -- Stifel Financial Corp. -- Analyst Yeah, guys. Good morning. Congratulations on the solid results and outlook. So, Jason and Naf, you obviously gave a lot of color around how bookings are shaping up for the rest of this year. But look, if we think about bookings for next year, I'm sure that's where a lot of investor interest levels are going to go to pretty surely. So you're just wondering what kind of color you can give us for 2025 at this point and wondering if the booking and pricing strength that you're seeing today is being transferred so far into 2025. Jason Liberty -- Chief Executive Officer Well, good morning, Steve. Thanks for the question. So one, I mean, all of our commentary around our bookings, the strength that we're seeing, but not only relates to 2024, but also to 2025. And we're getting close to the point where we'll soon be taking more bookings for '25 than we are for 2024. And so when we look into the booking behavior, one, the booking window continues to extend. So guests are making their decisions much further out. When we look at the repeat rates that are going on and the dreaming that our guests are doing to make sure that they're getting the vacation experience that they want is really all leading to very, very strong demand trends for 2024 as well as 2025. And by the way, we're also taking bookings into 2026. We're also seeing very strong booking behavior pre-cruise. And again, making sure that our guests are, have the ability to get their first day of their vacation back by planning their onboard activities and shore excursion activities well in advance. And that's also not only helping our ability to yield manage on the onboard experience, but it's also improving our customer deposits, which is also rising due to that. So all-in-all, things just continue to accelerate and the thirst or hunger for our brands and their experiences just continues to grow. And you see that not in just the booking behavior, but also all of our survey data around one propensity to cruise, but also propensity to cruise with us. Steve Wieczynski -- Stifel Financial Corp. -- Analyst OK. Gotcha. Thanks for that, Jason. And then second question, probably a bigger picture question, but look, if I remember correctly before the pandemic, you guys were always targeting, I think it was $20 a share in earnings by 2025. And look, obviously, you aren't prepared to give another long-term set of financial targets today. But I mean, look, if we start to think about your capacity yield cost algorithm, are we crazy to think that getting back to $20, even with the dilution and the higher interest costs that you guys took on during COVID? I mean, it seems like that's probably back on the horizon again. Are we kind of crazy to think that way? Jason Liberty -- Chief Executive Officer Well, I won't get into how crazy you are, Steve, because that could take the balance of the call. But I think as you pointed out, which I think is an important component is, we have a business that has really strong operating leverage. And what we have talked about is our formula for success, which is moderate yield growth, which clearly we haven't seen this year. We didn't see that last year. We've seen elevated yield growth. Moderate yield growth, good cost control, moderately grow your business, bring on new destinations, drives really very tremendous earnings power. You think about a 1% change in our yields is $120 million this year. A 1% change in our cost is about half of that. So grow your yields faster than your costs, bring in really strong, high yielding capacity that has great inventory mix. You bring in new destinations like more like, we did this year with Hideaway, bringing in the Beach Club and Nassau, bringing in the Beach Club in Mexico, etc. These are all things that are driving very high margins for us and is improving our return profile as well as our earning profile. And of course, none of that, takes into account, I mean, Naf and team have done an exceptional job already on the balance sheet. There'll be more opportunity to continue to lower the negative carry. And of course, none of this contemplates capital returns, which is one thing that we were doing pre-COVID. So it's something that we think as we look at how do we continue to improve your shareholder return? Those are things that could also improve our earnings outlook is by considering the dilution that occurred and return capital to shareholders. All of this are things in which we will begin to address once we get to our trifecta goals, which as you know, we described as base camp. Steve Wieczynski -- Stifel Financial Corp. -- Analyst That's great color. Thank you, guys. Appreciate it. Operator Your next question comes from the line of Ben Chaiken with Mizuho. Please go ahead. Ben Chaiken -- Mizuho Securities -- Analyst Hey. Good morning. Sounds like demand accelerating. Would be great to hear any color on demand for Paradise Island and then I guess related. Can you talk to us how you're differentiating the destinations from a marketing perspective of CocoCay and Paradise Island and Cozumel or maybe my ship class? Just any nuances you would call out. Like is this a CocoCay returning customer or a different person? That'd be great. Thanks. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International Hi, Ben. It's Michael. I mean, when we think of the Beach Club portfolio that we're planning on developing, along with Perfect Day, they're incredibly complementary destination experiences and they fit really in the sweet spot of our demographics and really in terms of what our guests are seeking, looking for when they go on a Caribbean cruise, they really knock it out of the park in terms of satisfying that demand, that need. So very similar type of product, different vibe. Perfect Day is the full day for thrill and chill and the Beach Club is, as you imagine, just an incredible day at the beach, which is what most guests are seeking in the Caribbean. And it's curated by Royal Caribbean. It's a stunning experience. And of course, it's very authentically connected to the culture, for example, in the Bahamas or Mexico. And it really is a huge demand driver. When we look at the demand that we've seen for Perfect Day, this year we'll take 3.2 million guests to Perfect Day. Last year it was 2.6 million. And it really is a demand driver. People want to sail on the ships that go to Perfect Day and they want to sail on the ships that go to the Beach Club. And I think it's proven to be incredibly successful. When you wrap that up with the kind of hardware we've introduced, for example, Icon, which has been an unbelievable success. I mean, beyond our wildest dreams success. And you add on Utopia, which is a brand new Oasis class ship, which was going straight into the short product market out of Port Canaveral. The demand we've seen for, for example, Utopia sailing to Perfect Day has been extraordinary. So we think we've got the formula figured out. And our plan is to continue to evolve and develop that formula over the coming years. Jason Liberty -- Chief Executive Officer Yes. And Ben, I just want to add and I had it in my remarks. I think one of the incredible things that we're seeing out of destinations like Perfect Day, and we'll see this in the World Beach Club and Nassau, is how it's drawing in new to cruise and millennials. So my comment that one and two of our guests, one out of two of our guests are millennial or younger, to me is a very powerful statement. The increase, we have an 11-point increase in new to cruise. And so, and what we know is when they sail with us, they're five times more likely to sail with us again. And the repeat rates that we're seeing are exceptional. And it's a lot because not only are we bringing that full incredible experience that our crew delivers on our ships, but we're enhancing the experience in the destinations. And I think that combination with where Michael and his team have really the dreaming and innovating and delivery on Perfect Day and how there's 25,000 guests a day that come into Nassau. And we're going to take some of those guests and we're going to bring them over to the Beach Club, which is great economically for us as well as it is for the Bahamas, and deliver an incredible experience that's going to drive probably 90 plus NPS scores. And that's what people are seeking. They want those experiences that they can walk away from and it's attracting a high level of demand. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International And Ben, not to continue on this, but to add to Jason's comments, Utopia is not by accident, Utopia is sailing out of Port Canaveral. It'll be going to Perfect Day. It really is another product that's squarely in this competitive space of land-based vacations and we're seeing huge demand coming for this product. And you think about the combination of a three, four-day product like Utopia going to Perfect Day, and then in 25, it'll go to Perfect Day and the Beach Club. That's really a phenomenal game changer. And it really is drawing in a huge amount of new to crews and it's beautifully positioned in Canaveral, right fundamentally in Orlando. Ben Chaiken -- Mizuho Securities -- Analyst Gotcha. Just a very quick follow-up on Paradise. I think, Jason, you mentioned 25,000 guests to Nassau. Am I interpreting that correct, that this could be a kind of like a revenue generator for not just your cruise guests, but also other people who are going to Nassau? Or is that the wrong reason? Jason Liberty -- Chief Executive Officer No. It's primarily for the Royal Caribbean brand. Our other brands will have access to it, but the broader cruise market would not have access to the Beach Club. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International But the beautiful thing is, is that the Royal Beach Club in Paradise Island is positioned pretty much at the entrance to Nassau. I think the point is, is that on a given day, there's 25,000 to 30,000 cruise guests coming in on multiple different cruise brands. And of course, when they sail into Nassau, the only thing they're going to see is the Royal Caribbean Royal Beach Club, which is going to be absolutely stunning. And they will be unbelievably jealous knowing that they can't go there. Ben Chaiken -- Mizuho Securities -- Analyst That's a great point. Thanks. Operator Your next question comes from the line of Matthew Boss with J.P. Morgan. Please go ahead. Matt Boss -- JPMorgan Chase and Company -- Analyst Great. Thanks. And congrats on another nice quarter. So Jason, coming off strongest wave season in history, could you elaborate on the continued near-term strength cited in April, both from demand and pricing, maybe, if anything, by region? And to your comments earlier, how best to think about your market share opportunity in this 1.9 trillion growing global vacation market? And then just for Naftali, just as we think about the underlying guidance rate, where are you more confident today as we think about the back half, maybe relative to three months ago? Jason Liberty -- Chief Executive Officer Sure. Well, thanks for the question, Matt. First off, I think just -- I mean wave was absolutely exceptional. It's kind of mid-teens better than what we saw on the previous year. Interesting enough, though, April was almost double that in terms of the level of demand that we were seeing. So that's why when I talk about demand is accelerating, it's not just what we saw when we last spoke to everybody in early February. It's not just when we updated at the end of February. But that acceleration has picked up speed. And of course, at this point, we only have about 12% load factors left to build for the year. And so that will provide opportunity for us to a degree this year. But what that I think means in terms of the opportunity into 2025 and beyond is very appealing. I think when you frame that the $1.9 trillion of travel space, and of course, that's a growing number, cruises $65 billion of that $1.9 trillion. So we're a very, very small fraction. And I think something we've talked about before is a 1% shift is worth 11 Oasis-class ships to us. And so for us, when you look at things like Perfect Day, when you look at things like the Royal Beach Club, when you look at things like Utopia, you look at things like what we're doing on Edge and Nova, it's very purposeful, less about what's happening with other cruise operators. It's more, how do we take further share? How do we compete with Orlando? How do we compete with Las Vegas? How do we compete with other land-based alternatives to grab that share, where as we know today, currently trades at least at a 25% or 30% premium to what we're getting. So that value, we want to close that gap to land-based vacation, and we want to take share. And we believe by waking up and being just obsessed at delivering the best vacation experiences in the world puts us in a position to win. Naftali Holtz -- Chief Financial Officer Hey, Matt. It's Naf. Just to add one other thing to Jason. Also, if you kind of look at 19 versus where we are today, we have been taking share. Again, you don't have to believe much. And as Jason said, 1% is 11 Oasis-class ships. That's a pretty significant rise. But we've continued to focus on it and make progress there. I think just in terms of the strength, as you kind of heard in our prepared remarks, the strength is across all our key itineraries. And, of course, the Caribbean continues to be performing very well. But as much as others, Alaska, Europe, and obviously we're coming back to China. So we feel pretty good of where we are standing today. When our book position, where the pricing is for the rest of the year. Matt Boss -- JPMorgan Chase and Company -- Analyst Great. Congrats. Best of luck. Operator Your next question comes from the line of Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia -- William Blair and Company -- Analyst Hi. Good morning. I think on the last call, you had talked about 80% of passengers being North American this year. I'm just wondering if there's any update on that, if there's any change. And then as we think about next year, kind of where would you expect, North America to go? It's kind of been unusually large the last few years. And if we see kind of China or Europe ramp up in the passenger base, how do we think about that impact on onboard revenue? Jason Liberty -- Chief Executive Officer Yes. Well, thanks for the question, Sharon. I hope you're doing well. So I think just starting off, we need to just frame that, we have global brands, not nationalistic brands. And these global brands are supported by a very significant commercial apparatus, with leading yield management tools and teams around the world. And so the sourcing is really a reflection of the demand patterns that we see to optimize our ultimate revenue. More China next year, as we add that second ship into China, can move this number a little bit to be less North American centric. But we're going to follow the demand patterns. And that is how we've done it for a very, very long period of time. And of course, that could potentially shift the mix of onboard and ticket. I don't think it's going to materially shift it because I do think that we'll probably be relatively close to the sourcing that we saw this year. Maybe it moves a little bit, but it's not going to move a lot. But we're focused on optimizing our revenue. And so if we're getting more in ticket from a customer and a little bit less on onboard, we're perfectly OK with that. As long as the answer is higher yield profile and higher margin profile for us. And that's how we've run the business for a very long time. And I think we're very fortunate to have thought long time ago to make sure that our brands are positioned to be globally desirable in sourcing from many different markets. Sharon Zackfia -- William Blair and Company -- Analyst Jason, can I ask a follow-up? The one or two passengers being millennials at this point, do you find that that customer is more inclined to pre-book onboard versus kind of their elders like me? Or, is it, are you seeing pre-booking success kind of across the demographic gamut? Jason Liberty -- Chief Executive Officer Yes. I mean, it skews a little bit younger, but I think, Sharon, one, if we can pick any, positiveness out of COVID, was that the consumer, a young or middle-aged, etc., got very used to booking or buying things online. We also really improved our ability to take friction out of the booking experience for a ticket price, as well as the booking experience for onboard, by curating, taking a lot of steps out of the process, etc. And that's really what is driving that better behavior. The installation of a proper commerce system that we can yield manage, that we can curate, which we're still very in the early innings on, is really what's benefiting that. And you just think about just shopping behavior. In the first quarter, we had 100 million visits to our websites, 100 million. That's twice what we had pre-COVID. And so, we have really upped our game, not just on a marketing basis, but also to make that our websites helped our customers dream about what they want to do and help them get to the experience that they're looking for. And then making sure that they have all the onboard experiences that they want to have and being able to resolve all that well in advance of them getting on the ship. Sharon Zackfia -- William Blair and Company -- Analyst Thank you so much. Operator Thanks, Sharon. Your next question comes from the line of Brandt Montour with Barclays. Please go ahead. Brandt Montour -- Barclays -- Analyst Hey, everybody. Thanks for taking my question. So maybe for Michael, China restarted this month. Wondering if you could give us maybe even qualitatively a sense of sort of initial load factors, initial pricing or initial expected onboard spend. Obviously, you can't give us that specifically, but just sort of better or worse than you were forecasting. And clearly, the follow-up is, you decided to take Ovation there next year. That's obviously a good sign. But why Ovation? I think that comes out of Alaska and Australia. Why that ship? And why not a ship necessarily out of the Caribbean or somewhere else? Thank you. Michael Bayley -- President and Chief Executive Officer, Royal Caribbean International Brandt, yes, good question. I think, the fact that we've already deployed a second ship into the China market gives you an indication of how well the first ship is doing in the China market. So we're pleased with the spectrum bookings. Our comparison, of course, is back in 2019, which we've used a lot over the last couple of years. Overall volume and rate for the China product in '24 is significantly higher in both volume and rate from '19, which is a great indicator of the kind of demand that we're seeing for the product. And we feel good about '24 going into '25. That's why we've got the second ship. Both quantum class, both have done very well in the China market. They seem to be really well suited for that market. And of course, Ovation, both in Alaska and Australia, is perfectly suited for the China market in terms of its geographical positioning. One will be in Tianjin, which we've operated out of many years before the pandemic. And of course, Shanghai, both great markets for us. The onboard spend, obviously, it's only the couple of days into the season, but it's looking really positive. We have high expectations and I think they're going to be realized. The other thing that's changed quite a lot in terms of the market dynamics in China is the change in our direct business versus the traditional trade business. There was quite a transformation during the pandemic in terms of a lot of the retailers that dropped out of business. Fortunately, pre-pandemic, we started to invest significantly in resources, technology, people to develop that direct business. And we continued through the pandemic and we accelerated when we came out of the pandemic. And it's proving to be very productive for us. So overall, our distribution strategy is proving to be successful. Demand seems very, very strong. Of course, Korea opened up, which is great. So that gives us a better itinerary product to offer to our guests. And we're feeling good about how this will play out. Of course, we've been in China for a decade before. So we've all been through the ups and downs, but currently it's looking pretty positive. Brandt Montour -- Barclays -- Analyst OK. That's really helpful. And then maybe one for Naf. The higher guidance for the year helps bring credit metrics, at least in our model, perhaps a little closer to IG, perhaps a little earlier than we had before. And so I guess, maybe it's worth you refreshing us on what you think the board needs to see to reestablish capital returns. And if today's report maybe helped that picture at all. And that's it for me. Naftali Holtz -- Chief Financial Officer Yes. So just on the balance sheet. So you're right, obviously, with the acceleration of performance, we're focused on basically three things, right? We're focused on reducing leverage. And I said in my prepared remarks, we will -- we expect to get to below the three and a half times leverage by the end of the year. So that's very positive. Obviously, we continue to pay down debt. EBITDA, increases are helping with that leverage. So we're feeling pretty good about that. And then reducing cost of capital, you saw us take an action this quarter reducing on one bond more than 500 basis points or almost $60 million of annual interest expense. And we'll continue to find those opportunities to lower the cost of capital and use both cash and opportunistic refinancing. I think there's much more to do there. And lastly, it's just an unsecured balance sheet. We want to get back that capacity on the balance sheet like we had pre-COVID. And we basically have three bonds left that if we pay them back or we refinance them, the whole structure collapses and we're back to unsecured balance sheet. So that's our focus. We'll continue to execute on that. Our focus is on metrics, not ratings. We were very pleased with the upgrades that we got from the rating agencies, but our focus in our getting to the balance sheet. Brandt Montour -- Barclays -- Analyst Thanks, everyone. Congrats on the quarter. Jason Liberty -- Chief Executive Officer No, no. I was just going to say obviously you're getting to base camp and getting to those metrics is an important line for us and as well as for our board in terms of consideration of capital returns. But I would just point to that pre-COVID. We certainly, that was very much part of our formula was having a competitive dividend and also buying back shares opportunistically. Brandt Montour -- Barclays -- Analyst Thanks, everyone. Operator Your next question will come from the line of Robin Farley with UBS. Please go ahead. Robin Farley -- UBS -- Analyst Great. Thanks. One clarification on your really excellent guidance. It sounded like you were suggesting that there were some fall Red Sea cruises that are still on your schedule, but did I understand your comment to mean that if they were to change, that's already factored into your guidance? So if we see that, see any changes in those, it wouldn't change your guidance. I just want to make sure I understood that part of your commentary, right? Naftali Holtz -- Chief Financial Officer Yes, Robin. That's correct. Robin Farley -- UBS -- Analyst OK. Great. Thank you. And then just my other question is on capacity and capacity growth. And you mentioned that moderate capacity growth has been your goal. Others out there, some have been more aggressive lately with ordering ships out into the future. And I wonder if you could just give us your thoughts on whether you feel that that changes anything with availability of slotted shipyards or if that changes in any way what you have been thinking about capacity or would think about needing to do in the future. Thanks. Jason Liberty -- Chief Executive Officer Sure. Hi, Robin. So first, I think it's important that when we talk about our order book, these are ships that are actually on order. We're not talking about options. We're not talking about slot reservations. We're talking about things on order. And of course, we don't have any orders going out to I think 2035 or 2036, at this point in time. What we do subscribe to is that we believe that we are in segments that have a lot of growth potential to them. We believe we have the right brands in those segments. And we believe that we should be moderately growing our brands over time. And so that's kind of what we're committed to. And I think we feel very good not only about our current order book and about the potential of that order book to grow moderately, but also our access to build those ships over an extended period of time. So I think we feel very good about it all around. And I think we're showing that the investments we're making in our brands, what the investments we're making in the destinations are yielding very high returns for our shareholders and continuing to expand our margins. Robin Farley -- UBS -- Analyst I guess maybe to clarify, do you feel that you would need to order ships more than five years in advance in the current environment? Or is that sort of five to six years out, I would say something five? Jason Liberty -- Chief Executive Officer Yes. I think it depends on the circumstances. We've ordered, Icon was being designed and dreamt of obviously COVID delayed some of those orders, but somewhere typically in that kind of five-to-six-year range is where you make those orders. But keep in mind, and that's what I think my comment is, that doesn't mean you don't have options and you don't have slot reservations and so forth that you could also, which is why we typically order in that kind of five-to-six-year type of range. We don't announce things unless they are fully contracted and we know the price and we have the financing in place. Robin Farley -- UBS -- Analyst OK. Great. Thank you. Michael McCarthy -- Vice President, Investor Relations We have time for one more question. Operator Our final question will come from the line of Vince Ciepiel with Cleveland Research. Please go ahead. Vince Ciepiel -- Cleveland Research Company -- Analyst Great. Thanks. Earlier in the call, there was some commentary on loyalty and I just wanted to get your sense for what you're seeing within that across your brands and varying products, what you see in terms of overlap of customers and then maybe finally within that, have you ever thought about getting into river cruising, thoughts on that segment of the market and is there much overlap with your current customer base? Jason Liberty -- Chief Executive Officer Yes. Well, first just to kind of build off of what I had said earlier is, we have been very thoughtful about having the right brands and the right segments. And we have done such an incredible job at delivering a vacation of a lifetime and we're focused on making sure we're set up to deliver a lifetime of vacations. And our guests, there is overlap between Royal and Celebrity and Royal and Silversea and vice versa because you could have a set of grandparents on Silversea that next month are going on a cruise with their kids and grandkids on the Royal Caribbean brand. That happens all the time. And one of our ultimate goals here is to make sure that we keep our customer in our ecosystem. And so we do that whether that's through awareness of our brands, whether that's through loyalty programs, whether that's through cross-selling, etc. And those are things that we have an opportunity to get better and better at, especially as our travel platform technology-wise is more flexible. The comment on river or other experiences, we're always evaluating opportunities. River is an area where we do see some overlap, not a lot of overlap, but we do see some overlap occurring and that could be something that we would consider at some point in the future. But at this point in time, we're very focused on excelling in our core, growing our core and also further building out our destination platform. All of that, as we're clearly seeing, is working to deliver a very high ROIC profile and producing strong shareholder returns. Vince Ciepiel -- Cleveland Research Company -- Analyst Great. Thank you. Operator I will now turn the conference back over to Naftali Holtz, CFO, for closing remarks. Naftali Holtz -- Chief Financial Officer We thank you all for your participation and interest. Michael will be available for any follow-up. We wish you all a great day.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Christine, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. [Operator instructions] I will now turn the call over to Dana Nolan to begin. Dana Nolan -- Executive Vice President, Head of Investor Relations Thank you, Christine. Welcome to Regions first quarter 2024 earnings call. John and David will provide high-level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the investor relations section of our website. These disclosures cover our presentation materials, prepared comments, and Q&A. I will now turn the call over to John. John Turner -- President and Chief Executive Officer Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. This morning, we reported first quarter earnings of $343 million, resulting in earnings per share of $0.37. However, adjusted items reconciled within our earnings supplement and press release represented an approximate $0.07 negative impact on our reported results. For the first quarter, total revenue was $1.7 billion on a reported basis and $1.8 billion on an adjusted basis as both net interest income and fee revenue demonstrated resiliency in the face of lingering macroeconomic and political uncertainty. Adjusted noninterest expenses increased quarter over quarter and is expected to represent the high watermark for the year as seasonal impacts offset our ongoing expense management actions. Average loans were lower quarter over quarter, reflecting limited client demand, client selectivity, paydowns, and an increase in debt capital markets activities. Average and ending deposits continued to grow during the quarter, consistent with seasonal patterns. Credit continues to perform in line with our expectations. While pressure remains within pockets of business lending, our consumers remain strong and healthy. We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic. In closing, we feel good about the successful execution of our strategic plan, as evidenced by our solid top-line revenue, which allows us to continue delivering consistent sustainable long-term performance while focused on soundness, profitability, and growth. Now, David will provide some highlights regarding the quarter. Dave Turner -- Chief Financial Officer Thank you, John. Let's start with the balance sheet. Average and ending loans decreased modestly on a sequential-quarter basis. Within the business portfolio, average loans declined 1% as modest increases associated with funding previously approved in investor real estate construction loans were offset by declines in C&I lending. Approximately $870 million of C&I loans were refinanced off-balance sheet through the debt capital markets during the quarter. Average consumer loans remained relatively stable as growth in residential mortgage, EnerBank, and consumer credit card were offset by declines in home equity and run-off portfolios. We expect 2024 average loans to be stable to down modestly compared to 2023. From a deposit standpoint, deposits increased on average and ending basis, which is typical for the first quarter tax refund season. In the second quarter, we expect to see declines in overall balances, reflecting the impact of tax payments. The mix of deposits continued to shift from noninterest-bearing to interest-bearing products, though the pace of remixing has continued to slow. Our analysis of the trends in overall customer spending behavior gives us confidence that by midyear, we will have a noninterest-bearing mix in the low 30% area, which corresponds to approximately $1 billion to $2 billion of potential further decline in low-interest savings and checking balances. So, let's shift to net interest income. As expected, net interest income declined by approximately 4% last quarter and the net interest margin declined 5 basis points. Deposit remixing and cost increases continued to pressure net interest income. The full rising rate cycle interest-bearing deposit beta is now 43%, and we continue to expect a peak in the mid-40% range. Offsetting this pressure, asset yields continued to benefit from higher rates through the maturity and replacement of lower-yielding fixed rate loans and securities. We expect net interest income to reach a bottom in the second quarter, followed by growth over the second half of the year as deposit trends continue to improve and the benefits of fixed rate asset turnover persist. The narrow 2024 net interest income range between $4.7 billion and $4.8 billion portrays a well-protected profile under a wide array of possible economic outcomes. Performance in the range will be driven mostly by our ability to reprice deposits. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle, mostly indexed deposits and CDs. We have taken steps to increase flexibility such as shortening promotional CD maturities and reducing promotional rates. If the Fed remains on hold, net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure. So, let's take a look at fee revenue, which experienced strong performance this quarter. Adjusted noninterest income increased 6% during the quarter as most categories experienced growth, particularly capital markets. Improvement in capital markets was driven by increased real estate, debt capital markets, and M&A activity. A portion of both real estate and M&A activities were pushed into the first quarter from year-end as clients delayed transactions. Late in the first quarter, we also closed on the bulk purchase of the rights to service $8 billion of residential mortgage loans. We have a low-cost servicing model, so you'll see us continue to look for additional opportunities. We continue to expect full year 2024 adjusted noninterest income to be between $2.3 billion and $2.4 billion. Let's move on to noninterest expense. Adjusted noninterest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR-related expenses and production-based incentive payments. Operational losses also ticked up during the quarter. The increase is attributable to check-related warranty claims from deposits that occurred last year. Despite this increase, current activity has normalized to expected levels, and we continue to expect full year 2024 operational losses to be approximately $100 million. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy, and vendor spend. We continue to expect full year 2024 adjusted noninterest expenses to be approximately $4.1 billion, with first quarter representing the high watermark for the year. From an asset quality standpoint, overall credit performance continues to normalize as expected. Adjusted net charge-offs increased 11 basis points, driven primarily by a large legacy restaurant credit and one commercial manufacturing credit. As a reminder, we exited our fast casual restaurant vertical in 2019 and the remaining portfolio is relatively small. Total nonperforming loans and business services criticized loans increased during the quarter and continued to normalize toward historical averages, while total delinquencies improved 11%. Nonperforming loans as a percentage of total loans increased to 94 basis points due primarily to downgrades within industries previously identified as under stress. We expect NPLs to continue to normalize toward historical averages. Provision expense was $152 million, or $31 million in excess of net charge-offs, resulting in a 6-basis-point increase in the allowance for credit loss ratio to 1.79%. The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress. We continue to expect our full year 2024 net charge-off ratio to be between 40 basis points and 50 basis points. Let's turn to capital and liquidity. We expect to maintain our common equity Tier 1 ratio consistent with current levels over the near term. This level will provide sufficient flexibility to meet proposed changes, along with the implementation timeline, while supporting strategic growth objectives and allowing us to continue to increase the dividend, commensurate with earnings. We ended the quarter with an estimated common equity Tier 1 ratio of 10.3% while executing $102 million in share repurchases and $220 million in common dividends during the quarter. With that, we'll move to the Q&A portion of the call. Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst OK. Thank you. Good morning, John and David. John Turner -- President and Chief Executive Officer Good morning. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst David, just following up on your comment around noninterest-bearing deposits hitting mid -- I guess low 30% by mid-2024, just give us a sense of if we don't get any rate cuts, do you see that dipping below 30% based on what you're seeing in terms of customer behavior and just use of balances? I'm assuming there's some attrition on consumer balances that's at play here. So, like where do you see that mix bottoming out and what's the latest that you are seeing in terms of pricing competition across the markets? Thank you. Dave Turner -- Chief Financial Officer Yeah. So, from a balance standpoint, we still feel pretty confident based on flows that we have seen and expect that we'd be in that low 30% range. You know, we continue to look to grow noninterest-bearing balances through new checking accounts, new operating accounts. That's what's important to us. That's what fuels our profitability. And so, being in the favorable places, in particular in the southeast where there's migration of businesses and people, give us some comfort that we can grow there. We talked about deposits bottoming out in the first half of the year and then maybe growing a little bit from there. So, I think that low 30% range is a good -- still a good a level. With regards to competition on pricing, I think, at the end of the day, we haven't seen, across the industry, a lot of loan growth. And as a result of that, competition for deposits is not as strong as it could have been had we had a lot of loan demand. We always have competition. We have to be fair and balanced with our customers and making sure that we are creating value. And so, we look at what our competitors are doing from a price standpoint, and we adjust accordingly. But there's nothing unusual that's happening there, and I think the biggest driver of that is because of the lack of loan growth. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst That's helpful. And just a separate question, as we think about capital deployment that you outlined on Slide 10, is there more to go in terms of just the appetite for securities repositioning and how much should we expect in terms of what you did in 1Q with regards to the lift in the second quarter to bond yields? Thank you. Dave Turner -- Chief Financial Officer Yeah. So, you know, we consistently challenge ourselves on what's the best use of our capital that we generate. Obviously, we're at a robust 10.3% common equity Tier 1. We think we're close enough to be in striking distance on whatever the regime changes with regards to capital. And again, with loan growth being muted in the industry, you know, we want to pay a fair dividend, so we're generating capital that needs to be put to work. We either buy the shares back or we do things like securities repositioning. You know, we did the $50 million in the first quarter. We'll continue to look for opportunities. You know, I would say that fruit is not as close to the ground as it was because we want to keep our payback less than three years and, frankly, closer to two and a half if we can get it. Our payback in this last trade was about 2.1. And so, we think that was a great use of capital for us. And so, we'll look to do that, but we're not committing to it. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Helpful. Thank you. Operator Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question. Scott Siefers -- Piper Sandler -- Analyst Good morning. Thank you for taking the question. I was hoping -- Dave Turner -- Chief Financial Officer Good morning. Scott Siefers -- Piper Sandler -- Analyst Good morning. I was hoping you could please flesh out some of the rationale behind the softened loan growth outlook. I certainly understand it given the backdrop and what we're seeing in the [Inaudible] data. But, you know, it, in ways, contrasts with some peers who might be expecting more of an acceleration in the second half. So, just curious to hear your updated thoughts on customer demand and how they're thinking. Dave Turner -- Chief Financial Officer Well, on the consumer side, as we mentioned, we did a pretty good job growing mortgage, growing EnerBank, growing card, but it was offset by declines in home equity, which made consumer -- consumers flat. Consumers are actually in really good shape. We feel good about that. We just don't see a lot of loan growth -- net-net loan growth. Relative to commercial, you know, depending on the industry, some industries are blowing and going and others are being careful at this point. You know, we've had nice production, but we've had pay-offs, paydowns. And of course, this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NIR standpoint, but obviously hurt us from a balance standpoint. You know, if we start seeing rates actually decline, that activity will pick up. And so, net-net, it is going to be hard to grow meaningfully through all that activity. And we're fine with that. We don't need to push -- in this environment, there's still uncertainty. We don't need to push for loan growth. We need to be careful on client selectivity. John has talked about that numerous times. And we want to be careful. We clearly have the capital and liquidity to do so. And if we see opportunities, we'll grow. But we're not going to force it. Scott Siefers -- Piper Sandler -- Analyst OK. Perfect. Thank you. And then separately, I was hoping you could discuss the additional operational losses. You know, I was definitely glad to see no change to the full year expectation, though they were elevated in the first quarter. Maybe just an additional color, were there new instances of the issues that had cropped up last year or were these just sort of true-ups, and what gives you confidence that all the issues are still resolved and everything? John Turner -- President and Chief Executive Officer Yeah. This is John. So, there were no new events. The tail was a little -- with respect to the breach of warranty claims was a little longer than we anticipated. And as a result, we did incur some additional losses in the quarter. What gives us confidence that we can meet our expectations is the exit rate for the quarter was significantly reduced, which implies that the countermeasures we put in place, the talent that we've recruited for our fraud prevention activities, all of that is working and gives us confidence that we can, in fact, meet our $100 million target for the year. Scott Siefers -- Piper Sandler -- Analyst Perfect. OK. Good. Thank you very much for taking the questions. John Turner -- President and Chief Executive Officer Thank you. Operator Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. John Turner -- President and Chief Executive Officer Good morning, Betsy. Dave Turner -- Chief Financial Officer Good morning. Betsy Graseck -- Morgan Stanley -- Analyst So, one question just on how we're thinking about NII for the full year in relation to loan growth being a little slower. So, I just wanted to understand, you know, your NII guide obviously is the same as it was before. Loan growth expectation is a little slower, understandably. So, how do I square those things? Thanks. Dave Turner -- Chief Financial Officer Well, loan growth, we had talked about being in the back half of the year, so you weren't going to get a lot of carry from loan growth in our guidance. And so, really, what we want to see loan growth for in the back half of the year is setting us up for 2025, not for 2024. So, that was never factored into the guidance that we gave you on NII. You know, we feel good about where we're positioned from a balance sheet standpoint with basically neutral to short-term rates. And, you know, we have a little bit of shape to the curve where we reinvest our securities book and we're picking up, you know, a little over 200 basis points, 235 basis points on that front book-back book. So, that gives us confidence there that we're going to do pretty well with regards to NII. And if you look at the input cost. So, our deposit cost, they've also started to flatten. If we look at the months of February and March, there was little change in our deposit costs. So, our cumulative beta, which is at 43 today, we said would be in the mid-40s. We have a lot of confidence in that. So, that's why we didn't change our NII guide. Betsy Graseck -- Morgan Stanley -- Analyst OK. Got it. That makes a lot of sense. And then just on the securities repositioning that you talked about on Slide 5, is it, just wanted to understand how you're thinking about the go forward here. You added some duration. Again, makes sense, but wanted to know if you're thinking of leaning in even more, like how long will -- are you comfortable extending the duration of this securities book? That's basically the question. Thanks. Dave Turner -- Chief Financial Officer Well, our extension of duration was only like 0.12 -- 12 basis points over the year, so it's negligible. Betsy Graseck -- Morgan Stanley -- Analyst Right. Fair. Dave Turner -- Chief Financial Officer And, you know, from a -- from our standpoint, especially if you believe the risk of rates going up as very low, i.e., you believe they're either flat to down, then perhaps taking a little duration risk where we get compensated for it make some sense today. You know, our duration naturally is declining. So, doing a trade to kind of keep it flat to modestly higher than where we are right now seems to make sense, and it's a good use of capital if we can get a payback. Like I said, the one we just did, our payback is 2.1 years. We'd like it to be less than three, closer to two and a half if we can. And so, while we won't commit to doing that, we would look at it. And if we did it, it would be no more than what you just experienced. We want to keep it at a fairly small percentage of our pre-tax income. Betsy Graseck -- Morgan Stanley -- Analyst I got it. Thanks so much. Really appreciate it. Operator Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning, John. John Pancari -- Evercore ISI -- Analyst Good morning. On the credit front, we saw about, you know, a moderate increase in nonperformers in the quarter. However, your loan loss reserve is, you know, pretty stable, you know, despite the move in reserves. So, it's -- I mean, in nonperformers. So, I just want to see if I can get a little bit of color on how you're thinking about the reserve here and also maybe you can give a little bit more color behind the nonperformers. John Turner -- President and Chief Executive Officer Yeah. John, I'll -- maybe I'll start. This is John Turner. First of all, I'd say we began signaling now -- a couple of quarters ago, stress in a couple of specific portfolios or industries: office, senior housing, transportation, healthcare, specifically goods and services, and technology. And the increases that we are seeing in nonaccrual loans and classified loans are largely consistent with the indication that there is stress in those particular industries. In fact, when you look at our nonaccruals, 21% of our -- 21 of our nonaccruals -- excuse me, 21 credits make up 72% of our nonaccruals, and 18 of those 21 credits are in those five sectors that I mentioned. So, we did anticipate that we would see some deterioration, and that's been consistent with our expectations. The second thing I'd point to is several quarters ago, we began to set the expectation that we would return to pre-pandemic historical levels of credit metrics. And specifically, that would be an average charge-off ratio of about 46 basis points and nonaccruals of 105 basis points. And again, we are -- we have trended back to those ranges, which is consistent with our expectations. With regard to the allowance, we go through the process every quarter to ensure that we are properly reserved against expectation for loss in those portfolios. Given that we have a very high degree of visibility into the 21 credits that make up 72% of our nonaccruals, you can expect that we feel very good about our reserve position. John Pancari -- Evercore ISI -- Analyst OK. Great. Thank you. Thanks for that. And then separately, on the expense front, I know you mentioned that the first quarter should represent the high watermark on expenses. Is that primarily because of the elevated operating losses or do you expect some -- you know, building efficiencies through the remainder of the year, you know, either given the backdrop or given the revenue picture? Dave Turner -- Chief Financial Officer John, it's several things. And, you know, we have probably $75 million worth of expense we can point to on different fronts. So, part of it is operational losses that we don't think will repeat. We obviously have the first quarter issues with regards to payroll taxes and things of that nature. We had an HR asset valuation that's offsetting NIR that's a part of that, too. We have some things in occupancy and professional fees. If you add all that up, it's about $75 million, and we have pretty good confidence that that won't repeat. We tried to signal that the first quarter was going to be the high watermark and that you couldn't take the 4.1 billion and divide it by four. And we're sticking to that, and we're sticking to our guidance that we have. And we have pretty good confidence. We did take some actions this quarter like we did in the fourth quarter from a severance standpoint. Now, the first quarter has the normal expense of payroll for those folks, in addition to the severance. So, that won't repeat. So, that -- all that, like I said, adds up to right at -- right around 75 million. John Turner -- President and Chief Executive Officer And that's just -- it would be -- we have other opportunities to reduce expenses as well. That's just an indicator of what we can pretty quickly identify and won't repeat. John Pancari -- Evercore ISI -- Analyst And if I could ask just one follow-up related to that. Is your -- the status of your core systems conversion, is that still trending as expected in terms of timing and cost? John Turner -- President and Chief Executive Officer It is. Yeah. We, in fact, just had a board meeting this week and went through all that with our board. We feel good about the project and the progress that we're making and the -- and our ability to stay on budget and on time. John Pancari -- Evercore ISI -- Analyst OK. Great. Thanks for taking my questions. John Turner -- President and Chief Executive Officer Thank you. Operator Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning. Ken Usdin -- Jefferies -- Analyst Thanks. Good morning. I'm wondering if we could -- David, you could talk a little bit about that bullet you put in on Slide 5 about stable deposit cost, February to March, and what our takeaway should be in terms of, you know, mix shift, pricing, movement, etc.? And I know you talked about still mid-40s peak deposit betas, but just, you know, what's changing underneath in terms of that stability that you're starting to see? Dave Turner -- Chief Financial Officer Yeah. Part of -- one of the big reasons we put that in there is because our deposit cost change was higher than what you're seeing from peers, but that's because of what we did in the fourth quarter and you had a full quarter effect of that. Now that we've kind of got that baked into the base and we're starting to see offers and things of that nature on the deposit offerings coming down, the exit in February and March gives us a lot of confidence that those deposit costs are stabilizing. And therefore, we have a lot of confidence in our cumulative beta being in the mid-40s. So, a couple more points from where we are today. Ken Usdin -- Jefferies -- Analyst OK. And I guess as a follow-up, are you starting to change pricing, change offers, bring in duration? What are you doing in terms of trying to, you know, take that point further? Dave Turner -- Chief Financial Officer Yeah, that's a good point, Ken. So, yes, we started that last quarter actually. We had some CD maturities coming that were longer dated, 12- or 13-month CDs, and we went shorter in the five- to seven-month range to be able to reprice those this year. With the original expectation, the rates would be coming down sooner than they probably are now. And so -- yeah. And we can see from a competitive standpoint -- we want to be competitive. We don't have to lead with price, but we do need to be fair and balanced. And so, that -- you're starting to see the benefit of having the promotional rates coming down a hair. Ken Usdin -- Jefferies -- Analyst OK. And on that last point about the higher for longer, you talked about the 12 billion to 14 billion of fixed rate production for a while now and you say that's per year. Has the benefit from that also -- does that get better in higher for longer or -- and does that -- how does that differ when you think about like this year versus next year? Thanks, David. Dave Turner -- Chief Financial Officer Yeah, I would say marginally higher for longer because you have a lot of securities that are repricing that, you know, we're picking up about 235 basis points today. We're picking, you know, call it, 125 basis points on the loan side. So, if you get -- and we expect to get the deposit cost stabilized, then you don't -- then the repricing can actually start overwhelming the cost that you had on the deposit side. That has not been the case thus far. It's been just the opposite. So, you're going to see that turn, which is why we're calling the bottom for us in the second quarter. Ken Usdin -- Jefferies -- Analyst Got it. Thanks, David. Operator Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question. Dave Rochester -- Compass Point Research and Trading -- Analyst Hey. Good morning, guys. John Turner -- President and Chief Executive Officer Good morning. Dave Rochester -- Compass Point Research and Trading -- Analyst Just on credit, regarding the large restaurant credit and the commercial manufacturing credit, could you guys quantify the impact on net charge-offs and provision this quarter? And if you could just give some additional background on where you are on the resolution process there, that'd be great. Dave Turner -- Chief Financial Officer Yeah. So, if you were to look at those two added together, just those two made about 7 basis points of charge-offs. So, if we didn't have those two, our 50 would have been 43. Dave Rochester -- Compass Point Research and Trading -- Analyst OK. Great. And then where are you guys in the process of resolving those? Dave Turner -- Chief Financial Officer Say that again? Dave Rochester -- Compass Point Research and Trading -- Analyst Where are you in the process of resolving those credits? John Turner -- President and Chief Executive Officer Those -- they're both still being worked out. Dave Rochester -- Compass Point Research and Trading -- Analyst OK. And I guess just bigger picture, with you reiterating the net charge-off guide here for the year of 40 bips to 50 bips, you're at the high end of that right now. So, you're expecting that to either remain stable here or decline through the end of the year and you have confidence around that? Dave Turner -- Chief Financial Officer We do. John Turner -- President and Chief Executive Officer Yes. Dave Rochester -- Compass Point Research and Trading -- Analyst Great. And then just switching to deposits, with the recent inflation data that's been elevated and the shift in expectations to fewer rate cuts this year, are you noticing any impact from any of that on your corporate deposit customers' behavior at all? Are you seeing any change in activity there, and does that impact your expected range of NIB remix at all for the year? Dave Turner -- Chief Financial Officer No. You know, our NIB largely comes from our consumer base. We do obviously have a big NIB on the commercial side. I think folks that we're going to move out of NIB to seek rate have done so. And we think that -- that's why we're calling for our NIB to decline a little bit, but still stay in the low 30% range. And they all just want to maintain a little bit more liquidity going into, you know, a cycle that still has uncertainty, geopolitical risk, our own elections this year. But no, I don't think, from an inflation standpoint, we're going to see a huge change from NIB. Dave Rochester -- Compass Point Research and Trading -- Analyst All right. Great. Thanks, guys. Operator Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. I was just wondering if you could elaborate a little bit on some of the fee trends. The deposit service charges were up nicely. And I know the treasury management is a big part of that and a positive driver, but there is weaker seasonality. So, I was wondering if you could flesh that out. John Turner -- President and Chief Executive Officer Yeah. So, if you look at -- I'll just talk about fee revenue across the -- across different parts of the business. Treasury management is up 7% year over year, and that's a reflection both of increases in fees and increases in relationships and activities. So, the nice growth in that business. Similarly, wealth management is up over 6% year over year, which is both reflective of increases in asset valuations and increases in assets held for customers, increasing relationships. We also saw a really nice increase in mortgage activity during the quarter, and we would expect that to continue. Consumer fees are down modestly, and that's a reflection really of the implementation of all the changes we've made to benefit customers with respect to overdrafts. And more specifically, as a result of the implementation of overdraft grace, we've seen about a 25% reduction in the number of customers who are actually overdrawn, so that is resulting in some decline in fee revenue, offset by our -- currently by interchange activity and customers' use of their debit card. So, generally, fee income is solid. We're seeing good growth in the wholesale parts of our business and in wealth management that reflects growth in relationships and growth in activities. Matt O'Connor -- Deutsche Bank -- Analyst OK. And then in capital markets, that also came in strong, and I think you've had this like 60 million to 80 million range in the past, you know, with room for upside. And, you know, just talk to were there any deals that -- you know, just talk to how sustainable you think that is. Obviously, it's somewhat market-dependent, but a little more color on the 1Q driver there and the thoughts going forward. Thanks. John Turner -- President and Chief Executive Officer Yeah. I think we still stick to that range generally and incorporate our expectations for capital markets into the broader guidance, around $2.3 billion to $2.4 billion in adjusted NRR. But we do see good pipelines. Capital markets activity is picking up. There's more M&A activity. We're seeing more customers go to the institutional market to raise debt, which has been helpful. Our M&A activity was pretty diverse during the quarter. And then real estate capital markets, which is a really important business for us, is also very active. And so, we feel pretty good about the $60 million to $80 million range for the quarter. Matt O'Connor -- Deutsche Bank -- Analyst OK. Thank you. Operator Our next question comes from the line of Gerard Cassidy with RBC. Please proceed with your question. Gerard Cassidy -- RBC Capital Markets -- Analyst Hey. Good morning, John. Good morning, David. Hi, guys. Dave Turner -- Chief Financial Officer Hey, Gerard. Before you ask your question, let me clean something up from a question that just came up on terms of the -- what the charge-off percentage would have been had we not had those two large credits. I said 7 basis points. It's 13 basis points actually. So, we would have been at 37 had we not had those two. I didn't do the math correctly. I just want to make sure that gets fixed in the transcript. Gerard Cassidy -- RBC Capital Markets -- Analyst Very good. All set? John Turner -- President and Chief Executive Officer Good morning, Gerard. Dave Turner -- Chief Financial Officer Fire away. Gerard Cassidy -- RBC Capital Markets -- Analyst OK. Thank you. Can you guys, excuse me, give us an update on where the proposal is going for the long-term debt and when do you think that will be finalized in the NPR that's out there? And second, as part of that, what your latest estimate is? I know you have given us some color on this in the past, but what's your latest estimate on what it might cost you once you have to -- and your peers, of course, have to issue the debt and carry higher levels of debt? Dave Turner -- Chief Financial Officer Yeah. So, Gerard, you know, the whole Basel III and long-term debt has kind of gone into a little bit of a hole at the time. We're not sure when that will get taken care of. We suspect it will be this year at some point. The proposal on debt was to have 6% of RWA, which is about $7 billion for us. Give you credit for what you have outstanding, which is a couple of billion. So, you're talking about raising $5 billion. You know, we can leverage that and put it to work. And it wasn't a terrible drag on NII, less than 1% drag on NII for us if fully implemented, and this was going to take time to do that. You know, we need to have some -- you know, our 2 billion of existing long-term debt is something we were going to address just in the natural order of things. But with loan growth being muted, there's no need to go out and raise debt if you don't have to have it. We're hoping that the proposal, though, comes down from the 6% number. There's been talk of it maybe being in the 2% to 3% range of RWA, but we don't know. We'll just have to adapt and overcome when the new rule gets put out. Gerard Cassidy -- RBC Capital Markets -- Analyst Very good. And then as a follow-up, you've been very clear about the identification of the stressed portfolios with credit. In your prepared comments, David, you mentioned that some of the increase in the nonperformers was due to -- I think you said, yeah, that some of it was due to the downgrades in certain -- you know, those industries that you've identified. Can you share with us, what -- within those downgrades, what process -- or not the process, but what caused the downgrades? Was it debt service coverage? Was it, you know, the business -- the borrowers' businesses deteriorating for some reason? Can you give a little more color on the downgrade part of that? Dave Turner -- Chief Financial Officer Gerard, usually -- so we're seeing strength in consumers and businesses in general. There are pockets of stressed industries that John mentioned earlier. I think, at the end of the day, they're -- they seem to be more idiosyncratic to the business model of that borrower, and these are valuation charges that are being taken. And so, you don't have any one -- when you kind of cut to the chase, you think about credit risk actually being fairly good right now, but you're going to have these pockets, these one-off pockets you use. As I just mentioned, just two credits for us is a big deal in terms of the effect on the charge-off percentage. So, we don't see it as a contagion as much as we see it as an idiosyncratic business issue. Gerard Cassidy -- RBC Capital Markets -- Analyst I see. So, it wasn't really like, across the board, the higher rate environment for these downgrades really affected it, but it was more idiosyncratic for each one of the borrowers? John Turner -- President and Chief Executive Officer I think the one exception to that, Gerard, would be transportation where we are seeing that industry, particularly truck -- the truckload industry and smaller borrowers, is under some stress, and valuations -- equipment valuations are also under stress. I mean, obviously, if you think about real estate-related portfolios, office and senior housing, in particular, you can understand why those are also under stress. But transportation would be the one area where I would say it feels like across that industry for the truckload-related. The less-than-truckload businesses are still doing OK, but truckload-related carriers are having challenges. Gerard Cassidy -- RBC Capital Markets -- Analyst Got it. Thank you. Operator Our next question comes from the line of Christopher Spahr with Wells Fargo. Please proceed with your question. Christopher Spahr -- Wells Fargo Securities -- Analyst Hi. Thank you. John Turner -- President and Chief Executive Officer Good morning. Christopher Spahr -- Wells Fargo Securities -- Analyst So, my question is just relating the shift in loan mix over the last few years, especially with EnerBank, and comparing it to the average pre-pandemic charge-offs. And just kind of your thoughts on where you think the mix would have -- has shifted a little bit and might have impacted the comparisons. And then just thoughts about the EnerBank kind of portfolio itself. It seems to be holding up a little bit better than expected. Thank you. Dave Turner -- Chief Financial Officer Well, let me couch it in terms of just our overall portfolio from a CECL standpoint. So, if you go back to pre-pandemic, so the fourth quarter of 2019 when we all implemented CECL, our CECL reserve at that time was 1.71%. If you adjust that for the portfolio we have today, so there's pluses and minuses, just a completely different mix, and apply those same loss rates to our current portfolio, that would imply a CECL reserve of 162. I think that's on one of our slides. And so, I think, at the end of the day, we have pretty robust reserves to cover expected losses. The stressed portfolios that we've talked about are a driver. The lower FICO bands of consumer have more pressure on it than the rest of the consumer base. And, you know, some of the portfolios that we've added, whether it be EnerBank or Ascentium, those are higher yield portfolios, and they have higher loss content. In both cases, we had those two portfolios, EnerBank and Ascentium, at, call it, 2%, 2.5% expectation, and, you know, they're performing in line with that. So -- and I think it gets back to the fact that businesses and consumers, generally speaking, are in pretty good shape. So, you know, we've been real careful, making sure we don't grow too fast in those portfolios. And so far, everything's worked according to plan. Christopher Spahr -- Wells Fargo Securities -- Analyst Thank you. Operator Our final question comes from the line of Peter Winter with D.A. Davidson. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning, Peter. Peter Winter -- D.A. Davidson -- Analyst Hi. Good morning. Just one quick question. Last quarter, you mentioned an exit rate for the NIM around 3.60. I'm just wondering if you're still comfortable with that. Just on the one hand, you're building more liquidity, but then you did the securities restructuring. Dave Turner -- Chief Financial Officer Yeah. You know, I think, whether we get -- we should get pretty close to that number still. Again, we're not counting on rates being a huge driver. Incrementally, though, if we have the long end that stays higher, then our reinvestment yields are a little bit better. If short rates come down, then our negative carry on our swap book will be helped, and that could propel us. So, you know, I would say the upper 3.50s to 3.60. We are carrying a bit more cash. You probably saw that, just out of an abundance of caution given the events of last quarter. And while that cash doesn't really hurt us from an NII standpoint, it does hurt us from a margin standpoint. And so, you know, we still should have one of the leading margins regardless because we have a lot of confidence in our funding costs kind of settling down. Peter Winter -- D.A. Davidson -- Analyst Got it. How much benefit do you get from the securities restructuring on the margin? Dave Turner -- Chief Financial Officer Well, cost is, round number, $50 million, and we're -- and it's a payback of 2.1 years. So, you can do a quick math. Peter Winter -- D.A. Davidson -- Analyst OK. Dave Turner -- Chief Financial Officer You mean on margin? It's a couple of basis points of a -- of positive. Peter Winter -- D.A. Davidson -- Analyst OK. Thanks, David. Operator Thank you. Mr. Turner, I would now like to turn the floor back over to you for closing comments. John Turner -- President and Chief Executive Officer OK. Well, I thank you all for your participation today. We appreciate your interest in our company. That concludes the call. Answer:

the Regions Financial Corporation's quarterly earnings call

Operator Good morning and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Christine, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. [Operator instructions] I will now turn the call over to Dana Nolan to begin. Dana Nolan -- Executive Vice President, Head of Investor Relations Thank you, Christine. Welcome to Regions first quarter 2024 earnings call. John and David will provide high-level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the investor relations section of our website. These disclosures cover our presentation materials, prepared comments, and Q&A. I will now turn the call over to John. John Turner -- President and Chief Executive Officer Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. This morning, we reported first quarter earnings of $343 million, resulting in earnings per share of $0.37. However, adjusted items reconciled within our earnings supplement and press release represented an approximate $0.07 negative impact on our reported results. For the first quarter, total revenue was $1.7 billion on a reported basis and $1.8 billion on an adjusted basis as both net interest income and fee revenue demonstrated resiliency in the face of lingering macroeconomic and political uncertainty. Adjusted noninterest expenses increased quarter over quarter and is expected to represent the high watermark for the year as seasonal impacts offset our ongoing expense management actions. Average loans were lower quarter over quarter, reflecting limited client demand, client selectivity, paydowns, and an increase in debt capital markets activities. Average and ending deposits continued to grow during the quarter, consistent with seasonal patterns. Credit continues to perform in line with our expectations. While pressure remains within pockets of business lending, our consumers remain strong and healthy. We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic. In closing, we feel good about the successful execution of our strategic plan, as evidenced by our solid top-line revenue, which allows us to continue delivering consistent sustainable long-term performance while focused on soundness, profitability, and growth. Now, David will provide some highlights regarding the quarter. Dave Turner -- Chief Financial Officer Thank you, John. Let's start with the balance sheet. Average and ending loans decreased modestly on a sequential-quarter basis. Within the business portfolio, average loans declined 1% as modest increases associated with funding previously approved in investor real estate construction loans were offset by declines in C&I lending. Approximately $870 million of C&I loans were refinanced off-balance sheet through the debt capital markets during the quarter. Average consumer loans remained relatively stable as growth in residential mortgage, EnerBank, and consumer credit card were offset by declines in home equity and run-off portfolios. We expect 2024 average loans to be stable to down modestly compared to 2023. From a deposit standpoint, deposits increased on average and ending basis, which is typical for the first quarter tax refund season. In the second quarter, we expect to see declines in overall balances, reflecting the impact of tax payments. The mix of deposits continued to shift from noninterest-bearing to interest-bearing products, though the pace of remixing has continued to slow. Our analysis of the trends in overall customer spending behavior gives us confidence that by midyear, we will have a noninterest-bearing mix in the low 30% area, which corresponds to approximately $1 billion to $2 billion of potential further decline in low-interest savings and checking balances. So, let's shift to net interest income. As expected, net interest income declined by approximately 4% last quarter and the net interest margin declined 5 basis points. Deposit remixing and cost increases continued to pressure net interest income. The full rising rate cycle interest-bearing deposit beta is now 43%, and we continue to expect a peak in the mid-40% range. Offsetting this pressure, asset yields continued to benefit from higher rates through the maturity and replacement of lower-yielding fixed rate loans and securities. We expect net interest income to reach a bottom in the second quarter, followed by growth over the second half of the year as deposit trends continue to improve and the benefits of fixed rate asset turnover persist. The narrow 2024 net interest income range between $4.7 billion and $4.8 billion portrays a well-protected profile under a wide array of possible economic outcomes. Performance in the range will be driven mostly by our ability to reprice deposits. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle, mostly indexed deposits and CDs. We have taken steps to increase flexibility such as shortening promotional CD maturities and reducing promotional rates. If the Fed remains on hold, net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure. So, let's take a look at fee revenue, which experienced strong performance this quarter. Adjusted noninterest income increased 6% during the quarter as most categories experienced growth, particularly capital markets. Improvement in capital markets was driven by increased real estate, debt capital markets, and M&A activity. A portion of both real estate and M&A activities were pushed into the first quarter from year-end as clients delayed transactions. Late in the first quarter, we also closed on the bulk purchase of the rights to service $8 billion of residential mortgage loans. We have a low-cost servicing model, so you'll see us continue to look for additional opportunities. We continue to expect full year 2024 adjusted noninterest income to be between $2.3 billion and $2.4 billion. Let's move on to noninterest expense. Adjusted noninterest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR-related expenses and production-based incentive payments. Operational losses also ticked up during the quarter. The increase is attributable to check-related warranty claims from deposits that occurred last year. Despite this increase, current activity has normalized to expected levels, and we continue to expect full year 2024 operational losses to be approximately $100 million. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy, and vendor spend. We continue to expect full year 2024 adjusted noninterest expenses to be approximately $4.1 billion, with first quarter representing the high watermark for the year. From an asset quality standpoint, overall credit performance continues to normalize as expected. Adjusted net charge-offs increased 11 basis points, driven primarily by a large legacy restaurant credit and one commercial manufacturing credit. As a reminder, we exited our fast casual restaurant vertical in 2019 and the remaining portfolio is relatively small. Total nonperforming loans and business services criticized loans increased during the quarter and continued to normalize toward historical averages, while total delinquencies improved 11%. Nonperforming loans as a percentage of total loans increased to 94 basis points due primarily to downgrades within industries previously identified as under stress. We expect NPLs to continue to normalize toward historical averages. Provision expense was $152 million, or $31 million in excess of net charge-offs, resulting in a 6-basis-point increase in the allowance for credit loss ratio to 1.79%. The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress. We continue to expect our full year 2024 net charge-off ratio to be between 40 basis points and 50 basis points. Let's turn to capital and liquidity. We expect to maintain our common equity Tier 1 ratio consistent with current levels over the near term. This level will provide sufficient flexibility to meet proposed changes, along with the implementation timeline, while supporting strategic growth objectives and allowing us to continue to increase the dividend, commensurate with earnings. We ended the quarter with an estimated common equity Tier 1 ratio of 10.3% while executing $102 million in share repurchases and $220 million in common dividends during the quarter. With that, we'll move to the Q&A portion of the call. Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst OK. Thank you. Good morning, John and David. John Turner -- President and Chief Executive Officer Good morning. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst David, just following up on your comment around noninterest-bearing deposits hitting mid -- I guess low 30% by mid-2024, just give us a sense of if we don't get any rate cuts, do you see that dipping below 30% based on what you're seeing in terms of customer behavior and just use of balances? I'm assuming there's some attrition on consumer balances that's at play here. So, like where do you see that mix bottoming out and what's the latest that you are seeing in terms of pricing competition across the markets? Thank you. Dave Turner -- Chief Financial Officer Yeah. So, from a balance standpoint, we still feel pretty confident based on flows that we have seen and expect that we'd be in that low 30% range. You know, we continue to look to grow noninterest-bearing balances through new checking accounts, new operating accounts. That's what's important to us. That's what fuels our profitability. And so, being in the favorable places, in particular in the southeast where there's migration of businesses and people, give us some comfort that we can grow there. We talked about deposits bottoming out in the first half of the year and then maybe growing a little bit from there. So, I think that low 30% range is a good -- still a good a level. With regards to competition on pricing, I think, at the end of the day, we haven't seen, across the industry, a lot of loan growth. And as a result of that, competition for deposits is not as strong as it could have been had we had a lot of loan demand. We always have competition. We have to be fair and balanced with our customers and making sure that we are creating value. And so, we look at what our competitors are doing from a price standpoint, and we adjust accordingly. But there's nothing unusual that's happening there, and I think the biggest driver of that is because of the lack of loan growth. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst That's helpful. And just a separate question, as we think about capital deployment that you outlined on Slide 10, is there more to go in terms of just the appetite for securities repositioning and how much should we expect in terms of what you did in 1Q with regards to the lift in the second quarter to bond yields? Thank you. Dave Turner -- Chief Financial Officer Yeah. So, you know, we consistently challenge ourselves on what's the best use of our capital that we generate. Obviously, we're at a robust 10.3% common equity Tier 1. We think we're close enough to be in striking distance on whatever the regime changes with regards to capital. And again, with loan growth being muted in the industry, you know, we want to pay a fair dividend, so we're generating capital that needs to be put to work. We either buy the shares back or we do things like securities repositioning. You know, we did the $50 million in the first quarter. We'll continue to look for opportunities. You know, I would say that fruit is not as close to the ground as it was because we want to keep our payback less than three years and, frankly, closer to two and a half if we can get it. Our payback in this last trade was about 2.1. And so, we think that was a great use of capital for us. And so, we'll look to do that, but we're not committing to it. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Helpful. Thank you. Operator Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question. Scott Siefers -- Piper Sandler -- Analyst Good morning. Thank you for taking the question. I was hoping -- Dave Turner -- Chief Financial Officer Good morning. Scott Siefers -- Piper Sandler -- Analyst Good morning. I was hoping you could please flesh out some of the rationale behind the softened loan growth outlook. I certainly understand it given the backdrop and what we're seeing in the [Inaudible] data. But, you know, it, in ways, contrasts with some peers who might be expecting more of an acceleration in the second half. So, just curious to hear your updated thoughts on customer demand and how they're thinking. Dave Turner -- Chief Financial Officer Well, on the consumer side, as we mentioned, we did a pretty good job growing mortgage, growing EnerBank, growing card, but it was offset by declines in home equity, which made consumer -- consumers flat. Consumers are actually in really good shape. We feel good about that. We just don't see a lot of loan growth -- net-net loan growth. Relative to commercial, you know, depending on the industry, some industries are blowing and going and others are being careful at this point. You know, we've had nice production, but we've had pay-offs, paydowns. And of course, this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NIR standpoint, but obviously hurt us from a balance standpoint. You know, if we start seeing rates actually decline, that activity will pick up. And so, net-net, it is going to be hard to grow meaningfully through all that activity. And we're fine with that. We don't need to push -- in this environment, there's still uncertainty. We don't need to push for loan growth. We need to be careful on client selectivity. John has talked about that numerous times. And we want to be careful. We clearly have the capital and liquidity to do so. And if we see opportunities, we'll grow. But we're not going to force it. Scott Siefers -- Piper Sandler -- Analyst OK. Perfect. Thank you. And then separately, I was hoping you could discuss the additional operational losses. You know, I was definitely glad to see no change to the full year expectation, though they were elevated in the first quarter. Maybe just an additional color, were there new instances of the issues that had cropped up last year or were these just sort of true-ups, and what gives you confidence that all the issues are still resolved and everything? John Turner -- President and Chief Executive Officer Yeah. This is John. So, there were no new events. The tail was a little -- with respect to the breach of warranty claims was a little longer than we anticipated. And as a result, we did incur some additional losses in the quarter. What gives us confidence that we can meet our expectations is the exit rate for the quarter was significantly reduced, which implies that the countermeasures we put in place, the talent that we've recruited for our fraud prevention activities, all of that is working and gives us confidence that we can, in fact, meet our $100 million target for the year. Scott Siefers -- Piper Sandler -- Analyst Perfect. OK. Good. Thank you very much for taking the questions. John Turner -- President and Chief Executive Officer Thank you. Operator Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. John Turner -- President and Chief Executive Officer Good morning, Betsy. Dave Turner -- Chief Financial Officer Good morning. Betsy Graseck -- Morgan Stanley -- Analyst So, one question just on how we're thinking about NII for the full year in relation to loan growth being a little slower. So, I just wanted to understand, you know, your NII guide obviously is the same as it was before. Loan growth expectation is a little slower, understandably. So, how do I square those things? Thanks. Dave Turner -- Chief Financial Officer Well, loan growth, we had talked about being in the back half of the year, so you weren't going to get a lot of carry from loan growth in our guidance. And so, really, what we want to see loan growth for in the back half of the year is setting us up for 2025, not for 2024. So, that was never factored into the guidance that we gave you on NII. You know, we feel good about where we're positioned from a balance sheet standpoint with basically neutral to short-term rates. And, you know, we have a little bit of shape to the curve where we reinvest our securities book and we're picking up, you know, a little over 200 basis points, 235 basis points on that front book-back book. So, that gives us confidence there that we're going to do pretty well with regards to NII. And if you look at the input cost. So, our deposit cost, they've also started to flatten. If we look at the months of February and March, there was little change in our deposit costs. So, our cumulative beta, which is at 43 today, we said would be in the mid-40s. We have a lot of confidence in that. So, that's why we didn't change our NII guide. Betsy Graseck -- Morgan Stanley -- Analyst OK. Got it. That makes a lot of sense. And then just on the securities repositioning that you talked about on Slide 5, is it, just wanted to understand how you're thinking about the go forward here. You added some duration. Again, makes sense, but wanted to know if you're thinking of leaning in even more, like how long will -- are you comfortable extending the duration of this securities book? That's basically the question. Thanks. Dave Turner -- Chief Financial Officer Well, our extension of duration was only like 0.12 -- 12 basis points over the year, so it's negligible. Betsy Graseck -- Morgan Stanley -- Analyst Right. Fair. Dave Turner -- Chief Financial Officer And, you know, from a -- from our standpoint, especially if you believe the risk of rates going up as very low, i.e., you believe they're either flat to down, then perhaps taking a little duration risk where we get compensated for it make some sense today. You know, our duration naturally is declining. So, doing a trade to kind of keep it flat to modestly higher than where we are right now seems to make sense, and it's a good use of capital if we can get a payback. Like I said, the one we just did, our payback is 2.1 years. We'd like it to be less than three, closer to two and a half if we can. And so, while we won't commit to doing that, we would look at it. And if we did it, it would be no more than what you just experienced. We want to keep it at a fairly small percentage of our pre-tax income. Betsy Graseck -- Morgan Stanley -- Analyst I got it. Thanks so much. Really appreciate it. Operator Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning, John. John Pancari -- Evercore ISI -- Analyst Good morning. On the credit front, we saw about, you know, a moderate increase in nonperformers in the quarter. However, your loan loss reserve is, you know, pretty stable, you know, despite the move in reserves. So, it's -- I mean, in nonperformers. So, I just want to see if I can get a little bit of color on how you're thinking about the reserve here and also maybe you can give a little bit more color behind the nonperformers. John Turner -- President and Chief Executive Officer Yeah. John, I'll -- maybe I'll start. This is John Turner. First of all, I'd say we began signaling now -- a couple of quarters ago, stress in a couple of specific portfolios or industries: office, senior housing, transportation, healthcare, specifically goods and services, and technology. And the increases that we are seeing in nonaccrual loans and classified loans are largely consistent with the indication that there is stress in those particular industries. In fact, when you look at our nonaccruals, 21% of our -- 21 of our nonaccruals -- excuse me, 21 credits make up 72% of our nonaccruals, and 18 of those 21 credits are in those five sectors that I mentioned. So, we did anticipate that we would see some deterioration, and that's been consistent with our expectations. The second thing I'd point to is several quarters ago, we began to set the expectation that we would return to pre-pandemic historical levels of credit metrics. And specifically, that would be an average charge-off ratio of about 46 basis points and nonaccruals of 105 basis points. And again, we are -- we have trended back to those ranges, which is consistent with our expectations. With regard to the allowance, we go through the process every quarter to ensure that we are properly reserved against expectation for loss in those portfolios. Given that we have a very high degree of visibility into the 21 credits that make up 72% of our nonaccruals, you can expect that we feel very good about our reserve position. John Pancari -- Evercore ISI -- Analyst OK. Great. Thank you. Thanks for that. And then separately, on the expense front, I know you mentioned that the first quarter should represent the high watermark on expenses. Is that primarily because of the elevated operating losses or do you expect some -- you know, building efficiencies through the remainder of the year, you know, either given the backdrop or given the revenue picture? Dave Turner -- Chief Financial Officer John, it's several things. And, you know, we have probably $75 million worth of expense we can point to on different fronts. So, part of it is operational losses that we don't think will repeat. We obviously have the first quarter issues with regards to payroll taxes and things of that nature. We had an HR asset valuation that's offsetting NIR that's a part of that, too. We have some things in occupancy and professional fees. If you add all that up, it's about $75 million, and we have pretty good confidence that that won't repeat. We tried to signal that the first quarter was going to be the high watermark and that you couldn't take the 4.1 billion and divide it by four. And we're sticking to that, and we're sticking to our guidance that we have. And we have pretty good confidence. We did take some actions this quarter like we did in the fourth quarter from a severance standpoint. Now, the first quarter has the normal expense of payroll for those folks, in addition to the severance. So, that won't repeat. So, that -- all that, like I said, adds up to right at -- right around 75 million. John Turner -- President and Chief Executive Officer And that's just -- it would be -- we have other opportunities to reduce expenses as well. That's just an indicator of what we can pretty quickly identify and won't repeat. John Pancari -- Evercore ISI -- Analyst And if I could ask just one follow-up related to that. Is your -- the status of your core systems conversion, is that still trending as expected in terms of timing and cost? John Turner -- President and Chief Executive Officer It is. Yeah. We, in fact, just had a board meeting this week and went through all that with our board. We feel good about the project and the progress that we're making and the -- and our ability to stay on budget and on time. John Pancari -- Evercore ISI -- Analyst OK. Great. Thanks for taking my questions. John Turner -- President and Chief Executive Officer Thank you. Operator Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning. Ken Usdin -- Jefferies -- Analyst Thanks. Good morning. I'm wondering if we could -- David, you could talk a little bit about that bullet you put in on Slide 5 about stable deposit cost, February to March, and what our takeaway should be in terms of, you know, mix shift, pricing, movement, etc.? And I know you talked about still mid-40s peak deposit betas, but just, you know, what's changing underneath in terms of that stability that you're starting to see? Dave Turner -- Chief Financial Officer Yeah. Part of -- one of the big reasons we put that in there is because our deposit cost change was higher than what you're seeing from peers, but that's because of what we did in the fourth quarter and you had a full quarter effect of that. Now that we've kind of got that baked into the base and we're starting to see offers and things of that nature on the deposit offerings coming down, the exit in February and March gives us a lot of confidence that those deposit costs are stabilizing. And therefore, we have a lot of confidence in our cumulative beta being in the mid-40s. So, a couple more points from where we are today. Ken Usdin -- Jefferies -- Analyst OK. And I guess as a follow-up, are you starting to change pricing, change offers, bring in duration? What are you doing in terms of trying to, you know, take that point further? Dave Turner -- Chief Financial Officer Yeah, that's a good point, Ken. So, yes, we started that last quarter actually. We had some CD maturities coming that were longer dated, 12- or 13-month CDs, and we went shorter in the five- to seven-month range to be able to reprice those this year. With the original expectation, the rates would be coming down sooner than they probably are now. And so -- yeah. And we can see from a competitive standpoint -- we want to be competitive. We don't have to lead with price, but we do need to be fair and balanced. And so, that -- you're starting to see the benefit of having the promotional rates coming down a hair. Ken Usdin -- Jefferies -- Analyst OK. And on that last point about the higher for longer, you talked about the 12 billion to 14 billion of fixed rate production for a while now and you say that's per year. Has the benefit from that also -- does that get better in higher for longer or -- and does that -- how does that differ when you think about like this year versus next year? Thanks, David. Dave Turner -- Chief Financial Officer Yeah, I would say marginally higher for longer because you have a lot of securities that are repricing that, you know, we're picking up about 235 basis points today. We're picking, you know, call it, 125 basis points on the loan side. So, if you get -- and we expect to get the deposit cost stabilized, then you don't -- then the repricing can actually start overwhelming the cost that you had on the deposit side. That has not been the case thus far. It's been just the opposite. So, you're going to see that turn, which is why we're calling the bottom for us in the second quarter. Ken Usdin -- Jefferies -- Analyst Got it. Thanks, David. Operator Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question. Dave Rochester -- Compass Point Research and Trading -- Analyst Hey. Good morning, guys. John Turner -- President and Chief Executive Officer Good morning. Dave Rochester -- Compass Point Research and Trading -- Analyst Just on credit, regarding the large restaurant credit and the commercial manufacturing credit, could you guys quantify the impact on net charge-offs and provision this quarter? And if you could just give some additional background on where you are on the resolution process there, that'd be great. Dave Turner -- Chief Financial Officer Yeah. So, if you were to look at those two added together, just those two made about 7 basis points of charge-offs. So, if we didn't have those two, our 50 would have been 43. Dave Rochester -- Compass Point Research and Trading -- Analyst OK. Great. And then where are you guys in the process of resolving those? Dave Turner -- Chief Financial Officer Say that again? Dave Rochester -- Compass Point Research and Trading -- Analyst Where are you in the process of resolving those credits? John Turner -- President and Chief Executive Officer Those -- they're both still being worked out. Dave Rochester -- Compass Point Research and Trading -- Analyst OK. And I guess just bigger picture, with you reiterating the net charge-off guide here for the year of 40 bips to 50 bips, you're at the high end of that right now. So, you're expecting that to either remain stable here or decline through the end of the year and you have confidence around that? Dave Turner -- Chief Financial Officer We do. John Turner -- President and Chief Executive Officer Yes. Dave Rochester -- Compass Point Research and Trading -- Analyst Great. And then just switching to deposits, with the recent inflation data that's been elevated and the shift in expectations to fewer rate cuts this year, are you noticing any impact from any of that on your corporate deposit customers' behavior at all? Are you seeing any change in activity there, and does that impact your expected range of NIB remix at all for the year? Dave Turner -- Chief Financial Officer No. You know, our NIB largely comes from our consumer base. We do obviously have a big NIB on the commercial side. I think folks that we're going to move out of NIB to seek rate have done so. And we think that -- that's why we're calling for our NIB to decline a little bit, but still stay in the low 30% range. And they all just want to maintain a little bit more liquidity going into, you know, a cycle that still has uncertainty, geopolitical risk, our own elections this year. But no, I don't think, from an inflation standpoint, we're going to see a huge change from NIB. Dave Rochester -- Compass Point Research and Trading -- Analyst All right. Great. Thanks, guys. Operator Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. I was just wondering if you could elaborate a little bit on some of the fee trends. The deposit service charges were up nicely. And I know the treasury management is a big part of that and a positive driver, but there is weaker seasonality. So, I was wondering if you could flesh that out. John Turner -- President and Chief Executive Officer Yeah. So, if you look at -- I'll just talk about fee revenue across the -- across different parts of the business. Treasury management is up 7% year over year, and that's a reflection both of increases in fees and increases in relationships and activities. So, the nice growth in that business. Similarly, wealth management is up over 6% year over year, which is both reflective of increases in asset valuations and increases in assets held for customers, increasing relationships. We also saw a really nice increase in mortgage activity during the quarter, and we would expect that to continue. Consumer fees are down modestly, and that's a reflection really of the implementation of all the changes we've made to benefit customers with respect to overdrafts. And more specifically, as a result of the implementation of overdraft grace, we've seen about a 25% reduction in the number of customers who are actually overdrawn, so that is resulting in some decline in fee revenue, offset by our -- currently by interchange activity and customers' use of their debit card. So, generally, fee income is solid. We're seeing good growth in the wholesale parts of our business and in wealth management that reflects growth in relationships and growth in activities. Matt O'Connor -- Deutsche Bank -- Analyst OK. And then in capital markets, that also came in strong, and I think you've had this like 60 million to 80 million range in the past, you know, with room for upside. And, you know, just talk to were there any deals that -- you know, just talk to how sustainable you think that is. Obviously, it's somewhat market-dependent, but a little more color on the 1Q driver there and the thoughts going forward. Thanks. John Turner -- President and Chief Executive Officer Yeah. I think we still stick to that range generally and incorporate our expectations for capital markets into the broader guidance, around $2.3 billion to $2.4 billion in adjusted NRR. But we do see good pipelines. Capital markets activity is picking up. There's more M&A activity. We're seeing more customers go to the institutional market to raise debt, which has been helpful. Our M&A activity was pretty diverse during the quarter. And then real estate capital markets, which is a really important business for us, is also very active. And so, we feel pretty good about the $60 million to $80 million range for the quarter. Matt O'Connor -- Deutsche Bank -- Analyst OK. Thank you. Operator Our next question comes from the line of Gerard Cassidy with RBC. Please proceed with your question. Gerard Cassidy -- RBC Capital Markets -- Analyst Hey. Good morning, John. Good morning, David. Hi, guys. Dave Turner -- Chief Financial Officer Hey, Gerard. Before you ask your question, let me clean something up from a question that just came up on terms of the -- what the charge-off percentage would have been had we not had those two large credits. I said 7 basis points. It's 13 basis points actually. So, we would have been at 37 had we not had those two. I didn't do the math correctly. I just want to make sure that gets fixed in the transcript. Gerard Cassidy -- RBC Capital Markets -- Analyst Very good. All set? John Turner -- President and Chief Executive Officer Good morning, Gerard. Dave Turner -- Chief Financial Officer Fire away. Gerard Cassidy -- RBC Capital Markets -- Analyst OK. Thank you. Can you guys, excuse me, give us an update on where the proposal is going for the long-term debt and when do you think that will be finalized in the NPR that's out there? And second, as part of that, what your latest estimate is? I know you have given us some color on this in the past, but what's your latest estimate on what it might cost you once you have to -- and your peers, of course, have to issue the debt and carry higher levels of debt? Dave Turner -- Chief Financial Officer Yeah. So, Gerard, you know, the whole Basel III and long-term debt has kind of gone into a little bit of a hole at the time. We're not sure when that will get taken care of. We suspect it will be this year at some point. The proposal on debt was to have 6% of RWA, which is about $7 billion for us. Give you credit for what you have outstanding, which is a couple of billion. So, you're talking about raising $5 billion. You know, we can leverage that and put it to work. And it wasn't a terrible drag on NII, less than 1% drag on NII for us if fully implemented, and this was going to take time to do that. You know, we need to have some -- you know, our 2 billion of existing long-term debt is something we were going to address just in the natural order of things. But with loan growth being muted, there's no need to go out and raise debt if you don't have to have it. We're hoping that the proposal, though, comes down from the 6% number. There's been talk of it maybe being in the 2% to 3% range of RWA, but we don't know. We'll just have to adapt and overcome when the new rule gets put out. Gerard Cassidy -- RBC Capital Markets -- Analyst Very good. And then as a follow-up, you've been very clear about the identification of the stressed portfolios with credit. In your prepared comments, David, you mentioned that some of the increase in the nonperformers was due to -- I think you said, yeah, that some of it was due to the downgrades in certain -- you know, those industries that you've identified. Can you share with us, what -- within those downgrades, what process -- or not the process, but what caused the downgrades? Was it debt service coverage? Was it, you know, the business -- the borrowers' businesses deteriorating for some reason? Can you give a little more color on the downgrade part of that? Dave Turner -- Chief Financial Officer Gerard, usually -- so we're seeing strength in consumers and businesses in general. There are pockets of stressed industries that John mentioned earlier. I think, at the end of the day, they're -- they seem to be more idiosyncratic to the business model of that borrower, and these are valuation charges that are being taken. And so, you don't have any one -- when you kind of cut to the chase, you think about credit risk actually being fairly good right now, but you're going to have these pockets, these one-off pockets you use. As I just mentioned, just two credits for us is a big deal in terms of the effect on the charge-off percentage. So, we don't see it as a contagion as much as we see it as an idiosyncratic business issue. Gerard Cassidy -- RBC Capital Markets -- Analyst I see. So, it wasn't really like, across the board, the higher rate environment for these downgrades really affected it, but it was more idiosyncratic for each one of the borrowers? John Turner -- President and Chief Executive Officer I think the one exception to that, Gerard, would be transportation where we are seeing that industry, particularly truck -- the truckload industry and smaller borrowers, is under some stress, and valuations -- equipment valuations are also under stress. I mean, obviously, if you think about real estate-related portfolios, office and senior housing, in particular, you can understand why those are also under stress. But transportation would be the one area where I would say it feels like across that industry for the truckload-related. The less-than-truckload businesses are still doing OK, but truckload-related carriers are having challenges. Gerard Cassidy -- RBC Capital Markets -- Analyst Got it. Thank you. Operator Our next question comes from the line of Christopher Spahr with Wells Fargo. Please proceed with your question. Christopher Spahr -- Wells Fargo Securities -- Analyst Hi. Thank you. John Turner -- President and Chief Executive Officer Good morning. Christopher Spahr -- Wells Fargo Securities -- Analyst So, my question is just relating the shift in loan mix over the last few years, especially with EnerBank, and comparing it to the average pre-pandemic charge-offs. And just kind of your thoughts on where you think the mix would have -- has shifted a little bit and might have impacted the comparisons. And then just thoughts about the EnerBank kind of portfolio itself. It seems to be holding up a little bit better than expected. Thank you. Dave Turner -- Chief Financial Officer Well, let me couch it in terms of just our overall portfolio from a CECL standpoint. So, if you go back to pre-pandemic, so the fourth quarter of 2019 when we all implemented CECL, our CECL reserve at that time was 1.71%. If you adjust that for the portfolio we have today, so there's pluses and minuses, just a completely different mix, and apply those same loss rates to our current portfolio, that would imply a CECL reserve of 162. I think that's on one of our slides. And so, I think, at the end of the day, we have pretty robust reserves to cover expected losses. The stressed portfolios that we've talked about are a driver. The lower FICO bands of consumer have more pressure on it than the rest of the consumer base. And, you know, some of the portfolios that we've added, whether it be EnerBank or Ascentium, those are higher yield portfolios, and they have higher loss content. In both cases, we had those two portfolios, EnerBank and Ascentium, at, call it, 2%, 2.5% expectation, and, you know, they're performing in line with that. So -- and I think it gets back to the fact that businesses and consumers, generally speaking, are in pretty good shape. So, you know, we've been real careful, making sure we don't grow too fast in those portfolios. And so far, everything's worked according to plan. Christopher Spahr -- Wells Fargo Securities -- Analyst Thank you. Operator Our final question comes from the line of Peter Winter with D.A. Davidson. Please proceed with your question. John Turner -- President and Chief Executive Officer Good morning, Peter. Peter Winter -- D.A. Davidson -- Analyst Hi. Good morning. Just one quick question. Last quarter, you mentioned an exit rate for the NIM around 3.60. I'm just wondering if you're still comfortable with that. Just on the one hand, you're building more liquidity, but then you did the securities restructuring. Dave Turner -- Chief Financial Officer Yeah. You know, I think, whether we get -- we should get pretty close to that number still. Again, we're not counting on rates being a huge driver. Incrementally, though, if we have the long end that stays higher, then our reinvestment yields are a little bit better. If short rates come down, then our negative carry on our swap book will be helped, and that could propel us. So, you know, I would say the upper 3.50s to 3.60. We are carrying a bit more cash. You probably saw that, just out of an abundance of caution given the events of last quarter. And while that cash doesn't really hurt us from an NII standpoint, it does hurt us from a margin standpoint. And so, you know, we still should have one of the leading margins regardless because we have a lot of confidence in our funding costs kind of settling down. Peter Winter -- D.A. Davidson -- Analyst Got it. How much benefit do you get from the securities restructuring on the margin? Dave Turner -- Chief Financial Officer Well, cost is, round number, $50 million, and we're -- and it's a payback of 2.1 years. So, you can do a quick math. Peter Winter -- D.A. Davidson -- Analyst OK. Dave Turner -- Chief Financial Officer You mean on margin? It's a couple of basis points of a -- of positive. Peter Winter -- D.A. Davidson -- Analyst OK. Thanks, David. Operator Thank you. Mr. Turner, I would now like to turn the floor back over to you for closing comments. John Turner -- President and Chief Executive Officer OK. Well, I thank you all for your participation today. We appreciate your interest in our company. That concludes the call.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, everyone, and welcome to the Delta Air Lines March quarter 2024 financial results conference call. My name is Matthew, and I will be your coordinator. [Operator instructions] As a reminder, today's call is being recorded. [Operator instructions] I would now like to turn the conference over to Julie Stewart, vice president of investor relations. Please go ahead. Julie Stewart -- Vice President, Investor Relations Thank you, Matthew. Good morning, everyone, and thanks for joining us for our March quarter 2024 earnings call. Joining us from Atlanta today are our CEO, Ed Bastian; our president, Glen Hauenstein; and our CFO, Dan Janki. Ed will open the call with an overview of Delta's performance and strategy, and Glen will provide an update on the revenue environment. Dan will discuss costs and our balance sheet. After the prepared remarks, we'll take analyst questions. [Operator instructions] And after the analyst Q&A, we'll move to our media questions. Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I'll turn the call over to Ed. Ed Bastian -- Chief Executive Officer Well, thank you, Julie, and good morning, everyone. We appreciate you joining us today. Earlier this morning, we reported our March quarter results, posting pre-tax earnings of $380 million or $0.45 per share, a $0.20 improvement over last year on revenue that was 6% higher and a new record for first quarter. Free cash flow was $1.4 billion, and we delivered a return on invested capital of nearly 14%, putting Delta's returns in the top half of the S&P 500. We are delivering industry-leading operational reliability and have widened the gap to our competition. Last summer, we made forward-leaning investments in the operation. And since then, our teams have delivered operational performance that is among the best in our history with mainline cancellations down 85% and setting new records for completion factor in both the fourth quarter and the first quarter. I'd like to sincerely thank Delta's 100,000 people for your dedication, professionalism, and hard work in delivering these outstanding results. In February, we recognized the efforts of our people with $1.4 billion in profit sharing, more than the rest of the industry combined and continuing Delta's long-standing philosophy to reward industry-leading performance with industry-leading compensation. Reflecting our People First culture, Forbes ranked Delta the fifth best large employer in America, and Delta was recently named the 2024 Global Airline of the Year by Air Transport World for our outstanding commitment to safety, operational performance, and premium customer service. While airline travel and transportation is what we do, it is the experiences on Delta that set us apart as a leading consumer brand and why Delta was recognized as No. 11 on Fortune's list of the world's most admired companies. Exciting customer-facing enhancements are on the near horizon, including the opening of new Delta One Lounges in JFK, Los Angeles, and Boston, the continued introduction of modern and fuel-efficient aircraft, new premium cabin service offerings, upgrades to the Fly Delta app and the international expansion of fast, free WiFi across our fleet. The rollout of WiFi and Delta Sync continues to be a tremendous success. Since launching last year, customers have logged more than 45 million free streaming quality sessions on board and millions have joined the SkyMiles program through this channel, recognizing our investment to ensure the future of travel is connected, we took the No. 2 spot in the travel category, a Fast Company's List of the Most Innovative Companies, the only airline to be recognized in the ranking. Loyalty to our brand has never been stronger. We continue to set new records with our remuneration from American Express, our most important commercial relationship, and are well on our way to our long-term target of $10 billion. On February 1st, we announced enhanced and refreshed benefits for our Delta SkyMiles American Express cards, providing more direct value and the customer response has been very positive. Turning to our outlook with strong first quarter performance and visibility into the strength of summer travel demand, we remain confident in our full-year guidance for earnings of $6 to $7 per share, free cash flow of $3 billion to $4 billion, and leverage of two and a half times. The three main guideposts that we shared with you in January. For the June quarter, we expect to deliver the highest quarterly revenue in our history of mid-teens operating margin and earnings of $2.20 to $2.50 per share. Our forecast for pre-tax profit of approximately $2 billion is on par with 2019 and just shy of last year due to higher fuel prices. Demand continues to be strong, and we see a record spring and summer travel season with our 11 highest sales days in our history, all occurring this calendar year. Spending on services recently to pass goods for the first time in five years, and there is further runway to return to their long-term trends. Delta's core consumers are in a healthy position and travel remains a top purchase priority. Generational shifts and evolving consumer preferences are driving secular growth in premium experiences. And business travel demand has taken another meaningful step forward this year with growth accelerating into the mid-teens over last year. When you put this level of demand strength together with the industry's increased focus on improving financial returns, this may be the most constructive backdrop that I've seen in my airline career. Our industry-leading performance continues to demonstrate the strength of Delta's differentiated brand and returns-focused strategy. And with our disciplined approach to capital investment and focus on free cash flow, Delta is exceptionally well positioned to further strengthen our balance sheet and deliver significant shareholder value. In closing, the momentum in the business continues to build. We are focused on delivering excellent reliability, elevating the customer experience, and improving efficiency across the company to support growth in our earnings and cash flow. I am excited for Delta's opportunities ahead, and we'll talk more about that and provide new long-term financial targets at our Investor Day, which we are scheduling for November 19th and 20th in New York City. Please put that on your calendar. Thank you again. And with that, let me hand it over to Glen for more details on our commercial performance. Glen Hauenstein -- President Thank you, Ed, and good morning. I want to start by thanking our employees for providing the best service and reliability in the industry to our customers every single day. 2024 is off to a great start, and we're delivering on our commercial priorities to optimize our network, grow higher-margin revenue streams, and invest in our future. Revenue for the March quarter increased 6% year over year to a record $12.6 billion on capacity growth of 6.8%. This result is at the high end of our initial guidance with upside driven by industry-leading operational performance and strength in close-in bookings. Since the start of the year, we've seen a sustained acceleration in business travel. Managed corporate travel sales grew 14% over the prior year with technology, consumer services, and financial services leading that momentum. We delivered positive unit revenues in our two largest entities, Domestic and Transatlantic, reflecting the continued optimization of our network. Total unit revenue growth improved 3 points sequentially to down 0.7%, including nearly a 1-point headwind from cargo and MRO. Domestic revenue grew 5% with record March quarter unit revenues, up 3% over the prior year. The more than 7-point improvement from 4Q to 1Q reflects strong demand trends and improving industry backdrop. International revenues grew 12% on a unit revenue decline of 3% as unit revenue growth in the transatlantic was muted by capacity investments from the continued rebuild of our Latin and Pacific franchise. Diverse high-margin revenue streams generated 57% of total revenue, differentiating Delta and underpinning industry-leading financial performance. Premium revenue was up 10% over prior year, and we have runway ahead as we continue adding more premium seats to our aircraft, improving our retailing capabilities, and further segmenting our products. Total loyalty revenue grew 12% on continued strength in the American Express co-brand portfolio with record quarterly remuneration of $1.7 billion. Following the refresh co-brand benefits, we saw card applications reach new records as we are seeing the highest premium acquisition mix in our program's history. Turning to our outlook. Consumer demand is robust and premium trends remain strong. The outlook for corporate travel is positive. 90% of Companies in our recent survey intend to maintain or increase travel volumes in 2Q, putting us back on track to deliver record corporate revenues in the back half of this year. For the June quarter, we expect revenue growth of 5% to 7% on capacity growth of 6% to 7% with unit revenues flat to down 2% from last year's very strong performance. Similar to the March quarter, 2Q faces a headwind from the normalization of travel credits. Domestically, we expect unit revenues to be flattish over prior year with growth focused on restoring our core hubs where departures and seats are not yet fully restored. The final stage of our core hub restoration will be the full return of regional flying. Pilot hiring has stabilized, increasing the capacity we expect to fly over the summer. We expect progressive improvement through 2025, driving higher asset utilization and improving our profitability. In the transatlantic, we are looking forward to another strong summer with record revenues. Unit revenues are expected to be similar to the last year as we lock record performance and benefit from the healthy demand for our premium cabins and improved corporate trends. In Latin America, profitability remains solid. Unit revenues are expected to be down double digits due to pressure in short-haul leisure markets. These markets are expected to see healthy improvements in the second half of the year as supply and demand comes back into balance. Our flying into deep South America, we are very pleased with the results. We are increasing capacity about 40% with minimal impact to unit revenues as we continue to deepen our ties with our JV partner, LATAM. We expect Pacific unit revenues to be in line with the prior year on 30% growth in capacity driven by strong demand for Korea and Japan, offsetting lower unit revenues in China. Profitability is expected to set a record as we continue to harvest the benefits of our multiyear restructuring. In closing, I'm pleased with how we have started 2024. Delta is continuing to lead on all fronts with industry-leading margin and returns, highlighting the strength of our trusted brand and differentiated commercial strategy. And with that, I'd like to turn it over to Dan to talk about the financials. Dan Janki -- Chief Financial Officer Great. Thank you, Glen, and good morning to everyone. For the March quarter, we delivered pre-tax income of $380 million, an improvement of $163 million over last year, earnings of $0.45 per share was at the upper end of our guidance as great operational performance and strong demand more than offset higher-than-expected fuel prices. Operational excellence is central to Delta's brand promise, and I couldn't be prouder of how our teams are delivering record reliability for our customers. A strong completion factor drove 1 point of higher capacity and nonfuel unit cost favorability. Nonfuel CASM was 1.5% above last year and ahead of guidance. Fuel prices averaged $2.76 per gallon, $0.16 higher than the midpoint of our guidance range. The refinery provided a $0.05 benefit generating a profit of $49 million. This was down $173 million from last year on more normalized refining margins. Fuel efficiency was 1.9% better than last year, benefiting from the continued renewal of our fleet and running a strong operation. Operating margin of 5.1% was 0.5 point higher year over year. Our pre-tax margin improved over 1 point, benefiting from reduced interest, pension expense, and higher earnings from our equity investments. We generated free cash flow of $1.4 billion. This was after paying $1.4 billion in profit sharing to our employees and investing $1.1 billion into the business. Debt reduction remains a top priority. Our leverage ratio improved to 2.9 times. During the quarter, we repaid $700 million of debt, including $400 million of scheduled maturities and $300 million of additional debt initiatives. We expect to repay at least $4 billion of debt this year and continue to be opportunistic in accelerating debt reduction. We are currently investment-grade rated at Moody's and BB+ at both S&P and Fitch, with all agencies now on positive outlook following updates from Fitch and Moody's during the quarter. Moving to the June quarter guidance. Combined with our outlook for top-line growth, we expect an operating margin of 14% to 15%, with earnings of $2.20 to $2.50 per share. Fuel prices are expected to be $2.70 to $2.90 per gallon, including a $0.10 contribution from the refinery. At the midpoint of this range, our all-in fuel price is expected to be over 10% higher than last year. Nonfuel unit costs are expected to be approximately 2% higher than last year, consistent with our full-year outlook of low single digit. Growth is normalizing, and we've entered a period of optimization with a focus on restoring our most profitable core hubs and delivering efficiency gains across the enterprise. The investments we made in fleet health and reliability in the second half of 2023 are paying off, supporting industry-leading operational performance. As we discussed with you in January, these investments are expected to continue through 2024 as we complete an elevated volume of heavy airframe and engine checks while managing through industrywide supply chain constraints. The intensity of hiring and training has moderated. The teams have good momentum in delivering on our efficiency goals for the year. This will help fund the investment in our people, in our operations, and the customer experience that support our revenue premium. In closing, we continue to be confident in our full-year outlook of earnings of $6 to $7 per share and free cash flow of $3 billion to $4 billion. Our industry-leading operational and financial performance is a result of the hard work and dedication of the Delta people. I'd like to thank each of them for what they do every day. With that, I'll turn it back to Julie for Q&A. Julie Stewart -- Vice President, Investor Relations Thanks, Dan. Matthew, can you please remind the analysts how to queue up for questions? And the first analyst question comes from Duane Pfennigwerth. Questions & Answers: Operator Certainly. [Operator instructions] Your first question is coming from Duane Pfennigwerth from Evercore ISI. Your line is live. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey. Good morning. Thank you. Just on the improved cost execution, you just talked on it in the script there, Dan, but can you speak to maintenance expense and the outlook relative to your expectations? The tone sounds like you're turning a corner on maintenance. And how do you think about that line into the second half and perhaps into next year? Dan Janki -- Chief Financial Officer Well, maintenances -- Duane, thank you. Maintenance is on plan and performing as we expected as we talked to you at the beginning part of the year, maintenance, we expect it to be up year over year $350 million. We expect that for the full year, the first quarter was on plan, and the team is executing well. And those investments, as I mentioned, that we made in fleet health will continue as we go through this year, those proactive visits along touching the aircraft. You're seeing the impact. Cancellations from a maintenance perspective year over year were down 80% sequentially, they improved 30%. So team is doing a good job. They're on plan and as expected. Ed Bastian -- Chief Executive Officer Dane, if I could add on to that, I want to congratulate the Tech Ops team, John Laughter, whose leadership over there in terms of helping to make that turn. We are seeing a renewed set of confidence back in the team. It's been a tough few years on the rebuild. Too early to declare victory. We know the supply chain continues to have a tremendous amount of constraint in it. But I'm confident that we're on a good journey. It's a good path here. Duane Pfennigwerth -- Evercore ISI -- Analyst Appreciate those thoughts. And then maybe more of a conceptual one for my follow-up on corporate and the continued recovery in corporate you're pointing to. I assume that's generally close in. And I wonder if you could comment on if you're seeing a decrease in average trip length. So maybe more trips but fewer days on the road per trip. Any commentary on those trends? Glen Hauenstein -- President No. I'd just say we're seeing both. We're seeing some shorter, and we're seeing some longer where people are blending the leisure trip with the business trips. And generally, they're purchasing a little bit further out than they had. And I think that's related to not having change fees any longer. So we've seen some changes in the booking curve, but really encouraged by what we see in terms of corporate bookings as we look forward through this quarter and as we look forward into the next couple of quarters. Duane Pfennigwerth -- Evercore ISI -- Analyst Thank you very much. Operator Thank you. Your next question is coming from Mike Linenberg from Deutsche Bank. Your line is live. Mike Linenberg -- Deutsche Bank -- Analyst Hey. Good morning everyone. Glen, I just -- I want to get back, you talked about the normalization of travel credits and how that still represents a bit of a headwind. Can you quantify what that impact is on June TRASM? Glen Hauenstein -- President I think we said in our previous that we faced headwinds in up to two -- a couple of points. And I think we're not going to go into the details of that. But that's generally what we've disclosed in the past. Mike Linenberg -- Deutsche Bank -- Analyst OK. Great. And then just my second question to Ed. Ed, can you just give us an update on the status of the -- I guess, it's an appeal process with the DOT on Aeromexico. How does that play out? Or I should say, what is the time line of that? And any milestones we should look forward with respect to that? Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary Hey, Mike. It's Peter Carter. Thanks for the question. That was a tentative order, and I think, as you know, our strong view is the DOT really struck out on that one. They're typically a great partner. But this was an example of regulatory overreach, which is why we've challenged it. It's bad for consumers, it's bad for competition. It's bad for the local economies that those flights have served. We are currently engaged with the administration and discussing, I'll say, less punitive solutions than the tentative order that was proposed. And I would say we've had hundreds of our, I'll say, with respect to the connection between Mexico and America way in, in support of this joint venture. We think this is going to take some time before the DOT issues a final order a number of months, but we're cautiously optimistic that they're going to come up with a better solution. Mike Linenberg -- Deutsche Bank -- Analyst Great. Thanks for that, Peter. Operator Thank you. Your next question is coming from Scott Group from Wolfe Research. Your line is live. Scott Group -- Wolfe Research -- Analyst Hey. Thanks. Good morning. Glen, when I think about the original guide for the year or three months ago, I think it was sort of flat RASM for the year. So we're down slightly in Q1, midpoint of guide for Q2, down slightly. So what's your visibility to second-half RASM inflection? I guess ultimately, at this point, do you see more upside or downside risk to that flat RASM? And maybe just with that, like the travel credit headwind, is that bigger or smaller in the second half? Glen Hauenstein -- President No. I think it's pretty -- first, on the travel credit headwinds, it is consistent through the year. But what I would say, is that we're ahead of our internal plan to get to flattish for the year and the comps get easier as we move through the year. And if you look at the back half of guidance as well as what people have loaded in their schedules, it looks like industry capacity is reaching a peak in 2Q. So I think we see a great setup for the back half of this year and we're on plan or ahead of plan from where we sit right now. Scott Group -- Wolfe Research -- Analyst OK. And then I just want to follow up just on RASM a little bit. So if you just -- last year, your absolute RASM in second quarter just meaningfully outperformed seasonality. And then you underperformed in Q3, right? If you look this year, you're guiding again like to really outperform like pre-pandemic seasonality. I'm wondering, do you think that there is a seasonal shift from Q3 into Q2 relative to what we used to see? And does that help in Q2? Does it potentially hurt Q3? I'm just curious your thoughts on that. Glen Hauenstein -- President I have thoughts some very -- yes, it has changed, and it's related to schools coming back in the south, in particular, earlier and earlier into August. As a matter of fact, here, I believe, schools in Georgia go back the first week of August now. And so that has materially changed, I think, over the years, making the second quarter stronger and making the third quarter a bit weaker. But I think we -- as we think about how we plan that now, we're incorporating that into our capacity plans moving forward. Scott Group -- Wolfe Research -- Analyst OK. All right. Thank you, guys. Operator Thank you. Your next question is coming from Ravi Shanker from Morgan Stanley. Your line is live. Ravi Shanker -- Morgan Stanley -- Analyst Thanks, everyone. So it looks like your leverage is getting to be in a pretty good place. When do you think you can start flexing the balance sheet for other use of cash kind of capex, cash return kind of over the next 12 months? Ed Bastian -- Chief Executive Officer Well, thanks, Ravi. We're not in a position yet to make any comments or any decisions around that. We still have more debt than we're comfortable with, and that continues to be the first call on cash to continue to take risk off the table. Interesting, I was looking at some numbers preparing for this call. if you look at our target for the end of this year and you factor in that we actually have eliminated the pension obligation, which we had at the end of 2019. We're actually pretty close to the leverage ratio we were at at the end of 2019, entering the pandemic. So we have made a lot of progress. That said, we'll be talking a bit about that at our Investor Day in November. But the first call will be and will be for some time to pay down the debt. Ravi Shanker -- Morgan Stanley -- Analyst Got it. That's helpful. And maybe as a follow-up and a little bit of a nuance detailed question here. Kind of obviously, with the Paris Olympics kind of being a pretty big catalyst for transatlantic travel in this summer kind of -- are we thinking of that potentially bringing on some noise toward end of 2Q, early 3Q? Kind of is that something that you would caution us in terms of modeling cadence versus seasonality. Glen Hauenstein -- President Well, generally, the Olympics are not good for airline revenues. And this year, I think, is no exception to that. So while we see a very favorable backdrop for Europe in its totality, there are some challenges for Paris as generally business travel ceases to and from the local markets as the Olympics approach. So I wouldn't say that, that's going to be a windfall. It's actually going to be a bit of a headwind for us in the numbers we've shared with you. Ed Bastian -- Chief Executive Officer That said, we are very excited as sponsor Team USA for the Paris Olympics and we'll get through it. Ravi Shanker -- Morgan Stanley -- Analyst Thanks, guys. Operator Thank you. Your next question is coming from Helane Becker from TD Cowen. Your line is live. Helane Becker -- TD Cowen -- Analyst Thanks very much, operator. Hi, team. So I just have two questions. In the first quarter, your landing fees seemed a little bit higher than I would normally expect to see for a first quarter. Is that maybe you can explain that rather than me suggesting what it could be? And then for my follow-up question, one of the issues that American Express cardholders have of which I am one is acceptance rate, especially in Europe. And I'm wondering if you're starting to see an improvement in that area as well? Dan Janki -- Chief Financial Officer Yeah. On landing fees, when you look at it year over year, yes, they're up. Volume, one; two, related to the cut in as it relates to our generational redevelopment projects you're picking up some of that expense. And then I would say the third item, airports across the country in 2022 and 2023 benefited from CARES. And as those have now gone away, they're adjusting their rates and you're seeing that come through. Helane Becker -- TD Cowen -- Analyst OK. That's very helpful. Glen Hauenstein -- President And on American Express global acceptance rates, we worked very hard years back with American Express on improving the domestic acceptance rates. And right now, they're at all-time highs in terms of the number of merchants that you can use American Express that domestically. And they are also doing that internationally. So particularly places that were strong, and we worked with them on prioritizing those places that Americans like to go for vacations. Helane Becker -- TD Cowen -- Analyst OK. That's very helpful. Thank you, guys. Operator Thank you. Your next question is coming from Andrew Didora from Bank of America. Your line is live. Andrew Didora -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, everyone. So, Glen, I had a question just with regards to your capacity. How are you thinking about the cadence as we move into the back half of the year obviously, with the first half capacity up north of six, 3Q schedules are still sort of above your 3% to 5% original guide. How should we think about your growth as we move through the back of the year because it would imply based on 3Q schedules that 4Q would be down. Kind of find that hard to believe. But just any thoughts there would be helpful. Thank you. Glen Hauenstein -- President I think we're going to -- first of all, thanks for our operating teams who have given us such exceptional completion factors that accounted for even higher than we had planned for. So I'd say, if those continue, which I imagine they will or hope they will, that we would be at the high of the 3% to 5%. And I think it's a bit early to say, but I think that we will be right at that 5% depending on how the completion factor comes in. Andrew Didora -- Bank of America Merrill Lynch -- Analyst That's helpful. Thank you. And then I think in your prepared remarks, you spoke to MRO headwinds in the ancillary revenue line in the quarter. What is driving that? I just sort of thought given everyone's elevated maintenance expense, it would have been a little bit more of a tailwind? Any thoughts there? Dan Janki -- Chief Financial Officer I'd say two things. One is, as it relates to our third-party activity, it's just -- we're always -- we're constrained by what the industry is constrained by, which is material and ability to generate that output. And as we've talked about our tech ops team, John and the team are focused on the Delta fleet. But I would say the constraint continues to be material and turnaround times associated with it. Andrew Didora -- Bank of America Merrill Lynch -- Analyst Understood. Thank you. Operator Thank you. Your next question is coming from Jamie Baker from J.P. Morgan. Your line is live. Jamie Baker -- JPMorgan Chase and Company -- Analyst Thanks. Good morning, everybody. A couple for Glen. First, on the topic of RASM premiums, pre-COVID, you were running, what, 20% domestic premium to the industry, and I think you were roughly flat on international. You and I spoke on one of the earnings calls as to what that what the path to achieving an international RASM premium might look like. Can we revisit that topic? Where is Delta currently both domestic and international. And where do you see that heading from here in the post-COVID world? Glen Hauenstein -- President Well, thanks for the question, Jamie. I think right now, we believe we are running international routes on premiums, that have primarily been driven by higher load factors on the fleet. But as the fleet continues to evolve and we continue to put more premium seats in the mix, we believe that is one of the key drivers for us to continue to accelerate our relative performance to our industry peers. So I think we're on a journey there, and I think we are now generating premiums consistently. And hopefully, we can accelerate those over the next several years as we execute on our plans to differentiate Delta. Jamie Baker -- JPMorgan Chase and Company -- Analyst And as a follow-up, Glen, on premium. So premium revenue was up 10% in the quarter, main Cabin was up 4%. What can you tell us about the constitution of that 4%? For example, what's the trend with basic economy? What percent of main cabin passengers are SkyMiles members compared to the premium cabins, that sort of thing? I'm just trying to understand where the 4% is coming from. Are those new customers? Are you taking share from discounters? That sort of thing. Glen Hauenstein -- President I think in the quarter, we ran a record domestic load factor in the first quarter. So what I believe drove that was the incremental traffic that we took over historical levels. So pretty excited about doing that in the first quarter. As you know, the first quarter is the most challenging in terms of loads. And for us to come through that quarter with the premiums that we took, I think, really is a testament to the strength of our brand. And of course, as we get through the year, there'll be less and less discounted seats available as you get toward peak. But generally, we're most open in 1Q. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK. Very helpful. Thank you, everyone. Operator Thank you. Your next question is coming from Brandon Oglenski from Barclays. Your line is live. Brandon Oglenski -- Barclays -- Analyst Hey. Good morning and thanks for taking the question. So, Glen, I guess I wanted to come back to domestic growth this summer because it looks like you're jumping up to 6% or 7% from about 2% in the first quarter. In the context around this, I think investors were a little bit concerned that, that growth could lead to lower RASM, but obviously, you're guiding to flat. So can you dig a little bit deeper on your domestic network priorities and maybe a little bit more on regional expansion? Glen Hauenstein -- President I think there -- what we've said in the past, and I'd like to go back to is, kind of coming out of COVID, we had to allocate the resources we had available. And those resources went to our once-in-a-lifetime opportunities to take leading positions in places like Boston and Los Angeles at the expense of rebuilding our core hubs, and we're still not done building our core hubs. And so our ability now to go back and to put seats back into our core where our cost structure is most advantaged and where our profitability is highest is where we're focused for the rest of this year. Dan Janki -- Chief Financial Officer And seat growth is about a point below, some growth that they see. Yes Brandon Oglenski -- Barclays -- Analyst OK. I appreciate that. And then, Glen, on the Latin differentiation, I think you were talking separately about short-haul and long-haul. Can you unpack that a little bit more for us? Glen Hauenstein -- President Well, we are really pleased with our South America performance. As I said in the prepared remarks, our capacity is up in the 30% to 40% range, and we're doing that with minimal degradation of our unit revenue. So we're really off to a great start with LATAM, and I think we have a really great future working with them to continue to evolve as the leading carrier between the United States and South America in our joint venture. So put that aside and then say the particularly leisure destinations, there was an oversupply in the first quarter. I think in first quarter of '23 the industry saw historically higher returns. And so when there are historically high returns, everybody wants to do more of it. We did considerably more of it. The industry did considerably more of it. And listen, it was quite profitable for us, but at the expense of unit revenues. And so as we move through next year, I'd say there's going to be probably a moderation of capacity as there always is when those things happen as well as easier comps as we get to next year. So I'm looking forward to actually next year's comps in Latin America. Brandon Oglenski -- Barclays -- Analyst OK. Thank you. Operator Thank you. Your next question is coming from Conor Cunningham from Melius Research. Your line is live. Conor Cunningham -- Melius Research -- Analyst Hi, everyone. Thank you. Just if we play back the performance in the U.S. domestic market in 1Q, it was pretty fantastic when you started off saying just expecting to inflect positive in March and you saw some improvement in quarter then an outcome of plus 3%. You've highlighted corporate momentum and premium. But I think there's a disparity in just your hub performance. Can you just talk about coastal gateways versus Core Hub rebuild and how things are playing out there just in general? Glen Hauenstein -- President Well, I think we're very pleased with our coastal gateways and really, they're moving in a pretty tight band right now with more capacity going to our core hubs and our core hubs generally having a higher unit revenue base than our coastal gateways that should have a positive inflection on total revenues. And I think that gets accelerated in the second and third quarters. Again, we had probably a little bit more in Boston than we had planned on because there were some opportunities there for us to move airplanes in. But generally, we're really pleased with where we sit today and how the back half of this year should play out for us. Conor Cunningham -- Melius Research -- Analyst OK. And then it seems like there's a potential for regulatory oversight to potentially pick up your -- when you have conversations with the FAA, what are some changes that they're talking to you about just given the operating environment? And maybe what are you asking them in general? It just seems like it could be a wildcard to potential growth, maybe medium to long term. So just any thoughts there would be helpful. Thank you. Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary Hey, Conor. This is Peter. So, just I'd say, fundamentally with the FAA, we're working very closely with them around staffing models, because as you know, there's an air traffic control shortage. And we're also engaged in Washington trying to help solve some of those, I'll say, more structural challenges around infrastructure. You probably have seen that the industry has made a request off the FAA to extend the New York Slot Waiver another season. And that's what I would call responsible partnership with our regulator in light of the staffing challenges they've had. So, a great relationship, deep partnership with them. Conor Cunningham -- Melius Research -- Analyst OK. Thank you. Operator Thank you. Your next question is coming from Savi Syth from Raymond James. Your line is live. Savi Syth -- Raymond James -- Analyst Hey. Good morning. Just a follow-up to Jamie's question on the premium revenue. Just kind of curious if you could share how much of that 10% is coming from volume versus yield, and I think you mentioned continuing to grow the premium offering. So just curious what the trend might be. Glen Hauenstein -- President Right. I would say, right now, the premium is probably 50-50 split between traffic and yield. Savi Syth -- Raymond James -- Analyst That's helpful. And then in terms of the volume growth in offering, how should we think about that? Glen Hauenstein -- President Well, I think we've said that, if you look at the longer-term trends, that we really haven't been adding coach seats into the domestic arena over the past 10 years. And so, all of our growth has been in the premium products and services. And I think on Investor Day, we're going to talk a little bit more about where we see that going, but I think we see a long runway for that in the coming years. Dan Janki -- Chief Financial Officer Yes. Premium product while pace main cabin all the way as you look at our fleet deliveries through 2030. Savi Syth -- Raymond James -- Analyst Helpful. And if I might on another follow-up, just on the domestic capacity growth with building back the hubs, is that then where the capacity comes a lot in this kind of regional-type markets or should I think of it as kind of growth in regional then shift some of those aircraft on to kind of other bigger markets that you could use those aircraft? Glen Hauenstein -- President I think little of both. We've been very short on our regionals. We still have probably at least 50 regionals either not flying or underutilized, probably almost 100 when you include the underutilization. So, that's a lot of seats and a lot of departures that we need in our hubs and we're missing a lot of the core feed from the regional feed in the local vicinity. So, right now, some of that's being done by Mainline and those planes can gravitate out, but mostly we'll be adding frequencies back in that historically have been there from feeder markets into our core hubs. Savi Syth -- Raymond James -- Analyst Helpful. Thank you. Operator Thank you. Your next question is coming from David Vernon from Bernstein. Your line is live. Dave Vernon -- AllianceBernstein -- Analyst Maybe just following up on that point of thought there, Glen, as you think about the improvements in the regional utilization, is there also some room for improving utilization to prior pre-COVID levels on the narrow body fleet as well? Or is this primarily just a regional issue? Glen Hauenstein -- President No. I would hope so. If we look at our wide bodies, we're now at or above where we were in '19 in terms of annual utilization. And this is going to be a game of working with our operators to improve asset utilization across the network, whatever they are, planes, airports. And that's the game we're playing, that's the long game and I think that's been a really exciting challenge for us all. Dave Vernon -- AllianceBernstein -- Analyst Yes. OK. And then I guess as you think about the yield management, it's a problem sort of through the summer months, you seem to have a lot more premium capacity into the mix. Does that change the way you guys go about sort of the day-to-day in managing pricing? Are there other opportunities in there that you see to continue to kind of work the segmented cabin differently than you may have done in the past? I'm just trying to get a sense for -- as this new sort of model is being marketed at a higher level of volume and a greater distribution of the number of seats you have on each aircraft, is that changing sort of the upper frontier on what you might be able to get out of yield management? Glen Hauenstein -- President Well, I think what we said is that, what really pushed us to do this journey several years back was the fact that on the premium products and experiences side, we controlled more of our destiny than we did on the commodity side. And so absolutely, that's been our journey, is to continue to play the game against ourselves as opposed to playing against the lowest common denominator. And I think we'll have a lot again on our Investor Day to talk about what we see the next evolution. But we see a lot of runway -- not to tease it out, but we see a lot of runway in taking this even further and using new tools and using things that we'll be talking about in November that I think will be very exciting for our investor base. Dave Vernon -- AllianceBernstein -- Analyst OK. And then last one for me is that you mentioned something about sort of improvements in retailing. Could you elaborate a little bit around what you're talking about there? Glen Hauenstein -- President Well, I think that that's the holy grail is, why did we wind up in a commoditized environment was because we couldn't distribute products and services. We weren't -- the industry was not geared to this. And this has been our long journey. And every day, I think we get better and better and better at it, whether or not we're working internally to improve our own internal displays where we're 65% direct-to-consumer right now or whether we're working with online booking tools to improve their display of products and services and making progress on that front as well. So, this has been a very, very long journey and every day we're working on improving it. Dave Vernon -- AllianceBernstein -- Analyst All right. Thanks very much for the time, guys. Operator Thank you. Your next question is coming from Sheila Kahyaoglu from Jefferies. Your line is live. Sheila Kahyaoglu -- Jefferies -- Analyst Hi. Good morning, everyone. Thank you for the time. Maybe just a follow-up on Latin America. The large capacity growth there in partnership with LATAM obviously magnifies the unit revenue decline, but you've, of course, talked about making these investments profitably. So maybe can you talk about where you are with -- today relative to your expectations in Latin America and how you expect that profitability curve to shape up in the coming quarters and years? Glen Hauenstein -- President Yes. I think we still see opportunity. We've got -- a lot of the opportunities now are in our baseline and we'll continue to work with LATAM to refine that moving forward. But I don't think you'll see this kind of dramatic growth in the out years as we'll be more focused on turning that into more of a harvest mode as opposed to an investment mode as we continue to work on bridging the two networks together. Sheila Kahyaoglu -- Jefferies -- Analyst OK. And then maybe one on cost, just to sum it up, Q1 TRASM performance was really good, Ed, and you talked about completion factors and just operations helping that. So, the Q2 guide assumes a bit more normalized putting you guys at 2% cost growth. So, is it just fair to think about that run rate in the context of the year with a low-single-digit guide? And what are the moving pieces as we think about headcount, maintenance costs, and any other noise you'd highlight throughout the year? Dan Janki -- Chief Financial Officer Yes. I think the 2% is in line with the low-single-digit. I think when you think about the variables inside of that run -- it starts with running a great operation. When you run a great operation, that sets the foundation. You get those frictional costs out and it really allows the operators and you're seeing it in two quarters in a row to have the confidence and really lean in and continue to drive not only better improvement in the operation but also get after those efficiencies. And as you do that, in a lot -- we said that we're carrying headcount higher than historical for what we ran in 2019, about 10%, and we'll grow into that and that drives the efficiency associated with that. And no change to maintenance. Maintenance is as we expected and -- but we'll continue to manage the supply chain. It's going to be the one that is -- has the largest constraint still associated with it as we execute through the year. Glen Hauenstein -- President Great. Thank you. Julie Stewart -- Vice President, Investor Relations Matthew, we'll now go to our final analyst question before moving to the media. Operator Certainly. Your last question is coming from Stephen Trent from Citi. Your line is live. Stephen Trent -- Citi -- Analyst Good morning, everybody, and thanks very much for squeezing me in. Just a follow-up question to Sheila's, if I may. When we think about probably the -- across the industry fleets getting older, could you give us a high-level sense about how valuable Delta TechOps is going to be for you guys over the next 10 years, for example, and that competitive advantage you have versus your legacy competitors? Thank you. Dan Janki -- Chief Financial Officer Yes, we can. I think it is a unique advantage, that along with our fleet, our fleet has actually gotten younger over the last few years. But we've also given the constraints in the industry around the OEMs, have leaned into restore the network into our flex fleets. So, flying 80 717s, flying the 757s longer than we anticipated, and that puts demand on our TechOps teams, and their ability to ensure that we have those aircraft, that they're reliable, is -- really allows us to flex and be more nimble. And as we go through this period and it gets more normalized, we're in a period of more normalized growth and more consistency around equipment, it's also going to allow us to go into a period of more natural retirements. We haven't retired any aircraft in 2022 and 2023. We'll start that at the back half of this year and that's really where our team has always shined, the ability to naturally retire but then recoup that equipment and reuse that used material and run out the fleets and they did it with the MD-88s and 90s. They've done it for a decade and they have that history. And that's really what we have in front of us. Ed Bastian -- Chief Executive Officer Stephen, if I could add on the back end of Dan's comments, two things. In the first quarter, our overall mainline reliability and completion factor was the strongest first quarter in our history. And that's quite a statement given where we've been through and the supply chain constraints that still exist and I attribute a lot of that to the maintenance team -- the TechOps team, having the product ready every day and responding to the opportunities that we see in front of us. So that's going to continue to be a positive green arrow forward as we move forward these next couple of years, as Dan was saying. Second thing is the MRO, while we've taken, I'd say, a pause given that we've had to focus our energies on our own fleet as compared to our customer's fleets. Going forward in the next couple of years, that's going to start turning back on again. And that growth rate that we've talked about is still there. It's just waiting for us. And I'm very, very excited as to what you talk about a five to 10-year timeline on that. That business is, I think is going to be -- our ability to capture that business is going to be even stronger than we were thinking pre-pandemic given what we've all been through. So, hats off to the TechOps team, a lot more work to go, but we are absolutely on the right path. Stephen Trent -- Citi -- Analyst Thank you very much, Ed and Dan. I appreciate the time. Julie Stewart -- Vice President, Investor Relations Thanks, Steve. That will wrap up the analyst portion of the call. I'll now turn it over to Tim Mapes to start the media questions. Tim Mapes -- Chief Marketing and Communications Officer Thank you, Julie. Matthew, if you don't mind, as we transition from the analysts to reporters, could you repeat the instructions for one question and a follow-up, please? Operator Certainly. At this time, we'll be conducting a Q&A session for media questions. [Operator instructions] Your first question is coming from Leslie Josephs from CNBC. Your line is live. Leslie Josephs -- Airline Reporter Hi, everyone. Thanks for taking my questions. On operations, just wondering if you saw any benefit from the fact that a lot of your hubs this past winter got rain and not blizzards? It seems like if it was 10, 15 degrees cooler, we have been talking about grounding the airline for a little bit at those hubs. And then separately, on the mechanical issues that some airlines have been having recently, have you reminded your employees or put out any kind of communication just to ensure that they're following all protocols and just kind of reemphasize safety at Delta? Thanks. Ed Bastian -- Chief Executive Officer Hi, Leslie. It's Ed. With respect to weather, we certainly have had a nice run of weather broadly across our system, candidly, across our country. And that certainly has helped with respect to the overall operational performance. But what we like to do is neutralize for weather events and we see the performance of the airline weather-adjusted within our own system and we're outperforming our prior performance even weather-adjusted. So the improved weather just adds nice icing to the cake, but the fundamental, the core is running at a much, much better clip. And as the communications, safety is job one at all times, every single day. We don't send out special messages around safety. We -- every day is Safety Day around here. Leslie Josephs -- Airline Reporter Thank you. Operator Thank you. Your next question is coming from Mary Schlangenstein from Bloomberg News. Your line is live. Mary Schlangenstein -- Airline Reporter Thank you. Good morning. I wanted to ask on the request for an addition of the Slot Waivers through another year. Have you seen any improvement at all in the ATC issues in the New York area? And does the Slot Waiver extension also include the DC area? Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary So, Mary, thank you. It's Peter Carter. It does traditionally include the DC area. That's the way the FAA likes to view it. And we still have a shortage of ATC controllers. So, it's still an incredibly challenging environment. Mary Schlangenstein -- Airline Reporter Have you seen any improvement at all? Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary Well, we've had the waivers -- we've had the waivers in place. So of course, with those waivers, there would be improvement because there's less capacity in that marketplace. But absent the waiver, I think we'd have some -- as an industry, some real challenges in New York. Mary Schlangenstein -- Airline Reporter Great. Thank you very much. Tim Mapes -- Chief Marketing and Communications Officer Thank you for the question, Mary. Matthew, I believe that wraps up our time, if you want to close out the call. Answer:

the Delta Air Lines March quarter 2024 financial results conference call

Operator Good morning, everyone, and welcome to the Delta Air Lines March quarter 2024 financial results conference call. My name is Matthew, and I will be your coordinator. [Operator instructions] As a reminder, today's call is being recorded. [Operator instructions] I would now like to turn the conference over to Julie Stewart, vice president of investor relations. Please go ahead. Julie Stewart -- Vice President, Investor Relations Thank you, Matthew. Good morning, everyone, and thanks for joining us for our March quarter 2024 earnings call. Joining us from Atlanta today are our CEO, Ed Bastian; our president, Glen Hauenstein; and our CFO, Dan Janki. Ed will open the call with an overview of Delta's performance and strategy, and Glen will provide an update on the revenue environment. Dan will discuss costs and our balance sheet. After the prepared remarks, we'll take analyst questions. [Operator instructions] And after the analyst Q&A, we'll move to our media questions. Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in Delta's SEC filings. We'll also discuss non-GAAP financial measures, and all results exclude special items unless otherwise noted. You can find a reconciliation of our non-GAAP measures on the Investor Relations page at ir.delta.com. And with that, I'll turn the call over to Ed. Ed Bastian -- Chief Executive Officer Well, thank you, Julie, and good morning, everyone. We appreciate you joining us today. Earlier this morning, we reported our March quarter results, posting pre-tax earnings of $380 million or $0.45 per share, a $0.20 improvement over last year on revenue that was 6% higher and a new record for first quarter. Free cash flow was $1.4 billion, and we delivered a return on invested capital of nearly 14%, putting Delta's returns in the top half of the S&P 500. We are delivering industry-leading operational reliability and have widened the gap to our competition. Last summer, we made forward-leaning investments in the operation. And since then, our teams have delivered operational performance that is among the best in our history with mainline cancellations down 85% and setting new records for completion factor in both the fourth quarter and the first quarter. I'd like to sincerely thank Delta's 100,000 people for your dedication, professionalism, and hard work in delivering these outstanding results. In February, we recognized the efforts of our people with $1.4 billion in profit sharing, more than the rest of the industry combined and continuing Delta's long-standing philosophy to reward industry-leading performance with industry-leading compensation. Reflecting our People First culture, Forbes ranked Delta the fifth best large employer in America, and Delta was recently named the 2024 Global Airline of the Year by Air Transport World for our outstanding commitment to safety, operational performance, and premium customer service. While airline travel and transportation is what we do, it is the experiences on Delta that set us apart as a leading consumer brand and why Delta was recognized as No. 11 on Fortune's list of the world's most admired companies. Exciting customer-facing enhancements are on the near horizon, including the opening of new Delta One Lounges in JFK, Los Angeles, and Boston, the continued introduction of modern and fuel-efficient aircraft, new premium cabin service offerings, upgrades to the Fly Delta app and the international expansion of fast, free WiFi across our fleet. The rollout of WiFi and Delta Sync continues to be a tremendous success. Since launching last year, customers have logged more than 45 million free streaming quality sessions on board and millions have joined the SkyMiles program through this channel, recognizing our investment to ensure the future of travel is connected, we took the No. 2 spot in the travel category, a Fast Company's List of the Most Innovative Companies, the only airline to be recognized in the ranking. Loyalty to our brand has never been stronger. We continue to set new records with our remuneration from American Express, our most important commercial relationship, and are well on our way to our long-term target of $10 billion. On February 1st, we announced enhanced and refreshed benefits for our Delta SkyMiles American Express cards, providing more direct value and the customer response has been very positive. Turning to our outlook with strong first quarter performance and visibility into the strength of summer travel demand, we remain confident in our full-year guidance for earnings of $6 to $7 per share, free cash flow of $3 billion to $4 billion, and leverage of two and a half times. The three main guideposts that we shared with you in January. For the June quarter, we expect to deliver the highest quarterly revenue in our history of mid-teens operating margin and earnings of $2.20 to $2.50 per share. Our forecast for pre-tax profit of approximately $2 billion is on par with 2019 and just shy of last year due to higher fuel prices. Demand continues to be strong, and we see a record spring and summer travel season with our 11 highest sales days in our history, all occurring this calendar year. Spending on services recently to pass goods for the first time in five years, and there is further runway to return to their long-term trends. Delta's core consumers are in a healthy position and travel remains a top purchase priority. Generational shifts and evolving consumer preferences are driving secular growth in premium experiences. And business travel demand has taken another meaningful step forward this year with growth accelerating into the mid-teens over last year. When you put this level of demand strength together with the industry's increased focus on improving financial returns, this may be the most constructive backdrop that I've seen in my airline career. Our industry-leading performance continues to demonstrate the strength of Delta's differentiated brand and returns-focused strategy. And with our disciplined approach to capital investment and focus on free cash flow, Delta is exceptionally well positioned to further strengthen our balance sheet and deliver significant shareholder value. In closing, the momentum in the business continues to build. We are focused on delivering excellent reliability, elevating the customer experience, and improving efficiency across the company to support growth in our earnings and cash flow. I am excited for Delta's opportunities ahead, and we'll talk more about that and provide new long-term financial targets at our Investor Day, which we are scheduling for November 19th and 20th in New York City. Please put that on your calendar. Thank you again. And with that, let me hand it over to Glen for more details on our commercial performance. Glen Hauenstein -- President Thank you, Ed, and good morning. I want to start by thanking our employees for providing the best service and reliability in the industry to our customers every single day. 2024 is off to a great start, and we're delivering on our commercial priorities to optimize our network, grow higher-margin revenue streams, and invest in our future. Revenue for the March quarter increased 6% year over year to a record $12.6 billion on capacity growth of 6.8%. This result is at the high end of our initial guidance with upside driven by industry-leading operational performance and strength in close-in bookings. Since the start of the year, we've seen a sustained acceleration in business travel. Managed corporate travel sales grew 14% over the prior year with technology, consumer services, and financial services leading that momentum. We delivered positive unit revenues in our two largest entities, Domestic and Transatlantic, reflecting the continued optimization of our network. Total unit revenue growth improved 3 points sequentially to down 0.7%, including nearly a 1-point headwind from cargo and MRO. Domestic revenue grew 5% with record March quarter unit revenues, up 3% over the prior year. The more than 7-point improvement from 4Q to 1Q reflects strong demand trends and improving industry backdrop. International revenues grew 12% on a unit revenue decline of 3% as unit revenue growth in the transatlantic was muted by capacity investments from the continued rebuild of our Latin and Pacific franchise. Diverse high-margin revenue streams generated 57% of total revenue, differentiating Delta and underpinning industry-leading financial performance. Premium revenue was up 10% over prior year, and we have runway ahead as we continue adding more premium seats to our aircraft, improving our retailing capabilities, and further segmenting our products. Total loyalty revenue grew 12% on continued strength in the American Express co-brand portfolio with record quarterly remuneration of $1.7 billion. Following the refresh co-brand benefits, we saw card applications reach new records as we are seeing the highest premium acquisition mix in our program's history. Turning to our outlook. Consumer demand is robust and premium trends remain strong. The outlook for corporate travel is positive. 90% of Companies in our recent survey intend to maintain or increase travel volumes in 2Q, putting us back on track to deliver record corporate revenues in the back half of this year. For the June quarter, we expect revenue growth of 5% to 7% on capacity growth of 6% to 7% with unit revenues flat to down 2% from last year's very strong performance. Similar to the March quarter, 2Q faces a headwind from the normalization of travel credits. Domestically, we expect unit revenues to be flattish over prior year with growth focused on restoring our core hubs where departures and seats are not yet fully restored. The final stage of our core hub restoration will be the full return of regional flying. Pilot hiring has stabilized, increasing the capacity we expect to fly over the summer. We expect progressive improvement through 2025, driving higher asset utilization and improving our profitability. In the transatlantic, we are looking forward to another strong summer with record revenues. Unit revenues are expected to be similar to the last year as we lock record performance and benefit from the healthy demand for our premium cabins and improved corporate trends. In Latin America, profitability remains solid. Unit revenues are expected to be down double digits due to pressure in short-haul leisure markets. These markets are expected to see healthy improvements in the second half of the year as supply and demand comes back into balance. Our flying into deep South America, we are very pleased with the results. We are increasing capacity about 40% with minimal impact to unit revenues as we continue to deepen our ties with our JV partner, LATAM. We expect Pacific unit revenues to be in line with the prior year on 30% growth in capacity driven by strong demand for Korea and Japan, offsetting lower unit revenues in China. Profitability is expected to set a record as we continue to harvest the benefits of our multiyear restructuring. In closing, I'm pleased with how we have started 2024. Delta is continuing to lead on all fronts with industry-leading margin and returns, highlighting the strength of our trusted brand and differentiated commercial strategy. And with that, I'd like to turn it over to Dan to talk about the financials. Dan Janki -- Chief Financial Officer Great. Thank you, Glen, and good morning to everyone. For the March quarter, we delivered pre-tax income of $380 million, an improvement of $163 million over last year, earnings of $0.45 per share was at the upper end of our guidance as great operational performance and strong demand more than offset higher-than-expected fuel prices. Operational excellence is central to Delta's brand promise, and I couldn't be prouder of how our teams are delivering record reliability for our customers. A strong completion factor drove 1 point of higher capacity and nonfuel unit cost favorability. Nonfuel CASM was 1.5% above last year and ahead of guidance. Fuel prices averaged $2.76 per gallon, $0.16 higher than the midpoint of our guidance range. The refinery provided a $0.05 benefit generating a profit of $49 million. This was down $173 million from last year on more normalized refining margins. Fuel efficiency was 1.9% better than last year, benefiting from the continued renewal of our fleet and running a strong operation. Operating margin of 5.1% was 0.5 point higher year over year. Our pre-tax margin improved over 1 point, benefiting from reduced interest, pension expense, and higher earnings from our equity investments. We generated free cash flow of $1.4 billion. This was after paying $1.4 billion in profit sharing to our employees and investing $1.1 billion into the business. Debt reduction remains a top priority. Our leverage ratio improved to 2.9 times. During the quarter, we repaid $700 million of debt, including $400 million of scheduled maturities and $300 million of additional debt initiatives. We expect to repay at least $4 billion of debt this year and continue to be opportunistic in accelerating debt reduction. We are currently investment-grade rated at Moody's and BB+ at both S&P and Fitch, with all agencies now on positive outlook following updates from Fitch and Moody's during the quarter. Moving to the June quarter guidance. Combined with our outlook for top-line growth, we expect an operating margin of 14% to 15%, with earnings of $2.20 to $2.50 per share. Fuel prices are expected to be $2.70 to $2.90 per gallon, including a $0.10 contribution from the refinery. At the midpoint of this range, our all-in fuel price is expected to be over 10% higher than last year. Nonfuel unit costs are expected to be approximately 2% higher than last year, consistent with our full-year outlook of low single digit. Growth is normalizing, and we've entered a period of optimization with a focus on restoring our most profitable core hubs and delivering efficiency gains across the enterprise. The investments we made in fleet health and reliability in the second half of 2023 are paying off, supporting industry-leading operational performance. As we discussed with you in January, these investments are expected to continue through 2024 as we complete an elevated volume of heavy airframe and engine checks while managing through industrywide supply chain constraints. The intensity of hiring and training has moderated. The teams have good momentum in delivering on our efficiency goals for the year. This will help fund the investment in our people, in our operations, and the customer experience that support our revenue premium. In closing, we continue to be confident in our full-year outlook of earnings of $6 to $7 per share and free cash flow of $3 billion to $4 billion. Our industry-leading operational and financial performance is a result of the hard work and dedication of the Delta people. I'd like to thank each of them for what they do every day. With that, I'll turn it back to Julie for Q&A. Julie Stewart -- Vice President, Investor Relations Thanks, Dan. Matthew, can you please remind the analysts how to queue up for questions? And the first analyst question comes from Duane Pfennigwerth. Questions & Answers: Operator Certainly. [Operator instructions] Your first question is coming from Duane Pfennigwerth from Evercore ISI. Your line is live. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey. Good morning. Thank you. Just on the improved cost execution, you just talked on it in the script there, Dan, but can you speak to maintenance expense and the outlook relative to your expectations? The tone sounds like you're turning a corner on maintenance. And how do you think about that line into the second half and perhaps into next year? Dan Janki -- Chief Financial Officer Well, maintenances -- Duane, thank you. Maintenance is on plan and performing as we expected as we talked to you at the beginning part of the year, maintenance, we expect it to be up year over year $350 million. We expect that for the full year, the first quarter was on plan, and the team is executing well. And those investments, as I mentioned, that we made in fleet health will continue as we go through this year, those proactive visits along touching the aircraft. You're seeing the impact. Cancellations from a maintenance perspective year over year were down 80% sequentially, they improved 30%. So team is doing a good job. They're on plan and as expected. Ed Bastian -- Chief Executive Officer Dane, if I could add on to that, I want to congratulate the Tech Ops team, John Laughter, whose leadership over there in terms of helping to make that turn. We are seeing a renewed set of confidence back in the team. It's been a tough few years on the rebuild. Too early to declare victory. We know the supply chain continues to have a tremendous amount of constraint in it. But I'm confident that we're on a good journey. It's a good path here. Duane Pfennigwerth -- Evercore ISI -- Analyst Appreciate those thoughts. And then maybe more of a conceptual one for my follow-up on corporate and the continued recovery in corporate you're pointing to. I assume that's generally close in. And I wonder if you could comment on if you're seeing a decrease in average trip length. So maybe more trips but fewer days on the road per trip. Any commentary on those trends? Glen Hauenstein -- President No. I'd just say we're seeing both. We're seeing some shorter, and we're seeing some longer where people are blending the leisure trip with the business trips. And generally, they're purchasing a little bit further out than they had. And I think that's related to not having change fees any longer. So we've seen some changes in the booking curve, but really encouraged by what we see in terms of corporate bookings as we look forward through this quarter and as we look forward into the next couple of quarters. Duane Pfennigwerth -- Evercore ISI -- Analyst Thank you very much. Operator Thank you. Your next question is coming from Mike Linenberg from Deutsche Bank. Your line is live. Mike Linenberg -- Deutsche Bank -- Analyst Hey. Good morning everyone. Glen, I just -- I want to get back, you talked about the normalization of travel credits and how that still represents a bit of a headwind. Can you quantify what that impact is on June TRASM? Glen Hauenstein -- President I think we said in our previous that we faced headwinds in up to two -- a couple of points. And I think we're not going to go into the details of that. But that's generally what we've disclosed in the past. Mike Linenberg -- Deutsche Bank -- Analyst OK. Great. And then just my second question to Ed. Ed, can you just give us an update on the status of the -- I guess, it's an appeal process with the DOT on Aeromexico. How does that play out? Or I should say, what is the time line of that? And any milestones we should look forward with respect to that? Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary Hey, Mike. It's Peter Carter. Thanks for the question. That was a tentative order, and I think, as you know, our strong view is the DOT really struck out on that one. They're typically a great partner. But this was an example of regulatory overreach, which is why we've challenged it. It's bad for consumers, it's bad for competition. It's bad for the local economies that those flights have served. We are currently engaged with the administration and discussing, I'll say, less punitive solutions than the tentative order that was proposed. And I would say we've had hundreds of our, I'll say, with respect to the connection between Mexico and America way in, in support of this joint venture. We think this is going to take some time before the DOT issues a final order a number of months, but we're cautiously optimistic that they're going to come up with a better solution. Mike Linenberg -- Deutsche Bank -- Analyst Great. Thanks for that, Peter. Operator Thank you. Your next question is coming from Scott Group from Wolfe Research. Your line is live. Scott Group -- Wolfe Research -- Analyst Hey. Thanks. Good morning. Glen, when I think about the original guide for the year or three months ago, I think it was sort of flat RASM for the year. So we're down slightly in Q1, midpoint of guide for Q2, down slightly. So what's your visibility to second-half RASM inflection? I guess ultimately, at this point, do you see more upside or downside risk to that flat RASM? And maybe just with that, like the travel credit headwind, is that bigger or smaller in the second half? Glen Hauenstein -- President No. I think it's pretty -- first, on the travel credit headwinds, it is consistent through the year. But what I would say, is that we're ahead of our internal plan to get to flattish for the year and the comps get easier as we move through the year. And if you look at the back half of guidance as well as what people have loaded in their schedules, it looks like industry capacity is reaching a peak in 2Q. So I think we see a great setup for the back half of this year and we're on plan or ahead of plan from where we sit right now. Scott Group -- Wolfe Research -- Analyst OK. And then I just want to follow up just on RASM a little bit. So if you just -- last year, your absolute RASM in second quarter just meaningfully outperformed seasonality. And then you underperformed in Q3, right? If you look this year, you're guiding again like to really outperform like pre-pandemic seasonality. I'm wondering, do you think that there is a seasonal shift from Q3 into Q2 relative to what we used to see? And does that help in Q2? Does it potentially hurt Q3? I'm just curious your thoughts on that. Glen Hauenstein -- President I have thoughts some very -- yes, it has changed, and it's related to schools coming back in the south, in particular, earlier and earlier into August. As a matter of fact, here, I believe, schools in Georgia go back the first week of August now. And so that has materially changed, I think, over the years, making the second quarter stronger and making the third quarter a bit weaker. But I think we -- as we think about how we plan that now, we're incorporating that into our capacity plans moving forward. Scott Group -- Wolfe Research -- Analyst OK. All right. Thank you, guys. Operator Thank you. Your next question is coming from Ravi Shanker from Morgan Stanley. Your line is live. Ravi Shanker -- Morgan Stanley -- Analyst Thanks, everyone. So it looks like your leverage is getting to be in a pretty good place. When do you think you can start flexing the balance sheet for other use of cash kind of capex, cash return kind of over the next 12 months? Ed Bastian -- Chief Executive Officer Well, thanks, Ravi. We're not in a position yet to make any comments or any decisions around that. We still have more debt than we're comfortable with, and that continues to be the first call on cash to continue to take risk off the table. Interesting, I was looking at some numbers preparing for this call. if you look at our target for the end of this year and you factor in that we actually have eliminated the pension obligation, which we had at the end of 2019. We're actually pretty close to the leverage ratio we were at at the end of 2019, entering the pandemic. So we have made a lot of progress. That said, we'll be talking a bit about that at our Investor Day in November. But the first call will be and will be for some time to pay down the debt. Ravi Shanker -- Morgan Stanley -- Analyst Got it. That's helpful. And maybe as a follow-up and a little bit of a nuance detailed question here. Kind of obviously, with the Paris Olympics kind of being a pretty big catalyst for transatlantic travel in this summer kind of -- are we thinking of that potentially bringing on some noise toward end of 2Q, early 3Q? Kind of is that something that you would caution us in terms of modeling cadence versus seasonality. Glen Hauenstein -- President Well, generally, the Olympics are not good for airline revenues. And this year, I think, is no exception to that. So while we see a very favorable backdrop for Europe in its totality, there are some challenges for Paris as generally business travel ceases to and from the local markets as the Olympics approach. So I wouldn't say that, that's going to be a windfall. It's actually going to be a bit of a headwind for us in the numbers we've shared with you. Ed Bastian -- Chief Executive Officer That said, we are very excited as sponsor Team USA for the Paris Olympics and we'll get through it. Ravi Shanker -- Morgan Stanley -- Analyst Thanks, guys. Operator Thank you. Your next question is coming from Helane Becker from TD Cowen. Your line is live. Helane Becker -- TD Cowen -- Analyst Thanks very much, operator. Hi, team. So I just have two questions. In the first quarter, your landing fees seemed a little bit higher than I would normally expect to see for a first quarter. Is that maybe you can explain that rather than me suggesting what it could be? And then for my follow-up question, one of the issues that American Express cardholders have of which I am one is acceptance rate, especially in Europe. And I'm wondering if you're starting to see an improvement in that area as well? Dan Janki -- Chief Financial Officer Yeah. On landing fees, when you look at it year over year, yes, they're up. Volume, one; two, related to the cut in as it relates to our generational redevelopment projects you're picking up some of that expense. And then I would say the third item, airports across the country in 2022 and 2023 benefited from CARES. And as those have now gone away, they're adjusting their rates and you're seeing that come through. Helane Becker -- TD Cowen -- Analyst OK. That's very helpful. Glen Hauenstein -- President And on American Express global acceptance rates, we worked very hard years back with American Express on improving the domestic acceptance rates. And right now, they're at all-time highs in terms of the number of merchants that you can use American Express that domestically. And they are also doing that internationally. So particularly places that were strong, and we worked with them on prioritizing those places that Americans like to go for vacations. Helane Becker -- TD Cowen -- Analyst OK. That's very helpful. Thank you, guys. Operator Thank you. Your next question is coming from Andrew Didora from Bank of America. Your line is live. Andrew Didora -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, everyone. So, Glen, I had a question just with regards to your capacity. How are you thinking about the cadence as we move into the back half of the year obviously, with the first half capacity up north of six, 3Q schedules are still sort of above your 3% to 5% original guide. How should we think about your growth as we move through the back of the year because it would imply based on 3Q schedules that 4Q would be down. Kind of find that hard to believe. But just any thoughts there would be helpful. Thank you. Glen Hauenstein -- President I think we're going to -- first of all, thanks for our operating teams who have given us such exceptional completion factors that accounted for even higher than we had planned for. So I'd say, if those continue, which I imagine they will or hope they will, that we would be at the high of the 3% to 5%. And I think it's a bit early to say, but I think that we will be right at that 5% depending on how the completion factor comes in. Andrew Didora -- Bank of America Merrill Lynch -- Analyst That's helpful. Thank you. And then I think in your prepared remarks, you spoke to MRO headwinds in the ancillary revenue line in the quarter. What is driving that? I just sort of thought given everyone's elevated maintenance expense, it would have been a little bit more of a tailwind? Any thoughts there? Dan Janki -- Chief Financial Officer I'd say two things. One is, as it relates to our third-party activity, it's just -- we're always -- we're constrained by what the industry is constrained by, which is material and ability to generate that output. And as we've talked about our tech ops team, John and the team are focused on the Delta fleet. But I would say the constraint continues to be material and turnaround times associated with it. Andrew Didora -- Bank of America Merrill Lynch -- Analyst Understood. Thank you. Operator Thank you. Your next question is coming from Jamie Baker from J.P. Morgan. Your line is live. Jamie Baker -- JPMorgan Chase and Company -- Analyst Thanks. Good morning, everybody. A couple for Glen. First, on the topic of RASM premiums, pre-COVID, you were running, what, 20% domestic premium to the industry, and I think you were roughly flat on international. You and I spoke on one of the earnings calls as to what that what the path to achieving an international RASM premium might look like. Can we revisit that topic? Where is Delta currently both domestic and international. And where do you see that heading from here in the post-COVID world? Glen Hauenstein -- President Well, thanks for the question, Jamie. I think right now, we believe we are running international routes on premiums, that have primarily been driven by higher load factors on the fleet. But as the fleet continues to evolve and we continue to put more premium seats in the mix, we believe that is one of the key drivers for us to continue to accelerate our relative performance to our industry peers. So I think we're on a journey there, and I think we are now generating premiums consistently. And hopefully, we can accelerate those over the next several years as we execute on our plans to differentiate Delta. Jamie Baker -- JPMorgan Chase and Company -- Analyst And as a follow-up, Glen, on premium. So premium revenue was up 10% in the quarter, main Cabin was up 4%. What can you tell us about the constitution of that 4%? For example, what's the trend with basic economy? What percent of main cabin passengers are SkyMiles members compared to the premium cabins, that sort of thing? I'm just trying to understand where the 4% is coming from. Are those new customers? Are you taking share from discounters? That sort of thing. Glen Hauenstein -- President I think in the quarter, we ran a record domestic load factor in the first quarter. So what I believe drove that was the incremental traffic that we took over historical levels. So pretty excited about doing that in the first quarter. As you know, the first quarter is the most challenging in terms of loads. And for us to come through that quarter with the premiums that we took, I think, really is a testament to the strength of our brand. And of course, as we get through the year, there'll be less and less discounted seats available as you get toward peak. But generally, we're most open in 1Q. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK. Very helpful. Thank you, everyone. Operator Thank you. Your next question is coming from Brandon Oglenski from Barclays. Your line is live. Brandon Oglenski -- Barclays -- Analyst Hey. Good morning and thanks for taking the question. So, Glen, I guess I wanted to come back to domestic growth this summer because it looks like you're jumping up to 6% or 7% from about 2% in the first quarter. In the context around this, I think investors were a little bit concerned that, that growth could lead to lower RASM, but obviously, you're guiding to flat. So can you dig a little bit deeper on your domestic network priorities and maybe a little bit more on regional expansion? Glen Hauenstein -- President I think there -- what we've said in the past, and I'd like to go back to is, kind of coming out of COVID, we had to allocate the resources we had available. And those resources went to our once-in-a-lifetime opportunities to take leading positions in places like Boston and Los Angeles at the expense of rebuilding our core hubs, and we're still not done building our core hubs. And so our ability now to go back and to put seats back into our core where our cost structure is most advantaged and where our profitability is highest is where we're focused for the rest of this year. Dan Janki -- Chief Financial Officer And seat growth is about a point below, some growth that they see. Yes Brandon Oglenski -- Barclays -- Analyst OK. I appreciate that. And then, Glen, on the Latin differentiation, I think you were talking separately about short-haul and long-haul. Can you unpack that a little bit more for us? Glen Hauenstein -- President Well, we are really pleased with our South America performance. As I said in the prepared remarks, our capacity is up in the 30% to 40% range, and we're doing that with minimal degradation of our unit revenue. So we're really off to a great start with LATAM, and I think we have a really great future working with them to continue to evolve as the leading carrier between the United States and South America in our joint venture. So put that aside and then say the particularly leisure destinations, there was an oversupply in the first quarter. I think in first quarter of '23 the industry saw historically higher returns. And so when there are historically high returns, everybody wants to do more of it. We did considerably more of it. The industry did considerably more of it. And listen, it was quite profitable for us, but at the expense of unit revenues. And so as we move through next year, I'd say there's going to be probably a moderation of capacity as there always is when those things happen as well as easier comps as we get to next year. So I'm looking forward to actually next year's comps in Latin America. Brandon Oglenski -- Barclays -- Analyst OK. Thank you. Operator Thank you. Your next question is coming from Conor Cunningham from Melius Research. Your line is live. Conor Cunningham -- Melius Research -- Analyst Hi, everyone. Thank you. Just if we play back the performance in the U.S. domestic market in 1Q, it was pretty fantastic when you started off saying just expecting to inflect positive in March and you saw some improvement in quarter then an outcome of plus 3%. You've highlighted corporate momentum and premium. But I think there's a disparity in just your hub performance. Can you just talk about coastal gateways versus Core Hub rebuild and how things are playing out there just in general? Glen Hauenstein -- President Well, I think we're very pleased with our coastal gateways and really, they're moving in a pretty tight band right now with more capacity going to our core hubs and our core hubs generally having a higher unit revenue base than our coastal gateways that should have a positive inflection on total revenues. And I think that gets accelerated in the second and third quarters. Again, we had probably a little bit more in Boston than we had planned on because there were some opportunities there for us to move airplanes in. But generally, we're really pleased with where we sit today and how the back half of this year should play out for us. Conor Cunningham -- Melius Research -- Analyst OK. And then it seems like there's a potential for regulatory oversight to potentially pick up your -- when you have conversations with the FAA, what are some changes that they're talking to you about just given the operating environment? And maybe what are you asking them in general? It just seems like it could be a wildcard to potential growth, maybe medium to long term. So just any thoughts there would be helpful. Thank you. Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary Hey, Conor. This is Peter. So, just I'd say, fundamentally with the FAA, we're working very closely with them around staffing models, because as you know, there's an air traffic control shortage. And we're also engaged in Washington trying to help solve some of those, I'll say, more structural challenges around infrastructure. You probably have seen that the industry has made a request off the FAA to extend the New York Slot Waiver another season. And that's what I would call responsible partnership with our regulator in light of the staffing challenges they've had. So, a great relationship, deep partnership with them. Conor Cunningham -- Melius Research -- Analyst OK. Thank you. Operator Thank you. Your next question is coming from Savi Syth from Raymond James. Your line is live. Savi Syth -- Raymond James -- Analyst Hey. Good morning. Just a follow-up to Jamie's question on the premium revenue. Just kind of curious if you could share how much of that 10% is coming from volume versus yield, and I think you mentioned continuing to grow the premium offering. So just curious what the trend might be. Glen Hauenstein -- President Right. I would say, right now, the premium is probably 50-50 split between traffic and yield. Savi Syth -- Raymond James -- Analyst That's helpful. And then in terms of the volume growth in offering, how should we think about that? Glen Hauenstein -- President Well, I think we've said that, if you look at the longer-term trends, that we really haven't been adding coach seats into the domestic arena over the past 10 years. And so, all of our growth has been in the premium products and services. And I think on Investor Day, we're going to talk a little bit more about where we see that going, but I think we see a long runway for that in the coming years. Dan Janki -- Chief Financial Officer Yes. Premium product while pace main cabin all the way as you look at our fleet deliveries through 2030. Savi Syth -- Raymond James -- Analyst Helpful. And if I might on another follow-up, just on the domestic capacity growth with building back the hubs, is that then where the capacity comes a lot in this kind of regional-type markets or should I think of it as kind of growth in regional then shift some of those aircraft on to kind of other bigger markets that you could use those aircraft? Glen Hauenstein -- President I think little of both. We've been very short on our regionals. We still have probably at least 50 regionals either not flying or underutilized, probably almost 100 when you include the underutilization. So, that's a lot of seats and a lot of departures that we need in our hubs and we're missing a lot of the core feed from the regional feed in the local vicinity. So, right now, some of that's being done by Mainline and those planes can gravitate out, but mostly we'll be adding frequencies back in that historically have been there from feeder markets into our core hubs. Savi Syth -- Raymond James -- Analyst Helpful. Thank you. Operator Thank you. Your next question is coming from David Vernon from Bernstein. Your line is live. Dave Vernon -- AllianceBernstein -- Analyst Maybe just following up on that point of thought there, Glen, as you think about the improvements in the regional utilization, is there also some room for improving utilization to prior pre-COVID levels on the narrow body fleet as well? Or is this primarily just a regional issue? Glen Hauenstein -- President No. I would hope so. If we look at our wide bodies, we're now at or above where we were in '19 in terms of annual utilization. And this is going to be a game of working with our operators to improve asset utilization across the network, whatever they are, planes, airports. And that's the game we're playing, that's the long game and I think that's been a really exciting challenge for us all. Dave Vernon -- AllianceBernstein -- Analyst Yes. OK. And then I guess as you think about the yield management, it's a problem sort of through the summer months, you seem to have a lot more premium capacity into the mix. Does that change the way you guys go about sort of the day-to-day in managing pricing? Are there other opportunities in there that you see to continue to kind of work the segmented cabin differently than you may have done in the past? I'm just trying to get a sense for -- as this new sort of model is being marketed at a higher level of volume and a greater distribution of the number of seats you have on each aircraft, is that changing sort of the upper frontier on what you might be able to get out of yield management? Glen Hauenstein -- President Well, I think what we said is that, what really pushed us to do this journey several years back was the fact that on the premium products and experiences side, we controlled more of our destiny than we did on the commodity side. And so absolutely, that's been our journey, is to continue to play the game against ourselves as opposed to playing against the lowest common denominator. And I think we'll have a lot again on our Investor Day to talk about what we see the next evolution. But we see a lot of runway -- not to tease it out, but we see a lot of runway in taking this even further and using new tools and using things that we'll be talking about in November that I think will be very exciting for our investor base. Dave Vernon -- AllianceBernstein -- Analyst OK. And then last one for me is that you mentioned something about sort of improvements in retailing. Could you elaborate a little bit around what you're talking about there? Glen Hauenstein -- President Well, I think that that's the holy grail is, why did we wind up in a commoditized environment was because we couldn't distribute products and services. We weren't -- the industry was not geared to this. And this has been our long journey. And every day, I think we get better and better and better at it, whether or not we're working internally to improve our own internal displays where we're 65% direct-to-consumer right now or whether we're working with online booking tools to improve their display of products and services and making progress on that front as well. So, this has been a very, very long journey and every day we're working on improving it. Dave Vernon -- AllianceBernstein -- Analyst All right. Thanks very much for the time, guys. Operator Thank you. Your next question is coming from Sheila Kahyaoglu from Jefferies. Your line is live. Sheila Kahyaoglu -- Jefferies -- Analyst Hi. Good morning, everyone. Thank you for the time. Maybe just a follow-up on Latin America. The large capacity growth there in partnership with LATAM obviously magnifies the unit revenue decline, but you've, of course, talked about making these investments profitably. So maybe can you talk about where you are with -- today relative to your expectations in Latin America and how you expect that profitability curve to shape up in the coming quarters and years? Glen Hauenstein -- President Yes. I think we still see opportunity. We've got -- a lot of the opportunities now are in our baseline and we'll continue to work with LATAM to refine that moving forward. But I don't think you'll see this kind of dramatic growth in the out years as we'll be more focused on turning that into more of a harvest mode as opposed to an investment mode as we continue to work on bridging the two networks together. Sheila Kahyaoglu -- Jefferies -- Analyst OK. And then maybe one on cost, just to sum it up, Q1 TRASM performance was really good, Ed, and you talked about completion factors and just operations helping that. So, the Q2 guide assumes a bit more normalized putting you guys at 2% cost growth. So, is it just fair to think about that run rate in the context of the year with a low-single-digit guide? And what are the moving pieces as we think about headcount, maintenance costs, and any other noise you'd highlight throughout the year? Dan Janki -- Chief Financial Officer Yes. I think the 2% is in line with the low-single-digit. I think when you think about the variables inside of that run -- it starts with running a great operation. When you run a great operation, that sets the foundation. You get those frictional costs out and it really allows the operators and you're seeing it in two quarters in a row to have the confidence and really lean in and continue to drive not only better improvement in the operation but also get after those efficiencies. And as you do that, in a lot -- we said that we're carrying headcount higher than historical for what we ran in 2019, about 10%, and we'll grow into that and that drives the efficiency associated with that. And no change to maintenance. Maintenance is as we expected and -- but we'll continue to manage the supply chain. It's going to be the one that is -- has the largest constraint still associated with it as we execute through the year. Glen Hauenstein -- President Great. Thank you. Julie Stewart -- Vice President, Investor Relations Matthew, we'll now go to our final analyst question before moving to the media. Operator Certainly. Your last question is coming from Stephen Trent from Citi. Your line is live. Stephen Trent -- Citi -- Analyst Good morning, everybody, and thanks very much for squeezing me in. Just a follow-up question to Sheila's, if I may. When we think about probably the -- across the industry fleets getting older, could you give us a high-level sense about how valuable Delta TechOps is going to be for you guys over the next 10 years, for example, and that competitive advantage you have versus your legacy competitors? Thank you. Dan Janki -- Chief Financial Officer Yes, we can. I think it is a unique advantage, that along with our fleet, our fleet has actually gotten younger over the last few years. But we've also given the constraints in the industry around the OEMs, have leaned into restore the network into our flex fleets. So, flying 80 717s, flying the 757s longer than we anticipated, and that puts demand on our TechOps teams, and their ability to ensure that we have those aircraft, that they're reliable, is -- really allows us to flex and be more nimble. And as we go through this period and it gets more normalized, we're in a period of more normalized growth and more consistency around equipment, it's also going to allow us to go into a period of more natural retirements. We haven't retired any aircraft in 2022 and 2023. We'll start that at the back half of this year and that's really where our team has always shined, the ability to naturally retire but then recoup that equipment and reuse that used material and run out the fleets and they did it with the MD-88s and 90s. They've done it for a decade and they have that history. And that's really what we have in front of us. Ed Bastian -- Chief Executive Officer Stephen, if I could add on the back end of Dan's comments, two things. In the first quarter, our overall mainline reliability and completion factor was the strongest first quarter in our history. And that's quite a statement given where we've been through and the supply chain constraints that still exist and I attribute a lot of that to the maintenance team -- the TechOps team, having the product ready every day and responding to the opportunities that we see in front of us. So that's going to continue to be a positive green arrow forward as we move forward these next couple of years, as Dan was saying. Second thing is the MRO, while we've taken, I'd say, a pause given that we've had to focus our energies on our own fleet as compared to our customer's fleets. Going forward in the next couple of years, that's going to start turning back on again. And that growth rate that we've talked about is still there. It's just waiting for us. And I'm very, very excited as to what you talk about a five to 10-year timeline on that. That business is, I think is going to be -- our ability to capture that business is going to be even stronger than we were thinking pre-pandemic given what we've all been through. So, hats off to the TechOps team, a lot more work to go, but we are absolutely on the right path. Stephen Trent -- Citi -- Analyst Thank you very much, Ed and Dan. I appreciate the time. Julie Stewart -- Vice President, Investor Relations Thanks, Steve. That will wrap up the analyst portion of the call. I'll now turn it over to Tim Mapes to start the media questions. Tim Mapes -- Chief Marketing and Communications Officer Thank you, Julie. Matthew, if you don't mind, as we transition from the analysts to reporters, could you repeat the instructions for one question and a follow-up, please? Operator Certainly. At this time, we'll be conducting a Q&A session for media questions. [Operator instructions] Your first question is coming from Leslie Josephs from CNBC. Your line is live. Leslie Josephs -- Airline Reporter Hi, everyone. Thanks for taking my questions. On operations, just wondering if you saw any benefit from the fact that a lot of your hubs this past winter got rain and not blizzards? It seems like if it was 10, 15 degrees cooler, we have been talking about grounding the airline for a little bit at those hubs. And then separately, on the mechanical issues that some airlines have been having recently, have you reminded your employees or put out any kind of communication just to ensure that they're following all protocols and just kind of reemphasize safety at Delta? Thanks. Ed Bastian -- Chief Executive Officer Hi, Leslie. It's Ed. With respect to weather, we certainly have had a nice run of weather broadly across our system, candidly, across our country. And that certainly has helped with respect to the overall operational performance. But what we like to do is neutralize for weather events and we see the performance of the airline weather-adjusted within our own system and we're outperforming our prior performance even weather-adjusted. So the improved weather just adds nice icing to the cake, but the fundamental, the core is running at a much, much better clip. And as the communications, safety is job one at all times, every single day. We don't send out special messages around safety. We -- every day is Safety Day around here. Leslie Josephs -- Airline Reporter Thank you. Operator Thank you. Your next question is coming from Mary Schlangenstein from Bloomberg News. Your line is live. Mary Schlangenstein -- Airline Reporter Thank you. Good morning. I wanted to ask on the request for an addition of the Slot Waivers through another year. Have you seen any improvement at all in the ATC issues in the New York area? And does the Slot Waiver extension also include the DC area? Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary So, Mary, thank you. It's Peter Carter. It does traditionally include the DC area. That's the way the FAA likes to view it. And we still have a shortage of ATC controllers. So, it's still an incredibly challenging environment. Mary Schlangenstein -- Airline Reporter Have you seen any improvement at all? Peter Carter -- Executive Vice President, Chief Legal Officer, and Corporate Secretary Well, we've had the waivers -- we've had the waivers in place. So of course, with those waivers, there would be improvement because there's less capacity in that marketplace. But absent the waiver, I think we'd have some -- as an industry, some real challenges in New York. Mary Schlangenstein -- Airline Reporter Great. Thank you very much. Tim Mapes -- Chief Marketing and Communications Officer Thank you for the question, Mary. Matthew, I believe that wraps up our time, if you want to close out the call.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning and welcome to the second-quarter 2024 earnings conference call for D.R. Horton, America's builder, the largest builder in the United States. [Operator instructions] I will now turn the call over to Jessica Hansen, senior vice president of communications for D.R. Horton. Jessica Hansen -- Senior Vice President, Communications Thank you, Tom, and good morning. Welcome to our call to discuss our financial results for the second quarter of fiscal 2024. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q early next week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the presentations section under news and events for your reference. Now, I will turn the call over to Paul Romanowski, our president and CEO. Paul Romanowski -- President and Chief Executive Officer Thank you, Jessica, and good morning. I'm pleased to also be joined on this call by Mike Murray, our executive vice president and chief operating officer; and Bill Wheat, our executive vice president and chief financial officer. For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $3.52 per diluted share. Our consolidated pre-tax income increased 23% to $1.5 billion on a 14% increase in revenues to $9.1 billion with a pre-tax profit margin of 16.8%. Our homebuilding return on inventory for the trailing 12 months ended March 31st was 29.9%, and our return on equity for the same period was 22.2%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior-year quarter as the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges. With 45,000 homes in inventory, we are well-positioned to continue consolidating market share. Our average construction cycle times are back to normal and our housing inventory turns are improving. We continue to focus on capital efficiency to produce consistent, strong homebuilding operating cash flows and returns. Mike? Mike Murray -- Executive Vice President, Chief Operating Officer Earnings for the second quarter of fiscal 2024 increased 29% to $3.52 per diluted share, compared to $2.73 per share in the prior-year quarter. Net income for the quarter was $1.2 billion on consolidated revenues of $9.1 billion. Our second quarter home sales revenues increased 14% to $8.5 billion on 22,548 homes closed, compared to $7.4 billion on 19,664 homes closed in the prior year. Our average closing price for the quarter was $375,500 flat sequentially and down 1% from the prior-year quarter. Bill? Bill Wheat -- Executive Vice President, Chief Financial Officer Our net sales orders in the second quarter increased 14% to 26,456 homes and order value increased 17% from the prior year to $10.1 billion. Our cancellation rate for the quarter was 15%, down from 19% sequentially and 18% in the prior-year quarter. Our average number of active selling communities was up 4% sequentially and up 15% year over year. The average price of net sales orders in the second quarter was $380,400, up 1% sequentially and up 2% from the prior-year quarter. To address affordability for homebuyers, we are still using incentives such as mortgage rate buydowns and we have reduced the prices and sizes of our homes where necessary. Based on current market conditions and mortgage rates, we expect our incentives to remain at these elevated levels in the near term. Our sales continue to be primarily from homes under construction and completed homes and we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Jessica? Jessica Hansen -- Senior Vice President, Communications Our gross profit margin on home sales revenues in the second quarter was 23.2%, up 30 basis points sequentially from the December quarter. On a per square-foot basis, home sales revenues and stick and brick costs were both essentially flat in the quarter, while lot costs increased 3%. Our home sales gross margin for the full year of fiscal 2024 will be dependent on the strength of demand during the rest of the spring selling season in addition to changes in mortgage interest rates and other market conditions. For the third quarter, we expect our home sales gross margin to be similar to or slightly better than the second quarter. Bill? Bill Wheat -- Executive Vice President, Chief Financial Officer In the second quarter, our homebuilding SG&A expenses increased by 13% from last year and homebuilding SG&A expense as a percentage of revenues was 7.2%, down 10 basis points from the same quarter in the prior year. Fiscal year-to-date homebuilding SG&A was 7.7% of revenues, up 20 basis points from the same period last year due primarily to the expansion of our operations to support growth. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul? Paul Romanowski -- President and Chief Executive Officer We started 24,900 homes in the March quarter and ended the quarter with 45,000 homes in inventory, up 3% from a year ago and up 6% sequentially. 27,600 of our homes at March 31st were unsold. 7,300 of our total unsold homes were completed, of which 790 had been completed for greater than six months. For homes we closed in the second quarter, our construction cycle time improved slightly from the first quarter and we are back to our historical average of four months from start to complete. We will maintain a sufficient starts pace and homes and inventory to meet demand and continue consolidating market share. Mike? Mike Murray -- Executive Vice President, Chief Operating Officer Our homebuilding lot position at March 31st consisted of approximately 617,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others. Of the homes we closed this quarter, 62% were on a lot developed by Forestar or a third party. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our second quarter homebuilding investments in lots, land, and development totaled $2.4 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $760 million for land development, and $230 million for land acquisition. Paul? Paul Romanowski -- President and Chief Executive Officer In the second quarter, our rental operations generated $33 million of pre-tax income on $371 million of revenues from the sale of 1,109 single-family rental homes and 424 multifamily rental units. Our rental property inventory at March 31st was $3.1 billion, which consisted of $1.3 billion of single-family rental properties and $1.8 billion of multi-family rental properties. We are not providing separate annual guidance for our rental segment due to the uncertainty regarding the timing of closings caused by interest rate volatility and capital market fluctuations. Based on our current pipeline of projects, we expect our rental revenues in the third quarter to be similar to the second quarter. Jessica? Jessica Hansen -- Senior Vice President, Communications Forestar, our majority-owned residential lot development company reported revenues of $334 million for the second quarter on 3,289 lots sold with pre-tax income of $59 million. Forestar's owned and controlled lot position at March 31st was 96,100 lots. 60% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $310 million of the finished lots we purchased in the second quarter were from Forestar. Forestar had approximately $800 million of liquidity at quarter end with a net debt to capital ratio of 16.4%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply, and relationship with D.R. Horton. Mike? Mike Murray -- Executive Vice President, Chief Operating Officer Financial services earned $78 million of pre-tax income in the second quarter on $226 million of revenues, resulting in a pre-tax profit margin of 34.6%. During the second quarter, essentially all of our mortgage companies loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 80% of our buyers. FHA and VA loans accounted for 59% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 725 and an average loan to value ratio of 89%. First time homebuyers represented 57% of the closings handled by a mortgage company this quarter. Bill? Bill Wheat -- Executive Vice President, Chief Financial Officer Our balanced capital approach focuses on being disciplined, flexible, and opportunistic to sustain an operating platform that produces consistent returns, growth, and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with the ability to adjust to changing market conditions. During the first six months of the year, our consolidated cash used in operations was $470 million and our homebuilding operations provided $408 million of cash. At March 31st, we had $5.7 billion of consolidated liquidity consisting of $3.1 billion of cash and $2.6 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.9 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at March 31st was 20% and consolidated leverage net of cash was 10.8%. At March 31st, our stockholders' equity was $23.8 billion and book value per share was $72.13, up 19% from a year ago. For the trailing 12 months ended March 31st, our return on equity was 22.2% and our consolidated return on assets was 15.1%. During the quarter, we paid cash dividends of $0.30 per share, totaling $99 million and our board has declared a quarterly dividend at the same level to be paid in May. We repurchased 2.7 million shares of common stock for $402 million during the quarter and our fiscal year-to-date stock repurchases were $801 million. Jessica? Jessica Hansen -- Senior Vice President, Communications For the third quarter, we currently expect to generate consolidated revenues of $9.5 billion to $9.7 billion and homes closed by our homebuilding operations to be in the range of 23,500 homes to 24,000 homes. We expect our home sales gross margin in the third quarter to be approximately 23% to 23.5% and homebuilding SG&A as a percentage of revenues to be approximately 7%. We anticipate a financial services pre-tax profit margin of around 30% to 35% in the third quarter, and we expect our quarterly income tax rate to be approximately 24%. Our full-year fiscal 2024 revenue, pricing, and margins will be affected by market conditions and changes in mortgage rates in addition to our efforts to meet demand by balancing sales pace and price to maximize returns. For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36.7 billion to $37.7 billion and expect homes closed by our homebuilding operations to be in the range of 89,000 to 91,000 homes. We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations. We now plan to purchase approximately $1.6 billion of our common stock for the full year in addition to our annual dividend payments of around $400 million. Finally, we now expect an income tax rate for fiscal 2024 in the range of 23.5% to 24%. We are balancing our cash flow utilization priorities to grow our operations, pay an increased dividend, and consistently repurchase shares while maintaining strong liquidity and conservative leverage. Paul? Paul Romanowski -- President and Chief Executive Officer In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth, and cash flow, while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued focus and hard work. This concludes our prepared remarks. We will now host questions. Questions & Answers: Operator Thank you. [Operator instructions] And the first question this morning is coming from Carl Reichardt from BTIG. Carl, your line is live. Please go ahead. Carl Reichardt -- BTIG -- Analyst Thanks. Good morning, everybody. I wanted to talk about Florida. It's a pretty important market for you all. The long experience there. We've seen an increase in existing home inventory in some parts of that market and we obviously know higher insurance costs are also coming to bear there. So could you talk a little bit in some detail about your performance there, maybe the various markets within Florida and how it feels to you right now? Paul Romanowski -- President and Chief Executive Officer You know, Carl, Florida still feels good to us. There certainly has been a lot of news tied to the rise in insurance rates and for most of where we sell our homes are off the coast and building new construction allows for some stability in those insurance rates. So haven't seen a significant an increase for the homes in the communities where we sell as you may see reported along the coastal and high wind zones. Still seeing good in migration and good job growth throughout the Florida market. So we feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida Peninsula. Carl Reichardt -- BTIG -- Analyst Right. Thanks. And then a follow-up on multi-family and single-family for sale, that portfolio business. With some lumpiness there, I'm curious about the markets where you've got fairly good-sized operations in multi-family and single-family rental, one of the reasons for you entering and playing more significantly in that space, I think is scale benefits for the overall homebuilding operations. So if you think about the markets where you're big in those two businesses, are you seeing lower overall vertical costs for the homebuilding operation too or better margins? And maybe sort of expand a little bit on that particular element of the business? Thanks. Paul Romanowski -- President and Chief Executive Officer I think there's two big factors that drive into our push into the rental business. One is, we're a better buyer of land, a better user of land and that we're able to convert more of the land to its ultimate final use. So we're a better counterparty to a lot of sellers as we can deal with the build for rent and multi-family component as well as the residential for sale. That gives us some economies in the purchase of the land and efficiencies in the entitlement process. Certainly within the vertical cost structure, we've probably seen more ability to influence cost on the traditional multi-family side coming over from our homebuilding operations because we're much bigger buyers of parts and pieces that go into the structures than a traditional multi-family developers. Carl Reichardt -- BTIG -- Analyst OK. I appreciate it. Thanks, all. Paul Romanowski -- President and Chief Executive Officer Thank you. Operator Thank you. Your next question is coming from John Lovallo from UBS. John, your line is live. Please go ahead. John Lovallo -- UBS -- Analyst Good morning, guys, and thank you for taking my questions. The first one, obviously, there's a lot of concern in the market given the stickier than expected CPI. Although rates -- the long-term mortgage rates only moved up by about 35 basis points since pre-CPI. I mean, I guess the question is, have you seen or would you expect to see any impact to demand or would there be any change in your incentive activity given this 35 basis point move in rates? Paul Romanowski -- President and Chief Executive Officer We expect to continue to meet the market and we continue to stay focused on incentives that drive that activity and interest rate buydowns has been a big portion of what we have done. We tend to move with the market. So as you've seen that increase in market rates, we will move up the rate buy downs to be about a point to a point and a half below market. But we do expect incentives to remain near their elevated levels today, especially with the rate instability and stickiness up in that 7% range today. John Lovallo -- UBS -- Analyst Understood. And maybe splitting gears slightly here, but you guys beat deliveries versus your outlook in the quarter by about 2,300 units at the midpoint, raised the outlook by about 1,500 units at the midpoint. I mean, was there some pull forward in the second quarter or is there some conservatism in this outlook or maybe the expectation that delivery pace could moderate to some extent? I mean, how should we think about that? Jessica Hansen -- Senior Vice President, Communications Yeah. Great question, John. We did go into the quarter with a significant number of completed specs. So we actually sold and closed intra-quarter 54% of our houses. And so that is a very high percentage for us. A typical range would be about 35% to 40% of our homes would be sold and closed within the same quarter. So we still have over 7,000 completed specs. So I do think you'll see that intra-quarter activity stay higher than our historical norms. It may not be at the 54% we saw this quarter. But that did allow for probably a little bit of pull forward of demand, and it gave us the confidence to up the low end of our range by the full 2,000 units that we beat, and then the high end of our range by just 1,000. And we're now back to normal, if not better than our historical inventory turns in terms of what we're guiding to at the high end, it'd be a roughly 2.2 times turn. So feel very good about the ability to take that range up, but don't think there is necessarily an opportunity for the same scale of beat next quarter. John Lovallo -- UBS -- Analyst Yeah. Makes a lot of sense. Thank you, guys. Operator Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Stephen your line is live. Please go ahead. Stephen Kim -- Evercore ISI -- Analyst Thanks very much, guys. Strong quarter. I appreciate all the guidance thus far. I was curious if you could shed a little bit more light regarding your cash flow guidance. You mentioned about $3 billion from homebuilding specifically, but you do have other segments, you have the rental segment, and you have Forestar in particular. And I was curious as to what kind of an offset should we expect from rental or Forestar this year relative to that $3 billion from homebuilding? And then specifically with rental, you have about $3.1 billion in inventory value right now. Where do you think that's going to go over the next, let's call it, 12 months or so? Bill Wheat -- Executive Vice President, Chief Financial Officer Sure, Steve. On our cash flow guide, we have been guiding to homebuilding cash flow because that has been the primary generator of cash for us over the last couple of years. And we have invested portions of that into the rental operation as well, which feeds to the consolidated cash flow from ops. So there is some offset versus the homebuilding cash flow this year. We're guiding to around $3 billion of homebuilding cash flow. I would expect in the $800 million to $1 billion range, probably offsets that for the full year this year on consolidated. But we do expect that gap to start narrowing in future years as the growth ramp of our rental platform starts to moderate. And so we would expect going forward, our consolidated cash flow and our homebuilding cash flow to be much nearer to the same number beyond fiscal '24. So with the rental platform asset growth moderating, we're at 3.1 today. We do still expect to see that grow a bit further this year and will grow slightly next year, primarily from the multi-family platform. Our multi-family platform continues to grow and we're building out a more elevated level of starts over the last couple of years. But that will probably late '25 start to moderate as well. And so we do see prospects for the cash flow on a consolidated basis to be increasing consistently from here into '24 and into '25. Stephen Kim -- Evercore ISI -- Analyst OK. That's helpful. Appreciate that. And then with respect to uses of cash, I think as always, you talk about the opportunity for growth and your market share across the country, it still leaves some room there. And so I wanted to ask about your community count. You were up 4% month-to-month, up 15% year over year. That's an area where a lot of other builders have struggled. And I'm curious if you can provide a little bit of granularity into how much you expect there is further opportunity for growth this year in your community count and what you generally target for the next year or two in terms of community count growth. Jessica Hansen -- Senior Vice President, Communications Sure, Steve. We've been up a double-digit percentage on a year-over-year basis for community count now for several quarters. So we've probably got at least another quarter or so until we've cycled and anniversaried that and would expect the growth to moderate a bit. But as we look at our overall lot position and our positioning for the future to continue to drive growth, we have shifted to a lot of that coming from community count rather than just continuing to have to drive more absorption out of each and every community. So I do think you'll continue to see our community count grow. It just probably won't continue to be at the double-digit percentage year-over-year increase here in a quarter or two. Stephen Kim -- Evercore ISI -- Analyst OK. Gotcha. So like more like kind of like a high single-digit kind of rate is what you're talking about, right? Jessica Hansen -- Senior Vice President, Communications Yes, mid to high. Stephen Kim -- Evercore ISI -- Analyst OK. Gotcha. Appreciate it. Thanks very much, guys. Paul Romanowski -- President and Chief Executive Officer Thank you, Stephen. Operator Thank you. Your next question is coming from Matthew Bouley from Barclays. Matthew, your line is live. Please go ahead. Matthew Bouley -- Barclays -- Analyst Good morning, everyone. Thank you for taking the questions. I wanted to ask around start pace going forward. Perhaps we -- assuming we live in this kind of mid to high sevens mortgage rate environment. Is there a scenario where you would dial back production at all to the extent it supports price or margin or maybe said another way, is there a mortgage rate at which you would consider pulling back a little bit on starts? Thank you. Paul Romanowski -- President and Chief Executive Officer I think we're going to manage the starts space at a community-by-community level based upon what we're seeing with buyers in the market and how they're responding to the current interest rate environment and mix of incentives that we're offering. Traditionally, we've had a limiter for the past several periods on lot supply in terms of what we could actually start. So as we're seeing our lots get developed and get brought online, we're able to bring good production starts into the market. I think we started just under 25,000 homes in the quarter. And we probably expect that to continue into the June quarter as if we see continued absorptions and sales. Jessica Hansen -- Senior Vice President, Communications And so with our gross margin currently over 23% and very solid, it would take a pretty big disruption in the market for you to see us have a broad-based across the board pullback in starts. As Mike alluded to, it's going to be just driven on a community-by-community basis like it always is based on our finished lot position and what makes the most sense to maximize returns at that individual community level. So as we see right now, without another big shock or any sort of big shock to the system or a more significant move in rates, I think we would expect our starts to be pretty consistent through the remainder of the year. Matthew Bouley -- Barclays -- Analyst Got it. Very helpful. Secondly, I wanted to ask around credit and DTI metrics, particularly for your first time buyers. Are you seeing any sort of incremental signs of stress in your mortgage applications just given this affordability backdrop? Thank you. Paul Romanowski -- President and Chief Executive Officer No. We've seen a pretty, pretty solid level of qualified buyer. Our average FICO store this last quarter was still at 725. And with the low level of inventory and available homes to purchase out there, you know, we still see strong buyer demographic and demand and we've remained pretty consistent. We have seen fluctuation in rates, but they've really not been significant enough to have any meaningful impact on our backlog and people's ability to qualify. Matthew Bouley -- Barclays -- Analyst Great. Thanks, everyone. Jessica Hansen -- Senior Vice President, Communications Thanks, Matt. Operator Thank you. Your next question is coming from Michael Rehaut from J.P. Morgan. Michael, your line is live. Please go ahead. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Thanks. Good morning, everyone. Just wanted to drill down, if possible a little bit on the demand trends over the last couple of months. And I know you don't typically go too far down the rabbit hole in terms of month-to-month, but obviously with the change in rates, with some of the concerns in the market, any kind of January, February, March, April type of progression. We've heard that for example, March -- I'm sorry March and April maybe are a little bit more moderate than what we saw in February. I'd love your take on just how the demand trends, how the sales pace has come in through the door maybe versus your expectations and if incentives in the marketplace have changed at all around that. Bill Wheat -- Executive Vice President, Chief Financial Officer Sure, Mike. We did see at the end of our first fiscal quarter in December, we saw I'd say better than normal seasonality in terms of sales demand and that continued on into January. When we had our call in January, we were still seeing, I'd say, probably a little bit better than normal seasonality into January. And then as we've talked many times, anytime you see a lot of volatility in rates, there is always an adjustment period for buyers. And so we saw more volatility in rates in February and March. And so we saw some intermittent periods where buyers were having to adjust, which does affect weekly sales pace. But then as we look up like over the last six weeks or so, we've seen that stabilize and are seeing a very good sales pace in line with our overall plans and very pleased that, that's position us to increase our guide for the year. Going forward, as Jessica has said a couple of times already, going forward, it's going to be subject to the rate -- what happens in the market with rates, and we're -- in the last week, we've seen another period of volatility. So I think we'll continue to see that the market adjust and we'll adjust to it as the rate environment changes. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Great. Thanks, Bill. Appreciate that. And I guess just maybe along those lines in terms of the impact of higher rates at points, it seems like if you go back to your guidance last quarter, there was a little bit of surprise that maybe the out quarter for gross margins was a little less than people were looking for and it kind of went back to the higher level of rates and incentives seen in three -- in the calendar third quarter. Wondering, obviously, you haven't given guidance for the fourth quarter, but all else equal, if perhaps you're having some of the delayed impact of perhaps higher incentives, perhaps more costly incentives, and I know there's some warehouse buying and delaying of an impact on the incentive front from the mortgage rate buydowns. If we were to stay at these levels just from the standpoint basically of the buydowns being maybe a little more expensive, all else equal, would that impact be more on your fiscal fourth quarter than your third quarter? Jessica Hansen -- Senior Vice President, Communications I think right now, Mike, with the number of homes that we're selling and closing intra-quarter, you're seeing a pretty good real-time average gross margin. And so unlike a lot of other builders, I think you'll see more real-time market conditions show up in our results faster. Hard to say split in hairs between Q3 and Q4, but we were really pleased with where our gross margin came in this quarter. And we actually did see an increase in the number of buyers sequentially that we're able to utilize a mortgage rate buy-down. And in spite of that, we had a slight tick-up in our gross margin. So without giving specific guidance for the remainder of the year because it is going to be dependent on the interest rate environment, it feels pretty good to us right now. Our costs outside of incentives have generally flattened out on the stick and brick side. We're still having some categories go up where we have pressure, but we've had some success getting categories to go down. We obviously do still have some lot cost inflation we would expect to continue to need to be able to offset. So when we think about really predominantly the next two quarters, it is going to be incentive as the wildcard, and it's going to be dependent solely on market conditions. Mike Rehaut -- JPMorgan Chase and Company -- Analyst But I think just to make sure we understand then, to the extent that rates have -- rates have risen and the cost of those mortgage rate buydowns become more expensive, you feel like a lot of that is already reflected in 2Q and 3Q? Bill Wheat -- Executive Vice President, Chief Financial Officer I think, again, based on the fact that we are selling more than 50% of our homes intra-quarter, we'll see how that plays out as we look at the next in the third quarter and the fourth. But we move our rates along with the market. And so really it becomes a question of absorption and pace. We're going to continue to manage pace and margin to the returns that we want. And if we need to press a little more on the incentives to keep that pace consistent, we'll do so. But we move our rates along with the market. So it doesn't necessarily mean we're seeing significant cost. In the level of those buydowns, it really just starts to stress the buyer when they climb up into the 7% and if they go to the 8% range, then we'll see a little more challenge in getting buyers qualified. And if it goes that high, I would expect to see our incentives increase to keep our pace. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Great. Thanks so much. Appreciate it. Jessica Hansen -- Senior Vice President, Communications Thanks, Mike. Operator Thank you. Your next question is coming from Eric Bosshard from CRC. Eric, your line is live. Please go ahead. Eric Bosshard -- Cleveland Research Company -- Analyst Good morning. Two things if I could. First of all, the gross margin in the quarter was a little bit better. What was different that created that? Jessica Hansen -- Senior Vice President, Communications I'm assuming you're talking on a sequential basis? Eric Bosshard -- Cleveland Research Company -- Analyst Correct. Jessica Hansen -- Senior Vice President, Communications Yeah. So a little bit of it was just core inclusive of just a very modest pickup on the incentive front in terms of the forward commitments and the interest rate buydown because you'll see when we put out our supplemental guidance, that kind of core margins up about 20 basis points. And then we also had a little bit less of an impact on warranty and litigation this quarter. Those are the two kind of biggest pieces of why there was a sequential increase. Eric Bosshard -- Cleveland Research Company -- Analyst OK. And then secondly, you talked about it a little bit, but I'm just curious that the effectiveness of the incentives as you moved through the quarter and in the March and April, I suppose. But just trying to figure out the effectiveness in the last comment that was made of as rates moved higher, what do you have to do different with buydowns? I'm just curious how you're seeing a conversion or closing customers behave relative to incentives relative to buydowns and if you indeed are having to do anything different? Paul Romanowski -- President and Chief Executive Officer Currently, we're not doing anything significantly different. We're responding to the rates and the customers that are in front of us at the time. And they are reacting very positively to the incentive offerings that our teams have crafted for the various neighbourhoods we have out there. So no, we're not seeing anything with the current range -- range of rates we've been dealing with right now. We feel like it's sort of -- I won't say business as usual in this crazy volatile world we're in. But right now, we feel pretty steady, pretty good about where things are. Eric Bosshard -- Cleveland Research Company -- Analyst OK. Thank you. Operator Thank you. Your next question is coming from Sam Reid from Wells Fargo. Sam, your line is live. Please go ahead. Sam Reid -- Wells Fargo Securities -- Analyst Awesome. Thanks so much, guys for taking my question. You made a lot of progress here in getting back to your historic levels on cycle times. That said, I mean, one thing that I'm thinking here is you're also building a more value engineered house today than perhaps what might have been the case pre-pandemic. So the question really is, is there an opportunity to bring cycle times lower versus that historical trend? Or do you really think kind of four months is the steady-state we should be thinking about longer term? Paul Romanowski -- President and Chief Executive Officer Yes, Sam, we're pleased to be back at what we deem our historical norm, and you bring up a good point, we are building a more efficient house and it's been an extreme focus of us to try and pull labor and man hours out-of-the home to reach affordable and maintain affordability. We're always going to believe there's upside for improvement in our business. And so we continue to stay focused on our inventory turns and the opportunity to reduce cycle times and be more efficient in the construction process where we can. We're going to continue to strive for that. We're not counting on significant reductions from here. We got back to this place and we'll continue to focus on doing everything we can to drive it down further. Sam Reid -- Wells Fargo Securities -- Analyst Gotcha. And then maybe to touch on order ASP a little bit. It looks like there was a little bit of a sequential lift between Q1 and Q2. I just would like to hear maybe a bit more context on that number. Was there a function of perhaps you know a little bit of a dial back in incentives in early spring? Or were there any kind of geographic or other mix dynamics that might have also driven that sequential improvement? Thanks. Jessica Hansen -- Senior Vice President, Communications Yeah. It continues to be primarily geographic when you look at our price points. The South Central and the Southeast, which are two of our lower price point markets in terms of average sales price has been a slightly lower percentage of our mix for a couple of quarters now and that continued this quarter. Sam Reid -- Wells Fargo Securities -- Analyst Awesome. Thanks so much. I'll pass it on. Operator Thank you. Your next question is coming from Alan Ratner from Zelman and Associates. Alan, your line is live. Please go ahead. Alan Ratner -- Zelman and Associates -- Analyst Hey, guys. Good morning. Nice quarter and thanks for taking my questions. First, on the resale market, I'm curious some of your thoughts there. We were starting to see inventories ticking up a little bit in some of your markets more meaningfully than others. And when I think about the spec entry-level model, I think you guys have really benefited from the tight resale market over the last few years. I'm just curious, are there any markets now where you're starting to see increased competition from resale, maybe more contingent buyers on your move-up product and just more broadly, how you're viewing kind of the uptick in resale inventory right now? Paul Romanowski -- President and Chief Executive Officer I still think it's a very limited amount of inventory that's available in the marketplace, especially at our price point -- affordable price point. That coupled with some of the interest rate incentives that we're able to offer that for the most part existing home offerings don't provide, we're able to solve the affordability problem a little better than some of the existing home sales would be able to do. But we haven't seen a significant impact on our sales pace to date. Alan Ratner -- Zelman and Associates -- Analyst Great. Appreciate that. And then second, on the NAR settlement with brokers. I know it's still very early, but you guys have been one of the heavier users that were friends to the brokerage community, if you will, over the years. I think you view them as an important tool to bring buyers to your communities. And I'm just curious if you've given any thought to how this settlement might change the economics there, the relationships you have with brokers. And any commentary you can give would be helpful. Paul Romanowski -- President and Chief Executive Officer Yeah, Alan, I mean, we think this is going to take some time to play out. You know we work very closely with the brokerage community, and we'll continue to do so regardless of what direction this takes. I think you are going to see some restructuring, certainly in terms of commissions and it will have some impact, I believe, on the number of realtors that stay active through the market. But we are going to continue to stay close to the realtor community, communicate with them. This is still an emotional buy for people. And we're also going to stay focused on our digital presence and ability to make sure that we are ahead of the curve in terms of reaching customers through whatever form it takes over the next couple of years. Alan Ratner -- Zelman and Associates -- Analyst Appreciate the thoughts. Thank you. Operator Thank you. Your next question is coming from Collin Verron from Jefferies. Colin, your line is live. Please go ahead. Collin Verron -- Jefferies -- Analyst Good morning. Thank you for taking my questions. I guess I just wanted to start on the lot in cost inflation you're seeing. Any thoughts on the magnitude of that through the remainder of the year? I think you said it was tracking in the low-single digits in the most recent quarter. Bill Wheat -- Executive Vice President, Chief Financial Officer Yeah. I think our expectation is we'll continue to see moderate increases, I think that low single-digit percentage continuing is in our current, what we can see in our current pipeline. Collin Verron -- Jefferies -- Analyst That's helpful. And then just on the lots controlled, it's moved up again as you concentrate on that land-light model. I guess how much more runway do you think that there is? And any update on the time line of getting there and just thoughts on the right number of the years of land or lots owned? Bill Wheat -- Executive Vice President, Chief Financial Officer So I think we continue to look for ways to be more efficient and more capital-efficient in our lot portfolio. 77% is a very controlled number position right now and we're looking at 62% of our deliveries were on lots that were actually developed by third-parties or Forestar. So, we're continuing to expand those relationships and seek opportunities to buy more lots from third-parties. I'm not going to put a ceiling on to how far we can take that, but we've made a lot of progress. And when you've had a lot of success, incremental success takes a lot more work, but that's what we do every day. Collin Verron -- Jefferies -- Analyst Great. Thank you for taking my questions. Bill Wheat -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. Your next question is coming from Jade Rahmani from KBW. Jade, your line is live. Please go ahead. Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst Thank you. Are you seeing any changes in terms of investor appetite for single-family rentals and multi-family leaving aside the issue of interest rates? We've seen Blackstone, for example, make a couple of quite large acquisitions, wondering what the tone is from the investors you sell to? Mike Murray -- Executive Vice President, Chief Operating Officer Yeah. I would say we've seen a little bit of a tick up in terms of interest and the number of investors out there in the market. They're still being cautious and rates are where they are and cap rates acting in kind. But I would say that just across the board, we've seen a bit of a tick up and have more interested parties in those assets that we have out for sale today. Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst And a follow-up would be, a lot of these investors are looking for scale in their capital deployment. You've already done some large deals. Are you seeing on average the size of deals you're looking at increase? Mike Murray -- Executive Vice President, Chief Operating Officer Size per community, not necessarily, but there are large appetites to place dollars at scale into this space. Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst Thank you. Mike Murray -- Executive Vice President, Chief Operating Officer There are multiple communities, yes. Operator Thank you. Your next question is coming from Mike Dahl from RBC Capital Markets. Mike, your line is live. Please go ahead. Mike Dahl -- RBC Capital Markets -- Analyst Good morning. Thanks for taking my questions. Just a follow-up on Jade's question on the -- on the rental side, revenue is flat sequentially expected in 3Q, you do have more units completed on, I think both single-family and multi-families. Is that a function of -- if you have to characterize why it's not better, is it more the investor hesitancy at this point or is it the conversations you're having around price don't meet your objectives for margin and return on those projects. Paul Romanowski -- President and Chief Executive Officer You know, it's really a matter of communities, community size, and timing of those closings and we're going to be selective through the process, but we have projects that are done and we're going to go ahead and monetize those and put them into the market. Not seeing the margins where we would like to see them, but that's relative, that's just tied to cap rates and interest rates. But no real significant shift that we're going to see in terms of up or down and it's going to be a little lumpy as we look through the quarters because we're selling whole communities at a time. It's not one at a time. Mike Dahl -- RBC Capital Markets -- Analyst Got it. OK. And then shifting gears back to the homebuilding margins. Last fall, when there was a period of significant rate volatility and ultimately rates came down, you had a negative mark-to-market. Jessica, I think you mentioned that lower forward contracts played a role in lower-cost or mark-to-market there played a role in sequential gross margin improvement in fiscal quarter. Can you be more specific around what impact or quantification your forward hedges are having on both the 2Q gross margin? And is that actually a continued sequential benefit in your 3Q guide? Jessica Hansen -- Senior Vice President, Communications No. I mean, we really think about it, Mike, as last quarter was somewhat of an anomaly. We're not going to say one-time. I mean, it could happen again, but it was highly unusual in terms of the rate move going up and down so quickly and the timing in which that happened and then a move close to quarter end. And so this quarter when we say minimal impact, I mean, we've talked about outside of Q1, it's been no more than a plus or minus 10 basis point move from a gross margin perspective. And so, hopefully, that will be the case going forward as well, and you won't see a repeat of what happened in Q1. Mike Dahl -- RBC Capital Markets -- Analyst OK. Great. Thanks. Operator Thank you. Your next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live. Please go ahead. Susan Maklari -- Goldman Sachs -- Analyst Thank you. Good morning, everyone. My first question is on the material costs. I think, Jessica, you had mentioned that you're seeing some success on seeing some of those move lower. Can you give more detail on what is coming down and how you're thinking about that relative to some of the other areas where there may be some inflation that's coming through? And any thoughts on lumber as well within that? Jessica Hansen -- Senior Vice President, Communications I'll start with lumber and then I'll leave that up and down on other categories to Paul and Mike, they're probably better or worse than I am. Lumber is still less than half what it was at its peak back in March of '22, but it has started to increase since December, which would be kind of a typical seasonal trend. So hopefully, we're not going to be talking about lumber in terms of big swings in our closings. And most of our year-over-year stick and brick decline is still from lumber, but in terms of sequential moves going forward, we expect it to be relatively modest. Mike Murray -- Executive Vice President, Chief Operating Officer Very fair. And I think in terms of the other categories, it's a market-by-market category-by-category, I don't want to say struggle or battle, but it's an ongoing effort to be as efficient as we can do that. And we make some progress on some categories and then we might have to give back some on others. So it's a constant battle, Susan. And we've seen right now, I think some moderation in seeing increases, which has been very helpful in margin right now. Susan Maklari -- Goldman Sachs -- Analyst OK. All right. That's helpful. And then you guided your SG&A to be about 7% for the third quarter, which is still really low in there even as you're making those investments. Can you just talk about the puts and takes into the SG&A as we think about not just the third quarter, but even looking out? Any thoughts there? Bill Wheat -- Executive Vice President, Chief Financial Officer Yeah, sure. So we're continually trying to position ourselves to -- across our footprint to be in position to grow. And as we've gotten larger and have more scale in individual markets, that has involved realigning certain divisions, you're breaking up certain markets into multiple divisions to put ourselves in a position to more deeply penetrate market share in those markets. And the same has applied across our infrastructure across the country as well. And so we're making some of those investments right now and we do see pretty quick payback on that. So that's why our SG&A percentage has remained as low as it has, but we are making those investments that sometimes do have to come a little bit ahead of the growth. But it's primarily in people and in making sure we've got the depth on our teams and we've got the land personnel in various markets in order to be able to tie-up the land positions and develop those relationships with third-party developers and trades to continue to position our platform to support growth. Susan Maklari -- Goldman Sachs -- Analyst OK. That's great. Thank you. Good luck. Mike Murray -- Executive Vice President, Chief Operating Officer Thank you. Operator Thank you. Your next question is coming from Kenneth Zener from Seaport Research Partners. Kenneth, your line is live. Please go ahead. Ken Zener -- Seaport Research Partners -- Analyst Good morning, everybody. Bill Wheat -- Executive Vice President, Chief Financial Officer Good morning. Paul Romanowski -- President and Chief Executive Officer Good morning, Ken. Ken Zener -- Seaport Research Partners -- Analyst All right. Margin stability up 52% of closings intra-quarter orders. Why was it higher specifically? It looks to be, again, I could make my own narrative, but I want to hear it specifically. And then what was the margin spread between those 52% intra-q versus the ones that were naturally coming out of backlog? Jessica Hansen -- Senior Vice President, Communications I frankly don't think any of us looked at that before the call, but we can take a look and get back to you. It was 54% versus the 52%, just to clarify. And the driver on that was just a function of we went into the quarter with over 9,000 completed specs and our cycle times are back to normal. Ken Zener -- Seaport Research Partners -- Analyst OK. So you're getting, yeah, we'll follow-up on the margin backlog versus intra-q, is that correct? Jessica Hansen -- Senior Vice President, Communications Yes. Ken Zener -- Seaport Research Partners -- Analyst OK. And then Paul I think you kind of talked about your markets in Florida not being affected by the rise in inventory we're seeing in coastal markets and/or a higher cost of ownership related to insurance. Could we maybe isolate that comment to a place like Central Texas, I think Austin? I know you're building in Buda, not Austin per se. But we are seeing inventory go up in Central Texas, you don't have right the coastal issues. Is this still that you have homes that are affordable and in demand? So you're seeing the same dynamics you talked about there where we're kind of excluding coastal conditions? Thank you. Paul Romanowski -- President and Chief Executive Officer Well, the question and the comment back on Florida was mostly as it relates to insurance and increased costs around that. Inventories, we have certainly seen more inventory in the market today on the resale side than we have in the past. Months of supply has crept up slowly across most of our markets, but majority of what we see coming to the market is still maybe either overpriced or has significant need and work and very minimal in the affordable price points where we tend to compete. So we expect it's going to take significantly more homes to come on before we see to be a lot of impact on our ability to sell. But we've competed in that market forever. We have been a spec builder. We do that to compete in the new-home market as much as we do against the resale market. Feel very good about our product and positioning against the homes that come to market as resale available when they do. And we think we have a great package of incentives, warranty and closing cost basis to compete against that inventory when it does come on and it will at some point in the future. Ken Zener -- Seaport Research Partners -- Analyst Right. Appreciate it. And I guess, Jessica, you said 3% on land. Could you split that between land you developed and land you're buying finished? Jessica Hansen -- Senior Vice President, Communications I don't think we've quantified that, and I definitely don't have that in front of me. Ken Zener -- Seaport Research Partners -- Analyst Talk to you guys later. Thank you. Operator Thank you. Your next question is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live. Please go ahead. Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst Hi. Good morning. Thanks for -- thanks for taking my questions. Just first on the fiscal third quarter gross margin outlook for flat to slightly up. Just how do we think about the assumptions for the stick and brick per square foot, net pricing and land inflation that's baked into that guidance? And then specifically on land inflation, just the lot cost is flat quarter-over-quarter. What are you seeing in terms of land inflation for land that's contracted today? Paul Romanowski -- President and Chief Executive Officer Yeah, Rafe, in our forward guide, we've got relative stability right now in materials and labor. So but we are still seeing some components go up slightly. So I think a very low single-digit percentage increase is generally the expectation there and our lot costs are a little bit higher than that, still low single-digits, but probably more in that 3% to 4% range. And in terms of just new land, that's deal by deal specific, market by market specific. I think in general, we've seen land prices kind of settle out here over the last little while, not as much inflation, but the long-term trend is still up over time. This industry still has a shortage of lot availability. And so I think that's going to continue to be a constrained situation. And so in that situation, we would not expect to see land prices come down. Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst Thank you. That's very helpful. And then on the further rate buydowns, the forward commitments that you all have, how long do those go out? Are those months, are those weeks? So the recent move in rates, it hasn't impacted the rates that you are offering yet. When will that start to be kind of offered to the homebuyer? Like how long of forward commitment do you have? Bill Wheat -- Executive Vice President, Chief Financial Officer We generally don't go out too terribly far in terms of the volume of forward commitments that we go with. We have various levels based upon anticipated demand of how much we'll buy for a given expiration date, which can vary from 60 days to 90 days out. But we're not going to look to fulfill all of our existing sales expectations with anyone given a hedge or anyone given build or forward and we'll continually sort of reprice to market so that we're offering incentives that are within as Paul said before, I think a point to a point and a half of market when that is the incentive that we feel is the most effective at driving appropriate pace and margin for the returns at a given community. Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst Thank you. That's helpful. Operator Thank you. Your next question is coming from Alex Barron from Housing Research Center. Alex, your line is live. Please go ahead. Alex Barron -- Housing Research Center -- Analyst Yeah. Thanks, guys and great job in the quarter. Yeah, I was just curious around land development costs. I mean, you guys are developing, I mean using a lot more land options and stuff, but are land development costs expected to impact margin for you guys in the near term or do you feel that's going to be more absorbed by whoever is developing the land for you? Paul Romanowski -- President and Chief Executive Officer Hey, Alex. We haven't seen much reduction in land development costs either from materials or labor. You know, we still have significant demand out there for the labor and those that are putting lots in the ground, not just in what we're doing and other builders are doing, but you have infrastructure improvements throughout the country that are keeping demand up for materials and labor. So that's kind of baked into what we look at in terms of our increase in lot price over time. So we don't -- we'd love to see some reduction, but we don't expect to see it in the near term. Alex Barron -- Housing Research Center -- Analyst Got it. And I guess you already touched a bit on the rental business, but I was just curious if the margins we saw this quarter, do you expect that's going to be sort of more what they're going to look like in the future or not necessarily? Bill Wheat -- Executive Vice President, Chief Financial Officer It's going to be largely rate dependent in the capital markets as to the execution on those. I think at this point, our expectation is that it's going to be somewhat consistent with where we are today, but there is opportunity for some volatility around that too, especially within quarters within one quarter to the next because these are some chunky transactions. There are large individual transactions. And our multi-family platform is not yet to the scale where they're producing a significant number of multi-family communities delivering every quarter to the marketplace. So there's a relatively small number, they can be chunky and there's opportunity for volatility. Our expectation is somewhere in the range we're in today. Alex Barron -- Housing Research Center -- Analyst Got it. OK. Well, good luck. Thanks. Paul Romanowski -- President and Chief Executive Officer Thank you. Bill Wheat -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. The final question this morning is coming from Jay McCanless from Wedbush. Jay, your line is live. Please go ahead. Jay McCanless -- Wedbush Securities -- Analyst Thanks. Good morning, everyone. So on that rental guidance you talked about for 3Q, is that guidance based on projects that already have financing in place? Or is that just the schedule of what you think might close during the quarter? Paul Romanowski -- President and Chief Executive Officer It's a mix of both. Jay McCanless -- Wedbush Securities -- Analyst OK. And then the other question I had is, I don't want to make too much of this if it's not a big deal, but it does seem like you're going from maybe an aggressive selling pace during the COVID years now to trying to gain market share leadership through more communities. I guess, how far along do you think you are in that transition? And I think kind of to Su's question also, what is that ultimately going to mean for SG&A going forward if you are starting to staff up and bring more people on to support a larger organization? Jessica Hansen -- Senior Vice President, Communications Yeah. I wouldn't say, Jay, that it has anything to do with us trying to push more pace during COVID, it's all tied to our lot position. And so we've been building our lot position up, but not all of those lots were ready to go. And so we knew the communities were coming. And obviously, the market was extremely hot for a period of time. So we were able to drive additional absorption where we had the lots available. We don't have that same kind of strong demand, less affordability challenged environment today. And at the same time, our lots are getting finished and the communities are ready to go. So we're bringing them online and it happens to be good timing that we have the communities ready to go when we're not able to drive incremental absorption further in our existing communities. Jay McCanless -- Wedbush Securities -- Analyst OK. And I guess how far along do you think you are maybe in the process of trying to get bigger from a community count standpoint? Jessica Hansen -- Senior Vice President, Communications That's going to be an ongoing plan and goal and positioning. And I'd say just watch our lot position and ultimately, the communities are going to come online over time. Now from year-to-year, what exactly is that community count growth going to look like. It's impossible for us to predict. Jay McCanless -- Wedbush Securities -- Analyst OK. Great. Thanks for fitting me in. Jessica Hansen -- Senior Vice President, Communications Sure. Thanks. Operator Thank you. I would now like to turn the floor back to Paul Romanowski for closing remarks. Paul Romanowski -- President and Chief Executive Officer Thank you, Tom. We appreciate everyone's time on the call today and look forward to speaking with you again to share our third-quarter results in July. Congratulations to the entire D.R. Horton family on producing a solid second quarter. We are proud to represent you on this call and appreciate all that you do. Answer:

the second-quarter 2024 earnings conference call for D.R. Horton

Operator Good morning and welcome to the second-quarter 2024 earnings conference call for D.R. Horton, America's builder, the largest builder in the United States. [Operator instructions] I will now turn the call over to Jessica Hansen, senior vice president of communications for D.R. Horton. Jessica Hansen -- Senior Vice President, Communications Thank you, Tom, and good morning. Welcome to our call to discuss our financial results for the second quarter of fiscal 2024. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q early next week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the presentations section under news and events for your reference. Now, I will turn the call over to Paul Romanowski, our president and CEO. Paul Romanowski -- President and Chief Executive Officer Thank you, Jessica, and good morning. I'm pleased to also be joined on this call by Mike Murray, our executive vice president and chief operating officer; and Bill Wheat, our executive vice president and chief financial officer. For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $3.52 per diluted share. Our consolidated pre-tax income increased 23% to $1.5 billion on a 14% increase in revenues to $9.1 billion with a pre-tax profit margin of 16.8%. Our homebuilding return on inventory for the trailing 12 months ended March 31st was 29.9%, and our return on equity for the same period was 22.2%. Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior-year quarter as the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges. With 45,000 homes in inventory, we are well-positioned to continue consolidating market share. Our average construction cycle times are back to normal and our housing inventory turns are improving. We continue to focus on capital efficiency to produce consistent, strong homebuilding operating cash flows and returns. Mike? Mike Murray -- Executive Vice President, Chief Operating Officer Earnings for the second quarter of fiscal 2024 increased 29% to $3.52 per diluted share, compared to $2.73 per share in the prior-year quarter. Net income for the quarter was $1.2 billion on consolidated revenues of $9.1 billion. Our second quarter home sales revenues increased 14% to $8.5 billion on 22,548 homes closed, compared to $7.4 billion on 19,664 homes closed in the prior year. Our average closing price for the quarter was $375,500 flat sequentially and down 1% from the prior-year quarter. Bill? Bill Wheat -- Executive Vice President, Chief Financial Officer Our net sales orders in the second quarter increased 14% to 26,456 homes and order value increased 17% from the prior year to $10.1 billion. Our cancellation rate for the quarter was 15%, down from 19% sequentially and 18% in the prior-year quarter. Our average number of active selling communities was up 4% sequentially and up 15% year over year. The average price of net sales orders in the second quarter was $380,400, up 1% sequentially and up 2% from the prior-year quarter. To address affordability for homebuyers, we are still using incentives such as mortgage rate buydowns and we have reduced the prices and sizes of our homes where necessary. Based on current market conditions and mortgage rates, we expect our incentives to remain at these elevated levels in the near term. Our sales continue to be primarily from homes under construction and completed homes and we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Jessica? Jessica Hansen -- Senior Vice President, Communications Our gross profit margin on home sales revenues in the second quarter was 23.2%, up 30 basis points sequentially from the December quarter. On a per square-foot basis, home sales revenues and stick and brick costs were both essentially flat in the quarter, while lot costs increased 3%. Our home sales gross margin for the full year of fiscal 2024 will be dependent on the strength of demand during the rest of the spring selling season in addition to changes in mortgage interest rates and other market conditions. For the third quarter, we expect our home sales gross margin to be similar to or slightly better than the second quarter. Bill? Bill Wheat -- Executive Vice President, Chief Financial Officer In the second quarter, our homebuilding SG&A expenses increased by 13% from last year and homebuilding SG&A expense as a percentage of revenues was 7.2%, down 10 basis points from the same quarter in the prior year. Fiscal year-to-date homebuilding SG&A was 7.7% of revenues, up 20 basis points from the same period last year due primarily to the expansion of our operations to support growth. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul? Paul Romanowski -- President and Chief Executive Officer We started 24,900 homes in the March quarter and ended the quarter with 45,000 homes in inventory, up 3% from a year ago and up 6% sequentially. 27,600 of our homes at March 31st were unsold. 7,300 of our total unsold homes were completed, of which 790 had been completed for greater than six months. For homes we closed in the second quarter, our construction cycle time improved slightly from the first quarter and we are back to our historical average of four months from start to complete. We will maintain a sufficient starts pace and homes and inventory to meet demand and continue consolidating market share. Mike? Mike Murray -- Executive Vice President, Chief Operating Officer Our homebuilding lot position at March 31st consisted of approximately 617,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others. Of the homes we closed this quarter, 62% were on a lot developed by Forestar or a third party. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our second quarter homebuilding investments in lots, land, and development totaled $2.4 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $760 million for land development, and $230 million for land acquisition. Paul? Paul Romanowski -- President and Chief Executive Officer In the second quarter, our rental operations generated $33 million of pre-tax income on $371 million of revenues from the sale of 1,109 single-family rental homes and 424 multifamily rental units. Our rental property inventory at March 31st was $3.1 billion, which consisted of $1.3 billion of single-family rental properties and $1.8 billion of multi-family rental properties. We are not providing separate annual guidance for our rental segment due to the uncertainty regarding the timing of closings caused by interest rate volatility and capital market fluctuations. Based on our current pipeline of projects, we expect our rental revenues in the third quarter to be similar to the second quarter. Jessica? Jessica Hansen -- Senior Vice President, Communications Forestar, our majority-owned residential lot development company reported revenues of $334 million for the second quarter on 3,289 lots sold with pre-tax income of $59 million. Forestar's owned and controlled lot position at March 31st was 96,100 lots. 60% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $310 million of the finished lots we purchased in the second quarter were from Forestar. Forestar had approximately $800 million of liquidity at quarter end with a net debt to capital ratio of 16.4%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry and to aggregate significant market share over the next few years with its strong balance sheet, lot supply, and relationship with D.R. Horton. Mike? Mike Murray -- Executive Vice President, Chief Operating Officer Financial services earned $78 million of pre-tax income in the second quarter on $226 million of revenues, resulting in a pre-tax profit margin of 34.6%. During the second quarter, essentially all of our mortgage companies loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 80% of our buyers. FHA and VA loans accounted for 59% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 725 and an average loan to value ratio of 89%. First time homebuyers represented 57% of the closings handled by a mortgage company this quarter. Bill? Bill Wheat -- Executive Vice President, Chief Financial Officer Our balanced capital approach focuses on being disciplined, flexible, and opportunistic to sustain an operating platform that produces consistent returns, growth, and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with the ability to adjust to changing market conditions. During the first six months of the year, our consolidated cash used in operations was $470 million and our homebuilding operations provided $408 million of cash. At March 31st, we had $5.7 billion of consolidated liquidity consisting of $3.1 billion of cash and $2.6 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.9 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at March 31st was 20% and consolidated leverage net of cash was 10.8%. At March 31st, our stockholders' equity was $23.8 billion and book value per share was $72.13, up 19% from a year ago. For the trailing 12 months ended March 31st, our return on equity was 22.2% and our consolidated return on assets was 15.1%. During the quarter, we paid cash dividends of $0.30 per share, totaling $99 million and our board has declared a quarterly dividend at the same level to be paid in May. We repurchased 2.7 million shares of common stock for $402 million during the quarter and our fiscal year-to-date stock repurchases were $801 million. Jessica? Jessica Hansen -- Senior Vice President, Communications For the third quarter, we currently expect to generate consolidated revenues of $9.5 billion to $9.7 billion and homes closed by our homebuilding operations to be in the range of 23,500 homes to 24,000 homes. We expect our home sales gross margin in the third quarter to be approximately 23% to 23.5% and homebuilding SG&A as a percentage of revenues to be approximately 7%. We anticipate a financial services pre-tax profit margin of around 30% to 35% in the third quarter, and we expect our quarterly income tax rate to be approximately 24%. Our full-year fiscal 2024 revenue, pricing, and margins will be affected by market conditions and changes in mortgage rates in addition to our efforts to meet demand by balancing sales pace and price to maximize returns. For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36.7 billion to $37.7 billion and expect homes closed by our homebuilding operations to be in the range of 89,000 to 91,000 homes. We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations. We now plan to purchase approximately $1.6 billion of our common stock for the full year in addition to our annual dividend payments of around $400 million. Finally, we now expect an income tax rate for fiscal 2024 in the range of 23.5% to 24%. We are balancing our cash flow utilization priorities to grow our operations, pay an increased dividend, and consistently repurchase shares while maintaining strong liquidity and conservative leverage. Paul? Paul Romanowski -- President and Chief Executive Officer In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint, and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth, and cash flow, while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued focus and hard work. This concludes our prepared remarks. We will now host questions. Questions & Answers: Operator Thank you. [Operator instructions] And the first question this morning is coming from Carl Reichardt from BTIG. Carl, your line is live. Please go ahead. Carl Reichardt -- BTIG -- Analyst Thanks. Good morning, everybody. I wanted to talk about Florida. It's a pretty important market for you all. The long experience there. We've seen an increase in existing home inventory in some parts of that market and we obviously know higher insurance costs are also coming to bear there. So could you talk a little bit in some detail about your performance there, maybe the various markets within Florida and how it feels to you right now? Paul Romanowski -- President and Chief Executive Officer You know, Carl, Florida still feels good to us. There certainly has been a lot of news tied to the rise in insurance rates and for most of where we sell our homes are off the coast and building new construction allows for some stability in those insurance rates. So haven't seen a significant an increase for the homes in the communities where we sell as you may see reported along the coastal and high wind zones. Still seeing good in migration and good job growth throughout the Florida market. So we feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida Peninsula. Carl Reichardt -- BTIG -- Analyst Right. Thanks. And then a follow-up on multi-family and single-family for sale, that portfolio business. With some lumpiness there, I'm curious about the markets where you've got fairly good-sized operations in multi-family and single-family rental, one of the reasons for you entering and playing more significantly in that space, I think is scale benefits for the overall homebuilding operations. So if you think about the markets where you're big in those two businesses, are you seeing lower overall vertical costs for the homebuilding operation too or better margins? And maybe sort of expand a little bit on that particular element of the business? Thanks. Paul Romanowski -- President and Chief Executive Officer I think there's two big factors that drive into our push into the rental business. One is, we're a better buyer of land, a better user of land and that we're able to convert more of the land to its ultimate final use. So we're a better counterparty to a lot of sellers as we can deal with the build for rent and multi-family component as well as the residential for sale. That gives us some economies in the purchase of the land and efficiencies in the entitlement process. Certainly within the vertical cost structure, we've probably seen more ability to influence cost on the traditional multi-family side coming over from our homebuilding operations because we're much bigger buyers of parts and pieces that go into the structures than a traditional multi-family developers. Carl Reichardt -- BTIG -- Analyst OK. I appreciate it. Thanks, all. Paul Romanowski -- President and Chief Executive Officer Thank you. Operator Thank you. Your next question is coming from John Lovallo from UBS. John, your line is live. Please go ahead. John Lovallo -- UBS -- Analyst Good morning, guys, and thank you for taking my questions. The first one, obviously, there's a lot of concern in the market given the stickier than expected CPI. Although rates -- the long-term mortgage rates only moved up by about 35 basis points since pre-CPI. I mean, I guess the question is, have you seen or would you expect to see any impact to demand or would there be any change in your incentive activity given this 35 basis point move in rates? Paul Romanowski -- President and Chief Executive Officer We expect to continue to meet the market and we continue to stay focused on incentives that drive that activity and interest rate buydowns has been a big portion of what we have done. We tend to move with the market. So as you've seen that increase in market rates, we will move up the rate buy downs to be about a point to a point and a half below market. But we do expect incentives to remain near their elevated levels today, especially with the rate instability and stickiness up in that 7% range today. John Lovallo -- UBS -- Analyst Understood. And maybe splitting gears slightly here, but you guys beat deliveries versus your outlook in the quarter by about 2,300 units at the midpoint, raised the outlook by about 1,500 units at the midpoint. I mean, was there some pull forward in the second quarter or is there some conservatism in this outlook or maybe the expectation that delivery pace could moderate to some extent? I mean, how should we think about that? Jessica Hansen -- Senior Vice President, Communications Yeah. Great question, John. We did go into the quarter with a significant number of completed specs. So we actually sold and closed intra-quarter 54% of our houses. And so that is a very high percentage for us. A typical range would be about 35% to 40% of our homes would be sold and closed within the same quarter. So we still have over 7,000 completed specs. So I do think you'll see that intra-quarter activity stay higher than our historical norms. It may not be at the 54% we saw this quarter. But that did allow for probably a little bit of pull forward of demand, and it gave us the confidence to up the low end of our range by the full 2,000 units that we beat, and then the high end of our range by just 1,000. And we're now back to normal, if not better than our historical inventory turns in terms of what we're guiding to at the high end, it'd be a roughly 2.2 times turn. So feel very good about the ability to take that range up, but don't think there is necessarily an opportunity for the same scale of beat next quarter. John Lovallo -- UBS -- Analyst Yeah. Makes a lot of sense. Thank you, guys. Operator Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Stephen your line is live. Please go ahead. Stephen Kim -- Evercore ISI -- Analyst Thanks very much, guys. Strong quarter. I appreciate all the guidance thus far. I was curious if you could shed a little bit more light regarding your cash flow guidance. You mentioned about $3 billion from homebuilding specifically, but you do have other segments, you have the rental segment, and you have Forestar in particular. And I was curious as to what kind of an offset should we expect from rental or Forestar this year relative to that $3 billion from homebuilding? And then specifically with rental, you have about $3.1 billion in inventory value right now. Where do you think that's going to go over the next, let's call it, 12 months or so? Bill Wheat -- Executive Vice President, Chief Financial Officer Sure, Steve. On our cash flow guide, we have been guiding to homebuilding cash flow because that has been the primary generator of cash for us over the last couple of years. And we have invested portions of that into the rental operation as well, which feeds to the consolidated cash flow from ops. So there is some offset versus the homebuilding cash flow this year. We're guiding to around $3 billion of homebuilding cash flow. I would expect in the $800 million to $1 billion range, probably offsets that for the full year this year on consolidated. But we do expect that gap to start narrowing in future years as the growth ramp of our rental platform starts to moderate. And so we would expect going forward, our consolidated cash flow and our homebuilding cash flow to be much nearer to the same number beyond fiscal '24. So with the rental platform asset growth moderating, we're at 3.1 today. We do still expect to see that grow a bit further this year and will grow slightly next year, primarily from the multi-family platform. Our multi-family platform continues to grow and we're building out a more elevated level of starts over the last couple of years. But that will probably late '25 start to moderate as well. And so we do see prospects for the cash flow on a consolidated basis to be increasing consistently from here into '24 and into '25. Stephen Kim -- Evercore ISI -- Analyst OK. That's helpful. Appreciate that. And then with respect to uses of cash, I think as always, you talk about the opportunity for growth and your market share across the country, it still leaves some room there. And so I wanted to ask about your community count. You were up 4% month-to-month, up 15% year over year. That's an area where a lot of other builders have struggled. And I'm curious if you can provide a little bit of granularity into how much you expect there is further opportunity for growth this year in your community count and what you generally target for the next year or two in terms of community count growth. Jessica Hansen -- Senior Vice President, Communications Sure, Steve. We've been up a double-digit percentage on a year-over-year basis for community count now for several quarters. So we've probably got at least another quarter or so until we've cycled and anniversaried that and would expect the growth to moderate a bit. But as we look at our overall lot position and our positioning for the future to continue to drive growth, we have shifted to a lot of that coming from community count rather than just continuing to have to drive more absorption out of each and every community. So I do think you'll continue to see our community count grow. It just probably won't continue to be at the double-digit percentage year-over-year increase here in a quarter or two. Stephen Kim -- Evercore ISI -- Analyst OK. Gotcha. So like more like kind of like a high single-digit kind of rate is what you're talking about, right? Jessica Hansen -- Senior Vice President, Communications Yes, mid to high. Stephen Kim -- Evercore ISI -- Analyst OK. Gotcha. Appreciate it. Thanks very much, guys. Paul Romanowski -- President and Chief Executive Officer Thank you, Stephen. Operator Thank you. Your next question is coming from Matthew Bouley from Barclays. Matthew, your line is live. Please go ahead. Matthew Bouley -- Barclays -- Analyst Good morning, everyone. Thank you for taking the questions. I wanted to ask around start pace going forward. Perhaps we -- assuming we live in this kind of mid to high sevens mortgage rate environment. Is there a scenario where you would dial back production at all to the extent it supports price or margin or maybe said another way, is there a mortgage rate at which you would consider pulling back a little bit on starts? Thank you. Paul Romanowski -- President and Chief Executive Officer I think we're going to manage the starts space at a community-by-community level based upon what we're seeing with buyers in the market and how they're responding to the current interest rate environment and mix of incentives that we're offering. Traditionally, we've had a limiter for the past several periods on lot supply in terms of what we could actually start. So as we're seeing our lots get developed and get brought online, we're able to bring good production starts into the market. I think we started just under 25,000 homes in the quarter. And we probably expect that to continue into the June quarter as if we see continued absorptions and sales. Jessica Hansen -- Senior Vice President, Communications And so with our gross margin currently over 23% and very solid, it would take a pretty big disruption in the market for you to see us have a broad-based across the board pullback in starts. As Mike alluded to, it's going to be just driven on a community-by-community basis like it always is based on our finished lot position and what makes the most sense to maximize returns at that individual community level. So as we see right now, without another big shock or any sort of big shock to the system or a more significant move in rates, I think we would expect our starts to be pretty consistent through the remainder of the year. Matthew Bouley -- Barclays -- Analyst Got it. Very helpful. Secondly, I wanted to ask around credit and DTI metrics, particularly for your first time buyers. Are you seeing any sort of incremental signs of stress in your mortgage applications just given this affordability backdrop? Thank you. Paul Romanowski -- President and Chief Executive Officer No. We've seen a pretty, pretty solid level of qualified buyer. Our average FICO store this last quarter was still at 725. And with the low level of inventory and available homes to purchase out there, you know, we still see strong buyer demographic and demand and we've remained pretty consistent. We have seen fluctuation in rates, but they've really not been significant enough to have any meaningful impact on our backlog and people's ability to qualify. Matthew Bouley -- Barclays -- Analyst Great. Thanks, everyone. Jessica Hansen -- Senior Vice President, Communications Thanks, Matt. Operator Thank you. Your next question is coming from Michael Rehaut from J.P. Morgan. Michael, your line is live. Please go ahead. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Thanks. Good morning, everyone. Just wanted to drill down, if possible a little bit on the demand trends over the last couple of months. And I know you don't typically go too far down the rabbit hole in terms of month-to-month, but obviously with the change in rates, with some of the concerns in the market, any kind of January, February, March, April type of progression. We've heard that for example, March -- I'm sorry March and April maybe are a little bit more moderate than what we saw in February. I'd love your take on just how the demand trends, how the sales pace has come in through the door maybe versus your expectations and if incentives in the marketplace have changed at all around that. Bill Wheat -- Executive Vice President, Chief Financial Officer Sure, Mike. We did see at the end of our first fiscal quarter in December, we saw I'd say better than normal seasonality in terms of sales demand and that continued on into January. When we had our call in January, we were still seeing, I'd say, probably a little bit better than normal seasonality into January. And then as we've talked many times, anytime you see a lot of volatility in rates, there is always an adjustment period for buyers. And so we saw more volatility in rates in February and March. And so we saw some intermittent periods where buyers were having to adjust, which does affect weekly sales pace. But then as we look up like over the last six weeks or so, we've seen that stabilize and are seeing a very good sales pace in line with our overall plans and very pleased that, that's position us to increase our guide for the year. Going forward, as Jessica has said a couple of times already, going forward, it's going to be subject to the rate -- what happens in the market with rates, and we're -- in the last week, we've seen another period of volatility. So I think we'll continue to see that the market adjust and we'll adjust to it as the rate environment changes. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Great. Thanks, Bill. Appreciate that. And I guess just maybe along those lines in terms of the impact of higher rates at points, it seems like if you go back to your guidance last quarter, there was a little bit of surprise that maybe the out quarter for gross margins was a little less than people were looking for and it kind of went back to the higher level of rates and incentives seen in three -- in the calendar third quarter. Wondering, obviously, you haven't given guidance for the fourth quarter, but all else equal, if perhaps you're having some of the delayed impact of perhaps higher incentives, perhaps more costly incentives, and I know there's some warehouse buying and delaying of an impact on the incentive front from the mortgage rate buydowns. If we were to stay at these levels just from the standpoint basically of the buydowns being maybe a little more expensive, all else equal, would that impact be more on your fiscal fourth quarter than your third quarter? Jessica Hansen -- Senior Vice President, Communications I think right now, Mike, with the number of homes that we're selling and closing intra-quarter, you're seeing a pretty good real-time average gross margin. And so unlike a lot of other builders, I think you'll see more real-time market conditions show up in our results faster. Hard to say split in hairs between Q3 and Q4, but we were really pleased with where our gross margin came in this quarter. And we actually did see an increase in the number of buyers sequentially that we're able to utilize a mortgage rate buy-down. And in spite of that, we had a slight tick-up in our gross margin. So without giving specific guidance for the remainder of the year because it is going to be dependent on the interest rate environment, it feels pretty good to us right now. Our costs outside of incentives have generally flattened out on the stick and brick side. We're still having some categories go up where we have pressure, but we've had some success getting categories to go down. We obviously do still have some lot cost inflation we would expect to continue to need to be able to offset. So when we think about really predominantly the next two quarters, it is going to be incentive as the wildcard, and it's going to be dependent solely on market conditions. Mike Rehaut -- JPMorgan Chase and Company -- Analyst But I think just to make sure we understand then, to the extent that rates have -- rates have risen and the cost of those mortgage rate buydowns become more expensive, you feel like a lot of that is already reflected in 2Q and 3Q? Bill Wheat -- Executive Vice President, Chief Financial Officer I think, again, based on the fact that we are selling more than 50% of our homes intra-quarter, we'll see how that plays out as we look at the next in the third quarter and the fourth. But we move our rates along with the market. And so really it becomes a question of absorption and pace. We're going to continue to manage pace and margin to the returns that we want. And if we need to press a little more on the incentives to keep that pace consistent, we'll do so. But we move our rates along with the market. So it doesn't necessarily mean we're seeing significant cost. In the level of those buydowns, it really just starts to stress the buyer when they climb up into the 7% and if they go to the 8% range, then we'll see a little more challenge in getting buyers qualified. And if it goes that high, I would expect to see our incentives increase to keep our pace. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Great. Thanks so much. Appreciate it. Jessica Hansen -- Senior Vice President, Communications Thanks, Mike. Operator Thank you. Your next question is coming from Eric Bosshard from CRC. Eric, your line is live. Please go ahead. Eric Bosshard -- Cleveland Research Company -- Analyst Good morning. Two things if I could. First of all, the gross margin in the quarter was a little bit better. What was different that created that? Jessica Hansen -- Senior Vice President, Communications I'm assuming you're talking on a sequential basis? Eric Bosshard -- Cleveland Research Company -- Analyst Correct. Jessica Hansen -- Senior Vice President, Communications Yeah. So a little bit of it was just core inclusive of just a very modest pickup on the incentive front in terms of the forward commitments and the interest rate buydown because you'll see when we put out our supplemental guidance, that kind of core margins up about 20 basis points. And then we also had a little bit less of an impact on warranty and litigation this quarter. Those are the two kind of biggest pieces of why there was a sequential increase. Eric Bosshard -- Cleveland Research Company -- Analyst OK. And then secondly, you talked about it a little bit, but I'm just curious that the effectiveness of the incentives as you moved through the quarter and in the March and April, I suppose. But just trying to figure out the effectiveness in the last comment that was made of as rates moved higher, what do you have to do different with buydowns? I'm just curious how you're seeing a conversion or closing customers behave relative to incentives relative to buydowns and if you indeed are having to do anything different? Paul Romanowski -- President and Chief Executive Officer Currently, we're not doing anything significantly different. We're responding to the rates and the customers that are in front of us at the time. And they are reacting very positively to the incentive offerings that our teams have crafted for the various neighbourhoods we have out there. So no, we're not seeing anything with the current range -- range of rates we've been dealing with right now. We feel like it's sort of -- I won't say business as usual in this crazy volatile world we're in. But right now, we feel pretty steady, pretty good about where things are. Eric Bosshard -- Cleveland Research Company -- Analyst OK. Thank you. Operator Thank you. Your next question is coming from Sam Reid from Wells Fargo. Sam, your line is live. Please go ahead. Sam Reid -- Wells Fargo Securities -- Analyst Awesome. Thanks so much, guys for taking my question. You made a lot of progress here in getting back to your historic levels on cycle times. That said, I mean, one thing that I'm thinking here is you're also building a more value engineered house today than perhaps what might have been the case pre-pandemic. So the question really is, is there an opportunity to bring cycle times lower versus that historical trend? Or do you really think kind of four months is the steady-state we should be thinking about longer term? Paul Romanowski -- President and Chief Executive Officer Yes, Sam, we're pleased to be back at what we deem our historical norm, and you bring up a good point, we are building a more efficient house and it's been an extreme focus of us to try and pull labor and man hours out-of-the home to reach affordable and maintain affordability. We're always going to believe there's upside for improvement in our business. And so we continue to stay focused on our inventory turns and the opportunity to reduce cycle times and be more efficient in the construction process where we can. We're going to continue to strive for that. We're not counting on significant reductions from here. We got back to this place and we'll continue to focus on doing everything we can to drive it down further. Sam Reid -- Wells Fargo Securities -- Analyst Gotcha. And then maybe to touch on order ASP a little bit. It looks like there was a little bit of a sequential lift between Q1 and Q2. I just would like to hear maybe a bit more context on that number. Was there a function of perhaps you know a little bit of a dial back in incentives in early spring? Or were there any kind of geographic or other mix dynamics that might have also driven that sequential improvement? Thanks. Jessica Hansen -- Senior Vice President, Communications Yeah. It continues to be primarily geographic when you look at our price points. The South Central and the Southeast, which are two of our lower price point markets in terms of average sales price has been a slightly lower percentage of our mix for a couple of quarters now and that continued this quarter. Sam Reid -- Wells Fargo Securities -- Analyst Awesome. Thanks so much. I'll pass it on. Operator Thank you. Your next question is coming from Alan Ratner from Zelman and Associates. Alan, your line is live. Please go ahead. Alan Ratner -- Zelman and Associates -- Analyst Hey, guys. Good morning. Nice quarter and thanks for taking my questions. First, on the resale market, I'm curious some of your thoughts there. We were starting to see inventories ticking up a little bit in some of your markets more meaningfully than others. And when I think about the spec entry-level model, I think you guys have really benefited from the tight resale market over the last few years. I'm just curious, are there any markets now where you're starting to see increased competition from resale, maybe more contingent buyers on your move-up product and just more broadly, how you're viewing kind of the uptick in resale inventory right now? Paul Romanowski -- President and Chief Executive Officer I still think it's a very limited amount of inventory that's available in the marketplace, especially at our price point -- affordable price point. That coupled with some of the interest rate incentives that we're able to offer that for the most part existing home offerings don't provide, we're able to solve the affordability problem a little better than some of the existing home sales would be able to do. But we haven't seen a significant impact on our sales pace to date. Alan Ratner -- Zelman and Associates -- Analyst Great. Appreciate that. And then second, on the NAR settlement with brokers. I know it's still very early, but you guys have been one of the heavier users that were friends to the brokerage community, if you will, over the years. I think you view them as an important tool to bring buyers to your communities. And I'm just curious if you've given any thought to how this settlement might change the economics there, the relationships you have with brokers. And any commentary you can give would be helpful. Paul Romanowski -- President and Chief Executive Officer Yeah, Alan, I mean, we think this is going to take some time to play out. You know we work very closely with the brokerage community, and we'll continue to do so regardless of what direction this takes. I think you are going to see some restructuring, certainly in terms of commissions and it will have some impact, I believe, on the number of realtors that stay active through the market. But we are going to continue to stay close to the realtor community, communicate with them. This is still an emotional buy for people. And we're also going to stay focused on our digital presence and ability to make sure that we are ahead of the curve in terms of reaching customers through whatever form it takes over the next couple of years. Alan Ratner -- Zelman and Associates -- Analyst Appreciate the thoughts. Thank you. Operator Thank you. Your next question is coming from Collin Verron from Jefferies. Colin, your line is live. Please go ahead. Collin Verron -- Jefferies -- Analyst Good morning. Thank you for taking my questions. I guess I just wanted to start on the lot in cost inflation you're seeing. Any thoughts on the magnitude of that through the remainder of the year? I think you said it was tracking in the low-single digits in the most recent quarter. Bill Wheat -- Executive Vice President, Chief Financial Officer Yeah. I think our expectation is we'll continue to see moderate increases, I think that low single-digit percentage continuing is in our current, what we can see in our current pipeline. Collin Verron -- Jefferies -- Analyst That's helpful. And then just on the lots controlled, it's moved up again as you concentrate on that land-light model. I guess how much more runway do you think that there is? And any update on the time line of getting there and just thoughts on the right number of the years of land or lots owned? Bill Wheat -- Executive Vice President, Chief Financial Officer So I think we continue to look for ways to be more efficient and more capital-efficient in our lot portfolio. 77% is a very controlled number position right now and we're looking at 62% of our deliveries were on lots that were actually developed by third-parties or Forestar. So, we're continuing to expand those relationships and seek opportunities to buy more lots from third-parties. I'm not going to put a ceiling on to how far we can take that, but we've made a lot of progress. And when you've had a lot of success, incremental success takes a lot more work, but that's what we do every day. Collin Verron -- Jefferies -- Analyst Great. Thank you for taking my questions. Bill Wheat -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. Your next question is coming from Jade Rahmani from KBW. Jade, your line is live. Please go ahead. Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst Thank you. Are you seeing any changes in terms of investor appetite for single-family rentals and multi-family leaving aside the issue of interest rates? We've seen Blackstone, for example, make a couple of quite large acquisitions, wondering what the tone is from the investors you sell to? Mike Murray -- Executive Vice President, Chief Operating Officer Yeah. I would say we've seen a little bit of a tick up in terms of interest and the number of investors out there in the market. They're still being cautious and rates are where they are and cap rates acting in kind. But I would say that just across the board, we've seen a bit of a tick up and have more interested parties in those assets that we have out for sale today. Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst And a follow-up would be, a lot of these investors are looking for scale in their capital deployment. You've already done some large deals. Are you seeing on average the size of deals you're looking at increase? Mike Murray -- Executive Vice President, Chief Operating Officer Size per community, not necessarily, but there are large appetites to place dollars at scale into this space. Jade Rahmani -- Keefe, Bruyette and Woods -- Analyst Thank you. Mike Murray -- Executive Vice President, Chief Operating Officer There are multiple communities, yes. Operator Thank you. Your next question is coming from Mike Dahl from RBC Capital Markets. Mike, your line is live. Please go ahead. Mike Dahl -- RBC Capital Markets -- Analyst Good morning. Thanks for taking my questions. Just a follow-up on Jade's question on the -- on the rental side, revenue is flat sequentially expected in 3Q, you do have more units completed on, I think both single-family and multi-families. Is that a function of -- if you have to characterize why it's not better, is it more the investor hesitancy at this point or is it the conversations you're having around price don't meet your objectives for margin and return on those projects. Paul Romanowski -- President and Chief Executive Officer You know, it's really a matter of communities, community size, and timing of those closings and we're going to be selective through the process, but we have projects that are done and we're going to go ahead and monetize those and put them into the market. Not seeing the margins where we would like to see them, but that's relative, that's just tied to cap rates and interest rates. But no real significant shift that we're going to see in terms of up or down and it's going to be a little lumpy as we look through the quarters because we're selling whole communities at a time. It's not one at a time. Mike Dahl -- RBC Capital Markets -- Analyst Got it. OK. And then shifting gears back to the homebuilding margins. Last fall, when there was a period of significant rate volatility and ultimately rates came down, you had a negative mark-to-market. Jessica, I think you mentioned that lower forward contracts played a role in lower-cost or mark-to-market there played a role in sequential gross margin improvement in fiscal quarter. Can you be more specific around what impact or quantification your forward hedges are having on both the 2Q gross margin? And is that actually a continued sequential benefit in your 3Q guide? Jessica Hansen -- Senior Vice President, Communications No. I mean, we really think about it, Mike, as last quarter was somewhat of an anomaly. We're not going to say one-time. I mean, it could happen again, but it was highly unusual in terms of the rate move going up and down so quickly and the timing in which that happened and then a move close to quarter end. And so this quarter when we say minimal impact, I mean, we've talked about outside of Q1, it's been no more than a plus or minus 10 basis point move from a gross margin perspective. And so, hopefully, that will be the case going forward as well, and you won't see a repeat of what happened in Q1. Mike Dahl -- RBC Capital Markets -- Analyst OK. Great. Thanks. Operator Thank you. Your next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live. Please go ahead. Susan Maklari -- Goldman Sachs -- Analyst Thank you. Good morning, everyone. My first question is on the material costs. I think, Jessica, you had mentioned that you're seeing some success on seeing some of those move lower. Can you give more detail on what is coming down and how you're thinking about that relative to some of the other areas where there may be some inflation that's coming through? And any thoughts on lumber as well within that? Jessica Hansen -- Senior Vice President, Communications I'll start with lumber and then I'll leave that up and down on other categories to Paul and Mike, they're probably better or worse than I am. Lumber is still less than half what it was at its peak back in March of '22, but it has started to increase since December, which would be kind of a typical seasonal trend. So hopefully, we're not going to be talking about lumber in terms of big swings in our closings. And most of our year-over-year stick and brick decline is still from lumber, but in terms of sequential moves going forward, we expect it to be relatively modest. Mike Murray -- Executive Vice President, Chief Operating Officer Very fair. And I think in terms of the other categories, it's a market-by-market category-by-category, I don't want to say struggle or battle, but it's an ongoing effort to be as efficient as we can do that. And we make some progress on some categories and then we might have to give back some on others. So it's a constant battle, Susan. And we've seen right now, I think some moderation in seeing increases, which has been very helpful in margin right now. Susan Maklari -- Goldman Sachs -- Analyst OK. All right. That's helpful. And then you guided your SG&A to be about 7% for the third quarter, which is still really low in there even as you're making those investments. Can you just talk about the puts and takes into the SG&A as we think about not just the third quarter, but even looking out? Any thoughts there? Bill Wheat -- Executive Vice President, Chief Financial Officer Yeah, sure. So we're continually trying to position ourselves to -- across our footprint to be in position to grow. And as we've gotten larger and have more scale in individual markets, that has involved realigning certain divisions, you're breaking up certain markets into multiple divisions to put ourselves in a position to more deeply penetrate market share in those markets. And the same has applied across our infrastructure across the country as well. And so we're making some of those investments right now and we do see pretty quick payback on that. So that's why our SG&A percentage has remained as low as it has, but we are making those investments that sometimes do have to come a little bit ahead of the growth. But it's primarily in people and in making sure we've got the depth on our teams and we've got the land personnel in various markets in order to be able to tie-up the land positions and develop those relationships with third-party developers and trades to continue to position our platform to support growth. Susan Maklari -- Goldman Sachs -- Analyst OK. That's great. Thank you. Good luck. Mike Murray -- Executive Vice President, Chief Operating Officer Thank you. Operator Thank you. Your next question is coming from Kenneth Zener from Seaport Research Partners. Kenneth, your line is live. Please go ahead. Ken Zener -- Seaport Research Partners -- Analyst Good morning, everybody. Bill Wheat -- Executive Vice President, Chief Financial Officer Good morning. Paul Romanowski -- President and Chief Executive Officer Good morning, Ken. Ken Zener -- Seaport Research Partners -- Analyst All right. Margin stability up 52% of closings intra-quarter orders. Why was it higher specifically? It looks to be, again, I could make my own narrative, but I want to hear it specifically. And then what was the margin spread between those 52% intra-q versus the ones that were naturally coming out of backlog? Jessica Hansen -- Senior Vice President, Communications I frankly don't think any of us looked at that before the call, but we can take a look and get back to you. It was 54% versus the 52%, just to clarify. And the driver on that was just a function of we went into the quarter with over 9,000 completed specs and our cycle times are back to normal. Ken Zener -- Seaport Research Partners -- Analyst OK. So you're getting, yeah, we'll follow-up on the margin backlog versus intra-q, is that correct? Jessica Hansen -- Senior Vice President, Communications Yes. Ken Zener -- Seaport Research Partners -- Analyst OK. And then Paul I think you kind of talked about your markets in Florida not being affected by the rise in inventory we're seeing in coastal markets and/or a higher cost of ownership related to insurance. Could we maybe isolate that comment to a place like Central Texas, I think Austin? I know you're building in Buda, not Austin per se. But we are seeing inventory go up in Central Texas, you don't have right the coastal issues. Is this still that you have homes that are affordable and in demand? So you're seeing the same dynamics you talked about there where we're kind of excluding coastal conditions? Thank you. Paul Romanowski -- President and Chief Executive Officer Well, the question and the comment back on Florida was mostly as it relates to insurance and increased costs around that. Inventories, we have certainly seen more inventory in the market today on the resale side than we have in the past. Months of supply has crept up slowly across most of our markets, but majority of what we see coming to the market is still maybe either overpriced or has significant need and work and very minimal in the affordable price points where we tend to compete. So we expect it's going to take significantly more homes to come on before we see to be a lot of impact on our ability to sell. But we've competed in that market forever. We have been a spec builder. We do that to compete in the new-home market as much as we do against the resale market. Feel very good about our product and positioning against the homes that come to market as resale available when they do. And we think we have a great package of incentives, warranty and closing cost basis to compete against that inventory when it does come on and it will at some point in the future. Ken Zener -- Seaport Research Partners -- Analyst Right. Appreciate it. And I guess, Jessica, you said 3% on land. Could you split that between land you developed and land you're buying finished? Jessica Hansen -- Senior Vice President, Communications I don't think we've quantified that, and I definitely don't have that in front of me. Ken Zener -- Seaport Research Partners -- Analyst Talk to you guys later. Thank you. Operator Thank you. Your next question is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live. Please go ahead. Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst Hi. Good morning. Thanks for -- thanks for taking my questions. Just first on the fiscal third quarter gross margin outlook for flat to slightly up. Just how do we think about the assumptions for the stick and brick per square foot, net pricing and land inflation that's baked into that guidance? And then specifically on land inflation, just the lot cost is flat quarter-over-quarter. What are you seeing in terms of land inflation for land that's contracted today? Paul Romanowski -- President and Chief Executive Officer Yeah, Rafe, in our forward guide, we've got relative stability right now in materials and labor. So but we are still seeing some components go up slightly. So I think a very low single-digit percentage increase is generally the expectation there and our lot costs are a little bit higher than that, still low single-digits, but probably more in that 3% to 4% range. And in terms of just new land, that's deal by deal specific, market by market specific. I think in general, we've seen land prices kind of settle out here over the last little while, not as much inflation, but the long-term trend is still up over time. This industry still has a shortage of lot availability. And so I think that's going to continue to be a constrained situation. And so in that situation, we would not expect to see land prices come down. Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst Thank you. That's very helpful. And then on the further rate buydowns, the forward commitments that you all have, how long do those go out? Are those months, are those weeks? So the recent move in rates, it hasn't impacted the rates that you are offering yet. When will that start to be kind of offered to the homebuyer? Like how long of forward commitment do you have? Bill Wheat -- Executive Vice President, Chief Financial Officer We generally don't go out too terribly far in terms of the volume of forward commitments that we go with. We have various levels based upon anticipated demand of how much we'll buy for a given expiration date, which can vary from 60 days to 90 days out. But we're not going to look to fulfill all of our existing sales expectations with anyone given a hedge or anyone given build or forward and we'll continually sort of reprice to market so that we're offering incentives that are within as Paul said before, I think a point to a point and a half of market when that is the incentive that we feel is the most effective at driving appropriate pace and margin for the returns at a given community. Rafe Jadrosich -- Bank of America Merrill Lynch -- Analyst Thank you. That's helpful. Operator Thank you. Your next question is coming from Alex Barron from Housing Research Center. Alex, your line is live. Please go ahead. Alex Barron -- Housing Research Center -- Analyst Yeah. Thanks, guys and great job in the quarter. Yeah, I was just curious around land development costs. I mean, you guys are developing, I mean using a lot more land options and stuff, but are land development costs expected to impact margin for you guys in the near term or do you feel that's going to be more absorbed by whoever is developing the land for you? Paul Romanowski -- President and Chief Executive Officer Hey, Alex. We haven't seen much reduction in land development costs either from materials or labor. You know, we still have significant demand out there for the labor and those that are putting lots in the ground, not just in what we're doing and other builders are doing, but you have infrastructure improvements throughout the country that are keeping demand up for materials and labor. So that's kind of baked into what we look at in terms of our increase in lot price over time. So we don't -- we'd love to see some reduction, but we don't expect to see it in the near term. Alex Barron -- Housing Research Center -- Analyst Got it. And I guess you already touched a bit on the rental business, but I was just curious if the margins we saw this quarter, do you expect that's going to be sort of more what they're going to look like in the future or not necessarily? Bill Wheat -- Executive Vice President, Chief Financial Officer It's going to be largely rate dependent in the capital markets as to the execution on those. I think at this point, our expectation is that it's going to be somewhat consistent with where we are today, but there is opportunity for some volatility around that too, especially within quarters within one quarter to the next because these are some chunky transactions. There are large individual transactions. And our multi-family platform is not yet to the scale where they're producing a significant number of multi-family communities delivering every quarter to the marketplace. So there's a relatively small number, they can be chunky and there's opportunity for volatility. Our expectation is somewhere in the range we're in today. Alex Barron -- Housing Research Center -- Analyst Got it. OK. Well, good luck. Thanks. Paul Romanowski -- President and Chief Executive Officer Thank you. Bill Wheat -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. The final question this morning is coming from Jay McCanless from Wedbush. Jay, your line is live. Please go ahead. Jay McCanless -- Wedbush Securities -- Analyst Thanks. Good morning, everyone. So on that rental guidance you talked about for 3Q, is that guidance based on projects that already have financing in place? Or is that just the schedule of what you think might close during the quarter? Paul Romanowski -- President and Chief Executive Officer It's a mix of both. Jay McCanless -- Wedbush Securities -- Analyst OK. And then the other question I had is, I don't want to make too much of this if it's not a big deal, but it does seem like you're going from maybe an aggressive selling pace during the COVID years now to trying to gain market share leadership through more communities. I guess, how far along do you think you are in that transition? And I think kind of to Su's question also, what is that ultimately going to mean for SG&A going forward if you are starting to staff up and bring more people on to support a larger organization? Jessica Hansen -- Senior Vice President, Communications Yeah. I wouldn't say, Jay, that it has anything to do with us trying to push more pace during COVID, it's all tied to our lot position. And so we've been building our lot position up, but not all of those lots were ready to go. And so we knew the communities were coming. And obviously, the market was extremely hot for a period of time. So we were able to drive additional absorption where we had the lots available. We don't have that same kind of strong demand, less affordability challenged environment today. And at the same time, our lots are getting finished and the communities are ready to go. So we're bringing them online and it happens to be good timing that we have the communities ready to go when we're not able to drive incremental absorption further in our existing communities. Jay McCanless -- Wedbush Securities -- Analyst OK. And I guess how far along do you think you are maybe in the process of trying to get bigger from a community count standpoint? Jessica Hansen -- Senior Vice President, Communications That's going to be an ongoing plan and goal and positioning. And I'd say just watch our lot position and ultimately, the communities are going to come online over time. Now from year-to-year, what exactly is that community count growth going to look like. It's impossible for us to predict. Jay McCanless -- Wedbush Securities -- Analyst OK. Great. Thanks for fitting me in. Jessica Hansen -- Senior Vice President, Communications Sure. Thanks. Operator Thank you. I would now like to turn the floor back to Paul Romanowski for closing remarks. Paul Romanowski -- President and Chief Executive Officer Thank you, Tom. We appreciate everyone's time on the call today and look forward to speaking with you again to share our third-quarter results in July. Congratulations to the entire D.R. Horton family on producing a solid second quarter. We are proud to represent you on this call and appreciate all that you do.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings, and welcome to the Dow first quarter 2024 earnings conference call. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to turn it over to Dow investor relations vice president, Pankaj Gupta. Mr. Gupta, you may begin. Pankaj Gupta -- Vice President, Investor Relations Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I'm Pankaj Gupta, Dow's outgoing investor relations vice president. Leading today's call are Jim Fitterling, Dow's Chair and chief executive officer; and Jeff Tate, chief financial officer. Also joining is our new investor relations vice president, Andrew Riker, who you may remember, was a member of our IR team a few years ago. Please note, our comments contain forward-looking statements and are subject to the related cautionary statements contained in the earnings news release and slides. Please refer to our public filings for further information about principal risks and uncertainties. Unless otherwise specified, all financials, where applicable, exclude significant items. We will also refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release and slides that are posted on our website. On Slide 2 is our agenda for today's call. Jim will review our first quarter results and operating segment performance. Jeff will then provide an update on the macroeconomic environment and modeling guidance as well as the results of our annual benchmarking. Jim will then provide an update on key milestones for our long-term strategy, which positions us well to deliver growth through the cycle. Following that, we will take your questions. Now let me turn the call over to Jim. Jim Fitterling -- Chairman and Chief Executive Officer Thank you, Pankaj. Beginning on Slide 3. In the first quarter, Team Dow delivered sequential volume growth and margin expansion. We strategically increased operating rates to capture improving demand, we maintained pricing and we benefited from lower feedstock and energy costs. These results reflect the strength of our advantaged portfolio, including our participation in diverse end markets and our cost advantage positions around the world. Net sales were $10.8 billion, down 9% versus the year ago period but up 1% sequentially, driven by gains in performance materials and coatings and industrial intermediates and infrastructure. Volume increased 1% year over year. And excluding hydrocarbons and energy, volume increased 5%, with gains in all regions. This marks the second consecutive quarter of year-over-year volume growth. Sequentially, volume increased 1% and excluding hydrocarbons and energy, was up 3%, led by gains in performance materials and coatings. Local price decreased 10% year over year and was flat sequentially as modest gains in Europe, the Middle East, Africa and India, or EMEAI, were offset by declines in Asia Pacific, the United States and Canada. Operating EBIT for the quarter was $674 million, down $34 million year over year driven by lower prices in all regions. Sequentially, operating EBIT was up $115 million, reflecting gains in performance materials and coatings and industrial intermediates and infrastructure. We delivered cash flow from operations of $460 million in the quarter, resulting in a 94% cash flow conversion on a trailing 12-month basis. This reflects our focus on cash flow generation and enabled $693 million in returns to shareholders. We also advanced our long-term strategy with our higher return, highly capital-efficient Path2Zero project in Fort Saskatchewan, Alberta, where construction started earlier this month. Now turning to our operating segment performance on Slide 4. In the packaging and specialty plastics segment, operating EBIT was $605 million, down $37 million compared to the year ago period, primarily due to lower integrated margins. Local price declines were primarily driven by lower energy and feedstock costs globally. Volume decreased year over year driven by declines in the hydrocarbons and energy business. This was primarily due to prioritizing higher-value downstream derivative polymer sales as well as lighter feed slate cracking in Europe. Sequentially, operating EBIT decreased by $59 million as improved polyethylene integrated margins were more than offset by expected lower nonrecurring licensing revenue and higher planned maintenance activity. Moving to the industrial intermediates and infrastructure segment. Operating EBIT was $87 million compared to $123 million in the year ago period. Results were driven by lower prices in both businesses, which were partly offset by three items: lower energy and feedstock costs, improved equity earnings and volume gains in Polyurethanes & Construction Chemicals. Sequentially, operating EBIT was up $72 million driven by improved equity earnings and lower energy and feedstock costs, primarily in EMEAI. And in the performance materials and coatings segment, operating EBIT was $41 million, up $6 million compared to the year ago period, driven by volume growth and higher operating rates. Volume was up year over year driven by gains primarily in the United States, Canada and Latin America. Sequentially, operating EBIT increased $102 million driven by higher seasonal volumes and overall improved demand. Now I'll turn it over to Jeff to review our outlook and actions. Jeff Tate -- Chief Financial Officer Thank you, Jim and good morning to everyone joining our call today. Turning to our outlook on Slide 5. We are seeing signs of improving macroeconomic conditions in several regions, which gives us cautious optimism heading into what is typically a seasonally strong quarter. That said, we are keeping a close eye on inflation, interest rates and geopolitical tensions. The U.S. is benefiting from improving industrial activity with manufacturing PMI in expansionary territory every month thus far this year. In fact, manufacturing production expanded at its fastest rate in 22 months in March. Average chemical railcar shipments were also up 4.3% year-to-date compared to last year through mid-April. And while high interest rates continue to improve building and construction activity in the U.S., building permits were 1.5% higher in March year over year, while existing home sales declined 3.7% in March. In Europe, consumer spending and industrial activity remain weak with manufacturing PMI decreasing in February and March. This partly reflects ongoing geopolitical tensions in the Red Sea, which have led to higher freight costs globally. Declines in inventory levels are a promising indicator with March at the lowest levels since July 2022. Economic activity in China continued to recover steadily with signs of improving demand. Industrial production increased 4.5% year over year in March. Additionally, retail sales grew 3.1% year over year in March, supported by consumer spending around the Lunar New Year. Nonetheless, the property sector remains weak with new home prices continuing to decline through March. Industrial activity in other regions remains constructive. In March, India manufacturing PMI reached its highest level in more than three years at 59.1. ASEAN manufacturing PMI reached an 11-month high at 51.5. And in Mexico, industrial production increased further in February. Now turning to our outlook for the second quarter on Slide 6. In the packaging and specialty plastics segment, higher global polyethylene integrated margins, resilient demand in packaging, as well as continued strength in the export markets are expected to drive a $150 million tailwind in the quarter. Additionally, we expect $25 million in tailwinds from our site in Bahia Blanca, Argentina, which has returned to operations following an unexpected storm in December of 2023. Lastly, we expect a $75 million headwind due to increased plant maintenance primarily in Sabine, Texas. In the industrial intermediates and infrastructure segment, consumer durables demand continues to be muted. However, we expect margin expansion on improved MDI and polyols spreads in Europe. We also expect modest seasonal demand improvement in building and construction end markets as well as resilient demand in pharma and energy end markets. Altogether, these represent a $25 million tailwind. In addition, we expect a headwind of $25 million due to planned maintenance in Europe and the U.S. Gulf Coast. This will be partly offset by the completion of a turnaround at a PDH unit in the first quarter. In the performance materials and coatings segment, higher global siloxane prices and seasonal demand increases in building and construction end markets are expected to drive a $75 million tailwind in the second quarter. We also expect an additional $25 million tailwind from a turnaround at our siloxane pillar site in the U.S., while our Deer Park and PDH sites will come back up following planned maintenance in the first quarter. So with all the puts and takes, at a company level, we expect second quarter earnings to be approximately $200 million above first quarter performance. Now moving to Slide 7. As we navigate the cycle and execute on our long-term strategic actions, Dow remains committed to our culture of transparency, accountability and benchmarking. Today, we published the results of our annual benchmarking update, once again demonstrating our strong performance and value creation relative to our peers. The results can be found on our investor website. Dow came in well ahead of pure average and broader S&P 500 with continued attractive three-year average free cash flow and dividend yields. This reflects our commitment to industry-leading cash generation and shareholder remuneration across the economic cycle. Our three-year EBITDA margins and return on invested capital are above the peer median with return on invested capital, 200 basis points above our 13% target across the economic cycle. We also delivered best-in-class net debt reduction since 2019, which allows us to deliver on our capital allocation priorities even at the bottom of the cycle. Our achievements in these areas point to our continued discipline and financial flexibility. As a result, Team Dow has set the stage for us to drive earnings growth and increase shareholder returns through the cycle. With that, I'll turn it back to Jim. Jim Fitterling -- Chairman and Chief Executive Officer Thank you, Jeff. Moving to Slide 8. Dow is well positioned to capture demand and drive earnings growth as the economic recovery takes hold. This is reflected in our competitive advantages and early cycle growth investments which are advancing while also demonstrating Dow's continued focus on operational and financial discipline. And we have a differentiated portfolio with structurally advantaged assets, global scale and low-cost positions in every region. Healthy oil-to-gas spreads, supported by growing natural gas and NGL production in North America, favor our cost advantage and ability to capture continued margin improvements as the economic recovery gathers strength. We've also taken actions to grow Dow's earnings as we execute our near-term, higher-value, lower-risk growth investments that are expected to deliver approximately $2 billion in incremental underlying EBITDA by mid-decade. Since 2021 we have added capacity that will increase our mid-cycle EBITDA by approximately $800 million, including investments in our FCDh unit in Louisiana and alkylation capacity investments in the United States and Europe that serve attractive market segments such as consumer nondurables and pharma. In addition, we have invested in multiple downstream silicone debottlenecks to address fast-growing applications in MobilityScience and electronics. We are on track to achieve the remaining $1.2 billion of our near-term EBITDA target by mid-decade, enabled by our lower risk and higher return growth projects. These investments represent a significant portion of Dow's earnings growth in the next up cycle. Moving to Slide 9. Dow continues to execute with financial and operational discipline as we invest through the bottom of the chemical industry's economic cycle for long-term profitable growth. Our near-term growth and efficiency investments continue to progress with our propylene glycol expansion in Thailand achieving mechanical completion this month. We are also making good progress on our Decarbonize & Grow strategy, including our Path2Zero project in Fort Saskatchewan, Alberta. Construction began earlier this month, where we're installing the first of approximately 4,000 piles that will anchor the foundation of our new net zero cracker. In addition, all long lead time equipment items have been ordered, further demonstrating our consistent focus on locking in cost efficiencies for this project. We also entered into a long-term agreement with Pembina, a leading ethane supply and transportation provider, to supply and transport up to 50,000 barrels per day of ethane. With this latest agreement, we have secured the majority of our cost-advantaged ethane supply with multiple suppliers in the region. Overall, I expect the Path2Zero project to deliver an additional $1 billion per year in mid-cycle EBITDA growth at full run rates over the economic cycle. In addition, we continue to advance circularity through our Transform the Waste strategy via strategic partnerships and offtake agreements. This includes a recent joint development agreement with Procter & Gamble, which will create a new recycling technology aimed at converting hard-to-recycle plastic packaging into recycled polyethylene. The result will be near virgin quality and lower greenhouse gas emissions than virgin polyethylene. All in, we expect our Transform the Waste initiatives to generate more than $500 million of incremental run rate EBITDA by 2030. Turning to Slide 10. Our actions since 2019 have created a stronger Dow. Over the past five years, we have worked hard to improve our balance sheet, to improve cash flow conversion and to build a more resilient company that maintains consistent discipline. This was demonstrated when we delivered $12.4 billion in peak EBITDA in 2021, higher than any other time frame in Dow's history. This has created the opportunity for us to invest strategically at the bottom of the cycle for long-term profitable growth. And as implementation of our growth strategy increases our underlying EBITDA, we will continue to target at least 65% of operating net income to shareholders as we move up the next peak. This means at least 45% in dividends and 20% in share buybacks. Closing on Slide 11, I want to thank you for your interest and ownership in Dow. The team and I look forward to engaging with many of you on our 2024 investor day on May 16. As a reminder, the event will be hosted from the New York Stock Exchange. It will also be available via live webcast. More information can be found on our website at investors.dow.com. During the event, we will share progress on Dow's commitment to improve underlying earnings by greater than $3 billion by 2030 that will enable raising the mid-cycle as well as the trough and peak earnings levels. We'll demonstrate our consistent commitment to operational and financial discipline, our capital allocation priorities and our leadership in attractive market verticals. And we'll show how, taken together, this creates significant value creation as we grow earnings and enhance shareholder returns over the cycle. Before I turn it over to Pankaj, he mentioned at the top of the call that we have our incoming vice president of investor relations, Andrew Riker, joining us today. I'd like to take a minute to congratulate Andrew as he takes charge and to thank Pankaj for leading the investor relations team over the last three years and also for his contributions to our upcoming investor day. Pankaj, we look forward to seeing your achievements in your next role leading our Dow Industrial Solutions business. With that, Pankaj, please get us started with the Q&A. Pankaj Gupta -- Vice President, Investor Relations Thank you, Jim. Now let's move on to your questions. I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Please go ahead. Hassan Ahmed -- Alembic Global -- Analyst Good morning, Jim. Jim, a quick question around global ethylene and polyethylene supply demand fundamentals. On the surface, as I sort of take a look at global utilization rates, they seem relatively slack. But then as one sort of thinks through marginal producer economics, I mean, they seem pretty weak right now and we're obviously hearing more and more announcements of capacity closures, out in Europe. So how do you see utilization rates pan out in '24 and beyond? Jim Fitterling -- Chairman and Chief Executive Officer Good morning, Hassan. Good question. I would say, obviously, there are differences around the globe depending on the cost positions. And we have a footprint that is very highly advantaged in North America and Latin America and the Middle East. Europe is right now where you've seen most of the focus on supply reductions with a couple of announcements of crackers being shut down. I'd also say China, there's a lot of pressure on operating rates there because the cash margins are negative and have been negative for some time and there's a big arbitrage window open between the United States and China. And so all of those things have really led to much higher operating rates in the cost-advantaged regions. And even in Europe, where we had LPG cracking flexibility in the first quarter and propane was still a little bit high in first quarter but that advantage led to higher operating rates for us in Europe. Our overall operating rates jumped about 10 percentage points in Europe in the first quarter. So I think if you've got a cost advantage position, things are looking pretty good. Europe is a little bit islanded off right now because of the tensions in the Middle East and the Red Sea effect from shipping. And so it's relying on its domestic production for the market growth and there has been some volume growth there. And the Middle East, that has been focused more on Asian demand. So I feel good about it. All of the -- most of the new capacity is in the market already and we're seeing volume growth, second consecutive quarter of volume growth. And we're starting to see year-over-year volume growth numbers. So it feels like we're starting to turn the quarter a little bit. Questions & Answers: Operator Your next question comes from the line of David Begleiter from Deutsche Bank. Please go ahead. David Begleiter -- Deutsche Bank -- Analyst Thank you. Good morning. Jim, last quarter, you gave a bit of an earnings walk up to about $6.4 billion, $6.5 billion of EBITDA this year. Do you still believe that number is achievable if not beatable given the solid Q1 results? Jim Fitterling -- Chairman and Chief Executive Officer Good morning, David. I think with the first quarter results and the $200 million that Jeff mentioned on the call, we're right on track. I would add that, as you go into third quarter, now that we'll have another $100 million from the restart of Glycol 2 in Plaquemine, so $100 million third quarter, $100 million fourth quarter kind of numbers. So we're starting to see that run rate and that run rate right in line with what we need to deliver that $6.4 billion. And then I would say the underlying chemical demand, I talked about in last quarter, it felt like destocking slowed. Inventory levels for us in December were lowest they've ever been. They continue to be low at the end of first quarter and chemical production and chemical shipments are up. And so when you look at those numbers, you say this volume growth right now feels like it's demand driven, not restocking driven. And so I think as we start to move up this thing, hopefully, the economy keeps with us here and we start to see us pick up some momentum on this trend. Operator Your next question comes from the line of Vincent Andrews from Morgan Stanley. Please go ahead. Vincent Andrews -- Morgan Stanley -- Analyst Thank you, and good morning, everyone. If I could just ask, in the PSP guidance for 2Q and that step up to $150 million, can you just walk us around the world and tell us sort of how you're bridging that $150 million? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Good morning, Vincent. Thank you. And it's mostly a step-up in integrated margins. I think we're looking at about $0.03 a pound globally in integrated margin increase. North America -- Europe may be a little bit more than 3, rest of the world is pretty flat. We've got, obviously, kind of a one-time improvement. We had Bahia Blanca down, as mentioned, in the first quarter -- for part of first quarter to the -- beginning of it because of the storm they had in December. But it's back. And so you'll see a $25 million improvement there. So those two positives are $175 million. We have higher turnaround costs in the quarter. We're doing the turnaround at Sabine this quarter. That's about $75 million. So net-net, you've got about $100 million up in P&SP for the second quarter. And the volume numbers are good. The margin numbers are good. Exports are good out of the U.S. Gulf Coast. Product is flowing. Operating rates are good. So we're starting to see the positive impacts of all those things. Operator Your next question comes from Frank Mitsch from Fermium Research. Please go ahead. Frank Mitsch -- Fermium Research -- Analyst Thank you. And let me also echo my congratulations to Pankaj. Best wishes in Industrial Solutions. Jim, I was wondering if you could talk about operating rates across the Dow portfolio in general. How has that -- that appears to be one of the positives in the quarter. If you could offer some commentary on your expectations for the Dow engine in 2Q and beyond on the operating rate front. Jim Fitterling -- Chairman and Chief Executive Officer Sure. Yeah, happy to do that, Frank. I'd say globally, at a high level, we were at about 6% which is up quarter over quarter. It's -- higher demand obviously drove that, lower energy costs in Europe were a big driver of that as well. The United States Gulf Coast, Argentina, Canada have been running at well north of 80%, some as high as 90% kind of rates. Europe saw the biggest individual step-up, as I mentioned previously but all regions saw a step up in rates. And so I'm optimistic that, that's just a sign of underlying demand coming. So you'd probably think -- I think I mentioned like about 10 percentage points up. That's good ballpark for the whole global number with North America, Latin America being -- continue to be strong and high rates and Europe being a big part of that step up. Operator Your next question comes from the line of Steve Byrne from Bank of America. Please go ahead. Steve Byrne -- Bank of America Merrill Lynch -- Analyst Yes, thank you. I wanted to ask a question about the hydrogen-fueled cracker you're building in Alberta. And then you also have the investments with the Mura pyrolysis feedstock. For those investments, how would you expect the unit costs of those downstream crackers to compare to, say, Texas-9 on a unit cost? And to drive the return on those projects, do you have sales agreements for the product at a premium price? Jim Fitterling -- Chairman and Chief Executive Officer Steve, on the hydrogen-fueled cracker, we recover part of the higher unit costs there through the price on carbon. And the team is working on as well, trying to get the premium pricing for that offtake. And I would say our view on that is that it will be there. There's a strong demand for low-carbon emission products, ethylene-based materials. And so we're working on that right now. But the returns on that project are going to be equal or greater than Texas-9 all in. And so when you take a look at it, we are very optimistic about where we're going to be with that project. And Texas-9 was one of the projects that obviously led us to be able to deliver the $12.4 billion in peak earnings in that 2021, 2022 time frame. So I feel good about that. Again, remember, because of the scale and because of the fact that we get the hydrogen and methane as byproducts off the back of the cracker, the incremental cost is coming through the autothermal reformer, which, part of that is recovered through the price on carbon. And then we have long-term ITCs, investment tax credits, from Canada for that low carbon investment. Those two things will make it very competitive with Texas-9. On Mura, Mura will be focused on, primarily on looking at the recycle demand, at which the supply for recycled polyethylene right now is much shorter than the demand. And so there are premiums in the market today for those materials. And the Mura process, in our view, is one of the more highly profitable ones because it uses the supercritical steam to change the product back into a monomer state. So we feel good about the start-up of that project. Josh Spector -- UBS -- Analyst Yeah. Hi. I was wondering if you could share some thoughts on free cash flow for '24 since you kind of reiterated your expectations there on EBITDA. How do you see that tracking? And any update you can provide on any of the nonoperating items that you thought could bridge free cash flow for this year as well? Thanks. Jim Fitterling -- Chairman and Chief Executive Officer Jeff, do you want to walk through what you think the free cash flow outlook is for the year? And I would just say, Josh, the one thing we have to remember, as we're turning the corner here, December was the low point from a pricing standpoint and we've seen successive improvements January, February, March. So we go from a use of cash -- a source of cash in the fourth quarter to use of cash in the first quarter. But as we make that turn and earnings improve, we'll start generating the free cash flow out of higher earnings. Jeff Tate -- Chief Financial Officer Yeah. Well said, Jim. And good morning, Josh. Building on Jim's statement there, the other thing I would mention is that we've also started to see, as the volumes have been improving, we're seeing sales ramp up and we saw the sales ramp up throughout the quarter. So our receivables are also ramping up as well from a working capital standpoint. We're also going into a heavy turnaround period as well, which we anticipated. So all of this is in line with our expectations and our projections, especially for the first half of the year in terms of the working capital uses of cash that we would expect and have. But as Jim mentioned, as we go into the second half of the year, we continue to see the volume growth and the volume ramp-up in the sales leading to earnings growth that will get us into a really good position as we think about our cash flow on a full year basis. And we'll continue to have what we like to call unique to Dow, cash levers. If you look over the past several years, we have had anywhere from $1 billion to almost $3 billion on an annual basis of cash levers that we've identified and executed on. And you can expect that to be very similar in 2024. As we work on our Nova judgment, which we've talked about in the past, we continue to evaluate a number of our nonproduct producing assets that we have across our portfolio as well. And we're going to continue to focus on structural working capital improvements that we can make while also looking at opportunities to get cash out of our joint ventures. Operator Your next question comes from the line of Mike Sison from Wells Fargo. Please go ahead. Mike Sison -- Wells Fargo Securities -- Analyst Hey, guys. Nice quarter. And congrats, Pankaj, again. In terms of 2Q volumes, will hydrocarbons and energy be a headwind again? And I guess, how much, I'm just curious on sort of the core volume growth for PSP. And then just quickly curious on siloxanes if -- why you think there could be improvement in 2Q versus 1Q? Thank you. Jim Fitterling -- Chairman and Chief Executive Officer Sure. I think on hydrocarbons and energy, I would say, as we went into first quarter because we had -- obviously Bahia had been impacted by the storm and because we had the arbitrage, obviously, to China and wanted to move more product. We elected not to move materials into the broader market and just focus on higher operating rates. So sometimes byproduct sales are not as high off the crackers, especially for cracking light like we were in Europe and in North America. And so that leads to less volume of byproducts to sell. And sometimes, it's running the derivatives harder. As I mentioned, volume was up 5% on derivatives since first quarter and that was just -- we were moving that ethylene through the derivatives and making more product. I expect that will continue. So we might see hydrocarbons and energy be a little bit less but I think you're going to see improved margins on those volumes. And the team is working hard to continue to deliver on the volume growth numbers. We had a very good first quarter result and we've got strong volume as part of that second quarter number plus the higher integrated margins. So I'd say price in China has moved up and demand for the downstream products is good, especially when you think about things like electronics, even continuing into automotive, hybrids and EVs both drive good demand, data centers, chips, thermal management for silicones is big. So the only thing that's a little bit slow is on the construction side. And so you've got higher operating rates in China. You've got better siloxane pricing. We've got personal care markets that are moving into positive territory. So I would say, before we even see a big step up in building and construction, those are already starting to improve. Operator Your next question comes from the line of Jeff Zekauskas from J.P. Morgan. Please go ahead. Jeff Zekauskas -- JPMorgan Chase and Company -- Analyst Thanks very much. In your industrial intermediates and infrastructure forecast, you have sales going up sequentially 1% or 2% and you've got your EBITDA flat sequentially. And normally, there's seasonal strength in the various construction markets. Why is your forecast so conservative? And then secondly for Jeff, how many shares will be issued? Or what's the amount of options and shares issued that will affect the share count in 2024? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Good morning, Jeff. I think the biggest thing, when you look from first quarter to second quarter on II&I is because of the Glycol 2 situation in Plaquemine. We had some insurance recoveries in the first quarter that don't recur in the second quarter. So that creates what looks like a bit of a headwind. I think the underlying business is good and the underlying demand is good. If you look at Polyurethanes & Construction Chemicals, obviously, we've seen a step up in Europe and in operating rates. Sadara is also doing more of the marketing of some of those materials and so we see a little bit less volume coming through Sadara, from Dow marketing the Sadara offtake. So that has a little bit of an impact. But I would say -- our view is, we're still seeing construction slightly better and we're seeing, obviously, Europe much better cost position and that's driving the improved operating rates and just that insurance delta is probably the biggest thing. Jeff? Jeff Tate -- Chief Financial Officer Jeff, in terms of the issuances for the full year and this then captures options, deferred stock, 401(k) plan as well as Dow employee stock purchase plans. We're looking at approximately 11 million shares on a full year basis. Operator Your next question comes from the line of Kevin McCarthy from Vertical Research Partners. Please go ahead. Kevin McCarthy -- Vertical Research Partners -- Analyst Yes, thank you and good morning. Jim, I'd like to ask you about your thoughts on the likely pace of capacity rationalization across the global ethylene chain. You mentioned the cash negative margins in China today. Obviously, we've seen some of your competitors announce rationalizations in Europe in recent weeks. So my question would be, relative to prior cycles, do you think we're likely to see more supply come out of the equation this cycle, based on a combination of the current energy regime in Europe and obviously a powerful drive to decarbonize? Jim Fitterling -- Chairman and Chief Executive Officer Hi. Good morning, Kevin. Always hard to predict exactly the pace that things are happening. But we've been under pressure on the high-cost assets have been under pressure from a cash cost standpoint for some time. So we're -- it's normal around this time you would start to see retirements. The thing that we should consider when we're looking at our assets likely to be retired, the age of the assets and the older the asset in general, you get a couple of things, those unit costs are not as competitive. It's maintenance costs start to ramp up. And so you have to question putting in big maintenance dollars on top of that asset. And then depending on the environment you're in, CO2 and the emissions off of those assets and what does that do to you longer term because there is a cost in Europe, obviously, for CO2. And if you're not going to abate that, then you have to take long-term decisions about that. So I think that's why Europe has seen the first moves. And obviously, as we've talked about before, there are a lot of policies in Europe that are continuing to drive costs up. So we've seen it not just in petrochemicals but we see it in steel. We see it in other energy-intensive industries. I think we've been fortunate that we are advantaged in Europe because of our ability to crack LPGs and that's helped us tremendously. In China, some of those assets are newer and a lot of state-owned enterprises there. So it may not be at a pace that you would see the changes in Europe. But we just have to keep an eye on that. I think nobody wants to run when you're bleeding the kind of cash that we're talking about, between $100 and $200 a ton. That's pretty ugly territory. So I think you'll continue to see some changes. Operator Your next question comes from the line of Laurence Alexander from Jefferies. Please go ahead. Kevin Estok -- Jefferies -- Analyst Hey. Good morning. This is Kevin Estok on for Laurence. Just to touch back on silicone trends. I was just wondering if you guys have seen any visibility into restocking in Europe and whether you've seen maybe any green shoots in construction globally. Thank you. Jim Fitterling -- Chairman and Chief Executive Officer No, I haven't seen big signs of restocking in Europe. I would say on construction trends, we are starting to see some positive things happening. When you take a look at existing home sales, even though some of the year-over-year trends are down, we're starting to see some marginal improvements, building permits are starting to tick up, which is good. So new homes -- there's a need for new homes in North America for sure. And so you're going to start to see that demand. And what the team says to me is that when we start to see interest rate declines, we see a couple of interest rate declines in a row, you tend to start to see a pretty immediate uptick in the downstream demand for products that are in our polyurethanes business, our silicones business or coatings business. So we're watching closely for that. But I feel like this is more underlying demand driven, some of the markets I talked about earlier, electronics, data centers, automotive, anything that has to deal with energy and thermal management. Those have been strong. Personal care is strong. Fair amount goes into infrastructure. Infrastructure is obviously still good. So as soon as we see some pickup in the housing, I think we're going to start to see another step change. Operator Your next question comes from the line of Duffy Fischer from Goldman Sachs. Please go ahead. Duffy Fischer -- Goldman Sachs -- Analyst Yeah, good morning. Just a question around your coatings and monomers business. You had volumes up but when you look at a lot of your big competitors -- or not competitors, customers who have announced already, PPG, Sherwin, EXO, their revenue was all down in Q1. What's your sense for what's happening in the coatings market this year? Are you guys overshipping, do you think, in Q1 for where the demand level for paints will be this year? And then just how do you see pricing trending in that business for you guys? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Good morning, Duffy. I don't think there's any overshipping or stocking going on there. I think, obviously, some customers are more exposed to the contractor business and that's very much driven by new homes and new construction. And then there's the DIY segment. And we're pretty heavily impacted by the DIY segment, so painting existing homes or when existing homes are sold. And so we tend to see that -- that bottom tends to help us. I think, obviously, we had a very strong fourth quarter. We had some turnaround activity in first quarter and still had pretty good numbers. So I think we're well positioned for the peak of the season and second and third quarter. And also some of the monomers demand from time to time can be an added positive on that. And so it doesn't all necessarily mean it's downstream coatings. Some of the monomers going into other markets could help us out a little bit, too. Operator Your next question comes from the line of John Roberts from Mizuho. Please go ahead. John Roberts -- Mizuho Securities -- Analyst And congrats as well to both Pankaj and Andrew on the new roles. Jim, there were some reports about European warehouses and ports being jammed again with your customers' products. Do you think there's supply chain inventory building again downstream in Europe? Jim Fitterling -- Chairman and Chief Executive Officer Any particular products, John, that you're thinking of? John Roberts -- Mizuho Securities -- Analyst Just the economic magazines are talking about because of the Red Sea issues, just a lot of safety stock, I guess, being built up again across some supply chains. Jim Fitterling -- Chairman and Chief Executive Officer I see. I haven't seen it in plastics for sure. I don't know if we've seen any of that in polyurethanes or construction chemicals. Our days of inventory are low. I mean, we're at 41 days of sales in inventory, which is one day better than we were in fourth quarter. So I'm certainly not seeing it in our case. And we're pretty focused in Europe on the domestic market. We're not -- we don't rely on Europe as an export hub. So I think that's to our advantage there. The Red Sea, I believe, is going to be the way it is for the next -- for the rest of the year probably. I mean, if things were resolved today, I think it would take about six months for the shipping channels to move back around. So I'll just -- we'll just have to keep an eye on it. It hasn't had an impact on us so far. And we're not exporting out of there. So -- and we're still expecting good operating rates in second quarter. Operator Your next question comes from the line of Patrick Cunningham from Citigroup. Please go ahead. Patrick Cunningham -- Citi -- Analyst Hi. Good morning. You called increased demand in functional polymers for the first time in a few quarters. Can you speak to some of the specific areas of strength or products for which you're seeing increased demand? And you've also called it out as the source of some higher return, high EBITDA contribution, incremental growth projects. How meaningful is that benefit in 2024? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Functional Polymers is going to primarily be driven by infrastructure markets. You think wire and cable is big, automotive is big, golf balls is a big part of it. Footwear sales are improved. So all those areas are very robust. I'd say the power demand, electric -- you hear about it, AI, data centers but just beyond that, the energy transition, electric grids, installations of new, it could be wind, it could be offshore wind, it could be a solar farm, it could be a telecom center, it could be a data center, it could be replacement of wiring in the existing grid. All of that takes the products that we sell and we're the market leader in wire and cable jacketing. So that's been big. And then I think we're kind of set up for year-over-year movements on footwear, which was a little bit slow last year. And then infrastructure also would include things tied to -- imagine membranes for aligning water basins, water treatment basins, membranes for roofing replacement. We do a lot of membranes into cool roofing for building efficiencies. So when you put a new flat roof on a building, you'll see a lot of these very white, light color roofs. We work with our customers who make that material and install those. There's a high demand for that and that's continued and commercial building and retrofits of anything from an energy efficiency standpoint still continues to be high. Solar PV, I should mention, we've got a big new piece of business for solar PV encapsulation. And we put on some of the outer layers that protect the solar panels. And so this is a product that is very durable and long-lasting and it's really picked up over the last couple of years. So those would be the big drivers. Operator Your next question comes from the line of Chris Parkinson from Wolfe Research. Please go ahead. Chris Parkinson -- Wolfe Research -- Analyst Great. Thank you so much. So Jim, there's been a lot of back and forth in the buy and the sell side communities about the $0.03 increase for April and then obviously some preliminary ideas for May. Just, where we stand right here, right now, given the U.S. macro, given where you anticipate USGC operating rates to be on a sequential basis, what's Dow's view of this? We all know what the consensus view is but what's your view in terms of how things play out during the second quarter and how that ultimately sets the tone for the second half? Thank you so much. Jim Fitterling -- Chairman and Chief Executive Officer We're moving up in the second quarter. I would say it almost moved up that $0.03 at the end of the first quarter. And the numbers have continued. The macroeconomic indicators have continued to get stronger, not weaker. So I think with the volume that we're seeing on the downstream derivatives with improved economic business and the consumer still being strong, I think you're going to see it move up in the second quarter. So I think we're very firm on the 3 April. And as I mentioned, we started at the low point at the end of December and we just saw steady improvement through the first quarter. And so I think we're off to start the second quarter at a much higher rate and see some momentum as we move through that quarter. Operator Your next question comes from the line of Mike Leithead from Barclays. Please go ahead. Mike Leithead -- Barclays -- Analyst Thank you. Good morning. I wanted to ask a follow-up to an earlier question on cash flow, maybe for Jeff. I guess, if you hit your EBITDA targets for this year, are you forecasting working capital to be a use of cash or a source of cash this year and to roughly what magnitude? Jeff Tate -- Chief Financial Officer Yeah. Good morning, Mike. Yes, we are actually looking at it still being a use of cash on a full year basis as we work our way through, again, the recovery for a number of the dynamics that I mentioned earlier in relation to Josh's question here. But again, as we see the earnings improve based on the volume improvements that we're anticipating, right, we will start to turn that corner. But coming from where we're coming from on our working capital today, it will be a use of cash on a full year basis. Operator Your next question comes from the line of Aleksey Yefremov from RBC Capital -- sorry, KeyBanc Capital Markets. Please go ahead. Alex Yefremov -- KeyBanc Capital Markets -- Analyst Thanks and good morning, everyone. I want to come back to silicones. Was the improvement that you saw more on the upstream silicone side or downstream? And as a follow-up, where are your downstream silicones margins relative to your mid-cycle expectations? And therefore, what's the sort of optionality for downstream silicones improvement? Jim Fitterling -- Chairman and Chief Executive Officer Good morning, Aleksey. It's from both. We saw better demand on siloxanes and better pricing and we saw better downstream. We saw improvements in building and infrastructure, which were primarily seasonality driven. We saw gains in personal care. We saw gains in industrial and chemical processing, where some of the products are used as intermediates. We saw gains in mobility and we saw gains in consumer electronics. So all the downstream markets were up. The siloxanes demand was up. The operating rates were up. The pricing on siloxanes were up. So it was pretty balanced on both sides. Operator Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. Thanks for taking my question. I hope you guys are well and good working with you, Pankaj, as well. And so I guess my question is, you're on a run rate now of, say, $6.3 billion, $6.4 billion, $6.5 billion of annual EBITDA. Do you still think maybe mid-cycle level is around $8 billion? And if that is the case, how do you bridge kind of going from $6.5 billion to $8 billion, is that -- that $1.5 billion, would -- are there any discrete items maybe that you'd call out as far as capacity additions? Or is it mainly going to be volume recovery based? Thanks. Jeff Tate -- Chief Financial Officer Yeah. Good morning, Arun, I think you're right on top of the run rate. So no comments there. I do think mid-cycle -- I mean, our view of mid-cycle is probably closer to $9 billion. And so to get to that mid-cycle run rate, obviously, we have to have another couple of step-ups to get there. Volume is a big part of it. So as I mentioned, all the projects, on the call that some that we've already put in place that equal $800 million of the step-up and the rest that we're in flight right now, that's another $1.2 billion of step-up. So that $2 billion of improved margins is all volume. And most of that capex is either been or will be finished this year and beginning of next year. So I feel good about that. Obviously, the Path2Zero in Alberta comes later. So I think you can see that $1 billion more toward as we're getting to the next peak. That's a '27 to '29 time frame where that's coming in, '27 is Phase 1, '29 is Phase 2. And so if we've got our timing right and that's what we intended, was we got that up and running before we get into the next peak. And so I think we've got the line of sight to the volume that's going to come from here to mid-cycle. When we get to investor day on May 16, we're going to unpack all that volume and that trajectory. And then we've got the line of sight into the stuff that gets us greater than $3 billion by 2030, which is next peak type economics. And from where we are, that's excellent growth rates for both of them. And so I feel like we've been through the worst of it here on the slowdown in the cycle. And so it should be more upside than downside from here out. Operator That concludes our question-and-answer session. I will now turn the conference back over to Pankaj Gupta for closing remarks. Pankaj Gupta -- Vice President, Investor Relations Thank you, Christa and thanks, everyone, for joining our call and we appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow's website within 48 hours. This concludes our call. Thanks once again. Answer:

the Dow first quarter 2024 earnings conference call

Operator Greetings, and welcome to the Dow first quarter 2024 earnings conference call. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to turn it over to Dow investor relations vice president, Pankaj Gupta. Mr. Gupta, you may begin. Pankaj Gupta -- Vice President, Investor Relations Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I'm Pankaj Gupta, Dow's outgoing investor relations vice president. Leading today's call are Jim Fitterling, Dow's Chair and chief executive officer; and Jeff Tate, chief financial officer. Also joining is our new investor relations vice president, Andrew Riker, who you may remember, was a member of our IR team a few years ago. Please note, our comments contain forward-looking statements and are subject to the related cautionary statements contained in the earnings news release and slides. Please refer to our public filings for further information about principal risks and uncertainties. Unless otherwise specified, all financials, where applicable, exclude significant items. We will also refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release and slides that are posted on our website. On Slide 2 is our agenda for today's call. Jim will review our first quarter results and operating segment performance. Jeff will then provide an update on the macroeconomic environment and modeling guidance as well as the results of our annual benchmarking. Jim will then provide an update on key milestones for our long-term strategy, which positions us well to deliver growth through the cycle. Following that, we will take your questions. Now let me turn the call over to Jim. Jim Fitterling -- Chairman and Chief Executive Officer Thank you, Pankaj. Beginning on Slide 3. In the first quarter, Team Dow delivered sequential volume growth and margin expansion. We strategically increased operating rates to capture improving demand, we maintained pricing and we benefited from lower feedstock and energy costs. These results reflect the strength of our advantaged portfolio, including our participation in diverse end markets and our cost advantage positions around the world. Net sales were $10.8 billion, down 9% versus the year ago period but up 1% sequentially, driven by gains in performance materials and coatings and industrial intermediates and infrastructure. Volume increased 1% year over year. And excluding hydrocarbons and energy, volume increased 5%, with gains in all regions. This marks the second consecutive quarter of year-over-year volume growth. Sequentially, volume increased 1% and excluding hydrocarbons and energy, was up 3%, led by gains in performance materials and coatings. Local price decreased 10% year over year and was flat sequentially as modest gains in Europe, the Middle East, Africa and India, or EMEAI, were offset by declines in Asia Pacific, the United States and Canada. Operating EBIT for the quarter was $674 million, down $34 million year over year driven by lower prices in all regions. Sequentially, operating EBIT was up $115 million, reflecting gains in performance materials and coatings and industrial intermediates and infrastructure. We delivered cash flow from operations of $460 million in the quarter, resulting in a 94% cash flow conversion on a trailing 12-month basis. This reflects our focus on cash flow generation and enabled $693 million in returns to shareholders. We also advanced our long-term strategy with our higher return, highly capital-efficient Path2Zero project in Fort Saskatchewan, Alberta, where construction started earlier this month. Now turning to our operating segment performance on Slide 4. In the packaging and specialty plastics segment, operating EBIT was $605 million, down $37 million compared to the year ago period, primarily due to lower integrated margins. Local price declines were primarily driven by lower energy and feedstock costs globally. Volume decreased year over year driven by declines in the hydrocarbons and energy business. This was primarily due to prioritizing higher-value downstream derivative polymer sales as well as lighter feed slate cracking in Europe. Sequentially, operating EBIT decreased by $59 million as improved polyethylene integrated margins were more than offset by expected lower nonrecurring licensing revenue and higher planned maintenance activity. Moving to the industrial intermediates and infrastructure segment. Operating EBIT was $87 million compared to $123 million in the year ago period. Results were driven by lower prices in both businesses, which were partly offset by three items: lower energy and feedstock costs, improved equity earnings and volume gains in Polyurethanes & Construction Chemicals. Sequentially, operating EBIT was up $72 million driven by improved equity earnings and lower energy and feedstock costs, primarily in EMEAI. And in the performance materials and coatings segment, operating EBIT was $41 million, up $6 million compared to the year ago period, driven by volume growth and higher operating rates. Volume was up year over year driven by gains primarily in the United States, Canada and Latin America. Sequentially, operating EBIT increased $102 million driven by higher seasonal volumes and overall improved demand. Now I'll turn it over to Jeff to review our outlook and actions. Jeff Tate -- Chief Financial Officer Thank you, Jim and good morning to everyone joining our call today. Turning to our outlook on Slide 5. We are seeing signs of improving macroeconomic conditions in several regions, which gives us cautious optimism heading into what is typically a seasonally strong quarter. That said, we are keeping a close eye on inflation, interest rates and geopolitical tensions. The U.S. is benefiting from improving industrial activity with manufacturing PMI in expansionary territory every month thus far this year. In fact, manufacturing production expanded at its fastest rate in 22 months in March. Average chemical railcar shipments were also up 4.3% year-to-date compared to last year through mid-April. And while high interest rates continue to improve building and construction activity in the U.S., building permits were 1.5% higher in March year over year, while existing home sales declined 3.7% in March. In Europe, consumer spending and industrial activity remain weak with manufacturing PMI decreasing in February and March. This partly reflects ongoing geopolitical tensions in the Red Sea, which have led to higher freight costs globally. Declines in inventory levels are a promising indicator with March at the lowest levels since July 2022. Economic activity in China continued to recover steadily with signs of improving demand. Industrial production increased 4.5% year over year in March. Additionally, retail sales grew 3.1% year over year in March, supported by consumer spending around the Lunar New Year. Nonetheless, the property sector remains weak with new home prices continuing to decline through March. Industrial activity in other regions remains constructive. In March, India manufacturing PMI reached its highest level in more than three years at 59.1. ASEAN manufacturing PMI reached an 11-month high at 51.5. And in Mexico, industrial production increased further in February. Now turning to our outlook for the second quarter on Slide 6. In the packaging and specialty plastics segment, higher global polyethylene integrated margins, resilient demand in packaging, as well as continued strength in the export markets are expected to drive a $150 million tailwind in the quarter. Additionally, we expect $25 million in tailwinds from our site in Bahia Blanca, Argentina, which has returned to operations following an unexpected storm in December of 2023. Lastly, we expect a $75 million headwind due to increased plant maintenance primarily in Sabine, Texas. In the industrial intermediates and infrastructure segment, consumer durables demand continues to be muted. However, we expect margin expansion on improved MDI and polyols spreads in Europe. We also expect modest seasonal demand improvement in building and construction end markets as well as resilient demand in pharma and energy end markets. Altogether, these represent a $25 million tailwind. In addition, we expect a headwind of $25 million due to planned maintenance in Europe and the U.S. Gulf Coast. This will be partly offset by the completion of a turnaround at a PDH unit in the first quarter. In the performance materials and coatings segment, higher global siloxane prices and seasonal demand increases in building and construction end markets are expected to drive a $75 million tailwind in the second quarter. We also expect an additional $25 million tailwind from a turnaround at our siloxane pillar site in the U.S., while our Deer Park and PDH sites will come back up following planned maintenance in the first quarter. So with all the puts and takes, at a company level, we expect second quarter earnings to be approximately $200 million above first quarter performance. Now moving to Slide 7. As we navigate the cycle and execute on our long-term strategic actions, Dow remains committed to our culture of transparency, accountability and benchmarking. Today, we published the results of our annual benchmarking update, once again demonstrating our strong performance and value creation relative to our peers. The results can be found on our investor website. Dow came in well ahead of pure average and broader S&P 500 with continued attractive three-year average free cash flow and dividend yields. This reflects our commitment to industry-leading cash generation and shareholder remuneration across the economic cycle. Our three-year EBITDA margins and return on invested capital are above the peer median with return on invested capital, 200 basis points above our 13% target across the economic cycle. We also delivered best-in-class net debt reduction since 2019, which allows us to deliver on our capital allocation priorities even at the bottom of the cycle. Our achievements in these areas point to our continued discipline and financial flexibility. As a result, Team Dow has set the stage for us to drive earnings growth and increase shareholder returns through the cycle. With that, I'll turn it back to Jim. Jim Fitterling -- Chairman and Chief Executive Officer Thank you, Jeff. Moving to Slide 8. Dow is well positioned to capture demand and drive earnings growth as the economic recovery takes hold. This is reflected in our competitive advantages and early cycle growth investments which are advancing while also demonstrating Dow's continued focus on operational and financial discipline. And we have a differentiated portfolio with structurally advantaged assets, global scale and low-cost positions in every region. Healthy oil-to-gas spreads, supported by growing natural gas and NGL production in North America, favor our cost advantage and ability to capture continued margin improvements as the economic recovery gathers strength. We've also taken actions to grow Dow's earnings as we execute our near-term, higher-value, lower-risk growth investments that are expected to deliver approximately $2 billion in incremental underlying EBITDA by mid-decade. Since 2021 we have added capacity that will increase our mid-cycle EBITDA by approximately $800 million, including investments in our FCDh unit in Louisiana and alkylation capacity investments in the United States and Europe that serve attractive market segments such as consumer nondurables and pharma. In addition, we have invested in multiple downstream silicone debottlenecks to address fast-growing applications in MobilityScience and electronics. We are on track to achieve the remaining $1.2 billion of our near-term EBITDA target by mid-decade, enabled by our lower risk and higher return growth projects. These investments represent a significant portion of Dow's earnings growth in the next up cycle. Moving to Slide 9. Dow continues to execute with financial and operational discipline as we invest through the bottom of the chemical industry's economic cycle for long-term profitable growth. Our near-term growth and efficiency investments continue to progress with our propylene glycol expansion in Thailand achieving mechanical completion this month. We are also making good progress on our Decarbonize & Grow strategy, including our Path2Zero project in Fort Saskatchewan, Alberta. Construction began earlier this month, where we're installing the first of approximately 4,000 piles that will anchor the foundation of our new net zero cracker. In addition, all long lead time equipment items have been ordered, further demonstrating our consistent focus on locking in cost efficiencies for this project. We also entered into a long-term agreement with Pembina, a leading ethane supply and transportation provider, to supply and transport up to 50,000 barrels per day of ethane. With this latest agreement, we have secured the majority of our cost-advantaged ethane supply with multiple suppliers in the region. Overall, I expect the Path2Zero project to deliver an additional $1 billion per year in mid-cycle EBITDA growth at full run rates over the economic cycle. In addition, we continue to advance circularity through our Transform the Waste strategy via strategic partnerships and offtake agreements. This includes a recent joint development agreement with Procter & Gamble, which will create a new recycling technology aimed at converting hard-to-recycle plastic packaging into recycled polyethylene. The result will be near virgin quality and lower greenhouse gas emissions than virgin polyethylene. All in, we expect our Transform the Waste initiatives to generate more than $500 million of incremental run rate EBITDA by 2030. Turning to Slide 10. Our actions since 2019 have created a stronger Dow. Over the past five years, we have worked hard to improve our balance sheet, to improve cash flow conversion and to build a more resilient company that maintains consistent discipline. This was demonstrated when we delivered $12.4 billion in peak EBITDA in 2021, higher than any other time frame in Dow's history. This has created the opportunity for us to invest strategically at the bottom of the cycle for long-term profitable growth. And as implementation of our growth strategy increases our underlying EBITDA, we will continue to target at least 65% of operating net income to shareholders as we move up the next peak. This means at least 45% in dividends and 20% in share buybacks. Closing on Slide 11, I want to thank you for your interest and ownership in Dow. The team and I look forward to engaging with many of you on our 2024 investor day on May 16. As a reminder, the event will be hosted from the New York Stock Exchange. It will also be available via live webcast. More information can be found on our website at investors.dow.com. During the event, we will share progress on Dow's commitment to improve underlying earnings by greater than $3 billion by 2030 that will enable raising the mid-cycle as well as the trough and peak earnings levels. We'll demonstrate our consistent commitment to operational and financial discipline, our capital allocation priorities and our leadership in attractive market verticals. And we'll show how, taken together, this creates significant value creation as we grow earnings and enhance shareholder returns over the cycle. Before I turn it over to Pankaj, he mentioned at the top of the call that we have our incoming vice president of investor relations, Andrew Riker, joining us today. I'd like to take a minute to congratulate Andrew as he takes charge and to thank Pankaj for leading the investor relations team over the last three years and also for his contributions to our upcoming investor day. Pankaj, we look forward to seeing your achievements in your next role leading our Dow Industrial Solutions business. With that, Pankaj, please get us started with the Q&A. Pankaj Gupta -- Vice President, Investor Relations Thank you, Jim. Now let's move on to your questions. I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Please go ahead. Hassan Ahmed -- Alembic Global -- Analyst Good morning, Jim. Jim, a quick question around global ethylene and polyethylene supply demand fundamentals. On the surface, as I sort of take a look at global utilization rates, they seem relatively slack. But then as one sort of thinks through marginal producer economics, I mean, they seem pretty weak right now and we're obviously hearing more and more announcements of capacity closures, out in Europe. So how do you see utilization rates pan out in '24 and beyond? Jim Fitterling -- Chairman and Chief Executive Officer Good morning, Hassan. Good question. I would say, obviously, there are differences around the globe depending on the cost positions. And we have a footprint that is very highly advantaged in North America and Latin America and the Middle East. Europe is right now where you've seen most of the focus on supply reductions with a couple of announcements of crackers being shut down. I'd also say China, there's a lot of pressure on operating rates there because the cash margins are negative and have been negative for some time and there's a big arbitrage window open between the United States and China. And so all of those things have really led to much higher operating rates in the cost-advantaged regions. And even in Europe, where we had LPG cracking flexibility in the first quarter and propane was still a little bit high in first quarter but that advantage led to higher operating rates for us in Europe. Our overall operating rates jumped about 10 percentage points in Europe in the first quarter. So I think if you've got a cost advantage position, things are looking pretty good. Europe is a little bit islanded off right now because of the tensions in the Middle East and the Red Sea effect from shipping. And so it's relying on its domestic production for the market growth and there has been some volume growth there. And the Middle East, that has been focused more on Asian demand. So I feel good about it. All of the -- most of the new capacity is in the market already and we're seeing volume growth, second consecutive quarter of volume growth. And we're starting to see year-over-year volume growth numbers. So it feels like we're starting to turn the quarter a little bit. Questions & Answers: Operator Your next question comes from the line of David Begleiter from Deutsche Bank. Please go ahead. David Begleiter -- Deutsche Bank -- Analyst Thank you. Good morning. Jim, last quarter, you gave a bit of an earnings walk up to about $6.4 billion, $6.5 billion of EBITDA this year. Do you still believe that number is achievable if not beatable given the solid Q1 results? Jim Fitterling -- Chairman and Chief Executive Officer Good morning, David. I think with the first quarter results and the $200 million that Jeff mentioned on the call, we're right on track. I would add that, as you go into third quarter, now that we'll have another $100 million from the restart of Glycol 2 in Plaquemine, so $100 million third quarter, $100 million fourth quarter kind of numbers. So we're starting to see that run rate and that run rate right in line with what we need to deliver that $6.4 billion. And then I would say the underlying chemical demand, I talked about in last quarter, it felt like destocking slowed. Inventory levels for us in December were lowest they've ever been. They continue to be low at the end of first quarter and chemical production and chemical shipments are up. And so when you look at those numbers, you say this volume growth right now feels like it's demand driven, not restocking driven. And so I think as we start to move up this thing, hopefully, the economy keeps with us here and we start to see us pick up some momentum on this trend. Operator Your next question comes from the line of Vincent Andrews from Morgan Stanley. Please go ahead. Vincent Andrews -- Morgan Stanley -- Analyst Thank you, and good morning, everyone. If I could just ask, in the PSP guidance for 2Q and that step up to $150 million, can you just walk us around the world and tell us sort of how you're bridging that $150 million? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Good morning, Vincent. Thank you. And it's mostly a step-up in integrated margins. I think we're looking at about $0.03 a pound globally in integrated margin increase. North America -- Europe may be a little bit more than 3, rest of the world is pretty flat. We've got, obviously, kind of a one-time improvement. We had Bahia Blanca down, as mentioned, in the first quarter -- for part of first quarter to the -- beginning of it because of the storm they had in December. But it's back. And so you'll see a $25 million improvement there. So those two positives are $175 million. We have higher turnaround costs in the quarter. We're doing the turnaround at Sabine this quarter. That's about $75 million. So net-net, you've got about $100 million up in P&SP for the second quarter. And the volume numbers are good. The margin numbers are good. Exports are good out of the U.S. Gulf Coast. Product is flowing. Operating rates are good. So we're starting to see the positive impacts of all those things. Operator Your next question comes from Frank Mitsch from Fermium Research. Please go ahead. Frank Mitsch -- Fermium Research -- Analyst Thank you. And let me also echo my congratulations to Pankaj. Best wishes in Industrial Solutions. Jim, I was wondering if you could talk about operating rates across the Dow portfolio in general. How has that -- that appears to be one of the positives in the quarter. If you could offer some commentary on your expectations for the Dow engine in 2Q and beyond on the operating rate front. Jim Fitterling -- Chairman and Chief Executive Officer Sure. Yeah, happy to do that, Frank. I'd say globally, at a high level, we were at about 6% which is up quarter over quarter. It's -- higher demand obviously drove that, lower energy costs in Europe were a big driver of that as well. The United States Gulf Coast, Argentina, Canada have been running at well north of 80%, some as high as 90% kind of rates. Europe saw the biggest individual step-up, as I mentioned previously but all regions saw a step up in rates. And so I'm optimistic that, that's just a sign of underlying demand coming. So you'd probably think -- I think I mentioned like about 10 percentage points up. That's good ballpark for the whole global number with North America, Latin America being -- continue to be strong and high rates and Europe being a big part of that step up. Operator Your next question comes from the line of Steve Byrne from Bank of America. Please go ahead. Steve Byrne -- Bank of America Merrill Lynch -- Analyst Yes, thank you. I wanted to ask a question about the hydrogen-fueled cracker you're building in Alberta. And then you also have the investments with the Mura pyrolysis feedstock. For those investments, how would you expect the unit costs of those downstream crackers to compare to, say, Texas-9 on a unit cost? And to drive the return on those projects, do you have sales agreements for the product at a premium price? Jim Fitterling -- Chairman and Chief Executive Officer Steve, on the hydrogen-fueled cracker, we recover part of the higher unit costs there through the price on carbon. And the team is working on as well, trying to get the premium pricing for that offtake. And I would say our view on that is that it will be there. There's a strong demand for low-carbon emission products, ethylene-based materials. And so we're working on that right now. But the returns on that project are going to be equal or greater than Texas-9 all in. And so when you take a look at it, we are very optimistic about where we're going to be with that project. And Texas-9 was one of the projects that obviously led us to be able to deliver the $12.4 billion in peak earnings in that 2021, 2022 time frame. So I feel good about that. Again, remember, because of the scale and because of the fact that we get the hydrogen and methane as byproducts off the back of the cracker, the incremental cost is coming through the autothermal reformer, which, part of that is recovered through the price on carbon. And then we have long-term ITCs, investment tax credits, from Canada for that low carbon investment. Those two things will make it very competitive with Texas-9. On Mura, Mura will be focused on, primarily on looking at the recycle demand, at which the supply for recycled polyethylene right now is much shorter than the demand. And so there are premiums in the market today for those materials. And the Mura process, in our view, is one of the more highly profitable ones because it uses the supercritical steam to change the product back into a monomer state. So we feel good about the start-up of that project. Josh Spector -- UBS -- Analyst Yeah. Hi. I was wondering if you could share some thoughts on free cash flow for '24 since you kind of reiterated your expectations there on EBITDA. How do you see that tracking? And any update you can provide on any of the nonoperating items that you thought could bridge free cash flow for this year as well? Thanks. Jim Fitterling -- Chairman and Chief Executive Officer Jeff, do you want to walk through what you think the free cash flow outlook is for the year? And I would just say, Josh, the one thing we have to remember, as we're turning the corner here, December was the low point from a pricing standpoint and we've seen successive improvements January, February, March. So we go from a use of cash -- a source of cash in the fourth quarter to use of cash in the first quarter. But as we make that turn and earnings improve, we'll start generating the free cash flow out of higher earnings. Jeff Tate -- Chief Financial Officer Yeah. Well said, Jim. And good morning, Josh. Building on Jim's statement there, the other thing I would mention is that we've also started to see, as the volumes have been improving, we're seeing sales ramp up and we saw the sales ramp up throughout the quarter. So our receivables are also ramping up as well from a working capital standpoint. We're also going into a heavy turnaround period as well, which we anticipated. So all of this is in line with our expectations and our projections, especially for the first half of the year in terms of the working capital uses of cash that we would expect and have. But as Jim mentioned, as we go into the second half of the year, we continue to see the volume growth and the volume ramp-up in the sales leading to earnings growth that will get us into a really good position as we think about our cash flow on a full year basis. And we'll continue to have what we like to call unique to Dow, cash levers. If you look over the past several years, we have had anywhere from $1 billion to almost $3 billion on an annual basis of cash levers that we've identified and executed on. And you can expect that to be very similar in 2024. As we work on our Nova judgment, which we've talked about in the past, we continue to evaluate a number of our nonproduct producing assets that we have across our portfolio as well. And we're going to continue to focus on structural working capital improvements that we can make while also looking at opportunities to get cash out of our joint ventures. Operator Your next question comes from the line of Mike Sison from Wells Fargo. Please go ahead. Mike Sison -- Wells Fargo Securities -- Analyst Hey, guys. Nice quarter. And congrats, Pankaj, again. In terms of 2Q volumes, will hydrocarbons and energy be a headwind again? And I guess, how much, I'm just curious on sort of the core volume growth for PSP. And then just quickly curious on siloxanes if -- why you think there could be improvement in 2Q versus 1Q? Thank you. Jim Fitterling -- Chairman and Chief Executive Officer Sure. I think on hydrocarbons and energy, I would say, as we went into first quarter because we had -- obviously Bahia had been impacted by the storm and because we had the arbitrage, obviously, to China and wanted to move more product. We elected not to move materials into the broader market and just focus on higher operating rates. So sometimes byproduct sales are not as high off the crackers, especially for cracking light like we were in Europe and in North America. And so that leads to less volume of byproducts to sell. And sometimes, it's running the derivatives harder. As I mentioned, volume was up 5% on derivatives since first quarter and that was just -- we were moving that ethylene through the derivatives and making more product. I expect that will continue. So we might see hydrocarbons and energy be a little bit less but I think you're going to see improved margins on those volumes. And the team is working hard to continue to deliver on the volume growth numbers. We had a very good first quarter result and we've got strong volume as part of that second quarter number plus the higher integrated margins. So I'd say price in China has moved up and demand for the downstream products is good, especially when you think about things like electronics, even continuing into automotive, hybrids and EVs both drive good demand, data centers, chips, thermal management for silicones is big. So the only thing that's a little bit slow is on the construction side. And so you've got higher operating rates in China. You've got better siloxane pricing. We've got personal care markets that are moving into positive territory. So I would say, before we even see a big step up in building and construction, those are already starting to improve. Operator Your next question comes from the line of Jeff Zekauskas from J.P. Morgan. Please go ahead. Jeff Zekauskas -- JPMorgan Chase and Company -- Analyst Thanks very much. In your industrial intermediates and infrastructure forecast, you have sales going up sequentially 1% or 2% and you've got your EBITDA flat sequentially. And normally, there's seasonal strength in the various construction markets. Why is your forecast so conservative? And then secondly for Jeff, how many shares will be issued? Or what's the amount of options and shares issued that will affect the share count in 2024? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Good morning, Jeff. I think the biggest thing, when you look from first quarter to second quarter on II&I is because of the Glycol 2 situation in Plaquemine. We had some insurance recoveries in the first quarter that don't recur in the second quarter. So that creates what looks like a bit of a headwind. I think the underlying business is good and the underlying demand is good. If you look at Polyurethanes & Construction Chemicals, obviously, we've seen a step up in Europe and in operating rates. Sadara is also doing more of the marketing of some of those materials and so we see a little bit less volume coming through Sadara, from Dow marketing the Sadara offtake. So that has a little bit of an impact. But I would say -- our view is, we're still seeing construction slightly better and we're seeing, obviously, Europe much better cost position and that's driving the improved operating rates and just that insurance delta is probably the biggest thing. Jeff? Jeff Tate -- Chief Financial Officer Jeff, in terms of the issuances for the full year and this then captures options, deferred stock, 401(k) plan as well as Dow employee stock purchase plans. We're looking at approximately 11 million shares on a full year basis. Operator Your next question comes from the line of Kevin McCarthy from Vertical Research Partners. Please go ahead. Kevin McCarthy -- Vertical Research Partners -- Analyst Yes, thank you and good morning. Jim, I'd like to ask you about your thoughts on the likely pace of capacity rationalization across the global ethylene chain. You mentioned the cash negative margins in China today. Obviously, we've seen some of your competitors announce rationalizations in Europe in recent weeks. So my question would be, relative to prior cycles, do you think we're likely to see more supply come out of the equation this cycle, based on a combination of the current energy regime in Europe and obviously a powerful drive to decarbonize? Jim Fitterling -- Chairman and Chief Executive Officer Hi. Good morning, Kevin. Always hard to predict exactly the pace that things are happening. But we've been under pressure on the high-cost assets have been under pressure from a cash cost standpoint for some time. So we're -- it's normal around this time you would start to see retirements. The thing that we should consider when we're looking at our assets likely to be retired, the age of the assets and the older the asset in general, you get a couple of things, those unit costs are not as competitive. It's maintenance costs start to ramp up. And so you have to question putting in big maintenance dollars on top of that asset. And then depending on the environment you're in, CO2 and the emissions off of those assets and what does that do to you longer term because there is a cost in Europe, obviously, for CO2. And if you're not going to abate that, then you have to take long-term decisions about that. So I think that's why Europe has seen the first moves. And obviously, as we've talked about before, there are a lot of policies in Europe that are continuing to drive costs up. So we've seen it not just in petrochemicals but we see it in steel. We see it in other energy-intensive industries. I think we've been fortunate that we are advantaged in Europe because of our ability to crack LPGs and that's helped us tremendously. In China, some of those assets are newer and a lot of state-owned enterprises there. So it may not be at a pace that you would see the changes in Europe. But we just have to keep an eye on that. I think nobody wants to run when you're bleeding the kind of cash that we're talking about, between $100 and $200 a ton. That's pretty ugly territory. So I think you'll continue to see some changes. Operator Your next question comes from the line of Laurence Alexander from Jefferies. Please go ahead. Kevin Estok -- Jefferies -- Analyst Hey. Good morning. This is Kevin Estok on for Laurence. Just to touch back on silicone trends. I was just wondering if you guys have seen any visibility into restocking in Europe and whether you've seen maybe any green shoots in construction globally. Thank you. Jim Fitterling -- Chairman and Chief Executive Officer No, I haven't seen big signs of restocking in Europe. I would say on construction trends, we are starting to see some positive things happening. When you take a look at existing home sales, even though some of the year-over-year trends are down, we're starting to see some marginal improvements, building permits are starting to tick up, which is good. So new homes -- there's a need for new homes in North America for sure. And so you're going to start to see that demand. And what the team says to me is that when we start to see interest rate declines, we see a couple of interest rate declines in a row, you tend to start to see a pretty immediate uptick in the downstream demand for products that are in our polyurethanes business, our silicones business or coatings business. So we're watching closely for that. But I feel like this is more underlying demand driven, some of the markets I talked about earlier, electronics, data centers, automotive, anything that has to deal with energy and thermal management. Those have been strong. Personal care is strong. Fair amount goes into infrastructure. Infrastructure is obviously still good. So as soon as we see some pickup in the housing, I think we're going to start to see another step change. Operator Your next question comes from the line of Duffy Fischer from Goldman Sachs. Please go ahead. Duffy Fischer -- Goldman Sachs -- Analyst Yeah, good morning. Just a question around your coatings and monomers business. You had volumes up but when you look at a lot of your big competitors -- or not competitors, customers who have announced already, PPG, Sherwin, EXO, their revenue was all down in Q1. What's your sense for what's happening in the coatings market this year? Are you guys overshipping, do you think, in Q1 for where the demand level for paints will be this year? And then just how do you see pricing trending in that business for you guys? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Good morning, Duffy. I don't think there's any overshipping or stocking going on there. I think, obviously, some customers are more exposed to the contractor business and that's very much driven by new homes and new construction. And then there's the DIY segment. And we're pretty heavily impacted by the DIY segment, so painting existing homes or when existing homes are sold. And so we tend to see that -- that bottom tends to help us. I think, obviously, we had a very strong fourth quarter. We had some turnaround activity in first quarter and still had pretty good numbers. So I think we're well positioned for the peak of the season and second and third quarter. And also some of the monomers demand from time to time can be an added positive on that. And so it doesn't all necessarily mean it's downstream coatings. Some of the monomers going into other markets could help us out a little bit, too. Operator Your next question comes from the line of John Roberts from Mizuho. Please go ahead. John Roberts -- Mizuho Securities -- Analyst And congrats as well to both Pankaj and Andrew on the new roles. Jim, there were some reports about European warehouses and ports being jammed again with your customers' products. Do you think there's supply chain inventory building again downstream in Europe? Jim Fitterling -- Chairman and Chief Executive Officer Any particular products, John, that you're thinking of? John Roberts -- Mizuho Securities -- Analyst Just the economic magazines are talking about because of the Red Sea issues, just a lot of safety stock, I guess, being built up again across some supply chains. Jim Fitterling -- Chairman and Chief Executive Officer I see. I haven't seen it in plastics for sure. I don't know if we've seen any of that in polyurethanes or construction chemicals. Our days of inventory are low. I mean, we're at 41 days of sales in inventory, which is one day better than we were in fourth quarter. So I'm certainly not seeing it in our case. And we're pretty focused in Europe on the domestic market. We're not -- we don't rely on Europe as an export hub. So I think that's to our advantage there. The Red Sea, I believe, is going to be the way it is for the next -- for the rest of the year probably. I mean, if things were resolved today, I think it would take about six months for the shipping channels to move back around. So I'll just -- we'll just have to keep an eye on it. It hasn't had an impact on us so far. And we're not exporting out of there. So -- and we're still expecting good operating rates in second quarter. Operator Your next question comes from the line of Patrick Cunningham from Citigroup. Please go ahead. Patrick Cunningham -- Citi -- Analyst Hi. Good morning. You called increased demand in functional polymers for the first time in a few quarters. Can you speak to some of the specific areas of strength or products for which you're seeing increased demand? And you've also called it out as the source of some higher return, high EBITDA contribution, incremental growth projects. How meaningful is that benefit in 2024? Jim Fitterling -- Chairman and Chief Executive Officer Yeah. Functional Polymers is going to primarily be driven by infrastructure markets. You think wire and cable is big, automotive is big, golf balls is a big part of it. Footwear sales are improved. So all those areas are very robust. I'd say the power demand, electric -- you hear about it, AI, data centers but just beyond that, the energy transition, electric grids, installations of new, it could be wind, it could be offshore wind, it could be a solar farm, it could be a telecom center, it could be a data center, it could be replacement of wiring in the existing grid. All of that takes the products that we sell and we're the market leader in wire and cable jacketing. So that's been big. And then I think we're kind of set up for year-over-year movements on footwear, which was a little bit slow last year. And then infrastructure also would include things tied to -- imagine membranes for aligning water basins, water treatment basins, membranes for roofing replacement. We do a lot of membranes into cool roofing for building efficiencies. So when you put a new flat roof on a building, you'll see a lot of these very white, light color roofs. We work with our customers who make that material and install those. There's a high demand for that and that's continued and commercial building and retrofits of anything from an energy efficiency standpoint still continues to be high. Solar PV, I should mention, we've got a big new piece of business for solar PV encapsulation. And we put on some of the outer layers that protect the solar panels. And so this is a product that is very durable and long-lasting and it's really picked up over the last couple of years. So those would be the big drivers. Operator Your next question comes from the line of Chris Parkinson from Wolfe Research. Please go ahead. Chris Parkinson -- Wolfe Research -- Analyst Great. Thank you so much. So Jim, there's been a lot of back and forth in the buy and the sell side communities about the $0.03 increase for April and then obviously some preliminary ideas for May. Just, where we stand right here, right now, given the U.S. macro, given where you anticipate USGC operating rates to be on a sequential basis, what's Dow's view of this? We all know what the consensus view is but what's your view in terms of how things play out during the second quarter and how that ultimately sets the tone for the second half? Thank you so much. Jim Fitterling -- Chairman and Chief Executive Officer We're moving up in the second quarter. I would say it almost moved up that $0.03 at the end of the first quarter. And the numbers have continued. The macroeconomic indicators have continued to get stronger, not weaker. So I think with the volume that we're seeing on the downstream derivatives with improved economic business and the consumer still being strong, I think you're going to see it move up in the second quarter. So I think we're very firm on the 3 April. And as I mentioned, we started at the low point at the end of December and we just saw steady improvement through the first quarter. And so I think we're off to start the second quarter at a much higher rate and see some momentum as we move through that quarter. Operator Your next question comes from the line of Mike Leithead from Barclays. Please go ahead. Mike Leithead -- Barclays -- Analyst Thank you. Good morning. I wanted to ask a follow-up to an earlier question on cash flow, maybe for Jeff. I guess, if you hit your EBITDA targets for this year, are you forecasting working capital to be a use of cash or a source of cash this year and to roughly what magnitude? Jeff Tate -- Chief Financial Officer Yeah. Good morning, Mike. Yes, we are actually looking at it still being a use of cash on a full year basis as we work our way through, again, the recovery for a number of the dynamics that I mentioned earlier in relation to Josh's question here. But again, as we see the earnings improve based on the volume improvements that we're anticipating, right, we will start to turn that corner. But coming from where we're coming from on our working capital today, it will be a use of cash on a full year basis. Operator Your next question comes from the line of Aleksey Yefremov from RBC Capital -- sorry, KeyBanc Capital Markets. Please go ahead. Alex Yefremov -- KeyBanc Capital Markets -- Analyst Thanks and good morning, everyone. I want to come back to silicones. Was the improvement that you saw more on the upstream silicone side or downstream? And as a follow-up, where are your downstream silicones margins relative to your mid-cycle expectations? And therefore, what's the sort of optionality for downstream silicones improvement? Jim Fitterling -- Chairman and Chief Executive Officer Good morning, Aleksey. It's from both. We saw better demand on siloxanes and better pricing and we saw better downstream. We saw improvements in building and infrastructure, which were primarily seasonality driven. We saw gains in personal care. We saw gains in industrial and chemical processing, where some of the products are used as intermediates. We saw gains in mobility and we saw gains in consumer electronics. So all the downstream markets were up. The siloxanes demand was up. The operating rates were up. The pricing on siloxanes were up. So it was pretty balanced on both sides. Operator Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead. Arun Viswanathan -- RBC Capital Markets -- Analyst Great. Thanks for taking my question. I hope you guys are well and good working with you, Pankaj, as well. And so I guess my question is, you're on a run rate now of, say, $6.3 billion, $6.4 billion, $6.5 billion of annual EBITDA. Do you still think maybe mid-cycle level is around $8 billion? And if that is the case, how do you bridge kind of going from $6.5 billion to $8 billion, is that -- that $1.5 billion, would -- are there any discrete items maybe that you'd call out as far as capacity additions? Or is it mainly going to be volume recovery based? Thanks. Jeff Tate -- Chief Financial Officer Yeah. Good morning, Arun, I think you're right on top of the run rate. So no comments there. I do think mid-cycle -- I mean, our view of mid-cycle is probably closer to $9 billion. And so to get to that mid-cycle run rate, obviously, we have to have another couple of step-ups to get there. Volume is a big part of it. So as I mentioned, all the projects, on the call that some that we've already put in place that equal $800 million of the step-up and the rest that we're in flight right now, that's another $1.2 billion of step-up. So that $2 billion of improved margins is all volume. And most of that capex is either been or will be finished this year and beginning of next year. So I feel good about that. Obviously, the Path2Zero in Alberta comes later. So I think you can see that $1 billion more toward as we're getting to the next peak. That's a '27 to '29 time frame where that's coming in, '27 is Phase 1, '29 is Phase 2. And so if we've got our timing right and that's what we intended, was we got that up and running before we get into the next peak. And so I think we've got the line of sight to the volume that's going to come from here to mid-cycle. When we get to investor day on May 16, we're going to unpack all that volume and that trajectory. And then we've got the line of sight into the stuff that gets us greater than $3 billion by 2030, which is next peak type economics. And from where we are, that's excellent growth rates for both of them. And so I feel like we've been through the worst of it here on the slowdown in the cycle. And so it should be more upside than downside from here out. Operator That concludes our question-and-answer session. I will now turn the conference back over to Pankaj Gupta for closing remarks. Pankaj Gupta -- Vice President, Investor Relations Thank you, Christa and thanks, everyone, for joining our call and we appreciate your interest in Dow. For your reference, a copy of our transcript will be posted on Dow's website within 48 hours. This concludes our call. Thanks once again.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Ladies and gentlemen, welcome to the Dexcom first quarter 2024 earnings release conference call. My name is Abby, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. [Operator instructions] As a reminder, the conference is being recorded. And I will now turn the call over to Sean Christensen, vice president of finance and investor relations. Mr. Christensen, you may begin. Sean Christensen -- Vice President of Finance and Investor Relations Thank you, Abby, and welcome to Dexcom's first quarter 2024 earnings call. Our agenda begins with Kevin Sayer, Dexcom's chairman, president, and CEO, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jereme Sylvain, our chief financial officer. Following our prepared remarks, we will open the call up for your questions. At that time, we ask analysts to limit themselves to one question so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our first quarter 2024 performance on the Dexcom investor relations website on the events and presentations page. With that, let's review our safe harbor statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, and expectations about future events, strategies, competition, products, operating plans, and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to Dexcom, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in Dexcom's annual report on Form 10-K, most recent quarterly report on Form 10-Q, and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash-based results. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our first quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now, I will turn it over to Kevin. Kevin Sayer -- Chairman, President, and Chief Executive Officer Thank you, Sean, thank you everyone for joining us. Today, we reported another great quarter for Dexcom, with first quarter organic revenue growth of 25%, compared to the first quarter of 2023. Demand for Dexcom CGM remains very high as customers continue to recognize and value our leading product performance and differentiated user experience. While it has only been a year since the launch of G7 in the US, we have seen a significant shift in the landscape over that time. We have attracted tens of thousands of new prescribers to our ecosystem, meaningfully improved our presence within primary care, and experienced growing demand from people with diabetes who are benefiting from significant expansions in coverage over the last year. Much of this momentum can be directly attributed to our product performance and innovative features. With the launch of G7, we extended our leadership in sensor accuracy and took a significant step forward in ease of use. We also introduced a new software ecosystem which was designed to improve our user experience, and drive high levels of customer engagement and retention. Importantly, we have continued to enhance the G7 experience with ongoing improvements to both the hardware and software platforms. In fact, we have completed software updates almost monthly since the launch of G7, introducing new features, upgrading performance and connectivity, and, most recently, establishing the ability to integrate insulin data into our app. These are great examples of how our new software architecture enables much faster innovation. We are constantly working to advance the customer experience and reinforce Dexcom as the technology leader in this space. Along those lines, we were very excited to receive clearance by the FDA for our direct-to-watch feature for G7 in the first quarter. This approval will allow our customers to use their Apple Watch as a primary display rather than connecting through their mobile phone, providing even greater flexibility in how and where they interact with their glucose data. This added to our long list of industry firsts, as G7 is the first FDA-cleared CGM that can communicate directly from sensor to watch. To enable this, we built a robust connectivity infrastructure into the design of G7. With the ability to connect to three different Bluetooth devices at the same time, our customers can simultaneously connect to a phone, a pump or receiver, and a watch. Dexcom is the only CGM system that gives customers these options. We have received great feedback since we launched our direct-to-watch software in the UK and Ireland, and look forward to extending it to additional markets shortly. Features like these add to our standing as the innovator in the CGM industry, strengthening our sensor platform as global access and awareness continue to expand. As a reminder, we recently crossed the one-year mark since the landmark CMS decision to expand coverage for all people using insulin and certain non-insulin-using individuals that struggle with hypoglycemia. This decision paved the way for greater commercial coverage for these populations, further strengthening our position as the most covered CGM in the US. It also served to broaden our conversations with payers. While payers have long recognized Dexcom's ability to help titrate insulin, there is now a growing appreciation for our ability to drive better outcomes through behavior change and customer engagement. There is also a growing awareness of these benefits in the clinical community. With much broader coverage now available, many physicians have started incorporating Dexcom CGM earlier into their customer care plans. They recognize lifestyle management as a cornerstone of the diabetes care and metabolic health landscapes and see CGM as a core tool to drive behavior alongside new drug therapies, like GPL-1s. To that point, in the second quarter, we will be launching a medication logging module and activity integration tool with the G7 app to help those using Dexcom CGM with these therapies. While this has helped us significantly expand our prescriber base over the past year, we are still only scratching the surface of this sizable opportunity. There are over 200,000 primary care physicians in the US who treat tens of millions of people with diabetes. There remains a clear opportunity for us to deepen our presence within this channel as we work to drive even greater care for their patients. As a result, we announced an expansion of our salesforce this past quarter. We were blown away by the level of interest and the quality of talent that we were able to attract for these roles. By the end of the first quarter, we had already completed our hiring and trained these new reps. This team is excited to hit the ground running, and we look forward to seeing them build momentum over the course of the year. As part of this initiative, beginning in the second quarter, we are also taking steps to optimize the structure of our sales team to be most effective with our call points across endocrinologists and primary care physicians, as well as leading practitioners in maternal-fetal medicine. We expect our new team in this upgraded structure to help us better capitalize on the significant opportunities ahead. Along those lines, we hit another significant milestone in our company's history, with the FDA's clearance of our newest product, Stelo, the first glucose biosensor approved for use without a prescription in the US. Recognizing a significant unmet need for the 25 million people with type 2 diabetes who are not on insulin or at risk of severe hypoglycemia, we developed Stelo as a more tailored solution for this population, and work closely with the FDA to simplify access to this product. By removing the burden of a prescription, we expect Stelo to draw broad interest from both the clinical community and directly from members of the diabetes community who want to better understand their blood sugar. In our dialogue with the FDA, it became clear that iCGM accuracy remains critically important in establishing this new sensor category, both as a safety measure and to ensure that our customers are receiving reliable, actionable information. Stelo will leverage the industry-leading accuracy of our G7 sensor hardware while providing a custom software experience to more directly meet the needs of those not taking insulin. We're on track to launch Stelo this summer as a 15-day cash-pay product, and will continue to build our case with payers for broader coverage. Stelo will be fulfilled initially via a brand-new e-commerce website, and available in one-time purchases or subscription models. We look forward to providing greater detail on Stelo features, including pricing, immediately before launch, and we'll share further updates on our go-to-market strategy and ordering process at ADA and on our second quarter earnings call. In our international business, we also advanced some key strategic initiatives this past quarter. In February, we officially launched Dexcom ONE Plus into eight European markets, which is our first step in moving our entire Dexcom ONE product line into the G7 form factor. This transition brings several of the G7 technological benefits to this customer base, such as the smaller form factor, shorter warm-up time, and improved accuracy, and further simplifies the prescribing process for physicians. Moving to a shared hardware platform also benefits our cost structure over time as it allows us to drive greater volume to our G7 lines and more quickly reach scale. We also completed our transition to a direct sales model in Japan, enabling us to begin commercial operations at the start of the second quarter. As a reminder, this is one of the only markets in the world with coverage for all people using insulin, which represents over 1 million people. Despite this, market penetration remains in its early stages, and we see a significant opportunity to drive greater uptake in Dexcom CGM share. As a result, we believe Japan can become a key growth driver for us over time as we strengthen our presence in this market in the coming quarters. This is an incredibly exciting time for us. There will be a lot to learn with the launch of Stelo, and we are thrilled to once again pioneer the CGM industry with a new subset of users. We look forward to sharing more updates with you as we begin this journey. With that, I will turn it over to Jereme for a review of the first quarter financials. Jereme? Jereme Sylvain -- Chief Financial Officer Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release, as well as on our IR website. For the first quarter of 2024, we reported worldwide revenue of $921 million, compared to $741 million for the first quarter of 2023, representing growth of 24% on a reported basis and 25% on an organic basis. As a reminder, our definition of organic revenue excludes the impact of foreign exchange in addition to our non-CGM revenue acquired or divested in the trailing 12 months. US revenue totaled $653 million for the first quarter, compared to $526 million in the first quarter of 2023, representing growth of 24%. Our recent momentum in the US continued this quarter as we again benefited from the largest expansion of reimbursed coverage in our company's history. This led to another quarter of significant new customer demand in the US and contributed to our record new start quarter globally. As Kevin mentioned, we are excited to build on this momentum with our expanded sales force and look forward to seeing the new team ramp up in the months ahead. International revenue grew 24%, totaling $268 million in the first quarter. International organic revenue growth was 26% for the first quarter. We executed very well across our international footprint and again took market share this quarter, benefiting from our targeted access expansion and product portfolio strategy. We delivered a particularly strong quarter in our core European markets, which more than offset the pause in growth from Japan as we finalized its transition to direct sales. Our first quarter gross profit was $569 million or 61.8% of revenue compared to 63.4% of revenue in the first quarter of 2023. This gross margin result was in line with our expectations as G7 continues to become a larger part of our product mix. As a reminder, G7 carries a lower margin than G6 today, but we expect this to change in the coming quarters as we drive more volume through our G7 lines in the US and Malaysia. Between the continued G7 demand, our pump integrations, and moving Dexcom ONE to the G7 platform, we continue to see more of our base moving to the G7 form factor. Operating expenses were $428.9 million for Q1 of 2024 compared to $391.2 million in Q1 of 2023. This quarter was another demonstration of our ability to generate significant operating leverage as we grow. In fact, we grew our revenue at more than double the rate of operating expenses in the first quarter, resulting in more than 600 basis points of opex leverage compared to the first quarter of 2023. Operating income was $140.2 million, or 15.2% of revenue in the first quarter of 2024 compared to $78.6 million or 10.6% of revenue in the same quarter of 2023. Adjusted EBITDA was $220.9 million or 24% of revenue for the first quarter, compared to $145.9 million or 19.7% of revenue for the first quarter of 2023. Net income for the first quarter was $128.2 million or $0.32 per share. We remain in a great financial position, closing the quarter with approximately $2.9 billion of cash and cash equivalents on the back of nearly doubling our free cash flow year over year. This provides us significant flexibility to both support our organic growth opportunities and assess any strategy uses of capital. From a capacity perspective, we remain in a great position with Malaysia quickly scaling, and we are further diversifying our footprint with the build-out of our Ireland facility. This leaves us well-positioned to support our near-term growth opportunities, including the highly anticipated launch of Stelo this summer. Turning to guidance, we are raising the midpoint of our revenue guidance with an updated range of $4.20 billion to $4.35 billion, representing organic growth of 17% to 21% for the year. For margins, we are reaffirming our prior full year guidance of non-GAAP gross profit margin in a range of 63% to 64%, non-GAAP operating margin of approximately 20%, and adjusted EBITDA margin of approximately 29%. With that, we can open up the call for Q&A. Sean? Sean Christensen -- Vice President of Finance and Investor Relations Thank you, Jereme. As a reminder, we ask our audience to limit themselves to only one question at this time, and then reenter the queue if necessary. Abby, please provide the Q&A instructions. Questions & Answers: Operator Thank you. We will now begin the question-and-answer session. [Operator instructions] And we will take our first question from Danielle Antalffy with UBS. Your line is open. Danielle Antalffy -- UBS -- Analyst Hey, good afternoon, everyone. Thanks so much for taking the question, and congrats on a strong start to the year. Kevin, so the Stelo over-the-counter clearance was obviously one of the most exciting things that we saw happen in the first quarter. Can you help us understand how you think the OTC label expand your addressable market, and how you're aligning the new sales team to capitalize on it? Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, thank you for the question. And it's been every bit as exciting for us as it's been -- as you can imagine, Danielle. We have had more media impressions, and inquiries, and buzz about Stelo from the outside than really anything we've ever done, it's been spectacular. We're very excited for it. The way it expands our access, since we thought through this, there's 25 million people with type 2 diabetes who are not on insulin or who don't suffer from severe hypoglycemia. We wanted to get that product out quickly and make it very accessible to them. We studied this, we spent a lot of time thinking about it. The best way to do that is to eliminate the prescription process, and not to have them in the middle of that with physicians. And that's also helpful for their healthcare providers because they don't have to call the pharmacy and do prescriptions as well, so the key to this and particularly in getting to a lot of people is to make this very easy to obtain. And that's why we went over the counter with it. At the same time, as I said in my remarks, we're thrilled with the labeling and the fact that we still have iCGM controls around the sensor by going over-the-counter we didn't just open up the floodgates for everybody to come in. We still have to have an incredibly good product to go do something like this. So, we think we have a very, very good advantage there. With respect to our sales expansion, I made a couple of comments about the expansion and positioning of the salesforce. We know for a fact that when we have coverage in the physician arena when we call on doctors we do extremely well. And so, as we repositioned our salesforce, I talked about repositioning between endocrinology, primary care, and also the maternal and fetal medicine markets as well. We've repositioned our group to whereby our -- we have specialists who spend more time in the endocrinology offices and with high prescribers, not so much with those who don't prescribe a lot. And a lot of the new adds, a lot of the expansion relates to primary care, where they will talk about Stelo with primary care doctors who see almost all of the type 2 patients who aren't on insulin. So, by expanding this way, we believe we'll be able to have more coverage with the physicians as well. And so, they will take that message out and talk with the doctors as well. But this will also be a message-driven direct-to-consumer in the same way that you see all the other type 2 products going on. Jereme, you might have a bit to add to that, too. Jereme Sylvain -- Chief Financial Officer Yeah, you asked the question about the salesforce, and Kevin certainly pointed to Stelo as a big part of the salesforce in expanding the TAM. And so, one of the reasons to expand is exactly as Kevin said, there's a massive opportunity there. However, there's also a massive opportunity in our existing markets. G7 is a wonderful product. G6 is a wonderful product. There is coverage continuing to expand as well in those categories. And so, expanding the salesforce also allows us to cover more in that category. And that court of category continues to do incredibly well. We had a record new patients quarter this quarter. And so, you could expect to see, really, growth on both ends of that as a result of the expansion of that salesforce. Operator And we will take our next question from Robbie Marcus with J.P. Morgan. Your line is open. Robbie Marcus -- J.P. Morgan -- Analyst Great. Thanks for taking the question, and congrats on a nice quarter. I wanted to talk about the leverage we saw down the P&L. It was pretty impressive. It will be by -- like 150 bps on operating margin. So, just wanted to see how we should think about gross margin progression and operating margin progression throughout the year. I saw the reiterated guidance, but just trying to think about cadence, especially in light of the Stelo launch and the key drivers of that upside in the quarter and how we should think about that moving through the year. Thanks a lot. Jereme Sylvain -- Chief Financial Officer Yeah, sure, Robbie. Thanks for the question. The way to think about gross margin, and that, of course -- well, of course, yes, we talked -- when we set guidance, that this was going to look a little bit like a more typical year. And in a more typical year, you generally see 300 to 400 basis points of expansion over the course of the year. And that's what I'd expect to see over the course of this year. A lot happened last year with the transition from G6 to G7, it's not a typical year. We had a new manufacturing facility coming online. So, as you go back into years prior to that, you see that sort of cadence. That's how we're thinking about, at least over the course of the year right now. And so, that gives you some context for that cadence. From an op margin perspective, or at least an opex spend perspective, we've already made the investment in the salesforce. And so, that you see playing through in the first quarter, and to your point, you saw some nice leverage in the first quarter. We will be making investments -- further investments in Japan here as we go live in the second quarter, and that will play out over the course of the year. And then, obviously associated with the launch of Stelo over the course of the summer, we'll be making investments there. So, we won't get the same leverage that you ultimately saw in the first quarter over the balance of the year. You should expect some leverage over the course of the year. And that, ultimately, contributes down to what you see as an expansion of op margin despite a gross margin guide, there's a bit of a click back from the prior year. So, that's the way to think about it. In terms of the overperformance in Q1, I think you are alluding to the beat in terms of op margin. And I think the takeaway here is it's an encouraging sign for us. We've demonstrated over the past few years we can drive leverage into this business. This year is no exception. All of the efforts that we've been talking about in prior years continue. However, it's a little early to change how we're thinking about the full year first quarter, as you mentioned. Nice start to the first quarter, and we'll keep you updated on progress as the year progresses. Operator And we will take our next question from Larry Biegelsen with Wells Fargo. Your line is open. Larry Biegelsen -- Wells Fargo Securities -- Analyst Good afternoon. Thanks for taking the question. Kevin, I'd love to ask about Stelo. So, I heard your comments about an e-commerce website. Why an e-commerce website as opposed to pharmacies and retail? Maybe talk about how you see utilization playing out. And I know the indication is only for type 2 oral patients, but do you see an opportunity beyond type 2 oral patients such as prediabetes and health-conscious people maybe down the road? Thanks for taking the question. Kevin Sayer -- Chairman, President, and Chief Executive Officer I'll start with the end and go back to the website. That product is labeled for people not on insulin. And it's not necessarily labeled just for people with diabetes. We designed the experience to focus more on those with type 2 diabetes because we believe there's a very, very strong unmet need. And a product tailored to that solution, we think, can do very well. We believe people will be interested who don't have diabetes and will, in fact, use it and will purchase it. But the focus, out of the gate, is in this marketplace where people have a direct need. Over time, we definitely see this platform and features in our software migrating toward those other markets. We just wanted to get started here first. With respect to the website and the reason we've gone with this direct distribution model, we've had great success with it launching products in some of the international markets as we've rolled Dexcom ONE out. So, we do know how to do this. Second of all, we want a little bit of control when the launch. When we start, we want to understand what's going on. We want to track utilization patterns. We want to see how this goes. And we felt this was the most efficient way to do it. And as you go back to my comments, I said initially, we will launch this program. I think as this gets bigger; we'll seek other distribution channels if it's more efficient to get more product to people. We are very well positioned, and we've done a lot of work setting this website up, and then the distribution process will be extremely efficient. So, we're not concerned about being overrun. Right now, we're in a really good position to get this product to the people who want it through the website that we've set up. Jereme Sylvain -- Chief Financial Officer Yeah, and then to your question on utilization, Larry it's going to be a little bit of everything. I think there's going to be some users that do use it full time. I think some folks will use it intermittently, that's based on our market research. Our market research has basically, for the most part, indicated once folks are on this product, they want to use it. And I think we've run studies where there was a high utilization while in the study and a high request to continue utilization post-study. That all being said, as we think about modeling, we want to make sure we're prudent in doing so. And so, we have a variety of utilization patterns that we'll ultimately put out there. So, I think we expect a little bit of everything. That population is so big, you'll get, I think, a grab bag of everything. Fortunately, we always are surprised by the positive of how often folks want to wear these things. Operator And we will take our next question from Joanne Wuensch with Citibank. Your line is open. Joanne Wuensch -- Citi -- Analyst Thank you very much for taking the question, and congrats on the quarter. With a 15-day Stelo out in the market, what are the steps to bringing a 15-day sensor onto the G6 or G7 platform? And what are the economics of moving to that time frame? Thank you. Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah. First of all, there won't be any G6 15-day. We're not going to spend any more money on G6. I can assure you of that. One of the reasons we're launching Stelo within 15 days in our current G7 platform is to learn its performance in this type of environment. As we've talked earlier, we have a level of performance and reliability and expectations of our customers. We wanted to make sure we delivered those, and we felt more comfortable at 10 days to start. We have numerous clinical efforts and R&D efforts to move the platform to 15 days for all the G7 products, and including Dexcom ONE Plus in our international markets at some point in time. As we've said in our guidance and what we've done, that's not anticipated for 2024, but it's certainly anticipated not long after that. So, you'll hear and see more about that over time. The economics are quite simple. You're selling two sensors over a 30-day period rather than three, so we can see a significant margin pick-up as long as we have the proper reliability. On the other side, because if you're shipping a sensor in a FedEx box to replace one that doesn't work, you've lost all your economies of scale anyway, so we're not only looking at 15 days, making it reliable. We're looking very hard at offering the maximum, most efficient customer experience for individuals when we go to 15 days, so they're ready. And so, this delivers what we've always delivered, because in our CSAT scores and as we survey our customers, one of the things that we always hear about is how much people value that experience and the support that we give them. So, it's a combination of all those things, but scientifically, we're well down the road to having 15-day product. Operator And we will take our next question from Jeff Johnson with Baird. Your line is open. Jeff Johnson -- Baird -- Analyst Thank you. Good afternoon, guys. Congrats on the quarter. So, I wanted to ask on basal, just any visibility you can give on how that's been scaling, obviously, a record new start quarter. This quarter, I would assume basal is contributing nicely to that. But what do the sequential patterns look like the last few quarters? Is it still sequentially growing at a pretty healthy rate, I'd assume? But any color you can provide there. And also, there's been some debate, obviously, on market share within the basal population here in the US. Just would love kind of any insights you can provide on that front as well. Thanks. Jereme Sylvain -- Chief Financial Officer Yes, sure I can take that one. Thanks, Jeff. I think when we talked about what we expected this year, we really talked about it in the context of basal adoption across the entire population. And we talked about exiting the year right around that 15% adoption across the basal population in the US, and the year moving over the course of the year to 23%, so about eight points of penetration. So, far through the first quarter, things are going as we expected. Record new patients, I think helps enforce that. And you are correct, a good chunk of our new patients are coming through that basal channel. And we continue to see really well performance in that category. So, qualitatively, the things we talked about the excitement in that channel, those still remain. In terms of share-taking and how we look at that category we get script data, we look at script data based on pathology. The debate, there's no debate internally to us, we know we're taking share. And we see that data. And I think a lot of you guys see that data. So, for what it's worth, that data is out there, you can see the scripts continuing to come our way for the purpose we talked about when we have coverage when we compete head to head, we've typically won. So, I think we can -- we may disagree with some comments out there. But I think the data is clear. When you look at the script data, I think it'll continue to demonstrate where this is going over time. Hope that helps. Operator And we will take our next question from Jayson Bedford with Raymond James. Your line is open. Jayson Bedford -- Raymond James -- Analyst Good afternoon. Thanks. Just on Stelo. Kevin, you mentioned getting it out quickly, but you're not launching it until the summer, and certainly don't mean to be impatient. But just outside of the Salesforce training, maybe the e-commerce setup, what else are you doing to prep for the launch? And then just does the FDA need to approve anything else? I'm thinking of an app or the like before you launch. Kevin Sayer -- Chairman, President, and Chief Executive Officer No, we have full FDA approval for launch. It has been our experience over time at Dexcom. When we get a very rapid approval, we tend to become very impatient, we launch very quickly. And we've from time to time actually put ourselves in a bind by going out as quickly as we have. We had a launch plan for this product anticipating an FDA approval when it was going to come and we're going to stick to the launch plan that we have. We have manufacturing scheduled, we have lines set up, we have molds, we have everything, packaging, everything that we need ready to go. But we're going to stick to the plan that we have. We believe our timing is good, and there's no need to rush anything. And so, we're sticking to what we have and we're comfortable with it. Operator We will take our next question from Margaret Andrew with William Blair. Your line is open. Margaret Andrew -- William Blair -- Analyst Hey, good afternoon, guys. Thanks for taking the questions. I wanted to hit something, Kevin, I think you had said earlier in your commentary that you're seeing growing coverage and plans for patients earlier in their care. So, I just wanted to know if you're referencing basal, which obviously we've heard about is it non-insulin, pre-diabetic, non-diabetics, maybe things that are less traditional as the street thinks about that. And then, and why -- and then as it relates to Stelo obviously there's ties to that, but just any sense of a number of people that have proactively reached out on your website right now to buy the product when it's launched. Thanks. Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, we haven't reached out to buy it because we haven't offered it for sale, but we certainly have a lot of inquiries. And again, as you go to media impressions, articles, interviews, unsolicited stuff, and things like that, Stelo has been the biggest offering that we've had as far as news. And as our reps walk into primary care doctor offices, I just spent a bunch of time with several of our field team members. That's the question the minute they walk in the door, when am I going to see Stelo in there? And when I was at ATTD, it was interesting. Many of the physicians came up to me and said, how does Stelo affect me in my practice? So, there is a lot of interest, and there is a lot of buzz on that. As far as using CGM earlier in treatment, we're certainly seeing that with basal. We're seeing that as somebody goes on basal insulin, look, you're going on basal insulin. You just as well use a sensor to know how this is affecting your body so you can learn, and so we can titrate your basal insulin the way it needs to be. And we're looking at product offerings and software enhancements to make that experience better. But even in the type 1 population, Margaret, you now see kids leave the hospital with their Dexcom. They get diagnosed; they go to the hospital. And again, I talked with someone this morning, even the six-year-old was diagnosed and left the hospital wearing a Dexcom because there's no way that they were told they could manage this disease without it. So, we have definitely become a product and offering that comes into play very, very quickly. I also think we see, particularly if there's coverage with somebody with type 2 diabetes who's not using insulin, the physician knows the patient can get it, they'll get it to them and use it as a teaching aid, as a tool to help these people manage their condition. Across the board, CGM is becoming used earlier in treatment over and over again. Jereme Sylvain -- Chief Financial Officer Yeah. And Margaret, this is one of the reasons why when we, last year, I think we talked a little bit about this, is we introduced a cash pay option on our G-Series. One of the reasons in doing so is, as Kevin alluded to, really, across the spectrum of managing your diabetes, there's been more interest. And so, those plans that do have pockets that do cover everybody with diabetes and the cash pay option have -- there has been some uptake. There's certainly not a majority of our uptake and certainly not the materiality of our customer base, but the interest is there. And so, you continue to see that taking place. It's why we're so bullish on Stelo, back to Kevin's point, why there's so much inbound interest in that product. So, hopefully, that gives you some context. There's a groundswell of attention to this and rightfully so, it can help a lot of people. Operator And we will take our next question from Matt Taylor with Jefferies. Your line is open. Matt Taylor -- Jefferies -- Analyst Hi, thank you for taking the question. I wanted to ask you kind of a combined question. When you were talking about moving earlier in the treatment paradigms and also with Stelo coming out, and obviously you've got plans to try to broaden coverage and have these conversations with payers about how that may benefit patients. So, the question is really, are you seeing signs from the payers that you could actually get coverage for the G-Series and/or for Stelo in some other format this year, basically earlier in the treatment paradigms than basal? And how long do you think it will take to get any kind of coverage officially? Jereme Sylvain -- Chief Financial Officer Yeah, so it's a fair question. There are some plans out there that actually do cover really all folks with diabetes. It's not a majority of plans, but these plans have seen early on the value of CGM as a lifestyle change, a preventative tool, and something that ultimately yields results back to the system. And it's the same economics we've talked to you about before. And so, some plans have done that. Again, it's not the majority. In terms of your question, though, more broad coverage, or how do we introduce that earlier? I don't think we expect that to expand significantly this year. Certainly, plan by plan you get wins here and there, but those aren't the majority of the national formularies at this point. And so, I think the work has to continue to take place. I think one of the reasons why we did want to get Stelo out there is because the data that's going to come up, in addition to all the clinical trials that are underway, the clinical work that's underway that consistently do along with our partner organizations, having that real-world data, I think, will be really helpful in demonstrating to payers and employers why this is a good tool to ultimately improve health and reduce costs at the end of the day. So, I don't expect it in 2024. If you asked us for the timeline, Kevin's been very clear. The two- to three-year window we think it takes to do so, we're highly incentivized to go quickly. Nevertheless, it's something we'll continue to work on and keep you posted on our progress as we make progress. Operator We will take our next question from Mathew Blackman with Stifel. Your line is open. Mathew Blackman -- Stifel Financial Corp. -- Analyst Hi. Good afternoon, everybody. Can you hear me OK? Kevin Sayer -- Chairman, President, and Chief Executive Officer Yes. Mathew Blackman -- Stifel Financial Corp. -- Analyst OK, great. Maybe, Jereme, this question for you, I know you're not going to give me precision here, but I'll ask anyway. Just on G7, where are we even in the roughest sense in terms of the mix of the installed base? And I guess, the more important question is, what's the tipping point for gross margin accretion in terms of G7 mix? Is that something we hit this year? Is that part of the quarter-over-quarter potential improvement to get you to the full year guide, or is that something that happens further out? And is AID integration a key component of that ramp? Jereme Sylvain -- Chief Financial Officer Yeah. So, here's my expectations, the way we're tracking, and again, it's going to depend on how things play out over the course of the year, but we are tracking to a point where G7, as a percentage of our overall sales, will eventually move ahead of G6, and I expect that here over the coming quarters in 2024. So, that is moving. And it's really started to -- it started moving, obviously, at the back half of last year, and having some to your point, the AID integration was very helpful for the base. So, that is happening, and it is the reason for some of the leverage in the back half of the year. As G7 starts to be the primary product, the economies of scale start to kick in, and that's where you start to see the cost come below G6. And so, that could happen this year, and it very well could happen as we move over the -- it's going to depend on the velocity at which we move. I will tell you, Q1 was a very strong velocity in movement. In terms of new patients coming in, and I think you guys can see it in the scripts, a majority of new patients are already moving to G7. So, the great news, is it's not a matter of if, it's when, and so it's really on converting that base. So, I think the long way to answer, yes, some of the leverage this year in gross margin is because we do expect G7 to be the majority of the product. When it gets lower, it's going to be kind of a timing thing. We don't have an exact date, but at the velocity we're going, it's happening very quickly, and it should be a good guy. And AID will play a large part in it. It's already started with our tandem base. I know we're talking about Insulet coming up here pretty soon. I'm excited about both of those opportunities in converting that base. Operator And we will take our next question from Shagun Singh with RBC. Your line is open. Shagun Singh -- RBC Capital Markets -- Analyst Great. Thank you so much. So, US growth was pretty strong at 24% year over year, but it was roughly in line with expectations. And so, I'm wondering if you can elaborate on pricing. I know that's been a big focus for you guys. What were trends year over year and sequentially? And then on Stelo pricing, is it fair to assume more in line with cash pay, similar to what your competitor has indicated? Thank you. Kevin Sayer -- Chairman, President, and Chief Executive Officer The Stelo pricing I'll start with, and then Jereme can jump into the other. Stelo pricing is going to be competitive. We've got a number of models we're considering. We said we'd bring you more information on that on the next call at ADA, and that's when you'll hear more. But we'll be very competitive with other cash offerings when we launch Stelo. Jereme Sylvain -- Chief Financial Officer Yeah. And then, to your question on Q1 in terms of pricing dynamics, the pricing dynamics are stable. We don't have a lot of contracts year over year that are changing. And when we do have those contracts in general, the pricing headwinds we do have that typical medical device headwind that's continued to play out. So, that is stable. The one thing you do see as you get into the start of a year and benefits reset, is we do see a lot of our new patients coming through the pharmacy channel. We still have a very strong DME business, and certainly, the DME business continues to be supported by our partners very, very well. But what we find is, as we call on more and more primary care physicians who are seeing where basal patients are seen, there is a bit of a heavier tilt toward the pharmacy channel for new patients. Again, the base is pretty stable. So, what you do find is, as you think about the mix, you do get a little bit more running through that channel given where the predominance of our new patients are coming from. We don't call that price. It's pretty consistent year over year, but it is helpful to understand those dynamics. It's not anything new, but it's something just to continue to be mindful of as we move into a new year. Operator And we will take our next question from Matthew O'Brien with Piper Sandler. Your line is open. Matthew O'Brien -- Piper Sandler -- Analyst Good afternoon. Thanks for taking the question. And Jereme, it sounds like you have a little bit of a cold, so I hope you feel better. When I looked at the stock in the aftermarket, it's down about 8%. You just had your easiest comp of the quarter, or of the year, I'm sorry. And then, the rest of the year just assumes a pretty nice acceleration throughout the course of the year off of tougher comps. Even when you do it on a two-year stack basis, it's still more than you just put up in Q1. I know Japan is going to be a little bit of a tailwind. You've got a broader sales force now, but those guys take time to kick in. Stelo is not going to really kick in until Q3, Q, probably more like Q4. So, just why the confidence in being able to hit kind of the midpoint of the guidance range for the remainder of the year, just given some of these dynamics? Jereme Sylvain -- Chief Financial Officer Yes, sure. I'm happy to provide that, Matt. And thanks for the wishes on the cold. I was trying to impress you with my deep voice. I guess that didn't work. In terms of how the confidence on the year, one of the things that as we go into a quarter we try to set a base case, and the base case has risk around things like competitors, things like adoption in the basal base, things like what we would do in terms of channel mix and pricing, internationally expansion. And while we said Japan was going to launch, you have to be mindful of that. Talking about basal coverage and adoption outside the US, all of those go into as we set ranges for base cases. And as some of those get knocked down, we feel much more confident about raising the base case. And so, that's the reason why we ultimately did it. We feel more confident in the base case as a floor. And so, we certainly felt good there. We haven't talked about it yet, but I think one of the things we are really excited about is in France, we've submitted our final paperwork for Dexcom ONE Plus to launch with what we expect is basal coverage in the coming months. And so, we talked about it. It was something we thought was coming. We knew it was coming, but it was one of those things that we needed to make sure we did the appropriate steps. So, as we start to de-risk it, that's one thing. In Germany, we have wonderful basal coverage there. It's just a wonderful, for the small population that's agreed to it. But that's a wonderful start for us in terms of now saying, well, there is a pocket of payers in Germany, albeit small, that do have basal coverage. That's a wonderful progression for us. And we are the leader in terms of basal coverage in Germany right now. And so, these are the things that help de-risk the year that hopefully give you guys a little bit more confidence in that base case. Certainly, it gives us confidence in that base case and that's why when we come out and feel comfortable moving that up it's that confidence that we have in that base case. Operator And we will take our next question from Marie Thibault with BTIG. Your line is open. Marie Thibault -- BTIG -- Analyst Good evening, thanks for taking the questions. I wanted to ask a question here in Japan. It certainly sounds like you have really broad favorable coverage for all people using insulin. So, I want to understand where was penetration into that market with your distributor partner, and what have been the barriers. What have really been the hurdles and what are you going to do to try to attack those? Kevin Sayer -- Chairman, President, and Chief Executive Officer Our penetration with our partner was next to very small. Japan has not been a big market for us in spite of the great coverage that has just come out which is why we've gone direct and our distributor partner and us have gone our separate ways. We've had this experience in several geographies over the years and those geographies where we acquire a distributor an existing infrastructure like we did in Australia, like we did many years ago in Germany, we get out of the gate very quickly and we can grow a market very fast because we have an infrastructure already in place. With respect to Japan, it's like, some of the other geographies we're starting from scratch similar to how we well like we're doing in France. For example, we're starting from scratch in France on our own. It will take us a while to build that growth engine and build that dynamic in Japan. I think what held us back more than anything else is we just didn't have enough infrastructure and then all fairness our distributor did what was most important for their business in their own minds and there wasn't that commitment and that drive there. There will be that commitment and drive going forward but it's going to take a while to build it. It's not going to happen overnight. We're very confident we've hired a team that can develop the relationships necessary. Japan is very much a market driven by physician and hospital decisions. We think what we've got certainly from a leadership perspective, a team that can build those relationships and do the things that they need to do, but this can take a little while. As I'm talking to you, if we're talking to you two years from now, I have every expectation that's going to be a very large market for us, but we'll be very successful there. Operator And we will take our next question from Bill Plovanic with Canaccord Genuity. Your line is open. Bill Plovanic -- Canaccord Genuity -- Analyst Great. Thanks for taking my questions. I was wondering if you could just comment on attrition rates, reorder rates, what have you seen with the transition to G7 from G6 and then how do we think about this in the different patient populations as we get out of the IAT patients and into the basal hypo and eventually in non-using? Jereme Sylvain -- Chief Financial Officer Yeah, it's a question we've asked ourselves quite a bit. So, I'm happy to give you our thoughts on it. From G6 to G7 we've seen a relatively consistent rate. There hasn't been much of a change in terms of retention utilization across those two products and that's expected as we upgrade folks, from one to the other. Obviously, we think the G7 experience is wonderful but so is the G6 experience and we pride ourselves on the experiences that we offer. So, that's been relatively consistent. What we've also found to date, and I think it's important to start to date, is that there isn't really as much of a difference in the populations we've served across those folks on our products today. We find that there's only really one category where retention and utilization is markedly different and it's those on AID systems. Everybody else seems to follow a pretty similar pattern of retention and utilization and I say that to date because we are moving into new populations. We are moving more into basal. We are moving it more into non-insulin-using populations, albeit still a smaller part of our user base, and the hypothesis has always been we expect a high utilization in those spaces. We've always been positively surprised, but we are aware that as you move down the acuity curve, there is the potential opportunity for folks to use it maybe a little bit less. That being said, we haven't seen it today, but we'll keep you posted as we're moving through what we're seeing to help you guys kind of get your arms around it. Kevin? Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah, and I would add as we head into non-intensive insulin therapy, we think there could be a number of outcomes here and there could be a number of use cases for people. One of the reasons to maintain our distribution on our own website to start with is to begin to understand those patterns and to understand what the purchasing patterns, how many people prefer the subscription model versus individual one-time purchases and how often do they come back, and then use our tools to find out what the experience is like, what they liked and what they didn't. The other thing I would add with respect to retention and attrition, one of our biggest barriers, particularly back in the day, was the copays of the first quarter when everybody was in the DME world. Now that we have pharmacy coverage, that barrier has been eliminated a bit and that's not as big a reason as to why we lose a customer at this point in time as it used to be in the past. We've been very successful in working that dynamic. The flip side is, our DME patients have very strong retention rates and very strong utilization patterns because of the attention our fine distributors pay to them. So, it's a mix of everything, Bill, but I think we're in a good spot. We will learn in a non-intensive insulin therapy world and figure out how to build product offerings that maximize our experience with those users. Operator And we will take our next question from Michael Polark with Wolfe Research. Your line is open. Michael Polark -- Wolfe Research -- Analyst Good afternoon. I wanted to ask about one of your salesforce comments, Kevin. I heard about the expansion, faster and higher quality talent than expected. Those folks are hitting the street in 2Q. I got that. I also heard about a new team upgraded structure and it didn't quite follow what you're doing there and why it's impactful. So, if you could unpack that update for me, I'd appreciate it. Thank you. Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah, as we looked out over what we needed to accomplish and where we needed more emphasis in the field, there are a couple things that happened. Number one, we realized as we had our reps who were calling on high prescribers also calling on a number of people who weren't prescribers or doing a bunch of going and finding new prescribers that we may not be paying enough attention to our high prescribers. And so, as we've set things up, we do have a set of folks who spend more time in endocrinology and high-prescribing diabetologist world than with primary care. At the same time, we needed people to call on more primary care physicians. Consistently, we have learned over and over again that where we call on people, we win. And so, we need to call on more folks, get more people out there. We've been much more aggressive with our sampling program over the past several months. We need to get samples to more individuals. We need to knock on more doors and have more relationships. A third element of that is education. As we get to some of these offices where we have somebody who's only written two or three CGM scripts, we've always had certainly some account managers who are regional people used to help train patients if they don't have doctor training in the office. We made a little more investment there. And then, last, there are many doctors, particularly as we get to Stelo and as we get more into the primary care world, who may not even see a rep. And so, we do have more of an internal salesforce, again on a regional basis, to do more of that work. So, we're trying to go broader and deeper at the same time, deeper with our high prescribers in the endocrinology world, and then broader across all aspects of primary care, including training and supporting patients. Operator We will take our next question from Steve Lichtman with Oppenheimer. Your line is open. Steve Lichtman -- Oppenheimer and Company -- Analyst Thank you, evening, guys. I wanted to ask about the non-insulin hypo at-risk group, which obviously does have coverage now and I think you've estimated before is about the same size as basal. Are the sales force expansion and moves you're making, you just alluded to, Kevin, in the commercial organization, helping with those education efforts? Any updates overall you could provide on where you're at for tapping this opportunity would be great. Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah, and thanks for the question. You're right, it's a big opportunity for us, but it is one that has taken a little bit more time. Obviously, the focus is on basal. It's a known quantity, but the hypoglycemia unawareness or the severe hypoglycemia event, I should say, those are harder to educate folks. And so, to your point, one of the things that we've done, and Terry and her team have really focused on, is really creating the educational materials, and then arming the sales force accordingly to get out there. And so, if you have a situation where we are expanding our sales force and reaching broader touchpoints, where a lot of these folks are seen, right, they're seen really across the gamut of the healthcare spectrum, that expansion does allow us to get out there and educate more. But the biggest challenge is the education. It doesn't come to the top of mind for individuals and prescribers that when this event takes place, I qualify. And that's just some more work we're going to have to continue to do on education. Again, more touchpoints, a good thing, and the team is working hard at that. Operator We will take our next question from Josh Jennings with TD Cowen. Your line is open. Josh Jennings -- TD Cowen -- Analyst Hi, good afternoon. Thanks for taking the questions. Kevin, you mentioned that you'll have numerous iterations of Stelo over the course of the first 24 months of launch, and I wanted to just see if there's any other color you can provide on those iterations. And are they mostly going to be on the software side, or is one of the iterations going to be an increase in the rate of sensors lasting the full 15 days, and how important is that expansion to the success of Stelo? Thanks so much. Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, we always work on sensor performance optimization, and we have a very, very strong program on that across the board. And Stelo is on the G7 platform, so I think we do a G7 certainly can apply to Stelo. With respect to changes that we make, I think I can go back to what I said about G7. We've literally had a software iteration every month since we launched G7, and we brought several new features into G7. We expect a similar ramp with Stelo once we launch it, and we have a number of features on a roadmap over the next 12 months that we would add to it from a software perspective, particularly as we learn what engages people as we start. But we've been very vague and will remain vague about the features we're going to have at launch and those that we're going to add for competitive reasons. We're just not going to give everybody else a roadmap. Operator And we will take our next question from Matt Miksic with Barclays. Your line is open. Matt Miksic -- Barclays -- Analyst Great. Thank you so much for taking the question. And Kevin, I just wanted to maybe go back also to some of the comments you made earlier in the call on the Stelo approval and kind of maintaining the timeline for the launch. If you could just talk -- you said things like want to make sure our manufacturing capacity is there and don't want to rush the launch post-approval. It would be also great to understand, just given the excitement about what this product could mean outside of the diabetes community, how you're thinking about prioritizing like supply and resources and business development, market development between those two opportunities going forward? Thanks. Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, again, I appreciate that. And again, we're going to stick to our launch timing here. We have made great investments. We are ready to go. We're on our schedule. We're on our plan. And we're ready to launch, though. We're ready when we launch it. Our approval timing was very rapid. We give the FDA tremendous credit for working with us with that, and our team, great credit for submitting -- for doing a wonderful submission. They did a great job to be able to get where we got so quickly. But we are going to stick to that time frame. And we think one of the reasons this will be successful is we will have everything lined up and ready to go the way it's supposed to be when we launch it. In all fairness, I've lived through many product launches here, and every time we go too early, I end up dealing with three days. I'm saying I because everybody's in my office with three days of inventory and what are you going to do? We are devoting the proper resources. We have several G7 manufacturing lines in Malaysia. That factory just came up this summer. We manufacture G7 here in Arizona as well, so we've got plenty of G7 capacity and we'll be running those lines. And we have lines dedicated to Stelo, and we'll go there. But we're going to stick to our plan. We're very comfortable with it. We'll be ready to go when it's time. Jereme Sylvain -- Chief Financial Officer We think about resource allocation, and there's obviously a combination of resources, which is what Kevin referred to as supply. And that's absolutely something we have the capacity to go after it. But in terms of resource allocation, then on the support, right, and what do we do from a sales and marketing and where do the resources go? We're making the decisions that really quite frankly are in the best interest of returns to the company and then serving the unmet needs. So, expect us to continue to look at that accordingly. One of the things we are doing this year, and I think you can see we've made it a priority, is as we go through the organization and drive efficiencies, it allows us to reinvest in the business. And all those efficiencies we've been able to get in working through leverage in the business has allowed us to do all the work we're doing around Stelo, which includes all of our launch plans. So, we'll continue to do the robust work that we do around resource allocation. It's really important for us to do so in order to continue to scale, but also to scale efficiently and appropriately. Operator And we will take our final question from Mike Kratky with Leerink Partners. Your line is open. Mike Kratky -- Leerink Partners -- Analyst Hi, everyone. Thanks for taking our question. How are you thinking about the possibility of seeing additional pricing pressure for G7 as one of your competitors starts to get AID integration, which has historically been part of your value proposition for payers? Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, again, that's also on a geographical basis. In the US, we're very comfortable with our pricing contracts. That's been very consistent over the course of several years. When you look at the product offerings in the AID world, and if you compare what we have to offer, we offer a number of features that make our offering much superior to anything else that's going to be out there. With Dexcom, patients can connect three devices at the same time. They have the Share follow system, they can connect to the phone, and they can now connect directly to Apple Watch. We're very comfortable with our pricing position here over time, and our pricing is set up in our US contracts regardless of whether it's AID, or people use centers without it. Certainly, if we go to the tender system in Europe, there is a two-tiered system in many countries. We offered the Dexcom ONE product there at lower price point to be able to address those in AID systems, and our AID pricing in those countries, we have prices set for G7, that are said in the tender process. So, we are very comfortable where we are in those as well. Operator And there are no further questions at this time. I'll now turn the call back to Mr. Kevin Sayer for closing remarks. Kevin Sayer -- Chairman, President, and Chief Executive Officer Thanks, everybody, for participating in our call today. This really was a great quarter for DexCom as we continue to drive the most important innovations in our industry. We are continuing to widen the gap between DexCom and our competitors by driving more first in our CGM user experience, particularly in the G7 platform. Direct to Watch has been the most requested addition through our experience, ever since we launched G5 many years ago, and now it's here. Our users are going to be able to, as I just articulated, have an incredibly discrete experience with CGM on Apple Watch only, and that will include all of our Share follow system as well. So, imagine again, a parent who wants to send their kid to school without a phone, they'll be able to do everything on a watch that they used to be able to do on their phone. Access to CGM on a global basis continues to expand. We are very well-positioned with our product portfolio to win these opportunities. And lastly, I just want to talk a bit about Stelo. We went from a December filing with the FDA on Stelo to a March approval for the first over-the-counter CGM product platform in the United States. This is going to greatly enhance the lives of many, many people, and we will learn so much about it during this launch in 2024. We will be very well-positioned in '25 and years going forward. And let's not forget the theme of this call, we continue to deliver outstanding worldwide top-line growth, and continued strong operating margin expansion, at the same time, we have not at all skimmed on investing in our future products and R&D, and we have a very strong commitment to creating the scale necessary to drive this business where it needs to get and pursue all of our opportunities. Thanks, everybody, and we appreciate your support on the call today. Answer:

the Dexcom first quarter 2024 earnings release conference call

Operator Ladies and gentlemen, welcome to the Dexcom first quarter 2024 earnings release conference call. My name is Abby, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. [Operator instructions] As a reminder, the conference is being recorded. And I will now turn the call over to Sean Christensen, vice president of finance and investor relations. Mr. Christensen, you may begin. Sean Christensen -- Vice President of Finance and Investor Relations Thank you, Abby, and welcome to Dexcom's first quarter 2024 earnings call. Our agenda begins with Kevin Sayer, Dexcom's chairman, president, and CEO, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jereme Sylvain, our chief financial officer. Following our prepared remarks, we will open the call up for your questions. At that time, we ask analysts to limit themselves to one question so we can provide an opportunity for everyone participating today. Please note that there are also slides available related to our first quarter 2024 performance on the Dexcom investor relations website on the events and presentations page. With that, let's review our safe harbor statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, and expectations about future events, strategies, competition, products, operating plans, and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to Dexcom, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in Dexcom's annual report on Form 10-K, most recent quarterly report on Form 10-Q, and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash-based results. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our first quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now, I will turn it over to Kevin. Kevin Sayer -- Chairman, President, and Chief Executive Officer Thank you, Sean, thank you everyone for joining us. Today, we reported another great quarter for Dexcom, with first quarter organic revenue growth of 25%, compared to the first quarter of 2023. Demand for Dexcom CGM remains very high as customers continue to recognize and value our leading product performance and differentiated user experience. While it has only been a year since the launch of G7 in the US, we have seen a significant shift in the landscape over that time. We have attracted tens of thousands of new prescribers to our ecosystem, meaningfully improved our presence within primary care, and experienced growing demand from people with diabetes who are benefiting from significant expansions in coverage over the last year. Much of this momentum can be directly attributed to our product performance and innovative features. With the launch of G7, we extended our leadership in sensor accuracy and took a significant step forward in ease of use. We also introduced a new software ecosystem which was designed to improve our user experience, and drive high levels of customer engagement and retention. Importantly, we have continued to enhance the G7 experience with ongoing improvements to both the hardware and software platforms. In fact, we have completed software updates almost monthly since the launch of G7, introducing new features, upgrading performance and connectivity, and, most recently, establishing the ability to integrate insulin data into our app. These are great examples of how our new software architecture enables much faster innovation. We are constantly working to advance the customer experience and reinforce Dexcom as the technology leader in this space. Along those lines, we were very excited to receive clearance by the FDA for our direct-to-watch feature for G7 in the first quarter. This approval will allow our customers to use their Apple Watch as a primary display rather than connecting through their mobile phone, providing even greater flexibility in how and where they interact with their glucose data. This added to our long list of industry firsts, as G7 is the first FDA-cleared CGM that can communicate directly from sensor to watch. To enable this, we built a robust connectivity infrastructure into the design of G7. With the ability to connect to three different Bluetooth devices at the same time, our customers can simultaneously connect to a phone, a pump or receiver, and a watch. Dexcom is the only CGM system that gives customers these options. We have received great feedback since we launched our direct-to-watch software in the UK and Ireland, and look forward to extending it to additional markets shortly. Features like these add to our standing as the innovator in the CGM industry, strengthening our sensor platform as global access and awareness continue to expand. As a reminder, we recently crossed the one-year mark since the landmark CMS decision to expand coverage for all people using insulin and certain non-insulin-using individuals that struggle with hypoglycemia. This decision paved the way for greater commercial coverage for these populations, further strengthening our position as the most covered CGM in the US. It also served to broaden our conversations with payers. While payers have long recognized Dexcom's ability to help titrate insulin, there is now a growing appreciation for our ability to drive better outcomes through behavior change and customer engagement. There is also a growing awareness of these benefits in the clinical community. With much broader coverage now available, many physicians have started incorporating Dexcom CGM earlier into their customer care plans. They recognize lifestyle management as a cornerstone of the diabetes care and metabolic health landscapes and see CGM as a core tool to drive behavior alongside new drug therapies, like GPL-1s. To that point, in the second quarter, we will be launching a medication logging module and activity integration tool with the G7 app to help those using Dexcom CGM with these therapies. While this has helped us significantly expand our prescriber base over the past year, we are still only scratching the surface of this sizable opportunity. There are over 200,000 primary care physicians in the US who treat tens of millions of people with diabetes. There remains a clear opportunity for us to deepen our presence within this channel as we work to drive even greater care for their patients. As a result, we announced an expansion of our salesforce this past quarter. We were blown away by the level of interest and the quality of talent that we were able to attract for these roles. By the end of the first quarter, we had already completed our hiring and trained these new reps. This team is excited to hit the ground running, and we look forward to seeing them build momentum over the course of the year. As part of this initiative, beginning in the second quarter, we are also taking steps to optimize the structure of our sales team to be most effective with our call points across endocrinologists and primary care physicians, as well as leading practitioners in maternal-fetal medicine. We expect our new team in this upgraded structure to help us better capitalize on the significant opportunities ahead. Along those lines, we hit another significant milestone in our company's history, with the FDA's clearance of our newest product, Stelo, the first glucose biosensor approved for use without a prescription in the US. Recognizing a significant unmet need for the 25 million people with type 2 diabetes who are not on insulin or at risk of severe hypoglycemia, we developed Stelo as a more tailored solution for this population, and work closely with the FDA to simplify access to this product. By removing the burden of a prescription, we expect Stelo to draw broad interest from both the clinical community and directly from members of the diabetes community who want to better understand their blood sugar. In our dialogue with the FDA, it became clear that iCGM accuracy remains critically important in establishing this new sensor category, both as a safety measure and to ensure that our customers are receiving reliable, actionable information. Stelo will leverage the industry-leading accuracy of our G7 sensor hardware while providing a custom software experience to more directly meet the needs of those not taking insulin. We're on track to launch Stelo this summer as a 15-day cash-pay product, and will continue to build our case with payers for broader coverage. Stelo will be fulfilled initially via a brand-new e-commerce website, and available in one-time purchases or subscription models. We look forward to providing greater detail on Stelo features, including pricing, immediately before launch, and we'll share further updates on our go-to-market strategy and ordering process at ADA and on our second quarter earnings call. In our international business, we also advanced some key strategic initiatives this past quarter. In February, we officially launched Dexcom ONE Plus into eight European markets, which is our first step in moving our entire Dexcom ONE product line into the G7 form factor. This transition brings several of the G7 technological benefits to this customer base, such as the smaller form factor, shorter warm-up time, and improved accuracy, and further simplifies the prescribing process for physicians. Moving to a shared hardware platform also benefits our cost structure over time as it allows us to drive greater volume to our G7 lines and more quickly reach scale. We also completed our transition to a direct sales model in Japan, enabling us to begin commercial operations at the start of the second quarter. As a reminder, this is one of the only markets in the world with coverage for all people using insulin, which represents over 1 million people. Despite this, market penetration remains in its early stages, and we see a significant opportunity to drive greater uptake in Dexcom CGM share. As a result, we believe Japan can become a key growth driver for us over time as we strengthen our presence in this market in the coming quarters. This is an incredibly exciting time for us. There will be a lot to learn with the launch of Stelo, and we are thrilled to once again pioneer the CGM industry with a new subset of users. We look forward to sharing more updates with you as we begin this journey. With that, I will turn it over to Jereme for a review of the first quarter financials. Jereme? Jereme Sylvain -- Chief Financial Officer Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release, as well as on our IR website. For the first quarter of 2024, we reported worldwide revenue of $921 million, compared to $741 million for the first quarter of 2023, representing growth of 24% on a reported basis and 25% on an organic basis. As a reminder, our definition of organic revenue excludes the impact of foreign exchange in addition to our non-CGM revenue acquired or divested in the trailing 12 months. US revenue totaled $653 million for the first quarter, compared to $526 million in the first quarter of 2023, representing growth of 24%. Our recent momentum in the US continued this quarter as we again benefited from the largest expansion of reimbursed coverage in our company's history. This led to another quarter of significant new customer demand in the US and contributed to our record new start quarter globally. As Kevin mentioned, we are excited to build on this momentum with our expanded sales force and look forward to seeing the new team ramp up in the months ahead. International revenue grew 24%, totaling $268 million in the first quarter. International organic revenue growth was 26% for the first quarter. We executed very well across our international footprint and again took market share this quarter, benefiting from our targeted access expansion and product portfolio strategy. We delivered a particularly strong quarter in our core European markets, which more than offset the pause in growth from Japan as we finalized its transition to direct sales. Our first quarter gross profit was $569 million or 61.8% of revenue compared to 63.4% of revenue in the first quarter of 2023. This gross margin result was in line with our expectations as G7 continues to become a larger part of our product mix. As a reminder, G7 carries a lower margin than G6 today, but we expect this to change in the coming quarters as we drive more volume through our G7 lines in the US and Malaysia. Between the continued G7 demand, our pump integrations, and moving Dexcom ONE to the G7 platform, we continue to see more of our base moving to the G7 form factor. Operating expenses were $428.9 million for Q1 of 2024 compared to $391.2 million in Q1 of 2023. This quarter was another demonstration of our ability to generate significant operating leverage as we grow. In fact, we grew our revenue at more than double the rate of operating expenses in the first quarter, resulting in more than 600 basis points of opex leverage compared to the first quarter of 2023. Operating income was $140.2 million, or 15.2% of revenue in the first quarter of 2024 compared to $78.6 million or 10.6% of revenue in the same quarter of 2023. Adjusted EBITDA was $220.9 million or 24% of revenue for the first quarter, compared to $145.9 million or 19.7% of revenue for the first quarter of 2023. Net income for the first quarter was $128.2 million or $0.32 per share. We remain in a great financial position, closing the quarter with approximately $2.9 billion of cash and cash equivalents on the back of nearly doubling our free cash flow year over year. This provides us significant flexibility to both support our organic growth opportunities and assess any strategy uses of capital. From a capacity perspective, we remain in a great position with Malaysia quickly scaling, and we are further diversifying our footprint with the build-out of our Ireland facility. This leaves us well-positioned to support our near-term growth opportunities, including the highly anticipated launch of Stelo this summer. Turning to guidance, we are raising the midpoint of our revenue guidance with an updated range of $4.20 billion to $4.35 billion, representing organic growth of 17% to 21% for the year. For margins, we are reaffirming our prior full year guidance of non-GAAP gross profit margin in a range of 63% to 64%, non-GAAP operating margin of approximately 20%, and adjusted EBITDA margin of approximately 29%. With that, we can open up the call for Q&A. Sean? Sean Christensen -- Vice President of Finance and Investor Relations Thank you, Jereme. As a reminder, we ask our audience to limit themselves to only one question at this time, and then reenter the queue if necessary. Abby, please provide the Q&A instructions. Questions & Answers: Operator Thank you. We will now begin the question-and-answer session. [Operator instructions] And we will take our first question from Danielle Antalffy with UBS. Your line is open. Danielle Antalffy -- UBS -- Analyst Hey, good afternoon, everyone. Thanks so much for taking the question, and congrats on a strong start to the year. Kevin, so the Stelo over-the-counter clearance was obviously one of the most exciting things that we saw happen in the first quarter. Can you help us understand how you think the OTC label expand your addressable market, and how you're aligning the new sales team to capitalize on it? Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, thank you for the question. And it's been every bit as exciting for us as it's been -- as you can imagine, Danielle. We have had more media impressions, and inquiries, and buzz about Stelo from the outside than really anything we've ever done, it's been spectacular. We're very excited for it. The way it expands our access, since we thought through this, there's 25 million people with type 2 diabetes who are not on insulin or who don't suffer from severe hypoglycemia. We wanted to get that product out quickly and make it very accessible to them. We studied this, we spent a lot of time thinking about it. The best way to do that is to eliminate the prescription process, and not to have them in the middle of that with physicians. And that's also helpful for their healthcare providers because they don't have to call the pharmacy and do prescriptions as well, so the key to this and particularly in getting to a lot of people is to make this very easy to obtain. And that's why we went over the counter with it. At the same time, as I said in my remarks, we're thrilled with the labeling and the fact that we still have iCGM controls around the sensor by going over-the-counter we didn't just open up the floodgates for everybody to come in. We still have to have an incredibly good product to go do something like this. So, we think we have a very, very good advantage there. With respect to our sales expansion, I made a couple of comments about the expansion and positioning of the salesforce. We know for a fact that when we have coverage in the physician arena when we call on doctors we do extremely well. And so, as we repositioned our salesforce, I talked about repositioning between endocrinology, primary care, and also the maternal and fetal medicine markets as well. We've repositioned our group to whereby our -- we have specialists who spend more time in the endocrinology offices and with high prescribers, not so much with those who don't prescribe a lot. And a lot of the new adds, a lot of the expansion relates to primary care, where they will talk about Stelo with primary care doctors who see almost all of the type 2 patients who aren't on insulin. So, by expanding this way, we believe we'll be able to have more coverage with the physicians as well. And so, they will take that message out and talk with the doctors as well. But this will also be a message-driven direct-to-consumer in the same way that you see all the other type 2 products going on. Jereme, you might have a bit to add to that, too. Jereme Sylvain -- Chief Financial Officer Yeah, you asked the question about the salesforce, and Kevin certainly pointed to Stelo as a big part of the salesforce in expanding the TAM. And so, one of the reasons to expand is exactly as Kevin said, there's a massive opportunity there. However, there's also a massive opportunity in our existing markets. G7 is a wonderful product. G6 is a wonderful product. There is coverage continuing to expand as well in those categories. And so, expanding the salesforce also allows us to cover more in that category. And that court of category continues to do incredibly well. We had a record new patients quarter this quarter. And so, you could expect to see, really, growth on both ends of that as a result of the expansion of that salesforce. Operator And we will take our next question from Robbie Marcus with J.P. Morgan. Your line is open. Robbie Marcus -- J.P. Morgan -- Analyst Great. Thanks for taking the question, and congrats on a nice quarter. I wanted to talk about the leverage we saw down the P&L. It was pretty impressive. It will be by -- like 150 bps on operating margin. So, just wanted to see how we should think about gross margin progression and operating margin progression throughout the year. I saw the reiterated guidance, but just trying to think about cadence, especially in light of the Stelo launch and the key drivers of that upside in the quarter and how we should think about that moving through the year. Thanks a lot. Jereme Sylvain -- Chief Financial Officer Yeah, sure, Robbie. Thanks for the question. The way to think about gross margin, and that, of course -- well, of course, yes, we talked -- when we set guidance, that this was going to look a little bit like a more typical year. And in a more typical year, you generally see 300 to 400 basis points of expansion over the course of the year. And that's what I'd expect to see over the course of this year. A lot happened last year with the transition from G6 to G7, it's not a typical year. We had a new manufacturing facility coming online. So, as you go back into years prior to that, you see that sort of cadence. That's how we're thinking about, at least over the course of the year right now. And so, that gives you some context for that cadence. From an op margin perspective, or at least an opex spend perspective, we've already made the investment in the salesforce. And so, that you see playing through in the first quarter, and to your point, you saw some nice leverage in the first quarter. We will be making investments -- further investments in Japan here as we go live in the second quarter, and that will play out over the course of the year. And then, obviously associated with the launch of Stelo over the course of the summer, we'll be making investments there. So, we won't get the same leverage that you ultimately saw in the first quarter over the balance of the year. You should expect some leverage over the course of the year. And that, ultimately, contributes down to what you see as an expansion of op margin despite a gross margin guide, there's a bit of a click back from the prior year. So, that's the way to think about it. In terms of the overperformance in Q1, I think you are alluding to the beat in terms of op margin. And I think the takeaway here is it's an encouraging sign for us. We've demonstrated over the past few years we can drive leverage into this business. This year is no exception. All of the efforts that we've been talking about in prior years continue. However, it's a little early to change how we're thinking about the full year first quarter, as you mentioned. Nice start to the first quarter, and we'll keep you updated on progress as the year progresses. Operator And we will take our next question from Larry Biegelsen with Wells Fargo. Your line is open. Larry Biegelsen -- Wells Fargo Securities -- Analyst Good afternoon. Thanks for taking the question. Kevin, I'd love to ask about Stelo. So, I heard your comments about an e-commerce website. Why an e-commerce website as opposed to pharmacies and retail? Maybe talk about how you see utilization playing out. And I know the indication is only for type 2 oral patients, but do you see an opportunity beyond type 2 oral patients such as prediabetes and health-conscious people maybe down the road? Thanks for taking the question. Kevin Sayer -- Chairman, President, and Chief Executive Officer I'll start with the end and go back to the website. That product is labeled for people not on insulin. And it's not necessarily labeled just for people with diabetes. We designed the experience to focus more on those with type 2 diabetes because we believe there's a very, very strong unmet need. And a product tailored to that solution, we think, can do very well. We believe people will be interested who don't have diabetes and will, in fact, use it and will purchase it. But the focus, out of the gate, is in this marketplace where people have a direct need. Over time, we definitely see this platform and features in our software migrating toward those other markets. We just wanted to get started here first. With respect to the website and the reason we've gone with this direct distribution model, we've had great success with it launching products in some of the international markets as we've rolled Dexcom ONE out. So, we do know how to do this. Second of all, we want a little bit of control when the launch. When we start, we want to understand what's going on. We want to track utilization patterns. We want to see how this goes. And we felt this was the most efficient way to do it. And as you go back to my comments, I said initially, we will launch this program. I think as this gets bigger; we'll seek other distribution channels if it's more efficient to get more product to people. We are very well positioned, and we've done a lot of work setting this website up, and then the distribution process will be extremely efficient. So, we're not concerned about being overrun. Right now, we're in a really good position to get this product to the people who want it through the website that we've set up. Jereme Sylvain -- Chief Financial Officer Yeah, and then to your question on utilization, Larry it's going to be a little bit of everything. I think there's going to be some users that do use it full time. I think some folks will use it intermittently, that's based on our market research. Our market research has basically, for the most part, indicated once folks are on this product, they want to use it. And I think we've run studies where there was a high utilization while in the study and a high request to continue utilization post-study. That all being said, as we think about modeling, we want to make sure we're prudent in doing so. And so, we have a variety of utilization patterns that we'll ultimately put out there. So, I think we expect a little bit of everything. That population is so big, you'll get, I think, a grab bag of everything. Fortunately, we always are surprised by the positive of how often folks want to wear these things. Operator And we will take our next question from Joanne Wuensch with Citibank. Your line is open. Joanne Wuensch -- Citi -- Analyst Thank you very much for taking the question, and congrats on the quarter. With a 15-day Stelo out in the market, what are the steps to bringing a 15-day sensor onto the G6 or G7 platform? And what are the economics of moving to that time frame? Thank you. Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah. First of all, there won't be any G6 15-day. We're not going to spend any more money on G6. I can assure you of that. One of the reasons we're launching Stelo within 15 days in our current G7 platform is to learn its performance in this type of environment. As we've talked earlier, we have a level of performance and reliability and expectations of our customers. We wanted to make sure we delivered those, and we felt more comfortable at 10 days to start. We have numerous clinical efforts and R&D efforts to move the platform to 15 days for all the G7 products, and including Dexcom ONE Plus in our international markets at some point in time. As we've said in our guidance and what we've done, that's not anticipated for 2024, but it's certainly anticipated not long after that. So, you'll hear and see more about that over time. The economics are quite simple. You're selling two sensors over a 30-day period rather than three, so we can see a significant margin pick-up as long as we have the proper reliability. On the other side, because if you're shipping a sensor in a FedEx box to replace one that doesn't work, you've lost all your economies of scale anyway, so we're not only looking at 15 days, making it reliable. We're looking very hard at offering the maximum, most efficient customer experience for individuals when we go to 15 days, so they're ready. And so, this delivers what we've always delivered, because in our CSAT scores and as we survey our customers, one of the things that we always hear about is how much people value that experience and the support that we give them. So, it's a combination of all those things, but scientifically, we're well down the road to having 15-day product. Operator And we will take our next question from Jeff Johnson with Baird. Your line is open. Jeff Johnson -- Baird -- Analyst Thank you. Good afternoon, guys. Congrats on the quarter. So, I wanted to ask on basal, just any visibility you can give on how that's been scaling, obviously, a record new start quarter. This quarter, I would assume basal is contributing nicely to that. But what do the sequential patterns look like the last few quarters? Is it still sequentially growing at a pretty healthy rate, I'd assume? But any color you can provide there. And also, there's been some debate, obviously, on market share within the basal population here in the US. Just would love kind of any insights you can provide on that front as well. Thanks. Jereme Sylvain -- Chief Financial Officer Yes, sure I can take that one. Thanks, Jeff. I think when we talked about what we expected this year, we really talked about it in the context of basal adoption across the entire population. And we talked about exiting the year right around that 15% adoption across the basal population in the US, and the year moving over the course of the year to 23%, so about eight points of penetration. So, far through the first quarter, things are going as we expected. Record new patients, I think helps enforce that. And you are correct, a good chunk of our new patients are coming through that basal channel. And we continue to see really well performance in that category. So, qualitatively, the things we talked about the excitement in that channel, those still remain. In terms of share-taking and how we look at that category we get script data, we look at script data based on pathology. The debate, there's no debate internally to us, we know we're taking share. And we see that data. And I think a lot of you guys see that data. So, for what it's worth, that data is out there, you can see the scripts continuing to come our way for the purpose we talked about when we have coverage when we compete head to head, we've typically won. So, I think we can -- we may disagree with some comments out there. But I think the data is clear. When you look at the script data, I think it'll continue to demonstrate where this is going over time. Hope that helps. Operator And we will take our next question from Jayson Bedford with Raymond James. Your line is open. Jayson Bedford -- Raymond James -- Analyst Good afternoon. Thanks. Just on Stelo. Kevin, you mentioned getting it out quickly, but you're not launching it until the summer, and certainly don't mean to be impatient. But just outside of the Salesforce training, maybe the e-commerce setup, what else are you doing to prep for the launch? And then just does the FDA need to approve anything else? I'm thinking of an app or the like before you launch. Kevin Sayer -- Chairman, President, and Chief Executive Officer No, we have full FDA approval for launch. It has been our experience over time at Dexcom. When we get a very rapid approval, we tend to become very impatient, we launch very quickly. And we've from time to time actually put ourselves in a bind by going out as quickly as we have. We had a launch plan for this product anticipating an FDA approval when it was going to come and we're going to stick to the launch plan that we have. We have manufacturing scheduled, we have lines set up, we have molds, we have everything, packaging, everything that we need ready to go. But we're going to stick to the plan that we have. We believe our timing is good, and there's no need to rush anything. And so, we're sticking to what we have and we're comfortable with it. Operator We will take our next question from Margaret Andrew with William Blair. Your line is open. Margaret Andrew -- William Blair -- Analyst Hey, good afternoon, guys. Thanks for taking the questions. I wanted to hit something, Kevin, I think you had said earlier in your commentary that you're seeing growing coverage and plans for patients earlier in their care. So, I just wanted to know if you're referencing basal, which obviously we've heard about is it non-insulin, pre-diabetic, non-diabetics, maybe things that are less traditional as the street thinks about that. And then, and why -- and then as it relates to Stelo obviously there's ties to that, but just any sense of a number of people that have proactively reached out on your website right now to buy the product when it's launched. Thanks. Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, we haven't reached out to buy it because we haven't offered it for sale, but we certainly have a lot of inquiries. And again, as you go to media impressions, articles, interviews, unsolicited stuff, and things like that, Stelo has been the biggest offering that we've had as far as news. And as our reps walk into primary care doctor offices, I just spent a bunch of time with several of our field team members. That's the question the minute they walk in the door, when am I going to see Stelo in there? And when I was at ATTD, it was interesting. Many of the physicians came up to me and said, how does Stelo affect me in my practice? So, there is a lot of interest, and there is a lot of buzz on that. As far as using CGM earlier in treatment, we're certainly seeing that with basal. We're seeing that as somebody goes on basal insulin, look, you're going on basal insulin. You just as well use a sensor to know how this is affecting your body so you can learn, and so we can titrate your basal insulin the way it needs to be. And we're looking at product offerings and software enhancements to make that experience better. But even in the type 1 population, Margaret, you now see kids leave the hospital with their Dexcom. They get diagnosed; they go to the hospital. And again, I talked with someone this morning, even the six-year-old was diagnosed and left the hospital wearing a Dexcom because there's no way that they were told they could manage this disease without it. So, we have definitely become a product and offering that comes into play very, very quickly. I also think we see, particularly if there's coverage with somebody with type 2 diabetes who's not using insulin, the physician knows the patient can get it, they'll get it to them and use it as a teaching aid, as a tool to help these people manage their condition. Across the board, CGM is becoming used earlier in treatment over and over again. Jereme Sylvain -- Chief Financial Officer Yeah. And Margaret, this is one of the reasons why when we, last year, I think we talked a little bit about this, is we introduced a cash pay option on our G-Series. One of the reasons in doing so is, as Kevin alluded to, really, across the spectrum of managing your diabetes, there's been more interest. And so, those plans that do have pockets that do cover everybody with diabetes and the cash pay option have -- there has been some uptake. There's certainly not a majority of our uptake and certainly not the materiality of our customer base, but the interest is there. And so, you continue to see that taking place. It's why we're so bullish on Stelo, back to Kevin's point, why there's so much inbound interest in that product. So, hopefully, that gives you some context. There's a groundswell of attention to this and rightfully so, it can help a lot of people. Operator And we will take our next question from Matt Taylor with Jefferies. Your line is open. Matt Taylor -- Jefferies -- Analyst Hi, thank you for taking the question. I wanted to ask you kind of a combined question. When you were talking about moving earlier in the treatment paradigms and also with Stelo coming out, and obviously you've got plans to try to broaden coverage and have these conversations with payers about how that may benefit patients. So, the question is really, are you seeing signs from the payers that you could actually get coverage for the G-Series and/or for Stelo in some other format this year, basically earlier in the treatment paradigms than basal? And how long do you think it will take to get any kind of coverage officially? Jereme Sylvain -- Chief Financial Officer Yeah, so it's a fair question. There are some plans out there that actually do cover really all folks with diabetes. It's not a majority of plans, but these plans have seen early on the value of CGM as a lifestyle change, a preventative tool, and something that ultimately yields results back to the system. And it's the same economics we've talked to you about before. And so, some plans have done that. Again, it's not the majority. In terms of your question, though, more broad coverage, or how do we introduce that earlier? I don't think we expect that to expand significantly this year. Certainly, plan by plan you get wins here and there, but those aren't the majority of the national formularies at this point. And so, I think the work has to continue to take place. I think one of the reasons why we did want to get Stelo out there is because the data that's going to come up, in addition to all the clinical trials that are underway, the clinical work that's underway that consistently do along with our partner organizations, having that real-world data, I think, will be really helpful in demonstrating to payers and employers why this is a good tool to ultimately improve health and reduce costs at the end of the day. So, I don't expect it in 2024. If you asked us for the timeline, Kevin's been very clear. The two- to three-year window we think it takes to do so, we're highly incentivized to go quickly. Nevertheless, it's something we'll continue to work on and keep you posted on our progress as we make progress. Operator We will take our next question from Mathew Blackman with Stifel. Your line is open. Mathew Blackman -- Stifel Financial Corp. -- Analyst Hi. Good afternoon, everybody. Can you hear me OK? Kevin Sayer -- Chairman, President, and Chief Executive Officer Yes. Mathew Blackman -- Stifel Financial Corp. -- Analyst OK, great. Maybe, Jereme, this question for you, I know you're not going to give me precision here, but I'll ask anyway. Just on G7, where are we even in the roughest sense in terms of the mix of the installed base? And I guess, the more important question is, what's the tipping point for gross margin accretion in terms of G7 mix? Is that something we hit this year? Is that part of the quarter-over-quarter potential improvement to get you to the full year guide, or is that something that happens further out? And is AID integration a key component of that ramp? Jereme Sylvain -- Chief Financial Officer Yeah. So, here's my expectations, the way we're tracking, and again, it's going to depend on how things play out over the course of the year, but we are tracking to a point where G7, as a percentage of our overall sales, will eventually move ahead of G6, and I expect that here over the coming quarters in 2024. So, that is moving. And it's really started to -- it started moving, obviously, at the back half of last year, and having some to your point, the AID integration was very helpful for the base. So, that is happening, and it is the reason for some of the leverage in the back half of the year. As G7 starts to be the primary product, the economies of scale start to kick in, and that's where you start to see the cost come below G6. And so, that could happen this year, and it very well could happen as we move over the -- it's going to depend on the velocity at which we move. I will tell you, Q1 was a very strong velocity in movement. In terms of new patients coming in, and I think you guys can see it in the scripts, a majority of new patients are already moving to G7. So, the great news, is it's not a matter of if, it's when, and so it's really on converting that base. So, I think the long way to answer, yes, some of the leverage this year in gross margin is because we do expect G7 to be the majority of the product. When it gets lower, it's going to be kind of a timing thing. We don't have an exact date, but at the velocity we're going, it's happening very quickly, and it should be a good guy. And AID will play a large part in it. It's already started with our tandem base. I know we're talking about Insulet coming up here pretty soon. I'm excited about both of those opportunities in converting that base. Operator And we will take our next question from Shagun Singh with RBC. Your line is open. Shagun Singh -- RBC Capital Markets -- Analyst Great. Thank you so much. So, US growth was pretty strong at 24% year over year, but it was roughly in line with expectations. And so, I'm wondering if you can elaborate on pricing. I know that's been a big focus for you guys. What were trends year over year and sequentially? And then on Stelo pricing, is it fair to assume more in line with cash pay, similar to what your competitor has indicated? Thank you. Kevin Sayer -- Chairman, President, and Chief Executive Officer The Stelo pricing I'll start with, and then Jereme can jump into the other. Stelo pricing is going to be competitive. We've got a number of models we're considering. We said we'd bring you more information on that on the next call at ADA, and that's when you'll hear more. But we'll be very competitive with other cash offerings when we launch Stelo. Jereme Sylvain -- Chief Financial Officer Yeah. And then, to your question on Q1 in terms of pricing dynamics, the pricing dynamics are stable. We don't have a lot of contracts year over year that are changing. And when we do have those contracts in general, the pricing headwinds we do have that typical medical device headwind that's continued to play out. So, that is stable. The one thing you do see as you get into the start of a year and benefits reset, is we do see a lot of our new patients coming through the pharmacy channel. We still have a very strong DME business, and certainly, the DME business continues to be supported by our partners very, very well. But what we find is, as we call on more and more primary care physicians who are seeing where basal patients are seen, there is a bit of a heavier tilt toward the pharmacy channel for new patients. Again, the base is pretty stable. So, what you do find is, as you think about the mix, you do get a little bit more running through that channel given where the predominance of our new patients are coming from. We don't call that price. It's pretty consistent year over year, but it is helpful to understand those dynamics. It's not anything new, but it's something just to continue to be mindful of as we move into a new year. Operator And we will take our next question from Matthew O'Brien with Piper Sandler. Your line is open. Matthew O'Brien -- Piper Sandler -- Analyst Good afternoon. Thanks for taking the question. And Jereme, it sounds like you have a little bit of a cold, so I hope you feel better. When I looked at the stock in the aftermarket, it's down about 8%. You just had your easiest comp of the quarter, or of the year, I'm sorry. And then, the rest of the year just assumes a pretty nice acceleration throughout the course of the year off of tougher comps. Even when you do it on a two-year stack basis, it's still more than you just put up in Q1. I know Japan is going to be a little bit of a tailwind. You've got a broader sales force now, but those guys take time to kick in. Stelo is not going to really kick in until Q3, Q, probably more like Q4. So, just why the confidence in being able to hit kind of the midpoint of the guidance range for the remainder of the year, just given some of these dynamics? Jereme Sylvain -- Chief Financial Officer Yes, sure. I'm happy to provide that, Matt. And thanks for the wishes on the cold. I was trying to impress you with my deep voice. I guess that didn't work. In terms of how the confidence on the year, one of the things that as we go into a quarter we try to set a base case, and the base case has risk around things like competitors, things like adoption in the basal base, things like what we would do in terms of channel mix and pricing, internationally expansion. And while we said Japan was going to launch, you have to be mindful of that. Talking about basal coverage and adoption outside the US, all of those go into as we set ranges for base cases. And as some of those get knocked down, we feel much more confident about raising the base case. And so, that's the reason why we ultimately did it. We feel more confident in the base case as a floor. And so, we certainly felt good there. We haven't talked about it yet, but I think one of the things we are really excited about is in France, we've submitted our final paperwork for Dexcom ONE Plus to launch with what we expect is basal coverage in the coming months. And so, we talked about it. It was something we thought was coming. We knew it was coming, but it was one of those things that we needed to make sure we did the appropriate steps. So, as we start to de-risk it, that's one thing. In Germany, we have wonderful basal coverage there. It's just a wonderful, for the small population that's agreed to it. But that's a wonderful start for us in terms of now saying, well, there is a pocket of payers in Germany, albeit small, that do have basal coverage. That's a wonderful progression for us. And we are the leader in terms of basal coverage in Germany right now. And so, these are the things that help de-risk the year that hopefully give you guys a little bit more confidence in that base case. Certainly, it gives us confidence in that base case and that's why when we come out and feel comfortable moving that up it's that confidence that we have in that base case. Operator And we will take our next question from Marie Thibault with BTIG. Your line is open. Marie Thibault -- BTIG -- Analyst Good evening, thanks for taking the questions. I wanted to ask a question here in Japan. It certainly sounds like you have really broad favorable coverage for all people using insulin. So, I want to understand where was penetration into that market with your distributor partner, and what have been the barriers. What have really been the hurdles and what are you going to do to try to attack those? Kevin Sayer -- Chairman, President, and Chief Executive Officer Our penetration with our partner was next to very small. Japan has not been a big market for us in spite of the great coverage that has just come out which is why we've gone direct and our distributor partner and us have gone our separate ways. We've had this experience in several geographies over the years and those geographies where we acquire a distributor an existing infrastructure like we did in Australia, like we did many years ago in Germany, we get out of the gate very quickly and we can grow a market very fast because we have an infrastructure already in place. With respect to Japan, it's like, some of the other geographies we're starting from scratch similar to how we well like we're doing in France. For example, we're starting from scratch in France on our own. It will take us a while to build that growth engine and build that dynamic in Japan. I think what held us back more than anything else is we just didn't have enough infrastructure and then all fairness our distributor did what was most important for their business in their own minds and there wasn't that commitment and that drive there. There will be that commitment and drive going forward but it's going to take a while to build it. It's not going to happen overnight. We're very confident we've hired a team that can develop the relationships necessary. Japan is very much a market driven by physician and hospital decisions. We think what we've got certainly from a leadership perspective, a team that can build those relationships and do the things that they need to do, but this can take a little while. As I'm talking to you, if we're talking to you two years from now, I have every expectation that's going to be a very large market for us, but we'll be very successful there. Operator And we will take our next question from Bill Plovanic with Canaccord Genuity. Your line is open. Bill Plovanic -- Canaccord Genuity -- Analyst Great. Thanks for taking my questions. I was wondering if you could just comment on attrition rates, reorder rates, what have you seen with the transition to G7 from G6 and then how do we think about this in the different patient populations as we get out of the IAT patients and into the basal hypo and eventually in non-using? Jereme Sylvain -- Chief Financial Officer Yeah, it's a question we've asked ourselves quite a bit. So, I'm happy to give you our thoughts on it. From G6 to G7 we've seen a relatively consistent rate. There hasn't been much of a change in terms of retention utilization across those two products and that's expected as we upgrade folks, from one to the other. Obviously, we think the G7 experience is wonderful but so is the G6 experience and we pride ourselves on the experiences that we offer. So, that's been relatively consistent. What we've also found to date, and I think it's important to start to date, is that there isn't really as much of a difference in the populations we've served across those folks on our products today. We find that there's only really one category where retention and utilization is markedly different and it's those on AID systems. Everybody else seems to follow a pretty similar pattern of retention and utilization and I say that to date because we are moving into new populations. We are moving more into basal. We are moving it more into non-insulin-using populations, albeit still a smaller part of our user base, and the hypothesis has always been we expect a high utilization in those spaces. We've always been positively surprised, but we are aware that as you move down the acuity curve, there is the potential opportunity for folks to use it maybe a little bit less. That being said, we haven't seen it today, but we'll keep you posted as we're moving through what we're seeing to help you guys kind of get your arms around it. Kevin? Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah, and I would add as we head into non-intensive insulin therapy, we think there could be a number of outcomes here and there could be a number of use cases for people. One of the reasons to maintain our distribution on our own website to start with is to begin to understand those patterns and to understand what the purchasing patterns, how many people prefer the subscription model versus individual one-time purchases and how often do they come back, and then use our tools to find out what the experience is like, what they liked and what they didn't. The other thing I would add with respect to retention and attrition, one of our biggest barriers, particularly back in the day, was the copays of the first quarter when everybody was in the DME world. Now that we have pharmacy coverage, that barrier has been eliminated a bit and that's not as big a reason as to why we lose a customer at this point in time as it used to be in the past. We've been very successful in working that dynamic. The flip side is, our DME patients have very strong retention rates and very strong utilization patterns because of the attention our fine distributors pay to them. So, it's a mix of everything, Bill, but I think we're in a good spot. We will learn in a non-intensive insulin therapy world and figure out how to build product offerings that maximize our experience with those users. Operator And we will take our next question from Michael Polark with Wolfe Research. Your line is open. Michael Polark -- Wolfe Research -- Analyst Good afternoon. I wanted to ask about one of your salesforce comments, Kevin. I heard about the expansion, faster and higher quality talent than expected. Those folks are hitting the street in 2Q. I got that. I also heard about a new team upgraded structure and it didn't quite follow what you're doing there and why it's impactful. So, if you could unpack that update for me, I'd appreciate it. Thank you. Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah, as we looked out over what we needed to accomplish and where we needed more emphasis in the field, there are a couple things that happened. Number one, we realized as we had our reps who were calling on high prescribers also calling on a number of people who weren't prescribers or doing a bunch of going and finding new prescribers that we may not be paying enough attention to our high prescribers. And so, as we've set things up, we do have a set of folks who spend more time in endocrinology and high-prescribing diabetologist world than with primary care. At the same time, we needed people to call on more primary care physicians. Consistently, we have learned over and over again that where we call on people, we win. And so, we need to call on more folks, get more people out there. We've been much more aggressive with our sampling program over the past several months. We need to get samples to more individuals. We need to knock on more doors and have more relationships. A third element of that is education. As we get to some of these offices where we have somebody who's only written two or three CGM scripts, we've always had certainly some account managers who are regional people used to help train patients if they don't have doctor training in the office. We made a little more investment there. And then, last, there are many doctors, particularly as we get to Stelo and as we get more into the primary care world, who may not even see a rep. And so, we do have more of an internal salesforce, again on a regional basis, to do more of that work. So, we're trying to go broader and deeper at the same time, deeper with our high prescribers in the endocrinology world, and then broader across all aspects of primary care, including training and supporting patients. Operator We will take our next question from Steve Lichtman with Oppenheimer. Your line is open. Steve Lichtman -- Oppenheimer and Company -- Analyst Thank you, evening, guys. I wanted to ask about the non-insulin hypo at-risk group, which obviously does have coverage now and I think you've estimated before is about the same size as basal. Are the sales force expansion and moves you're making, you just alluded to, Kevin, in the commercial organization, helping with those education efforts? Any updates overall you could provide on where you're at for tapping this opportunity would be great. Kevin Sayer -- Chairman, President, and Chief Executive Officer Yeah, and thanks for the question. You're right, it's a big opportunity for us, but it is one that has taken a little bit more time. Obviously, the focus is on basal. It's a known quantity, but the hypoglycemia unawareness or the severe hypoglycemia event, I should say, those are harder to educate folks. And so, to your point, one of the things that we've done, and Terry and her team have really focused on, is really creating the educational materials, and then arming the sales force accordingly to get out there. And so, if you have a situation where we are expanding our sales force and reaching broader touchpoints, where a lot of these folks are seen, right, they're seen really across the gamut of the healthcare spectrum, that expansion does allow us to get out there and educate more. But the biggest challenge is the education. It doesn't come to the top of mind for individuals and prescribers that when this event takes place, I qualify. And that's just some more work we're going to have to continue to do on education. Again, more touchpoints, a good thing, and the team is working hard at that. Operator We will take our next question from Josh Jennings with TD Cowen. Your line is open. Josh Jennings -- TD Cowen -- Analyst Hi, good afternoon. Thanks for taking the questions. Kevin, you mentioned that you'll have numerous iterations of Stelo over the course of the first 24 months of launch, and I wanted to just see if there's any other color you can provide on those iterations. And are they mostly going to be on the software side, or is one of the iterations going to be an increase in the rate of sensors lasting the full 15 days, and how important is that expansion to the success of Stelo? Thanks so much. Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, we always work on sensor performance optimization, and we have a very, very strong program on that across the board. And Stelo is on the G7 platform, so I think we do a G7 certainly can apply to Stelo. With respect to changes that we make, I think I can go back to what I said about G7. We've literally had a software iteration every month since we launched G7, and we brought several new features into G7. We expect a similar ramp with Stelo once we launch it, and we have a number of features on a roadmap over the next 12 months that we would add to it from a software perspective, particularly as we learn what engages people as we start. But we've been very vague and will remain vague about the features we're going to have at launch and those that we're going to add for competitive reasons. We're just not going to give everybody else a roadmap. Operator And we will take our next question from Matt Miksic with Barclays. Your line is open. Matt Miksic -- Barclays -- Analyst Great. Thank you so much for taking the question. And Kevin, I just wanted to maybe go back also to some of the comments you made earlier in the call on the Stelo approval and kind of maintaining the timeline for the launch. If you could just talk -- you said things like want to make sure our manufacturing capacity is there and don't want to rush the launch post-approval. It would be also great to understand, just given the excitement about what this product could mean outside of the diabetes community, how you're thinking about prioritizing like supply and resources and business development, market development between those two opportunities going forward? Thanks. Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, again, I appreciate that. And again, we're going to stick to our launch timing here. We have made great investments. We are ready to go. We're on our schedule. We're on our plan. And we're ready to launch, though. We're ready when we launch it. Our approval timing was very rapid. We give the FDA tremendous credit for working with us with that, and our team, great credit for submitting -- for doing a wonderful submission. They did a great job to be able to get where we got so quickly. But we are going to stick to that time frame. And we think one of the reasons this will be successful is we will have everything lined up and ready to go the way it's supposed to be when we launch it. In all fairness, I've lived through many product launches here, and every time we go too early, I end up dealing with three days. I'm saying I because everybody's in my office with three days of inventory and what are you going to do? We are devoting the proper resources. We have several G7 manufacturing lines in Malaysia. That factory just came up this summer. We manufacture G7 here in Arizona as well, so we've got plenty of G7 capacity and we'll be running those lines. And we have lines dedicated to Stelo, and we'll go there. But we're going to stick to our plan. We're very comfortable with it. We'll be ready to go when it's time. Jereme Sylvain -- Chief Financial Officer We think about resource allocation, and there's obviously a combination of resources, which is what Kevin referred to as supply. And that's absolutely something we have the capacity to go after it. But in terms of resource allocation, then on the support, right, and what do we do from a sales and marketing and where do the resources go? We're making the decisions that really quite frankly are in the best interest of returns to the company and then serving the unmet needs. So, expect us to continue to look at that accordingly. One of the things we are doing this year, and I think you can see we've made it a priority, is as we go through the organization and drive efficiencies, it allows us to reinvest in the business. And all those efficiencies we've been able to get in working through leverage in the business has allowed us to do all the work we're doing around Stelo, which includes all of our launch plans. So, we'll continue to do the robust work that we do around resource allocation. It's really important for us to do so in order to continue to scale, but also to scale efficiently and appropriately. Operator And we will take our final question from Mike Kratky with Leerink Partners. Your line is open. Mike Kratky -- Leerink Partners -- Analyst Hi, everyone. Thanks for taking our question. How are you thinking about the possibility of seeing additional pricing pressure for G7 as one of your competitors starts to get AID integration, which has historically been part of your value proposition for payers? Kevin Sayer -- Chairman, President, and Chief Executive Officer Well, again, that's also on a geographical basis. In the US, we're very comfortable with our pricing contracts. That's been very consistent over the course of several years. When you look at the product offerings in the AID world, and if you compare what we have to offer, we offer a number of features that make our offering much superior to anything else that's going to be out there. With Dexcom, patients can connect three devices at the same time. They have the Share follow system, they can connect to the phone, and they can now connect directly to Apple Watch. We're very comfortable with our pricing position here over time, and our pricing is set up in our US contracts regardless of whether it's AID, or people use centers without it. Certainly, if we go to the tender system in Europe, there is a two-tiered system in many countries. We offered the Dexcom ONE product there at lower price point to be able to address those in AID systems, and our AID pricing in those countries, we have prices set for G7, that are said in the tender process. So, we are very comfortable where we are in those as well. Operator And there are no further questions at this time. I'll now turn the call back to Mr. Kevin Sayer for closing remarks. Kevin Sayer -- Chairman, President, and Chief Executive Officer Thanks, everybody, for participating in our call today. This really was a great quarter for DexCom as we continue to drive the most important innovations in our industry. We are continuing to widen the gap between DexCom and our competitors by driving more first in our CGM user experience, particularly in the G7 platform. Direct to Watch has been the most requested addition through our experience, ever since we launched G5 many years ago, and now it's here. Our users are going to be able to, as I just articulated, have an incredibly discrete experience with CGM on Apple Watch only, and that will include all of our Share follow system as well. So, imagine again, a parent who wants to send their kid to school without a phone, they'll be able to do everything on a watch that they used to be able to do on their phone. Access to CGM on a global basis continues to expand. We are very well-positioned with our product portfolio to win these opportunities. And lastly, I just want to talk a bit about Stelo. We went from a December filing with the FDA on Stelo to a March approval for the first over-the-counter CGM product platform in the United States. This is going to greatly enhance the lives of many, many people, and we will learn so much about it during this launch in 2024. We will be very well-positioned in '25 and years going forward. And let's not forget the theme of this call, we continue to deliver outstanding worldwide top-line growth, and continued strong operating margin expansion, at the same time, we have not at all skimmed on investing in our future products and R&D, and we have a very strong commitment to creating the scale necessary to drive this business where it needs to get and pursue all of our opportunities. Thanks, everybody, and we appreciate your support on the call today.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Hello, and welcome to the Eastern Bankshares, Inc. first-quarter 2024 earnings conference call. Today's call will include forward-looking statements, including statements about Eastern's future financial and operating results, outlook, business strategies, and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that can cause actual results or the timing of events to differ materially from the views expressed today. Before information -- more information about such risks and uncertainties is set forth under the caption forward-looking statements in the earnings press release as well as in the Risk Factors section and other disclosures in the company's periodic filings with the Securities and Exchange Commission. Any forward-looking statements made during this call represent management's views and estimates as of today, and the company undertakes no obligation to update these statements as a result of new information or future events. During the call, the company will also discuss both GAAP and non-GAAP financial measures. For a reconciliation of GAAP to the non-GAAP financial measures, please refer to the company's earnings press release which can be found at investor.easternbank.com. Please note, this event is being recorded. [Operator instructions] Thank you. And now I would like to turn the call over to Bob Rivers, chair and CEO. Please go ahead, sir. Bob Rivers -- Chairman and Chief Executive Officer Thank you, Sylvia. Good morning, everyone, and thank you for joining our first-quarter earnings call. With me today is Jim Fitzgerald, our chief financial and chief administrative officer, who will go through our financial highlights in a few minutes. We expected a continued challenging environment as we enter 2024, and we've not been disappointed. Higher for longer interest rates, the inverted yield curve, and normalizing credit costs were all present in the first quarter, and we expect them to continue through the rest of the year. Our plan to meet these challenges has been twofold. The first is to maintain a fortress balance sheet, which we believe will continue to be a competitive advantage over time and allow us to capitalize on opportunities as they become available. Our Q1 balance sheet demonstrates this. Specifically, our capital ratios are robust with a CET1 ratio of 18.5%, and a TCE ratio of 11.6%. Our liquidity position is very strong with balance sheet cash of $700 million and essentially no wholesale funding. Our credit profile is a real strength with low levels of nonperforming loans very manageable charge-off levels and a healthy reserve that covers our nonperforming loans by more than two and a half times. The second is our anticipated merger with Cambridge Trust, which demonstrates how we are capitalizing on opportunities. During the course of our integration planning, we have become even more confident that the Cambridge Trust franchise is among the most valuable in our market. Their wealth, deposit, and lending businesses are all very additive to our own and will help us solidify our position as the leading independent bank in the Greater Boston area. In addition, we will create efficiencies and synergies that will benefit shareholders as we consolidate the two companies. Our capital strength allows us to absorb and mark the Cambridge Trust balance sheet to market, to reprice asset yields to market and create a higher net interest margin. The combination of expense savings and a better margin accelerates our financial performance metrics and will allow us to significantly grow earnings and EPS in an otherwise very challenging period. The company's capital position post-merger will be very strong, and we look forward to revisiting our capital management strategies, including share repurchases following the approval of the merger. We also continue to work with our regulators and expect to receive approvals later this quarter and closed early in the third quarter. In the interim, we are very busy planning for the integration and working closely with Cambridge's CEO, Denis Sheahan, and his entire management team. I am pleased to say that those efforts are going very well with an increasing comradery built upon a shared set of values and very similar cultures, which gives us confidence that the merger will provide the scale we need to better serve our customers and the communities upon whose vibrancy we depend, while delivering strong financial returns for our shareholders. Our partnership with Cambridge Trust also advances our goal to be Greater Boston's premier local community bank. One characterized not only by expanded and enhanced capabilities in delivering solutions to the financial needs of our customers but with a deep understanding of and commitment to the region. Recently, I was honored to be named among the Most Influential Bostonians in Massachusetts by Boston Magazine for the fifth consecutive year. That list includes our president Quincy Miller and several members of our board of directors and Advisory boards. Such recognition and many others we receive every year are a reflection of our extensive community engagement and rising reputation in the market. Those that truly know us recognize that this is Eastern special sauce and a key differentiator and driver of our business. While some of these awards are presented to us as individuals, they are always a reflection of the extremely talented and hard-working team we are privileged to work with at Eastern. For all of this and more, I am extremely grateful to all of our colleagues at Eastern and those soon joining us from Cambridge Trust as well as our customers and community partners for their tremendous support. Before I turn it over to Jim for a detailed discussion of our financial results, I'd like to thank him personally for his over 12 years of significant contributions to our company. In yesterday's earnings release, we announced Jim's upcoming retirement, a truly better suite and momentous change for our company. When Jim joined us as our Chief Financial Officer in 2012. After serving much at much larger banks as their CFO, Eastern was a mutual bank with $8 billion in assets. Because of that prior experience, he brought us a vision and understanding of how Eastern could best evolve into a major player in the Greater Boston market. Due to his leadership in executing our initial public offering three and a half years ago. Three and soon four, bank mergers, along with innumerable insurance agency acquisitions and ultimately, the divestiture of that business last year. Eastern will have grown by almost three times during his tenure. Serving in the dual role as both our CFO and chief administrative officer. Jim has also had a significant positive impact in guiding the increasing sophistication and efficiency of our technology and operating platforms. As importantly, he has served as a key mentor, coach and friend to our management team, starting with myself for whom he has been a strategic partner in confident. Thankfully, Jim will continue to serve in his current role until a worthy successor has been identified and beyond as a special advisor to Denis, Quincy and I as well as our board, as we complete our integration of Cambridge Trust and prepare for the next steps in our journey. And with all of that said and so much more than it could be, I turn it over to Jim. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Well, thank you, Bob. Thank you for that, and good morning, everyone. As Bob said, and you all know, it's been a very challenging environment in the first quarter, and we expect that to continue for the next few quarters as well. Given that backdrop, we're very pleased with our first-quarter results as our expense levels provided a foundation for solid earnings. GAAP net income was $38.6 million, or $0.24 per share and operating net income was $38.1 million, or $0.23 per share. I'll go through the details shortly. As Bob said, we continue to be and have high expectations for the Cambridge merger. There seems to be a little confusion, so we wanted to be very clear on the timing and regulatory approval. Consistent with what we communicated in our 8-K in February, we're working with our regulators to receive their approvals. We expect those approvals later this quarter, and we expect to close the merger in early July. This time line would be a delay of one quarter from our original expectations. I'll provide some specific updates to Cambridge in the second half of the year later in my remarks. I'll start with some highlights for the first quarter. As I just mentioned, net income was $38.6 million, or $0.24 per diluted share and operating net income was $38.1 million or $0.23 per diluted share. Overall, we saw a modest growth in the balance sheet with core deposits up $121 million, or 2.8% annualized, and loans up by $115 million or 3.3% annualized, driven by commercial lending. The net interest margin was stable in the quarter at 2.68% and very similar to the prior quarter margin of 2.69%. Expenses were $101.2 million and $97.6 million on an operating basis. I'll go through expenses later in my remarks in more detail, and we'll discuss again during my comments on the outlook. Asset quality was stable in the quarter and similar to the prior two quarters. NPLs were up slightly from $53 million to $57 million or from 38 basis points of loans to 41 basis points of loans during the quarter. Net charge-offs were $7.3 million or 21 basis points of loans on an annualized basis, down from $11 million and 32 basis points in the prior quarter. I'll also go through more credit details later in my comments. Our board approved a dividend of $0.11 per share payable on June 14th. I'll move to some comments on the balance sheet. We continue to maintain a very high-quality balance sheet, and we're very pleased with the overall position at the end of Q1. Cash was approximately $700 million at the end of Q1, consistent with levels at year-end. The securities portfolio was $4.7 billion, down slightly from the prior quarter due to paydowns in the portfolio and a modestly lower market value. Loans were $14.1 billion, and commercial loans ended the quarter at $10.1 billion. Commercial loan growth was $129 million or 5.2% annualized. Consumer loans had growth of $8 million or 2.2% annualized, and residential loans decreased by $21 million. Core deposit growth was $121 million or 2.8% annualized in the quarter. We continued to experience some migration from lower-cost accounts to higher-cost accounts. However, our total deposit cost remains very favorable at 1.66% in the quarter, a demonstration of the strength of our consumer -- of our customer base. As I mentioned earlier, we are essentially core deposit funded. We had no broker deposits at the end of the quarter and FHLB borrowings were less than $20 million. Shareholders' equity was down $22 million in the quarter as net income of $38 million was offset by a decline in other comprehensive income and the dividend paid in Q1. To follow up on Bob's comments, the overall capital and liquidity of our balance sheet is a competitive advantage that we think will create opportunities over time. Moving to earnings. Net interest income was $129.9 million compared to $133.3 million in Q4. As I mentioned, the margin of 2.68% was down just 1 basis point from the prior quarter. Interest-earning assets were approximately $200 million lower in the quarter and there's one less calendar day in the quarter as well. The provision for loan loss was $7.5 million in line with the last two to three quarters. Noninterest income was $27.7 million and $23.4 million on an operating basis. As we provide on Page 8 of the presentation, the only significant change quarter to quarter was in interest rate swaps, which was due to a difference in the market valuation component. Other than swaps, all line items were pretty consistent with the prior quarter. As we outlined on Page 9 of the presentation, there were a number of moving pieces in noninterest expenses relative to the prior quarter. As we mentioned at the time, Q4 expenses were very noisy and high with the largest contributor being the FDIC special assessment of $10.8 million. Q1 expenses were $101.2 million and were $97.6 million on an operating basis. These were lower than expected for a few reasons. There were two favorable items that we didn't expect to be recurring. We paid out lower incentive compensation for 2023 than we had accrued and we experienced a reduction in our provision for off-balance sheet commitments. Combined, these two items were $3.2 million favorable. Last quarter, we guided to include some expenses relative to our corporate headquarters move as well as a technology upgrade for our online mobile product. Most of these expenses will hit in Q2 and I'll provide a road map for expense expectations as I go through our outlook. The overall effective tax rate for the quarter was 21%. Asset quality was generally stable throughout the quarter, but I'll walk through the various components. As I mentioned, nonperforming loans were $57.2 million or 41 basis points of loans, up slightly from $52.6 million and 38 basis points the prior quarter. Of note in the quarter, we resolved one of the NPLs we discussed in Q3 of last year through a collateral sale. Sales price was slightly better than we expected. We also have two NPLs under contract for sale, both of which we expect to be resolved this quarter and both have sales prices that are in line with our expectations. We did move a suburban office property into nonperforming loan status and have started the workout process with borrower. We expect the sale of that collateral over the next few quarters and have provisioned for that outcome in our Q1 results. Charge-offs in the quarter were $7.3 million or 21 basis points of loans annualized. As I just mentioned, that included the suburban office loan that was moved to NPL status in the first quarter. We continue to add new pages of additional credit information. After the asset quality slide on Page 13, we provided some information on our overall commercial real estate portfolio on Page 14. The portfolio is generally diverse with the high-performing multifamily segment being the largest concentration at 31%. As a percentage of risk-based capital, our nonowner-occupied commercial real estate is 154%, which is well below the regulatory guidelines of 300%. As is outlined, 90% of the portfolio is located in our home markets of Massachusetts and New Hampshire markets we know very, very well. We continue to add to our office disclosures on Page 15. The investor office portfolio declined by $21 million in the quarter from $689 million to $668 million or 5% of the total loan portfolio. Of this total, criticized and classified loans totaled $103 million, up slightly from where it had been in the prior two quarters. We added some specific information about maturities as well. As you can see on the upper right-hand corner of that page, office maturities are light for the next two quarters, and average approximately $20 million over the next four quarters, a very manageable level. We're working very closely with the borrowers on all of these maturities and we'll provide updates as we move through the rest of the year. As a reminder, the Cambridge Trust portfolio will be mark-to-market for both interest rates and credit as part of the closing process. One additional comment I'd make here is that we are watching all of the loans in this portfolio very carefully. The two categories that get the most scrutiny are the criticized and classified loans and also those with upcoming maturities. We hope that this additional information helps investors track this portfolio over time. We updated our look at the multifamily portfolio on Page 16 that we provided last quarter. The shortage of housing continues to persist in our markets and multifamily is a very desirable asset class. We have no nonperforming loans in the portfolio and vacancy rates are extremely low. Turning to the outlook. We expect the second quarter to be similar to the first quarter in many ways. We expect the margin and net interest income to be similar to Q1 and expect overall loan and deposit growth to also be similar to the overall growth rates of the first quarter. We expect NPLs and net charge-offs to be similar to the last few quarters as well. We expect higher operating expenses in Q2 from a few sources. We do not expect a recurrence of the two favorable expense items totaling $3.2 million that occurred in Q1 and that I described earlier. We expect some normal increases in salaries based on the timing of our annual merit program as well as an increase in marketing expenses. The combination of these items -- of all of these items is expected to bring our run rate of expenses to between $104 million and $106 million. We expect some higher than run rate expenses for the costs associated with our headquarters move earlier this month and an increase in the technology cost for the transition to our new online mobile product rollout. These are expected to be out of the run rate by the end of Q2 and are approximately $3 million. We are waiting for the FDIC special assessment amount, and we expect to record that in Q2. We expect the tax rate to be 22% on an operating basis. Turning to the second half of the year and after the Cambridge closing, we expect to see the benefits of the Cambridge transaction start in Q3 and be very evident by Q4 of this year. We've updated the loan valuation for the Cambridge portfolio at the end of Q1. Although rates have increased in April, we're still comfortable that the fair value discount on loans will be less than what we presented in the original projections at the time of the acquisition announcement. We expect the post-merger net interest margin in Q4 to be 3%, up from our current levels of 2.68%. As we mentioned last quarter, we expect to liquidate the Cambridge investment portfolio and pay off their wholesale funding at closing. We expect the EPS accretion to exceed the original projections of plus 20%. We expect the cash efficiency ratio to be in the mid-50% by Q4 and as we move into 2025. This excludes the amortization of intangibles created in the transaction that we estimate to be $4 million to $5 million per quarter. On a run rate basis, we expect the combined wealth business to have over $60 million of revenues and operated efficiency ratio in the low 50% range. We expect the post-merger capital ratios to be strong and support our capital management strategies. As hopefully you can see from these comments, we continue to be very excited about the opportunity with Cambridge and look forward to providing updates as we move forward. That concludes my remarks. Thank you, Sylvia. We can open up for questions. Questions & Answers: Operator Thank you. [Operator instructions] And your first question will be from Mark Fitzgibbon of Piper Sandler. Please go ahead. Mark Fitzgibbon -- Piper Sandler -- Analyst Hey, guys. Happy Friday. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Good morning, Mark Mark Fitzgibbon -- Piper Sandler -- Analyst Jim, let me start off by echoing Bob's congratulations on your well-deserved retirement. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thank you. Mark Fitzgibbon -- Piper Sandler -- Analyst Before I let you off the hook, I'm going to ask a question I've asked before, and that is what gives you all such confidence that you'll get approval to close the transaction in the third quarter, given how long it's taken some other banks to get approval to close their transactions. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yeah. Sure, Mark. I -- jokingly I would say I anticipated that to be your first question. And in the many ways, I appreciate it because we understand the environment as you do. I think just by things we've communicated in the past, we have a very good communication channel with the regulators, very good relations. We wish the process was faster, but we certainly respect that they are doing what they have to do in much of our communication, and there's a lot of back and forth here, the regulatory applications are voluminous as you know, and then they're incremental requests along the way. So we've supplied an incredible amount of detail that they are going through. They've been very clear that they want to support us, I think, and they know our time lines for this and have communicated that they believe they will put us in a position to meet them. As I said, we respect their process and understand that it is their process, but I appreciate the communication we have with them, and that's what gives us the confidence. Mark Fitzgibbon -- Piper Sandler -- Analyst OK. And then somewhat related, where do the higher cost saves come from and the EPS accretion versus your original estimates post deal? What's kind of driving that? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yes. So I think things are generally as we expected. I think on the cost savings side, we're expected to be slightly higher than what we articulated last September. And I think -- so that's one component of it. And I think in this environment, gaining efficiencies is obviously critically important to us and to all banks. So we're very much excited about that. And as I said, we spent a lot of time in due diligence analyzing those costs, and we're comfortable then and continue to be. I think the mark-to-market of their balance sheet at closing, which is something we believe we're capable of doing it, and it's that balance sheet strength, the capital strength, in particular that we alluded to that allows us to afford that, if you will. And it's really just repricing those loans to market that enhances the Cambridge margin in such a way that when you combine it with Eastern you get the 32-basis-point uplift that I articulated. Actually those are the two drivers. Cambridge is a wonderful franchise, right? They've got a very strong wealth deposit and lending platform. And as Bob said in his remarks, and we've experienced in our last 6 months, it's very additive to us, and we think the market opportunity, especially when the environment gets a little bit easier or better is going to be very significant. Mark Fitzgibbon -- Piper Sandler -- Analyst OK. And then lastly, I think you mentioned you had two NPLs that you were selling. I guess I'm curious where you're selling those -- where the sales prices are relative to par. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yeah. No, I think I'd say this, Mark, we've had -- if you count them up, right, we've had a total of five properties that were in the process of either taking -- going through our charge-off process/provision process and/or we've sold. And it's a small sample size. Some of those are at discounts of 30% to 40% of the original values. One is a little bit worse than that, and some are slightly better. But I think the discounts that we expect of each asset is a little bit different. So it's hard to give you one number there. But the discounts are significant, as you know, and as I said, vary by facts and circumstances. Mark Fitzgibbon -- Piper Sandler -- Analyst Thank you. Operator Thank you. Next question will be coming from the line of Damon DelMonte at KBW. Please go ahead. Your line is open. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Hey. Good morning, guys. Thanks for taking my questions and Jim, congrats on the retirement. It's been enjoyable working with you. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thank you. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Just first question on the expenses. Just trying to clarify on this. So the headquarter move impact and the mobile banking impact both combined, that's $3 million or it's $3 million for each that will be hitting in the second quarter. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Combined. And just to answer that question, we have moved into our new headquarters just to make it real, and everybody is welcome anytime you're in Boston then come over and see we're quite proud of the new space. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Excellent. Cool. So if -- so then it's going to come off the expense base in the third quarter. Is that correct? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Correct. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst OK. All right. Great. Thanks for clarifying that. And then with the cash position that you had at the end of the quarter around $700 million or so, is the intent just to kind of leave that very liquid and not look to redeploy that into securities in the near term? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Correct. Yes. Our goal over time, Damon, is we've probably articulated is to bring the size of the securities portfolio down relative to total assets. So -- and if you look at where the yield curve is and the inversion there, our expectation certainly over the next couple of quarters, if we have that amount of cash would be to keep it in cash and earn overnight rates on it. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Got it. OK. And then just lastly, I appreciate the commentary around credit and kind of the outlook there. So is it fair to assume that you're still kind of targeting maybe mid-20 net charge-off level and kind of a provision that supports the reserve around this current level? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yes. Obviously, a volatile line item, Damon. And quarter to quarter, I'd expect some -- it's hard to be that precise on a quarter-to-quarter basis. But over the next couple of quarters, yes, on both the charge-off level and the provision. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst OK. Great. That's all that I have for now. Thanks. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thanks. Operator Thank you. Next question will be coming from the line of Laurie Hunsicker at Seaport Research. Please go ahead. Your line is open. Laurie Hunsicker -- Seaport Research Partners -- Analyst Yeah. Hi. hanks. Good morning. And Jim, I do want to say congrats. It's been really great working with you. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thank you, Laurie. Laurie Hunsicker -- Seaport Research Partners -- Analyst If we could just start with margins. So your 3% margin guide, how much accretion income is in that number? And do you have an accretion income figure that you can give us for the back half of '24 and into '25, especially as accretion income winds down, how should we be thinking about that? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Sure. Laurie, I'm laughing because I anticipated that question. You're sort of like, Mark asked the timing question, and you asked the accretion question, that -- I said that very folly, by the way. That's -- please take it the way that it's intended. Yes. Accretion is clearly a part of that. We are working through sort of how we would -- one of the problems we've got right now is rates are moving around. It's a little bit volatile. We're still a quarter away from closing. So it feels a little premature to put too much information about what the exact data play is now because it's going to be different. But we are sort of studying how we present that to you. And we'll follow up. I don't want to give you an answer off the top of my head because I think that's inappropriate. But we understand the question. We understand the importance of the question and it's something we spend a lot of time internally. So if you give us a little bit of time, we'll try and figure out how to give yourself and everybody sort of a better road map there. Laurie Hunsicker -- Seaport Research Partners -- Analyst OK. OK. And then sort of in line with that pro forma intangibles, do you have a number for us on that? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer We'll do that in the same way. I think our expectation -- and timing, again, makes this a little bit hard, right? If you go back to the original merger presentation, which was September 19, the pro forma tangible book value that we presented at that presentation, pretty confident it was $10.16, that's sort of at the end of the day, the tangible book value per share that was in the presentation. We're very comfortable it's going to be higher than that. Rates are moving around, both on the Eastern portfolio and obviously the Cambridge portfolio as well. So we're trying to figure out ways how best to present that. So at this point, I can say that we'll be higher than that and let us come back to you with some more thoughtful answers. Laurie Hunsicker -- Seaport Research Partners -- Analyst OK. OK. And then on office, and I really appreciate all the details you guys have added. What -- of your $668 million office book, how much is in nonperformers there? And any refresh on those loans that you can provide? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yeah. So I think, yes, we can go through the history because it's a small size. There's been -- and I may miss like a small business loan somewhere, but I don't believe I am. We've had four nonperforming office loans. Three, we reported first in the third quarter of 2023. Two of those were sold one in the fourth quarter, one in this quarter, and the third one is -- this quarter, meaning the first quarter of '24. So let me say it again, the three NPLs from the third quarter of '23, one was sold in the fourth quarter of '23, one was sold in the first quarter of '24, and the third one will be sold in the second quarter of '24. In addition to that, we had a retail commercial real estate loan that went nonperforming in the fourth quarter of '24, and that's slated to be sold in the second quarter -- I'm sorry, the fourth quarter of '23, and we sold in the second quarter of '24. And this new nonperformer we're just getting started went nonperforming just recently. And it's an -- so four NPLs. Laurie Hunsicker -- Seaport Research Partners -- Analyst Yes, the suburban office that went into nonperforming that's in workout that you're hopefully getting rid of this quarter. How much was that? And then how much did you actually provision for it in this first quarter? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer So we don't like to give out specific customer information. But I would say this, it's a suburban office. It was the heaviest discounts to both our loan value and also the original purchase price of the building of all four. And it was in the provision and the charge-offs for this quarter of $7 million, most of that was concentrated in that asset. Laurie Hunsicker -- Seaport Research Partners -- Analyst Gotcha. OK. And then just last year, CATC, their office exposure, do you have anything refreshed that you could share with us on that, what their balance is currently, how their book is looking? Anything that you can share there? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Sure. A little bit, right? Again, it's their information. But I think you can see from their public information, it's approximately $250 million in many ways, Cambridge Trust and Eastern were competitors in the commercial real estate arena. So we know many of those properties well. And I think our clear view is it's very similar to Easterns. Most of the loans that they originated had good underwriting characteristics and very similar to ours. The locations, there's some in Boston itself and some in the suburban areas. So the $250 million generally looks very similar to things that we would have expected and, quite frankly, look similar to our portfolio in many ways. And as I said -- I've said a couple of times, it will go through the -- as part of the mark-to-market process, it will be for both interest rates and credit. And we feel like we're developing a very good understanding of those assets. Laurie Hunsicker -- Seaport Research Partners -- Analyst Great. Perfect. Thanks for taking my questions. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thanks, Laurie. Operator Thank you. There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks. Bob Rivers -- Chairman and Chief Executive Officer Well, thank you for your interest in your questions this morning, and we look forward to sharing more with you during our next earnings call at the end of July. Answer:

the Eastern Bankshares, Inc. first-quarter 2024 earnings conference call

Operator Hello, and welcome to the Eastern Bankshares, Inc. first-quarter 2024 earnings conference call. Today's call will include forward-looking statements, including statements about Eastern's future financial and operating results, outlook, business strategies, and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that can cause actual results or the timing of events to differ materially from the views expressed today. Before information -- more information about such risks and uncertainties is set forth under the caption forward-looking statements in the earnings press release as well as in the Risk Factors section and other disclosures in the company's periodic filings with the Securities and Exchange Commission. Any forward-looking statements made during this call represent management's views and estimates as of today, and the company undertakes no obligation to update these statements as a result of new information or future events. During the call, the company will also discuss both GAAP and non-GAAP financial measures. For a reconciliation of GAAP to the non-GAAP financial measures, please refer to the company's earnings press release which can be found at investor.easternbank.com. Please note, this event is being recorded. [Operator instructions] Thank you. And now I would like to turn the call over to Bob Rivers, chair and CEO. Please go ahead, sir. Bob Rivers -- Chairman and Chief Executive Officer Thank you, Sylvia. Good morning, everyone, and thank you for joining our first-quarter earnings call. With me today is Jim Fitzgerald, our chief financial and chief administrative officer, who will go through our financial highlights in a few minutes. We expected a continued challenging environment as we enter 2024, and we've not been disappointed. Higher for longer interest rates, the inverted yield curve, and normalizing credit costs were all present in the first quarter, and we expect them to continue through the rest of the year. Our plan to meet these challenges has been twofold. The first is to maintain a fortress balance sheet, which we believe will continue to be a competitive advantage over time and allow us to capitalize on opportunities as they become available. Our Q1 balance sheet demonstrates this. Specifically, our capital ratios are robust with a CET1 ratio of 18.5%, and a TCE ratio of 11.6%. Our liquidity position is very strong with balance sheet cash of $700 million and essentially no wholesale funding. Our credit profile is a real strength with low levels of nonperforming loans very manageable charge-off levels and a healthy reserve that covers our nonperforming loans by more than two and a half times. The second is our anticipated merger with Cambridge Trust, which demonstrates how we are capitalizing on opportunities. During the course of our integration planning, we have become even more confident that the Cambridge Trust franchise is among the most valuable in our market. Their wealth, deposit, and lending businesses are all very additive to our own and will help us solidify our position as the leading independent bank in the Greater Boston area. In addition, we will create efficiencies and synergies that will benefit shareholders as we consolidate the two companies. Our capital strength allows us to absorb and mark the Cambridge Trust balance sheet to market, to reprice asset yields to market and create a higher net interest margin. The combination of expense savings and a better margin accelerates our financial performance metrics and will allow us to significantly grow earnings and EPS in an otherwise very challenging period. The company's capital position post-merger will be very strong, and we look forward to revisiting our capital management strategies, including share repurchases following the approval of the merger. We also continue to work with our regulators and expect to receive approvals later this quarter and closed early in the third quarter. In the interim, we are very busy planning for the integration and working closely with Cambridge's CEO, Denis Sheahan, and his entire management team. I am pleased to say that those efforts are going very well with an increasing comradery built upon a shared set of values and very similar cultures, which gives us confidence that the merger will provide the scale we need to better serve our customers and the communities upon whose vibrancy we depend, while delivering strong financial returns for our shareholders. Our partnership with Cambridge Trust also advances our goal to be Greater Boston's premier local community bank. One characterized not only by expanded and enhanced capabilities in delivering solutions to the financial needs of our customers but with a deep understanding of and commitment to the region. Recently, I was honored to be named among the Most Influential Bostonians in Massachusetts by Boston Magazine for the fifth consecutive year. That list includes our president Quincy Miller and several members of our board of directors and Advisory boards. Such recognition and many others we receive every year are a reflection of our extensive community engagement and rising reputation in the market. Those that truly know us recognize that this is Eastern special sauce and a key differentiator and driver of our business. While some of these awards are presented to us as individuals, they are always a reflection of the extremely talented and hard-working team we are privileged to work with at Eastern. For all of this and more, I am extremely grateful to all of our colleagues at Eastern and those soon joining us from Cambridge Trust as well as our customers and community partners for their tremendous support. Before I turn it over to Jim for a detailed discussion of our financial results, I'd like to thank him personally for his over 12 years of significant contributions to our company. In yesterday's earnings release, we announced Jim's upcoming retirement, a truly better suite and momentous change for our company. When Jim joined us as our Chief Financial Officer in 2012. After serving much at much larger banks as their CFO, Eastern was a mutual bank with $8 billion in assets. Because of that prior experience, he brought us a vision and understanding of how Eastern could best evolve into a major player in the Greater Boston market. Due to his leadership in executing our initial public offering three and a half years ago. Three and soon four, bank mergers, along with innumerable insurance agency acquisitions and ultimately, the divestiture of that business last year. Eastern will have grown by almost three times during his tenure. Serving in the dual role as both our CFO and chief administrative officer. Jim has also had a significant positive impact in guiding the increasing sophistication and efficiency of our technology and operating platforms. As importantly, he has served as a key mentor, coach and friend to our management team, starting with myself for whom he has been a strategic partner in confident. Thankfully, Jim will continue to serve in his current role until a worthy successor has been identified and beyond as a special advisor to Denis, Quincy and I as well as our board, as we complete our integration of Cambridge Trust and prepare for the next steps in our journey. And with all of that said and so much more than it could be, I turn it over to Jim. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Well, thank you, Bob. Thank you for that, and good morning, everyone. As Bob said, and you all know, it's been a very challenging environment in the first quarter, and we expect that to continue for the next few quarters as well. Given that backdrop, we're very pleased with our first-quarter results as our expense levels provided a foundation for solid earnings. GAAP net income was $38.6 million, or $0.24 per share and operating net income was $38.1 million, or $0.23 per share. I'll go through the details shortly. As Bob said, we continue to be and have high expectations for the Cambridge merger. There seems to be a little confusion, so we wanted to be very clear on the timing and regulatory approval. Consistent with what we communicated in our 8-K in February, we're working with our regulators to receive their approvals. We expect those approvals later this quarter, and we expect to close the merger in early July. This time line would be a delay of one quarter from our original expectations. I'll provide some specific updates to Cambridge in the second half of the year later in my remarks. I'll start with some highlights for the first quarter. As I just mentioned, net income was $38.6 million, or $0.24 per diluted share and operating net income was $38.1 million or $0.23 per diluted share. Overall, we saw a modest growth in the balance sheet with core deposits up $121 million, or 2.8% annualized, and loans up by $115 million or 3.3% annualized, driven by commercial lending. The net interest margin was stable in the quarter at 2.68% and very similar to the prior quarter margin of 2.69%. Expenses were $101.2 million and $97.6 million on an operating basis. I'll go through expenses later in my remarks in more detail, and we'll discuss again during my comments on the outlook. Asset quality was stable in the quarter and similar to the prior two quarters. NPLs were up slightly from $53 million to $57 million or from 38 basis points of loans to 41 basis points of loans during the quarter. Net charge-offs were $7.3 million or 21 basis points of loans on an annualized basis, down from $11 million and 32 basis points in the prior quarter. I'll also go through more credit details later in my comments. Our board approved a dividend of $0.11 per share payable on June 14th. I'll move to some comments on the balance sheet. We continue to maintain a very high-quality balance sheet, and we're very pleased with the overall position at the end of Q1. Cash was approximately $700 million at the end of Q1, consistent with levels at year-end. The securities portfolio was $4.7 billion, down slightly from the prior quarter due to paydowns in the portfolio and a modestly lower market value. Loans were $14.1 billion, and commercial loans ended the quarter at $10.1 billion. Commercial loan growth was $129 million or 5.2% annualized. Consumer loans had growth of $8 million or 2.2% annualized, and residential loans decreased by $21 million. Core deposit growth was $121 million or 2.8% annualized in the quarter. We continued to experience some migration from lower-cost accounts to higher-cost accounts. However, our total deposit cost remains very favorable at 1.66% in the quarter, a demonstration of the strength of our consumer -- of our customer base. As I mentioned earlier, we are essentially core deposit funded. We had no broker deposits at the end of the quarter and FHLB borrowings were less than $20 million. Shareholders' equity was down $22 million in the quarter as net income of $38 million was offset by a decline in other comprehensive income and the dividend paid in Q1. To follow up on Bob's comments, the overall capital and liquidity of our balance sheet is a competitive advantage that we think will create opportunities over time. Moving to earnings. Net interest income was $129.9 million compared to $133.3 million in Q4. As I mentioned, the margin of 2.68% was down just 1 basis point from the prior quarter. Interest-earning assets were approximately $200 million lower in the quarter and there's one less calendar day in the quarter as well. The provision for loan loss was $7.5 million in line with the last two to three quarters. Noninterest income was $27.7 million and $23.4 million on an operating basis. As we provide on Page 8 of the presentation, the only significant change quarter to quarter was in interest rate swaps, which was due to a difference in the market valuation component. Other than swaps, all line items were pretty consistent with the prior quarter. As we outlined on Page 9 of the presentation, there were a number of moving pieces in noninterest expenses relative to the prior quarter. As we mentioned at the time, Q4 expenses were very noisy and high with the largest contributor being the FDIC special assessment of $10.8 million. Q1 expenses were $101.2 million and were $97.6 million on an operating basis. These were lower than expected for a few reasons. There were two favorable items that we didn't expect to be recurring. We paid out lower incentive compensation for 2023 than we had accrued and we experienced a reduction in our provision for off-balance sheet commitments. Combined, these two items were $3.2 million favorable. Last quarter, we guided to include some expenses relative to our corporate headquarters move as well as a technology upgrade for our online mobile product. Most of these expenses will hit in Q2 and I'll provide a road map for expense expectations as I go through our outlook. The overall effective tax rate for the quarter was 21%. Asset quality was generally stable throughout the quarter, but I'll walk through the various components. As I mentioned, nonperforming loans were $57.2 million or 41 basis points of loans, up slightly from $52.6 million and 38 basis points the prior quarter. Of note in the quarter, we resolved one of the NPLs we discussed in Q3 of last year through a collateral sale. Sales price was slightly better than we expected. We also have two NPLs under contract for sale, both of which we expect to be resolved this quarter and both have sales prices that are in line with our expectations. We did move a suburban office property into nonperforming loan status and have started the workout process with borrower. We expect the sale of that collateral over the next few quarters and have provisioned for that outcome in our Q1 results. Charge-offs in the quarter were $7.3 million or 21 basis points of loans annualized. As I just mentioned, that included the suburban office loan that was moved to NPL status in the first quarter. We continue to add new pages of additional credit information. After the asset quality slide on Page 13, we provided some information on our overall commercial real estate portfolio on Page 14. The portfolio is generally diverse with the high-performing multifamily segment being the largest concentration at 31%. As a percentage of risk-based capital, our nonowner-occupied commercial real estate is 154%, which is well below the regulatory guidelines of 300%. As is outlined, 90% of the portfolio is located in our home markets of Massachusetts and New Hampshire markets we know very, very well. We continue to add to our office disclosures on Page 15. The investor office portfolio declined by $21 million in the quarter from $689 million to $668 million or 5% of the total loan portfolio. Of this total, criticized and classified loans totaled $103 million, up slightly from where it had been in the prior two quarters. We added some specific information about maturities as well. As you can see on the upper right-hand corner of that page, office maturities are light for the next two quarters, and average approximately $20 million over the next four quarters, a very manageable level. We're working very closely with the borrowers on all of these maturities and we'll provide updates as we move through the rest of the year. As a reminder, the Cambridge Trust portfolio will be mark-to-market for both interest rates and credit as part of the closing process. One additional comment I'd make here is that we are watching all of the loans in this portfolio very carefully. The two categories that get the most scrutiny are the criticized and classified loans and also those with upcoming maturities. We hope that this additional information helps investors track this portfolio over time. We updated our look at the multifamily portfolio on Page 16 that we provided last quarter. The shortage of housing continues to persist in our markets and multifamily is a very desirable asset class. We have no nonperforming loans in the portfolio and vacancy rates are extremely low. Turning to the outlook. We expect the second quarter to be similar to the first quarter in many ways. We expect the margin and net interest income to be similar to Q1 and expect overall loan and deposit growth to also be similar to the overall growth rates of the first quarter. We expect NPLs and net charge-offs to be similar to the last few quarters as well. We expect higher operating expenses in Q2 from a few sources. We do not expect a recurrence of the two favorable expense items totaling $3.2 million that occurred in Q1 and that I described earlier. We expect some normal increases in salaries based on the timing of our annual merit program as well as an increase in marketing expenses. The combination of these items -- of all of these items is expected to bring our run rate of expenses to between $104 million and $106 million. We expect some higher than run rate expenses for the costs associated with our headquarters move earlier this month and an increase in the technology cost for the transition to our new online mobile product rollout. These are expected to be out of the run rate by the end of Q2 and are approximately $3 million. We are waiting for the FDIC special assessment amount, and we expect to record that in Q2. We expect the tax rate to be 22% on an operating basis. Turning to the second half of the year and after the Cambridge closing, we expect to see the benefits of the Cambridge transaction start in Q3 and be very evident by Q4 of this year. We've updated the loan valuation for the Cambridge portfolio at the end of Q1. Although rates have increased in April, we're still comfortable that the fair value discount on loans will be less than what we presented in the original projections at the time of the acquisition announcement. We expect the post-merger net interest margin in Q4 to be 3%, up from our current levels of 2.68%. As we mentioned last quarter, we expect to liquidate the Cambridge investment portfolio and pay off their wholesale funding at closing. We expect the EPS accretion to exceed the original projections of plus 20%. We expect the cash efficiency ratio to be in the mid-50% by Q4 and as we move into 2025. This excludes the amortization of intangibles created in the transaction that we estimate to be $4 million to $5 million per quarter. On a run rate basis, we expect the combined wealth business to have over $60 million of revenues and operated efficiency ratio in the low 50% range. We expect the post-merger capital ratios to be strong and support our capital management strategies. As hopefully you can see from these comments, we continue to be very excited about the opportunity with Cambridge and look forward to providing updates as we move forward. That concludes my remarks. Thank you, Sylvia. We can open up for questions. Questions & Answers: Operator Thank you. [Operator instructions] And your first question will be from Mark Fitzgibbon of Piper Sandler. Please go ahead. Mark Fitzgibbon -- Piper Sandler -- Analyst Hey, guys. Happy Friday. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Good morning, Mark Mark Fitzgibbon -- Piper Sandler -- Analyst Jim, let me start off by echoing Bob's congratulations on your well-deserved retirement. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thank you. Mark Fitzgibbon -- Piper Sandler -- Analyst Before I let you off the hook, I'm going to ask a question I've asked before, and that is what gives you all such confidence that you'll get approval to close the transaction in the third quarter, given how long it's taken some other banks to get approval to close their transactions. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yeah. Sure, Mark. I -- jokingly I would say I anticipated that to be your first question. And in the many ways, I appreciate it because we understand the environment as you do. I think just by things we've communicated in the past, we have a very good communication channel with the regulators, very good relations. We wish the process was faster, but we certainly respect that they are doing what they have to do in much of our communication, and there's a lot of back and forth here, the regulatory applications are voluminous as you know, and then they're incremental requests along the way. So we've supplied an incredible amount of detail that they are going through. They've been very clear that they want to support us, I think, and they know our time lines for this and have communicated that they believe they will put us in a position to meet them. As I said, we respect their process and understand that it is their process, but I appreciate the communication we have with them, and that's what gives us the confidence. Mark Fitzgibbon -- Piper Sandler -- Analyst OK. And then somewhat related, where do the higher cost saves come from and the EPS accretion versus your original estimates post deal? What's kind of driving that? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yes. So I think things are generally as we expected. I think on the cost savings side, we're expected to be slightly higher than what we articulated last September. And I think -- so that's one component of it. And I think in this environment, gaining efficiencies is obviously critically important to us and to all banks. So we're very much excited about that. And as I said, we spent a lot of time in due diligence analyzing those costs, and we're comfortable then and continue to be. I think the mark-to-market of their balance sheet at closing, which is something we believe we're capable of doing it, and it's that balance sheet strength, the capital strength, in particular that we alluded to that allows us to afford that, if you will. And it's really just repricing those loans to market that enhances the Cambridge margin in such a way that when you combine it with Eastern you get the 32-basis-point uplift that I articulated. Actually those are the two drivers. Cambridge is a wonderful franchise, right? They've got a very strong wealth deposit and lending platform. And as Bob said in his remarks, and we've experienced in our last 6 months, it's very additive to us, and we think the market opportunity, especially when the environment gets a little bit easier or better is going to be very significant. Mark Fitzgibbon -- Piper Sandler -- Analyst OK. And then lastly, I think you mentioned you had two NPLs that you were selling. I guess I'm curious where you're selling those -- where the sales prices are relative to par. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yeah. No, I think I'd say this, Mark, we've had -- if you count them up, right, we've had a total of five properties that were in the process of either taking -- going through our charge-off process/provision process and/or we've sold. And it's a small sample size. Some of those are at discounts of 30% to 40% of the original values. One is a little bit worse than that, and some are slightly better. But I think the discounts that we expect of each asset is a little bit different. So it's hard to give you one number there. But the discounts are significant, as you know, and as I said, vary by facts and circumstances. Mark Fitzgibbon -- Piper Sandler -- Analyst Thank you. Operator Thank you. Next question will be coming from the line of Damon DelMonte at KBW. Please go ahead. Your line is open. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Hey. Good morning, guys. Thanks for taking my questions and Jim, congrats on the retirement. It's been enjoyable working with you. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thank you. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Just first question on the expenses. Just trying to clarify on this. So the headquarter move impact and the mobile banking impact both combined, that's $3 million or it's $3 million for each that will be hitting in the second quarter. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Combined. And just to answer that question, we have moved into our new headquarters just to make it real, and everybody is welcome anytime you're in Boston then come over and see we're quite proud of the new space. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Excellent. Cool. So if -- so then it's going to come off the expense base in the third quarter. Is that correct? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Correct. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst OK. All right. Great. Thanks for clarifying that. And then with the cash position that you had at the end of the quarter around $700 million or so, is the intent just to kind of leave that very liquid and not look to redeploy that into securities in the near term? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Correct. Yes. Our goal over time, Damon, is we've probably articulated is to bring the size of the securities portfolio down relative to total assets. So -- and if you look at where the yield curve is and the inversion there, our expectation certainly over the next couple of quarters, if we have that amount of cash would be to keep it in cash and earn overnight rates on it. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst Got it. OK. And then just lastly, I appreciate the commentary around credit and kind of the outlook there. So is it fair to assume that you're still kind of targeting maybe mid-20 net charge-off level and kind of a provision that supports the reserve around this current level? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yes. Obviously, a volatile line item, Damon. And quarter to quarter, I'd expect some -- it's hard to be that precise on a quarter-to-quarter basis. But over the next couple of quarters, yes, on both the charge-off level and the provision. Damon DelMonte -- Keefe, Bruyette and Woods -- Analyst OK. Great. That's all that I have for now. Thanks. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thanks. Operator Thank you. Next question will be coming from the line of Laurie Hunsicker at Seaport Research. Please go ahead. Your line is open. Laurie Hunsicker -- Seaport Research Partners -- Analyst Yeah. Hi. hanks. Good morning. And Jim, I do want to say congrats. It's been really great working with you. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thank you, Laurie. Laurie Hunsicker -- Seaport Research Partners -- Analyst If we could just start with margins. So your 3% margin guide, how much accretion income is in that number? And do you have an accretion income figure that you can give us for the back half of '24 and into '25, especially as accretion income winds down, how should we be thinking about that? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Sure. Laurie, I'm laughing because I anticipated that question. You're sort of like, Mark asked the timing question, and you asked the accretion question, that -- I said that very folly, by the way. That's -- please take it the way that it's intended. Yes. Accretion is clearly a part of that. We are working through sort of how we would -- one of the problems we've got right now is rates are moving around. It's a little bit volatile. We're still a quarter away from closing. So it feels a little premature to put too much information about what the exact data play is now because it's going to be different. But we are sort of studying how we present that to you. And we'll follow up. I don't want to give you an answer off the top of my head because I think that's inappropriate. But we understand the question. We understand the importance of the question and it's something we spend a lot of time internally. So if you give us a little bit of time, we'll try and figure out how to give yourself and everybody sort of a better road map there. Laurie Hunsicker -- Seaport Research Partners -- Analyst OK. OK. And then sort of in line with that pro forma intangibles, do you have a number for us on that? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer We'll do that in the same way. I think our expectation -- and timing, again, makes this a little bit hard, right? If you go back to the original merger presentation, which was September 19, the pro forma tangible book value that we presented at that presentation, pretty confident it was $10.16, that's sort of at the end of the day, the tangible book value per share that was in the presentation. We're very comfortable it's going to be higher than that. Rates are moving around, both on the Eastern portfolio and obviously the Cambridge portfolio as well. So we're trying to figure out ways how best to present that. So at this point, I can say that we'll be higher than that and let us come back to you with some more thoughtful answers. Laurie Hunsicker -- Seaport Research Partners -- Analyst OK. OK. And then on office, and I really appreciate all the details you guys have added. What -- of your $668 million office book, how much is in nonperformers there? And any refresh on those loans that you can provide? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Yeah. So I think, yes, we can go through the history because it's a small size. There's been -- and I may miss like a small business loan somewhere, but I don't believe I am. We've had four nonperforming office loans. Three, we reported first in the third quarter of 2023. Two of those were sold one in the fourth quarter, one in this quarter, and the third one is -- this quarter, meaning the first quarter of '24. So let me say it again, the three NPLs from the third quarter of '23, one was sold in the fourth quarter of '23, one was sold in the first quarter of '24, and the third one will be sold in the second quarter of '24. In addition to that, we had a retail commercial real estate loan that went nonperforming in the fourth quarter of '24, and that's slated to be sold in the second quarter -- I'm sorry, the fourth quarter of '23, and we sold in the second quarter of '24. And this new nonperformer we're just getting started went nonperforming just recently. And it's an -- so four NPLs. Laurie Hunsicker -- Seaport Research Partners -- Analyst Yes, the suburban office that went into nonperforming that's in workout that you're hopefully getting rid of this quarter. How much was that? And then how much did you actually provision for it in this first quarter? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer So we don't like to give out specific customer information. But I would say this, it's a suburban office. It was the heaviest discounts to both our loan value and also the original purchase price of the building of all four. And it was in the provision and the charge-offs for this quarter of $7 million, most of that was concentrated in that asset. Laurie Hunsicker -- Seaport Research Partners -- Analyst Gotcha. OK. And then just last year, CATC, their office exposure, do you have anything refreshed that you could share with us on that, what their balance is currently, how their book is looking? Anything that you can share there? Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Sure. A little bit, right? Again, it's their information. But I think you can see from their public information, it's approximately $250 million in many ways, Cambridge Trust and Eastern were competitors in the commercial real estate arena. So we know many of those properties well. And I think our clear view is it's very similar to Easterns. Most of the loans that they originated had good underwriting characteristics and very similar to ours. The locations, there's some in Boston itself and some in the suburban areas. So the $250 million generally looks very similar to things that we would have expected and, quite frankly, look similar to our portfolio in many ways. And as I said -- I've said a couple of times, it will go through the -- as part of the mark-to-market process, it will be for both interest rates and credit. And we feel like we're developing a very good understanding of those assets. Laurie Hunsicker -- Seaport Research Partners -- Analyst Great. Perfect. Thanks for taking my questions. Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer Thanks, Laurie. Operator Thank you. There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks. Bob Rivers -- Chairman and Chief Executive Officer Well, thank you for your interest in your questions this morning, and we look forward to sharing more with you during our next earnings call at the end of July.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, ladies and gentlemen, and welcome to the Q1 2024 Live Oak Bancshares earning call. [Operator instructions] This call is being recorded on Thursday, April 25th, 2024. I would now like to turn the conference over to Greg Seward, general counsel and chief risk officer. Please go ahead. Greg Seward -- General Counsel and Chief Risk Officer Thank you, and good morning, everyone. Welcome to Live Oak's first-quarter 2024 earnings conference call. We are webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com and go to the Events and Presentations tab for supporting materials. Our first quarter earnings release is also available on our website. Before we get started, I'd like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. I'll now turn the call over to Chip Mahan, our chairman and chief executive officer. Chip Mahan -- Chairman and Chief Executive Officer Thanks, Greg. Good morning fellow shareholders, and welcome to our Q1 call. I'm going to kick things off this morning and discuss several areas noted on Slide 4. We will touch on first-quarter loan originations and our pipeline of future loans to be generated. As always, we will present a credit quality update along with a view of increased operating leverage based on investments we have made. Then we will discuss growth drivers by way of adding new lending officers and a new way of underwriting small loans. Then we'll wrap up with a few thoughts from our Annual Report as we look back these last 10 years. Moving to Slide 5. Before we dig in on asset quality, a word on originations in Q1. Originations this quarter were $805 million, a $176 million decrease from Q4 of last year and $226 million less than Q1 of 2023. That said, a number of larger loans slipped at the last minute. As of today, many of those have closed. We expect to catch up to our original budget by the end of this quarter, we expect a nice increase in originations over last year. Our overall pipeline is at an all-time high up 23% over last year. Back to this slide, again steady as she goes, as it relates to the top portion of this slide. The bottom half requires further explanation. Steve and his Credit Team have quarterly watch list meetings with all 75 baggers. As you recall, these folks are recent college graduates responsible for gathering financial statements on all 6,000 customers every 90 days. This deep dive includes a healthy portion of all of our employees who touch the customer. He leaves no stone unturned. As we examine our charge-offs, as it relates to our provisioning on the next slide, Steve has a proven track record of conservatism. The real answer to credit quality exists on Slide 6. Let us dig in on actuals these last 13 quarters. Our unguaranteed ACL reserves are almost 2.5% of unguaranteed loans and leases or twice industry norms. As the nation's No. 1 SBA lender, we have also evolved as one of the nation's preeminent cash flow lenders. With interest rates rising over 500 basis points, in a very short period of time, our approach seems prudent. We have added $101 million to our reserves these last seven quarters, while charging off just $27 million. This includes $7 million in a fraudulent national participation in Q3 of last year. One needs to let this marinate a bit. Steve will be happy to answer any questions in our upcoming Q&A session. Walt will walk you through the non-operating adjustments as we move to Slide 7. Needless to say, we are quite pleased to see a 26% increase in operating leverage from the first quarter of last year to Q1 of this year. This $8 million increase year over year should accelerate in the future. Our investments in next-gen technology allows us to better answer the question, we constantly hear from our customers, am I approved and when do I get the money. Our goal of never touching data twice is around the corner. Treating each customer like our only customer is how we are built. We're in constant search of ways to raise our NPS score, and we look forward to this year's results. As discussed on our last call, we're incredibly excited about changes made at the SBA that affect loans under $1 million and particularly loans under $500,000. Our tech teams are working 24x7 to automate this process, in a way never before contemplated. Those loans will be sold on the secondary market. As we scale, those gain on sale dollars will have a positive effect on this ratio. Moving to Slide 8. In this year's annual report, we thought it would be informative to look back over the last 10 years. In 2013, we were a $400 million bank with $50 million in capital. Just after receiving our charter in May of '08, the FDIC restricted our growth to no more than 25% per year until 2015. We took the company public two months later. In 10 years, we have grown to $11 billion bank with almost $1 billion of capital. Assets have grown 39% year over year, while capital has grown a compounded 34% in those 10 years. Tangible book value has grown from $2.36 per share to $20.32 per share, a 10 times increase over the period. While we are not suggesting that the past is a proxy for the future, steady organic non-dilutive growth has been our mantra from inception. The rest of this slide shows how we got there. About $0.5 billion of organic earnings growth since the last time we had to access the capital markets back in 2017, driven by our core business earnings along with $207 million in gains from FinTech activities related to Finxact, Greenlight and Payrailz. Lastly, on Slide 9. Our increase in tangible book value compared to others in the KBW coverage universe, is in a class by itself. We are up over 700%, while the KBW coverage median has grown one-tenth of that. And with that, I will turn things over to Walt. Walt Phifer -- Chief Financial Officer Thank you, Chip, and good morning, everyone. I'll start today with a high-level review of Q1 on Slide 11. Our core financial objectives remain consistent with what we have discussed over recent calls, protect our credit vault, utilize pricing discipline to expand our net interest income and net interest margin, moderate expense growth yet remain opportunistic to add good costs and grow the business. Top-line figures show EPS of $0.36, a healthy net interest margin of 3.33%, a 42% quarter-over-quarter growth in reported PPNR, a 2% quarter-over-quarter loan growth, and a 7% increase quarter over quarter in our business deposits portfolio. From a soundness perspective, our small business borrowers continue to be resilient and maintain the eye of the tiger mindset, despite a challenging higher for longer rate environment, thus put pressure on some of the loans originated back in the lower rate years of 2020 and 2021. Our credit performance continues to remain within our expectations, and we remain confident in our portfolio strength and proactive monitoring. More on credit shortly. Our liquidity profile remains robust, with low uninsured deposits compared to the rest of the industry and three to one available liquidity capacity to those uninsured deposits. Our capital levels remain strong and have seen three consecutive quarters of capital ratio accretion. From a profitability perspective, our core business continues to perform well, as Chip mentioned, with a 26% year-over-year increase in core operating earnings. This growth reflects our focused initiatives to grow revenues, at a faster pace on our expenses, as we scale into the strategic hiring investments made over the past few years. Our 1% quarter-over-quarter increase in net interest income and 1 basis point quarter-over-quarter increase in net interest margin was in-line with our expectations. We will speak more on NIM in the upcoming slides. From a growth perspective, on the lending front, we remain the nation's largest SBA lender in terms of balanced volume thus far in the SBA fiscal year. Loan originations have a seasonal component with Q1 typically resulting in the lowest quarter of originations each year. And as Chip mentioned, a good portion of the loans that pushed to the right have already closed thus far in Q2. Our $3.2 billion pipeline remains at all-time highs as our lenders continue to do a fantastic job at sourcing new opportunities in a very competitive environment. Our ability to calibrate deposit growth to support our loan growth remains a strength. Customer deposits grew 4% quarter over quarter, primarily in our business deposit sector. This allowed us to reduce our more expensive brokered funding by 7% quarter over quarter. A couple of quick notes on Slides 12 and 13. Slide 12 highlights that roughly two-thirds of our $805 million of loan origination in Q1 2024 was in our small business banking space. As you can see on the top right, the bulk of the difference versus Q1 2023, was in the specialty and energy infrastructure business units. We also may view this as a timing difference, as these deals tend to be larger and more fluid in their estimated closing dates, and as such can easily push from one quarter to another quarter. We are also in the early days of our focus on small SBA 7(a) loans. Thus far, we have generated $13 million of small loan SBA 7(a) production year to date, and continue to see that pipeline increase. As Chip mentioned, as we work to automate the application documentation and decisioning process of our SBA-origination platform, we are excited as to what possibilities that provides for small loan 7(a) originations and the subsequent gain on sale income. Slide 13 highlights the quarter-over-quarter loan growth by component. It is important to note that prior to our typical sales and participations activity, our loan portfolio growth was 5% quarter over quarter, as new fully funding originations and construction loans continue to drive balanced growth. Our pipeline and portfolio activity suggest that a low double-digit full-year growth rate remains a reasonable loan growth expectation. Our deposit trends are highlighted on Slide 14. I've long viewed our funding model as a strength. Our branchless funding platform is extremely efficient with a ratio of approximately 5,000 deposit accounts to one customer success representatives and the expense of funds that typically ranges from 10 basis points to 20 basis points. And by the way, our customer calls are typically answered within a minute by a live customer service team that has a 93% plus first call resolution average, all while our competitive rate position ensures our customers are receiving market pricing regardless of the interest rate environment. As evidence of this strength, our total deposits increased to roughly $10.5 billion in Q1 2024, a $1 billion or 10% increase year over year. Customer deposit growth has been predominantly driven by our business deposits both in savings and CDs. Our overall customer deposit funding mix of 63% savings, 34% CDs, and 3% non-interest bearing has held constant over the past year, as we have not yet seen the migration in term deposits that many in the industry have begun to experience. Given the uncertainty of the Fed outlook, we continue to like our funding portfolio's short-term positioning. Our business checking product launched in Q4 2023 and while we are in the early days of rolling this product out, we have seen positive momentum thus far. Our expectation was that this was going to be a crawl, walk, run sort of pace, and we're optimistic with regards to this product's trajectory and its potential impact on our profitability as it scales to a larger portion of our funding mix over time. Slide 15 highlights our net interest income, NIM, and yield trends. As mentioned earlier our Q1 2024 net interest income was slightly up linked quarter, and our net interest margin improved by 1 basis point to 3.33%. As mentioned in our last call, pressure on net interest income growth in Q1 was expected as we had a large CD maturity event with an average renewal rate increase of 61 basis points. On the pricing front, our lenders continue to hold the line on spreads in a tougher, higher for longer rate environment, while many of our competitors are pricing well below prime. Our average yield on new production in Q1 was 9.12% or just above prime plus 60 basis points. Our average portfolio loan yield increased to 7.77% in Q1, up 16 basis points from Q4. As for deposit pricing, the average cost of funds increased over the last two quarters has largely been a result of our CD portfolio maturities and repricing. These maturity events have provided net interest income and net interest margin headwinds in Q4 2023 and Q1 2024, but they could ultimately provide future tailwinds if the Fed cuts later in 2024 or 2025. We have not raised our business savings rate since March of 2023 and have not raised our personal savings rate since November of 2023. At the same time we actually have been fortunate to begin lowering our CD rate offerings recently, as the market has begun to reprice its CD rates downward, as they try to shorten their funding portfolio, discourage funding migration to term deposits, and push customers to their more variable nation deposit offerings. Make no mistake that the market remains highly competitive, but it continues to show signs of rational pricing, which is encouraging. So what happens to our funding costs if or when the Fed cuts rates? Many banks throughout the industry, still expect rising funding costs even if the Fed cuts rate as the current offerings are still well below market competitive. This is evidenced by the national average savings rate still remaining just shy of 50 basis points, while most digital banks have offerings north of 400 basis points. We will assess the drivers of the Fed cuts, the competitive market, and our funding needs, yet ultimately expect the digital deposit market to react fairly, quickly and its downward repricing and we'll do the same. Lastly, given the recent inflation and Fed outlook news, let us quickly revisit our net interest income and margin expectations communicated by BJ, and myself over the past few calls. We've communicated that our net interest income and margin are expected to migrate up and to the right over 2024, albeit not in a linear fashion with more improvement in the back half of 2024. This expectation included returning to a NIM range of 3.50% to 3.75% by the end of the year and a high single-digit to low double-digit growth in 2024 net interest income relative to full year 2023, barring any unforeseen liquidity stress events. That guidance was based on three Fed cuts in the second half of 2024. And while we are optimistic that we will continue on up and to the right journey with our margin over time, the slope of that up and to the right trajectory for both net interest income and NIM, they flattened with less or no rate cuts, driving us toward the lower end of the expected range by the end of the year. Time will tell. Quarter-over-quarter fee income is outlined on Slide 16. We continue to be encouraged by improvement in the SBA secondary market in Q1. There is a good amount of liquidity in the market and stabilization in February aided the improvement on our average premium from 5 points to 7 points on loans sold. As you can see in the bottom table, our Q1 sales volume is typically lower than the rest of the year, followed by a slight stair-step up in Q2 through Q4. We expect 2024 to be no different. Gain on sale providing for roughly 8% to 12% of quarterly total revenues continues to feel like the right range at this point in time. As I mentioned in our last call, we were able to sell our first two USDA loans for the first time in over seven quarters, as asset sensitive banks begin to consider downward rate protection. We're excited about this development, but one quarter is not a trend. And as the timing of our USDA originations can be choppy, so will our USDA sales activity. Turning to expenses on Slide 17. Our Q1 2024 expenses of $79 million were up 7% quarter over quarter, though were essentially flat to Q1 2023. Quarter-over-quarter growth was driven by incremental personnel cost, such as 2024 hires, our annual salary merit adjustments, 2023 restricted stock unit awards, and accruals related to our 2024 employee bonus expectations. FTE growth for good costs with the addition of two senior loan officers, closing staff focused on small SBA 7(a) loans, and servicing internal audit and risk personnel to support our growth and complexity. We continue to operate as a growth organization, and we'll remain focused on adding revenue generators and other good costs as needed. If there are still opportunities to find efficiencies and scale in technology and support areas through automation and process improvements that will help manage expense growth going forward. Thus continuing to provide improvement in our operating leverage. Additional credit trends are included on Slide 18. Our $16 million provision was primarily attributed to portfolio macroeconomic changes, specifically the impact on customer cash flows from a higher for longer rate environment. Past dues are not materially outline with prior quarters and although non-accruals are up, as expected in the current environment, we still feel that these levels are manageable. As Steve can expand on in Q&A, we continue to actively monitor the existing portfolio, have yet to see any notable surprises outside of our expectations, and do not currently see any significant weak spots. Our trademark proactive direct servicing approach has and will continue to serve us well. In Q1 2024 alone, we spent approximately 40 hours over seven business days reviewing almost 500 presentations from 100 of our relationship managers on more than 700 of our credits to understand their specific situations and status. I continue to be impressed by our credit and servicing team's commitment to excellence and discipline in their respective areas. Our credit ball is in good hands. With 37% of our loan book government guaranteed, a strong capital and liquidity profile, a reserve to unguaranteed loans and leases ratio that is two times the industry median, a predominantly owner-occupied CRE portfolio that's 45% government guaranteed and our historical charge-off rate being a fraction of our current allowance, we remain confident in our reserve and portfolio's credit strength. Lastly, Slide 19 highlights our overall capital strength, which remains robust both in terms of regulatory ratios, as well as from the unguaranteed loan perspective, what we if actually call The Mahan Ratio. As you may have noticed in the earnings release, we did originate a $100 million term loan in Q1 2024 with the purpose of downstreaming the funds to our bank subsidiary to position our bank-level capital ratios for the anticipated growth to come. Our earnings over the last three quarters provides us with confidence in our ability to continue to support our growth through organic earnings as we have over the last six-plus years, while positioning ourselves to be able to weather whatever storms lie ahead. Thank you for joining us this morning. And with that, we're happy to take questions. Questions & Answers: Operator Thank you. [Operator instructions] First question comes from Steven Alexopoulos from J.P. Morgan. Please go ahead. Alex Lau -- J.P. Morgan -- Analyst Hi. Good morning. This is Alex Lau on for Steve. Steve Smits -- Chief Credit Officer Good morning, Alex. Chip Mahan -- Chairman and Chief Executive Officer Good morning, Alex. Alex Lau -- J.P. Morgan -- Analyst My first question is on credit. Can you share some color on the loans that you built specific reserves for in the quarter? And what is your outlook for the health of these credits in the related industries? Steve Smits -- Chief Credit Officer Yes. This is Steve Smits, I'll take that one. So these are predominantly main street SBA borrowers that are struggling with the higher rate environment and the impact to their overall debt obligations. So we've put impairments on these loans as we navigate. But as Walt had mentioned, we continue to stay very focused and close to them in our servicing, and we will continue to work through them. But with the uncertainties in the economic outlook going forward, how long rates will remain high, prudent steps to put the reserves today and continue to work with them to rehabilitate and work through these challenges. What gives me some comfort is that these really were not surprises. And these were borrowers that we were aware. We're experiencing challenges and struggles. So that bodes well to our servicing and being on top of understanding the challenges our borrowers are working through. So no huge surprises, but we will continue to work through them. Alex Lau -- J.P. Morgan -- Analyst Thank you. And I wanted to ask about expenses. So what is your expense outlook range for 2024 considering a baseline growth rate? And if there are opportunities to add more revenue producers, where would that expense range be? Thank you. Walt Phifer -- Chief Financial Officer Yes, it's a good question, Alex. This is Walt. So from expectations for 2024 baseline, we think a high single digits is reasonable given that we still remain that growth organization. To the extent that if we can hire revenue generators, what does that become? Does it move to low-single digit, perhaps right? I think there is still some efficiencies that we can look at. So -- and then obviously, it depends on how many revenue generators we can add. So to the extent that, that goes into low-single digits, mid-teens, I personally don't see that as a problem if it's all revenue generators because it's going to generate revenue and help with on the operating leverage side. Alex Lau -- J.P. Morgan -- Analyst Thank you for answering my question. Operator Thank you. Next question comes from Brandon King from Truist. Please go ahead. Brandon King -- Truist Securities -- Analyst Hi. Good morning. Chip Mahan -- Chairman and Chief Executive Officer Hi, Brandon. Brandon King -- Truist Securities -- Analyst So could you square away the commentary around the pipeline being stronger than ever, but we hear more and more how these higher rates are impacting just smaller business demand. So could you talk about what you're seeing within your customer base, what's driving these strong pipelines just relative to these higher rates potentially impacting demand and obviously credit as well? BJ Losch -- President Yes. Brandon, it's BJ. So I think, what we are seeing is an expectation level setting or kind of a realization if you will, of buyers and sellers, particularly in the SBA space, kind of getting on common ground on what valuation should be given the rapid increase in rates that happened over the last 18 months or so. So last year was kind of an interesting one in terms of sellers having expectations of valuations pre-increase in rates and buyers looking at their borrower base and what they could actually afford to pay. And so there were some disconnects there. There will continue to be high activity. But a lot of what we saw coming through our pipelines actually fell out of closing because buyers and sellers couldn't come to terms. We're seeing that true up a little bit more now. So rates are generally steady. Borrowers understand what their cash flow coverage is going to be, and can forecast that a little bit better. And so we are seeing much better pull-through activity, as we look at the pipeline. Now how -- what Walt said is true is in the first quarter, you'll see that our originations were largely flat quarter over quarter -- excuse me, year over year in SBA. They were down meaningfully in specialty finance and E&I, which we've already seen come back here in the second quarter. We do expect stronger SBA, small business volume in the second quarter in addition to that specialty and E&I. So we are pretty excited about what we are seeing going forward, and we expect to continue to see more growth with the existing business that we've got. As Walt talked about, we are always, always, always in the market for high-quality revenue producers. We're a growing company. We'd love to see more lenders come on to our platform, and we are actively looking for those. So you'll continue to see us invest there. Chip Mahan -- Chairman and Chief Executive Officer Just one other thing on that, Brandon. I have always felt in our business, the banking business, that banks are sold and not bought. Bank Boards have a certain expectation, I'm going to sell my back for two and a half times book and market in there, and [Inaudible] sell the bank. And I think that's what has happened, particularly in the M&A business space. The silver tsunami is expecting a certain price. Numbers don't pencil. Silver tsunami is running out of runway. Speaking as one of those silver tsunami guys, and it could come with realization that I'm not going to get two and a half times book, I'm going to get two times book and I better take it now. So I think our guys were saying and the phones are ringing and the phones are ringing. That's the reason that the pipe is up 26% or 23% or whatever it was. Brandon King -- Truist Securities -- Analyst OK. That makes sense. And then as far as the new commentary, it sounds like if we are in kind of the least stable rate environment, you're going to reach the low end of that 3.50%, 3.70% range by 4Q. But what is implied in your outlook for deposit costs within that guidance? Are you expecting deposit costs to be potentially stable from here? Or what sort of creep are you expecting on the deposit cost front? Walt Phifer -- Chief Financial Officer Hi, Brandon, it's Walt. So from a savings perspective, we expect it essentially to stabilize both on the personal and the business side. In that guidance, that gets us back toward that 3.50%, 3.75% range toward Q4. We still have two expected Fed cuts, which obviously -- our savings will respond accordingly. Those cuts I believe, are September and November in our current model. And then from a CD front, like I mentioned in the call, we've been able to reduce our CD rates thus far. I don't -- I think it largely will depend on how the market moves. Digital market typically on CD pricing will reprice ahead of Fed expectations. And then the gap between our renewal -- our maturing CD rates and our renewal rates, it's much less as we get further through the year, just given we were pricing our 12 month, which is our largest CD offering in Q3 and Q4 last year at the 5.25%, 5.30% mark. Brandon King -- Truist Securities -- Analyst OK. OK. So it sounds like interest-bearing checking and savings and money market are kind of least stable from here until Fed rate cuts and then CDs are marching toward that 5.20% would be the best way to frame it. Walt Phifer -- Chief Financial Officer Yes. I think I would frame it more -- yes, they're marching toward our current rate offerings today. Brandon King -- Truist Securities -- Analyst OK. Got it. Thanks for answering my questions. I'll hop back in queue. Walt Phifer -- Chief Financial Officer Thank you. Operator Thank you. Next question comes from Tim Switzer at [Ianudible]. Please go ahead. Tim Switzer -- KBW -- Analyst Hi. Good morning thank you for taking my questions. I had a quick follow-up on your commentary on the NIM and deposits. What's kind of the deposit beta you guys are assuming on the initial rate cuts, say, we get one or two cuts in the back half of '24? What's your initial expectation there? And then how could the beta possibly accelerate as we move through the cycle if we get a series of cuts? Walt Phifer -- Chief Financial Officer Yes. Great question. From a beta perspective, the bank here has been about 15 years old. So we have seen a lot of robust downward cycles. The last time the rates came down, our deposit pricing digital market acted pretty rational. From a beta perspective early on, will probably be somewhere in the 50% to 70% range. It could be a potential lag, whether it's one month or so. On the CD side, that's a typically 80% beta or so and that will -- we're pretty confident that will hold given the way CD market typically is very reactive. As you kind of move forward, as you saw kind of with rates between they own or when rates were rising, cumulative betas rose, we think our cumulative betas will also increase on the savings side as well. But largely will depend on how essentially the overall market reacts. Tim Switzer -- KBW -- Analyst OK. Got it. And then I also wanted to ask about your expectations around SBA margins, the secondary market demand kind of a good lift in the premiums this quarter. But now with rate cuts being pushed a little bit further out, interest rates moving higher, has that kind of moderated demand or the premiums for you? And what are your expectations once you get either stabilization or cut in rates? Walt Phifer -- Chief Financial Officer Yes. The secondary market tends to look at the forward curve. So the 105, there's a 107 improvement that we saw here in Q1. I think we'll stay in that range especially now given with potentially later Fed cuts, though, I think of the last six quarters or so and say, hey, that's probably a reasonable expectation for right now. As far as demand, demand is strong. The liquidity is strong in the market. So we're not having issues as far as selling and executing those sales. I think as the rates come down, we typically will see an improvement. Hard to say right now that improvement is drastic. But I think from a reasonable expectation, sticking that 105 to 107 range, at least through the next few quarters, feels right. Tim Switzer -- KBW -- Analyst OK. Great. That's all for me. Thank you. Operator Thank you. [Operator instructions] Next question comes from David Feaster at Raymond James. Please go ahead. David Feaster -- Raymond James -- Analyst Hi. Good morning everybody. BJ Losch -- President Good morning David. David Feaster -- Raymond James -- Analyst Maybe just -- I'd like to touch on the small loan automation. You guys touched a bit about it in your prepared remarks. I'm just curious, where are we in that build out? What's left there? And then -- I mean, are there any other investments or back office build-out that we need? And when do you maybe expect that we could start beta testing that or rolling it out more broadly? BJ Losch -- President Hi David. Good morning. It's BJ. So we have already started originating small dollar SBA loans. Right now, it's mainly through a small team that we put together. So I think we've got $12 million or $13 million booked to another pipeline about that size. So a good start. We had not opened it up to all of our lenders yet. We're getting ready to do that. But we've got two major technology/credit enhancements that we're looking at before we really open up the flood gates. One is a digital application, which we are expecting to have later in the second quarter, early third quarter. So that will be a big deal because that will automate the front end, make it very easy for our borrowers, our referral sources or our lenders to put small-dollar loans through our pipeline. That will be very helpful. The second is automated credit scoring. We will not go 100% automated credit scoring, but we are looking at streamlining the process for these small dollar loans to be able to get more through our system. So we're really excited about this. This has always been something that was available that other SBA lenders do, but we have tended to do larger dollar credits. We're very happy to provide access to capital for small business owners, and this very much aligns with what the FDA and the current administration are looking for from us and the industry. So we are excited about that. And it just adds to our ability to serve more and more small business customers. So more to come on this, but we expect it to really start to ramp toward the back half of the year. David Feaster -- Raymond James -- Analyst And is the plan still to sell all of that production? And where are gain on sale of smaller dollar relative to what you typically sell? Walt Phifer -- Chief Financial Officer Hi Dave, this is Walt. Yes, the plan is 100% sales model related to small loan SBA. Premiums, their range typically anywhere from 110 to 113 depending on your spreads. But historically, those have held true. The secondary market views those loans as kind of the credit loan because you can essentially create larger pools with more diversification. So high demand, good premiums, historically, and we expect those -- or expect that to continue to go forward. David Feaster -- Raymond James -- Analyst Got it. And then maybe switching gears back to the business deposit growth. I mean, first off, I guess, could you remind us where pricing is on those products? And then where would you characterize we are at this point? We've seen obviously nice growth. But are we still crawling from your perspective? And maybe when do you think that we shift to walking or even start running? Walt Phifer -- Chief Financial Officer I'll start. Yes. Dave, this is Walt. So on our business price -- or business deposit pricing, our savings is at 4%. Our CDs are the same, as our personal CD rate offerings. And then obviously you have a non-interest bearing checking. As far as the kind of where we are in the crawl-walk run, I'd say we're very much in the crawl stage. I think we are working as aggressively as we can to sell those to our existing customers as well to new customers. I think it will take time to ramp on the checking side, just where we are in the market right now where essentially depositors can get very nice rates on the interest-bearing side. BJ Losch -- President Yes, I think just to clarify. We are on a crawl as it relates to checking. And there is a long runway there. We are absolutely sprinting on business deposits. We've got a very strong offering there. We've got a great brand reputation. The growth in business deposits is incredibly strong. So we expect that to continue. Chip Mahan -- Chairman and Chief Executive Officer Yes. I would just add that -- David, this is Chip. So I would just add this right -- that we have been primarily a lending company for 15 years. And a lot of our SBA, particularly the generalists, have been SBA-commissioned loan producers. And now that we have a checking account product that is second to none in the industry, it's been a bit of an educational process, particularly for instance, if we are funding an acquisition and the money goes to the seller. We need to convince our customer, who is the buyer to bank with us that we are a bank this time. We're not just a lending company. And there is a -- that piece in that education is in the educational area in early days, and I would still put that piece in the crawl area. We can get better there -- and we will get better there. David Feaster -- Raymond James -- Analyst That makes sense. And honestly, that might play into -- as you do more conventional lending, play into more of that growth. And so maybe touching on the conventional lending side. Looking at one of your charts, it looks like you've seen a decent amount of growth on that front. There is obviously a hyper focus on the CRE front. I'm just curious, what are you targeting on the conventional side at this point? How is that going? And then how do you just think about growth of conventional production and shifting underwriting standards in credit quality there? BJ Losch -- President We're really excited about what we're doing on the conventional lending side. We've transported our theory of verticality from the SBA side over to the specialty side, which we think is incredibly important to be very expert in the verticals that we go after so that we can add value as an $11 billion bank on larger credits relative to just being a bank that's a generalist-type calling effort. And I think, we've been incredibly successful there so far. We've got an excellent sponsor finance business. We have a venture banking vertical, which makes sense with our organization, seniors housing, commercial real estate, specialty healthcare. So we are trying to be very niche oriented in how we grow that. And over the last five years, we have grown our specialty finance business ten-fold in terms of outstandings. And what that's also allowed us to do is have credit be comfortable with the credits that we're doing in those verticals because we're, by and large, seeing the same types of deals as opposed to again having a generalist calling effort on the conventional side, which could be more difficult to underwrite and approve. So we are pretty bullish on what we can do to grow that responsibly. And in addition to that, talking going back to the deposit side and the checking side, it is very common to do a conventional loan deal and ask for the deposits. And so from that perspective, we are having great success starting to build out our deposit, our checking platform on the specialty conventional side because our borrowers are used to being asked for the deposit. So we're going to build our book there probably quicker, frankly, than we're going to build it on the small business side, and we're starting to see the fruits of that labor. Chip Mahan -- Chairman and Chief Executive Officer Just one addition to that, David, this is Chip -- is it has been really, really fun for my co-founders, David Lucht and Lee Williams and I. We kind of view this from our perspective as regression to the norm. We came up with this idea to create a bank that's the porter-led of the banking business in the SBA area. All of a sudden, we get to use our 50 years' experience of being actually C&I lenders ourselves. So this is a bit again -- a regression to the norm for us. David Feaster -- Raymond James -- Analyst Getting back to your roots. That's great. Appreciate all the color. Thanks, everybody. Chip Mahan -- Chairman and Chief Executive Officer Thank you. Operator Thank you. We have no further questions. I will turn the call back over to Chip Mahan for final comments. Chip Mahan -- Chairman and Chief Executive Officer As always, we appreciate your attention today and look forward to seeing you again in 90 days. Thanks for coming. Answer:

the Q1 2024 Live Oak Bancshares earning call

Operator Good morning, ladies and gentlemen, and welcome to the Q1 2024 Live Oak Bancshares earning call. [Operator instructions] This call is being recorded on Thursday, April 25th, 2024. I would now like to turn the conference over to Greg Seward, general counsel and chief risk officer. Please go ahead. Greg Seward -- General Counsel and Chief Risk Officer Thank you, and good morning, everyone. Welcome to Live Oak's first-quarter 2024 earnings conference call. We are webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com and go to the Events and Presentations tab for supporting materials. Our first quarter earnings release is also available on our website. Before we get started, I'd like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. I'll now turn the call over to Chip Mahan, our chairman and chief executive officer. Chip Mahan -- Chairman and Chief Executive Officer Thanks, Greg. Good morning fellow shareholders, and welcome to our Q1 call. I'm going to kick things off this morning and discuss several areas noted on Slide 4. We will touch on first-quarter loan originations and our pipeline of future loans to be generated. As always, we will present a credit quality update along with a view of increased operating leverage based on investments we have made. Then we will discuss growth drivers by way of adding new lending officers and a new way of underwriting small loans. Then we'll wrap up with a few thoughts from our Annual Report as we look back these last 10 years. Moving to Slide 5. Before we dig in on asset quality, a word on originations in Q1. Originations this quarter were $805 million, a $176 million decrease from Q4 of last year and $226 million less than Q1 of 2023. That said, a number of larger loans slipped at the last minute. As of today, many of those have closed. We expect to catch up to our original budget by the end of this quarter, we expect a nice increase in originations over last year. Our overall pipeline is at an all-time high up 23% over last year. Back to this slide, again steady as she goes, as it relates to the top portion of this slide. The bottom half requires further explanation. Steve and his Credit Team have quarterly watch list meetings with all 75 baggers. As you recall, these folks are recent college graduates responsible for gathering financial statements on all 6,000 customers every 90 days. This deep dive includes a healthy portion of all of our employees who touch the customer. He leaves no stone unturned. As we examine our charge-offs, as it relates to our provisioning on the next slide, Steve has a proven track record of conservatism. The real answer to credit quality exists on Slide 6. Let us dig in on actuals these last 13 quarters. Our unguaranteed ACL reserves are almost 2.5% of unguaranteed loans and leases or twice industry norms. As the nation's No. 1 SBA lender, we have also evolved as one of the nation's preeminent cash flow lenders. With interest rates rising over 500 basis points, in a very short period of time, our approach seems prudent. We have added $101 million to our reserves these last seven quarters, while charging off just $27 million. This includes $7 million in a fraudulent national participation in Q3 of last year. One needs to let this marinate a bit. Steve will be happy to answer any questions in our upcoming Q&A session. Walt will walk you through the non-operating adjustments as we move to Slide 7. Needless to say, we are quite pleased to see a 26% increase in operating leverage from the first quarter of last year to Q1 of this year. This $8 million increase year over year should accelerate in the future. Our investments in next-gen technology allows us to better answer the question, we constantly hear from our customers, am I approved and when do I get the money. Our goal of never touching data twice is around the corner. Treating each customer like our only customer is how we are built. We're in constant search of ways to raise our NPS score, and we look forward to this year's results. As discussed on our last call, we're incredibly excited about changes made at the SBA that affect loans under $1 million and particularly loans under $500,000. Our tech teams are working 24x7 to automate this process, in a way never before contemplated. Those loans will be sold on the secondary market. As we scale, those gain on sale dollars will have a positive effect on this ratio. Moving to Slide 8. In this year's annual report, we thought it would be informative to look back over the last 10 years. In 2013, we were a $400 million bank with $50 million in capital. Just after receiving our charter in May of '08, the FDIC restricted our growth to no more than 25% per year until 2015. We took the company public two months later. In 10 years, we have grown to $11 billion bank with almost $1 billion of capital. Assets have grown 39% year over year, while capital has grown a compounded 34% in those 10 years. Tangible book value has grown from $2.36 per share to $20.32 per share, a 10 times increase over the period. While we are not suggesting that the past is a proxy for the future, steady organic non-dilutive growth has been our mantra from inception. The rest of this slide shows how we got there. About $0.5 billion of organic earnings growth since the last time we had to access the capital markets back in 2017, driven by our core business earnings along with $207 million in gains from FinTech activities related to Finxact, Greenlight and Payrailz. Lastly, on Slide 9. Our increase in tangible book value compared to others in the KBW coverage universe, is in a class by itself. We are up over 700%, while the KBW coverage median has grown one-tenth of that. And with that, I will turn things over to Walt. Walt Phifer -- Chief Financial Officer Thank you, Chip, and good morning, everyone. I'll start today with a high-level review of Q1 on Slide 11. Our core financial objectives remain consistent with what we have discussed over recent calls, protect our credit vault, utilize pricing discipline to expand our net interest income and net interest margin, moderate expense growth yet remain opportunistic to add good costs and grow the business. Top-line figures show EPS of $0.36, a healthy net interest margin of 3.33%, a 42% quarter-over-quarter growth in reported PPNR, a 2% quarter-over-quarter loan growth, and a 7% increase quarter over quarter in our business deposits portfolio. From a soundness perspective, our small business borrowers continue to be resilient and maintain the eye of the tiger mindset, despite a challenging higher for longer rate environment, thus put pressure on some of the loans originated back in the lower rate years of 2020 and 2021. Our credit performance continues to remain within our expectations, and we remain confident in our portfolio strength and proactive monitoring. More on credit shortly. Our liquidity profile remains robust, with low uninsured deposits compared to the rest of the industry and three to one available liquidity capacity to those uninsured deposits. Our capital levels remain strong and have seen three consecutive quarters of capital ratio accretion. From a profitability perspective, our core business continues to perform well, as Chip mentioned, with a 26% year-over-year increase in core operating earnings. This growth reflects our focused initiatives to grow revenues, at a faster pace on our expenses, as we scale into the strategic hiring investments made over the past few years. Our 1% quarter-over-quarter increase in net interest income and 1 basis point quarter-over-quarter increase in net interest margin was in-line with our expectations. We will speak more on NIM in the upcoming slides. From a growth perspective, on the lending front, we remain the nation's largest SBA lender in terms of balanced volume thus far in the SBA fiscal year. Loan originations have a seasonal component with Q1 typically resulting in the lowest quarter of originations each year. And as Chip mentioned, a good portion of the loans that pushed to the right have already closed thus far in Q2. Our $3.2 billion pipeline remains at all-time highs as our lenders continue to do a fantastic job at sourcing new opportunities in a very competitive environment. Our ability to calibrate deposit growth to support our loan growth remains a strength. Customer deposits grew 4% quarter over quarter, primarily in our business deposit sector. This allowed us to reduce our more expensive brokered funding by 7% quarter over quarter. A couple of quick notes on Slides 12 and 13. Slide 12 highlights that roughly two-thirds of our $805 million of loan origination in Q1 2024 was in our small business banking space. As you can see on the top right, the bulk of the difference versus Q1 2023, was in the specialty and energy infrastructure business units. We also may view this as a timing difference, as these deals tend to be larger and more fluid in their estimated closing dates, and as such can easily push from one quarter to another quarter. We are also in the early days of our focus on small SBA 7(a) loans. Thus far, we have generated $13 million of small loan SBA 7(a) production year to date, and continue to see that pipeline increase. As Chip mentioned, as we work to automate the application documentation and decisioning process of our SBA-origination platform, we are excited as to what possibilities that provides for small loan 7(a) originations and the subsequent gain on sale income. Slide 13 highlights the quarter-over-quarter loan growth by component. It is important to note that prior to our typical sales and participations activity, our loan portfolio growth was 5% quarter over quarter, as new fully funding originations and construction loans continue to drive balanced growth. Our pipeline and portfolio activity suggest that a low double-digit full-year growth rate remains a reasonable loan growth expectation. Our deposit trends are highlighted on Slide 14. I've long viewed our funding model as a strength. Our branchless funding platform is extremely efficient with a ratio of approximately 5,000 deposit accounts to one customer success representatives and the expense of funds that typically ranges from 10 basis points to 20 basis points. And by the way, our customer calls are typically answered within a minute by a live customer service team that has a 93% plus first call resolution average, all while our competitive rate position ensures our customers are receiving market pricing regardless of the interest rate environment. As evidence of this strength, our total deposits increased to roughly $10.5 billion in Q1 2024, a $1 billion or 10% increase year over year. Customer deposit growth has been predominantly driven by our business deposits both in savings and CDs. Our overall customer deposit funding mix of 63% savings, 34% CDs, and 3% non-interest bearing has held constant over the past year, as we have not yet seen the migration in term deposits that many in the industry have begun to experience. Given the uncertainty of the Fed outlook, we continue to like our funding portfolio's short-term positioning. Our business checking product launched in Q4 2023 and while we are in the early days of rolling this product out, we have seen positive momentum thus far. Our expectation was that this was going to be a crawl, walk, run sort of pace, and we're optimistic with regards to this product's trajectory and its potential impact on our profitability as it scales to a larger portion of our funding mix over time. Slide 15 highlights our net interest income, NIM, and yield trends. As mentioned earlier our Q1 2024 net interest income was slightly up linked quarter, and our net interest margin improved by 1 basis point to 3.33%. As mentioned in our last call, pressure on net interest income growth in Q1 was expected as we had a large CD maturity event with an average renewal rate increase of 61 basis points. On the pricing front, our lenders continue to hold the line on spreads in a tougher, higher for longer rate environment, while many of our competitors are pricing well below prime. Our average yield on new production in Q1 was 9.12% or just above prime plus 60 basis points. Our average portfolio loan yield increased to 7.77% in Q1, up 16 basis points from Q4. As for deposit pricing, the average cost of funds increased over the last two quarters has largely been a result of our CD portfolio maturities and repricing. These maturity events have provided net interest income and net interest margin headwinds in Q4 2023 and Q1 2024, but they could ultimately provide future tailwinds if the Fed cuts later in 2024 or 2025. We have not raised our business savings rate since March of 2023 and have not raised our personal savings rate since November of 2023. At the same time we actually have been fortunate to begin lowering our CD rate offerings recently, as the market has begun to reprice its CD rates downward, as they try to shorten their funding portfolio, discourage funding migration to term deposits, and push customers to their more variable nation deposit offerings. Make no mistake that the market remains highly competitive, but it continues to show signs of rational pricing, which is encouraging. So what happens to our funding costs if or when the Fed cuts rates? Many banks throughout the industry, still expect rising funding costs even if the Fed cuts rate as the current offerings are still well below market competitive. This is evidenced by the national average savings rate still remaining just shy of 50 basis points, while most digital banks have offerings north of 400 basis points. We will assess the drivers of the Fed cuts, the competitive market, and our funding needs, yet ultimately expect the digital deposit market to react fairly, quickly and its downward repricing and we'll do the same. Lastly, given the recent inflation and Fed outlook news, let us quickly revisit our net interest income and margin expectations communicated by BJ, and myself over the past few calls. We've communicated that our net interest income and margin are expected to migrate up and to the right over 2024, albeit not in a linear fashion with more improvement in the back half of 2024. This expectation included returning to a NIM range of 3.50% to 3.75% by the end of the year and a high single-digit to low double-digit growth in 2024 net interest income relative to full year 2023, barring any unforeseen liquidity stress events. That guidance was based on three Fed cuts in the second half of 2024. And while we are optimistic that we will continue on up and to the right journey with our margin over time, the slope of that up and to the right trajectory for both net interest income and NIM, they flattened with less or no rate cuts, driving us toward the lower end of the expected range by the end of the year. Time will tell. Quarter-over-quarter fee income is outlined on Slide 16. We continue to be encouraged by improvement in the SBA secondary market in Q1. There is a good amount of liquidity in the market and stabilization in February aided the improvement on our average premium from 5 points to 7 points on loans sold. As you can see in the bottom table, our Q1 sales volume is typically lower than the rest of the year, followed by a slight stair-step up in Q2 through Q4. We expect 2024 to be no different. Gain on sale providing for roughly 8% to 12% of quarterly total revenues continues to feel like the right range at this point in time. As I mentioned in our last call, we were able to sell our first two USDA loans for the first time in over seven quarters, as asset sensitive banks begin to consider downward rate protection. We're excited about this development, but one quarter is not a trend. And as the timing of our USDA originations can be choppy, so will our USDA sales activity. Turning to expenses on Slide 17. Our Q1 2024 expenses of $79 million were up 7% quarter over quarter, though were essentially flat to Q1 2023. Quarter-over-quarter growth was driven by incremental personnel cost, such as 2024 hires, our annual salary merit adjustments, 2023 restricted stock unit awards, and accruals related to our 2024 employee bonus expectations. FTE growth for good costs with the addition of two senior loan officers, closing staff focused on small SBA 7(a) loans, and servicing internal audit and risk personnel to support our growth and complexity. We continue to operate as a growth organization, and we'll remain focused on adding revenue generators and other good costs as needed. If there are still opportunities to find efficiencies and scale in technology and support areas through automation and process improvements that will help manage expense growth going forward. Thus continuing to provide improvement in our operating leverage. Additional credit trends are included on Slide 18. Our $16 million provision was primarily attributed to portfolio macroeconomic changes, specifically the impact on customer cash flows from a higher for longer rate environment. Past dues are not materially outline with prior quarters and although non-accruals are up, as expected in the current environment, we still feel that these levels are manageable. As Steve can expand on in Q&A, we continue to actively monitor the existing portfolio, have yet to see any notable surprises outside of our expectations, and do not currently see any significant weak spots. Our trademark proactive direct servicing approach has and will continue to serve us well. In Q1 2024 alone, we spent approximately 40 hours over seven business days reviewing almost 500 presentations from 100 of our relationship managers on more than 700 of our credits to understand their specific situations and status. I continue to be impressed by our credit and servicing team's commitment to excellence and discipline in their respective areas. Our credit ball is in good hands. With 37% of our loan book government guaranteed, a strong capital and liquidity profile, a reserve to unguaranteed loans and leases ratio that is two times the industry median, a predominantly owner-occupied CRE portfolio that's 45% government guaranteed and our historical charge-off rate being a fraction of our current allowance, we remain confident in our reserve and portfolio's credit strength. Lastly, Slide 19 highlights our overall capital strength, which remains robust both in terms of regulatory ratios, as well as from the unguaranteed loan perspective, what we if actually call The Mahan Ratio. As you may have noticed in the earnings release, we did originate a $100 million term loan in Q1 2024 with the purpose of downstreaming the funds to our bank subsidiary to position our bank-level capital ratios for the anticipated growth to come. Our earnings over the last three quarters provides us with confidence in our ability to continue to support our growth through organic earnings as we have over the last six-plus years, while positioning ourselves to be able to weather whatever storms lie ahead. Thank you for joining us this morning. And with that, we're happy to take questions. Questions & Answers: Operator Thank you. [Operator instructions] First question comes from Steven Alexopoulos from J.P. Morgan. Please go ahead. Alex Lau -- J.P. Morgan -- Analyst Hi. Good morning. This is Alex Lau on for Steve. Steve Smits -- Chief Credit Officer Good morning, Alex. Chip Mahan -- Chairman and Chief Executive Officer Good morning, Alex. Alex Lau -- J.P. Morgan -- Analyst My first question is on credit. Can you share some color on the loans that you built specific reserves for in the quarter? And what is your outlook for the health of these credits in the related industries? Steve Smits -- Chief Credit Officer Yes. This is Steve Smits, I'll take that one. So these are predominantly main street SBA borrowers that are struggling with the higher rate environment and the impact to their overall debt obligations. So we've put impairments on these loans as we navigate. But as Walt had mentioned, we continue to stay very focused and close to them in our servicing, and we will continue to work through them. But with the uncertainties in the economic outlook going forward, how long rates will remain high, prudent steps to put the reserves today and continue to work with them to rehabilitate and work through these challenges. What gives me some comfort is that these really were not surprises. And these were borrowers that we were aware. We're experiencing challenges and struggles. So that bodes well to our servicing and being on top of understanding the challenges our borrowers are working through. So no huge surprises, but we will continue to work through them. Alex Lau -- J.P. Morgan -- Analyst Thank you. And I wanted to ask about expenses. So what is your expense outlook range for 2024 considering a baseline growth rate? And if there are opportunities to add more revenue producers, where would that expense range be? Thank you. Walt Phifer -- Chief Financial Officer Yes, it's a good question, Alex. This is Walt. So from expectations for 2024 baseline, we think a high single digits is reasonable given that we still remain that growth organization. To the extent that if we can hire revenue generators, what does that become? Does it move to low-single digit, perhaps right? I think there is still some efficiencies that we can look at. So -- and then obviously, it depends on how many revenue generators we can add. So to the extent that, that goes into low-single digits, mid-teens, I personally don't see that as a problem if it's all revenue generators because it's going to generate revenue and help with on the operating leverage side. Alex Lau -- J.P. Morgan -- Analyst Thank you for answering my question. Operator Thank you. Next question comes from Brandon King from Truist. Please go ahead. Brandon King -- Truist Securities -- Analyst Hi. Good morning. Chip Mahan -- Chairman and Chief Executive Officer Hi, Brandon. Brandon King -- Truist Securities -- Analyst So could you square away the commentary around the pipeline being stronger than ever, but we hear more and more how these higher rates are impacting just smaller business demand. So could you talk about what you're seeing within your customer base, what's driving these strong pipelines just relative to these higher rates potentially impacting demand and obviously credit as well? BJ Losch -- President Yes. Brandon, it's BJ. So I think, what we are seeing is an expectation level setting or kind of a realization if you will, of buyers and sellers, particularly in the SBA space, kind of getting on common ground on what valuation should be given the rapid increase in rates that happened over the last 18 months or so. So last year was kind of an interesting one in terms of sellers having expectations of valuations pre-increase in rates and buyers looking at their borrower base and what they could actually afford to pay. And so there were some disconnects there. There will continue to be high activity. But a lot of what we saw coming through our pipelines actually fell out of closing because buyers and sellers couldn't come to terms. We're seeing that true up a little bit more now. So rates are generally steady. Borrowers understand what their cash flow coverage is going to be, and can forecast that a little bit better. And so we are seeing much better pull-through activity, as we look at the pipeline. Now how -- what Walt said is true is in the first quarter, you'll see that our originations were largely flat quarter over quarter -- excuse me, year over year in SBA. They were down meaningfully in specialty finance and E&I, which we've already seen come back here in the second quarter. We do expect stronger SBA, small business volume in the second quarter in addition to that specialty and E&I. So we are pretty excited about what we are seeing going forward, and we expect to continue to see more growth with the existing business that we've got. As Walt talked about, we are always, always, always in the market for high-quality revenue producers. We're a growing company. We'd love to see more lenders come on to our platform, and we are actively looking for those. So you'll continue to see us invest there. Chip Mahan -- Chairman and Chief Executive Officer Just one other thing on that, Brandon. I have always felt in our business, the banking business, that banks are sold and not bought. Bank Boards have a certain expectation, I'm going to sell my back for two and a half times book and market in there, and [Inaudible] sell the bank. And I think that's what has happened, particularly in the M&A business space. The silver tsunami is expecting a certain price. Numbers don't pencil. Silver tsunami is running out of runway. Speaking as one of those silver tsunami guys, and it could come with realization that I'm not going to get two and a half times book, I'm going to get two times book and I better take it now. So I think our guys were saying and the phones are ringing and the phones are ringing. That's the reason that the pipe is up 26% or 23% or whatever it was. Brandon King -- Truist Securities -- Analyst OK. That makes sense. And then as far as the new commentary, it sounds like if we are in kind of the least stable rate environment, you're going to reach the low end of that 3.50%, 3.70% range by 4Q. But what is implied in your outlook for deposit costs within that guidance? Are you expecting deposit costs to be potentially stable from here? Or what sort of creep are you expecting on the deposit cost front? Walt Phifer -- Chief Financial Officer Hi, Brandon, it's Walt. So from a savings perspective, we expect it essentially to stabilize both on the personal and the business side. In that guidance, that gets us back toward that 3.50%, 3.75% range toward Q4. We still have two expected Fed cuts, which obviously -- our savings will respond accordingly. Those cuts I believe, are September and November in our current model. And then from a CD front, like I mentioned in the call, we've been able to reduce our CD rates thus far. I don't -- I think it largely will depend on how the market moves. Digital market typically on CD pricing will reprice ahead of Fed expectations. And then the gap between our renewal -- our maturing CD rates and our renewal rates, it's much less as we get further through the year, just given we were pricing our 12 month, which is our largest CD offering in Q3 and Q4 last year at the 5.25%, 5.30% mark. Brandon King -- Truist Securities -- Analyst OK. OK. So it sounds like interest-bearing checking and savings and money market are kind of least stable from here until Fed rate cuts and then CDs are marching toward that 5.20% would be the best way to frame it. Walt Phifer -- Chief Financial Officer Yes. I think I would frame it more -- yes, they're marching toward our current rate offerings today. Brandon King -- Truist Securities -- Analyst OK. Got it. Thanks for answering my questions. I'll hop back in queue. Walt Phifer -- Chief Financial Officer Thank you. Operator Thank you. Next question comes from Tim Switzer at [Ianudible]. Please go ahead. Tim Switzer -- KBW -- Analyst Hi. Good morning thank you for taking my questions. I had a quick follow-up on your commentary on the NIM and deposits. What's kind of the deposit beta you guys are assuming on the initial rate cuts, say, we get one or two cuts in the back half of '24? What's your initial expectation there? And then how could the beta possibly accelerate as we move through the cycle if we get a series of cuts? Walt Phifer -- Chief Financial Officer Yes. Great question. From a beta perspective, the bank here has been about 15 years old. So we have seen a lot of robust downward cycles. The last time the rates came down, our deposit pricing digital market acted pretty rational. From a beta perspective early on, will probably be somewhere in the 50% to 70% range. It could be a potential lag, whether it's one month or so. On the CD side, that's a typically 80% beta or so and that will -- we're pretty confident that will hold given the way CD market typically is very reactive. As you kind of move forward, as you saw kind of with rates between they own or when rates were rising, cumulative betas rose, we think our cumulative betas will also increase on the savings side as well. But largely will depend on how essentially the overall market reacts. Tim Switzer -- KBW -- Analyst OK. Got it. And then I also wanted to ask about your expectations around SBA margins, the secondary market demand kind of a good lift in the premiums this quarter. But now with rate cuts being pushed a little bit further out, interest rates moving higher, has that kind of moderated demand or the premiums for you? And what are your expectations once you get either stabilization or cut in rates? Walt Phifer -- Chief Financial Officer Yes. The secondary market tends to look at the forward curve. So the 105, there's a 107 improvement that we saw here in Q1. I think we'll stay in that range especially now given with potentially later Fed cuts, though, I think of the last six quarters or so and say, hey, that's probably a reasonable expectation for right now. As far as demand, demand is strong. The liquidity is strong in the market. So we're not having issues as far as selling and executing those sales. I think as the rates come down, we typically will see an improvement. Hard to say right now that improvement is drastic. But I think from a reasonable expectation, sticking that 105 to 107 range, at least through the next few quarters, feels right. Tim Switzer -- KBW -- Analyst OK. Great. That's all for me. Thank you. Operator Thank you. [Operator instructions] Next question comes from David Feaster at Raymond James. Please go ahead. David Feaster -- Raymond James -- Analyst Hi. Good morning everybody. BJ Losch -- President Good morning David. David Feaster -- Raymond James -- Analyst Maybe just -- I'd like to touch on the small loan automation. You guys touched a bit about it in your prepared remarks. I'm just curious, where are we in that build out? What's left there? And then -- I mean, are there any other investments or back office build-out that we need? And when do you maybe expect that we could start beta testing that or rolling it out more broadly? BJ Losch -- President Hi David. Good morning. It's BJ. So we have already started originating small dollar SBA loans. Right now, it's mainly through a small team that we put together. So I think we've got $12 million or $13 million booked to another pipeline about that size. So a good start. We had not opened it up to all of our lenders yet. We're getting ready to do that. But we've got two major technology/credit enhancements that we're looking at before we really open up the flood gates. One is a digital application, which we are expecting to have later in the second quarter, early third quarter. So that will be a big deal because that will automate the front end, make it very easy for our borrowers, our referral sources or our lenders to put small-dollar loans through our pipeline. That will be very helpful. The second is automated credit scoring. We will not go 100% automated credit scoring, but we are looking at streamlining the process for these small dollar loans to be able to get more through our system. So we're really excited about this. This has always been something that was available that other SBA lenders do, but we have tended to do larger dollar credits. We're very happy to provide access to capital for small business owners, and this very much aligns with what the FDA and the current administration are looking for from us and the industry. So we are excited about that. And it just adds to our ability to serve more and more small business customers. So more to come on this, but we expect it to really start to ramp toward the back half of the year. David Feaster -- Raymond James -- Analyst And is the plan still to sell all of that production? And where are gain on sale of smaller dollar relative to what you typically sell? Walt Phifer -- Chief Financial Officer Hi Dave, this is Walt. Yes, the plan is 100% sales model related to small loan SBA. Premiums, their range typically anywhere from 110 to 113 depending on your spreads. But historically, those have held true. The secondary market views those loans as kind of the credit loan because you can essentially create larger pools with more diversification. So high demand, good premiums, historically, and we expect those -- or expect that to continue to go forward. David Feaster -- Raymond James -- Analyst Got it. And then maybe switching gears back to the business deposit growth. I mean, first off, I guess, could you remind us where pricing is on those products? And then where would you characterize we are at this point? We've seen obviously nice growth. But are we still crawling from your perspective? And maybe when do you think that we shift to walking or even start running? Walt Phifer -- Chief Financial Officer I'll start. Yes. Dave, this is Walt. So on our business price -- or business deposit pricing, our savings is at 4%. Our CDs are the same, as our personal CD rate offerings. And then obviously you have a non-interest bearing checking. As far as the kind of where we are in the crawl-walk run, I'd say we're very much in the crawl stage. I think we are working as aggressively as we can to sell those to our existing customers as well to new customers. I think it will take time to ramp on the checking side, just where we are in the market right now where essentially depositors can get very nice rates on the interest-bearing side. BJ Losch -- President Yes, I think just to clarify. We are on a crawl as it relates to checking. And there is a long runway there. We are absolutely sprinting on business deposits. We've got a very strong offering there. We've got a great brand reputation. The growth in business deposits is incredibly strong. So we expect that to continue. Chip Mahan -- Chairman and Chief Executive Officer Yes. I would just add that -- David, this is Chip. So I would just add this right -- that we have been primarily a lending company for 15 years. And a lot of our SBA, particularly the generalists, have been SBA-commissioned loan producers. And now that we have a checking account product that is second to none in the industry, it's been a bit of an educational process, particularly for instance, if we are funding an acquisition and the money goes to the seller. We need to convince our customer, who is the buyer to bank with us that we are a bank this time. We're not just a lending company. And there is a -- that piece in that education is in the educational area in early days, and I would still put that piece in the crawl area. We can get better there -- and we will get better there. David Feaster -- Raymond James -- Analyst That makes sense. And honestly, that might play into -- as you do more conventional lending, play into more of that growth. And so maybe touching on the conventional lending side. Looking at one of your charts, it looks like you've seen a decent amount of growth on that front. There is obviously a hyper focus on the CRE front. I'm just curious, what are you targeting on the conventional side at this point? How is that going? And then how do you just think about growth of conventional production and shifting underwriting standards in credit quality there? BJ Losch -- President We're really excited about what we're doing on the conventional lending side. We've transported our theory of verticality from the SBA side over to the specialty side, which we think is incredibly important to be very expert in the verticals that we go after so that we can add value as an $11 billion bank on larger credits relative to just being a bank that's a generalist-type calling effort. And I think, we've been incredibly successful there so far. We've got an excellent sponsor finance business. We have a venture banking vertical, which makes sense with our organization, seniors housing, commercial real estate, specialty healthcare. So we are trying to be very niche oriented in how we grow that. And over the last five years, we have grown our specialty finance business ten-fold in terms of outstandings. And what that's also allowed us to do is have credit be comfortable with the credits that we're doing in those verticals because we're, by and large, seeing the same types of deals as opposed to again having a generalist calling effort on the conventional side, which could be more difficult to underwrite and approve. So we are pretty bullish on what we can do to grow that responsibly. And in addition to that, talking going back to the deposit side and the checking side, it is very common to do a conventional loan deal and ask for the deposits. And so from that perspective, we are having great success starting to build out our deposit, our checking platform on the specialty conventional side because our borrowers are used to being asked for the deposit. So we're going to build our book there probably quicker, frankly, than we're going to build it on the small business side, and we're starting to see the fruits of that labor. Chip Mahan -- Chairman and Chief Executive Officer Just one addition to that, David, this is Chip -- is it has been really, really fun for my co-founders, David Lucht and Lee Williams and I. We kind of view this from our perspective as regression to the norm. We came up with this idea to create a bank that's the porter-led of the banking business in the SBA area. All of a sudden, we get to use our 50 years' experience of being actually C&I lenders ourselves. So this is a bit again -- a regression to the norm for us. David Feaster -- Raymond James -- Analyst Getting back to your roots. That's great. Appreciate all the color. Thanks, everybody. Chip Mahan -- Chairman and Chief Executive Officer Thank you. Operator Thank you. We have no further questions. I will turn the call back over to Chip Mahan for final comments. Chip Mahan -- Chairman and Chief Executive Officer As always, we appreciate your attention today and look forward to seeing you again in 90 days. Thanks for coming.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings, and welcome to the Lovesac fourth quarter fiscal 2024 earnings call. [Operator instructions] As a reminder, this conference is being recorded.I will now turn the call over to your host, Caitlin Churchill, investor relations for Lovesac. Thank you. You may begin. Caitlin Churchill -- Investor Relations Thank you. Good morning, everyone. With me on the call is Shawn Nelson, chief executive officer; Mary Fox, president and chief operating officer; and Keith Siegner, chief financial officer. Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections, and our plans and prospects. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now I'd like to turn the call over to Shawn Nelson, chief executive officer of The Lovesac Company. Shawn Nelson -- Chief Executive Officer Thank you, Caitlin. Good morning, everyone, and thank you for joining us today. What a year it has been. In our 25th year in business in true Lovesac fashion, we made meaningful strides across a number of areas as we strengthen our omnichannel infinity flywheel, reinforce our design for life product platform, and make the strategic investments necessary to profitably scale our brand and business for years and years to come. We crossed $700 million in revenue for the fiscal year, reflecting high single-digit growth for the year, and tripled the revenues of just four years ago. That is against a category that was down mid-teens for the year and approximately flat now over the past four years. Despite industry headwinds, we delivered material gross profit dollar expansion with gross margins up into the high 50s. This more than covered the essential investments in product and capabilities to support sustained profitable growth. While net income was down versus last year on a reported basis, excluding the nonrecurring expenses related to the restatement that we've discussed previously, we are pleased to deliver net income growth for the year. We ended the year with $87 million in cash and zero borrowings on our credit facility, a very healthy balance sheet. These results include a solid fourth quarter performance in which we delivered year-over-year growth in revenues, gross profits, and net income. While a mid-quarter low meant we fell just shy of our guidance for net sales, we managed costs well, and we're within the ranges for gross margin, adjusted EBITDA, net income, and diluted EPS, all of which Keith will review in detail later. The outperformance we have delivered compared to the industry over the past four years is underpinned by our focus on the customer, our advantaged products, and our unique omnichannel business model with an infinity flywheel unlike any other. We compete in a large addressable market of over $46 billion. We continue to take market share every year, and yet, we barely scratched the surface of this huge and fragmented category. We approach this TAM and everything we do through what has always been a sustainability lens rooted in our very unique design for life philosophy. We make things that are built to last a lifetime and designed to evolve. This approach in doing business delivers unmatched product longevity which when paired with the services we intend to launch should continue to drive long-term relationships with customers who love us. This is how we build a brand unlike any other. Our brand health is stronger than ever, gaining against our category with innovation that is changing the landscape of the home as seen in response to our new Angled Side and StealthTech products. We have best-in-class touch-point economics. We estimate they are second only to Apple and Tiffany's with incredible payback periods of about one year and four times the sales per square foot productivity compared to most of our competitors. Our advantaged supply chain delivers orders to our customers in a matter of days, backed with evergreen inventory. And to the investments we've made, we've driven further supply chain efficiencies of late, enabling us to reduce inventory at fiscal year end by almost 20% without compromising delivery times or customer experience. In addition to strengthening our supply chain and distribution capabilities, our investments over the past few years have been focused on expanding our showroom footprint, building technology capabilities, elevating end-to-end customer experience, and ensuring our innovation engine is cranking. As we enter fiscal '25, we've made many of the key foundational investments and are now focused on driving our next phase of growth. We are actively developing many new products to meaningfully expand our total addressable market in the comfort seating category and new categories as well. The actions we are taking today will position us to capitalize disproportionately when the category returns to growth, which it will. We're continually refining our marketing strategies and tactics to draw new customers into our brand fold, deepen the relationship once in the brand fold, and enhance the overall lifetime value of customers. For fiscal 2025, our outlook begins with a conservative macro backdrop. It's the prudent thing to do. We are estimating another year of category declines, including a full-year decline of approximately 10% with a modestly better back half than first. It's important to appreciate that our unique business model enables us to plan this way without giving up the upside. If the macro does better, we can ride the demand curve in near real time, a capability that very few of our competitors have. With that as a foundation, we expect to deliver net sales growth of approximately flat to up 10%, representing continued market share gains. Please note that we expect EBITDA to grow faster than sales over the long term, even while we continue to reinvest into SG&A and truly exciting future sales drivers. Lovesac is an outlier. We've achieved category-beating high-growth rates for years. We're profitable, cash flow positive, have net cash, and an active product development pipeline that spans products and categories. Lovesac is in a position of strength with a truly massive opportunity ahead of us. We're primed to over participate in a category rebound through continued market share gains on existing products, then we'll compound that growth by expanding our brand and business even further. As powerful as our product platforms, innovation pipeline, and marketing prowess are, we would be nothing without our amazing people, a huge shout-out to each and every one of our core #LovesacFamily. You make the magic happen. Speaking of amazing people, I will now hand the call over to Mary Fox, our president and chief operating officer, to discuss the key operational highlights of fiscal 2024 and priority areas for the upcoming year, after which Keith will go over our financial results and guidance in more detail. Mary Fox -- President and Chief Operating Officer Thank you, Shawn, and good morning, everyone. As Shawn discussed, with sales growth of 7.5% for fiscal 2024, our results reflected industry-leading growth, driven by our unique omnichannel business model. Importantly, on a full-year basis, our sales were up 200% from pre-pandemic levels compared to the category at flat over the same time period, and our adjusted EBITDA margin has increased 930 basis points. We believe this consistent financial outperformance is ahead of any other brand in our category, underpinned by our customer and product-centric focus on our unique omnichannel infinity flywheel. We have built a business model and a platform unlike anyone else in the category, resulting in a total addressable market opportunity that is significant, brand health that is strong and growing, best-in-class touch-point economics, and an advantaged supply chain. A few highlights of our infinity flywheels that Shawn shared earlier. We compete in a large addressable market of over $46 billion. We believe we have the No. 1 selling catch in America but have massive market share potential remaining as we barely scratched the surface of this huge and fragmented category. We're confident because our customers are our strongest proponents. Word of mouth is our No.1 awareness driver and over a third of our customers report that they don't even cross-shop with other brands. Our brand health is stronger than ever with innovation fueling these gains. The launches of Angled Side and StealthTech have helped drive customer lifetime value, customer acquisition cost ratio that is unsurpassed, and continued strength in our marketing ROI enables healthy reinvestment. We have best-in-class touch-point economics that we estimate second only to Apple and Tiffany based on incredible cash payback period of one year and up to four times the sales per foot productivity of our competitors. And finally, our evergreen inventory, coupled with an advantaged supply chain, enables delivery times measured in just days, resulting in customer satisfaction of over 84%, increasing customer loyalty and further differentiating Lovesac from the crowd. We are uniquely positioned to continue to profitably take market share with our core platform, even through the current market dynamics that Shawn discussed. On top of that, we expect our growth to further benefit from disciplined investments in our strategic initiatives and capabilities that expand our addressable markets. I will now provide key highlights of our go-forward plans on each of our strategic initiatives. Firstly, product innovation. Angled Side, which we launched last summer, continues to be a highlight for us. Notably, it continues to gain share, representing the largest mix of size within our factional business and driving a higher AUV than Sactionals without Angled Side. Additionally, customers who select Angled Side report having an even higher satisfaction with comfort than our standard-size customers. For StealthTech in fiscal '24, Sactionals that were sold with StealthTech generated nearly three times the average Sactional order value. We're also excited about our next StealthTech launch that is expected in the second half of this year. This minor launch will continue our commitment to bringing an elegant and invisible technology to our customers that enriches their experience on our product platform. In addition to StealthTech expansion, we have several other exciting and disruptive launches across both our Sactional and Sac platforms this year. We expect these to drive AOV and to broaden appeal of our product platforms. Stay tuned since we think you'll love them. In early fiscal '26, we are planning to launch a material innovation that we expect to significantly open the aperture of where we compete in the couch category and enable us to accelerate our market share gains. We look forward to sharing more details with you closer to launch. Lastly, behind the scenes, we're already developing many innovations for disruptive design for life product platform launches in existing and new product categories over the next several years. Secondly, our omnichannel experience, and we have become a true omnichannel retailer through a combination of our physical touch points and digital platform. For the physical aspect of omnichannel, I discussed our strong showroom economics when I covered brand health, and we've seen year-over-year occupancy cost reductions as we lean into our real estate strategy and shift to a higher percentage of no more locations and improved deal structures. In terms of our showrooms, we continue to see opportunity to roughly double our current showroom fleet from 230 to more than 400 locations over the next five years, and we'll continue exploring productive opportunities to bring our products and our services to our customers. For fiscal '25, we expect to open approximately 30 net new showrooms as we continue to leverage our predictive analytics tool and consistently optimize our fleet and our site selection model with industry-leading paybacks. Turning to the e-commerce aspect of omnichannel. We had a strong year with e-commerce sales growth of 12% and we're one of the only brands to grow in quarter 4 when we beat the e-commerce category trends by over 1,200 basis points and with customer satisfaction improving year over year. Looking at our other channels, our Best Buy shop-in-shops, which ended the year at 44 locations, which are discrete from our 230 showrooms, are very powerful as they allow tech-focused shoppers additional opportunity to experience our products, especially StealthTech, which is most effective when experienced in person. To that end, Best Buy shop-in-shop attachment rates for StealthTech are roughly double that of our stand-alone showrooms and eight times our online platform. For Costco, we continue to strengthen our partnership with nearly 50% growth in physical roadshows planned for fiscal '25 versus fiscal '24, backed by additional bundle assortments and increased relevancy for customers. The first step in expanding our assortment is the introduction of Angled Side at Costco, which started in Q1. We're proud of our roadshow results thus far and see significant runway for continued future expansion. Our efforts are resonating with consumers are as evidenced by our improving customer satisfaction scores. These scores improved year over year to our highest levels recorded, driven, in particular, by strategic investments in resources and technology in our customer service capabilities, supply chain, and our digital experience. Looking to fiscal '25 as part of our focus on customer satisfaction, we have begun a multiphase project to optimize the customer experience with a project we're calling MyHub. This will create a one-of-a-kind post-purchase experience whereby a customer can visit their account online and do everything from check the status of their order all the way to receive personalized content and videos based on their specific purchase and setup ideas. Phase 1 launched earlier this year, and subsequent phases will further integrate the omnichannel experience in a way that no other brand is doing. Thirdly, for our ecosystem, we have a circular operations philosophy and have developed a circular ecosystem for our customers and our products, driving optimal value for our customers and their investments in our design for life product platform. The goal is long-term relationship. During the year, we continue to market our product and brand using national advertising in traditional formats, including TV and established media, coupled with various digital strategies, leveraging social media and nonlinear TV, and influence some advertising. Our digital marketing efforts focused heavily on localized and targeted tactics driving shoppers into a Lovesac touch point to experience our products in person. This reinforces our commitment to a truly omnichannel business model, meeting customers where they choose to interact with us. In quarter 4, we successfully tested new targeting and promotional messaging for existing customers. As we grow our customer base, we believe that speaking differently to this segment is a key driver of success in building long-term value and loyalty and plan on rolling this out in fiscal '25. Media ROIs also improved year over year as we drove highly qualified traffic to our touch points and website throughout the year with a very special focus on hyperlocal digital marketing. We plan to expand new marketing tactics to drive high ROI performing traffic to our touch points to experience a demo, and we also plan to leverage prime and linear TV buys to drive reach. And here are a couple of data points to illustrate our progress. In fiscal '24, we gained over 155,000 new customers, and first-year purchase margin was up mid-single digits from fiscal '23. Our full first-year customer lifetime value, customer acquisition cost ratio remained flat year over year with CAC and LTV increasing relatively the same amount year over year in spite of some headwinds in promotional pricing and media inflation pressure. As a reminder, we more than breakeven at the first purchase, and we know that our customers do repeat, adding to or upgrading their design for life Sactionals or Sacs for decades. Our repeat business increased to 43% of overall transactions from 38% at the end of fiscal '23, demonstrating the opportunity to build long-term relationships with our customers around our design for life platform. Lastly, we just expanded an internal test for associates and open-box item sales. With this program, we are creating the foundation that we'll leverage as we begin to activate the right side of our flywheel and enable customer lifetime value through services, notably beginning with trade-in and resales. And finally, making disciplined infrastructure investments and driving efficiencies. Since our IPO in fiscal 2019, Lovesac has consistently demonstrated a very disciplined approach to investing and growing the business for the long term. Over this time period, we achieved profitable growth despite category headwinds and inflationary operating costs, and we will continue to manage the business this way. In fiscal '24, we delivered material gross margin improvement through COGS reductions and by leveraging cost reductions for inbound freight and warehousing, as well as new capabilities in planning and operational simplicity. This enables an 18% reduction in total inventory at year end, but more opportunities remain. We launched a new order management system that should further enhance customer satisfaction, improve delivery metrics around timeline expectations, and increase efficiency of working capital. We also see incremental savings on inbound freight and logistics through new partnerships. In fiscal '25, our other investment for growth will be primarily in the areas of technology and research and development to continue to fuel our flywheel and deliver the transformative innovations to come, some of which I shared earlier. So in summary, we are pleased with the progress on our strategic priorities as we continue to successfully expand the business and make important foundational investments to drive, as well as support the substantial growth that lies ahead. Before I turn over to Keith, I wanted to briefly mention our third annual ESG report, which was published in December '23 and where we outlined our road map to reach zero waste and zero emissions by 2040 at admirable goals. Sustainability starts with the word sustained, and we believe our design for life approach to Sactionals has diverted thousands of couches from landfills. Additionally, we repurposed and removed from the waste stream of very large amount of plastic bottles for use in upholstery fabric, more than 73 million in fiscal '24 and more than 253 million to date. In short, Lovesac makes products that sustain from sustainable materials. I will now pass the call over to Keith. Keith Siegner -- Chief Financial Officer Thanks, Mary. Fiscal '24 was a momentous year for Lovesac. It marks our 25th anniversary, and we delivered several milestone achievements. Revenues exceeded $700 million. Gross profits exceeded $400 million, representing a gross margin over 57%. Net income of $23.9 million as reported was down from fiscal '23 but adjusting for the just over $5 million in nonrecurring expenses related to the successfully resolved restatement net income would have been up. Inventories declined 18%, and we ended the year with $87 million in cash on the balance sheet. All of that is despite category headwinds and pressure on operating expenses from investments in people, systems, and product innovation to set us up for sustained profitable growth for the long term. Now let's jump right into a quick review of the fourth quarter of fiscal '24, which, as a reminder, included a 14th week, representing the 53rd week from our fiscal year. Then I'll discuss our outlook for fiscal '25. Net sales increased $12 million or 5% to $250.5 million in the fourth quarter with the year-over-year increase driven by showrooms and web. This was slightly below our expectations provided in early December, owing to a mid-quarter lull before a bounce back in late January. Showroom net sales increased $15.4 million or 10.9% to $156.9 million in the fourth quarter as compared to $141.5 million in the prior-year period. The increase in showroom sales was driven by the addition of 35 net new showrooms compared to the prior-year period, partially offset by a decrease of 4.1% in omnichannel comparable net sales. Internet net sales increased $1.7 million or 2.2% to $78.1 million in the fourth quarter as compared to $76.4 million in the prior-year period. Other net sales, which include pop-ups, shop-in-shop, and open-box inventory transactions, decreased $5 million or 24.6% to $15.5 million in the fourth quarter. The decrease was principally due to lower open-box inventory transactions, which were only $2.9 million, compared to $8.5 million in the fourth quarter of fiscal '23. As a reminder, we may engage in limited open-box inventory transactions with ICON going forward to ensure our warehouses are operating as efficiently as possible. However, we believe this recent run rate is more reflective of a potential baseline level, given the success of our return-to-stock program and the beneficial impact of resale and trade-in, which are targeted for launch later this year. By product category. In the fourth quarter, our Sactional net sales increased 7%. Sacs net sales decreased 13%, and our other net sales, which include decorative pillows, blankets, and accessories, decreased 8% compared to the prior year. Gross margin increased 360 basis points to 59.7% of net sales in the fourth quarter versus 56.1% in the prior-year quarter, primarily driven by 550 basis points decrease in inbound transportation costs, partially offset by 100 basis points in higher outbound transportation and warehousing costs and 90 basis points related to higher promotional discounted. SG&A expense as a percent of net sales increased by 170 basis points in the fourth quarter or less than half the deleverage seen in the third quarter. The deleverage was primarily due to deleverage within employment costs, continued investments to support current and future growth, professional fees, and selling-related expenses tied to the Lovesac credit card. In dollars, employment costs increased by $6.8 million, primarily driven by an increase in new hires in fiscal '24. Selling-related expenses increased $0.5 million, principally due to credit card fees related to the increase in net sales and an increase in credit card rates. Rent expenses increased $0.2 million, offset by a decrease in overhead expenses of $0.1 million, consisting mainly of increases of $4.4 million in infrastructure investments in other miscellaneous items and $2.4 million in professional fees, offset by a decrease of $6.4 million in equity-based compensation. We estimate nonrecurring incremental fees associated with the restatement of prior-period financials was approximately $1.9 million in the fourth quarter. Advertising and marketing expenses increased $3.7 million or 14.2% to $29.5 million for the fourth quarter of fiscal '24, compared to $25.8 million in the prior-year period. Advertising and marketing expenses were 11.8% of net sales in the fourth quarter as compared to 10.8% of net sales in the prior-year period. Operating income for the quarter was $40.4 million, compared to $36.5 million in the fourth quarter of last year, driven by the factors we just discussed. Before we turn our attention to net income, net income per diluted share, and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued early this morning. Net income for the quarter was $31 million or $1.87 per diluted share, compared to $26.2 million or $1.65 per diluted share in the prior period and included just under $2 million of nonrecurring expenses, as mentioned earlier. During the fourth quarter of fiscal '24 and '23, we recorded an income tax provision of $10.2 million. Adjusted EBITDA for the quarter was $48.4 million as compared to $46.7 million in the prior-year period. Turning to our balance sheet. Our total merchandise inventory levels are in line with our projections, down 18% versus the end of fiscal '23. We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times. Mary discussed ongoing initiatives to further optimize on top of this year's successes. We ended the fourth quarter with a very healthy balance sheet, inclusive of $87 million in cash and cash equivalents, as well as $36 million in availability on our revolving line of credit with no borrowings. Please refer to our earnings press release for other details on our fourth quarter financial performance. So now our outlook. As Shawn mentioned, the category has remained unpredictable and in decline. After a strong finish to January, February was a particularly difficult month. We then experienced substantial improvement in trends in March. Given this, we want to be transparent that we're prudently basing our outlook off another year of category declines, specifically a 10% full-year decline with modest improvement in the second half versus the first half. Should the category perform better, we would expect to perform better or vice versa. For the full-year fiscal '25, we estimate net sales of $700 million to $770 million. We expect adjusted EBITDA between $46 million and $60 million. This includes gross margins of 57% to 59%, advertising and marketing of approximately 13% as a percent of net sales, and SG&A of approximately 39% as a percent of net sales. We estimate net income to be between $18 million and $27 million. We estimate diluted income per common share in the range of $1.06 to $1.59 and approximately 17 million estimated diluted weighted average shares outstanding. As a reminder, fiscal '25 will contain 52 weeks versus fiscal '24, which contained an additional 53rd week in the fourth quarter. For the fiscal first quarter, which is our most difficult quarter to lap of the year, we estimate net sales of $126 million to $132 million. We expect adjusted EBITDA loss between $13 million and $16 million. This includes gross margins of approximately 55%. Advertising and marketing of 14% to 15% as a percent of net sales and SG&A of 51% to 53% as a percent of net sales. We estimate net loss to be between $13 million and $16 million. We estimate basic loss per common share to be between $0.84 and $1.03 with 15 million weighted average shares outstanding. In summary, stabilization of the category and an eventual return to category growth are ahead of us, even if that timing is unclear at the moment. While in this category 5, we are balancing prudent inefficiency and expenses with our belief that it's essential to stay focused on the big picture. That's the massive long-term opportunity for tremendous value creation for all Lovesac stakeholders. We are building the Lovesac brand and investing in new product innovation that spans style, function, and new categories. Make no mistake, we aim to grow irrespective of the category in the near term, continuing our track record of market share gains. Plus, we're primed to capitalize on the category rebound as soon as it happens and more in real time than our peers. As this occurs, the additional revenues should drive expanding flow-through of top-line growth to bottom line growth. I'll now turn the call back to the operator to start our Q&A session. Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Brian Nagel with Oppenheimer and Company. Please proceed with your question Brian Nagel -- Oppenheimer and Company -- Analyst Hi. Good morning.Morning, Brian. So my question, maybe I'll make it like one question with a few parts but just really with regard to kind of the sales trajectory. So Keith, and I think Shawn mentioned it, too. You talked about, if I heard you correctly, some -- was it weakness in -- or strength in January, weakness in February than restrengthening in March? Again, if I heard that correctly. So the question I have there is, is there anything -- I mean, we've talked about a difficult category for a while. Others have mentioned this as well. But is there anything you noticed that would kind of driven that anything you sort of say that's driven that sales volatility? Then the second question I have. If you look at the guidance you gave, the sales growth guidance you gave for Q1, is that reflective of where sales are tracking now, recognizing we're pretty late into the fiscal first quarter? And then the third question, just you talked about restrengthening sales over the balance of the current fiscal year. Is there anything in particular that you're pointing to there? Or is that more you discuss some product launches or just more kind of timing of related to the overall industry dynamics? Mary Fox -- President and Chief Operating Officer Yes. Thank you, Brian. I'll probably take the first part and then up the rest. So I think is Keith obviously shared with our guidance for the year, we are obviously still assuming the category to remain very tough. And we will even -- with the guidance that we've talked about continue to take very strong market share. Specifically, we talked about January was very strong for us. We had dial promotions up a little bit more because we've seen, as Keith talked about, a bit of a lull in December as we tried to pull down off the typical Black Friday promotions. We did that again in February, and what we saw is the same dynamic as in December. So key competitors were up to 50% off during February and had very aggressive deals in clearance. So for us, that was the first factor. And then as we pivoted into March, we moved back to 30% cost, and all of that is baked into our guidance because it's clear we need to have a very compelling value and category that's deep in promotions, and we've done that, and we feel really good to your point. March has been very strong, a big, big step up from where we were in February. I think the second piece, which was a little bit of what happened in February, is we did have a little bit of disruption. We moved to a new media agency. So there was a little bit around media planning timing and some targeting. This is all back on track. So again, hence, giving us the confidence for the rest of this year and the strengthening of the sale. So yes, as your question talks about the guidance in Q1 that is reflective and baked in, and as Keith had shared, March has been much, much stronger. In the early start of April, we are also seeing that as well. I think -- Keith Siegner -- Chief Financial Officer Yes, just to add on that, so when we look at the credit card data from Bank of America, which is one of the primary, let's call it, real time-ish benchmarks that we look at for category performance, it's still around down 14% for both February and March, right? So when you put the two months together, our performance is still showing market share gains, even if not where we would have planned for it for the reason as Mary just discussed it impact February. I would highlight that because of the 53rd week and because of the five weeks that happened in our P2, we're really just entering P3 right now. So it's basically from the early part of this week through the end of the quarter, which is May 5. So we still have basically most of all of P3 to go, and that's all incorporated into our guidance. But again, we were encouraged as to the rebound we saw in our trends in March. When we think about the drivers for the year and where that shakes out. Obviously, we try to give you more context around the baseline of category that's underpinning our outlook. And when we think about our ability to take market share, it's a lot of the same things. Mary talked about, we have a number of product launches coming this year. We have enhancements to our marketing. We're going to continue to tweak and optimize our promotions. We do have touch point expansion, right? We also have what looked like to us easier compares, especially on a two-year basis as we progress through the year. So put all that stuff together, we still have secular levers within our control that we are going to pull and continue to refine that we think will support another year of market share gains. Brian Nagel -- Oppenheimer and Company -- Analyst I appreciate all the color. Thank you. Operator Thank you. Our next question comes from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question. Maria Ripps -- Canaccord Genuity -- Analyst Great. Good morning, and thanks for taking my questions. So I appreciate all the color around your guidance. But sort of broadly, it looks like you were able to outperform the category by a wide margin for a couple of years now and sort of delivered growth in a declining category. So -- but kind of -- and you just sort of highlighted some of the reasons for softer Q1, but is there anything that maybe has changed its sort of in your ability to outperform the vertical, especially as we look toward Q1 with expected revenue declines? Mary Fox -- President and Chief Operating Officer Maria, yeah, sorry, we're just switching around. So thank you for the question. So I think we still feel incredibly confident in terms of all the factors around why our company has been so successful in the last four years. And if you think about 200% growth in the last four years on a category that is flat, and we've just delivered a year where no one else is the growth rates that we have delivered that we compete against, so we see a very strong line for the path around innovation that I touched on. We talk a lot about the continued performance around marketing and just the brand stickiness that continues to grow and improve. And our awareness, our unaided awareness is still low, but the aided awareness and then how we're able to pull customers through our purchase funnel continues to be very, very strong. And we talk a lot about the No. 1 indicator for our brand strength is around word of mouth. So we feel very good on that. And even with the guidance that Keith shared, we will still be gaining significant share. The second, we're very clear around our touch point openings for this year. The performance is continuing as we see our new showrooms outperforming on their pro formas, and I think Keith talked a bit about some of the economic benefits that we're getting as we manage our fleet and occupancy charges. And then I think the third one is we've always planned very conservatively. And I think we've gone through two years of very tough double-digit decline, and this team consistently every time outperformed. And the one thing I'm very proud, even as we talked about some of the businesses in February, this team pivots fast. We test. We move. We adjust, and everything that Keith has laid out in the forecast will continue. So I think there's a lot that we feel very good about for this year and beyond, and everything in terms of the financial performance continues to show that for us. Shawn Nelson -- Chief Executive Officer Yeah, and I'll just tag on. This is Shawn. Mary, I appreciate the question. The aspect to Lovesac that is probably overlooked, particularly at tough times like this for the category, is that for the last decade, we've invested very fastidiously and intensely in building our brand. And what I'm speaking to is there is obviously a lot of competition, particularly in the digital landscape for couches, modular couches, etc., because of the fervor we've created, and obviously, the growth that we've garnered in this realm. The big difference between Lovesac and all of those competitors in that realm, as well as some of the competitors in the traditional realm, most of the competitors, and this is based on our own internal brand strength studies is the strength of this brand. And that's taken a decade to build. And it's not just a digital marketing engine that's kicking butt and making hay when the sun is shining. But a real effort to -- through the activations, through the events, through obviously relentless traditional advertising, TV advertising, combined with digital, etc., that's really built a lot of awareness for our brand, a lot of acceptance, a lot of love, and a lot of demand. And so Lovesac is a highly sought-after product. We'll continue to launch more products underneath this brand flag, and we expect them to perform well, just as we continue to perform well versus the category. And so that brand strength really carries us through a time like this versus many others who are really focused on just converting through digital means or relying on foot traffic and showrooms, etc., in stores, etc. So Lovesac is a real outlier in this way, and I don't think it's fully appreciated or valued, and that's OK. We're focused on -- it's taken this long to build the brand to this point. It'll take another decade to take it where we want to take it. And that's our point of view at management. And in the meantime, we'll continue to shut and dive and do all the things necessary to perform against the category, gain market share, and emerge with some really exciting new products on the horizon in the near and medium term, even as this category will rebound. Maria Ripps -- Canaccord Genuity -- Analyst That's very helpful. Thank you. And then secondly, can you maybe give us a little bit more color on your trading and resale initiative? What are some of the sort of logistics investments that are needed to enable this initiative? And will you be sort of just connecting buying and selling consumers? Or will you be taking ownership of this inventory? Mary Fox -- President and Chief Operating Officer Yeah. Great. Thank you, Maria. This is an initiative we're very passionate about because I think as we talk about the infinity flywheel, we've been very active around the left side, around driving amazing brand awareness, touch points that we convert with an incredible design for life platform and amazing products that offer for life and the ability to be able to establish the services that we've touched on is so important. So the work that we started last year around circular operations, we're just starting to build the foundations for the ability to do trade-in and resale. And I touched a little bit on just the fact that we're even just in this foundational build launching an internal test for our own team members around open boxes and just building the technology to be able to do that, and we have an external partner that is also helping us with that. Also working in terms of just the overall S&OP processes that have to happen. All of that is baked in, in terms of those investments into our business for this year. And then later in the year, we'll come back and share with you the progress that we're making for resale and trade-in. And so yes, as we build that loop out, there will be ownership of inventory, and we will be then managing that through. And we see a very high demand for our product on the secondary market today, so it is happening today. So the ability for us to have an amazing brand experience and really do something that no one else can do because other brands, it's much harder for them to do resell and trade in, super expensive logistically and very complicated and hard to keep the product intact. So as we talk about innovations to come and then the ability for our customers that bought a product 10 years ago, able to trade in covers, get new covers, and be able to build up their lifetime value. We are very excited about visibility. So we look forward to sharing more news for you and the progress of this, obviously, very critical initiative. Maria Ripps -- Canaccord Genuity -- Analyst Got it. Thank you very much for the color. Operator Thank you. Our next question comes from the line of Matt Koranda with ROTH MKM. Please proceed with your question. Matt Koranda -- ROTH MKM -- Analyst Hey, guys. Good morning. Just wanted to spin back to the quarter-to-date trends that you shared. Maybe just -- is there any way to unpack them or quantify them, what you saw in February and March? And I know you mentioned March getting a little bit better than February on a relative basis. Just was March actually off on a year-over-year basis or just down less badly than February, maybe just a little bit more there? And then just, Mary, if you could talk about the promotional tactics. I know you sort of touched on it in one of your previous responses. But I just wanted to hear you speak a little bit more about the more frequent promotions that we're running and the 30% off promotions and how those are kind of faring relative to some of the broader promotions you mentioned in the industry. Keith Siegner -- Chief Financial Officer Yeah. I'll start off and then pass it over to Mary to talk more about the promotional tactics. Just in terms of specifics, at this point, we're not going to get into the exact specifics in relation to February and March, but Mary kind of gave the details and look at what a lot of what it boiled down to in February, given that the category was about the same according to the credit card data for both February and March. Some of this was company specific, right, for the factors, as Mary said, we've tried to dial back on the promotions. However, the competitors were dialing up on the promotions at that time. As well as dislocations in our marketing program relative to the change in agency, which happened on the first day of the fiscal year, right? So it really impacted the entirety of P1, but we corrected for that. We adjusted for that. We tweaked the promotions as we headed into March, and we saw a massive bounce back. It was a dramatic shift in trends. We've taken both February and March holistically into account as we think about our plans for P3, which is April, and that's all compartmentalized within our guidance. Obviously, this is an ongoing constant effort to tweak and refine and tweak and refine, test and learn, all those types of things. So at this point, we think this is the best representation of our placement in this quarter. And then as we get later into the year for all the things I talked about a little earlier, that's when we really start to see the launches, right, that Mary highlighted before. That's when we see the touch point expansion really kicking in. And that's when we think we can get even sharper with our marketing and promotions, finance offers, all that kind of stuff to really crystallize and convert the interest we're seeing from our customers. Mary, I don't know if you want to talk more about the promotional tactics. Mary Fox -- President and Chief Operating Officer Yeah. No. Thank you, Keith. And I think, Matt, obviously, Black Friday, typically, we see the strongest promotions of the year, and we came out at 30% off and a couple of bundled deals. And as you know, compared to the rest of the category, that's still substantially lower. We had a very strong performance. Then what we normally would do is step down a little bit coming out of that Black Friday. But as I shared, we saw everyone else holding, and it actually -- in many ways actually get more aggressive in using the clearance area, taking core stock products, and actually promoting it even more aggressively. We were seeing promotions up to 50% off. So when we had dialed back down the [Inaudible] then we saw the velocity just tail back a little bit because people, "growth was really strong, conversion was just a little bit slower." And we know we always have to have a compelling value. So as we test it back into the 30% off, as Keith said, we saw great growth in March. So like anything, we're going to continue to test and learn. And I think one of the really interesting parts of all of this is from a consumer behavior point of view, we see a very high percentage of customers close a quote in about a week to two weeks. So for us, we're just really adjusting our promo campaigns and tactics allowing that we see when they're coming in, and then able to drive them to conversion. So again, big advantage for us as we manage across all of our channels in the guidance that Keith has baked in. We have industry-leading gross margin performance. And we talked earlier about the growth year over year and just all of that performance. So we're just always threading the needle between top-line growth, gross margin growth, and how that flows through. So we'll adjust through the year but feel good now in terms of where we are settled in our programming. Matt Koranda -- ROTH MKM -- Analyst OK. Got it. And then on the gross margin guide for the first quarter, it looks like there's some expansion there. Just wondered maybe, Keith, if you could touch on sort of what's factored in, in terms of promotional headwind versus some of the continued sort of unlock that we're seeing from lower inbound freight. Maybe just touch on that. And then for the full year, if we look at the guidance, I guess, we're still seeing some deleverage on SG&A. Just wondered if you could maybe touch on sort of what the planned investments are there and maybe why not or why we can't see or couldn't see a little bit more leverage on that line this coming year? Keith Siegner -- Chief Financial Officer Sure thing. I'll start with the gross margin. So the story for first quarter gross margins is really consistent with kind of what we've been talking about the last six months. And with the full year, we got to this high 50s range. We think this is a comfortable level. Last year's first quarter was still burdened by a little bit of the capitalized inbound freight that hadn't burned off as in, that's helping us a little bit year over year in first quarter. We do expect gross margin expansion for this year. Obviously, the total top line will impact that range that you saw within our guidance that we provided, but there's a few things Mary was talking about that have the potential to benefit both the inbound and outbound side of freight and logistics for us. Even in first quarter, we were -- we had been getting some questions in relation to whether it's Red Sea, whether it's Baltimore, all that kind of stuff. Just to put some of this stuff into context, as we moved into P12 and P1, we've really changed some of the relationships we have. We moved to direct service providers for ocean freight and container drayage using a beneficial cargo owner direct carrier model. That's definitely impacting things for us. We're also moving on an outbound side into evaluating some alternative options for last-mile carrier projects and test all the stuff we think has potential to benefit the gross margin side of things. So look, we definitely see potential for gross margins, the magnitude of that expansion really, just depending upon the top line for the year, which, again, is largely dependent upon where the category ends up. On the SG&A side of things, look, this is really what we're trying to do here is to balance the long term against the near term here. We -- appreciate this is tricky, right, because we want to be efficient, but we also don't want to take our eyes off the price, right? We know we need to invest in these long-term value-creation drivers. And that's what you're seeing a lot of this year. We're off of last year's model, which was largely infrastructure-driven pressure on those, and now it's more about growth. So we gave some of those details earlier, but when Mary talks about a busy year for product innovation and a really exciting innovation coming in early fiscal '26 that opens the aperture and potentially benefits AOV for our core product category. this is where this is going. We -- and we hope to keep that pace of innovation going beyond that. That's -- we think, again, those who can make select investments during a period of macro uncertainty stand to benefit the most over the medium and long term. And that's what we're doing because we can. We are in a good position. We are profitable, and we have the cash for being wise, we're being prudent as we can. And look, if the macro does bounce back like we all hope it will, we wanted to -- you want to -- everybody wants to do. And if it does, we're ready to go. We're ready to exploit that and capitalize on that opportunity, and we'll be in a better position to do so because of these investments we're making, particularly in the product innovation. Matt Koranda -- ROTH MKM -- Analyst OK. Very helpful, Keith. If I could sneak one more in. Just -- can we just maybe level set everybody on the cadence of profitability by quarter for the rest of the year? Obviously, I'm not asking for specific guidance, but should we expect -- I would imagine 1Q would be the trough in terms of profitability. Could -- should we expect it to be at least breakeven or positive for the rest of the year? Maybe just a little bit more on sort of cadence. I know you provided a little 1H versus 2H, but just anything on profitability and cadence for this year? Keith Siegner -- Chief Financial Officer Yeah. I mean that really boils down to where the top line shakes out. I mean, obviously, this is based upon what we just gave in terms of category backdrop and full-year guidance, we expect the most difficult top-line picture of the year to be Q1. And it is historically also our most difficult quarter. Nothing changes on that front. Q4 still remains the bulk of the profits. It's just such a big selling year for us -- or selling quarter for us, sorry. There's a little wiggle around that, but it's -- you can look at seasonal trends historically, coupled with a slightly better macro backdrop for the year in the back half versus the first half, and the quarter was -- the quarter will likely fall out very similar in your model to what we have planned. So nothing unusual outside of those two dynamics that should be affecting that cadence. Matt Koranda -- ROTH MKM -- Analyst OK. Makes sense. I'll take the rest of my line off-line. Thanks, guys. Operator Thank you. Our next question comes from the line of Mike Baker with D.A. Davidson. Please proceed with your question. Mike Baker -- D.A. Davidson -- Analyst OK. Thanks. Maybe following up on some previous questions but asking it in a different way. The guidance has a massive ramp in sales growth and profitability growth after the first quarter, yet your advertising as a percent of sales seems to be the big driver to helping sales goes down for the rest of the year, right? I think your 14% change for the first quarter and then 13% for the full year, which implies something lower than that for the rest of the year. So I guess if you could help us again with a little more color to why the rest of the year gets so much better -- and then beyond that, like it seems like when you're advertising more advertising as a percent of sales, that's driving sales. Why not go above the 13% in the short term, 14%, 15% for 2024, for calendar 2024? Thanks. Keith Siegner -- Chief Financial Officer Sure. Sure thing. So look, just starting with Q1, look, obviously, given the seasonality that we just discussed to Matt's question, this is the most it's the lowest spend in Q1, and we had inefficiency and spend given that this location is related to the transition. That's kind of what drove that dynamic. We have bigger dollars and anticipate -- we anticipate more effectiveness and efficiency of the dollars as we get into the later seasons. That also couples with the promotions that also couples with the product innovation that we'll be bringing. All of these things kind of work together. So your question is fair. We totally get it. But we've been through all that and are very comfortable at this point with that dynamic of lower percentages, but higher dollars and more effectiveness and impact of all of those things combined to drive what you would see within that range of guidance. Mary Fox -- President and Chief Operating Officer I think, Keith, just to add, I think, Mike, what we also see, I mean, within our marketing and advertising spend, there's a short-term working media that drives growth. And that's in the quarter and beyond because it's never always just build time. I think the second piece in our spend is all the research and development work around the innovations to come. So that also built in, as well as brand equity building. One of the things that we've always talked about is we continue to test and learn all the time around advertising and marketing. So for example, the team are running a test right now, really looking at opportunities outside of promotional windows, tentpole moments that you would typically see to see in terms of the traffic that we can drive and then convert through the funnel. So -- the team is very energized around that, lots of debates and great outlook in terms of testing, and that will continue and is one of the reasons that we have been successful is that agility. And I think as Keith shared, we feel very good in terms of the runway for the rest of the year because, obviously, touch points are a key lever as well for us as we think about the growth and the formula of success that we've had for so many years. Mike Baker -- D.A. Davidson -- Analyst OK. Fair enough. One quick just housekeeping as part of the analysis, showing the back half, the variables we need are how much the extra week helped in terms of sales and EBITDA. Excuse me, I have my estimates, but is that something you're willing to share? Keith Siegner -- Chief Financial Officer Yeah, there was nothing unusual about it that would make it a nonstandard week for us, so it's pretty consistent across most of the metrics with a typical Q4 week, nothing really unusual on that front. Mike Baker -- D.A. Davidson -- Analyst Both in terms of sales and profitability or EBITDA dollars? Keith Siegner -- Chief Financial Officer Yes. Yeah, there's a number of moving pieces across the thing, but it's a relatively representative Q4 week. Mike Baker -- D.A. Davidson -- Analyst Understood. Thank you. Operator Thank you. Our next question comes from the line of Thomas Forte with Maxim Group. Please proceed with your question. Tom Forte -- Maxim Group -- Analyst Great. So for the sake of time, three quick questions, three quick answers are more than acceptable. The inventory management, was that a one off? Or is that a permanent change? And then on the services revenue, I'd like that you're talking more about it, but how should we think about the relative profitability? Your gross margin on your goods is quite high. And then lastly, when thinking about your full-year outlook, how do you think about the notion that there may be fewer rate cuts, but it seems like there's a greater likelihood of a soft landing. So I know home category could be highly sensitive to interest rates, but it seems like the good news is that there's a greater chance of a soft landing, and I'd love your high-level thoughts on that? Thanks. Mary Fox -- President and Chief Operating Officer Yeah. OK. Keith, can I take the inventory management one? Keith Siegner -- Chief Financial Officer Sure. Sounds good. Mary Fox -- President and Chief Operating Officer Yeah, Tom. So yes, for us, it was a result of a lot of the investments we've made in the past in supply chain. So for us, we will continue to drive efficiencies in our inventory and even just kind of the speed to market as we move goods from factory through to our DC. So continue -- you'll expect to see some benefits continuing -- and the team honestly have done an amazing job, so we're just very grateful. And I think back to the point Keith touched on before, the ability for us to drive up as the demand will swing back at the point where the category does back into some momentum. We're also really able to be very agile and be able to build up inventory. So we feel good on that one. I think service revenues, we'll share more through the year as we think in terms of the model, it's still very early days as we start to build out those capabilities. So we'll give you some more color to that later in the year. And I think, Keith, maybe you want to go to the outlook. Keith Siegner -- Chief Financial Officer Sure thing. So look, it's -- the macro discussion could get really complicated really quickly. Do we not get the rate cuts, which result in greater housing turnover, which typically results in more desire for the furnishings, but do we also get a soft landing, what happens with the elections, what happens is there's a lot of these moving pieces. And I think really what we were trying to say was because we are in this enviable position of not having to make a call on exactly when that bounce is going to come, we're going to take a conservative approach and manage our expenses against that, setting us up for the position where should that work out, should we get more housing turnover? Should we get more home furnishing demands. Rates go lower. Election is not a a big deal, whatever we can participate and ride that demand curve in real time. And that's the plan. So that's why we're providing a lot more of the transparency behind that. Yes, we hope it plays out the way you're talking about, but we're not building a plan that requires any of the more positive outcomes to really dominate the rest. And that's why we are so transparent with that macro benchmark underneath our guidance. Tom Forte -- Maxim Group -- Analyst Great. Thank you, Keith. Thank you, Mary. Thank you, Shawn. Operator Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments. Shawn Nelson -- Chief Executive Officer Yes. We just want to thank all of our investors, as well as all the Lovesacers out there that keep this company cranking, and we look forward to an amazing fiscal year. Thank you. Answer:

the Lovesac fourth quarter fiscal 2024 earnings call

Operator Greetings, and welcome to the Lovesac fourth quarter fiscal 2024 earnings call. [Operator instructions] As a reminder, this conference is being recorded.I will now turn the call over to your host, Caitlin Churchill, investor relations for Lovesac. Thank you. You may begin. Caitlin Churchill -- Investor Relations Thank you. Good morning, everyone. With me on the call is Shawn Nelson, chief executive officer; Mary Fox, president and chief operating officer; and Keith Siegner, chief financial officer. Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections, and our plans and prospects. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now I'd like to turn the call over to Shawn Nelson, chief executive officer of The Lovesac Company. Shawn Nelson -- Chief Executive Officer Thank you, Caitlin. Good morning, everyone, and thank you for joining us today. What a year it has been. In our 25th year in business in true Lovesac fashion, we made meaningful strides across a number of areas as we strengthen our omnichannel infinity flywheel, reinforce our design for life product platform, and make the strategic investments necessary to profitably scale our brand and business for years and years to come. We crossed $700 million in revenue for the fiscal year, reflecting high single-digit growth for the year, and tripled the revenues of just four years ago. That is against a category that was down mid-teens for the year and approximately flat now over the past four years. Despite industry headwinds, we delivered material gross profit dollar expansion with gross margins up into the high 50s. This more than covered the essential investments in product and capabilities to support sustained profitable growth. While net income was down versus last year on a reported basis, excluding the nonrecurring expenses related to the restatement that we've discussed previously, we are pleased to deliver net income growth for the year. We ended the year with $87 million in cash and zero borrowings on our credit facility, a very healthy balance sheet. These results include a solid fourth quarter performance in which we delivered year-over-year growth in revenues, gross profits, and net income. While a mid-quarter low meant we fell just shy of our guidance for net sales, we managed costs well, and we're within the ranges for gross margin, adjusted EBITDA, net income, and diluted EPS, all of which Keith will review in detail later. The outperformance we have delivered compared to the industry over the past four years is underpinned by our focus on the customer, our advantaged products, and our unique omnichannel business model with an infinity flywheel unlike any other. We compete in a large addressable market of over $46 billion. We continue to take market share every year, and yet, we barely scratched the surface of this huge and fragmented category. We approach this TAM and everything we do through what has always been a sustainability lens rooted in our very unique design for life philosophy. We make things that are built to last a lifetime and designed to evolve. This approach in doing business delivers unmatched product longevity which when paired with the services we intend to launch should continue to drive long-term relationships with customers who love us. This is how we build a brand unlike any other. Our brand health is stronger than ever, gaining against our category with innovation that is changing the landscape of the home as seen in response to our new Angled Side and StealthTech products. We have best-in-class touch-point economics. We estimate they are second only to Apple and Tiffany's with incredible payback periods of about one year and four times the sales per square foot productivity compared to most of our competitors. Our advantaged supply chain delivers orders to our customers in a matter of days, backed with evergreen inventory. And to the investments we've made, we've driven further supply chain efficiencies of late, enabling us to reduce inventory at fiscal year end by almost 20% without compromising delivery times or customer experience. In addition to strengthening our supply chain and distribution capabilities, our investments over the past few years have been focused on expanding our showroom footprint, building technology capabilities, elevating end-to-end customer experience, and ensuring our innovation engine is cranking. As we enter fiscal '25, we've made many of the key foundational investments and are now focused on driving our next phase of growth. We are actively developing many new products to meaningfully expand our total addressable market in the comfort seating category and new categories as well. The actions we are taking today will position us to capitalize disproportionately when the category returns to growth, which it will. We're continually refining our marketing strategies and tactics to draw new customers into our brand fold, deepen the relationship once in the brand fold, and enhance the overall lifetime value of customers. For fiscal 2025, our outlook begins with a conservative macro backdrop. It's the prudent thing to do. We are estimating another year of category declines, including a full-year decline of approximately 10% with a modestly better back half than first. It's important to appreciate that our unique business model enables us to plan this way without giving up the upside. If the macro does better, we can ride the demand curve in near real time, a capability that very few of our competitors have. With that as a foundation, we expect to deliver net sales growth of approximately flat to up 10%, representing continued market share gains. Please note that we expect EBITDA to grow faster than sales over the long term, even while we continue to reinvest into SG&A and truly exciting future sales drivers. Lovesac is an outlier. We've achieved category-beating high-growth rates for years. We're profitable, cash flow positive, have net cash, and an active product development pipeline that spans products and categories. Lovesac is in a position of strength with a truly massive opportunity ahead of us. We're primed to over participate in a category rebound through continued market share gains on existing products, then we'll compound that growth by expanding our brand and business even further. As powerful as our product platforms, innovation pipeline, and marketing prowess are, we would be nothing without our amazing people, a huge shout-out to each and every one of our core #LovesacFamily. You make the magic happen. Speaking of amazing people, I will now hand the call over to Mary Fox, our president and chief operating officer, to discuss the key operational highlights of fiscal 2024 and priority areas for the upcoming year, after which Keith will go over our financial results and guidance in more detail. Mary Fox -- President and Chief Operating Officer Thank you, Shawn, and good morning, everyone. As Shawn discussed, with sales growth of 7.5% for fiscal 2024, our results reflected industry-leading growth, driven by our unique omnichannel business model. Importantly, on a full-year basis, our sales were up 200% from pre-pandemic levels compared to the category at flat over the same time period, and our adjusted EBITDA margin has increased 930 basis points. We believe this consistent financial outperformance is ahead of any other brand in our category, underpinned by our customer and product-centric focus on our unique omnichannel infinity flywheel. We have built a business model and a platform unlike anyone else in the category, resulting in a total addressable market opportunity that is significant, brand health that is strong and growing, best-in-class touch-point economics, and an advantaged supply chain. A few highlights of our infinity flywheels that Shawn shared earlier. We compete in a large addressable market of over $46 billion. We believe we have the No. 1 selling catch in America but have massive market share potential remaining as we barely scratched the surface of this huge and fragmented category. We're confident because our customers are our strongest proponents. Word of mouth is our No.1 awareness driver and over a third of our customers report that they don't even cross-shop with other brands. Our brand health is stronger than ever with innovation fueling these gains. The launches of Angled Side and StealthTech have helped drive customer lifetime value, customer acquisition cost ratio that is unsurpassed, and continued strength in our marketing ROI enables healthy reinvestment. We have best-in-class touch-point economics that we estimate second only to Apple and Tiffany based on incredible cash payback period of one year and up to four times the sales per foot productivity of our competitors. And finally, our evergreen inventory, coupled with an advantaged supply chain, enables delivery times measured in just days, resulting in customer satisfaction of over 84%, increasing customer loyalty and further differentiating Lovesac from the crowd. We are uniquely positioned to continue to profitably take market share with our core platform, even through the current market dynamics that Shawn discussed. On top of that, we expect our growth to further benefit from disciplined investments in our strategic initiatives and capabilities that expand our addressable markets. I will now provide key highlights of our go-forward plans on each of our strategic initiatives. Firstly, product innovation. Angled Side, which we launched last summer, continues to be a highlight for us. Notably, it continues to gain share, representing the largest mix of size within our factional business and driving a higher AUV than Sactionals without Angled Side. Additionally, customers who select Angled Side report having an even higher satisfaction with comfort than our standard-size customers. For StealthTech in fiscal '24, Sactionals that were sold with StealthTech generated nearly three times the average Sactional order value. We're also excited about our next StealthTech launch that is expected in the second half of this year. This minor launch will continue our commitment to bringing an elegant and invisible technology to our customers that enriches their experience on our product platform. In addition to StealthTech expansion, we have several other exciting and disruptive launches across both our Sactional and Sac platforms this year. We expect these to drive AOV and to broaden appeal of our product platforms. Stay tuned since we think you'll love them. In early fiscal '26, we are planning to launch a material innovation that we expect to significantly open the aperture of where we compete in the couch category and enable us to accelerate our market share gains. We look forward to sharing more details with you closer to launch. Lastly, behind the scenes, we're already developing many innovations for disruptive design for life product platform launches in existing and new product categories over the next several years. Secondly, our omnichannel experience, and we have become a true omnichannel retailer through a combination of our physical touch points and digital platform. For the physical aspect of omnichannel, I discussed our strong showroom economics when I covered brand health, and we've seen year-over-year occupancy cost reductions as we lean into our real estate strategy and shift to a higher percentage of no more locations and improved deal structures. In terms of our showrooms, we continue to see opportunity to roughly double our current showroom fleet from 230 to more than 400 locations over the next five years, and we'll continue exploring productive opportunities to bring our products and our services to our customers. For fiscal '25, we expect to open approximately 30 net new showrooms as we continue to leverage our predictive analytics tool and consistently optimize our fleet and our site selection model with industry-leading paybacks. Turning to the e-commerce aspect of omnichannel. We had a strong year with e-commerce sales growth of 12% and we're one of the only brands to grow in quarter 4 when we beat the e-commerce category trends by over 1,200 basis points and with customer satisfaction improving year over year. Looking at our other channels, our Best Buy shop-in-shops, which ended the year at 44 locations, which are discrete from our 230 showrooms, are very powerful as they allow tech-focused shoppers additional opportunity to experience our products, especially StealthTech, which is most effective when experienced in person. To that end, Best Buy shop-in-shop attachment rates for StealthTech are roughly double that of our stand-alone showrooms and eight times our online platform. For Costco, we continue to strengthen our partnership with nearly 50% growth in physical roadshows planned for fiscal '25 versus fiscal '24, backed by additional bundle assortments and increased relevancy for customers. The first step in expanding our assortment is the introduction of Angled Side at Costco, which started in Q1. We're proud of our roadshow results thus far and see significant runway for continued future expansion. Our efforts are resonating with consumers are as evidenced by our improving customer satisfaction scores. These scores improved year over year to our highest levels recorded, driven, in particular, by strategic investments in resources and technology in our customer service capabilities, supply chain, and our digital experience. Looking to fiscal '25 as part of our focus on customer satisfaction, we have begun a multiphase project to optimize the customer experience with a project we're calling MyHub. This will create a one-of-a-kind post-purchase experience whereby a customer can visit their account online and do everything from check the status of their order all the way to receive personalized content and videos based on their specific purchase and setup ideas. Phase 1 launched earlier this year, and subsequent phases will further integrate the omnichannel experience in a way that no other brand is doing. Thirdly, for our ecosystem, we have a circular operations philosophy and have developed a circular ecosystem for our customers and our products, driving optimal value for our customers and their investments in our design for life product platform. The goal is long-term relationship. During the year, we continue to market our product and brand using national advertising in traditional formats, including TV and established media, coupled with various digital strategies, leveraging social media and nonlinear TV, and influence some advertising. Our digital marketing efforts focused heavily on localized and targeted tactics driving shoppers into a Lovesac touch point to experience our products in person. This reinforces our commitment to a truly omnichannel business model, meeting customers where they choose to interact with us. In quarter 4, we successfully tested new targeting and promotional messaging for existing customers. As we grow our customer base, we believe that speaking differently to this segment is a key driver of success in building long-term value and loyalty and plan on rolling this out in fiscal '25. Media ROIs also improved year over year as we drove highly qualified traffic to our touch points and website throughout the year with a very special focus on hyperlocal digital marketing. We plan to expand new marketing tactics to drive high ROI performing traffic to our touch points to experience a demo, and we also plan to leverage prime and linear TV buys to drive reach. And here are a couple of data points to illustrate our progress. In fiscal '24, we gained over 155,000 new customers, and first-year purchase margin was up mid-single digits from fiscal '23. Our full first-year customer lifetime value, customer acquisition cost ratio remained flat year over year with CAC and LTV increasing relatively the same amount year over year in spite of some headwinds in promotional pricing and media inflation pressure. As a reminder, we more than breakeven at the first purchase, and we know that our customers do repeat, adding to or upgrading their design for life Sactionals or Sacs for decades. Our repeat business increased to 43% of overall transactions from 38% at the end of fiscal '23, demonstrating the opportunity to build long-term relationships with our customers around our design for life platform. Lastly, we just expanded an internal test for associates and open-box item sales. With this program, we are creating the foundation that we'll leverage as we begin to activate the right side of our flywheel and enable customer lifetime value through services, notably beginning with trade-in and resales. And finally, making disciplined infrastructure investments and driving efficiencies. Since our IPO in fiscal 2019, Lovesac has consistently demonstrated a very disciplined approach to investing and growing the business for the long term. Over this time period, we achieved profitable growth despite category headwinds and inflationary operating costs, and we will continue to manage the business this way. In fiscal '24, we delivered material gross margin improvement through COGS reductions and by leveraging cost reductions for inbound freight and warehousing, as well as new capabilities in planning and operational simplicity. This enables an 18% reduction in total inventory at year end, but more opportunities remain. We launched a new order management system that should further enhance customer satisfaction, improve delivery metrics around timeline expectations, and increase efficiency of working capital. We also see incremental savings on inbound freight and logistics through new partnerships. In fiscal '25, our other investment for growth will be primarily in the areas of technology and research and development to continue to fuel our flywheel and deliver the transformative innovations to come, some of which I shared earlier. So in summary, we are pleased with the progress on our strategic priorities as we continue to successfully expand the business and make important foundational investments to drive, as well as support the substantial growth that lies ahead. Before I turn over to Keith, I wanted to briefly mention our third annual ESG report, which was published in December '23 and where we outlined our road map to reach zero waste and zero emissions by 2040 at admirable goals. Sustainability starts with the word sustained, and we believe our design for life approach to Sactionals has diverted thousands of couches from landfills. Additionally, we repurposed and removed from the waste stream of very large amount of plastic bottles for use in upholstery fabric, more than 73 million in fiscal '24 and more than 253 million to date. In short, Lovesac makes products that sustain from sustainable materials. I will now pass the call over to Keith. Keith Siegner -- Chief Financial Officer Thanks, Mary. Fiscal '24 was a momentous year for Lovesac. It marks our 25th anniversary, and we delivered several milestone achievements. Revenues exceeded $700 million. Gross profits exceeded $400 million, representing a gross margin over 57%. Net income of $23.9 million as reported was down from fiscal '23 but adjusting for the just over $5 million in nonrecurring expenses related to the successfully resolved restatement net income would have been up. Inventories declined 18%, and we ended the year with $87 million in cash on the balance sheet. All of that is despite category headwinds and pressure on operating expenses from investments in people, systems, and product innovation to set us up for sustained profitable growth for the long term. Now let's jump right into a quick review of the fourth quarter of fiscal '24, which, as a reminder, included a 14th week, representing the 53rd week from our fiscal year. Then I'll discuss our outlook for fiscal '25. Net sales increased $12 million or 5% to $250.5 million in the fourth quarter with the year-over-year increase driven by showrooms and web. This was slightly below our expectations provided in early December, owing to a mid-quarter lull before a bounce back in late January. Showroom net sales increased $15.4 million or 10.9% to $156.9 million in the fourth quarter as compared to $141.5 million in the prior-year period. The increase in showroom sales was driven by the addition of 35 net new showrooms compared to the prior-year period, partially offset by a decrease of 4.1% in omnichannel comparable net sales. Internet net sales increased $1.7 million or 2.2% to $78.1 million in the fourth quarter as compared to $76.4 million in the prior-year period. Other net sales, which include pop-ups, shop-in-shop, and open-box inventory transactions, decreased $5 million or 24.6% to $15.5 million in the fourth quarter. The decrease was principally due to lower open-box inventory transactions, which were only $2.9 million, compared to $8.5 million in the fourth quarter of fiscal '23. As a reminder, we may engage in limited open-box inventory transactions with ICON going forward to ensure our warehouses are operating as efficiently as possible. However, we believe this recent run rate is more reflective of a potential baseline level, given the success of our return-to-stock program and the beneficial impact of resale and trade-in, which are targeted for launch later this year. By product category. In the fourth quarter, our Sactional net sales increased 7%. Sacs net sales decreased 13%, and our other net sales, which include decorative pillows, blankets, and accessories, decreased 8% compared to the prior year. Gross margin increased 360 basis points to 59.7% of net sales in the fourth quarter versus 56.1% in the prior-year quarter, primarily driven by 550 basis points decrease in inbound transportation costs, partially offset by 100 basis points in higher outbound transportation and warehousing costs and 90 basis points related to higher promotional discounted. SG&A expense as a percent of net sales increased by 170 basis points in the fourth quarter or less than half the deleverage seen in the third quarter. The deleverage was primarily due to deleverage within employment costs, continued investments to support current and future growth, professional fees, and selling-related expenses tied to the Lovesac credit card. In dollars, employment costs increased by $6.8 million, primarily driven by an increase in new hires in fiscal '24. Selling-related expenses increased $0.5 million, principally due to credit card fees related to the increase in net sales and an increase in credit card rates. Rent expenses increased $0.2 million, offset by a decrease in overhead expenses of $0.1 million, consisting mainly of increases of $4.4 million in infrastructure investments in other miscellaneous items and $2.4 million in professional fees, offset by a decrease of $6.4 million in equity-based compensation. We estimate nonrecurring incremental fees associated with the restatement of prior-period financials was approximately $1.9 million in the fourth quarter. Advertising and marketing expenses increased $3.7 million or 14.2% to $29.5 million for the fourth quarter of fiscal '24, compared to $25.8 million in the prior-year period. Advertising and marketing expenses were 11.8% of net sales in the fourth quarter as compared to 10.8% of net sales in the prior-year period. Operating income for the quarter was $40.4 million, compared to $36.5 million in the fourth quarter of last year, driven by the factors we just discussed. Before we turn our attention to net income, net income per diluted share, and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued early this morning. Net income for the quarter was $31 million or $1.87 per diluted share, compared to $26.2 million or $1.65 per diluted share in the prior period and included just under $2 million of nonrecurring expenses, as mentioned earlier. During the fourth quarter of fiscal '24 and '23, we recorded an income tax provision of $10.2 million. Adjusted EBITDA for the quarter was $48.4 million as compared to $46.7 million in the prior-year period. Turning to our balance sheet. Our total merchandise inventory levels are in line with our projections, down 18% versus the end of fiscal '23. We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times. Mary discussed ongoing initiatives to further optimize on top of this year's successes. We ended the fourth quarter with a very healthy balance sheet, inclusive of $87 million in cash and cash equivalents, as well as $36 million in availability on our revolving line of credit with no borrowings. Please refer to our earnings press release for other details on our fourth quarter financial performance. So now our outlook. As Shawn mentioned, the category has remained unpredictable and in decline. After a strong finish to January, February was a particularly difficult month. We then experienced substantial improvement in trends in March. Given this, we want to be transparent that we're prudently basing our outlook off another year of category declines, specifically a 10% full-year decline with modest improvement in the second half versus the first half. Should the category perform better, we would expect to perform better or vice versa. For the full-year fiscal '25, we estimate net sales of $700 million to $770 million. We expect adjusted EBITDA between $46 million and $60 million. This includes gross margins of 57% to 59%, advertising and marketing of approximately 13% as a percent of net sales, and SG&A of approximately 39% as a percent of net sales. We estimate net income to be between $18 million and $27 million. We estimate diluted income per common share in the range of $1.06 to $1.59 and approximately 17 million estimated diluted weighted average shares outstanding. As a reminder, fiscal '25 will contain 52 weeks versus fiscal '24, which contained an additional 53rd week in the fourth quarter. For the fiscal first quarter, which is our most difficult quarter to lap of the year, we estimate net sales of $126 million to $132 million. We expect adjusted EBITDA loss between $13 million and $16 million. This includes gross margins of approximately 55%. Advertising and marketing of 14% to 15% as a percent of net sales and SG&A of 51% to 53% as a percent of net sales. We estimate net loss to be between $13 million and $16 million. We estimate basic loss per common share to be between $0.84 and $1.03 with 15 million weighted average shares outstanding. In summary, stabilization of the category and an eventual return to category growth are ahead of us, even if that timing is unclear at the moment. While in this category 5, we are balancing prudent inefficiency and expenses with our belief that it's essential to stay focused on the big picture. That's the massive long-term opportunity for tremendous value creation for all Lovesac stakeholders. We are building the Lovesac brand and investing in new product innovation that spans style, function, and new categories. Make no mistake, we aim to grow irrespective of the category in the near term, continuing our track record of market share gains. Plus, we're primed to capitalize on the category rebound as soon as it happens and more in real time than our peers. As this occurs, the additional revenues should drive expanding flow-through of top-line growth to bottom line growth. I'll now turn the call back to the operator to start our Q&A session. Questions & Answers: Operator [Operator instructions] Our first question comes from the line of Brian Nagel with Oppenheimer and Company. Please proceed with your question Brian Nagel -- Oppenheimer and Company -- Analyst Hi. Good morning.Morning, Brian. So my question, maybe I'll make it like one question with a few parts but just really with regard to kind of the sales trajectory. So Keith, and I think Shawn mentioned it, too. You talked about, if I heard you correctly, some -- was it weakness in -- or strength in January, weakness in February than restrengthening in March? Again, if I heard that correctly. So the question I have there is, is there anything -- I mean, we've talked about a difficult category for a while. Others have mentioned this as well. But is there anything you noticed that would kind of driven that anything you sort of say that's driven that sales volatility? Then the second question I have. If you look at the guidance you gave, the sales growth guidance you gave for Q1, is that reflective of where sales are tracking now, recognizing we're pretty late into the fiscal first quarter? And then the third question, just you talked about restrengthening sales over the balance of the current fiscal year. Is there anything in particular that you're pointing to there? Or is that more you discuss some product launches or just more kind of timing of related to the overall industry dynamics? Mary Fox -- President and Chief Operating Officer Yes. Thank you, Brian. I'll probably take the first part and then up the rest. So I think is Keith obviously shared with our guidance for the year, we are obviously still assuming the category to remain very tough. And we will even -- with the guidance that we've talked about continue to take very strong market share. Specifically, we talked about January was very strong for us. We had dial promotions up a little bit more because we've seen, as Keith talked about, a bit of a lull in December as we tried to pull down off the typical Black Friday promotions. We did that again in February, and what we saw is the same dynamic as in December. So key competitors were up to 50% off during February and had very aggressive deals in clearance. So for us, that was the first factor. And then as we pivoted into March, we moved back to 30% cost, and all of that is baked into our guidance because it's clear we need to have a very compelling value and category that's deep in promotions, and we've done that, and we feel really good to your point. March has been very strong, a big, big step up from where we were in February. I think the second piece, which was a little bit of what happened in February, is we did have a little bit of disruption. We moved to a new media agency. So there was a little bit around media planning timing and some targeting. This is all back on track. So again, hence, giving us the confidence for the rest of this year and the strengthening of the sale. So yes, as your question talks about the guidance in Q1 that is reflective and baked in, and as Keith had shared, March has been much, much stronger. In the early start of April, we are also seeing that as well. I think -- Keith Siegner -- Chief Financial Officer Yes, just to add on that, so when we look at the credit card data from Bank of America, which is one of the primary, let's call it, real time-ish benchmarks that we look at for category performance, it's still around down 14% for both February and March, right? So when you put the two months together, our performance is still showing market share gains, even if not where we would have planned for it for the reason as Mary just discussed it impact February. I would highlight that because of the 53rd week and because of the five weeks that happened in our P2, we're really just entering P3 right now. So it's basically from the early part of this week through the end of the quarter, which is May 5. So we still have basically most of all of P3 to go, and that's all incorporated into our guidance. But again, we were encouraged as to the rebound we saw in our trends in March. When we think about the drivers for the year and where that shakes out. Obviously, we try to give you more context around the baseline of category that's underpinning our outlook. And when we think about our ability to take market share, it's a lot of the same things. Mary talked about, we have a number of product launches coming this year. We have enhancements to our marketing. We're going to continue to tweak and optimize our promotions. We do have touch point expansion, right? We also have what looked like to us easier compares, especially on a two-year basis as we progress through the year. So put all that stuff together, we still have secular levers within our control that we are going to pull and continue to refine that we think will support another year of market share gains. Brian Nagel -- Oppenheimer and Company -- Analyst I appreciate all the color. Thank you. Operator Thank you. Our next question comes from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question. Maria Ripps -- Canaccord Genuity -- Analyst Great. Good morning, and thanks for taking my questions. So I appreciate all the color around your guidance. But sort of broadly, it looks like you were able to outperform the category by a wide margin for a couple of years now and sort of delivered growth in a declining category. So -- but kind of -- and you just sort of highlighted some of the reasons for softer Q1, but is there anything that maybe has changed its sort of in your ability to outperform the vertical, especially as we look toward Q1 with expected revenue declines? Mary Fox -- President and Chief Operating Officer Maria, yeah, sorry, we're just switching around. So thank you for the question. So I think we still feel incredibly confident in terms of all the factors around why our company has been so successful in the last four years. And if you think about 200% growth in the last four years on a category that is flat, and we've just delivered a year where no one else is the growth rates that we have delivered that we compete against, so we see a very strong line for the path around innovation that I touched on. We talk a lot about the continued performance around marketing and just the brand stickiness that continues to grow and improve. And our awareness, our unaided awareness is still low, but the aided awareness and then how we're able to pull customers through our purchase funnel continues to be very, very strong. And we talk a lot about the No. 1 indicator for our brand strength is around word of mouth. So we feel very good on that. And even with the guidance that Keith shared, we will still be gaining significant share. The second, we're very clear around our touch point openings for this year. The performance is continuing as we see our new showrooms outperforming on their pro formas, and I think Keith talked a bit about some of the economic benefits that we're getting as we manage our fleet and occupancy charges. And then I think the third one is we've always planned very conservatively. And I think we've gone through two years of very tough double-digit decline, and this team consistently every time outperformed. And the one thing I'm very proud, even as we talked about some of the businesses in February, this team pivots fast. We test. We move. We adjust, and everything that Keith has laid out in the forecast will continue. So I think there's a lot that we feel very good about for this year and beyond, and everything in terms of the financial performance continues to show that for us. Shawn Nelson -- Chief Executive Officer Yeah, and I'll just tag on. This is Shawn. Mary, I appreciate the question. The aspect to Lovesac that is probably overlooked, particularly at tough times like this for the category, is that for the last decade, we've invested very fastidiously and intensely in building our brand. And what I'm speaking to is there is obviously a lot of competition, particularly in the digital landscape for couches, modular couches, etc., because of the fervor we've created, and obviously, the growth that we've garnered in this realm. The big difference between Lovesac and all of those competitors in that realm, as well as some of the competitors in the traditional realm, most of the competitors, and this is based on our own internal brand strength studies is the strength of this brand. And that's taken a decade to build. And it's not just a digital marketing engine that's kicking butt and making hay when the sun is shining. But a real effort to -- through the activations, through the events, through obviously relentless traditional advertising, TV advertising, combined with digital, etc., that's really built a lot of awareness for our brand, a lot of acceptance, a lot of love, and a lot of demand. And so Lovesac is a highly sought-after product. We'll continue to launch more products underneath this brand flag, and we expect them to perform well, just as we continue to perform well versus the category. And so that brand strength really carries us through a time like this versus many others who are really focused on just converting through digital means or relying on foot traffic and showrooms, etc., in stores, etc. So Lovesac is a real outlier in this way, and I don't think it's fully appreciated or valued, and that's OK. We're focused on -- it's taken this long to build the brand to this point. It'll take another decade to take it where we want to take it. And that's our point of view at management. And in the meantime, we'll continue to shut and dive and do all the things necessary to perform against the category, gain market share, and emerge with some really exciting new products on the horizon in the near and medium term, even as this category will rebound. Maria Ripps -- Canaccord Genuity -- Analyst That's very helpful. Thank you. And then secondly, can you maybe give us a little bit more color on your trading and resale initiative? What are some of the sort of logistics investments that are needed to enable this initiative? And will you be sort of just connecting buying and selling consumers? Or will you be taking ownership of this inventory? Mary Fox -- President and Chief Operating Officer Yeah. Great. Thank you, Maria. This is an initiative we're very passionate about because I think as we talk about the infinity flywheel, we've been very active around the left side, around driving amazing brand awareness, touch points that we convert with an incredible design for life platform and amazing products that offer for life and the ability to be able to establish the services that we've touched on is so important. So the work that we started last year around circular operations, we're just starting to build the foundations for the ability to do trade-in and resale. And I touched a little bit on just the fact that we're even just in this foundational build launching an internal test for our own team members around open boxes and just building the technology to be able to do that, and we have an external partner that is also helping us with that. Also working in terms of just the overall S&OP processes that have to happen. All of that is baked in, in terms of those investments into our business for this year. And then later in the year, we'll come back and share with you the progress that we're making for resale and trade-in. And so yes, as we build that loop out, there will be ownership of inventory, and we will be then managing that through. And we see a very high demand for our product on the secondary market today, so it is happening today. So the ability for us to have an amazing brand experience and really do something that no one else can do because other brands, it's much harder for them to do resell and trade in, super expensive logistically and very complicated and hard to keep the product intact. So as we talk about innovations to come and then the ability for our customers that bought a product 10 years ago, able to trade in covers, get new covers, and be able to build up their lifetime value. We are very excited about visibility. So we look forward to sharing more news for you and the progress of this, obviously, very critical initiative. Maria Ripps -- Canaccord Genuity -- Analyst Got it. Thank you very much for the color. Operator Thank you. Our next question comes from the line of Matt Koranda with ROTH MKM. Please proceed with your question. Matt Koranda -- ROTH MKM -- Analyst Hey, guys. Good morning. Just wanted to spin back to the quarter-to-date trends that you shared. Maybe just -- is there any way to unpack them or quantify them, what you saw in February and March? And I know you mentioned March getting a little bit better than February on a relative basis. Just was March actually off on a year-over-year basis or just down less badly than February, maybe just a little bit more there? And then just, Mary, if you could talk about the promotional tactics. I know you sort of touched on it in one of your previous responses. But I just wanted to hear you speak a little bit more about the more frequent promotions that we're running and the 30% off promotions and how those are kind of faring relative to some of the broader promotions you mentioned in the industry. Keith Siegner -- Chief Financial Officer Yeah. I'll start off and then pass it over to Mary to talk more about the promotional tactics. Just in terms of specifics, at this point, we're not going to get into the exact specifics in relation to February and March, but Mary kind of gave the details and look at what a lot of what it boiled down to in February, given that the category was about the same according to the credit card data for both February and March. Some of this was company specific, right, for the factors, as Mary said, we've tried to dial back on the promotions. However, the competitors were dialing up on the promotions at that time. As well as dislocations in our marketing program relative to the change in agency, which happened on the first day of the fiscal year, right? So it really impacted the entirety of P1, but we corrected for that. We adjusted for that. We tweaked the promotions as we headed into March, and we saw a massive bounce back. It was a dramatic shift in trends. We've taken both February and March holistically into account as we think about our plans for P3, which is April, and that's all compartmentalized within our guidance. Obviously, this is an ongoing constant effort to tweak and refine and tweak and refine, test and learn, all those types of things. So at this point, we think this is the best representation of our placement in this quarter. And then as we get later into the year for all the things I talked about a little earlier, that's when we really start to see the launches, right, that Mary highlighted before. That's when we see the touch point expansion really kicking in. And that's when we think we can get even sharper with our marketing and promotions, finance offers, all that kind of stuff to really crystallize and convert the interest we're seeing from our customers. Mary, I don't know if you want to talk more about the promotional tactics. Mary Fox -- President and Chief Operating Officer Yeah. No. Thank you, Keith. And I think, Matt, obviously, Black Friday, typically, we see the strongest promotions of the year, and we came out at 30% off and a couple of bundled deals. And as you know, compared to the rest of the category, that's still substantially lower. We had a very strong performance. Then what we normally would do is step down a little bit coming out of that Black Friday. But as I shared, we saw everyone else holding, and it actually -- in many ways actually get more aggressive in using the clearance area, taking core stock products, and actually promoting it even more aggressively. We were seeing promotions up to 50% off. So when we had dialed back down the [Inaudible] then we saw the velocity just tail back a little bit because people, "growth was really strong, conversion was just a little bit slower." And we know we always have to have a compelling value. So as we test it back into the 30% off, as Keith said, we saw great growth in March. So like anything, we're going to continue to test and learn. And I think one of the really interesting parts of all of this is from a consumer behavior point of view, we see a very high percentage of customers close a quote in about a week to two weeks. So for us, we're just really adjusting our promo campaigns and tactics allowing that we see when they're coming in, and then able to drive them to conversion. So again, big advantage for us as we manage across all of our channels in the guidance that Keith has baked in. We have industry-leading gross margin performance. And we talked earlier about the growth year over year and just all of that performance. So we're just always threading the needle between top-line growth, gross margin growth, and how that flows through. So we'll adjust through the year but feel good now in terms of where we are settled in our programming. Matt Koranda -- ROTH MKM -- Analyst OK. Got it. And then on the gross margin guide for the first quarter, it looks like there's some expansion there. Just wondered maybe, Keith, if you could touch on sort of what's factored in, in terms of promotional headwind versus some of the continued sort of unlock that we're seeing from lower inbound freight. Maybe just touch on that. And then for the full year, if we look at the guidance, I guess, we're still seeing some deleverage on SG&A. Just wondered if you could maybe touch on sort of what the planned investments are there and maybe why not or why we can't see or couldn't see a little bit more leverage on that line this coming year? Keith Siegner -- Chief Financial Officer Sure thing. I'll start with the gross margin. So the story for first quarter gross margins is really consistent with kind of what we've been talking about the last six months. And with the full year, we got to this high 50s range. We think this is a comfortable level. Last year's first quarter was still burdened by a little bit of the capitalized inbound freight that hadn't burned off as in, that's helping us a little bit year over year in first quarter. We do expect gross margin expansion for this year. Obviously, the total top line will impact that range that you saw within our guidance that we provided, but there's a few things Mary was talking about that have the potential to benefit both the inbound and outbound side of freight and logistics for us. Even in first quarter, we were -- we had been getting some questions in relation to whether it's Red Sea, whether it's Baltimore, all that kind of stuff. Just to put some of this stuff into context, as we moved into P12 and P1, we've really changed some of the relationships we have. We moved to direct service providers for ocean freight and container drayage using a beneficial cargo owner direct carrier model. That's definitely impacting things for us. We're also moving on an outbound side into evaluating some alternative options for last-mile carrier projects and test all the stuff we think has potential to benefit the gross margin side of things. So look, we definitely see potential for gross margins, the magnitude of that expansion really, just depending upon the top line for the year, which, again, is largely dependent upon where the category ends up. On the SG&A side of things, look, this is really what we're trying to do here is to balance the long term against the near term here. We -- appreciate this is tricky, right, because we want to be efficient, but we also don't want to take our eyes off the price, right? We know we need to invest in these long-term value-creation drivers. And that's what you're seeing a lot of this year. We're off of last year's model, which was largely infrastructure-driven pressure on those, and now it's more about growth. So we gave some of those details earlier, but when Mary talks about a busy year for product innovation and a really exciting innovation coming in early fiscal '26 that opens the aperture and potentially benefits AOV for our core product category. this is where this is going. We -- and we hope to keep that pace of innovation going beyond that. That's -- we think, again, those who can make select investments during a period of macro uncertainty stand to benefit the most over the medium and long term. And that's what we're doing because we can. We are in a good position. We are profitable, and we have the cash for being wise, we're being prudent as we can. And look, if the macro does bounce back like we all hope it will, we wanted to -- you want to -- everybody wants to do. And if it does, we're ready to go. We're ready to exploit that and capitalize on that opportunity, and we'll be in a better position to do so because of these investments we're making, particularly in the product innovation. Matt Koranda -- ROTH MKM -- Analyst OK. Very helpful, Keith. If I could sneak one more in. Just -- can we just maybe level set everybody on the cadence of profitability by quarter for the rest of the year? Obviously, I'm not asking for specific guidance, but should we expect -- I would imagine 1Q would be the trough in terms of profitability. Could -- should we expect it to be at least breakeven or positive for the rest of the year? Maybe just a little bit more on sort of cadence. I know you provided a little 1H versus 2H, but just anything on profitability and cadence for this year? Keith Siegner -- Chief Financial Officer Yeah. I mean that really boils down to where the top line shakes out. I mean, obviously, this is based upon what we just gave in terms of category backdrop and full-year guidance, we expect the most difficult top-line picture of the year to be Q1. And it is historically also our most difficult quarter. Nothing changes on that front. Q4 still remains the bulk of the profits. It's just such a big selling year for us -- or selling quarter for us, sorry. There's a little wiggle around that, but it's -- you can look at seasonal trends historically, coupled with a slightly better macro backdrop for the year in the back half versus the first half, and the quarter was -- the quarter will likely fall out very similar in your model to what we have planned. So nothing unusual outside of those two dynamics that should be affecting that cadence. Matt Koranda -- ROTH MKM -- Analyst OK. Makes sense. I'll take the rest of my line off-line. Thanks, guys. Operator Thank you. Our next question comes from the line of Mike Baker with D.A. Davidson. Please proceed with your question. Mike Baker -- D.A. Davidson -- Analyst OK. Thanks. Maybe following up on some previous questions but asking it in a different way. The guidance has a massive ramp in sales growth and profitability growth after the first quarter, yet your advertising as a percent of sales seems to be the big driver to helping sales goes down for the rest of the year, right? I think your 14% change for the first quarter and then 13% for the full year, which implies something lower than that for the rest of the year. So I guess if you could help us again with a little more color to why the rest of the year gets so much better -- and then beyond that, like it seems like when you're advertising more advertising as a percent of sales, that's driving sales. Why not go above the 13% in the short term, 14%, 15% for 2024, for calendar 2024? Thanks. Keith Siegner -- Chief Financial Officer Sure. Sure thing. So look, just starting with Q1, look, obviously, given the seasonality that we just discussed to Matt's question, this is the most it's the lowest spend in Q1, and we had inefficiency and spend given that this location is related to the transition. That's kind of what drove that dynamic. We have bigger dollars and anticipate -- we anticipate more effectiveness and efficiency of the dollars as we get into the later seasons. That also couples with the promotions that also couples with the product innovation that we'll be bringing. All of these things kind of work together. So your question is fair. We totally get it. But we've been through all that and are very comfortable at this point with that dynamic of lower percentages, but higher dollars and more effectiveness and impact of all of those things combined to drive what you would see within that range of guidance. Mary Fox -- President and Chief Operating Officer I think, Keith, just to add, I think, Mike, what we also see, I mean, within our marketing and advertising spend, there's a short-term working media that drives growth. And that's in the quarter and beyond because it's never always just build time. I think the second piece in our spend is all the research and development work around the innovations to come. So that also built in, as well as brand equity building. One of the things that we've always talked about is we continue to test and learn all the time around advertising and marketing. So for example, the team are running a test right now, really looking at opportunities outside of promotional windows, tentpole moments that you would typically see to see in terms of the traffic that we can drive and then convert through the funnel. So -- the team is very energized around that, lots of debates and great outlook in terms of testing, and that will continue and is one of the reasons that we have been successful is that agility. And I think as Keith shared, we feel very good in terms of the runway for the rest of the year because, obviously, touch points are a key lever as well for us as we think about the growth and the formula of success that we've had for so many years. Mike Baker -- D.A. Davidson -- Analyst OK. Fair enough. One quick just housekeeping as part of the analysis, showing the back half, the variables we need are how much the extra week helped in terms of sales and EBITDA. Excuse me, I have my estimates, but is that something you're willing to share? Keith Siegner -- Chief Financial Officer Yeah, there was nothing unusual about it that would make it a nonstandard week for us, so it's pretty consistent across most of the metrics with a typical Q4 week, nothing really unusual on that front. Mike Baker -- D.A. Davidson -- Analyst Both in terms of sales and profitability or EBITDA dollars? Keith Siegner -- Chief Financial Officer Yes. Yeah, there's a number of moving pieces across the thing, but it's a relatively representative Q4 week. Mike Baker -- D.A. Davidson -- Analyst Understood. Thank you. Operator Thank you. Our next question comes from the line of Thomas Forte with Maxim Group. Please proceed with your question. Tom Forte -- Maxim Group -- Analyst Great. So for the sake of time, three quick questions, three quick answers are more than acceptable. The inventory management, was that a one off? Or is that a permanent change? And then on the services revenue, I'd like that you're talking more about it, but how should we think about the relative profitability? Your gross margin on your goods is quite high. And then lastly, when thinking about your full-year outlook, how do you think about the notion that there may be fewer rate cuts, but it seems like there's a greater likelihood of a soft landing. So I know home category could be highly sensitive to interest rates, but it seems like the good news is that there's a greater chance of a soft landing, and I'd love your high-level thoughts on that? Thanks. Mary Fox -- President and Chief Operating Officer Yeah. OK. Keith, can I take the inventory management one? Keith Siegner -- Chief Financial Officer Sure. Sounds good. Mary Fox -- President and Chief Operating Officer Yeah, Tom. So yes, for us, it was a result of a lot of the investments we've made in the past in supply chain. So for us, we will continue to drive efficiencies in our inventory and even just kind of the speed to market as we move goods from factory through to our DC. So continue -- you'll expect to see some benefits continuing -- and the team honestly have done an amazing job, so we're just very grateful. And I think back to the point Keith touched on before, the ability for us to drive up as the demand will swing back at the point where the category does back into some momentum. We're also really able to be very agile and be able to build up inventory. So we feel good on that one. I think service revenues, we'll share more through the year as we think in terms of the model, it's still very early days as we start to build out those capabilities. So we'll give you some more color to that later in the year. And I think, Keith, maybe you want to go to the outlook. Keith Siegner -- Chief Financial Officer Sure thing. So look, it's -- the macro discussion could get really complicated really quickly. Do we not get the rate cuts, which result in greater housing turnover, which typically results in more desire for the furnishings, but do we also get a soft landing, what happens with the elections, what happens is there's a lot of these moving pieces. And I think really what we were trying to say was because we are in this enviable position of not having to make a call on exactly when that bounce is going to come, we're going to take a conservative approach and manage our expenses against that, setting us up for the position where should that work out, should we get more housing turnover? Should we get more home furnishing demands. Rates go lower. Election is not a a big deal, whatever we can participate and ride that demand curve in real time. And that's the plan. So that's why we're providing a lot more of the transparency behind that. Yes, we hope it plays out the way you're talking about, but we're not building a plan that requires any of the more positive outcomes to really dominate the rest. And that's why we are so transparent with that macro benchmark underneath our guidance. Tom Forte -- Maxim Group -- Analyst Great. Thank you, Keith. Thank you, Mary. Thank you, Shawn. Operator Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments. Shawn Nelson -- Chief Executive Officer Yes. We just want to thank all of our investors, as well as all the Lovesacers out there that keep this company cranking, and we look forward to an amazing fiscal year. Thank you.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, everyone, and welcome to the Lam Research March 2024 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Ram Ganesh, head of investor relations. Sir, please go ahead. Ram Ganesh -- Head of Investor Relations Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, president and chief executive officer; and Doug Bettinger, executive vice president and chief financial officer. During today's call, we will share our overview of the business environment, and we'll review our financial results for the March 2024 quarter and our outlook for the June 2024 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release can also be found on the investor relations section of the company website. along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3:00 p.m. Pacific Time. A replay of this call will be made available later this afternoon. We're having some technical difficulties posting our earnings call slides externally. We will try to post it as the call is going on. If not, we will post it on our website after this call. And with that, I'll hand the call over to Tim. Tim Archer -- President and Chief Executive Officer Thanks, Ram, and thank you to everyone joining us today. Lam is off to a strong start in calendar 2024, with revenues, profitability, and earnings per share for the March quarter, all exceeding the midpoint of our guidance. These results, as well as our outlook for the June quarter point to Lam's solid execution in an industry environment that is progressing much as we predicted in our January call. Today, we see industry WFE spending for calendar 2024 in the low to mid-$90 billion range, with the modest increase from our prior view, driven mainly by additional lithography shipments in China. We see no meaningful change to our outlook for Lam's overall 2024 revenue profile. From an industry perspective, DRAM remains strong with WFE spending driven by growing demand for high-bandwidth memory, and sustained investment in domestic China. In foundry logic, growth in leading-edge spending this year is being partially offset by a decline in mature node spending outside of domestic China. Domestic China spending is running higher than we had previously expected. However, we still see it being first half weighted with Lam's revenue contribution from China declining as the year progresses. In NAND, we continue to expect year-on-year growth in WFE spending in calendar 2024. Encouragingly, we have seen an uptick in fab utilization. And in the March quarter, this has translated into double-digit percent growth quarter over quarter in our spares revenues. As supply and demand continues to normalize through the remainder of the year, we see a strong setup of developing for 2025 NAND spending. As we move toward a broader WFE recovery, Lam stands to benefit from powerful secular drivers of semiconductor growth and innovation. Generative AI and other emerging smart applications are built on a foundation of semiconductor technology and are expected to deliver trillions of dollars of economic benefit at a global level over the next decade. AI's transformative use cases, foreseen in both consumer and enterprise markets are only in the early stages of realization, and we believe that significant investment in semiconductor manufacturing capacity will be required to satisfy the coming demand for advanced compute, memory, and storage. In this environment, the winners will be the equipment companies that can accelerate the pace of technology advancement, while at the same time, deliver innovations that disrupt the rising cost and complexity of semiconductor fabrication. To this end, Lam is investing in two differentiated approaches: first, we are putting more capabilities and resources close to our customers to strengthen collaboration; and second, we are leveraging Lam's proprietary Semiverse Solutions, digital twin capabilities to reduce the time and cost of technology development. Already, we are seeing Lam's distributed R&D footprint having a positive effect. In the past quarter, we've used our customer-centric lab investments in Korea, Taiwan, and the US to accelerate cycles of learning on new applications. resulting in important wins for Lam in both DRAM and foundry logic advanced packaging. With respect to Semiverse Solutions, we leverage a portfolio of digital twins created at the scale of the device the process, and the reactor to model complex interactions that influence tool performance and productivity. Lam's engineers now regularly use these capabilities to optimize multidimensional etch and deposition process recipes faster and with less on-tool wafer experimentation. Turning to demand related to AI. The early impact has been most prominent in DRAM and foundry logic. We believe, however, that AI's impact on storage is still ahead and represents a key vector of long-term growth for our NAND business. More advanced AI applications need faster, more power-efficient, and higher-density NAND storage. NAND-based enterprise solid-state drives or eSSDs, are 50 times faster in read-right capability, two to five times more power efficient, and use 50% less space at the system level compared to hard disk drives or HDDs. Today, over 80% of enterprise data is stored on HDDs. And we expect this mix to shift in favor of SSDs as NAND capability and cost continue to improve. This is where Lam is playing a key role by enabling technologies, which are critical for both performance and cost scaling. In deposition, for example, Lam is leading the transition from tungsten to molybdenum in the word line to improve device access time and reduce stack height per storage cell. In etch, Lam is using high aspect ratio cryogenic etch to enhance productivity of memory hole formation. Today, we are approaching 1,000 cryo etch chambers in our high-volume manufacturing installed base. In partnership with our customers, we're using the tremendous amount of data coming from this installed base to rapidly improve technology and cost at each successive layer transition in NAND. Recently, we combined the learning from the installed base with the capabilities of our Semiverse Solutions simulation tools to further strengthen our differentiation. As a result of our accelerated innovation, we have defended every NAND high aspect ratio memory hole etch production decision made so far by customers. With respect to DRAM, AI servers use high-bandwidth memory or HBM to increase read-right speed and reduce server power consumption. HBM stacks multiple DRAM dies using TSVs enabling 15 times more data throughput than standard DRAM. However, HBM also requires an approximately threefold increase in wafers per bit compared to conventional memory. With this in mind, it's important that our SABRE 3D and Syndion tools not only provide best-in-class plating and etch capabilities but also deliver industry-leading throughput and productivity to keep overall costs low for our customers. We are the leading player in TSV applications for HBM and expect our HBM-related shipments to grow more than three times in calendar year 2024. Finally, on the foundry logic side. Lam tools, including selective etch and ALD, are well positioned to help enable the move from FinFET to gate all around, a key transition needed to improve transistor performance per watt by 15% to 20%. We see our shipments for gate all around nodes in calendar year 2024, exceeding $1 billion. Lam tools are also enabling foundry logic inflections such as backside power delivery, molybdenum interconnects, and dry photoresist processes for EUV patterning. Our traction with customers is strong on these inflections. And together, they represent a multibillion-dollar growth opportunity for Lam as AI drives a greater need for faster, more power-efficient devices. To conclude, the proliferation of AI, the global push for localized chip manufacturing capacity, and the ubiquity of semiconductors in new consumer and commercial products represent powerful secular drivers for Lam and the rest of the semiconductor equipment industry in the years ahead. We are pleased with the company's execution and our results in the March quarter, and remain focused on our opportunity to outperform through this next leg of industry growth. Thank you, and I'll now turn it over to Doug. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Tim. Good afternoon, everyone, and thank you all for joining our call today during what I know is a busy earnings season. We delivered solid results in the March 2024 quarter. Our March quarter results came in over the midpoint of our guidance ranges for all financial metrics. I'm pleased with the company's continued robust execution. We achieved the highest gross margin percentage since the merging of Lam with Novellus. We also continue to generate very strong free cash flow of $1.3 billion or 34% of revenue. Let's dive into the details of our March quarter results. Revenue for the March quarter was $3.79 billion, which was roughly flat with the prior quarter. Our deferred revenue balance at the end of the quarter was $1.75 billion, which was a decrease of $182 million from the December quarter related to revenue recognized that was tied to those customer advanced payments. I believe deferred revenue will continue to trend downwards as we continue throughout the year. From a segment perspective, March quarter, systems revenue in memory was 44%, which is a decrease from the prior-quarter level of 48%. The decline in the Memory segment was attributable to DRAM coming in at -- 23% of systems revenue versus the 31% that we saw in the December quarter. DRAM spending was focused on the 1y, 1-alpha and 1-beta nodes, spending largely driven by DDR5 and high-bandwidth memory enablement. As we noted in the last quarter, nonvolatile memory WFE is increasing in 2024, but it remained at a subdued level on a mix basis for the March quarter. This segment represented 21% of our systems revenue, up from 17% in the prior quarter. I do just want to mention one thing. We are characterizing one customer's investment in specialty DRAM as a nonvolatile investment since it has a nonvolatile component to the device. This might be different than what others in the industry are doing. NAND investment was driven by very modest spending in conversions to 2xx and 3xx layer devices. The foundry segment represented 44% of our systems revenue, a slight increase from the percentage concentration in the December quarter of 38%. Growth was driven predominantly by domestic China shipments. And finally, the logic and other segment were 12% of our systems revenue in the March quarter, down from the prior quarter level of 14%. The decline was driven by continued mature node softness. Now I'll discuss the regional composition of our total revenue. The China region came in at 42%, and up slightly from 40% in the prior quarter. While most of our China revenue continued to be from domestic Chinese customers. This was the largest quarter for multinational spending in China since mid last year. We expect spending from this region to increase year over year in 2024. I believe it will, however, decline as we go through the year. Our next largest geographic concentration was Korea at 24% of revenue in the March quarter versus 19% in the December quarter. Japan and Taiwan rounded out the remainder of the top 4 regions. Our customer support business group generated revenue in the March quarter totaling approximately $1.4 billion. This was down 4% from the December quarter and 13% lower than the March quarter and calendar year 2023. Our Reliance Systems revenue decreased in the March quarter due to continued weakness in mature node investments, partially offset by a higher level of spares. Reliant is at the lowest revenue level in the last two years and spares is at the highest revenue level since the end of 2022. The spares business is seeing very early signs of positive impact from utilization increases from our customers. Turning to the gross margin performance. The March quarter came in at 48.7%, above the midpoint of our guided range and above the December quarter level of 47.6%. The increase was primarily a result of favorable changes in product and customer mix, as well as improved factory efficiencies. March quarter operating expenses were $698 million, up from the prior quarter amount of $662 million. This was due in part to expenses incurred for an extra week in the quarter I'll remind you, it was a 14-week quarter, as well as our conscious growth in R&D spending. As Tim mentioned, we remain laser-focused on investing in R&D to extend our product and competitive differentiation. R&D as a percentage of spending was at a high watermark coming in at 71% of total spending. Operating margin for the current quarter was 30.3% and in line with the December quarter level of 30% and at the high end of our guidance range. This was primarily because of the strong gross margin performance, which was somewhat offset by the growth in R&D investment. Our non-GAAP tax rate for the quarter was 11.7%, consistent with our expectations. Looking further into calendar 2024, we continue to believe the tax rate will be in the low to mid-teens, with some possible fluctuations quarter by quarter. Other income and expense for the March quarter came in at $10 million in income, compared with $5 million in income in the December quarter. The increase in OI&E was due to higher cash balances and higher interest rates. OI&E will be subject to market-related fluctuations that could cause some level of volatility quarter by quarter. On the capital return side of things, we allocated approximately $860 million to share repurchases, and we paid $263 million in dividends in the March quarter. Our share repurchase activity included both open market repurchases, as well as an accelerated share repurchase arrangement. The ASRs continued to execute into the month of April. And I would just mention, we continue to track toward our long-term capital return plans of returning 75% to 100% of our free cash flow. March quarter diluted earnings per share was $7.79 toward the higher end of our guided range. The diluted share count was 132 million shares on track with expectations and down from the December quarter. We have $1.2 billion remaining on our board-authorized share repurchase plan. Let me pivot to the balance sheet. Our cash and short-term investments at the end of the March quarter totaled $5.7 billion, up a little bit from $5.6 billion at the end of the December quarter. The increase was largely due to collections with an extra week in the March quarter, offset by cash allocated to share buyback, dividend payments, and capital expenditures. Days sales outstanding was 57 days in the March quarter, a decrease from 66 days in the December quarter. Inventory at the end of the March quarter totaled $4.3 billion down $107 million from the December quarter level. Inventory turns remained flat from the prior quarter level at 1.8 times. We are making progress in bringing inventory levels down, and we will continue to work on this throughout calendar 2024. Noncash expenses for the March quarter included approximately $77 million in equity compensation, $75 million in depreciation, and $15 million in amortization. Capital expenditures in the March quarter were $104 million, down $12 million from the December quarter. Spending was primarily centered on lab expansions in the United States and Asia supporting our global strategy to be close to our customers' development locations. We ended the March quarter with approximately 17,200 regular full-time employees, which was flat with the prior quarter. Let's now turn to our non-GAAP guidance for the June 2024 quarter. We're expecting revenue of $3.8 billion, plus or minus $300 million, gross margin of 47.5%, plus or minus 1 percentage point. This gross margin decline from March is reflective of a quarter-to-quarter change in customer mix. Operating margins of 29.5%, plus or minus 1 percentage point. This reflects our continued commitment to prioritize R&D spending. And finally, earnings per share of $7.50 plus or minus $0.75 based on a share count of approximately 131 million shares. So, let me wrap up. 2024 is a year of continued transformation for Lam Research. We're investing in our long-term strategy to expand our technology leadership and operational excellence while efficiently managing overall spending. We're encouraged that the long-term drivers of semiconductor growth such as artificial intelligence, are seeing accelerated adoption and we expect Lam to be a strong beneficiary of these trends. We're well positioned for the architectural and material change coming, such as gate all around, advanced packaging, backside power delivery, and the move to drive photoresist. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions. Questions & Answers: Operator Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator instructions] At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Krish Sankar from TD Cowen. Please go ahead with your question. Krish Sankar -- TD Cowen -- Analyst Yeah, hi, thanks for taking my question. First one for Tim. Tim, a question on high aspect ratio for NAND, where you have a very high market share. And you said in your prepared comments, you defended market share there. Your competitor, Tokyo Electron, introduced a cryo etch product a year ago, but you also have one from three years ago. So, I'm kind of curious, can you talk a little bit about the market share dynamics and high aspect ratio? And the fact that some of your customers are talking about using cryo etch for 430-layer NAND. So, can you give us some color there on high aspect ratio etch? And then I have a follow-up for Doug. Tim Archer -- President and Chief Executive Officer Sure. Krish, on cryo etch, had a couple of data points in my prepared remarks. But one is we have an installed base of cryo etch tools used for NAND that's now approaching 1,000 chambers. So, obviously, we've been in high-volume production with this application for quite some time. And my comment was that there always are customers exploring different options during the development phase. But as my comment is, these are very complex processes to put into high-volume production. And so, we continue to leverage the learning that we get working with our customers, the focus on technology extension and manufacturing readiness. And by that focus, we've been able to defend the decisions once they come to that point of the customer really having to decide which tool to commit their next fabrication line, too. And so, that's all we can say is we're working hard to make sure we have the best tool for the application. And so, far, it's winning the day. Krish Sankar -- TD Cowen -- Analyst Got it. Got it. So, good to hear that the share is still solid. And then a follow-up for Doug on margins. Doug, you kind of mentioned about the gross margin, maybe moderation in the June quarter due to the customer mix. Is that mainly a function of China? And how to think about gross margins in the second half? And maybe if I can extend that question how to think about opex into the back half of the year? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. Krish, I guess I'd say a couple of things. First, gross margin sometimes it's a little bit better when we're selling to smaller customers, and I'm not going to pin it to any one geographic region necessarily. But in China, there are some smaller customers, and they tend to because we have volume purchase pricing sometimes, they pay a little bit more. But it's not because of geographic regions, it's because of the size of the customer. So, that's one thing to think about. And in my scripted remarks, as well as what Tim said is we think that the China region will modulate a little bit as we go through the year. So, that's part of what we need to think about. And I've been talking about this for a couple of quarters. So, anyway, I have that in mind when you're updating your models. Second, we've been talking, I think, for a couple of quarters now, maybe actually three quarters about the need to grow R&D investment this year because of these technology changes that we see it all around, backside power, advanced packaging and so forth, dry photoresist. And we're absolutely planning on doing that. You saw that in the March quarter, R&D as a percent of total spending was the highest that I have seen here at 71%, and we intend to keep investing in R&D. So, independent of whatever the top line is, we're going to grow R&D investment this year. Krish Sankar -- TD Cowen -- Analyst Thanks, Tim. Thanks, Doug. Tim Archer -- President and Chief Executive Officer Thanks, Krish. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Doug. Operator Our next question comes from Timothy Arcuri from UBS. Please go ahead with your question. Tim Arcuri -- UBS -- Analyst Thanks a lot. So, I wanted to ask about China. So, it's going to modulate through the year, the mix, but it sounds like it's still going to be up year over year for domestic China this year. So, I guess my question is, we've seen some headlines on a few entities being potentially added to the entity list. And I'm wondering if these comments reflect the potential addition of these entities. Or does it basically say, hey, if the status quo remains, this is what your assumption is, meaning that if there were entities added that that would be downside to these comments? Tim Archer -- President and Chief Executive Officer Yes. Tim, I mean, obviously, we can't forecast changes in US trade policy with respect to China that we don't know about. And so, we're basically giving you our best view of what we think our China business will be through the rest of the year and recognizing that there could be changes that we don't foresee. Well, what I will say is we -- obviously, we've built up what we believe is a strong government affairs team were plugged into all the relevant discussions. And I think over the last couple of years, you've seen we have a pretty strong track record of working with the US government responding to export control policy, and that's just what we plan to do going on into the future. Tim Arcuri -- UBS -- Analyst Sure. Thanks, Tim. And Doug, I just wanted to ask about service a bit. So, there's much different dynamics happening in the spares and in the Reliant business. Can you talk about that because it certainly sounds -- I mean, this is kind of an odd situation that we'd have spares piece so strong and Reliant piece so weak. So, can you sort of give us any read-throughs there? Like what does that mean for the future of that business? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. Listen, I think it's well understood right now that you've got two dynamics going on relative to thinking about the different components of CSBG. First, industry utilization is starting to get somewhat better. I would definitely say it's early days for that. But the reason I specifically talked about the spares level versus where it's been over the last couple of years is because of that. That clearly is beginning to show up in our spares business. However, when you look at CSBG in total, we were down now because of the softness in Reliant. I also think that's pretty well understood in the industry, right? Mature note investment outside of the China region certainly is pretty soft right now. And so, you have those two competing dynamics going on that's shown up in the CSBG line. If I was guessing, Tim, right now, CSBG is probably flattish this year from last year because of those two offsetting dynamics if that helps you think about it. Tim Arcuri -- UBS -- Analyst Perfect. Tim Archer -- President and Chief Executive Officer I think the only thing I would add there is, I mean, when you think about the CSBG business a little bit longer term, I mean, clearly, we commented on utilization starting to tick up. But as we move into 2025, I think we also will see significant upgrade activity coming back in, especially in the NAND space. We've talked about the fact that there is a large portion of that installed base that has not yet been moved toward the technology nodes that are most useful for our customers. And so, I think that will also flow through into the CSBG business perhaps not so much this year, but clearly, as we move into '25 and beyond. Tim Arcuri -- UBS -- Analyst Thank you, Tim. Operator Our next question comes from Harlan Sur from J.P. Morgan. Please go ahead with your question. Harlan Sur -- JPMorgan Chase and Company -- Analyst Good afternoon. Thanks for taking my question. With an accelerated compute and AI semiconductor segment of the market, there still seems to be a lot of constraints centered around high bandwidth memory and tightness in co-ops packaging. Obviously, you guys have a very strong position here, as you mentioned, Tim. You guys previously talked about this business, this opportunity as being potentially like $1 billion per year type of revenue opportunity. But just given the strong demand pull and some of the expanding use cases, I mean, is the Lam team already on track to drive $1 billion-plus in advanced packaging revenues this year? And now that the trends are in place, right, what's kind of your new or maybe revised view on the revenue opportunity here for the team over the next few years? Tim Archer -- President and Chief Executive Officer Yeah, Harlan, I think that you're right, there is a strong pull in. I mean, obviously, we're responding as quickly as we can to the demand. Our advanced packaging shipments this year will be over $1 billion. And so, that's kind of an important milestone for us. I don't know how to give you like that next milestone. Obviously, we're seeing tremendous growth in demand in this area. Our positions are strong, not only as you said, in the foundry logic side of advanced packaging, but also as we talked specifically about our very strong positions in HBM related to what we do on the packaging side of HBM. And so I think it's just an area where we'll see good long-term growth we are investing again in this area. We've talked in the past about our work in the panel processing space trying to look ahead to see where the packaging market is going to go to make sure that we are fully capable of taking advantage of what we see is a real long-term secular driver for semiconductors and the equipment industry. Harlan Sur -- JPMorgan Chase and Company -- Analyst Congratulations on hitting that milestone. For my follow-up question, with your customers and their spending outlooks looking more constructive as psychodynamics continues to improve, you've got strong tailwinds on manufacturing complexity trends like the growth outlook appears quite solid, right, for the team. So, if I look out beyond this year and the ramp of your new Malaysia manufacturing facility, I mean, not only is it low-cost geography, like you guys have mentioned, but you've got highly skilled workforce. You also set up the supply chain support infrastructure locally as well. So, I don't know if it's for Tim or Doug, but is there any way to think about the incremental gross margin benefit on incremental revenues that flow out of the Malaysia factory as you start to load it? Tim Archer -- President and Chief Executive Officer Let me take the first part of it, and then I'll let Doug talk specifically about the gross margin comment. I think it's one thing that I think we're feeling very comfortable with, which is your last question was, boy, there must be a lot of demand in you've got to be ramping up for that. I think as we come into this next upcycle, we feel very well positioned relative to all the things you just talked about, the physical capacity, the trained workforce. The supply chain has been built up and made more resilient since the last big upturn in the industry where we saw lots of constraints. And so, I think from that standpoint, we feel really good that we have executed on the operations side of the house. Now we just need to start seeing the kinds of new peak volumes that will demonstrate that externally. And I'll let Doug address your gross margin question. Doug Bettinger -- Executive Vice President, Chief Financial Officer Yes, Harlan. I guess, I'll just remind you what I've said in prior quarters, which is I don't want you to run ahead of that financial model we put out in 2020. That's still the right way to think about it. Now obviously, right now, we've got quite favorable customer mix. I don't expect that to continue. I don't know, maybe I'm wrong about that but the benefit from Malaysia after we came through the inflationary stuff and whatnot, was completely how we intend to get back to the gross margin, and better than that financial model maybe we can push a little higher. Certainly, we're not going to stop staying focused on that. But that's the way to think about it is Malaysia is still into the future. It will show up when we ramp incremental volumes, and we're ready for that. Harlan Sur -- JPMorgan Chase and Company -- Analyst Perfect. Thank you. Tim Archer -- President and Chief Executive Officer Thank you, Harlan. Operator Our next question comes from Srini Pajjuri from Raymond James. Please go ahead with your question. Srini Pajjuri -- Raymond James -- Analyst Doug, I think on the China side, just one clarification. Were you expecting China to moderate in this quarter? Did it come in better than you expected? And then just to go back to your comment about China moderation through the rest of the year. Any particular segment within China? I mean, is it DRAM? Or is it logic? Or is it both? If you can add some color to that, that would be helpful. Doug Bettinger -- Executive Vice President, Chief Financial Officer Yes, Srini. It came in pretty much as we expected. I suggested last quarter that it was going to continue to remain pretty good in March. So, no, that was pretty much as we expected. And I don't know, like at a segment level that I've got any specific color for you relative to the China slowing a little bit in the second half. There's such a broad set of customers there that are in every segment. It's in DRAM, it's in foundry, it's in logic. And it's a broad set. So, when we look at that in total, I do see it somewhat weighted here to the early part of the year, and it will modulate somewhat. But nothing specific I had to share with you from a segment standpoint. Srini Pajjuri -- Raymond James -- Analyst Thanks, Doug. And then maybe for Tim, Tim. Some of your large customers got a pretty good amount of subsidies from the government recently on the CHIPS Act and other stuff outside of the US as well. So, I'm just wondering what sort of impact should we expect in terms of your own business as I guess, that money comes in? And any, I guess, thoughts on the timing of potential orders from this incremental funding that they're getting? Thank you. Tim Archer -- President and Chief Executive Officer Yeah. I mean, obviously, you've seen in just even the last few weeks, quite a few announcements about the CHIPS Act grants in the US I'll also note that there are similar CHIPS Act programs going on in places like Japan and obviously, a little bit further in the future in Europe and elsewhere. And so, we've always said these are more of a '25, '26, '27 time frame from the equipment side, especially the shorter lead time tools like we provide. So, you see the fab coming up a lot of construction activity, you see long lead time tools go in. And then we know that our time will come. And so, I think it's still a '25, '26, '27 opportunity for us. But the important thing is, while that's a lot of extra money maybe what's really exciting about is most of that is targeted toward truly the leading-edge nodes. And one thing about Lam's story is that we have focused a lot of R&D investment to build our position in leading-edge foundry logic. In the next generations of DRAM and high-bandwidth memory as well as, of course, continuing our strength in NAND. And so, as we see these new fabs come up, I mean, it's not only additional spending, but it's at nodes where we believe that we will actually do better from a SAM and market share perspective. And so, we're patiently waiting. But we know it's going to come. You can go visit the sites, the fab buildings are there, and they're feverishly working to get them ready for equipment. Srini Pajjuri -- Raymond James -- Analyst Thanks, Tim. Tim Archer -- President and Chief Executive Officer Thanks, Srini. Operator Our next question comes from C.J. Muse from Cantor Fitzgerald. Please go ahead with your question. C.J. Muse -- Cantor Fitzgerald -- Analyst Yeah, good afternoon. Thank you for taking the question. I guess first question, I wanted to try to get a little bit more color on your updated WFE outlook. It looks like you're taking it up by about a billion. You talked about that being really litho, not impacting you. So, I guess should we infer from that, that you're still expecting WFE up kind of low to mid-single digits? And as part of that, how are you thinking about those four large drivers, particularly, I guess, two or three of them, and the growth potential there and the relative outperformance that you expect to see? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yes, C.J., I mean, obviously, one of our peers in the industry reported last week, we took a look at it and just have a view that we missed a little bit of what was shipping into China. That is the vast majority, if not all, of the change in WFE from our point of view. There's always some moving pieces and DRAMs may be a little stronger, trailing etch foundry logic is probably a little bit softer. But at the end of the day, the biggest change that we saw was we missed it a little bit because it's not part of our addressable market. I'm not sure I caught all of your -- the second part of your question, C.J. Try it one more time. C.J. Muse -- Cantor Fitzgerald -- Analyst Just as you think about those $1 billion-plus opportunities, particularly around advanced packaging and I guess, including HBM within that and also get all around how you think you'll fare relative to WFE in '24? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. I think given the mix we see in some of these technology transitions, it should be incrementally better than it was last year for sure. C.J. Muse -- Cantor Fitzgerald -- Analyst And then just as a quick second question, I guess, third question, if I could sneak it in. You talked about normalization of China into the second half. And getting back to maybe a 46%-ish type of normalized gross margin. It sounds like China, in your mind today is better. So, I guess, what would that number be if that continues to be strong for you guys? Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer I guess, C.J., you got to just kind of look at where we've been, right? You're absolutely right, and thanks for mentioning the 46%. That's sort of where gross margin was after we had done some of the Malaysia stuff and before China popped up with those smaller customers. And so, the fact that we're above that level is largely customer mix. And so, that's how you should be thinking about it. And if we have that mix wrong, then margin kind of -- you got a couple of data points in the last couple of quarters that you can kind of solve for to understand what it might look like. It will be in that 46% to 48-plus percent range depending on what the mix looks like. C.J. Muse -- Cantor Fitzgerald -- Analyst Thanks so much. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, C.J. Operator Our next question comes from Atif Malik from Citi. Please go ahead with your question. Atif Malik -- Citi -- Analyst Hi, thank you for taking my questions. The first one for Tim. Tim, good to see some green shoots in the NAND market. You talked about double-digit far parts growth in the NAND and you also talked about that the AI storage inflection for high-density SSDs is in front of us. But we do not have the 3x wafer per bit offset that you're seeing on the DRAM side. So, can you kind of paint for us the trajectory of the NAND improvement that you're expecting in the second half of the next year? Doug Bettinger -- Executive Vice President, Chief Financial Officer We're not going to give you a '25 forecast quite yet. It's way too early for that. It will be better though, right? I mean, it's improving. And Tim, I'll let you -- Tim Archer -- President and Chief Executive Officer Yeah. Well, I guess without giving you exact numbers. I mean, clearly, we all know that the NAND spending has been incredibly weak for the last 12 to 18 months. And so, we're in the very early stages of starting to see that recover. And I think if you look at what most of our -- we rely on our customer commentary that they make publicly for a lot of this, but they talk about the fact that maybe 90% of the bits they're shipping are at the leading edge. But when we look at the installed base of our systems, that was my comment. I believe that there is still going to be a large portion of the installed base that will move forward to the next technology nodes. It's the most efficient way for our customers to do that is to upgrade what they already have. And I think you'll see that move forward and therefore, NAND WFE move up in '25. But because it comes, to a large degree, through upgrades, Lam's capture rate of every dollar of WFE spend will be much higher than in a greenfield capacity added. So when I think about Lam's opportunity to outperform in 2025, in NAND, I think it is obviously with high confidence because of the type of spending we would expect to be seen in 2025. And in the other market segments, it's also pretty high because of the -- as I mentioned, the technology inflections that are occurring. And it stayed all around where we -- this year, we'll actually have over $1 billion of shipments into the gate all around technology nodes. And obviously, as gate all around continues to proliferate, our tools like ALD and selective etch will do better. in backside power delivery. We already talked about advanced packaging and then we obviously have out there in front of us also the work we're doing for dry photoresist processes for EUV. And so, I just feel like there are a number of growth drivers for the company besides the one that is the most obvious, which is a NAND recovery in 2025. Atif Malik -- Citi -- Analyst Great. Thank you. And then one for Doug. Doug, within your China 42% of sales, you talked about multinational picking up, which came as a positive surprise to me. Can you talk about what's driving that? Are those customers not worried about incremental restrictions? Or are they just trying to upgrade some of the older technology? Doug Bettinger -- Executive Vice President, Chief Financial Officer I think it's just being responsive to the demand they see relative to the capacity that's there. And yes, I said it's the highest level since mid last year. Although I do understand over position it. The vast majority of the spending in China continues to be the indigenous Chinese customer base. But I just observed it as I was going through the numbers and knowing everybody was going to be asking about China, that was something I thought I'd just mentioned. Atif Malik -- Citi -- Analyst Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks. Operator Our next question comes from Toshiya Hari from Goldman Sachs. Please go ahead with your question. Toshiya Hari -- Goldman Sachs -- Analyst Hi, guys. Thank you so much for taking the question. I wanted to ask a question on NAND as well. Tim, in your prepared remarks, you talked about the transition from tungsten to molybdenum potentially happening in the market. I suppose, over the next couple of years. Can you speak to the significance of that in terms of depth intensity and how that could impact your business over the next couple of years? Thanks. Tim Archer -- President and Chief Executive Officer Sure. Well, obviously, any time there's a material change requires a new system, it's an opportunity for Lam to provide that technology into the market. And so, it's an important change. I mean we call it moly just because it's so hard to say molybdenum. But the change to moly has some significant device benefits and also, I mentioned the important thing in NAND is -- I mean it's important in every element of semiconductor devices, but it's the cost and technology. And so, one thing that is sometimes lost is part of the transition to moly is also about enabling stack height reduction. So, you can go to more layers and limit the stack height in a way that allows you to then have more productive etches, more productive deposition, and other things. And so, I think it's an important import inflection for the industry and an opportunity for Lam and we're well positioned to win that inflection, we believe. Toshiya Hari -- Goldman Sachs -- Analyst Got it. Thank you. And then as my follow-up on HBM, you talked about your business growing more than 3x year over year, I think. And I think that comment was consistent with what you had communicated last quarter. based on sort of the input you have, the market intel you have, what kind of bit growth or market growth in HBM do you think that increase in your business supports in '24? And obviously, demand is very strong, but how are you thinking about supply/demand from your perspective exiting the year and into '25 in HBM? Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer Toshiya, maybe I'll get it to try. I mean when you look at overall bit demand, HBM was probably 0.22% of it, although it's growing and adding to the broad market. But it's clearly requiring incremental investment in our SABRE 3D tool, our deep silicon etch tool. And I think it's something you're going to hear us talking about for many years to come. This form factor is going to continue to be important relative to AI enablement and feeding the GPU, the data that it needs, small today but growing quite rapidly. Toshiya Hari -- Goldman Sachs -- Analyst Thanks so much. Tim Archer -- President and Chief Executive Officer Thanks, Toshiya. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Toshiya. Operator Our next question comes from Joe Moore from Morgan Stanley. Please go ahead with your question. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. I wanted to follow up. You had mentioned that there was a customer that you're classifying as NAND that others might be classifying as DRAM. I just wanted to double-click on that, if you could talk to what's going on there. Is that customer sort of doing both and people just have different classifications? Should we be thinking that there's more NAND capacity coming on in China than I had thought before? Can you just talk to that change? Doug Bettinger -- Executive Vice President, Chief Financial Officer I guess all I'd say, Joe, is sometimes there could be a little bit of confusion. And I felt that as I was talking to people over the last quarter. So, the reason I said it was, it's actually a nonvolatile device. It's got nonvolatile components. And early on, because of that, and we put everything into nonvolatile memory. So, nonvolatile memory is more than NAND. This isn't an enormous number but as big enough that I want people to hear us tell you where it is and you can go think about it. And you probably know who the customer is. I'm not going to disclose it here, but it is one customer in specialty DRAM. Joe Moore -- Morgan Stanley -- Analyst Got it. Thank you for that. And then on the Reliant business, can you talk about changes in that business as we sort of move into a lower level of utilization in trailing edge nodes? Do you see that kind of returning to more of a refurbished tools business, where there's stuff that you're able to actually refurbish? And any ramifications we should think about for profitability there? Tim Archer -- President and Chief Executive Officer Yeah. I guess I'll just comment on -- I would be surprised if we move back toward a customer's divesting of equipment from fabs and us being able to refurbish those tools. I think you could see, obviously, the ebbs and flows with demand of how many new tools we ship, but I think I think it still remains mostly as a new tool, trailing-edge node business for us. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. Tim Archer -- President and Chief Executive Officer Thank you, Joe. Operator Our next question comes from Stacy Rasgon from Bernstein Research. Please go ahead with your question. Stacy Rasgon -- AllianceBernstein -- Analyst Hi, guys. Thanks for taking my questions. Doug, I wanted to go back to something you just mentioned here around the relative capital intensity of upgrades versus greenfield investments for NAND as you get into '25. And I get the idea that you should take a larger share of upgrades. But am I thinking about this wrong? Wouldn't be the absolute amount of WFE in an upgrade-driven cycle to be a lot lower than if it was in the greenfield cycle? Like how do I think about the puts and takes of those two variables in the context of NAND growth into 2025? Tim Archer -- President and Chief Executive Officer Sure, Stacy, I'll take that. I was actually the one that -- this is Tim. He said he needs to comment. Yes, no problem. I just wanted to own it in case you disagree, but I think you're thinking about it exactly right. I mean the reason upgrades are so attractive for customers is the total WFE spend is lower. That's why they upgrade the installed base. And so, for my -- comment was specifically about Lam's outperformance relative to whatever WFE is for the industry next year. And so, in an upgrade-heavy cycle, which obviously we haven't had for the last two years, in that next cycle of NAND upgrades, we're saying we would capture a higher percentage of whatever that WFE is. Now we've said in the past that Lam's opportunity actually because of that much higher capture rate, is not so different in terms of revenue for every bit added through an upgrade versus a greenfield. So, WFE comes down, that's why it's attractive for customers. But for Lam, we capture almost the same amount of revenue because of the much higher capture rate. And so, it kind of goes both ways. Stacy Rasgon -- AllianceBernstein -- Analyst So you're indifferent to like an upgrade cycle versus a greenfield cycle? Tim Archer -- President and Chief Executive Officer Well, I would say the only thing I would say is because there's been lots of questions about whether Lam's market share and defense and others, we're not quite indifferent because the power of the installed base is that, again, when the customer's preferred path is to upgrade what they already have, means that the positions don't change. And so, Lam's very strong position carries forward in that case. So, agnostic from a financial perspective, but obviously, our position in the industry continues to strengthen through each of those upgrade cycles. Stacy Rasgon -- AllianceBernstein -- Analyst Got it. Got it. That's helpful. My follow-up, again, I wanted to go back to the segment expectations in China. So, I know this -- I think it was Doug who said you didn't have anything to tell us on segments. But if I look at your slide deck, on Slide 5, unless I'm reading it wrong, it does seem to suggest that you see it says sustained investment in domestic China for DRAM in calendar '24 and weakness in foundry logic. So, is that actually what you're expecting, the China degradation through the year in foundry logic and DRAM sustaining? Or is this slide -- am I just reading the slide wrong? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. No. Stacy, you kind of have one customer in China DRAM. So, I got to be careful talking about that. China is going to modulate through the year, right? It's not going to stay at 42% is the statement that I made, and it's going to modulate in every segment, I believe, in the China region. Stacy Rasgon -- AllianceBernstein -- Analyst OK. And the slide says, expect led by HBM's sustained investment in reference to China under DRAM. So, that's not what's going to happen? Doug Bettinger -- Executive Vice President, Chief Financial Officer Unfortunately, the slides are not in front of me right now, Stacy. We're having some technical challenges. It's all going to model in Slide 5, when you pull it up. Stacy Rasgon -- AllianceBernstein -- Analyst OK. Thank you, guys. Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah, no problem. Tim Archer -- President and Chief Executive Officer Thanks, Stacey. Operator Our next question comes from Vivek Arya from Bank of America Securities. Please go ahead with your question. Vivek Arya -- Bank of America Merrill Lynch -- Analyst Thanks for taking my question. I wanted to revisit your comment about spares doubling. How important is that data point? Like what were you expecting instead versus the actual result? And how much does it increase your confidence about NAND recovery? Because you're not really increasing the WFE expectations for this year, right? So, on surface, this comment about spares doubling sounds like a very important data point, but I'm not sure how to quite put that in context of what it means for Lam this year. Tim Archer -- President and Chief Executive Officer OK. Well, first, we didn't say spares would double. We said that it was a double-digit percent growth quarter on quarter in our spares revenue, so not doubling. But I think that in general, I mean, the way we look at that and why we made that comment. Obviously, it's positive for us to see spares move up. If you think -- go back in our commentary previously about CSBG over the last few years, we've said spares revenue will grow year on year because the installed base itself grows. However, through this downturn, the cuts in fab utilization were so severe that we actually saw spares revenue come down, which surprised us a bit. So maybe to your point of expectations. We knew that as soon as customers started to utilize the fabs and bring some of the tools back online, we would see spares increase. We said that would be the first sign that the end market was really starting to improve. And so, the reason we called it out was that obviously, it further confirms, I think what you're hearing from our customers which is that utilization is starting to improve. It doesn't tie to WFE because utilization of what you have is one issue when you choose to spend more to either upgrade technology or add capacity as a second decision. We've said that, that is likely still more of a 2025 event on the equipment spend side. But you have to get the first indication, which is utilization improvement, spares improving and then the rest would come. Vivek Arya -- Bank of America Merrill Lynch -- Analyst And then the other thing on the call, I believe, Doug, you mentioned CSBG will be flat year over year. Or did I not hear that properly? Or did you mean it sequentially? Or did you mean it for this calendar year because if it is for the calendar year, that implies pretty strong kind of mid-teens growth in the second half? So, if you could clarify what you said about CSBG growth and whatever time frame you were referring to? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah, I said flat-ish, plus or minus flat. And by the way, that's not a new disclosure. We said that last quarter as well. Vivek Arya -- Bank of America Merrill Lynch -- Analyst For this calendar year or for -- Doug Bettinger -- Executive Vice President, Chief Financial Officer Correct. For this calendar year, yeah, '24 over '23. Vivek Arya -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Vivek. Operator Our next question comes from Chris Caso from Wolfe Research. Please go ahead with your question. Chris Caso -- Wolfe Research -- Analyst Yes, thank you. I guess the first question is on DRAM. And could you perhaps talk about some of the moving parts that are going on with that right now? And I think in a previous question, you talked about the China part of DRAM expecting that to moderate through the year. Obviously, the direct revenue from HBM sounds good. But there's a broader capacity question going on in DRAM that's fungible with HBM. Could you talk about what your expectations are for that as the year progresses? Tim Archer -- President and Chief Executive Officer Yeah. Let me start. I think just to address this one point about the fungibility of capacity. You're correct. Obviously, if you're looking at DDR5, I think we've made a couple of comments in the past though. One, we're talking specifically about the additional tools that are needed to enable HBM. And so, that's why we talk about our electroplating and our Syndion silicon etch tools because those are added to whatever capacity you might have for DRAM, you need to add those tools to make HBM possible. And so, that's what we're seeing rise by 3x this year. On the second side, when you go from conventional DRAM to HBM, our customers have talked about and the industry has talked about the much larger die size because you've had to create the real estate that's needed to add the TSVs. And so, while you may be able to translate some of the same DRAM equipment over to produce the same number of bits, you'll need more of that equipment as well. So, those are the key drivers as you're moving for additional spending growth as you move into HBM DRAM. Chris Caso -- Wolfe Research -- Analyst Got it. As a follow-up, you made in your prepared remarks a comment talking about $1 billion in revenue from gate-all-around this year. Could you talk about that in the context of where the overall opportunity is for gate-all-around? Is this $1 billion represent what you would consider to be gate-all-around capacity? Is that just getting the processes started? Kind of where are we with that gate-all-around ramp? Tim Archer -- President and Chief Executive Officer Yes. I mean I think it's -- we're really just starting at gate-all-around. Our comment was $1 billion of shipments into the gate-all-around nodes this year. And it's across all of our types of products that help enable gate-all-around smaller technology nodes. And so, what we've said is that every technology node, etch and depth intensity grows and our SAM opportunity expands. And so, gate-all-around being an important node where there's need for new tools from Lam like in our selective etch product portfolio or in our ALD product portfolio that might not have existed to the same degree in prior notes. And so, that's -- those are the areas where we're seeing growth, as well as just growth in the rest of our advanced technology products and etch and dev. Ram Ganesh -- Head of Investor Relations Thank you, Chris. Operator, we'll take one more question. Operator Our next and final question comes from Brian Chin from Stifel. Please go ahead with your question. Brian Chin -- Stifel Financial Corp. -- Analyst Hi there. Thanks for sneaking me in. The company has previously discussed an incremental $1 billion to $1.5 billion increase the WFE for every 1% AI server penetration. Last year, given the underutilization of capacity and the focus on conversion activity, maybe the math was lower last year. But now utilization rates for advanced foundry and DRAM nodes have recovered. Do you see AI growth, I guess, driving spending levels more consistent with that $1 billion to $1.5 billion? And do you already see that maybe playing out to some degree in your order backlog? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah, Brian, we're not going to talk about order backlog. But the statements we made and you've got it right, which was for every percent that is an AI server versus an enterprise-class server because of the 8x DRAM, much bigger logic die, the GPUs, and the three times NAND, did so $1 billion to $1.5 billion incremental WFE. And that's absolutely still how we see it. But you're right, like if things are underutilized, you don't need to spend nearly as much, but that's a temporary situation. Eventually, things get back to being utilized. Brian Chin -- Stifel Financial Corp. -- Analyst OK. That's helpful. And then maybe just kind of a follow-up on the last follow-up. But again, of that $1 billion kind of shipment for gate-all-around in 2024 calendar year. How much of that is second half weighted? Is it more kind of pilot production? Or how much is it pilot versus high volume? Tim Archer -- President and Chief Executive Officer Yeah, we're not going to give color on exactly when we're shipping just because we figure that's more for our customers in terms of their expansion on those nodes. Brian Chin -- Stifel Financial Corp. -- Analyst OK. Fair enough. That's probably fair to more second-half bias. Thanks. Tim Archer -- President and Chief Executive Officer Thanks, Brian. Ram Ganesh -- Head of Investor Relations Thanks, operator Doug Bettinger -- Executive Vice President, Chief Financial Officer That concludes our remarks, guys. Thanks for joining the call. Answer:

the Lam Research March 2024 earnings conference call

Operator Good day, everyone, and welcome to the Lam Research March 2024 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Ram Ganesh, head of investor relations. Sir, please go ahead. Ram Ganesh -- Head of Investor Relations Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, president and chief executive officer; and Doug Bettinger, executive vice president and chief financial officer. During today's call, we will share our overview of the business environment, and we'll review our financial results for the March 2024 quarter and our outlook for the June 2024 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release can also be found on the investor relations section of the company website. along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3:00 p.m. Pacific Time. A replay of this call will be made available later this afternoon. We're having some technical difficulties posting our earnings call slides externally. We will try to post it as the call is going on. If not, we will post it on our website after this call. And with that, I'll hand the call over to Tim. Tim Archer -- President and Chief Executive Officer Thanks, Ram, and thank you to everyone joining us today. Lam is off to a strong start in calendar 2024, with revenues, profitability, and earnings per share for the March quarter, all exceeding the midpoint of our guidance. These results, as well as our outlook for the June quarter point to Lam's solid execution in an industry environment that is progressing much as we predicted in our January call. Today, we see industry WFE spending for calendar 2024 in the low to mid-$90 billion range, with the modest increase from our prior view, driven mainly by additional lithography shipments in China. We see no meaningful change to our outlook for Lam's overall 2024 revenue profile. From an industry perspective, DRAM remains strong with WFE spending driven by growing demand for high-bandwidth memory, and sustained investment in domestic China. In foundry logic, growth in leading-edge spending this year is being partially offset by a decline in mature node spending outside of domestic China. Domestic China spending is running higher than we had previously expected. However, we still see it being first half weighted with Lam's revenue contribution from China declining as the year progresses. In NAND, we continue to expect year-on-year growth in WFE spending in calendar 2024. Encouragingly, we have seen an uptick in fab utilization. And in the March quarter, this has translated into double-digit percent growth quarter over quarter in our spares revenues. As supply and demand continues to normalize through the remainder of the year, we see a strong setup of developing for 2025 NAND spending. As we move toward a broader WFE recovery, Lam stands to benefit from powerful secular drivers of semiconductor growth and innovation. Generative AI and other emerging smart applications are built on a foundation of semiconductor technology and are expected to deliver trillions of dollars of economic benefit at a global level over the next decade. AI's transformative use cases, foreseen in both consumer and enterprise markets are only in the early stages of realization, and we believe that significant investment in semiconductor manufacturing capacity will be required to satisfy the coming demand for advanced compute, memory, and storage. In this environment, the winners will be the equipment companies that can accelerate the pace of technology advancement, while at the same time, deliver innovations that disrupt the rising cost and complexity of semiconductor fabrication. To this end, Lam is investing in two differentiated approaches: first, we are putting more capabilities and resources close to our customers to strengthen collaboration; and second, we are leveraging Lam's proprietary Semiverse Solutions, digital twin capabilities to reduce the time and cost of technology development. Already, we are seeing Lam's distributed R&D footprint having a positive effect. In the past quarter, we've used our customer-centric lab investments in Korea, Taiwan, and the US to accelerate cycles of learning on new applications. resulting in important wins for Lam in both DRAM and foundry logic advanced packaging. With respect to Semiverse Solutions, we leverage a portfolio of digital twins created at the scale of the device the process, and the reactor to model complex interactions that influence tool performance and productivity. Lam's engineers now regularly use these capabilities to optimize multidimensional etch and deposition process recipes faster and with less on-tool wafer experimentation. Turning to demand related to AI. The early impact has been most prominent in DRAM and foundry logic. We believe, however, that AI's impact on storage is still ahead and represents a key vector of long-term growth for our NAND business. More advanced AI applications need faster, more power-efficient, and higher-density NAND storage. NAND-based enterprise solid-state drives or eSSDs, are 50 times faster in read-right capability, two to five times more power efficient, and use 50% less space at the system level compared to hard disk drives or HDDs. Today, over 80% of enterprise data is stored on HDDs. And we expect this mix to shift in favor of SSDs as NAND capability and cost continue to improve. This is where Lam is playing a key role by enabling technologies, which are critical for both performance and cost scaling. In deposition, for example, Lam is leading the transition from tungsten to molybdenum in the word line to improve device access time and reduce stack height per storage cell. In etch, Lam is using high aspect ratio cryogenic etch to enhance productivity of memory hole formation. Today, we are approaching 1,000 cryo etch chambers in our high-volume manufacturing installed base. In partnership with our customers, we're using the tremendous amount of data coming from this installed base to rapidly improve technology and cost at each successive layer transition in NAND. Recently, we combined the learning from the installed base with the capabilities of our Semiverse Solutions simulation tools to further strengthen our differentiation. As a result of our accelerated innovation, we have defended every NAND high aspect ratio memory hole etch production decision made so far by customers. With respect to DRAM, AI servers use high-bandwidth memory or HBM to increase read-right speed and reduce server power consumption. HBM stacks multiple DRAM dies using TSVs enabling 15 times more data throughput than standard DRAM. However, HBM also requires an approximately threefold increase in wafers per bit compared to conventional memory. With this in mind, it's important that our SABRE 3D and Syndion tools not only provide best-in-class plating and etch capabilities but also deliver industry-leading throughput and productivity to keep overall costs low for our customers. We are the leading player in TSV applications for HBM and expect our HBM-related shipments to grow more than three times in calendar year 2024. Finally, on the foundry logic side. Lam tools, including selective etch and ALD, are well positioned to help enable the move from FinFET to gate all around, a key transition needed to improve transistor performance per watt by 15% to 20%. We see our shipments for gate all around nodes in calendar year 2024, exceeding $1 billion. Lam tools are also enabling foundry logic inflections such as backside power delivery, molybdenum interconnects, and dry photoresist processes for EUV patterning. Our traction with customers is strong on these inflections. And together, they represent a multibillion-dollar growth opportunity for Lam as AI drives a greater need for faster, more power-efficient devices. To conclude, the proliferation of AI, the global push for localized chip manufacturing capacity, and the ubiquity of semiconductors in new consumer and commercial products represent powerful secular drivers for Lam and the rest of the semiconductor equipment industry in the years ahead. We are pleased with the company's execution and our results in the March quarter, and remain focused on our opportunity to outperform through this next leg of industry growth. Thank you, and I'll now turn it over to Doug. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Tim. Good afternoon, everyone, and thank you all for joining our call today during what I know is a busy earnings season. We delivered solid results in the March 2024 quarter. Our March quarter results came in over the midpoint of our guidance ranges for all financial metrics. I'm pleased with the company's continued robust execution. We achieved the highest gross margin percentage since the merging of Lam with Novellus. We also continue to generate very strong free cash flow of $1.3 billion or 34% of revenue. Let's dive into the details of our March quarter results. Revenue for the March quarter was $3.79 billion, which was roughly flat with the prior quarter. Our deferred revenue balance at the end of the quarter was $1.75 billion, which was a decrease of $182 million from the December quarter related to revenue recognized that was tied to those customer advanced payments. I believe deferred revenue will continue to trend downwards as we continue throughout the year. From a segment perspective, March quarter, systems revenue in memory was 44%, which is a decrease from the prior-quarter level of 48%. The decline in the Memory segment was attributable to DRAM coming in at -- 23% of systems revenue versus the 31% that we saw in the December quarter. DRAM spending was focused on the 1y, 1-alpha and 1-beta nodes, spending largely driven by DDR5 and high-bandwidth memory enablement. As we noted in the last quarter, nonvolatile memory WFE is increasing in 2024, but it remained at a subdued level on a mix basis for the March quarter. This segment represented 21% of our systems revenue, up from 17% in the prior quarter. I do just want to mention one thing. We are characterizing one customer's investment in specialty DRAM as a nonvolatile investment since it has a nonvolatile component to the device. This might be different than what others in the industry are doing. NAND investment was driven by very modest spending in conversions to 2xx and 3xx layer devices. The foundry segment represented 44% of our systems revenue, a slight increase from the percentage concentration in the December quarter of 38%. Growth was driven predominantly by domestic China shipments. And finally, the logic and other segment were 12% of our systems revenue in the March quarter, down from the prior quarter level of 14%. The decline was driven by continued mature node softness. Now I'll discuss the regional composition of our total revenue. The China region came in at 42%, and up slightly from 40% in the prior quarter. While most of our China revenue continued to be from domestic Chinese customers. This was the largest quarter for multinational spending in China since mid last year. We expect spending from this region to increase year over year in 2024. I believe it will, however, decline as we go through the year. Our next largest geographic concentration was Korea at 24% of revenue in the March quarter versus 19% in the December quarter. Japan and Taiwan rounded out the remainder of the top 4 regions. Our customer support business group generated revenue in the March quarter totaling approximately $1.4 billion. This was down 4% from the December quarter and 13% lower than the March quarter and calendar year 2023. Our Reliance Systems revenue decreased in the March quarter due to continued weakness in mature node investments, partially offset by a higher level of spares. Reliant is at the lowest revenue level in the last two years and spares is at the highest revenue level since the end of 2022. The spares business is seeing very early signs of positive impact from utilization increases from our customers. Turning to the gross margin performance. The March quarter came in at 48.7%, above the midpoint of our guided range and above the December quarter level of 47.6%. The increase was primarily a result of favorable changes in product and customer mix, as well as improved factory efficiencies. March quarter operating expenses were $698 million, up from the prior quarter amount of $662 million. This was due in part to expenses incurred for an extra week in the quarter I'll remind you, it was a 14-week quarter, as well as our conscious growth in R&D spending. As Tim mentioned, we remain laser-focused on investing in R&D to extend our product and competitive differentiation. R&D as a percentage of spending was at a high watermark coming in at 71% of total spending. Operating margin for the current quarter was 30.3% and in line with the December quarter level of 30% and at the high end of our guidance range. This was primarily because of the strong gross margin performance, which was somewhat offset by the growth in R&D investment. Our non-GAAP tax rate for the quarter was 11.7%, consistent with our expectations. Looking further into calendar 2024, we continue to believe the tax rate will be in the low to mid-teens, with some possible fluctuations quarter by quarter. Other income and expense for the March quarter came in at $10 million in income, compared with $5 million in income in the December quarter. The increase in OI&E was due to higher cash balances and higher interest rates. OI&E will be subject to market-related fluctuations that could cause some level of volatility quarter by quarter. On the capital return side of things, we allocated approximately $860 million to share repurchases, and we paid $263 million in dividends in the March quarter. Our share repurchase activity included both open market repurchases, as well as an accelerated share repurchase arrangement. The ASRs continued to execute into the month of April. And I would just mention, we continue to track toward our long-term capital return plans of returning 75% to 100% of our free cash flow. March quarter diluted earnings per share was $7.79 toward the higher end of our guided range. The diluted share count was 132 million shares on track with expectations and down from the December quarter. We have $1.2 billion remaining on our board-authorized share repurchase plan. Let me pivot to the balance sheet. Our cash and short-term investments at the end of the March quarter totaled $5.7 billion, up a little bit from $5.6 billion at the end of the December quarter. The increase was largely due to collections with an extra week in the March quarter, offset by cash allocated to share buyback, dividend payments, and capital expenditures. Days sales outstanding was 57 days in the March quarter, a decrease from 66 days in the December quarter. Inventory at the end of the March quarter totaled $4.3 billion down $107 million from the December quarter level. Inventory turns remained flat from the prior quarter level at 1.8 times. We are making progress in bringing inventory levels down, and we will continue to work on this throughout calendar 2024. Noncash expenses for the March quarter included approximately $77 million in equity compensation, $75 million in depreciation, and $15 million in amortization. Capital expenditures in the March quarter were $104 million, down $12 million from the December quarter. Spending was primarily centered on lab expansions in the United States and Asia supporting our global strategy to be close to our customers' development locations. We ended the March quarter with approximately 17,200 regular full-time employees, which was flat with the prior quarter. Let's now turn to our non-GAAP guidance for the June 2024 quarter. We're expecting revenue of $3.8 billion, plus or minus $300 million, gross margin of 47.5%, plus or minus 1 percentage point. This gross margin decline from March is reflective of a quarter-to-quarter change in customer mix. Operating margins of 29.5%, plus or minus 1 percentage point. This reflects our continued commitment to prioritize R&D spending. And finally, earnings per share of $7.50 plus or minus $0.75 based on a share count of approximately 131 million shares. So, let me wrap up. 2024 is a year of continued transformation for Lam Research. We're investing in our long-term strategy to expand our technology leadership and operational excellence while efficiently managing overall spending. We're encouraged that the long-term drivers of semiconductor growth such as artificial intelligence, are seeing accelerated adoption and we expect Lam to be a strong beneficiary of these trends. We're well positioned for the architectural and material change coming, such as gate all around, advanced packaging, backside power delivery, and the move to drive photoresist. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions. Questions & Answers: Operator Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator instructions] At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Krish Sankar from TD Cowen. Please go ahead with your question. Krish Sankar -- TD Cowen -- Analyst Yeah, hi, thanks for taking my question. First one for Tim. Tim, a question on high aspect ratio for NAND, where you have a very high market share. And you said in your prepared comments, you defended market share there. Your competitor, Tokyo Electron, introduced a cryo etch product a year ago, but you also have one from three years ago. So, I'm kind of curious, can you talk a little bit about the market share dynamics and high aspect ratio? And the fact that some of your customers are talking about using cryo etch for 430-layer NAND. So, can you give us some color there on high aspect ratio etch? And then I have a follow-up for Doug. Tim Archer -- President and Chief Executive Officer Sure. Krish, on cryo etch, had a couple of data points in my prepared remarks. But one is we have an installed base of cryo etch tools used for NAND that's now approaching 1,000 chambers. So, obviously, we've been in high-volume production with this application for quite some time. And my comment was that there always are customers exploring different options during the development phase. But as my comment is, these are very complex processes to put into high-volume production. And so, we continue to leverage the learning that we get working with our customers, the focus on technology extension and manufacturing readiness. And by that focus, we've been able to defend the decisions once they come to that point of the customer really having to decide which tool to commit their next fabrication line, too. And so, that's all we can say is we're working hard to make sure we have the best tool for the application. And so, far, it's winning the day. Krish Sankar -- TD Cowen -- Analyst Got it. Got it. So, good to hear that the share is still solid. And then a follow-up for Doug on margins. Doug, you kind of mentioned about the gross margin, maybe moderation in the June quarter due to the customer mix. Is that mainly a function of China? And how to think about gross margins in the second half? And maybe if I can extend that question how to think about opex into the back half of the year? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. Krish, I guess I'd say a couple of things. First, gross margin sometimes it's a little bit better when we're selling to smaller customers, and I'm not going to pin it to any one geographic region necessarily. But in China, there are some smaller customers, and they tend to because we have volume purchase pricing sometimes, they pay a little bit more. But it's not because of geographic regions, it's because of the size of the customer. So, that's one thing to think about. And in my scripted remarks, as well as what Tim said is we think that the China region will modulate a little bit as we go through the year. So, that's part of what we need to think about. And I've been talking about this for a couple of quarters. So, anyway, I have that in mind when you're updating your models. Second, we've been talking, I think, for a couple of quarters now, maybe actually three quarters about the need to grow R&D investment this year because of these technology changes that we see it all around, backside power, advanced packaging and so forth, dry photoresist. And we're absolutely planning on doing that. You saw that in the March quarter, R&D as a percent of total spending was the highest that I have seen here at 71%, and we intend to keep investing in R&D. So, independent of whatever the top line is, we're going to grow R&D investment this year. Krish Sankar -- TD Cowen -- Analyst Thanks, Tim. Thanks, Doug. Tim Archer -- President and Chief Executive Officer Thanks, Krish. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Doug. Operator Our next question comes from Timothy Arcuri from UBS. Please go ahead with your question. Tim Arcuri -- UBS -- Analyst Thanks a lot. So, I wanted to ask about China. So, it's going to modulate through the year, the mix, but it sounds like it's still going to be up year over year for domestic China this year. So, I guess my question is, we've seen some headlines on a few entities being potentially added to the entity list. And I'm wondering if these comments reflect the potential addition of these entities. Or does it basically say, hey, if the status quo remains, this is what your assumption is, meaning that if there were entities added that that would be downside to these comments? Tim Archer -- President and Chief Executive Officer Yes. Tim, I mean, obviously, we can't forecast changes in US trade policy with respect to China that we don't know about. And so, we're basically giving you our best view of what we think our China business will be through the rest of the year and recognizing that there could be changes that we don't foresee. Well, what I will say is we -- obviously, we've built up what we believe is a strong government affairs team were plugged into all the relevant discussions. And I think over the last couple of years, you've seen we have a pretty strong track record of working with the US government responding to export control policy, and that's just what we plan to do going on into the future. Tim Arcuri -- UBS -- Analyst Sure. Thanks, Tim. And Doug, I just wanted to ask about service a bit. So, there's much different dynamics happening in the spares and in the Reliant business. Can you talk about that because it certainly sounds -- I mean, this is kind of an odd situation that we'd have spares piece so strong and Reliant piece so weak. So, can you sort of give us any read-throughs there? Like what does that mean for the future of that business? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. Listen, I think it's well understood right now that you've got two dynamics going on relative to thinking about the different components of CSBG. First, industry utilization is starting to get somewhat better. I would definitely say it's early days for that. But the reason I specifically talked about the spares level versus where it's been over the last couple of years is because of that. That clearly is beginning to show up in our spares business. However, when you look at CSBG in total, we were down now because of the softness in Reliant. I also think that's pretty well understood in the industry, right? Mature note investment outside of the China region certainly is pretty soft right now. And so, you have those two competing dynamics going on that's shown up in the CSBG line. If I was guessing, Tim, right now, CSBG is probably flattish this year from last year because of those two offsetting dynamics if that helps you think about it. Tim Arcuri -- UBS -- Analyst Perfect. Tim Archer -- President and Chief Executive Officer I think the only thing I would add there is, I mean, when you think about the CSBG business a little bit longer term, I mean, clearly, we commented on utilization starting to tick up. But as we move into 2025, I think we also will see significant upgrade activity coming back in, especially in the NAND space. We've talked about the fact that there is a large portion of that installed base that has not yet been moved toward the technology nodes that are most useful for our customers. And so, I think that will also flow through into the CSBG business perhaps not so much this year, but clearly, as we move into '25 and beyond. Tim Arcuri -- UBS -- Analyst Thank you, Tim. Operator Our next question comes from Harlan Sur from J.P. Morgan. Please go ahead with your question. Harlan Sur -- JPMorgan Chase and Company -- Analyst Good afternoon. Thanks for taking my question. With an accelerated compute and AI semiconductor segment of the market, there still seems to be a lot of constraints centered around high bandwidth memory and tightness in co-ops packaging. Obviously, you guys have a very strong position here, as you mentioned, Tim. You guys previously talked about this business, this opportunity as being potentially like $1 billion per year type of revenue opportunity. But just given the strong demand pull and some of the expanding use cases, I mean, is the Lam team already on track to drive $1 billion-plus in advanced packaging revenues this year? And now that the trends are in place, right, what's kind of your new or maybe revised view on the revenue opportunity here for the team over the next few years? Tim Archer -- President and Chief Executive Officer Yeah, Harlan, I think that you're right, there is a strong pull in. I mean, obviously, we're responding as quickly as we can to the demand. Our advanced packaging shipments this year will be over $1 billion. And so, that's kind of an important milestone for us. I don't know how to give you like that next milestone. Obviously, we're seeing tremendous growth in demand in this area. Our positions are strong, not only as you said, in the foundry logic side of advanced packaging, but also as we talked specifically about our very strong positions in HBM related to what we do on the packaging side of HBM. And so I think it's just an area where we'll see good long-term growth we are investing again in this area. We've talked in the past about our work in the panel processing space trying to look ahead to see where the packaging market is going to go to make sure that we are fully capable of taking advantage of what we see is a real long-term secular driver for semiconductors and the equipment industry. Harlan Sur -- JPMorgan Chase and Company -- Analyst Congratulations on hitting that milestone. For my follow-up question, with your customers and their spending outlooks looking more constructive as psychodynamics continues to improve, you've got strong tailwinds on manufacturing complexity trends like the growth outlook appears quite solid, right, for the team. So, if I look out beyond this year and the ramp of your new Malaysia manufacturing facility, I mean, not only is it low-cost geography, like you guys have mentioned, but you've got highly skilled workforce. You also set up the supply chain support infrastructure locally as well. So, I don't know if it's for Tim or Doug, but is there any way to think about the incremental gross margin benefit on incremental revenues that flow out of the Malaysia factory as you start to load it? Tim Archer -- President and Chief Executive Officer Let me take the first part of it, and then I'll let Doug talk specifically about the gross margin comment. I think it's one thing that I think we're feeling very comfortable with, which is your last question was, boy, there must be a lot of demand in you've got to be ramping up for that. I think as we come into this next upcycle, we feel very well positioned relative to all the things you just talked about, the physical capacity, the trained workforce. The supply chain has been built up and made more resilient since the last big upturn in the industry where we saw lots of constraints. And so, I think from that standpoint, we feel really good that we have executed on the operations side of the house. Now we just need to start seeing the kinds of new peak volumes that will demonstrate that externally. And I'll let Doug address your gross margin question. Doug Bettinger -- Executive Vice President, Chief Financial Officer Yes, Harlan. I guess, I'll just remind you what I've said in prior quarters, which is I don't want you to run ahead of that financial model we put out in 2020. That's still the right way to think about it. Now obviously, right now, we've got quite favorable customer mix. I don't expect that to continue. I don't know, maybe I'm wrong about that but the benefit from Malaysia after we came through the inflationary stuff and whatnot, was completely how we intend to get back to the gross margin, and better than that financial model maybe we can push a little higher. Certainly, we're not going to stop staying focused on that. But that's the way to think about it is Malaysia is still into the future. It will show up when we ramp incremental volumes, and we're ready for that. Harlan Sur -- JPMorgan Chase and Company -- Analyst Perfect. Thank you. Tim Archer -- President and Chief Executive Officer Thank you, Harlan. Operator Our next question comes from Srini Pajjuri from Raymond James. Please go ahead with your question. Srini Pajjuri -- Raymond James -- Analyst Doug, I think on the China side, just one clarification. Were you expecting China to moderate in this quarter? Did it come in better than you expected? And then just to go back to your comment about China moderation through the rest of the year. Any particular segment within China? I mean, is it DRAM? Or is it logic? Or is it both? If you can add some color to that, that would be helpful. Doug Bettinger -- Executive Vice President, Chief Financial Officer Yes, Srini. It came in pretty much as we expected. I suggested last quarter that it was going to continue to remain pretty good in March. So, no, that was pretty much as we expected. And I don't know, like at a segment level that I've got any specific color for you relative to the China slowing a little bit in the second half. There's such a broad set of customers there that are in every segment. It's in DRAM, it's in foundry, it's in logic. And it's a broad set. So, when we look at that in total, I do see it somewhat weighted here to the early part of the year, and it will modulate somewhat. But nothing specific I had to share with you from a segment standpoint. Srini Pajjuri -- Raymond James -- Analyst Thanks, Doug. And then maybe for Tim, Tim. Some of your large customers got a pretty good amount of subsidies from the government recently on the CHIPS Act and other stuff outside of the US as well. So, I'm just wondering what sort of impact should we expect in terms of your own business as I guess, that money comes in? And any, I guess, thoughts on the timing of potential orders from this incremental funding that they're getting? Thank you. Tim Archer -- President and Chief Executive Officer Yeah. I mean, obviously, you've seen in just even the last few weeks, quite a few announcements about the CHIPS Act grants in the US I'll also note that there are similar CHIPS Act programs going on in places like Japan and obviously, a little bit further in the future in Europe and elsewhere. And so, we've always said these are more of a '25, '26, '27 time frame from the equipment side, especially the shorter lead time tools like we provide. So, you see the fab coming up a lot of construction activity, you see long lead time tools go in. And then we know that our time will come. And so, I think it's still a '25, '26, '27 opportunity for us. But the important thing is, while that's a lot of extra money maybe what's really exciting about is most of that is targeted toward truly the leading-edge nodes. And one thing about Lam's story is that we have focused a lot of R&D investment to build our position in leading-edge foundry logic. In the next generations of DRAM and high-bandwidth memory as well as, of course, continuing our strength in NAND. And so, as we see these new fabs come up, I mean, it's not only additional spending, but it's at nodes where we believe that we will actually do better from a SAM and market share perspective. And so, we're patiently waiting. But we know it's going to come. You can go visit the sites, the fab buildings are there, and they're feverishly working to get them ready for equipment. Srini Pajjuri -- Raymond James -- Analyst Thanks, Tim. Tim Archer -- President and Chief Executive Officer Thanks, Srini. Operator Our next question comes from C.J. Muse from Cantor Fitzgerald. Please go ahead with your question. C.J. Muse -- Cantor Fitzgerald -- Analyst Yeah, good afternoon. Thank you for taking the question. I guess first question, I wanted to try to get a little bit more color on your updated WFE outlook. It looks like you're taking it up by about a billion. You talked about that being really litho, not impacting you. So, I guess should we infer from that, that you're still expecting WFE up kind of low to mid-single digits? And as part of that, how are you thinking about those four large drivers, particularly, I guess, two or three of them, and the growth potential there and the relative outperformance that you expect to see? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yes, C.J., I mean, obviously, one of our peers in the industry reported last week, we took a look at it and just have a view that we missed a little bit of what was shipping into China. That is the vast majority, if not all, of the change in WFE from our point of view. There's always some moving pieces and DRAMs may be a little stronger, trailing etch foundry logic is probably a little bit softer. But at the end of the day, the biggest change that we saw was we missed it a little bit because it's not part of our addressable market. I'm not sure I caught all of your -- the second part of your question, C.J. Try it one more time. C.J. Muse -- Cantor Fitzgerald -- Analyst Just as you think about those $1 billion-plus opportunities, particularly around advanced packaging and I guess, including HBM within that and also get all around how you think you'll fare relative to WFE in '24? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. I think given the mix we see in some of these technology transitions, it should be incrementally better than it was last year for sure. C.J. Muse -- Cantor Fitzgerald -- Analyst And then just as a quick second question, I guess, third question, if I could sneak it in. You talked about normalization of China into the second half. And getting back to maybe a 46%-ish type of normalized gross margin. It sounds like China, in your mind today is better. So, I guess, what would that number be if that continues to be strong for you guys? Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer I guess, C.J., you got to just kind of look at where we've been, right? You're absolutely right, and thanks for mentioning the 46%. That's sort of where gross margin was after we had done some of the Malaysia stuff and before China popped up with those smaller customers. And so, the fact that we're above that level is largely customer mix. And so, that's how you should be thinking about it. And if we have that mix wrong, then margin kind of -- you got a couple of data points in the last couple of quarters that you can kind of solve for to understand what it might look like. It will be in that 46% to 48-plus percent range depending on what the mix looks like. C.J. Muse -- Cantor Fitzgerald -- Analyst Thanks so much. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, C.J. Operator Our next question comes from Atif Malik from Citi. Please go ahead with your question. Atif Malik -- Citi -- Analyst Hi, thank you for taking my questions. The first one for Tim. Tim, good to see some green shoots in the NAND market. You talked about double-digit far parts growth in the NAND and you also talked about that the AI storage inflection for high-density SSDs is in front of us. But we do not have the 3x wafer per bit offset that you're seeing on the DRAM side. So, can you kind of paint for us the trajectory of the NAND improvement that you're expecting in the second half of the next year? Doug Bettinger -- Executive Vice President, Chief Financial Officer We're not going to give you a '25 forecast quite yet. It's way too early for that. It will be better though, right? I mean, it's improving. And Tim, I'll let you -- Tim Archer -- President and Chief Executive Officer Yeah. Well, I guess without giving you exact numbers. I mean, clearly, we all know that the NAND spending has been incredibly weak for the last 12 to 18 months. And so, we're in the very early stages of starting to see that recover. And I think if you look at what most of our -- we rely on our customer commentary that they make publicly for a lot of this, but they talk about the fact that maybe 90% of the bits they're shipping are at the leading edge. But when we look at the installed base of our systems, that was my comment. I believe that there is still going to be a large portion of the installed base that will move forward to the next technology nodes. It's the most efficient way for our customers to do that is to upgrade what they already have. And I think you'll see that move forward and therefore, NAND WFE move up in '25. But because it comes, to a large degree, through upgrades, Lam's capture rate of every dollar of WFE spend will be much higher than in a greenfield capacity added. So when I think about Lam's opportunity to outperform in 2025, in NAND, I think it is obviously with high confidence because of the type of spending we would expect to be seen in 2025. And in the other market segments, it's also pretty high because of the -- as I mentioned, the technology inflections that are occurring. And it stayed all around where we -- this year, we'll actually have over $1 billion of shipments into the gate all around technology nodes. And obviously, as gate all around continues to proliferate, our tools like ALD and selective etch will do better. in backside power delivery. We already talked about advanced packaging and then we obviously have out there in front of us also the work we're doing for dry photoresist processes for EUV. And so, I just feel like there are a number of growth drivers for the company besides the one that is the most obvious, which is a NAND recovery in 2025. Atif Malik -- Citi -- Analyst Great. Thank you. And then one for Doug. Doug, within your China 42% of sales, you talked about multinational picking up, which came as a positive surprise to me. Can you talk about what's driving that? Are those customers not worried about incremental restrictions? Or are they just trying to upgrade some of the older technology? Doug Bettinger -- Executive Vice President, Chief Financial Officer I think it's just being responsive to the demand they see relative to the capacity that's there. And yes, I said it's the highest level since mid last year. Although I do understand over position it. The vast majority of the spending in China continues to be the indigenous Chinese customer base. But I just observed it as I was going through the numbers and knowing everybody was going to be asking about China, that was something I thought I'd just mentioned. Atif Malik -- Citi -- Analyst Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks. Operator Our next question comes from Toshiya Hari from Goldman Sachs. Please go ahead with your question. Toshiya Hari -- Goldman Sachs -- Analyst Hi, guys. Thank you so much for taking the question. I wanted to ask a question on NAND as well. Tim, in your prepared remarks, you talked about the transition from tungsten to molybdenum potentially happening in the market. I suppose, over the next couple of years. Can you speak to the significance of that in terms of depth intensity and how that could impact your business over the next couple of years? Thanks. Tim Archer -- President and Chief Executive Officer Sure. Well, obviously, any time there's a material change requires a new system, it's an opportunity for Lam to provide that technology into the market. And so, it's an important change. I mean we call it moly just because it's so hard to say molybdenum. But the change to moly has some significant device benefits and also, I mentioned the important thing in NAND is -- I mean it's important in every element of semiconductor devices, but it's the cost and technology. And so, one thing that is sometimes lost is part of the transition to moly is also about enabling stack height reduction. So, you can go to more layers and limit the stack height in a way that allows you to then have more productive etches, more productive deposition, and other things. And so, I think it's an important import inflection for the industry and an opportunity for Lam and we're well positioned to win that inflection, we believe. Toshiya Hari -- Goldman Sachs -- Analyst Got it. Thank you. And then as my follow-up on HBM, you talked about your business growing more than 3x year over year, I think. And I think that comment was consistent with what you had communicated last quarter. based on sort of the input you have, the market intel you have, what kind of bit growth or market growth in HBM do you think that increase in your business supports in '24? And obviously, demand is very strong, but how are you thinking about supply/demand from your perspective exiting the year and into '25 in HBM? Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer Toshiya, maybe I'll get it to try. I mean when you look at overall bit demand, HBM was probably 0.22% of it, although it's growing and adding to the broad market. But it's clearly requiring incremental investment in our SABRE 3D tool, our deep silicon etch tool. And I think it's something you're going to hear us talking about for many years to come. This form factor is going to continue to be important relative to AI enablement and feeding the GPU, the data that it needs, small today but growing quite rapidly. Toshiya Hari -- Goldman Sachs -- Analyst Thanks so much. Tim Archer -- President and Chief Executive Officer Thanks, Toshiya. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Toshiya. Operator Our next question comes from Joe Moore from Morgan Stanley. Please go ahead with your question. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. I wanted to follow up. You had mentioned that there was a customer that you're classifying as NAND that others might be classifying as DRAM. I just wanted to double-click on that, if you could talk to what's going on there. Is that customer sort of doing both and people just have different classifications? Should we be thinking that there's more NAND capacity coming on in China than I had thought before? Can you just talk to that change? Doug Bettinger -- Executive Vice President, Chief Financial Officer I guess all I'd say, Joe, is sometimes there could be a little bit of confusion. And I felt that as I was talking to people over the last quarter. So, the reason I said it was, it's actually a nonvolatile device. It's got nonvolatile components. And early on, because of that, and we put everything into nonvolatile memory. So, nonvolatile memory is more than NAND. This isn't an enormous number but as big enough that I want people to hear us tell you where it is and you can go think about it. And you probably know who the customer is. I'm not going to disclose it here, but it is one customer in specialty DRAM. Joe Moore -- Morgan Stanley -- Analyst Got it. Thank you for that. And then on the Reliant business, can you talk about changes in that business as we sort of move into a lower level of utilization in trailing edge nodes? Do you see that kind of returning to more of a refurbished tools business, where there's stuff that you're able to actually refurbish? And any ramifications we should think about for profitability there? Tim Archer -- President and Chief Executive Officer Yeah. I guess I'll just comment on -- I would be surprised if we move back toward a customer's divesting of equipment from fabs and us being able to refurbish those tools. I think you could see, obviously, the ebbs and flows with demand of how many new tools we ship, but I think I think it still remains mostly as a new tool, trailing-edge node business for us. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. Tim Archer -- President and Chief Executive Officer Thank you, Joe. Operator Our next question comes from Stacy Rasgon from Bernstein Research. Please go ahead with your question. Stacy Rasgon -- AllianceBernstein -- Analyst Hi, guys. Thanks for taking my questions. Doug, I wanted to go back to something you just mentioned here around the relative capital intensity of upgrades versus greenfield investments for NAND as you get into '25. And I get the idea that you should take a larger share of upgrades. But am I thinking about this wrong? Wouldn't be the absolute amount of WFE in an upgrade-driven cycle to be a lot lower than if it was in the greenfield cycle? Like how do I think about the puts and takes of those two variables in the context of NAND growth into 2025? Tim Archer -- President and Chief Executive Officer Sure, Stacy, I'll take that. I was actually the one that -- this is Tim. He said he needs to comment. Yes, no problem. I just wanted to own it in case you disagree, but I think you're thinking about it exactly right. I mean the reason upgrades are so attractive for customers is the total WFE spend is lower. That's why they upgrade the installed base. And so, for my -- comment was specifically about Lam's outperformance relative to whatever WFE is for the industry next year. And so, in an upgrade-heavy cycle, which obviously we haven't had for the last two years, in that next cycle of NAND upgrades, we're saying we would capture a higher percentage of whatever that WFE is. Now we've said in the past that Lam's opportunity actually because of that much higher capture rate, is not so different in terms of revenue for every bit added through an upgrade versus a greenfield. So, WFE comes down, that's why it's attractive for customers. But for Lam, we capture almost the same amount of revenue because of the much higher capture rate. And so, it kind of goes both ways. Stacy Rasgon -- AllianceBernstein -- Analyst So you're indifferent to like an upgrade cycle versus a greenfield cycle? Tim Archer -- President and Chief Executive Officer Well, I would say the only thing I would say is because there's been lots of questions about whether Lam's market share and defense and others, we're not quite indifferent because the power of the installed base is that, again, when the customer's preferred path is to upgrade what they already have, means that the positions don't change. And so, Lam's very strong position carries forward in that case. So, agnostic from a financial perspective, but obviously, our position in the industry continues to strengthen through each of those upgrade cycles. Stacy Rasgon -- AllianceBernstein -- Analyst Got it. Got it. That's helpful. My follow-up, again, I wanted to go back to the segment expectations in China. So, I know this -- I think it was Doug who said you didn't have anything to tell us on segments. But if I look at your slide deck, on Slide 5, unless I'm reading it wrong, it does seem to suggest that you see it says sustained investment in domestic China for DRAM in calendar '24 and weakness in foundry logic. So, is that actually what you're expecting, the China degradation through the year in foundry logic and DRAM sustaining? Or is this slide -- am I just reading the slide wrong? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah. No. Stacy, you kind of have one customer in China DRAM. So, I got to be careful talking about that. China is going to modulate through the year, right? It's not going to stay at 42% is the statement that I made, and it's going to modulate in every segment, I believe, in the China region. Stacy Rasgon -- AllianceBernstein -- Analyst OK. And the slide says, expect led by HBM's sustained investment in reference to China under DRAM. So, that's not what's going to happen? Doug Bettinger -- Executive Vice President, Chief Financial Officer Unfortunately, the slides are not in front of me right now, Stacy. We're having some technical challenges. It's all going to model in Slide 5, when you pull it up. Stacy Rasgon -- AllianceBernstein -- Analyst OK. Thank you, guys. Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah, no problem. Tim Archer -- President and Chief Executive Officer Thanks, Stacey. Operator Our next question comes from Vivek Arya from Bank of America Securities. Please go ahead with your question. Vivek Arya -- Bank of America Merrill Lynch -- Analyst Thanks for taking my question. I wanted to revisit your comment about spares doubling. How important is that data point? Like what were you expecting instead versus the actual result? And how much does it increase your confidence about NAND recovery? Because you're not really increasing the WFE expectations for this year, right? So, on surface, this comment about spares doubling sounds like a very important data point, but I'm not sure how to quite put that in context of what it means for Lam this year. Tim Archer -- President and Chief Executive Officer OK. Well, first, we didn't say spares would double. We said that it was a double-digit percent growth quarter on quarter in our spares revenue, so not doubling. But I think that in general, I mean, the way we look at that and why we made that comment. Obviously, it's positive for us to see spares move up. If you think -- go back in our commentary previously about CSBG over the last few years, we've said spares revenue will grow year on year because the installed base itself grows. However, through this downturn, the cuts in fab utilization were so severe that we actually saw spares revenue come down, which surprised us a bit. So maybe to your point of expectations. We knew that as soon as customers started to utilize the fabs and bring some of the tools back online, we would see spares increase. We said that would be the first sign that the end market was really starting to improve. And so, the reason we called it out was that obviously, it further confirms, I think what you're hearing from our customers which is that utilization is starting to improve. It doesn't tie to WFE because utilization of what you have is one issue when you choose to spend more to either upgrade technology or add capacity as a second decision. We've said that, that is likely still more of a 2025 event on the equipment spend side. But you have to get the first indication, which is utilization improvement, spares improving and then the rest would come. Vivek Arya -- Bank of America Merrill Lynch -- Analyst And then the other thing on the call, I believe, Doug, you mentioned CSBG will be flat year over year. Or did I not hear that properly? Or did you mean it sequentially? Or did you mean it for this calendar year because if it is for the calendar year, that implies pretty strong kind of mid-teens growth in the second half? So, if you could clarify what you said about CSBG growth and whatever time frame you were referring to? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah, I said flat-ish, plus or minus flat. And by the way, that's not a new disclosure. We said that last quarter as well. Vivek Arya -- Bank of America Merrill Lynch -- Analyst For this calendar year or for -- Doug Bettinger -- Executive Vice President, Chief Financial Officer Correct. For this calendar year, yeah, '24 over '23. Vivek Arya -- Bank of America Merrill Lynch -- Analyst Got it. Thank you. Doug Bettinger -- Executive Vice President, Chief Financial Officer Thanks, Vivek. Operator Our next question comes from Chris Caso from Wolfe Research. Please go ahead with your question. Chris Caso -- Wolfe Research -- Analyst Yes, thank you. I guess the first question is on DRAM. And could you perhaps talk about some of the moving parts that are going on with that right now? And I think in a previous question, you talked about the China part of DRAM expecting that to moderate through the year. Obviously, the direct revenue from HBM sounds good. But there's a broader capacity question going on in DRAM that's fungible with HBM. Could you talk about what your expectations are for that as the year progresses? Tim Archer -- President and Chief Executive Officer Yeah. Let me start. I think just to address this one point about the fungibility of capacity. You're correct. Obviously, if you're looking at DDR5, I think we've made a couple of comments in the past though. One, we're talking specifically about the additional tools that are needed to enable HBM. And so, that's why we talk about our electroplating and our Syndion silicon etch tools because those are added to whatever capacity you might have for DRAM, you need to add those tools to make HBM possible. And so, that's what we're seeing rise by 3x this year. On the second side, when you go from conventional DRAM to HBM, our customers have talked about and the industry has talked about the much larger die size because you've had to create the real estate that's needed to add the TSVs. And so, while you may be able to translate some of the same DRAM equipment over to produce the same number of bits, you'll need more of that equipment as well. So, those are the key drivers as you're moving for additional spending growth as you move into HBM DRAM. Chris Caso -- Wolfe Research -- Analyst Got it. As a follow-up, you made in your prepared remarks a comment talking about $1 billion in revenue from gate-all-around this year. Could you talk about that in the context of where the overall opportunity is for gate-all-around? Is this $1 billion represent what you would consider to be gate-all-around capacity? Is that just getting the processes started? Kind of where are we with that gate-all-around ramp? Tim Archer -- President and Chief Executive Officer Yes. I mean I think it's -- we're really just starting at gate-all-around. Our comment was $1 billion of shipments into the gate-all-around nodes this year. And it's across all of our types of products that help enable gate-all-around smaller technology nodes. And so, what we've said is that every technology node, etch and depth intensity grows and our SAM opportunity expands. And so, gate-all-around being an important node where there's need for new tools from Lam like in our selective etch product portfolio or in our ALD product portfolio that might not have existed to the same degree in prior notes. And so, that's -- those are the areas where we're seeing growth, as well as just growth in the rest of our advanced technology products and etch and dev. Ram Ganesh -- Head of Investor Relations Thank you, Chris. Operator, we'll take one more question. Operator Our next and final question comes from Brian Chin from Stifel. Please go ahead with your question. Brian Chin -- Stifel Financial Corp. -- Analyst Hi there. Thanks for sneaking me in. The company has previously discussed an incremental $1 billion to $1.5 billion increase the WFE for every 1% AI server penetration. Last year, given the underutilization of capacity and the focus on conversion activity, maybe the math was lower last year. But now utilization rates for advanced foundry and DRAM nodes have recovered. Do you see AI growth, I guess, driving spending levels more consistent with that $1 billion to $1.5 billion? And do you already see that maybe playing out to some degree in your order backlog? Doug Bettinger -- Executive Vice President, Chief Financial Officer Yeah, Brian, we're not going to talk about order backlog. But the statements we made and you've got it right, which was for every percent that is an AI server versus an enterprise-class server because of the 8x DRAM, much bigger logic die, the GPUs, and the three times NAND, did so $1 billion to $1.5 billion incremental WFE. And that's absolutely still how we see it. But you're right, like if things are underutilized, you don't need to spend nearly as much, but that's a temporary situation. Eventually, things get back to being utilized. Brian Chin -- Stifel Financial Corp. -- Analyst OK. That's helpful. And then maybe just kind of a follow-up on the last follow-up. But again, of that $1 billion kind of shipment for gate-all-around in 2024 calendar year. How much of that is second half weighted? Is it more kind of pilot production? Or how much is it pilot versus high volume? Tim Archer -- President and Chief Executive Officer Yeah, we're not going to give color on exactly when we're shipping just because we figure that's more for our customers in terms of their expansion on those nodes. Brian Chin -- Stifel Financial Corp. -- Analyst OK. Fair enough. That's probably fair to more second-half bias. Thanks. Tim Archer -- President and Chief Executive Officer Thanks, Brian. Ram Ganesh -- Head of Investor Relations Thanks, operator Doug Bettinger -- Executive Vice President, Chief Financial Officer That concludes our remarks, guys. Thanks for joining the call.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Hello, everyone, and welcome to the Southwest Airlines first-quarter 2024 conference call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator instructions] Now Mrs. Julia Landrum, vice president of investor relations, will begin the discussion. Please go ahead, Julia. Julia Landrum -- Vice President, Investor Relations Thank you so much. Hello, everyone, and welcome to Southwest Airlines first-quarter 2024 conference call. In just a moment, we will share our prepared remarks, after which we will be happy to take your questions. On the call with me today, we have our president and CEO, Bob Jordan; executive vice president and CFO, Tammy Romo; executive vice president and chief commercial officer, Ryan Green; and chief operating officer, Andrew Watterson. A quick reminder that we will make forward-looking statements, which are based on current expectations of future performance. and our actual results could differ materially from expectations. As we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our press release. So please refer to the disclosures in our press release from this morning and visit our Investor Relations website for more information. And now I'm pleased to turn the call over to you, Bob. Bob Jordan -- President and Chief Executive Officer Thank you, Julia. Hello, everyone, and welcome to our first-quarter call. Well, let me state right up front that I am disappointed with our first-quarter performance. There are a lot of factors that I'll go into, and there's a lot to cover, including the latest Boeing challenges. More importantly, there are significant efforts and progress underway as we cannot, and we won't be satisfied until we are delivering the kind of returns you expect from Southwest Airlines. So before I go any further, I just want to sincerely thank our people for their extraordinary efforts as we work quickly to drive improvement. Turning to our performance. We achieved records for first-quarter operating revenues and passengers continuing our streak of eight straight quarters of record top line performance. We saw a nice acceleration in managed business revenues up 25% nominally year over year. We also continued our streak of solid operational performance. For a while now, we have been consistently running a great completion factor averaging right around 99%, and we continue to improve in nearly all operational and customer metrics. I'm also proud of the progress we made on our open labor agreements. It's been a long road, and I want to recognize everyone involved for continuing to work through to the finish line to reward our amazing employees for their contributions. Ryan will go into our revenue performance in more detail in a moment. And while our revenue trends were solid in the first quarter and are expected to be solid year again in the second quarter, we need to increase revenue production to offset cost inflation. The biggest opportunity to improve performance and profitability and urgency is continued focus on network optimization and capacity. We opened 18 new cities during the pandemic and worked hard in 2023 to restore our network and fly our full fleet on the heels of the demand surge in 2022, while that boosted aircraft utilization, it added significant capacity. And when combined with 2023 business travel coming in below projections has resulted in a significant number of new markets under development and a material number of markets that are not performing at the level required in this higher-cost environment. Network adjustments planned last fall are in place as of the March schedule, and they are proving to be largely on track. Those optimization efforts were primarily aimed to adjust for changing demand trends, including lower capacity on Tuesday and Wednesday, a reduction in short-haul business markets and a material reduction in flights during shoulder periods of the day. The changes are beneficial and they contributed to us exiting the first quarter with healthy margins for the month of March, more as needed and we are continuing efforts to optimize the network and reduce the number of markets in development that aren't performing to more historic levels. Along those lines, we have made the difficult decision to eliminate service in four cities. Syracuse, New York, Houston, Intercontinental Cozumel, and Bellingham, Washington. That is never an easy decision. We form bonds with the airports and the communities that we serve. These are wonderful communities, and we are very grateful for their support over the past several years. In addition, we are also restructuring several other stations. Most notably, we are reducing flights in Atlanta and Chicago O'Hare. While it's never our desire to exit a city or shrink service to a market, we are committed to our financial performance goals, and network and capacity actions will continue as a lever to improve overall financial performance. In addition to network optimization, we have a number of other efforts underway to increase revenue productivity. First, tuning our new revenue management system by better anticipating and optimizing demand and fares along the booking curve and unlocking additional capabilities that will further boost the contribution from the system. Second, focusing on increasing passenger volume including adding new attributes to our value proposition. We are working to ensure our current and future customers understand our terrific value proposition. That includes a significant new brand campaign which started last week, highlighting our signature customer-friendly policies. Separately, we are considering more transformational options and follow-on initiatives. That includes work previously underway to study customer preference around seating and our cabin. It's been several years since we last studied this in-depth and customer preferences and expectations change over time. We are also studying the operational and financial benefits of any potential change. We remain committed to our industry best customer-friendly policies but we are also committed to understanding and meeting customer expectations. We have transformed before adding things like WiFi, larger bins, and in-seat power, and we will continue to adapt as needed. It is too early to share the specifics of what we are exploring, but I want to be transparent and let you know that work is well underway. Of course, the biggest change we have experienced is the news from Boeing on deliveries. The Boeing issues are a significant impact, and we are taking quick action to replan based on expected 2024 and 2025 delivery delays. As I've said before, while it's impactful, I support Boeing taking the time to do the work to understand and fix the issues, a stronger Boeing company for the long term is good for Southwest Airlines. I visit Boeing in late March, and while there is much work to do, I am encouraged by the comprehensive approach that their leadership is taking. I will be back at Boeing this summer when they complete their plan, and I will be visiting Spirit Aerosystems as well. I won't downplay the challenges from the Boeing issues. They are a big deal and contribute to changing capacity set. They're redoing schedules and forecasting now in accurate staffing levels. All of that is costly. It pulls people away from their regular work and it creates a significant financial drag. That said, it won't deter from our work to improve our results. We will continue to control what we can control and work our plan as they take the time to become a better Boeing company. Boeing issues aside, we already had aggressive plans in place to further optimize the network to improve profitability, moderate capex and capacity to improve free cash flow and ROIC and drive staffing and operational actions to improve efficiency. All of that work is now being accelerated. As we continue our focus on capital efficiency, free cash flow generation and aggressively restoring our returns, we will continue to moderate both capacity and capex until we do so. Managing our capex is obviously key to improving free cash flow, which, along with ROIC, we are laser-focused on. Our bias will remain to retire aircraft as planned and any capacity growth that we have in the near term will come entirely from gauge and initiatives to drive aircraft utilization, including tightening turn time through process innovation and automation, and introducing a modest level of red-eye flying. Both of those initiatives boost aircraft utilization and create capacity without aircraft capex. The initiative to reduce turn time is going well and is a first step. 12 stations will see a five-minute reduction in turn time in the November 2024 schedule with further reductions in early 2025. We will share details on the full plan, which includes these and other planned strategic initiatives at our Investor Day, now planned for September 26th when I look forward to welcoming everyone here to Dallas. On our cost control efforts, note that we already had plans in place to end 2024 with head count flat to down through efficiency efforts like deploying automation, and Gen AI solutions for greater productivity and some customer support functions and driving organizational efficiency by combining like functions. Further capacity reductions in 2024 and 2025 create additional head count and efficiency challenges, and we are moving quickly to address those through a combination of voluntary programs. We have essentially frozen and stopped all hiring except for a limited number of critical positions and now expect to end 2024 with head count down approximately 2,000 as compared to the end of 2023 and headcount will be down again in 2025 through continued efficiency efforts. We are already seeing the benefits of time off without pay program that in fact, the participation in these programs generated higher-than-expected savings in March which was one of the factors that contributed to us beating our first-quarter CASM-X guidance. Last quarter, we laid out a plan that included providing a line of sight to cover our cost of capital in 2024. We are admittedly materially off that plan. Much of this comes from external factors, including headwinds from increased market prices for fuel and impacts attributable to the most recent delays in Boeing deliveries but we aren't accepting that as our fate and are taking swift action against what we can control. So there's a lot going on right now, and we have a good grip and plan around areas of the business where we can improve. As a recap, we are continued to be guided by our goals to drive ROIC performance by making additional network adjustments to specifically address underperforming markets and adjusting capacity, enhancing revenue performance in the intermediate term through marketing and revenue management efforts, offsetting cost pressures with efficiency initiatives and programs to reduce headcount and lower discretionary spending. Curbing our capacity plans and managing down capex and investing in initiatives that create capacity without capital investment. And finally, by creating a new set of strategic initiatives to share with you at our Investor Day this September. We will not tolerate underperformance of any kind, and everyone is committed to doing what it takes. I am truly blessed to lead the company with such passionate and dedicated employees, and I am confident that we can and will adjust as needed as we have in the past and work to hit our financial targets, which are not negotiable. So before I close, I just want to say thank you again to our employees for all that they do every single day. And with that, I will turn it over to Tammy for a more in-depth review of our financial performance and outlook. Tammy Romo -- Executive Vice President, Chief Financial Officer Thank you, Bob, and hello, everyone. As Bob just covered, this year is not shaping up as we had initially planned. We have never and will never accept underperformance. There are a lot of things that contributed to our current position, the impact of continued delivery delays from Boeing, significant market-driven inflationary pressure from new labor contracts, volatile fuel prices, and dynamic customer travel patterns. Those are all very real reasons, but we will not use them as excuses. Instead, our focus is to control what we can control, to take aggressive actions to adapt as required and to produce financial returns period. Bob mentioned the warrior spirit of our employees. It's a very real thing, and it will be the key to our turnaround. So before I dive in, I want to thank our incredible employees for their resilience, their perseverance and their dedication as we gear up to tackle the challenge we have before us. Ryan and Andrew will speak to our revenue and operations performance in detail. So I'll start with our cost performance before moving to fleet and balance sheet. Overall, our unit cost, excluding special items, increased modestly, less than 1% year over year in first quarter. Our first-quarter average fuel price of $2.92 per gallon came in a bit below our guidance range. Market prices have been volatile. And based on the April 18th market, we increased our full-year fuel price guidance by roughly $0.15 to a range of $2.70 to $2.80 per gallon and we're anticipating our second-quarter fuel price to fall within that range as well. We are currently 55% hedged here in the second quarter and 58% hedged for the full year. We continue to prudently add to our fuel hedge position for 2026, now 26% hedged, and are currently 47% hedged in 2025. Our treasury team continues to do a great job managing our program as we see cost-effective opportunities to expand our hedging portfolio with the continued goal to get to roughly 50% hedging protection in each calendar year. The purpose of our hedge is to provide protection from spikes when we need it most. Over the past two years, we have benefited significantly from our hedge portfolio, generating net settlement gains of $872 million and $145 million in 2022 and 2023, respectively. For 2024, we are currently expecting only a very modest loss, but as Brent gets above $90 a barrel, our position would begin to materially kick in that obviously is helpful insurance to have in this volatile environment. Moving to nonfuel cost. Our first-quarter unit cost, excluding special items, were up 5% year over year in first quarter. Of course, that was primarily driven by pressure from new labor agreement and an increase in planned maintenance associated with the -800s coming off their engine honeymoon. This was a point ahead of our previous expectations, primarily from favorable airport settlements, but also from some early benefits from our cost control initiatives like voluntary time off programs. I am very thankful to all the employees who are pitching in to help reduce costs. It's always been part of our culture and the contributions that our people are making across the company are a sign that our culture is alive and well. Throughout first quarter, we were reacting and adjusting to continuous information from Boeing on further aircraft delivery delays, causing some additional movement within our CASM-X guidance expectations as we quickly worked to revise our 2024 plans. While Boeing's challenges continue to significantly impact us, I am immensely proud of the way our team continues to handle such a dynamic situation, running multiple forecasting scenarios for critical decision support, including support in adjusting capacity and reoptimizing the network. Looking to second-quarter and full-year 2024, we continue to expect similar cost pressures throughout the year, driven primarily by elevated labor costs and maintenance expenses. We currently estimate our second quarter CASM-X to increase in the range of 6.5% to 7.5% year over year and our full-year CASM-X to increase in the range of 7% to 8% year over year, elevated from our previous full-year CASM-X guidance due to lower capacity plans in the second half of the year. The estimated sequential change in nominal CASM-X from first to second quarter is largely in line with historical norms when adjusted for capacity levels. roughly 5 points of our full-year CASM-X guidance is attributable to elevated salaries, wages and benefits expense and roughly 1 point is due to elevated maintenance and materials expense. While we continue to expect pressure from maintenance costs this year, we have reworked our maintenance plans given our new delivery expectations and we now expect lower full-year 2024 maintenance expense compared with our previous expectations. We are also planning more voluntary leave and time off programs to further reduce labor expenses and address current overstaffing. Despite these added pressures, which are a direct result of the Boeing aircraft delivery delays, we are aggressively working to control costs, reduced inflationary pressures, and cut discretionary spending across all cost categories. I want to reiterate, we are far from satisfied with our current financial performance, and we will work relentlessly until we return to financial prosperity with our North Star being ROIC well exceeding our cost of capital. We will go into a lot more detail on our plans at Investor Day in September of this year. Now turning to our fleet. We have reacted quickly over the quarter to the updated Boeing delivery delays. We began the quarter with the expectation we received 79 of our 85 contractual deliveries in 2024. That number dropped to an expected 46-8 aircraft at the timing of our March 8-K and has since reduced even further to a conservatively planned 20-8 aircraft deliveries. Thus far, we have received 5-8 aircraft from Boeing during the first quarter and have retired 3-700 aircraft from our fleet. To reduce distractions and impacts to the business and hedge against further potential delivery delays, we will now plan to hold on to an additional 14-700 aircraft that were originally planned to retire this year, bringing our expected 2024 total retirements found to 35 aircraft, including 4-800 lease returns compared with our previous expectation 49 aircraft retirements. While we remain committed to our fleet modernization, we feel it is prudent to retain some flexibility until we have better certainty around our aircraft deliveries and around the certification of the MAX-7. The updated Boeing delivery expectations has also impacted our capital expenditures and cash flow expectations for the year. As a result of these 20 expected aircraft deliveries, we currently expect our capital spending to be approximately $2.5 billion, well below our previous guidance of $3.5 billion to $4 billion. Keep in mind, our 2024 capex guidance includes an estimate for progress payments based on our current contractual order book and capex estimates will be fluid until we finish working our plans and aligning on updated expectations for actual 2025 deliveries which we plan to share at our Investor Day this fall. A quick note on our capacity plans. The Boeing delivery delays did not impact our first-quarter capacity finishing up 11% year over year on solid completion factor. Looking ahead, as we rework our capacity plans for the year, we now expect second-quarter capacity to be up in the range of 8% to 9% year over year. The majority of the Boeing capacity cuts will occur over the second half of the year with third-quarter capacity expected to increase in the low single digits and fourth-quarter capacity expected to decrease in the low to mid-single digits, placing our full-year 2024 capacity up approximately 4% all year over year. Looking beyond 2024, we plan to keep any future growth at or below macroeconomic growth trends until we reach our long-term financial goals to consistently achieve ROIC well above our cost of capital. As a reminder, our aircraft delivery and retirement expectations are subject to Boeing's production capability and we will react as quickly as possible if any further adjustments are needed with the focus on taking care of our customers and aligning with our financial goals. Lastly, I am immensely grateful for our balance sheet strength as we move through another challenging year. We ended the quarter with $10.5 billion in cash and short-term investments with a nearly $1 billion reduction from the prior quarter, driven by the payout of a labor agreement ratification bonuses, which are onetime in nature. In addition, we returned $215 million to our shareholders through the payment of dividends and paid $8 million to retire debt and finance lease obligations. Finally, and most notably, I am proud to report we remain the only U.S. airline with an investment-grade rating by all three rating agencies, both Moody's and Fitch affirmed our rating during first quarter, and S&P reviewed and moved our rating unchanged. As ever, maintaining an investment-grade balance sheet is our utmost priority. As I close, I want to reiterate that we are not starting the year as we had hoped, and that is undeniably disappointing. However, throughout my years as this wonderful company, I have come to know that a better Southwest is often formed on the heels of adversity. I agree with Bob that is all because of the fight and warrior spirit of our people. And with that, I will turn it over to Ryan. Ryan Green -- Executive Vice President, Chief Commercial Officer Thank you, Tammy. As Bob mentioned, I'm going to provide you with details on our first-quarter revenue performance and base trends. I'll also share an outlook for the second quarter and full year, along with what we are assuming in the guide. And most importantly, I will give you some color on the additional actions we are taking to further improve our revenue performance. Starting with first quarter, unit revenue finished roughly flat on 11% capacity growth, both on a year over year basis. The variance to our original guidance is driven by a balance of higher-than-expected completion factor, close-in leisure volumes that came in below our expectations in the month of March and underperformance in select development markets. Development markets as a portfolio did not meet the maturation expectations, but the story isn't the same for all markets. Several development markets outperformed expectations, particularly Florida Beach destinations. But a few markets weighed down the portfolio. As Bob shared, we have made the difficult decision to address underperforming stations with closures effective August 4th and also to restructure and reduce capacity in other underperforming markets which are included in our updated June schedule. Despite coming in below our expectations, first quarter had strong demand, setting numerous records, including record first-quarter operating revenue, ancillary revenue, passenger revenue, and record first-quarter passengers carried, and we also added a quarterly record number of new Rapid Reward members into the program. In addition to these records, we were also really pleased to see the continued incremental benefits from our investments in managed business as first quarter managed business revenue grew 25% year over year and was roughly flat to 2019 levels. We continue to pick up market share year over year as we perform in line with or above the rest of the industry. Finally, from a geographical perspective, we saw the strongest year over year improvements coming from the West Coast and the Northeast, regions where demand has been slower to return post-COVID. I also want to stress that we had a better than historically normal sequential trend in nominal unit revenue. We are seeing improvement in revenue productivity and demand. Nominal RASM in the first quarter came in flat to fourth quarter despite first quarter historically being seasonally softer than fourth quarter. And this is particularly true in a post-COVID environment where peaks and troughs are magnified. To illustrate this point, consider 2018, the most recent year in which Easter fell in the last weekend of March. Nominal RASM declined sequentially 5 points. So even in the seasonally challenged quarter, the sequential performance was much better than our best holiday comparison. The most significant driver of this sequential improvement was our network optimization efforts, but we also saw a benefit from our other revenue initiatives, especially managed business investments. Looking to second quarter, we expect our ninth consecutive quarter of record revenue performance. In fact, we expect an all-time quarterly record for operating revenue. Second quarter 2024 RASM after being calibrated for recent booking trends is now expected to decrease in the range of 1.5% to 3.5% year over year. The year over year comparison includes a little over 1 point of headwind for holiday timing, both from outbound Easter shifting to the first quarter and for more outbound for the July travel shifting to third quarter. On a nominal sequential basis, this also implies another quarter of better than seasonally normal RASM improvement. Looking beyond second quarter, network planning teams are still reworking schedules in the back half of the year to accommodate Boeing delivery delays. After adjusting expectations for both current booking trends and for Boeing delivery delays, we are forecasting 2024 operating revenue growth to approach high single digits on a year over year basis. This expected revenue growth implies healthy RASM growth in the back half of the year driven by revenue initiatives as well as a reduction in year over year trips. While our development market maturation efforts are off track, which I'll discuss in a moment, our other revenue initiatives are expected to continue to drive value over the balance of the year. In fact, network optimization benefits contributed roughly $100 million in incremental revenue in March alone, primarily from reductions to shoulder flying early morning and late evening flights and short haul flying. For full year, the incremental year over year pre-tax profits from our strategic initiatives is now estimated to be between $1 billion and $1.5 billion after being updated for first-quarter actual performance, development market adjustments, and capacity changes in the back half of the year. The vast majority of the initiatives delivering value in 2024 continue to be revenue related. So while we are encouraged to see strong demand for our brand and solid sequential improvement, it is short of our goals. And as Bob and Tammy shared, it's simply not enough given the escalation of market-driven inflationary cost pressures. Therefore, we are taking actions to generate both immediate and longer-term revenue enhancements. We have stood up cross-functional teams to focus on things like accelerating the maturation of development markets further boost the value being delivered by our relatively new revenue management system and roll out new products and highlight our superior value proposition with our new brand campaign. We also have a larger team that is finalizing a more significant set of strategic initiatives, and they're tasked with delivering transformational streams of revenue productivity. Of course, we'll have more to share on this topic at Investor Day. As we build our plans, we will focus on leveraging our strengths, including those of our network, which, while it has optimization opportunities, remains incredibly relevant and well-positioned based on size and population migration trends. We continue to hold the top position in 22 of the largest 50 domestic markets, and we are by far the market leader in that regard. Also, we're well positioned for the future as population and GDP growth trends are forecast to be strongest in the Southern and Mountain West regions of the country, regions where we have significant leadership. We'll also lean into the customer experience we deliver. Year to date, our Trip Net Promoter Score is up over 5 points year over year. And finally, we continue to enhance our award-winning Rapid Rewards program just this week, we began rolling out the ability to book and pay with part cash and part Rapid Rewards points, which I expect to be very popular with our customers. So in closing, we have a large and relevant network, a strong demand environment and a loyal and highly engaged customer base. We also have the best people whom I want to sincerely thank and we are committed to being aggressive and innovative as we adapt, adjust and evolve to meet the preferences of our customers and to unlock the revenue productivity required to meet our financial imperatives. With that, I'll turn it over to you, Andrew. Andrew Watterson -- Chief Operating Officer Thank you, Ryan, and hello, everyone. I'd like to start out by thanking our incredible Southwest employees for continuing to deliver a strong operational performance. We produced a solid first-quarter completion factor of 98.5%, our highest first-quarter performance over the past 5 years. We delivered year over year improvement in early morning originators, turn compliance and turn differential, and mishandled bag rate and again saw a year over year improvement in our net Trip Net Promoter Score, as Ryan mentioned. Our on-time performance declined slightly year over year, largely due to weather challenges and delays driven by ATC programs. However, I'm pleased to report that we improved year over year on-time performance for the month of March. I'm proud of the hard work and investments made to bolster our win preparedness and modernize our operations, and I'm encouraged to see these efforts pay off in our operational performance. Picking up with Bob and Tammy left off, I want to stress that we remain focused on bringing out operational inefficiencies, increasing asset productivity and creating operating leverage by reducing structural costs. Our Southwest Turn initiative, which Bob shared is tracking ahead of schedule is a critical component of these efforts. One of the key elements include eliminating the need for printing on every flight, reducing the number of employee trips up and down the jet bridge and we're covering faster during the regular operations. We reached an important milestone in this multiyear effort just last week with the launch of electronic fight folders, which modernized several of our flight planning processes by digitizing documents used by our pilots, dispatchers and ops agents. We also continue to make progress on modernizing the airport experience, and that initiative is also coming together faster than originally planned. Our efforts for improving the lobby customer experience are on track to provide improvement to staffing standards ahead of the original schedule. We are working on updated schedules and look forward to sharing those with you as well. I'd also like to highlight a new application called SkyPath we recently implemented [Inaudible] for pilots and dispatchers to provide better awareness of turbulence along the flight path. This industry-leading system uses iPad sensors and GPS data from pilot's electronic flight bags to turbulence in real time, aggregating and sharing data from across -- from users across several airlines in North America. Our teams worked cross-functionally to accelerate the launch of this app for the spring season when we tend to see more turbulence across the network. And it's another tool we can use to support employees with additional information for decision-making, improve the onboard experience for customers and reduce operational risk. We look forward to sharing more on these and expensive of multiyear initiative-based efforts at Investor Day in September. Finally, I'd like to close by congratulating all of our employees who reached agreements on new contracts over the past year or a little bit more than a year plus. Each contract requires a significant amount of work. And as always, we remain committed to rewarding our deserved employees. With that, I'll turn it back over to Julia. Julia Landrum -- Vice President, Investor Relations Great. Thanks, Andrew. That completes our prepared remarks. We will now open the line for analyst questions. To allow for as many calls as possible, we ask that you limit yourself to one question and a brief follow-up if needed. We will now take the first question. Questions & Answers: Operator [Operator instructions] Our first question today comes from Michael Linenberg with Deutsche Bank. Please go ahead. Mike Linenberg -- Deutsche Bank -- Analyst Good morning, everyone. I guess, Tammy, I just want to -- on the bonuses to the employees incurred in the March quarter. Just can you remind us that number again? I thought you I heard it. And then is it just we're going to see another piece in the second quarter with the approval of the flight attendant contract, by the way, congratulations. But another piece in the second? And then is that it for the year? If you can just remind me of those numbers. Tammy Romo -- Executive Vice President, Chief Financial Officer Yes. Mike, First of all, we are thrilled to have an agreement with our wonderful flight attendant. And at the end of the quarter, we had roughly $625 million accrued for labor agreements that we expect to pay out for the remainder of this year. Mike Linenberg -- Deutsche Bank -- Analyst OK. Great. And then just my second question, Ryan, I recently, I've seen you give some presentations and talk about redeyes and redeye flying coming to Southwest Airlines. And I think you said it's about a two-year time frame. I'm just curious, what are the gating issues? What are the things that need to get done to be able to actually implement them? Because it does seem like a pretty long time, but I do realize it is something new for Southwest. Ryan Martinez -- Senior Vice President Finance, Controller Yes. Mike, the -- we can move technology time lines around by reprioritizing things here and there. And so some of the gating -- their crew scheduling changes that need to be made on a -- from a Red-eye standpoint, there are some changes that need to be made with some of our operational systems. And we can choose how fast or how fast to do those things and what elements go before or after them. So the two-year was rough estimate. We can go faster than that if we choose to do so. But it's just kind of a myriad of technology-related items. Andrew Watterson -- Chief Operating Officer Yes. This is Andrew. I'll add on that some of the kind of bigger issues so us down was with our contracts, our reserve periods. We had two reserve periods for the pilots in particular and didn't allow for good coverage of red-eyes. And so with a new contract we'll eventually go to three reserve periods and allow us to better have reserve pilots on standby, should there be a problem. So we didn't want to have those -- one of the larger scale, those flights unexposed or exposed rather to no reserve. So the new contracts allow us the flexibility to have extra reserve periods and that makes us much more comfortable proceeding. Bob Jordan -- President and Chief Executive Officer Mike, this is Bob. You didn't ask this, but on the why, maybe not just the timing, but Obviously, we've known for a long time, our customers want red-eye Flying. It's a little bit limited in scope, but there are red-eye flights that are very desirable for our customers. And so we wanted to do this. It also allows us to add capacity just like this turn work where you can add the capacity, and there's no capex related. You are just using the aircraft and higher utilization. So that's something we want to do, obviously. And then in a period here where we are overstaffed because we were shooting for a higher fleet number any incremental flying like that makes sense, obviously, it alleviates at least a piece of that overstaffing with our pilots. So that's one to give a background on the why in addition to the how long. Mike Linenberg -- Deutsche Bank -- Analyst Great. Thanks very helpful everyone. Operator The next question is from David Vernon with Bernstein. Please go ahead. Dave Vernon -- AllianceBernstein -- Analyst Hey. Thanks for taking the question. So Bob or Ryan, I think last quarter, we were talking about premium on the call, and you guys had made the comment that this is something that's cyclical, it comes up, it goes down. People put too many premium products in the cabin and then they have to take them away in the down cycle. Is the work that you're doing now in terms of looking at the product assigned that this shift could be something more permanent. Can you guys just help us understand how your view of the market may be changing a little bit that's precipitating this sort of more strategic review? Bob Jordan -- President and Chief Executive Officer You bet, and thanks for the question. I think maybe I'll just start a little wider, which is are always studying what our customer preferences are and if they're changing, that's out over time, and we're committed to meeting them. It's over time, we've added things like WiFi and now we're adding seat power, we've added a large overhead bins, and so we're committed to meeting our customers' preferences. And just to be transparent, we've been seriously studying this question around onboard seating and our cabin for a while. And to get it what you just said, which is an understanding of what customer expectations are today. I'm proud of our product today, and our customers love it but it was designed at a time when load factors were lower and higher load factors do change the way preferences work, the operation works and also, our customer -- the customer expectations change over time. So there's no decision. There's nothing to report other than we are seriously looking at this. But early indications, both for our customers and for Southwest look pretty darn interesting. So I'll just leave it there and more to follow. Dave Vernon -- AllianceBernstein -- Analyst I appreciate that. And maybe just as a follow-up on the same topic. Is this, if you were to go down this path, obviously, there's going to be cost of the cabin. But technologically, from a passenger service system and all that kind of stuff, like how complicated might that be to kind of think about doing things like seat assignments or segregating the cabin in some harder way. Is that a big technological challenge? Or is that something you guys already have the capability to do, but just aren't doing? Bob Jordan -- President and Chief Executive Officer Well, we just don't -- I don't want to get into details because a lot of those we don't have. Again, we're looking at customer preference. Obviously, the -- how would you do it technically, how long would it take? What impacted any would it have on the operation Obviously, what's the financial impact all of those things beyond the customer preference going to how you make your decision. So again, I'll just say we're looking at this very seriously and more to come and we look forward to sharing where we are at our Investor Day on September 26th. Andrew Watterson -- Chief Operating Officer And Bob, our PSS is the industry standard Amadeus tool, which obviously works in those environments. So the underlying system is not prohibitive from doing that. That's right. Dave Vernon -- AllianceBernstein -- Analyst All right. Thanks for that and thanks for taking the questions. Operator The next question is from Duane Pfennigwerth with Evercore ISI. Please go ahead. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey. Thanks. Just geographically, can you speak to how much differentiation you're seeing in unit revenue trends. You have a pretty broad-based domestic network, could you just comment on like relative strength versus relative weakness geographically across the country? Ryan Martinez -- Senior Vice President Finance, Controller Duane, I think there is definitely regional performance. I mentioned in the prepared remarks that the West Coast did well, particularly intra-Cal RASM and margins are up double digits year over year. Phoenix is doing really well. Vegas is doing really well. Of course, Vegas had some assistance there with the Super Bowl being there in February in the first quarter. But all those markets performing very well. The Northeast performed well. In Florida, there's been a lot of talk about Florida. Florida, we have above system average RASM. In Florida, it's come under pressure with some of the capacity growth there, but still RASM is above system averages in Florida. So there's strength across the network. Of course, we've got some weaknesses in the development markets, which we've talked about, and we've got plans underway to address with the station closures that we've talked about. And then we've restructured some of those development markets and some of the schedules that we've had to republish here as a result of the Boeing delivery delays. But yes, there's -- as always, with the network, the -- it's a portfolio and you've got markets that performed better than others. We're focused on making some improvements in those development markets. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Appreciate the thoughts. And then just on your capacity exit rate, or was it down low singles, low to mid-singles by the fourth quarter. How should we be thinking about early 2025 and are we still in a dynamic where seats are down more than ASMs. In other words, I think that was by several points, maybe 5 points or so that seats were trailing ASMs. Is that still the dynamic in the fourth quarter? Bob Jordan -- President and Chief Executive Officer Yes, Duane, thank you. And again, I'll just remind you that we're -- this is all very fluid as we work with Boeing on their delivery estimates. And obviously, '25 is more fluid than '24 and also, we are choosing how we -- so as we get some indication from Boeing, we're choosing how we're going to plan, which may be different because we don't want to have to go through this replanning the schedules over and over because it's very, very disruptive. So it's early to give you a signal on '25. But that said, I just would point out again that any capacity is going to come through either gauge or initiative-based additions, again, like the turn time work or red-eye flying. And so again, it's too early. But I think you're thinking directionally correctly, I'll just stop there. And Tammy, do you want to add something? Tammy Romo -- Executive Vice President, Chief Financial Officer Now the only thing I just might reiterate is we'll look to align our capacity growth for 2025 and with demand. So we've got a little bit of time here. And obviously, one thing I'd point out is we do have fleet flexibility by design. So we'll continue to evaluate that. And then just at a higher level, again, we do plan to grow below macroeconomic growth trends until we get our financial going in the right direction to achieve our goals. Bob Jordan -- President and Chief Executive Officer And maybe the other thing to add, too, just to disconnect from Boeing is the work on the network that work to moderate, significantly moderate our capacity isn't just Boeing. I mean, this is something we need to do. We need to manage ourselves, manage our appetite, continue to mature the network continues, as Ryan said, to work on the part of the network that is underperforming and moderate our capacity until we are hitting our financial targets, obviously, moderating your capacity manages down capex managing down capex is critical to free cash flow. It all helps us achieve our ROIC targets. So I don't want to lay this at the feet the capacity discipline and the network adjustments are Boeing, we are doing those things because we need to do those things to restore our financial our progress against our financial targets, and we will absolutely continue on that path until we get there. Andrew Watterson -- Chief Operating Officer And I think you take the sources of growth that Bob talked about and the network restructure that does imply that our central tenancy is for seats to trail ASMs and for trips to trail seat. That's a natural consequence of those actions. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Appreciate the thoughts from the team. Thank you. Operator The next question is from Jamie Baker with J.P. Morgan. Please go ahead. Jamie Baker -- JPMorgan Chase and Company -- Analyst Hey. Good afternoon, excuse me, good afternoon. Yes. So Tammy, how should we be thinking about operating cash flow for the rest of the year? I mean we've got the retro component in there with the flight attendants but presumably, a weaker demand outlook suggests some pressure on the air traffic liability. And then related, I guess, somewhat to that the dividend consumes, what, $450 million a year, $450 million of cash. Any idea how the board is thinking about that in light of some of the challenges that you articulated today? Tammy Romo -- Executive Vice President, Chief Financial Officer Yes. Jamie, we're focused, as Bob said, on generating free cash flow. Ultimately, we're working to restore our financial returns. So this year, we're very focused on what we can't control. And we are working on lowering our capex. That's already come down quite a bit, as we've already shared. And just in terms of the liquidity targets that we have established with our board, we do have a minimum cash target of $6 billion, which, of course, is on top of our revolver. So we're really working to manage, obviously, our operating cash flows and very focused on that as we've taken you through in our remarks and also working to balance that with our capital spending. So we are happy that we have our dividends reinstated. So plans, at least at this point with the board. But obviously, we'll continue to have those discussions as we move throughout the year. And again, Jamie, too, we our goal as ever is to maintain our investment-grade balance sheet and work toward our long-term leverage goal which is in the low to mid-30% range. Obviously, we're sitting higher than that now, but we have our eye on that goal as well. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK. And then Bob, so question, when you report earnings, does management then break up and host townhalls throughout the company. The reason I ask is that some airlines, some companies do that. I honestly don't know of Southwest. But I have to wonder, I mean, is the tone with the front line as somber as it is on this call. I mean, I guess it's hard to answer, but if I was in Baltimore right now, chatting up employees, do they get what's going on right now and just how grim this guide is. And the reason I ask is that clients are asking me if today's messaging is just reserved for Wall Street or if this is truly an all hands-on deck call for change, much like what Richard Anderson delivered at Delta in 2012, which in fairness did represent a real turn for that franchise. Any thoughts? Bob Jordan -- President and Chief Executive Officer Yes. Jamie, there's a lot in your question. So let me just start with we -- just to balance things out. Our financial returns are nowhere close to what we need and what we want them to be, period. And we will be relentless until we achieve those. The company -- so that is absolute. The company is not grim. In other words, we have significant demand for our product. We have awesome employees. We have real improvement in our operational performance and reliability. We had the best completion factor in five years. We have some of our highest NPS scores ever on and on and on. So the company has a pile of just absolute attributes that our customers love. So I would sort of separate it agree in terms of our financial returns, which I agree and the company is grim. Now your second -- your question is, is that -- does everybody know that? And are we aligned? Absolutely. We had a special all senior leader meeting Tuesday, as an example before this, to walk through exactly what we need to be doing, how to be thinking, what to be doing around the plan, how to be executing. I have multiple times per year, meeting with every leader at this company, from supervisors on of, it's 4,000 people, where I can talk directly to them about what we need to be doing. The messaging may be slightly different. In other words, the messaging for them may be how they need to think about costs, how they need to be thinking about winning and capturing and retaining customers. But absolutely, there is a line of top to bottom and focus. We have a solid plan with solid actions that we are all committed to and it's comprehensive. And it all drives toward restoring our financial returns and hitting our ROIC targets. We are committed to continued network adjustments to specifically address underperforming markets. We're committed to adjusting our capacity and managing down capex, as we just talked about, or created -- we're committed to creating capacity through initiatives like the turn reduction and the red-eye flying because that creates capacity while spending on aircraft . We're committed to enhancing our revenue performance and our demand through tuning our RM system and the major marketing efforts that Ryan has underway to drive demand and loyalty. We're committed to offsetting our cost pressures through efficiency efforts and programs to reduce headcount. We're going to be down 2,000 this year, down further next year, and we're down close to another 800 right now on top of that through these through these voluntary time off programs and we're committed to a set of new strategic initiatives. I've hinted it, boarding and seating and the cabin, and we're going to share those with you at Investor Day. Jamie Baker -- JPMorgan Chase and Company -- Analyst Bob, thank you very much for that answer. I appreciate it greatly. Take care. Operator There's time for one more question. It will come from Savi Syth with Raymond James. Please go ahead. Savi Syth -- Raymond James -- Analyst Hey. Good morning. If I might, just on the business revenue, that was a good performance here. I was curious what your to 2Q outlook is reflecting in terms of expectations and what you're seeing there? Ryan Green -- Executive Vice President, Chief Commercial Officer Savi, yes, managed business was up very healthy in the first quarter, up 25% and reached a significant milestone in getting back to flat to 2019 levels. So we were really pleased. With that, that was driven by a double-digit increase in unique travelers traveling under a contract in the managed business space. So that just means we're penetrating deeper into accounts. We're growing the number of companies under accounts, and we continue to pick up market share there. As we look forward, we expect the performance to continue and to accelerate the sequential performance in the second quarter to be better than the first. And it's kind of -- it's across the board. Our top 15 industries, 11 of those had double-digit growth year over year. So, the performance is widespread, and we expect it to continue and to help our revenue performance as we go forward. Savi Syth -- Raymond James -- Analyst That's helpful. If I might just ask just question related to capex. And just given your current outlook, talk Tammy, on kind of free cash flow generation here and kind of looking forward a little bit, what's realistic? Tammy Romo -- Executive Vice President, Chief Financial Officer Yes, Savi. We're -- as we said, we're expecting capex this year at $2.5 billion and that includes about $1 billion in aircraft spend. We are working through our plans for next year. So it's a bit early to give you guidance for next year. Obviously, we're working through that actively now. So we'll update you on our capex spending plans as part of our comprehensive update in September at our Investor Day. Savi Syth -- Raymond James -- Analyst Is the view that kind of is free cash flow generation important and possible? Or how are you thinking about kind of translating that capex into. Tammy Romo -- Executive Vice President, Chief Financial Officer We are absolutely working with the view to generate free cash flow. We -- that will obviously be part of the equation as we pull together our plan for next year. Savi Syth -- Raymond James -- Analyst Appreciate it. Thank you. Julia Landrum -- Vice President, Investor Relations OK. That wraps up the analyst portion of today's call. I appreciate everyone joining and have a great day. Operator Ladies and gentlemen, we will now transition to our media portion of today's call. Ms. Whitney Eichinger, chief communications officer, leads us off. Please go ahead, Whitney. Whitney Eichinger -- Chief Communications Officer Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, could you remind us and share instructions on how to queue up for questions? Operator [Operator instructions] And the first question comes from Alexandra Skores with the Dallas Morning News. Please go ahead. Alexandra Skores -- Airline Reporter Hello. Can you all hear me? OK, perfect. I'm wondering if we could hone in on the four airports that were announced today that would be cut and same less Atlanta and Chicago that are being reduced in flight. Could you talk a little bit about the decision to -- for those specific airports to be chosen? Bob Jordan -- President and Chief Executive Officer Well, it's never -- I'll just start with this. It's never an easy decision to close a station or to materially reduce flights in the station. We love our airports. We serve our communities, and so it's always difficult. But again, I'll just go back to we have portions of the network a higher-than-normal portion of the network that's just not performing to the level that we need. And for a variety of reasons. And so we need to hit our financial returns, and we will. And so you have to make the tough decision to continue working down the level of markets that aren't performing. So it was really that. It's just as we look at -- as we look at our network, it really relates to the areas that are just don't have a path to the level of financial performance that we need. That's really the basis for the decision. I don't know, Ryan, if you want to add anything else or Andrew? Ryan Green -- Executive Vice President, Chief Commercial Officer No, you covered it, I think. Alexandra Skores -- Airline Reporter And my second question, what kind of communications have been given to the employees at those airports. Bob Jordan -- President and Chief Executive Officer We have a very -- as you would expect, we take care of our employees, we take care of our partners, and we have a very rich communication plan that to go in the right order to make sure we communicate with folks it's done with compassion. Our employees will be offered jobs in other cities. And so they have a lot of options. But no, we handled all this, as you would expect, Southwest Airlines to handle. Andrew Watterson -- Chief Operating Officer We staged senior leaders there last night. So a very early morning hours, our people -- our leaders were there to explain the wise to the employees as well as to the airports and then also to go through with them the different options they'll have for moving it's a seniority-based system with our unions and so how that will all work for them. And so they've gone through that. There's obviously a range of emotions. People chose to relocate there, and so they will have some natural disappointment in the short term, but these people have long careers in Southwest Airlines that our ground employees tend to move around a decent amount anyway. So we expect most of them to take advantage of not all of the opportunities to relocate to other stations. Alexandra Skores -- Airline Reporter Got it. So that's every employee that's impacted is going to be offering some sort of job. Andrew Watterson -- Chief Operating Officer Yes. They were an employee, they chose to do so. Alexandra Skores -- Airline Reporter Got it. Thank you. Operator The next question is from Mary Schlangenstein with Bloomberg News. Please go ahead. Mary Schlangenstein -- Airline Reporter I appreciate it. I wanted to see if you could talk about the extent of the reductions in O'Hare and Atlanta. Andrew Watterson -- Chief Operating Officer There are about -- we took about half of a here down from about 30-something flights, about 15, 18 flights on the season day of week. So it's about a 50% reduction at in Atlanta. I can be on the top of my head, Ryan, it was 30%. I want to say the third [Inaudible] it's unfortunate we had been restoring Atlanta over the course of post-pandemic. We could never quite get back to the level of performance we needed at the scale we needed and so it's been reduced back down to a level, so just shortly coming out of the pandemic. And so it's still substantial activity there. It's just not as big as it was before. Mary Schlangenstein -- Airline Reporter Great. And if you could also address the impact of the new refund policies that were announced by the DOT yesterday, whether that's going to be a financial problem for Southwest? Or if you expect to have any trouble complying with those new rules? Ryan Green -- Executive Vice President, Chief Commercial Officer Mary, it's Ryan. Well, it's new. As you know, it was just issued yesterday. So we're digesting exactly what all of that means. But based on our read so far, I don't expect that it's going to be a significant impact. Of course, we already have the most customer-friendly policies in the industry. So we're best positioned to comply with any of these new regulations out of the gate. And today, if there's a long delay or a cancellation, customers can receive a refund from Southwest. So there's no real change there from our standpoint. And then, of course, unique in the industry, flight credits don't expire with Southwest, if you have to cancel your flight for any reason. But in general, we're proud to be unique among airlines in having these customer-friendly policies, no bag fees, no change fees, flight credits don't expire, we don't nickel and dime customers. But the -- those are our choices without government intervention. And it shows the marketplace works as consumers want different choices in who they fly. So again, I'd just point to the fact that we have the most customer-friendly policies in the industry, and I just don't see a tremendous amount of impact to Southwest from these. Mary Schlangenstein -- Airline Reporter Thank you. Operator Next question is from Alison Sider with Wall Street Journal. Please go ahead. Alison Sider -- Air Travel Reporter Hey. Thank you so much. I know that the overall demand environment remains very strong. But I am curious if you're seeing any indications of bookaway or traveler nervousness about Boeing or air safety more broadly? Bob Jordan -- President and Chief Executive Officer We -- I'll just give you a little overview and then obviously, Ryan can jump in. We -- this is something that we look at. So we study, we survey to understand our customers' views and whether anything that's going on impacts their view of Southwest or the industry generally. That's not perfect, but we don't see any -- we don't see an indication that this is having an impact on bookings or demand. It's not perfect. I think logic would tell you there could be something there. But certainly, we don't see anything material right. Ryan Green -- Executive Vice President, Chief Commercial Officer Yes. The only other thing that I would add is that we certainly are serving on the front end to see how top of mind it is for consumers when they're making a booking and then we also look at cancellations and ask customers once they cancel a flight, what their reasons for cancellations were and safety concerns or Boeing aircraft as a result of that on the cancellation side is 1% of our cancellation. So it's a very, very small number not material, I don't think, to the overall picture. Alison Sider -- Air Travel Reporter Interesting. And the four cities, the four markets that you're exiting, are those cities that you think would have been more successful if you had the MAX 7 in your fleet or had it coming soon? Ryan Green -- Executive Vice President, Chief Commercial Officer I think the markets themselves were just performing at a level that we needed to make the tough choice to remove them from the network. And I don't think that a smaller aircraft would have had a material difference on those markets. Operator Next question is from Dawn Gilbertson with Wall Street Journal. Please go ahead. Dawn Gilbertson -- Air Travel Reporter Hi. Thanks very much for taking my call. Bob, about six months ago, you were asked, as you always are, about the premium question, the open seating versus the signed seating, and you mentioned, as you always do, that you always said to customer preferences and if something changes, you'll adapt as you said today. But here's what you said then. You said there's nothing underway. There's no story here, nothing underway. So can you help us understand what has dramatically changed in the past six months on that particular front? And also related to that, is there any financially significant change to boarding or seating you can do without assigning seats? Bob Jordan -- President and Chief Executive Officer You bet, Dawn. Thank you. I think the -- it's what you say that the difference is we -- this is something that we look at on sort of on the surface pretty regularly. But in terms of a very deep dive of understanding customer preference and what we might do, that's something we do less frequently. So the answer was different six months ago because the work has really accelerated. It's work that we've done since then. And there's a lot of discussion out there about just cabin and premium and all kinds of things. So it may just generally in customer preference. So it makes sense in terms of timing to study that. Again, we always want to understand what our customers want and desire. And so again, we're -- I'll just again to tell you that we are very seriously studying this, and we're pretty deep in that study. And again, nothing to reveal today except that there are some interesting indications in terms of what this could mean to us and what it can mean to our customers. Again, that's nothing to reveal. On your question about are there other things you can do in boarding in particular? Our boarding process, we changed actually it's over. I think it's a decade ago at this point is very well received by our customers because it's very organized and the way you line up we have worked hard to monetize that and give our customers choice. You -- we give you choice around how you think about your boarding position and that's more important to some customers than others. But we've got that. We've got Business Select. We have an upgraded boarding at the gate product. I will admit, it is hard for me, Ryan might tag in here. It's hard for me to think of how we can really from a financial perspective or a customer desire perspective really push that even further. I think the products that we've added really attack what our customers want. So being just blunt. It is hard to think about how to implement more products related to boarding. Ryan Green -- Executive Vice President, Chief Commercial Officer Yes, I would agree with that on the incremental products. But what we are doing and what we can continue to do is to get better at how we price those products and drive incremental yield from those ancillary products. In total, our ancillary revenue in the first quarter was up 18% year over year. So well in excess of our O&D passenger growth. So we continue to push on optimizing for revenue there on our ancillary products, particularly the boarding products, but in terms of adding incremental products, it's tough to imagine how that would fit into the current boarding process. Dawn Gilbertson -- Air Travel Reporter If I can follow up then. My question is about -- you're talking about transformational changes here, and you're hinting at boarding and seeding. So can you do what kinds of things can you do, if anything, that doesn't involve assigning seats because to me, that would be transformational for Southwest. Like what -- can you give us -- I know you're not going to go into any detail until Investor Day, but what specifically is going to be different because just I think the price of upgraded boarding and early bird is obviously not going to meet your financial goals, as you just said. Bob Jordan -- President and Chief Executive Officer No, you're -- you -- I think you're exactly right, which is that's why you want to look at all of these things. And we're just not ready to tell you exactly what we're studying, and we're not ready to tell you then how that could, if we decide to go forward, turn into a different product design and a plan. But -- but yes, just conceptually, that where you're going is the reason we're looking at this is we know over time, customer preference has changed. They have my whole three, six years here at Southwest Airlines. And we have changed a lot. We've changed our boarding. We've changed our the product that we offer on board. We added loyalty programs and a modified those. So we are constantly changing to meet customer demand. So it's critical to understand three things: number one, what do your customers want. And that's really what we're studying right now. Two, what does that do to the way you operate the airline because we are obviously a bedrock of the company is operating very efficiently, having a quick operation, great turn times being efficient. And so making sure that whatever you might want to do, it's fits in with that. And then obviously, the third piece is, is it financially beneficial back to hitting our financial goals a piece of this is, as Ryan mentioned, continuing to drive progress against our financial aspirations and goals and hitting our ROIC and margin goals. So all those three things have to work together. And we're just not ready to share details today. but we will be, as we move across the summer and into our Investor Day in September. Dawn Gilbertson -- Air Travel Reporter Thanks, Bob. Operator The next question is from David Koenig with the Associated Press. Please go ahead. David Koenig -- Business Writer Thanks very much. Well, I was going to ask about the transformational options proceeding, but I think you've probably said all you're going to say on that, Bob. If I -- if you could go into a little bit of explanation on the 2,000 headcount reduction. First of all, I'd like to know how many jobs you think will be eliminated by the closure of those four airports and any drawdown at here in Atlanta and elsewhere. And then secondly, are you saying that you can get to 2,000 fewer jobs this year just through attrition and leaves, can you rule out furloughs? Bob Jordan -- President and Chief Executive Officer David, thank you. And yes, no, thanks for allowing me the ability to clarify that. We have line of sight on the 2000 that does not include furloughs. or anything like that, that we don't want to put on the table. And then it also does not include a headcount that are effectively sort of out of the workforce in terms of not being paid because they are on voluntary unpaid leave. So it doesn't even count that. So this is really through attrition in some cases, reassigning folks to have the work that does need to be done. But it's also coming through pretty sophisticated initiatives. We have initiatives underway to use Gen AI to automate the way we handle cut some of our customer support functions, generate responses, decide what to do with the customer request. We have other significant continuous improvement in automation going on in other parts of the company, and we plan to accelerate that. So not furloughs. It is primarily through planned attrition that we know we have a line of sight to. So and again, the line of sight to the 2000 the folks that are effectively out of the workforce because we're not -- they're not being paid in their own voluntary time off programs. That's on top of the 2,000. David Koenig -- Business Writer OK. And how many of the 2,000 do you think will be pilots? Andrew Watterson -- Chief Operating Officer Yes. I don't think we give a breakdown by work group, David. There'll be some that will be back office people that work at headquarters, some that will be a frontline we have. There's natural attrition that goes along throughout the company, whether one reaches retirement age or want to sites to go find a different job. You have that natural. We have a good history on that, so we can model out what that's going to look like and which ones we need to backfill, which ones do not need to backfill and that's how we get to these projections. It's not any kind of reduction in force or eliminated people currently employed is more when physicians become available, not backfilling them. David Koenig -- Business Writer All right. Thank you. Operator The next question is from Leslie Josephs with CNBC. Please go ahead. Leslie Josephs -- Airline Reporter Hi, everyone. Thanks for taking my question. Just knowing what you know now from these customer surveys about potential seating changes. Are you thinking that it could be like a big front seat or bigger front seat type product? Or do you think that at some point, there will be a curtain on a Southwest Airlines plan and secondly, are you ruling out baggage fees entirely? Is that still or is that something that's on the table for you as you're looking at revenue initiatives? And then on the 1% of bookings that were canceled because of concerns about air safety, how many people is 1%? And how does that compare with -- after the MAX crashes when the plane came back? Ryan Green -- Executive Vice President, Chief Commercial Officer Leslie, I'll try and take all of those. The first one on what we're learning from customer research, I think just stay tuned there. We'll have more to share on what we're learning and how that factors into what we may do different, if anything, at all. I will say though, the Southwest Airlines is -- we will stay true no matter what we do to the brand and who we are and how we approach customers. And I think things like curtains and things like that are a bit far field from Southwest Airlines is. On your bag fee question, no, we are not considering bag fees. The reason we're not considering bag fees is because people choose Southwest Airlines because we don't have bag fees. If you go look the most recent J.D. Power survey, which obviously is an independent syndicated piece of research that's well respected in the industry. Over 60% of customers say that they choose Southwest Airlines as one of their top reasons because of bag fees. You -- companies love to have differentiation in their product that drives customer preference and drives customer choice. Our next closest competitor on that measure is Alaska gets 19%. So we get three times the preference in terms of bag fees relative to our competition. So that's why bag fees are not on the table for consideration. On the 1% of cancellations, it's a very small number. We don't -- our overall cancellation rate is a very small number, so 1% of that is a very, very small number. So it's not material. Andrew Watterson -- Chief Operating Officer Yes. And I'll just emphasizing that, Leslie, it's not 1% of our bookings, it got canceled because of all of those people who canceled. And so yesterday, 0.4% of people canceled and 1% of that 0.4% said it was safety concerns. So it's a very small number of an extraordinarily small number that did that, which is why Ryan would say is immaterial or even inconsequential. Leslie Josephs -- Airline Reporter And how does that compare with what the MAX came back in 2020 after the crashes. Andrew Watterson -- Chief Operating Officer That was also quite small. I mean we also track people who look at what the aircraft type is on the website and those really didn't see any movement of consequence in there. And so it seems like this is not something that customers investigate any great deal with the very early days of the MAX grounding, there were some interest heightened to that. When the MAX came back, it was -- we prepared as if it would be, I think, of interest and it was not a thing of interest. And currently, customers are acting if it's not a thing of interest as well. So it's I think that even though Boeing is having individual controllers as a company, customers are trusting at least Southwest Airlines and that we will operate our aircraft safely. Leslie Josephs -- Airline Reporter Thank you. Operator The next question is from Rajesh Singh with Reuters. Please go ahead. Rajesh Singh -- Airline Reporter Bob, all the additional voluntary one time of programs that you're considering, does that include the pilot as well? Andrew Watterson -- Chief Operating Officer Rajesh, this is Andrew. And so what we're doing right now that we've spoken of is the voluntary time off has roughly been with our ground operations flight attendants and some of our call center people. They've taken advantage of that for flexibility in their programs. We do not have anything with our pilots at the moment. A provision of our contract requires us to consult with them, and we will certainly do that before we do anything with regards to our pilots. Rajesh Singh -- Airline Reporter Bob, you said that you were encouraged by Boeing's approach. Can you please share some specific examples and color that make you feel encouraged about their approach? Andrew Watterson -- Chief Operating Officer Andrew, again, I'll take that because I was up there with Bob on our visit. And so really, we're impressed by how Boeing is putting kind of quality ahead of short-term profit, so to speak. So an example is, they have many portions in their factory. There's like 10 stations they go through the construction. They don't allow anything to progress past stage 3 that has traveled work. And so that creates gaps in their factory, which then leads to obviously a plane that's not sold and delivered that month. The fact they're taking this very strong approach to bring quality out in the early stages of the production process from their suppliers is a much different approach. And frankly, as when to put safety ahead of profitability in the short term. But it's obviously they're a long-term interest. So we were very impressed by that kind of not just change of awards, but by change of actions. Bob Jordan -- President and Chief Executive Officer Yes. You want to see the tone at the top be appropriate, which is an understanding that -- again, I can't speak for Boeing, I'm just thinking about how we view this but a tone that recognizes that this is a big issue, and it's bigger than a quality escape. And to some extent, it is a cultural issue. And so they need to attack it very broadly. And that is the way that they -- our view when we visit with them, that is the way that they appear to be tackling that, as Andrew said, it appears to be showing up in their actions. Now at the end of the day, they have to deliver and -- but no, no, we are encouraged by what we're seeing. Rajesh Singh -- Airline Reporter And have you increased your inspectors at the Boeing sites following the last fire incident? Andrew Watterson -- Chief Operating Officer Thank you for the question. In 2022, we increased from having just a representative, which other airlines have to having a team of AMP certified mechanics on process, on site to inspect our aircraft as they go through the production process. I believe there's north of 85 inspection points that they look at between entering the factory and exiting the factory. And so -- that is the way we assure day-to-day that our quality of aircraft is maintained. We additionally have the engagement at the executive level that Bob talked about where we also see good results. So overall, are heightened attention to Boeing and the quality of the aircraft they manufacture has been going on for a while, and we think it's bearing fruit. Operator The next question is from David Slotnick with TPG. Please go ahead. David Slotnick -- Aviation Business Reporter Good afternoon. Thanks for the question. And going back to the transformation, you said that you're looking at changing customer preferences. And I'm sort of just wondering what perspective you're taking on that? Like are you looking at this as something where because of those preferences customers are choosing to book other airlines over Southwest? Or are you looking at this as maybe a place where Southwest is missing an opportunity to revenue on premiums or upsells what your rivals are from existing passengers? Bob Jordan -- President and Chief Executive Officer Ryan can give you much more detail, but I think you want to know all those things. You want to know -- why do customers book Southwest? What do they expect to Southwest? You want to know why do they book others and not Southwest Airlines, you want to know if they have preferences for other things within our product that we don't offer today, how do you think about pricing, those kinds of things and how it affects their desire to book Southwest Airlines. But now you want to need to know all those things. And again, additionally, in addition to the customer preference, you need to know what does it do for the operation and how we how -- how quickly especially we turn our aircraft and we're studying that as well. Ryan? Ryan Green -- Executive Vice President, Chief Commercial Officer I think you hit it all. Clearly, with any sort of transformational change, you're going to have a very robust, highly scientific, very sophisticated statistical models and research methodologies to test all of those things that Bob walked through. that's what anybody would expect of a company like Southwest, and that's the rigor at which we are approaching studying this issue. David Slotnick -- Aviation Business Reporter And I mean, back to the question before just considering the share of their revenue that your rivals are earning from upsells and from premium. Do you think you can really rule out something like a curtain in the cabin? Ryan Green -- Executive Vice President, Chief Commercial Officer Look, we're going to study customer -- like we've said, we're going to study customer preferences, but there's strong demand today for Southwest Airlines and the brand that we put and the product that we put in the marketplace today, it has worked for us for over 50 years, and customers understand well who we are and what we bring to the marketplace. We're not going to try to be somebody that we're not. And so we'll study it all, but we're -- at the end of the day, we're going to remain true to who Southwest Airlines is. Andrew Watterson -- Chief Operating Officer I think you also have to look at the revenue per square foot and you get in the cabin. And so it can be seem like you won't want to have a fancy product. But if it doesn't generate revenue off of that square foot, you have in the cabin, then it's necessarily not worth it. So we take a strong eye to the revenue that any of our products would generate as we evaluate this. Bob Jordan -- President and Chief Executive Officer And I think the -- I know we've said this probably 20 times on the call today, and I think the other short answer is we're not ready to go into detail. We have work to do here, obviously, to continue to finish up our work and then if there are things we do want to change, to understand how we would do it in the Southwest way. And so we will be back with detail when we're ready. And if there is something that we're going to change, we're aiming to do that at our Investor Day, which is planned in September, and we'll share obviously a lot more of that. Thank you. David Slotnick -- Aviation Business Reporter Thank you. Operator This concludes our question-and-answer session for media. So back over to Whitney now for some closing thoughts. Whitney Eichinger -- Chief Communications Officer Thanks to everyone who joined us today. If you guys have any further questions, our Communications Group is standing by. Their contact information along with today's news release are all available at swamedia.com. Answer:

the Southwest Airlines first-quarter 2024 conference call

Operator Hello, everyone, and welcome to the Southwest Airlines first-quarter 2024 conference call. I'm Gary, and I'll be moderating today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator instructions] Now Mrs. Julia Landrum, vice president of investor relations, will begin the discussion. Please go ahead, Julia. Julia Landrum -- Vice President, Investor Relations Thank you so much. Hello, everyone, and welcome to Southwest Airlines first-quarter 2024 conference call. In just a moment, we will share our prepared remarks, after which we will be happy to take your questions. On the call with me today, we have our president and CEO, Bob Jordan; executive vice president and CFO, Tammy Romo; executive vice president and chief commercial officer, Ryan Green; and chief operating officer, Andrew Watterson. A quick reminder that we will make forward-looking statements, which are based on current expectations of future performance. and our actual results could differ materially from expectations. As we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our press release. So please refer to the disclosures in our press release from this morning and visit our Investor Relations website for more information. And now I'm pleased to turn the call over to you, Bob. Bob Jordan -- President and Chief Executive Officer Thank you, Julia. Hello, everyone, and welcome to our first-quarter call. Well, let me state right up front that I am disappointed with our first-quarter performance. There are a lot of factors that I'll go into, and there's a lot to cover, including the latest Boeing challenges. More importantly, there are significant efforts and progress underway as we cannot, and we won't be satisfied until we are delivering the kind of returns you expect from Southwest Airlines. So before I go any further, I just want to sincerely thank our people for their extraordinary efforts as we work quickly to drive improvement. Turning to our performance. We achieved records for first-quarter operating revenues and passengers continuing our streak of eight straight quarters of record top line performance. We saw a nice acceleration in managed business revenues up 25% nominally year over year. We also continued our streak of solid operational performance. For a while now, we have been consistently running a great completion factor averaging right around 99%, and we continue to improve in nearly all operational and customer metrics. I'm also proud of the progress we made on our open labor agreements. It's been a long road, and I want to recognize everyone involved for continuing to work through to the finish line to reward our amazing employees for their contributions. Ryan will go into our revenue performance in more detail in a moment. And while our revenue trends were solid in the first quarter and are expected to be solid year again in the second quarter, we need to increase revenue production to offset cost inflation. The biggest opportunity to improve performance and profitability and urgency is continued focus on network optimization and capacity. We opened 18 new cities during the pandemic and worked hard in 2023 to restore our network and fly our full fleet on the heels of the demand surge in 2022, while that boosted aircraft utilization, it added significant capacity. And when combined with 2023 business travel coming in below projections has resulted in a significant number of new markets under development and a material number of markets that are not performing at the level required in this higher-cost environment. Network adjustments planned last fall are in place as of the March schedule, and they are proving to be largely on track. Those optimization efforts were primarily aimed to adjust for changing demand trends, including lower capacity on Tuesday and Wednesday, a reduction in short-haul business markets and a material reduction in flights during shoulder periods of the day. The changes are beneficial and they contributed to us exiting the first quarter with healthy margins for the month of March, more as needed and we are continuing efforts to optimize the network and reduce the number of markets in development that aren't performing to more historic levels. Along those lines, we have made the difficult decision to eliminate service in four cities. Syracuse, New York, Houston, Intercontinental Cozumel, and Bellingham, Washington. That is never an easy decision. We form bonds with the airports and the communities that we serve. These are wonderful communities, and we are very grateful for their support over the past several years. In addition, we are also restructuring several other stations. Most notably, we are reducing flights in Atlanta and Chicago O'Hare. While it's never our desire to exit a city or shrink service to a market, we are committed to our financial performance goals, and network and capacity actions will continue as a lever to improve overall financial performance. In addition to network optimization, we have a number of other efforts underway to increase revenue productivity. First, tuning our new revenue management system by better anticipating and optimizing demand and fares along the booking curve and unlocking additional capabilities that will further boost the contribution from the system. Second, focusing on increasing passenger volume including adding new attributes to our value proposition. We are working to ensure our current and future customers understand our terrific value proposition. That includes a significant new brand campaign which started last week, highlighting our signature customer-friendly policies. Separately, we are considering more transformational options and follow-on initiatives. That includes work previously underway to study customer preference around seating and our cabin. It's been several years since we last studied this in-depth and customer preferences and expectations change over time. We are also studying the operational and financial benefits of any potential change. We remain committed to our industry best customer-friendly policies but we are also committed to understanding and meeting customer expectations. We have transformed before adding things like WiFi, larger bins, and in-seat power, and we will continue to adapt as needed. It is too early to share the specifics of what we are exploring, but I want to be transparent and let you know that work is well underway. Of course, the biggest change we have experienced is the news from Boeing on deliveries. The Boeing issues are a significant impact, and we are taking quick action to replan based on expected 2024 and 2025 delivery delays. As I've said before, while it's impactful, I support Boeing taking the time to do the work to understand and fix the issues, a stronger Boeing company for the long term is good for Southwest Airlines. I visit Boeing in late March, and while there is much work to do, I am encouraged by the comprehensive approach that their leadership is taking. I will be back at Boeing this summer when they complete their plan, and I will be visiting Spirit Aerosystems as well. I won't downplay the challenges from the Boeing issues. They are a big deal and contribute to changing capacity set. They're redoing schedules and forecasting now in accurate staffing levels. All of that is costly. It pulls people away from their regular work and it creates a significant financial drag. That said, it won't deter from our work to improve our results. We will continue to control what we can control and work our plan as they take the time to become a better Boeing company. Boeing issues aside, we already had aggressive plans in place to further optimize the network to improve profitability, moderate capex and capacity to improve free cash flow and ROIC and drive staffing and operational actions to improve efficiency. All of that work is now being accelerated. As we continue our focus on capital efficiency, free cash flow generation and aggressively restoring our returns, we will continue to moderate both capacity and capex until we do so. Managing our capex is obviously key to improving free cash flow, which, along with ROIC, we are laser-focused on. Our bias will remain to retire aircraft as planned and any capacity growth that we have in the near term will come entirely from gauge and initiatives to drive aircraft utilization, including tightening turn time through process innovation and automation, and introducing a modest level of red-eye flying. Both of those initiatives boost aircraft utilization and create capacity without aircraft capex. The initiative to reduce turn time is going well and is a first step. 12 stations will see a five-minute reduction in turn time in the November 2024 schedule with further reductions in early 2025. We will share details on the full plan, which includes these and other planned strategic initiatives at our Investor Day, now planned for September 26th when I look forward to welcoming everyone here to Dallas. On our cost control efforts, note that we already had plans in place to end 2024 with head count flat to down through efficiency efforts like deploying automation, and Gen AI solutions for greater productivity and some customer support functions and driving organizational efficiency by combining like functions. Further capacity reductions in 2024 and 2025 create additional head count and efficiency challenges, and we are moving quickly to address those through a combination of voluntary programs. We have essentially frozen and stopped all hiring except for a limited number of critical positions and now expect to end 2024 with head count down approximately 2,000 as compared to the end of 2023 and headcount will be down again in 2025 through continued efficiency efforts. We are already seeing the benefits of time off without pay program that in fact, the participation in these programs generated higher-than-expected savings in March which was one of the factors that contributed to us beating our first-quarter CASM-X guidance. Last quarter, we laid out a plan that included providing a line of sight to cover our cost of capital in 2024. We are admittedly materially off that plan. Much of this comes from external factors, including headwinds from increased market prices for fuel and impacts attributable to the most recent delays in Boeing deliveries but we aren't accepting that as our fate and are taking swift action against what we can control. So there's a lot going on right now, and we have a good grip and plan around areas of the business where we can improve. As a recap, we are continued to be guided by our goals to drive ROIC performance by making additional network adjustments to specifically address underperforming markets and adjusting capacity, enhancing revenue performance in the intermediate term through marketing and revenue management efforts, offsetting cost pressures with efficiency initiatives and programs to reduce headcount and lower discretionary spending. Curbing our capacity plans and managing down capex and investing in initiatives that create capacity without capital investment. And finally, by creating a new set of strategic initiatives to share with you at our Investor Day this September. We will not tolerate underperformance of any kind, and everyone is committed to doing what it takes. I am truly blessed to lead the company with such passionate and dedicated employees, and I am confident that we can and will adjust as needed as we have in the past and work to hit our financial targets, which are not negotiable. So before I close, I just want to say thank you again to our employees for all that they do every single day. And with that, I will turn it over to Tammy for a more in-depth review of our financial performance and outlook. Tammy Romo -- Executive Vice President, Chief Financial Officer Thank you, Bob, and hello, everyone. As Bob just covered, this year is not shaping up as we had initially planned. We have never and will never accept underperformance. There are a lot of things that contributed to our current position, the impact of continued delivery delays from Boeing, significant market-driven inflationary pressure from new labor contracts, volatile fuel prices, and dynamic customer travel patterns. Those are all very real reasons, but we will not use them as excuses. Instead, our focus is to control what we can control, to take aggressive actions to adapt as required and to produce financial returns period. Bob mentioned the warrior spirit of our employees. It's a very real thing, and it will be the key to our turnaround. So before I dive in, I want to thank our incredible employees for their resilience, their perseverance and their dedication as we gear up to tackle the challenge we have before us. Ryan and Andrew will speak to our revenue and operations performance in detail. So I'll start with our cost performance before moving to fleet and balance sheet. Overall, our unit cost, excluding special items, increased modestly, less than 1% year over year in first quarter. Our first-quarter average fuel price of $2.92 per gallon came in a bit below our guidance range. Market prices have been volatile. And based on the April 18th market, we increased our full-year fuel price guidance by roughly $0.15 to a range of $2.70 to $2.80 per gallon and we're anticipating our second-quarter fuel price to fall within that range as well. We are currently 55% hedged here in the second quarter and 58% hedged for the full year. We continue to prudently add to our fuel hedge position for 2026, now 26% hedged, and are currently 47% hedged in 2025. Our treasury team continues to do a great job managing our program as we see cost-effective opportunities to expand our hedging portfolio with the continued goal to get to roughly 50% hedging protection in each calendar year. The purpose of our hedge is to provide protection from spikes when we need it most. Over the past two years, we have benefited significantly from our hedge portfolio, generating net settlement gains of $872 million and $145 million in 2022 and 2023, respectively. For 2024, we are currently expecting only a very modest loss, but as Brent gets above $90 a barrel, our position would begin to materially kick in that obviously is helpful insurance to have in this volatile environment. Moving to nonfuel cost. Our first-quarter unit cost, excluding special items, were up 5% year over year in first quarter. Of course, that was primarily driven by pressure from new labor agreement and an increase in planned maintenance associated with the -800s coming off their engine honeymoon. This was a point ahead of our previous expectations, primarily from favorable airport settlements, but also from some early benefits from our cost control initiatives like voluntary time off programs. I am very thankful to all the employees who are pitching in to help reduce costs. It's always been part of our culture and the contributions that our people are making across the company are a sign that our culture is alive and well. Throughout first quarter, we were reacting and adjusting to continuous information from Boeing on further aircraft delivery delays, causing some additional movement within our CASM-X guidance expectations as we quickly worked to revise our 2024 plans. While Boeing's challenges continue to significantly impact us, I am immensely proud of the way our team continues to handle such a dynamic situation, running multiple forecasting scenarios for critical decision support, including support in adjusting capacity and reoptimizing the network. Looking to second-quarter and full-year 2024, we continue to expect similar cost pressures throughout the year, driven primarily by elevated labor costs and maintenance expenses. We currently estimate our second quarter CASM-X to increase in the range of 6.5% to 7.5% year over year and our full-year CASM-X to increase in the range of 7% to 8% year over year, elevated from our previous full-year CASM-X guidance due to lower capacity plans in the second half of the year. The estimated sequential change in nominal CASM-X from first to second quarter is largely in line with historical norms when adjusted for capacity levels. roughly 5 points of our full-year CASM-X guidance is attributable to elevated salaries, wages and benefits expense and roughly 1 point is due to elevated maintenance and materials expense. While we continue to expect pressure from maintenance costs this year, we have reworked our maintenance plans given our new delivery expectations and we now expect lower full-year 2024 maintenance expense compared with our previous expectations. We are also planning more voluntary leave and time off programs to further reduce labor expenses and address current overstaffing. Despite these added pressures, which are a direct result of the Boeing aircraft delivery delays, we are aggressively working to control costs, reduced inflationary pressures, and cut discretionary spending across all cost categories. I want to reiterate, we are far from satisfied with our current financial performance, and we will work relentlessly until we return to financial prosperity with our North Star being ROIC well exceeding our cost of capital. We will go into a lot more detail on our plans at Investor Day in September of this year. Now turning to our fleet. We have reacted quickly over the quarter to the updated Boeing delivery delays. We began the quarter with the expectation we received 79 of our 85 contractual deliveries in 2024. That number dropped to an expected 46-8 aircraft at the timing of our March 8-K and has since reduced even further to a conservatively planned 20-8 aircraft deliveries. Thus far, we have received 5-8 aircraft from Boeing during the first quarter and have retired 3-700 aircraft from our fleet. To reduce distractions and impacts to the business and hedge against further potential delivery delays, we will now plan to hold on to an additional 14-700 aircraft that were originally planned to retire this year, bringing our expected 2024 total retirements found to 35 aircraft, including 4-800 lease returns compared with our previous expectation 49 aircraft retirements. While we remain committed to our fleet modernization, we feel it is prudent to retain some flexibility until we have better certainty around our aircraft deliveries and around the certification of the MAX-7. The updated Boeing delivery expectations has also impacted our capital expenditures and cash flow expectations for the year. As a result of these 20 expected aircraft deliveries, we currently expect our capital spending to be approximately $2.5 billion, well below our previous guidance of $3.5 billion to $4 billion. Keep in mind, our 2024 capex guidance includes an estimate for progress payments based on our current contractual order book and capex estimates will be fluid until we finish working our plans and aligning on updated expectations for actual 2025 deliveries which we plan to share at our Investor Day this fall. A quick note on our capacity plans. The Boeing delivery delays did not impact our first-quarter capacity finishing up 11% year over year on solid completion factor. Looking ahead, as we rework our capacity plans for the year, we now expect second-quarter capacity to be up in the range of 8% to 9% year over year. The majority of the Boeing capacity cuts will occur over the second half of the year with third-quarter capacity expected to increase in the low single digits and fourth-quarter capacity expected to decrease in the low to mid-single digits, placing our full-year 2024 capacity up approximately 4% all year over year. Looking beyond 2024, we plan to keep any future growth at or below macroeconomic growth trends until we reach our long-term financial goals to consistently achieve ROIC well above our cost of capital. As a reminder, our aircraft delivery and retirement expectations are subject to Boeing's production capability and we will react as quickly as possible if any further adjustments are needed with the focus on taking care of our customers and aligning with our financial goals. Lastly, I am immensely grateful for our balance sheet strength as we move through another challenging year. We ended the quarter with $10.5 billion in cash and short-term investments with a nearly $1 billion reduction from the prior quarter, driven by the payout of a labor agreement ratification bonuses, which are onetime in nature. In addition, we returned $215 million to our shareholders through the payment of dividends and paid $8 million to retire debt and finance lease obligations. Finally, and most notably, I am proud to report we remain the only U.S. airline with an investment-grade rating by all three rating agencies, both Moody's and Fitch affirmed our rating during first quarter, and S&P reviewed and moved our rating unchanged. As ever, maintaining an investment-grade balance sheet is our utmost priority. As I close, I want to reiterate that we are not starting the year as we had hoped, and that is undeniably disappointing. However, throughout my years as this wonderful company, I have come to know that a better Southwest is often formed on the heels of adversity. I agree with Bob that is all because of the fight and warrior spirit of our people. And with that, I will turn it over to Ryan. Ryan Green -- Executive Vice President, Chief Commercial Officer Thank you, Tammy. As Bob mentioned, I'm going to provide you with details on our first-quarter revenue performance and base trends. I'll also share an outlook for the second quarter and full year, along with what we are assuming in the guide. And most importantly, I will give you some color on the additional actions we are taking to further improve our revenue performance. Starting with first quarter, unit revenue finished roughly flat on 11% capacity growth, both on a year over year basis. The variance to our original guidance is driven by a balance of higher-than-expected completion factor, close-in leisure volumes that came in below our expectations in the month of March and underperformance in select development markets. Development markets as a portfolio did not meet the maturation expectations, but the story isn't the same for all markets. Several development markets outperformed expectations, particularly Florida Beach destinations. But a few markets weighed down the portfolio. As Bob shared, we have made the difficult decision to address underperforming stations with closures effective August 4th and also to restructure and reduce capacity in other underperforming markets which are included in our updated June schedule. Despite coming in below our expectations, first quarter had strong demand, setting numerous records, including record first-quarter operating revenue, ancillary revenue, passenger revenue, and record first-quarter passengers carried, and we also added a quarterly record number of new Rapid Reward members into the program. In addition to these records, we were also really pleased to see the continued incremental benefits from our investments in managed business as first quarter managed business revenue grew 25% year over year and was roughly flat to 2019 levels. We continue to pick up market share year over year as we perform in line with or above the rest of the industry. Finally, from a geographical perspective, we saw the strongest year over year improvements coming from the West Coast and the Northeast, regions where demand has been slower to return post-COVID. I also want to stress that we had a better than historically normal sequential trend in nominal unit revenue. We are seeing improvement in revenue productivity and demand. Nominal RASM in the first quarter came in flat to fourth quarter despite first quarter historically being seasonally softer than fourth quarter. And this is particularly true in a post-COVID environment where peaks and troughs are magnified. To illustrate this point, consider 2018, the most recent year in which Easter fell in the last weekend of March. Nominal RASM declined sequentially 5 points. So even in the seasonally challenged quarter, the sequential performance was much better than our best holiday comparison. The most significant driver of this sequential improvement was our network optimization efforts, but we also saw a benefit from our other revenue initiatives, especially managed business investments. Looking to second quarter, we expect our ninth consecutive quarter of record revenue performance. In fact, we expect an all-time quarterly record for operating revenue. Second quarter 2024 RASM after being calibrated for recent booking trends is now expected to decrease in the range of 1.5% to 3.5% year over year. The year over year comparison includes a little over 1 point of headwind for holiday timing, both from outbound Easter shifting to the first quarter and for more outbound for the July travel shifting to third quarter. On a nominal sequential basis, this also implies another quarter of better than seasonally normal RASM improvement. Looking beyond second quarter, network planning teams are still reworking schedules in the back half of the year to accommodate Boeing delivery delays. After adjusting expectations for both current booking trends and for Boeing delivery delays, we are forecasting 2024 operating revenue growth to approach high single digits on a year over year basis. This expected revenue growth implies healthy RASM growth in the back half of the year driven by revenue initiatives as well as a reduction in year over year trips. While our development market maturation efforts are off track, which I'll discuss in a moment, our other revenue initiatives are expected to continue to drive value over the balance of the year. In fact, network optimization benefits contributed roughly $100 million in incremental revenue in March alone, primarily from reductions to shoulder flying early morning and late evening flights and short haul flying. For full year, the incremental year over year pre-tax profits from our strategic initiatives is now estimated to be between $1 billion and $1.5 billion after being updated for first-quarter actual performance, development market adjustments, and capacity changes in the back half of the year. The vast majority of the initiatives delivering value in 2024 continue to be revenue related. So while we are encouraged to see strong demand for our brand and solid sequential improvement, it is short of our goals. And as Bob and Tammy shared, it's simply not enough given the escalation of market-driven inflationary cost pressures. Therefore, we are taking actions to generate both immediate and longer-term revenue enhancements. We have stood up cross-functional teams to focus on things like accelerating the maturation of development markets further boost the value being delivered by our relatively new revenue management system and roll out new products and highlight our superior value proposition with our new brand campaign. We also have a larger team that is finalizing a more significant set of strategic initiatives, and they're tasked with delivering transformational streams of revenue productivity. Of course, we'll have more to share on this topic at Investor Day. As we build our plans, we will focus on leveraging our strengths, including those of our network, which, while it has optimization opportunities, remains incredibly relevant and well-positioned based on size and population migration trends. We continue to hold the top position in 22 of the largest 50 domestic markets, and we are by far the market leader in that regard. Also, we're well positioned for the future as population and GDP growth trends are forecast to be strongest in the Southern and Mountain West regions of the country, regions where we have significant leadership. We'll also lean into the customer experience we deliver. Year to date, our Trip Net Promoter Score is up over 5 points year over year. And finally, we continue to enhance our award-winning Rapid Rewards program just this week, we began rolling out the ability to book and pay with part cash and part Rapid Rewards points, which I expect to be very popular with our customers. So in closing, we have a large and relevant network, a strong demand environment and a loyal and highly engaged customer base. We also have the best people whom I want to sincerely thank and we are committed to being aggressive and innovative as we adapt, adjust and evolve to meet the preferences of our customers and to unlock the revenue productivity required to meet our financial imperatives. With that, I'll turn it over to you, Andrew. Andrew Watterson -- Chief Operating Officer Thank you, Ryan, and hello, everyone. I'd like to start out by thanking our incredible Southwest employees for continuing to deliver a strong operational performance. We produced a solid first-quarter completion factor of 98.5%, our highest first-quarter performance over the past 5 years. We delivered year over year improvement in early morning originators, turn compliance and turn differential, and mishandled bag rate and again saw a year over year improvement in our net Trip Net Promoter Score, as Ryan mentioned. Our on-time performance declined slightly year over year, largely due to weather challenges and delays driven by ATC programs. However, I'm pleased to report that we improved year over year on-time performance for the month of March. I'm proud of the hard work and investments made to bolster our win preparedness and modernize our operations, and I'm encouraged to see these efforts pay off in our operational performance. Picking up with Bob and Tammy left off, I want to stress that we remain focused on bringing out operational inefficiencies, increasing asset productivity and creating operating leverage by reducing structural costs. Our Southwest Turn initiative, which Bob shared is tracking ahead of schedule is a critical component of these efforts. One of the key elements include eliminating the need for printing on every flight, reducing the number of employee trips up and down the jet bridge and we're covering faster during the regular operations. We reached an important milestone in this multiyear effort just last week with the launch of electronic fight folders, which modernized several of our flight planning processes by digitizing documents used by our pilots, dispatchers and ops agents. We also continue to make progress on modernizing the airport experience, and that initiative is also coming together faster than originally planned. Our efforts for improving the lobby customer experience are on track to provide improvement to staffing standards ahead of the original schedule. We are working on updated schedules and look forward to sharing those with you as well. I'd also like to highlight a new application called SkyPath we recently implemented [Inaudible] for pilots and dispatchers to provide better awareness of turbulence along the flight path. This industry-leading system uses iPad sensors and GPS data from pilot's electronic flight bags to turbulence in real time, aggregating and sharing data from across -- from users across several airlines in North America. Our teams worked cross-functionally to accelerate the launch of this app for the spring season when we tend to see more turbulence across the network. And it's another tool we can use to support employees with additional information for decision-making, improve the onboard experience for customers and reduce operational risk. We look forward to sharing more on these and expensive of multiyear initiative-based efforts at Investor Day in September. Finally, I'd like to close by congratulating all of our employees who reached agreements on new contracts over the past year or a little bit more than a year plus. Each contract requires a significant amount of work. And as always, we remain committed to rewarding our deserved employees. With that, I'll turn it back over to Julia. Julia Landrum -- Vice President, Investor Relations Great. Thanks, Andrew. That completes our prepared remarks. We will now open the line for analyst questions. To allow for as many calls as possible, we ask that you limit yourself to one question and a brief follow-up if needed. We will now take the first question. Questions & Answers: Operator [Operator instructions] Our first question today comes from Michael Linenberg with Deutsche Bank. Please go ahead. Mike Linenberg -- Deutsche Bank -- Analyst Good morning, everyone. I guess, Tammy, I just want to -- on the bonuses to the employees incurred in the March quarter. Just can you remind us that number again? I thought you I heard it. And then is it just we're going to see another piece in the second quarter with the approval of the flight attendant contract, by the way, congratulations. But another piece in the second? And then is that it for the year? If you can just remind me of those numbers. Tammy Romo -- Executive Vice President, Chief Financial Officer Yes. Mike, First of all, we are thrilled to have an agreement with our wonderful flight attendant. And at the end of the quarter, we had roughly $625 million accrued for labor agreements that we expect to pay out for the remainder of this year. Mike Linenberg -- Deutsche Bank -- Analyst OK. Great. And then just my second question, Ryan, I recently, I've seen you give some presentations and talk about redeyes and redeye flying coming to Southwest Airlines. And I think you said it's about a two-year time frame. I'm just curious, what are the gating issues? What are the things that need to get done to be able to actually implement them? Because it does seem like a pretty long time, but I do realize it is something new for Southwest. Ryan Martinez -- Senior Vice President Finance, Controller Yes. Mike, the -- we can move technology time lines around by reprioritizing things here and there. And so some of the gating -- their crew scheduling changes that need to be made on a -- from a Red-eye standpoint, there are some changes that need to be made with some of our operational systems. And we can choose how fast or how fast to do those things and what elements go before or after them. So the two-year was rough estimate. We can go faster than that if we choose to do so. But it's just kind of a myriad of technology-related items. Andrew Watterson -- Chief Operating Officer Yes. This is Andrew. I'll add on that some of the kind of bigger issues so us down was with our contracts, our reserve periods. We had two reserve periods for the pilots in particular and didn't allow for good coverage of red-eyes. And so with a new contract we'll eventually go to three reserve periods and allow us to better have reserve pilots on standby, should there be a problem. So we didn't want to have those -- one of the larger scale, those flights unexposed or exposed rather to no reserve. So the new contracts allow us the flexibility to have extra reserve periods and that makes us much more comfortable proceeding. Bob Jordan -- President and Chief Executive Officer Mike, this is Bob. You didn't ask this, but on the why, maybe not just the timing, but Obviously, we've known for a long time, our customers want red-eye Flying. It's a little bit limited in scope, but there are red-eye flights that are very desirable for our customers. And so we wanted to do this. It also allows us to add capacity just like this turn work where you can add the capacity, and there's no capex related. You are just using the aircraft and higher utilization. So that's something we want to do, obviously. And then in a period here where we are overstaffed because we were shooting for a higher fleet number any incremental flying like that makes sense, obviously, it alleviates at least a piece of that overstaffing with our pilots. So that's one to give a background on the why in addition to the how long. Mike Linenberg -- Deutsche Bank -- Analyst Great. Thanks very helpful everyone. Operator The next question is from David Vernon with Bernstein. Please go ahead. Dave Vernon -- AllianceBernstein -- Analyst Hey. Thanks for taking the question. So Bob or Ryan, I think last quarter, we were talking about premium on the call, and you guys had made the comment that this is something that's cyclical, it comes up, it goes down. People put too many premium products in the cabin and then they have to take them away in the down cycle. Is the work that you're doing now in terms of looking at the product assigned that this shift could be something more permanent. Can you guys just help us understand how your view of the market may be changing a little bit that's precipitating this sort of more strategic review? Bob Jordan -- President and Chief Executive Officer You bet, and thanks for the question. I think maybe I'll just start a little wider, which is are always studying what our customer preferences are and if they're changing, that's out over time, and we're committed to meeting them. It's over time, we've added things like WiFi and now we're adding seat power, we've added a large overhead bins, and so we're committed to meeting our customers' preferences. And just to be transparent, we've been seriously studying this question around onboard seating and our cabin for a while. And to get it what you just said, which is an understanding of what customer expectations are today. I'm proud of our product today, and our customers love it but it was designed at a time when load factors were lower and higher load factors do change the way preferences work, the operation works and also, our customer -- the customer expectations change over time. So there's no decision. There's nothing to report other than we are seriously looking at this. But early indications, both for our customers and for Southwest look pretty darn interesting. So I'll just leave it there and more to follow. Dave Vernon -- AllianceBernstein -- Analyst I appreciate that. And maybe just as a follow-up on the same topic. Is this, if you were to go down this path, obviously, there's going to be cost of the cabin. But technologically, from a passenger service system and all that kind of stuff, like how complicated might that be to kind of think about doing things like seat assignments or segregating the cabin in some harder way. Is that a big technological challenge? Or is that something you guys already have the capability to do, but just aren't doing? Bob Jordan -- President and Chief Executive Officer Well, we just don't -- I don't want to get into details because a lot of those we don't have. Again, we're looking at customer preference. Obviously, the -- how would you do it technically, how long would it take? What impacted any would it have on the operation Obviously, what's the financial impact all of those things beyond the customer preference going to how you make your decision. So again, I'll just say we're looking at this very seriously and more to come and we look forward to sharing where we are at our Investor Day on September 26th. Andrew Watterson -- Chief Operating Officer And Bob, our PSS is the industry standard Amadeus tool, which obviously works in those environments. So the underlying system is not prohibitive from doing that. That's right. Dave Vernon -- AllianceBernstein -- Analyst All right. Thanks for that and thanks for taking the questions. Operator The next question is from Duane Pfennigwerth with Evercore ISI. Please go ahead. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey. Thanks. Just geographically, can you speak to how much differentiation you're seeing in unit revenue trends. You have a pretty broad-based domestic network, could you just comment on like relative strength versus relative weakness geographically across the country? Ryan Martinez -- Senior Vice President Finance, Controller Duane, I think there is definitely regional performance. I mentioned in the prepared remarks that the West Coast did well, particularly intra-Cal RASM and margins are up double digits year over year. Phoenix is doing really well. Vegas is doing really well. Of course, Vegas had some assistance there with the Super Bowl being there in February in the first quarter. But all those markets performing very well. The Northeast performed well. In Florida, there's been a lot of talk about Florida. Florida, we have above system average RASM. In Florida, it's come under pressure with some of the capacity growth there, but still RASM is above system averages in Florida. So there's strength across the network. Of course, we've got some weaknesses in the development markets, which we've talked about, and we've got plans underway to address with the station closures that we've talked about. And then we've restructured some of those development markets and some of the schedules that we've had to republish here as a result of the Boeing delivery delays. But yes, there's -- as always, with the network, the -- it's a portfolio and you've got markets that performed better than others. We're focused on making some improvements in those development markets. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Appreciate the thoughts. And then just on your capacity exit rate, or was it down low singles, low to mid-singles by the fourth quarter. How should we be thinking about early 2025 and are we still in a dynamic where seats are down more than ASMs. In other words, I think that was by several points, maybe 5 points or so that seats were trailing ASMs. Is that still the dynamic in the fourth quarter? Bob Jordan -- President and Chief Executive Officer Yes, Duane, thank you. And again, I'll just remind you that we're -- this is all very fluid as we work with Boeing on their delivery estimates. And obviously, '25 is more fluid than '24 and also, we are choosing how we -- so as we get some indication from Boeing, we're choosing how we're going to plan, which may be different because we don't want to have to go through this replanning the schedules over and over because it's very, very disruptive. So it's early to give you a signal on '25. But that said, I just would point out again that any capacity is going to come through either gauge or initiative-based additions, again, like the turn time work or red-eye flying. And so again, it's too early. But I think you're thinking directionally correctly, I'll just stop there. And Tammy, do you want to add something? Tammy Romo -- Executive Vice President, Chief Financial Officer Now the only thing I just might reiterate is we'll look to align our capacity growth for 2025 and with demand. So we've got a little bit of time here. And obviously, one thing I'd point out is we do have fleet flexibility by design. So we'll continue to evaluate that. And then just at a higher level, again, we do plan to grow below macroeconomic growth trends until we get our financial going in the right direction to achieve our goals. Bob Jordan -- President and Chief Executive Officer And maybe the other thing to add, too, just to disconnect from Boeing is the work on the network that work to moderate, significantly moderate our capacity isn't just Boeing. I mean, this is something we need to do. We need to manage ourselves, manage our appetite, continue to mature the network continues, as Ryan said, to work on the part of the network that is underperforming and moderate our capacity until we are hitting our financial targets, obviously, moderating your capacity manages down capex managing down capex is critical to free cash flow. It all helps us achieve our ROIC targets. So I don't want to lay this at the feet the capacity discipline and the network adjustments are Boeing, we are doing those things because we need to do those things to restore our financial our progress against our financial targets, and we will absolutely continue on that path until we get there. Andrew Watterson -- Chief Operating Officer And I think you take the sources of growth that Bob talked about and the network restructure that does imply that our central tenancy is for seats to trail ASMs and for trips to trail seat. That's a natural consequence of those actions. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Appreciate the thoughts from the team. Thank you. Operator The next question is from Jamie Baker with J.P. Morgan. Please go ahead. Jamie Baker -- JPMorgan Chase and Company -- Analyst Hey. Good afternoon, excuse me, good afternoon. Yes. So Tammy, how should we be thinking about operating cash flow for the rest of the year? I mean we've got the retro component in there with the flight attendants but presumably, a weaker demand outlook suggests some pressure on the air traffic liability. And then related, I guess, somewhat to that the dividend consumes, what, $450 million a year, $450 million of cash. Any idea how the board is thinking about that in light of some of the challenges that you articulated today? Tammy Romo -- Executive Vice President, Chief Financial Officer Yes. Jamie, we're focused, as Bob said, on generating free cash flow. Ultimately, we're working to restore our financial returns. So this year, we're very focused on what we can't control. And we are working on lowering our capex. That's already come down quite a bit, as we've already shared. And just in terms of the liquidity targets that we have established with our board, we do have a minimum cash target of $6 billion, which, of course, is on top of our revolver. So we're really working to manage, obviously, our operating cash flows and very focused on that as we've taken you through in our remarks and also working to balance that with our capital spending. So we are happy that we have our dividends reinstated. So plans, at least at this point with the board. But obviously, we'll continue to have those discussions as we move throughout the year. And again, Jamie, too, we our goal as ever is to maintain our investment-grade balance sheet and work toward our long-term leverage goal which is in the low to mid-30% range. Obviously, we're sitting higher than that now, but we have our eye on that goal as well. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK. And then Bob, so question, when you report earnings, does management then break up and host townhalls throughout the company. The reason I ask is that some airlines, some companies do that. I honestly don't know of Southwest. But I have to wonder, I mean, is the tone with the front line as somber as it is on this call. I mean, I guess it's hard to answer, but if I was in Baltimore right now, chatting up employees, do they get what's going on right now and just how grim this guide is. And the reason I ask is that clients are asking me if today's messaging is just reserved for Wall Street or if this is truly an all hands-on deck call for change, much like what Richard Anderson delivered at Delta in 2012, which in fairness did represent a real turn for that franchise. Any thoughts? Bob Jordan -- President and Chief Executive Officer Yes. Jamie, there's a lot in your question. So let me just start with we -- just to balance things out. Our financial returns are nowhere close to what we need and what we want them to be, period. And we will be relentless until we achieve those. The company -- so that is absolute. The company is not grim. In other words, we have significant demand for our product. We have awesome employees. We have real improvement in our operational performance and reliability. We had the best completion factor in five years. We have some of our highest NPS scores ever on and on and on. So the company has a pile of just absolute attributes that our customers love. So I would sort of separate it agree in terms of our financial returns, which I agree and the company is grim. Now your second -- your question is, is that -- does everybody know that? And are we aligned? Absolutely. We had a special all senior leader meeting Tuesday, as an example before this, to walk through exactly what we need to be doing, how to be thinking, what to be doing around the plan, how to be executing. I have multiple times per year, meeting with every leader at this company, from supervisors on of, it's 4,000 people, where I can talk directly to them about what we need to be doing. The messaging may be slightly different. In other words, the messaging for them may be how they need to think about costs, how they need to be thinking about winning and capturing and retaining customers. But absolutely, there is a line of top to bottom and focus. We have a solid plan with solid actions that we are all committed to and it's comprehensive. And it all drives toward restoring our financial returns and hitting our ROIC targets. We are committed to continued network adjustments to specifically address underperforming markets. We're committed to adjusting our capacity and managing down capex, as we just talked about, or created -- we're committed to creating capacity through initiatives like the turn reduction and the red-eye flying because that creates capacity while spending on aircraft . We're committed to enhancing our revenue performance and our demand through tuning our RM system and the major marketing efforts that Ryan has underway to drive demand and loyalty. We're committed to offsetting our cost pressures through efficiency efforts and programs to reduce headcount. We're going to be down 2,000 this year, down further next year, and we're down close to another 800 right now on top of that through these through these voluntary time off programs and we're committed to a set of new strategic initiatives. I've hinted it, boarding and seating and the cabin, and we're going to share those with you at Investor Day. Jamie Baker -- JPMorgan Chase and Company -- Analyst Bob, thank you very much for that answer. I appreciate it greatly. Take care. Operator There's time for one more question. It will come from Savi Syth with Raymond James. Please go ahead. Savi Syth -- Raymond James -- Analyst Hey. Good morning. If I might, just on the business revenue, that was a good performance here. I was curious what your to 2Q outlook is reflecting in terms of expectations and what you're seeing there? Ryan Green -- Executive Vice President, Chief Commercial Officer Savi, yes, managed business was up very healthy in the first quarter, up 25% and reached a significant milestone in getting back to flat to 2019 levels. So we were really pleased. With that, that was driven by a double-digit increase in unique travelers traveling under a contract in the managed business space. So that just means we're penetrating deeper into accounts. We're growing the number of companies under accounts, and we continue to pick up market share there. As we look forward, we expect the performance to continue and to accelerate the sequential performance in the second quarter to be better than the first. And it's kind of -- it's across the board. Our top 15 industries, 11 of those had double-digit growth year over year. So, the performance is widespread, and we expect it to continue and to help our revenue performance as we go forward. Savi Syth -- Raymond James -- Analyst That's helpful. If I might just ask just question related to capex. And just given your current outlook, talk Tammy, on kind of free cash flow generation here and kind of looking forward a little bit, what's realistic? Tammy Romo -- Executive Vice President, Chief Financial Officer Yes, Savi. We're -- as we said, we're expecting capex this year at $2.5 billion and that includes about $1 billion in aircraft spend. We are working through our plans for next year. So it's a bit early to give you guidance for next year. Obviously, we're working through that actively now. So we'll update you on our capex spending plans as part of our comprehensive update in September at our Investor Day. Savi Syth -- Raymond James -- Analyst Is the view that kind of is free cash flow generation important and possible? Or how are you thinking about kind of translating that capex into. Tammy Romo -- Executive Vice President, Chief Financial Officer We are absolutely working with the view to generate free cash flow. We -- that will obviously be part of the equation as we pull together our plan for next year. Savi Syth -- Raymond James -- Analyst Appreciate it. Thank you. Julia Landrum -- Vice President, Investor Relations OK. That wraps up the analyst portion of today's call. I appreciate everyone joining and have a great day. Operator Ladies and gentlemen, we will now transition to our media portion of today's call. Ms. Whitney Eichinger, chief communications officer, leads us off. Please go ahead, Whitney. Whitney Eichinger -- Chief Communications Officer Thanks, Gary. Welcome to the media on our call today. Before we begin taking your questions, Gary, could you remind us and share instructions on how to queue up for questions? Operator [Operator instructions] And the first question comes from Alexandra Skores with the Dallas Morning News. Please go ahead. Alexandra Skores -- Airline Reporter Hello. Can you all hear me? OK, perfect. I'm wondering if we could hone in on the four airports that were announced today that would be cut and same less Atlanta and Chicago that are being reduced in flight. Could you talk a little bit about the decision to -- for those specific airports to be chosen? Bob Jordan -- President and Chief Executive Officer Well, it's never -- I'll just start with this. It's never an easy decision to close a station or to materially reduce flights in the station. We love our airports. We serve our communities, and so it's always difficult. But again, I'll just go back to we have portions of the network a higher-than-normal portion of the network that's just not performing to the level that we need. And for a variety of reasons. And so we need to hit our financial returns, and we will. And so you have to make the tough decision to continue working down the level of markets that aren't performing. So it was really that. It's just as we look at -- as we look at our network, it really relates to the areas that are just don't have a path to the level of financial performance that we need. That's really the basis for the decision. I don't know, Ryan, if you want to add anything else or Andrew? Ryan Green -- Executive Vice President, Chief Commercial Officer No, you covered it, I think. Alexandra Skores -- Airline Reporter And my second question, what kind of communications have been given to the employees at those airports. Bob Jordan -- President and Chief Executive Officer We have a very -- as you would expect, we take care of our employees, we take care of our partners, and we have a very rich communication plan that to go in the right order to make sure we communicate with folks it's done with compassion. Our employees will be offered jobs in other cities. And so they have a lot of options. But no, we handled all this, as you would expect, Southwest Airlines to handle. Andrew Watterson -- Chief Operating Officer We staged senior leaders there last night. So a very early morning hours, our people -- our leaders were there to explain the wise to the employees as well as to the airports and then also to go through with them the different options they'll have for moving it's a seniority-based system with our unions and so how that will all work for them. And so they've gone through that. There's obviously a range of emotions. People chose to relocate there, and so they will have some natural disappointment in the short term, but these people have long careers in Southwest Airlines that our ground employees tend to move around a decent amount anyway. So we expect most of them to take advantage of not all of the opportunities to relocate to other stations. Alexandra Skores -- Airline Reporter Got it. So that's every employee that's impacted is going to be offering some sort of job. Andrew Watterson -- Chief Operating Officer Yes. They were an employee, they chose to do so. Alexandra Skores -- Airline Reporter Got it. Thank you. Operator The next question is from Mary Schlangenstein with Bloomberg News. Please go ahead. Mary Schlangenstein -- Airline Reporter I appreciate it. I wanted to see if you could talk about the extent of the reductions in O'Hare and Atlanta. Andrew Watterson -- Chief Operating Officer There are about -- we took about half of a here down from about 30-something flights, about 15, 18 flights on the season day of week. So it's about a 50% reduction at in Atlanta. I can be on the top of my head, Ryan, it was 30%. I want to say the third [Inaudible] it's unfortunate we had been restoring Atlanta over the course of post-pandemic. We could never quite get back to the level of performance we needed at the scale we needed and so it's been reduced back down to a level, so just shortly coming out of the pandemic. And so it's still substantial activity there. It's just not as big as it was before. Mary Schlangenstein -- Airline Reporter Great. And if you could also address the impact of the new refund policies that were announced by the DOT yesterday, whether that's going to be a financial problem for Southwest? Or if you expect to have any trouble complying with those new rules? Ryan Green -- Executive Vice President, Chief Commercial Officer Mary, it's Ryan. Well, it's new. As you know, it was just issued yesterday. So we're digesting exactly what all of that means. But based on our read so far, I don't expect that it's going to be a significant impact. Of course, we already have the most customer-friendly policies in the industry. So we're best positioned to comply with any of these new regulations out of the gate. And today, if there's a long delay or a cancellation, customers can receive a refund from Southwest. So there's no real change there from our standpoint. And then, of course, unique in the industry, flight credits don't expire with Southwest, if you have to cancel your flight for any reason. But in general, we're proud to be unique among airlines in having these customer-friendly policies, no bag fees, no change fees, flight credits don't expire, we don't nickel and dime customers. But the -- those are our choices without government intervention. And it shows the marketplace works as consumers want different choices in who they fly. So again, I'd just point to the fact that we have the most customer-friendly policies in the industry, and I just don't see a tremendous amount of impact to Southwest from these. Mary Schlangenstein -- Airline Reporter Thank you. Operator Next question is from Alison Sider with Wall Street Journal. Please go ahead. Alison Sider -- Air Travel Reporter Hey. Thank you so much. I know that the overall demand environment remains very strong. But I am curious if you're seeing any indications of bookaway or traveler nervousness about Boeing or air safety more broadly? Bob Jordan -- President and Chief Executive Officer We -- I'll just give you a little overview and then obviously, Ryan can jump in. We -- this is something that we look at. So we study, we survey to understand our customers' views and whether anything that's going on impacts their view of Southwest or the industry generally. That's not perfect, but we don't see any -- we don't see an indication that this is having an impact on bookings or demand. It's not perfect. I think logic would tell you there could be something there. But certainly, we don't see anything material right. Ryan Green -- Executive Vice President, Chief Commercial Officer Yes. The only other thing that I would add is that we certainly are serving on the front end to see how top of mind it is for consumers when they're making a booking and then we also look at cancellations and ask customers once they cancel a flight, what their reasons for cancellations were and safety concerns or Boeing aircraft as a result of that on the cancellation side is 1% of our cancellation. So it's a very, very small number not material, I don't think, to the overall picture. Alison Sider -- Air Travel Reporter Interesting. And the four cities, the four markets that you're exiting, are those cities that you think would have been more successful if you had the MAX 7 in your fleet or had it coming soon? Ryan Green -- Executive Vice President, Chief Commercial Officer I think the markets themselves were just performing at a level that we needed to make the tough choice to remove them from the network. And I don't think that a smaller aircraft would have had a material difference on those markets. Operator Next question is from Dawn Gilbertson with Wall Street Journal. Please go ahead. Dawn Gilbertson -- Air Travel Reporter Hi. Thanks very much for taking my call. Bob, about six months ago, you were asked, as you always are, about the premium question, the open seating versus the signed seating, and you mentioned, as you always do, that you always said to customer preferences and if something changes, you'll adapt as you said today. But here's what you said then. You said there's nothing underway. There's no story here, nothing underway. So can you help us understand what has dramatically changed in the past six months on that particular front? And also related to that, is there any financially significant change to boarding or seating you can do without assigning seats? Bob Jordan -- President and Chief Executive Officer You bet, Dawn. Thank you. I think the -- it's what you say that the difference is we -- this is something that we look at on sort of on the surface pretty regularly. But in terms of a very deep dive of understanding customer preference and what we might do, that's something we do less frequently. So the answer was different six months ago because the work has really accelerated. It's work that we've done since then. And there's a lot of discussion out there about just cabin and premium and all kinds of things. So it may just generally in customer preference. So it makes sense in terms of timing to study that. Again, we always want to understand what our customers want and desire. And so again, we're -- I'll just again to tell you that we are very seriously studying this, and we're pretty deep in that study. And again, nothing to reveal today except that there are some interesting indications in terms of what this could mean to us and what it can mean to our customers. Again, that's nothing to reveal. On your question about are there other things you can do in boarding in particular? Our boarding process, we changed actually it's over. I think it's a decade ago at this point is very well received by our customers because it's very organized and the way you line up we have worked hard to monetize that and give our customers choice. You -- we give you choice around how you think about your boarding position and that's more important to some customers than others. But we've got that. We've got Business Select. We have an upgraded boarding at the gate product. I will admit, it is hard for me, Ryan might tag in here. It's hard for me to think of how we can really from a financial perspective or a customer desire perspective really push that even further. I think the products that we've added really attack what our customers want. So being just blunt. It is hard to think about how to implement more products related to boarding. Ryan Green -- Executive Vice President, Chief Commercial Officer Yes, I would agree with that on the incremental products. But what we are doing and what we can continue to do is to get better at how we price those products and drive incremental yield from those ancillary products. In total, our ancillary revenue in the first quarter was up 18% year over year. So well in excess of our O&D passenger growth. So we continue to push on optimizing for revenue there on our ancillary products, particularly the boarding products, but in terms of adding incremental products, it's tough to imagine how that would fit into the current boarding process. Dawn Gilbertson -- Air Travel Reporter If I can follow up then. My question is about -- you're talking about transformational changes here, and you're hinting at boarding and seeding. So can you do what kinds of things can you do, if anything, that doesn't involve assigning seats because to me, that would be transformational for Southwest. Like what -- can you give us -- I know you're not going to go into any detail until Investor Day, but what specifically is going to be different because just I think the price of upgraded boarding and early bird is obviously not going to meet your financial goals, as you just said. Bob Jordan -- President and Chief Executive Officer No, you're -- you -- I think you're exactly right, which is that's why you want to look at all of these things. And we're just not ready to tell you exactly what we're studying, and we're not ready to tell you then how that could, if we decide to go forward, turn into a different product design and a plan. But -- but yes, just conceptually, that where you're going is the reason we're looking at this is we know over time, customer preference has changed. They have my whole three, six years here at Southwest Airlines. And we have changed a lot. We've changed our boarding. We've changed our the product that we offer on board. We added loyalty programs and a modified those. So we are constantly changing to meet customer demand. So it's critical to understand three things: number one, what do your customers want. And that's really what we're studying right now. Two, what does that do to the way you operate the airline because we are obviously a bedrock of the company is operating very efficiently, having a quick operation, great turn times being efficient. And so making sure that whatever you might want to do, it's fits in with that. And then obviously, the third piece is, is it financially beneficial back to hitting our financial goals a piece of this is, as Ryan mentioned, continuing to drive progress against our financial aspirations and goals and hitting our ROIC and margin goals. So all those three things have to work together. And we're just not ready to share details today. but we will be, as we move across the summer and into our Investor Day in September. Dawn Gilbertson -- Air Travel Reporter Thanks, Bob. Operator The next question is from David Koenig with the Associated Press. Please go ahead. David Koenig -- Business Writer Thanks very much. Well, I was going to ask about the transformational options proceeding, but I think you've probably said all you're going to say on that, Bob. If I -- if you could go into a little bit of explanation on the 2,000 headcount reduction. First of all, I'd like to know how many jobs you think will be eliminated by the closure of those four airports and any drawdown at here in Atlanta and elsewhere. And then secondly, are you saying that you can get to 2,000 fewer jobs this year just through attrition and leaves, can you rule out furloughs? Bob Jordan -- President and Chief Executive Officer David, thank you. And yes, no, thanks for allowing me the ability to clarify that. We have line of sight on the 2000 that does not include furloughs. or anything like that, that we don't want to put on the table. And then it also does not include a headcount that are effectively sort of out of the workforce in terms of not being paid because they are on voluntary unpaid leave. So it doesn't even count that. So this is really through attrition in some cases, reassigning folks to have the work that does need to be done. But it's also coming through pretty sophisticated initiatives. We have initiatives underway to use Gen AI to automate the way we handle cut some of our customer support functions, generate responses, decide what to do with the customer request. We have other significant continuous improvement in automation going on in other parts of the company, and we plan to accelerate that. So not furloughs. It is primarily through planned attrition that we know we have a line of sight to. So and again, the line of sight to the 2000 the folks that are effectively out of the workforce because we're not -- they're not being paid in their own voluntary time off programs. That's on top of the 2,000. David Koenig -- Business Writer OK. And how many of the 2,000 do you think will be pilots? Andrew Watterson -- Chief Operating Officer Yes. I don't think we give a breakdown by work group, David. There'll be some that will be back office people that work at headquarters, some that will be a frontline we have. There's natural attrition that goes along throughout the company, whether one reaches retirement age or want to sites to go find a different job. You have that natural. We have a good history on that, so we can model out what that's going to look like and which ones we need to backfill, which ones do not need to backfill and that's how we get to these projections. It's not any kind of reduction in force or eliminated people currently employed is more when physicians become available, not backfilling them. David Koenig -- Business Writer All right. Thank you. Operator The next question is from Leslie Josephs with CNBC. Please go ahead. Leslie Josephs -- Airline Reporter Hi, everyone. Thanks for taking my question. Just knowing what you know now from these customer surveys about potential seating changes. Are you thinking that it could be like a big front seat or bigger front seat type product? Or do you think that at some point, there will be a curtain on a Southwest Airlines plan and secondly, are you ruling out baggage fees entirely? Is that still or is that something that's on the table for you as you're looking at revenue initiatives? And then on the 1% of bookings that were canceled because of concerns about air safety, how many people is 1%? And how does that compare with -- after the MAX crashes when the plane came back? Ryan Green -- Executive Vice President, Chief Commercial Officer Leslie, I'll try and take all of those. The first one on what we're learning from customer research, I think just stay tuned there. We'll have more to share on what we're learning and how that factors into what we may do different, if anything, at all. I will say though, the Southwest Airlines is -- we will stay true no matter what we do to the brand and who we are and how we approach customers. And I think things like curtains and things like that are a bit far field from Southwest Airlines is. On your bag fee question, no, we are not considering bag fees. The reason we're not considering bag fees is because people choose Southwest Airlines because we don't have bag fees. If you go look the most recent J.D. Power survey, which obviously is an independent syndicated piece of research that's well respected in the industry. Over 60% of customers say that they choose Southwest Airlines as one of their top reasons because of bag fees. You -- companies love to have differentiation in their product that drives customer preference and drives customer choice. Our next closest competitor on that measure is Alaska gets 19%. So we get three times the preference in terms of bag fees relative to our competition. So that's why bag fees are not on the table for consideration. On the 1% of cancellations, it's a very small number. We don't -- our overall cancellation rate is a very small number, so 1% of that is a very, very small number. So it's not material. Andrew Watterson -- Chief Operating Officer Yes. And I'll just emphasizing that, Leslie, it's not 1% of our bookings, it got canceled because of all of those people who canceled. And so yesterday, 0.4% of people canceled and 1% of that 0.4% said it was safety concerns. So it's a very small number of an extraordinarily small number that did that, which is why Ryan would say is immaterial or even inconsequential. Leslie Josephs -- Airline Reporter And how does that compare with what the MAX came back in 2020 after the crashes. Andrew Watterson -- Chief Operating Officer That was also quite small. I mean we also track people who look at what the aircraft type is on the website and those really didn't see any movement of consequence in there. And so it seems like this is not something that customers investigate any great deal with the very early days of the MAX grounding, there were some interest heightened to that. When the MAX came back, it was -- we prepared as if it would be, I think, of interest and it was not a thing of interest. And currently, customers are acting if it's not a thing of interest as well. So it's I think that even though Boeing is having individual controllers as a company, customers are trusting at least Southwest Airlines and that we will operate our aircraft safely. Leslie Josephs -- Airline Reporter Thank you. Operator The next question is from Rajesh Singh with Reuters. Please go ahead. Rajesh Singh -- Airline Reporter Bob, all the additional voluntary one time of programs that you're considering, does that include the pilot as well? Andrew Watterson -- Chief Operating Officer Rajesh, this is Andrew. And so what we're doing right now that we've spoken of is the voluntary time off has roughly been with our ground operations flight attendants and some of our call center people. They've taken advantage of that for flexibility in their programs. We do not have anything with our pilots at the moment. A provision of our contract requires us to consult with them, and we will certainly do that before we do anything with regards to our pilots. Rajesh Singh -- Airline Reporter Bob, you said that you were encouraged by Boeing's approach. Can you please share some specific examples and color that make you feel encouraged about their approach? Andrew Watterson -- Chief Operating Officer Andrew, again, I'll take that because I was up there with Bob on our visit. And so really, we're impressed by how Boeing is putting kind of quality ahead of short-term profit, so to speak. So an example is, they have many portions in their factory. There's like 10 stations they go through the construction. They don't allow anything to progress past stage 3 that has traveled work. And so that creates gaps in their factory, which then leads to obviously a plane that's not sold and delivered that month. The fact they're taking this very strong approach to bring quality out in the early stages of the production process from their suppliers is a much different approach. And frankly, as when to put safety ahead of profitability in the short term. But it's obviously they're a long-term interest. So we were very impressed by that kind of not just change of awards, but by change of actions. Bob Jordan -- President and Chief Executive Officer Yes. You want to see the tone at the top be appropriate, which is an understanding that -- again, I can't speak for Boeing, I'm just thinking about how we view this but a tone that recognizes that this is a big issue, and it's bigger than a quality escape. And to some extent, it is a cultural issue. And so they need to attack it very broadly. And that is the way that they -- our view when we visit with them, that is the way that they appear to be tackling that, as Andrew said, it appears to be showing up in their actions. Now at the end of the day, they have to deliver and -- but no, no, we are encouraged by what we're seeing. Rajesh Singh -- Airline Reporter And have you increased your inspectors at the Boeing sites following the last fire incident? Andrew Watterson -- Chief Operating Officer Thank you for the question. In 2022, we increased from having just a representative, which other airlines have to having a team of AMP certified mechanics on process, on site to inspect our aircraft as they go through the production process. I believe there's north of 85 inspection points that they look at between entering the factory and exiting the factory. And so -- that is the way we assure day-to-day that our quality of aircraft is maintained. We additionally have the engagement at the executive level that Bob talked about where we also see good results. So overall, are heightened attention to Boeing and the quality of the aircraft they manufacture has been going on for a while, and we think it's bearing fruit. Operator The next question is from David Slotnick with TPG. Please go ahead. David Slotnick -- Aviation Business Reporter Good afternoon. Thanks for the question. And going back to the transformation, you said that you're looking at changing customer preferences. And I'm sort of just wondering what perspective you're taking on that? Like are you looking at this as something where because of those preferences customers are choosing to book other airlines over Southwest? Or are you looking at this as maybe a place where Southwest is missing an opportunity to revenue on premiums or upsells what your rivals are from existing passengers? Bob Jordan -- President and Chief Executive Officer Ryan can give you much more detail, but I think you want to know all those things. You want to know -- why do customers book Southwest? What do they expect to Southwest? You want to know why do they book others and not Southwest Airlines, you want to know if they have preferences for other things within our product that we don't offer today, how do you think about pricing, those kinds of things and how it affects their desire to book Southwest Airlines. But now you want to need to know all those things. And again, additionally, in addition to the customer preference, you need to know what does it do for the operation and how we how -- how quickly especially we turn our aircraft and we're studying that as well. Ryan? Ryan Green -- Executive Vice President, Chief Commercial Officer I think you hit it all. Clearly, with any sort of transformational change, you're going to have a very robust, highly scientific, very sophisticated statistical models and research methodologies to test all of those things that Bob walked through. that's what anybody would expect of a company like Southwest, and that's the rigor at which we are approaching studying this issue. David Slotnick -- Aviation Business Reporter And I mean, back to the question before just considering the share of their revenue that your rivals are earning from upsells and from premium. Do you think you can really rule out something like a curtain in the cabin? Ryan Green -- Executive Vice President, Chief Commercial Officer Look, we're going to study customer -- like we've said, we're going to study customer preferences, but there's strong demand today for Southwest Airlines and the brand that we put and the product that we put in the marketplace today, it has worked for us for over 50 years, and customers understand well who we are and what we bring to the marketplace. We're not going to try to be somebody that we're not. And so we'll study it all, but we're -- at the end of the day, we're going to remain true to who Southwest Airlines is. Andrew Watterson -- Chief Operating Officer I think you also have to look at the revenue per square foot and you get in the cabin. And so it can be seem like you won't want to have a fancy product. But if it doesn't generate revenue off of that square foot, you have in the cabin, then it's necessarily not worth it. So we take a strong eye to the revenue that any of our products would generate as we evaluate this. Bob Jordan -- President and Chief Executive Officer And I think the -- I know we've said this probably 20 times on the call today, and I think the other short answer is we're not ready to go into detail. We have work to do here, obviously, to continue to finish up our work and then if there are things we do want to change, to understand how we would do it in the Southwest way. And so we will be back with detail when we're ready. And if there is something that we're going to change, we're aiming to do that at our Investor Day, which is planned in September, and we'll share obviously a lot more of that. Thank you. David Slotnick -- Aviation Business Reporter Thank you. Operator This concludes our question-and-answer session for media. So back over to Whitney now for some closing thoughts. Whitney Eichinger -- Chief Communications Officer Thanks to everyone who joined us today. If you guys have any further questions, our Communications Group is standing by. Their contact information along with today's news release are all available at swamedia.com.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, ladies and gentlemen, and welcome to the Sands' first-quarter 2024 earnings call. [Operator instructions] It is now my pleasure to turn the floor over to Mr. Daniel Briggs, senior vice president of investor relations at Sands. Sir, the floor is yours. Daniel Briggs -- Vice President, Investor Relations Thank you, Paul. Joining the call today are Rob Goldstein, our chairman and CEO; Patrick Dumont, our president and COO; Dr. Wilfred Wong, executive vice chairman of Sands China; and Grant Chum, CEO and president of Sands China and EVP of Asia Operations. Today's conference call will contain forward-looking statements. We will be making these statements under the safe harbor provision of Federal Securities laws. The Company's actual results may differ materially from the results reflected in those forward-looking statements. In addition, we will discuss non-GAAP measures. Reconciliations to the most comparable GAAP financial measure are included in our press release. We have posted an earnings presentation on our website. We will refer to that presentation during the call. [Operator instructions] This presentation is being recorded. I'll now turn the call over to Rob. Rob Goldstein -- Chairman and Chief Executive Officer Thanks, Dan, and thanks for joining us today. The Macao market continues to grow as it has each in the past five quarters. Since the reopening in early 2023, the annual run rate of the market has grown every quarter from $17 billion in Q1 of last year to $22 billion, then $24 billion and $26 billion, now reaching $28 billion in annualized gaming revenue. We remain confident -- so fully confident in the future growth of the Macao market. I've said in the past, Macao market will grow to $30 billion and then $35 billion and then $40 billion beyond in the years ahead, I remain steadfast in our belief. We remain equally confident in our business strategy to invest in both the quality and scale of our market-leading assets in Macao. Our capital investment programs ensure that we will continue to be the market leader in the years ahead. Our investments position us to grow faster than the market over the long term to grow our share of EBITDA in the market and to generate industry-leading returns on invested capital. Turning to our current financial results for Macao. We delivered a solid result for the quarter despite the disruption of our ongoing capital investment programs. SCL continues to lead the market in gaming and non-gaming revenue and most importantly, in the market share of EBITDA. Because of our market-leading investments, we will capture high-value, high-margin tourism over the long run. We have a unique competitive position in terms of scale, quality and diversity of product offerings. Upon completion of the second phase of the London and our co-tying redevelopment program, our product advantage will be more substantial than ever. Turning to Singapore, we delivered a record quarter. We believe it's a record for the industry. So the team there has done an extraordinary job, and this is what happens when a superior product is located in the proper market. Our financial results in Singapore reflect the impact of our capital investment programs and our service capabilities. The appeal of Singapore as its tourist and destination and the robust entertainment and lifestyle event calendar also contributed to the growth at MBS. As we complete the balance of our investment programs, there will be a lot more runway for growth in the future. Thanks for joining us today. I'll turn it over to Patrick for more details. Patrick Dumont -- President and Chief Operating Officer Thanks, Rob. Macao EBITDA was $610 million. If we had held as expected in our rolling program, our EBITDA would have been higher by $31 million. When adjusted for lower-than-expected holds in the rolling segment, our EBITDA margin would have been 34.4%, or up 380 basis points compared to the first quarter of 2023. This highlights our focus on cost discipline and profitability. The ongoing capital investment programs at The Londoner and at the Cotai Arena had an impact on our results this quarter. The Cotai Arena was closed for renovation in January this year. After the significant reinvestment and renovation, the arena is expected to reopen in November. In terms of the second phase of the Londoner, we have now commenced the room renovation on the first Sheraton. We plan the completion of the first tower by year-end and of the second tower by Golden Week in May of 2025. The renovation of the casino on the Sheraton side of London will commence in May of this year with the reopening scheduled for December of 2024. While there will be ongoing disruption from these capital projects, as these products come online between the end of '24 and the first half of '25, our competitive position will be stronger than ever. The scale, quality and diversity of product will be better than we have ever offered before. They will be unmatched in the market. Turning to Singapore, MBS and EBITDA came in at $597 million, an all-time record for the property and for the industry. Our strong results reflect the impact of high-quality investment and market-leading products. Had we held as expected in our Rolling Play segment, EBITDA would have been $77 million lower. Had we held as expected in the Rolling Play segment, MBS EBITDA margin would have been 49.1%, or 181 -- 180 basis points higher than in Q1 of 2023. We have now completed both Tower 1 and Tower 2 of the Marina Bay Sands hotel refurbishment. While we have substantially completed the original $1 billion capex program, we are still in initial stages of realizing the benefits of these new products. We have now commenced the next phase of our capital investment program at Marina Bay Sands. The $750 million renovation that includes Tower 3. Tower 3 is scheduled to be completed by the second quarter of next year. This will support further growth in 2025 and beyond. Turning to our program to return capital to shareholders. We repurchased $450 million of LVS stock during the quarter. We also paid our recurring quarterly dividend. In addition, LVS has completed the previously announced purchase of $250 million of SCL stock, which increases the parent company's ownership interest in SCL to approximately 71%. We continue to see value in both repurchasing LVS stock and increasing our ownership interest in SCL. We look forward to continuing to utilize the company's capital return program to increase return to shareholders in the future. Thanks again for joining the call today. Now, let's take some questions. Questions & Answers: Operator Thank you.[Operator instructions] And the first question today is coming from Stephen Grambling from Morgan Stanley. Stephen, your line is live. Stephen, your line is live. Stephen Grambling -- Morgan Stanley -- Analyst Hey. Thanks so much. You talked to the March higher for the market in Macau, but this quarter looks like the margin flow through and EBITDA actually went in the other direction. How should we be thinking about flow through in Macau and operating expenses going forward in that market? Patrick Dumont -- President and Chief Operating Officer Yeah. I just want to say one thing before we turn it over to Grant. I think some of this has to do in Macau with some of the disruption that we experienced during the quarter. So when we take the arena in January, we lose the benefit of our entertainment programs during a peak period. That did have an impact. So when you look at our operation, you compare it to Q1 of last year, Q1 of last year, we were coming out of the pandemic and it really took a while for visitation to get started again. This year, unfortunately, we did this to ourselves. We started renovating our arena. It's a very powerful asset. It has lots of entertainment and went through the Chinese New Year period and unfortunately, with some hotel rooms out and the arena out, we felt on the revenue side. So as we've said before, as the market continues to grow, we will do well. We have the best product. We've invested the most in non-gaming assets. We have the most amenities to offer to our patrons and they're very high quality, diversity of retail, diversity of food and beverage, diversity of entertainment, which is very important. Unfortunately, we didn't have that tool this quarter in full swing. We only had the London arena, which is good, but it can't compete with the Cotai Arena. So I think for us, as the revenues continue to grow, as you've seen in prior quarters, our margins will fall in line. And you see that in the Venetian, as the revenues are where they need to be, the margins fall in line as well. So that's sort of the headline from the margin performance this quarter. I do want to turn it over to Grant to see if he has any additional color. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. Thanks, Patrick. I think the most important point is still the GGR is growing in the market, and I think if you look at our profitability, at this level of GGR, I think we should be looking at low to mid-30s in operating margin -- EBITDA margin, and we're right at the high end of the range there. Obviously, each quarter there's seasonality relating to different parts of the business, the revenue mix. So first quarter, I think 34.4% in terms of underlying margin is a really good number. I think 2024 is going to be one that is impacted by our capital works and the renovations that Patrick referenced also in his opening remarks. We have obviously, started the hotel renovation in the first half of Sheraton, and down -- we're probably down about 500, 600 rooms in the first quarter on average in that hotel. But the number of keys that will be out of inventory will increase further in the second and third quarters. And of course, Cotai Arena, as Patrick referenced, that's always been a core part of our content programming, our content offering, and we were able to offer plenty of shows at the London Arena. But if you just compare -- just the sheer number of shows that we had in the first quarter, we had 12 shows compared with the fourth quarter last year, we had 31 shows. It's a big difference. And obviously, in terms of capacity, there's a big difference. So the attendance per show obviously was much higher in the fourth quarter as well. So hopefully, that gives you some color in terms of the disruption that had on our business with the arena being closed for renovation. And as I said, the hotel renovation is ongoing and you're going to see more keys out of inventory in the next couple of quarters. Stephen Grambling -- Morgan Stanley -- Analyst Got it. And maybe one clarification. I guess in the quarter, industrywide, I'm not sure, maybe I missed this in the presentation or I haven't seen the slides, but is VIP -- the VIP actually grew faster than mass overall in the first quarter for the industry. And how are you thinking about base mass versus premium mass from here? I know you kind of touched on this a little bit, but would be curious about the industrywide thought process. Patrick Dumont -- President and Chief Operating Officer Rob, should I take that? Rob Goldstein -- Chairman and Chief Executive Officer Yes. Yes, please. Yes. Patrick Dumont -- President and Chief Operating Officer Yes, you're right. I think if you look at our slides, the mass revenues sequentially would be around 4%, and the overall GGR for the quarter grew at 6% sequentially. So yes, the VIP revenues in the market as a whole grew faster than the mass revenues Q-o-Q. I think in terms of the premium mass versus base mass, again, I think you can see it from our slides. Premium mass grew slightly faster for us in this quarter, but the difference is not material when you account for things like whole percentage and patron counts and so forth. So I wouldn't say, there's a material divergence in the growth rates between premium mass and base mass, and it's part of business for the quarter. Rob Goldstein -- Chairman and Chief Executive Officer I think it's important to note that -- it's important that the visitation still isn't like it to be. Obviously, there's still millions of people have not come versus the 2019 visitation numbers. We believe long-term visitation GGRs did grow, whether it be base or premium, we'll get more than our fair share. And I think we've seen obviously, I'll say the obvious, the promotional situation the market has changed and more people incent doing things. And once everyone starts playing that game, I believe that will resolve itself. We believe that assets will prevail. We believe London will be extraordinary asset much like it's happening in Singapore. I think our results in Singapore reflect a fully developed program and the execution in Singapore shows what can be done. We have the right kind of assets. What we have even done in Singapore the number is extraordinary. The same will happen in our business in Macao in time. As DGOs accelerate and they will, visitation accelerates and it will. We'll continue to be margin-focused, even without focus, and get more than a fair share and assets will prevail over promotions from our perspective. Stephen Grambling -- Morgan Stanley -- Analyst Got it. Thanks. I'll jump back in the queue. Appreciate it. Rob Goldstein -- Chairman and Chief Executive Officer Thank you. Operator Thank you. The next question is coming from Carlo Santarelli from Deutsche Bank. Carlo, your line is live. Carlo Santarelli -- Deutsche Bank -- Analyst Hey, guys. Thank you. Just following up on the first-quarter margins. If I look at the fourth quarter, for example, and kind of extract the big element of turnover rent that comes in and obviously, very high flow through, it looks like margins are probably fairly similar. So it doesn't seem like a lot changed on that front. Is that accurate? Or am I missing something else seasonally there? Rob Goldstein -- Chairman and Chief Executive Officer Primarily you're correct. That's a fair statement to make. The term red does, as you know, as you know to occur in the fourth quarter, and it's material. Grant, do you want to add to that? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yes. It's accurate. You're right. Carlo Santarelli -- Deutsche Bank -- Analyst Great. Thank you. And if I could, just one follow-up on capital allocation. Obviously, over $400 million of buyback in this quarter. As you guys think about the capital needs here going forward, the stuff that you've announced, the stuff that obviously, is being contemplated and looking for budgets around and whatnot. Do you feel like that this pace is adequate and where you want to be as you look throughout the balance of this year? Patrick Dumont -- President and Chief Operating Officer Yeah. So I think first off, I just want to say we see value in both equities. And I think, we have a very long-term bullish view given the market opportunity for growth, our market-leading investments and our assets, and just how we feel about the opportunities in both markets that we have. So as we said before, we're going to be overweight share repurchases. As we think about future capital return, we are going to be more heavily weighted toward share repurchase and dividends. We think the repurchases are going to be more accretive than dividends over time and we want to shrink that denominator. And so I think we're going to look to make purchases that are consistent with our share authorization by the board and with prior practice. And I think we'll look to be a little bit opportunistic. We may vary levels, but I think we're going to continue to be aggressive in the market. I mean, I think you see with the $450 million of LVS shares, the SCL share repurchases, we think this represents an interesting opportunity just a moment in time. And so we're going to try to take advantage of it. We happen to have a very strong balance sheet. We have a lot of liquidity and we tend to put it to use. So I think we're pretty happy with where the program has taken us so far -- both so far and we'll continue to use it and we'll see how it goes across the year. But we're going to look to repurchase more shares. Carlo Santarelli -- Deutsche Bank -- Analyst Thanks for that, Patrick. Just one aside. Guys, I'm not sure the slides are actually posted yet. It certainly could be a user error, but it looks like that they haven't posted yet for the first quarter. Patrick Dumont -- President and Chief Operating Officer Yeah. We're working on it. Carlo Santarelli -- Deutsche Bank -- Analyst Thank you. Operator Thank you. The next question is coming from Joe Greff from J.P. Morgan. Joe, your line is live. Joe Greff -- J.P. Morgan -- Analyst Hey, everybody. I was hoping one of you could maybe help quantify the revenue and EBITDA impact from the renovations going on at Londoner and Cotai Arena. And then do you see that renovation disruption impact accelerating, and when do you start to see that decelerate? I know you kind of talked about the two towers and when they open up, but to kind of help understand that renovation impact in terms of how you're seeing it, and I think would be helpful for everybody. Patrick Dumont -- President and Chief Operating Officer Yeah. I don't know that we can necessarily quantify accurately what the impact was because we can't know what we displaced. You heard Grant describe the number of missing shows and the number of people typically will go to those shows in the Cotai Arena, and you get a sense of the type of high-quality patron that we bring in when we have live entertainment. And it is impactful. I think Q1 typically is a very powerful quarter for us as is Q4, and you kind of see the difference that the impact had for entertainment. We made a decision that if we take the arena offline and do it and make it the high -- one of the highest-quality arenas in Asia, then in the long run, we will benefit from the entertainment. And so we decided to do it as quickly as possible. And so that meant taking it offline in January this year and trying to get it done by October-November. And so once we do that, we're going to have an incredibly high-quality arena with amenities that we've never had before. So it will make us more competitive in the market and actually drive additional high-quality tourism from both traditional markets and other markets and will also help drive high-quality tourism from our core customer base and allow for more repeat visits from our high-value customers. We're very excited about the opportunities this new entertainment asset will present to us. Unfortunately, we're going to take some pain while it's offline, and that really started in January of this year. I can't quantify the exact amount, but you hear the count from Grant and you realize that it is not immaterial. And then the other side is, we're taking the shared it out. And when we're done, it's going to be one of our best properties in Macao. The design will be high-level. The fundamentals of the Sheraton Tower are quite good and both towers are quite good. They're actually a little bit better than the existing Londoner side, believe it or not. The layout of the casino will be very good. The additional food and beverage amenities that we can add. And I think the connectivity will be a very good driver of future results for that property. That's the reason why we're pretty confident that the result, when it's done, will be that or exceed that of the Venetian. So I think for us, we're doing it now. It is going to be disruptive. The worst is going to be across the summer when we have the lowest key count that we've had since we really opened what was then in Sands Cotai Central because we're taking out -- that we're going to take the Sheraton out. And so it's going to be more of this disruption across the summer. But then hopefully, as keys come back online across the phasing, and as we get the arena back, let's call it October-November, we'll have a much more powerful set of assets to drive tourism and create cash flow. So there will be disruption. I can't quantify it for you, but it's not going to be immaterial. Grant, I don't know if you have other things you'd like to add to that. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations I think you covered it perfectly. I think the only thing I supplement is Londoner phase one really gave us that elevation in the shared quality of product, as well as a very successful rebranding and repositioning of the entire property. But what phase two gives us is that scale of high-quality product and the diversity of it. And that's when I think the earnings power of this resort will be fundamentally transformed. Joe Greff -- J.P. Morgan -- Analyst Perfect. And -- Rob Goldstein -- Chairman and Chief Executive Officer I believe what we think once Londoner -- we think once Londoner is done, Joe, we'll have the one and two -- No. 1 and 2 assets in the GALP, by far. Not sure whether they'll be fully in front, but that company really gives us a unique positioning for '25 and the years ahead to dominate the market in terms of the largest resorts and those proper resorts, both one and two. Joe Greff -- J.P. Morgan -- Analyst Great. Thanks, Rob. You may have answered my follow-up question indirectly on your prior margin commentary, and maybe this is something Grant could talk about. But can you talk about the level of the markets, premium mass reinvestment levels? Has that been pretty consistent in the first quarter? And what you're seeing year to date versus how the end of the year finished? Or is there any kind of trend change on that front? That's all for me. Thanks. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Thanks, Joe. For us, yes, our profitability, the structure of a margin in every segment actually, quarter on quarter very consistent. No significant changes there. And that obviously, fed through to the result that the earlier question described, which is that we had a very consistent margin quarter on quarter despite obviously, some inflation in the payroll costs due to holiday pay and salary increases. Joe Greff -- J.P. Morgan -- Analyst Yeah. My question -- maybe I didn't explain it that clearly. The level of premium mass reinvestment from your competitors, how would you characterize that year to date versus the end of last year? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Sorry. You're talking about the overall market now. Joe Greff -- J.P. Morgan -- Analyst Yes. Rob Goldstein -- Chairman and Chief Executive Officer Direct investment invested to customers. Patrick Dumont -- President and Chief Operating Officer I think the promotion activities levels are relatively intense right now. Is it higher than Q4, I don't think so, but it comes and goes and goes up and has ups and downs. But I think over time, there really isn't any necessity in this market to be too aggressive on promotions. The demand and supply, supply constrained market, the quality of supply is exceptional, and we are a big contributor to that. And as GGR rises, that becomes even less of an issue over time. And for us, it doesn't matter. We stick to our strategy, which is as Rob referenced product based is driven off our asset base. The upgrades we're making, the quality of the assets and the services that go with that in addition to the programming -- the content programming, and like we talked about, we're very big believers in that entertainment being co-offering. That's why we're investing this $200 million in the upgrade of Cotai Arena. So -- yeah, when it's all said and done, we believe that GGR continues to rise, our asset base is going to be better than before and better than ever. And that's the way we're going to compete and that's the only way we think we can compete on a sustainable and profitable basis is really based on the quality execution of a product and the service that go with that. Joe Greff -- J.P. Morgan -- Analyst Thank you. Rob Goldstein -- Chairman and Chief Executive Officer Joe, we're obviously, keenly aware of the commercial environment down. We're certainly aware of what's happening with Macao promotions, but we remain steadfast. I believe that our product, once completed, will be superior. The scale is greater. The market will grow, and that's how we'll capture our fair share and remain focused on margins and keeping our EBITDA once again. So we're not going to play the game of chasing $10 more for promotions. We don't think it's our business and who we are. We're an asset-driven company with quality assets and scale. And again, we've proven that time and time again, and once Londoner is done, the arena will be just want to be in terms of market leading and margin of the assets and the cap. Operator Thank you. The next question is coming from Shaun Kelley from Bank of America. Shaun, your line is live. Shaun Kelley -- Bank of America Merrill Lynch -- Analyst Hi. Good afternoon, everyone. Sorry if I'm beating the dead horse here, but I did want to just kind of stick with the margin commentary, but I'll give it a little bit of a longer-term view. My question is really just trying to get a sense of what would it take to get back to let's call it the mid to high thirties on margins here. Is what we're seeing today and now increasingly expecting for the balance of '24 more about customer mix? Or is it about sort of one time callouts around renovations and maybe some lost very high-margin non-gaming revenue? Patrick Dumont -- President and Chief Operating Officer So it's a very interesting question, and it's the right question to ask. So as these properties reach run rates so as they reach their full potential, the margin should be upper 30s [Inaudible] Sorry. I think someone in Sands China put us on hold. Please excuse us. So we think about margins in the upper thirties. If you look at the performance of the Venetian, that's a good benchmark, right? It was impacted a little bit this quarter, again, also by the entertainment not being there in the Cotai Arena, but -- and mix-wise, to be fair, pre-pandemic, it had more mass play and that's a higher margin. And so as tourism returns, so as visitation increases, which has more mass play, and we have plenty of capacity for it. So if you look at our asset base, the scale of the assets, the food and beverage we have, the amenities we have, we can accommodate a lot of mass play, and we have the positions to do it. And so for us, as visitation shows up and continues to on an upward trend, our assets are ready to take that visitation, revenue will grow, margins will grow, and they will normalize back toward a more traditional mix. That being said, the Londoner has the opportunity to also bring a lot of high-value tourism. So we're carrying the expense base without the revenue, right? So we have the team members, we have the -- we have all the things going on that you have, that we're fully operating, but it's not fully operating at. So the margins naturally are not going to look right. So as the revenue comes in and as the visitation comes in, as the patrons come in, as the hotel is completed, and as the rest of the amenities are done, that will look more normal. The only problem is it's in '25. So we have a little bit of time that we have to get through with this investment. Are there some high-value things that are very high margin that we're missing because of entertainment or keys out, yes, that's true. But when you look at the asset base that we have, the experience that we have, the team that we have there, their ability to execute and how they've executed so far, and the asset base that we're creating with these investments, we're going to be in a great position. And the margins, we believe, will get there. So we need visitation to continue. That will be helpful for the Venetian. It'll be helpful for the mass to recover. We need to have all of our assets in line. So that's the Cotai Arena to be finished and the Sheraton to become fully Londonerized, that's a word, and get to our full key count. And then you'll see the true power of these assets and the margins will get there. We have a lifestyle program that we run with high-quality amenities. If you haven't been to Macau and you haven't seen what we've done, I would encourage you to do it. It's not simply one thing. It's not simply hospitality. It's not simply gaming. It's not simply retail. It's an ecosystem that allows our customers to travel around all of our assets and have an experience they can't get anyplace else. And that's really what we have on offer and it's unique, and it's been invested in and it will continue to get better. So for us, as Rob said, we're not chasing promotional activity. We're chasing asset development, and that will drive our success. Shaun Kelley -- Bank of America Merrill Lynch -- Analyst Thanks, Patrick, and appreciate the insight. As a quick follow-up for whoever as appropriate. Just looking at Singapore, I mean, obviously, a breakout quarter with a run rate above $500 million. There were some one time things in that market, Taylor Swift, I believe, being one and then, of course, which I think you called out event activity broadly speaking. But also there's a change in, I think, Chinese visa policies that was probably potentially fruitful for the market. So just the big question here is, what's the right run rate? And do you think again, maybe event activity agnostic we could sustain above the $500 million mark? And are we kind of off to the race here? And notwithstanding the fact that even that number sounds like it included a little bit of tower three disruption. Rob Goldstein -- Chairman and Chief Executive Officer I think the first thing you should note is that the building is still under renovation. I think we believe $500 million a quarter annualized is very durable and more. And the most important thing you should note is two things. The growth in Singapore as a desirable destination is soaring. It's not just Taylor Swift. It's Bruno Mars. It's the Hamilton show. It's endless events, F1. It's a juggernaut. And really, it's become accelerated. This market has become very special in a very short order. And I think that's attributed to government there and the programs happening, entertainment, etc. So Singapore is highly desirable, and yes, that's very sustainable. And as good as Taylor Swift was, there's a lot more in the pipeline that will make that continue. Secondly, our building has less than 200 top-tier suites. Upon completion, we'll have an excess of 700. The suite-spot on the market is the premium mass and super premium mass, rolling, non-rolling. We can't -- I think we're almost approaching a billion dollars a slot when we may be out of bullets there as we get more capacity. But this is a very special market. Our building is a special building. I don't think there's any reason to doubt that 520, 540, 600. Look, this may keep growing. This is a great place to be. We're lucky to be there. We're lucky that the government is very supportive and excellent team in place. But most importantly, the assets, it didn't happen by luck. We are doing -- spending a lot of money to make sure those assets are superb and the customers come back time and time again. The real question is what happens when the building has four wheels instead of three? That's going to happen later this year, in early 2025, when those suites are rolled out and they are great suites. They are phenomenal suites. Can that building go to two-two, two-four, two-five, it can and it will. And I think, again, what we're trying to tell you about Macau is we're frustrated by Macau. The operating environment is more difficult. We're under construction a self-inflicted wound. But once we emulate in Macau and we've done in Singapore, the same thing will prevail. Londoner I wish neck and neck to drive that market. And again, I think the government recently talked about a lot of things they're trying to do. Increase tourism and visas, etc. We see a real nice support system coming out of now, and we're grateful to the government for recognizing a session this week about increased tourism, increased entertainment. We're lucky to be in two very, very special places, and, yes, Singapore can do 500, they can do 550. It's not about Taylor Swift. It's about a great market, a great asset, and a team running it. Shaun Kelley -- Bank of America Merrill Lynch -- Analyst Thank you. Operator Thank you. The next question is coming from Robin Farley from UBS. Robin, your line is live. Robin Farley -- UBS -- Analyst Great. Thanks. I just wanted to circle back. You were commenting earlier and the slides were not up yet so I haven't been able to go through them. But it sounded like you were saying that your sequential growth in mass and premium were both at a similar rate sequentially. And just wondering if there's anything to add any color around that since, you know, the market has generally speaking been seeing better premium mass recovery. Just any color you'd add there. Patrick Dumont -- President and Chief Operating Officer Grant, I think you should take that. Grant? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah, Robin. I don't know if the deck is up. Patrick Dumont -- President and Chief Operating Officer It's up now. Rob Goldstein -- Chairman and Chief Executive Officer It's up now, I mean. Patrick Dumont -- President and Chief Operating Officer It's up, guys. Yes. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. So if you look at a premium mass win, we're up 2% quarter on quarter, and base maths were down 3% quarter on quarter. But I think my point earlier is the difference that's here and there could be related to any number of I think non-substantive factors. So I wouldn't describe this as a divergence in trend, but this quarter we just did slightly better in premium mass versus base mass. Visitations continue just like see the wider market growing. Our property visitations actually grew sequentially as well. So nothing significant to remark on in terms of the segment divergence. Robin Farley -- UBS -- Analyst OK. Great. That's helpful. Thank you. And just any thoughts around New York timing and your expectations there? Sort of anything new to add there? Thanks. Patrick Dumont -- President and Chief Operating Officer Yeah. But we're very disappointed by New York. I mean, we've been working there for a long time and we thought it was going to happen in '24. That was the state. Now they're saying '25 or '26, but I don't think we have any real clarity. And to be honest with you, it's confusing and disappointing because we've done a lot of work in New York and a lot of time into it. So I have no guidance because I don't really know what to tell you with candor and insight. Just don't know about New York. And it's just wish -- we wish they figured it out and let us know. We just don't know. So we'll remain hopeful that things turn around there. Robin Farley -- UBS -- Analyst OK. Great. Thank you. Rob Goldstein -- Chairman and Chief Executive Officer Thanks, Robin. Operator Thank you. The next question is coming from Vitaly Umansky from Seaport. Vitaly, your line is live. Vitaly Umansky -- Seaport Research Partners -- Analyst Hi. Good morning, guys. I think maybe switching over to Singapore if we think about kind of the quantifying the effect of what the renovations at that property have already done, and Rob, you talked about potentially this property getting up to about $2.4 billion, $2.5 billion. In theory, once the renovations are done in the first phase of the property, where do we see kind of constraints being built in? Because if you look at kind of occupancy rates in the hotel rooms today and we look at ADRs, they continue to expand. At some point, we're going to reach a limit as to how many rooms can be filled, and then we're talking about trying to fill rooms with higher-value customers. So when we think about before we get to the expansion, where is that constraint, and how quickly do you think we can get there? Rob Goldstein -- Chairman and Chief Executive Officer It's a good question. I think unfortunately, it's probably an answer that we've seen that we never dreamed slots with a billion dollars on property that they're approaching that. We never dreamed that in this environment. So quickly after COVID, we reached the kind of epic levels we're seeing. The growth in the premium mass is powerful and I was enjoying Grant on the call last week telling us it's still a drop in the bucket. There's so much more to go. And so I think the growth will come out of this super premium mass, both rolling, non-rolling. I don't think ADR is all that impactful because hopefully someday we won't sell many rooms. This will be a product that is mostly gaming customers in the rooms. I hope the suites we're building are just exemplary. And I think that this product is only going to have more good days ahead. I used to do five as a goal for our Company as the decade progresses and it's very attainable. It reached $600 million almost this quarter in actual is very stimulating. It's very exciting. But the cash in capacity, it's already a problem for us in terms of slot machines. It will be a room problem. We wish you had more exposure to Singapore that's why we're building more products. This is a very, very special place that people gravitate to. And as Singapore does its job as a lifestyle, entertainment, exciting place to visit, demands have grown. So the only concern we have in Singapore is how quickly we get there. Once these fleets are unleashed in the market, they see it. I think we'll have some very bright days ahead. But obviously, it's a capacity constraint. You only have so many rooms, only have so many slot machines, and I don't worry about getting there. I just think we get there, we'll be disappointed can't have more exposure, and that's why we're building phase two. Patrick Dumont -- President and Chief Operating Officer Hey, Vitaly. One thing, and welcome back to the call. I think the key thing for us is we have a very strong view of the future success of Singapore. So strong that we're investing a couple of billion dollars in this property and we're looking to do IR2 as quickly as we can. We think that this market is benefiting from a lot of the factors that make Singapore, great infrastructure, strong, stable government, great investment, great policy. And to be fair, you're seeing the result of it. And it's only our business, as many businesses in Singapore. And so I think that that's a very helpful indicator. But more importantly, the more other investment that goes into Singapore will help drive further visitation. So the infrastructure is already there. The real question is how many more hotel rooms will go in. We feel very strongly that the more hotel rooms are added will help add to the critical mass of tourism that Singapore already has today. If you look at the wealth creation going around in Southeast Asia, it's pretty substantial. The last four years, even during the pandemic and they're pretty meaningful. And there are a lot of customers that are new to Singapore, new to Marina Bay Sands, and they're affluent and very successful, and they want to consume and they want to take advantage of the Singapore -- things Singapore has on offer. And so we feel very strongly about the future visitation in Singapore. It's an interesting question, where is the peak of demand? We don't really see it right now. What we see is a supply constraint, right? When you look at who is trying to come to Singapore and the activities that are going on, we feel very strongly about future investment. We think it's there. Vitaly Umansky -- Seaport Research Partners -- Analyst Thanks, Patrick and Rob. Maybe just a follow-up, switching gears to Macau. And Grant, you talked a little bit about kind of the base mass and the growth you've seen in the quarter is very similar to premium. But I think overall, if we kind of think about sands in Macau, obviously, you're very strong in the direct VIP business, you're very strong in the premium business, but where you have a massive competitive advantage? In my view, it's just your scale, which then talks about base mass and the higher margin available from base mass. If you look at the recovery in overall base mass, it has not been as strong as the more premium end of the market. Can you maybe give an explanation as to why you think that is, if you agree with that statement, and then how does the market maybe change, or need to change over the next couple of quarters in order to get some of that base mass back, which I think would benefit Sands relative to others in a much stronger way? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yes. Thanks. Patrick Dumont -- President and Chief Operating Officer Grant, go ahead. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. Yeah, sure, Patrick. Yeah, I'll take it. And I think first point is your -- I agree we have a huge advantage with our scale, but I think the scale advantage speaks to all the segments. I think if you looked at historically, how the company has developed absolutely the base mask with our scale, that has been a core advantage. But in the sense of how we described all of these capital investments that we're making, especially in Londoner, the scale we have on the quality of the premium product is really unprecedented. So I think scale advantage will apply to all segments, in my view. Specifically on base mass, if you look at our actual numbers, the way we break it out between premium mass and base mass through the recovery since the reopening after the COVID restrictions, actually they're not too dissimilar now in terms of rate of recovery from a volume and revenue perspective. But it is true that in terms of customer count patron hours, we're still missing more from the base mass. So really it's two things it tells you. One is the quality of patronage has risen significantly because the revenue per patron is higher than before COVID. And secondly, there is still room for that base mass revenue and visitation to further recover. And I think there are many reasons and it's hard to specifically attribute to one or two factors, but I think over time, especially as the economy improves and also so I think people -- the distribution of content in terms of the lifestyle, the destination attractions, all of the events, all of the non-gaming products and assets and events that are actually distributed out there, I think you see a progressive improvement in that base mass segment. And obviously, we will be -- obviously, best placed to capture that growth when that comes. Vitaly Umansky -- Seaport Research Partners -- Analyst Thanks, Grant. That's helpful. Operator Thank you. The next question is coming from Chad Beynon from Macquarie. Chad, your line is live. Chad Beynon -- Macquarie Research -- Analyst Afternoon. Thanks for taking my question and thanks for posting the slides. On Slide 44, the flags of interest remain the same as what we've seen in the past couple of decks, Macau, Singapore, New York, and you've talked through all these. There's been some recent discussions around Thailand and some even think that an integrated resort could open in Thailand, maybe even ahead of Japan. So wondering if you could opine on your views. I know early, but could this market be big enough? Could a resort generate the cash flow meaningful enough for you guys to look at the market? Any views there? Thanks. Rob Goldstein -- Chairman and Chief Executive Officer Yeah. We absolutely have interest in Thailand. To your point, it could happen quicker than Japan. I think it's conceivable. It's early days, though we still have work to do with the numbers and understanding it. It's a very, very exciting market in a lot of levels, and just the sheer size of population, the accessibility and the willingness of people travel to Thailand, it's obviously, I think, No. 1 resort destination city in Asia. So yeah, we're very interested. But again, it's early days. I agree with your comments. It could be faster than Japan, which is possible. Certainly, there's usually a lot of pent-up desire from both business and government to work toward us. So we're interested, we're listening. We're doing the work to find out what makes sense for us there and we'll keep you posted. Chad Beynon -- Macquarie Research -- Analyst Thank you. And then on the P&L statement, investors are increasingly looking at EPS just given what you're generating and where the stock is trading. I believe there was a tax benefit in Q1. Could you talk to that potential benefit? And then any additional color in terms of will the tax rate start to look similar to what we saw in prior years, given your mix of Singapore and Macau? Thanks. Patrick Dumont -- President and Chief Operating Officer I'll answer this in reverse. Yes, it will look more normal. It was a one-time item. It was related to reversal in Macau, $57 million. But the tax rate will look more normal going forward. Chad Beynon -- Macquarie Research -- Analyst Thanks, Patrick. Appreciate it, guys. Patrick Dumont -- President and Chief Operating Officer No problem. Operator Thank you. The next question is coming from David Katz from Jefferies. David, your line is live. David Katz -- Jefferies -- Analyst Hi. Evening. Thanks for taking my questions. When we look at the Macao strategy in view of the renovations that are going on this year, I would think about, you know, reinvestment credit referral programs that people are talking about. What's your philosophy on those this year? And do you dial them back until next year? Or how should we think about that? Rob Goldstein -- Chairman and Chief Executive Officer I'm just trying to understand your question. Will we dial back our investment programs because we're under renovation? Is that your question? David Katz -- Jefferies -- Analyst That's right. Level of conservatism versus aggressiveness and sort of how you -- Rob Goldstein -- Chairman and Chief Executive Officer No, no. We're not going to -- we will not dial back. We just may not be as aggressive as some of, you know, the competitive pressures on the commercial front right now, it's been talked about quite a bit. We're not believers in that approach. We believe we make our buildings the best in class. We have the scale. We have a lifestyle product. We just believe long-term GGRs will grow. We'll participate in that. We'll be very, very here into good margins, and that's an important part of business. But no, we won't dial back our current reinvestment strategy. We won't necessarily dial it up either to compete in the market right now. So this will be a year of reinvestment, as Patrick and Grant alluded to, both the arena and the Londoner. But we're not going to pull back. If anything, we'll stay consistent. David Katz -- Jefferies -- Analyst Perfect. And I wanted to just ask about, you know, one of the slides we show your maturities, you know forthcoming '25-'26, any sort of updated thoughts about, you know, how or when you're approaching those. And that's it for me. Thanks. Patrick Dumont -- President and Chief Operating Officer Yeah. So you know, we're going to look to deal with. So if you go to Page 32, which is the page I think you're referring to, and you look at the LVS maturities, we should deal with those in short order. That's kind of our intent. And then in August of '25, we have the $8 billion that you see at the SEL level, and we'll address those in due time. We mentioned that we wanted to bring down our total debt level in at SEL given that we borrowed during the pandemic so you'll see us reduce the quantum of debt there. And then as part of the MDS credit facility, we'll address that in course along with the IR2 start. So that's kind of how we'll deal with our capital structure. You'll see us turn that out as we've done previously. David Katz -- Jefferies -- Analyst Perfect. Thanks. Operator Thank you. Next question will be from Daniel Politzer from Wells Fargo. Daniel, you're line is live. Dan Politzer -- Wells Fargo Securities -- Analyst Hey. Good afternoon. Thanks for taking my question. First one on Macau. This is, I think, the second quarter in a row your mass shares declined a little bit. Obviously, there was a lot of different factors this quarter, but if you could kind of maybe give us a little bit more color. Is this really just disruption, heightened promotional levels? Or is there a difference in the customer that you're seeing coming into the market, or maybe something else altogether that's kind of driving the market share shifts we're seeing on the mass side? Patrick Dumont -- President and Chief Operating Officer Yeah. I do want to point out before Grant answers this question, that when we have less revenue because of disruption, we'll have less market share. So I do want to point out that with the arena being out with less revenue and a slightly lower margin because of the impact, having some hotel rooms out, that our market share will be impacted because it's the same thing. So with that, I'll just turn it over to Grant. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. I think it's hard to say which factors. I mean, you have a promotion environment out there that people have been talking about and that Rob reference you have, obviously, the disruptions that we've encountered because of our own projects. But on the other hand, it's also just looking at a very short time period here and there. So yes, our mass revenues were flat for the quarter and the market grew 3%, 4%. But there's also a lot of factors that could have swung our way during the quarter and we would have been much closer to the market growth rate. So I wouldn't draw too big a conclusion from that. If you look at historically how we've sustained our share of EBITDA in a pre-pandemic, the market shares fluctuate, but we always end up back in that low to mid-30s range in terms of EBITDA share. And to be fair, let's look at a longer time frame, let's look at the scorecard for 2023, we achieved 35% EBITDA share against a GGR share of 26%. We were leaders in GGR, yes, but we were, by a much bigger margin, the leader in EBITDA share as well as non-gaming revenues, where we had 41% of the share of the market. So in aggregate, for the year, if you look at revenue gaming, non-gaming EBITDA, I think our performance has been solid. But quarter to quarter, obviously there will be fluctuations depending on those factors that we just discussed. Dan Politzer -- Wells Fargo Securities -- Analyst Got it. And then just for the follow-up, I think you guys have gone up to 71% share of 1928 HK. I mean, can you talk about maybe where that goes over time? Is there an upper limit there and maybe some of the puts and takes to increasing that ownership stake? Patrick Dumont -- President and Chief Operating Officer So I think there's an upper limit of 75% by exchange rules, although they do give waivers based on the size of the equity, depending on the name. For us, I think, as I said before, SEL is investing a lot for the future. It has a bright future ahead of it, and we'd like to own more of it. So you'll see us be aggressive, and I think where we stand, we see value in the stocks today meaningfully. So that is a repeat of what we said before, but I think you understand our conviction. Dan Politzer -- Wells Fargo Securities -- Analyst Understood. Thank you. Rob Goldstein -- Chairman and Chief Executive Officer Thanks, Dan. Operator Thank you. The next question is coming from Colin Mansfield from CBRE Institutional Research. Colin, your line is live. Colin Mansfield -- CBRE Institutional Research -- Analyst Hey, everybody. Thanks for taking my call, and congratulations on getting the last rating up to investment grade during the quarter. Maybe following on to David's question about the refinancing, maybe just an updated thoughts on how you're thinking about the subordinated term loan down at Sands China. And I know there's a lot of liquidity up at the parent, but how are you guys thinking about timing of potentially taking that out of the capital structure down there? And then I have one follow-up on ratings. Patrick Dumont -- President and Chief Operating Officer Sure. I think you'll see us deal with LBS maturities and the SEL 25s before you see any activity around the LVS [Inaudible] term loan down to SEL. The one thing I'd like to point out is that it benefits SEL. It's a very favorable loan and allows them to have high-quality financing deeply subordinated at a favorable rate. So from that standpoint, the maturity is '28, and we'll see how it goes with SEL and what their needs are and kind of go from there. But I think we have ample liquidity up at parent co we believe to do what we need. Colin Mansfield -- CBRE Institutional Research -- Analyst Great. Thanks, Patrick. And then just one follow-up on ratings. I mean, obviously, the company fully back at investment grade now. And I think with the development pipeline that you guys do have ahead of you, I'd just be curious how you're thinking about any sort of change to financial policy as it relates to target ratings. I think this is one of the companies that could eventually get to mid-BBB if you guys so desired. So I guess how do you guys balance any sort of desire to have those levels of ratings as it relates to cost of capital relative to obviously, the development pipeline you have ahead of yourself? Patrick Dumont -- President and Chief Operating Officer Thanks. So I think as we look back pre-pandemic, we spent five years working toward investment grade. We think it's very important for us to actually be investment grade. It gives us access to the largest most liquid debt market in the world, gives us a very efficient cost of capital, which in the long run provides us flexibility, but really drives returns on new projects. We have this investment rate balance sheet. It helps us in new jurisdictions. You heard Rob talk about several of them. We have the financial capability to execute on these projects. Our financial policy always been that we like gross leverage to be between two and three times. You know, we've said this for many years. Nothing has really changed. It's our consistent view. I think over time, we're going to delever just because of EBITDA expansion. If you look what happened at MBS, it occurred, and our belief is that it will continue to occur at Sands China as well. So I think for us, the investment grade is very important. That gross leverage parameter of two or three times is consistent with prior statement, prior practice. And I actually think, you know, we're very favorably levered on a net basis and on a gross basis, and we're looking forward to doing some new development. And I think that will fit within our leverage profile based on sort of the prior discussions that we've had about progression of funding and EBITDA development. So we're very focused on it. We think we can handle our new development, our investment, our existing assets, and have a very healthy return of capital program while balancing all these things and having investment grade balance sheet. That's our goal and that's our view. Colin Mansfield -- CBRE Institutional Research -- Analyst Great. Thanks again, guys, for -- thanks again for taking the question, and congrats again on getting fully back to IHE. Patrick Dumont -- President and Chief Operating Officer Appreciate it. Thanks so much. Answer:

the Sands' first-quarter 2024 earnings call

Operator Good day, ladies and gentlemen, and welcome to the Sands' first-quarter 2024 earnings call. [Operator instructions] It is now my pleasure to turn the floor over to Mr. Daniel Briggs, senior vice president of investor relations at Sands. Sir, the floor is yours. Daniel Briggs -- Vice President, Investor Relations Thank you, Paul. Joining the call today are Rob Goldstein, our chairman and CEO; Patrick Dumont, our president and COO; Dr. Wilfred Wong, executive vice chairman of Sands China; and Grant Chum, CEO and president of Sands China and EVP of Asia Operations. Today's conference call will contain forward-looking statements. We will be making these statements under the safe harbor provision of Federal Securities laws. The Company's actual results may differ materially from the results reflected in those forward-looking statements. In addition, we will discuss non-GAAP measures. Reconciliations to the most comparable GAAP financial measure are included in our press release. We have posted an earnings presentation on our website. We will refer to that presentation during the call. [Operator instructions] This presentation is being recorded. I'll now turn the call over to Rob. Rob Goldstein -- Chairman and Chief Executive Officer Thanks, Dan, and thanks for joining us today. The Macao market continues to grow as it has each in the past five quarters. Since the reopening in early 2023, the annual run rate of the market has grown every quarter from $17 billion in Q1 of last year to $22 billion, then $24 billion and $26 billion, now reaching $28 billion in annualized gaming revenue. We remain confident -- so fully confident in the future growth of the Macao market. I've said in the past, Macao market will grow to $30 billion and then $35 billion and then $40 billion beyond in the years ahead, I remain steadfast in our belief. We remain equally confident in our business strategy to invest in both the quality and scale of our market-leading assets in Macao. Our capital investment programs ensure that we will continue to be the market leader in the years ahead. Our investments position us to grow faster than the market over the long term to grow our share of EBITDA in the market and to generate industry-leading returns on invested capital. Turning to our current financial results for Macao. We delivered a solid result for the quarter despite the disruption of our ongoing capital investment programs. SCL continues to lead the market in gaming and non-gaming revenue and most importantly, in the market share of EBITDA. Because of our market-leading investments, we will capture high-value, high-margin tourism over the long run. We have a unique competitive position in terms of scale, quality and diversity of product offerings. Upon completion of the second phase of the London and our co-tying redevelopment program, our product advantage will be more substantial than ever. Turning to Singapore, we delivered a record quarter. We believe it's a record for the industry. So the team there has done an extraordinary job, and this is what happens when a superior product is located in the proper market. Our financial results in Singapore reflect the impact of our capital investment programs and our service capabilities. The appeal of Singapore as its tourist and destination and the robust entertainment and lifestyle event calendar also contributed to the growth at MBS. As we complete the balance of our investment programs, there will be a lot more runway for growth in the future. Thanks for joining us today. I'll turn it over to Patrick for more details. Patrick Dumont -- President and Chief Operating Officer Thanks, Rob. Macao EBITDA was $610 million. If we had held as expected in our rolling program, our EBITDA would have been higher by $31 million. When adjusted for lower-than-expected holds in the rolling segment, our EBITDA margin would have been 34.4%, or up 380 basis points compared to the first quarter of 2023. This highlights our focus on cost discipline and profitability. The ongoing capital investment programs at The Londoner and at the Cotai Arena had an impact on our results this quarter. The Cotai Arena was closed for renovation in January this year. After the significant reinvestment and renovation, the arena is expected to reopen in November. In terms of the second phase of the Londoner, we have now commenced the room renovation on the first Sheraton. We plan the completion of the first tower by year-end and of the second tower by Golden Week in May of 2025. The renovation of the casino on the Sheraton side of London will commence in May of this year with the reopening scheduled for December of 2024. While there will be ongoing disruption from these capital projects, as these products come online between the end of '24 and the first half of '25, our competitive position will be stronger than ever. The scale, quality and diversity of product will be better than we have ever offered before. They will be unmatched in the market. Turning to Singapore, MBS and EBITDA came in at $597 million, an all-time record for the property and for the industry. Our strong results reflect the impact of high-quality investment and market-leading products. Had we held as expected in our Rolling Play segment, EBITDA would have been $77 million lower. Had we held as expected in the Rolling Play segment, MBS EBITDA margin would have been 49.1%, or 181 -- 180 basis points higher than in Q1 of 2023. We have now completed both Tower 1 and Tower 2 of the Marina Bay Sands hotel refurbishment. While we have substantially completed the original $1 billion capex program, we are still in initial stages of realizing the benefits of these new products. We have now commenced the next phase of our capital investment program at Marina Bay Sands. The $750 million renovation that includes Tower 3. Tower 3 is scheduled to be completed by the second quarter of next year. This will support further growth in 2025 and beyond. Turning to our program to return capital to shareholders. We repurchased $450 million of LVS stock during the quarter. We also paid our recurring quarterly dividend. In addition, LVS has completed the previously announced purchase of $250 million of SCL stock, which increases the parent company's ownership interest in SCL to approximately 71%. We continue to see value in both repurchasing LVS stock and increasing our ownership interest in SCL. We look forward to continuing to utilize the company's capital return program to increase return to shareholders in the future. Thanks again for joining the call today. Now, let's take some questions. Questions & Answers: Operator Thank you.[Operator instructions] And the first question today is coming from Stephen Grambling from Morgan Stanley. Stephen, your line is live. Stephen, your line is live. Stephen Grambling -- Morgan Stanley -- Analyst Hey. Thanks so much. You talked to the March higher for the market in Macau, but this quarter looks like the margin flow through and EBITDA actually went in the other direction. How should we be thinking about flow through in Macau and operating expenses going forward in that market? Patrick Dumont -- President and Chief Operating Officer Yeah. I just want to say one thing before we turn it over to Grant. I think some of this has to do in Macau with some of the disruption that we experienced during the quarter. So when we take the arena in January, we lose the benefit of our entertainment programs during a peak period. That did have an impact. So when you look at our operation, you compare it to Q1 of last year, Q1 of last year, we were coming out of the pandemic and it really took a while for visitation to get started again. This year, unfortunately, we did this to ourselves. We started renovating our arena. It's a very powerful asset. It has lots of entertainment and went through the Chinese New Year period and unfortunately, with some hotel rooms out and the arena out, we felt on the revenue side. So as we've said before, as the market continues to grow, we will do well. We have the best product. We've invested the most in non-gaming assets. We have the most amenities to offer to our patrons and they're very high quality, diversity of retail, diversity of food and beverage, diversity of entertainment, which is very important. Unfortunately, we didn't have that tool this quarter in full swing. We only had the London arena, which is good, but it can't compete with the Cotai Arena. So I think for us, as the revenues continue to grow, as you've seen in prior quarters, our margins will fall in line. And you see that in the Venetian, as the revenues are where they need to be, the margins fall in line as well. So that's sort of the headline from the margin performance this quarter. I do want to turn it over to Grant to see if he has any additional color. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. Thanks, Patrick. I think the most important point is still the GGR is growing in the market, and I think if you look at our profitability, at this level of GGR, I think we should be looking at low to mid-30s in operating margin -- EBITDA margin, and we're right at the high end of the range there. Obviously, each quarter there's seasonality relating to different parts of the business, the revenue mix. So first quarter, I think 34.4% in terms of underlying margin is a really good number. I think 2024 is going to be one that is impacted by our capital works and the renovations that Patrick referenced also in his opening remarks. We have obviously, started the hotel renovation in the first half of Sheraton, and down -- we're probably down about 500, 600 rooms in the first quarter on average in that hotel. But the number of keys that will be out of inventory will increase further in the second and third quarters. And of course, Cotai Arena, as Patrick referenced, that's always been a core part of our content programming, our content offering, and we were able to offer plenty of shows at the London Arena. But if you just compare -- just the sheer number of shows that we had in the first quarter, we had 12 shows compared with the fourth quarter last year, we had 31 shows. It's a big difference. And obviously, in terms of capacity, there's a big difference. So the attendance per show obviously was much higher in the fourth quarter as well. So hopefully, that gives you some color in terms of the disruption that had on our business with the arena being closed for renovation. And as I said, the hotel renovation is ongoing and you're going to see more keys out of inventory in the next couple of quarters. Stephen Grambling -- Morgan Stanley -- Analyst Got it. And maybe one clarification. I guess in the quarter, industrywide, I'm not sure, maybe I missed this in the presentation or I haven't seen the slides, but is VIP -- the VIP actually grew faster than mass overall in the first quarter for the industry. And how are you thinking about base mass versus premium mass from here? I know you kind of touched on this a little bit, but would be curious about the industrywide thought process. Patrick Dumont -- President and Chief Operating Officer Rob, should I take that? Rob Goldstein -- Chairman and Chief Executive Officer Yes. Yes, please. Yes. Patrick Dumont -- President and Chief Operating Officer Yes, you're right. I think if you look at our slides, the mass revenues sequentially would be around 4%, and the overall GGR for the quarter grew at 6% sequentially. So yes, the VIP revenues in the market as a whole grew faster than the mass revenues Q-o-Q. I think in terms of the premium mass versus base mass, again, I think you can see it from our slides. Premium mass grew slightly faster for us in this quarter, but the difference is not material when you account for things like whole percentage and patron counts and so forth. So I wouldn't say, there's a material divergence in the growth rates between premium mass and base mass, and it's part of business for the quarter. Rob Goldstein -- Chairman and Chief Executive Officer I think it's important to note that -- it's important that the visitation still isn't like it to be. Obviously, there's still millions of people have not come versus the 2019 visitation numbers. We believe long-term visitation GGRs did grow, whether it be base or premium, we'll get more than our fair share. And I think we've seen obviously, I'll say the obvious, the promotional situation the market has changed and more people incent doing things. And once everyone starts playing that game, I believe that will resolve itself. We believe that assets will prevail. We believe London will be extraordinary asset much like it's happening in Singapore. I think our results in Singapore reflect a fully developed program and the execution in Singapore shows what can be done. We have the right kind of assets. What we have even done in Singapore the number is extraordinary. The same will happen in our business in Macao in time. As DGOs accelerate and they will, visitation accelerates and it will. We'll continue to be margin-focused, even without focus, and get more than a fair share and assets will prevail over promotions from our perspective. Stephen Grambling -- Morgan Stanley -- Analyst Got it. Thanks. I'll jump back in the queue. Appreciate it. Rob Goldstein -- Chairman and Chief Executive Officer Thank you. Operator Thank you. The next question is coming from Carlo Santarelli from Deutsche Bank. Carlo, your line is live. Carlo Santarelli -- Deutsche Bank -- Analyst Hey, guys. Thank you. Just following up on the first-quarter margins. If I look at the fourth quarter, for example, and kind of extract the big element of turnover rent that comes in and obviously, very high flow through, it looks like margins are probably fairly similar. So it doesn't seem like a lot changed on that front. Is that accurate? Or am I missing something else seasonally there? Rob Goldstein -- Chairman and Chief Executive Officer Primarily you're correct. That's a fair statement to make. The term red does, as you know, as you know to occur in the fourth quarter, and it's material. Grant, do you want to add to that? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yes. It's accurate. You're right. Carlo Santarelli -- Deutsche Bank -- Analyst Great. Thank you. And if I could, just one follow-up on capital allocation. Obviously, over $400 million of buyback in this quarter. As you guys think about the capital needs here going forward, the stuff that you've announced, the stuff that obviously, is being contemplated and looking for budgets around and whatnot. Do you feel like that this pace is adequate and where you want to be as you look throughout the balance of this year? Patrick Dumont -- President and Chief Operating Officer Yeah. So I think first off, I just want to say we see value in both equities. And I think, we have a very long-term bullish view given the market opportunity for growth, our market-leading investments and our assets, and just how we feel about the opportunities in both markets that we have. So as we said before, we're going to be overweight share repurchases. As we think about future capital return, we are going to be more heavily weighted toward share repurchase and dividends. We think the repurchases are going to be more accretive than dividends over time and we want to shrink that denominator. And so I think we're going to look to make purchases that are consistent with our share authorization by the board and with prior practice. And I think we'll look to be a little bit opportunistic. We may vary levels, but I think we're going to continue to be aggressive in the market. I mean, I think you see with the $450 million of LVS shares, the SCL share repurchases, we think this represents an interesting opportunity just a moment in time. And so we're going to try to take advantage of it. We happen to have a very strong balance sheet. We have a lot of liquidity and we tend to put it to use. So I think we're pretty happy with where the program has taken us so far -- both so far and we'll continue to use it and we'll see how it goes across the year. But we're going to look to repurchase more shares. Carlo Santarelli -- Deutsche Bank -- Analyst Thanks for that, Patrick. Just one aside. Guys, I'm not sure the slides are actually posted yet. It certainly could be a user error, but it looks like that they haven't posted yet for the first quarter. Patrick Dumont -- President and Chief Operating Officer Yeah. We're working on it. Carlo Santarelli -- Deutsche Bank -- Analyst Thank you. Operator Thank you. The next question is coming from Joe Greff from J.P. Morgan. Joe, your line is live. Joe Greff -- J.P. Morgan -- Analyst Hey, everybody. I was hoping one of you could maybe help quantify the revenue and EBITDA impact from the renovations going on at Londoner and Cotai Arena. And then do you see that renovation disruption impact accelerating, and when do you start to see that decelerate? I know you kind of talked about the two towers and when they open up, but to kind of help understand that renovation impact in terms of how you're seeing it, and I think would be helpful for everybody. Patrick Dumont -- President and Chief Operating Officer Yeah. I don't know that we can necessarily quantify accurately what the impact was because we can't know what we displaced. You heard Grant describe the number of missing shows and the number of people typically will go to those shows in the Cotai Arena, and you get a sense of the type of high-quality patron that we bring in when we have live entertainment. And it is impactful. I think Q1 typically is a very powerful quarter for us as is Q4, and you kind of see the difference that the impact had for entertainment. We made a decision that if we take the arena offline and do it and make it the high -- one of the highest-quality arenas in Asia, then in the long run, we will benefit from the entertainment. And so we decided to do it as quickly as possible. And so that meant taking it offline in January this year and trying to get it done by October-November. And so once we do that, we're going to have an incredibly high-quality arena with amenities that we've never had before. So it will make us more competitive in the market and actually drive additional high-quality tourism from both traditional markets and other markets and will also help drive high-quality tourism from our core customer base and allow for more repeat visits from our high-value customers. We're very excited about the opportunities this new entertainment asset will present to us. Unfortunately, we're going to take some pain while it's offline, and that really started in January of this year. I can't quantify the exact amount, but you hear the count from Grant and you realize that it is not immaterial. And then the other side is, we're taking the shared it out. And when we're done, it's going to be one of our best properties in Macao. The design will be high-level. The fundamentals of the Sheraton Tower are quite good and both towers are quite good. They're actually a little bit better than the existing Londoner side, believe it or not. The layout of the casino will be very good. The additional food and beverage amenities that we can add. And I think the connectivity will be a very good driver of future results for that property. That's the reason why we're pretty confident that the result, when it's done, will be that or exceed that of the Venetian. So I think for us, we're doing it now. It is going to be disruptive. The worst is going to be across the summer when we have the lowest key count that we've had since we really opened what was then in Sands Cotai Central because we're taking out -- that we're going to take the Sheraton out. And so it's going to be more of this disruption across the summer. But then hopefully, as keys come back online across the phasing, and as we get the arena back, let's call it October-November, we'll have a much more powerful set of assets to drive tourism and create cash flow. So there will be disruption. I can't quantify it for you, but it's not going to be immaterial. Grant, I don't know if you have other things you'd like to add to that. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations I think you covered it perfectly. I think the only thing I supplement is Londoner phase one really gave us that elevation in the shared quality of product, as well as a very successful rebranding and repositioning of the entire property. But what phase two gives us is that scale of high-quality product and the diversity of it. And that's when I think the earnings power of this resort will be fundamentally transformed. Joe Greff -- J.P. Morgan -- Analyst Perfect. And -- Rob Goldstein -- Chairman and Chief Executive Officer I believe what we think once Londoner -- we think once Londoner is done, Joe, we'll have the one and two -- No. 1 and 2 assets in the GALP, by far. Not sure whether they'll be fully in front, but that company really gives us a unique positioning for '25 and the years ahead to dominate the market in terms of the largest resorts and those proper resorts, both one and two. Joe Greff -- J.P. Morgan -- Analyst Great. Thanks, Rob. You may have answered my follow-up question indirectly on your prior margin commentary, and maybe this is something Grant could talk about. But can you talk about the level of the markets, premium mass reinvestment levels? Has that been pretty consistent in the first quarter? And what you're seeing year to date versus how the end of the year finished? Or is there any kind of trend change on that front? That's all for me. Thanks. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Thanks, Joe. For us, yes, our profitability, the structure of a margin in every segment actually, quarter on quarter very consistent. No significant changes there. And that obviously, fed through to the result that the earlier question described, which is that we had a very consistent margin quarter on quarter despite obviously, some inflation in the payroll costs due to holiday pay and salary increases. Joe Greff -- J.P. Morgan -- Analyst Yeah. My question -- maybe I didn't explain it that clearly. The level of premium mass reinvestment from your competitors, how would you characterize that year to date versus the end of last year? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Sorry. You're talking about the overall market now. Joe Greff -- J.P. Morgan -- Analyst Yes. Rob Goldstein -- Chairman and Chief Executive Officer Direct investment invested to customers. Patrick Dumont -- President and Chief Operating Officer I think the promotion activities levels are relatively intense right now. Is it higher than Q4, I don't think so, but it comes and goes and goes up and has ups and downs. But I think over time, there really isn't any necessity in this market to be too aggressive on promotions. The demand and supply, supply constrained market, the quality of supply is exceptional, and we are a big contributor to that. And as GGR rises, that becomes even less of an issue over time. And for us, it doesn't matter. We stick to our strategy, which is as Rob referenced product based is driven off our asset base. The upgrades we're making, the quality of the assets and the services that go with that in addition to the programming -- the content programming, and like we talked about, we're very big believers in that entertainment being co-offering. That's why we're investing this $200 million in the upgrade of Cotai Arena. So -- yeah, when it's all said and done, we believe that GGR continues to rise, our asset base is going to be better than before and better than ever. And that's the way we're going to compete and that's the only way we think we can compete on a sustainable and profitable basis is really based on the quality execution of a product and the service that go with that. Joe Greff -- J.P. Morgan -- Analyst Thank you. Rob Goldstein -- Chairman and Chief Executive Officer Joe, we're obviously, keenly aware of the commercial environment down. We're certainly aware of what's happening with Macao promotions, but we remain steadfast. I believe that our product, once completed, will be superior. The scale is greater. The market will grow, and that's how we'll capture our fair share and remain focused on margins and keeping our EBITDA once again. So we're not going to play the game of chasing $10 more for promotions. We don't think it's our business and who we are. We're an asset-driven company with quality assets and scale. And again, we've proven that time and time again, and once Londoner is done, the arena will be just want to be in terms of market leading and margin of the assets and the cap. Operator Thank you. The next question is coming from Shaun Kelley from Bank of America. Shaun, your line is live. Shaun Kelley -- Bank of America Merrill Lynch -- Analyst Hi. Good afternoon, everyone. Sorry if I'm beating the dead horse here, but I did want to just kind of stick with the margin commentary, but I'll give it a little bit of a longer-term view. My question is really just trying to get a sense of what would it take to get back to let's call it the mid to high thirties on margins here. Is what we're seeing today and now increasingly expecting for the balance of '24 more about customer mix? Or is it about sort of one time callouts around renovations and maybe some lost very high-margin non-gaming revenue? Patrick Dumont -- President and Chief Operating Officer So it's a very interesting question, and it's the right question to ask. So as these properties reach run rates so as they reach their full potential, the margin should be upper 30s [Inaudible] Sorry. I think someone in Sands China put us on hold. Please excuse us. So we think about margins in the upper thirties. If you look at the performance of the Venetian, that's a good benchmark, right? It was impacted a little bit this quarter, again, also by the entertainment not being there in the Cotai Arena, but -- and mix-wise, to be fair, pre-pandemic, it had more mass play and that's a higher margin. And so as tourism returns, so as visitation increases, which has more mass play, and we have plenty of capacity for it. So if you look at our asset base, the scale of the assets, the food and beverage we have, the amenities we have, we can accommodate a lot of mass play, and we have the positions to do it. And so for us, as visitation shows up and continues to on an upward trend, our assets are ready to take that visitation, revenue will grow, margins will grow, and they will normalize back toward a more traditional mix. That being said, the Londoner has the opportunity to also bring a lot of high-value tourism. So we're carrying the expense base without the revenue, right? So we have the team members, we have the -- we have all the things going on that you have, that we're fully operating, but it's not fully operating at. So the margins naturally are not going to look right. So as the revenue comes in and as the visitation comes in, as the patrons come in, as the hotel is completed, and as the rest of the amenities are done, that will look more normal. The only problem is it's in '25. So we have a little bit of time that we have to get through with this investment. Are there some high-value things that are very high margin that we're missing because of entertainment or keys out, yes, that's true. But when you look at the asset base that we have, the experience that we have, the team that we have there, their ability to execute and how they've executed so far, and the asset base that we're creating with these investments, we're going to be in a great position. And the margins, we believe, will get there. So we need visitation to continue. That will be helpful for the Venetian. It'll be helpful for the mass to recover. We need to have all of our assets in line. So that's the Cotai Arena to be finished and the Sheraton to become fully Londonerized, that's a word, and get to our full key count. And then you'll see the true power of these assets and the margins will get there. We have a lifestyle program that we run with high-quality amenities. If you haven't been to Macau and you haven't seen what we've done, I would encourage you to do it. It's not simply one thing. It's not simply hospitality. It's not simply gaming. It's not simply retail. It's an ecosystem that allows our customers to travel around all of our assets and have an experience they can't get anyplace else. And that's really what we have on offer and it's unique, and it's been invested in and it will continue to get better. So for us, as Rob said, we're not chasing promotional activity. We're chasing asset development, and that will drive our success. Shaun Kelley -- Bank of America Merrill Lynch -- Analyst Thanks, Patrick, and appreciate the insight. As a quick follow-up for whoever as appropriate. Just looking at Singapore, I mean, obviously, a breakout quarter with a run rate above $500 million. There were some one time things in that market, Taylor Swift, I believe, being one and then, of course, which I think you called out event activity broadly speaking. But also there's a change in, I think, Chinese visa policies that was probably potentially fruitful for the market. So just the big question here is, what's the right run rate? And do you think again, maybe event activity agnostic we could sustain above the $500 million mark? And are we kind of off to the race here? And notwithstanding the fact that even that number sounds like it included a little bit of tower three disruption. Rob Goldstein -- Chairman and Chief Executive Officer I think the first thing you should note is that the building is still under renovation. I think we believe $500 million a quarter annualized is very durable and more. And the most important thing you should note is two things. The growth in Singapore as a desirable destination is soaring. It's not just Taylor Swift. It's Bruno Mars. It's the Hamilton show. It's endless events, F1. It's a juggernaut. And really, it's become accelerated. This market has become very special in a very short order. And I think that's attributed to government there and the programs happening, entertainment, etc. So Singapore is highly desirable, and yes, that's very sustainable. And as good as Taylor Swift was, there's a lot more in the pipeline that will make that continue. Secondly, our building has less than 200 top-tier suites. Upon completion, we'll have an excess of 700. The suite-spot on the market is the premium mass and super premium mass, rolling, non-rolling. We can't -- I think we're almost approaching a billion dollars a slot when we may be out of bullets there as we get more capacity. But this is a very special market. Our building is a special building. I don't think there's any reason to doubt that 520, 540, 600. Look, this may keep growing. This is a great place to be. We're lucky to be there. We're lucky that the government is very supportive and excellent team in place. But most importantly, the assets, it didn't happen by luck. We are doing -- spending a lot of money to make sure those assets are superb and the customers come back time and time again. The real question is what happens when the building has four wheels instead of three? That's going to happen later this year, in early 2025, when those suites are rolled out and they are great suites. They are phenomenal suites. Can that building go to two-two, two-four, two-five, it can and it will. And I think, again, what we're trying to tell you about Macau is we're frustrated by Macau. The operating environment is more difficult. We're under construction a self-inflicted wound. But once we emulate in Macau and we've done in Singapore, the same thing will prevail. Londoner I wish neck and neck to drive that market. And again, I think the government recently talked about a lot of things they're trying to do. Increase tourism and visas, etc. We see a real nice support system coming out of now, and we're grateful to the government for recognizing a session this week about increased tourism, increased entertainment. We're lucky to be in two very, very special places, and, yes, Singapore can do 500, they can do 550. It's not about Taylor Swift. It's about a great market, a great asset, and a team running it. Shaun Kelley -- Bank of America Merrill Lynch -- Analyst Thank you. Operator Thank you. The next question is coming from Robin Farley from UBS. Robin, your line is live. Robin Farley -- UBS -- Analyst Great. Thanks. I just wanted to circle back. You were commenting earlier and the slides were not up yet so I haven't been able to go through them. But it sounded like you were saying that your sequential growth in mass and premium were both at a similar rate sequentially. And just wondering if there's anything to add any color around that since, you know, the market has generally speaking been seeing better premium mass recovery. Just any color you'd add there. Patrick Dumont -- President and Chief Operating Officer Grant, I think you should take that. Grant? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah, Robin. I don't know if the deck is up. Patrick Dumont -- President and Chief Operating Officer It's up now. Rob Goldstein -- Chairman and Chief Executive Officer It's up now, I mean. Patrick Dumont -- President and Chief Operating Officer It's up, guys. Yes. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. So if you look at a premium mass win, we're up 2% quarter on quarter, and base maths were down 3% quarter on quarter. But I think my point earlier is the difference that's here and there could be related to any number of I think non-substantive factors. So I wouldn't describe this as a divergence in trend, but this quarter we just did slightly better in premium mass versus base mass. Visitations continue just like see the wider market growing. Our property visitations actually grew sequentially as well. So nothing significant to remark on in terms of the segment divergence. Robin Farley -- UBS -- Analyst OK. Great. That's helpful. Thank you. And just any thoughts around New York timing and your expectations there? Sort of anything new to add there? Thanks. Patrick Dumont -- President and Chief Operating Officer Yeah. But we're very disappointed by New York. I mean, we've been working there for a long time and we thought it was going to happen in '24. That was the state. Now they're saying '25 or '26, but I don't think we have any real clarity. And to be honest with you, it's confusing and disappointing because we've done a lot of work in New York and a lot of time into it. So I have no guidance because I don't really know what to tell you with candor and insight. Just don't know about New York. And it's just wish -- we wish they figured it out and let us know. We just don't know. So we'll remain hopeful that things turn around there. Robin Farley -- UBS -- Analyst OK. Great. Thank you. Rob Goldstein -- Chairman and Chief Executive Officer Thanks, Robin. Operator Thank you. The next question is coming from Vitaly Umansky from Seaport. Vitaly, your line is live. Vitaly Umansky -- Seaport Research Partners -- Analyst Hi. Good morning, guys. I think maybe switching over to Singapore if we think about kind of the quantifying the effect of what the renovations at that property have already done, and Rob, you talked about potentially this property getting up to about $2.4 billion, $2.5 billion. In theory, once the renovations are done in the first phase of the property, where do we see kind of constraints being built in? Because if you look at kind of occupancy rates in the hotel rooms today and we look at ADRs, they continue to expand. At some point, we're going to reach a limit as to how many rooms can be filled, and then we're talking about trying to fill rooms with higher-value customers. So when we think about before we get to the expansion, where is that constraint, and how quickly do you think we can get there? Rob Goldstein -- Chairman and Chief Executive Officer It's a good question. I think unfortunately, it's probably an answer that we've seen that we never dreamed slots with a billion dollars on property that they're approaching that. We never dreamed that in this environment. So quickly after COVID, we reached the kind of epic levels we're seeing. The growth in the premium mass is powerful and I was enjoying Grant on the call last week telling us it's still a drop in the bucket. There's so much more to go. And so I think the growth will come out of this super premium mass, both rolling, non-rolling. I don't think ADR is all that impactful because hopefully someday we won't sell many rooms. This will be a product that is mostly gaming customers in the rooms. I hope the suites we're building are just exemplary. And I think that this product is only going to have more good days ahead. I used to do five as a goal for our Company as the decade progresses and it's very attainable. It reached $600 million almost this quarter in actual is very stimulating. It's very exciting. But the cash in capacity, it's already a problem for us in terms of slot machines. It will be a room problem. We wish you had more exposure to Singapore that's why we're building more products. This is a very, very special place that people gravitate to. And as Singapore does its job as a lifestyle, entertainment, exciting place to visit, demands have grown. So the only concern we have in Singapore is how quickly we get there. Once these fleets are unleashed in the market, they see it. I think we'll have some very bright days ahead. But obviously, it's a capacity constraint. You only have so many rooms, only have so many slot machines, and I don't worry about getting there. I just think we get there, we'll be disappointed can't have more exposure, and that's why we're building phase two. Patrick Dumont -- President and Chief Operating Officer Hey, Vitaly. One thing, and welcome back to the call. I think the key thing for us is we have a very strong view of the future success of Singapore. So strong that we're investing a couple of billion dollars in this property and we're looking to do IR2 as quickly as we can. We think that this market is benefiting from a lot of the factors that make Singapore, great infrastructure, strong, stable government, great investment, great policy. And to be fair, you're seeing the result of it. And it's only our business, as many businesses in Singapore. And so I think that that's a very helpful indicator. But more importantly, the more other investment that goes into Singapore will help drive further visitation. So the infrastructure is already there. The real question is how many more hotel rooms will go in. We feel very strongly that the more hotel rooms are added will help add to the critical mass of tourism that Singapore already has today. If you look at the wealth creation going around in Southeast Asia, it's pretty substantial. The last four years, even during the pandemic and they're pretty meaningful. And there are a lot of customers that are new to Singapore, new to Marina Bay Sands, and they're affluent and very successful, and they want to consume and they want to take advantage of the Singapore -- things Singapore has on offer. And so we feel very strongly about the future visitation in Singapore. It's an interesting question, where is the peak of demand? We don't really see it right now. What we see is a supply constraint, right? When you look at who is trying to come to Singapore and the activities that are going on, we feel very strongly about future investment. We think it's there. Vitaly Umansky -- Seaport Research Partners -- Analyst Thanks, Patrick and Rob. Maybe just a follow-up, switching gears to Macau. And Grant, you talked a little bit about kind of the base mass and the growth you've seen in the quarter is very similar to premium. But I think overall, if we kind of think about sands in Macau, obviously, you're very strong in the direct VIP business, you're very strong in the premium business, but where you have a massive competitive advantage? In my view, it's just your scale, which then talks about base mass and the higher margin available from base mass. If you look at the recovery in overall base mass, it has not been as strong as the more premium end of the market. Can you maybe give an explanation as to why you think that is, if you agree with that statement, and then how does the market maybe change, or need to change over the next couple of quarters in order to get some of that base mass back, which I think would benefit Sands relative to others in a much stronger way? Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yes. Thanks. Patrick Dumont -- President and Chief Operating Officer Grant, go ahead. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. Yeah, sure, Patrick. Yeah, I'll take it. And I think first point is your -- I agree we have a huge advantage with our scale, but I think the scale advantage speaks to all the segments. I think if you looked at historically, how the company has developed absolutely the base mask with our scale, that has been a core advantage. But in the sense of how we described all of these capital investments that we're making, especially in Londoner, the scale we have on the quality of the premium product is really unprecedented. So I think scale advantage will apply to all segments, in my view. Specifically on base mass, if you look at our actual numbers, the way we break it out between premium mass and base mass through the recovery since the reopening after the COVID restrictions, actually they're not too dissimilar now in terms of rate of recovery from a volume and revenue perspective. But it is true that in terms of customer count patron hours, we're still missing more from the base mass. So really it's two things it tells you. One is the quality of patronage has risen significantly because the revenue per patron is higher than before COVID. And secondly, there is still room for that base mass revenue and visitation to further recover. And I think there are many reasons and it's hard to specifically attribute to one or two factors, but I think over time, especially as the economy improves and also so I think people -- the distribution of content in terms of the lifestyle, the destination attractions, all of the events, all of the non-gaming products and assets and events that are actually distributed out there, I think you see a progressive improvement in that base mass segment. And obviously, we will be -- obviously, best placed to capture that growth when that comes. Vitaly Umansky -- Seaport Research Partners -- Analyst Thanks, Grant. That's helpful. Operator Thank you. The next question is coming from Chad Beynon from Macquarie. Chad, your line is live. Chad Beynon -- Macquarie Research -- Analyst Afternoon. Thanks for taking my question and thanks for posting the slides. On Slide 44, the flags of interest remain the same as what we've seen in the past couple of decks, Macau, Singapore, New York, and you've talked through all these. There's been some recent discussions around Thailand and some even think that an integrated resort could open in Thailand, maybe even ahead of Japan. So wondering if you could opine on your views. I know early, but could this market be big enough? Could a resort generate the cash flow meaningful enough for you guys to look at the market? Any views there? Thanks. Rob Goldstein -- Chairman and Chief Executive Officer Yeah. We absolutely have interest in Thailand. To your point, it could happen quicker than Japan. I think it's conceivable. It's early days, though we still have work to do with the numbers and understanding it. It's a very, very exciting market in a lot of levels, and just the sheer size of population, the accessibility and the willingness of people travel to Thailand, it's obviously, I think, No. 1 resort destination city in Asia. So yeah, we're very interested. But again, it's early days. I agree with your comments. It could be faster than Japan, which is possible. Certainly, there's usually a lot of pent-up desire from both business and government to work toward us. So we're interested, we're listening. We're doing the work to find out what makes sense for us there and we'll keep you posted. Chad Beynon -- Macquarie Research -- Analyst Thank you. And then on the P&L statement, investors are increasingly looking at EPS just given what you're generating and where the stock is trading. I believe there was a tax benefit in Q1. Could you talk to that potential benefit? And then any additional color in terms of will the tax rate start to look similar to what we saw in prior years, given your mix of Singapore and Macau? Thanks. Patrick Dumont -- President and Chief Operating Officer I'll answer this in reverse. Yes, it will look more normal. It was a one-time item. It was related to reversal in Macau, $57 million. But the tax rate will look more normal going forward. Chad Beynon -- Macquarie Research -- Analyst Thanks, Patrick. Appreciate it, guys. Patrick Dumont -- President and Chief Operating Officer No problem. Operator Thank you. The next question is coming from David Katz from Jefferies. David, your line is live. David Katz -- Jefferies -- Analyst Hi. Evening. Thanks for taking my questions. When we look at the Macao strategy in view of the renovations that are going on this year, I would think about, you know, reinvestment credit referral programs that people are talking about. What's your philosophy on those this year? And do you dial them back until next year? Or how should we think about that? Rob Goldstein -- Chairman and Chief Executive Officer I'm just trying to understand your question. Will we dial back our investment programs because we're under renovation? Is that your question? David Katz -- Jefferies -- Analyst That's right. Level of conservatism versus aggressiveness and sort of how you -- Rob Goldstein -- Chairman and Chief Executive Officer No, no. We're not going to -- we will not dial back. We just may not be as aggressive as some of, you know, the competitive pressures on the commercial front right now, it's been talked about quite a bit. We're not believers in that approach. We believe we make our buildings the best in class. We have the scale. We have a lifestyle product. We just believe long-term GGRs will grow. We'll participate in that. We'll be very, very here into good margins, and that's an important part of business. But no, we won't dial back our current reinvestment strategy. We won't necessarily dial it up either to compete in the market right now. So this will be a year of reinvestment, as Patrick and Grant alluded to, both the arena and the Londoner. But we're not going to pull back. If anything, we'll stay consistent. David Katz -- Jefferies -- Analyst Perfect. And I wanted to just ask about, you know, one of the slides we show your maturities, you know forthcoming '25-'26, any sort of updated thoughts about, you know, how or when you're approaching those. And that's it for me. Thanks. Patrick Dumont -- President and Chief Operating Officer Yeah. So you know, we're going to look to deal with. So if you go to Page 32, which is the page I think you're referring to, and you look at the LVS maturities, we should deal with those in short order. That's kind of our intent. And then in August of '25, we have the $8 billion that you see at the SEL level, and we'll address those in due time. We mentioned that we wanted to bring down our total debt level in at SEL given that we borrowed during the pandemic so you'll see us reduce the quantum of debt there. And then as part of the MDS credit facility, we'll address that in course along with the IR2 start. So that's kind of how we'll deal with our capital structure. You'll see us turn that out as we've done previously. David Katz -- Jefferies -- Analyst Perfect. Thanks. Operator Thank you. Next question will be from Daniel Politzer from Wells Fargo. Daniel, you're line is live. Dan Politzer -- Wells Fargo Securities -- Analyst Hey. Good afternoon. Thanks for taking my question. First one on Macau. This is, I think, the second quarter in a row your mass shares declined a little bit. Obviously, there was a lot of different factors this quarter, but if you could kind of maybe give us a little bit more color. Is this really just disruption, heightened promotional levels? Or is there a difference in the customer that you're seeing coming into the market, or maybe something else altogether that's kind of driving the market share shifts we're seeing on the mass side? Patrick Dumont -- President and Chief Operating Officer Yeah. I do want to point out before Grant answers this question, that when we have less revenue because of disruption, we'll have less market share. So I do want to point out that with the arena being out with less revenue and a slightly lower margin because of the impact, having some hotel rooms out, that our market share will be impacted because it's the same thing. So with that, I'll just turn it over to Grant. Grant Chum -- CEO and President of Sands China and EVP of Asia Operations Yeah. I think it's hard to say which factors. I mean, you have a promotion environment out there that people have been talking about and that Rob reference you have, obviously, the disruptions that we've encountered because of our own projects. But on the other hand, it's also just looking at a very short time period here and there. So yes, our mass revenues were flat for the quarter and the market grew 3%, 4%. But there's also a lot of factors that could have swung our way during the quarter and we would have been much closer to the market growth rate. So I wouldn't draw too big a conclusion from that. If you look at historically how we've sustained our share of EBITDA in a pre-pandemic, the market shares fluctuate, but we always end up back in that low to mid-30s range in terms of EBITDA share. And to be fair, let's look at a longer time frame, let's look at the scorecard for 2023, we achieved 35% EBITDA share against a GGR share of 26%. We were leaders in GGR, yes, but we were, by a much bigger margin, the leader in EBITDA share as well as non-gaming revenues, where we had 41% of the share of the market. So in aggregate, for the year, if you look at revenue gaming, non-gaming EBITDA, I think our performance has been solid. But quarter to quarter, obviously there will be fluctuations depending on those factors that we just discussed. Dan Politzer -- Wells Fargo Securities -- Analyst Got it. And then just for the follow-up, I think you guys have gone up to 71% share of 1928 HK. I mean, can you talk about maybe where that goes over time? Is there an upper limit there and maybe some of the puts and takes to increasing that ownership stake? Patrick Dumont -- President and Chief Operating Officer So I think there's an upper limit of 75% by exchange rules, although they do give waivers based on the size of the equity, depending on the name. For us, I think, as I said before, SEL is investing a lot for the future. It has a bright future ahead of it, and we'd like to own more of it. So you'll see us be aggressive, and I think where we stand, we see value in the stocks today meaningfully. So that is a repeat of what we said before, but I think you understand our conviction. Dan Politzer -- Wells Fargo Securities -- Analyst Understood. Thank you. Rob Goldstein -- Chairman and Chief Executive Officer Thanks, Dan. Operator Thank you. The next question is coming from Colin Mansfield from CBRE Institutional Research. Colin, your line is live. Colin Mansfield -- CBRE Institutional Research -- Analyst Hey, everybody. Thanks for taking my call, and congratulations on getting the last rating up to investment grade during the quarter. Maybe following on to David's question about the refinancing, maybe just an updated thoughts on how you're thinking about the subordinated term loan down at Sands China. And I know there's a lot of liquidity up at the parent, but how are you guys thinking about timing of potentially taking that out of the capital structure down there? And then I have one follow-up on ratings. Patrick Dumont -- President and Chief Operating Officer Sure. I think you'll see us deal with LBS maturities and the SEL 25s before you see any activity around the LVS [Inaudible] term loan down to SEL. The one thing I'd like to point out is that it benefits SEL. It's a very favorable loan and allows them to have high-quality financing deeply subordinated at a favorable rate. So from that standpoint, the maturity is '28, and we'll see how it goes with SEL and what their needs are and kind of go from there. But I think we have ample liquidity up at parent co we believe to do what we need. Colin Mansfield -- CBRE Institutional Research -- Analyst Great. Thanks, Patrick. And then just one follow-up on ratings. I mean, obviously, the company fully back at investment grade now. And I think with the development pipeline that you guys do have ahead of you, I'd just be curious how you're thinking about any sort of change to financial policy as it relates to target ratings. I think this is one of the companies that could eventually get to mid-BBB if you guys so desired. So I guess how do you guys balance any sort of desire to have those levels of ratings as it relates to cost of capital relative to obviously, the development pipeline you have ahead of yourself? Patrick Dumont -- President and Chief Operating Officer Thanks. So I think as we look back pre-pandemic, we spent five years working toward investment grade. We think it's very important for us to actually be investment grade. It gives us access to the largest most liquid debt market in the world, gives us a very efficient cost of capital, which in the long run provides us flexibility, but really drives returns on new projects. We have this investment rate balance sheet. It helps us in new jurisdictions. You heard Rob talk about several of them. We have the financial capability to execute on these projects. Our financial policy always been that we like gross leverage to be between two and three times. You know, we've said this for many years. Nothing has really changed. It's our consistent view. I think over time, we're going to delever just because of EBITDA expansion. If you look what happened at MBS, it occurred, and our belief is that it will continue to occur at Sands China as well. So I think for us, the investment grade is very important. That gross leverage parameter of two or three times is consistent with prior statement, prior practice. And I actually think, you know, we're very favorably levered on a net basis and on a gross basis, and we're looking forward to doing some new development. And I think that will fit within our leverage profile based on sort of the prior discussions that we've had about progression of funding and EBITDA development. So we're very focused on it. We think we can handle our new development, our investment, our existing assets, and have a very healthy return of capital program while balancing all these things and having investment grade balance sheet. That's our goal and that's our view. Colin Mansfield -- CBRE Institutional Research -- Analyst Great. Thanks again, guys, for -- thanks again for taking the question, and congrats again on getting fully back to IHE. Patrick Dumont -- President and Chief Operating Officer Appreciate it. Thanks so much.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings, and welcome to the Mobileye's first quarter 2024 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves, chief communications officer. Please, you may begin. Dan Galves -- Chief Communications Officer Thanks, Maria. Hello, everyone, and welcome to Mobileye's first quarter 2024 earnings conference call for the period ending March 30th, 2024. Please note that today's discussion contains forward-looking statements based on the business environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today, as always, are Professor Amnon Shashua, Mobileye's CEO and president; and Moran Shemesh, Mobileye's CFO. Also joining today for the Q&A session is Nimrod Nehushtan, Mobileye's executive vice president of strategy and business development. Thanks, and now I'll turn the call over to Amnon. Amnon Shashua -- Founder and Chief Executive Officer Hello, everyone, and thanks for joining our earnings call. From a revenue and income perspective, Q1 was fully aligned with the outlook we provided in January, and I'm pleased that the inventory consumption is tracking as we expected. Based on information from our tier 1 customers and our own analysis, we believe that 70% to 75% of excess inventory was consumed in Q1 this year. Adjusting for that, as well as some level of inventory growth in Q1 of last year, our volume growth, the core ADAS would have been mid-single digits, which is very solid performance in the current environment. In terms of business development and executing on our strategy, we continue to make meaningful progress across our portfolio. This starts with our eyes on hands-on ADAS business and extends throughout our advanced product portfolio, including SuperVision, Chauffeur, and Drive. Starting with eyes on hands-on systems or what we generally refer to as base and cloud-enhanced data. Our [Inaudible] of this business has always been about providing incremental safety features to meet the constantly expanding regulatory and rating requirements while leveraging scale and purpose-built hardware to maintain a consistent overall cost to the automaker. In Q1, we had our best-ever design win quarter for base on cloud-enhanced ADAS, generating 26 million units of future projected volume across many OEMs and all key geographic regions. Design win activity -- so you shouldn't annualize this number, but we believe this should address any open questions on whether the excess inventory indicated some weakening of our position and opportunities for continued growth. It did not. We believe the key driver of this elevated design win volume was the start of production of our next-generation high-volume ADAS chip, the EyeQ6L. This system on chip tax is 4.4 times the processing power of its predecessor, the EyeQ4, into half the packaging side and supports many incremental safety and convenience features that are aligned with the global regulatory and EnCap safety rating roadmap for the next many years to come. And this was accomplished without any material price increase to our customer or cost increase to Mobileye. Turning to Mobileye's advanced product portfolio, we see three waves of future growth. Initially, eyes-on, hands-free navigation, on-pilot through SuperVision. This system is in production now with more than 200,000 systems on the road and has customer wins that imply significant scaling over the next few years. Progressing toward eyes-off, we have Chauffeur for consumer-owned vehicles and drive for network-deployed driverless vehicles. Each are still development that have serious production wins that will begin to scale in 2026. From a revenue per unit perspective, we believe these products can accelerate our growth in a meaningful manner. For example, our future projected revenue from design wins in 2023 was $7.4 billion. Approximately 40% of this future projected revenue was accounted for by SuperVision and 20% by Chauffeur. Yet those products combined accounted for only 4% of the future volume. Over the last 12 months, we have observed an increasing consensus among automakers that eyes-on, hands-free across a broad operational domain is a must-have feature to be competitive over the rest of the decade and beyond. What's new since the start of the year is that we have seen a diffusion of this interest from primarily premium brands to more mainstream brands. We have also seen additional prospects reach out to mobilize due to challenges with their current direction, whether that was fully in-house development or collaboration with our competitors. We now have design wins or in advanced discussions with 14 OEMs representing 46% of the industry production as compared to 11 OEMs representing 37% of industry production at the end of 2023. We continue to make steady progress with more mature prospects. We have been working with since mid to late 2023 and see the likelihood of converting a number of these during the second half of 2024. In the aggregate, Mobileye is now bidding on RFQs representing a multiple of the approximately $4.5 billion of pipeline revenue generated in 2023 from SuperVision and Chauffeur design wins. There are several reasons for this significant expansion in interest and I will elaborate on five driving factors. Number one, the public announcement by Volkswagen Group for their alignment with our SuperVision, Chauffeur, and Drive products was very important, both in terms of a large global OEM moving forward on these product categories with conviction and an endorsement of our capability and ability to execute. As expected, the announcement led to incremental traction with other OEMs. Number two, we believe that Mobileye has significant and somewhat unique advantages in delivering an optimal balance of performance and cost. Our SoC cost is a fraction of competing high-end SoCs and very importantly, our SoC comes with the full software stack validated for production readiness with a proven record of quality. Moreover, REM enables geographic scalability at very low cost. Overall, our eyes on hands-off performance is best in class, despite running on low-cost silicon and requiring many fewer sensors than competition. Number three, as EyeQ6 High approaches production in mid-2025, we are now able to utilize late-stage SoC and ECU samples in testing. The software stack built to run on these next-generation ECUs includes state-of-the-art, novel artificial intelligence systems, including end-to-end perception and end-to-end actuation, running in parallel for purpose of redundancy to the networks powering our current generation of SuperVision. Our target for the camera-based subsystem for perception is 1,000 hours of driving on highway roads without intervention and our testing show that we are on the right path of achieving those targets. I would mention that those meantime between intervention targets are expected to be industry-leading at quite a large gap. We believe that – number four, we believe that SuperVision provides a validated bridge to a true eyes-off system across a wide domain, which is seen by many OEMs as a true value driver long-term. But the performance requirements for eyes-off are really underappreciated by the public and also by certain OEMs who are throwing everything they have at an eyes-on system with seemingly no clear plan on how to boost meantime between failure from one safety intervention every few hours to one every hundreds of thousands of hours. Mobileye on the other hand has a unique methodology and offering, including crowdsourced mapping that boost perception of performance, boost perception performance, redundant perception layers, a market-leading imaging radar to support our True Redundancy concept, RSS, and purpose-built efficient-compute. These areas of vertical integration experience in our view are considerable assets. Number five, we have already seen an initial positive impact from Tesla's decision to double down FSD and Robotaxi, which adds to the desire for other OEMs to have competitive offerings but also is seen as an area where our legacy customers can utilize Mobileye's strength to introduce far-reaching intelligence-driving systems. Overall, I'm very pleased with the progress of our technology and business building with OEMs. I look forward to more updates through the year and now turn the call over to Moran. Moran Shemesh -- Chief Financial Officer Thank you, Amnon, and thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurements. The primary exclusion in Mobileye's non-GAAP numbers is amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017. We also exclude stock-based compensation. Starting with Q1 results, they were closely aligned with the Q1 outlook we provided back in January. I'll provide a brief summary and then get into a bit more detail. The severe year-on-year decline in the key metrics was almost exclusively isolated to EyeQ volumes, which were impacted by the inventory correction. During the quarter, we delivered 3.5 million EyeQs. In addition to these new shipments, our customers use a significant EyeQ inventory to satisfy the demand for our products during the quarter. The approximately 4.6 million units year-over-year decline, which converted at our high gross margin, especially accounting for substantially all the reduction in gross profit. Our cost is nearly all variable. The fixed component is very minimal. The balance of the year-over-year decline in operating income was driven by some growth in operating expenses, but this was relatively minor. And our operating expenses do not flex with revenue, as R&D spending is correlated with the execution of our advanced product strategy and is not impacted by short-term fluctuations in revenue. Behind the volume decline, we also saw some modest decline in EyeQ ASP and gross margin related to mix. SuperVision was pretty strong in the quarter. We delivered 39,000 units, compared to 25,000 units in the year-ago period. This was above expectation that this was due to timing. We continue to see the first-half deliveries totaling around 70,000 units, in line with our initial expectations, but with Q1 slightly higher than expected, Q2 is slightly lower. So far we see gross margin improved somehow in Q1, both sequentially and year-over-year. The more meaningful increase into the low 40 range is expected in Q2 as close to 1% of our volume will be with the new low-cost domain control. On the overall blended gross margin basis, the lower-than-normal percentage was related to the fact that SuperVision was around 20% of revenue in Q1, compared to an average of 6% in 2023 calendar year. While SuperVision volumes grew year over year, the mix of SuperVision was exaggerated by the temporary reduction in EyeQ volume in the quarter, which will return to more normalized level in Q2 and even more so in the back half. Despite the operating loss, operating cash flow was modestly positive in the quarter. One item to note here is that our balance sheet inventory rose sequentially. This has nothing to do with inventory at the tier 1 customers. Our balance sheet inventory rose modestly due to lower shipment in the quarter and the need to maintain somehow steady purchasing of EyeQ chip over the course of the year. By the end of 2024, we would expect our balance sheet inventory to be consistent with the 2023 year-end figure. Looking ahead, we believe that the inventory consumption process is on track. At this point, the vast majority of Q2 volume is based on binding purchase orders from our customers. There is quite some level of uncertainty regarding timing of late-quarter shipments, but we are comfortable in projecting approximately 7.4 million units, up more than 100% as compared to Q1. Based on our in analysis and information from our customers, we expect that the inventory at our tier 1 customers will be back around normal orders by end of Q2. Please note that we may not continue to give as much specification on quarterly unit volume outlook, but given the unusual cadence of this year we feel is worthwhile. We expect gross margin to move higher to around 67% and for operating expenses to continue to grow steadily on a sequential basis. Overall, our revenue and adjusted operating income expectation for Q2 are well aligned with the current analyst consensus. In terms of the full-year guidance, it is unchanged from the outlook we provided on January 25. From a volume perspective, we are assuming 31 million to 33 million EyeQ shipments and 175,000 to 195,000 SuperVision in shipments in 2024. On the EyeQ side, the midpoint of our guidance implies around 21 million units in the back half. This is supported by regularly updated indication from our customers, which have been quite stable over the last couple of months. And it also appears to be reflective of the true level of demand in the back half of 2024 based on our own analysis of OEM production forecast. If we isolate average system price for the single-chip EyeQ business, we expect it to be down slightly in 2024 on a year-over-year basis, consistent with our view in January. The modest weakening in vehicle mix that impacts us somehow in 2023 is expected to continue in 2024. This is compared to a very rich mix we saw in 2021 and 2022 due to overall automotive industry production constraints. Higher-priced chips for cloud-enhanced ADAS and other advanced programs are providing an offer, but we do not view this tailwind as very materially in 2024. As [Inaudible] volumes are still not a meaningful portion of the total and the base of vehicles paying us annual REM-related license payments continue to build. On the SuperVision side, these volumes can be more difficult to precisely predict given that we are currently on five models that are all in the EV space, which has been in a period of volatility. Increase in volumes in the second half of 2024 versus the first half of 2024, is supported by several factors, including, number one, the recent mid-cycle refresh of ZEEKR 001, which caused a significant uptick in demand; number two, incremental scaling of Zeekr 001volumes in Europe; number three, an additional version of the Zeekr 009 with enhanced features; number four, we start, of course, our four deliveries in Europe and U.S. in the second half; and number five, continued ramping of Smart number one in Volvo EM90 volumes. On a total company basis, we expect average system price to rise to approximately $55 in 2024 from $53 in 2023 based on SuperVision growth. We expect gross margin in the range of 67% to 68% range for the remainder of the year based on current expectations for the mix of SuperVision in EyeQ revenue. We continue to expect adjusted operating expenses to grow approximately 25% on a year-over-year basis as we execute on our advanced product portfolio in preparation for substantial numbers of SuperVision and Drive product launches in upcoming years. And we continue to believe that our operating expenses in the near or long term should be structurally lower than we expected as of a year ago, and that opex percentage growth in 2025 and beyond should be significantly lower than in 2024. Lastly, in terms of tax rate, we continue to assume a non-GAAP effective tax rate of 15% and 17% for 2024 in comparison to 11% in 2023. Thank you, and we will now take your questions. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from James Picariello with BNP Paribas. Please proceed with your question. James Picariello -- Exane BNP Paribas -- Analyst Good morning, everybody, or good evening, good afternoon. So just on the gross margin guide, so was it declared that it's 67% to 68% as the range through the remainder of the year? Or was that a full-year number for gross margins? Moran Shemesh -- Chief Financial Officer Yeah. This is for the remainder of the year. I believe, I also mentioned the full year that approximately 67%. But this quarter, of course, was lowered to mix of SuperVision. As I mentioned, SuperVision was 20%. So it's not a representative gross margin. James Picariello -- Exane BNP Paribas -- Analyst Right, right. Yeah. So my follow-on question, can you just confirm the -- and apologies if I missed it, the SuperVision shipment number in the first quarter? And then can you just walk through for opex, what drives the somewhat material step up through the remainder of the year on the opex side to get to the 25% year-over-year opex growth? Thanks. Moran Shemesh -- Chief Financial Officer Yeah. So in the first quarter, we delivered 39,000 units. And I also said we are expected to deliver 70,000 for the first half for SuperVision units, and the rest of the year, again, on track with our guidance. As for the opex, so the main bucket for increase is headcount, so headcount to support our activities, our design wins, and new advanced programs that approximately $100 million of headcount growth and some compensational inflation. The other element is R&D related to headcount, again to support the advanced programs from EyeQ 6 EyeQ 7, Lidar. Lidar is also the software related to design new programs, building the hardware. So, all these R&Ds around maybe $80 million or $90 million but offset with some higher NRE reimbursement mainly related to our new programs and also related to drive offset some of this amount. We also have approximately $20 million or $30 million as a result of occupancy, the new campus, and other sites, including depreciation. So, these are the main drivers for cost increase in our opex increase in 2024. Operator Our next question comes from Joshua Buchalter with TD Cowen and Company. Please proceed with your question. Joshua Buchalter -- TD Cowen -- Analyst Hey, guys. Thank you for taking my question. For my first one, any more details you can provide on the 14 advanced engagements and in particular, the incremental three that you added in the quarter, whether by geographic mix, drivetrain, and most -- perhaps most importantly, any updates on timelines to conversion for the advanced engagements? Thank you. Amnon Shashua -- Founder and Chief Executive Officer I'll take this. So, in general, we have been making steady progress with our activities, as mentioned, and the increase comes from a mix of geographies, European, American, and also in Asia. The progress we're making is in three fronts: on commercial front, technical fronts, and also in the legal firms in order to make sure that all aspects related to these agreements are addressed, and we continue to expect to make -- to get the convergence within the second half of the year. And I just want to maybe to refer to the Volkswagen partnership, which took us between year and year and a half to conclude, we do see shorter time frames in the existing engagements, but -- so, I still think that second half of the year will be a good point in time to start to see more conversions there. Joshua Buchalter -- TD Cowen -- Analyst Thank you for that. And for my follow-up, I just wanted to ask about EyeQ6L. Obviously, some good initial design win metrics there. Can you maybe spend a minute or two talking about what are the features that customers can use on the 6L and also, how are you able to, I guess, extract incremental ASP from the part? Because I assume -- you mentioned the ASP doesn't change all that much. I guess I was a bit surprised given you're moving from 28-nanometer to 7-nanometer on that chip. So that should allow for a good amount of performance uplift. So, I'd just be curious to hear about some more details on the engagements there in core ADAS as EyeQ6L begins a more meaningful part of the mix over time. Thank you. Amnon Shashua -- Founder and Chief Executive Officer OK. The ASP is driven by the functional bundle and not the process node of the chip. The bundles are increasing due to regulatory expansion and also incorporating expansion. Many of these programs also programs that we win also include cloud enhanced. So right now, the programs that we won in Q1 have a similar ASP to the existing generation, but we do see a drive toward higher bundles, which would increase the ASP. But the big ASP jump comes from the advanced product portfolio, the SuperVision, Chauffeur, and Drive. Any ASP increase in base does is really incremental. And just one follow-up -- Operator Our next question -- go ahead. Amnon Shashua -- Founder and Chief Executive Officer Sorry, just make one follow-up to that, just to reinforce, is kind of historically, each generation, the goal is really to provide incremental features that allow the OEMs to meet regulatory and cap requirements without changing the price. So this has really been kind of our strategy over time. Obviously, the higher performance gives you the potential for increased bundles, which can drive higher ASP. But in general, what we're trying to do is kind of keep pricing and keep cost the same for each successive generation or provide incremental features. Operator Our next question comes from Shreyas Patil with Wolfe Research. Please proceed with your question. Shreyas Patil -- Wolfe Research -- Analyst Hey, thanks so much for taking the question. Maybe just firstly, as we think about SuperVision profitability, I think you're indicating a low 40% gross margin by the second quarter, I believe -- and the long-term target is closer to 50%. So how should we think about the progression toward that long-term target over the next few quarters or even beyond? Amnon Shashua -- Founder and Chief Executive Officer No. We are on track of increasing the gross margin. We have a second-generation domain controller, which is now in production and on the road. And in few months will completely replace the generation one of domain controller, and that increases gross margin considerably. And the future products with IQ6 are also designed with the gross margin approaching our target of 50%, so we are converging. Shreyas Patil -- Wolfe Research -- Analyst OK. And then maybe this is a bit of a longer-term question. But I'm curious how you think about some of the trends that we see in markets like China, for example, with some of the automakers seemingly willing to invest and deploy quite expensive systems but to kind of own the data or trying to develop the software in-house. I know you've talked before about the challenges those automakers will have in terms of scaling outside of China. Do you see -- I guess, I'm curious if you see that as a risk inside China if more automakers are willing to pursue those approaches, albeit at a more expensive cost to what SuperVision can deliver? And do you see potentially automakers in other regions working on internal systems as well in a similar way? Thanks. Amnon Shashua -- Founder and Chief Executive Officer Our view also historically is that competition is good because it creates more demand for those high-end solutions. In-house development in China exists. We work hand-in-hand with those OEMs. So they have some car models are in-house development, some car models are mobilized equipped. But automotive you see out there are eyes-on systems. Now with eyes-on systems, what wins at the end of the day is cost versus performance. No one will pay higher cost for the same performance. Mobileye's SuperVision system is about 50% of the cost of competing systems. Some of those systems have three ADAS, we have a SuperVision without ADAS. It's not necessarily to have the ADAS our SuperVision system. So when you look at sympotically, it is for an eyes-on system, it is cost needs to move performance and not first performance and then cost. And we have a great advantage there. Another advantage we have in China is our rapid expansion of REM. This allows to enable hands-free driving also in urban settings. We are going to launch in, I think, next month or in the next six weeks, the first urban drive in Shanghai, which is going to be deployed on all the 200,000 vehicles that are currently on the road. And this is going to be really industry-leading experience, and then we can expand throughout China quite quickly. And this is something that if you don't have this outsourced technology to do that, it's very, very difficult to scale high definition maps over across urban areas. And then come the next generation, which is eye-off and none of our competitors have a concrete plan on how to get to an eye off system, Mobileye is the only company -- only supplier that has eyes-off the production programs and not only one multiple production programs, especially with a leading company like Audi, which also generates volume, not only credibility. So I think putting everything together, the kind of competition we see in China is not a risk. We see this as an advantage because it puts pressure on other OEMs also outside of China to deploy these kind of advanced systems. The in-house development outside of China, we see that declining considerably. Many OEMs that made the announcement of in-house developments have taken a step back. And we are starting to have a serious on -- adopting a SuperVision and so forth. Dan Galves -- Chief Communications Officer If I may follow up, I think what's important for us in this dynamics in China is that it's an evidence that when OEMs seek for differentiation, autonomy is kind of the most important aspect for them to invest in to ensure that they have a competitive product. Some OEMs lean toward in-house development with expensive systems and investing in significant capital, it still says that they believe that autonomy will be the key differentiator in the future for them. And this was recently supported also by statements that Tesla made in their earnings call earlier this week that this is going to be kind of the next big thing for OEMs who seek to kind of escape from the price challenges that today -- are kind of ruling the world in China. So we see this as a very important development because it solidifies our long-term perspective. And most OEMs, we expect will lead toward competitive products with short time to market with competitive cost and with the best-in-class performance. And that -- now that they need to compete within the next couple of years. And we believe we have the product to best suit this need at this point in time. So this is -- this is what stands behind the increase in the amount of engagements we've had in the last quarter Shreyas Patil -- Wolfe Research -- Analyst Thanks. Operator Our next question comes from Tom Narayan with RBC. Please proceed with your question. Tom Narayan -- RBC Capital Markets -- Analyst Yes. Thanks for taking the questions. The first one is kind of high level. You mentioned the Tesla announcement this week or recent weeks seems to be a pivot toward more on the robotaxi front. Certainly, FSD is a big driver of that, the Vision 12. But I guess the question is, it seems like from talking to them, there's a reluctance to engage in this level 2 plus. But for some reason, how there's this movement toward potentially level 4 as a proof of concept when a consumer sees the level 4 that they believe in it more see the robotaxis on the road, maybe then it's a halo effect in autonomy in general. I guess the question is -- do you think -- do you agree with them that maybe that the robotaxi the level 4 side of things isn't some far distant thing. Maybe this has pulled forward a little bit, and it's a proof of concept that could potentially be a catalyst for level 2 plus. Or do you view these two things as completely separate animals? Amnon Shashua -- Founder and Chief Executive Officer Well, just FSD is level 2 plus. They call it now FSD supervised that this is level 2 plus. We're all in or of Tesla accelerating the robotaxi plants, but we have also robotaxi in production with Volkswagen of the ID. Buzz coming out in 2026. So any uplift in the demand for robotaxi is also an uplift for us. Now whether they could introduce robotaxi using only cameras, we are kind of skeptical, but no, we don't know what they're going to introduce. If you just say robotaxi with additional active sensors, not only camera. We believe that eyes-off systems rather than calling this robotaxi, let's call it eyes-off systems because eyes off means that you can drive autonomously on selected type of roads, not necessarily on every type of road. It's still a great value. Eyes-off systems, which is our show product line has a great value proposition. And we also believe that in time, it will even overtake the level 2 plus in terms of volume, but we see that something for the next decade in terms of the volume ramp. SuperVision is this decade and eyes-off would be in terms of scaling and overtaking level 2 plus, we see that as something for the next decade. But we'll be very happy to be proven wrong and to have this accelerated. Tom Narayan -- RBC Capital Markets -- Analyst OK. And my quick follow-up. The 14 OEMs you're talking to, obviously, five of them you've already won, and there's three new ones. There's obviously -- there's SuperVision, the regular SuperVision where you've won, and there's obviously the kind of more light version of SuperVision. Just curious if -- of those 14 OEMs you're talking to outside of the ones you've already won. The majority of those, the regular kind of SuperVision or are those different kind of varieties, kind of a SuperVision light product? How do you think about that on that distribution? Amnon Shashua -- Founder and Chief Executive Officer Well, first of all, the answer is it's a mix between SuperVision safer and SuperVision light. And it's kind of a very balanced mix, I would say. What we see is that OEMs are trying to build their vehicle lines such that some of the vehicle lines will have a full SuperVision also for both. And then maybe the bulk of the volumes will have instead of just the front camera will have a SuperVision light type of system, which has five cameras and five radars or six cameras and five radars, but still offers very advanced functions compared to the base data we have today, which will improve their competitiveness in the low-cost cars. We'll offer new SuperVision to consumers, but at controllable costs. And this kind of lives like in parallel to the SuperVision or Chauffeur, which will be for other car lights. And this is what we see in our engagements with OEMs. And this is, for us, really kind of changes the way we're looking into base ADAS in the future because we actually think it will potentially diverge to two streams. One will continue to be low-end, front-camera only, just to meet from the lowest cost possible with regulation. And in addition to that, we see a growing demand for SuperVision light as the next generation for the base data segment, let's say. So it's kind of an extension and lives -- it coexists next to the SuperVision. That's what I was looking for. Yeah. And just to clarify, most of the engagement or the vast majority of the engagements are including discussions around multiple of these products, right, just like the Volkswagen Group define. Tom Narayan -- RBC Capital Markets -- Analyst Got it. Thanks. Operator Our next question comes from Dan Levy with Barclays. Please proceed with your question. Dan Levy -- Barclays -- Analyst Hi. Good morning. Thank you for taking my question. I wanted to start with a question on Volkswagen. Now, that's more publicly known. So maybe you could just give us a little more on the parameters of the program, what the software versus hardware component homicides actually using your domain controller, what's the extent of the functionality that's going to be enabled the regional split? And then in the release, I think there was some commentary that at some point, VW would eventually use in-house solutions. Maybe you could just comment on, I guess, the stickiness of your agreement with them? Or is this maybe a bridge solution for that? Amnon Shashua -- Founder and Chief Executive Officer So in terms of the parameters of the deal with the Volkswagen Group, Mobileye is the position of a tier 1 supplier. So we're responsible end to end for the hardware, and we have other tier 2 suppliers working with us, for example, for the parking systems. So we are a full tier 1 supplier. I don't expect us to be a full tier 1 suppliers and many additional programs, but for this program, we are a full tier 1 suppliers. So we are responsible for the progress end to end. And that includes the perception in terms of software, the perception, the driving policy, the control, there's a DXP component to fine-tune and customize the driving experience to each brand. In terms of the comment about them at some point, moving to an in-house development, I think that's what they've -- that was on the table for many, many years. They have a Software Division called CARIAD and that software division is still in operation in full force. And at that point, maybe they will be able to deliver the kind of system that we deliver, but we believe that the stickiness of our systems are very, very, very strong. The validation required to reach the very high levels of the performance of SuperVision are enormous. Stabilization required for eyes-off is beyond anything that the industry has experienced so far. So, I believe the stickiness is very strong. Do you have a -- Nimrod Nehushtan -- Executive Vice President, Strategy and Business Development Yes, if I may add a little bit more color. First of all, the partnership we announced includes SuperVision, Chauffeur, and Drive, as Amnon mentioned, and it's going to be deployed overall in 17 car models, and it includes most of the brands in the Volkswagen Group, the premium brands, Audi, Porsche, Bentley, Lamborghini, and so on. But just to maybe sharpen the stickiness aspect, this partnership addresses the existing architecture or the next-generation architecture that Volkswagen plan to launch 2026 onwards. And there is kind of a plan to deploy specific car models that are allocated today with this product for many years to come after they started production. Their in-house activity that still exists today is for a future architecture that maybe in some point in time will mature. It includes many other things that they're working on, but it's not that it will replace our product in case it will mature. It will live in a different architecture in different cars, some parts in the future in case did materialize. So, in terms of the stickiness once it reaches production, many, many cars that are -- will be deployed with this for many years after this year's production. Dan Levy -- Barclays -- Analyst Great. Thank you. And then as a follow-up, I wanted to go to some of your China commentary. And I think just some time ago, you noted that ZEEKR was offering free 12-month trial of highway SuperVision. I don't know if you could provide any feedback. But is there any way to get a sense of what the take rate is going to be in the future of this functionality? Is this something where you have confidence that this could be a fairly high take rate or we can maybe standard fit throughout the ZEEKR lineup of vehicles. Amnon Shashua -- Founder and Chief Executive Officer We are in discussions with ZEEKR to make it really a standard fit rather than a take-rate type of functionality because of the rising competition in China. I believe the convergence will be that it will be standard fit. Dan Levy -- Barclays -- Analyst Thank you. Operator Our next question comes from Samik Chatterjee with J.P. Morgan. Please proceed with your question. Joe Cardoso -- JPMorgan Chase and Company -- Analyst Hi, thanks for the question. This is Joe Cardoso on for Samik. Maybe a follow-up on the OEM engagements myself. You guys have shown good progress moving from three to 14 OEMs now, production now covering 46% versus 9% a year ago. Just curious, when you think of the headroom that you have left to go after, like how would you characterize it? And has your views relative to, let's call it, a ceiling change relative to six, nine months ago, or even a year ago, given the developments in the ecosystem and now that you're approaching 50% of production, at least in kind of the engagements that you have already under your peripherals? Thank you. Nimrod Nehushtan -- Executive Vice President, Strategy and Business Development Yes. I think that there is a flywheel effect that we're seeing in which the more we have engagements with OEMs and the more we announced partnership with OEMs, the more -- it builds our credibility on these advanced product line. And we are also more prepared today, let's say, in terms of our business development activities and supporting 14 engagements in parallel, and we have the capacity to support this and we have the capacity to support even more than this. What happened last year are multiple factors Amnon laid out at the beginning. Number one competition in China and also outside of China is moving toward this hands-off as the next differentiators for cars. Number two, we build our credibility, more announcements kind of helps us to reinforce our position as leaders in this front. And I think, we know more today about what needs to be done in order to secure these engagements after a year-long negotiation with one of the biggest car companies in the world. So, I think this is what stands behind this increase. And also, this is kind of the adoption curve where today, what's interesting as Dan mentioned, is that we are working with kind of the early majority and the middle of the pack back of OEM, not just the innovators of the market today on these engagements, which kind of shows us that in '26, '27 time frame, these hand-off products will become very available in terms of the amount of OEMs to launch them. Joe Cardoso -- JPMorgan Chase and Company -- Analyst And then maybe just a quick follow-up. Just one -- or my second question rather. I just wanted to touch on the destocking situation. It sounds like you've made great progress. Can you just talk to maybe some of the changes or processes that you have put into place to improve your visibility around inventory at your customers and how they're tracking are working today? Thanks for the question. Moran Shemesh -- Chief Financial Officer Yes. So I think we actually discussed it in the last call that this is a situation that we haven't experienced before. So we did put some processes in place. For this year, I can say, for Q1, we actually based on global production, actual production and ADAS fitment rates, production per OEM, we've actually analyzed the gap between what we actually shipped in Q1 and what we would expect to ship if we didn't have the inventory issue. And that gives us kind of the comfort and also looked, of course, the year-over-year growth to see that it makes sense. We did the same exercise for the full year, so for the full year, taking again the expected lower volume, which looks pretty good. So it's increasing for our top customers. Looking at Q3, Q4 and the outcome that we get compared to our customers' order indications for Q3, Q4, we get to approximately similar numbers, which is encouraging in that aspect. So it's a step-down analysis versus other indications. In terms of receiving data or some visibility for our customers, we get some verification from them, but only indication, not something -- we don't have full visibility to that. But with the process we have in place with the top down, we can, again, verify the data that we received and have actually a comparison between the two to make sure we are aligned with escalation Operator Our next question comes from Ananda Baruah with Loop Capital Markets. Please proceed with your question. Ananda Baruah -- Loop Capital Markets -- Analyst Hey, guys. Thanks for taking the question. Just two quick clarifications for me, if I could. The first was, you guys commented on expecting mix to normalize into the second half of the year. And I guess, the clarification is, is it back to mid-single-digit SuperVision or look something different sort of given the SuperVision ramp? And then I have a quick clarification follow-up as well. Thanks. Amnon Shashua -- Founder and Chief Executive Officer I think the issue that we had with inventory is not related to SuperVision, related to the EyeQ. SuperVision is on track. This quarter was the volume we shipped 39,000 was above expectation, but we believe that the number for the first half of the year would follow our guidance, which is about 70,000. And the full guidance of the year, we have the remaining second half is according to the guidance we gave at the beginning of the year. Ananda Baruah -- Loop Capital Markets -- Analyst And then for the second clarification is around ASP. I heard -- and this may just be me is this hearing what we said or not hearing completely. But I heard on the one hand, ASP for 2024 being $55, up to 2023. And then I thought I also heard another comment about 2024 ASP being down year over year. So -- Moran Shemesh -- Chief Financial Officer Yes. So the 55 versus 53, that takes into account the mix of SuperVision and EyeQ. So SuperVision of course with a higher ASP, as we are also – the vendor for the hardware. So the ASP is significantly higher. And again, overall ASP of 53 or 55 in 2024 is mainly driven by the mix of SuperVision revenue as a percentage of the total revenue. Again, it's much higher in the segment. As for EyeQ and ASP, and that was my comment, the EyeQ, ASP – yes, the EyeQ, ASP was lower in Q1 specifically. We don't believe this is -- this ASP represents the normal ASP for this year. And for Q1, we shipped only 3.5 million chips, so the mix is obviously has changed. So for example, if some of the low-cost programs in China became a higher percentage out of these 3.5 million chips, then the ASP is lower. So it's very volatile in such a quarter when we deliver only 3.5 million chips. So we do expect an increase in Q2 and Q3 of the ASP for EyeQ. About €0.40 or €0.50. On the total year, yes, we expect EyeQ ASP to go down as it did in 2023 and approximately $0.50, $0.75 year on year, continuing the normalization of the mix as compared to a very rich level that we had in 2021 and 2022. So this had a modest impact in 2023, and we expect a similar impact in 2024 for the full year. Ananda Baruah -- Loop Capital Markets -- Analyst Very helpful. Thank you. Appreciate that. Operator Our next question comes from Adam Jonas with Morgan Stanley. Please proceed with your question. Adam Jonas -- Morgan Stanley -- Analyst Well, first, I just want to share my thoughts to the Mobileye team and the community and people with Israel during the ongoing situation in and [Inaudible]. On seven months ago, you posted on LinkedIn that Tesla's decision to adopt an end-to-end generative AI approach to full self-driving to Triannual Networks was neither necessary nor sufficient for full self-driving programs. Do you still feel the same way today, Amnon? Amnon Shashua -- Founder and Chief Executive Officer Yes, indeed. Now, in my prepared remarks I mentioned that on the EyeQ6 we're going to have end to end both perception and actuation, and that does not contradict the point that we made. The Tesla end to end is the sole technology. Our end to end is just one engine on top of multiple engines in order to create a decomposable system that is explainable, that is modifiable, that you can explain what it does to regulatory bodies, that you can customize the driving experience for OEM. And if you look at some of our competitors like Waymo, they have the same view, that there's a very, very strong reliance on neural networks, on data-driven networks, language models, but at the end of the day it needs to be a system that is designed to be explainable and modifiable. So we're not against end to end. We're against end to end being the sole engine for the system. So I'm back at the CES a few months ago in January. I presented, mobilized the end-to-end perception engine, what I call the multi, by the power of five, how to build a end-to-end perception engine, and this is running on the EyeQ6, and we have also another engine which also includes actuation. So this is going from videos to actuation as an end to end, but it's a component, it's a subsystem of a more complex system. Adam Jonas -- Morgan Stanley -- Analyst Thanks, Amnon, for clarifying. And just as a follow-up, I know you've said that some of your design wins are also for SuperVision, include internal combustion architectures, and some people on this call might be a little skeptical as to whether their OEM customers would have software-defined internal combustion vehicles. So I guess my question is, when would you actually -- well, theoretically and practically possible, when would you expect based on your visibility of today to see a SuperVision fitment in production internal combustion architecture vehicle? Amnon Shashua -- Founder and Chief Executive Officer So the 12-target group wins with 17 models, nine of them are combustion engine models. So 50% of the models is going to be combustion engine, and it doesn't have to be a software-defined vehicle. It's a system, just like ADAS is a system, it's really encapsulated in our ECU, so it doesn't have to be a software-defined vehicle, and all the air updates is done through our ECU, so everything is self-contained. Moran Shemesh -- Chief Financial Officer If I may follow up on this, I think that maybe a few years ago, some OEMs said that their future plans in terms of future architecture software-defined vehicles will be based on EVs, under the assumption that EVs will become the leading powertrain for their cars and toward the back half of the decade. What has changed for some OEMs in the last year is that the plans are today maybe a little bit more moderate in terms of the EV percentage versus combustion engine, or a hybrid, but this still means that they are kind of aligning their architectures to the powertrain in a more balanced way, as opposed to going all-in on EVs for future technologies. Dan Galves -- Chief Communications Officer Thank you. Thank you, Adam. We can take one more question, Maria. Operator OK. Our last question comes from Chris McNally with Evercore ISI. Please proceed with your question. Chris McNally -- Evercore ISI -- Analyst Thanks so much, team. Last but hopefully not least, maybe we could dive into some of the SuperVision detail on the potential wins for second half. Would love to know if we look at the wins by type with the RFPs. Is it sort of the old model-by-model RFP approach where we've seen the legacy OEMs kind of bid this out in the past? Or maybe DXP or sort of the wider Audi push deployment has led to a broader fleet deployment for the potential RFPs, i.e., could we have hundreds of thousands of vehicles in the per OEM and the 27-plus time frame? Amnon Shashua -- Founder and Chief Executive Officer Yes. So that -- I have is for -- and normally, what we do is to see kind of the plans for OEMs in launching specific vehicle models, but it's more a platform question as opposed to specific vehicle models. So normally, a platform will include a few vehicle models that will be launched according to their plans. And then we're not kind of going one by one in kind of a rigorous process with each OEM. It's a bundle of cars and car models that can be -- the volumes can vary according to [Inaudible] of course. But when we have a deal, it can include multiple car models as we had with Volkswagen Group, which with one announcement we covered 17 car models with multiple brands and then with all geographies and so on and so forth. Chris McNally -- Evercore ISI -- Analyst Really appreciate that. And maybe just a follow-up. If we could follow on to Adam's question and sticking to this topic of at least for now supervised eyes-on performance, autonomous evolution to the side. And in the past, I think Mobileye has discussed something like you were hoping for 10 times better miles per disengagement from SuperVision when we compare it to something like full self-driving. I think a lot of those comments were pre-version 12. Any thought on how you think SuperVision, again, as a supervised eyes-on system, the competitive statistics stacks up today? Amnon Shashua -- Founder and Chief Executive Officer No. We are targeting the current generation with EyeQ 5 is improving all the time, but we have over-the-air update every two months or so. We are close to achieving a 100-hour mean time between interventional highways less so in urban, but it's more than one or two hours of mean time between intervention. On the EyeQ 6 system, as I mentioned in my prepared remarks, just for the camera subsystem, it's about 1,000 hours of mean time between intervention on highways. Now I don't know what is the mean time to intervention on Tesla's Version 12. I don't know if anyone measured that, but these are the kind of things that we measure in terms of KPIs on how we progress. Operator There are no further questions at this time. I would now like to turn the floor back over to Dan Galves for closing comments. Dan Galves -- Chief Communications Officer Thanks, everyone, for your time, and we will talk to you next quarter. And thanks for the Mobileye team for the session. Thank you. Answer:

the Mobileye's first quarter 2024 earnings call

Operator Greetings, and welcome to the Mobileye's first quarter 2024 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves, chief communications officer. Please, you may begin. Dan Galves -- Chief Communications Officer Thanks, Maria. Hello, everyone, and welcome to Mobileye's first quarter 2024 earnings conference call for the period ending March 30th, 2024. Please note that today's discussion contains forward-looking statements based on the business environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today, as always, are Professor Amnon Shashua, Mobileye's CEO and president; and Moran Shemesh, Mobileye's CFO. Also joining today for the Q&A session is Nimrod Nehushtan, Mobileye's executive vice president of strategy and business development. Thanks, and now I'll turn the call over to Amnon. Amnon Shashua -- Founder and Chief Executive Officer Hello, everyone, and thanks for joining our earnings call. From a revenue and income perspective, Q1 was fully aligned with the outlook we provided in January, and I'm pleased that the inventory consumption is tracking as we expected. Based on information from our tier 1 customers and our own analysis, we believe that 70% to 75% of excess inventory was consumed in Q1 this year. Adjusting for that, as well as some level of inventory growth in Q1 of last year, our volume growth, the core ADAS would have been mid-single digits, which is very solid performance in the current environment. In terms of business development and executing on our strategy, we continue to make meaningful progress across our portfolio. This starts with our eyes on hands-on ADAS business and extends throughout our advanced product portfolio, including SuperVision, Chauffeur, and Drive. Starting with eyes on hands-on systems or what we generally refer to as base and cloud-enhanced data. Our [Inaudible] of this business has always been about providing incremental safety features to meet the constantly expanding regulatory and rating requirements while leveraging scale and purpose-built hardware to maintain a consistent overall cost to the automaker. In Q1, we had our best-ever design win quarter for base on cloud-enhanced ADAS, generating 26 million units of future projected volume across many OEMs and all key geographic regions. Design win activity -- so you shouldn't annualize this number, but we believe this should address any open questions on whether the excess inventory indicated some weakening of our position and opportunities for continued growth. It did not. We believe the key driver of this elevated design win volume was the start of production of our next-generation high-volume ADAS chip, the EyeQ6L. This system on chip tax is 4.4 times the processing power of its predecessor, the EyeQ4, into half the packaging side and supports many incremental safety and convenience features that are aligned with the global regulatory and EnCap safety rating roadmap for the next many years to come. And this was accomplished without any material price increase to our customer or cost increase to Mobileye. Turning to Mobileye's advanced product portfolio, we see three waves of future growth. Initially, eyes-on, hands-free navigation, on-pilot through SuperVision. This system is in production now with more than 200,000 systems on the road and has customer wins that imply significant scaling over the next few years. Progressing toward eyes-off, we have Chauffeur for consumer-owned vehicles and drive for network-deployed driverless vehicles. Each are still development that have serious production wins that will begin to scale in 2026. From a revenue per unit perspective, we believe these products can accelerate our growth in a meaningful manner. For example, our future projected revenue from design wins in 2023 was $7.4 billion. Approximately 40% of this future projected revenue was accounted for by SuperVision and 20% by Chauffeur. Yet those products combined accounted for only 4% of the future volume. Over the last 12 months, we have observed an increasing consensus among automakers that eyes-on, hands-free across a broad operational domain is a must-have feature to be competitive over the rest of the decade and beyond. What's new since the start of the year is that we have seen a diffusion of this interest from primarily premium brands to more mainstream brands. We have also seen additional prospects reach out to mobilize due to challenges with their current direction, whether that was fully in-house development or collaboration with our competitors. We now have design wins or in advanced discussions with 14 OEMs representing 46% of the industry production as compared to 11 OEMs representing 37% of industry production at the end of 2023. We continue to make steady progress with more mature prospects. We have been working with since mid to late 2023 and see the likelihood of converting a number of these during the second half of 2024. In the aggregate, Mobileye is now bidding on RFQs representing a multiple of the approximately $4.5 billion of pipeline revenue generated in 2023 from SuperVision and Chauffeur design wins. There are several reasons for this significant expansion in interest and I will elaborate on five driving factors. Number one, the public announcement by Volkswagen Group for their alignment with our SuperVision, Chauffeur, and Drive products was very important, both in terms of a large global OEM moving forward on these product categories with conviction and an endorsement of our capability and ability to execute. As expected, the announcement led to incremental traction with other OEMs. Number two, we believe that Mobileye has significant and somewhat unique advantages in delivering an optimal balance of performance and cost. Our SoC cost is a fraction of competing high-end SoCs and very importantly, our SoC comes with the full software stack validated for production readiness with a proven record of quality. Moreover, REM enables geographic scalability at very low cost. Overall, our eyes on hands-off performance is best in class, despite running on low-cost silicon and requiring many fewer sensors than competition. Number three, as EyeQ6 High approaches production in mid-2025, we are now able to utilize late-stage SoC and ECU samples in testing. The software stack built to run on these next-generation ECUs includes state-of-the-art, novel artificial intelligence systems, including end-to-end perception and end-to-end actuation, running in parallel for purpose of redundancy to the networks powering our current generation of SuperVision. Our target for the camera-based subsystem for perception is 1,000 hours of driving on highway roads without intervention and our testing show that we are on the right path of achieving those targets. I would mention that those meantime between intervention targets are expected to be industry-leading at quite a large gap. We believe that – number four, we believe that SuperVision provides a validated bridge to a true eyes-off system across a wide domain, which is seen by many OEMs as a true value driver long-term. But the performance requirements for eyes-off are really underappreciated by the public and also by certain OEMs who are throwing everything they have at an eyes-on system with seemingly no clear plan on how to boost meantime between failure from one safety intervention every few hours to one every hundreds of thousands of hours. Mobileye on the other hand has a unique methodology and offering, including crowdsourced mapping that boost perception of performance, boost perception performance, redundant perception layers, a market-leading imaging radar to support our True Redundancy concept, RSS, and purpose-built efficient-compute. These areas of vertical integration experience in our view are considerable assets. Number five, we have already seen an initial positive impact from Tesla's decision to double down FSD and Robotaxi, which adds to the desire for other OEMs to have competitive offerings but also is seen as an area where our legacy customers can utilize Mobileye's strength to introduce far-reaching intelligence-driving systems. Overall, I'm very pleased with the progress of our technology and business building with OEMs. I look forward to more updates through the year and now turn the call over to Moran. Moran Shemesh -- Chief Financial Officer Thank you, Amnon, and thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability will refer to non-GAAP measurements. The primary exclusion in Mobileye's non-GAAP numbers is amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017. We also exclude stock-based compensation. Starting with Q1 results, they were closely aligned with the Q1 outlook we provided back in January. I'll provide a brief summary and then get into a bit more detail. The severe year-on-year decline in the key metrics was almost exclusively isolated to EyeQ volumes, which were impacted by the inventory correction. During the quarter, we delivered 3.5 million EyeQs. In addition to these new shipments, our customers use a significant EyeQ inventory to satisfy the demand for our products during the quarter. The approximately 4.6 million units year-over-year decline, which converted at our high gross margin, especially accounting for substantially all the reduction in gross profit. Our cost is nearly all variable. The fixed component is very minimal. The balance of the year-over-year decline in operating income was driven by some growth in operating expenses, but this was relatively minor. And our operating expenses do not flex with revenue, as R&D spending is correlated with the execution of our advanced product strategy and is not impacted by short-term fluctuations in revenue. Behind the volume decline, we also saw some modest decline in EyeQ ASP and gross margin related to mix. SuperVision was pretty strong in the quarter. We delivered 39,000 units, compared to 25,000 units in the year-ago period. This was above expectation that this was due to timing. We continue to see the first-half deliveries totaling around 70,000 units, in line with our initial expectations, but with Q1 slightly higher than expected, Q2 is slightly lower. So far we see gross margin improved somehow in Q1, both sequentially and year-over-year. The more meaningful increase into the low 40 range is expected in Q2 as close to 1% of our volume will be with the new low-cost domain control. On the overall blended gross margin basis, the lower-than-normal percentage was related to the fact that SuperVision was around 20% of revenue in Q1, compared to an average of 6% in 2023 calendar year. While SuperVision volumes grew year over year, the mix of SuperVision was exaggerated by the temporary reduction in EyeQ volume in the quarter, which will return to more normalized level in Q2 and even more so in the back half. Despite the operating loss, operating cash flow was modestly positive in the quarter. One item to note here is that our balance sheet inventory rose sequentially. This has nothing to do with inventory at the tier 1 customers. Our balance sheet inventory rose modestly due to lower shipment in the quarter and the need to maintain somehow steady purchasing of EyeQ chip over the course of the year. By the end of 2024, we would expect our balance sheet inventory to be consistent with the 2023 year-end figure. Looking ahead, we believe that the inventory consumption process is on track. At this point, the vast majority of Q2 volume is based on binding purchase orders from our customers. There is quite some level of uncertainty regarding timing of late-quarter shipments, but we are comfortable in projecting approximately 7.4 million units, up more than 100% as compared to Q1. Based on our in analysis and information from our customers, we expect that the inventory at our tier 1 customers will be back around normal orders by end of Q2. Please note that we may not continue to give as much specification on quarterly unit volume outlook, but given the unusual cadence of this year we feel is worthwhile. We expect gross margin to move higher to around 67% and for operating expenses to continue to grow steadily on a sequential basis. Overall, our revenue and adjusted operating income expectation for Q2 are well aligned with the current analyst consensus. In terms of the full-year guidance, it is unchanged from the outlook we provided on January 25. From a volume perspective, we are assuming 31 million to 33 million EyeQ shipments and 175,000 to 195,000 SuperVision in shipments in 2024. On the EyeQ side, the midpoint of our guidance implies around 21 million units in the back half. This is supported by regularly updated indication from our customers, which have been quite stable over the last couple of months. And it also appears to be reflective of the true level of demand in the back half of 2024 based on our own analysis of OEM production forecast. If we isolate average system price for the single-chip EyeQ business, we expect it to be down slightly in 2024 on a year-over-year basis, consistent with our view in January. The modest weakening in vehicle mix that impacts us somehow in 2023 is expected to continue in 2024. This is compared to a very rich mix we saw in 2021 and 2022 due to overall automotive industry production constraints. Higher-priced chips for cloud-enhanced ADAS and other advanced programs are providing an offer, but we do not view this tailwind as very materially in 2024. As [Inaudible] volumes are still not a meaningful portion of the total and the base of vehicles paying us annual REM-related license payments continue to build. On the SuperVision side, these volumes can be more difficult to precisely predict given that we are currently on five models that are all in the EV space, which has been in a period of volatility. Increase in volumes in the second half of 2024 versus the first half of 2024, is supported by several factors, including, number one, the recent mid-cycle refresh of ZEEKR 001, which caused a significant uptick in demand; number two, incremental scaling of Zeekr 001volumes in Europe; number three, an additional version of the Zeekr 009 with enhanced features; number four, we start, of course, our four deliveries in Europe and U.S. in the second half; and number five, continued ramping of Smart number one in Volvo EM90 volumes. On a total company basis, we expect average system price to rise to approximately $55 in 2024 from $53 in 2023 based on SuperVision growth. We expect gross margin in the range of 67% to 68% range for the remainder of the year based on current expectations for the mix of SuperVision in EyeQ revenue. We continue to expect adjusted operating expenses to grow approximately 25% on a year-over-year basis as we execute on our advanced product portfolio in preparation for substantial numbers of SuperVision and Drive product launches in upcoming years. And we continue to believe that our operating expenses in the near or long term should be structurally lower than we expected as of a year ago, and that opex percentage growth in 2025 and beyond should be significantly lower than in 2024. Lastly, in terms of tax rate, we continue to assume a non-GAAP effective tax rate of 15% and 17% for 2024 in comparison to 11% in 2023. Thank you, and we will now take your questions. Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from James Picariello with BNP Paribas. Please proceed with your question. James Picariello -- Exane BNP Paribas -- Analyst Good morning, everybody, or good evening, good afternoon. So just on the gross margin guide, so was it declared that it's 67% to 68% as the range through the remainder of the year? Or was that a full-year number for gross margins? Moran Shemesh -- Chief Financial Officer Yeah. This is for the remainder of the year. I believe, I also mentioned the full year that approximately 67%. But this quarter, of course, was lowered to mix of SuperVision. As I mentioned, SuperVision was 20%. So it's not a representative gross margin. James Picariello -- Exane BNP Paribas -- Analyst Right, right. Yeah. So my follow-on question, can you just confirm the -- and apologies if I missed it, the SuperVision shipment number in the first quarter? And then can you just walk through for opex, what drives the somewhat material step up through the remainder of the year on the opex side to get to the 25% year-over-year opex growth? Thanks. Moran Shemesh -- Chief Financial Officer Yeah. So in the first quarter, we delivered 39,000 units. And I also said we are expected to deliver 70,000 for the first half for SuperVision units, and the rest of the year, again, on track with our guidance. As for the opex, so the main bucket for increase is headcount, so headcount to support our activities, our design wins, and new advanced programs that approximately $100 million of headcount growth and some compensational inflation. The other element is R&D related to headcount, again to support the advanced programs from EyeQ 6 EyeQ 7, Lidar. Lidar is also the software related to design new programs, building the hardware. So, all these R&Ds around maybe $80 million or $90 million but offset with some higher NRE reimbursement mainly related to our new programs and also related to drive offset some of this amount. We also have approximately $20 million or $30 million as a result of occupancy, the new campus, and other sites, including depreciation. So, these are the main drivers for cost increase in our opex increase in 2024. Operator Our next question comes from Joshua Buchalter with TD Cowen and Company. Please proceed with your question. Joshua Buchalter -- TD Cowen -- Analyst Hey, guys. Thank you for taking my question. For my first one, any more details you can provide on the 14 advanced engagements and in particular, the incremental three that you added in the quarter, whether by geographic mix, drivetrain, and most -- perhaps most importantly, any updates on timelines to conversion for the advanced engagements? Thank you. Amnon Shashua -- Founder and Chief Executive Officer I'll take this. So, in general, we have been making steady progress with our activities, as mentioned, and the increase comes from a mix of geographies, European, American, and also in Asia. The progress we're making is in three fronts: on commercial front, technical fronts, and also in the legal firms in order to make sure that all aspects related to these agreements are addressed, and we continue to expect to make -- to get the convergence within the second half of the year. And I just want to maybe to refer to the Volkswagen partnership, which took us between year and year and a half to conclude, we do see shorter time frames in the existing engagements, but -- so, I still think that second half of the year will be a good point in time to start to see more conversions there. Joshua Buchalter -- TD Cowen -- Analyst Thank you for that. And for my follow-up, I just wanted to ask about EyeQ6L. Obviously, some good initial design win metrics there. Can you maybe spend a minute or two talking about what are the features that customers can use on the 6L and also, how are you able to, I guess, extract incremental ASP from the part? Because I assume -- you mentioned the ASP doesn't change all that much. I guess I was a bit surprised given you're moving from 28-nanometer to 7-nanometer on that chip. So that should allow for a good amount of performance uplift. So, I'd just be curious to hear about some more details on the engagements there in core ADAS as EyeQ6L begins a more meaningful part of the mix over time. Thank you. Amnon Shashua -- Founder and Chief Executive Officer OK. The ASP is driven by the functional bundle and not the process node of the chip. The bundles are increasing due to regulatory expansion and also incorporating expansion. Many of these programs also programs that we win also include cloud enhanced. So right now, the programs that we won in Q1 have a similar ASP to the existing generation, but we do see a drive toward higher bundles, which would increase the ASP. But the big ASP jump comes from the advanced product portfolio, the SuperVision, Chauffeur, and Drive. Any ASP increase in base does is really incremental. And just one follow-up -- Operator Our next question -- go ahead. Amnon Shashua -- Founder and Chief Executive Officer Sorry, just make one follow-up to that, just to reinforce, is kind of historically, each generation, the goal is really to provide incremental features that allow the OEMs to meet regulatory and cap requirements without changing the price. So this has really been kind of our strategy over time. Obviously, the higher performance gives you the potential for increased bundles, which can drive higher ASP. But in general, what we're trying to do is kind of keep pricing and keep cost the same for each successive generation or provide incremental features. Operator Our next question comes from Shreyas Patil with Wolfe Research. Please proceed with your question. Shreyas Patil -- Wolfe Research -- Analyst Hey, thanks so much for taking the question. Maybe just firstly, as we think about SuperVision profitability, I think you're indicating a low 40% gross margin by the second quarter, I believe -- and the long-term target is closer to 50%. So how should we think about the progression toward that long-term target over the next few quarters or even beyond? Amnon Shashua -- Founder and Chief Executive Officer No. We are on track of increasing the gross margin. We have a second-generation domain controller, which is now in production and on the road. And in few months will completely replace the generation one of domain controller, and that increases gross margin considerably. And the future products with IQ6 are also designed with the gross margin approaching our target of 50%, so we are converging. Shreyas Patil -- Wolfe Research -- Analyst OK. And then maybe this is a bit of a longer-term question. But I'm curious how you think about some of the trends that we see in markets like China, for example, with some of the automakers seemingly willing to invest and deploy quite expensive systems but to kind of own the data or trying to develop the software in-house. I know you've talked before about the challenges those automakers will have in terms of scaling outside of China. Do you see -- I guess, I'm curious if you see that as a risk inside China if more automakers are willing to pursue those approaches, albeit at a more expensive cost to what SuperVision can deliver? And do you see potentially automakers in other regions working on internal systems as well in a similar way? Thanks. Amnon Shashua -- Founder and Chief Executive Officer Our view also historically is that competition is good because it creates more demand for those high-end solutions. In-house development in China exists. We work hand-in-hand with those OEMs. So they have some car models are in-house development, some car models are mobilized equipped. But automotive you see out there are eyes-on systems. Now with eyes-on systems, what wins at the end of the day is cost versus performance. No one will pay higher cost for the same performance. Mobileye's SuperVision system is about 50% of the cost of competing systems. Some of those systems have three ADAS, we have a SuperVision without ADAS. It's not necessarily to have the ADAS our SuperVision system. So when you look at sympotically, it is for an eyes-on system, it is cost needs to move performance and not first performance and then cost. And we have a great advantage there. Another advantage we have in China is our rapid expansion of REM. This allows to enable hands-free driving also in urban settings. We are going to launch in, I think, next month or in the next six weeks, the first urban drive in Shanghai, which is going to be deployed on all the 200,000 vehicles that are currently on the road. And this is going to be really industry-leading experience, and then we can expand throughout China quite quickly. And this is something that if you don't have this outsourced technology to do that, it's very, very difficult to scale high definition maps over across urban areas. And then come the next generation, which is eye-off and none of our competitors have a concrete plan on how to get to an eye off system, Mobileye is the only company -- only supplier that has eyes-off the production programs and not only one multiple production programs, especially with a leading company like Audi, which also generates volume, not only credibility. So I think putting everything together, the kind of competition we see in China is not a risk. We see this as an advantage because it puts pressure on other OEMs also outside of China to deploy these kind of advanced systems. The in-house development outside of China, we see that declining considerably. Many OEMs that made the announcement of in-house developments have taken a step back. And we are starting to have a serious on -- adopting a SuperVision and so forth. Dan Galves -- Chief Communications Officer If I may follow up, I think what's important for us in this dynamics in China is that it's an evidence that when OEMs seek for differentiation, autonomy is kind of the most important aspect for them to invest in to ensure that they have a competitive product. Some OEMs lean toward in-house development with expensive systems and investing in significant capital, it still says that they believe that autonomy will be the key differentiator in the future for them. And this was recently supported also by statements that Tesla made in their earnings call earlier this week that this is going to be kind of the next big thing for OEMs who seek to kind of escape from the price challenges that today -- are kind of ruling the world in China. So we see this as a very important development because it solidifies our long-term perspective. And most OEMs, we expect will lead toward competitive products with short time to market with competitive cost and with the best-in-class performance. And that -- now that they need to compete within the next couple of years. And we believe we have the product to best suit this need at this point in time. So this is -- this is what stands behind the increase in the amount of engagements we've had in the last quarter Shreyas Patil -- Wolfe Research -- Analyst Thanks. Operator Our next question comes from Tom Narayan with RBC. Please proceed with your question. Tom Narayan -- RBC Capital Markets -- Analyst Yes. Thanks for taking the questions. The first one is kind of high level. You mentioned the Tesla announcement this week or recent weeks seems to be a pivot toward more on the robotaxi front. Certainly, FSD is a big driver of that, the Vision 12. But I guess the question is, it seems like from talking to them, there's a reluctance to engage in this level 2 plus. But for some reason, how there's this movement toward potentially level 4 as a proof of concept when a consumer sees the level 4 that they believe in it more see the robotaxis on the road, maybe then it's a halo effect in autonomy in general. I guess the question is -- do you think -- do you agree with them that maybe that the robotaxi the level 4 side of things isn't some far distant thing. Maybe this has pulled forward a little bit, and it's a proof of concept that could potentially be a catalyst for level 2 plus. Or do you view these two things as completely separate animals? Amnon Shashua -- Founder and Chief Executive Officer Well, just FSD is level 2 plus. They call it now FSD supervised that this is level 2 plus. We're all in or of Tesla accelerating the robotaxi plants, but we have also robotaxi in production with Volkswagen of the ID. Buzz coming out in 2026. So any uplift in the demand for robotaxi is also an uplift for us. Now whether they could introduce robotaxi using only cameras, we are kind of skeptical, but no, we don't know what they're going to introduce. If you just say robotaxi with additional active sensors, not only camera. We believe that eyes-off systems rather than calling this robotaxi, let's call it eyes-off systems because eyes off means that you can drive autonomously on selected type of roads, not necessarily on every type of road. It's still a great value. Eyes-off systems, which is our show product line has a great value proposition. And we also believe that in time, it will even overtake the level 2 plus in terms of volume, but we see that something for the next decade in terms of the volume ramp. SuperVision is this decade and eyes-off would be in terms of scaling and overtaking level 2 plus, we see that as something for the next decade. But we'll be very happy to be proven wrong and to have this accelerated. Tom Narayan -- RBC Capital Markets -- Analyst OK. And my quick follow-up. The 14 OEMs you're talking to, obviously, five of them you've already won, and there's three new ones. There's obviously -- there's SuperVision, the regular SuperVision where you've won, and there's obviously the kind of more light version of SuperVision. Just curious if -- of those 14 OEMs you're talking to outside of the ones you've already won. The majority of those, the regular kind of SuperVision or are those different kind of varieties, kind of a SuperVision light product? How do you think about that on that distribution? Amnon Shashua -- Founder and Chief Executive Officer Well, first of all, the answer is it's a mix between SuperVision safer and SuperVision light. And it's kind of a very balanced mix, I would say. What we see is that OEMs are trying to build their vehicle lines such that some of the vehicle lines will have a full SuperVision also for both. And then maybe the bulk of the volumes will have instead of just the front camera will have a SuperVision light type of system, which has five cameras and five radars or six cameras and five radars, but still offers very advanced functions compared to the base data we have today, which will improve their competitiveness in the low-cost cars. We'll offer new SuperVision to consumers, but at controllable costs. And this kind of lives like in parallel to the SuperVision or Chauffeur, which will be for other car lights. And this is what we see in our engagements with OEMs. And this is, for us, really kind of changes the way we're looking into base ADAS in the future because we actually think it will potentially diverge to two streams. One will continue to be low-end, front-camera only, just to meet from the lowest cost possible with regulation. And in addition to that, we see a growing demand for SuperVision light as the next generation for the base data segment, let's say. So it's kind of an extension and lives -- it coexists next to the SuperVision. That's what I was looking for. Yeah. And just to clarify, most of the engagement or the vast majority of the engagements are including discussions around multiple of these products, right, just like the Volkswagen Group define. Tom Narayan -- RBC Capital Markets -- Analyst Got it. Thanks. Operator Our next question comes from Dan Levy with Barclays. Please proceed with your question. Dan Levy -- Barclays -- Analyst Hi. Good morning. Thank you for taking my question. I wanted to start with a question on Volkswagen. Now, that's more publicly known. So maybe you could just give us a little more on the parameters of the program, what the software versus hardware component homicides actually using your domain controller, what's the extent of the functionality that's going to be enabled the regional split? And then in the release, I think there was some commentary that at some point, VW would eventually use in-house solutions. Maybe you could just comment on, I guess, the stickiness of your agreement with them? Or is this maybe a bridge solution for that? Amnon Shashua -- Founder and Chief Executive Officer So in terms of the parameters of the deal with the Volkswagen Group, Mobileye is the position of a tier 1 supplier. So we're responsible end to end for the hardware, and we have other tier 2 suppliers working with us, for example, for the parking systems. So we are a full tier 1 supplier. I don't expect us to be a full tier 1 suppliers and many additional programs, but for this program, we are a full tier 1 suppliers. So we are responsible for the progress end to end. And that includes the perception in terms of software, the perception, the driving policy, the control, there's a DXP component to fine-tune and customize the driving experience to each brand. In terms of the comment about them at some point, moving to an in-house development, I think that's what they've -- that was on the table for many, many years. They have a Software Division called CARIAD and that software division is still in operation in full force. And at that point, maybe they will be able to deliver the kind of system that we deliver, but we believe that the stickiness of our systems are very, very, very strong. The validation required to reach the very high levels of the performance of SuperVision are enormous. Stabilization required for eyes-off is beyond anything that the industry has experienced so far. So, I believe the stickiness is very strong. Do you have a -- Nimrod Nehushtan -- Executive Vice President, Strategy and Business Development Yes, if I may add a little bit more color. First of all, the partnership we announced includes SuperVision, Chauffeur, and Drive, as Amnon mentioned, and it's going to be deployed overall in 17 car models, and it includes most of the brands in the Volkswagen Group, the premium brands, Audi, Porsche, Bentley, Lamborghini, and so on. But just to maybe sharpen the stickiness aspect, this partnership addresses the existing architecture or the next-generation architecture that Volkswagen plan to launch 2026 onwards. And there is kind of a plan to deploy specific car models that are allocated today with this product for many years to come after they started production. Their in-house activity that still exists today is for a future architecture that maybe in some point in time will mature. It includes many other things that they're working on, but it's not that it will replace our product in case it will mature. It will live in a different architecture in different cars, some parts in the future in case did materialize. So, in terms of the stickiness once it reaches production, many, many cars that are -- will be deployed with this for many years after this year's production. Dan Levy -- Barclays -- Analyst Great. Thank you. And then as a follow-up, I wanted to go to some of your China commentary. And I think just some time ago, you noted that ZEEKR was offering free 12-month trial of highway SuperVision. I don't know if you could provide any feedback. But is there any way to get a sense of what the take rate is going to be in the future of this functionality? Is this something where you have confidence that this could be a fairly high take rate or we can maybe standard fit throughout the ZEEKR lineup of vehicles. Amnon Shashua -- Founder and Chief Executive Officer We are in discussions with ZEEKR to make it really a standard fit rather than a take-rate type of functionality because of the rising competition in China. I believe the convergence will be that it will be standard fit. Dan Levy -- Barclays -- Analyst Thank you. Operator Our next question comes from Samik Chatterjee with J.P. Morgan. Please proceed with your question. Joe Cardoso -- JPMorgan Chase and Company -- Analyst Hi, thanks for the question. This is Joe Cardoso on for Samik. Maybe a follow-up on the OEM engagements myself. You guys have shown good progress moving from three to 14 OEMs now, production now covering 46% versus 9% a year ago. Just curious, when you think of the headroom that you have left to go after, like how would you characterize it? And has your views relative to, let's call it, a ceiling change relative to six, nine months ago, or even a year ago, given the developments in the ecosystem and now that you're approaching 50% of production, at least in kind of the engagements that you have already under your peripherals? Thank you. Nimrod Nehushtan -- Executive Vice President, Strategy and Business Development Yes. I think that there is a flywheel effect that we're seeing in which the more we have engagements with OEMs and the more we announced partnership with OEMs, the more -- it builds our credibility on these advanced product line. And we are also more prepared today, let's say, in terms of our business development activities and supporting 14 engagements in parallel, and we have the capacity to support this and we have the capacity to support even more than this. What happened last year are multiple factors Amnon laid out at the beginning. Number one competition in China and also outside of China is moving toward this hands-off as the next differentiators for cars. Number two, we build our credibility, more announcements kind of helps us to reinforce our position as leaders in this front. And I think, we know more today about what needs to be done in order to secure these engagements after a year-long negotiation with one of the biggest car companies in the world. So, I think this is what stands behind this increase. And also, this is kind of the adoption curve where today, what's interesting as Dan mentioned, is that we are working with kind of the early majority and the middle of the pack back of OEM, not just the innovators of the market today on these engagements, which kind of shows us that in '26, '27 time frame, these hand-off products will become very available in terms of the amount of OEMs to launch them. Joe Cardoso -- JPMorgan Chase and Company -- Analyst And then maybe just a quick follow-up. Just one -- or my second question rather. I just wanted to touch on the destocking situation. It sounds like you've made great progress. Can you just talk to maybe some of the changes or processes that you have put into place to improve your visibility around inventory at your customers and how they're tracking are working today? Thanks for the question. Moran Shemesh -- Chief Financial Officer Yes. So I think we actually discussed it in the last call that this is a situation that we haven't experienced before. So we did put some processes in place. For this year, I can say, for Q1, we actually based on global production, actual production and ADAS fitment rates, production per OEM, we've actually analyzed the gap between what we actually shipped in Q1 and what we would expect to ship if we didn't have the inventory issue. And that gives us kind of the comfort and also looked, of course, the year-over-year growth to see that it makes sense. We did the same exercise for the full year, so for the full year, taking again the expected lower volume, which looks pretty good. So it's increasing for our top customers. Looking at Q3, Q4 and the outcome that we get compared to our customers' order indications for Q3, Q4, we get to approximately similar numbers, which is encouraging in that aspect. So it's a step-down analysis versus other indications. In terms of receiving data or some visibility for our customers, we get some verification from them, but only indication, not something -- we don't have full visibility to that. But with the process we have in place with the top down, we can, again, verify the data that we received and have actually a comparison between the two to make sure we are aligned with escalation Operator Our next question comes from Ananda Baruah with Loop Capital Markets. Please proceed with your question. Ananda Baruah -- Loop Capital Markets -- Analyst Hey, guys. Thanks for taking the question. Just two quick clarifications for me, if I could. The first was, you guys commented on expecting mix to normalize into the second half of the year. And I guess, the clarification is, is it back to mid-single-digit SuperVision or look something different sort of given the SuperVision ramp? And then I have a quick clarification follow-up as well. Thanks. Amnon Shashua -- Founder and Chief Executive Officer I think the issue that we had with inventory is not related to SuperVision, related to the EyeQ. SuperVision is on track. This quarter was the volume we shipped 39,000 was above expectation, but we believe that the number for the first half of the year would follow our guidance, which is about 70,000. And the full guidance of the year, we have the remaining second half is according to the guidance we gave at the beginning of the year. Ananda Baruah -- Loop Capital Markets -- Analyst And then for the second clarification is around ASP. I heard -- and this may just be me is this hearing what we said or not hearing completely. But I heard on the one hand, ASP for 2024 being $55, up to 2023. And then I thought I also heard another comment about 2024 ASP being down year over year. So -- Moran Shemesh -- Chief Financial Officer Yes. So the 55 versus 53, that takes into account the mix of SuperVision and EyeQ. So SuperVision of course with a higher ASP, as we are also – the vendor for the hardware. So the ASP is significantly higher. And again, overall ASP of 53 or 55 in 2024 is mainly driven by the mix of SuperVision revenue as a percentage of the total revenue. Again, it's much higher in the segment. As for EyeQ and ASP, and that was my comment, the EyeQ, ASP – yes, the EyeQ, ASP was lower in Q1 specifically. We don't believe this is -- this ASP represents the normal ASP for this year. And for Q1, we shipped only 3.5 million chips, so the mix is obviously has changed. So for example, if some of the low-cost programs in China became a higher percentage out of these 3.5 million chips, then the ASP is lower. So it's very volatile in such a quarter when we deliver only 3.5 million chips. So we do expect an increase in Q2 and Q3 of the ASP for EyeQ. About €0.40 or €0.50. On the total year, yes, we expect EyeQ ASP to go down as it did in 2023 and approximately $0.50, $0.75 year on year, continuing the normalization of the mix as compared to a very rich level that we had in 2021 and 2022. So this had a modest impact in 2023, and we expect a similar impact in 2024 for the full year. Ananda Baruah -- Loop Capital Markets -- Analyst Very helpful. Thank you. Appreciate that. Operator Our next question comes from Adam Jonas with Morgan Stanley. Please proceed with your question. Adam Jonas -- Morgan Stanley -- Analyst Well, first, I just want to share my thoughts to the Mobileye team and the community and people with Israel during the ongoing situation in and [Inaudible]. On seven months ago, you posted on LinkedIn that Tesla's decision to adopt an end-to-end generative AI approach to full self-driving to Triannual Networks was neither necessary nor sufficient for full self-driving programs. Do you still feel the same way today, Amnon? Amnon Shashua -- Founder and Chief Executive Officer Yes, indeed. Now, in my prepared remarks I mentioned that on the EyeQ6 we're going to have end to end both perception and actuation, and that does not contradict the point that we made. The Tesla end to end is the sole technology. Our end to end is just one engine on top of multiple engines in order to create a decomposable system that is explainable, that is modifiable, that you can explain what it does to regulatory bodies, that you can customize the driving experience for OEM. And if you look at some of our competitors like Waymo, they have the same view, that there's a very, very strong reliance on neural networks, on data-driven networks, language models, but at the end of the day it needs to be a system that is designed to be explainable and modifiable. So we're not against end to end. We're against end to end being the sole engine for the system. So I'm back at the CES a few months ago in January. I presented, mobilized the end-to-end perception engine, what I call the multi, by the power of five, how to build a end-to-end perception engine, and this is running on the EyeQ6, and we have also another engine which also includes actuation. So this is going from videos to actuation as an end to end, but it's a component, it's a subsystem of a more complex system. Adam Jonas -- Morgan Stanley -- Analyst Thanks, Amnon, for clarifying. And just as a follow-up, I know you've said that some of your design wins are also for SuperVision, include internal combustion architectures, and some people on this call might be a little skeptical as to whether their OEM customers would have software-defined internal combustion vehicles. So I guess my question is, when would you actually -- well, theoretically and practically possible, when would you expect based on your visibility of today to see a SuperVision fitment in production internal combustion architecture vehicle? Amnon Shashua -- Founder and Chief Executive Officer So the 12-target group wins with 17 models, nine of them are combustion engine models. So 50% of the models is going to be combustion engine, and it doesn't have to be a software-defined vehicle. It's a system, just like ADAS is a system, it's really encapsulated in our ECU, so it doesn't have to be a software-defined vehicle, and all the air updates is done through our ECU, so everything is self-contained. Moran Shemesh -- Chief Financial Officer If I may follow up on this, I think that maybe a few years ago, some OEMs said that their future plans in terms of future architecture software-defined vehicles will be based on EVs, under the assumption that EVs will become the leading powertrain for their cars and toward the back half of the decade. What has changed for some OEMs in the last year is that the plans are today maybe a little bit more moderate in terms of the EV percentage versus combustion engine, or a hybrid, but this still means that they are kind of aligning their architectures to the powertrain in a more balanced way, as opposed to going all-in on EVs for future technologies. Dan Galves -- Chief Communications Officer Thank you. Thank you, Adam. We can take one more question, Maria. Operator OK. Our last question comes from Chris McNally with Evercore ISI. Please proceed with your question. Chris McNally -- Evercore ISI -- Analyst Thanks so much, team. Last but hopefully not least, maybe we could dive into some of the SuperVision detail on the potential wins for second half. Would love to know if we look at the wins by type with the RFPs. Is it sort of the old model-by-model RFP approach where we've seen the legacy OEMs kind of bid this out in the past? Or maybe DXP or sort of the wider Audi push deployment has led to a broader fleet deployment for the potential RFPs, i.e., could we have hundreds of thousands of vehicles in the per OEM and the 27-plus time frame? Amnon Shashua -- Founder and Chief Executive Officer Yes. So that -- I have is for -- and normally, what we do is to see kind of the plans for OEMs in launching specific vehicle models, but it's more a platform question as opposed to specific vehicle models. So normally, a platform will include a few vehicle models that will be launched according to their plans. And then we're not kind of going one by one in kind of a rigorous process with each OEM. It's a bundle of cars and car models that can be -- the volumes can vary according to [Inaudible] of course. But when we have a deal, it can include multiple car models as we had with Volkswagen Group, which with one announcement we covered 17 car models with multiple brands and then with all geographies and so on and so forth. Chris McNally -- Evercore ISI -- Analyst Really appreciate that. And maybe just a follow-up. If we could follow on to Adam's question and sticking to this topic of at least for now supervised eyes-on performance, autonomous evolution to the side. And in the past, I think Mobileye has discussed something like you were hoping for 10 times better miles per disengagement from SuperVision when we compare it to something like full self-driving. I think a lot of those comments were pre-version 12. Any thought on how you think SuperVision, again, as a supervised eyes-on system, the competitive statistics stacks up today? Amnon Shashua -- Founder and Chief Executive Officer No. We are targeting the current generation with EyeQ 5 is improving all the time, but we have over-the-air update every two months or so. We are close to achieving a 100-hour mean time between interventional highways less so in urban, but it's more than one or two hours of mean time between intervention. On the EyeQ 6 system, as I mentioned in my prepared remarks, just for the camera subsystem, it's about 1,000 hours of mean time between intervention on highways. Now I don't know what is the mean time to intervention on Tesla's Version 12. I don't know if anyone measured that, but these are the kind of things that we measure in terms of KPIs on how we progress. Operator There are no further questions at this time. I would now like to turn the floor back over to Dan Galves for closing comments. Dan Galves -- Chief Communications Officer Thanks, everyone, for your time, and we will talk to you next quarter. And thanks for the Mobileye team for the session. Thank you.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you for joining today's conference call to discuss Tilray Brands' financial results for the third quarter of fiscal year 2024 ended February 29th, 2024. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session for analysts and investment firms conducted via audio. I will now turn the call over to Ms. Berrin Noorata, Tilray Brands' chief corporate affairs and communications officer. Thank you. You may now begin. Berrin Noorata -- Chief Corporate Affairs and Communications Officer Thank you, operator, and good morning, everyone. By now, you should have access to the earnings press release which is available on the investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from those described in those forward-looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward-looking statements. Today, we will be hearing from key members of our senior leadership team beginning with Irwin Simon, chairman and chief executive officer, who will provide opening remarks and commentary; followed by Carl Merton, chief financial officer, who will review our quarterly financial results for the third quarter and update our financial guidance for the fiscal year 2024. Also joining us for the question-and-answer segment are Denise Faltischek, strategy officer and head of international; Blaire MacNeil, president of Tilray Canada; and Ty Gilmore, president of our U.S. beer business. And now, I'd like to turn the call over to Tilray Brands' chairman and CEO, Irwin Simon. Irwin Simon -- Chairman and Chief Executive Officer Thank you, Berrin. Good morning, everyone, and thank you for joining us. At Tilray Brands, we take great pride in our mission to be the most responsible, trusted, and market-leading cannabis and consumer products company across the globe. Today, with our complementary business units, we believe Tilray Brands is the best-positioned company in the world to take advantage of all the positive regulatory tailwinds happening globally with cannabis legalization and drug policy reform. In Canada, Tilray continues to lead the cannabis industry with the leading portfolio of adult-use brands and the No.1 market share. In the event the current excise tax regime were to be replaced with a 10% ad warrant tax based on the value of the product sold and not a per gram tax, we expect an annual savings of $80 million. We also expect to benefit from additional cannabis-related regulatory reforms around marketing and THC potencies. I'll take a deeper dive in the Canadian market shortly. In Germany, Tilray has the leading cannabis market share by revenue for the trailing 12 months, and we believe we are best positioned to capture a large portion of the expected growth in the medical market with both our in-country cultivation facility in Germany and our state-of-the-art facility in Portugal. We also have the ability to ship products from Canada to Germany. In the U.S., Tilray has multiple options and, in particular, is well positioned to benefit from the federal legalization of medical cannabis as a result of rescheduling. Yes, we believe that the rescheduling of cannabis from Schedule 1 to Schedule 3 in the U.S. would provide a path for Tilray to sell pharmaceutical-grade medical cannabis in the U.S., subject to doctor prescriptions. This is a different strategy from what MSOs are doing today. We believe there's an opportunity to supply medical cannabis products from our existing operations into the U.S. for medical purposes. Further, in the event of a future federal adult use and medical cannabis legalization in the U.S., we believe Tilray is well positioned to immediately leverage its strong global leadership position, know-how, and strategic strengths across operations, distribution, and brands to sell THC-infused products across its robust distribution network and sales channels in the U.S. Today, Tilray is a clear outlier in the global cannabis industry because we're the only company with global expertise in both adult-use and medical cannabis. Our innovation comes from GMP-certified pharmaceutical-grade medicines to all recreational cannabis formats, including THC-infused beverages, which also parlays into our beverage strategy. We have rigorous cannabis quality control, regulatory affairs, branding, marketing, sales, and distribution. We also have the No.1 cannabis market share in Canada, the No.1 cannabis market share in Germany as measured by revenue, and we distribute medical cannabis in over 20 countries around the world. Since 2019, we quickly developed a diversified and award-winning portfolio of brands backed by best-in-class operations in Canada, the U.S., Europe, Australia, and Latin America that supports our goals of becoming a multi-billion-dollar cannabis and consumer products company that addresses the needs of consumers and patients we serve today. As you know, the leadership team at Tilray has the expertise of buying CPG brands and building them into somewhat greater than they were before. Our creative portfolio of beverage brands includes craft beers, spirits, ready-to-drink cocktails, ciders, and nonalcoholic beverages. We are now the fifth-largest craft brewer in the U.S. with a 4.5% share of the craft beer market. With over 500 beer distributors alone. Tilray is now dominating key regions across the U.S. with our craft beer brands in the northeast, Pacific Northwest, Midwest, and southeast, along with one of the most awarded bourbon brands with Breckenridge Distillery, which continues to gain market share across whiskey, vodka, and gin products. Our wellness brands include Manitoba Harvest, hemp-based food products, ingredients and snacks; as well as our Happy Flower, our CBD-infused beverages; and our recently relaunched HiBall energy drinks which, in its first month on Amazon, received over $1 million in orders. With the appropriate approvals, we're also looking to introduce hemp-based delta-9- beverages and products with our Happy Flower brand and across other wellness brands in the U.S. And finally, we own and operate a European medical cannabis and pharmaceutical distribution business in Germany, CC Pharma, also known as Tilray Pharma, with a robust footprint reaching 13,000 pharmacies in Germany alone. With broader medical cannabis use, doctor prescriptions in Germany, we expect there to be tremendous demand for medical cannabis within pharmacies. I can't predict the future, but my belief is there will be a lot of cannabis regulatory changes we've seen with Germany, in Canada, and the U.S., and Tilray is best equipped to reach these underlying opportunities. And we have the assets and the tools to reach our goal for Tilray Brands to deliver industry-leading profitable growth and sustainable long-term shareholder value through a focus on these three fundamentals, maximizing profitable revenue growth through organic growth and strategic acquisitions with strong synergy opportunities, realizing the benefits of optimized asset utilization and cost management to ensure an efficient cost structure across all our business segments, and to strengthen our industry-leading balance sheet and cash position. During Q3, we achieved net revenue of $188 million, representing approximately 30% growth over the previous year. We grew our revenue across our core business segments. This was achieved by focusing on organic growth of legacy brands and enhancing the performance of our more recent strategic acquisitions. Gross profit was 49.4 million despite impact of the newly acquired craft beverage brands which have a lower margin. Our net loss was 105 million, which only 4.5 million represented loss from operations, and cash used in operating activities was 15.6 million. Adjusted gross profit was 51.6 million. Adjusted EBITDA was 10.2 million, adjusted net income of 900,000, and adjusted EPS of $0.00. We delivered positive adjusted free cash flow for the quarter. Over the last three quarters, we significantly reduced our convertible debt by 205 million, decreasing our net debt to approximately 175 million, and will work to continue reducing our indebtedness, optimizing our capital structure, and enhancing our financial flexibility. The net reduction in our convertible debt will decrease our annual interest expense by $9.8 million, which flows directly to adjusted net loss and adjusted free cash flow. Let's now dive deeper into each of our business segments. We grew our global cannabis net revenue by 33% to 63.4 million in Q3 compared to the previous-year quarter, driven by our acquisition of HEXO and Truss as well as our international business and innovation in the Canadian markets. Net Canadian cannabis revenue grew 31% to 49.4 million in Q3 compared to the previous year. We achieved this growth with the HEXO acquisition despite price compression totaling 3.1 million from the prior-year quarter and a crippling tax structure that has allowed taxes to spike while prices declined by more than 50%. Excise tax increased by 8.2 million and amounted to 21.8 million, or 32% of our gross Canadian cannabis revenue in Q3, compared to 13.6 million, or 26% in the same quarter last year. Recent enforcement efforts by Canada Revenue Agency garnishing LP payments from the provincial boards is already having an impact on our competitors, over 1,000 of whom have negligible market share. The continued enforcement by CRA, we believe, will lead to further and necessary industry consolidation perhaps on a mass level. Canada continues to be the largest federally legal and commercial adult-use cannabis market in the world, and Tilray Brands maintains that No.1 market share position in the country. We are No.1 in Ontario, No.1 in Quebec, No.1 in British Columbia, which together represents over 60% of the population of Canada. We're also No.1 in cannabis flower, oils, concentrates, and THC beverages; No. 2 in pre-rolls; No. 4 in vapes; and in the top 10 in all other categories, all while operating under rigorous high-quality control standards. Our focus in Canada is on two things: first, growing sales primarily through continuous launches of new product innovation; and second, taking more and more costs out of our businesses. On the latter, a large part of our acquisition strategy for HEXO and Truss involves removing legacy costs and SKU rationalization from these businesses. For HEXO, we originally target $27 million but then increased that to between 30 million and 35 million, of which we've already achieved 27.5 million in savings on an annualized-run-rate basis, of which 15.6 million is realized cost savings during the period. Our HEXO integration plan includes streamlining our Canadian operations, improving utilization of our core facilities, improving margins, and maximizing cash opportunities by pursuing divestitures and consolidating facilities. We plan to close the Cayuga facility and move its cannabis cultivation to our existing Canadian production lines; sell our Masson facility in Quebec, which is currently cultivating cucumbers as a vegetable operator; and sell the Belleville facility and move our manufacturing to our London facility for our beverages. We expect this plan to result in one-time $70 million to $85 million of Canadian cash flow inflow opportunity and accretive to margins and net income by $5 million to $7 million on an annual basis. From a regulatory standpoint, the expert panel appointed by the federal government clearly highlights three areas of focus which Tilray would benefit from once implemented. First, excise tax reduction, which I've talked about, both in adult recreation and medical, would benefit Tilray $80 million. Secondly, there is a proposed opportunity for pharmacies to carry CBD and medical cannabis for medical patients, which would move plant-based medicines into the mainstream as an options for patients to treat ailments. And finally, enforcement against illicit websites, dispensaries that don't contribute to excise tax and put youth at risk through unregulated product channels available easily online with e-transfer and Canadian Post mail. We think Canada Post and the Canadian banking system are responsible for shutting down access to these unlawful establishments. Turning to international cannabis. We grew net revenue organically by 44% year over year to $14 million, and we remain the No. 1 market leader in medical cannabis across Europe with a leading market share in Germany and Poland. Tilray's international growth has also been driven by increased sales in our existing markets such as Portugal, Italy, the U.K., Australia, and New Zealand. The new German medical market opportunity is projected to be approximately 3 billion in the medium term, while the European opportunity could represent a potential $45 billion medical market alone in the long term. Our presence in Europe allows Tilray to grow our global brand portfolio to a base of over 700 million people in Europe, which is twice the population of the U.S. While much of the media attention related to the new cannabis reform in Germany has been centered around cultivation for personal use and the establishment of cannabis social clubs, the new opportunities for Tilray flow mostly from the removal of medical cannabis from the Narcotics Act. This schedule change is expected to significantly expand the medical cannabis market in Germany as it would allow for more doctors to prescribe medical cannabis more easily to patients and potentially allow for broader health insurance coverage. We will therefore be increasing our educational efforts to bring more and more health professionals on board with medical cannabis as therapeutic options. We estimate that less than 0.4% of the population in Germany are presently buying medical cannabis, compared with 4% in states like Pennsylvania. In Germany, we also stand to benefit from the abolishment of the tender process for in-country cultivation of medicinal cannabis, which is being replaced with a licensing scheme. We are currently one of the only three in-country cultivation facilities in Germany today, and these legislative changes would allow us to better meet patients' need by expanding our medical cannabis product offerings. This would, in turn, significantly increase our cannabis production in Germany by five times more than double our revenue opportunities. Tilray opportunities in U.S. cannabis remains strong. Over the past several years, our playbook of expanding our business beyond cannabis to adjacencies and complementary markets has positioned Tilray well for the current environment as well for future growth opportunities. While we currently do not engage in any U.S. cannabis operations because of federal regulations, we're well positioned to participate and win in a federally legalized market when that changes either rescheduling or medical cannabis or the passage of federal cannabis legalization given our deep knowledge, global expertise in medical and adult-use cannabis, and the regulatory compliance at play. Tilray's playbook in the U.S. is to build and deliver iconic sought-off brands in the beverage alcohol and the CPG, backed by product excellence and innovation; educate consumers about our brands and our stringent quality standards to encourage trial and foster loyalty; and last but not least, to drive and scale and distribute to get our brands into consumer hands to grow our market share. Moving to our beverage segment, which is quickly approaching approximately 300 million annualized. As mentioned earlier, Tilray Brands is now the fifth-largest craft brewer in the U.S. with a 4.5% craft beer market share, and we aspire to be a top 12 beverage company in the U.S. Q3 beverage alcohol net revenue was 54.7 million, representing 165% growth year over year. Tilray now holds a 4.5% of the craft beer market share in the U.S. and we're just getting started and ramping up. Of this, our legacy brands of SweetWater, Montauk, Alpine Nelson, and Green Flash demonstrates our ability to successfully grow existing brands along with our recent acquisition of 12 craft brands from AB InBev, we have gained a state -- we have gained in scale and see further expansion opportunities. SweetWater remains the No. 1 brand family in Georgia multi-outlets. Montauk remains the No. 1 brand family in metro New York. Having increased its distribution by 28% versus last year, Tilray is now the No. 1 craft supplier year to date in the Pacific Northwest. 10 Barrels volume growth increased by 413 basis points since Tilray took over the brand, and we're now capitalizing on the success of 10 Barrel Pub Beer brand extensions by adding Pub Ice, Pub Cerveza line extensions. Both innovations, we are extremely excited to launch. Growing 24%, Pub Beer is now a top 20 brand on the West Coast with only half the distribution of top competitors due to its focus on the Pacific Northwest states. Still, our vision is to be much higher as we're aiming and uniquely positioned to become a top 12 beverage alcohol business. This will be accomplished by leveraging our portfolio to win more occasions through core products such as craft beer and beyond through innovation to categories like flavored malt beverages, ready-to-drink cocktails, and spirits. But ultimately, our plans go beyond alcohol as we will be expanding into sparkling water, energy drinks, and other categories. This is important because we have the manufacturing facilities, the distribution, and the sales and marketing infrastructure to drive Tilray businesses. Working with BCG, we developed a clear and focused strategy to drive top-line and bottom-line growth for our beverage businesses. The three-pronged approach will deploy our regional strategy called fuel to stabilize scale brands such as SweetWater, Montauk, and Blue Point in their respective key adjacent regional markets across the U.S. and maximize their potential to gain market share from competitors. Fuel is already paying off. According to BI sales to retail data, Tilray has increased its market share of total beer in 13 states, including key beer markets such as Oregon, Washington, Colorado, Idaho, Minnesota, and Arizona when comparing share before and after the Craft acquisition. In the southeast alone, we've improved trends by 4.6% post acquisition. For Q3, 10 Barrel has seen a 12.3% increase in distribution among our top 10 distributors when compared to the same time last year. And when comparing six months pre-acquisition with the five months post-acquisition, overall trends have improved 3.5%. Overall trends for Blue Point have improved 1.3% while No. 1 distributor has improved trends by 3.8%. And those are just a few examples. We are also executing a national brand strategy, beginning with revitalizing Shock Top, to win as a national craft beer over time by targeting share and connect occasions to reach mainstream male and female drinkers. We think there is tremendous upside with Shock Top as, according to our qualitative research, Shock Top has the highest purchase intent among 12 of the largest beer brands. This is why we're focused on increasing distribution and getting this brand back into the hands of consumers. We are already on our way. In Q3, Shock Top No. 1 distributor has increased distribution 24% versus last year, while on-premise distribution has increased a half a percent over last year among Shock Top top 10 distributors. We are aggressively launching new and often disruptive innovation across our beer and nonalcoholic craft to increase portfolio brand appeal to new consumers and new occasions. Many of our newly acquired brands have not had innovation in the last couple of years. Among many others, recent examples include Liquid Love for heartfelt hydration; Runner's High, a nonalcoholic craft brew for athletes; HiBall and HardBall, a non-carbonated 10% ABV product sold in 16.9-ounce plastic resealable containers; and non-carbonated Shock Top LiiT Hard Tea. Let me say that we're working to get the cost structure right, transforming the productivity and profitability of the breweries we acquire. We expect that our beer gross margins will increase once we fully realize the cost savings achieved in connection with the fully integrated beverage alcohol platform as we move away from the existing capacity manufacture agreements with ABI and increase our productivity in our newly acquired breweries and 13 brew pubs. Finally, let's discuss our wellness segment represented mostly by Manitoba Harvest, which is fostering a positive impact on people and the planet through hemp by making ongoing commitments to sustainability with breakthrough initiatives such as investment in regenerative agriculture. Revenue grew 12% in Q3 to 13.4 million compared to last year. We partnered with bioactives company Brightseed to revolutionize the functional fiber market and breakthrough product, Manitoba Harvest Bioactive Fiber, which is now exclusively available at Whole Foods markets nationwide. Incredibly, 95% of Americans do not consume the recommended daily intake of fiber. This product provides six grams of both soluble and insoluble fiber per serving and is the only fiber solution containing two powerful hemp-based bioactive for gut health. Moving forward, the team continues to assess the opportunity to bring hemp derivative delta-9 beverages to market under Happy Flower and Tilray brands. With that, I now turn the call over to Carl discuss our financials in greater detail. Carl? Carl Merton -- Chief Financial Officer Thank you, Irwin. Recall that we present our financial results in accordance with U.S. GAAP and in U.S. dollars. Throughout our discussion, we will be referring to both GAAP and non-GAAP adjusted results, and we encourage you to review the reconciliation contained within our press release from our reported results under GAAP to the corresponding non-GAAP measures. Let's now review our quarterly performance for the three months ended February 29th, 2024, Q3 total net revenue rose to 188.3 million compared to the prior-year quarter of 145.6 million, representing almost 30% growth. Excluding acquisitions completed within the fiscal year and the $8.7 million HEXO advisory fee captured in the prior year quarter, our legacy businesses remain consistent despite a 13% revenue decline in our lowest-margin segment. We continually see emphasized the strategic importance of our adjacency business model, which is a key differentiator for us. This is best reflected by the contribution of our four segments to our overall results, which shows that we are not too dependent on any individual segment having a disproportionate impact on our sales or profit growth. Each segment is also, in our view, on a path to sustainable long-term growth. Looking at each segment now. During Q3 and compared against the prior-year period, net beverage alcohol rose 165% and represented 25% of our total revenue mix, more than double relative to last year's 14% of total mix. Net cannabis revenue rose 33% and represented 34% of total mix, up slightly from 33% last year. Distribution revenue decreased 13% and represented 30% of total mix, down from 45% last year. And wellness revenue rose 12% and represented about 7% of total mix, down only slightly from 8% last year, respectively. Diversification is also reflected in our geographic footprint. During Q3, more than 62% of our net revenue was generated in North America, roughly 36% was generated in EMEA, and the remaining 2% coming from other parts of the world. This compares to about half from North America and EMEA in Q3 last year with the variance related to the North American acquisitions we completed since that time, namely HEXO, the Craft acquisition brands, and the remainder of Truss Beverages. Let me first touch on the key current item related to cannabis before moving on to a discussion on profitability. We incurred 21.8 million in Canadian cannabis excise taxes during Q3, which are a reduction to revenue, compared to only 13.6 million last year. The increase in excise taxes is reflected by a sharp increase in cannabis revenue generated in Canada versus the year-ago period due in part to the HEXO and Truss acquisitions and a change in our revenue mix due to higher excise tax products. Through the first three quarters of our fiscal year, we've incurred more than $75 million in excise taxes versus 47 million for the year-ago nine-month period. For many quarters, we have been on the record with respect to the inherent unfairness as to how the excise tax is predominantly computed, which is largely a fixed price on gram sold rather than as a percentage of the selling price. Because the selling price has declined meaningfully since the law was first enacted in 2018, it has made the excise tax a larger and larger component of net revenue over time, particularly as current growth categories like infused pre-rolls and concentrates become the biggest part of our sales mix. To prove this point further, excise tax amounted to 32% of gross Canadian cannabis revenue in Q3, compared to 26% in the same quarter last year. All through the first three quarters of the year, excise tax came to 34% of gross cannabis revenue versus 27% for the first nine months of fiscal 2023. In our view and in the view of so many others, this price-based tax structure is crippling as it has allowed taxes to spike as the price of cannabis has declined by more than 50% since legalization. In late February, the Canadian House of Commons Standing Committee on Finance issued a report outlining several recommendations regarding the regulated adult-use cannabis industry, including the recommendation to adjust the tax structure. Recommendation three to nine in particular calls on legislators to make adjustment to the excise duty formula for cannabis so that it is limited to a 10% ad valorem rate. If enacted, this would be a welcome change that could result in 80 million in annualized revenue for our cannabis business, which would largely fall to the bottom line. The key to the government's plan and needed relief for our industry is that the provinces not enact their own excise tax to reflect the loss and taxes they are reaping from the status quo, increase their profits at the boards, or mandate that the tax savings are passed on directly to the consumer in the form of lower pricing. The budget announcement is next week, and we'll be following developments closely but are resolute in our view that reform is greatly needed and measures must be enacted to stabilize the Canadian cannabis industry. Turning back to our performance. Gross profit was $49.4 million, compared to a loss of 11.7 million in the prior year quarter, while gross margin increased to 26% from negative 8% in the prior-year quarter. Adjusted gross margin decreased to 27%, compared to 30% in the prior-year quarter. I will discuss adjusted gross margin by individual segment in a moment. However, the majority of the decrease relates to the addition of the new craft brands, which are subject to a co-manufacturing agreement with ABI until at least the end of Q1 next year and the prior-year figure including the HEXO advisory fees. Net loss improved to $105, million compared to a net loss of 1.2 billion in the prior-year quarter which included $934 million of impairments. On a per-share basis, this amounted to a net loss of $0.12 versus $1.90 in the prior-year quarter. Recall that last quarter we introduced two new reporting metrics to our discussions: adjusted net income loss and adjusted earnings per share. The definitions of both are identified in the press release along with the relevant reconciliations and calculations. For Q3, we are reporting an adjusted net income of $900,000, which, when calculated on a per-share basis, results in EPS of zero for the quarter. Adjusted EBITDA was $10.2 million, down from 13.3 million in the prior-year quarter. This is mainly a consequence of the negative impact the cannabis gross margin related to wholesale revenue, the termination of the HEXO advisory services contract on our acquisition of HEXO in June, and the co-manufacturing agreements with the new craft brands, as I will explain shortly. During the quarter, we made great progress against the HEXO synergy plan which we had previously increased to between $30 million and $35 million. As of the end of Q3, we achieved 27.5 million in savings on an annualized run rate basis, of which 15.6 represented actual cost savings during the period. Operating cash flow was negative15.4 million, compared to negative 18.6 million in the prior-year quarter. This improvement in cash used during Q3 this year was primarily related to achieved synergies of previously identified cost savings plans. Moving now to our four big business segments. Beverage alcohol revenue was 54.7 million, up 165% from 20.6 million in the prior-year quarter. The positive delta was due to contributions from the craft brands which were purchased last fall. However, we note that the impact of dry January was far more of a headwind than it was for the industry in previous years. Average alcohol gross profit increased to 18.9 million compared to $10 million, while beverage alcohol gross margin decreased to 34% from 48% in the prior-year quarter. Adjusted gross margin fell to 38% from 53%. Both of these outcomes were a result of the craft brands, which currently have lower margins than our historical business. This is primarily due to the co-manufacturing agreements for brewing. For greater context, adjusted gross margin for our legacy beverage business was 59%, compared to the prior-year quarter of 53%, primarily as a result of an agreement with the distributor related to our spirits business. Adjusted gross margin from the craft brands was 26%. The improvement of gross margins in the beverage alcohol business, primarily in the beer portion of the business, represents a major focus for the organization. Gross cannabis revenue of 85.2 million was comprised of 62.1 million in Canadian adult-use revenue, 14 million in international cannabis revenue, 6.4 million in Canadian medical cannabis revenue, and 2.8 million in wholesale cannabis revenue. Net cannabis revenue, which excludes the aforementioned 21.8 million in excise taxes, was $63.4 million, representing a 33% increase from the year-ago period. The positive variance is related to the increased organic growth of over 14% combined with contributions from the acquisitions of HEXO and Truss. Offsetting the increase in net cannabis revenue was the elimination of advisory services revenue totaling 8.7 million from the prior-year quarter due to the HEXO acquisition, which terminated the previous strategic arrangement that was in place. While revenue from Canadian medical cannabis grew only slightly as a category is being impacted by competition from the adult-use market and its related price compression, revenue from Canadian adult-use rose 37%, which was driven by new product innovation and increased revenue from HEXO and Truss. International cannabis grew 44% largely because of growth in our existing markets and the expansion into emerging international medical markets. Wholesale cannabis revenue increased to 2.8 million from essentially zero last year as these sales are opportunistic and variable. We entered into this wholesale agreement to optimize our inventory levels and prioritize the generation of positive operating cash flow. However, it unfavorably impacted our gross profit and EBITDA. Cannabis gross profit was 20.9 million and cannabis gross margin was 33%, compared to negative 32.8 million and negative 69% in the prior-year quarter. Excluding the impact of the noncash fair value purchase price accounting step-up and inventory valuation adjustments, adjusted gross margin decreased to 33% from 47%. As I said earlier, a portion of the margin decrease as a result of the termination of the HEXO advisory services agreement, which contributed zero gross profit in the current year compared to 8.7 million in the prior year, which, if excluded, would decrease adjusted gross margin to 35%, essentially meaning that our cannabis gross margin was largely flat year over year. Distribution revenue derived predominantly through Tilray Pharma decreased 13% to 56.8 million from 65.4 million in the prior-year quarter. Revenue was negatively impacted by infrastructure outages and weather, which impacted revenue by just over $3 million and short-term challenges related to new rebate regulations. Tilray Pharma gross profit decreased to 5.6 million, compared to 7.5 million in the prior-year period. Tilray Parma gross margin decreased to 10% from 11% in the prior-year quarter because of product mix. Wellness revenue grew to 12% at 13.4 million from 12 million in the prior-year quarter. The increase was driven by our strategic focus on targeted advertising campaigns aligned with emerging trends in healthier lifestyles, particularly around the new year, coupled with our continuous innovation efforts. Wellness gross profit was $4.1 million, up from 3.7 million in the prior-year quarter, and gross margin held at 30% compared to 31% in the prior-year period as we experienced a change in sales mix toward more bulk retail sales. Our cash and marketable securities balance as of February 29th was $225.9 million, down from 408.3 million in the year-ago period. The majority of the variance was related to the payment on maturity of the Tilray 23s, our cash acquisition of the new craft brands, and settling assumed liabilities from HEXO, including unpaid excise tax as well as legacy litigation settlements. Having now completed three quarters of our fiscal year, it is clear that our prior fiscal 2024 guidance of adjusted EBITDA between 68 million and 78 million is no longer feasible. We have therefore lowered our adjusted EBITDA range to be between 60 million and 63 million, which takes into consideration our performance through the three quarters, over $12 million year-to-date price compression in the cannabis business, and continued expectations for the fourth quarter. Still, the fourth quarter represents a major increase from the current quarter, which is traditionally our lowest quarter due to the seasonality within our segment. The fourth quarter seasonality improvement is a function of our beer business leading up to the summer, a historically busy season; new innovation scheduled to be launched as part of the spring reset; new innovation in our cannabis business along with expected wholesale sales; and in our distribution business as pharmacies buy in bulk for their customers ahead of them going on summer vacation. Recall that we also projected positive adjusted free cash flow from operations for the entire fiscal year, excluding our integration costs for HEXO Trust, the new craft brands, and the cash income taxes associated with Aphria Diamond. Due to the timing of collecting the cash on the various asset sales mentioned, we now do not expect to achieve this prior adjusted free cash flow guidance. While we were adjusted free cash flow positive in the current quarter, our current expectations are for a very strong fourth quarter of adjusted positive free cash flow. Of course, we will continue managing capex as part of our efforts to strengthen our industry-leading balance sheet. Let me now conclude our prepared remarks and open the lines for questions from our covering analysts. Operator, what's the first question? Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Andrew Carter with Stifel. Please proceed with your question. Andrew Carter -- Stifel Financial Corp. -- Analyst Hey, thank you. Good morning. I wanted to ask about the German changes. I mean, obviously, that it's going to likely manifest in a big uptick in patients with doctors now having more more freedom to prescribe cannabis. But kind of thinking through this competitively, how do you -- how do you see this as your position unique and being able to attack this market? I know that, you know, for the past five years, we've seen a lot of decks with German -- German -- Germany circled and capacity to hit that market. Is that capacity still out there, and how expensive it is to maintain this? And can you give us a reminder of kind of the stringent quality standards you have to have in place to serve the German market? Thanks. Irwin Simon -- Chairman and Chief Executive Officer Andrew, thank you and great question. Number one, listen, we see the opportunities in Germany in multiple ways. We have a facility in Germany today, and the Germany before only with service of tender to the German government. Now, that tender process will go away, and we'll be able to sell product into the marketplace. So, that's number one. Number two is, before, only a certain amount of doctors were able to prescribe cannabis, and it was a very small amount for specialty reasons. And now, every doctor, because it's no longer a narcotic, will be able to prescribe cannabis. Number three, you know, we also have a facility in Portugal which will be able to supply Germany. Number four is we have something called Tilray Pharmacy, CC Pharma, which is a distribution company that distributes cannabis and other medicines to over 13,000 drugstores. We have a team based in Germany. We have a sales team based in Germany. We have R&D. We have quality assurance. So, we've been there for four or five years, and we've had some tough four or five years because of what's happening. The other big thing here is, you know, Europe is a big country. And, you know, with no longer being a narcotic and decriminalized, we see lots of other places -- you know, countries opening up. I have Denise Faltischek here as head of Europe. Denise, anything I missed here or anything that, you know, you should add? Denise Faltischek -- President, International Business and Chief Strategy Officer Yeah, no, Irwin, you did not miss anything. Just to add a little bit more in terms of facts. So, in terms of that abolishment of the tender that Irwin spoke about, and the fact that under the new -- under the new regulations, we'll be able to apply for a license with our facility in Neumunster. So, today, just to refresh, you know, everyone's memory, we are subject to a tender contract. We are capped at about 1,000 kilograms that we can grow every year and that is done pursuant to certain pricing. So, with the abolishment of the tender, we now open up into a licensing process where we are now subject to just market conditions as relates to patient demand. And so, we can utilize that facility to meet that demand, which would allow us to increase our capacity. We have the ability to today grow up to about 5,000 to 6,000 kilograms without any additional capex, and we can basically then also have pricing that is subject to market demand today. So, that -- that is an immediate benefit there. In terms of the ability to prescribe, we are amping up our ability to be in front of doctors and working on symposiums and educational platforms. On the -- one of the things we've done on the prescription platform software, if a doctor wants to prescribe medical cannabis, they can -- they go to that page and there's a Tilray banner at the bottom which shows all of our portfolio of products, what the conditions are, how to prescribe. So, we are out there also providing basically information for doctors who are willing to prescribe and want to prescribe. Irwin Simon -- Chairman and Chief Executive Officer I think the big thing is we do have a brand in Tilray brand, but you know, the whole thing is socialized medicine and prescription and paying for it. We see lots of changes happening. So, you know, we have been working in the German market in regards to, you know, products for pain, for anxiety, for sleep, for cancer, for epilepsy. So, we've been all over that and take our expertise of what we do at medical cannabis, you know, in Canada and translate it there. And secondly, like I said, there is a market out there that will be looking for medical cannabis but ultimately using it for recreational cannabis. So, from a standpoint, we really are excited about what's happening in Germany. It does not affect us in regards to the social measures that have come in place there. And, you know, we have the team, we have the grow, we have the infrastructure, the research, and development ready to-to go here, and it's, you know, effective now. Andrew Carter -- Stifel Financial Corp. -- Analyst Thanks. I'll pass it on. Irwin Simon -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question. Nadine Sarwat -- AllianceBernstein -- Analyst Hi, thank you. Two for me, please. First, on the guidance, I appreciate the added color that you gave. Could you be a little bit more specific and perhaps what exactly has changed versus last quarter and this quarter, what sort of surprise to the downside, and how do you see that progressing over the quarters to come? And then, my second question, I know you guys called out your No.1 position in Canadian cannabis. So, looking at the market share numbers you guys quote in the press release, I think that's on the downward trend for the last couple of quarters. So, could you break down what's driving that, and if you think you can regain that over the quarters to come, and if so, how -- how do you anticipate doing that? Thank you. Irwin Simon -- Chairman and Chief Executive Officer So, I'm going to take -- start part of it. Number one, not all quarters are equal, this third quarter being one of our lowest quarters in regards to bev alcohol and our cannabis business, our fourth quarters, and our first quarter, second quarter. So, that's you know, as you look at our quarters and absolutely there's seasonality within all these businesses. Secondly, you know, we did lose some share in Canada. Some of it was again coming back to price compression and some of it was coming back to some of the prices in regards to our flower. The other thing, what happened is we have a lot of innovation that was coming into the marketplace that we didn't get into the market, you know, in our third quarter, which we expect, you know, to get back in our fourth quarter. I think, you know, what's important here, again, there's been lots of price compression in Canada where, in regards to -- we talked about our percentage in excise tax, and the market is changing dramatically there in regards to potencies, and being, you know, infused pre-rolls etc. So, some of it is just timing. And do I expect to get it back? Blair, you're on the line. Do you expect to get your -- your share back? Blair MacNeil -- President, Canadian Business Yeah, thanks, Irwin, and thanks, Nadine, for the call. Just to add a little bit more color to what everyone was talking about, Q2 and Q3 were our most operational complex periods. So, in addition to what Irwin talked about, what we also saw is when you were moving the location of SKUs and where they're going to be distributed from, and one of the things we've done is centralized all our packaging and logistics out of Leamington, that requires us to draw down inventories in each of the boards and then rebuild that inventory once we've changed the source location. So, what you're seeing in some of the numbers is, in addition to the price compression Irwin talked about and the -- and the innovation side, is just a reflection of the operational complexity we -- we implemented in Q2 and Q3. Once that is completed and it was all completed inside of Q3, that will generate very strong operational efficiencies for us moving forward as everything outside of beverages will be shipped out of one location. Irwin Simon -- Chairman and Chief Executive Officer Carl? Carl Merton -- Chief Financial Officer Yeah, yeah, so just to align a couple of things to -- to the explanation as well, you know, in our beverage alcohol business, and I think in the entire industry, was hit -- it was hit a little bit harder than it has in the past in terms of -- in terms of dry January. And so, that took away a bit of a portion of our -- our sales expectation for the -- for the year. You know, the beverage alcohol business with the new acquisition of -- of the new brands, those brands are adding lower gross margin than they -- than the rest of our businesses. We're working very hard to -- to -- to bring those -- those pieces up and we will get that up over time. As I said in the script, you know, we expect to be able to bring those up much closer to to the historical margins that we've achieved. But it's going to take -- it's going to take a few quarters, and so it's just -- it's -- it's coming. It's really a function of the manufacturing agreements that we have and getting that production moved into our facilities and organize them in an effective manner while not clogging operational problems during -- during that move. And in terms of the free cash flow guidance, we had some expectations on cash receipts on some of -- some of the bigger things including some of the make whole provisions inside of the spirits business, which we now see coming in in -- in June or July as opposed to in May, and that's really what's led to that thing. Irwin Simon -- Chairman and Chief Executive Officer I think the big thing here is just timing and that's -- you know, I can't always predict things. And, you know, with our beer businesses, you know, the ABI businesses bought lower margins. But just from an integration standpoint, we had a service agreement, you know, with ABI, we're moving away from that at the end of May, moving into our facilities. You know, we expect to get our margins up into the high 30s, low 40s today. But our SweetWater and our legacy businesses, we're running margins at that rate. So, you know, with that, we look -- we look to those margins. In regards to, you know, the Canadian cannabis businesses, as Blair said, integrating HEXO with SKU rationalization with some of the strains and looking at some of the potencies and timing. And when you're dealing with agriculture products, not everything moves accordingly here. You know, we've made some moves in regards to, you know, our Cayuga, in regards to Masson, in regards to Belleville, and consolidating our businesses there, taking note of costs. So, again, as we look at guidance, yes, there's guidance out there, but a lot of it is just timing. And as we move forward, you know, we have four quarters, not six quarters. If it was six quarters, it would be different. Nadine Sarwat -- AllianceBernstein -- Analyst Understood. Thank you. Irwin Simon -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question. Remington Smith -- Alliance Global Partners -- Analyst Hi, good morning and thank you for the questions. This is Remington Smith on for Aaron Grey. My first question is, in terms of the CRA having the provinces garnish wages, do we start to see any changes in purchase habits from provinces or the overall competitive environment yet, and then, with kind of greater focus on those LPs paying their taxes? Carl Merton -- Chief Financial Officer I don't think we've necessarily seen changes in -- in purchasing patterns. I think we saw very quickly, after CRA started garnishing those wages, a couple of LPs filed for protection within the same week. And then, I think there's been a few more that have filed since that period of time. And so, you know, someone who's -- who's excessively behind on their excise tax and -- and having their payments garnished are looking at four or five, maybe six months of time before they're going to get their next payment. They just don't have a lot of choices, and and so they're -- they're having to file for that protection. You know, I don't think the -- the boards are actually changing those patterns yet. I think that'll probably happen over the next two, three, or four months as more of these LPs realize and get caught up in the garnishment. Irwin Simon -- Chairman and Chief Executive Officer But there's a lot of the boards out there that been asked by this area to garnish excise tax when they sell into it. I think the big thing for us is we're finally seeing, you know, the Canadian government taking this serious, and those that, you know, weren't paying excise tax could keep going and, you know, putting the rest of us at a disadvantage. So, I think we're going to continuously see changes. And, you know, we've talked about the study that's come out there in regards to changes in regards to excise tax and marketing, you know, medical cannabis, etc. I think there's some major things here that could really benefit the Canadian cannabis industry. Remington Smith -- Alliance Global Partners -- Analyst Great. Thank you. I appreciate the color there. And then, my second question -- oh, go ahead. Irwin Simon -- Chairman and Chief Executive Officer No, go ahead. Remington Smith -- Alliance Global Partners -- Analyst And my second question just on the excise change -- excise tax changes that you mentioned that could potentially occur in the budget potentially next week, you mentioned tax savings potentially of $80 million for -- for Tilray. So, I guess with those savings, you expect it to mostly be realized by the LPs, or could there be, you know, some benefit realized from the provinces and the retail as well? Any color there would be helpful. Irwin Simon -- Chairman and Chief Executive Officer You know, good question, good question. I think, as we know provinces and we know governments, I'm sure they're going to try and grab some of that. But I think, listen, as we've said and we've only said it's about $80 million, you know, to Tilray. And the big thing is you got price compression and you still have the same amount of excise tax that you're paying. And, you know, I think in this quarter it was 32, 33% of our sales was going to excise tax. So, something has to be done. I don't mind if some of it goes back to the governments on education and promoting the safety, bringing awareness, marketing, and allow us to do these things. So, again, if we got half of it, $40 million back -- invest back in the business, I think it would be tremendous, beneficial, you know, to Tilray and other LPs. Carl Merton -- Chief Financial Officer And I think the key -- the key in this piece is that if the government is making the change to strengthen the industry because the tax became, in a way, oppressive, they need to avoid creating new things that -- that -- that pull that money back, and they need to allow it to go to the industry to help the industry continue to grow and strengthen. Remington Smith -- Alliance Global Partners -- Analyst Great. Thank you for the answer today. Operator Thank you. Our next question comes from the line of Bill Kirk with Roth MKM. Please proceed with your question. Bill Kirk -- ROTH MKM -- Analyst OK, thank you for taking the questions. Maybe I missed it in the prepared remarks, but what is the -- the 29 million in assets that have been moved to held for sale? I imagine some of it might be facilities that you mentioned earlier, but what specifically is in that -- that number, and how is it determined? Carl Merton -- Chief Financial Officer So, that number is -- is Cayuga facility, it's Masson, and it's the Bellville facility that we acquired as part of trust. And so, in each case, it's a facility, it isn't the business. The business is being reorganized within our existing footprints, and then we're -- we're releasing or selling them what becomes redundant assets at that point in time. Bill Kirk -- ROTH MKM -- Analyst OK, got it. That's what I was looking for on not -- not the businesses, OK. And then, in the third quarter compared to 2Q, selling, marketing expenses up a little bit. Carl Merton -- Chief Financial Officer Did we -- did we lose you, Bill? Bill Kirk -- ROTH MKM -- Analyst [Inaudible] Operator I'm sorry, it seems that his line may have a technical difficulty. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question. Michael Lavery -- Piper Sandler -- Analyst Thank you. Good morning. I just wanted to touch on the U.S. And I understand at the moment it's strictly speaking a little bit hypothetical still, but if rescheduling occurs, you laid out at a high level how you're thinking about it in a more pharmaceutical approach. I guess a couple questions. Is it -- just maybe what's your patience level if it does come to that, just because the FDA certainly is known not for its speed? And so, you know, is your understanding just, you know, that -- that -- that obviously if that door opens, it could still take quite some time? Or how are you thinking about that? And in the release as well, you reminded us about the connection to MedMen. And how would that fit into that potentially? Is that something that would still stay separate or could potentially become sort of like pharmacies? I guess just maybe lay out some of how you're thinking about potential U.S. opportunities should regulatory change come through? Irwin Simon -- Chairman and Chief Executive Officer So, as you know, as I said, within the U.S., if medical cannabis is rescheduled and medical cannabis becomes legal, we being, you know, a large medical cannabis producer in Canada and Europe and had the expertise and have the research, not knowing what the FDA and not knowing In regards to, you know, what the guidelines will be, you know, Tilray is ready to capitalize on all our expertise. Is there a possibility with NAFTA or with other rules that we can, you know, export cannabis from Canada that's GMP certified. Today, you can export, you know, cannabis from Canada to other parts of the other countries around the world if it's GMP certified. So, I'm not sure why that wouldn't be the case in the U.S. if that happens. My personal belief if it's rescheduled from the medical cannabis standpoint and they leave it up to each of the states on a recreational standpoint, then you know, that is something different. So, I think the big thing is I look into a crystal ball not knowing where this is going. I think something happens from a rescheduling standpoint. And, you know, Tilray is ready to move from a medical standpoint. If there was an acquisition for us, we're ready to move. And, you know, we uphold the debt of MedMen. We think the Medmen name still has a strong -- strong brand name even though it's had its challenges and it's going through, you know, some changes right now to get rid of some of those liabilities and that. And there's an opportunity that, you know, we could execute with the MedMen name across the U.S. The other thing is depending -- and I think one of the biggest opportunities, and we're seeing, you know, some opportunities with delta-9, which is infused drinks with hemp-infused THC. I think the biggest opportunity is in drinks. And with our distribution systems, with our brands within our beer business and spirits, you know, Tilray could get into that. So, you know, not knowing and not -- you know, what's going to happen, I think, as I said, Tilray is circled in the U.S. And it's not like we'd have to change their model being an MSO where we're, you know, restricted to each state right now. We could take our expertise from around the world. We can take our medical expertise, we can take our beverage expertise and bring it to the U.S. once we know which way rescheduling happens and it goes. So, that's what I'm excited about is once we know what the guidelines are, once we know what the opportunities are, we could easily jump in there without undoing something that we own today. Michael Lavery -- Piper Sandler -- Analyst OK, thanks. And just on the beverage side, you touched on your hopes for distribution upside on a lot of the especially recently acquired brands. But do you have a sense how you coming into this spring's shelf resets and what sort of shelf space gains your position for that are already in hand? Irwin Simon -- Chairman and Chief Executive Officer Hey, Ty, you're on the call, right? Do you want to jump in there? Listen, I got to tell you in a short period of time, you know, a lot of these brands were just starved on innovation, starved on distribution. We have 500 distributors out there, and I always say to Ty, if each distributor could do $1 million more, which is not a lot, that's $500 million. So, I think the upside on beer is tremendous. You know, as you look at pricing, you look -- you look in regards to the whole spirits industry. I think we're so well positioned on beer, on innovation that we're coming out with, you know, moving into water, we're moving into some energy drinks, moving into some other infused drinks. So, we're well positioned with our distributors. We have over 100 salespeople and, you know, headquarter people between marketing. So, Ty, you want to just talk about some of the stuff that's happening? Ty Gilmore -- President, US Beer Division Yeah, yeah, no, thanks, Irwin, and thanks for the question, Michael. Yeah, no, we -- we feel really solid about some of the distribution gains, not only that we've made in the third quarter, but we also feel solid about the conversations we're having with, you know, several national and regional retailers across on and off-premise with our brands. You know, specifically, if I look over Q3, I mean we've gained north of 1,200 new effective placements on our existing brands, and with the innovation, you know, we continue to see uptick every day with our distributor network and how they're leaning in with us and helping drive distribution. So, you know, chains are going to continue to play a critical role in our success, and we're well suited, as Irwin said, to leverage our partnerships with our distributors and the relationships that we have across the U.S. Michael Lavery -- Piper Sandler -- Analyst OK, thanks so much. Operator Thank you. Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question. Matt Bottomley -- Canaccord Genuity -- Analyst Good morning, everyone. This one's for Carl. I just wanted to go back to the revised guidance here on adjusted EBITDA going into fiscal Q4 here. So, I'm just wondering if you could give a little more color on the dynamic between, you know, overall revenue progression versus margin expansion. There's -- there's obviously quite still a big step-up expected even in the revised guidance. And then, specifically within that, I'm wondering how much of that is -- is beverage related given that I think you had commented that you're close to about a $300 million business now in all your beverage portfolios. If you run rate this quarter, and I understand there's seasonality, it's closer to 200 to 225. So, I'm just wondering if there's some step-up on the revenue side specifically in Q4 when it comes to your alcohol contribution. Carl Merton -- Chief Financial Officer So, thanks -- thanks, Matt. There -- there is significant increase in -- in sales in Q4 in -- in beer. I think we've talked a little bit already on the call in terms of the spring reset and -- and hitting -- hitting those -- you know, the key summer selling season, which is really driven in our April and May sales results for -- for the organization, particularly in beer. We've also -- we've talked a few times about challenges in the spirits business with -- with sales growth and that, you know, we were going to get resolution of that in Q4 of this year. So, that's also reflected inside of those -- that expectation on the guidance, as you know, potentially driving both revenue and and margins during that -- during that time period. I think on -- on the beer businesses margin side, you are going to see an increase in margins in Q4 that will be driven by just more -- more volume flowing through the facilities as we -- as we ramp up production in -- you know, in March and April to hit those April and May sales because there's such quick turnaround time and lack of inventory inside -- inside that segment. You know, we've also got the buildup on the cannabis business for the summer period that time and, you know, increases in things like pre-rolls and -- and other product forms in the cannabis business that are -- that are consumed on a more of a, let's call it, a shared basis either in a shared setting or actually shared on its own. And so, that's -- that's a -- that's a part of it. And -- and with that increased sales level comes increases in margins just because of the efficiency on -- on the production side. Matt Bottomley -- Canaccord Genuity -- Analyst OK, very helpful. Thank you. Operator Thank you. Our next question comes from the line of Doug Miehm with RBC Capital Markets. Please proceed with your question. Douglas Miehm -- RBC Capital Markets -- Analyst Yeah, thank you, and good morning. Question just has to do with, again, the excise tax. And going back to this, there's obviously an opportunity for your company, but I am curious, if these changes were to go through and you benefit somewhere between 40 million and 80 million the way you expected, what do you -- what's your thinking on the other companies? Because we're starting to lose some of the smaller companies, but is this going to provide the smaller companies with another year or two of life? And I'd say the other thing that I'm curious about as it relates to this, could this result in another leg of downward pricing as they try to maintain market share? Irwin Simon -- Chairman and Chief Executive Officer So, I think a couple of things. Yes, I think, you know, if companies don't have to pay the same amount of excise tax, that, you know, everybody is, I think some of these companies absolutely will survive. And I think -- listen, I think at the end of the day, we all want a strong cannabis market in Canada. The big thing is, again, what's got to change is the excise tax. And, yes, you know, we probably are the highest -- we are the highest payer of excise tax in Canada. So, for us to receive back -- it's $80 million is a lot of money. But at the end of the day, it's money that we're going to put into building our brands, building our products, our innovation, and hopefully marketing, and building a bigger category out there. And I think that's ultimately the benefit that the money's not going back to, you know -- taxes is going back in to build a marketplace and back into, you know, continuously grow the industry. So, yes, will -- if more competition be out there, could there be price compression? Absolutely. But I'll tell you what, I don't mind some more price compression. I don't mind some more LPs being in there. I wouldn't mind that $80 million coming into our -- you know, into our company where we can invest it back in our business and drive growth, drive, you know, innovation, and drive marketing to brands to much bigger category. Carl Merton -- Chief Financial Officer I think it's also important to understand that different entities are going to have different amounts of a win related to this, right? And as you get -- as you get closer to the tail end of share, the -- the impact for a lot of those companies is going to be a lot less. And if they're behind on their excise taxes, you know, the excise tax garnishment may have -- may have a bigger impact for them. We're on the -- as Irwin said, we're on the opposite end of that tail because -- because we're the largest. And then, you've got a bunch of companies in the middle where, you know, I think that is more toward where your question was, were you're going to see some people who will be able to survive a little bit easier. Irwin Simon -- Chairman and Chief Executive Officer And I don't think excise tax is going to keep everybody in business here, OK? I hope not. I think, you know, I continuously see more consolidation in the Canadian market. I see, you know, some of the smaller players ultimately going away, and I think that's what happens there, as a new industry, there's just a filtration of, you know, these LPs. If you come back and look at it today, 25 LPs make up about 50% of the market share. There's about another thousand LPs that make up the other 50% market share. So, you see some consolidation, you see companies going away, and I think what this creates is a much stronger cannabis industry within the Canadian market. And what happens also, as I said before, there could be opportunities for grow in Canada to be shipped into the U.S. and other parts of the world, which could, you know, enhance the Canadian cannabis industry. Douglas Miehm -- RBC Capital Markets -- Analyst OK, excellent. Thank you. Irwin Simon -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question. John Zamparo -- CIBC World Markets -- Analyst Thank you. Good morning. My question is on -- on the cost side, both COGS and SG&A, and there's just a lot of moving parts here. And I wonder how much FQ3 represents a run rate because you've got additional synergies coming from HEXO. It sounds like you have savings on the beverage side as you move away from co-packing agreements, but you're also investing in innovation and product extensions. And it sounds like another variable is selling the production facilities, which I think you said saves $5 million to $7 million annually. So, I wonder when you think about all of this in aggregate, is there a net benefit on the cost side? And do you expect to see total cost come down from FQ3 because it seems like organic revenue growth is a bit more difficult to achieve near term? Thank you. Carl Merton -- Chief Financial Officer So, first off, I think, you know, organic growth is going to come particularly in the -- in the fourth quarter as we see the new launches and the new innovation hit the market, particularly in some of these new categories that we're doing on -- on the beverage alcohol side, including -- including the water and the nonalcoholic. And playing in that space, playing in the F&B party space, things like that, are our new categories for us. And so -- so, I think there are opportunities for -- for organic growth. But, you know, if you're using Q3 as a baseline, I don't think that's the right way to look at it. And similarly, you know, I don't think Q4 is necessarily the right baseline for -- and they're for the exact polar opposite reasons. Q3 is traditionally our lowest quarter in terms of revenue and production and Q4 is traditionally our highest quarter in terms of revenue and production. So, we get -- we're going to get a -- an uptick on margins as a result of that incremental volume, particularly in beverage alcohol in our legacy business, and -- and that's -- that's going to be what drives a chunk of the earnings guidance. And it's going to be what -- what drives our results and exports. Irwin Simon -- Chairman and Chief Executive Officer I think the big thing here is, too, you heard me say before this, the savings we're getting from the integration of HEXO and Truss and somewheres between, you know, close to $35 million, we don't get that up immediately. You know, it evens out over the quarter. So, it takes us a full year to get that amount. The second thing is, you know, as we just own the ABI businesses for two months and just -- you know, two quarters, as we integrate them into our businesses and start from the procurement -- from, you know -- from the distribution standpoint, I mean, there's a lot for us to get done here, but we're -- we're focused on organic growth and we're starting to see that already. We're focused on which facilities to integrate these products to, which states we're going to focus on. We also have 13 brew pubs out there that were focused on growing our brands through these brew pubs. you know, big event for us 4/20 coming up. April 20th, you know, we have two big events, one in Atlanta and one in Long Island. And there's also -- in every retailer, there's displays built. So, July 4th is one of the biggest, you know, beer category months that is sold out there from occasions. So, you know, right now, as we bring this together and our aspirations is to grow our beer business to a $300 million business -- and you got to remember, in 2020, we sold 2.5 million cases when we first acquired the SweetWater brand. You know, today, we're on a run rate at 12.5 million cases with tremendous opportunity with, you know, all the innovation that's happening. So, there's just a lot of evening out here and there's a lot of moving pieces to bring all this together. And I think the big thing is -- is as we look at it, when we get a full year behind all of these acquisitions with -- with HEXO, with Truss, and the integration there, and we get all this, you know, full year together with all the ABI stuff, we're seeing some great stuff. And listen, just with Montauk, we've owned it over a year, one of the, you know, fastest-growing beer within New York today. Some of the stuff we're seeing on the West Coast with Green Flash, Nelson's and Alpine. So, the legacy stuff that we've already bought and owned the year, we're seeing good results for it. It just takes us some time here to get these things integrated. John Zamparo -- CIBC World Markets -- Analyst OK, I appreciate the color. I'll pass it on. Thank you. Operator Thank you, ladies and gentlemen. That concludes our question-and-answer session. I'll turn the floor back to Mr. Simon for any final comments. Irwin Simon -- Chairman and Chief Executive Officer Thank you, everybody, for joining us today. Listen, I wish I could predict what's going to happen in the cannabis industry. There's going to be one thing for sure I can predict: There will be change. And we've been waiting for change for a long time, you know, in the German market. It finally came to fruition, and there's going to be a lot of execution to get it where it needs to be, but it's happening. I do think we've been sitting and waiting through the Biden administration before that change happened within the cannabis industry. There's lots of discussion about rescheduling, and again, it's not something we have control of. But one thing we do have control of, we do know how to grow cannabis. We do know how to sell medical cannabis. We know about research. We do have within Canada Day over 5 million square feet of growth. We do have in Europe, you know, two major facilities. And with that, depending what happens in the U.S., we will be ready to launch what needs to be launched into the U.S., whether it's taking from our existing businesses, acquiring, putting something together, we will have the opportunity to do that. You know, as I've said, our aspirations is to grow our beer business to a $300 million beer business. We already are the fifth-largest craft brewer today within, you know, the U.S. We have a great business within Breckenridge Distillery. We've been named some of the No. 1, you know, whiskeys within the world, within the U.S., and some exciting things happening. I'm also really excited about what's happening, you know, in our wellness business in regards to Manitoba Harvest and what's happening with hemp from a high-protein food and now the perception of hemp as a great product and a healthy product. So, you know, you know, as Tilray Brands comes together over the last five years, there's a lot of real good pieces that ultimately will come together. There's tremendous opportunities with our products, there's tremendous opportunity with our distribution, there's tremendous opportunities as we build out, you know, our global market. So, you know, as I look at Tilray, we've circled a lot of the right wagons and again that dealing with regulatory, dealing with unknowns in regards to rescheduling. But Tilray is there. I'm real happy with the team that I have in place and excited to work with the team. We've done a great job in an industry in regards to banking what we've done with our balance sheet, and we continue to work on that balance sheet. I'm someone personally that does not like debt. So, how do we focus on our balance sheet? I'm very much in favor, and as I push with Carl and the rest of team, cash flow and taking costs out of our business. And there's not too many other industries out there that are taxed the way we are on cannabis, on beer, and on spirits. And I wish I was -- Tilray was already the amount of money that we're providing the governments of Canada, U.S., and Europe from our taxes that we generate from our business. With that, I look forward to talking to you again soon. I appreciate you getting on the call and have a great week. Thank you. Answer:

the conference call to discuss Tilray Brands' financial results for the third quarter of fiscal year 2024 ended February 29th, 2024

Operator Thank you for joining today's conference call to discuss Tilray Brands' financial results for the third quarter of fiscal year 2024 ended February 29th, 2024. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session for analysts and investment firms conducted via audio. I will now turn the call over to Ms. Berrin Noorata, Tilray Brands' chief corporate affairs and communications officer. Thank you. You may now begin. Berrin Noorata -- Chief Corporate Affairs and Communications Officer Thank you, operator, and good morning, everyone. By now, you should have access to the earnings press release which is available on the investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from those described in those forward-looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward-looking statements. Today, we will be hearing from key members of our senior leadership team beginning with Irwin Simon, chairman and chief executive officer, who will provide opening remarks and commentary; followed by Carl Merton, chief financial officer, who will review our quarterly financial results for the third quarter and update our financial guidance for the fiscal year 2024. Also joining us for the question-and-answer segment are Denise Faltischek, strategy officer and head of international; Blaire MacNeil, president of Tilray Canada; and Ty Gilmore, president of our U.S. beer business. And now, I'd like to turn the call over to Tilray Brands' chairman and CEO, Irwin Simon. Irwin Simon -- Chairman and Chief Executive Officer Thank you, Berrin. Good morning, everyone, and thank you for joining us. At Tilray Brands, we take great pride in our mission to be the most responsible, trusted, and market-leading cannabis and consumer products company across the globe. Today, with our complementary business units, we believe Tilray Brands is the best-positioned company in the world to take advantage of all the positive regulatory tailwinds happening globally with cannabis legalization and drug policy reform. In Canada, Tilray continues to lead the cannabis industry with the leading portfolio of adult-use brands and the No.1 market share. In the event the current excise tax regime were to be replaced with a 10% ad warrant tax based on the value of the product sold and not a per gram tax, we expect an annual savings of $80 million. We also expect to benefit from additional cannabis-related regulatory reforms around marketing and THC potencies. I'll take a deeper dive in the Canadian market shortly. In Germany, Tilray has the leading cannabis market share by revenue for the trailing 12 months, and we believe we are best positioned to capture a large portion of the expected growth in the medical market with both our in-country cultivation facility in Germany and our state-of-the-art facility in Portugal. We also have the ability to ship products from Canada to Germany. In the U.S., Tilray has multiple options and, in particular, is well positioned to benefit from the federal legalization of medical cannabis as a result of rescheduling. Yes, we believe that the rescheduling of cannabis from Schedule 1 to Schedule 3 in the U.S. would provide a path for Tilray to sell pharmaceutical-grade medical cannabis in the U.S., subject to doctor prescriptions. This is a different strategy from what MSOs are doing today. We believe there's an opportunity to supply medical cannabis products from our existing operations into the U.S. for medical purposes. Further, in the event of a future federal adult use and medical cannabis legalization in the U.S., we believe Tilray is well positioned to immediately leverage its strong global leadership position, know-how, and strategic strengths across operations, distribution, and brands to sell THC-infused products across its robust distribution network and sales channels in the U.S. Today, Tilray is a clear outlier in the global cannabis industry because we're the only company with global expertise in both adult-use and medical cannabis. Our innovation comes from GMP-certified pharmaceutical-grade medicines to all recreational cannabis formats, including THC-infused beverages, which also parlays into our beverage strategy. We have rigorous cannabis quality control, regulatory affairs, branding, marketing, sales, and distribution. We also have the No.1 cannabis market share in Canada, the No.1 cannabis market share in Germany as measured by revenue, and we distribute medical cannabis in over 20 countries around the world. Since 2019, we quickly developed a diversified and award-winning portfolio of brands backed by best-in-class operations in Canada, the U.S., Europe, Australia, and Latin America that supports our goals of becoming a multi-billion-dollar cannabis and consumer products company that addresses the needs of consumers and patients we serve today. As you know, the leadership team at Tilray has the expertise of buying CPG brands and building them into somewhat greater than they were before. Our creative portfolio of beverage brands includes craft beers, spirits, ready-to-drink cocktails, ciders, and nonalcoholic beverages. We are now the fifth-largest craft brewer in the U.S. with a 4.5% share of the craft beer market. With over 500 beer distributors alone. Tilray is now dominating key regions across the U.S. with our craft beer brands in the northeast, Pacific Northwest, Midwest, and southeast, along with one of the most awarded bourbon brands with Breckenridge Distillery, which continues to gain market share across whiskey, vodka, and gin products. Our wellness brands include Manitoba Harvest, hemp-based food products, ingredients and snacks; as well as our Happy Flower, our CBD-infused beverages; and our recently relaunched HiBall energy drinks which, in its first month on Amazon, received over $1 million in orders. With the appropriate approvals, we're also looking to introduce hemp-based delta-9- beverages and products with our Happy Flower brand and across other wellness brands in the U.S. And finally, we own and operate a European medical cannabis and pharmaceutical distribution business in Germany, CC Pharma, also known as Tilray Pharma, with a robust footprint reaching 13,000 pharmacies in Germany alone. With broader medical cannabis use, doctor prescriptions in Germany, we expect there to be tremendous demand for medical cannabis within pharmacies. I can't predict the future, but my belief is there will be a lot of cannabis regulatory changes we've seen with Germany, in Canada, and the U.S., and Tilray is best equipped to reach these underlying opportunities. And we have the assets and the tools to reach our goal for Tilray Brands to deliver industry-leading profitable growth and sustainable long-term shareholder value through a focus on these three fundamentals, maximizing profitable revenue growth through organic growth and strategic acquisitions with strong synergy opportunities, realizing the benefits of optimized asset utilization and cost management to ensure an efficient cost structure across all our business segments, and to strengthen our industry-leading balance sheet and cash position. During Q3, we achieved net revenue of $188 million, representing approximately 30% growth over the previous year. We grew our revenue across our core business segments. This was achieved by focusing on organic growth of legacy brands and enhancing the performance of our more recent strategic acquisitions. Gross profit was 49.4 million despite impact of the newly acquired craft beverage brands which have a lower margin. Our net loss was 105 million, which only 4.5 million represented loss from operations, and cash used in operating activities was 15.6 million. Adjusted gross profit was 51.6 million. Adjusted EBITDA was 10.2 million, adjusted net income of 900,000, and adjusted EPS of $0.00. We delivered positive adjusted free cash flow for the quarter. Over the last three quarters, we significantly reduced our convertible debt by 205 million, decreasing our net debt to approximately 175 million, and will work to continue reducing our indebtedness, optimizing our capital structure, and enhancing our financial flexibility. The net reduction in our convertible debt will decrease our annual interest expense by $9.8 million, which flows directly to adjusted net loss and adjusted free cash flow. Let's now dive deeper into each of our business segments. We grew our global cannabis net revenue by 33% to 63.4 million in Q3 compared to the previous-year quarter, driven by our acquisition of HEXO and Truss as well as our international business and innovation in the Canadian markets. Net Canadian cannabis revenue grew 31% to 49.4 million in Q3 compared to the previous year. We achieved this growth with the HEXO acquisition despite price compression totaling 3.1 million from the prior-year quarter and a crippling tax structure that has allowed taxes to spike while prices declined by more than 50%. Excise tax increased by 8.2 million and amounted to 21.8 million, or 32% of our gross Canadian cannabis revenue in Q3, compared to 13.6 million, or 26% in the same quarter last year. Recent enforcement efforts by Canada Revenue Agency garnishing LP payments from the provincial boards is already having an impact on our competitors, over 1,000 of whom have negligible market share. The continued enforcement by CRA, we believe, will lead to further and necessary industry consolidation perhaps on a mass level. Canada continues to be the largest federally legal and commercial adult-use cannabis market in the world, and Tilray Brands maintains that No.1 market share position in the country. We are No.1 in Ontario, No.1 in Quebec, No.1 in British Columbia, which together represents over 60% of the population of Canada. We're also No.1 in cannabis flower, oils, concentrates, and THC beverages; No. 2 in pre-rolls; No. 4 in vapes; and in the top 10 in all other categories, all while operating under rigorous high-quality control standards. Our focus in Canada is on two things: first, growing sales primarily through continuous launches of new product innovation; and second, taking more and more costs out of our businesses. On the latter, a large part of our acquisition strategy for HEXO and Truss involves removing legacy costs and SKU rationalization from these businesses. For HEXO, we originally target $27 million but then increased that to between 30 million and 35 million, of which we've already achieved 27.5 million in savings on an annualized-run-rate basis, of which 15.6 million is realized cost savings during the period. Our HEXO integration plan includes streamlining our Canadian operations, improving utilization of our core facilities, improving margins, and maximizing cash opportunities by pursuing divestitures and consolidating facilities. We plan to close the Cayuga facility and move its cannabis cultivation to our existing Canadian production lines; sell our Masson facility in Quebec, which is currently cultivating cucumbers as a vegetable operator; and sell the Belleville facility and move our manufacturing to our London facility for our beverages. We expect this plan to result in one-time $70 million to $85 million of Canadian cash flow inflow opportunity and accretive to margins and net income by $5 million to $7 million on an annual basis. From a regulatory standpoint, the expert panel appointed by the federal government clearly highlights three areas of focus which Tilray would benefit from once implemented. First, excise tax reduction, which I've talked about, both in adult recreation and medical, would benefit Tilray $80 million. Secondly, there is a proposed opportunity for pharmacies to carry CBD and medical cannabis for medical patients, which would move plant-based medicines into the mainstream as an options for patients to treat ailments. And finally, enforcement against illicit websites, dispensaries that don't contribute to excise tax and put youth at risk through unregulated product channels available easily online with e-transfer and Canadian Post mail. We think Canada Post and the Canadian banking system are responsible for shutting down access to these unlawful establishments. Turning to international cannabis. We grew net revenue organically by 44% year over year to $14 million, and we remain the No. 1 market leader in medical cannabis across Europe with a leading market share in Germany and Poland. Tilray's international growth has also been driven by increased sales in our existing markets such as Portugal, Italy, the U.K., Australia, and New Zealand. The new German medical market opportunity is projected to be approximately 3 billion in the medium term, while the European opportunity could represent a potential $45 billion medical market alone in the long term. Our presence in Europe allows Tilray to grow our global brand portfolio to a base of over 700 million people in Europe, which is twice the population of the U.S. While much of the media attention related to the new cannabis reform in Germany has been centered around cultivation for personal use and the establishment of cannabis social clubs, the new opportunities for Tilray flow mostly from the removal of medical cannabis from the Narcotics Act. This schedule change is expected to significantly expand the medical cannabis market in Germany as it would allow for more doctors to prescribe medical cannabis more easily to patients and potentially allow for broader health insurance coverage. We will therefore be increasing our educational efforts to bring more and more health professionals on board with medical cannabis as therapeutic options. We estimate that less than 0.4% of the population in Germany are presently buying medical cannabis, compared with 4% in states like Pennsylvania. In Germany, we also stand to benefit from the abolishment of the tender process for in-country cultivation of medicinal cannabis, which is being replaced with a licensing scheme. We are currently one of the only three in-country cultivation facilities in Germany today, and these legislative changes would allow us to better meet patients' need by expanding our medical cannabis product offerings. This would, in turn, significantly increase our cannabis production in Germany by five times more than double our revenue opportunities. Tilray opportunities in U.S. cannabis remains strong. Over the past several years, our playbook of expanding our business beyond cannabis to adjacencies and complementary markets has positioned Tilray well for the current environment as well for future growth opportunities. While we currently do not engage in any U.S. cannabis operations because of federal regulations, we're well positioned to participate and win in a federally legalized market when that changes either rescheduling or medical cannabis or the passage of federal cannabis legalization given our deep knowledge, global expertise in medical and adult-use cannabis, and the regulatory compliance at play. Tilray's playbook in the U.S. is to build and deliver iconic sought-off brands in the beverage alcohol and the CPG, backed by product excellence and innovation; educate consumers about our brands and our stringent quality standards to encourage trial and foster loyalty; and last but not least, to drive and scale and distribute to get our brands into consumer hands to grow our market share. Moving to our beverage segment, which is quickly approaching approximately 300 million annualized. As mentioned earlier, Tilray Brands is now the fifth-largest craft brewer in the U.S. with a 4.5% craft beer market share, and we aspire to be a top 12 beverage company in the U.S. Q3 beverage alcohol net revenue was 54.7 million, representing 165% growth year over year. Tilray now holds a 4.5% of the craft beer market share in the U.S. and we're just getting started and ramping up. Of this, our legacy brands of SweetWater, Montauk, Alpine Nelson, and Green Flash demonstrates our ability to successfully grow existing brands along with our recent acquisition of 12 craft brands from AB InBev, we have gained a state -- we have gained in scale and see further expansion opportunities. SweetWater remains the No. 1 brand family in Georgia multi-outlets. Montauk remains the No. 1 brand family in metro New York. Having increased its distribution by 28% versus last year, Tilray is now the No. 1 craft supplier year to date in the Pacific Northwest. 10 Barrels volume growth increased by 413 basis points since Tilray took over the brand, and we're now capitalizing on the success of 10 Barrel Pub Beer brand extensions by adding Pub Ice, Pub Cerveza line extensions. Both innovations, we are extremely excited to launch. Growing 24%, Pub Beer is now a top 20 brand on the West Coast with only half the distribution of top competitors due to its focus on the Pacific Northwest states. Still, our vision is to be much higher as we're aiming and uniquely positioned to become a top 12 beverage alcohol business. This will be accomplished by leveraging our portfolio to win more occasions through core products such as craft beer and beyond through innovation to categories like flavored malt beverages, ready-to-drink cocktails, and spirits. But ultimately, our plans go beyond alcohol as we will be expanding into sparkling water, energy drinks, and other categories. This is important because we have the manufacturing facilities, the distribution, and the sales and marketing infrastructure to drive Tilray businesses. Working with BCG, we developed a clear and focused strategy to drive top-line and bottom-line growth for our beverage businesses. The three-pronged approach will deploy our regional strategy called fuel to stabilize scale brands such as SweetWater, Montauk, and Blue Point in their respective key adjacent regional markets across the U.S. and maximize their potential to gain market share from competitors. Fuel is already paying off. According to BI sales to retail data, Tilray has increased its market share of total beer in 13 states, including key beer markets such as Oregon, Washington, Colorado, Idaho, Minnesota, and Arizona when comparing share before and after the Craft acquisition. In the southeast alone, we've improved trends by 4.6% post acquisition. For Q3, 10 Barrel has seen a 12.3% increase in distribution among our top 10 distributors when compared to the same time last year. And when comparing six months pre-acquisition with the five months post-acquisition, overall trends have improved 3.5%. Overall trends for Blue Point have improved 1.3% while No. 1 distributor has improved trends by 3.8%. And those are just a few examples. We are also executing a national brand strategy, beginning with revitalizing Shock Top, to win as a national craft beer over time by targeting share and connect occasions to reach mainstream male and female drinkers. We think there is tremendous upside with Shock Top as, according to our qualitative research, Shock Top has the highest purchase intent among 12 of the largest beer brands. This is why we're focused on increasing distribution and getting this brand back into the hands of consumers. We are already on our way. In Q3, Shock Top No. 1 distributor has increased distribution 24% versus last year, while on-premise distribution has increased a half a percent over last year among Shock Top top 10 distributors. We are aggressively launching new and often disruptive innovation across our beer and nonalcoholic craft to increase portfolio brand appeal to new consumers and new occasions. Many of our newly acquired brands have not had innovation in the last couple of years. Among many others, recent examples include Liquid Love for heartfelt hydration; Runner's High, a nonalcoholic craft brew for athletes; HiBall and HardBall, a non-carbonated 10% ABV product sold in 16.9-ounce plastic resealable containers; and non-carbonated Shock Top LiiT Hard Tea. Let me say that we're working to get the cost structure right, transforming the productivity and profitability of the breweries we acquire. We expect that our beer gross margins will increase once we fully realize the cost savings achieved in connection with the fully integrated beverage alcohol platform as we move away from the existing capacity manufacture agreements with ABI and increase our productivity in our newly acquired breweries and 13 brew pubs. Finally, let's discuss our wellness segment represented mostly by Manitoba Harvest, which is fostering a positive impact on people and the planet through hemp by making ongoing commitments to sustainability with breakthrough initiatives such as investment in regenerative agriculture. Revenue grew 12% in Q3 to 13.4 million compared to last year. We partnered with bioactives company Brightseed to revolutionize the functional fiber market and breakthrough product, Manitoba Harvest Bioactive Fiber, which is now exclusively available at Whole Foods markets nationwide. Incredibly, 95% of Americans do not consume the recommended daily intake of fiber. This product provides six grams of both soluble and insoluble fiber per serving and is the only fiber solution containing two powerful hemp-based bioactive for gut health. Moving forward, the team continues to assess the opportunity to bring hemp derivative delta-9 beverages to market under Happy Flower and Tilray brands. With that, I now turn the call over to Carl discuss our financials in greater detail. Carl? Carl Merton -- Chief Financial Officer Thank you, Irwin. Recall that we present our financial results in accordance with U.S. GAAP and in U.S. dollars. Throughout our discussion, we will be referring to both GAAP and non-GAAP adjusted results, and we encourage you to review the reconciliation contained within our press release from our reported results under GAAP to the corresponding non-GAAP measures. Let's now review our quarterly performance for the three months ended February 29th, 2024, Q3 total net revenue rose to 188.3 million compared to the prior-year quarter of 145.6 million, representing almost 30% growth. Excluding acquisitions completed within the fiscal year and the $8.7 million HEXO advisory fee captured in the prior year quarter, our legacy businesses remain consistent despite a 13% revenue decline in our lowest-margin segment. We continually see emphasized the strategic importance of our adjacency business model, which is a key differentiator for us. This is best reflected by the contribution of our four segments to our overall results, which shows that we are not too dependent on any individual segment having a disproportionate impact on our sales or profit growth. Each segment is also, in our view, on a path to sustainable long-term growth. Looking at each segment now. During Q3 and compared against the prior-year period, net beverage alcohol rose 165% and represented 25% of our total revenue mix, more than double relative to last year's 14% of total mix. Net cannabis revenue rose 33% and represented 34% of total mix, up slightly from 33% last year. Distribution revenue decreased 13% and represented 30% of total mix, down from 45% last year. And wellness revenue rose 12% and represented about 7% of total mix, down only slightly from 8% last year, respectively. Diversification is also reflected in our geographic footprint. During Q3, more than 62% of our net revenue was generated in North America, roughly 36% was generated in EMEA, and the remaining 2% coming from other parts of the world. This compares to about half from North America and EMEA in Q3 last year with the variance related to the North American acquisitions we completed since that time, namely HEXO, the Craft acquisition brands, and the remainder of Truss Beverages. Let me first touch on the key current item related to cannabis before moving on to a discussion on profitability. We incurred 21.8 million in Canadian cannabis excise taxes during Q3, which are a reduction to revenue, compared to only 13.6 million last year. The increase in excise taxes is reflected by a sharp increase in cannabis revenue generated in Canada versus the year-ago period due in part to the HEXO and Truss acquisitions and a change in our revenue mix due to higher excise tax products. Through the first three quarters of our fiscal year, we've incurred more than $75 million in excise taxes versus 47 million for the year-ago nine-month period. For many quarters, we have been on the record with respect to the inherent unfairness as to how the excise tax is predominantly computed, which is largely a fixed price on gram sold rather than as a percentage of the selling price. Because the selling price has declined meaningfully since the law was first enacted in 2018, it has made the excise tax a larger and larger component of net revenue over time, particularly as current growth categories like infused pre-rolls and concentrates become the biggest part of our sales mix. To prove this point further, excise tax amounted to 32% of gross Canadian cannabis revenue in Q3, compared to 26% in the same quarter last year. All through the first three quarters of the year, excise tax came to 34% of gross cannabis revenue versus 27% for the first nine months of fiscal 2023. In our view and in the view of so many others, this price-based tax structure is crippling as it has allowed taxes to spike as the price of cannabis has declined by more than 50% since legalization. In late February, the Canadian House of Commons Standing Committee on Finance issued a report outlining several recommendations regarding the regulated adult-use cannabis industry, including the recommendation to adjust the tax structure. Recommendation three to nine in particular calls on legislators to make adjustment to the excise duty formula for cannabis so that it is limited to a 10% ad valorem rate. If enacted, this would be a welcome change that could result in 80 million in annualized revenue for our cannabis business, which would largely fall to the bottom line. The key to the government's plan and needed relief for our industry is that the provinces not enact their own excise tax to reflect the loss and taxes they are reaping from the status quo, increase their profits at the boards, or mandate that the tax savings are passed on directly to the consumer in the form of lower pricing. The budget announcement is next week, and we'll be following developments closely but are resolute in our view that reform is greatly needed and measures must be enacted to stabilize the Canadian cannabis industry. Turning back to our performance. Gross profit was $49.4 million, compared to a loss of 11.7 million in the prior year quarter, while gross margin increased to 26% from negative 8% in the prior-year quarter. Adjusted gross margin decreased to 27%, compared to 30% in the prior-year quarter. I will discuss adjusted gross margin by individual segment in a moment. However, the majority of the decrease relates to the addition of the new craft brands, which are subject to a co-manufacturing agreement with ABI until at least the end of Q1 next year and the prior-year figure including the HEXO advisory fees. Net loss improved to $105, million compared to a net loss of 1.2 billion in the prior-year quarter which included $934 million of impairments. On a per-share basis, this amounted to a net loss of $0.12 versus $1.90 in the prior-year quarter. Recall that last quarter we introduced two new reporting metrics to our discussions: adjusted net income loss and adjusted earnings per share. The definitions of both are identified in the press release along with the relevant reconciliations and calculations. For Q3, we are reporting an adjusted net income of $900,000, which, when calculated on a per-share basis, results in EPS of zero for the quarter. Adjusted EBITDA was $10.2 million, down from 13.3 million in the prior-year quarter. This is mainly a consequence of the negative impact the cannabis gross margin related to wholesale revenue, the termination of the HEXO advisory services contract on our acquisition of HEXO in June, and the co-manufacturing agreements with the new craft brands, as I will explain shortly. During the quarter, we made great progress against the HEXO synergy plan which we had previously increased to between $30 million and $35 million. As of the end of Q3, we achieved 27.5 million in savings on an annualized run rate basis, of which 15.6 represented actual cost savings during the period. Operating cash flow was negative15.4 million, compared to negative 18.6 million in the prior-year quarter. This improvement in cash used during Q3 this year was primarily related to achieved synergies of previously identified cost savings plans. Moving now to our four big business segments. Beverage alcohol revenue was 54.7 million, up 165% from 20.6 million in the prior-year quarter. The positive delta was due to contributions from the craft brands which were purchased last fall. However, we note that the impact of dry January was far more of a headwind than it was for the industry in previous years. Average alcohol gross profit increased to 18.9 million compared to $10 million, while beverage alcohol gross margin decreased to 34% from 48% in the prior-year quarter. Adjusted gross margin fell to 38% from 53%. Both of these outcomes were a result of the craft brands, which currently have lower margins than our historical business. This is primarily due to the co-manufacturing agreements for brewing. For greater context, adjusted gross margin for our legacy beverage business was 59%, compared to the prior-year quarter of 53%, primarily as a result of an agreement with the distributor related to our spirits business. Adjusted gross margin from the craft brands was 26%. The improvement of gross margins in the beverage alcohol business, primarily in the beer portion of the business, represents a major focus for the organization. Gross cannabis revenue of 85.2 million was comprised of 62.1 million in Canadian adult-use revenue, 14 million in international cannabis revenue, 6.4 million in Canadian medical cannabis revenue, and 2.8 million in wholesale cannabis revenue. Net cannabis revenue, which excludes the aforementioned 21.8 million in excise taxes, was $63.4 million, representing a 33% increase from the year-ago period. The positive variance is related to the increased organic growth of over 14% combined with contributions from the acquisitions of HEXO and Truss. Offsetting the increase in net cannabis revenue was the elimination of advisory services revenue totaling 8.7 million from the prior-year quarter due to the HEXO acquisition, which terminated the previous strategic arrangement that was in place. While revenue from Canadian medical cannabis grew only slightly as a category is being impacted by competition from the adult-use market and its related price compression, revenue from Canadian adult-use rose 37%, which was driven by new product innovation and increased revenue from HEXO and Truss. International cannabis grew 44% largely because of growth in our existing markets and the expansion into emerging international medical markets. Wholesale cannabis revenue increased to 2.8 million from essentially zero last year as these sales are opportunistic and variable. We entered into this wholesale agreement to optimize our inventory levels and prioritize the generation of positive operating cash flow. However, it unfavorably impacted our gross profit and EBITDA. Cannabis gross profit was 20.9 million and cannabis gross margin was 33%, compared to negative 32.8 million and negative 69% in the prior-year quarter. Excluding the impact of the noncash fair value purchase price accounting step-up and inventory valuation adjustments, adjusted gross margin decreased to 33% from 47%. As I said earlier, a portion of the margin decrease as a result of the termination of the HEXO advisory services agreement, which contributed zero gross profit in the current year compared to 8.7 million in the prior year, which, if excluded, would decrease adjusted gross margin to 35%, essentially meaning that our cannabis gross margin was largely flat year over year. Distribution revenue derived predominantly through Tilray Pharma decreased 13% to 56.8 million from 65.4 million in the prior-year quarter. Revenue was negatively impacted by infrastructure outages and weather, which impacted revenue by just over $3 million and short-term challenges related to new rebate regulations. Tilray Pharma gross profit decreased to 5.6 million, compared to 7.5 million in the prior-year period. Tilray Parma gross margin decreased to 10% from 11% in the prior-year quarter because of product mix. Wellness revenue grew to 12% at 13.4 million from 12 million in the prior-year quarter. The increase was driven by our strategic focus on targeted advertising campaigns aligned with emerging trends in healthier lifestyles, particularly around the new year, coupled with our continuous innovation efforts. Wellness gross profit was $4.1 million, up from 3.7 million in the prior-year quarter, and gross margin held at 30% compared to 31% in the prior-year period as we experienced a change in sales mix toward more bulk retail sales. Our cash and marketable securities balance as of February 29th was $225.9 million, down from 408.3 million in the year-ago period. The majority of the variance was related to the payment on maturity of the Tilray 23s, our cash acquisition of the new craft brands, and settling assumed liabilities from HEXO, including unpaid excise tax as well as legacy litigation settlements. Having now completed three quarters of our fiscal year, it is clear that our prior fiscal 2024 guidance of adjusted EBITDA between 68 million and 78 million is no longer feasible. We have therefore lowered our adjusted EBITDA range to be between 60 million and 63 million, which takes into consideration our performance through the three quarters, over $12 million year-to-date price compression in the cannabis business, and continued expectations for the fourth quarter. Still, the fourth quarter represents a major increase from the current quarter, which is traditionally our lowest quarter due to the seasonality within our segment. The fourth quarter seasonality improvement is a function of our beer business leading up to the summer, a historically busy season; new innovation scheduled to be launched as part of the spring reset; new innovation in our cannabis business along with expected wholesale sales; and in our distribution business as pharmacies buy in bulk for their customers ahead of them going on summer vacation. Recall that we also projected positive adjusted free cash flow from operations for the entire fiscal year, excluding our integration costs for HEXO Trust, the new craft brands, and the cash income taxes associated with Aphria Diamond. Due to the timing of collecting the cash on the various asset sales mentioned, we now do not expect to achieve this prior adjusted free cash flow guidance. While we were adjusted free cash flow positive in the current quarter, our current expectations are for a very strong fourth quarter of adjusted positive free cash flow. Of course, we will continue managing capex as part of our efforts to strengthen our industry-leading balance sheet. Let me now conclude our prepared remarks and open the lines for questions from our covering analysts. Operator, what's the first question? Questions & Answers: Operator Thank you. [Operator instructions] Our first question comes from the line of Andrew Carter with Stifel. Please proceed with your question. Andrew Carter -- Stifel Financial Corp. -- Analyst Hey, thank you. Good morning. I wanted to ask about the German changes. I mean, obviously, that it's going to likely manifest in a big uptick in patients with doctors now having more more freedom to prescribe cannabis. But kind of thinking through this competitively, how do you -- how do you see this as your position unique and being able to attack this market? I know that, you know, for the past five years, we've seen a lot of decks with German -- German -- Germany circled and capacity to hit that market. Is that capacity still out there, and how expensive it is to maintain this? And can you give us a reminder of kind of the stringent quality standards you have to have in place to serve the German market? Thanks. Irwin Simon -- Chairman and Chief Executive Officer Andrew, thank you and great question. Number one, listen, we see the opportunities in Germany in multiple ways. We have a facility in Germany today, and the Germany before only with service of tender to the German government. Now, that tender process will go away, and we'll be able to sell product into the marketplace. So, that's number one. Number two is, before, only a certain amount of doctors were able to prescribe cannabis, and it was a very small amount for specialty reasons. And now, every doctor, because it's no longer a narcotic, will be able to prescribe cannabis. Number three, you know, we also have a facility in Portugal which will be able to supply Germany. Number four is we have something called Tilray Pharmacy, CC Pharma, which is a distribution company that distributes cannabis and other medicines to over 13,000 drugstores. We have a team based in Germany. We have a sales team based in Germany. We have R&D. We have quality assurance. So, we've been there for four or five years, and we've had some tough four or five years because of what's happening. The other big thing here is, you know, Europe is a big country. And, you know, with no longer being a narcotic and decriminalized, we see lots of other places -- you know, countries opening up. I have Denise Faltischek here as head of Europe. Denise, anything I missed here or anything that, you know, you should add? Denise Faltischek -- President, International Business and Chief Strategy Officer Yeah, no, Irwin, you did not miss anything. Just to add a little bit more in terms of facts. So, in terms of that abolishment of the tender that Irwin spoke about, and the fact that under the new -- under the new regulations, we'll be able to apply for a license with our facility in Neumunster. So, today, just to refresh, you know, everyone's memory, we are subject to a tender contract. We are capped at about 1,000 kilograms that we can grow every year and that is done pursuant to certain pricing. So, with the abolishment of the tender, we now open up into a licensing process where we are now subject to just market conditions as relates to patient demand. And so, we can utilize that facility to meet that demand, which would allow us to increase our capacity. We have the ability to today grow up to about 5,000 to 6,000 kilograms without any additional capex, and we can basically then also have pricing that is subject to market demand today. So, that -- that is an immediate benefit there. In terms of the ability to prescribe, we are amping up our ability to be in front of doctors and working on symposiums and educational platforms. On the -- one of the things we've done on the prescription platform software, if a doctor wants to prescribe medical cannabis, they can -- they go to that page and there's a Tilray banner at the bottom which shows all of our portfolio of products, what the conditions are, how to prescribe. So, we are out there also providing basically information for doctors who are willing to prescribe and want to prescribe. Irwin Simon -- Chairman and Chief Executive Officer I think the big thing is we do have a brand in Tilray brand, but you know, the whole thing is socialized medicine and prescription and paying for it. We see lots of changes happening. So, you know, we have been working in the German market in regards to, you know, products for pain, for anxiety, for sleep, for cancer, for epilepsy. So, we've been all over that and take our expertise of what we do at medical cannabis, you know, in Canada and translate it there. And secondly, like I said, there is a market out there that will be looking for medical cannabis but ultimately using it for recreational cannabis. So, from a standpoint, we really are excited about what's happening in Germany. It does not affect us in regards to the social measures that have come in place there. And, you know, we have the team, we have the grow, we have the infrastructure, the research, and development ready to-to go here, and it's, you know, effective now. Andrew Carter -- Stifel Financial Corp. -- Analyst Thanks. I'll pass it on. Irwin Simon -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question. Nadine Sarwat -- AllianceBernstein -- Analyst Hi, thank you. Two for me, please. First, on the guidance, I appreciate the added color that you gave. Could you be a little bit more specific and perhaps what exactly has changed versus last quarter and this quarter, what sort of surprise to the downside, and how do you see that progressing over the quarters to come? And then, my second question, I know you guys called out your No.1 position in Canadian cannabis. So, looking at the market share numbers you guys quote in the press release, I think that's on the downward trend for the last couple of quarters. So, could you break down what's driving that, and if you think you can regain that over the quarters to come, and if so, how -- how do you anticipate doing that? Thank you. Irwin Simon -- Chairman and Chief Executive Officer So, I'm going to take -- start part of it. Number one, not all quarters are equal, this third quarter being one of our lowest quarters in regards to bev alcohol and our cannabis business, our fourth quarters, and our first quarter, second quarter. So, that's you know, as you look at our quarters and absolutely there's seasonality within all these businesses. Secondly, you know, we did lose some share in Canada. Some of it was again coming back to price compression and some of it was coming back to some of the prices in regards to our flower. The other thing, what happened is we have a lot of innovation that was coming into the marketplace that we didn't get into the market, you know, in our third quarter, which we expect, you know, to get back in our fourth quarter. I think, you know, what's important here, again, there's been lots of price compression in Canada where, in regards to -- we talked about our percentage in excise tax, and the market is changing dramatically there in regards to potencies, and being, you know, infused pre-rolls etc. So, some of it is just timing. And do I expect to get it back? Blair, you're on the line. Do you expect to get your -- your share back? Blair MacNeil -- President, Canadian Business Yeah, thanks, Irwin, and thanks, Nadine, for the call. Just to add a little bit more color to what everyone was talking about, Q2 and Q3 were our most operational complex periods. So, in addition to what Irwin talked about, what we also saw is when you were moving the location of SKUs and where they're going to be distributed from, and one of the things we've done is centralized all our packaging and logistics out of Leamington, that requires us to draw down inventories in each of the boards and then rebuild that inventory once we've changed the source location. So, what you're seeing in some of the numbers is, in addition to the price compression Irwin talked about and the -- and the innovation side, is just a reflection of the operational complexity we -- we implemented in Q2 and Q3. Once that is completed and it was all completed inside of Q3, that will generate very strong operational efficiencies for us moving forward as everything outside of beverages will be shipped out of one location. Irwin Simon -- Chairman and Chief Executive Officer Carl? Carl Merton -- Chief Financial Officer Yeah, yeah, so just to align a couple of things to -- to the explanation as well, you know, in our beverage alcohol business, and I think in the entire industry, was hit -- it was hit a little bit harder than it has in the past in terms of -- in terms of dry January. And so, that took away a bit of a portion of our -- our sales expectation for the -- for the year. You know, the beverage alcohol business with the new acquisition of -- of the new brands, those brands are adding lower gross margin than they -- than the rest of our businesses. We're working very hard to -- to -- to bring those -- those pieces up and we will get that up over time. As I said in the script, you know, we expect to be able to bring those up much closer to to the historical margins that we've achieved. But it's going to take -- it's going to take a few quarters, and so it's just -- it's -- it's coming. It's really a function of the manufacturing agreements that we have and getting that production moved into our facilities and organize them in an effective manner while not clogging operational problems during -- during that move. And in terms of the free cash flow guidance, we had some expectations on cash receipts on some of -- some of the bigger things including some of the make whole provisions inside of the spirits business, which we now see coming in in -- in June or July as opposed to in May, and that's really what's led to that thing. Irwin Simon -- Chairman and Chief Executive Officer I think the big thing here is just timing and that's -- you know, I can't always predict things. And, you know, with our beer businesses, you know, the ABI businesses bought lower margins. But just from an integration standpoint, we had a service agreement, you know, with ABI, we're moving away from that at the end of May, moving into our facilities. You know, we expect to get our margins up into the high 30s, low 40s today. But our SweetWater and our legacy businesses, we're running margins at that rate. So, you know, with that, we look -- we look to those margins. In regards to, you know, the Canadian cannabis businesses, as Blair said, integrating HEXO with SKU rationalization with some of the strains and looking at some of the potencies and timing. And when you're dealing with agriculture products, not everything moves accordingly here. You know, we've made some moves in regards to, you know, our Cayuga, in regards to Masson, in regards to Belleville, and consolidating our businesses there, taking note of costs. So, again, as we look at guidance, yes, there's guidance out there, but a lot of it is just timing. And as we move forward, you know, we have four quarters, not six quarters. If it was six quarters, it would be different. Nadine Sarwat -- AllianceBernstein -- Analyst Understood. Thank you. Irwin Simon -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question. Remington Smith -- Alliance Global Partners -- Analyst Hi, good morning and thank you for the questions. This is Remington Smith on for Aaron Grey. My first question is, in terms of the CRA having the provinces garnish wages, do we start to see any changes in purchase habits from provinces or the overall competitive environment yet, and then, with kind of greater focus on those LPs paying their taxes? Carl Merton -- Chief Financial Officer I don't think we've necessarily seen changes in -- in purchasing patterns. I think we saw very quickly, after CRA started garnishing those wages, a couple of LPs filed for protection within the same week. And then, I think there's been a few more that have filed since that period of time. And so, you know, someone who's -- who's excessively behind on their excise tax and -- and having their payments garnished are looking at four or five, maybe six months of time before they're going to get their next payment. They just don't have a lot of choices, and and so they're -- they're having to file for that protection. You know, I don't think the -- the boards are actually changing those patterns yet. I think that'll probably happen over the next two, three, or four months as more of these LPs realize and get caught up in the garnishment. Irwin Simon -- Chairman and Chief Executive Officer But there's a lot of the boards out there that been asked by this area to garnish excise tax when they sell into it. I think the big thing for us is we're finally seeing, you know, the Canadian government taking this serious, and those that, you know, weren't paying excise tax could keep going and, you know, putting the rest of us at a disadvantage. So, I think we're going to continuously see changes. And, you know, we've talked about the study that's come out there in regards to changes in regards to excise tax and marketing, you know, medical cannabis, etc. I think there's some major things here that could really benefit the Canadian cannabis industry. Remington Smith -- Alliance Global Partners -- Analyst Great. Thank you. I appreciate the color there. And then, my second question -- oh, go ahead. Irwin Simon -- Chairman and Chief Executive Officer No, go ahead. Remington Smith -- Alliance Global Partners -- Analyst And my second question just on the excise change -- excise tax changes that you mentioned that could potentially occur in the budget potentially next week, you mentioned tax savings potentially of $80 million for -- for Tilray. So, I guess with those savings, you expect it to mostly be realized by the LPs, or could there be, you know, some benefit realized from the provinces and the retail as well? Any color there would be helpful. Irwin Simon -- Chairman and Chief Executive Officer You know, good question, good question. I think, as we know provinces and we know governments, I'm sure they're going to try and grab some of that. But I think, listen, as we've said and we've only said it's about $80 million, you know, to Tilray. And the big thing is you got price compression and you still have the same amount of excise tax that you're paying. And, you know, I think in this quarter it was 32, 33% of our sales was going to excise tax. So, something has to be done. I don't mind if some of it goes back to the governments on education and promoting the safety, bringing awareness, marketing, and allow us to do these things. So, again, if we got half of it, $40 million back -- invest back in the business, I think it would be tremendous, beneficial, you know, to Tilray and other LPs. Carl Merton -- Chief Financial Officer And I think the key -- the key in this piece is that if the government is making the change to strengthen the industry because the tax became, in a way, oppressive, they need to avoid creating new things that -- that -- that pull that money back, and they need to allow it to go to the industry to help the industry continue to grow and strengthen. Remington Smith -- Alliance Global Partners -- Analyst Great. Thank you for the answer today. Operator Thank you. Our next question comes from the line of Bill Kirk with Roth MKM. Please proceed with your question. Bill Kirk -- ROTH MKM -- Analyst OK, thank you for taking the questions. Maybe I missed it in the prepared remarks, but what is the -- the 29 million in assets that have been moved to held for sale? I imagine some of it might be facilities that you mentioned earlier, but what specifically is in that -- that number, and how is it determined? Carl Merton -- Chief Financial Officer So, that number is -- is Cayuga facility, it's Masson, and it's the Bellville facility that we acquired as part of trust. And so, in each case, it's a facility, it isn't the business. The business is being reorganized within our existing footprints, and then we're -- we're releasing or selling them what becomes redundant assets at that point in time. Bill Kirk -- ROTH MKM -- Analyst OK, got it. That's what I was looking for on not -- not the businesses, OK. And then, in the third quarter compared to 2Q, selling, marketing expenses up a little bit. Carl Merton -- Chief Financial Officer Did we -- did we lose you, Bill? Bill Kirk -- ROTH MKM -- Analyst [Inaudible] Operator I'm sorry, it seems that his line may have a technical difficulty. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question. Michael Lavery -- Piper Sandler -- Analyst Thank you. Good morning. I just wanted to touch on the U.S. And I understand at the moment it's strictly speaking a little bit hypothetical still, but if rescheduling occurs, you laid out at a high level how you're thinking about it in a more pharmaceutical approach. I guess a couple questions. Is it -- just maybe what's your patience level if it does come to that, just because the FDA certainly is known not for its speed? And so, you know, is your understanding just, you know, that -- that -- that obviously if that door opens, it could still take quite some time? Or how are you thinking about that? And in the release as well, you reminded us about the connection to MedMen. And how would that fit into that potentially? Is that something that would still stay separate or could potentially become sort of like pharmacies? I guess just maybe lay out some of how you're thinking about potential U.S. opportunities should regulatory change come through? Irwin Simon -- Chairman and Chief Executive Officer So, as you know, as I said, within the U.S., if medical cannabis is rescheduled and medical cannabis becomes legal, we being, you know, a large medical cannabis producer in Canada and Europe and had the expertise and have the research, not knowing what the FDA and not knowing In regards to, you know, what the guidelines will be, you know, Tilray is ready to capitalize on all our expertise. Is there a possibility with NAFTA or with other rules that we can, you know, export cannabis from Canada that's GMP certified. Today, you can export, you know, cannabis from Canada to other parts of the other countries around the world if it's GMP certified. So, I'm not sure why that wouldn't be the case in the U.S. if that happens. My personal belief if it's rescheduled from the medical cannabis standpoint and they leave it up to each of the states on a recreational standpoint, then you know, that is something different. So, I think the big thing is I look into a crystal ball not knowing where this is going. I think something happens from a rescheduling standpoint. And, you know, Tilray is ready to move from a medical standpoint. If there was an acquisition for us, we're ready to move. And, you know, we uphold the debt of MedMen. We think the Medmen name still has a strong -- strong brand name even though it's had its challenges and it's going through, you know, some changes right now to get rid of some of those liabilities and that. And there's an opportunity that, you know, we could execute with the MedMen name across the U.S. The other thing is depending -- and I think one of the biggest opportunities, and we're seeing, you know, some opportunities with delta-9, which is infused drinks with hemp-infused THC. I think the biggest opportunity is in drinks. And with our distribution systems, with our brands within our beer business and spirits, you know, Tilray could get into that. So, you know, not knowing and not -- you know, what's going to happen, I think, as I said, Tilray is circled in the U.S. And it's not like we'd have to change their model being an MSO where we're, you know, restricted to each state right now. We could take our expertise from around the world. We can take our medical expertise, we can take our beverage expertise and bring it to the U.S. once we know which way rescheduling happens and it goes. So, that's what I'm excited about is once we know what the guidelines are, once we know what the opportunities are, we could easily jump in there without undoing something that we own today. Michael Lavery -- Piper Sandler -- Analyst OK, thanks. And just on the beverage side, you touched on your hopes for distribution upside on a lot of the especially recently acquired brands. But do you have a sense how you coming into this spring's shelf resets and what sort of shelf space gains your position for that are already in hand? Irwin Simon -- Chairman and Chief Executive Officer Hey, Ty, you're on the call, right? Do you want to jump in there? Listen, I got to tell you in a short period of time, you know, a lot of these brands were just starved on innovation, starved on distribution. We have 500 distributors out there, and I always say to Ty, if each distributor could do $1 million more, which is not a lot, that's $500 million. So, I think the upside on beer is tremendous. You know, as you look at pricing, you look -- you look in regards to the whole spirits industry. I think we're so well positioned on beer, on innovation that we're coming out with, you know, moving into water, we're moving into some energy drinks, moving into some other infused drinks. So, we're well positioned with our distributors. We have over 100 salespeople and, you know, headquarter people between marketing. So, Ty, you want to just talk about some of the stuff that's happening? Ty Gilmore -- President, US Beer Division Yeah, yeah, no, thanks, Irwin, and thanks for the question, Michael. Yeah, no, we -- we feel really solid about some of the distribution gains, not only that we've made in the third quarter, but we also feel solid about the conversations we're having with, you know, several national and regional retailers across on and off-premise with our brands. You know, specifically, if I look over Q3, I mean we've gained north of 1,200 new effective placements on our existing brands, and with the innovation, you know, we continue to see uptick every day with our distributor network and how they're leaning in with us and helping drive distribution. So, you know, chains are going to continue to play a critical role in our success, and we're well suited, as Irwin said, to leverage our partnerships with our distributors and the relationships that we have across the U.S. Michael Lavery -- Piper Sandler -- Analyst OK, thanks so much. Operator Thank you. Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question. Matt Bottomley -- Canaccord Genuity -- Analyst Good morning, everyone. This one's for Carl. I just wanted to go back to the revised guidance here on adjusted EBITDA going into fiscal Q4 here. So, I'm just wondering if you could give a little more color on the dynamic between, you know, overall revenue progression versus margin expansion. There's -- there's obviously quite still a big step-up expected even in the revised guidance. And then, specifically within that, I'm wondering how much of that is -- is beverage related given that I think you had commented that you're close to about a $300 million business now in all your beverage portfolios. If you run rate this quarter, and I understand there's seasonality, it's closer to 200 to 225. So, I'm just wondering if there's some step-up on the revenue side specifically in Q4 when it comes to your alcohol contribution. Carl Merton -- Chief Financial Officer So, thanks -- thanks, Matt. There -- there is significant increase in -- in sales in Q4 in -- in beer. I think we've talked a little bit already on the call in terms of the spring reset and -- and hitting -- hitting those -- you know, the key summer selling season, which is really driven in our April and May sales results for -- for the organization, particularly in beer. We've also -- we've talked a few times about challenges in the spirits business with -- with sales growth and that, you know, we were going to get resolution of that in Q4 of this year. So, that's also reflected inside of those -- that expectation on the guidance, as you know, potentially driving both revenue and and margins during that -- during that time period. I think on -- on the beer businesses margin side, you are going to see an increase in margins in Q4 that will be driven by just more -- more volume flowing through the facilities as we -- as we ramp up production in -- you know, in March and April to hit those April and May sales because there's such quick turnaround time and lack of inventory inside -- inside that segment. You know, we've also got the buildup on the cannabis business for the summer period that time and, you know, increases in things like pre-rolls and -- and other product forms in the cannabis business that are -- that are consumed on a more of a, let's call it, a shared basis either in a shared setting or actually shared on its own. And so, that's -- that's a -- that's a part of it. And -- and with that increased sales level comes increases in margins just because of the efficiency on -- on the production side. Matt Bottomley -- Canaccord Genuity -- Analyst OK, very helpful. Thank you. Operator Thank you. Our next question comes from the line of Doug Miehm with RBC Capital Markets. Please proceed with your question. Douglas Miehm -- RBC Capital Markets -- Analyst Yeah, thank you, and good morning. Question just has to do with, again, the excise tax. And going back to this, there's obviously an opportunity for your company, but I am curious, if these changes were to go through and you benefit somewhere between 40 million and 80 million the way you expected, what do you -- what's your thinking on the other companies? Because we're starting to lose some of the smaller companies, but is this going to provide the smaller companies with another year or two of life? And I'd say the other thing that I'm curious about as it relates to this, could this result in another leg of downward pricing as they try to maintain market share? Irwin Simon -- Chairman and Chief Executive Officer So, I think a couple of things. Yes, I think, you know, if companies don't have to pay the same amount of excise tax, that, you know, everybody is, I think some of these companies absolutely will survive. And I think -- listen, I think at the end of the day, we all want a strong cannabis market in Canada. The big thing is, again, what's got to change is the excise tax. And, yes, you know, we probably are the highest -- we are the highest payer of excise tax in Canada. So, for us to receive back -- it's $80 million is a lot of money. But at the end of the day, it's money that we're going to put into building our brands, building our products, our innovation, and hopefully marketing, and building a bigger category out there. And I think that's ultimately the benefit that the money's not going back to, you know -- taxes is going back in to build a marketplace and back into, you know, continuously grow the industry. So, yes, will -- if more competition be out there, could there be price compression? Absolutely. But I'll tell you what, I don't mind some more price compression. I don't mind some more LPs being in there. I wouldn't mind that $80 million coming into our -- you know, into our company where we can invest it back in our business and drive growth, drive, you know, innovation, and drive marketing to brands to much bigger category. Carl Merton -- Chief Financial Officer I think it's also important to understand that different entities are going to have different amounts of a win related to this, right? And as you get -- as you get closer to the tail end of share, the -- the impact for a lot of those companies is going to be a lot less. And if they're behind on their excise taxes, you know, the excise tax garnishment may have -- may have a bigger impact for them. We're on the -- as Irwin said, we're on the opposite end of that tail because -- because we're the largest. And then, you've got a bunch of companies in the middle where, you know, I think that is more toward where your question was, were you're going to see some people who will be able to survive a little bit easier. Irwin Simon -- Chairman and Chief Executive Officer And I don't think excise tax is going to keep everybody in business here, OK? I hope not. I think, you know, I continuously see more consolidation in the Canadian market. I see, you know, some of the smaller players ultimately going away, and I think that's what happens there, as a new industry, there's just a filtration of, you know, these LPs. If you come back and look at it today, 25 LPs make up about 50% of the market share. There's about another thousand LPs that make up the other 50% market share. So, you see some consolidation, you see companies going away, and I think what this creates is a much stronger cannabis industry within the Canadian market. And what happens also, as I said before, there could be opportunities for grow in Canada to be shipped into the U.S. and other parts of the world, which could, you know, enhance the Canadian cannabis industry. Douglas Miehm -- RBC Capital Markets -- Analyst OK, excellent. Thank you. Irwin Simon -- Chairman and Chief Executive Officer Thank you. Operator Thank you. Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question. John Zamparo -- CIBC World Markets -- Analyst Thank you. Good morning. My question is on -- on the cost side, both COGS and SG&A, and there's just a lot of moving parts here. And I wonder how much FQ3 represents a run rate because you've got additional synergies coming from HEXO. It sounds like you have savings on the beverage side as you move away from co-packing agreements, but you're also investing in innovation and product extensions. And it sounds like another variable is selling the production facilities, which I think you said saves $5 million to $7 million annually. So, I wonder when you think about all of this in aggregate, is there a net benefit on the cost side? And do you expect to see total cost come down from FQ3 because it seems like organic revenue growth is a bit more difficult to achieve near term? Thank you. Carl Merton -- Chief Financial Officer So, first off, I think, you know, organic growth is going to come particularly in the -- in the fourth quarter as we see the new launches and the new innovation hit the market, particularly in some of these new categories that we're doing on -- on the beverage alcohol side, including -- including the water and the nonalcoholic. And playing in that space, playing in the F&B party space, things like that, are our new categories for us. And so -- so, I think there are opportunities for -- for organic growth. But, you know, if you're using Q3 as a baseline, I don't think that's the right way to look at it. And similarly, you know, I don't think Q4 is necessarily the right baseline for -- and they're for the exact polar opposite reasons. Q3 is traditionally our lowest quarter in terms of revenue and production and Q4 is traditionally our highest quarter in terms of revenue and production. So, we get -- we're going to get a -- an uptick on margins as a result of that incremental volume, particularly in beverage alcohol in our legacy business, and -- and that's -- that's going to be what drives a chunk of the earnings guidance. And it's going to be what -- what drives our results and exports. Irwin Simon -- Chairman and Chief Executive Officer I think the big thing here is, too, you heard me say before this, the savings we're getting from the integration of HEXO and Truss and somewheres between, you know, close to $35 million, we don't get that up immediately. You know, it evens out over the quarter. So, it takes us a full year to get that amount. The second thing is, you know, as we just own the ABI businesses for two months and just -- you know, two quarters, as we integrate them into our businesses and start from the procurement -- from, you know -- from the distribution standpoint, I mean, there's a lot for us to get done here, but we're -- we're focused on organic growth and we're starting to see that already. We're focused on which facilities to integrate these products to, which states we're going to focus on. We also have 13 brew pubs out there that were focused on growing our brands through these brew pubs. you know, big event for us 4/20 coming up. April 20th, you know, we have two big events, one in Atlanta and one in Long Island. And there's also -- in every retailer, there's displays built. So, July 4th is one of the biggest, you know, beer category months that is sold out there from occasions. So, you know, right now, as we bring this together and our aspirations is to grow our beer business to a $300 million business -- and you got to remember, in 2020, we sold 2.5 million cases when we first acquired the SweetWater brand. You know, today, we're on a run rate at 12.5 million cases with tremendous opportunity with, you know, all the innovation that's happening. So, there's just a lot of evening out here and there's a lot of moving pieces to bring all this together. And I think the big thing is -- is as we look at it, when we get a full year behind all of these acquisitions with -- with HEXO, with Truss, and the integration there, and we get all this, you know, full year together with all the ABI stuff, we're seeing some great stuff. And listen, just with Montauk, we've owned it over a year, one of the, you know, fastest-growing beer within New York today. Some of the stuff we're seeing on the West Coast with Green Flash, Nelson's and Alpine. So, the legacy stuff that we've already bought and owned the year, we're seeing good results for it. It just takes us some time here to get these things integrated. John Zamparo -- CIBC World Markets -- Analyst OK, I appreciate the color. I'll pass it on. Thank you. Operator Thank you, ladies and gentlemen. That concludes our question-and-answer session. I'll turn the floor back to Mr. Simon for any final comments. Irwin Simon -- Chairman and Chief Executive Officer Thank you, everybody, for joining us today. Listen, I wish I could predict what's going to happen in the cannabis industry. There's going to be one thing for sure I can predict: There will be change. And we've been waiting for change for a long time, you know, in the German market. It finally came to fruition, and there's going to be a lot of execution to get it where it needs to be, but it's happening. I do think we've been sitting and waiting through the Biden administration before that change happened within the cannabis industry. There's lots of discussion about rescheduling, and again, it's not something we have control of. But one thing we do have control of, we do know how to grow cannabis. We do know how to sell medical cannabis. We know about research. We do have within Canada Day over 5 million square feet of growth. We do have in Europe, you know, two major facilities. And with that, depending what happens in the U.S., we will be ready to launch what needs to be launched into the U.S., whether it's taking from our existing businesses, acquiring, putting something together, we will have the opportunity to do that. You know, as I've said, our aspirations is to grow our beer business to a $300 million beer business. We already are the fifth-largest craft brewer today within, you know, the U.S. We have a great business within Breckenridge Distillery. We've been named some of the No. 1, you know, whiskeys within the world, within the U.S., and some exciting things happening. I'm also really excited about what's happening, you know, in our wellness business in regards to Manitoba Harvest and what's happening with hemp from a high-protein food and now the perception of hemp as a great product and a healthy product. So, you know, you know, as Tilray Brands comes together over the last five years, there's a lot of real good pieces that ultimately will come together. There's tremendous opportunities with our products, there's tremendous opportunity with our distribution, there's tremendous opportunities as we build out, you know, our global market. So, you know, as I look at Tilray, we've circled a lot of the right wagons and again that dealing with regulatory, dealing with unknowns in regards to rescheduling. But Tilray is there. I'm real happy with the team that I have in place and excited to work with the team. We've done a great job in an industry in regards to banking what we've done with our balance sheet, and we continue to work on that balance sheet. I'm someone personally that does not like debt. So, how do we focus on our balance sheet? I'm very much in favor, and as I push with Carl and the rest of team, cash flow and taking costs out of our business. And there's not too many other industries out there that are taxed the way we are on cannabis, on beer, and on spirits. And I wish I was -- Tilray was already the amount of money that we're providing the governments of Canada, U.S., and Europe from our taxes that we generate from our business. With that, I look forward to talking to you again soon. I appreciate you getting on the call and have a great week. Thank you.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2024 first quarter conference call. My name is Angela, and I'll be coordinating your call today. [Operator instructions] I would like to introduce our moderator for the call, Mr. Rafael Tejada, vice president, investor relations. Mr. Tejada, you may begin the call. Rafael Tejada -- Vice President, Investor Relations Good morning, and thank you for joining us. On the call with me today is Marc Casper, our chairman, president and chief executive officer, and Stephen Williamson, senior vice president and chief financial officer. Please note this call is being webcast live and will be archived on the investors section of our website thermofisher.com, under the heading News, Events & Presentations until May 8, 2024. A copy of the press release of our first quarter 2024 earnings is available in the investors section of our website under the heading financials. So, before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K, which is on file with the SEC and available in the investors section of our website under the heading financials, SEC filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2024 earnings and also in the Investors section of our website under the heading financials. So with that, I'll now turn the call over to Marc. Marc Casper -- Chairman, President, and Chief Executive Officer Thank you, Raf. Good morning, everyone, and thanks for joining us today for our first quarter call. As you saw in our press release, we had a great start to the year. We delivered another quarter of strong financial performance. I'm proud of our team's ongoing focus on enabling the success of our customers while demonstrating incredibly strong commercial execution and operational discipline and our continued success is a result of our proven growth strategy and our PPI business system. So, let me first recap the financials. Our revenue in the quarter was $10.34 billion. Our adjusted operating income was $2.28 billion. We expanded our adjusted operating margin in Q1 to 22%, and we delivered another quarter of strong adjusted EPS performance, achieving a 2% increase year over year to $5.11 per share. Our performance in the first quarter is allowing us to raise our guidance and sets us up to deliver differentiated performance in 2024. Turning to our performance by end-market. In the first quarter, underlying market conditions played out as we'd expected. Our team's excellent execution enabled us to deliver differentiated revenue performance that was ahead of our expectations. Now, let me provide you some additional context. Starting with pharma and biotech, we declined in the low single-digits for the quarter, which was a sequential improvement in performance over Q4 2023. In the first quarter, the vaccine and therapy revenue runoff resulted in a three point headwind for this customer segment and we also delivered strong growth in our clinical research business. A quick reminder on academic and government and industrial and applied. A year ago, we had very strong shipments of analytical instruments as we worked down the backlog that was caused by pandemic-related supply chain disruptions. As a result, in academic and government, we declined in the low-single digits during the quarter. We delivered strong growth in our electron microscopy business, as well as in our research and safety market channel. In industrial and applied, we declined in the low single-digits for the quarter. We delivered strong growth in our electron microscopy business in this segment. Finally, in diagnostics and healthcare in Q1, we declined in the high single-digits. The reported growth in this end-market was impacted by the runoff of COVID-19 testing-related revenue. During the quarter, core revenue growth was highlighted by our transplant diagnostics and immunodiagnostics businesses, as well as our healthcare market channel. So wrapping up on our end-markets, underlying market conditions played out as we expected to start the year. As you recall, our assumption for 2024 is that we'll see a modest pickup in economic activity as the year progresses. During the quarter, it was good to see a couple of positive developments in our end-markets that support this view, including continued improvements in the biotech funding environment and the stimulus program announced by China. I'll now turn to an update on our growth strategy. As a reminder, our strategy consists of three pillars, high-impact innovation, our trusted partner status with customers and our unparalleled commercial engine. Starting with the first pillar, high-impact innovation. We had an excellent start to the year, launching a number of new products across our businesses during the first-quarter. Let me first highlight a number of products in analytical instruments that demonstrate our continued market leadership. In our chromatography and mass spectrometry business, we launched the Thermo Scientific Dionex Inuvion Ion Chromatography system, which enables higher resolution, faster time-to-results and streamline workflows to more efficiently identify contaminants for environmental testing. In our chemical analysis business, we launched the Thermo Scientific LInspector Edge In-line metrology solution to enhance battery safety, performance and production. And we also launched the Thermo Scientific TruScan G3 Handheld Raman Analyzer, a next-generation handheld instrument for the rapid identification of chemical compounds used in drug production. And then, in Life Science Solutions, we launched the Axiom PangenomiX Array, a high-throughput microarray for use in human genomic studies across global populations, including disease risk and detection research, as well as population scale disease research programs. So, another strong quarter of product launches. One of the highlights of our high-impact innovation during the quarter was being named as one of Fast Company Magazine's Most Innovative Companies. It's great external recognition for the impact that our team is driving for our customers. Moving to the second pillar of our strategy. We are in the trusted partner status over many years and it gives me the unique opportunity to connect with our customers' senior executive teams. Since the beginning of the year, I've had many meetings with our customers as they're turning to us more than ever. This is to both reinforce our partnership, as well as to help them navigate the opportunities and challenges that they face. These conversations are happening across our company at all levels of the organization. Our customers see our team as part of theirs and our culture of always finding a better way every day serves to reinforce our trusted partner status with our customers. We do not take lightly the trust our customers have in our company and we'll continue to partner closely with them to enable their innovation and productivity. The first example of this is in our clinical next-generation sequencing business. In the quarter, we announced a collaboration with Bayer to develop a next-generation sequencing-based companion diagnostic that will help identify patients who may benefit from Bayer's growing portfolio of precision cancer therapies. The second example is our analytical instruments business. We are partnering with the North Carolina Collaboratory to support PFAS research capacity in the state as they help to identify and implement solutions to address PFAS contamination. This is the first network of its kind and they'll use several of our state-of-the-art instruments, including the Orbitrap Astral in their research. And finally, in our clinical research business, I'll share two examples of how our trusted partner status comes to life as our customers look for solutions to their unmet needs. We expanded our portfolio of GMP lab services to include qPCR-based biosafety testing capabilities for the detection of bacteria and other contaminants and medicines. This offering enables significantly faster results versus traditional testing method, allowing for quicker delivery of medicines to patients. And we launched the CorEvitas syndicated clinical registry in generalized pustular psoriasis to address an unmet need for real-world evidence related to outcomes for patients with this rare disease. As you recall, CorEvitas became part of our company last year. The business is performing very well and making a difference for our customers and patients. All of these are great examples of our trusted partner status. Now, let me turn to our PPI business system, which enables outstanding execution during the quarter. PPI engages and empowers all of our colleagues to find a better way every day. You can see it in our strong profitability and cash flow that we delivered in the first quarter. Looking forward, our team is actively utilizing Generative AI as part of the PPI business system to increase efficiency and productivity, as well as to continually improve the customer experience across the company. To share a couple of examples of how we're applying AI, it's enabling us to accelerate software development timelines in our analytical instruments and Life Science Solutions businesses. We're also leveraging the combination of large language models with a vast and differentiated amount of data at our disposal. One benefit we're seeing is our ability to enhance the capability of our technical and customer service teams to more effectively serve our customers. Generative AI is another great example of how we continually strengthen the impact of the PPI business system. Let me now give you an update on our corporate social responsibility initiatives. As a mission-driven company, we help to make the world a better place by enabling the important work of our customers. We also have a positive impact by supporting our communities, being a good steward of our planet and focusing on STEM education and advancing global health equity. To that end, during the first quarter, we announced a collaboration with the South African Medical Research Council. Together, we'll establish a center of excellence and training program focused on molecular biology and life sciences. The facility will provide specialized education and support for professional development to scientists and laboratory professionals in Africa. I'm also pleased to share that Thermo Fisher achieved a perfect score on the Human Rights Campaign Foundation's Corporate Equality Index for the eighth year in a row. Let me now give you an update on capital deployment. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. During the quarter, we reached the one-year anniversary of the Binding Site acquisition, now our protein diagnostics business. Its financial performance is tracking ahead of the deal model with really strong growth. I recently had the chance to visit the headquarters of our protein diagnostics business and saw the great progress they're making, given the exciting new products that can positively impact patient care for multiple myeloma. Turning to our planned acquisition of Olink. We're working through the regulatory process and the transaction is on track to close by mid-2024. We look forward to welcoming our new colleagues to the company later this year. And in terms of return of capital during the quarter, we repurchased $3 billion of shares and increased our dividend by 11%. As I reflect on the quarter, I'm very proud of what our team accomplished and grateful for their contributions to our success. In a nice recognition of both our team and track record, Thermo Fisher has once again been included on Fortune Magazine's list of Most Admired Companies. Let me now turn to our guidance. Given the stronger operational performance to start the year, we are raising our 2024 guidance. We now expect revenue to be in the range of $42.3 billion to $43.3 billion, and we expect adjusted EPS to be in the range of $21.14 to $22.02 per share. Stephen will take you through the details in his remarks. So, to summarize our key takeaways from the first quarter, we delivered another quarter of strong financial results, driven by our proven growth strategy and PPI Business System. We continue to enable our customer success and this continually reinforces our trusted partner status. Our strong results in Q1 position us to deliver differentiated performance in 2024 as we continue to create value for all of our stakeholders and build an even brighter future for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen? Stephen Williamson -- Senior Vice President, Chief Financial Officer Thanks, Marc, and good morning, everyone. I'll take you through an overview of our first quarter results for the total company, then provide color on our four business segments and I'll conclude by providing our updated 2024 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view on how the first quarter played out versus our expectations at the time of our last earnings call. In Q1, market conditions were as we'd expected. We had another quarter of excellent execution and this enabled us to deliver Q1 financials meaningfully ahead of what we'd assumed in our prior guidance. Core organic revenue was $150 million or 1.5% ahead. And adjusted EPS was $0.40 ahead. To give you some color on that $0.40, $0.19 was from very strong profitability pull-through on the revenue beat, $0.12 was from phasing of spending within the year, $0.07 was from lower FX headwinds and $0.02 was from lower net interest expense. So, we're continuing to manage the business really well and are off to a great start to the year. Let me now provide you with some additional details on our performance, beginning with earnings per share. In the quarter, we grew adjusted EPS by 2% to $5.11. GAAP EPS in the quarter was $3.46, up 4% from Q1 last year. On the top line in Q1, reported revenue was 3% lower year over year. The components of our Q1 reported revenue change included 4% lower organic revenue and a slight contribution from acquisitions. Q1 core organic revenue decreased 3%. And in the quarter, pandemic-related revenue was approximately $200 million, including $175 million of vaccines and therapies related revenue. Turning to our organic revenue performance by geography. In Q1, North America declined mid-single-digits, Europe declined low single-digits and Asia-Pacific and China declined in the low single-digits. With respect to our operational performance, the team used the PPI Business System to execute really well in the quarter, delivering $2.3 billion of adjusted operating income, which was 22% of revenue, 20 basis points higher than Q1 last year. Total company adjusted gross margin in the quarter came in at 41.8%, 150 basis points higher than Q1 last year. In the quarter, we continued to deliver very strong productivity, reflecting our continued focus on cost management, as well as the carryover benefit from the cost actions put in place last year. This enabled us to more than offset the impact of lower volumes while appropriately funding investments to further advance our industry leadership. Moving to the details of the P&L, adjusted SG&A in the quarter was 16.5% of revenue. Total R&D expense was $330 million in Q1, reflecting our ongoing investment in high-impact innovation. R&D as a percent of manufacturing revenue was 7.2% in the quarter. Looking at our results below the line, our Q1 net interest expense was $84 million, which is $70 million lower than Q1 2023 due to increased cash balances. Our adjusted tax rate in the quarter was 10.5% and average diluted shares were $384 million in Q1, approximately $4 million lower year over year, driven by share repurchases net of option dilution. Turning to free cash flow and the balance sheet, we had a strong start to the year with cash flow generation. Q1 cash flow from operations was $1.3 billion and free cash flow for Q1 was $910 million after investing $340 million of net capital expenditures. We continued to return capital to shareholders in Q1 with an 11% increase in our dividend and the $3 billion of share buybacks which were completed in January. We ended the quarter with $7.25 billion in cash and short-term investments and $35.6 billion of total debt. Our leverage ratio at the end of the quarter was 3.3 times gross debt-to-adjusted EBITDA and 2.6 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 11.8%, reflecting the strong returns on investment that we've been generating across the company. Now, I'll provide some color on the performance of our four business segments, starting with Life Sciences Solutions. Q1 reported revenue in this segment declined 13% and organic revenue was 12% lower than the prior year quarter. This is driven by moderation in pandemic-related revenue in the segment, as well as lower levels of activity in our bioproduction business versus the year-ago quarter. Q1 adjusted operating income for Life Science Solutions increased 1% and adjusted operating margin was 36.8%, up 480 basis points versus the prior year quarter. During Q1, we delivered exceptionally strong productivity, which was partially offset by unfavorable volume pull-through. The team continues to do an excellent job to appropriately manage the cost base and deal with the unwind of the pandemic. In the Analytical Instruments segment, reported revenue declined 2% and organic growth was 1% lower than the prior year quarter. We continue to deliver very strong growth in the electron microscopy business. And as a reminder, we had very strong comparisons in this segment in the quarter due to the high level of instrument shipments in Q1 last year as we worked down the backlog. In this segment, Q1 adjusted operating income decreased 5% and adjusted operating margin was 23.7%, 70 basis points lower year over year. In the quarter, we delivered strong productivity, which was more than offset by unfavorable volume mix and strategic investments. Turning to our Specialty Diagnostics. In Q1, reported revenue and organic revenue were flat versus the prior year quarter. In Q1, we continued to see strong underlying growth in the core, led by our transplant diagnostics and immunodiagnostics businesses, as well as in our healthcare market channel. Q1 adjusted operating income for Specialty Diagnostics increased 5% and adjusted operating margin was 26.5%, which is 120 basis points higher than Q1 2023. During the quarter, we delivered favorable business mix and good productivity, which was partially offset by strategic investments. And finally, in Laboratory Products and Biopharma Services segment, both reported revenue and organic growth decreased 1% in Q1 versus the prior year quarter. This was driven by the runoff of vaccines and therapies revenue. During the quarter, we delivered strong growth in our clinical research business. Q1 adjusted operating income declined 6% and adjusted operating margin was 13%, which is 80 basis points lower than Q1 2023. In the quarter, we delivered strong productivity, which was more than offset by unfavorable volume mix and strategic investments. Turning now to guidance. As Marc outlined, given the strong start to the year, we're raising our 2024 full-year guidance. We now expect revenue to be in the range of $42.3 billion to $43.3 billion and adjusted EPS to be in the range of $21.14 to $22.02. At the midpoint, that reflects a core revenue increase of just under $100 million. We continue to assume core organic revenue growth will be in the range of minus 1% to positive 1% for 2024. We continue to assume that the market declines low single-digits this year. Our growth strategy and PPI Business System execution will enable us to continue to take share once again. In terms of adjusted EPS, the increase in the guidance at the midpoint is just over $0.10. The majority of this is from the core revenue raise, but also $0.02 from assumed lower net interest expense versus our prior guidance. Our 2024 updated guidance range assumes an adjusted operating income margin between 22.4% and 22.8%, slightly improved from the prior guide. We continue to use the PPI Business System to enable excellent execution, manage costs appropriately and fund the right long-term investments to enable us to further advance our industry leadership. So, a great start to the year and increasing the guidance outlook. We remain well positioned to continue to deliver differentiated performance. I thought it would be helpful to remind you of some of the key underlying assumptions behind the guide that remain unchanged from the previous guidance. In 2024, we're assuming just under $100 million of testing revenue and $300 million to $400 million of vaccines and therapies-related revenue. In total, this represents a year-over-year headwind of $1.3 billion to $1.4 billion or 3% of revenue. We assume that FX will be roughly neutral year over year to both revenue and adjusted EPS. Given recent FX rate changes, we're assuming that the $0.07 beat that we saw in Q1 is offset in the remainder of the year, leading to no change for the year as a whole for FX versus our prior guide. We expect the adjusted income tax rate will be 10.5% in 2024, and we're assuming between $1.3 billion and $1.5 billion of net capital expenditures and free cash flow in the range of $6.5 billion to $7 billion. In terms of capital deployment, we're assuming $3 billion of share buybacks, which were completed in January. We expect to return approximately $600 million of capital to shareholders this year through dividends. We continue to assume that we'll close the Olink acquisition by mid-year. Full year average diluted share count is assumed to be approximately 383 million shares. And finally, I wanted to touch on quarterly phasing. In Q2, we expect revenue dollars to step up from the first quarter and organic growth will likely be two points better than Q1. And we expect Q2 adjusted EPS to be similar to Q1. This reflects the revised view of the phasing of spending within the year that I mentioned earlier. I think this view of Q2 is pretty close to what's currently baked into consensus right now. So to conclude, we delivered on our commitments in Q1, and we're in a great position to deliver differentiated performance for all our stakeholders in 2024. With that, I'll turn the call-back over to Raf. Rafael Tejada -- Vice President, Investor Relations Operator, we're ready for the Q&A portion of the call. Questions & Answers: Operator Thank you, Mr. Tejada. [Operator instructions] We have the first question from Doug Schenkel with Wolfe Research. Your line is open. Doug Schenkel -- Wolfe Research -- Analyst Good morning, guys. Thank you for taking my questions. Simply put, it was a better start than expected to the year. Marc, can you share color on, one, how did the quarter progress? And two, how does that progression and really momentum heading into the second quarter, how do those things inform your thinking on the outlook for the balance of the year? Marc Casper -- Chairman, President, and Chief Executive Officer Thanks. So, I thought just in the spirit of continuous improvement in PPI, that I would frame a few of the key points for the Q&A session and then get to your questions. So, indulge me for a second. So, when I think about the key points, one, I will start with the long term. We serve an awesome industry that has a bright future. All right? And when you think about what drives the bright future, very durable growth driven by the great science, the strong pipelines and the unmet medical needs. When I think about the first quarter, zooming into the short term, market conditions were in line with our expectations and really with strong execution in the quarter that resulted in the financial performance that was ahead of our expectations that allowed us to retire risk, as well as raise our full-year outlook. Reminding our investors, what's assumed in the '24 guidance is that we're going to see a modest step-up or pickup in economic activity as the year progresses. And during the quarter, it was really good to see a couple of positive developments in our end-markets that supports the view of a pickup as the year progresses, which is continued improvements in the biotech funding environment and the stimulus program that was announced by China. As you know, how we define success is that we deliver differentiated short-term performance with a strong emphasis on share gain while strengthening our competitive position for the long term and Q1 was another quarter in which we achieved that. So, Doug, as I think about the phasing of the quarter, market really played out exactly as we thought it was and we looked at the different parts of it and really in aggregate and in the pieces, it really played out that way. As the quarter unfolded, what I would say is, didn't see a huge change in pattern, although March was a little bit better than the first couple of months. You had the way Easter laid out, which kind of makes it a little bit hard to know exactly, but it felt like March was a good exit rate consistent with the modest step-up and that's baked into it. And I would say that, April is, in the first couple of weeks kind of playing out with that as well. Doug Schenkel -- Wolfe Research -- Analyst OK. That's super helpful. And thank you for the high-level thoughts as well. If I could, maybe just kind of double-click into an area of focus for all of us, lab products and services was stronger than expected relative to certainly what I had in my model and from what I can tell was in consensus. In particular, obviously, the CRO and the CDMO businesses are a focus for all of us. What are you seeing there? Is it fair to say that things are picking up there a little bit better and maybe better than expected, keeping in mind that, some of the early updates from CDMO peers have been relatively encouraging? And then, I think maybe more on the CRO side is where we'd see this impact, but as we kind of keeping in mind that Q1 was the best biopharma funding quarter in about five years, how does that make you feel about the outlook for the next several quarters, and the years ahead? Stephen Williamson -- Senior Vice President, Chief Financial Officer Yes, Doug, I'll tee up the kind of the view versus consensus. Personally, I'm not going to talk about the kind of business dynamics. So, we don't guide by segment in terms of our organic growth. And for us, it came in, as Marc said, the markets came in as we had expected in aggregate and that's the same thing for the segment and we executed well. So, it wasn't a huge outperformance part of the beat, it was kind of pretty much across the board for the company. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. And then, when you get into the dynamics, the one thing I would call out is in our CRO capabilities, clinical research, the former PPD business, really excellent execution in the first quarter drove really very strong performance, very proud of what the team accomplished. And when I think about the market dynamics, definitely seeing the pipeline of activity picking up and as you certainly know, it takes a while for that to actually materialize into revenues given the cycle of the business, but very encouraging given the biotech funding environment to see that level of pipeline of work picking up. So, thank you, Doug. Operator Thank you. The next question is from Mike Ryskin with Bank of America. Your line is open. Mike Ryskin -- Bank of America Merrill Lynch -- Analyst Great. Thanks for taking the question and congrats on the quarter. Marc, I want to pick up on something you just mentioned. You called out continued improvement in biotech funding environment. And earlier you talked about the stimulus in China, two positive developments you saw in the end-market in 1Q. But I think you also acknowledge it's still relatively early going for those, and there have been a few false starts in end-markets over the course of 2023. So I guess the question is, what gives you confidence that these have really turned the corner? What data points you're looking for as the year progresses and especially given your position on the China Business Council? Just when do you think the better funding and stimulus will show up as revenues for you -- for Thermo? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, Mike, I think it's a great question. I like the way you framed it as well. So we're not -- nothing about false starts. The way that I think about it is and super clear on the word choice. What was assumed in our original guidance was a modest pickup. The two data points that I called out would be consistent with our view. So, we're not changing our view upwards on the market, but rather what's going to drive the slight pickup, the fact that biotech funding is improving and that China announced a stimulus program. I think everybody was probably positively surprised that they announced it as early in the year as that they did and they're trying to get their economy growing. Those are facts to support the modest step-up, and set ourselves up for an even stronger set of market conditions as we enter 2025. So that's how I think about the kind of the phasing of what's going on in the market. And then, the other thing that I wouldn't just note about the quarter, which was very positive is that, it actually played out as we expected, right, including the four end-markets and that's good because that means the normal incredible visibility and predictability that you typically have in this business is returning, which is helpful as well. Mike Ryskin -- Bank of America Merrill Lynch -- Analyst OK. That's really helpful. And Doug asked about lab products and services. Let me focus on analytical instruments. You called out electron microscopy continue to do very well there. But -- and you do have really tough comps, but maybe you could focus a little bit on chromatography, mass spec. What are you seeing there from an end-market perspective? There's been a lot of concern about pharma, capex budgets and sort of how they're trending in 2024. So, any early comments you can say about that part of the portfolio? Thanks. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, Mike, when I think about analytical instruments, we had a really good quarter and it's against a very, very strong comparison, which is why I called it out because compared to the high-teens growth last year, it's important to flag it. Let me start with electron microscopy, then I'll get to chroma mass spec. So, electron microscopy, that business has been performing at a great level, continues to have strong order book, and just doing a really good job and I feel great about that. When I think about chromatography and mass spectrometry, they as well have incredibly strong comparisons. We're getting really good uptake on the Astral and really have had some milestone level of shipments on that product over the first nine months of owning -- you know, launching it. So, that's gone well. Most of our business is in the high-end research portion, which has done well for us. We have a little bit less exposure to kind of the more routine applications. You know, I did flag one product that we launched, which is really quite relevant. As you know, we're the very strong market leader in ion chromatography. You hear a lot about PFAS testing, things of this sort and we launched the next generation of instrumentation there, which is great just given how large our fleet is around the world and that product is off to a great start. So, I feel good about the outlook for the different pieces. And I highlighted a couple of interesting launches in chemical analysis, the smallest of the three businesses where we're enabling battery production and really trying to change the way that QAQC is done in pharmaceutical manufacturing by having raw materials inspected at the factory versus doing lab testing and the Handheld Raman Analyzer does that. So, really great innovation drives growth in the business and a really good performance to start the year. Operator Thank you. The next question is from Jack Meehan with Nephron Research. Your line is open. Jack Meehan -- Nephron Research -- Analyst Good morning, guys. I wanted to keep digging in on the pharma businesses here. So, the first question is on clinical research. You called out strong growth. Just a clarification, is this inclusive of the COVID headwinds you've talked about before? The tone sounds more positive. Any comments around what you're seeing would be great. Marc Casper -- Chairman, President, and Chief Executive Officer Yes, there's no adjustments to any of that. It's just business just grew through that. And when I think about the year, when I think about the guidance that some -- the assumptions embedded in the guidance, we reminded our investors that we had the largest role in clinical research on supporting the pandemic response. We also had in parallel incredible growth in the business and really just an excellent start and excellent execution to deliver strong growth in the quarter. And while we expect this business will moderate this year relative to the last few years, just the momentum it has bodes extremely well for the mid-term of high single-digit growth business plus synergies. So, the team has done a great job of becoming part of the company, leveraging our relationships, and getting really strong commercial momentum. So really nice start to the year. Jack Meehan -- Nephron Research -- Analyst Awesome. And then, on the pharma services side, there's been a little bit of a competitive shakeup with Novo's proposed acquisition of Catalent. Can you just talk about your win rates at Patheon and how you feel about the runway for future tech transfers? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, Jack, when I think about pharma services, the business has performed very well. And when I think about the industry dynamics that have gone on, in an area that we're the market leader, sterile fill-finish where we put the medicine or vaccine in its final dosage form. Effectively, you have one of the pure-play competitors being taken out of the CDMO business effectively or less so. And that in an area where capacity is constrained already, it bodes really well for our business as the market leader and great reputation. Our activity level is high. The number of dialogue we're having with our customers is high. We're securing new business. So, I feel great about it. And our job is -- as the trusted partner, is to enable our customer success, right? And our customers think in decades in this industry and when there's events that make them uncertain, whether it's Biosecure or whether it's an acquisition of one of the suppliers, they look at the industry leader and say, this is a company that doesn't create uncertainty, it does a great job and those things ultimately allow us to better support our customers going forward. Operator Thank you. The next question is from Rachel Vatnsdal with J.P. Morgan. Your line is open. Rachel Vatnsdal -- JPMorgan Chase and Company -- Analyst Good morning and congratulations on the quarter. So, I wanted to dig into the comments around China stimulus a little bit more. Just on one hand, the language around the stimulus is fairly broad, but this tranche also appears to be two and a half times the dollar amount of the stimulus package that benefited last year. So, can you walk us through what are you hearing from customers regarding the stimulus? Are you working on proposals with customers yet? Or have you even seen any orders related to that stimulus come through, albeit it's probably a bit early for that? And then, just to follow up on those comments around the timeline for stimulus, if we look at what happened last year, the stimulus was actually announced in September '22, but we really didn't see an impact until early 2023. So, just given that delay between initial announcement and actually seeing the benefit, in your view, could we potentially see the benefit this year or could this ultimately be a 2025 dynamic? Marc Casper -- Chairman, President, and Chief Executive Officer So, Rachel, thanks for the question. I share the enthusiasm about the government's efforts to stimulate the economy, get things going. So, it's an interesting time in that respect. So -- Stephen Williamson -- Senior Vice President, Chief Financial Officer Back to Mike's comment about the view on is this a start, de-start, post-start, I think it's a good thing that China is trying to find ways to stimulate the economy. And I think this is one element of it and we look forward to other things happening as well in terms of the way that China is managing the economy. Marc, all right, go ahead. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So when I think about actually the way things play out and a lot of this is about signaling as far as I can tell from my own experience, I worked in China for many years. It's a multiyear program as opposed to the last one, which was shorter term. So, basically, the government is signaling at least to the economy that they're looking for investments in instrumentation equipment, technological advances, advanced research. So, that's very encouraging in terms of that it's not a short-term program, but rather longer term. And yes, we've already have proposals in front of customers. And yes, there's quite a bit of dialogue. Customers are actually waiting for some of the very practical details of how this will work because it varies by province ultimately. So to my knowledge, no orders yet. I wouldn't expect any of that quickly anyway, but lots of activity. And the way that I would think about this is there's the direct effect and then the indirect effect. I would expect that we would see orders really later in the year and some revenue late in the year directly associated with the stimulus, but that may miss by a few months one way or the other. So, I wouldn't expect material shipments in Q2 around us. It would be the way I would think about my experience. The indirect effect is a confidence booster, right, which is basically saying the government is going to try to get the economy up and going and that should help more broadly and that doesn't help tomorrow, but it helps from a contextual standpoint of business confidence. So, I think those things would say that you're seeing China try to get the economy growing. We're not assuming a lot in China in our numbers this year in terms of major changes. So, what I'm most excited about there is that it sets up for '25, not that we won't see a benefit this year, but it's kind of a direction of travel. And our view is this, longer-term China should be a good growth market for us. Rachel Vatnsdal -- JPMorgan Chase and Company -- Analyst Perfect. Really appreciate all that detail. And I just wanted to stick on China for my follow-up then. Obviously, we've seen some of these headlines around Biosecure Act. We've heard some of your customers talking about trying to derisk some of their supply chains and go with more Western manufacturers, just given where we're at from that headline perspective. So, I wanted to see how has that been impacting your customer conversations? And have you seen any increase in inbounds in terms of Patheon? And then, just from a timing, if you were to benefit from this, obviously, a pretty capacity-constrained sector right now. I know, you mentioned some of the Catalent-Novo dynamics earlier as well. And could you even benefit in the near term from any competitive wins relating to Biosecure or is it just a function of capacity constraints? This really alludes to the value chain and the vertical integration that Thermo has, but will be more of a benefit longer term. Thank you. Marc Casper -- Chairman, President, and Chief Executive Officer So, the way that I think about Biosecure is, I kind of put it into the context of there's a level of geopolitical tensions that exist around the world, including between the US and China. It's never exactly clear whether these things become enacted or not. It's our job to help our customers navigate those shifting landscapes. I think at the highest level, actually relations are falling between the countries a bit. There will always be challenges. When I think about how this could play out, should it play out, I think that what is making the customer base that's largely Western in terms of where biotech and pharmaceutical activity is largely, just think more about their supply chains, who's doing development work, etc., given our network is effectively 100% in US and Western Europe and that set of capabilities, we're likely to be a long-term beneficiary, not per se of the Act, but rather the fact that customers are thinking about who are their partners and where should those partners be based. So, I think that's a long term, should be OK and I don't think it has any material impact to the results in the short term. Thank you, Rachel. Operator Thank you. The next question is from Dan Brennan with TD Cowen. Your line is open. Dan Brennan -- TD Cowen -- Analyst Great. Thanks for the questions, Marc and Stephen. Maybe just on China, I know some -- there's already been some discussion points here, Marc, but could you just give us a sense, how that -- how the low single-digit decline in the quarter kind of compare to expectations? And just remind us what's assumed for the full year and kind of any color you can share about just demand trends across your business segments in China? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, when I think about China, that actually played out as we expected. The team delivered on the expectations for the quarter. And as you know, our guidance, we don't guide by geography or by business. It's really the aggregate of it all. But actually the first quarter played out as the team expected and they executed well. When you kind of go down into the sub-segments of China, now you're getting to the tiny portions of our revenue, nothing really significant of note in terms of things better or worse than what we've been seeing or what we would expect. So that's -- that would be my high-level view. I'm looking forward to returning to China early and early in the summer. So, get some first-hand perspectives on that as well. Dan Brennan -- TD Cowen -- Analyst Got it. And then, maybe just on bioprocessing, I know the consumable portion of your business, Marc, is, call it 10% or so of revenues, but net, there's obviously tremendous focus there right now. Could you give any color on how that business performed in the quarter? And any color you can provide on like, this ongoing destock issue, whether or not you've seen orders start to grow again sequentially? Thanks. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah, Dan, thanks for the question on bioproduction. It's definitely -- to factor where it got in the queue of the questions, it says that the emphasis is reducing on that, so it's becoming a little bit more predictable. Really, Q1 was in line with expectations. Organic growth did decline as we expected in the quarter due to the strong comparisons from a year ago. But when I look at orders, that's now two quarters in a row with really good sequential bookings growth, nice improvement in book-to-bill, and when I look at the things that have been said externally about the quarter, I feel really good about our performance in terms of how we executed. So, working out in line with what we thought would happen. Thanks, Dan. Operator Thank you. The next question is from Matt Sykes with Goldman Sachs. Your line is open. Matt Sykes -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for taking my questions. Maybe just revisiting the AI segment and maybe just compare, contrast the end-markets and where you're seeing some of the greatest strengths, it sounds like Industrial, Applied remained strong, but just would love to hear you kind of go through Biopharma, and Applied, Industrial, and Academic, Government and sort of the phasing of growth over the course of this year in those end-markets for AI? Thank you. Marc Casper -- Chairman, President, and Chief Executive Officer Sure. So, when I think about the business, one of the things, Matt, is we really don't manage it by end segment because effectively you produce a certain amount of products and then you ship them to specific customers. So you can have quarters where you ship more to an industrial customer, the exact same product as a biopharma customer, and therefore it kind of skews things. So, that's my caveat around that. But when I look at the parts of the business, the Industrial and Applied, continues to have strong momentum in semiconductor, material science applications for electron microscopy was strong. So, in terms of how that played out, very difficult comparisons for all of the businesses based on the shipments a year ago, but that was strong. And then, the other segments in terms of Academic and Government, Pharma and Biotech pretty much played out as we expected. So, nothing that really jumped out at me as being significant in terms of trends or patterns. Matt Sykes -- Goldman Sachs -- Analyst Got it. And then, just for my follow-up, just on LPS and the margins. I know when you had acquired PPD, you talked about potential for long-term margin expansion in that business. Could you just maybe talk about some of the leverage you've got within LPS, understanding that revenue improvement would help a lot, but just any levers to get that margin within LPS to expand that over time? Marc Casper -- Chairman, President, and Chief Executive Officer I'll start, and then maybe Stephen will add a few additional thoughts. So, when I think about margins and obviously, you have different businesses there, the clinical research business, formerly PPD, incredibly strong operational execution, right? So, when you actually look at utilization rates, modification, all of the things that ultimately drive margins, they're doing a great job and executing really well. We're obviously benefiting from the synergies that we outlined, and we will have achieved all of our synergy targets on the cost side. So, that's gone well. And so, they're really doing a great job of just executing the trials really well and that bodes well for margin expansion along with volume. When I think about pharma services, they're -- the underlying is very strong, but we obviously have enough capacity coming online and also the runoff of the COVID revenues. So, when you lose the volume, you see short-term pressure on margins. But if I say how is the team operating, actually the team is operating well. So, the margins there will expand as the year progresses and into the future as well. So, that will be my thoughts about margins. But I don't know, Stephen, anything else? Stephen Williamson -- Senior Vice President, Chief Financial Officer I think on the pharma services side, it's the capacity coming online and switching over, there's a cost to do that and as you're ramping up the facility, bringing on the colleagues to be able to operate that facility, those are all facts that come into that. So, those are right drivers. Marc Casper -- Chairman, President, and Chief Executive Officer Thanks, Matt. Rafael Tejada -- Vice President, Investor Relations And operator, we have time for one more question. Operator Thank you. The last question we have time for today is from Luke Sergott with Barclays. Your line is open. Luke Sergott -- Barclays -- Analyst Great. Thanks for the question. So, I want to dig back in into the Biosecure Act and follow-up on what Rachel was asking about. But I wanted to know, Marc, what you guys are hearing from your customers and multinationals that operate over there? And what they're saying to you regarding their assumptions on China retaliating and maybe excluding them from the region? I know, it seems pretty unlikely and it's probably going to be limited, but is this something that is on their radar or some of those conversations that you're having? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. I can't really speculate and be prudent on how -- whether this thing will even come to pass and if it comes to pass, what is the response to it. Our job is to do a great job of supporting our customers globally to comply with the global regulations, both the actual regulations and the spirit of the regulations of the various countries and we'll do a good job navigating it. So, that's how I would think about it, Luke. Luke Sergott -- Barclays -- Analyst Yeah, OK. And then, Stephen, for you on the life science margins, so very, very strong here from Life Science Solutions. I understand that the destocking is less of an issue, but how much of this step-up in the quarter was from the restocking? Just kind of walk through and double click on the drivers there? And should we consider this as kind of the jump-off point or it will be around this range for the rest of the year or anything from a modeling perspective? Stephen Williamson -- Senior Vice President, Chief Financial Officer So, Luke, the -- that's really good margin profile in the segment and that is really about addressing the cost base in that business given the lower volumes, both from the pandemic unwind and the kind of the bioproduction aspect to it. So, it's really just fundamentally addressing the costs that we have in that business. Team has done a great job of doing that and that's the way to think about that. Marc Casper -- Chairman, President, and Chief Executive Officer So, thank you, Luke, and thanks everyone for the questions. Let me wrap up. Very pleased to deliver a very strong quarter, incredibly well positioned to deliver differentiated performance as we continue to create value for all of our stakeholders, build an even brighter future for our company. I look forward to updating you on our second quarter results in July and discussing our very bright future, as well as outlook at our upcoming investor day on September 19. As always, thank you for your support for Thermo Fisher Scientific. Thanks, everyone. Answer:

the Thermo Fisher Scientific 2024 first quarter conference call

Operator Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2024 first quarter conference call. My name is Angela, and I'll be coordinating your call today. [Operator instructions] I would like to introduce our moderator for the call, Mr. Rafael Tejada, vice president, investor relations. Mr. Tejada, you may begin the call. Rafael Tejada -- Vice President, Investor Relations Good morning, and thank you for joining us. On the call with me today is Marc Casper, our chairman, president and chief executive officer, and Stephen Williamson, senior vice president and chief financial officer. Please note this call is being webcast live and will be archived on the investors section of our website thermofisher.com, under the heading News, Events & Presentations until May 8, 2024. A copy of the press release of our first quarter 2024 earnings is available in the investors section of our website under the heading financials. So, before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K, which is on file with the SEC and available in the investors section of our website under the heading financials, SEC filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2024 earnings and also in the Investors section of our website under the heading financials. So with that, I'll now turn the call over to Marc. Marc Casper -- Chairman, President, and Chief Executive Officer Thank you, Raf. Good morning, everyone, and thanks for joining us today for our first quarter call. As you saw in our press release, we had a great start to the year. We delivered another quarter of strong financial performance. I'm proud of our team's ongoing focus on enabling the success of our customers while demonstrating incredibly strong commercial execution and operational discipline and our continued success is a result of our proven growth strategy and our PPI business system. So, let me first recap the financials. Our revenue in the quarter was $10.34 billion. Our adjusted operating income was $2.28 billion. We expanded our adjusted operating margin in Q1 to 22%, and we delivered another quarter of strong adjusted EPS performance, achieving a 2% increase year over year to $5.11 per share. Our performance in the first quarter is allowing us to raise our guidance and sets us up to deliver differentiated performance in 2024. Turning to our performance by end-market. In the first quarter, underlying market conditions played out as we'd expected. Our team's excellent execution enabled us to deliver differentiated revenue performance that was ahead of our expectations. Now, let me provide you some additional context. Starting with pharma and biotech, we declined in the low single-digits for the quarter, which was a sequential improvement in performance over Q4 2023. In the first quarter, the vaccine and therapy revenue runoff resulted in a three point headwind for this customer segment and we also delivered strong growth in our clinical research business. A quick reminder on academic and government and industrial and applied. A year ago, we had very strong shipments of analytical instruments as we worked down the backlog that was caused by pandemic-related supply chain disruptions. As a result, in academic and government, we declined in the low-single digits during the quarter. We delivered strong growth in our electron microscopy business, as well as in our research and safety market channel. In industrial and applied, we declined in the low single-digits for the quarter. We delivered strong growth in our electron microscopy business in this segment. Finally, in diagnostics and healthcare in Q1, we declined in the high single-digits. The reported growth in this end-market was impacted by the runoff of COVID-19 testing-related revenue. During the quarter, core revenue growth was highlighted by our transplant diagnostics and immunodiagnostics businesses, as well as our healthcare market channel. So wrapping up on our end-markets, underlying market conditions played out as we expected to start the year. As you recall, our assumption for 2024 is that we'll see a modest pickup in economic activity as the year progresses. During the quarter, it was good to see a couple of positive developments in our end-markets that support this view, including continued improvements in the biotech funding environment and the stimulus program announced by China. I'll now turn to an update on our growth strategy. As a reminder, our strategy consists of three pillars, high-impact innovation, our trusted partner status with customers and our unparalleled commercial engine. Starting with the first pillar, high-impact innovation. We had an excellent start to the year, launching a number of new products across our businesses during the first-quarter. Let me first highlight a number of products in analytical instruments that demonstrate our continued market leadership. In our chromatography and mass spectrometry business, we launched the Thermo Scientific Dionex Inuvion Ion Chromatography system, which enables higher resolution, faster time-to-results and streamline workflows to more efficiently identify contaminants for environmental testing. In our chemical analysis business, we launched the Thermo Scientific LInspector Edge In-line metrology solution to enhance battery safety, performance and production. And we also launched the Thermo Scientific TruScan G3 Handheld Raman Analyzer, a next-generation handheld instrument for the rapid identification of chemical compounds used in drug production. And then, in Life Science Solutions, we launched the Axiom PangenomiX Array, a high-throughput microarray for use in human genomic studies across global populations, including disease risk and detection research, as well as population scale disease research programs. So, another strong quarter of product launches. One of the highlights of our high-impact innovation during the quarter was being named as one of Fast Company Magazine's Most Innovative Companies. It's great external recognition for the impact that our team is driving for our customers. Moving to the second pillar of our strategy. We are in the trusted partner status over many years and it gives me the unique opportunity to connect with our customers' senior executive teams. Since the beginning of the year, I've had many meetings with our customers as they're turning to us more than ever. This is to both reinforce our partnership, as well as to help them navigate the opportunities and challenges that they face. These conversations are happening across our company at all levels of the organization. Our customers see our team as part of theirs and our culture of always finding a better way every day serves to reinforce our trusted partner status with our customers. We do not take lightly the trust our customers have in our company and we'll continue to partner closely with them to enable their innovation and productivity. The first example of this is in our clinical next-generation sequencing business. In the quarter, we announced a collaboration with Bayer to develop a next-generation sequencing-based companion diagnostic that will help identify patients who may benefit from Bayer's growing portfolio of precision cancer therapies. The second example is our analytical instruments business. We are partnering with the North Carolina Collaboratory to support PFAS research capacity in the state as they help to identify and implement solutions to address PFAS contamination. This is the first network of its kind and they'll use several of our state-of-the-art instruments, including the Orbitrap Astral in their research. And finally, in our clinical research business, I'll share two examples of how our trusted partner status comes to life as our customers look for solutions to their unmet needs. We expanded our portfolio of GMP lab services to include qPCR-based biosafety testing capabilities for the detection of bacteria and other contaminants and medicines. This offering enables significantly faster results versus traditional testing method, allowing for quicker delivery of medicines to patients. And we launched the CorEvitas syndicated clinical registry in generalized pustular psoriasis to address an unmet need for real-world evidence related to outcomes for patients with this rare disease. As you recall, CorEvitas became part of our company last year. The business is performing very well and making a difference for our customers and patients. All of these are great examples of our trusted partner status. Now, let me turn to our PPI business system, which enables outstanding execution during the quarter. PPI engages and empowers all of our colleagues to find a better way every day. You can see it in our strong profitability and cash flow that we delivered in the first quarter. Looking forward, our team is actively utilizing Generative AI as part of the PPI business system to increase efficiency and productivity, as well as to continually improve the customer experience across the company. To share a couple of examples of how we're applying AI, it's enabling us to accelerate software development timelines in our analytical instruments and Life Science Solutions businesses. We're also leveraging the combination of large language models with a vast and differentiated amount of data at our disposal. One benefit we're seeing is our ability to enhance the capability of our technical and customer service teams to more effectively serve our customers. Generative AI is another great example of how we continually strengthen the impact of the PPI business system. Let me now give you an update on our corporate social responsibility initiatives. As a mission-driven company, we help to make the world a better place by enabling the important work of our customers. We also have a positive impact by supporting our communities, being a good steward of our planet and focusing on STEM education and advancing global health equity. To that end, during the first quarter, we announced a collaboration with the South African Medical Research Council. Together, we'll establish a center of excellence and training program focused on molecular biology and life sciences. The facility will provide specialized education and support for professional development to scientists and laboratory professionals in Africa. I'm also pleased to share that Thermo Fisher achieved a perfect score on the Human Rights Campaign Foundation's Corporate Equality Index for the eighth year in a row. Let me now give you an update on capital deployment. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. During the quarter, we reached the one-year anniversary of the Binding Site acquisition, now our protein diagnostics business. Its financial performance is tracking ahead of the deal model with really strong growth. I recently had the chance to visit the headquarters of our protein diagnostics business and saw the great progress they're making, given the exciting new products that can positively impact patient care for multiple myeloma. Turning to our planned acquisition of Olink. We're working through the regulatory process and the transaction is on track to close by mid-2024. We look forward to welcoming our new colleagues to the company later this year. And in terms of return of capital during the quarter, we repurchased $3 billion of shares and increased our dividend by 11%. As I reflect on the quarter, I'm very proud of what our team accomplished and grateful for their contributions to our success. In a nice recognition of both our team and track record, Thermo Fisher has once again been included on Fortune Magazine's list of Most Admired Companies. Let me now turn to our guidance. Given the stronger operational performance to start the year, we are raising our 2024 guidance. We now expect revenue to be in the range of $42.3 billion to $43.3 billion, and we expect adjusted EPS to be in the range of $21.14 to $22.02 per share. Stephen will take you through the details in his remarks. So, to summarize our key takeaways from the first quarter, we delivered another quarter of strong financial results, driven by our proven growth strategy and PPI Business System. We continue to enable our customer success and this continually reinforces our trusted partner status. Our strong results in Q1 position us to deliver differentiated performance in 2024 as we continue to create value for all of our stakeholders and build an even brighter future for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen? Stephen Williamson -- Senior Vice President, Chief Financial Officer Thanks, Marc, and good morning, everyone. I'll take you through an overview of our first quarter results for the total company, then provide color on our four business segments and I'll conclude by providing our updated 2024 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view on how the first quarter played out versus our expectations at the time of our last earnings call. In Q1, market conditions were as we'd expected. We had another quarter of excellent execution and this enabled us to deliver Q1 financials meaningfully ahead of what we'd assumed in our prior guidance. Core organic revenue was $150 million or 1.5% ahead. And adjusted EPS was $0.40 ahead. To give you some color on that $0.40, $0.19 was from very strong profitability pull-through on the revenue beat, $0.12 was from phasing of spending within the year, $0.07 was from lower FX headwinds and $0.02 was from lower net interest expense. So, we're continuing to manage the business really well and are off to a great start to the year. Let me now provide you with some additional details on our performance, beginning with earnings per share. In the quarter, we grew adjusted EPS by 2% to $5.11. GAAP EPS in the quarter was $3.46, up 4% from Q1 last year. On the top line in Q1, reported revenue was 3% lower year over year. The components of our Q1 reported revenue change included 4% lower organic revenue and a slight contribution from acquisitions. Q1 core organic revenue decreased 3%. And in the quarter, pandemic-related revenue was approximately $200 million, including $175 million of vaccines and therapies related revenue. Turning to our organic revenue performance by geography. In Q1, North America declined mid-single-digits, Europe declined low single-digits and Asia-Pacific and China declined in the low single-digits. With respect to our operational performance, the team used the PPI Business System to execute really well in the quarter, delivering $2.3 billion of adjusted operating income, which was 22% of revenue, 20 basis points higher than Q1 last year. Total company adjusted gross margin in the quarter came in at 41.8%, 150 basis points higher than Q1 last year. In the quarter, we continued to deliver very strong productivity, reflecting our continued focus on cost management, as well as the carryover benefit from the cost actions put in place last year. This enabled us to more than offset the impact of lower volumes while appropriately funding investments to further advance our industry leadership. Moving to the details of the P&L, adjusted SG&A in the quarter was 16.5% of revenue. Total R&D expense was $330 million in Q1, reflecting our ongoing investment in high-impact innovation. R&D as a percent of manufacturing revenue was 7.2% in the quarter. Looking at our results below the line, our Q1 net interest expense was $84 million, which is $70 million lower than Q1 2023 due to increased cash balances. Our adjusted tax rate in the quarter was 10.5% and average diluted shares were $384 million in Q1, approximately $4 million lower year over year, driven by share repurchases net of option dilution. Turning to free cash flow and the balance sheet, we had a strong start to the year with cash flow generation. Q1 cash flow from operations was $1.3 billion and free cash flow for Q1 was $910 million after investing $340 million of net capital expenditures. We continued to return capital to shareholders in Q1 with an 11% increase in our dividend and the $3 billion of share buybacks which were completed in January. We ended the quarter with $7.25 billion in cash and short-term investments and $35.6 billion of total debt. Our leverage ratio at the end of the quarter was 3.3 times gross debt-to-adjusted EBITDA and 2.6 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 11.8%, reflecting the strong returns on investment that we've been generating across the company. Now, I'll provide some color on the performance of our four business segments, starting with Life Sciences Solutions. Q1 reported revenue in this segment declined 13% and organic revenue was 12% lower than the prior year quarter. This is driven by moderation in pandemic-related revenue in the segment, as well as lower levels of activity in our bioproduction business versus the year-ago quarter. Q1 adjusted operating income for Life Science Solutions increased 1% and adjusted operating margin was 36.8%, up 480 basis points versus the prior year quarter. During Q1, we delivered exceptionally strong productivity, which was partially offset by unfavorable volume pull-through. The team continues to do an excellent job to appropriately manage the cost base and deal with the unwind of the pandemic. In the Analytical Instruments segment, reported revenue declined 2% and organic growth was 1% lower than the prior year quarter. We continue to deliver very strong growth in the electron microscopy business. And as a reminder, we had very strong comparisons in this segment in the quarter due to the high level of instrument shipments in Q1 last year as we worked down the backlog. In this segment, Q1 adjusted operating income decreased 5% and adjusted operating margin was 23.7%, 70 basis points lower year over year. In the quarter, we delivered strong productivity, which was more than offset by unfavorable volume mix and strategic investments. Turning to our Specialty Diagnostics. In Q1, reported revenue and organic revenue were flat versus the prior year quarter. In Q1, we continued to see strong underlying growth in the core, led by our transplant diagnostics and immunodiagnostics businesses, as well as in our healthcare market channel. Q1 adjusted operating income for Specialty Diagnostics increased 5% and adjusted operating margin was 26.5%, which is 120 basis points higher than Q1 2023. During the quarter, we delivered favorable business mix and good productivity, which was partially offset by strategic investments. And finally, in Laboratory Products and Biopharma Services segment, both reported revenue and organic growth decreased 1% in Q1 versus the prior year quarter. This was driven by the runoff of vaccines and therapies revenue. During the quarter, we delivered strong growth in our clinical research business. Q1 adjusted operating income declined 6% and adjusted operating margin was 13%, which is 80 basis points lower than Q1 2023. In the quarter, we delivered strong productivity, which was more than offset by unfavorable volume mix and strategic investments. Turning now to guidance. As Marc outlined, given the strong start to the year, we're raising our 2024 full-year guidance. We now expect revenue to be in the range of $42.3 billion to $43.3 billion and adjusted EPS to be in the range of $21.14 to $22.02. At the midpoint, that reflects a core revenue increase of just under $100 million. We continue to assume core organic revenue growth will be in the range of minus 1% to positive 1% for 2024. We continue to assume that the market declines low single-digits this year. Our growth strategy and PPI Business System execution will enable us to continue to take share once again. In terms of adjusted EPS, the increase in the guidance at the midpoint is just over $0.10. The majority of this is from the core revenue raise, but also $0.02 from assumed lower net interest expense versus our prior guidance. Our 2024 updated guidance range assumes an adjusted operating income margin between 22.4% and 22.8%, slightly improved from the prior guide. We continue to use the PPI Business System to enable excellent execution, manage costs appropriately and fund the right long-term investments to enable us to further advance our industry leadership. So, a great start to the year and increasing the guidance outlook. We remain well positioned to continue to deliver differentiated performance. I thought it would be helpful to remind you of some of the key underlying assumptions behind the guide that remain unchanged from the previous guidance. In 2024, we're assuming just under $100 million of testing revenue and $300 million to $400 million of vaccines and therapies-related revenue. In total, this represents a year-over-year headwind of $1.3 billion to $1.4 billion or 3% of revenue. We assume that FX will be roughly neutral year over year to both revenue and adjusted EPS. Given recent FX rate changes, we're assuming that the $0.07 beat that we saw in Q1 is offset in the remainder of the year, leading to no change for the year as a whole for FX versus our prior guide. We expect the adjusted income tax rate will be 10.5% in 2024, and we're assuming between $1.3 billion and $1.5 billion of net capital expenditures and free cash flow in the range of $6.5 billion to $7 billion. In terms of capital deployment, we're assuming $3 billion of share buybacks, which were completed in January. We expect to return approximately $600 million of capital to shareholders this year through dividends. We continue to assume that we'll close the Olink acquisition by mid-year. Full year average diluted share count is assumed to be approximately 383 million shares. And finally, I wanted to touch on quarterly phasing. In Q2, we expect revenue dollars to step up from the first quarter and organic growth will likely be two points better than Q1. And we expect Q2 adjusted EPS to be similar to Q1. This reflects the revised view of the phasing of spending within the year that I mentioned earlier. I think this view of Q2 is pretty close to what's currently baked into consensus right now. So to conclude, we delivered on our commitments in Q1, and we're in a great position to deliver differentiated performance for all our stakeholders in 2024. With that, I'll turn the call-back over to Raf. Rafael Tejada -- Vice President, Investor Relations Operator, we're ready for the Q&A portion of the call. Questions & Answers: Operator Thank you, Mr. Tejada. [Operator instructions] We have the first question from Doug Schenkel with Wolfe Research. Your line is open. Doug Schenkel -- Wolfe Research -- Analyst Good morning, guys. Thank you for taking my questions. Simply put, it was a better start than expected to the year. Marc, can you share color on, one, how did the quarter progress? And two, how does that progression and really momentum heading into the second quarter, how do those things inform your thinking on the outlook for the balance of the year? Marc Casper -- Chairman, President, and Chief Executive Officer Thanks. So, I thought just in the spirit of continuous improvement in PPI, that I would frame a few of the key points for the Q&A session and then get to your questions. So, indulge me for a second. So, when I think about the key points, one, I will start with the long term. We serve an awesome industry that has a bright future. All right? And when you think about what drives the bright future, very durable growth driven by the great science, the strong pipelines and the unmet medical needs. When I think about the first quarter, zooming into the short term, market conditions were in line with our expectations and really with strong execution in the quarter that resulted in the financial performance that was ahead of our expectations that allowed us to retire risk, as well as raise our full-year outlook. Reminding our investors, what's assumed in the '24 guidance is that we're going to see a modest step-up or pickup in economic activity as the year progresses. And during the quarter, it was really good to see a couple of positive developments in our end-markets that supports the view of a pickup as the year progresses, which is continued improvements in the biotech funding environment and the stimulus program that was announced by China. As you know, how we define success is that we deliver differentiated short-term performance with a strong emphasis on share gain while strengthening our competitive position for the long term and Q1 was another quarter in which we achieved that. So, Doug, as I think about the phasing of the quarter, market really played out exactly as we thought it was and we looked at the different parts of it and really in aggregate and in the pieces, it really played out that way. As the quarter unfolded, what I would say is, didn't see a huge change in pattern, although March was a little bit better than the first couple of months. You had the way Easter laid out, which kind of makes it a little bit hard to know exactly, but it felt like March was a good exit rate consistent with the modest step-up and that's baked into it. And I would say that, April is, in the first couple of weeks kind of playing out with that as well. Doug Schenkel -- Wolfe Research -- Analyst OK. That's super helpful. And thank you for the high-level thoughts as well. If I could, maybe just kind of double-click into an area of focus for all of us, lab products and services was stronger than expected relative to certainly what I had in my model and from what I can tell was in consensus. In particular, obviously, the CRO and the CDMO businesses are a focus for all of us. What are you seeing there? Is it fair to say that things are picking up there a little bit better and maybe better than expected, keeping in mind that, some of the early updates from CDMO peers have been relatively encouraging? And then, I think maybe more on the CRO side is where we'd see this impact, but as we kind of keeping in mind that Q1 was the best biopharma funding quarter in about five years, how does that make you feel about the outlook for the next several quarters, and the years ahead? Stephen Williamson -- Senior Vice President, Chief Financial Officer Yes, Doug, I'll tee up the kind of the view versus consensus. Personally, I'm not going to talk about the kind of business dynamics. So, we don't guide by segment in terms of our organic growth. And for us, it came in, as Marc said, the markets came in as we had expected in aggregate and that's the same thing for the segment and we executed well. So, it wasn't a huge outperformance part of the beat, it was kind of pretty much across the board for the company. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. And then, when you get into the dynamics, the one thing I would call out is in our CRO capabilities, clinical research, the former PPD business, really excellent execution in the first quarter drove really very strong performance, very proud of what the team accomplished. And when I think about the market dynamics, definitely seeing the pipeline of activity picking up and as you certainly know, it takes a while for that to actually materialize into revenues given the cycle of the business, but very encouraging given the biotech funding environment to see that level of pipeline of work picking up. So, thank you, Doug. Operator Thank you. The next question is from Mike Ryskin with Bank of America. Your line is open. Mike Ryskin -- Bank of America Merrill Lynch -- Analyst Great. Thanks for taking the question and congrats on the quarter. Marc, I want to pick up on something you just mentioned. You called out continued improvement in biotech funding environment. And earlier you talked about the stimulus in China, two positive developments you saw in the end-market in 1Q. But I think you also acknowledge it's still relatively early going for those, and there have been a few false starts in end-markets over the course of 2023. So I guess the question is, what gives you confidence that these have really turned the corner? What data points you're looking for as the year progresses and especially given your position on the China Business Council? Just when do you think the better funding and stimulus will show up as revenues for you -- for Thermo? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, Mike, I think it's a great question. I like the way you framed it as well. So we're not -- nothing about false starts. The way that I think about it is and super clear on the word choice. What was assumed in our original guidance was a modest pickup. The two data points that I called out would be consistent with our view. So, we're not changing our view upwards on the market, but rather what's going to drive the slight pickup, the fact that biotech funding is improving and that China announced a stimulus program. I think everybody was probably positively surprised that they announced it as early in the year as that they did and they're trying to get their economy growing. Those are facts to support the modest step-up, and set ourselves up for an even stronger set of market conditions as we enter 2025. So that's how I think about the kind of the phasing of what's going on in the market. And then, the other thing that I wouldn't just note about the quarter, which was very positive is that, it actually played out as we expected, right, including the four end-markets and that's good because that means the normal incredible visibility and predictability that you typically have in this business is returning, which is helpful as well. Mike Ryskin -- Bank of America Merrill Lynch -- Analyst OK. That's really helpful. And Doug asked about lab products and services. Let me focus on analytical instruments. You called out electron microscopy continue to do very well there. But -- and you do have really tough comps, but maybe you could focus a little bit on chromatography, mass spec. What are you seeing there from an end-market perspective? There's been a lot of concern about pharma, capex budgets and sort of how they're trending in 2024. So, any early comments you can say about that part of the portfolio? Thanks. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, Mike, when I think about analytical instruments, we had a really good quarter and it's against a very, very strong comparison, which is why I called it out because compared to the high-teens growth last year, it's important to flag it. Let me start with electron microscopy, then I'll get to chroma mass spec. So, electron microscopy, that business has been performing at a great level, continues to have strong order book, and just doing a really good job and I feel great about that. When I think about chromatography and mass spectrometry, they as well have incredibly strong comparisons. We're getting really good uptake on the Astral and really have had some milestone level of shipments on that product over the first nine months of owning -- you know, launching it. So, that's gone well. Most of our business is in the high-end research portion, which has done well for us. We have a little bit less exposure to kind of the more routine applications. You know, I did flag one product that we launched, which is really quite relevant. As you know, we're the very strong market leader in ion chromatography. You hear a lot about PFAS testing, things of this sort and we launched the next generation of instrumentation there, which is great just given how large our fleet is around the world and that product is off to a great start. So, I feel good about the outlook for the different pieces. And I highlighted a couple of interesting launches in chemical analysis, the smallest of the three businesses where we're enabling battery production and really trying to change the way that QAQC is done in pharmaceutical manufacturing by having raw materials inspected at the factory versus doing lab testing and the Handheld Raman Analyzer does that. So, really great innovation drives growth in the business and a really good performance to start the year. Operator Thank you. The next question is from Jack Meehan with Nephron Research. Your line is open. Jack Meehan -- Nephron Research -- Analyst Good morning, guys. I wanted to keep digging in on the pharma businesses here. So, the first question is on clinical research. You called out strong growth. Just a clarification, is this inclusive of the COVID headwinds you've talked about before? The tone sounds more positive. Any comments around what you're seeing would be great. Marc Casper -- Chairman, President, and Chief Executive Officer Yes, there's no adjustments to any of that. It's just business just grew through that. And when I think about the year, when I think about the guidance that some -- the assumptions embedded in the guidance, we reminded our investors that we had the largest role in clinical research on supporting the pandemic response. We also had in parallel incredible growth in the business and really just an excellent start and excellent execution to deliver strong growth in the quarter. And while we expect this business will moderate this year relative to the last few years, just the momentum it has bodes extremely well for the mid-term of high single-digit growth business plus synergies. So, the team has done a great job of becoming part of the company, leveraging our relationships, and getting really strong commercial momentum. So really nice start to the year. Jack Meehan -- Nephron Research -- Analyst Awesome. And then, on the pharma services side, there's been a little bit of a competitive shakeup with Novo's proposed acquisition of Catalent. Can you just talk about your win rates at Patheon and how you feel about the runway for future tech transfers? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, Jack, when I think about pharma services, the business has performed very well. And when I think about the industry dynamics that have gone on, in an area that we're the market leader, sterile fill-finish where we put the medicine or vaccine in its final dosage form. Effectively, you have one of the pure-play competitors being taken out of the CDMO business effectively or less so. And that in an area where capacity is constrained already, it bodes really well for our business as the market leader and great reputation. Our activity level is high. The number of dialogue we're having with our customers is high. We're securing new business. So, I feel great about it. And our job is -- as the trusted partner, is to enable our customer success, right? And our customers think in decades in this industry and when there's events that make them uncertain, whether it's Biosecure or whether it's an acquisition of one of the suppliers, they look at the industry leader and say, this is a company that doesn't create uncertainty, it does a great job and those things ultimately allow us to better support our customers going forward. Operator Thank you. The next question is from Rachel Vatnsdal with J.P. Morgan. Your line is open. Rachel Vatnsdal -- JPMorgan Chase and Company -- Analyst Good morning and congratulations on the quarter. So, I wanted to dig into the comments around China stimulus a little bit more. Just on one hand, the language around the stimulus is fairly broad, but this tranche also appears to be two and a half times the dollar amount of the stimulus package that benefited last year. So, can you walk us through what are you hearing from customers regarding the stimulus? Are you working on proposals with customers yet? Or have you even seen any orders related to that stimulus come through, albeit it's probably a bit early for that? And then, just to follow up on those comments around the timeline for stimulus, if we look at what happened last year, the stimulus was actually announced in September '22, but we really didn't see an impact until early 2023. So, just given that delay between initial announcement and actually seeing the benefit, in your view, could we potentially see the benefit this year or could this ultimately be a 2025 dynamic? Marc Casper -- Chairman, President, and Chief Executive Officer So, Rachel, thanks for the question. I share the enthusiasm about the government's efforts to stimulate the economy, get things going. So, it's an interesting time in that respect. So -- Stephen Williamson -- Senior Vice President, Chief Financial Officer Back to Mike's comment about the view on is this a start, de-start, post-start, I think it's a good thing that China is trying to find ways to stimulate the economy. And I think this is one element of it and we look forward to other things happening as well in terms of the way that China is managing the economy. Marc, all right, go ahead. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So when I think about actually the way things play out and a lot of this is about signaling as far as I can tell from my own experience, I worked in China for many years. It's a multiyear program as opposed to the last one, which was shorter term. So, basically, the government is signaling at least to the economy that they're looking for investments in instrumentation equipment, technological advances, advanced research. So, that's very encouraging in terms of that it's not a short-term program, but rather longer term. And yes, we've already have proposals in front of customers. And yes, there's quite a bit of dialogue. Customers are actually waiting for some of the very practical details of how this will work because it varies by province ultimately. So to my knowledge, no orders yet. I wouldn't expect any of that quickly anyway, but lots of activity. And the way that I would think about this is there's the direct effect and then the indirect effect. I would expect that we would see orders really later in the year and some revenue late in the year directly associated with the stimulus, but that may miss by a few months one way or the other. So, I wouldn't expect material shipments in Q2 around us. It would be the way I would think about my experience. The indirect effect is a confidence booster, right, which is basically saying the government is going to try to get the economy up and going and that should help more broadly and that doesn't help tomorrow, but it helps from a contextual standpoint of business confidence. So, I think those things would say that you're seeing China try to get the economy growing. We're not assuming a lot in China in our numbers this year in terms of major changes. So, what I'm most excited about there is that it sets up for '25, not that we won't see a benefit this year, but it's kind of a direction of travel. And our view is this, longer-term China should be a good growth market for us. Rachel Vatnsdal -- JPMorgan Chase and Company -- Analyst Perfect. Really appreciate all that detail. And I just wanted to stick on China for my follow-up then. Obviously, we've seen some of these headlines around Biosecure Act. We've heard some of your customers talking about trying to derisk some of their supply chains and go with more Western manufacturers, just given where we're at from that headline perspective. So, I wanted to see how has that been impacting your customer conversations? And have you seen any increase in inbounds in terms of Patheon? And then, just from a timing, if you were to benefit from this, obviously, a pretty capacity-constrained sector right now. I know, you mentioned some of the Catalent-Novo dynamics earlier as well. And could you even benefit in the near term from any competitive wins relating to Biosecure or is it just a function of capacity constraints? This really alludes to the value chain and the vertical integration that Thermo has, but will be more of a benefit longer term. Thank you. Marc Casper -- Chairman, President, and Chief Executive Officer So, the way that I think about Biosecure is, I kind of put it into the context of there's a level of geopolitical tensions that exist around the world, including between the US and China. It's never exactly clear whether these things become enacted or not. It's our job to help our customers navigate those shifting landscapes. I think at the highest level, actually relations are falling between the countries a bit. There will always be challenges. When I think about how this could play out, should it play out, I think that what is making the customer base that's largely Western in terms of where biotech and pharmaceutical activity is largely, just think more about their supply chains, who's doing development work, etc., given our network is effectively 100% in US and Western Europe and that set of capabilities, we're likely to be a long-term beneficiary, not per se of the Act, but rather the fact that customers are thinking about who are their partners and where should those partners be based. So, I think that's a long term, should be OK and I don't think it has any material impact to the results in the short term. Thank you, Rachel. Operator Thank you. The next question is from Dan Brennan with TD Cowen. Your line is open. Dan Brennan -- TD Cowen -- Analyst Great. Thanks for the questions, Marc and Stephen. Maybe just on China, I know some -- there's already been some discussion points here, Marc, but could you just give us a sense, how that -- how the low single-digit decline in the quarter kind of compare to expectations? And just remind us what's assumed for the full year and kind of any color you can share about just demand trends across your business segments in China? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. So, when I think about China, that actually played out as we expected. The team delivered on the expectations for the quarter. And as you know, our guidance, we don't guide by geography or by business. It's really the aggregate of it all. But actually the first quarter played out as the team expected and they executed well. When you kind of go down into the sub-segments of China, now you're getting to the tiny portions of our revenue, nothing really significant of note in terms of things better or worse than what we've been seeing or what we would expect. So that's -- that would be my high-level view. I'm looking forward to returning to China early and early in the summer. So, get some first-hand perspectives on that as well. Dan Brennan -- TD Cowen -- Analyst Got it. And then, maybe just on bioprocessing, I know the consumable portion of your business, Marc, is, call it 10% or so of revenues, but net, there's obviously tremendous focus there right now. Could you give any color on how that business performed in the quarter? And any color you can provide on like, this ongoing destock issue, whether or not you've seen orders start to grow again sequentially? Thanks. Marc Casper -- Chairman, President, and Chief Executive Officer Yeah, Dan, thanks for the question on bioproduction. It's definitely -- to factor where it got in the queue of the questions, it says that the emphasis is reducing on that, so it's becoming a little bit more predictable. Really, Q1 was in line with expectations. Organic growth did decline as we expected in the quarter due to the strong comparisons from a year ago. But when I look at orders, that's now two quarters in a row with really good sequential bookings growth, nice improvement in book-to-bill, and when I look at the things that have been said externally about the quarter, I feel really good about our performance in terms of how we executed. So, working out in line with what we thought would happen. Thanks, Dan. Operator Thank you. The next question is from Matt Sykes with Goldman Sachs. Your line is open. Matt Sykes -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for taking my questions. Maybe just revisiting the AI segment and maybe just compare, contrast the end-markets and where you're seeing some of the greatest strengths, it sounds like Industrial, Applied remained strong, but just would love to hear you kind of go through Biopharma, and Applied, Industrial, and Academic, Government and sort of the phasing of growth over the course of this year in those end-markets for AI? Thank you. Marc Casper -- Chairman, President, and Chief Executive Officer Sure. So, when I think about the business, one of the things, Matt, is we really don't manage it by end segment because effectively you produce a certain amount of products and then you ship them to specific customers. So you can have quarters where you ship more to an industrial customer, the exact same product as a biopharma customer, and therefore it kind of skews things. So, that's my caveat around that. But when I look at the parts of the business, the Industrial and Applied, continues to have strong momentum in semiconductor, material science applications for electron microscopy was strong. So, in terms of how that played out, very difficult comparisons for all of the businesses based on the shipments a year ago, but that was strong. And then, the other segments in terms of Academic and Government, Pharma and Biotech pretty much played out as we expected. So, nothing that really jumped out at me as being significant in terms of trends or patterns. Matt Sykes -- Goldman Sachs -- Analyst Got it. And then, just for my follow-up, just on LPS and the margins. I know when you had acquired PPD, you talked about potential for long-term margin expansion in that business. Could you just maybe talk about some of the leverage you've got within LPS, understanding that revenue improvement would help a lot, but just any levers to get that margin within LPS to expand that over time? Marc Casper -- Chairman, President, and Chief Executive Officer I'll start, and then maybe Stephen will add a few additional thoughts. So, when I think about margins and obviously, you have different businesses there, the clinical research business, formerly PPD, incredibly strong operational execution, right? So, when you actually look at utilization rates, modification, all of the things that ultimately drive margins, they're doing a great job and executing really well. We're obviously benefiting from the synergies that we outlined, and we will have achieved all of our synergy targets on the cost side. So, that's gone well. And so, they're really doing a great job of just executing the trials really well and that bodes well for margin expansion along with volume. When I think about pharma services, they're -- the underlying is very strong, but we obviously have enough capacity coming online and also the runoff of the COVID revenues. So, when you lose the volume, you see short-term pressure on margins. But if I say how is the team operating, actually the team is operating well. So, the margins there will expand as the year progresses and into the future as well. So, that will be my thoughts about margins. But I don't know, Stephen, anything else? Stephen Williamson -- Senior Vice President, Chief Financial Officer I think on the pharma services side, it's the capacity coming online and switching over, there's a cost to do that and as you're ramping up the facility, bringing on the colleagues to be able to operate that facility, those are all facts that come into that. So, those are right drivers. Marc Casper -- Chairman, President, and Chief Executive Officer Thanks, Matt. Rafael Tejada -- Vice President, Investor Relations And operator, we have time for one more question. Operator Thank you. The last question we have time for today is from Luke Sergott with Barclays. Your line is open. Luke Sergott -- Barclays -- Analyst Great. Thanks for the question. So, I want to dig back in into the Biosecure Act and follow-up on what Rachel was asking about. But I wanted to know, Marc, what you guys are hearing from your customers and multinationals that operate over there? And what they're saying to you regarding their assumptions on China retaliating and maybe excluding them from the region? I know, it seems pretty unlikely and it's probably going to be limited, but is this something that is on their radar or some of those conversations that you're having? Marc Casper -- Chairman, President, and Chief Executive Officer Yeah. I can't really speculate and be prudent on how -- whether this thing will even come to pass and if it comes to pass, what is the response to it. Our job is to do a great job of supporting our customers globally to comply with the global regulations, both the actual regulations and the spirit of the regulations of the various countries and we'll do a good job navigating it. So, that's how I would think about it, Luke. Luke Sergott -- Barclays -- Analyst Yeah, OK. And then, Stephen, for you on the life science margins, so very, very strong here from Life Science Solutions. I understand that the destocking is less of an issue, but how much of this step-up in the quarter was from the restocking? Just kind of walk through and double click on the drivers there? And should we consider this as kind of the jump-off point or it will be around this range for the rest of the year or anything from a modeling perspective? Stephen Williamson -- Senior Vice President, Chief Financial Officer So, Luke, the -- that's really good margin profile in the segment and that is really about addressing the cost base in that business given the lower volumes, both from the pandemic unwind and the kind of the bioproduction aspect to it. So, it's really just fundamentally addressing the costs that we have in that business. Team has done a great job of doing that and that's the way to think about that. Marc Casper -- Chairman, President, and Chief Executive Officer So, thank you, Luke, and thanks everyone for the questions. Let me wrap up. Very pleased to deliver a very strong quarter, incredibly well positioned to deliver differentiated performance as we continue to create value for all of our stakeholders, build an even brighter future for our company. I look forward to updating you on our second quarter results in July and discussing our very bright future, as well as outlook at our upcoming investor day on September 19. As always, thank you for your support for Thermo Fisher Scientific. Thanks, everyone.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good afternoon. [Operator instructions] I would now like to turn the conference over to Mr. Jud Henry, senior vice president, strategic advisor, investor relations for T-Mobile US. Please go ahead, sir. Jud Henry -- Senior Vice President and Head of Investor Relations Welcome to T-Mobile's first quarter 2024 earnings call. Joining me on the call today are Mike Sievert, our president and CEO; Peter Osvaldik, our CFO; as well as other members of the senior leadership team. During this call, we'll make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review. Our earnings release, investor fact book and other documents related to our results, as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found in our quarterly results section of the investor relations website. And with that, let me turn it over to Mike. Mike Sievert -- President and Chief Executive Officer OK. Thanks, Jud. Good afternoon, everybody. Welcome. If you're watching online, you can see that I've got a good part of the senior team here. We're coming to you from Bellevue, Washington today, and we're looking forward to a great discussion. And as you can see from our Q1 results, we are off to a great start in 2024. The year is unfolding right in line with what we expected across the board, and in fact, better in some areas, and we're increasing our guidance for the year accordingly. I'll briefly touch on a few highlights, and then we'll get right to your questions. First, a comment on growth. We continue to take share in Q1 just as expected with postpaid phone net adds that were right in line with Q1 last year, while industry net adds were lower by a double-digit percentage. Our best value, best network proposition continues to resonate in the market with our postpaid phone gross adds up year over year for the fourth consecutive quarter even while industry gross adds were down. And we matched our best ever Q1 postpaid phone churn, showing that customers love the Un-carrier value proposition and network. Second, a comment on those lowest ever postpaid upgrades for phones in Q1. I think, this metric showcases our ongoing winning formula by demonstrating that customers choose to stay with T-Mobile for the best-in-class value and network they enjoy, which is the only retention strategy that drives profitable growth over the long term. The network is an increasingly powerful part of our customers' loyalty as three quarters of our postpaid phone customers already have a 5G smartphone, and they're having a differentiated experience on the T-Mobile network. It also demonstrates how we put our investments where they can have the greatest customer impact, letting natural customer demand drive the pace of upgrades. Overall, from consumers in major metros to smaller markets and businesses from large enterprises to SMBs, T-Mobile's durable, differentiated growth momentum continues across the segments. And the most exciting part is that there are still many years of market-leading growth runway ahead for our core business. OK. Let's talk broadband. Home broadband customers love a great value on a great network, too. That's been the formula that's made us the fastest-growing broadband provider for the past two years. And we did it again in Q1 as our 405,000 nets are expected to represent a higher share of industry broadband net adds than even a year ago and are expected to be more than half of all nets from the major providers once again. Our broadband strategy is unfolding exactly the way we said it would. And we now proudly serve over 5 million high-speed Internet customers. And as we previously announced, we're also growing the value of that customer base, successfully sunsetting our launch era promotions and attracting customers at our nominal price points. In addition, our new rate plans for home mesh networks and for on-the-go usage are just the latest ways we intend to continue to enhance the value of this space and find new ways to serve customers better. OK. Let me comment on fiber. I've been saying for a while that smart fiber partnerships would allow us to profitably serve even more broadband customers. And today, we announced a joint venture with EQT that will acquire Lumos. Consistent with everything we've said for the last year, this JV is the latest example of a capital-light model, and we're excited to have such great and experienced partners. EQT is one of the leading infrastructure investors across the U.S. and Europe and brings a wealth of knowledge to the table. The Lumos management team under Brian Stading is outstanding and has years of experience building fiber in an efficient, cost-effective and targeted build model. We're really excited to be able to accelerate what Lumos has already been doing to reach more and more households in the years ahead. Together, we target 3.5 million homes passed by 2028, and T-Mobile expects to invest about $950 million upon close, which we expect less than a year from now, and another $500 million between 2027 and '28 to get there. T-Mobile will be a 50% owner of Lumos and will own the customer relationships, including their existing fiber customers at close, as Lumos will convert to a wholesale model. This is exactly the type of value-creating investment that we had contemplated with our strategic envelope of funds that we set aside back when we shared the current stockholder return program with you last fall. And we expect to remain on track as it relates to our stockholder return ambitions. Lastly, I am so happy to report that we have received regulatory approval to acquire Mint and Ultra Mobile. And we, therefore, currently expect to close on May 1. We are really looking forward to welcoming them to the Un-carrier family. And I know they're going to fit in because they are hyper-focused on offering customers compelling products at a great value. We'll work to further fuel their success while also learning from their team who are absolute rock stars in the direct-to-consumer and value segments. Financially, in Q1, we again showed how T-Mobile translates profitable growth into market-leading consolidated service revenue growth and core adjusted EBITDA growth that was double the rate of our principal competitors. And T-Mobile again delivered the highest free cash flow margins in the industry. So to wrap up, our model is working. It's consistent. And our confidence in it only builds with each passing quarter of success. We remain focused on continuing to take share in wireless and broadband while delivering industry-leading growth in service revenue, profitability and cash flows. I couldn't be more excited about what's ahead for T-Mobile. And I want you to know that we plan to have a capital markets day this fall, where we look forward to going deeper with you on topics like the big opportunities that we see coming, how we're seizing them and how that will translate into enormous value creation for our company in the years ahead. And I think you're going to see once again that in many ways, we're just getting started. OK. Peter, over to you to talk about our key financial highlights and an update on our guidance. Peter Osvaldik -- Chief Financial Officer Well, thank you, Mike. All right. As you can see, we kicked off 2024 with great momentum. Mike already highlighted our best-in-class growth in both the top and bottom line and how our industry-leading conversion of service revenue to adjusted free cash flow continues to differentiate T-Mobile. So let me jump into our updated expectations for how that growth will continue in 2024. Starting with customers, where we now expect total postpaid net customer additions to be between 5.2 million and 5.6 million, up 150,000 at the midpoint. We now expect full year postpaid ARPA to grow up to 3% in 2024, a further acceleration of the growth we saw in 2023 from both the continued execution of our strategy to win and expand account relationships and as we anticipate taking further rate plan optimization actions within the base. There is no change in our expectations for postpaid phone net adds from our original guidance last quarter with Q1's strong growth coming in as we expected and because we anticipate slight year-over-year headwinds to postpaid phone net adds in Q2 and Q3 related to those rate plan optimizations, which are accretive to the business on an all-in basis. Core adjusted EBITDA is now expected to be between $31.4 billion and $31.9 billion, up 9% year over year at the midpoint. And as I mentioned on the last earnings call, we expect our industry-leading service revenue growth to accelerate at a higher rate in 2024 than we delivered in 2023 even with the discontinuation of the Affordable Connectivity Program that appears imminent at this point in time and is contemplated within the increased guidance. We continue to expect cash capex to be between $8.6 billion and $9.4 billion as we deliver a capital efficiency unmatched in our industry on the back of our network integration and 5G leadership. Lastly, we now expect adjusted free cash flow, including payments for merger-related costs, to be in the range of $16.4 billion to $16.9 billion. This is up 23% over last year at the midpoint and five times the expected growth rate of our next closest competitor, thanks to our margin expansion and capital efficiency and does not assume any material net cash inflows from securitization. This also represents an adjusted free cash flow to service revenue margin, which is multiple percentage points higher than peers. So in closing, we continue to expect 2024 to be another year of differentiated profitable growth as we continue to extend our network leadership and further scale our unique growth opportunities. We expect this to continue to translate into industry-leading growth in service revenue, core adjusted EBITDA and free cash flow along with the highest adjusted free cash flow margin in the industry, unlocking shareholder value. I couldn't be more excited about the continued enormous value creation opportunity that we have in front of us for years to come. OK. Before we open it up for Q&A, I just want to take a moment to announce a changing of the guard in our Investor Relations leadership. After 11 years and an unbelievable 44 earnings cycles in IR, I'm tremendously excited for Jud to take on a broader role within our finance organization. And I'm equally excited to introduce Cathy Yao as our new SVP of Investor Relations. Many of you may know Cathy, from her time on the sell side at MoffettNathanson or on the corporate side at Altice USA among other roles on her fabulous resume. We look forward to Cathy continuing T-Mobile's strong tradition of Investor Relations excellence. And with that, I will now turn the call back to Jud to begin his last Q&A. Jud? Jud Henry -- Senior Vice President and Head of Investor Relations Thanks, Peter. All right. Let's get to your questions. [Operator instructions] We'll start with a question on the phone. Operator, first question, please. Questions & Answers: Operator The first question comes from Michael Rollins with Citi. Michael Rollins -- Citi -- Analyst Congrats, Jud, on the new role. Just a couple of questions, if I could. So first, you mentioned that you may be taking some pricing actions and that could affect some of the subscriber performance in 2Q, 3Q. Can you unpack the plan on how you're approaching those actions and how to think about the net benefit? And then, just secondly, taking a step back, if you can give us an update on how you're seeing the competitive landscape, how you're seeing the switcher pool and how T-Mobile is navigating some of these changes with the industry seemingly having lower upgrades, lower churn. Mike Sievert -- President and Chief Executive Officer OK. Great. Well, why don't I jump in, and I'll give a comment on -- or a lack of a comment on the first question, and then I'll hand it to John Freier for the second one. No, we're not really going to announce any particular plans today. I will tell you that nothing we do is going to question or challenge our long-standing strategy of being the value leader in this market. But surely, over the span of many years, what that means kind of changes over time. Costs have risen. Changes have happened in a broader industry context. And we're going to jealously guard that value leadership. And I think customers understand that if there are changes around the margins once every many years in a world where costs change, they'll understand and accept that. We've actually made changes here and there over the past six months. We've understood what that looks like and what that takes. And there may be more changes, particularly with older rate plans. But we're not here to announce anything. I will tell you that all the outcomes that we see from all of that on the customer side, as well as on the ARPA side and on the EBITDA and revenue side are contained within the guidance that Peter just shared. Do you want to add anything in the first question before we go to the second one? Peter Osvaldik -- Chief Financial Officer I think you got it. Mike Sievert -- President and Chief Executive Officer OK. Competitive context on up -- what are we seeing on upgrades? What's driving that? What's happening with the competition, Jon? Jon Freier -- President, Consumer Group Yes, you bet. So I'll tell you a little bit about what's happening competitively. It's been an intense competitive environment in the marketplace, but it's been generally consistent as you look at this overall competitive intensity. And for our business, we continue to have these differentiated growth opportunities, whether that be smaller markets and rural areas, whether that be within our high-speed Internet or in our overall enterprise and government space that Callie can talk about in just a few moments as well. And so, during that overall competitive context, we have these unique growth vectors that we continue to be underpenetrated on, driving a lot of good success so far but continue to have a lot of runway in front of us. So while that competitive environment is intense, sometimes one competitor is leaning in. Sometimes one competitor is leaning out. We're always navigating that. Things are always changing. Sometimes it's a little bit more device oriented. Sometimes it might be more rate oriented in terms of how the competitive environment is unfolding. But we've navigated that for years and years now and continue to be very comfortable with how that overall competitive environment is playing out. With respect to upgrades, we continue to meet the natural demand of upgrades. As you can see, the upgrade rate is a low 2.4% at the same time when we're matching the best Q1 postpaid phone churn performance in the company's history. We've been more targeted than surgical with some of our upgrade offers, for sure. But the overall natural demand and the upgrade cycle is lengthening. It's really kind of the best of both worlds when you have customers that are staying at incredible rates, record low rates and not staying for free devices exclusively. They're staying for this differentiated value proposition, the network and the overall experience, something we're very, very pleased with how it's unfolding. Mike Sievert -- President and Chief Executive Officer I'll just add one last thing. As I said in my prepared remarks, 75% of our customers have 5G devices, and those customers are having a very differentiated experience with T-Mobile's lead in 5G. And we can talk more about that, I hope, during the call. I'm so pleased with what's happened. We continue to extend our lead. And so that -- the impetus when you're having a fantastic experience on your phone, to prematurely swap it out, just isn't there. And they'll do it in a stepwise way. They continue to do it. And you can tell we're upgrading people fast enough by the fact that all those people have 5G phones, which is right at or even above competitive benchmark. So our customers continue to upgrade at just the pace that we think is appropriate. Operator The next question comes from John Hodulik with UBS. John Hodulik -- UBS -- Analyst Maybe first on the Lumos transaction. Firstly, should we expect similar deals in other parts of the country? And you talked about 3.5 million homes passed. Is that about -- I mean, that's just in one small part of the country. Should we expect something similar as we look at the rest of the U.S.? And then, in the release today, you guys had a line about not being able to meet all the demand for broadband with your fixed wireless network. Can you talk a little bit about how much growth there is left there and if you're seeing capacity constraints in any particular areas? What kind of partner ecosystem are you building to execute on your strategy? Mike Sievert -- President and Chief Executive Officer Let's go straight to Callie. Callie Field -- President, Business Group Well, thanks, John, for the question. We saw very strong growth in Q1, outpacing our benchmark competitor again in postpaid phone nets. And to comment a little bit on the question that John was answering in the business category if we're seeing pressure in that category, I think it might be us. And one of the interesting things, I think, that's going on in our business right now is that not only are we delivering on top line growth but also on CLV growth across all segments. And in enterprise, we just delivered our strongest postpaid nets ever in the history of the company. We also delivered our lowest churn in enterprise. In SMB, we had our highest ever port ratios, and we're net positive for seven consecutive quarters. So we're really liking the pace of the business. We've really graduated from just being a price comp to really a solution-oriented sale for customers. And we see that with partnerships with Dialpad Ai with delivering mission-critical push-to-talk. And I know, John, you also asked who are some of the partners that we're working with in building our ecosystem. Obviously, we're partnering with the largest OEMs, working with Ericsson and Cisco, as well as industry segment experts like OCS when it comes to serve our government customers. So really building out our ecosystem that allows us to really focus on enterprise solutions, enabling them to innovate and to love their customers at scale. I will mention just a couple of key wins in the Advanced Network Solution business. You might have read about our partnership agreement with Delta, where they named us as their preferred wireless provider. But we're also deploying a 5G hybrid network solution at their Atlanta headquarters, which we're really excited about. Also the U.S. Coast Guard is working with us build out a private network to deliver seamless secure connectivity from ship to shore. And then, with Ericsson, not only as a strategic partner, but we're also working with them to deploy our first network slice on a SIM-based SASE solution within a 5G connected laptop. So we're really excited about the kinds of solutions, the sort of enterprises that we're bringing on and the momentum in the business overall. Mike Sievert -- President and Chief Executive Officer It's really interesting when you hear us talk about enterprise, how different it is from four or five years ago. I mean, we were trying our best to sell SIMs to companies that would take meetings with us like the procurement department. And what's happened in this 5G strategy as it's unfolded is Callie and team have built solutions to some of the most pressing connectivity problems that enterprises of all kinds face. And suddenly, we're in strategic conversations because we have capabilities like network slicing, like SIM-based security and many other emerging 5G capabilities that are way out in front. And that's not just giving us revenues in those advanced 5G services, but it's also winning us all those smartphones that we used to struggle so hard and back then have to price so hard to win. So it's been this really nice evolution. And make no mistake, we love low prices, and we're going to be the value leader here. But today, we're solving some of the most complicated connectivity problems that enterprises and organizations face. And that is a great place to compete. Callie Field -- President, Business Group Yes. Thank you, Mike. Totally agree. Jud Henry -- Senior Vice President and Head of Investor Relations OK. All right. Let's try this again. Operator, can we get a question? Operator The next question comes from John Hodulik with UBS. John Hodulik -- UBS -- Analyst OK. Great. So I have a couple of questions on the Lumos transaction. So first of all, should we just think of this transaction as sort of a one-off? Or should we expect other deals similar to this in other regions? And then, of the 3.5 million homes that you guys are talking about passing, how big could that get over the next five years? So that's first. And then, second of all, in the release, you guys talked about not being able to fulfill the demand that you're seeing in broadband on the fixed wireless side. How much growth is still left in fixed wireless? And are you seeing areas today where you're running out of capacity? Mike Sievert -- President and Chief Executive Officer OK. Let's start with the second one. All along, if I remind all of our listeners, I know you know this, our fixed wireless strategy has always been about selling excess capacity, where we predict normal cellphone usage won't suck up that 5G capacity. And so, this gives us the opportunity to serve broadband customers. And now, at scale, we're serving millions and millions of them under this strategy. We had originally said we saw this strategy leading to about 7 million to 8 million total customers in terms of opportunity. We don't have any updates on that. I've said several times, we're working on thinking about examining ways that we could try to extend that, and we haven't drawn any conclusions yet. We have to make sure it's done in an economic way, and we have to make sure it's done in a way that customers will love, and they have a fantastic product experience. That being said, what's interesting about fiber, fiber can be a strategy that relieves some pressure on the 5G network and extend the TAM, if you think about it, right, because some customers will -- where we offer fiber in the future, will be able to naturally graduate up to fiber, which is really a totally separate category. And that, obviously, opens up an opportunity for their neighbor to then become a 5G customer. So there's some TAM expansion there. And then, to your point, even in places where Lumos currently operates, we have a long wait list of people who applied. They put their address in our system. They applied to be a fixed wireless customer, and we haven't accepted them yet because their address isn't one of those places that I described where we have the predicted excess capacity. So there's lots of opportunity there. As it relates to your first question around is this the first of many, etc., look, we don't have anything to say about that other than our strategy is to opportunistically find ways that are very capital-light, very smart to put our brand in this space, and we've done that here. And we think this will lead to millions of homes passed. And that's a great place for us to be. We're going to continue to learn, grow, expand. And we're open-minded about this. But we're not interested in any wholesale changes that basically change who we are. No big on-balance sheet acquisitions are currently being examined. It's not something that -- we know our investors like our fast, efficient, capital efficient, high capital return strategy, and we have no intentions of changing all that. That being said, if we can lay track for the long term in a very capital-efficient way, we're open-minded. And we really like this model that we've struck with EQT and Lumos, and can't wait to get started and get this approved through the regulatory bodies and begin to see this build out and accelerate. Operator The next question is from Craig Moffett with MoffettNathanson. Craig Moffett -- MoffettNathanson -- Analyst First, Jud, congratulations. But thank you for all those 40-some-odd quarters of your able support and help. And congratulations to Cathy if she's on the call. A question about ACP just because that's the obligatory topic this quarter. Can you just talk about what you expect with ACP, how you think that might affect your business, especially perhaps your prepaid business, but whether you think it will have an impact on your postpaid business as well? And you just introduced a plan where you no longer do credit checks, which I think was a head scratcher to me just coming right before the expiry of ACP. I wonder if you could just talk about how you plan to sort of ensure that ACP customers without government support won't upend that kind of an offer. Mike Sievert -- President and Chief Executive Officer Well, let's start out with Mike Katz so we can disentangle some of these offers for you because there could be some misunderstanding out there. And then, we'll go to Peter and talk about the financial, what we see in the financial picture as it relates to the expected turndown of ACP. Mike Katz -- Chief Marketing Officer Yes. Thanks, Craig. First, to answer the first part of your question on what our expectations are with ACP, at this point, we're expecting that the program funding is going to end. And the impact of that is fully contemplated in the guidance that Peter talked about and shared earlier. And as a reminder, I think it's important to contextualize like how T-Mobile has participated in the ACP program. First of all, we have not participated in any form in postpaid across any products. It's nonexistent in our postpaid business. We have a small amount. I think, we've said a couple of hundred thousand inside of our prepaid, our owned prepaid portfolio. And the vast amount of our participation is inside wholesale via wholesale partners that we work with. So for -- so just to contextualize where our participation is. That being said, we are both in the small amount that we have in our own prepaid business but also with the wholesale partners, working with them on communication and plans to help those customers transition. We think wireless is not a category that customers are going to walk away from. So these customers need another alternative, and we're working closely with the partners and with the customers to find them another alternative, whether it's other plans or other programs like Lifeline. So we're deep in doing that. And look, like we think if you look at T-Mobile, and Mike talked a lot about our passion around and focus around guarding our value position and the brands in our portfolio like Metro and soon to be Mint, these are all value brands that are focused on delivering value. And we think that's a great opportunity, both to help customers inside of our wholesale partners to transition, but honestly, customers that also may feel stranded from competitors to come to find a value to continue their wireless services. So I hope that's helpful for the question you're answering. Peter Osvaldik -- Chief Financial Officer Yes. And let me maybe add to that just a little bit on your other questions, Craig. And I think Mike really highlighted our thinking around this well. Of course, it's in front of us, more so than behind us. No new activations as of February, but it's in front of us, but we think it's fully baked into the guidance range that we gave you, the range of outcomes that we anticipate. And when we think about -- you asked about the no credit check. And I can tell you, one, that we continue to see very healthy levels of bad debt. We continue to actually be the leader compared to our peers in terms of bad debt as a percentage of total revenue. So we're very happy with what we see there. We're always testing and trying new things. For example, we have a way and an ability for prepaid customers who have a certain number of on-time payments to graduate into postpaid without an incremental credit check. And that's because we have data and know exactly how those customers behave over time and what the really data informed credit risk around those consumers are. So we're always going to be testing around edges what is really beneficial for consumers while being very thoughtful around, of course, risk protection for the entity, and that's why we sit at the bad debt rates that we do. Mike Sievert -- President and Chief Executive Officer And that's not new. We've had that program in place for many years. Peter Osvaldik -- Chief Financial Officer Of course, yes. Absolutely. Absolutely. Craig Moffett -- MoffettNathanson -- Analyst Is there any risk, though, that ACP customers who've been essentially getting their bills paid by the government and therefore have good credit histories might be higher credit risk as ACP ends? Peter Osvaldik -- Chief Financial Officer Yes, absolutely. You're absolutely right, and that's thoughtful around -- remember, as Mike Katz said, the amount of ACP customers that are sitting in our prepaid base and Metro is very small. So that's a very small exposure. Mike Sievert -- President and Chief Executive Officer And the amount in the postpaid base -- Peter Osvaldik -- Chief Financial Officer Zero. Postpaid is absolutely zero for us. And so, it's really finding products. And you saw us probably launch out there some ways to help consumers and think about can you get into other programs like T-Mobile Connect or other low-cost opportunities or Lifeline type of construct. So look, we're going to be very thoughtful around making sure customers in this critical category stay connected while being, of course, very thoughtful around the risk profile to T-Mobile. Mike Sievert -- President and Chief Executive Officer Yes. As Mike pointed out, it's not just our customers that are facing this, right? Everybody else is. But we've got this incredible portfolio of brands that are famous for value. And we're going to make sure that those brands are in front of people because we're going to stand up and serve them at a time when they might find that they need a new offer, and we will be there with incredible offers for them. Operator And the next question comes from Jonathan Chaplin with New Street Research. Jonathan Chaplin -- New Street Research -- Analyst Congratulations to Jud and Cathy. That's fantastic news. Since it's Jud's last call, I've got nine questions to ask. I'll try and consolidate them. So Mike, I'm wondering if you can give us just an update on the sort of the fiber strategies that you're collecting together in aggregate. So you've announced so far pilot, the Lumos deal. I think, there are deals out there with Tillman, Intrepid and SiFi. How many -- when you put all of those together, how many homes passed does it amount to? And for the Lumos deal specifically, can you -- how much cash is EQT putting in? We're just trying to get a sense of sort of the total capitalization here. And then, how much comes from sort of incremental debt? And then, my last question on this is, how do you see -- all of the deals that we've had about so far seem to be focused on guys building new infrastructure. How about -- how do you think about those sorts of assets versus partnering with guys who have existing copper infrastructure that they're upgrading? Mike Sievert -- President and Chief Executive Officer You bet. We won't be able to give you too much on sort of broad strategy here other than the fact that we're opportunistic. The strategies we've employed so far, both across wholesale, which we got started on in a very small way already, as well as this new partnership, are about putting the T-Mobile brand and team to work, selling a fiber product that complements our wildly successful 5G product. And to us, that's a great strategy because we believe we have an opportunity to generate superior returns than a purely disinterested investor could do by virtue of our assets and our know-how. And we've proven that know-how to ourselves through our success with 5G Home Internet. You think about our incredible distribution, our leading brand, our tens of millions of customers, our incredible team. We have very insightful data that our customers give us permission to use to put relevant offers about their T-Mobile experience in front of them. These are all advantages that are purely financial or disinterested investor wouldn't have. And so, when we look at this area and say, can we extract a return that's better than others could, we have some confidence. And so, we think about it from that opportunistic standpoint, not from a convergence defensive standpoint. We believe that our T-Mobile offers stand tall and stand alone and don't "need" convergence. We just think that this is a place where we can make customers happy and generate a superior financial return and that it complements a leadership product that we already have out there. Beyond that, I can't say much more about the strategy other than what I said earlier. We like this partnership. We're very excited about where it could go. Maybe Peter can comment on the capital structure. But one of the things I do like about it is that we decided as we formed this to fund it and give it the wherewithal with some additional debt to have everything it needs from an equity standpoint to get to the 3.5 million homes passed, which we think is a nice threshold for us. It will be a multistate footprint. It will be big enough to matter. And of course, that will be through a combination of debt and equity. Peter Osvaldik -- Chief Financial Officer Yes. And again, Jon, I can't give you all the details because we have counterparties involved in this. First, it is a 50-50 joint venture. It will be unconsolidated for us. So it's an equity method investment for us. So everybody kind of captures that fine point. And then, as Mike said, there -- just given that it's a 50-50, there will be, obviously, cash infusion from EQT as a partner in this as well. And when you think about that incremental 500 million, for example, that would be an equivalent cash infusion from EQT. And there is -- given this is an infrastructure and a great anchor tenant in the form of T-Mobile having the retail customers, there is an ability to also lever the entity up. And the overarching thought process is this is about a maximum of 2:1 debt-to-equity ratio, but it will be based on what the funding needs of the entity actually is to get to that 3.5 million. Jonathan Chaplin -- New Street Research -- Analyst One quick follow-up, Peter, if I can. You mentioned at the beginning that you sort of set capital aside for things like this in 2024. You haven't used up that whole sort of reservoir of capital yet. If you look at what's left there, is it more directed toward fiber transactions like this or spectrum? Like how do you sort of balance between those two assets? Peter Osvaldik -- Chief Financial Officer It really is looking at what the best return profile for T-Mobile is. And sometimes, as you know, spectrum opportunities may come up. They may not come up. We could have some of the 2.5-gig leased spectrum come up, and then we have rights of first refusal around those. So it's still a balance. We don't have line of sight to how we would use every dollar of what's still remaining in that bucket. But as opportunities come up, we're going to tumble it through the normal capital allocation thought process that we have that we've described very many times, and that's exactly how you think we should think about it. Mike Sievert -- President and Chief Executive Officer And nor should we, right? So I mean, one of the reasons why we were this transparent, maybe unusually transparent with you, is that we wanted you to know that we could, in the normal course, pursue opportunities and yet still honor our stockholder return ambitions. And we wanted to make it clear that -- nothing has changed in that. And that's why we put an envelope out there at the beginning so that you would have confidence that whether it was spectrum, partnerships like this, other things that we would see that we could use our know-how and embedded assets to be able to extract a superior financial return and delight customers that we would have the wherewithal to seize those things within that range. So we're really pleased to have been able to bring this one to fruition and can't wait to get started once we get approval. Operator And the next question is from Simon Flannery with Morgan Stanley. Simon Flannery -- Morgan Stanley -- Analyst Great. And best of luck, Jud. Thanks for all the help. And welcome, Cathy. Peter, I wanted to talk a little bit about margins, if I could. You had nice EBITDA growth of 8%, margins up nearly 200 basis points year over year. I think, in the past, you sort of suggested the cadence would kind of ramp through the year. So perhaps just talk a little bit about margin trajectory, both this year and just longer term, the opportunity? I think, Mike, you said we're just getting started here. So talk about the cost side, if you could. And then, maybe on spectrum, just any update you can give us on the status of the 800-megahertz spectrum. Given we passed the DISH April 1 deadline, what should we expect in coming months from you in terms of auctioning that off to third parties? Mike Sievert -- President and Chief Executive Officer You take the first one, and I'll take the second. Peter Osvaldik -- Chief Financial Officer Yes, absolutely. Thanks, Simon. It's a tremendously exciting story, actually. One of the reasons, as we've talked about before, is we've now achieved as of Q4 of last year, in this tremendously successful merger integration, the run rate synergies, which we raised a couple of times during the pendency of the deal and execution itself. And so now, though, we continue with this guide to see run rates EBITDA increases that are significant, in fact, quite similar to what we had during those synergy unlock days. And there's a couple of things that create that. One is continued outsized profitable share taking, of course, taking those fixed costs and leveraging the fact that we're continuing to take outsized share and turning that into outsized service revenue growth. So when you have postpaid service revenue growth like we delivered this quarter of 6.5% year over year on a lot of fixed cost nature of the base, that, obviously, gives you leverage. Besides that, we're going to continue. And really, it's a culture. It's kind of a flow of thinking here that we have around continued optimization efficiencies, where can we extract efficiency out of the business so that we can plow it back into customer acquisition, margin expansion. And most importantly, and we've talked about this, we tend to think about it as service revenue to free cash flow conversion. That free cash flow is what unlocks all the ability for further value-creating investments, whether it's spectrum purchases, whether it's capital returns. And so, we're hyper-focused on how do we make sure that we create efficiencies in the expense profiles and how do we make sure that in our capex profile, we're making every single dollar count and delivering the next best tranche of value for us. And I think we have some really bespoke unique ways that we approach that. But that's how we continue to see this expansion, particularly in that service revenue to free cash flow play out over a period of time. Mike Sievert -- President and Chief Executive Officer I hope it doesn't sound like we're sort of flogging our book when we say we look at cash flow margins. We are. But also, I think cash is king, and a view that doesn't look at cash flow margins would miss the fact that we have, we think, a durably more capital-efficient strategy than our benchmark competitors. And therefore, from a geography standpoint, EBITDA margins don't tell the whole story, even though I'm pleased we're up 200 bps almost, and we're making great progress there. But the cash margins are the story because they are inclusive of what we think is a durably superior capital investment profile. And we'll talk a lot more about what we think our secret sauce is with you at some point when we have more time. But this is a strategy we have growing confidence in that it's going to be durable. OK. So the second question around 800. Well, first of all, I will just remind you what Peter, I know, has told people in the past, that we've chosen our business plan to be pretty conservative as it relates to how to think about the 800. And what I mean by that is we didn't include any proceeds from this auction in our financial plan so that they would be found money going into that reserve fund. We were talking about a few minutes ago with Jonathan. But secondly, we also did not put the usage of that spectrum into our network planning and capacity plan. And so, kind of no matter what happens here with this auction, which has begun. We either get found spectrum and capacity that we get to keep and figure out a way to use. And this is a great spectrum, nationwide, contiguous low band, lots of interesting things we can do with it, especially with emerging technologies. But also, this action may conclude successfully. And if it does, we'll have cash on hand that enhances our profile. So what's the update? We have commenced. We have interested parties. We have nonbinding indications of interest. There's reason to believe that we will meet the reserve. So it's a little too soon. Everything is nonbinding, but we'll have more to say after we get past kind of the binding parts of this. So stay tuned. But again, whichever way it shakes out for us, it's a win because of our conservative planning. Operator The next question is from David Barden with Bank of America. David Barden -- Bank of America Merrill Lynch -- Analyst Perfect. Congrats to Jud and Cathy. So I guess, my first question would be related to the comments in the results about how kind of going after the business market has kind of impacted the ARPU calculation, and that's been trending down for a couple of quarters. And so, I was wondering if you could kind of maybe unpack the kind of subscriber number that we're watching evolve here and how it balances between consumer versus business. Obviously, I'm obligated to ask you how free lines and other things contribute to the reported postpaid number. And the second question, if I could, maybe, Mike, just to go back to this Lumos situation. You're basically saying that today, you're prepared to invest about $1.45 billion between now and 2028 to own 50% of basically 2.5% of the households in America. And if you got 50% of that, you would have slightly around under -- between 1% and 1.5%. So what is the point? Like why is it worth the brain damage to spend the money, the years building the organization to get something that looks realistically so small in the grand scheme? Mike Sievert -- President and Chief Executive Officer Yes. Thanks, David. Well, let me start with the second one, and then I'll hand it to Peter on the first one. Look, I'm really excited about this because I think we're getting a lot and enabling this company to accelerate growth. And if you think about close to $1.5 billion spread over in time, 3.5 million passings being the goal for that funding, from what we -- the capital we put out, that's less than $500 per passing. And to the premise of the question, that's not for sort of like half of it because the other way it works is that T-Mobile is the branded entity for all of those passings. And it's up to us to make sure that it stays that way and we perform and so on. But our strategy is to be able to get augmentations to an already nationwide multimillion customer broadband strategy. And this is a smart way to do that. And I signaled we're open to constructs like this around the margins. And so, maybe in the end, it'll add up to more than this, and certainly, 3.5 million isn't where this probably ends. This is a growth engine that could continue into the future. We're not obligated for it, too. So I love the strategy. And I think it's about getting a better return based on our embedded assets and complementing a complementary product that's already scaled, and that makes it very appealing for us to think about the efficiencies of how we would go to market. And we are the go-to-market entity in this construct as Lumos pivots into a wholesale model. So hopefully, that helps. To your first question on ARPU, maybe you could unpack it a little bit vis-a-vis business versus consumer and then answer once again the age-old question of free lines and all that stuff. Peter Osvaldik -- Chief Financial Officer Yes, absolutely. And Dave, as we've been long saying, our focus is primarily on ARPA, drive accounts, land them, expand them. And we just gave an updated guide with respect to ARPA, both from that, as well as those continued rate plan optimization. And we'll probably see that more unfold in the second half of the year. But that trickles down into ARPU as well. So I'd say probably this year, we're expecting ARPU to be up, say, maybe 0.5%, again, more weighted to the second half of the year. But it is very much, as you say, a mix-driven metric. And now, we don't separately disclose consumer versus business, but there's just so much goodness in terms of ARPA, both accounts and ARPA accretion, that you would expect us to go heavily after, as Callie was talking about, the enterprise space and the government space where naturally, ARPUs are lower. But account and CLVs and enterprise value creation is really great and strong. So you see success in -- even in the consumer space with segmented consumer offers like in the 55-plus segment in the military segment. Once again, we're willing to do lower ARPUs because you have great CLVs with those types of customers for differential reasons each in their own segment. So we're going to continue to pursue this strategy. But again, now we expect about probably 0.5% increase in ARPU. Now this whole age-old free line question, I understand because there's some stuff that's happening in the industry. As you know, we don't do first free lines. Now we've long had a construct in our rate plan constructs that encourages higher number of lines in terms of our accounts because the higher number of lines get to be more sticky, generate more ARPA and greater lifetime value. But there's really been no trajectory change there at all from a year-over-year sequential perspective. In fact, I would say it contributed less this Q1 than it did last Q1. But that to me is very much a rate plan construct. And again, we don't do first free lines. And so that's kind of -- it's not really any sort of a contributor to what you see have happened year over year in terms of our net add performance relative to the industry. Operator And the next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow -- Wells Fargo Securities -- Analyst Great. Just a follow-up on the fiber-to-the-home strategy at a high level. As you look at potential future opportunities, is the goal to target areas where you might be underpenetrated in either fixed wireless or traditional mobile to kind of expand your addressable market? Or is it in part to provide an alternative for existing FWA subs to offload to a higher capacity option? Any color there would be helpful. And then, secondly, just on the network positioning today, maybe you could talk about how you're sequencing capital to put additional spectrum to work between C-band, the DoD spectrum, 2.5 gigahertz, refarming AWS. Just anything -- any color you could provide on how you're working to maintain your network advantage, particularly as your two large peers have made further progress in building out mid-band spectrum. Mike Sievert -- President and Chief Executive Officer Sounds good. Let's start with the second one about network. I mean, I am really pleased with what is happening with Ulf and team. We continue to actually extend our lead. If you look nationwide, don't look at somebody's favorite denominator, but just look nationwide at all of the customers and all of the experience that all the customers are having. We're actually pulling ahead, and our average speeds are double our competitive benchmarks. And so -- and one of the reasons for this is that it's not just looking underneath the 5G, but it's looking at the availability of that 5G that for us is in so many more places reaching so many more people. And with that full layer cake, which keeps the customers connected to 5G, all that results in a fantastic experience. Maybe you can give a little color on what's been unfolding, talk about Auction 108 and how we're deploying advanced technologies, Ulf. Ulf Ewaldsson -- President, Technology Well, thank you, Mike. And yes, we're very excited about the network and how it keeps advancing. And you mentioned C-band. So some of our competitors have launched C-band and put it out there. And in the areas where they launched it, we do see that the gap between us and them narrowed a little bit even though we are still way ahead. But as you said, we also noticed that the overall median downlink speeds, we are gaining another quarter again. And the main reason for us doing that is really the unique way we've built and constructed the network. We are the only one in the country who has three completely dedicated bands toward 5G. We have 2.5. We have 1,900 now. And we have 600. And that gives us that big advantage together with the stand-alone network and the larger deployment in the footprint that we have. In fact, we have now 90% of our sites capable of 5G. We have, traffic-wise, about 85% of our traffic on these tri-band sites that are all working with stand-alone technology and working with carrier -- Mike Sievert -- President and Chief Executive Officer Let's talk more about that one. Somebody -- so 85% of the time, our people are attaching to a site with all three bands of 5G. And how does that affect the quality of the connection and the reliability of the 5G connection? Ulf Ewaldsson -- President, Technology Well, very much so because out of that, we also have -- and this is an even more remarkable stat. We have 93% of the traffic on mid-band, which means that there is no toggling. It just creates a much more consistent experience. There is no toggling between when you're an LTE. In fact, you're staying in 5G the entire -- no targeting between low band and mid-band. So another factor of no toggling. The other one is that we have a grid, and this is a unique thing for T-Mobile. We have a grid that is based from the beginning on a mid-band experience. So when we deploy 2.5, we get a very consistent experience between our towers as opposed to some of our competitors who has a low-band grid and therefore -- and a higher band on the C-band. C-band is higher than 2.5. That creates a less -- more sort of interrupted, not so clear and consistent experience. Mike Sievert -- President and Chief Executive Officer That's why we are differentiated with somebody experiencing a cell edge condition of 5G, right, because our grid is tighter and our spectrum reaches further. And the net effect of those two things is you're on 5G and a high-quality 5G link more of the time. And 85% of the time, you're seeing all three bands where a lot of the time, we use advanced carrier aggregation techniques so that you get the benefit of all those bands in terms of your signal strength like the uplink might be in the low band, the downlink might be in the mid-band, etc., etc. And these are all advanced techniques that the rollout with our competitors is quite variable. But we're really focused on giving everybody a consistent experience. Ulf Ewaldsson -- President, Technology That's very right, Mike. And it's recognized. I mean, we saw in the Ookla measurements another quarter where we came in at the overall network leader. We were also recognized by Opensignal as having the most reliable experience. So I think those are remarkable facts showing. And then, you mentioned also our 108 auction and how quickly we deployed. It took us two weeks to get it all lit up in our entire network. Over a population of about 60 million, we were able to shoot up our 5G median linked speeds by about 20% or a little bit more even. So really a good result and very quickly and shows that we can deploy our spectrum very fast. Mike Sievert -- President and Chief Executive Officer Well, thank you all for joining our fireside chat about network. And -- but I did want to make sure because there is this kind of misnomer out there that everybody is catching up and the party is over. And it's -- and I've been saying this for years. We remain two years ahead of the party on 5G, and our customers are having a radically differentiated experience. And you can see it in the data, not just in the rhetoric. So really glad you asked about that. Now there was another question, though, about fiber and where we intend to target. Look, I can't help you much on that because we don't have -- we're not rolling out a plan that this is the beginning of a big wave of initiatives here. We're really happy about this initiative and how it augments 5G broadband. And we intend to go put our energy into it. So -- but look, I do want to remind people that this isn't a regional thing for 5G Home Internet. It's really a sector-by-sector assessment, neighborhood by neighborhood as to where will we have excess capacity because that sector gets hung in order to give the kind of competitive experience that we were just coffee talking about. But then, if mobile usage isn't predicted to soak up all that capacity, then individual households get approved for home broadband. And so now, if those neighborhoods are neighborhoods where we roll out fiber, then we can actually have some of those neighbors be added to the 5G who wouldn't otherwise be added. And that's TAM expanding, potentially. But we're really focused on these things right now. Very happy to have this initiative out the door and nothing further to report about it. Jud Henry -- Senior Vice President and Head of Investor Relations That was great. I'm sorry, I didn't bring my popcorn for that one. Operator And the next question is from Sam McHugh with BNP Paribas. Sam McHugh -- Exane BNP Paribas -- Analyst Just on fiber to begin with, on the existing wholesale agreement you have, can you give us any color on what kind of penetration levels you're seeing kind of Year 1, Year 2, so we can think about the potential in the new JV? And then, secondly, I think on FWA, I've seen some reports suggesting you might start selling notifications to people who move the products from the home address. Do you think that will have any impact on the kind of net adds going forward? And I guess, more broadly, how should we think about that cadence of FWA through the rest of this year? Mike Sievert -- President and Chief Executive Officer Thank you. And we'll go to Mike for both questions. Mike Katz -- Chief Marketing Officer Yes. So first, on the fiber question. Remember, a lot of these wholesale markets that we've launched are brand new and haven't even been existing for a year. But when you heard Mike talking about the assets that T-Mobile has and how we think that those give us advantage relative to other investors, that is exactly what we're starting to see play out in these wholesale markets. Remember, at small scale, we're in parts of about 16 markets spread around the country. But what we're seeing is a pace that would get us over 20% in the first year inside those markets. So we're really pleased with the penetration that we're seeing there. Mike Sievert -- President and Chief Executive Officer Now on your FWA question. And specifically, earlier this week, we launched a couple of new products. And let me just give a little bit of context to those. Mike talked about us moving over 5 million customers in our home broadband business this quarter, which, obviously, is a huge milestone for us. And we now sit at the center of millions of homes with the most important technology in their house. And we think that gives us an opportunity, and I think I've mentioned this in the last couple of calls, to look at opportunities to expand into other products and services inside the home, as well as give us tons of insight from what we're hearing from customers of additional needs. So earlier this week, we launched a program called Whole Home, which gives customers the ability to -- in addition to the CPE and router that we provide in our regular HSI package, they can expand that and add mesh that integrates into our CPE. So they can give themselves a much larger WiFi footprint inside their home. We also include some additional support for all the peripheral devices that attach to your network. So if you've got a laptop or a printer that you need support on, we'll offer that as part of this program. And then, secondly, we offered a new program called Away. And I'm really excited about this one because one of the things we've heard from customers is because this is a product that only requires power, we're not running a wire into your house or anything like that, it just requires power. And we see customers that want to use this on their boat or in their RV or while they're camping. And we created a couple of new plans specifically for those use cases that allow customers to move this as their life move along in their RV. The other thing I'm really excited about in combination with that is we struck a partnership with Camping World. And Camping World, if you're not familiar with them, is the largest camping and RV retailer in the country, and they're going to be partnering with us on these Away programs to sell to their customers and to integrate our HSI routers inside RVs that they sell. Mike Katz -- Chief Marketing Officer And you can send your orders for our new Away product at mike.katz@ -- Mike Sievert -- President and Chief Executive Officer By the way, you asked one last question, which is about what we're seeing with the wholesale fiber penetration rates. It's all very early because remember, these are greenfield projects. And so, these were -- our partners were starting out after the wholesale partnerships were struck. But so far, so good. At a small scale, we're seeing Year 1 penetration rates trending to 20%. That's above industry benchmarks. That's a good sign on your way to terminal penetration rates that are much higher than that. So everything we're seeing from these small scale so far anyway, it's going to grow. But so far, small-scale pilots in the wholesale range was very positive. And that's adding, of course, to our confidence to do news like today. So hopefully, that covers your question, Sam. Sam McHugh -- Exane BNP Paribas -- Analyst Just the cadence on FWA. Mike Sievert -- President and Chief Executive Officer Cadence, tell me one more time what that part's about. Sam McHugh -- Exane BNP Paribas -- Analyst In terms of kind of net add development through the rest of the year. We've, obviously, seen some moves from T and others. Kind of how we should think about growth going forward. Mike Sievert -- President and Chief Executive Officer We don't guide on it. But one thing we did do when we made the changes around sunsetting our launch era promotions is we indicated that this quarter would be more like 400,000 instead of the 500,000 we've seen in the past. And that's what happened. We delivered 405,000. We haven't guided on the rest of the year, but we've said we're well on track to the goal that we have always anticipated being by the end of 2025 in that 7 million to 8 million customers range. And what's interesting is that 400,000 and 500,000 net additions this quarter actually represented, as I said in my prepared remarks, a higher percentage of total broadband net adds than last year's 500-and-some thousand. And so, we're sticking right in there with a very competitive more than half, that means more than all the others combined, number of net adds in the space. And so, we're really happy with where it is because at the same time, we're seeing the value of this customer base start to appreciate, and that's also important, not just through pricing or promotion sunsets but through the kinds of value-added services that Mike just summarized. Jud Henry -- Senior Vice President and Head of Investor Relations Operator, let's squeeze in one question, please. Operator And that question comes from Kannan Venkateshwar with Barclays. Kannan Venkateshwar -- Barclays -- Analyst Congratulations, Jud and Cathy, once more. Mike, I'm trying to maybe nudge you along a little bit more on your prior response on broadband. You now have scale in broadband, and you're already one of the biggest operators in this market through fixed wireless. But you seem to be hedging your comments a little bit on fiber in terms of the scale or the kind of ambitions that you might have here long term. So could you maybe talk about what the ultimate scale ambitions here are? Are you viewing this as a cheap option at this point and you want to test out the market a little bit to see where it goes? Or is there a longer-term vision behind this in terms of how you see the company as a whole evolving in terms of its business mix? Mike Sievert -- President and Chief Executive Officer Yes, I can say a couple of things. And one of them -- and this will be a little unsatisfying, but I do plan to lay out a more long-term view on how we think about this space at our capital markets day that I mentioned would be this fall because I know that people want a multiyear view. Even that view will include an element that we intend to be patient, opportunistic. And it will also include an element that says we have no interest in fundamentally changing who we are. We are a highly successful mobile business that's mobile-first that's generating superior cash flow returns in this industry because of our superior strategy. And we're embarked upon a shareholder return program that we think makes a lot of sense in this piece of our life. So look, we're going to -- we like this area for all the reasons I said on this call. But it's premature for us to lay out kind of a detailed strategy on where we expect to be. And even when I lay it out, there will be some element of it that you'll have to be patient with us because we're going to be patient. We're going to be smart. We're going to be opportunistic because we have so much confidence in our core strategy. And hopefully, you see that patience on our part as a sign of our confidence in our core business. Jud Henry -- Senior Vice President and Head of Investor Relations Well, that's all the time we have for questions, and we definitely appreciate everyone joining us today. It's been an absolute privilege working with you. And if you have any additional questions, please reach out to either the Investor Relations or Media Relations departments. And with that, have a great day. Mike Sievert -- President and Chief Executive Officer Thanks, everybody. Answer:

T-Mobile's first quarter 2024 earnings call

Operator Good afternoon. [Operator instructions] I would now like to turn the conference over to Mr. Jud Henry, senior vice president, strategic advisor, investor relations for T-Mobile US. Please go ahead, sir. Jud Henry -- Senior Vice President and Head of Investor Relations Welcome to T-Mobile's first quarter 2024 earnings call. Joining me on the call today are Mike Sievert, our president and CEO; Peter Osvaldik, our CFO; as well as other members of the senior leadership team. During this call, we'll make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review. Our earnings release, investor fact book and other documents related to our results, as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found in our quarterly results section of the investor relations website. And with that, let me turn it over to Mike. Mike Sievert -- President and Chief Executive Officer OK. Thanks, Jud. Good afternoon, everybody. Welcome. If you're watching online, you can see that I've got a good part of the senior team here. We're coming to you from Bellevue, Washington today, and we're looking forward to a great discussion. And as you can see from our Q1 results, we are off to a great start in 2024. The year is unfolding right in line with what we expected across the board, and in fact, better in some areas, and we're increasing our guidance for the year accordingly. I'll briefly touch on a few highlights, and then we'll get right to your questions. First, a comment on growth. We continue to take share in Q1 just as expected with postpaid phone net adds that were right in line with Q1 last year, while industry net adds were lower by a double-digit percentage. Our best value, best network proposition continues to resonate in the market with our postpaid phone gross adds up year over year for the fourth consecutive quarter even while industry gross adds were down. And we matched our best ever Q1 postpaid phone churn, showing that customers love the Un-carrier value proposition and network. Second, a comment on those lowest ever postpaid upgrades for phones in Q1. I think, this metric showcases our ongoing winning formula by demonstrating that customers choose to stay with T-Mobile for the best-in-class value and network they enjoy, which is the only retention strategy that drives profitable growth over the long term. The network is an increasingly powerful part of our customers' loyalty as three quarters of our postpaid phone customers already have a 5G smartphone, and they're having a differentiated experience on the T-Mobile network. It also demonstrates how we put our investments where they can have the greatest customer impact, letting natural customer demand drive the pace of upgrades. Overall, from consumers in major metros to smaller markets and businesses from large enterprises to SMBs, T-Mobile's durable, differentiated growth momentum continues across the segments. And the most exciting part is that there are still many years of market-leading growth runway ahead for our core business. OK. Let's talk broadband. Home broadband customers love a great value on a great network, too. That's been the formula that's made us the fastest-growing broadband provider for the past two years. And we did it again in Q1 as our 405,000 nets are expected to represent a higher share of industry broadband net adds than even a year ago and are expected to be more than half of all nets from the major providers once again. Our broadband strategy is unfolding exactly the way we said it would. And we now proudly serve over 5 million high-speed Internet customers. And as we previously announced, we're also growing the value of that customer base, successfully sunsetting our launch era promotions and attracting customers at our nominal price points. In addition, our new rate plans for home mesh networks and for on-the-go usage are just the latest ways we intend to continue to enhance the value of this space and find new ways to serve customers better. OK. Let me comment on fiber. I've been saying for a while that smart fiber partnerships would allow us to profitably serve even more broadband customers. And today, we announced a joint venture with EQT that will acquire Lumos. Consistent with everything we've said for the last year, this JV is the latest example of a capital-light model, and we're excited to have such great and experienced partners. EQT is one of the leading infrastructure investors across the U.S. and Europe and brings a wealth of knowledge to the table. The Lumos management team under Brian Stading is outstanding and has years of experience building fiber in an efficient, cost-effective and targeted build model. We're really excited to be able to accelerate what Lumos has already been doing to reach more and more households in the years ahead. Together, we target 3.5 million homes passed by 2028, and T-Mobile expects to invest about $950 million upon close, which we expect less than a year from now, and another $500 million between 2027 and '28 to get there. T-Mobile will be a 50% owner of Lumos and will own the customer relationships, including their existing fiber customers at close, as Lumos will convert to a wholesale model. This is exactly the type of value-creating investment that we had contemplated with our strategic envelope of funds that we set aside back when we shared the current stockholder return program with you last fall. And we expect to remain on track as it relates to our stockholder return ambitions. Lastly, I am so happy to report that we have received regulatory approval to acquire Mint and Ultra Mobile. And we, therefore, currently expect to close on May 1. We are really looking forward to welcoming them to the Un-carrier family. And I know they're going to fit in because they are hyper-focused on offering customers compelling products at a great value. We'll work to further fuel their success while also learning from their team who are absolute rock stars in the direct-to-consumer and value segments. Financially, in Q1, we again showed how T-Mobile translates profitable growth into market-leading consolidated service revenue growth and core adjusted EBITDA growth that was double the rate of our principal competitors. And T-Mobile again delivered the highest free cash flow margins in the industry. So to wrap up, our model is working. It's consistent. And our confidence in it only builds with each passing quarter of success. We remain focused on continuing to take share in wireless and broadband while delivering industry-leading growth in service revenue, profitability and cash flows. I couldn't be more excited about what's ahead for T-Mobile. And I want you to know that we plan to have a capital markets day this fall, where we look forward to going deeper with you on topics like the big opportunities that we see coming, how we're seizing them and how that will translate into enormous value creation for our company in the years ahead. And I think you're going to see once again that in many ways, we're just getting started. OK. Peter, over to you to talk about our key financial highlights and an update on our guidance. Peter Osvaldik -- Chief Financial Officer Well, thank you, Mike. All right. As you can see, we kicked off 2024 with great momentum. Mike already highlighted our best-in-class growth in both the top and bottom line and how our industry-leading conversion of service revenue to adjusted free cash flow continues to differentiate T-Mobile. So let me jump into our updated expectations for how that growth will continue in 2024. Starting with customers, where we now expect total postpaid net customer additions to be between 5.2 million and 5.6 million, up 150,000 at the midpoint. We now expect full year postpaid ARPA to grow up to 3% in 2024, a further acceleration of the growth we saw in 2023 from both the continued execution of our strategy to win and expand account relationships and as we anticipate taking further rate plan optimization actions within the base. There is no change in our expectations for postpaid phone net adds from our original guidance last quarter with Q1's strong growth coming in as we expected and because we anticipate slight year-over-year headwinds to postpaid phone net adds in Q2 and Q3 related to those rate plan optimizations, which are accretive to the business on an all-in basis. Core adjusted EBITDA is now expected to be between $31.4 billion and $31.9 billion, up 9% year over year at the midpoint. And as I mentioned on the last earnings call, we expect our industry-leading service revenue growth to accelerate at a higher rate in 2024 than we delivered in 2023 even with the discontinuation of the Affordable Connectivity Program that appears imminent at this point in time and is contemplated within the increased guidance. We continue to expect cash capex to be between $8.6 billion and $9.4 billion as we deliver a capital efficiency unmatched in our industry on the back of our network integration and 5G leadership. Lastly, we now expect adjusted free cash flow, including payments for merger-related costs, to be in the range of $16.4 billion to $16.9 billion. This is up 23% over last year at the midpoint and five times the expected growth rate of our next closest competitor, thanks to our margin expansion and capital efficiency and does not assume any material net cash inflows from securitization. This also represents an adjusted free cash flow to service revenue margin, which is multiple percentage points higher than peers. So in closing, we continue to expect 2024 to be another year of differentiated profitable growth as we continue to extend our network leadership and further scale our unique growth opportunities. We expect this to continue to translate into industry-leading growth in service revenue, core adjusted EBITDA and free cash flow along with the highest adjusted free cash flow margin in the industry, unlocking shareholder value. I couldn't be more excited about the continued enormous value creation opportunity that we have in front of us for years to come. OK. Before we open it up for Q&A, I just want to take a moment to announce a changing of the guard in our Investor Relations leadership. After 11 years and an unbelievable 44 earnings cycles in IR, I'm tremendously excited for Jud to take on a broader role within our finance organization. And I'm equally excited to introduce Cathy Yao as our new SVP of Investor Relations. Many of you may know Cathy, from her time on the sell side at MoffettNathanson or on the corporate side at Altice USA among other roles on her fabulous resume. We look forward to Cathy continuing T-Mobile's strong tradition of Investor Relations excellence. And with that, I will now turn the call back to Jud to begin his last Q&A. Jud? Jud Henry -- Senior Vice President and Head of Investor Relations Thanks, Peter. All right. Let's get to your questions. [Operator instructions] We'll start with a question on the phone. Operator, first question, please. Questions & Answers: Operator The first question comes from Michael Rollins with Citi. Michael Rollins -- Citi -- Analyst Congrats, Jud, on the new role. Just a couple of questions, if I could. So first, you mentioned that you may be taking some pricing actions and that could affect some of the subscriber performance in 2Q, 3Q. Can you unpack the plan on how you're approaching those actions and how to think about the net benefit? And then, just secondly, taking a step back, if you can give us an update on how you're seeing the competitive landscape, how you're seeing the switcher pool and how T-Mobile is navigating some of these changes with the industry seemingly having lower upgrades, lower churn. Mike Sievert -- President and Chief Executive Officer OK. Great. Well, why don't I jump in, and I'll give a comment on -- or a lack of a comment on the first question, and then I'll hand it to John Freier for the second one. No, we're not really going to announce any particular plans today. I will tell you that nothing we do is going to question or challenge our long-standing strategy of being the value leader in this market. But surely, over the span of many years, what that means kind of changes over time. Costs have risen. Changes have happened in a broader industry context. And we're going to jealously guard that value leadership. And I think customers understand that if there are changes around the margins once every many years in a world where costs change, they'll understand and accept that. We've actually made changes here and there over the past six months. We've understood what that looks like and what that takes. And there may be more changes, particularly with older rate plans. But we're not here to announce anything. I will tell you that all the outcomes that we see from all of that on the customer side, as well as on the ARPA side and on the EBITDA and revenue side are contained within the guidance that Peter just shared. Do you want to add anything in the first question before we go to the second one? Peter Osvaldik -- Chief Financial Officer I think you got it. Mike Sievert -- President and Chief Executive Officer OK. Competitive context on up -- what are we seeing on upgrades? What's driving that? What's happening with the competition, Jon? Jon Freier -- President, Consumer Group Yes, you bet. So I'll tell you a little bit about what's happening competitively. It's been an intense competitive environment in the marketplace, but it's been generally consistent as you look at this overall competitive intensity. And for our business, we continue to have these differentiated growth opportunities, whether that be smaller markets and rural areas, whether that be within our high-speed Internet or in our overall enterprise and government space that Callie can talk about in just a few moments as well. And so, during that overall competitive context, we have these unique growth vectors that we continue to be underpenetrated on, driving a lot of good success so far but continue to have a lot of runway in front of us. So while that competitive environment is intense, sometimes one competitor is leaning in. Sometimes one competitor is leaning out. We're always navigating that. Things are always changing. Sometimes it's a little bit more device oriented. Sometimes it might be more rate oriented in terms of how the competitive environment is unfolding. But we've navigated that for years and years now and continue to be very comfortable with how that overall competitive environment is playing out. With respect to upgrades, we continue to meet the natural demand of upgrades. As you can see, the upgrade rate is a low 2.4% at the same time when we're matching the best Q1 postpaid phone churn performance in the company's history. We've been more targeted than surgical with some of our upgrade offers, for sure. But the overall natural demand and the upgrade cycle is lengthening. It's really kind of the best of both worlds when you have customers that are staying at incredible rates, record low rates and not staying for free devices exclusively. They're staying for this differentiated value proposition, the network and the overall experience, something we're very, very pleased with how it's unfolding. Mike Sievert -- President and Chief Executive Officer I'll just add one last thing. As I said in my prepared remarks, 75% of our customers have 5G devices, and those customers are having a very differentiated experience with T-Mobile's lead in 5G. And we can talk more about that, I hope, during the call. I'm so pleased with what's happened. We continue to extend our lead. And so that -- the impetus when you're having a fantastic experience on your phone, to prematurely swap it out, just isn't there. And they'll do it in a stepwise way. They continue to do it. And you can tell we're upgrading people fast enough by the fact that all those people have 5G phones, which is right at or even above competitive benchmark. So our customers continue to upgrade at just the pace that we think is appropriate. Operator The next question comes from John Hodulik with UBS. John Hodulik -- UBS -- Analyst Maybe first on the Lumos transaction. Firstly, should we expect similar deals in other parts of the country? And you talked about 3.5 million homes passed. Is that about -- I mean, that's just in one small part of the country. Should we expect something similar as we look at the rest of the U.S.? And then, in the release today, you guys had a line about not being able to meet all the demand for broadband with your fixed wireless network. Can you talk a little bit about how much growth there is left there and if you're seeing capacity constraints in any particular areas? What kind of partner ecosystem are you building to execute on your strategy? Mike Sievert -- President and Chief Executive Officer Let's go straight to Callie. Callie Field -- President, Business Group Well, thanks, John, for the question. We saw very strong growth in Q1, outpacing our benchmark competitor again in postpaid phone nets. And to comment a little bit on the question that John was answering in the business category if we're seeing pressure in that category, I think it might be us. And one of the interesting things, I think, that's going on in our business right now is that not only are we delivering on top line growth but also on CLV growth across all segments. And in enterprise, we just delivered our strongest postpaid nets ever in the history of the company. We also delivered our lowest churn in enterprise. In SMB, we had our highest ever port ratios, and we're net positive for seven consecutive quarters. So we're really liking the pace of the business. We've really graduated from just being a price comp to really a solution-oriented sale for customers. And we see that with partnerships with Dialpad Ai with delivering mission-critical push-to-talk. And I know, John, you also asked who are some of the partners that we're working with in building our ecosystem. Obviously, we're partnering with the largest OEMs, working with Ericsson and Cisco, as well as industry segment experts like OCS when it comes to serve our government customers. So really building out our ecosystem that allows us to really focus on enterprise solutions, enabling them to innovate and to love their customers at scale. I will mention just a couple of key wins in the Advanced Network Solution business. You might have read about our partnership agreement with Delta, where they named us as their preferred wireless provider. But we're also deploying a 5G hybrid network solution at their Atlanta headquarters, which we're really excited about. Also the U.S. Coast Guard is working with us build out a private network to deliver seamless secure connectivity from ship to shore. And then, with Ericsson, not only as a strategic partner, but we're also working with them to deploy our first network slice on a SIM-based SASE solution within a 5G connected laptop. So we're really excited about the kinds of solutions, the sort of enterprises that we're bringing on and the momentum in the business overall. Mike Sievert -- President and Chief Executive Officer It's really interesting when you hear us talk about enterprise, how different it is from four or five years ago. I mean, we were trying our best to sell SIMs to companies that would take meetings with us like the procurement department. And what's happened in this 5G strategy as it's unfolded is Callie and team have built solutions to some of the most pressing connectivity problems that enterprises of all kinds face. And suddenly, we're in strategic conversations because we have capabilities like network slicing, like SIM-based security and many other emerging 5G capabilities that are way out in front. And that's not just giving us revenues in those advanced 5G services, but it's also winning us all those smartphones that we used to struggle so hard and back then have to price so hard to win. So it's been this really nice evolution. And make no mistake, we love low prices, and we're going to be the value leader here. But today, we're solving some of the most complicated connectivity problems that enterprises and organizations face. And that is a great place to compete. Callie Field -- President, Business Group Yes. Thank you, Mike. Totally agree. Jud Henry -- Senior Vice President and Head of Investor Relations OK. All right. Let's try this again. Operator, can we get a question? Operator The next question comes from John Hodulik with UBS. John Hodulik -- UBS -- Analyst OK. Great. So I have a couple of questions on the Lumos transaction. So first of all, should we just think of this transaction as sort of a one-off? Or should we expect other deals similar to this in other regions? And then, of the 3.5 million homes that you guys are talking about passing, how big could that get over the next five years? So that's first. And then, second of all, in the release, you guys talked about not being able to fulfill the demand that you're seeing in broadband on the fixed wireless side. How much growth is still left in fixed wireless? And are you seeing areas today where you're running out of capacity? Mike Sievert -- President and Chief Executive Officer OK. Let's start with the second one. All along, if I remind all of our listeners, I know you know this, our fixed wireless strategy has always been about selling excess capacity, where we predict normal cellphone usage won't suck up that 5G capacity. And so, this gives us the opportunity to serve broadband customers. And now, at scale, we're serving millions and millions of them under this strategy. We had originally said we saw this strategy leading to about 7 million to 8 million total customers in terms of opportunity. We don't have any updates on that. I've said several times, we're working on thinking about examining ways that we could try to extend that, and we haven't drawn any conclusions yet. We have to make sure it's done in an economic way, and we have to make sure it's done in a way that customers will love, and they have a fantastic product experience. That being said, what's interesting about fiber, fiber can be a strategy that relieves some pressure on the 5G network and extend the TAM, if you think about it, right, because some customers will -- where we offer fiber in the future, will be able to naturally graduate up to fiber, which is really a totally separate category. And that, obviously, opens up an opportunity for their neighbor to then become a 5G customer. So there's some TAM expansion there. And then, to your point, even in places where Lumos currently operates, we have a long wait list of people who applied. They put their address in our system. They applied to be a fixed wireless customer, and we haven't accepted them yet because their address isn't one of those places that I described where we have the predicted excess capacity. So there's lots of opportunity there. As it relates to your first question around is this the first of many, etc., look, we don't have anything to say about that other than our strategy is to opportunistically find ways that are very capital-light, very smart to put our brand in this space, and we've done that here. And we think this will lead to millions of homes passed. And that's a great place for us to be. We're going to continue to learn, grow, expand. And we're open-minded about this. But we're not interested in any wholesale changes that basically change who we are. No big on-balance sheet acquisitions are currently being examined. It's not something that -- we know our investors like our fast, efficient, capital efficient, high capital return strategy, and we have no intentions of changing all that. That being said, if we can lay track for the long term in a very capital-efficient way, we're open-minded. And we really like this model that we've struck with EQT and Lumos, and can't wait to get started and get this approved through the regulatory bodies and begin to see this build out and accelerate. Operator The next question is from Craig Moffett with MoffettNathanson. Craig Moffett -- MoffettNathanson -- Analyst First, Jud, congratulations. But thank you for all those 40-some-odd quarters of your able support and help. And congratulations to Cathy if she's on the call. A question about ACP just because that's the obligatory topic this quarter. Can you just talk about what you expect with ACP, how you think that might affect your business, especially perhaps your prepaid business, but whether you think it will have an impact on your postpaid business as well? And you just introduced a plan where you no longer do credit checks, which I think was a head scratcher to me just coming right before the expiry of ACP. I wonder if you could just talk about how you plan to sort of ensure that ACP customers without government support won't upend that kind of an offer. Mike Sievert -- President and Chief Executive Officer Well, let's start out with Mike Katz so we can disentangle some of these offers for you because there could be some misunderstanding out there. And then, we'll go to Peter and talk about the financial, what we see in the financial picture as it relates to the expected turndown of ACP. Mike Katz -- Chief Marketing Officer Yes. Thanks, Craig. First, to answer the first part of your question on what our expectations are with ACP, at this point, we're expecting that the program funding is going to end. And the impact of that is fully contemplated in the guidance that Peter talked about and shared earlier. And as a reminder, I think it's important to contextualize like how T-Mobile has participated in the ACP program. First of all, we have not participated in any form in postpaid across any products. It's nonexistent in our postpaid business. We have a small amount. I think, we've said a couple of hundred thousand inside of our prepaid, our owned prepaid portfolio. And the vast amount of our participation is inside wholesale via wholesale partners that we work with. So for -- so just to contextualize where our participation is. That being said, we are both in the small amount that we have in our own prepaid business but also with the wholesale partners, working with them on communication and plans to help those customers transition. We think wireless is not a category that customers are going to walk away from. So these customers need another alternative, and we're working closely with the partners and with the customers to find them another alternative, whether it's other plans or other programs like Lifeline. So we're deep in doing that. And look, like we think if you look at T-Mobile, and Mike talked a lot about our passion around and focus around guarding our value position and the brands in our portfolio like Metro and soon to be Mint, these are all value brands that are focused on delivering value. And we think that's a great opportunity, both to help customers inside of our wholesale partners to transition, but honestly, customers that also may feel stranded from competitors to come to find a value to continue their wireless services. So I hope that's helpful for the question you're answering. Peter Osvaldik -- Chief Financial Officer Yes. And let me maybe add to that just a little bit on your other questions, Craig. And I think Mike really highlighted our thinking around this well. Of course, it's in front of us, more so than behind us. No new activations as of February, but it's in front of us, but we think it's fully baked into the guidance range that we gave you, the range of outcomes that we anticipate. And when we think about -- you asked about the no credit check. And I can tell you, one, that we continue to see very healthy levels of bad debt. We continue to actually be the leader compared to our peers in terms of bad debt as a percentage of total revenue. So we're very happy with what we see there. We're always testing and trying new things. For example, we have a way and an ability for prepaid customers who have a certain number of on-time payments to graduate into postpaid without an incremental credit check. And that's because we have data and know exactly how those customers behave over time and what the really data informed credit risk around those consumers are. So we're always going to be testing around edges what is really beneficial for consumers while being very thoughtful around, of course, risk protection for the entity, and that's why we sit at the bad debt rates that we do. Mike Sievert -- President and Chief Executive Officer And that's not new. We've had that program in place for many years. Peter Osvaldik -- Chief Financial Officer Of course, yes. Absolutely. Absolutely. Craig Moffett -- MoffettNathanson -- Analyst Is there any risk, though, that ACP customers who've been essentially getting their bills paid by the government and therefore have good credit histories might be higher credit risk as ACP ends? Peter Osvaldik -- Chief Financial Officer Yes, absolutely. You're absolutely right, and that's thoughtful around -- remember, as Mike Katz said, the amount of ACP customers that are sitting in our prepaid base and Metro is very small. So that's a very small exposure. Mike Sievert -- President and Chief Executive Officer And the amount in the postpaid base -- Peter Osvaldik -- Chief Financial Officer Zero. Postpaid is absolutely zero for us. And so, it's really finding products. And you saw us probably launch out there some ways to help consumers and think about can you get into other programs like T-Mobile Connect or other low-cost opportunities or Lifeline type of construct. So look, we're going to be very thoughtful around making sure customers in this critical category stay connected while being, of course, very thoughtful around the risk profile to T-Mobile. Mike Sievert -- President and Chief Executive Officer Yes. As Mike pointed out, it's not just our customers that are facing this, right? Everybody else is. But we've got this incredible portfolio of brands that are famous for value. And we're going to make sure that those brands are in front of people because we're going to stand up and serve them at a time when they might find that they need a new offer, and we will be there with incredible offers for them. Operator And the next question comes from Jonathan Chaplin with New Street Research. Jonathan Chaplin -- New Street Research -- Analyst Congratulations to Jud and Cathy. That's fantastic news. Since it's Jud's last call, I've got nine questions to ask. I'll try and consolidate them. So Mike, I'm wondering if you can give us just an update on the sort of the fiber strategies that you're collecting together in aggregate. So you've announced so far pilot, the Lumos deal. I think, there are deals out there with Tillman, Intrepid and SiFi. How many -- when you put all of those together, how many homes passed does it amount to? And for the Lumos deal specifically, can you -- how much cash is EQT putting in? We're just trying to get a sense of sort of the total capitalization here. And then, how much comes from sort of incremental debt? And then, my last question on this is, how do you see -- all of the deals that we've had about so far seem to be focused on guys building new infrastructure. How about -- how do you think about those sorts of assets versus partnering with guys who have existing copper infrastructure that they're upgrading? Mike Sievert -- President and Chief Executive Officer You bet. We won't be able to give you too much on sort of broad strategy here other than the fact that we're opportunistic. The strategies we've employed so far, both across wholesale, which we got started on in a very small way already, as well as this new partnership, are about putting the T-Mobile brand and team to work, selling a fiber product that complements our wildly successful 5G product. And to us, that's a great strategy because we believe we have an opportunity to generate superior returns than a purely disinterested investor could do by virtue of our assets and our know-how. And we've proven that know-how to ourselves through our success with 5G Home Internet. You think about our incredible distribution, our leading brand, our tens of millions of customers, our incredible team. We have very insightful data that our customers give us permission to use to put relevant offers about their T-Mobile experience in front of them. These are all advantages that are purely financial or disinterested investor wouldn't have. And so, when we look at this area and say, can we extract a return that's better than others could, we have some confidence. And so, we think about it from that opportunistic standpoint, not from a convergence defensive standpoint. We believe that our T-Mobile offers stand tall and stand alone and don't "need" convergence. We just think that this is a place where we can make customers happy and generate a superior financial return and that it complements a leadership product that we already have out there. Beyond that, I can't say much more about the strategy other than what I said earlier. We like this partnership. We're very excited about where it could go. Maybe Peter can comment on the capital structure. But one of the things I do like about it is that we decided as we formed this to fund it and give it the wherewithal with some additional debt to have everything it needs from an equity standpoint to get to the 3.5 million homes passed, which we think is a nice threshold for us. It will be a multistate footprint. It will be big enough to matter. And of course, that will be through a combination of debt and equity. Peter Osvaldik -- Chief Financial Officer Yes. And again, Jon, I can't give you all the details because we have counterparties involved in this. First, it is a 50-50 joint venture. It will be unconsolidated for us. So it's an equity method investment for us. So everybody kind of captures that fine point. And then, as Mike said, there -- just given that it's a 50-50, there will be, obviously, cash infusion from EQT as a partner in this as well. And when you think about that incremental 500 million, for example, that would be an equivalent cash infusion from EQT. And there is -- given this is an infrastructure and a great anchor tenant in the form of T-Mobile having the retail customers, there is an ability to also lever the entity up. And the overarching thought process is this is about a maximum of 2:1 debt-to-equity ratio, but it will be based on what the funding needs of the entity actually is to get to that 3.5 million. Jonathan Chaplin -- New Street Research -- Analyst One quick follow-up, Peter, if I can. You mentioned at the beginning that you sort of set capital aside for things like this in 2024. You haven't used up that whole sort of reservoir of capital yet. If you look at what's left there, is it more directed toward fiber transactions like this or spectrum? Like how do you sort of balance between those two assets? Peter Osvaldik -- Chief Financial Officer It really is looking at what the best return profile for T-Mobile is. And sometimes, as you know, spectrum opportunities may come up. They may not come up. We could have some of the 2.5-gig leased spectrum come up, and then we have rights of first refusal around those. So it's still a balance. We don't have line of sight to how we would use every dollar of what's still remaining in that bucket. But as opportunities come up, we're going to tumble it through the normal capital allocation thought process that we have that we've described very many times, and that's exactly how you think we should think about it. Mike Sievert -- President and Chief Executive Officer And nor should we, right? So I mean, one of the reasons why we were this transparent, maybe unusually transparent with you, is that we wanted you to know that we could, in the normal course, pursue opportunities and yet still honor our stockholder return ambitions. And we wanted to make it clear that -- nothing has changed in that. And that's why we put an envelope out there at the beginning so that you would have confidence that whether it was spectrum, partnerships like this, other things that we would see that we could use our know-how and embedded assets to be able to extract a superior financial return and delight customers that we would have the wherewithal to seize those things within that range. So we're really pleased to have been able to bring this one to fruition and can't wait to get started once we get approval. Operator And the next question is from Simon Flannery with Morgan Stanley. Simon Flannery -- Morgan Stanley -- Analyst Great. And best of luck, Jud. Thanks for all the help. And welcome, Cathy. Peter, I wanted to talk a little bit about margins, if I could. You had nice EBITDA growth of 8%, margins up nearly 200 basis points year over year. I think, in the past, you sort of suggested the cadence would kind of ramp through the year. So perhaps just talk a little bit about margin trajectory, both this year and just longer term, the opportunity? I think, Mike, you said we're just getting started here. So talk about the cost side, if you could. And then, maybe on spectrum, just any update you can give us on the status of the 800-megahertz spectrum. Given we passed the DISH April 1 deadline, what should we expect in coming months from you in terms of auctioning that off to third parties? Mike Sievert -- President and Chief Executive Officer You take the first one, and I'll take the second. Peter Osvaldik -- Chief Financial Officer Yes, absolutely. Thanks, Simon. It's a tremendously exciting story, actually. One of the reasons, as we've talked about before, is we've now achieved as of Q4 of last year, in this tremendously successful merger integration, the run rate synergies, which we raised a couple of times during the pendency of the deal and execution itself. And so now, though, we continue with this guide to see run rates EBITDA increases that are significant, in fact, quite similar to what we had during those synergy unlock days. And there's a couple of things that create that. One is continued outsized profitable share taking, of course, taking those fixed costs and leveraging the fact that we're continuing to take outsized share and turning that into outsized service revenue growth. So when you have postpaid service revenue growth like we delivered this quarter of 6.5% year over year on a lot of fixed cost nature of the base, that, obviously, gives you leverage. Besides that, we're going to continue. And really, it's a culture. It's kind of a flow of thinking here that we have around continued optimization efficiencies, where can we extract efficiency out of the business so that we can plow it back into customer acquisition, margin expansion. And most importantly, and we've talked about this, we tend to think about it as service revenue to free cash flow conversion. That free cash flow is what unlocks all the ability for further value-creating investments, whether it's spectrum purchases, whether it's capital returns. And so, we're hyper-focused on how do we make sure that we create efficiencies in the expense profiles and how do we make sure that in our capex profile, we're making every single dollar count and delivering the next best tranche of value for us. And I think we have some really bespoke unique ways that we approach that. But that's how we continue to see this expansion, particularly in that service revenue to free cash flow play out over a period of time. Mike Sievert -- President and Chief Executive Officer I hope it doesn't sound like we're sort of flogging our book when we say we look at cash flow margins. We are. But also, I think cash is king, and a view that doesn't look at cash flow margins would miss the fact that we have, we think, a durably more capital-efficient strategy than our benchmark competitors. And therefore, from a geography standpoint, EBITDA margins don't tell the whole story, even though I'm pleased we're up 200 bps almost, and we're making great progress there. But the cash margins are the story because they are inclusive of what we think is a durably superior capital investment profile. And we'll talk a lot more about what we think our secret sauce is with you at some point when we have more time. But this is a strategy we have growing confidence in that it's going to be durable. OK. So the second question around 800. Well, first of all, I will just remind you what Peter, I know, has told people in the past, that we've chosen our business plan to be pretty conservative as it relates to how to think about the 800. And what I mean by that is we didn't include any proceeds from this auction in our financial plan so that they would be found money going into that reserve fund. We were talking about a few minutes ago with Jonathan. But secondly, we also did not put the usage of that spectrum into our network planning and capacity plan. And so, kind of no matter what happens here with this auction, which has begun. We either get found spectrum and capacity that we get to keep and figure out a way to use. And this is a great spectrum, nationwide, contiguous low band, lots of interesting things we can do with it, especially with emerging technologies. But also, this action may conclude successfully. And if it does, we'll have cash on hand that enhances our profile. So what's the update? We have commenced. We have interested parties. We have nonbinding indications of interest. There's reason to believe that we will meet the reserve. So it's a little too soon. Everything is nonbinding, but we'll have more to say after we get past kind of the binding parts of this. So stay tuned. But again, whichever way it shakes out for us, it's a win because of our conservative planning. Operator The next question is from David Barden with Bank of America. David Barden -- Bank of America Merrill Lynch -- Analyst Perfect. Congrats to Jud and Cathy. So I guess, my first question would be related to the comments in the results about how kind of going after the business market has kind of impacted the ARPU calculation, and that's been trending down for a couple of quarters. And so, I was wondering if you could kind of maybe unpack the kind of subscriber number that we're watching evolve here and how it balances between consumer versus business. Obviously, I'm obligated to ask you how free lines and other things contribute to the reported postpaid number. And the second question, if I could, maybe, Mike, just to go back to this Lumos situation. You're basically saying that today, you're prepared to invest about $1.45 billion between now and 2028 to own 50% of basically 2.5% of the households in America. And if you got 50% of that, you would have slightly around under -- between 1% and 1.5%. So what is the point? Like why is it worth the brain damage to spend the money, the years building the organization to get something that looks realistically so small in the grand scheme? Mike Sievert -- President and Chief Executive Officer Yes. Thanks, David. Well, let me start with the second one, and then I'll hand it to Peter on the first one. Look, I'm really excited about this because I think we're getting a lot and enabling this company to accelerate growth. And if you think about close to $1.5 billion spread over in time, 3.5 million passings being the goal for that funding, from what we -- the capital we put out, that's less than $500 per passing. And to the premise of the question, that's not for sort of like half of it because the other way it works is that T-Mobile is the branded entity for all of those passings. And it's up to us to make sure that it stays that way and we perform and so on. But our strategy is to be able to get augmentations to an already nationwide multimillion customer broadband strategy. And this is a smart way to do that. And I signaled we're open to constructs like this around the margins. And so, maybe in the end, it'll add up to more than this, and certainly, 3.5 million isn't where this probably ends. This is a growth engine that could continue into the future. We're not obligated for it, too. So I love the strategy. And I think it's about getting a better return based on our embedded assets and complementing a complementary product that's already scaled, and that makes it very appealing for us to think about the efficiencies of how we would go to market. And we are the go-to-market entity in this construct as Lumos pivots into a wholesale model. So hopefully, that helps. To your first question on ARPU, maybe you could unpack it a little bit vis-a-vis business versus consumer and then answer once again the age-old question of free lines and all that stuff. Peter Osvaldik -- Chief Financial Officer Yes, absolutely. And Dave, as we've been long saying, our focus is primarily on ARPA, drive accounts, land them, expand them. And we just gave an updated guide with respect to ARPA, both from that, as well as those continued rate plan optimization. And we'll probably see that more unfold in the second half of the year. But that trickles down into ARPU as well. So I'd say probably this year, we're expecting ARPU to be up, say, maybe 0.5%, again, more weighted to the second half of the year. But it is very much, as you say, a mix-driven metric. And now, we don't separately disclose consumer versus business, but there's just so much goodness in terms of ARPA, both accounts and ARPA accretion, that you would expect us to go heavily after, as Callie was talking about, the enterprise space and the government space where naturally, ARPUs are lower. But account and CLVs and enterprise value creation is really great and strong. So you see success in -- even in the consumer space with segmented consumer offers like in the 55-plus segment in the military segment. Once again, we're willing to do lower ARPUs because you have great CLVs with those types of customers for differential reasons each in their own segment. So we're going to continue to pursue this strategy. But again, now we expect about probably 0.5% increase in ARPU. Now this whole age-old free line question, I understand because there's some stuff that's happening in the industry. As you know, we don't do first free lines. Now we've long had a construct in our rate plan constructs that encourages higher number of lines in terms of our accounts because the higher number of lines get to be more sticky, generate more ARPA and greater lifetime value. But there's really been no trajectory change there at all from a year-over-year sequential perspective. In fact, I would say it contributed less this Q1 than it did last Q1. But that to me is very much a rate plan construct. And again, we don't do first free lines. And so that's kind of -- it's not really any sort of a contributor to what you see have happened year over year in terms of our net add performance relative to the industry. Operator And the next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow -- Wells Fargo Securities -- Analyst Great. Just a follow-up on the fiber-to-the-home strategy at a high level. As you look at potential future opportunities, is the goal to target areas where you might be underpenetrated in either fixed wireless or traditional mobile to kind of expand your addressable market? Or is it in part to provide an alternative for existing FWA subs to offload to a higher capacity option? Any color there would be helpful. And then, secondly, just on the network positioning today, maybe you could talk about how you're sequencing capital to put additional spectrum to work between C-band, the DoD spectrum, 2.5 gigahertz, refarming AWS. Just anything -- any color you could provide on how you're working to maintain your network advantage, particularly as your two large peers have made further progress in building out mid-band spectrum. Mike Sievert -- President and Chief Executive Officer Sounds good. Let's start with the second one about network. I mean, I am really pleased with what is happening with Ulf and team. We continue to actually extend our lead. If you look nationwide, don't look at somebody's favorite denominator, but just look nationwide at all of the customers and all of the experience that all the customers are having. We're actually pulling ahead, and our average speeds are double our competitive benchmarks. And so -- and one of the reasons for this is that it's not just looking underneath the 5G, but it's looking at the availability of that 5G that for us is in so many more places reaching so many more people. And with that full layer cake, which keeps the customers connected to 5G, all that results in a fantastic experience. Maybe you can give a little color on what's been unfolding, talk about Auction 108 and how we're deploying advanced technologies, Ulf. Ulf Ewaldsson -- President, Technology Well, thank you, Mike. And yes, we're very excited about the network and how it keeps advancing. And you mentioned C-band. So some of our competitors have launched C-band and put it out there. And in the areas where they launched it, we do see that the gap between us and them narrowed a little bit even though we are still way ahead. But as you said, we also noticed that the overall median downlink speeds, we are gaining another quarter again. And the main reason for us doing that is really the unique way we've built and constructed the network. We are the only one in the country who has three completely dedicated bands toward 5G. We have 2.5. We have 1,900 now. And we have 600. And that gives us that big advantage together with the stand-alone network and the larger deployment in the footprint that we have. In fact, we have now 90% of our sites capable of 5G. We have, traffic-wise, about 85% of our traffic on these tri-band sites that are all working with stand-alone technology and working with carrier -- Mike Sievert -- President and Chief Executive Officer Let's talk more about that one. Somebody -- so 85% of the time, our people are attaching to a site with all three bands of 5G. And how does that affect the quality of the connection and the reliability of the 5G connection? Ulf Ewaldsson -- President, Technology Well, very much so because out of that, we also have -- and this is an even more remarkable stat. We have 93% of the traffic on mid-band, which means that there is no toggling. It just creates a much more consistent experience. There is no toggling between when you're an LTE. In fact, you're staying in 5G the entire -- no targeting between low band and mid-band. So another factor of no toggling. The other one is that we have a grid, and this is a unique thing for T-Mobile. We have a grid that is based from the beginning on a mid-band experience. So when we deploy 2.5, we get a very consistent experience between our towers as opposed to some of our competitors who has a low-band grid and therefore -- and a higher band on the C-band. C-band is higher than 2.5. That creates a less -- more sort of interrupted, not so clear and consistent experience. Mike Sievert -- President and Chief Executive Officer That's why we are differentiated with somebody experiencing a cell edge condition of 5G, right, because our grid is tighter and our spectrum reaches further. And the net effect of those two things is you're on 5G and a high-quality 5G link more of the time. And 85% of the time, you're seeing all three bands where a lot of the time, we use advanced carrier aggregation techniques so that you get the benefit of all those bands in terms of your signal strength like the uplink might be in the low band, the downlink might be in the mid-band, etc., etc. And these are all advanced techniques that the rollout with our competitors is quite variable. But we're really focused on giving everybody a consistent experience. Ulf Ewaldsson -- President, Technology That's very right, Mike. And it's recognized. I mean, we saw in the Ookla measurements another quarter where we came in at the overall network leader. We were also recognized by Opensignal as having the most reliable experience. So I think those are remarkable facts showing. And then, you mentioned also our 108 auction and how quickly we deployed. It took us two weeks to get it all lit up in our entire network. Over a population of about 60 million, we were able to shoot up our 5G median linked speeds by about 20% or a little bit more even. So really a good result and very quickly and shows that we can deploy our spectrum very fast. Mike Sievert -- President and Chief Executive Officer Well, thank you all for joining our fireside chat about network. And -- but I did want to make sure because there is this kind of misnomer out there that everybody is catching up and the party is over. And it's -- and I've been saying this for years. We remain two years ahead of the party on 5G, and our customers are having a radically differentiated experience. And you can see it in the data, not just in the rhetoric. So really glad you asked about that. Now there was another question, though, about fiber and where we intend to target. Look, I can't help you much on that because we don't have -- we're not rolling out a plan that this is the beginning of a big wave of initiatives here. We're really happy about this initiative and how it augments 5G broadband. And we intend to go put our energy into it. So -- but look, I do want to remind people that this isn't a regional thing for 5G Home Internet. It's really a sector-by-sector assessment, neighborhood by neighborhood as to where will we have excess capacity because that sector gets hung in order to give the kind of competitive experience that we were just coffee talking about. But then, if mobile usage isn't predicted to soak up all that capacity, then individual households get approved for home broadband. And so now, if those neighborhoods are neighborhoods where we roll out fiber, then we can actually have some of those neighbors be added to the 5G who wouldn't otherwise be added. And that's TAM expanding, potentially. But we're really focused on these things right now. Very happy to have this initiative out the door and nothing further to report about it. Jud Henry -- Senior Vice President and Head of Investor Relations That was great. I'm sorry, I didn't bring my popcorn for that one. Operator And the next question is from Sam McHugh with BNP Paribas. Sam McHugh -- Exane BNP Paribas -- Analyst Just on fiber to begin with, on the existing wholesale agreement you have, can you give us any color on what kind of penetration levels you're seeing kind of Year 1, Year 2, so we can think about the potential in the new JV? And then, secondly, I think on FWA, I've seen some reports suggesting you might start selling notifications to people who move the products from the home address. Do you think that will have any impact on the kind of net adds going forward? And I guess, more broadly, how should we think about that cadence of FWA through the rest of this year? Mike Sievert -- President and Chief Executive Officer Thank you. And we'll go to Mike for both questions. Mike Katz -- Chief Marketing Officer Yes. So first, on the fiber question. Remember, a lot of these wholesale markets that we've launched are brand new and haven't even been existing for a year. But when you heard Mike talking about the assets that T-Mobile has and how we think that those give us advantage relative to other investors, that is exactly what we're starting to see play out in these wholesale markets. Remember, at small scale, we're in parts of about 16 markets spread around the country. But what we're seeing is a pace that would get us over 20% in the first year inside those markets. So we're really pleased with the penetration that we're seeing there. Mike Sievert -- President and Chief Executive Officer Now on your FWA question. And specifically, earlier this week, we launched a couple of new products. And let me just give a little bit of context to those. Mike talked about us moving over 5 million customers in our home broadband business this quarter, which, obviously, is a huge milestone for us. And we now sit at the center of millions of homes with the most important technology in their house. And we think that gives us an opportunity, and I think I've mentioned this in the last couple of calls, to look at opportunities to expand into other products and services inside the home, as well as give us tons of insight from what we're hearing from customers of additional needs. So earlier this week, we launched a program called Whole Home, which gives customers the ability to -- in addition to the CPE and router that we provide in our regular HSI package, they can expand that and add mesh that integrates into our CPE. So they can give themselves a much larger WiFi footprint inside their home. We also include some additional support for all the peripheral devices that attach to your network. So if you've got a laptop or a printer that you need support on, we'll offer that as part of this program. And then, secondly, we offered a new program called Away. And I'm really excited about this one because one of the things we've heard from customers is because this is a product that only requires power, we're not running a wire into your house or anything like that, it just requires power. And we see customers that want to use this on their boat or in their RV or while they're camping. And we created a couple of new plans specifically for those use cases that allow customers to move this as their life move along in their RV. The other thing I'm really excited about in combination with that is we struck a partnership with Camping World. And Camping World, if you're not familiar with them, is the largest camping and RV retailer in the country, and they're going to be partnering with us on these Away programs to sell to their customers and to integrate our HSI routers inside RVs that they sell. Mike Katz -- Chief Marketing Officer And you can send your orders for our new Away product at mike.katz@ -- Mike Sievert -- President and Chief Executive Officer By the way, you asked one last question, which is about what we're seeing with the wholesale fiber penetration rates. It's all very early because remember, these are greenfield projects. And so, these were -- our partners were starting out after the wholesale partnerships were struck. But so far, so good. At a small scale, we're seeing Year 1 penetration rates trending to 20%. That's above industry benchmarks. That's a good sign on your way to terminal penetration rates that are much higher than that. So everything we're seeing from these small scale so far anyway, it's going to grow. But so far, small-scale pilots in the wholesale range was very positive. And that's adding, of course, to our confidence to do news like today. So hopefully, that covers your question, Sam. Sam McHugh -- Exane BNP Paribas -- Analyst Just the cadence on FWA. Mike Sievert -- President and Chief Executive Officer Cadence, tell me one more time what that part's about. Sam McHugh -- Exane BNP Paribas -- Analyst In terms of kind of net add development through the rest of the year. We've, obviously, seen some moves from T and others. Kind of how we should think about growth going forward. Mike Sievert -- President and Chief Executive Officer We don't guide on it. But one thing we did do when we made the changes around sunsetting our launch era promotions is we indicated that this quarter would be more like 400,000 instead of the 500,000 we've seen in the past. And that's what happened. We delivered 405,000. We haven't guided on the rest of the year, but we've said we're well on track to the goal that we have always anticipated being by the end of 2025 in that 7 million to 8 million customers range. And what's interesting is that 400,000 and 500,000 net additions this quarter actually represented, as I said in my prepared remarks, a higher percentage of total broadband net adds than last year's 500-and-some thousand. And so, we're sticking right in there with a very competitive more than half, that means more than all the others combined, number of net adds in the space. And so, we're really happy with where it is because at the same time, we're seeing the value of this customer base start to appreciate, and that's also important, not just through pricing or promotion sunsets but through the kinds of value-added services that Mike just summarized. Jud Henry -- Senior Vice President and Head of Investor Relations Operator, let's squeeze in one question, please. Operator And that question comes from Kannan Venkateshwar with Barclays. Kannan Venkateshwar -- Barclays -- Analyst Congratulations, Jud and Cathy, once more. Mike, I'm trying to maybe nudge you along a little bit more on your prior response on broadband. You now have scale in broadband, and you're already one of the biggest operators in this market through fixed wireless. But you seem to be hedging your comments a little bit on fiber in terms of the scale or the kind of ambitions that you might have here long term. So could you maybe talk about what the ultimate scale ambitions here are? Are you viewing this as a cheap option at this point and you want to test out the market a little bit to see where it goes? Or is there a longer-term vision behind this in terms of how you see the company as a whole evolving in terms of its business mix? Mike Sievert -- President and Chief Executive Officer Yes, I can say a couple of things. And one of them -- and this will be a little unsatisfying, but I do plan to lay out a more long-term view on how we think about this space at our capital markets day that I mentioned would be this fall because I know that people want a multiyear view. Even that view will include an element that we intend to be patient, opportunistic. And it will also include an element that says we have no interest in fundamentally changing who we are. We are a highly successful mobile business that's mobile-first that's generating superior cash flow returns in this industry because of our superior strategy. And we're embarked upon a shareholder return program that we think makes a lot of sense in this piece of our life. So look, we're going to -- we like this area for all the reasons I said on this call. But it's premature for us to lay out kind of a detailed strategy on where we expect to be. And even when I lay it out, there will be some element of it that you'll have to be patient with us because we're going to be patient. We're going to be smart. We're going to be opportunistic because we have so much confidence in our core strategy. And hopefully, you see that patience on our part as a sign of our confidence in our core business. Jud Henry -- Senior Vice President and Head of Investor Relations Well, that's all the time we have for questions, and we definitely appreciate everyone joining us today. It's been an absolute privilege working with you. And if you have any additional questions, please reach out to either the Investor Relations or Media Relations departments. And with that, have a great day. Mike Sievert -- President and Chief Executive Officer Thanks, everybody.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Martin Viecha [Audio gap] first quarter 2024 Q&A webcast. My name is Martin Viecha, VP of investor relations, and I'm joined today by Elon Musk, Vaibhav Taneja, and a number of other executives. Our Q1 results were announced at about 3:00 p.m. Central Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events and results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today's call, please limit yourself to one question and one follow-up. Please use the Raise Hand button to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk -- Chief Executive Officer and Product Architect Thanks, Martin. To recap, in Q1, we navigated several unforeseen challenges as well as the ramp of the updated Model 3 in Fremont. As we all have seen, the EV adoption rate globally is under pressure and a lot of other order manufacturers are pulling back on EVs and pursuing plug-in hybrids instead. We believe this is not the right strategy and electric vehicles will ultimately dominate the market. Despite these challenges, the Tesla team did a great job executing in a tough environment and energy storage deployments of Megapack, in particular, reached an all-time high in Q1 leading to record profitability for the energy business. And that looks likely to continue to increase in the quarters and years ahead. It will increase. We actually know it will, so significantly faster than the car business as we expected. We also continue to expand our AI training capacity in Q1 more than doubling our training compute sequentially. In terms of the new product road map, there's been a lot of talk about our upcoming vehicle line in the next -- in the past several weeks. We've updated our future vehicle lineup to accelerate the launch of new models ahead, previously mentioned start of production in the second half of 2025. So, we expect it to be more like the early 2025, if not late this year. These new vehicles, including more affordable models, will use aspects of the next-generation platform as well as aspects of our current platforms, and we'll be able to produce on the same manufacturing lines as our current vehicle lineup. So, it's not contingent upon any new factory or massive new production line, it will be made on our current production lines much more efficiently. And we think this should allow us to get to over 3 million vehicles of capacity when realized to the full extent. Regarding FSD Version 12, which is the pure AI-based self-driving, if you haven't experienced this, I strongly urge you to try it out, it's profound. And the rate of improvement is rapid. And we've now turned that on for all cars with the cameras and inference computer everything from Hardware 3 on in North America. So, it's been pushed out to, I think, around 1.8 million vehicles, and we're seeing about half of people use it so far and that percentage is increasing with each passing week. So, we now have over 300 billion miles that have been driven with FSD V12 since the launch of full self-driving -- supervised full self-driving. It's become very clear that the vision-based approach with end-to-end neural networks is the right solution for scalable autonomy. And it's really how humans drive. Our entire road network is designed for biological neural nets and eyes. So, naturally, cameras and digital neural nets are the solution to our current road system. To make it more accessible, we've reduced the subscription price to $99 a month, so it's easy to try out. And as we've announced, we will be showcasing our purpose-built robotaxi or Cybercab in August. Yeah. Regarding AI compute, over the past few months, we've been actively working on expanding Tesla's core AI infrastructure. For a while there, we were training constrained in our progress. We are, at this point, no longer training-constrained, and so we're making rapid progress. We've installed and commissioned, meaning they're actually working 35,000 H100 computers or GPUs. GPU is wrong word. They need a new word. I always feel like a wince when I say GPU because it's not. GPU stand -- G stands for graphics, and it doesn't do graphics. But you know, roughly 35,000 H100S are active, and we expect that to be probably 85,000 or thereabouts by the end of this year and training, just for training. We are making sure that we're being as efficient as possible in our training. It's not just about the number of H100s, but how efficiently they're used. So, in conclusion, we're super excited about our autonomy road map. I think it should be obvious to anyone who's driving Version 12 and it is only a matter of time before we exceed the reliability of humans in not much time with that. And we're really headed for an electric vehicle and autonomous future. And I go back to something I said several years ago that in the future, gasoline cars that are not autonomous will be like riding a horse and using a flip phone. And that will become very obvious in hindsight. We continue to make the necessary investments that will drive growth and profits for Tesla in the future, and I wanted to thank the Tesla team for incredible execution during this period and look forward to everything that we have planned ahead. Next. Martin Viecha Thank you very much, and Vaibhav has comments as well. Vaibhav Taneja -- Chief Financial Officer It's important to acknowledge what Elon said. From our auto business perspective, we did see a decline in revenues quarter over quarter, and these were primarily because of seasonality, uncertain macroeconomic environment, and other reasons, which Elon had mentioned earlier. Auto margins declined from 18.9% to 18.5%, excluding the impact of Cybertruck. The impact of pricing actions was largely offset by reductions in per-unit costs and the recognition of revenue from Autopilot feature for certain vehicles in the U.S. that previously did not have that functionality. Additionally, while we did experience higher cost due to the ramp of Model 3 in Fremont and disruptions in Berlin, these costs were largely offset by cost-reduction initiatives. In fact, if we exclude Cybertruck and Fremont Model 3 ramp costs, the revenue from auto margins improved slightly. Currently, normalized Model Y cost per vehicle in Austin and Berlin are already very close to that of Fremont. Our ability to reduce costs without sacrificing on quality was due to the amazing efforts of the team in executing Tesla's relentless pursuit of efficiency across the business. We've also witnessed that as other OEMs are pulling back on their investments in EV, there is increasing appetite for credits, and that means a steady stream of revenue for us. Obviously, seeing others pull back from EVs not the future we want. We would prefer it, the whole industry went all in. On the demand front, we've undertaken a variety of initiatives, including lowering the price of both the purchase and subscription options for launching extremely attractive leasing specials for the Model 3 in the U.S. for $299 a month and offering attractive financing options in certain markets. We believe that our awareness activities paired with attractive financing will go a long way in expanding our reach and driving demand for our products. Our Energy business continues to make meaningful progress with margins reaching a record of 24.6%. We expect the energy storage deployments for 2024 to grow at least 75% higher from 2023. And accordingly, this business will begin contributing significantly to our overall profitability. Note that there is a bit of lumpiness in our storage deployments due to a variety of factors that are outside of our control, so deployments may fluctuate quarter over quarter. On the operating expense front, we saw a sequential increase from our AI initiatives, continued investment in future projects, marketing, and other activities. We had negative free cash flow of $2.5 billion in the first quarter. The primary driver of this was an increase in inventory from a mismatch between builds and deliveries as discussed before, and our elevated spend on capex across various initiatives, including AI compute. We expect the inventory build to reverse in the second quarter and free cash flow to return to positive again. As we prepare the company for the next phase of growth, we had to make the hard but necessary decision to reduce our head count by over 10%. The savings generated are expected to be well in excess of $1 billion on an annual run rate basis. We are also getting hyper-focused on capex efficiency and utilizing our installed capacity in a more efficient manner. The savings from these initiatives, including our cost reductions will help improve our overall profitability and ultimately enable us to increase the scale of our investments in AI. In conclusion, the future is extremely bright and the journey to get there while challenging will be extremely rewarding. Once again, I would like to thank the whole Tesla team for delivering great results. And we can open it up to Q&A. Martin Viecha OK. Let's start with investor Q&A. The first question is, what is the status of 4680? What is the current output? Lars? Lars Moravy -- Vice President, Vehicle Engineering Sure. 4680 production increased about 18%, 20% over -- from Q4 reaching greater than [Inaudible] for Cybertruck, which is about 7 gigawatt hours per year as we posted on X. We expect to stay ahead of the Cybertruck ramp with the cell production throughout Q2 as we ramp the third of four lines in Phase 1, while maintaining multiple weeks of cell inventory to make sure we're ahead of the ramp. Because we're ramping, COGS continues to drop rapidly week over week, driven by yield improvements throughout the lines and production volume increases. So, our goal, and we expect to do this, is to beat supplier cost of nickel-based cells by the end of the year. Martin Viecha Thank you. The second question is on Optimus. So, what is the current status of Optimus? Are they currently performing any factory tasks? When do you expect to start mass production? Elon Musk -- Chief Executive Officer and Product Architect We are able to do simple factory tasks or at least, I should say, factory tasks in the lab. We do think we will have Optimus in limited production in the natural factory itself, doing useful tasks before the end of this year. And then I think we may be able to sell it externally by the end of next year. These are just guesses. As I've said before, I think Optimus will be more valuable than everything else combined. Because if you've got a sentient humanoid robots that is able to navigate reality and do tasks at request, there is no meaningful limit to the size of the economy. So, that's what's going to happen. And I think Tesla is best positioned of any humanoid robot maker to be able to reach volume production with efficient inference on the robot itself. I mean, this, perhaps, is a point that is worth emphasizing Tesla's AI inference efficiency is vastly better than any other company. There's no company even close to the inference efficiency of Tesla. We've had to do that because we were constrained by the inference hardware in the car. We didn't have a choice. But that will pay dividends in many ways. Martin Viecha The third question is, what is the current assessment of the pathway toward regulatory approval for unsupervised FSD in the U.S.? And how should we think about the appropriate safety threshold compared to human drivers? Lars Moravy -- Vice President, Vehicle Engineering I can start. There are a handful of states that already have adopted autonomous vehicle laws. These states are paving the way for operations, while the data for such operations guides a broader adoption of driverless vehicles. I think Ashok can talk a little bit about our safety methodology, but we expect that these states and the work ongoing as well as the data that we're providing will pave a way for a broad-based regulatory approval in the U.S. at least and then in other countries as well. Elon Musk -- Chief Executive Officer and Product Architect Yeah. It's actually been pretty helpful that the autonomous car companies have been cutting a path through the regulatory jungle. So, that's actually quite helpful. And they have obviously been operating in San Francisco for a while. I think they got approval for City of Vale. So, these approvals are happening rapidly. I think if you've got at scale, a statistically significant amount of data that shows conclusively that the autonomous car has, let's say, half the accident rate of a human-driven car, I think that's difficult to ignore because at that point, stopping autonomy means killing people. So, I actually do not think that there will be significant regulatory barriers provided, there was conclusive data that the autonomous car is safer than a human-driven car. And in my view, this will be much like elevators. Elevators used to be operated by a guy with relay switch. But sometimes, the guy would get tired or drunk or just make a mistake and send somebody in half between floors. So, we just get an elevator and press button, we don't think about it. In fact, it's kind of weird if somebody is standing there with a relay switch. And that will be how cars work. You just summon the car using your phone. You get in. It takes you to a destination. You get out. Vaibhav Taneja -- Chief Financial Officer You don't even think about it. Elon Musk -- Chief Executive Officer and Product Architect You don't even think about it, just like an elevator. It takes you to your floor. That's it. Don't think about how the elevator is working or anything like that. And something I should clarify is that Tesla will be operating the fleet. So, you can think of like how Tesla, think of it as combination of Airbnb and Uber meaning that there will be some number of cars that Tesla owns itself and operates in the fleet. There will be some number of cars and then there'll be a bunch of cars where they're owned by the end user. That end user can add or subtract their car to the fleet whenever they want, and they can decide if they want to only let the car be used by friends and family or only buy five-star users or by anyone at any time they could have the car come back to them and be exclusively theirs like an Airbnb. You could rent out your guest room or not, any time you want. So, as our fleet grows, we have 7 million cars going -- 9 million cars going to eventually tens of millions of cars worldwide. With a constant feedback loop, every time something goes wrong, that gets added to the training data and you get this training flywheel happening in the same way that Google Search has the sort of flywheel, it's very difficult to compete with Google because people are constantly doing searches and clicking, and Google is getting that feedback loop. So, the same with Tesla. But at the scale that is maybe difficult to comprehend, but ultimately, it will be tens of millions. I think there's also some potential here for an AWS element down the road where if we've got very powerful inference because we've got a Hardware 3 in the cars, but now all cars are being made with Hardware 4. Hardware 5 is pretty much designed and should be in cars, hopefully toward the end of next year. And there's a potential to run -- when the car is not moving to actually run distributed inference. So, kind of like AWS, but distributed inference. Like it takes a lot of computers to train an AI model, but many orders of magnitude less compute to run it. So, if you can imagine future, perhaps where there's a fleet of 100 million Teslas, and on average, they've got like maybe a kilowatt of inference compute. That's 100 gigawatts of inference compute distributed all around the world. It's pretty hard to put together 100 gigawatts of AI compute. And even in an autonomous future where the car is, perhaps, used instead of being used 10 hours a week, it is used 50 hours a week. That still leaves over 100 hours a week where the car inference computer could be doing something else. And it seems like it will be a waste not to use it. Martin Viecha Ashok, do you want to chime in on the process and safety? Ashok Elluswamy -- Director, Autopilot Software Yeah. We have multiple years of validating the safety for in any given week, we train hundreds of neural networks that can produce different trajectories for how to drive the car, replay them through the millions of clips that we have already collected from our users and our own QA those are like critical events, like someone jumping out in front or like other critical events that we have gathered database over many, many years, and we replay through all of them to make sure that we are net improving safety. We have simulation systems that also try to create this and test this in close to fashion. And some of this is validated, we give it to our QA networks. We have hundreds of them in different cities, in San Francisco, Los Angeles, Austin, New York, a lot of different locations. They are also driving this and collecting real-world miles, and we have an estimate of what are the critical events, are they net improvement compared to the previous-week builds. And once we have confidence that the build is a net improvement, then we start shipping to early users, like 2,000 employees initially that they would like it to build, they will give feedback on like if it's an improvement there or they're noting some new issues that we did not capture in our own QA process. And only after all of this is validated, then we go to external customers. And even when we go external, we have like live dashboards of monitoring every critical event that's happening in the fleet sorted by the criticality of it. So, we are having a constant pulse on the build quality and the safety improvement along the way. And then any failures like Elon alluded to, we get the data back, add it to the training and that improves the model in the next cycle. So, we have this like constant feedback loop of issues, fixes, evaluations and then rinse and repeat. And especially with the new V12 architecture, all of this is automatically improving without requiring much engineering interventions in the sense that engineers don't have to be creative and like how they code the algorithms. It's mostly learning on its own based on data. So, you see that, OK, every failure or like this is how a person chooses is how you drive the intersection or something like that, they get the data back. We add it to the neural network, and it learns from that trained data automatically instead of some engineers saying that, oh, here, you must rotate the steering wheel by this much or something like that. There's no hard inference conditions. Everything is neural network. It's pretty soft. It's probabilistic, so it will adopt probabilistic distribution based on the new data that it's getting. Elon Musk -- Chief Executive Officer and Product Architect Yeah. And we do have some insight into how good the things will be in like, let's say, three or four months because we have advanced models that our far more capable than what is in the car, but have some issues with them that we need to fix. So, they are there'll be a step change improvement in the capabilities of the car, but it will have some quirks that are -- that need to be addressed in order to release it. As Ashok was saying, we have to be very careful in what we release the fleet or to customers in general. So, if we look at, say, 12.4 and 12.5, which are really -- could arguably even be Version 13, Version 14 because it's pretty close to a total retrain of the neural nets in each case are substantially different. So, we have good insight into where the model is, how well the car will perform in, say, three or four months. Ashok Elluswamy -- Director, Autopilot Software Yeah. In terms of scaling loss, people in the community generally talk about model scaling loss where they increase the model size a lot and then their corresponding gains in performance, but we have also figured out scaling loss and other access in addition to the model side scaling, making also data scaling. You can increase the amount of data you use to train the neural network and that also gives similar gains and you can also scale up by training compute, you can train it for much longer and one more GPUs or more dojo nodes that also gives better performance, and you can also have architecture scaling where you count with better architectures for the same amount of compute produce better results. So, a combination of model size scaling, data scaling, training compute scaling and the architecture scaling, we can basically extrapolate, OK, with the continue scaling based at this ratio, we can perfect big future performance. Obviously, it takes time to do the experiments because it takes a few weeks to train, it takes a few weeks to collect tens of millions of video clips and process all of them, but you can estimate what is going to be the future progress based on the trends that we have seen in the past, and they're generally held true based on past data. Martin Viecha OK. Thank you very much. I'll go to the next question, which is, can we get an official announcement of the time line for the $25,000 vehicle? Lars Moravy -- Vice President, Vehicle Engineering I think Elon mentioned it in the opening remarks. But as you mentioned, we're updating our future vehicle lineup to accelerate the launch of our low-cost vehicles in a more capex-efficient way. That's our mission to get the most affordable cars to customers as fast as possible. These new vehicles we built on our existing lines and open capacity, and that's a major shift to utilize all our capacity with marginal capex before we go spend high capex. Elon Musk -- Chief Executive Officer and Product Architect Yeah. We'll talk about this more on August 8. But really, the way to think of Tesla is almost entirely in terms of solving autonomy and being able to turn on that autonomy for a gigantic fleet. And I think it might be the biggest asset value appreciation history when that day happens when you can do unsupervised full self-driving. Lars Moravy -- Vice President, Vehicle Engineering Five million cars. Elon Musk -- Chief Executive Officer and Product Architect Yeah. It will be 7 million cars in a year or so and then 10 million, and then eventually, we're talking about tens of millions of cars -- not eventually, it's like before the end of this year. Yeah. But in the decade, it's several tens of million cars, I think. Martin Viecha Thank you. The next question is, what is the progress on the Cybertruck ramp? Lars Moravy -- Vice President, Vehicle Engineering I can take that one, too. Cybertruck had 1K a week just a couple of weeks ago. This happened in the first four to five months since we SOP late last year. Of course, volume production is what matters. That's what drives costs and so our costs are dropping, but the ramp still faces like a lot of challenges with so many new technologies, some supplier limitations, etc., and continue to ramp this year, just focusing on cost efficiency and quality. Martin Viecha OK. Thank you. The next question, have any of the legacy automakers contacted Tesla about possibly licensing FSD in the future? Elon Musk -- Chief Executive Officer and Product Architect We're in conversations with one major automaker regarding licensing FSD. Martin Viecha Thank you. The next question is about the robotaxi. Elon already talked about that. So, we'll have to wait till August. The following question is about the next-generation vehicle. We already talked about that. So, let's go to the semi. What is the time line for scaling semi? Lars Moravy -- Vice President, Vehicle Engineering So, we're finalizing the engineering of semi to enable like a super cost-effective high-volume production with our learnings from our fleet and our pilot fleet and Pepsi fleet, which we are expanding this year marginally. In parallel, as we showed in the shareholders' deck, we have started construction on the factory in Reno. Our first vehicles are planned for late 2021 with external customers starting in 2026. Martin Viecha OK. A couple of more questions. So, our favorite, can we make FSD transfer permanent until FSD is fully delivered with Level 5 autonomy? Lars Moravy -- Vice President, Vehicle Engineering Yes. Martin Viecha OK. Next question. What is the getting the production ramp at Lathrop, where do you see the Megapack run rate at the end of the year? Mike? Unknown speaker Yeah. Lathrop is ramping as planned. We have our second GA line allowing us to increase our exit rate from 20 gigawatt hours per year to -- at the start of this year to 40 gigawatt hours per year by the end of the year. That lines commissioned. There's really nothing limiting the ramp. Given the longer sales cycles for these large projects, we typically have order visibility 12 to 24 months prior to ship dates. So, we're able to plan the build plan several quarters in advance. So, this allows us to ramp the factory to align with the business and order growth. Lastly, we'd like to thank our customers globally for their trust in Tesla as a partner for these incredible projects. Martin Viecha Let's go to analyst questions. The first question comes from Tony Sacconaghi from Bernstein. Tony, please go ahead and unmute. Tony Sacconaghi -- AllianceBernstein -- Analyst Thank you for taking the question. I was just wondering if you can elaborate a little bit more on kind of the new vehicles that you talked about today. Are these like tweaks on existing models given that they're going to be running on the same lines? Or are these like new models? And how should we think about them in the context of like the Model 3 Highland update what will these models be like relative to that? And given the quick time frame, Model 3 Highland has required a lot of work and a lot of retooling. Maybe you can help put that all in context. And I have a follow-up, please. Elon Musk -- Chief Executive Officer and Product Architect I think we've said we were on that front. So, what's your follow-up? Tony Sacconaghi -- AllianceBernstein -- Analyst It's a more personal one for you, Elon, which is that you're leading many important companies right now. Maybe you can just talk about where your heart is at in terms of your interests. And do you expect to lessen your involvement with Tesla at any point over the next three years? Elon Musk -- Chief Executive Officer and Product Architect Well, as it constitutes a majority of my work time, and I work pretty much every day of the week, it's rare for me to take a Sunday afternoon off. I'm going to make sure Tesla is quite prosperous. And it is -- like it is prosperous, and it will be very much so in the future. Martin Viecha OK. Thank you. Let's go to Adam Jonas from Morgan Stanley. Adam, please go ahead. Go ahead and unmute. Adam Jonas -- Morgan Stanley -- Analyst OK. Great. Hey, Elon. So, you and your team on volume expect a 2024 growth rate, notably lower than that achieved in 2023. But what's your team's degree of confidence on growth above 0%? In other words, does that statement leave room for potentially lower sales year on year? Elon Musk -- Chief Executive Officer and Product Architect No, I think we'll have higher sales this year than last year. Adam Jonas -- Morgan Stanley -- Analyst OK. My follow-up, Elon, on future products. If you had nailed execution, assuming that you nail execution on your next-gen cheaper vehicles, more aggressive giga castings, I don't want to say one piece, but getting closer to, say, one-piece structural pack, unboxed, 300-mile range, $25,000 price point, putting aside robotaxi, those features unique to you. How long would it take your best Chinese competitors to copy a cheaper and better vehicle that you could offer a couple of years from now? How long would it take your best Chinese competitors to copy that? Thanks. Elon Musk -- Chief Executive Officer and Product Architect I mean, I don't know what our competitors can do, except we've done relatively better than they have because if you look at the drop in our competitors in China sales versus our drop in sales, our drop was less than theirs. So, we're doing well. But I think Cathie Wood said it best. Like really, we should be thought of as an AI or robotics company. If you value Tesla as just like an auto company, you just have to -- fundamentally, it's just the wrong framework and if you ask the wrong question, then the right answer is impossible. So, I mean, if somebody doesn't believe Tesla is going to solve autonomy, I think they should not be an investor in the company. Like that is, but we will and we are and then you have a car that goes from 10 hours of use a week, like an hour and a half a day to probably 50%, but it costs the same. Vaibhav Taneja -- Chief Financial Officer I think that's the key thing to remember, right, especially if you look at FSD Supervised, if you didn't believe in autonomy, this should give you a review that this is coming. It's actually getting better day by day. Elon Musk -- Chief Executive Officer and Product Architect Yeah. If you've not tried the FSD 12.3, and like I said, 12.4 is going to be significantly better and 12.5 even better than that. And we have visibility into those things. Then you really don't understand what's going on. It's not possible. Vaibhav Taneja -- Chief Financial Officer Yeah. And that's why we can't just look at just as a car company because a car company would just have a car. But here, we have more than a car company because the cars can be autonomous. And like I said, it's happening. Ashok Elluswamy -- Director, Autopilot Software Yeah. This is all in addition to Testa AI community is just like increasing -- improving rapidly. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, we're putting the actual auto in automobile. So, sort of we go like, well, sort of like tell us about future horse carriages you're making. I'm like, well, actually, it doesn't need a horse that's the whole point. That's really the whole point. Martin Viecha OK. Thank you. The next question comes from Alex Potter from Piper Sandler. Alex, please go ahead and unmute. Alex Potter -- Piper Sandler -- Analyst Great. Thanks. Yes, so I couldn't agree more. The thesis hinges completely on AI, the future of AI, full self-driving neural net training, all of these things. In that context, Elon, you've spoken about your desire to obtain 25% voting control of the company. And I understand completely why that would be. So, I'm not necessarily asking about that. I'm asking if you've come up with any mechanism by which you can ensure that you'll obtain that level of voting control. Because if not, then the core part of the thesis could potentially be at risk. So, any additional commentary you might have on that topic? Elon Musk -- Chief Executive Officer and Product Architect Well, I think no matter what Tesla -- even if I get kidnapped by aliens tomorrow, Tesla will solve autonomy, maybe a little slower, but it would solve autonomy for vehicles at least. I don't know if we would win on with respect to Optimus or with respect to future products, but it would that -- that there's enough momentum for Tesla to solve autonomy even if I disappeared for vehicles. Yes, there's a whole range of things we can do in the future beyond that. I'll be more reticent with respect to Optimus, if we have a super-sentient humanoid robot that can follow you indoors and that you can escape, we're talking terminator-level risk. And yes, I'd be uncomfortable with. If there's not some meaningful level of influence over how that is deployed. And there's shareholders have an opportunity to ratify or reratify the sort of competition because I can't say that. That is a fact. They have an opportunity. And yes, we'll see. If the company generates a lot of positive cash flow, we could obviously buy back shares. Alex Potter -- Piper Sandler -- Analyst All right. That's actually all very helpful context. Thank you. Maybe one final question, and I'll pass it on. Opex reductions, thank you for quantifying the impact there. I'd be interested also in potentially more qualitative discussion of what the implications are for these headcount reductions. What are the types of activities that you're presumably sacrificing as a result of parting ways with these folks? Thanks very much. Vaibhav Taneja -- Chief Financial Officer So, you know, like we said, we've done these headcount reductions across the board. And as companies grow over time, there are certain redundancies. There's some duplication of efforts, which happens in certain areas. So, you need to go back and look at where all these pockets are, get rid of it. So, we're basically going through that exercise wherein we're like, hey, how do we set this company right for the next phase of growth? And the way to think about it is any tree, which grows. It needs pruning. This is the pruning exercise which we went through. And at the end of it, we'll be much stronger and much more resilient to deal with the future because the future is really bright. Like I said in my opening remarks, we just have to get through this period and get there. Elon Musk -- Chief Executive Officer and Product Architect Yeah. We're not giving up anything that is significant that I'm aware of. We've had a long period of prosperity from 2019 to now. And so, if a company sort of organizationally is 5% wrong per year, that accumulates to of inefficiency. We've made some corrections along the way. But it is time to reorganize the company for the next phase of growth and you really need to reorganize it, just like a human when we start off with one cell and kind of zygote, kind of blastocyst and you start growing arms and legs and briefly, you have a tail. Alex Potter -- Piper Sandler -- Analyst But you shed the tail. Elon Musk -- Chief Executive Officer and Product Architect You shed the tail, hopefully. And then you're a baby, and basically, you have to be the organism -- a company is kind of like creature growing. And if you don't reorganize it for different phases of growth, it will fail. You can't have the same organizational structure if you're 10 cells versus 100 versus 1 million versus 1 billion versus 1 trillion. Humans are around 35 trillion cells, doesn't feel like it feels like one person. But you're basically a walking cell colony of roughly 35 trillion depending on your body mass and about three times that number in bacteria. So, anyway, you've got to reorganize the company for a new phase of growth or will fail to achieve that growth. Martin Viecha Thank you. Let's go to Mark Delaney from Goldman Sachs. Mark, please go ahead and unmute. Mark Delaney -- Goldman Sachs -- Analyst Yes. Good afternoon. Thanks very much for taking the question. The company previously characterized potential FSD licensing discussions in the early phase and some OEMs had not really been believing in it. Can you elaborate on how much the licensing business opportunity you mentioned today has progressed? And is there anything Tesla needs to achieve with the technology in terms of product milestones in order to be successful at reaching a licensing agreement in your view? Elon Musk -- Chief Executive Officer and Product Architect Well, I think we just need to -- it just needs to be obvious that our approach is the right approach. And I think it is. I think we've now with 12.3, if you just have the car drive you around, it is obvious that our solution with a relatively low-cost inference computer and standard cameras can achieve self-driving. No LiDARs, no radars, ultrasonic. Nothing. Vaibhav Taneja -- Chief Financial Officer No heavy integration work for vehicle manufacturers. Elon Musk -- Chief Executive Officer and Product Architect Yeah. So, it really just be a case of having them use the same cameras and inference computer and licensing our software. Once it becomes obvious that if you don't have this in a car, nobody wants your car. It's a smart car. I still remember in fact, when Nokia was king of the hill, yeah, and the cellphone is crushing. And then I saw them come out with a smartphone that was basically a brick with limited functionality. And then the iPhone and Android, people still do not understand that all the phones are going to be that way. There's not going to be any flip phones. There will be a niche product or home phone. Yeah. Not even exactly. When's the last time you saw a whole book? That's like an idea. Yeah. Vaibhav Taneja -- Chief Financial Officer In a hotel, sometimes in hotels. Elon Musk -- Chief Executive Officer and Product Architect Yes, the hotels have them. The people don't understand all cars will need to be smart cars, or you will not sell, or the car will not -- nobody would buy it. Once that becomes obvious, I think licensing becomes not optional. Lars Moravy -- Vice President, Vehicle Engineering It becomes a method of survival. Elon Musk -- Chief Executive Officer and Product Architect Yes, absolutely, it is. License it, or nobody will buy your car. Vaibhav Taneja -- Chief Financial Officer I mean, one other thing which I'll add is in the conversations which we've had with some of these OEMs, I just want to also point out that they take a lot of time in their product life cycle. They're talking about years before they will put it in their product. We might have a licensing deal earlier than that, but it takes a while. So, this is where the big difference between us and them is. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, really, a deal signed now would result in it being in a car probably three years. Vaibhav Taneja -- Chief Financial Officer That would be early. Elon Musk -- Chief Executive Officer and Product Architect That's like lightning, basically. Vaibhav Taneja -- Chief Financial Officer That's an eager OEM. Elon Musk -- Chief Executive Officer and Product Architect Yeah. So, I wouldn't be surprised if we do sign a deal. I think we have a good chance we do sign a deal this year, maybe more than one. But yes, it would be probably three years before it's integrated with a car. even though all you need is cameras and our inference computer. So, just talking about a massive design change. Vaibhav Taneja -- Chief Financial Officer Yes. And again, just to clarify, it's not the work which we have to do. It's the work which they have to do, which will take the time. Right, Mark? Mark Delaney -- Goldman Sachs -- Analyst Yeah, very helpful. My follow-up was to better understand Tesla's approach to pricing going forward. Previously, the company had said that the price reductions were driving incremental demand with how affordable the cars have become, especially for vehicles that have access to IRA credits and some of the leasing offers that Tesla has in place. Do you still see meaningful incremental price reductions as making sense from here for the existing products? And can the company meaningfully lower prices from here and also stay free cash flow positive on an annual basis with the current product set? Elon Musk -- Chief Executive Officer and Product Architect Yeah. I think we can be free cash flow positive meaningfully. Lars Moravy -- Vice President, Vehicle Engineering I think Vaibhav said it in his opening remarks, like our cost-down efforts, we basically were offsetting the price cut like we're trying to give it back to the customers. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, at the end of the day, like for any given company, if you sell a great product at a great price -- if you have a great product at a great price, the sales will be excellent. That's true of any area. So, over time, we do need to keep making sure that we're -- that it's a great product at a great price. And moreover, that price is accessible to people. So, it's not -- you have to solve both the value for money and the fundamental affordability question. The fundamental affordability question is sometimes overlooked. If somebody is earning several hundred thousand dollars a year, they don't think of a car from a fundamental affordability standpoint. But vast majority of people are living paycheck to paycheck. So, it actually makes a difference if the cost per month for lease refinancing is $10 one way or the other. It is important to keep improving the affordability and to keep making the price -- Lars Moravy -- Vice President, Vehicle Engineering More accessible. Elon Musk -- Chief Executive Officer and Product Architect Yeah, exactly. Make the price more accessible, the value for money better, and to keep improving that over time. Lars Moravy -- Vice President, Vehicle Engineering But also to kick ass if people want to buy. Elon Musk -- Chief Executive Officer and Product Architect Yeah. It's going to be a great product and at a great price. And the standards for what constitutes a great product at a great price keep increasing. So, there's like -- you can't just be static. You have to keep making the car better, improving the price but improving the cost of production, and that's what we're doing. Vaibhav Taneja -- Chief Financial Officer Yeah. And in fact, like I said in my opening remarks also, like the revised -- the updated Model 3 is a fantastic car. I don't think people fully even understand the amount of engineering effort which has gone, and Lars and team have actually put out videos explaining how much the car is different. I mean, it looks and feels different. Not only it looks and feels different, we've added so much value to it, but you can lease it for like as low as $299 a month. Lars Moravy -- Vice President, Vehicle Engineering Without gas. Vaibhav Taneja -- Chief Financial Officer Yeah. Martin Viecha All right. The next question comes from George from Canaccord. George, please go ahead and unmute. George Gianarikas -- Canaccord Genuity -- Analyst Hi. Thank you for taking my question. First, could you please help us understand some of the timing of launching FSD in additional geographies, including maybe clarifying your recent comment about China? Thank you. Elon Musk -- Chief Executive Officer and Product Architect You mean like new markets? Yeah, we are -- there are a bunch of markets where we don't currently sell cars that we should be selling cars in. We'll see some acceleration of that. George Gianarikas -- Canaccord Genuity -- Analyst And FSD new markets? Elon Musk -- Chief Executive Officer and Product Architect Yeah. So, think about the end-to-end neural net-based autonomy is that just like a human, it actually works pretty well without modification in almost any market. So, we plan on -- with the approval of the regulators, releasing it as a supervised autonomy system in any market that -- where we can get regulatory approval for that, which we think includes China. So, yes, it's -- just like a human, you can go rent a car in a foreign country and you can drive pretty well. Obviously, if you live in that country, you'll drive better. And so, we'll make the car drive better in these other countries with country-specific training. But it can drive quite well almost everywhere. Vaibhav Taneja -- Chief Financial Officer The basics of driving are basically same everywhere. Like car is a car, the traffic lights, a road is a road. Elon Musk -- Chief Executive Officer and Product Architect It understands that it shouldn't hit things, no matter what the road rules are. Vaibhav Taneja -- Chief Financial Officer Exactly. There are some road rules that you need to follow. And in China, you shouldn't cross over a solid line to do a lane change. In U.S., it's a recommendation, I think. In China, you get fined heavily if you do that. We have to do some more actions, but it's mostly smaller adoptions. It's not like the entire change of stack or something like that. Martin Viecha Hey, George, do you have a follow-up? George Gianarikas -- Canaccord Genuity -- Analyst Yeah. So, my follow-up has to do with the first quarter deliveries and I'm curious as to whether or not you feel that supply constraints that you mentioned throughout the release impacted the results, and maybe can you help us quantify that? And is that why you have some confidence in unit growth in 2024? Vaibhav Taneja -- Chief Financial Officer Yeah. I think we did cover this a little bit in the opening remarks to you. Q1 had a lot of different things which are happening. Seasonality was a big one, continued pressure from the macroeconomic environment. We had attacks at our factory. We had Red Sea attacks, we are ramping Model 3, we're ramping Cybertruck. All these things are happening. I mean, it almost feels like a culmination of all those activities in a constrained period. And that gives us that confidence that, hey, we don't expect these things to recur. Elon Musk -- Chief Executive Officer and Product Architect Yeah. We think Q2 will be a lot better. Yeah. Lars Moravy -- Vice President, Vehicle Engineering Just one thing after another. So crazy. Elon Musk -- Chief Executive Officer and Product Architect Yeah, exactly. It's just -- if you've got cars that are sitting on ships, they obviously cannot delivered to people. And if you've got the excess demand for Model 3 and Model Y in one market, but you don't have it there. It's quite a -- it's extremely complex logistics situation. So, I'd say also the -- we did overcomplicate the sales process, which we've just in the past week or so have greatly simplified. So, it became far too complex to buy a Tesla, whereas it should just be you can buy the car in under a minute. So, we're getting back to the -- you can buy a Tesla in under a minute interface from what was quite complex. Martin Viecha OK. Thank you. Let's go to Colin Rusch from Oppenheimer. Colin, unmute, please. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much, guys. Given the pursuit of Tesla really as a leader in AI for the physical world, in your comments around distributed inference, can you talk about what that approach is unlocking beyond what's happening in the vehicle right now? Elon Musk -- Chief Executive Officer and Product Architect Ashok, do you want to say something? Ashok Elluswamy -- Director, Autopilot Software Yeah. Like Elon mentioned, like the car, even when it's a full robotaxi, it's probably going to be used for 150 hours a week. Elon Musk -- Chief Executive Officer and Product Architect That's my guess, like a third of the hours of the week. Ashok Elluswamy -- Director, Autopilot Software Yeah. It could be more or less, but then there's certainly going to be some hours left for charging and cleaning and maintenance in that world, you can do a lot of other workloads, even right now, we are seeing, for example, the LLM companies have these batch workloads where they send a bunch of documents and those are run through pretty large neural networks and take a lot of compute to chunk through those workloads. And now that we have already paid for this compute in these cars, it might be wise to use them and not let them be like buying a lot of expensive machinery and leaving to them idle. We don't want that. We want to use the computer as much as possible and close to like basically 100% of the time to make full use of it. Elon Musk -- Chief Executive Officer and Product Architect I think it's analogous to Amazon Web Services, where people didn't expect that AWS would be the most valuable part of Amazon when it started out as a bookstore. So, that was on nobody's radar. But they found that they had excess compute because the compute needs would spike to extreme levels for brief periods of the year and then they had idle compute for the rest of the year. So, then what should they do to pull that excess compute for the rest of the year. That's kind of -- yeah, monetize it. It seems like kind of a no-brainer to say, OK, if we've got millions and then tens of millions of vehicles out there where the computers are idle most of the time that we might well have them do something useful. And then I mean if you get like to the 100 million vehicle level, which I think we will, at some point, get to, then -- and you've got a kilowatt of useable compute and maybe your own Hardware 6 or 7 by that time. Then you really -- I think you could have on the order of 100 gigawatts of useful compute, which might be more than anyone, more than any company, probably more than any company. Ashok Elluswamy -- Director, Autopilot Software Yeah, probably because it takes a lot of intelligence to drive the car anyway. And when it's not driving the car, you just put this intelligence to other uses, solving scientific problems like a human or answering dumb questions for someone else. Elon Musk -- Chief Executive Officer and Product Architect We've already learned about deploying workloads to these compute nodes. Ashok Elluswamy -- Director, Autopilot Software And unlike laptops and our cellphones, it is totally under Tesla's control. So, it's easier to distribute the workload across different nodes as opposed as opposed to asking users for permission on their own cellphones would be very tedious. Elon Musk -- Chief Executive Officer and Product Architect Well, you're just draining the battery on the phone, so like technically, I suppose like Apple would have the most amount of distributed compute, but you can't use it because you can't get the -- you can't just run the phone at full power and drain the battery. So, for the car, even if you're a kilowatt-level inference computer, which is crazy power compared to a phone. If you've got 50- or 60-kilowatt-hour pack, it's still not a big deal whether you plugged it or not. It could be plugged in or not like you could run for 10 hours and use 10 kilowatt hours of your kilowatt of compute power. Lars Moravy -- Vice President, Vehicle Engineering We got built-in like liquid-cooled thermal management. Yes, it's exactly for data centers. It's already there in the car. Elon Musk -- Chief Executive Officer and Product Architect Exactly. It's distributed power generation -- distributed access to power and distributed cooling. That was already paid for. Ashok Elluswamy -- Director, Autopilot Software Yes. I mean, that distributed power and cooling, people underestimate that costs a lot of money. Vaibhav Taneja -- Chief Financial Officer Yes. And the capex is shared by the entire world. Sort of everyone owns a small chunk, and they get a small profit out of it maybe. Elon Musk -- Chief Executive Officer and Product Architect Yeah. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much, guys. And just my follow-up is a little bit more mundane. Looking at the 4680 ramp, can you talk about how close you were to target yields and when you might start to accelerate incremental capacity expansions on that technology? Elon Musk -- Chief Executive Officer and Product Architect You know, we're making good progress on that. But I don't think it's super important for at least in the near term. As Lars said, we think it will exceed the competitiveness of suppliers by the end of this year. And then we'll continue to improve. Lars Moravy -- Vice President, Vehicle Engineering Yes. I mean, I think it's important to note also that like the ramp right now is relevant to the Cybertruck ramp. And so, like we're not going to just randomly build 4680s unless we have a place to put them. And so, we're going to make sure we're prudent about that. But we also have a lot of investments with all our cell suppliers and vendors. They're great partners, and they've done great development work with us, and a lot of the advancements in technologies and chemistry, they're also putting into their cells. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, a big part of the 4680, Tesla doing internal cells was a hedge against what would happen with our suppliers because for a while they are it was very difficult because every big carmaker put in massive battery orders. And so, the price per kilowatt hour of lithium-ion batteries went to crazy numbers, crazy levels. Vaibhav Taneja -- Chief Financial Officer Bonkers. Elon Musk -- Chief Executive Officer and Product Architect Yeah, just bonkers. So, like, OK, we've got to have some hedge here to deal with cost per kilowatt hours of numbers that were double what we anticipated. If we have an internal cell production, then we have that hedge against demand shocks, we have too much demand. That's really the way to think about it. It's not like we want to take on a whole bunch of problems just for the hell of it. We did the cell program in order to address the crazy increase in cost per kilowatt hour from our suppliers due to gigantic orders placed by every carmaker on Earth. Martin Viecha OK. Thank you. And the last question comes from Ben Kallo from Baird. Ben, go ahead and unmute. Ben, you're still muted. Elon Musk -- Chief Executive Officer and Product Architect Well, I want to say again, we'd just like to strongly recommend that anyone who is, I guess, thinking about the Tesla stock should really drive 12.3. It really -- you can't -- it's impossible to understand the company if you do not do this. Martin Viecha All right. So, since Ben is not unmuting, let's try Shreyas Patil from Wolfe Research. Final question. Shreyas Patil -- Wolfe Research -- Analyst Hey, thanks so much. Just Elon, during the Investor Day last year, you mentioned that auto COGS per unit for the next-gen vehicle would decline by 50% versus the current 3 and Y. I think that was implying something around $20,000 of COGS. About a third of that was coming from the on-box manufacturing process. But I'm curious if you see an opportunity that the -- some of the other drivers around powertrain cost reduction or material cost savings, would those be largely transferable to some of the new products that you're now talking about introducing? Lars Moravy -- Vice President, Vehicle Engineering Yeah, sure. I mean, in short, yes, I mean, like the on-box manufacturing method is certainly great and revolutionary, but with it comes some risks because new production lines and not, but all the subsystems we developed, whether it was powertrains, drive units, battery improvements in manufacturing and automation, thermal systems, seating, integration of interior components and reduction of LV controllers, all that's transferable, and that's what we're doing, trying to get it in their products as fast as possible. And so, yes, that engineering work, we're not trying to just throw it away and put a cough and we're going to take it and utilize it and utilize it to the best advantage of the cars we make in the future. Shreyas Patil -- Wolfe Research -- Analyst OK. Great. And then just on that topic of 4680 cells, I know you mentioned it, you really thought of it more as like a hedge against rising battery costs from other OEMs. But it seems even today, it seems like you would have a cost advantage against some of those other automakers. And I'm wondering, given the rationalizing of your vehicle manufacturing plans that you're talking about now, if there's an opportunity to maybe convert the 4680 cells and maybe sell those to other automakers and really generate an additional revenue stream. I'm just curious if you have any thoughts about that. Elon Musk -- Chief Executive Officer and Product Architect Great. What seems to be happening is that the nets are missing something, the orders for batteries from other automakers have declined dramatically. So, we're seeing much more competitive prices for sales from our suppliers, dramatically more competitive than in the past. It is clear that a lot of our suppliers have excess capacity. Unknown speaker Yeah. In addition to what Elon said, this is coming -- by the way, in addition to what Elon said about 4680, what 4680 did for us from a supply chain perspective was help us understand the supply chain that's upstream of our cell suppliers. So, a lot of the deals that we had struck for 4680, we can also supply those materials to our partners, reducing the overall cost back to Tesla. So, we're basically inserting ourselves in the upstream supply chain by doing that. So, that's also been beneficial in reducing the overall pricing in addition to the excess capacity that these suppliers have. Elon Musk -- Chief Executive Officer and Product Architect Yeah. No, I mean, this is going to wax and wane, obviously. So, there's going to be a boom and bust in battery cell production where production exceeds supply and then supply exceeds production and back and forth kind of like, I don't know, DRAM or something. But it's like what is true today will not be true in the future, there's going to be somewhat of a boom-and-bust cycle here. And then there are additional complications with government incentives like the Inflation Reduction Act, the IRA -- I always found it like a funny name or a comical name. Yeah, it is like Irish Republican Army, the Internet Research Agency from Russia. Vaibhav Taneja -- Chief Financial Officer Independent retirement account. Elon Musk -- Chief Executive Officer and Product Architect Yeah, exactly. Roth IRA. It's like a Spider-Man situation, which IRA wins. But it is complicate the incentive structure. So, that is there's the stronger demand for cells that are produced in the U.S. than outside the U.S. But then how long does the IRA last, I don't know. Unknown speaker Which is why it's important that we have both [Inaudible] how to hedge against all of this. Martin Viecha OK. Thank you very much. That's all the time we have today. But at the same time, I would like to make a short announcement. And I wanted to let the investment community know that about a month ago, I met up with Elon and Vaibhav and announced that I'll be moving on from the world of investor relations. I'll be hanging around for another couple of months or so. So, feel free to reach out at any time. But after the seven-year sprint, I'm going to be taking a break and spending some good quality time with my family. And I wanted to say that these seven years have been the greatest privilege of my professional life. I'll never forget the memories from I started literally at the beginning of production hell and just watching the company from the inside to see what it's become today. And especially super thankful to the people in this room and dozens of people outside of this room that I've worked for over the years. I think the team's strength and teamwork at Tesla is unlike anything else I've seen in my career. Elon, thank you very much for this opportunity that I got back in 2017. Thank you for seeking investor feedback regularly and debating it with me. Elon Musk -- Chief Executive Officer and Product Architect Yeah. Well, I mean, the reason I reached out to you was because I thought your analysis of Tesla was the best that I had seen. Yes, thank you for helping Tesla to get to where it is today over seven years. It's been a pleasure working with you. Martin Viecha Thank you so much. And yeah, thank you for all the thousands of shareholders that we've met over the years and walked around factories and loved all the interactions, even the tough ones. And yeah, looking forward to the call in the next three months, but I'll be on the other side, listening in. Thank you very much. Answer:

first quarter 2024 Q&A webcast

Martin Viecha [Audio gap] first quarter 2024 Q&A webcast. My name is Martin Viecha, VP of investor relations, and I'm joined today by Elon Musk, Vaibhav Taneja, and a number of other executives. Our Q1 results were announced at about 3:00 p.m. Central Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events and results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today's call, please limit yourself to one question and one follow-up. Please use the Raise Hand button to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk -- Chief Executive Officer and Product Architect Thanks, Martin. To recap, in Q1, we navigated several unforeseen challenges as well as the ramp of the updated Model 3 in Fremont. As we all have seen, the EV adoption rate globally is under pressure and a lot of other order manufacturers are pulling back on EVs and pursuing plug-in hybrids instead. We believe this is not the right strategy and electric vehicles will ultimately dominate the market. Despite these challenges, the Tesla team did a great job executing in a tough environment and energy storage deployments of Megapack, in particular, reached an all-time high in Q1 leading to record profitability for the energy business. And that looks likely to continue to increase in the quarters and years ahead. It will increase. We actually know it will, so significantly faster than the car business as we expected. We also continue to expand our AI training capacity in Q1 more than doubling our training compute sequentially. In terms of the new product road map, there's been a lot of talk about our upcoming vehicle line in the next -- in the past several weeks. We've updated our future vehicle lineup to accelerate the launch of new models ahead, previously mentioned start of production in the second half of 2025. So, we expect it to be more like the early 2025, if not late this year. These new vehicles, including more affordable models, will use aspects of the next-generation platform as well as aspects of our current platforms, and we'll be able to produce on the same manufacturing lines as our current vehicle lineup. So, it's not contingent upon any new factory or massive new production line, it will be made on our current production lines much more efficiently. And we think this should allow us to get to over 3 million vehicles of capacity when realized to the full extent. Regarding FSD Version 12, which is the pure AI-based self-driving, if you haven't experienced this, I strongly urge you to try it out, it's profound. And the rate of improvement is rapid. And we've now turned that on for all cars with the cameras and inference computer everything from Hardware 3 on in North America. So, it's been pushed out to, I think, around 1.8 million vehicles, and we're seeing about half of people use it so far and that percentage is increasing with each passing week. So, we now have over 300 billion miles that have been driven with FSD V12 since the launch of full self-driving -- supervised full self-driving. It's become very clear that the vision-based approach with end-to-end neural networks is the right solution for scalable autonomy. And it's really how humans drive. Our entire road network is designed for biological neural nets and eyes. So, naturally, cameras and digital neural nets are the solution to our current road system. To make it more accessible, we've reduced the subscription price to $99 a month, so it's easy to try out. And as we've announced, we will be showcasing our purpose-built robotaxi or Cybercab in August. Yeah. Regarding AI compute, over the past few months, we've been actively working on expanding Tesla's core AI infrastructure. For a while there, we were training constrained in our progress. We are, at this point, no longer training-constrained, and so we're making rapid progress. We've installed and commissioned, meaning they're actually working 35,000 H100 computers or GPUs. GPU is wrong word. They need a new word. I always feel like a wince when I say GPU because it's not. GPU stand -- G stands for graphics, and it doesn't do graphics. But you know, roughly 35,000 H100S are active, and we expect that to be probably 85,000 or thereabouts by the end of this year and training, just for training. We are making sure that we're being as efficient as possible in our training. It's not just about the number of H100s, but how efficiently they're used. So, in conclusion, we're super excited about our autonomy road map. I think it should be obvious to anyone who's driving Version 12 and it is only a matter of time before we exceed the reliability of humans in not much time with that. And we're really headed for an electric vehicle and autonomous future. And I go back to something I said several years ago that in the future, gasoline cars that are not autonomous will be like riding a horse and using a flip phone. And that will become very obvious in hindsight. We continue to make the necessary investments that will drive growth and profits for Tesla in the future, and I wanted to thank the Tesla team for incredible execution during this period and look forward to everything that we have planned ahead. Next. Martin Viecha Thank you very much, and Vaibhav has comments as well. Vaibhav Taneja -- Chief Financial Officer It's important to acknowledge what Elon said. From our auto business perspective, we did see a decline in revenues quarter over quarter, and these were primarily because of seasonality, uncertain macroeconomic environment, and other reasons, which Elon had mentioned earlier. Auto margins declined from 18.9% to 18.5%, excluding the impact of Cybertruck. The impact of pricing actions was largely offset by reductions in per-unit costs and the recognition of revenue from Autopilot feature for certain vehicles in the U.S. that previously did not have that functionality. Additionally, while we did experience higher cost due to the ramp of Model 3 in Fremont and disruptions in Berlin, these costs were largely offset by cost-reduction initiatives. In fact, if we exclude Cybertruck and Fremont Model 3 ramp costs, the revenue from auto margins improved slightly. Currently, normalized Model Y cost per vehicle in Austin and Berlin are already very close to that of Fremont. Our ability to reduce costs without sacrificing on quality was due to the amazing efforts of the team in executing Tesla's relentless pursuit of efficiency across the business. We've also witnessed that as other OEMs are pulling back on their investments in EV, there is increasing appetite for credits, and that means a steady stream of revenue for us. Obviously, seeing others pull back from EVs not the future we want. We would prefer it, the whole industry went all in. On the demand front, we've undertaken a variety of initiatives, including lowering the price of both the purchase and subscription options for launching extremely attractive leasing specials for the Model 3 in the U.S. for $299 a month and offering attractive financing options in certain markets. We believe that our awareness activities paired with attractive financing will go a long way in expanding our reach and driving demand for our products. Our Energy business continues to make meaningful progress with margins reaching a record of 24.6%. We expect the energy storage deployments for 2024 to grow at least 75% higher from 2023. And accordingly, this business will begin contributing significantly to our overall profitability. Note that there is a bit of lumpiness in our storage deployments due to a variety of factors that are outside of our control, so deployments may fluctuate quarter over quarter. On the operating expense front, we saw a sequential increase from our AI initiatives, continued investment in future projects, marketing, and other activities. We had negative free cash flow of $2.5 billion in the first quarter. The primary driver of this was an increase in inventory from a mismatch between builds and deliveries as discussed before, and our elevated spend on capex across various initiatives, including AI compute. We expect the inventory build to reverse in the second quarter and free cash flow to return to positive again. As we prepare the company for the next phase of growth, we had to make the hard but necessary decision to reduce our head count by over 10%. The savings generated are expected to be well in excess of $1 billion on an annual run rate basis. We are also getting hyper-focused on capex efficiency and utilizing our installed capacity in a more efficient manner. The savings from these initiatives, including our cost reductions will help improve our overall profitability and ultimately enable us to increase the scale of our investments in AI. In conclusion, the future is extremely bright and the journey to get there while challenging will be extremely rewarding. Once again, I would like to thank the whole Tesla team for delivering great results. And we can open it up to Q&A. Martin Viecha OK. Let's start with investor Q&A. The first question is, what is the status of 4680? What is the current output? Lars? Lars Moravy -- Vice President, Vehicle Engineering Sure. 4680 production increased about 18%, 20% over -- from Q4 reaching greater than [Inaudible] for Cybertruck, which is about 7 gigawatt hours per year as we posted on X. We expect to stay ahead of the Cybertruck ramp with the cell production throughout Q2 as we ramp the third of four lines in Phase 1, while maintaining multiple weeks of cell inventory to make sure we're ahead of the ramp. Because we're ramping, COGS continues to drop rapidly week over week, driven by yield improvements throughout the lines and production volume increases. So, our goal, and we expect to do this, is to beat supplier cost of nickel-based cells by the end of the year. Martin Viecha Thank you. The second question is on Optimus. So, what is the current status of Optimus? Are they currently performing any factory tasks? When do you expect to start mass production? Elon Musk -- Chief Executive Officer and Product Architect We are able to do simple factory tasks or at least, I should say, factory tasks in the lab. We do think we will have Optimus in limited production in the natural factory itself, doing useful tasks before the end of this year. And then I think we may be able to sell it externally by the end of next year. These are just guesses. As I've said before, I think Optimus will be more valuable than everything else combined. Because if you've got a sentient humanoid robots that is able to navigate reality and do tasks at request, there is no meaningful limit to the size of the economy. So, that's what's going to happen. And I think Tesla is best positioned of any humanoid robot maker to be able to reach volume production with efficient inference on the robot itself. I mean, this, perhaps, is a point that is worth emphasizing Tesla's AI inference efficiency is vastly better than any other company. There's no company even close to the inference efficiency of Tesla. We've had to do that because we were constrained by the inference hardware in the car. We didn't have a choice. But that will pay dividends in many ways. Martin Viecha The third question is, what is the current assessment of the pathway toward regulatory approval for unsupervised FSD in the U.S.? And how should we think about the appropriate safety threshold compared to human drivers? Lars Moravy -- Vice President, Vehicle Engineering I can start. There are a handful of states that already have adopted autonomous vehicle laws. These states are paving the way for operations, while the data for such operations guides a broader adoption of driverless vehicles. I think Ashok can talk a little bit about our safety methodology, but we expect that these states and the work ongoing as well as the data that we're providing will pave a way for a broad-based regulatory approval in the U.S. at least and then in other countries as well. Elon Musk -- Chief Executive Officer and Product Architect Yeah. It's actually been pretty helpful that the autonomous car companies have been cutting a path through the regulatory jungle. So, that's actually quite helpful. And they have obviously been operating in San Francisco for a while. I think they got approval for City of Vale. So, these approvals are happening rapidly. I think if you've got at scale, a statistically significant amount of data that shows conclusively that the autonomous car has, let's say, half the accident rate of a human-driven car, I think that's difficult to ignore because at that point, stopping autonomy means killing people. So, I actually do not think that there will be significant regulatory barriers provided, there was conclusive data that the autonomous car is safer than a human-driven car. And in my view, this will be much like elevators. Elevators used to be operated by a guy with relay switch. But sometimes, the guy would get tired or drunk or just make a mistake and send somebody in half between floors. So, we just get an elevator and press button, we don't think about it. In fact, it's kind of weird if somebody is standing there with a relay switch. And that will be how cars work. You just summon the car using your phone. You get in. It takes you to a destination. You get out. Vaibhav Taneja -- Chief Financial Officer You don't even think about it. Elon Musk -- Chief Executive Officer and Product Architect You don't even think about it, just like an elevator. It takes you to your floor. That's it. Don't think about how the elevator is working or anything like that. And something I should clarify is that Tesla will be operating the fleet. So, you can think of like how Tesla, think of it as combination of Airbnb and Uber meaning that there will be some number of cars that Tesla owns itself and operates in the fleet. There will be some number of cars and then there'll be a bunch of cars where they're owned by the end user. That end user can add or subtract their car to the fleet whenever they want, and they can decide if they want to only let the car be used by friends and family or only buy five-star users or by anyone at any time they could have the car come back to them and be exclusively theirs like an Airbnb. You could rent out your guest room or not, any time you want. So, as our fleet grows, we have 7 million cars going -- 9 million cars going to eventually tens of millions of cars worldwide. With a constant feedback loop, every time something goes wrong, that gets added to the training data and you get this training flywheel happening in the same way that Google Search has the sort of flywheel, it's very difficult to compete with Google because people are constantly doing searches and clicking, and Google is getting that feedback loop. So, the same with Tesla. But at the scale that is maybe difficult to comprehend, but ultimately, it will be tens of millions. I think there's also some potential here for an AWS element down the road where if we've got very powerful inference because we've got a Hardware 3 in the cars, but now all cars are being made with Hardware 4. Hardware 5 is pretty much designed and should be in cars, hopefully toward the end of next year. And there's a potential to run -- when the car is not moving to actually run distributed inference. So, kind of like AWS, but distributed inference. Like it takes a lot of computers to train an AI model, but many orders of magnitude less compute to run it. So, if you can imagine future, perhaps where there's a fleet of 100 million Teslas, and on average, they've got like maybe a kilowatt of inference compute. That's 100 gigawatts of inference compute distributed all around the world. It's pretty hard to put together 100 gigawatts of AI compute. And even in an autonomous future where the car is, perhaps, used instead of being used 10 hours a week, it is used 50 hours a week. That still leaves over 100 hours a week where the car inference computer could be doing something else. And it seems like it will be a waste not to use it. Martin Viecha Ashok, do you want to chime in on the process and safety? Ashok Elluswamy -- Director, Autopilot Software Yeah. We have multiple years of validating the safety for in any given week, we train hundreds of neural networks that can produce different trajectories for how to drive the car, replay them through the millions of clips that we have already collected from our users and our own QA those are like critical events, like someone jumping out in front or like other critical events that we have gathered database over many, many years, and we replay through all of them to make sure that we are net improving safety. We have simulation systems that also try to create this and test this in close to fashion. And some of this is validated, we give it to our QA networks. We have hundreds of them in different cities, in San Francisco, Los Angeles, Austin, New York, a lot of different locations. They are also driving this and collecting real-world miles, and we have an estimate of what are the critical events, are they net improvement compared to the previous-week builds. And once we have confidence that the build is a net improvement, then we start shipping to early users, like 2,000 employees initially that they would like it to build, they will give feedback on like if it's an improvement there or they're noting some new issues that we did not capture in our own QA process. And only after all of this is validated, then we go to external customers. And even when we go external, we have like live dashboards of monitoring every critical event that's happening in the fleet sorted by the criticality of it. So, we are having a constant pulse on the build quality and the safety improvement along the way. And then any failures like Elon alluded to, we get the data back, add it to the training and that improves the model in the next cycle. So, we have this like constant feedback loop of issues, fixes, evaluations and then rinse and repeat. And especially with the new V12 architecture, all of this is automatically improving without requiring much engineering interventions in the sense that engineers don't have to be creative and like how they code the algorithms. It's mostly learning on its own based on data. So, you see that, OK, every failure or like this is how a person chooses is how you drive the intersection or something like that, they get the data back. We add it to the neural network, and it learns from that trained data automatically instead of some engineers saying that, oh, here, you must rotate the steering wheel by this much or something like that. There's no hard inference conditions. Everything is neural network. It's pretty soft. It's probabilistic, so it will adopt probabilistic distribution based on the new data that it's getting. Elon Musk -- Chief Executive Officer and Product Architect Yeah. And we do have some insight into how good the things will be in like, let's say, three or four months because we have advanced models that our far more capable than what is in the car, but have some issues with them that we need to fix. So, they are there'll be a step change improvement in the capabilities of the car, but it will have some quirks that are -- that need to be addressed in order to release it. As Ashok was saying, we have to be very careful in what we release the fleet or to customers in general. So, if we look at, say, 12.4 and 12.5, which are really -- could arguably even be Version 13, Version 14 because it's pretty close to a total retrain of the neural nets in each case are substantially different. So, we have good insight into where the model is, how well the car will perform in, say, three or four months. Ashok Elluswamy -- Director, Autopilot Software Yeah. In terms of scaling loss, people in the community generally talk about model scaling loss where they increase the model size a lot and then their corresponding gains in performance, but we have also figured out scaling loss and other access in addition to the model side scaling, making also data scaling. You can increase the amount of data you use to train the neural network and that also gives similar gains and you can also scale up by training compute, you can train it for much longer and one more GPUs or more dojo nodes that also gives better performance, and you can also have architecture scaling where you count with better architectures for the same amount of compute produce better results. So, a combination of model size scaling, data scaling, training compute scaling and the architecture scaling, we can basically extrapolate, OK, with the continue scaling based at this ratio, we can perfect big future performance. Obviously, it takes time to do the experiments because it takes a few weeks to train, it takes a few weeks to collect tens of millions of video clips and process all of them, but you can estimate what is going to be the future progress based on the trends that we have seen in the past, and they're generally held true based on past data. Martin Viecha OK. Thank you very much. I'll go to the next question, which is, can we get an official announcement of the time line for the $25,000 vehicle? Lars Moravy -- Vice President, Vehicle Engineering I think Elon mentioned it in the opening remarks. But as you mentioned, we're updating our future vehicle lineup to accelerate the launch of our low-cost vehicles in a more capex-efficient way. That's our mission to get the most affordable cars to customers as fast as possible. These new vehicles we built on our existing lines and open capacity, and that's a major shift to utilize all our capacity with marginal capex before we go spend high capex. Elon Musk -- Chief Executive Officer and Product Architect Yeah. We'll talk about this more on August 8. But really, the way to think of Tesla is almost entirely in terms of solving autonomy and being able to turn on that autonomy for a gigantic fleet. And I think it might be the biggest asset value appreciation history when that day happens when you can do unsupervised full self-driving. Lars Moravy -- Vice President, Vehicle Engineering Five million cars. Elon Musk -- Chief Executive Officer and Product Architect Yeah. It will be 7 million cars in a year or so and then 10 million, and then eventually, we're talking about tens of millions of cars -- not eventually, it's like before the end of this year. Yeah. But in the decade, it's several tens of million cars, I think. Martin Viecha Thank you. The next question is, what is the progress on the Cybertruck ramp? Lars Moravy -- Vice President, Vehicle Engineering I can take that one, too. Cybertruck had 1K a week just a couple of weeks ago. This happened in the first four to five months since we SOP late last year. Of course, volume production is what matters. That's what drives costs and so our costs are dropping, but the ramp still faces like a lot of challenges with so many new technologies, some supplier limitations, etc., and continue to ramp this year, just focusing on cost efficiency and quality. Martin Viecha OK. Thank you. The next question, have any of the legacy automakers contacted Tesla about possibly licensing FSD in the future? Elon Musk -- Chief Executive Officer and Product Architect We're in conversations with one major automaker regarding licensing FSD. Martin Viecha Thank you. The next question is about the robotaxi. Elon already talked about that. So, we'll have to wait till August. The following question is about the next-generation vehicle. We already talked about that. So, let's go to the semi. What is the time line for scaling semi? Lars Moravy -- Vice President, Vehicle Engineering So, we're finalizing the engineering of semi to enable like a super cost-effective high-volume production with our learnings from our fleet and our pilot fleet and Pepsi fleet, which we are expanding this year marginally. In parallel, as we showed in the shareholders' deck, we have started construction on the factory in Reno. Our first vehicles are planned for late 2021 with external customers starting in 2026. Martin Viecha OK. A couple of more questions. So, our favorite, can we make FSD transfer permanent until FSD is fully delivered with Level 5 autonomy? Lars Moravy -- Vice President, Vehicle Engineering Yes. Martin Viecha OK. Next question. What is the getting the production ramp at Lathrop, where do you see the Megapack run rate at the end of the year? Mike? Unknown speaker Yeah. Lathrop is ramping as planned. We have our second GA line allowing us to increase our exit rate from 20 gigawatt hours per year to -- at the start of this year to 40 gigawatt hours per year by the end of the year. That lines commissioned. There's really nothing limiting the ramp. Given the longer sales cycles for these large projects, we typically have order visibility 12 to 24 months prior to ship dates. So, we're able to plan the build plan several quarters in advance. So, this allows us to ramp the factory to align with the business and order growth. Lastly, we'd like to thank our customers globally for their trust in Tesla as a partner for these incredible projects. Martin Viecha Let's go to analyst questions. The first question comes from Tony Sacconaghi from Bernstein. Tony, please go ahead and unmute. Tony Sacconaghi -- AllianceBernstein -- Analyst Thank you for taking the question. I was just wondering if you can elaborate a little bit more on kind of the new vehicles that you talked about today. Are these like tweaks on existing models given that they're going to be running on the same lines? Or are these like new models? And how should we think about them in the context of like the Model 3 Highland update what will these models be like relative to that? And given the quick time frame, Model 3 Highland has required a lot of work and a lot of retooling. Maybe you can help put that all in context. And I have a follow-up, please. Elon Musk -- Chief Executive Officer and Product Architect I think we've said we were on that front. So, what's your follow-up? Tony Sacconaghi -- AllianceBernstein -- Analyst It's a more personal one for you, Elon, which is that you're leading many important companies right now. Maybe you can just talk about where your heart is at in terms of your interests. And do you expect to lessen your involvement with Tesla at any point over the next three years? Elon Musk -- Chief Executive Officer and Product Architect Well, as it constitutes a majority of my work time, and I work pretty much every day of the week, it's rare for me to take a Sunday afternoon off. I'm going to make sure Tesla is quite prosperous. And it is -- like it is prosperous, and it will be very much so in the future. Martin Viecha OK. Thank you. Let's go to Adam Jonas from Morgan Stanley. Adam, please go ahead. Go ahead and unmute. Adam Jonas -- Morgan Stanley -- Analyst OK. Great. Hey, Elon. So, you and your team on volume expect a 2024 growth rate, notably lower than that achieved in 2023. But what's your team's degree of confidence on growth above 0%? In other words, does that statement leave room for potentially lower sales year on year? Elon Musk -- Chief Executive Officer and Product Architect No, I think we'll have higher sales this year than last year. Adam Jonas -- Morgan Stanley -- Analyst OK. My follow-up, Elon, on future products. If you had nailed execution, assuming that you nail execution on your next-gen cheaper vehicles, more aggressive giga castings, I don't want to say one piece, but getting closer to, say, one-piece structural pack, unboxed, 300-mile range, $25,000 price point, putting aside robotaxi, those features unique to you. How long would it take your best Chinese competitors to copy a cheaper and better vehicle that you could offer a couple of years from now? How long would it take your best Chinese competitors to copy that? Thanks. Elon Musk -- Chief Executive Officer and Product Architect I mean, I don't know what our competitors can do, except we've done relatively better than they have because if you look at the drop in our competitors in China sales versus our drop in sales, our drop was less than theirs. So, we're doing well. But I think Cathie Wood said it best. Like really, we should be thought of as an AI or robotics company. If you value Tesla as just like an auto company, you just have to -- fundamentally, it's just the wrong framework and if you ask the wrong question, then the right answer is impossible. So, I mean, if somebody doesn't believe Tesla is going to solve autonomy, I think they should not be an investor in the company. Like that is, but we will and we are and then you have a car that goes from 10 hours of use a week, like an hour and a half a day to probably 50%, but it costs the same. Vaibhav Taneja -- Chief Financial Officer I think that's the key thing to remember, right, especially if you look at FSD Supervised, if you didn't believe in autonomy, this should give you a review that this is coming. It's actually getting better day by day. Elon Musk -- Chief Executive Officer and Product Architect Yeah. If you've not tried the FSD 12.3, and like I said, 12.4 is going to be significantly better and 12.5 even better than that. And we have visibility into those things. Then you really don't understand what's going on. It's not possible. Vaibhav Taneja -- Chief Financial Officer Yeah. And that's why we can't just look at just as a car company because a car company would just have a car. But here, we have more than a car company because the cars can be autonomous. And like I said, it's happening. Ashok Elluswamy -- Director, Autopilot Software Yeah. This is all in addition to Testa AI community is just like increasing -- improving rapidly. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, we're putting the actual auto in automobile. So, sort of we go like, well, sort of like tell us about future horse carriages you're making. I'm like, well, actually, it doesn't need a horse that's the whole point. That's really the whole point. Martin Viecha OK. Thank you. The next question comes from Alex Potter from Piper Sandler. Alex, please go ahead and unmute. Alex Potter -- Piper Sandler -- Analyst Great. Thanks. Yes, so I couldn't agree more. The thesis hinges completely on AI, the future of AI, full self-driving neural net training, all of these things. In that context, Elon, you've spoken about your desire to obtain 25% voting control of the company. And I understand completely why that would be. So, I'm not necessarily asking about that. I'm asking if you've come up with any mechanism by which you can ensure that you'll obtain that level of voting control. Because if not, then the core part of the thesis could potentially be at risk. So, any additional commentary you might have on that topic? Elon Musk -- Chief Executive Officer and Product Architect Well, I think no matter what Tesla -- even if I get kidnapped by aliens tomorrow, Tesla will solve autonomy, maybe a little slower, but it would solve autonomy for vehicles at least. I don't know if we would win on with respect to Optimus or with respect to future products, but it would that -- that there's enough momentum for Tesla to solve autonomy even if I disappeared for vehicles. Yes, there's a whole range of things we can do in the future beyond that. I'll be more reticent with respect to Optimus, if we have a super-sentient humanoid robot that can follow you indoors and that you can escape, we're talking terminator-level risk. And yes, I'd be uncomfortable with. If there's not some meaningful level of influence over how that is deployed. And there's shareholders have an opportunity to ratify or reratify the sort of competition because I can't say that. That is a fact. They have an opportunity. And yes, we'll see. If the company generates a lot of positive cash flow, we could obviously buy back shares. Alex Potter -- Piper Sandler -- Analyst All right. That's actually all very helpful context. Thank you. Maybe one final question, and I'll pass it on. Opex reductions, thank you for quantifying the impact there. I'd be interested also in potentially more qualitative discussion of what the implications are for these headcount reductions. What are the types of activities that you're presumably sacrificing as a result of parting ways with these folks? Thanks very much. Vaibhav Taneja -- Chief Financial Officer So, you know, like we said, we've done these headcount reductions across the board. And as companies grow over time, there are certain redundancies. There's some duplication of efforts, which happens in certain areas. So, you need to go back and look at where all these pockets are, get rid of it. So, we're basically going through that exercise wherein we're like, hey, how do we set this company right for the next phase of growth? And the way to think about it is any tree, which grows. It needs pruning. This is the pruning exercise which we went through. And at the end of it, we'll be much stronger and much more resilient to deal with the future because the future is really bright. Like I said in my opening remarks, we just have to get through this period and get there. Elon Musk -- Chief Executive Officer and Product Architect Yeah. We're not giving up anything that is significant that I'm aware of. We've had a long period of prosperity from 2019 to now. And so, if a company sort of organizationally is 5% wrong per year, that accumulates to of inefficiency. We've made some corrections along the way. But it is time to reorganize the company for the next phase of growth and you really need to reorganize it, just like a human when we start off with one cell and kind of zygote, kind of blastocyst and you start growing arms and legs and briefly, you have a tail. Alex Potter -- Piper Sandler -- Analyst But you shed the tail. Elon Musk -- Chief Executive Officer and Product Architect You shed the tail, hopefully. And then you're a baby, and basically, you have to be the organism -- a company is kind of like creature growing. And if you don't reorganize it for different phases of growth, it will fail. You can't have the same organizational structure if you're 10 cells versus 100 versus 1 million versus 1 billion versus 1 trillion. Humans are around 35 trillion cells, doesn't feel like it feels like one person. But you're basically a walking cell colony of roughly 35 trillion depending on your body mass and about three times that number in bacteria. So, anyway, you've got to reorganize the company for a new phase of growth or will fail to achieve that growth. Martin Viecha Thank you. Let's go to Mark Delaney from Goldman Sachs. Mark, please go ahead and unmute. Mark Delaney -- Goldman Sachs -- Analyst Yes. Good afternoon. Thanks very much for taking the question. The company previously characterized potential FSD licensing discussions in the early phase and some OEMs had not really been believing in it. Can you elaborate on how much the licensing business opportunity you mentioned today has progressed? And is there anything Tesla needs to achieve with the technology in terms of product milestones in order to be successful at reaching a licensing agreement in your view? Elon Musk -- Chief Executive Officer and Product Architect Well, I think we just need to -- it just needs to be obvious that our approach is the right approach. And I think it is. I think we've now with 12.3, if you just have the car drive you around, it is obvious that our solution with a relatively low-cost inference computer and standard cameras can achieve self-driving. No LiDARs, no radars, ultrasonic. Nothing. Vaibhav Taneja -- Chief Financial Officer No heavy integration work for vehicle manufacturers. Elon Musk -- Chief Executive Officer and Product Architect Yeah. So, it really just be a case of having them use the same cameras and inference computer and licensing our software. Once it becomes obvious that if you don't have this in a car, nobody wants your car. It's a smart car. I still remember in fact, when Nokia was king of the hill, yeah, and the cellphone is crushing. And then I saw them come out with a smartphone that was basically a brick with limited functionality. And then the iPhone and Android, people still do not understand that all the phones are going to be that way. There's not going to be any flip phones. There will be a niche product or home phone. Yeah. Not even exactly. When's the last time you saw a whole book? That's like an idea. Yeah. Vaibhav Taneja -- Chief Financial Officer In a hotel, sometimes in hotels. Elon Musk -- Chief Executive Officer and Product Architect Yes, the hotels have them. The people don't understand all cars will need to be smart cars, or you will not sell, or the car will not -- nobody would buy it. Once that becomes obvious, I think licensing becomes not optional. Lars Moravy -- Vice President, Vehicle Engineering It becomes a method of survival. Elon Musk -- Chief Executive Officer and Product Architect Yes, absolutely, it is. License it, or nobody will buy your car. Vaibhav Taneja -- Chief Financial Officer I mean, one other thing which I'll add is in the conversations which we've had with some of these OEMs, I just want to also point out that they take a lot of time in their product life cycle. They're talking about years before they will put it in their product. We might have a licensing deal earlier than that, but it takes a while. So, this is where the big difference between us and them is. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, really, a deal signed now would result in it being in a car probably three years. Vaibhav Taneja -- Chief Financial Officer That would be early. Elon Musk -- Chief Executive Officer and Product Architect That's like lightning, basically. Vaibhav Taneja -- Chief Financial Officer That's an eager OEM. Elon Musk -- Chief Executive Officer and Product Architect Yeah. So, I wouldn't be surprised if we do sign a deal. I think we have a good chance we do sign a deal this year, maybe more than one. But yes, it would be probably three years before it's integrated with a car. even though all you need is cameras and our inference computer. So, just talking about a massive design change. Vaibhav Taneja -- Chief Financial Officer Yes. And again, just to clarify, it's not the work which we have to do. It's the work which they have to do, which will take the time. Right, Mark? Mark Delaney -- Goldman Sachs -- Analyst Yeah, very helpful. My follow-up was to better understand Tesla's approach to pricing going forward. Previously, the company had said that the price reductions were driving incremental demand with how affordable the cars have become, especially for vehicles that have access to IRA credits and some of the leasing offers that Tesla has in place. Do you still see meaningful incremental price reductions as making sense from here for the existing products? And can the company meaningfully lower prices from here and also stay free cash flow positive on an annual basis with the current product set? Elon Musk -- Chief Executive Officer and Product Architect Yeah. I think we can be free cash flow positive meaningfully. Lars Moravy -- Vice President, Vehicle Engineering I think Vaibhav said it in his opening remarks, like our cost-down efforts, we basically were offsetting the price cut like we're trying to give it back to the customers. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, at the end of the day, like for any given company, if you sell a great product at a great price -- if you have a great product at a great price, the sales will be excellent. That's true of any area. So, over time, we do need to keep making sure that we're -- that it's a great product at a great price. And moreover, that price is accessible to people. So, it's not -- you have to solve both the value for money and the fundamental affordability question. The fundamental affordability question is sometimes overlooked. If somebody is earning several hundred thousand dollars a year, they don't think of a car from a fundamental affordability standpoint. But vast majority of people are living paycheck to paycheck. So, it actually makes a difference if the cost per month for lease refinancing is $10 one way or the other. It is important to keep improving the affordability and to keep making the price -- Lars Moravy -- Vice President, Vehicle Engineering More accessible. Elon Musk -- Chief Executive Officer and Product Architect Yeah, exactly. Make the price more accessible, the value for money better, and to keep improving that over time. Lars Moravy -- Vice President, Vehicle Engineering But also to kick ass if people want to buy. Elon Musk -- Chief Executive Officer and Product Architect Yeah. It's going to be a great product and at a great price. And the standards for what constitutes a great product at a great price keep increasing. So, there's like -- you can't just be static. You have to keep making the car better, improving the price but improving the cost of production, and that's what we're doing. Vaibhav Taneja -- Chief Financial Officer Yeah. And in fact, like I said in my opening remarks also, like the revised -- the updated Model 3 is a fantastic car. I don't think people fully even understand the amount of engineering effort which has gone, and Lars and team have actually put out videos explaining how much the car is different. I mean, it looks and feels different. Not only it looks and feels different, we've added so much value to it, but you can lease it for like as low as $299 a month. Lars Moravy -- Vice President, Vehicle Engineering Without gas. Vaibhav Taneja -- Chief Financial Officer Yeah. Martin Viecha All right. The next question comes from George from Canaccord. George, please go ahead and unmute. George Gianarikas -- Canaccord Genuity -- Analyst Hi. Thank you for taking my question. First, could you please help us understand some of the timing of launching FSD in additional geographies, including maybe clarifying your recent comment about China? Thank you. Elon Musk -- Chief Executive Officer and Product Architect You mean like new markets? Yeah, we are -- there are a bunch of markets where we don't currently sell cars that we should be selling cars in. We'll see some acceleration of that. George Gianarikas -- Canaccord Genuity -- Analyst And FSD new markets? Elon Musk -- Chief Executive Officer and Product Architect Yeah. So, think about the end-to-end neural net-based autonomy is that just like a human, it actually works pretty well without modification in almost any market. So, we plan on -- with the approval of the regulators, releasing it as a supervised autonomy system in any market that -- where we can get regulatory approval for that, which we think includes China. So, yes, it's -- just like a human, you can go rent a car in a foreign country and you can drive pretty well. Obviously, if you live in that country, you'll drive better. And so, we'll make the car drive better in these other countries with country-specific training. But it can drive quite well almost everywhere. Vaibhav Taneja -- Chief Financial Officer The basics of driving are basically same everywhere. Like car is a car, the traffic lights, a road is a road. Elon Musk -- Chief Executive Officer and Product Architect It understands that it shouldn't hit things, no matter what the road rules are. Vaibhav Taneja -- Chief Financial Officer Exactly. There are some road rules that you need to follow. And in China, you shouldn't cross over a solid line to do a lane change. In U.S., it's a recommendation, I think. In China, you get fined heavily if you do that. We have to do some more actions, but it's mostly smaller adoptions. It's not like the entire change of stack or something like that. Martin Viecha Hey, George, do you have a follow-up? George Gianarikas -- Canaccord Genuity -- Analyst Yeah. So, my follow-up has to do with the first quarter deliveries and I'm curious as to whether or not you feel that supply constraints that you mentioned throughout the release impacted the results, and maybe can you help us quantify that? And is that why you have some confidence in unit growth in 2024? Vaibhav Taneja -- Chief Financial Officer Yeah. I think we did cover this a little bit in the opening remarks to you. Q1 had a lot of different things which are happening. Seasonality was a big one, continued pressure from the macroeconomic environment. We had attacks at our factory. We had Red Sea attacks, we are ramping Model 3, we're ramping Cybertruck. All these things are happening. I mean, it almost feels like a culmination of all those activities in a constrained period. And that gives us that confidence that, hey, we don't expect these things to recur. Elon Musk -- Chief Executive Officer and Product Architect Yeah. We think Q2 will be a lot better. Yeah. Lars Moravy -- Vice President, Vehicle Engineering Just one thing after another. So crazy. Elon Musk -- Chief Executive Officer and Product Architect Yeah, exactly. It's just -- if you've got cars that are sitting on ships, they obviously cannot delivered to people. And if you've got the excess demand for Model 3 and Model Y in one market, but you don't have it there. It's quite a -- it's extremely complex logistics situation. So, I'd say also the -- we did overcomplicate the sales process, which we've just in the past week or so have greatly simplified. So, it became far too complex to buy a Tesla, whereas it should just be you can buy the car in under a minute. So, we're getting back to the -- you can buy a Tesla in under a minute interface from what was quite complex. Martin Viecha OK. Thank you. Let's go to Colin Rusch from Oppenheimer. Colin, unmute, please. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much, guys. Given the pursuit of Tesla really as a leader in AI for the physical world, in your comments around distributed inference, can you talk about what that approach is unlocking beyond what's happening in the vehicle right now? Elon Musk -- Chief Executive Officer and Product Architect Ashok, do you want to say something? Ashok Elluswamy -- Director, Autopilot Software Yeah. Like Elon mentioned, like the car, even when it's a full robotaxi, it's probably going to be used for 150 hours a week. Elon Musk -- Chief Executive Officer and Product Architect That's my guess, like a third of the hours of the week. Ashok Elluswamy -- Director, Autopilot Software Yeah. It could be more or less, but then there's certainly going to be some hours left for charging and cleaning and maintenance in that world, you can do a lot of other workloads, even right now, we are seeing, for example, the LLM companies have these batch workloads where they send a bunch of documents and those are run through pretty large neural networks and take a lot of compute to chunk through those workloads. And now that we have already paid for this compute in these cars, it might be wise to use them and not let them be like buying a lot of expensive machinery and leaving to them idle. We don't want that. We want to use the computer as much as possible and close to like basically 100% of the time to make full use of it. Elon Musk -- Chief Executive Officer and Product Architect I think it's analogous to Amazon Web Services, where people didn't expect that AWS would be the most valuable part of Amazon when it started out as a bookstore. So, that was on nobody's radar. But they found that they had excess compute because the compute needs would spike to extreme levels for brief periods of the year and then they had idle compute for the rest of the year. So, then what should they do to pull that excess compute for the rest of the year. That's kind of -- yeah, monetize it. It seems like kind of a no-brainer to say, OK, if we've got millions and then tens of millions of vehicles out there where the computers are idle most of the time that we might well have them do something useful. And then I mean if you get like to the 100 million vehicle level, which I think we will, at some point, get to, then -- and you've got a kilowatt of useable compute and maybe your own Hardware 6 or 7 by that time. Then you really -- I think you could have on the order of 100 gigawatts of useful compute, which might be more than anyone, more than any company, probably more than any company. Ashok Elluswamy -- Director, Autopilot Software Yeah, probably because it takes a lot of intelligence to drive the car anyway. And when it's not driving the car, you just put this intelligence to other uses, solving scientific problems like a human or answering dumb questions for someone else. Elon Musk -- Chief Executive Officer and Product Architect We've already learned about deploying workloads to these compute nodes. Ashok Elluswamy -- Director, Autopilot Software And unlike laptops and our cellphones, it is totally under Tesla's control. So, it's easier to distribute the workload across different nodes as opposed as opposed to asking users for permission on their own cellphones would be very tedious. Elon Musk -- Chief Executive Officer and Product Architect Well, you're just draining the battery on the phone, so like technically, I suppose like Apple would have the most amount of distributed compute, but you can't use it because you can't get the -- you can't just run the phone at full power and drain the battery. So, for the car, even if you're a kilowatt-level inference computer, which is crazy power compared to a phone. If you've got 50- or 60-kilowatt-hour pack, it's still not a big deal whether you plugged it or not. It could be plugged in or not like you could run for 10 hours and use 10 kilowatt hours of your kilowatt of compute power. Lars Moravy -- Vice President, Vehicle Engineering We got built-in like liquid-cooled thermal management. Yes, it's exactly for data centers. It's already there in the car. Elon Musk -- Chief Executive Officer and Product Architect Exactly. It's distributed power generation -- distributed access to power and distributed cooling. That was already paid for. Ashok Elluswamy -- Director, Autopilot Software Yes. I mean, that distributed power and cooling, people underestimate that costs a lot of money. Vaibhav Taneja -- Chief Financial Officer Yes. And the capex is shared by the entire world. Sort of everyone owns a small chunk, and they get a small profit out of it maybe. Elon Musk -- Chief Executive Officer and Product Architect Yeah. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much, guys. And just my follow-up is a little bit more mundane. Looking at the 4680 ramp, can you talk about how close you were to target yields and when you might start to accelerate incremental capacity expansions on that technology? Elon Musk -- Chief Executive Officer and Product Architect You know, we're making good progress on that. But I don't think it's super important for at least in the near term. As Lars said, we think it will exceed the competitiveness of suppliers by the end of this year. And then we'll continue to improve. Lars Moravy -- Vice President, Vehicle Engineering Yes. I mean, I think it's important to note also that like the ramp right now is relevant to the Cybertruck ramp. And so, like we're not going to just randomly build 4680s unless we have a place to put them. And so, we're going to make sure we're prudent about that. But we also have a lot of investments with all our cell suppliers and vendors. They're great partners, and they've done great development work with us, and a lot of the advancements in technologies and chemistry, they're also putting into their cells. Elon Musk -- Chief Executive Officer and Product Architect Yeah. I mean, a big part of the 4680, Tesla doing internal cells was a hedge against what would happen with our suppliers because for a while they are it was very difficult because every big carmaker put in massive battery orders. And so, the price per kilowatt hour of lithium-ion batteries went to crazy numbers, crazy levels. Vaibhav Taneja -- Chief Financial Officer Bonkers. Elon Musk -- Chief Executive Officer and Product Architect Yeah, just bonkers. So, like, OK, we've got to have some hedge here to deal with cost per kilowatt hours of numbers that were double what we anticipated. If we have an internal cell production, then we have that hedge against demand shocks, we have too much demand. That's really the way to think about it. It's not like we want to take on a whole bunch of problems just for the hell of it. We did the cell program in order to address the crazy increase in cost per kilowatt hour from our suppliers due to gigantic orders placed by every carmaker on Earth. Martin Viecha OK. Thank you. And the last question comes from Ben Kallo from Baird. Ben, go ahead and unmute. Ben, you're still muted. Elon Musk -- Chief Executive Officer and Product Architect Well, I want to say again, we'd just like to strongly recommend that anyone who is, I guess, thinking about the Tesla stock should really drive 12.3. It really -- you can't -- it's impossible to understand the company if you do not do this. Martin Viecha All right. So, since Ben is not unmuting, let's try Shreyas Patil from Wolfe Research. Final question. Shreyas Patil -- Wolfe Research -- Analyst Hey, thanks so much. Just Elon, during the Investor Day last year, you mentioned that auto COGS per unit for the next-gen vehicle would decline by 50% versus the current 3 and Y. I think that was implying something around $20,000 of COGS. About a third of that was coming from the on-box manufacturing process. But I'm curious if you see an opportunity that the -- some of the other drivers around powertrain cost reduction or material cost savings, would those be largely transferable to some of the new products that you're now talking about introducing? Lars Moravy -- Vice President, Vehicle Engineering Yeah, sure. I mean, in short, yes, I mean, like the on-box manufacturing method is certainly great and revolutionary, but with it comes some risks because new production lines and not, but all the subsystems we developed, whether it was powertrains, drive units, battery improvements in manufacturing and automation, thermal systems, seating, integration of interior components and reduction of LV controllers, all that's transferable, and that's what we're doing, trying to get it in their products as fast as possible. And so, yes, that engineering work, we're not trying to just throw it away and put a cough and we're going to take it and utilize it and utilize it to the best advantage of the cars we make in the future. Shreyas Patil -- Wolfe Research -- Analyst OK. Great. And then just on that topic of 4680 cells, I know you mentioned it, you really thought of it more as like a hedge against rising battery costs from other OEMs. But it seems even today, it seems like you would have a cost advantage against some of those other automakers. And I'm wondering, given the rationalizing of your vehicle manufacturing plans that you're talking about now, if there's an opportunity to maybe convert the 4680 cells and maybe sell those to other automakers and really generate an additional revenue stream. I'm just curious if you have any thoughts about that. Elon Musk -- Chief Executive Officer and Product Architect Great. What seems to be happening is that the nets are missing something, the orders for batteries from other automakers have declined dramatically. So, we're seeing much more competitive prices for sales from our suppliers, dramatically more competitive than in the past. It is clear that a lot of our suppliers have excess capacity. Unknown speaker Yeah. In addition to what Elon said, this is coming -- by the way, in addition to what Elon said about 4680, what 4680 did for us from a supply chain perspective was help us understand the supply chain that's upstream of our cell suppliers. So, a lot of the deals that we had struck for 4680, we can also supply those materials to our partners, reducing the overall cost back to Tesla. So, we're basically inserting ourselves in the upstream supply chain by doing that. So, that's also been beneficial in reducing the overall pricing in addition to the excess capacity that these suppliers have. Elon Musk -- Chief Executive Officer and Product Architect Yeah. No, I mean, this is going to wax and wane, obviously. So, there's going to be a boom and bust in battery cell production where production exceeds supply and then supply exceeds production and back and forth kind of like, I don't know, DRAM or something. But it's like what is true today will not be true in the future, there's going to be somewhat of a boom-and-bust cycle here. And then there are additional complications with government incentives like the Inflation Reduction Act, the IRA -- I always found it like a funny name or a comical name. Yeah, it is like Irish Republican Army, the Internet Research Agency from Russia. Vaibhav Taneja -- Chief Financial Officer Independent retirement account. Elon Musk -- Chief Executive Officer and Product Architect Yeah, exactly. Roth IRA. It's like a Spider-Man situation, which IRA wins. But it is complicate the incentive structure. So, that is there's the stronger demand for cells that are produced in the U.S. than outside the U.S. But then how long does the IRA last, I don't know. Unknown speaker Which is why it's important that we have both [Inaudible] how to hedge against all of this. Martin Viecha OK. Thank you very much. That's all the time we have today. But at the same time, I would like to make a short announcement. And I wanted to let the investment community know that about a month ago, I met up with Elon and Vaibhav and announced that I'll be moving on from the world of investor relations. I'll be hanging around for another couple of months or so. So, feel free to reach out at any time. But after the seven-year sprint, I'm going to be taking a break and spending some good quality time with my family. And I wanted to say that these seven years have been the greatest privilege of my professional life. I'll never forget the memories from I started literally at the beginning of production hell and just watching the company from the inside to see what it's become today. And especially super thankful to the people in this room and dozens of people outside of this room that I've worked for over the years. I think the team's strength and teamwork at Tesla is unlike anything else I've seen in my career. Elon, thank you very much for this opportunity that I got back in 2017. Thank you for seeking investor feedback regularly and debating it with me. Elon Musk -- Chief Executive Officer and Product Architect Yeah. Well, I mean, the reason I reached out to you was because I thought your analysis of Tesla was the best that I had seen. Yes, thank you for helping Tesla to get to where it is today over seven years. It's been a pleasure working with you. Martin Viecha Thank you so much. And yeah, thank you for all the thousands of shareholders that we've met over the years and walked around factories and loved all the interactions, even the tough ones. And yeah, looking forward to the call in the next three months, but I'll be on the other side, listening in. Thank you very much.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Jeff Su [Foreign language] Good afternoon, everyone, and welcome to TSMC's first-quarter 2024 earnings conference call. This is Jeff Su, TSMC's director of investor relations and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials shortly. [Operator instructions] The format for today's event will be as follows, first, TSMC's senior vice president and CFO, Mr. Wendell Huang, will summarize our operations in the first-quarter 2024, followed by our guidance for the second-quarter 2024. Afterwards, Mr. Huang and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the lines for the question-and-answer session. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears on our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang -- Vice President and Chief Financial Officer Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the first-quarter 2024. After that, I will provide the guidance for the second-quarter 2024. First-quarter revenue decreased 5.3% sequentially in NT dollars or 3.8% in U.S. dollars as our business was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Gross margin increased 0.1 percentage point sequentially to 53.1%, mainly reflecting product mix changes due to smartphone seasonality, partially offset by a less favorable foreign exchange rate. Total operating expenses accounted for 11.1% of net revenue, which is lower than the 12% implied in our first-quarter guidance, mainly due to tighter expense controls. Thus, operating margin increased 0.4 percentage points sequentially to 42%. Overall, our first-quarter EPS was NT$8.7 and ROE was 25.4%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 9% of wafer revenue in the first quarter, while 5-nanometer and 7-nanometer accounted for 37% and 19%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 65% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 3% quarter over quarter to account for 46% of our first-quarter revenue. Smartphone decreased 16% to account for 38%. IoT increased 5% to account for 6%. Automotive remained flat and accounted for 6%, and DCE increased 33% to account for 2%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of NT$1.9 trillion or $60 billion. On the liability side, current liabilities increased by NT$113 billion, mainly due to the increase of NT$140 billion in accrued liabilities and others, partially offset by the decrease of NT$44 billion in accounts payable. The increase in accrued liabilities and others was mainly due to the reclassification of the temporary receipt from customers from long-term liabilities. Our financial ratios, accounts receivable turnover days remained at 31 days, while days of inventory increased five days to 90 days, primarily due to ramp of 3-nanometer technologies. Regarding cash flow and capex. During the first quarter, we generated about NT$436 billion in cash from operations, spent NT$181 billion in capex and distributed NT$78 billion for second-quarter 2023 cash dividend. In addition, we raised NT$23 billion in cash from bond issuances. Overall, our cash balance increased NT$233 billion to NT$1.7 trillion at the end of the quarter. In U.S. dollar terms, our first-quarter capital expenditures totaled $5.77 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second-quarter revenue to be between $19.6 billion and $20.4 billion, which represents a 6% sequential increase and 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to NT$32.3, gross margin is expected to be between 51% and 53%, operating margin between 40% and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second-quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full-year tax rate will be between 15% to 16% compared to 14.5% in 2023. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on the impact from the April 3rd earthquake. On April 3rd, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude of our fabs was five. Safety systems and protocols at our fabs were initiated immediately, and all TSMC personnel are safe. Based on TSMC's deep experience and capabilities in earthquake response and damage prevention as well as regular disasters drills, the overall tool recovery in our fabs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day. There were no power outages, no structural damage to our fabs, and there's no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and, thus, minimum impact to our second-quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first quarter '24 and second quarter '24 profitability. Compared to fourth-quarter 2023, our first-quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality. We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to the impact from the earthquake on April 3rd, as just discussed, and higher electricity cost in Taiwan. After last year's 17% electricity price increase from April 1st, TSMC's electricity price in Taiwan has increased by another 25% starting April 1st this year. This is expected to take out 70 to 80 basis points from our second-quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity cost to continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemical and gases, and other variable costs. In addition, we expect our overall business in the second quarter of the year to be stronger than the first half. And the revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half of '24 as compared to 2 to 3 percentage points in first half of '24. Finally, as we have said before, we have a strategy to convert some 5-nanometer tools to support 3-nanometer capacity given the strong multiyear demand. We expect this conversion to dilute our gross margin by about 1 to 2 percentage points in the second half of 2024. To manage our profitability in second-half 2024, we will work diligently on internal cost improvement efforts while continuing to sell our value. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Jeff Su OK. Sorry to interrupt, Wendell, because we have been informed that some of the audience are having difficulty linking through the website to the call. So let's pause a few minutes, and we'll continue once we resolve the IT issue. Thank you, everyone, for your patience. OK. Thank you, everyone, for your patience. Sorry about the technical issues. We believe the webcast, if you're through the TSMC website, you should be able to log back in and listen to the webcast. For those of you on the line or having difficulty with the telephone, I think try the webcast first and the telephone line should be available shortly. Again, sorry for the inconvenience, and thank you for the patience. In light of the fact that we had these technical issues, I think we'll start with Wendell Huang, our CFO, to give our guidance, and then we will go into our prepared remarks. Thank you. Wendell Huang -- Vice President and Chief Financial Officer Thank you, Jeff. Sorry, everyone. Let me repeat the guidance for second quarter again. For the second quarter of 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second-quarter revenue to be between $19.6 billion and $20.4 billion, which represents a 6% sequential increase or a 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to NT$32.3, gross margin is expected to be between 51% and 53%, operating margin between 40% and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second-quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full-year tax rate will be between 15% to 16% compared to 14.5% in 2023. Now that concludes the financial presentation. Let me now repeat our key messages. I will start by making some comments on the impact from the April 3rd earthquake. On April 3rd, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude at our fabs was five. Safety systems and protocols at our fabs were initiated immediately, and all TSMC personnel are safe. Based on TSMC's deep experience and capabilities in earthquake response and damage prevention as well as regular disasters drills, the overall tool recovery in our fabs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day. There were no power shortages, no structure damage to our fabs and there is no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and, thus, minimal impact to our second-quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first-quarter 2024 and second-quarter 2024 profitability. Compared to fourth quarter of 2023, our first quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality. We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to impact from the earthquake on April 3rd, as just discussed, and higher electricity costs in Taiwan. After last year's 17% electricity price increase from April 1st, TSMC's electricity price in Taiwan was -- has increased by another 25% starting April 1st this year. This is expected to take out 70 to 80 basis points from our second-quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity costs continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemicals and gases and other variable costs. In addition, we expect our overall business in the second half of the year to be stronger than the first half. And revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half '24, as compared to 2 to 3 percentage points in first half of '24. Finally, as we have said before, we have a strategy to convert some 5-nanometer tools to support 3-nanometer capacity given the strong multiyear demand. We expect this conversion to dilute our gross margin by about 1 to 2 percentage points in the second half of 2024. To manage our profitability in second half of '24, we will work diligently on internal cost improvement efforts while continuing to sell our value. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Finally, let me talk about our 2024 capital budget. Every year, our capex is spent in anticipation of the growth that will follow in future years. Our capex and capacity planning is always based on long-term market demand profile. We reiterate our 2024 capital budget is expected to be between $28 billion and $32 billion as we continue to invest to support customers' growth. Out of the $28 billion to $32 billion capex for 2024, between 70% and 80% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making and others. Now let me turn the microphone over to C.C. C.C. Wei -- Chief Executive Officer Thank you, Wendell. Good afternoon, everyone. Before I start, I would like to take a moment and make a few remarks. On April 3rd, TSMC experienced a major-scale earthquake of 7.2 magnitude. Our deepest sympathies and heart go out to all those who are affected by this tragedy. I also want to recognize and deeply thank all of our employees and our suppliers for their dedication and hard effort during this time. Although it was largest earthquake in Taiwan in the last 25 years, we worked together tirelessly and were able to resume for operation at all our fab within three days with minimal disruptions, demonstrating the resilience of our operation in Taiwan. Lastly, I would also like to extend our great appreciation to our customers with their understanding and support as we work to recover the lost production during the second quarter. Now let me start my prepared remarks with our near-term demand outlook. We concluded our first quarter with revenue of $18.9 billion, slightly above our guidance in U.S. dollar terms. Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Moving into second quarter 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Looking at the full year 2024, macroeconomic and geopolitical uncertainty persists, potentially further weighing on consumer sentiment and end-market demand. We thus expect the overall semiconductor market, excluding memory, to experience a more mild and gradual recovery in 2024. We lowered our forecast for the 2024 overall semiconductor market, excluding memory, to increase by approximately 10% year over year, while foundry industry growth is now forecast to be mid- to high-teens percent, both are coming off the steep inventory correction and/or base of 2023. Having said that, we continue to expect 2024 to be a healthy growth year for TSMC. Supported by our technology leadership and broader customer base, we expect that our business to grow quarter over quarter throughout 2024 and reaffirm our full-year revenue to increase by low to mid-20% in U.S. dollar terms. Next, I will talk about the strong AI-related demand outlook. The continued surge in AI-related demand supports our already strong conviction that structural demand for energy-efficient computing is accelerating in an intelligent and connected world. TSMC is a key enabler of AI applications. AI technology is evolving to use ever increasingly complex AI models, which needs to be supported by more powerful semiconductor hardware. No matter which approach is taken, it requires use of the most advanced semiconductor process technologies. Thus, the value of our technology position is increasing as customers rely on TSMC to provide the most advanced process and packaging technology at scale with a dependable and predictable cadence of technology offering. In summary, our technology leadership enable TSMC to win business and enables our customer to win business in their end market. Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing power. We forecast the revenue contribution from several AI processors to more than double this year and account for low-teens percent of our total revenue in 2024. For the next five years, we forecast it to grow at 50% CAGR and increase to higher than 20% of our revenue by 2028. Several AI processors are narrowly defined as GPUs, AI accelerators and CPU's performing, training, and inference functions and do not include the networking edge or on-device AI. We expect several AI processors to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years. Now let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider of the global IC -- logic IC industry for years to come. Given the strong HPC and AI-related demand, it is strategically important for TSMC to expand our global manufacturing footprint to continue to support our U.S. customers' growth, increase customers' trust, and expand our future growth potential. In Arizona, we have received the strong commitment and support from our U.S. customers and plan to build three fabs, which help to create greater economies of scale. Each of our fab in Arizona will have a clean-room area that is approximately double the size of a typical logical fab. We have made significant progress in our first fab, which has already entered engineering wafer production in April with the N4 process technology. We are well on track for volume production in first-half 2025. Our second fab has been upgraded to utilize 2-nanometer technologies to support a strong AI-related demand in addition to the previously announced 3-nanometer. We recently completed the tapping off, in which the last steel construction beam was raised into place, and volume production is scheduled to begin in 2028. We also recently announced plans to build a third fab in Arizona using 2-nanometer or more advanced technologies, with production beginning by the end of the decade. We are confident that once we begin volume production, we will be able to deliver the same level of manufacturing quality and reliability in each of our fab in Arizona as from our fab in Taiwan. In Japan, we held an opening ceremony in February in Kumamoto for our first specialty technology fab. This fab will utilize the 12/16 and the 22/28-nanometer process technologies and is on track for volume production in the fourth quarter of this year. Together with our JV partners, we also announced a plan to build a second specialty fab in Japan with 40, 12/16 and the 6/7-nanometer process technologies to support a strategic customer for consumer, automotive, industrial and HPC-related applications. Construction is scheduled to begin in second half '24 with production target by the end 2027. In Europe, we plan to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications with our JV partners where construction is scheduled to begin in fourth quarter this year. Our overseas decision are based on our customers' need and the necessary level of government support. This is to maximize the value for our shareholders. In today's fragmented globalization environment, cost will be higher of everyone, including TSMC, our customers, our competitors and the entire semiconductor industry. We plan to manage and minimize the overseas cost gap by, first, pricing strategically to reflect the value of geographic flexibility; second, working closely with government to secure their support; and third, leveraging our fundamental advantage of manufacturing technology leadership and our large-scale manufacturing base, which no other manufacturer in this industry can match. Thus, even after factoring in the higher cost of overseas fab, we are confident to deliver a long-term gross margin of 53% and higher and sustainable ROE of greater than 25% that we have committed to our shareholders. At the same time, TSMC will be the most efficient and cost-effective manufacturer in the region that we operate. We are continuing to provide our customers with the most advanced technology at scale to support their growth. Finally, I will talk about our N2 status. Our N2 technology leads our industry in addressing the insatiable need for energy-efficient computing, and almost all AI innovators are working with TSMC. We are observing a high level of customer interest and engagement at N2 and expect the number of the new tape-outs from 2-nanometer technology in its first two years to be higher than both 3-nanometer and 5-nanometer in their first 2 years. Our 2-nanometer technology will adopt the nanosheet transistors structure and be the most advanced semiconductor industry technology in both density and energy efficiency. N2 technology development is progressing well with device performance and yield on track or ahead of plan. N2 is on track for volume production in 2025 with a ramp profile similar to N3. With our strategy of continuous enhancement, N2 and its derivative will further extend our technology leadership position and enable TSMC to capture the AI-related growth opportunities well into future. This concludes our key message, and thank you for your attention. Jeff Su OK. Thank you, C.C. This concludes our prepared remarks. Again, thank you, everyone, for your patience. [Operator instructions] So now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Thank you. Questions & Answers: Operator Yes. The first one to ask questions is Gokul Hariharan, J.P. Morgan. Gokul Hariharan -- JPMorgan Chase and Company -- Analyst Yeah. Hi. Good afternoon, and thanks for taking my question. My first questions are on demand. So C.C., you kind of reduced the expectation for the overall semiconductor industry growth. Could you talk a little bit about where is the area where you have seen that slower pickup in demand? I think you talked about smartphone a couple of times in the call. Is it primarily the smartphone area where you've seen a slower pickup in terms of demand? And previously, a couple of quarters back, you talked about cannibalization or decline in regular data center demand due to the crowding out of AI and being a drag for TSMC. Do you see that the regular compute, regular data center networking kind of demand is coming back? Or is it still remaining muted and most of the demand uptick is still focused on AI? Jeff Su OK. So, Gokul, thank you. So Gokul's first question is a little bit two parts. So he notes that we have lowered our overall semiconductor ex-memory growth forecast for this year to approximately 10% and foundry now to mid to high teens. So Gokul wants to understand, in what segments or applications or areas are we seeing a slower pickup in demand? And then also, in terms of specifically AI versus traditional servers, how are you seeing that demand shape out? And what is the impact to TSMC? Is that generally correct, Gokul? Gokul Hariharan -- JPMorgan Chase and Company -- Analyst Yes. And I think maybe since you called out smartphone, just maybe mention how you see the smartphone demand compared to maybe three months back as well. C.C. Wei -- Chief Executive Officer Well, Gokul, this is C.C. Wei. Let me answer your questions and some of your comment also. Yes, smartphone end-market demand is seeing gradual recovery and not a steep recovery, of course. PC has been bottomed out and the recovery is slower. However, AI-related data center demand is very, very strong. And the traditional server demand is slow, lukewarm. IoT and consumer remain sluggish. Automotive inventory continue to correct, OK? What does that mean to TSMC? The budget for a hyperscale player, their wallet share shifted from traditional server to AI server is favorable for TSMC. And we are able to capture most of the semiconductor content in an AI server's area as we define the GPU, edge AI networking processor, etc. Well, we have a lower presence in those CPU-only, CPU-centric traditional server. So we expect our growth will be very healthy. Do I answer your question, Gokul? Gokul Hariharan -- JPMorgan Chase and Company -- Analyst OK. So yes, I just wanted to ask, is it smartphone the main change compared to, let's say, back in January when you had more than 10% growth for semi? Or is it across the board you're seeing a slower recovery? Jeff Su So Gokul is asking sort of versus three months ago, where have we seen the major shift in the overall end market? Is there a particular area that we have seen? Wendell Huang -- Vice President and Chief Financial Officer Yes, Gokul. Three months ago, we project that one of the platforms, the automotive platform was -- will increase this year, but now we're expecting it to decrease. So I think that is the one area that we saw was different. Gokul Hariharan -- JPMorgan Chase and Company -- Analyst OK. My second question, just wanted to understand gross margin trends. We talked about 3 to 4 percentage point gross margin dilution from N3 ramp in second half of the year. Should we think that the N3-related gross margin drag is more severe than usual for what we have seen for leading-edge nodes in the past? Or is it largely similar to what we have seen in N5 or N7? And when we go to N2, do you think that this will kind of be the similar pattern? Or do you think that the gross margin dilution will be lower when we go to like future process nodes given that N3 seems to be, at least compared to previous cycle, seems to be dragging a little bit more compared to like N5 or N7 in the past few years? Jeff Su OK. Thank you, Gokul. So let me summarize your second question, basically, is on gross margin. Gokul notes that N3, as Wendell said, will dilute our margin by 3 to 4 points, percentage points in the second half. So his question is, it seems that N3, the gross margin dilution or drag is more severe than past nodes such as N5 and N7. Is that the case? And also, of course, with N2 upcoming, will we face a similar pattern? Or what is the margin profile for N2? Which I think Wendell can address, yes. Wendell Huang -- Vice President and Chief Financial Officer Yes, Gokul, it is true that N3 is taking longer time to reach the corporate margin than the other nodes like N5 or N7. N5 or N7 before, it was like 8 to 10 quarters to reach the corporate. But for N3, we think it will take about 10 to 12 quarters. And this is probably because N3 process complexity has increased, and also our corporate average gross margin also increased during the period. But another reason is that we set the pricing of N3 very early, several years ahead of production. However, we experienced a lot of cost inflation pressures in the following years. So as a result, N3 will take a longer time than N5 and N7 to reach the corporate average gross margin. For N2, based on what we can see so far is that we are doing a better job in cost and selling our value, and we expect N2 to have a better margin profile than N3. Gokul Hariharan -- JPMorgan Chase and Company -- Analyst OK. That's very clear. Thank you. Jeff Su OK. Thank you. Gokul. Operator, can we move on to the next participant, please? Operator The next one to ask a question, Brett Simpson, Arete. Brett Simpson -- Arete Research -- Analyst Yeah. Thanks very much. I had a question on the AI returns at TSMC. So I think it's clear that AI is producing a large profit pool at your customers. And the HBM is also driving super-normal returns for memory players. So my question is, does TSMC believe they're getting their fair share of the returns in the AI value chain today? And is there scope for TSMC to raise pricing for AI chips in the future? Jeff Su OK. Thank you, Brett. So, Brett's first question is looking at the AI-related demand. He notes that AI customers are earning very good returns, HBM, and other components as well. So his question is that whether TSMC, do we feel we are earning or capturing our fair value or right value of the returns? And I think on pricing, how would we price for AI basically, I think. Brett, sorry, that's your question, right? Brett Simpson -- Arete Research -- Analyst That's it. C.C. Wei -- Chief Executive Officer Well, let me answer the questions. We always say that we want to sell our value, but it is a continuous process for TSMC. And let me tell you that we are working on it. We are happy that our customers are doing well. And if customers do well, TSMC does well. So let me summarize it. We are working on it, and we hopefully that we can sell our value. Brett Simpson -- Arete Research -- Analyst Right. For my follow-up question, I wanted -- yes, that's great, Jeff. And my follow-up question was on the lighting edge nodes at TSMC. And looking at Q1 sales for 12-nanometer and above, your overall revenues for these nodes collectively was off 20% year on year, and it's only 35% of your overall sales. Can you maybe share with us whether you see a recovery at all this year at these nodes? And we're seeing a lot of government support in building out new fabs in the U.S. and China around lighting edge nodes. So are you concerned at all about structural overcapacity for the older nodes to the cycle? Jeff Su OK. Thank you, Brett. So, Brett's second question is more on the mature nodes. He notes that the demand for our mature nodes, 12-nanometer and older, are down year over year. So he wonders sort of what is the outlook for the recovery of mature nodes in the second half of the year. I think that's the first part of his question. C.C. Wei -- Chief Executive Officer OK. Brett, let me answer this question. First, the mature node demand remains sluggish because of a site. As we just announced it, the whole semiconductor industry is gradually recovering, but not fast enough. So we expect to gradually improve in the second half of 2024. As you mentioned that you -- do we have a concern on the overcapacity because of some of the companies, they continue to build a lot of mature node capacity. For us, actually, our strategy at a mature node is work closely with our strategic customers to develop specialty technology solution to meet their requirement. And we create an appreciated and long-lasting value to customers. So we have less exposed to this possible overcapacity environment. And we believe that our utilization and profitability on mature node can be well protected. Jeff Su Does that answer your second question, Brett? Brett Simpson -- Arete Research -- Analyst That's clear. Jeff Su OK. Thank you, Brett. Brett Simpson -- Arete Research -- Analyst Yeah. That's great. Thank you, Jeff. Jeff Su All right. Thanks, Brett. Operator, can we move on to the next participant, please? Operator Next one, we have Randy Abrams, UBS. Randy Abrams -- UBS -- Analyst Yes. Hi. Thank you. I wanted to ask a question, following up on C.C.'s comment about a ramp profile similar to 3-nanometer for 2-nanometer. Could you clarify for the timing of the meaningful revenue ramp for that node? Is the expectation that would be starting early 2026 and ramping up steep through 2026? Or any potential to pull that in? And then just a second question on that is you noted that tape-outs are higher. Would there be potential with higher tape-outs in three and five for either steeper or it ramps to be larger than the prior nodes once underway or looking out a couple of years? Jeff Su OK. So Randy's first question is around 2-nanometer. So his first question is to C.C. with that we said that the N2 ramp profile will be similar to N3. We also said, of course, the production begins in 2025. So his question partly is, when do we expect to see the revenue contribution, meaningful revenue contribution from N2? And then also that with N2, the tape-outs being higher, what is the multiyear opportunity or contribution from N2 maybe in terms of the revenue as compared to N3 or other nodes? C.C. Wei -- Chief Executive Officer Randy, the N2's ramp profile we say is very similar to N3 because of, look at the cycle time, we start the N2 production in the second half of 2025, actually in the last quarter of 2025. And because of the cycle time and all the kind of back-end process, and so we expect the meaningful revenue will start from the end of the first quarter or beginning of the second quarter of 2026. That's what we mean that is the profile is very similar to N3. Now your second question is there have been a lot of engagement and the tape-out will be higher, and do we see a very steep kind of a production? Well, we do expect that, but let me say again, N2 is a very complicated work or a very complex technology node. So my customer, they also take a little bit longer time to prepare for the tape-out. So that's why they all engage with TSMC in the early stage. And -- but for their product ramp-up, they will have their own product road map and their own business consideration. However, we still say that N2 will be a very, very big node for TSMC. Randy, does that answer your question? Randy Abrams -- UBS -- Analyst OK. Great. No, that's helpful color. Yes. Yes, it does. No, helpful color. My second question is just relating to the upward expectations you gave for the AI accelerators. Curious how that ties to how you're looking at the capex, if you say that we're entering either higher growth or investment cycle, where capital intensity could need to rise up above that mid-30s range that you set or at least in absolute dollars from the $30 billion this year, we should start growing or thinking about capex at least growing with revenue. Jeff Su OK. So Randy's second question is basically, I think, with such strong AI-related demand, what does this mean for our capex and capacity planning? And also, what does this mean for our capital intensity outlook? Wendell Huang -- Vice President and Chief Financial Officer Yes. Randy, for TSMC, a higher level of capital expenditure is always correlated with higher growth opportunity in the following years. We work with our customers closely, and our capex and capacity planning are always based on the long-term structural market demand profile that is underpinned by the multiyear megatrends. We always review our capex plan on an ongoing basis. And as a key enabler of AI, we will work with our customers closely to plan the appropriate level of capacity to support their needs. Jeff Su And then in terms of the capital intensity and capex dollar outlook. Wendell Huang -- Vice President and Chief Financial Officer Yes. The capital intensity, in the past few years, it was high as we invested heavily to meet the strong customer demand. Now the increase -- the rate of increase for the capex is leveling off. So this year and the next several years, we are expecting that the capital intensity is somewhere at the mid-30s level. But as I just said, if there are opportunities in the future years, then we will invest accordingly. Jeff Su Does that answer your second question, Randy? Randy Abrams -- UBS -- Analyst If I could ask a quick follow-up. Yes, it does. Sorry, I'll ask a quick follow-up. Is this -- would this be viewed as a bit of a digestion year since you ramped a lot of the 3-nanometer spending in the past couple of years? So then as you kick off to -- like I mean, should we look at it at a lower -- or should we see this as kind of a normal in that trend? Jeff Su So I think Randy's question is with -- Randy, you're still asking about capex. So is that correct? Randy Abrams -- UBS -- Analyst Yes. Sorry, still on capex. If it's a capex digestion year, since you've ramped a lot of three spending already in the 2-nanometer still, a lot of that is still in front of us. Wendell Huang -- Vice President and Chief Financial Officer Yes, Randy, I wouldn't call it a digestion year. I mean every year, we invest based on the forward-looking business opportunities, and we constantly review that. So this is what we're seeing in the future, and that's why we're -- the funds that we're investing in. So no, I wouldn't call it a digestion year. OK? Randy Abrams -- UBS -- Analyst OK. Good. Operator And next one to ask questions, Charlie Chan from Morgan Stanley. Charlie Chan -- Morgan Stanley -- Analyst So my first question is about selling the value. I think another caller also addressed this topic, but I want to go a little bit deeper. Because given all the efforts you made, right, and also ongoing cost challenge made at the coming U.S. fab, electricity cost hike, I'm not sure if you can give investors kind of a range about a potential price adjustment or kind of the value you're going to sell to your customers. Based on our back testing, I think based on your revenue and shipments in 2022 and 2023, we calculate your price hike could be around 10% in 2022 and the price hike of 5% in 2023. So C.C., I'm not sure whether you are planning to hike price in this kind of a range or magnitude for 2025, so we can be comfortable you can achieve the 53% gross margin in 2025. Jeff Su OK. So Charlie's first question is about TSMC's pricing strategy. He notes that TSMC, of course, makes a lot of efforts to deliver technology leadership and manufacturing excellence to our customers, but we also face a lot of cost challenges, whether from electricity price hikes or the higher cost of overseas fabs. So his question is, number one, I guess, what is our intention about pricing strategy to sell our value; and then, number two, he would like to know what percentage range, if any? C.C. Wei -- Chief Executive Officer OK, Charlie. This is C.C. Wei. First, I would like to emphasize again this kind of a pricing strategy is very confidential and totally between TSMC and the customer. However, let me expand a little bit, we do encounter some kind of higher cost in the overseas or even recently, the inflation and the electricity. We expect our customers to share some of the higher cost with us, and we already started our discussion with our customers. And as I said, for the overseas fab, we want to share our value, which also includes the flexibility of geopolitical location or something like that. If my customer requests to be in some certain area, then definitely, TSMC and the customer had to share the incremental cost. Charlie, did I answer your question? Charlie Chan -- Morgan Stanley -- Analyst Yes, I think that answers my question. I think passing through some cost or all the cost to -- incremental cost to customers should be fair, especially you are creating lots of value to your customers. And my second question is about AI. I know the -- your cost capacity has been very tight, very strategic. But I'm wondering how you're going to judge the demand and allocate the capacity to all the different type of AI semi customers. Because we're hearing your major customer is demanding for two times capacity next year. So I'm wondering how you're going to allocate, so I mean, will you still reserve a certain percentage for some smaller or strategic customers no matter if it's ASIC or smaller GPU vendors? So what is the kind of benchmark you're going to allocate those capacity to customers? And are you OK with that if your major customers' demand cannot be fulfilled by you? Are you OK to give out or do some market share to some of your industry competitors? Jeff Su OK. So Charlie's second question is around, I guess, basically, our advanced packaging and more specifically, CoWoS. And he, of course, notes that the CoWoS capacity, the demand is very strong today and also into 2025. So the capacity is very tight. So his question is, how does TSMC decide on how to allocate the capacity to customers, where we have large customers, but will we reserve capacity to support smaller customers as well? And then lastly, would we be OK if customers want to use somebody else, so to speak? So several parts to this question. C.C. Wei -- Chief Executive Officer Charlie, let me say it again, the demand is very, very strong, and we have done our best where we put all the effort to increase the capacity. It's probably more than double this year as compared with last year. However, it's still not enough to meet the customers' demand, and we leverage our OSAT partners to complement of TSMC's capacity to fulfill our customers' need. Still not enough, of course. But in my mind, my first priority is to make our customer to be successful, no matter which one. And of course, the long-term partners will have a better cooperation with TSMC in terms of technology and processing complexity, so much easier to be ramped up. However, no matter what, let me say again, the demand is very high, extremely high. And we do our best to increase the capacity to alleviate the shortage. We also leverage the OSAT partners. We want to make sure that all our customers get supported, probably not enough this year; but for next year, we try, we try very hard. And you mentioned about giving up some market share, that's not my consideration. My consideration is to help our customers to be successful in their market. Charlie Chan -- Morgan Stanley -- Analyst I see. So since your major customers said there's no room for other type of AI computing chips, but it seems like TSMC is happy to see some similar customers, right? So is that the right interpretation about your comments? C.C. Wei -- Chief Executive Officer Yes. Jeff Su Yes. C.C. said all customers, yes. Thank you, Charlie. Operator Next one to ask questions, Bruce Lu from Goldman Sachs. Bruce Lu -- Goldman Sachs -- Analyst I think, again, the question is coming back to AI still. I think currently, most of the AI accelerators are mostly in 5-nanometers, which is N minus one comparing to a smartphone for now. So when do we expect them to catch up or surplus in terms of technology node? Do we see them to be the technology driver in 2 nanometers or above? Jeff Su OK. So Bruce's first question is about, again, looking at AI accelerators. He notes that in his view, they're currently at 5-nanometer now. His question is, do we expect them to catch up? How do we see AI accelerators and also maybe HPC as a whole being the driver or adopter of TSMC's most leading-edge or advanced technology node? Is that correct, Bruce? Bruce Lu -- Goldman Sachs -- Analyst Yes. That's correct. C.C. Wei -- Chief Executive Officer OK. Bruce, let me answer the questions. Yes, your observation is right. Today, all the AI accelerators, most of them are in the 5- or 4-nanometer technology. But my customers are working with TSMC for the next node. Even for the next, next node, they have to move fast because, as I said, the power consumption has to be considered in the AI data center. So the energy-efficient is fairly important. So our 3-nanometer is much better than the 5-nanometer. And again, it will be improved in the 2-nanometer. So all I can say is all my customers are working on this kind of a trend from 4-nanometer to 3 to 2. Bruce? Bruce Lu -- Goldman Sachs -- Analyst But if that is the case, do we see -- yes, if that is the case, do we see a bigger revenue in the first two years of the 2-nanometers? Because in the past, it's only smartphone. But in 2-nanometer, it would be both smartphone and HPC customers. Jeff Su So Bruce is asking then, well, then with such strong AI-related demand, should we see more revenue from 2-nanometer in its first two years compared to past nodes? Wendell Huang -- Vice President and Chief Financial Officer Yes, Bruce, as we said, we believe that it will be -- our advanced technologies will be long-lasting nodes and larger nodes, N2, then N3 or N5. So the dollar value will certainly be larger. Jeff Su I think, Bruce, we're locating at these opportunities in a multiyear period. So as Wendell and C.C. just said, certainly, with the demand that we're seeing, we do expect N2 revenue contribution to be even larger than N3, just like three has a larger contribution or larger node than five, etc., etc. Bruce Lu -- Goldman Sachs -- Analyst I see. So my second question is for dividends. We do see very strong free cash flow in the first quarter. And the capital intensity, as Wendell mentioned, is stabilizing. And we even started to pay a huge amount of return in tax. So do we -- can we turn more aggressive in terms of dividends? The current dividend level is much, much lower than 70% of free cash flow in the back-of-envelope calculation. So can we expect to see more dividends in the coming quarters? Jeff Su OK. Thank you, Bruce. So Bruce's second question is on the cash dividend policy. He notes that in the first quarter, we're generating very, very strong free cash flow. As we have said, the capital intensity is beginning to stabilize and also that we are paying a very high retained earnings tax. So his question, I think, is, what is the outlook? Can we pay more dividends in the coming quarters? Or what should investors expect? Wendell Huang -- Vice President and Chief Financial Officer Yes. Bruce, the -- our dividend policy is, in principle, to pay 70% of our free cash flow in a year as cash dividends. So I would not just look at quarterly cash, free cash flow to make a judgment. But indeed, as we said before, now that we're harvesting the heavy investment that we did in the past few years, we expect our dividend policy to switch to steadily increasing from the sustainable in the past few years. Operator Next one, we have Laura Chen from Citi. Laura Chen -- Citi -- Analyst My question is about the edge AI. We know that C.C. mentioned that the smartphone and the PC recovery is still probably prolonged, yet we are also seeing that the AI PC or AI smartphone is getting quite topical. So I'm just wondering, what's TSMC's view on this kind of edge AI device take off maybe later or 2025? And what's the implication to TSMC? That's my first question. Jeff Su OK. Thank you, Laura. So Laura's first question is on AI, but more specifically edge or what we call on-device AI. She notes that there's AI being added to smartphones and also AI for PCs. It's quite topical. So she wants to know how do we see this trend, more importantly, what is the implication to TSMC. Is that correct, Laura? Laura Chen -- Citi -- Analyst Yes. C.C. Wei -- Chief Executive Officer OK, Laura. Let me answer the question. The edge AI or the on-device AI, the first order of magnitude is the die size. We saw without the AI -- with the AI for neuroprocessor inside. The die size will be increased, OK? That's the first we observed. And it's happening. And then for the future, I would think that replacement cycle for smartphone or for those kind of a PC will be accelerated a little bit in the future, at least. It's not happening yet, but we do expect that it will happen soon. And all in all, I would say that on-device AI will be very positive for TSMC because we capture the larger share of the market. Did I answer the question, Laura? Laura Chen -- Citi -- Analyst Yes. And so in that case -- yes, very helpful. So in that case, can we expect that our demand -- and see, because now it's still mostly on the smartphone or mobile. So can we expect that N3's revenue contribution in second half or next year will be bigger, say, like a 20% plus in the second half of this year? Jeff Su OK. So well, Laura's follow-on to the first question is then should we expect that N3 demand in the second half or into 2025. Sorry, I didn't catch the exact percentage, but a large percentage or significantly larger than it is today. Is that correct, Laura? Laura Chen -- Citi -- Analyst Yes. C.C. Wei -- Chief Executive Officer OK. Certainly, as I said, we expect to happen at a larger die size. As I said, we already observed that. And for the replacement cycle to be accelerated, it will happen, but I cannot give you a definite number because of -- it's too early to predict in 2025. But it's an upward trend, no doubt about it, and we expect we have a good business. Wendell Huang -- Vice President and Chief Financial Officer Just to follow up on C.C.'s comments. Last time, we also said that this year, N3 revenue will be more than triple than the revenue in 2023. Laura Chen -- Citi -- Analyst OK. That's very clear. My second question is about, again, advanced packaging. We know that TSMC is working on the 3DIC for many years. So I'm just wondering that what's the current progress? Will we expect to see more meaningful take-off with our N2 ramp-up for like a high-computing PC? And between different kind of technology, like hybrid bonding or TSV, what's TSMC's major consideration? Jeff Su OK. So Laura's, I guess, second question, although -- yes, fine. Second question is about our advanced packaging solutions and 3DIC solutions. She is wondering, what is the outlook or take-up for the demand for the next several years? And she also would like us to comment on the consideration of TSV versus hybrid bonding and such. C.C. Wei -- Chief Executive Officer Wow, you asked a very technical question about the TSV and the hybrid bonding. It's all together. The 3DIC's packaging technology is very complicated, and our customers start to adopt it. Not a big volume yet, but we expect it to start to grow from this year. How big it will be? It's hard to say, but I think it is a trend. Whether it is a micro-bumping or it's a hybrid connection, that it depends on the customer's product requirement. Jeff Su OK, Laura? Laura Chen -- Citi -- Analyst So starting from this year, we'll see -- yes, yes, just very quickly. So starting from later this year, we will see that 3DIC products from our customers, that's the current progress? Jeff Su So Laura is asking, will we start to see 3DIC products from our customers when? C.C. Wei -- Chief Executive Officer Now. I'm sorry, I just said that the customers start to adopt it from now, and you would expect that product in the market soon. All right? Jeff Su Thank you, Laura. OK. In the interest of time, maybe we'll take questions from the last two participants on the call. Thank you. Operator? Operator Next one, we have Rolf Bulk from New Street Research. Rolf Bulk -- New Street Research -- Analyst Earlier on the call, you mentioned the possibility of converting so much your N5 capacity to N3. But what I was wondering, considering the strong demand for AI chips and a recovery in smartphones, is there a scenario in which you would consider similar conversions from some of your older nodes such as N7 given that utilization and revenues there are still well below peak levels? Jeff Su OK. So Rolf's first question is about our tool commonality and conversion. He notes that we have already said we are converting some of the capacity -- using some of the N5 tools to support the strong multiyear demand for N3 for AI-related and such. His question is that given our 7-nanometer is still underutilized, will we also consider converting 7-nanometer tools to support more leading-edge stronger demand? C.C. Wei -- Chief Executive Officer Well, let me answer this question. We can convert one technology node capacity to the next one is because of our GI's physical advantage, meaning, let me give you one example, our 3-nanometer and 5-nanometer are adjacent to each other, the fabs, and they are all connected. So it's much easier for TSMC to convert from five to three. And that doesn't mean that every node can do the same. That's one. And your question about the N7 converted to N5, presumably. No, because we expect the N7 in the next couple of years, it will pick up, the demand will pick up again. And you want repeat -- probably repeat the same kind of experience we have in 28-nanometer. So today, no, we don't have any solid plan to convert the N7 into N5. Jeff Su OK. Rolf, does that answer your first question? Rolf Bulk -- New Street Research -- Analyst Yes. An unrelated follow-up? Jeff Su Sure. Rolf Bulk -- New Street Research -- Analyst Yes, it does. And unrelated follow-up, it's a follow-up to Laura's question, actually. On SoIC, given that the technology is now being adopted more broadly, do you see beginning of interest of your smartphone customer base to also adopt the technology? Could you comment on the likely time line of adoption of SoIC in smartphones? Jeff Su OK. So Rolf's second question is basically going back to SoIC adoption. His question really is pretty straightforward. Do we see a time line or can we give a time line for adoption of SoIC by smartphone applications? C.C. Wei -- Chief Executive Officer Well, let me answer the question. Just HPC product is the first one. HPC customer is the first one to adopt, that is a 3DIC or SoIC's advanced packaging technology. And the other area, let's wait, wait and see. I cannot make any comment. We are working on it. OK? Jeff Su OK, Rolf? Rolf Bulk -- New Street Research -- Analyst Yes. Operator The last one to ask question, Mehdi Hosseini from SIG. Mehdi Hosseini -- Susquehanna International Group -- Analyst Two from my end. You had a very nice upside to revenue expectation for the first half of '24, but has kept the year-end unchanged. Is that a reflection of that slow recovery that you were highlighting? Or would you prefer to wait to have more visibility before updating 2024 target? Jeff Su OK. So Mehdi's first question is about our revenue outlook and guidance. His question is saying we have a nice upside to our revenue in the first half of this year, but we have kept the full year guidance in to grow low to mid-20s. So is that because we are more cautious on the second half? Or is it because we will see how things go? But I'm not sure if you mean by upside to the first half, Mehdi. You're saying, of course, our first quarter, as C.C. said, was slightly ahead of our guidance in U.S. dollar term, but very minutely. But -- yes? Wendell Huang -- Vice President and Chief Financial Officer Yes. Mehdi, our guidance for the quarterly profile did not change. We always said that quarter over quarter, there will be growth. And also, the full year guidance will stay the same. So I don't think there is a so-called upside, as you just said. Jeff Su To the first half, yes. Wendell Huang -- Vice President and Chief Financial Officer Yes. Mehdi Hosseini -- Susquehanna International Group -- Analyst OK. And regarding the investment in U.S., especially for 2-nanometer, does that include advanced packaging? Or would advanced packaging be mostly concentrated in Taiwan region? Jeff Su OK. So Mehdi's second question is that, of course, that we have announced to build three fabs in the U.S., including 2-nanometer, given the strong AI-related demand. So his question is then what about the advanced packaging side, will we also build advanced packaging in Arizona? Or yes, what is our plan? C.C. Wei -- Chief Executive Officer Well, let me answer this question. It is always customer's decision for where the back-end service are done for their product. So in Arizona, we are happy to see that Amkor's recent announcement to build an advanced packaging facility that's very close to our AZ fab. Actually, we are working with Amkor and try to support all our customers in AZ and for their demand, for their need. Jeff Su OK, Mehdi, does that address your second question? Mehdi Hosseini -- Susquehanna International Group -- Analyst Yes. Jeff Su OK. Great. All right. Everyone, this concludes our question-and-answer session. Again, we do apologize for the technical difficulties. If you have anything unclear or need to follow up, please contact TSMC's IR, and we'll be more than happy to help. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now, and the transcript will become available 24 hours from now, both of which are going to be available through TSMC's website at www.tsmc.com. So thank you again for joining us today. We hope everyone continues to stay safe and healthy, and we hope to see you again next quarter. Goodbye, and have a good day. Answer:

TSMC's first-quarter 2024 earnings conference call

Jeff Su [Foreign language] Good afternoon, everyone, and welcome to TSMC's first-quarter 2024 earnings conference call. This is Jeff Su, TSMC's director of investor relations and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials shortly. [Operator instructions] The format for today's event will be as follows, first, TSMC's senior vice president and CFO, Mr. Wendell Huang, will summarize our operations in the first-quarter 2024, followed by our guidance for the second-quarter 2024. Afterwards, Mr. Huang and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the lines for the question-and-answer session. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears on our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Wendell Huang -- Vice President and Chief Financial Officer Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the first-quarter 2024. After that, I will provide the guidance for the second-quarter 2024. First-quarter revenue decreased 5.3% sequentially in NT dollars or 3.8% in U.S. dollars as our business was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Gross margin increased 0.1 percentage point sequentially to 53.1%, mainly reflecting product mix changes due to smartphone seasonality, partially offset by a less favorable foreign exchange rate. Total operating expenses accounted for 11.1% of net revenue, which is lower than the 12% implied in our first-quarter guidance, mainly due to tighter expense controls. Thus, operating margin increased 0.4 percentage points sequentially to 42%. Overall, our first-quarter EPS was NT$8.7 and ROE was 25.4%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 9% of wafer revenue in the first quarter, while 5-nanometer and 7-nanometer accounted for 37% and 19%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 65% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 3% quarter over quarter to account for 46% of our first-quarter revenue. Smartphone decreased 16% to account for 38%. IoT increased 5% to account for 6%. Automotive remained flat and accounted for 6%, and DCE increased 33% to account for 2%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of NT$1.9 trillion or $60 billion. On the liability side, current liabilities increased by NT$113 billion, mainly due to the increase of NT$140 billion in accrued liabilities and others, partially offset by the decrease of NT$44 billion in accounts payable. The increase in accrued liabilities and others was mainly due to the reclassification of the temporary receipt from customers from long-term liabilities. Our financial ratios, accounts receivable turnover days remained at 31 days, while days of inventory increased five days to 90 days, primarily due to ramp of 3-nanometer technologies. Regarding cash flow and capex. During the first quarter, we generated about NT$436 billion in cash from operations, spent NT$181 billion in capex and distributed NT$78 billion for second-quarter 2023 cash dividend. In addition, we raised NT$23 billion in cash from bond issuances. Overall, our cash balance increased NT$233 billion to NT$1.7 trillion at the end of the quarter. In U.S. dollar terms, our first-quarter capital expenditures totaled $5.77 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second-quarter revenue to be between $19.6 billion and $20.4 billion, which represents a 6% sequential increase and 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to NT$32.3, gross margin is expected to be between 51% and 53%, operating margin between 40% and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second-quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full-year tax rate will be between 15% to 16% compared to 14.5% in 2023. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on the impact from the April 3rd earthquake. On April 3rd, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude of our fabs was five. Safety systems and protocols at our fabs were initiated immediately, and all TSMC personnel are safe. Based on TSMC's deep experience and capabilities in earthquake response and damage prevention as well as regular disasters drills, the overall tool recovery in our fabs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day. There were no power outages, no structural damage to our fabs, and there's no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and, thus, minimum impact to our second-quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first quarter '24 and second quarter '24 profitability. Compared to fourth-quarter 2023, our first-quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality. We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to the impact from the earthquake on April 3rd, as just discussed, and higher electricity cost in Taiwan. After last year's 17% electricity price increase from April 1st, TSMC's electricity price in Taiwan has increased by another 25% starting April 1st this year. This is expected to take out 70 to 80 basis points from our second-quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity cost to continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemical and gases, and other variable costs. In addition, we expect our overall business in the second quarter of the year to be stronger than the first half. And the revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half of '24 as compared to 2 to 3 percentage points in first half of '24. Finally, as we have said before, we have a strategy to convert some 5-nanometer tools to support 3-nanometer capacity given the strong multiyear demand. We expect this conversion to dilute our gross margin by about 1 to 2 percentage points in the second half of 2024. To manage our profitability in second-half 2024, we will work diligently on internal cost improvement efforts while continuing to sell our value. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Jeff Su OK. Sorry to interrupt, Wendell, because we have been informed that some of the audience are having difficulty linking through the website to the call. So let's pause a few minutes, and we'll continue once we resolve the IT issue. Thank you, everyone, for your patience. OK. Thank you, everyone, for your patience. Sorry about the technical issues. We believe the webcast, if you're through the TSMC website, you should be able to log back in and listen to the webcast. For those of you on the line or having difficulty with the telephone, I think try the webcast first and the telephone line should be available shortly. Again, sorry for the inconvenience, and thank you for the patience. In light of the fact that we had these technical issues, I think we'll start with Wendell Huang, our CFO, to give our guidance, and then we will go into our prepared remarks. Thank you. Wendell Huang -- Vice President and Chief Financial Officer Thank you, Jeff. Sorry, everyone. Let me repeat the guidance for second quarter again. For the second quarter of 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Based on the current business outlook, we expect our second-quarter revenue to be between $19.6 billion and $20.4 billion, which represents a 6% sequential increase or a 27.6% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to NT$32.3, gross margin is expected to be between 51% and 53%, operating margin between 40% and 42%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second-quarter tax rate will be slightly above 19%. The tax rate will then fall back to 13% to 14% level in the third and fourth quarter, and the full-year tax rate will be between 15% to 16% compared to 14.5% in 2023. Now that concludes the financial presentation. Let me now repeat our key messages. I will start by making some comments on the impact from the April 3rd earthquake. On April 3rd, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude at our fabs was five. Safety systems and protocols at our fabs were initiated immediately, and all TSMC personnel are safe. Based on TSMC's deep experience and capabilities in earthquake response and damage prevention as well as regular disasters drills, the overall tool recovery in our fabs reached more than 70% within the first 10 hours and were fully recovered by the end of the third day. There were no power shortages, no structure damage to our fabs and there is no damage to our critical tools, including all of our EUV lithography tools. That being said, a certain number of wafers in process were impacted and had to be scrapped, but we expect most of the lost production to be recovered in the second quarter and, thus, minimal impact to our second-quarter revenue. We expect the total impact from the earthquake to reduce our second quarter gross margin by about 50 basis points, mainly due to the losses associated with wafer scraps and material loss. Next, let me talk about our first-quarter 2024 and second-quarter 2024 profitability. Compared to fourth quarter of 2023, our first quarter gross margin slightly increased by 10 basis points sequentially to 53.1%, primarily driven by product mix changes due to smartphone seasonality. We have just guided our second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to impact from the earthquake on April 3rd, as just discussed, and higher electricity costs in Taiwan. After last year's 17% electricity price increase from April 1st, TSMC's electricity price in Taiwan was -- has increased by another 25% starting April 1st this year. This is expected to take out 70 to 80 basis points from our second-quarter gross margin. Looking ahead to the second half of the year, we expect the impact from higher electricity costs continue and dilute our gross margin by 60 to 70 basis points. We also expect the higher electricity cost to indirectly lead to higher materials, chemicals and gases and other variable costs. In addition, we expect our overall business in the second half of the year to be stronger than the first half. And revenue contribution from 3-nanometer technologies is expected to increase as well, which will dilute our gross margin by 3 to 4 percentage points in second half '24, as compared to 2 to 3 percentage points in first half of '24. Finally, as we have said before, we have a strategy to convert some 5-nanometer tools to support 3-nanometer capacity given the strong multiyear demand. We expect this conversion to dilute our gross margin by about 1 to 2 percentage points in the second half of 2024. To manage our profitability in second half of '24, we will work diligently on internal cost improvement efforts while continuing to sell our value. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Finally, let me talk about our 2024 capital budget. Every year, our capex is spent in anticipation of the growth that will follow in future years. Our capex and capacity planning is always based on long-term market demand profile. We reiterate our 2024 capital budget is expected to be between $28 billion and $32 billion as we continue to invest to support customers' growth. Out of the $28 billion to $32 billion capex for 2024, between 70% and 80% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making and others. Now let me turn the microphone over to C.C. C.C. Wei -- Chief Executive Officer Thank you, Wendell. Good afternoon, everyone. Before I start, I would like to take a moment and make a few remarks. On April 3rd, TSMC experienced a major-scale earthquake of 7.2 magnitude. Our deepest sympathies and heart go out to all those who are affected by this tragedy. I also want to recognize and deeply thank all of our employees and our suppliers for their dedication and hard effort during this time. Although it was largest earthquake in Taiwan in the last 25 years, we worked together tirelessly and were able to resume for operation at all our fab within three days with minimal disruptions, demonstrating the resilience of our operation in Taiwan. Lastly, I would also like to extend our great appreciation to our customers with their understanding and support as we work to recover the lost production during the second quarter. Now let me start my prepared remarks with our near-term demand outlook. We concluded our first quarter with revenue of $18.9 billion, slightly above our guidance in U.S. dollar terms. Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued HPC-related demand. Moving into second quarter 2024, we expect our business to be supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality. Looking at the full year 2024, macroeconomic and geopolitical uncertainty persists, potentially further weighing on consumer sentiment and end-market demand. We thus expect the overall semiconductor market, excluding memory, to experience a more mild and gradual recovery in 2024. We lowered our forecast for the 2024 overall semiconductor market, excluding memory, to increase by approximately 10% year over year, while foundry industry growth is now forecast to be mid- to high-teens percent, both are coming off the steep inventory correction and/or base of 2023. Having said that, we continue to expect 2024 to be a healthy growth year for TSMC. Supported by our technology leadership and broader customer base, we expect that our business to grow quarter over quarter throughout 2024 and reaffirm our full-year revenue to increase by low to mid-20% in U.S. dollar terms. Next, I will talk about the strong AI-related demand outlook. The continued surge in AI-related demand supports our already strong conviction that structural demand for energy-efficient computing is accelerating in an intelligent and connected world. TSMC is a key enabler of AI applications. AI technology is evolving to use ever increasingly complex AI models, which needs to be supported by more powerful semiconductor hardware. No matter which approach is taken, it requires use of the most advanced semiconductor process technologies. Thus, the value of our technology position is increasing as customers rely on TSMC to provide the most advanced process and packaging technology at scale with a dependable and predictable cadence of technology offering. In summary, our technology leadership enable TSMC to win business and enables our customer to win business in their end market. Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing power. We forecast the revenue contribution from several AI processors to more than double this year and account for low-teens percent of our total revenue in 2024. For the next five years, we forecast it to grow at 50% CAGR and increase to higher than 20% of our revenue by 2028. Several AI processors are narrowly defined as GPUs, AI accelerators and CPU's performing, training, and inference functions and do not include the networking edge or on-device AI. We expect several AI processors to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years. Now let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider of the global IC -- logic IC industry for years to come. Given the strong HPC and AI-related demand, it is strategically important for TSMC to expand our global manufacturing footprint to continue to support our U.S. customers' growth, increase customers' trust, and expand our future growth potential. In Arizona, we have received the strong commitment and support from our U.S. customers and plan to build three fabs, which help to create greater economies of scale. Each of our fab in Arizona will have a clean-room area that is approximately double the size of a typical logical fab. We have made significant progress in our first fab, which has already entered engineering wafer production in April with the N4 process technology. We are well on track for volume production in first-half 2025. Our second fab has been upgraded to utilize 2-nanometer technologies to support a strong AI-related demand in addition to the previously announced 3-nanometer. We recently completed the tapping off, in which the last steel construction beam was raised into place, and volume production is scheduled to begin in 2028. We also recently announced plans to build a third fab in Arizona using 2-nanometer or more advanced technologies, with production beginning by the end of the decade. We are confident that once we begin volume production, we will be able to deliver the same level of manufacturing quality and reliability in each of our fab in Arizona as from our fab in Taiwan. In Japan, we held an opening ceremony in February in Kumamoto for our first specialty technology fab. This fab will utilize the 12/16 and the 22/28-nanometer process technologies and is on track for volume production in the fourth quarter of this year. Together with our JV partners, we also announced a plan to build a second specialty fab in Japan with 40, 12/16 and the 6/7-nanometer process technologies to support a strategic customer for consumer, automotive, industrial and HPC-related applications. Construction is scheduled to begin in second half '24 with production target by the end 2027. In Europe, we plan to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications with our JV partners where construction is scheduled to begin in fourth quarter this year. Our overseas decision are based on our customers' need and the necessary level of government support. This is to maximize the value for our shareholders. In today's fragmented globalization environment, cost will be higher of everyone, including TSMC, our customers, our competitors and the entire semiconductor industry. We plan to manage and minimize the overseas cost gap by, first, pricing strategically to reflect the value of geographic flexibility; second, working closely with government to secure their support; and third, leveraging our fundamental advantage of manufacturing technology leadership and our large-scale manufacturing base, which no other manufacturer in this industry can match. Thus, even after factoring in the higher cost of overseas fab, we are confident to deliver a long-term gross margin of 53% and higher and sustainable ROE of greater than 25% that we have committed to our shareholders. At the same time, TSMC will be the most efficient and cost-effective manufacturer in the region that we operate. We are continuing to provide our customers with the most advanced technology at scale to support their growth. Finally, I will talk about our N2 status. Our N2 technology leads our industry in addressing the insatiable need for energy-efficient computing, and almost all AI innovators are working with TSMC. We are observing a high level of customer interest and engagement at N2 and expect the number of the new tape-outs from 2-nanometer technology in its first two years to be higher than both 3-nanometer and 5-nanometer in their first 2 years. Our 2-nanometer technology will adopt the nanosheet transistors structure and be the most advanced semiconductor industry technology in both density and energy efficiency. N2 technology development is progressing well with device performance and yield on track or ahead of plan. N2 is on track for volume production in 2025 with a ramp profile similar to N3. With our strategy of continuous enhancement, N2 and its derivative will further extend our technology leadership position and enable TSMC to capture the AI-related growth opportunities well into future. This concludes our key message, and thank you for your attention. Jeff Su OK. Thank you, C.C. This concludes our prepared remarks. Again, thank you, everyone, for your patience. [Operator instructions] So now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Thank you. Questions & Answers: Operator Yes. The first one to ask questions is Gokul Hariharan, J.P. Morgan. Gokul Hariharan -- JPMorgan Chase and Company -- Analyst Yeah. Hi. Good afternoon, and thanks for taking my question. My first questions are on demand. So C.C., you kind of reduced the expectation for the overall semiconductor industry growth. Could you talk a little bit about where is the area where you have seen that slower pickup in demand? I think you talked about smartphone a couple of times in the call. Is it primarily the smartphone area where you've seen a slower pickup in terms of demand? And previously, a couple of quarters back, you talked about cannibalization or decline in regular data center demand due to the crowding out of AI and being a drag for TSMC. Do you see that the regular compute, regular data center networking kind of demand is coming back? Or is it still remaining muted and most of the demand uptick is still focused on AI? Jeff Su OK. So, Gokul, thank you. So Gokul's first question is a little bit two parts. So he notes that we have lowered our overall semiconductor ex-memory growth forecast for this year to approximately 10% and foundry now to mid to high teens. So Gokul wants to understand, in what segments or applications or areas are we seeing a slower pickup in demand? And then also, in terms of specifically AI versus traditional servers, how are you seeing that demand shape out? And what is the impact to TSMC? Is that generally correct, Gokul? Gokul Hariharan -- JPMorgan Chase and Company -- Analyst Yes. And I think maybe since you called out smartphone, just maybe mention how you see the smartphone demand compared to maybe three months back as well. C.C. Wei -- Chief Executive Officer Well, Gokul, this is C.C. Wei. Let me answer your questions and some of your comment also. Yes, smartphone end-market demand is seeing gradual recovery and not a steep recovery, of course. PC has been bottomed out and the recovery is slower. However, AI-related data center demand is very, very strong. And the traditional server demand is slow, lukewarm. IoT and consumer remain sluggish. Automotive inventory continue to correct, OK? What does that mean to TSMC? The budget for a hyperscale player, their wallet share shifted from traditional server to AI server is favorable for TSMC. And we are able to capture most of the semiconductor content in an AI server's area as we define the GPU, edge AI networking processor, etc. Well, we have a lower presence in those CPU-only, CPU-centric traditional server. So we expect our growth will be very healthy. Do I answer your question, Gokul? Gokul Hariharan -- JPMorgan Chase and Company -- Analyst OK. So yes, I just wanted to ask, is it smartphone the main change compared to, let's say, back in January when you had more than 10% growth for semi? Or is it across the board you're seeing a slower recovery? Jeff Su So Gokul is asking sort of versus three months ago, where have we seen the major shift in the overall end market? Is there a particular area that we have seen? Wendell Huang -- Vice President and Chief Financial Officer Yes, Gokul. Three months ago, we project that one of the platforms, the automotive platform was -- will increase this year, but now we're expecting it to decrease. So I think that is the one area that we saw was different. Gokul Hariharan -- JPMorgan Chase and Company -- Analyst OK. My second question, just wanted to understand gross margin trends. We talked about 3 to 4 percentage point gross margin dilution from N3 ramp in second half of the year. Should we think that the N3-related gross margin drag is more severe than usual for what we have seen for leading-edge nodes in the past? Or is it largely similar to what we have seen in N5 or N7? And when we go to N2, do you think that this will kind of be the similar pattern? Or do you think that the gross margin dilution will be lower when we go to like future process nodes given that N3 seems to be, at least compared to previous cycle, seems to be dragging a little bit more compared to like N5 or N7 in the past few years? Jeff Su OK. Thank you, Gokul. So let me summarize your second question, basically, is on gross margin. Gokul notes that N3, as Wendell said, will dilute our margin by 3 to 4 points, percentage points in the second half. So his question is, it seems that N3, the gross margin dilution or drag is more severe than past nodes such as N5 and N7. Is that the case? And also, of course, with N2 upcoming, will we face a similar pattern? Or what is the margin profile for N2? Which I think Wendell can address, yes. Wendell Huang -- Vice President and Chief Financial Officer Yes, Gokul, it is true that N3 is taking longer time to reach the corporate margin than the other nodes like N5 or N7. N5 or N7 before, it was like 8 to 10 quarters to reach the corporate. But for N3, we think it will take about 10 to 12 quarters. And this is probably because N3 process complexity has increased, and also our corporate average gross margin also increased during the period. But another reason is that we set the pricing of N3 very early, several years ahead of production. However, we experienced a lot of cost inflation pressures in the following years. So as a result, N3 will take a longer time than N5 and N7 to reach the corporate average gross margin. For N2, based on what we can see so far is that we are doing a better job in cost and selling our value, and we expect N2 to have a better margin profile than N3. Gokul Hariharan -- JPMorgan Chase and Company -- Analyst OK. That's very clear. Thank you. Jeff Su OK. Thank you. Gokul. Operator, can we move on to the next participant, please? Operator The next one to ask a question, Brett Simpson, Arete. Brett Simpson -- Arete Research -- Analyst Yeah. Thanks very much. I had a question on the AI returns at TSMC. So I think it's clear that AI is producing a large profit pool at your customers. And the HBM is also driving super-normal returns for memory players. So my question is, does TSMC believe they're getting their fair share of the returns in the AI value chain today? And is there scope for TSMC to raise pricing for AI chips in the future? Jeff Su OK. Thank you, Brett. So, Brett's first question is looking at the AI-related demand. He notes that AI customers are earning very good returns, HBM, and other components as well. So his question is that whether TSMC, do we feel we are earning or capturing our fair value or right value of the returns? And I think on pricing, how would we price for AI basically, I think. Brett, sorry, that's your question, right? Brett Simpson -- Arete Research -- Analyst That's it. C.C. Wei -- Chief Executive Officer Well, let me answer the questions. We always say that we want to sell our value, but it is a continuous process for TSMC. And let me tell you that we are working on it. We are happy that our customers are doing well. And if customers do well, TSMC does well. So let me summarize it. We are working on it, and we hopefully that we can sell our value. Brett Simpson -- Arete Research -- Analyst Right. For my follow-up question, I wanted -- yes, that's great, Jeff. And my follow-up question was on the lighting edge nodes at TSMC. And looking at Q1 sales for 12-nanometer and above, your overall revenues for these nodes collectively was off 20% year on year, and it's only 35% of your overall sales. Can you maybe share with us whether you see a recovery at all this year at these nodes? And we're seeing a lot of government support in building out new fabs in the U.S. and China around lighting edge nodes. So are you concerned at all about structural overcapacity for the older nodes to the cycle? Jeff Su OK. Thank you, Brett. So, Brett's second question is more on the mature nodes. He notes that the demand for our mature nodes, 12-nanometer and older, are down year over year. So he wonders sort of what is the outlook for the recovery of mature nodes in the second half of the year. I think that's the first part of his question. C.C. Wei -- Chief Executive Officer OK. Brett, let me answer this question. First, the mature node demand remains sluggish because of a site. As we just announced it, the whole semiconductor industry is gradually recovering, but not fast enough. So we expect to gradually improve in the second half of 2024. As you mentioned that you -- do we have a concern on the overcapacity because of some of the companies, they continue to build a lot of mature node capacity. For us, actually, our strategy at a mature node is work closely with our strategic customers to develop specialty technology solution to meet their requirement. And we create an appreciated and long-lasting value to customers. So we have less exposed to this possible overcapacity environment. And we believe that our utilization and profitability on mature node can be well protected. Jeff Su Does that answer your second question, Brett? Brett Simpson -- Arete Research -- Analyst That's clear. Jeff Su OK. Thank you, Brett. Brett Simpson -- Arete Research -- Analyst Yeah. That's great. Thank you, Jeff. Jeff Su All right. Thanks, Brett. Operator, can we move on to the next participant, please? Operator Next one, we have Randy Abrams, UBS. Randy Abrams -- UBS -- Analyst Yes. Hi. Thank you. I wanted to ask a question, following up on C.C.'s comment about a ramp profile similar to 3-nanometer for 2-nanometer. Could you clarify for the timing of the meaningful revenue ramp for that node? Is the expectation that would be starting early 2026 and ramping up steep through 2026? Or any potential to pull that in? And then just a second question on that is you noted that tape-outs are higher. Would there be potential with higher tape-outs in three and five for either steeper or it ramps to be larger than the prior nodes once underway or looking out a couple of years? Jeff Su OK. So Randy's first question is around 2-nanometer. So his first question is to C.C. with that we said that the N2 ramp profile will be similar to N3. We also said, of course, the production begins in 2025. So his question partly is, when do we expect to see the revenue contribution, meaningful revenue contribution from N2? And then also that with N2, the tape-outs being higher, what is the multiyear opportunity or contribution from N2 maybe in terms of the revenue as compared to N3 or other nodes? C.C. Wei -- Chief Executive Officer Randy, the N2's ramp profile we say is very similar to N3 because of, look at the cycle time, we start the N2 production in the second half of 2025, actually in the last quarter of 2025. And because of the cycle time and all the kind of back-end process, and so we expect the meaningful revenue will start from the end of the first quarter or beginning of the second quarter of 2026. That's what we mean that is the profile is very similar to N3. Now your second question is there have been a lot of engagement and the tape-out will be higher, and do we see a very steep kind of a production? Well, we do expect that, but let me say again, N2 is a very complicated work or a very complex technology node. So my customer, they also take a little bit longer time to prepare for the tape-out. So that's why they all engage with TSMC in the early stage. And -- but for their product ramp-up, they will have their own product road map and their own business consideration. However, we still say that N2 will be a very, very big node for TSMC. Randy, does that answer your question? Randy Abrams -- UBS -- Analyst OK. Great. No, that's helpful color. Yes. Yes, it does. No, helpful color. My second question is just relating to the upward expectations you gave for the AI accelerators. Curious how that ties to how you're looking at the capex, if you say that we're entering either higher growth or investment cycle, where capital intensity could need to rise up above that mid-30s range that you set or at least in absolute dollars from the $30 billion this year, we should start growing or thinking about capex at least growing with revenue. Jeff Su OK. So Randy's second question is basically, I think, with such strong AI-related demand, what does this mean for our capex and capacity planning? And also, what does this mean for our capital intensity outlook? Wendell Huang -- Vice President and Chief Financial Officer Yes. Randy, for TSMC, a higher level of capital expenditure is always correlated with higher growth opportunity in the following years. We work with our customers closely, and our capex and capacity planning are always based on the long-term structural market demand profile that is underpinned by the multiyear megatrends. We always review our capex plan on an ongoing basis. And as a key enabler of AI, we will work with our customers closely to plan the appropriate level of capacity to support their needs. Jeff Su And then in terms of the capital intensity and capex dollar outlook. Wendell Huang -- Vice President and Chief Financial Officer Yes. The capital intensity, in the past few years, it was high as we invested heavily to meet the strong customer demand. Now the increase -- the rate of increase for the capex is leveling off. So this year and the next several years, we are expecting that the capital intensity is somewhere at the mid-30s level. But as I just said, if there are opportunities in the future years, then we will invest accordingly. Jeff Su Does that answer your second question, Randy? Randy Abrams -- UBS -- Analyst If I could ask a quick follow-up. Yes, it does. Sorry, I'll ask a quick follow-up. Is this -- would this be viewed as a bit of a digestion year since you ramped a lot of the 3-nanometer spending in the past couple of years? So then as you kick off to -- like I mean, should we look at it at a lower -- or should we see this as kind of a normal in that trend? Jeff Su So I think Randy's question is with -- Randy, you're still asking about capex. So is that correct? Randy Abrams -- UBS -- Analyst Yes. Sorry, still on capex. If it's a capex digestion year, since you've ramped a lot of three spending already in the 2-nanometer still, a lot of that is still in front of us. Wendell Huang -- Vice President and Chief Financial Officer Yes, Randy, I wouldn't call it a digestion year. I mean every year, we invest based on the forward-looking business opportunities, and we constantly review that. So this is what we're seeing in the future, and that's why we're -- the funds that we're investing in. So no, I wouldn't call it a digestion year. OK? Randy Abrams -- UBS -- Analyst OK. Good. Operator And next one to ask questions, Charlie Chan from Morgan Stanley. Charlie Chan -- Morgan Stanley -- Analyst So my first question is about selling the value. I think another caller also addressed this topic, but I want to go a little bit deeper. Because given all the efforts you made, right, and also ongoing cost challenge made at the coming U.S. fab, electricity cost hike, I'm not sure if you can give investors kind of a range about a potential price adjustment or kind of the value you're going to sell to your customers. Based on our back testing, I think based on your revenue and shipments in 2022 and 2023, we calculate your price hike could be around 10% in 2022 and the price hike of 5% in 2023. So C.C., I'm not sure whether you are planning to hike price in this kind of a range or magnitude for 2025, so we can be comfortable you can achieve the 53% gross margin in 2025. Jeff Su OK. So Charlie's first question is about TSMC's pricing strategy. He notes that TSMC, of course, makes a lot of efforts to deliver technology leadership and manufacturing excellence to our customers, but we also face a lot of cost challenges, whether from electricity price hikes or the higher cost of overseas fabs. So his question is, number one, I guess, what is our intention about pricing strategy to sell our value; and then, number two, he would like to know what percentage range, if any? C.C. Wei -- Chief Executive Officer OK, Charlie. This is C.C. Wei. First, I would like to emphasize again this kind of a pricing strategy is very confidential and totally between TSMC and the customer. However, let me expand a little bit, we do encounter some kind of higher cost in the overseas or even recently, the inflation and the electricity. We expect our customers to share some of the higher cost with us, and we already started our discussion with our customers. And as I said, for the overseas fab, we want to share our value, which also includes the flexibility of geopolitical location or something like that. If my customer requests to be in some certain area, then definitely, TSMC and the customer had to share the incremental cost. Charlie, did I answer your question? Charlie Chan -- Morgan Stanley -- Analyst Yes, I think that answers my question. I think passing through some cost or all the cost to -- incremental cost to customers should be fair, especially you are creating lots of value to your customers. And my second question is about AI. I know the -- your cost capacity has been very tight, very strategic. But I'm wondering how you're going to judge the demand and allocate the capacity to all the different type of AI semi customers. Because we're hearing your major customer is demanding for two times capacity next year. So I'm wondering how you're going to allocate, so I mean, will you still reserve a certain percentage for some smaller or strategic customers no matter if it's ASIC or smaller GPU vendors? So what is the kind of benchmark you're going to allocate those capacity to customers? And are you OK with that if your major customers' demand cannot be fulfilled by you? Are you OK to give out or do some market share to some of your industry competitors? Jeff Su OK. So Charlie's second question is around, I guess, basically, our advanced packaging and more specifically, CoWoS. And he, of course, notes that the CoWoS capacity, the demand is very strong today and also into 2025. So the capacity is very tight. So his question is, how does TSMC decide on how to allocate the capacity to customers, where we have large customers, but will we reserve capacity to support smaller customers as well? And then lastly, would we be OK if customers want to use somebody else, so to speak? So several parts to this question. C.C. Wei -- Chief Executive Officer Charlie, let me say it again, the demand is very, very strong, and we have done our best where we put all the effort to increase the capacity. It's probably more than double this year as compared with last year. However, it's still not enough to meet the customers' demand, and we leverage our OSAT partners to complement of TSMC's capacity to fulfill our customers' need. Still not enough, of course. But in my mind, my first priority is to make our customer to be successful, no matter which one. And of course, the long-term partners will have a better cooperation with TSMC in terms of technology and processing complexity, so much easier to be ramped up. However, no matter what, let me say again, the demand is very high, extremely high. And we do our best to increase the capacity to alleviate the shortage. We also leverage the OSAT partners. We want to make sure that all our customers get supported, probably not enough this year; but for next year, we try, we try very hard. And you mentioned about giving up some market share, that's not my consideration. My consideration is to help our customers to be successful in their market. Charlie Chan -- Morgan Stanley -- Analyst I see. So since your major customers said there's no room for other type of AI computing chips, but it seems like TSMC is happy to see some similar customers, right? So is that the right interpretation about your comments? C.C. Wei -- Chief Executive Officer Yes. Jeff Su Yes. C.C. said all customers, yes. Thank you, Charlie. Operator Next one to ask questions, Bruce Lu from Goldman Sachs. Bruce Lu -- Goldman Sachs -- Analyst I think, again, the question is coming back to AI still. I think currently, most of the AI accelerators are mostly in 5-nanometers, which is N minus one comparing to a smartphone for now. So when do we expect them to catch up or surplus in terms of technology node? Do we see them to be the technology driver in 2 nanometers or above? Jeff Su OK. So Bruce's first question is about, again, looking at AI accelerators. He notes that in his view, they're currently at 5-nanometer now. His question is, do we expect them to catch up? How do we see AI accelerators and also maybe HPC as a whole being the driver or adopter of TSMC's most leading-edge or advanced technology node? Is that correct, Bruce? Bruce Lu -- Goldman Sachs -- Analyst Yes. That's correct. C.C. Wei -- Chief Executive Officer OK. Bruce, let me answer the questions. Yes, your observation is right. Today, all the AI accelerators, most of them are in the 5- or 4-nanometer technology. But my customers are working with TSMC for the next node. Even for the next, next node, they have to move fast because, as I said, the power consumption has to be considered in the AI data center. So the energy-efficient is fairly important. So our 3-nanometer is much better than the 5-nanometer. And again, it will be improved in the 2-nanometer. So all I can say is all my customers are working on this kind of a trend from 4-nanometer to 3 to 2. Bruce? Bruce Lu -- Goldman Sachs -- Analyst But if that is the case, do we see -- yes, if that is the case, do we see a bigger revenue in the first two years of the 2-nanometers? Because in the past, it's only smartphone. But in 2-nanometer, it would be both smartphone and HPC customers. Jeff Su So Bruce is asking then, well, then with such strong AI-related demand, should we see more revenue from 2-nanometer in its first two years compared to past nodes? Wendell Huang -- Vice President and Chief Financial Officer Yes, Bruce, as we said, we believe that it will be -- our advanced technologies will be long-lasting nodes and larger nodes, N2, then N3 or N5. So the dollar value will certainly be larger. Jeff Su I think, Bruce, we're locating at these opportunities in a multiyear period. So as Wendell and C.C. just said, certainly, with the demand that we're seeing, we do expect N2 revenue contribution to be even larger than N3, just like three has a larger contribution or larger node than five, etc., etc. Bruce Lu -- Goldman Sachs -- Analyst I see. So my second question is for dividends. We do see very strong free cash flow in the first quarter. And the capital intensity, as Wendell mentioned, is stabilizing. And we even started to pay a huge amount of return in tax. So do we -- can we turn more aggressive in terms of dividends? The current dividend level is much, much lower than 70% of free cash flow in the back-of-envelope calculation. So can we expect to see more dividends in the coming quarters? Jeff Su OK. Thank you, Bruce. So Bruce's second question is on the cash dividend policy. He notes that in the first quarter, we're generating very, very strong free cash flow. As we have said, the capital intensity is beginning to stabilize and also that we are paying a very high retained earnings tax. So his question, I think, is, what is the outlook? Can we pay more dividends in the coming quarters? Or what should investors expect? Wendell Huang -- Vice President and Chief Financial Officer Yes. Bruce, the -- our dividend policy is, in principle, to pay 70% of our free cash flow in a year as cash dividends. So I would not just look at quarterly cash, free cash flow to make a judgment. But indeed, as we said before, now that we're harvesting the heavy investment that we did in the past few years, we expect our dividend policy to switch to steadily increasing from the sustainable in the past few years. Operator Next one, we have Laura Chen from Citi. Laura Chen -- Citi -- Analyst My question is about the edge AI. We know that C.C. mentioned that the smartphone and the PC recovery is still probably prolonged, yet we are also seeing that the AI PC or AI smartphone is getting quite topical. So I'm just wondering, what's TSMC's view on this kind of edge AI device take off maybe later or 2025? And what's the implication to TSMC? That's my first question. Jeff Su OK. Thank you, Laura. So Laura's first question is on AI, but more specifically edge or what we call on-device AI. She notes that there's AI being added to smartphones and also AI for PCs. It's quite topical. So she wants to know how do we see this trend, more importantly, what is the implication to TSMC. Is that correct, Laura? Laura Chen -- Citi -- Analyst Yes. C.C. Wei -- Chief Executive Officer OK, Laura. Let me answer the question. The edge AI or the on-device AI, the first order of magnitude is the die size. We saw without the AI -- with the AI for neuroprocessor inside. The die size will be increased, OK? That's the first we observed. And it's happening. And then for the future, I would think that replacement cycle for smartphone or for those kind of a PC will be accelerated a little bit in the future, at least. It's not happening yet, but we do expect that it will happen soon. And all in all, I would say that on-device AI will be very positive for TSMC because we capture the larger share of the market. Did I answer the question, Laura? Laura Chen -- Citi -- Analyst Yes. And so in that case -- yes, very helpful. So in that case, can we expect that our demand -- and see, because now it's still mostly on the smartphone or mobile. So can we expect that N3's revenue contribution in second half or next year will be bigger, say, like a 20% plus in the second half of this year? Jeff Su OK. So well, Laura's follow-on to the first question is then should we expect that N3 demand in the second half or into 2025. Sorry, I didn't catch the exact percentage, but a large percentage or significantly larger than it is today. Is that correct, Laura? Laura Chen -- Citi -- Analyst Yes. C.C. Wei -- Chief Executive Officer OK. Certainly, as I said, we expect to happen at a larger die size. As I said, we already observed that. And for the replacement cycle to be accelerated, it will happen, but I cannot give you a definite number because of -- it's too early to predict in 2025. But it's an upward trend, no doubt about it, and we expect we have a good business. Wendell Huang -- Vice President and Chief Financial Officer Just to follow up on C.C.'s comments. Last time, we also said that this year, N3 revenue will be more than triple than the revenue in 2023. Laura Chen -- Citi -- Analyst OK. That's very clear. My second question is about, again, advanced packaging. We know that TSMC is working on the 3DIC for many years. So I'm just wondering that what's the current progress? Will we expect to see more meaningful take-off with our N2 ramp-up for like a high-computing PC? And between different kind of technology, like hybrid bonding or TSV, what's TSMC's major consideration? Jeff Su OK. So Laura's, I guess, second question, although -- yes, fine. Second question is about our advanced packaging solutions and 3DIC solutions. She is wondering, what is the outlook or take-up for the demand for the next several years? And she also would like us to comment on the consideration of TSV versus hybrid bonding and such. C.C. Wei -- Chief Executive Officer Wow, you asked a very technical question about the TSV and the hybrid bonding. It's all together. The 3DIC's packaging technology is very complicated, and our customers start to adopt it. Not a big volume yet, but we expect it to start to grow from this year. How big it will be? It's hard to say, but I think it is a trend. Whether it is a micro-bumping or it's a hybrid connection, that it depends on the customer's product requirement. Jeff Su OK, Laura? Laura Chen -- Citi -- Analyst So starting from this year, we'll see -- yes, yes, just very quickly. So starting from later this year, we will see that 3DIC products from our customers, that's the current progress? Jeff Su So Laura is asking, will we start to see 3DIC products from our customers when? C.C. Wei -- Chief Executive Officer Now. I'm sorry, I just said that the customers start to adopt it from now, and you would expect that product in the market soon. All right? Jeff Su Thank you, Laura. OK. In the interest of time, maybe we'll take questions from the last two participants on the call. Thank you. Operator? Operator Next one, we have Rolf Bulk from New Street Research. Rolf Bulk -- New Street Research -- Analyst Earlier on the call, you mentioned the possibility of converting so much your N5 capacity to N3. But what I was wondering, considering the strong demand for AI chips and a recovery in smartphones, is there a scenario in which you would consider similar conversions from some of your older nodes such as N7 given that utilization and revenues there are still well below peak levels? Jeff Su OK. So Rolf's first question is about our tool commonality and conversion. He notes that we have already said we are converting some of the capacity -- using some of the N5 tools to support the strong multiyear demand for N3 for AI-related and such. His question is that given our 7-nanometer is still underutilized, will we also consider converting 7-nanometer tools to support more leading-edge stronger demand? C.C. Wei -- Chief Executive Officer Well, let me answer this question. We can convert one technology node capacity to the next one is because of our GI's physical advantage, meaning, let me give you one example, our 3-nanometer and 5-nanometer are adjacent to each other, the fabs, and they are all connected. So it's much easier for TSMC to convert from five to three. And that doesn't mean that every node can do the same. That's one. And your question about the N7 converted to N5, presumably. No, because we expect the N7 in the next couple of years, it will pick up, the demand will pick up again. And you want repeat -- probably repeat the same kind of experience we have in 28-nanometer. So today, no, we don't have any solid plan to convert the N7 into N5. Jeff Su OK. Rolf, does that answer your first question? Rolf Bulk -- New Street Research -- Analyst Yes. An unrelated follow-up? Jeff Su Sure. Rolf Bulk -- New Street Research -- Analyst Yes, it does. And unrelated follow-up, it's a follow-up to Laura's question, actually. On SoIC, given that the technology is now being adopted more broadly, do you see beginning of interest of your smartphone customer base to also adopt the technology? Could you comment on the likely time line of adoption of SoIC in smartphones? Jeff Su OK. So Rolf's second question is basically going back to SoIC adoption. His question really is pretty straightforward. Do we see a time line or can we give a time line for adoption of SoIC by smartphone applications? C.C. Wei -- Chief Executive Officer Well, let me answer the question. Just HPC product is the first one. HPC customer is the first one to adopt, that is a 3DIC or SoIC's advanced packaging technology. And the other area, let's wait, wait and see. I cannot make any comment. We are working on it. OK? Jeff Su OK, Rolf? Rolf Bulk -- New Street Research -- Analyst Yes. Operator The last one to ask question, Mehdi Hosseini from SIG. Mehdi Hosseini -- Susquehanna International Group -- Analyst Two from my end. You had a very nice upside to revenue expectation for the first half of '24, but has kept the year-end unchanged. Is that a reflection of that slow recovery that you were highlighting? Or would you prefer to wait to have more visibility before updating 2024 target? Jeff Su OK. So Mehdi's first question is about our revenue outlook and guidance. His question is saying we have a nice upside to our revenue in the first half of this year, but we have kept the full year guidance in to grow low to mid-20s. So is that because we are more cautious on the second half? Or is it because we will see how things go? But I'm not sure if you mean by upside to the first half, Mehdi. You're saying, of course, our first quarter, as C.C. said, was slightly ahead of our guidance in U.S. dollar term, but very minutely. But -- yes? Wendell Huang -- Vice President and Chief Financial Officer Yes. Mehdi, our guidance for the quarterly profile did not change. We always said that quarter over quarter, there will be growth. And also, the full year guidance will stay the same. So I don't think there is a so-called upside, as you just said. Jeff Su To the first half, yes. Wendell Huang -- Vice President and Chief Financial Officer Yes. Mehdi Hosseini -- Susquehanna International Group -- Analyst OK. And regarding the investment in U.S., especially for 2-nanometer, does that include advanced packaging? Or would advanced packaging be mostly concentrated in Taiwan region? Jeff Su OK. So Mehdi's second question is that, of course, that we have announced to build three fabs in the U.S., including 2-nanometer, given the strong AI-related demand. So his question is then what about the advanced packaging side, will we also build advanced packaging in Arizona? Or yes, what is our plan? C.C. Wei -- Chief Executive Officer Well, let me answer this question. It is always customer's decision for where the back-end service are done for their product. So in Arizona, we are happy to see that Amkor's recent announcement to build an advanced packaging facility that's very close to our AZ fab. Actually, we are working with Amkor and try to support all our customers in AZ and for their demand, for their need. Jeff Su OK, Mehdi, does that address your second question? Mehdi Hosseini -- Susquehanna International Group -- Analyst Yes. Jeff Su OK. Great. All right. Everyone, this concludes our question-and-answer session. Again, we do apologize for the technical difficulties. If you have anything unclear or need to follow up, please contact TSMC's IR, and we'll be more than happy to help. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now, and the transcript will become available 24 hours from now, both of which are going to be available through TSMC's website at www.tsmc.com. So thank you again for joining us today. We hope everyone continues to stay safe and healthy, and we hope to see you again next quarter. Goodbye, and have a good day.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, everyone, and welcome to The Boeing Company's first-quarter 2024 earnings conference call. Today's call is being recorded. The management discussion and the slide presentation plus the analyst question-and-answer session are being broadcast live over the Internet. [Operator instructions] At this time, for opening remarks and introductions, I'm turning the call over to Mr. Matt Welch, vice president of investor relations for The Boeing Company. Mr. Welch, please go ahead. Matt Welch -- Vice President, Investor Relations Thank you, and good morning, everyone. Welcome to Boeing's quarterly earnings call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's president and chief executive officer; and Brian West, Boeing's executive vice president and chief financial officer. As a reminder, you can follow today's broadcast and slide presentation at boeing.com. As always, detailed financial information is included in today's press release. Furthermore, projections, estimates, and goals included in today's discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the beginning of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to Dave Calhoun. Dave Calhoun -- President and Chief Executive Officer Thanks, Matt. Good morning, and thanks for joining us. Although, we report first-quarter financial results today, I will direct my comments toward the dramatic actions we've taken since the Alaska Airlines accident in January. First, we began with taking responsibility. We immediately and transparently began supporting the NTSB to identify the cause of the accident. We supported the FAA investigation of the 737-9 fleet in its entirety to do comprehensive airline inspections, and the aircraft were cleared to go back into service. We immediately acted, working alongside our supply chain, to ensure the door plug depressurization event doesn't ever happen again. We held quality standdowns across all of our production lines in BCA and sought the advice and counsel of more than 70,000 employees to improve our factory disciplines and adherence to our quality standards. All in all, we collected over 30,000 ideas, and the list continues to grow. We have categorized and prioritized all. Employee engagement has been energizing for all. Actions are being taken across all of our factories, and areas of focus include: training, particularly on the job, taking advantage of our slowdown and adding hundreds of hours of training for each of our manufacturing employees; tooling, more of it and improve maintenance; work instructions, simplify, simplify, simplify; compliance checks, discipline; travel work controls, don't travel work; incentive structures; employee listening; and maybe above all, culture improvement. We transparently engaged with the FAA and immediately went to work on a 90-day plan of quality action, to drive improvements throughout our production system. We completed our 30-day review, and we're regularly checking in with the FAA, as we complete our 90-day plan. We engaged a team of independent quality experts to systematically review our quality control process and bring forward long-term recommendation. They are roughly 60 days into their work beginning with Renton and Spirit. And we expect them to stay for several years. We have appointed several new leaders into critical BCA leadership roles in the last couple of months. All have jumped in with both feet, alongside our world-class workforce. They are seasoned operators and all with a critical eye. Effective March 1st, we moved inspection and rework teams to Wichita. Since then, we have only allowed fully inspected fuselages to be shipped to Renton, which has dramatically reduced our nonconformances entering the Renton factory. This started as a triple and has been slowly improving as time goes on. The visibility in Wichita will help the Spirit team prevent nonconformances from being created in the first place. We are already beginning to see signs of more predictable and reduced cycle times in our factory, as a result of these enhanced quality control standards. We expect this will continue to improve. We've extended our commitment to reduce traveled work across all of our assembly lines and deep into our supply chain. While near-term delivery shortfalls hurt and will affect our performance during our first half of the year, the long-term benefits from a synchronized supply chain will be substantial. We are absolutely committed to doing everything that we can to make certain our regulators, our customers, and most importantly, our employees and the flying public are 100% confident in Boeing. And while I have shared my plans to step down as CEO by the end of the year, I will be very focused every day on seeing that commitment through. As we move through this period, it is important that our people and our stakeholders understand how promising Boeing's future looks. Demand across our portfolio remains incredibly strong. Our people are world-class. There's a lot of work in front of us, but I'm proud of our team and remain fully confident in our future. While this effort will slow our recovery timing, we are now seeing these proof points that give us confidence that we'll begin to stabilize and improve performance moving forward. By the end of this year, we expect to have largely delivered our 737 and 787 inventory, effectively shutting down our two large shadow factories. Our commercial business will be more stable. Our defense unit will be progressing toward more historic levels of performance. And our services team will continue to deliver exceptional results. And most importantly, we will have embedded all of the important lessons we've learned in the last few months and over the last several years. During that time, I've had the opportunity to speak to many of our frontline team members, engineers, and mechanics. I continue to be amazed by the pride they take in their work, their commitment to getting things done the right way, the safe way, their willingness to raise their hands and offer ideas for how to do things better. With that, I'll turn it over to Brian. Brian West -- Executive Vice President, Chief Financial Officer Thanks, Dave, and good morning, everyone. Let's start with the total company financial performance for the quarter. Revenue was $16.6 billion, down 8% versus last year, primarily reflecting lower 737 delivery volume. The core loss per share was $1.13, a slight improvement versus last year, also reflecting lower 737 deliveries. Free cash flow was a usage of $3.9 billion in the quarter, a higher usage than last year and in line with the expectations shared last month. Cash was impacted by lower commercial deliveries and unfavorable timing of receipts and expenditures. Turning to next page, I'll cover Boeing Commercial Airplanes. BCA booked 125 net orders in the quarter, including 85, 737-10s for American Airlines and 28, 777Xs for customers, including Ethiopian Airlines. The backlog grew to $448 billion and includes more than 5,600 airplanes. BCA delivered 83 airplanes in the quarter. Revenue was $4.7 billion, and operating margin was minus 24.6%. These results were significantly lower than last year primarily reflecting lower 737 deliveries and the 737-9 grounding impact for customer considerations of $443 million. Now I'll give more color on the key programs. On the 737, we delivered 67 airplanes in the first quarter as we deliberately slowed production below 38 per month to incorporate improvements to our quality and safety management systems, including reducing traveled work and addressing supplier non-conformances. These continued efforts will cause April deliveries to be more in line with February levels as we complete our work. Production were below 38 per month for the first half of the year and will be higher in the second half as we move back to 38 per month. With the timing of rates beyond 38, predicated on the work we're doing with the FAA. We've recently made adjustments to the master schedule, and we'll continue to manage supplier by supplier based on inventory levels and rate ramp readiness. Our objective remains to keep the supply chain paced ahead of final assembly to support stability and minimize traveled work. The quarter ended with approximately 110, 737-8s built prior to 2023, the vast majority for customers in China and India. This is down 30 airplanes from last quarter and in line with our plans. We still expect to deliver most of these inventoried airplanes by year-end as we work toward shutting down the shadow factory. There were -- 95 additional airplanes in inventory, about 35 of which were -7 and -10s, and the remaining are WIP airplanes impacted by factory and supply chain constraints. On the anti-icing, the timeline is unchanged, and we're making good progress toward resolution. As it pertains to the certification of the -7 and the -10, we coordinated with our customers and added more 8s and 9s into the skyline in the near term to mitigate impacts to their fleet needs and stabilize our production plans. And the program margin has been updated to reflect these impacts as well as the slower production ramp. On the 787, we delivered 13 airplanes in the quarter. We're slowing near-term production and plan to return to five per month later this year. We expect to achieve rate increases, including 10 per month by 2026. We ended the quarter with about 60 airplanes of inventory, about 40 of which require rework, which continues to progress steadily and in line with our expectations. We still expect to finish the reworked airplanes and shut down the shadow factory by year-end with most of these airplanes delivering in the year. Finally, on 777X, we continue to progress along the program timeline and still expect first delivery in 2025. We'll follow the lead of the FAA, as we progress through the process, including working to obtain approval from the FAA to begin certification flight testing. Moving on to the next page, we'll go to Boeing Defense & Space. BDS booked $9 billion in orders during the quarter, including awards for 17 P-8 aircraft for the Royal Canadian Air Force and the German Navy and securing final FAA team newbuild production contract from the U.S. Navy. The backlog grew to $61 billion. Revenue was $7 billion, up 6% on improved volume, and BDS delivered 14 aircraft in the quarter. Operating margin was 2.2%, another quarter of sequential improvement, but still more work to do. First-quarter results were impacted by losses on two fixed price development programs totaling $222 million, $128 million on the Tanker and $94 million on the T-7A. Our game plan to get BDS back to high single-digit margins by the 2025, 2026 time frame remains intact. We've made important progress in 1Q. Our core business, representing about 60% of our revenue, is seeing solid consistent performance in the mid- to high single-digit margin range with strong demand across the board. On the 25% of the portfolio, primarily comprised of fighter and satellite programs, operational performance further stabilized in the quarter, which drove improved margin trends. We still expect to return to the strong historical performance levels as we roll into new contracts with tighter underwriting disciplines as we move into the 2025, 2026 time frame. Lastly, we have our fixed-price development programs that represent the remaining 15% of revenue. Despite the relatively modest updates in the quarter, we continue to retire risks and remain focused on maturing these programs quarter in and quarter out. Importantly, on the MQ-25 program, the program was awarded a cost-type contract modification from the U.S. Navy that included two additional test aircraft, demonstrating our progress and our commitment to stronger underwriting disciplines in the area of the development programs. The program also delivered the first static test article to the Navy, and the airframe is ready to begin stress testing. And on the Starliner, the program continues to progress toward a May 6th crew flight test, as the spacecraft was recently integrated on top of its [Inaudible] rocket, and prelaunch testing is underway. Lastly, the T-7A test aircraft completed climate lab testing in February, and the program continues to progress with Air Force flight testing. Overall, the defense portfolio is well-positioned. As seen in the initial FY 2025 presidential budget, there's strong demand across the customer base. The products are performing in the field, and we're confident that our efforts to drive active stability will return this business to performance levels that our investors recognize. Moving on to the next page, Boeing Global Services. BGS had another strong quarter. They received $5 billion in orders, and backlog is at $20 billion. Revenue was $5 billion, up 7% primarily on higher commercial volume and favorable mix. Operating margin was a strong 18.2%, an expansion of 30 basis points compared to last year. In the quarter, BGS opened a maintenance facility in Jacksonville, Florida, supporting our military customers. And the U.S. Navy exercised options on a P-8 sustainment modification contract. Turning to the next page, I'll cover cash and debt. On cash and marketable securities, we ended the quarter at $7.5 billion, reflecting the debt repayment activity and use of free cash in the quarter. The debt balance decreased to $47.9 billion, as we paid down $4.4 billion of the $5 billion of maturities due this year. We continue to maintain access to $10 billion of revolving credit facilities, all of which remain undrawn. While we're still not in a position to provide a more detailed 2024 outlook today, I want to provide some additional context on the path forward. The 2024 free cash flow outlook I shared last month is still expected to be a generation in the low single-digit billions. Cash flow should improve as we move through the year and be back-end loaded, driven by BCA deliveries and receipt timing, including an expected Lot 11 award on the Tanker. Second quarter free cash flow is expected to improve sequentially but be another sizable use of cash. We're committed to managing the balance sheet in a prudent manner with two main objectives: one, prioritize the investment-grade rating; and two, allow the factory and supply chain to stabilize for a stronger trajectory as we exit this year. As we operate at these lower production rates, we're actively monitoring our liquidity levels and believe we have significant market access and are continuously monitoring and evaluating opportunities should we decide to supplement our liquidity position. Longer-term, we remain confident in our ability to achieve $10 billion of free cash flow. However, given our continued focus on safety, quality, stability, we continue to expect that this goal will take us longer than we originally planned and later in the 2025, 2026 window primarily tied to the 737 and 787 production delivery ramps of 50 per month and 10 per month, respectively. Moving on, discussions with Spirit are ongoing. As with any large and complex deal, there are a number of terms and issues we need to work through, including price, financing and other key items. And the best approach to handling and potentially divesting certain work that Spirit does for other customers. We believe in the strategic logic of a deal, but we'll take the time needed to get this right before we decide to enter into agreement. In the meantime, the focus is on factory stability in Wichita and in Renton. And as you saw yesterday, we agreed to advance Spirit $425 million, virtually all of which will be repaid in the third quarter. This will be accounted for as investing cash. Looking forward to the balance of the year, we're taking the time now to ensure our BCA factories are stable and positioned to ramp production. We'll also continue to make progress on other important objectives, including shutting down the shadow factories, maturing and derisking the defense fixed-price development programs and building on the continued strong results in services. Our backlog of nearly $530 billion speaks to the breadth of our portfolio, and this demand backdrop underpins our commitment to drive long-term results, all enabled by the everyday execution of 170,000 incredibly talented and dedicated team of Boeing employees. With that, why don't we turn it over to questions? Questions & Answers: Operator Thank you. [Operator instructions] And our first question will come from the line of Myles Walton with Wolfe Research. Please go ahead. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. You gave color on the April MAX deliveries similar to February, but I'm really more interested in the production output, how it's going on the line, where you are relative to where you were -- when you started to give the no traveled work policy, how that's improving or not? And what specific metrics you're looking at to allow you to go higher over the next six months? Dave Calhoun -- President and Chief Executive Officer So why don't I start this off? It is going to stay sporadic through 2Q. The real pivot for us is the number of clean fuselages we get out of Spirit with the new inspection protocols. It started slow. In the meantime, we've been working on all the fuselages that were already trapped in the pipeline that did not go through that inspection process. So that's why, it's slow and lumpy here in these couple of months, but we will be through that process within the next 60 days. And then we will just be dealing with clean fuselages out of Wichita. So far, we're quite encouraged at just how clean they are and how quickly they move through our production cycle, substantially better, faster than before. So as we exit 2Q, we will know exactly what numbers are coming out of Wichita and what expectations are. We are not going to rush it. We're simply going to demand that they be clean. But I like all the signals. I was walking through the factory yesterday. When we get a clean one, it whistles through the factory, and that's the most important thing. Myles Walton -- Wolfe Research -- Analyst OK. Thank you. Operator Thank you. The next question is from Doug Harned from Bernstein. Please go ahead. Doug Harned -- AllianceBernstein -- Analyst Yes. Thank you. Good morning. Dave Calhoun -- President and Chief Executive Officer Hi, Doug. Doug Harned -- AllianceBernstein -- Analyst When you look at production on the 737, when you talk about going to $10 billion in free cash flow maybe by late -- by the end of 2026 or even 2027, this seems to be very much contingent on getting to this 50 a month rate. But when you look at that process, if I go back even pre-grounding for the MAX, Spirit had never successfully done a rate break to 50 a month before. And given the restart mode that they're in right now, how do you see the pathway to getting up from where they are today, getting through the quality issues and getting to 50 a month there within two years? Dave Calhoun -- President and Chief Executive Officer We do. Spirit's committed to it. I think the acquisition of Spirit will factor in significantly into that prospect. Clean fuselages in Spirit and in Wichita and fix on all those non-conformances will reduce their cycle and improve their output. So there's a lot of things that contribute to it, Doug. If we get ourselves to 38, which is our first objective, and we do it in a steady fashion moving up another 12 in my view is doable in the window that we're talking about. So that's the bet we're making, and I'm confident we can get there. But job one is the six months that commenced post Alaska and the inspection protocols and the non-conformance fixes that are then embedded into the Wichita facility. Doug Harned -- AllianceBernstein -- Analyst OK. Thank you. Operator Thank you. The next question is from Cai von Rumohr from TD Cowen. Please go ahead. Cai von Rumohr -- TD Cowen -- Analyst Yes. Thank you. So as a result of the production slowdown, you've had some -- presumably, you'll have late deliveries to customers. And traditionally, late deliveries require compensation. Could you give us some color in terms of what sort of a number we're going to look at? And basically, where are we going to see it? Is that going to be front-loaded, back-loaded? How should we think about that? Brian West -- Executive Vice President, Chief Financial Officer Cai, I'll take that one. Why don't we talk about in the context of 737 overall margins? The program booked about 300 basis points of impact in the quarter. And that was primarily driven by the delayed rate rent that you're describing, as well as mixing in more 8s and 9s or 10s in the near-term so that we can support our customers and their fleet planning. So that will all roll through, and the timing will be expanded over the next couple of years. What our expectation is that over time that while these program margins won't get back to the 2018 levels, they will expand. And that will largely be driven by the rate ramps that Dave described. And the reason why they'll be different from where they were in 2018 is largely, as you know, is because of the customer mix and these delayed considerations. So all-in-all, when we step back and think about long-term, structurally, particularly on the cash margin front, not a lot has changed. We just have to work through getting from here to those higher levels, including the consideration that we've described that we booked in the quarter. Overall, long term, we still think we get there. Cai von Rumohr -- TD Cowen -- Analyst Thank you. Operator Thank you. The next question is from Seth Seifman from J.P. Morgan. Please go ahead. Seth Seifman -- JPMorgan Chase and Company -- Analyst Thanks very much and good morning. Brian, you talked a little bit about the cash balance and liquidity. I don't know if this is necessarily the right way to think about it, but I feel like there's this conventional wisdom out there that Boeing should have roughly $10 billion of cash on the balance sheet. Maybe that can dip a little bit lower intra-year as we see now. But burning cash in the second quarter, kind of how low can that cash balance get before you have to do something? When you talked about additional sources of liquidity, what were you talking about? And how much room do you think you still have with the rating agencies to avoid getting put on a negative watch? Brian West -- Executive Vice President, Chief Financial Officer Thanks, Seth. First and foremost, I remind everyone that we do have $17 billion of liquidity today, comprised of the cash on hand as well as our credit lines. What we're focused on is a first half cash usage that is resulting from all of the actions we're taking to stabilize both the factory and the supply chain to set ourselves up for success as we move to the second half and into 2025. And to that end, any supplemental funding that I talked about would do two things. First of all, it would restore our cash balance to the historical level that you point out, that $10 billion-ish. But it also means that we want to continue our practice to stay well ahead of our near-term maturities. And by near term, I mean roughly the next 12 months. So that's what we're thinking about as we sit here today. We will be prudent and thoughtful. We believe the market would be open to us. And as we've said consistently, the most important thing is our investment-grade credit rating that we think a lot about, and it is a priority. Seth Seifman -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Operator Thank you. Our next question is from Sheila Kahyaoglu from Jefferies. Please go ahead. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, Dave, Brian, Matt. Can we talk about the 737 rate again? How much of that is self-inflicted versus the FAA processes that are in place? And when we think about the 90-day timeline that comes to a head with the IAM negotiations over the summertime, I would assume, so how do we think about the IAM progressing as well? And how much was incorporated into the $10 billion free cash flow target? Dave Calhoun -- President and Chief Executive Officer OK, Sheila, that's like a three-parter. Sheila Kahyaoglu -- Jefferies -- Analyst Sorry about that. Dave Calhoun -- President and Chief Executive Officer Yes, I'll do my best. So I -- all of the 737 disruption that it goes on today, in my view, is self-inflicted in the sense that we've made the decision that the amount of traveled work, particularly as it relates to the fuselage that was embedded and normalized in our factory that we would make a dramatic reduction in it. So that move we made with all the inspectors and all the rework operators down to Wichita, the visibility we've provided to the Wichita workforce with respect to the rework that we were doing. The FAA didn't demand that. We demanded it because it's -- we're determined to get ahead of it. What the FAA is doing, and they have been very diligent and business-like in the way they've approached this is they want a control plan. And they want a control plan in 90 days that, in essence, monitors and measures whether our production system is in control moving forward. And if it ever gets out of control, the signals are clear, both to the FAA and to us even more importantly, and that we don't -- we won't extend. We won't rate up. We won't do anything until it is under control, and that has to stay that way. So 90 days isn't like a wave a magic flag, and everything is great, and you guys can go from 38 to 40. It's quite different. It is simply a set of metrics and controls that we both agree are the right ones to monitor the performance of our factories. And I am confident it will be a good set of controls and something that we can live up to. And we're going to work our way through this one. As I said, the most important thing that occurs over the next six months or frankly, starting in January when we launched this effort is going to be the pace at which clean fuselages come out of Wichita. That is the most essential part of this equation. With respect to IAM, as you know, we work through the summer, there's a lot of discussions going on between our team and their teams. It feels productive. While we're doing that, we have huge engagement with a relatively new workforce across our factories in light of what we've just experienced. That engagement helps. It doesn't hurt. I am -- I can't ever tell you I'm perfectly confident that we rush to an agreement. But we're all going to try to solve for continuous production. And I think we -- I think our chances are good. So -- but we're not going to know until we get really close to the deadline. And that's just real life and labor negotiation. And I think that covers most of what you asked. Was there any other part I missed? Sheila Kahyaoglu -- Jefferies -- Analyst The $10 billion free cash flow, does it incorporate the IAM negotiation? Dave Calhoun -- President and Chief Executive Officer Oh, yes. Yes. Yes. Sheila Kahyaoglu -- Jefferies -- Analyst OK. Thank you. Dave Calhoun -- President and Chief Executive Officer Yeah. Operator Thank you. And the next question is from the line of Noah Poponak from Goldman Sachs. Please go ahead. Noah Poponak -- Goldman Sachs -- Analyst Hi. Good morning, everybody. Dave Calhoun -- President and Chief Executive Officer Hey, Noah. Noah Poponak -- Goldman Sachs -- Analyst I guess this is sort of asked, and you've alluded to pieces of the answer to this, but I'm just going to ask it anyway because it seems to be the most important thing, which is just how long does it take to do everything you need to do on product quality? And how much of it needs to be done before you can increase production again versus how much of it can be done as you're increasing production again? Because I've heard you now reference six months a few times, and you've referenced the back half of the year looking a lot different than the first half of the year. And six months isn't a short window of time. But in the context of what you're doing and referencing 30,000 ideas and if you're going to take Spirit in, that hasn't even happened yet, and it's almost May, when you were working with the FAA on 787 a few years ago, you didn't deliver one for 18 months. So I don't know what you can say to that, but how do we get confident that the time just doesn't keep ripping by, and you're not iterating back and forth and there isn't a much longer window of time needed to do everything you need to do to start to ramp again? Dave Calhoun -- President and Chief Executive Officer Yeah. So Noah, I'll address this one. First of all, I'm glad you asked about the six months. When I say six months, I'm talking about the first half of this year because remember, we commenced all of these actions the day after the Alaska Air accident. Our determination -- the big factor here, in my view with respect to the essence of the question, is this move to eliminate traveled work in our factory and specifically and most importantly, the fuselage. So that action was commenced on March 1st, inspection line in place, full inspections being performed in Wichita. Our rework teams with respect to non-conformances that were worked up in Seattle, those teams have been visiting regularly down to Wichita. And I fully expect – I fully expect for them to come up to rate with clean fuselages here as we get into the second half. That, again, is the big productivity driver in the Renton factory. And the cycle time improvements also double up as capacity improvements for pretty much for us and for them. So that is the big question. The 30,000 ideas, that is a long list of stuff that just provides for continuous improvement from this day until forever. So that's not something that all has to get processed and completed before we can sort of flip the switch and go. It's quite the opposite. It is a set of continuous improvement concepts and ideas that we simply set out with our workforce and our leadership team over time. And that's recognized by our employees and by our leadership team. So that's how I think about this sequence. Noah Poponak -- Goldman Sachs -- Analyst OK. Have you guys thought about framing and disclosing some version of that timeline of work maybe in big buckets or categories that you would provide to the investment community? Because it feels like everybody is guessing and has no visibility. And if you said, traveled work is one category, Wichita, I don't know what the categories would even be. But if there was four or five of them, and you could provide an update on which are complete and how complete the other ones are as you report just some version of milestones that investors could follow on your progress here? Dave Calhoun -- President and Chief Executive Officer I think that's fair. Noah, the most important one, the essential one and that we will have to report as we close the second quarter is going to be the number of clean fuselages that we're receiving from Wichita, and the prognosis for that going forward. So that will be the most essential part of the equation I think you're trying to solve. I think all the other stuff, we'll categorize for you. That's not hard. We do it for the FAA. We do it for our own teams. But that is not going to be rate limiting. It's not -- none of that is going to factor into the rate limits. What is going to factor is this determination, it's to make sure traveled work doesn't come back to us and that Wichita is up to the rate increases. Noah Poponak -- Goldman Sachs -- Analyst OK. Thank you. Operator Thank you. Our next question is from Kristine Liwag from Morgan Stanley. Please go ahead. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning. Dave, Brian, you mentioned that the first half deliveries for the 737 will be under pressure as you focus on quality. But then again, stability of the supply chain is also a priority. So in the event that 737 MAX production and deliveries continue to be under pressure beyond the first half of this year, how long can you keep the supply chain at a higher rate? What does it mean to keep them stable? And then also as a follow-on to that, if this were to play out, can you talk about the puts and takes of free cash flow generation in the second half of the year? Dave Calhoun -- President and Chief Executive Officer Yes, I'm sure Brian is going to answer this one, but let me start. We have a rate increase plan. And as everyone knows, it gets us up to 50 here as we get into that 2025, 2026 window. So our job now, given the slowdown here in these six months and then sort of the push out of those rate increases is to make sure we have all the inventory we need to satisfy that 50 number and have the buffers where they need to be to make sure that the supply chain can demonstrate the capacity to meet those numbers. So this slowdown, in my view, is an opportunity for us to shore up whatever supply chain issues were out there sort of one supplier at a time and to get there. Now, if we get to a moment because the slowdown has gone on too long, if we get to a moment where the buffers exceed that requirement, we will curtail but not until they exceed that requirement. Brian? Brian West -- Executive Vice President, Chief Financial Officer Only thing I would add is that tactically, we have adjusted the master schedule at a supplier-by-supplier basis. It's all out there. They know it. We will continue to pace final assembly in line with that master schedule so that we don't sacrifice stability because what we're talking about is a very important near-term investment that we have to stay laser-like focused on so that we don't take a step back. And that's what we're focused on. And we believe that we can handle the cash flow fluctuations as we get through the first half into the second half and position ourselves for 2025. Kristine Liwag -- Morgan Stanley -- Analyst Great. Thank you for the color. Operator Thank you. And our next question is from Scott Deuschle from Deutsche Bank. Please go ahead. Scott Deuschle -- Deutsche Bank -- Analyst Hey, good morning. Dave Calhoun -- President and Chief Executive Officer Scott, good morning. Scott Deuschle -- Deutsche Bank -- Analyst Dave, could you further characterize what you're seeing with respect to supply chain performance on the 87? And where the constraints are that are driving you to drop back below five a month? And then I'm curious if there's been any change to the plan on the 777X ramp. Thank you. Dave Calhoun -- President and Chief Executive Officer Yes, no change on the latter. But we really have two constraints to think about on the 87. One is discrete, it's well understood and known, and it's heat exchangers. This is a product that used to be built in Russia. When the invasion happened, it got moved, and the capacity of that supplier has not kept pace with us. But the improvement plan that we all see gets us where we need to be by the fourth quarter, and we have a lot of confidence in it. So again, discrete, well known, etc. The other one that is -- that affects us is not necessarily our suppliers. But as you may know, the seat suppliers out there are in shorter capacity. A lot of that is buyer furnished, but nevertheless, it holds up an airplane. And so that one is a little more medium term-ish. Capacity is being built out. I think people will get ahead of it, but that will be a little longer than the heat exchanger. And anyway, so that will affect us a bit. And when you have a buyer-furnished problem like that, you don't have a consequence attach to it, as you probably know. Scott Deuschle -- Deutsche Bank -- Analyst Got it. And then, Brian, can you get an advance on the large P-8 contract that you won this quarter? Brian West -- Executive Vice President, Chief Financial Officer So we're going to not talk about that specifically in terms of that award. I did want to come back to two things that you asked about. I want to make sure there's color out there. 777X as we described, no changes. But I would like to indicate that we're starting to see the inventory implications of that ramp. And that's something that's big and important as we move through this year, and we're excited to be able to put that in service. But that does create some working capital pressure that I don't want to be -- have lost on anyone. And as it pertains to the 87, very nice progress in terms of our inventory liquidation progressing well. Keep in mind, not all of that will get delivered. All that will get reworked and completed, but the deliveries are going to lag. And as far as production is concerned, we will be a couple lower than that five per month for most of the year as the supply chain catches up. And as Dave mentioned, we do have a recovery plan, and we are optimistic. And one bright spot is that that second line has now been activated. So as soon as that supply chain is positioned we'll be ready to go, but it will be lower as we move through this year. Scott Deuschle -- Deutsche Bank -- Analyst Thank you. Operator Thank you. And the next question is from David Strauss from Barclays. Please go ahead. David Strauss -- Barclays -- Analyst Thanks. Good morning. Just wanted to clarify on your comments around the balance sheet and liquidity. Is equity -- considering equity issuance, is that still off the table as you think about the balance sheet and potentially funding Spirit? Brian West -- Executive Vice President, Chief Financial Officer Well, as we stand for what I described in terms of what we're looking at right now, working closely with the rating agencies, we believe we can do the move I described in the near term with market access without that. As it pertains to Spirit, we talked about that this is a deal where discussions are ongoing. It's complicated. There's other parties involved. And what this means is that once it does get signed, we expect it to, that it's going to take time to close. And in that time between signing and closing, we're going to explore the optimal financing for that transaction in order to maintain the investment credit rating. And that's important. How exactly that looks? Don't know. We've got the time. And importantly, at the same time, we're going to have a factory that we expect to get more and more stable. So we're going to get to the optimal answer. We're going to protect the investment-grade credit rating and how the pieces play out, stay tuned. David Strauss -- Barclays -- Analyst OK. And a quick follow-up there as it relates to Spirit. How engaged is Airbus in this process at this point and thinking about potentially taking back their own work? And does the deal need to wait until you get full clarity on what might happen with that Airbus business? Or do you think you can move forward without full clarity there? Dave Calhoun -- President and Chief Executive Officer No, we can move forward without full clarity. And as you probably know, we're not going to get involved in that, whatever is going on there. We encourage Spirit to do whatever they need to do to try to remedy or improve their business relative to our potential acquisition. So I don't have a lot of insight into that. But I encourage Spirit to try to resolve that kind of stuff as quickly as they can. But we are not being held hostage to that. David Strauss -- Barclays -- Analyst Thanks very much. Operator Thank you. Our next question is from Peter Arment from Baird. Please go ahead. Peter Arment -- Robert W. Baird and Company -- Analyst Thanks. Good morning, Dave and Brian. Can you talk about your pending kind of leadership change? I mean, you've been on the board for many years. You've been CEO for five years during what obviously been a very challenging environment with MAX, COVID, 787. But it kind of -- as we think about it in reality, Boeing is in kind of a position to have a multiyear improvement story. So what do you think is the right leader that's needed to execute what is a very complex company? Dave Calhoun -- President and Chief Executive Officer Yeah. I always, I appreciate your asking it, Peter. First of all, the process we have in place is a good one. Steve Mollenkopf in the chair role, Bob Bradway in the governance role, the board at large, they're going to look at the market every way they can. They know I have an internal candidate that I think the world of. They will balance sort of their perspective and get to the right conclusion with my full support. I do not expect that to happen in the next month or two. So let's all be clear about that. Look, my prescription is pretty simple. You know as well as anybody, maybe better than anybody how long-term this business is. You also know that mistakes that matter are usually in the development of another airplane, not so much in the production issues that we face today or the supply chain issues that were created from COVID. These are in the context of aviation, short-term issues that have to get wrestled through slowly in a disciplined way. On the other hand, when you get big development programs wrong, you pay a price, and you pay it for a long time, and I know an awful lot about that. So my view is that next leader has to be prepared to make smart long-term decisions and get the development programs right. So that's the prescription that I've offered to the board, that I offer to pretty much everybody. And again, I have an internal succession plan broadly that I like. And anyway, we'll see where things turn out. But either way, they have my full support. Peter Arment -- Robert W. Baird and Company -- Analyst Appreciate it. Thanks. Matt Welch -- Vice President, Investor Relations Lois, we have time for one more question. Operator Thank you. And that question will come from the line of Jason Gursky from Citigroup. Please go ahead. Jason Gursky -- Citi -- Analyst OK. Great. Good morning everybody. Recognizing that you've got two other segments, the last caller here, nobody has touched on BDS. Dave Calhoun -- President and Chief Executive Officer So, Jason, thank you. Jason Gursky -- Citi -- Analyst The first on the services business. Look, the operating margins there have been quite healthy over the last year or so and I think are operating well above kind of your targeted margin range for that medium-term targets out there in 2025, 2026. So the question is, can we sustain the margins that we've got that we're seeing today out into that period? And then over on BDS, the incremental charges seem like they're coming down quarter-on-quarter. But Brian, just kind of curious, are there some -- any significant milestones or risk retirements that you're -- that you could point to here over the next 12, 18 months that kind of give us a little bit of an idea of when those things completely go away and we begin to start seeing that financial model that you've talked about start to lock in for that 2025, 2026 timeframe? Thanks. Dave Calhoun -- President and Chief Executive Officer Let's split this, Brian. I'll do the services. You can handle the defense contracts. So services. The one thing that I don't think anybody's factored into margin for us in services, a big profit pool that we have is our distribution business. This was the acquisitions of Aviall, KLX over the years. This calendar year, we have a full integration of those two distribution companies in mind. I've reviewed this program. This will be another important productivity stepping stone for the business that, in my view, provides for a sustainable margin improvement and just a better, smarter, simpler way of doing business around the world. So that project is in full swing. We will likely do the change somewhere in the fourth or first quarter of next -- fourth quarter this year or the first quarter of next year. We'll let that team tell us when they want to pull the trigger. But that one is a pretty big one. And it's a pretty important one. It's one I've always wanted to get done. It will take those brands out of play. It will simply be a Boeing brand. And the integration in the warehouses broadly across our company, it's pretty significant. So you want to hit the -- Brian West -- Executive Vice President, Chief Financial Officer Sure. On BDS, Jason, characterize in a couple of ways. We're retiring risk every day, particularly on a program like VC-25B, which will move our way through. And we will deliver two airplanes, and then that will be over as a program. The ones that are interesting to us in terms of the development side would be the T-7 and the MQ. T-7, we expect to get through the flight test program, good progress with the customer. It's proceeding well. That's an important milestone as we exit this year. Similarly, on MQ-25, we will get to the build, we will get to the software integration, and we will be able to get through an important milestone with the customer as we exit this year. Importantly, on the MQ-25, as I mentioned, we just signed with the customer two additional airplanes that are going to be cost type. That's important, another move toward our intent to derisk. And then on the commercial crew, we've got a launch coming up. That will continue to derisk that program. And the Tanker, the Tanker continues to show good progress. It does get impacted somewhat by our determination to reduce traveled work. But long term, the Tankers are performing in the field. We're getting a better handle on what that needs to look like over time, and we're confident that we're derisking it. So by and large, we still feel confident that we'll work our way through it. And that will result in a BDS margin level as we get into the '25, '26 time frame that we believe is going to be in the high single digits. Nothing has taken us off that, and we look forward to retiring these risks. Jason Gursky -- Citi -- Analyst OK. Great. Thank you, guys. Appreciate it. Matt Welch -- Vice President, Investor Relations And that concludes our call today. Thank you, everybody, for joining. Answer:

The Boeing Company's first-quarter 2024 earnings conference call

Operator Good day, everyone, and welcome to The Boeing Company's first-quarter 2024 earnings conference call. Today's call is being recorded. The management discussion and the slide presentation plus the analyst question-and-answer session are being broadcast live over the Internet. [Operator instructions] At this time, for opening remarks and introductions, I'm turning the call over to Mr. Matt Welch, vice president of investor relations for The Boeing Company. Mr. Welch, please go ahead. Matt Welch -- Vice President, Investor Relations Thank you, and good morning, everyone. Welcome to Boeing's quarterly earnings call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's president and chief executive officer; and Brian West, Boeing's executive vice president and chief financial officer. As a reminder, you can follow today's broadcast and slide presentation at boeing.com. As always, detailed financial information is included in today's press release. Furthermore, projections, estimates, and goals included in today's discussion involve risks, including those described in our SEC filings and in the forward-looking statement disclaimer at the beginning of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Now I will turn the call over to Dave Calhoun. Dave Calhoun -- President and Chief Executive Officer Thanks, Matt. Good morning, and thanks for joining us. Although, we report first-quarter financial results today, I will direct my comments toward the dramatic actions we've taken since the Alaska Airlines accident in January. First, we began with taking responsibility. We immediately and transparently began supporting the NTSB to identify the cause of the accident. We supported the FAA investigation of the 737-9 fleet in its entirety to do comprehensive airline inspections, and the aircraft were cleared to go back into service. We immediately acted, working alongside our supply chain, to ensure the door plug depressurization event doesn't ever happen again. We held quality standdowns across all of our production lines in BCA and sought the advice and counsel of more than 70,000 employees to improve our factory disciplines and adherence to our quality standards. All in all, we collected over 30,000 ideas, and the list continues to grow. We have categorized and prioritized all. Employee engagement has been energizing for all. Actions are being taken across all of our factories, and areas of focus include: training, particularly on the job, taking advantage of our slowdown and adding hundreds of hours of training for each of our manufacturing employees; tooling, more of it and improve maintenance; work instructions, simplify, simplify, simplify; compliance checks, discipline; travel work controls, don't travel work; incentive structures; employee listening; and maybe above all, culture improvement. We transparently engaged with the FAA and immediately went to work on a 90-day plan of quality action, to drive improvements throughout our production system. We completed our 30-day review, and we're regularly checking in with the FAA, as we complete our 90-day plan. We engaged a team of independent quality experts to systematically review our quality control process and bring forward long-term recommendation. They are roughly 60 days into their work beginning with Renton and Spirit. And we expect them to stay for several years. We have appointed several new leaders into critical BCA leadership roles in the last couple of months. All have jumped in with both feet, alongside our world-class workforce. They are seasoned operators and all with a critical eye. Effective March 1st, we moved inspection and rework teams to Wichita. Since then, we have only allowed fully inspected fuselages to be shipped to Renton, which has dramatically reduced our nonconformances entering the Renton factory. This started as a triple and has been slowly improving as time goes on. The visibility in Wichita will help the Spirit team prevent nonconformances from being created in the first place. We are already beginning to see signs of more predictable and reduced cycle times in our factory, as a result of these enhanced quality control standards. We expect this will continue to improve. We've extended our commitment to reduce traveled work across all of our assembly lines and deep into our supply chain. While near-term delivery shortfalls hurt and will affect our performance during our first half of the year, the long-term benefits from a synchronized supply chain will be substantial. We are absolutely committed to doing everything that we can to make certain our regulators, our customers, and most importantly, our employees and the flying public are 100% confident in Boeing. And while I have shared my plans to step down as CEO by the end of the year, I will be very focused every day on seeing that commitment through. As we move through this period, it is important that our people and our stakeholders understand how promising Boeing's future looks. Demand across our portfolio remains incredibly strong. Our people are world-class. There's a lot of work in front of us, but I'm proud of our team and remain fully confident in our future. While this effort will slow our recovery timing, we are now seeing these proof points that give us confidence that we'll begin to stabilize and improve performance moving forward. By the end of this year, we expect to have largely delivered our 737 and 787 inventory, effectively shutting down our two large shadow factories. Our commercial business will be more stable. Our defense unit will be progressing toward more historic levels of performance. And our services team will continue to deliver exceptional results. And most importantly, we will have embedded all of the important lessons we've learned in the last few months and over the last several years. During that time, I've had the opportunity to speak to many of our frontline team members, engineers, and mechanics. I continue to be amazed by the pride they take in their work, their commitment to getting things done the right way, the safe way, their willingness to raise their hands and offer ideas for how to do things better. With that, I'll turn it over to Brian. Brian West -- Executive Vice President, Chief Financial Officer Thanks, Dave, and good morning, everyone. Let's start with the total company financial performance for the quarter. Revenue was $16.6 billion, down 8% versus last year, primarily reflecting lower 737 delivery volume. The core loss per share was $1.13, a slight improvement versus last year, also reflecting lower 737 deliveries. Free cash flow was a usage of $3.9 billion in the quarter, a higher usage than last year and in line with the expectations shared last month. Cash was impacted by lower commercial deliveries and unfavorable timing of receipts and expenditures. Turning to next page, I'll cover Boeing Commercial Airplanes. BCA booked 125 net orders in the quarter, including 85, 737-10s for American Airlines and 28, 777Xs for customers, including Ethiopian Airlines. The backlog grew to $448 billion and includes more than 5,600 airplanes. BCA delivered 83 airplanes in the quarter. Revenue was $4.7 billion, and operating margin was minus 24.6%. These results were significantly lower than last year primarily reflecting lower 737 deliveries and the 737-9 grounding impact for customer considerations of $443 million. Now I'll give more color on the key programs. On the 737, we delivered 67 airplanes in the first quarter as we deliberately slowed production below 38 per month to incorporate improvements to our quality and safety management systems, including reducing traveled work and addressing supplier non-conformances. These continued efforts will cause April deliveries to be more in line with February levels as we complete our work. Production were below 38 per month for the first half of the year and will be higher in the second half as we move back to 38 per month. With the timing of rates beyond 38, predicated on the work we're doing with the FAA. We've recently made adjustments to the master schedule, and we'll continue to manage supplier by supplier based on inventory levels and rate ramp readiness. Our objective remains to keep the supply chain paced ahead of final assembly to support stability and minimize traveled work. The quarter ended with approximately 110, 737-8s built prior to 2023, the vast majority for customers in China and India. This is down 30 airplanes from last quarter and in line with our plans. We still expect to deliver most of these inventoried airplanes by year-end as we work toward shutting down the shadow factory. There were -- 95 additional airplanes in inventory, about 35 of which were -7 and -10s, and the remaining are WIP airplanes impacted by factory and supply chain constraints. On the anti-icing, the timeline is unchanged, and we're making good progress toward resolution. As it pertains to the certification of the -7 and the -10, we coordinated with our customers and added more 8s and 9s into the skyline in the near term to mitigate impacts to their fleet needs and stabilize our production plans. And the program margin has been updated to reflect these impacts as well as the slower production ramp. On the 787, we delivered 13 airplanes in the quarter. We're slowing near-term production and plan to return to five per month later this year. We expect to achieve rate increases, including 10 per month by 2026. We ended the quarter with about 60 airplanes of inventory, about 40 of which require rework, which continues to progress steadily and in line with our expectations. We still expect to finish the reworked airplanes and shut down the shadow factory by year-end with most of these airplanes delivering in the year. Finally, on 777X, we continue to progress along the program timeline and still expect first delivery in 2025. We'll follow the lead of the FAA, as we progress through the process, including working to obtain approval from the FAA to begin certification flight testing. Moving on to the next page, we'll go to Boeing Defense & Space. BDS booked $9 billion in orders during the quarter, including awards for 17 P-8 aircraft for the Royal Canadian Air Force and the German Navy and securing final FAA team newbuild production contract from the U.S. Navy. The backlog grew to $61 billion. Revenue was $7 billion, up 6% on improved volume, and BDS delivered 14 aircraft in the quarter. Operating margin was 2.2%, another quarter of sequential improvement, but still more work to do. First-quarter results were impacted by losses on two fixed price development programs totaling $222 million, $128 million on the Tanker and $94 million on the T-7A. Our game plan to get BDS back to high single-digit margins by the 2025, 2026 time frame remains intact. We've made important progress in 1Q. Our core business, representing about 60% of our revenue, is seeing solid consistent performance in the mid- to high single-digit margin range with strong demand across the board. On the 25% of the portfolio, primarily comprised of fighter and satellite programs, operational performance further stabilized in the quarter, which drove improved margin trends. We still expect to return to the strong historical performance levels as we roll into new contracts with tighter underwriting disciplines as we move into the 2025, 2026 time frame. Lastly, we have our fixed-price development programs that represent the remaining 15% of revenue. Despite the relatively modest updates in the quarter, we continue to retire risks and remain focused on maturing these programs quarter in and quarter out. Importantly, on the MQ-25 program, the program was awarded a cost-type contract modification from the U.S. Navy that included two additional test aircraft, demonstrating our progress and our commitment to stronger underwriting disciplines in the area of the development programs. The program also delivered the first static test article to the Navy, and the airframe is ready to begin stress testing. And on the Starliner, the program continues to progress toward a May 6th crew flight test, as the spacecraft was recently integrated on top of its [Inaudible] rocket, and prelaunch testing is underway. Lastly, the T-7A test aircraft completed climate lab testing in February, and the program continues to progress with Air Force flight testing. Overall, the defense portfolio is well-positioned. As seen in the initial FY 2025 presidential budget, there's strong demand across the customer base. The products are performing in the field, and we're confident that our efforts to drive active stability will return this business to performance levels that our investors recognize. Moving on to the next page, Boeing Global Services. BGS had another strong quarter. They received $5 billion in orders, and backlog is at $20 billion. Revenue was $5 billion, up 7% primarily on higher commercial volume and favorable mix. Operating margin was a strong 18.2%, an expansion of 30 basis points compared to last year. In the quarter, BGS opened a maintenance facility in Jacksonville, Florida, supporting our military customers. And the U.S. Navy exercised options on a P-8 sustainment modification contract. Turning to the next page, I'll cover cash and debt. On cash and marketable securities, we ended the quarter at $7.5 billion, reflecting the debt repayment activity and use of free cash in the quarter. The debt balance decreased to $47.9 billion, as we paid down $4.4 billion of the $5 billion of maturities due this year. We continue to maintain access to $10 billion of revolving credit facilities, all of which remain undrawn. While we're still not in a position to provide a more detailed 2024 outlook today, I want to provide some additional context on the path forward. The 2024 free cash flow outlook I shared last month is still expected to be a generation in the low single-digit billions. Cash flow should improve as we move through the year and be back-end loaded, driven by BCA deliveries and receipt timing, including an expected Lot 11 award on the Tanker. Second quarter free cash flow is expected to improve sequentially but be another sizable use of cash. We're committed to managing the balance sheet in a prudent manner with two main objectives: one, prioritize the investment-grade rating; and two, allow the factory and supply chain to stabilize for a stronger trajectory as we exit this year. As we operate at these lower production rates, we're actively monitoring our liquidity levels and believe we have significant market access and are continuously monitoring and evaluating opportunities should we decide to supplement our liquidity position. Longer-term, we remain confident in our ability to achieve $10 billion of free cash flow. However, given our continued focus on safety, quality, stability, we continue to expect that this goal will take us longer than we originally planned and later in the 2025, 2026 window primarily tied to the 737 and 787 production delivery ramps of 50 per month and 10 per month, respectively. Moving on, discussions with Spirit are ongoing. As with any large and complex deal, there are a number of terms and issues we need to work through, including price, financing and other key items. And the best approach to handling and potentially divesting certain work that Spirit does for other customers. We believe in the strategic logic of a deal, but we'll take the time needed to get this right before we decide to enter into agreement. In the meantime, the focus is on factory stability in Wichita and in Renton. And as you saw yesterday, we agreed to advance Spirit $425 million, virtually all of which will be repaid in the third quarter. This will be accounted for as investing cash. Looking forward to the balance of the year, we're taking the time now to ensure our BCA factories are stable and positioned to ramp production. We'll also continue to make progress on other important objectives, including shutting down the shadow factories, maturing and derisking the defense fixed-price development programs and building on the continued strong results in services. Our backlog of nearly $530 billion speaks to the breadth of our portfolio, and this demand backdrop underpins our commitment to drive long-term results, all enabled by the everyday execution of 170,000 incredibly talented and dedicated team of Boeing employees. With that, why don't we turn it over to questions? Questions & Answers: Operator Thank you. [Operator instructions] And our first question will come from the line of Myles Walton with Wolfe Research. Please go ahead. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. You gave color on the April MAX deliveries similar to February, but I'm really more interested in the production output, how it's going on the line, where you are relative to where you were -- when you started to give the no traveled work policy, how that's improving or not? And what specific metrics you're looking at to allow you to go higher over the next six months? Dave Calhoun -- President and Chief Executive Officer So why don't I start this off? It is going to stay sporadic through 2Q. The real pivot for us is the number of clean fuselages we get out of Spirit with the new inspection protocols. It started slow. In the meantime, we've been working on all the fuselages that were already trapped in the pipeline that did not go through that inspection process. So that's why, it's slow and lumpy here in these couple of months, but we will be through that process within the next 60 days. And then we will just be dealing with clean fuselages out of Wichita. So far, we're quite encouraged at just how clean they are and how quickly they move through our production cycle, substantially better, faster than before. So as we exit 2Q, we will know exactly what numbers are coming out of Wichita and what expectations are. We are not going to rush it. We're simply going to demand that they be clean. But I like all the signals. I was walking through the factory yesterday. When we get a clean one, it whistles through the factory, and that's the most important thing. Myles Walton -- Wolfe Research -- Analyst OK. Thank you. Operator Thank you. The next question is from Doug Harned from Bernstein. Please go ahead. Doug Harned -- AllianceBernstein -- Analyst Yes. Thank you. Good morning. Dave Calhoun -- President and Chief Executive Officer Hi, Doug. Doug Harned -- AllianceBernstein -- Analyst When you look at production on the 737, when you talk about going to $10 billion in free cash flow maybe by late -- by the end of 2026 or even 2027, this seems to be very much contingent on getting to this 50 a month rate. But when you look at that process, if I go back even pre-grounding for the MAX, Spirit had never successfully done a rate break to 50 a month before. And given the restart mode that they're in right now, how do you see the pathway to getting up from where they are today, getting through the quality issues and getting to 50 a month there within two years? Dave Calhoun -- President and Chief Executive Officer We do. Spirit's committed to it. I think the acquisition of Spirit will factor in significantly into that prospect. Clean fuselages in Spirit and in Wichita and fix on all those non-conformances will reduce their cycle and improve their output. So there's a lot of things that contribute to it, Doug. If we get ourselves to 38, which is our first objective, and we do it in a steady fashion moving up another 12 in my view is doable in the window that we're talking about. So that's the bet we're making, and I'm confident we can get there. But job one is the six months that commenced post Alaska and the inspection protocols and the non-conformance fixes that are then embedded into the Wichita facility. Doug Harned -- AllianceBernstein -- Analyst OK. Thank you. Operator Thank you. The next question is from Cai von Rumohr from TD Cowen. Please go ahead. Cai von Rumohr -- TD Cowen -- Analyst Yes. Thank you. So as a result of the production slowdown, you've had some -- presumably, you'll have late deliveries to customers. And traditionally, late deliveries require compensation. Could you give us some color in terms of what sort of a number we're going to look at? And basically, where are we going to see it? Is that going to be front-loaded, back-loaded? How should we think about that? Brian West -- Executive Vice President, Chief Financial Officer Cai, I'll take that one. Why don't we talk about in the context of 737 overall margins? The program booked about 300 basis points of impact in the quarter. And that was primarily driven by the delayed rate rent that you're describing, as well as mixing in more 8s and 9s or 10s in the near-term so that we can support our customers and their fleet planning. So that will all roll through, and the timing will be expanded over the next couple of years. What our expectation is that over time that while these program margins won't get back to the 2018 levels, they will expand. And that will largely be driven by the rate ramps that Dave described. And the reason why they'll be different from where they were in 2018 is largely, as you know, is because of the customer mix and these delayed considerations. So all-in-all, when we step back and think about long-term, structurally, particularly on the cash margin front, not a lot has changed. We just have to work through getting from here to those higher levels, including the consideration that we've described that we booked in the quarter. Overall, long term, we still think we get there. Cai von Rumohr -- TD Cowen -- Analyst Thank you. Operator Thank you. The next question is from Seth Seifman from J.P. Morgan. Please go ahead. Seth Seifman -- JPMorgan Chase and Company -- Analyst Thanks very much and good morning. Brian, you talked a little bit about the cash balance and liquidity. I don't know if this is necessarily the right way to think about it, but I feel like there's this conventional wisdom out there that Boeing should have roughly $10 billion of cash on the balance sheet. Maybe that can dip a little bit lower intra-year as we see now. But burning cash in the second quarter, kind of how low can that cash balance get before you have to do something? When you talked about additional sources of liquidity, what were you talking about? And how much room do you think you still have with the rating agencies to avoid getting put on a negative watch? Brian West -- Executive Vice President, Chief Financial Officer Thanks, Seth. First and foremost, I remind everyone that we do have $17 billion of liquidity today, comprised of the cash on hand as well as our credit lines. What we're focused on is a first half cash usage that is resulting from all of the actions we're taking to stabilize both the factory and the supply chain to set ourselves up for success as we move to the second half and into 2025. And to that end, any supplemental funding that I talked about would do two things. First of all, it would restore our cash balance to the historical level that you point out, that $10 billion-ish. But it also means that we want to continue our practice to stay well ahead of our near-term maturities. And by near term, I mean roughly the next 12 months. So that's what we're thinking about as we sit here today. We will be prudent and thoughtful. We believe the market would be open to us. And as we've said consistently, the most important thing is our investment-grade credit rating that we think a lot about, and it is a priority. Seth Seifman -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Operator Thank you. Our next question is from Sheila Kahyaoglu from Jefferies. Please go ahead. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, Dave, Brian, Matt. Can we talk about the 737 rate again? How much of that is self-inflicted versus the FAA processes that are in place? And when we think about the 90-day timeline that comes to a head with the IAM negotiations over the summertime, I would assume, so how do we think about the IAM progressing as well? And how much was incorporated into the $10 billion free cash flow target? Dave Calhoun -- President and Chief Executive Officer OK, Sheila, that's like a three-parter. Sheila Kahyaoglu -- Jefferies -- Analyst Sorry about that. Dave Calhoun -- President and Chief Executive Officer Yes, I'll do my best. So I -- all of the 737 disruption that it goes on today, in my view, is self-inflicted in the sense that we've made the decision that the amount of traveled work, particularly as it relates to the fuselage that was embedded and normalized in our factory that we would make a dramatic reduction in it. So that move we made with all the inspectors and all the rework operators down to Wichita, the visibility we've provided to the Wichita workforce with respect to the rework that we were doing. The FAA didn't demand that. We demanded it because it's -- we're determined to get ahead of it. What the FAA is doing, and they have been very diligent and business-like in the way they've approached this is they want a control plan. And they want a control plan in 90 days that, in essence, monitors and measures whether our production system is in control moving forward. And if it ever gets out of control, the signals are clear, both to the FAA and to us even more importantly, and that we don't -- we won't extend. We won't rate up. We won't do anything until it is under control, and that has to stay that way. So 90 days isn't like a wave a magic flag, and everything is great, and you guys can go from 38 to 40. It's quite different. It is simply a set of metrics and controls that we both agree are the right ones to monitor the performance of our factories. And I am confident it will be a good set of controls and something that we can live up to. And we're going to work our way through this one. As I said, the most important thing that occurs over the next six months or frankly, starting in January when we launched this effort is going to be the pace at which clean fuselages come out of Wichita. That is the most essential part of this equation. With respect to IAM, as you know, we work through the summer, there's a lot of discussions going on between our team and their teams. It feels productive. While we're doing that, we have huge engagement with a relatively new workforce across our factories in light of what we've just experienced. That engagement helps. It doesn't hurt. I am -- I can't ever tell you I'm perfectly confident that we rush to an agreement. But we're all going to try to solve for continuous production. And I think we -- I think our chances are good. So -- but we're not going to know until we get really close to the deadline. And that's just real life and labor negotiation. And I think that covers most of what you asked. Was there any other part I missed? Sheila Kahyaoglu -- Jefferies -- Analyst The $10 billion free cash flow, does it incorporate the IAM negotiation? Dave Calhoun -- President and Chief Executive Officer Oh, yes. Yes. Yes. Sheila Kahyaoglu -- Jefferies -- Analyst OK. Thank you. Dave Calhoun -- President and Chief Executive Officer Yeah. Operator Thank you. And the next question is from the line of Noah Poponak from Goldman Sachs. Please go ahead. Noah Poponak -- Goldman Sachs -- Analyst Hi. Good morning, everybody. Dave Calhoun -- President and Chief Executive Officer Hey, Noah. Noah Poponak -- Goldman Sachs -- Analyst I guess this is sort of asked, and you've alluded to pieces of the answer to this, but I'm just going to ask it anyway because it seems to be the most important thing, which is just how long does it take to do everything you need to do on product quality? And how much of it needs to be done before you can increase production again versus how much of it can be done as you're increasing production again? Because I've heard you now reference six months a few times, and you've referenced the back half of the year looking a lot different than the first half of the year. And six months isn't a short window of time. But in the context of what you're doing and referencing 30,000 ideas and if you're going to take Spirit in, that hasn't even happened yet, and it's almost May, when you were working with the FAA on 787 a few years ago, you didn't deliver one for 18 months. So I don't know what you can say to that, but how do we get confident that the time just doesn't keep ripping by, and you're not iterating back and forth and there isn't a much longer window of time needed to do everything you need to do to start to ramp again? Dave Calhoun -- President and Chief Executive Officer Yeah. So Noah, I'll address this one. First of all, I'm glad you asked about the six months. When I say six months, I'm talking about the first half of this year because remember, we commenced all of these actions the day after the Alaska Air accident. Our determination -- the big factor here, in my view with respect to the essence of the question, is this move to eliminate traveled work in our factory and specifically and most importantly, the fuselage. So that action was commenced on March 1st, inspection line in place, full inspections being performed in Wichita. Our rework teams with respect to non-conformances that were worked up in Seattle, those teams have been visiting regularly down to Wichita. And I fully expect – I fully expect for them to come up to rate with clean fuselages here as we get into the second half. That, again, is the big productivity driver in the Renton factory. And the cycle time improvements also double up as capacity improvements for pretty much for us and for them. So that is the big question. The 30,000 ideas, that is a long list of stuff that just provides for continuous improvement from this day until forever. So that's not something that all has to get processed and completed before we can sort of flip the switch and go. It's quite the opposite. It is a set of continuous improvement concepts and ideas that we simply set out with our workforce and our leadership team over time. And that's recognized by our employees and by our leadership team. So that's how I think about this sequence. Noah Poponak -- Goldman Sachs -- Analyst OK. Have you guys thought about framing and disclosing some version of that timeline of work maybe in big buckets or categories that you would provide to the investment community? Because it feels like everybody is guessing and has no visibility. And if you said, traveled work is one category, Wichita, I don't know what the categories would even be. But if there was four or five of them, and you could provide an update on which are complete and how complete the other ones are as you report just some version of milestones that investors could follow on your progress here? Dave Calhoun -- President and Chief Executive Officer I think that's fair. Noah, the most important one, the essential one and that we will have to report as we close the second quarter is going to be the number of clean fuselages that we're receiving from Wichita, and the prognosis for that going forward. So that will be the most essential part of the equation I think you're trying to solve. I think all the other stuff, we'll categorize for you. That's not hard. We do it for the FAA. We do it for our own teams. But that is not going to be rate limiting. It's not -- none of that is going to factor into the rate limits. What is going to factor is this determination, it's to make sure traveled work doesn't come back to us and that Wichita is up to the rate increases. Noah Poponak -- Goldman Sachs -- Analyst OK. Thank you. Operator Thank you. Our next question is from Kristine Liwag from Morgan Stanley. Please go ahead. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning. Dave, Brian, you mentioned that the first half deliveries for the 737 will be under pressure as you focus on quality. But then again, stability of the supply chain is also a priority. So in the event that 737 MAX production and deliveries continue to be under pressure beyond the first half of this year, how long can you keep the supply chain at a higher rate? What does it mean to keep them stable? And then also as a follow-on to that, if this were to play out, can you talk about the puts and takes of free cash flow generation in the second half of the year? Dave Calhoun -- President and Chief Executive Officer Yes, I'm sure Brian is going to answer this one, but let me start. We have a rate increase plan. And as everyone knows, it gets us up to 50 here as we get into that 2025, 2026 window. So our job now, given the slowdown here in these six months and then sort of the push out of those rate increases is to make sure we have all the inventory we need to satisfy that 50 number and have the buffers where they need to be to make sure that the supply chain can demonstrate the capacity to meet those numbers. So this slowdown, in my view, is an opportunity for us to shore up whatever supply chain issues were out there sort of one supplier at a time and to get there. Now, if we get to a moment because the slowdown has gone on too long, if we get to a moment where the buffers exceed that requirement, we will curtail but not until they exceed that requirement. Brian? Brian West -- Executive Vice President, Chief Financial Officer Only thing I would add is that tactically, we have adjusted the master schedule at a supplier-by-supplier basis. It's all out there. They know it. We will continue to pace final assembly in line with that master schedule so that we don't sacrifice stability because what we're talking about is a very important near-term investment that we have to stay laser-like focused on so that we don't take a step back. And that's what we're focused on. And we believe that we can handle the cash flow fluctuations as we get through the first half into the second half and position ourselves for 2025. Kristine Liwag -- Morgan Stanley -- Analyst Great. Thank you for the color. Operator Thank you. And our next question is from Scott Deuschle from Deutsche Bank. Please go ahead. Scott Deuschle -- Deutsche Bank -- Analyst Hey, good morning. Dave Calhoun -- President and Chief Executive Officer Scott, good morning. Scott Deuschle -- Deutsche Bank -- Analyst Dave, could you further characterize what you're seeing with respect to supply chain performance on the 87? And where the constraints are that are driving you to drop back below five a month? And then I'm curious if there's been any change to the plan on the 777X ramp. Thank you. Dave Calhoun -- President and Chief Executive Officer Yes, no change on the latter. But we really have two constraints to think about on the 87. One is discrete, it's well understood and known, and it's heat exchangers. This is a product that used to be built in Russia. When the invasion happened, it got moved, and the capacity of that supplier has not kept pace with us. But the improvement plan that we all see gets us where we need to be by the fourth quarter, and we have a lot of confidence in it. So again, discrete, well known, etc. The other one that is -- that affects us is not necessarily our suppliers. But as you may know, the seat suppliers out there are in shorter capacity. A lot of that is buyer furnished, but nevertheless, it holds up an airplane. And so that one is a little more medium term-ish. Capacity is being built out. I think people will get ahead of it, but that will be a little longer than the heat exchanger. And anyway, so that will affect us a bit. And when you have a buyer-furnished problem like that, you don't have a consequence attach to it, as you probably know. Scott Deuschle -- Deutsche Bank -- Analyst Got it. And then, Brian, can you get an advance on the large P-8 contract that you won this quarter? Brian West -- Executive Vice President, Chief Financial Officer So we're going to not talk about that specifically in terms of that award. I did want to come back to two things that you asked about. I want to make sure there's color out there. 777X as we described, no changes. But I would like to indicate that we're starting to see the inventory implications of that ramp. And that's something that's big and important as we move through this year, and we're excited to be able to put that in service. But that does create some working capital pressure that I don't want to be -- have lost on anyone. And as it pertains to the 87, very nice progress in terms of our inventory liquidation progressing well. Keep in mind, not all of that will get delivered. All that will get reworked and completed, but the deliveries are going to lag. And as far as production is concerned, we will be a couple lower than that five per month for most of the year as the supply chain catches up. And as Dave mentioned, we do have a recovery plan, and we are optimistic. And one bright spot is that that second line has now been activated. So as soon as that supply chain is positioned we'll be ready to go, but it will be lower as we move through this year. Scott Deuschle -- Deutsche Bank -- Analyst Thank you. Operator Thank you. And the next question is from David Strauss from Barclays. Please go ahead. David Strauss -- Barclays -- Analyst Thanks. Good morning. Just wanted to clarify on your comments around the balance sheet and liquidity. Is equity -- considering equity issuance, is that still off the table as you think about the balance sheet and potentially funding Spirit? Brian West -- Executive Vice President, Chief Financial Officer Well, as we stand for what I described in terms of what we're looking at right now, working closely with the rating agencies, we believe we can do the move I described in the near term with market access without that. As it pertains to Spirit, we talked about that this is a deal where discussions are ongoing. It's complicated. There's other parties involved. And what this means is that once it does get signed, we expect it to, that it's going to take time to close. And in that time between signing and closing, we're going to explore the optimal financing for that transaction in order to maintain the investment credit rating. And that's important. How exactly that looks? Don't know. We've got the time. And importantly, at the same time, we're going to have a factory that we expect to get more and more stable. So we're going to get to the optimal answer. We're going to protect the investment-grade credit rating and how the pieces play out, stay tuned. David Strauss -- Barclays -- Analyst OK. And a quick follow-up there as it relates to Spirit. How engaged is Airbus in this process at this point and thinking about potentially taking back their own work? And does the deal need to wait until you get full clarity on what might happen with that Airbus business? Or do you think you can move forward without full clarity there? Dave Calhoun -- President and Chief Executive Officer No, we can move forward without full clarity. And as you probably know, we're not going to get involved in that, whatever is going on there. We encourage Spirit to do whatever they need to do to try to remedy or improve their business relative to our potential acquisition. So I don't have a lot of insight into that. But I encourage Spirit to try to resolve that kind of stuff as quickly as they can. But we are not being held hostage to that. David Strauss -- Barclays -- Analyst Thanks very much. Operator Thank you. Our next question is from Peter Arment from Baird. Please go ahead. Peter Arment -- Robert W. Baird and Company -- Analyst Thanks. Good morning, Dave and Brian. Can you talk about your pending kind of leadership change? I mean, you've been on the board for many years. You've been CEO for five years during what obviously been a very challenging environment with MAX, COVID, 787. But it kind of -- as we think about it in reality, Boeing is in kind of a position to have a multiyear improvement story. So what do you think is the right leader that's needed to execute what is a very complex company? Dave Calhoun -- President and Chief Executive Officer Yeah. I always, I appreciate your asking it, Peter. First of all, the process we have in place is a good one. Steve Mollenkopf in the chair role, Bob Bradway in the governance role, the board at large, they're going to look at the market every way they can. They know I have an internal candidate that I think the world of. They will balance sort of their perspective and get to the right conclusion with my full support. I do not expect that to happen in the next month or two. So let's all be clear about that. Look, my prescription is pretty simple. You know as well as anybody, maybe better than anybody how long-term this business is. You also know that mistakes that matter are usually in the development of another airplane, not so much in the production issues that we face today or the supply chain issues that were created from COVID. These are in the context of aviation, short-term issues that have to get wrestled through slowly in a disciplined way. On the other hand, when you get big development programs wrong, you pay a price, and you pay it for a long time, and I know an awful lot about that. So my view is that next leader has to be prepared to make smart long-term decisions and get the development programs right. So that's the prescription that I've offered to the board, that I offer to pretty much everybody. And again, I have an internal succession plan broadly that I like. And anyway, we'll see where things turn out. But either way, they have my full support. Peter Arment -- Robert W. Baird and Company -- Analyst Appreciate it. Thanks. Matt Welch -- Vice President, Investor Relations Lois, we have time for one more question. Operator Thank you. And that question will come from the line of Jason Gursky from Citigroup. Please go ahead. Jason Gursky -- Citi -- Analyst OK. Great. Good morning everybody. Recognizing that you've got two other segments, the last caller here, nobody has touched on BDS. Dave Calhoun -- President and Chief Executive Officer So, Jason, thank you. Jason Gursky -- Citi -- Analyst The first on the services business. Look, the operating margins there have been quite healthy over the last year or so and I think are operating well above kind of your targeted margin range for that medium-term targets out there in 2025, 2026. So the question is, can we sustain the margins that we've got that we're seeing today out into that period? And then over on BDS, the incremental charges seem like they're coming down quarter-on-quarter. But Brian, just kind of curious, are there some -- any significant milestones or risk retirements that you're -- that you could point to here over the next 12, 18 months that kind of give us a little bit of an idea of when those things completely go away and we begin to start seeing that financial model that you've talked about start to lock in for that 2025, 2026 timeframe? Thanks. Dave Calhoun -- President and Chief Executive Officer Let's split this, Brian. I'll do the services. You can handle the defense contracts. So services. The one thing that I don't think anybody's factored into margin for us in services, a big profit pool that we have is our distribution business. This was the acquisitions of Aviall, KLX over the years. This calendar year, we have a full integration of those two distribution companies in mind. I've reviewed this program. This will be another important productivity stepping stone for the business that, in my view, provides for a sustainable margin improvement and just a better, smarter, simpler way of doing business around the world. So that project is in full swing. We will likely do the change somewhere in the fourth or first quarter of next -- fourth quarter this year or the first quarter of next year. We'll let that team tell us when they want to pull the trigger. But that one is a pretty big one. And it's a pretty important one. It's one I've always wanted to get done. It will take those brands out of play. It will simply be a Boeing brand. And the integration in the warehouses broadly across our company, it's pretty significant. So you want to hit the -- Brian West -- Executive Vice President, Chief Financial Officer Sure. On BDS, Jason, characterize in a couple of ways. We're retiring risk every day, particularly on a program like VC-25B, which will move our way through. And we will deliver two airplanes, and then that will be over as a program. The ones that are interesting to us in terms of the development side would be the T-7 and the MQ. T-7, we expect to get through the flight test program, good progress with the customer. It's proceeding well. That's an important milestone as we exit this year. Similarly, on MQ-25, we will get to the build, we will get to the software integration, and we will be able to get through an important milestone with the customer as we exit this year. Importantly, on the MQ-25, as I mentioned, we just signed with the customer two additional airplanes that are going to be cost type. That's important, another move toward our intent to derisk. And then on the commercial crew, we've got a launch coming up. That will continue to derisk that program. And the Tanker, the Tanker continues to show good progress. It does get impacted somewhat by our determination to reduce traveled work. But long term, the Tankers are performing in the field. We're getting a better handle on what that needs to look like over time, and we're confident that we're derisking it. So by and large, we still feel confident that we'll work our way through it. And that will result in a BDS margin level as we get into the '25, '26 time frame that we believe is going to be in the high single digits. Nothing has taken us off that, and we look forward to retiring these risks. Jason Gursky -- Citi -- Analyst OK. Great. Thank you, guys. Appreciate it. Matt Welch -- Vice President, Investor Relations And that concludes our call today. Thank you, everybody, for joining.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, everyone, and welcome to the Bank of America earnings announcement. [Operator instructions] Please note, this call may be recorded. [Operator instructions] It is my pleasure to turn the conference over to Lee McEntire of Bank of America. Lee McEntire -- Senior Vice President, Investor Relations Good morning. Thank you, Leo. Welcome, and thank you for joining the call to review our first-quarter results. Our earnings release documents are available on the Investor Relations section of the bankofamerica.com website, and that includes the earnings presentation that we will be referring to during the call. I trust that everyone's had a chance to review the documents. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments before Alastair Borthwick, our CFO, discusses the details of the quarter. Before they begin, let me just remind you, we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials, our SEC filings that are available on our website. Information about non-GAAP financial measures, including the reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on the website. So with that, I'll turn the call over to you, Brian. Thanks. Brian Moynihan -- Chief Executive Officer Thank you, Lee, and good morning to all of you, and thank you for joining us. I am starting on Slide 2 of the earnings presentation. We once again delivered a strong set of results in Quarter 1. We reported net income of $6.7 billion after tax and EPS of $0.76. This included the additional expense accrual for the industry's special assessment by the FDIC to recover losses from the failures of Silicon Valley Bank and Signature Bank. This lowered our Quarter 1 EPS by $0.07. Excluding net expense, net income was $7.2 billion and EPS was $0.83 per share in Quarter 1. Alastair is going to walk you through the details of the quarter momentarily. But first, let me give you a few thoughts on our performance. We delivered good improvement in our fee-based business, driven both by continued organic growth and good market conditions. Investment banking saw a nice rebound this quarter. We delivered nearly $1.6 billion in investment banking fees and grew 35% from the first-quarter 2023. Matthew Koder and the team have done a great job delivering market share growth. In addition, our results reflect the benefits of investments beta, our middle-market investment banking teams and dual-coverage teams. Matthew has utilized his benefit and power wisely to grow our middle-market team from 15 bankers in 2018 across a dozen cities to more than 200 bankers in twice as many cities today. Both groups work with our commercial bankers and wealth management advisors in those cities to deliver for our clients. Investment in brokerage services revenue across Merrill and the Private Bank grew 11% year over year in Quarter 1 to nearly $3.6 billion. Continued investments in our advisor training programs and digital delivery for our clients as well as positive market helped us deliver strong revenue. Asset under management flows were $25 billion in the quarter. Sales and trading, excluding DVA, delivered its eighth consecutive quarter of year over year revenue improvement. At $5.2 billion, this is the highest first-quarter result in over a decade. We have allocated more balance sheet invested in talent to build on our strengths for the last five years in this business. Those investments, plus the intensity of the teams under Jimmy DeMare's leadership has resulted in good momentum and market share improvement. From a balance sheet perspective, we entered the quarter expecting modest loss in loan growth and a decline in deposits, those were our expectations. What we actually delivered was growth in any deposits of more than $20 billion. Ending loans were down modestly due to the expected credit card seasonality. Otherwise, loans are pretty stable. This balance sheet performance, along with our continued pricing discipline, allowed us to deliver better-than-expected NII performance. We told you last quarter that we expected NII to decline from the fourth quarter of 2023 to the first quarter of 2024, a decline about $100 million to $200 million. We actually reported today NII of $14.2 billion. That was $100 million higher than Quarter 4, exceeding our guidance. We continue to deliver strong expense management. Year-over-year expenses, adjusted for the FDIC assessment, was up a little less than 2%. That compares to a 4%-plus inflation rate. We also continue to invest in our company while managing those expenses. We had several categories of stronger fee-based revenue in the first quarter this year. This drove higher formulaic compensation and processing costs of the increased activity. Fees and commissions were up 10% year over year. We are happy to pay for that revenue and deliver warnings to the bottom line because of it. So how did we do all that and hold expenses under the inflation rate? Well, we remain focused on three primary drivers of Bank of America. First, our operational excellence platform continues to deliver and improve processes. These savings from that growth helped fund the future growth in the company and lower the risk. Second, we managed head count as we eliminated work. Recall, we noted the expectation in January of last year that our head count will be down throughout the year. Our head count at the end of first-quarter 2024 is down by more than 4,700 people from the first-quarter 2023. It declined 650 people just for the end of 2023. The digitization activity is also driving ongoing expense cost savings, customer retention, and market share improvement, driving across all three factors. It also then supports the ever-increasing volumes of client activity with little increased cost. I would highlight our continued capital strength with common equity Tier 1 capital of $197 billion. That amount of capital is $31 billion over the current regulatory minimums for our company. That capital has allowed us to both support our clients and returned $4.4 billion to shareholders this quarter and share repurchases and dividends. Let me highlight a few points on organic growth before I pass over to Alastair. Now I'm turning to Slide 3. You can see Slide 3, the highlights of the Quarter 1 success for organic activity across the businesses. We continue to invest and enhance our digital platforms. We provide our customers with convenient and secure banking experiences. By leveraging our technology and continuous investment in that technology and putting customers at the center of everything we do, we have successfully deepened our relationships and expanded our customer base across all our businesses. In consumer, we added 245,000 net new checking accounts this quarter. This completes 21 straight quarters of net additions. Dean Athanasia, Aron Levine, and Holly O'Neill helped drive that business for us and continue to perform well, driving strong performance across our consumer franchise. These checking balances continue to drive the performance of our consumer deposits. These checking additions are important for many other reasons. On average, 68% of our deposit balances have been with us for more than 10 years. 92% of the customer checking accounts are primary checking accounts in the household, meaning that they're the core operating account for the household for their financial lives. So when we onboard a client, we start a long-term valuable relationship. About 60% of our checking accounts customers use a debit card, and in average they do about 400 transactions per year on that card. The new checking accounts have traditionally opened savings accounts, about 25% of the time within a few months of opening that checking account. And opening a new checking account on average brings about $4,000 in balances below our averages. But that continues to grow, and within a year, it's two times that amount. Likewise, when we open a new savings account, it on average brings about $7,000 in balances. This also deepened it by about two times during the year. Investment relationships and credit card account openings continue to be strong in the first quarter as well. And while we believe some of these statistics are best-in-class, rest assured, there are plenty of opportunities for further growth in our franchise and our company. As we think about our Global Wealth team led by Eric Schimpf, Lindsay Hans, and Katy Knox, that team added 7,300 net new wealth relationships at the Merrill and the Private Bank. Our advisors opened 29,000 new bank accounts in the quarter with our customers deepening the relationships. More than 60% are investing clients in Merrill, and 90% of our private banking clients now have a core banking relationship with us. In addition, across our wealth spectrum, we saw $60 billion in total flows over the last year. As you can see on the slide, we now manage more than $5.6 trillion in total client balances across loans, deposits, and investments in consumer and wealth management. When we move to Global Banking, we added more new relationships in this quarter than we did in last year's first quarter. We also increased the number of solutions per relationship with preexisting clients. Just like in our consumer business, we have seen good growth in customers seeking the benefits of both our physical and our online capabilities and our talent, and also the care of our talented relationship managers who provide financing solutions and advice for our clients with global needs. A couple of other points I'd make on our digital success. Erica, our virtual banking assistant, reached a key milestone of more than 2 billion interactions since its introduction about 6 years ago. It took four years to reach 1 billion interactions. It took just 18 months to reach the second billion. In August, we extended Erica's reach and launched Erica in our Global Treasury Services business and CashPro. Erica, as a result, 43% of the CashPro chat inquiries automatedly, demonstrating more and more clients are able to self-solve. This is a great example of best practices being shared across the scale of our company. Second, as an example of our digital success, Zelle continues to grow. It wasn't long ago that we noted that the number of Zelle transactions in a quarter had surpassed the numbers of checks written. Shortly after that, Zelle transactions reached two times the number of checks written. This quarter, Zelle transactions has now passed the combined number of checks written, plus the amount of cash withdrawals from tellers and from ATMs. That is a rapid adoption and represents continued cost savings and convenience and security for the customers. These stats and others are included in our quarterly [Inaudible] for our digital banking progress. That's included in Slides 20, 22, and 24. I encourage you to read them. They show our market-leading efforts, representing billions of dollars of our investment over the years, and we are continuing to drive growth with expense growth under control. This solid earnings results achieved this quarter are testament to the dedication and talent of our 212,000 people who work here and deliver for our customers every day. I thank them for another great quarter. And with that, I'll turn it over to Alastair. Alastair Borthwick -- Chief Financial Officer Thank you, Brian. And I'm going to start on Slide 4 of the earnings presentation. So Brian covered much of the income statement highlights, and he noted the difference in our reported results and the results adjusted for the FDIC assessment. So I'm not going to repeat that. I'd just add that we delivered strong returns. On a reported basis, our return on average assets was 83 basis points, and return on tangible common equity was 12.7%. And when adjusted for the FDIC assessment, our efficiency ratio was 64%, ROA at 89 basis points, and ROTCE at 14%. So let's move to the balance sheet on Slide 5, where we ended the quarter at $3.27 trillion of total assets, up $94 billion from the fourth quarter. And the bulk of that increase was in Global Markets to support seasonally elevated levels of client activity. Outside of the Global Markets activity, we'd highlight both the $23 billion growth in deposits and the $20 billion decline in cash levels. So with that increase in liquidity, you'll also note that debt securities increased $39 billion, which included an $8 billion decline in hold-to-maturity securities and a $47 billion increase in AFS securities. And those are mostly hedged U.S. treasuries added with yields effectively at cash rates. At $313 billion, our absolute cash levels remain higher than required. Liquidity remained strong with $909 billion of global liquidity sources, and that's up $12 billion from the fourth quarter and remains $333 billion above our pre-pandemic fourth quarter '19 level. Shareholders' equity increased $1.9 billion from the fourth quarter earnings, as they were only partially offset by capital distributed to shareholders. And AOCI was little changed in the quarter. During the quarter, we paid out $1.9 billion in common dividends and we bought back $2.5 billion in shares, which more than offset our employee awards. As part of those share awards in the first quarter, we announced our seventh consecutive year of sharing success compensation awards, covering more than 95% of our associates and further aligning their interest with shareholders. Tangible book value per share of $24.79 is up 9% year over year. Looking at regulatory capital, our CET1 level improved to $197 billion from December 31st, and the CET1 ratio was stable at 11.8% and remained well above our current 10% requirement. We also remain quite well-positioned against the current proposed capital rules, as our CET1 level is also above the 10% requirement even when we include estimated RWA inflation from those new proposed rules. Risk-weighted assets increased modestly, driven by client activity in Global Markets. And our supplemental leverage ratio was 6%, compared to a minimum requirement of 5%, which leaves capacity for balance sheet growth. And at $475 billion of total loss-absorbing capital, our TLAC ratio remains comfortably above our requirements. Let's turn our balance sheet focus to loans by looking at the average balances on Slide 6. Average loans in the first quarter of $1.048 trillion were flat compared to the fourth quarter, and they improved 1% year over year as solid credit card growth was partially offset by declines in securities-based lending. Commercial loans grew modestly year over year. We experienced modest improvement in revolver utilization and commercial lending in the first quarter, and that's being offset for the most part by paydowns as larger client financing solutions are being met through capital markets access. And lastly on a positive note, loan spreads continued to widen. Moving to deposits. We'll stay focused on averages on Slide 7. And relative to pre-pandemic Q4 2019, average deposits are still up 35%. Every line of business remains well above their pre-pandemic levels, and consumer is up 32% with checking up 38%, driven by net new checking accounts added, as Brian noted earlier. Linked-quarter total average deposits remained steady at more than $1.9 trillion. The total rate paid on consumer deposits in the quarter was 55 basis points. And while the rate increased 9 basis points from the fourth quarter, the pace of increases continues to slow. The mix of low-rate and high-quality transactional accounts keeps the rate paid low. Wealth Management and Global Banking also saw a slowdown in the increases in their rate paid and slowdown in the rotation out of noninterest-bearing accounts in the first quarter. Focusing for a moment on ending deposits and movement from the fourth quarter. This quarter, we delivered good deposit growth. Total deposits grew $23 billion, and they're now $100 billion above their trough in mid-May of 2023. Consumer Banking deposits saw growth in both consumer interest-bearing and noninterest-bearing. Global Banking continued their more normal pattern of deposits seen for the past five quarters and up more than $30 billion over the last year. Deposit growth exceeded loan growth for the third straight quarter and our excess of deposits over loans expanded to $897 billion, and that's nearly two times the $450 billion we had pre-pandemic. You can see that on the upper left-hand side of Slide 8. We continue to have a mix of cash available-for-sale securities and held-to-maturity securities. And this quarter, our combination of cash and AFS is now 52% of the total $1.2 trillion noted on this page. You'll also notice the continued change in mix of the shorter-term portfolio, as we again lowered cash and increased AFS securities that are mostly hedged and have similar yields to the cash. Note also the hold-to-maturity book continues to decline from paydowns. In total, the hold-to-maturity book is now down $96 billion from its peak, and it consists of about $122 billion in treasuries and about $458 billion in mortgage-backed securities, along with $7 billion of other securities. Lastly, the blended cash and securities yield of 360 basis points continued to rise and remained about 168 basis points above the rate we pay for deposits. The replacement of lower-earning assets into higher-yielding assets continues to provide an ongoing benefit to NII. Let's turn our focus to NII performance using Slide 9, where you can see on a fully tax equivalent basis, NII was $14.2 billion. Good deposit growth provided a strong start to the year for NII. And as Brian noted, NII of $14.2 billion increased by $100 million from the fourth quarter. Now that compares to our expectation and guidance of a decline of $100 million to $200 million, and that would have resulted in NII this quarter of $13.9 billion or $14 billion. So we did quite a bit better than we had originally expected. The improvement in quarterly NII in Q1 compared to Q4 included the benefits of higher-yielding assets and improvement in Global Markets NII, partially offset by higher deposit costs and one less day in Q1 than Q4 '23. Deposit balance activity more generally also aided in the beat versus our expectations. As we look forward for Q2, we expect some modest impact of lower deposits in wealth management as clients make their seasonal income tax payments. And we expect Global Markets NII to decline mostly seasonally a little bit as well. So we expect second-quarter NII could approach $14 billion on an FTE basis. And further, we continue to expect that Q2 will be the low point for NII, and we expect the back half of 2024 to grow. And compared to our guidance last quarter, we're obviously growing off a larger base of NII after having outperformed in the first quarter. With regard to that forward view, let me just note a few other caveats. It includes our assumption that interest rates in the forward curve at the end of the quarter materialize. And at the end of the first quarter, there were still three cuts expected this year starting in June. Our forward view also includes an expectation of low single-digit loan growth and some moderate growth in deposits as we move into the back half of 2024. And given our recent deposit and loan performance, we continue to feel good about these assumptions. Turning to asset sensitivity and focused on a forward yield curve basis, our sensitivity to the plus and minus 100 basis point parallel shift in the forward curve at March 31st remains well balanced. OK. Let's turn to expense. And we'll use Slide 10 for that discussion, where we reported $17.2 billion expense this quarter, including the FDIC assessment. Adjusted for the assessment, expenses were $16.5 billion, and the increase over the fourth quarter included a little more than $400 million in seasonal payroll tax expense as well as higher revenue-related costs and, to a lesser extent, annual merit increases and other annual awards like sharing success awards provided this quarter. $16.5 billion was just a little above our forecast for Q1, which we made last quarter, and the increase is driven by better-than-expected fee revenue across wealth management, investment banking and sales and trading. And as Brian said, that's a trade-off we're more than happy to make, bringing more earnings to the bottom line. And while expense is up almost 2% from last year, we simply remind you, inflation was up by more than 4%, and we've increased our investment and we're paying for the revenue growth. So we think it represents good work by our teams. As we look forward in Q2, we expect a decline from the Q1 level, as we typically see about two-thirds of the Q1 elevated payroll tax expense come back out. And the remainder of the year, expense is expected to trend down. Continued digital engagement, savings, and operational excellence initiatives should help us offset other cost increases for people and technology through the back half of the year. Turning to credit on Slide 11. Provision expense was $1.3 billion in the first quarter, and that included $179 million of reserve release due to a modestly improved macro environmental outlook, as the baseline consensus expectations improved from the fourth quarter. On a weighted basis, we remain reserved for an unemployment rate of nearly 5% by the end of 2025 compared to the most recent actual 3.8% rate. Net charge-offs of $1.5 billion increased $306 million from the fourth quarter, driven by continued credit card seasoning and commercial real estate office exposures, as swift revaluations from current appraisals and resolutions drove higher charge-offs. The net charge-off ratio was 58 basis points, a 13 basis point increase from the fourth quarter. On Slide 12, we show you the credit quality metrics for both our consumer and commercial portfolios. Consumer net charge-offs increased $115 million versus the fourth quarter from the flow-through of higher late-stage credit card delinquencies. We included a credit card delinquency Slide number 28 in our appendix. And we're encouraged by the trend of delinquencies because the late-stage increases slowed and early stage delinquencies improved as well. And that leads us to believe we should begin to see consumer net charge-offs start to level out over the next quarter or so. All of this is still well within our risk appetite and our expectations, and it's consistent with the normalization of credit we've discussed with you in prior calls. Commercial net charge-offs increased $191 million versus the fourth quarter, driven by commercial real estate losses and office exposures. And on office losses this quarter, we recorded charge-offs on 16 office loans: four were a result of sales activity, i.e., final resolution; seven were from losses that we expect on exposures that are in the process of expected resolution in the course of the next 90 days; and the rest we took as a result of refreshed valuations. Using a continuous and thorough loan-by-loan analysis, and we're quick to recognize impacts in the commercial real estate office space through our risk ratings, and that's resulted in several downgrades in the last few quarters. As a result of these quick actions and our downgrades in categorization, we've also refreshed the valuation of our reservable criticized properties, and we've taken appropriate reserves and charge-offs in the process. Roughly one-third of our office exposure is now categorized as reservable criticized. And importantly, the pace of the increase in reservable criticized exposures has slowed each quarter since the second quarter of last year. So we believe the losses on these office properties have been front-loaded and largely reserved. We expect the losses to move lower in the second quarter. And we expect a notable decline in the second half of the year when compared to the first half of this year, absent any material change in expected real estate prices. In the appendix on Slide 29, we've included a current view of our commercial real estate and office portfolio metrics, as we usually do. OK. Let's turn to the various lines of business and offer some brief comments on their results, starting on Slide 13 with Consumer Banking. For the quarter, Consumer Banking earned $2.7 billion on continued strong organic growth. The reported earnings declined 15% year over year as revenue declined from lower deposit balances compared to the first quarter of '23. Credit card loss normalization also caused year-over-year provision expense to increase. As Brian noted, customer activity showed another strong quarter of net new checking growth, another strong period of card openings, and investment balances for consumer clients, which climbed 29% year over year to a record $456 billion. That included market appreciation and also very strong full-year flows of $44 billion. As noted earlier, loans grew nicely year over year from credit card as well as small business where we remain the industry leader. Expenses were flat year over year, fighting off inflation, merit increases, higher minimum wages, and new and renovated financial centers and technology investments. So holding expense flat reflected very good work by the consumer team. As you can see on the appendix, Page 20, digital adoption and engagement continued to improve, reaching a record of 3.4 billion digital log-ins in the quarter, and it showed good year-over-year improvement. Customer satisfaction scores at near-record levels illustrate the continued appreciation of the enhanced capabilities we provide. Moving to wealth management on Slide 14. We produced good results, and that included good organic client activity, market favorability, and strong flows. Our comprehensive suite of investment and advisory services, coupled with a commitment to personalized wealth management planning and solutions, has enabled us to meet the diverse needs and aspirations of our clients. In the first quarter, we reported record revenue of $5.6 billion and a little more than $1 billion in net income. That net income rose 10% from the first quarter of '23. Business generated positive operating leverage and grew revenue faster than expense, while improving the pre-tax margin year over year. While overall average loans were down year over year driven by the securities-based lending, it's worth noting the strong growth we're seeing in custom lending, and ending loans in the wealth management customer loan book are up 6% year over year. As Brian noted earlier, both Merrill and the Private Bank continued to see strong organic growth and produced good assets under management flows of more than $60 billion since the first quarter of '23, which reflects a good mix of new client money as well as existing clients putting money to work. Expense growth here max the revenue growth, otherwise fighting off higher investment costs and inflation. Let me also highlight the continued digital momentum here. As an example, Merrill has 86% of its clients now engaging with us digitally and 80% utilizing eDelivery. 76% of their eligible accounts are now opened digitally. So the cost for us to open is half, and the customer cycle times are improved greatly. On Slide 15, you see Global Banking results. And the business produced earnings of just less than $2 billion, down 22% year over year, as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 4%, driven by the impact of interest rates and deposit rotation to interest-bearing, and that impacted NII. The diversification of our revenue across products and regions continues to reflect the strength of this platform, and GTS and investment banking fees are good examples. In our Global Treasury Services business, some of the NII pressure from higher rates on deposits is offset by the fees paid for moving and managing the cash of clients, and that continues to grow with existing clients as well as with new client generation. As Brian noted, Investment Banking had a strong quarter. And at $1.6 billion in investment banking fees, this quarter was the strongest quarter in seven years, absent the pandemic 2020 and 2021 periods. An increase in provision expense included the commercial real estate net charge-offs I discussed earlier as well as a larger reserve release in the prior year period. Expense increased 2% year over year, including the 35% lift in investment banking fees from the first quarter of '23. Switching to Global Markets on Slide 16. We'll focus our comments on results, excluding DVA, as we normally do. The team had another terrific quarter with $1.8 billion in earnings, growing 7% year over year. Revenue improved 6% from the first quarter of '23, and return on average allocated capital was 16%. Focusing on sales and trading ex DVA. Revenue improved 2% year over year to $5.2 billion, which is the highest first-quarter result in over a decade. FICC was down 4%, while equities increased 15% compared to the first quarter of '23. And the decline in the FICC revenues versus the first quarter was driven by a weaker macro trading quarter that was partially offset by better mortgage trading results. Equities was driven by strong trading results in derivatives, and year-over-year expenses were up 4% on continued investment in the business. Finally, and on Slide 17, All Other shows a loss of $700 million, driven by the FDIC assessment. Revenue declined year over year, reflecting higher investment tax credit deals. And expense, adjusted for the FDIC assessment, was down $113 million, driven by lower unemployment processing costs. Our effective tax rate for the quarter was 8%. And excluding the FDIC assessment and other discrete items, it would have been 9%. And further excluding tax credits related to investments in renewable energy and affordable housing, our effective tax rate would have been 26%. Thank you. And with that, we'll jump into Q&A. Questions & Answers: Operator [Operator instructions] We'll take our first question from Steven Chubak of Wolfe Research. Steven Chubak -- Wolfe Research -- Analyst Hey. Good morning. Alastair Borthwick -- Chief Financial Officer Good morning Steven. Steven Chubak -- Wolfe Research -- Analyst So maybe just to start off with a question on capital management. Just given the strength of your excess capital position, there may be still some uncertainty around Basel III endgame and where the proposal could ultimately shake out. I was hoping you could just speak to where you're comfortable running on CET1. And when can we expect that you'll return to 100%-plus type payout? Brian Moynihan -- Chief Executive Officer I think you should expect that we run a cushion. Whatever rules come out and when they come out and get clarity, we'll expect to run the requirements plus 50 basis points up to 100 basis points of excess. And anything above that will be either used to continue to grow the company, if needed. If not, it will be returned. And so we're just -- as all of us are waiting for the finalization of these rules, right now we're sitting on $30 billion under the old rules. We have enough under the new rules as previously proposed. But obviously, they're talking about changing them. So you should expect clarity on that. What you also expect is, as we think about it beginning now, you're basically at the point where you're sitting on the capital, the very modest need to build a cushion to the rules as proposed and any changes will be more favorable, that I assume. So expect us to continue to return capital at a fairly strong rate as we move through the second quarter and beyond and the rules become clarified. Steven Chubak -- Wolfe Research -- Analyst Great color, Brian. And for my follow-up, just on the NII commentary. Alastair, it sounds like you're still assuming some modest deposit growth in the back half as part of that NII trajectory, that recovery off the trough in 2Q. Just given your deposit balances increased $500 billion since COVID, I know some of that's going to be a function of share gains. But as we prepare for some Q2-driven outflows, how are you handicapping the risk of deposit attrition? And how does that impact the NII guidance? If you can frame any sort of sensitivity, recognizing many of those tend to be hot money or higher-cost deposits. Alastair Borthwick -- Chief Financial Officer Yes. So first thing, I would just say, Steven, is we've been up against Q2 now for the last couple of years. So the deposits are beginning to settle in now. And if we were to go back to -- if you take, for example, consumer, if you were to go back to pre-pandemic and think about what long-term sustainable growth rates look like for consumer, if you just extended that through from the fourth quarter of 2019 to today, given that the economy is 30% larger, we kind of feel like consumer is approaching that floor. So we're still in this belief that Q2 is going to be -- Q3 may be the turning point for consumer. You can see that slowing though. The rest of our business, if you look at the exhibit we put together on deposits, if you look at that bottom left chart on wealth, you'll see it slowed and grew this quarter. And then in Global Banking on the right-hand side of that page, they're kind of back to pre-pandemic growth rates. They're up 7% year over year. So we're seeing some structure now in the deposit base. Even with Q2 over the course of the past year, our deposits were up $100 billion. So it has been a point of conviction of ours that, as we get toward Q2, we should see the consumer side begin to stabilize. That's what's driving our conviction that NII will go up in Q3 and Q4. We're in that transition period right now. Steven Chubak -- Wolfe Research -- Analyst Good color. Thanks so much for taking my questions. Operator We'll take our next question from Mike Mayo of Wells Fargo. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. Well, thanks for the outlook for NII and then consumer charge-offs. But once again, I go back to efficiency. And you highlight the 2 billion Erica interactions, the last 1 billion in the last 18 months. You mentioned Zelle, transaction now double the check, transactions are more than checks plus cash withdrawals from ATMs plus cash withdrawal from tellers. So for all the great tech work, the efficiency ratio improved 66% to 64% quarter over quarter. But I know you're still not happy with that 64%. So as you see the NII decline in site and as you have this tech evolutions continuing, when do you think you can get below a 60% efficiency ratio? What's your outlook for that? Because I'm just reconciling the numbers that we look at with all the progress you're making internally. Brian Moynihan -- Chief Executive Officer Mike, I think as NII sort of moves along the path that Alastair mentioned, all that sort of flows through because there's no more activity it touches, as you're pointing out, and we continue to reduce marginal expense of that activity because largely, that's a consumer and wealth management and Global Banking, which don't add lots more clients and stuff and lots more activity. Even though the numbers go up, it's out of efficiency. So that continue to improve our efficiency ratio. As you also well know, when the revenue growth is coming through the wealth management business, which, by definition, because of the way the compensation process works, has the lowest efficiency ratio in the company, that's a good thing. Because it grows and we get good profitability growth out of it, but we're fighting that trend. And as one of the largest wealth management business in the world, if not, it's a higher percentage of our revenues and our expense base. And so we'll continue to drive it down. We're at 64%. You'd expect that to improve as the deposit balance has stabilized and for many quarters now and starting to grow. The rate paid has really flattened out sequentially by quarter, and the yield of the portfolio and the yield of the assets continue to grow. So we feel good about how it's going. Our focus is really on deploying expenses in operating leverage. And as we get through the twist in the NII, you should start to see us return to that again. And that would then obviously drive down the efficiency ratio. Mike Mayo -- Wells Fargo Securities -- Analyst What are you thinking about expense growth for the rest of the year or next year? For a while there, you're trying -- and I get it, inflation has gone up quite a bit. But what are your thoughts about expense growth looking ahead? Alastair Borthwick -- Chief Financial Officer Well, last year, remember, Mike, we told you we thought we could drive expense down every quarter. We believe this year, the expense will trend down over the course of this year. And obviously, Q1 has inflated a little bit with just payroll tax and some of the revenue seasonality. But underneath that, there's pretty significant revenue strength. So I think that probably cost us $100 million or so this quarter. I think we probably are looking -- if this environment continues, we're looking at another $100 million per quarter going forward. But it's -- to Brian's point, it's the good expense that comes with revenue growth over time. That's really the only change, I'd say, with respect to how we think about the expense picture. Mike Mayo -- Wells Fargo Securities -- Analyst All right. Thank you. Operator We'll take our next question from John McDonald of Autonomous Research. John McDonald -- Autonomous Research -- Analyst Thanks, good morning. I wanted to follow up on the helpful deposit commentary, Alastair. So you mentioned the consumer. You're thinking that that will stabilize in the back half of the year on deposits. Wondering what your mix shift expectations are. Earlier this year, you kind of thought that those customers had moved for rate seeking, already had. I'm just wondering if higher rates for longer could put some pressure on rate-seeking behavior again. And what you're baking in, in terms of mix shift from noninterest-bearing. Is interest-bearing in your outlook and your planning? Brian Moynihan -- Chief Executive Officer Yes, John, I think if you look at seven, you could see sort of the mix in the left-hand corner. Remember that one of the things people have to -- we all have to be careful about is in the Global Banking area, the way the fees are paid and earnings credit. It messes up the simplicity of noninterest-bearing and interest-bearing, so it's complex. But if you look at the quarters coming across from the first quarter of '23 through the first quarter of '24, you can see that -- you're seeing the rate of change slow dramatically and kind of settle in. So I don't -- a lot of the money has moved in -- if you look at the seven-day average for consumer go all the way back to the early part of October, it's been relatively stable at $950 billion, $960 billion. So we're just getting to the tax seasons and ins and outs in the wealth management business and consumer. People paying taxes out on the wealthier side and receiving benefits on the tax refund side. So as we stabilize in that, we expect it to grow. We don't expect a massive change in how the deposits are structured from a -- what's in money markets, what's in savings, what's in checking, what's in that. It's really slowed down and been relatively stable. So things bump around, but it's all very good value, even the highest-paid balances in the wealth management business are good value for the company. But if you look at what really drives the value to the $950-odd billion in checking balances, you can see on Page 7 the core checking balances, that's what drives it. John McDonald -- Autonomous Research -- Analyst Yes. You're still feeling, Brian, like the bulk of people that have kind of moved on rate-seeking behavior likely have done so. Brian Moynihan -- Chief Executive Officer Yes. If you look on the consumer business and you think about tracking those deposits accounts from pre-pandemic to now, which is one thing we talked about for different purposes. But if you look at where all the deposit balances, if people with lower average balances are still multiples of where they were pre-pandemic, people with higher balances are actually lower because, obviously, they were sitting on cash when the pandemic and accumulate more cash. And when rates came up, they moved it. And all in, that gives you what you see in consumer, which is at the end of the day, a couple of hundred billion dollars over where it was pre-pandemic. And so -- but the people have moved. And you're seeing it month-to-month relatively stable as we track that every month on both sides, frankly, the lower average balance accounts from pre-pandemic are basically bouncing around at the same level right now, not going down, not going up. And the higher ones are stable, but they are down 15%, 20% for people with a $0.5 million, $1 million balances largely because they moved it in the market. So we feel stabilized. There'll be ins and outs, and we'll see it play out, but it's extremely valuable no matter how you look at it. John McDonald -- Autonomous Research -- Analyst OK. And maybe as a quick follow-up for Alastair. It's nice to see the core NIM, the net interest yield ex markets inflect positively this quarter. Is that sustainable, do you feel like? And what are some of the fixed asset reprice dynamics that are tailwinds beyond the $10 billion per quarter on securities in terms of like loans and swaps that all come due over the next year or two and help the NIM a bit? Could you talk a little bit about that? Alastair Borthwick -- Chief Financial Officer Sure. We've talked about the fact that the net interest yield, obviously, this quarter benefits from the NII growth. So you're getting in the numerator. But we inflated the denominator in terms of the average earning assets last year as we just made the balance sheet more liquid. So that's going to allow us to continue the deposits growth, to grow the interest income over time without necessarily growing the other earning assets. So Q2 will have a little more of a challenge. But going forward, I expect all the NII improvement in Q3 and Q4 to drop into that net interest yield. And part of the things supporting that, John, as you pointed out, is we do have loans repricing. Because we've got loans coming off the balance sheet, we're booking new loans at higher rates. So that's one element. Second element is we've got securities that we're reinvesting underneath all those two. So obviously, we're sweeping the hold-to-maturity paydowns and reinvesting those at much higher rates. And then third, the teams have been working hard at repricing the balance sheet broadly for things like loans. And I believe we've now had seven quarters in a row of improving loan pricing. So we just got to keep grinding away at that. John McDonald -- Autonomous Research -- Analyst Thank you. Operator We'll take our next question from Betsy Graseck of Morgan Stanley. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. Brian Moynihan -- Chief Executive Officer Good morning Betsy Graseck -- Morgan Stanley -- Analyst Thanks very much for taking the question. I guess I just wanted to follow up on the conversation you're just having. And Alastair, I know that, look, your NII guide improved this quarter due to 1Q results being better than what you anticipated a quarter ago. My question is on the second half '24 improvement. I get that it's going to be an improvement from first half, right? That's basically the base that you're looking at. I'm wondering how you're thinking about the NII trajectory on a year [Inaudible]? I believe NII is down about 3% year-on-year in 1Q. Should we anticipate that that is kind of stable pace throughout the year? Or that reduces as well when we're talking about second half '24? If you could just give us a sense of year-on-year, that would be helpful. Brian Moynihan -- Chief Executive Officer Betsy, before Alastair answers your question, it's good to have you back. And we wish you good luck with everything. So Alastair, why don't you hit that? Betsy Graseck -- Morgan Stanley -- Analyst Thanks so much, Brian. Really appreciate that. Alastair Borthwick -- Chief Financial Officer It's good to have you. So I guess a couple of things. The first thing is we haven't changed our perspective in terms of this idea of Q2 being the low point and the trough for the year. We haven't changed our point of view on growing in terms of Q3 and Q4. I think the important thing we're trying to convey is because of the continued stability in pricing rotation and because of this continued stability in deposits, we feel like that extra couple of hundred million in Q1 is something that should flow through in Q2, Q3 and Q4. And then there'll be a second dynamic to watch for as well, Betsy, which is if we have less rate cuts, we're going to benefit from that. We wouldn't necessarily benefit a lot in Q2 because there isn't enough cuts or time in Q2. But I think by the time we get to Q3 and Q4, we'll know more about the rate structure at that point, and we'll be able to tell you more about how -- what we expect for the growth in the back half of the year. But we're reasonably optimistic there. Betsy Graseck -- Morgan Stanley -- Analyst Super. That's perfect. And then just one follow-up is on the AOCI. So we all know that HTM is a portfolio that you're in runoff on, I guess, if that's fair to say, is the balances are pulling off. And this quarter, we did have a backup in the long end of the curve. Your AOCI really didn't flex that much. And part of my question is, is that a function of how the securities book is comprised? And you've been shifting toward treasuries, and that's reducing this risk as the back end of the curve increases. I just wanted to understand how that's trajecting in your mind. Because it is a concern that people raise, and what I thought today suggests that it's much less of a concern than it had been a year ago, say, for example. Would you agree with that? Or -- Alastair Borthwick -- Chief Financial Officer Yes. I mean we've deliberately worked on that over time. But we've always, I think, had a pretty good program of hedging the fixed-rate securities in the AFS book so that they're swapped. And that means that if rates go up, we obviously benefit from that. It doesn't necessarily hurt us in terms of AOCI. So most all of the treasuries that you see in our portfolio are swapped. So I would expect very little in the way of AOCI impact there. Betsy Graseck -- Morgan Stanley -- Analyst Thanks so much. Operator We'll take our next question from Glenn Schorr of Evercore. Glenn Schorr -- Evercore ISI -- Analyst I think perfect leading to this question. On Slide 8, you talk about AFS book securities mostly hedged, you're pulling the cost and the duration of less than a half year. I know the Fed forward curve keeps not being correct, but at some point, it's going to be correct and rates are going to come in. My question is, what do you do about that? How much do you think about extending duration and managing the swaps a little differently, as we eventually knew at this time transition to a different rate backdrop? Alastair Borthwick -- Chief Financial Officer Yes. So Glenn, I mean, ultimately, we'll use the same philosophy and strategy that we do to this point. We are in, obviously, a very good position where we have substantial deposits in excess of loans. That's what creates this excess in the top left of Page 8, and it's what allows us to put everything to work in the top right. The balance that we try to strike, you can start to see in left-hand side. We're trying to make sure that, that cash and securities yield, compared to deposit rate paid, performs in any environment. So in an environment like this one where there's an awful lot going on with rates, we feel like if you look at that spread, I think it was 1 basis point different quarter over quarter. So we're trying to make sure that we lock in the value, monetize the deposits regardless of whatever rate environment turns out to be. And we feel like we're pretty balanced now. We've got a pretty good balance of short-dated, long-dated, fixed, and floating. That should allow us to perform whether rates go up or down from here. One final thing I'll just say, and I think you know this. Underneath all of this, obviously, we've got some securities repricing. And to the point, I think it was John asked earlier, we've got the loans repricing as well, and all of that gives a little bit of underlying resilience to this. Glenn Schorr -- Evercore ISI -- Analyst Yes, I get that. I guess you have a lot of flexibility should you decide this time. Just one follow-up. You talked deposits with that. You had a smidgen of year-on-year loan growth mostly in cards, I think. But it seems -- I know how we got here, but we're in an environment -- it's really strong economy, up markets and yet no loan growth. Are we -- is this just -- any way you slice it, we have to like go through another year or two of super low loan growth. Or are there any leading indicators that would lead you to believe we can get back to a little bit more normal BofA loan growth and not have to wait two years for it? Alastair Borthwick -- Chief Financial Officer Yes. Well, I think we're probably getting closer now because, remember, in a big macro, we're in that transition period where post-pandemic, the economy is sort of recovering and rates are settling in and it's changing people's behaviors. So we've actually got pretty good credit card growth. And that's just offset by the fact that, for example, with securities-based lending at rates that are 5% higher, people are doing less of it. Or in commercial, we've got some loan growth, but the revolver utilization is still suppressed because revolver costs a lot more. So as the Fed has raised rates, it's changed some of the borrowing patterns of our clients, but that's not going to last forever. Because as you point out, the economy powers through at 3%, 3.5,%. Whatever it ends up being, loan growth is going to catch up to that over time. So for right now, we're in that transition period. But we're anticipating that loan growth will pick up at some point in the future, but it's not an enormous part of our NII guide at this point. Brian Moynihan -- Chief Executive Officer And just remember that the capital markets opened up and a lot of the larger clients access them as they, frankly, have gotten used to the higher rate structure and need to refinance. So that -- if you look across the businesses, you've got the commercial run. But if you look across the commercial businesses in the middle market and business banking, the segment up to $50 million in revenue companies and up to $2.5 billion, they actually saw progress on loan growth. It was really in the high end, Global Corporate and Investment Banking business, where you saw sort of paydowns and bring that down. That phenomena is one that occurs from time to time. It's probably stabilized now and we'll see it play out. But we are fighting for loan growth. And frankly, line usage stabilized and is better than it's been for the last few quarters in terms of trend. And so again, that all speaks to people feeling fine, but they're not quite as aggressive as they would be when you read the economic statistics. And that's one of the great debates you can read about in the paper every day. Glenn Schorr -- Evercore ISI -- Analyst Thank you both for all that. Operator We'll take our next question from Matt O'Connor of Deutsche Bank. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. So obviously, there's been a lot of questions on net interest income and a lot of color, I guess. Just when you put it all together, like when you think about the higher-for-longer environment, obviously, it's good on the reinvestments. You're trying to match the deposits like you talked about. But how would you just boil it down? The rate disclosures still show $3 billion kind of exposure to either side. Is stable rates for a couple of years, is that good? Or does that accelerate the deposit repricing? Or just boil that down. Alastair Borthwick -- Chief Financial Officer Sure. Well, I'd say generally speaking, higher for longer is probably better for banks as a general statement. The question will become why are rates higher? Like what's going on in the economy? Are we talking about inflation? Is it under control? Is it coming down? Right now, that appears to be the case. So that's obviously a good place. And the Fed is in a good place because they appear to have rates -- a real rate that's high enough to make sure that inflation stays in a good place. Things can change that, so an awful lot will depend upon just the why for rates. But generally speaking, if it's just because it's taken a little while longer for the inflation to nudge down before the next set of cuts, that's probably a good environment for us. I would expect us to perform relatively better than we've disclosed so far. And then you're asking a second question, which is around the what does the sensitivity look like to plus $100 million or minus $100 million. We've tried to just make sure that we continue to stay balanced. If anything, that corridor of plus $100 million, minus $100 million has gotten narrower and narrower over time as we're trying to lock in NII that's $4 billion or $5 billion higher per quarter today than it was three years ago. And just make sure that the shareholder benefits from that through the course of time. So we'll see how the environment plays out. It's only been a quarter since we were last year talking about six cuts, now it's three. So we just have to watch this play out and stay patient. Matt O'Connor -- Deutsche Bank -- Analyst OK. Fair enough. That's helpful. Thank you. Operator We'll take our next question from Ken Usdin of Jefferies. Ken Usdin -- Jefferies -- Analyst Thanks very much. Good morning. A real breakout quarter for the IB fee line. And just wondering a couple of things within that. One, there was a bit of a back and forth from some of the other banks about whether or not DCM was pulled forward a little bit from future. I wonder what you think about that. But more broadly, just you guys have done a good job taking share. What inning do you think you are in terms of not so much as green shoots, but in terms of where that incremental productivity is in terms of getting that IB line to a more permanent higher level? Brian Moynihan -- Chief Executive Officer So think about it, if you go back in sort of the period prior to the run-up in the couple of years after pandemic, you've had sort of mid-$1.5 billion, this type of numbers a quarter. We think we're fundamentally stronger in the market position, as you said. So we feel very good about the work Matthew and the team have done. And we -- as we look at it, we believe that they'll continue to gain share. And I think this is a more normalized level and whether it's pulled forward or not, we'll find out. But it's a more normalized level given those dynamics and one we should be able to build off, especially as I said earlier, the penetration in the middle-market side of our business, whether those clients working up our wealth management in the markets generally, plus working across the globe, and we've done better work international. So we feel good everything that the team has done, the combination of corporate and investment banking is very strong. So we don't think this is like an unusually high-water mark, and we should be able to build from here. Ken Usdin -- Jefferies -- Analyst OK. Got it. And then one question about wealth management and just client choices in terms of where they're sitting relative to earning NII or earning fees. Where do you sense that the kind of cash versus fully invested is in terms of the wealth management brokerage business? And could that turn to the better, turn to the worse, depending on how that mix answer goes? Alastair Borthwick -- Chief Financial Officer Well, wealth management, I think Lindsay, Katy, and Eric highlight for us regularly just the elevated levels of cash that our clients have. A lot of that is on us, and you can see that in our deposit chart. But there's a lot that we captured in the investment area, too, where there, a lot of their flows are coming into maybe it's money market funds, maybe the short-dated treasuries, but there's a lot of cash at this point. So that would tell you it's supporting the ability to see continued assets under management flows going forward, depending on how the -- obviously, the stock market shakes out over time. But we're all struck by just the sheer amount of cash on the sidelines at this point. Ken Usdin -- Jefferies -- Analyst OK. Got it. Thank you. Operator [Operator instructions] And we'll take our next question from Gerard Cassidy of RBC. Gerard Cassidy -- RBC Capital Markets -- Analyst Hi, Alastair. Hi, Brian. Brian Moynihan -- Chief Executive Officer Hi Gerard. Gerard Cassidy -- RBC Capital Markets -- Analyst Alastair, coming back to Slide 8, which is obviously quite impressive on deposits, particularly the upper left-hand graph you've presented. When you go back to maybe 2014 or '15 and take a look at the deposit levels of your company from, let's say, 2015 to 2019, you just didn't have the growth that you experienced from the end of '19 through today. Can you guys share with us what drove this meaningful increase in not only in excess deposits but all deposits? Brian Moynihan -- Chief Executive Officer I think, Gerard, so you've been around long enough to understand some of those dynamics. So as we move through the post-financial crisis, we had -- in terms of that chart, if you looked at it, you had a lot of loans that we ran off because they weren't core loans anymore and kind of troughed out the $900 billion level and then grew out from there. In 2015, that's where we started driving responsible growth. It was a call to growth now that we pushed out a lot of stuff in the financial crisis and got it behind us. On the -- so the loans then start picking up. But if you remember back then, I think we had almost $300 billion, if I remember right, and if you looked at the slide on loans and the non-line of business loans are $200 billion or something like that, and it's down to $10 billion. So think about that dimension. So as we ran that down and could grow, we could overcome it. And so then on the growth on loan side is driven by discipline where we want to play, and the card business is getting it positioned. Right now, we could start to push from there, whether it's on home equity business on the auto loan business. And on the commercial side, it was -- we had less issues after financial crisis in commercial. But kind of getting through all that, it was getting to their credit quality we wanted. And a source of great growth for us from 2010 and beyond has been we've probably gone from, I don't know, $20 billion, $30 billion of outstanding loans out in the international, part of Matthew's business and GCIB to almost $100 billion type of number. So expansion of our international capabilities and done with great credit work by Geoff Greener and the team and Bruce Thompson's team. So put all that together, that's the loan side. On the deposit side, it really started with a focus that began really prior to -- in the middle of the financial crisis and beyond where we said we're going to go for core checking accounts in consumer, primary checking accounts, drive customer satisfaction, drive organic growth and not care about the number of sales as much as the net growth in net sales. And as the team of Dean and Thong over time and then Aron and Holly now have continued to push that, adding 1 million-ish net new checking accounts, all core. We've gone from 60% core to 92%. We've gone from customer satisfaction to the highest levels ever in the mid-80s, top 2 box, etc., etc. Attrition down the lowest ever. Preferred Rewards kicked in. And all that has led to higher and higher balance retention per account and then also more accounts. And so we've probably grown in the consumer from, I think, around $300 billion at the beginning of 2010, '11 to now at $900 billion. Now there's economic growth and economy grows, but that's way outsized. And that's what's driven the real value of the deposit franchise. And then wealth management, again, after Merrill putting together and then driving that core aspects between the team there, has kept us up to $300 billion. That's from $200-and-something billion pre-pandemic and probably less than that, I think it was $200 billion at the time of the merger. So all these things are just part of it, and the GTS business investments that have driven those products. So that spread is high and growing again, which is kind of counterintuitive to the narrative that one of your colleagues mentioned earlier, which is leave aside all the quantitative tightening, all the interest rate and all the stuff that's supposed to happen. Quarter after quarter, we're now growing the amount of deposits over the top of the loans and the loans, hopefully, will kick back in and grow a little faster. But they still won't use a lot of those balances up, and so we feel very good about that position. And those deposits, as you can see on the bottom of Page 8 on the left-hand side, all-in cost is 193 basis points against the Fed funds rate, the 5.5%. And the rate of change in those deposit prices have flattened out to be very modest linked quarter, and that's just a tremendous leverage for the company. Gerard Cassidy -- RBC Capital Markets -- Analyst Very helpful, Brian. Maybe as a follow-up, I think, Alastair, you pointed too that your CET1 ratio is if Basel III endgame went in as originally proposed, you're very comfortable with it. Can you guys share with us what's the latest? We all read about the watering down of Basel III endgame. Do you guys have a sense when you may actually see a final proposal? And could it kick into next year possibly? Alastair Borthwick -- Chief Financial Officer Look, we don't have an update on the timing yet, Gerard. We're in the same place you are. We're kind of waiting for the rules to come out. And we're still listening for updates from the Fed chair and the vice chair, and we'll wait until we see those come out. Brian Moynihan -- Chief Executive Officer But the key is that we're sitting, even under the current interpretation we told you earlier on about any modifications, we're sitting on enough CET1 nominal amount, $197 billion. That exceeds what we did for the increase in RWA under the current version of the rules they propose. Anything that changes in that would be positive throughout. So we don't need to retain capital to meet those standards. We don't -- so we're off and running. Gerard Cassidy -- RBC Capital Markets -- Analyst Appreciate it, Brian. Thank you. Operator We'll take that question from Jim Mitchell of Seaport Global. Brian Moynihan -- Chief Executive Officer Morning, Jim. Jim Mitchell -- Seaport Global Securities -- Analyst Hey. Good morning. Maybe just one last follow-up on that last question from Gerard. If Basel III is reduced, as Powell suggested, is it with limited loan growth just more likely to be put toward buybacks? Or do you see opportunities beyond just loan growth, whether it's building -- growing the trading balance sheet or other opportunities to deploy that capital to drive growth? Just curious how you deploy that. Brian Moynihan -- Chief Executive Officer Well, number one, our primary interest is to use the capital to support our customer businesses. So you've seen that happen in the markets business. As we said, it was one of the best quarters in a decade first quarters. That is a multiyear process of building up not only the balance sheet and capital committed to the business, but importantly also, the investment systems and technology and risk management and other things, if they continue to make money almost every trading day over the last several years. So that's where we'd like to use it, supporting that business, supporting loan business, supporting all the businesses. The reality is, it's outside of the capital markets business, then you go to loan growth. And that -- and the kind of loan growth in mid-single digits, that doesn't eat a lot of the capital up. So that is just there to be returned. And so we got two basic phenomena. One is we storehoused a bunch of capital. If you think about the last few years between the changes in CCAR a few years ago, that changed the capital dimension then the proposed rules, and then now whatever happens with them. So they were sort of sitting in pandemic. Before that, we were sitting on a fair amount of capital. That should be released over time here. And then secondly, the question will be what those rules are going forward. And then third would be what do you need to support the business, which again, that's our primary responsibility. But generally, that is a modest amount of capital. And so most of our desire is really deploying more expenses and technology investments, and we've gone from $3 billion to $3.8 billion in annual technology investments across the last couple of years, more branches. But that's more of an expense question than a capital question. All right. I think that's all Lee, correct? OK. Why don't we wrap it up here? Thank you for your time and attention. This quarter marks another quarter of strong organic growth across every businesses, continued this quarter. Good fees and what we call fees and commissions in the wealth management business, investment banking, and trading. NII continues to outperform what we told you last quarter for the quarter, first quarter. We rolled that into second quarter, and we expect continued performance in that as we go through the trough and meet the second half of the year. We continue to manage expenses well into the inflation rate, and we start with strong capital and liquidity and a strong balance sheet. So we are -- the team did a great job this quarter, and we look forward to talking to you next quarter. Thank you. Answer:

the Bank of America earnings announcement

Operator Good day, everyone, and welcome to the Bank of America earnings announcement. [Operator instructions] Please note, this call may be recorded. [Operator instructions] It is my pleasure to turn the conference over to Lee McEntire of Bank of America. Lee McEntire -- Senior Vice President, Investor Relations Good morning. Thank you, Leo. Welcome, and thank you for joining the call to review our first-quarter results. Our earnings release documents are available on the Investor Relations section of the bankofamerica.com website, and that includes the earnings presentation that we will be referring to during the call. I trust that everyone's had a chance to review the documents. I'm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments before Alastair Borthwick, our CFO, discusses the details of the quarter. Before they begin, let me just remind you, we may make forward-looking statements and refer to non-GAAP financial measures during the call. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials, our SEC filings that are available on our website. Information about non-GAAP financial measures, including the reconciliations to U.S. GAAP, can also be found in our earnings materials that are available on the website. So with that, I'll turn the call over to you, Brian. Thanks. Brian Moynihan -- Chief Executive Officer Thank you, Lee, and good morning to all of you, and thank you for joining us. I am starting on Slide 2 of the earnings presentation. We once again delivered a strong set of results in Quarter 1. We reported net income of $6.7 billion after tax and EPS of $0.76. This included the additional expense accrual for the industry's special assessment by the FDIC to recover losses from the failures of Silicon Valley Bank and Signature Bank. This lowered our Quarter 1 EPS by $0.07. Excluding net expense, net income was $7.2 billion and EPS was $0.83 per share in Quarter 1. Alastair is going to walk you through the details of the quarter momentarily. But first, let me give you a few thoughts on our performance. We delivered good improvement in our fee-based business, driven both by continued organic growth and good market conditions. Investment banking saw a nice rebound this quarter. We delivered nearly $1.6 billion in investment banking fees and grew 35% from the first-quarter 2023. Matthew Koder and the team have done a great job delivering market share growth. In addition, our results reflect the benefits of investments beta, our middle-market investment banking teams and dual-coverage teams. Matthew has utilized his benefit and power wisely to grow our middle-market team from 15 bankers in 2018 across a dozen cities to more than 200 bankers in twice as many cities today. Both groups work with our commercial bankers and wealth management advisors in those cities to deliver for our clients. Investment in brokerage services revenue across Merrill and the Private Bank grew 11% year over year in Quarter 1 to nearly $3.6 billion. Continued investments in our advisor training programs and digital delivery for our clients as well as positive market helped us deliver strong revenue. Asset under management flows were $25 billion in the quarter. Sales and trading, excluding DVA, delivered its eighth consecutive quarter of year over year revenue improvement. At $5.2 billion, this is the highest first-quarter result in over a decade. We have allocated more balance sheet invested in talent to build on our strengths for the last five years in this business. Those investments, plus the intensity of the teams under Jimmy DeMare's leadership has resulted in good momentum and market share improvement. From a balance sheet perspective, we entered the quarter expecting modest loss in loan growth and a decline in deposits, those were our expectations. What we actually delivered was growth in any deposits of more than $20 billion. Ending loans were down modestly due to the expected credit card seasonality. Otherwise, loans are pretty stable. This balance sheet performance, along with our continued pricing discipline, allowed us to deliver better-than-expected NII performance. We told you last quarter that we expected NII to decline from the fourth quarter of 2023 to the first quarter of 2024, a decline about $100 million to $200 million. We actually reported today NII of $14.2 billion. That was $100 million higher than Quarter 4, exceeding our guidance. We continue to deliver strong expense management. Year-over-year expenses, adjusted for the FDIC assessment, was up a little less than 2%. That compares to a 4%-plus inflation rate. We also continue to invest in our company while managing those expenses. We had several categories of stronger fee-based revenue in the first quarter this year. This drove higher formulaic compensation and processing costs of the increased activity. Fees and commissions were up 10% year over year. We are happy to pay for that revenue and deliver warnings to the bottom line because of it. So how did we do all that and hold expenses under the inflation rate? Well, we remain focused on three primary drivers of Bank of America. First, our operational excellence platform continues to deliver and improve processes. These savings from that growth helped fund the future growth in the company and lower the risk. Second, we managed head count as we eliminated work. Recall, we noted the expectation in January of last year that our head count will be down throughout the year. Our head count at the end of first-quarter 2024 is down by more than 4,700 people from the first-quarter 2023. It declined 650 people just for the end of 2023. The digitization activity is also driving ongoing expense cost savings, customer retention, and market share improvement, driving across all three factors. It also then supports the ever-increasing volumes of client activity with little increased cost. I would highlight our continued capital strength with common equity Tier 1 capital of $197 billion. That amount of capital is $31 billion over the current regulatory minimums for our company. That capital has allowed us to both support our clients and returned $4.4 billion to shareholders this quarter and share repurchases and dividends. Let me highlight a few points on organic growth before I pass over to Alastair. Now I'm turning to Slide 3. You can see Slide 3, the highlights of the Quarter 1 success for organic activity across the businesses. We continue to invest and enhance our digital platforms. We provide our customers with convenient and secure banking experiences. By leveraging our technology and continuous investment in that technology and putting customers at the center of everything we do, we have successfully deepened our relationships and expanded our customer base across all our businesses. In consumer, we added 245,000 net new checking accounts this quarter. This completes 21 straight quarters of net additions. Dean Athanasia, Aron Levine, and Holly O'Neill helped drive that business for us and continue to perform well, driving strong performance across our consumer franchise. These checking balances continue to drive the performance of our consumer deposits. These checking additions are important for many other reasons. On average, 68% of our deposit balances have been with us for more than 10 years. 92% of the customer checking accounts are primary checking accounts in the household, meaning that they're the core operating account for the household for their financial lives. So when we onboard a client, we start a long-term valuable relationship. About 60% of our checking accounts customers use a debit card, and in average they do about 400 transactions per year on that card. The new checking accounts have traditionally opened savings accounts, about 25% of the time within a few months of opening that checking account. And opening a new checking account on average brings about $4,000 in balances below our averages. But that continues to grow, and within a year, it's two times that amount. Likewise, when we open a new savings account, it on average brings about $7,000 in balances. This also deepened it by about two times during the year. Investment relationships and credit card account openings continue to be strong in the first quarter as well. And while we believe some of these statistics are best-in-class, rest assured, there are plenty of opportunities for further growth in our franchise and our company. As we think about our Global Wealth team led by Eric Schimpf, Lindsay Hans, and Katy Knox, that team added 7,300 net new wealth relationships at the Merrill and the Private Bank. Our advisors opened 29,000 new bank accounts in the quarter with our customers deepening the relationships. More than 60% are investing clients in Merrill, and 90% of our private banking clients now have a core banking relationship with us. In addition, across our wealth spectrum, we saw $60 billion in total flows over the last year. As you can see on the slide, we now manage more than $5.6 trillion in total client balances across loans, deposits, and investments in consumer and wealth management. When we move to Global Banking, we added more new relationships in this quarter than we did in last year's first quarter. We also increased the number of solutions per relationship with preexisting clients. Just like in our consumer business, we have seen good growth in customers seeking the benefits of both our physical and our online capabilities and our talent, and also the care of our talented relationship managers who provide financing solutions and advice for our clients with global needs. A couple of other points I'd make on our digital success. Erica, our virtual banking assistant, reached a key milestone of more than 2 billion interactions since its introduction about 6 years ago. It took four years to reach 1 billion interactions. It took just 18 months to reach the second billion. In August, we extended Erica's reach and launched Erica in our Global Treasury Services business and CashPro. Erica, as a result, 43% of the CashPro chat inquiries automatedly, demonstrating more and more clients are able to self-solve. This is a great example of best practices being shared across the scale of our company. Second, as an example of our digital success, Zelle continues to grow. It wasn't long ago that we noted that the number of Zelle transactions in a quarter had surpassed the numbers of checks written. Shortly after that, Zelle transactions reached two times the number of checks written. This quarter, Zelle transactions has now passed the combined number of checks written, plus the amount of cash withdrawals from tellers and from ATMs. That is a rapid adoption and represents continued cost savings and convenience and security for the customers. These stats and others are included in our quarterly [Inaudible] for our digital banking progress. That's included in Slides 20, 22, and 24. I encourage you to read them. They show our market-leading efforts, representing billions of dollars of our investment over the years, and we are continuing to drive growth with expense growth under control. This solid earnings results achieved this quarter are testament to the dedication and talent of our 212,000 people who work here and deliver for our customers every day. I thank them for another great quarter. And with that, I'll turn it over to Alastair. Alastair Borthwick -- Chief Financial Officer Thank you, Brian. And I'm going to start on Slide 4 of the earnings presentation. So Brian covered much of the income statement highlights, and he noted the difference in our reported results and the results adjusted for the FDIC assessment. So I'm not going to repeat that. I'd just add that we delivered strong returns. On a reported basis, our return on average assets was 83 basis points, and return on tangible common equity was 12.7%. And when adjusted for the FDIC assessment, our efficiency ratio was 64%, ROA at 89 basis points, and ROTCE at 14%. So let's move to the balance sheet on Slide 5, where we ended the quarter at $3.27 trillion of total assets, up $94 billion from the fourth quarter. And the bulk of that increase was in Global Markets to support seasonally elevated levels of client activity. Outside of the Global Markets activity, we'd highlight both the $23 billion growth in deposits and the $20 billion decline in cash levels. So with that increase in liquidity, you'll also note that debt securities increased $39 billion, which included an $8 billion decline in hold-to-maturity securities and a $47 billion increase in AFS securities. And those are mostly hedged U.S. treasuries added with yields effectively at cash rates. At $313 billion, our absolute cash levels remain higher than required. Liquidity remained strong with $909 billion of global liquidity sources, and that's up $12 billion from the fourth quarter and remains $333 billion above our pre-pandemic fourth quarter '19 level. Shareholders' equity increased $1.9 billion from the fourth quarter earnings, as they were only partially offset by capital distributed to shareholders. And AOCI was little changed in the quarter. During the quarter, we paid out $1.9 billion in common dividends and we bought back $2.5 billion in shares, which more than offset our employee awards. As part of those share awards in the first quarter, we announced our seventh consecutive year of sharing success compensation awards, covering more than 95% of our associates and further aligning their interest with shareholders. Tangible book value per share of $24.79 is up 9% year over year. Looking at regulatory capital, our CET1 level improved to $197 billion from December 31st, and the CET1 ratio was stable at 11.8% and remained well above our current 10% requirement. We also remain quite well-positioned against the current proposed capital rules, as our CET1 level is also above the 10% requirement even when we include estimated RWA inflation from those new proposed rules. Risk-weighted assets increased modestly, driven by client activity in Global Markets. And our supplemental leverage ratio was 6%, compared to a minimum requirement of 5%, which leaves capacity for balance sheet growth. And at $475 billion of total loss-absorbing capital, our TLAC ratio remains comfortably above our requirements. Let's turn our balance sheet focus to loans by looking at the average balances on Slide 6. Average loans in the first quarter of $1.048 trillion were flat compared to the fourth quarter, and they improved 1% year over year as solid credit card growth was partially offset by declines in securities-based lending. Commercial loans grew modestly year over year. We experienced modest improvement in revolver utilization and commercial lending in the first quarter, and that's being offset for the most part by paydowns as larger client financing solutions are being met through capital markets access. And lastly on a positive note, loan spreads continued to widen. Moving to deposits. We'll stay focused on averages on Slide 7. And relative to pre-pandemic Q4 2019, average deposits are still up 35%. Every line of business remains well above their pre-pandemic levels, and consumer is up 32% with checking up 38%, driven by net new checking accounts added, as Brian noted earlier. Linked-quarter total average deposits remained steady at more than $1.9 trillion. The total rate paid on consumer deposits in the quarter was 55 basis points. And while the rate increased 9 basis points from the fourth quarter, the pace of increases continues to slow. The mix of low-rate and high-quality transactional accounts keeps the rate paid low. Wealth Management and Global Banking also saw a slowdown in the increases in their rate paid and slowdown in the rotation out of noninterest-bearing accounts in the first quarter. Focusing for a moment on ending deposits and movement from the fourth quarter. This quarter, we delivered good deposit growth. Total deposits grew $23 billion, and they're now $100 billion above their trough in mid-May of 2023. Consumer Banking deposits saw growth in both consumer interest-bearing and noninterest-bearing. Global Banking continued their more normal pattern of deposits seen for the past five quarters and up more than $30 billion over the last year. Deposit growth exceeded loan growth for the third straight quarter and our excess of deposits over loans expanded to $897 billion, and that's nearly two times the $450 billion we had pre-pandemic. You can see that on the upper left-hand side of Slide 8. We continue to have a mix of cash available-for-sale securities and held-to-maturity securities. And this quarter, our combination of cash and AFS is now 52% of the total $1.2 trillion noted on this page. You'll also notice the continued change in mix of the shorter-term portfolio, as we again lowered cash and increased AFS securities that are mostly hedged and have similar yields to the cash. Note also the hold-to-maturity book continues to decline from paydowns. In total, the hold-to-maturity book is now down $96 billion from its peak, and it consists of about $122 billion in treasuries and about $458 billion in mortgage-backed securities, along with $7 billion of other securities. Lastly, the blended cash and securities yield of 360 basis points continued to rise and remained about 168 basis points above the rate we pay for deposits. The replacement of lower-earning assets into higher-yielding assets continues to provide an ongoing benefit to NII. Let's turn our focus to NII performance using Slide 9, where you can see on a fully tax equivalent basis, NII was $14.2 billion. Good deposit growth provided a strong start to the year for NII. And as Brian noted, NII of $14.2 billion increased by $100 million from the fourth quarter. Now that compares to our expectation and guidance of a decline of $100 million to $200 million, and that would have resulted in NII this quarter of $13.9 billion or $14 billion. So we did quite a bit better than we had originally expected. The improvement in quarterly NII in Q1 compared to Q4 included the benefits of higher-yielding assets and improvement in Global Markets NII, partially offset by higher deposit costs and one less day in Q1 than Q4 '23. Deposit balance activity more generally also aided in the beat versus our expectations. As we look forward for Q2, we expect some modest impact of lower deposits in wealth management as clients make their seasonal income tax payments. And we expect Global Markets NII to decline mostly seasonally a little bit as well. So we expect second-quarter NII could approach $14 billion on an FTE basis. And further, we continue to expect that Q2 will be the low point for NII, and we expect the back half of 2024 to grow. And compared to our guidance last quarter, we're obviously growing off a larger base of NII after having outperformed in the first quarter. With regard to that forward view, let me just note a few other caveats. It includes our assumption that interest rates in the forward curve at the end of the quarter materialize. And at the end of the first quarter, there were still three cuts expected this year starting in June. Our forward view also includes an expectation of low single-digit loan growth and some moderate growth in deposits as we move into the back half of 2024. And given our recent deposit and loan performance, we continue to feel good about these assumptions. Turning to asset sensitivity and focused on a forward yield curve basis, our sensitivity to the plus and minus 100 basis point parallel shift in the forward curve at March 31st remains well balanced. OK. Let's turn to expense. And we'll use Slide 10 for that discussion, where we reported $17.2 billion expense this quarter, including the FDIC assessment. Adjusted for the assessment, expenses were $16.5 billion, and the increase over the fourth quarter included a little more than $400 million in seasonal payroll tax expense as well as higher revenue-related costs and, to a lesser extent, annual merit increases and other annual awards like sharing success awards provided this quarter. $16.5 billion was just a little above our forecast for Q1, which we made last quarter, and the increase is driven by better-than-expected fee revenue across wealth management, investment banking and sales and trading. And as Brian said, that's a trade-off we're more than happy to make, bringing more earnings to the bottom line. And while expense is up almost 2% from last year, we simply remind you, inflation was up by more than 4%, and we've increased our investment and we're paying for the revenue growth. So we think it represents good work by our teams. As we look forward in Q2, we expect a decline from the Q1 level, as we typically see about two-thirds of the Q1 elevated payroll tax expense come back out. And the remainder of the year, expense is expected to trend down. Continued digital engagement, savings, and operational excellence initiatives should help us offset other cost increases for people and technology through the back half of the year. Turning to credit on Slide 11. Provision expense was $1.3 billion in the first quarter, and that included $179 million of reserve release due to a modestly improved macro environmental outlook, as the baseline consensus expectations improved from the fourth quarter. On a weighted basis, we remain reserved for an unemployment rate of nearly 5% by the end of 2025 compared to the most recent actual 3.8% rate. Net charge-offs of $1.5 billion increased $306 million from the fourth quarter, driven by continued credit card seasoning and commercial real estate office exposures, as swift revaluations from current appraisals and resolutions drove higher charge-offs. The net charge-off ratio was 58 basis points, a 13 basis point increase from the fourth quarter. On Slide 12, we show you the credit quality metrics for both our consumer and commercial portfolios. Consumer net charge-offs increased $115 million versus the fourth quarter from the flow-through of higher late-stage credit card delinquencies. We included a credit card delinquency Slide number 28 in our appendix. And we're encouraged by the trend of delinquencies because the late-stage increases slowed and early stage delinquencies improved as well. And that leads us to believe we should begin to see consumer net charge-offs start to level out over the next quarter or so. All of this is still well within our risk appetite and our expectations, and it's consistent with the normalization of credit we've discussed with you in prior calls. Commercial net charge-offs increased $191 million versus the fourth quarter, driven by commercial real estate losses and office exposures. And on office losses this quarter, we recorded charge-offs on 16 office loans: four were a result of sales activity, i.e., final resolution; seven were from losses that we expect on exposures that are in the process of expected resolution in the course of the next 90 days; and the rest we took as a result of refreshed valuations. Using a continuous and thorough loan-by-loan analysis, and we're quick to recognize impacts in the commercial real estate office space through our risk ratings, and that's resulted in several downgrades in the last few quarters. As a result of these quick actions and our downgrades in categorization, we've also refreshed the valuation of our reservable criticized properties, and we've taken appropriate reserves and charge-offs in the process. Roughly one-third of our office exposure is now categorized as reservable criticized. And importantly, the pace of the increase in reservable criticized exposures has slowed each quarter since the second quarter of last year. So we believe the losses on these office properties have been front-loaded and largely reserved. We expect the losses to move lower in the second quarter. And we expect a notable decline in the second half of the year when compared to the first half of this year, absent any material change in expected real estate prices. In the appendix on Slide 29, we've included a current view of our commercial real estate and office portfolio metrics, as we usually do. OK. Let's turn to the various lines of business and offer some brief comments on their results, starting on Slide 13 with Consumer Banking. For the quarter, Consumer Banking earned $2.7 billion on continued strong organic growth. The reported earnings declined 15% year over year as revenue declined from lower deposit balances compared to the first quarter of '23. Credit card loss normalization also caused year-over-year provision expense to increase. As Brian noted, customer activity showed another strong quarter of net new checking growth, another strong period of card openings, and investment balances for consumer clients, which climbed 29% year over year to a record $456 billion. That included market appreciation and also very strong full-year flows of $44 billion. As noted earlier, loans grew nicely year over year from credit card as well as small business where we remain the industry leader. Expenses were flat year over year, fighting off inflation, merit increases, higher minimum wages, and new and renovated financial centers and technology investments. So holding expense flat reflected very good work by the consumer team. As you can see on the appendix, Page 20, digital adoption and engagement continued to improve, reaching a record of 3.4 billion digital log-ins in the quarter, and it showed good year-over-year improvement. Customer satisfaction scores at near-record levels illustrate the continued appreciation of the enhanced capabilities we provide. Moving to wealth management on Slide 14. We produced good results, and that included good organic client activity, market favorability, and strong flows. Our comprehensive suite of investment and advisory services, coupled with a commitment to personalized wealth management planning and solutions, has enabled us to meet the diverse needs and aspirations of our clients. In the first quarter, we reported record revenue of $5.6 billion and a little more than $1 billion in net income. That net income rose 10% from the first quarter of '23. Business generated positive operating leverage and grew revenue faster than expense, while improving the pre-tax margin year over year. While overall average loans were down year over year driven by the securities-based lending, it's worth noting the strong growth we're seeing in custom lending, and ending loans in the wealth management customer loan book are up 6% year over year. As Brian noted earlier, both Merrill and the Private Bank continued to see strong organic growth and produced good assets under management flows of more than $60 billion since the first quarter of '23, which reflects a good mix of new client money as well as existing clients putting money to work. Expense growth here max the revenue growth, otherwise fighting off higher investment costs and inflation. Let me also highlight the continued digital momentum here. As an example, Merrill has 86% of its clients now engaging with us digitally and 80% utilizing eDelivery. 76% of their eligible accounts are now opened digitally. So the cost for us to open is half, and the customer cycle times are improved greatly. On Slide 15, you see Global Banking results. And the business produced earnings of just less than $2 billion, down 22% year over year, as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 4%, driven by the impact of interest rates and deposit rotation to interest-bearing, and that impacted NII. The diversification of our revenue across products and regions continues to reflect the strength of this platform, and GTS and investment banking fees are good examples. In our Global Treasury Services business, some of the NII pressure from higher rates on deposits is offset by the fees paid for moving and managing the cash of clients, and that continues to grow with existing clients as well as with new client generation. As Brian noted, Investment Banking had a strong quarter. And at $1.6 billion in investment banking fees, this quarter was the strongest quarter in seven years, absent the pandemic 2020 and 2021 periods. An increase in provision expense included the commercial real estate net charge-offs I discussed earlier as well as a larger reserve release in the prior year period. Expense increased 2% year over year, including the 35% lift in investment banking fees from the first quarter of '23. Switching to Global Markets on Slide 16. We'll focus our comments on results, excluding DVA, as we normally do. The team had another terrific quarter with $1.8 billion in earnings, growing 7% year over year. Revenue improved 6% from the first quarter of '23, and return on average allocated capital was 16%. Focusing on sales and trading ex DVA. Revenue improved 2% year over year to $5.2 billion, which is the highest first-quarter result in over a decade. FICC was down 4%, while equities increased 15% compared to the first quarter of '23. And the decline in the FICC revenues versus the first quarter was driven by a weaker macro trading quarter that was partially offset by better mortgage trading results. Equities was driven by strong trading results in derivatives, and year-over-year expenses were up 4% on continued investment in the business. Finally, and on Slide 17, All Other shows a loss of $700 million, driven by the FDIC assessment. Revenue declined year over year, reflecting higher investment tax credit deals. And expense, adjusted for the FDIC assessment, was down $113 million, driven by lower unemployment processing costs. Our effective tax rate for the quarter was 8%. And excluding the FDIC assessment and other discrete items, it would have been 9%. And further excluding tax credits related to investments in renewable energy and affordable housing, our effective tax rate would have been 26%. Thank you. And with that, we'll jump into Q&A. Questions & Answers: Operator [Operator instructions] We'll take our first question from Steven Chubak of Wolfe Research. Steven Chubak -- Wolfe Research -- Analyst Hey. Good morning. Alastair Borthwick -- Chief Financial Officer Good morning Steven. Steven Chubak -- Wolfe Research -- Analyst So maybe just to start off with a question on capital management. Just given the strength of your excess capital position, there may be still some uncertainty around Basel III endgame and where the proposal could ultimately shake out. I was hoping you could just speak to where you're comfortable running on CET1. And when can we expect that you'll return to 100%-plus type payout? Brian Moynihan -- Chief Executive Officer I think you should expect that we run a cushion. Whatever rules come out and when they come out and get clarity, we'll expect to run the requirements plus 50 basis points up to 100 basis points of excess. And anything above that will be either used to continue to grow the company, if needed. If not, it will be returned. And so we're just -- as all of us are waiting for the finalization of these rules, right now we're sitting on $30 billion under the old rules. We have enough under the new rules as previously proposed. But obviously, they're talking about changing them. So you should expect clarity on that. What you also expect is, as we think about it beginning now, you're basically at the point where you're sitting on the capital, the very modest need to build a cushion to the rules as proposed and any changes will be more favorable, that I assume. So expect us to continue to return capital at a fairly strong rate as we move through the second quarter and beyond and the rules become clarified. Steven Chubak -- Wolfe Research -- Analyst Great color, Brian. And for my follow-up, just on the NII commentary. Alastair, it sounds like you're still assuming some modest deposit growth in the back half as part of that NII trajectory, that recovery off the trough in 2Q. Just given your deposit balances increased $500 billion since COVID, I know some of that's going to be a function of share gains. But as we prepare for some Q2-driven outflows, how are you handicapping the risk of deposit attrition? And how does that impact the NII guidance? If you can frame any sort of sensitivity, recognizing many of those tend to be hot money or higher-cost deposits. Alastair Borthwick -- Chief Financial Officer Yes. So first thing, I would just say, Steven, is we've been up against Q2 now for the last couple of years. So the deposits are beginning to settle in now. And if we were to go back to -- if you take, for example, consumer, if you were to go back to pre-pandemic and think about what long-term sustainable growth rates look like for consumer, if you just extended that through from the fourth quarter of 2019 to today, given that the economy is 30% larger, we kind of feel like consumer is approaching that floor. So we're still in this belief that Q2 is going to be -- Q3 may be the turning point for consumer. You can see that slowing though. The rest of our business, if you look at the exhibit we put together on deposits, if you look at that bottom left chart on wealth, you'll see it slowed and grew this quarter. And then in Global Banking on the right-hand side of that page, they're kind of back to pre-pandemic growth rates. They're up 7% year over year. So we're seeing some structure now in the deposit base. Even with Q2 over the course of the past year, our deposits were up $100 billion. So it has been a point of conviction of ours that, as we get toward Q2, we should see the consumer side begin to stabilize. That's what's driving our conviction that NII will go up in Q3 and Q4. We're in that transition period right now. Steven Chubak -- Wolfe Research -- Analyst Good color. Thanks so much for taking my questions. Operator We'll take our next question from Mike Mayo of Wells Fargo. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. Well, thanks for the outlook for NII and then consumer charge-offs. But once again, I go back to efficiency. And you highlight the 2 billion Erica interactions, the last 1 billion in the last 18 months. You mentioned Zelle, transaction now double the check, transactions are more than checks plus cash withdrawals from ATMs plus cash withdrawal from tellers. So for all the great tech work, the efficiency ratio improved 66% to 64% quarter over quarter. But I know you're still not happy with that 64%. So as you see the NII decline in site and as you have this tech evolutions continuing, when do you think you can get below a 60% efficiency ratio? What's your outlook for that? Because I'm just reconciling the numbers that we look at with all the progress you're making internally. Brian Moynihan -- Chief Executive Officer Mike, I think as NII sort of moves along the path that Alastair mentioned, all that sort of flows through because there's no more activity it touches, as you're pointing out, and we continue to reduce marginal expense of that activity because largely, that's a consumer and wealth management and Global Banking, which don't add lots more clients and stuff and lots more activity. Even though the numbers go up, it's out of efficiency. So that continue to improve our efficiency ratio. As you also well know, when the revenue growth is coming through the wealth management business, which, by definition, because of the way the compensation process works, has the lowest efficiency ratio in the company, that's a good thing. Because it grows and we get good profitability growth out of it, but we're fighting that trend. And as one of the largest wealth management business in the world, if not, it's a higher percentage of our revenues and our expense base. And so we'll continue to drive it down. We're at 64%. You'd expect that to improve as the deposit balance has stabilized and for many quarters now and starting to grow. The rate paid has really flattened out sequentially by quarter, and the yield of the portfolio and the yield of the assets continue to grow. So we feel good about how it's going. Our focus is really on deploying expenses in operating leverage. And as we get through the twist in the NII, you should start to see us return to that again. And that would then obviously drive down the efficiency ratio. Mike Mayo -- Wells Fargo Securities -- Analyst What are you thinking about expense growth for the rest of the year or next year? For a while there, you're trying -- and I get it, inflation has gone up quite a bit. But what are your thoughts about expense growth looking ahead? Alastair Borthwick -- Chief Financial Officer Well, last year, remember, Mike, we told you we thought we could drive expense down every quarter. We believe this year, the expense will trend down over the course of this year. And obviously, Q1 has inflated a little bit with just payroll tax and some of the revenue seasonality. But underneath that, there's pretty significant revenue strength. So I think that probably cost us $100 million or so this quarter. I think we probably are looking -- if this environment continues, we're looking at another $100 million per quarter going forward. But it's -- to Brian's point, it's the good expense that comes with revenue growth over time. That's really the only change, I'd say, with respect to how we think about the expense picture. Mike Mayo -- Wells Fargo Securities -- Analyst All right. Thank you. Operator We'll take our next question from John McDonald of Autonomous Research. John McDonald -- Autonomous Research -- Analyst Thanks, good morning. I wanted to follow up on the helpful deposit commentary, Alastair. So you mentioned the consumer. You're thinking that that will stabilize in the back half of the year on deposits. Wondering what your mix shift expectations are. Earlier this year, you kind of thought that those customers had moved for rate seeking, already had. I'm just wondering if higher rates for longer could put some pressure on rate-seeking behavior again. And what you're baking in, in terms of mix shift from noninterest-bearing. Is interest-bearing in your outlook and your planning? Brian Moynihan -- Chief Executive Officer Yes, John, I think if you look at seven, you could see sort of the mix in the left-hand corner. Remember that one of the things people have to -- we all have to be careful about is in the Global Banking area, the way the fees are paid and earnings credit. It messes up the simplicity of noninterest-bearing and interest-bearing, so it's complex. But if you look at the quarters coming across from the first quarter of '23 through the first quarter of '24, you can see that -- you're seeing the rate of change slow dramatically and kind of settle in. So I don't -- a lot of the money has moved in -- if you look at the seven-day average for consumer go all the way back to the early part of October, it's been relatively stable at $950 billion, $960 billion. So we're just getting to the tax seasons and ins and outs in the wealth management business and consumer. People paying taxes out on the wealthier side and receiving benefits on the tax refund side. So as we stabilize in that, we expect it to grow. We don't expect a massive change in how the deposits are structured from a -- what's in money markets, what's in savings, what's in checking, what's in that. It's really slowed down and been relatively stable. So things bump around, but it's all very good value, even the highest-paid balances in the wealth management business are good value for the company. But if you look at what really drives the value to the $950-odd billion in checking balances, you can see on Page 7 the core checking balances, that's what drives it. John McDonald -- Autonomous Research -- Analyst Yes. You're still feeling, Brian, like the bulk of people that have kind of moved on rate-seeking behavior likely have done so. Brian Moynihan -- Chief Executive Officer Yes. If you look on the consumer business and you think about tracking those deposits accounts from pre-pandemic to now, which is one thing we talked about for different purposes. But if you look at where all the deposit balances, if people with lower average balances are still multiples of where they were pre-pandemic, people with higher balances are actually lower because, obviously, they were sitting on cash when the pandemic and accumulate more cash. And when rates came up, they moved it. And all in, that gives you what you see in consumer, which is at the end of the day, a couple of hundred billion dollars over where it was pre-pandemic. And so -- but the people have moved. And you're seeing it month-to-month relatively stable as we track that every month on both sides, frankly, the lower average balance accounts from pre-pandemic are basically bouncing around at the same level right now, not going down, not going up. And the higher ones are stable, but they are down 15%, 20% for people with a $0.5 million, $1 million balances largely because they moved it in the market. So we feel stabilized. There'll be ins and outs, and we'll see it play out, but it's extremely valuable no matter how you look at it. John McDonald -- Autonomous Research -- Analyst OK. And maybe as a quick follow-up for Alastair. It's nice to see the core NIM, the net interest yield ex markets inflect positively this quarter. Is that sustainable, do you feel like? And what are some of the fixed asset reprice dynamics that are tailwinds beyond the $10 billion per quarter on securities in terms of like loans and swaps that all come due over the next year or two and help the NIM a bit? Could you talk a little bit about that? Alastair Borthwick -- Chief Financial Officer Sure. We've talked about the fact that the net interest yield, obviously, this quarter benefits from the NII growth. So you're getting in the numerator. But we inflated the denominator in terms of the average earning assets last year as we just made the balance sheet more liquid. So that's going to allow us to continue the deposits growth, to grow the interest income over time without necessarily growing the other earning assets. So Q2 will have a little more of a challenge. But going forward, I expect all the NII improvement in Q3 and Q4 to drop into that net interest yield. And part of the things supporting that, John, as you pointed out, is we do have loans repricing. Because we've got loans coming off the balance sheet, we're booking new loans at higher rates. So that's one element. Second element is we've got securities that we're reinvesting underneath all those two. So obviously, we're sweeping the hold-to-maturity paydowns and reinvesting those at much higher rates. And then third, the teams have been working hard at repricing the balance sheet broadly for things like loans. And I believe we've now had seven quarters in a row of improving loan pricing. So we just got to keep grinding away at that. John McDonald -- Autonomous Research -- Analyst Thank you. Operator We'll take our next question from Betsy Graseck of Morgan Stanley. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. Brian Moynihan -- Chief Executive Officer Good morning Betsy Graseck -- Morgan Stanley -- Analyst Thanks very much for taking the question. I guess I just wanted to follow up on the conversation you're just having. And Alastair, I know that, look, your NII guide improved this quarter due to 1Q results being better than what you anticipated a quarter ago. My question is on the second half '24 improvement. I get that it's going to be an improvement from first half, right? That's basically the base that you're looking at. I'm wondering how you're thinking about the NII trajectory on a year [Inaudible]? I believe NII is down about 3% year-on-year in 1Q. Should we anticipate that that is kind of stable pace throughout the year? Or that reduces as well when we're talking about second half '24? If you could just give us a sense of year-on-year, that would be helpful. Brian Moynihan -- Chief Executive Officer Betsy, before Alastair answers your question, it's good to have you back. And we wish you good luck with everything. So Alastair, why don't you hit that? Betsy Graseck -- Morgan Stanley -- Analyst Thanks so much, Brian. Really appreciate that. Alastair Borthwick -- Chief Financial Officer It's good to have you. So I guess a couple of things. The first thing is we haven't changed our perspective in terms of this idea of Q2 being the low point and the trough for the year. We haven't changed our point of view on growing in terms of Q3 and Q4. I think the important thing we're trying to convey is because of the continued stability in pricing rotation and because of this continued stability in deposits, we feel like that extra couple of hundred million in Q1 is something that should flow through in Q2, Q3 and Q4. And then there'll be a second dynamic to watch for as well, Betsy, which is if we have less rate cuts, we're going to benefit from that. We wouldn't necessarily benefit a lot in Q2 because there isn't enough cuts or time in Q2. But I think by the time we get to Q3 and Q4, we'll know more about the rate structure at that point, and we'll be able to tell you more about how -- what we expect for the growth in the back half of the year. But we're reasonably optimistic there. Betsy Graseck -- Morgan Stanley -- Analyst Super. That's perfect. And then just one follow-up is on the AOCI. So we all know that HTM is a portfolio that you're in runoff on, I guess, if that's fair to say, is the balances are pulling off. And this quarter, we did have a backup in the long end of the curve. Your AOCI really didn't flex that much. And part of my question is, is that a function of how the securities book is comprised? And you've been shifting toward treasuries, and that's reducing this risk as the back end of the curve increases. I just wanted to understand how that's trajecting in your mind. Because it is a concern that people raise, and what I thought today suggests that it's much less of a concern than it had been a year ago, say, for example. Would you agree with that? Or -- Alastair Borthwick -- Chief Financial Officer Yes. I mean we've deliberately worked on that over time. But we've always, I think, had a pretty good program of hedging the fixed-rate securities in the AFS book so that they're swapped. And that means that if rates go up, we obviously benefit from that. It doesn't necessarily hurt us in terms of AOCI. So most all of the treasuries that you see in our portfolio are swapped. So I would expect very little in the way of AOCI impact there. Betsy Graseck -- Morgan Stanley -- Analyst Thanks so much. Operator We'll take our next question from Glenn Schorr of Evercore. Glenn Schorr -- Evercore ISI -- Analyst I think perfect leading to this question. On Slide 8, you talk about AFS book securities mostly hedged, you're pulling the cost and the duration of less than a half year. I know the Fed forward curve keeps not being correct, but at some point, it's going to be correct and rates are going to come in. My question is, what do you do about that? How much do you think about extending duration and managing the swaps a little differently, as we eventually knew at this time transition to a different rate backdrop? Alastair Borthwick -- Chief Financial Officer Yes. So Glenn, I mean, ultimately, we'll use the same philosophy and strategy that we do to this point. We are in, obviously, a very good position where we have substantial deposits in excess of loans. That's what creates this excess in the top left of Page 8, and it's what allows us to put everything to work in the top right. The balance that we try to strike, you can start to see in left-hand side. We're trying to make sure that, that cash and securities yield, compared to deposit rate paid, performs in any environment. So in an environment like this one where there's an awful lot going on with rates, we feel like if you look at that spread, I think it was 1 basis point different quarter over quarter. So we're trying to make sure that we lock in the value, monetize the deposits regardless of whatever rate environment turns out to be. And we feel like we're pretty balanced now. We've got a pretty good balance of short-dated, long-dated, fixed, and floating. That should allow us to perform whether rates go up or down from here. One final thing I'll just say, and I think you know this. Underneath all of this, obviously, we've got some securities repricing. And to the point, I think it was John asked earlier, we've got the loans repricing as well, and all of that gives a little bit of underlying resilience to this. Glenn Schorr -- Evercore ISI -- Analyst Yes, I get that. I guess you have a lot of flexibility should you decide this time. Just one follow-up. You talked deposits with that. You had a smidgen of year-on-year loan growth mostly in cards, I think. But it seems -- I know how we got here, but we're in an environment -- it's really strong economy, up markets and yet no loan growth. Are we -- is this just -- any way you slice it, we have to like go through another year or two of super low loan growth. Or are there any leading indicators that would lead you to believe we can get back to a little bit more normal BofA loan growth and not have to wait two years for it? Alastair Borthwick -- Chief Financial Officer Yes. Well, I think we're probably getting closer now because, remember, in a big macro, we're in that transition period where post-pandemic, the economy is sort of recovering and rates are settling in and it's changing people's behaviors. So we've actually got pretty good credit card growth. And that's just offset by the fact that, for example, with securities-based lending at rates that are 5% higher, people are doing less of it. Or in commercial, we've got some loan growth, but the revolver utilization is still suppressed because revolver costs a lot more. So as the Fed has raised rates, it's changed some of the borrowing patterns of our clients, but that's not going to last forever. Because as you point out, the economy powers through at 3%, 3.5,%. Whatever it ends up being, loan growth is going to catch up to that over time. So for right now, we're in that transition period. But we're anticipating that loan growth will pick up at some point in the future, but it's not an enormous part of our NII guide at this point. Brian Moynihan -- Chief Executive Officer And just remember that the capital markets opened up and a lot of the larger clients access them as they, frankly, have gotten used to the higher rate structure and need to refinance. So that -- if you look across the businesses, you've got the commercial run. But if you look across the commercial businesses in the middle market and business banking, the segment up to $50 million in revenue companies and up to $2.5 billion, they actually saw progress on loan growth. It was really in the high end, Global Corporate and Investment Banking business, where you saw sort of paydowns and bring that down. That phenomena is one that occurs from time to time. It's probably stabilized now and we'll see it play out. But we are fighting for loan growth. And frankly, line usage stabilized and is better than it's been for the last few quarters in terms of trend. And so again, that all speaks to people feeling fine, but they're not quite as aggressive as they would be when you read the economic statistics. And that's one of the great debates you can read about in the paper every day. Glenn Schorr -- Evercore ISI -- Analyst Thank you both for all that. Operator We'll take our next question from Matt O'Connor of Deutsche Bank. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. So obviously, there's been a lot of questions on net interest income and a lot of color, I guess. Just when you put it all together, like when you think about the higher-for-longer environment, obviously, it's good on the reinvestments. You're trying to match the deposits like you talked about. But how would you just boil it down? The rate disclosures still show $3 billion kind of exposure to either side. Is stable rates for a couple of years, is that good? Or does that accelerate the deposit repricing? Or just boil that down. Alastair Borthwick -- Chief Financial Officer Sure. Well, I'd say generally speaking, higher for longer is probably better for banks as a general statement. The question will become why are rates higher? Like what's going on in the economy? Are we talking about inflation? Is it under control? Is it coming down? Right now, that appears to be the case. So that's obviously a good place. And the Fed is in a good place because they appear to have rates -- a real rate that's high enough to make sure that inflation stays in a good place. Things can change that, so an awful lot will depend upon just the why for rates. But generally speaking, if it's just because it's taken a little while longer for the inflation to nudge down before the next set of cuts, that's probably a good environment for us. I would expect us to perform relatively better than we've disclosed so far. And then you're asking a second question, which is around the what does the sensitivity look like to plus $100 million or minus $100 million. We've tried to just make sure that we continue to stay balanced. If anything, that corridor of plus $100 million, minus $100 million has gotten narrower and narrower over time as we're trying to lock in NII that's $4 billion or $5 billion higher per quarter today than it was three years ago. And just make sure that the shareholder benefits from that through the course of time. So we'll see how the environment plays out. It's only been a quarter since we were last year talking about six cuts, now it's three. So we just have to watch this play out and stay patient. Matt O'Connor -- Deutsche Bank -- Analyst OK. Fair enough. That's helpful. Thank you. Operator We'll take our next question from Ken Usdin of Jefferies. Ken Usdin -- Jefferies -- Analyst Thanks very much. Good morning. A real breakout quarter for the IB fee line. And just wondering a couple of things within that. One, there was a bit of a back and forth from some of the other banks about whether or not DCM was pulled forward a little bit from future. I wonder what you think about that. But more broadly, just you guys have done a good job taking share. What inning do you think you are in terms of not so much as green shoots, but in terms of where that incremental productivity is in terms of getting that IB line to a more permanent higher level? Brian Moynihan -- Chief Executive Officer So think about it, if you go back in sort of the period prior to the run-up in the couple of years after pandemic, you've had sort of mid-$1.5 billion, this type of numbers a quarter. We think we're fundamentally stronger in the market position, as you said. So we feel very good about the work Matthew and the team have done. And we -- as we look at it, we believe that they'll continue to gain share. And I think this is a more normalized level and whether it's pulled forward or not, we'll find out. But it's a more normalized level given those dynamics and one we should be able to build off, especially as I said earlier, the penetration in the middle-market side of our business, whether those clients working up our wealth management in the markets generally, plus working across the globe, and we've done better work international. So we feel good everything that the team has done, the combination of corporate and investment banking is very strong. So we don't think this is like an unusually high-water mark, and we should be able to build from here. Ken Usdin -- Jefferies -- Analyst OK. Got it. And then one question about wealth management and just client choices in terms of where they're sitting relative to earning NII or earning fees. Where do you sense that the kind of cash versus fully invested is in terms of the wealth management brokerage business? And could that turn to the better, turn to the worse, depending on how that mix answer goes? Alastair Borthwick -- Chief Financial Officer Well, wealth management, I think Lindsay, Katy, and Eric highlight for us regularly just the elevated levels of cash that our clients have. A lot of that is on us, and you can see that in our deposit chart. But there's a lot that we captured in the investment area, too, where there, a lot of their flows are coming into maybe it's money market funds, maybe the short-dated treasuries, but there's a lot of cash at this point. So that would tell you it's supporting the ability to see continued assets under management flows going forward, depending on how the -- obviously, the stock market shakes out over time. But we're all struck by just the sheer amount of cash on the sidelines at this point. Ken Usdin -- Jefferies -- Analyst OK. Got it. Thank you. Operator [Operator instructions] And we'll take our next question from Gerard Cassidy of RBC. Gerard Cassidy -- RBC Capital Markets -- Analyst Hi, Alastair. Hi, Brian. Brian Moynihan -- Chief Executive Officer Hi Gerard. Gerard Cassidy -- RBC Capital Markets -- Analyst Alastair, coming back to Slide 8, which is obviously quite impressive on deposits, particularly the upper left-hand graph you've presented. When you go back to maybe 2014 or '15 and take a look at the deposit levels of your company from, let's say, 2015 to 2019, you just didn't have the growth that you experienced from the end of '19 through today. Can you guys share with us what drove this meaningful increase in not only in excess deposits but all deposits? Brian Moynihan -- Chief Executive Officer I think, Gerard, so you've been around long enough to understand some of those dynamics. So as we move through the post-financial crisis, we had -- in terms of that chart, if you looked at it, you had a lot of loans that we ran off because they weren't core loans anymore and kind of troughed out the $900 billion level and then grew out from there. In 2015, that's where we started driving responsible growth. It was a call to growth now that we pushed out a lot of stuff in the financial crisis and got it behind us. On the -- so the loans then start picking up. But if you remember back then, I think we had almost $300 billion, if I remember right, and if you looked at the slide on loans and the non-line of business loans are $200 billion or something like that, and it's down to $10 billion. So think about that dimension. So as we ran that down and could grow, we could overcome it. And so then on the growth on loan side is driven by discipline where we want to play, and the card business is getting it positioned. Right now, we could start to push from there, whether it's on home equity business on the auto loan business. And on the commercial side, it was -- we had less issues after financial crisis in commercial. But kind of getting through all that, it was getting to their credit quality we wanted. And a source of great growth for us from 2010 and beyond has been we've probably gone from, I don't know, $20 billion, $30 billion of outstanding loans out in the international, part of Matthew's business and GCIB to almost $100 billion type of number. So expansion of our international capabilities and done with great credit work by Geoff Greener and the team and Bruce Thompson's team. So put all that together, that's the loan side. On the deposit side, it really started with a focus that began really prior to -- in the middle of the financial crisis and beyond where we said we're going to go for core checking accounts in consumer, primary checking accounts, drive customer satisfaction, drive organic growth and not care about the number of sales as much as the net growth in net sales. And as the team of Dean and Thong over time and then Aron and Holly now have continued to push that, adding 1 million-ish net new checking accounts, all core. We've gone from 60% core to 92%. We've gone from customer satisfaction to the highest levels ever in the mid-80s, top 2 box, etc., etc. Attrition down the lowest ever. Preferred Rewards kicked in. And all that has led to higher and higher balance retention per account and then also more accounts. And so we've probably grown in the consumer from, I think, around $300 billion at the beginning of 2010, '11 to now at $900 billion. Now there's economic growth and economy grows, but that's way outsized. And that's what's driven the real value of the deposit franchise. And then wealth management, again, after Merrill putting together and then driving that core aspects between the team there, has kept us up to $300 billion. That's from $200-and-something billion pre-pandemic and probably less than that, I think it was $200 billion at the time of the merger. So all these things are just part of it, and the GTS business investments that have driven those products. So that spread is high and growing again, which is kind of counterintuitive to the narrative that one of your colleagues mentioned earlier, which is leave aside all the quantitative tightening, all the interest rate and all the stuff that's supposed to happen. Quarter after quarter, we're now growing the amount of deposits over the top of the loans and the loans, hopefully, will kick back in and grow a little faster. But they still won't use a lot of those balances up, and so we feel very good about that position. And those deposits, as you can see on the bottom of Page 8 on the left-hand side, all-in cost is 193 basis points against the Fed funds rate, the 5.5%. And the rate of change in those deposit prices have flattened out to be very modest linked quarter, and that's just a tremendous leverage for the company. Gerard Cassidy -- RBC Capital Markets -- Analyst Very helpful, Brian. Maybe as a follow-up, I think, Alastair, you pointed too that your CET1 ratio is if Basel III endgame went in as originally proposed, you're very comfortable with it. Can you guys share with us what's the latest? We all read about the watering down of Basel III endgame. Do you guys have a sense when you may actually see a final proposal? And could it kick into next year possibly? Alastair Borthwick -- Chief Financial Officer Look, we don't have an update on the timing yet, Gerard. We're in the same place you are. We're kind of waiting for the rules to come out. And we're still listening for updates from the Fed chair and the vice chair, and we'll wait until we see those come out. Brian Moynihan -- Chief Executive Officer But the key is that we're sitting, even under the current interpretation we told you earlier on about any modifications, we're sitting on enough CET1 nominal amount, $197 billion. That exceeds what we did for the increase in RWA under the current version of the rules they propose. Anything that changes in that would be positive throughout. So we don't need to retain capital to meet those standards. We don't -- so we're off and running. Gerard Cassidy -- RBC Capital Markets -- Analyst Appreciate it, Brian. Thank you. Operator We'll take that question from Jim Mitchell of Seaport Global. Brian Moynihan -- Chief Executive Officer Morning, Jim. Jim Mitchell -- Seaport Global Securities -- Analyst Hey. Good morning. Maybe just one last follow-up on that last question from Gerard. If Basel III is reduced, as Powell suggested, is it with limited loan growth just more likely to be put toward buybacks? Or do you see opportunities beyond just loan growth, whether it's building -- growing the trading balance sheet or other opportunities to deploy that capital to drive growth? Just curious how you deploy that. Brian Moynihan -- Chief Executive Officer Well, number one, our primary interest is to use the capital to support our customer businesses. So you've seen that happen in the markets business. As we said, it was one of the best quarters in a decade first quarters. That is a multiyear process of building up not only the balance sheet and capital committed to the business, but importantly also, the investment systems and technology and risk management and other things, if they continue to make money almost every trading day over the last several years. So that's where we'd like to use it, supporting that business, supporting loan business, supporting all the businesses. The reality is, it's outside of the capital markets business, then you go to loan growth. And that -- and the kind of loan growth in mid-single digits, that doesn't eat a lot of the capital up. So that is just there to be returned. And so we got two basic phenomena. One is we storehoused a bunch of capital. If you think about the last few years between the changes in CCAR a few years ago, that changed the capital dimension then the proposed rules, and then now whatever happens with them. So they were sort of sitting in pandemic. Before that, we were sitting on a fair amount of capital. That should be released over time here. And then secondly, the question will be what those rules are going forward. And then third would be what do you need to support the business, which again, that's our primary responsibility. But generally, that is a modest amount of capital. And so most of our desire is really deploying more expenses and technology investments, and we've gone from $3 billion to $3.8 billion in annual technology investments across the last couple of years, more branches. But that's more of an expense question than a capital question. All right. I think that's all Lee, correct? OK. Why don't we wrap it up here? Thank you for your time and attention. This quarter marks another quarter of strong organic growth across every businesses, continued this quarter. Good fees and what we call fees and commissions in the wealth management business, investment banking, and trading. NII continues to outperform what we told you last quarter for the quarter, first quarter. We rolled that into second quarter, and we expect continued performance in that as we go through the trough and meet the second half of the year. We continue to manage expenses well into the inflation rate, and we start with strong capital and liquidity and a strong balance sheet. So we are -- the team did a great job this quarter, and we look forward to talking to you next quarter. Thank you.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Biogen first-quarter 2024 earnings call and business update. [Operator instructions] Today's conference is being recorded. Thank you. I would now like to turn the conference over to Mr. Chuck Triano, head of investor relations. Mr. Triano, you may begin your conference. Chuck Triano -- Head of Investor Relations Thanks, Jennifer. Good morning, good afternoon, good evening, everyone, and welcome to Biogen's first-quarter 2024 earnings call. Before we begin, I'll remind you that the earnings release and related financial tables, including our GAAP financial measures with a reconciliation to the GAAP and non-GAAP financial measures that we will discuss today are in the Investors section of biogen.com. Our GAAP financials are provided in tables 1 and 2 and table 4 includes a reconciliation of our GAAP to non-GAAP financial results. We believe that non-GAAP financial results better represent the ongoing economics of our business and reflect how we manage the business internally. We have also posted the slides on our website that will be used during this call. I'd point out that we will be making forward-looking statements, which are based on our expectations. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors discussed in our SEC filings for additional detail. On today's call, I'm joined by our president and chief executive officer, Chris Viehbacher; our head and president of North America, Alisha Alaimo; our CFO, Mike McDonnell; and Dr. Priya Singhal, head of development is with us and will be available for the Q&A session. Chris, Alisha, and Mike will each make some opening comments and then we'll move to the Q&A session. [Operator instructions] With that out of the way, I'll now turn the call over to Chris. Chris Viehbacher -- President and Chief Executive Officer Thank you, Chuck. Good morning, everybody. Well, it is certainly great to be able to announce earnings-per-share growth in our first quarter. This is the first time in several years that the underlying business performance of Biogen has allowed us to actually demonstrate earnings-per-share growth, and that's a major achievement. We've clearly still got a lot of work to do, but I think it feels like we're turning the corner in the company. And with that, I'd like to actually take the opportunity to thank my Biogen colleagues. We have instituted an awful lot of change within the company and I'd like to thank them for their commitment, passion, and patience throughout this process. But I think you're seeing some of that change that has occurred now in the numbers. We have tried to bring a lot more focus and discipline to really putting our resources behind those things that do good and drive value. And one of the things that you may not see is that, there is an awful lot of reinvestment going on. One of my early bosses in my career once told me, you can't save your way to prosperity in this business, and that is absolutely true. And that's not really what we set out to do. The Fit for Growth project, which is, as you can see from the numbers, on track to achieve its $1 billion in gross savings and $800 million in net cost savings and by the way, $800 million of increased cash flow as well by the end of 2025. But what we really tried to do was redesign the organization. We have been so focused as a business for decades on our multiple sclerosis franchise, and here we are launching four first-in-class new medicines and we really needed to make sure we're supporting those launches. And in fact, despite the cost reductions and margin improvements that Mike is going to go into in more detail, but behind that, there are hundreds of millions of dollars being invested in new launches. And while our overall expense in research and development has decreased, this focus has actually enabled us to increase the investment in those assets where we have the most conviction. So this is much more than a cost-savings exercise. This has been a redesign and a change in our culture to a degree. So let's look at some of these new launches. And obviously, the one that everybody is most interested in is Leqembi and if we can move to that slide. You can look at this in a number of different layers. Obviously, first, we're seeing really good quarter-on-quarter trends. As you've seen, the number of patients on drug has increased to two and a half fold compared to where we finished the fourth-quarter. Our in-market revenue almost tripled in Q1 versus Q4 of last year, and that's obviously important. But the thing that really is important to me as I look at this is not so much just that. I've been in this business for three and a half decades. I've lost count of how many launches I've seen, but this is an extraordinarily difficult launch, really because the amount of change that physicians are facing with this is really profound. And as I go around to hospitals and talk to doctors and talk to those who are seeing other doctors, it really becomes evident that there are an awful lot of challenges to getting that -- even that first patient on treatment. We were at one hospital, it was going to take -- it took them three months to get approval just to hire a nurse to help navigate the system. At another major medical center, they're having to develop a five-year business plan, just to be able to access the infusion beds. And when you look at some of the uncertainty around PET scan reimbursement, and although CMS had clarified that and a lot of the MACs have pulled it through, there was still a lot of difficulty getting that clarity all the way through the channel. You know why I'm really encouraged by when I look at these numbers is, when -- although there are a lot of challenges, it's a lot of time investment for physicians and I think a lot of those physicians to their credit are investing that time and not necessarily getting reimbursed for that, but they're getting it done. They're overcoming these challenges and barriers. And that is, I think, what is so important. They see the need when they look at patients who are accomplished people, who are loved by their families, and seeing this dreaded disease pull the patient away from that on a day-by-day basis. So I do think we are seeing an awful lot of momentum here. And again, I think there's an awful lot of credit to the neurologists and to these centers to overcoming these challenges and I think that is going to allow us to continue to see quarter-on-quarter growth. It may not be completely linear, and Alisha will go into more detail on that, but it takes time to get these protocols in-place and even when you get the first patient, there has been a tendency that let's have a handful of patients so we get comfortable with the system. But then, once they've done all that, then, we're starting to see volume pull through. And one of the interesting things about this launch is that, generally, we look at revenue as a surrogate for demand. And here there's -- that linkage is not quite so clear because it has taken this upfront time before you see revenue pull through. And I think that's one of the other things we're now seeing in this first quarter is that, we're actually seeing a little bit more of that linkage between demand and revenue. And behind all of this, once those processes are in place, and once physicians are ready, there is clearly an underlying demand behind that. So I think that has given us a lot of confidence to now invest more, and we have a 30% expansion in our U.S. field force plan. But I would also say, this is a launch that really didn't start until 1st of September. And even then, you could argue we weren't fully in the mode of being able to launch because the PET scan reimbursement hadn't been cleared. But our U.S. teams for both Eisai and Biogen have done an awful lot of work to look at the data from the first seven months of the launch. And really, we're now looking at redeploying some resources here and there as we see what's important and what's not. I think the teams are really working well together. And we have a number of new elements of our promotional mix that will start to come into play as we progress through the second quarter. So from a Biogen point of view, I think it's too early to put out any forecast. We're going to be looking at those month-over-month new patient starts and the increase in revenue. But I would certainly say I'm extremely encouraged by the progress that has occurred. And if I could switch gears to another key growth driver, which is Skyclarys, and Alisha, again, will go into more detail and I think also just show investors how we're progressing versus other analogs because the rare disease market doesn't behave so typically as in other markets. There is always a catch-up population in rare disease. And so it takes a while for that catch-up population to work through the system and then have a look at what's the underlying demand. Remember that these are not patients sitting in waiting rooms and that there is a huge amount of work that goes into finding patients. And I think that is actually one of Biogen's strengths. That's I think what gives me the confidence to continue to invest more because I do think there is a know-how within Biogen and that's one of the reasons we want to build out a rare disease franchise. But we've got 1,100 patients now on therapy in the US. That's a really significant number. But I'm also really encouraged by the launch in Europe. We've already got -- and remember, this drug was only approved in the -- at the end of January and yet we already have 300 patients on treatment. Now, you all know Europe. We have to go country-by-country to get reimbursement and we have early access programs, some of those we can charge revenue for, some of them we can't, but we have already submitted reimbursement dossiers in five countries in the US. So I think Europe will increasingly add to the revenue. It's probably more of a 2025 story than a 2024. But I think if I'm looking at the acceptance and the uptake, then, that launch is also off to a successful start. And we know that there are an awful lot of patients in Latin America and we've already submitted in Brazil, for example, submitting in Argentina. And I think that actually is going to be a major benefit and opportunity for us as well. Remember, there are no patients in Asia because this is a genetic disease that really affects people of European descent. And in fact, it was quite interesting. I was talking to a key opinion leader in Germany who is actually done genetic studies. And you basically just follow where the explorers went and that's where you're going to find the patients. So I think with that, let's dive in a little bit deeper and I'll turn it over to Alisha. Alisha Alaimo -- President, Biogen US Thank you, Chris. Good morning to everyone that's able to join the call today. I'm Alisha Alaimo. And as Chuck shared, I lead our business in North America. This is a really unique period in Biogen's history with multiple first-in-class drug launches in the U.S., which gives us an opportunity to drive our return to growth. And for our team, it's also meaningful to support more people living with Alzheimer's, Friedreich's ataxia, and postpartum depression. We thought it might be helpful to provide a perspective on the market dynamics of the launches and share how we're seeking a tailored approach to help provide patients with access to our therapies. Let me begin with the Alzheimer's market. As Chris mentioned, we are seeing many major health systems across the country take a deliberate staged and phased approach, meaning, they are setting up their pathways to get patients started with diagnosis, treatment, and monitoring. We believe we are now seeing a dynamic where some IDNs are turning the page and they are focusing on expanding and extending their model. In Q1, we saw several IDNs across regions scale their patient volume. Among our priority 100 IDNs, units more than tripled in Quarter 1 compared to Quarter 4, which contributed to the overall estimated patients on therapy increasing approximately two and a half times in Quarter 1 versus Quarter 4. We believe this acceleration in new patients really began to emerge at the end of the quarter. For example, more than 20% of new patients since launch were added in March. Today, among our 100 priority IDNs, more than 80% have approved Leqembi through their P&T process and nearly 85% of those IDNs with approval have placed an order. Chris also mentioned that we're seeing more physicians gain experience with Leqembi. We saw the number of unique prescribers in Quarter 1 double compared to Quarter 4. We believe that we're still in the early phases of unlocking the potential to treat a high volume of patients at the priority IDNs, and I thought it might be helpful to share some examples of these dynamics at the site level. There is one large health system in the Midwest that added Leqembi to its formulary in July of last year. Six months later, entering Q1, this system had ordered only 300 units. However, by the end of March, they had ordered 2,700 units. Similar to the example I just shared, there is also a health system in the Southeast that added Leqembi to its formulary in August of 2023. Five months later, entering Q1, this system ordered about 560 units. By the end of Q1, this system ordered more than 1,750 units to treat their patients. For context, a local neurologist network in that same region ordered 3,000 units through the same time period, perhaps because they've been able to scale their processes to treat more patients. However, we believe this well-known Southeast IDN is planning to move beyond their flagship side of care to treat at multiple locations, which is another example of the expand and extend trend at the IDNs. We believe many systems just now appear to be completing the staging phase, and we think the recent trends observed support our continued belief that Leqembi represents a significant commercial opportunity over the mid to longer term. With access and infrastructure progressing and patient volume accelerating, we believe this is also the right time to expand the field force. Biogen leaders are working to hire a customer-facing field team, which will join Eisai. Simultaneously, to activate the patient community, Biogen and Eisai have launched new direct-to-patient and caregiver omnichannel marketing campaigns. These digital programs and point-of-care resources are focused on the already diagnosed patients, who we believe are under the care of a neurologist. With these promising signals emerging, we look-forward to providing more updates in the future. Now moving to Skyclarys. We believe we're driving strong performance with the launch as we continue to exceed market penetration rates of most rare disease launch analogs. As of April 19, we now have over 1,100 patients on therapy. With an estimated 4,500 addressable Friedreich's ataxia patients in the U.S., we have achieved 24% market penetration, which exceeds our own strong Spinraza launch. As is typical with rare disease launches, we believe we are now moving beyond the catch-up population, to reach additional patients who previously received a diagnosis of, or are suspected to have Friedreich's Ataxia. Though patient numbers may be uneven, we anticipate adding patients each month. Last quarter, we shared how we've integrated some of our sophisticated rare disease capabilities to drive improvements in access, logistics, and patient support. Notably, our market access team continued to make progress by securing favorable policies in Quarter 1. Today, nearly 80% of all U.S. pharmacy lives now have Skyclarys reimbursement. These patient support and access efforts are critical to help patients start therapy as soon as possible, and remain on treatment for the long term. With a meaningful foundation of patients on therapy, we are focusing on two key areas in this next phase of our launch. First, educating community neurologists and PCPs about Friedreich's ataxia and Skyclarys, and second, engaging additional appropriate patients. I'll begin with our focus on HCPs. Remember with Friedreich's ataxia, in addition to patients being concentrated at the top centers of excellence, we believe they are also being treated in the community. To support these physicians, we've expanded our field footprint and we are using AI to analyze data to help reach the HCPs who may have untreated patients, with insights into the relevant sites of care and when patients last engaged with their physician, we believe we can help more patients even sooner. And with genetic testing, we anticipate patients can confirm a potential diagnosis and determine if Skyclarys is a treatment option. As far as our patient activation focus, we are encouraged by real-world experiences that patients are sharing on social media as, in our experience, these stories can help other diagnosed patients. Many of these stories about the impact of Skyclarys include reports of slowing of disease progression and in some cases, even an improvement in their symptoms long term. In addition to these organic stories, we anticipate launching our Skyclarys social media campaign soon. So we believe we're off to a strong start, but we know there are more people living with Friedreich's ataxia that we can help, and we look forward to supporting them, which now brings me to Zurzuvae. As Chris mentioned, we are encouraged by the performance of the launch to date, and we think we are seeing several positive trends with providers, patient experience, and reimbursement. First, let me begin with providers. Across multiple physician types, we believe many providers are demonstrating an urgency to treat. Notably, OB-GYNs led overall prescribing in Quarter 1, which we believe is encouraging as they are often the first to see PPD patients. Furthermore, breadth of adoption has continued to grow. In March, nearly double the number of HCPs prescribed Zurzuvae compared to just January. We've seen that some early prescribers require only a few calls before they treat. Keep in mind that Zurzuvae is a scheduled product available through a specialty pharmacy. While we believe psychiatrists are generally familiar with working with specialty pharmacy, this could be a new process for many OB-GYNs. We're working to educate these providers on the steps required, so that they can support their appropriate patients. Second, some HCPs have early experience with Zurzuvae, have shared that some of their patients reported significant improvement in depressive symptoms within days of starting treatment. Several patients are sharing their personal 14-day treatment experiences on platforms like TikTok, and we believe their courage to tell their story will help educate other women living with postpartum depression. Third, we believe we're making good progress with government in commercial access. Many payers already have policies in place, the majority of which have been favorable, while some others continue to cover Zurzuvae, even without formal policies in place. Two of the three national pharmacy benefit managers are providing coverage for Zurzuvae without overly burdensome restrictions. We are in active discussions with the third national PBM as we await their decision. And while Medicaid tends to take longer, almost half of the states, including several of the largest, accelerated reviews into Quarter 1, which we believe is unusual for a process that can typically take up to a year after FDA approval. We are encouraged that approximately two-thirds of Medicaid lives with published policies appear to have minimal access restrictions. We anticipate the remaining states will review coverage throughout 2024, and we will continue to support their reviews as much as possible. Before handing it over to Mike, I want to underscore that we have an important responsibility to help people living with Alzheimer's, Friedreich's ataxia, and postpartum depression. And we are working with urgency to help these patient communities. We believe we're making significant progress in that mission, and we look forward to continuing to share updates with you. With that, I'd like now to pass it over to Mike. Mike McDonnell -- Chief Financial Officer Thank you, Alisha, and hello to everyone. I'd like to start with a high-level overview of our financial profile, and how we are seeing this progress in the context of our Fit for Growth program. We maintain a sharp focus on improving profitability as we endeavor to return the company to not just EPS growth, but revenue growth as well. Please note that any financial comparisons that I make are versus the first quarter of 2023. Regarding our top line, our four recent launches contributed revenue in the first quarter, which more than offset the 4% decline in our MS business. And as we noted during our previous earnings call and at a recent webcast investor conference, we expect that this year's revenue will be skewed more toward the second half of the year, and we expect this to be due to both the timing of shipments for Spinraza outside the U.S., as well as the expected growth profiles for our recently launched products. On gross margin, we saw improvement of 5 percentage points in the quarter as our revenue mix has shifted. This is due to increasing high-margin product revenue replacing lower-margin contract manufacturing revenue. We also had $45 million of idle capacity charges in the first quarter of 2023, and none in the first quarter of 2024. Our R&D prioritization and Fit for Growth initiatives had a clear impact on our non-GAAP R&D and SG&A expenses, which we refer to as core opex during the quarter, and that resulted in a 13% decrease year over year. These savings contributed to meaningful growth of our non-GAAP operating income of 24% year over year. Our operating margin was 31% in the quarter, as compared to 23% in the first quarter of 2023. And while these are encouraging improvements so far, we believe there is still more work that can be done to continue to improve these metrics. Now, a bit more color on revenue dynamics during the first quarter. Total revenue was $2.3 billion, which was a decrease of 7% at actual and constant currency. Our MS franchise revenue declined approximately 4% driven by competition and the usual channel seasonality that we see in the first quarter. Within MS, VUMERITY revenue grew 18% and benefited from global patient growth as well as some favorable channel dynamics during the first quarter. Regarding Tecfidera in the EU, we have now seen most generics exit the market, which drove ex-U.S. growth of 5% for Tecfidera this quarter. We continue to believe we are entitled to market protection in the EU until February of 2025. And now, a quick double-click on our rare disease revenue for the quarter. Skyclarys delivered $78 million of revenue, including approximately $5 million in Europe, where we have launches in several countries underway. For Spinraza in the U.S., revenue was up 1% in the quarter, and we remain encouraged by the resilience here. Spinraza revenue outside the U.S. declined 35%. The majority of this year-over-year decline was due to shipment timing in certain emerging markets. We continue to generally see stable patient numbers globally, and we would expect the shipping dynamic outside the U.S. to largely normalize throughout the remainder of 2024. We also saw some modest negative impacts from competition and foreign exchange in the quarter. For the full-year 2024, we expect global Spinraza revenue to decline by a low-single-digit percentage. Zurzuvae delivered $12 million of revenue, which we believe is inclusive of some channel stocking in anticipation of increasing demand, which is common for any new launch. And lastly, contract manufacturing revenue was notably lower year over year, and as we reflected in our guidance for the full year, we continue to expect contribution from this line to be significantly lower than last year, due to completing a number of batch commitments in 2023. First-quarter non-GAAP cost of sales was 22% of total revenue, and that's an improvement of 5 percentage points. As I previously mentioned, this improvement was driven by a more favorable product mix, as revenue from new product launches replaced lower margin contract manufacturing revenue, and it also was related to having lower idle capacity charges. We did not have any in the first quarter of 2024. First-quarter non-GAAP R&D expense decreased $124 million, which was driven primarily by savings achieved from Fit for Growth, where we remain on track to achieve cost savings of $1 billion gross and $8 million (sic-$800 million) net of investment by the end of 2025. We also saw savings as a result of our R&D portfolio prioritization, which has had a meaningful impact as we discontinued some programs and have focused our spend on areas we believe have a higher probability of success. Non-GAAP SG&A expense decreased approximately $33 million in the first quarter, and this was primarily due to $50 million of G&A-related cost reductions, which were realized in 2024 in connection with our Fit for Growth program, and that was offset by an increase in operational spending on sales and marketing activities in support of the Leqembi and Skyclarys launches. I will also note that the prior year included $31 million related to the termination of a co-promote agreement for our MS project -- products in Japan. All of this together contributed to non-GAAP operating income growing 24%, with non-GAAP operating margin now above 30% and improving and non-GAAP EPS growth of 8%. Next, a brief update on our balance sheet. We ended the quarter with approximately $6.5 billion of debt, $1.1 billion in cash and marketable securities, and net debt of roughly $5.5 billion. As of March 31st, 2024, the $6.5 billion of total debt included $250 million of the $1 billion 2023 term loan, which was put in place at the time of the Reata acquisition. As of March 31st, 2024, we had repaid $750 million of this $1 billion facility. The remaining $250 million is expected to be repaid during the second quarter of this year, so this quarter, earlier than our original expectation, which was by the end of this year. I'd note that this cash and marketable securities figure does not include a $437 million payment from Samsung, which we received earlier this month. We continued to generate strong free cash flow during the first quarter with approximately $507 million of free cash flow. So overall, our balance sheet remains in a strong position, with increasing capacity to invest in growth initiatives. And regarding our strategic review of the biosimilars business, at this point, we have not received an acceptable offer from a third-party. Our process remains ongoing and we will remain disciplined as we continue to explore all options including retaining the business. Next, I'd like to discuss our full-year 2024 guidance ranges and assumptions. We are reaffirming our expectation of full-year 2024 non-GAAP diluted earnings per share of between $15 and $16, which reflects expected growth of approximately 5% at the midpoint of the range as compared to 2023. All of the previous assumptions to our guidance, including those you see on this slide, remain unchanged. I'd like to remind that we have potential R&D success milestone or opt-in payments associated with the upcoming clinical data readouts, and we have made an allowance for some of these potential payments in our guidance. Of course, whether or not they are paid will be dependent on the data and our resulting decisions. And finally, we just announced the completion of a sale of one of our two priority review vouchers for $103 million. At this point, we expect to earmark these proceeds for business investment, or to support business development opportunities as they arise. And in closing, we remain committed to our number one goal of returning Biogen to sustainable top and bottom-line growth, and creating long-term value for our shareholders. We will now open up the call for questions. Chuck Triano -- Head of Investor Relations Thanks, Mike. Jennifer, can we go to questions? Questions & Answers: Operator Thank you. [Operator instructions] Your first question comes from the line of Eric Schmidt with Cantor Fitzgerald. Eric Schmidt -- Cantor Fitzgerald -- Analyst Hi. Thanks so much for all the updates and for taking my question. I guess on Leqembi and maybe for Priya, we had a couple of updates in the last month or so the EMA delay on the CHMP recommendation. And also, I know this is your partner's doing, but Eisai announced that they couldn't submit for the subcu approval until they finished the immunogenicity study. I was hoping you could just update us on timelines for both of those initiatives going forward? Thank you. Priya Singhal -- Head of Research and Development Yes. Thanks, Eric. So maybe I can just start off by saying that we are working with Eisai to really provide patients with the optionality of a subcutaneous formulation. Our approach is entirely data driven. So we were very encouraged to see the bioequivalence we met last year and we shared that at CTAD. This was the most important milestone. Thereafter, we've engaged with the FDA. And currently, just to characterize how we are approaching this, we've split our strategy for subcutaneous formulation. First and foremost, we are working to submit a rolling submission for subcutaneous autoinjector for maintenance. This we're going to do at earliest. Eisai has already submitted a fast-track application. We're awaiting that. And as soon as we get it, we will make the submission, while we continue to generate the data for the three-month immunogenicity that the FDA has required. Second, because our exposure with subcutaneous formulation was higher than the IV formulation, we believe it's in the interest of patients to optimize dose, and that will lead to more convenience. So we are optimizing this dose and that is something that is already ongoing and is currently ongoing this year. In terms of timelines, if we get the fast track for subcutaneous maintenance, we will file immediately for rolling review, and that we expect would be in this year even if we don't get the fast track because we have completed the three-month immunogenicity data by Q4. Second, for the subcutaneous induction therapy, we expect that we would file by the first quarter of 2026. That is what Eisai has already communicated in their investor comments early March. I'd also like to remind us that we completed our intravenous maintenance filing by Q1 2024 as we had aimed. Thank you. Chuck Triano -- Head of Investor Relations Thank you, operator. Next question, please. Operator We'll go next to Paul Matteis with Stifel. Paul Matteis -- Stifel Financial Corp. -- Analyst Good morning. Thank you for taking my question. I was wondering if we could get your updated perspective on business development as it relates to capacity, therapeutic area, stage of development, or commercial? And just in the context of this, how the kind of uncertain -- promising, but uncertain trajectory of lecanemab influences your appetite to execute on something now versus maybe wait a bit until 2025? Thank you. Chris Viehbacher -- President and Chief Executive Officer Thanks, Paul. I think this year, we're going to be focused on business development to bring in some new assets, both into early stage research and development. We have always called ourselves a neuroscience company, but the reality of neuroscience is that, this is a high-risk area. We don't always understand the underlying disease biology, the diseases progress slowly, that leads you to some very long and expensive trials. You can't often do a proof-of-concept study in phase 2. And so while we remain committed to neuroscience, my personal view is that I think that is to -- that is not diversified enough for a company of our size. And so already last year, we signaled that we'd like to go into some adjacencies in rare disease. I think we actually have a tremendous commercial capability in rare disease. There are special commercial requirements, the need sometimes to support diagnosis, all of the hurdles with payers that have to be overcome and of course, finding the patients. And there are an awful lot of tools that I think we have to be able to do that. And then immunology, we've been an immunology company since the get-go since some -- MS is really an autoimmune disease. So I think we'll use the opportunity with licensing collaborations to expand that. I think where our balance sheet is, if something really extraordinary came along, I suppose we look at it, but I don't think where we sit right now, we'd be thinking about doing anything this year on an acquisition front, not certainly of any size. But Mike, maybe you can talk to the balance sheet capability. Mike McDonnell -- Chief Financial Officer Yes. So, Paul, I would just comment that our balance sheet is in a very good spot. If you look at our net debt position at the end of the first quarter, and then you pro forma that for the Samsung payment and the paydown that we'll make in the second quarter on the term loan, it's about $5 billion of net debt. We generate about $3 billion of EBITDA. So it's only about a -- somewhere between a turn and a half and two turns of leverage. So we certainly could add another turn of leverage for something that we liked, at least temporarily, and we generate a couple of billion dollars of free cash flow per year. So I think about it in the context of 2024 as maybe a $4 billion to $5 billion of capacity sort of number for things that we might be really interested in. And then, if you were looking at something more Reata-like, that's probably a little more logical, capacity wise in 2025 or beyond. Chuck Triano -- Head of Investor Relations Thanks, Mike and Chris. Can we take the next question, please? Operator Yes. We'll go next to Salveen Richter with Goldman Sachs. Salveen Richter -- Goldman Sachs -- Analyst Good morning. Thanks for taking my question. For Skyclarys, could you speak to the 2024 outlook and any bolus dynamics that has impacted this? And specifically, you've talked being 24% U.S. market penetration. How are you thinking about peak penetration in the U.S. and then the expectations for pace of uptake in Europe and net pricing there? Thank you. Chris Viehbacher -- President and Chief Executive Officer Alisha, you want to take U.S. and I can follow up with Europe? Alisha Alaimo -- President, Biogen US Yes. I think when you look at the U.S. and the market penetration, and you probably saw in the analogs on the slide that the launch has gone very well thus far. And as I also said, we've made it through sort of the catch-up population. We have a lot of really good things in place right now that we are launching in parallel to identify and hopefully get to the rest of the population. The way in which we think about this market though is, we do have two sets of patients. You have a set that are highly engaged with their physicians, and you have another set who haven't been engaged, probably over the last two to five years. We have enough data and analytics to understand exactly where these physicians are, and how the patients have moved through them. And so with that, we are now identifying a lot of these offices, especially in the community who could have a patient or two that might be diagnosed with general ataxia, but not Friedreich's. And so what I referred to earlier on the call is expanding the field force footprint. We have a very targeted approach to these offices in order to, again, increase the market penetration. Now, as you see with something like a Spinraza, we've also performed very well, and also have driven quite a good market penetration with that product, even though there's competitors in the marketplace. With Skyclarys, with no competitor really in the market, we expect to continue over the next several years to penetrate this for as far as we can go. We know that there are 4,500 approximate patients that could have Friedreich's ataxia. And so what we're doing is planning everything that we can to get to as many of them as quickly as possible. Chuck Triano -- Head of Investor Relations Thanks, Alisha. Chris Viehbacher -- President and Chief Executive Officer Yes. And on Europe, in some ways the single-payer systems actually are really ideal for rare diseases. A lot of patients in the U.S., even if you have reimbursement, even if you have insurance coverage, there are an awful lot of hurdles that the U.S. healthcare system imposes upon patients. And a lot of those, we don't really see in Europe. And so I think we're seeing a rapid uptake. Again, there's -- there is a catch-up on population. So there's -- and there's a difference between patients on treatment and revenue-generating patients. So first, we have -- we have actually the commercial launch in Germany because we can get reimbursement relatively quickly. Other countries will come online as we go through the individual country reimbursement processes, but our objective is actually build up the patients. So there's a number who are on free drug at the moment through these EAPs, some of the EAPs you can charge for. So it's going to be a little lumpy as we look at the revenue line. But I'd say we're extremely encouraged by the uptake of patients. And then, ex-US in Latin America, that could well be a story for 2025. I think you may see our first launch in Brazil in early part of 2025. Chuck Triano -- Head of Investor Relations Great. Thanks, Chris. Can we move to the next question, please? Operator Yes. We'll go next to Umer Raffat with Evercore. Umer Raffat -- Evercore ISI -- Analyst Hi, guys. Thanks for taking my question. I have one for Priya, if I may. I know there's the late-stage lupus readout with the CD40 ligand antibody this summer. I also realize the time point on this readout is week 48 instead of week 24. And I guess my question is, knowing that there wasn't a clear dose-response on efficacy in the prior trial, could you speak to how the B cell impact was different between doses and whether the prolonged duration could actually help the B cell impact on this upcoming readout? Thank you. Priya Singhal -- Head of Research and Development Thanks, Umer. We have looked at the phase 2 study very carefully, and we have decided and we included the 48-week endpoint on BICLA for this phase 3 study. And ultimately, we're looking for a meaningful change on the primary endpoint, and the key secondary endpoints for SLE such as severe flare prevention and patients achieving low disease activity. We also think that the BICLA is a sensitive, clinically meaningful composite measure of SLE disease activity, and requires disease improvement across all body systems with moderate or severe baseline activity without worsening and the need for escalation in background medications. So we modified the trial, we are -- we have refined the population, and we think that this is going to be really important as we kind of look forward to the readout. The other piece I think here to keep in mind is that we considered how we can modify the population for this study and get to an answer really quickly to bring potentially dapi to patients. So I hope that answers your question. Chuck Triano -- Head of Investor Relations Thanks, Priya. Let's go to the next question, please. Operator We'll go next to Michael Yee with Jefferies. Mike Yee -- Jefferies -- Analyst Hey, guys. Thanks. I wanted to revisit Skyclarys comments. I know you said you were planning to add patients month-to-month. Can you just talk about the trajectory of Skyclarys this year as it relates to also any offsets like discontinuation rates, etc., etc., how does that factor into it? And also, will you book Germany revenues this year? So just talk about the dynamics of revenues for Skyclarys. And if I may sneak in one clarification. Priya said subcu induction filing for Leqembi Q1 2026. I just wanted to clear that's what she said? Thank you so much. Priya Singhal -- Head of Research and Development Yes. The outcome and the filing will be in that period, but we'll communicate more on this once we optimize the dose and we go forward. Mike Yee -- Jefferies -- Analyst OK. And Skyclarys? Alisha Alaimo -- President, Biogen US Yes. So for Skyclarys, it is quite complicated month-to-month, I will say, because you have patients, obviously, that we're getting via the start forms, which I will say for the highly engaged population we are pretty much maxing that out now. We absolutely know who they are and we've captured them through the physicians. But then, you're also going to have a discontinuation rate as you have noted, and you're going to have patients that are being pulled off the start forms, putting on to product. And then of course, you may have them miss a dose or two, right? So then, there's compliance. So month-to-month, it will be lumpy because you can say you add 50 patients, but then you have other dynamics going on in the patient population. But what our outlook is for the year, which I can't give you a specific number, is that we are going to continue to add every single month. We are able to find those patients in the community, and there are other puts and takes in those numbers. But at the end of the day, we will ensure that we are still leading the rare disease analogs and that we're going to generate market penetration. Chris Viehbacher -- President and Chief Executive Officer Yes. And in Europe, we're booking revenue now for Germany and actually -- we've actually launched in Austria and the Czech Republic as well. And in some countries, we're actually able to charge for the early access programs in Europe and some of that revenue will come down too, but you probably see more full EU as a region revenue in 2025, but there will be certainly revenue contributions in 2024 from certain countries in Europe. Chuck Triano -- Head of Investor Relations Great. Thanks, Chris. Let's go to the next question, please. Operator We'll go next to Colin Bristow with UBS. Colin Bristow -- UBS -- Analyst Good morning and thanks for taking the questions. Maybe one on the Leqembi commercial setup. So one investor concern and important feedback we've been hearing from physicians is around, there being less sales and marketing presence than perhaps had been expected. I heard in your prepared remarks you're saying you expect a 30% increase in the U.S. footprint. Are you able to sort of quantify the current U.S. commercial footprint? And was the 30% increase always planned, or was it based on some review that the current footprint wasn't adequate? Thank you. Alisha Alaimo -- President, Biogen US Thank you very much for the question. If you really take a step back and look at how we strategically looked at this launch, we always said that we were going to do in a stepwise approach. We knew from the beginning that sites were going to take a while to get up and running. We had to wait for several indicators from CMS giving full approval and NCD being overturned for PET. And so with that being said, we didn't want to go out of the gate with a really huge field force that wasn't able to actually impact or penetrate the market. So instead, what was decided is we went in with a very focused approach. We focused on really the top accounts that we think handle the majority of the diagnosed patients, especially that are under neurology care. And we said once the market gets to a place where we think it's ready for expansion, then we will expand. Now, to your comment about physicians coming back saying they're not seeing a lot of sales efforts, I think, we also have to have really the context of getting these sites up and running takes a lot of effort. And you also don't want to have three, four, five different people going into these accounts to support. And so we've been very focused on really getting the large IDNs up and running. Some of these centers that have come forward that really could move quite quickly, we got them up and running. And now as you see the expansion take place with the 30%, we are going to focus mainly on the large IDNs that are now opening up their expand and extend satellite offices, where they're now going to allow a larger cohort of patients to come through for diagnosis and treatment. And so with this next phase of a build, which we believe we've done a lot of analytics behind it, and we've had a lot of third parties weigh in on what is the appropriate sizing, we and Eisai believe that this is going to be the right footprint to drive the next acceleration of growth. Chuck Triano -- Head of Investor Relations And let me just turn it to Priya for a clarification back to Mike Yee's question on subcu. Priya Singhal -- Head of Research and Development Thank you. Thank you. Just wanted to clarify that it's the outcome by fiscal year -- Eisai's fiscal year 2025, which is Q1 2026 for the subcutaneous induction. Of course, that -- it could be a range because it would involve sBLA, a prior -- potentially a priority review and other such aspects, which could shift it, but that is the -- that is what Eisai has communicated. I just wanted to reaffirm that. Thank you. Chuck Triano -- Head of Investor Relations So the outcome and not the filing? Priya Singhal -- Head of Research and Development Yes. Chuck Triano -- Head of Investor Relations Obviously earlier? Priya Singhal -- Head of Research and Development Earlier. Chuck Triano -- Head of Investor Relations Yes. Priya Singhal -- Head of Research and Development Thank you. Chuck Triano -- Head of Investor Relations Thanks, Priya. Let's move to the next question, please. Operator We'll go next to Brian Abrahams with RBC Capital Markets. Brian Abrahams -- RBC Capital Markets -- Analyst Hi, there. Good morning. Thanks so much for taking my question. With regards to Leqembi subcu, on the FDA request for immunogenicity data, I'm curious if you have a sense as to what drove that request. Your level of confidence that the PK will be linear using half the subcu dose? And then, when are you proposing that patients in their course of treatment should transition from an IV to a subcu maintenance? Thanks. Priya Singhal -- Head of Research and Development Sure. Thanks, Brian. So overall, we -- as you know, we had tested the 720 milligrams in the naive patient population that was in the Clarity AD open-label extension sub-study for subcutaneous. Now, from that -- in addition to that, we had modeling data and this is what we are proposing for 360 milligrams to be the weekly maintenance, and the FDA is just requiring additional immunogenicity data. We see this as a reasonable request, and we are already in the process of generating it. So overall, we don't expect that the bioequivalence is going to be in question. This is now really about the immunogenicity and actually generating on patients who would be tested for this. So that's what we expect with that. Can you remind me what was the second aspect of your question? Brian Abrahams -- RBC Capital Markets -- Analyst When are you proposing that patients transition from the IV to the subcu maintenance? Is there data supporting what -- when in the course of treatment that transition should happen? Priya Singhal -- Head of Research and Development Yes. And I think that's important because we have filed for an intravenous maintenance like -- we've already completed this filing Q1 2024, and really that has come from three lines of evidence. The Study 201, which was the phase 2 study, the GAAP period modeling, as well as open-label extension in the phase 3. So that's what's informed our maintenance IV filing. And really, it will be decided along with the FDA on what is the appropriate time for transition from IV biweekly to weekly now -- up to four-weekly. And in addition, following that, we'll have the subcutaneous maintenance discussion. So really, it's very systematic and we need to first get through all the IV maintenance. And in parallel, we have the SC maintenance. I hope that makes sense. Chuck Triano -- Head of Investor Relations Thanks, Priya. Let's move to the next question, please. Operator We'll go next to Jay Olson with Oppenheimer. Jay Olson -- Oppenheimer and Company -- Analyst Hey. Thanks for providing this update. It seems like compared to previous quarters, you're focusing more on your three commercial launches and relatively less on the R&D pipeline. Is there any particular reason for that shift in focus? And how much more work do you plan to do to optimize your R&D portfolio? Thank you. Chris Viehbacher -- President and Chief Executive Officer I'll start. I mean, I think we have first -- four data readouts coming in midyear. So I think, we felt we'd have more data when we -- it makes sense to bring back the R&D when we've got more data. I would say actually from a prioritization point of view, and Priya, you can weigh-in here, but I think we've largely done the job of having projects that are either projects of conviction, or projects where we're waiting the data outcome. They're in-flight and just given the nature of neuroscience projects, we wait -- we need to wait and see what the data say. I think you're going to find us much more disciplined about whether we progress or not. Our go/no-go decisions, I think have all been clearly defined for those. I think the next job is really now to build out the pipeline, as I talked about earlier, that we want to diversify our business a little bit more than we have in the past. So, Priya is certainly working along with Jane on thinking about what things we can additionally bring into the pipeline from outside. But, Priya, I don't know whether you want to add anything there. Priya Singhal -- Head of Research and Development Thanks, Chris. I think you covered it. That's exactly right. We are very excited about our four readouts. We are preparing for them. We have already worked through go/no-go criteria. And we continue to remain very excited about the rest of the pipeline that's in mid and late-stage, particularly our anti-tau ASO BIIB080, as well as our two phase 3 programs in SLE, litifilimab as well as dapi that we just talked about, and with litifilimab also in cutaneous lupus. So we have a number of projects in early phase development, and we're trying to be very disciplined about making sure that we make evidence and data-based decisions. Chuck Triano -- Head of Investor Relations Thanks. Thanks, Priya. Next question, please. Operator We'll go next to Chris Raymond with Piper Sandler. Chris Raymond -- Piper Sandler -- Analyst Thanks. Just maybe a strategic question on your biz dev strategy. So, Chris, I heard your comments around diversifying away from neurology. You guys have been saying that for a while and your deals are focused on areas other than MS. But there is actually, if you look across the industry, some decent early innovation in MS. Even with your business on the decline, our checks still indicate that Biogen remains a trusted company and there's an awful lot of value, I would argue with that market presence. I guess maybe just the question here strategically is, is your activities in business development, is that due to your view of the need to diversify away from MS strategically? Or is it a view that you just haven't seen an early asset worth licensing, or is there some other underlying dynamic of the MS market that has led you guys to prioritize other areas? Thanks. Chris Viehbacher -- President and Chief Executive Officer Yes, well, there's a little bit of a lot of the above in there. I think the first is, we haven't abandoned MS. We do have programs in research early. The unmet need in MS has really narrowed. It's really the progressive form, which is a very tough indication really to go after. But we have programs still in ALS. And in fact, I think the fact that Qalsody was approved has actually proven to be an enormous scientific achievement. It may not be a major financial achievement, but this really opens up the field to having a biomarker where you can tell whether something is working or not in ALS. And so we have a number of programs in ALS. We're in Huntington's. We have a program in Parkinson's, as you know. We've got TAU, which I think between TAU and lupus, we see as programs of high conviction within the company. So we feel that -- I think you're right. We are very well-placed. Neurology, I wouldn't just say MS, but neurology. But the reality is that, we sit there with programs that are very difficult to predict, very expensive, very long running. And when you actually look at the ability to do external deals, that field is also very narrow. There's just not that many people working in the CNS space. So we're by no means abandoning it. And in fact, the fact that we go after these really tough diseases is really a source of pride within Biogen. And I have to say, I continue to be amazed at the capability and talent we have within the organization. But the reality is, we need to have more predictable results out of R&D. And I think we do have a lot of that capability within the company. I don't see us ever -- moving -- going left turn into oncology or something like that. But I do think we have a legitimacy and being in rare diseases and expanding into immunology.And in fact, I think what we've been doing in MS and in fact lupus is really an indicator of that. So I think we're going to continue to branch out, but it also branches out our opportunity set for collaboration, and not just diversifying our portfolio. Chuck Triano -- Head of Investor Relations Thanks, Chris. And can we take our last question, please, operator? Operator Yes. We'll go next to Terence Flynn with Morgan Stanley. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks for taking the question. Maybe a two-part on Leqembi. Just wondering, obviously, you talked about the number of unique prescribers more than doubling this quarter. Just wondering how much more breadth you're expecting from the field force expansion here as we think about the forward through 2024? And then, any early insights on duration of treatment that you're seeing so far? Thank you. Alisha Alaimo -- President, Biogen US Yes. So thank you for the question. My outlook for the rest of the year is, when you really think about the phases that these IDNs are in, and even you see these small accounts that they do move fast out in the community. And if you really take a step back and look in context for the IDNs, we got an approval -- full approval in July. It took about six to eight months for these very large systems to get organized, which is that staged and phased approach I talked about. And the fact that now they're actually opening up these other sites for diagnosing and prescribing, I believe that you're going to also see the number of physicians prescribing increasing, and it will continue to increase throughout the rest of the year. If you look at how many physicians that we are targeting and the numbers that are actually prescribing, we still have a good delta there. And so I do see that continuing, especially with the field force coming in, if they're covering, our goal is really to drive the acceleration at these large IDNs. I talked to you about the Priority 100, but keep in mind, we actually target quite more than that. I just keep referring to the priority. And there are many other IDNs that are also prescribing and are also expanding and extending. The second part of your question was around -- Chuck Triano -- Head of Investor Relations Duration. Alisha Alaimo -- President, Biogen US Duration. What's interesting with this and there's been a lot of conversations with many of these prescribing sites. Physicians lay very specific and explicit expectations with patients that when they go on this therapy, their expectation is they come in, every two weeks, to get their IV infusion and that they stay on product. And what we've seen thus far, and what we believe to be happening thus far is patients are staying on product. We hear that as feedback from the physicians. We also hear that as feedback from the numbers that we see the data that we see. So far with duration, the plan is that they're keeping patients on product. I think there are questions out there as to what to do about duration, but in the absence of any data, physicians are keeping patients on. Chuck Triano -- Head of Investor Relations Right. Thanks, Alisha, and thanks to all of you for joining us today for the call and the IR team, of course, is available for follow-ups. Have a good rest of your day. Answer:

the Biogen first-quarter 2024 earnings call and business update

Operator Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Biogen first-quarter 2024 earnings call and business update. [Operator instructions] Today's conference is being recorded. Thank you. I would now like to turn the conference over to Mr. Chuck Triano, head of investor relations. Mr. Triano, you may begin your conference. Chuck Triano -- Head of Investor Relations Thanks, Jennifer. Good morning, good afternoon, good evening, everyone, and welcome to Biogen's first-quarter 2024 earnings call. Before we begin, I'll remind you that the earnings release and related financial tables, including our GAAP financial measures with a reconciliation to the GAAP and non-GAAP financial measures that we will discuss today are in the Investors section of biogen.com. Our GAAP financials are provided in tables 1 and 2 and table 4 includes a reconciliation of our GAAP to non-GAAP financial results. We believe that non-GAAP financial results better represent the ongoing economics of our business and reflect how we manage the business internally. We have also posted the slides on our website that will be used during this call. I'd point out that we will be making forward-looking statements, which are based on our expectations. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors discussed in our SEC filings for additional detail. On today's call, I'm joined by our president and chief executive officer, Chris Viehbacher; our head and president of North America, Alisha Alaimo; our CFO, Mike McDonnell; and Dr. Priya Singhal, head of development is with us and will be available for the Q&A session. Chris, Alisha, and Mike will each make some opening comments and then we'll move to the Q&A session. [Operator instructions] With that out of the way, I'll now turn the call over to Chris. Chris Viehbacher -- President and Chief Executive Officer Thank you, Chuck. Good morning, everybody. Well, it is certainly great to be able to announce earnings-per-share growth in our first quarter. This is the first time in several years that the underlying business performance of Biogen has allowed us to actually demonstrate earnings-per-share growth, and that's a major achievement. We've clearly still got a lot of work to do, but I think it feels like we're turning the corner in the company. And with that, I'd like to actually take the opportunity to thank my Biogen colleagues. We have instituted an awful lot of change within the company and I'd like to thank them for their commitment, passion, and patience throughout this process. But I think you're seeing some of that change that has occurred now in the numbers. We have tried to bring a lot more focus and discipline to really putting our resources behind those things that do good and drive value. And one of the things that you may not see is that, there is an awful lot of reinvestment going on. One of my early bosses in my career once told me, you can't save your way to prosperity in this business, and that is absolutely true. And that's not really what we set out to do. The Fit for Growth project, which is, as you can see from the numbers, on track to achieve its $1 billion in gross savings and $800 million in net cost savings and by the way, $800 million of increased cash flow as well by the end of 2025. But what we really tried to do was redesign the organization. We have been so focused as a business for decades on our multiple sclerosis franchise, and here we are launching four first-in-class new medicines and we really needed to make sure we're supporting those launches. And in fact, despite the cost reductions and margin improvements that Mike is going to go into in more detail, but behind that, there are hundreds of millions of dollars being invested in new launches. And while our overall expense in research and development has decreased, this focus has actually enabled us to increase the investment in those assets where we have the most conviction. So this is much more than a cost-savings exercise. This has been a redesign and a change in our culture to a degree. So let's look at some of these new launches. And obviously, the one that everybody is most interested in is Leqembi and if we can move to that slide. You can look at this in a number of different layers. Obviously, first, we're seeing really good quarter-on-quarter trends. As you've seen, the number of patients on drug has increased to two and a half fold compared to where we finished the fourth-quarter. Our in-market revenue almost tripled in Q1 versus Q4 of last year, and that's obviously important. But the thing that really is important to me as I look at this is not so much just that. I've been in this business for three and a half decades. I've lost count of how many launches I've seen, but this is an extraordinarily difficult launch, really because the amount of change that physicians are facing with this is really profound. And as I go around to hospitals and talk to doctors and talk to those who are seeing other doctors, it really becomes evident that there are an awful lot of challenges to getting that -- even that first patient on treatment. We were at one hospital, it was going to take -- it took them three months to get approval just to hire a nurse to help navigate the system. At another major medical center, they're having to develop a five-year business plan, just to be able to access the infusion beds. And when you look at some of the uncertainty around PET scan reimbursement, and although CMS had clarified that and a lot of the MACs have pulled it through, there was still a lot of difficulty getting that clarity all the way through the channel. You know why I'm really encouraged by when I look at these numbers is, when -- although there are a lot of challenges, it's a lot of time investment for physicians and I think a lot of those physicians to their credit are investing that time and not necessarily getting reimbursed for that, but they're getting it done. They're overcoming these challenges and barriers. And that is, I think, what is so important. They see the need when they look at patients who are accomplished people, who are loved by their families, and seeing this dreaded disease pull the patient away from that on a day-by-day basis. So I do think we are seeing an awful lot of momentum here. And again, I think there's an awful lot of credit to the neurologists and to these centers to overcoming these challenges and I think that is going to allow us to continue to see quarter-on-quarter growth. It may not be completely linear, and Alisha will go into more detail on that, but it takes time to get these protocols in-place and even when you get the first patient, there has been a tendency that let's have a handful of patients so we get comfortable with the system. But then, once they've done all that, then, we're starting to see volume pull through. And one of the interesting things about this launch is that, generally, we look at revenue as a surrogate for demand. And here there's -- that linkage is not quite so clear because it has taken this upfront time before you see revenue pull through. And I think that's one of the other things we're now seeing in this first quarter is that, we're actually seeing a little bit more of that linkage between demand and revenue. And behind all of this, once those processes are in place, and once physicians are ready, there is clearly an underlying demand behind that. So I think that has given us a lot of confidence to now invest more, and we have a 30% expansion in our U.S. field force plan. But I would also say, this is a launch that really didn't start until 1st of September. And even then, you could argue we weren't fully in the mode of being able to launch because the PET scan reimbursement hadn't been cleared. But our U.S. teams for both Eisai and Biogen have done an awful lot of work to look at the data from the first seven months of the launch. And really, we're now looking at redeploying some resources here and there as we see what's important and what's not. I think the teams are really working well together. And we have a number of new elements of our promotional mix that will start to come into play as we progress through the second quarter. So from a Biogen point of view, I think it's too early to put out any forecast. We're going to be looking at those month-over-month new patient starts and the increase in revenue. But I would certainly say I'm extremely encouraged by the progress that has occurred. And if I could switch gears to another key growth driver, which is Skyclarys, and Alisha, again, will go into more detail and I think also just show investors how we're progressing versus other analogs because the rare disease market doesn't behave so typically as in other markets. There is always a catch-up population in rare disease. And so it takes a while for that catch-up population to work through the system and then have a look at what's the underlying demand. Remember that these are not patients sitting in waiting rooms and that there is a huge amount of work that goes into finding patients. And I think that is actually one of Biogen's strengths. That's I think what gives me the confidence to continue to invest more because I do think there is a know-how within Biogen and that's one of the reasons we want to build out a rare disease franchise. But we've got 1,100 patients now on therapy in the US. That's a really significant number. But I'm also really encouraged by the launch in Europe. We've already got -- and remember, this drug was only approved in the -- at the end of January and yet we already have 300 patients on treatment. Now, you all know Europe. We have to go country-by-country to get reimbursement and we have early access programs, some of those we can charge revenue for, some of them we can't, but we have already submitted reimbursement dossiers in five countries in the US. So I think Europe will increasingly add to the revenue. It's probably more of a 2025 story than a 2024. But I think if I'm looking at the acceptance and the uptake, then, that launch is also off to a successful start. And we know that there are an awful lot of patients in Latin America and we've already submitted in Brazil, for example, submitting in Argentina. And I think that actually is going to be a major benefit and opportunity for us as well. Remember, there are no patients in Asia because this is a genetic disease that really affects people of European descent. And in fact, it was quite interesting. I was talking to a key opinion leader in Germany who is actually done genetic studies. And you basically just follow where the explorers went and that's where you're going to find the patients. So I think with that, let's dive in a little bit deeper and I'll turn it over to Alisha. Alisha Alaimo -- President, Biogen US Thank you, Chris. Good morning to everyone that's able to join the call today. I'm Alisha Alaimo. And as Chuck shared, I lead our business in North America. This is a really unique period in Biogen's history with multiple first-in-class drug launches in the U.S., which gives us an opportunity to drive our return to growth. And for our team, it's also meaningful to support more people living with Alzheimer's, Friedreich's ataxia, and postpartum depression. We thought it might be helpful to provide a perspective on the market dynamics of the launches and share how we're seeking a tailored approach to help provide patients with access to our therapies. Let me begin with the Alzheimer's market. As Chris mentioned, we are seeing many major health systems across the country take a deliberate staged and phased approach, meaning, they are setting up their pathways to get patients started with diagnosis, treatment, and monitoring. We believe we are now seeing a dynamic where some IDNs are turning the page and they are focusing on expanding and extending their model. In Q1, we saw several IDNs across regions scale their patient volume. Among our priority 100 IDNs, units more than tripled in Quarter 1 compared to Quarter 4, which contributed to the overall estimated patients on therapy increasing approximately two and a half times in Quarter 1 versus Quarter 4. We believe this acceleration in new patients really began to emerge at the end of the quarter. For example, more than 20% of new patients since launch were added in March. Today, among our 100 priority IDNs, more than 80% have approved Leqembi through their P&T process and nearly 85% of those IDNs with approval have placed an order. Chris also mentioned that we're seeing more physicians gain experience with Leqembi. We saw the number of unique prescribers in Quarter 1 double compared to Quarter 4. We believe that we're still in the early phases of unlocking the potential to treat a high volume of patients at the priority IDNs, and I thought it might be helpful to share some examples of these dynamics at the site level. There is one large health system in the Midwest that added Leqembi to its formulary in July of last year. Six months later, entering Q1, this system had ordered only 300 units. However, by the end of March, they had ordered 2,700 units. Similar to the example I just shared, there is also a health system in the Southeast that added Leqembi to its formulary in August of 2023. Five months later, entering Q1, this system ordered about 560 units. By the end of Q1, this system ordered more than 1,750 units to treat their patients. For context, a local neurologist network in that same region ordered 3,000 units through the same time period, perhaps because they've been able to scale their processes to treat more patients. However, we believe this well-known Southeast IDN is planning to move beyond their flagship side of care to treat at multiple locations, which is another example of the expand and extend trend at the IDNs. We believe many systems just now appear to be completing the staging phase, and we think the recent trends observed support our continued belief that Leqembi represents a significant commercial opportunity over the mid to longer term. With access and infrastructure progressing and patient volume accelerating, we believe this is also the right time to expand the field force. Biogen leaders are working to hire a customer-facing field team, which will join Eisai. Simultaneously, to activate the patient community, Biogen and Eisai have launched new direct-to-patient and caregiver omnichannel marketing campaigns. These digital programs and point-of-care resources are focused on the already diagnosed patients, who we believe are under the care of a neurologist. With these promising signals emerging, we look-forward to providing more updates in the future. Now moving to Skyclarys. We believe we're driving strong performance with the launch as we continue to exceed market penetration rates of most rare disease launch analogs. As of April 19, we now have over 1,100 patients on therapy. With an estimated 4,500 addressable Friedreich's ataxia patients in the U.S., we have achieved 24% market penetration, which exceeds our own strong Spinraza launch. As is typical with rare disease launches, we believe we are now moving beyond the catch-up population, to reach additional patients who previously received a diagnosis of, or are suspected to have Friedreich's Ataxia. Though patient numbers may be uneven, we anticipate adding patients each month. Last quarter, we shared how we've integrated some of our sophisticated rare disease capabilities to drive improvements in access, logistics, and patient support. Notably, our market access team continued to make progress by securing favorable policies in Quarter 1. Today, nearly 80% of all U.S. pharmacy lives now have Skyclarys reimbursement. These patient support and access efforts are critical to help patients start therapy as soon as possible, and remain on treatment for the long term. With a meaningful foundation of patients on therapy, we are focusing on two key areas in this next phase of our launch. First, educating community neurologists and PCPs about Friedreich's ataxia and Skyclarys, and second, engaging additional appropriate patients. I'll begin with our focus on HCPs. Remember with Friedreich's ataxia, in addition to patients being concentrated at the top centers of excellence, we believe they are also being treated in the community. To support these physicians, we've expanded our field footprint and we are using AI to analyze data to help reach the HCPs who may have untreated patients, with insights into the relevant sites of care and when patients last engaged with their physician, we believe we can help more patients even sooner. And with genetic testing, we anticipate patients can confirm a potential diagnosis and determine if Skyclarys is a treatment option. As far as our patient activation focus, we are encouraged by real-world experiences that patients are sharing on social media as, in our experience, these stories can help other diagnosed patients. Many of these stories about the impact of Skyclarys include reports of slowing of disease progression and in some cases, even an improvement in their symptoms long term. In addition to these organic stories, we anticipate launching our Skyclarys social media campaign soon. So we believe we're off to a strong start, but we know there are more people living with Friedreich's ataxia that we can help, and we look forward to supporting them, which now brings me to Zurzuvae. As Chris mentioned, we are encouraged by the performance of the launch to date, and we think we are seeing several positive trends with providers, patient experience, and reimbursement. First, let me begin with providers. Across multiple physician types, we believe many providers are demonstrating an urgency to treat. Notably, OB-GYNs led overall prescribing in Quarter 1, which we believe is encouraging as they are often the first to see PPD patients. Furthermore, breadth of adoption has continued to grow. In March, nearly double the number of HCPs prescribed Zurzuvae compared to just January. We've seen that some early prescribers require only a few calls before they treat. Keep in mind that Zurzuvae is a scheduled product available through a specialty pharmacy. While we believe psychiatrists are generally familiar with working with specialty pharmacy, this could be a new process for many OB-GYNs. We're working to educate these providers on the steps required, so that they can support their appropriate patients. Second, some HCPs have early experience with Zurzuvae, have shared that some of their patients reported significant improvement in depressive symptoms within days of starting treatment. Several patients are sharing their personal 14-day treatment experiences on platforms like TikTok, and we believe their courage to tell their story will help educate other women living with postpartum depression. Third, we believe we're making good progress with government in commercial access. Many payers already have policies in place, the majority of which have been favorable, while some others continue to cover Zurzuvae, even without formal policies in place. Two of the three national pharmacy benefit managers are providing coverage for Zurzuvae without overly burdensome restrictions. We are in active discussions with the third national PBM as we await their decision. And while Medicaid tends to take longer, almost half of the states, including several of the largest, accelerated reviews into Quarter 1, which we believe is unusual for a process that can typically take up to a year after FDA approval. We are encouraged that approximately two-thirds of Medicaid lives with published policies appear to have minimal access restrictions. We anticipate the remaining states will review coverage throughout 2024, and we will continue to support their reviews as much as possible. Before handing it over to Mike, I want to underscore that we have an important responsibility to help people living with Alzheimer's, Friedreich's ataxia, and postpartum depression. And we are working with urgency to help these patient communities. We believe we're making significant progress in that mission, and we look forward to continuing to share updates with you. With that, I'd like now to pass it over to Mike. Mike McDonnell -- Chief Financial Officer Thank you, Alisha, and hello to everyone. I'd like to start with a high-level overview of our financial profile, and how we are seeing this progress in the context of our Fit for Growth program. We maintain a sharp focus on improving profitability as we endeavor to return the company to not just EPS growth, but revenue growth as well. Please note that any financial comparisons that I make are versus the first quarter of 2023. Regarding our top line, our four recent launches contributed revenue in the first quarter, which more than offset the 4% decline in our MS business. And as we noted during our previous earnings call and at a recent webcast investor conference, we expect that this year's revenue will be skewed more toward the second half of the year, and we expect this to be due to both the timing of shipments for Spinraza outside the U.S., as well as the expected growth profiles for our recently launched products. On gross margin, we saw improvement of 5 percentage points in the quarter as our revenue mix has shifted. This is due to increasing high-margin product revenue replacing lower-margin contract manufacturing revenue. We also had $45 million of idle capacity charges in the first quarter of 2023, and none in the first quarter of 2024. Our R&D prioritization and Fit for Growth initiatives had a clear impact on our non-GAAP R&D and SG&A expenses, which we refer to as core opex during the quarter, and that resulted in a 13% decrease year over year. These savings contributed to meaningful growth of our non-GAAP operating income of 24% year over year. Our operating margin was 31% in the quarter, as compared to 23% in the first quarter of 2023. And while these are encouraging improvements so far, we believe there is still more work that can be done to continue to improve these metrics. Now, a bit more color on revenue dynamics during the first quarter. Total revenue was $2.3 billion, which was a decrease of 7% at actual and constant currency. Our MS franchise revenue declined approximately 4% driven by competition and the usual channel seasonality that we see in the first quarter. Within MS, VUMERITY revenue grew 18% and benefited from global patient growth as well as some favorable channel dynamics during the first quarter. Regarding Tecfidera in the EU, we have now seen most generics exit the market, which drove ex-U.S. growth of 5% for Tecfidera this quarter. We continue to believe we are entitled to market protection in the EU until February of 2025. And now, a quick double-click on our rare disease revenue for the quarter. Skyclarys delivered $78 million of revenue, including approximately $5 million in Europe, where we have launches in several countries underway. For Spinraza in the U.S., revenue was up 1% in the quarter, and we remain encouraged by the resilience here. Spinraza revenue outside the U.S. declined 35%. The majority of this year-over-year decline was due to shipment timing in certain emerging markets. We continue to generally see stable patient numbers globally, and we would expect the shipping dynamic outside the U.S. to largely normalize throughout the remainder of 2024. We also saw some modest negative impacts from competition and foreign exchange in the quarter. For the full-year 2024, we expect global Spinraza revenue to decline by a low-single-digit percentage. Zurzuvae delivered $12 million of revenue, which we believe is inclusive of some channel stocking in anticipation of increasing demand, which is common for any new launch. And lastly, contract manufacturing revenue was notably lower year over year, and as we reflected in our guidance for the full year, we continue to expect contribution from this line to be significantly lower than last year, due to completing a number of batch commitments in 2023. First-quarter non-GAAP cost of sales was 22% of total revenue, and that's an improvement of 5 percentage points. As I previously mentioned, this improvement was driven by a more favorable product mix, as revenue from new product launches replaced lower margin contract manufacturing revenue, and it also was related to having lower idle capacity charges. We did not have any in the first quarter of 2024. First-quarter non-GAAP R&D expense decreased $124 million, which was driven primarily by savings achieved from Fit for Growth, where we remain on track to achieve cost savings of $1 billion gross and $8 million (sic-$800 million) net of investment by the end of 2025. We also saw savings as a result of our R&D portfolio prioritization, which has had a meaningful impact as we discontinued some programs and have focused our spend on areas we believe have a higher probability of success. Non-GAAP SG&A expense decreased approximately $33 million in the first quarter, and this was primarily due to $50 million of G&A-related cost reductions, which were realized in 2024 in connection with our Fit for Growth program, and that was offset by an increase in operational spending on sales and marketing activities in support of the Leqembi and Skyclarys launches. I will also note that the prior year included $31 million related to the termination of a co-promote agreement for our MS project -- products in Japan. All of this together contributed to non-GAAP operating income growing 24%, with non-GAAP operating margin now above 30% and improving and non-GAAP EPS growth of 8%. Next, a brief update on our balance sheet. We ended the quarter with approximately $6.5 billion of debt, $1.1 billion in cash and marketable securities, and net debt of roughly $5.5 billion. As of March 31st, 2024, the $6.5 billion of total debt included $250 million of the $1 billion 2023 term loan, which was put in place at the time of the Reata acquisition. As of March 31st, 2024, we had repaid $750 million of this $1 billion facility. The remaining $250 million is expected to be repaid during the second quarter of this year, so this quarter, earlier than our original expectation, which was by the end of this year. I'd note that this cash and marketable securities figure does not include a $437 million payment from Samsung, which we received earlier this month. We continued to generate strong free cash flow during the first quarter with approximately $507 million of free cash flow. So overall, our balance sheet remains in a strong position, with increasing capacity to invest in growth initiatives. And regarding our strategic review of the biosimilars business, at this point, we have not received an acceptable offer from a third-party. Our process remains ongoing and we will remain disciplined as we continue to explore all options including retaining the business. Next, I'd like to discuss our full-year 2024 guidance ranges and assumptions. We are reaffirming our expectation of full-year 2024 non-GAAP diluted earnings per share of between $15 and $16, which reflects expected growth of approximately 5% at the midpoint of the range as compared to 2023. All of the previous assumptions to our guidance, including those you see on this slide, remain unchanged. I'd like to remind that we have potential R&D success milestone or opt-in payments associated with the upcoming clinical data readouts, and we have made an allowance for some of these potential payments in our guidance. Of course, whether or not they are paid will be dependent on the data and our resulting decisions. And finally, we just announced the completion of a sale of one of our two priority review vouchers for $103 million. At this point, we expect to earmark these proceeds for business investment, or to support business development opportunities as they arise. And in closing, we remain committed to our number one goal of returning Biogen to sustainable top and bottom-line growth, and creating long-term value for our shareholders. We will now open up the call for questions. Chuck Triano -- Head of Investor Relations Thanks, Mike. Jennifer, can we go to questions? Questions & Answers: Operator Thank you. [Operator instructions] Your first question comes from the line of Eric Schmidt with Cantor Fitzgerald. Eric Schmidt -- Cantor Fitzgerald -- Analyst Hi. Thanks so much for all the updates and for taking my question. I guess on Leqembi and maybe for Priya, we had a couple of updates in the last month or so the EMA delay on the CHMP recommendation. And also, I know this is your partner's doing, but Eisai announced that they couldn't submit for the subcu approval until they finished the immunogenicity study. I was hoping you could just update us on timelines for both of those initiatives going forward? Thank you. Priya Singhal -- Head of Research and Development Yes. Thanks, Eric. So maybe I can just start off by saying that we are working with Eisai to really provide patients with the optionality of a subcutaneous formulation. Our approach is entirely data driven. So we were very encouraged to see the bioequivalence we met last year and we shared that at CTAD. This was the most important milestone. Thereafter, we've engaged with the FDA. And currently, just to characterize how we are approaching this, we've split our strategy for subcutaneous formulation. First and foremost, we are working to submit a rolling submission for subcutaneous autoinjector for maintenance. This we're going to do at earliest. Eisai has already submitted a fast-track application. We're awaiting that. And as soon as we get it, we will make the submission, while we continue to generate the data for the three-month immunogenicity that the FDA has required. Second, because our exposure with subcutaneous formulation was higher than the IV formulation, we believe it's in the interest of patients to optimize dose, and that will lead to more convenience. So we are optimizing this dose and that is something that is already ongoing and is currently ongoing this year. In terms of timelines, if we get the fast track for subcutaneous maintenance, we will file immediately for rolling review, and that we expect would be in this year even if we don't get the fast track because we have completed the three-month immunogenicity data by Q4. Second, for the subcutaneous induction therapy, we expect that we would file by the first quarter of 2026. That is what Eisai has already communicated in their investor comments early March. I'd also like to remind us that we completed our intravenous maintenance filing by Q1 2024 as we had aimed. Thank you. Chuck Triano -- Head of Investor Relations Thank you, operator. Next question, please. Operator We'll go next to Paul Matteis with Stifel. Paul Matteis -- Stifel Financial Corp. -- Analyst Good morning. Thank you for taking my question. I was wondering if we could get your updated perspective on business development as it relates to capacity, therapeutic area, stage of development, or commercial? And just in the context of this, how the kind of uncertain -- promising, but uncertain trajectory of lecanemab influences your appetite to execute on something now versus maybe wait a bit until 2025? Thank you. Chris Viehbacher -- President and Chief Executive Officer Thanks, Paul. I think this year, we're going to be focused on business development to bring in some new assets, both into early stage research and development. We have always called ourselves a neuroscience company, but the reality of neuroscience is that, this is a high-risk area. We don't always understand the underlying disease biology, the diseases progress slowly, that leads you to some very long and expensive trials. You can't often do a proof-of-concept study in phase 2. And so while we remain committed to neuroscience, my personal view is that I think that is to -- that is not diversified enough for a company of our size. And so already last year, we signaled that we'd like to go into some adjacencies in rare disease. I think we actually have a tremendous commercial capability in rare disease. There are special commercial requirements, the need sometimes to support diagnosis, all of the hurdles with payers that have to be overcome and of course, finding the patients. And there are an awful lot of tools that I think we have to be able to do that. And then immunology, we've been an immunology company since the get-go since some -- MS is really an autoimmune disease. So I think we'll use the opportunity with licensing collaborations to expand that. I think where our balance sheet is, if something really extraordinary came along, I suppose we look at it, but I don't think where we sit right now, we'd be thinking about doing anything this year on an acquisition front, not certainly of any size. But Mike, maybe you can talk to the balance sheet capability. Mike McDonnell -- Chief Financial Officer Yes. So, Paul, I would just comment that our balance sheet is in a very good spot. If you look at our net debt position at the end of the first quarter, and then you pro forma that for the Samsung payment and the paydown that we'll make in the second quarter on the term loan, it's about $5 billion of net debt. We generate about $3 billion of EBITDA. So it's only about a -- somewhere between a turn and a half and two turns of leverage. So we certainly could add another turn of leverage for something that we liked, at least temporarily, and we generate a couple of billion dollars of free cash flow per year. So I think about it in the context of 2024 as maybe a $4 billion to $5 billion of capacity sort of number for things that we might be really interested in. And then, if you were looking at something more Reata-like, that's probably a little more logical, capacity wise in 2025 or beyond. Chuck Triano -- Head of Investor Relations Thanks, Mike and Chris. Can we take the next question, please? Operator Yes. We'll go next to Salveen Richter with Goldman Sachs. Salveen Richter -- Goldman Sachs -- Analyst Good morning. Thanks for taking my question. For Skyclarys, could you speak to the 2024 outlook and any bolus dynamics that has impacted this? And specifically, you've talked being 24% U.S. market penetration. How are you thinking about peak penetration in the U.S. and then the expectations for pace of uptake in Europe and net pricing there? Thank you. Chris Viehbacher -- President and Chief Executive Officer Alisha, you want to take U.S. and I can follow up with Europe? Alisha Alaimo -- President, Biogen US Yes. I think when you look at the U.S. and the market penetration, and you probably saw in the analogs on the slide that the launch has gone very well thus far. And as I also said, we've made it through sort of the catch-up population. We have a lot of really good things in place right now that we are launching in parallel to identify and hopefully get to the rest of the population. The way in which we think about this market though is, we do have two sets of patients. You have a set that are highly engaged with their physicians, and you have another set who haven't been engaged, probably over the last two to five years. We have enough data and analytics to understand exactly where these physicians are, and how the patients have moved through them. And so with that, we are now identifying a lot of these offices, especially in the community who could have a patient or two that might be diagnosed with general ataxia, but not Friedreich's. And so what I referred to earlier on the call is expanding the field force footprint. We have a very targeted approach to these offices in order to, again, increase the market penetration. Now, as you see with something like a Spinraza, we've also performed very well, and also have driven quite a good market penetration with that product, even though there's competitors in the marketplace. With Skyclarys, with no competitor really in the market, we expect to continue over the next several years to penetrate this for as far as we can go. We know that there are 4,500 approximate patients that could have Friedreich's ataxia. And so what we're doing is planning everything that we can to get to as many of them as quickly as possible. Chuck Triano -- Head of Investor Relations Thanks, Alisha. Chris Viehbacher -- President and Chief Executive Officer Yes. And on Europe, in some ways the single-payer systems actually are really ideal for rare diseases. A lot of patients in the U.S., even if you have reimbursement, even if you have insurance coverage, there are an awful lot of hurdles that the U.S. healthcare system imposes upon patients. And a lot of those, we don't really see in Europe. And so I think we're seeing a rapid uptake. Again, there's -- there is a catch-up on population. So there's -- and there's a difference between patients on treatment and revenue-generating patients. So first, we have -- we have actually the commercial launch in Germany because we can get reimbursement relatively quickly. Other countries will come online as we go through the individual country reimbursement processes, but our objective is actually build up the patients. So there's a number who are on free drug at the moment through these EAPs, some of the EAPs you can charge for. So it's going to be a little lumpy as we look at the revenue line. But I'd say we're extremely encouraged by the uptake of patients. And then, ex-US in Latin America, that could well be a story for 2025. I think you may see our first launch in Brazil in early part of 2025. Chuck Triano -- Head of Investor Relations Great. Thanks, Chris. Can we move to the next question, please? Operator Yes. We'll go next to Umer Raffat with Evercore. Umer Raffat -- Evercore ISI -- Analyst Hi, guys. Thanks for taking my question. I have one for Priya, if I may. I know there's the late-stage lupus readout with the CD40 ligand antibody this summer. I also realize the time point on this readout is week 48 instead of week 24. And I guess my question is, knowing that there wasn't a clear dose-response on efficacy in the prior trial, could you speak to how the B cell impact was different between doses and whether the prolonged duration could actually help the B cell impact on this upcoming readout? Thank you. Priya Singhal -- Head of Research and Development Thanks, Umer. We have looked at the phase 2 study very carefully, and we have decided and we included the 48-week endpoint on BICLA for this phase 3 study. And ultimately, we're looking for a meaningful change on the primary endpoint, and the key secondary endpoints for SLE such as severe flare prevention and patients achieving low disease activity. We also think that the BICLA is a sensitive, clinically meaningful composite measure of SLE disease activity, and requires disease improvement across all body systems with moderate or severe baseline activity without worsening and the need for escalation in background medications. So we modified the trial, we are -- we have refined the population, and we think that this is going to be really important as we kind of look forward to the readout. The other piece I think here to keep in mind is that we considered how we can modify the population for this study and get to an answer really quickly to bring potentially dapi to patients. So I hope that answers your question. Chuck Triano -- Head of Investor Relations Thanks, Priya. Let's go to the next question, please. Operator We'll go next to Michael Yee with Jefferies. Mike Yee -- Jefferies -- Analyst Hey, guys. Thanks. I wanted to revisit Skyclarys comments. I know you said you were planning to add patients month-to-month. Can you just talk about the trajectory of Skyclarys this year as it relates to also any offsets like discontinuation rates, etc., etc., how does that factor into it? And also, will you book Germany revenues this year? So just talk about the dynamics of revenues for Skyclarys. And if I may sneak in one clarification. Priya said subcu induction filing for Leqembi Q1 2026. I just wanted to clear that's what she said? Thank you so much. Priya Singhal -- Head of Research and Development Yes. The outcome and the filing will be in that period, but we'll communicate more on this once we optimize the dose and we go forward. Mike Yee -- Jefferies -- Analyst OK. And Skyclarys? Alisha Alaimo -- President, Biogen US Yes. So for Skyclarys, it is quite complicated month-to-month, I will say, because you have patients, obviously, that we're getting via the start forms, which I will say for the highly engaged population we are pretty much maxing that out now. We absolutely know who they are and we've captured them through the physicians. But then, you're also going to have a discontinuation rate as you have noted, and you're going to have patients that are being pulled off the start forms, putting on to product. And then of course, you may have them miss a dose or two, right? So then, there's compliance. So month-to-month, it will be lumpy because you can say you add 50 patients, but then you have other dynamics going on in the patient population. But what our outlook is for the year, which I can't give you a specific number, is that we are going to continue to add every single month. We are able to find those patients in the community, and there are other puts and takes in those numbers. But at the end of the day, we will ensure that we are still leading the rare disease analogs and that we're going to generate market penetration. Chris Viehbacher -- President and Chief Executive Officer Yes. And in Europe, we're booking revenue now for Germany and actually -- we've actually launched in Austria and the Czech Republic as well. And in some countries, we're actually able to charge for the early access programs in Europe and some of that revenue will come down too, but you probably see more full EU as a region revenue in 2025, but there will be certainly revenue contributions in 2024 from certain countries in Europe. Chuck Triano -- Head of Investor Relations Great. Thanks, Chris. Let's go to the next question, please. Operator We'll go next to Colin Bristow with UBS. Colin Bristow -- UBS -- Analyst Good morning and thanks for taking the questions. Maybe one on the Leqembi commercial setup. So one investor concern and important feedback we've been hearing from physicians is around, there being less sales and marketing presence than perhaps had been expected. I heard in your prepared remarks you're saying you expect a 30% increase in the U.S. footprint. Are you able to sort of quantify the current U.S. commercial footprint? And was the 30% increase always planned, or was it based on some review that the current footprint wasn't adequate? Thank you. Alisha Alaimo -- President, Biogen US Thank you very much for the question. If you really take a step back and look at how we strategically looked at this launch, we always said that we were going to do in a stepwise approach. We knew from the beginning that sites were going to take a while to get up and running. We had to wait for several indicators from CMS giving full approval and NCD being overturned for PET. And so with that being said, we didn't want to go out of the gate with a really huge field force that wasn't able to actually impact or penetrate the market. So instead, what was decided is we went in with a very focused approach. We focused on really the top accounts that we think handle the majority of the diagnosed patients, especially that are under neurology care. And we said once the market gets to a place where we think it's ready for expansion, then we will expand. Now, to your comment about physicians coming back saying they're not seeing a lot of sales efforts, I think, we also have to have really the context of getting these sites up and running takes a lot of effort. And you also don't want to have three, four, five different people going into these accounts to support. And so we've been very focused on really getting the large IDNs up and running. Some of these centers that have come forward that really could move quite quickly, we got them up and running. And now as you see the expansion take place with the 30%, we are going to focus mainly on the large IDNs that are now opening up their expand and extend satellite offices, where they're now going to allow a larger cohort of patients to come through for diagnosis and treatment. And so with this next phase of a build, which we believe we've done a lot of analytics behind it, and we've had a lot of third parties weigh in on what is the appropriate sizing, we and Eisai believe that this is going to be the right footprint to drive the next acceleration of growth. Chuck Triano -- Head of Investor Relations And let me just turn it to Priya for a clarification back to Mike Yee's question on subcu. Priya Singhal -- Head of Research and Development Thank you. Thank you. Just wanted to clarify that it's the outcome by fiscal year -- Eisai's fiscal year 2025, which is Q1 2026 for the subcutaneous induction. Of course, that -- it could be a range because it would involve sBLA, a prior -- potentially a priority review and other such aspects, which could shift it, but that is the -- that is what Eisai has communicated. I just wanted to reaffirm that. Thank you. Chuck Triano -- Head of Investor Relations So the outcome and not the filing? Priya Singhal -- Head of Research and Development Yes. Chuck Triano -- Head of Investor Relations Obviously earlier? Priya Singhal -- Head of Research and Development Earlier. Chuck Triano -- Head of Investor Relations Yes. Priya Singhal -- Head of Research and Development Thank you. Chuck Triano -- Head of Investor Relations Thanks, Priya. Let's move to the next question, please. Operator We'll go next to Brian Abrahams with RBC Capital Markets. Brian Abrahams -- RBC Capital Markets -- Analyst Hi, there. Good morning. Thanks so much for taking my question. With regards to Leqembi subcu, on the FDA request for immunogenicity data, I'm curious if you have a sense as to what drove that request. Your level of confidence that the PK will be linear using half the subcu dose? And then, when are you proposing that patients in their course of treatment should transition from an IV to a subcu maintenance? Thanks. Priya Singhal -- Head of Research and Development Sure. Thanks, Brian. So overall, we -- as you know, we had tested the 720 milligrams in the naive patient population that was in the Clarity AD open-label extension sub-study for subcutaneous. Now, from that -- in addition to that, we had modeling data and this is what we are proposing for 360 milligrams to be the weekly maintenance, and the FDA is just requiring additional immunogenicity data. We see this as a reasonable request, and we are already in the process of generating it. So overall, we don't expect that the bioequivalence is going to be in question. This is now really about the immunogenicity and actually generating on patients who would be tested for this. So that's what we expect with that. Can you remind me what was the second aspect of your question? Brian Abrahams -- RBC Capital Markets -- Analyst When are you proposing that patients transition from the IV to the subcu maintenance? Is there data supporting what -- when in the course of treatment that transition should happen? Priya Singhal -- Head of Research and Development Yes. And I think that's important because we have filed for an intravenous maintenance like -- we've already completed this filing Q1 2024, and really that has come from three lines of evidence. The Study 201, which was the phase 2 study, the GAAP period modeling, as well as open-label extension in the phase 3. So that's what's informed our maintenance IV filing. And really, it will be decided along with the FDA on what is the appropriate time for transition from IV biweekly to weekly now -- up to four-weekly. And in addition, following that, we'll have the subcutaneous maintenance discussion. So really, it's very systematic and we need to first get through all the IV maintenance. And in parallel, we have the SC maintenance. I hope that makes sense. Chuck Triano -- Head of Investor Relations Thanks, Priya. Let's move to the next question, please. Operator We'll go next to Jay Olson with Oppenheimer. Jay Olson -- Oppenheimer and Company -- Analyst Hey. Thanks for providing this update. It seems like compared to previous quarters, you're focusing more on your three commercial launches and relatively less on the R&D pipeline. Is there any particular reason for that shift in focus? And how much more work do you plan to do to optimize your R&D portfolio? Thank you. Chris Viehbacher -- President and Chief Executive Officer I'll start. I mean, I think we have first -- four data readouts coming in midyear. So I think, we felt we'd have more data when we -- it makes sense to bring back the R&D when we've got more data. I would say actually from a prioritization point of view, and Priya, you can weigh-in here, but I think we've largely done the job of having projects that are either projects of conviction, or projects where we're waiting the data outcome. They're in-flight and just given the nature of neuroscience projects, we wait -- we need to wait and see what the data say. I think you're going to find us much more disciplined about whether we progress or not. Our go/no-go decisions, I think have all been clearly defined for those. I think the next job is really now to build out the pipeline, as I talked about earlier, that we want to diversify our business a little bit more than we have in the past. So, Priya is certainly working along with Jane on thinking about what things we can additionally bring into the pipeline from outside. But, Priya, I don't know whether you want to add anything there. Priya Singhal -- Head of Research and Development Thanks, Chris. I think you covered it. That's exactly right. We are very excited about our four readouts. We are preparing for them. We have already worked through go/no-go criteria. And we continue to remain very excited about the rest of the pipeline that's in mid and late-stage, particularly our anti-tau ASO BIIB080, as well as our two phase 3 programs in SLE, litifilimab as well as dapi that we just talked about, and with litifilimab also in cutaneous lupus. So we have a number of projects in early phase development, and we're trying to be very disciplined about making sure that we make evidence and data-based decisions. Chuck Triano -- Head of Investor Relations Thanks. Thanks, Priya. Next question, please. Operator We'll go next to Chris Raymond with Piper Sandler. Chris Raymond -- Piper Sandler -- Analyst Thanks. Just maybe a strategic question on your biz dev strategy. So, Chris, I heard your comments around diversifying away from neurology. You guys have been saying that for a while and your deals are focused on areas other than MS. But there is actually, if you look across the industry, some decent early innovation in MS. Even with your business on the decline, our checks still indicate that Biogen remains a trusted company and there's an awful lot of value, I would argue with that market presence. I guess maybe just the question here strategically is, is your activities in business development, is that due to your view of the need to diversify away from MS strategically? Or is it a view that you just haven't seen an early asset worth licensing, or is there some other underlying dynamic of the MS market that has led you guys to prioritize other areas? Thanks. Chris Viehbacher -- President and Chief Executive Officer Yes, well, there's a little bit of a lot of the above in there. I think the first is, we haven't abandoned MS. We do have programs in research early. The unmet need in MS has really narrowed. It's really the progressive form, which is a very tough indication really to go after. But we have programs still in ALS. And in fact, I think the fact that Qalsody was approved has actually proven to be an enormous scientific achievement. It may not be a major financial achievement, but this really opens up the field to having a biomarker where you can tell whether something is working or not in ALS. And so we have a number of programs in ALS. We're in Huntington's. We have a program in Parkinson's, as you know. We've got TAU, which I think between TAU and lupus, we see as programs of high conviction within the company. So we feel that -- I think you're right. We are very well-placed. Neurology, I wouldn't just say MS, but neurology. But the reality is that, we sit there with programs that are very difficult to predict, very expensive, very long running. And when you actually look at the ability to do external deals, that field is also very narrow. There's just not that many people working in the CNS space. So we're by no means abandoning it. And in fact, the fact that we go after these really tough diseases is really a source of pride within Biogen. And I have to say, I continue to be amazed at the capability and talent we have within the organization. But the reality is, we need to have more predictable results out of R&D. And I think we do have a lot of that capability within the company. I don't see us ever -- moving -- going left turn into oncology or something like that. But I do think we have a legitimacy and being in rare diseases and expanding into immunology.And in fact, I think what we've been doing in MS and in fact lupus is really an indicator of that. So I think we're going to continue to branch out, but it also branches out our opportunity set for collaboration, and not just diversifying our portfolio. Chuck Triano -- Head of Investor Relations Thanks, Chris. And can we take our last question, please, operator? Operator Yes. We'll go next to Terence Flynn with Morgan Stanley. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks for taking the question. Maybe a two-part on Leqembi. Just wondering, obviously, you talked about the number of unique prescribers more than doubling this quarter. Just wondering how much more breadth you're expecting from the field force expansion here as we think about the forward through 2024? And then, any early insights on duration of treatment that you're seeing so far? Thank you. Alisha Alaimo -- President, Biogen US Yes. So thank you for the question. My outlook for the rest of the year is, when you really think about the phases that these IDNs are in, and even you see these small accounts that they do move fast out in the community. And if you really take a step back and look in context for the IDNs, we got an approval -- full approval in July. It took about six to eight months for these very large systems to get organized, which is that staged and phased approach I talked about. And the fact that now they're actually opening up these other sites for diagnosing and prescribing, I believe that you're going to also see the number of physicians prescribing increasing, and it will continue to increase throughout the rest of the year. If you look at how many physicians that we are targeting and the numbers that are actually prescribing, we still have a good delta there. And so I do see that continuing, especially with the field force coming in, if they're covering, our goal is really to drive the acceleration at these large IDNs. I talked to you about the Priority 100, but keep in mind, we actually target quite more than that. I just keep referring to the priority. And there are many other IDNs that are also prescribing and are also expanding and extending. The second part of your question was around -- Chuck Triano -- Head of Investor Relations Duration. Alisha Alaimo -- President, Biogen US Duration. What's interesting with this and there's been a lot of conversations with many of these prescribing sites. Physicians lay very specific and explicit expectations with patients that when they go on this therapy, their expectation is they come in, every two weeks, to get their IV infusion and that they stay on product. And what we've seen thus far, and what we believe to be happening thus far is patients are staying on product. We hear that as feedback from the physicians. We also hear that as feedback from the numbers that we see the data that we see. So far with duration, the plan is that they're keeping patients on product. I think there are questions out there as to what to do about duration, but in the absence of any data, physicians are keeping patients on. Chuck Triano -- Head of Investor Relations Right. Thanks, Alisha, and thanks to all of you for joining us today for the call and the IR team, of course, is available for follow-ups. Have a good rest of your day.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning. My name is Katie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. first-quarter 2024 earnings teleconference. Our host for today's call will be the chairman and chief executive officer, Laurence D. Fink; chief financial officer, Martin S. Small; president, Robert S. Kapito; and general counsel, Christopher J. Meade. [Operator instructions] Thank you. Mr. Meade, you may begin your conference. Chris Meade -- General Counsel Thank you. Good morning, everyone. I'm Chris Meade, the general counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, which was some of the factors that may result -- cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, I'll turn it over to Martin. Martin Small -- Chief Financial Officer Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the first quarter of 2024. Before I turn it over to Larry, I'll review our financial performance and business results. Our earnings release discloses both GAAP and as-adjusted financial results. I'll be focusing primarily on our as-adjusted results. BlackRock's first quarter results reflect sustained momentum across our entire platform. We ended the quarter with record AUM of nearly $10.5 trillion and one of the strongest opportunity sets ahead across multiple growth engines, including technology, outsourced solutions, and private markets. Momentum's accelerating, and we have line of sight into a breadth of significant mandates in investment management and technology, spanning client channels and geographies. Teams across BlackRock are energized and organized to execute on these opportunities and deliver BlackRock's platform to clients through world-class client service. We built BlackRock to be a structural grower with industry leadership in secular growth areas like ETFs, private markets, model portfolios, and technology. With supportive markets and more optimistic sentiment from clients, we're confident in our ability to both grow assets on behalf of clients and drive profitable growth for our shareholders. First-quarter long-term net inflows of $76 billion continued to lead the industry, driving positive organic base fee growth alongside double-digit growth year over year in revenue and earnings as well as 180 basis points of margin expansion. Excluding low-fee institutional index equity flows, we saw $100 billion of long-term net inflows in the quarter. As equity markets powered to record highs in the first quarter, investors who are waiting in cash missed out on significant returns across broader markets. With long-term investing, time in the markets is often more important than market timing. Although cash remains an attractive safe haven with the prospect of fewer rate cuts for 2024, the nearly 30% increase in equities over the last year continues to propel clients toward rerisking into stocks and bonds. Clients choose BlackRock for performance. They continue to consolidate more of their portfolios with us, which is driving our growth premium. With more clarity on interest rates and a supportive market backdrop, the assets we manage on behalf of our clients, our units of trust ended the quarter up $1.4 trillion from a year ago, an increase of 15%. Organic asset and base fee growth again accelerated into the end of the quarter, and we see broad-based momentum growing across client channels and regions. In the first quarter, BlackRock generated long-term net inflows of $76 billion, partially offset by seasonal outflows from institutional money market funds. Total annualized organic base fee growth of 1% reflected seasonally softer flows earlier in the quarter before coming back to target in March. First quarter revenue of $4.7 billion increased 11% year over year, driven by the impact of market appreciation over the last 12 months on average AUM and higher performance fees and technology services revenue. Operating income of $1.8 billion was up 17% and earnings per share of $9.81 was 24% higher versus a year ago, also reflecting higher nonoperating income. Nonoperating results for the quarter included $90 million of net investment gains, driven primarily by mark-to-market noncash gains on our unhedged seed capital investments and minority investment in Investec. Our as-adjusted tax rate for the first quarter was approximately 23% and included discrete tax benefits related to stock-based compensation awards that vest in the first quarter of each year. We continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2024, though the actual effective tax rate may differ because of nonrecurring or discrete items or potential changes in tax legislation. First-quarter base fees and securities lending revenue of $3.8 billion was up 8% year over year and up 5% sequentially, driven by the positive impact of market beta on average AUM and positive organic base fee growth. On an equivalent day count basis, our annualized effective fee rate was 3/10 of a basis points lower compared to the fourth quarter. This was mainly due to the relative outperformance of lower fee U.S. equity markets, client preferences for lower fee U.S. exposures, and lower securities lending revenue. Performance fees of $204 million increased from a year ago, primarily reflecting higher revenue from alternatives. Quarterly technology services revenue was up 11% compared to a year ago, reflecting sustained demand for our Aladdin technology offerings. Annual contract value or ACV increased 9% year over year. Beginning in the first quarter of 2024, earnings recognized from minority investments accounted for under equity method will be presented as part of our nonoperating results. Advisory and other revenue increased from a year ago, primarily reflecting this change. In addition, as many of you know, we updated the presentation of expense line items by including a new sales, asset and account income statement caption. This category includes distribution and servicing costs, direct fund expense, and sub-advisory and other sales, asset and account-based expense. Sub-advisory and other expense, which are variable noncompensation expenses associated with asset and revenue growth was previously reported within general and administration expense. We believe this change provides investors a clearer view of both BlackRock's variable noncompensation expense and G&A, which represents more fixed costs. It represents how we'll execute on our financial rubric of aligning investment spend with our highest conviction growth areas, variabilizing more of our expense base and generating fixed cost scale. Total expense increased 8% year over year, reflecting higher compensation, G&A and sales asset and account expense. Employee compensation and benefit expense was up 11%, primarily reflecting higher incentive compensation as a result of higher operating income and performance fees. G&A expense increased 6% due to the timing of technology investment spend in the prior year. Sequentially, G&A expense decreased 12%, reflecting timing of technology investment spend and seasonally higher marketing and promotional expense in the fourth quarter. While one quarter's results can be impacted by timing of spend, we expect technology to be one of our primary areas of investment within G&A. Sales asset and account expense increased 5% compared to a year ago, primarily driven by higher direct fund expense. Direct fund expense was up 7% year over year, mainly due to higher average index AUM. Sequentially, direct fund expense increased due to higher average index AUM in the current quarter and higher rebates that seasonally occur in the fourth quarter. Our first quarter as-adjusted operating margin of 42.2% was up 180 basis points from a year ago. As markets improve, we remain committed to driving operating leverage and profitable growth. BlackRock's industry-leading organic growth is a direct result of the disciplined investments we've made consistently through market cycles. Looking forward, we'll continue to prioritize investments with differentiated organic growth potential or that will expand operating leverage through enhanced scale. In line with our guidance in January, and excluding the impact of Global Infrastructure Partners and related transaction costs, at present, we would expect our headcount to be broadly flat in 2024, and we would also expect a low to mid-single-digit percentage increase in 2024 core G&A expense. Our capital management strategy remains consistent. We invest first, either the scale strategic growth initiatives or drive operational efficiency and then return excess cash to our shareholders through a combination of dividends and share repurchases. At times, we may make inorganic investments where we see an opportunity to accelerate organic growth and support our strategic initiatives. Last month, we announced our agreement to acquire the remaining equity interest in Spyder Rock Advisors, a leading provider of customized option overlay strategies in the U.S. wealth market. This transaction expands on BlackRock's minority investment in Spyder Rock Advisors made in 2021 and builds on BlackRock's strong growth in personalized separately managed accounts via Aperio and ETF mod portfolios. At present, we expect the transaction to close in the second quarter of this year, subject to customary closing conditions. In March, we issued $3 billion of debt to fund a portion of the cash consideration for our planned acquisition of GIP. Our offering consisted of three tranches of senior unsecured notes across five, 10, and 30 year maturities. The offering was well received by fixed-income investors, especially our inaugural 30-year bond. We currently have invested the proceeds of the offering at substantially the same rate as the cost of borrowing, effectively eliminating incremental cost of carrying additional debt prior to the close of the GIP transaction. We continue to target the third quarter of 2024 for the closing of the GIP transaction, which remains subject to regulatory approvals and other customary closing conditions. We repurchased $375 million worth of common shares in the first quarter. At present, based on our capital spending plans for the year and subject to market conditions, we still anticipate repurchasing at least $375 million of shares per quarter for the balance of the year, consistent with our January guidance. More positive sentiment from clients and in markets persisted into the first quarter. Clients increasingly turn to BlackRock to reposition and redeploy across their portfolios. First quarter long-term net inflows of $76 billion were positive across active and index strategies as well as each of our client and product types. ETF net inflows of $67 billion were led by core equity and fixed-income ETFs with net inflows of $37 billion and $18 billion, respectively. These inflows were partially offset by seasonal tax trading-related outflows from our U.S. style box exposure in Precision ETFs. As you'll hear from Larry, our Bitcoin ETF saw surging demand after launching in January, gathering $14 billion of net inflows in the quarter. This is just the latest example of BlackRock innovating to provide better access and transparency to a wider range of investment exposures. Retail net inflows of $7 billion were led by continued growth in Aperio as well as renewed demand for active fixed income. Financial advisors are increasingly looking to customize whole portfolios at scale, driving growth across our SMA and managed model platforms. Our partnership with Envestnet is one channel powering flows to model portfolios. We saw our best gross sales month ever on the platform and year-to-date organic asset and revenue growth has more than doubled compared to this time last year. Sales on the platform aren't just accelerating. They're diversifying. We similarly saw record gross flows in custom models and record AUM in our global allocation models, both of which have larger active components. Within SMAs, our previously mentioned acquisition of Spyder Rock Advisors will further enhance our product offerings and provide even greater personalization across our wealth segments. Institutional active net inflows of $15 billion were driven by our LifePath target date franchise and outsourcing mandates. We see significant momentum across our whole portfolio capabilities. Our pipeline remains strong as more and more clients turn to BlackRock for outsourcing solutions. Institutional index net outflows of $13 billion were concentrated in low fee index equities as several large clients rebalance their portfolios amid significant equity market appreciation in the last 6 months. Our private markets franchise saw $1 billion of net inflows. Continued demand for our liquid offerings was offset by alpha generation for our clients, reflected in over $3 billion of fund monetization and LP distributions or change in fee basis, primarily for more seasoned private equity solutions programs. Finally, BlackRock's cash management platform saw $19 billion of net outflows in the first quarter, in line with institutional money market industry trends. Our cash business can experience seasonal rotations in the first quarter as many institutional clients withdraw these liquid assets for operational purposes, including tax and bonus payments. Cash management flows were impacted by approximately $14 billion of net redemptions during the last week of March ahead of the Good Friday holiday. Outflows were driven by clients redeeming balances to have cash on hand during a time when many businesses are open, but the financial markets are closed. This phenomenon is not uncommon or unique to BlackRock. Balance has largely returned with approximately $20 billion of money market net inflows in the first week of April. BlackRock's differentiated business model has enabled us to continue to grow with our clients, driving industry-leading organic growth and margins. Looking ahead, as markets trend to be more supportive and clients rerisk, we see significant opportunity to expand our market share and consolidate our position to clients. We've set ourselves up to be a structural grower with the diversified platform that we've built. Enthusiasm is growing, momentum's building across the platform. All of us at BlackRock are excited about our future and the growing opportunities for BlackRock, for our clients, for our employees, and, of course, for our shareholders. With that, I'll turn it over to Larry. Larry Fink -- Chairman and Chief Executive Officer Thank you, Martin. Good morning, everyone and thank you for joining the call. BlackRock is partnering with clients to navigate structural and secular changes in business models, technology, monetary and fiscal policies, always staying focused on each and every client goal. Through this connectivity, we are having richer conversations with clients than ever before about their whole portfolio and, in many cases, deepening our relationships with them. This is driving accelerating momentum with a strong pipeline that has some of the best breadth of opportunities across all our client channels and regions that we've ever seen. BlackRock's integrated investment technology advisory platform and durable performance are resonating. In my conversations with clients around the world, I'm hearing about how they want to put their money to work. But they want to do it differently than they did in the past. They want their portfolios to be more holistically blending public and private markets active in an index. They want their portfolios to be nimble, customized, text-enabled. They want to work with fewer providers or maybe just with one provider. BlackRock is the only asset manager that can partner in this way, having the most diverse, integrated investment and technology platform in the industry. Clients around the world are choosing to do more with BlackRock, and this is resonating in our results. But I'm actually more excited about the building momentum we're seeing across our entire platform. BlackRock's AUM ended the first quarter at a new record of nearly $10.5 trillion, up $1.4 trillion or 15% over the last 12 months. Also, at that time, BlackRock has entrusted BlackRock of more than $236 billion of net new assets. BlackRock generated positive net flows across active and index and across all client types. And we grew our technology service revenues and ACV as clients leverage Aladdin to support investments, processes, and in their entire platform. We've had a number of real large marquee wins in Aladdin and are working on a number of significant new opportunities. Momentum remains strong as we grow with new and existing clients. We continue to deliver sustained asset and technology services growth at scale. BlackRock's operating income was up 17% year over year, and we increased our margin by 180 basis points. Earnings per share were up 24%. Activity is notably accelerating. As Martin said, we generated $76 billion of long-term net flows in the first quarter, which represents nearly 40% of last year's long-term flows in just the first three months of this year. And long-term net inflows across retail and ETFs and institutional active was actually $100 billion, which excludes the episodic institutional equity activity Martin mentioned. Some of these are public, some aren't, but over the last few months, we've been chosen for a breadth of mandate, both wealth and institutional clients across regions that will fund over future quarters and we're in active conversations on a number of unique broad-based opportunities, including several large mandates for Aladdin. There is still a record amount of cash on the sidelines and money market fund balances are now approaching $9 trillion. I think this stems from fear and uncertainty, but it's hard to achieve retirement or long-dated objectives by holding cash. Clients worldwide are coming to BlackRock for advice on where and how to deploy their capital, and in many ways, how to help them reduce that fear and putting that money to work. Being a growth company requires continued innovation, lots of investments, and intense client focus. BlackRock has invested ahead of these themes, we believe will define the next decade of asset management. I see the greatest opportunities I've ever seen for BlackRock for our clients and for our shareholders, and I'm very optimistic about the momentum into the rest of 2024 and beyond. The uncertain backdrop does not mean a lack of opportunities. Instead, we see great opportunities for investors across a number of structural trends with near-term catalysts. These include rapid advancements in technology and AI, the rewiring of globalization, accelerated economic growth in certain emerging markets, and an unprecedented need for new infrastructure. BlackRock is connecting with clients to these opportunities and providing them the confidence to continually investing in the long run. In a world where clients are looking for more certainty, the higher coupon, longer duration returns of infrastructure private markets are increasingly becoming more attractive. Demand for all -- for the infrastructure is surging around the world from telecom networks to power generation to transport hubs for data centers and new ways of securing energy. Over the last 12 months, BlackRock's infrastructure platform has delivered 19% organic asset growth. BlackRock's infrastructure franchise and our private markets business more broadly benefited from the firm's global footprint, our deep network of clients and distribution relationships, and access to high-quality deal flow. As we spoke in January, we believe the planned combination of BlackRock's infrastructure platform with GIP will provide clients with access to market-leading investments and operating expertise across infrastructure private markets. We have a deep conviction that this planned combination will be another transformational moment for BlackRock. It will be another example in our long-term history of staying ahead of client needs, positioning ourselves against accelerated macro trends. I believe this structured private markets are approaching the upward trajectory of their J curve just as ETF did when we announced our acquisition of BGI and iShares nearly 15 years ago. We always viewed ETF as a technology that facilitated investing. Since our acquisition of iShares, BlackRock has led in expanding the market of ETFs by making them more accessible by delivering new asset classes like bonds, investment strategies like actives. As a result of that success, the ETFs evolved beyond what started as an indexing concept. It is recognized as an efficient structure for a range of all investment solutions. First-quarter ETF net inflows of $67 billion reflected sustained demand across our client categories, led by core equity and body ETFs -- flows demonstrated accelerating activity with March accounting for more than half of the quarterly net inflows. And our flows in the month were 80% higher than the next largest issuer. We continue to innovate across our ETF platform to give our clients better access to the most diverse range of exposures in the industry. Our Bitcoin fund, which was launched in January, was the fastest-growing ETF in history, and already has nearly $20 billion in AUM. Our active ETF drove $9 billion of net inflows in the first quarter led by our equity factor rotation and flexible income ETFs. These products offer alpha generation with some of our leading investors at BlackRock in a more efficient, more transparent ETF wrapper. Across BlackRock, we continue to scale our product offerings to democratize access to new strategies, increase transparency, and drive cost efficiency. To that end, last month, we announced the launch of our first tokenize fund as well as our minority investment in Securitized, a blockchain-based tokenization platform. This builds on our existing digital asset strategy. And we'll continue to innovate in new products and wrappers all with the aim of providing greater access and customization to each and every of our clients. We continue to see demand for customization with our own wealth business as financial advisors, and their clients they serve increasingly turn to SMAs to personalize their portfolios. We acquired Aperio three years ago in anticipation of this trend, and organic growth in that business has been over 20% since our acquisition. To further booster our SMA capabilities, we announced our planned acquisition of the remaining equity interest of Spyder Rock, as Martin discussed. Among wealth clients, we are also seeking the renewed demand for our high-performing active fixed-income strategies with particularly strength in high-yield and unconstrained bond funds. In the post-QE market, we see more opportunity ahead for active management with greater potential for selective risk taking to generate superior returns. Quarterly active net inflows of $15 billion reflects strength in systematic equity and fundamental fixed income, including the funding of several institutional outsourcing mandates. Across our active franchise, BlackRock has delivered durable investment performance with 82%, 90%, and 93% of our fundamental equity, systematic equity, and taxable fixed income AUM above benchmarks or peer medium for the last five years. Our active investment insights, our strong investment performance, our integrated Aladdin technology differentiates BlackRock and ultimately drives better outcomes for our clients. We first built Aladdin as a risk management enabler, empowering investors to better understand their portfolios through technology. Today, Aladdin is much more than that. Our clients are leveraging Aladdin as a whole enterprise operating system, connecting multiple asset classes, data, technology partners, and a single platform. Aladdin's integrated offering continues to resonate with the majority of our sales this quarter, spanning multiple Aladdin products. We are in the late-stage conversation with several large potential Aladdin clients, and we look forward to executing on more opportunities ahead to be bringing the benefits of Aladdin to new clients and by expanding relationships with our existing clients. From the early days of developing Aladdin to now managing nearly $10.5 trillion across our platform, our ambition has always been to help investors benefit from the growth of the capital markets and achieve financial futures that they seek. More than half of the assets we manage are related to retirement, making this an outcome central to many of our client conversations. BlackRock has been at the forefront of innovation and advocacy for retirement solutions for years. In fact, we pioneered the first target date fund called LifePath back in 1993, when we introduced the concept. It was a revolutionary, eliminating some of the guesswork retirement savings by automatically adjusting their investment mix over their time frame. Fast forward 30 years, target date funds have become the most common default investment option in defined contribution plans in the United States, where we're entrusted to manage the retirement assets of 35 million Americans. We continue to evolve LifePath to help deliver the retirement outcome participants need. That has meant introducing LifePath options in new countries and in new wrappers such as LifePath Target Date ETFs we launched last year. Our LifePath Target Date franchise now has nearly $470 billion in assets and has risen over $115 billion in assets just over the last five years. In addition to helping people save for retirement, we also work to expand the LifePath solution to help people spend throughout their increasingly longer retirement. Society focuses a tremendous amount on helping people live longer and healthier lives, but spend just a fraction of that time and effort on helping them afford those extra wonderful years. The shift from pension to defined contribution models have put the large as the large burden on individual savers. They have to first build up the retirement stage, which in and itself is a formidable challenge. Then even as they have this sizable savings at retirement, there's not much guidance about how to spend and or not -- and how not to overspend these savings. We've been working for years to address this de-accumulation challenge, and we believe this will help increase hope in America. In 2020, we announced the LifePath Paycheck, the next generation of targeted solutions. It will include an option to purchase a lifetime income stream from insurers selected by BlackRock and is expected to go live toward the end of the month. We are partnering on implementing LifePath Paycheck right now with 14 planned sponsors, representing over $25 billion in target date AUM and now have 0.5 million participants. We'll pair the flexibility of a 401(k) investment with a potential for a predictable paycheck life income stream similar to a pension. I believe it will be in one day, the most used investment strategy in defined contribution plans. This pioneering structure can help address global gaps in funding retirement security, improve the quality of life and retirement for millions of Americans and bring back hope for those who were retiring. It's been four years since the start of the pandemic and the subsequent geopolitical upheavals. Leaders of countries, leaders of companies need to create hope for the future for all of their stakeholders. That's certainly what we're doing at BlackRock. I've spoken before about the fear we see today, some is stoked by increasingly political polarization in the world. Our industry and BlackRock have been a subject of political dialogue mostly in the United States. We recognize some of this with being the industry leader. We have done a better job now of telling our story so that people can make decisions based on facts, not on lies and not on misinformation or politicization by others. Unfortunately, there are still others out there who put short-term politics, who continuously lie about these issues. They are putting those issues above the long-term fiduciary responsibilities. As a fiduciary, politics should never outweigh performance. I do believe that with the vast majority of our clients, our long-term fiduciary approach and performance are resonating. We heard it in our dialogue with them, and we see it in our flows, and I know all of you as shareholders see it in our flows. Over the last past five years, clients have entrusted BlackRock with an aggregate of $1.9 trillion of total net inflows, $1 trillion over the last three years and nearly $300 billion last year. It has been in the United States where client-led inflows in every one of these areas. It is true also in the first quarter of this year. This is in all is in the environment where the industry has experienced flat or negative flows, BlackRock saw inflows. Our sustained growth, our accelerating momentum are made possible by the trust of our clients and shareholders and the dedication of all the BlackRock people. Across our firm, we're delivering BlackRock to meet all our clients' individual needs, we're helping each and every client unlock their new opportunities and the power of BlackRock's integrated platform has enabled us to drive better outcomes for each and every client and providing them a differentiated growth for them, which then entails providing differentiating growth for you, our shareholders. I believe at this time, our momentum has never been stronger. The opportunity we have in front of us has never been stronger. And I look forward at BlackRock to be delivering on a significant broad base of opportunities across the world, across our platform, across all of our products, and delivering the responsible fiduciary responsibilities that we provide to each and every client. Operator, let's open it up for questions. Questions & Answers: Operator [Operator instructions] We'll go first to Craig Siegenthaler with Bank of America. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, Larry. Larry Fink -- Chairman and Chief Executive Officer Hey, Craig. Good morning. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst So my question is on your commentary around building momentum and line of sight into significant fundings. So if we exclude fee rate issues like divergent beta, when BlackRock can get back to 5% base -- organic growth? And with the law of large numbers a factor, what is your confidence that this objective is still achievable at your current $10 trillion AUM size? Larry Fink -- Chairman and Chief Executive Officer Martin? Martin Small -- Chief Financial Officer Thanks, Craig. It's Martin. Listen, I'd start by like Q1 net flows were solid at $76 billion. And on a more granular look, we just see durable growth in that flows mix. We had about $100 billion across ETFs, retail, institutional active, institutional fixed income. Of course, we saw some of these $19 billion redemptions from cash with the Good Friday quarter-end dynamic and the $26 billion rebalanced away in institutional index equities. You know those institutional index equities happen from time to time. They're not meaningful revenue impacts or fee rate detractors, but they weigh on kind of the long-term flow totals. When we look at this core momentum on flows, excluding the episodic index redemptions, Q1 flows were $100 billion. It's a healthy trajectory. It's an affirmation for us that we're focused on the right things to grow with clients. And on base fees, the management team here, we really feel like we've turned a corner. Over the last two quarters, we see really solid trends in organic fee growth. They're really some of the best since the end of 2021. We saw excellent momentum to finish the fourth quarter, which we talked about on the last call. We closed out in November and December higher than target. And this quarter, March new base fees annualized at target after we had a slower start. So over the last six months, we see organic base fee growth ticking up and trending more halfway or halfway plus to our long-term targets. It's not a straight line, but we're moving to target. And I say this because we see key positive trends in these sort of critical base fee growers for us. Retail posted $7 billion of flows in that 40 to 50 basis point bucket. Money is going back to work, redemption rates are moderating. We see really excellent momentum in active overall with $15 billion of flows and good velocity in institutional and retail active fixed income, in particular, at $9 billion. And I think what Larry is getting at, we've been selected for a breadth of mandates across investment management and technology that we see supporting 5% organic growth and will fund over future quarters. Our planned acquisition of GIP will help us build and bump from there. So we look forward to closing that transaction, executing on these mandates, and keeping you guys posted on our progress. Larry Fink -- Chairman and Chief Executive Officer I would just add, the breadth of conversations we're having with clients worldwide. Rob Kapito right now is in Asia, the type of conversations we had there. The opportunities we see in Europe, in the U.K., Middle East. These are just very large opportunities, large mandates, big opportunities. And if you then overlay the opportunities and you overlay what infrastructure can do related to the build-out of power with all the AI promise and the need for data centers and the need for power is going to be extraordinary. And all of this is going to lead to much bigger opportunities. And then more importantly, more and more clients are going to be seeking those organizations who deliver the proprietary differentiated products. Operator Thank you. We'll go next to Michael Cyprys with Morgan Stanley. Michael Cyprys -- Morgan Stanley -- Analyst Hey. Good morning. Thanks for taking the question. Just wanted to ask about balancing investment spend with margin expansion. In the past, we've heard BlackRock talk about being margin aware. So just curious how the thinking of that has evolved. What does that mean in today's environment? And how might you quantify the opportunity for margin expansion over time? How do you see some of the levers to achieve that? Martin Small -- Chief Financial Officer Thanks, Mike. Our approach to shareholder value creation is obviously to generate differentiated organic growth, it's to drive operating leverage in a premium margin and it's to execute on a consistent capital management strategy. We have a strong track record of investing in our business for growth and scale and expanding profitability. And I want to emphasize, it's not just about growth. It's about profitable growth over the long term. And that growth comes from making continued investments in our business. And I've talked a lot about on the last several calls and obviously, some of the other meetings we've had, we're looking to size our operating investments in line with the prudent lens on organic growth potential. We're aiming to put more flexibility in our cost base and variabilize expenses where we can. And most importantly, we're looking to generate fixed cost scale, especially through investments in technology. We're consistently delivering industry-leading margins, which is a goal, and we've expanded our margin in six out of the last 10 years. And I think those scale indicators are coming through in our results. We're delivering profitable growth. We generated 180 bps of margin expansion year on year, while revenue op income and EPS all rose double digits. And we delivered 60 basis points of sequential improvement. Over the last 18 months, AUM's up $2.5 trillion, while headcount is actually flat or slightly lower. So I feel like we're delivering benefits of scale and productivity, which is showing in margin expansion. As I mentioned, we're planning for full-year low to mid-single digits core G&A growth, flat headcount, both excluding the GIP transaction. So you've heard on our last few calls, and I hope today and some of Larry's color, we're looking to drive more fixed cost scale. That comes from technology. It comes from automation. It can come from AI. It comes from organizational design, global footprint -- printing using some of our innovation hubs around the world. We see those as our major levers to drive margin expansion. And in the end, we're just looking to optimize organic growth in the most efficient way possible, deliver growth for clients and shareholders and ultimately expand our margin over time. Larry Fink -- Chairman and Chief Executive Officer Michael, I would just add, as we continue to be investing in AI, our most recent experience of having $2.5 trillion more assets with the same headcount is a real good indication of how we are trying to drive more efficiencies, more productivity. I think this is critical. We're going to bring down an inflation in America. This is how it's going to have to be done, driven through technology and -- which will increase more productivity. And overall, and actually through that process, we continue to drive more productivity. What it also means is rising wages. So people do more and the whole organization is doing more with less people as a percent of the overall organization. That is really our ambition. Operator Thank you. Your next question comes from Ken Worthington with J.P. Morgan. Ken Worthington -- JPMorgan Chase and Company -- Analyst Hi. Good morning and thanks for taking the question. Fixed income flows have picked up for U.S. -- the U.S. mutual fund industry so far this year, but the same data services that track the industry don't show a proportionate pickup for BlackRock. Your fixed-income ETF sales were solid at $18 billion, but below levels seen last year. Can you talk about the competitive landscape for fixed-income retail and fixed-income ETFs, both inside and outside the U.S.? And to what extent do you think investor appetite may have changed in 2024? Rob Kapito -- President So Rob here. The conversations that we're having across all of the distribution systems are about a new allocation into fixed income. It's been very much clouded by all the noise around inflation and the Fed. So the yield curve remains inverted and investors are currently getting paid to wait. And a more balanced term structure of interest rates is going to be the indicator to watch, and that's where we'll start to see demand for intermediate and longer-term fixed income. So the first quarter for us flows of $42 billion, which I think is considerable, we saw the strength in the bond ETFs from immunization activity in institutional and about 25% of the flows were into active strategies. So we're seeing renewed demand for active fixed income and that's led to flows into the high yield, the unconstrained, and the total return strategies and the fact that our longer-term performance has about 93% of our taxable active fixed income AUM above the benchmark or peer medium in the last five years are really set up to capture this. But I do think the noise that's out there focused on inflation and the fact that you can still earn 5%, which is very attractive right now is causing the delay in more allocations to fixed income. The other part of why I'm more encouraged is we are finding a growing interest in high-performing active fixed-income strategies alongside private market strategies. So I think that we stand to bode very well once you see some changes in the yield curve. Operator Thank you. We'll go -- Larry Fink -- Chairman and Chief Executive Officer Let me just add, operator, to Ken's question. Ken, I do believe as an industry, the large pension funds that have an overallocation of private equity and the rotation of money in the private equity area has slowed down precipitously. We are also seeing evidence that more and more clients are keeping a higher balance of cash to meet their liability discharges. And so without the momentum and the velocity of money in private equity, they actually have to keep higher cash balances, too. So I think that is something to be watched to. If there was an unlock in the movement of private equity, I do believe you would see a factor allocation for the industry in fixed income and other income-producing products. Operator Thank you. We'll go next to Alex Blostein with Goldman Sachs. Larry Fink -- Chairman and Chief Executive Officer Hi, Alex. Alex Blostein -- Goldman Sachs -- Analyst Hi, Larry. Good morning, everybody. My question is related to private markets and GIP. Larry, you referred to it again this morning as a transformational deal for BlackRock maybe similar to some of the other large ones you've done. Does this give you enough in terms of what you're trying to accomplish in the private markets broadly? Or do you expect to pursue more acquisitions that are related in this area? And I guess somewhat related to that, growth in private markets, retail products has been quite significant and still early days. Maybe just remind us on how BlackRock is pursuing that opportunity. Martin Small -- Chief Financial Officer Hey, Alex. How are you? It's Martin. I'll offer a few thoughts, and then Larry will jump in. Let's say, look, all of our clients continue to increase their allocations to private markets. That's what drove our acquisition of eFront. It's what drove our planned acquisition of GIP. And it's also a great focus of the organic investments we've made to build in illiquid alternatives business of size. There are sort of liquid alternatives business. We've reached $167 billion of assets, roughly $140 billion fee paying. We had a good quarter there. Infrastructure and private credit deployment added $1 billion of inflows offset by a return of capital that I talked about. We're getting close on our final closes for our BlackRock Infrastructure IV fund for decarbonization partners, which has been a great first-time funded vintage. We've got $30 billion of committed but uninvested capital. So there's good dry powder in the system. As Larry mentioned, we're originating really strong unique transactions there. So we think our capabilities are expanding in a way that's going to plan. Just yesterday, we announced an infrastructure debt deal with Santander where we're going to be financing about $600 million of infrastructure loans in a structured transaction. And we just see good fundraising momentum, which we think we can kick into next year with GIP. Since 2021, we've had $140 billion of gross capital across the platform, continue to see good momentum with clients. And to the topic you mentioned, we've been building out our semi-liquid products for retail with credit strategies. Our credit strategy is interval funds and our nontraded credit BDC BDEBT, have a combined $1 billion plus of AUM. We received a really important placement for BDEBT at the national wirehouse. So we think that will be a strong seller in for organic growth. And then finally, that planned acquisition with GIP is going to really extend our capabilities. We think the business can be a much stronger platform for capital formation of scale and build on this philosophy we have in illiquid alternatives. We also think there's a great opportunity to bring GIP's capabilities to private wealth globally, retail retirement platforms in the U.K. and Europe with the LTIP and LTAP structures. And obviously, we'll keep you updated on our progress. Larry Fink -- Chairman and Chief Executive Officer I would just add that the feedback we're having from clients, including a dinner I had with a major energy company last night. The opportunity we have for driving more unique proprietary origination is going to be driving accelerated growth for us in the private markets, especially in infrastructure. I do believe the combinations of our two organization is going to open up so many more avenues. Avenues with companies, but also avenues of countries. And that -- being said, look, we're always in the market and are looking for different opportunities and we're not slowing down, looking at different opportunities. We're not here to suggest we're doing anything that is forthcoming because the number one through five thing to do is to close GIP. But the doors are knocking at BlackRock to see if there's other opportunities we want to we want to pursue. And if it makes sense one day, we will continue to be open minded to pursue more private market opportunities. Operator Thank you. We'll go next to Dan Fannon with Jefferies. Dan Fannon -- Jefferies -- Analyst Thanks. Good morning. Martin, for your comments on improving trends throughout the quarter for flows, can you put in context what that means for maybe exit fee rate? And also on this pipeline of activity that's building, can you talk about the mix of fees and products more specifically and how that might inform your base fee outlook going forward? Martin Small -- Chief Financial Officer Yeah. So thanks, Dan. As I mentioned, we see good base momentum. At the end of Q4, we were running at hotter than target. At the end of this quarter, we're at target. And as I mentioned, when we look at the trends over months, not days, we feel like we're half or halfway plus to our target growth. So we've got good base fee momentum. First quarter base fees, excluding securities lending, were $3.6 billion, which is up 9% year on year, which is largely due to the impact of market movements on AUM and organic growth. And if -- the Q2 entry fee rate ex-fee lending is pretty much flat compared to the Q1 fee rate on a day count equivalent basis. But overall, I think as we see good flows into active with the $15 billion we've had, as I mentioned, retail flows of $7 billion coming in. We see good fee rate trends, which we think are about -- mostly about mix. We focus really on driving organic base fee growth in the most efficient way possible, focusing on the clients, focusing on the investments they want to make. We don't focus on a specific fee rate or product. We focus on the clients and the fee rate is more of an output. But the trends in terms of where we're raising assets on the fee rates we think are good. But as I mentioned, Q2 fee rate -- Q2 entry fee rate excess funding is flat compared to the Q1 fee rate on the same day count. Operator We'll go next to Bill Katz with TD Cowen. Bill Katz -- TD Cowen -- Analyst OK. Good morning, everybody and thank you so much for taking the question. I appreciate the update. Maybe a different vein. Your performance fees continue to run pretty high. And just sort of wondering, are we reaching a new level of normalized performance fees? And how might that translate into sort of the comp ratio as we look ahead, particularly as you continue to migrate to a bigger pool of private markets post-GIP? Martin Small -- Chief Financial Officer Thanks, Bill, for the question. We appreciate it. So on the performance fees of $204 million in the quarter, obviously, they're up about four times year on year. If you could put yourself in a time machine and think back to that first quarter in '23, it was a really difficult market. We had SVB. We had some vol in the rate markets, etc. So I think it was a tough time. This quarter, we've really seen good performance coming through on our teams, which has been very, very strong, and I think reflected in those performance fees. Rough justice, about half of that performance fee is coming from kind of our private equity funds and private equity programs where we had some very successful realizations that Larry talked about last year, which was created in some of the distributions associated with that. And the other half is more in liquid hedge funds in our strategic equity hedge funds and some of our systematic strategies as well. Ultimately, our goal is to deliver long-term performance with clients and where we see performance fee revenues picking up, obviously, there's healthy alignment there and more supportive markets, and stronger markets and strong performance, we'd expect a lot of that leverage to drop to a lower comp to revenue ratio. But ultimately, talent is one of our key investments, and we'd expect it to be on a go-forward basis. Operator Thank you. We'll go next to Brian Bedell with Deutsche Bank. Brian Bedell -- Deutsche Bank -- Analyst Great. Thanks. Good morning, folks. Thanks for taking my question Maybe just to focus on the multi-asset category and a couple of areas within that. I think, Martin, you were talking about obviously the build of the organic growth pipeline and also in conjunction with Larry, with your comments about the conversation pipeline. Talk about two areas, in particular, as that developed throughout the year. That would be OCIO deals and then also, as we start up LifePath Paycheck, how you anticipate that contributing to organic growth, I guess, as the year unfolds, obviously very early, but even over the next couple of years. Martin Small -- Chief Financial Officer Sure. Thanks so much for the question. Appreciate it. I guess maybe I can start with a little color on the multi-asset flows, and then Larry can comment on LifePath Paycheck. So multi-asset strategy saw inflows in the quarter of about $5 billion after we had a really strong 2023 with $83 billion. Those strong inflows were driven by the continued demand for our LifePath target date offerings. And obviously, we see significant growth ahead in that core business, but also in the upcoming launch of LifePath Paycheck. Our LifePath Target Date franchise has about $470 billion in assets, generated $9 billion of flows in the first quarter, thanks to the funding of several large mandates. We have about an organic growth rate of 8%. So we're leading the market there in terms of growth and we continue to outperform relative to the industry. Again, we're building on a strong core business there. We had $25 billion of flows in '23, which was about 7% growth. We're the No. 1 DC investment-only, DCIO firm. We have 70,000 DC plans, and we're the only provider, I think that's really global. Most of the assets at BlackRock are investing to finance retirement, and we've been at the forefront of innovation and advocacy for retirement solutions throughout our history. It's a key part of our growth. And the innovation that we're doing in LifePath Paycheck, we think is exciting and a significant area of our future organic growth. Larry Fink -- Chairman and Chief Executive Officer As I said in my prepared remarks, we have 14 corporations that are preparing to transform their defined contribution plan to LifePath Paycheck. So the conversations we're having with so many other clients is enormous. Many clients wanted to see tool implementation of these plans. As we said in the prepared remarks, the first implementation of the first plan is going to be in the next few weeks. We'll have many announcements about that, and we plan to really make that a big issue for us going forward. We believe, as I said before, this is going to change retirement. The movement away from defined benefits to defined contributions have left many, many individuals stranded in making the decisions of their own retirement by themselves. And this eliminates some of the uncertainty for retirement. The target date has eliminated a lot of the variability of retirement, but there has been no transformation in terms of bringing -- once you are retired, how do you know what you have. And through this innovation of integrating investment strategies around insurance wrappers can really narrow the outcomes that the individual can have a very narrow corridor of what the dollar amount that they're going to be earning each month. And as I said in my letter, with growing longevity, retirement is going to become a bigger and bigger issue. And having this type of certainty really will alleviate some of the fear. As I said, our conversations are broad. And let me be clear, the conversations are also now beginning in Europe and other places, too. So we look at this as a major component of our future growth rates over the next three to five years. Obviously, it's not the highest fee-based product. It is like a target date product. But -- so it's -- but it can generate more connectivity with more clients, deeper relationships with all our clients. And so this is something that I'm very proud of what the firm has created, and I do believe it's going to transform BlackRock as a leader in retirement benefits. Operator Thank you. We'll go back to Patrick Davitt with Autonomous Research. Larry Fink -- Chairman and Chief Executive Officer Good morning, Patrick. Patrick Davitt -- Autonomous Research -- Analyst Good morning, everyone. Thanks. My question on Europe ETFs. Obviously, the active to passive equity flow mix continues to track more like the U.S. and Europe so far this year. So firstly, could you update us on the defensibility of your positioning around that theme? And to what extent you're seeing more aggressive price competition? And finally, higher level, to what extent you're seeing a real change in how ETFs are bought and sold in Europe that could portend this so-called trend continuing more indefinitely? Thank you. Martin Small -- Chief Financial Officer Thanks, Patrick. Really appreciate the question. As we mentioned, we had about $67 billion of iShares inflows in the first quarter, led by core fixed income -- The business is running in a very strong way, high single-digit asset growth -- base fee growth. All the trends globally are very strong. But we have been stressing, and I'm glad for the question, just the real strength and competitive position of the iShares business in Europe. European iShares continues to lead the market with about 30% market share of inflows. That's two times the inflows of the No. 2 player. And our inflows exceed the two and three players combined. Our iShares franchise in Europe is $850 billion AUM, that's bigger than next five players combined. So we think we have a real outsized opportunity to grow ETFs in the U.K. and Europe. And obviously, the competitive dynamics there, I think, are very, very different than they are here in the United States in terms of the buying units, how buying units are sold. This is largely a private banking market that uses exchange-traded funds through discretionary private management programs and iShares is really a very strong and preferred provider. I want you to think about it this way. The United States built trillions and trillions of dollars ETF business with a national best bid, best offer system, a unified securities regulator, national exchange. Europe has more fragmented markets and has been growing, growing, and growing. So we really see, obviously, regulation is trending favorable in Europe, the buying dynamics as very favorable, and iShares is in a great market leadership position there, we think, to post outsized growth. Operator Thank you. Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks? Larry Fink -- Chairman and Chief Executive Officer Yes, operator, one last comment. I want to thank everybody for joining us this morning and for your continued interest in BlackRock. Our performance is a direct result of our steadfast commitment to serving our clients in each and every client and evolving for the long-term trends ahead of their needs. We started 2024 with great momentum, and I strongly believe that there are more opportunities ahead for BlackRock more than any other time before. Thank you, everyone, and have a great quarter. Answer:

the BlackRock first-quarter 2024 earnings teleconference

Operator Good morning. My name is Katie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock, Inc. first-quarter 2024 earnings teleconference. Our host for today's call will be the chairman and chief executive officer, Laurence D. Fink; chief financial officer, Martin S. Small; president, Robert S. Kapito; and general counsel, Christopher J. Meade. [Operator instructions] Thank you. Mr. Meade, you may begin your conference. Chris Meade -- General Counsel Thank you. Good morning, everyone. I'm Chris Meade, the general counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, which was some of the factors that may result -- cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, I'll turn it over to Martin. Martin Small -- Chief Financial Officer Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the first quarter of 2024. Before I turn it over to Larry, I'll review our financial performance and business results. Our earnings release discloses both GAAP and as-adjusted financial results. I'll be focusing primarily on our as-adjusted results. BlackRock's first quarter results reflect sustained momentum across our entire platform. We ended the quarter with record AUM of nearly $10.5 trillion and one of the strongest opportunity sets ahead across multiple growth engines, including technology, outsourced solutions, and private markets. Momentum's accelerating, and we have line of sight into a breadth of significant mandates in investment management and technology, spanning client channels and geographies. Teams across BlackRock are energized and organized to execute on these opportunities and deliver BlackRock's platform to clients through world-class client service. We built BlackRock to be a structural grower with industry leadership in secular growth areas like ETFs, private markets, model portfolios, and technology. With supportive markets and more optimistic sentiment from clients, we're confident in our ability to both grow assets on behalf of clients and drive profitable growth for our shareholders. First-quarter long-term net inflows of $76 billion continued to lead the industry, driving positive organic base fee growth alongside double-digit growth year over year in revenue and earnings as well as 180 basis points of margin expansion. Excluding low-fee institutional index equity flows, we saw $100 billion of long-term net inflows in the quarter. As equity markets powered to record highs in the first quarter, investors who are waiting in cash missed out on significant returns across broader markets. With long-term investing, time in the markets is often more important than market timing. Although cash remains an attractive safe haven with the prospect of fewer rate cuts for 2024, the nearly 30% increase in equities over the last year continues to propel clients toward rerisking into stocks and bonds. Clients choose BlackRock for performance. They continue to consolidate more of their portfolios with us, which is driving our growth premium. With more clarity on interest rates and a supportive market backdrop, the assets we manage on behalf of our clients, our units of trust ended the quarter up $1.4 trillion from a year ago, an increase of 15%. Organic asset and base fee growth again accelerated into the end of the quarter, and we see broad-based momentum growing across client channels and regions. In the first quarter, BlackRock generated long-term net inflows of $76 billion, partially offset by seasonal outflows from institutional money market funds. Total annualized organic base fee growth of 1% reflected seasonally softer flows earlier in the quarter before coming back to target in March. First quarter revenue of $4.7 billion increased 11% year over year, driven by the impact of market appreciation over the last 12 months on average AUM and higher performance fees and technology services revenue. Operating income of $1.8 billion was up 17% and earnings per share of $9.81 was 24% higher versus a year ago, also reflecting higher nonoperating income. Nonoperating results for the quarter included $90 million of net investment gains, driven primarily by mark-to-market noncash gains on our unhedged seed capital investments and minority investment in Investec. Our as-adjusted tax rate for the first quarter was approximately 23% and included discrete tax benefits related to stock-based compensation awards that vest in the first quarter of each year. We continue to estimate that 25% is a reasonable projected tax run rate for the remainder of 2024, though the actual effective tax rate may differ because of nonrecurring or discrete items or potential changes in tax legislation. First-quarter base fees and securities lending revenue of $3.8 billion was up 8% year over year and up 5% sequentially, driven by the positive impact of market beta on average AUM and positive organic base fee growth. On an equivalent day count basis, our annualized effective fee rate was 3/10 of a basis points lower compared to the fourth quarter. This was mainly due to the relative outperformance of lower fee U.S. equity markets, client preferences for lower fee U.S. exposures, and lower securities lending revenue. Performance fees of $204 million increased from a year ago, primarily reflecting higher revenue from alternatives. Quarterly technology services revenue was up 11% compared to a year ago, reflecting sustained demand for our Aladdin technology offerings. Annual contract value or ACV increased 9% year over year. Beginning in the first quarter of 2024, earnings recognized from minority investments accounted for under equity method will be presented as part of our nonoperating results. Advisory and other revenue increased from a year ago, primarily reflecting this change. In addition, as many of you know, we updated the presentation of expense line items by including a new sales, asset and account income statement caption. This category includes distribution and servicing costs, direct fund expense, and sub-advisory and other sales, asset and account-based expense. Sub-advisory and other expense, which are variable noncompensation expenses associated with asset and revenue growth was previously reported within general and administration expense. We believe this change provides investors a clearer view of both BlackRock's variable noncompensation expense and G&A, which represents more fixed costs. It represents how we'll execute on our financial rubric of aligning investment spend with our highest conviction growth areas, variabilizing more of our expense base and generating fixed cost scale. Total expense increased 8% year over year, reflecting higher compensation, G&A and sales asset and account expense. Employee compensation and benefit expense was up 11%, primarily reflecting higher incentive compensation as a result of higher operating income and performance fees. G&A expense increased 6% due to the timing of technology investment spend in the prior year. Sequentially, G&A expense decreased 12%, reflecting timing of technology investment spend and seasonally higher marketing and promotional expense in the fourth quarter. While one quarter's results can be impacted by timing of spend, we expect technology to be one of our primary areas of investment within G&A. Sales asset and account expense increased 5% compared to a year ago, primarily driven by higher direct fund expense. Direct fund expense was up 7% year over year, mainly due to higher average index AUM. Sequentially, direct fund expense increased due to higher average index AUM in the current quarter and higher rebates that seasonally occur in the fourth quarter. Our first quarter as-adjusted operating margin of 42.2% was up 180 basis points from a year ago. As markets improve, we remain committed to driving operating leverage and profitable growth. BlackRock's industry-leading organic growth is a direct result of the disciplined investments we've made consistently through market cycles. Looking forward, we'll continue to prioritize investments with differentiated organic growth potential or that will expand operating leverage through enhanced scale. In line with our guidance in January, and excluding the impact of Global Infrastructure Partners and related transaction costs, at present, we would expect our headcount to be broadly flat in 2024, and we would also expect a low to mid-single-digit percentage increase in 2024 core G&A expense. Our capital management strategy remains consistent. We invest first, either the scale strategic growth initiatives or drive operational efficiency and then return excess cash to our shareholders through a combination of dividends and share repurchases. At times, we may make inorganic investments where we see an opportunity to accelerate organic growth and support our strategic initiatives. Last month, we announced our agreement to acquire the remaining equity interest in Spyder Rock Advisors, a leading provider of customized option overlay strategies in the U.S. wealth market. This transaction expands on BlackRock's minority investment in Spyder Rock Advisors made in 2021 and builds on BlackRock's strong growth in personalized separately managed accounts via Aperio and ETF mod portfolios. At present, we expect the transaction to close in the second quarter of this year, subject to customary closing conditions. In March, we issued $3 billion of debt to fund a portion of the cash consideration for our planned acquisition of GIP. Our offering consisted of three tranches of senior unsecured notes across five, 10, and 30 year maturities. The offering was well received by fixed-income investors, especially our inaugural 30-year bond. We currently have invested the proceeds of the offering at substantially the same rate as the cost of borrowing, effectively eliminating incremental cost of carrying additional debt prior to the close of the GIP transaction. We continue to target the third quarter of 2024 for the closing of the GIP transaction, which remains subject to regulatory approvals and other customary closing conditions. We repurchased $375 million worth of common shares in the first quarter. At present, based on our capital spending plans for the year and subject to market conditions, we still anticipate repurchasing at least $375 million of shares per quarter for the balance of the year, consistent with our January guidance. More positive sentiment from clients and in markets persisted into the first quarter. Clients increasingly turn to BlackRock to reposition and redeploy across their portfolios. First quarter long-term net inflows of $76 billion were positive across active and index strategies as well as each of our client and product types. ETF net inflows of $67 billion were led by core equity and fixed-income ETFs with net inflows of $37 billion and $18 billion, respectively. These inflows were partially offset by seasonal tax trading-related outflows from our U.S. style box exposure in Precision ETFs. As you'll hear from Larry, our Bitcoin ETF saw surging demand after launching in January, gathering $14 billion of net inflows in the quarter. This is just the latest example of BlackRock innovating to provide better access and transparency to a wider range of investment exposures. Retail net inflows of $7 billion were led by continued growth in Aperio as well as renewed demand for active fixed income. Financial advisors are increasingly looking to customize whole portfolios at scale, driving growth across our SMA and managed model platforms. Our partnership with Envestnet is one channel powering flows to model portfolios. We saw our best gross sales month ever on the platform and year-to-date organic asset and revenue growth has more than doubled compared to this time last year. Sales on the platform aren't just accelerating. They're diversifying. We similarly saw record gross flows in custom models and record AUM in our global allocation models, both of which have larger active components. Within SMAs, our previously mentioned acquisition of Spyder Rock Advisors will further enhance our product offerings and provide even greater personalization across our wealth segments. Institutional active net inflows of $15 billion were driven by our LifePath target date franchise and outsourcing mandates. We see significant momentum across our whole portfolio capabilities. Our pipeline remains strong as more and more clients turn to BlackRock for outsourcing solutions. Institutional index net outflows of $13 billion were concentrated in low fee index equities as several large clients rebalance their portfolios amid significant equity market appreciation in the last 6 months. Our private markets franchise saw $1 billion of net inflows. Continued demand for our liquid offerings was offset by alpha generation for our clients, reflected in over $3 billion of fund monetization and LP distributions or change in fee basis, primarily for more seasoned private equity solutions programs. Finally, BlackRock's cash management platform saw $19 billion of net outflows in the first quarter, in line with institutional money market industry trends. Our cash business can experience seasonal rotations in the first quarter as many institutional clients withdraw these liquid assets for operational purposes, including tax and bonus payments. Cash management flows were impacted by approximately $14 billion of net redemptions during the last week of March ahead of the Good Friday holiday. Outflows were driven by clients redeeming balances to have cash on hand during a time when many businesses are open, but the financial markets are closed. This phenomenon is not uncommon or unique to BlackRock. Balance has largely returned with approximately $20 billion of money market net inflows in the first week of April. BlackRock's differentiated business model has enabled us to continue to grow with our clients, driving industry-leading organic growth and margins. Looking ahead, as markets trend to be more supportive and clients rerisk, we see significant opportunity to expand our market share and consolidate our position to clients. We've set ourselves up to be a structural grower with the diversified platform that we've built. Enthusiasm is growing, momentum's building across the platform. All of us at BlackRock are excited about our future and the growing opportunities for BlackRock, for our clients, for our employees, and, of course, for our shareholders. With that, I'll turn it over to Larry. Larry Fink -- Chairman and Chief Executive Officer Thank you, Martin. Good morning, everyone and thank you for joining the call. BlackRock is partnering with clients to navigate structural and secular changes in business models, technology, monetary and fiscal policies, always staying focused on each and every client goal. Through this connectivity, we are having richer conversations with clients than ever before about their whole portfolio and, in many cases, deepening our relationships with them. This is driving accelerating momentum with a strong pipeline that has some of the best breadth of opportunities across all our client channels and regions that we've ever seen. BlackRock's integrated investment technology advisory platform and durable performance are resonating. In my conversations with clients around the world, I'm hearing about how they want to put their money to work. But they want to do it differently than they did in the past. They want their portfolios to be more holistically blending public and private markets active in an index. They want their portfolios to be nimble, customized, text-enabled. They want to work with fewer providers or maybe just with one provider. BlackRock is the only asset manager that can partner in this way, having the most diverse, integrated investment and technology platform in the industry. Clients around the world are choosing to do more with BlackRock, and this is resonating in our results. But I'm actually more excited about the building momentum we're seeing across our entire platform. BlackRock's AUM ended the first quarter at a new record of nearly $10.5 trillion, up $1.4 trillion or 15% over the last 12 months. Also, at that time, BlackRock has entrusted BlackRock of more than $236 billion of net new assets. BlackRock generated positive net flows across active and index and across all client types. And we grew our technology service revenues and ACV as clients leverage Aladdin to support investments, processes, and in their entire platform. We've had a number of real large marquee wins in Aladdin and are working on a number of significant new opportunities. Momentum remains strong as we grow with new and existing clients. We continue to deliver sustained asset and technology services growth at scale. BlackRock's operating income was up 17% year over year, and we increased our margin by 180 basis points. Earnings per share were up 24%. Activity is notably accelerating. As Martin said, we generated $76 billion of long-term net flows in the first quarter, which represents nearly 40% of last year's long-term flows in just the first three months of this year. And long-term net inflows across retail and ETFs and institutional active was actually $100 billion, which excludes the episodic institutional equity activity Martin mentioned. Some of these are public, some aren't, but over the last few months, we've been chosen for a breadth of mandate, both wealth and institutional clients across regions that will fund over future quarters and we're in active conversations on a number of unique broad-based opportunities, including several large mandates for Aladdin. There is still a record amount of cash on the sidelines and money market fund balances are now approaching $9 trillion. I think this stems from fear and uncertainty, but it's hard to achieve retirement or long-dated objectives by holding cash. Clients worldwide are coming to BlackRock for advice on where and how to deploy their capital, and in many ways, how to help them reduce that fear and putting that money to work. Being a growth company requires continued innovation, lots of investments, and intense client focus. BlackRock has invested ahead of these themes, we believe will define the next decade of asset management. I see the greatest opportunities I've ever seen for BlackRock for our clients and for our shareholders, and I'm very optimistic about the momentum into the rest of 2024 and beyond. The uncertain backdrop does not mean a lack of opportunities. Instead, we see great opportunities for investors across a number of structural trends with near-term catalysts. These include rapid advancements in technology and AI, the rewiring of globalization, accelerated economic growth in certain emerging markets, and an unprecedented need for new infrastructure. BlackRock is connecting with clients to these opportunities and providing them the confidence to continually investing in the long run. In a world where clients are looking for more certainty, the higher coupon, longer duration returns of infrastructure private markets are increasingly becoming more attractive. Demand for all -- for the infrastructure is surging around the world from telecom networks to power generation to transport hubs for data centers and new ways of securing energy. Over the last 12 months, BlackRock's infrastructure platform has delivered 19% organic asset growth. BlackRock's infrastructure franchise and our private markets business more broadly benefited from the firm's global footprint, our deep network of clients and distribution relationships, and access to high-quality deal flow. As we spoke in January, we believe the planned combination of BlackRock's infrastructure platform with GIP will provide clients with access to market-leading investments and operating expertise across infrastructure private markets. We have a deep conviction that this planned combination will be another transformational moment for BlackRock. It will be another example in our long-term history of staying ahead of client needs, positioning ourselves against accelerated macro trends. I believe this structured private markets are approaching the upward trajectory of their J curve just as ETF did when we announced our acquisition of BGI and iShares nearly 15 years ago. We always viewed ETF as a technology that facilitated investing. Since our acquisition of iShares, BlackRock has led in expanding the market of ETFs by making them more accessible by delivering new asset classes like bonds, investment strategies like actives. As a result of that success, the ETFs evolved beyond what started as an indexing concept. It is recognized as an efficient structure for a range of all investment solutions. First-quarter ETF net inflows of $67 billion reflected sustained demand across our client categories, led by core equity and body ETFs -- flows demonstrated accelerating activity with March accounting for more than half of the quarterly net inflows. And our flows in the month were 80% higher than the next largest issuer. We continue to innovate across our ETF platform to give our clients better access to the most diverse range of exposures in the industry. Our Bitcoin fund, which was launched in January, was the fastest-growing ETF in history, and already has nearly $20 billion in AUM. Our active ETF drove $9 billion of net inflows in the first quarter led by our equity factor rotation and flexible income ETFs. These products offer alpha generation with some of our leading investors at BlackRock in a more efficient, more transparent ETF wrapper. Across BlackRock, we continue to scale our product offerings to democratize access to new strategies, increase transparency, and drive cost efficiency. To that end, last month, we announced the launch of our first tokenize fund as well as our minority investment in Securitized, a blockchain-based tokenization platform. This builds on our existing digital asset strategy. And we'll continue to innovate in new products and wrappers all with the aim of providing greater access and customization to each and every of our clients. We continue to see demand for customization with our own wealth business as financial advisors, and their clients they serve increasingly turn to SMAs to personalize their portfolios. We acquired Aperio three years ago in anticipation of this trend, and organic growth in that business has been over 20% since our acquisition. To further booster our SMA capabilities, we announced our planned acquisition of the remaining equity interest of Spyder Rock, as Martin discussed. Among wealth clients, we are also seeking the renewed demand for our high-performing active fixed-income strategies with particularly strength in high-yield and unconstrained bond funds. In the post-QE market, we see more opportunity ahead for active management with greater potential for selective risk taking to generate superior returns. Quarterly active net inflows of $15 billion reflects strength in systematic equity and fundamental fixed income, including the funding of several institutional outsourcing mandates. Across our active franchise, BlackRock has delivered durable investment performance with 82%, 90%, and 93% of our fundamental equity, systematic equity, and taxable fixed income AUM above benchmarks or peer medium for the last five years. Our active investment insights, our strong investment performance, our integrated Aladdin technology differentiates BlackRock and ultimately drives better outcomes for our clients. We first built Aladdin as a risk management enabler, empowering investors to better understand their portfolios through technology. Today, Aladdin is much more than that. Our clients are leveraging Aladdin as a whole enterprise operating system, connecting multiple asset classes, data, technology partners, and a single platform. Aladdin's integrated offering continues to resonate with the majority of our sales this quarter, spanning multiple Aladdin products. We are in the late-stage conversation with several large potential Aladdin clients, and we look forward to executing on more opportunities ahead to be bringing the benefits of Aladdin to new clients and by expanding relationships with our existing clients. From the early days of developing Aladdin to now managing nearly $10.5 trillion across our platform, our ambition has always been to help investors benefit from the growth of the capital markets and achieve financial futures that they seek. More than half of the assets we manage are related to retirement, making this an outcome central to many of our client conversations. BlackRock has been at the forefront of innovation and advocacy for retirement solutions for years. In fact, we pioneered the first target date fund called LifePath back in 1993, when we introduced the concept. It was a revolutionary, eliminating some of the guesswork retirement savings by automatically adjusting their investment mix over their time frame. Fast forward 30 years, target date funds have become the most common default investment option in defined contribution plans in the United States, where we're entrusted to manage the retirement assets of 35 million Americans. We continue to evolve LifePath to help deliver the retirement outcome participants need. That has meant introducing LifePath options in new countries and in new wrappers such as LifePath Target Date ETFs we launched last year. Our LifePath Target Date franchise now has nearly $470 billion in assets and has risen over $115 billion in assets just over the last five years. In addition to helping people save for retirement, we also work to expand the LifePath solution to help people spend throughout their increasingly longer retirement. Society focuses a tremendous amount on helping people live longer and healthier lives, but spend just a fraction of that time and effort on helping them afford those extra wonderful years. The shift from pension to defined contribution models have put the large as the large burden on individual savers. They have to first build up the retirement stage, which in and itself is a formidable challenge. Then even as they have this sizable savings at retirement, there's not much guidance about how to spend and or not -- and how not to overspend these savings. We've been working for years to address this de-accumulation challenge, and we believe this will help increase hope in America. In 2020, we announced the LifePath Paycheck, the next generation of targeted solutions. It will include an option to purchase a lifetime income stream from insurers selected by BlackRock and is expected to go live toward the end of the month. We are partnering on implementing LifePath Paycheck right now with 14 planned sponsors, representing over $25 billion in target date AUM and now have 0.5 million participants. We'll pair the flexibility of a 401(k) investment with a potential for a predictable paycheck life income stream similar to a pension. I believe it will be in one day, the most used investment strategy in defined contribution plans. This pioneering structure can help address global gaps in funding retirement security, improve the quality of life and retirement for millions of Americans and bring back hope for those who were retiring. It's been four years since the start of the pandemic and the subsequent geopolitical upheavals. Leaders of countries, leaders of companies need to create hope for the future for all of their stakeholders. That's certainly what we're doing at BlackRock. I've spoken before about the fear we see today, some is stoked by increasingly political polarization in the world. Our industry and BlackRock have been a subject of political dialogue mostly in the United States. We recognize some of this with being the industry leader. We have done a better job now of telling our story so that people can make decisions based on facts, not on lies and not on misinformation or politicization by others. Unfortunately, there are still others out there who put short-term politics, who continuously lie about these issues. They are putting those issues above the long-term fiduciary responsibilities. As a fiduciary, politics should never outweigh performance. I do believe that with the vast majority of our clients, our long-term fiduciary approach and performance are resonating. We heard it in our dialogue with them, and we see it in our flows, and I know all of you as shareholders see it in our flows. Over the last past five years, clients have entrusted BlackRock with an aggregate of $1.9 trillion of total net inflows, $1 trillion over the last three years and nearly $300 billion last year. It has been in the United States where client-led inflows in every one of these areas. It is true also in the first quarter of this year. This is in all is in the environment where the industry has experienced flat or negative flows, BlackRock saw inflows. Our sustained growth, our accelerating momentum are made possible by the trust of our clients and shareholders and the dedication of all the BlackRock people. Across our firm, we're delivering BlackRock to meet all our clients' individual needs, we're helping each and every client unlock their new opportunities and the power of BlackRock's integrated platform has enabled us to drive better outcomes for each and every client and providing them a differentiated growth for them, which then entails providing differentiating growth for you, our shareholders. I believe at this time, our momentum has never been stronger. The opportunity we have in front of us has never been stronger. And I look forward at BlackRock to be delivering on a significant broad base of opportunities across the world, across our platform, across all of our products, and delivering the responsible fiduciary responsibilities that we provide to each and every client. Operator, let's open it up for questions. Questions & Answers: Operator [Operator instructions] We'll go first to Craig Siegenthaler with Bank of America. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst Hey. Good morning, Larry. Larry Fink -- Chairman and Chief Executive Officer Hey, Craig. Good morning. Craig Siegenthaler -- Bank of America Merrill Lynch -- Analyst So my question is on your commentary around building momentum and line of sight into significant fundings. So if we exclude fee rate issues like divergent beta, when BlackRock can get back to 5% base -- organic growth? And with the law of large numbers a factor, what is your confidence that this objective is still achievable at your current $10 trillion AUM size? Larry Fink -- Chairman and Chief Executive Officer Martin? Martin Small -- Chief Financial Officer Thanks, Craig. It's Martin. Listen, I'd start by like Q1 net flows were solid at $76 billion. And on a more granular look, we just see durable growth in that flows mix. We had about $100 billion across ETFs, retail, institutional active, institutional fixed income. Of course, we saw some of these $19 billion redemptions from cash with the Good Friday quarter-end dynamic and the $26 billion rebalanced away in institutional index equities. You know those institutional index equities happen from time to time. They're not meaningful revenue impacts or fee rate detractors, but they weigh on kind of the long-term flow totals. When we look at this core momentum on flows, excluding the episodic index redemptions, Q1 flows were $100 billion. It's a healthy trajectory. It's an affirmation for us that we're focused on the right things to grow with clients. And on base fees, the management team here, we really feel like we've turned a corner. Over the last two quarters, we see really solid trends in organic fee growth. They're really some of the best since the end of 2021. We saw excellent momentum to finish the fourth quarter, which we talked about on the last call. We closed out in November and December higher than target. And this quarter, March new base fees annualized at target after we had a slower start. So over the last six months, we see organic base fee growth ticking up and trending more halfway or halfway plus to our long-term targets. It's not a straight line, but we're moving to target. And I say this because we see key positive trends in these sort of critical base fee growers for us. Retail posted $7 billion of flows in that 40 to 50 basis point bucket. Money is going back to work, redemption rates are moderating. We see really excellent momentum in active overall with $15 billion of flows and good velocity in institutional and retail active fixed income, in particular, at $9 billion. And I think what Larry is getting at, we've been selected for a breadth of mandates across investment management and technology that we see supporting 5% organic growth and will fund over future quarters. Our planned acquisition of GIP will help us build and bump from there. So we look forward to closing that transaction, executing on these mandates, and keeping you guys posted on our progress. Larry Fink -- Chairman and Chief Executive Officer I would just add, the breadth of conversations we're having with clients worldwide. Rob Kapito right now is in Asia, the type of conversations we had there. The opportunities we see in Europe, in the U.K., Middle East. These are just very large opportunities, large mandates, big opportunities. And if you then overlay the opportunities and you overlay what infrastructure can do related to the build-out of power with all the AI promise and the need for data centers and the need for power is going to be extraordinary. And all of this is going to lead to much bigger opportunities. And then more importantly, more and more clients are going to be seeking those organizations who deliver the proprietary differentiated products. Operator Thank you. We'll go next to Michael Cyprys with Morgan Stanley. Michael Cyprys -- Morgan Stanley -- Analyst Hey. Good morning. Thanks for taking the question. Just wanted to ask about balancing investment spend with margin expansion. In the past, we've heard BlackRock talk about being margin aware. So just curious how the thinking of that has evolved. What does that mean in today's environment? And how might you quantify the opportunity for margin expansion over time? How do you see some of the levers to achieve that? Martin Small -- Chief Financial Officer Thanks, Mike. Our approach to shareholder value creation is obviously to generate differentiated organic growth, it's to drive operating leverage in a premium margin and it's to execute on a consistent capital management strategy. We have a strong track record of investing in our business for growth and scale and expanding profitability. And I want to emphasize, it's not just about growth. It's about profitable growth over the long term. And that growth comes from making continued investments in our business. And I've talked a lot about on the last several calls and obviously, some of the other meetings we've had, we're looking to size our operating investments in line with the prudent lens on organic growth potential. We're aiming to put more flexibility in our cost base and variabilize expenses where we can. And most importantly, we're looking to generate fixed cost scale, especially through investments in technology. We're consistently delivering industry-leading margins, which is a goal, and we've expanded our margin in six out of the last 10 years. And I think those scale indicators are coming through in our results. We're delivering profitable growth. We generated 180 bps of margin expansion year on year, while revenue op income and EPS all rose double digits. And we delivered 60 basis points of sequential improvement. Over the last 18 months, AUM's up $2.5 trillion, while headcount is actually flat or slightly lower. So I feel like we're delivering benefits of scale and productivity, which is showing in margin expansion. As I mentioned, we're planning for full-year low to mid-single digits core G&A growth, flat headcount, both excluding the GIP transaction. So you've heard on our last few calls, and I hope today and some of Larry's color, we're looking to drive more fixed cost scale. That comes from technology. It comes from automation. It can come from AI. It comes from organizational design, global footprint -- printing using some of our innovation hubs around the world. We see those as our major levers to drive margin expansion. And in the end, we're just looking to optimize organic growth in the most efficient way possible, deliver growth for clients and shareholders and ultimately expand our margin over time. Larry Fink -- Chairman and Chief Executive Officer Michael, I would just add, as we continue to be investing in AI, our most recent experience of having $2.5 trillion more assets with the same headcount is a real good indication of how we are trying to drive more efficiencies, more productivity. I think this is critical. We're going to bring down an inflation in America. This is how it's going to have to be done, driven through technology and -- which will increase more productivity. And overall, and actually through that process, we continue to drive more productivity. What it also means is rising wages. So people do more and the whole organization is doing more with less people as a percent of the overall organization. That is really our ambition. Operator Thank you. Your next question comes from Ken Worthington with J.P. Morgan. Ken Worthington -- JPMorgan Chase and Company -- Analyst Hi. Good morning and thanks for taking the question. Fixed income flows have picked up for U.S. -- the U.S. mutual fund industry so far this year, but the same data services that track the industry don't show a proportionate pickup for BlackRock. Your fixed-income ETF sales were solid at $18 billion, but below levels seen last year. Can you talk about the competitive landscape for fixed-income retail and fixed-income ETFs, both inside and outside the U.S.? And to what extent do you think investor appetite may have changed in 2024? Rob Kapito -- President So Rob here. The conversations that we're having across all of the distribution systems are about a new allocation into fixed income. It's been very much clouded by all the noise around inflation and the Fed. So the yield curve remains inverted and investors are currently getting paid to wait. And a more balanced term structure of interest rates is going to be the indicator to watch, and that's where we'll start to see demand for intermediate and longer-term fixed income. So the first quarter for us flows of $42 billion, which I think is considerable, we saw the strength in the bond ETFs from immunization activity in institutional and about 25% of the flows were into active strategies. So we're seeing renewed demand for active fixed income and that's led to flows into the high yield, the unconstrained, and the total return strategies and the fact that our longer-term performance has about 93% of our taxable active fixed income AUM above the benchmark or peer medium in the last five years are really set up to capture this. But I do think the noise that's out there focused on inflation and the fact that you can still earn 5%, which is very attractive right now is causing the delay in more allocations to fixed income. The other part of why I'm more encouraged is we are finding a growing interest in high-performing active fixed-income strategies alongside private market strategies. So I think that we stand to bode very well once you see some changes in the yield curve. Operator Thank you. We'll go -- Larry Fink -- Chairman and Chief Executive Officer Let me just add, operator, to Ken's question. Ken, I do believe as an industry, the large pension funds that have an overallocation of private equity and the rotation of money in the private equity area has slowed down precipitously. We are also seeing evidence that more and more clients are keeping a higher balance of cash to meet their liability discharges. And so without the momentum and the velocity of money in private equity, they actually have to keep higher cash balances, too. So I think that is something to be watched to. If there was an unlock in the movement of private equity, I do believe you would see a factor allocation for the industry in fixed income and other income-producing products. Operator Thank you. We'll go next to Alex Blostein with Goldman Sachs. Larry Fink -- Chairman and Chief Executive Officer Hi, Alex. Alex Blostein -- Goldman Sachs -- Analyst Hi, Larry. Good morning, everybody. My question is related to private markets and GIP. Larry, you referred to it again this morning as a transformational deal for BlackRock maybe similar to some of the other large ones you've done. Does this give you enough in terms of what you're trying to accomplish in the private markets broadly? Or do you expect to pursue more acquisitions that are related in this area? And I guess somewhat related to that, growth in private markets, retail products has been quite significant and still early days. Maybe just remind us on how BlackRock is pursuing that opportunity. Martin Small -- Chief Financial Officer Hey, Alex. How are you? It's Martin. I'll offer a few thoughts, and then Larry will jump in. Let's say, look, all of our clients continue to increase their allocations to private markets. That's what drove our acquisition of eFront. It's what drove our planned acquisition of GIP. And it's also a great focus of the organic investments we've made to build in illiquid alternatives business of size. There are sort of liquid alternatives business. We've reached $167 billion of assets, roughly $140 billion fee paying. We had a good quarter there. Infrastructure and private credit deployment added $1 billion of inflows offset by a return of capital that I talked about. We're getting close on our final closes for our BlackRock Infrastructure IV fund for decarbonization partners, which has been a great first-time funded vintage. We've got $30 billion of committed but uninvested capital. So there's good dry powder in the system. As Larry mentioned, we're originating really strong unique transactions there. So we think our capabilities are expanding in a way that's going to plan. Just yesterday, we announced an infrastructure debt deal with Santander where we're going to be financing about $600 million of infrastructure loans in a structured transaction. And we just see good fundraising momentum, which we think we can kick into next year with GIP. Since 2021, we've had $140 billion of gross capital across the platform, continue to see good momentum with clients. And to the topic you mentioned, we've been building out our semi-liquid products for retail with credit strategies. Our credit strategy is interval funds and our nontraded credit BDC BDEBT, have a combined $1 billion plus of AUM. We received a really important placement for BDEBT at the national wirehouse. So we think that will be a strong seller in for organic growth. And then finally, that planned acquisition with GIP is going to really extend our capabilities. We think the business can be a much stronger platform for capital formation of scale and build on this philosophy we have in illiquid alternatives. We also think there's a great opportunity to bring GIP's capabilities to private wealth globally, retail retirement platforms in the U.K. and Europe with the LTIP and LTAP structures. And obviously, we'll keep you updated on our progress. Larry Fink -- Chairman and Chief Executive Officer I would just add that the feedback we're having from clients, including a dinner I had with a major energy company last night. The opportunity we have for driving more unique proprietary origination is going to be driving accelerated growth for us in the private markets, especially in infrastructure. I do believe the combinations of our two organization is going to open up so many more avenues. Avenues with companies, but also avenues of countries. And that -- being said, look, we're always in the market and are looking for different opportunities and we're not slowing down, looking at different opportunities. We're not here to suggest we're doing anything that is forthcoming because the number one through five thing to do is to close GIP. But the doors are knocking at BlackRock to see if there's other opportunities we want to we want to pursue. And if it makes sense one day, we will continue to be open minded to pursue more private market opportunities. Operator Thank you. We'll go next to Dan Fannon with Jefferies. Dan Fannon -- Jefferies -- Analyst Thanks. Good morning. Martin, for your comments on improving trends throughout the quarter for flows, can you put in context what that means for maybe exit fee rate? And also on this pipeline of activity that's building, can you talk about the mix of fees and products more specifically and how that might inform your base fee outlook going forward? Martin Small -- Chief Financial Officer Yeah. So thanks, Dan. As I mentioned, we see good base momentum. At the end of Q4, we were running at hotter than target. At the end of this quarter, we're at target. And as I mentioned, when we look at the trends over months, not days, we feel like we're half or halfway plus to our target growth. So we've got good base fee momentum. First quarter base fees, excluding securities lending, were $3.6 billion, which is up 9% year on year, which is largely due to the impact of market movements on AUM and organic growth. And if -- the Q2 entry fee rate ex-fee lending is pretty much flat compared to the Q1 fee rate on a day count equivalent basis. But overall, I think as we see good flows into active with the $15 billion we've had, as I mentioned, retail flows of $7 billion coming in. We see good fee rate trends, which we think are about -- mostly about mix. We focus really on driving organic base fee growth in the most efficient way possible, focusing on the clients, focusing on the investments they want to make. We don't focus on a specific fee rate or product. We focus on the clients and the fee rate is more of an output. But the trends in terms of where we're raising assets on the fee rates we think are good. But as I mentioned, Q2 fee rate -- Q2 entry fee rate excess funding is flat compared to the Q1 fee rate on the same day count. Operator We'll go next to Bill Katz with TD Cowen. Bill Katz -- TD Cowen -- Analyst OK. Good morning, everybody and thank you so much for taking the question. I appreciate the update. Maybe a different vein. Your performance fees continue to run pretty high. And just sort of wondering, are we reaching a new level of normalized performance fees? And how might that translate into sort of the comp ratio as we look ahead, particularly as you continue to migrate to a bigger pool of private markets post-GIP? Martin Small -- Chief Financial Officer Thanks, Bill, for the question. We appreciate it. So on the performance fees of $204 million in the quarter, obviously, they're up about four times year on year. If you could put yourself in a time machine and think back to that first quarter in '23, it was a really difficult market. We had SVB. We had some vol in the rate markets, etc. So I think it was a tough time. This quarter, we've really seen good performance coming through on our teams, which has been very, very strong, and I think reflected in those performance fees. Rough justice, about half of that performance fee is coming from kind of our private equity funds and private equity programs where we had some very successful realizations that Larry talked about last year, which was created in some of the distributions associated with that. And the other half is more in liquid hedge funds in our strategic equity hedge funds and some of our systematic strategies as well. Ultimately, our goal is to deliver long-term performance with clients and where we see performance fee revenues picking up, obviously, there's healthy alignment there and more supportive markets, and stronger markets and strong performance, we'd expect a lot of that leverage to drop to a lower comp to revenue ratio. But ultimately, talent is one of our key investments, and we'd expect it to be on a go-forward basis. Operator Thank you. We'll go next to Brian Bedell with Deutsche Bank. Brian Bedell -- Deutsche Bank -- Analyst Great. Thanks. Good morning, folks. Thanks for taking my question Maybe just to focus on the multi-asset category and a couple of areas within that. I think, Martin, you were talking about obviously the build of the organic growth pipeline and also in conjunction with Larry, with your comments about the conversation pipeline. Talk about two areas, in particular, as that developed throughout the year. That would be OCIO deals and then also, as we start up LifePath Paycheck, how you anticipate that contributing to organic growth, I guess, as the year unfolds, obviously very early, but even over the next couple of years. Martin Small -- Chief Financial Officer Sure. Thanks so much for the question. Appreciate it. I guess maybe I can start with a little color on the multi-asset flows, and then Larry can comment on LifePath Paycheck. So multi-asset strategy saw inflows in the quarter of about $5 billion after we had a really strong 2023 with $83 billion. Those strong inflows were driven by the continued demand for our LifePath target date offerings. And obviously, we see significant growth ahead in that core business, but also in the upcoming launch of LifePath Paycheck. Our LifePath Target Date franchise has about $470 billion in assets, generated $9 billion of flows in the first quarter, thanks to the funding of several large mandates. We have about an organic growth rate of 8%. So we're leading the market there in terms of growth and we continue to outperform relative to the industry. Again, we're building on a strong core business there. We had $25 billion of flows in '23, which was about 7% growth. We're the No. 1 DC investment-only, DCIO firm. We have 70,000 DC plans, and we're the only provider, I think that's really global. Most of the assets at BlackRock are investing to finance retirement, and we've been at the forefront of innovation and advocacy for retirement solutions throughout our history. It's a key part of our growth. And the innovation that we're doing in LifePath Paycheck, we think is exciting and a significant area of our future organic growth. Larry Fink -- Chairman and Chief Executive Officer As I said in my prepared remarks, we have 14 corporations that are preparing to transform their defined contribution plan to LifePath Paycheck. So the conversations we're having with so many other clients is enormous. Many clients wanted to see tool implementation of these plans. As we said in the prepared remarks, the first implementation of the first plan is going to be in the next few weeks. We'll have many announcements about that, and we plan to really make that a big issue for us going forward. We believe, as I said before, this is going to change retirement. The movement away from defined benefits to defined contributions have left many, many individuals stranded in making the decisions of their own retirement by themselves. And this eliminates some of the uncertainty for retirement. The target date has eliminated a lot of the variability of retirement, but there has been no transformation in terms of bringing -- once you are retired, how do you know what you have. And through this innovation of integrating investment strategies around insurance wrappers can really narrow the outcomes that the individual can have a very narrow corridor of what the dollar amount that they're going to be earning each month. And as I said in my letter, with growing longevity, retirement is going to become a bigger and bigger issue. And having this type of certainty really will alleviate some of the fear. As I said, our conversations are broad. And let me be clear, the conversations are also now beginning in Europe and other places, too. So we look at this as a major component of our future growth rates over the next three to five years. Obviously, it's not the highest fee-based product. It is like a target date product. But -- so it's -- but it can generate more connectivity with more clients, deeper relationships with all our clients. And so this is something that I'm very proud of what the firm has created, and I do believe it's going to transform BlackRock as a leader in retirement benefits. Operator Thank you. We'll go back to Patrick Davitt with Autonomous Research. Larry Fink -- Chairman and Chief Executive Officer Good morning, Patrick. Patrick Davitt -- Autonomous Research -- Analyst Good morning, everyone. Thanks. My question on Europe ETFs. Obviously, the active to passive equity flow mix continues to track more like the U.S. and Europe so far this year. So firstly, could you update us on the defensibility of your positioning around that theme? And to what extent you're seeing more aggressive price competition? And finally, higher level, to what extent you're seeing a real change in how ETFs are bought and sold in Europe that could portend this so-called trend continuing more indefinitely? Thank you. Martin Small -- Chief Financial Officer Thanks, Patrick. Really appreciate the question. As we mentioned, we had about $67 billion of iShares inflows in the first quarter, led by core fixed income -- The business is running in a very strong way, high single-digit asset growth -- base fee growth. All the trends globally are very strong. But we have been stressing, and I'm glad for the question, just the real strength and competitive position of the iShares business in Europe. European iShares continues to lead the market with about 30% market share of inflows. That's two times the inflows of the No. 2 player. And our inflows exceed the two and three players combined. Our iShares franchise in Europe is $850 billion AUM, that's bigger than next five players combined. So we think we have a real outsized opportunity to grow ETFs in the U.K. and Europe. And obviously, the competitive dynamics there, I think, are very, very different than they are here in the United States in terms of the buying units, how buying units are sold. This is largely a private banking market that uses exchange-traded funds through discretionary private management programs and iShares is really a very strong and preferred provider. I want you to think about it this way. The United States built trillions and trillions of dollars ETF business with a national best bid, best offer system, a unified securities regulator, national exchange. Europe has more fragmented markets and has been growing, growing, and growing. So we really see, obviously, regulation is trending favorable in Europe, the buying dynamics as very favorable, and iShares is in a great market leadership position there, we think, to post outsized growth. Operator Thank you. Ladies and gentlemen, we have reached the allotted time for questions. Mr. Fink, do you have any closing remarks? Larry Fink -- Chairman and Chief Executive Officer Yes, operator, one last comment. I want to thank everybody for joining us this morning and for your continued interest in BlackRock. Our performance is a direct result of our steadfast commitment to serving our clients in each and every client and evolving for the long-term trends ahead of their needs. We started 2024 with great momentum, and I strongly believe that there are more opportunities ahead for BlackRock more than any other time before. Thank you, everyone, and have a great quarter.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and thank you for standing by. Welcome to the Q1 2024 IMAX Corporation earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker Jennifer Horsley, head of investor relations. Please go ahead. Jennifer Horsley -- Senior Vice President, Investor Relations Good afternoon, and thank you for joining us for IMAX's first-quarter 2024 earnings conference call. On the call today to review the financial results are Rich Gelfond, chief executive officer; and Natasha Fernandes, our chief financial officer. Rob Lister, chief legal officer is also joining us today. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our earnings press release and the slide presentation have been posted on the Investor Relations section of our site. Our historical Excel model is posted to the website as well. I would like to remind you of the following information regarding forward-looking statements. Today's call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause our actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today. And we undertake no obligation to update these statements as a result of new information future events or otherwise. During today's call references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures as well as a reconciliation to non-GAAP financial measures are contained in this morning's press release and our earnings materials, which are available on the Investor Relations page of our website at imax.com. With that, let me now turn the call over to Mr. Richard Gelfond. Rich? Rich Gelfond -- Chief Executive Officer Thanks, Jennifer, and thanks everyone for joining us today. IMAX powers awe-inspiring experiences for audiences around the world. We partner end-to-end with the greatest filmmakers and creators working today to help them realize their visions to the fullest. Deployed at scale globally, we deliver Hollywood and international blockbusters, original documentaries, and immersive events across about 90 countries and territories worldwide. Our technology, our deep relationships with filmmakers, our global footprint, all of it combines to make IMAX a wholly differentiated platform, which is why we are a consistent winner in the media and global entertainment landscape. The company delivered solid results in the first quarter, thanks to a record-breaking surge in March that bodes well for another strong year ahead. Year-to-date, we delivered another 17 signings globally, including agreements in growth markets like India, Thailand, and Turkey that further diversify our footprint. Our first-quarter global box office of $261 million marks our third highest grossing Q1 ever, capped off by our best March ever, despite limited content owing to the strikes last year. Domestically, we delivered a remarkable 5.9% of the overall box office, our highest quarterly market share ever in North America, despite accounting for only 1% of the screens. I'm going to repeat that again. Almost 6% of the domestic box office on only 1% of the screens, it's an incredible number. And we drove strong profitability, including gross profit margin of 59% and total adjusted EBITDA margin of 40%. Our Q1 results are consistent with the full-year guidance we issued earlier this year. From the beginning, we've said that 2024 will be better at the box office than many pundits predicted. In the wake of Dune 2 and Godzilla x Kong, the world is coming around to our point of view. And as we said before, we expect 2025 to be a strong growth year. Our momentum is fueled by a virtuous cycle in our business. Global moviegoing is shifting rapidly to IMAX as a result of global box office market share and indexing are all at near time highs, and this is fueling sales activity, particularly in the rest of the world, high PSA markets where we're prioritizing our network growth. Studios and filmmakers see this and lean into IMAX, filming with IMAX cameras, leading with IMAX exclusive events and partnerships, and making the IMAX platform a centerpiece of their marketing. This was evident at the recent CinemaCon Movie Conference, where IMAX was heavily featured in studio presentations, trailers, and filmmaker remarks. As Marvel Chief, Kevin Feige said from the stage at the Disney presentation, what IMAX does to get people out of their homes and into your theaters is second to none. Creators, content owners, and brands beyond Hollywood and across the spectrum see this and want to work with IMAX, yielding opportunities to open our content aperture across music, gaming, sports, live events, and more. Local language films and music experiences have been a strong contributor to our results year-to-date, and this diversifying content portfolio across awe-inspiring experiences from gaming franchises to sports leagues to live global events further strengthens our differentiated offering for consumers. The wheel continues to turn and accelerate, which is why we're very confident in our ability to drive future growth for the company. Today, I'd like to offer updates on number one, our global network and number two, our content slate. I'll then hand it over to Natasha to go through our financial results before taking your questions. First, 2023 was a strong year for IMAX network growth in which we levered off our box office momentum to achieve significant gains in sales activity and network growth. We also further diversified our footprint of the 128 system installs we completed in '23 and IMAX records 61 were in international markets outside of North America and China. The rest of the world opportunity for IMAX is very strong. The IMAX network is only 33% penetrated in these markets. Despite a slower start for the global box office this year, we've kept up the momentum delivering a flurry of system signings in key markets year-to-date. We completed agreements for new systems in a diverse collection of markets, including India, Thailand, Turkey and China this year. And we have further significant agreements in the immediate horizon. With the slate strengthening in the second half of '24 and an extremely promising outlook in '25 and '26, we expect sales activity and installations to accelerate. Turning to the outlook for our content portfolio, it is indeed very promising. Dune: Part 2 and Godzilla x Kong, both film for IMAX titles, provided a jolt to the global box office and demonstrated also two very positive trends. First, demand for movie going in the marketplace is strong and the '24 slate holds more promise than many have predicted. And second, quite simply, consumers recognize that IMAX is a superior experience. The stories people want to see and hear are in IMAX, and we are fast becoming appointment viewing for the biggest cinematic events. Oppenheimer, a film Christopher Nolan conceived and film very specifically for IMAX, won eight Academy Awards and crossed $190 million in IMAX box office, entering our top five releases of all time. Dune: Part 2 is now a top 10 release of all time with more than $143 million in global box office to date. We generated a stunning 21% of the film's total gross. In the wake of Oppenheimer, we released a limited number of 70-millimeter prints of Dune: Part 2 which earned sellouts for weeks on end. IMAX 70 millimeter film, the absolute gold standard of cinema with up to 18K resolution is surging in popularity, and we will continue to capitalize on this, next with film prints for the highly anticipated Joker sequel coming out this October. Godzilla x Kong has also performed very well for IMAX. We delivered 11% of the film's domestic opening, even though our entire film network, including top-tier locations in New York and Los Angeles, continued to play and perform very well with Dune, which we're still playing that weekend. Film for IMAX releases offer the best possible cinematic experience, and as a result, Film for IMAX is a coveted point of distinction for filmmakers and a significant driver of box office and indexing. More than ever, the IMAX experience is as much about content creation as it is about content delivery. We currently have more films in production shooting with IMAX cameras than at any point in our history. Next year, we have an unprecedented run in which every IMAX release from May through September will be filmed with IMAX cameras. That includes Mission Impossible 8, two Marvel films, the forthcoming Formula 1 film starring Brad Pitt from Top Gun: Maverick director, Joe Kosinski, Superman from DC, How to Train Your Dragon, and many more. And earlier in '25, we'll have the new project from Michael B. Jordan and Black Panther Director Ryan Coogler, which is shooting with IMAX film cameras, as well as the J. J. Abrams produced IMAX shot Flowervale Street. As I've said, our slate is significantly committed for most of the year in 2025. And 2026 looks perhaps even stronger with carryover from Avatar 3, as well as new installments of Avengers, Star Wars, Batman, Super Mario Brothers, Toy Story, and Wicked, along with our expanding portfolio of local language, documentaries, and events experiences. Even for releases not filmed with IMAX cameras, we are seeing filmmakers and studios lean more heavily into the IMAX platform. For instance, Disney has made IMAX a centerpiece of its promotional campaign for Kingdom of the Planet of the Apes, a promising title coming out shortly, including prominent IMAX placement and advertising during major events like the NCAA tournament. And we'll see a similar focus in Warner Brother's campaign for Furiosa as it rolls out. Our success continues to yield opportunities to open our content aperture and expand further beyond Hollywood blockbusters. On May 17th, we released the first new IMAX original documentary under our revamped strategy, The Blue Angels, produced in partnership with J.J. Abrams and Glen Powell. This film very much represents our aspiration to create blockbusters. It was shot by the same team behind Top Gun: Maverick, and its aerial footage rivals anything in that mega hit. And it will roll out in a new extremely advantageous model for us with a one week exclusive engagement across our commercial network domestically and in select international markets. Availability thereafter on Amazon Prime Video to which we sold the streaming rights and later in '24 or early '25, a 45-minute version of the film will release in our institutional theaters. We have several more original blockbusters in our pipeline, including the upcoming Stormbound with producer Adam McKay. We also partnered with Amazon to make the launch platform for Jonathan Nolan's new series, Fallout, with a seven city IMAX exclusive premier screening event. Fallout is topping the streaming charts and has emerged as one of the Amazon Prime Video's best performing series of all time. We'll have an IMAX exclusive run and live concert event for the forthcoming Disney+ release, The Beach Boys, a documentary from legendary filmmaker Frank Marshall. The release will continue to build our recent momentum in music with Q1's Queen Rock Montreal and Andre 3000 experiences. Queen alone grossed more than $5.5 million in IMAX and was subsequently licensed by Disney+ as an IMAX Enhanced exclusive in the home. And IMAX was the exclusive premier partner for this month's concert event for BTS's SUGA, which earned $2 million in IMAX box office for two showtimes in select theaters. To close, IMAX continued to drive positive momentum in the first quarter, setting the table for a very promising period, which will continue. Let's be clear, the only premium entertainment platform with our filmmaker relationships, global scale, and patented technology is IMAX. We continue to drive global network growth with an eye toward expansion into underpenetrated markets where moviegoing is strong and increasing. Our diversified content strategy with Hollywood and local language blockbusters, IMAX documentaries, and new events and experiences is delivering great results. Q1 was among our best of all time at the global box office. Audience demand for IMAX is feeding box office growth, which in turn is yielding network growth. We are in a great position to use our increased market power to accelerate growth and margin expansion with a remarkably good slate in '25 and '26. We look forward to continuing to deliver results in our business and for our shareholders. Thank you again. And with that, I'll turn it to you, Natasha. Natasha Fernandes -- Chief Financial Officer Thanks, Rich, and good morning, everyone. IMAX's first quarter delivered a solid financial and operating performance and reflects a strong start to 2024. We exceeded market expectations on revenues, earnings per share, and total adjusted EBITDA. This includes a gross profit margin of 59% and total adjusted EBITDA margin of 40.5%. And our results are consistent with our full year guidance. These are high quality earnings that reflect the strength of our operating model, our cost discipline and our ability to deliver consistent financial results. We are confident that our momentum will continue to build throughout the year and beyond. We ended the quarter with our highest-ever grossing March box office and achieved a record monthly global market share of 6.6% on less than 1% of screens worldwide. IMAX's Dune: Part 2 box office dramatically demonstrated the benefits of filming with IMAX cameras, roughly one out of five tickets or over 20% of the box office on the planet for Dune 2 came from IMAX, and we currently have more film for IMAX releases in production than ever before. We continue to grow the IMAX global network and we are unmatched in our scale and reach, and we continue to strategically grow and diversify our content portfolio across local language, documentaries, and alternative content to drive utilization. Increasing capacity utilization is an opportunity for our business. Just a 1 percentage point improvement in utilization of our global network could drive anywhere from $75 million to $100 million in annual box office depending on geographic mix and other factors, all of which result in high incremental profit. We believe there is significant runway to increase utilization as we continue to open our aperture to bring in more content in off peak time periods, partner with filmmakers and studios to create a stronger IMAX connection resulting in a higher market share, and use data to refine our programming strategy. Overall, we believe, we can drive accelerating growth for years to come given our continuing network expansion, increasing amount of IMAX DNA in films, and growing consumer demand for IMAX. Turning now to our first-quarter financial results. We are pleased with Q1 revenue of $79 million driven by very strong end-of-quarter momentum. Content solutions revenue grew 6% year over year driven by incremental revenues from alternative content, including the Queen Rock Montreal concert film, coupled with strong box office from Dune and Godzilla x Kong. Technology product and services revenues declined 16%, driven by a lower level of system renewals as the prior year had a larger one time renewal and a lower mix of sales type installations this year. However, this is purely a mix dynamic as overall system installations grew 67% year over year. Gross margin was 59%, up 200 basis points year over year, reflecting improvement in the content solutions margin, driven by the mix of titles, including more alternative content and lower film marketing expenses. SG&A excluding stock-based compensation was $27 million and improved $2 million year over year, reflecting timing and marketing spend and benefits from our cost actions taken in the prior year. R&D expense was $2 million in the quarter, reflecting our continued investments in both the core business and streaming and consumer technology. Total consolidated adjusted EBITDA of $32 million was comparable to the prior year propelled by the strong margin performance. From a profitability perspective, total adjusted EBITDA margin was 40.5%, which was up from 37% in the prior year and is above our full-year guidance of high 30%. Adjusted EPS in Q1 was $0.15, which compares to the adjusted EPS of $0.16 in the year-ago period. EPS continues to be impacted by a tax valuation allowance of approximately $0.02. We expect the tax rate to normalize over the full year. Turning to our global network. System installations and signings remain key drivers of our long-term growth. In Q1 2024, we completed 15 system installations, up 67% over Q1 2023. Of the installations, 80% were in new locations and were weighted to markets with higher per-screen averages with eight of our installations coming in rest of world areas including France, England, Indonesia, Saudi Arabia, and three in North America. Signings activity is also ramping up. Since the beginning of the year, we have signed deals for 17 systems with eight coming in the first quarter and the rest around CinemaCon. Our fast start on installations and signings to date, along with our significant backlog of 442 systems at the end of Q1, gives us confidence in our network growth trajectory. Turning to cash flow and the balance sheet. Operating cash flow in Q1 was a use of $11 million compared to a source of $21 million in the prior year. The lower year-over-year operating cash flow reflects the timing of box office receipts this year as box office strength came in March with Q4, January and February weaker due to strike impacts versus the prior year when Q1 box office strength came in January, driven by Avatar: The Way of Water, whose box office straddle the end of 2022 and beginning of 2023. We expect the trends in cash flow to improve throughout the year driven by seasonality, the improving box office slate and the related timing of collections. Our capital position remains very strong as we ended the quarter with $81 million in cash, and $302 million in debt, excluding deferred financing costs. As a reminder, $230 million of our debt comes from our convertible senior notes due in 2026 that bear an interest rate of 0.5% per annum with a capped call leading to a $37 per share conversion price. Our current available liquidity is approximately $367 million which includes $286 million in available borrowing capacity under the company's various revolving facilities. From a capital allocation perspective, we opportunistically purchased $16 million of shares in early Q1 at an average price of $13.99 at a time when the share price was impacted by the strike overhang. We have $151 million available under our share repurchase authorization. To conclude, momentum is building from the growing demand for IMAX among consumers, filmmakers, studios, and exhibitors. And as we continue to grow our network and expand our content aperture, we expect our asset light highly incremental business model to deliver accelerating growth, increasing cash flows, and margin expansion. With that, I will turn the call over to the operator for Q&A. Questions & Answers: Operator Certainly [Operator instructions] And one moment for our first question. It will come from Eric Wold of B. Riley Securities. Your line is open. Eric Wold -- B. Riley Financial -- Analyst Thank you. Good morning. A couple of questions. I guess first off, Rich, you talked obviously a lot about the benefits of shooting with IMAX cameras and having the greatest number of films in production with IMAX DNA that you've ever had. I guess, what would be the maximum do you think you could do in your or that could be done through your network, for film to shallow dynamic cameras? Does this become norm for studios looking to lock up IMAX windows either by their choice to drive movie boarder man and a higher share, or could this potentially become a requirement of yours that you need to shoot with IMAX cameras in order to reserve specific, IMAX windows? Rich Gelfond -- Chief Executive Officer So, Eric, there are two ways to shoot with IMAX cameras. One is with film cameras, which was what Chris Nolan did at Oppenheimer and the other way is with digital cameras, which is what Denis Villeneuve did with Dune. So with digital cameras, there really is no limit to the number of cameras or the ability to make them available. Basically, we built a set of attachments that work with a variety of digital cameras and all the major ones. So there's as much a supply as filmmakers would need. On the film side, there's a limited number of film cameras. However, later this year, we're going to release some more and we've been building some more of them. So this is just a guess, but probably depending on how big the production is or whatever, you could probably only do three or four film projects a year along with unlimited number of digital projects. The other constraint would just be your release schedule. So if you shoot with IMAX cameras, you get a two-week guaranteed release window. So you have to go through a period of time like, let's say, the summer, which is very popular. There are a limited number of slots that you could guarantee, to filmmakers. But that was kind of your general question. I know I didn't directly answer it because there is no, like, you know, 15. There's no answer like that. It depends on the circumstances. The other thing I would say is that we don't want every film filmed with IMAX cameras. So not to pick on it, but a film like Sideways, which Paul Giamatti did, which is two people drinking wine at a wine bar for a lot of the movie. That's not the kind of thing that's consistent with the IMAX brand. So the overlying factor is, is it the right filmmaker and is it the right subject matter where the camera is really going to enhance the look of it. And we turned down many filmmakers who want to film it with IMAX cameras, both because the content we don't think will benefit and also because we don't think it's worthy of an extended release. I hope that's close to answering your question without giving you a number. Eric Wold -- B. Riley Financial -- Analyst That's short, Rich. And I guess my last question, can you update us on where you are with SSIMWAVE and kind of in that operating segment? When do you think we start seeing an inflection point in terms of that business's overall contribution to revenues and profitability? Is that something we could see in the back half of this year or is that more a '25, '26 story? Rich Gelfond -- Chief Executive Officer So just this past weekend, Eric, NAB was in Las Vegas. And what was formerly known as SSIMWAVE, now renamed IMAX Consumer Streaming Technology, had a prominent place. We had about 250 meetings. We were on several panels in the main ballroom, including, with Disney+ on the panel to talk about our experiences. We had a number of extremely positive meetings, and we have a kind of a backlog of things that we think will happen within this year. With that said, and we remain very optimistic about the business, I should add one thing is we added a product to it, which we, I think, briefly touched on. But originally, we talked about saving money for streaming services. We've developed it more where we could now develop people streaming to the streaming services and the broadcasters. So think mostly of sports content where we can save, for example, the NBA a lot of money and what they're streaming to TNT or whatever their outlets are. So there's a lot of demand. There's more product. We remain positive, but I can't predict when the other side is going to sign. So I'm sure that frustrates you and our investors, and it frustrates me. But I think the business is going to be very good, but I just can't predict the time. Eric Wold -- B. Riley Financial -- Analyst Perfect. Thanks, Rich. Operator And one moment for our next question. And our next question will come from Omar Mejias of Wells Fargo. Your line is open. Omar Mejias -- Wells Fargo Securities -- Analyst Morning, guys, and thank you for taking my questions. Rich, maybe first, IMAX delivered almost 6% of share from the total domestic box office in Q1 and the highest ever in North America. We've also talked about currently having the highest number of films in production with IMAX cameras. Just in general, can you describe what this post-pandemic shift to the demand for more premium experiences and the blockbusterization of cinema being for IMAX? And how does this impact your market share potential in the runway you still have ahead just given, all the trends that are sort of lining up in your favor? Rich Gelfond -- Chief Executive Officer So the blockbusterization of cinema started well before the pandemic. And if you look at the statistics, blockbusters became a much bigger part of the boss office years ago and you can analyze it and see it going up. And that probably had to do with things like streaming and other factors that people want to go to the theater for big kinds of movies. And obviously, that's been a tailwind for IMAX for a while. The premiumization trend has been more since the pandemic ended. And I think what's behind that is that people leave their homes, they want something that's more special and probably that was influenced by bigger television screens and a variety of home choices. But that's unmistakable. And I mean, you look at what the studio say, but also you look at what they do and leaning into IMAX and using our cameras in our DNA is clearly supports their belief that people will pay more and will come out in greater numbers for a premium experience. And I just have to add that when you look at the numbers for Dune versus the TLS, which I call kind of copycat IMAX theaters, IMAX had a larger share of what you call premium, but I divide into premium and fake premium. So I think all of those trends you talk about, blockbusterization, premiumization, IMAX creating the software, the films as well as the hardware, I think that's all the wind in our backs that you're seeing manifest itself in signings and financial results. Omar Mejias -- Wells Fargo Securities -- Analyst And maybe shifting to just the outperformance, on content solutions margins, which came in well ahead of expectations. You guys highlighted alternative content and lower marketing spend. Can you maybe unpack some of the key drivers and some of the levers you're seeing from the increased demand for IMAX? And if you can talk about sort of the economics of alternative content and describe the opportunity for margin expansion there as you drive that vertical? Natasha Fernandes -- Chief Financial Officer Hi, Omar. It's Natasha. I think we had a great start to the year with alternative content. We did the Queen Rock event, then we did an event with Andre 3000. We've also signed a slate deal with a '24 to do one Wednesday a month and bring out an iconic film from their library. And in all of that, we are, all of them run under different deal types. So, obviously, we negotiate each one individually, all with the opportunity to maximize, box office in that period. So when you think about it, we're putting the content on a day of the week where we get higher utilization and that's where you're getting your bigger returns because that becomes the incrementality in your model when you start to think about how can we increase box office on days when, there's room because weekends are sold out. You can look at June and I think it was for June, we were at 80% utilization on that opening weekend. So you start to look at the mid-weekdays and say what's the opportunity there, and that's where you can see incrementality fall through, and which is what you saw in Q1 coming through on the margins. And then, of course, the lower marketing spend with respect to Q1. I mean, Dune came out in March, and so we put some marketing behind there. But you had last year as a comparator, you had Avatar playing for a good six weeks plus in Q1. And so you had a lot of marketing steps come through last year. So I think that there's opportunities in all of that. And Rich has talked about before on some of our prior calls about leverage in the system and where we have opportunities. And what you're seeing is a lot of opportunities for, studios to partner with IMAX with respect to marketing so that, all of the spend is not on us necessarily, but we work together toward a joint effort to promote IMAX in the right way, especially when it comes down to using our film cameras and digital cameras. Omar Mejias -- Wells Fargo Securities -- Analyst Very helpful. Thank you, guys. Operator And one moment for our next question. And our next question will come from Eric Handler of ROTH MRM. Your line is open, Eric. Eric Handler -- ROTH MKM -- Analyst Good morning and thank you for the question. Richard and Natasha, when I look at the expense line for content solutions or mostly DMR costs, you've really done a great job of keeping that line flat over the last several years and even it's pretty much in line with where you were back in 2018. This is despite having a lot more movies that you're putting into the system every year, and seemingly no inflation. How sustainable is this? Natasha Fernandes -- Chief Financial Officer Hi, Eric. We think about we've talked about this before too is the leverage in our model is significant. We actually are using technology to remaster our films and to work through that process. And so, I think we mentioned it a while ago, but we created this in the cloud process as well that allows us to do especially local language titles and foreign titles, at a much more cost effective manner and as well quicker. And so through all of those sort of improvements as well as incorporating AI, which we have in some of our processes as well for remastering, we are getting the opportunity to realize sustainable cost and actually reducing our cost per film as time goes on. And then it goes back to my comments that I was just mentioning on the prior answer was, our ability to reduce our marketing costs as well and use better distribution. So using digital channels as opposed to print, which historically print was the predominant mode of marketing. And now you're getting lots more opportunities to use digital to push marketing as opposed to print. And so that's where you can get some cost savings as well. Eric Handler -- ROTH MKM -- Analyst Great. And then as you look to do more sporting events, it's not unusual for various leagues to want to extract a greater pound of flesh when they put out their rights fees. Are you able to keep your economic model the same like a movie with sporting events? Rich Gelfond -- Chief Executive Officer The answer, Eric, is that, first of all, we haven't really committed to doing a lot of sporting event things. We're testing a number of things, including the Olympics, as you know, which we now recently, we've done some tests with the NHL. We've done some soccer tests. We're flirting around now some things with basketball, by the way, not just in the U.S., but in international territories. So it's too soon to say really what the margin profile will look like there. But I think it goes back to a really important point that Natasha made, which is about capacity utilization. So IMAX is like the church that was built for Easter Sunday, it's packed. But during the weekdays, it's not as packed and at different times a year. So when you're putting content through our network at a time where it's really empty or very slow, at those times, it's extremely high margin because you had no revenues. But how it affects our margin mix, we're a long way from assessing that. Eric Handler -- ROTH MKM -- Analyst Great. Thank you. Operator And one moment for our next question. Our next question will be coming from Chad Beynon of Macquarie. Your line is open. Chad Beynon -- Macquarie Group -- Analyst Morning. Nice quarter. Thanks for taking my question. Good to see the diversification of global box office, but I wanted to focus on China. We're just hearing and seeing a lot of softness in the market just taking a little longer for the consumer to recover and there are certain restrictions for corporations and just from a consumer standpoint. Can you talk about the outlook for the rest of the year in that market? Are you starting to see good demand when either local product or just kind of product that hits well with the consumer? Is there or is this something that could continue with the consumer? Rich Gelfond -- Chief Executive Officer So I think you have to separate the question into two parts. One is the macro issues in China and the other is the release schedule. So in 2023, China, even though it had just opened up from the pandemic, had in the film side, had a very good year despite the fact that the economy was quite challenged there. And one of the few bright spots in the Chinese economy was the film sector. And as a matter of fact, IMAX had a pretty good year in '23, as you know, and it was not far off our best years actually in '23. So I have no question that the audience will be there and there's appetite for film, and I'm less worried that I think people are in other sectors of the economy like real estate, for example. In terms of 2024, the issue is a little bit more film driven. And I would say, in the first quarter, our Chinese New Year was fine, but the year before was a record and that had much less to do with the economy than to do with the film selection that was available. And much more of U.S. films are now getting into China than got in, in the last couple of years. So for most of the films in our foreseeable future, they've already been submitted and accepted. And then there's which of the local films and what are they going to be? Will we extend we don't have we have a lot of visibility into the industry, which is positive. We don't have as much visibility into the specific films and how they'll play. So I again, I'd rather say the answer is ex dollars. But I think it depends on how the films perform, but I don't see any particular impediments in China that would prevent it from behaving in the way as the rest of the world does. Chad Beynon -- Macquarie Group -- Analyst And then on the capital allocation, $40 million spent on buybacks at good prices. So certainly great to see that being done. Rich, what are you seeing in just the overall M&A market when you talk to different tech partners, when you go to some of these conferences that you talked about with SSIMWAVE? Are there still tuck in opportunities or from a capital allocation, should we just kind of focus on, you know, the convert cap call and, incremental buybacks? Rich Gelfond -- Chief Executive Officer So I don't think part of our strategy at this time is really to do a significant acquisition of any sort. And we're not really looking at that. And I think the biggest reason is we have what we think is a really strong model and that showed in '23. It showed in the first quarter. And I think, you know, as I talked about in my prepared remarks, '25 and '26 are going to be awesome. And at the same time, you know, we're expanding our aperture for content. We play whether it's documentaries or alternative content and using our platform in more ways. So we have obviously a lot more signings, so the theater network will grow. So we have a lot of faith in the ability of our company to generate improved cash flow and improved earnings. So I don't think you'll see us veering off. The only caveat I would give you is maybe we would do something that fills in a small way. So if we found something that could help SSIMWAVE or we found something that could help some of our core strategies, that's something we would think about. But I think otherwise, it will be continue to invest in our joint venture arrangements, which have extremely good IRR profile, as you know, and when we'll be opportunistic about buying in stock. Chad Beynon -- Macquarie Group -- Analyst Thank you very much. Appreciate it. Operator And one moment for our next question. And our next question will be coming from Stephen Laszczyk of Goldman Sachs. Your line is open. Stephen Laszczyk -- Goldman Sachs -- Analyst Hey. Great. Thanks for taking the questions. Rich, on local language, I think local language hit $55 million in box in the first quarter. Can you maybe update us on how you're expecting local language scale over the course of the year, just given how the release slate stands today? And then any notable updates on maybe the slate looking ahead into '25 and beyond? Rich Gelfond -- Chief Executive Officer Yes. So I think we feel pretty good about our local language initiative. I would hope it will be better, the box office, than it was. Last year, to give you like kind of a snapshot in time, Stephen, I think it was last week, we were playing five local language films. We had one from Indonesia, two in India, one in Korea, and one or two in Japan, and maybe we had something in China, I'm not even sure. So it's just a regular part of our business. But we kind of look at it a little bit differently than the Hollywood business because the Hollywood business is more a blockbuster driven. So if you ask me what are the big titles in '25 or '26, I can tell you what they are and maybe even to be able to do a close forecast. But for local language films, it's more of a portfolio approach for us, which is, as Natasha and I were both talking about, increasing utilization of the theater network and just being that additive to the slate other than obviously like Chinese films in China or Japanese films in Japan. So we don't really have that the same kind of visibility into next year or the year after because our approach is somewhat different. In a way, the bigger films, the Hollywood films is more like, elephant hunting, whereas the other local language films are more tactical on filling and gaps in schedule. But I would say we're investing in that, and we part of our strategic goal is to continue to develop that, and I haven't seen anything in terms of obstacles in the way of accomplishing that. Operator And one moment for our next question. And our next question will come from Mike Hickey of The Benchmark Company. Mike Hickey -- The Benchmark Company -- Analyst Hey, Rich, Natasha, Jennifer, thanks for taking our questions here, and congratulations on a great quarter. I guess, just thinking about, Rich, your Hollywood collaboration, obviously, you guys are nailing it, Oppenheimer Dune: Part 2. And it seems like, it's pretty clear you've got heavy influence with your cameras and tech on the slate that matters for '25 and '26. And I think obviously great share performance you had in the quarter in North America. I guess just thinking about the opportunity you see, Rich, outside of maybe your domestic market with Hollywood Blockbusters, obviously, you go serve a global market, but thinking about local language and maybe the opportunity to use more of your cameras and tech with some of those films? And I guess, you just said it's difficult to kind of pick the winners, but maybe you can do that. I'm not sure. But just sort of curious the opportunity there and if that can help your share performance and sort of bridge to where you are in North America? And then the second question would be on, just how obvious it is, I guess, on '25 and '26 and your influence on the film slate and your likely share of that slate. When should we see more of a follow through you think on system signings and installations? I guess just with the backdrop here of 1Q signings that look like they're down year over year, and I think you said it's picked up. But just sort of curious how system signings and installations should pace into that, pretty profound '25, '26 opportunity led by IMAX? Rich Gelfond -- Chief Executive Officer So I'm going to answer your second one first and then go back to your first question. But you should not get the feeling that signings or installations are slower. I mean, the quarter is a period of time. And as we said in our remarks, we have 17 installs, 17 signings, as of and back we have 17 installs also, but we have 17 signings through today. But the level of activity is very high, and I'm not someone who predicts things. But I think in the coming weeks, you're going to see a fair amount more coming. So whatever the quarter says, there's no indication that signings have slowed down. And as a matter of fact, coming out of CinemaCon, there's a lot of activity as much as I've seen. And I think that's largely driven by things you're talking about, the '25 slate, the '26 slate, filmmakers leaning in heavily, studios leaning in heavily, marketing leaning in heavily. And I would think a number of those indices, whether it's signings, whether it's market share, whether it's installs, especially as we approach the '25 incredible slate with lots of IMAX DNA in it. So I think that's all added to it. And I think that's going to create a lot of momentum around our business. And I don't have to remind everyone, but I should that if you go backwards in time, you're coming out of a pandemic and a rider strike. But when you go forward in time, you're going into slated in '25 and '26 that look remarkable with tons of IMAX DNA in it. So making it simple, I mean, that should influence the trajectory of our whole business. As to your first question about using IMAX technology and cameras and our DNA in international projects. I'm glad you asked that question because, in fact, yesterday, I was on a call, with Daniel Manwaring, our CEO of China, and I actually didn't realize this, but we have six films now being filmed in China using IMAX cameras. And I think he said he thought three would release this year and three would release next year on our call. And again, we're in negotiations with a few people in India about using our cameras in other areas. So the world is small enough where they saw the results of coming out of where IMAX DNA is involved. And certainly, they're interested in doing that on a global basis. And we didn't really give you color where just kind of non-quantitative color. But coming out of CinemaCon, we had an IMAX CEO forum, and I think this is important, not just from studios, but from filmmakers on kind of a global basis. The level of interest and inquiries has really spiked. So if I showed you my call sheet or our incoming inquiry list and the names of the filmmakers about doing different things, that's really increased dramatically. And that becomes really important because it's not only the studios who are saying as part of our strategy, but it's the talent. And as you know, the talent has a lot of influence, not just in Hollywood, but in Beijing and Seoul and a lot of other places. So I think the trends, both financial trends and artistic trends, are definitely spilling over on a global basis. Mike Hickey -- The Benchmark Company -- Analyst Nice. Thank you. Operator And one moment for our next question. And our next question comes from Jim Goss of Barrington Research. Your line is open. Jim Goss -- Barrington Research -- Analyst Thanks. Rich, you've talked about your broadened view of what you feel can work on IMAX screens and especially in terms of the IMAX cameras. And I'm wondering how you and you've also talked about interplay with a greater variety of, content creators. And I'm wondering how you navigate and make those decisions, because I know you're very selective on that, in terms of who you decide to work with and what you think might fit. And is some of this being targeted then to the, screen time during the week, as alternative content rather than, just things that will go on the weekend, displays? Rich Gelfond -- Chief Executive Officer Yes, Jim. Absolutely. I think Natasha spoke a little bit about some of that. So as she mentioned, our partnership within '24 is aimed to go out on Wednesdays. I mean, right now, we're in the middle of a discussion where there's a very exciting project, but it releases on a weekend when we have a really big film release. And we're declining to do that project because it's not really incremental. So we're much more focused on capacity utilization and filling things in on the off days. And when we discuss alternative content with our counterparties, frequently, that's the discussion that these are the days that are available we would consider. And I actually don't remember which days, but like, Andre 3000 was released on a weekday. This weekend, we're partially doing in our network, a film called challengers. But we did select premiers, I think, on Tuesday night, and Zendaya, the star, showed up in an IMAX theater to do that and things like the Beach Boys concert with Disney+ that we're doing. So that's definitely the way we're positioning it is not to be competitive with our core blockbuster projects, but to use our platform in a complementary way to fill in the utilization gaps. Jim Goss -- Barrington Research -- Analyst And there was a time the studios weren't so fond of your cutting back on some of their showings during the week, in favor of anything else. So I gather you're making more headway in terms of your ability to control your screen usage and offer them what you think is appropriate? Rich Gelfond -- Chief Executive Officer Yes. Well, as you know, Jim, you know, every negotiation on life is based on supply and demand and leverage and lots of factors. And I think, you know, I mean, I got to stop and say we get almost 6% of the North American box office on 1% of the screen. So you could understand that's made studios a little bit more flexible in terms of their willingness to let us program something else on a Tuesday night, and it's made us maybe a little more careful when we give away the slot. So instead of what we would have said, we promise you a 100% of the network for two weeks. We're carving out exceptions in advance to facilitate the alternative content and the documentations. We're affirmatively making that effort. Jim Goss -- Barrington Research -- Analyst OK. And last thing, congratulations on that 5.9%, very impressive. You clearly have had continuing success versus, the depth of product, maybe broad more broadly. As 2025 and 2026, come into play and you have an increased, you know, at least we're expecting an increased supply of films. So you'll have greater film strength, but you also have greater competition. And I think Mike was bringing this up a little bit already. But just how should we frame our expectations in that more competitive but more robust environment? Rich Gelfond -- Chief Executive Officer I mean, I think you should assume that we'll have better financial performance. That's what we assume. I think it's, as I said, we don't have many holes in the whole year for 2025 and 2026, and that doesn't include the supplemental content, which we've been discussing and widening our aperture. So I think at the moment, we feel extremely good. Jim Goss -- Barrington Research -- Analyst OK. That's great. Thank you very much. Rich Gelfond -- Chief Executive Officer Thanks, Jim. Operator And one moment for our next question And our last question will be coming from Steven Frankel of Rosenblatt Securities. Your line is open. Steve Frankel -- Rosenblatt Securities -- Analyst Good morning, and thanks for the opportunity to give me an hour. I'll be quick. You tried to consolidate the China sub as a way to save money. Maybe detail for us, since that didn't happen, where you can pull cost out of that operation without sacrificing opportunities? Rich Gelfond -- Chief Executive Officer Well, good question, Steven. In fact, we've been doing that. So we just moved our office in Shanghai, our headquarters into half the space and half the rent. And it's one of our strategic goals is to manage cost there. We brought in our IR effort there and saved some cost in the financial area, you know, kind of across the board, we've been looking at what opportunities that presents. And you didn't ask this, but I'll address it because we've gotten the question, are we going to try and privatize it again? And we can't go back until much later this year. But we haven't made a decision yet what to do. I think it will depend on China's financial performance, what IMAX's liquidity looks like, and then how the Chinese shareholders feel about it I will make a decision just reminding everyone that wasn't, have to do. That was it would be nice if we could do it. But even though we didn't get it done in the way we wanted, we've realized some of those savings along the way by being strategic about how we manage our costs there. Steve Frankel -- Rosenblatt Securities -- Analyst Great. And then sales efforts are now concentrated on areas outside of China, true? So that's another opportunity, I assume? Natasha Fernandes -- Chief Financial Officer Yes, it is, Steve. Actually, in our 17 signings year to date, we actually have two new customers, one in India and one in Turkey. And so as we look at our strategy to continue to expand in rest of world regions, we are thinking through not only which countries we can expand in, but who are the partners we can expand with and getting new opportunities from new partners is a great way to expand as well. Steve Frankel -- Rosenblatt Securities -- Analyst Great. Thank you so much. Operator And I'm showing no further questions. I would now like to turn the conference back to management for closing remarks. Rich Gelfond -- Chief Executive Officer Thank you, operator, and thank you for joining us. I mean, this year was predicted to be a way down year. We didn't agree with that. The first two months, obviously, were challenging, but March was just incredible. And I think starting this quarter, we're very much on budget for what we see for the second quarter. And I think if people line up this year's content versus last year's, it really is not a weaker year, at least for IMAX that was. And we remain consistent with how we felt about this year at the beginning of the year. And I think when you look into rest of the year, Joker, Deadpool, Despicable Me, a lot of other things, there's a lot of good stuff to come. And as I said, stay tuned on the signings front. There's a lot of activity there. And when you look into '25 and '26, I think there's a lot to be excited about. And without getting hyperbolic about it, morale at IMAX and seeing it from the inside, we feel we're extremely well-positioned, and we think that people falsely think we're like an exhibitor. But if you look at what our box office is and you look at what our margins are and you look at what our balance sheet looks like, I think we continue to deliver, and I think that'll be more and more visible as we move forward. Thank you all for joining. Answer:

the Q1 2024 IMAX Corporation earnings conference call

Operator Good day, and thank you for standing by. Welcome to the Q1 2024 IMAX Corporation earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker Jennifer Horsley, head of investor relations. Please go ahead. Jennifer Horsley -- Senior Vice President, Investor Relations Good afternoon, and thank you for joining us for IMAX's first-quarter 2024 earnings conference call. On the call today to review the financial results are Rich Gelfond, chief executive officer; and Natasha Fernandes, our chief financial officer. Rob Lister, chief legal officer is also joining us today. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our earnings press release and the slide presentation have been posted on the Investor Relations section of our site. Our historical Excel model is posted to the website as well. I would like to remind you of the following information regarding forward-looking statements. Today's call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause our actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today. And we undertake no obligation to update these statements as a result of new information future events or otherwise. During today's call references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures as well as a reconciliation to non-GAAP financial measures are contained in this morning's press release and our earnings materials, which are available on the Investor Relations page of our website at imax.com. With that, let me now turn the call over to Mr. Richard Gelfond. Rich? Rich Gelfond -- Chief Executive Officer Thanks, Jennifer, and thanks everyone for joining us today. IMAX powers awe-inspiring experiences for audiences around the world. We partner end-to-end with the greatest filmmakers and creators working today to help them realize their visions to the fullest. Deployed at scale globally, we deliver Hollywood and international blockbusters, original documentaries, and immersive events across about 90 countries and territories worldwide. Our technology, our deep relationships with filmmakers, our global footprint, all of it combines to make IMAX a wholly differentiated platform, which is why we are a consistent winner in the media and global entertainment landscape. The company delivered solid results in the first quarter, thanks to a record-breaking surge in March that bodes well for another strong year ahead. Year-to-date, we delivered another 17 signings globally, including agreements in growth markets like India, Thailand, and Turkey that further diversify our footprint. Our first-quarter global box office of $261 million marks our third highest grossing Q1 ever, capped off by our best March ever, despite limited content owing to the strikes last year. Domestically, we delivered a remarkable 5.9% of the overall box office, our highest quarterly market share ever in North America, despite accounting for only 1% of the screens. I'm going to repeat that again. Almost 6% of the domestic box office on only 1% of the screens, it's an incredible number. And we drove strong profitability, including gross profit margin of 59% and total adjusted EBITDA margin of 40%. Our Q1 results are consistent with the full-year guidance we issued earlier this year. From the beginning, we've said that 2024 will be better at the box office than many pundits predicted. In the wake of Dune 2 and Godzilla x Kong, the world is coming around to our point of view. And as we said before, we expect 2025 to be a strong growth year. Our momentum is fueled by a virtuous cycle in our business. Global moviegoing is shifting rapidly to IMAX as a result of global box office market share and indexing are all at near time highs, and this is fueling sales activity, particularly in the rest of the world, high PSA markets where we're prioritizing our network growth. Studios and filmmakers see this and lean into IMAX, filming with IMAX cameras, leading with IMAX exclusive events and partnerships, and making the IMAX platform a centerpiece of their marketing. This was evident at the recent CinemaCon Movie Conference, where IMAX was heavily featured in studio presentations, trailers, and filmmaker remarks. As Marvel Chief, Kevin Feige said from the stage at the Disney presentation, what IMAX does to get people out of their homes and into your theaters is second to none. Creators, content owners, and brands beyond Hollywood and across the spectrum see this and want to work with IMAX, yielding opportunities to open our content aperture across music, gaming, sports, live events, and more. Local language films and music experiences have been a strong contributor to our results year-to-date, and this diversifying content portfolio across awe-inspiring experiences from gaming franchises to sports leagues to live global events further strengthens our differentiated offering for consumers. The wheel continues to turn and accelerate, which is why we're very confident in our ability to drive future growth for the company. Today, I'd like to offer updates on number one, our global network and number two, our content slate. I'll then hand it over to Natasha to go through our financial results before taking your questions. First, 2023 was a strong year for IMAX network growth in which we levered off our box office momentum to achieve significant gains in sales activity and network growth. We also further diversified our footprint of the 128 system installs we completed in '23 and IMAX records 61 were in international markets outside of North America and China. The rest of the world opportunity for IMAX is very strong. The IMAX network is only 33% penetrated in these markets. Despite a slower start for the global box office this year, we've kept up the momentum delivering a flurry of system signings in key markets year-to-date. We completed agreements for new systems in a diverse collection of markets, including India, Thailand, Turkey and China this year. And we have further significant agreements in the immediate horizon. With the slate strengthening in the second half of '24 and an extremely promising outlook in '25 and '26, we expect sales activity and installations to accelerate. Turning to the outlook for our content portfolio, it is indeed very promising. Dune: Part 2 and Godzilla x Kong, both film for IMAX titles, provided a jolt to the global box office and demonstrated also two very positive trends. First, demand for movie going in the marketplace is strong and the '24 slate holds more promise than many have predicted. And second, quite simply, consumers recognize that IMAX is a superior experience. The stories people want to see and hear are in IMAX, and we are fast becoming appointment viewing for the biggest cinematic events. Oppenheimer, a film Christopher Nolan conceived and film very specifically for IMAX, won eight Academy Awards and crossed $190 million in IMAX box office, entering our top five releases of all time. Dune: Part 2 is now a top 10 release of all time with more than $143 million in global box office to date. We generated a stunning 21% of the film's total gross. In the wake of Oppenheimer, we released a limited number of 70-millimeter prints of Dune: Part 2 which earned sellouts for weeks on end. IMAX 70 millimeter film, the absolute gold standard of cinema with up to 18K resolution is surging in popularity, and we will continue to capitalize on this, next with film prints for the highly anticipated Joker sequel coming out this October. Godzilla x Kong has also performed very well for IMAX. We delivered 11% of the film's domestic opening, even though our entire film network, including top-tier locations in New York and Los Angeles, continued to play and perform very well with Dune, which we're still playing that weekend. Film for IMAX releases offer the best possible cinematic experience, and as a result, Film for IMAX is a coveted point of distinction for filmmakers and a significant driver of box office and indexing. More than ever, the IMAX experience is as much about content creation as it is about content delivery. We currently have more films in production shooting with IMAX cameras than at any point in our history. Next year, we have an unprecedented run in which every IMAX release from May through September will be filmed with IMAX cameras. That includes Mission Impossible 8, two Marvel films, the forthcoming Formula 1 film starring Brad Pitt from Top Gun: Maverick director, Joe Kosinski, Superman from DC, How to Train Your Dragon, and many more. And earlier in '25, we'll have the new project from Michael B. Jordan and Black Panther Director Ryan Coogler, which is shooting with IMAX film cameras, as well as the J. J. Abrams produced IMAX shot Flowervale Street. As I've said, our slate is significantly committed for most of the year in 2025. And 2026 looks perhaps even stronger with carryover from Avatar 3, as well as new installments of Avengers, Star Wars, Batman, Super Mario Brothers, Toy Story, and Wicked, along with our expanding portfolio of local language, documentaries, and events experiences. Even for releases not filmed with IMAX cameras, we are seeing filmmakers and studios lean more heavily into the IMAX platform. For instance, Disney has made IMAX a centerpiece of its promotional campaign for Kingdom of the Planet of the Apes, a promising title coming out shortly, including prominent IMAX placement and advertising during major events like the NCAA tournament. And we'll see a similar focus in Warner Brother's campaign for Furiosa as it rolls out. Our success continues to yield opportunities to open our content aperture and expand further beyond Hollywood blockbusters. On May 17th, we released the first new IMAX original documentary under our revamped strategy, The Blue Angels, produced in partnership with J.J. Abrams and Glen Powell. This film very much represents our aspiration to create blockbusters. It was shot by the same team behind Top Gun: Maverick, and its aerial footage rivals anything in that mega hit. And it will roll out in a new extremely advantageous model for us with a one week exclusive engagement across our commercial network domestically and in select international markets. Availability thereafter on Amazon Prime Video to which we sold the streaming rights and later in '24 or early '25, a 45-minute version of the film will release in our institutional theaters. We have several more original blockbusters in our pipeline, including the upcoming Stormbound with producer Adam McKay. We also partnered with Amazon to make the launch platform for Jonathan Nolan's new series, Fallout, with a seven city IMAX exclusive premier screening event. Fallout is topping the streaming charts and has emerged as one of the Amazon Prime Video's best performing series of all time. We'll have an IMAX exclusive run and live concert event for the forthcoming Disney+ release, The Beach Boys, a documentary from legendary filmmaker Frank Marshall. The release will continue to build our recent momentum in music with Q1's Queen Rock Montreal and Andre 3000 experiences. Queen alone grossed more than $5.5 million in IMAX and was subsequently licensed by Disney+ as an IMAX Enhanced exclusive in the home. And IMAX was the exclusive premier partner for this month's concert event for BTS's SUGA, which earned $2 million in IMAX box office for two showtimes in select theaters. To close, IMAX continued to drive positive momentum in the first quarter, setting the table for a very promising period, which will continue. Let's be clear, the only premium entertainment platform with our filmmaker relationships, global scale, and patented technology is IMAX. We continue to drive global network growth with an eye toward expansion into underpenetrated markets where moviegoing is strong and increasing. Our diversified content strategy with Hollywood and local language blockbusters, IMAX documentaries, and new events and experiences is delivering great results. Q1 was among our best of all time at the global box office. Audience demand for IMAX is feeding box office growth, which in turn is yielding network growth. We are in a great position to use our increased market power to accelerate growth and margin expansion with a remarkably good slate in '25 and '26. We look forward to continuing to deliver results in our business and for our shareholders. Thank you again. And with that, I'll turn it to you, Natasha. Natasha Fernandes -- Chief Financial Officer Thanks, Rich, and good morning, everyone. IMAX's first quarter delivered a solid financial and operating performance and reflects a strong start to 2024. We exceeded market expectations on revenues, earnings per share, and total adjusted EBITDA. This includes a gross profit margin of 59% and total adjusted EBITDA margin of 40.5%. And our results are consistent with our full year guidance. These are high quality earnings that reflect the strength of our operating model, our cost discipline and our ability to deliver consistent financial results. We are confident that our momentum will continue to build throughout the year and beyond. We ended the quarter with our highest-ever grossing March box office and achieved a record monthly global market share of 6.6% on less than 1% of screens worldwide. IMAX's Dune: Part 2 box office dramatically demonstrated the benefits of filming with IMAX cameras, roughly one out of five tickets or over 20% of the box office on the planet for Dune 2 came from IMAX, and we currently have more film for IMAX releases in production than ever before. We continue to grow the IMAX global network and we are unmatched in our scale and reach, and we continue to strategically grow and diversify our content portfolio across local language, documentaries, and alternative content to drive utilization. Increasing capacity utilization is an opportunity for our business. Just a 1 percentage point improvement in utilization of our global network could drive anywhere from $75 million to $100 million in annual box office depending on geographic mix and other factors, all of which result in high incremental profit. We believe there is significant runway to increase utilization as we continue to open our aperture to bring in more content in off peak time periods, partner with filmmakers and studios to create a stronger IMAX connection resulting in a higher market share, and use data to refine our programming strategy. Overall, we believe, we can drive accelerating growth for years to come given our continuing network expansion, increasing amount of IMAX DNA in films, and growing consumer demand for IMAX. Turning now to our first-quarter financial results. We are pleased with Q1 revenue of $79 million driven by very strong end-of-quarter momentum. Content solutions revenue grew 6% year over year driven by incremental revenues from alternative content, including the Queen Rock Montreal concert film, coupled with strong box office from Dune and Godzilla x Kong. Technology product and services revenues declined 16%, driven by a lower level of system renewals as the prior year had a larger one time renewal and a lower mix of sales type installations this year. However, this is purely a mix dynamic as overall system installations grew 67% year over year. Gross margin was 59%, up 200 basis points year over year, reflecting improvement in the content solutions margin, driven by the mix of titles, including more alternative content and lower film marketing expenses. SG&A excluding stock-based compensation was $27 million and improved $2 million year over year, reflecting timing and marketing spend and benefits from our cost actions taken in the prior year. R&D expense was $2 million in the quarter, reflecting our continued investments in both the core business and streaming and consumer technology. Total consolidated adjusted EBITDA of $32 million was comparable to the prior year propelled by the strong margin performance. From a profitability perspective, total adjusted EBITDA margin was 40.5%, which was up from 37% in the prior year and is above our full-year guidance of high 30%. Adjusted EPS in Q1 was $0.15, which compares to the adjusted EPS of $0.16 in the year-ago period. EPS continues to be impacted by a tax valuation allowance of approximately $0.02. We expect the tax rate to normalize over the full year. Turning to our global network. System installations and signings remain key drivers of our long-term growth. In Q1 2024, we completed 15 system installations, up 67% over Q1 2023. Of the installations, 80% were in new locations and were weighted to markets with higher per-screen averages with eight of our installations coming in rest of world areas including France, England, Indonesia, Saudi Arabia, and three in North America. Signings activity is also ramping up. Since the beginning of the year, we have signed deals for 17 systems with eight coming in the first quarter and the rest around CinemaCon. Our fast start on installations and signings to date, along with our significant backlog of 442 systems at the end of Q1, gives us confidence in our network growth trajectory. Turning to cash flow and the balance sheet. Operating cash flow in Q1 was a use of $11 million compared to a source of $21 million in the prior year. The lower year-over-year operating cash flow reflects the timing of box office receipts this year as box office strength came in March with Q4, January and February weaker due to strike impacts versus the prior year when Q1 box office strength came in January, driven by Avatar: The Way of Water, whose box office straddle the end of 2022 and beginning of 2023. We expect the trends in cash flow to improve throughout the year driven by seasonality, the improving box office slate and the related timing of collections. Our capital position remains very strong as we ended the quarter with $81 million in cash, and $302 million in debt, excluding deferred financing costs. As a reminder, $230 million of our debt comes from our convertible senior notes due in 2026 that bear an interest rate of 0.5% per annum with a capped call leading to a $37 per share conversion price. Our current available liquidity is approximately $367 million which includes $286 million in available borrowing capacity under the company's various revolving facilities. From a capital allocation perspective, we opportunistically purchased $16 million of shares in early Q1 at an average price of $13.99 at a time when the share price was impacted by the strike overhang. We have $151 million available under our share repurchase authorization. To conclude, momentum is building from the growing demand for IMAX among consumers, filmmakers, studios, and exhibitors. And as we continue to grow our network and expand our content aperture, we expect our asset light highly incremental business model to deliver accelerating growth, increasing cash flows, and margin expansion. With that, I will turn the call over to the operator for Q&A. Questions & Answers: Operator Certainly [Operator instructions] And one moment for our first question. It will come from Eric Wold of B. Riley Securities. Your line is open. Eric Wold -- B. Riley Financial -- Analyst Thank you. Good morning. A couple of questions. I guess first off, Rich, you talked obviously a lot about the benefits of shooting with IMAX cameras and having the greatest number of films in production with IMAX DNA that you've ever had. I guess, what would be the maximum do you think you could do in your or that could be done through your network, for film to shallow dynamic cameras? Does this become norm for studios looking to lock up IMAX windows either by their choice to drive movie boarder man and a higher share, or could this potentially become a requirement of yours that you need to shoot with IMAX cameras in order to reserve specific, IMAX windows? Rich Gelfond -- Chief Executive Officer So, Eric, there are two ways to shoot with IMAX cameras. One is with film cameras, which was what Chris Nolan did at Oppenheimer and the other way is with digital cameras, which is what Denis Villeneuve did with Dune. So with digital cameras, there really is no limit to the number of cameras or the ability to make them available. Basically, we built a set of attachments that work with a variety of digital cameras and all the major ones. So there's as much a supply as filmmakers would need. On the film side, there's a limited number of film cameras. However, later this year, we're going to release some more and we've been building some more of them. So this is just a guess, but probably depending on how big the production is or whatever, you could probably only do three or four film projects a year along with unlimited number of digital projects. The other constraint would just be your release schedule. So if you shoot with IMAX cameras, you get a two-week guaranteed release window. So you have to go through a period of time like, let's say, the summer, which is very popular. There are a limited number of slots that you could guarantee, to filmmakers. But that was kind of your general question. I know I didn't directly answer it because there is no, like, you know, 15. There's no answer like that. It depends on the circumstances. The other thing I would say is that we don't want every film filmed with IMAX cameras. So not to pick on it, but a film like Sideways, which Paul Giamatti did, which is two people drinking wine at a wine bar for a lot of the movie. That's not the kind of thing that's consistent with the IMAX brand. So the overlying factor is, is it the right filmmaker and is it the right subject matter where the camera is really going to enhance the look of it. And we turned down many filmmakers who want to film it with IMAX cameras, both because the content we don't think will benefit and also because we don't think it's worthy of an extended release. I hope that's close to answering your question without giving you a number. Eric Wold -- B. Riley Financial -- Analyst That's short, Rich. And I guess my last question, can you update us on where you are with SSIMWAVE and kind of in that operating segment? When do you think we start seeing an inflection point in terms of that business's overall contribution to revenues and profitability? Is that something we could see in the back half of this year or is that more a '25, '26 story? Rich Gelfond -- Chief Executive Officer So just this past weekend, Eric, NAB was in Las Vegas. And what was formerly known as SSIMWAVE, now renamed IMAX Consumer Streaming Technology, had a prominent place. We had about 250 meetings. We were on several panels in the main ballroom, including, with Disney+ on the panel to talk about our experiences. We had a number of extremely positive meetings, and we have a kind of a backlog of things that we think will happen within this year. With that said, and we remain very optimistic about the business, I should add one thing is we added a product to it, which we, I think, briefly touched on. But originally, we talked about saving money for streaming services. We've developed it more where we could now develop people streaming to the streaming services and the broadcasters. So think mostly of sports content where we can save, for example, the NBA a lot of money and what they're streaming to TNT or whatever their outlets are. So there's a lot of demand. There's more product. We remain positive, but I can't predict when the other side is going to sign. So I'm sure that frustrates you and our investors, and it frustrates me. But I think the business is going to be very good, but I just can't predict the time. Eric Wold -- B. Riley Financial -- Analyst Perfect. Thanks, Rich. Operator And one moment for our next question. And our next question will come from Omar Mejias of Wells Fargo. Your line is open. Omar Mejias -- Wells Fargo Securities -- Analyst Morning, guys, and thank you for taking my questions. Rich, maybe first, IMAX delivered almost 6% of share from the total domestic box office in Q1 and the highest ever in North America. We've also talked about currently having the highest number of films in production with IMAX cameras. Just in general, can you describe what this post-pandemic shift to the demand for more premium experiences and the blockbusterization of cinema being for IMAX? And how does this impact your market share potential in the runway you still have ahead just given, all the trends that are sort of lining up in your favor? Rich Gelfond -- Chief Executive Officer So the blockbusterization of cinema started well before the pandemic. And if you look at the statistics, blockbusters became a much bigger part of the boss office years ago and you can analyze it and see it going up. And that probably had to do with things like streaming and other factors that people want to go to the theater for big kinds of movies. And obviously, that's been a tailwind for IMAX for a while. The premiumization trend has been more since the pandemic ended. And I think what's behind that is that people leave their homes, they want something that's more special and probably that was influenced by bigger television screens and a variety of home choices. But that's unmistakable. And I mean, you look at what the studio say, but also you look at what they do and leaning into IMAX and using our cameras in our DNA is clearly supports their belief that people will pay more and will come out in greater numbers for a premium experience. And I just have to add that when you look at the numbers for Dune versus the TLS, which I call kind of copycat IMAX theaters, IMAX had a larger share of what you call premium, but I divide into premium and fake premium. So I think all of those trends you talk about, blockbusterization, premiumization, IMAX creating the software, the films as well as the hardware, I think that's all the wind in our backs that you're seeing manifest itself in signings and financial results. Omar Mejias -- Wells Fargo Securities -- Analyst And maybe shifting to just the outperformance, on content solutions margins, which came in well ahead of expectations. You guys highlighted alternative content and lower marketing spend. Can you maybe unpack some of the key drivers and some of the levers you're seeing from the increased demand for IMAX? And if you can talk about sort of the economics of alternative content and describe the opportunity for margin expansion there as you drive that vertical? Natasha Fernandes -- Chief Financial Officer Hi, Omar. It's Natasha. I think we had a great start to the year with alternative content. We did the Queen Rock event, then we did an event with Andre 3000. We've also signed a slate deal with a '24 to do one Wednesday a month and bring out an iconic film from their library. And in all of that, we are, all of them run under different deal types. So, obviously, we negotiate each one individually, all with the opportunity to maximize, box office in that period. So when you think about it, we're putting the content on a day of the week where we get higher utilization and that's where you're getting your bigger returns because that becomes the incrementality in your model when you start to think about how can we increase box office on days when, there's room because weekends are sold out. You can look at June and I think it was for June, we were at 80% utilization on that opening weekend. So you start to look at the mid-weekdays and say what's the opportunity there, and that's where you can see incrementality fall through, and which is what you saw in Q1 coming through on the margins. And then, of course, the lower marketing spend with respect to Q1. I mean, Dune came out in March, and so we put some marketing behind there. But you had last year as a comparator, you had Avatar playing for a good six weeks plus in Q1. And so you had a lot of marketing steps come through last year. So I think that there's opportunities in all of that. And Rich has talked about before on some of our prior calls about leverage in the system and where we have opportunities. And what you're seeing is a lot of opportunities for, studios to partner with IMAX with respect to marketing so that, all of the spend is not on us necessarily, but we work together toward a joint effort to promote IMAX in the right way, especially when it comes down to using our film cameras and digital cameras. Omar Mejias -- Wells Fargo Securities -- Analyst Very helpful. Thank you, guys. Operator And one moment for our next question. And our next question will come from Eric Handler of ROTH MRM. Your line is open, Eric. Eric Handler -- ROTH MKM -- Analyst Good morning and thank you for the question. Richard and Natasha, when I look at the expense line for content solutions or mostly DMR costs, you've really done a great job of keeping that line flat over the last several years and even it's pretty much in line with where you were back in 2018. This is despite having a lot more movies that you're putting into the system every year, and seemingly no inflation. How sustainable is this? Natasha Fernandes -- Chief Financial Officer Hi, Eric. We think about we've talked about this before too is the leverage in our model is significant. We actually are using technology to remaster our films and to work through that process. And so, I think we mentioned it a while ago, but we created this in the cloud process as well that allows us to do especially local language titles and foreign titles, at a much more cost effective manner and as well quicker. And so through all of those sort of improvements as well as incorporating AI, which we have in some of our processes as well for remastering, we are getting the opportunity to realize sustainable cost and actually reducing our cost per film as time goes on. And then it goes back to my comments that I was just mentioning on the prior answer was, our ability to reduce our marketing costs as well and use better distribution. So using digital channels as opposed to print, which historically print was the predominant mode of marketing. And now you're getting lots more opportunities to use digital to push marketing as opposed to print. And so that's where you can get some cost savings as well. Eric Handler -- ROTH MKM -- Analyst Great. And then as you look to do more sporting events, it's not unusual for various leagues to want to extract a greater pound of flesh when they put out their rights fees. Are you able to keep your economic model the same like a movie with sporting events? Rich Gelfond -- Chief Executive Officer The answer, Eric, is that, first of all, we haven't really committed to doing a lot of sporting event things. We're testing a number of things, including the Olympics, as you know, which we now recently, we've done some tests with the NHL. We've done some soccer tests. We're flirting around now some things with basketball, by the way, not just in the U.S., but in international territories. So it's too soon to say really what the margin profile will look like there. But I think it goes back to a really important point that Natasha made, which is about capacity utilization. So IMAX is like the church that was built for Easter Sunday, it's packed. But during the weekdays, it's not as packed and at different times a year. So when you're putting content through our network at a time where it's really empty or very slow, at those times, it's extremely high margin because you had no revenues. But how it affects our margin mix, we're a long way from assessing that. Eric Handler -- ROTH MKM -- Analyst Great. Thank you. Operator And one moment for our next question. Our next question will be coming from Chad Beynon of Macquarie. Your line is open. Chad Beynon -- Macquarie Group -- Analyst Morning. Nice quarter. Thanks for taking my question. Good to see the diversification of global box office, but I wanted to focus on China. We're just hearing and seeing a lot of softness in the market just taking a little longer for the consumer to recover and there are certain restrictions for corporations and just from a consumer standpoint. Can you talk about the outlook for the rest of the year in that market? Are you starting to see good demand when either local product or just kind of product that hits well with the consumer? Is there or is this something that could continue with the consumer? Rich Gelfond -- Chief Executive Officer So I think you have to separate the question into two parts. One is the macro issues in China and the other is the release schedule. So in 2023, China, even though it had just opened up from the pandemic, had in the film side, had a very good year despite the fact that the economy was quite challenged there. And one of the few bright spots in the Chinese economy was the film sector. And as a matter of fact, IMAX had a pretty good year in '23, as you know, and it was not far off our best years actually in '23. So I have no question that the audience will be there and there's appetite for film, and I'm less worried that I think people are in other sectors of the economy like real estate, for example. In terms of 2024, the issue is a little bit more film driven. And I would say, in the first quarter, our Chinese New Year was fine, but the year before was a record and that had much less to do with the economy than to do with the film selection that was available. And much more of U.S. films are now getting into China than got in, in the last couple of years. So for most of the films in our foreseeable future, they've already been submitted and accepted. And then there's which of the local films and what are they going to be? Will we extend we don't have we have a lot of visibility into the industry, which is positive. We don't have as much visibility into the specific films and how they'll play. So I again, I'd rather say the answer is ex dollars. But I think it depends on how the films perform, but I don't see any particular impediments in China that would prevent it from behaving in the way as the rest of the world does. Chad Beynon -- Macquarie Group -- Analyst And then on the capital allocation, $40 million spent on buybacks at good prices. So certainly great to see that being done. Rich, what are you seeing in just the overall M&A market when you talk to different tech partners, when you go to some of these conferences that you talked about with SSIMWAVE? Are there still tuck in opportunities or from a capital allocation, should we just kind of focus on, you know, the convert cap call and, incremental buybacks? Rich Gelfond -- Chief Executive Officer So I don't think part of our strategy at this time is really to do a significant acquisition of any sort. And we're not really looking at that. And I think the biggest reason is we have what we think is a really strong model and that showed in '23. It showed in the first quarter. And I think, you know, as I talked about in my prepared remarks, '25 and '26 are going to be awesome. And at the same time, you know, we're expanding our aperture for content. We play whether it's documentaries or alternative content and using our platform in more ways. So we have obviously a lot more signings, so the theater network will grow. So we have a lot of faith in the ability of our company to generate improved cash flow and improved earnings. So I don't think you'll see us veering off. The only caveat I would give you is maybe we would do something that fills in a small way. So if we found something that could help SSIMWAVE or we found something that could help some of our core strategies, that's something we would think about. But I think otherwise, it will be continue to invest in our joint venture arrangements, which have extremely good IRR profile, as you know, and when we'll be opportunistic about buying in stock. Chad Beynon -- Macquarie Group -- Analyst Thank you very much. Appreciate it. Operator And one moment for our next question. And our next question will be coming from Stephen Laszczyk of Goldman Sachs. Your line is open. Stephen Laszczyk -- Goldman Sachs -- Analyst Hey. Great. Thanks for taking the questions. Rich, on local language, I think local language hit $55 million in box in the first quarter. Can you maybe update us on how you're expecting local language scale over the course of the year, just given how the release slate stands today? And then any notable updates on maybe the slate looking ahead into '25 and beyond? Rich Gelfond -- Chief Executive Officer Yes. So I think we feel pretty good about our local language initiative. I would hope it will be better, the box office, than it was. Last year, to give you like kind of a snapshot in time, Stephen, I think it was last week, we were playing five local language films. We had one from Indonesia, two in India, one in Korea, and one or two in Japan, and maybe we had something in China, I'm not even sure. So it's just a regular part of our business. But we kind of look at it a little bit differently than the Hollywood business because the Hollywood business is more a blockbuster driven. So if you ask me what are the big titles in '25 or '26, I can tell you what they are and maybe even to be able to do a close forecast. But for local language films, it's more of a portfolio approach for us, which is, as Natasha and I were both talking about, increasing utilization of the theater network and just being that additive to the slate other than obviously like Chinese films in China or Japanese films in Japan. So we don't really have that the same kind of visibility into next year or the year after because our approach is somewhat different. In a way, the bigger films, the Hollywood films is more like, elephant hunting, whereas the other local language films are more tactical on filling and gaps in schedule. But I would say we're investing in that, and we part of our strategic goal is to continue to develop that, and I haven't seen anything in terms of obstacles in the way of accomplishing that. Operator And one moment for our next question. And our next question will come from Mike Hickey of The Benchmark Company. Mike Hickey -- The Benchmark Company -- Analyst Hey, Rich, Natasha, Jennifer, thanks for taking our questions here, and congratulations on a great quarter. I guess, just thinking about, Rich, your Hollywood collaboration, obviously, you guys are nailing it, Oppenheimer Dune: Part 2. And it seems like, it's pretty clear you've got heavy influence with your cameras and tech on the slate that matters for '25 and '26. And I think obviously great share performance you had in the quarter in North America. I guess just thinking about the opportunity you see, Rich, outside of maybe your domestic market with Hollywood Blockbusters, obviously, you go serve a global market, but thinking about local language and maybe the opportunity to use more of your cameras and tech with some of those films? And I guess, you just said it's difficult to kind of pick the winners, but maybe you can do that. I'm not sure. But just sort of curious the opportunity there and if that can help your share performance and sort of bridge to where you are in North America? And then the second question would be on, just how obvious it is, I guess, on '25 and '26 and your influence on the film slate and your likely share of that slate. When should we see more of a follow through you think on system signings and installations? I guess just with the backdrop here of 1Q signings that look like they're down year over year, and I think you said it's picked up. But just sort of curious how system signings and installations should pace into that, pretty profound '25, '26 opportunity led by IMAX? Rich Gelfond -- Chief Executive Officer So I'm going to answer your second one first and then go back to your first question. But you should not get the feeling that signings or installations are slower. I mean, the quarter is a period of time. And as we said in our remarks, we have 17 installs, 17 signings, as of and back we have 17 installs also, but we have 17 signings through today. But the level of activity is very high, and I'm not someone who predicts things. But I think in the coming weeks, you're going to see a fair amount more coming. So whatever the quarter says, there's no indication that signings have slowed down. And as a matter of fact, coming out of CinemaCon, there's a lot of activity as much as I've seen. And I think that's largely driven by things you're talking about, the '25 slate, the '26 slate, filmmakers leaning in heavily, studios leaning in heavily, marketing leaning in heavily. And I would think a number of those indices, whether it's signings, whether it's market share, whether it's installs, especially as we approach the '25 incredible slate with lots of IMAX DNA in it. So I think that's all added to it. And I think that's going to create a lot of momentum around our business. And I don't have to remind everyone, but I should that if you go backwards in time, you're coming out of a pandemic and a rider strike. But when you go forward in time, you're going into slated in '25 and '26 that look remarkable with tons of IMAX DNA in it. So making it simple, I mean, that should influence the trajectory of our whole business. As to your first question about using IMAX technology and cameras and our DNA in international projects. I'm glad you asked that question because, in fact, yesterday, I was on a call, with Daniel Manwaring, our CEO of China, and I actually didn't realize this, but we have six films now being filmed in China using IMAX cameras. And I think he said he thought three would release this year and three would release next year on our call. And again, we're in negotiations with a few people in India about using our cameras in other areas. So the world is small enough where they saw the results of coming out of where IMAX DNA is involved. And certainly, they're interested in doing that on a global basis. And we didn't really give you color where just kind of non-quantitative color. But coming out of CinemaCon, we had an IMAX CEO forum, and I think this is important, not just from studios, but from filmmakers on kind of a global basis. The level of interest and inquiries has really spiked. So if I showed you my call sheet or our incoming inquiry list and the names of the filmmakers about doing different things, that's really increased dramatically. And that becomes really important because it's not only the studios who are saying as part of our strategy, but it's the talent. And as you know, the talent has a lot of influence, not just in Hollywood, but in Beijing and Seoul and a lot of other places. So I think the trends, both financial trends and artistic trends, are definitely spilling over on a global basis. Mike Hickey -- The Benchmark Company -- Analyst Nice. Thank you. Operator And one moment for our next question. And our next question comes from Jim Goss of Barrington Research. Your line is open. Jim Goss -- Barrington Research -- Analyst Thanks. Rich, you've talked about your broadened view of what you feel can work on IMAX screens and especially in terms of the IMAX cameras. And I'm wondering how you and you've also talked about interplay with a greater variety of, content creators. And I'm wondering how you navigate and make those decisions, because I know you're very selective on that, in terms of who you decide to work with and what you think might fit. And is some of this being targeted then to the, screen time during the week, as alternative content rather than, just things that will go on the weekend, displays? Rich Gelfond -- Chief Executive Officer Yes, Jim. Absolutely. I think Natasha spoke a little bit about some of that. So as she mentioned, our partnership within '24 is aimed to go out on Wednesdays. I mean, right now, we're in the middle of a discussion where there's a very exciting project, but it releases on a weekend when we have a really big film release. And we're declining to do that project because it's not really incremental. So we're much more focused on capacity utilization and filling things in on the off days. And when we discuss alternative content with our counterparties, frequently, that's the discussion that these are the days that are available we would consider. And I actually don't remember which days, but like, Andre 3000 was released on a weekday. This weekend, we're partially doing in our network, a film called challengers. But we did select premiers, I think, on Tuesday night, and Zendaya, the star, showed up in an IMAX theater to do that and things like the Beach Boys concert with Disney+ that we're doing. So that's definitely the way we're positioning it is not to be competitive with our core blockbuster projects, but to use our platform in a complementary way to fill in the utilization gaps. Jim Goss -- Barrington Research -- Analyst And there was a time the studios weren't so fond of your cutting back on some of their showings during the week, in favor of anything else. So I gather you're making more headway in terms of your ability to control your screen usage and offer them what you think is appropriate? Rich Gelfond -- Chief Executive Officer Yes. Well, as you know, Jim, you know, every negotiation on life is based on supply and demand and leverage and lots of factors. And I think, you know, I mean, I got to stop and say we get almost 6% of the North American box office on 1% of the screen. So you could understand that's made studios a little bit more flexible in terms of their willingness to let us program something else on a Tuesday night, and it's made us maybe a little more careful when we give away the slot. So instead of what we would have said, we promise you a 100% of the network for two weeks. We're carving out exceptions in advance to facilitate the alternative content and the documentations. We're affirmatively making that effort. Jim Goss -- Barrington Research -- Analyst OK. And last thing, congratulations on that 5.9%, very impressive. You clearly have had continuing success versus, the depth of product, maybe broad more broadly. As 2025 and 2026, come into play and you have an increased, you know, at least we're expecting an increased supply of films. So you'll have greater film strength, but you also have greater competition. And I think Mike was bringing this up a little bit already. But just how should we frame our expectations in that more competitive but more robust environment? Rich Gelfond -- Chief Executive Officer I mean, I think you should assume that we'll have better financial performance. That's what we assume. I think it's, as I said, we don't have many holes in the whole year for 2025 and 2026, and that doesn't include the supplemental content, which we've been discussing and widening our aperture. So I think at the moment, we feel extremely good. Jim Goss -- Barrington Research -- Analyst OK. That's great. Thank you very much. Rich Gelfond -- Chief Executive Officer Thanks, Jim. Operator And one moment for our next question And our last question will be coming from Steven Frankel of Rosenblatt Securities. Your line is open. Steve Frankel -- Rosenblatt Securities -- Analyst Good morning, and thanks for the opportunity to give me an hour. I'll be quick. You tried to consolidate the China sub as a way to save money. Maybe detail for us, since that didn't happen, where you can pull cost out of that operation without sacrificing opportunities? Rich Gelfond -- Chief Executive Officer Well, good question, Steven. In fact, we've been doing that. So we just moved our office in Shanghai, our headquarters into half the space and half the rent. And it's one of our strategic goals is to manage cost there. We brought in our IR effort there and saved some cost in the financial area, you know, kind of across the board, we've been looking at what opportunities that presents. And you didn't ask this, but I'll address it because we've gotten the question, are we going to try and privatize it again? And we can't go back until much later this year. But we haven't made a decision yet what to do. I think it will depend on China's financial performance, what IMAX's liquidity looks like, and then how the Chinese shareholders feel about it I will make a decision just reminding everyone that wasn't, have to do. That was it would be nice if we could do it. But even though we didn't get it done in the way we wanted, we've realized some of those savings along the way by being strategic about how we manage our costs there. Steve Frankel -- Rosenblatt Securities -- Analyst Great. And then sales efforts are now concentrated on areas outside of China, true? So that's another opportunity, I assume? Natasha Fernandes -- Chief Financial Officer Yes, it is, Steve. Actually, in our 17 signings year to date, we actually have two new customers, one in India and one in Turkey. And so as we look at our strategy to continue to expand in rest of world regions, we are thinking through not only which countries we can expand in, but who are the partners we can expand with and getting new opportunities from new partners is a great way to expand as well. Steve Frankel -- Rosenblatt Securities -- Analyst Great. Thank you so much. Operator And I'm showing no further questions. I would now like to turn the conference back to management for closing remarks. Rich Gelfond -- Chief Executive Officer Thank you, operator, and thank you for joining us. I mean, this year was predicted to be a way down year. We didn't agree with that. The first two months, obviously, were challenging, but March was just incredible. And I think starting this quarter, we're very much on budget for what we see for the second quarter. And I think if people line up this year's content versus last year's, it really is not a weaker year, at least for IMAX that was. And we remain consistent with how we felt about this year at the beginning of the year. And I think when you look into rest of the year, Joker, Deadpool, Despicable Me, a lot of other things, there's a lot of good stuff to come. And as I said, stay tuned on the signings front. There's a lot of activity there. And when you look into '25 and '26, I think there's a lot to be excited about. And without getting hyperbolic about it, morale at IMAX and seeing it from the inside, we feel we're extremely well-positioned, and we think that people falsely think we're like an exhibitor. But if you look at what our box office is and you look at what our margins are and you look at what our balance sheet looks like, I think we continue to deliver, and I think that'll be more and more visible as we move forward. Thank you all for joining.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you for standing by, and welcome to the Intel Corporation's first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, corporate vice president of investor relations. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Jonathan. By now, you should have received a copy of the Q1 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I'm joined today by our CEO, Pat Gelsinger; and our CFO, David Zinsner. In a moment, we will hear brief comments from both followed by a Q&A session. Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it and as such, are subject to various risks and uncertainties. It also contains reference to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release most recent quarterly report on Form 10-Q and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to corresponding GAAP financial measures. With that, let me turn things over to Pat. Pat Gelsinger -- Chief Executive Officer Thanks, John, and welcome, everyone. We've reported solid Q1 results, delivering revenue in line and EPS above our guidance as we continue to focus on operating leverage and expense management. Our results reflect our disciplined approach on reducing costs as well as the steady progress we are making against our long-term priorities. While first-half trends are modestly weaker than we originally anticipated, they are consistent with what others have said and also reflect some of our own near-term supply constraints. We continue to see Q1 as the bottom, and we expect sequential revenue growth to strengthen throughout the year and into 2025, underpinned by: one, the beginnings of an enterprise refresh cycle and growing momentum for AI PCs; two, a data center recovery with a return to more normal CPU buying patterns and ramping of our accelerator offerings; and three, cyclical recoveries in NEX, Mobileye, and Altera. We had an extremely productive Q1 and achieved several important milestones along our journey to reposition the company for improved execution, competitiveness, and perhaps, most importantly, financial results. We hosted our first-ever Intel foundry, Direct Connect, which drew nearly 300 partners, customers, and potential customers to hear about the momentum we are building with our foundry offerings. We were pleased to announce Microsoft as our fifth Intel 18A customer. We also updated our lifetime deal value to greater than $15 billion and extended our road map with Intel 14A, the first process node in the industry to use high NA EUV technology. Shortly following Direct Connect, we were thrilled to join with President Biden and Commerce Secretary Raimondo to announce our position as the National Semiconductor Champion along with the single largest award from the Chips and Science Act of more than $45 billion of proposed grants, tax incentives, and loans. During the second week of April, we brought together more than 1,000 of our top customers and partners at Intel Vision 2024, where we introduced our next-generation Gaudi 3 accelerator. We were joined by Naver, Dell, Bosch, Super Micro, and Roche, among many others who shared how they are benefiting from Intel solutions. Vision went straight into open source Summit where we led the launch of the open platform for enterprise AI project. This industry initiative aims to accelerate Gen AI deployments in what will be the largest market for AI applications, starting with retrieval augmented generation, or REG, our Xeon plus Gaudi use cases, along with our established enterprise ecosystem have a big role to play here. Lastly, we hosted the industry's first sustainability summit, underscoring our deep commitment to building a more geographically diverse, resilient, trusted, and of course, sustainable supply chain for semiconductors. We are proud of our leadership position in chemical conservation, renewable energy, and water reclamation. Our accomplishments year-to-date build on all the work we have done to execute on the strategy I laid out when I rejoined the company three years ago. Job No. 1 was to accelerate our efforts to close the technology gap that was created by over a decade of underinvestment. The heart of Phase 1 was five nodes in four years. The rallying cry was toured at combined accelerating our node transitions with improving our product execution and cadence to regain customer trust. We have rebuilt our growth in culture and execution engine and are on track to completing our five nodes four-year goal, which many of our stakeholders thought impossible at inception. In so doing, we are in a unique position with at-scale EUV technology, Western-based capacity, and at the very least, a level playing field with the market leader. Intel 28, which helps pave the way for Intel 18A begins production ramp in the second half of this year with AroLink. We expect to release the 1.0 PDK for Intel 18A this quarter. Furthermore, our lead products, Clearwater Forest and Pampa Lake are already in fab, and we expect to begin production ramp of Intel 18A in these products in the first half of '25 for product release in the middle of next year. Given this progress, now is the time to turn our focus to matching technology leadership with a competitive cost structure. Establishing a founder relationship between our products group and our manufacturing group was a critical step to achieve better structural cost. This quarter, we officially transitioned to our new operating model and introduced Intel Products and Intel Foundry. Today, for the first time, we are reporting our results to reflect the new way in which we are running the company. Separating the internal financial reporting between Intel Foundry and Intel Products was a critical step needed to provide transparency, accountability, and the proper incentives to allow both groups to make better decisions to optimize their own cost structures. This change also provided the added benefit of giving more transparency to our outside owners, we knew that the Day 1 P&L for Intel foundry was going to spark debate, but we also knew it was important to establish a baseline and provide a target model based on reasonable to conservative revenue and cost assumptions that we have a high degree of confidence we will achieve. I'm going to reiterate that point, so it is heard and understood. Our target model is reasonable, conservative, and reflects a high degree of confidence in our ability to deliver. And you can rest assured that we will be working hard to beat these targets. If we can move faster and do better, we will, and our new operating model is already catalyzing change in driving efficiencies across the organization. Let me highlight three important aspects of our business and our strategy that is underscored by the new model. First, with Intel Products, we have exposed a solid fabless franchise with established, powerful, and hard-to-displace installed base and ecosystem across enterprise, consumer, and edge that provide meaningful benefits to our customers and partners. Intel Products is a solidly profitable business today despite just recently emerging from a semiconductor downturn and still competing with legacy process technology. That is changing rapidly as we ramp Intel 3 in 2024 and Intel 18A in 2025. Within Klein, we are defining and leading the AI PC category. IDC indicates the overall PC market is now expanding. And as stated earlier, as standards emerge and applications begin to take advantage of new AI-embedded capabilities we see demand signals improving, especially in second half of the year, helped by a likely corporate refresh. Our Core Ultra ramp, led by Meteor Lake, continues to accelerate beyond our original expectation with units expected to double sequentially in Q2, limited only by our supply of wafer-level assembly, improving second half Meteor Lake supply and the addition of Lunar Lake and Aero Lake later this year will allow us to ship in excess of our original $40 million AI PC CPU target in 2024. Next year, with Meteor Lake, we will extend our lead with Intel 18A and further product enhancements. Our share position is strong and continues to strengthen as we execute on our product road map. Within DC AI, as committed, we have achieved product release on our first Intel 3 server product, the first-generation Ecor Xeon 6, codename Sierra Forest. The next-generation key core Xeon 6 product, Granite Rapids, will be released in Q3. At Vision, we demonstrated a $70 billion parameter model running natively on Xeon 6 with good performance. We continue to expect share trends to stabilize this year before improving in 2025. While budgets are still being prioritized to generative AI build-out, where we have a strong position in the head node, customer conversations continue to show improving signs for traditional CPU refresh starting in late Q2 and into the second half. Our first Intel 18A product, Clearwater Forest, is slated to launch next year and will allow us to accelerate share gains. Our Gaudi 3 launch gave us a strong offering to improve our position in accelerated computing for the data center and cloud. We now expect over $500 million in accelerated revenue in second half of 2024 and with increasing momentum into 2025 based on Gaudi 3's vastly superior TCO as well as our own expanding supply. In addition, we are finding good traction with the Intel Developer Cloud with customers onboarding with this platform, including Dell and Seeker, our largest IDC win to date. We are encouraged by our progress, but far from satisfied. Lastly, within NEX, the business has stabilized and beat our Q1 targets with channel inventories approaching normal levels and business acceleration expected through the year as a result. We also recently announced our plans for scale up and scale out Ethernet-based AI networking delivered as a discrete NIC and chiplets for AI foundry customers with numerous key providers in the industry and market standardization through the ultra-Ethernet consortium. So, that is Intel Products, good momentum, and a lot for us to build on. Let me turn to Intel Foundry. We are executing on our strategy to drive meaningful improvement in profitability over time. We are obviously not there yet, given the large upfront investment we needed to build out this business. But we always said this was going to be a multiyear plan, and we are right on track with where we expect it to be right now. As we discussed during our webinar at the beginning of the month, the transition from pre-EUV wafers to post-EUV wafers is a powerful tailwind for us. We expect our blended average wafer pricing to grow 3x faster than costs over the decade, driving significant margin expansion. In addition, more competitive wafers will allow us to bring home many of the tiles that today are being manufactured at external foundries. Both dynamics are in our control and not dependent on revenue growth and are key elements to drive the business to breakeven more than doubling our current earnings power at the Intel consolidated level. Of course, more competitive wafers combined with our position as the only company manufacturing with leading-edge wafers outside of Asia is drawing strong interest from potential external customers. It is important to note that our leadership in advanced packaging creates more value in our wafer technologies and wafer-level assembly and base die opportunities further fill our factories and extend the useful life of our tools for increased financial returns. I am pleased to announce that this quarter, we signed another meaningful customer on Intel 18A bringing our total to 6, a leader in the aerospace and defense industry. This customer chose Intel foundry based not only on the process technology benefits of Intel 18A but also because of their desire to have a secure U.S.-only supply base. Just this week, we were very pleased to announce that the DoD awarded Intel foundry Phase III of the RAMP C program, which we are confident will lead to additional federal aerospace and defense customers. More broadly, we are seeing growing interest in Intel 18A and we continue to have a strong pipeline of nearly 50 test chips. The near-term interest in Intel foundry continues to be strongest with advanced packaging, which now includes engagements with nearly every foundry customer in the industry, including five design awards. While we are highly focused on improving the near-term profitability of Intel Foundry, it is also important that we keep sight of the long-term opportunity here. The foundry market is expected to grow from $110 billion today to $240 billion by 2030, with almost 90% of the growth coming from EUV nodes and advanced packaging. Given this backdrop, we have clear line of sight to becoming the largest system foundry for the AI era and the second largest overall by 2030, building on our EUV High-NA process technology leadership in advanced packaging, manufacturing capacity, our systems expertise, and the surge in AI demand. Put it another way, our $15 billion of external revenue embedded in our Intel foundry target model would represent less than 15% of the leading-edge foundry market. It is not a question of if but when Intel foundry achieves escape velocity. And every day, we are proving to the market that Intel Foundry is a resilient, sustainable, and trusted alternative to serve a semi market on a path to top $1 trillion by the end of the decade. Let me wrap up by speaking to our All Other category, where our No. 1 priority is to unlock shareholder value. This quarter, we formally rebranded our Programmable Solutions Group, Altera, an Intel company. We look forward to bringing in a private equity partner this year to help prepare the company for an IPO in the coming years. This puts Altera on a similar path as Mobileye. We are excited about the future of both companies by providing them with separation and autonomy, we believe we enhance their ability to capitalize on their growth opportunities in their respective market and accelerate their path to create value. Combined with IMS, our mass writing equipment business, we believe these three assets represent more than a quarter of our overall market value today along with a solid Intel Products franchise and an Intel foundry business rapidly approaching $100 billion in net tangible assets, we see the opportunity to unlock significant value for our shareholders as we meet our financial commitments, stand up Intel foundry and drive it to profitability and further leverage our opportunity in AI. So, overall, I'll say that there's a lot for us to build on coming out of Q1. We are systematically executing to our strategy, and we are making steady progress. We are maniacally focused on executional excellence and fiscal discipline, and we are relentless in our drive to regain process leadership and bring next-generation solutions to solve our customers' hardest problems. All of this gives me confidence in where we are headed. Yes, we have a lot of hard work in front of us, but we know what we need to do and the payoff will be significant in the end. Semiconductors are the currency that will drive the global economy for decades to come. We are one of two, maybe three companies in the world that can continue to enable next-generation chip technologies and the only one that has Western capacity and R&D, and we will participate in the entire AI market. Quarter by quarter, we are positioning ourselves well to capitalize on the immense opportunities ahead. With that, let me turn things over to Dave. Dave Zinsner -- Chief Financial Officer Thank you, Pat, and good afternoon, everyone. We delivered solid results in the quarter with revenue finishing in line and gross margin and EPS, again beating guidance. Forward-looking demand signals in our core markets improved at a measured pace through the first quarter, and we expect to deliver full-year revenue and EPS growth in 2024 with the pace of revenue growth accelerating in the second half. First quarter revenue was $12.7 billion, up 9% year over year and just above the midpoint of our guidance, with product segments performing in line with expectations. Intel Products delivered 17% year-over-year growth, offset by inventory headwinds impacting Mobileye, Altera, and our 5G customers as well as the sunsetting of several noncore lines of business including the traditional packaging business within Intel foundry. These non-core revenue headwinds drove a sequential decline of just over $1 billion, in line with our Q1 guidance. Gross margin was 45.1%, 60 basis points above guidance, and EPS of $0.18 beat guidance by $0.05 on operating spending discipline and strong sell-through of previously reserved inventory. Q1 operating cash flow was negative $1.2 billion. Net capex was $5 billion, resulting in an adjusted free cash flow of negative $6.2 billion, and we paid dividends of $0.5 billion in the quarter. We expect Q1 to be the low point for adjusted free cash flow, driven by seasonal factors, including timing of annual bonus payments, along with upsides from larger capital offsets expected in the second half. As Pat mentioned, this is our first quarter reporting in the new operating segments. The revised structure creates a foundry relationship between manufacturing and our products groups with Intel Products, purchasing wafers and services from Intel foundry at fair market prices. This quarter represents another important step in our transformation with increased transparency and accountability across all layers of the organization, which is already having a positive impact on decision-making, efficiencies, and financial discipline. As I talk about our results, I'll categorize them between Intel Products Intel foundry, and All Other, with the All Other category, including the results of Mobileye and Altera. Additional detail can be found in our earnings release and SEC filings. Intel Products revenue was $11.9 billion, up 17% year over year. The client business grew by more than 30% year over year with a strong product portfolio and share position and significantly improved customer inventory levels. The data center and AI business contributed 5% year-over-year growth, driven by higher Xeon ASPs and improved enterprise demand. NEX revenue declined 8% year over year. As discussed last quarter, we saw significant declines in the 5G market partially offset by approximately 10% year-over-year growth in our network and edge markets, which we expect to continue to recover through the year. Intel Products operating profit expanded by more than $2.1 billion year over year, driven by higher revenue, better sell-through of reserved inventory, and operating spending discipline, resulting in an operating margin of approximately 28% in the quarter. Intel foundry revenue was $4.4 billion, down 10% year over year on lower back-end services and sample revenue, along with lower IMS tool sales. In addition, wafer volume was modestly higher in the quarter, with ASPs modestly down, driven by pricing for mature nodes. Operating profit declined by approximately $100 million year over year, with lower revenue being partially offset by improved factory utilization. Op margin declined significantly quarter over quarter, driven by higher start-up costs and the conclusion of the traditional packaging business impacting revenue. The foundry P&L will remain challenged through the year, and we expect operating margins to trough in 2024 as start-up costs associated with five nodes in four years, peak and the P&L absorbs an expected increase of roughly $2 billion in depreciation. Beyond 2024, as volume begins to shift toward leadership manufacturing nodes with a competitive cost structure scale improves, including the return of compute tiles to internal process nodes and our efficiency actions begin to flow through the P&L, we expect to see rapid profitability improvement. Mobileye revenue of $239 million and an operating loss of $68 million were both down meaningfully year over year due to a well-publicized drawdown of IQ customer inventory. Mobileye reiterated full-year guidance on their earnings call this morning. With the inventory digestion process on track, financial results are expected to recover quickly. Altera revenue was $342 million, down significantly year over year, with results impacted by the industrywide inventory digestion following supply constraints in 2022 and '23. Altera's $39 million operating loss is a result of lower revenue and spending associated with standing up Altera as a stand-alone company. We continue to expect Altera to exit 2024 at a $2 billion revenue run rate as inventory positions normalize. I want to acknowledge the hard work and focused execution across the company to transition our systems and processes to our new reporting structure. We're already seeing the results of the increased transparency catalyzing change and driving efficiencies across the company. Now, turning to our Q2 guidance. We expect revenue of $12.5 billion to $13.5 billion in the second quarter, with the midpoint aligned to typical seasonal growth. At the midpoint of $13 billion, we expect gross margin of approximately 43.5% with a tax rate of 13% and EPS of $0.10, all on a non-GAAP basis. We see the client and data center business roughly flat to Q1 results at the low end of seasonal. Q2 client revenue is constrained by wafer-level assembly supply, which is impacting our ability to meet demand for our Core Ultra-based AI PCs. We do expect sequential growth from Mobileye, NEX, and foundry services. As we look beyond Q2 guidance, we expect growth across all segments in the second half of the year, led by improved demand for general-purpose servers from both cloud and enterprise customers and increased Core Ultra assembly capacity to support a growing PC TAM driven by enterprise refresh and the AI PC. We should also see accelerating growth from our network and edge businesses, a return to growth for Altera, and a meaningful Gaudi ramp in the second half. Despite 2024, representing the peak for five-node and four-year driven factory start-up costs, we expect roughly 200 basis points of FY '24 gross margin improvement compared to FY '23. Our net capital intensity forecast of mid-30s as a percent of revenue across 2023 and 2024 in aggregate remains unchanged. With significant capital offsets expected to land in the second half of the year, we continue to expect approximately neutral 2024 adjusted free cash flow. While first-half demand signals have been a bit weaker, Q1 played out largely in line with our expectations. We achieved several important milestones toward our IDM 2.0 vision, and we're participating in a large and growing TAM with encouraging market signals for the second half of the year and into 2025. By capturing margin at both the foundry level and the fabless product level, we have margin stacking advantage unique in the industry. We are three years into our transformation, and 2024 represents the steepest part of the climb with five-node and four-year start-up cost peaking and the majority of our volume on pre-EUV process nodes with uncompetitive economics. However, as we crest the hill and look toward the next few years, we have strong wins at our back and a clear path to achieving the mid- and long-term financial targets we laid out earlier this month. With that, let me turn the call back over to John. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Dave. We will now transition to the Q&A portion of our call. As a reminder, we request that each of you ask one question and a brief follow-up where applicable so that we can get to as many of your questions as possible. With that, Jonathan, can we take the first question? Questions & Answers: Operator Certainly. And our first question comes from the line of Ross Seymore from Deutsche Bank. Your question, please. Ross Seymore -- Deutsche Bank -- Analyst Hi, guys. Thanks for letting me ask a question. I guess for my first question, I wanted to dive into the demand side of the equation. What was weaker in the near term than you had expected? And much more importantly, it seems like the back half you're going to have double-digit sequential growth in largely both quarters, so that's significantly above seasonal. I know you went through some of the reasons at a high level, but can you dive a little bit deeper into what gives you that level of confidence in the second-half ramp? Pat Gelsinger -- Chief Executive Officer Yeah. Starting out, so Ross, thanks for the question. I'll just say the market was weaker. You've seen that in a number of others that have commented as well. So, I'll say somewhat across the board a bit. We've seen that cloud customers, enterprise across geos. So, I'll just say a bit weaker demand, right, we'll just say at the low end of seasonality Q1 to Q2 that we saw. And as we go into the second half of the year, we're engaging deeply with our customers today, our OEM partners, and we just see strength across the board, right? Part of that is driven by our unique product position, some of it driven by the market characteristics and client, AI PC, and a second half Windows upgrade cycle, we believe, underway and Core Ultra is hot. And as we said, even in Q2, we're racing -- we're meeting all of our commitments, but not all of the upside requests that we're seeing from customers. So, we see a very strong AI PC outlook in the data center, as we bring in our new products, we're seeing ASPs increase very healthy on our data center products and with products like CRS that we just went to production with this week on Intel 3, we're seeing improved product position as well for competitiveness. We have the $0.5 billion of Gaudi, right? And most of that is second half loaded. And the All Other businesses coming out of inventory positions in Altera and Mobileye and NEX, all of those improved first half to second half as well. And then incremental, I'll just say, Intel Foundry, every quarter from here until the decade and we're seeing improvement in the Intel foundry. And one by one, we're seeing all of those business improvements both on revenue and margin improvements over time. So, we feel very comfortable that the second half outlook is quite strong for the business, a first half a bit weaker, but we think it's very understandable, very explainable, and a second half outlook that will be very comfortable for every business across Intel growing and a lot of momentum as we go into '25. John Pitzer -- Corporate Vice President, Investor Relations Ross, do you have a quick follow-up? Ross Seymore -- Deutsche Bank -- Analyst I do. Maybe for Dave, on the gross margin side, nice upside in the first quarter, but the drop in the second quarter is a little bit puzzling with revenues going up. So, could you just talk a little bit about that second-quarter drop and then the confidence in the rebound in the second half? Is that just revenue-driven in the second half? Or what's the key metrics there, please? Dave Zinsner -- Chief Financial Officer Yeah. Good. Thanks, Ross. Maybe start with Q1 because it somewhat explains Q2, we had better sell-through of product, had even mentioned Meteor Lake strength, that better sell-through on previously reserved material. And so, we just saw some upside in gross margins because of that. We had a little bit more of a flattish plan between Q1 and Q2 in terms of how that would flow through. And so, it kind of pulled some of the benefit of gross margin improvement we would have seen in Q2 and kind of pulled it into Q1. So, that was part of it. The second part is, as we talked about, this year was going to be a heavy year for start-up cost for us. And it really shows up more meaningfully in the second quarter versus the first quarter. And so, that puts a little added pressure on gross margins. As you point out, the upside in the revenue, we will have good fall-through in Q3 and Q4, that will help lift the gross margins from where they are today. And then on top of that, we'll see some areas which have high gross margins, helping us like, for example, Mobileye, we get good gross margin for Mobileye and the strength that we'll see through the year there and products like that will also help drive better gross margins in the back half of the year. As we look into '25, I think we'll have better gross margins than '25 than we had in '24. So, this should be an ongoing story for us on the gross margin front. And as you know, we're driving to get to kind of mid-50s gross margins by the midpoint between now and 2030 and ultimately getting to 60%. Of course, revenue will be part of that. But a lot of that is within our control. It's things like 18A wafer pricing growing at 3x the cost of 18A that will help drive margins. The pull-in of tiles, as Pat mentioned, internally is going to drive better gross margins for us over time. All of what we're doing in terms of resegmenting new businesses to drive better decision-making, that better decision-making will translate into significant cost improvements for us, which should also be a meaningful driver for gross margins over time as well. And of course, as Pat mentioned, we're happy to get the chips announcement out. And of course, that, coupled with what we expect from the EU and the investment tax credit will also be major tailwinds on gross margins over a long-term basis. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Ross. Jonathan, can we have the next question, please? Operator Certainly. And our next question comes from the line of Ben Reitzes from Melius. Your question, please. Ben Reitzes -- Melius Research -- Analyst Hey, guys, thanks a lot. Appreciate the chance to ask a question here. Pat, can you talk a little bit more about servers in the data center? There was talk of a bottom there in previous discussions, how do you see that kind of going throughout the year in light of your 2Q guidance? And what's the catalyst for the pickup there? Thanks a lot. Pat Gelsinger -- Chief Executive Officer Yeah. Thank you, Ben. And obviously, as we look at our position in the data center, I'll just say we're stabilizing. And with that, we're improving our competitiveness. We also see, as I mentioned in the comments, that the ASPs are going up comfortably as well. So, socket, fairly stable through the year, but the ASP per socket with increased core count, improves our position in, and then new products like Sierra Forest or Xeon Gen 6 product definitely gives us power performance capabilities. So, overall, we're seeing a very healthy growth rate, mid-20s as we go through the year. We're also seeing increasing interest in the AI capabilities of Xeon. And we're winning head node positions, and we're seeing pretty extraordinary performance at Vision. We talked about the ability to now run 70 billion parameter models directly on Xeon and these type of capabilities, say, for a lot of enterprise use cases, Xeon is a very strong product. And as we laid out at Vision, the ability for Xeon plus Gaudi to start positioning this open platform for enterprise AI is a very strong position for us. So, overall, we feel like we're on a solid trajectory into a market that even though it's been dominated by the Gen AI theme as enterprises, our OEMs and ODMs are communicating, there's growth here in servers. And we now have a much better product position, improving ASPs and a better overall positioning in AI for a lot of these use cases where it's Xeon CPU plus GPU and accelerator. John Pitzer -- Corporate Vice President, Investor Relations Ben, do you have a quick follow-up? Ben Reitzes -- Melius Research -- Analyst Yeah. Thanks. Can we just double-click also on Gaudi $500 million in the back half of the year? I think you previously talked about a couple of billion in the pipeline. What does that say about your yield to revenue on an annualized basis with AI? And is there an update on the pipeline and your confidence there heading into 2025 on the accelerator front? Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Ben. And obviously, pipeline converting into revenue, revenue is much more meaningful and as we said, greater than $500 million for the year, and that's obviously quarter on quarter, accelerating rapidly, which also gives a great indication for the business in '25 as well. At our vision event, we had over 20 customers publicly describing their embrace of Gaudi 2 and Gaudi 3. And I was super pleased to see the breadth of those customers. It was CSPs like Naver and Ola and IBM Cloud. It was ISVs like Seeker, right, coming on board, but maybe most importantly, enterprise customers. And ultimately, Gen AI training, OK, creating models, but enterprises are going to use models, and that's where our TCO benefits, the ability for us to action customers' data in their enterprise environment is so powerful, and customers like Bosch were coming forward and Roche to be able to demonstrate the true benefits of Gaudi and Xeon plus Gaudi. The road map is in good shape. The Gaudi 3, Falcon Shores in '25. We're also seeing that the industry wants to open alternatives. And we announced our AI networking initiative, Ultra Ethernet consortium standardizing on scale up and scale out to Ethernet, increasing work for abstract levels of AI development with PyTorch, and the embrace of the open platform for enterprise AI that we rolled out. All of those taken together, the industry is looking for open enterprise alternatives for regenerative AI deployment and Intel are quite well-positioned, and we're starting to really see that uptake in our Accelerator and Xeon pipeline now. John Pitzer -- Corporate Vice President, Investor Relations Thanks, Ben. Jonathan, can we have the next question, please? Operator Certainly. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. I wonder if you could talk to the server road map. It sounds like you're confirming the time frame for both Sierra Forest and Granite Rapids. Can you talk about -- is there demand for the Sierra Forest product as well? Do you expect that to be bifurcated where you see demand for both? And then how quickly how quickly you see those products come to volume? Pat Gelsinger -- Chief Executive Officer Yeah. So, Sierra Forest, our first Xeon 6 product on Intel 3, I'm super proud, right? Now we have a leadership process technology back on American soil for the first time in a decade. This is really exciting. And Sierra Forest, high core count, 144, 288 core product, very focused on power, performance, efficiency, and we do see a good pipeline of customers and a good pipeline of, I'll say, socket win backs because the area of power performance has been an area that we've been carrying a deficit being on an older node and now that we're on leadership nodes, we definitely see share gains for that. Of course, Granite Rapids, which will come in Q3, the Xeon 6 core part is much more of the bread and butter of the Xeon family. So, we do see that being a stronger element to the portfolio this year as we haven't been participating in the power performance sockets as aggressively lately, and Sierra Forest gives us that tool. So, it really is a one-two punch, as we've described with Granite coming in Q3 and a volume ramp on Intel 3 with that, we feel we have a very good product line. Next year is Clearwater Forest, the second generation of the Ecorepart, the leadership position on 18A in the server market, a very strong product for us. Unquestioned leadership and power performance, so I believe that's a great opportunity for us to gain share again in the data center. So, the road map is healthy. The execution is strong, and we're rebuilding customer trust. They're looking at us now and saying, "Oh, Intel is back." And we're quite excited by that. And then beyond that, building the volume, building the confidence and the momentum for traditional use cases as well as the AI use cases as I just referred on Ben's question as well. John Pitzer -- Corporate Vice President, Investor Relations Joe, do you have a quick follow-up? Joe Moore -- Morgan Stanley -- Analyst Yeah, I do. Thank you. On the foundry webinar, you had sort of talked about Intel 3 volume being kind of more of an inflection next year. Does that mean it was in server that these Intel 3 products are sort of get to volume crossover kind of some point next year? Or could we see -- obviously, it's the leadership you just talked about is important. What's kind of keeping you from getting those products ramping in the second half? Pat Gelsinger -- Chief Executive Officer Yeah. Joe, thank you. And servers always just take a while to ramp. Customers bring them in, they qualify them, they test them because they're generally putting these things at scale. So, there's just an adoption cycle for server products. And the numbers that I'm holding my team accountable for are some of the most aggressive volume ramps that we've ever achieved on server products. So, we're driving them very hard. That said, in terms of the total wafer volume this year, right, it's dominated by Intel 7 and the Intel 4 and 3 wafer volumes become much more prominent next year, and that's what I was communicating on the webinar. But as we go through the year, you're going to start to see the wafer ASPs pick up as a result of Intel 4, 3 ramping a much better ASP points, better margins associated with those, and they will become much more prominent in the foundry P&L next year. But these are production ramps that are already underway on Intel 3. The Intel 4 ramp already underway. We began that second half of last year. So, these wafer ramps are underway with volume productions, volume products that we're bringing to the marketplace, very confident in our ability. And then, of course, 18A as we deliver the PDK for that in Q2, the 1.0 PDK and we'll begin the volume ramps on Clearwater Forest, [Inaudible] Panther Lake in the first half of next year for those products coming out. So, we feel very comfortable with that overall picture that we laid out. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Joe. Jonathan, can we have the next question, please? Operator Certainly. And our next question comes from the line of Vijay Rakesh from Mizuho Securities. Your question, please. Vijay Rakesh -- Mizuho Securities -- Analyst Yeah. Hey, just a quick question on the Grand Rapids. Any thoughts on the timing? And do you expect to regain some computing share server share there with those ramps? Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Vijay. I'm building a little bit on the last question. Granite Rapids will come in Q3 of this year when we'll have the production release of that product. Same as -- it just takes some time for customers to get comfortable, qualify, and bring those products to marketplace. But Sierra Forest, Granite Rapids these are much more competitive power performance products on Intel 3. So, we see them stabilizing and then giving us opportunity to regain share. And as we go into next year, we expect that we're regaining share as we end this year and go into next year. These are great products and we're going to be ramping them very aggressively with our customers. John Pitzer -- Corporate Vice President, Investor Relations Vijay, do you have a follow-up? Vijay Rakesh -- Mizuho Securities -- Analyst Yeah. Thanks. Just on the GPU side, on the AI side, any parts on Falcon shares? Any preliminary takes on that? How do you see that building out into '25? Thanks. Pat Gelsinger -- Chief Executive Officer Yeah. And Gaudi 3 announcement this quarter extremely well received. And as I mentioned already, 20-plus customers for Gaudi 2, 3, we're seeing that build. Obviously, Falcon Shores will build on that momentum. We'll be bringing that late next year when Falcon Shores when we combine the great systolic performance of Gaudi 3 with a fully programmable architecture and all of that comes together with Falcon Shores. And then we have a rich -- a very aggressive cadence of Falcon Shores products following that. We also added the Gaudi PCIE card to it, this use case of Xeon plus an accelerator or Gaudi accelerator is getting very good response from customers as well. So, we'll be bringing that out later this year. But the real story is delivering the TCO value, delivering the enterprise use cases. Falcon Shores will just build on the momentum that we're establishing with Gaudi 2 and 3. We also described customers coming on the Intel Developer Cloud, where we're getting these products very early in their life available for developers and enterprise customers, and customers like Seeker now our biggest Intel Developer Cloud win to date are seeing the benefits, but the bigger story is how do we unleash the data assets of our enterprise customers, and that's things like the open platform for enterprise AI that we launched at Open Summit. So, overall, a lot of good things happening to unleash the Gen AI cycle for Intel. And of course, right, as we're doing this, AI is a hot market, we're participating across all of our segments whether that's client edge, enterprise, or our foundry opportunities as well, delivering AI everywhere. John Pitzer -- Corporate Vice President, Investor Relations Thanks, Vijay. Jonathan, can we have the next caller, please? Operator Certainly. And our next question comes from the line of Timothy Arcuri from UBS Securities. Your question, please. Tim Arcuri -- UBS -- Analyst Thanks a lot. Dave, I also wanted to ask about gross margin. You did seem to be better next year, but it is really whipping around a lot. And it looks like you sort of have to exit this year at 48 or maybe a little higher which is already well above the 45.5 that you'll be at this year because you're guiding it up to 100 basis points. So, I know you don't want to guide next year, but if you can even qualitatively help us can you sustain those margins at that level? And I asked because last year, you sort of exited at 49% and then things crashed here during the first half of the year. So, can you help us just think about what some of the puts and takes will be next year off of that high base if you're going to exit this year at? Dave Zinsner -- Chief Financial Officer Yeah. Good question. So, there will be additional start-up costs next year. We do think it on a percent of revenue basis, it will be lower. So, that should help lift the margins. Of course, the expectation would be we see growth in revenue. That also should help. On top of that, we already are seeing good decision-making and changing decision-making around how we operate now under this new different business structure that we have at this point. A lot of that stuff doesn't actually show up in the P&L. So, all these decisions get made this year, but a lot of the decisions made -- sorry, a lot of the benefits to those decisions don't show up until next year and the year after. So, we should see some benefit from that as well. The other thing that kind of has whipped this -- our margins around a bit over the last few years has been this notion where we reserve material all the way up until the PRQ Pat just mentioned that Sierra Forest is just PRQ. So, ordinarily, we take a whole bunch of reserves on Sierra Forest and then we would release them as we as we started shipping beyond the PRQ date. We won't be doing that going forward. So, that should help adjust the volatility of the gross margin. So, it will be more a function of revenue growth profile in the fabs, start-up costs that we have, and the mix. John Pitzer -- Corporate Vice President, Investor Relations Tim, do you have a follow-up question? Tim Arcuri -- UBS -- Analyst I do. I do, yes. So, I want to ask about server CPU share. March, I think the assumption for March was that service share was going to be pretty flat. So, the question is, was that the case? And it sounds -- you sound maybe a little bit less optimistic, if I'm sort of reading between the lines, on share into the back half of the year, just given how long it takes these things to sort of impact your share. So, your bullish outlook in the second half of the year. It sounds like it's more market-driven versus share-driven. Can you just clarify that? Thanks. Pat Gelsinger -- Chief Executive Officer Well, overall, I like to say it's hard to predict, right, exactly how these will play out in light of the overall Gen AI surge that we've seen. That said, products are good, right? We came into the year improving our market share position in the first quarter of the year. It does take time to ramp these new products. But better products, rebuilding trust with our customers that we're delivering on these, and now hitting what we would call the early end of the cycles on these new products is giving us a lot of interest with the market and the customer. New use cases also demonstrated a $70 billion parameter model running natively on Granite Rapids at our vision event, all of these just make us more and more confident in our business execution. We're also seeing that we don't need socket count to increase. The ASPs are going up with the core counts on our new leadership products as well. So, all of those in a fairly optimistic view that we're getting from our OEMs and our channel partners for their view of upgrade cycles, building momentum from customers across the industry. We feel very comfortable that we're stabilizing our position. We have an improving our road map, and we do expect to see share gains as we end the year and go into '25. John Pitzer -- Corporate Vice President, Investor Relations Jonathan, can we have the next caller, please? Operator Certainly. Our next question comes from the line of Srinivas Pajjuri from Raymond James. Your question, please. Srini Pajjuri -- Raymond James -- Analyst Thank you. My question is on the client side. I think, Pat, you mentioned something about supply constraints impacting your 2Q outlook. If you could provide some color as to what's causing those supply constraints? And when do you expect those to ease as we, I guess, go into the second half? And then in terms of your AI PCs, I think you've been talking about $40 million or so potentially shipping this year. Could you maybe put that into some context as to how it actually helps Intel? Is it just higher ASPs? Is it higher margin? I would think that these products also come with higher costs. I just want to understand how we should think about the benefit to Intel as these AI PCs ramp. Pat Gelsinger -- Chief Executive Officer Yeah. Thank you. And overall, as we've seen, this is a hot product. The AIPC category, and we declared this as we finished last year, and we've just been incrementing up our AIPC or the Core Ultra product volumes throughout. We're meeting our customer commitments that we've had, but they've come back and asked for upside on multiple occasions across different markets. And we are racing to catch up to those upside request, and the constraint has been on the back end. Wafer-level assembly, one of the new capabilities that are part of Meteor Lake and our subsequent client products. So, with that, we're working to catch up and build more wafer-level assembly capacity to meet those. How does it help us? Hey, it's a new category. And that new category of products will generally be at higher ASPs as your question suggests. But we also think it's new use cases and new use cases over time, create a larger TAM that creates an upgrade cycle that we're seeing. It creates new applications, and we're seeing essentially every ISV -- AI behind their app, whether it's the communications, capabilities of Zoom and team for translation and contextualization whether it's new security capabilities with CrowdStrike and others finding new ways to do security on the client or whether it's creators and gamers taking advantage of this. So, we see that every PC is going to become an AI PC over time. And when you have that kind of cycle underway, Srini, everybody starts to say, "Oh, how do I upgrade my platform?" And we even demonstrated how we're using AI PC in the Intel factories now to improve yields and performance inside of our own factories. And as I've described it, it's like a Centrino moment, right where Centrino ushered in WiFi at scale. We see the AI PC ushering in these new use cases at scale, and that's going to be great for the industry. But as the unquestioned market leader -- the leader in the category creation, we think we're going to differentially benefit from the emergence of the AI PC. John Pitzer -- Corporate Vice President, Investor Relations Srini, do you have a follow-up? Srini Pajjuri -- Raymond James -- Analyst Yes, John. Thank you. And I guess my other question is on the other bucket. I think, Dave, you kind of talked about Altera potentially exiting the year at a $2 billion run rate from current levels, that's a pretty steep ramp. And also, I think you said next growth will accelerate over the next couple of quarters. So, given the telecom weakness out there that we're seeing, I'm just curious as to what's giving you that visibility or confidence. I mean, is this driven by some new products? Or is it just the market recovering? Any color would be helpful. Thank you. Dave Zinsner -- Chief Financial Officer Yeah. On Altera, and this is not unprecedented when you see a massive work down of inventory, of course, that significantly impacts the revenue. But as that normalizes, then you start shipping to end consumption. So, it's actually a pretty easy lift to get to the $2 billion mark once we're through the inventory digestion period. So, I think we have high confidence on that. Pat Gelsinger -- Chief Executive Officer And others have commented on their inventory cycles as well in the FPGA category. We have good products in the second half of the year with Agilex starting to ramp as well. Dave Zinsner -- Chief Financial Officer And then on NEX, of course, that business also has gone through its own inventory adjustment. So, we have good confidence around that reversing, which will help drive strength. And then some of the products that are were tailored to the AI space. Of course, we'll see like Phoenix, for example, we'll see strength through the year. And so, that should drive good revenue growth through the year as well. Pat Gelsinger -- Chief Executive Officer Yeah. And also, in NEX, the AI networking products are strong, our IPU products, we're seeing strength in that area. So, it's inventory as well as products. Even though, as your question suggests, the communication sector and the service providers, that is weaker through the year, but pretty much every aspect of their business and AI, as Dave said, is seeing strength as we go into the second half of the year and into '25. John Pitzer -- Corporate Vice President, Investor Relations Thanks, Srini. Jonathan, can we have the next call caller, please? Operator Certainly. Our next question comes from the line of Vivek Arya from Bank of America. Your question, please. Vivek Arya -- Bank of America Merrill Lynch -- Analyst Thanks for taking my question. Pat, just a conceptual question. In a gen AI server with accelerators, how important is the role of a specific CPU? Or is it easily interchangeable between [Inaudible] or AMDs or arms? I guess the question is that if most of the workload is being done on the accelerator, does it really matter what CPU use? And can that move toward gen AI servers essentially shrink the TAM for x86 server CPUs because a number of your cloud customers have announced ARM-based server alternatives? So, I'm just curious, how do you think about that conversion over to Gen AI, and what that means for x86 server CPU TAM going forward? Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Vivek. And we spoke at our Vision event about use cases like RAG, retrievable augmented generation, where the LLM might run on an accelerator, but all of the real-time data, all of the databases, all of the embedding is running on the CPU. So, you're seeing all of these data environments, which are already running on Xeon and x86 being augmented with AI capabilities to feed an LLM and I believe this whole area of RAG becomes one of the primary use cases for enterprise AI. And if you think about it, an LLM might be trained with one-, two-year-old data, right? But many of the business processes and environment are real-time, right? You're not going to be retraining constantly. And that's where this area of the front-end database becomes very prominent. All of those databases run on x86 today. All of them are being enhanced for use cases like RAG. And that's why we see this unlock occurring because the data sits on-prem, the data sits in the x86 database environments that are all being enhanced against these use cases. And as we've shown, we don't need accelerators in some cases. We can run a 70 billion parameter model natively on Xeon with extraordinary TCO value for customers. And furthermore, all of the IT environments that enterprises run today, they have the security, they have the networking, they have the management technologies in place. They don't need to upgrade or change those from any of those use cases. So, we see a lot of opportunity here to build on the enterprise asset that we have with the Xeon franchise, but we're also going to be aggressively augmenting that and we're commonly the head note, even when it's other accelerators being used or other GPUs being used and as we've described, Xeon plus Gaudi, we think is going to be a very powerful opportunity for enterprises. So, in many of those cases, we see this as a market lift, new applications, new use cases, new energy coming to the enterprise AI. Here we are in year 23 of the cloud. And while 60% of the workload has moved to the cloud, over 80% of the data remains on-prem under the control of the enterprise, much of that underutilized in businesses today. That's what Gen AI is going to unlock. And a lot of that is going to happen through the x86 CPU and we see a powerful cycle emerging. And I would just point you back to what we described that vision. This was a great event, and many customers are seeing that value today. John Pitzer -- Corporate Vice President, Investor Relations Vivek, do you have a quick follow-up? Vivek Arya -- Bank of America Merrill Lynch -- Analyst Yes. Thank you. Maybe one for Dave on the potential operating loss, kind of how do we model that for the foundry business. So, let's say, if I exclude the $2 billion in depreciation headwind, which I'm assuming is almost all going to your foundry business. What is the right way, Dave, to think about foundry operating income or loss this year? And how much of external foundry revenue are you expecting this year? Thank you. Dave Zinsner -- Chief Financial Officer Yeah. Good question. The operating losses will pick up. We roughly were at like 2.4-ish in the first quarter. It will pick up in the second quarter, given the start-up costs are increasing and I would say, be roughly in that range for the remainder of the year. And then what I said before is we see that improving then going into '25. And Pat's given me the order, he wants to see every quarter some improvement in the operating loss ultimately to get to breakeven midway through the point between now and 2030. And I think that is very achievable. Sorry, Vivek, what was the second question? Are you still on? Operator No, we've moved on. John Pitzer -- Corporate Vice President, Investor Relations Why don't we go to the next caller, Jonathan? Operator Certainly. Our next question comes from the line of Matt Ramsay from Cowen. Your question, please. Matt Ramsay -- TD Cowen -- Analyst Yeah. Thank you very many guys. Pat, one question I've been getting from some folks, and I totally understand the lead times of starting some of these programs to put increased tile volume at external foundry, but you guys have made the progress on the five nodes in four years, as you highlighted multiple times. Is there any flex at all to bring back some of that external volume earlier? And I think it matters to some folks because it's a demonstration of you guys being able to ramp your own product to volume and to yield and to economics on 18A, which might give some indication to some external customers that are looking at your foundry business. So, just any flex at all to pull that timeline in sort of reshoring some of the external tiles? Thanks. Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Matt. And largely, those decisions are made when the product decisions are made. So, there's limited flexibility to move them around. And if you pick a process node for a certain tile, generally, that's the process node that it's on. So, there's limited flexibility there. And many of those decisions, as we've highlighted before, Matt were literally made years ago, right? And those choices were made. That said, we see the peak of our external tiles being this year and next year. And then the road map and the movement of those coming back begins to quite accelerate even starting late next year. So, the plan is clearly laid out. As we said, we see a couple of fabs worth of capacity coming back into the Intel factory network as we move into '26 and beyond. So, this becomes a significant driver. We've also driven significant road map decisions against that improving profile of our products. And I'll say that begins in a very powerful way next year with Panther Lake and Clearwater Forest. Unquestioned the best products in clients, the best products and servers are now being built on Intel 18A. And as the question suggests we see customers seeing that every foundry customer that we speak to, right, understanding where we are in our product and process cycle and the ability for them to essentially benefit from Intel as customer zero in the foundry network. So, overall, this is feeling very good. We're on track to go accomplish that and the business model that we've laid out and Dave and I presented as we go through the decade, shows a very healthy improvement in wafer ASP, wafer volume, foundry, and these decisions are made, right? We're on track to both have the wafer foundry capabilities, to have the process technology and the products to fill those factories. And that's why Dave and I have such confidence in the business model that we've laid out and the improvements that it will deliver as we go over the next several years together. John Pitzer -- Corporate Vice President, Investor Relations Matt, do you have a quick follow-up? Matt Ramsay -- TD Cowen -- Analyst Yes, John. Thank you. I wanted to ask a question about the AI accelerator road map. So, you guys have Gaudi 3 that you talked about and Falcon Shores coming next year. And the hardware looks quite good. I wanted to ask a question about the software that goes on top of that for both -- well, really for inference but also for training. How do you feel about the software road map that you guys have in the AI space going forward? And how much compatibility or uniqueness rather, is there to the software that runs on Gaudi 3 versus what will come on Falcon Shores and the forward road map? Thanks. Pat Gelsinger -- Chief Executive Officer Yeah. Maybe three different points there. The first one is for inferencing, you need a whole lot less software compatibility, right? And as the market is more focused on inferencing going forward, if you can run the models, right, in the context of the databases and the other, so that portends and is why we're seeing the strength that we're seeing right now, you know, Matt, in these use cases. And clearly, some of the software compatibility issues of a GPU have led to the training environments that have been challenging for us. But now as customers get much more focused on enterprise use cases, inferencing TCO, we're finding a lot of strength in the offerings that we have. And as we've matured a number of customers now, we've worked through many of those use cases and getting quite a lot of acceptance of the software stack that we have with Gaudi 2 and 3. We will have a very smooth and seamless upgrade from Gaudi 3 into Falcon Shores. But the powerful thing that will come with Falcon showers is the full programmability that you'll see with the complete instruction set capabilities of Falcon Shores. At that point, we will have no deficits for any of the use cases and much greater compatibility for the full range of AI capabilities. The other thing that I emphasize is Xeon is a powerful capability with incredible programmable capabilities and we're finding these use cases like I described with the open platform for enterprise AI, RAG use cases is clearly beneficial there for us. So, overall, we're feeling like the software story is coming together very nicely. And the entire industry is moving to higher-level software abstraction such as Python and Triton. So, they're moving away from any of these dependencies to an open software or platform. So, the industry trends are in the right direction. Our maturity is in the right direction, and our software stack has gotten much more mature, and we'll have a very smooth upgrade to Falcon Shores. So, let me just close our time together and say thank you for the questions. Thanks for joining our call. We appreciate the update to give you on a very solid Q1. And we got a lot done in Q1 that gives us a great foundation for the future. We continue to drive our process and products and AI innovations and delivering on our process technology and leadership road map. If any of you were at Computex in a few months, I look forward to seeing you there. We have a number of products and offerings that we'll be announcing there as we continue our AI momentum and competitiveness. And as always, we look forward to talking to you next quarter. Thank you very much. Operator Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. Answer:

the Intel Corporation's first quarter 2024 earnings call

Operator Thank you for standing by, and welcome to the Intel Corporation's first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Pitzer, corporate vice president of investor relations. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Jonathan. By now, you should have received a copy of the Q1 earnings release and earnings presentation, both of which are available on our Investor Relations website, intc.com. For those joining us online today, the earnings presentation is also available in our webcast window. I'm joined today by our CEO, Pat Gelsinger; and our CFO, David Zinsner. In a moment, we will hear brief comments from both followed by a Q&A session. Before we begin, please note that today's discussion does contain forward-looking statements based on the environment as we currently see it and as such, are subject to various risks and uncertainties. It also contains reference to non-GAAP financial measures that we believe provide useful information to our investors. Our earnings release most recent quarterly report on Form 10-Q and other filings with the SEC provide more information on specific risk factors that could cause actual results to differ materially from our expectations. They also provide additional information on our non-GAAP financial measures, including reconciliations where appropriate to corresponding GAAP financial measures. With that, let me turn things over to Pat. Pat Gelsinger -- Chief Executive Officer Thanks, John, and welcome, everyone. We've reported solid Q1 results, delivering revenue in line and EPS above our guidance as we continue to focus on operating leverage and expense management. Our results reflect our disciplined approach on reducing costs as well as the steady progress we are making against our long-term priorities. While first-half trends are modestly weaker than we originally anticipated, they are consistent with what others have said and also reflect some of our own near-term supply constraints. We continue to see Q1 as the bottom, and we expect sequential revenue growth to strengthen throughout the year and into 2025, underpinned by: one, the beginnings of an enterprise refresh cycle and growing momentum for AI PCs; two, a data center recovery with a return to more normal CPU buying patterns and ramping of our accelerator offerings; and three, cyclical recoveries in NEX, Mobileye, and Altera. We had an extremely productive Q1 and achieved several important milestones along our journey to reposition the company for improved execution, competitiveness, and perhaps, most importantly, financial results. We hosted our first-ever Intel foundry, Direct Connect, which drew nearly 300 partners, customers, and potential customers to hear about the momentum we are building with our foundry offerings. We were pleased to announce Microsoft as our fifth Intel 18A customer. We also updated our lifetime deal value to greater than $15 billion and extended our road map with Intel 14A, the first process node in the industry to use high NA EUV technology. Shortly following Direct Connect, we were thrilled to join with President Biden and Commerce Secretary Raimondo to announce our position as the National Semiconductor Champion along with the single largest award from the Chips and Science Act of more than $45 billion of proposed grants, tax incentives, and loans. During the second week of April, we brought together more than 1,000 of our top customers and partners at Intel Vision 2024, where we introduced our next-generation Gaudi 3 accelerator. We were joined by Naver, Dell, Bosch, Super Micro, and Roche, among many others who shared how they are benefiting from Intel solutions. Vision went straight into open source Summit where we led the launch of the open platform for enterprise AI project. This industry initiative aims to accelerate Gen AI deployments in what will be the largest market for AI applications, starting with retrieval augmented generation, or REG, our Xeon plus Gaudi use cases, along with our established enterprise ecosystem have a big role to play here. Lastly, we hosted the industry's first sustainability summit, underscoring our deep commitment to building a more geographically diverse, resilient, trusted, and of course, sustainable supply chain for semiconductors. We are proud of our leadership position in chemical conservation, renewable energy, and water reclamation. Our accomplishments year-to-date build on all the work we have done to execute on the strategy I laid out when I rejoined the company three years ago. Job No. 1 was to accelerate our efforts to close the technology gap that was created by over a decade of underinvestment. The heart of Phase 1 was five nodes in four years. The rallying cry was toured at combined accelerating our node transitions with improving our product execution and cadence to regain customer trust. We have rebuilt our growth in culture and execution engine and are on track to completing our five nodes four-year goal, which many of our stakeholders thought impossible at inception. In so doing, we are in a unique position with at-scale EUV technology, Western-based capacity, and at the very least, a level playing field with the market leader. Intel 28, which helps pave the way for Intel 18A begins production ramp in the second half of this year with AroLink. We expect to release the 1.0 PDK for Intel 18A this quarter. Furthermore, our lead products, Clearwater Forest and Pampa Lake are already in fab, and we expect to begin production ramp of Intel 18A in these products in the first half of '25 for product release in the middle of next year. Given this progress, now is the time to turn our focus to matching technology leadership with a competitive cost structure. Establishing a founder relationship between our products group and our manufacturing group was a critical step to achieve better structural cost. This quarter, we officially transitioned to our new operating model and introduced Intel Products and Intel Foundry. Today, for the first time, we are reporting our results to reflect the new way in which we are running the company. Separating the internal financial reporting between Intel Foundry and Intel Products was a critical step needed to provide transparency, accountability, and the proper incentives to allow both groups to make better decisions to optimize their own cost structures. This change also provided the added benefit of giving more transparency to our outside owners, we knew that the Day 1 P&L for Intel foundry was going to spark debate, but we also knew it was important to establish a baseline and provide a target model based on reasonable to conservative revenue and cost assumptions that we have a high degree of confidence we will achieve. I'm going to reiterate that point, so it is heard and understood. Our target model is reasonable, conservative, and reflects a high degree of confidence in our ability to deliver. And you can rest assured that we will be working hard to beat these targets. If we can move faster and do better, we will, and our new operating model is already catalyzing change in driving efficiencies across the organization. Let me highlight three important aspects of our business and our strategy that is underscored by the new model. First, with Intel Products, we have exposed a solid fabless franchise with established, powerful, and hard-to-displace installed base and ecosystem across enterprise, consumer, and edge that provide meaningful benefits to our customers and partners. Intel Products is a solidly profitable business today despite just recently emerging from a semiconductor downturn and still competing with legacy process technology. That is changing rapidly as we ramp Intel 3 in 2024 and Intel 18A in 2025. Within Klein, we are defining and leading the AI PC category. IDC indicates the overall PC market is now expanding. And as stated earlier, as standards emerge and applications begin to take advantage of new AI-embedded capabilities we see demand signals improving, especially in second half of the year, helped by a likely corporate refresh. Our Core Ultra ramp, led by Meteor Lake, continues to accelerate beyond our original expectation with units expected to double sequentially in Q2, limited only by our supply of wafer-level assembly, improving second half Meteor Lake supply and the addition of Lunar Lake and Aero Lake later this year will allow us to ship in excess of our original $40 million AI PC CPU target in 2024. Next year, with Meteor Lake, we will extend our lead with Intel 18A and further product enhancements. Our share position is strong and continues to strengthen as we execute on our product road map. Within DC AI, as committed, we have achieved product release on our first Intel 3 server product, the first-generation Ecor Xeon 6, codename Sierra Forest. The next-generation key core Xeon 6 product, Granite Rapids, will be released in Q3. At Vision, we demonstrated a $70 billion parameter model running natively on Xeon 6 with good performance. We continue to expect share trends to stabilize this year before improving in 2025. While budgets are still being prioritized to generative AI build-out, where we have a strong position in the head node, customer conversations continue to show improving signs for traditional CPU refresh starting in late Q2 and into the second half. Our first Intel 18A product, Clearwater Forest, is slated to launch next year and will allow us to accelerate share gains. Our Gaudi 3 launch gave us a strong offering to improve our position in accelerated computing for the data center and cloud. We now expect over $500 million in accelerated revenue in second half of 2024 and with increasing momentum into 2025 based on Gaudi 3's vastly superior TCO as well as our own expanding supply. In addition, we are finding good traction with the Intel Developer Cloud with customers onboarding with this platform, including Dell and Seeker, our largest IDC win to date. We are encouraged by our progress, but far from satisfied. Lastly, within NEX, the business has stabilized and beat our Q1 targets with channel inventories approaching normal levels and business acceleration expected through the year as a result. We also recently announced our plans for scale up and scale out Ethernet-based AI networking delivered as a discrete NIC and chiplets for AI foundry customers with numerous key providers in the industry and market standardization through the ultra-Ethernet consortium. So, that is Intel Products, good momentum, and a lot for us to build on. Let me turn to Intel Foundry. We are executing on our strategy to drive meaningful improvement in profitability over time. We are obviously not there yet, given the large upfront investment we needed to build out this business. But we always said this was going to be a multiyear plan, and we are right on track with where we expect it to be right now. As we discussed during our webinar at the beginning of the month, the transition from pre-EUV wafers to post-EUV wafers is a powerful tailwind for us. We expect our blended average wafer pricing to grow 3x faster than costs over the decade, driving significant margin expansion. In addition, more competitive wafers will allow us to bring home many of the tiles that today are being manufactured at external foundries. Both dynamics are in our control and not dependent on revenue growth and are key elements to drive the business to breakeven more than doubling our current earnings power at the Intel consolidated level. Of course, more competitive wafers combined with our position as the only company manufacturing with leading-edge wafers outside of Asia is drawing strong interest from potential external customers. It is important to note that our leadership in advanced packaging creates more value in our wafer technologies and wafer-level assembly and base die opportunities further fill our factories and extend the useful life of our tools for increased financial returns. I am pleased to announce that this quarter, we signed another meaningful customer on Intel 18A bringing our total to 6, a leader in the aerospace and defense industry. This customer chose Intel foundry based not only on the process technology benefits of Intel 18A but also because of their desire to have a secure U.S.-only supply base. Just this week, we were very pleased to announce that the DoD awarded Intel foundry Phase III of the RAMP C program, which we are confident will lead to additional federal aerospace and defense customers. More broadly, we are seeing growing interest in Intel 18A and we continue to have a strong pipeline of nearly 50 test chips. The near-term interest in Intel foundry continues to be strongest with advanced packaging, which now includes engagements with nearly every foundry customer in the industry, including five design awards. While we are highly focused on improving the near-term profitability of Intel Foundry, it is also important that we keep sight of the long-term opportunity here. The foundry market is expected to grow from $110 billion today to $240 billion by 2030, with almost 90% of the growth coming from EUV nodes and advanced packaging. Given this backdrop, we have clear line of sight to becoming the largest system foundry for the AI era and the second largest overall by 2030, building on our EUV High-NA process technology leadership in advanced packaging, manufacturing capacity, our systems expertise, and the surge in AI demand. Put it another way, our $15 billion of external revenue embedded in our Intel foundry target model would represent less than 15% of the leading-edge foundry market. It is not a question of if but when Intel foundry achieves escape velocity. And every day, we are proving to the market that Intel Foundry is a resilient, sustainable, and trusted alternative to serve a semi market on a path to top $1 trillion by the end of the decade. Let me wrap up by speaking to our All Other category, where our No. 1 priority is to unlock shareholder value. This quarter, we formally rebranded our Programmable Solutions Group, Altera, an Intel company. We look forward to bringing in a private equity partner this year to help prepare the company for an IPO in the coming years. This puts Altera on a similar path as Mobileye. We are excited about the future of both companies by providing them with separation and autonomy, we believe we enhance their ability to capitalize on their growth opportunities in their respective market and accelerate their path to create value. Combined with IMS, our mass writing equipment business, we believe these three assets represent more than a quarter of our overall market value today along with a solid Intel Products franchise and an Intel foundry business rapidly approaching $100 billion in net tangible assets, we see the opportunity to unlock significant value for our shareholders as we meet our financial commitments, stand up Intel foundry and drive it to profitability and further leverage our opportunity in AI. So, overall, I'll say that there's a lot for us to build on coming out of Q1. We are systematically executing to our strategy, and we are making steady progress. We are maniacally focused on executional excellence and fiscal discipline, and we are relentless in our drive to regain process leadership and bring next-generation solutions to solve our customers' hardest problems. All of this gives me confidence in where we are headed. Yes, we have a lot of hard work in front of us, but we know what we need to do and the payoff will be significant in the end. Semiconductors are the currency that will drive the global economy for decades to come. We are one of two, maybe three companies in the world that can continue to enable next-generation chip technologies and the only one that has Western capacity and R&D, and we will participate in the entire AI market. Quarter by quarter, we are positioning ourselves well to capitalize on the immense opportunities ahead. With that, let me turn things over to Dave. Dave Zinsner -- Chief Financial Officer Thank you, Pat, and good afternoon, everyone. We delivered solid results in the quarter with revenue finishing in line and gross margin and EPS, again beating guidance. Forward-looking demand signals in our core markets improved at a measured pace through the first quarter, and we expect to deliver full-year revenue and EPS growth in 2024 with the pace of revenue growth accelerating in the second half. First quarter revenue was $12.7 billion, up 9% year over year and just above the midpoint of our guidance, with product segments performing in line with expectations. Intel Products delivered 17% year-over-year growth, offset by inventory headwinds impacting Mobileye, Altera, and our 5G customers as well as the sunsetting of several noncore lines of business including the traditional packaging business within Intel foundry. These non-core revenue headwinds drove a sequential decline of just over $1 billion, in line with our Q1 guidance. Gross margin was 45.1%, 60 basis points above guidance, and EPS of $0.18 beat guidance by $0.05 on operating spending discipline and strong sell-through of previously reserved inventory. Q1 operating cash flow was negative $1.2 billion. Net capex was $5 billion, resulting in an adjusted free cash flow of negative $6.2 billion, and we paid dividends of $0.5 billion in the quarter. We expect Q1 to be the low point for adjusted free cash flow, driven by seasonal factors, including timing of annual bonus payments, along with upsides from larger capital offsets expected in the second half. As Pat mentioned, this is our first quarter reporting in the new operating segments. The revised structure creates a foundry relationship between manufacturing and our products groups with Intel Products, purchasing wafers and services from Intel foundry at fair market prices. This quarter represents another important step in our transformation with increased transparency and accountability across all layers of the organization, which is already having a positive impact on decision-making, efficiencies, and financial discipline. As I talk about our results, I'll categorize them between Intel Products Intel foundry, and All Other, with the All Other category, including the results of Mobileye and Altera. Additional detail can be found in our earnings release and SEC filings. Intel Products revenue was $11.9 billion, up 17% year over year. The client business grew by more than 30% year over year with a strong product portfolio and share position and significantly improved customer inventory levels. The data center and AI business contributed 5% year-over-year growth, driven by higher Xeon ASPs and improved enterprise demand. NEX revenue declined 8% year over year. As discussed last quarter, we saw significant declines in the 5G market partially offset by approximately 10% year-over-year growth in our network and edge markets, which we expect to continue to recover through the year. Intel Products operating profit expanded by more than $2.1 billion year over year, driven by higher revenue, better sell-through of reserved inventory, and operating spending discipline, resulting in an operating margin of approximately 28% in the quarter. Intel foundry revenue was $4.4 billion, down 10% year over year on lower back-end services and sample revenue, along with lower IMS tool sales. In addition, wafer volume was modestly higher in the quarter, with ASPs modestly down, driven by pricing for mature nodes. Operating profit declined by approximately $100 million year over year, with lower revenue being partially offset by improved factory utilization. Op margin declined significantly quarter over quarter, driven by higher start-up costs and the conclusion of the traditional packaging business impacting revenue. The foundry P&L will remain challenged through the year, and we expect operating margins to trough in 2024 as start-up costs associated with five nodes in four years, peak and the P&L absorbs an expected increase of roughly $2 billion in depreciation. Beyond 2024, as volume begins to shift toward leadership manufacturing nodes with a competitive cost structure scale improves, including the return of compute tiles to internal process nodes and our efficiency actions begin to flow through the P&L, we expect to see rapid profitability improvement. Mobileye revenue of $239 million and an operating loss of $68 million were both down meaningfully year over year due to a well-publicized drawdown of IQ customer inventory. Mobileye reiterated full-year guidance on their earnings call this morning. With the inventory digestion process on track, financial results are expected to recover quickly. Altera revenue was $342 million, down significantly year over year, with results impacted by the industrywide inventory digestion following supply constraints in 2022 and '23. Altera's $39 million operating loss is a result of lower revenue and spending associated with standing up Altera as a stand-alone company. We continue to expect Altera to exit 2024 at a $2 billion revenue run rate as inventory positions normalize. I want to acknowledge the hard work and focused execution across the company to transition our systems and processes to our new reporting structure. We're already seeing the results of the increased transparency catalyzing change and driving efficiencies across the company. Now, turning to our Q2 guidance. We expect revenue of $12.5 billion to $13.5 billion in the second quarter, with the midpoint aligned to typical seasonal growth. At the midpoint of $13 billion, we expect gross margin of approximately 43.5% with a tax rate of 13% and EPS of $0.10, all on a non-GAAP basis. We see the client and data center business roughly flat to Q1 results at the low end of seasonal. Q2 client revenue is constrained by wafer-level assembly supply, which is impacting our ability to meet demand for our Core Ultra-based AI PCs. We do expect sequential growth from Mobileye, NEX, and foundry services. As we look beyond Q2 guidance, we expect growth across all segments in the second half of the year, led by improved demand for general-purpose servers from both cloud and enterprise customers and increased Core Ultra assembly capacity to support a growing PC TAM driven by enterprise refresh and the AI PC. We should also see accelerating growth from our network and edge businesses, a return to growth for Altera, and a meaningful Gaudi ramp in the second half. Despite 2024, representing the peak for five-node and four-year driven factory start-up costs, we expect roughly 200 basis points of FY '24 gross margin improvement compared to FY '23. Our net capital intensity forecast of mid-30s as a percent of revenue across 2023 and 2024 in aggregate remains unchanged. With significant capital offsets expected to land in the second half of the year, we continue to expect approximately neutral 2024 adjusted free cash flow. While first-half demand signals have been a bit weaker, Q1 played out largely in line with our expectations. We achieved several important milestones toward our IDM 2.0 vision, and we're participating in a large and growing TAM with encouraging market signals for the second half of the year and into 2025. By capturing margin at both the foundry level and the fabless product level, we have margin stacking advantage unique in the industry. We are three years into our transformation, and 2024 represents the steepest part of the climb with five-node and four-year start-up cost peaking and the majority of our volume on pre-EUV process nodes with uncompetitive economics. However, as we crest the hill and look toward the next few years, we have strong wins at our back and a clear path to achieving the mid- and long-term financial targets we laid out earlier this month. With that, let me turn the call back over to John. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Dave. We will now transition to the Q&A portion of our call. As a reminder, we request that each of you ask one question and a brief follow-up where applicable so that we can get to as many of your questions as possible. With that, Jonathan, can we take the first question? Questions & Answers: Operator Certainly. And our first question comes from the line of Ross Seymore from Deutsche Bank. Your question, please. Ross Seymore -- Deutsche Bank -- Analyst Hi, guys. Thanks for letting me ask a question. I guess for my first question, I wanted to dive into the demand side of the equation. What was weaker in the near term than you had expected? And much more importantly, it seems like the back half you're going to have double-digit sequential growth in largely both quarters, so that's significantly above seasonal. I know you went through some of the reasons at a high level, but can you dive a little bit deeper into what gives you that level of confidence in the second-half ramp? Pat Gelsinger -- Chief Executive Officer Yeah. Starting out, so Ross, thanks for the question. I'll just say the market was weaker. You've seen that in a number of others that have commented as well. So, I'll say somewhat across the board a bit. We've seen that cloud customers, enterprise across geos. So, I'll just say a bit weaker demand, right, we'll just say at the low end of seasonality Q1 to Q2 that we saw. And as we go into the second half of the year, we're engaging deeply with our customers today, our OEM partners, and we just see strength across the board, right? Part of that is driven by our unique product position, some of it driven by the market characteristics and client, AI PC, and a second half Windows upgrade cycle, we believe, underway and Core Ultra is hot. And as we said, even in Q2, we're racing -- we're meeting all of our commitments, but not all of the upside requests that we're seeing from customers. So, we see a very strong AI PC outlook in the data center, as we bring in our new products, we're seeing ASPs increase very healthy on our data center products and with products like CRS that we just went to production with this week on Intel 3, we're seeing improved product position as well for competitiveness. We have the $0.5 billion of Gaudi, right? And most of that is second half loaded. And the All Other businesses coming out of inventory positions in Altera and Mobileye and NEX, all of those improved first half to second half as well. And then incremental, I'll just say, Intel Foundry, every quarter from here until the decade and we're seeing improvement in the Intel foundry. And one by one, we're seeing all of those business improvements both on revenue and margin improvements over time. So, we feel very comfortable that the second half outlook is quite strong for the business, a first half a bit weaker, but we think it's very understandable, very explainable, and a second half outlook that will be very comfortable for every business across Intel growing and a lot of momentum as we go into '25. John Pitzer -- Corporate Vice President, Investor Relations Ross, do you have a quick follow-up? Ross Seymore -- Deutsche Bank -- Analyst I do. Maybe for Dave, on the gross margin side, nice upside in the first quarter, but the drop in the second quarter is a little bit puzzling with revenues going up. So, could you just talk a little bit about that second-quarter drop and then the confidence in the rebound in the second half? Is that just revenue-driven in the second half? Or what's the key metrics there, please? Dave Zinsner -- Chief Financial Officer Yeah. Good. Thanks, Ross. Maybe start with Q1 because it somewhat explains Q2, we had better sell-through of product, had even mentioned Meteor Lake strength, that better sell-through on previously reserved material. And so, we just saw some upside in gross margins because of that. We had a little bit more of a flattish plan between Q1 and Q2 in terms of how that would flow through. And so, it kind of pulled some of the benefit of gross margin improvement we would have seen in Q2 and kind of pulled it into Q1. So, that was part of it. The second part is, as we talked about, this year was going to be a heavy year for start-up cost for us. And it really shows up more meaningfully in the second quarter versus the first quarter. And so, that puts a little added pressure on gross margins. As you point out, the upside in the revenue, we will have good fall-through in Q3 and Q4, that will help lift the gross margins from where they are today. And then on top of that, we'll see some areas which have high gross margins, helping us like, for example, Mobileye, we get good gross margin for Mobileye and the strength that we'll see through the year there and products like that will also help drive better gross margins in the back half of the year. As we look into '25, I think we'll have better gross margins than '25 than we had in '24. So, this should be an ongoing story for us on the gross margin front. And as you know, we're driving to get to kind of mid-50s gross margins by the midpoint between now and 2030 and ultimately getting to 60%. Of course, revenue will be part of that. But a lot of that is within our control. It's things like 18A wafer pricing growing at 3x the cost of 18A that will help drive margins. The pull-in of tiles, as Pat mentioned, internally is going to drive better gross margins for us over time. All of what we're doing in terms of resegmenting new businesses to drive better decision-making, that better decision-making will translate into significant cost improvements for us, which should also be a meaningful driver for gross margins over time as well. And of course, as Pat mentioned, we're happy to get the chips announcement out. And of course, that, coupled with what we expect from the EU and the investment tax credit will also be major tailwinds on gross margins over a long-term basis. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Ross. Jonathan, can we have the next question, please? Operator Certainly. And our next question comes from the line of Ben Reitzes from Melius. Your question, please. Ben Reitzes -- Melius Research -- Analyst Hey, guys, thanks a lot. Appreciate the chance to ask a question here. Pat, can you talk a little bit more about servers in the data center? There was talk of a bottom there in previous discussions, how do you see that kind of going throughout the year in light of your 2Q guidance? And what's the catalyst for the pickup there? Thanks a lot. Pat Gelsinger -- Chief Executive Officer Yeah. Thank you, Ben. And obviously, as we look at our position in the data center, I'll just say we're stabilizing. And with that, we're improving our competitiveness. We also see, as I mentioned in the comments, that the ASPs are going up comfortably as well. So, socket, fairly stable through the year, but the ASP per socket with increased core count, improves our position in, and then new products like Sierra Forest or Xeon Gen 6 product definitely gives us power performance capabilities. So, overall, we're seeing a very healthy growth rate, mid-20s as we go through the year. We're also seeing increasing interest in the AI capabilities of Xeon. And we're winning head node positions, and we're seeing pretty extraordinary performance at Vision. We talked about the ability to now run 70 billion parameter models directly on Xeon and these type of capabilities, say, for a lot of enterprise use cases, Xeon is a very strong product. And as we laid out at Vision, the ability for Xeon plus Gaudi to start positioning this open platform for enterprise AI is a very strong position for us. So, overall, we feel like we're on a solid trajectory into a market that even though it's been dominated by the Gen AI theme as enterprises, our OEMs and ODMs are communicating, there's growth here in servers. And we now have a much better product position, improving ASPs and a better overall positioning in AI for a lot of these use cases where it's Xeon CPU plus GPU and accelerator. John Pitzer -- Corporate Vice President, Investor Relations Ben, do you have a quick follow-up? Ben Reitzes -- Melius Research -- Analyst Yeah. Thanks. Can we just double-click also on Gaudi $500 million in the back half of the year? I think you previously talked about a couple of billion in the pipeline. What does that say about your yield to revenue on an annualized basis with AI? And is there an update on the pipeline and your confidence there heading into 2025 on the accelerator front? Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Ben. And obviously, pipeline converting into revenue, revenue is much more meaningful and as we said, greater than $500 million for the year, and that's obviously quarter on quarter, accelerating rapidly, which also gives a great indication for the business in '25 as well. At our vision event, we had over 20 customers publicly describing their embrace of Gaudi 2 and Gaudi 3. And I was super pleased to see the breadth of those customers. It was CSPs like Naver and Ola and IBM Cloud. It was ISVs like Seeker, right, coming on board, but maybe most importantly, enterprise customers. And ultimately, Gen AI training, OK, creating models, but enterprises are going to use models, and that's where our TCO benefits, the ability for us to action customers' data in their enterprise environment is so powerful, and customers like Bosch were coming forward and Roche to be able to demonstrate the true benefits of Gaudi and Xeon plus Gaudi. The road map is in good shape. The Gaudi 3, Falcon Shores in '25. We're also seeing that the industry wants to open alternatives. And we announced our AI networking initiative, Ultra Ethernet consortium standardizing on scale up and scale out to Ethernet, increasing work for abstract levels of AI development with PyTorch, and the embrace of the open platform for enterprise AI that we rolled out. All of those taken together, the industry is looking for open enterprise alternatives for regenerative AI deployment and Intel are quite well-positioned, and we're starting to really see that uptake in our Accelerator and Xeon pipeline now. John Pitzer -- Corporate Vice President, Investor Relations Thanks, Ben. Jonathan, can we have the next question, please? Operator Certainly. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please. Joe Moore -- Morgan Stanley -- Analyst Great. Thank you. I wonder if you could talk to the server road map. It sounds like you're confirming the time frame for both Sierra Forest and Granite Rapids. Can you talk about -- is there demand for the Sierra Forest product as well? Do you expect that to be bifurcated where you see demand for both? And then how quickly how quickly you see those products come to volume? Pat Gelsinger -- Chief Executive Officer Yeah. So, Sierra Forest, our first Xeon 6 product on Intel 3, I'm super proud, right? Now we have a leadership process technology back on American soil for the first time in a decade. This is really exciting. And Sierra Forest, high core count, 144, 288 core product, very focused on power, performance, efficiency, and we do see a good pipeline of customers and a good pipeline of, I'll say, socket win backs because the area of power performance has been an area that we've been carrying a deficit being on an older node and now that we're on leadership nodes, we definitely see share gains for that. Of course, Granite Rapids, which will come in Q3, the Xeon 6 core part is much more of the bread and butter of the Xeon family. So, we do see that being a stronger element to the portfolio this year as we haven't been participating in the power performance sockets as aggressively lately, and Sierra Forest gives us that tool. So, it really is a one-two punch, as we've described with Granite coming in Q3 and a volume ramp on Intel 3 with that, we feel we have a very good product line. Next year is Clearwater Forest, the second generation of the Ecorepart, the leadership position on 18A in the server market, a very strong product for us. Unquestioned leadership and power performance, so I believe that's a great opportunity for us to gain share again in the data center. So, the road map is healthy. The execution is strong, and we're rebuilding customer trust. They're looking at us now and saying, "Oh, Intel is back." And we're quite excited by that. And then beyond that, building the volume, building the confidence and the momentum for traditional use cases as well as the AI use cases as I just referred on Ben's question as well. John Pitzer -- Corporate Vice President, Investor Relations Joe, do you have a quick follow-up? Joe Moore -- Morgan Stanley -- Analyst Yeah, I do. Thank you. On the foundry webinar, you had sort of talked about Intel 3 volume being kind of more of an inflection next year. Does that mean it was in server that these Intel 3 products are sort of get to volume crossover kind of some point next year? Or could we see -- obviously, it's the leadership you just talked about is important. What's kind of keeping you from getting those products ramping in the second half? Pat Gelsinger -- Chief Executive Officer Yeah. Joe, thank you. And servers always just take a while to ramp. Customers bring them in, they qualify them, they test them because they're generally putting these things at scale. So, there's just an adoption cycle for server products. And the numbers that I'm holding my team accountable for are some of the most aggressive volume ramps that we've ever achieved on server products. So, we're driving them very hard. That said, in terms of the total wafer volume this year, right, it's dominated by Intel 7 and the Intel 4 and 3 wafer volumes become much more prominent next year, and that's what I was communicating on the webinar. But as we go through the year, you're going to start to see the wafer ASPs pick up as a result of Intel 4, 3 ramping a much better ASP points, better margins associated with those, and they will become much more prominent in the foundry P&L next year. But these are production ramps that are already underway on Intel 3. The Intel 4 ramp already underway. We began that second half of last year. So, these wafer ramps are underway with volume productions, volume products that we're bringing to the marketplace, very confident in our ability. And then, of course, 18A as we deliver the PDK for that in Q2, the 1.0 PDK and we'll begin the volume ramps on Clearwater Forest, [Inaudible] Panther Lake in the first half of next year for those products coming out. So, we feel very comfortable with that overall picture that we laid out. John Pitzer -- Corporate Vice President, Investor Relations Thank you, Joe. Jonathan, can we have the next question, please? Operator Certainly. And our next question comes from the line of Vijay Rakesh from Mizuho Securities. Your question, please. Vijay Rakesh -- Mizuho Securities -- Analyst Yeah. Hey, just a quick question on the Grand Rapids. Any thoughts on the timing? And do you expect to regain some computing share server share there with those ramps? Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Vijay. I'm building a little bit on the last question. Granite Rapids will come in Q3 of this year when we'll have the production release of that product. Same as -- it just takes some time for customers to get comfortable, qualify, and bring those products to marketplace. But Sierra Forest, Granite Rapids these are much more competitive power performance products on Intel 3. So, we see them stabilizing and then giving us opportunity to regain share. And as we go into next year, we expect that we're regaining share as we end this year and go into next year. These are great products and we're going to be ramping them very aggressively with our customers. John Pitzer -- Corporate Vice President, Investor Relations Vijay, do you have a follow-up? Vijay Rakesh -- Mizuho Securities -- Analyst Yeah. Thanks. Just on the GPU side, on the AI side, any parts on Falcon shares? Any preliminary takes on that? How do you see that building out into '25? Thanks. Pat Gelsinger -- Chief Executive Officer Yeah. And Gaudi 3 announcement this quarter extremely well received. And as I mentioned already, 20-plus customers for Gaudi 2, 3, we're seeing that build. Obviously, Falcon Shores will build on that momentum. We'll be bringing that late next year when Falcon Shores when we combine the great systolic performance of Gaudi 3 with a fully programmable architecture and all of that comes together with Falcon Shores. And then we have a rich -- a very aggressive cadence of Falcon Shores products following that. We also added the Gaudi PCIE card to it, this use case of Xeon plus an accelerator or Gaudi accelerator is getting very good response from customers as well. So, we'll be bringing that out later this year. But the real story is delivering the TCO value, delivering the enterprise use cases. Falcon Shores will just build on the momentum that we're establishing with Gaudi 2 and 3. We also described customers coming on the Intel Developer Cloud, where we're getting these products very early in their life available for developers and enterprise customers, and customers like Seeker now our biggest Intel Developer Cloud win to date are seeing the benefits, but the bigger story is how do we unleash the data assets of our enterprise customers, and that's things like the open platform for enterprise AI that we launched at Open Summit. So, overall, a lot of good things happening to unleash the Gen AI cycle for Intel. And of course, right, as we're doing this, AI is a hot market, we're participating across all of our segments whether that's client edge, enterprise, or our foundry opportunities as well, delivering AI everywhere. John Pitzer -- Corporate Vice President, Investor Relations Thanks, Vijay. Jonathan, can we have the next caller, please? Operator Certainly. And our next question comes from the line of Timothy Arcuri from UBS Securities. Your question, please. Tim Arcuri -- UBS -- Analyst Thanks a lot. Dave, I also wanted to ask about gross margin. You did seem to be better next year, but it is really whipping around a lot. And it looks like you sort of have to exit this year at 48 or maybe a little higher which is already well above the 45.5 that you'll be at this year because you're guiding it up to 100 basis points. So, I know you don't want to guide next year, but if you can even qualitatively help us can you sustain those margins at that level? And I asked because last year, you sort of exited at 49% and then things crashed here during the first half of the year. So, can you help us just think about what some of the puts and takes will be next year off of that high base if you're going to exit this year at? Dave Zinsner -- Chief Financial Officer Yeah. Good question. So, there will be additional start-up costs next year. We do think it on a percent of revenue basis, it will be lower. So, that should help lift the margins. Of course, the expectation would be we see growth in revenue. That also should help. On top of that, we already are seeing good decision-making and changing decision-making around how we operate now under this new different business structure that we have at this point. A lot of that stuff doesn't actually show up in the P&L. So, all these decisions get made this year, but a lot of the decisions made -- sorry, a lot of the benefits to those decisions don't show up until next year and the year after. So, we should see some benefit from that as well. The other thing that kind of has whipped this -- our margins around a bit over the last few years has been this notion where we reserve material all the way up until the PRQ Pat just mentioned that Sierra Forest is just PRQ. So, ordinarily, we take a whole bunch of reserves on Sierra Forest and then we would release them as we as we started shipping beyond the PRQ date. We won't be doing that going forward. So, that should help adjust the volatility of the gross margin. So, it will be more a function of revenue growth profile in the fabs, start-up costs that we have, and the mix. John Pitzer -- Corporate Vice President, Investor Relations Tim, do you have a follow-up question? Tim Arcuri -- UBS -- Analyst I do. I do, yes. So, I want to ask about server CPU share. March, I think the assumption for March was that service share was going to be pretty flat. So, the question is, was that the case? And it sounds -- you sound maybe a little bit less optimistic, if I'm sort of reading between the lines, on share into the back half of the year, just given how long it takes these things to sort of impact your share. So, your bullish outlook in the second half of the year. It sounds like it's more market-driven versus share-driven. Can you just clarify that? Thanks. Pat Gelsinger -- Chief Executive Officer Well, overall, I like to say it's hard to predict, right, exactly how these will play out in light of the overall Gen AI surge that we've seen. That said, products are good, right? We came into the year improving our market share position in the first quarter of the year. It does take time to ramp these new products. But better products, rebuilding trust with our customers that we're delivering on these, and now hitting what we would call the early end of the cycles on these new products is giving us a lot of interest with the market and the customer. New use cases also demonstrated a $70 billion parameter model running natively on Granite Rapids at our vision event, all of these just make us more and more confident in our business execution. We're also seeing that we don't need socket count to increase. The ASPs are going up with the core counts on our new leadership products as well. So, all of those in a fairly optimistic view that we're getting from our OEMs and our channel partners for their view of upgrade cycles, building momentum from customers across the industry. We feel very comfortable that we're stabilizing our position. We have an improving our road map, and we do expect to see share gains as we end the year and go into '25. John Pitzer -- Corporate Vice President, Investor Relations Jonathan, can we have the next caller, please? Operator Certainly. Our next question comes from the line of Srinivas Pajjuri from Raymond James. Your question, please. Srini Pajjuri -- Raymond James -- Analyst Thank you. My question is on the client side. I think, Pat, you mentioned something about supply constraints impacting your 2Q outlook. If you could provide some color as to what's causing those supply constraints? And when do you expect those to ease as we, I guess, go into the second half? And then in terms of your AI PCs, I think you've been talking about $40 million or so potentially shipping this year. Could you maybe put that into some context as to how it actually helps Intel? Is it just higher ASPs? Is it higher margin? I would think that these products also come with higher costs. I just want to understand how we should think about the benefit to Intel as these AI PCs ramp. Pat Gelsinger -- Chief Executive Officer Yeah. Thank you. And overall, as we've seen, this is a hot product. The AIPC category, and we declared this as we finished last year, and we've just been incrementing up our AIPC or the Core Ultra product volumes throughout. We're meeting our customer commitments that we've had, but they've come back and asked for upside on multiple occasions across different markets. And we are racing to catch up to those upside request, and the constraint has been on the back end. Wafer-level assembly, one of the new capabilities that are part of Meteor Lake and our subsequent client products. So, with that, we're working to catch up and build more wafer-level assembly capacity to meet those. How does it help us? Hey, it's a new category. And that new category of products will generally be at higher ASPs as your question suggests. But we also think it's new use cases and new use cases over time, create a larger TAM that creates an upgrade cycle that we're seeing. It creates new applications, and we're seeing essentially every ISV -- AI behind their app, whether it's the communications, capabilities of Zoom and team for translation and contextualization whether it's new security capabilities with CrowdStrike and others finding new ways to do security on the client or whether it's creators and gamers taking advantage of this. So, we see that every PC is going to become an AI PC over time. And when you have that kind of cycle underway, Srini, everybody starts to say, "Oh, how do I upgrade my platform?" And we even demonstrated how we're using AI PC in the Intel factories now to improve yields and performance inside of our own factories. And as I've described it, it's like a Centrino moment, right where Centrino ushered in WiFi at scale. We see the AI PC ushering in these new use cases at scale, and that's going to be great for the industry. But as the unquestioned market leader -- the leader in the category creation, we think we're going to differentially benefit from the emergence of the AI PC. John Pitzer -- Corporate Vice President, Investor Relations Srini, do you have a follow-up? Srini Pajjuri -- Raymond James -- Analyst Yes, John. Thank you. And I guess my other question is on the other bucket. I think, Dave, you kind of talked about Altera potentially exiting the year at a $2 billion run rate from current levels, that's a pretty steep ramp. And also, I think you said next growth will accelerate over the next couple of quarters. So, given the telecom weakness out there that we're seeing, I'm just curious as to what's giving you that visibility or confidence. I mean, is this driven by some new products? Or is it just the market recovering? Any color would be helpful. Thank you. Dave Zinsner -- Chief Financial Officer Yeah. On Altera, and this is not unprecedented when you see a massive work down of inventory, of course, that significantly impacts the revenue. But as that normalizes, then you start shipping to end consumption. So, it's actually a pretty easy lift to get to the $2 billion mark once we're through the inventory digestion period. So, I think we have high confidence on that. Pat Gelsinger -- Chief Executive Officer And others have commented on their inventory cycles as well in the FPGA category. We have good products in the second half of the year with Agilex starting to ramp as well. Dave Zinsner -- Chief Financial Officer And then on NEX, of course, that business also has gone through its own inventory adjustment. So, we have good confidence around that reversing, which will help drive strength. And then some of the products that are were tailored to the AI space. Of course, we'll see like Phoenix, for example, we'll see strength through the year. And so, that should drive good revenue growth through the year as well. Pat Gelsinger -- Chief Executive Officer Yeah. And also, in NEX, the AI networking products are strong, our IPU products, we're seeing strength in that area. So, it's inventory as well as products. Even though, as your question suggests, the communication sector and the service providers, that is weaker through the year, but pretty much every aspect of their business and AI, as Dave said, is seeing strength as we go into the second half of the year and into '25. John Pitzer -- Corporate Vice President, Investor Relations Thanks, Srini. Jonathan, can we have the next call caller, please? Operator Certainly. Our next question comes from the line of Vivek Arya from Bank of America. Your question, please. Vivek Arya -- Bank of America Merrill Lynch -- Analyst Thanks for taking my question. Pat, just a conceptual question. In a gen AI server with accelerators, how important is the role of a specific CPU? Or is it easily interchangeable between [Inaudible] or AMDs or arms? I guess the question is that if most of the workload is being done on the accelerator, does it really matter what CPU use? And can that move toward gen AI servers essentially shrink the TAM for x86 server CPUs because a number of your cloud customers have announced ARM-based server alternatives? So, I'm just curious, how do you think about that conversion over to Gen AI, and what that means for x86 server CPU TAM going forward? Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Vivek. And we spoke at our Vision event about use cases like RAG, retrievable augmented generation, where the LLM might run on an accelerator, but all of the real-time data, all of the databases, all of the embedding is running on the CPU. So, you're seeing all of these data environments, which are already running on Xeon and x86 being augmented with AI capabilities to feed an LLM and I believe this whole area of RAG becomes one of the primary use cases for enterprise AI. And if you think about it, an LLM might be trained with one-, two-year-old data, right? But many of the business processes and environment are real-time, right? You're not going to be retraining constantly. And that's where this area of the front-end database becomes very prominent. All of those databases run on x86 today. All of them are being enhanced for use cases like RAG. And that's why we see this unlock occurring because the data sits on-prem, the data sits in the x86 database environments that are all being enhanced against these use cases. And as we've shown, we don't need accelerators in some cases. We can run a 70 billion parameter model natively on Xeon with extraordinary TCO value for customers. And furthermore, all of the IT environments that enterprises run today, they have the security, they have the networking, they have the management technologies in place. They don't need to upgrade or change those from any of those use cases. So, we see a lot of opportunity here to build on the enterprise asset that we have with the Xeon franchise, but we're also going to be aggressively augmenting that and we're commonly the head note, even when it's other accelerators being used or other GPUs being used and as we've described, Xeon plus Gaudi, we think is going to be a very powerful opportunity for enterprises. So, in many of those cases, we see this as a market lift, new applications, new use cases, new energy coming to the enterprise AI. Here we are in year 23 of the cloud. And while 60% of the workload has moved to the cloud, over 80% of the data remains on-prem under the control of the enterprise, much of that underutilized in businesses today. That's what Gen AI is going to unlock. And a lot of that is going to happen through the x86 CPU and we see a powerful cycle emerging. And I would just point you back to what we described that vision. This was a great event, and many customers are seeing that value today. John Pitzer -- Corporate Vice President, Investor Relations Vivek, do you have a quick follow-up? Vivek Arya -- Bank of America Merrill Lynch -- Analyst Yes. Thank you. Maybe one for Dave on the potential operating loss, kind of how do we model that for the foundry business. So, let's say, if I exclude the $2 billion in depreciation headwind, which I'm assuming is almost all going to your foundry business. What is the right way, Dave, to think about foundry operating income or loss this year? And how much of external foundry revenue are you expecting this year? Thank you. Dave Zinsner -- Chief Financial Officer Yeah. Good question. The operating losses will pick up. We roughly were at like 2.4-ish in the first quarter. It will pick up in the second quarter, given the start-up costs are increasing and I would say, be roughly in that range for the remainder of the year. And then what I said before is we see that improving then going into '25. And Pat's given me the order, he wants to see every quarter some improvement in the operating loss ultimately to get to breakeven midway through the point between now and 2030. And I think that is very achievable. Sorry, Vivek, what was the second question? Are you still on? Operator No, we've moved on. John Pitzer -- Corporate Vice President, Investor Relations Why don't we go to the next caller, Jonathan? Operator Certainly. Our next question comes from the line of Matt Ramsay from Cowen. Your question, please. Matt Ramsay -- TD Cowen -- Analyst Yeah. Thank you very many guys. Pat, one question I've been getting from some folks, and I totally understand the lead times of starting some of these programs to put increased tile volume at external foundry, but you guys have made the progress on the five nodes in four years, as you highlighted multiple times. Is there any flex at all to bring back some of that external volume earlier? And I think it matters to some folks because it's a demonstration of you guys being able to ramp your own product to volume and to yield and to economics on 18A, which might give some indication to some external customers that are looking at your foundry business. So, just any flex at all to pull that timeline in sort of reshoring some of the external tiles? Thanks. Pat Gelsinger -- Chief Executive Officer Yeah. Thanks, Matt. And largely, those decisions are made when the product decisions are made. So, there's limited flexibility to move them around. And if you pick a process node for a certain tile, generally, that's the process node that it's on. So, there's limited flexibility there. And many of those decisions, as we've highlighted before, Matt were literally made years ago, right? And those choices were made. That said, we see the peak of our external tiles being this year and next year. And then the road map and the movement of those coming back begins to quite accelerate even starting late next year. So, the plan is clearly laid out. As we said, we see a couple of fabs worth of capacity coming back into the Intel factory network as we move into '26 and beyond. So, this becomes a significant driver. We've also driven significant road map decisions against that improving profile of our products. And I'll say that begins in a very powerful way next year with Panther Lake and Clearwater Forest. Unquestioned the best products in clients, the best products and servers are now being built on Intel 18A. And as the question suggests we see customers seeing that every foundry customer that we speak to, right, understanding where we are in our product and process cycle and the ability for them to essentially benefit from Intel as customer zero in the foundry network. So, overall, this is feeling very good. We're on track to go accomplish that and the business model that we've laid out and Dave and I presented as we go through the decade, shows a very healthy improvement in wafer ASP, wafer volume, foundry, and these decisions are made, right? We're on track to both have the wafer foundry capabilities, to have the process technology and the products to fill those factories. And that's why Dave and I have such confidence in the business model that we've laid out and the improvements that it will deliver as we go over the next several years together. John Pitzer -- Corporate Vice President, Investor Relations Matt, do you have a quick follow-up? Matt Ramsay -- TD Cowen -- Analyst Yes, John. Thank you. I wanted to ask a question about the AI accelerator road map. So, you guys have Gaudi 3 that you talked about and Falcon Shores coming next year. And the hardware looks quite good. I wanted to ask a question about the software that goes on top of that for both -- well, really for inference but also for training. How do you feel about the software road map that you guys have in the AI space going forward? And how much compatibility or uniqueness rather, is there to the software that runs on Gaudi 3 versus what will come on Falcon Shores and the forward road map? Thanks. Pat Gelsinger -- Chief Executive Officer Yeah. Maybe three different points there. The first one is for inferencing, you need a whole lot less software compatibility, right? And as the market is more focused on inferencing going forward, if you can run the models, right, in the context of the databases and the other, so that portends and is why we're seeing the strength that we're seeing right now, you know, Matt, in these use cases. And clearly, some of the software compatibility issues of a GPU have led to the training environments that have been challenging for us. But now as customers get much more focused on enterprise use cases, inferencing TCO, we're finding a lot of strength in the offerings that we have. And as we've matured a number of customers now, we've worked through many of those use cases and getting quite a lot of acceptance of the software stack that we have with Gaudi 2 and 3. We will have a very smooth and seamless upgrade from Gaudi 3 into Falcon Shores. But the powerful thing that will come with Falcon showers is the full programmability that you'll see with the complete instruction set capabilities of Falcon Shores. At that point, we will have no deficits for any of the use cases and much greater compatibility for the full range of AI capabilities. The other thing that I emphasize is Xeon is a powerful capability with incredible programmable capabilities and we're finding these use cases like I described with the open platform for enterprise AI, RAG use cases is clearly beneficial there for us. So, overall, we're feeling like the software story is coming together very nicely. And the entire industry is moving to higher-level software abstraction such as Python and Triton. So, they're moving away from any of these dependencies to an open software or platform. So, the industry trends are in the right direction. Our maturity is in the right direction, and our software stack has gotten much more mature, and we'll have a very smooth upgrade to Falcon Shores. So, let me just close our time together and say thank you for the questions. Thanks for joining our call. We appreciate the update to give you on a very solid Q1. And we got a lot done in Q1 that gives us a great foundation for the future. We continue to drive our process and products and AI innovations and delivering on our process technology and leadership road map. If any of you were at Computex in a few months, I look forward to seeing you there. We have a number of products and offerings that we'll be announcing there as we continue our AI momentum and competitiveness. And as always, we look forward to talking to you next quarter. Thank you very much. Operator Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you, everyone, for standing by, and welcome to the Intuitive Q1 2024 earnings release call. At this time, all participants are on a listen-only mode. [Operator instructions] As a reminder, today's call is being recorded. I will now turn the call over to our host, head of investor relations for Intuitive Surgical, Brian King. Please go ahead. Brian King -- Head of Investor Relations Good afternoon, and welcome to Intuitive's first quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our CFO. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent annual report on Form 10-K for the fiscal year ended December 31, 2023, and subsequent filings. Our SEC filings can be found through our website or at the SEC's website. Investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website at intuitive.com on the events section under our investor relations page. Today's press release and supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our first quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2024. And finally, we will host a question-and-answer session. And with that, I will turn it over to Gary. Gary Guthart -- Chief Executive Officer Thank you for joining us today. The first quarter of 2024 was a solid one for Intuitive, where core measures of our business remain healthy including solid procedure growth and capital placements. Furthermore, our teams delivered important milestones across several parts of our Intuitive ecosystem, including launching our next-generation multiport platform, da Vinci 5, launching our da Vinci SP platform in Europe and improving our supply constraints for Ion catheters. Some regional challenges existed in the quarter, which we'll describe today. Taken together, we remain enthusiastic about our opportunity and we'll work through near-term pressures by focusing on what we can control. Starting first with procedures, we experienced solid growth in the quarter of 16%, compared with a strong Q1 of '23 that was a result of elevated patient volume from the return of patients post pandemic. Q1 of 2024, procedure performance was led by broad growth in general surgery in the United States, and by procedures beyond urology outside the United States. Globally, cholecystectomy, colon resection, and foregut procedures led the way. Regional performance included strength in China, Germany, and the United Kingdom. In Japan, we saw a moderation of growth in urology as we reach higher levels of penetration and Q1 2023 benefited from the return of patients in backlog. In Korea, growth was lower than our expectation, primarily due to a physician strike in the country, which began in February and has continued. Turning to capital. We placed 313 da Vinci systems in the quarter, of which 289 were multiport systems, compared with 302 multiport systems in Q1 of '23. SP placements were 24 in the quarter versus 10 systems a year ago, and Ion placements for the quarter were 70 versus 55 a year ago. Capital placements were solid in the United States, our global distribution markets and in Germany. Placements in China appear to be impacted by delayed tenders and an apparent increase in provincial preference for domestic robotic competition. We saw some placement weakness in the UK as financial pressures in the NHS constrained access to capital. System utilization defined as procedures per installed system per quarter grew 1% globally year over year for our multiport platform, lower than last quarter and our historical trend, a result of a strong placement year in 2023 in which the multiport clinical installed base grew 14%, while customers addressed a COVID-related backlog. For our newer platforms, utilization grew 10% for SP and 14% for Ion in the quarter. Utilization is an important indicator of customer health and is a reflection of customers driving value from their systems. Turning to our finances. Revenue growth of 11% in the quarter reflects solid procedure performance and capital placements. Average system selling prices declined modestly due to regional and product mix. Product margins were within our expectations, reflecting a higher mix of newer platforms. Operating expenses came in slightly below plan, resulting in pro forma operating profit growth of 18%. Jamie will take you through our finances in greater detail later in the call. In the quarter, we made good progress with our new platforms. In March, we received FDA clearance for our next-generation multiport platform, da Vinci 5. Within the quarter, we placed eight da Vinci 5 systems and surgeon completed their first cases. As we engage with customers during their activation of da Vinci 5, our customers are noting and appreciating improved precision, improved imaging, improved efficiency for surgeon and staff, improved ergonomics and they are exploring the potential of Force Feedback, where early surgeons are excited to test hypothesis about its procedural, clinical and learning value. Digital analytical capabilities of da Vinci 5 are also drawing positive reviews. In parallel with customer support, we're working hard to optimize our supply chains and manufacturing capabilities for da Vinci 5 components. We will remain in our measured rollout as we stabilize supply and respond to customer input. Turning to Ion, our teams have made meaningful progress on resolving supply challenges for our catheter and Ion vision probe, although work still remains to be done. Earlier this month, FDA reviewed our set of design and production changes and cleared an increase in an Ion catheter lives from five lives to eight lives alleviating some supply constraints while improving the economics for us and our customers. Also in March, we received NMPA clearance for Ion in China through a special review process for innovative medical devices. While NMPA clearance is only the first step toward commercialization in China, we believe Ion can play an important role in helping to address the significant burden of lung cancer in the country. Turning to SP, we received CE mark in Europe with a broad set of indications in the quarter, and we placed eight systems. First cases in Europe were performed this April, and we're encouraged by early customer interest for SP. In closing, for 2024, our priorities are as follows: first, we'll support the measured launch of da Vinci 5 and our other new platforms by region. Second, we're focused on supporting surgeons' adoption of focused procedures. Third, we're focused on improving our product margins and quality. And finally, we're focused on improving productivity in those functions that benefit from global scale. I'll now turn the time over to Jamie, who will take you through our finances in greater detail. Jamie Samath -- Chief Financial Officer Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis and will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. In Q1, da Vinci procedures grew 16%, the installed base of systems grew 14% to 8,887 systems and average system utilization increased by 2%, lower than recent trends because of the strength in procedure growth and utilization in Q1 of last year that reflected a significant benefit from the treatment of patient backlogs. US procedures grew 14%, driven by broad growth in general surgery. Bariatrics procedure growth in the US continued to moderate and was flat year over year. OUS procedures grew 20%, reflecting strong growth in general surgery and thoracic procedures. Brian will provide additional detail on our clinical performance later in the call. Turning to capital. We placed 313 systems in the first quarter, compared to 312 systems in Q1 of last year. Excluding trading transactions, net new system placements grew 16% to 284 systems. In the US, we placed 148 systems in Q1, including eight da Vinci five placements, compared with 141 systems placed in Q1 of last year. Given constrained supply of da Vinci 5, system placements may be choppy this year as some customers that are interested in da Vinci 5 decide whether to acquire a fourth-generation system with an upgrade rate or wait for adequate supply. Outside the US, we placed 165 systems in Q1 compared with 171 systems last year. Current quarter system placements included 84 into Europe, 20 into Japan, and 10 into China compared with 101 into Europe, 16 into Japan, and 18 into China of Q1 of last year. Placements in the UK were below our expectations and lower than Q1 last year because of the reallocation of NHS capital funding to help address industrial actions in the NHS. Placements in China continue to reflect the impact of domestic robotic competition and delayed tenders due to a broader central government focus on systematic governance across sectors, including healthcare. First quarter revenue was $1.89 billion, an increase of 11% from last year. On a constant currency basis, revenue growth was 12%. Additional revenue statistics and trends are as follows: Leasing represented 51% of Q1 placements, compared with 42% in Q1 of last year. Given customer preference for our usage-based models in the US and the launch of da Vinci 5, we continue to expect the proportion of systems placed under lease arrangements to grow over time. Q1 system average selling prices were $1.39 million as compared to $1.47 million last year. System ASPs were negatively impacted by regional and platform mix and lower pricing in China, partially offset by lower trade-ins. We've recognized $29 million of lease buyout revenue in the first quarter, compared with $21 million last quarter and $24 million last year. da Vinci instrument and accessory revenue per procedure was approximately $1,780, flat to last year and down $20, compared to last quarter. The sequential decline in I&A per procedure is primarily a result of procedure mix in the US given strong growth in cholecystectomy and the moderation of growth in bariatrics. We have also seen larger IDNs in the US look for operational efficiencies by reducing inventory. Turning to Ion. There were approximately 19,500 Ion procedures in the first quarter, an increase of 90% as compared to last year. Since launching the Ion platform in 2019, on a cumulative basis, more than 100,000 procedures have now been performed. In Q1, we placed 70 Ion systems compared to 55 in Q1 of 2023 and 44 last quarter. Q1 results reflected a partial recovery from last quarter as catheter supply improved. Our team continued to work on stabilizing supply of the catheter and the vision probe. Q1 results included four Ion system placements in the UK following European clearance last year. The installed base of Ion systems increased 61% year over year to 604 systems, of which 244 are under operating lease arrangements. 24 of the systems placed in the quarter were SP systems, including eight systems in Europe, reflecting clearance early in the quarter. First quarter SP procedure growth was 60% with healthy growth in Korea and the US and early stage growth in Japan. In the US, during the quarter, we completed a 510k submission for a thoracic indication, made continued regulatory progress toward a colorectal submission and enrolled additional patients in our IDE for nipple-sparing mastectomy. The SP installed base grew 55% from the year-ago quarter to 201 systems. Moving on to the rest of the P&L. Pro forma gross margin for the first quarter of 2024 was 67.6%, compared with 67.2% for the first quarter of 2023 and 68% last quarter. The sequential reduction in pro forma gross margin primarily reflects higher fixed costs including depreciation expense for expanded manufacturing capacity and higher costs associated with the launch of da Vinci 5. Our manufacturing and business unit teams made progress in the quarter on activities to improve gross margin over the medium term. This remains an area of key focus for us. First quarter pro forma operating expenses increased 7%, compared with last year, slightly lower than expectations due to the timing of certain expenses. Pro forma operating expenses as a percentage of revenue were 140 basis points lower than Q1 last year, reflecting planned leverage in enabling functions, partially offset by increased R&D to fund innovation and future growth. Pro forma other income was $72.5 million for Q1, higher than $67.1 million in the prior quarter, primarily due to higher interest income. Our pro forma effective tax rate for the first quarter was 22.5%, consistent with our expectations. First quarter 2024 pro forma net income was $544 million or $1.50 per share compared with $444 million or $1.23 per share for the first quarter of last year. I will now summarize our GAAP results. GAAP net income was $547 million or $1.51 per share for the first quarter of 2024, compared with GAAP net income of $361 million or $1 per share for the first quarter of 2023. First quarter GAAP tax expense was a benefit of $9 million, reflecting excess tax benefits associated with employee equity plans of $111 million. The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee equity plans, employee stock-based compensation, amortization of intangibles, litigation charges and gains and losses on strategic investments. We ended the quarter with cash and investments of $7.3 billion, flat to the end of last year. The sequential changes in cash included cash generated from operating activities, offset by capital expenditures of $242 million and the net impact of employee equity plans of $46 million. And with that, I would like to turn it over to Brian. Brian King -- Head of Investor Relations Thank you, Jamie. Overall, first quarter procedure growth was 16% year over year, compared to 26% for the first quarter of 2023 and 21% last quarter. In the US, first quarter 2024 procedure growth was 14% year over year, compared to 26% for the first quarter of 2023 and 17% last quarter. First quarter growth was led by procedures within general surgery, with strength in cholecystectomy, colon resection and foregut procedures. Growth in bariatrics procedures continued to moderate and was flat year over year. Outside of the US, first quarter procedure volume grew 20%, compared with 28% for the first quarter of 2023 and 29% last quarter. Over 70% of procedure volume growth was led by procedures beyond urology with strength in colon resection, hysterectomy and lung resection procedures. In Europe, first quarter growth continued to be led by general surgery and gynecology procedure categories. Germany and the UK procedure performance led the region with both experiencing strong growth in colon and rectal resection, and hysterectomy procedures. In Asia, growth in the first quarter was led by China, with strong procedure performance in urology and gynecology procedures. Year-over-year procedure growth in the country benefited from a comparison period, where procedures were beginning to recover from COVID during the first quarter of 2023. In Japan, while we experienced a moderation in growth in urology, overall procedure growth was healthy with strength in general surgery procedures such as colon and rectal resection in gynecology procedures. Effective June 1, 2024, five additional procedures will have reimbursement in Japan with two existing rectal resection procedures receiving an increase in reimbursement for equivalency to laparoscopic surgery. The opportunity for these procedures is relatively modest, but continues to support the adoption of minimally invasive robotic surgery across a growing set of procedures. Now turning to the clinical side of our business. Each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years. In the first quarter of this year, Dr. Jae Hwan Choi and team from University of South Florida in Tampa, Florida, published a meta-analysis of randomized controlled trials describing outcomes of robotic-assisted abdominopelvic surgery in the journal Surgical Endoscopy. This analysis included a review of 50 publications published through April 2021, included over 4,800 patients from randomized controlled studies and covered a variety of abdominopelvic surgical procedures, including anti-reflux, gastrointestinal, colorectal, urologic, hernia repair and gynecologic procedures. The authors compared robotic-assisted outcomes with those from both open and laparoscopic procedures. When compared to the open approach, robotic-assisted procedures had lower rates of postoperative complications with a 32% lower risk of postoperative complications across all procedures, as well as less estimated blood loss with a mean difference of 286.8 milliliters. Furthermore, length of stay was on average 1.7 days shorter for robotic-assisted procedures. Relative to the laparoscopic approach, rates of conversion to open for the robotic assisted group was approximately half the rate of the laparoscopic approach. Length of stay was also shorter for robotic-assisted procedures. Interestingly, the authors also reported an analysis on the impact of surgeon experience comparing inexperienced versus experienced surgeons and found that the experienced robotic-assisted surgeons had a lower risk of intraoperative complications with significantly less risk in the experienced group as compared with the laparoscopic group, as well as a lower risk of conversion to open for the experienced surgeon relative to the laparoscopic group with comparable operative times compared to laparoscopy with experienced surgeons. The authors concluded in part that their results suggest robotic surgery may shorten length of stay and rates of conversion to open when compared to laparoscopy with experience mitigating potential differences in operating time, while improving rates of intraoperative complications and conversions to open surgery. n March this year, Dr. Nicole Lunardi from the University of Texas Southwestern, along with colleagues from other hospitals and data support from the Intuitive Health Economics and Outcomes Research team, reported outcomes describing the use of robotic technology in emergency general surgery cases. Published in JAMA Surgery, this analysis used the PI and CAI healthcare database, a database that collects data from over 800 facilities to identify adult patients undergoing urgent or emergent cholecystectomy, colectomy, inguinal and ventral hernia repairs between 2013 and 2021. For reference, emergent procedures were described as those required for life-threatening or potentially disabling conditions, while urgent procedures were those where immediate intervention was needed and prioritized as first available. Over 1 million urgent or emergent procedures were identified. During the study period, the use of robotic-assisted surgery for all procedures experienced a 3.5-fold increase in cholecystectomy, a six-fold increase for colectomy and 38-fold increase in inguinal hernia repairs. Notably, increases in the robotic-assisted approach corresponded to decreases in the open approach for these procedures, as well as a decrease in laparoscopy for cholecystectomy and colectomy procedures. Furthermore, a propensity score matched analysis demonstrated a lower risk of conversion to open for the robotic-assisted approach when compared to laparoscopy. Cholecystectomy procedures with a 45% lower risk of conversion, colectomy with a 63% lower risk, inguinal hernia repair with a 79% lower risk and ventral hernia repair with a 70% lower risk of conversion. The authors concluded, "The application of robotic surgery in emergency general surgery has steadily increased in the past decade, which is especially useful in older patients with several comorbidities. As observed in this cohort study, compared with laparoscopic surgery, robotic surgery appears to have resulted in lower rates of conversion to open surgery from 2013 to 2021. Robotic surgery also leads to a shorter or comparable post-operative length of stay in the hospital. Nevertheless, open surgery remains a key component for most emergency general surgery. As robotic surgery continues to increase in emergency general surgery, barriers to implementation need to be addressed and optimized through coordinated efforts across stakeholders." I will now turn to our financial outlook for 2024. Starting with procedures. On our last call, we forecasted full year 2024 procedure growth within a range of 13% and 16%. We are now increasing our forecast and expect full year 2024 procedure growth of 14% to 17%. The low end of the range assumes further weakness in bariatric procedures, along with challenges in China from increasing provincial robotic competition and delayed tenders impacting capital placements and therefore, procedure growth. We also assume there is no benefit of patient backlog in the year. At the high end of the range, we assume bariatrics continues at flat to slightly positive growth rates and factors in China don't have a significant impact on our business. In addition, we assume any backlog of patients would decline throughout the year. Turning to gross profit. We continue to expect our pro forma gross profit margin to be within 67% and 68% of net revenue. Pro forma gross profit margin in 2024 reflects the impact of growth in our newer products, da Vinci 5, Ion, and SP and the impact of capital investments that will come on to support the growth of our business. Our actual gross profit margin will vary quarter to quarter depending largely on product, regional and trade-in mix and the impact of new product mix. Turning to operating expenses. We are holding our guidance for pro forma operating expense growth to be between 11% and 15%. We continue to expect our noncash stock compensation expense to range between $680 million to $710 million in 2024. We are holding our guidance for other income, which is comprised mostly of interest income to total between $290 million and $320 million in 2024. With regard to capital expenditures, we continue to estimate a range of $1 billion to $1.2 billion, primarily for planned facility construction activities. With regard to income tax, there is no change to our guidance of 2024 pro forma income tax rate to be between 22% and 24% of pre-tax income. That concludes our prepared comments. We will now open the call to your questions. Thank you. Questions & Answers: Operator Thank you. [Operator instructions] We will go to the first question at this time, and that's from Robbie Marcus, J.P. Morgan. Please go ahead. Robbie Marcus -- J.P. Morgan -- Analyst Great and congrats on a very nice quarter. I was hoping you could touch on what surprised me the most was the procedure volume off a really difficult quarter here, 16%. Could you walk us through your view of what's driving it? Obviously, you gave color on some of the procedures, but it's a really strong number. And what gives you the confidence that it's sustainable with the raised guidance through the rest of the year? Gary Guthart -- Chief Executive Officer Yeah, I'm going to turn that first question over to Jamie. Thanks, Marcus. Jamie, why don't you go, and then I'll add a few thoughts thereafter. Jamie Samath -- Chief Financial Officer Yeah, where we saw particular strength regionally was in the US and the UK in particular. What you also see in OUS markets, as Brian described, is this continuing growth in procedures beyond urology. That first is focused on cancer procedures, colorectal, thoracic, hysterectomy some early stage growth in benign in our international markets. So, the combination of those things, I think, were behind the performance in Q1. And as you kind of look at then the inputs from the teams as we get feedback from our customers, I think then we kind of reflect that in the rest of the year guidance. Obviously, the guidance is only up a point at the high end of the range. So, it's something we're watching carefully. Robbie Marcus -- J.P. Morgan -- Analyst Maybe just as a quick follow-up at the SAGES conference now, and the doctor feedback is phenomenal on da Vinci 5 from our end and the doctors we spoke to. I was hoping you could just give us some early feedback on what you've heard across the field. Doctors' willingness and hospitals' willingness to not just add new systems, but upgrade the fleet and just what you've been hearing. Thanks a lot. Gary Guthart -- Chief Executive Officer Yeah. In terms of early feedback we're hearing, I think what we were hoping for in terms of our design intent, they're appreciating the improvements to precision and imaging to workflow and the team's efforts on human factors design and user interface, strong commentary on ergonomics. And I think Force Feedback is something that is new and will create opportunities to really understand the clinical implications of force application during surgery. I think that will be exciting and powerful over time. I think it's really hard for us sitting where we are today to predict the depth and timing of a replacement cycle. We're excited. I think that folks are excited about what's the potential of the product. That said, Xi is great. Xi has a lot of clinical indications. And we're going to have some supply constraints here as we work through our launch. Jamie, I don't know if there's anything you'd like to add to that, today? Jamie Samath -- Chief Financial Officer No, I think you got it, Gary. Gary Guthart -- Chief Executive Officer Thanks, Robbie. Operator We'll go to the next line, Larry Biegelsen, Wells Fargo. Please go ahead. Larry Biegelsen -- Wells Fargo Securities -- Analyst Thanks for taking the question. I'll echo Robbie's congratulations on a nice quarter here. Just two on da Vinci 5 for me. Maybe starting with Gary, the supply constraints. When do you expect those to be resolved? How long into 2025 will the limited launch last? And what will trigger the full launch? Gary Guthart -- Chief Executive Officer Yeah. Thanks, Larry, there's three things that are going on for us. One of them is optimizing the supply chain, making sure that we have the quality that we want, that will, for sure, go through all of '24 in some part of the early part of '25. So, that's one. The second thing is we want to incorporate feedback from our customers. We want to make sure that we're adjusting the things that we need to adjust to make sure they're highly satisfied. And then the last thing is we have additional feature content and hardware improvements and other things that are planned that our design teams are going to execute on, whether it's software or other updates or some of the things we can do in imaging, that we want to do as we bring it through. So, it's kind of a three-part set of activities. And we think it's pretty well planned out. I wouldn't expect big changes from our plan. And if there are changes in the future, then we'll be sure to talk about them. Larry Biegelsen -- Wells Fargo Securities -- Analyst That's helpful. And Gary, you haven't been specific about new indications that da Vinci 5 could open, but can you help us understand what the features are of da Vinci 5 that could allow physicians to do new procedures and why? Thanks for taking the question. Gary Guthart -- Chief Executive Officer Yeah. Our first thought here and bringing the system to the market has been to allow surgeons to go deeper into the existing indications we have already. So, the indications for da Vinci 5 largely mirror the Xi -- indications that we had already. But we do think that it will invite new surgeons and care teams into robotic-assisted surgery. I think it allows us to deepen our relationship with that customer base, and we're excited about it. In terms of core capabilities, da Vinci 5 has some really cool things. Better imaging that right now today is better and will get better over time, precision and high performance and tracking performance allows for really subtle and fine surgical motions. And we think that's really powerful, and it's a core capability. Faster workflow opens new opportunities for people too. So, we do think there are additional clinical indications we can pursue. We are evaluating them. We have not finalized on everything yet, and likely, they will require conversations with FDA. So, we're not prepared at this time to tell you what they might be. But as we get a little closer and work through it, then we'll describe it once we've settled our approach. Operator And we will go to the next line, Travis Steed, Bank of America. Please go ahead. Travis Steed -- Bank of America Merrill Lynch -- Analyst I wanted to ask a little bit more color on the strong Xi placements and the capital environment even ahead of the dV5 launch. And it sounded like the message changed on system placements in 2023. I think or 2024, I think before it was system placements could be lower in '24 and now it's just choppy. So, does that mean there's a chance that system placements are up in 2024? Gary Guthart -- Chief Executive Officer Jamie, why don't I -- Jamie Samath -- Chief Financial Officer Oh, go ahead, Gary. Gary Guthart -- Chief Executive Officer Jamie, go ahead and take it. Apologies. Jamie Samath -- Chief Financial Officer Yes. I think the first dynamic is trading given the limited supply in dV5. Those placements will be during the measured launch focused on incremental placements. So, not a lot of trade activity coming from dV5. And if you look at what's left in the installed base for our third-gen Xi, you've got about 350 systems globally, of which 50 are in the US. So, we do expect trading volumes to be down quite a bit in '24. With respect to overall system placements, I know we made the comments on the last call, but generally, we don't guide system placements. So, we'll let you run that through your models, given the update of our procedure guidance, but certainly, we've acknowledged that placements could be choppy, while we're constrained on dV5. In Q1, we didn't really see any customers pushing back on, I don't want an Xi, we want to wait for dV5. But since the launch, which obviously was only in March, we've had our Connect conference. We've had SAGES this week, a significant number of surgeons and executives have now seen dV5 put their hands on it. So, we're acknowledging that customers may choose to wait. We don't have enough evidence or indication yet to see which way that will go. Travis Steed -- Bank of America Merrill Lynch -- Analyst Great. And, maybe, Gary, if you could spend some time just kind of a bigger picture question on dV5 and the capabilities it brings to training, being able to practice some of the edge cases helping with proctoring. I'm just curious how you see the impact on robotic surgery adoption and driving better outcomes from some of these dV5 training capabilities that's going to roll out? And how long some of this stuff actually is going to take? Gary Guthart -- Chief Executive Officer In terms of raw capability, I think that it will help care teams acquire skills more quickly, and it also helps them in the case. You can kind of think of that as context sensitive help. The device is kind of aware of where it is and what it's doing and can share that information with the care team so that as they're doing things, whether it's changing tools or setting it up, it provides real-time help to help guide them through it. And I think that's a really good thing. It just makes it easier to use. Our Intuitive hub has integration technologies that start with da Vinci 5, and we'll get better over time as we release software updates and hardware updates. And so, that starts to close an analytical loop for our customers from what they're seeing in the case to video review to video analytics to feeding back information to their phones and their laptops and whatever their means are consuming that data is. And so, that gives them an analytical loop, which should also help. And we'll also continue to evolve our simulation training in some of our other packages or online learning that will help them as well. So, I think all of this is going to take a little bit of time. But I think the design concept, I think our designers did a beautiful job. I think the design concept of integrating these ideas, making it easy for care teams, for surgeons to follow that journey should help us. The final point I'll make is that in our labs and during our early experience with da Vinci 5, it looks like force reflection helps novice, new to robotics, new to robotics system surgery acquire their skills faster. So, it should invite more surgeons in and ease their journey, remains to be proven. It's not done and done, but we think it's encouraging. And so, stay tuned. I think keep asking that question. And as the data starts to come out, we'll be pleased to share it with you. Travis Steed -- Bank of America Merrill Lynch -- Analyst Great. I can't wait to see and congrats. Operator OK. And we'll go to the next line. Rick Wise, Stifel. Please go ahead. Rick Wise -- Stifel Financial Corp. -- Analyst Good afternoon. Gary, maybe it would be helpful to hear in a little more detail, your thoughts on a couple of points that maybe some of the headwinds, bariatrics flat year over year. I wasn't sure completely what I was hearing about trends. Is it getting worse, still is the rate of pressure easing? I appreciate talking about the guidance you talked about a range given the range of outcomes. But I just want to make sure I understood what you're saying. Gary Guthart -- Chief Executive Officer Yeah. Let me share my perspective. Rick, thanks for the question. And then Brian, I'll kick it to you to talk about the range. I think what we can tell you is what we see, and what we've seen is continued deceleration such that it's flat year over year. There are a lot of opinions out in the field, and we can all talk to them. I think the reality is nobody really knows yet. We're going to have to live through it together. And as a result, it's going to be dynamic. We do know that bariatric surgery is well tolerated and it's a good option. And we also know that people are interested in pharmaceuticals and that the pharmaceuticals work as long as you take them for a subset of the population and then stop working if you don't. What that means for future surgery, I think there's a range of opinion, and I would not hang a lot of confidence on any of them just yet. And that's why we have a range. And Brian, perhaps you can just touch on how you see bariatric surgery affecting the range, just reiterate that, if you would. Brian King -- Head of Investor Relations Sure. And just to reiterate again, the low end of the range assumes that there's further weakness in bariatric procedures, right? So, at the low end of the range, further weakness in bariatric procedures. At the high end of the range, we assume that bariatrics continues at flat to slightly positive growth rates. And I think, again, to Gary's point, it will be dynamic, and we're just going to have to see how it plays out throughout the year. Rick Wise -- Stifel Financial Corp. -- Analyst OK. Great. And let me turn to some of the new and incremental features you talked about, Gary. I'm sure all of us on the call have been talking to doctors have been hearing a variety of additional features, some quite compelling. Can you give us any flavor -- I mean, first of all, I'd be happy to hear from you what some of them could be. But how quickly, given what you know today, when could we see those features that, again, I would assume would enhance the value? Are we going to see them this year, second half? Or is it more likely that's something for next year as you get the supply chain where you want it to be? Thank you. Gary Guthart -- Chief Executive Officer Yeah. I think as we add capabilities in time, we have some imaging things that we want to do. We have some things in terms of software upgrades and analytics power and some things we want to do in terms of integration. That's much more likely to be '25 and later than '24. A lot of '24 will be making sure that we and our suppliers feel great about what we've got and then adapting to any immediate feedback that we see. Operator And we will go to the next line. Adam Maeder, Piper Sandler. Please go ahead. Adam Maeder -- Piper Sandler -- Analyst Good afternoon. Thank you for taking the questions and congrats on the nice quarter. I wanted to start by asking about the Force Feedback instruments. I was hoping, Gary, you could share a little bit more color on the feedback that you're getting from clinicians thus far into launch. And then if I understand correctly, you have six Force Feedback instruments that are used across different common procedures. Will you look to expand the portfolio of that technology going forward? And if so, what might that look like? And then I have a follow-up. Thank you. Gary Guthart -- Chief Executive Officer Sure. We're getting a variety of feedback on the instruments themselves. Just a reminder for everyone, they have very sensitive sensors that are built into the distal end -- in the body end of the instruments that are sterilizable and cleanable and they report back contact forces with tissue, which at a sensitive way, which has been a goal for us and for surgery for a long time. So, it's a hard technology. We've been really excited to bring it to market. We will hear everything from, hey, I'm getting great results with da Vinci X and Xi today that has very limited version of haptics. It really doesn't have in body sensing. It does have a little something, but it's not sensing in a technical sense. And that's true. They're getting great results. So, it's a new sense. That said, people are quite interested to explore where it'll take them. And what's interesting is that when you're using a force sensing instrument, it's sensing whether you turn on force reflection into the surgeon's hands or not. So, the surgeon can feel it. They can turn it on, or they can turn it off, but still measure so that they have the feeling experience of an X or an Xi. And what they find when they turn it on and off is that the amount of force that they apply during surgery to tissue decreases when force reflection into the hands is on. And so, the big question is, what's the clinical value of that? What will be the implications for patient outcomes by procedure and by technique? And that's what they're going to go explore, and we will help them do that exploration. So, now we're talking about the future of what could happen. I suspect, I believe, it's a personal opinion. There will be types of procedures and types of patients where having lower force applied to tissue during the surgery is going to be clinically meaningful, and we have to go prove that. So, I think it's quite interesting. The technology is sophisticated. We are with our manufacturing partners, learning how to make these at scale with good yield and robust. It's a worthy endeavor, but it is not easy, and we're going to focus on it and make sure that we get what we want. We want to make sure we have robust and high-yield products. We want to extend their lives to help the economics of our customers and our economics. So, that is our first focus. As to the six instruments, I'm going to look to Jamie as to whether the six number is right, I think it is. Certainly, over time, we have the opportunity to extend it to other instruments. But that first set of six are the ones that we thought were right. Six is the right number, Jamie? Jamie Samath -- Chief Financial Officer It is. And it's a combination of graspers and needle drivers and those instruments are used in very common tasks, dissection, retraction, and suturing. Gary Guthart -- Chief Executive Officer Thanks, Adam. Operator We'll go to the next line. Drew Ranieri, Morgan Stanley. Please go ahead. Drew Ranieri -- Morgan Stanley -- Analyst Thank you for taking the question. Maybe just on SP for a moment with the indication expansion in Europe. Can you talk about that a bit more, Gary, and I was hearing from a surgeon today that the CRSA conference in November in Rome could be pretty important for just getting broader adoption from European surgeons? But does that inform how you could approach the US market with a broader indication? And then I just had a follow-up. Gary Guthart -- Chief Executive Officer Yeah, yeah. I'm actually here in Europe have been for the last couple of weeks talking to SP surgeons here. I think the early uptake and early excitement is quite palpable. Where we've had broad indications, as you know, in Korea and now Japan, we've seen nice uptake in adoption and good study, good clinical study. And I think that the surgeons here are building on that. They're learning from and adapting what they see in the rest of the world and getting excited about it. So, I'm encouraged. How deep that goes? It's still early days here in Europe. We will see. But we're starting to see fairly long case studies. In things like colorectal surgery coming out of Asia and other places, we have submitted, as Jamie had mentioned, for an additional indication in the United States. We have another one coming. We have IDE trials ongoing. So, we have some natural experiments to see what occurs. We know that the experiment in Korea has worked out well. We're in process in Japan and now we're in the early experience for broad indications in Europe. That should help us generate data and accelerate additional indications over time in the US And I have to say, I think, it remains a build for SP, but I'm encouraged by the build. Drew Ranieri -- Morgan Stanley -- Analyst Thank you. And maybe this is more for Jamie. But Jamie, could you talk about the commentary about lower pricing in China for the quarter? Just talk about that a little bit more and maybe put that into context on if this is temporary, if it's permanent or more to come and just the overall competitive situation in China would be great. Thank you. Jamie Samath -- Chief Financial Officer Yeah. It's primarily a function of the competitive environment we've described with the domestic robotic players. What we actually have now, given last year, we qualified a domestically manufactured Xi is actually some segmentation between the domestically manufactured product and an imported product. And the domestic product gives us the opportunity to both participate in tenders that require a locally produced system, but also allows us to segment on price. But the primary impact on China pricing is really competition. And you kind of see that theme broadly with other med tech players in terms of the impact of VBP. It doesn't apply in this case, but kind of the macro theme of pricing pressure does. Operator And we will go to the next line. And that will be Matt Miksic, Barclays. Please go ahead. Matt Miksic -- Barclays -- Analyst Hey, thanks so much for taking the questions and congrats on a really strong quarter against tough comps. So, a couple of follow-ups, if I could, on a couple of things you mentioned, Gary, in your last answer around Force Feedback and sort of the clinical impacts of optimizing and reducing the force used during surgery, which is kind of buzzing around here at SAGES quite a bit this year in the sessions. And I'm wondering -- I appreciate always the data that you talked about during the prepared remarks and recent clinical data. I'm wondering how far out are we going to see clinical reference like that to studies around the use of Force Feedback versus not. And also, maybe efficiency is driven by a lot of the docs you're talking about smoother operating arms and being able to get through cases faster. Is that a year out? Are we six months? Are we two years out for dV5 research like that? And again, appreciate you taking the question. Gary Guthart -- Chief Executive Officer Yeah. It's a good question. Thank you. This is approximate, not specific, so take it with some error bars. But I think what you're going to see in Force Feedback study is going to be a progression. You'll see narrow series, single-institution studies come out first that are kind of directional. They talk about what they're seeing in their own. And then you'll see a little bit -- and that should be the kind of thing that comes out in the next 12 months. And then over the next period after that over the next couple of years, you'll see multiple center trials that are comparing in a little more structured way. So, I think you can predict the path of the journey. But I think this is something that you're going to see from narrower input to start to broader input in the next year to prospective studies that start to report over the next year after that. So, I think it's a build, but I think it's going to be a powerful build in the end. I think with regard to efficiencies, we're hearing anecdotal reports already that the surgeon autonomy features that are in da Vinci 5, the ability for them to control their own field and to control the equipment, ancillary equipment in the room, has been really positive, and they're reporting efficiencies already. I think real-world evidence is going to be powerful on the efficiency side. And I think that's the kind of thing that people can benchmark their own cases, also our data collection capabilities between Intuitive Hub and the My Intuitive app allowed them to measure that very quickly. So, I think you'll see the real-world evidence of that build, and it will be in the coming months and quarters, and that will be exciting for us. Matt Miksic -- Barclays -- Analyst That's great. Thank you. Operator We'll go the next line. Brandon Vazquez, William Blair. Please go ahead. Brandon Vazquez -- William Blair -- Analyst Thanks for taking the question. I want to focus on Ion real quick. You had a nice rebound in the quarter thereafter some supply last quarter. Just curious, you see a little bit of catch-up there or not? And then even as these numbers are getting bigger, you're still putting up some really strong growth. So, curious where you're seeing the most growth there, new accounts or existing utilization, and how sustainable you think it is? Gary Guthart -- Chief Executive Officer Jamie, why don't you take that one? Jamie Samath -- Chief Financial Officer Yeah, I'd say it was a partial recovery in the quarter. We haven't completely resolved both catheter supply and the vision probe. We still have a little bit of backlog in terms of the number of systems that's pending kind of stabilization of that supply. With respect to where are we placing those systems, it's actually a blend between existing accounts and new accounts. We still have a number of opportunities, what I call greenfield accounts. And so, both are a focus for the sales team. Brandon Vazquez -- William Blair -- Analyst OK. And one quick follow-up maybe on the surgical side. The 1% utilization growth, I appreciate off of a tough comp, and we're kind of normalizing, but I think we usually use utilization growth as an indication for system placements and then it implies a certain procedure growth as well. Just talk to us a little bit about what you kind of think a below historical average utilization growth in the quarter might mean for those key moving pieces in the next couple of quarters. Thanks. Gary Guthart -- Chief Executive Officer I'll start. Jamie Samath -- Chief Financial Officer Go ahead, Gary. Gary Guthart -- Chief Executive Officer I'll jump in and then Jamie take it. I think that in the prepared remarks, we had said you had a nice capital placement year and we have bolus of post-COVID come back into Q1. I think the uncertainty part of this is really just going to be what the inpatient volumes look like in the next quarters of 2024. In other words, just the patient census as it comes through. But you're right. I think that it's an indicator of capacity. So, depending on what that patient census looks like, that will determine the high end and the low end of utilization growth in terms of how many procedures people want to put on those systems. Sorry, Jamie, go ahead, you might discuss the modeling there. Jamie Samath -- Chief Financial Officer I would just say that if you look at Q1 utilization over an extended period, look at what the CAGR is versus the year-over-year comparison, you see that start to be in a more normal range of 3% to 4%. I do think that in the year-ago quarter, you had a number of institutions that actually set themselves up to do sprint with respect to their ability to treat patients. And so, I do think that was elevated and at that level of utilization growth of 13%, it wasn't particularly sustainable. So, as I look forward to the rest of the year, I'd expect some levels of utilization growth of, let's say, closer to our long-term averages. There's still some patient backlog benefit in the year-ago quarters, even in Q2 and Q3. So, it's not perfectly matched, but I think there's room for normalization over time. Operator And we will go to the next question from the line of Jayson Bedford, Raymond James. Please go ahead. Jayson Bedford -- Raymond James -- Analyst Good afternoon. Thanks for taking the question. Just maybe Ion in China. Obviously, a large opportunity there. Just a couple of questions, and I apologize if I missed this. But does Ion fall within the existing robotics quota? And then for Ion, you mentioned clearance is the first step. Can you just talk through the other steps to commercialization and associated timing of those steps? Thanks. Jamie Samath -- Chief Financial Officer Yeah, we have some work to put Ion at a point where it's actually available to sell. So, that will take us some time. We're not expecting to have commercialization really until the back half of 2024. And China is a market where, like many cases, when we launch a new product in a market, we do that progressively as we kind of build our infrastructure in terms of training capabilities and engage with customers. So, I'd say back half of '24 is when you start to see the potential for Ion placements in China. Gary Guthart -- Chief Executive Officer On the issue of is it competing for the same quota, Jamie? Jamie Samath -- Chief Financial Officer Sorry. Yes, our understanding is it's not in the quota given the price. Jayson Bedford -- Raymond James -- Analyst Thank you. Gary Guthart -- Chief Executive Officer And Jayson, if you have one more follow-up, that will wrap it up for us. Jayson Bedford -- Raymond James -- Analyst No, that's fine. Thank you. Gary Guthart -- Chief Executive Officer OK. That was our last question. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians, and care teams in pursuit of what our customers have termed the Quadruple Aim, better, more predictable patient outcomes, better experiences for patients, better experiences for their care teams; and ultimately, a lower total cost of care. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs, and their environment. At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in three months. Answer:

the Intuitive Q1 2024 earnings release call

Operator Thank you, everyone, for standing by, and welcome to the Intuitive Q1 2024 earnings release call. At this time, all participants are on a listen-only mode. [Operator instructions] As a reminder, today's call is being recorded. I will now turn the call over to our host, head of investor relations for Intuitive Surgical, Brian King. Please go ahead. Brian King -- Head of Investor Relations Good afternoon, and welcome to Intuitive's first quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our CFO. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent annual report on Form 10-K for the fiscal year ended December 31, 2023, and subsequent filings. Our SEC filings can be found through our website or at the SEC's website. Investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website at intuitive.com on the events section under our investor relations page. Today's press release and supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our first quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2024. And finally, we will host a question-and-answer session. And with that, I will turn it over to Gary. Gary Guthart -- Chief Executive Officer Thank you for joining us today. The first quarter of 2024 was a solid one for Intuitive, where core measures of our business remain healthy including solid procedure growth and capital placements. Furthermore, our teams delivered important milestones across several parts of our Intuitive ecosystem, including launching our next-generation multiport platform, da Vinci 5, launching our da Vinci SP platform in Europe and improving our supply constraints for Ion catheters. Some regional challenges existed in the quarter, which we'll describe today. Taken together, we remain enthusiastic about our opportunity and we'll work through near-term pressures by focusing on what we can control. Starting first with procedures, we experienced solid growth in the quarter of 16%, compared with a strong Q1 of '23 that was a result of elevated patient volume from the return of patients post pandemic. Q1 of 2024, procedure performance was led by broad growth in general surgery in the United States, and by procedures beyond urology outside the United States. Globally, cholecystectomy, colon resection, and foregut procedures led the way. Regional performance included strength in China, Germany, and the United Kingdom. In Japan, we saw a moderation of growth in urology as we reach higher levels of penetration and Q1 2023 benefited from the return of patients in backlog. In Korea, growth was lower than our expectation, primarily due to a physician strike in the country, which began in February and has continued. Turning to capital. We placed 313 da Vinci systems in the quarter, of which 289 were multiport systems, compared with 302 multiport systems in Q1 of '23. SP placements were 24 in the quarter versus 10 systems a year ago, and Ion placements for the quarter were 70 versus 55 a year ago. Capital placements were solid in the United States, our global distribution markets and in Germany. Placements in China appear to be impacted by delayed tenders and an apparent increase in provincial preference for domestic robotic competition. We saw some placement weakness in the UK as financial pressures in the NHS constrained access to capital. System utilization defined as procedures per installed system per quarter grew 1% globally year over year for our multiport platform, lower than last quarter and our historical trend, a result of a strong placement year in 2023 in which the multiport clinical installed base grew 14%, while customers addressed a COVID-related backlog. For our newer platforms, utilization grew 10% for SP and 14% for Ion in the quarter. Utilization is an important indicator of customer health and is a reflection of customers driving value from their systems. Turning to our finances. Revenue growth of 11% in the quarter reflects solid procedure performance and capital placements. Average system selling prices declined modestly due to regional and product mix. Product margins were within our expectations, reflecting a higher mix of newer platforms. Operating expenses came in slightly below plan, resulting in pro forma operating profit growth of 18%. Jamie will take you through our finances in greater detail later in the call. In the quarter, we made good progress with our new platforms. In March, we received FDA clearance for our next-generation multiport platform, da Vinci 5. Within the quarter, we placed eight da Vinci 5 systems and surgeon completed their first cases. As we engage with customers during their activation of da Vinci 5, our customers are noting and appreciating improved precision, improved imaging, improved efficiency for surgeon and staff, improved ergonomics and they are exploring the potential of Force Feedback, where early surgeons are excited to test hypothesis about its procedural, clinical and learning value. Digital analytical capabilities of da Vinci 5 are also drawing positive reviews. In parallel with customer support, we're working hard to optimize our supply chains and manufacturing capabilities for da Vinci 5 components. We will remain in our measured rollout as we stabilize supply and respond to customer input. Turning to Ion, our teams have made meaningful progress on resolving supply challenges for our catheter and Ion vision probe, although work still remains to be done. Earlier this month, FDA reviewed our set of design and production changes and cleared an increase in an Ion catheter lives from five lives to eight lives alleviating some supply constraints while improving the economics for us and our customers. Also in March, we received NMPA clearance for Ion in China through a special review process for innovative medical devices. While NMPA clearance is only the first step toward commercialization in China, we believe Ion can play an important role in helping to address the significant burden of lung cancer in the country. Turning to SP, we received CE mark in Europe with a broad set of indications in the quarter, and we placed eight systems. First cases in Europe were performed this April, and we're encouraged by early customer interest for SP. In closing, for 2024, our priorities are as follows: first, we'll support the measured launch of da Vinci 5 and our other new platforms by region. Second, we're focused on supporting surgeons' adoption of focused procedures. Third, we're focused on improving our product margins and quality. And finally, we're focused on improving productivity in those functions that benefit from global scale. I'll now turn the time over to Jamie, who will take you through our finances in greater detail. Jamie Samath -- Chief Financial Officer Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis and will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. In Q1, da Vinci procedures grew 16%, the installed base of systems grew 14% to 8,887 systems and average system utilization increased by 2%, lower than recent trends because of the strength in procedure growth and utilization in Q1 of last year that reflected a significant benefit from the treatment of patient backlogs. US procedures grew 14%, driven by broad growth in general surgery. Bariatrics procedure growth in the US continued to moderate and was flat year over year. OUS procedures grew 20%, reflecting strong growth in general surgery and thoracic procedures. Brian will provide additional detail on our clinical performance later in the call. Turning to capital. We placed 313 systems in the first quarter, compared to 312 systems in Q1 of last year. Excluding trading transactions, net new system placements grew 16% to 284 systems. In the US, we placed 148 systems in Q1, including eight da Vinci five placements, compared with 141 systems placed in Q1 of last year. Given constrained supply of da Vinci 5, system placements may be choppy this year as some customers that are interested in da Vinci 5 decide whether to acquire a fourth-generation system with an upgrade rate or wait for adequate supply. Outside the US, we placed 165 systems in Q1 compared with 171 systems last year. Current quarter system placements included 84 into Europe, 20 into Japan, and 10 into China compared with 101 into Europe, 16 into Japan, and 18 into China of Q1 of last year. Placements in the UK were below our expectations and lower than Q1 last year because of the reallocation of NHS capital funding to help address industrial actions in the NHS. Placements in China continue to reflect the impact of domestic robotic competition and delayed tenders due to a broader central government focus on systematic governance across sectors, including healthcare. First quarter revenue was $1.89 billion, an increase of 11% from last year. On a constant currency basis, revenue growth was 12%. Additional revenue statistics and trends are as follows: Leasing represented 51% of Q1 placements, compared with 42% in Q1 of last year. Given customer preference for our usage-based models in the US and the launch of da Vinci 5, we continue to expect the proportion of systems placed under lease arrangements to grow over time. Q1 system average selling prices were $1.39 million as compared to $1.47 million last year. System ASPs were negatively impacted by regional and platform mix and lower pricing in China, partially offset by lower trade-ins. We've recognized $29 million of lease buyout revenue in the first quarter, compared with $21 million last quarter and $24 million last year. da Vinci instrument and accessory revenue per procedure was approximately $1,780, flat to last year and down $20, compared to last quarter. The sequential decline in I&A per procedure is primarily a result of procedure mix in the US given strong growth in cholecystectomy and the moderation of growth in bariatrics. We have also seen larger IDNs in the US look for operational efficiencies by reducing inventory. Turning to Ion. There were approximately 19,500 Ion procedures in the first quarter, an increase of 90% as compared to last year. Since launching the Ion platform in 2019, on a cumulative basis, more than 100,000 procedures have now been performed. In Q1, we placed 70 Ion systems compared to 55 in Q1 of 2023 and 44 last quarter. Q1 results reflected a partial recovery from last quarter as catheter supply improved. Our team continued to work on stabilizing supply of the catheter and the vision probe. Q1 results included four Ion system placements in the UK following European clearance last year. The installed base of Ion systems increased 61% year over year to 604 systems, of which 244 are under operating lease arrangements. 24 of the systems placed in the quarter were SP systems, including eight systems in Europe, reflecting clearance early in the quarter. First quarter SP procedure growth was 60% with healthy growth in Korea and the US and early stage growth in Japan. In the US, during the quarter, we completed a 510k submission for a thoracic indication, made continued regulatory progress toward a colorectal submission and enrolled additional patients in our IDE for nipple-sparing mastectomy. The SP installed base grew 55% from the year-ago quarter to 201 systems. Moving on to the rest of the P&L. Pro forma gross margin for the first quarter of 2024 was 67.6%, compared with 67.2% for the first quarter of 2023 and 68% last quarter. The sequential reduction in pro forma gross margin primarily reflects higher fixed costs including depreciation expense for expanded manufacturing capacity and higher costs associated with the launch of da Vinci 5. Our manufacturing and business unit teams made progress in the quarter on activities to improve gross margin over the medium term. This remains an area of key focus for us. First quarter pro forma operating expenses increased 7%, compared with last year, slightly lower than expectations due to the timing of certain expenses. Pro forma operating expenses as a percentage of revenue were 140 basis points lower than Q1 last year, reflecting planned leverage in enabling functions, partially offset by increased R&D to fund innovation and future growth. Pro forma other income was $72.5 million for Q1, higher than $67.1 million in the prior quarter, primarily due to higher interest income. Our pro forma effective tax rate for the first quarter was 22.5%, consistent with our expectations. First quarter 2024 pro forma net income was $544 million or $1.50 per share compared with $444 million or $1.23 per share for the first quarter of last year. I will now summarize our GAAP results. GAAP net income was $547 million or $1.51 per share for the first quarter of 2024, compared with GAAP net income of $361 million or $1 per share for the first quarter of 2023. First quarter GAAP tax expense was a benefit of $9 million, reflecting excess tax benefits associated with employee equity plans of $111 million. The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee equity plans, employee stock-based compensation, amortization of intangibles, litigation charges and gains and losses on strategic investments. We ended the quarter with cash and investments of $7.3 billion, flat to the end of last year. The sequential changes in cash included cash generated from operating activities, offset by capital expenditures of $242 million and the net impact of employee equity plans of $46 million. And with that, I would like to turn it over to Brian. Brian King -- Head of Investor Relations Thank you, Jamie. Overall, first quarter procedure growth was 16% year over year, compared to 26% for the first quarter of 2023 and 21% last quarter. In the US, first quarter 2024 procedure growth was 14% year over year, compared to 26% for the first quarter of 2023 and 17% last quarter. First quarter growth was led by procedures within general surgery, with strength in cholecystectomy, colon resection and foregut procedures. Growth in bariatrics procedures continued to moderate and was flat year over year. Outside of the US, first quarter procedure volume grew 20%, compared with 28% for the first quarter of 2023 and 29% last quarter. Over 70% of procedure volume growth was led by procedures beyond urology with strength in colon resection, hysterectomy and lung resection procedures. In Europe, first quarter growth continued to be led by general surgery and gynecology procedure categories. Germany and the UK procedure performance led the region with both experiencing strong growth in colon and rectal resection, and hysterectomy procedures. In Asia, growth in the first quarter was led by China, with strong procedure performance in urology and gynecology procedures. Year-over-year procedure growth in the country benefited from a comparison period, where procedures were beginning to recover from COVID during the first quarter of 2023. In Japan, while we experienced a moderation in growth in urology, overall procedure growth was healthy with strength in general surgery procedures such as colon and rectal resection in gynecology procedures. Effective June 1, 2024, five additional procedures will have reimbursement in Japan with two existing rectal resection procedures receiving an increase in reimbursement for equivalency to laparoscopic surgery. The opportunity for these procedures is relatively modest, but continues to support the adoption of minimally invasive robotic surgery across a growing set of procedures. Now turning to the clinical side of our business. Each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years. In the first quarter of this year, Dr. Jae Hwan Choi and team from University of South Florida in Tampa, Florida, published a meta-analysis of randomized controlled trials describing outcomes of robotic-assisted abdominopelvic surgery in the journal Surgical Endoscopy. This analysis included a review of 50 publications published through April 2021, included over 4,800 patients from randomized controlled studies and covered a variety of abdominopelvic surgical procedures, including anti-reflux, gastrointestinal, colorectal, urologic, hernia repair and gynecologic procedures. The authors compared robotic-assisted outcomes with those from both open and laparoscopic procedures. When compared to the open approach, robotic-assisted procedures had lower rates of postoperative complications with a 32% lower risk of postoperative complications across all procedures, as well as less estimated blood loss with a mean difference of 286.8 milliliters. Furthermore, length of stay was on average 1.7 days shorter for robotic-assisted procedures. Relative to the laparoscopic approach, rates of conversion to open for the robotic assisted group was approximately half the rate of the laparoscopic approach. Length of stay was also shorter for robotic-assisted procedures. Interestingly, the authors also reported an analysis on the impact of surgeon experience comparing inexperienced versus experienced surgeons and found that the experienced robotic-assisted surgeons had a lower risk of intraoperative complications with significantly less risk in the experienced group as compared with the laparoscopic group, as well as a lower risk of conversion to open for the experienced surgeon relative to the laparoscopic group with comparable operative times compared to laparoscopy with experienced surgeons. The authors concluded in part that their results suggest robotic surgery may shorten length of stay and rates of conversion to open when compared to laparoscopy with experience mitigating potential differences in operating time, while improving rates of intraoperative complications and conversions to open surgery. n March this year, Dr. Nicole Lunardi from the University of Texas Southwestern, along with colleagues from other hospitals and data support from the Intuitive Health Economics and Outcomes Research team, reported outcomes describing the use of robotic technology in emergency general surgery cases. Published in JAMA Surgery, this analysis used the PI and CAI healthcare database, a database that collects data from over 800 facilities to identify adult patients undergoing urgent or emergent cholecystectomy, colectomy, inguinal and ventral hernia repairs between 2013 and 2021. For reference, emergent procedures were described as those required for life-threatening or potentially disabling conditions, while urgent procedures were those where immediate intervention was needed and prioritized as first available. Over 1 million urgent or emergent procedures were identified. During the study period, the use of robotic-assisted surgery for all procedures experienced a 3.5-fold increase in cholecystectomy, a six-fold increase for colectomy and 38-fold increase in inguinal hernia repairs. Notably, increases in the robotic-assisted approach corresponded to decreases in the open approach for these procedures, as well as a decrease in laparoscopy for cholecystectomy and colectomy procedures. Furthermore, a propensity score matched analysis demonstrated a lower risk of conversion to open for the robotic-assisted approach when compared to laparoscopy. Cholecystectomy procedures with a 45% lower risk of conversion, colectomy with a 63% lower risk, inguinal hernia repair with a 79% lower risk and ventral hernia repair with a 70% lower risk of conversion. The authors concluded, "The application of robotic surgery in emergency general surgery has steadily increased in the past decade, which is especially useful in older patients with several comorbidities. As observed in this cohort study, compared with laparoscopic surgery, robotic surgery appears to have resulted in lower rates of conversion to open surgery from 2013 to 2021. Robotic surgery also leads to a shorter or comparable post-operative length of stay in the hospital. Nevertheless, open surgery remains a key component for most emergency general surgery. As robotic surgery continues to increase in emergency general surgery, barriers to implementation need to be addressed and optimized through coordinated efforts across stakeholders." I will now turn to our financial outlook for 2024. Starting with procedures. On our last call, we forecasted full year 2024 procedure growth within a range of 13% and 16%. We are now increasing our forecast and expect full year 2024 procedure growth of 14% to 17%. The low end of the range assumes further weakness in bariatric procedures, along with challenges in China from increasing provincial robotic competition and delayed tenders impacting capital placements and therefore, procedure growth. We also assume there is no benefit of patient backlog in the year. At the high end of the range, we assume bariatrics continues at flat to slightly positive growth rates and factors in China don't have a significant impact on our business. In addition, we assume any backlog of patients would decline throughout the year. Turning to gross profit. We continue to expect our pro forma gross profit margin to be within 67% and 68% of net revenue. Pro forma gross profit margin in 2024 reflects the impact of growth in our newer products, da Vinci 5, Ion, and SP and the impact of capital investments that will come on to support the growth of our business. Our actual gross profit margin will vary quarter to quarter depending largely on product, regional and trade-in mix and the impact of new product mix. Turning to operating expenses. We are holding our guidance for pro forma operating expense growth to be between 11% and 15%. We continue to expect our noncash stock compensation expense to range between $680 million to $710 million in 2024. We are holding our guidance for other income, which is comprised mostly of interest income to total between $290 million and $320 million in 2024. With regard to capital expenditures, we continue to estimate a range of $1 billion to $1.2 billion, primarily for planned facility construction activities. With regard to income tax, there is no change to our guidance of 2024 pro forma income tax rate to be between 22% and 24% of pre-tax income. That concludes our prepared comments. We will now open the call to your questions. Thank you. Questions & Answers: Operator Thank you. [Operator instructions] We will go to the first question at this time, and that's from Robbie Marcus, J.P. Morgan. Please go ahead. Robbie Marcus -- J.P. Morgan -- Analyst Great and congrats on a very nice quarter. I was hoping you could touch on what surprised me the most was the procedure volume off a really difficult quarter here, 16%. Could you walk us through your view of what's driving it? Obviously, you gave color on some of the procedures, but it's a really strong number. And what gives you the confidence that it's sustainable with the raised guidance through the rest of the year? Gary Guthart -- Chief Executive Officer Yeah, I'm going to turn that first question over to Jamie. Thanks, Marcus. Jamie, why don't you go, and then I'll add a few thoughts thereafter. Jamie Samath -- Chief Financial Officer Yeah, where we saw particular strength regionally was in the US and the UK in particular. What you also see in OUS markets, as Brian described, is this continuing growth in procedures beyond urology. That first is focused on cancer procedures, colorectal, thoracic, hysterectomy some early stage growth in benign in our international markets. So, the combination of those things, I think, were behind the performance in Q1. And as you kind of look at then the inputs from the teams as we get feedback from our customers, I think then we kind of reflect that in the rest of the year guidance. Obviously, the guidance is only up a point at the high end of the range. So, it's something we're watching carefully. Robbie Marcus -- J.P. Morgan -- Analyst Maybe just as a quick follow-up at the SAGES conference now, and the doctor feedback is phenomenal on da Vinci 5 from our end and the doctors we spoke to. I was hoping you could just give us some early feedback on what you've heard across the field. Doctors' willingness and hospitals' willingness to not just add new systems, but upgrade the fleet and just what you've been hearing. Thanks a lot. Gary Guthart -- Chief Executive Officer Yeah. In terms of early feedback we're hearing, I think what we were hoping for in terms of our design intent, they're appreciating the improvements to precision and imaging to workflow and the team's efforts on human factors design and user interface, strong commentary on ergonomics. And I think Force Feedback is something that is new and will create opportunities to really understand the clinical implications of force application during surgery. I think that will be exciting and powerful over time. I think it's really hard for us sitting where we are today to predict the depth and timing of a replacement cycle. We're excited. I think that folks are excited about what's the potential of the product. That said, Xi is great. Xi has a lot of clinical indications. And we're going to have some supply constraints here as we work through our launch. Jamie, I don't know if there's anything you'd like to add to that, today? Jamie Samath -- Chief Financial Officer No, I think you got it, Gary. Gary Guthart -- Chief Executive Officer Thanks, Robbie. Operator We'll go to the next line, Larry Biegelsen, Wells Fargo. Please go ahead. Larry Biegelsen -- Wells Fargo Securities -- Analyst Thanks for taking the question. I'll echo Robbie's congratulations on a nice quarter here. Just two on da Vinci 5 for me. Maybe starting with Gary, the supply constraints. When do you expect those to be resolved? How long into 2025 will the limited launch last? And what will trigger the full launch? Gary Guthart -- Chief Executive Officer Yeah. Thanks, Larry, there's three things that are going on for us. One of them is optimizing the supply chain, making sure that we have the quality that we want, that will, for sure, go through all of '24 in some part of the early part of '25. So, that's one. The second thing is we want to incorporate feedback from our customers. We want to make sure that we're adjusting the things that we need to adjust to make sure they're highly satisfied. And then the last thing is we have additional feature content and hardware improvements and other things that are planned that our design teams are going to execute on, whether it's software or other updates or some of the things we can do in imaging, that we want to do as we bring it through. So, it's kind of a three-part set of activities. And we think it's pretty well planned out. I wouldn't expect big changes from our plan. And if there are changes in the future, then we'll be sure to talk about them. Larry Biegelsen -- Wells Fargo Securities -- Analyst That's helpful. And Gary, you haven't been specific about new indications that da Vinci 5 could open, but can you help us understand what the features are of da Vinci 5 that could allow physicians to do new procedures and why? Thanks for taking the question. Gary Guthart -- Chief Executive Officer Yeah. Our first thought here and bringing the system to the market has been to allow surgeons to go deeper into the existing indications we have already. So, the indications for da Vinci 5 largely mirror the Xi -- indications that we had already. But we do think that it will invite new surgeons and care teams into robotic-assisted surgery. I think it allows us to deepen our relationship with that customer base, and we're excited about it. In terms of core capabilities, da Vinci 5 has some really cool things. Better imaging that right now today is better and will get better over time, precision and high performance and tracking performance allows for really subtle and fine surgical motions. And we think that's really powerful, and it's a core capability. Faster workflow opens new opportunities for people too. So, we do think there are additional clinical indications we can pursue. We are evaluating them. We have not finalized on everything yet, and likely, they will require conversations with FDA. So, we're not prepared at this time to tell you what they might be. But as we get a little closer and work through it, then we'll describe it once we've settled our approach. Operator And we will go to the next line, Travis Steed, Bank of America. Please go ahead. Travis Steed -- Bank of America Merrill Lynch -- Analyst I wanted to ask a little bit more color on the strong Xi placements and the capital environment even ahead of the dV5 launch. And it sounded like the message changed on system placements in 2023. I think or 2024, I think before it was system placements could be lower in '24 and now it's just choppy. So, does that mean there's a chance that system placements are up in 2024? Gary Guthart -- Chief Executive Officer Jamie, why don't I -- Jamie Samath -- Chief Financial Officer Oh, go ahead, Gary. Gary Guthart -- Chief Executive Officer Jamie, go ahead and take it. Apologies. Jamie Samath -- Chief Financial Officer Yes. I think the first dynamic is trading given the limited supply in dV5. Those placements will be during the measured launch focused on incremental placements. So, not a lot of trade activity coming from dV5. And if you look at what's left in the installed base for our third-gen Xi, you've got about 350 systems globally, of which 50 are in the US. So, we do expect trading volumes to be down quite a bit in '24. With respect to overall system placements, I know we made the comments on the last call, but generally, we don't guide system placements. So, we'll let you run that through your models, given the update of our procedure guidance, but certainly, we've acknowledged that placements could be choppy, while we're constrained on dV5. In Q1, we didn't really see any customers pushing back on, I don't want an Xi, we want to wait for dV5. But since the launch, which obviously was only in March, we've had our Connect conference. We've had SAGES this week, a significant number of surgeons and executives have now seen dV5 put their hands on it. So, we're acknowledging that customers may choose to wait. We don't have enough evidence or indication yet to see which way that will go. Travis Steed -- Bank of America Merrill Lynch -- Analyst Great. And, maybe, Gary, if you could spend some time just kind of a bigger picture question on dV5 and the capabilities it brings to training, being able to practice some of the edge cases helping with proctoring. I'm just curious how you see the impact on robotic surgery adoption and driving better outcomes from some of these dV5 training capabilities that's going to roll out? And how long some of this stuff actually is going to take? Gary Guthart -- Chief Executive Officer In terms of raw capability, I think that it will help care teams acquire skills more quickly, and it also helps them in the case. You can kind of think of that as context sensitive help. The device is kind of aware of where it is and what it's doing and can share that information with the care team so that as they're doing things, whether it's changing tools or setting it up, it provides real-time help to help guide them through it. And I think that's a really good thing. It just makes it easier to use. Our Intuitive hub has integration technologies that start with da Vinci 5, and we'll get better over time as we release software updates and hardware updates. And so, that starts to close an analytical loop for our customers from what they're seeing in the case to video review to video analytics to feeding back information to their phones and their laptops and whatever their means are consuming that data is. And so, that gives them an analytical loop, which should also help. And we'll also continue to evolve our simulation training in some of our other packages or online learning that will help them as well. So, I think all of this is going to take a little bit of time. But I think the design concept, I think our designers did a beautiful job. I think the design concept of integrating these ideas, making it easy for care teams, for surgeons to follow that journey should help us. The final point I'll make is that in our labs and during our early experience with da Vinci 5, it looks like force reflection helps novice, new to robotics, new to robotics system surgery acquire their skills faster. So, it should invite more surgeons in and ease their journey, remains to be proven. It's not done and done, but we think it's encouraging. And so, stay tuned. I think keep asking that question. And as the data starts to come out, we'll be pleased to share it with you. Travis Steed -- Bank of America Merrill Lynch -- Analyst Great. I can't wait to see and congrats. Operator OK. And we'll go to the next line. Rick Wise, Stifel. Please go ahead. Rick Wise -- Stifel Financial Corp. -- Analyst Good afternoon. Gary, maybe it would be helpful to hear in a little more detail, your thoughts on a couple of points that maybe some of the headwinds, bariatrics flat year over year. I wasn't sure completely what I was hearing about trends. Is it getting worse, still is the rate of pressure easing? I appreciate talking about the guidance you talked about a range given the range of outcomes. But I just want to make sure I understood what you're saying. Gary Guthart -- Chief Executive Officer Yeah. Let me share my perspective. Rick, thanks for the question. And then Brian, I'll kick it to you to talk about the range. I think what we can tell you is what we see, and what we've seen is continued deceleration such that it's flat year over year. There are a lot of opinions out in the field, and we can all talk to them. I think the reality is nobody really knows yet. We're going to have to live through it together. And as a result, it's going to be dynamic. We do know that bariatric surgery is well tolerated and it's a good option. And we also know that people are interested in pharmaceuticals and that the pharmaceuticals work as long as you take them for a subset of the population and then stop working if you don't. What that means for future surgery, I think there's a range of opinion, and I would not hang a lot of confidence on any of them just yet. And that's why we have a range. And Brian, perhaps you can just touch on how you see bariatric surgery affecting the range, just reiterate that, if you would. Brian King -- Head of Investor Relations Sure. And just to reiterate again, the low end of the range assumes that there's further weakness in bariatric procedures, right? So, at the low end of the range, further weakness in bariatric procedures. At the high end of the range, we assume that bariatrics continues at flat to slightly positive growth rates. And I think, again, to Gary's point, it will be dynamic, and we're just going to have to see how it plays out throughout the year. Rick Wise -- Stifel Financial Corp. -- Analyst OK. Great. And let me turn to some of the new and incremental features you talked about, Gary. I'm sure all of us on the call have been talking to doctors have been hearing a variety of additional features, some quite compelling. Can you give us any flavor -- I mean, first of all, I'd be happy to hear from you what some of them could be. But how quickly, given what you know today, when could we see those features that, again, I would assume would enhance the value? Are we going to see them this year, second half? Or is it more likely that's something for next year as you get the supply chain where you want it to be? Thank you. Gary Guthart -- Chief Executive Officer Yeah. I think as we add capabilities in time, we have some imaging things that we want to do. We have some things in terms of software upgrades and analytics power and some things we want to do in terms of integration. That's much more likely to be '25 and later than '24. A lot of '24 will be making sure that we and our suppliers feel great about what we've got and then adapting to any immediate feedback that we see. Operator And we will go to the next line. Adam Maeder, Piper Sandler. Please go ahead. Adam Maeder -- Piper Sandler -- Analyst Good afternoon. Thank you for taking the questions and congrats on the nice quarter. I wanted to start by asking about the Force Feedback instruments. I was hoping, Gary, you could share a little bit more color on the feedback that you're getting from clinicians thus far into launch. And then if I understand correctly, you have six Force Feedback instruments that are used across different common procedures. Will you look to expand the portfolio of that technology going forward? And if so, what might that look like? And then I have a follow-up. Thank you. Gary Guthart -- Chief Executive Officer Sure. We're getting a variety of feedback on the instruments themselves. Just a reminder for everyone, they have very sensitive sensors that are built into the distal end -- in the body end of the instruments that are sterilizable and cleanable and they report back contact forces with tissue, which at a sensitive way, which has been a goal for us and for surgery for a long time. So, it's a hard technology. We've been really excited to bring it to market. We will hear everything from, hey, I'm getting great results with da Vinci X and Xi today that has very limited version of haptics. It really doesn't have in body sensing. It does have a little something, but it's not sensing in a technical sense. And that's true. They're getting great results. So, it's a new sense. That said, people are quite interested to explore where it'll take them. And what's interesting is that when you're using a force sensing instrument, it's sensing whether you turn on force reflection into the surgeon's hands or not. So, the surgeon can feel it. They can turn it on, or they can turn it off, but still measure so that they have the feeling experience of an X or an Xi. And what they find when they turn it on and off is that the amount of force that they apply during surgery to tissue decreases when force reflection into the hands is on. And so, the big question is, what's the clinical value of that? What will be the implications for patient outcomes by procedure and by technique? And that's what they're going to go explore, and we will help them do that exploration. So, now we're talking about the future of what could happen. I suspect, I believe, it's a personal opinion. There will be types of procedures and types of patients where having lower force applied to tissue during the surgery is going to be clinically meaningful, and we have to go prove that. So, I think it's quite interesting. The technology is sophisticated. We are with our manufacturing partners, learning how to make these at scale with good yield and robust. It's a worthy endeavor, but it is not easy, and we're going to focus on it and make sure that we get what we want. We want to make sure we have robust and high-yield products. We want to extend their lives to help the economics of our customers and our economics. So, that is our first focus. As to the six instruments, I'm going to look to Jamie as to whether the six number is right, I think it is. Certainly, over time, we have the opportunity to extend it to other instruments. But that first set of six are the ones that we thought were right. Six is the right number, Jamie? Jamie Samath -- Chief Financial Officer It is. And it's a combination of graspers and needle drivers and those instruments are used in very common tasks, dissection, retraction, and suturing. Gary Guthart -- Chief Executive Officer Thanks, Adam. Operator We'll go to the next line. Drew Ranieri, Morgan Stanley. Please go ahead. Drew Ranieri -- Morgan Stanley -- Analyst Thank you for taking the question. Maybe just on SP for a moment with the indication expansion in Europe. Can you talk about that a bit more, Gary, and I was hearing from a surgeon today that the CRSA conference in November in Rome could be pretty important for just getting broader adoption from European surgeons? But does that inform how you could approach the US market with a broader indication? And then I just had a follow-up. Gary Guthart -- Chief Executive Officer Yeah, yeah. I'm actually here in Europe have been for the last couple of weeks talking to SP surgeons here. I think the early uptake and early excitement is quite palpable. Where we've had broad indications, as you know, in Korea and now Japan, we've seen nice uptake in adoption and good study, good clinical study. And I think that the surgeons here are building on that. They're learning from and adapting what they see in the rest of the world and getting excited about it. So, I'm encouraged. How deep that goes? It's still early days here in Europe. We will see. But we're starting to see fairly long case studies. In things like colorectal surgery coming out of Asia and other places, we have submitted, as Jamie had mentioned, for an additional indication in the United States. We have another one coming. We have IDE trials ongoing. So, we have some natural experiments to see what occurs. We know that the experiment in Korea has worked out well. We're in process in Japan and now we're in the early experience for broad indications in Europe. That should help us generate data and accelerate additional indications over time in the US And I have to say, I think, it remains a build for SP, but I'm encouraged by the build. Drew Ranieri -- Morgan Stanley -- Analyst Thank you. And maybe this is more for Jamie. But Jamie, could you talk about the commentary about lower pricing in China for the quarter? Just talk about that a little bit more and maybe put that into context on if this is temporary, if it's permanent or more to come and just the overall competitive situation in China would be great. Thank you. Jamie Samath -- Chief Financial Officer Yeah. It's primarily a function of the competitive environment we've described with the domestic robotic players. What we actually have now, given last year, we qualified a domestically manufactured Xi is actually some segmentation between the domestically manufactured product and an imported product. And the domestic product gives us the opportunity to both participate in tenders that require a locally produced system, but also allows us to segment on price. But the primary impact on China pricing is really competition. And you kind of see that theme broadly with other med tech players in terms of the impact of VBP. It doesn't apply in this case, but kind of the macro theme of pricing pressure does. Operator And we will go to the next line. And that will be Matt Miksic, Barclays. Please go ahead. Matt Miksic -- Barclays -- Analyst Hey, thanks so much for taking the questions and congrats on a really strong quarter against tough comps. So, a couple of follow-ups, if I could, on a couple of things you mentioned, Gary, in your last answer around Force Feedback and sort of the clinical impacts of optimizing and reducing the force used during surgery, which is kind of buzzing around here at SAGES quite a bit this year in the sessions. And I'm wondering -- I appreciate always the data that you talked about during the prepared remarks and recent clinical data. I'm wondering how far out are we going to see clinical reference like that to studies around the use of Force Feedback versus not. And also, maybe efficiency is driven by a lot of the docs you're talking about smoother operating arms and being able to get through cases faster. Is that a year out? Are we six months? Are we two years out for dV5 research like that? And again, appreciate you taking the question. Gary Guthart -- Chief Executive Officer Yeah. It's a good question. Thank you. This is approximate, not specific, so take it with some error bars. But I think what you're going to see in Force Feedback study is going to be a progression. You'll see narrow series, single-institution studies come out first that are kind of directional. They talk about what they're seeing in their own. And then you'll see a little bit -- and that should be the kind of thing that comes out in the next 12 months. And then over the next period after that over the next couple of years, you'll see multiple center trials that are comparing in a little more structured way. So, I think you can predict the path of the journey. But I think this is something that you're going to see from narrower input to start to broader input in the next year to prospective studies that start to report over the next year after that. So, I think it's a build, but I think it's going to be a powerful build in the end. I think with regard to efficiencies, we're hearing anecdotal reports already that the surgeon autonomy features that are in da Vinci 5, the ability for them to control their own field and to control the equipment, ancillary equipment in the room, has been really positive, and they're reporting efficiencies already. I think real-world evidence is going to be powerful on the efficiency side. And I think that's the kind of thing that people can benchmark their own cases, also our data collection capabilities between Intuitive Hub and the My Intuitive app allowed them to measure that very quickly. So, I think you'll see the real-world evidence of that build, and it will be in the coming months and quarters, and that will be exciting for us. Matt Miksic -- Barclays -- Analyst That's great. Thank you. Operator We'll go the next line. Brandon Vazquez, William Blair. Please go ahead. Brandon Vazquez -- William Blair -- Analyst Thanks for taking the question. I want to focus on Ion real quick. You had a nice rebound in the quarter thereafter some supply last quarter. Just curious, you see a little bit of catch-up there or not? And then even as these numbers are getting bigger, you're still putting up some really strong growth. So, curious where you're seeing the most growth there, new accounts or existing utilization, and how sustainable you think it is? Gary Guthart -- Chief Executive Officer Jamie, why don't you take that one? Jamie Samath -- Chief Financial Officer Yeah, I'd say it was a partial recovery in the quarter. We haven't completely resolved both catheter supply and the vision probe. We still have a little bit of backlog in terms of the number of systems that's pending kind of stabilization of that supply. With respect to where are we placing those systems, it's actually a blend between existing accounts and new accounts. We still have a number of opportunities, what I call greenfield accounts. And so, both are a focus for the sales team. Brandon Vazquez -- William Blair -- Analyst OK. And one quick follow-up maybe on the surgical side. The 1% utilization growth, I appreciate off of a tough comp, and we're kind of normalizing, but I think we usually use utilization growth as an indication for system placements and then it implies a certain procedure growth as well. Just talk to us a little bit about what you kind of think a below historical average utilization growth in the quarter might mean for those key moving pieces in the next couple of quarters. Thanks. Gary Guthart -- Chief Executive Officer I'll start. Jamie Samath -- Chief Financial Officer Go ahead, Gary. Gary Guthart -- Chief Executive Officer I'll jump in and then Jamie take it. I think that in the prepared remarks, we had said you had a nice capital placement year and we have bolus of post-COVID come back into Q1. I think the uncertainty part of this is really just going to be what the inpatient volumes look like in the next quarters of 2024. In other words, just the patient census as it comes through. But you're right. I think that it's an indicator of capacity. So, depending on what that patient census looks like, that will determine the high end and the low end of utilization growth in terms of how many procedures people want to put on those systems. Sorry, Jamie, go ahead, you might discuss the modeling there. Jamie Samath -- Chief Financial Officer I would just say that if you look at Q1 utilization over an extended period, look at what the CAGR is versus the year-over-year comparison, you see that start to be in a more normal range of 3% to 4%. I do think that in the year-ago quarter, you had a number of institutions that actually set themselves up to do sprint with respect to their ability to treat patients. And so, I do think that was elevated and at that level of utilization growth of 13%, it wasn't particularly sustainable. So, as I look forward to the rest of the year, I'd expect some levels of utilization growth of, let's say, closer to our long-term averages. There's still some patient backlog benefit in the year-ago quarters, even in Q2 and Q3. So, it's not perfectly matched, but I think there's room for normalization over time. Operator And we will go to the next question from the line of Jayson Bedford, Raymond James. Please go ahead. Jayson Bedford -- Raymond James -- Analyst Good afternoon. Thanks for taking the question. Just maybe Ion in China. Obviously, a large opportunity there. Just a couple of questions, and I apologize if I missed this. But does Ion fall within the existing robotics quota? And then for Ion, you mentioned clearance is the first step. Can you just talk through the other steps to commercialization and associated timing of those steps? Thanks. Jamie Samath -- Chief Financial Officer Yeah, we have some work to put Ion at a point where it's actually available to sell. So, that will take us some time. We're not expecting to have commercialization really until the back half of 2024. And China is a market where, like many cases, when we launch a new product in a market, we do that progressively as we kind of build our infrastructure in terms of training capabilities and engage with customers. So, I'd say back half of '24 is when you start to see the potential for Ion placements in China. Gary Guthart -- Chief Executive Officer On the issue of is it competing for the same quota, Jamie? Jamie Samath -- Chief Financial Officer Sorry. Yes, our understanding is it's not in the quota given the price. Jayson Bedford -- Raymond James -- Analyst Thank you. Gary Guthart -- Chief Executive Officer And Jayson, if you have one more follow-up, that will wrap it up for us. Jayson Bedford -- Raymond James -- Analyst No, that's fine. Thank you. Gary Guthart -- Chief Executive Officer OK. That was our last question. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians, and care teams in pursuit of what our customers have termed the Quadruple Aim, better, more predictable patient outcomes, better experiences for patients, better experiences for their care teams; and ultimately, a lower total cost of care. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs, and their environment. At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in three months.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning. My name is James. I would like to welcome everyone to the JetBlue Airways' first quarter 2024 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. I would now like to turn the call over to JetBlue's director of investor relations, Koosh Patel. Please go ahead, sir. Koosh Patel -- Director, Investor Relations Thanks, James. Good morning, everyone. And thanks for joining us for our first quarter 2024 earnings call. This morning, we issued our earnings release and a presentation that we will reference during this call. All of those documents are available on our website at investor.jetblue.com and on the SEC's website at www.sec.gov. In New York, to discuss our results, are Joanna Geraghty, our chief executive officer; Marty St. George, our president; and Ursula Hurley, our chief financial officer. Also joining us for Q&A, is Dave Clark, our former head of revenue and planning and newly appointed head of financial planning and analysis, investor relations and Strategy. During today's call, we will make forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1985. Such forward-looking statements include without limitation statements regarding our second quarter and full year 2024 financial outlook, and our future results of operations and financial position, industry and market trends expectations with respect to headwinds, our ability to achieve our operational and financial targets, our business strategy and plans for future operations and the associated impacts on our business. All such forward-looking statements are subject to risks, and uncertainties. And actual results may differ materially from these expressed or implied in these statements. Please refer to our most recent earnings release as well as our fiscal year 2023 10-K and other filings for more detailed discussion of the risks and uncertainties that could cause the actual results to differ materially from those contained in our forward-looking statements. The statements made during today's call are made only as of the date of the call. And other than, as may be required by law, we undertake no obligation to update this information. Investors should not place undue reliance on these forward-looking statements. Also, during the course of our call, we may discuss certain non-GAAP financial measures. For an explanation of these non-GAAP measures and reconciliation to the corresponding GAAP measures, please refer to our earnings release, a copy of which is available on our website and on sec.gov. And now, I'd like to turn the call over to Joanna Geraghty, JetBlue's CEO. Joanna Geraghty -- Chief Executive Officer Thank you, Koosh. Good morning, everyone. And thanks for joining us today. It's been a busy start to the year. With the Spirit transaction now resolved, we are moving quickly to execute on our refocused stand-alone plan. Our first quarter beat demonstrates our sense of urgency. And while we are adjusting our full year guidance to reflect headwinds in our Latin flying associated with continued elevated capacity in the region, our early progress supports our confidence that we are building the right plan to create long-term sustainable value for our owners and all of our stakeholders. As always, the success of our efforts depends on our crew members, and they are stepping up for JetBlue every day. I would like to thank each of them, first and foremost, for running a safe operation and ensuring a strong safety culture. I'd also like to thank them for supporting one another and our customers as they strive to deliver an outstanding experience every day. Their actions contributed to our better first quarter performance, which included generating an adjusted pre-tax profit for the month of March. In my first two months in this role, building the right senior leadership team has been a top priority. We've been able to appoint several seasoned leaders into key roles, including attracting great outside talent, giving us an ideal mix of expertise and skills at a pivotal time for JetBlue. In addition to Warren's promotion to chief operating officer in January, we welcomed Marty St. George back to JetBlue in February as our new president. It's great to have Marty back here and on the call with us today. In addition, last week we announced that Daniel Shurz has joined JetBlue as our new head of revenue network and enterprise planning. Daniel has an impressive track record in the industry and is ready to hit the ground running. Dave Clark who has demonstrated his capabilities over the past 15 years at JetBlue and is already familiar to many on this call is transitioning to lead financial planning and analysis, investor relations and strategy. Among our new leadership team, it's essential that we have alignment on our path forward. I want to ensure they have sufficient time to pressure test our strategy and frankly begin executing on more of it before we communicate our long-term plans to investors. We also need to make additional progress with Pratt & Whitney for our team to feel confident in our multiyear growth plans. With these things in mind, we are shifting our investor day from May 30th to the fall of this year. With that said, we remain biased toward action. As reflected by the steps we are already taking, including resolving the Spirit transaction, deferring Airbus deliveries, announcing meaningful network changes, implementing new ancillary fee initiatives, implementing early pieces of our multiyear reliability initiative and announcing key members of the senior leadership team. As we work toward investor day, we will continue to implement early pieces of the strategy in the weeks and months ahead. Now turning to slide 3. During the first quarter of 2024, we began expeditiously implementing our strategic priorities. The investments we've made to build resiliency and recoverability into our schedule enabled us to complete more flights than planned despite facing weather events, which were more severe in greater frequency than last year. These investments also benefited us financially, setting the foundation to generate more revenue and better control our costs, while positioning us to deliver a better experience for our customers. As a result, I'm pleased to share that our year-over-year revenue performed at the better end of our initial guidance metrics while both capacity and unit costs exceeded the better end of their respected updated ranges, all of which was well-ahead of our original guidance. As we look ahead, we are continuing to work with urgency to strengthen our competitive position. As we discussed last quarter, demand trends in our core geographies and from our core customers have changed considerably since before the pandemic. Many of these changes played a JetBlue strengths. For instance, leisure travel remains an increasing priority for customers and there is no longer the same divide between corporate and leisure travel as more people can take advantage of the ability to work from anywhere. However, that also means most of the industry has shifted a portion of their flying to meet this increasing demand for leisure travel, allocating capacity to many of JetBlue's bread and butter routes. Specifically we continue to see elevated capacity in the Latin region, which represents 35% of our total ASMs and is one of our most valuable and profitable geographies. The elevated capacity in this region is significantly pressuring the overall revenue acceleration we expected to see from the first quarter into the second quarter. We've, therefore, revised our full year guidance and no longer expect to approach breakeven adjusted operating margin for the full year. Marty and Ursula will share more on our outlook for the second quarter and full year, but before we get to the remarks I want to stress the confidence I have in the near-term actions we are taking and our long-term plan to return to profitability again. We've made progress and we know we need to continue to do more. Since our last earnings call we've taken significant steps to rebalance our network and we expect to continue implementing additional tranches in the coming weeks and months, including trimming capacity in the fall trough to better match supply with demand. Given we are not yet profitable and not growing this year, we have increased the hurdle rate of underperforming markets and as a result have announced the closure of seven Blue cities. It is never an easy decision for us to close the station, and I want to extend a heartfelt thank you to the crew members in those Blue cities for their dedication to JetBlue. In addition to significant network changes, we're making solid progress on the 300 million of revenue initiatives we announced during our fourth quarter call, which Marty will elaborate on further. Our team is moving swiftly to continue to launch a number of these initiatives over the remainder of this year. And we remain on track to achieve the $300 million of cumulative top-line benefit in the fourth quarter with additional ramp expected into 2025, as these initiatives achieve their full revenue potential. As we advance these initiatives, and as we evaluate industrywide changes, we're also rigorously assessing the evolving needs and preferences of our core customers, particularly in how we merchandise our product offering and the experience they receive on board. We know there are still gaps in our product offering where our customer's needs may not be fully met, and our team is working swiftly to address them. Finally, a key component of our work to return our business to profitability is ensuring we maintain a low cost base in a year where we are not growing, it is imperative that we right size, our fixed cost base to the current operating environment. To that end, actioned several initiatives in the first quarter, such as offering a voluntary opt-out program, continuing to optimize our real estate footprint and leveraging technology to help us make decisions more efficiently. Across the board, we're acting quickly to take self help measures and advance our refocus strategy to return to profitability again. I'm confident the benefits of this plan will help us to more effectively compete in our core geographies and coupled with our low cost base, strong brand and the industry's best crew members will distinguish us from the competition and set JetBlue up for long-term success. I'd like to close by extending another thank you to our crew members for their continued commitment to delivering a safe experience for our customers and for each other and one another each day. The safety of our crew members and customers has always been our top priority. And we, as our number one value will continue to stress the importance of it and everything that we do. I will now pass it over to Marty, who I'm excited to welcome back to JetBlue, while it is not your first earnings call with us, it has been a while and I know I speak for all of us when I say how happy we are to have you back in the room. Over to you, Marty. Marty St. George -- President Thank you, Joanna. Let me start by saying how thrilled I am to be back at JetBlue at such a pivotal moment for our business. I see so much opportunity ahead. JetBlue has an exceptional brand, incredibly high value geographies, and a strategy that I'm excited to execute on. Most importantly, we have the industry's best crew members. It's been great to reconnect with so many of our talented crew members over the past several weeks. And I'd like to echo Joanna and adding my thanks for all that you do for our customers and for each other. Turning to Slide 5 for the first quarter, capacity contracted 2.7% exceeding our guidance, as we continued focus on operational liability drove a strong completion factor of 98.7% exceeding plan. This reflects the strong execution by the team and the planning we have done to position our operation to respond more effectively to operational disruptions. Looking ahead, we expect second quarter capacity to be down 2% to 5% year over year, driven primarily by the continued headwinds we face related to the GTF engine issues. First, we'll provide more detail on that front. And as you will hear, we are actively seeking opportunities to drive near-term capacity growth, including extending the life of our A320 fleet. As Joanna mentioned, we remain focused on rebalancing our network to ensure we are allocating aircraft support both our operational and financial goals. We are making modular creative network changes, changes targeted at our core customers and geographies, redeploying capacity from underperforming markets and doubling down on proven leisure and VFR markets. As part of this work, we have closed a handful of Blue cities. And we're also scaling back our flying in Los Angeles and in a number of underperforming intra-West Coast international markets as we prioritize our focus in L.A. on our Transcon and net routes. We also continue the planned margin-accretive unwinding of our LaGuardia flying. Starting this month we will operate under 30 daily flights, down from 50 at this time last year with another planned reduction anticipated at the end of October. This reduction has driven over a 15-point improvement to margin at LaGuardia and has benefited the trailing 12-month margin performance of New York City versus where it was at this time last year. Albeit slowly, we continue to see signs that New York is recovering and we are encouraged by the improvement of various economic indicators such as the forecasted return of tourism to 2019 levels beginning next year. Moving on to revenues, first quarter revenue declined 5.1% year over year at the better end of our outlook driven by improving close in and strong peak period revenue and aided by the shift of the Easter holiday up-bound travel into late match. This shift contributed an estimated 1.5 points of unit revenue growth to the first quarter. Within the cabin, our premium offerings are performing exceptionally well, particularly our even more space seating, which produced double-digit more revenue year over year on a low single-digit decline in capacity. Our award-winning mid-cabin also continues to perform well with unit revenue growth up year over year in both our Transcon and TransAtlantic franchises. In our network, we saw improving results in our domestic markets with unit revenues inflecting positive for the quarter. This was supported by double-digit year-over-year growth in contracted corporate travel revenue. We've also seen significant improvements in TransAtlantic performance with unit revenues up greater than 25% year over year. However, as Joanna mentioned, we continue to be challenged by elevated capacity in our Latin region, which makes up roughly 35% of our total capacity and where we are nearly double the size of our next largest competitor. Industry capacity in our Latin leisure markets has increased over 60% since 2019 and has grown double-digits each quarter since the start of the second half of 2023, significantly pressuring our yields and fares. To put this pressure into context, if you exclude our Latin flying, our system-level unit revenue growth would be positive for the first quarter versus actual unit revenue growth which was down 2.5%. In order to offset this weakness, the other two-thirds of our network would have to perform five-year on planned levels. Despite these headwinds, we remain confident in our Latin leisure and VFR strongholds. These are core JetBlue geographies and they remain a top part of our refocused strategy and a meaningful component of our profit engine. We are committed to aggressively addressing challenges and winning in these core markets. The key tenets of our refreshed strategy will help us get there. From our reinvigorated focus on reliability to our enhanced loyalty program, improved merchandising efforts, and an evolved product. I'm confident we are putting the right focus in place to win these markets. Turning to our revenue outlook for the second quarter. We expect revenue to decline 6.5% to 10.5% year over year. We continue to cycle against a difficult revenue comparison given the unprecedented demand we experienced throughout the first half of 2023 and as mentioned, elevated industry supply in the Latin region. Second quarter is further challenged by the Easter holiday shifts. When adjusting for the shift the midpoint of our implied year-over-year RASM growth in 2Q is in line to slightly improve versus Q1. Given these factors, we expect unit revenue will remain largely stable throughout the first half as opposed to accelerating at the pace we had originally anticipated in Q2. That said, we do expect stronger year-over-year RASM acceleration in the second half of the year as our revenue initiatives ramp and we layer in additional initiatives. In the first quarter, we delivered $40 million in benefits, including preferred seating revenue, which is already exceeding our expectations. And we expect the cumulative $300 million to ramp in the second half. We're also encouraged by the growth and the diversified revenue streams from our loyalty program and JetBlue Travel Products. Our loyalty program continues to drive margin accretive revenue as we roll out additional ways for customers to earn points and be rewarded for their loyalty through our enhanced TrueBlue program, which now enables our customers to choose the perks that are most valuable to them. We're also expanding opportunities for our customers to redeem points, and we expect to add a number of global redemption partners in the current months. In the first quarter, TrueBlue members accounted for a record percentage of overall revenue, reflecting the increased engagement we are seeing from our enhanced programs. Overall, spending on our corporate card is up 10% year over year, and new cardholder the growth remains steady, particularly with our mosaics, the vast majority of them now carry JetBlue card. As we refocus our core franchises, we're encouraged by continued outsized growth of active members in our proven geographies, especially the greater Northeast region and Florida, and the loyal customer base will be key to our success as we rebalance the network. Similarly, JetBlue Travel Products started 2024, continuing the momentum from a record setting 2023. Our commission revenues from JetBlue Vacations and Paisly grew by 21% in the first quarter and we see promising trends around forward summer bookings relative to last year. I'm particularly encouraged by the fact that not only is awareness of these product offerings increasing, but that repeat customers are our fastest growing segment for both products. Before I turn it over to Ursula, I returned to JetBlue because I love this brand, our crew members, and our customers. Our culture is a true differentiator, one that powers our brand, drives a safe operation, and distinguishes us from the competition. Our crew members are at the core, enabling us to deliver the JetBlue experience our customers expect and positioning us for operational and financial success. I'm excited to be back here at this pivotal moment, because I see the maze potential of this company, and I also see the collective commitment to evolve the strategy in order to restore our historical earnings power. This team is leaving no stone unturned, as we pursue the path back to profitability. And I'm confident we are building the right plan to effectively compete and generate value for the stakeholders again. With that, over to you, Ursula. Ursula Hurley -- Chief Financial Officer Thank you, Marty. As Joanna and Marty have noted, the swift actions we took in the first quarter allowed us to exceed our Q1 financial commitments, one early indicator of our ability to advance toward our goal of generating positive returns again. And though we weren't profitable in the first quarter, our operating margin exceeded our expectations, supported by our improving operational reliability, solid peak period demand, and continued execution on controllable costs. Starting on Slide 7, we delivered better than expected CASM ex-fuel in the first quarter, with unit costs increasing by 7.1%, beating the better end of our revised March outlook. This was partially driven by improved operational performance as our continued focus on driving reliability allowed us to complete more flights than planned, resulting in cost efficiencies. Additionally, we saw a shift in the timing of certain expenses, primarily maintenance-related to later in the year. Also benefiting our cost performance is our structural cost program and fleet modernization program. In the first three months of the year, our structural cost program delivered $30 million in incremental savings, driven by more efficient management of disruption costs and optimizing mid to end-of-life maintenance spend. With to-date savings of $100 million, we remain on track to deliver run rate savings in the range of $175 million to $200 million by the end of the year, and we expect savings to ramp significantly throughout this year, driven by productivity improvements. Our fleet monetization program is coming to fruition, as we continue to replace our E190 fleet with the margin accretive A220s, which deliver a 20% improvement in ex-fuel unit cost economics versus the E190s. By the end of the month, we'll have reached a milestone on our fleet transition with more A220s in active service than E190s. We'll continue to replace our E190s with A220s on a one-for-one basis by the end of 2025, when the E190 fleet is set to officially retire. In addition to better economics, we have already realized $70 million to date in maintenance savings, and we now expect to realize $100 million in maintenance cost savings through the end of this year, up from the original $75 million goal we previously forecasted. Once we are through this transition period, we expect a more meaningful tailwind to our costs as we return to operating just two fleet types. With regard to our aircraft availability in the second quarter and full year, we expect an average of 11 aircraft to be out of service due to the GTF issues throughout the year. We expect we'll peak in the low teens in the late second to early third quarter. As we run long-range capacity plans to support our multi-year refocus stand-alone plan, we continue to face uncertainty around the expected number of aircraft on the ground for 2025 and 2026. While we expect this number will increase above 2024 levels, the situation remains frustratingly fluid. We also continue to work toward reaching an agreement with Pratt & Whitney on 2024 compensation. As far as the initial GTF compensation that we had included in our 2024 plan, we had originally been advised that the accounting treatment for this compensation could be recorded as an offset to operating expenses. However, following analysis of precedent industry transactions of similar nature, we will now record compensation as a reduction to aircraft assets or as amortization of maintenance expense. This is expected to have an adverse impact on CASM ex-fuel, as this benefit will now be recognized over a longer period of time. Despite the significantly reduced compensation recognized in 2024 earnings, full-year CASM ex-fuel growth is expected to be within the range of our initial January guidance, partially driven by incremental cost offsets we have already internally identified. For the second quarter, we expect CASM ex-fuel to increase between five and a half and 7.5% year over year, coming down from the first quarter levels as we lap a full year of costs related to our 2023 pilot agreement and as we execute on our controllable costs and fixed cost reductions. For the full year, we continue to expect CASM ex-fuel growth of mid-to high-single digits year over year. To better align our cost base with our operating levels during this challenge growth period. We've scaled back fixed costs spending where we can. In January, we offered a voluntary opt-out program, to targeted workgroups across our operation and support centers and the cost savings are on track with our expectations. In addition, we are rightsizing our real estate footprint in several airports with above-the average airport costs, such as LaGuardia and LAX. Combined, these fixed cost savings are expected to drive a half a point of unit cost savings for the full year, which is reflected in our full year guidance. Additionally as Joanna mentioned, we are utilizing technology to further enhance our efficiency and productivity and we expect it will be a main driver of incremental cost savings. Finally, though we no longer plan to approach breakeven profitability this year, I'm confident we have a strong plan in place to overcome the headwinds we face and the continued control of our cost structure will provide the baseline support we need to become profitable again. Turning to liquidity and our balance sheet on Slide 8. As we continue to work through near-term growth challenges stemming from the GTF issues, we are exploring cost-effective and capital-light ways to grow our fleet. To date, we have committed to purchase or purchased 12 A320 aircraft off lease that were set for return to lessors. Looking ahead, we have further optionality and could elect to extend the life of approximately 30 A320 aircraft in total, which represents approximately 10% of our total fleet today. We also continue to receive new aircraft from our order book with Airbus. And in the first quarter, we took delivery of eight aircraft. Through the remainder of the year, we expect to take delivery of 19 aircraft for a total of 27 deliveries in 2024, 20 of which are A220. Prioritizing A220 deliveries in the near-term helps to better match the needs of our customers with our cost goals, while continuing to evolve our product offering, as the A220 offers 90% more premium seating than our E190 aircraft. In addition, all of our 2024 and 2025 A321neo deliveries will be configured with our award-winning Mint product, further increasing our mix of premium ASN. Ultimately our fleet is a key enabler to delivering a more premium experience, which is a core piece of our strategic evolution to better serve the full spectrum of leisure customers. We ended the quarter with $1.7 billion in liquidity excluding our undrawn $600 million revolving credit facility. As we reach the peak of our fleet modernization efforts, we have been actively financing our aircraft deliveries and we have secured nearly $1.6 billion of committed financing year-to-date. Finally, we continue to opportunistically look at hedging as a means to manage risk, particularly in a market that continues to increase volatility as a result of geopolitical concerns in the Middle East. As of today, we have hedged approximately 27% of our expected fuel consumption for the second quarter and approximately 16% for the full year. In closing, I want to thank our amazing crew members for all their hard work and dedication day in and day out. We are 100% focused on executing on our strategic initiatives to meet the challenges of our industry. We have already taken action across the board as evidenced by the deferral of $2.5 billion of planned capex, significant network changes, the launch of our revenue initiatives and our continued laser focus on costs all with our eyes trained on our ultimate goal of profitability. I am confident we are building a strong plan to fully leverage our unique position in the market. And as you can see from our results, we are already executing on this plan and moving with urgency to set the airline on a path back to delivering long-term value for our owners and all of our stakeholders. With that, we will now take your questions. Koosh Patel -- Director, Investor Relations Thanks, everyone. We are now ready for the question-and-answer session. James, please go ahead with the instructions. Questions & Answers: Operator [Operator instructions] And we'll take our first question today from Dan McKenzie with Seaport Global. Dan McKenzie -- Seaport Global Securities -- Analyst Hey. Thanks. Good morning, guys. I guess, Joanna, following up on the steps that you outlined to restore earnings and feel free to emphasize those steps again. But what normalized margins are you targeting at this point? And what does that trajectory look like? And I guess, what I'm getting at is should investors view the changes as a gradual ramp up to normalized earnings say, two years from now maybe three? Or out of the steps you've outlined, is there some low-hanging fruit that could really move the dial near-term? Joanna Geraghty -- Chief Executive Officer Hi, Dan thanks for the question. I'm not going to put a time line around when we start to see meaningful margin accretion. I think our focus right now is about returning to profitability and that is where all of our priorities are focused. We've talked about our unique position in the industry. Obviously, coming out of COVID leisure is a strong point for JetBlue. We've got great geographies, some of which obviously are a bit impaired at this point in time but we do think they will become a tailwind. We've got a good product. We know there's gaps. We're working to fill those, our brands, our cost structure. Our focus right now is executing what we can control and I think you're seeing that in many of the steps that we have undertaken in the last several weeks including the network redeployment, some of the changes to ancillary fees and revenue, doing some nice work around driving that $300 million of revenue initiatives, our reliability initiatives and early wins there stronger completion factor in Q1 and improved A14 compared to Q1 of 2023. Obviously, loyalty and JTP are doing well and then our cost initiative. I'll be frank the Pratt situation is a challenge. We'd like more certainty there and we're working toward having that. But the team is focused on executing and really focused on returning to profitability. The challenge in the Latin region that will cycle through. We hoped that we would see acceleration into Q2. We're not seeing that. But again we view that as transitory in nature. In terms of what could provide real acceleration? Honestly, the network changes as we look at those and the $300 million of revenue initiatives many of those network changes haven't actually layered in yet. So they're announced but you're not seeing the benefit of those. So again, focused on making sure that we're executing quickly and with haste to return to profitability. Dan McKenzie -- Seaport Global Securities -- Analyst Yeah. Very good. I guess on that point -- I guess, the second question is for Marty. On the network announcement, is there an adjustment period as the new flying ramps up? Or as you -- or is it typically a move-up in RASM as you lop off the unprofitable flying? And my thought is maybe it's the latter, just given your expectation for RASM acceleration in the back half of the year. But if you could just clarify a little bit more on sort of where you -- if there's more to do and how that would impact how you're thinking about revenues in the back half of this year into 2025? Thanks for taking the questions. Marty St. George -- President Sure. Hi, Dan. Thanks for the question. Well, first, I'd say that our expectations as far as the accretion due to the network changes, our path of the $300 million we've already communicated as our expectation for 2024. So that's actually built in there. And I think to make a point that I reiterate a point that Joanna made the first city closure actually isn't until next week. So we haven't really seen a lot of the benefits going forward. I would say as far as redeploying our aircraft, we're coming into the third quarter. I think we had identified some very desirable places to redeploy. And that, again, it all reflects the numbers that we saw. I have to say that some of the network changes were directly related to aircraft shortfalls due to our situation with Pratt. So it's one of the reasons why we thought the best way to communicate this would be just explain the $300 million number. And again, that's the number we'll be getting by the end of the year. So that's sort of how we should view the accretion of the network changes. And I will also say that there are more network changes to come. And back to the point that Joanna made about the postponing of investor day. I think these things are all tied together as far as making sure that we have rolled out all the changes that we want to do with respect to the opportunities that be the case, the next tranche is in the $300 million, but I think it's fair to say we are not done as far as continue to fine tune the network. Dan McKenzie -- Seaport Global Securities -- Analyst Thanks so much, guys. Operator Our next question will come from Jamie Baker with J.P. Morgan. Jamie Baker -- JPMorgan Chase and Company -- Analyst Yes. Good morning, everybody. So probably for Marty, I know airlines don't like to offer route P&L commentary, but I figured I'd try to ask the question in a way you might answer. So without speaking to individual stations, can you give us some margin commentary on the aggregate of Baltimore or Kansas City, the short-haul L.A. and Latin markets that you are exiting them perhaps a margin basis or maybe just sheer dollars of loss. Just trying to -- any color as to what that reduction in lost production sums to? Marty St. George -- President Well, listen, I appreciate your efforts in trying to get me to give you that number. I mean we generally really don't talk about that level of detail. I will just say that the aggregate of those changes and the redeployment of airplanes is all based in the $300 million. So that's really sort of how we look at that and how we communicate it. I feel like given more time and different competitive situations, things may have been different as far as some of the stuff that we chose to exit. But between the stuff you mentioned between the L.A. short haul, and the imperative back to Joanna's point, the imperative of improving profitability now, it was really -- it was time for us to make moves, and we're very excited about the changes. It's always unfortunate, given the situation with our crew members. But we have to prioritize returns right now. Jamie Baker -- JPMorgan Chase and Company -- Analyst Yeah. OK. And then second, probably for Ursula on liquidity. What's the minimum cash balance that you internally target to run the airline? And also if we set aside brand and loyalty what's the size of the remaining unencumbered asset pool in your estimate? Ursula Hurley -- Chief Financial Officer Thanks for the question, Jamie. And I think you're celebrating a birthday this week aren't you? Jamie Baker -- JPMorgan Chase and Company -- Analyst Robin's legacy lives on. Thank you. Ursula Hurley -- Chief Financial Officer Of course. So we are targeting somewhere between $1.5 billion and $1.6 billion of cash at any point in time. As a reminder, we also have the $600 million revolving credit facility on top of that. And to your question on the unencumbered asset base, so we've publicly commented that we have about $10 billion and just over half of that is associated with the loyalty and the brand. So the remaining of that unencumbered asset pool is a combination of floodgate some routes aircraft and engines. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK, perfect. Thank you very much. Operator Our next question will come from Mike Linenberg with Deutsche Bank. Mike Linenberg -- Deutsche Bank -- Analyst Good morning, everyone. Just the downward revision in top line for the year is that entirely Latin America? Or is there a shift in maybe GTF groundings and/or delayed Airbus narrow-bodies. I mean are there other components to that? Dave Clark -- Head of Revenue Planning Hi, Mike. This is Dave Clark. I'm happy to take that. Yes, it is primarily sort of unit revenue related. And as exemplified with the Latin capacity and pressure we're seeing that's causing it to not accelerate as quickly as we expected. There is a little bit of capacity. We're trimming the fall-trough as we look at the latest demand and supply trends and try to better match supply with demand. You don't see that in the capacity guidance because completion factors are running ahead, but it's mostly sort of unit revenue and there's a bit of lower trough capacity in the back half of the year. Joanna Geraghty -- Chief Executive Officer And Mike, maybe I'll just add. We did see capacity growth coming down slightly in Q2. So we had expected acceleration from Q1 into Q2. We're just not seeing that. And so as you think about the size of the Latin market to JetBlue and its importance we think this is the most prudent move. As we know capacity comes and goes, this region tends to be quite resilient and performs well for us. We will continue to double down in this area because it is so core to our geographies. But it is frustrating that we aren't seeing that acceleration into Q2 that we thought we would see with capacity growth slightly moderating from Q1 to Q2. Mike Linenberg -- Deutsche Bank -- Analyst OK, great. And just a second question. I think I heard you correctly Ursula you said that all of the airplanes maybe or at least the A321neos coming in 2024 and 2025, which I guess are all the airplanes I could be wrong except for A220s are coming with the Mint configuration. Is that the large Mint configuration or small Mint configuration? And I guess also what I'm getting to is should we anticipate additional TransAtlantic cities over the next year or two above and beyond what you've already announced? Thanks for taking my question. Ursula Hurley -- Chief Financial Officer Yeah. Thanks, Mike. So as a reminder we have 27 deliveries this year in 2024 seven of them are the A321neos. So they will be in the 16-seat Mint configuration. And then in 2025, we have 25 deliveries and five of those are A321neos, which will be in Mint. Joanna Geraghty -- Chief Executive Officer And then maybe I'll pick up on the TransAtlantic question. TransAtlantic has performed very well for us. We know the summer will be strong, as we've mentioned before. However, as we look at growth there, we are currently serving what we believe are sort of the top underserved markets for JetBlue out of Boston and New York. So we'll look to continue doing this. Further seasonalizing them as appropriate, if you look at Edinburgh and Dublin both seasonal markets doing well for us so far but great contributors right now. On the Mint question, I'll also emphasize premium is doing exceptionally well. 25% of our seats are premium, a combination of mint and even more space. And so between the A220 and the 321s that we're seeing we will see an increase in our premium mix which is great. Mike Linenberg -- Deutsche Bank -- Analyst Very good. Thank you. Operator Our next question will come from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey. Thank you. I wonder if we could drill a little bit deeper on the Latin trends. Is this primarily, US to Caribbean, I think if JetBlue historically is more of a Caribbean network. Your two largest markets by a very wide margin are Puerto Rico and the Dominican Republic. Can you speak to trends in those two markets specifically, and then if you would, is there any differentiation and trend between Caribbean originating from the Northeast and Caribbean originating from South Florida. Dave Clark -- Head of Revenue Planning Thanks, Duane. This is Dave. I'll take that. I think the easiest way to think about it is the breakdown between sort of Caribbean beach destinations and Caribbean VFR destinations. The VFR is holding up relatively well. Industry capacity there has been relatively less. So that is still under some pressure but not as much as the beach destinations, where we see increased capacity, really high increased capacity which is driving even higher pressure on the yields. Puerto Rico and Dominican Republic both extremely important markets to us. We are 100% committed to winning, competing and maintaining our leadership in these markets. So we feel very good about them. We have a deep history there a large operation and are working to roll out some enhancements to be performing even better in each. So I'm really committed to these markets. They're under a bit of pressure with competitive capacity that ebbs and flows. But we feel it's transitory in nature and will continue to be a very important and profitable region for us. Duane Pfennigwerth -- Evercore ISI -- Analyst I guess of those two, which one is more VFR and which one is more beach? Dave Clark -- Head of Revenue Planning The Dominican Republic in general is a bit more VFR, especially we have very large operations in Santa Domingo and Santiago, which are almost entirely VFR. Duane Pfennigwerth -- Evercore ISI -- Analyst Thanks. And then just for my follow-up on reliability I wonder if you can survey this in any way. But as your reliability has improved, do you think there may be a gap between how customers perceive your reliability and where it stands the improvement you've made? How long of a hangover may exist from past operational perceptions? Thanks for taking the questions. Joanna Geraghty -- Chief Executive Officer Yes. Thanks, Duane. So we are in the early stages of our operational reliability initiatives. So we're seeing some nice progress but it's a multiyear initiative and we've got some work to do. So I definitely think there'll be a lag in customer perception. We obviously are also focused on this summer. ATC is going to be a challenge this summer. So despite many of the efforts that we're making, we're still going to have bad weather days and we'll probably be fairly acute in New York. So there's definitely some work to do on the customer perception piece, but we've got to start somewhere, and I'm pleased with the progress that we've made in Q1 and it will be some, I think, incremental progress quarter over quarter until we're in a much better place over the next couple of years. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Thank you. Operator Our next question will come from Savi Syth with Raymond James. Savi Syth -- Raymond James -- Analyst Hey, good morning. I was just kind of curious on the unit revenue. The guidance seems to be calling for -- going from like down mid-single digits to up mid-single digits and you've kind of called out some of the components that drive that. But I was wondering just generally, how much of that is driven by maybe easier comps in the second half last year versus this year versus kind of the network changes you've talked about? And just maybe the third bucket, how much of that might be coming from just industry capacity moderating in Latin? Dave Clark -- Head of Revenue Planning Yeah. Thanks, Savi. This is Dave. I'll take that. You hit the big three components right there. There's a few things that help us as we go from the first half to the second half in terms of the continued progress of our sequential unit revenue. The $300 million of revenue initiatives ramping up is clearly the first one. As mentioned, we secured $40 million in the first quarter. That will continue to ramp over the next three to get us to a total of $300 million across all of them. So that's clearly a significant tailwind, excuse me. And then there is a comp certainly easing coming up. The first half of 2023 had a lot of pent-up COVID demand, especially in our sort of spring break, Florida and Latin geographies that we're still cycling against in this quarter, but that eases as we go through the quarter. So I think those are the two biggest ones. Capacity right now, it looks to moderate, we'll sort of see if schedules firm up and we go through the year, and that could be sort of the third benefit as well. Savi Syth -- Raymond James -- Analyst Got it. And then if I might, on for Ursula, just on the financing for this year, could you talk about what you're seeing? And just as all of that kind of comes together, what you're kind of expecting in terms of net interest expense? Ursula Hurley -- Chief Financial Officer Yeah. Thanks, Savi. So we had previously communicated, we were targeting to raise $1.6 billion. And so I mentioned in my prepared remarks that, we've have committed financing up to $1.3 billion. So that's a combination of finance leases and just some bilateral bank loans. Obviously, with the adjusted to revenue that we provided today, we'll most likely need to raise some incremental capital beyond the $1.6 billion that we originally targeted. So we will clearly be out in the market later this year. As a reminder, we've got a healthy mix of unencumbered assets. So we can optimize across markets to focus on, quite frankly, the cost of the debt as well as building in some prepayment flexibility because those -- our priorities of ours. In terms of interest expense on a full year basis, in my prepared remarks in January, I provided guidance $320 million to $330 million. We are trending even despite having to raise incremental debt, we're trending slightly below that just given we've been more thoughtful about the timing that we're bringing in cash, but also we've been seeing some relief in terms of rate as well. So hopefully, that gives you a little bit of color. Savi Syth -- Raymond James -- Analyst Very helpful. Thank you. Operator Our next question will come from Helane Becker with TD Cowen. Helane Becker -- TD Cowen -- Analyst Thanks very much, operator. Hi, everybody. Just Ursula one point of clarification, in your slide I think on my page it's slide 9, but it might be slide 8. You talk about not having any significant debt due before 2026. So and maybe you just answered this in Savi's question. I think you also have a $750 million convert that has to be addressed. Are you thinking of refinancing your debt that's coming due? Like how should we think about, I guess maybe replacing debt versus paying down debt? Ursula Hurley -- Chief Financial Officer Yeah. Thanks for the question Helane. So in regards to the comment in the presentation, the significant debt maturity due in 2026 that actually is the convertible debt deal. So that's the next significant maturity that we'll face. We do intend to refinance that. It's quite early at this point but the team is exploring opportunities to refinance that. Again we've got a significant amount of unencumbered collateral and we can target specific markets just through the lens of raising the most cost-effective money. The convertible debt is the most friendly in terms of rate that we have in the capital structure, so in terms of financing we'll do that as close to the maturity as possible. And we got to get the business back to profitability, so that we're actually generating free cash flow so that we can then pivot to actually start paying down debt. That is the goal that we're focused on. Helane Becker -- TD Cowen -- Analyst OK. That's very helpful. Thanks, Ursula. And then on the $562 million of special items in the quarter, can you say like what percent was related to Spirit versus opt-out versus the E190 transition. And are all the Spirit costs now behind you? Ursula Hurley -- Chief Financial Officer And so put very simply all of the Spirit costs are behind us. And of the $560 million, $530-ish million were associated with Spirit. Helane Becker -- TD Cowen -- Analyst Thanks very much team. Thanks, Ursula. Operator Our next question will come from Scott Group with Wolfe Research. Scott Group -- Wolfe Research -- Analyst Hey, thanks. Good morning. So I understand not breakeven for the year. I'm just wondering, do you see a path back to breakeven in the second half? And then I just want to clarify the second quarter RASM. So I guess given Latin it seems like domestic RASM flat to up slightly year over year. Is that right? And I guess why not better just given domestic capacity down over 10%? Ursula Hurley -- Chief Financial Officer Yeah. So I'll take the first part of the question in terms of operating margin. Make no mistake our number one priority is getting this business back to consistent profitability. We were profitable in the month of March and we're focused on driving sustainable long-term profitability. And we were in an environment where we were constrained over the last few years given Spirit. And so I feel confident that we're showing action between the network changes, the revenue initiatives, controllable costs, as well as reducing our fixed costs. I do believe that these actions are going to continue to ramp up and put us on a path to drive accretive value. In terms of the second half of the year, I mean, it's a little early to tell. I mean, it's very dependent on the strength of the peak period demand during the summer and obviously, over the holidays in November and December and fuel. I mean, we can't ignore that the volatility of fuel over the last few weeks has been extremely volatile. So it's challenging to tell whether we're breakeven in 2H, obviously, that's the ultimate goal. Dave Clark -- Head of Revenue Planning And then Scott, this is Dave. With regards to the second quarter RASM question. So yes, Latin is the entire headwind, right? It's down mid-teens. As we said in the presentation, it's about 35% of our capacity. So that's a big piece. If you look at the rest of our network, excluding -- and it continues to be RASM positive as it was in the first quarter. And then in terms of why not better regardless, given the capacity being down, keep in mind, we're still comping against very significant pent-up demand last year in the first half of the year as especially spring break destinations had pent-up demand that had been sort of built up during COVID. And then secondly, competitive capacity does tick up a bit for us in the second quarter. It's one point higher than it was in the first. So there is a bit of pressure there as well. Scott Group -- Wolfe Research -- Analyst OK. That's helpful. And then just separately, on the cash balance, can you just let us know where the ATL stood at the end of the quarter? And then on the financing side, are there any covenants we need to be aware of just in terms of limits on how much more debt you can raise? Ursula Hurley -- Chief Financial Officer Yes. Thanks for the question, Scott. We'll take the ATL question offline. I'll have Koosh circle up with you. There hasn't been a material change. And then in regards to your covenant question, there's nothing material. I mean, in a few of our agreements, we have a min liquidity target, which we are more than well above. So there's nothing else material beyond that. Scott Group -- Wolfe Research -- Analyst OK. Thank you guys. Appreciate it. Operator Our next question will come from Chris Stathoulopoulos with Susquehanna International Group. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst Good morning. Thanks for taking my questions. So Joanna or Dave, I understand the revised revenue guide primarily due to LatAm and full trough lying, but if you could put a finer detail as we think about perhaps the 0 to 60-day booking window, but then also the second half, when we look at the various segments. So maybe if you could put a finer detailed domestic leisure business short-haul international long-haul peak, offpeak. And then tying it all together, just kind of what gives you the confidence here that other parts of the network? I know you have the ancillary initiatives in place but that can offset what looks like this persistent LatAm weakness? Thank you. Joanna Geraghty -- Chief Executive Officer Yes. Maybe I'll take the kind of second. Over to Dave for a deep dive on the network by geography. So we're confident that the Latin headwinds are transitory in nature. We've seen capacity while it's still up, it is moderating and it continues to moderate in Latin through the rest of the year. And the reality is this is a very strong market for JetBlue from a margin perspective, and it will continue to be. These headwinds are transitory and we're going to continue to double down in this area, because this is part of our core geography. We're pleased with the progress of domestic that has generated positive unit revenue into Q1 and then into Q2, we expect to see about the same transatlantic. RASM is up 20% against significant capacity adds in that region. So again, very happy there. So as we think about kind of looking at the full year, this Latin headwind, given the presence of JetBlue in those markets 35% is really the big challenge that we're currently facing. But we've been there before. It will cycle out and JetBlue will win in these geographies. Dave, if you'd like to maybe grab a deeper dive in some of the other areas. Dave Clark -- Head of Revenue Planning Yes. Thanks. I think you noted there's a lot of different moving pieces as sort of we come out of this COVID period. To address a couple of them. peaks remain stronger than off peaks. That's been consistent for about a year or so now. We are taking those learnings and continuing to plan our trough period a bit differently than we had before in order to try to drive the best financial performance during that. We've already been doing that for the fall trough. As mentioned, we're going to pull a bit more capacity at the fall trough as well. So working hard with those learnings. The comp gets easier as we go through the year as we sort of get away from cycling against this pent-up COVID demand that we've seen in the first half. So that's another piece too. And then lastly, I mean the booking window – we still have customers booking relatively close in. That's where the majority of our revenue comes. It can give us more challenges looking further ahead, which is why we sort of go one quarter at a time generally with our guidance. The booking curve has moved out a little bit, I'd say over the past year as sort of COVID concerns have dissipated and as more and more customers are buying our Blue Fare, which is our main cabin fare and has no change fees. So there's less risk to book further out. But within all those things, we feel really good about the moves we're making about our Latin geography over the long-term as it cycles through this temporary increased competitive capacity and feel that all parts of our network with the moves we're making are going to be contributing meaningfully in the future. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst OK. Thank you. And my follow-up. So on Slide 7 here where you referenced the potential for exploring additional cost savings opportunities. Could you walk us through sort of what areas you're thinking about there, whether it's on maintenance or there's perhaps additional opportunities within these voluntary opt-out. And within that if you could kind of clarify the work groups that those have been applied to. But also does that opportunity also move with depending on all these – where these full trough capacity revisions are made. Thank you. Ursula Hurley -- Chief Financial Officer Yes. So we have committed given the accounting change due to the Pratt & Whitney GTF compensation. We have to your point committed to offset a good portion of that. And so the team has identified opportunities to better leverage technology to drive better productivity in our frontline workforce and also being more strategic and thoughtful about maintenance, timing, as well as what level of investments take place when, obviously not at the expense of safety. And so these are areas that the team is doubling down on to help overcome the Pratt offset. In terms of the opt out that has trended where we thought it would. The areas that we're covered within the opt out are support centers so corporate functions as well as some of the frontline work groups – and so we also – so I do think we're pleased with the results. The other area we've been diving into is real estate footprints and downsizing in high-cost cities. And then the third focus continues and always continues in terms of strategic sourcing and just working to be more thoughtful and strategic about the contracts that we enter into, whether it be pricing service expectations as well as variability to move with the business. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst OK. Thank you. Operator Next question will come from Conor Cunningham with Melius Research. Conor Cunningham -- Melius Research -- Analyst Hi, everyone. Thank you. As you've made all these network changes, I was wondering how you're engaging your change in relevancy with your core customers. You didn't cite any loyalty numbers or credit card sign-ups. I'm just curious on why the lack of comments there. Is there anything to dive deeper into that? Thank you. Joanna Geraghty -- Chief Executive Officer Yeah. Sure. So I think we mentioned in Marty's prepared remarks some loyalty commentary. But I think importantly, the network changes are focused around retrenching into our core strengths, which should drive improvement in relevance for our customers, who tend to be over-indexing in those areas. So I think New York, Boston, South Florida. We're really pleased with loyalty, and we've had strong growth of our True Blue base below mosaic in Q1 versus Q1 2023. Our mosaics continue to grow. We have a much higher tax rate this quarter compared to year over year. We've seen healthy growth in customer spend, healthy remuneration from Barclays. So we're very pleased with the trajectory. The majority of our mosaics now hold a JetBlue co-brand credit card. So I think that's a great indicator of the value that they place in the loyalty program and the value that the Barclays Co-brand card drives. The other piece I'll mention is we've introduced a number of new perks this quarter. We will continue to introduce new perks, and we think we've got more opportunity with diversification of the card portfolio products. So overall, I think a lot of great progress there, but we're focused on being highly relevant in our key focus cities. And over the last several years, some of that relevance came at the expense of those focus cities because we paused things for Spirit because the NEA was in place that we had to draw down from certain areas. I'm actually excited by this retrenching because I think it will actually drive even more relevance for our customers in those locations. Marty, you have something to add. Marty St. George -- President Yeah. Conor, I think if you actually were to look at the schedule patterns that we've had -- most specifically in Boston for a lesser extent in Fort Lauderdale. And you look over the last five years. We've actually done a lot of compromising on the schedules to take advantage of things like the NEA. And frankly, going from 20-something flights to 50-something flights in LaGuardia, those planes came from somewhere and a lot of that came from schedule quality. So I would actually say the exact opposite, which is -- this is actually going to supercharge schedule quality in some markets that we've actually neglected over the years because we were trying to do a lot of things at the same time. And I'm actually very excited about what this is giving us ability to do as far as reclaiming some of the strength that we've had historically. Conor Cunningham -- Melius Research -- Analyst That's helpful. And then I've heard a lot of talk about Latin America headwinds being somewhat transitory. And I don't I'm trying to understand why you think that. Do you expect the market to shrink? Or do you believe it just takes a little bit of time for it to mature a little bit from here? Just trying to understand the transitory comment there. Thank you. Marty St. George -- President So I'll make two comments. First of all, I think if you look at total ASMs to Latin America since short Latin, Caribbean since 2019 they're up 50% to like 60%. Now, to be clear, there has been a permanent shift in the business leisure mix and a lot of those -- or not a lot of those ASMs have actually been absorbed by the marketplace. That being the case, I think if you look at -- go back six or nine months, when the industry was all talking about Florida, and how much capacity is sold into Orlando capacity tends to moderate when RASM is pressured. And frankly this is a period where RASM is pressured. And I think if you look at the way capacity ebbs and flows, it does tend to return to the mean and mostly because there's opportunity cost for every ASM that we fly and every competitor fly. So frankly, I think that we're already seeing a bit of that moderation already and we expect to see it continue. Conor Cunningham -- Melius Research -- Analyst OK. Thank you. Operator Our final question will come from Stephen Trent with Citi. Stephen Trent -- Citi -- Analyst Many thanks everybody, and appreciate squeezing me in. Just one very quick follow-up to Helane's question earlier. When we think about your cash level, do you have a minimum cash balance in mind that you think about maintaining is you're looking at your aircraft needs and the 2026 convert. I would just love your color on that? Thank you. Ursula Hurley -- Chief Financial Officer Thanks Stephen. And, yeah, we target about $1.5 billion to $1.6 billion in cash on hand at any point in time. We actually ended the quarter slightly on the higher end of that. As a reminder, we have a $600 million revolving credit facility. So between cash on hand and the revolver we think that that's a healthy balance. And also as a reminder, we've got a healthy unencumbered asset base as well that we can utilize at any point to raise funding when necessary. Stephen Trent -- Citi -- Analyst I appreciate that. Thank you. Operator That will conclude today's question-and-answer session. I will now turn the conference over to Mr. Patel for any additional closing remarks. Koosh Patel -- Director, Investor Relations And that concludes our first quarter 2024 call. Thanks for joining us and have a great day. Answer:

the JetBlue Airways' first quarter 2024 earnings conference call

Operator Good morning. My name is James. I would like to welcome everyone to the JetBlue Airways' first quarter 2024 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. I would now like to turn the call over to JetBlue's director of investor relations, Koosh Patel. Please go ahead, sir. Koosh Patel -- Director, Investor Relations Thanks, James. Good morning, everyone. And thanks for joining us for our first quarter 2024 earnings call. This morning, we issued our earnings release and a presentation that we will reference during this call. All of those documents are available on our website at investor.jetblue.com and on the SEC's website at www.sec.gov. In New York, to discuss our results, are Joanna Geraghty, our chief executive officer; Marty St. George, our president; and Ursula Hurley, our chief financial officer. Also joining us for Q&A, is Dave Clark, our former head of revenue and planning and newly appointed head of financial planning and analysis, investor relations and Strategy. During today's call, we will make forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1985. Such forward-looking statements include without limitation statements regarding our second quarter and full year 2024 financial outlook, and our future results of operations and financial position, industry and market trends expectations with respect to headwinds, our ability to achieve our operational and financial targets, our business strategy and plans for future operations and the associated impacts on our business. All such forward-looking statements are subject to risks, and uncertainties. And actual results may differ materially from these expressed or implied in these statements. Please refer to our most recent earnings release as well as our fiscal year 2023 10-K and other filings for more detailed discussion of the risks and uncertainties that could cause the actual results to differ materially from those contained in our forward-looking statements. The statements made during today's call are made only as of the date of the call. And other than, as may be required by law, we undertake no obligation to update this information. Investors should not place undue reliance on these forward-looking statements. Also, during the course of our call, we may discuss certain non-GAAP financial measures. For an explanation of these non-GAAP measures and reconciliation to the corresponding GAAP measures, please refer to our earnings release, a copy of which is available on our website and on sec.gov. And now, I'd like to turn the call over to Joanna Geraghty, JetBlue's CEO. Joanna Geraghty -- Chief Executive Officer Thank you, Koosh. Good morning, everyone. And thanks for joining us today. It's been a busy start to the year. With the Spirit transaction now resolved, we are moving quickly to execute on our refocused stand-alone plan. Our first quarter beat demonstrates our sense of urgency. And while we are adjusting our full year guidance to reflect headwinds in our Latin flying associated with continued elevated capacity in the region, our early progress supports our confidence that we are building the right plan to create long-term sustainable value for our owners and all of our stakeholders. As always, the success of our efforts depends on our crew members, and they are stepping up for JetBlue every day. I would like to thank each of them, first and foremost, for running a safe operation and ensuring a strong safety culture. I'd also like to thank them for supporting one another and our customers as they strive to deliver an outstanding experience every day. Their actions contributed to our better first quarter performance, which included generating an adjusted pre-tax profit for the month of March. In my first two months in this role, building the right senior leadership team has been a top priority. We've been able to appoint several seasoned leaders into key roles, including attracting great outside talent, giving us an ideal mix of expertise and skills at a pivotal time for JetBlue. In addition to Warren's promotion to chief operating officer in January, we welcomed Marty St. George back to JetBlue in February as our new president. It's great to have Marty back here and on the call with us today. In addition, last week we announced that Daniel Shurz has joined JetBlue as our new head of revenue network and enterprise planning. Daniel has an impressive track record in the industry and is ready to hit the ground running. Dave Clark who has demonstrated his capabilities over the past 15 years at JetBlue and is already familiar to many on this call is transitioning to lead financial planning and analysis, investor relations and strategy. Among our new leadership team, it's essential that we have alignment on our path forward. I want to ensure they have sufficient time to pressure test our strategy and frankly begin executing on more of it before we communicate our long-term plans to investors. We also need to make additional progress with Pratt & Whitney for our team to feel confident in our multiyear growth plans. With these things in mind, we are shifting our investor day from May 30th to the fall of this year. With that said, we remain biased toward action. As reflected by the steps we are already taking, including resolving the Spirit transaction, deferring Airbus deliveries, announcing meaningful network changes, implementing new ancillary fee initiatives, implementing early pieces of our multiyear reliability initiative and announcing key members of the senior leadership team. As we work toward investor day, we will continue to implement early pieces of the strategy in the weeks and months ahead. Now turning to slide 3. During the first quarter of 2024, we began expeditiously implementing our strategic priorities. The investments we've made to build resiliency and recoverability into our schedule enabled us to complete more flights than planned despite facing weather events, which were more severe in greater frequency than last year. These investments also benefited us financially, setting the foundation to generate more revenue and better control our costs, while positioning us to deliver a better experience for our customers. As a result, I'm pleased to share that our year-over-year revenue performed at the better end of our initial guidance metrics while both capacity and unit costs exceeded the better end of their respected updated ranges, all of which was well-ahead of our original guidance. As we look ahead, we are continuing to work with urgency to strengthen our competitive position. As we discussed last quarter, demand trends in our core geographies and from our core customers have changed considerably since before the pandemic. Many of these changes played a JetBlue strengths. For instance, leisure travel remains an increasing priority for customers and there is no longer the same divide between corporate and leisure travel as more people can take advantage of the ability to work from anywhere. However, that also means most of the industry has shifted a portion of their flying to meet this increasing demand for leisure travel, allocating capacity to many of JetBlue's bread and butter routes. Specifically we continue to see elevated capacity in the Latin region, which represents 35% of our total ASMs and is one of our most valuable and profitable geographies. The elevated capacity in this region is significantly pressuring the overall revenue acceleration we expected to see from the first quarter into the second quarter. We've, therefore, revised our full year guidance and no longer expect to approach breakeven adjusted operating margin for the full year. Marty and Ursula will share more on our outlook for the second quarter and full year, but before we get to the remarks I want to stress the confidence I have in the near-term actions we are taking and our long-term plan to return to profitability again. We've made progress and we know we need to continue to do more. Since our last earnings call we've taken significant steps to rebalance our network and we expect to continue implementing additional tranches in the coming weeks and months, including trimming capacity in the fall trough to better match supply with demand. Given we are not yet profitable and not growing this year, we have increased the hurdle rate of underperforming markets and as a result have announced the closure of seven Blue cities. It is never an easy decision for us to close the station, and I want to extend a heartfelt thank you to the crew members in those Blue cities for their dedication to JetBlue. In addition to significant network changes, we're making solid progress on the 300 million of revenue initiatives we announced during our fourth quarter call, which Marty will elaborate on further. Our team is moving swiftly to continue to launch a number of these initiatives over the remainder of this year. And we remain on track to achieve the $300 million of cumulative top-line benefit in the fourth quarter with additional ramp expected into 2025, as these initiatives achieve their full revenue potential. As we advance these initiatives, and as we evaluate industrywide changes, we're also rigorously assessing the evolving needs and preferences of our core customers, particularly in how we merchandise our product offering and the experience they receive on board. We know there are still gaps in our product offering where our customer's needs may not be fully met, and our team is working swiftly to address them. Finally, a key component of our work to return our business to profitability is ensuring we maintain a low cost base in a year where we are not growing, it is imperative that we right size, our fixed cost base to the current operating environment. To that end, actioned several initiatives in the first quarter, such as offering a voluntary opt-out program, continuing to optimize our real estate footprint and leveraging technology to help us make decisions more efficiently. Across the board, we're acting quickly to take self help measures and advance our refocus strategy to return to profitability again. I'm confident the benefits of this plan will help us to more effectively compete in our core geographies and coupled with our low cost base, strong brand and the industry's best crew members will distinguish us from the competition and set JetBlue up for long-term success. I'd like to close by extending another thank you to our crew members for their continued commitment to delivering a safe experience for our customers and for each other and one another each day. The safety of our crew members and customers has always been our top priority. And we, as our number one value will continue to stress the importance of it and everything that we do. I will now pass it over to Marty, who I'm excited to welcome back to JetBlue, while it is not your first earnings call with us, it has been a while and I know I speak for all of us when I say how happy we are to have you back in the room. Over to you, Marty. Marty St. George -- President Thank you, Joanna. Let me start by saying how thrilled I am to be back at JetBlue at such a pivotal moment for our business. I see so much opportunity ahead. JetBlue has an exceptional brand, incredibly high value geographies, and a strategy that I'm excited to execute on. Most importantly, we have the industry's best crew members. It's been great to reconnect with so many of our talented crew members over the past several weeks. And I'd like to echo Joanna and adding my thanks for all that you do for our customers and for each other. Turning to Slide 5 for the first quarter, capacity contracted 2.7% exceeding our guidance, as we continued focus on operational liability drove a strong completion factor of 98.7% exceeding plan. This reflects the strong execution by the team and the planning we have done to position our operation to respond more effectively to operational disruptions. Looking ahead, we expect second quarter capacity to be down 2% to 5% year over year, driven primarily by the continued headwinds we face related to the GTF engine issues. First, we'll provide more detail on that front. And as you will hear, we are actively seeking opportunities to drive near-term capacity growth, including extending the life of our A320 fleet. As Joanna mentioned, we remain focused on rebalancing our network to ensure we are allocating aircraft support both our operational and financial goals. We are making modular creative network changes, changes targeted at our core customers and geographies, redeploying capacity from underperforming markets and doubling down on proven leisure and VFR markets. As part of this work, we have closed a handful of Blue cities. And we're also scaling back our flying in Los Angeles and in a number of underperforming intra-West Coast international markets as we prioritize our focus in L.A. on our Transcon and net routes. We also continue the planned margin-accretive unwinding of our LaGuardia flying. Starting this month we will operate under 30 daily flights, down from 50 at this time last year with another planned reduction anticipated at the end of October. This reduction has driven over a 15-point improvement to margin at LaGuardia and has benefited the trailing 12-month margin performance of New York City versus where it was at this time last year. Albeit slowly, we continue to see signs that New York is recovering and we are encouraged by the improvement of various economic indicators such as the forecasted return of tourism to 2019 levels beginning next year. Moving on to revenues, first quarter revenue declined 5.1% year over year at the better end of our outlook driven by improving close in and strong peak period revenue and aided by the shift of the Easter holiday up-bound travel into late match. This shift contributed an estimated 1.5 points of unit revenue growth to the first quarter. Within the cabin, our premium offerings are performing exceptionally well, particularly our even more space seating, which produced double-digit more revenue year over year on a low single-digit decline in capacity. Our award-winning mid-cabin also continues to perform well with unit revenue growth up year over year in both our Transcon and TransAtlantic franchises. In our network, we saw improving results in our domestic markets with unit revenues inflecting positive for the quarter. This was supported by double-digit year-over-year growth in contracted corporate travel revenue. We've also seen significant improvements in TransAtlantic performance with unit revenues up greater than 25% year over year. However, as Joanna mentioned, we continue to be challenged by elevated capacity in our Latin region, which makes up roughly 35% of our total capacity and where we are nearly double the size of our next largest competitor. Industry capacity in our Latin leisure markets has increased over 60% since 2019 and has grown double-digits each quarter since the start of the second half of 2023, significantly pressuring our yields and fares. To put this pressure into context, if you exclude our Latin flying, our system-level unit revenue growth would be positive for the first quarter versus actual unit revenue growth which was down 2.5%. In order to offset this weakness, the other two-thirds of our network would have to perform five-year on planned levels. Despite these headwinds, we remain confident in our Latin leisure and VFR strongholds. These are core JetBlue geographies and they remain a top part of our refocused strategy and a meaningful component of our profit engine. We are committed to aggressively addressing challenges and winning in these core markets. The key tenets of our refreshed strategy will help us get there. From our reinvigorated focus on reliability to our enhanced loyalty program, improved merchandising efforts, and an evolved product. I'm confident we are putting the right focus in place to win these markets. Turning to our revenue outlook for the second quarter. We expect revenue to decline 6.5% to 10.5% year over year. We continue to cycle against a difficult revenue comparison given the unprecedented demand we experienced throughout the first half of 2023 and as mentioned, elevated industry supply in the Latin region. Second quarter is further challenged by the Easter holiday shifts. When adjusting for the shift the midpoint of our implied year-over-year RASM growth in 2Q is in line to slightly improve versus Q1. Given these factors, we expect unit revenue will remain largely stable throughout the first half as opposed to accelerating at the pace we had originally anticipated in Q2. That said, we do expect stronger year-over-year RASM acceleration in the second half of the year as our revenue initiatives ramp and we layer in additional initiatives. In the first quarter, we delivered $40 million in benefits, including preferred seating revenue, which is already exceeding our expectations. And we expect the cumulative $300 million to ramp in the second half. We're also encouraged by the growth and the diversified revenue streams from our loyalty program and JetBlue Travel Products. Our loyalty program continues to drive margin accretive revenue as we roll out additional ways for customers to earn points and be rewarded for their loyalty through our enhanced TrueBlue program, which now enables our customers to choose the perks that are most valuable to them. We're also expanding opportunities for our customers to redeem points, and we expect to add a number of global redemption partners in the current months. In the first quarter, TrueBlue members accounted for a record percentage of overall revenue, reflecting the increased engagement we are seeing from our enhanced programs. Overall, spending on our corporate card is up 10% year over year, and new cardholder the growth remains steady, particularly with our mosaics, the vast majority of them now carry JetBlue card. As we refocus our core franchises, we're encouraged by continued outsized growth of active members in our proven geographies, especially the greater Northeast region and Florida, and the loyal customer base will be key to our success as we rebalance the network. Similarly, JetBlue Travel Products started 2024, continuing the momentum from a record setting 2023. Our commission revenues from JetBlue Vacations and Paisly grew by 21% in the first quarter and we see promising trends around forward summer bookings relative to last year. I'm particularly encouraged by the fact that not only is awareness of these product offerings increasing, but that repeat customers are our fastest growing segment for both products. Before I turn it over to Ursula, I returned to JetBlue because I love this brand, our crew members, and our customers. Our culture is a true differentiator, one that powers our brand, drives a safe operation, and distinguishes us from the competition. Our crew members are at the core, enabling us to deliver the JetBlue experience our customers expect and positioning us for operational and financial success. I'm excited to be back here at this pivotal moment, because I see the maze potential of this company, and I also see the collective commitment to evolve the strategy in order to restore our historical earnings power. This team is leaving no stone unturned, as we pursue the path back to profitability. And I'm confident we are building the right plan to effectively compete and generate value for the stakeholders again. With that, over to you, Ursula. Ursula Hurley -- Chief Financial Officer Thank you, Marty. As Joanna and Marty have noted, the swift actions we took in the first quarter allowed us to exceed our Q1 financial commitments, one early indicator of our ability to advance toward our goal of generating positive returns again. And though we weren't profitable in the first quarter, our operating margin exceeded our expectations, supported by our improving operational reliability, solid peak period demand, and continued execution on controllable costs. Starting on Slide 7, we delivered better than expected CASM ex-fuel in the first quarter, with unit costs increasing by 7.1%, beating the better end of our revised March outlook. This was partially driven by improved operational performance as our continued focus on driving reliability allowed us to complete more flights than planned, resulting in cost efficiencies. Additionally, we saw a shift in the timing of certain expenses, primarily maintenance-related to later in the year. Also benefiting our cost performance is our structural cost program and fleet modernization program. In the first three months of the year, our structural cost program delivered $30 million in incremental savings, driven by more efficient management of disruption costs and optimizing mid to end-of-life maintenance spend. With to-date savings of $100 million, we remain on track to deliver run rate savings in the range of $175 million to $200 million by the end of the year, and we expect savings to ramp significantly throughout this year, driven by productivity improvements. Our fleet monetization program is coming to fruition, as we continue to replace our E190 fleet with the margin accretive A220s, which deliver a 20% improvement in ex-fuel unit cost economics versus the E190s. By the end of the month, we'll have reached a milestone on our fleet transition with more A220s in active service than E190s. We'll continue to replace our E190s with A220s on a one-for-one basis by the end of 2025, when the E190 fleet is set to officially retire. In addition to better economics, we have already realized $70 million to date in maintenance savings, and we now expect to realize $100 million in maintenance cost savings through the end of this year, up from the original $75 million goal we previously forecasted. Once we are through this transition period, we expect a more meaningful tailwind to our costs as we return to operating just two fleet types. With regard to our aircraft availability in the second quarter and full year, we expect an average of 11 aircraft to be out of service due to the GTF issues throughout the year. We expect we'll peak in the low teens in the late second to early third quarter. As we run long-range capacity plans to support our multi-year refocus stand-alone plan, we continue to face uncertainty around the expected number of aircraft on the ground for 2025 and 2026. While we expect this number will increase above 2024 levels, the situation remains frustratingly fluid. We also continue to work toward reaching an agreement with Pratt & Whitney on 2024 compensation. As far as the initial GTF compensation that we had included in our 2024 plan, we had originally been advised that the accounting treatment for this compensation could be recorded as an offset to operating expenses. However, following analysis of precedent industry transactions of similar nature, we will now record compensation as a reduction to aircraft assets or as amortization of maintenance expense. This is expected to have an adverse impact on CASM ex-fuel, as this benefit will now be recognized over a longer period of time. Despite the significantly reduced compensation recognized in 2024 earnings, full-year CASM ex-fuel growth is expected to be within the range of our initial January guidance, partially driven by incremental cost offsets we have already internally identified. For the second quarter, we expect CASM ex-fuel to increase between five and a half and 7.5% year over year, coming down from the first quarter levels as we lap a full year of costs related to our 2023 pilot agreement and as we execute on our controllable costs and fixed cost reductions. For the full year, we continue to expect CASM ex-fuel growth of mid-to high-single digits year over year. To better align our cost base with our operating levels during this challenge growth period. We've scaled back fixed costs spending where we can. In January, we offered a voluntary opt-out program, to targeted workgroups across our operation and support centers and the cost savings are on track with our expectations. In addition, we are rightsizing our real estate footprint in several airports with above-the average airport costs, such as LaGuardia and LAX. Combined, these fixed cost savings are expected to drive a half a point of unit cost savings for the full year, which is reflected in our full year guidance. Additionally as Joanna mentioned, we are utilizing technology to further enhance our efficiency and productivity and we expect it will be a main driver of incremental cost savings. Finally, though we no longer plan to approach breakeven profitability this year, I'm confident we have a strong plan in place to overcome the headwinds we face and the continued control of our cost structure will provide the baseline support we need to become profitable again. Turning to liquidity and our balance sheet on Slide 8. As we continue to work through near-term growth challenges stemming from the GTF issues, we are exploring cost-effective and capital-light ways to grow our fleet. To date, we have committed to purchase or purchased 12 A320 aircraft off lease that were set for return to lessors. Looking ahead, we have further optionality and could elect to extend the life of approximately 30 A320 aircraft in total, which represents approximately 10% of our total fleet today. We also continue to receive new aircraft from our order book with Airbus. And in the first quarter, we took delivery of eight aircraft. Through the remainder of the year, we expect to take delivery of 19 aircraft for a total of 27 deliveries in 2024, 20 of which are A220. Prioritizing A220 deliveries in the near-term helps to better match the needs of our customers with our cost goals, while continuing to evolve our product offering, as the A220 offers 90% more premium seating than our E190 aircraft. In addition, all of our 2024 and 2025 A321neo deliveries will be configured with our award-winning Mint product, further increasing our mix of premium ASN. Ultimately our fleet is a key enabler to delivering a more premium experience, which is a core piece of our strategic evolution to better serve the full spectrum of leisure customers. We ended the quarter with $1.7 billion in liquidity excluding our undrawn $600 million revolving credit facility. As we reach the peak of our fleet modernization efforts, we have been actively financing our aircraft deliveries and we have secured nearly $1.6 billion of committed financing year-to-date. Finally, we continue to opportunistically look at hedging as a means to manage risk, particularly in a market that continues to increase volatility as a result of geopolitical concerns in the Middle East. As of today, we have hedged approximately 27% of our expected fuel consumption for the second quarter and approximately 16% for the full year. In closing, I want to thank our amazing crew members for all their hard work and dedication day in and day out. We are 100% focused on executing on our strategic initiatives to meet the challenges of our industry. We have already taken action across the board as evidenced by the deferral of $2.5 billion of planned capex, significant network changes, the launch of our revenue initiatives and our continued laser focus on costs all with our eyes trained on our ultimate goal of profitability. I am confident we are building a strong plan to fully leverage our unique position in the market. And as you can see from our results, we are already executing on this plan and moving with urgency to set the airline on a path back to delivering long-term value for our owners and all of our stakeholders. With that, we will now take your questions. Koosh Patel -- Director, Investor Relations Thanks, everyone. We are now ready for the question-and-answer session. James, please go ahead with the instructions. Questions & Answers: Operator [Operator instructions] And we'll take our first question today from Dan McKenzie with Seaport Global. Dan McKenzie -- Seaport Global Securities -- Analyst Hey. Thanks. Good morning, guys. I guess, Joanna, following up on the steps that you outlined to restore earnings and feel free to emphasize those steps again. But what normalized margins are you targeting at this point? And what does that trajectory look like? And I guess, what I'm getting at is should investors view the changes as a gradual ramp up to normalized earnings say, two years from now maybe three? Or out of the steps you've outlined, is there some low-hanging fruit that could really move the dial near-term? Joanna Geraghty -- Chief Executive Officer Hi, Dan thanks for the question. I'm not going to put a time line around when we start to see meaningful margin accretion. I think our focus right now is about returning to profitability and that is where all of our priorities are focused. We've talked about our unique position in the industry. Obviously, coming out of COVID leisure is a strong point for JetBlue. We've got great geographies, some of which obviously are a bit impaired at this point in time but we do think they will become a tailwind. We've got a good product. We know there's gaps. We're working to fill those, our brands, our cost structure. Our focus right now is executing what we can control and I think you're seeing that in many of the steps that we have undertaken in the last several weeks including the network redeployment, some of the changes to ancillary fees and revenue, doing some nice work around driving that $300 million of revenue initiatives, our reliability initiatives and early wins there stronger completion factor in Q1 and improved A14 compared to Q1 of 2023. Obviously, loyalty and JTP are doing well and then our cost initiative. I'll be frank the Pratt situation is a challenge. We'd like more certainty there and we're working toward having that. But the team is focused on executing and really focused on returning to profitability. The challenge in the Latin region that will cycle through. We hoped that we would see acceleration into Q2. We're not seeing that. But again we view that as transitory in nature. In terms of what could provide real acceleration? Honestly, the network changes as we look at those and the $300 million of revenue initiatives many of those network changes haven't actually layered in yet. So they're announced but you're not seeing the benefit of those. So again, focused on making sure that we're executing quickly and with haste to return to profitability. Dan McKenzie -- Seaport Global Securities -- Analyst Yeah. Very good. I guess on that point -- I guess, the second question is for Marty. On the network announcement, is there an adjustment period as the new flying ramps up? Or as you -- or is it typically a move-up in RASM as you lop off the unprofitable flying? And my thought is maybe it's the latter, just given your expectation for RASM acceleration in the back half of the year. But if you could just clarify a little bit more on sort of where you -- if there's more to do and how that would impact how you're thinking about revenues in the back half of this year into 2025? Thanks for taking the questions. Marty St. George -- President Sure. Hi, Dan. Thanks for the question. Well, first, I'd say that our expectations as far as the accretion due to the network changes, our path of the $300 million we've already communicated as our expectation for 2024. So that's actually built in there. And I think to make a point that I reiterate a point that Joanna made the first city closure actually isn't until next week. So we haven't really seen a lot of the benefits going forward. I would say as far as redeploying our aircraft, we're coming into the third quarter. I think we had identified some very desirable places to redeploy. And that, again, it all reflects the numbers that we saw. I have to say that some of the network changes were directly related to aircraft shortfalls due to our situation with Pratt. So it's one of the reasons why we thought the best way to communicate this would be just explain the $300 million number. And again, that's the number we'll be getting by the end of the year. So that's sort of how we should view the accretion of the network changes. And I will also say that there are more network changes to come. And back to the point that Joanna made about the postponing of investor day. I think these things are all tied together as far as making sure that we have rolled out all the changes that we want to do with respect to the opportunities that be the case, the next tranche is in the $300 million, but I think it's fair to say we are not done as far as continue to fine tune the network. Dan McKenzie -- Seaport Global Securities -- Analyst Thanks so much, guys. Operator Our next question will come from Jamie Baker with J.P. Morgan. Jamie Baker -- JPMorgan Chase and Company -- Analyst Yes. Good morning, everybody. So probably for Marty, I know airlines don't like to offer route P&L commentary, but I figured I'd try to ask the question in a way you might answer. So without speaking to individual stations, can you give us some margin commentary on the aggregate of Baltimore or Kansas City, the short-haul L.A. and Latin markets that you are exiting them perhaps a margin basis or maybe just sheer dollars of loss. Just trying to -- any color as to what that reduction in lost production sums to? Marty St. George -- President Well, listen, I appreciate your efforts in trying to get me to give you that number. I mean we generally really don't talk about that level of detail. I will just say that the aggregate of those changes and the redeployment of airplanes is all based in the $300 million. So that's really sort of how we look at that and how we communicate it. I feel like given more time and different competitive situations, things may have been different as far as some of the stuff that we chose to exit. But between the stuff you mentioned between the L.A. short haul, and the imperative back to Joanna's point, the imperative of improving profitability now, it was really -- it was time for us to make moves, and we're very excited about the changes. It's always unfortunate, given the situation with our crew members. But we have to prioritize returns right now. Jamie Baker -- JPMorgan Chase and Company -- Analyst Yeah. OK. And then second, probably for Ursula on liquidity. What's the minimum cash balance that you internally target to run the airline? And also if we set aside brand and loyalty what's the size of the remaining unencumbered asset pool in your estimate? Ursula Hurley -- Chief Financial Officer Thanks for the question, Jamie. And I think you're celebrating a birthday this week aren't you? Jamie Baker -- JPMorgan Chase and Company -- Analyst Robin's legacy lives on. Thank you. Ursula Hurley -- Chief Financial Officer Of course. So we are targeting somewhere between $1.5 billion and $1.6 billion of cash at any point in time. As a reminder, we also have the $600 million revolving credit facility on top of that. And to your question on the unencumbered asset base, so we've publicly commented that we have about $10 billion and just over half of that is associated with the loyalty and the brand. So the remaining of that unencumbered asset pool is a combination of floodgate some routes aircraft and engines. Jamie Baker -- JPMorgan Chase and Company -- Analyst OK, perfect. Thank you very much. Operator Our next question will come from Mike Linenberg with Deutsche Bank. Mike Linenberg -- Deutsche Bank -- Analyst Good morning, everyone. Just the downward revision in top line for the year is that entirely Latin America? Or is there a shift in maybe GTF groundings and/or delayed Airbus narrow-bodies. I mean are there other components to that? Dave Clark -- Head of Revenue Planning Hi, Mike. This is Dave Clark. I'm happy to take that. Yes, it is primarily sort of unit revenue related. And as exemplified with the Latin capacity and pressure we're seeing that's causing it to not accelerate as quickly as we expected. There is a little bit of capacity. We're trimming the fall-trough as we look at the latest demand and supply trends and try to better match supply with demand. You don't see that in the capacity guidance because completion factors are running ahead, but it's mostly sort of unit revenue and there's a bit of lower trough capacity in the back half of the year. Joanna Geraghty -- Chief Executive Officer And Mike, maybe I'll just add. We did see capacity growth coming down slightly in Q2. So we had expected acceleration from Q1 into Q2. We're just not seeing that. And so as you think about the size of the Latin market to JetBlue and its importance we think this is the most prudent move. As we know capacity comes and goes, this region tends to be quite resilient and performs well for us. We will continue to double down in this area because it is so core to our geographies. But it is frustrating that we aren't seeing that acceleration into Q2 that we thought we would see with capacity growth slightly moderating from Q1 to Q2. Mike Linenberg -- Deutsche Bank -- Analyst OK, great. And just a second question. I think I heard you correctly Ursula you said that all of the airplanes maybe or at least the A321neos coming in 2024 and 2025, which I guess are all the airplanes I could be wrong except for A220s are coming with the Mint configuration. Is that the large Mint configuration or small Mint configuration? And I guess also what I'm getting to is should we anticipate additional TransAtlantic cities over the next year or two above and beyond what you've already announced? Thanks for taking my question. Ursula Hurley -- Chief Financial Officer Yeah. Thanks, Mike. So as a reminder we have 27 deliveries this year in 2024 seven of them are the A321neos. So they will be in the 16-seat Mint configuration. And then in 2025, we have 25 deliveries and five of those are A321neos, which will be in Mint. Joanna Geraghty -- Chief Executive Officer And then maybe I'll pick up on the TransAtlantic question. TransAtlantic has performed very well for us. We know the summer will be strong, as we've mentioned before. However, as we look at growth there, we are currently serving what we believe are sort of the top underserved markets for JetBlue out of Boston and New York. So we'll look to continue doing this. Further seasonalizing them as appropriate, if you look at Edinburgh and Dublin both seasonal markets doing well for us so far but great contributors right now. On the Mint question, I'll also emphasize premium is doing exceptionally well. 25% of our seats are premium, a combination of mint and even more space. And so between the A220 and the 321s that we're seeing we will see an increase in our premium mix which is great. Mike Linenberg -- Deutsche Bank -- Analyst Very good. Thank you. Operator Our next question will come from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth -- Evercore ISI -- Analyst Hey. Thank you. I wonder if we could drill a little bit deeper on the Latin trends. Is this primarily, US to Caribbean, I think if JetBlue historically is more of a Caribbean network. Your two largest markets by a very wide margin are Puerto Rico and the Dominican Republic. Can you speak to trends in those two markets specifically, and then if you would, is there any differentiation and trend between Caribbean originating from the Northeast and Caribbean originating from South Florida. Dave Clark -- Head of Revenue Planning Thanks, Duane. This is Dave. I'll take that. I think the easiest way to think about it is the breakdown between sort of Caribbean beach destinations and Caribbean VFR destinations. The VFR is holding up relatively well. Industry capacity there has been relatively less. So that is still under some pressure but not as much as the beach destinations, where we see increased capacity, really high increased capacity which is driving even higher pressure on the yields. Puerto Rico and Dominican Republic both extremely important markets to us. We are 100% committed to winning, competing and maintaining our leadership in these markets. So we feel very good about them. We have a deep history there a large operation and are working to roll out some enhancements to be performing even better in each. So I'm really committed to these markets. They're under a bit of pressure with competitive capacity that ebbs and flows. But we feel it's transitory in nature and will continue to be a very important and profitable region for us. Duane Pfennigwerth -- Evercore ISI -- Analyst I guess of those two, which one is more VFR and which one is more beach? Dave Clark -- Head of Revenue Planning The Dominican Republic in general is a bit more VFR, especially we have very large operations in Santa Domingo and Santiago, which are almost entirely VFR. Duane Pfennigwerth -- Evercore ISI -- Analyst Thanks. And then just for my follow-up on reliability I wonder if you can survey this in any way. But as your reliability has improved, do you think there may be a gap between how customers perceive your reliability and where it stands the improvement you've made? How long of a hangover may exist from past operational perceptions? Thanks for taking the questions. Joanna Geraghty -- Chief Executive Officer Yes. Thanks, Duane. So we are in the early stages of our operational reliability initiatives. So we're seeing some nice progress but it's a multiyear initiative and we've got some work to do. So I definitely think there'll be a lag in customer perception. We obviously are also focused on this summer. ATC is going to be a challenge this summer. So despite many of the efforts that we're making, we're still going to have bad weather days and we'll probably be fairly acute in New York. So there's definitely some work to do on the customer perception piece, but we've got to start somewhere, and I'm pleased with the progress that we've made in Q1 and it will be some, I think, incremental progress quarter over quarter until we're in a much better place over the next couple of years. Duane Pfennigwerth -- Evercore ISI -- Analyst OK. Thank you. Operator Our next question will come from Savi Syth with Raymond James. Savi Syth -- Raymond James -- Analyst Hey, good morning. I was just kind of curious on the unit revenue. The guidance seems to be calling for -- going from like down mid-single digits to up mid-single digits and you've kind of called out some of the components that drive that. But I was wondering just generally, how much of that is driven by maybe easier comps in the second half last year versus this year versus kind of the network changes you've talked about? And just maybe the third bucket, how much of that might be coming from just industry capacity moderating in Latin? Dave Clark -- Head of Revenue Planning Yeah. Thanks, Savi. This is Dave. I'll take that. You hit the big three components right there. There's a few things that help us as we go from the first half to the second half in terms of the continued progress of our sequential unit revenue. The $300 million of revenue initiatives ramping up is clearly the first one. As mentioned, we secured $40 million in the first quarter. That will continue to ramp over the next three to get us to a total of $300 million across all of them. So that's clearly a significant tailwind, excuse me. And then there is a comp certainly easing coming up. The first half of 2023 had a lot of pent-up COVID demand, especially in our sort of spring break, Florida and Latin geographies that we're still cycling against in this quarter, but that eases as we go through the quarter. So I think those are the two biggest ones. Capacity right now, it looks to moderate, we'll sort of see if schedules firm up and we go through the year, and that could be sort of the third benefit as well. Savi Syth -- Raymond James -- Analyst Got it. And then if I might, on for Ursula, just on the financing for this year, could you talk about what you're seeing? And just as all of that kind of comes together, what you're kind of expecting in terms of net interest expense? Ursula Hurley -- Chief Financial Officer Yeah. Thanks, Savi. So we had previously communicated, we were targeting to raise $1.6 billion. And so I mentioned in my prepared remarks that, we've have committed financing up to $1.3 billion. So that's a combination of finance leases and just some bilateral bank loans. Obviously, with the adjusted to revenue that we provided today, we'll most likely need to raise some incremental capital beyond the $1.6 billion that we originally targeted. So we will clearly be out in the market later this year. As a reminder, we've got a healthy mix of unencumbered assets. So we can optimize across markets to focus on, quite frankly, the cost of the debt as well as building in some prepayment flexibility because those -- our priorities of ours. In terms of interest expense on a full year basis, in my prepared remarks in January, I provided guidance $320 million to $330 million. We are trending even despite having to raise incremental debt, we're trending slightly below that just given we've been more thoughtful about the timing that we're bringing in cash, but also we've been seeing some relief in terms of rate as well. So hopefully, that gives you a little bit of color. Savi Syth -- Raymond James -- Analyst Very helpful. Thank you. Operator Our next question will come from Helane Becker with TD Cowen. Helane Becker -- TD Cowen -- Analyst Thanks very much, operator. Hi, everybody. Just Ursula one point of clarification, in your slide I think on my page it's slide 9, but it might be slide 8. You talk about not having any significant debt due before 2026. So and maybe you just answered this in Savi's question. I think you also have a $750 million convert that has to be addressed. Are you thinking of refinancing your debt that's coming due? Like how should we think about, I guess maybe replacing debt versus paying down debt? Ursula Hurley -- Chief Financial Officer Yeah. Thanks for the question Helane. So in regards to the comment in the presentation, the significant debt maturity due in 2026 that actually is the convertible debt deal. So that's the next significant maturity that we'll face. We do intend to refinance that. It's quite early at this point but the team is exploring opportunities to refinance that. Again we've got a significant amount of unencumbered collateral and we can target specific markets just through the lens of raising the most cost-effective money. The convertible debt is the most friendly in terms of rate that we have in the capital structure, so in terms of financing we'll do that as close to the maturity as possible. And we got to get the business back to profitability, so that we're actually generating free cash flow so that we can then pivot to actually start paying down debt. That is the goal that we're focused on. Helane Becker -- TD Cowen -- Analyst OK. That's very helpful. Thanks, Ursula. And then on the $562 million of special items in the quarter, can you say like what percent was related to Spirit versus opt-out versus the E190 transition. And are all the Spirit costs now behind you? Ursula Hurley -- Chief Financial Officer And so put very simply all of the Spirit costs are behind us. And of the $560 million, $530-ish million were associated with Spirit. Helane Becker -- TD Cowen -- Analyst Thanks very much team. Thanks, Ursula. Operator Our next question will come from Scott Group with Wolfe Research. Scott Group -- Wolfe Research -- Analyst Hey, thanks. Good morning. So I understand not breakeven for the year. I'm just wondering, do you see a path back to breakeven in the second half? And then I just want to clarify the second quarter RASM. So I guess given Latin it seems like domestic RASM flat to up slightly year over year. Is that right? And I guess why not better just given domestic capacity down over 10%? Ursula Hurley -- Chief Financial Officer Yeah. So I'll take the first part of the question in terms of operating margin. Make no mistake our number one priority is getting this business back to consistent profitability. We were profitable in the month of March and we're focused on driving sustainable long-term profitability. And we were in an environment where we were constrained over the last few years given Spirit. And so I feel confident that we're showing action between the network changes, the revenue initiatives, controllable costs, as well as reducing our fixed costs. I do believe that these actions are going to continue to ramp up and put us on a path to drive accretive value. In terms of the second half of the year, I mean, it's a little early to tell. I mean, it's very dependent on the strength of the peak period demand during the summer and obviously, over the holidays in November and December and fuel. I mean, we can't ignore that the volatility of fuel over the last few weeks has been extremely volatile. So it's challenging to tell whether we're breakeven in 2H, obviously, that's the ultimate goal. Dave Clark -- Head of Revenue Planning And then Scott, this is Dave. With regards to the second quarter RASM question. So yes, Latin is the entire headwind, right? It's down mid-teens. As we said in the presentation, it's about 35% of our capacity. So that's a big piece. If you look at the rest of our network, excluding -- and it continues to be RASM positive as it was in the first quarter. And then in terms of why not better regardless, given the capacity being down, keep in mind, we're still comping against very significant pent-up demand last year in the first half of the year as especially spring break destinations had pent-up demand that had been sort of built up during COVID. And then secondly, competitive capacity does tick up a bit for us in the second quarter. It's one point higher than it was in the first. So there is a bit of pressure there as well. Scott Group -- Wolfe Research -- Analyst OK. That's helpful. And then just separately, on the cash balance, can you just let us know where the ATL stood at the end of the quarter? And then on the financing side, are there any covenants we need to be aware of just in terms of limits on how much more debt you can raise? Ursula Hurley -- Chief Financial Officer Yes. Thanks for the question, Scott. We'll take the ATL question offline. I'll have Koosh circle up with you. There hasn't been a material change. And then in regards to your covenant question, there's nothing material. I mean, in a few of our agreements, we have a min liquidity target, which we are more than well above. So there's nothing else material beyond that. Scott Group -- Wolfe Research -- Analyst OK. Thank you guys. Appreciate it. Operator Our next question will come from Chris Stathoulopoulos with Susquehanna International Group. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst Good morning. Thanks for taking my questions. So Joanna or Dave, I understand the revised revenue guide primarily due to LatAm and full trough lying, but if you could put a finer detail as we think about perhaps the 0 to 60-day booking window, but then also the second half, when we look at the various segments. So maybe if you could put a finer detailed domestic leisure business short-haul international long-haul peak, offpeak. And then tying it all together, just kind of what gives you the confidence here that other parts of the network? I know you have the ancillary initiatives in place but that can offset what looks like this persistent LatAm weakness? Thank you. Joanna Geraghty -- Chief Executive Officer Yes. Maybe I'll take the kind of second. Over to Dave for a deep dive on the network by geography. So we're confident that the Latin headwinds are transitory in nature. We've seen capacity while it's still up, it is moderating and it continues to moderate in Latin through the rest of the year. And the reality is this is a very strong market for JetBlue from a margin perspective, and it will continue to be. These headwinds are transitory and we're going to continue to double down in this area, because this is part of our core geography. We're pleased with the progress of domestic that has generated positive unit revenue into Q1 and then into Q2, we expect to see about the same transatlantic. RASM is up 20% against significant capacity adds in that region. So again, very happy there. So as we think about kind of looking at the full year, this Latin headwind, given the presence of JetBlue in those markets 35% is really the big challenge that we're currently facing. But we've been there before. It will cycle out and JetBlue will win in these geographies. Dave, if you'd like to maybe grab a deeper dive in some of the other areas. Dave Clark -- Head of Revenue Planning Yes. Thanks. I think you noted there's a lot of different moving pieces as sort of we come out of this COVID period. To address a couple of them. peaks remain stronger than off peaks. That's been consistent for about a year or so now. We are taking those learnings and continuing to plan our trough period a bit differently than we had before in order to try to drive the best financial performance during that. We've already been doing that for the fall trough. As mentioned, we're going to pull a bit more capacity at the fall trough as well. So working hard with those learnings. The comp gets easier as we go through the year as we sort of get away from cycling against this pent-up COVID demand that we've seen in the first half. So that's another piece too. And then lastly, I mean the booking window – we still have customers booking relatively close in. That's where the majority of our revenue comes. It can give us more challenges looking further ahead, which is why we sort of go one quarter at a time generally with our guidance. The booking curve has moved out a little bit, I'd say over the past year as sort of COVID concerns have dissipated and as more and more customers are buying our Blue Fare, which is our main cabin fare and has no change fees. So there's less risk to book further out. But within all those things, we feel really good about the moves we're making about our Latin geography over the long-term as it cycles through this temporary increased competitive capacity and feel that all parts of our network with the moves we're making are going to be contributing meaningfully in the future. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst OK. Thank you. And my follow-up. So on Slide 7 here where you referenced the potential for exploring additional cost savings opportunities. Could you walk us through sort of what areas you're thinking about there, whether it's on maintenance or there's perhaps additional opportunities within these voluntary opt-out. And within that if you could kind of clarify the work groups that those have been applied to. But also does that opportunity also move with depending on all these – where these full trough capacity revisions are made. Thank you. Ursula Hurley -- Chief Financial Officer Yes. So we have committed given the accounting change due to the Pratt & Whitney GTF compensation. We have to your point committed to offset a good portion of that. And so the team has identified opportunities to better leverage technology to drive better productivity in our frontline workforce and also being more strategic and thoughtful about maintenance, timing, as well as what level of investments take place when, obviously not at the expense of safety. And so these are areas that the team is doubling down on to help overcome the Pratt offset. In terms of the opt out that has trended where we thought it would. The areas that we're covered within the opt out are support centers so corporate functions as well as some of the frontline work groups – and so we also – so I do think we're pleased with the results. The other area we've been diving into is real estate footprints and downsizing in high-cost cities. And then the third focus continues and always continues in terms of strategic sourcing and just working to be more thoughtful and strategic about the contracts that we enter into, whether it be pricing service expectations as well as variability to move with the business. Chris Stathoulopoulos -- Susquehanna International Group -- Analyst OK. Thank you. Operator Next question will come from Conor Cunningham with Melius Research. Conor Cunningham -- Melius Research -- Analyst Hi, everyone. Thank you. As you've made all these network changes, I was wondering how you're engaging your change in relevancy with your core customers. You didn't cite any loyalty numbers or credit card sign-ups. I'm just curious on why the lack of comments there. Is there anything to dive deeper into that? Thank you. Joanna Geraghty -- Chief Executive Officer Yeah. Sure. So I think we mentioned in Marty's prepared remarks some loyalty commentary. But I think importantly, the network changes are focused around retrenching into our core strengths, which should drive improvement in relevance for our customers, who tend to be over-indexing in those areas. So I think New York, Boston, South Florida. We're really pleased with loyalty, and we've had strong growth of our True Blue base below mosaic in Q1 versus Q1 2023. Our mosaics continue to grow. We have a much higher tax rate this quarter compared to year over year. We've seen healthy growth in customer spend, healthy remuneration from Barclays. So we're very pleased with the trajectory. The majority of our mosaics now hold a JetBlue co-brand credit card. So I think that's a great indicator of the value that they place in the loyalty program and the value that the Barclays Co-brand card drives. The other piece I'll mention is we've introduced a number of new perks this quarter. We will continue to introduce new perks, and we think we've got more opportunity with diversification of the card portfolio products. So overall, I think a lot of great progress there, but we're focused on being highly relevant in our key focus cities. And over the last several years, some of that relevance came at the expense of those focus cities because we paused things for Spirit because the NEA was in place that we had to draw down from certain areas. I'm actually excited by this retrenching because I think it will actually drive even more relevance for our customers in those locations. Marty, you have something to add. Marty St. George -- President Yeah. Conor, I think if you actually were to look at the schedule patterns that we've had -- most specifically in Boston for a lesser extent in Fort Lauderdale. And you look over the last five years. We've actually done a lot of compromising on the schedules to take advantage of things like the NEA. And frankly, going from 20-something flights to 50-something flights in LaGuardia, those planes came from somewhere and a lot of that came from schedule quality. So I would actually say the exact opposite, which is -- this is actually going to supercharge schedule quality in some markets that we've actually neglected over the years because we were trying to do a lot of things at the same time. And I'm actually very excited about what this is giving us ability to do as far as reclaiming some of the strength that we've had historically. Conor Cunningham -- Melius Research -- Analyst That's helpful. And then I've heard a lot of talk about Latin America headwinds being somewhat transitory. And I don't I'm trying to understand why you think that. Do you expect the market to shrink? Or do you believe it just takes a little bit of time for it to mature a little bit from here? Just trying to understand the transitory comment there. Thank you. Marty St. George -- President So I'll make two comments. First of all, I think if you look at total ASMs to Latin America since short Latin, Caribbean since 2019 they're up 50% to like 60%. Now, to be clear, there has been a permanent shift in the business leisure mix and a lot of those -- or not a lot of those ASMs have actually been absorbed by the marketplace. That being the case, I think if you look at -- go back six or nine months, when the industry was all talking about Florida, and how much capacity is sold into Orlando capacity tends to moderate when RASM is pressured. And frankly this is a period where RASM is pressured. And I think if you look at the way capacity ebbs and flows, it does tend to return to the mean and mostly because there's opportunity cost for every ASM that we fly and every competitor fly. So frankly, I think that we're already seeing a bit of that moderation already and we expect to see it continue. Conor Cunningham -- Melius Research -- Analyst OK. Thank you. Operator Our final question will come from Stephen Trent with Citi. Stephen Trent -- Citi -- Analyst Many thanks everybody, and appreciate squeezing me in. Just one very quick follow-up to Helane's question earlier. When we think about your cash level, do you have a minimum cash balance in mind that you think about maintaining is you're looking at your aircraft needs and the 2026 convert. I would just love your color on that? Thank you. Ursula Hurley -- Chief Financial Officer Thanks Stephen. And, yeah, we target about $1.5 billion to $1.6 billion in cash on hand at any point in time. We actually ended the quarter slightly on the higher end of that. As a reminder, we have a $600 million revolving credit facility. So between cash on hand and the revolver we think that that's a healthy balance. And also as a reminder, we've got a healthy unencumbered asset base as well that we can utilize at any point to raise funding when necessary. Stephen Trent -- Citi -- Analyst I appreciate that. Thank you. Operator That will conclude today's question-and-answer session. I will now turn the conference over to Mr. Patel for any additional closing remarks. Koosh Patel -- Director, Investor Relations And that concludes our first quarter 2024 call. Thanks for joining us and have a great day.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to Johnson & Johnson's first-quarter 2024 earnings conference call. [Operator instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. [Operator instructions] I would now like to turn the conference over to Johnson & Johnson. You may begin. Jessica Moore -- Vice President, Investor Relations Hello, everyone. This is Jessica Moore, vice president of investor relations for Johnson & Johnson. Welcome to our company's review of the first quarter business results and our full-year financial outlook for 2024. A few logistics before we get into the details. As a reminder, you can find additional materials, including today's presentation and associated schedules, on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. Please note that this presentation contains forward-looking statements regarding, among other things, the company's future operating and financial performance, market position, and business strategy. You are cautioned not to rely on these forward-looking statements, which are based on the current expectations of future events using the information available as of the date of this recording and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. A description of these risks, uncertainties, and other factors can be found in our SEC filings, including our 2023 Form 10-K, which is available at investor.jnj.com and on the SEC's website. Additionally, several of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Moving to today's agenda. I will start by reviewing the first quarter sales and P&L results for the corporation as well as highlights related to our two businesses. Joe Wolk, our CFO, will then provide additional business and financial commentary before sharing an overview of our cash position, capital allocation priorities, and guidance for 2024. The remaining time will be available for your questions. Joaquin Duato, our chairman and CEO; as well as Jennifer Taubert, John Reed, and Tim Schmid, our innovative medicine and med tech leaders will be joining us for Q&A. To ensure we provide enough time to address your questions, we anticipate the webcast will last approximately 60 minutes. Unless otherwise stated, the financial results and guidance highlighted today reflect the continuing operations of Johnson & Johnson. Furthermore, the percentages quoted represent operational results and, therefore, exclude the impact of currency translation. Turning to our first quarter sales results. Worldwide sales were $21.4 billion for the first quarter of 2024. Sales increased 3.9%, with growth of 7.8% in the U.S. and a decline of 0.3% outside of the U.S. Excluding the impact of the COVID-19 vaccine, operational sales growth was 7.6% worldwide and 7.4% outside of the U.S. Sales growth in Europe, excluding the COVID-19 vaccine, was 6%. Turning now to earnings. For the quarter, net earnings were $5.4 billion, and diluted earnings per share was $2.20 versus a basic loss per share of $0.19 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $6.6 billion, and adjusted diluted earnings per share was $2.71, representing increases of 3.8% and 12.4%, respectively, compared to the first quarter of 2023. On an operational basis, adjusted diluted earnings per share increased 12.8%. I will now comment on business sales performance in the quarter, beginning with Innovative Medicine. Worldwide Innovative Medicine sales of $13.6 billion increased 2.5%, with growth of 8.4% in the U.S. and a decline of 4% outside of the U.S. Excluding the impact of the COVID-19 vaccine, operational sales growth was 8.3%, both worldwide and outside of the U.S. Innovative Medicine growth was driven by our key brands and continued uptake from recently launched products, with nine assets delivering double-digit growth. We continue to drive strong sales growth across our multiple myeloma portfolio. Darzalex growth was 21%, primarily driven by share gains of 6 points across all lines of therapy and 10 points in the frontline setting. As of this quarter, we are now disclosing Tecvayli sales, which were previously reported in other oncology. Sales achieved $133 million in the quarter compared to $63 million in the first quarter of last year, reflecting a strong launch in the relapsed refractory setting. Carvykti achieved sales of $157 million compared to $72 million in the first quarter of last year driven by continued capacity expansion, manufacturing efficiencies, and strong demand. While sequential growth was roughly flat due to phasing, we continue to anticipate quarter-over-quarter growth, with acceleration in the back half of the year. Other oncology growth was driven by continued strong uptake of Talvey, our GPRC5D bispecific, and Rybrevant, our bispecific antibody for non-small cell lung cancer. Also in oncology, Erleada continues to deliver strong growth of 28.4%, primarily driven by share gains. Growth of 22.4% in pulmonary hypertension was driven by favorable patient mix, share gains and market growth for both Opsumit and Uptravi. As a reminder, favorable patient mix was a driver in Q2 2023 through Q1 2024. Therefore, while we still anticipate growth, we expect to lap this dynamic beginning in Q2 2024. Within immunology, we saw sales growth in Tremfya of 27.6% driven by market growth and share gains. Stelara growth of 1.1% was driven by market growth and share gains in IBD, partially offset by unfavorable patient mix in the U.S. and, as expected, share loss in PsO and PsA. We anticipate continued volume growth, largely offset by price declines as we move toward biosimilar entry. In neuroscience, Spravato growth of 72% continues to be driven by share gains and additional market launches. Total Innovative Medicine sales growth was partially offset by unfavorable patient mix in Xarelto, which we anticipate continuing throughout the year, as well as a decrease in Imbruvica due to competitive pressures, partially offset by stocking dynamics in the U.S. Finally, it is worth noting distribution rights for Remicade and Simponi in Europe will be returned in Q4. I'll now turn your attention to MedTech. Worldwide MedTech sales of $7.8 billion increased 6.3%, with growth in the U.S. of 6.6% and 6.1% outside of the U.S. In the quarter, worldwide MedTech growth was negatively impacted by approximately 80 basis points due to fewer selling days, disproportionately impacting Orthopaedics. In Cardiovascular, previously referred to as Interventional Solutions, electrophysiology delivered double-digit growth of 25.9%, with strong growth in all regions. Performance was driven by global procedure growth, new product uptake, commercial execution, and a onetime inventory build in Asia Pacific, impacting worldwide growth by approximately 370 basis points. In addition, Abiomed delivered growth of 15%, driven by continued strong adoption of Impella 5.5 and Impella RP technology. Orthopaedics growth of 4.8% includes a onetime revenue recognition timing change related to certain products across all platforms in the U.S., positively impacting worldwide growth by approximately 300 basis points. As a reminder, Orthopaedics was over-indexed by the impact of reduced selling days in the quarter. Strong performance in hips and knees was driven by procedure recovery, growth of new products, and commercial execution, while trauma and spine were negatively impacted by competitive pressures, and core trauma was further impacted by weather-related softness in the U.S. Growth of 1.9% in Surgery was driven primarily by procedure recovery and strength of our biosurgery and wound closure portfolios, partially offset by competitive pressures in China volume-based procurement in energy and endocutters. Contact Lenses declined 2.3%, driven by U.S. stocking dynamics, partially offset by strong performance in ACUVUE OASYS 1-Day family of products. Worldwide growth was negatively impacted by 120 basis points due to the Blink divestiture in Q3 2023. Surgical vision grew 1.1%, driven by TECNIS Eyhance, our monofocal intraocular lens, partially offset by China VBP. Now turning to our consolidated statement of earnings for the first quarter of 2024. I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. Cost of products sold margin leveraged by 160 basis points, primarily driven by lower COVID-19 supply network-related exit costs. Selling, marketing and administrative margins deleveraged 110 basis points, driven primarily by timing of marketing investment in the Innovative Medicine business. We continue to invest strategically in research and development at competitive levels, investing $3.5 billion or 16.6% of sales this quarter. We invested $2.9 billion or 21.4% of sales in Innovative Medicine, with the increase in investment being driven by continued pipeline progression. In MedTech, R&D investment was $0.6 billion or 8.3% of sales, a slight decrease driven by phasing. Interest income was $209 million in the first quarter of 2024 as compared to $14 million of expense in the first quarter of 2023. The increase in income was driven by a lower average debt balance and higher interest rates earned on cash balances. Other income and expense was income of $322 million in the first quarter of 2024, compared to an expense of $6.9 billion in the first quarter of 2023. This change was primarily due to the $6.9 billion charge related to the talc settlement proposal recorded in the first quarter of 2023. Regarding taxes in the quarter, our effective tax rate was 16.9% versus 61.8% in the same period last year, which was primarily driven by the tax benefit on the talc settlement proposal recorded in the first quarter of 2023. Excluding special items, the effective tax rate was 16.5% versus 15.9% in the same period last year. I encourage you to review our upcoming first quarter 10-Q filing for additional details on specific tax-related matters. Lastly, I'll direct your attention to the box section of the slide, where we have also provided our income before tax, net earnings, and earnings per share adjusted to exclude the impact of intangible amortization expense and special items. Now let's look at adjusted income before tax by segment. In the first quarter of 2024, our adjusted income before tax for the enterprise as a percentage of sales increased from 36.1% to 36.8%, primarily driven by an increase in nonallocated interest income, with both Innovative Medicine and MedTech margins remaining relatively flat year over year. When comparing against the fourth quarter and full year 2023, Innovative Medicine and MedTech adjusted income before tax margins have improved. This concludes the sales and earnings portion of the call. I'm now pleased to turn it over to Joe. Joe Wolk -- Executive Vice President, Chief Financial Officer Thank you, Jessica. Hello, everyone. As you just heard, we are off to a solid financial start in 2024, complemented by sustained momentum within our Innovative Medicine and MedTech pipelines, marked by significant regulatory and clinical milestones. Before we delve into segment highlights from the quarter, I want to touch upon some important announcements that we made that will further enhance our competitive positioning. Earlier this month, we announced a definitive agreement to acquire Shockwave Medical. Johnson & Johnson has a long history of addressing cardiovascular disease through both our Innovative Medicine and MedTech businesses. The acquisition of Shockwave with its leading intravascular lithotripsy, or IVL technology, will provide us with a unique opportunity to impact coronary artery and peripheral artery disease, two of the highest-growth, innovation-oriented segments within cardiovascular intervention. This addition is not only adjacent to our other cardiovascular businesses, but also consistent with our strategy of becoming a best-in-class MedTech company. During the first quarter, we also expanded our Innovative Medicine portfolio with the completion of the Ambrx acquisition. With its promising pipeline and ADC platform, Ambrx will further strengthen our oncology portfolio and ability to deliver enhanced precision biologics that treat cancer. Now I'll move to segment highlights from the quarter. As Jessica previously shared, our growth in Innovative Medicine continues to be driven by momentum from key brands and the adoption of new products. During the quarter, we hit several regulatory and clinical targets that are key to delivering longer-term growth. Starting with Oncology. In multiple myeloma, we received FDA approval and a positive CHMP opinion for Carvykti for patients who have received at least one prior therapy, making it the only BCMA-targeting treatment available for patients in the second-line setting. We also received biweekly dosing approval from the FDA for Tecvayli, the only approved BCMA-targeting bispecific antibody that provides patients with dosing flexibility. And finally, we submitted an application to the EMA for regulatory approval for Darzalex-based quadruple therapy and were granted U.S. priority review by the FDA. In addition, we made significant steps forward in the treatment of patients with EGFR-mutated non-small cell lung cancer. During the quarter, we received FDA approval for Rybrevant in combination with chemotherapy for the first-line treatment of patients with locally advanced or metastatic non-small cell lung cancer with EGFR exon 20 insertion mutations. The approval was based on data from the phase 3 PAPILLON study. We also received priority review from the FDA and submitted a filing to the EMA for Rybrevant in combination with lazertinib as a first-line treatment option for adult patients with locally advanced or metastatic EGFR mutation non-small cell lung cancer. The priority review and filing to the EMA are supported by data from the landmark phase 3 MARIPOSA study. Turning to our immunology portfolio. We submitted a supplemental biologics license application to the FDA seeking approval for Tremfya in the treatment of adults with moderate to severe ulcerative colitis. We are looking forward to presenting data from the phase 3 QUASAR study evaluating Tremfya in patients with ulcerative colitis at Digestive Disease Week in May. We also significantly advanced our pipeline with important data readouts, including positive top-line results from the FRONTIER 2 study demonstrating JNJ-2113 as the first and only investigational targeted oral peptide that maintain skin clearance in moderate to severe plaque psoriasis through one year. Nipocalimab also delivered positive top-line results in phase 2 and phase 3 studies in adults with Sjogren's disease and myasthenia gravis, respectively. We also received FDA breakthrough designation in the treatment of HDFN, hemolytic disease of the fetus and newborn, and Fast Track designation for FNAIT, a rare and potentially fatal blood disorder in infants. Looking ahead, we expect upcoming data readouts for Erleada in localized prostate cancer as well as aticaprant and seltorexant in major depressive disorder. We also expect phase 2 results for our combination therapy, JNJ-4804 in psoriatic arthritis as well as pivotal data from TAR-200 in non-muscle invasive bladder cancer, which will be presented at the American Urological Association Annual Meeting in May. Lastly, we're excited to present our phase 3 Tremfya Crohn's disease data as well as our subcu data for Rybrevant at upcoming medical meetings. In MedTech, notable highlights in the first quarter include significant advancements across our cardiovascular portfolio. In pulsed field ablation, we received the CE Mark approval for VARIPULSE based on the 12-month inspIRE study, which demonstrated 80% of patients achieved freedom from recurrence and zero primary adverse events. We filed for U.S. approval of VARIPULSE based on the admIRE study, which showed all pilot phase patients achieved acute success and 80% remaining free from atrial arrhythmia reoccurrence after one year. We also submitted a CE Mark filing for our Dual Energy SMARTTOUCH SF Catheter, which will provide physicians the optionality for RF and PsA energy sources in one catheter. We began enrollment of patients in a pivotal trial evaluating Laminar's left atrial appendage elimination device to reduce the risk of stroke in patients with nonvalvular atrial fibrillation. And the late-breaking DanGer Shock study presented at the American College of Cardiology Conference and simultaneously published in the New England Journal of Medicine confirmed routine use of Abiomed's Impella CP in patients who have had a heart attack with STEMI cardiogenic shock reduced 180-day mortality by 12.7%. In Vision, we launched TECNIS PureSee, a next-generation presbyopia-correcting lens for cataract patients in EMEA. We also presented new data for our presbyopia correcting IOL, TECNIS Odyssey, at the 2024 American Society of Cataract and Refractive Surgery in April. Looking ahead, we will continue to advance our electrophysiology pipeline with the full U.S. market release of the QDOT MICRO catheter, the U.S. commercial launch of Abiomed's Impella RP Flex with SmartAssist as well as the submission of Impella ECP. Within our robotic surgery pipeline, we are on track to submit an investigational device exemption to the FDA for OTTAVA in the second half of 2024. Turning to financials, starting with cash and capital allocation. We ended the first quarter with $26.2 billion of cash and marketable securities and $33.6 billion of debt for a net debt position of $7.4 billion. We are pleased with our free cash flow generation in the first quarter of approximately $3 billion. This was above the first quarter of 2023, which included the consumer health business cash flow. Also in the first quarter of 2024, we incurred elevated payment levels made in furtherance of achieving a responsible, final, and comprehensive resolution of the talc litigation. We continue to maintain a healthy balance sheet and strong credit rating, underscoring the strength of Johnson & Johnson's financial position and ability to execute against our capital allocation priorities. Innovation continues to be a main priority for the company, as demonstrated by our industry-leading R&D spend. During the first quarter, we invested more than $3.5 billion in research and development or 16.6% of sales. We also remain committed to returning capital directly to shareholders through our dividend. We appreciate the value our investors place on the dividend, and we were pleased to announce this morning that our Board of Directors has authorized a 4.2% increase, marking our 62nd consecutive year of dividend increases. As we stated previously, we are disciplined in our approach to inorganic growth and prioritize acquisitions that strategically fit and present meaningful long-term growth opportunities. This is evidenced by the pending transaction in which we are adding a profitable commercialized portfolio of Shockwave Technologies in high-growth markets as well as a robust pipeline. I'll now discuss our full-year 2024 guidance, which excludes the recently announced acquisition of Shockwave. As previously communicated, we assume the closing of the transaction will take place by midyear 2024, at which time we will update our guidance to reflect the expected dilution to adjusted earnings per share in 2024 of approximately $0.10 per share driven by financing costs. Based on the results delivered in the first quarter, we are tightening our ranges and increasing the midpoints for our full-year operational sales and adjusted operational EPS guidance. As such, we expect operational sales growth for the full year to be in the range of 5.5% to 6% or $88.7 billion to $89.1 billion, increasing the midpoint by $300 million or 0.3%. As a reminder, our sales guidance continues to exclude any impact from COVID-19 vaccine sales. As you know, we don't speculate on future currency movements. Last quarter, we utilized the euro spot rate relative to the U.S. dollar of 1.09. As of last week, the euro spot rate was 1.08, a modest strengthening of the U.S. dollar also experienced by a handful of other currencies. As a result, we now estimate a negative full-year foreign currency impact of $700 million, resulting in an estimated reported sales growth between 4.7% to 5.2% compared to 2023, with a midpoint of $88.2 billion or 5% at the midpoint, consistent with last quarter's guidance. We are maintaining other elements of our guidance provided on January's earnings call with the exception of two items. We are increasing interest income to a range of $550 million to $650 million. We are also tightening the range of our adjusted operational earnings per share guidance to $10.60 to $10.75, increasing the midpoint by $0.03 to $10.68, reflecting year-on-year growth of 7.7%. While not predicting the impact of currency movements, utilizing the recent exchange rates I previously referenced, our reported adjusted earnings per share for the year estimates a negative foreign exchange impact of $0.03 per share. As a result, the reported adjusted earnings per share remains unchanged at $10.65, reflecting 7.4% growth versus 2023. While we do not provide guidance by segment or on a quarterly basis, we continue to expect that the same qualitative considerations provided during January's earnings call to remain intact. We anticipate Innovative Medicine sales growth to be slightly stronger in the first half of the year compared to the second half given the anticipated entry of Stelara biosimilars in Europe midyear. For MedTech, we expect operational sales growth to be relatively consistent throughout the year. Looking ahead, we have many important catalysts in the pipeline that will drive meaningful near- and long-term growth across both Innovative Medicine and MedTech. We look forward to advancing our pipelines in both segments to deliver innovative treatments, solving some of the most complex health challenges. This wouldn't be possible without our employees around the world, so it's only appropriate, before turning to your questions, that we recognize and thank our colleagues for their continued hard work, commitment, and dedication to patients. I'm pleased to be joined by Joaquin, Jennifer, John, and Tim for the Q&A and kindly ask Kevin to provide instructions to initiate that portion of the call. Questions & Answers: Operator Thank you. [Operator instructions] Our first question today is coming from Terence Flynn from Morgan Stanley. Your line is now live. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks so much for taking the question. Maybe just a two-part on myeloma. First, on Carvykti, was just wondering if you could elaborate on the phasing comments that impacted sales in the quarter. And then secondly, on Tecvayli, how should we think about growth for this product? It looks like it's been somewhat flattish over the last couple of quarters, but just wondering if Talvey had an impact there. So as we think about those franchises back half of this year, maybe you could provide some high-level commentary. Joaquin Duato -- Chairman and Chief Executive Officer Thank you, Terence, for your question. And before we go into the specifics of your question on Carvykti and Tecvayli and Talvey, our multiple myeloma franchise, let me share with all of you some reflections on this quarter. We are entering 2024 in a position of strength, and I'm particularly encouraged on the performance of our strategic platforms, the ones that are going to drive growth in the second half of the decade. In Innovative Medicines, Darzalex, Tremfya, Erleada all grew over 20%. And specifically on Tremfya, now we have more sales in our psoriasis and psoriatic arthritic indications than we do with Stelara. And we have high expectations for the brand with ulcerative colitis data to be presented at the Digestive Disease Week just a few weeks from now and also data on Crohn's disease to be presented also this year. We continue to see increased demand from our new product launches, Spravato, Tecvayli, Talvey, Carvykti, with Carvykti just a few weeks ago receiving FDA approval to move into the second line setting. Now let me move into MedTech. We have demonstrated a strong performance across cardiovascular, in electrophysiology, and Abiomed, and we have made significant progress with our PsA portfolio. We also have delivered several important capital allocation milestones in Q1, investing heavily in R&D, raising our dividend for the 62nd consecutive year, closing the Ambrx acquisition, and announcing the planned acquisition of Shockwave Medical. As you have heard from Joe in his prepared remarks, we continue to make progress on achieving responsible, final, and comprehensive resolution of the talc litigation. Overall, I'm proud of the performance in the quarter, both in terms of the solid financial, but also the numerous pipeline advancements. It is a solid start of the year that puts us in a position of strength for 2024. And also, the sustained progress gives us give me great confidence in achieving our long-term growth goals of operational sales compounded annual growth rate of 5% to 7% from 2025 to 2030. Overall, it gives me great confidence in the future of Johnson & Johnson. Now to Jennifer on your question, Terence, on Carvykti, Tecvayli, and Talvey. Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Well, thanks, Joaquin. Just also a quick shout-out and a big thanks to our Innovative Medicine colleagues around the world, delivering 8.3% adjusted operational growth, definitely above-market growth for the quarter, with strength being really across our core launch -- our core and launch brands, nine brands, achieving double-digit growth, 10 actually, if you include Talvey in that mix, a strong pipeline progress that Joaquin noted and also the announcement and closing of our acquisition of Ambrx really to add key -- another key pipeline asset for us as well as key technology that can help us in ADC. So really strong quarter all the way around. With respect to your question specifically in multiple myeloma and then Carvykti and Talvey, multiple myeloma continues to be a true stronghold for us, and we had significant performance in growth across the board in those assets during the quarter. I can start off real quickly with Darzalex with 21% growth, predominantly with that growth coming in the frontline setting and also was noted that with -- our PERSEUS data has been filed, which will offer us an additional expansion in frontline. For Carvykti, we had over 100% growth versus the first quarter of 2023. Very, very strong demand. We did have both the AdCom in the United States, which results in a unanimous recommendation for approval, and then the, subsequent to the end of the quarter, approval of Carvykti for that line two plus, which we think bodes very well. I know there's always questions on how are we doing and how are we expanding our capacity given the strengths of the data and the additional data that's coming through in indications. I'm real happy to say, we have doubled our manufacturing capacity since the beginning of 2023. For cell processing, we are continuing to work on our Ghent facility to have that as a secondary source of supply. We brought on some contract manufacturers, and we have completely transformed and expanded lentivirus production so that, that's not a rate-limiting step for us. So I know we were a flat -- roughly flat quarter to quarter from 4Q to 1Q. As noted, that really just was some phasing and timing of orders. And when they were actually delivered and built for nothing that -- anything to really see there. We do anticipate continued growth for this asset, particularly second half versus first half, as we continue to add more slots and expand our capacity. And based on the data and everything that we're seeing, we've continued to have a lot of optimism for how Carvykti is performing. Likewise, as it relates to Tecvayli, the Tecvayli launch is going very well around the world. Consistently, we're seeing very strong uptake and rapid adoption, whether we're in the U.S., Germany, Austria, France, the major markets that have launched to date. And really, as the first we believe best-in-class off-the-shelf BCMA bispecific, we really believe that, that therapy is offering deep and durable responses. And so a lot of optimism for continuing to drive the launch there. The product is performing well in the later line settings and is also performing very well from a competitive standpoint. And last but not least is actually Talvey, which is our 10th product with double-digit growth, although that falls in the all other oncology category, so we're not fully breaking that out yet. But very, very strong uptake as the first and only GPRC5D off-the-shelf by bispecific as well. So I think what this really means is we have got fabulous opportunities across lines of therapy with what we believe are truly best-in-class agents, and many of these agents have potential as well to be combined as we work toward curing multiple myeloma. So a significant business for us, and I'm very positive on our outlook for the rest of the year and going forward. Operator Thank you. Our next question is coming from Larry Biegelsen from Wells Fargo. Your line is now live. Larry Biegelsen -- Wells Fargo Securities -- Analyst Good morning. Thanks for taking the question. A question for Tim. Your MedTech business grew 6.5% on an adjusted operational basis in Q1, but there were a number of onetime items. What was the net impact from those onetime items in your view? And what are you seeing around the world from a procedure standpoint? And what are your expectations for the rest of the year? Thank you. Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Well, thank you for the question, Larry. And let me maybe just reflect a little on the journey that we've been on. As you know, we surpassed $30 billion last year with adjusted operational growth of 7.8%. And I think it's important to note that when we compare ourselves against the majority of the competitors within our competitive composite, we are double their size. So that is performance that we are particularly proud of. We've now followed that up with another solid quarter of 6.3% growth in the first quarter. Now, Larry, to your point, there has been some noise in that. We are particularly proud of the tremendous double-digit growth within our electrophysiology business. And to put that in context, this is a business that is nearing on $5 billion, growing north of 20%. And I think that really called out the leadership position, which we're continuing to build on and couldn't be more excited about the progress we're making in PFA, which we believe also will continue to drive that performance. There has been some noise specifically in relation to our Vision business. But please rest assured, we are extremely confident in the underlying health of our Vision portfolio. This is a business that grew 6.6% last year, and we expect it to grow in high single-digit performance this year. There has been some stocking issues related to distributor inventory, which was the predominant driver of the performance you see this year. But once again, very confident that we'll see that return to strong single-digit performance for the remainder of the year. There had been a couple of one-timers, both in terms of selling days, as we mentioned earlier, about 80 bps of selling days and then a revenue recognition change within our Orthopaedics business, which impacted that business about 300 basis points. But all in all, a strong quarter, Larry, and we remain very committed to strong high single-digit growth for the remainder of the year for 2024. John Reed -- Executive Vice President, Pharmaceuticals Research and Development Larry, I just want to maybe add on to Tim's good comments there. The one-timers, there was tailwinds and headwinds in that number. So the 6.3% that you're seeing, the 6.5%, is pretty much a true number when you consider both sides of the equation. Operator Our next question is coming from Chris Schott from J.P. Morgan. Your line is now live. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much for the question. I just have a BD question here. I guess, following the Shockwave acquisition, what's the appetite, I guess, for further away? Maybe talk about like larger tuck-in type transactions, either in your MedTech or Pharma business. It just seems like the portfolio and the pipeline at J&J has evolved pretty nicely over the past few years. And I'm interested if you think the business is now at a point where we can think about maybe smaller earlier-stage assets as the primary focus for BD. Or do you still have a greater sense of urgency either in MedTech or Pharma to add some of these kind of bolt-on type transactions going forward? Joaquin Duato -- Chairman and Chief Executive Officer Thank you, Chris, and this is Joaquin. And I'm glad that you recognize the strategic consistency of our M&A trajectory, and that's good. Our M&A strategy looks for the long term, so it's not going to change. Our capital allocation strategy will continue to be disciplined. And M&A, it's going to be -- remain a critical component of that. And it's important for me to underline that with the strength of our cash flow and our balance sheet, we have significant flexibility to consider multiple types of transactions, as you mentioned. And what we have done so far is a demonstration of that with Abiomed, Laminar, Ambrx, and now the planned acquisition of Shockwave. All of them are good examples of our studying consistency and the principles that we have outlined to you. So that is not going to change. Our M&A strategy is not going to change. We'll continue to evaluate opportunities agnostic to the sector and size. And what we are looking for, it's a number of components. One, does this technology improve the current standard of care? That's critical for us. To what extent we believe there is a patient impact, which is positive. Number two, does it -- is it consistent with the capabilities and knowledge that we have in-house? We see a correlation between that and the success in the acquisitions. Number three, does it enable us to enter into higher growth markets, so areas that are growing in which we can continue to develop that market? And finally, and very important for us, does it continue to deliver a compelling financial result for our shareholders? So that's our M&A strategy, and it's been a cornerstone of our ability to create value. I am glad that you recognize the consistency that we have deployed, and it's not going to change looking into the future. When we think about M&A, we think in decades. We don't think opportunistically. Operator Thank you. Our next question is coming from Joanne Wuensch from Citibank. Your line is now live. Joanne Wuensch -- Citi -- Analyst Good morning and thank you for taking the question. Can we circle back to Vision Care, please? And can we unpack the different parts that are positive and negatives on the IOL and the contact lens business? Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Of course, Joanne. Thank you for bringing this up because it is -- it does look odd and certainly isn't consistent with our expectations or the performance that we expect going forward from that business. As I mentioned earlier, this is a business that grew 6.6% in 2023 and actually consistently grows in high single digit. We absolutely believe in the underlying health of our Vision business and that remains strong and continues to perform above market. As I mentioned earlier, the Q1 performance was predominantly driven by a contraction of U.S. distributor inventory in contact lens. As we have mentioned in the past, we had some variability in terms of our supply, which resulted in changes within distributor inventory. We've now started to see that. As our supply for contact lenses has stabilized, we've started to see a normalization of the inventory that our distributors are carrying on hand. And so that is the big driver in the results that you see today. As you know, in contact lens, this is an annuity business where it's all about how you gain your fair share of new users while, at the same time, protecting the base. We are incredibly pleased with the ongoing performance of our premium ACUVUE OASYS 1-Day family, and we are seeing unprecedented share gains in multifocal. I will also say that if we look at sequential share gains across the contact lens business, we are seeing sequential gains, which should bode well for continued performance for the remainder of the year. Specifically to IOLs, as you know, we are not currently a market leader, but we are expecting to deliver the fourth consecutive year of global share gains, driven primarily by tremendous performances of our IOL business in Asia-Pac and in EMEA. We're also excited, as you heard from Jess earlier, by the limited market release of our TECNIS PureSee and Odyssey next-gen multifocals, and we'll see a full release occur through the remainder of the year. So once again, very confident that you will see tremendous improvement in the performance of that business, and we expect high single-digit growth for Vision for 2024. Thank you, Joanne. Operator Thank you. Your next question is coming from Chris Shibutani from Goldman Sachs. Your line is now live. Chris Shibutani -- Goldman Sachs -- Analyst Great. Thank you very much. Good morning. If I could ask about the Pulmonary Hypertension business. This quarter, quite strong. You mentioned, in particular, share gains and favorable patient mix. If you could help us understand that a little bit better. And then on the forward, the pulmonary arterial hypertension segment is anticipated to see some disruption with the introduction of the recently approved product from Merck, Winrevair. Can you comment on what you're thinking the portfolio will perform and how that market will respond to this anticipated shift? Thank you. Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Chris, it's Jennifer. So yes, we're really pleased with our Pulmonary Hypertension results for the first quarter, with both Opsumit and Uptravi delivering strong growth. That was both volume and share gains in the market as well as some favorable patient mix and really rounding out a year of favorable patient mix. That last piece, we don't see continuing to go forward to the same degree. But the products are performing very well for patients with PAH. Importantly, in the quarter, we got approval for Opsynvi, which is the first combination tablet of PDE5 and an ERA. This is in line with guidelines. It's really once a patient is diagnosed, really, the right first choice for them is to start them on combination therapy. And so we think that this is an important introduction. And as we take a look at our portfolio, and even despite other new competitors that are coming in, we do believe with Opsumit and Uptravi, they've got very strong usage and both with the launch of Opsynvi as well as what we have, that these will continue to be really productive assets and a good therapeutic area for us. Operator Thank you. Next question is coming from Danielle Antalffy from UBS. Your line is now live. Danielle Antalffy -- UBS -- Analyst Hey. Good morning, everyone. Thank you so much for taking the question. Tim, if I could just follow up on MedTech and specifically Orthopaedics, and appreciate the onetime revenue recognition, not sure you can provide any color on exactly what changed there. But also you talked about consistent MedTech growth going forward. I mean, taking -- backing that out, you get to sort of 3% U.S. Orthopaedic sales growth. Is that the right way to think about that specific segment going forward? Or am I missing some onetime tailwinds? Maybe talk a little bit about the outlook for Ortho given what you guys put up this quarter. Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Thank you, Danielle. Firstly, we are operating in a very robust market. As we communicated in the fourth quarter of last year, we still see some remnants of procedural backlog that are benefiting primarily our Orthopaedics business, and we expect that to continue at least to the first half of 2024. As you mentioned, our overall performance in Orthopaedics of 4.8% was impacted by a onetime change in revenue recognition timing. And this is only related to our U.S. business, but it did impact that business by about 300 basis points. Now keep in mind, we also had the impact of the fewer selling days, which disproportionately impacted our Ortho business by 80 bps. We are proud of the ongoing progress we're making, specifically in areas where we needed to compete better. And specifically in hips and knees, we saw high single-digit growth in the first quarter, and specifically in knees driven by the tremendous performance of our VELYS platform. We're now within two years in 18 markets, 50,000 procedures and are seeing that as a constant tailwind as we now expand the provision of VELYS into EMEA and Asia-Pac through the remainder of the year. And so I think you can expect continued improvement in our Orthopaedics business for the remainder of the year, as we continue to build our portfolio and drive further expansion across the globe. Operator Thank you. Our next question today is coming from Geoff Meacham from Bank of America. Your line is now live. Charlie Yang -- Bank of America Merrill Lynch -- Analyst This is Charlie Yang for Geoff. I have two questions, please. I know there's recent news regarding the Invega Sustenna/Xeplion litigation. Can you just tell us about kind of what we should kind of think about in terms of the potential kind of impact or in terms of the timing of the next steps? And then second, can you just talk about the very strong bladder cancer data expectation, AUA? In terms of what kind of benchmark we should expect in terms of the 1-year CR rate? Thank you. Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Perfect. Well, I'll take the Invega Sustenna question, and I'll pass it over to my colleague, John, to take the next one. So if we think about our LAI portfolio, our long-acting injectables, just as a reminder for everybody, we really are leading therapies in this space with our Invega Sustenna, Invega Trinza, and Invega Hafyera products. And we're really excited about the latest data that we have, particularly for Hafyera, which a recent study shows that at two years, 96% patients on Humira -- excuse me, on Hafyera are relapse-free, which is really, really striking. So as we get to the legal question, we really don't speculate on the impact of ongoing litigation. But that being said, we remain really confident about the strength of our Invega Sustenna patents, and we're going to continue to defend the intellectual property that's associated with these patents. If we're clear to go a little bit deeper, the Federal Circuit's April 1st decision did not invalidate our patent. It just remanded the case back to the New Jersey District Court, the one that had ruled in our favor originally. Likewise, there was another ruling and another case on this patent against a different company that also did go in our favor. So it's going back to the original judge that ruled on -- in favor of the patents, and we'll have to see what comes. We won't speculate on that, but we remain really confident on the strength of our patents. John Reed -- Executive Vice President, Pharmaceuticals Research and Development Yes. Thanks for your interest in the platform that we have, the drug device combo for early bladder cancer. Clearly, a great unmet need in as much as there are more than 600,000 people every year who are diagnosed with early bladder cancer. And the vast majority of those patients go on to have their bladders removed, which clearly has a very detrimental effect on quality of life. With our drug device system which, I think, again, is a great example of how MedTech and Pharma can come together in a synergistic way, but we delivered, really, I think, exciting early data. Those were presented at the ESMO conference last September and showed, for example, with the TAR-200 product that has gemcitabine, an impressive complete response rate of over 75% and nice durability with 21 out of 23 patients, who we showed at that meeting, still ongoing and no patients having had to progress to a radical cystectomy. So I think at the AUA, because those data are not yet disclosed, I can't provide the details. But I think you can expect to see more of the same now with longer follow-up. And with more patients, we've expanded those cohorts and do believe that we're on track to deliver pivotal data in that first indication, which is in the BCG nonresponsive patients. Recollect that in early bladder non-muscle invasive bladder cancer, standard care is this attenuated mycobacteria BCG. Unfortunately, fewer than half patients receive -- achieve a complete response. And the therapy is -- has tolerability problems, to say the least, where patients feel like they have a chronic urinary tract infection. The discontinuation rate with TAR-200 has been very low. So we're very delighted with the excellent tolerability profile as well as these impressive deep efficacy -- deep and durable efficacy. So yes, so please watch that AUA presentation. I think we remain on track for a filing early next year based on these pivotal data, and we look forward to sharing those results at that Congress. Operator Thank you. Next question is coming from Matt Miksic from Barclays. Your line is now live. Matt Miksic -- Barclays -- Analyst Hi. Thanks so much for taking the question. So a follow-up maybe on some of the device trends. In particular, cardio and EP, very strong in the quarter. Wondering if you could provide some color kind of geographically as to how some of the product launches have either driven overseas or competitive environment in the U.S. has affected U.S. performance so far. And then just one quick one on Ortho, if I could. Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Sure, Matt. Firstly, let me start on cardio. As Joaquin mentioned, we've made a lot of progress in building out our portfolio. And until recently, we only participated in one high-growth category within cardiovascular, and that being electrophysiology, which I will touch on performance in a second. We are and have had a 20-year lead in electrophysiology and now have built on that position in cardiovascular with the acquisition of Abiomed. We're now over a year into integrating that business and couldn't be more proud of the progress we've made. We continue to perform ahead of the deal model. And once again, this quarter did so with growth in excess of 15%. That gives us now two leadership positions within cardiovascular care. Once we close the acquisition of Shockwave, that will be our third very thoughtful and deliberate move to only participate in high-growth, high-margin cardiovascular areas where there is significant unmet need and tremendous opportunity for us to grow. And so we're very excited by the fact that we will be one of the only strategics with only high growth, high-margin businesses in the largest category within MedTech, $60 billion market, growing roughly 8%, incremental $5 billion of growth coming out of that category each and every year. So very excited by those moves. Specifically to your questions on EP, we've seen growth across the board in excess of 20%, both in the U.S. and ex-U.S. And I think it really talks to the trust that our customers have in our technology today. RF and our portfolio of RF products are the most and tested products with 20 years of experience. And by the way, we're not going to miss PFA, the progress we've made on ensuring that we can build our presence in that category with the approval in the EU as well as in Japan. We've also submitted for FDA approval. And while we don't control the timings, we expect that approval to come through by the end of this year or early next year. And so very confident in our ability to build on our leadership position in EP. Was there a specific question to Ortho? Matt Miksic -- Barclays -- Analyst Yes. Just a comment on Ortho generally was sort of low to mid-single digits. But in hips and knees, sounded like 9%-ish. Add back the selling day and you're at double digits. It is just kind of really off the chart growth, I think, in that category. And I'm just wondering, should we see some sustainability of that rate or ramping down of that rate? How can you help us think about the rest of the year, in particular in hips and knees? Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Well, Matt, I think it's a testament to the progress of our team within also in building out our portfolio. We had some gaps in the past and now filling those gaps, both in hips and then even more notably in knees with the launch of our VELYS robot is really what is creating the tailwind that we're enjoying today, and we do expect that to continue. Now this was a strong quarter. Can we see that sort of growth every single quarter? Not absolutely sure, but we do expect high single-digit growth out of both of those categories going forward. I will also say that the work we've done in the Orthopaedics here isn't -- hasn't been just about growth. It's also about improving our margin profile. And you know that in the second quarter of '23, we announced a major restructuring, which is focused on really simplifying our portfolio and focusing our business on where we could drive the greatest impact for patients and for shareholders. That effort is resulting in a 20% reduction in our implants. And to put that in context, we have 100,000 implants today within our Orthopaedics business. And so a real testament to the effort of that group to not only drive top-line performance, but also evolve the portfolio to improve margins. Thank you, again, Matt. Jessica Moore -- Vice President, Investor Relations Thanks, Matt. Kevin, we have time for one more question. Operator Thank you. Our final question today is coming from Vamil Divan from Guggenheim Securities. Your line is now live. Vamil Divan -- Guggenheim Partners -- Analyst Thanks so much for taking my questions. One, I just was curious on Spravato and sort of where -- and very strong growth again this quarter. If you can just provide a little more context there on where the growth is coming from, what sorts of practices, what that -- the patients are given that product to be hopefully get a sense of that trend. And then just the other question we get a lot from investors is on the drug price negotiations with Medicare on the 10 drugs that are selected for this year's program through IRA. I know you probably don't want to get too much into the specifics, but I'm curious if you can just share some high-level thoughts on how the progress of those discussions are going. And is it sort of in line with what you expected? Is there anything sort of very different from what you expected as the process plays out? Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Well, thanks for the question, and thanks for asking about Spravato. We continue to be really pleased with the uptake of Spravato, as we continue to launch that product globally. You saw that there's over 70% growth in the quarter, as it continues to perform well for patients with treatment-resistant depression. And so we've got a bold outlook for Spravato as we continue to launch it into more markets and as we are able to even further penetrate the existing markets that we're in into a bit more of the community setting there. In terms -- so good -- really, really good outlook. We're also -- just to put in a plug for neuroscience. We talk a lot about our oncology business and our immunology business. Neuroscience is also a key area for us. So Spravato is a key platform. We've also got aticaprant and seltorexant coming, and we had mentioned the long-acting therapies with the Invega Sustenna franchise earlier. So back on IRA, we've been really clear that we do think that these -- the IRA drug setting provisions are damaging to the healthcare innovative system. It just -- it is not something that is going to help reinforce the tremendous investments that we're making in R&D to develop the next types of treatments and cures. That being said, we do focus on patient access and are trying to make sure that our products are available to the patients who need them. And so we're working appropriately with the government and in line with the process to start going back and forth around what the ultimate price will be. So there has been a round or two of going back and forth. And so we're still in the middle of that process. I can't really provide any more details on that. What I will say is that the products that we have that are going through the process, they are not our growth drivers for the future. Those are -- they are our products that are more at end of life. And so they're not the ones that are going to be really key for us, both in the coming years as well as out through the end of the decade. And what I'd love to also reinforce is that we do remain confident that we've got a clear path to achieving our $57 billion commitment that we made back in December at our enterprise business review as well as from '25 to '30, delivering above market growth with 5% to 7% compounded annual growth rate, and with growth in every year, that being 2025 as well as all of the years beyond that. So irrespective of the IRA, when I take a look at our growth drivers and how our pipeline is coming in, we feel real confident about the state of our business. Jessica Moore -- Vice President, Investor Relations Thank you, Vamil, and thanks to everyone for your questions and your continued interest in our company. We apologize to those that we couldn't get to because of time, but don't hesitate to reach out to the Investor Relations team with any remaining questions you may have. I will now turn the call over to Joaquin for some brief closing remarks. Joaquin Duato -- Chairman and Chief Executive Officer Thank you, Jess. And Johnson & Johnson's solid first-quarter performance reflects our sharpened focus and the progress in our portfolio and pipeline. Our impact across the full spectrum of healthcare is unique in our industry. And the commercial, clinical and capital allocation milestones achieved in Q1 reinforce our position as an innovation powerhouse. One of the most significant milestones this quarter was the announcement of our planned acquisition of Shockwave that will further strengthen our leadership position in cardiovascular. We continue to make strong progress toward the goals that we set out at our December enterprise business review, and I'm looking forward to all that we will achieve through the remainder of 2024. Answer:

Johnson & Johnson's first-quarter 2024 earnings conference call

Operator Good morning, and welcome to Johnson & Johnson's first-quarter 2024 earnings conference call. [Operator instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. [Operator instructions] I would now like to turn the conference over to Johnson & Johnson. You may begin. Jessica Moore -- Vice President, Investor Relations Hello, everyone. This is Jessica Moore, vice president of investor relations for Johnson & Johnson. Welcome to our company's review of the first quarter business results and our full-year financial outlook for 2024. A few logistics before we get into the details. As a reminder, you can find additional materials, including today's presentation and associated schedules, on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. Please note that this presentation contains forward-looking statements regarding, among other things, the company's future operating and financial performance, market position, and business strategy. You are cautioned not to rely on these forward-looking statements, which are based on the current expectations of future events using the information available as of the date of this recording and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. A description of these risks, uncertainties, and other factors can be found in our SEC filings, including our 2023 Form 10-K, which is available at investor.jnj.com and on the SEC's website. Additionally, several of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Moving to today's agenda. I will start by reviewing the first quarter sales and P&L results for the corporation as well as highlights related to our two businesses. Joe Wolk, our CFO, will then provide additional business and financial commentary before sharing an overview of our cash position, capital allocation priorities, and guidance for 2024. The remaining time will be available for your questions. Joaquin Duato, our chairman and CEO; as well as Jennifer Taubert, John Reed, and Tim Schmid, our innovative medicine and med tech leaders will be joining us for Q&A. To ensure we provide enough time to address your questions, we anticipate the webcast will last approximately 60 minutes. Unless otherwise stated, the financial results and guidance highlighted today reflect the continuing operations of Johnson & Johnson. Furthermore, the percentages quoted represent operational results and, therefore, exclude the impact of currency translation. Turning to our first quarter sales results. Worldwide sales were $21.4 billion for the first quarter of 2024. Sales increased 3.9%, with growth of 7.8% in the U.S. and a decline of 0.3% outside of the U.S. Excluding the impact of the COVID-19 vaccine, operational sales growth was 7.6% worldwide and 7.4% outside of the U.S. Sales growth in Europe, excluding the COVID-19 vaccine, was 6%. Turning now to earnings. For the quarter, net earnings were $5.4 billion, and diluted earnings per share was $2.20 versus a basic loss per share of $0.19 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $6.6 billion, and adjusted diluted earnings per share was $2.71, representing increases of 3.8% and 12.4%, respectively, compared to the first quarter of 2023. On an operational basis, adjusted diluted earnings per share increased 12.8%. I will now comment on business sales performance in the quarter, beginning with Innovative Medicine. Worldwide Innovative Medicine sales of $13.6 billion increased 2.5%, with growth of 8.4% in the U.S. and a decline of 4% outside of the U.S. Excluding the impact of the COVID-19 vaccine, operational sales growth was 8.3%, both worldwide and outside of the U.S. Innovative Medicine growth was driven by our key brands and continued uptake from recently launched products, with nine assets delivering double-digit growth. We continue to drive strong sales growth across our multiple myeloma portfolio. Darzalex growth was 21%, primarily driven by share gains of 6 points across all lines of therapy and 10 points in the frontline setting. As of this quarter, we are now disclosing Tecvayli sales, which were previously reported in other oncology. Sales achieved $133 million in the quarter compared to $63 million in the first quarter of last year, reflecting a strong launch in the relapsed refractory setting. Carvykti achieved sales of $157 million compared to $72 million in the first quarter of last year driven by continued capacity expansion, manufacturing efficiencies, and strong demand. While sequential growth was roughly flat due to phasing, we continue to anticipate quarter-over-quarter growth, with acceleration in the back half of the year. Other oncology growth was driven by continued strong uptake of Talvey, our GPRC5D bispecific, and Rybrevant, our bispecific antibody for non-small cell lung cancer. Also in oncology, Erleada continues to deliver strong growth of 28.4%, primarily driven by share gains. Growth of 22.4% in pulmonary hypertension was driven by favorable patient mix, share gains and market growth for both Opsumit and Uptravi. As a reminder, favorable patient mix was a driver in Q2 2023 through Q1 2024. Therefore, while we still anticipate growth, we expect to lap this dynamic beginning in Q2 2024. Within immunology, we saw sales growth in Tremfya of 27.6% driven by market growth and share gains. Stelara growth of 1.1% was driven by market growth and share gains in IBD, partially offset by unfavorable patient mix in the U.S. and, as expected, share loss in PsO and PsA. We anticipate continued volume growth, largely offset by price declines as we move toward biosimilar entry. In neuroscience, Spravato growth of 72% continues to be driven by share gains and additional market launches. Total Innovative Medicine sales growth was partially offset by unfavorable patient mix in Xarelto, which we anticipate continuing throughout the year, as well as a decrease in Imbruvica due to competitive pressures, partially offset by stocking dynamics in the U.S. Finally, it is worth noting distribution rights for Remicade and Simponi in Europe will be returned in Q4. I'll now turn your attention to MedTech. Worldwide MedTech sales of $7.8 billion increased 6.3%, with growth in the U.S. of 6.6% and 6.1% outside of the U.S. In the quarter, worldwide MedTech growth was negatively impacted by approximately 80 basis points due to fewer selling days, disproportionately impacting Orthopaedics. In Cardiovascular, previously referred to as Interventional Solutions, electrophysiology delivered double-digit growth of 25.9%, with strong growth in all regions. Performance was driven by global procedure growth, new product uptake, commercial execution, and a onetime inventory build in Asia Pacific, impacting worldwide growth by approximately 370 basis points. In addition, Abiomed delivered growth of 15%, driven by continued strong adoption of Impella 5.5 and Impella RP technology. Orthopaedics growth of 4.8% includes a onetime revenue recognition timing change related to certain products across all platforms in the U.S., positively impacting worldwide growth by approximately 300 basis points. As a reminder, Orthopaedics was over-indexed by the impact of reduced selling days in the quarter. Strong performance in hips and knees was driven by procedure recovery, growth of new products, and commercial execution, while trauma and spine were negatively impacted by competitive pressures, and core trauma was further impacted by weather-related softness in the U.S. Growth of 1.9% in Surgery was driven primarily by procedure recovery and strength of our biosurgery and wound closure portfolios, partially offset by competitive pressures in China volume-based procurement in energy and endocutters. Contact Lenses declined 2.3%, driven by U.S. stocking dynamics, partially offset by strong performance in ACUVUE OASYS 1-Day family of products. Worldwide growth was negatively impacted by 120 basis points due to the Blink divestiture in Q3 2023. Surgical vision grew 1.1%, driven by TECNIS Eyhance, our monofocal intraocular lens, partially offset by China VBP. Now turning to our consolidated statement of earnings for the first quarter of 2024. I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. Cost of products sold margin leveraged by 160 basis points, primarily driven by lower COVID-19 supply network-related exit costs. Selling, marketing and administrative margins deleveraged 110 basis points, driven primarily by timing of marketing investment in the Innovative Medicine business. We continue to invest strategically in research and development at competitive levels, investing $3.5 billion or 16.6% of sales this quarter. We invested $2.9 billion or 21.4% of sales in Innovative Medicine, with the increase in investment being driven by continued pipeline progression. In MedTech, R&D investment was $0.6 billion or 8.3% of sales, a slight decrease driven by phasing. Interest income was $209 million in the first quarter of 2024 as compared to $14 million of expense in the first quarter of 2023. The increase in income was driven by a lower average debt balance and higher interest rates earned on cash balances. Other income and expense was income of $322 million in the first quarter of 2024, compared to an expense of $6.9 billion in the first quarter of 2023. This change was primarily due to the $6.9 billion charge related to the talc settlement proposal recorded in the first quarter of 2023. Regarding taxes in the quarter, our effective tax rate was 16.9% versus 61.8% in the same period last year, which was primarily driven by the tax benefit on the talc settlement proposal recorded in the first quarter of 2023. Excluding special items, the effective tax rate was 16.5% versus 15.9% in the same period last year. I encourage you to review our upcoming first quarter 10-Q filing for additional details on specific tax-related matters. Lastly, I'll direct your attention to the box section of the slide, where we have also provided our income before tax, net earnings, and earnings per share adjusted to exclude the impact of intangible amortization expense and special items. Now let's look at adjusted income before tax by segment. In the first quarter of 2024, our adjusted income before tax for the enterprise as a percentage of sales increased from 36.1% to 36.8%, primarily driven by an increase in nonallocated interest income, with both Innovative Medicine and MedTech margins remaining relatively flat year over year. When comparing against the fourth quarter and full year 2023, Innovative Medicine and MedTech adjusted income before tax margins have improved. This concludes the sales and earnings portion of the call. I'm now pleased to turn it over to Joe. Joe Wolk -- Executive Vice President, Chief Financial Officer Thank you, Jessica. Hello, everyone. As you just heard, we are off to a solid financial start in 2024, complemented by sustained momentum within our Innovative Medicine and MedTech pipelines, marked by significant regulatory and clinical milestones. Before we delve into segment highlights from the quarter, I want to touch upon some important announcements that we made that will further enhance our competitive positioning. Earlier this month, we announced a definitive agreement to acquire Shockwave Medical. Johnson & Johnson has a long history of addressing cardiovascular disease through both our Innovative Medicine and MedTech businesses. The acquisition of Shockwave with its leading intravascular lithotripsy, or IVL technology, will provide us with a unique opportunity to impact coronary artery and peripheral artery disease, two of the highest-growth, innovation-oriented segments within cardiovascular intervention. This addition is not only adjacent to our other cardiovascular businesses, but also consistent with our strategy of becoming a best-in-class MedTech company. During the first quarter, we also expanded our Innovative Medicine portfolio with the completion of the Ambrx acquisition. With its promising pipeline and ADC platform, Ambrx will further strengthen our oncology portfolio and ability to deliver enhanced precision biologics that treat cancer. Now I'll move to segment highlights from the quarter. As Jessica previously shared, our growth in Innovative Medicine continues to be driven by momentum from key brands and the adoption of new products. During the quarter, we hit several regulatory and clinical targets that are key to delivering longer-term growth. Starting with Oncology. In multiple myeloma, we received FDA approval and a positive CHMP opinion for Carvykti for patients who have received at least one prior therapy, making it the only BCMA-targeting treatment available for patients in the second-line setting. We also received biweekly dosing approval from the FDA for Tecvayli, the only approved BCMA-targeting bispecific antibody that provides patients with dosing flexibility. And finally, we submitted an application to the EMA for regulatory approval for Darzalex-based quadruple therapy and were granted U.S. priority review by the FDA. In addition, we made significant steps forward in the treatment of patients with EGFR-mutated non-small cell lung cancer. During the quarter, we received FDA approval for Rybrevant in combination with chemotherapy for the first-line treatment of patients with locally advanced or metastatic non-small cell lung cancer with EGFR exon 20 insertion mutations. The approval was based on data from the phase 3 PAPILLON study. We also received priority review from the FDA and submitted a filing to the EMA for Rybrevant in combination with lazertinib as a first-line treatment option for adult patients with locally advanced or metastatic EGFR mutation non-small cell lung cancer. The priority review and filing to the EMA are supported by data from the landmark phase 3 MARIPOSA study. Turning to our immunology portfolio. We submitted a supplemental biologics license application to the FDA seeking approval for Tremfya in the treatment of adults with moderate to severe ulcerative colitis. We are looking forward to presenting data from the phase 3 QUASAR study evaluating Tremfya in patients with ulcerative colitis at Digestive Disease Week in May. We also significantly advanced our pipeline with important data readouts, including positive top-line results from the FRONTIER 2 study demonstrating JNJ-2113 as the first and only investigational targeted oral peptide that maintain skin clearance in moderate to severe plaque psoriasis through one year. Nipocalimab also delivered positive top-line results in phase 2 and phase 3 studies in adults with Sjogren's disease and myasthenia gravis, respectively. We also received FDA breakthrough designation in the treatment of HDFN, hemolytic disease of the fetus and newborn, and Fast Track designation for FNAIT, a rare and potentially fatal blood disorder in infants. Looking ahead, we expect upcoming data readouts for Erleada in localized prostate cancer as well as aticaprant and seltorexant in major depressive disorder. We also expect phase 2 results for our combination therapy, JNJ-4804 in psoriatic arthritis as well as pivotal data from TAR-200 in non-muscle invasive bladder cancer, which will be presented at the American Urological Association Annual Meeting in May. Lastly, we're excited to present our phase 3 Tremfya Crohn's disease data as well as our subcu data for Rybrevant at upcoming medical meetings. In MedTech, notable highlights in the first quarter include significant advancements across our cardiovascular portfolio. In pulsed field ablation, we received the CE Mark approval for VARIPULSE based on the 12-month inspIRE study, which demonstrated 80% of patients achieved freedom from recurrence and zero primary adverse events. We filed for U.S. approval of VARIPULSE based on the admIRE study, which showed all pilot phase patients achieved acute success and 80% remaining free from atrial arrhythmia reoccurrence after one year. We also submitted a CE Mark filing for our Dual Energy SMARTTOUCH SF Catheter, which will provide physicians the optionality for RF and PsA energy sources in one catheter. We began enrollment of patients in a pivotal trial evaluating Laminar's left atrial appendage elimination device to reduce the risk of stroke in patients with nonvalvular atrial fibrillation. And the late-breaking DanGer Shock study presented at the American College of Cardiology Conference and simultaneously published in the New England Journal of Medicine confirmed routine use of Abiomed's Impella CP in patients who have had a heart attack with STEMI cardiogenic shock reduced 180-day mortality by 12.7%. In Vision, we launched TECNIS PureSee, a next-generation presbyopia-correcting lens for cataract patients in EMEA. We also presented new data for our presbyopia correcting IOL, TECNIS Odyssey, at the 2024 American Society of Cataract and Refractive Surgery in April. Looking ahead, we will continue to advance our electrophysiology pipeline with the full U.S. market release of the QDOT MICRO catheter, the U.S. commercial launch of Abiomed's Impella RP Flex with SmartAssist as well as the submission of Impella ECP. Within our robotic surgery pipeline, we are on track to submit an investigational device exemption to the FDA for OTTAVA in the second half of 2024. Turning to financials, starting with cash and capital allocation. We ended the first quarter with $26.2 billion of cash and marketable securities and $33.6 billion of debt for a net debt position of $7.4 billion. We are pleased with our free cash flow generation in the first quarter of approximately $3 billion. This was above the first quarter of 2023, which included the consumer health business cash flow. Also in the first quarter of 2024, we incurred elevated payment levels made in furtherance of achieving a responsible, final, and comprehensive resolution of the talc litigation. We continue to maintain a healthy balance sheet and strong credit rating, underscoring the strength of Johnson & Johnson's financial position and ability to execute against our capital allocation priorities. Innovation continues to be a main priority for the company, as demonstrated by our industry-leading R&D spend. During the first quarter, we invested more than $3.5 billion in research and development or 16.6% of sales. We also remain committed to returning capital directly to shareholders through our dividend. We appreciate the value our investors place on the dividend, and we were pleased to announce this morning that our Board of Directors has authorized a 4.2% increase, marking our 62nd consecutive year of dividend increases. As we stated previously, we are disciplined in our approach to inorganic growth and prioritize acquisitions that strategically fit and present meaningful long-term growth opportunities. This is evidenced by the pending transaction in which we are adding a profitable commercialized portfolio of Shockwave Technologies in high-growth markets as well as a robust pipeline. I'll now discuss our full-year 2024 guidance, which excludes the recently announced acquisition of Shockwave. As previously communicated, we assume the closing of the transaction will take place by midyear 2024, at which time we will update our guidance to reflect the expected dilution to adjusted earnings per share in 2024 of approximately $0.10 per share driven by financing costs. Based on the results delivered in the first quarter, we are tightening our ranges and increasing the midpoints for our full-year operational sales and adjusted operational EPS guidance. As such, we expect operational sales growth for the full year to be in the range of 5.5% to 6% or $88.7 billion to $89.1 billion, increasing the midpoint by $300 million or 0.3%. As a reminder, our sales guidance continues to exclude any impact from COVID-19 vaccine sales. As you know, we don't speculate on future currency movements. Last quarter, we utilized the euro spot rate relative to the U.S. dollar of 1.09. As of last week, the euro spot rate was 1.08, a modest strengthening of the U.S. dollar also experienced by a handful of other currencies. As a result, we now estimate a negative full-year foreign currency impact of $700 million, resulting in an estimated reported sales growth between 4.7% to 5.2% compared to 2023, with a midpoint of $88.2 billion or 5% at the midpoint, consistent with last quarter's guidance. We are maintaining other elements of our guidance provided on January's earnings call with the exception of two items. We are increasing interest income to a range of $550 million to $650 million. We are also tightening the range of our adjusted operational earnings per share guidance to $10.60 to $10.75, increasing the midpoint by $0.03 to $10.68, reflecting year-on-year growth of 7.7%. While not predicting the impact of currency movements, utilizing the recent exchange rates I previously referenced, our reported adjusted earnings per share for the year estimates a negative foreign exchange impact of $0.03 per share. As a result, the reported adjusted earnings per share remains unchanged at $10.65, reflecting 7.4% growth versus 2023. While we do not provide guidance by segment or on a quarterly basis, we continue to expect that the same qualitative considerations provided during January's earnings call to remain intact. We anticipate Innovative Medicine sales growth to be slightly stronger in the first half of the year compared to the second half given the anticipated entry of Stelara biosimilars in Europe midyear. For MedTech, we expect operational sales growth to be relatively consistent throughout the year. Looking ahead, we have many important catalysts in the pipeline that will drive meaningful near- and long-term growth across both Innovative Medicine and MedTech. We look forward to advancing our pipelines in both segments to deliver innovative treatments, solving some of the most complex health challenges. This wouldn't be possible without our employees around the world, so it's only appropriate, before turning to your questions, that we recognize and thank our colleagues for their continued hard work, commitment, and dedication to patients. I'm pleased to be joined by Joaquin, Jennifer, John, and Tim for the Q&A and kindly ask Kevin to provide instructions to initiate that portion of the call. Questions & Answers: Operator Thank you. [Operator instructions] Our first question today is coming from Terence Flynn from Morgan Stanley. Your line is now live. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks so much for taking the question. Maybe just a two-part on myeloma. First, on Carvykti, was just wondering if you could elaborate on the phasing comments that impacted sales in the quarter. And then secondly, on Tecvayli, how should we think about growth for this product? It looks like it's been somewhat flattish over the last couple of quarters, but just wondering if Talvey had an impact there. So as we think about those franchises back half of this year, maybe you could provide some high-level commentary. Joaquin Duato -- Chairman and Chief Executive Officer Thank you, Terence, for your question. And before we go into the specifics of your question on Carvykti and Tecvayli and Talvey, our multiple myeloma franchise, let me share with all of you some reflections on this quarter. We are entering 2024 in a position of strength, and I'm particularly encouraged on the performance of our strategic platforms, the ones that are going to drive growth in the second half of the decade. In Innovative Medicines, Darzalex, Tremfya, Erleada all grew over 20%. And specifically on Tremfya, now we have more sales in our psoriasis and psoriatic arthritic indications than we do with Stelara. And we have high expectations for the brand with ulcerative colitis data to be presented at the Digestive Disease Week just a few weeks from now and also data on Crohn's disease to be presented also this year. We continue to see increased demand from our new product launches, Spravato, Tecvayli, Talvey, Carvykti, with Carvykti just a few weeks ago receiving FDA approval to move into the second line setting. Now let me move into MedTech. We have demonstrated a strong performance across cardiovascular, in electrophysiology, and Abiomed, and we have made significant progress with our PsA portfolio. We also have delivered several important capital allocation milestones in Q1, investing heavily in R&D, raising our dividend for the 62nd consecutive year, closing the Ambrx acquisition, and announcing the planned acquisition of Shockwave Medical. As you have heard from Joe in his prepared remarks, we continue to make progress on achieving responsible, final, and comprehensive resolution of the talc litigation. Overall, I'm proud of the performance in the quarter, both in terms of the solid financial, but also the numerous pipeline advancements. It is a solid start of the year that puts us in a position of strength for 2024. And also, the sustained progress gives us give me great confidence in achieving our long-term growth goals of operational sales compounded annual growth rate of 5% to 7% from 2025 to 2030. Overall, it gives me great confidence in the future of Johnson & Johnson. Now to Jennifer on your question, Terence, on Carvykti, Tecvayli, and Talvey. Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Well, thanks, Joaquin. Just also a quick shout-out and a big thanks to our Innovative Medicine colleagues around the world, delivering 8.3% adjusted operational growth, definitely above-market growth for the quarter, with strength being really across our core launch -- our core and launch brands, nine brands, achieving double-digit growth, 10 actually, if you include Talvey in that mix, a strong pipeline progress that Joaquin noted and also the announcement and closing of our acquisition of Ambrx really to add key -- another key pipeline asset for us as well as key technology that can help us in ADC. So really strong quarter all the way around. With respect to your question specifically in multiple myeloma and then Carvykti and Talvey, multiple myeloma continues to be a true stronghold for us, and we had significant performance in growth across the board in those assets during the quarter. I can start off real quickly with Darzalex with 21% growth, predominantly with that growth coming in the frontline setting and also was noted that with -- our PERSEUS data has been filed, which will offer us an additional expansion in frontline. For Carvykti, we had over 100% growth versus the first quarter of 2023. Very, very strong demand. We did have both the AdCom in the United States, which results in a unanimous recommendation for approval, and then the, subsequent to the end of the quarter, approval of Carvykti for that line two plus, which we think bodes very well. I know there's always questions on how are we doing and how are we expanding our capacity given the strengths of the data and the additional data that's coming through in indications. I'm real happy to say, we have doubled our manufacturing capacity since the beginning of 2023. For cell processing, we are continuing to work on our Ghent facility to have that as a secondary source of supply. We brought on some contract manufacturers, and we have completely transformed and expanded lentivirus production so that, that's not a rate-limiting step for us. So I know we were a flat -- roughly flat quarter to quarter from 4Q to 1Q. As noted, that really just was some phasing and timing of orders. And when they were actually delivered and built for nothing that -- anything to really see there. We do anticipate continued growth for this asset, particularly second half versus first half, as we continue to add more slots and expand our capacity. And based on the data and everything that we're seeing, we've continued to have a lot of optimism for how Carvykti is performing. Likewise, as it relates to Tecvayli, the Tecvayli launch is going very well around the world. Consistently, we're seeing very strong uptake and rapid adoption, whether we're in the U.S., Germany, Austria, France, the major markets that have launched to date. And really, as the first we believe best-in-class off-the-shelf BCMA bispecific, we really believe that, that therapy is offering deep and durable responses. And so a lot of optimism for continuing to drive the launch there. The product is performing well in the later line settings and is also performing very well from a competitive standpoint. And last but not least is actually Talvey, which is our 10th product with double-digit growth, although that falls in the all other oncology category, so we're not fully breaking that out yet. But very, very strong uptake as the first and only GPRC5D off-the-shelf by bispecific as well. So I think what this really means is we have got fabulous opportunities across lines of therapy with what we believe are truly best-in-class agents, and many of these agents have potential as well to be combined as we work toward curing multiple myeloma. So a significant business for us, and I'm very positive on our outlook for the rest of the year and going forward. Operator Thank you. Our next question is coming from Larry Biegelsen from Wells Fargo. Your line is now live. Larry Biegelsen -- Wells Fargo Securities -- Analyst Good morning. Thanks for taking the question. A question for Tim. Your MedTech business grew 6.5% on an adjusted operational basis in Q1, but there were a number of onetime items. What was the net impact from those onetime items in your view? And what are you seeing around the world from a procedure standpoint? And what are your expectations for the rest of the year? Thank you. Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Well, thank you for the question, Larry. And let me maybe just reflect a little on the journey that we've been on. As you know, we surpassed $30 billion last year with adjusted operational growth of 7.8%. And I think it's important to note that when we compare ourselves against the majority of the competitors within our competitive composite, we are double their size. So that is performance that we are particularly proud of. We've now followed that up with another solid quarter of 6.3% growth in the first quarter. Now, Larry, to your point, there has been some noise in that. We are particularly proud of the tremendous double-digit growth within our electrophysiology business. And to put that in context, this is a business that is nearing on $5 billion, growing north of 20%. And I think that really called out the leadership position, which we're continuing to build on and couldn't be more excited about the progress we're making in PFA, which we believe also will continue to drive that performance. There has been some noise specifically in relation to our Vision business. But please rest assured, we are extremely confident in the underlying health of our Vision portfolio. This is a business that grew 6.6% last year, and we expect it to grow in high single-digit performance this year. There has been some stocking issues related to distributor inventory, which was the predominant driver of the performance you see this year. But once again, very confident that we'll see that return to strong single-digit performance for the remainder of the year. There had been a couple of one-timers, both in terms of selling days, as we mentioned earlier, about 80 bps of selling days and then a revenue recognition change within our Orthopaedics business, which impacted that business about 300 basis points. But all in all, a strong quarter, Larry, and we remain very committed to strong high single-digit growth for the remainder of the year for 2024. John Reed -- Executive Vice President, Pharmaceuticals Research and Development Larry, I just want to maybe add on to Tim's good comments there. The one-timers, there was tailwinds and headwinds in that number. So the 6.3% that you're seeing, the 6.5%, is pretty much a true number when you consider both sides of the equation. Operator Our next question is coming from Chris Schott from J.P. Morgan. Your line is now live. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much for the question. I just have a BD question here. I guess, following the Shockwave acquisition, what's the appetite, I guess, for further away? Maybe talk about like larger tuck-in type transactions, either in your MedTech or Pharma business. It just seems like the portfolio and the pipeline at J&J has evolved pretty nicely over the past few years. And I'm interested if you think the business is now at a point where we can think about maybe smaller earlier-stage assets as the primary focus for BD. Or do you still have a greater sense of urgency either in MedTech or Pharma to add some of these kind of bolt-on type transactions going forward? Joaquin Duato -- Chairman and Chief Executive Officer Thank you, Chris, and this is Joaquin. And I'm glad that you recognize the strategic consistency of our M&A trajectory, and that's good. Our M&A strategy looks for the long term, so it's not going to change. Our capital allocation strategy will continue to be disciplined. And M&A, it's going to be -- remain a critical component of that. And it's important for me to underline that with the strength of our cash flow and our balance sheet, we have significant flexibility to consider multiple types of transactions, as you mentioned. And what we have done so far is a demonstration of that with Abiomed, Laminar, Ambrx, and now the planned acquisition of Shockwave. All of them are good examples of our studying consistency and the principles that we have outlined to you. So that is not going to change. Our M&A strategy is not going to change. We'll continue to evaluate opportunities agnostic to the sector and size. And what we are looking for, it's a number of components. One, does this technology improve the current standard of care? That's critical for us. To what extent we believe there is a patient impact, which is positive. Number two, does it -- is it consistent with the capabilities and knowledge that we have in-house? We see a correlation between that and the success in the acquisitions. Number three, does it enable us to enter into higher growth markets, so areas that are growing in which we can continue to develop that market? And finally, and very important for us, does it continue to deliver a compelling financial result for our shareholders? So that's our M&A strategy, and it's been a cornerstone of our ability to create value. I am glad that you recognize the consistency that we have deployed, and it's not going to change looking into the future. When we think about M&A, we think in decades. We don't think opportunistically. Operator Thank you. Our next question is coming from Joanne Wuensch from Citibank. Your line is now live. Joanne Wuensch -- Citi -- Analyst Good morning and thank you for taking the question. Can we circle back to Vision Care, please? And can we unpack the different parts that are positive and negatives on the IOL and the contact lens business? Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Of course, Joanne. Thank you for bringing this up because it is -- it does look odd and certainly isn't consistent with our expectations or the performance that we expect going forward from that business. As I mentioned earlier, this is a business that grew 6.6% in 2023 and actually consistently grows in high single digit. We absolutely believe in the underlying health of our Vision business and that remains strong and continues to perform above market. As I mentioned earlier, the Q1 performance was predominantly driven by a contraction of U.S. distributor inventory in contact lens. As we have mentioned in the past, we had some variability in terms of our supply, which resulted in changes within distributor inventory. We've now started to see that. As our supply for contact lenses has stabilized, we've started to see a normalization of the inventory that our distributors are carrying on hand. And so that is the big driver in the results that you see today. As you know, in contact lens, this is an annuity business where it's all about how you gain your fair share of new users while, at the same time, protecting the base. We are incredibly pleased with the ongoing performance of our premium ACUVUE OASYS 1-Day family, and we are seeing unprecedented share gains in multifocal. I will also say that if we look at sequential share gains across the contact lens business, we are seeing sequential gains, which should bode well for continued performance for the remainder of the year. Specifically to IOLs, as you know, we are not currently a market leader, but we are expecting to deliver the fourth consecutive year of global share gains, driven primarily by tremendous performances of our IOL business in Asia-Pac and in EMEA. We're also excited, as you heard from Jess earlier, by the limited market release of our TECNIS PureSee and Odyssey next-gen multifocals, and we'll see a full release occur through the remainder of the year. So once again, very confident that you will see tremendous improvement in the performance of that business, and we expect high single-digit growth for Vision for 2024. Thank you, Joanne. Operator Thank you. Your next question is coming from Chris Shibutani from Goldman Sachs. Your line is now live. Chris Shibutani -- Goldman Sachs -- Analyst Great. Thank you very much. Good morning. If I could ask about the Pulmonary Hypertension business. This quarter, quite strong. You mentioned, in particular, share gains and favorable patient mix. If you could help us understand that a little bit better. And then on the forward, the pulmonary arterial hypertension segment is anticipated to see some disruption with the introduction of the recently approved product from Merck, Winrevair. Can you comment on what you're thinking the portfolio will perform and how that market will respond to this anticipated shift? Thank you. Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Chris, it's Jennifer. So yes, we're really pleased with our Pulmonary Hypertension results for the first quarter, with both Opsumit and Uptravi delivering strong growth. That was both volume and share gains in the market as well as some favorable patient mix and really rounding out a year of favorable patient mix. That last piece, we don't see continuing to go forward to the same degree. But the products are performing very well for patients with PAH. Importantly, in the quarter, we got approval for Opsynvi, which is the first combination tablet of PDE5 and an ERA. This is in line with guidelines. It's really once a patient is diagnosed, really, the right first choice for them is to start them on combination therapy. And so we think that this is an important introduction. And as we take a look at our portfolio, and even despite other new competitors that are coming in, we do believe with Opsumit and Uptravi, they've got very strong usage and both with the launch of Opsynvi as well as what we have, that these will continue to be really productive assets and a good therapeutic area for us. Operator Thank you. Next question is coming from Danielle Antalffy from UBS. Your line is now live. Danielle Antalffy -- UBS -- Analyst Hey. Good morning, everyone. Thank you so much for taking the question. Tim, if I could just follow up on MedTech and specifically Orthopaedics, and appreciate the onetime revenue recognition, not sure you can provide any color on exactly what changed there. But also you talked about consistent MedTech growth going forward. I mean, taking -- backing that out, you get to sort of 3% U.S. Orthopaedic sales growth. Is that the right way to think about that specific segment going forward? Or am I missing some onetime tailwinds? Maybe talk a little bit about the outlook for Ortho given what you guys put up this quarter. Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Thank you, Danielle. Firstly, we are operating in a very robust market. As we communicated in the fourth quarter of last year, we still see some remnants of procedural backlog that are benefiting primarily our Orthopaedics business, and we expect that to continue at least to the first half of 2024. As you mentioned, our overall performance in Orthopaedics of 4.8% was impacted by a onetime change in revenue recognition timing. And this is only related to our U.S. business, but it did impact that business by about 300 basis points. Now keep in mind, we also had the impact of the fewer selling days, which disproportionately impacted our Ortho business by 80 bps. We are proud of the ongoing progress we're making, specifically in areas where we needed to compete better. And specifically in hips and knees, we saw high single-digit growth in the first quarter, and specifically in knees driven by the tremendous performance of our VELYS platform. We're now within two years in 18 markets, 50,000 procedures and are seeing that as a constant tailwind as we now expand the provision of VELYS into EMEA and Asia-Pac through the remainder of the year. And so I think you can expect continued improvement in our Orthopaedics business for the remainder of the year, as we continue to build our portfolio and drive further expansion across the globe. Operator Thank you. Our next question today is coming from Geoff Meacham from Bank of America. Your line is now live. Charlie Yang -- Bank of America Merrill Lynch -- Analyst This is Charlie Yang for Geoff. I have two questions, please. I know there's recent news regarding the Invega Sustenna/Xeplion litigation. Can you just tell us about kind of what we should kind of think about in terms of the potential kind of impact or in terms of the timing of the next steps? And then second, can you just talk about the very strong bladder cancer data expectation, AUA? In terms of what kind of benchmark we should expect in terms of the 1-year CR rate? Thank you. Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Perfect. Well, I'll take the Invega Sustenna question, and I'll pass it over to my colleague, John, to take the next one. So if we think about our LAI portfolio, our long-acting injectables, just as a reminder for everybody, we really are leading therapies in this space with our Invega Sustenna, Invega Trinza, and Invega Hafyera products. And we're really excited about the latest data that we have, particularly for Hafyera, which a recent study shows that at two years, 96% patients on Humira -- excuse me, on Hafyera are relapse-free, which is really, really striking. So as we get to the legal question, we really don't speculate on the impact of ongoing litigation. But that being said, we remain really confident about the strength of our Invega Sustenna patents, and we're going to continue to defend the intellectual property that's associated with these patents. If we're clear to go a little bit deeper, the Federal Circuit's April 1st decision did not invalidate our patent. It just remanded the case back to the New Jersey District Court, the one that had ruled in our favor originally. Likewise, there was another ruling and another case on this patent against a different company that also did go in our favor. So it's going back to the original judge that ruled on -- in favor of the patents, and we'll have to see what comes. We won't speculate on that, but we remain really confident on the strength of our patents. John Reed -- Executive Vice President, Pharmaceuticals Research and Development Yes. Thanks for your interest in the platform that we have, the drug device combo for early bladder cancer. Clearly, a great unmet need in as much as there are more than 600,000 people every year who are diagnosed with early bladder cancer. And the vast majority of those patients go on to have their bladders removed, which clearly has a very detrimental effect on quality of life. With our drug device system which, I think, again, is a great example of how MedTech and Pharma can come together in a synergistic way, but we delivered, really, I think, exciting early data. Those were presented at the ESMO conference last September and showed, for example, with the TAR-200 product that has gemcitabine, an impressive complete response rate of over 75% and nice durability with 21 out of 23 patients, who we showed at that meeting, still ongoing and no patients having had to progress to a radical cystectomy. So I think at the AUA, because those data are not yet disclosed, I can't provide the details. But I think you can expect to see more of the same now with longer follow-up. And with more patients, we've expanded those cohorts and do believe that we're on track to deliver pivotal data in that first indication, which is in the BCG nonresponsive patients. Recollect that in early bladder non-muscle invasive bladder cancer, standard care is this attenuated mycobacteria BCG. Unfortunately, fewer than half patients receive -- achieve a complete response. And the therapy is -- has tolerability problems, to say the least, where patients feel like they have a chronic urinary tract infection. The discontinuation rate with TAR-200 has been very low. So we're very delighted with the excellent tolerability profile as well as these impressive deep efficacy -- deep and durable efficacy. So yes, so please watch that AUA presentation. I think we remain on track for a filing early next year based on these pivotal data, and we look forward to sharing those results at that Congress. Operator Thank you. Next question is coming from Matt Miksic from Barclays. Your line is now live. Matt Miksic -- Barclays -- Analyst Hi. Thanks so much for taking the question. So a follow-up maybe on some of the device trends. In particular, cardio and EP, very strong in the quarter. Wondering if you could provide some color kind of geographically as to how some of the product launches have either driven overseas or competitive environment in the U.S. has affected U.S. performance so far. And then just one quick one on Ortho, if I could. Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Sure, Matt. Firstly, let me start on cardio. As Joaquin mentioned, we've made a lot of progress in building out our portfolio. And until recently, we only participated in one high-growth category within cardiovascular, and that being electrophysiology, which I will touch on performance in a second. We are and have had a 20-year lead in electrophysiology and now have built on that position in cardiovascular with the acquisition of Abiomed. We're now over a year into integrating that business and couldn't be more proud of the progress we've made. We continue to perform ahead of the deal model. And once again, this quarter did so with growth in excess of 15%. That gives us now two leadership positions within cardiovascular care. Once we close the acquisition of Shockwave, that will be our third very thoughtful and deliberate move to only participate in high-growth, high-margin cardiovascular areas where there is significant unmet need and tremendous opportunity for us to grow. And so we're very excited by the fact that we will be one of the only strategics with only high growth, high-margin businesses in the largest category within MedTech, $60 billion market, growing roughly 8%, incremental $5 billion of growth coming out of that category each and every year. So very excited by those moves. Specifically to your questions on EP, we've seen growth across the board in excess of 20%, both in the U.S. and ex-U.S. And I think it really talks to the trust that our customers have in our technology today. RF and our portfolio of RF products are the most and tested products with 20 years of experience. And by the way, we're not going to miss PFA, the progress we've made on ensuring that we can build our presence in that category with the approval in the EU as well as in Japan. We've also submitted for FDA approval. And while we don't control the timings, we expect that approval to come through by the end of this year or early next year. And so very confident in our ability to build on our leadership position in EP. Was there a specific question to Ortho? Matt Miksic -- Barclays -- Analyst Yes. Just a comment on Ortho generally was sort of low to mid-single digits. But in hips and knees, sounded like 9%-ish. Add back the selling day and you're at double digits. It is just kind of really off the chart growth, I think, in that category. And I'm just wondering, should we see some sustainability of that rate or ramping down of that rate? How can you help us think about the rest of the year, in particular in hips and knees? Tim Schmid -- Executive Vice President, Worldwide Chairman, MedTech Well, Matt, I think it's a testament to the progress of our team within also in building out our portfolio. We had some gaps in the past and now filling those gaps, both in hips and then even more notably in knees with the launch of our VELYS robot is really what is creating the tailwind that we're enjoying today, and we do expect that to continue. Now this was a strong quarter. Can we see that sort of growth every single quarter? Not absolutely sure, but we do expect high single-digit growth out of both of those categories going forward. I will also say that the work we've done in the Orthopaedics here isn't -- hasn't been just about growth. It's also about improving our margin profile. And you know that in the second quarter of '23, we announced a major restructuring, which is focused on really simplifying our portfolio and focusing our business on where we could drive the greatest impact for patients and for shareholders. That effort is resulting in a 20% reduction in our implants. And to put that in context, we have 100,000 implants today within our Orthopaedics business. And so a real testament to the effort of that group to not only drive top-line performance, but also evolve the portfolio to improve margins. Thank you, again, Matt. Jessica Moore -- Vice President, Investor Relations Thanks, Matt. Kevin, we have time for one more question. Operator Thank you. Our final question today is coming from Vamil Divan from Guggenheim Securities. Your line is now live. Vamil Divan -- Guggenheim Partners -- Analyst Thanks so much for taking my questions. One, I just was curious on Spravato and sort of where -- and very strong growth again this quarter. If you can just provide a little more context there on where the growth is coming from, what sorts of practices, what that -- the patients are given that product to be hopefully get a sense of that trend. And then just the other question we get a lot from investors is on the drug price negotiations with Medicare on the 10 drugs that are selected for this year's program through IRA. I know you probably don't want to get too much into the specifics, but I'm curious if you can just share some high-level thoughts on how the progress of those discussions are going. And is it sort of in line with what you expected? Is there anything sort of very different from what you expected as the process plays out? Jennifer Taubert -- Executive Vice President, Worldwide Chairman, Innovative Medicine Well, thanks for the question, and thanks for asking about Spravato. We continue to be really pleased with the uptake of Spravato, as we continue to launch that product globally. You saw that there's over 70% growth in the quarter, as it continues to perform well for patients with treatment-resistant depression. And so we've got a bold outlook for Spravato as we continue to launch it into more markets and as we are able to even further penetrate the existing markets that we're in into a bit more of the community setting there. In terms -- so good -- really, really good outlook. We're also -- just to put in a plug for neuroscience. We talk a lot about our oncology business and our immunology business. Neuroscience is also a key area for us. So Spravato is a key platform. We've also got aticaprant and seltorexant coming, and we had mentioned the long-acting therapies with the Invega Sustenna franchise earlier. So back on IRA, we've been really clear that we do think that these -- the IRA drug setting provisions are damaging to the healthcare innovative system. It just -- it is not something that is going to help reinforce the tremendous investments that we're making in R&D to develop the next types of treatments and cures. That being said, we do focus on patient access and are trying to make sure that our products are available to the patients who need them. And so we're working appropriately with the government and in line with the process to start going back and forth around what the ultimate price will be. So there has been a round or two of going back and forth. And so we're still in the middle of that process. I can't really provide any more details on that. What I will say is that the products that we have that are going through the process, they are not our growth drivers for the future. Those are -- they are our products that are more at end of life. And so they're not the ones that are going to be really key for us, both in the coming years as well as out through the end of the decade. And what I'd love to also reinforce is that we do remain confident that we've got a clear path to achieving our $57 billion commitment that we made back in December at our enterprise business review as well as from '25 to '30, delivering above market growth with 5% to 7% compounded annual growth rate, and with growth in every year, that being 2025 as well as all of the years beyond that. So irrespective of the IRA, when I take a look at our growth drivers and how our pipeline is coming in, we feel real confident about the state of our business. Jessica Moore -- Vice President, Investor Relations Thank you, Vamil, and thanks to everyone for your questions and your continued interest in our company. We apologize to those that we couldn't get to because of time, but don't hesitate to reach out to the Investor Relations team with any remaining questions you may have. I will now turn the call over to Joaquin for some brief closing remarks. Joaquin Duato -- Chairman and Chief Executive Officer Thank you, Jess. And Johnson & Johnson's solid first-quarter performance reflects our sharpened focus and the progress in our portfolio and pipeline. Our impact across the full spectrum of healthcare is unique in our industry. And the commercial, clinical and capital allocation milestones achieved in Q1 reinforce our position as an innovation powerhouse. One of the most significant milestones this quarter was the announcement of our planned acquisition of Shockwave that will further strengthen our leadership position in cardiovascular. We continue to make strong progress toward the goals that we set out at our December enterprise business review, and I'm looking forward to all that we will achieve through the remainder of 2024.

edtsum5

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's first-quarter 2024 earnings call. This call is being recorded. [Operator instructions] We will now go live to the presentation. Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's chairman and CEO, Jamie Dimon; and chief financial officer, Jeremy Barnum. Mr. Barnum, please go ahead. Jeremy Barnum -- Chief Financial Officer Thank you very much, and good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. Starting on Page 1. The firm reported net income of $13.4 billion, EPS of $4.44 on revenue of $42.5 billion, and delivered an ROTCE of 21%. These results included a $725 million increase to the special assessment resulting from the FDIC's updated estimate of expected losses from the closures of Silicon Valley Bank and Signature Bank. Touching on a couple of highlights. Firmwide IB fees were up 18% year on year, reflecting particular strength in underwriting fees. And we have seen strong net inflows across AWM as well as in the CCB and Wealth Management business. On Page 2, we have some more detail. This is the last quarter we'll discuss results excluding First Republic, given that going forward, First Republic results will naturally be included in the prior period, making year-on-year results comparable. For this quarter, First Republic contributed $1.7 billion of revenue, $806 million of expense, and $668 million of net income. Now focusing on the firmwide results excluding First Republic. Revenue of $40.9 billion was up $1.5 billion or 4% year on year. NII ex Markets was up $736 million or 4% driven by the impact of balance sheet mix and higher rates as well as higher revolving balances in card, largely offset by deposit margin compression and lower deposit balances in CCB. NIR ex Markets was up $1.2 billion or 12% driven by higher firmwide asset management and Investment Banking fees as well as lower net investment securities losses. And Markets revenue was down $400 million or 5% year on year. Expenses of $22 billion were up $1.8 billion or 9% year on year driven by higher compensation, including growth in employees and the increase to the FDIC special assessment. And credit costs were $1.9 billion, reflecting net charge-offs of $2 billion and a net reserve release of $38 million. Net charge-offs were up $116 million predominantly driven by Card. On to balance sheet and capital on Page 3. We ended the quarter with a CET1 ratio of 15%, relatively flat versus the prior quarter, reflecting net income which was predominantly offset by higher RWA and capital distribution. This quarter's higher RWA is largely due to seasonal effects, including higher client activity in Markets and higher risk weights on deferred tax assets, partially offset by lower Card loans. Now let's go to our businesses, starting with CCB on Page 4. Consumers remain financially healthy, supported by a resilient labor market. While cash buffers have largely normalized, balances were still above pre-pandemic levels, and wages are keeping pace with inflation. When looking at a stable cohort of customers, overall spend is in line with the prior year. Turning now to the financial results excluding First Republic. CCB reported net income of $4.4 billion on revenue of $16.6 billion, which was up 1% year on year. In Banking & Wealth Management, revenue was down 4% year on year, reflecting lower NII on lower deposits with average balances down 7% as our CD mix increased. Client investment assets were up 25% year on year driven by market performance and strong net inflows. In Home Lending, revenue was up 10% year on year, predominantly driven by higher NII and production revenue. Originations, while still modest, were up 10%. Moving to Card Services & Auto. Revenue was up 8% year on year driven by higher Card Services NII on higher revolving balances, partially offset by higher card acquisition costs from new account growth and lower auto lease income. Card outstandings were up 13% due to strong account acquisition and the continued normalization of revolve. And in auto, originations were $8.9 billion, down 3%, while we maintained healthy margins and market share. Expenses of $8.8 billion were up 9% year on year, largely driven by field compensation and continued growth in technology and marketing. In terms of credit performance this quarter, credit costs were $1.9 billion, driven by net charge-offs, which were up $825 million year on year predominantly due to continued normalization in Card. The net reserve build was $45 million, reflecting the build in Card largely offset by a release in Home Lending. Next, the Corporate & Investment Bank on Page 5. Before reporting CIB's results, I want to note that this will also be the last quarter we will be -- we will report earnings for the CIB and CB as stand-alone segments. Between now and Investor Day, we will furnish an 8-K with historical results, including five quarters and two full years of history consistent with the structure of the new Commercial and Investment Bank segment, in line with the reorganization that was announced in January. Turning back to this quarter. CIB reported net income of $4.8 billion on revenue of $13.6 billion. Investment Banking revenue of $2 billion was up 27% year on year. IB fees were up 21% year on year, and we ranked No. 1 with year-to-date wallet share of 9.1%. In Advisory, fees were down 21% driven by fewer large completed deals. Underwriting fees were up significantly, benefiting from improved market conditions with debt up 58% and equity up 51%. In terms of the outlook. While we are encouraged by the level of capital markets activity we saw this quarter, we need to be mindful that some meaningful portion of that is likely pulling forward from later in the year. Similarly, while it was encouraging to see some positive momentum in announced M&A in the quarter, it remains to be seen whether that will continue, and the Advisory business still faces structural headwinds from the regulatory environment. Payments revenue was $2.4 billion, down 1% year on year, as deposit margin normalization and deposit-related client credits were largely offset by higher fee-based revenue and deposit balances. Moving to Markets. Total revenue was $8 billion, down 5% year on year. Fixed income was down 7% driven by lower activity in rates and commodities compared to a strong prior-year quarter, partially offset by strong results in Securitized Products. Equity Markets was flat. Securities Services revenue of $1.2 billion was up 3% year on year. Expenses of $7.2 billion were down 4% year on year predominantly driven by lower legal expense. Moving to the Commercial Bank on Page 6. Commercial Banking reported net income of $1.6 billion. Revenue of $3.6 billion was up 3% year on year driven by higher noninterest revenue. Gross Investment Banking and Markets revenue of $913 million was up 4% year on year with increased IB fees, largely offset by lower Markets revenue compared to a strong prior-year quarter. Payments revenue of $1.9 billion was down 2% year on year driven by lower deposit margins and balances, largely offset by fee growth, net of higher deposit-related client credits. Expenses of $1.5 billion were up 13% year on year predominantly driven by higher compensation, reflecting an increase in employees, including for office and technology investments, as well as higher volume-related expenses. Average deposits were down 3% year on year, primarily driven by lower nonoperating deposits and down 1% quarter on quarter, reflecting seasonally lower balances. Loans were flat quarter on quarter. C&I loans were down 1%, reflecting muted demand for new loans as clients remain cautious. And CRE loans were flat as higher rates continue to have an impact on originations and sales activity. Finally, credit costs were a net benefit of $35 million, including a net reserve release of $101 million and net charge-offs of $66 million. Then to complete our lines of business, AWM on Page 7. Asset & Wealth Management reported net income of $1 billion with pre-tax margin of 28%. Revenue of $4.7 billion was down 1% year on year. Excluding net investment valuation gains in the prior year, revenue was up 5% driven by higher management fees on strong net inflows and higher average market levels, partially offset by lower NII due to deposit margin compression. Expenses of $3.4 billion were up 11% year on year largely driven by higher compensation, including revenue-related compensation; continued growth in our private banking advisor teams; and the impact of the JPMorgan Asset Management China acquisition; as well as higher distribution fees. For the quarter, long-term net inflows were $34 billion, led by equities and fixed income. AUM of $3.6 trillion was up 19% year on year. And client assets of $5.2 trillion were up 20% year on year driven by higher market levels and continued net inflow. And finally, loans were down 1% quarter on quarter and deposits were flat. Turning to Corporate on Page 8. Corporate reported net income of $918 million. Revenue was $2.3 billion, up $1.3 billion year on year. NII was $2.5 billion, up $737 million year on year driven by the impact of the balance sheet mix and higher rates. NIR was a net loss of $188 million. The current quarter included net investment securities losses of $366 million, compared with net securities losses of $868 million in the prior year quarter. Expenses of $1 billion were up $889 million year on year predominantly driven by the increase to the FDIC special assessment. To finish up, we have the outlook on Page 9. We now expect NII ex Markets to be approximately $89 billion based on a forward curve that contained three rate cuts at quarter end. Our total NII guidance remains approximately $90 billion, which implies a decrease in our Markets NII guidance from around $2 billion to around $1 billion. The primary driver of that reduction is balance sheet growth and mix shift in the Markets business. And as a reminder, changes in Markets NII are generally revenue-neutral. Our outlook for adjusted expense is now about $91 billion, reflecting the increase to the FDIC special assessment I mentioned upfront. And on credit, we continue to expect the 2024 Card net charge-off rate to be below 3.5%. Finally, you may have noticed that our effective tax rate has increased this quarter, and it will likely stay around 23% this year, absent discrete items, which can vary quite a bit. The driver of this change is the firm's adoption of the proportional amortization method for certain tax equity investments. Our managed rate is unchanged, and it should average about 3.5% above the effective tax rate. This is a smaller gap than we've previously observed, and we expect this approximate relationship to persist going forward, although the difference will continue to fluctuate as it has in the past. For the avoidance of doubt, these changes have no meaningful impact on expected annual net income. We're just mentioning this to help with your models. So to wrap up. We're pleased with another quarter of strong operating results even as the journey toward NII normalization begins. While we remain confident in our ability to produce strong returns and manage risk across a range of scenarios, the economic, geopolitical, and regulatory uncertainties that we have been talking about for some time remain prominent, and we are focused on being prepared to navigate those challenges as well as any others that may come our way. And with that, let's open up the line for Q&A. Questions & Answers: Operator The first question is coming from the line of Betsy Graseck from Morgan Stanley. You may proceed. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. Jamie Dimon -- Chairman and Chief Executive Officer Good morning. Betsy Graseck -- Morgan Stanley -- Analyst So a couple of questions here. Just one, Jamie, could you talk through the decision to raise the dividend kind of mid-cycle, it felt like, pre-CCAR? And also help us understand how you're thinking about where that payout ratio, that dividend payout ratio range should be. Because over the past several years, it's been somewhere between 24% and 32%. And so is this suggesting we could be toward the higher end of that range or even expanding above that? And then I also just wanted to understand the buyback and the keeping of the CET1 at 15% here. The minimum is 11.9%. I know it's -- we have to wait for Basel III endgame reproposal to come through and all that. But are we -- should we be expecting that, hey, we're going to hold 15% CET1 until we know all these rules? Jamie Dimon -- Chairman and Chief Executive Officer Yes. So, Betsy, before I answer the question, I want to say something on behalf of all of us at JPMorgan and me personally. I'm thrilled to have you on this call. For those who don't know, Betsy has been through a terrible medical episode. And to remind all of us how lucky we are to be here, but Betsy in particular, the amount of respect we have, not just in your work, but in your character over the last 20-plus years have been exceptional. So on behalf of all of us, I just want to welcome you back. I'm thrilled to have you here. And so you're asking a pertinent question. So we're earning a lot of money. Our capital cup runneth over, and that's why we increased the dividend. And if you ask me what we'd like to do is to pay out something like 1/3 of normalized earnings. Of course, it's hard to calculate always what normalized earnings are, but we don't mind being a little bit ahead of that sometimes, a little bit behind that sometimes. If I could give people kind of consistent dividend guidance, etc. I think the far more important question is the 15%. So look at the 15%, I'm going to oversimplify it. That basically will prepare us for the total Basel endgame today roughly. The specifics don't matter that much. Remember, we can do a lot of things to change that in the short run or the long run. But -- and it looks like Basel III endgame may not be the worst case, it will be something less than that. So obviously, when and if that happens, it would free up a lot of capital, and I'm going to say on the order of $20 billion or something like that. And yes, we're -- we've always had the capital hierarchy the same way, which is we're going to use capital to build our business first. And we pay the dividend, the steady dividend. Build the business. And if we think it's appropriate, to buy back stock. We're continuing to buy back stock at $2 billion a year. I personally do not want to buy back a lot more than that at these current prices. I think you've all heard me talk about the world and things like that. So waiting in preparation for Basel. Hopefully, we'll know something later, and then we can be much more specific with you all. But in the meantime, there's also -- it's very important to put in mind, there are short-term uses for capital that are good for shareholders that could reduce our CET1, too. So you may see us do things in the short run that will increase earnings, increase capital -- that are using up that capital. Jeremy mentioned on the -- on one of the things that we know, the balance sheet and how we use the balance sheet for credit and trading, we could do things now. So it's a great position to be in. We're going to be very, very patient. I urge all the analysts to keep in mind, excess capital is not wasted capital, it's earnings in store. We will deploy it in a very good way for our shareholders in due course. Jeremy Barnum -- Chief Financial Officer Betsy, I just wanted to add my welcome back thoughts as well. And just a very minor edit to Jamie's answer. I think he just misspoke when he said $2 billion a year in buybacks, the trajectory. It's $2 billion a quarter. Jamie Dimon -- Chairman and Chief Executive Officer I'm sorry, $2 billion a quarter. Jeremy Barnum -- Chief Financial Officer Otherwise, I have nothing to add to Jamie's very complete answer. But welcome back, Betsy. Betsy Graseck -- Morgan Stanley -- Analyst OK. Thank you so much, and I appreciate it. Looking forward to seeing you at Investor Day on May 20. Jeremy Barnum -- Chief Financial Officer Excellent. Us too. Operator Thank you. Our next question comes from Jim Mitchell with Seaport Global. You may proceed. Jim Mitchell -- Seaport Global Securities -- Analyst Hey. Good morning. Jeremy, can you speak to the trends you're seeing with respect to deposit migration in the quarter, if there's been any change? Have you seen that migration start to slow or not? Jeremy Barnum -- Chief Financial Officer Yeah. A good question, Jim. I think the simplest and best answer to that is not really. So as we've been saying for a while, migration from checking and savings to CDs is sort of the dominant trend that is driving the increase in weighted average rate paid in the consumer deposit franchise. That continues. We continue to capture that money in motion at a very high rate. So we're very happy about what that means about the consumer franchise and the level of engagement that we're seeing. I'm aware that there's a little bit of a narrative out there about are we seeing the end of what people sometimes refer to as cash-sorting? We've looked at that data. We see some evidence that maybe it's slowing a little bit. We're quite cautious on that. We really sort of don't think it makes sense to assume they're in a world where checking and savings is paying effectively zero and the policy rate is above 5%, that you're not going to see ongoing migration. And frankly, we expect to see that even in a world where -- even if the current yield curve environment were to change and meaningful cuts were to get reintroduced and we would actually start to see those, we would still expect to see ongoing migration and yield-seeking behavior. So it's quite conceivable. And this is actually on the yield curve that we had in the fourth quarter that had six cuts in it, we were still nonetheless expecting an increase in weighted average rate paid as that migration continues. So I would say no meaningful change in the trends, and the expectation for ongoing migration is very much still there. Jim Mitchell -- Seaport Global Securities -- Analyst OK. And just a follow-up on that and just sort of bigger picture on NII. Is that sort of the biggest driver of your outlook? Is it migration? Is it the forward curve? Is it balances? It sounds like it's migration, but just be curious to hear your thoughts on the biggest drivers of upside or downside. Jeremy Barnum -- Chief Financial Officer Yes. So I mean, I think the drivers of, let's say, what's embedded in the current guidance is actually not meaningfully different from what it was in the fourth quarter, meaning it's the current yield curve, which is a little bit stale now, but the snap from quarter end had roughly three cuts in it. So it's the current yield curve. It's what I just said, the expectation of ongoing internal migration. There is some meaningful offset from card revolve growth, which, while it's a little bit less than it was in prior years, is still a tailwind there. We expect deposit balances to be sort of flat to modestly down. So that's a little bit of a headwind at the margin. And then there's obviously the wildcard of potential product-level reprice, which we always say we're going to make those decisions situationally as a function of competitive conditions in the marketplace. And you know this, obviously. But in a world where we've got something like $900 billion of deposits paying effectively zero, relatively small changes in the product-level reprice can change the NII run rate by a lot. So the error bands here are pretty wide. And we're always going to stick with our mantra, which has been not losing primary bank relationships and thinking about the long-term health of the franchise when we think about deposit pricing. Jim Mitchell -- Seaport Global Securities -- Analyst Right. OK. Great. Thanks for the color. Thanks. Operator Thank you. Our next question comes from John McDonald with Autonomous Research. You may proceed. John McDonald -- Autonomous Research -- Analyst Thanks. Jeremy, you had mentioned at a conference earlier this year that The Street might need to build in more reserve growth for the Card growth. You've had more reserve build. We didn't see that this quarter. Is that just kind of seasonal? And would you still expect the kind of growth math to play out in terms of Card growth and reserve build needs? Jeremy Barnum -- Chief Financial Officer Yes, John. So in short, yes to both questions. So yes, the relative lack of build this quarter is a function of the normal seasonal patterns of Card. Yes, we still expect 12% card loan growth for the full year. And yes, that still means that all else equal, we think the consensus for the allowance build for the back three quarters is still a little too low if you map it to that expected card loan growth. Obviously, there's the wildcard of what happens with our probabilities and our parameters and the output of our internal process of assessing the SKU and the CECL distribution and so on. And we're not speaking to that one way or the other. So if you guys have your own opinions about that, that's fine. But we're narrowly just saying that, based on the card loan growth, that we expect and normal coverage ratios for that, we do expect build in the back half of the year. John McDonald -- Autonomous Research -- Analyst OK. Got it. And then just a follow-up to make it super clear on the idea of the Markets NII, that outlook being revised down by $1 billion, but revenue-neutral. I guess the obvious thing is there, there's typically an offset in fee income, and you don't guide to that. But the idea would be, the way you're structuring trades, the way the balance sheet is evolving, there's some offset that you'd expect in Markets fees from the lower Markets NII, correct? Jeremy Barnum -- Chief Financial Officer That is exactly right. And specifically, what's going on here is this shift between the on-balance sheet and off-balance sheet in the financing businesses and prime and so on within Markets. And you can actually see a little bit of a pop of the Markets balance sheet in the supplement, and these things are all related. So fundamentally, you can think of it as like we either hold equities on the balance sheet, non-interest bearing, high funding expense, negative for NII; or we receive that in total return form through derivatives, exactly the same economics, no impact on NII. So that shifts as a function of the sort of borrower relationships in the marketplace in ways that are bottom line effectively neutral. It's second order effects, but they change the geography quite a bit, and that's what happened this quarter. And that's why we've been emphasizing for some time that the NII ex Markets is the better number to focus on in terms of an indicator of how the core banking franchise is performing. John McDonald -- Autonomous Research -- Analyst Thank you. Operator Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. You may proceed. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Hey. Good morning. I guess just in terms of, Jamie, when you think about the outlook for the economy, would appreciate your thoughts on the health of the customer base, both commercial and consumer. And when we think about higher for longer, maybe the economy is too strong so don't get any rate cuts. Are you seeing that when you talk to your customers and the feedback you're getting from your bankers, where the momentum is picking up? And I appreciate all the macro risks Jamie's pointed out, but I'm just getting -- trying to get to a sense of what your view is in terms of the most likely outcome based on what you're seeing today from the customers. Jamie Dimon -- Chairman and Chief Executive Officer So I would say consumer customers are fine. The unemployment is very low. Home price dropped, stock price dropped. The amount of income they need to service their debt is still kind of low. But the extra money of the lower-income folks is running out -- not running out, but normalizing. And you see credit normalizing a little bit. And of course, higher-income folks still have more money. They're still spending it. So whatever happens, the customer's in pretty good shape. And they're -- if you go into a recession, they'd be in pretty good shape. Businesses are in good shape. If you look at it today, their confidence is up, their order books drop, their profits are up. But what I caution people, these are all the same results of a lot of fiscal spending, a lot of QE, etc. And so we don't really know what's going to happen. And I also want to look at the year, look at two years or three years, all the geopolitical effects and oil and gas and how much fiscal spending will actually take place, our elections, etc. So we're in good -- we're OK right now. It does not mean we're OK down the road. And if you look at any inflection point, being OK in the current time is always true. That was true in '72, it was true in any time you've had it. So I'm just on the more cautious side that how people feel, the confidence levels and all that, that doesn't necessarily stop you from having an inflection point. And so everything is OK today, but you've got to be prepared for a range of outcomes, which we are. And the other thing I want to point out because all of these questions about interest rates and yield curves and NII and credit losses, one thing you projected today based on what -- not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed. But these numbers have always been wrong. You have to ask the question, what if other things happen? Like higher rates with this modest recession, etc., then all these numbers change. I just don't think any of us should be surprised if and when that happens. And I just think the chance of that happen is higher than other people. I don't know the outcome. We don't want to guess the outcome. I've never seen anyone actually positively predict a big inflection point in the economy literally in my life or in history. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst That's helpful. And just tied to that, as we look at commercial real estate, both for JP and for the economy overall, is higher rates alone enough to create more vulnerabilities and issues beyond office CRE? How would you characterize the health of the CRE market? Jamie Dimon -- Chairman and Chief Executive Officer Yes. So I'll put it into two buckets. First of all, we're fine. We've got good reserves against office. We think the multifamily is fine. Jeremy can give you more detail on that if you want. But if you think of real estate, there's two pieces. If rates go up, think of the yield curve, the whole yield curve, not Fed funds, but the 10-year bond rate, it goes up 2%. All assets, all assets, every asset on the planet, including real estate, is worth 20% less. Well obviously, that creates a little bit of stress and strain, and people have to roll those over and finance it more. But it's not just true for real estate, it's true for everybody. And that happens, leveraged loans, real estate will have some effect. The second thing is the why does that happen? If that happens because we have a strong economy, well, that's not so bad for real estate because people will be hiring and filling things out. And other financial assets. If that happens because we have stagflation, well, that's the worst case. All of a sudden, you are going to have more vacancies. You are going to have more companies cutting back. You are going to have less leases. It will affect -- including multifamily, that will filter through the whole economy in a way that people haven't really experienced since 2010. So I'd just put in the back of your mind, the why is important, the interest rates are important, the recession is important. If things stay where they are today, we have kind of the soft landing that seems to be embedded in the marketplace, everyone -- the real estate will muddle through. Obviously, it'd be idiosyncratic if you're in different cities and different types and B versus A buildings and all that, but people will muddle through. They won't muddle through under higher rates with the recession. That would be tougher on a lot of folks, and not just real estate, if in fact that happens. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Helpful. Thank you so much. Operator Thank you. Our next question comes from Erika Najarian with UBS. You may proceed. Erika Najarian -- UBS -- Analyst Hi. Good morning. Given that your response to Betsy's question is that 15% CET1 today prepares you for Basel III endgame as written. You earn 22% on -- without the FDIC assessment. Ahead of Investor Day, I guess, six weeks from now or five weeks from now, as we think about that 17% through-the-cycle target, if you're at the right capital level per you guys, where are you overearning today? Jeremy Barnum -- Chief Financial Officer Right. So interesting framing of the question, Erika. So I think we've been pretty consistent about where we're overearning, right? So obviously, one major area is that we're overearning in deposit margins, especially in consumer. And that's sort of why we're expecting sequential declines in NII, why we've talked about compressing deposit margins and increases in weighted average rate paid. So I think that's probably the single biggest source of, let's call it, excess earnings currently. You also heard Jamie say that we're overearning in credit. I mean, wholesale charge-offs have been particularly low, but we have built for that. So in the current run rate, a bit less clear, the extent of what we're earning. And in Card, of course, while charge-offs are now close to normalized, essentially, we did go through an extended period of charge-offs being very low by historical standards, although that was coupled with NII also being low by historical standards. So from a bottom-line perspective, it's not entirely clear what the net of that was. But broadly, it's really deposit margin that's the biggest single factor in the overearning narrative. Embedded in your question, I think, is a little bit of the what are you thinking about the 17% CET1 in light of the current level of capital and so on. And you did talk about Investor Day. I was hoping that we would have interesting things to say about that at Investor Day in light of potential updates of the Basel III endgame, given that the single most important factor for that 17% is how much denominator expansion do we see through the Basel III endgame. At the rate we're going, we won't actually know that much more about that by Investor Day. So we might not have that much more to say, except to reiterate what I've said in the past, which is that whatever it is, it's going to be very good, our returns in absolute terms, very good in relative terms. We will optimize. We will seek to reprice. We will adjust in various ways as to the best of our ability. But given the structure of the rule, as proposed at least, there -- a lot of this cannot be optimized away. And so in the base case, you have to think of it as a headwind. Erika Najarian -- UBS -- Analyst Got it. And just as a follow-up question. You mentioned that the current curve that you set your NII outlook upon is stale. I guess, does it matter? That it seems like the market down-pricing; and obviously no June cut; no September cut; and a toss-up in December, which shouldn't matter for this year. As we think about that $90 billion, does the -- if we price rate cuts out totally, does that matter much? Given that it seems like June is the only one that... Jeremy Barnum -- Chief Financial Officer Yes. Sorry, Erika. So just quick things on this. One, let's focus on NII ex, not on total NII. So I'd anchor you to the $89 billion. Number two, if you want to do math for like the changes of the average funds rate for the rest of the year and multiply that times the EAR, like be my guest. Looks like as good as an approach as any. But I would just once again remind you, of the $900 billion of deposits paying practically 0, that very small changes there can make a big difference. And we've got other factors, we've got the impact of QT on deposit balances, etc., etc., etc. So we want to make sure that we don't get too precise here. We're giving you our best guess based on a series of assumptions. And it's going to be what it's going to be. Jamie Dimon -- Chairman and Chief Executive Officer Which we know are going to be wrong. Erika Najarian -- UBS -- Analyst Thanks. Operator Thank you. Our next question comes from Ken Usdin with Jefferies. You may proceed. Ken Usdin -- Jefferies -- Analyst Thanks. Good morning. Jeremy, I was wondering if you could expand a little bit on one of your prepared comments. When you talked about -- we will have hopes and expectations for the Investment Banking pipeline to continue to move along. We obviously saw the good movement in ECM and DCM and the lag in Advisory. Can you just talk about that? You mentioned like potential cautiousness around the election. Just what are you hearing from both the corporate side and the sponsor side with -- when it relates to M&A on like go, no-go type of feel and conversation levels? And then what are you thinking we need to have to kick start just another good level of IPO activity in the ECM markets? Jeremy Barnum -- Chief Financial Officer Sure. Yes. Let me take the IPO first. So we had been a little bit cautious there. Some cohorts and vintages of IPOs had performed somewhat disappointingly. And I think that narrative has changed to a meaningful degree this quarter. So I think we're seeing better IPO performance. Obviously, equity markets have been under a little bit of pressure the last few days. But in general, we have a lot of support there, and that always helps. Dialogue is quite good. A lot of interesting different types of conversations happening with global firms, multinationals, carve-out type things. So dialogue is good. Valuation environment is better, like sort of decent reasons for optimism there. But of course, with ECM, there's always a pipeline dynamic, and conditions were particularly good this quarter. And so we caution a little bit there about pull-forward, which is even more acute, I think, on the DCM side, given that quite a high percentage of the total amount of debt that needed to be refinanced this year has gotten done in the first quarter. So that's a factor. And then the question of M&A, I think, is probably the single most important question, not only because of its impact on M&A but also because of its knock-on impact on DCM through acquisition financing and so on. And there's the well-known kind of regulatory headwinds there, and that's definitely having a bit of a chilling effect. I don't know. I've heard some narratives that maybe there's like some pent-up deal demand. Who knows how important politics are in all this. So I don't know. We're fundamentally, as I said I think on the press call, happy to see momentum this quarter, happy to see momentum in announced M&A. Little bit cautious about the pull-forward dynamic, a little bit cautious about the regulatory headwinds. And in the end, we're just going to fight really hard for our share of the wallet here. Ken Usdin -- Jefferies -- Analyst Got it. And I guess I'll just stick on the theme of capital markets. And not surprising at all to see a little bit tougher comp in FICC. I think you guys have kind of indicated that maybe a flattish fee pool is a reasonable place, and I know that's impossible to guide on. But just maybe just talk through some of the dynamics in terms of activity across the fixed income and equities business. And do you feel like this is the type of environment where, given that lingering uncertainty about rates, clients are either more engaged or less engaged in terms of how they're positioning portfolios? Jeremy Barnum -- Chief Financial Officer Yes, a really good question. I would say, in general, that the sort of volatility and uncertainty in the rate environment overall on balance is actually supportive for the Markets revenue pool. And I think that, together with generally more balance sheet deployment as well as sort of some level of natural background growth, is one of the reasons that the overall level of Markets revenue has stabilized at meaningfully above what was normal in the pre-pandemic period. And while that does occasionally make us a little bit anxious like, oh, is this sustainable? Might there be downside here? For now, that does seem to be the new normal. And I do think that having rates off the lower zero bound and a sort of more normal dynamic in global rates, that not only affects the rates business, but it affects the foreign exchange business. It generally just makes asset allocation decisions more important and more interesting. And so all of that creates risk management needs, and active managers need to grapple with it and so on and so forth. So I think that those are some of the themes on the Markets side at the margin. And yes, we'll see how the rest of the year goes. But it sort of seems to be behaving relatively normally, I would say. Operator Thank you. Our next question comes from Mike Mayo with Wells Fargo. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. Jamie, I'm just trying to reconcile some of your concerns in your CEO letter. I'm sure the 60 pages, I can see you put a lot of effort into that and it's appreciated. But you talked about scenarios, tail risk, macro risk, geopolitical risk and all that over several years, it's not weeks or months, I get it. On the other hand, the firm is investing so much more outside the U.S., whether it's commercial or some digital banking, Consumer or Wholesale Payments. So I'm just trying to reconcile kind of your actions with your words. And specifically, how is global Wholesale Payments going? You mentioned you're in 60 countries. You do business a lot more. How is that business in particular doing? Jeremy Barnum -- Chief Financial Officer Right, Mike. So I'm sorry to tell you that Jamie actually left us because he's at a leadership offsite. That's why he was here remote. So I think he left the call in my hands for better or for worse. So -- but let me try to address some of your points and without sort of speaking for Jamie here. I think that when we talk about the impact of the geopolitical uncertainty on the outlook, part of the point there is to note that the U.S. is not isolated from that, right? If we have global macroeconomic problems as a result of geopolitical situations, that's not only a problem outside the U.S. That affects the global economy and therefore the U.S. and therefore our corporate customers, etc., etc. So -- and in that context, keeping in mind what we always say, that we invest through the cycle, that we sort of go -- we don't go into countries and then leave countries, etc. Obviously, we adjust around the edges. We manage risks. We do make choices as a function of the overall geopolitical environment. But broadly, the notion that we would pull back meaningfully from one of the key competitive strengths that this company has always had, which is its sort of global character because of a particular moment geopolitically would just be inconsistent with how we've always operated. And in terms of the Wholesale Payments business, it's going great. It's -- we're taking share. There's been a lot of innovation there, a lot of investment in technology, a lot of connectivity to payment systems in different countries around the world. And yes, I'm sure we'll give you more color and other settings on that, but it's a good story. It's a nice thing to see. Mike Mayo -- Wells Fargo Securities -- Analyst Just as a follow-up to that, then. Why is it doing great in terms of Wholesale Payments, given such the dislocations in the world from wars to supply chain changes, everything else, why is Wholesale Payments doing great? Jeremy Barnum -- Chief Financial Officer Well, I think one of the things about payments businesses is that, in some sense, they're -- I mean, recession-proof is probably the wrong word. And in any case, we're not dealing with a recession, but we're talking fundamentally about moving money through pipes around the world. And that's a thing that people need to do more or less no matter what. So that's one piece. But I think the other piece is that our willingness to invest, which has always been a focus of yours, is one of the key things separating us in this business right now. And so we are seeing the benefits of that. Mike Mayo -- Wells Fargo Securities -- Analyst All right. Thank you. Jeremy Barnum -- Chief Financial Officer Thanks, Mike. Operator Thank you. Our next question comes from Glenn Schorr with Evercore. You may proceed. Glenn Schorr -- Evercore ISI -- Analyst Thank you. Your commentary with Ken's questions were great and clear on Investment Banking for the near term and this year. I have a bigger-picture question in terms of you're so good in spelling out where you're overearning. Do you feel like you're underearning on the Investment Banking side? And I just use some of your own numbers from the past of like, look, the market has added like $40 trillion of equity market cap and $40 trillion of fixed income market cap last 10 years, yes the wallet is like 20% plus below the 10-year average. So is that -- is there just a bigger upside, and it's just a matter of when, not if? Jeremy Barnum -- Chief Financial Officer Yes, Glenn, in short, yes. I mean, I think we're not shy about saying that we're underearning in Investment Banking now. Clearly, we're below cycle averages, as you point out. We've been talking about when do we get back to the pre-pandemic wallet. But as you know, at this point, it was like March 2020, right, it was the beginning of the pandemic. So it's like four years ago at this point. So there's been GDP growth, especially in nominal terms during that period, and you would expect the wallet to grow with that. So I do think there's meaningful upside in the Investment Banking fee wallet. As I've noted, there are some headwinds, I think, particularly in M&A. But over time, you would hope that the amount of M&A is a function of the underlying industrial logic rather than the regulatory environment. So you could see some mean reversion there. And yes, so that's why we're sort of leaning in. We're engaging with clients. We're making sure that we're appropriately resourced for a more robust level of the wallet and fighting for every dollar of share. Glenn Schorr -- Evercore ISI -- Analyst Maybe one other follow-up. You're always investing. You clearly get paid in growth across the franchise as you do. But relative to a lot of other banks that have been keeping the expenses a lot closer to flat, do you envision an environment -- or maybe I should rephrase that. What type of environment would have JPMorgan pull back on this tremendous investment spending wave that you've been going through? Jeremy Barnum -- Chief Financial Officer Sure. So I think the first thing to say, which is somewhat obvious, but I'm going to say it anyway, is that there are some like auto-governors in this, right? Like some portion of the expense base is directly related to revenue, whether it's volume-related commissions, whether it's incentive compensation, whether it's other things. So there are some auto-correcting elements of the expense base that would happen automatically as part of the normal discipline. So that's point one. Point two is that, independently of the environment, we are always looking for efficiencies. And it's a little bit hard to see it. And in our world, where we're guiding to, I guess now with the special assessment added, $91 billion of expenses, it's hard to tell a story about all the efficiencies that are being generated underneath. But that is part of the DNA in the company. That does happen in BAU all the time as we grind things out, get the benefits of scale and try to extract that efficiency. And I think, to get to the heart of your question, which is, OK, in what type of environment would we make different strategic questions? And in the end, I think that's a little bit about what that environment is really like. So if you talk about like a normal recession with visibility on the cycle, would we change our long-term strategic investment plans, which are always built up from a financial modeling perspective, assuming resilience through the cycle? No, we wouldn't. Could there be some environments that, for whatever reason, change the business case for certain investments or even certain businesses that lead us to make meaningfully different strategic choices? Yes, but that would be because the through-the-cycle analysis has changed for some reason. I just don't see us fundamentally making strategically different decisions if the strategic outlook is unchanged, simply because of the business cycle in the short term. Glenn Schorr -- Evercore ISI -- Analyst Awesome. Thank you. Jeremy Barnum -- Chief Financial Officer Thanks. Operator Thank you. Our next question comes from Matt O'Connor with Deutsche Bank. You may proceed. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. You mentioned one use of capital is to lean into the trading businesses with your balance sheet. And we did see the trading assets going up Q2, which is probably seasonal, but also up a lot year over year, but not necessarily translate into higher revenues. And I know they don't like match up necessarily each quarter. But maybe just elaborate like how you're leaning into the trading with the balance sheet and how you expect that to benefit you over time. Jeremy Barnum -- Chief Financial Officer Yes, sure. So let me break this question down into a couple of different parts. So I think what Jamie was sort of suggesting is that you can think of a concept that's kind of like strategic capital versus tactical capital, for lack of a better term. And what he's kind of saying is that, in a moment where you're carrying a lot of excess capital sort of for strategic reasons, you have the ability, at least in theory, to deploy portions of that with kind of like -- into relatively short-duration assets or strategies or client opportunities in whatever moment for whatever reason in what might be thought of as a tactical sense. So he's just pointing out that, that's an option that you have. And the extent to which this quarter's increase in Markets RWA is a reflection of that, maybe a little bit, but probably not. I agree with you that it's hard in any given quarter to specifically link the change in capital and RWA to a change in revenue. There's just too many moving parts there. But for sure, one thing that's true is that higher run rate of the Markets businesses as a whole that we talked about a second ago is linked also to a higher deployment of balance sheet into those businesses. So as you well know, we pride ourselves on being extremely analytical and extremely disciplined in how we analyze capital liquidity, balance sheet deployment, G-SIB capacity utilization, etc., in the Markets business. And we don't just chase revenue. We go after returns fully measured. And that's part of the DNA, and we continue to do it, and we will. So we still are operating under multiple binding constraints, and obviously, the environment is complex. So the ability to sort of throw a ton of capital at opportunities is not quite that simple always. But big picture, we are clearly in a very, very strong capital position, which is in no small part in anticipation of all of the uncertainty. But it does also mean that, if opportunities arise between now and when the Basel III endgame is final, we are very well-positioned to take advantage of those opportunities. Matt O'Connor -- Deutsche Bank -- Analyst Got it. And then just separately, within the consumer card businesses, you highlighted volumes are up 9% year over year. Obviously, still a very strong piece. Any trends within that, that are worth noting in terms of changes in spend category -- either overall or among certain segments? Jeremy Barnum -- Chief Financial Officer Maybe a little bit. Jamie already alluded somewhat to this. So I do think spend is fine but not boomy, broadly speaking, I would say. You can look at it a lot of different ways, inflation cohorts, etc. But when you kind of triangulate that, you get back to this kind of flattish picture. There is a little bit of evidence of substituting out of discretionary into nondiscretionary. And I think the single most notable thing is just this effect where in the -- while it is true that real incomes have gone up in the lowest-income cohorts, within that, there's obviously a probability of distribution, and there's some -- or rather just a distribution of outcomes. And there are some such people whose real incomes are not up, they're down, and who are therefore struggling a little bit, unfortunately. And what you observe in the spending patterns of those people is some meaningful slowing rather than what you might have feared, which is sort of aggressive levering up. So I think that's maybe an economic indicator of sorts, although this portion of the population is small enough that I'm not sure the read-across is that big. But it is encouraging from a credit perspective because it just means that people are behaving kind of rationally and in a sort of normal post-pandemic type of way as they manage their own balance sheets. And that's sort of at the margin good news from a credit perspective. Matt O'Connor -- Deutsche Bank -- Analyst OK. That's helpful. Thank you very much. Operator Thank you. Our next question comes from Gerard Cassidy with RBC Capital Markets. You may proceed. Gerard Cassidy -- RBC Capital Markets -- Analyst Hi, Jeremy. Jeremy Barnum -- Chief Financial Officer Hey, Gerard. How are you doing? Gerard Cassidy -- RBC Capital Markets -- Analyst Good. Thanks. Notwithstanding your guys' outlook for uncertainty, and of course, Jamie talked about it in the shareholder letter and addressed it also on this call when he was here earlier. Can you guys share -- or can you share with us the color on what's going on in the corporate lending market in terms of spreads seem to be getting tighter? It's not reflecting, I don't think, a real fear out there in the global geopolitical world. And any color just on what you guys are seeing in the leveraged loan market as well. Jeremy Barnum -- Chief Financial Officer Right. So I think what's true about spreads in general, just broadly credit spreads, including secondary markets, and to some extent the leverage lending space, is that they're exceptionally tight. So I'm sure that's reversed a little bit in the last few days. But broadly throughout the quarter, we've really seen credit spreads tighten quite a bit. You even see that a little bit in our OCI this quarter, where losses in OCI that we would have had from higher rates have been meaningfully offset by tighter credit spreads in the portfolio. So broadly sort of in keeping with the big run-up that we saw in equity markets and the general sort of bullish tone, you saw quite a bit of credit spread tightening that -- in secondary markets. That, I think, has manifested itself a little bit in the leveraged lending space in the normal way that it does in that there's a lot of competition among providers for the revenue pool. And you start to see a little bit of loosening of terms, which always makes us a little bit concerned. And as we have in the past, we are going to be very well prepared to lose share in that space if we don't like the terms. We never compromise on structure there. So you are seeing a little bit of that. I think that away from the leveraged lending space, in the broader C&I space, there was a moment a few months ago where I think in no small part as a result of banks generally anticipating this more challenging capital environment and sort of disciplining a little bit their lending, we were seeing a little bit of widening actually in those corporate lending spreads. I don't know if that trend has like survived the last few weeks, and it's always a little bit hard to observe in any case. But I would say broadly the dynamics or the tension between people trying to be careful with their balance sheets and the fact that overall asset prices and conditions are quite supportive, and secondary market credit spreads have rallied a lot. Gerard Cassidy -- RBC Capital Markets -- Analyst And I guess as a tie-in to that question and answer. We've read and seen so much about the private credit growth in this country by private credit companies. Can you give us some color on what you're seeing there as both as a competitor but also as a client of JPMorgan, how you balance the two out? Where you may see them bidding on business that you'd like, but at the same time, you're supporting their business. Jeremy Barnum -- Chief Financial Officer Right. Yes. I mean, I think that tension between us as a provider of secured financing to some portions of the private credit, private equity community, now you're talking about different parts of the capital structure. But we do recognize that, that we compete in some areas and we are clients of each other in other areas. And that's part of the franchise, and it's all good at some level. But narrowly on private credit, it is interesting to observe what's going on there. So I would say for us, the strategy there is very much to be product-agnostic, actually. It's not so much like, oh, is it private credit or is it syndicated lending? What does it take to be good at this stuff? And what it takes is stuff that we have and have always had and that we're very good at in each individual silos. So you have -- you need underwriting skills, structuring skill, origination, distribution, secondary trading, risk appetite, credit analysis capabilities. And this is what we do, and we're really good at it. And increasingly, what you see actually is that as you see us doing a little bit, as the private credit space gets bigger, it starts to make sense to actually bring in some co-lenders so that you can sort of do big enough deals without having undue concentration risks. I mean, even if you have the capital, you just may not want the concentration risk. And so in a funny way, the private credit space becomes a little bit more like the syndicated lending space. At the same time, the syndicated lending space, being influenced a little bit by these private credit unitranche structures, gets pushed a little bit in the private credit direction in terms of like speed of execution, other aspects of how that business works. So we're watching it. The competitive dynamics are interesting. Certainly, there's some pressure in some areas. But we really do think that our overall value proposition and competitive position here is second to none. And so we're looking forward to the future here. Gerard Cassidy -- RBC Capital Markets -- Analyst Appreciate the color. Thank you. Operator Thank you. Our last question comes from Charles Peabody with Portales. Your line is open. Charles Peabody -- Portales Partners -- Analyst Good morning. A couple of questions on the First Republic acquisition. Some of us obviously thought that would be a home run, and I'm glad to see that Jamie Dimon validated that in his annual letter. When you look at the first quarter, it annualizes out to $2.7 billion, $2.8 billion, above the $2 billion that Jamie published in the letter. Now I know you don't want to extrapolate that. But can you remind us what sort of cost savings you still have in that? Because this quarter did see expenses come down to $800 million, down from $900 million. And then secondly, is there an offset to that where the accretion becomes less and less, and that's why you don't want to extrapolate the $2.7 billion, $2.8 billion? So that's my first question. Jeremy Barnum -- Chief Financial Officer OK. Thanks, Charlie. And I'm going to do my best to answer your question while sticking to my sort of guns on not giving too much First Republic-specific guidance. But I do think that kind of framework you're articulating is broadly correct. So let me go through the pieces. So yes, the current quarter's results annualize to more than the $2 billion Jamie talked about. Yes, a big part of that reason is discount accretion, which was very front-loaded as a result of short-dated assets. So that's part of the reason that you see that converge. Yes, it's also true that we expect the expense run rate to decline later in the year as we continue making progress on integration. Obviously, as I think as I mentioned to you last quarter, from a full-year perspective, you just have the offset of the full year calendarization effect. There was maybe an embedded question then there, too, about we had talked about $2.5 billion of integration expense. And the integration is real, the expenses are real, and also the time spent on that is quite real. It's a lot of work for a lot of people. It's going well, but we're not done yet, and it takes a lot of effort. But broadly, I think that our expectation for integration expense are probably coming in a bit lower than we originally assumed on the morning of the deal for a couple of reasons. One is that the framework around the time was understandably quite conservative and sort of assumed that we would kind of lose a meaningful portion of the franchise and would sort of need to size the expense base accordingly. And of course, it's worked out, to your point, quite a bit better than that. And therefore, the amount of expenses that is necessary to keep this bigger franchise is higher. And that means less integration expense associated with taking down those numbers. It's probably also true that the integration assumptions were conservative. They were based on kind of more typical type of bank M&A assumptions as opposed to the particular nature of this deal, including the FDIC and so on and so forth. So yes, I think that probably is a pretty complete answer to your question. Thanks, Charlie. Charles Peabody -- Portales Partners -- Analyst As a quick follow-up, where are the next home runs going to come from? And this is more strategic beyond just JPMorgan. But there's probably going to be more regional bank failures, whether it's this year or next year, and opportunities to pick those up. But what you're seeing is that private equity and family offices are setting up to participate in this next round of bank failures. Mnuchin's buying of NYCB is clearly to create a platform for roll-ups of failed banks. And then there are other family offices that have filed shelf registrations for bank holding companies whose specific purpose is to buy failed banks. So where -- do you think that these opportunities are going to be competed away by private credit? And as part of that, do you think the regulators are going to view private credit as a different party and less attractive party versus bank takeovers of failed banks? So that's my question. Jeremy Barnum -- Chief Financial Officer Right. OK, Charlie, there's a lot in there. And to be honest, I just don't love the idea of spending a lot of time on this call speculating about bank failures. Like you obviously have a particular view about the next wave in the landscape. I'm not going to bother debating that with you. But I guess let me just try to say a couple of things, doing my best to answer your question. Like as we talked about earlier, we have a lot of capital. And as Jamie says, the capital is earnings in store. And right now, we don't see a lot of really compelling opportunities to deploy the capital. But if opportunities arise, despite the uncertainty about the Basel III endgame, we will be well-positioned to deploy it. I think embedded there is also sort of a question about the FDIC and the FDIC's attitude toward different types of bidders. And obviously, there's a lot of thinking and analysis happening about the entire process and some recent forums and speeches on bank resolution and so on and so forth. And I think probably we can all agree that it's better, all else equal, for the system to have as much capital available and as many different types of capital available to ensure that things are stabilized if anything ever goes wrong. But the mechanics of how you do that when you're talking about banks are not trivial and not to be underestimated. So I guess that's probably as much as I have on that. Charles Peabody -- Portales Partners -- Analyst Thank you. Operator We have no further questions at this time. Jeremy Barnum -- Chief Financial Officer Thank you, everyone. Answer:

JPMorgan Chase's first-quarter 2024 earnings call

Operator Good morning, ladies and gentlemen. Welcome to JPMorgan Chase's first-quarter 2024 earnings call. This call is being recorded. [Operator instructions] We will now go live to the presentation. Please stand by. At this time, I would like to turn the call over to JPMorgan Chase's chairman and CEO, Jamie Dimon; and chief financial officer, Jeremy Barnum. Mr. Barnum, please go ahead. Jeremy Barnum -- Chief Financial Officer Thank you very much, and good morning, everyone. The presentation is available on our website, and please refer to the disclaimer in the back. Starting on Page 1. The firm reported net income of $13.4 billion, EPS of $4.44 on revenue of $42.5 billion, and delivered an ROTCE of 21%. These results included a $725 million increase to the special assessment resulting from the FDIC's updated estimate of expected losses from the closures of Silicon Valley Bank and Signature Bank. Touching on a couple of highlights. Firmwide IB fees were up 18% year on year, reflecting particular strength in underwriting fees. And we have seen strong net inflows across AWM as well as in the CCB and Wealth Management business. On Page 2, we have some more detail. This is the last quarter we'll discuss results excluding First Republic, given that going forward, First Republic results will naturally be included in the prior period, making year-on-year results comparable. For this quarter, First Republic contributed $1.7 billion of revenue, $806 million of expense, and $668 million of net income. Now focusing on the firmwide results excluding First Republic. Revenue of $40.9 billion was up $1.5 billion or 4% year on year. NII ex Markets was up $736 million or 4% driven by the impact of balance sheet mix and higher rates as well as higher revolving balances in card, largely offset by deposit margin compression and lower deposit balances in CCB. NIR ex Markets was up $1.2 billion or 12% driven by higher firmwide asset management and Investment Banking fees as well as lower net investment securities losses. And Markets revenue was down $400 million or 5% year on year. Expenses of $22 billion were up $1.8 billion or 9% year on year driven by higher compensation, including growth in employees and the increase to the FDIC special assessment. And credit costs were $1.9 billion, reflecting net charge-offs of $2 billion and a net reserve release of $38 million. Net charge-offs were up $116 million predominantly driven by Card. On to balance sheet and capital on Page 3. We ended the quarter with a CET1 ratio of 15%, relatively flat versus the prior quarter, reflecting net income which was predominantly offset by higher RWA and capital distribution. This quarter's higher RWA is largely due to seasonal effects, including higher client activity in Markets and higher risk weights on deferred tax assets, partially offset by lower Card loans. Now let's go to our businesses, starting with CCB on Page 4. Consumers remain financially healthy, supported by a resilient labor market. While cash buffers have largely normalized, balances were still above pre-pandemic levels, and wages are keeping pace with inflation. When looking at a stable cohort of customers, overall spend is in line with the prior year. Turning now to the financial results excluding First Republic. CCB reported net income of $4.4 billion on revenue of $16.6 billion, which was up 1% year on year. In Banking & Wealth Management, revenue was down 4% year on year, reflecting lower NII on lower deposits with average balances down 7% as our CD mix increased. Client investment assets were up 25% year on year driven by market performance and strong net inflows. In Home Lending, revenue was up 10% year on year, predominantly driven by higher NII and production revenue. Originations, while still modest, were up 10%. Moving to Card Services & Auto. Revenue was up 8% year on year driven by higher Card Services NII on higher revolving balances, partially offset by higher card acquisition costs from new account growth and lower auto lease income. Card outstandings were up 13% due to strong account acquisition and the continued normalization of revolve. And in auto, originations were $8.9 billion, down 3%, while we maintained healthy margins and market share. Expenses of $8.8 billion were up 9% year on year, largely driven by field compensation and continued growth in technology and marketing. In terms of credit performance this quarter, credit costs were $1.9 billion, driven by net charge-offs, which were up $825 million year on year predominantly due to continued normalization in Card. The net reserve build was $45 million, reflecting the build in Card largely offset by a release in Home Lending. Next, the Corporate & Investment Bank on Page 5. Before reporting CIB's results, I want to note that this will also be the last quarter we will be -- we will report earnings for the CIB and CB as stand-alone segments. Between now and Investor Day, we will furnish an 8-K with historical results, including five quarters and two full years of history consistent with the structure of the new Commercial and Investment Bank segment, in line with the reorganization that was announced in January. Turning back to this quarter. CIB reported net income of $4.8 billion on revenue of $13.6 billion. Investment Banking revenue of $2 billion was up 27% year on year. IB fees were up 21% year on year, and we ranked No. 1 with year-to-date wallet share of 9.1%. In Advisory, fees were down 21% driven by fewer large completed deals. Underwriting fees were up significantly, benefiting from improved market conditions with debt up 58% and equity up 51%. In terms of the outlook. While we are encouraged by the level of capital markets activity we saw this quarter, we need to be mindful that some meaningful portion of that is likely pulling forward from later in the year. Similarly, while it was encouraging to see some positive momentum in announced M&A in the quarter, it remains to be seen whether that will continue, and the Advisory business still faces structural headwinds from the regulatory environment. Payments revenue was $2.4 billion, down 1% year on year, as deposit margin normalization and deposit-related client credits were largely offset by higher fee-based revenue and deposit balances. Moving to Markets. Total revenue was $8 billion, down 5% year on year. Fixed income was down 7% driven by lower activity in rates and commodities compared to a strong prior-year quarter, partially offset by strong results in Securitized Products. Equity Markets was flat. Securities Services revenue of $1.2 billion was up 3% year on year. Expenses of $7.2 billion were down 4% year on year predominantly driven by lower legal expense. Moving to the Commercial Bank on Page 6. Commercial Banking reported net income of $1.6 billion. Revenue of $3.6 billion was up 3% year on year driven by higher noninterest revenue. Gross Investment Banking and Markets revenue of $913 million was up 4% year on year with increased IB fees, largely offset by lower Markets revenue compared to a strong prior-year quarter. Payments revenue of $1.9 billion was down 2% year on year driven by lower deposit margins and balances, largely offset by fee growth, net of higher deposit-related client credits. Expenses of $1.5 billion were up 13% year on year predominantly driven by higher compensation, reflecting an increase in employees, including for office and technology investments, as well as higher volume-related expenses. Average deposits were down 3% year on year, primarily driven by lower nonoperating deposits and down 1% quarter on quarter, reflecting seasonally lower balances. Loans were flat quarter on quarter. C&I loans were down 1%, reflecting muted demand for new loans as clients remain cautious. And CRE loans were flat as higher rates continue to have an impact on originations and sales activity. Finally, credit costs were a net benefit of $35 million, including a net reserve release of $101 million and net charge-offs of $66 million. Then to complete our lines of business, AWM on Page 7. Asset & Wealth Management reported net income of $1 billion with pre-tax margin of 28%. Revenue of $4.7 billion was down 1% year on year. Excluding net investment valuation gains in the prior year, revenue was up 5% driven by higher management fees on strong net inflows and higher average market levels, partially offset by lower NII due to deposit margin compression. Expenses of $3.4 billion were up 11% year on year largely driven by higher compensation, including revenue-related compensation; continued growth in our private banking advisor teams; and the impact of the JPMorgan Asset Management China acquisition; as well as higher distribution fees. For the quarter, long-term net inflows were $34 billion, led by equities and fixed income. AUM of $3.6 trillion was up 19% year on year. And client assets of $5.2 trillion were up 20% year on year driven by higher market levels and continued net inflow. And finally, loans were down 1% quarter on quarter and deposits were flat. Turning to Corporate on Page 8. Corporate reported net income of $918 million. Revenue was $2.3 billion, up $1.3 billion year on year. NII was $2.5 billion, up $737 million year on year driven by the impact of the balance sheet mix and higher rates. NIR was a net loss of $188 million. The current quarter included net investment securities losses of $366 million, compared with net securities losses of $868 million in the prior year quarter. Expenses of $1 billion were up $889 million year on year predominantly driven by the increase to the FDIC special assessment. To finish up, we have the outlook on Page 9. We now expect NII ex Markets to be approximately $89 billion based on a forward curve that contained three rate cuts at quarter end. Our total NII guidance remains approximately $90 billion, which implies a decrease in our Markets NII guidance from around $2 billion to around $1 billion. The primary driver of that reduction is balance sheet growth and mix shift in the Markets business. And as a reminder, changes in Markets NII are generally revenue-neutral. Our outlook for adjusted expense is now about $91 billion, reflecting the increase to the FDIC special assessment I mentioned upfront. And on credit, we continue to expect the 2024 Card net charge-off rate to be below 3.5%. Finally, you may have noticed that our effective tax rate has increased this quarter, and it will likely stay around 23% this year, absent discrete items, which can vary quite a bit. The driver of this change is the firm's adoption of the proportional amortization method for certain tax equity investments. Our managed rate is unchanged, and it should average about 3.5% above the effective tax rate. This is a smaller gap than we've previously observed, and we expect this approximate relationship to persist going forward, although the difference will continue to fluctuate as it has in the past. For the avoidance of doubt, these changes have no meaningful impact on expected annual net income. We're just mentioning this to help with your models. So to wrap up. We're pleased with another quarter of strong operating results even as the journey toward NII normalization begins. While we remain confident in our ability to produce strong returns and manage risk across a range of scenarios, the economic, geopolitical, and regulatory uncertainties that we have been talking about for some time remain prominent, and we are focused on being prepared to navigate those challenges as well as any others that may come our way. And with that, let's open up the line for Q&A. Questions & Answers: Operator The first question is coming from the line of Betsy Graseck from Morgan Stanley. You may proceed. Betsy Graseck -- Morgan Stanley -- Analyst Hi. Good morning. Jamie Dimon -- Chairman and Chief Executive Officer Good morning. Betsy Graseck -- Morgan Stanley -- Analyst So a couple of questions here. Just one, Jamie, could you talk through the decision to raise the dividend kind of mid-cycle, it felt like, pre-CCAR? And also help us understand how you're thinking about where that payout ratio, that dividend payout ratio range should be. Because over the past several years, it's been somewhere between 24% and 32%. And so is this suggesting we could be toward the higher end of that range or even expanding above that? And then I also just wanted to understand the buyback and the keeping of the CET1 at 15% here. The minimum is 11.9%. I know it's -- we have to wait for Basel III endgame reproposal to come through and all that. But are we -- should we be expecting that, hey, we're going to hold 15% CET1 until we know all these rules? Jamie Dimon -- Chairman and Chief Executive Officer Yes. So, Betsy, before I answer the question, I want to say something on behalf of all of us at JPMorgan and me personally. I'm thrilled to have you on this call. For those who don't know, Betsy has been through a terrible medical episode. And to remind all of us how lucky we are to be here, but Betsy in particular, the amount of respect we have, not just in your work, but in your character over the last 20-plus years have been exceptional. So on behalf of all of us, I just want to welcome you back. I'm thrilled to have you here. And so you're asking a pertinent question. So we're earning a lot of money. Our capital cup runneth over, and that's why we increased the dividend. And if you ask me what we'd like to do is to pay out something like 1/3 of normalized earnings. Of course, it's hard to calculate always what normalized earnings are, but we don't mind being a little bit ahead of that sometimes, a little bit behind that sometimes. If I could give people kind of consistent dividend guidance, etc. I think the far more important question is the 15%. So look at the 15%, I'm going to oversimplify it. That basically will prepare us for the total Basel endgame today roughly. The specifics don't matter that much. Remember, we can do a lot of things to change that in the short run or the long run. But -- and it looks like Basel III endgame may not be the worst case, it will be something less than that. So obviously, when and if that happens, it would free up a lot of capital, and I'm going to say on the order of $20 billion or something like that. And yes, we're -- we've always had the capital hierarchy the same way, which is we're going to use capital to build our business first. And we pay the dividend, the steady dividend. Build the business. And if we think it's appropriate, to buy back stock. We're continuing to buy back stock at $2 billion a year. I personally do not want to buy back a lot more than that at these current prices. I think you've all heard me talk about the world and things like that. So waiting in preparation for Basel. Hopefully, we'll know something later, and then we can be much more specific with you all. But in the meantime, there's also -- it's very important to put in mind, there are short-term uses for capital that are good for shareholders that could reduce our CET1, too. So you may see us do things in the short run that will increase earnings, increase capital -- that are using up that capital. Jeremy mentioned on the -- on one of the things that we know, the balance sheet and how we use the balance sheet for credit and trading, we could do things now. So it's a great position to be in. We're going to be very, very patient. I urge all the analysts to keep in mind, excess capital is not wasted capital, it's earnings in store. We will deploy it in a very good way for our shareholders in due course. Jeremy Barnum -- Chief Financial Officer Betsy, I just wanted to add my welcome back thoughts as well. And just a very minor edit to Jamie's answer. I think he just misspoke when he said $2 billion a year in buybacks, the trajectory. It's $2 billion a quarter. Jamie Dimon -- Chairman and Chief Executive Officer I'm sorry, $2 billion a quarter. Jeremy Barnum -- Chief Financial Officer Otherwise, I have nothing to add to Jamie's very complete answer. But welcome back, Betsy. Betsy Graseck -- Morgan Stanley -- Analyst OK. Thank you so much, and I appreciate it. Looking forward to seeing you at Investor Day on May 20. Jeremy Barnum -- Chief Financial Officer Excellent. Us too. Operator Thank you. Our next question comes from Jim Mitchell with Seaport Global. You may proceed. Jim Mitchell -- Seaport Global Securities -- Analyst Hey. Good morning. Jeremy, can you speak to the trends you're seeing with respect to deposit migration in the quarter, if there's been any change? Have you seen that migration start to slow or not? Jeremy Barnum -- Chief Financial Officer Yeah. A good question, Jim. I think the simplest and best answer to that is not really. So as we've been saying for a while, migration from checking and savings to CDs is sort of the dominant trend that is driving the increase in weighted average rate paid in the consumer deposit franchise. That continues. We continue to capture that money in motion at a very high rate. So we're very happy about what that means about the consumer franchise and the level of engagement that we're seeing. I'm aware that there's a little bit of a narrative out there about are we seeing the end of what people sometimes refer to as cash-sorting? We've looked at that data. We see some evidence that maybe it's slowing a little bit. We're quite cautious on that. We really sort of don't think it makes sense to assume they're in a world where checking and savings is paying effectively zero and the policy rate is above 5%, that you're not going to see ongoing migration. And frankly, we expect to see that even in a world where -- even if the current yield curve environment were to change and meaningful cuts were to get reintroduced and we would actually start to see those, we would still expect to see ongoing migration and yield-seeking behavior. So it's quite conceivable. And this is actually on the yield curve that we had in the fourth quarter that had six cuts in it, we were still nonetheless expecting an increase in weighted average rate paid as that migration continues. So I would say no meaningful change in the trends, and the expectation for ongoing migration is very much still there. Jim Mitchell -- Seaport Global Securities -- Analyst OK. And just a follow-up on that and just sort of bigger picture on NII. Is that sort of the biggest driver of your outlook? Is it migration? Is it the forward curve? Is it balances? It sounds like it's migration, but just be curious to hear your thoughts on the biggest drivers of upside or downside. Jeremy Barnum -- Chief Financial Officer Yes. So I mean, I think the drivers of, let's say, what's embedded in the current guidance is actually not meaningfully different from what it was in the fourth quarter, meaning it's the current yield curve, which is a little bit stale now, but the snap from quarter end had roughly three cuts in it. So it's the current yield curve. It's what I just said, the expectation of ongoing internal migration. There is some meaningful offset from card revolve growth, which, while it's a little bit less than it was in prior years, is still a tailwind there. We expect deposit balances to be sort of flat to modestly down. So that's a little bit of a headwind at the margin. And then there's obviously the wildcard of potential product-level reprice, which we always say we're going to make those decisions situationally as a function of competitive conditions in the marketplace. And you know this, obviously. But in a world where we've got something like $900 billion of deposits paying effectively zero, relatively small changes in the product-level reprice can change the NII run rate by a lot. So the error bands here are pretty wide. And we're always going to stick with our mantra, which has been not losing primary bank relationships and thinking about the long-term health of the franchise when we think about deposit pricing. Jim Mitchell -- Seaport Global Securities -- Analyst Right. OK. Great. Thanks for the color. Thanks. Operator Thank you. Our next question comes from John McDonald with Autonomous Research. You may proceed. John McDonald -- Autonomous Research -- Analyst Thanks. Jeremy, you had mentioned at a conference earlier this year that The Street might need to build in more reserve growth for the Card growth. You've had more reserve build. We didn't see that this quarter. Is that just kind of seasonal? And would you still expect the kind of growth math to play out in terms of Card growth and reserve build needs? Jeremy Barnum -- Chief Financial Officer Yes, John. So in short, yes to both questions. So yes, the relative lack of build this quarter is a function of the normal seasonal patterns of Card. Yes, we still expect 12% card loan growth for the full year. And yes, that still means that all else equal, we think the consensus for the allowance build for the back three quarters is still a little too low if you map it to that expected card loan growth. Obviously, there's the wildcard of what happens with our probabilities and our parameters and the output of our internal process of assessing the SKU and the CECL distribution and so on. And we're not speaking to that one way or the other. So if you guys have your own opinions about that, that's fine. But we're narrowly just saying that, based on the card loan growth, that we expect and normal coverage ratios for that, we do expect build in the back half of the year. John McDonald -- Autonomous Research -- Analyst OK. Got it. And then just a follow-up to make it super clear on the idea of the Markets NII, that outlook being revised down by $1 billion, but revenue-neutral. I guess the obvious thing is there, there's typically an offset in fee income, and you don't guide to that. But the idea would be, the way you're structuring trades, the way the balance sheet is evolving, there's some offset that you'd expect in Markets fees from the lower Markets NII, correct? Jeremy Barnum -- Chief Financial Officer That is exactly right. And specifically, what's going on here is this shift between the on-balance sheet and off-balance sheet in the financing businesses and prime and so on within Markets. And you can actually see a little bit of a pop of the Markets balance sheet in the supplement, and these things are all related. So fundamentally, you can think of it as like we either hold equities on the balance sheet, non-interest bearing, high funding expense, negative for NII; or we receive that in total return form through derivatives, exactly the same economics, no impact on NII. So that shifts as a function of the sort of borrower relationships in the marketplace in ways that are bottom line effectively neutral. It's second order effects, but they change the geography quite a bit, and that's what happened this quarter. And that's why we've been emphasizing for some time that the NII ex Markets is the better number to focus on in terms of an indicator of how the core banking franchise is performing. John McDonald -- Autonomous Research -- Analyst Thank you. Operator Thank you. Our next question comes from Ebrahim Poonawala with Bank of America. You may proceed. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Hey. Good morning. I guess just in terms of, Jamie, when you think about the outlook for the economy, would appreciate your thoughts on the health of the customer base, both commercial and consumer. And when we think about higher for longer, maybe the economy is too strong so don't get any rate cuts. Are you seeing that when you talk to your customers and the feedback you're getting from your bankers, where the momentum is picking up? And I appreciate all the macro risks Jamie's pointed out, but I'm just getting -- trying to get to a sense of what your view is in terms of the most likely outcome based on what you're seeing today from the customers. Jamie Dimon -- Chairman and Chief Executive Officer So I would say consumer customers are fine. The unemployment is very low. Home price dropped, stock price dropped. The amount of income they need to service their debt is still kind of low. But the extra money of the lower-income folks is running out -- not running out, but normalizing. And you see credit normalizing a little bit. And of course, higher-income folks still have more money. They're still spending it. So whatever happens, the customer's in pretty good shape. And they're -- if you go into a recession, they'd be in pretty good shape. Businesses are in good shape. If you look at it today, their confidence is up, their order books drop, their profits are up. But what I caution people, these are all the same results of a lot of fiscal spending, a lot of QE, etc. And so we don't really know what's going to happen. And I also want to look at the year, look at two years or three years, all the geopolitical effects and oil and gas and how much fiscal spending will actually take place, our elections, etc. So we're in good -- we're OK right now. It does not mean we're OK down the road. And if you look at any inflection point, being OK in the current time is always true. That was true in '72, it was true in any time you've had it. So I'm just on the more cautious side that how people feel, the confidence levels and all that, that doesn't necessarily stop you from having an inflection point. And so everything is OK today, but you've got to be prepared for a range of outcomes, which we are. And the other thing I want to point out because all of these questions about interest rates and yield curves and NII and credit losses, one thing you projected today based on what -- not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed. But these numbers have always been wrong. You have to ask the question, what if other things happen? Like higher rates with this modest recession, etc., then all these numbers change. I just don't think any of us should be surprised if and when that happens. And I just think the chance of that happen is higher than other people. I don't know the outcome. We don't want to guess the outcome. I've never seen anyone actually positively predict a big inflection point in the economy literally in my life or in history. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst That's helpful. And just tied to that, as we look at commercial real estate, both for JP and for the economy overall, is higher rates alone enough to create more vulnerabilities and issues beyond office CRE? How would you characterize the health of the CRE market? Jamie Dimon -- Chairman and Chief Executive Officer Yes. So I'll put it into two buckets. First of all, we're fine. We've got good reserves against office. We think the multifamily is fine. Jeremy can give you more detail on that if you want. But if you think of real estate, there's two pieces. If rates go up, think of the yield curve, the whole yield curve, not Fed funds, but the 10-year bond rate, it goes up 2%. All assets, all assets, every asset on the planet, including real estate, is worth 20% less. Well obviously, that creates a little bit of stress and strain, and people have to roll those over and finance it more. But it's not just true for real estate, it's true for everybody. And that happens, leveraged loans, real estate will have some effect. The second thing is the why does that happen? If that happens because we have a strong economy, well, that's not so bad for real estate because people will be hiring and filling things out. And other financial assets. If that happens because we have stagflation, well, that's the worst case. All of a sudden, you are going to have more vacancies. You are going to have more companies cutting back. You are going to have less leases. It will affect -- including multifamily, that will filter through the whole economy in a way that people haven't really experienced since 2010. So I'd just put in the back of your mind, the why is important, the interest rates are important, the recession is important. If things stay where they are today, we have kind of the soft landing that seems to be embedded in the marketplace, everyone -- the real estate will muddle through. Obviously, it'd be idiosyncratic if you're in different cities and different types and B versus A buildings and all that, but people will muddle through. They won't muddle through under higher rates with the recession. That would be tougher on a lot of folks, and not just real estate, if in fact that happens. Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst Helpful. Thank you so much. Operator Thank you. Our next question comes from Erika Najarian with UBS. You may proceed. Erika Najarian -- UBS -- Analyst Hi. Good morning. Given that your response to Betsy's question is that 15% CET1 today prepares you for Basel III endgame as written. You earn 22% on -- without the FDIC assessment. Ahead of Investor Day, I guess, six weeks from now or five weeks from now, as we think about that 17% through-the-cycle target, if you're at the right capital level per you guys, where are you overearning today? Jeremy Barnum -- Chief Financial Officer Right. So interesting framing of the question, Erika. So I think we've been pretty consistent about where we're overearning, right? So obviously, one major area is that we're overearning in deposit margins, especially in consumer. And that's sort of why we're expecting sequential declines in NII, why we've talked about compressing deposit margins and increases in weighted average rate paid. So I think that's probably the single biggest source of, let's call it, excess earnings currently. You also heard Jamie say that we're overearning in credit. I mean, wholesale charge-offs have been particularly low, but we have built for that. So in the current run rate, a bit less clear, the extent of what we're earning. And in Card, of course, while charge-offs are now close to normalized, essentially, we did go through an extended period of charge-offs being very low by historical standards, although that was coupled with NII also being low by historical standards. So from a bottom-line perspective, it's not entirely clear what the net of that was. But broadly, it's really deposit margin that's the biggest single factor in the overearning narrative. Embedded in your question, I think, is a little bit of the what are you thinking about the 17% CET1 in light of the current level of capital and so on. And you did talk about Investor Day. I was hoping that we would have interesting things to say about that at Investor Day in light of potential updates of the Basel III endgame, given that the single most important factor for that 17% is how much denominator expansion do we see through the Basel III endgame. At the rate we're going, we won't actually know that much more about that by Investor Day. So we might not have that much more to say, except to reiterate what I've said in the past, which is that whatever it is, it's going to be very good, our returns in absolute terms, very good in relative terms. We will optimize. We will seek to reprice. We will adjust in various ways as to the best of our ability. But given the structure of the rule, as proposed at least, there -- a lot of this cannot be optimized away. And so in the base case, you have to think of it as a headwind. Erika Najarian -- UBS -- Analyst Got it. And just as a follow-up question. You mentioned that the current curve that you set your NII outlook upon is stale. I guess, does it matter? That it seems like the market down-pricing; and obviously no June cut; no September cut; and a toss-up in December, which shouldn't matter for this year. As we think about that $90 billion, does the -- if we price rate cuts out totally, does that matter much? Given that it seems like June is the only one that... Jeremy Barnum -- Chief Financial Officer Yes. Sorry, Erika. So just quick things on this. One, let's focus on NII ex, not on total NII. So I'd anchor you to the $89 billion. Number two, if you want to do math for like the changes of the average funds rate for the rest of the year and multiply that times the EAR, like be my guest. Looks like as good as an approach as any. But I would just once again remind you, of the $900 billion of deposits paying practically 0, that very small changes there can make a big difference. And we've got other factors, we've got the impact of QT on deposit balances, etc., etc., etc. So we want to make sure that we don't get too precise here. We're giving you our best guess based on a series of assumptions. And it's going to be what it's going to be. Jamie Dimon -- Chairman and Chief Executive Officer Which we know are going to be wrong. Erika Najarian -- UBS -- Analyst Thanks. Operator Thank you. Our next question comes from Ken Usdin with Jefferies. You may proceed. Ken Usdin -- Jefferies -- Analyst Thanks. Good morning. Jeremy, I was wondering if you could expand a little bit on one of your prepared comments. When you talked about -- we will have hopes and expectations for the Investment Banking pipeline to continue to move along. We obviously saw the good movement in ECM and DCM and the lag in Advisory. Can you just talk about that? You mentioned like potential cautiousness around the election. Just what are you hearing from both the corporate side and the sponsor side with -- when it relates to M&A on like go, no-go type of feel and conversation levels? And then what are you thinking we need to have to kick start just another good level of IPO activity in the ECM markets? Jeremy Barnum -- Chief Financial Officer Sure. Yes. Let me take the IPO first. So we had been a little bit cautious there. Some cohorts and vintages of IPOs had performed somewhat disappointingly. And I think that narrative has changed to a meaningful degree this quarter. So I think we're seeing better IPO performance. Obviously, equity markets have been under a little bit of pressure the last few days. But in general, we have a lot of support there, and that always helps. Dialogue is quite good. A lot of interesting different types of conversations happening with global firms, multinationals, carve-out type things. So dialogue is good. Valuation environment is better, like sort of decent reasons for optimism there. But of course, with ECM, there's always a pipeline dynamic, and conditions were particularly good this quarter. And so we caution a little bit there about pull-forward, which is even more acute, I think, on the DCM side, given that quite a high percentage of the total amount of debt that needed to be refinanced this year has gotten done in the first quarter. So that's a factor. And then the question of M&A, I think, is probably the single most important question, not only because of its impact on M&A but also because of its knock-on impact on DCM through acquisition financing and so on. And there's the well-known kind of regulatory headwinds there, and that's definitely having a bit of a chilling effect. I don't know. I've heard some narratives that maybe there's like some pent-up deal demand. Who knows how important politics are in all this. So I don't know. We're fundamentally, as I said I think on the press call, happy to see momentum this quarter, happy to see momentum in announced M&A. Little bit cautious about the pull-forward dynamic, a little bit cautious about the regulatory headwinds. And in the end, we're just going to fight really hard for our share of the wallet here. Ken Usdin -- Jefferies -- Analyst Got it. And I guess I'll just stick on the theme of capital markets. And not surprising at all to see a little bit tougher comp in FICC. I think you guys have kind of indicated that maybe a flattish fee pool is a reasonable place, and I know that's impossible to guide on. But just maybe just talk through some of the dynamics in terms of activity across the fixed income and equities business. And do you feel like this is the type of environment where, given that lingering uncertainty about rates, clients are either more engaged or less engaged in terms of how they're positioning portfolios? Jeremy Barnum -- Chief Financial Officer Yes, a really good question. I would say, in general, that the sort of volatility and uncertainty in the rate environment overall on balance is actually supportive for the Markets revenue pool. And I think that, together with generally more balance sheet deployment as well as sort of some level of natural background growth, is one of the reasons that the overall level of Markets revenue has stabilized at meaningfully above what was normal in the pre-pandemic period. And while that does occasionally make us a little bit anxious like, oh, is this sustainable? Might there be downside here? For now, that does seem to be the new normal. And I do think that having rates off the lower zero bound and a sort of more normal dynamic in global rates, that not only affects the rates business, but it affects the foreign exchange business. It generally just makes asset allocation decisions more important and more interesting. And so all of that creates risk management needs, and active managers need to grapple with it and so on and so forth. So I think that those are some of the themes on the Markets side at the margin. And yes, we'll see how the rest of the year goes. But it sort of seems to be behaving relatively normally, I would say. Operator Thank you. Our next question comes from Mike Mayo with Wells Fargo. Mike Mayo -- Wells Fargo Securities -- Analyst Hi. Jamie, I'm just trying to reconcile some of your concerns in your CEO letter. I'm sure the 60 pages, I can see you put a lot of effort into that and it's appreciated. But you talked about scenarios, tail risk, macro risk, geopolitical risk and all that over several years, it's not weeks or months, I get it. On the other hand, the firm is investing so much more outside the U.S., whether it's commercial or some digital banking, Consumer or Wholesale Payments. So I'm just trying to reconcile kind of your actions with your words. And specifically, how is global Wholesale Payments going? You mentioned you're in 60 countries. You do business a lot more. How is that business in particular doing? Jeremy Barnum -- Chief Financial Officer Right, Mike. So I'm sorry to tell you that Jamie actually left us because he's at a leadership offsite. That's why he was here remote. So I think he left the call in my hands for better or for worse. So -- but let me try to address some of your points and without sort of speaking for Jamie here. I think that when we talk about the impact of the geopolitical uncertainty on the outlook, part of the point there is to note that the U.S. is not isolated from that, right? If we have global macroeconomic problems as a result of geopolitical situations, that's not only a problem outside the U.S. That affects the global economy and therefore the U.S. and therefore our corporate customers, etc., etc. So -- and in that context, keeping in mind what we always say, that we invest through the cycle, that we sort of go -- we don't go into countries and then leave countries, etc. Obviously, we adjust around the edges. We manage risks. We do make choices as a function of the overall geopolitical environment. But broadly, the notion that we would pull back meaningfully from one of the key competitive strengths that this company has always had, which is its sort of global character because of a particular moment geopolitically would just be inconsistent with how we've always operated. And in terms of the Wholesale Payments business, it's going great. It's -- we're taking share. There's been a lot of innovation there, a lot of investment in technology, a lot of connectivity to payment systems in different countries around the world. And yes, I'm sure we'll give you more color and other settings on that, but it's a good story. It's a nice thing to see. Mike Mayo -- Wells Fargo Securities -- Analyst Just as a follow-up to that, then. Why is it doing great in terms of Wholesale Payments, given such the dislocations in the world from wars to supply chain changes, everything else, why is Wholesale Payments doing great? Jeremy Barnum -- Chief Financial Officer Well, I think one of the things about payments businesses is that, in some sense, they're -- I mean, recession-proof is probably the wrong word. And in any case, we're not dealing with a recession, but we're talking fundamentally about moving money through pipes around the world. And that's a thing that people need to do more or less no matter what. So that's one piece. But I think the other piece is that our willingness to invest, which has always been a focus of yours, is one of the key things separating us in this business right now. And so we are seeing the benefits of that. Mike Mayo -- Wells Fargo Securities -- Analyst All right. Thank you. Jeremy Barnum -- Chief Financial Officer Thanks, Mike. Operator Thank you. Our next question comes from Glenn Schorr with Evercore. You may proceed. Glenn Schorr -- Evercore ISI -- Analyst Thank you. Your commentary with Ken's questions were great and clear on Investment Banking for the near term and this year. I have a bigger-picture question in terms of you're so good in spelling out where you're overearning. Do you feel like you're underearning on the Investment Banking side? And I just use some of your own numbers from the past of like, look, the market has added like $40 trillion of equity market cap and $40 trillion of fixed income market cap last 10 years, yes the wallet is like 20% plus below the 10-year average. So is that -- is there just a bigger upside, and it's just a matter of when, not if? Jeremy Barnum -- Chief Financial Officer Yes, Glenn, in short, yes. I mean, I think we're not shy about saying that we're underearning in Investment Banking now. Clearly, we're below cycle averages, as you point out. We've been talking about when do we get back to the pre-pandemic wallet. But as you know, at this point, it was like March 2020, right, it was the beginning of the pandemic. So it's like four years ago at this point. So there's been GDP growth, especially in nominal terms during that period, and you would expect the wallet to grow with that. So I do think there's meaningful upside in the Investment Banking fee wallet. As I've noted, there are some headwinds, I think, particularly in M&A. But over time, you would hope that the amount of M&A is a function of the underlying industrial logic rather than the regulatory environment. So you could see some mean reversion there. And yes, so that's why we're sort of leaning in. We're engaging with clients. We're making sure that we're appropriately resourced for a more robust level of the wallet and fighting for every dollar of share. Glenn Schorr -- Evercore ISI -- Analyst Maybe one other follow-up. You're always investing. You clearly get paid in growth across the franchise as you do. But relative to a lot of other banks that have been keeping the expenses a lot closer to flat, do you envision an environment -- or maybe I should rephrase that. What type of environment would have JPMorgan pull back on this tremendous investment spending wave that you've been going through? Jeremy Barnum -- Chief Financial Officer Sure. So I think the first thing to say, which is somewhat obvious, but I'm going to say it anyway, is that there are some like auto-governors in this, right? Like some portion of the expense base is directly related to revenue, whether it's volume-related commissions, whether it's incentive compensation, whether it's other things. So there are some auto-correcting elements of the expense base that would happen automatically as part of the normal discipline. So that's point one. Point two is that, independently of the environment, we are always looking for efficiencies. And it's a little bit hard to see it. And in our world, where we're guiding to, I guess now with the special assessment added, $91 billion of expenses, it's hard to tell a story about all the efficiencies that are being generated underneath. But that is part of the DNA in the company. That does happen in BAU all the time as we grind things out, get the benefits of scale and try to extract that efficiency. And I think, to get to the heart of your question, which is, OK, in what type of environment would we make different strategic questions? And in the end, I think that's a little bit about what that environment is really like. So if you talk about like a normal recession with visibility on the cycle, would we change our long-term strategic investment plans, which are always built up from a financial modeling perspective, assuming resilience through the cycle? No, we wouldn't. Could there be some environments that, for whatever reason, change the business case for certain investments or even certain businesses that lead us to make meaningfully different strategic choices? Yes, but that would be because the through-the-cycle analysis has changed for some reason. I just don't see us fundamentally making strategically different decisions if the strategic outlook is unchanged, simply because of the business cycle in the short term. Glenn Schorr -- Evercore ISI -- Analyst Awesome. Thank you. Jeremy Barnum -- Chief Financial Officer Thanks. Operator Thank you. Our next question comes from Matt O'Connor with Deutsche Bank. You may proceed. Matt O'Connor -- Deutsche Bank -- Analyst Good morning. You mentioned one use of capital is to lean into the trading businesses with your balance sheet. And we did see the trading assets going up Q2, which is probably seasonal, but also up a lot year over year, but not necessarily translate into higher revenues. And I know they don't like match up necessarily each quarter. But maybe just elaborate like how you're leaning into the trading with the balance sheet and how you expect that to benefit you over time. Jeremy Barnum -- Chief Financial Officer Yes, sure. So let me break this question down into a couple of different parts. So I think what Jamie was sort of suggesting is that you can think of a concept that's kind of like strategic capital versus tactical capital, for lack of a better term. And what he's kind of saying is that, in a moment where you're carrying a lot of excess capital sort of for strategic reasons, you have the ability, at least in theory, to deploy portions of that with kind of like -- into relatively short-duration assets or strategies or client opportunities in whatever moment for whatever reason in what might be thought of as a tactical sense. So he's just pointing out that, that's an option that you have. And the extent to which this quarter's increase in Markets RWA is a reflection of that, maybe a little bit, but probably not. I agree with you that it's hard in any given quarter to specifically link the change in capital and RWA to a change in revenue. There's just too many moving parts there. But for sure, one thing that's true is that higher run rate of the Markets businesses as a whole that we talked about a second ago is linked also to a higher deployment of balance sheet into those businesses. So as you well know, we pride ourselves on being extremely analytical and extremely disciplined in how we analyze capital liquidity, balance sheet deployment, G-SIB capacity utilization, etc., in the Markets business. And we don't just chase revenue. We go after returns fully measured. And that's part of the DNA, and we continue to do it, and we will. So we still are operating under multiple binding constraints, and obviously, the environment is complex. So the ability to sort of throw a ton of capital at opportunities is not quite that simple always. But big picture, we are clearly in a very, very strong capital position, which is in no small part in anticipation of all of the uncertainty. But it does also mean that, if opportunities arise between now and when the Basel III endgame is final, we are very well-positioned to take advantage of those opportunities. Matt O'Connor -- Deutsche Bank -- Analyst Got it. And then just separately, within the consumer card businesses, you highlighted volumes are up 9% year over year. Obviously, still a very strong piece. Any trends within that, that are worth noting in terms of changes in spend category -- either overall or among certain segments? Jeremy Barnum -- Chief Financial Officer Maybe a little bit. Jamie already alluded somewhat to this. So I do think spend is fine but not boomy, broadly speaking, I would say. You can look at it a lot of different ways, inflation cohorts, etc. But when you kind of triangulate that, you get back to this kind of flattish picture. There is a little bit of evidence of substituting out of discretionary into nondiscretionary. And I think the single most notable thing is just this effect where in the -- while it is true that real incomes have gone up in the lowest-income cohorts, within that, there's obviously a probability of distribution, and there's some -- or rather just a distribution of outcomes. And there are some such people whose real incomes are not up, they're down, and who are therefore struggling a little bit, unfortunately. And what you observe in the spending patterns of those people is some meaningful slowing rather than what you might have feared, which is sort of aggressive levering up. So I think that's maybe an economic indicator of sorts, although this portion of the population is small enough that I'm not sure the read-across is that big. But it is encouraging from a credit perspective because it just means that people are behaving kind of rationally and in a sort of normal post-pandemic type of way as they manage their own balance sheets. And that's sort of at the margin good news from a credit perspective. Matt O'Connor -- Deutsche Bank -- Analyst OK. That's helpful. Thank you very much. Operator Thank you. Our next question comes from Gerard Cassidy with RBC Capital Markets. You may proceed. Gerard Cassidy -- RBC Capital Markets -- Analyst Hi, Jeremy. Jeremy Barnum -- Chief Financial Officer Hey, Gerard. How are you doing? Gerard Cassidy -- RBC Capital Markets -- Analyst Good. Thanks. Notwithstanding your guys' outlook for uncertainty, and of course, Jamie talked about it in the shareholder letter and addressed it also on this call when he was here earlier. Can you guys share -- or can you share with us the color on what's going on in the corporate lending market in terms of spreads seem to be getting tighter? It's not reflecting, I don't think, a real fear out there in the global geopolitical world. And any color just on what you guys are seeing in the leveraged loan market as well. Jeremy Barnum -- Chief Financial Officer Right. So I think what's true about spreads in general, just broadly credit spreads, including secondary markets, and to some extent the leverage lending space, is that they're exceptionally tight. So I'm sure that's reversed a little bit in the last few days. But broadly throughout the quarter, we've really seen credit spreads tighten quite a bit. You even see that a little bit in our OCI this quarter, where losses in OCI that we would have had from higher rates have been meaningfully offset by tighter credit spreads in the portfolio. So broadly sort of in keeping with the big run-up that we saw in equity markets and the general sort of bullish tone, you saw quite a bit of credit spread tightening that -- in secondary markets. That, I think, has manifested itself a little bit in the leveraged lending space in the normal way that it does in that there's a lot of competition among providers for the revenue pool. And you start to see a little bit of loosening of terms, which always makes us a little bit concerned. And as we have in the past, we are going to be very well prepared to lose share in that space if we don't like the terms. We never compromise on structure there. So you are seeing a little bit of that. I think that away from the leveraged lending space, in the broader C&I space, there was a moment a few months ago where I think in no small part as a result of banks generally anticipating this more challenging capital environment and sort of disciplining a little bit their lending, we were seeing a little bit of widening actually in those corporate lending spreads. I don't know if that trend has like survived the last few weeks, and it's always a little bit hard to observe in any case. But I would say broadly the dynamics or the tension between people trying to be careful with their balance sheets and the fact that overall asset prices and conditions are quite supportive, and secondary market credit spreads have rallied a lot. Gerard Cassidy -- RBC Capital Markets -- Analyst And I guess as a tie-in to that question and answer. We've read and seen so much about the private credit growth in this country by private credit companies. Can you give us some color on what you're seeing there as both as a competitor but also as a client of JPMorgan, how you balance the two out? Where you may see them bidding on business that you'd like, but at the same time, you're supporting their business. Jeremy Barnum -- Chief Financial Officer Right. Yes. I mean, I think that tension between us as a provider of secured financing to some portions of the private credit, private equity community, now you're talking about different parts of the capital structure. But we do recognize that, that we compete in some areas and we are clients of each other in other areas. And that's part of the franchise, and it's all good at some level. But narrowly on private credit, it is interesting to observe what's going on there. So I would say for us, the strategy there is very much to be product-agnostic, actually. It's not so much like, oh, is it private credit or is it syndicated lending? What does it take to be good at this stuff? And what it takes is stuff that we have and have always had and that we're very good at in each individual silos. So you have -- you need underwriting skills, structuring skill, origination, distribution, secondary trading, risk appetite, credit analysis capabilities. And this is what we do, and we're really good at it. And increasingly, what you see actually is that as you see us doing a little bit, as the private credit space gets bigger, it starts to make sense to actually bring in some co-lenders so that you can sort of do big enough deals without having undue concentration risks. I mean, even if you have the capital, you just may not want the concentration risk. And so in a funny way, the private credit space becomes a little bit more like the syndicated lending space. At the same time, the syndicated lending space, being influenced a little bit by these private credit unitranche structures, gets pushed a little bit in the private credit direction in terms of like speed of execution, other aspects of how that business works. So we're watching it. The competitive dynamics are interesting. Certainly, there's some pressure in some areas. But we really do think that our overall value proposition and competitive position here is second to none. And so we're looking forward to the future here. Gerard Cassidy -- RBC Capital Markets -- Analyst Appreciate the color. Thank you. Operator Thank you. Our last question comes from Charles Peabody with Portales. Your line is open. Charles Peabody -- Portales Partners -- Analyst Good morning. A couple of questions on the First Republic acquisition. Some of us obviously thought that would be a home run, and I'm glad to see that Jamie Dimon validated that in his annual letter. When you look at the first quarter, it annualizes out to $2.7 billion, $2.8 billion, above the $2 billion that Jamie published in the letter. Now I know you don't want to extrapolate that. But can you remind us what sort of cost savings you still have in that? Because this quarter did see expenses come down to $800 million, down from $900 million. And then secondly, is there an offset to that where the accretion becomes less and less, and that's why you don't want to extrapolate the $2.7 billion, $2.8 billion? So that's my first question. Jeremy Barnum -- Chief Financial Officer OK. Thanks, Charlie. And I'm going to do my best to answer your question while sticking to my sort of guns on not giving too much First Republic-specific guidance. But I do think that kind of framework you're articulating is broadly correct. So let me go through the pieces. So yes, the current quarter's results annualize to more than the $2 billion Jamie talked about. Yes, a big part of that reason is discount accretion, which was very front-loaded as a result of short-dated assets. So that's part of the reason that you see that converge. Yes, it's also true that we expect the expense run rate to decline later in the year as we continue making progress on integration. Obviously, as I think as I mentioned to you last quarter, from a full-year perspective, you just have the offset of the full year calendarization effect. There was maybe an embedded question then there, too, about we had talked about $2.5 billion of integration expense. And the integration is real, the expenses are real, and also the time spent on that is quite real. It's a lot of work for a lot of people. It's going well, but we're not done yet, and it takes a lot of effort. But broadly, I think that our expectation for integration expense are probably coming in a bit lower than we originally assumed on the morning of the deal for a couple of reasons. One is that the framework around the time was understandably quite conservative and sort of assumed that we would kind of lose a meaningful portion of the franchise and would sort of need to size the expense base accordingly. And of course, it's worked out, to your point, quite a bit better than that. And therefore, the amount of expenses that is necessary to keep this bigger franchise is higher. And that means less integration expense associated with taking down those numbers. It's probably also true that the integration assumptions were conservative. They were based on kind of more typical type of bank M&A assumptions as opposed to the particular nature of this deal, including the FDIC and so on and so forth. So yes, I think that probably is a pretty complete answer to your question. Thanks, Charlie. Charles Peabody -- Portales Partners -- Analyst As a quick follow-up, where are the next home runs going to come from? And this is more strategic beyond just JPMorgan. But there's probably going to be more regional bank failures, whether it's this year or next year, and opportunities to pick those up. But what you're seeing is that private equity and family offices are setting up to participate in this next round of bank failures. Mnuchin's buying of NYCB is clearly to create a platform for roll-ups of failed banks. And then there are other family offices that have filed shelf registrations for bank holding companies whose specific purpose is to buy failed banks. So where -- do you think that these opportunities are going to be competed away by private credit? And as part of that, do you think the regulators are going to view private credit as a different party and less attractive party versus bank takeovers of failed banks? So that's my question. Jeremy Barnum -- Chief Financial Officer Right. OK, Charlie, there's a lot in there. And to be honest, I just don't love the idea of spending a lot of time on this call speculating about bank failures. Like you obviously have a particular view about the next wave in the landscape. I'm not going to bother debating that with you. But I guess let me just try to say a couple of things, doing my best to answer your question. Like as we talked about earlier, we have a lot of capital. And as Jamie says, the capital is earnings in store. And right now, we don't see a lot of really compelling opportunities to deploy the capital. But if opportunities arise, despite the uncertainty about the Basel III endgame, we will be well-positioned to deploy it. I think embedded there is also sort of a question about the FDIC and the FDIC's attitude toward different types of bidders. And obviously, there's a lot of thinking and analysis happening about the entire process and some recent forums and speeches on bank resolution and so on and so forth. And I think probably we can all agree that it's better, all else equal, for the system to have as much capital available and as many different types of capital available to ensure that things are stabilized if anything ever goes wrong. But the mechanics of how you do that when you're talking about banks are not trivial and not to be underestimated. So I guess that's probably as much as I have on that. Charles Peabody -- Portales Partners -- Analyst Thank you. Operator We have no further questions at this time. Jeremy Barnum -- Chief Financial Officer Thank you, everyone.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings. Welcome to Rollins, Inc. first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] Please note this conference is being recorded. I will now turn the conference over to Lyndsey Burton, vice president of investor relations. Thank you. You may begin. Lyndsey Burton -- Vice President, Investor Relations Thank you, and good morning, everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at www.rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release. The company's earnings release discusses the business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to yesterday's press release and the company's SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2023. On the line with me today and speaking are Jerry Gahlhoff, president and chief executive officer; and Ken Krause, executive vice president, chief financial officer, and treasurer. Management will make some opening remarks, and then we'll open the line for your questions. Before I turn it over to Jerry, I want to remind everyone of our upcoming Investor Day on May 17 in New York City. We're looking forward to hosting the investment community and discussing our strategies for growing our business and driving value for our stakeholders. Jerry, would you like to begin? Jerry Gahlhoff -- President and Chief Executive Officer Thank you, Lyndsey. Good morning, everyone. I'm pleased to report that Rollins delivered another good quarter of growth and profitability, reflecting consistent execution of our operating strategies and continuous improvement in our business. Our financial performance for the first quarter was highlighted by an increase in revenue of nearly 14% to $748 million. We delivered healthy organic growth of 7.5% in the quarter. despite some unfavorable and erratic weather in January compared to last year, which Ken will discuss in more detail. Overall, we continued to see double-digit revenue growth across all major service lines as total residential revenue increased 16.5%, commercial rose 11.4% and termite was up 11.7% this quarter. We continue to invest in growing our business. As you would expect, we invested in incremental sales staffing and marketing activities ahead of peak season to ensure that we are well-positioned and top of mind for the consumer as pet season begins. We are well-staffed on the technician and customer support front, so their people are onboarded, extensively trained, and ready to provide an exceptional level of service for our customers. On the commercial side of the business, we are leveraging analytics to identify areas in the market where opportunity warrants additional resources. And this continues to pay dividends as evidenced by another quarter of double-digit commercial growth. We continue to strategically add feet on the street to our sales force and are leveraging our training and sales tools to better enable their success as well. Investments to drive organic growth are complemented by strategic M&A. April 1 marked the one-year anniversary of closing the Fox acquisition, and that team has performed exceptionally well. We anticipate that Fox will continue to positively impact organic growth and profitability as we go forward. We closed 12 tuck-in deals in the first three months of the year, and the M&A pipeline remains healthy. We're actively evaluating acquisition opportunities, both domestically and internationally, and remain on track to deliver at least 2% of growth from M&A activity in 2024. Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. Ken will discuss in more detail, but we saw a healthy margin improvement in the quarter as we executed our pricing strategy. leveraged our cost structure and drove efficiencies throughout the business. Safety remains an important area of focus for us and efforts to enhance safety coaching, training, and protocols resulted in higher driving safety scores and fewer recorded safety incidents when compared to a year ago. In closing, we're excited about where our business stands today. This year is off to a solid start, and demand from our customers remains strong with over 7% organic growth in the first quarter. Our markets are solid, staffing levels are healthy, and our team is focused on driving continuous improvement and profitable growth. I want to thank each of our 19,000-plus team members around the world for their ongoing commitment to our customers. Before I hand it over to Ken, I'd like to announce a few changes to our board of directors. First, we would like to thank Jerry Nix, who recently retired from our board, for his service to our company. We've been so fortunate to have Jerry as our lead director for the past several years. His experience, wisdom, and guidance helped us navigate uncharted waters for our company, and we're incredibly grateful for the significant contributions he's made along the way. Second, we would like to welcome Dale Jones, who was elected to our board at a recent shareholder meeting. Additionally, Louise Sams has been appointed as our new lead independent director. We're excited about the level of expertise and experience that both Dale and Louis will bring to our board in their new roles. Ken, I'll now turn the call over to you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Thanks, Jerry, and good morning, everyone. The first quarter reflects continued strong execution by the Rollins team. A few highlights to start. Growth was robust at the start of the year. We delivered revenue growth of 13.7% year over year. Organic growth was 7.5%, and we saw significant improvement moving throughout the quarter as organic revenue growth accelerated to over 10% for February and March. Adjusted operating margins were 18.4%, up a healthy 130 basis points with strong gross profit performance and solid expense leverage despite incremental investments aimed at growing our business. Cash flow continues to be very strong with free cash flow increasing 29%, enabling a balanced capital allocation strategy. Diving further into the quarter, we saw good growth across each of our service offerings. In the first quarter, residential revenues increased 16.5%. Commercial pest control rose 11.4% and termite and ancillary increased by 11.7%. Organic growth was also healthy across the portfolio, with growth of 4.3% in residential, 10.1% in commercial, and 9.3% in termite and ancillary. As Jerry mentioned, our residential organic growth was impacted by a slower start in January. To provide context, February and March total organic growth was a very strong 10.8% versus 7.5% for the quarter. And looking at residential revenue specifically, February and March organic growth was a healthy 8% versus 4.3% for the quarter. We are pleased with the consistent growth we continue to see across the business. Turning to profitability. Our gross margins were healthy at 51.2%, up 90 basis points versus last year. We continue to be positive on the price-cost equation and saw good performance across several key cost categories. While Fox was accretive to gross margins for the quarter by about 40 basis points, organic margin improved 50 basis points as we saw nice leverage from people cost, fleet, and materials and supplies. Quarterly SG&A costs as a percentage of revenue decreased by 10 basis points versus last year. Excluding the earn-out adjustment for the Fox acquisition, cost as a percentage of revenue decreased by 20 basis points in the quarter. We saw healthy leverage from administrative-related costs which enabled reinvestment and incremental advertising and selling expenses associated with growth initiatives that Jerry discussed. First quarter GAAP operating income was $132 million, up 18% year over year. Adjusted operating income was $138 million, up nearly 23% versus prior year on approximately 14% total revenue growth. Adjusted operating margins were 18.4%, up 130 basis points year over year on strong gross margins, coupled with solid expense leverage. First quarter EBITDA was $160 million, up over 14% and representing a 21.3% margin, up 10 basis points versus last year. You'll recall that last quarter, we called out a negative impact to adjusted EBITDA due to lower nonoperational gains versus the comparable period in the prior year. We saw a similar dynamic in the first quarter as well. Given that we do, from time to time, divest nonoperational assets, we have made the decision to exclude gains and losses on these types of sales. Adjusted EBITDA, adjusted net income, and adjusted EPS are measures of operating performance, and this change will allow us to better compare our underlying performance more consistently over time. A table showing the revised metrics for fiscal 2023 is included in our earnings release. First quarter adjusted EBITDA was $161 million, up 19% versus last year. Adjusted EBITDA margin of 21.5% was strong, improving 100 basis points driven by leverage across the P&L. Incremental adjusted EBITDA margin was 29%, a healthy result considering that Q1 is a slower period and can have a lower profitability profile as we invest ahead of our busier seasons. The effective tax rate was approximately 24% in the quarter, in line with the prior year. Quarterly GAAP net income was $94 million or $0.19 per share, increasing from $0.18 per share in the same period a year ago. For the first quarter, we had non-GAAP pre-tax adjustments associated with the Fox acquisition-related items totaling approximately $5 million of pre-tax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $98 million or $0.20 per share, increasing over 17% from the same period a year ago despite the higher level of interest cost on the higher debt balances versus the comparable period. Turning to cash flow and the balance sheet. Operating cash flow increased 27% in the quarter to $127 million. We generated $120 million of free cash flow, a 29% increase versus last year. Cash flow conversion, the percent of income that was converted into operating cash flow was well above 100% for the 120% for the quarter. We made acquisitions totaling $47 million, and we paid $73 million in dividends, both up versus the same period a year ago. Debt-to-EBITDA leverage is well below one times on a gross and net level, and our balance sheet is very healthy and positions us well to continue to execute on our capital allocation priorities. In closing, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our teams. Demand is healthy and our acquisition pipeline provides us a sense of optimism. We remain focused on providing our customers with the best customer experience and driving growth both organically and through disciplined acquisitions. With that, I'll turn the call back over to Jerry. Jerry Gahlhoff -- President and Chief Executive Officer Thank you, Ken. We're happy to take any questions at this time. Questions & Answers: Operator Thank you. [Operator instructions] Please ask one question and one follow-up question and requeue for additional questions. Our first question is from Tim Mulrooney with William Blair. Please proceed. Tim Mulrooney -- William Blair and Company -- Analyst Ken, Jerry, good morning. Jerry Gahlhoff -- President and Chief Executive Officer Good morning. Tim Mulrooney -- William Blair and Company -- Analyst So, just stepping back here, with trends accelerating in February and March. I just wonder if folks are going to extrapolate that 10% organic growth rate. into the next several months and quarters. I mean, 10% to me just sounds like touch on the strong side. So, I wonder if that's how you're thinking about things or if expectations are better level set to kind of what we saw over the last several quarters, more in that 7% to 8% range for organic growth. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Thanks for the question, Tim. I appreciate that. And when looking at the business, we certainly did see some improvements as we went throughout the quarter. But one quarter is certainly not a long-term trend. We are continuing to remain very confident in our outlook, and that outlook is really anchored around 7% to 8% sort of growth rate that we've consistently talked about. That stepped up, as you all know, since COVID, and we continue to benefit from that higher growth rate and more favorable operating environment. But yes, I think 7% to 8% is kind of how we think about the business from an organic basis going forward. Tim Mulrooney -- William Blair and Company -- Analyst That's really helpful. Thank you, Ken. And this is not a follow-up. It's a completely separate topic, but I'm going to do it anyway. The step-up in sales and marketing expense, OK? Like I think there's like a couple of different ways folks could interpret that, either as more of a defensive move because you're having to spend more, maybe on digital marketing to win customers, or more as an offensive move, hiring more sales folks for future growth, for example. Could you just double-click into that increase in sales and marketing expense column? And help us understand that decision a little better to ramp up spending there. Thank you. Jerry Gahlhoff -- President and Chief Executive Officer Yeah. Tim, this is Jerry. A lot of that cost really was on the heavier side on the selling expense as it relates to us staffing up. Let me give you a couple of examples, a couple of data points. Just looking at Orkin alone, when we look compared to prior year in the first quarter, we had over 50 more commercial account managers at Orkin alone. We had over 100 more home sales inspectors at Orkin in the first quarter of this year than we did the last year. So, that's where a lot of our investment continues to be. We see that opportunity. That's what I referred to as the feet-on-the-street opportunity. So, our sales salaries are up there. It's not necessarily some sort of targeted defensive marketing spend. It's an offensive sales mobilization and really building out your sales team for the growth opportunities ahead. Tim Mulrooney -- William Blair and Company -- Analyst Got it. Makes sense. Thank you. Jerry Gahlhoff -- President and Chief Executive Officer Thank you. Operator Our next question is from George Tong with Goldman Sachs. Please proceed. George Tong -- Goldman Sachs -- Analyst All right. Thanks. Good morning. I wanted to dive into trends that you're seeing in the residential business. It sounds like most of the impact to organic revenue growth in residential was due to unfavorable January weather, leading to the 4% organic growth. I wanted to see if there were any other trends you would call out there. I know last quarter, you highlighted one-time sales impact. So, any changes there and other operating items to consider as it relates to the organic growth in residential? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Certainly. When we look at the residential business, we look at the residential business very broadly across our residential services as well as our termite and ancillary. Across that portfolio, the business continues to perform very well. Onetime business can be choppy. It continues to be choppy. But generally, demand for our services remains very healthy. As I indicated on the -- in my prepared commentary, what we saw when we look just at the residential business alone, we saw an improvement, 4.3% growth for the quarter but close to 8% growth as we look at February and March. So, we continue to see really good demand levels for our business. Jerry Gahlhoff -- President and Chief Executive Officer I would add to that, George, that when we think about some of the onetime business as well, as Ken mentioned, it's usually choppier in the shoulder seasons when weather -- that's an area of the business that weather can impact more so than anything, but you still have your recurring customer base that's there to service. But we also continue to see really strong health in our onetime ancillary business that really shows that a consumer side of it is strong, and the consumers continue to be willing to invest in protecting their homes. George Tong -- Goldman Sachs -- Analyst Got it. That's helpful. And then within the termite and ancillary services business, organic growth seems to have decelerated a bit to 9% compared to 11% in 4Q. Can you talk about some of the puts and takes that could have led to that performance? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Certainly. When you unpack the termite business, there's two components to the termite and ancillary. There is your normal recurring termite business, your pretreat business, and then you have ancillary business in there as well. We're seeing really good demand across the spectrum. Our business, our recurring bait monitoring business, continues to grow at a very healthy level. But also, our ancillary business in that area continues to grow as well at a nice rate. So, it's really a broad-based growth that we're seeing in demand for our services. George Tong -- Goldman Sachs -- Analyst OK. Got it. Any factors that could have caused the deceleration in organic revenue growth there? Jerry Gahlhoff -- President and Chief Executive Officer You know, I look at it from a productivity standpoint. We continue to -- the sales are there, the working the backlog can be a challenge. And in the quarter -- and that goes back to a January type of phenomenon, that where we have, we had more branches and operations closed for multiple days compared to the prior year. And that affects productivity and ability to get the work done, even if our sales force is out there selling and they're out there continuing to do what they do and building that backlog of work to get done. And so, the work is there for us to get done. So, we're optimistic about that. It's not a selling issue. It's us getting all the workload done in a given period of time. So, when you carry a backlog over into the second quarter, things still look healthy, if that helps add any color. George Tong -- Goldman Sachs -- Analyst Got it. Very helpful. Thank you. Operator Our next question is from Stephanie Moore with Jefferies. Please proceed. Unknown speaker [Inaudible] coming on for Stephanie Moore. I just wanted to touch on commercial organic growth. been pretty strong over the last few quarters. And I know you mentioned leveraging analysts and things like that, but I was just curious if there's anything else to call out. And if you could kind of talk about the sustainability of growth there? Jerry Gahlhoff -- President and Chief Executive Officer I know it sounds like a broken record, and we've said this now for a few years. We just continue to invest in our sales staff getting them ramped up and being successful. That is -- that B2B sales process is a relationship type of sale. It's got a long selling cycle, and you got to be patient, you got to invest. You got to invest in training and sales tools and supporting those new account managers when they're brought up to get them ramped up and brought to speed just as fast as possible. That is the more you add in the sales force and the more investments you make to make them successful we just continue to see that opportunity there. So, I wouldn't say there's anything magical about it other than being committed to continue to add incrementally to our sales force. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer It's interesting. When I step back and I look at the financials and I look at the trend in spend across different categories of SG&A, Jerry's spot on. Sales salaries continues to be an area that we continue to invest disproportionately in. We're saving money in some of the back-office costs and admin areas, but we continue to invest pretty heavily on the front end of our business and taking a very offensive perspective on our business. Unknown speaker Just on the resi side, have you guys seen any slowdown? I think it's meaningful related to the new business wins or a sort of meaningful pickup in customer churn and maybe lower household income areas. And then just anything you could share around how April's kind of shaping up so far? Jerry Gahlhoff -- President and Chief Executive Officer We haven't seen any significant change in from a retention issue one way or the other. So, that remains pretty solid. Any color on April? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer It would be very difficult to grow our business at the rate we're growing if we saw tightening in customer churn. And so, customer churn, although it is not kiting, it still remains an opportunity for us to continue to improve. When we look at April, we continue to see healthy levels of demand. We're starting April strongly. But again, we continue to think about a 7% to 8% sort of organic growth rate across the business as we think about the future. Operator Our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed. David Paige -- RBC Capital Markets -- Analyst Hi. Good morning. This is David Paige on for Ashish. In terms of capital allocation, now that you've lapped the Fox acquisition, how should we think about, I guess, your M&A pipeline in terms of larger deals or smaller deals going forward, especially given this robust free cash flow that you keep generating? Thank you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer When we look at the pipeline, it's very healthy. It's very balanced. There's opportunities across the spectrum with respect to M&A. Something that we have consistently said, however, for 2024, is that we do think that 2% to 3% of revenue growth is probably a realistic expectation of contribution from M&A. We continue to look at deals. We continue to evaluate deals. And in fact, in Q1, we spent roughly $45 million to $50 million on M&A, and that was up considerably year over year. Of course, last year, we were preparing for Fox. But I think it just shows that there continues to be a very healthy pipeline of M&A in a very fragmented market that we continue to compete in. Operator [Operator instructions] Our next question is from Josh Chan with UBS. Please proceed. Josh Chan -- UBS -- Analyst Hi. Good morning, Jerry, Ken, Lyndsey. So, I guess you mentioned that 7% to 8% sustainable growth rate. And given how strong commercial and termite is, does that imply that you expect residential to kind of remain in this 4% range going forward? Just curious how you're thinking about how the different businesses contribute to that 7% to 8%. Thank you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer You know, it's interesting when you start to put a fine point on that, but we do think that probably commercial and termite and ancillary will probably grow a little bit faster than the overall average. And resi might grow a little bit slower. You just have puts and takes across the portfolio. It doesn't mean that we're not bullish in residential -- but I just think that that's generally how the growth profile has unfolded over time for us. Jerry Gahlhoff -- President and Chief Executive Officer Yeah, I agree with you, Ken. I think it's hard to predict that. I mean, there's going to be movement in any of those categories potentially based on a number of factors and we'll. That's where it all comes out in that 7% to 8%. Josh Chan -- UBS -- Analyst Thank you. OK. That helps there. And then on your decision to accelerate investment during the off season, sometimes, you focus on the peak season to invest, sometimes you invest ahead of the season. So, could you just talk about the rationale for investing ahead of the season this year, what you're seeing, and what opportunities you expect to realize? Thank you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Yeah. As we had talked about, I mean, the business started to grow pretty nicely on a year-over-year basis, organic basis in February and into March. And so, we saw that, and we saw an opportunity to pull forward some investments. It doesn't mean that we're going to invest any lighter in Q2. In fact, we're going to continue to invest in Q2 and drive further growth. The market opportunity is there. and you've got to invest when that market opportunity is there. This is a very short-cycle business. And when you see weather patterns that improve or demand trends that might change, you have to be ready to invest. And so, I think that's just -- it's just reflective of our investment and our interest in investing in growth across our portfolio. Jerry Gahlhoff -- President and Chief Executive Officer We have a lot more carrying costs from people side in late fourth quarter and certainly in the first quarter than I think we've ever had. The reality is it's certainly harder to find people -- and then with the level of intensity that we put in the time and energy that we put into training and development upfront, that takes time to have people ready. And so, our strategy has been to get ahead of that. Josh Chan -- UBS -- Analyst Absolutely. Yeah. Thank you so much for your time, and congrats on the good quarter. Jerry Gahlhoff -- President and Chief Executive Officer Thank you, Josh. Operator Our next question is from Ollie Davies with Redburn Atlantic. Please proceed. Ollie Davies -- Redburn Atlantic -- Analyst Yeah. Good morning. Just two for me. So, firstly, can you just talk about the level of price increases you're putting through? And if you're seeing any pushback on the residential side, just given the level of volume growth in the first quarter. And then secondly, in terms of -- probably one for Ken -- just in terms of the SG&A, I mean, obviously, the admin expenses, I guess some of that is coming from the modernization that you did last year. So, how sustainable are they going forward through this year and, I guess, your ability to reinvest that? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer So, looking at your questions -- thank you for your questions. The first question with respect to pricing, it's interesting. When we look -- step back and we look at this business, I think recently, you've heard me start to talk about this as a CPI-plus type of business. So, we think this service is certainly an essential service and should command CPI-plus level pricing. So, 3% to 4% this year is certainly -- it's something we passed along, and we're seeing that stick. We just feel like the service is just too valuable, not to price it at those levels. And then secondly, when you look at the SG&A levels across the business, we're -- it's good to see the improvements that we're seeing in our cost structure. I think in the quarter, we talked about a 20-basis-point improvement in SG&A as a percentage of sales. But when you unpack that, you see that we spent roughly 50 basis points more on growth-oriented investments but 70 basis points less of back-office costs. And I think that's representative of the work we're doing to improve the effectiveness and the productivity of our business. We feel like there's more to come, but we certainly are happy with the progress we're making there. Ollie Davies -- Redburn Atlantic -- Analyst OK. Thanks. Operator And our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed. Unknown speaker Hey, sorry, Steve again. Apologies if I missed this one, but what was the exit growth for residential? I believe the 10% was for the entire company, but what was it for resi? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Yeah. It was 10.8% to be -- to put a fine point on it for the entire company. And for residential, it was 8%. Jerry Gahlhoff -- President and Chief Executive Officer For February and March. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Yeah, for February and March. Operator We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments. Jerry Gahlhoff -- President and Chief Executive Officer Thank you, everyone, for joining us today. We appreciate your interest in our company and look forward to speaking with you all at our upcoming investor conference. Thanks again. Answer:

Operator Greetings. Welcome to Rollins, Inc. first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] Please note this conference is being recorded. I will now turn the conference over to Lyndsey Burton, vice president of investor relations. Thank you. You may begin. Lyndsey Burton -- Vice President, Investor Relations Thank you, and good morning, everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at www.rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release. The company's earnings release discusses the business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to yesterday's press release and the company's SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2023. On the line with me today and speaking are Jerry Gahlhoff, president and chief executive officer; and Ken Krause, executive vice president, chief financial officer, and treasurer. Management will make some opening remarks, and then we'll open the line for your questions. Before I turn it over to Jerry, I want to remind everyone of our upcoming Investor Day on May 17 in New York City. We're looking forward to hosting the investment community and discussing our strategies for growing our business and driving value for our stakeholders. Jerry, would you like to begin? Jerry Gahlhoff -- President and Chief Executive Officer Thank you, Lyndsey. Good morning, everyone. I'm pleased to report that Rollins delivered another good quarter of growth and profitability, reflecting consistent execution of our operating strategies and continuous improvement in our business. Our financial performance for the first quarter was highlighted by an increase in revenue of nearly 14% to $748 million. We delivered healthy organic growth of 7.5% in the quarter. despite some unfavorable and erratic weather in January compared to last year, which Ken will discuss in more detail. Overall, we continued to see double-digit revenue growth across all major service lines as total residential revenue increased 16.5%, commercial rose 11.4% and termite was up 11.7% this quarter. We continue to invest in growing our business. As you would expect, we invested in incremental sales staffing and marketing activities ahead of peak season to ensure that we are well-positioned and top of mind for the consumer as pet season begins. We are well-staffed on the technician and customer support front, so their people are onboarded, extensively trained, and ready to provide an exceptional level of service for our customers. On the commercial side of the business, we are leveraging analytics to identify areas in the market where opportunity warrants additional resources. And this continues to pay dividends as evidenced by another quarter of double-digit commercial growth. We continue to strategically add feet on the street to our sales force and are leveraging our training and sales tools to better enable their success as well. Investments to drive organic growth are complemented by strategic M&A. April 1 marked the one-year anniversary of closing the Fox acquisition, and that team has performed exceptionally well. We anticipate that Fox will continue to positively impact organic growth and profitability as we go forward. We closed 12 tuck-in deals in the first three months of the year, and the M&A pipeline remains healthy. We're actively evaluating acquisition opportunities, both domestically and internationally, and remain on track to deliver at least 2% of growth from M&A activity in 2024. Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. Ken will discuss in more detail, but we saw a healthy margin improvement in the quarter as we executed our pricing strategy. leveraged our cost structure and drove efficiencies throughout the business. Safety remains an important area of focus for us and efforts to enhance safety coaching, training, and protocols resulted in higher driving safety scores and fewer recorded safety incidents when compared to a year ago. In closing, we're excited about where our business stands today. This year is off to a solid start, and demand from our customers remains strong with over 7% organic growth in the first quarter. Our markets are solid, staffing levels are healthy, and our team is focused on driving continuous improvement and profitable growth. I want to thank each of our 19,000-plus team members around the world for their ongoing commitment to our customers. Before I hand it over to Ken, I'd like to announce a few changes to our board of directors. First, we would like to thank Jerry Nix, who recently retired from our board, for his service to our company. We've been so fortunate to have Jerry as our lead director for the past several years. His experience, wisdom, and guidance helped us navigate uncharted waters for our company, and we're incredibly grateful for the significant contributions he's made along the way. Second, we would like to welcome Dale Jones, who was elected to our board at a recent shareholder meeting. Additionally, Louise Sams has been appointed as our new lead independent director. We're excited about the level of expertise and experience that both Dale and Louis will bring to our board in their new roles. Ken, I'll now turn the call over to you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Thanks, Jerry, and good morning, everyone. The first quarter reflects continued strong execution by the Rollins team. A few highlights to start. Growth was robust at the start of the year. We delivered revenue growth of 13.7% year over year. Organic growth was 7.5%, and we saw significant improvement moving throughout the quarter as organic revenue growth accelerated to over 10% for February and March. Adjusted operating margins were 18.4%, up a healthy 130 basis points with strong gross profit performance and solid expense leverage despite incremental investments aimed at growing our business. Cash flow continues to be very strong with free cash flow increasing 29%, enabling a balanced capital allocation strategy. Diving further into the quarter, we saw good growth across each of our service offerings. In the first quarter, residential revenues increased 16.5%. Commercial pest control rose 11.4% and termite and ancillary increased by 11.7%. Organic growth was also healthy across the portfolio, with growth of 4.3% in residential, 10.1% in commercial, and 9.3% in termite and ancillary. As Jerry mentioned, our residential organic growth was impacted by a slower start in January. To provide context, February and March total organic growth was a very strong 10.8% versus 7.5% for the quarter. And looking at residential revenue specifically, February and March organic growth was a healthy 8% versus 4.3% for the quarter. We are pleased with the consistent growth we continue to see across the business. Turning to profitability. Our gross margins were healthy at 51.2%, up 90 basis points versus last year. We continue to be positive on the price-cost equation and saw good performance across several key cost categories. While Fox was accretive to gross margins for the quarter by about 40 basis points, organic margin improved 50 basis points as we saw nice leverage from people cost, fleet, and materials and supplies. Quarterly SG&A costs as a percentage of revenue decreased by 10 basis points versus last year. Excluding the earn-out adjustment for the Fox acquisition, cost as a percentage of revenue decreased by 20 basis points in the quarter. We saw healthy leverage from administrative-related costs which enabled reinvestment and incremental advertising and selling expenses associated with growth initiatives that Jerry discussed. First quarter GAAP operating income was $132 million, up 18% year over year. Adjusted operating income was $138 million, up nearly 23% versus prior year on approximately 14% total revenue growth. Adjusted operating margins were 18.4%, up 130 basis points year over year on strong gross margins, coupled with solid expense leverage. First quarter EBITDA was $160 million, up over 14% and representing a 21.3% margin, up 10 basis points versus last year. You'll recall that last quarter, we called out a negative impact to adjusted EBITDA due to lower nonoperational gains versus the comparable period in the prior year. We saw a similar dynamic in the first quarter as well. Given that we do, from time to time, divest nonoperational assets, we have made the decision to exclude gains and losses on these types of sales. Adjusted EBITDA, adjusted net income, and adjusted EPS are measures of operating performance, and this change will allow us to better compare our underlying performance more consistently over time. A table showing the revised metrics for fiscal 2023 is included in our earnings release. First quarter adjusted EBITDA was $161 million, up 19% versus last year. Adjusted EBITDA margin of 21.5% was strong, improving 100 basis points driven by leverage across the P&L. Incremental adjusted EBITDA margin was 29%, a healthy result considering that Q1 is a slower period and can have a lower profitability profile as we invest ahead of our busier seasons. The effective tax rate was approximately 24% in the quarter, in line with the prior year. Quarterly GAAP net income was $94 million or $0.19 per share, increasing from $0.18 per share in the same period a year ago. For the first quarter, we had non-GAAP pre-tax adjustments associated with the Fox acquisition-related items totaling approximately $5 million of pre-tax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $98 million or $0.20 per share, increasing over 17% from the same period a year ago despite the higher level of interest cost on the higher debt balances versus the comparable period. Turning to cash flow and the balance sheet. Operating cash flow increased 27% in the quarter to $127 million. We generated $120 million of free cash flow, a 29% increase versus last year. Cash flow conversion, the percent of income that was converted into operating cash flow was well above 100% for the 120% for the quarter. We made acquisitions totaling $47 million, and we paid $73 million in dividends, both up versus the same period a year ago. Debt-to-EBITDA leverage is well below one times on a gross and net level, and our balance sheet is very healthy and positions us well to continue to execute on our capital allocation priorities. In closing, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our teams. Demand is healthy and our acquisition pipeline provides us a sense of optimism. We remain focused on providing our customers with the best customer experience and driving growth both organically and through disciplined acquisitions. With that, I'll turn the call back over to Jerry. Jerry Gahlhoff -- President and Chief Executive Officer Thank you, Ken. We're happy to take any questions at this time. Questions & Answers: Operator Thank you. [Operator instructions] Please ask one question and one follow-up question and requeue for additional questions. Our first question is from Tim Mulrooney with William Blair. Please proceed. Tim Mulrooney -- William Blair and Company -- Analyst Ken, Jerry, good morning. Jerry Gahlhoff -- President and Chief Executive Officer Good morning. Tim Mulrooney -- William Blair and Company -- Analyst So, just stepping back here, with trends accelerating in February and March. I just wonder if folks are going to extrapolate that 10% organic growth rate. into the next several months and quarters. I mean, 10% to me just sounds like touch on the strong side. So, I wonder if that's how you're thinking about things or if expectations are better level set to kind of what we saw over the last several quarters, more in that 7% to 8% range for organic growth. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Thanks for the question, Tim. I appreciate that. And when looking at the business, we certainly did see some improvements as we went throughout the quarter. But one quarter is certainly not a long-term trend. We are continuing to remain very confident in our outlook, and that outlook is really anchored around 7% to 8% sort of growth rate that we've consistently talked about. That stepped up, as you all know, since COVID, and we continue to benefit from that higher growth rate and more favorable operating environment. But yes, I think 7% to 8% is kind of how we think about the business from an organic basis going forward. Tim Mulrooney -- William Blair and Company -- Analyst That's really helpful. Thank you, Ken. And this is not a follow-up. It's a completely separate topic, but I'm going to do it anyway. The step-up in sales and marketing expense, OK? Like I think there's like a couple of different ways folks could interpret that, either as more of a defensive move because you're having to spend more, maybe on digital marketing to win customers, or more as an offensive move, hiring more sales folks for future growth, for example. Could you just double-click into that increase in sales and marketing expense column? And help us understand that decision a little better to ramp up spending there. Thank you. Jerry Gahlhoff -- President and Chief Executive Officer Yeah. Tim, this is Jerry. A lot of that cost really was on the heavier side on the selling expense as it relates to us staffing up. Let me give you a couple of examples, a couple of data points. Just looking at Orkin alone, when we look compared to prior year in the first quarter, we had over 50 more commercial account managers at Orkin alone. We had over 100 more home sales inspectors at Orkin in the first quarter of this year than we did the last year. So, that's where a lot of our investment continues to be. We see that opportunity. That's what I referred to as the feet-on-the-street opportunity. So, our sales salaries are up there. It's not necessarily some sort of targeted defensive marketing spend. It's an offensive sales mobilization and really building out your sales team for the growth opportunities ahead. Tim Mulrooney -- William Blair and Company -- Analyst Got it. Makes sense. Thank you. Jerry Gahlhoff -- President and Chief Executive Officer Thank you. Operator Our next question is from George Tong with Goldman Sachs. Please proceed. George Tong -- Goldman Sachs -- Analyst All right. Thanks. Good morning. I wanted to dive into trends that you're seeing in the residential business. It sounds like most of the impact to organic revenue growth in residential was due to unfavorable January weather, leading to the 4% organic growth. I wanted to see if there were any other trends you would call out there. I know last quarter, you highlighted one-time sales impact. So, any changes there and other operating items to consider as it relates to the organic growth in residential? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Certainly. When we look at the residential business, we look at the residential business very broadly across our residential services as well as our termite and ancillary. Across that portfolio, the business continues to perform very well. Onetime business can be choppy. It continues to be choppy. But generally, demand for our services remains very healthy. As I indicated on the -- in my prepared commentary, what we saw when we look just at the residential business alone, we saw an improvement, 4.3% growth for the quarter but close to 8% growth as we look at February and March. So, we continue to see really good demand levels for our business. Jerry Gahlhoff -- President and Chief Executive Officer I would add to that, George, that when we think about some of the onetime business as well, as Ken mentioned, it's usually choppier in the shoulder seasons when weather -- that's an area of the business that weather can impact more so than anything, but you still have your recurring customer base that's there to service. But we also continue to see really strong health in our onetime ancillary business that really shows that a consumer side of it is strong, and the consumers continue to be willing to invest in protecting their homes. George Tong -- Goldman Sachs -- Analyst Got it. That's helpful. And then within the termite and ancillary services business, organic growth seems to have decelerated a bit to 9% compared to 11% in 4Q. Can you talk about some of the puts and takes that could have led to that performance? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Certainly. When you unpack the termite business, there's two components to the termite and ancillary. There is your normal recurring termite business, your pretreat business, and then you have ancillary business in there as well. We're seeing really good demand across the spectrum. Our business, our recurring bait monitoring business, continues to grow at a very healthy level. But also, our ancillary business in that area continues to grow as well at a nice rate. So, it's really a broad-based growth that we're seeing in demand for our services. George Tong -- Goldman Sachs -- Analyst OK. Got it. Any factors that could have caused the deceleration in organic revenue growth there? Jerry Gahlhoff -- President and Chief Executive Officer You know, I look at it from a productivity standpoint. We continue to -- the sales are there, the working the backlog can be a challenge. And in the quarter -- and that goes back to a January type of phenomenon, that where we have, we had more branches and operations closed for multiple days compared to the prior year. And that affects productivity and ability to get the work done, even if our sales force is out there selling and they're out there continuing to do what they do and building that backlog of work to get done. And so, the work is there for us to get done. So, we're optimistic about that. It's not a selling issue. It's us getting all the workload done in a given period of time. So, when you carry a backlog over into the second quarter, things still look healthy, if that helps add any color. George Tong -- Goldman Sachs -- Analyst Got it. Very helpful. Thank you. Operator Our next question is from Stephanie Moore with Jefferies. Please proceed. Unknown speaker [Inaudible] coming on for Stephanie Moore. I just wanted to touch on commercial organic growth. been pretty strong over the last few quarters. And I know you mentioned leveraging analysts and things like that, but I was just curious if there's anything else to call out. And if you could kind of talk about the sustainability of growth there? Jerry Gahlhoff -- President and Chief Executive Officer I know it sounds like a broken record, and we've said this now for a few years. We just continue to invest in our sales staff getting them ramped up and being successful. That is -- that B2B sales process is a relationship type of sale. It's got a long selling cycle, and you got to be patient, you got to invest. You got to invest in training and sales tools and supporting those new account managers when they're brought up to get them ramped up and brought to speed just as fast as possible. That is the more you add in the sales force and the more investments you make to make them successful we just continue to see that opportunity there. So, I wouldn't say there's anything magical about it other than being committed to continue to add incrementally to our sales force. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer It's interesting. When I step back and I look at the financials and I look at the trend in spend across different categories of SG&A, Jerry's spot on. Sales salaries continues to be an area that we continue to invest disproportionately in. We're saving money in some of the back-office costs and admin areas, but we continue to invest pretty heavily on the front end of our business and taking a very offensive perspective on our business. Unknown speaker Just on the resi side, have you guys seen any slowdown? I think it's meaningful related to the new business wins or a sort of meaningful pickup in customer churn and maybe lower household income areas. And then just anything you could share around how April's kind of shaping up so far? Jerry Gahlhoff -- President and Chief Executive Officer We haven't seen any significant change in from a retention issue one way or the other. So, that remains pretty solid. Any color on April? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer It would be very difficult to grow our business at the rate we're growing if we saw tightening in customer churn. And so, customer churn, although it is not kiting, it still remains an opportunity for us to continue to improve. When we look at April, we continue to see healthy levels of demand. We're starting April strongly. But again, we continue to think about a 7% to 8% sort of organic growth rate across the business as we think about the future. Operator Our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed. David Paige -- RBC Capital Markets -- Analyst Hi. Good morning. This is David Paige on for Ashish. In terms of capital allocation, now that you've lapped the Fox acquisition, how should we think about, I guess, your M&A pipeline in terms of larger deals or smaller deals going forward, especially given this robust free cash flow that you keep generating? Thank you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer When we look at the pipeline, it's very healthy. It's very balanced. There's opportunities across the spectrum with respect to M&A. Something that we have consistently said, however, for 2024, is that we do think that 2% to 3% of revenue growth is probably a realistic expectation of contribution from M&A. We continue to look at deals. We continue to evaluate deals. And in fact, in Q1, we spent roughly $45 million to $50 million on M&A, and that was up considerably year over year. Of course, last year, we were preparing for Fox. But I think it just shows that there continues to be a very healthy pipeline of M&A in a very fragmented market that we continue to compete in. Operator [Operator instructions] Our next question is from Josh Chan with UBS. Please proceed. Josh Chan -- UBS -- Analyst Hi. Good morning, Jerry, Ken, Lyndsey. So, I guess you mentioned that 7% to 8% sustainable growth rate. And given how strong commercial and termite is, does that imply that you expect residential to kind of remain in this 4% range going forward? Just curious how you're thinking about how the different businesses contribute to that 7% to 8%. Thank you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer You know, it's interesting when you start to put a fine point on that, but we do think that probably commercial and termite and ancillary will probably grow a little bit faster than the overall average. And resi might grow a little bit slower. You just have puts and takes across the portfolio. It doesn't mean that we're not bullish in residential -- but I just think that that's generally how the growth profile has unfolded over time for us. Jerry Gahlhoff -- President and Chief Executive Officer Yeah, I agree with you, Ken. I think it's hard to predict that. I mean, there's going to be movement in any of those categories potentially based on a number of factors and we'll. That's where it all comes out in that 7% to 8%. Josh Chan -- UBS -- Analyst Thank you. OK. That helps there. And then on your decision to accelerate investment during the off season, sometimes, you focus on the peak season to invest, sometimes you invest ahead of the season. So, could you just talk about the rationale for investing ahead of the season this year, what you're seeing, and what opportunities you expect to realize? Thank you. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Yeah. As we had talked about, I mean, the business started to grow pretty nicely on a year-over-year basis, organic basis in February and into March. And so, we saw that, and we saw an opportunity to pull forward some investments. It doesn't mean that we're going to invest any lighter in Q2. In fact, we're going to continue to invest in Q2 and drive further growth. The market opportunity is there. and you've got to invest when that market opportunity is there. This is a very short-cycle business. And when you see weather patterns that improve or demand trends that might change, you have to be ready to invest. And so, I think that's just -- it's just reflective of our investment and our interest in investing in growth across our portfolio. Jerry Gahlhoff -- President and Chief Executive Officer We have a lot more carrying costs from people side in late fourth quarter and certainly in the first quarter than I think we've ever had. The reality is it's certainly harder to find people -- and then with the level of intensity that we put in the time and energy that we put into training and development upfront, that takes time to have people ready. And so, our strategy has been to get ahead of that. Josh Chan -- UBS -- Analyst Absolutely. Yeah. Thank you so much for your time, and congrats on the good quarter. Jerry Gahlhoff -- President and Chief Executive Officer Thank you, Josh. Operator Our next question is from Ollie Davies with Redburn Atlantic. Please proceed. Ollie Davies -- Redburn Atlantic -- Analyst Yeah. Good morning. Just two for me. So, firstly, can you just talk about the level of price increases you're putting through? And if you're seeing any pushback on the residential side, just given the level of volume growth in the first quarter. And then secondly, in terms of -- probably one for Ken -- just in terms of the SG&A, I mean, obviously, the admin expenses, I guess some of that is coming from the modernization that you did last year. So, how sustainable are they going forward through this year and, I guess, your ability to reinvest that? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer So, looking at your questions -- thank you for your questions. The first question with respect to pricing, it's interesting. When we look -- step back and we look at this business, I think recently, you've heard me start to talk about this as a CPI-plus type of business. So, we think this service is certainly an essential service and should command CPI-plus level pricing. So, 3% to 4% this year is certainly -- it's something we passed along, and we're seeing that stick. We just feel like the service is just too valuable, not to price it at those levels. And then secondly, when you look at the SG&A levels across the business, we're -- it's good to see the improvements that we're seeing in our cost structure. I think in the quarter, we talked about a 20-basis-point improvement in SG&A as a percentage of sales. But when you unpack that, you see that we spent roughly 50 basis points more on growth-oriented investments but 70 basis points less of back-office costs. And I think that's representative of the work we're doing to improve the effectiveness and the productivity of our business. We feel like there's more to come, but we certainly are happy with the progress we're making there. Ollie Davies -- Redburn Atlantic -- Analyst OK. Thanks. Operator And our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed. Unknown speaker Hey, sorry, Steve again. Apologies if I missed this one, but what was the exit growth for residential? I believe the 10% was for the entire company, but what was it for resi? Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Yeah. It was 10.8% to be -- to put a fine point on it for the entire company. And for residential, it was 8%. Jerry Gahlhoff -- President and Chief Executive Officer For February and March. Ken Krause -- Executive Vice President, Chief Financial Officer and Treasurer Yeah, for February and March. Operator We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments. Jerry Gahlhoff -- President and Chief Executive Officer Thank you, everyone, for joining us today. We appreciate your interest in our company and look forward to speaking with you all at our upcoming investor conference. Thanks again.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good afternoon, everyone, and welcome to Snap Incorporated's first quarter 2024 earnings conference call. At this time, participants are in a listen-only mode. I would now like to turn the call over to David Ometer, head of investor relations. David Ometer -- Head of Investor Relations Thank you, and good afternoon, everyone. Welcome to Snap's first quarter 2024 earnings conference call. With us today are Evan Spiegel, chief executive officer and co-founder; and Derek Andersen, chief financial officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, slides, investor letter, and investor presentation. This conference call includes forward-looking statements which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today, as well as risks described in our most recent Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes, as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan. Evan Spiegel -- Chief Executive Officer and Co-Founder Hi, everyone, and thank you all for joining us. I'm excited to share the progress we are making on our strategic priorities and the momentum we are building to capitalize on the long-term potential of our business. I'm deeply inspired by the dedication and efforts so many of our team members have put into serving our community and our partners, and it is gratifying to see our efforts beginning to bear fruit. On our call today, I'll open with some observations about our strategic direction and key developments and then you'll hear from Derek. The full financial detail is in our investor letter, but going forward, we'll also be giving more context on the earnings call. We remain committed to executing against our three strategic priorities; accelerating and diversifying our revenue growth, growing our community and deepening their engagement, and leading in augmented reality. The most important strategic priority we set out for 2024 is accelerating and diversifying revenue growth. We have made significant progress to start the year with revenue growing 21% year over year, an acceleration of 16 percentage points over the prior quarter growth rate, which was driven by improvements we have made to our advertising platform and an increase in demand for our advertising solutions while also benefiting from the impact of an improved operating environment. Our large hard-to-reach audience, brand-safe environment, and continued innovation and progress on our advertising platform have made us a valuable partner for businesses that want to reach the next generation. Our second strategic priority, designing innovative products and services that enhance people's relationships with their friends, family, and the world, continues to drive the growth of our global community. In Q1, we reached 422 million daily active users, an increase of 39 million or 10% year over year. We continue to broaden and deepen engagement with our content platform with the number of viewers and total time spent watching content growing globally year over year. Our focus on visual communication between friends and family is a strategic advantage that has enabled us to reach more than 75% of 13 to 34-year-olds in over 25 countries with these countries representing more than 50% of the global advertising market. Relationships are what drive the depth of engagement on our platform. Our goal is to ensure that Snapchat helps enhance relationships with the people who matter most. These relationships lead to increased daily active usage of our platform and happier members of our community. Four out of five Snapchatters believe that connecting with friends is the simplest way to feel better. This year, we are particularly focused on helping lightly engaged new and resurrected Snapchatters build relationships on our platform. Building just one or two close relationships on Snapchat and dramatically increase the number of active days for these cohorts, while simultaneously leading to a happier and healthier community. Over 90% of Snapchatters say they feel comfortable, happy, and connected when they use Snapchat. And Snapchat is ranked as the number one happiest platform when compared to other apps. We've been working hard to improve our advertising platform by helping our partners transition to new ways of measuring and optimizing their advertising spend in order to provide improved ROAS. In Q1, ongoing momentum with our 70-pixel purchase optimization model led to a more than 75% increase in purchase-related conversions year over year. In addition, we are excited by the progress we're seeing with our small and medium-sized advertising partners. Today, small- and medium-sized businesses and creators can promote their services, content, or products and reach new audiences, all with just a few taps within the Snapchat application. This has been instrumental in significantly accelerating the number of SMB advertisers on Snapchat, which increased 85% year over year. As we look forward, the deliberate actions we've taken with our cost structure have cleared a path to meaningful adjusted EBITDA profitability and positive free cash flow. We have invested heavily in cloud infrastructure over the past year in order to improve the performance of our advertising products and deepen engagement on our platform. We will continue to calibrate our investments, carefully moving forward to ensure we build on this momentum while also realizing the operating leverage necessary to drive improved financial performance. We believe that a strong financial foundation and track record of innovation are critical inputs in fulfilling our vision of computing overlaid on the world. This is our third strategic priority. We have never worked on anything as profound and meaningful as augmented reality. AR enables us to service digital experiences seamlessly in the world around us, transforming the way we use computing in our daily lives. Our AR products and services are driving major impact at scale today. On average, over 300 million people engage with augmented reality every single day on Snapchat. Our community plays with AR lenses billions of times per day on average, and our AR creator community has built millions of lenses using our Lens Studio software. Having a large engaged AR audience and creator community enables us to innovate rapidly. This unique position has allowed us to develop a lead and augmented reality over the last decade by leveraging one of the world's most used cameras, developing highly advanced technology and tools, and growing a vibrant AR creator ecosystem. We believe that our large and growing community, an innovative and engaging service that continues to evolve and a strong balance sheet with positive free cash flow positions us well to achieve our long-term vision for augmented reality, which we believe will be one of the most meaningful advancements in computing that the world has ever seen. With that, I'd like to turn the call over to Derek to speak about our financials. Derek Andersen -- Chief Financial Officer Thanks, Evan, and good afternoon, everyone. For the first quarter, revenue and adjusted EBITDA exceeded our expectations as a result of increased demand for our advertising solutions and an improved cost structure that enabled us to generate greater operating leverage. Q1 revenue grew 21% year over year to $1.195 billion, driven by the 14 percentage point acceleration in advertising revenue, which grew 16% year over year in Q1. The Direct Response, or DR portion of advertising revenue increased 17% year over year, up from 3% growth in the prior quarter as we began to see improved ROAS for our advertising partners, translate into accelerating demand on our ad platform. Small and medium-sized advertisers, in particular, grew quickly in Q1, with active advertisers in this segment, up 85% year over year. brand-oriented advertising revenue increased 12% year over year, driven by strong demand for our takeover products in Q1 and an improved operating environment. We also continue to make progress toward diversifying our revenue sources with other revenue up 194% year over year to reach $87 million. Other revenue includes all nonadvertising revenue and consists almost entirely of Snapchat+ subscription revenue. Snapchat+ subscribers topped $9 million in Q1, more than tripling year over year. From a regional perspective, we observed acceleration in both DR and brand-related advertising revenue growth across all regions in Q1. We were particularly pleased to see the improvements we have made to our ad platform translate to improved revenue growth in North America, where revenue grew 16% year over year in Q1, an acceleration of 14 percentage points over the prior quarter growth rate. Brand-oriented demand in Rest of World and Europe accelerated at a relatively faster pace in Q1, as these regions were more significantly impacted by the war in the Middle East in the prior quarter. We observed the highest rate of acceleration in total advertising revenue growth in Rest of World in Q1, driven in part by strong seasonal demand during the Ramadan holiday, which was further amplified by the timing of the holiday season shifting into Q1 of the current year. Total adjusted cost of revenue was $570 million in Q1, up 31% year over year. Infrastructure costs were the largest driver of the year-over-year increase, driven in large part by the ramp in ML and AI investments to support our DR platform and content engagement that we implemented in Q2 and Q3 of the prior year. The level of investment in ML and AI was relatively stable across Q4 of 2023 and Q1 of 2024, and we have continued to improve our cloud infrastructure unit costs through a combination of engineering efficiency and pricing improvements. In addition, we benefited from higher-than-average service provider credits in Q1 that helped to further reduce infrastructure costs in Q1. As a result, infrastructure cost per DAU declined from $0.84 in Q4 of 2023 to $0.80 in Q1 of 2024. The remaining components of adjusted cost of revenue, including content, developer, advertising, and other partner costs were $232 million in Q1 or 19% of revenue, compared to 20% in the prior quarter and 21% in the prior year. Adjusted gross margin was 52% in Q1 compared to 55% in the prior quarter and 56% in the prior year. The quarter-over-quarter decline in adjusted gross margin is driven entirely by seasonally lower revenue in Q1 compared to Q4, partially offset by the sequential decline in infrastructure costs per DAU. The year-over-year decline in adjusted gross margin reflects higher infrastructure investments that began to ramp up in Q2 and Q3 of the prior year, which was partially offset by operating leverage from accelerating revenue growth in Q1. Adjusted operating expenses were $579 million in Q1, up 5% year over year. Personnel costs increased 4% year over year in Q1, driven primarily by the impact of higher personnel costs per regular full-time employee, which was partially offset by reductions in team size as a result of the restructuring initiatives. We implemented the restructuring in phases throughout the quarter, resulting in a 3% decline in average head count year over year. We ended Q1 with 4,835 full-time head count, which was down 7% year over year and down 27% from our peak headcount in mid-Q3 of 2022. Adjusted EBITDA was $46 million in Q1, up from $1 million in Q1 of the prior year, reflecting both accelerating revenue growth and operating expense discipline. Net loss was $305 million in Q1 compared to $329 million in Q1 of the prior year. The improvement in net loss on a year-over-year basis reflects the flow-through of higher adjusted EBITDA and as well as a $60 million reduction in stock-based compensation and related expenses, or SBC, partially offset by transition costs of $70 million related to our restructuring initiatives. The impact of past refresh grants on the GAAP accounting of SBC expense has now fully dissipated from the cost structure. This was the largest driver of the year-over-year decline in SBC in Q1 and followed by the impact of reduced headcount as a result of the recent restructuring. Dilution or growth in our share count was 3.8% in Q1, down from 5.7% in the prior quarter. As part of our efforts to responsibly manage the impact of SBC on our share count, we repurchased 21 million shares at a cost of $235 million in Q1 reflecting an average repurchase price of $11.19. Since we began opportunistically managing our share count through share repurchases in Q3 of 2022. We have repurchased 145 million shares, representing 8% of fully diluted shares outstanding at an average price of $9.86 per share a total cost of $1.4 billion. Free cash flow was $38 million in Q1, as we continued to strategically prioritize our investments to drive sustained and meaningful positive free cash flow. We ended Q1 with $2.9 billion in cash and marketable securities on hand. In addition, in Q1, we repurchased $100 million of our outstanding 2025 convertible notes and $351 million of our outstanding 2026 convertible notes at prices below par value. Through these transactions, we have further reduced the level of debt maturing in the years ahead, while also eliminating the risk of future dilution from the repurchased convertible notes. Turning to our outlook. We anticipate continued growth of our global community and our Q2 guidance is built on the assumption that DAU will be approximately $431 million in Q2. Our Q2 guidance range for revenue is $1.225 billion, to $1.255 billion, implying year-over-year revenue growth of 15% to 18%. This would represent a three to six-percentage-point deceleration in growth rate compared to Q1. And which we attribute to the three-percentage-point quarter-over-quarter acceleration in revenue growth experienced in the prior year and a further estimated three-percentage-point headwind due to changes in seasonality factors, including the timing of the Ramadan holiday season shifting toward Q1 in the current year and the impact of the leap day in Q1 of 2024. Our investment plans for Q2 include modest incremental investments in infrastructure, personnel, and marketing to sustain the momentum we have established in our business as well as the impact of an increasing legal and regulatory burden on our cost structure. Given the revenue range above and our investment plans for the quarter ahead, we estimate that adjusted EBITDA will be between $15 million and $45 million in Q2. We have made significant progress to optimize our cost structure and believe it will be productive to provide forward-looking insights into our estimated full-year 2024 cost structure. We currently estimate that quarterly infrastructure cost per DAU will be in the $0.83 to $0.85 range for the remainder of 2024. We will continue to assess our infrastructure investment levels based on what is in the best long-term interest of our business. We expect the remaining components of cost of revenue, including content and developer partner costs, as well as advertising partner and other costs to remain relatively stable as a percentage of revenue at a combined 19% to 21% of revenue, which is within the range we have reported over the trailing four quarters. We currently anticipate that the headcount and personnel costs will grow modestly as we move through 2024, resulting in full-year adjusted operating expenses of approximately $2.425 billion to $2.55 billion. We see limited opportunity to productively reduce adjusted operating expenses below this range. And if we are able to sustain higher rates of revenue growth into the second half of 2024, we will invest prudently to support that growth. For SBC, we anticipate modest sequential growth as we move through 2024, resulting in an estimated full-year SBC expense of $1.13 billion to $1.2 billion. With that, I'll kick it back to Evan for closing remarks. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Derek. As we continue to execute in the quarters ahead, we remain focused on serving our community with innovative and responsible products, investing in our direct response business to deliver measurable ROAS for our advertising partners, cultivating new sources of revenue to diversify our top-line growth and scaling our investment levels prudently to deliver meaningful and sustained profitability and positive free cash flow. The most critical input to delivering on these strategic initiatives we laid out is innovation. That includes innovating on our products, our advertising platform, and the future of augmented reality. We believe that our demonstrated track record of innovation over the last 12 years positions us well to deliver on this for our community, our partners, and our investors. While there is still a lot of work to be done, we are pleased that this focus has translated into improved results in Q1. We will now begin our Q&A session. Questions & Answers: Operator Thank you. We will now begin the Q&A session. [Operator instructions] Our first question comes from Doug Anmuth with JPMorgan. Please proceed. Doug Anmuth -- JPMorgan Chase and Company -- Analyst Thanks so much for taking the question. Can you just help us understand the drivers and you listed a number of things, but just help us kind of frame and maybe prioritize the drivers of the DR acceleration in 1Q. And just kind of how you think about linearity and progression through 2024? And then if you could comment just on the slight detail that you're guiding to in the second quarter as well? Thank you. Derek Andersen -- Chief Financial Officer Hi, Doug. It's Derek. Thanks for the question. I think, look, at the first outset, I would say that probably the most important takeaway or theme of the top line results is just how broad-based the acceleration was on the top line. You mentioned DR specifically, but we did see each of brand NDR and those two pillars across all three of our regions accelerate in the quarter. We also saw that the SMB customer base grew quite quickly, active advertisers, they are up 85%. And also then looking over at the Snapchat+ business also subs tripling or more year over year to $9 million. So, we did see a really broad-based improvement in the top line. On the DR side, specifically, I think you've probably seen that we've been making really significant investments in that line of business over the last year, and we made a lot of investments in infrastructure to help improve their number one, leveraging more of our privacy say, signals for ranking and optimization and then continuing to evolve our models to incorporate more of those signals, making larger models and refreshing them more frequently. And we've seen really good momentum, in particular on the 70-pixel purchase optimization that led to more than 75% increase in purchase-related conversions in Q1. And we're making progress on some of the nuts and bolts there around, for example, CAPY adoption. We saw a more than 300% increase year over year on that. And we now have coverage there of approximately half of the DR revenue. And you made some improvements just in expanding the addressable market there with the rollout of 70 optimization to app install and app purchase with additional app goals coming in Q2 on the road map there. So, there's a lot of progress on that front. We're seeing that show up in improved rollouts. And I think many of you saw in your channel checks even in Q4 that you were starting to hear about the return on rollouts in the advertising community. And I think you can see that now showing up in the demand in this quarter. So, if you take them together, I think that each of those are proof points that the DR business is performing much, much better now. And that each of those things are rollout-based, return-based, customer success base, and that speaks to sort of the durability of that basis. So, you asked a little bit about the transition of the growth rate into Q2, and we do expect the progress that we've made with the DR business to continue but we do have some unique items just on seasonality. I pointed to a couple in the letter. One in particular, we did have an improvement in the growth rate in the prior year of about 3 percentage points quarter over quarter, so that contributes to comps a little. And then there's some unique seasonality factors as we transition from Q1 to Q2 this year, notably, the leap day in Q1 of this year that contributed to the higher growth in as well as the timing of the Ramadan holiday season, moving more so into Q1 this year relative to Q2 last year and that further contributes to some of the transitions there, but none of those factors really speaking to the fundamentals of the improvement in the business that we're seeing. So, hopefully, that gives you a little bit of a sense of what we're seeing and the momentum that we've established on that line of the business. Thank you. Operator Our next question comes from Ken Gawrelski with Wells Fargo. Please proceed. Ken Gawrelski -- Well Fargo Securities -- Analyst Hi, Evan and Derek. You discussed on the fourth quarter earnings call, a shift in the company resources to grow engagement in North America and EMEA. Can you talk about any early progress I know North America DAUs were flat quarter over quarter in 1Q, but maybe any early thoughts on future North America growth for 2Q and beyond and maybe what's incorporated in that and the early look at 2Q DAUs, please? Thank you. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Ken. Yes, we certainly have been shifting more of our resourcing and focus to growth in North America and Europe. It's a different opportunity set. Historically, we were more focused on new users and developing markets who are typically on Android devices. This is really about focusing more on reengagement with users who have downloaded Snapchat before and who may not be using it as often as some of their friends and those users are typically on iOS. So, I'd say the opportunity set overall is different. And in our early explorations, we're finding a lot of opportunity to improve that product experience. So, the near-term month-over-month trends have been pretty constructive growth from February to March and March to April month-to-date in North America. It has been positive. So, we're making progress here. It is early, but we are seeing a lot of opportunity and eager to improve the product for our community in North America and Europe. Operator Our next question comes from Rich Greenfield with LightShed Partners. Please proceed. Rich Greenfield -- LightShed Partners -- Analyst Hi. Thanks for taking the question. Look, I think the -- Evan, when I look at the time spent watching content globally, it was up, but North America was relatively -- you sort of signaled the last couple of quarters, it's flattish. But you keep calling out Spotlight momentum. And it feels like if I think about how you shift time spent on the platform or grow time spent on the platform? It seems like Spotlight's, the key to unlocking meaningful growth. Yes, creator stores are growing, but especially as you unify the feed, it feels like Spotlight's so important. And I guess could you just -- as you look across the landscape, real short TikTok versus Spotlight. How do you evaluate where Spotlight is today on a relative basis versus the choices consumers have are similar? I realize it's not exact, but a similar experience. And how aggressively are you investing to take share with Spotlight? Thanks. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Rich. Yes, as we look at Spotlight and creator stories, they've definitely been bright spots in terms of time spent. As you mentioned, we are really working to simplify and unify the experience, both in terms of the user perspective. So, one unified feed of content, but also the ranking stack, which is going to enable us to really share signal, engagement signals between stories, and Spotlight, which we just haven't done historically. So, we think that will really help personalize the experience overall. I'd say looking at the feedback from our community, one area where we can really improve is in making the content feel more timely and topical. We have a lot of great signals from our community about things that are trending, things that they're interested in, in a given moment. But we haven't done a very good job surfacing the corresponding content that we also have as well because people are making billions of snaps every day on Snapchat. So, I think there's work to be done to make our content experience feel more timely and topical, and then we're spending a lot of focus on the creator journey overall. That journey from using Snapchat to communicate with 100 friends to growing a following of millions. And really making sure that people are creating great stories or great Spotlight content can be discovered and then grow that following and ultimately build a business over time. So, that's been a big focus as well. Certainly, a big opportunity for us, and we're working away at it. Operator Our next question comes from Ross Sandler with Barclays. Please proceed. Ross Sandler -- Barclays -- Analyst Yeah. Hi, guys. So, it sounds like you're upgrading, revamping the app install or app kind of transaction category within the DR business. Can you just remind us like back in the day, how big that category -- Operator And it appears we've lost connection with Ross. Our next question today comes from James Heaney with Jefferies. Please proceed. James Heaney -- Jefferies -- Analyst Great. Thanks for the question. Over the last few quarters, you've continued to grow your advertiser count at a pretty healthy clip. Can you guys just talk about this newer cohort of advertisers and what their propensity to spend looks like relative to older advertiser cohorts? And at what point do you feel like your SMB revenue starts to become more material? Thanks. Derek Andersen -- Chief Financial Officer Hey there. Thanks. I think to start, we're growing a newer segment of customers here, and I think that's really exciting to broadening out the overall base of advertisers. So, I shared earlier in response to another question that we've seen the active advertiser count on the small and medium-sized customer base up to 85% year over year and it being the fastest-growing customer segment. So, that is very exciting. And I think overall, you're seeing a broadening of the base of advertisers. There's a journey. I think that you're going to see advertisers go through in terms of one coming on to the platform, initial testing seeing performance with some of these scaled self-serve products and then being able to grow and optimize. And of course, as we continue to bring more privacy-safe signals into our models and invest in bigger models, and get better and better at optimization and ranking, those products become more performant. They deliver better roots to those customers and then give them the ability to bid and expand their budget. So, I do think there's a journey here. I think what's really exciting is to see the ad platform delivering the kind of results that can help us grow that customer base because over the long term, the small and medium-sized customer base is going to be an absolutely critical ingredient to reaching the full monetization potential of the business. So, off to a good start, and a lot of work to do to continue helping more of these advertisers through that journey. Hopefully, that context helps. Operator Our next question comes from Michael Morris with Guggenheim. Please proceed. Michael Morris -- Guggenheim Securities -- Analyst Thank you. Good afternoon. Wanted to ask you about spending and investment. Large companies in the technology sector are certainly increasing their investment in artificial intelligence infrastructure. Can you talk about your level of investment currently, whether you think that's sufficient? And how you think about your size and scale relative to larger players and what it takes for you to continue to be competitive in connecting with your audience. And if I could just ask one follow-up on those statistics, Derek, that you reported and just shared about the CAP integrations and the purchase conversions, the numbers are very large, far ahead of where your revenue growth is. Can you just talk about what it takes to get more of your customer base engaged with those? And can that drive acceleration in that revenue in the coming quarters and years? Thanks. Derek Andersen -- Chief Financial Officer Yes, I can start around the scale and scope of the infrastructure investments, and you're going to see those show up in really a couple of places. Number one, we shared last year that we scaled up our ML and AI infrastructure spending into the range of about $100 million a quarter starting in Q2 and Q3 of last year. And then we shared that that investment -- larger investments were relatively stable over the last two quarters. Obviously, with the full-year range on infrastructure for Dow, stepping up from $0.80 in Q1 to 83% to 85% in the remaining quarters of the year. We've given ourselves room to invest more there. I think the important -- there's a couple of important things I would say, just to put our investment in perspective. One is that we're investing on a different model rather than capex, it's showing up as a cloud infrastructure cost that's running through cost of revenue. But two, there's a multiplier on that spend as an ongoing operating expense relative to the underlying capex it represents. So, while we might be spending hundreds of millions a year currently on this type of infrastructure, the underlying capital is multiples of that. So, the scale of the infrastructure that we have access to, to run our models is obviously much, much larger. And so, that's giving the business access to a lot of capacity. And I think second and perhaps really over the long term, the most important thing is whether or not we're seeing the returns on that investment that are going to allow us to continue to scale that investment profitably for the business. And I think what you're seeing in the results in Q1 here are proof points that those investments that we've made in that infrastructure are paying off in significant and accelerating revenue growth and in particular, on the DR ad platform in addition to how it's contributing on the engagement side, and that's going to position the business to be able to continue to scale those investments ideally continue to see positive ROI on that like we have seen and grow our business over time. So, hopefully, that gives you a little bit of perspective of how we're thinking of we're going to continue to reassess that. We've been really pleased with the ROI on those investments to date, and we've made room to scale them, and we'll continue to do that based on the data that we're getting back. On your second question related to CAP integrations, we're really pleased with the momentum on the coverage that we've seen there. I'd mentioned that we're looking at about 50% demand-weighted coverage of our DR ad revenue and those integrations are up about 3x, 300% year over year. So, obviously, good momentum in getting that adopted across our DR advertising customer base. So, really important, I think, to insulating the business going forward and helping our customers to have measurable results. And as I said in the answer to the prior question, the recipe here is getting people on board, getting them to adopt the right advertising solution for the objectives they're trying to achieve. And a good proof point on that is we are providing targeted offers to small- and medium-sized customers. based on what we know about their business to recommend the right advertising product for them and advertisers that adopt those recommendations are seeing much improved results, and that's contributing in a scaled, self-served way, to people being able to meet their ROAS objectives, grow their business, which puts them in a position to invest more on our platform. So, I think that's the recipe there in terms of us seeing that advertiser base scale -- and we shared that 85% growth in the active advertisers in the segment to let you know that in addition to people making progress on these integrations, it's turning into a flywheel on the actual customer base. So, hopefully, that gives you a little bit more context of what we see as the path there and how that's going. Operator Our next question comes from Benjamin Black of Deutsche Bank. Please proceed. Benjamin Black -- Deutsche Bank -- Analyst Great. Thanks for taking my question. Can you talk a little bit more about your build-out of the app value optimization? How meaningful could that be -- is there any risk of disruption to the app install business in that progress there? And perhaps more broadly, what are some of the other initiatives you have on the product road map over the next 12 to 18 months that you're excited about? Evan Spiegel -- Chief Executive Officer and Co-Founder Yeah. Thanks so much for the question. On the app side, the biggest thing we've been working on lately is just landing these model updates. We, I guess, in the last week or so, have updated our app install models, both for scan and non-scan. So, that's been great. And we now have our app install 70 and purchase 70 products in testing. It's very early, but the results have been promising so far. We also have a new scan offering that we're just introducing to our customers. So, we'll be excited to get their feedback and see how that can improve their performance, and we have a number of customers testing that already. I think value optimization will follow. We've really just been focused on driving more click-through installs at much lower CPIs for our advertising partners. And then we'll be working more on the value optimization piece. I think just broadly looking at the advertising platform, we have made a lot of progress, as Derek mentioned, on signals and running much larger unified models, of course, the ad interactions as well in the ad formats. I think sort of looking ahead, we've been working on things like product selection for our dynamic product ads product. We've been making progress with things like cold start, which is especially relevant for SMB advertisers at lower levels of spend to help them find success. So, I think there's a lot more work to do, but we're building on a solid foundation now, and we've been able to make some very rapid progress. Operator Our next question comes from Mark Shmulik with Bernstein. Please proceed. Mark Shmulik -- Bernstein -- Analyst Yeah. Thanks for taking my question. A couple if I may. The first just on Snap Stars. It sounds like it's growing quite well and really contributing to engagement. Just wanted to kind of ask how do we think about the philosophy as we think about onboarding more Snap stars, more spotlight more broadcast out media and how does that fit in the long-term engagement strategy kind of balancing it with like deepening connections with friends family of people you care about? And then just the second question for Derek, we've heard from others just on the recovery of the digital ad market, certain verticals coming back kind of quicker than others. Any color you can share just about the vertical mix you've seen? Thanks. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks so much for the question. Yeah, as we look at content on Snapshot, I think the most successful is really about relationships. And those can be relationships with your close friends and family, but it could also be relationships with Snap Stars. And that's the feedback we hear from Snap Stars as well that the engagement they have the relationship they're able to build with their audience on Snapchat is really unparalleled. And one of the reasons why they love investing in our platform. As we look at scaling the Snap Star program, I'd say today, the focus is mostly around looking at countries, geographies where we're sort of under-indexed in investing in Snap Stars there so we can build out more local language content. We're also looking at interest. A lot of Snap Stars create content around their interests. That could be food or travel, sports, those sorts of things. And so, we're really looking at this intersection of the geographies where we have Snap Stars and on the interest as well and really lining up with that up with our community and what they're looking for. So, yes, I would say overall, to your point, relationships really do drive that content consumption on our service, and that's why Snap Stars are such an important part of our offering. Derek Andersen -- Chief Financial Officer Sorry, in terms of color on the verticals and where we're seeing the operating environment generally, as we went through Q1, number one, I think we've seen the improvement in the operating environment to be fairly broad into Q1 and that we did see certain regions particularly impacted by the war in the Middle East in Q4. And so, that certainly, we've seen demand, as we mentioned in the letter, really improve on that front quarter over quarter. But I think more broadly, we saw a much more robust brand environment, which played out in all of our regions in Q1. And then from a DR perspective, it's really about fit. And of course, with purchase optimization and the scaled self-serve SMB product is working really well. We've seen verticals such as CPG, e-commerce, restaurants and travel, and SMBs broadly working really well. And I think what we're excited about is to be able to broaden that out to a wider set of customers as we introduce more of these out-based optimizations and start to address other verticals. So, a much better environment in Q1 for sure. Thank you for the question. Operator Our last question comes from Dan Salmon with New Street Research. Please proceed. Dan Salmon -- New Street Research -- Analyst Hi. Good afternoon, everybody. Can you hear me, OK? Evan Spiegel -- Chief Executive Officer and Co-Founder Yes, we can. Thank you. Dan Salmon -- New Street Research -- Analyst OK. Good. Sorry about that. So, two questions. Evan, I'm just curious, any early learnings from your ad partnership with Amazon and whether or not you'd consider more ad partners that can bring incremental demand both Amazon and Google or cloud partners after all could be interesting. And then second for Derek, can we just go back to the SMB advertiser growth at 85%. I mean, that's significant acceleration. Was there something like one-time in that? Or is that the type of level of growth you can expect throughout the year? Thank you. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Dan. Yes, as we look at Amazon partnership and what they're doing with Handshake, I do think that's a great learning opportunity for us. It's still very early, but I think what's exciting is being able to bring relevant products to Amazon shoppers inside the Snapchat experience. We know that people now shop where they consume content and so to be able to offer a relevant product selection in line and allow people to check out with 1 tap is certainly an exciting product development. So, we'll obviously continue to learn there and evolve that product. I do think just separately that some of these ad partnerships we've done and work we've done with other demand partners have been important elements of our growth, and we do see continued opportunity there. Derek Andersen -- Chief Financial Officer Dan, on the question about SMB, I would agree. I mean, that growth on the active advertisers is obviously, a really important input to building what we hope will be a very big business for us over time. And we're early in the going. So, there's a lot of opportunity set here both in terms of product-market fit as we are able to have more optimizations that are going to appeal to a wider and wider audience in that SMB set. And I think we're learning a lot about how to use integration partners to help make it easier for these advertisers to onboard over time as well as the ability to work our funnels, whether that's from awareness to onboarding an acquisition to trial and discovery and through the scaling process of delivering raws for these partners. So, we're early in the going there, but excited about the progress we're seeing so far, and it's something that we'll hope to build on as we go forward. So, thanks for the question. Hopefully, that gives you a little more perspective thinking about it. Operator This concludes our Q&A session as well as Snap Inc. first quarter 2024 earnings conference call. Answer:

Operator Good afternoon, everyone, and welcome to Snap Incorporated's first quarter 2024 earnings conference call. At this time, participants are in a listen-only mode. I would now like to turn the call over to David Ometer, head of investor relations. David Ometer -- Head of Investor Relations Thank you, and good afternoon, everyone. Welcome to Snap's first quarter 2024 earnings conference call. With us today are Evan Spiegel, chief executive officer and co-founder; and Derek Andersen, chief financial officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, slides, investor letter, and investor presentation. This conference call includes forward-looking statements which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today, as well as risks described in our most recent Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes, as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan. Evan Spiegel -- Chief Executive Officer and Co-Founder Hi, everyone, and thank you all for joining us. I'm excited to share the progress we are making on our strategic priorities and the momentum we are building to capitalize on the long-term potential of our business. I'm deeply inspired by the dedication and efforts so many of our team members have put into serving our community and our partners, and it is gratifying to see our efforts beginning to bear fruit. On our call today, I'll open with some observations about our strategic direction and key developments and then you'll hear from Derek. The full financial detail is in our investor letter, but going forward, we'll also be giving more context on the earnings call. We remain committed to executing against our three strategic priorities; accelerating and diversifying our revenue growth, growing our community and deepening their engagement, and leading in augmented reality. The most important strategic priority we set out for 2024 is accelerating and diversifying revenue growth. We have made significant progress to start the year with revenue growing 21% year over year, an acceleration of 16 percentage points over the prior quarter growth rate, which was driven by improvements we have made to our advertising platform and an increase in demand for our advertising solutions while also benefiting from the impact of an improved operating environment. Our large hard-to-reach audience, brand-safe environment, and continued innovation and progress on our advertising platform have made us a valuable partner for businesses that want to reach the next generation. Our second strategic priority, designing innovative products and services that enhance people's relationships with their friends, family, and the world, continues to drive the growth of our global community. In Q1, we reached 422 million daily active users, an increase of 39 million or 10% year over year. We continue to broaden and deepen engagement with our content platform with the number of viewers and total time spent watching content growing globally year over year. Our focus on visual communication between friends and family is a strategic advantage that has enabled us to reach more than 75% of 13 to 34-year-olds in over 25 countries with these countries representing more than 50% of the global advertising market. Relationships are what drive the depth of engagement on our platform. Our goal is to ensure that Snapchat helps enhance relationships with the people who matter most. These relationships lead to increased daily active usage of our platform and happier members of our community. Four out of five Snapchatters believe that connecting with friends is the simplest way to feel better. This year, we are particularly focused on helping lightly engaged new and resurrected Snapchatters build relationships on our platform. Building just one or two close relationships on Snapchat and dramatically increase the number of active days for these cohorts, while simultaneously leading to a happier and healthier community. Over 90% of Snapchatters say they feel comfortable, happy, and connected when they use Snapchat. And Snapchat is ranked as the number one happiest platform when compared to other apps. We've been working hard to improve our advertising platform by helping our partners transition to new ways of measuring and optimizing their advertising spend in order to provide improved ROAS. In Q1, ongoing momentum with our 70-pixel purchase optimization model led to a more than 75% increase in purchase-related conversions year over year. In addition, we are excited by the progress we're seeing with our small and medium-sized advertising partners. Today, small- and medium-sized businesses and creators can promote their services, content, or products and reach new audiences, all with just a few taps within the Snapchat application. This has been instrumental in significantly accelerating the number of SMB advertisers on Snapchat, which increased 85% year over year. As we look forward, the deliberate actions we've taken with our cost structure have cleared a path to meaningful adjusted EBITDA profitability and positive free cash flow. We have invested heavily in cloud infrastructure over the past year in order to improve the performance of our advertising products and deepen engagement on our platform. We will continue to calibrate our investments, carefully moving forward to ensure we build on this momentum while also realizing the operating leverage necessary to drive improved financial performance. We believe that a strong financial foundation and track record of innovation are critical inputs in fulfilling our vision of computing overlaid on the world. This is our third strategic priority. We have never worked on anything as profound and meaningful as augmented reality. AR enables us to service digital experiences seamlessly in the world around us, transforming the way we use computing in our daily lives. Our AR products and services are driving major impact at scale today. On average, over 300 million people engage with augmented reality every single day on Snapchat. Our community plays with AR lenses billions of times per day on average, and our AR creator community has built millions of lenses using our Lens Studio software. Having a large engaged AR audience and creator community enables us to innovate rapidly. This unique position has allowed us to develop a lead and augmented reality over the last decade by leveraging one of the world's most used cameras, developing highly advanced technology and tools, and growing a vibrant AR creator ecosystem. We believe that our large and growing community, an innovative and engaging service that continues to evolve and a strong balance sheet with positive free cash flow positions us well to achieve our long-term vision for augmented reality, which we believe will be one of the most meaningful advancements in computing that the world has ever seen. With that, I'd like to turn the call over to Derek to speak about our financials. Derek Andersen -- Chief Financial Officer Thanks, Evan, and good afternoon, everyone. For the first quarter, revenue and adjusted EBITDA exceeded our expectations as a result of increased demand for our advertising solutions and an improved cost structure that enabled us to generate greater operating leverage. Q1 revenue grew 21% year over year to $1.195 billion, driven by the 14 percentage point acceleration in advertising revenue, which grew 16% year over year in Q1. The Direct Response, or DR portion of advertising revenue increased 17% year over year, up from 3% growth in the prior quarter as we began to see improved ROAS for our advertising partners, translate into accelerating demand on our ad platform. Small and medium-sized advertisers, in particular, grew quickly in Q1, with active advertisers in this segment, up 85% year over year. brand-oriented advertising revenue increased 12% year over year, driven by strong demand for our takeover products in Q1 and an improved operating environment. We also continue to make progress toward diversifying our revenue sources with other revenue up 194% year over year to reach $87 million. Other revenue includes all nonadvertising revenue and consists almost entirely of Snapchat+ subscription revenue. Snapchat+ subscribers topped $9 million in Q1, more than tripling year over year. From a regional perspective, we observed acceleration in both DR and brand-related advertising revenue growth across all regions in Q1. We were particularly pleased to see the improvements we have made to our ad platform translate to improved revenue growth in North America, where revenue grew 16% year over year in Q1, an acceleration of 14 percentage points over the prior quarter growth rate. Brand-oriented demand in Rest of World and Europe accelerated at a relatively faster pace in Q1, as these regions were more significantly impacted by the war in the Middle East in the prior quarter. We observed the highest rate of acceleration in total advertising revenue growth in Rest of World in Q1, driven in part by strong seasonal demand during the Ramadan holiday, which was further amplified by the timing of the holiday season shifting into Q1 of the current year. Total adjusted cost of revenue was $570 million in Q1, up 31% year over year. Infrastructure costs were the largest driver of the year-over-year increase, driven in large part by the ramp in ML and AI investments to support our DR platform and content engagement that we implemented in Q2 and Q3 of the prior year. The level of investment in ML and AI was relatively stable across Q4 of 2023 and Q1 of 2024, and we have continued to improve our cloud infrastructure unit costs through a combination of engineering efficiency and pricing improvements. In addition, we benefited from higher-than-average service provider credits in Q1 that helped to further reduce infrastructure costs in Q1. As a result, infrastructure cost per DAU declined from $0.84 in Q4 of 2023 to $0.80 in Q1 of 2024. The remaining components of adjusted cost of revenue, including content, developer, advertising, and other partner costs were $232 million in Q1 or 19% of revenue, compared to 20% in the prior quarter and 21% in the prior year. Adjusted gross margin was 52% in Q1 compared to 55% in the prior quarter and 56% in the prior year. The quarter-over-quarter decline in adjusted gross margin is driven entirely by seasonally lower revenue in Q1 compared to Q4, partially offset by the sequential decline in infrastructure costs per DAU. The year-over-year decline in adjusted gross margin reflects higher infrastructure investments that began to ramp up in Q2 and Q3 of the prior year, which was partially offset by operating leverage from accelerating revenue growth in Q1. Adjusted operating expenses were $579 million in Q1, up 5% year over year. Personnel costs increased 4% year over year in Q1, driven primarily by the impact of higher personnel costs per regular full-time employee, which was partially offset by reductions in team size as a result of the restructuring initiatives. We implemented the restructuring in phases throughout the quarter, resulting in a 3% decline in average head count year over year. We ended Q1 with 4,835 full-time head count, which was down 7% year over year and down 27% from our peak headcount in mid-Q3 of 2022. Adjusted EBITDA was $46 million in Q1, up from $1 million in Q1 of the prior year, reflecting both accelerating revenue growth and operating expense discipline. Net loss was $305 million in Q1 compared to $329 million in Q1 of the prior year. The improvement in net loss on a year-over-year basis reflects the flow-through of higher adjusted EBITDA and as well as a $60 million reduction in stock-based compensation and related expenses, or SBC, partially offset by transition costs of $70 million related to our restructuring initiatives. The impact of past refresh grants on the GAAP accounting of SBC expense has now fully dissipated from the cost structure. This was the largest driver of the year-over-year decline in SBC in Q1 and followed by the impact of reduced headcount as a result of the recent restructuring. Dilution or growth in our share count was 3.8% in Q1, down from 5.7% in the prior quarter. As part of our efforts to responsibly manage the impact of SBC on our share count, we repurchased 21 million shares at a cost of $235 million in Q1 reflecting an average repurchase price of $11.19. Since we began opportunistically managing our share count through share repurchases in Q3 of 2022. We have repurchased 145 million shares, representing 8% of fully diluted shares outstanding at an average price of $9.86 per share a total cost of $1.4 billion. Free cash flow was $38 million in Q1, as we continued to strategically prioritize our investments to drive sustained and meaningful positive free cash flow. We ended Q1 with $2.9 billion in cash and marketable securities on hand. In addition, in Q1, we repurchased $100 million of our outstanding 2025 convertible notes and $351 million of our outstanding 2026 convertible notes at prices below par value. Through these transactions, we have further reduced the level of debt maturing in the years ahead, while also eliminating the risk of future dilution from the repurchased convertible notes. Turning to our outlook. We anticipate continued growth of our global community and our Q2 guidance is built on the assumption that DAU will be approximately $431 million in Q2. Our Q2 guidance range for revenue is $1.225 billion, to $1.255 billion, implying year-over-year revenue growth of 15% to 18%. This would represent a three to six-percentage-point deceleration in growth rate compared to Q1. And which we attribute to the three-percentage-point quarter-over-quarter acceleration in revenue growth experienced in the prior year and a further estimated three-percentage-point headwind due to changes in seasonality factors, including the timing of the Ramadan holiday season shifting toward Q1 in the current year and the impact of the leap day in Q1 of 2024. Our investment plans for Q2 include modest incremental investments in infrastructure, personnel, and marketing to sustain the momentum we have established in our business as well as the impact of an increasing legal and regulatory burden on our cost structure. Given the revenue range above and our investment plans for the quarter ahead, we estimate that adjusted EBITDA will be between $15 million and $45 million in Q2. We have made significant progress to optimize our cost structure and believe it will be productive to provide forward-looking insights into our estimated full-year 2024 cost structure. We currently estimate that quarterly infrastructure cost per DAU will be in the $0.83 to $0.85 range for the remainder of 2024. We will continue to assess our infrastructure investment levels based on what is in the best long-term interest of our business. We expect the remaining components of cost of revenue, including content and developer partner costs, as well as advertising partner and other costs to remain relatively stable as a percentage of revenue at a combined 19% to 21% of revenue, which is within the range we have reported over the trailing four quarters. We currently anticipate that the headcount and personnel costs will grow modestly as we move through 2024, resulting in full-year adjusted operating expenses of approximately $2.425 billion to $2.55 billion. We see limited opportunity to productively reduce adjusted operating expenses below this range. And if we are able to sustain higher rates of revenue growth into the second half of 2024, we will invest prudently to support that growth. For SBC, we anticipate modest sequential growth as we move through 2024, resulting in an estimated full-year SBC expense of $1.13 billion to $1.2 billion. With that, I'll kick it back to Evan for closing remarks. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Derek. As we continue to execute in the quarters ahead, we remain focused on serving our community with innovative and responsible products, investing in our direct response business to deliver measurable ROAS for our advertising partners, cultivating new sources of revenue to diversify our top-line growth and scaling our investment levels prudently to deliver meaningful and sustained profitability and positive free cash flow. The most critical input to delivering on these strategic initiatives we laid out is innovation. That includes innovating on our products, our advertising platform, and the future of augmented reality. We believe that our demonstrated track record of innovation over the last 12 years positions us well to deliver on this for our community, our partners, and our investors. While there is still a lot of work to be done, we are pleased that this focus has translated into improved results in Q1. We will now begin our Q&A session. Questions & Answers: Operator Thank you. We will now begin the Q&A session. [Operator instructions] Our first question comes from Doug Anmuth with JPMorgan. Please proceed. Doug Anmuth -- JPMorgan Chase and Company -- Analyst Thanks so much for taking the question. Can you just help us understand the drivers and you listed a number of things, but just help us kind of frame and maybe prioritize the drivers of the DR acceleration in 1Q. And just kind of how you think about linearity and progression through 2024? And then if you could comment just on the slight detail that you're guiding to in the second quarter as well? Thank you. Derek Andersen -- Chief Financial Officer Hi, Doug. It's Derek. Thanks for the question. I think, look, at the first outset, I would say that probably the most important takeaway or theme of the top line results is just how broad-based the acceleration was on the top line. You mentioned DR specifically, but we did see each of brand NDR and those two pillars across all three of our regions accelerate in the quarter. We also saw that the SMB customer base grew quite quickly, active advertisers, they are up 85%. And also then looking over at the Snapchat+ business also subs tripling or more year over year to $9 million. So, we did see a really broad-based improvement in the top line. On the DR side, specifically, I think you've probably seen that we've been making really significant investments in that line of business over the last year, and we made a lot of investments in infrastructure to help improve their number one, leveraging more of our privacy say, signals for ranking and optimization and then continuing to evolve our models to incorporate more of those signals, making larger models and refreshing them more frequently. And we've seen really good momentum, in particular on the 70-pixel purchase optimization that led to more than 75% increase in purchase-related conversions in Q1. And we're making progress on some of the nuts and bolts there around, for example, CAPY adoption. We saw a more than 300% increase year over year on that. And we now have coverage there of approximately half of the DR revenue. And you made some improvements just in expanding the addressable market there with the rollout of 70 optimization to app install and app purchase with additional app goals coming in Q2 on the road map there. So, there's a lot of progress on that front. We're seeing that show up in improved rollouts. And I think many of you saw in your channel checks even in Q4 that you were starting to hear about the return on rollouts in the advertising community. And I think you can see that now showing up in the demand in this quarter. So, if you take them together, I think that each of those are proof points that the DR business is performing much, much better now. And that each of those things are rollout-based, return-based, customer success base, and that speaks to sort of the durability of that basis. So, you asked a little bit about the transition of the growth rate into Q2, and we do expect the progress that we've made with the DR business to continue but we do have some unique items just on seasonality. I pointed to a couple in the letter. One in particular, we did have an improvement in the growth rate in the prior year of about 3 percentage points quarter over quarter, so that contributes to comps a little. And then there's some unique seasonality factors as we transition from Q1 to Q2 this year, notably, the leap day in Q1 of this year that contributed to the higher growth in as well as the timing of the Ramadan holiday season, moving more so into Q1 this year relative to Q2 last year and that further contributes to some of the transitions there, but none of those factors really speaking to the fundamentals of the improvement in the business that we're seeing. So, hopefully, that gives you a little bit of a sense of what we're seeing and the momentum that we've established on that line of the business. Thank you. Operator Our next question comes from Ken Gawrelski with Wells Fargo. Please proceed. Ken Gawrelski -- Well Fargo Securities -- Analyst Hi, Evan and Derek. You discussed on the fourth quarter earnings call, a shift in the company resources to grow engagement in North America and EMEA. Can you talk about any early progress I know North America DAUs were flat quarter over quarter in 1Q, but maybe any early thoughts on future North America growth for 2Q and beyond and maybe what's incorporated in that and the early look at 2Q DAUs, please? Thank you. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Ken. Yes, we certainly have been shifting more of our resourcing and focus to growth in North America and Europe. It's a different opportunity set. Historically, we were more focused on new users and developing markets who are typically on Android devices. This is really about focusing more on reengagement with users who have downloaded Snapchat before and who may not be using it as often as some of their friends and those users are typically on iOS. So, I'd say the opportunity set overall is different. And in our early explorations, we're finding a lot of opportunity to improve that product experience. So, the near-term month-over-month trends have been pretty constructive growth from February to March and March to April month-to-date in North America. It has been positive. So, we're making progress here. It is early, but we are seeing a lot of opportunity and eager to improve the product for our community in North America and Europe. Operator Our next question comes from Rich Greenfield with LightShed Partners. Please proceed. Rich Greenfield -- LightShed Partners -- Analyst Hi. Thanks for taking the question. Look, I think the -- Evan, when I look at the time spent watching content globally, it was up, but North America was relatively -- you sort of signaled the last couple of quarters, it's flattish. But you keep calling out Spotlight momentum. And it feels like if I think about how you shift time spent on the platform or grow time spent on the platform? It seems like Spotlight's, the key to unlocking meaningful growth. Yes, creator stores are growing, but especially as you unify the feed, it feels like Spotlight's so important. And I guess could you just -- as you look across the landscape, real short TikTok versus Spotlight. How do you evaluate where Spotlight is today on a relative basis versus the choices consumers have are similar? I realize it's not exact, but a similar experience. And how aggressively are you investing to take share with Spotlight? Thanks. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Rich. Yes, as we look at Spotlight and creator stories, they've definitely been bright spots in terms of time spent. As you mentioned, we are really working to simplify and unify the experience, both in terms of the user perspective. So, one unified feed of content, but also the ranking stack, which is going to enable us to really share signal, engagement signals between stories, and Spotlight, which we just haven't done historically. So, we think that will really help personalize the experience overall. I'd say looking at the feedback from our community, one area where we can really improve is in making the content feel more timely and topical. We have a lot of great signals from our community about things that are trending, things that they're interested in, in a given moment. But we haven't done a very good job surfacing the corresponding content that we also have as well because people are making billions of snaps every day on Snapchat. So, I think there's work to be done to make our content experience feel more timely and topical, and then we're spending a lot of focus on the creator journey overall. That journey from using Snapchat to communicate with 100 friends to growing a following of millions. And really making sure that people are creating great stories or great Spotlight content can be discovered and then grow that following and ultimately build a business over time. So, that's been a big focus as well. Certainly, a big opportunity for us, and we're working away at it. Operator Our next question comes from Ross Sandler with Barclays. Please proceed. Ross Sandler -- Barclays -- Analyst Yeah. Hi, guys. So, it sounds like you're upgrading, revamping the app install or app kind of transaction category within the DR business. Can you just remind us like back in the day, how big that category -- Operator And it appears we've lost connection with Ross. Our next question today comes from James Heaney with Jefferies. Please proceed. James Heaney -- Jefferies -- Analyst Great. Thanks for the question. Over the last few quarters, you've continued to grow your advertiser count at a pretty healthy clip. Can you guys just talk about this newer cohort of advertisers and what their propensity to spend looks like relative to older advertiser cohorts? And at what point do you feel like your SMB revenue starts to become more material? Thanks. Derek Andersen -- Chief Financial Officer Hey there. Thanks. I think to start, we're growing a newer segment of customers here, and I think that's really exciting to broadening out the overall base of advertisers. So, I shared earlier in response to another question that we've seen the active advertiser count on the small and medium-sized customer base up to 85% year over year and it being the fastest-growing customer segment. So, that is very exciting. And I think overall, you're seeing a broadening of the base of advertisers. There's a journey. I think that you're going to see advertisers go through in terms of one coming on to the platform, initial testing seeing performance with some of these scaled self-serve products and then being able to grow and optimize. And of course, as we continue to bring more privacy-safe signals into our models and invest in bigger models, and get better and better at optimization and ranking, those products become more performant. They deliver better roots to those customers and then give them the ability to bid and expand their budget. So, I do think there's a journey here. I think what's really exciting is to see the ad platform delivering the kind of results that can help us grow that customer base because over the long term, the small and medium-sized customer base is going to be an absolutely critical ingredient to reaching the full monetization potential of the business. So, off to a good start, and a lot of work to do to continue helping more of these advertisers through that journey. Hopefully, that context helps. Operator Our next question comes from Michael Morris with Guggenheim. Please proceed. Michael Morris -- Guggenheim Securities -- Analyst Thank you. Good afternoon. Wanted to ask you about spending and investment. Large companies in the technology sector are certainly increasing their investment in artificial intelligence infrastructure. Can you talk about your level of investment currently, whether you think that's sufficient? And how you think about your size and scale relative to larger players and what it takes for you to continue to be competitive in connecting with your audience. And if I could just ask one follow-up on those statistics, Derek, that you reported and just shared about the CAP integrations and the purchase conversions, the numbers are very large, far ahead of where your revenue growth is. Can you just talk about what it takes to get more of your customer base engaged with those? And can that drive acceleration in that revenue in the coming quarters and years? Thanks. Derek Andersen -- Chief Financial Officer Yes, I can start around the scale and scope of the infrastructure investments, and you're going to see those show up in really a couple of places. Number one, we shared last year that we scaled up our ML and AI infrastructure spending into the range of about $100 million a quarter starting in Q2 and Q3 of last year. And then we shared that that investment -- larger investments were relatively stable over the last two quarters. Obviously, with the full-year range on infrastructure for Dow, stepping up from $0.80 in Q1 to 83% to 85% in the remaining quarters of the year. We've given ourselves room to invest more there. I think the important -- there's a couple of important things I would say, just to put our investment in perspective. One is that we're investing on a different model rather than capex, it's showing up as a cloud infrastructure cost that's running through cost of revenue. But two, there's a multiplier on that spend as an ongoing operating expense relative to the underlying capex it represents. So, while we might be spending hundreds of millions a year currently on this type of infrastructure, the underlying capital is multiples of that. So, the scale of the infrastructure that we have access to, to run our models is obviously much, much larger. And so, that's giving the business access to a lot of capacity. And I think second and perhaps really over the long term, the most important thing is whether or not we're seeing the returns on that investment that are going to allow us to continue to scale that investment profitably for the business. And I think what you're seeing in the results in Q1 here are proof points that those investments that we've made in that infrastructure are paying off in significant and accelerating revenue growth and in particular, on the DR ad platform in addition to how it's contributing on the engagement side, and that's going to position the business to be able to continue to scale those investments ideally continue to see positive ROI on that like we have seen and grow our business over time. So, hopefully, that gives you a little bit of perspective of how we're thinking of we're going to continue to reassess that. We've been really pleased with the ROI on those investments to date, and we've made room to scale them, and we'll continue to do that based on the data that we're getting back. On your second question related to CAP integrations, we're really pleased with the momentum on the coverage that we've seen there. I'd mentioned that we're looking at about 50% demand-weighted coverage of our DR ad revenue and those integrations are up about 3x, 300% year over year. So, obviously, good momentum in getting that adopted across our DR advertising customer base. So, really important, I think, to insulating the business going forward and helping our customers to have measurable results. And as I said in the answer to the prior question, the recipe here is getting people on board, getting them to adopt the right advertising solution for the objectives they're trying to achieve. And a good proof point on that is we are providing targeted offers to small- and medium-sized customers. based on what we know about their business to recommend the right advertising product for them and advertisers that adopt those recommendations are seeing much improved results, and that's contributing in a scaled, self-served way, to people being able to meet their ROAS objectives, grow their business, which puts them in a position to invest more on our platform. So, I think that's the recipe there in terms of us seeing that advertiser base scale -- and we shared that 85% growth in the active advertisers in the segment to let you know that in addition to people making progress on these integrations, it's turning into a flywheel on the actual customer base. So, hopefully, that gives you a little bit more context of what we see as the path there and how that's going. Operator Our next question comes from Benjamin Black of Deutsche Bank. Please proceed. Benjamin Black -- Deutsche Bank -- Analyst Great. Thanks for taking my question. Can you talk a little bit more about your build-out of the app value optimization? How meaningful could that be -- is there any risk of disruption to the app install business in that progress there? And perhaps more broadly, what are some of the other initiatives you have on the product road map over the next 12 to 18 months that you're excited about? Evan Spiegel -- Chief Executive Officer and Co-Founder Yeah. Thanks so much for the question. On the app side, the biggest thing we've been working on lately is just landing these model updates. We, I guess, in the last week or so, have updated our app install models, both for scan and non-scan. So, that's been great. And we now have our app install 70 and purchase 70 products in testing. It's very early, but the results have been promising so far. We also have a new scan offering that we're just introducing to our customers. So, we'll be excited to get their feedback and see how that can improve their performance, and we have a number of customers testing that already. I think value optimization will follow. We've really just been focused on driving more click-through installs at much lower CPIs for our advertising partners. And then we'll be working more on the value optimization piece. I think just broadly looking at the advertising platform, we have made a lot of progress, as Derek mentioned, on signals and running much larger unified models, of course, the ad interactions as well in the ad formats. I think sort of looking ahead, we've been working on things like product selection for our dynamic product ads product. We've been making progress with things like cold start, which is especially relevant for SMB advertisers at lower levels of spend to help them find success. So, I think there's a lot more work to do, but we're building on a solid foundation now, and we've been able to make some very rapid progress. Operator Our next question comes from Mark Shmulik with Bernstein. Please proceed. Mark Shmulik -- Bernstein -- Analyst Yeah. Thanks for taking my question. A couple if I may. The first just on Snap Stars. It sounds like it's growing quite well and really contributing to engagement. Just wanted to kind of ask how do we think about the philosophy as we think about onboarding more Snap stars, more spotlight more broadcast out media and how does that fit in the long-term engagement strategy kind of balancing it with like deepening connections with friends family of people you care about? And then just the second question for Derek, we've heard from others just on the recovery of the digital ad market, certain verticals coming back kind of quicker than others. Any color you can share just about the vertical mix you've seen? Thanks. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks so much for the question. Yeah, as we look at content on Snapshot, I think the most successful is really about relationships. And those can be relationships with your close friends and family, but it could also be relationships with Snap Stars. And that's the feedback we hear from Snap Stars as well that the engagement they have the relationship they're able to build with their audience on Snapchat is really unparalleled. And one of the reasons why they love investing in our platform. As we look at scaling the Snap Star program, I'd say today, the focus is mostly around looking at countries, geographies where we're sort of under-indexed in investing in Snap Stars there so we can build out more local language content. We're also looking at interest. A lot of Snap Stars create content around their interests. That could be food or travel, sports, those sorts of things. And so, we're really looking at this intersection of the geographies where we have Snap Stars and on the interest as well and really lining up with that up with our community and what they're looking for. So, yes, I would say overall, to your point, relationships really do drive that content consumption on our service, and that's why Snap Stars are such an important part of our offering. Derek Andersen -- Chief Financial Officer Sorry, in terms of color on the verticals and where we're seeing the operating environment generally, as we went through Q1, number one, I think we've seen the improvement in the operating environment to be fairly broad into Q1 and that we did see certain regions particularly impacted by the war in the Middle East in Q4. And so, that certainly, we've seen demand, as we mentioned in the letter, really improve on that front quarter over quarter. But I think more broadly, we saw a much more robust brand environment, which played out in all of our regions in Q1. And then from a DR perspective, it's really about fit. And of course, with purchase optimization and the scaled self-serve SMB product is working really well. We've seen verticals such as CPG, e-commerce, restaurants and travel, and SMBs broadly working really well. And I think what we're excited about is to be able to broaden that out to a wider set of customers as we introduce more of these out-based optimizations and start to address other verticals. So, a much better environment in Q1 for sure. Thank you for the question. Operator Our last question comes from Dan Salmon with New Street Research. Please proceed. Dan Salmon -- New Street Research -- Analyst Hi. Good afternoon, everybody. Can you hear me, OK? Evan Spiegel -- Chief Executive Officer and Co-Founder Yes, we can. Thank you. Dan Salmon -- New Street Research -- Analyst OK. Good. Sorry about that. So, two questions. Evan, I'm just curious, any early learnings from your ad partnership with Amazon and whether or not you'd consider more ad partners that can bring incremental demand both Amazon and Google or cloud partners after all could be interesting. And then second for Derek, can we just go back to the SMB advertiser growth at 85%. I mean, that's significant acceleration. Was there something like one-time in that? Or is that the type of level of growth you can expect throughout the year? Thank you. Evan Spiegel -- Chief Executive Officer and Co-Founder Thanks, Dan. Yes, as we look at Amazon partnership and what they're doing with Handshake, I do think that's a great learning opportunity for us. It's still very early, but I think what's exciting is being able to bring relevant products to Amazon shoppers inside the Snapchat experience. We know that people now shop where they consume content and so to be able to offer a relevant product selection in line and allow people to check out with 1 tap is certainly an exciting product development. So, we'll obviously continue to learn there and evolve that product. I do think just separately that some of these ad partnerships we've done and work we've done with other demand partners have been important elements of our growth, and we do see continued opportunity there. Derek Andersen -- Chief Financial Officer Dan, on the question about SMB, I would agree. I mean, that growth on the active advertisers is obviously, a really important input to building what we hope will be a very big business for us over time. And we're early in the going. So, there's a lot of opportunity set here both in terms of product-market fit as we are able to have more optimizations that are going to appeal to a wider and wider audience in that SMB set. And I think we're learning a lot about how to use integration partners to help make it easier for these advertisers to onboard over time as well as the ability to work our funnels, whether that's from awareness to onboarding an acquisition to trial and discovery and through the scaling process of delivering raws for these partners. So, we're early in the going there, but excited about the progress we're seeing so far, and it's something that we'll hope to build on as we go forward. So, thanks for the question. Hopefully, that gives you a little more perspective thinking about it. Operator This concludes our Q&A session as well as Snap Inc. first quarter 2024 earnings conference call.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to Sleep Number's Q1 2024 Earnings Conference Call. [Operator instructions]. Today's call is being recorded. [Operator instructions] I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. Thank you. You may begin. Dave Schwantes -- Vice President, Finance and Investor Relations Good afternoon, and welcome to the Sleep Number Corporation First Quarter 2024 Earnings Conference Call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Ibach, our Chair, President, and CEO; and Francis Lee, our Chief Financial Officer. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call. The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. We also want to refer you to the latest version of our investor presentation, which is available on the Investor Relations section of our website. I will now turn the call over to Shelly for her comments. Shelly Ibach -- President and Chief Executive Officer Good afternoon, everyone, and thank you for joining us. My SleepIQ Score last night was 90. Since our last earnings call in February, our team members throughout have consistently demonstrated resourcefulness while executing our three strategic comparatives: competing effectively, restoring margins, and increasing cash generation to pay down debt. As this work to transform our operating model continues, the industrywide challenges that we have faced over the last two years also persist. Our actions are positioning Sleep Number for greater resilience across a range of macroeconomic and industry environments. First-quarter results are largely as we expected, and we are reiterating our full-year adjusted EBITDA guidance. During today's call, I'll provide a brief context on the consumer environment, share our first-quarter performance highlights, and describe ongoing actions we are taking to deliver on our commitments. Following my remarks, Francis will provide further details on our performance. The mattress industry remains in a historic recession, with demand for the category likely down mid-single digits for the first quarter after incurring two previous years of double-digit mattress unit declines. While consumer sentiment is showing signs of improvement, the consumers' purchasing power is limited due to elevated interest rates and record high credit card debt. As a result, consumers continue to scrutinize their spending and make near-term decisions based primarily on need, price, and perceived value, and they are deferring higher ticket durable purchases. These factors contributed to consumer purchasing volatility throughout the first quarter. We experienced our strongest demand in February driven by the President's Day selling period and the weakest demand in January impacted by weather. For the quarter overall, our demand was down mid-single digits. In the first quarter, we generated net sales of $470 million, down 11% from the prior year compared to the 10% decline we expected. Despite the pressured sales climate, our strong execution resulted in better-than-expected first-quarter adjusted EBITDA of $37 million. Against this backdrop, we prioritize actions that efficiently activate consumer interest and demand while lowering our customer acquisition costs compared to prior year. These precise realtime adjustments to our marketing and selling strategies led to improved adjusted EBITDA margin performance. We have focused our efforts on three areas: First, consumer attitudinal segments to optimize our media strategy and lower our costs while maintaining impressions and increasing traffic. Next, marketing messaging to convey more clearly the differentiated benefits of our smart beds. Our new Why Choose Sleep Number campaign highlights our leadership in adjustable firmness, active individualized temperature benefits, the value of our smart beds for every budget, and claims of high customer satisfaction with our smart beds, including our J.D. Power No.1 ranking for mattresses purchased in-store. The campaign is resonating with consumers, and our brand health metrics are strong on consideration, value perception of the affordability of Sleep Number smart beds, and brand trust, particularly among premium and tenders. And finally, actions that drive conversion by helping customers select the right smart bed for their budget before they consider the additional benefits of a smart adjustable base. By continuing to test, learn, and adjust our online experience, promotional strategy and selling process, we are generating a more profitable sales mix across all our digital and in-store touch points. These actions drove a lower promotional spend and a higher mix in the first quarter, resulting in a gross margin rate that was better than we expected. The efficiency improvements we have implemented over the past two quarters are meeting the revenue and margin targets established in the different tests. With this validation, we are now beginning to scale these actions for accelerated impact. We will accomplish this goal by leveraging our current econometric model used to inform media channel mix and investment levels and the predictive capabilities of our new elasticity model used to guide our promotional strategies in a range of consumer environments. Our teams have also developed a new smart bed that we plan to launch by the third quarter. The c1 smart bed will be priced at $9.99 every day. We expect a strong value equation of smart adjustability starting under $1,000 to resonate with the scrutinizing consumer. In addition, we will be taking $200 in pricing on our c2 smart bed. These actions strengthen our competitive position and support more efficient demand generation, particularly among value-conscious consumers. Our second strategic imperative is restoring margins. We are continuing to target operating cost improvements of $40 million to $45 million in 2024 on top of the $85 million we realized in 2023. As a result, we expect 2024 operating expenses to be $125 million to $130 million below 2022 levels. We also remain intently focused on returning our gross margin rate to our historical average in the low 60s and expect our actions to restore our adjusted EBITDA margin to mid-double digits as industry demand normalizes. To deliver on these operating expense and margin improvements, we are driving sustainable change across the organization in four principal areas: cost of customer acquisition, cost to serve customers, cost of goods sold, and G&A R&D leverage. During the first quarter, we made tangible progress in each of these categories, including reductions in customer acquisition costs through the advancement of our predictive analytics; reductions in our cost-to-serve customers through self-service offerings, outsourcing strategies, and component sustainability efforts; and reductions in our cost of goods through structured sourcing strategies with additional flexibility in product and logistics. These actions will drive improved 2024 results as well as process capabilities that will enable performance improvements in future years. Increasing cash generation to pay down debt is our third strategic priority. In the first quarter, our adjusted EBITDA performance led to free cash flow generation of $24 million compared to $3 million for the same period last year. As we realize the benefits of our operating model transformation through 2024, we expect to generate $60 million to $80 million of free cash flow. Despite the persistent near-term headwinds, our long-term growth opportunity remains intact as illustrated in the Investor Relations deck we posted to our website last month. Sleep remains one of the top health and wellness priorities of consumers and also one of the areas in which they have the most unmet needs. Sleep Number is uniquely positioned in the industry to address consumer barriers to quality sleep, help solve critical sleep health challenges, and improve lives through proven quality sleep. Company culture is an important contributor to performance, and Sleep Number's exceptional culture is the result of our 4,000 team members' purpose-driven commitment. Thank you to our teams and partners for your passion, teamwork, and innovative mindset as we find new ways to compete effectively, restore margins, and generate robust free cash flow. We continue to focus on delivering value for our shareholders as we capitalize on the implementation of our durable operating model, the industry's gradual recovery in our strategic progression as a sleep wellness technology company. With that, I'll turn the call over to Francis, who will provide more details on our first-quarter results and full-year guidance. Francis Lee -- Chief Financial Officer Thank you, Shelly. And good afternoon, everyone. I will focus my remarks today on three primary areas: one, review of our first quarter results; two, ongoing progress we are making in our cost restructuring efforts; and three, our 2024 outlook. Our results for the first quarter came in largely as expected with adjusted EBITDA a little higher than planned and net sales a couple of million dollars below expectations. Now let me unpack more details regarding our first-quarter results. First-quarter net sales of $470 million were down 11% versus last year. Our net sales growth for the quarter included four points of headwind from year-over-year backlog changes. Our delivered units were down 9% for the quarter with our ARU down 1% versus prior year. Restoring our gross margin rate to higher levels is a key priority for the company, and we were pleased with the progress we made in the first quarter. Our first-quarter gross margin of 58.7% was above our expectations and a meaningful improvement from the back half of last year. We continue to identify and execute cost-efficiency initiatives across the organization, including in our cost of goods sold. We also continue to make meaningful progress in driving efficiencies in our business and were ahead of plan in the first quarter. Operating expenses, pre-restructuring costs were down $24 million versus prior year. Cost reductions were broad-based, including reductions in selling and marketing expenses and R&D. We continue to target $40 million to $45 million of operating expense reductions for the year. We recorded $10.6 million of restructuring costs in the quarter and expect approximately $3 million of additional restructuring costs for the balance of the year. As a reminder, restructuring costs are reported as a separate line item in our financial statements, and we have also provided an as adjusted EPS figure in our financial statements for comparative purposes. We generated $37 million of adjusted EBITDA in the quarter versus $49 million last year, primarily due to the year-over-year net sales decline. Our first-quarter adjusted EBITDA was slightly ahead of expectations as we benefited from the acceleration of our cost efficiency initiatives. A key focus for us in 2024 is to generate free cash flow to reduce our outstanding credit line balance, even with the expectation of a modest sales decline for the year. For the first quarter, we generated $24 million of free cash flow compared with $3 million last year. The $21 million increase in free cash flow year-over-year included a $15 million improvement in operating cash flow combined with a $6 million reduction in capex spending. For the full year, we expect to generate free cash flow of $60 million to $80 million, which we intend to use to pay down our credit line. Now let me provide an update on the ongoing work we are doing in support of a more durable operating model. The mechanisms we put in place to promote and build sustainable change are enabling us to meet our operational, transformational goals. Our initiatives and efforts are resulting in greater operating efficiency and financial resilience. We have progressed strategic sourcing initiatives across materials. And logistics that have lowered our total cost of goods, services, simplification programs with increased digital assets for customer self-service options are lowering our cost to serve. We have also implemented new stringent practices around indirect costs in support of sustained G&A leverage. Our store actions are on track with our expectations, and there are no material changes to the plan for the year that we communicated last quarter. As a reminder, we expect the net impact of store actions to be about a one-point drag to 2024 net sales growth, and we expect to end 2024 with approximately 30 fewer stores compared to 2023. Our gross margin improvement actions are progressing. We are focusing on durable operating activities that drive value engineering for our products, material cost reductions, and additional efficiencies through our manufacturing and home delivery network. Let me turn to an update on our 2024 outlook and a reminder on key assumptions included in our projected performance for the year. The demand environment remains challenging, and we continue to focus on the things we can control. We have built our operating expense plans for the year on the basis of the industry not experiencing any material recovery in 2024 despite undergoing two-plus years of recessionary demand levels. We are reiterating our 2024 full-year adjusted EBITDA outlook range of $125 million to $145 million. Here are a few items to highlight regarding the full-year guidance and second-quarter expectations. We continue to expect net sales to be down mid-single digits for the year with a low single-digit demand decline. We are still assuming three percentage points of headwind from year-over-year backlog changes and one percentage point from net store actions. We expect sales growth to improve throughout the year with low single-digit net sales growth expected in the back half of the year against easier comparisons. We continue to expect a majority of the approximately 100 basis points of gross margin rate expansion in 2024 to be in the back half of the year. We are estimating restructuring costs of approximately $14 million for the year, slightly higher than our prior estimate of $12 million. Our debt-to-EBITDA ratio was 4.2 times at the end of the first quarter compared to our covenant maximum of 5.0 times for the quarter. We continue to expect our debt-to-EBITDA leverage to peak in Q2 and end the year below 3.75 times. We also wanted to provide some clarity regarding our second-quarter 2024 performance expectations. We are expecting net sales to be down high single digits versus the prior year second quarter, including five to six points of headwind from year-over-year backlog changes. We expect second-quarter adjusted EBITDA to be $20 million to $25 million. I want to thank the entire team for the rigor and tenacity they have exhibited as we make important changes to our business for a more durable operating model while positioning ourselves to rebound with pace when the demand environment improves. We look forward to sharing our ongoing progress with you as we proceed throughout the year. With that, operator, please open the line for questions. Questions & Answers: Operator [Operator instructions] Your first question comes from the line of Peter Keith of Piper Sandler. Your line is open. Peter Keith -- Piper Sandler -- Analyst Hi. Good afternoon, everyone. Hope all is well. I just wanted to get to the demand trends, just to clarify a few things. So I think the quarter ended up negative mid-single digit on a demand basis. I think at the time of the Q4 call, you were also at negative mid-single digit. So I guess it's fair to say that, I guess, in March, you just kind of continue this negative mid-single-digit trend. And any comments around what we're seeing so far in Q2? Shelly Ibach -- President and Chief Executive Officer Yeah. Hi, Peter, thank you for the question. You're right in your summary of the demand trends. The shape of the first quarter was certainly choppy. We did end the month of February, down low single digits and March and Q2 to date. So March and April to date are also down mid-single digits. We expect the strength of Q2 to be in May, again, around the market share period. And that, of course, is the the largest month. And for the second quarter, we're expecting demand to be down low to mid-single digits in the quarter. And from everything that we've read and understand it, it appears the industry probably also was down mid-single digits for the first quarter. Peter Keith -- Piper Sandler -- Analyst OK. Very helpful, and I agree with that. And then you mentioned you're launching the c1 product in Q3 and I think adjusting the pricing on the c2. I think it's coming down a little bit. Does that have any implications on the gross margin as we just think about maybe back half of the year as those pricing adjustments come in and new products come in? Shelly Ibach -- President and Chief Executive Officer Yes, in a positive way. The c2, we're taking pricing on the c2, so we're actually increasing the price of the c2 by $200. And the c1 will be at $9.99, and that's certainly a value-engineered innovation that our teams have developed here in a short period of time. And we like the opening price point for a smart bed with adjustable firmness, and we see the combination of these actions to be positive as a contributor to our gross margin improvement expectations in the back half. And again, we continue to expect about 100 basis points of gross margin rate improvement on the year, primarily in the back half. Peter Keith -- Piper Sandler -- Analyst OK. Very helpful. One last one for me. And Shelly, this is kind of an off-all question, but it's something I've been thinking about. I'm wondering if you have ever contemplated taking the brand back to wholesale. I know that was on pre-GFC in quite a wide manner. And just thinking about it maybe if you were to go to more of a specialized manner, one to two key retailers, a nice way to expand the brand, take some share, and you'd certainly be taking advantage of an environment where retailers are looking for new and innovative products. Shelly Ibach -- President and Chief Executive Officer Well, thanks so much for the thought, and we continue to explore a wide range of opportunities as we look forward and are very focused on increasing our shareholder value. So we'll continue to compete aggressively. You'll see us be leaning in and thanks for your thoughts. Peter Keith -- Piper Sandler -- Analyst OK. Thank you. Good luck. Operator Your next question comes from the line of Robert Griffin of Raymond James. Your line is open. Robert Griffin -- Raymond James -- Analyst Hey, guys. Good afternoon. This is Bobby. thanks for taking my questions. I guess, Shelly, first, I wanted to go back to, I think it was in your prepared remarks, you talked a little bit about the change in some of the promotional aspects. So I was hoping, can you just unpack kind of what you guys have changed and maybe share some of the data that you're seeing that gives you confidence that the different promotional aspects is not driving an impact in sales? Because I think right now, a lot of investors are zeroed in on getting the sales to turn in this business given kind of the flow through. Shelly Ibach -- President and Chief Executive Officer Yeah. Thanks for your question, Bobby. Maybe I'll just start with with media and where we have media planned and where we -- how we spend in Q1. So we continue to plan about 14% of sales. We expect efficiency from our initiatives, especially in this very challenging environment. And in the first quarter, we were down mid-single digits in our media spend, the same as demand. We focused on continuing to test, learn, and make adjustments building on the initiatives that we started in the fourth quarter around segments who we're targeting, around the media allocation messaging, and also our promotional strategy. And in addition to the econometric model that we've been utilizing for -- well, since 2013, that is quite helpful in media allocation. The new model with predictive analytics that we have built around promotional promotional strategy is informing our actions to be more precise on how we spend our promotional and financing dollars so that we benefit to the greatest degree driving efficiency, improving our efficiency so we can allocate more dollars to media in this environment. And so we've continued to learn. We have been very effective in our test results, and we are ready to apply this and have begun applying this at greater scale in the second quarter. I would turn to the results in Q1, although constrained around demand, the effectiveness of our results drove a higher mix and a higher gross margin profile overall. So that is very important in our durable operating model to be able to be more efficient and active with our media dollars. This continues to be a time of real pressure on our industry. Our industry normally benefits from natural traffic flow in the macro, which contributes about 20% of sales in just a regular industry environment with strong consumer sentiment. And right now, that base is only about 12%. So the effectiveness of our dollars is really important for us. And that's what we're excited about with the advanced machine learning we have and taking -- and reviewing them in a holistic manner to both our media dollars and promotional dollars and how we will apply them for the balance of the year to be able to generate and deliver against our margin and revenue goals. Robert Griffin -- Raymond James -- Analyst OK. Thank you. And I guess my second question before I turn it back over to others is just on the store portfolio changes, we've started some of the closing process, and I know it's still early. But Francis, anything you can share on what you're seeing from a recapture basis as you've gone market-by-market and started closing some of these stores? Francis Lee -- Chief Financial Officer Hey, Bobby, thanks for asking. Our store actions are progressing on track. As we communicated, we will be ending the year with about 30 net store actions relative to 2023. Majority of those closures are happening in the first half of the year, and our early indications on the sales transfers are that they are tracking to or above our expectations, and we'll continue to monitor that as we get more solid data as time continues here. Robert Griffin -- Raymond James -- Analyst Thank you. I'll turn it over to somebody else, but best of luck here in the second quarter. Shelly Ibach -- President and Chief Executive Officer Thank you. Operator Your next question comes from the line of Seth Basham of Wedbush. Your line is open. Seth Basham -- Wedbush Securities -- Analyst Thanks a lot and good afternoon. My first question is on average revenue per mattress unit, which dipped year-over-year in the quarter. Could you give us some color as to why that is? And how should we think about that going forward? Francis Lee -- Chief Financial Officer Yes, I can certainly -- thanks for the question, Seth. This is Francis. I can certainly share with you our our outlook for the year. We anticipate ARU and units to be flattish for the year on a demand basis, in line with our expectations. The -- when we split it out and look at it first half versus second half of the year, we're looking at the ARU to be down slightly in the first half and up low single digits in the second half of the year. But those are right in line with our expectations for our plans. Seth Basham -- Wedbush Securities -- Analyst Got it. And that change is being driven by comparisons? Is it being driven by a mix of -- or attachments or promotions? What's driving it? Shelly Ibach -- President and Chief Executive Officer Seth, I think you were asking specifically about Q1 ARU, and the ARU from Q4 to Q1 came up about $200, and that was driven by mix. Mix within the smart bed line, driving a stronger innovation mix, and we continue to have strength with our our Climate360. The year-over-year compare, you're right, was down slightly. And we do, as Francis said, continue to see these two metrics being about flat for the year, flattish, and there will be some fluctuations. When you look at last year's ARU, we -- it was the first quarter that we were -- that we had the FlexFit 3 and FlexFit 2 back into our assortment after not having them for about 18 months. So there was some pent-up attach on the FlexFit 3 at that time. So thus, this composition with higher ARU than fourth quarter, but yet a little lower than prior year, the relationship driving up the smart bed line drove higher higher mix and ARU and margin overall. So we spent less promotion dollars in financing in the quarter from both a rate and a dollar perspective. Seth Basham -- Wedbush Securities -- Analyst Got you. And that's a good segue. So improving rates and margin dollars on a gross basis. What about after taking into account promotional financing costs, as we noticed about your 0% financing terms extended later in the quarter? Shelly Ibach -- President and Chief Executive Officer Yes. When I mentioned that the promo, so promo and financing combined year-over-year our dollars and rate were lower on a demand basis than the prior year. Seth Basham -- Wedbush Securities -- Analyst Got it. As you think about your new models and how effective they are going between cash discounts versus longer financing terms, is what we saw later in the quarter more indicative of how you plan to adjust going forward? Or is there considerations around holiday market share periods versus non-holiday periods? Shelly Ibach -- President and Chief Executive Officer There are absolutely considerations in the different periods. And we are seeing the strength of the business in the market share period, and we will continue to lean into other tactics, especially with our smart sleepers in some of the non-promotional or nonmarket share period. Seth Basham -- Wedbush Securities -- Analyst Got it. Thank you very much. Shelly Ibach -- President and Chief Executive Officer Yeah. Thanks, Seth.[:p id="-1" name="Operator" :]Your next question comes from the line of Dan Silverstein of UBS. Your line is open. Dan Silverstein -- UBS -- Analyst This is Dan calling in on behalf of Michael Lasser. thanks for taking our questions, and congrats on the quarter. Shelly Ibach -- President and Chief Executive Officer Yeah. Thanks, Dan. Nice to meet you. Dan Silverstein -- UBS -- Analyst You as well. Just a quick question on the demand comp expectations. So for the full year, guidance contemplates a low single-digit decline, kind of 2Q. To date is in the down mid-singles range. So I guess that implies a slight acceleration in the back half, but shouldn't this accelerate a lot? Like if you look at the multiyear compares in the back half this year, it gets a lot easier. So just wondering, is that just some level of conservatism? I guess that's the first question. Shelly Ibach -- President and Chief Executive Officer Yeah. Well, let's start with the industry overall. We continue to expect a pressured industry even with multiple years of double-digit unit declines. We still expect the industry to be pressured this year, and we have a little bit of additional pressure with our store actions. That's about one point of additional pressure. And you're right, as we lap Q3, Q3 for us and for the industry was down double digits. We were -- we had even more pressure in Q3, more opportunity, I should say, around our messaging this year, which we expect to be much stronger. So we do expect improvement in the back half. It remains a very choppy environment as we experienced in January with a consumer pullback and weather and also the consumer behavior in March, and yet some good strength in February. So the environment remains choppy. We do expect improvement in the third quarter and in the back half as we comp easier compares, but also as we advance our initiatives around competing more effectively, and it gives us confidence in being able to deliver on our commitments. But we -- like everyone, we're anxious to see a better environment for the consumer and for this industry. Dan Silverstein -- UBS -- Analyst Got it. Thank you. And then just a second question on gross margins, maybe kind of more of a longer-term one. If you achieve the guidance you guys laid out for 100 bps of expansion this year, what gets you -- what's the glide path to 60% plus from there? Is it just continued operational work? Or if you could just comment on the major drivers that remain -- the opportunity that remains today. Francis Lee -- Chief Financial Officer Yeah. Hi, Dan. We are working on making sustainable changes in our operating model across a variety of areas that I referenced in my prepared remarks around gross margin, around sourcing, manufacturing, how we deliver the product. And so as we come -- those are sustainable changes. Some of those changes come in this year. They'll be more fully annualized into next year and beyond. So you couple that with also some volume uptick when the industry returns, and you'll be getting essentially gross margin leverage going forward so that you'll be back into a more normalized zone that we've seen in the past. Dan Silverstein -- UBS -- Analyst Thank you, and best of luck. Shelly Ibach -- President and Chief Executive Officer Thank you, Dan.[:p id="-1" name="Operator" :]Your last question comes from the line of Bradley Thomas of KeyBanc. Your line is open. Bradley Thomas -- KeyBanc Capital Markets -- Analyst Hi. Thanks for squeezing me on here. Shelly, I wanted to just follow up on the c2 and the relaunch and the price increase. For one, maybe can you give us any early insights into how the product is different from the prior version as you refresh it? And just the $200 price increase does seem pretty significant on what is it, about $1,100. I think the list price is today pretty significant. Just in the context of we know the consumer has been a bit stretched. And I think it was only a quarter or two ago that you were talking about being a little bit more promotional to make sure you drove demand. So just a little bit more about your confidence that that price increase is something that is the right move here for that product at this time. Shelly Ibach -- President and Chief Executive Officer Yeah. Brad, thank you for your question. So we are introducing an additional smart bed called the c1, and we're introducing that bed at $9.99. So that comes in lower than our current and at the same time, working pricing, not relaunching, but just taking pricing, increasing the price of the c2 by $200. So that's a step-up story. So we'll offer the c1 Sleep Number smart bed with adjustability, effortless adjustable firmness and all the features of the smart bed at $9.99 every day. And then we will take pricing of $200 on the c2. And then of course, we'll continue with our other models. So the c1 is an addition. Bradley Thomas -- KeyBanc Capital Markets -- Analyst Got you. OK. That's helpful. And then just if I could follow up with a margin question of my own. I know that the company is committed to R&D and innovation. But just wondering as you reflect on the current margin trends in the current environment, if there's any updated thinking about what the right level of R&D spend is for the company to properly still be able to drive growth but also be disciplined and just how you're thinking about that in short sort of the short term and longer term. Shelly Ibach -- President and Chief Executive Officer Yeah, I'll comment on the four areas that I mentioned in my script that we will be measuring on an ongoing basis when we think about our durable operating model: the cost of acquisition, the cost of goods, the cost to serve customers, and then G&A R&D leverage. So we'll always be tying out to those principal areas in the future. That helps us with ongoing discipline over time on each of those areas -- in each of those areas. So I think that's a good way to think about it as we think about it. We're driving some significant R&D reduction here this year in our operating model. And we've reprioritized for efficiency, many of the resources, which is helping us get after our cost of goods sold right now, as well as innovations like the c1, the addition of c1, and other strong innovation pipeline items that we have coming in as we approach 2025. Bradley Thomas -- KeyBanc Capital Markets -- Analyst Got you. That's helpful. Thanks so much, Shelly. Shelly Ibach -- President and Chief Executive Officer Yeah. Thank you. Operator That concludes our Q&A session. I will now turn the conference back over to the company for closing remarks. Dave Schwantes -- Vice President, Finance and Investor Relations Thank you for joining us today. We look forward to discussing our second-quarter 2024 performance with you in July. Sleep well and dream big. Answer:

Operator Welcome to Sleep Number's Q1 2024 Earnings Conference Call. [Operator instructions]. Today's call is being recorded. [Operator instructions] I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. Thank you. You may begin. Dave Schwantes -- Vice President, Finance and Investor Relations Good afternoon, and welcome to the Sleep Number Corporation First Quarter 2024 Earnings Conference Call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Ibach, our Chair, President, and CEO; and Francis Lee, our Chief Financial Officer. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call. The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. We also want to refer you to the latest version of our investor presentation, which is available on the Investor Relations section of our website. I will now turn the call over to Shelly for her comments. Shelly Ibach -- President and Chief Executive Officer Good afternoon, everyone, and thank you for joining us. My SleepIQ Score last night was 90. Since our last earnings call in February, our team members throughout have consistently demonstrated resourcefulness while executing our three strategic comparatives: competing effectively, restoring margins, and increasing cash generation to pay down debt. As this work to transform our operating model continues, the industrywide challenges that we have faced over the last two years also persist. Our actions are positioning Sleep Number for greater resilience across a range of macroeconomic and industry environments. First-quarter results are largely as we expected, and we are reiterating our full-year adjusted EBITDA guidance. During today's call, I'll provide a brief context on the consumer environment, share our first-quarter performance highlights, and describe ongoing actions we are taking to deliver on our commitments. Following my remarks, Francis will provide further details on our performance. The mattress industry remains in a historic recession, with demand for the category likely down mid-single digits for the first quarter after incurring two previous years of double-digit mattress unit declines. While consumer sentiment is showing signs of improvement, the consumers' purchasing power is limited due to elevated interest rates and record high credit card debt. As a result, consumers continue to scrutinize their spending and make near-term decisions based primarily on need, price, and perceived value, and they are deferring higher ticket durable purchases. These factors contributed to consumer purchasing volatility throughout the first quarter. We experienced our strongest demand in February driven by the President's Day selling period and the weakest demand in January impacted by weather. For the quarter overall, our demand was down mid-single digits. In the first quarter, we generated net sales of $470 million, down 11% from the prior year compared to the 10% decline we expected. Despite the pressured sales climate, our strong execution resulted in better-than-expected first-quarter adjusted EBITDA of $37 million. Against this backdrop, we prioritize actions that efficiently activate consumer interest and demand while lowering our customer acquisition costs compared to prior year. These precise realtime adjustments to our marketing and selling strategies led to improved adjusted EBITDA margin performance. We have focused our efforts on three areas: First, consumer attitudinal segments to optimize our media strategy and lower our costs while maintaining impressions and increasing traffic. Next, marketing messaging to convey more clearly the differentiated benefits of our smart beds. Our new Why Choose Sleep Number campaign highlights our leadership in adjustable firmness, active individualized temperature benefits, the value of our smart beds for every budget, and claims of high customer satisfaction with our smart beds, including our J.D. Power No.1 ranking for mattresses purchased in-store. The campaign is resonating with consumers, and our brand health metrics are strong on consideration, value perception of the affordability of Sleep Number smart beds, and brand trust, particularly among premium and tenders. And finally, actions that drive conversion by helping customers select the right smart bed for their budget before they consider the additional benefits of a smart adjustable base. By continuing to test, learn, and adjust our online experience, promotional strategy and selling process, we are generating a more profitable sales mix across all our digital and in-store touch points. These actions drove a lower promotional spend and a higher mix in the first quarter, resulting in a gross margin rate that was better than we expected. The efficiency improvements we have implemented over the past two quarters are meeting the revenue and margin targets established in the different tests. With this validation, we are now beginning to scale these actions for accelerated impact. We will accomplish this goal by leveraging our current econometric model used to inform media channel mix and investment levels and the predictive capabilities of our new elasticity model used to guide our promotional strategies in a range of consumer environments. Our teams have also developed a new smart bed that we plan to launch by the third quarter. The c1 smart bed will be priced at $9.99 every day. We expect a strong value equation of smart adjustability starting under $1,000 to resonate with the scrutinizing consumer. In addition, we will be taking $200 in pricing on our c2 smart bed. These actions strengthen our competitive position and support more efficient demand generation, particularly among value-conscious consumers. Our second strategic imperative is restoring margins. We are continuing to target operating cost improvements of $40 million to $45 million in 2024 on top of the $85 million we realized in 2023. As a result, we expect 2024 operating expenses to be $125 million to $130 million below 2022 levels. We also remain intently focused on returning our gross margin rate to our historical average in the low 60s and expect our actions to restore our adjusted EBITDA margin to mid-double digits as industry demand normalizes. To deliver on these operating expense and margin improvements, we are driving sustainable change across the organization in four principal areas: cost of customer acquisition, cost to serve customers, cost of goods sold, and G&A R&D leverage. During the first quarter, we made tangible progress in each of these categories, including reductions in customer acquisition costs through the advancement of our predictive analytics; reductions in our cost-to-serve customers through self-service offerings, outsourcing strategies, and component sustainability efforts; and reductions in our cost of goods through structured sourcing strategies with additional flexibility in product and logistics. These actions will drive improved 2024 results as well as process capabilities that will enable performance improvements in future years. Increasing cash generation to pay down debt is our third strategic priority. In the first quarter, our adjusted EBITDA performance led to free cash flow generation of $24 million compared to $3 million for the same period last year. As we realize the benefits of our operating model transformation through 2024, we expect to generate $60 million to $80 million of free cash flow. Despite the persistent near-term headwinds, our long-term growth opportunity remains intact as illustrated in the Investor Relations deck we posted to our website last month. Sleep remains one of the top health and wellness priorities of consumers and also one of the areas in which they have the most unmet needs. Sleep Number is uniquely positioned in the industry to address consumer barriers to quality sleep, help solve critical sleep health challenges, and improve lives through proven quality sleep. Company culture is an important contributor to performance, and Sleep Number's exceptional culture is the result of our 4,000 team members' purpose-driven commitment. Thank you to our teams and partners for your passion, teamwork, and innovative mindset as we find new ways to compete effectively, restore margins, and generate robust free cash flow. We continue to focus on delivering value for our shareholders as we capitalize on the implementation of our durable operating model, the industry's gradual recovery in our strategic progression as a sleep wellness technology company. With that, I'll turn the call over to Francis, who will provide more details on our first-quarter results and full-year guidance. Francis Lee -- Chief Financial Officer Thank you, Shelly. And good afternoon, everyone. I will focus my remarks today on three primary areas: one, review of our first quarter results; two, ongoing progress we are making in our cost restructuring efforts; and three, our 2024 outlook. Our results for the first quarter came in largely as expected with adjusted EBITDA a little higher than planned and net sales a couple of million dollars below expectations. Now let me unpack more details regarding our first-quarter results. First-quarter net sales of $470 million were down 11% versus last year. Our net sales growth for the quarter included four points of headwind from year-over-year backlog changes. Our delivered units were down 9% for the quarter with our ARU down 1% versus prior year. Restoring our gross margin rate to higher levels is a key priority for the company, and we were pleased with the progress we made in the first quarter. Our first-quarter gross margin of 58.7% was above our expectations and a meaningful improvement from the back half of last year. We continue to identify and execute cost-efficiency initiatives across the organization, including in our cost of goods sold. We also continue to make meaningful progress in driving efficiencies in our business and were ahead of plan in the first quarter. Operating expenses, pre-restructuring costs were down $24 million versus prior year. Cost reductions were broad-based, including reductions in selling and marketing expenses and R&D. We continue to target $40 million to $45 million of operating expense reductions for the year. We recorded $10.6 million of restructuring costs in the quarter and expect approximately $3 million of additional restructuring costs for the balance of the year. As a reminder, restructuring costs are reported as a separate line item in our financial statements, and we have also provided an as adjusted EPS figure in our financial statements for comparative purposes. We generated $37 million of adjusted EBITDA in the quarter versus $49 million last year, primarily due to the year-over-year net sales decline. Our first-quarter adjusted EBITDA was slightly ahead of expectations as we benefited from the acceleration of our cost efficiency initiatives. A key focus for us in 2024 is to generate free cash flow to reduce our outstanding credit line balance, even with the expectation of a modest sales decline for the year. For the first quarter, we generated $24 million of free cash flow compared with $3 million last year. The $21 million increase in free cash flow year-over-year included a $15 million improvement in operating cash flow combined with a $6 million reduction in capex spending. For the full year, we expect to generate free cash flow of $60 million to $80 million, which we intend to use to pay down our credit line. Now let me provide an update on the ongoing work we are doing in support of a more durable operating model. The mechanisms we put in place to promote and build sustainable change are enabling us to meet our operational, transformational goals. Our initiatives and efforts are resulting in greater operating efficiency and financial resilience. We have progressed strategic sourcing initiatives across materials. And logistics that have lowered our total cost of goods, services, simplification programs with increased digital assets for customer self-service options are lowering our cost to serve. We have also implemented new stringent practices around indirect costs in support of sustained G&A leverage. Our store actions are on track with our expectations, and there are no material changes to the plan for the year that we communicated last quarter. As a reminder, we expect the net impact of store actions to be about a one-point drag to 2024 net sales growth, and we expect to end 2024 with approximately 30 fewer stores compared to 2023. Our gross margin improvement actions are progressing. We are focusing on durable operating activities that drive value engineering for our products, material cost reductions, and additional efficiencies through our manufacturing and home delivery network. Let me turn to an update on our 2024 outlook and a reminder on key assumptions included in our projected performance for the year. The demand environment remains challenging, and we continue to focus on the things we can control. We have built our operating expense plans for the year on the basis of the industry not experiencing any material recovery in 2024 despite undergoing two-plus years of recessionary demand levels. We are reiterating our 2024 full-year adjusted EBITDA outlook range of $125 million to $145 million. Here are a few items to highlight regarding the full-year guidance and second-quarter expectations. We continue to expect net sales to be down mid-single digits for the year with a low single-digit demand decline. We are still assuming three percentage points of headwind from year-over-year backlog changes and one percentage point from net store actions. We expect sales growth to improve throughout the year with low single-digit net sales growth expected in the back half of the year against easier comparisons. We continue to expect a majority of the approximately 100 basis points of gross margin rate expansion in 2024 to be in the back half of the year. We are estimating restructuring costs of approximately $14 million for the year, slightly higher than our prior estimate of $12 million. Our debt-to-EBITDA ratio was 4.2 times at the end of the first quarter compared to our covenant maximum of 5.0 times for the quarter. We continue to expect our debt-to-EBITDA leverage to peak in Q2 and end the year below 3.75 times. We also wanted to provide some clarity regarding our second-quarter 2024 performance expectations. We are expecting net sales to be down high single digits versus the prior year second quarter, including five to six points of headwind from year-over-year backlog changes. We expect second-quarter adjusted EBITDA to be $20 million to $25 million. I want to thank the entire team for the rigor and tenacity they have exhibited as we make important changes to our business for a more durable operating model while positioning ourselves to rebound with pace when the demand environment improves. We look forward to sharing our ongoing progress with you as we proceed throughout the year. With that, operator, please open the line for questions. Questions & Answers: Operator [Operator instructions] Your first question comes from the line of Peter Keith of Piper Sandler. Your line is open. Peter Keith -- Piper Sandler -- Analyst Hi. Good afternoon, everyone. Hope all is well. I just wanted to get to the demand trends, just to clarify a few things. So I think the quarter ended up negative mid-single digit on a demand basis. I think at the time of the Q4 call, you were also at negative mid-single digit. So I guess it's fair to say that, I guess, in March, you just kind of continue this negative mid-single-digit trend. And any comments around what we're seeing so far in Q2? Shelly Ibach -- President and Chief Executive Officer Yeah. Hi, Peter, thank you for the question. You're right in your summary of the demand trends. The shape of the first quarter was certainly choppy. We did end the month of February, down low single digits and March and Q2 to date. So March and April to date are also down mid-single digits. We expect the strength of Q2 to be in May, again, around the market share period. And that, of course, is the the largest month. And for the second quarter, we're expecting demand to be down low to mid-single digits in the quarter. And from everything that we've read and understand it, it appears the industry probably also was down mid-single digits for the first quarter. Peter Keith -- Piper Sandler -- Analyst OK. Very helpful, and I agree with that. And then you mentioned you're launching the c1 product in Q3 and I think adjusting the pricing on the c2. I think it's coming down a little bit. Does that have any implications on the gross margin as we just think about maybe back half of the year as those pricing adjustments come in and new products come in? Shelly Ibach -- President and Chief Executive Officer Yes, in a positive way. The c2, we're taking pricing on the c2, so we're actually increasing the price of the c2 by $200. And the c1 will be at $9.99, and that's certainly a value-engineered innovation that our teams have developed here in a short period of time. And we like the opening price point for a smart bed with adjustable firmness, and we see the combination of these actions to be positive as a contributor to our gross margin improvement expectations in the back half. And again, we continue to expect about 100 basis points of gross margin rate improvement on the year, primarily in the back half. Peter Keith -- Piper Sandler -- Analyst OK. Very helpful. One last one for me. And Shelly, this is kind of an off-all question, but it's something I've been thinking about. I'm wondering if you have ever contemplated taking the brand back to wholesale. I know that was on pre-GFC in quite a wide manner. And just thinking about it maybe if you were to go to more of a specialized manner, one to two key retailers, a nice way to expand the brand, take some share, and you'd certainly be taking advantage of an environment where retailers are looking for new and innovative products. Shelly Ibach -- President and Chief Executive Officer Well, thanks so much for the thought, and we continue to explore a wide range of opportunities as we look forward and are very focused on increasing our shareholder value. So we'll continue to compete aggressively. You'll see us be leaning in and thanks for your thoughts. Peter Keith -- Piper Sandler -- Analyst OK. Thank you. Good luck. Operator Your next question comes from the line of Robert Griffin of Raymond James. Your line is open. Robert Griffin -- Raymond James -- Analyst Hey, guys. Good afternoon. This is Bobby. thanks for taking my questions. I guess, Shelly, first, I wanted to go back to, I think it was in your prepared remarks, you talked a little bit about the change in some of the promotional aspects. So I was hoping, can you just unpack kind of what you guys have changed and maybe share some of the data that you're seeing that gives you confidence that the different promotional aspects is not driving an impact in sales? Because I think right now, a lot of investors are zeroed in on getting the sales to turn in this business given kind of the flow through. Shelly Ibach -- President and Chief Executive Officer Yeah. Thanks for your question, Bobby. Maybe I'll just start with with media and where we have media planned and where we -- how we spend in Q1. So we continue to plan about 14% of sales. We expect efficiency from our initiatives, especially in this very challenging environment. And in the first quarter, we were down mid-single digits in our media spend, the same as demand. We focused on continuing to test, learn, and make adjustments building on the initiatives that we started in the fourth quarter around segments who we're targeting, around the media allocation messaging, and also our promotional strategy. And in addition to the econometric model that we've been utilizing for -- well, since 2013, that is quite helpful in media allocation. The new model with predictive analytics that we have built around promotional promotional strategy is informing our actions to be more precise on how we spend our promotional and financing dollars so that we benefit to the greatest degree driving efficiency, improving our efficiency so we can allocate more dollars to media in this environment. And so we've continued to learn. We have been very effective in our test results, and we are ready to apply this and have begun applying this at greater scale in the second quarter. I would turn to the results in Q1, although constrained around demand, the effectiveness of our results drove a higher mix and a higher gross margin profile overall. So that is very important in our durable operating model to be able to be more efficient and active with our media dollars. This continues to be a time of real pressure on our industry. Our industry normally benefits from natural traffic flow in the macro, which contributes about 20% of sales in just a regular industry environment with strong consumer sentiment. And right now, that base is only about 12%. So the effectiveness of our dollars is really important for us. And that's what we're excited about with the advanced machine learning we have and taking -- and reviewing them in a holistic manner to both our media dollars and promotional dollars and how we will apply them for the balance of the year to be able to generate and deliver against our margin and revenue goals. Robert Griffin -- Raymond James -- Analyst OK. Thank you. And I guess my second question before I turn it back over to others is just on the store portfolio changes, we've started some of the closing process, and I know it's still early. But Francis, anything you can share on what you're seeing from a recapture basis as you've gone market-by-market and started closing some of these stores? Francis Lee -- Chief Financial Officer Hey, Bobby, thanks for asking. Our store actions are progressing on track. As we communicated, we will be ending the year with about 30 net store actions relative to 2023. Majority of those closures are happening in the first half of the year, and our early indications on the sales transfers are that they are tracking to or above our expectations, and we'll continue to monitor that as we get more solid data as time continues here. Robert Griffin -- Raymond James -- Analyst Thank you. I'll turn it over to somebody else, but best of luck here in the second quarter. Shelly Ibach -- President and Chief Executive Officer Thank you. Operator Your next question comes from the line of Seth Basham of Wedbush. Your line is open. Seth Basham -- Wedbush Securities -- Analyst Thanks a lot and good afternoon. My first question is on average revenue per mattress unit, which dipped year-over-year in the quarter. Could you give us some color as to why that is? And how should we think about that going forward? Francis Lee -- Chief Financial Officer Yes, I can certainly -- thanks for the question, Seth. This is Francis. I can certainly share with you our our outlook for the year. We anticipate ARU and units to be flattish for the year on a demand basis, in line with our expectations. The -- when we split it out and look at it first half versus second half of the year, we're looking at the ARU to be down slightly in the first half and up low single digits in the second half of the year. But those are right in line with our expectations for our plans. Seth Basham -- Wedbush Securities -- Analyst Got it. And that change is being driven by comparisons? Is it being driven by a mix of -- or attachments or promotions? What's driving it? Shelly Ibach -- President and Chief Executive Officer Seth, I think you were asking specifically about Q1 ARU, and the ARU from Q4 to Q1 came up about $200, and that was driven by mix. Mix within the smart bed line, driving a stronger innovation mix, and we continue to have strength with our our Climate360. The year-over-year compare, you're right, was down slightly. And we do, as Francis said, continue to see these two metrics being about flat for the year, flattish, and there will be some fluctuations. When you look at last year's ARU, we -- it was the first quarter that we were -- that we had the FlexFit 3 and FlexFit 2 back into our assortment after not having them for about 18 months. So there was some pent-up attach on the FlexFit 3 at that time. So thus, this composition with higher ARU than fourth quarter, but yet a little lower than prior year, the relationship driving up the smart bed line drove higher higher mix and ARU and margin overall. So we spent less promotion dollars in financing in the quarter from both a rate and a dollar perspective. Seth Basham -- Wedbush Securities -- Analyst Got you. And that's a good segue. So improving rates and margin dollars on a gross basis. What about after taking into account promotional financing costs, as we noticed about your 0% financing terms extended later in the quarter? Shelly Ibach -- President and Chief Executive Officer Yes. When I mentioned that the promo, so promo and financing combined year-over-year our dollars and rate were lower on a demand basis than the prior year. Seth Basham -- Wedbush Securities -- Analyst Got it. As you think about your new models and how effective they are going between cash discounts versus longer financing terms, is what we saw later in the quarter more indicative of how you plan to adjust going forward? Or is there considerations around holiday market share periods versus non-holiday periods? Shelly Ibach -- President and Chief Executive Officer There are absolutely considerations in the different periods. And we are seeing the strength of the business in the market share period, and we will continue to lean into other tactics, especially with our smart sleepers in some of the non-promotional or nonmarket share period. Seth Basham -- Wedbush Securities -- Analyst Got it. Thank you very much. Shelly Ibach -- President and Chief Executive Officer Yeah. Thanks, Seth.[:p id="-1" name="Operator" :]Your next question comes from the line of Dan Silverstein of UBS. Your line is open. Dan Silverstein -- UBS -- Analyst This is Dan calling in on behalf of Michael Lasser. thanks for taking our questions, and congrats on the quarter. Shelly Ibach -- President and Chief Executive Officer Yeah. Thanks, Dan. Nice to meet you. Dan Silverstein -- UBS -- Analyst You as well. Just a quick question on the demand comp expectations. So for the full year, guidance contemplates a low single-digit decline, kind of 2Q. To date is in the down mid-singles range. So I guess that implies a slight acceleration in the back half, but shouldn't this accelerate a lot? Like if you look at the multiyear compares in the back half this year, it gets a lot easier. So just wondering, is that just some level of conservatism? I guess that's the first question. Shelly Ibach -- President and Chief Executive Officer Yeah. Well, let's start with the industry overall. We continue to expect a pressured industry even with multiple years of double-digit unit declines. We still expect the industry to be pressured this year, and we have a little bit of additional pressure with our store actions. That's about one point of additional pressure. And you're right, as we lap Q3, Q3 for us and for the industry was down double digits. We were -- we had even more pressure in Q3, more opportunity, I should say, around our messaging this year, which we expect to be much stronger. So we do expect improvement in the back half. It remains a very choppy environment as we experienced in January with a consumer pullback and weather and also the consumer behavior in March, and yet some good strength in February. So the environment remains choppy. We do expect improvement in the third quarter and in the back half as we comp easier compares, but also as we advance our initiatives around competing more effectively, and it gives us confidence in being able to deliver on our commitments. But we -- like everyone, we're anxious to see a better environment for the consumer and for this industry. Dan Silverstein -- UBS -- Analyst Got it. Thank you. And then just a second question on gross margins, maybe kind of more of a longer-term one. If you achieve the guidance you guys laid out for 100 bps of expansion this year, what gets you -- what's the glide path to 60% plus from there? Is it just continued operational work? Or if you could just comment on the major drivers that remain -- the opportunity that remains today. Francis Lee -- Chief Financial Officer Yeah. Hi, Dan. We are working on making sustainable changes in our operating model across a variety of areas that I referenced in my prepared remarks around gross margin, around sourcing, manufacturing, how we deliver the product. And so as we come -- those are sustainable changes. Some of those changes come in this year. They'll be more fully annualized into next year and beyond. So you couple that with also some volume uptick when the industry returns, and you'll be getting essentially gross margin leverage going forward so that you'll be back into a more normalized zone that we've seen in the past. Dan Silverstein -- UBS -- Analyst Thank you, and best of luck. Shelly Ibach -- President and Chief Executive Officer Thank you, Dan.[:p id="-1" name="Operator" :]Your last question comes from the line of Bradley Thomas of KeyBanc. Your line is open. Bradley Thomas -- KeyBanc Capital Markets -- Analyst Hi. Thanks for squeezing me on here. Shelly, I wanted to just follow up on the c2 and the relaunch and the price increase. For one, maybe can you give us any early insights into how the product is different from the prior version as you refresh it? And just the $200 price increase does seem pretty significant on what is it, about $1,100. I think the list price is today pretty significant. Just in the context of we know the consumer has been a bit stretched. And I think it was only a quarter or two ago that you were talking about being a little bit more promotional to make sure you drove demand. So just a little bit more about your confidence that that price increase is something that is the right move here for that product at this time. Shelly Ibach -- President and Chief Executive Officer Yeah. Brad, thank you for your question. So we are introducing an additional smart bed called the c1, and we're introducing that bed at $9.99. So that comes in lower than our current and at the same time, working pricing, not relaunching, but just taking pricing, increasing the price of the c2 by $200. So that's a step-up story. So we'll offer the c1 Sleep Number smart bed with adjustability, effortless adjustable firmness and all the features of the smart bed at $9.99 every day. And then we will take pricing of $200 on the c2. And then of course, we'll continue with our other models. So the c1 is an addition. Bradley Thomas -- KeyBanc Capital Markets -- Analyst Got you. OK. That's helpful. And then just if I could follow up with a margin question of my own. I know that the company is committed to R&D and innovation. But just wondering as you reflect on the current margin trends in the current environment, if there's any updated thinking about what the right level of R&D spend is for the company to properly still be able to drive growth but also be disciplined and just how you're thinking about that in short sort of the short term and longer term. Shelly Ibach -- President and Chief Executive Officer Yeah, I'll comment on the four areas that I mentioned in my script that we will be measuring on an ongoing basis when we think about our durable operating model: the cost of acquisition, the cost of goods, the cost to serve customers, and then G&A R&D leverage. So we'll always be tying out to those principal areas in the future. That helps us with ongoing discipline over time on each of those areas -- in each of those areas. So I think that's a good way to think about it as we think about it. We're driving some significant R&D reduction here this year in our operating model. And we've reprioritized for efficiency, many of the resources, which is helping us get after our cost of goods sold right now, as well as innovations like the c1, the addition of c1, and other strong innovation pipeline items that we have coming in as we approach 2025. Bradley Thomas -- KeyBanc Capital Markets -- Analyst Got you. That's helpful. Thanks so much, Shelly. Shelly Ibach -- President and Chief Executive Officer Yeah. Thank you. Operator That concludes our Q&A session. I will now turn the conference back over to the company for closing remarks. Dave Schwantes -- Vice President, Finance and Investor Relations Thank you for joining us today. We look forward to discussing our second-quarter 2024 performance with you in July. Sleep well and dream big.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Paul Hudson Welcome to the Q1 2024 conference call. You can find the slides of this call on the sanofi.com Investors page. I'd like to remind you that the information presented in this call contains forward-looking statements, which is subject to substantial risks and uncertainties that may cause actual results to differ materially. I encourage you to read the disclaimer in our presentation. In addition, I refer you to our Form 20-F on file with the SEC and our Document d'Enregistrement Universel for a description of these risk factors. I'm pleased to welcome our new CFO, Francois, to the presentation, and Francois will be followed by Houman, our head of R&D on the pipeline. For Q&A, we have Brian, Olivier, Thomas, and Julie to cover the global business units; and Roy, our GC. For the Q&A, you have two options to participate. In Zoom, raise your hand to submit your questions in Q&A. Those have been explained on the slide. Let's turn to the business. We had an excellent start in 2024 with 7% sales growth, in line with our fast-moving portfolio transformation. Growth was driven by launches, including new and existing indications for Dupixent, and this performance fully underpins our 2024 EPS guidance as CEO. Dupixent continues to increase penetration in all approved indications, and we saw performance diversified further across all geographies, plus, of course, the usual U.S. insurance plans. Pharma launches were led by Nexviazyme and Altuviiio with more details to come a little later. Launches also boosted the performance in vaccines with Beyfortus making further progress, including in countries in the southern hemisphere. In consumer health, growth of 9% reflected the consolidation of the Qunol acquisition, as well, of course, as organic growth. We're progressing the plan to separate this business as discussed in the past. Overall, we're pleased with the ongoing portfolio transformation, which is becoming more visible, also in our cost lines with more resources going into the pipeline and less into SG&A. This is exactly the development we set out last year and when we announced the next chapter of our strategy. Before moving on, I'd like to extend my thanks to all the Sanofi colleagues for their dedicated work and their commitment to patients chase the miracles of science to improve people's lives. Dupixent continues to perform a strong demand-driven growth, therein sales of more than 2.8 billion euro in the first quarter. Sales of this unique medicine increased by 25% globally, fueled by the accelerated growth from indication expansions in the ex U.S. markets, where sales grew as much as 51%. With now more than 850,000 patients worldwide, the strong contribution from countries like Japan, China, and Germany highlights the tremendous growth potential for Dupixent across all indications and geographies. In the U.S., sales exceeded 2 billion euro in the quarter, up 17%. And as we can see every year, U.S. growth reflects the impact from the customary dynamics of the annual reset of insurance plans. Almost eight years into its initial U.S. launch in atopic dermatitis, this effect underscores the large size and rapid growth of Dupixent with the leadership positions in new prescriptions across all five approved indications. As we look ahead to Q2, we remain very excited about the outlook for Dupixent's outstanding commercial success across all geographies, supported by regulatory progress toward launching multiple new indications in major markets. And with our strong Q1 performance, we're extremely confident in delivering our previously communicated objective of around 13 billion euro in sales for the full year. As one of the leading medicines in immunology respiratory is a core disease area for Dupixent, well ahead of any of the competing -- of any other competing biology medicine. Dupixent has established and maintained a distinct leadership position in new prescriptions among pulmonologists across asthma and chronic rhinosinusitis with nasal polyps in the U.S. We believe in the growing importance of pulmonologists in adopting biologics to treat respiratory diseases, but also confident that they're growing familiarity with Dupixent in type 2 inflammation will play a key role in the adoption of Dupixent as the potentially first advance therapy in COPD in more than a decade if approved. We also continue to build a growing body of scientific evidence around Dupixent in addressing airway inflammation in the VESTIGE study, which was recently presented at the Quadruple AI Congress, Dupixent demonstrated reduced airway inflammation of mucus plugging in functional respiratory imaging in house. We have an ambition to potentially introduce a new standard of care with Dupixent in COPD for patients with type 2 inflammation. As you may recall, significant regulatory progress has been achieved with Dupixent's potential in COPD across key markets. We are preparing for a potential launch in the U.S. as early as late June if approved by the FDA and plan for additional potential approvals in Europe and China by the end of the year. We're excited about the outlook for Dupixent's potential to become a breakthrough medicine for COPD, a leading cause of death worldwide. Dupixent is well-positioned to potentially address the high unmet need in COPD with a strong clinical profile across two large Phase 3 studies and more than seven years of real-world evidence of -- real-world evidence data on safety across five approved indications. Dupixent addresses unmet medical need of a well-defined population of roughly 300,000 patients in the U.S. alone, whose disease is driven by type 2 inflammation and uncontrolled despite standard-of-care therapies. COPD is a historically difficult disease area and a heterogeneous disease with multiple development failures in the last decade. Over time, many patients become resigned to their medical condition with an experienced team that has a track record of development and commercial excellence in respiratory, we planned a targeted approach to drive the awareness and identification of COPD with type 2 inflammation among patients and pulmonologists. As we've seen with our launches across other major indications, the adoption of Dupixent as the first and only biologic in the COPD indication will require some time initially and the inflection of sales growth and is most likely to come in 2025 after the U.S. launch. We are confident that, if approved, COPD will become the next major growth pillar for Dupixent. And together with our second potential blockbuster developed for COPD, itepekimab, we continue to expect peak sales of more than 5 billion euro for both products combined. Let's now move to the new launches as Q1 further demonstrates our ability to execute successful launches and bring new medicines to patients. This quarter, all our new launches, including Beyfortus, made up close to 1 billion euro in sales or 9% of our total biopharma business. Beyfortus continued its global rollout in the quarter with the launch in the Southern Hemisphere countries of all interim protection programs in some Australian states and Chile. As RSV is seasonal, Beyfortus will have a sales pattern like what many of you know from flu vaccines. Nexviazyme grew strongly from new patients, as well as patients converting from older medicines in the Pompe franchise. We're pleased with the overall growth in franchise sustainability. Altuviiio is soon annualizing its launch. It has been -- it has seen continued strong uptake with most of the growth coming from other factor medicines [Inaudible] and even some uptake from patients not on factor medicines. It showed us how innovation can help to revitalize hemophilia and grow Sanofi's total share. Other launch medicines also did well in growth in absolute terms, including Sarclisa approved in multiple myeloma. Taking a closer look at Beyfortus, what we're really focused on are proud of is the impact on improving public health and benefit for thousands of families. We've now real-world results from last year's implementation of broad immunization programs in the U.S., France, and Spain with Beyfortus. The results are strikingly impressive. You can see the dramatic reduction of hospitalizations by the numbers on this slide. These real-world results are either consistent or even better than those from the clinical trials. The U.S. CDC recently published our effectiveness data for Beyfortus at 90%. And in Europe, we have seen similar results for hospitalization reduction across France and Spain. Overall, following the first season in the three launch countries where Beyfortus is used for all in from protection, this means that nearly 40,000 hospitalizations have already been avoided for families. This is the impact that matters most. This also provides a perspective for Beyfortus global health benefit as we plan to launch in additional countries in H2. Together with AZ, we're working with the regulatory authorities and extending the manufacturing network to make Beyfortus more available for the upcoming season as we're glad to see such enthusiastic demand. We're confident that where we will meet anticipated customer demand and look forward to extending all in from protection programs in the upcoming Northern Hemisphere RSV season. On my final slide, I wanted to highlight some progress on our ESG ambition exemplified by the work of our global health unit. Since its launch in 2021, the essential medicines from our GHC portfolio have supported close to 550,000 patients suffering from noncommunicable diseases in 31 countries with the objective to reach two million NCD patients by 2030. An additional differentiator is the meaningful work done by our teams to help building sustainable healthcare systems through partnerships with the ministries of health, trainings of healthcare professionals, and our impact investment fund focused on supporting exclusive start-ups and businesses. I now have great pleasure to hand over to Francois, our new CFO. Francois Roger -- Chief Financial Officer Thank you, Paul. I'm pleased to have joined the team here at Sanofi earlier in April, and I'm looking forward to interacting with all of you in the future. Sales were up 7% in the quarter, and as Paul mentioned, growth was driven by our ongoing portfolio transformation toward biopharma medicines with Dupixent sales up by 25% and the new launches, including Beyfortus, up by 150%. Excluding the impact of Aubagio loss of exclusivity and COVID-19, growth was 12%. This analysis does not aim at removing all headwinds but simply illustrates what the new Sanofi may look like in the future. On gross margin at 73.5% was down by 2.6 percentage points, mainly due to Aubagio and due to the absence of COVID-19 vaccine sales this year. In addition, the quarter was impacted by a one-off inventory adjustment to reflect declining standard costs. R&D expenses increased by 12% at constant exchange rates, in line with our ambition to invest more in our pipeline. Resources are being deployed to advance late-stage immunology and neurology projects. SG&A increased by less than 3% below half of sales growth, illustrating our strategic reallocation of resources. Our business operating margin decreased to 27.2%, mainly due to the gross margin decline, the step-up in R&D expenses, and an increase in the profit sharing with Regeneron. As expected, EPS was down 7.4% in Q1, also partly impacted by a higher tax rate. Just one word on cash flow. It will be impacted in 2024 by our lower business operating income and by the phasing of rebate payments in the U.S. related to prior-year sales. Let me now give you some additional information on our coming quarter. In Q2 2024, we expect Dupixent on the new pharma launches to grow further, while we continue to see the impact of the Aubagio loss of exclusivity in Europe. Of note, we don't expect any Beyfortus sales in Q2 due to early delivery in Q1 in some Southern Hemisphere countries, while shipments in Northern Hemisphere countries are not expected before the second half of 2024. For the full-year 2024 sales outlook, we expect Dupixent to reach around 13 billion euro and the vaccine franchise to grow mid-single-digit with Beyfortus anticipated to reach blockbuster status. The Aubagio loss of exclusivity will continue to impact the top line, mainly in H1. Finally, planned divestments will lower our sales by around 300 million euro over the year. For the full-year P&L, we expect our gross margin to decrease slightly due to Aubagio and the absence of COVID-19 sales and revenues this year. Opex is expected to grow with about 700 million euro step-up in R&D, while SG&A expenses are expected to remain stable. Finally, our tax rate will increase to around 21% due to the implementation of the OCD Pillar 2. We confirm our full-year 2024 expectation of a low single-digit decline of our business EPS at constant exchange rates. Excluding the impact of the higher tax rate, the full-year 2024 business EPS is expected to be roughly stable. On foreign exchange, we see a negative currency impact to EPS of around 6% based on April 2024 average exchange rates. As a reminder, we continue to anticipate strong business EPS rebounds in 2025. And as we have mentioned earlier, in 2024, we are transforming the company for long-term value creation. With that, I will now hand over to Houman. Houman Ashrafian -- Global Head of Research and Development Thank you, Francois. We've seen substantial Phase 2 -- we've seen substantial positive pipeline progress already in Q1 where we continue to deliver a consistent news flow of clinically important data and scientific publications and congresses. Frexalimab's encouraging Phase 2 data and multiples choices was recently published in the New England Journal but updated with data from the 48-week open-label extension, which we presented last week at the AAN Conference supporting our commitment to MS patients. In atopic dermatitis, we have the potential to further establish our leadership with amlitelimab, where we presented the Phase 2b data at AAD where largely sustained effective amlitelimab on atopic dermatitis symptoms, which demonstrated after 52 weeks of dosing. Later, I will further talk about the data presented from these two pipeline projects. On the regulatory side, we've reached an impressive pace of approvals with two of them for Dupixent in multiple indications within different countries. FDA discussions regarding Dupixent's SBLA in COPD are ongoing under the priority review process, as Paul has mentioned. As usual, it's always possible that the FDA could require additional information to complete the priority review of our submission to finalize labeling. As a reminder, there is currently no biologic treatment approved in COPD underlining our commitment to make Dupixent available to as many patients as possible as quickly as possible and supporting the ambitions to Dupixent that Paul has already outlined. Amlitelimab, our non-depleting OX40 ligand monoclonal antibody, has shown potential best-in-class efficacy with a durable clinical response rate after 52 weeks from the STREAM AD Phase 2b study. The responder percentage is reflected in the IIGA 0/1 and the EG75 scores, which are both surrogate endpoints AD were maintained and still significant, in fact, following the withdrawal from the drug at week 24. As you can see from the bar chart, at week 52 results on and off medicine are similar, which shows the persistence of response, suggesting the potential normalization of inflammatory T cell activity and potential effect on type 2 and non-type 2 biomarkers. These important data support the viability of the 12-week extended dosing interval, which will improve the patient's treatment paradigm and potentially expand Sanofi's presence in AD and beyond has been interpreted by some to hit the potential disease-modifying activity. The opportunity of treating patients by treating this core central pathway with consistently good safety in both parts of the study signals that amilitelimab has the potential to reach much beyond AD and become pipeline [Inaudible]. The cleanest AE profile in this class may reflect the importance of nondepleting mechanism differentiating amilitelimab. The enrollment of all four studies Phase 3 studies is on track for the first regulatory submission expected in 2027. Now switching to frexelimab, our CD40 ligand antibody high-efficacy non-lymphocyte-depleting potential MS treatment also has a pipeline and a product potential with multiple indications under development. Most importantly, in relapsing remitting MS, the 48-week data from the Phase 2 open-label extension study has shown a sustained reduction of disease activity monitored by a mean number of gadolinium-positive type 1 lesions occurring appearing at each MRI. As you can see on the bar chart, patients who have switched from the placebo arm to the frexelimab arm, both IV and subcu, have shown an impressive decrease of MS. It's important to mention that nearly every patient on frexelimab IV had no new lesions presented at a near to zero annualized relapse rate at 48 weeks. 87% of participants completed the extension, and frexelimab once again proved to be well tolerated with an acceptable safety profile. Phase 3 studies are relapsed on remitting MS and NRPMS have initiated and the first regulatory submission is expected in 2027. Frexelimab has the potential to provide additional benefits to patients and extend Sanofi's presence in multiple sclerosis. Switching gear now turning to rilzabrutinib, our oral BTKi, one of our 12 priority medicines. As you can see, we're developing this medicine in multiple indications such as in ITP and rare hematological diseases, but also in our main key therapeutic area immunology, including asthma and chronic spontaneous urticaria. We were pleased to announce earlier in the week the positive readout of the LUNA 3 Phase 3 study in ITP, a rare autoimmune bleeding disorder characterized by abnormally low levels of platelets, persistent and disabling fatigue and increased hemorrhage. These results confirm the positive Phase 2 data with additional details to be presented at forthcoming medical meetings and a regulatory submission later this year. Alongside this positive news, we also received more Phase 2 data in asthma. This time at the high dose, confirming the previous positive trends. We are very excited by the opportunity to present the data at the ATS conference next month. We can't wait to see that. Positive data in the third indication CSU were presented in February at the AAI AI Annual Meeting with Phase 3 starting later this year. These datasets are important stepping stones of our R&D transformation journey, emphasizing our commitment to rare diseases and to unlocking the important potential for BTK inhibitors and also highlighting the value that our experience in immunology can bring to the development of a medicine that started its life in another company. Having recently reshaped our overall oncology strategy, we want to cover this in a little greater detail. Our strategy is one of selectively investing in areas where we believe we have a chance to make a meaningful difference based on our expertise in immunology. Our aim is to focus on critical unmet medical need for patients benefiting from immune mechanisms and related mechanism of action, such as our NK cell engagers and using our technologies and platforms with the ABCs of the nanobody. I would like to end this slide on the positive news for the cancer community, where we are pleased by the recent positive U.S. development supporting the use of minimal residual disease or MRD has clinical endpoint in myeloma. When recognized by the FDA, this potentially bring new effective treatments to patients earlier. We currently have Sarclisa, our CD38 with a best-in-class potential and approvals in more than 50 countries as an option in the relapse myeloma setting. Last December, the readout of the IIa study marked the fifth positive Phase 3 study and second positive in transplant eligible, newly diagnosed multiple myeloma patients, where 77% of patients received -- reached MRD negativity versus 67% in the comparator arm. The Sarclisa Group had a 60% higher chance of achieving these states. Additionally, we had the Phase 3 study which was positive, and we look forward to sharing the LatAm upcoming Medical Congress anticipated -- with anticipated submission in trial. To end my part of the presentation on a positive note showing our ongoing commitment to deliver clinical data in the service of patients, I would like to highlight the upcoming Phase 3 and Phase 2 readouts, as well as regulatory submissions occurring in 2024 and 2025. As you can see, news flow will increase and become busier as we move into 2025, supported by the step-up in R&D investments that Francois just mentioned. I'm enthusiastic and impatient at the same time, has the news flow keeps on getting richer and better, thanks to the clinical study that we are constantly started. With this, I hand back to Paul. Paul Hudson For sure, enthusiastic and impatient, I can confirm that. We'll now open the floor for questions. As a reminder, we would ask you to limit your questions to one or two. As you can see, you have two options for Q&A. Click the Raise Hand icon, you'll be notified your line is open. So do remember to unmute or submit your question through Q&A function and your question will be readout by us. Over to you. Questions & Answers: Operator Yes. The first question will be from Peter Welford from Jefferies. Peter? Peter Welford -- Jefferies -- Analyst Hi. I hope you can hear me. Thanks very much for the question. Can we just start off with Dupixent and just thinking about the momentum we've seen, but all the more important new indications COPD. I guess, I just wanted if you can sort of square up some of the very positive commentary. I guess, we heard on the potential for this indication, obviously, significant unmet medical need, and that there also is some perhaps word of caution does not get to ahead of ourselves. I guess, certainly challenging, we've done a lot of doctors seem to think that COPD patients, they already know whether they have type 2 information in many cases or not. So if you could talk about, from your point of view, what the challenges are here and why we shouldn't expect at least initially a potential bolus of patients given they currently have no other options available and potential challenges, I guess, what would you think about that? And then if I could just ask a second question just quickly to Francois, you mentioned on the gross margin just with regards to a one-time adjustment. I would maybe just go into that in a little bit more detail. And is that very much onetime for the first quarter? And then perhaps you could be possible quantified would help? Thank you. Paul Hudson Hi, Peter. Thank you. Brian, Dupixent, COPD. Brian Foard -- Global Business Unit Head, Specialty Care Yeah. Thank you so much for the question. Really, as we get ready for the launch in COPD, first and foremost, it all starts with the patients. And I think what we've seen with this brand is that by going into diseases that are driven by underlying type 2 inflammation, we've really opened up new treatment opportunities for these patients and really transform a lot of patients' lives, I think, as Paul mentioned, over 850,000 patients already on therapy. Many of those actually happen to be asthma sufferers and are treated by the pulmonologist community. So as you can imagine, as we've spoken with pulmonologists, they're extremely excited about having potentially a new option to treat these patients that, quite frankly, are on the highest dose of therapy, and that's why I think to contextualize them, these patients are on the highest doses of therapy and still exacerbating. So we have to contextualize that the right way. And then you saw our reductions in both the BOREAS and areata trials, how effective they were at actually adding reduction in exacerbation rates of 30% and 34%. So we're very positive about this. I think the challenge with this particular patient population is probably less about the patient population and more about the fact that whenever you bring a new therapy like this in more than 10 years, biologic ramp will take just a little bit of time. Even though there's a burden of disease there for the patients, they will take a bit of time to get these physicians used to using biologics. That said, the pulmonologist community does use biologics today. So we feel like we're in a good spot and preparing the marketplace really quite well. But excited about bringing it whenever it comes to the market. Paul Hudson Thank you, Brian. Houman, anything to add? Houman Ashrafian -- Global Head of Research and Development Yeah. Hi, Peter. You asked a very specific question about the patient burden of disease and patient population. I just want to be clear about how we develop this molecule, both in BOREAS and areata. We were very specific about our stratification strategy, we thought very deeply about the EOs concentration in the blood and specifically the pheno. We stuck to our knitting very specifically on what we saw in the Phase 2 and that reflected in an outstanding reduction in the exacerbations in our Phase 3 studies. I think it's really important to recognize the Sanofi goes forward. But our development strategy is laser-focused to enable launch in the highest unmet medical need population. And that's what we've done. So that's why we have confidence in the way this population launch will expand. Paul Hudson Let me just add. I think, Brian, just on it, too. But remember -- and I have to give Regeneron some credit for really pioneering in AD with us back in the beginning, but they were strong on that. We had to really build out the education around these things. We enter new areas you have to do the proper amount of education and work, make sure the right patients are identified and get supported. And that's why I think we've shared that we expect an inflection point in the business evolution more likely to be in 2025 because we have got work to do. Francois? Francois Roger -- Chief Financial Officer Yes. Good afternoon, Peter. So the question on the inventory adjustment, it's a one-off essentially for the Q1. What happened is that our standard costs are moving down, which is actually a good news for the medium term. But we had to revalue as a consequence of that, our existing inventory to the lower standard cost and this is a one-off adjustment that we booked in Q1. We don't expect to get much of it in Q2 and Q3 and for the balance of the year. And it was relatively sizable because it was close to half of the gross margin decline in Q1, so which means that we can expect that our gross margin should not see the same negative deviation versus last year as we progress further into the year. Paul Hudson Thank you. Next question. Operator The next question is from Luisa Hector from Berenberg. Luisa? Luisa Hector -- Berenberg Capital Markets -- Analyst Hello. Thanks for taking my questions. I wonder if we could just get an update on consumer factors that will determine your exit strategy and the timing and pros and cons of the different exit routes for maximizing shareholder value. And then I wanted to ask on rilzabrutinib. So good data in ITP. Just how you think about that sales opportunity -- and also the asthma, so the Phase 2 positive for the high dose, I think, in asthma, any more color around the safety profile and how you can proceed in asthma. I think the next step was Phase 2b, but any more color on the endpoints, trial design and that stepping stone to Phase 3? Thank you Paul Hudson OK. Good. Francois, CFC? Francois Roger -- Chief Financial Officer Yes. Luisa, Francois speaking. So I'll take the question on consumer. As of now, we want to keep all options open. So which means, basically, you can consider that we can consider a potential spin-off an IPO, probably partnering as well with private equity. So we keep all options open with one single idea, which is to maximize value creation for shareholders. So I don't want to comment on the pros and the cons of each of the options for the time being given that we are working on with a very open view for the time being. But we'll keep you posted as we progress further into the year. But don't be worried, this is about creating value for shareholders. Paul Hudson Do you want a quick comment about where we're at in terms of technically being ready? Unknown speaker Sure. I mean, first, I can confirm that we're excited and that we're on track and to give maybe a little bit more color on the practical side, all our system cloning activities that had to happen successfully happened actually just last week and moreover, we're well advanced in determining the scope of all the transition service agreements, which are very important as well. And in the meantime, we continue to focus on our three strategic priorities as we execute our overarching mission to make self-care as simple as it should be. So we're well underway. Paul Hudson Thank you, both. Good questions on rilzabrutinib. Houman, I don't remember Brian, do you want to comment on potential value in ITP, or Houman can either? But Houman, do you want to start off with -- Houman Ashrafian -- Global Head of Research and Development Let me start -- actually, Brian and I will tag-team this one. Luisa, thanks for the question. So let's -- you have two parts to your question. There was ITP and asthma tolerability. So I'll just hit this very directly. I think that there still is a major unmet medical need in ITP. As you know, it's 50% of patients remain undercovered for care, particularly in terms of a lack of stability of platelet count, they also suffer very substantially from fatigue. Rilzabrutinib is something a great joy to me personally having treated these patients. The beauty of this treatment has a number of elements. One is, it obviously prevents the production of B cells, hence the BTKi, the inhibition, but also prevents phagocytosis of those platelets and reducing their platelet count. So mechanistically interesting compared to standard of care today, which undercovers 50% of patients, but also in some cases, required relatively extreme dietary modification, wills are offers real opportunity, point one. Point two, you asked about tolerability. To date, what we've seen has been gratifying in terms of tolerability in every aspect. So that's pretty exciting. And then your question about asthma is super clear. We presented our latest asthma data last year. As you know, we are excited by that data. The opportunity for Realtor to become the first oral advanced asthmatic treatment is remarkable, but it has the potential to change the paradigm of how we treat asthma compared to what we have today. All I can say is that it is with very substantial pleasure that I will invite everyone on this call to come to the ATS meeting just the outcomes of our study, which we could not be more thrilled in sharing. With that, to dimensionalize the market, I'm going to hand over to my friend, Brian. Brian Foard -- Global Business Unit Head, Specialty Care So I think it's a really good question. I think as you saw on R&D day, when we really started to talk about the 12 assets. This was one of those assets we talked about. So the slide I think that was presented earlier was really impressive to show that in three potential indications, CSU, ITP, and then in asthma. This can be really differentiated versus the competition in each of those therapeutic areas. Now specifically as it relates to ITP, and maybe I'll go a little bit broader and just say in rare blood space. We actually think that this could be potentially a blockbuster across both ITP and combined. But contextually speaking, I mean, if you think about the two of them, obviously, ITP will be a little bit bigger than what we see in just based on the size. I think there's about 50,000 patients we see as being eligible for ITP. So really excited about this differentiated profile and bringing it to patients as soon as possible. Paul Hudson Thank you. I'll be in San Diego at ADS for the weekend between other meetings. So I'm looking forward to seeing the data presented to. Next question? Operator Yeah. Next question from Graham Parry from BofA. Graham? Graham Parry -- Bank of America Merrill Lynch -- Analyst Great. Thanks for taking my questions. So first one is just on tolebrutinib and just thinking about scenarios for the readout of the data there. Just given the low likely annualized relapse rate that you're going to see in the control arm, if you assume it's going to be similar to ibrutinib. Do you see that there's a thought process here that perhaps actually progression would be the better primary endpoint? And is there a possibility here to change the statistical analysis plan for those relapsing studies to disease progression? And alternatively, in the event that you didn't see that you met the primary endpoint on the GEMINI studies and this you do hit endpoints in the progressive trials. Do you think that this could be something which should be priced higher in the market for that smaller overall MS patient population, but just as a progressive MS drug? So that's first on tolebrutinib. Second one, Beyfortus supply. You said you can do -- make this a blockbuster this year. I think my understanding was that that's sort of based on what you know you definitely have for supply, but you're working on increased supply So perhaps could you sort of dimensionalize or quantify the upside here from bringing more supply on through the course of the year? I think if you just assumed you're able to satisfy the U.S. birth cohort alone that would be 1.5 billion euro or so. And you did talk about launching an additional market. So perhaps help us to dream a little about Beyfortus revenue for the year? Thanks. Paul Hudson OK. We'll help you dream a little in a moment, Graham, but first that well, maybe there to tolebrutinib. Houman? Houman Ashrafian -- Global Head of Research and Development I'll start before Paul breaks out to song. I'm going to -- just tolebrutinib, and thanks for the question, Graham, deeply thoughtful as always. So first part of the question was on scenarios. As you know, there's a bunch of scenarios. We have two relapsing-remitting trials running GEMINI I and II. We've got and I think going into all the permutations of those scenarios are challenging. But let me just be -- let me just dimensionalize this across those indications. Firstly, in terms of relapse and remitting, you make an excellent point about previous failures, particularly in comparison to Let me just remind everybody very briefly on this call that in terms of penetration across the CSF by a physical property and actually some of the biological properties we've seen with tolebrutinib, these are outclassed in some cases, by two log orders, any of the other molecules in the space, even ibrutinib's primary biological capability is very substantial. Second point, I'll remind you when we talk about mechanism is compared to some of our competitors out there, patients who come off standard of care and go on to tolebrutinib have a continuing reduction in the neurofilament light. These two parameters make us optimistic about -- yet cautious in the role of tolebrutinib both in relapsing and progressive, so it's point one. Point two, in terms of your specific question, which you asked about endpoints. Of course, you're right that in 2024, ARR is currently the endpoint of choice. However, most of the community and most of the physicians that are looking after these patients will point you to the fact that actually composite confirmed disability progression is much more important to the patients. And indeed, many of the endpoints that are currently use a relapsed independent progression rate. So the short answer to this question is, we'll see where we get with GEMINI I and II, but I would strongly suggest that the regulator and the patients care deeply about disease progression, and we are well-powered to address that question. On the progressive disease, we're very substantially hopeful because of the data we've discussed before. And of course, there is no Aubagio comparator arm in that population. I think that provides you with a nice wrap-up of tolebrutinib, I'm going to hand over to Brian on that. Brian Foard -- Global Business Unit Head, Specialty Care Yeah, I think the question on price is really the question on value, I think, more than anything else. It starts with there's no more differentiated program, I think, in MS for sure than this tolebrutinib program. So we'll see what the scenarios are. It's hard to guess today what the final scenarios will likely be, and we'll determine the value based upon that, and we'll comment on price probably at that particular point, but not now. Paul Hudson Thank you, Brian. Thomas, Beyfortus supply? Thomas Triomphe -- Global Business Unit Head, Vaccines Exciting to speak. So where we are on Beyfortus. First of all, you've seen the strong performance in Q1. I start by reminding at that point. With a significant amount of sales above 180 million euro just in Q1, I'm mentioning that to highlight the fact that it covers not only NH23, 24 last shipment for Northern Hemisphere, but also the first shipment of Southern Hemisphere with two South Hemisphere countries where we have started. So that's the first part. As you have seen also, we mentioned through Francois, that we will not expect sales of Beyfortus in Q2 has nothing to do with supply, simply related to the fact that we were able to actually ship the South Hemisphere supply in Q1 and not in Q2. And, of course, the rest of the sales for this year will come with Northern Hemisphere in Q3 and Q4. Now as per the heart of your question on supply. We have full speed, both AstraZeneca and us are working on extending our industrial network as we have mentioned before, together. We are adding not -- we've already added, of course, packaging lines, we're adding filling lines as we have discussed altogether. And as we speak today, we are, every single day, filling new Beyfortus syringes for the coming season. We're going full speed as we discussed also. Of course, while we are currently manufacturing and filling doses, it will then depend as to the release of this product as per the speed of approval on these two filling lines by the regulators, notably, U.S. FDA, and EMA, especially. So we believe that with all the elements we're putting together with our partner, we'll be able to have this supply release in due time for the coming Northern Hemisphere, which is why we are very confident in our ability to reach blockbuster status. To be more specific beyond that will be what we will discuss together at the Q2 earnings call when we'll have more news from our supply perspective, and this -- regulators. Paul Hudson Yeah. And thanks, Tom. And I think everybody AstraZeneca, ourselves, everybody is doing the very best because the demand is so significant and Q2 is a much better moment to give you much more facts as we have them frankly. Next question? Operator Yes. Next question from Tim Anderson from Wolfe. Tim? Brian Tsang -- Wolfe Research -- Analyst Hi. This is Brian on for Tim. Just two quick ones from us. After the EPS reset in 2024, you talked about a strong rebound in 2025. Consensus has growth being around 15% in 2025. Any comment even if only directionally on that figure? I know you might not say anything right now, but anything you might want to call out, such as uncertain variables that might jump out? And then a second question on OX40. You've said previously that this might be your most important pipeline drug similar to Dupixent, but you capture full economics. Just want to ask how derisked do you think this asset is at this point in terms of how Phase 3 trials might read out. And whether you can confirm that there might potentially be earlier readout potentially in 2025? Paul Hudson OK. Thanks, Brian, asking for a friend. I would say, Francois, any comment? I mean, to be clear, I don't want to put you on the spot, but we just had strong rebound. So is there any other color you can give? Francois Roger -- Chief Financial Officer No. Brian, what I can tell you, I don't want to quantify the EPS but we are very confident about it. I think we have the building blocks, starting with the growth profile that we have today. And if we -- you put aside already, even you can see it in the first quarter of 2024, some of the exceptional items, the negative ones like Aubagio and the comparison base for COVID-19 sales, for example, we are already on a very strong platform in terms of growth today, and which gives you a fair illustration of where we can be in 2025. But I think it's too early to quantify it today. And I would not like to give guidance for 2025 at this point in time. Paul Hudson Thank you. Houman, on OX40-Ligand? Houman Ashrafian -- Global Head of Research and Development Yeah. Let me respond to this very briefly. I presented the data earlier. Super excited by the data, three points, rather this is a biologic, which has been a large number of patients, it's likely to be extremely safe, particularly compared to anything else that's out there. It's highly well tolerated. The dosing interval, extremely interesting. And importantly, off-drug disease suppression is important. So there are only three comments to make on this. One is, you said how optimistic are we, very optimistic, but we're optimistic because it may also have the opportunity, and this has been echoed by external commentators to have the potential to reduce atopic march and the progression of disease particularly in those with earlier atopic disease, point one. So number one is we are bullish for that reason. Number two is, mechanistically, it's kind of interesting because it addresses both TH2, as well as TH17, TH22 pathways, which impact on our broad ethnics populations. So number two is it's derisked from that perspective. And number three is clearly, we're taking it forward in a multiplicity of indications, some of which we'll read out this year. So the quick answer to your question is we're driving the studies as hard as we can. We've got four Phase 3s in flight, we'll drive them to completion in an orderly manner as possible. And bear in mind as a biologic, feel optimistic that we have been able to quantify its risks and benefits. Paul Hudson Great. Thank you. Next question. Operator Yes. Next question from Emily Field from Barclays. Emily? Emily Field -- Barclays -- Analyst Hi. Thanks for taking my question. The first is just piggybacking off of the earlier Dupixent launch and COPD answer. The contrasting thought between the biologic ramp is going to take some time, but that pulmonologists are very familiar with Dupixent, obviously. As we're thinking about this launch is this one that is going to require a great deal of incremental promotional spend? And then on Altuviiio, you mentioned taking share from therapies other than Loctite. Are you seeing more share take from Hemlibra as that a decline in U.S. in the quarter? And then big focus of their call yesterday was on the potential competitive threat from Mimi. Are you seeing that as a potential threat to Altuviiio or do you see that more as posing a threat to bispecifics? Thank you. Paul Hudson OK. Brian, over to you, COPD ramp. And I think the challenge is if pulmonologists know Dupixent already, why should it take some, and what will be the cost of doing it? Brian Foard -- Global Business Unit Head, Specialty Care Yeah, I think there's a couple of things in there. And so I think just as we said before, as you bring in a new therapy like this, any patient population, you've got to educate the patient population. You've got to educate the physicians. There's a lot to be done there to where it's not just to come in and take share game. It's going to be one of those things where it's bio penetration. We've seen this very well in atopic dermatitis. As you see in AD, here we are we're nearly eight years in and the bio-penetration rate is 11%. So it takes time, it takes effort. The good news about cost, and I think the expense is, if you think about it, we're very efficiently set up because we're already set up across the alliance actually deeply in the pulmonologist offices across all countries. So from an opex standpoint, there will be a lot of efficiencies there because this will be our second indication in the same offices. So we, of course, will spend to support this launch. It's absolutely a critical launch to reach as many patients as possible, but we certainly see some efficiency there and the way in which we're set up. Paul Hudson Thank you. Altuviiio share any business coming from non-factor and a comment on Mimi? Houman Ashrafian -- Global Head of Research and Development Yeah. A couple of things there. I think it always goes back to the patient and the unmet medical need. So if you think about this patient population, it's all about efficacy at the end of the day. And previously, where you speak about Hemlibra, that was more of a convenience play than anything else. While effective, it was more of a convenience play, the first subcutaneous product. So I'll break it into two pieces. Altuviiio is doing exceptionally well. We couldn't be more pleased with the launch progress because, again, the physician and the patient population really understood that for a single dose, you can actually have near-normal factor levels for an entire week. And that's really changing the game in the offices. Now where are we primarily taking business from? We always said we primarily take it from factors, because we believe all patients that are on factors should be moved to Altuviiio. And the factor marketplace is about 60% of the marketplace still today, 60% to 65% of the marketplace. So that is primarily where we're taking business. Two-thirds of our switches are coming from competitives, one-third is coming from Loctite again, a factor that should be switched. Now as it specifically relates to Hemlibra, and then we'll talk about the competitor that's coming, I definitely think Hemlibra should be more nervous about the competitor than us for sure. But we're taking about 10%, about 10% of our business is actually coming from Hemlibra. It wasn't what we anticipated necessarily, but again, I think it goes back to the efficacy side of things. So again, we couldn't be more pleased with the progress so far. A lot of our physicians more than 80% of the physicians have prescribed and we'll reiterate that they continue to increase their prescribing moving forward. So again, we're off to, again, a really good start as we hit almost the first-year mark for Altuviiio. Paul Hudson Thank you, Brian. And of course, as we watch the market evolve, you're right, I think we took more patients from Hemlibra than expected, and probably because they're trying to chase efficacy down to the once a week, which meant once-a-week convenience was roughly the same. I think when Hemlibra set the bar, and we're trying to find some new convenience standard. And I think this month or perhaps even eight weekly reduced around, I think that could be a new level two. So the market is clearly going convenience versus efficacy in the trade. So I think we're going to be well-positioned. Next question. Operator Yes. Next question from Emmanuel Papadakis from Deutsche Bank. Emmanuel Papadakis -- Deutsche Bank -- Analyst Thank you for taking the questions. Maybe a question on cash flow, first of all, please. Francois, you mentioned some caution on the outlook for this year. I think you mentioned some one-time adjustments for prior-year rebating. Perhaps you could give us a bit of color maybe in absolute sense, cash flow last year was around 11 billion euro, free cash flow was above 8 billion euro. So what should we be thinking of for this year? And you did have some rather outsized restructuring costs in Q1 over 700 million euro. So where is that likely to land for the full year? And what proportion of that is cash and a lot of capital working capital outflow in Q1, which drove a negative cash from operations, which is also rather unusual. So comments around those would be very helpful. And then a quick one on teased flat again, a few quarters in a row, still confident on blockbuster potential? If so, what gets us there? What are the timelines? Thank you. Paul Hudson So Francois, you do that, and then maybe, I don't know, Olivier want to comment on Tzield? Francois Roger -- Chief Financial Officer Let me start. Good afternoon, Emmanuel. On the cash flow, so it is essentially the fact that the decrease already in Q1 is essentially coming from the lower gross to net in Lantus. As you know, we are booking lower, but we have to pay from a cash flow point of view, to rebate on a higher base, at least in Q1, we will have a little bit of an impact as well in Q2 and Q3. This has impacted our cash flow significantly in Q1, and there will be a little bit of it the next two quarters. Obviously, this will remain for the full year. So I just wanted to flag the fact that this is kind of a one-off that will impact our cash flow for the full year. I don't want to quantify it because there are other moving parts, but this is a fairly significant one-off impact. On the restructuring costs, it's essentially linked to many of the projects that we have already announced part of it is actually obviously hitting France, as you know, because it's in the public domain as well. It's not necessarily a cash item that will be significant in 2024. It will spread over the next two years, partly, but some of it could potentially impact the end of 2024. Paul Hudson Thank you. Olivier comments on Tzield? Olivier Charmeil -- Global Business Unit Head, General Medicines Comment on Tzield. So we see a positive evolution and a slight acceleration growth in terms of screening and in terms of infusion rates, Q1 versus Q4 where we have higher infusion in Q1, we have more -- we have higher infusion in pediatric patients, which is for us a good signal, which means that we are progressing. Infusion have accelerated, driven by more field force execution and better coordination along the patient journey. Payers coverage is good. It's not a barrier to utilization. We said from the beginning that it would be a slow burn. We are shaping a market that didn't exist. There was no screening because there was no treatment. We know that it will take some time, but we think that it's worth the effort. It's about creating the awareness and making sure that both awareness at the patient level, at the family level but also with HCP is developed. We are very encouraged by the consensus guidelines that are being developed a white paper from ADA as that was recently developed, and there are a lot of activities to activity in the congress of ADT with GRF making and aligning a lot of medical society toward guidelines. So overall, it's going to be a slow burn, but we are confident that in the future, it will continue to progress. We think that it's worth continuing to invest, and this is reinforced by our exchange with KOL and clinicians that really gives us confidence that with Tzield we have the first and only disease-modifying therapy in type 1 diabetes. Paul Hudson Maybe I could add as well, Olivier, that we said it, we knew full well when we made the transaction. There's a reason why some of these small companies sell a great medicine is because they just can't do this type of work over this many years. If I could add anything, the quarterly transitions are less -- of less interest at the moment, the screening numbers are where we're heading. And we will, in 2026, 2027, 2028, this medicine is going to be a big deal contributing to the company would do the hard yards. And I'm not sure you mentioned, Olivier, but there was no competition for a decade. So we don't need to rush this. We can do this properly. In fact, we're the next competitor with the CD40 ligand. So in time invested in building proper screening, infusion capacity where necessary, doing these things. We've all been on this journey before, I was with hep C., it was only with Remicade. You just do the work properly, and we'll get the benefits a few years from now because there's nothing to displace us. And that, of course, will set us up in the community for the CD40 ligand. So we're actually really pleased with how guidelines and other things are falling quickly into that. Next question. Operator Yes. Next question from Seamus Fernandez from Guggenheim. Seamus? Seamus Fernandez -- Guggenheim Partners -- Analyst Great. Thanks so much for the question. So I just wanted to clarify the tolerability comments around rilzabrutinib. Just to confirm, it says safety consistent with prior results on the slide. Just wanted to confirm that that is consistent with the lack of an LFT or liver signal, as previously stated, as well as maybe confirmation to some degree that the MS population that the BTK signal and the MS population may actually be population-specific? And just a quick second question. Paul, just wanted to get a sense for how you're thinking about business development from here. I guess, with the incremental investment in R&D, and the robust kind of pipeline dynamics heading forward. I wanted to get a better sense of how you're thinking about business development going forward in terms of the perhaps areas that you're most focused on building out or if there is a profitability or stage of development later stage that's more interesting versus early stage? Thanks so much. Paul Hudson OK. Thank you, Seamus. Houman, tolerability; and some also comments about MS and the populations different responses. Houman Ashrafian -- Global Head of Research and Development Yeah. So Seamus, thanks for the question, both thoughtful. The first one brief and to the point, I can confirm that we are pleased with liver tolerability profile of rilzabrutinib thus far and are confident taking it forward. As you said, 0.2 on tolebrutinib, you very thoughtfully have called out the fact that multiple sclerosis appears to be a distinct indication with the BTKIs. There may be interaction between the BTKI and the underlying biology in MS, which pretty set people to let me signal, I think that's, as you were referring to, reasonable hypothesis, we have data supporting it and reflects clinical experience. I think both of these points are recently are well made. Paul Hudson Thank you. On the BD, I guess, to M&A point, we guided to the sort of 2 billion euro to 5 billion euro range in bolt-ons, that's sort of standard, I think. We did commit after Q3 last year that we would hold R&D through 2024 and 2025 round about 7.7 billion euro. So we don't want to regale away from that. I don't think that's appropriate. Of course, we will get some failures in there, which will free up some capacity or some delayed starts or different things, which will mean that capacity will open up for us perhaps into 2025 and 2026. And then, of course, most of the big studies start to graduate as the pipeline comes along and that gives us the sort of automatic bandwidth. I think to maintain that, you might see more of our effort and energy on the bolt-ons, either in the early phases where this bigger spend comes later and we can absorb that without missing a commitment or indeed in the late stages where the R&D commitment ongoing is minimal, and we can hold the line on what we've said and perhaps bring in a later-stage asset. We have a good balance sheet. We have to leverage that. But I think the discipline around working within the envelope on our R&D budget is to be maintained. Should I throw the normal CEO disclaimer in, we remain opportunistic and everything else. Of course, but we've given guidance to you, we'd like to honor it for us and for you and make sure we get it done. And if we find some opportunities to reallocate, that's perhaps our biggest thing we'll take it. But demonstrating the discipline post Q3 last year is the number one priority because don't forget we're having enough assets in-house to, we believe, to grow EPS, of course, and to do what we need to do and to go all the way through the LOE of Dupixent whenever that comes. But the discipline is what will be judged on, I think, over the next couple of years at least. So that's as much as I can share with you. Next question. Operator Yeah. Next question from Jo Walton from UBS. Jo? Jo Walton -- UBS -- Analyst Yes. Can you hear me? Paul Hudson Yes. Jo Walton -- UBS -- Analyst Excellent. Two quick questions then, please. On Altuviiio, I wonder, is there any evidence of moderate patients rather than severe patients beginning to try prophylaxis given that this is now an ability to get to a normal level of factor clotting on Beyfortus, could you give us an idea of what the next countries would be? So you've obviously got potentially more demand than supply. What's the sort of order of countries that we should be thinking of as you roll out because you said you would be rolling out some more this year? If I can just finally say, is there any read across from the failure in frexelimab in any of the other indications or should we see that as completely isolated? Paul Hudson OK. Good -- Jo, good questions. Brian, Altuviiio use moving into moderate? Brian Foard -- Global Business Unit Head, Specialty Care Yeah. I think I mean the way we think about the marketplace is actually, again, all these patients are on therapies. So it's -- when we talk about the switches, again, these patients are identified really early in their life and then they're on some type of therapy. So from a moderate standpoint, we don't think about it that way. Actually, we think about it as what type of therapy are you on? And what types of efficacy levels are you looking for or convenience levels are you looking for? And that's why, again, we're really bullish because of what we've seen from a switch standpoint the marketplace is really responding to the profile that we're bringing, which is better efficacy near normal factor levels over a weekly period with a 1 dose type of therapy. So we're seeing switches of all patient types, no matter the types of therapy that they're on. Paul Hudson Thank you. I do think Altuviiio is going to surprise everybody. I have to say all the feedback and a bit in the conferences, I think that near normal thing Jo mentioned is the goal. Thomas, I'm not sure whether you're prepared to share a list of countries in what order, but maybe you could give some regional input? Thomas Triomphe -- Global Business Unit Head, Vaccines Yes. And I can say a little bit of flavor of how we are doing it and why we're not seeing so much more. So rightfully, as you said, Jo, of course, we are going to make sure that we have ample supply for the three geographies where we had significant uptake last year. You know very well about Spain, the U.S. and France. Moving forward, we've already during South Hemisphere season, Chile and a couple of regions in Australia. Moving forward for Northern Hemisphere 2024, I expect more European countries to pick up. What happens, and that's very important to remember, each time we introduce a new immunization, it's always -- there is always a very specific national process for first setting up the right recommendations through the recommending body, then high setup and then we launch into the right national immunization schedule, which is why I cannot give you specific European countries right now because I need to leave it to the recommending bodies to make sure that we have those votes and we proceed for NS 2024. In addition to this geography in Europe, very well, but we just got the registration of Beyfortus in Japan in Q1 2024. And you should expect a little bit of Japan and China sales in the private setup, I would say, not national immunization program for 2024 in order to prepare for larger volumes in the coming years, that's for the following season. Paul Hudson Houman, I think Jo's comment on rilzabrutinib is well placed. So over to you. Houman Ashrafian -- Global Head of Research and Development Yeah. Thanks, Paul. Thanks, Jo. Great question. Just to be super clear, we've always positioned frexelimab, primarily on MS and T1D medication, and it's clearly demonstrated as chops in MS in great detail and is progressing in T1D. It is incumbent on us as a patient-centric organization for us to be thoughtful about the broadest possible patient benefit we can bring with our drugs. In my own clinical practice, I treated a bunch of patients with Sjögren, and they are definitely an unmet medical need. We initiated some experimental medicine study to see whether we could signal seek in those indications. I don't see the Sjögren's readout as anything other than failure in a signal-seeking study, and we remain confident about frexelimab in the bigger latter indications. Paul Hudson Yes. I think you're right, the type 1 diabetes and MS, where I think you said it already, but just the risk of repeating it. Where we have a pipeline in a product, we will go and explore some adjacent areas where we think there's some pathway or some biological reason why there might be an impact. And you should expect more of that from us in like early pox, left and right the pipeline on the product drugs because we need to do that. I think we really need to do that. And of course, everybody's tried Sjögren's, because it's difficult to crack. And we can't go any bunches in we can do something. OK. Next question? Operator Next question from David Risinger from Leerink. David? David Risinger -- Leerink Partners -- Analyst Yes. Thanks very much and thanks for all the updates today. So I just have one question, and maybe you could comment in some detail, please? So the company has accelerating I&I Phase 2 readouts in 2025. Could you discuss the key cards that will be turning over for the candidates with the biggest commercial potential? Thanks very much. Paul Hudson OK, David, thank you. So I think Houman will start with you on -- we've already put them into two buckets, frankly. So we -- I don't know how much more we need to add. But for the readouts that you're excited about, for example, Houman for I&I for 2025, specifically is what you asked. Houman Ashrafian -- Global Head of Research and Development Yeah, specifically. It's like choosing between one's favorite children for our readouts in 2025, but I'll give it a go. So firstly, it's our big letter. I mean you asked for the answers in some detail, and I will try and provide them with thoughtful detail. So our Phase 2s reading out, as you've seen there, amilitelimab in a variety of disorders, particularly and alopecia. Number one, as I said, with a nondepleting OX40 ligand inhibitor, we hit the type 2 inflammation, but also take on a bunch of other mechanisms. OX40 is often regarded to the checkpoint and a new checkpoint. And I'm excited about it's alopecia areata and the [Inaudible], which have very diverse chemical indications. Obviously, we have an all RIPK1 with a role in ulcerative colitis. We think that's interesting. The biology is well-precedented. So number one, I think the amilitelimab constellation of therapeutic opportunities is interesting. I think the IRC degrader is super interesting. It's mechanistically unique where we our partner have played both in atopic dermatitis as an oral therapy, but also in hidradenitis suppurativa again. And then two others, just to call out, as you asked what our favorites were. The oral TNFR1 signaling inhibitor has the potential to be a truly disruptive therapy for patients with inflammatory disease as it will capture potentially the value of classical TNF treatment but with a differentiated side effect profile not affecting TNFR2. And the second one I wanted to call out is, obviously, Lunsekimig, our very special molecule in asthma. The reason it's special is because it seeks to augment durability but also raise efficacy healing. And the way it does so is to take two modular targets, both of which are precedented mechanisms in asthma put them together. So what we do is learn from the ecosystem and with the excellence of our platforms to enhance what we know from the ecosystem. Before I jump off the pedestal, I also want to talk about Tomar [ph], because it would be remiss of me to talk about our pharma agents and not talk about the RSV products that are reading out in Phase 2 next year. We remain as excited about vaccines as we do as our pharma products. Paul Hudson So Houman, it's nice it took you a while to David's question -- did you mention OX40 ligand in HS? Houman Ashrafian -- Global Head of Research and Development I didn't mention, nor did I mention TL1A or some of the other -- Paul Hudson TL1A will be up there, too. So it's going to be busy. It's going to be busy, but this is what we've been trying to get the company to this point. We don't know if they will work, of course, but we do know that we would rather have the readouts. OK. Next question? Operator The next question from Gary Steventon from Exane. Gary Steventon -- Exane BNP Paribas -- Analyst Hi. Thanks for taking the question. I hope you can hear me. Just firstly, on the outlook. Given the top-line momentum, could you frame maybe the level of flexibility you have in the R&D and launch plan and hence, the likelihood that any outperformance could drop through to earnings? I mean, it wasn't that long ago, you outlined the acceleration. So I assume that any near-term investment opportunities that you wanted to accelerate you perhaps have done already? And then secondly, just on the theme of the consumer separation, perhaps, Francois, it's your first earnings call as CFO, I ask your thoughts on what might be on your list in the scenario where Sanofi was to receive a significant cash inflow. So really just your thoughts on appetite for larger volume or larger value of M&A, larger buybacks, or willingness to operate with net cash for a period of time? Thank you. Paul Hudson Francois, do you want to take a stab at those? Francois Roger -- Chief Financial Officer Yeah. I can. On the R&D flexibility, I mean this is good news if we can generate additional resources. I think that we will need to decide in due time on each and every single case on their merits. If we have good cases for good return on investment on R&D, I think we will not hesitate to do it. But that being said, I mean, we should not discount the fact that we let some of it flow to the bottom line. And I think that it's extremely important that one that we reward our shareholders in an attractive way, which is the reason why I'm coming back to what I said earlier as well on our total confidence on the significant rebound in EPS, for example, in 2025. I think on capital allocation, I think that we have a very clear policy. So first of all, we want to invest in our business, both organically and inorganically as well. I think Paul touched on it earlier, and we need to be very disciplined on that, so which is -- which means that we are rather thinking today of bolt-on cases within the 2 billion euro to 5 billion euro. Clearly, with a view to get some return and generate value for shareholders as well. Paul said it, we don't want to discount either larger opportunities if they themselves and they're attractive, obviously. In terms of capital allocation, we don't want to discount share buybacks. That's a possibility, especially in the context of the separation of CHC. So this is part of the option that we keep on reviewing. Let us work further into the year to decide exactly on, which route we get. But we heard the message that there is an appetite as well from shareholders to get some share of the cash that we could generate from that transaction. Paul Hudson Thank you, Francois. We have time for another question. Operator Yes. The last one will be from Peter Verdult from Citi. Peter Verdult -- Citi -- Analyst Thank you. Peter Verdult from Citi. Two questions, Peter. I think everyone on the call realizes in your comments that pipeline perception is the missing piece of the puzzle to get the shares flying again and above 100 euro. So with that in mind, I've got two follow-up questions for Houman, please, on rilza and tolebrutinib. I totally get you can't disclose too much ahead of data presentation, but Houman, can I push you as best I can to give us a sense of how competitive you think that rilza dataset in ITP is from an efficacy safety perspective to incumbent molecules such as Promacta, especially given Promacta is facing generic risks and I try to be as ambitious best I can without getting you to disclose the data? And then on tole ahead of the late summer Phase 3 readouts, just how you're thinking about the relative opportunity across readouts remitting and progressive, because on relapse remitting, the KOL feedback we're receiving and the data that's being presented at ACTRIMS and ECTRIMS seems to be showing a waning effect for both EVO and tole over time as it relates to gadolinium lesion reduction. So the message we're getting is be wary of a positive result in relapsed remitting, progressive is clearly where the biggest unmet need is. But we don't yet have any randomized Phase 2 data we can bank on. So is it just the brain penetration angle and the NFL data that you spoke about earlier, Houman that it is what gives you confidence in the progressive trials? Or would you bring any other points to the table? Thank you. Houman Ashrafian -- Global Head of Research and Development OK. Thank you so much for those questions. As always, deeply thoughtful, let me just take very quickly. I think the existing standard of care leave -- they've been incredibly important medicines by the way. I don't want any level people not to appreciate how important they've been to the treatment of ITP. But they don't get to the heart of the disorder, as I said, mechanistically, suppression of the B cells and the reduction of Fc-gamma-based macrophage platelet destruction has been really important and just building up a number of platelets doesn't ameliorate the severe fatigue, etc. So I really do think rilza is a deeply important new add to that space. And as Brian beautifully said, beyond ITP, its future role potentially in rare blood is really very significant. And the tolebrutinib profile is -- as you said, I can't disclose, but to my mind, very pleasing. So the ITP answer, bullish on rilza. On tolebrutinib from time to time, I find it frustrating that people try and change the goal post. And let me be super clear, I think in progressive disease, there is almost nothing out there of any significant value in secondary progressive MS. It's a horrible disorder with ventricular dilatation and substantially unmet medical need. Today, many of those patients are either undertreated or labeled as a different condition in order to access therapy, right? So for progressive disease, I think the risk benefit should the tolebrutinib readout play to our favor is unequivocal. And I'm prepared to be confident that if there is efficacy with the level of safety we've now seen with monitoring that in progressive disease, there is significant value over here. With respect to relapsing/remitting when my frustration comes in, to take at this stage in GEMINI's development to argue that even if the molecule works in a Phase 3 and passes the goalpost that we now have another discussion about whether this is going to be sustained. I think difficult question to answer. My view is, in a few months, we will see the results of GEMINI 1 and 2. I think that the regulatory path is really well established, both with respect to ARR, but also with respect to disability. This isn't something we've invented. And I think the onus will be on us and the regulator to get this through and benefit patients with relapsing disease, if we hit ARR and/or disability. I think as simple as that. Paul Hudson Yes. Thank you, I mean we – I'm with you, I think rilza has a really competitive profile irrespective of Promacta and its challenges with diet and everything else. I think once we get beyond as well to asthma and to CSU, I think you took in advanced orals in these spaces, and I think the question is the right question about earlier was asked about tolerability. If you can thread that needle, which I believe we can, you really unlock huge patient potential, that's why we put it in the two. On tole, I think Houman summed it up beautifully. Let's not forget that an advanced oral with potentially disease-modifying could be the profile. And it's -- there's a real space for it. So I think that if we can get it done the right way and we'll get the study soon enough, so it's sort of not even worth speculating anymore. I think if we take progression in any form, even if we have to have conversations with regulators about what is understood and what is not, actually, it's very hard to resist something that could do that. We will find out we'll see how good the data is. So thanks, everyone, for your time today. We've had an excellent start in 2024. Sales advanced by 7% growth was driven by launches, including new indications for Dupixent. Our transformation is gathering pace, and I thought that a bit today during the call questions weighted toward the future and what we're trying to do. If you have any follow-up questions, feel free to contact the IR team. They never rest. And have a great rest of your day. Answer:

Paul Hudson Welcome to the Q1 2024 conference call. You can find the slides of this call on the sanofi.com Investors page. I'd like to remind you that the information presented in this call contains forward-looking statements, which is subject to substantial risks and uncertainties that may cause actual results to differ materially. I encourage you to read the disclaimer in our presentation. In addition, I refer you to our Form 20-F on file with the SEC and our Document d'Enregistrement Universel for a description of these risk factors. I'm pleased to welcome our new CFO, Francois, to the presentation, and Francois will be followed by Houman, our head of R&D on the pipeline. For Q&A, we have Brian, Olivier, Thomas, and Julie to cover the global business units; and Roy, our GC. For the Q&A, you have two options to participate. In Zoom, raise your hand to submit your questions in Q&A. Those have been explained on the slide. Let's turn to the business. We had an excellent start in 2024 with 7% sales growth, in line with our fast-moving portfolio transformation. Growth was driven by launches, including new and existing indications for Dupixent, and this performance fully underpins our 2024 EPS guidance as CEO. Dupixent continues to increase penetration in all approved indications, and we saw performance diversified further across all geographies, plus, of course, the usual U.S. insurance plans. Pharma launches were led by Nexviazyme and Altuviiio with more details to come a little later. Launches also boosted the performance in vaccines with Beyfortus making further progress, including in countries in the southern hemisphere. In consumer health, growth of 9% reflected the consolidation of the Qunol acquisition, as well, of course, as organic growth. We're progressing the plan to separate this business as discussed in the past. Overall, we're pleased with the ongoing portfolio transformation, which is becoming more visible, also in our cost lines with more resources going into the pipeline and less into SG&A. This is exactly the development we set out last year and when we announced the next chapter of our strategy. Before moving on, I'd like to extend my thanks to all the Sanofi colleagues for their dedicated work and their commitment to patients chase the miracles of science to improve people's lives. Dupixent continues to perform a strong demand-driven growth, therein sales of more than 2.8 billion euro in the first quarter. Sales of this unique medicine increased by 25% globally, fueled by the accelerated growth from indication expansions in the ex U.S. markets, where sales grew as much as 51%. With now more than 850,000 patients worldwide, the strong contribution from countries like Japan, China, and Germany highlights the tremendous growth potential for Dupixent across all indications and geographies. In the U.S., sales exceeded 2 billion euro in the quarter, up 17%. And as we can see every year, U.S. growth reflects the impact from the customary dynamics of the annual reset of insurance plans. Almost eight years into its initial U.S. launch in atopic dermatitis, this effect underscores the large size and rapid growth of Dupixent with the leadership positions in new prescriptions across all five approved indications. As we look ahead to Q2, we remain very excited about the outlook for Dupixent's outstanding commercial success across all geographies, supported by regulatory progress toward launching multiple new indications in major markets. And with our strong Q1 performance, we're extremely confident in delivering our previously communicated objective of around 13 billion euro in sales for the full year. As one of the leading medicines in immunology respiratory is a core disease area for Dupixent, well ahead of any of the competing -- of any other competing biology medicine. Dupixent has established and maintained a distinct leadership position in new prescriptions among pulmonologists across asthma and chronic rhinosinusitis with nasal polyps in the U.S. We believe in the growing importance of pulmonologists in adopting biologics to treat respiratory diseases, but also confident that they're growing familiarity with Dupixent in type 2 inflammation will play a key role in the adoption of Dupixent as the potentially first advance therapy in COPD in more than a decade if approved. We also continue to build a growing body of scientific evidence around Dupixent in addressing airway inflammation in the VESTIGE study, which was recently presented at the Quadruple AI Congress, Dupixent demonstrated reduced airway inflammation of mucus plugging in functional respiratory imaging in house. We have an ambition to potentially introduce a new standard of care with Dupixent in COPD for patients with type 2 inflammation. As you may recall, significant regulatory progress has been achieved with Dupixent's potential in COPD across key markets. We are preparing for a potential launch in the U.S. as early as late June if approved by the FDA and plan for additional potential approvals in Europe and China by the end of the year. We're excited about the outlook for Dupixent's potential to become a breakthrough medicine for COPD, a leading cause of death worldwide. Dupixent is well-positioned to potentially address the high unmet need in COPD with a strong clinical profile across two large Phase 3 studies and more than seven years of real-world evidence of -- real-world evidence data on safety across five approved indications. Dupixent addresses unmet medical need of a well-defined population of roughly 300,000 patients in the U.S. alone, whose disease is driven by type 2 inflammation and uncontrolled despite standard-of-care therapies. COPD is a historically difficult disease area and a heterogeneous disease with multiple development failures in the last decade. Over time, many patients become resigned to their medical condition with an experienced team that has a track record of development and commercial excellence in respiratory, we planned a targeted approach to drive the awareness and identification of COPD with type 2 inflammation among patients and pulmonologists. As we've seen with our launches across other major indications, the adoption of Dupixent as the first and only biologic in the COPD indication will require some time initially and the inflection of sales growth and is most likely to come in 2025 after the U.S. launch. We are confident that, if approved, COPD will become the next major growth pillar for Dupixent. And together with our second potential blockbuster developed for COPD, itepekimab, we continue to expect peak sales of more than 5 billion euro for both products combined. Let's now move to the new launches as Q1 further demonstrates our ability to execute successful launches and bring new medicines to patients. This quarter, all our new launches, including Beyfortus, made up close to 1 billion euro in sales or 9% of our total biopharma business. Beyfortus continued its global rollout in the quarter with the launch in the Southern Hemisphere countries of all interim protection programs in some Australian states and Chile. As RSV is seasonal, Beyfortus will have a sales pattern like what many of you know from flu vaccines. Nexviazyme grew strongly from new patients, as well as patients converting from older medicines in the Pompe franchise. We're pleased with the overall growth in franchise sustainability. Altuviiio is soon annualizing its launch. It has been -- it has seen continued strong uptake with most of the growth coming from other factor medicines [Inaudible] and even some uptake from patients not on factor medicines. It showed us how innovation can help to revitalize hemophilia and grow Sanofi's total share. Other launch medicines also did well in growth in absolute terms, including Sarclisa approved in multiple myeloma. Taking a closer look at Beyfortus, what we're really focused on are proud of is the impact on improving public health and benefit for thousands of families. We've now real-world results from last year's implementation of broad immunization programs in the U.S., France, and Spain with Beyfortus. The results are strikingly impressive. You can see the dramatic reduction of hospitalizations by the numbers on this slide. These real-world results are either consistent or even better than those from the clinical trials. The U.S. CDC recently published our effectiveness data for Beyfortus at 90%. And in Europe, we have seen similar results for hospitalization reduction across France and Spain. Overall, following the first season in the three launch countries where Beyfortus is used for all in from protection, this means that nearly 40,000 hospitalizations have already been avoided for families. This is the impact that matters most. This also provides a perspective for Beyfortus global health benefit as we plan to launch in additional countries in H2. Together with AZ, we're working with the regulatory authorities and extending the manufacturing network to make Beyfortus more available for the upcoming season as we're glad to see such enthusiastic demand. We're confident that where we will meet anticipated customer demand and look forward to extending all in from protection programs in the upcoming Northern Hemisphere RSV season. On my final slide, I wanted to highlight some progress on our ESG ambition exemplified by the work of our global health unit. Since its launch in 2021, the essential medicines from our GHC portfolio have supported close to 550,000 patients suffering from noncommunicable diseases in 31 countries with the objective to reach two million NCD patients by 2030. An additional differentiator is the meaningful work done by our teams to help building sustainable healthcare systems through partnerships with the ministries of health, trainings of healthcare professionals, and our impact investment fund focused on supporting exclusive start-ups and businesses. I now have great pleasure to hand over to Francois, our new CFO. Francois Roger -- Chief Financial Officer Thank you, Paul. I'm pleased to have joined the team here at Sanofi earlier in April, and I'm looking forward to interacting with all of you in the future. Sales were up 7% in the quarter, and as Paul mentioned, growth was driven by our ongoing portfolio transformation toward biopharma medicines with Dupixent sales up by 25% and the new launches, including Beyfortus, up by 150%. Excluding the impact of Aubagio loss of exclusivity and COVID-19, growth was 12%. This analysis does not aim at removing all headwinds but simply illustrates what the new Sanofi may look like in the future. On gross margin at 73.5% was down by 2.6 percentage points, mainly due to Aubagio and due to the absence of COVID-19 vaccine sales this year. In addition, the quarter was impacted by a one-off inventory adjustment to reflect declining standard costs. R&D expenses increased by 12% at constant exchange rates, in line with our ambition to invest more in our pipeline. Resources are being deployed to advance late-stage immunology and neurology projects. SG&A increased by less than 3% below half of sales growth, illustrating our strategic reallocation of resources. Our business operating margin decreased to 27.2%, mainly due to the gross margin decline, the step-up in R&D expenses, and an increase in the profit sharing with Regeneron. As expected, EPS was down 7.4% in Q1, also partly impacted by a higher tax rate. Just one word on cash flow. It will be impacted in 2024 by our lower business operating income and by the phasing of rebate payments in the U.S. related to prior-year sales. Let me now give you some additional information on our coming quarter. In Q2 2024, we expect Dupixent on the new pharma launches to grow further, while we continue to see the impact of the Aubagio loss of exclusivity in Europe. Of note, we don't expect any Beyfortus sales in Q2 due to early delivery in Q1 in some Southern Hemisphere countries, while shipments in Northern Hemisphere countries are not expected before the second half of 2024. For the full-year 2024 sales outlook, we expect Dupixent to reach around 13 billion euro and the vaccine franchise to grow mid-single-digit with Beyfortus anticipated to reach blockbuster status. The Aubagio loss of exclusivity will continue to impact the top line, mainly in H1. Finally, planned divestments will lower our sales by around 300 million euro over the year. For the full-year P&L, we expect our gross margin to decrease slightly due to Aubagio and the absence of COVID-19 sales and revenues this year. Opex is expected to grow with about 700 million euro step-up in R&D, while SG&A expenses are expected to remain stable. Finally, our tax rate will increase to around 21% due to the implementation of the OCD Pillar 2. We confirm our full-year 2024 expectation of a low single-digit decline of our business EPS at constant exchange rates. Excluding the impact of the higher tax rate, the full-year 2024 business EPS is expected to be roughly stable. On foreign exchange, we see a negative currency impact to EPS of around 6% based on April 2024 average exchange rates. As a reminder, we continue to anticipate strong business EPS rebounds in 2025. And as we have mentioned earlier, in 2024, we are transforming the company for long-term value creation. With that, I will now hand over to Houman. Houman Ashrafian -- Global Head of Research and Development Thank you, Francois. We've seen substantial Phase 2 -- we've seen substantial positive pipeline progress already in Q1 where we continue to deliver a consistent news flow of clinically important data and scientific publications and congresses. Frexalimab's encouraging Phase 2 data and multiples choices was recently published in the New England Journal but updated with data from the 48-week open-label extension, which we presented last week at the AAN Conference supporting our commitment to MS patients. In atopic dermatitis, we have the potential to further establish our leadership with amlitelimab, where we presented the Phase 2b data at AAD where largely sustained effective amlitelimab on atopic dermatitis symptoms, which demonstrated after 52 weeks of dosing. Later, I will further talk about the data presented from these two pipeline projects. On the regulatory side, we've reached an impressive pace of approvals with two of them for Dupixent in multiple indications within different countries. FDA discussions regarding Dupixent's SBLA in COPD are ongoing under the priority review process, as Paul has mentioned. As usual, it's always possible that the FDA could require additional information to complete the priority review of our submission to finalize labeling. As a reminder, there is currently no biologic treatment approved in COPD underlining our commitment to make Dupixent available to as many patients as possible as quickly as possible and supporting the ambitions to Dupixent that Paul has already outlined. Amlitelimab, our non-depleting OX40 ligand monoclonal antibody, has shown potential best-in-class efficacy with a durable clinical response rate after 52 weeks from the STREAM AD Phase 2b study. The responder percentage is reflected in the IIGA 0/1 and the EG75 scores, which are both surrogate endpoints AD were maintained and still significant, in fact, following the withdrawal from the drug at week 24. As you can see from the bar chart, at week 52 results on and off medicine are similar, which shows the persistence of response, suggesting the potential normalization of inflammatory T cell activity and potential effect on type 2 and non-type 2 biomarkers. These important data support the viability of the 12-week extended dosing interval, which will improve the patient's treatment paradigm and potentially expand Sanofi's presence in AD and beyond has been interpreted by some to hit the potential disease-modifying activity. The opportunity of treating patients by treating this core central pathway with consistently good safety in both parts of the study signals that amilitelimab has the potential to reach much beyond AD and become pipeline [Inaudible]. The cleanest AE profile in this class may reflect the importance of nondepleting mechanism differentiating amilitelimab. The enrollment of all four studies Phase 3 studies is on track for the first regulatory submission expected in 2027. Now switching to frexelimab, our CD40 ligand antibody high-efficacy non-lymphocyte-depleting potential MS treatment also has a pipeline and a product potential with multiple indications under development. Most importantly, in relapsing remitting MS, the 48-week data from the Phase 2 open-label extension study has shown a sustained reduction of disease activity monitored by a mean number of gadolinium-positive type 1 lesions occurring appearing at each MRI. As you can see on the bar chart, patients who have switched from the placebo arm to the frexelimab arm, both IV and subcu, have shown an impressive decrease of MS. It's important to mention that nearly every patient on frexelimab IV had no new lesions presented at a near to zero annualized relapse rate at 48 weeks. 87% of participants completed the extension, and frexelimab once again proved to be well tolerated with an acceptable safety profile. Phase 3 studies are relapsed on remitting MS and NRPMS have initiated and the first regulatory submission is expected in 2027. Frexelimab has the potential to provide additional benefits to patients and extend Sanofi's presence in multiple sclerosis. Switching gear now turning to rilzabrutinib, our oral BTKi, one of our 12 priority medicines. As you can see, we're developing this medicine in multiple indications such as in ITP and rare hematological diseases, but also in our main key therapeutic area immunology, including asthma and chronic spontaneous urticaria. We were pleased to announce earlier in the week the positive readout of the LUNA 3 Phase 3 study in ITP, a rare autoimmune bleeding disorder characterized by abnormally low levels of platelets, persistent and disabling fatigue and increased hemorrhage. These results confirm the positive Phase 2 data with additional details to be presented at forthcoming medical meetings and a regulatory submission later this year. Alongside this positive news, we also received more Phase 2 data in asthma. This time at the high dose, confirming the previous positive trends. We are very excited by the opportunity to present the data at the ATS conference next month. We can't wait to see that. Positive data in the third indication CSU were presented in February at the AAI AI Annual Meeting with Phase 3 starting later this year. These datasets are important stepping stones of our R&D transformation journey, emphasizing our commitment to rare diseases and to unlocking the important potential for BTK inhibitors and also highlighting the value that our experience in immunology can bring to the development of a medicine that started its life in another company. Having recently reshaped our overall oncology strategy, we want to cover this in a little greater detail. Our strategy is one of selectively investing in areas where we believe we have a chance to make a meaningful difference based on our expertise in immunology. Our aim is to focus on critical unmet medical need for patients benefiting from immune mechanisms and related mechanism of action, such as our NK cell engagers and using our technologies and platforms with the ABCs of the nanobody. I would like to end this slide on the positive news for the cancer community, where we are pleased by the recent positive U.S. development supporting the use of minimal residual disease or MRD has clinical endpoint in myeloma. When recognized by the FDA, this potentially bring new effective treatments to patients earlier. We currently have Sarclisa, our CD38 with a best-in-class potential and approvals in more than 50 countries as an option in the relapse myeloma setting. Last December, the readout of the IIa study marked the fifth positive Phase 3 study and second positive in transplant eligible, newly diagnosed multiple myeloma patients, where 77% of patients received -- reached MRD negativity versus 67% in the comparator arm. The Sarclisa Group had a 60% higher chance of achieving these states. Additionally, we had the Phase 3 study which was positive, and we look forward to sharing the LatAm upcoming Medical Congress anticipated -- with anticipated submission in trial. To end my part of the presentation on a positive note showing our ongoing commitment to deliver clinical data in the service of patients, I would like to highlight the upcoming Phase 3 and Phase 2 readouts, as well as regulatory submissions occurring in 2024 and 2025. As you can see, news flow will increase and become busier as we move into 2025, supported by the step-up in R&D investments that Francois just mentioned. I'm enthusiastic and impatient at the same time, has the news flow keeps on getting richer and better, thanks to the clinical study that we are constantly started. With this, I hand back to Paul. Paul Hudson For sure, enthusiastic and impatient, I can confirm that. We'll now open the floor for questions. As a reminder, we would ask you to limit your questions to one or two. As you can see, you have two options for Q&A. Click the Raise Hand icon, you'll be notified your line is open. So do remember to unmute or submit your question through Q&A function and your question will be readout by us. Over to you. Questions & Answers: Operator Yes. The first question will be from Peter Welford from Jefferies. Peter? Peter Welford -- Jefferies -- Analyst Hi. I hope you can hear me. Thanks very much for the question. Can we just start off with Dupixent and just thinking about the momentum we've seen, but all the more important new indications COPD. I guess, I just wanted if you can sort of square up some of the very positive commentary. I guess, we heard on the potential for this indication, obviously, significant unmet medical need, and that there also is some perhaps word of caution does not get to ahead of ourselves. I guess, certainly challenging, we've done a lot of doctors seem to think that COPD patients, they already know whether they have type 2 information in many cases or not. So if you could talk about, from your point of view, what the challenges are here and why we shouldn't expect at least initially a potential bolus of patients given they currently have no other options available and potential challenges, I guess, what would you think about that? And then if I could just ask a second question just quickly to Francois, you mentioned on the gross margin just with regards to a one-time adjustment. I would maybe just go into that in a little bit more detail. And is that very much onetime for the first quarter? And then perhaps you could be possible quantified would help? Thank you. Paul Hudson Hi, Peter. Thank you. Brian, Dupixent, COPD. Brian Foard -- Global Business Unit Head, Specialty Care Yeah. Thank you so much for the question. Really, as we get ready for the launch in COPD, first and foremost, it all starts with the patients. And I think what we've seen with this brand is that by going into diseases that are driven by underlying type 2 inflammation, we've really opened up new treatment opportunities for these patients and really transform a lot of patients' lives, I think, as Paul mentioned, over 850,000 patients already on therapy. Many of those actually happen to be asthma sufferers and are treated by the pulmonologist community. So as you can imagine, as we've spoken with pulmonologists, they're extremely excited about having potentially a new option to treat these patients that, quite frankly, are on the highest dose of therapy, and that's why I think to contextualize them, these patients are on the highest doses of therapy and still exacerbating. So we have to contextualize that the right way. And then you saw our reductions in both the BOREAS and areata trials, how effective they were at actually adding reduction in exacerbation rates of 30% and 34%. So we're very positive about this. I think the challenge with this particular patient population is probably less about the patient population and more about the fact that whenever you bring a new therapy like this in more than 10 years, biologic ramp will take just a little bit of time. Even though there's a burden of disease there for the patients, they will take a bit of time to get these physicians used to using biologics. That said, the pulmonologist community does use biologics today. So we feel like we're in a good spot and preparing the marketplace really quite well. But excited about bringing it whenever it comes to the market. Paul Hudson Thank you, Brian. Houman, anything to add? Houman Ashrafian -- Global Head of Research and Development Yeah. Hi, Peter. You asked a very specific question about the patient burden of disease and patient population. I just want to be clear about how we develop this molecule, both in BOREAS and areata. We were very specific about our stratification strategy, we thought very deeply about the EOs concentration in the blood and specifically the pheno. We stuck to our knitting very specifically on what we saw in the Phase 2 and that reflected in an outstanding reduction in the exacerbations in our Phase 3 studies. I think it's really important to recognize the Sanofi goes forward. But our development strategy is laser-focused to enable launch in the highest unmet medical need population. And that's what we've done. So that's why we have confidence in the way this population launch will expand. Paul Hudson Let me just add. I think, Brian, just on it, too. But remember -- and I have to give Regeneron some credit for really pioneering in AD with us back in the beginning, but they were strong on that. We had to really build out the education around these things. We enter new areas you have to do the proper amount of education and work, make sure the right patients are identified and get supported. And that's why I think we've shared that we expect an inflection point in the business evolution more likely to be in 2025 because we have got work to do. Francois? Francois Roger -- Chief Financial Officer Yes. Good afternoon, Peter. So the question on the inventory adjustment, it's a one-off essentially for the Q1. What happened is that our standard costs are moving down, which is actually a good news for the medium term. But we had to revalue as a consequence of that, our existing inventory to the lower standard cost and this is a one-off adjustment that we booked in Q1. We don't expect to get much of it in Q2 and Q3 and for the balance of the year. And it was relatively sizable because it was close to half of the gross margin decline in Q1, so which means that we can expect that our gross margin should not see the same negative deviation versus last year as we progress further into the year. Paul Hudson Thank you. Next question. Operator The next question is from Luisa Hector from Berenberg. Luisa? Luisa Hector -- Berenberg Capital Markets -- Analyst Hello. Thanks for taking my questions. I wonder if we could just get an update on consumer factors that will determine your exit strategy and the timing and pros and cons of the different exit routes for maximizing shareholder value. And then I wanted to ask on rilzabrutinib. So good data in ITP. Just how you think about that sales opportunity -- and also the asthma, so the Phase 2 positive for the high dose, I think, in asthma, any more color around the safety profile and how you can proceed in asthma. I think the next step was Phase 2b, but any more color on the endpoints, trial design and that stepping stone to Phase 3? Thank you Paul Hudson OK. Good. Francois, CFC? Francois Roger -- Chief Financial Officer Yes. Luisa, Francois speaking. So I'll take the question on consumer. As of now, we want to keep all options open. So which means, basically, you can consider that we can consider a potential spin-off an IPO, probably partnering as well with private equity. So we keep all options open with one single idea, which is to maximize value creation for shareholders. So I don't want to comment on the pros and the cons of each of the options for the time being given that we are working on with a very open view for the time being. But we'll keep you posted as we progress further into the year. But don't be worried, this is about creating value for shareholders. Paul Hudson Do you want a quick comment about where we're at in terms of technically being ready? Unknown speaker Sure. I mean, first, I can confirm that we're excited and that we're on track and to give maybe a little bit more color on the practical side, all our system cloning activities that had to happen successfully happened actually just last week and moreover, we're well advanced in determining the scope of all the transition service agreements, which are very important as well. And in the meantime, we continue to focus on our three strategic priorities as we execute our overarching mission to make self-care as simple as it should be. So we're well underway. Paul Hudson Thank you, both. Good questions on rilzabrutinib. Houman, I don't remember Brian, do you want to comment on potential value in ITP, or Houman can either? But Houman, do you want to start off with -- Houman Ashrafian -- Global Head of Research and Development Let me start -- actually, Brian and I will tag-team this one. Luisa, thanks for the question. So let's -- you have two parts to your question. There was ITP and asthma tolerability. So I'll just hit this very directly. I think that there still is a major unmet medical need in ITP. As you know, it's 50% of patients remain undercovered for care, particularly in terms of a lack of stability of platelet count, they also suffer very substantially from fatigue. Rilzabrutinib is something a great joy to me personally having treated these patients. The beauty of this treatment has a number of elements. One is, it obviously prevents the production of B cells, hence the BTKi, the inhibition, but also prevents phagocytosis of those platelets and reducing their platelet count. So mechanistically interesting compared to standard of care today, which undercovers 50% of patients, but also in some cases, required relatively extreme dietary modification, wills are offers real opportunity, point one. Point two, you asked about tolerability. To date, what we've seen has been gratifying in terms of tolerability in every aspect. So that's pretty exciting. And then your question about asthma is super clear. We presented our latest asthma data last year. As you know, we are excited by that data. The opportunity for Realtor to become the first oral advanced asthmatic treatment is remarkable, but it has the potential to change the paradigm of how we treat asthma compared to what we have today. All I can say is that it is with very substantial pleasure that I will invite everyone on this call to come to the ATS meeting just the outcomes of our study, which we could not be more thrilled in sharing. With that, to dimensionalize the market, I'm going to hand over to my friend, Brian. Brian Foard -- Global Business Unit Head, Specialty Care So I think it's a really good question. I think as you saw on R&D day, when we really started to talk about the 12 assets. This was one of those assets we talked about. So the slide I think that was presented earlier was really impressive to show that in three potential indications, CSU, ITP, and then in asthma. This can be really differentiated versus the competition in each of those therapeutic areas. Now specifically as it relates to ITP, and maybe I'll go a little bit broader and just say in rare blood space. We actually think that this could be potentially a blockbuster across both ITP and combined. But contextually speaking, I mean, if you think about the two of them, obviously, ITP will be a little bit bigger than what we see in just based on the size. I think there's about 50,000 patients we see as being eligible for ITP. So really excited about this differentiated profile and bringing it to patients as soon as possible. Paul Hudson Thank you. I'll be in San Diego at ADS for the weekend between other meetings. So I'm looking forward to seeing the data presented to. Next question? Operator Yeah. Next question from Graham Parry from BofA. Graham? Graham Parry -- Bank of America Merrill Lynch -- Analyst Great. Thanks for taking my questions. So first one is just on tolebrutinib and just thinking about scenarios for the readout of the data there. Just given the low likely annualized relapse rate that you're going to see in the control arm, if you assume it's going to be similar to ibrutinib. Do you see that there's a thought process here that perhaps actually progression would be the better primary endpoint? And is there a possibility here to change the statistical analysis plan for those relapsing studies to disease progression? And alternatively, in the event that you didn't see that you met the primary endpoint on the GEMINI studies and this you do hit endpoints in the progressive trials. Do you think that this could be something which should be priced higher in the market for that smaller overall MS patient population, but just as a progressive MS drug? So that's first on tolebrutinib. Second one, Beyfortus supply. You said you can do -- make this a blockbuster this year. I think my understanding was that that's sort of based on what you know you definitely have for supply, but you're working on increased supply So perhaps could you sort of dimensionalize or quantify the upside here from bringing more supply on through the course of the year? I think if you just assumed you're able to satisfy the U.S. birth cohort alone that would be 1.5 billion euro or so. And you did talk about launching an additional market. So perhaps help us to dream a little about Beyfortus revenue for the year? Thanks. Paul Hudson OK. We'll help you dream a little in a moment, Graham, but first that well, maybe there to tolebrutinib. Houman? Houman Ashrafian -- Global Head of Research and Development I'll start before Paul breaks out to song. I'm going to -- just tolebrutinib, and thanks for the question, Graham, deeply thoughtful as always. So first part of the question was on scenarios. As you know, there's a bunch of scenarios. We have two relapsing-remitting trials running GEMINI I and II. We've got and I think going into all the permutations of those scenarios are challenging. But let me just be -- let me just dimensionalize this across those indications. Firstly, in terms of relapse and remitting, you make an excellent point about previous failures, particularly in comparison to Let me just remind everybody very briefly on this call that in terms of penetration across the CSF by a physical property and actually some of the biological properties we've seen with tolebrutinib, these are outclassed in some cases, by two log orders, any of the other molecules in the space, even ibrutinib's primary biological capability is very substantial. Second point, I'll remind you when we talk about mechanism is compared to some of our competitors out there, patients who come off standard of care and go on to tolebrutinib have a continuing reduction in the neurofilament light. These two parameters make us optimistic about -- yet cautious in the role of tolebrutinib both in relapsing and progressive, so it's point one. Point two, in terms of your specific question, which you asked about endpoints. Of course, you're right that in 2024, ARR is currently the endpoint of choice. However, most of the community and most of the physicians that are looking after these patients will point you to the fact that actually composite confirmed disability progression is much more important to the patients. And indeed, many of the endpoints that are currently use a relapsed independent progression rate. So the short answer to this question is, we'll see where we get with GEMINI I and II, but I would strongly suggest that the regulator and the patients care deeply about disease progression, and we are well-powered to address that question. On the progressive disease, we're very substantially hopeful because of the data we've discussed before. And of course, there is no Aubagio comparator arm in that population. I think that provides you with a nice wrap-up of tolebrutinib, I'm going to hand over to Brian on that. Brian Foard -- Global Business Unit Head, Specialty Care Yeah, I think the question on price is really the question on value, I think, more than anything else. It starts with there's no more differentiated program, I think, in MS for sure than this tolebrutinib program. So we'll see what the scenarios are. It's hard to guess today what the final scenarios will likely be, and we'll determine the value based upon that, and we'll comment on price probably at that particular point, but not now. Paul Hudson Thank you, Brian. Thomas, Beyfortus supply? Thomas Triomphe -- Global Business Unit Head, Vaccines Exciting to speak. So where we are on Beyfortus. First of all, you've seen the strong performance in Q1. I start by reminding at that point. With a significant amount of sales above 180 million euro just in Q1, I'm mentioning that to highlight the fact that it covers not only NH23, 24 last shipment for Northern Hemisphere, but also the first shipment of Southern Hemisphere with two South Hemisphere countries where we have started. So that's the first part. As you have seen also, we mentioned through Francois, that we will not expect sales of Beyfortus in Q2 has nothing to do with supply, simply related to the fact that we were able to actually ship the South Hemisphere supply in Q1 and not in Q2. And, of course, the rest of the sales for this year will come with Northern Hemisphere in Q3 and Q4. Now as per the heart of your question on supply. We have full speed, both AstraZeneca and us are working on extending our industrial network as we have mentioned before, together. We are adding not -- we've already added, of course, packaging lines, we're adding filling lines as we have discussed altogether. And as we speak today, we are, every single day, filling new Beyfortus syringes for the coming season. We're going full speed as we discussed also. Of course, while we are currently manufacturing and filling doses, it will then depend as to the release of this product as per the speed of approval on these two filling lines by the regulators, notably, U.S. FDA, and EMA, especially. So we believe that with all the elements we're putting together with our partner, we'll be able to have this supply release in due time for the coming Northern Hemisphere, which is why we are very confident in our ability to reach blockbuster status. To be more specific beyond that will be what we will discuss together at the Q2 earnings call when we'll have more news from our supply perspective, and this -- regulators. Paul Hudson Yeah. And thanks, Tom. And I think everybody AstraZeneca, ourselves, everybody is doing the very best because the demand is so significant and Q2 is a much better moment to give you much more facts as we have them frankly. Next question? Operator Yes. Next question from Tim Anderson from Wolfe. Tim? Brian Tsang -- Wolfe Research -- Analyst Hi. This is Brian on for Tim. Just two quick ones from us. After the EPS reset in 2024, you talked about a strong rebound in 2025. Consensus has growth being around 15% in 2025. Any comment even if only directionally on that figure? I know you might not say anything right now, but anything you might want to call out, such as uncertain variables that might jump out? And then a second question on OX40. You've said previously that this might be your most important pipeline drug similar to Dupixent, but you capture full economics. Just want to ask how derisked do you think this asset is at this point in terms of how Phase 3 trials might read out. And whether you can confirm that there might potentially be earlier readout potentially in 2025? Paul Hudson OK. Thanks, Brian, asking for a friend. I would say, Francois, any comment? I mean, to be clear, I don't want to put you on the spot, but we just had strong rebound. So is there any other color you can give? Francois Roger -- Chief Financial Officer No. Brian, what I can tell you, I don't want to quantify the EPS but we are very confident about it. I think we have the building blocks, starting with the growth profile that we have today. And if we -- you put aside already, even you can see it in the first quarter of 2024, some of the exceptional items, the negative ones like Aubagio and the comparison base for COVID-19 sales, for example, we are already on a very strong platform in terms of growth today, and which gives you a fair illustration of where we can be in 2025. But I think it's too early to quantify it today. And I would not like to give guidance for 2025 at this point in time. Paul Hudson Thank you. Houman, on OX40-Ligand? Houman Ashrafian -- Global Head of Research and Development Yeah. Let me respond to this very briefly. I presented the data earlier. Super excited by the data, three points, rather this is a biologic, which has been a large number of patients, it's likely to be extremely safe, particularly compared to anything else that's out there. It's highly well tolerated. The dosing interval, extremely interesting. And importantly, off-drug disease suppression is important. So there are only three comments to make on this. One is, you said how optimistic are we, very optimistic, but we're optimistic because it may also have the opportunity, and this has been echoed by external commentators to have the potential to reduce atopic march and the progression of disease particularly in those with earlier atopic disease, point one. So number one is we are bullish for that reason. Number two is, mechanistically, it's kind of interesting because it addresses both TH2, as well as TH17, TH22 pathways, which impact on our broad ethnics populations. So number two is it's derisked from that perspective. And number three is clearly, we're taking it forward in a multiplicity of indications, some of which we'll read out this year. So the quick answer to your question is we're driving the studies as hard as we can. We've got four Phase 3s in flight, we'll drive them to completion in an orderly manner as possible. And bear in mind as a biologic, feel optimistic that we have been able to quantify its risks and benefits. Paul Hudson Great. Thank you. Next question. Operator Yes. Next question from Emily Field from Barclays. Emily? Emily Field -- Barclays -- Analyst Hi. Thanks for taking my question. The first is just piggybacking off of the earlier Dupixent launch and COPD answer. The contrasting thought between the biologic ramp is going to take some time, but that pulmonologists are very familiar with Dupixent, obviously. As we're thinking about this launch is this one that is going to require a great deal of incremental promotional spend? And then on Altuviiio, you mentioned taking share from therapies other than Loctite. Are you seeing more share take from Hemlibra as that a decline in U.S. in the quarter? And then big focus of their call yesterday was on the potential competitive threat from Mimi. Are you seeing that as a potential threat to Altuviiio or do you see that more as posing a threat to bispecifics? Thank you. Paul Hudson OK. Brian, over to you, COPD ramp. And I think the challenge is if pulmonologists know Dupixent already, why should it take some, and what will be the cost of doing it? Brian Foard -- Global Business Unit Head, Specialty Care Yeah, I think there's a couple of things in there. And so I think just as we said before, as you bring in a new therapy like this, any patient population, you've got to educate the patient population. You've got to educate the physicians. There's a lot to be done there to where it's not just to come in and take share game. It's going to be one of those things where it's bio penetration. We've seen this very well in atopic dermatitis. As you see in AD, here we are we're nearly eight years in and the bio-penetration rate is 11%. So it takes time, it takes effort. The good news about cost, and I think the expense is, if you think about it, we're very efficiently set up because we're already set up across the alliance actually deeply in the pulmonologist offices across all countries. So from an opex standpoint, there will be a lot of efficiencies there because this will be our second indication in the same offices. So we, of course, will spend to support this launch. It's absolutely a critical launch to reach as many patients as possible, but we certainly see some efficiency there and the way in which we're set up. Paul Hudson Thank you. Altuviiio share any business coming from non-factor and a comment on Mimi? Houman Ashrafian -- Global Head of Research and Development Yeah. A couple of things there. I think it always goes back to the patient and the unmet medical need. So if you think about this patient population, it's all about efficacy at the end of the day. And previously, where you speak about Hemlibra, that was more of a convenience play than anything else. While effective, it was more of a convenience play, the first subcutaneous product. So I'll break it into two pieces. Altuviiio is doing exceptionally well. We couldn't be more pleased with the launch progress because, again, the physician and the patient population really understood that for a single dose, you can actually have near-normal factor levels for an entire week. And that's really changing the game in the offices. Now where are we primarily taking business from? We always said we primarily take it from factors, because we believe all patients that are on factors should be moved to Altuviiio. And the factor marketplace is about 60% of the marketplace still today, 60% to 65% of the marketplace. So that is primarily where we're taking business. Two-thirds of our switches are coming from competitives, one-third is coming from Loctite again, a factor that should be switched. Now as it specifically relates to Hemlibra, and then we'll talk about the competitor that's coming, I definitely think Hemlibra should be more nervous about the competitor than us for sure. But we're taking about 10%, about 10% of our business is actually coming from Hemlibra. It wasn't what we anticipated necessarily, but again, I think it goes back to the efficacy side of things. So again, we couldn't be more pleased with the progress so far. A lot of our physicians more than 80% of the physicians have prescribed and we'll reiterate that they continue to increase their prescribing moving forward. So again, we're off to, again, a really good start as we hit almost the first-year mark for Altuviiio. Paul Hudson Thank you, Brian. And of course, as we watch the market evolve, you're right, I think we took more patients from Hemlibra than expected, and probably because they're trying to chase efficacy down to the once a week, which meant once-a-week convenience was roughly the same. I think when Hemlibra set the bar, and we're trying to find some new convenience standard. And I think this month or perhaps even eight weekly reduced around, I think that could be a new level two. So the market is clearly going convenience versus efficacy in the trade. So I think we're going to be well-positioned. Next question. Operator Yes. Next question from Emmanuel Papadakis from Deutsche Bank. Emmanuel Papadakis -- Deutsche Bank -- Analyst Thank you for taking the questions. Maybe a question on cash flow, first of all, please. Francois, you mentioned some caution on the outlook for this year. I think you mentioned some one-time adjustments for prior-year rebating. Perhaps you could give us a bit of color maybe in absolute sense, cash flow last year was around 11 billion euro, free cash flow was above 8 billion euro. So what should we be thinking of for this year? And you did have some rather outsized restructuring costs in Q1 over 700 million euro. So where is that likely to land for the full year? And what proportion of that is cash and a lot of capital working capital outflow in Q1, which drove a negative cash from operations, which is also rather unusual. So comments around those would be very helpful. And then a quick one on teased flat again, a few quarters in a row, still confident on blockbuster potential? If so, what gets us there? What are the timelines? Thank you. Paul Hudson So Francois, you do that, and then maybe, I don't know, Olivier want to comment on Tzield? Francois Roger -- Chief Financial Officer Let me start. Good afternoon, Emmanuel. On the cash flow, so it is essentially the fact that the decrease already in Q1 is essentially coming from the lower gross to net in Lantus. As you know, we are booking lower, but we have to pay from a cash flow point of view, to rebate on a higher base, at least in Q1, we will have a little bit of an impact as well in Q2 and Q3. This has impacted our cash flow significantly in Q1, and there will be a little bit of it the next two quarters. Obviously, this will remain for the full year. So I just wanted to flag the fact that this is kind of a one-off that will impact our cash flow for the full year. I don't want to quantify it because there are other moving parts, but this is a fairly significant one-off impact. On the restructuring costs, it's essentially linked to many of the projects that we have already announced part of it is actually obviously hitting France, as you know, because it's in the public domain as well. It's not necessarily a cash item that will be significant in 2024. It will spread over the next two years, partly, but some of it could potentially impact the end of 2024. Paul Hudson Thank you. Olivier comments on Tzield? Olivier Charmeil -- Global Business Unit Head, General Medicines Comment on Tzield. So we see a positive evolution and a slight acceleration growth in terms of screening and in terms of infusion rates, Q1 versus Q4 where we have higher infusion in Q1, we have more -- we have higher infusion in pediatric patients, which is for us a good signal, which means that we are progressing. Infusion have accelerated, driven by more field force execution and better coordination along the patient journey. Payers coverage is good. It's not a barrier to utilization. We said from the beginning that it would be a slow burn. We are shaping a market that didn't exist. There was no screening because there was no treatment. We know that it will take some time, but we think that it's worth the effort. It's about creating the awareness and making sure that both awareness at the patient level, at the family level but also with HCP is developed. We are very encouraged by the consensus guidelines that are being developed a white paper from ADA as that was recently developed, and there are a lot of activities to activity in the congress of ADT with GRF making and aligning a lot of medical society toward guidelines. So overall, it's going to be a slow burn, but we are confident that in the future, it will continue to progress. We think that it's worth continuing to invest, and this is reinforced by our exchange with KOL and clinicians that really gives us confidence that with Tzield we have the first and only disease-modifying therapy in type 1 diabetes. Paul Hudson Maybe I could add as well, Olivier, that we said it, we knew full well when we made the transaction. There's a reason why some of these small companies sell a great medicine is because they just can't do this type of work over this many years. If I could add anything, the quarterly transitions are less -- of less interest at the moment, the screening numbers are where we're heading. And we will, in 2026, 2027, 2028, this medicine is going to be a big deal contributing to the company would do the hard yards. And I'm not sure you mentioned, Olivier, but there was no competition for a decade. So we don't need to rush this. We can do this properly. In fact, we're the next competitor with the CD40 ligand. So in time invested in building proper screening, infusion capacity where necessary, doing these things. We've all been on this journey before, I was with hep C., it was only with Remicade. You just do the work properly, and we'll get the benefits a few years from now because there's nothing to displace us. And that, of course, will set us up in the community for the CD40 ligand. So we're actually really pleased with how guidelines and other things are falling quickly into that. Next question. Operator Yes. Next question from Seamus Fernandez from Guggenheim. Seamus? Seamus Fernandez -- Guggenheim Partners -- Analyst Great. Thanks so much for the question. So I just wanted to clarify the tolerability comments around rilzabrutinib. Just to confirm, it says safety consistent with prior results on the slide. Just wanted to confirm that that is consistent with the lack of an LFT or liver signal, as previously stated, as well as maybe confirmation to some degree that the MS population that the BTK signal and the MS population may actually be population-specific? And just a quick second question. Paul, just wanted to get a sense for how you're thinking about business development from here. I guess, with the incremental investment in R&D, and the robust kind of pipeline dynamics heading forward. I wanted to get a better sense of how you're thinking about business development going forward in terms of the perhaps areas that you're most focused on building out or if there is a profitability or stage of development later stage that's more interesting versus early stage? Thanks so much. Paul Hudson OK. Thank you, Seamus. Houman, tolerability; and some also comments about MS and the populations different responses. Houman Ashrafian -- Global Head of Research and Development Yeah. So Seamus, thanks for the question, both thoughtful. The first one brief and to the point, I can confirm that we are pleased with liver tolerability profile of rilzabrutinib thus far and are confident taking it forward. As you said, 0.2 on tolebrutinib, you very thoughtfully have called out the fact that multiple sclerosis appears to be a distinct indication with the BTKIs. There may be interaction between the BTKI and the underlying biology in MS, which pretty set people to let me signal, I think that's, as you were referring to, reasonable hypothesis, we have data supporting it and reflects clinical experience. I think both of these points are recently are well made. Paul Hudson Thank you. On the BD, I guess, to M&A point, we guided to the sort of 2 billion euro to 5 billion euro range in bolt-ons, that's sort of standard, I think. We did commit after Q3 last year that we would hold R&D through 2024 and 2025 round about 7.7 billion euro. So we don't want to regale away from that. I don't think that's appropriate. Of course, we will get some failures in there, which will free up some capacity or some delayed starts or different things, which will mean that capacity will open up for us perhaps into 2025 and 2026. And then, of course, most of the big studies start to graduate as the pipeline comes along and that gives us the sort of automatic bandwidth. I think to maintain that, you might see more of our effort and energy on the bolt-ons, either in the early phases where this bigger spend comes later and we can absorb that without missing a commitment or indeed in the late stages where the R&D commitment ongoing is minimal, and we can hold the line on what we've said and perhaps bring in a later-stage asset. We have a good balance sheet. We have to leverage that. But I think the discipline around working within the envelope on our R&D budget is to be maintained. Should I throw the normal CEO disclaimer in, we remain opportunistic and everything else. Of course, but we've given guidance to you, we'd like to honor it for us and for you and make sure we get it done. And if we find some opportunities to reallocate, that's perhaps our biggest thing we'll take it. But demonstrating the discipline post Q3 last year is the number one priority because don't forget we're having enough assets in-house to, we believe, to grow EPS, of course, and to do what we need to do and to go all the way through the LOE of Dupixent whenever that comes. But the discipline is what will be judged on, I think, over the next couple of years at least. So that's as much as I can share with you. Next question. Operator Yeah. Next question from Jo Walton from UBS. Jo? Jo Walton -- UBS -- Analyst Yes. Can you hear me? Paul Hudson Yes. Jo Walton -- UBS -- Analyst Excellent. Two quick questions then, please. On Altuviiio, I wonder, is there any evidence of moderate patients rather than severe patients beginning to try prophylaxis given that this is now an ability to get to a normal level of factor clotting on Beyfortus, could you give us an idea of what the next countries would be? So you've obviously got potentially more demand than supply. What's the sort of order of countries that we should be thinking of as you roll out because you said you would be rolling out some more this year? If I can just finally say, is there any read across from the failure in frexelimab in any of the other indications or should we see that as completely isolated? Paul Hudson OK. Good -- Jo, good questions. Brian, Altuviiio use moving into moderate? Brian Foard -- Global Business Unit Head, Specialty Care Yeah. I think I mean the way we think about the marketplace is actually, again, all these patients are on therapies. So it's -- when we talk about the switches, again, these patients are identified really early in their life and then they're on some type of therapy. So from a moderate standpoint, we don't think about it that way. Actually, we think about it as what type of therapy are you on? And what types of efficacy levels are you looking for or convenience levels are you looking for? And that's why, again, we're really bullish because of what we've seen from a switch standpoint the marketplace is really responding to the profile that we're bringing, which is better efficacy near normal factor levels over a weekly period with a 1 dose type of therapy. So we're seeing switches of all patient types, no matter the types of therapy that they're on. Paul Hudson Thank you. I do think Altuviiio is going to surprise everybody. I have to say all the feedback and a bit in the conferences, I think that near normal thing Jo mentioned is the goal. Thomas, I'm not sure whether you're prepared to share a list of countries in what order, but maybe you could give some regional input? Thomas Triomphe -- Global Business Unit Head, Vaccines Yes. And I can say a little bit of flavor of how we are doing it and why we're not seeing so much more. So rightfully, as you said, Jo, of course, we are going to make sure that we have ample supply for the three geographies where we had significant uptake last year. You know very well about Spain, the U.S. and France. Moving forward, we've already during South Hemisphere season, Chile and a couple of regions in Australia. Moving forward for Northern Hemisphere 2024, I expect more European countries to pick up. What happens, and that's very important to remember, each time we introduce a new immunization, it's always -- there is always a very specific national process for first setting up the right recommendations through the recommending body, then high setup and then we launch into the right national immunization schedule, which is why I cannot give you specific European countries right now because I need to leave it to the recommending bodies to make sure that we have those votes and we proceed for NS 2024. In addition to this geography in Europe, very well, but we just got the registration of Beyfortus in Japan in Q1 2024. And you should expect a little bit of Japan and China sales in the private setup, I would say, not national immunization program for 2024 in order to prepare for larger volumes in the coming years, that's for the following season. Paul Hudson Houman, I think Jo's comment on rilzabrutinib is well placed. So over to you. Houman Ashrafian -- Global Head of Research and Development Yeah. Thanks, Paul. Thanks, Jo. Great question. Just to be super clear, we've always positioned frexelimab, primarily on MS and T1D medication, and it's clearly demonstrated as chops in MS in great detail and is progressing in T1D. It is incumbent on us as a patient-centric organization for us to be thoughtful about the broadest possible patient benefit we can bring with our drugs. In my own clinical practice, I treated a bunch of patients with Sjögren, and they are definitely an unmet medical need. We initiated some experimental medicine study to see whether we could signal seek in those indications. I don't see the Sjögren's readout as anything other than failure in a signal-seeking study, and we remain confident about frexelimab in the bigger latter indications. Paul Hudson Yes. I think you're right, the type 1 diabetes and MS, where I think you said it already, but just the risk of repeating it. Where we have a pipeline in a product, we will go and explore some adjacent areas where we think there's some pathway or some biological reason why there might be an impact. And you should expect more of that from us in like early pox, left and right the pipeline on the product drugs because we need to do that. I think we really need to do that. And of course, everybody's tried Sjögren's, because it's difficult to crack. And we can't go any bunches in we can do something. OK. Next question? Operator Next question from David Risinger from Leerink. David? David Risinger -- Leerink Partners -- Analyst Yes. Thanks very much and thanks for all the updates today. So I just have one question, and maybe you could comment in some detail, please? So the company has accelerating I&I Phase 2 readouts in 2025. Could you discuss the key cards that will be turning over for the candidates with the biggest commercial potential? Thanks very much. Paul Hudson OK, David, thank you. So I think Houman will start with you on -- we've already put them into two buckets, frankly. So we -- I don't know how much more we need to add. But for the readouts that you're excited about, for example, Houman for I&I for 2025, specifically is what you asked. Houman Ashrafian -- Global Head of Research and Development Yeah, specifically. It's like choosing between one's favorite children for our readouts in 2025, but I'll give it a go. So firstly, it's our big letter. I mean you asked for the answers in some detail, and I will try and provide them with thoughtful detail. So our Phase 2s reading out, as you've seen there, amilitelimab in a variety of disorders, particularly and alopecia. Number one, as I said, with a nondepleting OX40 ligand inhibitor, we hit the type 2 inflammation, but also take on a bunch of other mechanisms. OX40 is often regarded to the checkpoint and a new checkpoint. And I'm excited about it's alopecia areata and the [Inaudible], which have very diverse chemical indications. Obviously, we have an all RIPK1 with a role in ulcerative colitis. We think that's interesting. The biology is well-precedented. So number one, I think the amilitelimab constellation of therapeutic opportunities is interesting. I think the IRC degrader is super interesting. It's mechanistically unique where we our partner have played both in atopic dermatitis as an oral therapy, but also in hidradenitis suppurativa again. And then two others, just to call out, as you asked what our favorites were. The oral TNFR1 signaling inhibitor has the potential to be a truly disruptive therapy for patients with inflammatory disease as it will capture potentially the value of classical TNF treatment but with a differentiated side effect profile not affecting TNFR2. And the second one I wanted to call out is, obviously, Lunsekimig, our very special molecule in asthma. The reason it's special is because it seeks to augment durability but also raise efficacy healing. And the way it does so is to take two modular targets, both of which are precedented mechanisms in asthma put them together. So what we do is learn from the ecosystem and with the excellence of our platforms to enhance what we know from the ecosystem. Before I jump off the pedestal, I also want to talk about Tomar [ph], because it would be remiss of me to talk about our pharma agents and not talk about the RSV products that are reading out in Phase 2 next year. We remain as excited about vaccines as we do as our pharma products. Paul Hudson So Houman, it's nice it took you a while to David's question -- did you mention OX40 ligand in HS? Houman Ashrafian -- Global Head of Research and Development I didn't mention, nor did I mention TL1A or some of the other -- Paul Hudson TL1A will be up there, too. So it's going to be busy. It's going to be busy, but this is what we've been trying to get the company to this point. We don't know if they will work, of course, but we do know that we would rather have the readouts. OK. Next question? Operator The next question from Gary Steventon from Exane. Gary Steventon -- Exane BNP Paribas -- Analyst Hi. Thanks for taking the question. I hope you can hear me. Just firstly, on the outlook. Given the top-line momentum, could you frame maybe the level of flexibility you have in the R&D and launch plan and hence, the likelihood that any outperformance could drop through to earnings? I mean, it wasn't that long ago, you outlined the acceleration. So I assume that any near-term investment opportunities that you wanted to accelerate you perhaps have done already? And then secondly, just on the theme of the consumer separation, perhaps, Francois, it's your first earnings call as CFO, I ask your thoughts on what might be on your list in the scenario where Sanofi was to receive a significant cash inflow. So really just your thoughts on appetite for larger volume or larger value of M&A, larger buybacks, or willingness to operate with net cash for a period of time? Thank you. Paul Hudson Francois, do you want to take a stab at those? Francois Roger -- Chief Financial Officer Yeah. I can. On the R&D flexibility, I mean this is good news if we can generate additional resources. I think that we will need to decide in due time on each and every single case on their merits. If we have good cases for good return on investment on R&D, I think we will not hesitate to do it. But that being said, I mean, we should not discount the fact that we let some of it flow to the bottom line. And I think that it's extremely important that one that we reward our shareholders in an attractive way, which is the reason why I'm coming back to what I said earlier as well on our total confidence on the significant rebound in EPS, for example, in 2025. I think on capital allocation, I think that we have a very clear policy. So first of all, we want to invest in our business, both organically and inorganically as well. I think Paul touched on it earlier, and we need to be very disciplined on that, so which is -- which means that we are rather thinking today of bolt-on cases within the 2 billion euro to 5 billion euro. Clearly, with a view to get some return and generate value for shareholders as well. Paul said it, we don't want to discount either larger opportunities if they themselves and they're attractive, obviously. In terms of capital allocation, we don't want to discount share buybacks. That's a possibility, especially in the context of the separation of CHC. So this is part of the option that we keep on reviewing. Let us work further into the year to decide exactly on, which route we get. But we heard the message that there is an appetite as well from shareholders to get some share of the cash that we could generate from that transaction. Paul Hudson Thank you, Francois. We have time for another question. Operator Yes. The last one will be from Peter Verdult from Citi. Peter Verdult -- Citi -- Analyst Thank you. Peter Verdult from Citi. Two questions, Peter. I think everyone on the call realizes in your comments that pipeline perception is the missing piece of the puzzle to get the shares flying again and above 100 euro. So with that in mind, I've got two follow-up questions for Houman, please, on rilza and tolebrutinib. I totally get you can't disclose too much ahead of data presentation, but Houman, can I push you as best I can to give us a sense of how competitive you think that rilza dataset in ITP is from an efficacy safety perspective to incumbent molecules such as Promacta, especially given Promacta is facing generic risks and I try to be as ambitious best I can without getting you to disclose the data? And then on tole ahead of the late summer Phase 3 readouts, just how you're thinking about the relative opportunity across readouts remitting and progressive, because on relapse remitting, the KOL feedback we're receiving and the data that's being presented at ACTRIMS and ECTRIMS seems to be showing a waning effect for both EVO and tole over time as it relates to gadolinium lesion reduction. So the message we're getting is be wary of a positive result in relapsed remitting, progressive is clearly where the biggest unmet need is. But we don't yet have any randomized Phase 2 data we can bank on. So is it just the brain penetration angle and the NFL data that you spoke about earlier, Houman that it is what gives you confidence in the progressive trials? Or would you bring any other points to the table? Thank you. Houman Ashrafian -- Global Head of Research and Development OK. Thank you so much for those questions. As always, deeply thoughtful, let me just take very quickly. I think the existing standard of care leave -- they've been incredibly important medicines by the way. I don't want any level people not to appreciate how important they've been to the treatment of ITP. But they don't get to the heart of the disorder, as I said, mechanistically, suppression of the B cells and the reduction of Fc-gamma-based macrophage platelet destruction has been really important and just building up a number of platelets doesn't ameliorate the severe fatigue, etc. So I really do think rilza is a deeply important new add to that space. And as Brian beautifully said, beyond ITP, its future role potentially in rare blood is really very significant. And the tolebrutinib profile is -- as you said, I can't disclose, but to my mind, very pleasing. So the ITP answer, bullish on rilza. On tolebrutinib from time to time, I find it frustrating that people try and change the goal post. And let me be super clear, I think in progressive disease, there is almost nothing out there of any significant value in secondary progressive MS. It's a horrible disorder with ventricular dilatation and substantially unmet medical need. Today, many of those patients are either undertreated or labeled as a different condition in order to access therapy, right? So for progressive disease, I think the risk benefit should the tolebrutinib readout play to our favor is unequivocal. And I'm prepared to be confident that if there is efficacy with the level of safety we've now seen with monitoring that in progressive disease, there is significant value over here. With respect to relapsing/remitting when my frustration comes in, to take at this stage in GEMINI's development to argue that even if the molecule works in a Phase 3 and passes the goalpost that we now have another discussion about whether this is going to be sustained. I think difficult question to answer. My view is, in a few months, we will see the results of GEMINI 1 and 2. I think that the regulatory path is really well established, both with respect to ARR, but also with respect to disability. This isn't something we've invented. And I think the onus will be on us and the regulator to get this through and benefit patients with relapsing disease, if we hit ARR and/or disability. I think as simple as that. Paul Hudson Yes. Thank you, I mean we – I'm with you, I think rilza has a really competitive profile irrespective of Promacta and its challenges with diet and everything else. I think once we get beyond as well to asthma and to CSU, I think you took in advanced orals in these spaces, and I think the question is the right question about earlier was asked about tolerability. If you can thread that needle, which I believe we can, you really unlock huge patient potential, that's why we put it in the two. On tole, I think Houman summed it up beautifully. Let's not forget that an advanced oral with potentially disease-modifying could be the profile. And it's -- there's a real space for it. So I think that if we can get it done the right way and we'll get the study soon enough, so it's sort of not even worth speculating anymore. I think if we take progression in any form, even if we have to have conversations with regulators about what is understood and what is not, actually, it's very hard to resist something that could do that. We will find out we'll see how good the data is. So thanks, everyone, for your time today. We've had an excellent start in 2024. Sales advanced by 7% growth was driven by launches, including new indications for Dupixent. Our transformation is gathering pace, and I thought that a bit today during the call questions weighted toward the future and what we're trying to do. If you have any follow-up questions, feel free to contact the IR team. They never rest. And have a great rest of your day.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good evening, and thank you for standing by for New Oriental's FY 2024 third-quarter results earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Sisi Zhao -- Director, Investor Relations Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter 2024 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, Stephen Yang, executive president and chief financial officer, and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are pleased to announce that New Oriental has achieved robust growth this quarter that have surpassed our expectations. The remarkable top-line performance this quarter has spoken volumes about sustained recovery across our diverse business lines, while steady expansion of our new business made healthy contributions to the company's revenue, invigorating our portfolio of innovative endeavors. New Oriental's bottom-line performance has achieved encouraging yields with operating margin and non-GAAP operating margin reaching 9.4% and 11.7% for this quarter, respectively. Thanks to the combined efforts of our restructured business model by the utilized resources, and streamlined cost structure. Bolstered by a vital growth across all business lines, our commitment to maintaining a healthy market share growth stands firm as we strive to create sustainable value for our customers and shareholders in the long term. Now, I would like to spend some time to talk about the quarter's performance across our remaining business lines and new initiatives to you in detail. Our key remaining business have tended a promising upward trajectory, while the new initiatives secure positive momentum. Breaking it down, the overseas test drive business recorded a revenue increase of about 53% in dollar terms or 59% in the RMB terms year over year for the third fiscal quarter of 2024. The overseas study consulting business recorded a revenue increase of about 26% in dollar terms or 31% in RMB terms year over year for this quarter. The adults and university students business recorded a revenue increase of 53% in dollar terms or 60% increase in RMB terms year over year for this quarter. Our multipronged new initiatives, which mostly revolve around facilitating students all-around development, have continued to deliver continued growth and meaningful profit to the company. Firstly, the nonacademic tutoring courses, which we have offered in around 60 existing cities, focuses on cultivating students' innovative ability and comprehensive quality. The markets we have tapped into have recorded elevated penetration, especially in higher-tier cities, with a total of approximately 355,000 student enrollments reported in this quarter. The top 10 cities in China contributed over 60% of this business. Secondly, the intelligence learning system and device business, a service designed to provide a tailored digital learning experience for students to enhance learning efficiency, has been adopted in around 60 EC. We have observed enhanced customer retention rate and the scalability of this new initiative business with approximately 188,000 active paid users recorded in this quarter. The revenue contribution of this initiative from the top 10 cities in China is over 55%. Our smart education business, educational material, and digitalized smart study solutions have continued to contribute material results to the overall advancement of the company. In summary, our new educational business initiatives reported a revenue increase of 73% in dollar terms or 80% increase in RMB year over year for this quarter. In addition, as mentioned in the past quarters, we inaugurated a newly integrated tourism-related business line as one of our creative venture tailored with diverse offerings of culture trips studied toward in China and overseas as well camp education. New Oriental's cultural tourism business shares the spirit to provide premium quality of travel experiences that are infused with joy from cultural exchange, knowledge sharing, and personal fulfillment. Within the new business line, our study tour and research camp business for students of K-12 and university age achieved inspiring growth in this quarter. We have conducted study tours and research camps in over 50 cities across the country with the top 10 city in China offering over 55% of revenue share of this business. We also piloted a number of top-notch tourism offerings to expand our reach to all age group, including the middle-aged and elderly individuals across 25 featured provinces as we are still at the preliminary stage of the planning, testifying, and evaluating the availability of this business in select regions. We will keep you posted should there be timely updates. With regards to our OMO system, online merge offline system, we have persist in revamping our platform and leverage our educational infrastructure and technology edge on remaining key business and new initiatives with the vision to provide advanced diversified education services to customers of all ages. During this reporting period, a total of $25.5 million has been invested in our OMO teaching platform, which equips us with the flexibility to maintain unrivaled service to students. With regards to the East Buy, East Buy attained sustainable growth momentum in this quarter. Thanks to a rapid development of its private label products. As part of the ongoing expansion strategy from early venture like East Buy, we have devoted substantial investments to support the growth of the company, including the optimization of the East Buy multi-platform strategies, supply chains, product offerings, as well as quality control to safeguard on product quality and regions. We're glad to see that East Buy has further enlarged its customer base following the latest establishments of Yuhui channel [Inaudible]. In addition, further enhancements in East Buy have been made through our comprehensive optimizational structure strategy enhanced for professional talents and app upgrades, all of which strengthened East Buy's private label products and live streaming e-commerce. The resources we committed into East Buy have thankfully nourished improved user management and loyalty, and we look forward to leverage these inputs to propel further growth of the platform that promise premium offerings and sustainable growth for our customers. With regards to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial statement with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.8 billion. On July 26th, 2022, the company's board of directors offers a share repurchase of up to $400 million of the company ADS were common shares during the period from July 28th, 2022 through May 31st, 2023. The company's board of directors further authorize the company to extend its share repurchase program launched in July 2022 by 12 months to May 31st, 2024. As of yesterday, April 23, 2024, the company repurchased an aggregate of approximately 6 million ADS for approximately $195.3 million from open market under the share repurchase program. Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead. Sisi Zhao -- Director, Investor Relations OK. Now I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $1,093.9 million representing a 59.1% increase year over year. Non-GAAP operating cost and expenses for the quarter, which excludes share-based compensation expenses, were $1,066.4 million, representing a 60.1% increase year over year. The increase was primarily due to the cost expenses related to substantial growth in East Buy's private label products and live streaming e-commerce business. Cost of revenue increased by 74.5% year over year to $644.8 million. Selling and marketing expenses increased by 57.1% year over year to $161.3 million. G&A expenses for the quarter increased by 33.6% year over year to $287.8 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.6 million, representing a 40.7% increase year over year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 28.3% to $27.5 million in the third fiscal quarter of 2024. Operating income was $113.4 million, representing a 70.6% increase year over year. Non-GAAP income from operations for the quarter was $140.9 million, representing a 60.3% increase year over year. Net income attributable to New Oriental for the quarter was $87.2 million, representing a 6.8% increase year over year. Basic and diluted net income per ADS attributable to New Oriental were $0.53 and $0.52, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $104.7 million, representing a 9.8% increase year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.53 and $0.52, respectively. Net cash flow generated from operations for the third fiscal quarter of 2024 was approximately $109.4 million, and capital expenditures for the quarter were $80.1 million. Turning to the balance sheet. As of February 29th, 2024, New Oriental had cash and cash equivalents of $2,013.6 million. In addition, the company had $1,570.8 million in term deposits and $1,175.3 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services for goods are delivered at the end of the third quarter of fiscal year 2024 was $1,521.7 million, an increase of 30.8% as compared to $1,163.2 million at the end of the third quarter of last fiscal year. Now, I'll hand over to Stephen to go through our outlook and guidance. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you, Sisi. As we progress into the fourth quarter, which is typically expected as a slower quarter comparing with the third quarter in terms of the revenue growth and profitability due to various seasonality of our key educational businesses, we place confidence in sustaining a healthy growth, building on the collective breaks of our routed foundation, brand advantage, and differential teaching resources. Our strategic focus and investment approach aimed at achieving satisfactory operating profit in the rest of the year, coupled with the year-over-year margin expansion for the full year. As always, we will work diligently to adhere to the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position to further strengthen our edge on all business lines and creative endeavors. With regards to the learning center and classroom space as part of the continued evolution of our offering across business lines, we plan to increase our capacity by around about 30% for this fiscal year, by which a reasonable amount of new learning centers is expected to be opened while classroom areas of some existing learning centers will be expanded in a few major cities. Most of the new openings will be launched in the city with better top-line and bottom-line performance in this year. At the same time, we will continue to hire new teachers and staff to match our capacity expansion and support our revenue growth, especially for new education business initiatives and newly integrated tourism-related business. We expect total net revenue in the fourth quarter 2024, March 1st, 2024 to May 31st, 2024, to be in the range of $1,101.5 million to $1,127.3 million, representing a year-over-year increase in the range of 28% to 31% in dollar terms. The projected increase of revenue in our functional currency, RMB, is expected to be in the range of 34% to 37% for the fourth quarter of this fiscal year 2024. To conclude, New Oriental is determined to persistently expand our existing offerings and fertilize new endeavors, dedicating strategic inputs to sharpen our capability. We will also continue to devote reasonable resources on research and application of new technologies such as AI and ChatGPT into our offerings, a strong belief that we could uplift our strength to favor further growth, better margin, and operating efficiency. At the same time, we will also continue to seek guidance from and cooperate with the government authorities in various provinces and municipalities in China in alignment with this effort to comply with the relevant policies, regulations, and measures as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measure as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you. Questions & Answers: Operator Thank you. The question-and-answer session of this conference call will start in a moment. In order to be fair to our colleagues who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. [Operator instructions] Your first question comes from the line of Felix Liu from UBS. Please ask your question, Felix. Felix Liu -- UBS -- Analyst Hi, good evening, management. Thank you very much for taking my question. And congratulations on the strong growth and guidance. My question is on growth. So first, I understand that Q4, we will have a bit of seasonality in the education business. But maybe could you just share more color on the growth in different business segments in Q4? And also, you mentioned that the capacity expansion guidance for the year is now lifted to 30%. How do you see that capacity expansion pace going forward? Do you think 30% is a sustainable expansion that we can maybe keep for two to three years? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you, Felix. Yeah, as you know, we built the top-line guidance this quarter a lot, just like the past couple of quarters. And as for the revenue guidance in Q4, which seems to be a little bit lower than the Q3 year-over-year revenue growth, there are three reasons. Number one, as always, we're quite conservative to give the guidance. So, this is number one. And number two, yeah, as you know, Q4 is typically expected as a slower quarter compared to the Q1 and Q3. And because of the seasonality, for example, like for the K-12 related business and the overseas related business, typically, Q4 is the low season. And number 3 is, in the last year, Q4, without the impact of the pandemic, I think our business in last year Q4 was basically back to normal. So, that's why we think the Q4 top-line guidance seems to be a little bit lower. But in my personal view, I think the guidance in dollar terms is 28% to 31%. In RMB terms, it's 34% to 37%. I think it is still very strong. And I think in the coming new fiscal year, that means that fiscal year '25, we're quite optimistic on revenue growth with the margin inflation for the whole fiscal year '25. As for the expansion plan, yes, we raised the guidance of the capacity expansion by 30% year over year this time because, actually, we're taking market share. And I think the demand from the customers is very strong, and that's why we raised the guidance of the expansion plan again this quarter. And going forward, next year, I think we will keep almost the same pace to open the new learning centers because we will make the analysis of the market demand and the supply. So, I think we are still on the pace to take more market share. And as for the revenue growth of the different businesses, we disclose it in next con call. Sisi Zhao -- Director, Investor Relations Just roughly, our key business lines, like overseas related, including the test prep and consulting will grow roughly about 15% to 20% range. And domestic test prep university students business revenue growth will be around 20% to 25%. And high school tutoring will grow moderately. And the new business, new initiative, which is the key growth driver, will be over maybe 60% revenue growth. This is based on the exchange rate estimated by us when we do the projection. Felix Liu -- UBS -- Analyst Very clear. Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Felix. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen. Yiwen Zhang -- China Renaissance -- Analyst Good evening, management. Thanks for taking my question. So, my question is regarding our margin. If we look at the group level adjusted operating margin, it was 11.7%, which was flattish on a Y-o-Y basis. I understood a lot of incremental opex was due to expansion. So, if we just look at education-related margin, how does it expand on Y-o-Y basis? And how would you expect it to trend in the next few quarters? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Yeah. The group's non-GAAP OP margin was flattish in this quarter. But within the education business, I think we're seeing the meaningful GP margin and non-GAAP OP margin expansion for education business in this quarter. I think -- thanks to the newly business restructured model and the higher utilized resources and the better utilization for the learning centers and the streamlined cost structure, so it made the education business margin expansion again this quarter. And so, going forward, I think in the coming Q4 and even for the whole year, the new year, fiscal year '25, I think we do have the operating leverage in hand. Yes. As you know, we raised the guidance of the learning center expansion by 30%, and we hired more teachers and staff to match with the new expansion. But I think the top-line growth in the new fiscal year '25 will be very strong. And we do have a leverage in fiscal year '25. So, we expect you will see the margin expansion with the healthy top-line growth for education business in the new fiscal year '25. And then the East Buy, yes, I think the cost of expenses, especially for the selling and marketing expenses, this quarter increased. It was partly due to the East Buy's investment. And yes, I think you saw a very strong growth in top line, especially for the private label products and the e-commerce business. And I think East Buy has devoted substantial investment to support the growth of the company, including like the optimization of the multi-platform strategies in [Inaudible] and the other platform, supply chain and product offerings and quality control. And also, East Buy recruited some more of the professional talent people from the market. And so, we are optimistic on East Buy's development going forward. And we look forward to leverage this investment with input this time and going forward. So, in summary, the margin profile for the whole group -- so we are quite optimistic about the margin expansion for the whole group for the education business in fiscal year '25. And also as well, we do think the East Buy will generate more revenue, top-line growth, and more profit to the company going forward. Yiwen Zhang -- China Renaissance -- Analyst OK, thank you. That's very clear. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Yiwen. Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question, Lucy. Lucy Yu -- Bank of America Merrill Lynch -- Analyst Thank you, Stephen, Sisi. So, my question is still on the margins. So, it looks like, judging from the minority interest, that East Buy might be loss-making for the quarter. So, how should we think about the East Buy margin volatility impact on a group level in the upcoming quarter and upcoming fiscal year? So, Stephen, how do you plan those margins for the next fiscal year? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Lucy, I'm glad to hear from you, your questions about the East Buy. But I'm afraid I'm unable to share with you about the latest financial results at this moment and our guidance for the East Buy. And in the next quarter, in July, I think East Buy will announce the full-year report -- half-year report and the full-year report. And so, at that time, I think the management of [Inaudible] of East Buy will share more color with you about the margins and the top line growth. Yes, but I must mention that we are still quite optimistic about the East Buy's investment in this quarter. And over the long run, I think the East Buy will bear fruit from this investment and will generate more revenue and profit to the whole group, Lucy. Lucy Yu -- Bank of America Merrill Lynch -- Analyst Thank you, Stephen. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Lucy. Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question, Tian. Tian Hou -- T.H. Capital -- Analyst Hello. Yes. Hi, Steve and Sisi. The question is related to the high school learning center expansion and also the non-academic course learning center. What's the retention rate and utilization rate for both of them? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer I think for the utilization rate and the student retention rate for both the high school business and the non-academic courses for K-9 are still improving year over year, actually quarter by quarter. And so, the good news for us is we're seeing the trend is still there. And so, going forward, we will -- I think we will see the higher -- the utilization rates for the -- for this business for the existing learning centers and the higher the student retention rates. And a couple of years ago, typically, it will spend us for 12 months to get the breakeven point after we opened the new learning center. But now, I think, roughly, it will take the half year, let's say, the six months to kind of breakeven point. And so, I think going forward, we expect the better -- the higher utilization rate for learning centers and the higher students retention rate for all these lines. Thank you. Tian Hou -- T.H. Capital -- Analyst Yeah. So, one follow-up question. So, before the double reduction, so when you guys do the learning center expansion, so there's a tricky line. So, how much you do the expansion, if you do a little bit bigger more than will be impact the gross profit margin? So, I saw this quarter, the gross profit margin relative to last year's same time was down like a 5 percentage points. Is that because the learning center expansion, or is it because the East Buy? Stephen Yang -- Executive Vice President, Chief Financial Officer Yes. I think the learning center expansion -- we raised again the learning center expansion by 30%. I think it's the results that we analyze the whole picture of this business for the last three -- two to three quarters. And as I said, on demand side is very strong, especially for the non-academic courses for the kids. And on the competition side, the competition environment is different compared to a couple of years ago. And so, I think -- and the key is, we only choose the top performance cities both the bottom line -- the top line and bottom line to allow them to open more learning centers or extend the new classroom area for the existing learning centers. So, I think it will not drag the whole margin. In opposite, it will help the margin expansion going forward. Tian Hou -- T.H. Capital -- Analyst Got it. Thank you so much, Stephen. Good quarter. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Tian. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy. Timothy Zhao -- Goldman Sachs -- Analyst Great. Hi, Stephen. Hi, Sisi. Thank you for taking my question. My question is regarding the cash flow statement. So, basically, one is on the operating cash flow. I noticed that for this quarter, I think the operating cash flow drop a little bit on a year-on-year basis. Just wondering if you can share some color on the rationale or the reason behind that? And second, also on the financing cash flow, I do notice that the existing share repurchase program is about to expire. Just wondering regarding your capital allocation and shareholder return? Any thoughts on the shareholder policy going forward in terms of potential dividend or further share repurchase programs? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer As for the operating cash flow, I think you know I suggest the investors to make the analysis of the cash flow by year on year, not Q on Q because the business seasonality where the students enrollment window change quarter by quarter. So, that's why I suggest to you guys to make the analysis year on year. So, if you saw the deferred revenue balance year on year, the increase is still very strong. So, yes, that's it. And that's why we give the very strong -- the top-line guidance for Q4, yes, even though Q4 is weak -- is a slow quarter, yes. And as for the share buyback plan, yes, I think we keep to create more value to the shareholders. And I think we will keep buying the share back. And this round, we announced the share repurchase plan two years -- roughly two years ago. And we finished almost half $195 million. And I think we'll keep buying in this quarter. And in the -- this fiscal year end, I think we will discuss with the board to decide whether or not to extend the share repurchase plan. And -- but historically, we made a couple of times share buybacks and a couple several times the special dividend. So, our aim is to create more value to the investors as the capital return, either share buyback or dividend. Thank you, Tim. Timothy Zhao -- Goldman Sachs -- Analyst Thank you. Thank you, Stephen. That's helpful. Operator Thank you, Timothy. Our next question comes from the line of Xinyi Wang from CICC. Please ask your question, Xinyi. Xinyi Wang -- CICC -- Analyst Hi, Stephen and Sisi. So actually, I had a question about the financials. So, we saw a larger loss from equity method investments this quarter as well as less investment interest this quarter compared to same period of last year. So, I'm just wondering which factors led to these changes? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer I think, yes, we -- in this quarter, we made to the investor company in loss in this quarter. So, it -- I think we do have a one-time impact on the very bottom line this quarter. I think all those two companies was negatively impacted by the deduction policy two and a half years ago. And -- but this is one time. It's not-it's just one time. Yes. Xinyi Wang -- CICC -- Analyst Thank you. Just a follow-up question about the -- also, we saw less investment interest this quarter Q on Q. So, I'm just wondering the reason. Stephen Yang -- Executive Vice President, Chief Financial Officer I'm sorry. Can you repeat again? Less than what? Xinyi Wang -- CICC -- Analyst Yes, as you saw less other income, which I suppose is mainly our investment interest this quarter only decreased. Stephen Yang -- Executive Vice President, Chief Financial Officer Yes. The -- I think the interest rate in China, you know, it has been down in this quarter. And so, it will -- I think it impacts some interest income. Sisi Zhao -- Director, Investor Relations Actually, the interest income is -- the absolute dollar number are similar with previous one to two quarters. Stephen Yang -- Executive Vice President, Chief Financial Officer Yes. Sisi Zhao -- Director, Investor Relations So, it's pretty stable. Xinyi Wang -- CICC -- Analyst Understood. Thank you, Stephen and Sisi. Congrats on the results again. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. [Operator instructions] All right, we are now approaching the end of the conference call. And we do have one more question from DS Kim from JPMorgan. Please ask your question, DS Kim. DS Kim -- JPMorgan Chase and Company -- Analyst Hello, sir. Good evening, and congrats on amazing top-line growth again. Actually, I wanted to ask about margins and expansion. I think you're right to discuss all of that. So, just wanted to follow up on one small thing, if that's OK. You mentioned earlier, that new center expansions are now could be a margin accretive because it's primarily expansion of the existing center. But if we only look at, say, newly opened location, newly opened centers for non-academic courses, how long do you think -- how long does it take for those new centers to hit breakeven and then to ramp up to the full level on the center level? I think back in the days, it took about a year to turn breakeven for the new learning center K-12 AST and another a couple of more quarters to fully ramp up. And I'm wondering how this has changed now versus now that the courses has changed primarily for non-academic? Stephen Yang -- Executive Vice President, Chief Financial Officer I think now, typically, on average, it will take the six months to get a breakeven point for the new work, that means went up the learning centers even more faster. And so, in the second year, typically, the margin of the new learning centers depends on the different areas. I think the margins of that new learning centers to get somewhere around 15% to 20%. So, it's much better. That's why we make the decision to raise the learning center expansion guidance by 30%. And so, I think it's a good trade off. This round -- in this quarter and next -- in Q3, Q4, even for the whole year in fiscal year 2024, we opened more learnings center, 30%, but it will drive the top-line growth up in the new fiscal year 2025. And I believe that for the whole business education business, the whole margin of the education business will be improved in the fiscal year 2024 because of the better utilization and the higher student retention. DS Kim -- JPMorgan Chase and Company -- Analyst Thank you, sir. I think it's not just good, it's amazing trade-off to have. But if I may follow-up here, like do you think that faster ramp-up or faster breakeven is just a timing thing, earlier recovery or earlier ramp-up in utilization and/or do you think that even after the ramp up, the ultimate level of center level margin can be actually higher than the back end the days, the academic, i.e. -- like on a central level, do you think that five years down the road, some of the non-academic centers can make more than 20% margins better than the K-9 academic of the past or just the timing is all there? Stephen Yang -- Executive Vice President, Chief Financial Officer Both. As I said, it will take the shorter time to get the breakeven point. This is number one. And number two is theoretically, I think the ultimate for the margin of the new learning centers, I think will be a little bit higher than a couple of years ago, so it's a good trade-off for us to open more learning centers for non-academic courses or even for the overseas related business. DS Kim -- JPMorgan Chase and Company -- Analyst Sure, sir. It's an amazing trend, and congrats again. Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, DS. We have now approached the end of the conference call. I'll now turn the call over to New Oriental's executive president and CFO, Stephen Yang, for his closing remarks. Stephen Yang -- Executive Vice President, Chief Financial Officer Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you. Answer:

New Oriental's FY 2024 third-quarter results earnings conference call

Operator Good evening, and thank you for standing by for New Oriental's FY 2024 third-quarter results earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Sisi Zhao -- Director, Investor Relations Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter 2024 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, Stephen Yang, executive president and chief financial officer, and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are pleased to announce that New Oriental has achieved robust growth this quarter that have surpassed our expectations. The remarkable top-line performance this quarter has spoken volumes about sustained recovery across our diverse business lines, while steady expansion of our new business made healthy contributions to the company's revenue, invigorating our portfolio of innovative endeavors. New Oriental's bottom-line performance has achieved encouraging yields with operating margin and non-GAAP operating margin reaching 9.4% and 11.7% for this quarter, respectively. Thanks to the combined efforts of our restructured business model by the utilized resources, and streamlined cost structure. Bolstered by a vital growth across all business lines, our commitment to maintaining a healthy market share growth stands firm as we strive to create sustainable value for our customers and shareholders in the long term. Now, I would like to spend some time to talk about the quarter's performance across our remaining business lines and new initiatives to you in detail. Our key remaining business have tended a promising upward trajectory, while the new initiatives secure positive momentum. Breaking it down, the overseas test drive business recorded a revenue increase of about 53% in dollar terms or 59% in the RMB terms year over year for the third fiscal quarter of 2024. The overseas study consulting business recorded a revenue increase of about 26% in dollar terms or 31% in RMB terms year over year for this quarter. The adults and university students business recorded a revenue increase of 53% in dollar terms or 60% increase in RMB terms year over year for this quarter. Our multipronged new initiatives, which mostly revolve around facilitating students all-around development, have continued to deliver continued growth and meaningful profit to the company. Firstly, the nonacademic tutoring courses, which we have offered in around 60 existing cities, focuses on cultivating students' innovative ability and comprehensive quality. The markets we have tapped into have recorded elevated penetration, especially in higher-tier cities, with a total of approximately 355,000 student enrollments reported in this quarter. The top 10 cities in China contributed over 60% of this business. Secondly, the intelligence learning system and device business, a service designed to provide a tailored digital learning experience for students to enhance learning efficiency, has been adopted in around 60 EC. We have observed enhanced customer retention rate and the scalability of this new initiative business with approximately 188,000 active paid users recorded in this quarter. The revenue contribution of this initiative from the top 10 cities in China is over 55%. Our smart education business, educational material, and digitalized smart study solutions have continued to contribute material results to the overall advancement of the company. In summary, our new educational business initiatives reported a revenue increase of 73% in dollar terms or 80% increase in RMB year over year for this quarter. In addition, as mentioned in the past quarters, we inaugurated a newly integrated tourism-related business line as one of our creative venture tailored with diverse offerings of culture trips studied toward in China and overseas as well camp education. New Oriental's cultural tourism business shares the spirit to provide premium quality of travel experiences that are infused with joy from cultural exchange, knowledge sharing, and personal fulfillment. Within the new business line, our study tour and research camp business for students of K-12 and university age achieved inspiring growth in this quarter. We have conducted study tours and research camps in over 50 cities across the country with the top 10 city in China offering over 55% of revenue share of this business. We also piloted a number of top-notch tourism offerings to expand our reach to all age group, including the middle-aged and elderly individuals across 25 featured provinces as we are still at the preliminary stage of the planning, testifying, and evaluating the availability of this business in select regions. We will keep you posted should there be timely updates. With regards to our OMO system, online merge offline system, we have persist in revamping our platform and leverage our educational infrastructure and technology edge on remaining key business and new initiatives with the vision to provide advanced diversified education services to customers of all ages. During this reporting period, a total of $25.5 million has been invested in our OMO teaching platform, which equips us with the flexibility to maintain unrivaled service to students. With regards to the East Buy, East Buy attained sustainable growth momentum in this quarter. Thanks to a rapid development of its private label products. As part of the ongoing expansion strategy from early venture like East Buy, we have devoted substantial investments to support the growth of the company, including the optimization of the East Buy multi-platform strategies, supply chains, product offerings, as well as quality control to safeguard on product quality and regions. We're glad to see that East Buy has further enlarged its customer base following the latest establishments of Yuhui channel [Inaudible]. In addition, further enhancements in East Buy have been made through our comprehensive optimizational structure strategy enhanced for professional talents and app upgrades, all of which strengthened East Buy's private label products and live streaming e-commerce. The resources we committed into East Buy have thankfully nourished improved user management and loyalty, and we look forward to leverage these inputs to propel further growth of the platform that promise premium offerings and sustainable growth for our customers. With regards to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial statement with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.8 billion. On July 26th, 2022, the company's board of directors offers a share repurchase of up to $400 million of the company ADS were common shares during the period from July 28th, 2022 through May 31st, 2023. The company's board of directors further authorize the company to extend its share repurchase program launched in July 2022 by 12 months to May 31st, 2024. As of yesterday, April 23, 2024, the company repurchased an aggregate of approximately 6 million ADS for approximately $195.3 million from open market under the share repurchase program. Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead. Sisi Zhao -- Director, Investor Relations OK. Now I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $1,093.9 million representing a 59.1% increase year over year. Non-GAAP operating cost and expenses for the quarter, which excludes share-based compensation expenses, were $1,066.4 million, representing a 60.1% increase year over year. The increase was primarily due to the cost expenses related to substantial growth in East Buy's private label products and live streaming e-commerce business. Cost of revenue increased by 74.5% year over year to $644.8 million. Selling and marketing expenses increased by 57.1% year over year to $161.3 million. G&A expenses for the quarter increased by 33.6% year over year to $287.8 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.6 million, representing a 40.7% increase year over year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 28.3% to $27.5 million in the third fiscal quarter of 2024. Operating income was $113.4 million, representing a 70.6% increase year over year. Non-GAAP income from operations for the quarter was $140.9 million, representing a 60.3% increase year over year. Net income attributable to New Oriental for the quarter was $87.2 million, representing a 6.8% increase year over year. Basic and diluted net income per ADS attributable to New Oriental were $0.53 and $0.52, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $104.7 million, representing a 9.8% increase year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.53 and $0.52, respectively. Net cash flow generated from operations for the third fiscal quarter of 2024 was approximately $109.4 million, and capital expenditures for the quarter were $80.1 million. Turning to the balance sheet. As of February 29th, 2024, New Oriental had cash and cash equivalents of $2,013.6 million. In addition, the company had $1,570.8 million in term deposits and $1,175.3 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services for goods are delivered at the end of the third quarter of fiscal year 2024 was $1,521.7 million, an increase of 30.8% as compared to $1,163.2 million at the end of the third quarter of last fiscal year. Now, I'll hand over to Stephen to go through our outlook and guidance. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you, Sisi. As we progress into the fourth quarter, which is typically expected as a slower quarter comparing with the third quarter in terms of the revenue growth and profitability due to various seasonality of our key educational businesses, we place confidence in sustaining a healthy growth, building on the collective breaks of our routed foundation, brand advantage, and differential teaching resources. Our strategic focus and investment approach aimed at achieving satisfactory operating profit in the rest of the year, coupled with the year-over-year margin expansion for the full year. As always, we will work diligently to adhere to the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position to further strengthen our edge on all business lines and creative endeavors. With regards to the learning center and classroom space as part of the continued evolution of our offering across business lines, we plan to increase our capacity by around about 30% for this fiscal year, by which a reasonable amount of new learning centers is expected to be opened while classroom areas of some existing learning centers will be expanded in a few major cities. Most of the new openings will be launched in the city with better top-line and bottom-line performance in this year. At the same time, we will continue to hire new teachers and staff to match our capacity expansion and support our revenue growth, especially for new education business initiatives and newly integrated tourism-related business. We expect total net revenue in the fourth quarter 2024, March 1st, 2024 to May 31st, 2024, to be in the range of $1,101.5 million to $1,127.3 million, representing a year-over-year increase in the range of 28% to 31% in dollar terms. The projected increase of revenue in our functional currency, RMB, is expected to be in the range of 34% to 37% for the fourth quarter of this fiscal year 2024. To conclude, New Oriental is determined to persistently expand our existing offerings and fertilize new endeavors, dedicating strategic inputs to sharpen our capability. We will also continue to devote reasonable resources on research and application of new technologies such as AI and ChatGPT into our offerings, a strong belief that we could uplift our strength to favor further growth, better margin, and operating efficiency. At the same time, we will also continue to seek guidance from and cooperate with the government authorities in various provinces and municipalities in China in alignment with this effort to comply with the relevant policies, regulations, and measures as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measure as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you. Questions & Answers: Operator Thank you. The question-and-answer session of this conference call will start in a moment. In order to be fair to our colleagues who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. [Operator instructions] Your first question comes from the line of Felix Liu from UBS. Please ask your question, Felix. Felix Liu -- UBS -- Analyst Hi, good evening, management. Thank you very much for taking my question. And congratulations on the strong growth and guidance. My question is on growth. So first, I understand that Q4, we will have a bit of seasonality in the education business. But maybe could you just share more color on the growth in different business segments in Q4? And also, you mentioned that the capacity expansion guidance for the year is now lifted to 30%. How do you see that capacity expansion pace going forward? Do you think 30% is a sustainable expansion that we can maybe keep for two to three years? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you, Felix. Yeah, as you know, we built the top-line guidance this quarter a lot, just like the past couple of quarters. And as for the revenue guidance in Q4, which seems to be a little bit lower than the Q3 year-over-year revenue growth, there are three reasons. Number one, as always, we're quite conservative to give the guidance. So, this is number one. And number two, yeah, as you know, Q4 is typically expected as a slower quarter compared to the Q1 and Q3. And because of the seasonality, for example, like for the K-12 related business and the overseas related business, typically, Q4 is the low season. And number 3 is, in the last year, Q4, without the impact of the pandemic, I think our business in last year Q4 was basically back to normal. So, that's why we think the Q4 top-line guidance seems to be a little bit lower. But in my personal view, I think the guidance in dollar terms is 28% to 31%. In RMB terms, it's 34% to 37%. I think it is still very strong. And I think in the coming new fiscal year, that means that fiscal year '25, we're quite optimistic on revenue growth with the margin inflation for the whole fiscal year '25. As for the expansion plan, yes, we raised the guidance of the capacity expansion by 30% year over year this time because, actually, we're taking market share. And I think the demand from the customers is very strong, and that's why we raised the guidance of the expansion plan again this quarter. And going forward, next year, I think we will keep almost the same pace to open the new learning centers because we will make the analysis of the market demand and the supply. So, I think we are still on the pace to take more market share. And as for the revenue growth of the different businesses, we disclose it in next con call. Sisi Zhao -- Director, Investor Relations Just roughly, our key business lines, like overseas related, including the test prep and consulting will grow roughly about 15% to 20% range. And domestic test prep university students business revenue growth will be around 20% to 25%. And high school tutoring will grow moderately. And the new business, new initiative, which is the key growth driver, will be over maybe 60% revenue growth. This is based on the exchange rate estimated by us when we do the projection. Felix Liu -- UBS -- Analyst Very clear. Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Felix. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen. Yiwen Zhang -- China Renaissance -- Analyst Good evening, management. Thanks for taking my question. So, my question is regarding our margin. If we look at the group level adjusted operating margin, it was 11.7%, which was flattish on a Y-o-Y basis. I understood a lot of incremental opex was due to expansion. So, if we just look at education-related margin, how does it expand on Y-o-Y basis? And how would you expect it to trend in the next few quarters? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Yeah. The group's non-GAAP OP margin was flattish in this quarter. But within the education business, I think we're seeing the meaningful GP margin and non-GAAP OP margin expansion for education business in this quarter. I think -- thanks to the newly business restructured model and the higher utilized resources and the better utilization for the learning centers and the streamlined cost structure, so it made the education business margin expansion again this quarter. And so, going forward, I think in the coming Q4 and even for the whole year, the new year, fiscal year '25, I think we do have the operating leverage in hand. Yes. As you know, we raised the guidance of the learning center expansion by 30%, and we hired more teachers and staff to match with the new expansion. But I think the top-line growth in the new fiscal year '25 will be very strong. And we do have a leverage in fiscal year '25. So, we expect you will see the margin expansion with the healthy top-line growth for education business in the new fiscal year '25. And then the East Buy, yes, I think the cost of expenses, especially for the selling and marketing expenses, this quarter increased. It was partly due to the East Buy's investment. And yes, I think you saw a very strong growth in top line, especially for the private label products and the e-commerce business. And I think East Buy has devoted substantial investment to support the growth of the company, including like the optimization of the multi-platform strategies in [Inaudible] and the other platform, supply chain and product offerings and quality control. And also, East Buy recruited some more of the professional talent people from the market. And so, we are optimistic on East Buy's development going forward. And we look forward to leverage this investment with input this time and going forward. So, in summary, the margin profile for the whole group -- so we are quite optimistic about the margin expansion for the whole group for the education business in fiscal year '25. And also as well, we do think the East Buy will generate more revenue, top-line growth, and more profit to the company going forward. Yiwen Zhang -- China Renaissance -- Analyst OK, thank you. That's very clear. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Yiwen. Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question, Lucy. Lucy Yu -- Bank of America Merrill Lynch -- Analyst Thank you, Stephen, Sisi. So, my question is still on the margins. So, it looks like, judging from the minority interest, that East Buy might be loss-making for the quarter. So, how should we think about the East Buy margin volatility impact on a group level in the upcoming quarter and upcoming fiscal year? So, Stephen, how do you plan those margins for the next fiscal year? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Lucy, I'm glad to hear from you, your questions about the East Buy. But I'm afraid I'm unable to share with you about the latest financial results at this moment and our guidance for the East Buy. And in the next quarter, in July, I think East Buy will announce the full-year report -- half-year report and the full-year report. And so, at that time, I think the management of [Inaudible] of East Buy will share more color with you about the margins and the top line growth. Yes, but I must mention that we are still quite optimistic about the East Buy's investment in this quarter. And over the long run, I think the East Buy will bear fruit from this investment and will generate more revenue and profit to the whole group, Lucy. Lucy Yu -- Bank of America Merrill Lynch -- Analyst Thank you, Stephen. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Lucy. Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question, Tian. Tian Hou -- T.H. Capital -- Analyst Hello. Yes. Hi, Steve and Sisi. The question is related to the high school learning center expansion and also the non-academic course learning center. What's the retention rate and utilization rate for both of them? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer I think for the utilization rate and the student retention rate for both the high school business and the non-academic courses for K-9 are still improving year over year, actually quarter by quarter. And so, the good news for us is we're seeing the trend is still there. And so, going forward, we will -- I think we will see the higher -- the utilization rates for the -- for this business for the existing learning centers and the higher the student retention rates. And a couple of years ago, typically, it will spend us for 12 months to get the breakeven point after we opened the new learning center. But now, I think, roughly, it will take the half year, let's say, the six months to kind of breakeven point. And so, I think going forward, we expect the better -- the higher utilization rate for learning centers and the higher students retention rate for all these lines. Thank you. Tian Hou -- T.H. Capital -- Analyst Yeah. So, one follow-up question. So, before the double reduction, so when you guys do the learning center expansion, so there's a tricky line. So, how much you do the expansion, if you do a little bit bigger more than will be impact the gross profit margin? So, I saw this quarter, the gross profit margin relative to last year's same time was down like a 5 percentage points. Is that because the learning center expansion, or is it because the East Buy? Stephen Yang -- Executive Vice President, Chief Financial Officer Yes. I think the learning center expansion -- we raised again the learning center expansion by 30%. I think it's the results that we analyze the whole picture of this business for the last three -- two to three quarters. And as I said, on demand side is very strong, especially for the non-academic courses for the kids. And on the competition side, the competition environment is different compared to a couple of years ago. And so, I think -- and the key is, we only choose the top performance cities both the bottom line -- the top line and bottom line to allow them to open more learning centers or extend the new classroom area for the existing learning centers. So, I think it will not drag the whole margin. In opposite, it will help the margin expansion going forward. Tian Hou -- T.H. Capital -- Analyst Got it. Thank you so much, Stephen. Good quarter. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, Tian. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy. Timothy Zhao -- Goldman Sachs -- Analyst Great. Hi, Stephen. Hi, Sisi. Thank you for taking my question. My question is regarding the cash flow statement. So, basically, one is on the operating cash flow. I noticed that for this quarter, I think the operating cash flow drop a little bit on a year-on-year basis. Just wondering if you can share some color on the rationale or the reason behind that? And second, also on the financing cash flow, I do notice that the existing share repurchase program is about to expire. Just wondering regarding your capital allocation and shareholder return? Any thoughts on the shareholder policy going forward in terms of potential dividend or further share repurchase programs? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer As for the operating cash flow, I think you know I suggest the investors to make the analysis of the cash flow by year on year, not Q on Q because the business seasonality where the students enrollment window change quarter by quarter. So, that's why I suggest to you guys to make the analysis year on year. So, if you saw the deferred revenue balance year on year, the increase is still very strong. So, yes, that's it. And that's why we give the very strong -- the top-line guidance for Q4, yes, even though Q4 is weak -- is a slow quarter, yes. And as for the share buyback plan, yes, I think we keep to create more value to the shareholders. And I think we will keep buying the share back. And this round, we announced the share repurchase plan two years -- roughly two years ago. And we finished almost half $195 million. And I think we'll keep buying in this quarter. And in the -- this fiscal year end, I think we will discuss with the board to decide whether or not to extend the share repurchase plan. And -- but historically, we made a couple of times share buybacks and a couple several times the special dividend. So, our aim is to create more value to the investors as the capital return, either share buyback or dividend. Thank you, Tim. Timothy Zhao -- Goldman Sachs -- Analyst Thank you. Thank you, Stephen. That's helpful. Operator Thank you, Timothy. Our next question comes from the line of Xinyi Wang from CICC. Please ask your question, Xinyi. Xinyi Wang -- CICC -- Analyst Hi, Stephen and Sisi. So actually, I had a question about the financials. So, we saw a larger loss from equity method investments this quarter as well as less investment interest this quarter compared to same period of last year. So, I'm just wondering which factors led to these changes? Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer I think, yes, we -- in this quarter, we made to the investor company in loss in this quarter. So, it -- I think we do have a one-time impact on the very bottom line this quarter. I think all those two companies was negatively impacted by the deduction policy two and a half years ago. And -- but this is one time. It's not-it's just one time. Yes. Xinyi Wang -- CICC -- Analyst Thank you. Just a follow-up question about the -- also, we saw less investment interest this quarter Q on Q. So, I'm just wondering the reason. Stephen Yang -- Executive Vice President, Chief Financial Officer I'm sorry. Can you repeat again? Less than what? Xinyi Wang -- CICC -- Analyst Yes, as you saw less other income, which I suppose is mainly our investment interest this quarter only decreased. Stephen Yang -- Executive Vice President, Chief Financial Officer Yes. The -- I think the interest rate in China, you know, it has been down in this quarter. And so, it will -- I think it impacts some interest income. Sisi Zhao -- Director, Investor Relations Actually, the interest income is -- the absolute dollar number are similar with previous one to two quarters. Stephen Yang -- Executive Vice President, Chief Financial Officer Yes. Sisi Zhao -- Director, Investor Relations So, it's pretty stable. Xinyi Wang -- CICC -- Analyst Understood. Thank you, Stephen and Sisi. Congrats on the results again. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you. [Operator instructions] All right, we are now approaching the end of the conference call. And we do have one more question from DS Kim from JPMorgan. Please ask your question, DS Kim. DS Kim -- JPMorgan Chase and Company -- Analyst Hello, sir. Good evening, and congrats on amazing top-line growth again. Actually, I wanted to ask about margins and expansion. I think you're right to discuss all of that. So, just wanted to follow up on one small thing, if that's OK. You mentioned earlier, that new center expansions are now could be a margin accretive because it's primarily expansion of the existing center. But if we only look at, say, newly opened location, newly opened centers for non-academic courses, how long do you think -- how long does it take for those new centers to hit breakeven and then to ramp up to the full level on the center level? I think back in the days, it took about a year to turn breakeven for the new learning center K-12 AST and another a couple of more quarters to fully ramp up. And I'm wondering how this has changed now versus now that the courses has changed primarily for non-academic? Stephen Yang -- Executive Vice President, Chief Financial Officer I think now, typically, on average, it will take the six months to get a breakeven point for the new work, that means went up the learning centers even more faster. And so, in the second year, typically, the margin of the new learning centers depends on the different areas. I think the margins of that new learning centers to get somewhere around 15% to 20%. So, it's much better. That's why we make the decision to raise the learning center expansion guidance by 30%. And so, I think it's a good trade off. This round -- in this quarter and next -- in Q3, Q4, even for the whole year in fiscal year 2024, we opened more learnings center, 30%, but it will drive the top-line growth up in the new fiscal year 2025. And I believe that for the whole business education business, the whole margin of the education business will be improved in the fiscal year 2024 because of the better utilization and the higher student retention. DS Kim -- JPMorgan Chase and Company -- Analyst Thank you, sir. I think it's not just good, it's amazing trade-off to have. But if I may follow-up here, like do you think that faster ramp-up or faster breakeven is just a timing thing, earlier recovery or earlier ramp-up in utilization and/or do you think that even after the ramp up, the ultimate level of center level margin can be actually higher than the back end the days, the academic, i.e. -- like on a central level, do you think that five years down the road, some of the non-academic centers can make more than 20% margins better than the K-9 academic of the past or just the timing is all there? Stephen Yang -- Executive Vice President, Chief Financial Officer Both. As I said, it will take the shorter time to get the breakeven point. This is number one. And number two is theoretically, I think the ultimate for the margin of the new learning centers, I think will be a little bit higher than a couple of years ago, so it's a good trade-off for us to open more learning centers for non-academic courses or even for the overseas related business. DS Kim -- JPMorgan Chase and Company -- Analyst Sure, sir. It's an amazing trend, and congrats again. Thank you. Stephen Yang -- Executive Vice President, Chief Financial Officer Thank you. Operator Thank you, DS. We have now approached the end of the conference call. I'll now turn the call over to New Oriental's executive president and CFO, Stephen Yang, for his closing remarks. Stephen Yang -- Executive Vice President, Chief Financial Officer Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health first-quarter earnings conference call. [Operator instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Steve Tanal -- Vice President, Investor Relations Good morning, and welcome to Elevance Health's first-quarter 2024 earning call. This is Steve Tanal, vice president of investor relations. And with us this morning on the earnings call are Gail Boudreaux, president and CEO; Mark Kaye, our CFO; and Pete Haytaian, president of Carelon; Morgan Kendrick, president of our Commercial Health Benefits business; and Felicia Norwood, president of our Government Health Benefits business. Gail will begin the call with a brief discussion of the quarter, recent progress against our strategic initiatives, and our updated outlook for the year. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, eleventhealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elvanse Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail. Gail Boudreaux -- President and Chief Executive Officer Thank you, Steve, and good morning, everyone. We appreciate you joining today's earnings call. I'm pleased to report that Elevance Health delivered first-quarter GAAP earnings per share of $9.59 and adjusted diluted earnings per share of $10.64, reflecting growth of 12.5%. These results reflect disciplined execution of our strategic initiatives during a dynamic time for our industry. Given the solid start to the year, we increased our guidance for adjusted earnings per share by $0.10 to be greater than $37.20. We are making significant progress on our enterprise strategy in 2024 to accelerate capabilities and services, invest in high-growth opportunities, and optimize our health benefits business. On Monday, we announced the next step in our journey to expand access to high-quality patient-centered value-based care in our local market. After years of experience working closely with care providers to advance value-based care, we are confident that our hyper local approach, which aligns the right incentives, real-time patient information, and clinical decision support tools delivers better health outcomes, improve consumer and provider experience and greater affordability. Accordingly, we entered into an agreement to form a strategic partnership with Clayton Dubler and Rice to build a payer-agnostic advanced primary care and physician enablement business, serving consumers across commercial, Medicare and Medicaid health plans, consistent with the diversity of our own medical membership. Upon formation, the combined company will serve nearly 1 million consumers. The new venture will bring together the strength of three innovative care provider entities, including certain care delivery and enablement assets of Carelon Health. Importantly, we have worked closely with these companies and their management teams and are confident in the value they deliver for our Medicare, Medicaid and commercial health plan members and employers. We're excited to collaborate with CD&R and a broad range of care provider partners to accelerate innovation, enhance healthcare experiences and improve health outcomes for consumers. The collaborative development of the business will advance our enterprise strategy by accelerating the provision of value-based care for our members and consumers more broadly, with our Carelon businesses providing capabilities to integrate and personalize the care delivered. In time, Elevance Health will have full ownership of what we expect will be a leading platform for value-based care delivery and physician enablement at scale across commercial group, ACA, Medicare, and Medicaid health plans, advancing our role as a lifetime trusted health partner for the consumers we are privileged to serve. In the first quarter, we made tangible progress on our strategic initiatives, notably in Carelon, where we continue to scale our flywheel for enterprise growth. Carelon Rx closed its acquisition of Paragon Healthcare, a leading provider of infusion services. We are looking forward to expanding its geographic reach and therapeutic coverage to serve more consumers and Elevance Health members for years to come. As Carol on Rx furthers our enterprise commitment to address the whole health needs of our members, notably those with chronic and complex conditions, we are accelerating the build-out of our own specialty pharmacy. For example, we recently entered into an agreement to acquire Kroger Specialty Pharmacy business, the sixth largest specialty pharmacy in the country. The acquisition will bolster the growth of our existing pharmacy and infusion businesses, while increasing Carelon RX's access to limited distribution drugs. Carelon Services is also up to a strong start this year as we implemented and were awarded multiple new contracts, a testament to the value Carillon Services provides. For instance, Carillon Behavioral Health was selected by the Maryland Department of Health to provide behavioral health management services to more than 1.7 million Medicaid members starting in 2025. And in California, our team will partner with the public school system to expand behavioral health management services for students later this year. This initiative represents a major step forward in addressing the critical need for mental health support in educational settings and demonstrates our commitment to improving the health and well-being of our communities. Momentum with external clients is building and underscores the value Carelon services is creating for health plan customers to better consumer experiences and improved affordability. Our health benefits business is similarly off to a solid start. Commercial margin continues to recover from pandemic air lows, and we are enjoying momentum in membership growth, notably in our individual ACA plans and among large self-insured employers. Existing clients are demonstrating their confidence in our offerings by consolidating their business with us after years of offering our solutions side-by-side with those of our competitors. In our Medicaid business, we were pleased to be selected in Florida and Virginia to serve beneficiaries across traditional and complex populations statewide, including those with serious mental illness in Florida, and sole source foster care in Virginia. These awards and their pull-through opportunities for Carelon services underscore the distinct value Elevance Health delivers. In the first quarter, our Medicaid business performed in line with our expectations. We estimate that nearly 90% of our members have had their eligibility redetermined. Further, our team continues to work tirelessly to maximize access to care for Medicaid members subject to eligibility redetermination, helping them to understand their options in the face of ongoing logistical and operational challenges. Holistically, we are proud of the work we have done in contacting more than 4.5 million Medicaid beneficiaries through our omnichannel approach. Nonetheless, a majority of members who have lost coverage for administrative reasons have not yet returned. We're seeing a gradual increase in Medicaid reenrollment and anticipate continued upticks in rejoiner rates as more Medicaid beneficiaries recognize their need to reenroll, aligned with the trends that we have observed in recent months. Turning to Medicare. We were pleased to announce last month that CMS updated the Star scores for four of our contracts, which increased the percentage of our members in four-star or higher-rated contracts to nearly 50%, up from 34%. While this will improve our star quality bonus revenue in 2025, our goal is to have our star quality ratings at the high end of all plans in our local markets, which will be a multiyear journey. Funding for Medicare in 2025 will be challenging for the entire industry. We are disappointed that CMS has decided to cut Medicare Advantage rates for the second consecutive year, which will negatively impact seniors, notably, those at the lower end of the income spectrum who rely on the program for their health and well-being. While we remain committed to serving seniors through plan offerings that focus on their unique needs, we will also continue to demonstrate discipline in our Medicare Advantage bids, seeking to balance growth and margin while continuing to deliver exceptional value for seniors. Across the enterprise, our focus on delivering whole health for the consumers we are privileged to serve remains steadfast. We recently released our 2023 Advancing Health Together Progress Report, which underscores the strides we are making through value-based care. The report showcases examples of our success, facilitated by the unique partnerships that we've created with care providers across the healthcare ecosystem. I'd like to highlight a particular achievement that underscores our innovative approach to improving quality and value in healthcare. Recently, Elevance Health was honored by the NCQA with its innovation award featuring quality accelerators in healthcare for leading-edge strategies that improve quality and value, specifically for our obstetric specialty provider enablement program. The impact of these value-based partnerships and clinical interventions has led to consistent improvements in health outcomes and costs, including reducing preterm birth rates by 12% and and low birth weight babies by 20%, all while improving access to timely prenatal care and postpartum follow-up. For those interested in learning more about these transformative initiatives and other examples of our progress, I encourage you to visit our Advancing Health Together website. In closing, I want to extend my deep gratitude to our 100,000 associates who embody our purpose of improving the health of humanity through their tireless commitment. It's also heartening to see their efforts recognized externally. We were honored to be named to Fortune Magazine's 100 Best Companies to Work For list for the fourth year in a row. We were also included in their world's most admired companies and America's most innovative companies list. With that, I'd like to turn the call over to our CFO, Mark Kaye, to provide more on our operating results and outlook. Mark? Mark Kaye -- Chief Financial Officer Thank you, Gail. As you heard earlier, our first quarter results reflect solid performance and drive dynamic operating environment. We ended March with 46.2 million members, reflecting Medicaid attrition, partially offset by ongoing momentum in our commercial business. During the quarter, we added nearly 400,000 commercial fee-based members, driven by strong retention and a successful national account selling season and over 200,000 individual ACA members given our attractive product positioning and coverage transitions away from Medicaid. Medicare Advantage membership declined slightly, as expected, given select market exits and the collective actions we continue to take to establish a strong foundation for profitable and sustainable growth over the long term. Operating revenue for the quarter was $42.3 billion, in line with our expectations. The consolidated benefit expense ratio of 85.6% improved 20 basis points year over year due to disciplined premium rate adjustments to reflect medical cost trends and the ongoing recovery of commercial margins from pandemic-era lows. The adjusted operating expense ratio was 11.4%, consistent with the first quarter of 2023, indicative of our commitment to disciplined expense management and investment prioritization. Solid performance and growth in operating gains for both our Health Benefits and Carelon segments of $138 million and $72 million, respectively, led to growth in consolidated adjusted operating gains of over 7%. Carelon Services had a particularly strong start to the year, with revenue and operating earnings growth driven by risk-based service line expansions and effective cost management especially in our Carelon insights and Carelon Behavioral Health businesses, further accelerating our enterprise flywheel or growth. Operating cash flow in the first quarter was $2 billion or approximately 0.9 times net income. With respect to the balance sheet, we ended the quarter with a debt-to-capital ratio of 39.4%, in line with our target range preserving ongoing capital allocation flexibility. We repurchased 1.1 million shares of common stock for approximately $566 million during the quarter, underscoring our confidence in the intrinsic value of our shares and the long-term value proposition. We maintained our prudent and consistent approach to reserving. Days in claims payable stood at 49 days as of March 31st, up three days from the prior year quarter. This increase was largely driven by higher reserves associated with slower claims receipts due to an industrywide disruption that it acted a major claims clearinghouse. As a reminder, we expect our days in claims payable to be in the low 40s range long term. I'd also like to take a moment to provide additional color on our strategic partnership with Clayton, Dubilier, and Rice. We are excited to partner with CD&R to scale what will be a best-in-class payer-agnostic advanced care delivery and enablement platform catering to the unique needs of consumers regardless of their form of coverage. This collaboration will allow us to advance our local oriented approach to care delivery based on the unique needs of the communities, consumers, and employers we are privileged to serve. At the onset, Elevance Health will hold a significant minority position in the combined business with a clear path to first majority and then full ownership in approximately five years. The formation of the strategic partnership includes our capital contribution in the form of cash and equity interest in certain care delivery and enablement assets of Kion Health as well as the conveyance from CD&R of our pre-health and millennium physician group and is subject to customary regulatory approvals. Overall, we are pleased with our first quarter performance and a solid start to the year momentum in our health benefits and Caron businesses and the balance and resilience of our enterprise underscores our confidence in delivering another year of growth in adjusted diluted earnings per share consistent with our long-term compound annual growth rate of at least 12%. As we look forward to the rest of 2024, our focus will remain on successfully executing our strategy as we accelerate capabilities and services, invest in high-growth opportunities and optimize our health benefits business. And with that, operator, please open the call for questions. Questions & Answers: Operator [Operator instructions] For our first question, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks so much. Let me ask a little bit about the value-based care strategy and the execution. That's obviously a really big step forward. Could you talk a little bit about kind of the vision and scope of this? Is this going to be more focused on enablement or in particular markets is practice ownership going to be important? And then maybe if you can kind of color in the picture a little bit as far as leadership names, which Carelon assets are going to be contributed. And near term, do you see -- which areas of leverage across the membership base of Elevance do you see this being able to penetrate most effectively? Gail Boudreaux -- President and Chief Executive Officer Well, great. Thanks so much for the question, Lance. First, as I shared in my opening comments, we're very excited about this partnership with CD&R because it is very much the next step in our journey to bring value-based care to more consumers, specifically about partnering closely with care providers and we see it as absolutely consistent, driving greater risk adoption and advancing our specialty enablement strategy as well. So it's very much a first step there. And as you said in your question, this aligns very closely with our strategy and our broad partnership focus to work directly with care providers in our local markets. And our goal again remains to increase more downside risk sharing in our value-based arrangements. I think take a step back, what makes this approach unique is that we're enabling value-based care across all lines of business. So as I shared, the combined company is going to be payer agnostic, and it's focused on enabling advanced primary care locally. And from the get-go, it's going to serve nearly 1 million consumers, and that's going to be across our commercial, Medicare and Medicaid health plans upon formation. Another thing I think is important is that it provides the opportunity to pull through Carillon services to support those patients and accelerate that specialty enablement for complex and chronic patients. We have been working with these management teams and these assets for some time. and feel very confident about the alignment of our goals to serve as a lifetime trusted health partner. The goal gets back again to focusing on whole health, the needs of consumers driving greater affordability, and fundamentally a differentiated consumer experience. A few things about the partnership too, and again, what makes it different for patients. They're going to have access to integrated teams. We're looking at personalized navigation, expanded digital assets, and specialized services. The primary care model is going to be built to be very distinctive, including community practices purpose still clinics, high-risk clinics, and digitally enabled care model. So you can see it's a fairly comprehensive approach. And the last thing I'd say is that employers in market have not historically had access to a lot of these capabilities. And we have seen through the work that we're already doing that this dedicated primary care capacity that integrates the clinical and benefits navigation with their specific health and wellness strategies is truly differentiating. So again, this is being purpose built to work across all of the aspects of Medicare, Medicare commercial, not just a single business. So very much excited. We see this as an opportunity to accelerate innovation in the space and improve healthcare outcomes and consumer experiences. So thanks very much for the question. Next question, please. Operator Next, we'll go to the line of A.J. Rice from UBS. Please go ahead. A.J. Rice -- UBS -- Analyst Hi, everybody, and thanks for the question. I appreciate Mark's comments about build up a little bit on date payable, but just maybe to flush out a little bit more of the impact of the change cyberattack on results. Do you have a sense as to what percentage of your claims that you normally see in the first quarter may still be out there. Do you feel like you've got a good handle on that. And anything when you address that in terms of your normal IBNR and maybe you've got a significantly higher level of IBNR because you're allowing for the change? And if you can break out what you're actually seeing a little bit on cost trends versus needing to sort of provision for the unknowns of the change cyber attack. Gail Boudreaux -- President and Chief Executive Officer Thanks for the question, A.J. Let me maybe provide some broad-based comments and then I'll turn it over to Mark to provide a little more specificity on your questions. I want to say, first and foremost, I'm really proud of our teams and how they responded to this issue that occurred with change quickly and effectively first, to protect our members and their data and also help our care providers maintain their operations and cash flow. Importantly, I think it's important to note that from a perspective, we were not as significantly impacted by this, and we are back to normal operations in terms of claims flow. Importantly, another thing that's really important to understand is our prior authorization provider payments and pharmacy claims were not materially impacted as well because they don't go through change. We don't use change significantly for those. So with that, I'll turn it over to Mark to provide a little more comments. But I think framing it overall, we feel that our teams acted quite quickly and really proud of our ability to work in the ecosystem to help support them. Mark Kaye -- Chief Financial Officer As you just heard from Gail, we acted quite responsibly to several network connections to chain healthcare and to protect the data of both our members and providers. While we initially observed a 15% to 20% reduction in the daily volume of electronic data receipts from providers, most of which are claims related. In recent weeks, our extensive efforts have led to a significant catch-up in outstanding claim volumes. And for the quarter, we are effectively caught up on claims receipts and are now working to complete all necessary claims adjudication and processing activities. As such as part of the normal reserving practices, we've reflected the appropriate impact of the industrywide disruption related to Change Healthcare in the reserves we reported for our first quarter financials and that ensures both consistency with historical practice improvements. And then to your specific question, the impact here was to increase our sequential days in claims payable quarter result by approximately 1.7 days. Gail Boudreaux -- President and Chief Executive Officer Thank you. Next question, please. Operator Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead. Josh Raskin -- Nephron Research -- Analyst Hi. Thanks. Good morning. I wanted to get back to the partnership with CD&R. And specifically, what alternatives did you evaluate and consider before coming to this arrangement? I think in the past, you were stressing more, and I've heard it today as well that focus on specialty care. So how does that fit in and sort of get bolted on on top of this? And maybe where does this fit into your longer-term national approach? And then how important was it that you could serve multiple memberships and just Medicare Advantage. Gail Boudreaux -- President and Chief Executive Officer Yes. Thanks for the question, Josh, because I think it very much aligns to the strategy that we've laid out. I guess, first and foremost, it's payer agnostic, and it was really important. We've always said that our goal, given the diversity of our business mix to serve all members across all business lines. given the depth and density of our membership in our local markets, that is very important. We had a partnership already working with many of these assets. So as I said, we know the membership -- we know the leadership teams. We know the value that can be created. And so we have been working with them and feel quite good about what we can create. This is payer agnostic, which we also think is very important. And again, this will help us continue through having a focus on advanced primary care, it's still very much focused on our chronic patients and complex patients. And we are still building specialty care enablement, which is, again, another very important component of what we're trying to prime through. So I think from that value-based care across all lines of business, a critical part of our strategy, very consistent, driving value-based care continuing to drive much more downside risk, which means that we needed strong enablement capabilities to help practices work their way through that. We know that it takes time. It is also a technology-driven model. So one of the nice things about this partnership is that there our embedded technology assets to digitally enable care as well. And then we have a focus on patient access and experience in the adoption of next-generation models. So again, consistent with the strategy that we've had over the last several years, not really a diversion, I think, from that. And I think the timing for us was right because we have been experimenting with multiple models and have a lot of experience in the space right now. Next question, please. Operator Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix -- RBC Capital Markets -- Analyst Hey. Thank you very much. Just another question on the CD&R partnership. To what extent are these primary care platforms taking risk currently? Is that something that we will need to see develop as we kind of get more of these digital enablement abilities from Carelon? Just wanted to see over the five-year horizon to full ownership we can expect to kind of get the full capitation on those platforms over that time period? Gail Boudreaux -- President and Chief Executive Officer Thanks, Ben. I'm going to have Pete probably provide a lot more context. But just quickly, about a third of the membership is under risk arrangement now. So with that, Pete, why don't you give a little more color into the relationship and how we see it evolve. Peter Haytaian -- President, Carelon and CarelonRx That's great. Thanks for the question, Ben. And I'll give you a little bit more color on the assets and the capabilities they really all have the distinct strengths. We see great opportunities, quite frankly, to cross-pollinate. When you think about MPG to your question on risk, they really are a leader in managing Medicare and commercial risk. And they've also got a very strong chassis I think, for future growth and a proven model in that regard in terms of acquiring provider practices. So very strong at managing risk and a lot of capabilities in that regard. What's really interesting about Apri and Gail referenced this is they've got a differentiating technology and navigation capabilities with a real strong focus on the commercial business. So a really nice entry point for us. We've been working on relationships already in this regard. And I'm really excited about that because we, obviously, as a company, have a really strong commercial footprint, a really nice entry point for us. And then, of course, Carelon Health advanced primary care which is a leader in managing the complex in the chronic and largely takes risk today. We see a tremendous opportunity in a variety of ways for that. One, from a technology perspective, state-of-the-art EMR that we can upgrade as well as from a growth perspective in terms of partnering with MPG and APRI. And then finally, and Gail mentioned this, but I'll reiterate it, a tremendous opportunity to wrap around existing Carelon services to this arrangement that will create value for all three assets. So I appreciate the question. Mark Kaye -- Chief Financial Officer And then one quick financial remark just at the end of Pete's comments there. We do expect the consolidated entity once formed to have over $4 billion in annualized debt revenue. Gail Boudreaux -- President and Chief Executive Officer Thank you. Next question, please. Operator Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead. Dave Windley -- Jefferies -- Analyst Hi. Good morning. Thanks for taking my questions. I'll switch topics over to Medicaid. Your redetermination enrollment impact seem to maybe pick up some momentum in the quarter. I think you said 90% of members have now been redetermined. I wondered if you could give us some view of kind of how you expect that to gate out over the next several quarters? And then from a risk pool and rate adequacy standpoint. Could you update on how that looks now that the membership is whittling down? Gail Boudreaux -- President and Chief Executive Officer I'm going to have Felicia Norwood address your questions. Felicia Norwood -- President, Government Business Division Thank you for the question. Frankly, right now, we're at a point where our Medicaid business is actually tracking very much in line with our expectations. As you referenced, we believe that about 90% of our members have had their eligibility redetermined. So as we go through the next few months, you certainly see this tapering down as we really wrap up the unwinding process as we get through June. One of the things I want to make sure you understand, the downward trend in membership in the first quarter resulted not just from redeterminations, but footprint changes as well. So it's really the cumulative impact of those two things in terms of the first quarter. When we think about the work that we will continue to do is we will continue to outreach to Medicaid members. Many members who have lost their membership at this point, did that as a result of really procedural reasons. So the team will continue to be very aggressive around continuing the outreach that's been going on, and we're really proud of the work that we continue to do to really reach out to over 4.5 million people as all referenced in the opening comments to make sure that individuals who are truly eligible for Medicaid have access to Medicaid and if not, are able to transition to an exchange product and continue coverage. In terms of where we are today with respect to the acuity and mix of that membership, the acuity is in line with what we expected. And I will also say that at this point, we have visibility into 75% of our Medicaid rates and premiums for 2024. The vast majority of those are in line with our expectations and are actuarially sound. As you know, we have ongoing conversations with our state partners as we go throughout this process, and we expect those rates to continue to be actuarially sound. So we're going to continue to work with our state partners. We're going to continue the efficacy with our members in terms of making sure they have access to care and coverage, and we're going to make sure that we go through this process with a lot of discipline and rigor, understand the mix of our membership and the levers versus stairs as we go through this process. Thank you for the question. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Lisa Gill from J.P. Morgan. Please go ahead. Lisa Gill -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Thank you. I was wondering if maybe you could talk about utilization trends by line of business than what you saw in the quarter versus your expectation. Mark Kaye -- Chief Financial Officer Lisa, thanks very much for the question. Utilization in the first quarter in our health benefits businesses was in line with our expectation, and that was reflected in our reported benefit expense ratio of approximately 85.6%. In the commercial business, specifically inpatient and outpatient authorization levels year to date were aligned with our expectations and our internal year-to-go trend remains unchanged. On Medicare, as expected, we saw utilization related to both the two midnight rule for inpatient stays as well as pockets of outpatient authorizations around, for example, radiology and cardiovascular procedures. And importantly, these trends were broadly planned for as part of our underlying cost train assumptions. Medicaid, as you heard Felicia talk about a moment ago, did experience increased but state-specific utilization attributed to the redetermination mix impact and we remain very comfortable with what we're seeing there, given those ongoing constructive dialogues with the impacted states. And so overall, we remain confident that both our MA bids for 2024 and our commercial pricing really reflect the appropriate projections for utilization and medical cost trends. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Great. Thanks. Just wondering if it's not a huge increase in guidance, but would love to kind of hear what was driving the increase in guidance? Is something -- is it on the health plan side? Is it the Carelon side? And I guess just thoughts about how you thought about providing increases in guidance. It sounds like you believe that visibility is relatively high in claims, but obviously, there's some concern there. So I don't know if there's any conservatism or thought about pace of raises versus what you're actually seeing in the core business today? Mark Kaye -- Chief Financial Officer We were pleased to report our adjusted diluted EPS this quarter. which came in slightly better than our seasonal expectation. And that was led by solid performance in both our health benefits and Kion divisions, where operating margin increased by 30 basis points and 20 basis points, respectively, highlighting what we see as disciplined execution of our initiatives during a dynamic time for the industry. Of specific note, and you referenced this in your question, was the favorable performance in the first quarter benefit expense ratio and that was driven by commercial margins that continue to recover from pandemic aero lows. We're very pleased with the Q1 results. It's still early in the year. And given our business is subject to some variability around medical cost trend, we're intentionally remaining thoughtful and prudent in our outlook and that led us to increase our guide for adjusted EPS by $0.10 to be greater than $37.20. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Whit Mayo from Leerink Partners. Please go ahead. Whit Mayo -- Leerink Partners -- Analyst Hey. Thanks. Just wanted to hear any comments on the external revenue growth with Carelon services. Did that grow faster than the overall segment? You did, I think, referenced some strong external growth. So curious what might be gaining traction in the market. And then just a quick question on guidance. Mark, you've averaged maybe 55% to 56% of earnings in the first half. Any reason that would be different this year? Gail Boudreaux -- President and Chief Executive Officer Great. Why don't I have Pete address sort of the Carelon questions, and then Mark will talk about the earnings percentages. Pete? Peter Haytaian -- President, Carelon and CarelonRx Yes. Thanks for the question. As it relates to Carelon external growth, we continue to see really nice momentum in our build. I mean for 2024, from an overall sales perspective, we've already at this time of the year, exceeded what we did in all 2023. And you heard Gail mentioned in her prepared remarks, several new wins, which we're really excited about, really growth across the portfolio with some notable wins in behavioral health. She mentioned winning a statewide account in Medicaid for Maryland, which we're really excited about. And then some new innovative solutions with large employers as well as wins in the state of California. And on the behavioral health side, also some select wins in the crisis space. So areas that we've been really focused on. In addition to that, we've had some notable wins with the Blues related to our Insights business. We've talked about this before, but it's really critical that we prove some of our risk arrangements and our differentiated capabilities in Elevance. And then port those to the Blues, and we've seen that play through couple with several notable wins. Lastly, I'd say we're excited about the 25 pipeline. We're obviously actively in the selling season. Our pipeline is very rich. And again, I would say a large focus on our insights businesses as well as our behavioral health businesses. Mark Kaye -- Chief Financial Officer On your second question, the seasonality of the adjusted diluted EPS in 2024 is expected to be consistent with the past several years with approximately 55% of earnings in the first half of the year. I also want to call out that Workday seasonality, given it is a leap year did result in a smaller than historically normal impact in the first quarter. But we expect the workday seasonality to put slightly more pressure on the third quarter MLR with an offsetting favorability than in the fourth quarter as those work days normalize. Gail Boudreaux -- President and Chief Executive Officer Thanks, Mark, and thanks for the question, Whit. And I just want to add to Pete's comments about just the momentum that we're seeing inside of Carelon. First, our proof points are within Elevance Health. And then secondarily, now seeing some really nice momentum and traction externally. Next question, please. Operator Next, we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead. Nate Rich -- Goldman Sachs -- Analyst Great. Good morning and thanks for the questions. Gail, I wanted to follow up on your comments on the Medicare business and the goal of balancing growth and margin you maybe just elaborate on that given the tougher rate environment that you highlighted. And I think the company has prioritized margin improvement in Medicare this year, does that kind of remain on track for '24? And do you expect to plan for further improvement in 2025? Gail Boudreaux -- President and Chief Executive Officer Thanks for the question, Nathan. As I shared in my opening comments, first of all, the Medicare rate announcement, as you've heard, represents second year of consecutive cuts to the program. that we know will result in increased premiums and reduced benefits for seniors with disabilities and particularly those that have really needed this program. Our approach is very consistent. We're going to continue to be disciplined in our approach to the Medicare business. Our focus is to get consistency high-value competitive benefits and balanced growth and margin. we're focused on building a sustainable, attractive long-term business. It's too early to provide specifics for the 2025 bid at this stage. But again, I'm going to repeat, we're looking to really balance growth and margins. And as we talked about in our Investor Day, our focus is on keeping our members Blue for life. And there, we're focused on particularly our 14 Blue states and continuing to prioritize the very significant business we have in SNP where our unique competitive advantage is serving the needs of those consumers with complex conditions. So overall, we're in the midst of the process right now. So we'll have more as we get through the bid process, but thank you very much for the question. Next question, please. Operator Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead. Stephen Baxter -- Wells Fargo Securities -- Analyst Hi. Thanks. Just interested, it seems like now you're talking about at least 12% EPS CAGR as your long-term expectations in both the slides and the prepared remarks. So obviously, in the past, you've talked about a 12% to 15% EPS growth CAGR target. Just wondering what, if anything, we should be reading into that. Thank you. Mark Kaye -- Chief Financial Officer Thank you very much for the question. you should see these two targets as synergistic. We remain firmly committed to achieving a long-term adjusted earnings per share CAGR of 12% to 15% through 2027 and as we communicated at our Investor Day event last year. And then as we think more broadly around the long term, we have confidence that through business cycles and over time, the earnings power of our health benefits in Carelon Flywheel will generate the momentum and the foundation that's needed to sustain a long-term compound annual growth rate of at least 12%. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah, your line is open. Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok -- Barclays -- Analyst Hi, Good morning. Hoping you can give us an update on your transition of specialty scripts to BioPlus and help us understand the contribution that, that's expected to have this year. Thanks. Gail Boudreaux -- President and Chief Executive Officer Let me have Pete to address your question. Peter Haytaian -- President, Carelon and CarelonRx Yes. Thanks for the question, Andrew. Listen, the integration of BioPlus is going well. As you know, we remain on an accelerated calendar regarding this. I'll just reiterate, we spent last year building out the infrastructure and the team, and we did begin migrating Scripps in January of this year. And we're doing so really on a stage basis. So we'll continue to do the migration throughout '24 and into 2025 as it relates to the ElevanceHealth book of business. I'd say overall, things are going well. The infrastructure build is going well in addition to the BioPlus dispensing facilities that are in place. We're live with one additional facility now as we speak, and we have two more going live this year. So we feel very good about the capacity, not only with respect to the ElevanceHealth business beyond that. So we're excited we're on a path. And again, it will be staged throughout '24 and '25. Gail Boudreaux -- President and Chief Executive Officer Yes. In addition, I'll just add to what Pete said to BioPlus. As you know, we also announced the acquisition of Kroger Specialty Pharmacy. And that is also well aligned to Caroline's effort to control those levers that matter. So thank you for the question. Next question, please. Operator Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead. George Hill -- Deutsche Bank -- Analyst First, I'd like to follow up on Dave's question on Medicaid. And I guess, can you talk about where you think we are in the kind of where in, I guess, in the calendar and the mix of rate determinations versus acuity mix and kind of -- I guess I'm trying to get a sense for how far behind do you think the kind of the rate repricings are versus the changes in acuity mix from redeterminations. And given that you just talked about specialty, I wonder if you could just add a comment on the Kroger deal and if you expect those scripts to transfer over to BioPlus and how you think about the stickiness of those scripts. Gail Boudreaux -- President and Chief Executive Officer Yes, George, I think Felicia pretty much covered your question, which is we think things are quite aligned at this point. So in terms of the acuity and the mix, everything, we have visibility into 75% of our Medicaid premiums. We've had very constructive discussions with our states. So overall, we feel things are lining up. They're actuarially sound, and our conversations are ongoing. So I feel very good about our Medicaid business, just to sort of put a finer point on that. In terms of Kroger, I'm going to ask Pete to comment on Kroger and how that's going to align with our broader pharmacy. Peter Haytaian -- President, Carelon and CarelonRx Yes, George, thanks for the question on Kroger. And as Gail alluded to it, we're excited about this deal. It furthers the Carelon and the pharmacy strategy. It certainly is a natural extension of our recent arrangement with BioPlus. And just to give you some background Kroger Specialty Pharmacy is the largest non-payer owned specialty pharmacy. They do about 500,000 scripts a year. And it really is a natural complement to what we're doing with both BioPlus and Paragon, quite frankly. To give you a sense of what this is going to do for us. It's going to add meaningful scale. It increases our access to more LDDs, [Inaudible] distribution drugs, which is very important. Certainly strengthens our relationship with manufacturers, enabling us to really provide greater affordability and quality. And in fact, it has a nice presence in Puerto Rico, which could be very helpful to our MMM business. As it relates to your question on transition of Scripps, we feel very good about that. I mean, obviously, in this case with specialty pharmacy providers and members have choice. But we feel very good about the execution model. We feel very good about the stickiness the scripts, and we believe the integration and the transition will be straightforward. We expect the arrangement to likely close in Q3 for this year. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead. Scott Fidel -- Stephens, Inc. -- Analyst Hi, Thanks. Just so if we could double-click on the Carelon services margins in the first quarter with the 90 basis points of expansion. Anything specifically that you would call out there? And then that pacing does seem to be quite a bit stronger than the full-year guidance where you had sort of called for flattish to down 30 basis points. So curious whether you have any updates for us just on how you expect Carelon Services margins to trend for the full year? Mark Kaye -- Chief Financial Officer Thank you very much for the question. Margins were better than expected in the first quarter, and that aligned very well to a very strong revenue growth in the quarter. given the launch of several new internal risk deals, which we expect to accelerate as the year goes on. We're not seeking to update our full-year guidance at this time, given that both the seasonality of the business continues to evolve, as we expand our risk-based revenue, and the timing of new product launches is anticipated to result in some transitory quarterly volatility. But let me turn it over to Pete for a couple of minutes to talk about what we're doing. Peter Haytaian -- President, Carelon and CarelonRx Yes. No, it's appreciated. And Mark's really covered it. But think about it this way. We are launching some pretty significant risk arrangements this year. We've talked about it, but a full risk arrangement in oncology a full risk arrangement with the seriously mentally ill. And you should think about this as a natural cadence to launching this throughout the year, and that's what's going to impact the margin. So for example, with the seriously mentally ill, we're doing this largely with the Medicaid business. It's not a big bang across all the Medicaid states immediately, as you'd expect. It's more methodical state by state in '24 and '25. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake -- Wolfe Research -- Analyst Thanks. Good morning. There are some significant changes coming in the Part D space for 2025. I was curious as to your view on what that could mean for premiums. Just maybe you could tell us where you think kind of industry premiums are this year and how significant that increase could be for 2025. Gail Boudreaux -- President and Chief Executive Officer I'm going to ask Felicia to address that. Felicia Norwood -- President, Government Business Division So Justin, thank you for the question. There are significant changes coming for 2025. And I'll say this, it's early to provide specifics around what our 2025 strategy is going to be. But as Gail mentioned before, we are going to make sure that we have a very balanced approach as we think about the margins around our Medicare business and focus on those things that we believe bring the highest value to our members as we really work to make sure we have a competitive product in market that meets the needs of those members that we're trying to serve with a lot of dynamic changes that are going on in the Medicare environment for 2025. So thank you for the question. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Ann Hynes from Mizuho. Please go ahead. Ann Hynes -- Mizuho Securities -- Analyst Yeah. Thank you. Congrats on retaining the Florida contract, but it looks like you're actually gaining market share. Can you let us know the membership growth. And also looking ahead over the next couple of years, is there any big state renewal risks for Elevance, and alternatively, is there any big RFP opportunities for you? Thanks. Felicia Norwood -- President, Government Business Division So good morning, Ann and thank you. We are certainly very pleased with the results in Florida. It's a state that we have been partnering in for a long period of time. But certainly, the win here allows us to expand our footprint and additionally serve some complex populations, particularly SMI, which will be very much kind of a collaboration with our Carelon services business. So very excited about that. We are also very focused on our Virginia go live, which is coming up in July as well. So a lot of work happening there. Outstanding at this point is certainly Georgia, where we will be defending our procurement with respect to our core business as well as our Foster Care business in the State of Georgia and feel very good about the work that we continue to do there in partnership with the state. In addition, we are very much focused on a couple of new geographies where we are bidding this year and look forward to hearing those results. But on top of that, the states are very much focused on specialty populations, and we see that as the opportunity for growth as we go forward. Medicaid is a very important business for us. Our recent RFP wins, I think, demonstrate the value that we bring to our state partners. But more importantly, the improvement in quality and outcomes that we are providing to Medicaid beneficiaries. So thank you very much for the question. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Gary Taylor from TD Cowen. Please go ahead. Gary Taylor -- TD Cowen -- Analyst Hi. Good morning. Two quick ones for me. I just wanted to come back to Medicaid for a second. I mean, it's obviously your commercial book is doing very well, but you had expected Medicaid margins to come down this year, but you're saying the rate adjustments you're getting are actuarially sound for the acuity changes. So should we think about the lower Medicaid margins this year, primarily just the deleveraging, the opex impact of losing the revenue and enrollment and that MLR is going to be fairly stable? And then just my second question was Mark made this comment. John made this comment for years about how days claims payable would eventually come down into the low 40s. That's a lot of inherent or embedded earnings power that could come through the P&L at some point over time. Can you give us any sort of sense of what long-term means in terms of seeing the reserves move lower? Mark Kaye -- Chief Financial Officer Gary, good morning and thank you for the questions. Let me start maybe with the margins, and let me bring it up to the health benefits business segment to talk about first. So in terms of health benefits, the margins this quarter were very much in line with our expectations. It puts us squarely on track to achieve our guidance for the full year of an increase between 25 and 50 basis points. Not looking necessarily to comment on a single businesses margin, but you could expect Medicaid margins to normalize given we already have line of sight and you heard Felicia talk about this into approximately 75% of the Medicaid premiums for 2024 and that we are comfortable with the actuarial soundness of the rates that we are seeing. Over the long term, Medicaid continues to normalize, as we spoke about last quarter, and it is performing as expected. On the DCP for 2024, if we look out through the end of the year, we anticipate remaining in the mid- to upper 40s range given Medicaid membership is expected to decline to within our guidance range of 8.8 million to 9.2 million members. And as you know, Medicaid has a slightly lower relative DCP compared to commercial, for example. And then over time to reiterate the guidance, we do expect over the long term DCPs to return to that more normalized range in the low 40s. Gail Boudreaux -- President and Chief Executive Officer Thank you, Mark. One more question, please. Operator And for our final question, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. Just wanted to clarify a couple of things. One, on the reserve boost -- are you saying that 1.7 days is fully related to conservatism via change because that seems like about a $600 reserve boost to us. So I wanted to see if there was any other factors in that 1.7 days. And second, could you give us a sense of your Medicaid rate seasonality? Like what percent of your book renews in 1Q versus 2Q versus 3Q?? Mark Kaye -- Chief Financial Officer On your first question, the sequential increase in days in claims payable quarter result of 1.7 is primarily related to the Change Healthcare. I just want to -- maybe one clarification around this. It's worth noting that neither the decrease in claims receipts that we saw during the quarter or the reserve accrual that we took related to Change Healthcare had any discernible impact on our benefit expense ratio or P&L and that's because we believe the reserve represents an amount you would otherwise have paid had there been no disruption. So you should think about this as overall for the quarter, incurred claims are completely consistent with our expectations. Given some of the notes that came out this morning, I also like to just reiterate that we do expect operating cash flow to be at least $8.1 billion for the full year, reiterating our earlier guidance. Felicia Norwood -- President, Government Business Division And Sara, just on your question with respect to our Medicaid states and when our rates are up for renewal. We have roughly 10 states that were new in January, another state that renews in April, another nine that renewed in July. And then the last two renew in the back half of the year in September and October. Gail Boudreaux -- President and Chief Executive Officer Well, thank you very much for your questions. Just in some closing thoughts. We're very pleased to be off to a solid start this year, and we're confident, as you heard in the ongoing execution of our strategy and the balance and resilience of our diverse set of businesses positions us well for 2024 and beyond. We're very excited about the future and look forward to sharing more on our progress with you in the coming year. Thank you for your interest in Elevance Health, and have a great rest of your week. Operator Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 17th, 2024. You may access the replay system at any time by dialing 800 876 495. International participants can dial (203) 369-3997. Answer:

the Elevance Health first-quarter earnings conference call

Operator Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health first-quarter earnings conference call. [Operator instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Steve Tanal -- Vice President, Investor Relations Good morning, and welcome to Elevance Health's first-quarter 2024 earning call. This is Steve Tanal, vice president of investor relations. And with us this morning on the earnings call are Gail Boudreaux, president and CEO; Mark Kaye, our CFO; and Pete Haytaian, president of Carelon; Morgan Kendrick, president of our Commercial Health Benefits business; and Felicia Norwood, president of our Government Health Benefits business. Gail will begin the call with a brief discussion of the quarter, recent progress against our strategic initiatives, and our updated outlook for the year. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, eleventhealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elvanse Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail. Gail Boudreaux -- President and Chief Executive Officer Thank you, Steve, and good morning, everyone. We appreciate you joining today's earnings call. I'm pleased to report that Elevance Health delivered first-quarter GAAP earnings per share of $9.59 and adjusted diluted earnings per share of $10.64, reflecting growth of 12.5%. These results reflect disciplined execution of our strategic initiatives during a dynamic time for our industry. Given the solid start to the year, we increased our guidance for adjusted earnings per share by $0.10 to be greater than $37.20. We are making significant progress on our enterprise strategy in 2024 to accelerate capabilities and services, invest in high-growth opportunities, and optimize our health benefits business. On Monday, we announced the next step in our journey to expand access to high-quality patient-centered value-based care in our local market. After years of experience working closely with care providers to advance value-based care, we are confident that our hyper local approach, which aligns the right incentives, real-time patient information, and clinical decision support tools delivers better health outcomes, improve consumer and provider experience and greater affordability. Accordingly, we entered into an agreement to form a strategic partnership with Clayton Dubler and Rice to build a payer-agnostic advanced primary care and physician enablement business, serving consumers across commercial, Medicare and Medicaid health plans, consistent with the diversity of our own medical membership. Upon formation, the combined company will serve nearly 1 million consumers. The new venture will bring together the strength of three innovative care provider entities, including certain care delivery and enablement assets of Carelon Health. Importantly, we have worked closely with these companies and their management teams and are confident in the value they deliver for our Medicare, Medicaid and commercial health plan members and employers. We're excited to collaborate with CD&R and a broad range of care provider partners to accelerate innovation, enhance healthcare experiences and improve health outcomes for consumers. The collaborative development of the business will advance our enterprise strategy by accelerating the provision of value-based care for our members and consumers more broadly, with our Carelon businesses providing capabilities to integrate and personalize the care delivered. In time, Elevance Health will have full ownership of what we expect will be a leading platform for value-based care delivery and physician enablement at scale across commercial group, ACA, Medicare, and Medicaid health plans, advancing our role as a lifetime trusted health partner for the consumers we are privileged to serve. In the first quarter, we made tangible progress on our strategic initiatives, notably in Carelon, where we continue to scale our flywheel for enterprise growth. Carelon Rx closed its acquisition of Paragon Healthcare, a leading provider of infusion services. We are looking forward to expanding its geographic reach and therapeutic coverage to serve more consumers and Elevance Health members for years to come. As Carol on Rx furthers our enterprise commitment to address the whole health needs of our members, notably those with chronic and complex conditions, we are accelerating the build-out of our own specialty pharmacy. For example, we recently entered into an agreement to acquire Kroger Specialty Pharmacy business, the sixth largest specialty pharmacy in the country. The acquisition will bolster the growth of our existing pharmacy and infusion businesses, while increasing Carelon RX's access to limited distribution drugs. Carelon Services is also up to a strong start this year as we implemented and were awarded multiple new contracts, a testament to the value Carillon Services provides. For instance, Carillon Behavioral Health was selected by the Maryland Department of Health to provide behavioral health management services to more than 1.7 million Medicaid members starting in 2025. And in California, our team will partner with the public school system to expand behavioral health management services for students later this year. This initiative represents a major step forward in addressing the critical need for mental health support in educational settings and demonstrates our commitment to improving the health and well-being of our communities. Momentum with external clients is building and underscores the value Carelon services is creating for health plan customers to better consumer experiences and improved affordability. Our health benefits business is similarly off to a solid start. Commercial margin continues to recover from pandemic air lows, and we are enjoying momentum in membership growth, notably in our individual ACA plans and among large self-insured employers. Existing clients are demonstrating their confidence in our offerings by consolidating their business with us after years of offering our solutions side-by-side with those of our competitors. In our Medicaid business, we were pleased to be selected in Florida and Virginia to serve beneficiaries across traditional and complex populations statewide, including those with serious mental illness in Florida, and sole source foster care in Virginia. These awards and their pull-through opportunities for Carelon services underscore the distinct value Elevance Health delivers. In the first quarter, our Medicaid business performed in line with our expectations. We estimate that nearly 90% of our members have had their eligibility redetermined. Further, our team continues to work tirelessly to maximize access to care for Medicaid members subject to eligibility redetermination, helping them to understand their options in the face of ongoing logistical and operational challenges. Holistically, we are proud of the work we have done in contacting more than 4.5 million Medicaid beneficiaries through our omnichannel approach. Nonetheless, a majority of members who have lost coverage for administrative reasons have not yet returned. We're seeing a gradual increase in Medicaid reenrollment and anticipate continued upticks in rejoiner rates as more Medicaid beneficiaries recognize their need to reenroll, aligned with the trends that we have observed in recent months. Turning to Medicare. We were pleased to announce last month that CMS updated the Star scores for four of our contracts, which increased the percentage of our members in four-star or higher-rated contracts to nearly 50%, up from 34%. While this will improve our star quality bonus revenue in 2025, our goal is to have our star quality ratings at the high end of all plans in our local markets, which will be a multiyear journey. Funding for Medicare in 2025 will be challenging for the entire industry. We are disappointed that CMS has decided to cut Medicare Advantage rates for the second consecutive year, which will negatively impact seniors, notably, those at the lower end of the income spectrum who rely on the program for their health and well-being. While we remain committed to serving seniors through plan offerings that focus on their unique needs, we will also continue to demonstrate discipline in our Medicare Advantage bids, seeking to balance growth and margin while continuing to deliver exceptional value for seniors. Across the enterprise, our focus on delivering whole health for the consumers we are privileged to serve remains steadfast. We recently released our 2023 Advancing Health Together Progress Report, which underscores the strides we are making through value-based care. The report showcases examples of our success, facilitated by the unique partnerships that we've created with care providers across the healthcare ecosystem. I'd like to highlight a particular achievement that underscores our innovative approach to improving quality and value in healthcare. Recently, Elevance Health was honored by the NCQA with its innovation award featuring quality accelerators in healthcare for leading-edge strategies that improve quality and value, specifically for our obstetric specialty provider enablement program. The impact of these value-based partnerships and clinical interventions has led to consistent improvements in health outcomes and costs, including reducing preterm birth rates by 12% and and low birth weight babies by 20%, all while improving access to timely prenatal care and postpartum follow-up. For those interested in learning more about these transformative initiatives and other examples of our progress, I encourage you to visit our Advancing Health Together website. In closing, I want to extend my deep gratitude to our 100,000 associates who embody our purpose of improving the health of humanity through their tireless commitment. It's also heartening to see their efforts recognized externally. We were honored to be named to Fortune Magazine's 100 Best Companies to Work For list for the fourth year in a row. We were also included in their world's most admired companies and America's most innovative companies list. With that, I'd like to turn the call over to our CFO, Mark Kaye, to provide more on our operating results and outlook. Mark? Mark Kaye -- Chief Financial Officer Thank you, Gail. As you heard earlier, our first quarter results reflect solid performance and drive dynamic operating environment. We ended March with 46.2 million members, reflecting Medicaid attrition, partially offset by ongoing momentum in our commercial business. During the quarter, we added nearly 400,000 commercial fee-based members, driven by strong retention and a successful national account selling season and over 200,000 individual ACA members given our attractive product positioning and coverage transitions away from Medicaid. Medicare Advantage membership declined slightly, as expected, given select market exits and the collective actions we continue to take to establish a strong foundation for profitable and sustainable growth over the long term. Operating revenue for the quarter was $42.3 billion, in line with our expectations. The consolidated benefit expense ratio of 85.6% improved 20 basis points year over year due to disciplined premium rate adjustments to reflect medical cost trends and the ongoing recovery of commercial margins from pandemic-era lows. The adjusted operating expense ratio was 11.4%, consistent with the first quarter of 2023, indicative of our commitment to disciplined expense management and investment prioritization. Solid performance and growth in operating gains for both our Health Benefits and Carelon segments of $138 million and $72 million, respectively, led to growth in consolidated adjusted operating gains of over 7%. Carelon Services had a particularly strong start to the year, with revenue and operating earnings growth driven by risk-based service line expansions and effective cost management especially in our Carelon insights and Carelon Behavioral Health businesses, further accelerating our enterprise flywheel or growth. Operating cash flow in the first quarter was $2 billion or approximately 0.9 times net income. With respect to the balance sheet, we ended the quarter with a debt-to-capital ratio of 39.4%, in line with our target range preserving ongoing capital allocation flexibility. We repurchased 1.1 million shares of common stock for approximately $566 million during the quarter, underscoring our confidence in the intrinsic value of our shares and the long-term value proposition. We maintained our prudent and consistent approach to reserving. Days in claims payable stood at 49 days as of March 31st, up three days from the prior year quarter. This increase was largely driven by higher reserves associated with slower claims receipts due to an industrywide disruption that it acted a major claims clearinghouse. As a reminder, we expect our days in claims payable to be in the low 40s range long term. I'd also like to take a moment to provide additional color on our strategic partnership with Clayton, Dubilier, and Rice. We are excited to partner with CD&R to scale what will be a best-in-class payer-agnostic advanced care delivery and enablement platform catering to the unique needs of consumers regardless of their form of coverage. This collaboration will allow us to advance our local oriented approach to care delivery based on the unique needs of the communities, consumers, and employers we are privileged to serve. At the onset, Elevance Health will hold a significant minority position in the combined business with a clear path to first majority and then full ownership in approximately five years. The formation of the strategic partnership includes our capital contribution in the form of cash and equity interest in certain care delivery and enablement assets of Kion Health as well as the conveyance from CD&R of our pre-health and millennium physician group and is subject to customary regulatory approvals. Overall, we are pleased with our first quarter performance and a solid start to the year momentum in our health benefits and Caron businesses and the balance and resilience of our enterprise underscores our confidence in delivering another year of growth in adjusted diluted earnings per share consistent with our long-term compound annual growth rate of at least 12%. As we look forward to the rest of 2024, our focus will remain on successfully executing our strategy as we accelerate capabilities and services, invest in high-growth opportunities and optimize our health benefits business. And with that, operator, please open the call for questions. Questions & Answers: Operator [Operator instructions] For our first question, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead. Lance Wilkes -- AllianceBernstein -- Analyst Great. Thanks so much. Let me ask a little bit about the value-based care strategy and the execution. That's obviously a really big step forward. Could you talk a little bit about kind of the vision and scope of this? Is this going to be more focused on enablement or in particular markets is practice ownership going to be important? And then maybe if you can kind of color in the picture a little bit as far as leadership names, which Carelon assets are going to be contributed. And near term, do you see -- which areas of leverage across the membership base of Elevance do you see this being able to penetrate most effectively? Gail Boudreaux -- President and Chief Executive Officer Well, great. Thanks so much for the question, Lance. First, as I shared in my opening comments, we're very excited about this partnership with CD&R because it is very much the next step in our journey to bring value-based care to more consumers, specifically about partnering closely with care providers and we see it as absolutely consistent, driving greater risk adoption and advancing our specialty enablement strategy as well. So it's very much a first step there. And as you said in your question, this aligns very closely with our strategy and our broad partnership focus to work directly with care providers in our local markets. And our goal again remains to increase more downside risk sharing in our value-based arrangements. I think take a step back, what makes this approach unique is that we're enabling value-based care across all lines of business. So as I shared, the combined company is going to be payer agnostic, and it's focused on enabling advanced primary care locally. And from the get-go, it's going to serve nearly 1 million consumers, and that's going to be across our commercial, Medicare and Medicaid health plans upon formation. Another thing I think is important is that it provides the opportunity to pull through Carillon services to support those patients and accelerate that specialty enablement for complex and chronic patients. We have been working with these management teams and these assets for some time. and feel very confident about the alignment of our goals to serve as a lifetime trusted health partner. The goal gets back again to focusing on whole health, the needs of consumers driving greater affordability, and fundamentally a differentiated consumer experience. A few things about the partnership too, and again, what makes it different for patients. They're going to have access to integrated teams. We're looking at personalized navigation, expanded digital assets, and specialized services. The primary care model is going to be built to be very distinctive, including community practices purpose still clinics, high-risk clinics, and digitally enabled care model. So you can see it's a fairly comprehensive approach. And the last thing I'd say is that employers in market have not historically had access to a lot of these capabilities. And we have seen through the work that we're already doing that this dedicated primary care capacity that integrates the clinical and benefits navigation with their specific health and wellness strategies is truly differentiating. So again, this is being purpose built to work across all of the aspects of Medicare, Medicare commercial, not just a single business. So very much excited. We see this as an opportunity to accelerate innovation in the space and improve healthcare outcomes and consumer experiences. So thanks very much for the question. Next question, please. Operator Next, we'll go to the line of A.J. Rice from UBS. Please go ahead. A.J. Rice -- UBS -- Analyst Hi, everybody, and thanks for the question. I appreciate Mark's comments about build up a little bit on date payable, but just maybe to flush out a little bit more of the impact of the change cyberattack on results. Do you have a sense as to what percentage of your claims that you normally see in the first quarter may still be out there. Do you feel like you've got a good handle on that. And anything when you address that in terms of your normal IBNR and maybe you've got a significantly higher level of IBNR because you're allowing for the change? And if you can break out what you're actually seeing a little bit on cost trends versus needing to sort of provision for the unknowns of the change cyber attack. Gail Boudreaux -- President and Chief Executive Officer Thanks for the question, A.J. Let me maybe provide some broad-based comments and then I'll turn it over to Mark to provide a little more specificity on your questions. I want to say, first and foremost, I'm really proud of our teams and how they responded to this issue that occurred with change quickly and effectively first, to protect our members and their data and also help our care providers maintain their operations and cash flow. Importantly, I think it's important to note that from a perspective, we were not as significantly impacted by this, and we are back to normal operations in terms of claims flow. Importantly, another thing that's really important to understand is our prior authorization provider payments and pharmacy claims were not materially impacted as well because they don't go through change. We don't use change significantly for those. So with that, I'll turn it over to Mark to provide a little more comments. But I think framing it overall, we feel that our teams acted quite quickly and really proud of our ability to work in the ecosystem to help support them. Mark Kaye -- Chief Financial Officer As you just heard from Gail, we acted quite responsibly to several network connections to chain healthcare and to protect the data of both our members and providers. While we initially observed a 15% to 20% reduction in the daily volume of electronic data receipts from providers, most of which are claims related. In recent weeks, our extensive efforts have led to a significant catch-up in outstanding claim volumes. And for the quarter, we are effectively caught up on claims receipts and are now working to complete all necessary claims adjudication and processing activities. As such as part of the normal reserving practices, we've reflected the appropriate impact of the industrywide disruption related to Change Healthcare in the reserves we reported for our first quarter financials and that ensures both consistency with historical practice improvements. And then to your specific question, the impact here was to increase our sequential days in claims payable quarter result by approximately 1.7 days. Gail Boudreaux -- President and Chief Executive Officer Thank you. Next question, please. Operator Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead. Josh Raskin -- Nephron Research -- Analyst Hi. Thanks. Good morning. I wanted to get back to the partnership with CD&R. And specifically, what alternatives did you evaluate and consider before coming to this arrangement? I think in the past, you were stressing more, and I've heard it today as well that focus on specialty care. So how does that fit in and sort of get bolted on on top of this? And maybe where does this fit into your longer-term national approach? And then how important was it that you could serve multiple memberships and just Medicare Advantage. Gail Boudreaux -- President and Chief Executive Officer Yes. Thanks for the question, Josh, because I think it very much aligns to the strategy that we've laid out. I guess, first and foremost, it's payer agnostic, and it was really important. We've always said that our goal, given the diversity of our business mix to serve all members across all business lines. given the depth and density of our membership in our local markets, that is very important. We had a partnership already working with many of these assets. So as I said, we know the membership -- we know the leadership teams. We know the value that can be created. And so we have been working with them and feel quite good about what we can create. This is payer agnostic, which we also think is very important. And again, this will help us continue through having a focus on advanced primary care, it's still very much focused on our chronic patients and complex patients. And we are still building specialty care enablement, which is, again, another very important component of what we're trying to prime through. So I think from that value-based care across all lines of business, a critical part of our strategy, very consistent, driving value-based care continuing to drive much more downside risk, which means that we needed strong enablement capabilities to help practices work their way through that. We know that it takes time. It is also a technology-driven model. So one of the nice things about this partnership is that there our embedded technology assets to digitally enable care as well. And then we have a focus on patient access and experience in the adoption of next-generation models. So again, consistent with the strategy that we've had over the last several years, not really a diversion, I think, from that. And I think the timing for us was right because we have been experimenting with multiple models and have a lot of experience in the space right now. Next question, please. Operator Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead. Ben Hendrix -- RBC Capital Markets -- Analyst Hey. Thank you very much. Just another question on the CD&R partnership. To what extent are these primary care platforms taking risk currently? Is that something that we will need to see develop as we kind of get more of these digital enablement abilities from Carelon? Just wanted to see over the five-year horizon to full ownership we can expect to kind of get the full capitation on those platforms over that time period? Gail Boudreaux -- President and Chief Executive Officer Thanks, Ben. I'm going to have Pete probably provide a lot more context. But just quickly, about a third of the membership is under risk arrangement now. So with that, Pete, why don't you give a little more color into the relationship and how we see it evolve. Peter Haytaian -- President, Carelon and CarelonRx That's great. Thanks for the question, Ben. And I'll give you a little bit more color on the assets and the capabilities they really all have the distinct strengths. We see great opportunities, quite frankly, to cross-pollinate. When you think about MPG to your question on risk, they really are a leader in managing Medicare and commercial risk. And they've also got a very strong chassis I think, for future growth and a proven model in that regard in terms of acquiring provider practices. So very strong at managing risk and a lot of capabilities in that regard. What's really interesting about Apri and Gail referenced this is they've got a differentiating technology and navigation capabilities with a real strong focus on the commercial business. So a really nice entry point for us. We've been working on relationships already in this regard. And I'm really excited about that because we, obviously, as a company, have a really strong commercial footprint, a really nice entry point for us. And then, of course, Carelon Health advanced primary care which is a leader in managing the complex in the chronic and largely takes risk today. We see a tremendous opportunity in a variety of ways for that. One, from a technology perspective, state-of-the-art EMR that we can upgrade as well as from a growth perspective in terms of partnering with MPG and APRI. And then finally, and Gail mentioned this, but I'll reiterate it, a tremendous opportunity to wrap around existing Carelon services to this arrangement that will create value for all three assets. So I appreciate the question. Mark Kaye -- Chief Financial Officer And then one quick financial remark just at the end of Pete's comments there. We do expect the consolidated entity once formed to have over $4 billion in annualized debt revenue. Gail Boudreaux -- President and Chief Executive Officer Thank you. Next question, please. Operator Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead. Dave Windley -- Jefferies -- Analyst Hi. Good morning. Thanks for taking my questions. I'll switch topics over to Medicaid. Your redetermination enrollment impact seem to maybe pick up some momentum in the quarter. I think you said 90% of members have now been redetermined. I wondered if you could give us some view of kind of how you expect that to gate out over the next several quarters? And then from a risk pool and rate adequacy standpoint. Could you update on how that looks now that the membership is whittling down? Gail Boudreaux -- President and Chief Executive Officer I'm going to have Felicia Norwood address your questions. Felicia Norwood -- President, Government Business Division Thank you for the question. Frankly, right now, we're at a point where our Medicaid business is actually tracking very much in line with our expectations. As you referenced, we believe that about 90% of our members have had their eligibility redetermined. So as we go through the next few months, you certainly see this tapering down as we really wrap up the unwinding process as we get through June. One of the things I want to make sure you understand, the downward trend in membership in the first quarter resulted not just from redeterminations, but footprint changes as well. So it's really the cumulative impact of those two things in terms of the first quarter. When we think about the work that we will continue to do is we will continue to outreach to Medicaid members. Many members who have lost their membership at this point, did that as a result of really procedural reasons. So the team will continue to be very aggressive around continuing the outreach that's been going on, and we're really proud of the work that we continue to do to really reach out to over 4.5 million people as all referenced in the opening comments to make sure that individuals who are truly eligible for Medicaid have access to Medicaid and if not, are able to transition to an exchange product and continue coverage. In terms of where we are today with respect to the acuity and mix of that membership, the acuity is in line with what we expected. And I will also say that at this point, we have visibility into 75% of our Medicaid rates and premiums for 2024. The vast majority of those are in line with our expectations and are actuarially sound. As you know, we have ongoing conversations with our state partners as we go throughout this process, and we expect those rates to continue to be actuarially sound. So we're going to continue to work with our state partners. We're going to continue the efficacy with our members in terms of making sure they have access to care and coverage, and we're going to make sure that we go through this process with a lot of discipline and rigor, understand the mix of our membership and the levers versus stairs as we go through this process. Thank you for the question. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Lisa Gill from J.P. Morgan. Please go ahead. Lisa Gill -- JPMorgan Chase and Company -- Analyst Hi. Good morning. Thank you. I was wondering if maybe you could talk about utilization trends by line of business than what you saw in the quarter versus your expectation. Mark Kaye -- Chief Financial Officer Lisa, thanks very much for the question. Utilization in the first quarter in our health benefits businesses was in line with our expectation, and that was reflected in our reported benefit expense ratio of approximately 85.6%. In the commercial business, specifically inpatient and outpatient authorization levels year to date were aligned with our expectations and our internal year-to-go trend remains unchanged. On Medicare, as expected, we saw utilization related to both the two midnight rule for inpatient stays as well as pockets of outpatient authorizations around, for example, radiology and cardiovascular procedures. And importantly, these trends were broadly planned for as part of our underlying cost train assumptions. Medicaid, as you heard Felicia talk about a moment ago, did experience increased but state-specific utilization attributed to the redetermination mix impact and we remain very comfortable with what we're seeing there, given those ongoing constructive dialogues with the impacted states. And so overall, we remain confident that both our MA bids for 2024 and our commercial pricing really reflect the appropriate projections for utilization and medical cost trends. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead. Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst Great. Thanks. Just wondering if it's not a huge increase in guidance, but would love to kind of hear what was driving the increase in guidance? Is something -- is it on the health plan side? Is it the Carelon side? And I guess just thoughts about how you thought about providing increases in guidance. It sounds like you believe that visibility is relatively high in claims, but obviously, there's some concern there. So I don't know if there's any conservatism or thought about pace of raises versus what you're actually seeing in the core business today? Mark Kaye -- Chief Financial Officer We were pleased to report our adjusted diluted EPS this quarter. which came in slightly better than our seasonal expectation. And that was led by solid performance in both our health benefits and Kion divisions, where operating margin increased by 30 basis points and 20 basis points, respectively, highlighting what we see as disciplined execution of our initiatives during a dynamic time for the industry. Of specific note, and you referenced this in your question, was the favorable performance in the first quarter benefit expense ratio and that was driven by commercial margins that continue to recover from pandemic aero lows. We're very pleased with the Q1 results. It's still early in the year. And given our business is subject to some variability around medical cost trend, we're intentionally remaining thoughtful and prudent in our outlook and that led us to increase our guide for adjusted EPS by $0.10 to be greater than $37.20. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Whit Mayo from Leerink Partners. Please go ahead. Whit Mayo -- Leerink Partners -- Analyst Hey. Thanks. Just wanted to hear any comments on the external revenue growth with Carelon services. Did that grow faster than the overall segment? You did, I think, referenced some strong external growth. So curious what might be gaining traction in the market. And then just a quick question on guidance. Mark, you've averaged maybe 55% to 56% of earnings in the first half. Any reason that would be different this year? Gail Boudreaux -- President and Chief Executive Officer Great. Why don't I have Pete address sort of the Carelon questions, and then Mark will talk about the earnings percentages. Pete? Peter Haytaian -- President, Carelon and CarelonRx Yes. Thanks for the question. As it relates to Carelon external growth, we continue to see really nice momentum in our build. I mean for 2024, from an overall sales perspective, we've already at this time of the year, exceeded what we did in all 2023. And you heard Gail mentioned in her prepared remarks, several new wins, which we're really excited about, really growth across the portfolio with some notable wins in behavioral health. She mentioned winning a statewide account in Medicaid for Maryland, which we're really excited about. And then some new innovative solutions with large employers as well as wins in the state of California. And on the behavioral health side, also some select wins in the crisis space. So areas that we've been really focused on. In addition to that, we've had some notable wins with the Blues related to our Insights business. We've talked about this before, but it's really critical that we prove some of our risk arrangements and our differentiated capabilities in Elevance. And then port those to the Blues, and we've seen that play through couple with several notable wins. Lastly, I'd say we're excited about the 25 pipeline. We're obviously actively in the selling season. Our pipeline is very rich. And again, I would say a large focus on our insights businesses as well as our behavioral health businesses. Mark Kaye -- Chief Financial Officer On your second question, the seasonality of the adjusted diluted EPS in 2024 is expected to be consistent with the past several years with approximately 55% of earnings in the first half of the year. I also want to call out that Workday seasonality, given it is a leap year did result in a smaller than historically normal impact in the first quarter. But we expect the workday seasonality to put slightly more pressure on the third quarter MLR with an offsetting favorability than in the fourth quarter as those work days normalize. Gail Boudreaux -- President and Chief Executive Officer Thanks, Mark, and thanks for the question, Whit. And I just want to add to Pete's comments about just the momentum that we're seeing inside of Carelon. First, our proof points are within Elevance Health. And then secondarily, now seeing some really nice momentum and traction externally. Next question, please. Operator Next, we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead. Nate Rich -- Goldman Sachs -- Analyst Great. Good morning and thanks for the questions. Gail, I wanted to follow up on your comments on the Medicare business and the goal of balancing growth and margin you maybe just elaborate on that given the tougher rate environment that you highlighted. And I think the company has prioritized margin improvement in Medicare this year, does that kind of remain on track for '24? And do you expect to plan for further improvement in 2025? Gail Boudreaux -- President and Chief Executive Officer Thanks for the question, Nathan. As I shared in my opening comments, first of all, the Medicare rate announcement, as you've heard, represents second year of consecutive cuts to the program. that we know will result in increased premiums and reduced benefits for seniors with disabilities and particularly those that have really needed this program. Our approach is very consistent. We're going to continue to be disciplined in our approach to the Medicare business. Our focus is to get consistency high-value competitive benefits and balanced growth and margin. we're focused on building a sustainable, attractive long-term business. It's too early to provide specifics for the 2025 bid at this stage. But again, I'm going to repeat, we're looking to really balance growth and margins. And as we talked about in our Investor Day, our focus is on keeping our members Blue for life. And there, we're focused on particularly our 14 Blue states and continuing to prioritize the very significant business we have in SNP where our unique competitive advantage is serving the needs of those consumers with complex conditions. So overall, we're in the midst of the process right now. So we'll have more as we get through the bid process, but thank you very much for the question. Next question, please. Operator Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead. Stephen Baxter -- Wells Fargo Securities -- Analyst Hi. Thanks. Just interested, it seems like now you're talking about at least 12% EPS CAGR as your long-term expectations in both the slides and the prepared remarks. So obviously, in the past, you've talked about a 12% to 15% EPS growth CAGR target. Just wondering what, if anything, we should be reading into that. Thank you. Mark Kaye -- Chief Financial Officer Thank you very much for the question. you should see these two targets as synergistic. We remain firmly committed to achieving a long-term adjusted earnings per share CAGR of 12% to 15% through 2027 and as we communicated at our Investor Day event last year. And then as we think more broadly around the long term, we have confidence that through business cycles and over time, the earnings power of our health benefits in Carelon Flywheel will generate the momentum and the foundation that's needed to sustain a long-term compound annual growth rate of at least 12%. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah, your line is open. Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead. Andrew Mok -- Barclays -- Analyst Hi, Good morning. Hoping you can give us an update on your transition of specialty scripts to BioPlus and help us understand the contribution that, that's expected to have this year. Thanks. Gail Boudreaux -- President and Chief Executive Officer Let me have Pete to address your question. Peter Haytaian -- President, Carelon and CarelonRx Yes. Thanks for the question, Andrew. Listen, the integration of BioPlus is going well. As you know, we remain on an accelerated calendar regarding this. I'll just reiterate, we spent last year building out the infrastructure and the team, and we did begin migrating Scripps in January of this year. And we're doing so really on a stage basis. So we'll continue to do the migration throughout '24 and into 2025 as it relates to the ElevanceHealth book of business. I'd say overall, things are going well. The infrastructure build is going well in addition to the BioPlus dispensing facilities that are in place. We're live with one additional facility now as we speak, and we have two more going live this year. So we feel very good about the capacity, not only with respect to the ElevanceHealth business beyond that. So we're excited we're on a path. And again, it will be staged throughout '24 and '25. Gail Boudreaux -- President and Chief Executive Officer Yes. In addition, I'll just add to what Pete said to BioPlus. As you know, we also announced the acquisition of Kroger Specialty Pharmacy. And that is also well aligned to Caroline's effort to control those levers that matter. So thank you for the question. Next question, please. Operator Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead. George Hill -- Deutsche Bank -- Analyst First, I'd like to follow up on Dave's question on Medicaid. And I guess, can you talk about where you think we are in the kind of where in, I guess, in the calendar and the mix of rate determinations versus acuity mix and kind of -- I guess I'm trying to get a sense for how far behind do you think the kind of the rate repricings are versus the changes in acuity mix from redeterminations. And given that you just talked about specialty, I wonder if you could just add a comment on the Kroger deal and if you expect those scripts to transfer over to BioPlus and how you think about the stickiness of those scripts. Gail Boudreaux -- President and Chief Executive Officer Yes, George, I think Felicia pretty much covered your question, which is we think things are quite aligned at this point. So in terms of the acuity and the mix, everything, we have visibility into 75% of our Medicaid premiums. We've had very constructive discussions with our states. So overall, we feel things are lining up. They're actuarially sound, and our conversations are ongoing. So I feel very good about our Medicaid business, just to sort of put a finer point on that. In terms of Kroger, I'm going to ask Pete to comment on Kroger and how that's going to align with our broader pharmacy. Peter Haytaian -- President, Carelon and CarelonRx Yes, George, thanks for the question on Kroger. And as Gail alluded to it, we're excited about this deal. It furthers the Carelon and the pharmacy strategy. It certainly is a natural extension of our recent arrangement with BioPlus. And just to give you some background Kroger Specialty Pharmacy is the largest non-payer owned specialty pharmacy. They do about 500,000 scripts a year. And it really is a natural complement to what we're doing with both BioPlus and Paragon, quite frankly. To give you a sense of what this is going to do for us. It's going to add meaningful scale. It increases our access to more LDDs, [Inaudible] distribution drugs, which is very important. Certainly strengthens our relationship with manufacturers, enabling us to really provide greater affordability and quality. And in fact, it has a nice presence in Puerto Rico, which could be very helpful to our MMM business. As it relates to your question on transition of Scripps, we feel very good about that. I mean, obviously, in this case with specialty pharmacy providers and members have choice. But we feel very good about the execution model. We feel very good about the stickiness the scripts, and we believe the integration and the transition will be straightforward. We expect the arrangement to likely close in Q3 for this year. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead. Scott Fidel -- Stephens, Inc. -- Analyst Hi, Thanks. Just so if we could double-click on the Carelon services margins in the first quarter with the 90 basis points of expansion. Anything specifically that you would call out there? And then that pacing does seem to be quite a bit stronger than the full-year guidance where you had sort of called for flattish to down 30 basis points. So curious whether you have any updates for us just on how you expect Carelon Services margins to trend for the full year? Mark Kaye -- Chief Financial Officer Thank you very much for the question. Margins were better than expected in the first quarter, and that aligned very well to a very strong revenue growth in the quarter. given the launch of several new internal risk deals, which we expect to accelerate as the year goes on. We're not seeking to update our full-year guidance at this time, given that both the seasonality of the business continues to evolve, as we expand our risk-based revenue, and the timing of new product launches is anticipated to result in some transitory quarterly volatility. But let me turn it over to Pete for a couple of minutes to talk about what we're doing. Peter Haytaian -- President, Carelon and CarelonRx Yes. No, it's appreciated. And Mark's really covered it. But think about it this way. We are launching some pretty significant risk arrangements this year. We've talked about it, but a full risk arrangement in oncology a full risk arrangement with the seriously mentally ill. And you should think about this as a natural cadence to launching this throughout the year, and that's what's going to impact the margin. So for example, with the seriously mentally ill, we're doing this largely with the Medicaid business. It's not a big bang across all the Medicaid states immediately, as you'd expect. It's more methodical state by state in '24 and '25. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead. Justin Lake -- Wolfe Research -- Analyst Thanks. Good morning. There are some significant changes coming in the Part D space for 2025. I was curious as to your view on what that could mean for premiums. Just maybe you could tell us where you think kind of industry premiums are this year and how significant that increase could be for 2025. Gail Boudreaux -- President and Chief Executive Officer I'm going to ask Felicia to address that. Felicia Norwood -- President, Government Business Division So Justin, thank you for the question. There are significant changes coming for 2025. And I'll say this, it's early to provide specifics around what our 2025 strategy is going to be. But as Gail mentioned before, we are going to make sure that we have a very balanced approach as we think about the margins around our Medicare business and focus on those things that we believe bring the highest value to our members as we really work to make sure we have a competitive product in market that meets the needs of those members that we're trying to serve with a lot of dynamic changes that are going on in the Medicare environment for 2025. So thank you for the question. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Ann Hynes from Mizuho. Please go ahead. Ann Hynes -- Mizuho Securities -- Analyst Yeah. Thank you. Congrats on retaining the Florida contract, but it looks like you're actually gaining market share. Can you let us know the membership growth. And also looking ahead over the next couple of years, is there any big state renewal risks for Elevance, and alternatively, is there any big RFP opportunities for you? Thanks. Felicia Norwood -- President, Government Business Division So good morning, Ann and thank you. We are certainly very pleased with the results in Florida. It's a state that we have been partnering in for a long period of time. But certainly, the win here allows us to expand our footprint and additionally serve some complex populations, particularly SMI, which will be very much kind of a collaboration with our Carelon services business. So very excited about that. We are also very focused on our Virginia go live, which is coming up in July as well. So a lot of work happening there. Outstanding at this point is certainly Georgia, where we will be defending our procurement with respect to our core business as well as our Foster Care business in the State of Georgia and feel very good about the work that we continue to do there in partnership with the state. In addition, we are very much focused on a couple of new geographies where we are bidding this year and look forward to hearing those results. But on top of that, the states are very much focused on specialty populations, and we see that as the opportunity for growth as we go forward. Medicaid is a very important business for us. Our recent RFP wins, I think, demonstrate the value that we bring to our state partners. But more importantly, the improvement in quality and outcomes that we are providing to Medicaid beneficiaries. So thank you very much for the question. Gail Boudreaux -- President and Chief Executive Officer Next question, please. Operator Next, we'll go to the line of Gary Taylor from TD Cowen. Please go ahead. Gary Taylor -- TD Cowen -- Analyst Hi. Good morning. Two quick ones for me. I just wanted to come back to Medicaid for a second. I mean, it's obviously your commercial book is doing very well, but you had expected Medicaid margins to come down this year, but you're saying the rate adjustments you're getting are actuarially sound for the acuity changes. So should we think about the lower Medicaid margins this year, primarily just the deleveraging, the opex impact of losing the revenue and enrollment and that MLR is going to be fairly stable? And then just my second question was Mark made this comment. John made this comment for years about how days claims payable would eventually come down into the low 40s. That's a lot of inherent or embedded earnings power that could come through the P&L at some point over time. Can you give us any sort of sense of what long-term means in terms of seeing the reserves move lower? Mark Kaye -- Chief Financial Officer Gary, good morning and thank you for the questions. Let me start maybe with the margins, and let me bring it up to the health benefits business segment to talk about first. So in terms of health benefits, the margins this quarter were very much in line with our expectations. It puts us squarely on track to achieve our guidance for the full year of an increase between 25 and 50 basis points. Not looking necessarily to comment on a single businesses margin, but you could expect Medicaid margins to normalize given we already have line of sight and you heard Felicia talk about this into approximately 75% of the Medicaid premiums for 2024 and that we are comfortable with the actuarial soundness of the rates that we are seeing. Over the long term, Medicaid continues to normalize, as we spoke about last quarter, and it is performing as expected. On the DCP for 2024, if we look out through the end of the year, we anticipate remaining in the mid- to upper 40s range given Medicaid membership is expected to decline to within our guidance range of 8.8 million to 9.2 million members. And as you know, Medicaid has a slightly lower relative DCP compared to commercial, for example. And then over time to reiterate the guidance, we do expect over the long term DCPs to return to that more normalized range in the low 40s. Gail Boudreaux -- President and Chief Executive Officer Thank you, Mark. One more question, please. Operator And for our final question, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead. Sarah James -- Cantor Fitzgerald -- Analyst Thank you. Just wanted to clarify a couple of things. One, on the reserve boost -- are you saying that 1.7 days is fully related to conservatism via change because that seems like about a $600 reserve boost to us. So I wanted to see if there was any other factors in that 1.7 days. And second, could you give us a sense of your Medicaid rate seasonality? Like what percent of your book renews in 1Q versus 2Q versus 3Q?? Mark Kaye -- Chief Financial Officer On your first question, the sequential increase in days in claims payable quarter result of 1.7 is primarily related to the Change Healthcare. I just want to -- maybe one clarification around this. It's worth noting that neither the decrease in claims receipts that we saw during the quarter or the reserve accrual that we took related to Change Healthcare had any discernible impact on our benefit expense ratio or P&L and that's because we believe the reserve represents an amount you would otherwise have paid had there been no disruption. So you should think about this as overall for the quarter, incurred claims are completely consistent with our expectations. Given some of the notes that came out this morning, I also like to just reiterate that we do expect operating cash flow to be at least $8.1 billion for the full year, reiterating our earlier guidance. Felicia Norwood -- President, Government Business Division And Sara, just on your question with respect to our Medicaid states and when our rates are up for renewal. We have roughly 10 states that were new in January, another state that renews in April, another nine that renewed in July. And then the last two renew in the back half of the year in September and October. Gail Boudreaux -- President and Chief Executive Officer Well, thank you very much for your questions. Just in some closing thoughts. We're very pleased to be off to a solid start this year, and we're confident, as you heard in the ongoing execution of our strategy and the balance and resilience of our diverse set of businesses positions us well for 2024 and beyond. We're very excited about the future and look forward to sharing more on our progress with you in the coming year. Thank you for your interest in Elevance Health, and have a great rest of your week. Operator Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 17th, 2024. You may access the replay system at any time by dialing 800 876 495. International participants can dial (203) 369-3997.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and welcome to the Enphase Energy first quarter 2024 financial results conference call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] We ask that you please limit yourself to one question and a single follow-up. You may then reenter the queue if you have more questions. Please also note today's event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead. Zach Freedman -- Head of Investor Relations Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2024 results. On today's call are Badri Kothandaraman, our president and chief executive officer; Mandy Yang, our chief financial officer; and Raghu Belur, our chief products officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31st, 2024. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance; market trends; the capabilities of our technology and products and the benefits to homeowners and installers; our operations, including manufacturing, customer service and supply and demand; anticipated growth in existing and new markets; the timing of new product introductions; and regulatory and tax matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K, which can also be found in the investor relations section of our website. Now I would like to introduce Badri Kothandaraman, our president and chief executive officer. Badri? Badri Kothandaraman -- President and Chief Executive Officer Good afternoon, and thank you for joining us today to discuss our first quarter 2024 financial results. We reported quarterly revenue of $263.3 million, shipped approximately 1.4 million microinverters and 75.5 megawatt hours of batteries and generated free cash flow of $41.8 million. We reduced our channel inventory by approximately $113 million in Q1, slightly less than anticipated because of softer demand. For the first quarter, we delivered 46% gross margin, 31% operating expenses, and 15% operating income, all as a percentage of revenue on a non-GAAP basis, including the IRA benefit. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 78% in Q1, compared to 77% in Q4. Our average call wait time was 1.9 minutes in Q1 compared to one minute in Q4. We are adding data scientists, enhancing our analytics to identify problems proactively, and fixing them automatically through software. Our field engineers and technicians are assisting installers and complex installations, while bringing back learning to our development teams, enabling continuous improvement. Let's cover operations. We shipped approximately 506,000 microinverters in Q1 from our US contract manufacturing facilities that qualified for 45X production tax credits. Once fully ramped, we expect to have a global capacity of approximately 7.25 million microinverters per quarter, of which 5 million capacity will be in the US We expect to ship approximately 0.5 million microinverters to customers from our US manufacturing facilities in Q2. The number is a little less than what we would like, but our top priority is to reduce our factory inventory. We anticipate resuming a higher level of shipments in the second half of the year. For IQ Batteries, we have two cell pack suppliers, both in China, which have sufficient manufacturing capacity to support our ramp in 2024. As previously discussed, we expect to add battery manufacturing capability in the US during the third quarter of 2024. Let's now cover the regions. Our US and international revenue mix for Q1 was 57% and 43%, respectively. For more visibility into our business, we are providing regional breakdowns and sell-through dollar metrics by region. In the US, our revenue decreased 34% sequentially as we undershipped to end customer demand. The overall sell-through of our microinverters and batteries in the US was down 23% in Q1 compared to Q4. Let's discuss the market trends we are seeing in the US split by non-California states and California. For non-California states, our overall sell-through was 21% down in Q1 compared to Q4. The sell-through was similarly down for both microinverters and batteries due to seasonality. In California, our overall sell-through was down by 30% in Q1 compared to Q4. The sell-through of our microinverters was down 37%, and sell-through of our batteries was down 18% in Q1 due to seasonality and the NEM 3 transition. I'll provide more statistics and color on NEM 3 later in the call. In Europe, our revenue increased 70% sequentially as channel inventory improved and we introduced new products. The overall sell-through of our microinverters and batteries was up 7% in Q1 compared to Q4. The sell-through of our microinverters was up 3%, while the sell-through of our batteries was up 28% in Q1. I'll provide some color on key markets in Europe, particularly Netherlands, France, and Germany. In the Netherlands, our overall sell-through in Q1 was down 4% compared to Q4. The market stabilized during Q1, and we are encouraged by the demand signals we see after seeing the government's decision to support NEM for the foreseeable future. We expect to see the sell-through of microinverters pick up in Q2 as a result of this decision. We continue to believe solar plus batteries are going to become the norm as dynamic tariffs and grid services become more prevalent. In France, our overall sell-through in Q1 was up 13% compared to Q4. We have been encouraged by the continued strength in this market, supported by higher utility rates. Solar penetration in France is still small, and we see potential for the country to grow and evolve into a significant solar plus battery market for Enphase. In Germany, our overall sell-through in Q1 was up 28% compared to Q4. We are going from strength to strength in this market. We plan to launch our three-phase battery solution in the country later this year, along with additional software. We are leveraging AI and ML to enhance our home energy management software and expand grid services participation. We are continuing to launch our IQ8 microinverters and IQ Batteries into many new countries across Europe. Notably, we started shipping IQ Batteries into Italy in the first quarter. Our sell-through in the new countries is beginning to ramp, and we anticipate steady growth throughout 2024. In Australia, our Enphase Energy Systems are powered by IQ8 Microinverters and IQ Battery 5P, a third-generation battery, which we introduced in June last year. We expect higher battery attachment rates in Australia during the second half of this year. In Brazil, we are making good progress in building our installer base. In Mexico and India, we are shipping our highest-powered microinverters, IQ8P, to support high-power panels. We just started shipping the same microinverters into Thailand and the Philippines in Q1. As a reminder, IQ8P is a high-power microinverter at 480 watts AC for both residential and commercial applications. Let me say a few words about our market share. In the US, we see a stable share of our microinverters and batteries based on both internal and third-party data. There have been several changes in the market over the last year, including a shift away from loans and toward lease and PPAs. Our continued strong market share is a testament toward our installer relationships and the differentiated value proposition we provide them with our products. We are fully focused on enhancing our product portfolio, solving installer pain points, and deepening our relationships. In Europe, we are using the same strategy to grow market share. Let me provide some color on NEM 3.0. In the last three to four weeks, I've been on the road, we have visited over 25 installers in California to really understand how their businesses are doing. Many reported that their businesses are down by 50% or more from last year's high and they have all adjusted by becoming much leaner. They are getting better at selling NEM 3.0. They can clearly articulate what works and what doesn't. They are hungry for high-quality leads. They're also becoming adept at selling batteries, either a grid-tied battery or a backup battery with every install. They are becoming flexible in the financing options they offer to the homeowners. If the loans don't work, they aren't afraid to switch over to leases or PPAs, which are becoming increasingly available to the long tail. Most of them reported stronger sales in March of this year compared to January and February. I came away feeling that we are beginning to climb out of the bottom, and we should get back to growth shortly. Let's cover some NEM 3.0 statistics, which haven't changed that much from our last call. In Q1, 50% of our California installs were NEM 3.0 systems. These systems have a very high battery attach rate of over 90% compared to NEM 2.0 systems, which have an attach rate of 15%. Our data also shows that half of our NEM 3.0 systems are using Enphase batteries. Taking this data into account, our average revenue per NEM 3.0 system is approximately 1.5 times our average NEM 2.0 system. We believe this will contribute to stabilizing and increasing our California revenue in the second half. Let's come to our Q2 guidance. We are guiding revenue in the range of $290 million to $330 million. We expect to ship 100- to 120-megawatt hours of IQ Batteries. We expect sell-through demand of our products to be approximately $400 million in Q2, up from $376 million in Q1 due to seasonal strength in Europe and non-California states, offset by some decline in California. We plan to undership to the end market demand for our products by approximately $90 million in Q2. We expect the channel to normalize by the end of Q2 on microinverters as we previously forecasted. Our channel is almost normal on batteries already. Let's talk about products, starting with IQ Battery. Our third-generation battery called IQ Battery 5P has been very well received. It delivers the best power specs and commissioning times of any Enphase battery to date as an industry-leading 15-year warranty. Battery adoption rates are on the rise globally, and we are well-positioned to grow our sales in 2024. As we discussed last quarter, we expect our gross margins on batteries to continuously improve throughout the year. There are three factors: cell pack costs, which are coming down rapidly; battery microinverter costs, which are coming down due to IRA benefit from manufacturing in the US; and costs coming down due to improved architecture on our fourth-generation battery. We're already seeing the benefits of the first two factors, and we will benefit from the third factor early next year. We are working on entering more countries in Europe and Asia with our third-generation battery. We expect to also introduce our new three-phase battery with backup for Germany during this year. We expect to launch several balance of system improvement initiatives for the US that will improve the cost of installing batteries for backup. We plan to pilot our fourth-generation battery later in the year. This battery will have a great cost structure and an elegant form factor due to the integrated battery management and power conversion architecture. As previously discussed, we have entered many new markets with the IQ8 family of microinverters and we are now in 24 countries. We plan to enter more new countries in Europe and Asia throughout 2024 with our microinverters. And we plan to increase our available market further by introducing social housing and balcony solar solutions to European countries during the year. We recently launched the IQ Combiner light in Netherlands to simplify the installation of small solar systems on social housing units. The other variant of the IQ8P Microinverter with the new three-phase cabling system is well suited for small commercial solar installs ranging from 20 to 200 kilowatts. We launched this product in North America in December, and we are seeing good early adoption. We are excited about the product and look forward to manufacturing IQ8P Microinverters at our US facilities starting this quarter, further reducing costs. Let's cover EV charging. We launched our IQ smart EV chargers in the US and Canada in Q4. We are developing smart EV chargers for European countries, and we expect to introduce them this year. The team is also working on bidirectional EV charger, which will unlock use cases like V2G and V2H as part of the Enphase System. This charger will have a GaN-based bidirectional inverter. We expect to release the product in 2025. Let's cover the latest upgrades to our energy management software. We recently did a press release where we launched Enphase Power Control, or PCS, software that can integrate with our systems in North America. PCS dynamically controls the power produced by the Enphase System, giving installers a lot of flexibility in system design to build larger systems and avoid costly main panel upgrades while meeting utility and national electric code requirements. Our software is evolving to manage the increased complexity in the energy markets by leveraging AI and ML for forecasting and optimization. Our next software offering will manage dynamic tariffs in countries like Netherlands and Germany. This new software is intended to help maximize ROI and reduce the payback period for solar homeowners throughout Europe, where electricity prices can change by the hour. Let me provide you with an update on IQ9 Microinverters with gallium nitride or we also call GaN. We expect IQ9 microinverters to deliver higher power at lower costs. Multiple vendors have been providing us with GaN parts, and we are increasingly confident in the reliability of our design. We expect to launch the product in the first half of 2025 to address the two markets: one is residential and the other is three-phase small commercial markets, both the 208 watts, as well as the 480 watts. Let's now discuss our installer platform. We announced some key features and improvements to Solargraf in Q1, including advanced 3D design with smart design capability, California NEM 3.0 support and enhancements, and verification of shading and support for small commercial projects. Solargraf is currently available to installers in the US, Canada, Brazil, Germany, and Austria, and we expect to release it to more countries in the coming quarters. Let me conclude. We have been managing through a period of slowdown in demand. We believe Q1 was the bottom quarter. Europe has already begun to recover, and we expect the non-California states to bounce back in Q2. California is becoming less of a wild card, and we expect demand to stabilize and increase in the back half of 2024. We are bullish about NEM 3.0 in the long term. The payback is attractive for solar plus batteries. The utility rates are going up steeply and the sales teams are learning rapidly. I am pleased that we have executed well through the market downturn over the last year. We have maintained profitability and free cash flow throughout this period while correcting the channel. We have not sacrificed any new product development or geographic expansion plans and are now entering a growth cycle with a good product portfolio and a growing TAM, and there is still a lot more to come. We expect to begin field testing our microinverters, IQ9 Microinverters, and fourth-generation batteries later in the year. We are making balance of system improvements to enable faster and easier battery installation. We plan to roll out significant software upgrades like PCS and dynamic tariffs in both the US and Europe. We remain laser-focused on operational excellence, concentrating on sell-through and installer count, reducing operating expenses and product costs and maintaining healthy gross margin as our company returns to strong growth. With that, I will turn the call over to Mandy for a review of our financial results. Mandy? Mandy Yang -- Chief Financial Officer Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2024 financial results, as well as our business outlook for the second quarter of 2024. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $263.3 million. We shipped approximately 603.6 megawatts DC of microinverters and 75.5 megawatt hours of IQ Batteries in the quarter. Non-GAAP gross margin for Q1 was 46.2% compared to 50.3% in Q4. The decrease was primarily driven by lower net IRA benefits. GAAP gross margin was 43.9% for Q1. Non-GAAP gross margin without net IRA benefit for Q1 was 41%, compared to 41.8% in Q4, mainly driven by lower volume. Given non-GAAP gross margin for Q1 included $13.7 million of net IRA benefit. Non-GAAP operating expenses were $82.6 million for Q1 compared to $86.6 million for Q4. The decrease was the result of the restructuring plan we implemented in December 2023. GAAP operating expenses were $144.6 million for Q1, compared to $156.9 million for Q4. GAAP operating expenses for Q1 included $56.7 million of stock-based compensation expenses, $3.5 million of amortization for acquired intangible assets and $1.9 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $39 million, compared to $65.6 million for Q4. On a GAAP basis, loss from operations was $29.1 million for Q1, compared to a loss of $10.2 million for Q4. On a non-GAAP basis, net income for Q1 was $48 million, compared to $73.5 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.35 for Q1 compared to $0.54 for Q4. GAAP net loss for Q1 was $16.1 million compared to GAAP net income of $20.9 million for Q4. This resulted in GAAP diluted loss per share of $0.12 for Q1 compared to GAAP diluted earnings per share of $0.15 for Q4. We exited Q1 with total cash, cash equivalents, and marketable securities balance of $1.63 billion compared to $1.7 billion at the end of Q4. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 332,735 shares of our common stock at an average price of $126.21 per share for a total of approximately $42 million in Q1. In addition, we spent approximately $60 million by reporting shares to cover taxes for employees' stock vesting and options in Q1. That reduced the diluted shares by 480,735 shares. We expect to continue this anti-dilution plan. In Q1, we generated $49.2 million in cash flow from operations and $41.8 million in free cash flow. Despite the macroeconomic challenges, we continue to generate free cash flow. Capital expenditure was $7.4 million for Q1 compared to $20.1 million for Q4. Capital expenditure requirements decreased due to a reduction in our US manufacturing spending. Now let's discuss our outlook for the second quarter of 2024. We expect our revenue for Q2 to be within a range of $290 million to $330 million, which includes shipments of 100- to 120-megawatt hours of IQ Batteries. We expect GAAP gross margin to be within a range of 42% to 45%. We expect non-GAAP gross margin to be within a range of 44% to 47% with net IRA benefit and 39% to 42% before net IRA benefit. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect the net IRA benefit to be between $14 million and $17 million on estimated shipments of 500,000 units of US microinverters in Q2. We expect to increase the US main microinverter shipments to two-thirds of our overall microinverter shipments in the second half of this year. We expect our GAAP operating expenses to be within the range of $134 million to $138 million, including approximately $56 million estimated for stock-based compensation expense, acquisition-related amortization, and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within the range of $78 million to $82 million. We expect our GAAP and non-GAAP annualized effective tax rate, excluding discrete items for 2024, to be at 18%, plus or minus 1% with IRA benefit. With that, I will open the line for questions. Questions & Answers: Operator Thank you. We will now begin the question-and-answer session. [Operator instructions] We ask that you please limit yourself to one question and a single follow-up. You may then reenter the queue if you have further questions. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Colin Rusch with Oppenheimer. Please go ahead. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much, guys. As you start entering some of these newer markets with energy storage, can you talk about how much of the volume you're guiding into 2Q, could be considered selling to build a little bit of inventory to support those customers? Badri Kothandaraman -- President and Chief Executive Officer Yeah. Could you please repeat that question, Colin? I didn't follow that properly. Colin Rusch -- Oppenheimer and Company -- Analyst Sure. So, as you start selling energy storage into new markets and looking at the 2Q guide, how much of that energy storage sales dynamic is actually selling into the channel and channel just to get prepared in those markets? Badri Kothandaraman -- President and Chief Executive Officer Not much really because the new markets are just ramping up for us. For example, we introduced storage in Italy in Q1. So, really, that's the only one where we introduced into a new market. Prior to that, you see, we introduced into a few European countries. Prior to that, we introduced it in the UK. In fact, our storage is -- the channel is very healthy. We are actually normalized as we speak on storage. That's what I said, we are there on storage. In fact, I'll give you a data that I didn't talk about in the call. Our sell-through of batteries in Q4 overall worldwide was 140-megawatt hours, while the sell-through of batteries in Q1 was 128-megawatt hours, only 8% down. It's much better than the seasonality of 20% that we are seeing on the other products. And so, batteries are doing well in general. Yet despite the 128-megawatt hours sell-through, we had the discipline to only ship 75.5-megawatt hour. That means we took 43-megawatt hours out of the channel. The channel is quite lean for storage. That's why you see we are increasing the guidance. When I guided for Q1, I guided 70- to 90-megawatt hours. Now I'm guiding for Q2, I'm guiding 100- to 120-megawatt hours on storage. So, storage is a good story. We expect it to continue. We expect, over the long term, every market to transition to solar plus storage. We talked about the color of some of our markets. Netherlands, we talked about. France, we talked about. Germany is already there. California, we'll get there soon. So, in general, storage is a good story for us. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much. And then on the pricing dynamic, it looks like microinverter pricing was down maybe 4%-ish, 5% quarter over quarter on average. Can you talk a little bit about the dynamic around pricing and discounts as you get through the inventory flush and what we can expect as you get into the middle of the year here? Badri Kothandaraman -- President and Chief Executive Officer Right. And we measure something called ASP variance and we measure something called customer variance. The customer variance means how much pricing did you drop at a particular customer quarter to quarter. And ASP variance is simply a function of how you mix it. For example, if you have a lower pricing for a particular customer and his volume went up, it will show up as an overall reduction in ASP. Really, the measure of effectiveness in pricing comes from customer ASP variance. Are you dropping pricing at a particular customer? And the answer is we are very disciplined there. So, what you are seeing is a result of the mix, but we are extremely disciplined when it comes to -- you talked about in order to move inventory, do you need to lower pricing? No. We don't do -- we don't play games like that. So, we are disciplined, we will be disciplined, we sell on value. And what you're seeing is purely a product mix issue. Colin Rusch -- Oppenheimer and Company -- Analyst Excellent, super helpful. Thanks guys. Operator Thank you. And our next question today comes from Brian Lee at Goldman Sachs. Please go ahead. Brian Lee -- Goldman Sachs -- Analyst Hey, guys, good afternoon. Thanks for taking the questions. Badri, can you talk a little bit about -- you said at the onset of the call that you undership demand in Q1 a little bit less than -- or destocked a little bit less than you would have expected just because demand was softer. So, the $90 million of destock, that should kind of clear the inventory for micros in 2Q in your guide. You're saying normalized, you're seeing 400. So, are you inferring that normalized demand when you strip out the $90 million of destock is running at like 4 90? Because I know last call, you were talking about 450 to 500. So, maybe just to high-level kind of walk us through your thought process of what demand you're seeing out there, what the normalized level looks like once you get through all this inventory reset? And then maybe what time frame you think you kind of get back to those normalized run rates as well? Badri Kothandaraman -- President and Chief Executive Officer Got it. So, Brian, in Q1, our sell-through demand, which is end customer demand, was $376 million in Q1, and we reported revenue of $263.3 million. Therefore, you can do the math, $376 million minus $263 million is $113 million of under shipment. Now in Q2, I guided $290 million to $330 million. Midpoint of guidance is $310 million. And now I said my estimated sell-through in Q2, which is reflective of when customer demand is $400 million. So, the difference between the two, $310 million, minus $400 million, or the other way, $400 million minus $310 million is the $90 million of under shipment. Now, what could that $400 million be in the second half of the year? That's where we are talking about the markets. We expect Europe, for example, to continuously improve. Netherlands government has approved net metering for the foreseeable future. We are starting to see the lead generation much higher in Netherlands. That should start to result in increased sell-through and increased activations in Netherlands, which is a big deal. Next one is France. France, the utility rates are helping us. So, you can see, despite this environment, we expect France to be strong. Third one is Germany. We reported sell-through of 28% higher in Q1 from Q4. And once again, there, the cost of electricity is high, and we expect solar and storage or solar and batteries to continuously grow. On top of it, I talked about our product introductions. In the last year, we have set ourselves up nice by introducing IQ8 and batteries everywhere. We are now in 24 countries. Even in Q1, we introduced batteries into Italy. Prior to that, we introduced in the UK Then we introduced Sweden, Denmark, et cetera, prior to that. I'm not going to list everything. So, we are attacking new markets in both Asia, as well as Europe. And now let's come back to the US. In the US, the dynamics are non-California states and California states -- and California. So, non-California states, there are multiple data points for us to tell you that things are improving. In the last few weeks, let's say, last four weeks, we are seeing better sell-through numbers compared to what we saw prior to that. That's the first data point. The second one is we have our internal Solargraf software, which is now being used by over 1,000 plus installers, and therefore, we can look at sales proposals, and contracts, we can see those numbers are continuously going up in March. The numbers are up in March versus February, numbers are up in April versus March. So, that's a good sign. Then, of course, it is anecdotal. My interactions with customers in California in the last four weeks, all of them universally said March is a much better sales month than February. The last one is, you do see third-party analytics reports like that talk about permitting. And you can see the -- in general, the permits for non-California, as well as California are up in the month of March versus February. By the way, the trends that I told you are valid for both non-California, as well as California in the last few weeks. So, we are cautiously optimistic that things are turning. And that's why I said Q1 is the bottom quarter. That's why we are raising our guidance to $290 million to $330 million for Q2. That's why we said the sell-through is going up from $376 million to $400 million. With these growth trends, we expect sell-through to continuously go up. And the last one, the point which I wanted to talk about, was interest rates. We now hear that there are going to be likely two interest rates -- two cuts instead of maybe three or four planned before. So, anytime that there is a cut that is going to expand the non-California states even further, meaning the demand further, so those all could come into play. Brian Lee -- Goldman Sachs -- Analyst Understood. OK. No, that's super helpful. I guess if we think about just, again, kind of trying to dissect the normalized demand outlook you have here, the channel is clean exiting 2Q and you're looking at barring any meaningful mix changes or pricing changes and demand staying basically where you think it is today, like $400 million. Is there any reason you would not be shipping that level in 3Q? I mean is there any structural shifts to what the channel is willing to take or kind of lead times and things of that nature? I guess I'm just trying to understand how that $400 million -- what are the puts and takes for that $400 million -- to stay $400 million versus, again, I think there was a view earlier in the year that it would be higher than $400 million, but right now, it is at $400 million. So, what moves that higher? And then what potentially moves that lower if it were to go into the opposite direction? Badri Kothandaraman -- President and Chief Executive Officer Yeah, I think what you said is correct, meaning once the channel is normalized, sell-in and sell-out should be balanced. So, that's right. So, for example, we do expect the sell-through in Q3 to be higher. But if you were to say it is sell-through remains around, let's say, $400 million level, our sell-in would remain similar because now we have taken all the inventory out, we don't need to do any under shipment any longer. So, our sell-in and sell-out are balanced at that time. But like what I said, there are several vectors for that sell-through to improve in Q3, which I highlighted, all of the things in Europe, all of the new products we are introducing, non-California states which are improving, California installers learning to do NEM 3.0, more financing options being available to the installers in general than before in the US and is starting to ramp on small commercial products. So, all of that makes me optimistic that sell-through would start to become higher in Q3 and beyond. Brian Lee -- Goldman Sachs -- Analyst All right. Appreciate it. Thanks, guys. I'll pass it on. Operator Thank you. And our next question comes from Kashy Harrison with Piper Sandler. Please go ahead. Kashy Harrison -- Piper Sandler -- Analyst Good evening, and thanks for taking the question So, Badri, first one, you indicated last quarter sell-through expectations for Q1 of $390 million to $430 million, and sell-through, to your point, came in at $376 million. And in the spirit of continuous improvement, I was wondering if you could just walk us through the specific input or approach to your forecasting methodology that was faulty and then how you've adjusted for those errors heading into the second quarter? Essentially, what I'm just trying to get at is are you forecasting approaches improving? And how? And I'm trying to get to a point where the Street can have confidence that that sell-through will land about where you expect it to in the second quarter. Badri Kothandaraman -- President and Chief Executive Officer Right. In general, we are not perfect. We forecast based on the seasonality. We were right in most places. And as I reported, the California numbers were a little bit worse. And you can see that the sell-through in California was about 30% lower, 37% on microinverters and about, I think, 18% or 19% on batteries. So, I think California was the wild card, which I did mention in the prior quarter. And I think we are getting the increasing confidence in California. I outlined everything which we discussed with the California installers. So, we are confident in our forecast right now, and the first few weeks of the quarter seem to be trending in that direction. Kashy Harrison -- Piper Sandler -- Analyst Fair enough. Appreciate it. And as my follow-up question is on IQ9. You indicated the first half 2025 commercial release date, and I think you said pilots later this year. How long would it take for IQ9 to ramp to 100%? And then just strategically, can you talk about how you're thinking about using a lower-cost product, both in the US and in international markets, from a share perspective? Badri Kothandaraman -- President and Chief Executive Officer Yeah. IQ9, first of all, we're going to -- we are working on two flavors. One is a 427-watt microinverter and the other is the 548-watt microinverter. The 427-watt microinverter would be what I would consider the bread and butter for the US in probably a year from today, which is right in the time frame that we are introducing. And I would say that typically, an introduction and the ramp for a new product like that would be four to six quarters based upon our experience with IQ8. So, two flavors, 427 and 548. In the 548, things get a lot more interesting. We are now going to have the 548 for three-phase 208 volts, as well as 480 watts small commercial installs. So, that will be good. The principal thing about IQ9 is it uses gallium nitride. Gallium nitride enables a much higher power with similar form factors. It's got good efficiency. And it doesn't dissipate as much heat. So, when we are using it in our -- both the AC, as well as DC effects, we are able to get -- we don't need to blow up the microinverter form factor. And the other advantage with gallium nitride is it allows us to operate at a higher frequency. Earlier, we used to operate at -- or today in IQ8, we are operating at 100 kilohertz. With gallium nitride, we can go up to 1-megahertz, and we need to -- we are working on our ASIC in order to get to that capability of megahertz. But once you get to a megahertz, then what happens is you can basically get rid of your big transformers and the transformer sizes can all go down. And anyone who knows about inverters know that there is a lot of dollars going in there. So, in terms of form factor, things will get a lot more tighter so that now since they get tighter, you're not talking about blowing up the area due to higher power because one of the concerns always is efficiency. When you have higher power, if you operate at your same efficiency, you're dissipating a lot of heat, like, for example, at 548 watts, you have, let's say, 97% efficiency, that means 548 watts times 3%, that's 16 watts of power and 16 watts of heat. But with the gallium nitride FETs, we are able to operate them with good efficiency. And so, we don't need to blow up the inverter, and we can keep it with an elegant form factor. For installers, we can look at bringing the dollars per watt continuously down. Because for us, the more compact we make the microinverter, the more integration we achieve, the better it is. And just as in FYI, where there are four silicon FETs before on the AC side, we will only need two silicon FETs for transistors because we got something called a bidirectional switch for GaN. It can operate both ways. So, just zooming back to a higher level, GaN will allow us to operate at higher power lower efficiency with the same form factor, thereby dropping the dollar per watt because you're increasing your power line. Kashy Harrison -- Piper Sandler -- Analyst Helpful color. Thank you. Operator Thank you. And our next question today comes from Mark Strouse at J.P. Morgan. Please go ahead. Mark Strouse -- JPMorgan Chase and Company -- Analyst I got two questions on gross margins. For the 2Q guide, the 39% to 42%, that's down a bit from what you've been guiding the last couple of quarters. In response to Colin's question earlier, you mentioned mix as a part of that. I just want to confirm, are you kind of talking about kind of mix of just kind of random installers that you're selling to in a given period? Or is there anything to signal as far as kind of international mix or storage mix? Any other color there would help. Badri Kothandaraman -- President and Chief Executive Officer Yeah, what I was talking about on the question from Colin, which was microinverters was installer mix, that's correct. But this question that you are asking, the 39% meaning, we guided 39% to 42% for non-GAAP gross margin without IRA in Q2. Your question is why? And yes, we increased our battery guidance by 30-megawatt hours. As we can see, Q1 guidance was 70 to 90, we increased 100 to 120. That means we are -- the battery to microinverter ratio is increasing from before. We are getting better and better and better on the gross margin of batteries, and you'll see those numbers continuously improve. On battery specifically, I called out three factors. I said the cell pack costs are continuing to come down rapidly. We are beginning to manufacture now our microinverters, which are used in the battery. We are beginning to manufacture them in the US Those will provide us with the production tax credit, which is exactly the intention that we need to produce that product in the US, the inverters made in the battery. And then the last one, which is exciting one is where we are moving to more integrated architecture for power conversion and battery management. And basically, what's going to happen is our third-generation battery, the Y direction is going to almost get cut by 40%. And instead of six microinverters that we have in the third-generation battery, we will now have two microinverters, one on each side of the fourth-generation battery significantly cutting down the form factor. So, we expect that to bring in another big level of improvement in gross margin. So, those are the gross margin puts and takes on our batteries. Mark Strouse -- JPMorgan Chase and Company -- Analyst OK. Very helpful. And then my quick follow-up question. On the 45X within gross margin, last quarter, you talked about 500,000 units being about a $12 million to $14 million benefit. For 2Q, you're talking about a similar number of units, but with a $14 million to $17 million benefit. I'm not sure if I'm just splitting hairs there, but just wanted to see if you're kind of signaling that you're maybe keeping more of that 45X credit. Badri Kothandaraman -- President and Chief Executive Officer No. What happens is there is a few things that happened there. It depends upon the power of the microinverters that we are building. Sometimes we may build a 384-watt microinverter, you do the $0.11 per watt there, or we may build a 640-watt microinverter that is used inside the battery. So, it's a function of that and purely a function of that. So, it just falls out. The higher power we make, the more advantage we have, which is why we are beginning to -- I told you that we are beginning to make our small commercial IQ8P Microinverters starting in Q2 as well from the US So, those are 480 watts. So, $0.11 a watt is $53 gross benefit -- gross production tax credit there. Mark Strouse -- JPMorgan Chase and Company -- Analyst Yeah, OK. That makes sense. Thank you very much. Operator Thank you. And our next question comes from Praneeth Satish with Wells Fargo. Please go ahead. Praneeth Satish -- Wells Fargo Securities -- Analyst Thanks. Maybe just staying on the battery. So, looking out to the fourth-gen battery, it seems like there's a very large cost reduction coming. I guess, how do you think about keeping this cost savings versus passing it on to customers? I guess, specifically, I'm thinking about this in the context of Tesla Powerwall 3. Today, you can buy a Tesla Powerwall 3 with its integrated inverter and that's going to be cheaper than an Enphase battery and inverter solution. And I know it's apples to oranges because they're using a string inverter. But I guess with the fourth-generation battery, you have the ability to close that gap while still earning more margins. So, I guess I'm just trying to see how you think about that opportunity next year with that new battery. Badri Kothandaraman -- President and Chief Executive Officer Yeah, before that, let me give you a color on -- you talked about many things there. You talked about battery, you talked about competition, you talked about string inverter integrated into the battery. I just want to remind you of our benefits and why we offer tremendous value. So, in my trip in the last four weeks, many of our customers are -- they're very experienced. They have used string inverters and you have no idea of all of the troubles they have gone through. And they -- for them, some of the customers mentioned safe AC on the roof is religion for us. So, safe AC on the roof. You don't want high-voltage DC above you. That's the first point on Enphase. Production, we have microinverters for every panel, MPPT at the panel level. Production can be enhanced almost by 5% to 15% when you compare to normal string inverters. Per panel monitoring, many of our installers love that, per panel monitoring. And their homeowners love it because they're able to say, OK, this particular thing isn't working and they are able to get service from Enphase ultrafast. We are open 24/7. Reliability, you can count on. That's why we provide 25-year warranty, most of competition, maybe 10 or 12 years. No single point of failure unlike string inverters, that causes much higher uptime for your system. And that's that you're all familiar with. Simple plug-and-play install, our installers love the simplicity, no additional RSD, rapid shutdown devices, needed. Any roofs in different orientations, it's got to be Enphase, nothing else. Grid-forming IQ8 Microinverters enabling sunlight jump start for depleted batteries. Everybody knows this. But if I were to emphasize, you are running off grid, you have a power shutdown, you're running off grid, your battery, let's say, you've turned on the AC on by accident, your battery runs down. Your battery runs down all the way to a particular percentage. Then the battery has got a capability to do what is called Black Start. It opens -- it wakes up every few minutes the next day and it says I'm ready and it has solar and that can happen for one or two days. But after one or two days, even that energy in the battery goes away and the battery is dead. That is the state of charge drops to 1% or below. Now with Enphase IQ Microinverters, you could do sunlight jump start. Even without the grid, sunlight comes, you form the grid, you jump start the battery at that time and the battery state of charge comes up. So, that's an example, sunlight jump start that we do. And of course, our microinverters are now being made in America. That's a big deal. Many of our installers love that. When it comes to storage, safe chemistry, lithium-ion phosphate, big deal. UL 9540A fire certification, very big deal. And we have worked with the fire departments and make sure that we have optimized the placement of batteries there. So, we have done it for a lot of AHJs in California. Best warranty in the industry. You see competition at 10 years approximately. Our warranty is 15 years, no moving parts or fans. Low-voltage DC operation of the batteries. If you see a concept of a hybrid inverter where one inverter takes care of solar and storage, obviously, there is a lot more stress on that. But we have a distributed architecture, which means you've got inverters on the roof that take care of solar. You got inverters in the battery that take care of storage. And even if one inverter in the battery goes down, the other inverters are there to help. The system is never down. Field serviceable in situ without taking the battery of the wall minimizing downtime. I talked about gross margin. This time, I didn't say this, but it is a big deal. Our overhead costs in running a battery business are dropping quite a bit because we have figured out how to not do expensive RMAs. An expensive RMAs is what, you have a big system hanging off your wall. The worst thing you do is it doesn't work, you take it off the wall, the homeowner is off commissioned for many days in a row, then you have to take it back to the installers warehouse. The OEM or the component manufacturer or battery manufacturer has to ship product to him and the installer has to spend his valuable time on the field once again installing the new battery. The homeowner is down. He is losing solar and storage. He is losing self-consumption dollars, and especially in a place like California, that can add up a lot. It can be a major source of annoyance. With our field serviceability in situ instead of taking a $5,000 battery, we can take a $50 board, PCB board off, take that out, put the new board. In a matter of an hour, you're up and running. And so, enhanced serviceability. The next one, LRA. An 48-amp LRA for every 5-kilowatt hour battery, 144 amperes for a 15-kilowatt hours enough to start a two batteries, two of our five-kilowatt hour batteries are enough to start three-ton air conditioners. And our power is double both the peak and continuous power are double that of the previous generation, and our installers love that. Simple to install and commission. For example, the NEM 3.0. The NEM 3.0 scenario, much like Germany, our installs -- most of our installs are what called has a grid-tied installed. The grid-tied install or a rate saver install or a time of use install or savings battery, they're all identical. The battery is simply provides economic advantage. And installing such a battery is trivial. You finish your solar, you're done with AC on the roof, all you need to do is to take two of our five kilowatt-hour batteries, you hang it off the AC bus, there is nothing to size, there is no main panel upgrade, you don't need to worry about where to place it, you simply hang it off the AC bus, and the installation can be done in less than two hours. You connect it to the same combiner box that you use for solar, no extra component and you're up and running. So, that's becoming very popular. Rate saver battery or a grid-tied battery becoming extremely popular. So, that's that. So, I told you the benefits of Enphase solar and Enphase Storage System. If you look at all in one mobile app. The problem with having multiple solar and storage manufacturers is the homeowner has got a mess of apps. And it's possible, but it's difficult to keep track of all of that. So, all information and control at your fingertips. The ability to take the home off the grid through an Enphase app. We provide that as well. We provide 24/7 customer service with 100 field service technicians who will take care of the batteries. The installer doesn't need to spend his valuable time. He can focus on a new install. And as you know, the big advantage is with an AC-coupled system is you have both the power from your solar system, as well as from your batteries. So, the combination means even more power. You don't have one inverter constraining your output. And of course, the last one is our PCS software, power control system software. That one is going to be invaluable to installers to not do main panel upgrades. And by the way, we can do PCS simply even for NEM 2.0 expansion systems. If you want to expand your NEM 2.0 system, as long as you do not export anything beyond your old system, you can still do your NEM 2.0 system to support your current consumption while exporting energy -- maximum energy from the old system. So, NEM 2.0 expansion is now a lot easier. So, hopefully, I gave you some color on the value that we add, and we are not stopping. We are going to be focused on cost. The batteries are -- our customers are cost sensitive. And with every opportunity, we are going to be removing boxes off the wall. Raghu was with me with all of the installers, and we have clear plans on what we are going to do to eliminate more boxes on the wall. So, we are ultrasensitive as in response to your question. And if we need to drop pricing because we aren't providing as much value compared to competition, we will do so. Praneeth Satish -- Wells Fargo Securities -- Analyst Got it. No, thank you for that very expensive answer. Maybe just one more quick one, again, on batteries. So, you said that the channel is normal for batteries. You are at battery sell-through of 128-megawatt hours in Q1 for a seasonally weak quarter. The guidance for Q2 has battery shipments at 100- to 120-megawatt hours. And I'm assuming there that sell-in equal sell-through in Q2. So, maybe if you can just talk about what's driving that slight decrease from 128-megawatt hours to the guidance of 110? Is that conservatism? Or are there other factors? Because it seems like there's a lot of tailwinds in the battery business. Badri Kothandaraman -- President and Chief Executive Officer That is conservatism. And yes, I knew that you guys would ask me the questions because you're intelligent. I said carefully worded that it is almost there. That's what I said. But you're right in general. The battery, we expect to run quite lean on batteries. And so, yes, we are conservative. It does seem that there is some opportunity for upside there. Praneeth Satish -- Wells Fargo Securities -- Analyst Got it. Thank you. Operator Thank you. And our next question today comes from Philip Shen with ROTH MKM. Please go ahead. Philip Shen -- ROTH MKM -- Analyst Hi, everyone. Thanks for taking my questions. Back to Brian's question earlier on the timing of normalized revenue. Badri, I think you said on the last call, the $475 million would come in the back half of this year. Are we still on track for that? So, the $475 million could be in either Q3 or Q4? And can you walk us through, is it more likely Q4 or Q3? Or if there is a chance that, that gets pushed out to Q1? Thanks. Badri Kothandaraman -- President and Chief Executive Officer Well, Phil, you know that we don't give guidance for Q3 nor Q4, but I described all of the tailwinds. And we are growing from a sell-through demand of 376 to 400. And we described the growth vectors. We are optimistic about all of the growth vectors. And we talked about the puts and takes in Europe. We talked about Netherlands, we talked about France, we talked about Germany, we are extremely bullish there. We are introducing a lot of new products in those regions. We expect -- we have done that in the last year. We expect them to take off. Then we talked about the non-California states where we are seeing them seasonally bounce back up. And California, I would say California installers are -- like what I said, I was extremely optimistic after my trip. The last three to four weeks of data also shows good trends. So, while we are talking about a sell-through demand and customer demand of $400 million in Q2, I expect the numbers to go continuously up in Q3 and Q4. Philip Shen -- ROTH MKM -- Analyst Great. OK. So, very much still on path, but there might be a little bit of risk, but you definitely see a path. It sounds like. Badri Kothandaraman -- President and Chief Executive Officer Yes, I do. Philip Shen -- ROTH MKM -- Analyst Great. OK. Thank you. Shifting gears to maybe data that might be even ahead of sell-through. Our channel work suggests in this challenging US resi time, you guys are gaining a healthy amount of share. And whether it's 5% from one source versus a recent poll that we did, you might be gaining 11% share with 5% of the market. That's pretty healthy and potentially can make a big difference. And so, I wanted to see if you can help us understand what is the activation implied revenue that you might be seeing versus sell-through and obviously compared to the sell-in? So, do you track that in a way that you can articulate what was the activation implied revenue for maybe Q1, maybe what you see for Q2 and beyond? Thanks. Badri Kothandaraman -- President and Chief Executive Officer Yeah. I mean, we do see reports, we do see sell-side reports, we do see third quart reports. We are focused on highlighting our value and working with installers in these times. These are difficult times. So, we are trying to help them with all the services we have, whether it's proposal, whether it is permitting, whether it is proper modeling, whether it's leads or whether it's simply to understand their RMAs, how can we help them understand their service, understand their labor, understand how to improve their efficiency, doing Kaizen with the installers. So, we believe that our relationships with the installers in these times is the single most reason on any market share gain that you're highlighting. Normally, from sell-through to activations for us, it will take us about four to eight weeks. But any market share gains, we will start potentially seeing going forward because, as you know, when installers switched to us, no one switches 100% like that. There is a ramp associated with ramping down what they are using and ramping up the new product. And I would say that will show up definitely as sell-through increases. And we will report that in Q2 -- I mean, we will report our Q2 results in the Q3 call. That's what I mean. Philip Shen -- ROTH MKM -- Analyst OK. Thanks very much. I'll pass it on. Operator Thank you. Our next question comes from Christine Cho with Barclays. Please go ahead. Christine Cho -- Barclays -- Analyst Good evening. Thank you for taking my question So, I'm going to ask the sell-through question a different way. It's $400 million in 2Q and expected to get to somewhere between $450 to $500 million by year-end. So, let's just take the midpoint, $75 million. Can you just give us an idea combining all of the comments that you gave us individually, but that $75 million, how much of it is driven by Europe versus US? Is it like half? Is it more Europe? Is it more US? And then how much of it is driven by microinverters versus batteries? And then when you guys say that destocking will be done by end of Q2, are you assuming back to the 8 to 10 weeks? Is that what you're considering normalized levels of inventory? Badri Kothandaraman -- President and Chief Executive Officer Yes. So, let me answer all of them. We expect -- I mean Europe, as well as the US have healthy growth vectors for us. We do expect 50-50 from North America and Europe. Your other question was -- Christine Cho -- Barclays -- Analyst MIs versus batteries. Badri Kothandaraman -- President and Chief Executive Officer Micro versus battery? Yes, micro versus battery, I would say, considering that non-California states battery attach isn't high. So, micro versus battery, I would still say 60-40 on micros versus battery is what I would say. And the last one you asked is that 8 to 10 weeks. The way we measure our weeks on hand is typically backward looking is what we say is over the quarter, this was the sell-through rate, this is the inventory you have on hand today, divide the inventory by the sell-through rate, you get the weeks on hand. One of the interesting ways that I would expect distributors will measure it will be forward-looking weeks of inventory, which is, if the demand, for example, in the last two or three weeks shows a significant uptick, that weeks on hand would be existing amount they have in front of them divided by that increased rate in the last two, four weeks. And so, those numbers, in good times, the forward-looking inventory weeks on hand will be lower than the backward-looking weeks on hand. And so, for us, we are consistent in the way we measure it. We always look at whenever I tell you weeks on hand, I will tell you that, OK, this is the sell-through for the quarter that what happened in, for example, Q1, this is what happened in Q1. This was the inventory at the end of Q1. That channel inventory divided by the sell-through is the weeks on end and our number -- rule of thumb, our general number has been always 8 to 10 weeks. If you are on the upswing, forward-looking weeks on hand could be smaller than that. Christine Cho -- Barclays -- Analyst Right. OK. That's an interesting nuance. I did not realize that you were looking backwards. My second question, the -- you said in your prepared remarks that 50% of your NEM 3.0 systems are attaching your battery. You also mentioned you're meeting with a whole bunch of installers -- you met with a whole bunch of installers in California. Do you have a sense of whether your -- the installers using your product are leaning more toward load shifting or backup? And I'm not sure if you answered this with Praneeth's question, and I just missed it. But can you also give us a sense of where you are in the development of your meter color and when we should expect it to roll one out? Badri Kothandaraman -- President and Chief Executive Officer That's right. Load shifting is a significant fraction of our installers, that's right. And then the second is, when is the meter color coming out. So, just for the benefit of the audience, basically, California has something called meter main combos. These meter main combos have both the meter and the main panel integrated into one structure. And when you have to insert backup, everybody knows you have to do ugly things like ripping your loads apart, you have to put a backup switch in between. And therefore, there's a lot of labor that is actually spent in doing that. Typically, a day or two is spent in relocating all of those loads and then putting a system controller in between the meter and the main load center. With the meter collar, it's a very elegant way, where you have that switch at the meter. It's a device that comes around the meter. It's got the MID, which is the microgrid interconnect switch relay right there at the meter -- at the color, and that basically means you don't spend any labor relocating those loads. Our version of the meter color is coming out shortly. It will be piloting by the end of the year. Operator Thank you. And our next question today comes from James West of Evercore ISI. Please go ahead. James West -- Evercore ISI -- Analyst Hey, Badri, a real quick one for me. Based on your conversations in California over the last three or four weeks, as you met with the installer base and you talked about how they -- you talked earlier about how they cut costs pretty significantly, is there any concern at all about if growth does come back as you see it, their ability to respond to that growth? Badri Kothandaraman -- President and Chief Executive Officer No, I think they're all much more savvy than what we think, especially the long tail. The people I met are representative of the segments we service. They typically -- they do between one and five megawatts a year. That means you can probably see they generate revenues between $5 million and $15 million -- $5 million and $20 million a year annual revenue. They have teams usually two to three crews or even one to two crews, very lean team. Company is less than 50 people. And core employees are relatively less. They use contractors if they have to, and they have become very smart in managing money as well. They know that they shouldn't be -- they should be lean in these times. They don't waste money. They have less inventory. One other big thing that has changed is now they have a lot more financing options available to them. So, they have a lot of options available to them. If loans do not work well, they have leases or PPAs. Many of them, I did meet at least a third, maybe 30% of the installers were still selling cash to the customers in Southern California, as well as Northern California. Those are no problem. But the other folks who are moving to lease or PPA rapidly now that there are multiple suppliers. So, all in all, I think what I'm trying to say is that they are nimble. They understand exactly what is happening. They are very savvy on the products. They gave us a number of ideas to improve and do even better than what we are doing. And we are going to take that feedback, and I'm not worried whether they will be able to grow. They'll be able to grow exactly like us in good times. James West -- Evercore ISI -- Analyst Got it. That's very helpful. Thank you. Operator Thank you. And our next question today comes from Moses Sutton of BNP Paribas. Please go ahead. Unknown speaker Hi, this is Heidi on from Moses. Thanks for fitting me in. I just have a quick question. Coming back to the $113 million in under shipments in 1Q, can you provide the rough breakout of what was US versus non-US? And then same for the $90 million of expected under shipment in 2Q, how much was US versus non-US? Thank you. Badri Kothandaraman -- President and Chief Executive Officer I would basically expect that it is roughly in the ratio that we shipped, which is, I would say, two-thirds US and the third Europe. Unknown speaker OK, great. Thank you. Operator And our next question today comes from Jordan Levy with Truist Securities. Please go ahead. Jordan Levy -- Truist Securities -- Analyst Just wanted to see if there was any -- if you had any updates on the exclusivity arrangement with SunPower. I know that, that was scheduled to come to an end, I think, back in March. So, just curious if there's anything to touch on there? Badri Kothandaraman -- President and Chief Executive Officer The question is, is there any update on SunPower? SunPower has new management, as everybody knows, and we know Tom well. I have been talking to Tom. Right now, it's a business as usual for us. We have a very strong relationship. We are supporting SunPower well and vice versa. And when we sign such a contract, we will let you know. Jordan Levy -- Truist Securities -- Analyst Thanks so much for that. And maybe just a follow-up. I know with getting ready to step down, I think, at the end of June I'm just curious if you could talk to any updates or if you have someone in mind for that role or any other details as you look to proceed in that process? Badri Kothandaraman -- President and Chief Executive Officer Yeah, we're having a hard time hearing you, but I think I got the question, this is a replacement for your chief commercial officer is I guess the question. Yes, we have already finalized that. We have two very experienced executives that I have put in charge because Europe is so important for us. I wanted a very experienced executive to live in Europe, somebody who understands the headquarters properly. And so, one of our executive staff, meaning the one that reported to me his name is Sabbas he is going to be running all of Europe and South Africa sales. So, basically, he is actually relocating to Europe in order to manage that team. And then the team in the rest of the world, I call it, Americas, Australia, India, Asia, both Americas, north, as well as South, especially North American team is a very seasoned team. We have Ken Fong runs our North American team, while Mehran is the senior vice president, who is going to manage rest of the world sales, and Ken Fong will report to him. And Mehran has got a lot of experience in batteries. He's the one who actually created the battery business unit at Enphase and ramped it to high revenue. So, both the executive Sabbas, as well as Mehran have lots of experience, and they'll be able to pay a lot more attention to these regions, and we expect it to be incrementally positive for us. Jordan Levy -- Truist Securities -- Analyst That's really great detail. Appreciate all the answers. Thanks so much. Operator Thank you. And our next question today comes from Andrew Percoco with Morgan Stanley. Please go ahead. Andrew Percoco -- Morgan Stanley -- Analyst Yeah. Thanks so much for taking the question. Most of my questions at this point have been answered. It's been a very comprehensive call. But if I can just maybe zoom out for a second, I'm just curious, how are you guys improving your visibility into the channel so this inventory issue doesn't happen again. I'm assuming this isn't going to be the last cycle that we all see. So, I guess, how are you investing in the platform, whether that be software or otherwise, to make sure you have more visibility the next go around, the next time there's demand side shock and to avoid these channel inventory issues next time? Thank you. Badri Kothandaraman -- President and Chief Executive Officer Right. So, I mean, the answer is somewhat simple. It is to basically get a hold on the metrics of the front end, which is, leads get converted into proposals, converted into contracts, converted into permits, and then the installs happen, then you have activations. So, we have to get into the front end. And getting into the front end, we have Solargraf. Solargraf is a platform for us which helps us because we provide the design and proposal software. And therefore, that gives us the entire visibility on -- it doesn't need to give us the customer -- what every customer is doing, but the broad trends and broad strokes are what we are interested saying, this month what happened in this particular region? What is the statistics of leads versus contracts signed? And then, we do have third-party reports for permits. And of course, we do have our own Enlighten software for activations. And of course, in between we have sell-through, which is when the distributors sell our products to installers from the channel. So, what we are doing is to essentially tighten up that entire chain by putting in metrics at every point there. And by having more and more and more revenue coverage for Solargraf design and proposal tools so that as many installers possible are on that particular tool. So, then we have a lot more statistics. We'll continue to get aggregate reports from third parties as much as they are available. And putting all of these together to create a regression model, maybe even with the help of some sophisticated machine learning. And then, the key is for us to then make decisions on sell-in into how much do we sell into the channel? What are the guard bands of selling into the channel at the end of the day? Like don't get -- don't succumb to irrational exuberance. That is, you think everything is going to be great, therefore you ship a lot more into the channel than the sell-through, do not ever succumb to that. Go always by -- my ex-boss used to call it as mass balance. Mass balance means, whatever you ship out of the channel, you ship into the channel. So, we are putting in all of those statistical process control in place. And we are already better for it. Our weekly ship review every Wednesday, we have exactly the graph, how much is our sell-through? How much is our sell-in? Should we really do so much of sell-in? Are we going to stay within the guardrails, which is eight to 10 weeks? Anytime somebody goes above 10 weeks, we question saying, "Why do it?" And it helps us -- it's starting to help us in many ways. Because then we focus on the real growth, which is, you then start focusing on training installers to increase sell-through. You start understanding which of the installers aren't doing enough volume with you. Sales guys are focused on the right things versus pushing in stuff into the channel. So, I think companies have gotten a lot better in this front during the last year. Andrew Percoco -- Morgan Stanley -- Analyst Understood. Thank you so much. Badri Kothandaraman -- President and Chief Executive Officer Thank you. Operator Thank you. And our next question today comes from Maheep Mandloi with Mizuho. Please go ahead. David Benjamin -- Mizuho Securities -- Analyst Hi, this is David Benjamin in for Maheep. I've got a question and then a follow-up. Can you please give us some insights on your thoughts on the Solargraf market share or penetration with installers within the US? Just trying to get some visibility with sales leads in the market. Badri Kothandaraman -- President and Chief Executive Officer Yeah. We have over a thousand installers on Solargraf using our design and proposal tool. And we have over a few hundred using our permitting tool. David Benjamin -- Mizuho Securities -- Analyst OK. Great. Thanks very much. And then a follow-up. Just on the gallium nitride, can you talk a little bit about, like, where you plan to source the materials? Is that going to be concentrated mostly from China or other markets? And lastly, any thoughts on impact from annuity AD/CVD on the US solar demand or thoughts on the NEM 3 challenge in the California courts? Badri Kothandaraman -- President and Chief Executive Officer Gallium nitride, we do have a lot of sources for gallium nitride transistors. Some of the sources are people we already do business with for the silicon FETs. So, we aren't worried. We have lots of opportunities. There is many people with good quality gallium nitride FETs. Raghu will take the question on NEM 3. Raghu Belur -- Chief Products Officer Yeah. NEM 3, we are aware of the challenge, where it was -- there was an -- it had gone into appeals court because they actually lost the case in the lower court. It remains to be seen. The fact is that I think it's going to be difficult to overturn, but if they do, obviously, the market will react differently. But for now, for us, business as usual, we are going out there. We recognize that in the long term solar plus batteries is the way to go. And we are really working toward making sure that our battery solution -- solar plus battery solution is best in class, and that's what we are doing right now. But the courts will take their time, they'll do their thing, but it's not something that we are really focused on. David Benjamin -- Mizuho Securities -- Analyst Great. Thanks very much. Operator Thank you. And our next question comes from Austin Moeller with Canaccord. Please go ahead. Austin Moeller -- Canaccord Genuity -- Analyst Hi, good afternoon. Just my first question here, what does the market or growth opportunity look like for home battery sales on new installations versus upgrades of existing solar arrays that are already installed on homes? Badri Kothandaraman -- President and Chief Executive Officer Yeah, Raghu will take it. Raghu Belur -- Chief Products Officer Sure. I think both opportunities are equally valuable. Again, it depends on the geography. So, if you're in California, for example, all new homes must have solar, and you are going to be part of NEM 3 install, so you obviously need to have batteries, because if you did a solar-only install in NEM 3, your bill offset is going to be at about 55%. You add 10 kilowatt hours of NEM 3 grid-tied battery, your bill offset could be as high as 80%-85%. So, I think it makes complete sense to go ahead and add a battery in that case. In the retrofit case in California, if you're in a NEM 2 environment, not a lot of incentive to go ahead and add battery, at least for bill offset, because you already get that with NEM 2 where in that case basically the grid acts like your battery. The only other use case for battery in that case would be if you want to do it for resiliency or backup purposes. In other geographies, outside of California, the case for batteries would be -- again, you're seeing more and more of these what are called VPP programs or grid services programs, and so people may come in and retrofit a battery on their system and avail themselves of whatever the utility provides in terms of incentives, whether that is an upfront dollar per kilowatt hour incentive for adding a battery or an ongoing incentive for participation in the VPP program. Very similar situation in Europe as well. If you, for example, look at the Netherlands, obviously, that's a net metering market, but there is a push for retrofitting batteries there because just given the penetration level of solar there, which is about 28%, you do get penalized for uncontrolled export of solar. So, it makes sense to move toward what's called self-consumption. And the way you do that is by adding a battery and then managing that solar plus battery system through software, especially by participating in what's called a dynamic tariff program. You also have obviously VPP that same thing applies to Germany and other countries in Europe as well. Austin Moeller -- Canaccord Genuity -- Analyst Great. And just to follow-up, what do you see as that key growth driver in demand for Europe and Germany in particular? Is it primarily current utility rates? And do you see changes to tax credits in countries like Italy as a potential impediment to that? Raghu Belur -- Chief Products Officer Yeah. So, usually, you're seeing more and more, particularly in Europe, I refer to it as feed-in tariff inversion, wherein the buy rate is significantly higher than sell rate. So, the amount of what you get paid for feeding energy into the grid is significantly lower than retail cost of energy. So, it makes no economic sense to export even a single electron into the grid. So, that's the driver. It is self-consumption. Layered on top of that is if you participate in supporting the grid through a VPP program, you get paid additional monies. So, it's all a driver toward better ROI. But it goes beyond that. It goes beyond solar plus batteries, because now you're seeing in Europe you're adding EV chargers and heat pumps, and those are additional steerable assets that are sitting behind the meter. And if you have a very sophisticated home energy management system, which like we do with all the AI and ML work that we are doing, you can really do some very, very fine optimization and deliver the best economics for the homeowner, a combination of solar, battery, EV charger, and heat pump. For that matter, any combination thereof. So, you're going to see, Italy included, all of these markets in Europe moving toward a whole energy management system with all of these assets. Now imagine what happens a year or two from now when EVs become fully bidirectional, you get yet another powerful asset that's sitting behind the meter that you can use to optimize your consumption and optimize your bill. Operator Thank you. And our next question today comes from Dylan Nassano with Wolfe Research. Please go ahead. Dylan Nassano -- Wolfe Research -- Analyst Yeah, hi. Thanks for running a little long to fit me in here. Just a quick one from me on buyback. So, it looks like share repurchases in the quarter more or less matched up with your free cash flow generation, whereas in 4Q I think you bought back a little more than you actually generated. So, just curious, how are you thinking about the attractiveness of repurchases at these levels? And how should we think about your cash allocation as demand hopefully ramps back up from here? Thanks. Badri Kothandaraman -- President and Chief Executive Officer Yeah, I'll add some color and then Mandy can add more. We did approximately a similar amount in both quarters, but I'll explain the nuance. In Q4, we bought back shares for $100 million. While in Q1 what we did was we did a combination, which is we bought back shares for about $40 million-odd, and we -- some of our stock options, which basically were actually vesting, those stock options, essentially, Mandy didn't allow them to dilute the market. So, we basically spent about $60 million as anti-dilution there. So, in a sense, we spent the same money, $100 million; $40 million for buying back shares out of the market, $60 million for preventing shares into the market. We did that and we continue to -- I mean, you should expect us to continue to do a similar amount as long as the stock is attractive, which it is right now. Dylan Nassano -- Wolfe Research -- Analyst OK. Fair enough. Thank you for clarifying. Operator Thank you. And our next question comes from Dushyant Ailani with Jefferies. Please go ahead. Dushyant Ailani -- Jefferies -- Analyst Hi, thank you for taking my question. Just one on, how much NEM 2.0 backlog is remaining with the installers? I think you talked about 50% being NEM 3.0. So, going into 2Q, how can we expect the backlog cadence to dwindle down for NEM 2.0? Badri Kothandaraman -- President and Chief Executive Officer Yeah, I mean that's an interesting question. All our conversations with installers -- there was one installer who had a backlog of nine months, and there are installers with a backlog of three months. So, we don't really know what the answer is. Like you, we were surprised that the number is still 50%, NEM 2. But installers are learning on NEM 3 rapidly. They are depleting through their NEM 2 backlog. I'm not sure. I can't forecast the number. But I'm sure that within six months, it will dwindle down. Dushyant Ailani -- Jefferies -- Analyst OK. Thank you. Operator Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks. Badri Kothandaraman -- President and Chief Executive Officer Yeah, thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye. Answer:

the Enphase Energy first quarter 2024 financial results conference call

Operator Good day, and welcome to the Enphase Energy first quarter 2024 financial results conference call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] We ask that you please limit yourself to one question and a single follow-up. You may then reenter the queue if you have more questions. Please also note today's event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead. Zach Freedman -- Head of Investor Relations Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2024 results. On today's call are Badri Kothandaraman, our president and chief executive officer; Mandy Yang, our chief financial officer; and Raghu Belur, our chief products officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31st, 2024. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance; market trends; the capabilities of our technology and products and the benefits to homeowners and installers; our operations, including manufacturing, customer service and supply and demand; anticipated growth in existing and new markets; the timing of new product introductions; and regulatory and tax matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K, which can also be found in the investor relations section of our website. Now I would like to introduce Badri Kothandaraman, our president and chief executive officer. Badri? Badri Kothandaraman -- President and Chief Executive Officer Good afternoon, and thank you for joining us today to discuss our first quarter 2024 financial results. We reported quarterly revenue of $263.3 million, shipped approximately 1.4 million microinverters and 75.5 megawatt hours of batteries and generated free cash flow of $41.8 million. We reduced our channel inventory by approximately $113 million in Q1, slightly less than anticipated because of softer demand. For the first quarter, we delivered 46% gross margin, 31% operating expenses, and 15% operating income, all as a percentage of revenue on a non-GAAP basis, including the IRA benefit. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 78% in Q1, compared to 77% in Q4. Our average call wait time was 1.9 minutes in Q1 compared to one minute in Q4. We are adding data scientists, enhancing our analytics to identify problems proactively, and fixing them automatically through software. Our field engineers and technicians are assisting installers and complex installations, while bringing back learning to our development teams, enabling continuous improvement. Let's cover operations. We shipped approximately 506,000 microinverters in Q1 from our US contract manufacturing facilities that qualified for 45X production tax credits. Once fully ramped, we expect to have a global capacity of approximately 7.25 million microinverters per quarter, of which 5 million capacity will be in the US We expect to ship approximately 0.5 million microinverters to customers from our US manufacturing facilities in Q2. The number is a little less than what we would like, but our top priority is to reduce our factory inventory. We anticipate resuming a higher level of shipments in the second half of the year. For IQ Batteries, we have two cell pack suppliers, both in China, which have sufficient manufacturing capacity to support our ramp in 2024. As previously discussed, we expect to add battery manufacturing capability in the US during the third quarter of 2024. Let's now cover the regions. Our US and international revenue mix for Q1 was 57% and 43%, respectively. For more visibility into our business, we are providing regional breakdowns and sell-through dollar metrics by region. In the US, our revenue decreased 34% sequentially as we undershipped to end customer demand. The overall sell-through of our microinverters and batteries in the US was down 23% in Q1 compared to Q4. Let's discuss the market trends we are seeing in the US split by non-California states and California. For non-California states, our overall sell-through was 21% down in Q1 compared to Q4. The sell-through was similarly down for both microinverters and batteries due to seasonality. In California, our overall sell-through was down by 30% in Q1 compared to Q4. The sell-through of our microinverters was down 37%, and sell-through of our batteries was down 18% in Q1 due to seasonality and the NEM 3 transition. I'll provide more statistics and color on NEM 3 later in the call. In Europe, our revenue increased 70% sequentially as channel inventory improved and we introduced new products. The overall sell-through of our microinverters and batteries was up 7% in Q1 compared to Q4. The sell-through of our microinverters was up 3%, while the sell-through of our batteries was up 28% in Q1. I'll provide some color on key markets in Europe, particularly Netherlands, France, and Germany. In the Netherlands, our overall sell-through in Q1 was down 4% compared to Q4. The market stabilized during Q1, and we are encouraged by the demand signals we see after seeing the government's decision to support NEM for the foreseeable future. We expect to see the sell-through of microinverters pick up in Q2 as a result of this decision. We continue to believe solar plus batteries are going to become the norm as dynamic tariffs and grid services become more prevalent. In France, our overall sell-through in Q1 was up 13% compared to Q4. We have been encouraged by the continued strength in this market, supported by higher utility rates. Solar penetration in France is still small, and we see potential for the country to grow and evolve into a significant solar plus battery market for Enphase. In Germany, our overall sell-through in Q1 was up 28% compared to Q4. We are going from strength to strength in this market. We plan to launch our three-phase battery solution in the country later this year, along with additional software. We are leveraging AI and ML to enhance our home energy management software and expand grid services participation. We are continuing to launch our IQ8 microinverters and IQ Batteries into many new countries across Europe. Notably, we started shipping IQ Batteries into Italy in the first quarter. Our sell-through in the new countries is beginning to ramp, and we anticipate steady growth throughout 2024. In Australia, our Enphase Energy Systems are powered by IQ8 Microinverters and IQ Battery 5P, a third-generation battery, which we introduced in June last year. We expect higher battery attachment rates in Australia during the second half of this year. In Brazil, we are making good progress in building our installer base. In Mexico and India, we are shipping our highest-powered microinverters, IQ8P, to support high-power panels. We just started shipping the same microinverters into Thailand and the Philippines in Q1. As a reminder, IQ8P is a high-power microinverter at 480 watts AC for both residential and commercial applications. Let me say a few words about our market share. In the US, we see a stable share of our microinverters and batteries based on both internal and third-party data. There have been several changes in the market over the last year, including a shift away from loans and toward lease and PPAs. Our continued strong market share is a testament toward our installer relationships and the differentiated value proposition we provide them with our products. We are fully focused on enhancing our product portfolio, solving installer pain points, and deepening our relationships. In Europe, we are using the same strategy to grow market share. Let me provide some color on NEM 3.0. In the last three to four weeks, I've been on the road, we have visited over 25 installers in California to really understand how their businesses are doing. Many reported that their businesses are down by 50% or more from last year's high and they have all adjusted by becoming much leaner. They are getting better at selling NEM 3.0. They can clearly articulate what works and what doesn't. They are hungry for high-quality leads. They're also becoming adept at selling batteries, either a grid-tied battery or a backup battery with every install. They are becoming flexible in the financing options they offer to the homeowners. If the loans don't work, they aren't afraid to switch over to leases or PPAs, which are becoming increasingly available to the long tail. Most of them reported stronger sales in March of this year compared to January and February. I came away feeling that we are beginning to climb out of the bottom, and we should get back to growth shortly. Let's cover some NEM 3.0 statistics, which haven't changed that much from our last call. In Q1, 50% of our California installs were NEM 3.0 systems. These systems have a very high battery attach rate of over 90% compared to NEM 2.0 systems, which have an attach rate of 15%. Our data also shows that half of our NEM 3.0 systems are using Enphase batteries. Taking this data into account, our average revenue per NEM 3.0 system is approximately 1.5 times our average NEM 2.0 system. We believe this will contribute to stabilizing and increasing our California revenue in the second half. Let's come to our Q2 guidance. We are guiding revenue in the range of $290 million to $330 million. We expect to ship 100- to 120-megawatt hours of IQ Batteries. We expect sell-through demand of our products to be approximately $400 million in Q2, up from $376 million in Q1 due to seasonal strength in Europe and non-California states, offset by some decline in California. We plan to undership to the end market demand for our products by approximately $90 million in Q2. We expect the channel to normalize by the end of Q2 on microinverters as we previously forecasted. Our channel is almost normal on batteries already. Let's talk about products, starting with IQ Battery. Our third-generation battery called IQ Battery 5P has been very well received. It delivers the best power specs and commissioning times of any Enphase battery to date as an industry-leading 15-year warranty. Battery adoption rates are on the rise globally, and we are well-positioned to grow our sales in 2024. As we discussed last quarter, we expect our gross margins on batteries to continuously improve throughout the year. There are three factors: cell pack costs, which are coming down rapidly; battery microinverter costs, which are coming down due to IRA benefit from manufacturing in the US; and costs coming down due to improved architecture on our fourth-generation battery. We're already seeing the benefits of the first two factors, and we will benefit from the third factor early next year. We are working on entering more countries in Europe and Asia with our third-generation battery. We expect to also introduce our new three-phase battery with backup for Germany during this year. We expect to launch several balance of system improvement initiatives for the US that will improve the cost of installing batteries for backup. We plan to pilot our fourth-generation battery later in the year. This battery will have a great cost structure and an elegant form factor due to the integrated battery management and power conversion architecture. As previously discussed, we have entered many new markets with the IQ8 family of microinverters and we are now in 24 countries. We plan to enter more new countries in Europe and Asia throughout 2024 with our microinverters. And we plan to increase our available market further by introducing social housing and balcony solar solutions to European countries during the year. We recently launched the IQ Combiner light in Netherlands to simplify the installation of small solar systems on social housing units. The other variant of the IQ8P Microinverter with the new three-phase cabling system is well suited for small commercial solar installs ranging from 20 to 200 kilowatts. We launched this product in North America in December, and we are seeing good early adoption. We are excited about the product and look forward to manufacturing IQ8P Microinverters at our US facilities starting this quarter, further reducing costs. Let's cover EV charging. We launched our IQ smart EV chargers in the US and Canada in Q4. We are developing smart EV chargers for European countries, and we expect to introduce them this year. The team is also working on bidirectional EV charger, which will unlock use cases like V2G and V2H as part of the Enphase System. This charger will have a GaN-based bidirectional inverter. We expect to release the product in 2025. Let's cover the latest upgrades to our energy management software. We recently did a press release where we launched Enphase Power Control, or PCS, software that can integrate with our systems in North America. PCS dynamically controls the power produced by the Enphase System, giving installers a lot of flexibility in system design to build larger systems and avoid costly main panel upgrades while meeting utility and national electric code requirements. Our software is evolving to manage the increased complexity in the energy markets by leveraging AI and ML for forecasting and optimization. Our next software offering will manage dynamic tariffs in countries like Netherlands and Germany. This new software is intended to help maximize ROI and reduce the payback period for solar homeowners throughout Europe, where electricity prices can change by the hour. Let me provide you with an update on IQ9 Microinverters with gallium nitride or we also call GaN. We expect IQ9 microinverters to deliver higher power at lower costs. Multiple vendors have been providing us with GaN parts, and we are increasingly confident in the reliability of our design. We expect to launch the product in the first half of 2025 to address the two markets: one is residential and the other is three-phase small commercial markets, both the 208 watts, as well as the 480 watts. Let's now discuss our installer platform. We announced some key features and improvements to Solargraf in Q1, including advanced 3D design with smart design capability, California NEM 3.0 support and enhancements, and verification of shading and support for small commercial projects. Solargraf is currently available to installers in the US, Canada, Brazil, Germany, and Austria, and we expect to release it to more countries in the coming quarters. Let me conclude. We have been managing through a period of slowdown in demand. We believe Q1 was the bottom quarter. Europe has already begun to recover, and we expect the non-California states to bounce back in Q2. California is becoming less of a wild card, and we expect demand to stabilize and increase in the back half of 2024. We are bullish about NEM 3.0 in the long term. The payback is attractive for solar plus batteries. The utility rates are going up steeply and the sales teams are learning rapidly. I am pleased that we have executed well through the market downturn over the last year. We have maintained profitability and free cash flow throughout this period while correcting the channel. We have not sacrificed any new product development or geographic expansion plans and are now entering a growth cycle with a good product portfolio and a growing TAM, and there is still a lot more to come. We expect to begin field testing our microinverters, IQ9 Microinverters, and fourth-generation batteries later in the year. We are making balance of system improvements to enable faster and easier battery installation. We plan to roll out significant software upgrades like PCS and dynamic tariffs in both the US and Europe. We remain laser-focused on operational excellence, concentrating on sell-through and installer count, reducing operating expenses and product costs and maintaining healthy gross margin as our company returns to strong growth. With that, I will turn the call over to Mandy for a review of our financial results. Mandy? Mandy Yang -- Chief Financial Officer Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2024 financial results, as well as our business outlook for the second quarter of 2024. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $263.3 million. We shipped approximately 603.6 megawatts DC of microinverters and 75.5 megawatt hours of IQ Batteries in the quarter. Non-GAAP gross margin for Q1 was 46.2% compared to 50.3% in Q4. The decrease was primarily driven by lower net IRA benefits. GAAP gross margin was 43.9% for Q1. Non-GAAP gross margin without net IRA benefit for Q1 was 41%, compared to 41.8% in Q4, mainly driven by lower volume. Given non-GAAP gross margin for Q1 included $13.7 million of net IRA benefit. Non-GAAP operating expenses were $82.6 million for Q1 compared to $86.6 million for Q4. The decrease was the result of the restructuring plan we implemented in December 2023. GAAP operating expenses were $144.6 million for Q1, compared to $156.9 million for Q4. GAAP operating expenses for Q1 included $56.7 million of stock-based compensation expenses, $3.5 million of amortization for acquired intangible assets and $1.9 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $39 million, compared to $65.6 million for Q4. On a GAAP basis, loss from operations was $29.1 million for Q1, compared to a loss of $10.2 million for Q4. On a non-GAAP basis, net income for Q1 was $48 million, compared to $73.5 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.35 for Q1 compared to $0.54 for Q4. GAAP net loss for Q1 was $16.1 million compared to GAAP net income of $20.9 million for Q4. This resulted in GAAP diluted loss per share of $0.12 for Q1 compared to GAAP diluted earnings per share of $0.15 for Q4. We exited Q1 with total cash, cash equivalents, and marketable securities balance of $1.63 billion compared to $1.7 billion at the end of Q4. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 332,735 shares of our common stock at an average price of $126.21 per share for a total of approximately $42 million in Q1. In addition, we spent approximately $60 million by reporting shares to cover taxes for employees' stock vesting and options in Q1. That reduced the diluted shares by 480,735 shares. We expect to continue this anti-dilution plan. In Q1, we generated $49.2 million in cash flow from operations and $41.8 million in free cash flow. Despite the macroeconomic challenges, we continue to generate free cash flow. Capital expenditure was $7.4 million for Q1 compared to $20.1 million for Q4. Capital expenditure requirements decreased due to a reduction in our US manufacturing spending. Now let's discuss our outlook for the second quarter of 2024. We expect our revenue for Q2 to be within a range of $290 million to $330 million, which includes shipments of 100- to 120-megawatt hours of IQ Batteries. We expect GAAP gross margin to be within a range of 42% to 45%. We expect non-GAAP gross margin to be within a range of 44% to 47% with net IRA benefit and 39% to 42% before net IRA benefit. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect the net IRA benefit to be between $14 million and $17 million on estimated shipments of 500,000 units of US microinverters in Q2. We expect to increase the US main microinverter shipments to two-thirds of our overall microinverter shipments in the second half of this year. We expect our GAAP operating expenses to be within the range of $134 million to $138 million, including approximately $56 million estimated for stock-based compensation expense, acquisition-related amortization, and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within the range of $78 million to $82 million. We expect our GAAP and non-GAAP annualized effective tax rate, excluding discrete items for 2024, to be at 18%, plus or minus 1% with IRA benefit. With that, I will open the line for questions. Questions & Answers: Operator Thank you. We will now begin the question-and-answer session. [Operator instructions] We ask that you please limit yourself to one question and a single follow-up. You may then reenter the queue if you have further questions. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Colin Rusch with Oppenheimer. Please go ahead. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much, guys. As you start entering some of these newer markets with energy storage, can you talk about how much of the volume you're guiding into 2Q, could be considered selling to build a little bit of inventory to support those customers? Badri Kothandaraman -- President and Chief Executive Officer Yeah. Could you please repeat that question, Colin? I didn't follow that properly. Colin Rusch -- Oppenheimer and Company -- Analyst Sure. So, as you start selling energy storage into new markets and looking at the 2Q guide, how much of that energy storage sales dynamic is actually selling into the channel and channel just to get prepared in those markets? Badri Kothandaraman -- President and Chief Executive Officer Not much really because the new markets are just ramping up for us. For example, we introduced storage in Italy in Q1. So, really, that's the only one where we introduced into a new market. Prior to that, you see, we introduced into a few European countries. Prior to that, we introduced it in the UK. In fact, our storage is -- the channel is very healthy. We are actually normalized as we speak on storage. That's what I said, we are there on storage. In fact, I'll give you a data that I didn't talk about in the call. Our sell-through of batteries in Q4 overall worldwide was 140-megawatt hours, while the sell-through of batteries in Q1 was 128-megawatt hours, only 8% down. It's much better than the seasonality of 20% that we are seeing on the other products. And so, batteries are doing well in general. Yet despite the 128-megawatt hours sell-through, we had the discipline to only ship 75.5-megawatt hour. That means we took 43-megawatt hours out of the channel. The channel is quite lean for storage. That's why you see we are increasing the guidance. When I guided for Q1, I guided 70- to 90-megawatt hours. Now I'm guiding for Q2, I'm guiding 100- to 120-megawatt hours on storage. So, storage is a good story. We expect it to continue. We expect, over the long term, every market to transition to solar plus storage. We talked about the color of some of our markets. Netherlands, we talked about. France, we talked about. Germany is already there. California, we'll get there soon. So, in general, storage is a good story for us. Colin Rusch -- Oppenheimer and Company -- Analyst Thanks so much. And then on the pricing dynamic, it looks like microinverter pricing was down maybe 4%-ish, 5% quarter over quarter on average. Can you talk a little bit about the dynamic around pricing and discounts as you get through the inventory flush and what we can expect as you get into the middle of the year here? Badri Kothandaraman -- President and Chief Executive Officer Right. And we measure something called ASP variance and we measure something called customer variance. The customer variance means how much pricing did you drop at a particular customer quarter to quarter. And ASP variance is simply a function of how you mix it. For example, if you have a lower pricing for a particular customer and his volume went up, it will show up as an overall reduction in ASP. Really, the measure of effectiveness in pricing comes from customer ASP variance. Are you dropping pricing at a particular customer? And the answer is we are very disciplined there. So, what you are seeing is a result of the mix, but we are extremely disciplined when it comes to -- you talked about in order to move inventory, do you need to lower pricing? No. We don't do -- we don't play games like that. So, we are disciplined, we will be disciplined, we sell on value. And what you're seeing is purely a product mix issue. Colin Rusch -- Oppenheimer and Company -- Analyst Excellent, super helpful. Thanks guys. Operator Thank you. And our next question today comes from Brian Lee at Goldman Sachs. Please go ahead. Brian Lee -- Goldman Sachs -- Analyst Hey, guys, good afternoon. Thanks for taking the questions. Badri, can you talk a little bit about -- you said at the onset of the call that you undership demand in Q1 a little bit less than -- or destocked a little bit less than you would have expected just because demand was softer. So, the $90 million of destock, that should kind of clear the inventory for micros in 2Q in your guide. You're saying normalized, you're seeing 400. So, are you inferring that normalized demand when you strip out the $90 million of destock is running at like 4 90? Because I know last call, you were talking about 450 to 500. So, maybe just to high-level kind of walk us through your thought process of what demand you're seeing out there, what the normalized level looks like once you get through all this inventory reset? And then maybe what time frame you think you kind of get back to those normalized run rates as well? Badri Kothandaraman -- President and Chief Executive Officer Got it. So, Brian, in Q1, our sell-through demand, which is end customer demand, was $376 million in Q1, and we reported revenue of $263.3 million. Therefore, you can do the math, $376 million minus $263 million is $113 million of under shipment. Now in Q2, I guided $290 million to $330 million. Midpoint of guidance is $310 million. And now I said my estimated sell-through in Q2, which is reflective of when customer demand is $400 million. So, the difference between the two, $310 million, minus $400 million, or the other way, $400 million minus $310 million is the $90 million of under shipment. Now, what could that $400 million be in the second half of the year? That's where we are talking about the markets. We expect Europe, for example, to continuously improve. Netherlands government has approved net metering for the foreseeable future. We are starting to see the lead generation much higher in Netherlands. That should start to result in increased sell-through and increased activations in Netherlands, which is a big deal. Next one is France. France, the utility rates are helping us. So, you can see, despite this environment, we expect France to be strong. Third one is Germany. We reported sell-through of 28% higher in Q1 from Q4. And once again, there, the cost of electricity is high, and we expect solar and storage or solar and batteries to continuously grow. On top of it, I talked about our product introductions. In the last year, we have set ourselves up nice by introducing IQ8 and batteries everywhere. We are now in 24 countries. Even in Q1, we introduced batteries into Italy. Prior to that, we introduced in the UK Then we introduced Sweden, Denmark, et cetera, prior to that. I'm not going to list everything. So, we are attacking new markets in both Asia, as well as Europe. And now let's come back to the US. In the US, the dynamics are non-California states and California states -- and California. So, non-California states, there are multiple data points for us to tell you that things are improving. In the last few weeks, let's say, last four weeks, we are seeing better sell-through numbers compared to what we saw prior to that. That's the first data point. The second one is we have our internal Solargraf software, which is now being used by over 1,000 plus installers, and therefore, we can look at sales proposals, and contracts, we can see those numbers are continuously going up in March. The numbers are up in March versus February, numbers are up in April versus March. So, that's a good sign. Then, of course, it is anecdotal. My interactions with customers in California in the last four weeks, all of them universally said March is a much better sales month than February. The last one is, you do see third-party analytics reports like that talk about permitting. And you can see the -- in general, the permits for non-California, as well as California are up in the month of March versus February. By the way, the trends that I told you are valid for both non-California, as well as California in the last few weeks. So, we are cautiously optimistic that things are turning. And that's why I said Q1 is the bottom quarter. That's why we are raising our guidance to $290 million to $330 million for Q2. That's why we said the sell-through is going up from $376 million to $400 million. With these growth trends, we expect sell-through to continuously go up. And the last one, the point which I wanted to talk about, was interest rates. We now hear that there are going to be likely two interest rates -- two cuts instead of maybe three or four planned before. So, anytime that there is a cut that is going to expand the non-California states even further, meaning the demand further, so those all could come into play. Brian Lee -- Goldman Sachs -- Analyst Understood. OK. No, that's super helpful. I guess if we think about just, again, kind of trying to dissect the normalized demand outlook you have here, the channel is clean exiting 2Q and you're looking at barring any meaningful mix changes or pricing changes and demand staying basically where you think it is today, like $400 million. Is there any reason you would not be shipping that level in 3Q? I mean is there any structural shifts to what the channel is willing to take or kind of lead times and things of that nature? I guess I'm just trying to understand how that $400 million -- what are the puts and takes for that $400 million -- to stay $400 million versus, again, I think there was a view earlier in the year that it would be higher than $400 million, but right now, it is at $400 million. So, what moves that higher? And then what potentially moves that lower if it were to go into the opposite direction? Badri Kothandaraman -- President and Chief Executive Officer Yeah, I think what you said is correct, meaning once the channel is normalized, sell-in and sell-out should be balanced. So, that's right. So, for example, we do expect the sell-through in Q3 to be higher. But if you were to say it is sell-through remains around, let's say, $400 million level, our sell-in would remain similar because now we have taken all the inventory out, we don't need to do any under shipment any longer. So, our sell-in and sell-out are balanced at that time. But like what I said, there are several vectors for that sell-through to improve in Q3, which I highlighted, all of the things in Europe, all of the new products we are introducing, non-California states which are improving, California installers learning to do NEM 3.0, more financing options being available to the installers in general than before in the US and is starting to ramp on small commercial products. So, all of that makes me optimistic that sell-through would start to become higher in Q3 and beyond. Brian Lee -- Goldman Sachs -- Analyst All right. Appreciate it. Thanks, guys. I'll pass it on. Operator Thank you. And our next question comes from Kashy Harrison with Piper Sandler. Please go ahead. Kashy Harrison -- Piper Sandler -- Analyst Good evening, and thanks for taking the question So, Badri, first one, you indicated last quarter sell-through expectations for Q1 of $390 million to $430 million, and sell-through, to your point, came in at $376 million. And in the spirit of continuous improvement, I was wondering if you could just walk us through the specific input or approach to your forecasting methodology that was faulty and then how you've adjusted for those errors heading into the second quarter? Essentially, what I'm just trying to get at is are you forecasting approaches improving? And how? And I'm trying to get to a point where the Street can have confidence that that sell-through will land about where you expect it to in the second quarter. Badri Kothandaraman -- President and Chief Executive Officer Right. In general, we are not perfect. We forecast based on the seasonality. We were right in most places. And as I reported, the California numbers were a little bit worse. And you can see that the sell-through in California was about 30% lower, 37% on microinverters and about, I think, 18% or 19% on batteries. So, I think California was the wild card, which I did mention in the prior quarter. And I think we are getting the increasing confidence in California. I outlined everything which we discussed with the California installers. So, we are confident in our forecast right now, and the first few weeks of the quarter seem to be trending in that direction. Kashy Harrison -- Piper Sandler -- Analyst Fair enough. Appreciate it. And as my follow-up question is on IQ9. You indicated the first half 2025 commercial release date, and I think you said pilots later this year. How long would it take for IQ9 to ramp to 100%? And then just strategically, can you talk about how you're thinking about using a lower-cost product, both in the US and in international markets, from a share perspective? Badri Kothandaraman -- President and Chief Executive Officer Yeah. IQ9, first of all, we're going to -- we are working on two flavors. One is a 427-watt microinverter and the other is the 548-watt microinverter. The 427-watt microinverter would be what I would consider the bread and butter for the US in probably a year from today, which is right in the time frame that we are introducing. And I would say that typically, an introduction and the ramp for a new product like that would be four to six quarters based upon our experience with IQ8. So, two flavors, 427 and 548. In the 548, things get a lot more interesting. We are now going to have the 548 for three-phase 208 volts, as well as 480 watts small commercial installs. So, that will be good. The principal thing about IQ9 is it uses gallium nitride. Gallium nitride enables a much higher power with similar form factors. It's got good efficiency. And it doesn't dissipate as much heat. So, when we are using it in our -- both the AC, as well as DC effects, we are able to get -- we don't need to blow up the microinverter form factor. And the other advantage with gallium nitride is it allows us to operate at a higher frequency. Earlier, we used to operate at -- or today in IQ8, we are operating at 100 kilohertz. With gallium nitride, we can go up to 1-megahertz, and we need to -- we are working on our ASIC in order to get to that capability of megahertz. But once you get to a megahertz, then what happens is you can basically get rid of your big transformers and the transformer sizes can all go down. And anyone who knows about inverters know that there is a lot of dollars going in there. So, in terms of form factor, things will get a lot more tighter so that now since they get tighter, you're not talking about blowing up the area due to higher power because one of the concerns always is efficiency. When you have higher power, if you operate at your same efficiency, you're dissipating a lot of heat, like, for example, at 548 watts, you have, let's say, 97% efficiency, that means 548 watts times 3%, that's 16 watts of power and 16 watts of heat. But with the gallium nitride FETs, we are able to operate them with good efficiency. And so, we don't need to blow up the inverter, and we can keep it with an elegant form factor. For installers, we can look at bringing the dollars per watt continuously down. Because for us, the more compact we make the microinverter, the more integration we achieve, the better it is. And just as in FYI, where there are four silicon FETs before on the AC side, we will only need two silicon FETs for transistors because we got something called a bidirectional switch for GaN. It can operate both ways. So, just zooming back to a higher level, GaN will allow us to operate at higher power lower efficiency with the same form factor, thereby dropping the dollar per watt because you're increasing your power line. Kashy Harrison -- Piper Sandler -- Analyst Helpful color. Thank you. Operator Thank you. And our next question today comes from Mark Strouse at J.P. Morgan. Please go ahead. Mark Strouse -- JPMorgan Chase and Company -- Analyst I got two questions on gross margins. For the 2Q guide, the 39% to 42%, that's down a bit from what you've been guiding the last couple of quarters. In response to Colin's question earlier, you mentioned mix as a part of that. I just want to confirm, are you kind of talking about kind of mix of just kind of random installers that you're selling to in a given period? Or is there anything to signal as far as kind of international mix or storage mix? Any other color there would help. Badri Kothandaraman -- President and Chief Executive Officer Yeah, what I was talking about on the question from Colin, which was microinverters was installer mix, that's correct. But this question that you are asking, the 39% meaning, we guided 39% to 42% for non-GAAP gross margin without IRA in Q2. Your question is why? And yes, we increased our battery guidance by 30-megawatt hours. As we can see, Q1 guidance was 70 to 90, we increased 100 to 120. That means we are -- the battery to microinverter ratio is increasing from before. We are getting better and better and better on the gross margin of batteries, and you'll see those numbers continuously improve. On battery specifically, I called out three factors. I said the cell pack costs are continuing to come down rapidly. We are beginning to manufacture now our microinverters, which are used in the battery. We are beginning to manufacture them in the US Those will provide us with the production tax credit, which is exactly the intention that we need to produce that product in the US, the inverters made in the battery. And then the last one, which is exciting one is where we are moving to more integrated architecture for power conversion and battery management. And basically, what's going to happen is our third-generation battery, the Y direction is going to almost get cut by 40%. And instead of six microinverters that we have in the third-generation battery, we will now have two microinverters, one on each side of the fourth-generation battery significantly cutting down the form factor. So, we expect that to bring in another big level of improvement in gross margin. So, those are the gross margin puts and takes on our batteries. Mark Strouse -- JPMorgan Chase and Company -- Analyst OK. Very helpful. And then my quick follow-up question. On the 45X within gross margin, last quarter, you talked about 500,000 units being about a $12 million to $14 million benefit. For 2Q, you're talking about a similar number of units, but with a $14 million to $17 million benefit. I'm not sure if I'm just splitting hairs there, but just wanted to see if you're kind of signaling that you're maybe keeping more of that 45X credit. Badri Kothandaraman -- President and Chief Executive Officer No. What happens is there is a few things that happened there. It depends upon the power of the microinverters that we are building. Sometimes we may build a 384-watt microinverter, you do the $0.11 per watt there, or we may build a 640-watt microinverter that is used inside the battery. So, it's a function of that and purely a function of that. So, it just falls out. The higher power we make, the more advantage we have, which is why we are beginning to -- I told you that we are beginning to make our small commercial IQ8P Microinverters starting in Q2 as well from the US So, those are 480 watts. So, $0.11 a watt is $53 gross benefit -- gross production tax credit there. Mark Strouse -- JPMorgan Chase and Company -- Analyst Yeah, OK. That makes sense. Thank you very much. Operator Thank you. And our next question comes from Praneeth Satish with Wells Fargo. Please go ahead. Praneeth Satish -- Wells Fargo Securities -- Analyst Thanks. Maybe just staying on the battery. So, looking out to the fourth-gen battery, it seems like there's a very large cost reduction coming. I guess, how do you think about keeping this cost savings versus passing it on to customers? I guess, specifically, I'm thinking about this in the context of Tesla Powerwall 3. Today, you can buy a Tesla Powerwall 3 with its integrated inverter and that's going to be cheaper than an Enphase battery and inverter solution. And I know it's apples to oranges because they're using a string inverter. But I guess with the fourth-generation battery, you have the ability to close that gap while still earning more margins. So, I guess I'm just trying to see how you think about that opportunity next year with that new battery. Badri Kothandaraman -- President and Chief Executive Officer Yeah, before that, let me give you a color on -- you talked about many things there. You talked about battery, you talked about competition, you talked about string inverter integrated into the battery. I just want to remind you of our benefits and why we offer tremendous value. So, in my trip in the last four weeks, many of our customers are -- they're very experienced. They have used string inverters and you have no idea of all of the troubles they have gone through. And they -- for them, some of the customers mentioned safe AC on the roof is religion for us. So, safe AC on the roof. You don't want high-voltage DC above you. That's the first point on Enphase. Production, we have microinverters for every panel, MPPT at the panel level. Production can be enhanced almost by 5% to 15% when you compare to normal string inverters. Per panel monitoring, many of our installers love that, per panel monitoring. And their homeowners love it because they're able to say, OK, this particular thing isn't working and they are able to get service from Enphase ultrafast. We are open 24/7. Reliability, you can count on. That's why we provide 25-year warranty, most of competition, maybe 10 or 12 years. No single point of failure unlike string inverters, that causes much higher uptime for your system. And that's that you're all familiar with. Simple plug-and-play install, our installers love the simplicity, no additional RSD, rapid shutdown devices, needed. Any roofs in different orientations, it's got to be Enphase, nothing else. Grid-forming IQ8 Microinverters enabling sunlight jump start for depleted batteries. Everybody knows this. But if I were to emphasize, you are running off grid, you have a power shutdown, you're running off grid, your battery, let's say, you've turned on the AC on by accident, your battery runs down. Your battery runs down all the way to a particular percentage. Then the battery has got a capability to do what is called Black Start. It opens -- it wakes up every few minutes the next day and it says I'm ready and it has solar and that can happen for one or two days. But after one or two days, even that energy in the battery goes away and the battery is dead. That is the state of charge drops to 1% or below. Now with Enphase IQ Microinverters, you could do sunlight jump start. Even without the grid, sunlight comes, you form the grid, you jump start the battery at that time and the battery state of charge comes up. So, that's an example, sunlight jump start that we do. And of course, our microinverters are now being made in America. That's a big deal. Many of our installers love that. When it comes to storage, safe chemistry, lithium-ion phosphate, big deal. UL 9540A fire certification, very big deal. And we have worked with the fire departments and make sure that we have optimized the placement of batteries there. So, we have done it for a lot of AHJs in California. Best warranty in the industry. You see competition at 10 years approximately. Our warranty is 15 years, no moving parts or fans. Low-voltage DC operation of the batteries. If you see a concept of a hybrid inverter where one inverter takes care of solar and storage, obviously, there is a lot more stress on that. But we have a distributed architecture, which means you've got inverters on the roof that take care of solar. You got inverters in the battery that take care of storage. And even if one inverter in the battery goes down, the other inverters are there to help. The system is never down. Field serviceable in situ without taking the battery of the wall minimizing downtime. I talked about gross margin. This time, I didn't say this, but it is a big deal. Our overhead costs in running a battery business are dropping quite a bit because we have figured out how to not do expensive RMAs. An expensive RMAs is what, you have a big system hanging off your wall. The worst thing you do is it doesn't work, you take it off the wall, the homeowner is off commissioned for many days in a row, then you have to take it back to the installers warehouse. The OEM or the component manufacturer or battery manufacturer has to ship product to him and the installer has to spend his valuable time on the field once again installing the new battery. The homeowner is down. He is losing solar and storage. He is losing self-consumption dollars, and especially in a place like California, that can add up a lot. It can be a major source of annoyance. With our field serviceability in situ instead of taking a $5,000 battery, we can take a $50 board, PCB board off, take that out, put the new board. In a matter of an hour, you're up and running. And so, enhanced serviceability. The next one, LRA. An 48-amp LRA for every 5-kilowatt hour battery, 144 amperes for a 15-kilowatt hours enough to start a two batteries, two of our five-kilowatt hour batteries are enough to start three-ton air conditioners. And our power is double both the peak and continuous power are double that of the previous generation, and our installers love that. Simple to install and commission. For example, the NEM 3.0. The NEM 3.0 scenario, much like Germany, our installs -- most of our installs are what called has a grid-tied installed. The grid-tied install or a rate saver install or a time of use install or savings battery, they're all identical. The battery is simply provides economic advantage. And installing such a battery is trivial. You finish your solar, you're done with AC on the roof, all you need to do is to take two of our five kilowatt-hour batteries, you hang it off the AC bus, there is nothing to size, there is no main panel upgrade, you don't need to worry about where to place it, you simply hang it off the AC bus, and the installation can be done in less than two hours. You connect it to the same combiner box that you use for solar, no extra component and you're up and running. So, that's becoming very popular. Rate saver battery or a grid-tied battery becoming extremely popular. So, that's that. So, I told you the benefits of Enphase solar and Enphase Storage System. If you look at all in one mobile app. The problem with having multiple solar and storage manufacturers is the homeowner has got a mess of apps. And it's possible, but it's difficult to keep track of all of that. So, all information and control at your fingertips. The ability to take the home off the grid through an Enphase app. We provide that as well. We provide 24/7 customer service with 100 field service technicians who will take care of the batteries. The installer doesn't need to spend his valuable time. He can focus on a new install. And as you know, the big advantage is with an AC-coupled system is you have both the power from your solar system, as well as from your batteries. So, the combination means even more power. You don't have one inverter constraining your output. And of course, the last one is our PCS software, power control system software. That one is going to be invaluable to installers to not do main panel upgrades. And by the way, we can do PCS simply even for NEM 2.0 expansion systems. If you want to expand your NEM 2.0 system, as long as you do not export anything beyond your old system, you can still do your NEM 2.0 system to support your current consumption while exporting energy -- maximum energy from the old system. So, NEM 2.0 expansion is now a lot easier. So, hopefully, I gave you some color on the value that we add, and we are not stopping. We are going to be focused on cost. The batteries are -- our customers are cost sensitive. And with every opportunity, we are going to be removing boxes off the wall. Raghu was with me with all of the installers, and we have clear plans on what we are going to do to eliminate more boxes on the wall. So, we are ultrasensitive as in response to your question. And if we need to drop pricing because we aren't providing as much value compared to competition, we will do so. Praneeth Satish -- Wells Fargo Securities -- Analyst Got it. No, thank you for that very expensive answer. Maybe just one more quick one, again, on batteries. So, you said that the channel is normal for batteries. You are at battery sell-through of 128-megawatt hours in Q1 for a seasonally weak quarter. The guidance for Q2 has battery shipments at 100- to 120-megawatt hours. And I'm assuming there that sell-in equal sell-through in Q2. So, maybe if you can just talk about what's driving that slight decrease from 128-megawatt hours to the guidance of 110? Is that conservatism? Or are there other factors? Because it seems like there's a lot of tailwinds in the battery business. Badri Kothandaraman -- President and Chief Executive Officer That is conservatism. And yes, I knew that you guys would ask me the questions because you're intelligent. I said carefully worded that it is almost there. That's what I said. But you're right in general. The battery, we expect to run quite lean on batteries. And so, yes, we are conservative. It does seem that there is some opportunity for upside there. Praneeth Satish -- Wells Fargo Securities -- Analyst Got it. Thank you. Operator Thank you. And our next question today comes from Philip Shen with ROTH MKM. Please go ahead. Philip Shen -- ROTH MKM -- Analyst Hi, everyone. Thanks for taking my questions. Back to Brian's question earlier on the timing of normalized revenue. Badri, I think you said on the last call, the $475 million would come in the back half of this year. Are we still on track for that? So, the $475 million could be in either Q3 or Q4? And can you walk us through, is it more likely Q4 or Q3? Or if there is a chance that, that gets pushed out to Q1? Thanks. Badri Kothandaraman -- President and Chief Executive Officer Well, Phil, you know that we don't give guidance for Q3 nor Q4, but I described all of the tailwinds. And we are growing from a sell-through demand of 376 to 400. And we described the growth vectors. We are optimistic about all of the growth vectors. And we talked about the puts and takes in Europe. We talked about Netherlands, we talked about France, we talked about Germany, we are extremely bullish there. We are introducing a lot of new products in those regions. We expect -- we have done that in the last year. We expect them to take off. Then we talked about the non-California states where we are seeing them seasonally bounce back up. And California, I would say California installers are -- like what I said, I was extremely optimistic after my trip. The last three to four weeks of data also shows good trends. So, while we are talking about a sell-through demand and customer demand of $400 million in Q2, I expect the numbers to go continuously up in Q3 and Q4. Philip Shen -- ROTH MKM -- Analyst Great. OK. So, very much still on path, but there might be a little bit of risk, but you definitely see a path. It sounds like. Badri Kothandaraman -- President and Chief Executive Officer Yes, I do. Philip Shen -- ROTH MKM -- Analyst Great. OK. Thank you. Shifting gears to maybe data that might be even ahead of sell-through. Our channel work suggests in this challenging US resi time, you guys are gaining a healthy amount of share. And whether it's 5% from one source versus a recent poll that we did, you might be gaining 11% share with 5% of the market. That's pretty healthy and potentially can make a big difference. And so, I wanted to see if you can help us understand what is the activation implied revenue that you might be seeing versus sell-through and obviously compared to the sell-in? So, do you track that in a way that you can articulate what was the activation implied revenue for maybe Q1, maybe what you see for Q2 and beyond? Thanks. Badri Kothandaraman -- President and Chief Executive Officer Yeah. I mean, we do see reports, we do see sell-side reports, we do see third quart reports. We are focused on highlighting our value and working with installers in these times. These are difficult times. So, we are trying to help them with all the services we have, whether it's proposal, whether it is permitting, whether it is proper modeling, whether it's leads or whether it's simply to understand their RMAs, how can we help them understand their service, understand their labor, understand how to improve their efficiency, doing Kaizen with the installers. So, we believe that our relationships with the installers in these times is the single most reason on any market share gain that you're highlighting. Normally, from sell-through to activations for us, it will take us about four to eight weeks. But any market share gains, we will start potentially seeing going forward because, as you know, when installers switched to us, no one switches 100% like that. There is a ramp associated with ramping down what they are using and ramping up the new product. And I would say that will show up definitely as sell-through increases. And we will report that in Q2 -- I mean, we will report our Q2 results in the Q3 call. That's what I mean. Philip Shen -- ROTH MKM -- Analyst OK. Thanks very much. I'll pass it on. Operator Thank you. Our next question comes from Christine Cho with Barclays. Please go ahead. Christine Cho -- Barclays -- Analyst Good evening. Thank you for taking my question So, I'm going to ask the sell-through question a different way. It's $400 million in 2Q and expected to get to somewhere between $450 to $500 million by year-end. So, let's just take the midpoint, $75 million. Can you just give us an idea combining all of the comments that you gave us individually, but that $75 million, how much of it is driven by Europe versus US? Is it like half? Is it more Europe? Is it more US? And then how much of it is driven by microinverters versus batteries? And then when you guys say that destocking will be done by end of Q2, are you assuming back to the 8 to 10 weeks? Is that what you're considering normalized levels of inventory? Badri Kothandaraman -- President and Chief Executive Officer Yes. So, let me answer all of them. We expect -- I mean Europe, as well as the US have healthy growth vectors for us. We do expect 50-50 from North America and Europe. Your other question was -- Christine Cho -- Barclays -- Analyst MIs versus batteries. Badri Kothandaraman -- President and Chief Executive Officer Micro versus battery? Yes, micro versus battery, I would say, considering that non-California states battery attach isn't high. So, micro versus battery, I would still say 60-40 on micros versus battery is what I would say. And the last one you asked is that 8 to 10 weeks. The way we measure our weeks on hand is typically backward looking is what we say is over the quarter, this was the sell-through rate, this is the inventory you have on hand today, divide the inventory by the sell-through rate, you get the weeks on hand. One of the interesting ways that I would expect distributors will measure it will be forward-looking weeks of inventory, which is, if the demand, for example, in the last two or three weeks shows a significant uptick, that weeks on hand would be existing amount they have in front of them divided by that increased rate in the last two, four weeks. And so, those numbers, in good times, the forward-looking inventory weeks on hand will be lower than the backward-looking weeks on hand. And so, for us, we are consistent in the way we measure it. We always look at whenever I tell you weeks on hand, I will tell you that, OK, this is the sell-through for the quarter that what happened in, for example, Q1, this is what happened in Q1. This was the inventory at the end of Q1. That channel inventory divided by the sell-through is the weeks on end and our number -- rule of thumb, our general number has been always 8 to 10 weeks. If you are on the upswing, forward-looking weeks on hand could be smaller than that. Christine Cho -- Barclays -- Analyst Right. OK. That's an interesting nuance. I did not realize that you were looking backwards. My second question, the -- you said in your prepared remarks that 50% of your NEM 3.0 systems are attaching your battery. You also mentioned you're meeting with a whole bunch of installers -- you met with a whole bunch of installers in California. Do you have a sense of whether your -- the installers using your product are leaning more toward load shifting or backup? And I'm not sure if you answered this with Praneeth's question, and I just missed it. But can you also give us a sense of where you are in the development of your meter color and when we should expect it to roll one out? Badri Kothandaraman -- President and Chief Executive Officer That's right. Load shifting is a significant fraction of our installers, that's right. And then the second is, when is the meter color coming out. So, just for the benefit of the audience, basically, California has something called meter main combos. These meter main combos have both the meter and the main panel integrated into one structure. And when you have to insert backup, everybody knows you have to do ugly things like ripping your loads apart, you have to put a backup switch in between. And therefore, there's a lot of labor that is actually spent in doing that. Typically, a day or two is spent in relocating all of those loads and then putting a system controller in between the meter and the main load center. With the meter collar, it's a very elegant way, where you have that switch at the meter. It's a device that comes around the meter. It's got the MID, which is the microgrid interconnect switch relay right there at the meter -- at the color, and that basically means you don't spend any labor relocating those loads. Our version of the meter color is coming out shortly. It will be piloting by the end of the year. Operator Thank you. And our next question today comes from James West of Evercore ISI. Please go ahead. James West -- Evercore ISI -- Analyst Hey, Badri, a real quick one for me. Based on your conversations in California over the last three or four weeks, as you met with the installer base and you talked about how they -- you talked earlier about how they cut costs pretty significantly, is there any concern at all about if growth does come back as you see it, their ability to respond to that growth? Badri Kothandaraman -- President and Chief Executive Officer No, I think they're all much more savvy than what we think, especially the long tail. The people I met are representative of the segments we service. They typically -- they do between one and five megawatts a year. That means you can probably see they generate revenues between $5 million and $15 million -- $5 million and $20 million a year annual revenue. They have teams usually two to three crews or even one to two crews, very lean team. Company is less than 50 people. And core employees are relatively less. They use contractors if they have to, and they have become very smart in managing money as well. They know that they shouldn't be -- they should be lean in these times. They don't waste money. They have less inventory. One other big thing that has changed is now they have a lot more financing options available to them. So, they have a lot of options available to them. If loans do not work well, they have leases or PPAs. Many of them, I did meet at least a third, maybe 30% of the installers were still selling cash to the customers in Southern California, as well as Northern California. Those are no problem. But the other folks who are moving to lease or PPA rapidly now that there are multiple suppliers. So, all in all, I think what I'm trying to say is that they are nimble. They understand exactly what is happening. They are very savvy on the products. They gave us a number of ideas to improve and do even better than what we are doing. And we are going to take that feedback, and I'm not worried whether they will be able to grow. They'll be able to grow exactly like us in good times. James West -- Evercore ISI -- Analyst Got it. That's very helpful. Thank you. Operator Thank you. And our next question today comes from Moses Sutton of BNP Paribas. Please go ahead. Unknown speaker Hi, this is Heidi on from Moses. Thanks for fitting me in. I just have a quick question. Coming back to the $113 million in under shipments in 1Q, can you provide the rough breakout of what was US versus non-US? And then same for the $90 million of expected under shipment in 2Q, how much was US versus non-US? Thank you. Badri Kothandaraman -- President and Chief Executive Officer I would basically expect that it is roughly in the ratio that we shipped, which is, I would say, two-thirds US and the third Europe. Unknown speaker OK, great. Thank you. Operator And our next question today comes from Jordan Levy with Truist Securities. Please go ahead. Jordan Levy -- Truist Securities -- Analyst Just wanted to see if there was any -- if you had any updates on the exclusivity arrangement with SunPower. I know that, that was scheduled to come to an end, I think, back in March. So, just curious if there's anything to touch on there? Badri Kothandaraman -- President and Chief Executive Officer The question is, is there any update on SunPower? SunPower has new management, as everybody knows, and we know Tom well. I have been talking to Tom. Right now, it's a business as usual for us. We have a very strong relationship. We are supporting SunPower well and vice versa. And when we sign such a contract, we will let you know. Jordan Levy -- Truist Securities -- Analyst Thanks so much for that. And maybe just a follow-up. I know with getting ready to step down, I think, at the end of June I'm just curious if you could talk to any updates or if you have someone in mind for that role or any other details as you look to proceed in that process? Badri Kothandaraman -- President and Chief Executive Officer Yeah, we're having a hard time hearing you, but I think I got the question, this is a replacement for your chief commercial officer is I guess the question. Yes, we have already finalized that. We have two very experienced executives that I have put in charge because Europe is so important for us. I wanted a very experienced executive to live in Europe, somebody who understands the headquarters properly. And so, one of our executive staff, meaning the one that reported to me his name is Sabbas he is going to be running all of Europe and South Africa sales. So, basically, he is actually relocating to Europe in order to manage that team. And then the team in the rest of the world, I call it, Americas, Australia, India, Asia, both Americas, north, as well as South, especially North American team is a very seasoned team. We have Ken Fong runs our North American team, while Mehran is the senior vice president, who is going to manage rest of the world sales, and Ken Fong will report to him. And Mehran has got a lot of experience in batteries. He's the one who actually created the battery business unit at Enphase and ramped it to high revenue. So, both the executive Sabbas, as well as Mehran have lots of experience, and they'll be able to pay a lot more attention to these regions, and we expect it to be incrementally positive for us. Jordan Levy -- Truist Securities -- Analyst That's really great detail. Appreciate all the answers. Thanks so much. Operator Thank you. And our next question today comes from Andrew Percoco with Morgan Stanley. Please go ahead. Andrew Percoco -- Morgan Stanley -- Analyst Yeah. Thanks so much for taking the question. Most of my questions at this point have been answered. It's been a very comprehensive call. But if I can just maybe zoom out for a second, I'm just curious, how are you guys improving your visibility into the channel so this inventory issue doesn't happen again. I'm assuming this isn't going to be the last cycle that we all see. So, I guess, how are you investing in the platform, whether that be software or otherwise, to make sure you have more visibility the next go around, the next time there's demand side shock and to avoid these channel inventory issues next time? Thank you. Badri Kothandaraman -- President and Chief Executive Officer Right. So, I mean, the answer is somewhat simple. It is to basically get a hold on the metrics of the front end, which is, leads get converted into proposals, converted into contracts, converted into permits, and then the installs happen, then you have activations. So, we have to get into the front end. And getting into the front end, we have Solargraf. Solargraf is a platform for us which helps us because we provide the design and proposal software. And therefore, that gives us the entire visibility on -- it doesn't need to give us the customer -- what every customer is doing, but the broad trends and broad strokes are what we are interested saying, this month what happened in this particular region? What is the statistics of leads versus contracts signed? And then, we do have third-party reports for permits. And of course, we do have our own Enlighten software for activations. And of course, in between we have sell-through, which is when the distributors sell our products to installers from the channel. So, what we are doing is to essentially tighten up that entire chain by putting in metrics at every point there. And by having more and more and more revenue coverage for Solargraf design and proposal tools so that as many installers possible are on that particular tool. So, then we have a lot more statistics. We'll continue to get aggregate reports from third parties as much as they are available. And putting all of these together to create a regression model, maybe even with the help of some sophisticated machine learning. And then, the key is for us to then make decisions on sell-in into how much do we sell into the channel? What are the guard bands of selling into the channel at the end of the day? Like don't get -- don't succumb to irrational exuberance. That is, you think everything is going to be great, therefore you ship a lot more into the channel than the sell-through, do not ever succumb to that. Go always by -- my ex-boss used to call it as mass balance. Mass balance means, whatever you ship out of the channel, you ship into the channel. So, we are putting in all of those statistical process control in place. And we are already better for it. Our weekly ship review every Wednesday, we have exactly the graph, how much is our sell-through? How much is our sell-in? Should we really do so much of sell-in? Are we going to stay within the guardrails, which is eight to 10 weeks? Anytime somebody goes above 10 weeks, we question saying, "Why do it?" And it helps us -- it's starting to help us in many ways. Because then we focus on the real growth, which is, you then start focusing on training installers to increase sell-through. You start understanding which of the installers aren't doing enough volume with you. Sales guys are focused on the right things versus pushing in stuff into the channel. So, I think companies have gotten a lot better in this front during the last year. Andrew Percoco -- Morgan Stanley -- Analyst Understood. Thank you so much. Badri Kothandaraman -- President and Chief Executive Officer Thank you. Operator Thank you. And our next question today comes from Maheep Mandloi with Mizuho. Please go ahead. David Benjamin -- Mizuho Securities -- Analyst Hi, this is David Benjamin in for Maheep. I've got a question and then a follow-up. Can you please give us some insights on your thoughts on the Solargraf market share or penetration with installers within the US? Just trying to get some visibility with sales leads in the market. Badri Kothandaraman -- President and Chief Executive Officer Yeah. We have over a thousand installers on Solargraf using our design and proposal tool. And we have over a few hundred using our permitting tool. David Benjamin -- Mizuho Securities -- Analyst OK. Great. Thanks very much. And then a follow-up. Just on the gallium nitride, can you talk a little bit about, like, where you plan to source the materials? Is that going to be concentrated mostly from China or other markets? And lastly, any thoughts on impact from annuity AD/CVD on the US solar demand or thoughts on the NEM 3 challenge in the California courts? Badri Kothandaraman -- President and Chief Executive Officer Gallium nitride, we do have a lot of sources for gallium nitride transistors. Some of the sources are people we already do business with for the silicon FETs. So, we aren't worried. We have lots of opportunities. There is many people with good quality gallium nitride FETs. Raghu will take the question on NEM 3. Raghu Belur -- Chief Products Officer Yeah. NEM 3, we are aware of the challenge, where it was -- there was an -- it had gone into appeals court because they actually lost the case in the lower court. It remains to be seen. The fact is that I think it's going to be difficult to overturn, but if they do, obviously, the market will react differently. But for now, for us, business as usual, we are going out there. We recognize that in the long term solar plus batteries is the way to go. And we are really working toward making sure that our battery solution -- solar plus battery solution is best in class, and that's what we are doing right now. But the courts will take their time, they'll do their thing, but it's not something that we are really focused on. David Benjamin -- Mizuho Securities -- Analyst Great. Thanks very much. Operator Thank you. And our next question comes from Austin Moeller with Canaccord. Please go ahead. Austin Moeller -- Canaccord Genuity -- Analyst Hi, good afternoon. Just my first question here, what does the market or growth opportunity look like for home battery sales on new installations versus upgrades of existing solar arrays that are already installed on homes? Badri Kothandaraman -- President and Chief Executive Officer Yeah, Raghu will take it. Raghu Belur -- Chief Products Officer Sure. I think both opportunities are equally valuable. Again, it depends on the geography. So, if you're in California, for example, all new homes must have solar, and you are going to be part of NEM 3 install, so you obviously need to have batteries, because if you did a solar-only install in NEM 3, your bill offset is going to be at about 55%. You add 10 kilowatt hours of NEM 3 grid-tied battery, your bill offset could be as high as 80%-85%. So, I think it makes complete sense to go ahead and add a battery in that case. In the retrofit case in California, if you're in a NEM 2 environment, not a lot of incentive to go ahead and add battery, at least for bill offset, because you already get that with NEM 2 where in that case basically the grid acts like your battery. The only other use case for battery in that case would be if you want to do it for resiliency or backup purposes. In other geographies, outside of California, the case for batteries would be -- again, you're seeing more and more of these what are called VPP programs or grid services programs, and so people may come in and retrofit a battery on their system and avail themselves of whatever the utility provides in terms of incentives, whether that is an upfront dollar per kilowatt hour incentive for adding a battery or an ongoing incentive for participation in the VPP program. Very similar situation in Europe as well. If you, for example, look at the Netherlands, obviously, that's a net metering market, but there is a push for retrofitting batteries there because just given the penetration level of solar there, which is about 28%, you do get penalized for uncontrolled export of solar. So, it makes sense to move toward what's called self-consumption. And the way you do that is by adding a battery and then managing that solar plus battery system through software, especially by participating in what's called a dynamic tariff program. You also have obviously VPP that same thing applies to Germany and other countries in Europe as well. Austin Moeller -- Canaccord Genuity -- Analyst Great. And just to follow-up, what do you see as that key growth driver in demand for Europe and Germany in particular? Is it primarily current utility rates? And do you see changes to tax credits in countries like Italy as a potential impediment to that? Raghu Belur -- Chief Products Officer Yeah. So, usually, you're seeing more and more, particularly in Europe, I refer to it as feed-in tariff inversion, wherein the buy rate is significantly higher than sell rate. So, the amount of what you get paid for feeding energy into the grid is significantly lower than retail cost of energy. So, it makes no economic sense to export even a single electron into the grid. So, that's the driver. It is self-consumption. Layered on top of that is if you participate in supporting the grid through a VPP program, you get paid additional monies. So, it's all a driver toward better ROI. But it goes beyond that. It goes beyond solar plus batteries, because now you're seeing in Europe you're adding EV chargers and heat pumps, and those are additional steerable assets that are sitting behind the meter. And if you have a very sophisticated home energy management system, which like we do with all the AI and ML work that we are doing, you can really do some very, very fine optimization and deliver the best economics for the homeowner, a combination of solar, battery, EV charger, and heat pump. For that matter, any combination thereof. So, you're going to see, Italy included, all of these markets in Europe moving toward a whole energy management system with all of these assets. Now imagine what happens a year or two from now when EVs become fully bidirectional, you get yet another powerful asset that's sitting behind the meter that you can use to optimize your consumption and optimize your bill. Operator Thank you. And our next question today comes from Dylan Nassano with Wolfe Research. Please go ahead. Dylan Nassano -- Wolfe Research -- Analyst Yeah, hi. Thanks for running a little long to fit me in here. Just a quick one from me on buyback. So, it looks like share repurchases in the quarter more or less matched up with your free cash flow generation, whereas in 4Q I think you bought back a little more than you actually generated. So, just curious, how are you thinking about the attractiveness of repurchases at these levels? And how should we think about your cash allocation as demand hopefully ramps back up from here? Thanks. Badri Kothandaraman -- President and Chief Executive Officer Yeah, I'll add some color and then Mandy can add more. We did approximately a similar amount in both quarters, but I'll explain the nuance. In Q4, we bought back shares for $100 million. While in Q1 what we did was we did a combination, which is we bought back shares for about $40 million-odd, and we -- some of our stock options, which basically were actually vesting, those stock options, essentially, Mandy didn't allow them to dilute the market. So, we basically spent about $60 million as anti-dilution there. So, in a sense, we spent the same money, $100 million; $40 million for buying back shares out of the market, $60 million for preventing shares into the market. We did that and we continue to -- I mean, you should expect us to continue to do a similar amount as long as the stock is attractive, which it is right now. Dylan Nassano -- Wolfe Research -- Analyst OK. Fair enough. Thank you for clarifying. Operator Thank you. And our next question comes from Dushyant Ailani with Jefferies. Please go ahead. Dushyant Ailani -- Jefferies -- Analyst Hi, thank you for taking my question. Just one on, how much NEM 2.0 backlog is remaining with the installers? I think you talked about 50% being NEM 3.0. So, going into 2Q, how can we expect the backlog cadence to dwindle down for NEM 2.0? Badri Kothandaraman -- President and Chief Executive Officer Yeah, I mean that's an interesting question. All our conversations with installers -- there was one installer who had a backlog of nine months, and there are installers with a backlog of three months. So, we don't really know what the answer is. Like you, we were surprised that the number is still 50%, NEM 2. But installers are learning on NEM 3 rapidly. They are depleting through their NEM 2 backlog. I'm not sure. I can't forecast the number. But I'm sure that within six months, it will dwindle down. Dushyant Ailani -- Jefferies -- Analyst OK. Thank you. Operator Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks. Badri Kothandaraman -- President and Chief Executive Officer Yeah, thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Daniel Morris Hello, everyone, and welcome to today's presentation of Ericsson's first-quarter 2024 results. With me today are Borje Ekholm, our president and CEO; and Lars Sandstrom, chief financial officer. As usual, we'll have a short presentation followed by Q&A. [Operator instructions] Details can be found in today's earning release and on the Investor Relations website. Please be advised that today's call is being recorded, and I also need to advise you that today's presentation may include forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. I'll now hand the call over to Borje and to Lars for their introductory comments. Borje Ekholm -- Chief Executive Officer Thanks, Daniel, and good morning, everyone. So let me first start off by welcoming my two new colleagues, Lars Sandstrom, our new CFO; as well as Daniel Morris, our new head of IR. So it's great to have both of you joining the call and being on board at Ericsson, so a big welcome. So first, I will cover some key highlights from the quarter before Lars goes through the financials in much greater detail. So during Q1, we continued to execute on our strategy to strengthen our leadership in the mobile networks and drive a focused expansion into Enterprise while, of course, continuing to strengthen our culture and operational execution. As expected, our customers remain cautious with their investments, and our organic sales declined and with India slowing following the rapid and unprecedented 5G build-out last year. We continue to view the level of industry investments that's unsustainably low, but we can't, in reality, impact this in the short term, though what we work on is what we can control, and that's like the commercial and operational discipline and, of course, having a competitive solutions and product portfolio. So despite the market headwind and difficult market conditions, we maintained our market-leading position and delivered a good improvement in gross margin to 42.7%, excluding restructuring charges. For the rest of the year, we expect the mobile networks market to remain weak. External sources estimate that the global RAN market will decline by minus 4%. That looks a bit optimistic to me. However, we see the potential for sales to start to stabilize on a year-over-year basis during the second half. And the reason for that is, of course, that North America investments are expected to grow for the full year 2024, and in the second part of the year, we should start to see the benefit from this. But we will, of course, also see the benefit from the recent contract win we had that we announced in the end of last year. We continue to be disciplined in our execution, including proactively taking cost-saving measures to ensure that we're well-positioned to maximize shareholder value when the market ultimately improves. We're still in the early phases of the build-out of 5G, but the improvement in the market will ultimately be in the hands of our customers, and that will happen when traffic grows and new use cases can be launched. So in the meantime, we remain fully focused on manage what's in our control but, at the same time, making the critical investment that reinforces our long-term competitive positioning. And of course, that includes creating the high-performance and programmable networks for the future and exposing their capabilities through a Global Network Platform for network APIs. You've seen that revenues in Vonage fell during the quarter, and that's due to the contract loss we had in Q4 but also our decision to reduce our operations in some countries. Of course, we need to prudently manage the current business in Vonage, but our strategic ambition with Vonage is to build up the Global Network Platform. And during the quarter, we took several steps in our strategy execution by announcing partnerships with Verizon, AT&T, AWS, and KDDI. You heard me say this before, but creating this market will take some time, but we're seeing good traction in building the ecosystem, which will ultimately be crucial to drive the next step of digitalization of enterprise and society, leveraging the capabilities of their mobile networks. And 5G is really a platform technology that allows many different use cases that actually build on that technology. We see very good and solid opportunities on mission-critical networks in many parts of the world. And you have seen that during the quarter, we launched something we call the Ericsson Federal Technologies Group. And that's an activity that we can use to serve the different parts of the U.S. government. And we see this as a very interesting opportunity to expand our market for the 5G technology. Let me also briefly touch on the news that our independent monitor has certified our compliance program. This is, of course, a very important step in order to conclude our plea agreement with the DOJ, but our focus on culture and integrity will continue beyond the monitorship. So with that, I'd like to pass over to Lars to go through the financial details of the quarter. Lars Sandstrom -- Chief Financial Officer All right. Thank you, Borje. Let me start by adding a few additional points on the group before we discuss the segments in more detail. In the quarter, we saw an organic sales decline of 14%. This was primarily driven by Networks. In North America, the rate of decline improved in the quarter, and customer inventory levels have now stabilized. As Borje already highlighted, we delivered a good expansion in our gross margin, excluding restructuring charges, with 42.7% in Q1. Opex, excluding restructuring charges, was down by SEK 0.8 billion in the quarter, with the benefit of our cost-saving actions partially offset by higher variable incentives and inflation. We are working to identify additional efficiencies and believe there is more we can do. EBITA, excluding restructuring charges, was SEK 5.1 billion in the quarter, with a margin of 9.6%. This included a onetime gain of SEK 1.9 billion from the resolution of a commercial dispute. With that, let's move to the segments. In Networks, organic sales were down by 19% year over year as customers continue to be cautious with their investments and as India slowed as expected, following a rapid 5G build-out last year. Despite this, we generated a strong gross margin, excluding restructuring charges of 44.3%. And this was driven by our competitive product portfolio as well as our actions on costs. Gross margin was also positively impacted by retroactive IPR licensing revenues. EBITA, excluding restructuring charges, declined to SEK 4.3 billion, compared to SEK 6.4 billion last year, and we reached an EBITA margin of 12.7%. The decrease in EBITA reflects continuous cautious customer investment level across multiple geographies, leading to lower sales and lower gross income. As Borje said, we are taking proactive actions to optimize the business and drive efficiencies, and this is already supporting gross margins and driving down operating expenses. In segment Cloud Software and Services, we continue to execute on our strategy to strengthen delivery performance and commercial discipline. Organic sales decreased by 2% compared to last year primarily driven by descoping contracts and contract exits in Managed Network Services. While this is impacting the top line, these are strategic actions that will position the segment for attractive profitability levels in the future. We delivered a gross margin, excluding restructuring charges of 37.4%, and EBITA margins improved year on year for a fifth consecutive quarter. Our IPR revenues grew in the quarter with a new 5G patent license agreement, and we are confident of delivering future growth benefiting from additional 5G agreements and an expansion into additional licensing areas. The time of growth will vary as we seek to optimize the value of new agreements. In Enterprise, sales were broadly stable overall, with growth in Enterprise Wireless Solutions offset by a decline in Global Communication Platform. Sales in Global Communication Platform were negatively impacted by an earlier-announced loss, low-margin customer contract that we lost in Q4 and our decision to reduce our operations in some countries, with the impact expected to continue throughout the year. Gross margin, excluding restructuring charges, increased to 48.1%, with improvements in Enterprise Wireless Solutions and technologies and new businesses. Turning to free cash flow, which was SEK 3.7 billion before M&A in the quarter. This strong improvement compared to last year is due to our operational actions on working capital, including lower inventory levels. Cash flow also improved as large customer projects move out of the intense rollout phase, something that affected working capital last year and is now behind us. Variable incentive payments were also lower compared to last year. Net cash increased sequentially by SEK 3 billion to SEK 10.8 billion, driven by positive free cash flow after M&A and the positive exchange rate effect. And we delivered a return on capital employed of 9.2% in the quarter. Next, I will cover the outlook. Turning first to sales where we expect seasonality in mobile networks to be broadly similar in Q2 to what we have seen in the past. In Networks, average seasonality between Q1 and Q2 has been around plus 8% over the last three years, and in Cloud Software and Services, it has been around 13% plus. For the full year, we expect the RAN market to decline. External sources estimate this decline to be around 4% globally, but as Borje already mentioned, we view this as optimistic. Given our contract win, which will contribute during the second part of the year, we see potential for stabilizing sales on a year-over-year basis during the second half. In Enterprise, we expect sales in Global Communication Platform to continue to be impacted by the recent low-margin customer loss and our decision to reduce operations in some countries. Next, turning to profitability. In Networks, we expect Q2 gross margin, excluding restructurings, to remain solid between 42% to 44%. Sequential changes will be driven primarily by less favorable market mix compared to Q1, which also benefits from higher IPR revenues. As mentioned before, the benefits from recent contract wins in North America will be seen more in the second half. Regarding opex, we expect to see the usual seasonality between Q1 and Q2, which, over the last three years, has been an increase of some SEK 1.6 billion. And finally, the further cost actions announced during the quarter will bring additional restructuring costs, which we anticipate will be in the range of SEK 3 billion to SEK 4 billion in 2024. We are in the early stages of discussions with the unions, and we'll update you on timing once those have been progressed. With that, I will hand back to you, Borje. Borje Ekholm -- Chief Executive Officer Thank you, Lars. Yes, we are facing a tough market environment, but given that, we are laser focused on managing what's in our control through commercial discipline and the strategic actions we're taking, of course, including the cost savings initiatives. We're prudently managing our operations and balance sheet. At the same time, we're focused on executing on our strategy and keeping investments critical to our long-term transformation and future growth intact. It's foundational that we maintain our technology and market leadership. We're also focused on taking important step to build a stronger Ericsson for the long term, which will ensure we remain best positioned when the market eventually recovers. In addition to investing in our technology leadership, flexible supply chain and digitalization of Ericsson, we're investing in Enterprise to help generate the meaningful growth the telecom industry needs, including through our Global Network Platform for network APIs. Creating this new market will take time but will be crucial in the next step of driving digitalization of enterprises as well as society. And our vision to become the leading networks and enterprise platform is unchanged. And as you've seen, we're taking steps to realize these ambitions. With this, I think we are ready to take your questions. Daniel Morris Great. Thanks, Borje. [Operator instructions] So the first question today is going to come from Andreas Joelsson from Carnegie. Andreas, your line is now open. Andreas Joelsson -- Carnegie Investment Bank -- Analyst Thanks a lot and good morning, everyone. Just a little bit curious on the comments into the second half. It seems like you feel that the visibility for the second half is a little bit higher than normal perhaps, given the contract that you have signed. But can you say something more about the rest of North America and the visibility you have on that part, what you build your expectation on the improved stabilization for the second half? That would be great. Borje Ekholm -- Chief Executive Officer Should I take it? Lars Sandstrom -- Chief Financial Officer All right. Borje Ekholm -- Chief Executive Officer So Andreas, what we see is, in reality, a couple of things going on in North America. The first one is really that inventory levels are stabilizing now and our norm kind of at low levels with our customers. And that gives us more comfort. The second thing is, of course, the contract wins that will start to drive meaningful revenues in the second part. And that's what creates the view that we have that we should be able to see a potential for stabilization in the second part of the year on sales. Andreas Joelsson -- Carnegie Investment Bank -- Analyst Could I have a follow-up on that maybe on that contract? What has the reaction been from other large customers based on that Open RAN contract? Borje Ekholm -- Chief Executive Officer It's generating a lot of discussions in the market, and basically with all customers that this is -- and I think we said that already when we announced. It's a bit of an industry-shaping type of contract where the customer, in this case, looks at the total opex envelope and the total capex envelope and try to optimize the investments in revenue-generating equipment. So when they look at this, this is starting to drive the similar discussion in many customer interactions. We saw that in Mobile World Congress just a few months ago in the end of February, where this was one of the key discussion items with a number of customers, and we'll see how we can deliver on that going forward, but it puts us in a very interesting position with very interesting discussions with customers. Andreas Joelsson -- Carnegie Investment Bank -- Analyst Thank you. Daniel Morris Thanks for the question, Andreas. We will move to the next question. The next question comes from Francois Bouvignies from UBS. Francois, your line is now open. Francois Bouvignies -- UBS -- Analyst Great. Thank you very much. So my question was on the gross margin, which obviously was quite strong this quarter, and looking at your Q1 outlook as well, remaining at high level. So maybe what would be helpful is, can you quantify this cost versus mix versus pricing, in a way, giving more visibility into the gross margin trend? And how should we think about the gross margin, therefore, going forward? Do you have a lot of costs to take out still? And that -- so basically, in other words, the sustainability of this gross margin would be very helpful. Lars Sandstrom -- Chief Financial Officer I can start, and then you fill in, Borje. On the gross margin here in Q1, I think it's worth mentioning, there is -- it is -- in basics, it's -- there are no big one-offs. There is one, and that is the IPR agreement that helped the margin a bit in Q1. But otherwise, it's a fairly stable product and market mix. In some areas, you could argue a little bit weaker on the software product mix side. But what we see is a general improvement in our cost structure, supporting margins and also general improvement in margins in several markets and product areas coming through actually. So it's -- there is no big swings in the quarter from that perspective. So I think it is the cost reductions that you -- are coming through in a good way. And also what we mentioned here when it comes to commercial discipline to really focus on profitability in our the -- in the business that we conduct. And on your question there on forward, we don't guide, and we give you an outlook for Q2. What we can say on the second half is that we have somewhat support from the market mix, with North America ramping up and India then as a year-over-year comparison coming down somewhat. But that is -- that has some impact but not too much, I would argue still. Francois Bouvignies -- UBS -- Analyst And then on the cost measures, I mean, do you have a lot to potential still to work on? Or where are you in these cost measures in the gross margin? Lars Sandstrom -- Chief Financial Officer Yes. On the previous program that we have talked about, I think there we are where we -- those are through now and have delivered, and we see that impact. And then what we have announced during Q1 on the additional side that is to support, that will take a bit of time, as you know, when we need to have the union negotiations in place, etc. And then it takes a bit of time before it comes through in the result, in the financials. Borje Ekholm -- Chief Executive Officer We -- just to add, we know from experience also when we do cost initiatives on the -- in cost of sales, it takes a bit of time before it comes through into the P&L. That's why you also see the support from the cost out we did last year coming through now. It takes a bit longer than you would hope sometimes. Daniel Morris Thanks for this question, Francois. We'll move on to our next question. So the next question comes from Joachim Gunell at DNB. Your line is now open. Joachim Gunell -- DNB Markets -- Analyst Thank you for that and good morning. So just a clarification when it comes to how you've talked about H2 and this stabilization in growth coming from year-over-year declines in H1. Does that -- is this basically supporting your view of the overall Networks market? Or is this also to be seen for you? I mean is this excluding the AT&T contract ramping where you expect more of a flattish development H2? Or is this including that contract? Lars Sandstrom -- Chief Financial Officer If we start with your comment there on stabilization on growth, I think we are not saying stabilization of growth. We are saying stabilization of it in the downgoing market. I think that's worth reminding. And also on the total, where we highlight the external view of minus 4%, which we see -- still see a bit optimistic. So just to get that right. And in this, what we talk about, so saying that is, of course, including the total group, including the rollout of Networks in the U.S. Joachim Gunell -- DNB Markets -- Analyst Thank you. Daniel Morris Great. Thanks for the question, Joachim. The next question will come from Sandeep Deshpande at J.P. Morgan. Sandeep, please go ahead. Sandeep Deshpande -- JPMorgan Chase and Company -- Analyst Yeah. Hi. Thanks for taking me on. My question is, when you look at North America and your design wins in -- your footprint wins in North America, how do we -- how should we look at them in terms of not only the -- how they're going to ramp up as well as the margin impacts of these wins, whether they will be immediately accretive or they will take time to be accretive to margin? Lars Sandstrom -- Chief Financial Officer I think here, it has not a big impact. It's rather stable over the rollout period. It depends a little bit on the work that we conduct during the project phase, and that is plans going on together with the customer now. And so there can be, in some periods, a bit of a weaker margin, and then it's back to normal again for this market. So that -- it is a bit early to say in that sense, and you will -- we will see that paving out. And this is a long-term contract. It's for '24 into '25 and forward as well. Sandeep Deshpande -- JPMorgan Chase and Company -- Analyst And you're fairly confident this is going to start in the second half of this year? Lars Sandstrom -- Chief Financial Officer Yes. Sandeep Deshpande -- JPMorgan Chase and Company -- Analyst Thank you. Daniel Morris Thanks, Sandeep. So we'll move to the next question. So the next question is coming from Daniel Djurberg from Handelsbanken. Daniel, your line is now open. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Thank you, operator. A question on the IPR run rate, excluding one-offs entering Q2. How large was the catch-up item? And also, if I may, how many of the larger Tier 1 handset OEMs is still about to close 5G? Have you, for example, done the BBK? And also the status of Lenovo would be fine to understand. Lars Sandstrom -- Chief Financial Officer On the financials, the run rate coming out of Q1 here is around SEK 12 billion -- sorry, SEK 11 billion. And then what we have said previously is that we are aiming for a full year of around SEK 12 billion to SEK 13 billion, and that remains. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Perfect. Is it -- yes, sorry. Borje Ekholm -- Chief Executive Officer A couple of the big handset vendors still remain unlicensed. And you know we have a litigation ongoing with one of them you mentioned. So we can't comment really on where that is right now. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Yes. Just a super first follow-up on the nonrecurring item of SEK 1.9 billion. It was a noncash, it seems, but it was a commercial dispute resolution. Why is it not cash flow impacting? Lars Sandstrom -- Chief Financial Officer It will be cash flow impacting in Q2. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Super thanks. Daniel Morris Great. Thanks for the question, Daniel. We'll move to the next question. So that's coming from Joe Zhou at Barclays. Joe, please go ahead. Joe Zhou -- Barclays -- Analyst Hello. Good morning, everyone, and thank you for taking my question. I have two. I'll go one at a time. So firstly, just to understand, in the second half, you mentioned stabilization, but it just seems sort of the quarterly phasing of it. Are we expecting to see still some contraction in Q3 before improving year on year in Q4? That's my first question. Lars Sandstrom -- Chief Financial Officer I think I understand your question. But as you know, we have large project deliveries coming in. And if they end up in a quarter or the next quarter, it's always very difficult to exactly pinpoint that. So we will -- that's why we keep to explaining the second half of the year only. Joe Zhou -- Barclays -- Analyst OK. And then my second question is just on the free cash flow. And this quarter, there is quite a meaningful boost from contract liabilities, so the SEK 6.5 billion. And I understand most of that typically is customer advances. And can you just give us some more color on why is that -- do you have that kind of increase? Because that can't be explained all by the IPR payments just by looking at the magnitude and looking going forward as well. Lars Sandstrom -- Chief Financial Officer Yes. I think impacting the working capital is, as I mentioned, we have a reduction in inventories supporting. We also have a significant lower paying out on the incentives this year compared to last year. And then, of course, the whole contract ramp-up that we had last year. So those are, I'd say, the three big components impacting working capital year over year. Joe Zhou -- Barclays -- Analyst Yes. Sorry, I get the inventory going down, but contract liabilities is a separate thing. It's just that specific item. It's been building up again, I think, following like three- or four-quarter declines. So I just wonder, what is driving that? Lars Sandstrom -- Chief Financial Officer I think you have -- let me get back on the details, and I'm happy to do that. But the main three impacts are what I said. It's inventories, it's the lower incentive payout, and then the whole contract rollout that we had last year. So those are the main items. But I think we are happy to reach out to you to give more insights into the different parts. Joe Zhou -- Barclays -- Analyst That'll be great. Thank you. Super helpful. Thanks. Daniel Morris Thanks, Joe. Moving to the next question. Next question is coming from Sebastien Sztabowicz at Kepler Cheuvreux. Your line is now open. Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst Yeah. Hello, everyone. Thanks for taking my question. On Vonage, the business is now down by 5% year on year in Q1, and the group is trending well behind your and our initial expectations. Are you taking any specific actions to support sales in the coming quarters? And coming back to this, I would say, activities in some countries that you are reducing, what are the reasons behind that exactly? What is happening in those countries with Vonage? Lars Sandstrom -- Chief Financial Officer Yes. As you saw and as you mentioned there, Vonage is down. And as we mentioned, it is a loss of contract that we had last year in Q4. And also that we look at the different markets where it makes commercial sense to invest. And in some markets, we have said that we reduced our activities there and focus on more of the growth areas where we see there is a better opportunity. And I think there, it is really we are focusing on the long-term investments here to drive this part of the industry. Borje Ekholm -- Chief Executive Officer Yes. As I said, Sebastien, it's, in reality, our focus is on driving the Global Network Platform for network APIs. That's where we are tremendously focused. We're trying to, of course, manage the current business as prudently as possible, but it's really the focus on executing the strategic rationale behind the acquisition. That's our key focus. And that's where we allocate most of the time. And that's where we are starting to get the traction. We had DT in the end of last year, followed by Verizon, AT&T, KDDI and AWS now in the first quarter. We're trying to shape that ecosystem. That's really where the criticality is. Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst We see good commercial traction. But when do you expect more sizable revenue to be recognized on network APIs? It is one-year horizon or more three- to five-year horizon for network APIs? Borje Ekholm -- Chief Executive Officer I think the reality here is it's going to be the next one to two years when this market will be shaped. That's really where our focus is. Then I think we'll see a longer-term growth as applications start to develop and use cases start to develop. But to get this first traction, it's about creating that market. That's why it's so important, of course, to get operators in, but it's equally important to get application developers, digital natives starting to use what's available. And we see actually an interest now from developers, from the hyperscalers about how do we shape this market, how do we create the applications of the future. It's really up to us now to deliver on that. And that's really where our focus is. Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst Thank you. Daniel Morris Thanks, Sebastien, So just turning to the next question. The next question will come from Erik Rojestal from SEB. Erik, please go ahead. Erik Lindholm-Rojestal -- Skandinaviska Enskilda Banken -- Analyst Thank you and good morning, everyone. So you announced some further cost measures here with a headcount reduction of 1,200 in Sweden. I mean is it possible to quantify what sort of impact you expect to see from this? And when do you expect it to start contributing? Lars Sandstrom -- Chief Financial Officer All right. Thanks, Erik. As we said, we -- in the outlook here, we see restructuring costs for the full year of SEK 3 billion to SEK 4 billion. And how do we -- normally, we are in the negotiations now in Sweden, and we are looking into more countries as we also have mentioned, and that it always takes a bit of time before it comes through depending on the market and what activities we do. So we will not see too much of that impact until the end of the year, I would expect, as it looks now. But depending on how we are progressing, and we will update you continuously on this in the coming quarter as well to give you more insights on this topic. Erik Lindholm-Rojestal -- Skandinaviska Enskilda Banken -- Analyst All right. Perfect. Thank you. Daniel Morris Thanks for the question, Erik. Turning to the next question, we have Felix Henriksson from Nordea. Felix Henriksson -- Nordea Markets -- Analyst Hi, there. Thanks for taking my question. Felix Henriksson from Nordea. I wanted to ask about the free cash flow trajectory moving into the right direction during Q1. So just on the phasing for the rest of 2024, given the sort of working capital release that you expect to witness in India. And also given these additional restructuring charges that you've communicated, how should we think about the free cash flow trajectory for the rest of the year? Lars Sandstrom -- Chief Financial Officer I think as I mentioned there before, the working capital buildup we had last year also came down at the end of Q4. So we will have some support on that also this year. We have part of it now and that -- so there will not be a very big impact for -- coming for the rest of the year from that part. Then, of course, we have a continuous focus on working capital for the rest of the year. And of course, as you know, the most important part of the cash flow is EBITA and the result before working capital. Felix Henriksson -- Nordea Markets -- Analyst Perfect. Thank you. And as a quick follow-up, could you perhaps clarify that -- which market do you think that Dell'Oro is too optimistic about in the sort of minus 4% global RAN market forecast for this year? Lars Sandstrom -- Chief Financial Officer No. We don't go into the different markets as such. What we say is that the total decline of 4% is a bit optimistic as we see it now. Felix Henriksson -- Nordea Markets -- Analyst Got it clear. Thank you. Daniel Morris Thanks for the question, Felix. Moving on to the next, we have Sami Sarkamies at Danske Bank. Sami, please go ahead. Sami Sarkamies -- Danske Bank -- Analyst Hi. Thanks for taking my question. I would still like to dig a bit deeper into the new cost program. So could you provide some kind of split between COGS and opex, the total savings target and maybe mention a couple of areas where you're able to find new savings on top of the measures that you implemented last year? Lars Sandstrom -- Chief Financial Officer I think I cannot give you a split between COGS and opex there. We are identifying different areas, but it's in both, for sure. And it is mainly -- or to large extent, it's related to people costs, both employees but also consultants that we have in the group. And then to some extent, they can be connected to real estate savings, etc. So those are sort of the key areas. But these are targeted structured plans that we are setting up, and I think we are happy to come back as they progress and when we do the restructuring to share more on what we are doing there. Borje Ekholm -- Chief Executive Officer And I think -- so one thing to add there, Sami, is that, we like also to get into more of a habit of continuous improvement to actually take cost out continuously rather than think about this as programs. The problem, and you know that from different countries and primarily Europe, it becomes -- when you consolidate, it becomes a large number, and that's why we felt it was appropriate to communicate the Swedish number not to avoid speculation. But in reality, this is going to be part of driving a continuous focus on efficiency. But we're taking out some activities as well, which includes focusing the product portfolio a bit more and things like that. Sami Sarkamies -- Danske Bank -- Analyst OK. Thanks and welcome on board, Lars. Daniel Morris Thanks for the question, Sami. So the final question today comes from Richard Kramer at Arete. Richard, your line is open. Please go ahead. Richard Kramer -- Arete Research -- Analyst OK. Thanks very much. Borje, I guess just to wrap up, we've heard you talking for many years now about rising traffic and underinvestment by your large customers. You specifically noted that in Europe, where we have a number of consolidations underway. What do you think unlocks that? I mean what are you looking for with your customers to say or to show that they're going to be willing to spend more? Because right now, it just feels like the business is drifting without a catalyst for increased spending by those customers. Is there anything you can point to in the second half of the year or into 2025 that's going to force the issue and raise those relatively low spending levels? Borje Ekholm -- Chief Executive Officer Thanks, Richard. That's the -- you're asking the right question. I mean the reality is we see the traffic growth in the networks continues. And you start to see -- in many markets, not singling out anyone specifically, but you're starting to see congested networks, which means that when it's crowded, you're in a crowded space. You may actually get the signal, but you can't really use it. You have simply no capacity left in the network. We're starting to see those signs. We start to see signs that sites are congested. At the same time, the industry has a problem with return on investments. And that's why I think personally we need to see in-market consolidation actually start to happening and start to get approved. When that happens, we will get bigger scale. And it's interesting, when you look at this from a global perspective, the average European operator is about 4.5 million subscribers. It's 95 million, I believe, in the U.S., 300 million in India, 400 million in China. So the scale in Europe is simply too small. So there is consolidation needed. The second part that needs to happen, and that's what we try to do with the Global Network Platform for network APIs, is actually to change the pricing model in the industry. So today, you have a pricing model on almost, call it, a monthly subscription. And that monthly subscription is kind of decoupled from network traffic, network investments, etc., putting actually a squeeze on the profitability in an operator. What we need to see happening to unlock investments is that you're able to monetize the network features. And that -- think about it as speed, latency, could be location, could be different quality of service or differentiated experiences. You can offer network slicing, for example. We need to define that new type of use cases that unlocks those revenue streams. Otherwise, the customers, our operators, they're not going to see growing revenues. And if they don't see growing revenues, they're not going to invest. That's the perfect rational decision. So I think we have that, call it, opportunity or maybe responsibility to create those new type of revenues coming out of leverage in the 5G technology in a better way. That's why you see our investments on the Enterprise side being so important. Richard Kramer -- Arete Research -- Analyst OK. Thank you. Daniel Morris Answer:

today's presentation of Ericsson's first-quarter 2024 results

Daniel Morris Hello, everyone, and welcome to today's presentation of Ericsson's first-quarter 2024 results. With me today are Borje Ekholm, our president and CEO; and Lars Sandstrom, chief financial officer. As usual, we'll have a short presentation followed by Q&A. [Operator instructions] Details can be found in today's earning release and on the Investor Relations website. Please be advised that today's call is being recorded, and I also need to advise you that today's presentation may include forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. I'll now hand the call over to Borje and to Lars for their introductory comments. Borje Ekholm -- Chief Executive Officer Thanks, Daniel, and good morning, everyone. So let me first start off by welcoming my two new colleagues, Lars Sandstrom, our new CFO; as well as Daniel Morris, our new head of IR. So it's great to have both of you joining the call and being on board at Ericsson, so a big welcome. So first, I will cover some key highlights from the quarter before Lars goes through the financials in much greater detail. So during Q1, we continued to execute on our strategy to strengthen our leadership in the mobile networks and drive a focused expansion into Enterprise while, of course, continuing to strengthen our culture and operational execution. As expected, our customers remain cautious with their investments, and our organic sales declined and with India slowing following the rapid and unprecedented 5G build-out last year. We continue to view the level of industry investments that's unsustainably low, but we can't, in reality, impact this in the short term, though what we work on is what we can control, and that's like the commercial and operational discipline and, of course, having a competitive solutions and product portfolio. So despite the market headwind and difficult market conditions, we maintained our market-leading position and delivered a good improvement in gross margin to 42.7%, excluding restructuring charges. For the rest of the year, we expect the mobile networks market to remain weak. External sources estimate that the global RAN market will decline by minus 4%. That looks a bit optimistic to me. However, we see the potential for sales to start to stabilize on a year-over-year basis during the second half. And the reason for that is, of course, that North America investments are expected to grow for the full year 2024, and in the second part of the year, we should start to see the benefit from this. But we will, of course, also see the benefit from the recent contract win we had that we announced in the end of last year. We continue to be disciplined in our execution, including proactively taking cost-saving measures to ensure that we're well-positioned to maximize shareholder value when the market ultimately improves. We're still in the early phases of the build-out of 5G, but the improvement in the market will ultimately be in the hands of our customers, and that will happen when traffic grows and new use cases can be launched. So in the meantime, we remain fully focused on manage what's in our control but, at the same time, making the critical investment that reinforces our long-term competitive positioning. And of course, that includes creating the high-performance and programmable networks for the future and exposing their capabilities through a Global Network Platform for network APIs. You've seen that revenues in Vonage fell during the quarter, and that's due to the contract loss we had in Q4 but also our decision to reduce our operations in some countries. Of course, we need to prudently manage the current business in Vonage, but our strategic ambition with Vonage is to build up the Global Network Platform. And during the quarter, we took several steps in our strategy execution by announcing partnerships with Verizon, AT&T, AWS, and KDDI. You heard me say this before, but creating this market will take some time, but we're seeing good traction in building the ecosystem, which will ultimately be crucial to drive the next step of digitalization of enterprise and society, leveraging the capabilities of their mobile networks. And 5G is really a platform technology that allows many different use cases that actually build on that technology. We see very good and solid opportunities on mission-critical networks in many parts of the world. And you have seen that during the quarter, we launched something we call the Ericsson Federal Technologies Group. And that's an activity that we can use to serve the different parts of the U.S. government. And we see this as a very interesting opportunity to expand our market for the 5G technology. Let me also briefly touch on the news that our independent monitor has certified our compliance program. This is, of course, a very important step in order to conclude our plea agreement with the DOJ, but our focus on culture and integrity will continue beyond the monitorship. So with that, I'd like to pass over to Lars to go through the financial details of the quarter. Lars Sandstrom -- Chief Financial Officer All right. Thank you, Borje. Let me start by adding a few additional points on the group before we discuss the segments in more detail. In the quarter, we saw an organic sales decline of 14%. This was primarily driven by Networks. In North America, the rate of decline improved in the quarter, and customer inventory levels have now stabilized. As Borje already highlighted, we delivered a good expansion in our gross margin, excluding restructuring charges, with 42.7% in Q1. Opex, excluding restructuring charges, was down by SEK 0.8 billion in the quarter, with the benefit of our cost-saving actions partially offset by higher variable incentives and inflation. We are working to identify additional efficiencies and believe there is more we can do. EBITA, excluding restructuring charges, was SEK 5.1 billion in the quarter, with a margin of 9.6%. This included a onetime gain of SEK 1.9 billion from the resolution of a commercial dispute. With that, let's move to the segments. In Networks, organic sales were down by 19% year over year as customers continue to be cautious with their investments and as India slowed as expected, following a rapid 5G build-out last year. Despite this, we generated a strong gross margin, excluding restructuring charges of 44.3%. And this was driven by our competitive product portfolio as well as our actions on costs. Gross margin was also positively impacted by retroactive IPR licensing revenues. EBITA, excluding restructuring charges, declined to SEK 4.3 billion, compared to SEK 6.4 billion last year, and we reached an EBITA margin of 12.7%. The decrease in EBITA reflects continuous cautious customer investment level across multiple geographies, leading to lower sales and lower gross income. As Borje said, we are taking proactive actions to optimize the business and drive efficiencies, and this is already supporting gross margins and driving down operating expenses. In segment Cloud Software and Services, we continue to execute on our strategy to strengthen delivery performance and commercial discipline. Organic sales decreased by 2% compared to last year primarily driven by descoping contracts and contract exits in Managed Network Services. While this is impacting the top line, these are strategic actions that will position the segment for attractive profitability levels in the future. We delivered a gross margin, excluding restructuring charges of 37.4%, and EBITA margins improved year on year for a fifth consecutive quarter. Our IPR revenues grew in the quarter with a new 5G patent license agreement, and we are confident of delivering future growth benefiting from additional 5G agreements and an expansion into additional licensing areas. The time of growth will vary as we seek to optimize the value of new agreements. In Enterprise, sales were broadly stable overall, with growth in Enterprise Wireless Solutions offset by a decline in Global Communication Platform. Sales in Global Communication Platform were negatively impacted by an earlier-announced loss, low-margin customer contract that we lost in Q4 and our decision to reduce our operations in some countries, with the impact expected to continue throughout the year. Gross margin, excluding restructuring charges, increased to 48.1%, with improvements in Enterprise Wireless Solutions and technologies and new businesses. Turning to free cash flow, which was SEK 3.7 billion before M&A in the quarter. This strong improvement compared to last year is due to our operational actions on working capital, including lower inventory levels. Cash flow also improved as large customer projects move out of the intense rollout phase, something that affected working capital last year and is now behind us. Variable incentive payments were also lower compared to last year. Net cash increased sequentially by SEK 3 billion to SEK 10.8 billion, driven by positive free cash flow after M&A and the positive exchange rate effect. And we delivered a return on capital employed of 9.2% in the quarter. Next, I will cover the outlook. Turning first to sales where we expect seasonality in mobile networks to be broadly similar in Q2 to what we have seen in the past. In Networks, average seasonality between Q1 and Q2 has been around plus 8% over the last three years, and in Cloud Software and Services, it has been around 13% plus. For the full year, we expect the RAN market to decline. External sources estimate this decline to be around 4% globally, but as Borje already mentioned, we view this as optimistic. Given our contract win, which will contribute during the second part of the year, we see potential for stabilizing sales on a year-over-year basis during the second half. In Enterprise, we expect sales in Global Communication Platform to continue to be impacted by the recent low-margin customer loss and our decision to reduce operations in some countries. Next, turning to profitability. In Networks, we expect Q2 gross margin, excluding restructurings, to remain solid between 42% to 44%. Sequential changes will be driven primarily by less favorable market mix compared to Q1, which also benefits from higher IPR revenues. As mentioned before, the benefits from recent contract wins in North America will be seen more in the second half. Regarding opex, we expect to see the usual seasonality between Q1 and Q2, which, over the last three years, has been an increase of some SEK 1.6 billion. And finally, the further cost actions announced during the quarter will bring additional restructuring costs, which we anticipate will be in the range of SEK 3 billion to SEK 4 billion in 2024. We are in the early stages of discussions with the unions, and we'll update you on timing once those have been progressed. With that, I will hand back to you, Borje. Borje Ekholm -- Chief Executive Officer Thank you, Lars. Yes, we are facing a tough market environment, but given that, we are laser focused on managing what's in our control through commercial discipline and the strategic actions we're taking, of course, including the cost savings initiatives. We're prudently managing our operations and balance sheet. At the same time, we're focused on executing on our strategy and keeping investments critical to our long-term transformation and future growth intact. It's foundational that we maintain our technology and market leadership. We're also focused on taking important step to build a stronger Ericsson for the long term, which will ensure we remain best positioned when the market eventually recovers. In addition to investing in our technology leadership, flexible supply chain and digitalization of Ericsson, we're investing in Enterprise to help generate the meaningful growth the telecom industry needs, including through our Global Network Platform for network APIs. Creating this new market will take time but will be crucial in the next step of driving digitalization of enterprises as well as society. And our vision to become the leading networks and enterprise platform is unchanged. And as you've seen, we're taking steps to realize these ambitions. With this, I think we are ready to take your questions. Daniel Morris Great. Thanks, Borje. [Operator instructions] So the first question today is going to come from Andreas Joelsson from Carnegie. Andreas, your line is now open. Andreas Joelsson -- Carnegie Investment Bank -- Analyst Thanks a lot and good morning, everyone. Just a little bit curious on the comments into the second half. It seems like you feel that the visibility for the second half is a little bit higher than normal perhaps, given the contract that you have signed. But can you say something more about the rest of North America and the visibility you have on that part, what you build your expectation on the improved stabilization for the second half? That would be great. Borje Ekholm -- Chief Executive Officer Should I take it? Lars Sandstrom -- Chief Financial Officer All right. Borje Ekholm -- Chief Executive Officer So Andreas, what we see is, in reality, a couple of things going on in North America. The first one is really that inventory levels are stabilizing now and our norm kind of at low levels with our customers. And that gives us more comfort. The second thing is, of course, the contract wins that will start to drive meaningful revenues in the second part. And that's what creates the view that we have that we should be able to see a potential for stabilization in the second part of the year on sales. Andreas Joelsson -- Carnegie Investment Bank -- Analyst Could I have a follow-up on that maybe on that contract? What has the reaction been from other large customers based on that Open RAN contract? Borje Ekholm -- Chief Executive Officer It's generating a lot of discussions in the market, and basically with all customers that this is -- and I think we said that already when we announced. It's a bit of an industry-shaping type of contract where the customer, in this case, looks at the total opex envelope and the total capex envelope and try to optimize the investments in revenue-generating equipment. So when they look at this, this is starting to drive the similar discussion in many customer interactions. We saw that in Mobile World Congress just a few months ago in the end of February, where this was one of the key discussion items with a number of customers, and we'll see how we can deliver on that going forward, but it puts us in a very interesting position with very interesting discussions with customers. Andreas Joelsson -- Carnegie Investment Bank -- Analyst Thank you. Daniel Morris Thanks for the question, Andreas. We will move to the next question. The next question comes from Francois Bouvignies from UBS. Francois, your line is now open. Francois Bouvignies -- UBS -- Analyst Great. Thank you very much. So my question was on the gross margin, which obviously was quite strong this quarter, and looking at your Q1 outlook as well, remaining at high level. So maybe what would be helpful is, can you quantify this cost versus mix versus pricing, in a way, giving more visibility into the gross margin trend? And how should we think about the gross margin, therefore, going forward? Do you have a lot of costs to take out still? And that -- so basically, in other words, the sustainability of this gross margin would be very helpful. Lars Sandstrom -- Chief Financial Officer I can start, and then you fill in, Borje. On the gross margin here in Q1, I think it's worth mentioning, there is -- it is -- in basics, it's -- there are no big one-offs. There is one, and that is the IPR agreement that helped the margin a bit in Q1. But otherwise, it's a fairly stable product and market mix. In some areas, you could argue a little bit weaker on the software product mix side. But what we see is a general improvement in our cost structure, supporting margins and also general improvement in margins in several markets and product areas coming through actually. So it's -- there is no big swings in the quarter from that perspective. So I think it is the cost reductions that you -- are coming through in a good way. And also what we mentioned here when it comes to commercial discipline to really focus on profitability in our the -- in the business that we conduct. And on your question there on forward, we don't guide, and we give you an outlook for Q2. What we can say on the second half is that we have somewhat support from the market mix, with North America ramping up and India then as a year-over-year comparison coming down somewhat. But that is -- that has some impact but not too much, I would argue still. Francois Bouvignies -- UBS -- Analyst And then on the cost measures, I mean, do you have a lot to potential still to work on? Or where are you in these cost measures in the gross margin? Lars Sandstrom -- Chief Financial Officer Yes. On the previous program that we have talked about, I think there we are where we -- those are through now and have delivered, and we see that impact. And then what we have announced during Q1 on the additional side that is to support, that will take a bit of time, as you know, when we need to have the union negotiations in place, etc. And then it takes a bit of time before it comes through in the result, in the financials. Borje Ekholm -- Chief Executive Officer We -- just to add, we know from experience also when we do cost initiatives on the -- in cost of sales, it takes a bit of time before it comes through into the P&L. That's why you also see the support from the cost out we did last year coming through now. It takes a bit longer than you would hope sometimes. Daniel Morris Thanks for this question, Francois. We'll move on to our next question. So the next question comes from Joachim Gunell at DNB. Your line is now open. Joachim Gunell -- DNB Markets -- Analyst Thank you for that and good morning. So just a clarification when it comes to how you've talked about H2 and this stabilization in growth coming from year-over-year declines in H1. Does that -- is this basically supporting your view of the overall Networks market? Or is this also to be seen for you? I mean is this excluding the AT&T contract ramping where you expect more of a flattish development H2? Or is this including that contract? Lars Sandstrom -- Chief Financial Officer If we start with your comment there on stabilization on growth, I think we are not saying stabilization of growth. We are saying stabilization of it in the downgoing market. I think that's worth reminding. And also on the total, where we highlight the external view of minus 4%, which we see -- still see a bit optimistic. So just to get that right. And in this, what we talk about, so saying that is, of course, including the total group, including the rollout of Networks in the U.S. Joachim Gunell -- DNB Markets -- Analyst Thank you. Daniel Morris Great. Thanks for the question, Joachim. The next question will come from Sandeep Deshpande at J.P. Morgan. Sandeep, please go ahead. Sandeep Deshpande -- JPMorgan Chase and Company -- Analyst Yeah. Hi. Thanks for taking me on. My question is, when you look at North America and your design wins in -- your footprint wins in North America, how do we -- how should we look at them in terms of not only the -- how they're going to ramp up as well as the margin impacts of these wins, whether they will be immediately accretive or they will take time to be accretive to margin? Lars Sandstrom -- Chief Financial Officer I think here, it has not a big impact. It's rather stable over the rollout period. It depends a little bit on the work that we conduct during the project phase, and that is plans going on together with the customer now. And so there can be, in some periods, a bit of a weaker margin, and then it's back to normal again for this market. So that -- it is a bit early to say in that sense, and you will -- we will see that paving out. And this is a long-term contract. It's for '24 into '25 and forward as well. Sandeep Deshpande -- JPMorgan Chase and Company -- Analyst And you're fairly confident this is going to start in the second half of this year? Lars Sandstrom -- Chief Financial Officer Yes. Sandeep Deshpande -- JPMorgan Chase and Company -- Analyst Thank you. Daniel Morris Thanks, Sandeep. So we'll move to the next question. So the next question is coming from Daniel Djurberg from Handelsbanken. Daniel, your line is now open. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Thank you, operator. A question on the IPR run rate, excluding one-offs entering Q2. How large was the catch-up item? And also, if I may, how many of the larger Tier 1 handset OEMs is still about to close 5G? Have you, for example, done the BBK? And also the status of Lenovo would be fine to understand. Lars Sandstrom -- Chief Financial Officer On the financials, the run rate coming out of Q1 here is around SEK 12 billion -- sorry, SEK 11 billion. And then what we have said previously is that we are aiming for a full year of around SEK 12 billion to SEK 13 billion, and that remains. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Perfect. Is it -- yes, sorry. Borje Ekholm -- Chief Executive Officer A couple of the big handset vendors still remain unlicensed. And you know we have a litigation ongoing with one of them you mentioned. So we can't comment really on where that is right now. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Yes. Just a super first follow-up on the nonrecurring item of SEK 1.9 billion. It was a noncash, it seems, but it was a commercial dispute resolution. Why is it not cash flow impacting? Lars Sandstrom -- Chief Financial Officer It will be cash flow impacting in Q2. Daniel Djurberg -- Handelsbanken Capital Markets -- Analyst Super thanks. Daniel Morris Great. Thanks for the question, Daniel. We'll move to the next question. So that's coming from Joe Zhou at Barclays. Joe, please go ahead. Joe Zhou -- Barclays -- Analyst Hello. Good morning, everyone, and thank you for taking my question. I have two. I'll go one at a time. So firstly, just to understand, in the second half, you mentioned stabilization, but it just seems sort of the quarterly phasing of it. Are we expecting to see still some contraction in Q3 before improving year on year in Q4? That's my first question. Lars Sandstrom -- Chief Financial Officer I think I understand your question. But as you know, we have large project deliveries coming in. And if they end up in a quarter or the next quarter, it's always very difficult to exactly pinpoint that. So we will -- that's why we keep to explaining the second half of the year only. Joe Zhou -- Barclays -- Analyst OK. And then my second question is just on the free cash flow. And this quarter, there is quite a meaningful boost from contract liabilities, so the SEK 6.5 billion. And I understand most of that typically is customer advances. And can you just give us some more color on why is that -- do you have that kind of increase? Because that can't be explained all by the IPR payments just by looking at the magnitude and looking going forward as well. Lars Sandstrom -- Chief Financial Officer Yes. I think impacting the working capital is, as I mentioned, we have a reduction in inventories supporting. We also have a significant lower paying out on the incentives this year compared to last year. And then, of course, the whole contract ramp-up that we had last year. So those are, I'd say, the three big components impacting working capital year over year. Joe Zhou -- Barclays -- Analyst Yes. Sorry, I get the inventory going down, but contract liabilities is a separate thing. It's just that specific item. It's been building up again, I think, following like three- or four-quarter declines. So I just wonder, what is driving that? Lars Sandstrom -- Chief Financial Officer I think you have -- let me get back on the details, and I'm happy to do that. But the main three impacts are what I said. It's inventories, it's the lower incentive payout, and then the whole contract rollout that we had last year. So those are the main items. But I think we are happy to reach out to you to give more insights into the different parts. Joe Zhou -- Barclays -- Analyst That'll be great. Thank you. Super helpful. Thanks. Daniel Morris Thanks, Joe. Moving to the next question. Next question is coming from Sebastien Sztabowicz at Kepler Cheuvreux. Your line is now open. Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst Yeah. Hello, everyone. Thanks for taking my question. On Vonage, the business is now down by 5% year on year in Q1, and the group is trending well behind your and our initial expectations. Are you taking any specific actions to support sales in the coming quarters? And coming back to this, I would say, activities in some countries that you are reducing, what are the reasons behind that exactly? What is happening in those countries with Vonage? Lars Sandstrom -- Chief Financial Officer Yes. As you saw and as you mentioned there, Vonage is down. And as we mentioned, it is a loss of contract that we had last year in Q4. And also that we look at the different markets where it makes commercial sense to invest. And in some markets, we have said that we reduced our activities there and focus on more of the growth areas where we see there is a better opportunity. And I think there, it is really we are focusing on the long-term investments here to drive this part of the industry. Borje Ekholm -- Chief Executive Officer Yes. As I said, Sebastien, it's, in reality, our focus is on driving the Global Network Platform for network APIs. That's where we are tremendously focused. We're trying to, of course, manage the current business as prudently as possible, but it's really the focus on executing the strategic rationale behind the acquisition. That's our key focus. And that's where we allocate most of the time. And that's where we are starting to get the traction. We had DT in the end of last year, followed by Verizon, AT&T, KDDI and AWS now in the first quarter. We're trying to shape that ecosystem. That's really where the criticality is. Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst We see good commercial traction. But when do you expect more sizable revenue to be recognized on network APIs? It is one-year horizon or more three- to five-year horizon for network APIs? Borje Ekholm -- Chief Executive Officer I think the reality here is it's going to be the next one to two years when this market will be shaped. That's really where our focus is. Then I think we'll see a longer-term growth as applications start to develop and use cases start to develop. But to get this first traction, it's about creating that market. That's why it's so important, of course, to get operators in, but it's equally important to get application developers, digital natives starting to use what's available. And we see actually an interest now from developers, from the hyperscalers about how do we shape this market, how do we create the applications of the future. It's really up to us now to deliver on that. And that's really where our focus is. Sebastien Sztabowicz -- Kepler Cheuvreux -- Analyst Thank you. Daniel Morris Thanks, Sebastien, So just turning to the next question. The next question will come from Erik Rojestal from SEB. Erik, please go ahead. Erik Lindholm-Rojestal -- Skandinaviska Enskilda Banken -- Analyst Thank you and good morning, everyone. So you announced some further cost measures here with a headcount reduction of 1,200 in Sweden. I mean is it possible to quantify what sort of impact you expect to see from this? And when do you expect it to start contributing? Lars Sandstrom -- Chief Financial Officer All right. Thanks, Erik. As we said, we -- in the outlook here, we see restructuring costs for the full year of SEK 3 billion to SEK 4 billion. And how do we -- normally, we are in the negotiations now in Sweden, and we are looking into more countries as we also have mentioned, and that it always takes a bit of time before it comes through depending on the market and what activities we do. So we will not see too much of that impact until the end of the year, I would expect, as it looks now. But depending on how we are progressing, and we will update you continuously on this in the coming quarter as well to give you more insights on this topic. Erik Lindholm-Rojestal -- Skandinaviska Enskilda Banken -- Analyst All right. Perfect. Thank you. Daniel Morris Thanks for the question, Erik. Turning to the next question, we have Felix Henriksson from Nordea. Felix Henriksson -- Nordea Markets -- Analyst Hi, there. Thanks for taking my question. Felix Henriksson from Nordea. I wanted to ask about the free cash flow trajectory moving into the right direction during Q1. So just on the phasing for the rest of 2024, given the sort of working capital release that you expect to witness in India. And also given these additional restructuring charges that you've communicated, how should we think about the free cash flow trajectory for the rest of the year? Lars Sandstrom -- Chief Financial Officer I think as I mentioned there before, the working capital buildup we had last year also came down at the end of Q4. So we will have some support on that also this year. We have part of it now and that -- so there will not be a very big impact for -- coming for the rest of the year from that part. Then, of course, we have a continuous focus on working capital for the rest of the year. And of course, as you know, the most important part of the cash flow is EBITA and the result before working capital. Felix Henriksson -- Nordea Markets -- Analyst Perfect. Thank you. And as a quick follow-up, could you perhaps clarify that -- which market do you think that Dell'Oro is too optimistic about in the sort of minus 4% global RAN market forecast for this year? Lars Sandstrom -- Chief Financial Officer No. We don't go into the different markets as such. What we say is that the total decline of 4% is a bit optimistic as we see it now. Felix Henriksson -- Nordea Markets -- Analyst Got it clear. Thank you. Daniel Morris Thanks for the question, Felix. Moving on to the next, we have Sami Sarkamies at Danske Bank. Sami, please go ahead. Sami Sarkamies -- Danske Bank -- Analyst Hi. Thanks for taking my question. I would still like to dig a bit deeper into the new cost program. So could you provide some kind of split between COGS and opex, the total savings target and maybe mention a couple of areas where you're able to find new savings on top of the measures that you implemented last year? Lars Sandstrom -- Chief Financial Officer I think I cannot give you a split between COGS and opex there. We are identifying different areas, but it's in both, for sure. And it is mainly -- or to large extent, it's related to people costs, both employees but also consultants that we have in the group. And then to some extent, they can be connected to real estate savings, etc. So those are sort of the key areas. But these are targeted structured plans that we are setting up, and I think we are happy to come back as they progress and when we do the restructuring to share more on what we are doing there. Borje Ekholm -- Chief Executive Officer And I think -- so one thing to add there, Sami, is that, we like also to get into more of a habit of continuous improvement to actually take cost out continuously rather than think about this as programs. The problem, and you know that from different countries and primarily Europe, it becomes -- when you consolidate, it becomes a large number, and that's why we felt it was appropriate to communicate the Swedish number not to avoid speculation. But in reality, this is going to be part of driving a continuous focus on efficiency. But we're taking out some activities as well, which includes focusing the product portfolio a bit more and things like that. Sami Sarkamies -- Danske Bank -- Analyst OK. Thanks and welcome on board, Lars. Daniel Morris Thanks for the question, Sami. So the final question today comes from Richard Kramer at Arete. Richard, your line is open. Please go ahead. Richard Kramer -- Arete Research -- Analyst OK. Thanks very much. Borje, I guess just to wrap up, we've heard you talking for many years now about rising traffic and underinvestment by your large customers. You specifically noted that in Europe, where we have a number of consolidations underway. What do you think unlocks that? I mean what are you looking for with your customers to say or to show that they're going to be willing to spend more? Because right now, it just feels like the business is drifting without a catalyst for increased spending by those customers. Is there anything you can point to in the second half of the year or into 2025 that's going to force the issue and raise those relatively low spending levels? Borje Ekholm -- Chief Executive Officer Thanks, Richard. That's the -- you're asking the right question. I mean the reality is we see the traffic growth in the networks continues. And you start to see -- in many markets, not singling out anyone specifically, but you're starting to see congested networks, which means that when it's crowded, you're in a crowded space. You may actually get the signal, but you can't really use it. You have simply no capacity left in the network. We're starting to see those signs. We start to see signs that sites are congested. At the same time, the industry has a problem with return on investments. And that's why I think personally we need to see in-market consolidation actually start to happening and start to get approved. When that happens, we will get bigger scale. And it's interesting, when you look at this from a global perspective, the average European operator is about 4.5 million subscribers. It's 95 million, I believe, in the U.S., 300 million in India, 400 million in China. So the scale in Europe is simply too small. So there is consolidation needed. The second part that needs to happen, and that's what we try to do with the Global Network Platform for network APIs, is actually to change the pricing model in the industry. So today, you have a pricing model on almost, call it, a monthly subscription. And that monthly subscription is kind of decoupled from network traffic, network investments, etc., putting actually a squeeze on the profitability in an operator. What we need to see happening to unlock investments is that you're able to monetize the network features. And that -- think about it as speed, latency, could be location, could be different quality of service or differentiated experiences. You can offer network slicing, for example. We need to define that new type of use cases that unlocks those revenue streams. Otherwise, the customers, our operators, they're not going to see growing revenues. And if they don't see growing revenues, they're not going to invest. That's the perfect rational decision. So I think we have that, call it, opportunity or maybe responsibility to create those new type of revenues coming out of leverage in the 5G technology in a better way. That's why you see our investments on the Enterprise side being so important. Richard Kramer -- Arete Research -- Analyst OK. Thank you. Daniel Morris

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, everyone. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company first quarter 2024 earnings conference call. [Operator instructions] Please note, this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, executive director of investor relations. Please go ahead. Lynn Tyson -- Executive Director, Investor Relations Thanks, Gary. Welcome to Ford Motor Company's first quarter 2024 earnings call. With me today are Jim Farley, president and CEO; and John Lawler, chief financial officer. Also joining us for Q&A is Cathy O'Callaghan, CEO of Ford Credit. Today's discussion includes some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials and other important content at shareholder.ford.com. Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 19. Unless otherwise noted, all comparisons are year over year. Company EBIT, EPS, and free cash flow are on an adjusted basis. Lastly, I want to call out a few of our near-term IR engagements. May 30, Jim Farley will participate in a fireside chat in New York with Toni Sacconaghi and Daniel Röska at the Bernstein Annual Strategic Decisions Conference. And June 11, John Lawler will participate in a fireside chat in New York with Emmanuel Rosner at Deutsche Bank's Auto Summit. Jim? Jim Farley -- President and Chief Executive Officer Thank you, Lynn. Hi, everyone, and thank you for joining us. The cornerstone of Ford+ is pretty straightforward, a more resilient business model, higher growth, higher margin and more capital efficiency. And I would say Quarter 1 had a lot of great green shoots in that plan. It sets us up for a very strong 2024 and beyond. Before John goes through the quarter, I wanted to highlight four key strategic areas: how our growth drivers are changing, our progress in quality, the resilient Ford Pro business, and what we're learning on the electrification journey in Quarter 1. On growth, the portfolio changes we made and the restructuring we've done in our geographic footprint has really paid off for Ford. Several years ago, we normally would be reducing our volume and our mix and having good news on pricing. What's changed in the last year and especially in Q1, you could see, is our top-line and bottom-line profitability are increasing, driven by improved volumes and mix, and we're actually seeing pricing headwinds. And that new portfolio and geographic footprint is really tremendous to see at Ford. There is no better example for this than the portfolio changes we've made in our truck and van business. Ford is the No. 1 best-selling pickup manufacturer in the world. And our Ford Transit cargo van is the best-selling in the world. It's now our second best-selling nameplate at Ford. And our midsized Ranger, not our most affordable pickup, is the third best-selling vehicle at Ford and together with the Everest makes up our profits outside of China, North America and Europe. It's an incredible new franchise for Ford. These changes in our portfolio at all different sizes and price points in the truck and the van business has really played to Ford's strength. And it doesn't stop there. Our growth drivers are diversifying. We now have a vibrant software business and physical services business led by Ford Pro. You don't need to look very far beyond our mobile service as an example. Ford now has 3,500 or more remote service vehicles in our fleet globally. And last year, we did 2.4 million remote service experiences, both remote service, and pickup and delivery. 40% of that was for Pro and 60% was for our retail business. Ford now has more than 700,000 paid subscribers for software. That's up 47% year over year. It's capital efficient and the gross margins of more than 50%. Our quality is making real progress. Kumar and the team have really focused on key areas. Our '23 model year three months in service, initial quality is 10% better than the previous model year. And we're seeing our current model year that we're selling for several months, another 10% improvement. That should put us in the middle of the pack, and many of our vehicles start to lead their segments in initial quality. But to bend the curve on warranty costs and customer recalls, we're really focusing on our launches. We're past the Super Duty launch now and well into the F-150 launch, and we made a lot of changes to improve and bend that curve. On the F-150 and others, we've delayed the OK to buy three to six weeks. We've taken a lot of new testing regimens. Actually, we ended the quarter with 60,000 units in our plant stock, which hurt our first quarter, but we'll benefit because we're shipping those now in our second quarter for all those quality processes. And what we're so far seeing is we avoided about 12 recalls on F-150, and we're seeing the best performance on three MIS after launch in a long time. And I'd like to be specific here. Normally, after a launch, we've seen about -- in the last five years, about a 70% spike in our defects. The industry average is about 20%. In the Super Duty and Mustang launches, we're about that industry average 20% spike. And now, we're seeing with the F-150 even better performance at industry average. And boy, do we have a lot of launches in the second half to prove out this new launch process. What we're going to see long term is fewer recalls and lower warranty costs because of this new process. I'm really proud of the team's progress on quality, and we have so much more to do. I'd like to talk quickly about Ford Pro. I mean, look at Quarter 1. We made $3 billion. It's how much we made the whole year in Pro two years ago. We're growing revenues, EBIT, EBIT margin. We're growing our volume. Our attach rates for high-margin software and physical services are improving. And when you ask yourself, why is this different and why would this business -- why would these profits be more resilient than our retail business, it comes down to three things. First is the diversity of our customer base. About a third of our Pro customers are small business. Another third are large companies, and about 20% more is governments, all different kinds. And the diversity of those customers and all three of them are driving white-hot demand for our vehicles and services right now from infrastructure build-out, roadworks, 5G, onshoring manufacturing and refleeting for our key government fleets. One out of four of those fleets are all Ford, and boy, do they trust our company. But more than anything, it's the breadth and freshness of our new lineup at Pro that's driving our profitability. We have the freshest lineup we've had in 20 years in Pro. We have an all-new Super Duty, an all-new Transit from top to bottom. And we have an all-new Ranger in five-plus plants around the world. These new products are really attractive to customers. And beyond that, we have the most diverse Class 1 to 7 lineup in North America, our key market. In that adjacency, sales are important because customers buy different kinds of vehicles for us in the same fleet. But beyond that, in those fresh nameplates, we offer the best choice. We have cabin chassis and cutaway versions of our vans, different wheel bases and heights, the same on our pickup trucks. And we also have the most choice in terms of upfitters. We have 500 different upfitters across Western Europe and the U.S. that prefer to work with Ford because of our experience with them. And it doesn't stop there. We have -- we design all of our commercial vehicles with a multi-energy platform, and that allows our customers to choose electric, partial electric, diesel, petrol, whatever choice on powertrain that best meets their cost of ownership. No one has this kind of lineup in our business globally. The third key area is the diversification and the completeness of our software and physical services experiences for our customers. Now 13% of Ford Pro's profits in the last 12 years make up these attached services. And it's a big change for us. And what's really driving that is our advantage in physical service. We have the largest repair network you can find of any brand out there, and we're widening that gap. We've added 700 commercial service bays in the last year and more than 11 very large service lead centers with between 50 and 200 repair bays that are open 24/7 for our customers. None of our competitors offer this kind of extensive repair network. And it doesn't stop there. We have over 2,000 remote trucks and vans doing remote service for our Pro customers. No brand can match that either. And now, we have over 560,000 active software subscriptions for Pro customers. That's up 40%. And that Pro Intelligence business took many years to build. It requires advanced electric architectures, and it's a really hard moat to copy. Long and the short, Ford Pro is in for a great performance over the next several years. What did we learn on electric so far? Well, as you know, we're No. 2 in our home market in electric sales for the last couple of years, and boy, we learned a lot. Since capital markets last year, we continue to adapt and evolve our spending and our investment ramp for battery plants and assembly capacity for our EVs to match customers' demand and more importantly than all of that, match their price expectations. We're retiming our launches and our capital spending. In fact, this year, we expected to spend about $10 billion as a company. We've now guided $8 billion to $9 billion. We'll probably be on the low end of that range. And we're being very consistent about our discipline on profitability. We expect every one of our EVs to make money in the first 12 months, and that is a very disciplined process. In fact, we delayed the launch of our three-row crossover, which is a great product, two years, not only to match the slower growth in EV but more importantly to take advantage of new battery chemistry and formats to substantially reduce the cost of the batteries for that vehicle. We'll do everything it takes to be profitable in the first 12 months of our vehicles. And what's our bet as a company? Well, it's pretty simple. We're going to bet on commercial work vehicles where we do really well, where we know the customers, where we can innovate for them like Pro Power Onboard with partial and fully electric vehicles. But increasingly, our bet will be on our new small affordable platform developed by our team on the West Coast. Why is affordability so important? When we look at the connected car data from our EV customers, we noticed that people live in the suburbs. Urban customers, they tend to drive shorter distances and those more affordable vehicles, more approachable. And we believe that's where the adoption of EV will grow the fastest. And we believe we can compete in segments of small cars and vehicles, more affordable vehicles in a unique way that's Ford. A good example was we learned a lot when we -- in our more expensive vehicles, Mach-E, when, in February, we dropped the price 17%, our volume went up 141%. That's telling us that the more affordable we can make great product, the more attractive it is to these mainstream EV adopters. And the last thing I'd say is we're learning about the importance of choice. Our growth in the first quarter in hybrids is a good example. We grew 36%. We think the full year will be 40%. We're now approaching 400,000 units volume for our hybrid business, and we're now No. 3 in hybrids in the U.S. It's a big advantage. We've been in the business for more than 20 years. And what's really exciting for us is, for the first time, some of our contribution margins on hybrids are above or at similar contribution margins than our pure internal combustion engine margins. With that, I'll turn it over to John. John Lawler -- Chief Financial Officer OK. Thanks, Jim. So our team around the globe is becoming more focused and adept at applying the Ford+ strategy, and we really did deliver a solid quarter. We are transforming Ford into a higher-growth, higher-margin, more capital-efficient and more resilient business. We're progressively shedding behaviors that have weighed down performance and valuation of legacy auto companies for most of the industry's history. Our strong global product lineup is differentiated, offering customers freedom of powertrain choice and drove first quarter revenue of $43 billion up 3%. Our revenue has grown in each of the last three years, and we expect 2024 to be no different. Wholesales were down 1%, more than explained by the late quarter launch timing of the new F-150. We delivered $2.8 billion in adjusted EBIT with a margin of 6.5%, reflecting continued strength in Ford Pro. Costs were up $1.2 billion, but if you double-click on this, you'll see that $1.1 billion of that was investments in growth by Ford Pro, including new products. Ford Blue and Ford Model e costs were roughly flat, and we're on track to deliver $2 billion of cost efficiencies for the full year. Adjusted free cash flow was a use of $500 million, more than explained by the vehicles in inventory, and this impact will reverse in the second quarter. Our balance sheet remains strong with $25 billion in cash and close to $43 billion in liquidity. And earlier this week, we also completed the renewal of our $18 billion corporate credit facilities, extending maturities by an additional year. Overall, our strong liquidity provides significant flexibility for us to invest in profitable growth. Consistent with our commitment to return 40% to 50% of adjusted free cash flow to shareholders, today, we also declared a regular second quarter dividend of $0.15 per share payable June 3 to shareholders of record on May 8. I'll spend a few minutes summarizing the financial performance of each of our customer-focused segments. And there's evidence in every one of them of how Ford+ is making our business stronger. Ford Pro delivered a 36% increase in revenue on a 21% increase in wholesales. The segment has consistently delivered year-over-year revenue growth each quarter since we resegmented our business. EBIT more than doubled to $3 billion with a margin of 16.7%, reflecting increased Super Duty and Transit production, richer Super Duty mix and higher net pricing. In addition, over the past 12 months, roughly 13% of Ford Pro's EBIT came from software and physical services, on the glide path to reaching 20% in a few years. And this important revenue stream generates sticky and recurring gross margins in the 40% to 50% range. And as you can see, given the breadth and depth of Ford Pro's competitive moats, investments in growth drive tremendous operating leverage. The segment's results this quarter demonstrate the consistency, predictability and earnings power of this growth business. Ford Model e generated a loss of $1.3 billion as significant industry pricing pressure more than offset flat costs as wholesales declined 20%. In the quarter, we took action to bring down inventory levels. For example, after being at a price premium to competition in 2023, we lowered pricing on Mustang Mach-E in the U.S. by 17%, bringing us in line with the two-row crossover segment. And as Jim mentioned, we did see elasticity with an improved mix of higher trends. In the U.S., retail sales jumped 77% versus the total EV segment, which was up roughly 2.6%. Our total EV market share grew by 3.4 points to 7.5%, and Mach-E was the second best-selling e-SUV, only behind Tesla's Model Y. The bottom line is that we're more competitive and doing well in the marketplace. We've reduced our stock levels significantly, and the pace of sales has increased. In Ford Blue, revenue, wholesales, and EBIT were down, all impacted by the F-150 production ramp, and vehicles and inventory. EBIT margin was 4.2%, and our international operations continue to be profitable across the board. Ford Blue's global product portfolio remains strong and our hybrid sales continue to grow, up 36% in the quarter as we get the benefit of hybrid products planned years ago. Our global mix of hybrid is currently at 7%, up 2 points year over year with more products on the way. Additionally, China exports increased 33%, including Lincoln Nautilus, and that's consistent with our strategy to better leverage that asset-light footprint. Ford Credit generated EBT of $326 million. In the quarter, financing margin improved and credit loss performance continued to normalize and remains below our historical average. Importantly, we continued to see a high-quality book based on strong FICO scores, which continue to exceed 750. And as expected, auction values have declined by roughly 10% as lease return rates continue to normalize. So we're beginning to unlock the huge potential for customers and all of our stakeholders with the Freedom of Choice made possible by Ford+. There's plenty of work ahead to fulfill that potential. However, the progress we've made so far is undeniable. We're delivering growth and profitability, sharpening capital efficiency and fortifying the resilience of our business. Accordingly, turning to our outlook, we continue to expect full year company adjusted EBIT of $10 billion to $12 billion and are tracking toward the high end of this range, and that would be a record for Ford. We're raising our adjusted free cash flow guidance to $6.5 billion to $7.5 billion, supported by the underlying strength of the business and lower-than-planned capex. Our adjusted free cash flow guidance is consistent with our cash flow conversion target of 50% to 60%. We're tightening our capex range to $8 billion to $9 billion as the team adjusts to the dynamic EV landscape. We're scrutinizing every dollar and driving efficiencies that we believe could land us at the lower end of this revised capex range. Our outlook for 2024 assumes a flat to slightly higher SAAR in both the U.S. and Europe. Our planning assumption is -- for the U.S. is 16 million to 16.5 million units, full year of customer demand for all-new Super Duty contributing to better market factors for Ford Pro, industry supply demand normalizing. From a planning perspective, we're assuming lower industry pricing of roughly 2%, driven by higher incentive spending as we move through the year. We expect this to be partially offset by top-line growth from the launch of our new products. There's no change to our segment outlook, which anticipates continued strength in Ford Pro leading to EBIT of $8 billion to $9 billion, and that's driven by the continued growth and favorable mix, partially offset by moderated pricing. As expected, a loss in the range of $5.5 billion to $5 billion for Model e, driven by continued pricing pressure and investments in new vehicles; and for Ford Blue, EBIT of $7 billion to $7.5 billion, reflecting a balanced market equation and also cost efficiencies offsetting higher labor and product costs. And we expect Ford Credit's EBT to be about $1.5 billion, up slightly year over year. Our performance this quarter continues to demonstrate the positive momentum of Ford+. Capital discipline is driving the right global footprint, portfolio of products and consistent cash generation. We continue to see growth opportunities and remain focused on delivering improvements in both quality and cost. So that wraps up our prepared remarks, and we'll use the balance of the time to address what's on your mind. So thank you, and operator, please open up the line for questions. Questions & Answers: Operator [Operator instructions] The first question today is from Adam Jonas with Morgan Stanley. Adam Jonas -- Morgan Stanley -- Analyst I got one question for John and one for Jim. John, you were just on Bloomberg saying EVs are needed to meet compliance regulations. Now it's my understanding that Ford does not disclose penalties or ZEV credit purchases for Ford on clean air regulation. Can you confirm that? That's not disclosed, right? John Lawler -- Chief Financial Officer So let me clarify a few things, Adam, on that, is that it's not an option for us not to be compliant. If you don't comply with your ZEV or your greenhouse gas emissions requirements, you can't pay fines. What happens is you can't sell, and that's consistent across the industry. So it's -- that's for all OEMs. All OEMs are under those rules. And so, there's really three levers that we have. We can sell EVs and hybrids. We can sell fewer ICE, or we can contract to buy credits from another OEM. And when we do contract to buy credits, we will disclose that as we did in our 10-K at the end of the year. And so, those are the three levers. And we, I would say, monthly, if not weekly, are working to optimize across those three levers to drive the highest profitability and the highest cash flow for the company. So to continue to sell the ICE vehicles, we are going to need to sell EVs, and we're going to optimize across the profitability. Now the most important thing, as Jim said, is we need to get the EV business to stand on its own, to be profitable and return on the capital we've invested, and then all the levers will be accretive to Ford. And we'll be able to make it really positive. So that's what we're focused on, and that's what I intended to communicate earlier today. Adam Jonas -- Morgan Stanley -- Analyst OK. But you did -- so you do disclose? You do disclose the ZEV? What was it? John Lawler -- Chief Financial Officer Yes, we disclosed last year in the 10-K that we had purchase commitments of $700 million. Adam Jonas -- Morgan Stanley -- Analyst And will that increase this year? John Lawler -- Chief Financial Officer In the first quarter, there wasn't anything material. And as we go through the year, if it's the right lever to pull, as I said, as we're optimizing, we will report it. Adam Jonas -- Morgan Stanley -- Analyst All right. I appreciate that, John. Just my follow-up for Jim. Ford Pro is kicking butt. OK? And at 10x EBIT, that business can be worth like double Ford's entire market cap. So the market is kind of implying that the rest of the business will be valued at negative many, many tens of billions. Seen another way, your stock -- I mean, this business is incredible. People would die to have this business. And I think folks are aware -- it's not a secret anymore, Jim, but people are aware of how good this business is. Yet your stock ranks 491 out of 500 companies in the S&P 500 on PE multiple. Now, Jim, I know you don't like it and I know you don't agree with it. But can you explain why does the market value -- your company is one of the lowest multiple companies in the world in any industry. Why -- try to rationalize that for me because it seems important that you, as a leader of this organization, understand that you can address that problem. Jim Farley -- President and Chief Executive Officer Thank you, Adam. And first of all, thanks for your report on Pro. I appreciate you taking the time to understand the business. Look, I mean, we -- as John mentioned, we have to make tremendous progress on Model e. It's a huge drag not just on Ford but on our whole industry, even for pure-play EV players. So -- and we're very clear-eyed about that. We're very committed to transparency. A lot of OEMs will handle EVs very different. We won't -- it's like if we had an unprofitable regional business and we rolled it up and it wouldn't be transparent to investors. We would never do that. We're not going to do that with EVs, and we're not going to subsidize our Pro and Blue business by not being transparent about e. It's how we run the business. I think, investors should understand for me as a leader is that we're going to build a sustainably profitable EV business with terminal value. And we -- and it needs to return the cost of capital on its own and not be subsidized as I mentioned. And the real turning point for us not only is our flat cost in Model e this year, but most importantly, it will be the profitability in our next cycle of products. And I'm proud of the work that our team has done to make the adjustments in our capital spending and to make sure that all of our next EVs are profitable. And the evidence will be there. And I think that is the main drag on the company right now as it will be for our whole industry. Blue is in really good shape. I wonder out loud, Adam, if everyone really understands the resilience of the Pro business over time. We're very profitable now, but we believe that this business will be profitable and durable for many years to come. And I'm not sure the full market understands that personally. I know you've gone through the business understanding the demand, and I encourage everyone to understand and ask us more questions about Pro. Thanks. Operator The next question is from John Murphy with Bank of America Merrill Lynch. John Murphy -- Bank of America Merrill Lynch -- Analyst The Freedom of Choice is a great marketing tool to go out to market with, and I think it's reasonably -- or should be very effective. But Jim, as you think about this, as the market is shifting toward hybrids at least in the near term, I'm just curious what kind of capacity you have to ramp up significantly in hybrids if the demand really is there. And if you think about sort of the competitive threat really coming from Toyota with a lot of capacity on this side, is there risk that there's market share losses to them over time? Or do you have the ability to really step up here? I think you mentioned something about 400,000 hybrids on an LTM basis. But can you do a whole lot more and really sort of garner your fair share of the market? Jim Farley -- President and Chief Executive Officer John, we made a lot of capacity decisions several years ago on hybrid, and I'm very thankful we did. For example, we just radically increased the capacity for F-150 that we're launching now up to 25%. And it takes -- as you said, it takes a long time for suppliers to ramp to that capacity. It's not assembly capacity is a constraint. So that 400,000 is almost double what we did a couple of years ago. That was all very intentional. And we made the decision a couple of years ago to actually make hybrid more pervasive in our lineup, and we're actually now going to -- we've now committed publicly, we're going to offer hybrid on all of our vehicles across our lineup. And of course, the capacity has to be there. But if you look at the pricing premium today, which is maybe the most important thing to look for because now that contribution margin for hybrid is covering the cost of the hybrid incremental material cost, that's really meaningful development. And I think we're in good shape. Of course, our hybrid business is different than the others. We're No. 3 in the U.S. No. 1 and No. 2 is close Toyota and Honda. But our hybrid capacity is in trucks. That's where most of our hybrid sales are in North America. And we don't see a lot of competition so far for that business. We'll see over time. So I feel really good about the decisions we made several years ago about our capacity expansion. Will it be more than 40% growth? It could be. And I think we have flexibility. Now we have really meaningful scale for our suppliers. A lot of our competitors will be starting from scratch. John Murphy -- Bank of America Merrill Lynch -- Analyst And I have one follow-up on Pro. It seems like there's a lot of pent-up demand on the fleet side, both on commercial and government. I'm just wondering if you can comment though on that on sort of a unit basis, as well as potentially a service basis and just really kind of talk about what kind of benefit that may sort of still garner toward for Pro, which is, as you said, shooting the lights out or we should say that. It seems like there's a lot of opportunity here still just from a market release of pent-up demand, and that might be even more structural over time. Jim Farley -- President and Chief Executive Officer It's true. The demand on Pro is fundamentally different than retail. There's no doubt about it. Our retail customers are not refleeting. They're not doing roadworks and 5G infrastructure build-out. I mean, these are all fundamental drivers. The ambulance market in the U.S., the average ambulance is 15 years old. I mean, they've been waiting for Transits for a long time. We're now increasing our capacity, which is great. But I mean, we're oversubscribed on the new Super Duty 2:1. So I wish I could say we got that right. We didn't, but we are expanding capacity. I think -- and we have this freshest lineup that we've never had. So we have this kind of double opportunity. Our lineup is fresh. We have the most choice. At the same time, our customers are in kind of white-hot demand that we saw in retail two years ago during the supply shock. And we're doing everything we can to increase our capacity for our customers. It's very frustrating for them. Operator The next question is from Ryan Brinkman with J.P. Morgan. Ryan Brinkman -- J.P. Morgan -- Analyst I'd love to get some more of your thoughts on capital allocation, including after in the release, you repeat the intention to return 40% to 50% of free cash flow to shareholders. I guess, with capex coming further down and FCF up, there's more to return. But at the same time, targeting to return only up to half of what you generate, obviously, implies you want to continue to grow cash on hand despite the current $28 billion being well more than the over $20 billion that you've historically targeted. And of course, you've got lots of available liquidity beyond that, close to a record, I think. So just curious what might be driving the conservatism here, whether it relates to more macro or industry uncertainty or wanting to preserve some other optionality or for some contingency I'm not thinking of. I think, in the past when I've asked this question, you'd sort of point to the industry transition toward EVs. But seems like the last couple of quarters now, your focus is more on improving the EV business by trying to spend less, not needing to spend more to -- all right? So just wanted to check in how you're feeling about capital allocation, what you're seeing that caused you to want to be conservative now. And then, what could cause you to potentially want to become more aggressive in the future? John Lawler -- Chief Financial Officer Yes, so thank you. So we have our stated policy, as you said, 40% to 50% of free cash flow. Our balance sheet is strong. Our cash position, we ended the year strong. We're at $25 billion this quarter when we talked about the fact that our guidance for this year went up. So when we look at it, we believe that right now in the transition point for the industry, we would rather invest in accretive growth opportunities. And we've always said that if those opportunities don't come to fruition, then we'll need to look at other allocation decisions that we would need to make, but we're not there yet. So we're continuing to talk about this as a team consistently. But we think, at this point, the position we're at, we're comfortable with given where we're at in the transition. We'll pay out the 40%, 50% of free cash flow. The last couple of years, it's been at the high end of that range. And eventually, as we continue to execute on our Ford+ plan, if those accretive opportunities to allocate capital for additional accretive growth aren't there, then we'll look at other ways of returning that cash to our shareholders. Operator The next question is from Bruno Dossena with Wolfe Research. Bruno Dossena -- Wolfe Research -- Analyst I wanted to ask in Model e. And I understand that reaching breakeven depends on the timing of the launch of the next-gen vehicles. But in the intermediate term, can you tell us how you're thinking about the trajectory of losses in e and specifically the potential to work down the structural costs associated with this business? John Lawler -- Chief Financial Officer Yes. So we are -- I don't know, it's a cliche, I guess, laser-focused on the -- all the costs around Model e. And for the year, when you look at -- well, let's just take it back up a second. The last couple of years, when you look at Model e, we've actually reduced the cost of our vehicles significantly. On Mach-E, we've taken over $5,000 of cost out, but the revenue keeps dropping faster than we're able to take out the cost. And we're being very thoughtful about what we're putting in as far as structural costs, etc. And so, we're going to continue to work on driving every dollar of cost out of the business in the near term. And if the pricing stabilizes and we don't see these significant reductions continuing across the industry, then I think that you could probably start to see some of those cost reductions flow to the bottom line. But so far, the last 12 to 18 months, it's just been a continuous march down on the top line, which is offsetting any of the savings we've had from a cost standpoint. So it's in our control. We have to take cost out. We know that. That's what we're marching toward. And we're understanding the dynamics and the competitiveness of the market equation as we set up the cost structure for our second-gen vehicles. And as Jim said, we pushed out the three-row SUV because we need more cost to come out of that for that to be at the margin levels we expect. Bruno Dossena -- Wolfe Research -- Analyst OK. On a similar vein, the comments you made around cost and pricing for the Mach-E, if we look at your combustion, Blue and Pro, we see the costs are up $1.2 billion year over year, presumably from material content on some new launches, warranty, maybe offset by some savings. And we also see that pricing in these businesses is up about $1 billion. But can you give us some insight into if or when you'll see some improvement in variable costs relative to pricing and Ford beginning to close the variable cost gap compared to peers? John Lawler -- Chief Financial Officer Yes. So if you look at that, most of the cost this quarter was up in Ford Pro and is all related to the material costs for our new product launches, both the Super Duty and the Transit that we launched in Europe, as well as manufacturing costs for the increased volumes that we're bringing across, as Jim mentioned. So that's what drove most of the cost increase in the quarter. We're on track to deliver the $2 billion of cost reductions we talked about at the beginning of the year of raw manufacturing costs, material costs, as well as freight and overhead. And so, you'll start to see that really gain traction as we move through the second half of the year. And that's when you'll start to see it on our quarterly results. Operator The next question is from Itay Michaeli with Citi. Itay Michaeli -- Citi -- Analyst Just two questions for me. First, back to Pro. With a $3 billion outcome in Q1, can you maybe talk about the puts and takes if I think about the rest of the year? And maybe should we think about the full year at the high end of the range? And then, going back to Model e, the press release did allude to EV costs improving going forward but an offset from top-line pressure. I was hoping you could help dimension what you're assuming for EV prices the rest of the year. And as volume kind of responds to these price cuts, is there a level where Model e can still become contribution margin positive over the next 12-plus months? John Lawler -- Chief Financial Officer So let me unpack that. So for the year, we're not projecting where -- or sharing where we expect the cost to come down. If you look at what recently happened in the quarter when it comes to pricing on Model e, we had entered the year assuming that prices would come down about 20%. They came down much more than that. We had to take our prices down another 17% to remain competitive and mask competition in -- as we went through the quarter. So we've seen prices coming down quite dramatically, and that's why we haven't been able to keep up from a cost reduction standpoint. Look, we're targeting to take out as much cost this year as we can on Model e and all in the spirit of driving toward that contribution margin positive so we can have some leverage as we move volumes through the chain. So that definitely is our intention as we continue to work on Model e in the near term. Jim Farley -- President and Chief Executive Officer On Pro, obviously, Q1, Pro is really structured not necessarily on traditional demand like retail. It's actually deliveries. So our delivery volume in Q1, it's kind of -- it's a cyclical business globally, and we have a lot of strong delivery in the first quarter just because of the contractual agreements with our customers, including fleetail. And when you look at the rest of the year, we have shutdowns. There are a lot of other -- we have launches. There are a lot of reasons why we feel really comfortable, even with the strong result in the first quarter, that our guidance is still accurate for Ford Pro given all the puts and takes. But we'll revisit in the second quarter. We'll see how pricing lands. We're going to be doing quite a bit of fleetail business this quarter, as well as looking at locking in pricing for some of our large corporate fleets later in the year. So we're going to learn a lot more this quarter on whether there's tailwinds or headwinds on Pro. Operator The next question is from Joseph Spak with UBS. Joe Spak -- UBS -- Analyst Jim, first to start, I appreciate all the commentary you talked about on the F-150 launches and as well as Super Duty and Mustang and some of the improvement there. As you mentioned, you've got some other big launches coming up later this year, I think Explorer and a number of others. So was the lesson learned that you will go more cautious and careful? And is that -- should we expect a slower ramp-up than we've seen historically for some of these new launches later in the year? Jim Farley -- President and Chief Executive Officer I would say we're seeing real benefits to our customers and the company, I believe, long term in taking this new approach to launches. It also requires our industrial system under Kumar to work differently, solve problems, to do different kinds of testing, and that goes into kind of our longer-term lessons learned. And we're now really spending a lot of time on long-term durability, which is an area where Ford has standards but maybe didn't look to lead the industry, which we now look to. And so, we're not going to change our approach to these launches. We think this new more measured approach with more physical testing, a lot more time for problem solving for our team is the right approach for the company in the midterm and long term. We do have some very significant launches coming up. We have Explorer and Aviator as you mentioned, which are high volume in both North America. And in China, we have a new wave, we call Wave 2 for the one-ton Transit in Europe, which is super profitable. And we're going to be building and launching the higher-end derivatives of that. We have the Bronco in China. I mean, I can go on and on. We have a freshened Maverick and Bronco Sport coming and even more models than that. So given all that complexity, it's actually even more important for us to take our time. And it may -- like Quarter 1, it may mean that in some quarter ends, we may have some company stock and plans to make sure that we do the right thing on quality. So our earnings may be a little bit lumpy. We'll see how that works out based on this new approach. Joe Spak -- UBS -- Analyst OK. And just back to the hybrid conversation because, as you pointed out, your hybrid portfolio is much different than a Toyota or a Honda. It's pretty limited. I think, you only have like three hybrids right now. But how should we think about scaling that to the rest of the portfolio as you mentioned? Is it really like taking existing power plants you have and trying to sort of fit it -- make it fit on more models? Or are there real new investments that need to be made for hybrids? Jim Farley -- President and Chief Executive Officer It's a good question. So I would say mostly, it's taking our current internal combustion engines and adding new hybrid components and doing the engineering to fit that. Look, look at the T6 platform. We had the Ranger. We had the Everest stuff. We have the Bronco. That's an obvious candidate. We have our full-size SUVs candidate. We have the Explorer platform. And I think we're lucky. We have the right engines. Some of them may have to go to an Atkinson cycle engine from a normal combustion cycle. We have the components in our system from the hybrid, the torque splitting devices that -- we do have to up the investment in some capacities like our hybrid transmissions, but we've made the decision to do that already, and that's in our spending plan this year. I think, we're in really good shape. It doesn't require wholesale inventing new powertrains, but it does involve some engineering and investment in capacity. I would say kind of modest investments, mostly in the capacity side and some engineering. Operator The next question is from Colin Langan with Wells Fargo. Colin Langan -- Wells Fargo Securities -- Analyst It sounds like you're pretty optimistic about pickup demand, but I think there's media reports that some of the data showing pricing was a bit weak in Q1, inventories look pretty high. So are you seeing any risks in the market? And where do you see pricing for some of these models coming for the rest of the year, I guess, now that you got maybe some of the 2023s out? And then, where should inventory really end? John Lawler -- Chief Financial Officer Yes. So what you saw in pickups for us as we came out of the end of last year into the first quarter of this year here in the U.S. is we built up stock as we knew we were coming into the launch. So we built stocks of '23 models. And then, we were selling those down in the first quarter throughout the majority of the quarter. And that's why you saw, to stay competitive with our competitors who had '24 year model pickup trucks, we saw some top line come down. So we had higher incentives to sell the '23 model year longer through the quarter. You see now that our '24 F-150s are at dealers and selling, they're turning in about seven days, you'll see, as you look at the data, that our average transaction prices are going up and our incentive spend is coming down because of the [Inaudible] year mix. So that's a big part of what moved it for us on pickup trucks. And it was -- because we're such a big player, it was moving in [Inaudible]. Jim Farley -- President and Chief Executive Officer I just want to emphasize, I don't think there's a brand out there that has a Maverick. That's pretty much alone in the segment, and we still are in a supply shock for Maverick. It's one of our fastest-growing vehicles. We have an all-new F-150 with a hybrid option, as John said, turning really fast. We have a Super Duty on the Pro side that's oversubscribed 2:1, and we have a brand-new Ranger. So we're a bit of a unicorn in the sense that, yes, we're big, and there is some risk. But I would say the risk is for people who have aged product. And I think Ford is in a particularly advantaged situation. Colin Langan -- Wells Fargo Securities -- Analyst And what about inventory levels? I think some of the data is showing at the high 90s ending up March kind of coming down to -- John Lawler -- Chief Financial Officer Yes, that's come down considerably, and if you look at us on an overall basis, our dealer day supply is mid-50s. Jim Farley -- President and Chief Executive Officer Yes. We're completely out of stock on Rangers. Maverick is like 30-day supply or something like that. F-150 came down because we had quite a few '23s. But now, with the launch and the quality effort, I think the stocks are really in good shape. And Super Duty, we have very few in stock for retail. John Lawler -- Chief Financial Officer Yes. So you've got to look at the dealer day supply, and that's in a good place. Colin Langan -- Wells Fargo Securities -- Analyst And just as a follow-up, maybe a color on industry pricing. What is sort of embedded in your guidance at this point? And how is pricing holding up, I guess, sequentially because I think some of the comps are a little tough with launches year over year? John Lawler -- Chief Financial Officer Yes. First quarter, pricing held up pretty well Q4 into Q1. From a planning perspective, we assume that the industry, we expect to see pricing pressure of about 2% negative pricing across the industry. And it really comes back to affordability. Many folks across the industry have been talking about pricing coming down, though what -- and it hasn't. And again, we saw in the first quarter that it remained pretty robust. But we keep looking at it from an affordability standpoint, from the consumer perspective. And when you look at where consumers were pre COVID, then we had the supply shocks and we had a very imbalance between supply and demand, but now as that's normalized, we would expect that affordability should go back to where it was pre COVID, and that's about 13% to 14% of monthly disposable income. And you also have to factor in right now, with interest rates, that payment prices have gone up. Insurance rates have gone up, as well as maintenance rates. And so, when you take all that together, we think about affordability, we say, OK, if you're going to be back toward that range of affordability for the consumer, then prices are going to have to come off a couple of points or so across the industry. And so, that's how we think about it and that's what we have planned. And we'll see where that runs with Q2 and then as we go through the second half of this year. Operator The next question is from Tom Narayan with RBC. Tom Narayan -- RBC Capital Markets -- Analyst Jim, we heard from your guys' commentary that if EV prices, those drops stabilized, then the losses would lessen. But as we've heard from some of the earnings yesterday, Tesla, GM, it seems like the opposite is happening. It seems like OEMs are trying to make cheaper EVs and that pricing is really only going to go lower. I guess -- and how confident are you that you could reduce EV losses in this environment if EV prices just keep on going down? John Lawler -- Chief Financial Officer So when you look at it, it's clear that when the EV craze started, right, it was -- it looked like demand was going to be well long supply. But that was with the early adopters and they were willing to pay a higher price. What we're finding with being in the marketplace is that EV prices are normalizing, and our early majority customers are not willing to pay a premium. And that's what we're seeing. And so, we think that prices for EVs are going to normalize around where gas is and the consumer is going to weigh the value proposition of that propulsion choice, either for their duty cycle, what works for them, either it's going to be an EV or a traditional ICE engine or a diesel or a hybrid. And pricing is going to have to be relatively consistent across all choices of propulsion, and a customer will make a choice based on the value of that. And that's how we're building the business model for electric vehicles. I don't think that you're going to find that you're going to have electric vehicles well below gas prices unless there's so much capacity pushing against the demand curve, and it's an imbalance on that end of it. But eventually, rational players will have to come to the marketplace. Jim Farley -- President and Chief Executive Officer We launched our first small SUV this year in Europe in Cologne, our Explorer. It's a two-row crossover. It's a relatively small vehicle certainly in the U.S. And you can expect, as I mentioned several times, that our new affordable platform will be used for most of our volume in their next cycle of product. What's really exciting for us is that we see an opening in the market. We see a lot of brands having to launch compliance vehicles that lose money, and they probably don't want to sell a lot of volume but they have to. We believe that we can be profitable at $25,000 to $30,000, so it's a huge opportunity for Ford. And what we're learning with BlueCruise and our Protiviti software on Pro is that all those vehicles will be great platforms for software and services. And so, we're really excited about that new more affordable vehicle lineup starting with Explorer in Europe this year. Tom Narayan -- RBC Capital Markets -- Analyst And maybe as a follow-up, maybe this is something that could help here, is battery raw mat costs. We have lithium down like 80% since it peaked in 2022. Could you just remind us of how your contracts work? I think there's -- we've heard from some other OEMs that there's still some benefits to come, actually getting better given how contracts work, and you could actually see some benefits on battery raw mats later in the year. John Lawler -- Chief Financial Officer Yes, we're seeing the same thing. We're no different. Jim Farley -- President and Chief Executive Officer I would say that the biggest leverage on the battery cost is still going to be taking nickel out of them and those kind of things. It's great to see the easing of some of the raw materials, and that will definitely cascade into our business, depending on our contracts. I think, the most important thing strategically is to get to new chemistries that have a lot less expensive materials in them. And we see that right around the corner at Ford. And we're changing our launch timing to take advantage of that. Operator Our final question today is from James Picariello with BNP Paribas Exane. James Picariello -- Exane BNP Paribas -- Analyst Just back on Joe's question regarding this year's heavy slate of model launches. I know the hyperfocus is on improved launch quality. I believe, Jim, you mentioned at some point Ford Pro lost $1 billion in profit last year from a more delivered Super Duty launch, excluding the impact from the strike. My question is, we already saw the F-150 refresh this quarter result in 60,000 units getting pushed. Is there a risk to Ford Blue's guide from lower launch volumes? Is this already factored into the range? Or is it mainly expected Ford will avoid any material slowdown from here? John Lawler -- Chief Financial Officer It's already factored in. James Picariello -- Exane BNP Paribas -- Analyst Already factored in. OK. That was easy. Can you also -- can you just unpack how the implied ASP for Model e in the quarter finished in the $10,000 to $14,000 range? And then, just given the slow volume start to the year, should we still be expecting modest full year growth for Model e? John Lawler -- Chief Financial Officer Yes, we expect high single-digit growth in the Model e, primarily with the launch of the Explorer, as Jim mentioned, in Europe. When you look at the average selling price, with the math, it's difficult because of the quarter. So we had quite a few units in stock. And as we saw the competitive pricing in the industry come down, we took our prices down, too. So then we had to take the prices down of all units in stock equally, and that was about $300 million of impact there. So when you look at the tenth of revenue for the quarter for Model e, you need to add that $300 million in, if you want to do the math based on the wholesales in the quarter. James Picariello -- Exane BNP Paribas -- Analyst Got it. Maybe my first question doesn't count given how easy the answer is. Just on the $2 billion in material manufacturing cost savings for this year, I know there are not going to be clean numbers that stand out in the bridge quarter to quarter. But can you just give a high-level assessment on the progress to date? What initiatives are really showing through? And any color you're willing to share on first half versus second half timing on those initiatives? John Lawler -- Chief Financial Officer Yes. So majority of them are going to be toward the second half. I'm really encouraged by the progress that Kumar and the industrial platform are making around the design changes. And those design changes are trying to be implemented as we get the new model year changeover in the second half and as we bring vehicles online in the second half. So that's one area where I've seen tremendous progress by the Ford teams. They're working on those design reductions to come through. The other area we're seeing progress is in manufacturing, and Bryce and his team, they're working to drive efficiencies to help offset the increases we have this year based on the contract that we signed last year. So in both areas, I'm seeing green shoots there. And Liz is doing a really nice job on the supply chain side as well. We've got better systems and tools and processes. We're working more collaboratively with the supply base. She's changing the culture. And so, across all three of those areas in the industrial platform between what Kumar is doing, leading the team with Bryce and Liz, we're seeing green shoots, and we're confident on the $2 billion this year but mostly timed toward the second half. Jim Farley -- President and Chief Executive Officer And one of the most important priorities for us as a team is to take that cost out and improve quality at the same time. So on the design side, for example, we have specific windows where the team can make design changes and not to -- protect our quality. I just want to emphasize that because we're trying to do both at the same time, improve quality and improve our costs in the industrial system. And to do that, we have to be very intentional. Answer:

the Ford Motor Company first quarter 2024 earnings conference call

Operator Good day, everyone. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company first quarter 2024 earnings conference call. [Operator instructions] Please note, this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, executive director of investor relations. Please go ahead. Lynn Tyson -- Executive Director, Investor Relations Thanks, Gary. Welcome to Ford Motor Company's first quarter 2024 earnings call. With me today are Jim Farley, president and CEO; and John Lawler, chief financial officer. Also joining us for Q&A is Cathy O'Callaghan, CEO of Ford Credit. Today's discussion includes some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials and other important content at shareholder.ford.com. Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 19. Unless otherwise noted, all comparisons are year over year. Company EBIT, EPS, and free cash flow are on an adjusted basis. Lastly, I want to call out a few of our near-term IR engagements. May 30, Jim Farley will participate in a fireside chat in New York with Toni Sacconaghi and Daniel Röska at the Bernstein Annual Strategic Decisions Conference. And June 11, John Lawler will participate in a fireside chat in New York with Emmanuel Rosner at Deutsche Bank's Auto Summit. Jim? Jim Farley -- President and Chief Executive Officer Thank you, Lynn. Hi, everyone, and thank you for joining us. The cornerstone of Ford+ is pretty straightforward, a more resilient business model, higher growth, higher margin and more capital efficiency. And I would say Quarter 1 had a lot of great green shoots in that plan. It sets us up for a very strong 2024 and beyond. Before John goes through the quarter, I wanted to highlight four key strategic areas: how our growth drivers are changing, our progress in quality, the resilient Ford Pro business, and what we're learning on the electrification journey in Quarter 1. On growth, the portfolio changes we made and the restructuring we've done in our geographic footprint has really paid off for Ford. Several years ago, we normally would be reducing our volume and our mix and having good news on pricing. What's changed in the last year and especially in Q1, you could see, is our top-line and bottom-line profitability are increasing, driven by improved volumes and mix, and we're actually seeing pricing headwinds. And that new portfolio and geographic footprint is really tremendous to see at Ford. There is no better example for this than the portfolio changes we've made in our truck and van business. Ford is the No. 1 best-selling pickup manufacturer in the world. And our Ford Transit cargo van is the best-selling in the world. It's now our second best-selling nameplate at Ford. And our midsized Ranger, not our most affordable pickup, is the third best-selling vehicle at Ford and together with the Everest makes up our profits outside of China, North America and Europe. It's an incredible new franchise for Ford. These changes in our portfolio at all different sizes and price points in the truck and the van business has really played to Ford's strength. And it doesn't stop there. Our growth drivers are diversifying. We now have a vibrant software business and physical services business led by Ford Pro. You don't need to look very far beyond our mobile service as an example. Ford now has 3,500 or more remote service vehicles in our fleet globally. And last year, we did 2.4 million remote service experiences, both remote service, and pickup and delivery. 40% of that was for Pro and 60% was for our retail business. Ford now has more than 700,000 paid subscribers for software. That's up 47% year over year. It's capital efficient and the gross margins of more than 50%. Our quality is making real progress. Kumar and the team have really focused on key areas. Our '23 model year three months in service, initial quality is 10% better than the previous model year. And we're seeing our current model year that we're selling for several months, another 10% improvement. That should put us in the middle of the pack, and many of our vehicles start to lead their segments in initial quality. But to bend the curve on warranty costs and customer recalls, we're really focusing on our launches. We're past the Super Duty launch now and well into the F-150 launch, and we made a lot of changes to improve and bend that curve. On the F-150 and others, we've delayed the OK to buy three to six weeks. We've taken a lot of new testing regimens. Actually, we ended the quarter with 60,000 units in our plant stock, which hurt our first quarter, but we'll benefit because we're shipping those now in our second quarter for all those quality processes. And what we're so far seeing is we avoided about 12 recalls on F-150, and we're seeing the best performance on three MIS after launch in a long time. And I'd like to be specific here. Normally, after a launch, we've seen about -- in the last five years, about a 70% spike in our defects. The industry average is about 20%. In the Super Duty and Mustang launches, we're about that industry average 20% spike. And now, we're seeing with the F-150 even better performance at industry average. And boy, do we have a lot of launches in the second half to prove out this new launch process. What we're going to see long term is fewer recalls and lower warranty costs because of this new process. I'm really proud of the team's progress on quality, and we have so much more to do. I'd like to talk quickly about Ford Pro. I mean, look at Quarter 1. We made $3 billion. It's how much we made the whole year in Pro two years ago. We're growing revenues, EBIT, EBIT margin. We're growing our volume. Our attach rates for high-margin software and physical services are improving. And when you ask yourself, why is this different and why would this business -- why would these profits be more resilient than our retail business, it comes down to three things. First is the diversity of our customer base. About a third of our Pro customers are small business. Another third are large companies, and about 20% more is governments, all different kinds. And the diversity of those customers and all three of them are driving white-hot demand for our vehicles and services right now from infrastructure build-out, roadworks, 5G, onshoring manufacturing and refleeting for our key government fleets. One out of four of those fleets are all Ford, and boy, do they trust our company. But more than anything, it's the breadth and freshness of our new lineup at Pro that's driving our profitability. We have the freshest lineup we've had in 20 years in Pro. We have an all-new Super Duty, an all-new Transit from top to bottom. And we have an all-new Ranger in five-plus plants around the world. These new products are really attractive to customers. And beyond that, we have the most diverse Class 1 to 7 lineup in North America, our key market. In that adjacency, sales are important because customers buy different kinds of vehicles for us in the same fleet. But beyond that, in those fresh nameplates, we offer the best choice. We have cabin chassis and cutaway versions of our vans, different wheel bases and heights, the same on our pickup trucks. And we also have the most choice in terms of upfitters. We have 500 different upfitters across Western Europe and the U.S. that prefer to work with Ford because of our experience with them. And it doesn't stop there. We have -- we design all of our commercial vehicles with a multi-energy platform, and that allows our customers to choose electric, partial electric, diesel, petrol, whatever choice on powertrain that best meets their cost of ownership. No one has this kind of lineup in our business globally. The third key area is the diversification and the completeness of our software and physical services experiences for our customers. Now 13% of Ford Pro's profits in the last 12 years make up these attached services. And it's a big change for us. And what's really driving that is our advantage in physical service. We have the largest repair network you can find of any brand out there, and we're widening that gap. We've added 700 commercial service bays in the last year and more than 11 very large service lead centers with between 50 and 200 repair bays that are open 24/7 for our customers. None of our competitors offer this kind of extensive repair network. And it doesn't stop there. We have over 2,000 remote trucks and vans doing remote service for our Pro customers. No brand can match that either. And now, we have over 560,000 active software subscriptions for Pro customers. That's up 40%. And that Pro Intelligence business took many years to build. It requires advanced electric architectures, and it's a really hard moat to copy. Long and the short, Ford Pro is in for a great performance over the next several years. What did we learn on electric so far? Well, as you know, we're No. 2 in our home market in electric sales for the last couple of years, and boy, we learned a lot. Since capital markets last year, we continue to adapt and evolve our spending and our investment ramp for battery plants and assembly capacity for our EVs to match customers' demand and more importantly than all of that, match their price expectations. We're retiming our launches and our capital spending. In fact, this year, we expected to spend about $10 billion as a company. We've now guided $8 billion to $9 billion. We'll probably be on the low end of that range. And we're being very consistent about our discipline on profitability. We expect every one of our EVs to make money in the first 12 months, and that is a very disciplined process. In fact, we delayed the launch of our three-row crossover, which is a great product, two years, not only to match the slower growth in EV but more importantly to take advantage of new battery chemistry and formats to substantially reduce the cost of the batteries for that vehicle. We'll do everything it takes to be profitable in the first 12 months of our vehicles. And what's our bet as a company? Well, it's pretty simple. We're going to bet on commercial work vehicles where we do really well, where we know the customers, where we can innovate for them like Pro Power Onboard with partial and fully electric vehicles. But increasingly, our bet will be on our new small affordable platform developed by our team on the West Coast. Why is affordability so important? When we look at the connected car data from our EV customers, we noticed that people live in the suburbs. Urban customers, they tend to drive shorter distances and those more affordable vehicles, more approachable. And we believe that's where the adoption of EV will grow the fastest. And we believe we can compete in segments of small cars and vehicles, more affordable vehicles in a unique way that's Ford. A good example was we learned a lot when we -- in our more expensive vehicles, Mach-E, when, in February, we dropped the price 17%, our volume went up 141%. That's telling us that the more affordable we can make great product, the more attractive it is to these mainstream EV adopters. And the last thing I'd say is we're learning about the importance of choice. Our growth in the first quarter in hybrids is a good example. We grew 36%. We think the full year will be 40%. We're now approaching 400,000 units volume for our hybrid business, and we're now No. 3 in hybrids in the U.S. It's a big advantage. We've been in the business for more than 20 years. And what's really exciting for us is, for the first time, some of our contribution margins on hybrids are above or at similar contribution margins than our pure internal combustion engine margins. With that, I'll turn it over to John. John Lawler -- Chief Financial Officer OK. Thanks, Jim. So our team around the globe is becoming more focused and adept at applying the Ford+ strategy, and we really did deliver a solid quarter. We are transforming Ford into a higher-growth, higher-margin, more capital-efficient and more resilient business. We're progressively shedding behaviors that have weighed down performance and valuation of legacy auto companies for most of the industry's history. Our strong global product lineup is differentiated, offering customers freedom of powertrain choice and drove first quarter revenue of $43 billion up 3%. Our revenue has grown in each of the last three years, and we expect 2024 to be no different. Wholesales were down 1%, more than explained by the late quarter launch timing of the new F-150. We delivered $2.8 billion in adjusted EBIT with a margin of 6.5%, reflecting continued strength in Ford Pro. Costs were up $1.2 billion, but if you double-click on this, you'll see that $1.1 billion of that was investments in growth by Ford Pro, including new products. Ford Blue and Ford Model e costs were roughly flat, and we're on track to deliver $2 billion of cost efficiencies for the full year. Adjusted free cash flow was a use of $500 million, more than explained by the vehicles in inventory, and this impact will reverse in the second quarter. Our balance sheet remains strong with $25 billion in cash and close to $43 billion in liquidity. And earlier this week, we also completed the renewal of our $18 billion corporate credit facilities, extending maturities by an additional year. Overall, our strong liquidity provides significant flexibility for us to invest in profitable growth. Consistent with our commitment to return 40% to 50% of adjusted free cash flow to shareholders, today, we also declared a regular second quarter dividend of $0.15 per share payable June 3 to shareholders of record on May 8. I'll spend a few minutes summarizing the financial performance of each of our customer-focused segments. And there's evidence in every one of them of how Ford+ is making our business stronger. Ford Pro delivered a 36% increase in revenue on a 21% increase in wholesales. The segment has consistently delivered year-over-year revenue growth each quarter since we resegmented our business. EBIT more than doubled to $3 billion with a margin of 16.7%, reflecting increased Super Duty and Transit production, richer Super Duty mix and higher net pricing. In addition, over the past 12 months, roughly 13% of Ford Pro's EBIT came from software and physical services, on the glide path to reaching 20% in a few years. And this important revenue stream generates sticky and recurring gross margins in the 40% to 50% range. And as you can see, given the breadth and depth of Ford Pro's competitive moats, investments in growth drive tremendous operating leverage. The segment's results this quarter demonstrate the consistency, predictability and earnings power of this growth business. Ford Model e generated a loss of $1.3 billion as significant industry pricing pressure more than offset flat costs as wholesales declined 20%. In the quarter, we took action to bring down inventory levels. For example, after being at a price premium to competition in 2023, we lowered pricing on Mustang Mach-E in the U.S. by 17%, bringing us in line with the two-row crossover segment. And as Jim mentioned, we did see elasticity with an improved mix of higher trends. In the U.S., retail sales jumped 77% versus the total EV segment, which was up roughly 2.6%. Our total EV market share grew by 3.4 points to 7.5%, and Mach-E was the second best-selling e-SUV, only behind Tesla's Model Y. The bottom line is that we're more competitive and doing well in the marketplace. We've reduced our stock levels significantly, and the pace of sales has increased. In Ford Blue, revenue, wholesales, and EBIT were down, all impacted by the F-150 production ramp, and vehicles and inventory. EBIT margin was 4.2%, and our international operations continue to be profitable across the board. Ford Blue's global product portfolio remains strong and our hybrid sales continue to grow, up 36% in the quarter as we get the benefit of hybrid products planned years ago. Our global mix of hybrid is currently at 7%, up 2 points year over year with more products on the way. Additionally, China exports increased 33%, including Lincoln Nautilus, and that's consistent with our strategy to better leverage that asset-light footprint. Ford Credit generated EBT of $326 million. In the quarter, financing margin improved and credit loss performance continued to normalize and remains below our historical average. Importantly, we continued to see a high-quality book based on strong FICO scores, which continue to exceed 750. And as expected, auction values have declined by roughly 10% as lease return rates continue to normalize. So we're beginning to unlock the huge potential for customers and all of our stakeholders with the Freedom of Choice made possible by Ford+. There's plenty of work ahead to fulfill that potential. However, the progress we've made so far is undeniable. We're delivering growth and profitability, sharpening capital efficiency and fortifying the resilience of our business. Accordingly, turning to our outlook, we continue to expect full year company adjusted EBIT of $10 billion to $12 billion and are tracking toward the high end of this range, and that would be a record for Ford. We're raising our adjusted free cash flow guidance to $6.5 billion to $7.5 billion, supported by the underlying strength of the business and lower-than-planned capex. Our adjusted free cash flow guidance is consistent with our cash flow conversion target of 50% to 60%. We're tightening our capex range to $8 billion to $9 billion as the team adjusts to the dynamic EV landscape. We're scrutinizing every dollar and driving efficiencies that we believe could land us at the lower end of this revised capex range. Our outlook for 2024 assumes a flat to slightly higher SAAR in both the U.S. and Europe. Our planning assumption is -- for the U.S. is 16 million to 16.5 million units, full year of customer demand for all-new Super Duty contributing to better market factors for Ford Pro, industry supply demand normalizing. From a planning perspective, we're assuming lower industry pricing of roughly 2%, driven by higher incentive spending as we move through the year. We expect this to be partially offset by top-line growth from the launch of our new products. There's no change to our segment outlook, which anticipates continued strength in Ford Pro leading to EBIT of $8 billion to $9 billion, and that's driven by the continued growth and favorable mix, partially offset by moderated pricing. As expected, a loss in the range of $5.5 billion to $5 billion for Model e, driven by continued pricing pressure and investments in new vehicles; and for Ford Blue, EBIT of $7 billion to $7.5 billion, reflecting a balanced market equation and also cost efficiencies offsetting higher labor and product costs. And we expect Ford Credit's EBT to be about $1.5 billion, up slightly year over year. Our performance this quarter continues to demonstrate the positive momentum of Ford+. Capital discipline is driving the right global footprint, portfolio of products and consistent cash generation. We continue to see growth opportunities and remain focused on delivering improvements in both quality and cost. So that wraps up our prepared remarks, and we'll use the balance of the time to address what's on your mind. So thank you, and operator, please open up the line for questions. Questions & Answers: Operator [Operator instructions] The first question today is from Adam Jonas with Morgan Stanley. Adam Jonas -- Morgan Stanley -- Analyst I got one question for John and one for Jim. John, you were just on Bloomberg saying EVs are needed to meet compliance regulations. Now it's my understanding that Ford does not disclose penalties or ZEV credit purchases for Ford on clean air regulation. Can you confirm that? That's not disclosed, right? John Lawler -- Chief Financial Officer So let me clarify a few things, Adam, on that, is that it's not an option for us not to be compliant. If you don't comply with your ZEV or your greenhouse gas emissions requirements, you can't pay fines. What happens is you can't sell, and that's consistent across the industry. So it's -- that's for all OEMs. All OEMs are under those rules. And so, there's really three levers that we have. We can sell EVs and hybrids. We can sell fewer ICE, or we can contract to buy credits from another OEM. And when we do contract to buy credits, we will disclose that as we did in our 10-K at the end of the year. And so, those are the three levers. And we, I would say, monthly, if not weekly, are working to optimize across those three levers to drive the highest profitability and the highest cash flow for the company. So to continue to sell the ICE vehicles, we are going to need to sell EVs, and we're going to optimize across the profitability. Now the most important thing, as Jim said, is we need to get the EV business to stand on its own, to be profitable and return on the capital we've invested, and then all the levers will be accretive to Ford. And we'll be able to make it really positive. So that's what we're focused on, and that's what I intended to communicate earlier today. Adam Jonas -- Morgan Stanley -- Analyst OK. But you did -- so you do disclose? You do disclose the ZEV? What was it? John Lawler -- Chief Financial Officer Yes, we disclosed last year in the 10-K that we had purchase commitments of $700 million. Adam Jonas -- Morgan Stanley -- Analyst And will that increase this year? John Lawler -- Chief Financial Officer In the first quarter, there wasn't anything material. And as we go through the year, if it's the right lever to pull, as I said, as we're optimizing, we will report it. Adam Jonas -- Morgan Stanley -- Analyst All right. I appreciate that, John. Just my follow-up for Jim. Ford Pro is kicking butt. OK? And at 10x EBIT, that business can be worth like double Ford's entire market cap. So the market is kind of implying that the rest of the business will be valued at negative many, many tens of billions. Seen another way, your stock -- I mean, this business is incredible. People would die to have this business. And I think folks are aware -- it's not a secret anymore, Jim, but people are aware of how good this business is. Yet your stock ranks 491 out of 500 companies in the S&P 500 on PE multiple. Now, Jim, I know you don't like it and I know you don't agree with it. But can you explain why does the market value -- your company is one of the lowest multiple companies in the world in any industry. Why -- try to rationalize that for me because it seems important that you, as a leader of this organization, understand that you can address that problem. Jim Farley -- President and Chief Executive Officer Thank you, Adam. And first of all, thanks for your report on Pro. I appreciate you taking the time to understand the business. Look, I mean, we -- as John mentioned, we have to make tremendous progress on Model e. It's a huge drag not just on Ford but on our whole industry, even for pure-play EV players. So -- and we're very clear-eyed about that. We're very committed to transparency. A lot of OEMs will handle EVs very different. We won't -- it's like if we had an unprofitable regional business and we rolled it up and it wouldn't be transparent to investors. We would never do that. We're not going to do that with EVs, and we're not going to subsidize our Pro and Blue business by not being transparent about e. It's how we run the business. I think, investors should understand for me as a leader is that we're going to build a sustainably profitable EV business with terminal value. And we -- and it needs to return the cost of capital on its own and not be subsidized as I mentioned. And the real turning point for us not only is our flat cost in Model e this year, but most importantly, it will be the profitability in our next cycle of products. And I'm proud of the work that our team has done to make the adjustments in our capital spending and to make sure that all of our next EVs are profitable. And the evidence will be there. And I think that is the main drag on the company right now as it will be for our whole industry. Blue is in really good shape. I wonder out loud, Adam, if everyone really understands the resilience of the Pro business over time. We're very profitable now, but we believe that this business will be profitable and durable for many years to come. And I'm not sure the full market understands that personally. I know you've gone through the business understanding the demand, and I encourage everyone to understand and ask us more questions about Pro. Thanks. Operator The next question is from John Murphy with Bank of America Merrill Lynch. John Murphy -- Bank of America Merrill Lynch -- Analyst The Freedom of Choice is a great marketing tool to go out to market with, and I think it's reasonably -- or should be very effective. But Jim, as you think about this, as the market is shifting toward hybrids at least in the near term, I'm just curious what kind of capacity you have to ramp up significantly in hybrids if the demand really is there. And if you think about sort of the competitive threat really coming from Toyota with a lot of capacity on this side, is there risk that there's market share losses to them over time? Or do you have the ability to really step up here? I think you mentioned something about 400,000 hybrids on an LTM basis. But can you do a whole lot more and really sort of garner your fair share of the market? Jim Farley -- President and Chief Executive Officer John, we made a lot of capacity decisions several years ago on hybrid, and I'm very thankful we did. For example, we just radically increased the capacity for F-150 that we're launching now up to 25%. And it takes -- as you said, it takes a long time for suppliers to ramp to that capacity. It's not assembly capacity is a constraint. So that 400,000 is almost double what we did a couple of years ago. That was all very intentional. And we made the decision a couple of years ago to actually make hybrid more pervasive in our lineup, and we're actually now going to -- we've now committed publicly, we're going to offer hybrid on all of our vehicles across our lineup. And of course, the capacity has to be there. But if you look at the pricing premium today, which is maybe the most important thing to look for because now that contribution margin for hybrid is covering the cost of the hybrid incremental material cost, that's really meaningful development. And I think we're in good shape. Of course, our hybrid business is different than the others. We're No. 3 in the U.S. No. 1 and No. 2 is close Toyota and Honda. But our hybrid capacity is in trucks. That's where most of our hybrid sales are in North America. And we don't see a lot of competition so far for that business. We'll see over time. So I feel really good about the decisions we made several years ago about our capacity expansion. Will it be more than 40% growth? It could be. And I think we have flexibility. Now we have really meaningful scale for our suppliers. A lot of our competitors will be starting from scratch. John Murphy -- Bank of America Merrill Lynch -- Analyst And I have one follow-up on Pro. It seems like there's a lot of pent-up demand on the fleet side, both on commercial and government. I'm just wondering if you can comment though on that on sort of a unit basis, as well as potentially a service basis and just really kind of talk about what kind of benefit that may sort of still garner toward for Pro, which is, as you said, shooting the lights out or we should say that. It seems like there's a lot of opportunity here still just from a market release of pent-up demand, and that might be even more structural over time. Jim Farley -- President and Chief Executive Officer It's true. The demand on Pro is fundamentally different than retail. There's no doubt about it. Our retail customers are not refleeting. They're not doing roadworks and 5G infrastructure build-out. I mean, these are all fundamental drivers. The ambulance market in the U.S., the average ambulance is 15 years old. I mean, they've been waiting for Transits for a long time. We're now increasing our capacity, which is great. But I mean, we're oversubscribed on the new Super Duty 2:1. So I wish I could say we got that right. We didn't, but we are expanding capacity. I think -- and we have this freshest lineup that we've never had. So we have this kind of double opportunity. Our lineup is fresh. We have the most choice. At the same time, our customers are in kind of white-hot demand that we saw in retail two years ago during the supply shock. And we're doing everything we can to increase our capacity for our customers. It's very frustrating for them. Operator The next question is from Ryan Brinkman with J.P. Morgan. Ryan Brinkman -- J.P. Morgan -- Analyst I'd love to get some more of your thoughts on capital allocation, including after in the release, you repeat the intention to return 40% to 50% of free cash flow to shareholders. I guess, with capex coming further down and FCF up, there's more to return. But at the same time, targeting to return only up to half of what you generate, obviously, implies you want to continue to grow cash on hand despite the current $28 billion being well more than the over $20 billion that you've historically targeted. And of course, you've got lots of available liquidity beyond that, close to a record, I think. So just curious what might be driving the conservatism here, whether it relates to more macro or industry uncertainty or wanting to preserve some other optionality or for some contingency I'm not thinking of. I think, in the past when I've asked this question, you'd sort of point to the industry transition toward EVs. But seems like the last couple of quarters now, your focus is more on improving the EV business by trying to spend less, not needing to spend more to -- all right? So just wanted to check in how you're feeling about capital allocation, what you're seeing that caused you to want to be conservative now. And then, what could cause you to potentially want to become more aggressive in the future? John Lawler -- Chief Financial Officer Yes, so thank you. So we have our stated policy, as you said, 40% to 50% of free cash flow. Our balance sheet is strong. Our cash position, we ended the year strong. We're at $25 billion this quarter when we talked about the fact that our guidance for this year went up. So when we look at it, we believe that right now in the transition point for the industry, we would rather invest in accretive growth opportunities. And we've always said that if those opportunities don't come to fruition, then we'll need to look at other allocation decisions that we would need to make, but we're not there yet. So we're continuing to talk about this as a team consistently. But we think, at this point, the position we're at, we're comfortable with given where we're at in the transition. We'll pay out the 40%, 50% of free cash flow. The last couple of years, it's been at the high end of that range. And eventually, as we continue to execute on our Ford+ plan, if those accretive opportunities to allocate capital for additional accretive growth aren't there, then we'll look at other ways of returning that cash to our shareholders. Operator The next question is from Bruno Dossena with Wolfe Research. Bruno Dossena -- Wolfe Research -- Analyst I wanted to ask in Model e. And I understand that reaching breakeven depends on the timing of the launch of the next-gen vehicles. But in the intermediate term, can you tell us how you're thinking about the trajectory of losses in e and specifically the potential to work down the structural costs associated with this business? John Lawler -- Chief Financial Officer Yes. So we are -- I don't know, it's a cliche, I guess, laser-focused on the -- all the costs around Model e. And for the year, when you look at -- well, let's just take it back up a second. The last couple of years, when you look at Model e, we've actually reduced the cost of our vehicles significantly. On Mach-E, we've taken over $5,000 of cost out, but the revenue keeps dropping faster than we're able to take out the cost. And we're being very thoughtful about what we're putting in as far as structural costs, etc. And so, we're going to continue to work on driving every dollar of cost out of the business in the near term. And if the pricing stabilizes and we don't see these significant reductions continuing across the industry, then I think that you could probably start to see some of those cost reductions flow to the bottom line. But so far, the last 12 to 18 months, it's just been a continuous march down on the top line, which is offsetting any of the savings we've had from a cost standpoint. So it's in our control. We have to take cost out. We know that. That's what we're marching toward. And we're understanding the dynamics and the competitiveness of the market equation as we set up the cost structure for our second-gen vehicles. And as Jim said, we pushed out the three-row SUV because we need more cost to come out of that for that to be at the margin levels we expect. Bruno Dossena -- Wolfe Research -- Analyst OK. On a similar vein, the comments you made around cost and pricing for the Mach-E, if we look at your combustion, Blue and Pro, we see the costs are up $1.2 billion year over year, presumably from material content on some new launches, warranty, maybe offset by some savings. And we also see that pricing in these businesses is up about $1 billion. But can you give us some insight into if or when you'll see some improvement in variable costs relative to pricing and Ford beginning to close the variable cost gap compared to peers? John Lawler -- Chief Financial Officer Yes. So if you look at that, most of the cost this quarter was up in Ford Pro and is all related to the material costs for our new product launches, both the Super Duty and the Transit that we launched in Europe, as well as manufacturing costs for the increased volumes that we're bringing across, as Jim mentioned. So that's what drove most of the cost increase in the quarter. We're on track to deliver the $2 billion of cost reductions we talked about at the beginning of the year of raw manufacturing costs, material costs, as well as freight and overhead. And so, you'll start to see that really gain traction as we move through the second half of the year. And that's when you'll start to see it on our quarterly results. Operator The next question is from Itay Michaeli with Citi. Itay Michaeli -- Citi -- Analyst Just two questions for me. First, back to Pro. With a $3 billion outcome in Q1, can you maybe talk about the puts and takes if I think about the rest of the year? And maybe should we think about the full year at the high end of the range? And then, going back to Model e, the press release did allude to EV costs improving going forward but an offset from top-line pressure. I was hoping you could help dimension what you're assuming for EV prices the rest of the year. And as volume kind of responds to these price cuts, is there a level where Model e can still become contribution margin positive over the next 12-plus months? John Lawler -- Chief Financial Officer So let me unpack that. So for the year, we're not projecting where -- or sharing where we expect the cost to come down. If you look at what recently happened in the quarter when it comes to pricing on Model e, we had entered the year assuming that prices would come down about 20%. They came down much more than that. We had to take our prices down another 17% to remain competitive and mask competition in -- as we went through the quarter. So we've seen prices coming down quite dramatically, and that's why we haven't been able to keep up from a cost reduction standpoint. Look, we're targeting to take out as much cost this year as we can on Model e and all in the spirit of driving toward that contribution margin positive so we can have some leverage as we move volumes through the chain. So that definitely is our intention as we continue to work on Model e in the near term. Jim Farley -- President and Chief Executive Officer On Pro, obviously, Q1, Pro is really structured not necessarily on traditional demand like retail. It's actually deliveries. So our delivery volume in Q1, it's kind of -- it's a cyclical business globally, and we have a lot of strong delivery in the first quarter just because of the contractual agreements with our customers, including fleetail. And when you look at the rest of the year, we have shutdowns. There are a lot of other -- we have launches. There are a lot of reasons why we feel really comfortable, even with the strong result in the first quarter, that our guidance is still accurate for Ford Pro given all the puts and takes. But we'll revisit in the second quarter. We'll see how pricing lands. We're going to be doing quite a bit of fleetail business this quarter, as well as looking at locking in pricing for some of our large corporate fleets later in the year. So we're going to learn a lot more this quarter on whether there's tailwinds or headwinds on Pro. Operator The next question is from Joseph Spak with UBS. Joe Spak -- UBS -- Analyst Jim, first to start, I appreciate all the commentary you talked about on the F-150 launches and as well as Super Duty and Mustang and some of the improvement there. As you mentioned, you've got some other big launches coming up later this year, I think Explorer and a number of others. So was the lesson learned that you will go more cautious and careful? And is that -- should we expect a slower ramp-up than we've seen historically for some of these new launches later in the year? Jim Farley -- President and Chief Executive Officer I would say we're seeing real benefits to our customers and the company, I believe, long term in taking this new approach to launches. It also requires our industrial system under Kumar to work differently, solve problems, to do different kinds of testing, and that goes into kind of our longer-term lessons learned. And we're now really spending a lot of time on long-term durability, which is an area where Ford has standards but maybe didn't look to lead the industry, which we now look to. And so, we're not going to change our approach to these launches. We think this new more measured approach with more physical testing, a lot more time for problem solving for our team is the right approach for the company in the midterm and long term. We do have some very significant launches coming up. We have Explorer and Aviator as you mentioned, which are high volume in both North America. And in China, we have a new wave, we call Wave 2 for the one-ton Transit in Europe, which is super profitable. And we're going to be building and launching the higher-end derivatives of that. We have the Bronco in China. I mean, I can go on and on. We have a freshened Maverick and Bronco Sport coming and even more models than that. So given all that complexity, it's actually even more important for us to take our time. And it may -- like Quarter 1, it may mean that in some quarter ends, we may have some company stock and plans to make sure that we do the right thing on quality. So our earnings may be a little bit lumpy. We'll see how that works out based on this new approach. Joe Spak -- UBS -- Analyst OK. And just back to the hybrid conversation because, as you pointed out, your hybrid portfolio is much different than a Toyota or a Honda. It's pretty limited. I think, you only have like three hybrids right now. But how should we think about scaling that to the rest of the portfolio as you mentioned? Is it really like taking existing power plants you have and trying to sort of fit it -- make it fit on more models? Or are there real new investments that need to be made for hybrids? Jim Farley -- President and Chief Executive Officer It's a good question. So I would say mostly, it's taking our current internal combustion engines and adding new hybrid components and doing the engineering to fit that. Look, look at the T6 platform. We had the Ranger. We had the Everest stuff. We have the Bronco. That's an obvious candidate. We have our full-size SUVs candidate. We have the Explorer platform. And I think we're lucky. We have the right engines. Some of them may have to go to an Atkinson cycle engine from a normal combustion cycle. We have the components in our system from the hybrid, the torque splitting devices that -- we do have to up the investment in some capacities like our hybrid transmissions, but we've made the decision to do that already, and that's in our spending plan this year. I think, we're in really good shape. It doesn't require wholesale inventing new powertrains, but it does involve some engineering and investment in capacity. I would say kind of modest investments, mostly in the capacity side and some engineering. Operator The next question is from Colin Langan with Wells Fargo. Colin Langan -- Wells Fargo Securities -- Analyst It sounds like you're pretty optimistic about pickup demand, but I think there's media reports that some of the data showing pricing was a bit weak in Q1, inventories look pretty high. So are you seeing any risks in the market? And where do you see pricing for some of these models coming for the rest of the year, I guess, now that you got maybe some of the 2023s out? And then, where should inventory really end? John Lawler -- Chief Financial Officer Yes. So what you saw in pickups for us as we came out of the end of last year into the first quarter of this year here in the U.S. is we built up stock as we knew we were coming into the launch. So we built stocks of '23 models. And then, we were selling those down in the first quarter throughout the majority of the quarter. And that's why you saw, to stay competitive with our competitors who had '24 year model pickup trucks, we saw some top line come down. So we had higher incentives to sell the '23 model year longer through the quarter. You see now that our '24 F-150s are at dealers and selling, they're turning in about seven days, you'll see, as you look at the data, that our average transaction prices are going up and our incentive spend is coming down because of the [Inaudible] year mix. So that's a big part of what moved it for us on pickup trucks. And it was -- because we're such a big player, it was moving in [Inaudible]. Jim Farley -- President and Chief Executive Officer I just want to emphasize, I don't think there's a brand out there that has a Maverick. That's pretty much alone in the segment, and we still are in a supply shock for Maverick. It's one of our fastest-growing vehicles. We have an all-new F-150 with a hybrid option, as John said, turning really fast. We have a Super Duty on the Pro side that's oversubscribed 2:1, and we have a brand-new Ranger. So we're a bit of a unicorn in the sense that, yes, we're big, and there is some risk. But I would say the risk is for people who have aged product. And I think Ford is in a particularly advantaged situation. Colin Langan -- Wells Fargo Securities -- Analyst And what about inventory levels? I think some of the data is showing at the high 90s ending up March kind of coming down to -- John Lawler -- Chief Financial Officer Yes, that's come down considerably, and if you look at us on an overall basis, our dealer day supply is mid-50s. Jim Farley -- President and Chief Executive Officer Yes. We're completely out of stock on Rangers. Maverick is like 30-day supply or something like that. F-150 came down because we had quite a few '23s. But now, with the launch and the quality effort, I think the stocks are really in good shape. And Super Duty, we have very few in stock for retail. John Lawler -- Chief Financial Officer Yes. So you've got to look at the dealer day supply, and that's in a good place. Colin Langan -- Wells Fargo Securities -- Analyst And just as a follow-up, maybe a color on industry pricing. What is sort of embedded in your guidance at this point? And how is pricing holding up, I guess, sequentially because I think some of the comps are a little tough with launches year over year? John Lawler -- Chief Financial Officer Yes. First quarter, pricing held up pretty well Q4 into Q1. From a planning perspective, we assume that the industry, we expect to see pricing pressure of about 2% negative pricing across the industry. And it really comes back to affordability. Many folks across the industry have been talking about pricing coming down, though what -- and it hasn't. And again, we saw in the first quarter that it remained pretty robust. But we keep looking at it from an affordability standpoint, from the consumer perspective. And when you look at where consumers were pre COVID, then we had the supply shocks and we had a very imbalance between supply and demand, but now as that's normalized, we would expect that affordability should go back to where it was pre COVID, and that's about 13% to 14% of monthly disposable income. And you also have to factor in right now, with interest rates, that payment prices have gone up. Insurance rates have gone up, as well as maintenance rates. And so, when you take all that together, we think about affordability, we say, OK, if you're going to be back toward that range of affordability for the consumer, then prices are going to have to come off a couple of points or so across the industry. And so, that's how we think about it and that's what we have planned. And we'll see where that runs with Q2 and then as we go through the second half of this year. Operator The next question is from Tom Narayan with RBC. Tom Narayan -- RBC Capital Markets -- Analyst Jim, we heard from your guys' commentary that if EV prices, those drops stabilized, then the losses would lessen. But as we've heard from some of the earnings yesterday, Tesla, GM, it seems like the opposite is happening. It seems like OEMs are trying to make cheaper EVs and that pricing is really only going to go lower. I guess -- and how confident are you that you could reduce EV losses in this environment if EV prices just keep on going down? John Lawler -- Chief Financial Officer So when you look at it, it's clear that when the EV craze started, right, it was -- it looked like demand was going to be well long supply. But that was with the early adopters and they were willing to pay a higher price. What we're finding with being in the marketplace is that EV prices are normalizing, and our early majority customers are not willing to pay a premium. And that's what we're seeing. And so, we think that prices for EVs are going to normalize around where gas is and the consumer is going to weigh the value proposition of that propulsion choice, either for their duty cycle, what works for them, either it's going to be an EV or a traditional ICE engine or a diesel or a hybrid. And pricing is going to have to be relatively consistent across all choices of propulsion, and a customer will make a choice based on the value of that. And that's how we're building the business model for electric vehicles. I don't think that you're going to find that you're going to have electric vehicles well below gas prices unless there's so much capacity pushing against the demand curve, and it's an imbalance on that end of it. But eventually, rational players will have to come to the marketplace. Jim Farley -- President and Chief Executive Officer We launched our first small SUV this year in Europe in Cologne, our Explorer. It's a two-row crossover. It's a relatively small vehicle certainly in the U.S. And you can expect, as I mentioned several times, that our new affordable platform will be used for most of our volume in their next cycle of product. What's really exciting for us is that we see an opening in the market. We see a lot of brands having to launch compliance vehicles that lose money, and they probably don't want to sell a lot of volume but they have to. We believe that we can be profitable at $25,000 to $30,000, so it's a huge opportunity for Ford. And what we're learning with BlueCruise and our Protiviti software on Pro is that all those vehicles will be great platforms for software and services. And so, we're really excited about that new more affordable vehicle lineup starting with Explorer in Europe this year. Tom Narayan -- RBC Capital Markets -- Analyst And maybe as a follow-up, maybe this is something that could help here, is battery raw mat costs. We have lithium down like 80% since it peaked in 2022. Could you just remind us of how your contracts work? I think there's -- we've heard from some other OEMs that there's still some benefits to come, actually getting better given how contracts work, and you could actually see some benefits on battery raw mats later in the year. John Lawler -- Chief Financial Officer Yes, we're seeing the same thing. We're no different. Jim Farley -- President and Chief Executive Officer I would say that the biggest leverage on the battery cost is still going to be taking nickel out of them and those kind of things. It's great to see the easing of some of the raw materials, and that will definitely cascade into our business, depending on our contracts. I think, the most important thing strategically is to get to new chemistries that have a lot less expensive materials in them. And we see that right around the corner at Ford. And we're changing our launch timing to take advantage of that. Operator Our final question today is from James Picariello with BNP Paribas Exane. James Picariello -- Exane BNP Paribas -- Analyst Just back on Joe's question regarding this year's heavy slate of model launches. I know the hyperfocus is on improved launch quality. I believe, Jim, you mentioned at some point Ford Pro lost $1 billion in profit last year from a more delivered Super Duty launch, excluding the impact from the strike. My question is, we already saw the F-150 refresh this quarter result in 60,000 units getting pushed. Is there a risk to Ford Blue's guide from lower launch volumes? Is this already factored into the range? Or is it mainly expected Ford will avoid any material slowdown from here? John Lawler -- Chief Financial Officer It's already factored in. James Picariello -- Exane BNP Paribas -- Analyst Already factored in. OK. That was easy. Can you also -- can you just unpack how the implied ASP for Model e in the quarter finished in the $10,000 to $14,000 range? And then, just given the slow volume start to the year, should we still be expecting modest full year growth for Model e? John Lawler -- Chief Financial Officer Yes, we expect high single-digit growth in the Model e, primarily with the launch of the Explorer, as Jim mentioned, in Europe. When you look at the average selling price, with the math, it's difficult because of the quarter. So we had quite a few units in stock. And as we saw the competitive pricing in the industry come down, we took our prices down, too. So then we had to take the prices down of all units in stock equally, and that was about $300 million of impact there. So when you look at the tenth of revenue for the quarter for Model e, you need to add that $300 million in, if you want to do the math based on the wholesales in the quarter. James Picariello -- Exane BNP Paribas -- Analyst Got it. Maybe my first question doesn't count given how easy the answer is. Just on the $2 billion in material manufacturing cost savings for this year, I know there are not going to be clean numbers that stand out in the bridge quarter to quarter. But can you just give a high-level assessment on the progress to date? What initiatives are really showing through? And any color you're willing to share on first half versus second half timing on those initiatives? John Lawler -- Chief Financial Officer Yes. So majority of them are going to be toward the second half. I'm really encouraged by the progress that Kumar and the industrial platform are making around the design changes. And those design changes are trying to be implemented as we get the new model year changeover in the second half and as we bring vehicles online in the second half. So that's one area where I've seen tremendous progress by the Ford teams. They're working on those design reductions to come through. The other area we're seeing progress is in manufacturing, and Bryce and his team, they're working to drive efficiencies to help offset the increases we have this year based on the contract that we signed last year. So in both areas, I'm seeing green shoots there. And Liz is doing a really nice job on the supply chain side as well. We've got better systems and tools and processes. We're working more collaboratively with the supply base. She's changing the culture. And so, across all three of those areas in the industrial platform between what Kumar is doing, leading the team with Bryce and Liz, we're seeing green shoots, and we're confident on the $2 billion this year but mostly timed toward the second half. Jim Farley -- President and Chief Executive Officer And one of the most important priorities for us as a team is to take that cost out and improve quality at the same time. So on the design side, for example, we have specific windows where the team can make design changes and not to -- protect our quality. I just want to emphasize that because we're trying to do both at the same time, improve quality and improve our costs in the industrial system. And to do that, we have to be very intentional.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you for standing by, and welcome to the TechnipFMC first quarter 2024 earnings conference call. I would now like to welcome Matt Seinsheimer to begin the call. Matt, over to you. Matt Seinsheimer -- Vice President, Investor Relations Thank you, Mandi. Good morning and good afternoon, and welcome to TechnipFMC's first quarter 2024 earnings conference call. Our news release and financial statements issued earlier today can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs, and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q, and other periodic filings with the US Securities and Exchange Commission. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise. I will now turn the call over to Doug Pferdehirt, TechnipFMC's chair and chief executive officer. Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you, Matt. Good morning and good afternoon. Thank you for participating in our first quarter earnings call. I am very pleased with the strong performance in the quarter. which further highlights our continuing success in delivering on our commitments. Total company revenue for the first quarter was $2 billion. Total company adjusted EBITDA was $257 million with an adjusted EBITDA margin of 12.6% when excluding foreign exchange impacts. Total company inbound orders in the quarter were $2.8 billion. In Subsea, we had a solid start to the year with first quarter orders of $2.4 billion representing a book-to-bill of 1.4. Importantly, a significant portion of our inbound was driven by new technologies, several of which were industry-first for subsea that will help unlock opportunities in both new and mature offshore basins. In January, we announced our first iEPCI for Petrobras. This one utilizing subsea processing for the Mero 3 HISEP development. The project represents a major industry milestone as it will be the first to use subsea separation to capture CO2 directly from the well stream for injection back into the reservoir, all of which will occur on the sea floor. During the quarter, we were also awarded the first iEPCI to utilize a 20K-production system. This being for Shell's Sparta project in the Paleogene play in the US Gulf of Mexico. The 20,000 PSI production system includes new technologies required to meet the demands of high-pressure, high-temperature reservoir conditions. This marks our third award for 20K production equipment as clients look to produce from deeper waters and reservoirs in the maturing basin. The Paleogene formation spans the central and western regions of the Gulf of Mexico with reservoirs located in water depths that exceed 1,500 meters and generally exhibit higher pressures. The Paleogene has become one of the most productive and fastest-growing sources of supply in the Gulf. And it is estimated that 1 billion barrels of discovered reserves will require the use of 20K technology for development. We expect additional projects to successfully move forward over the next 24 months, representing yet another opportunity set for our company. And finally, we announced an award from the Northern Endurance partnership to deliver the first all-electric subsea iEPCI, which is anticipated to be inbound in the second half of this year. The partnership, which is a joint venture between BP, Equinor, and TotalEnergies, is building CO2 transportation and storage infrastructure for carbon capture projects in the UK's East Coast cluster. Our all-electric solution will collect and feed the pressurized gas into an offer for permanent storage. All-electric systems drive simplification of the field design, enabling the reduction of infrastructure and installation time through the removal of hydraulic components and simplified umbilicals. The technology also enables the development of projects over long distances. With Northern Endurance, the power and controls to the subsea equipment will extend 145 kilometers from the onshore host facility. The award of an entirely all-electric subsea system is a significant achievement for both our company and the industry. Mero 3 HISEP, Sparta, and Northern Endurance are all strong examples of our differentiated technology portfolio. Each of these projects provides a unique solution to an industry challenge. And it is this unique combination of innovative technologies and integrated execution that is creating new market opportunities for our company. While project selectivity remains a critical objective, it is even more important that we successfully deliver on time and on budget as promised. As demonstrated by our financial performance in the quarter, Operational execution across the portfolio continues at a high level, driven in part, by this focus on project selectivity and the favorable impact it is having on the quality of orders in our backlog. Having both the right backlog and strong execution gives us confidence that we can capitalize on the strong market and achieve our financial targets. Finally, we completed the sale of our measurement solutions business in March. In keeping with our commitment to shareholder distributions, a significant portion of the proceeds were allocated to repurchasing $150 million of shares in the first quarter. This brings our total shareholder distributions to $520 million in less than two years. And given this acceleration in share repurchases, we now expect total shareholder distributions in the current year to grow at least 70% when compared to the levels achieved in 2023. I will now turn the call over to Alf. Alf Melin -- Chief Financial Officer Thanks, Doug. Inbound in the quarter was $2.8 billion, driven by $2.4 billion of subsea orders. Total company backlog increased sequentially to $13.5 billion. Revenue in the quarter was $2 billion. EBITDA was $257 million, when excluding a gain on the sale of our measurement solutions business of $75 million; restructuring, impairment, and other charges totaling $5 million, and a foreign exchange loss of $4 million. Turning to the segment results. In subsea, revenue of $1.7 billion was largely flat versus the fourth quarter. Higher project activity in Brazil and the Gulf of Mexico was largely offset by lower activity in the North Sea and Asia Pacific and reduced services revenue due to typical offshore seasonality. Adjusted EBITDA was $242 million, with a margin of 14%, up 90 basis points from the fourth quarter. The sequential increase was driven by strong execution and improved earnings mix from the backlog. In surface technologies, revenue was $307 million, down 14% sequentially. Revenue decreased due to the closing of the sale of measurement solutions before the end of the quarter, lower activity in North America, and portfolio optimization in Latin America. Adjusted EBITDA was $41 million, a 21% decrease from the fourth quarter, driven by lower revenue from measurement solutions and lower activity in North America. Adjusted EBITDA margin was 13.5%, down 120 basis points versus the fourth quarter. Turning to corporate and other items in the period. Corporate expense was $27 million when excluding charges of $5 million, which were primarily transaction-related costs associated with the sale of measurement solutions. Foreign exchange loss was $4 million. Net interest expense was $13 million, which benefited from higher average cash balances in the period. Tax expense in the quarter was $50 million. Cash required by operating activities was $127 million. The outflow follows the typical seasonal pattern of our business. Additionally, cash flow in the period included a payment of $56 million to the P&F. Similar payments will occur in the second and third quarters and will fulfill our remaining obligation. Capital expenditures were $52 million. This resulted in free cash flow consumption of $179 million in the quarter. As Doug highlighted, we completed the sale of the measurement solutions in March. Proceeds from the sale were $186 million, with the majority being used for share repurchase. This drove a significant increase in total shareholder distributions in the first quarter to $172 million, which included $150 million for share repurchase and $22 million in dividends. We ended the period with cash and cash equivalents of $697 million. Net debt was $327 million. Now, I will provide some thoughts on our outlook. Starting with the second quarter. For Subsea, we expect to benefit from the typical seasonal uplift, as well as improved margins in backlog with sequential revenue growth of approximately $200 million and margin expansion of approximately 250 basis points. For surface technologies, we expect revenue and adjusted EBITDA margin to be in line with the first quarter. This includes the impact of the sale of measurement solutions. Now I will also give you an update to our full year outlook. Given the anticipated strength of our first half results and taking into account a range of outcomes, we now expect total company adjusted EBITDA to approximate $1.29 billion when excluding foreign exchange, an increase of approximately $40 million from the guidance we provided in February. Within this total company outlook, we see the following relative to the guidance provided in February. Subsea revenue and EBITDA margin both trending toward the upper half of the guidance ranges. Both revenue and EBITDA margin for surface technologies, as well as corporate expense remain on track for the midpoint of their respective guidance ranges. Lastly, I want to discuss our current view of our capital structure. In March, we received an upgrade from Standard & Poor's to investment grade. This upgrade serves as a significant milestone for the company and reflects the tremendous efforts by the entire organization to materially deleverage the balance sheet and achieve investment-grade metrics. With this update, we are also revising our target capital structure to approximately $800 million of cash and $800 million of debt, together amounting to zero net debt. This is a $500 million reduction versus our prior target and the level we can achieve over time as scheduled debt maturities come due. Importantly, we believe this capital structure provides us with the flexibility to manage our operations and fund our capital needs while also delivering on our commitment to shareholder distributions. Operator, you may now open the line for questions. Questions & Answers: Operator The floor is now open for your questions. [Operator instructions] We ask that you please limit yourself to one question and one follow-up question. We'll now take a moment to compile our roster. Our first question comes from the line of Arun Jayaram with J.P. Morgan Securities. Please go ahead. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Good morning, Doug. I wanted to see if you could provide more details on Northern Endurance what do you think drove your success on the projects? Maybe more details on the scope and perhaps what technologies is FTI providing in terms of the CCS nature of that project? Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you and good morning. Look, this was -- as stated in my prepared remarks, a major milestone for our company but also for the industry. This will be the first application of an all-electric production system. We are extremely, extremely proud to have been selected. There was a very rigorous technical qualification are required to be able to be considered and to receive the award. And we're pleased that we came out on top of that qualification. Think of it as everything from the shore to the seafloor. We call it the integrated carbon transportation system. We have a specific CO 2.0 tree, so part of our 2.0 family. We have developed a configuration to order CO2 injection tree. It looks simplified compared to a traditional oil and gas tree, but it's actually very technical, particularly when it comes to the sealing surfaces because of the number of cycles that you will -- the number of times that you were opening close or would is called a cycle, the cycling of a valve in a CO2 injection tree is far, far greater than what you would do in a typical oil and gas development. So, a higher technical standard. We were extremely pleased to be selected for that. And we have that entire scope and what's really interesting about it is the distance that is being traversed. There's over 145 kilometers, and there will be nothing floating on top of the water. In other words, we've taken it all subsea much like we did on the CCS project in Brazil. On the HISEP project, it is just a major, major milestone where we are really driving the CCS market by enabling the seafloor to be a key component of these projects. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Great, Doug. And I wanted to see if you could maybe comment on your prepared remarks, you talked about some new technologies that you're using to unlock opportunities in more mature basins. I was wondering if you can maybe expand upon that and maybe comment on what you see in some of the more mature basins? I know one of your peers talked about anticipating maybe an improvement in West Africa starting next year, but maybe if you could elaborate on that? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. So, there's just the, I would call it, the traditional projects that are likely to be driven forward in mature basins given the project economics by doing it with an integrated with an integrated approach, what we call iEPCI, along with our 2.0 family, we can help unlock the economic value of those projects. But specifically, what I was referring to was in a mature basin there's really two opportunities is to find a different producing horizon. And in the case of the Paleogene, it's a deeper horizon, in the Gulf of Mexico, or it could just be a further step out from the host facility. And so, what are the technologies that are the key enablers? To get to the Paleogene, it's 20K and to have a full 20K production system fully qualified, supported by the regulators, as well as our clients, major achievement. As noted, this is our third project. This is the first integrated 20K project to be awarded. And as alluded to in the script, we expect more to come in the future. When you look at the further step-outs in a mature basin, that will be enabled by all-electric. So, this will be the primary application in the traditional energy or the oil and gas environment when it comes to the all-electric production systems, again, enabling a much greater distance up to three to four times further than you can do via using hydraulic controls to reach back to an existing host facility. So, the two key technology enablers in this case being 20K, and the all-electric. In the case of HISEP, as we talked about in the first quarter, it was advanced CO2 separation, subsea separation technology, where we are separating and then reinjecting all on the seafloor. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Great. Thanks a lot, Doug. Operator Our next question comes from the line of James West with Evercore ISI. Please go ahead. James West -- Evercore ISI -- Analyst Hey, good morning, guys. Doug Pferdehirt -- Chairman and Chief Executive Officer Good morning, James. How are you? James West -- Evercore ISI -- Analyst I'm doing all right, Doug. How are you? Doug Pferdehirt -- Chairman and Chief Executive Officer Good. Thank you. James West -- Evercore ISI -- Analyst Actually, I saw your results. I know how you're doing well. I wanted to start a little bit bigger picture. It's something we've talked about a bit in the past. With the backlog that you have now, all of these EPCI contracts coming through, how are you feeling about capacity? And are you starting to really lever into some of these joint ventures and partnerships to add to that capacity to make sure you can deliver on all those back on? Doug Pferdehirt -- Chairman and Chief Executive Officer James, a timely question. I would expect that you will see us utilize the support that we have within our ecosystem to be able to continue to grow and expand the iEPCI market. And just for those that are not as familiar with the terminology, ecosystem, we made a decision years ago that we would restructure the way that the subsea industry operated, both from the integrated projects, but also from the way that we would drive higher asset utilization and drive through cycle returns, to a standard that was not only higher than in the past, but sustainable. And the way we would do that was to work well with others. And that's the personality of our company. We're not a big monster. We work well with people. We have very deep relationships, and they're all trust-based, and we put a lot of time and effort into that. So, what that's allowed us to do was to go out to other vessel operators and introduce them to the iEPCI concept. And as the iEPCI market continues to grow and become a very significant portion of the total projects that are being awarded today giving -- providing access to our partners to work alongside us on those projects and deliver integrated projects. So, that's what allows us to, if you will, expand beyond theoretical capacity in the installation portion of the projects, but there's also the manufacturing side of the projects. And this is the -- a significant benefit. And I think one that's not been fully understood, but as you see it showing up in our financial results now of the ability to be able to get leverage by using Subsea 2.0 configure to order. It runs through our plant at approximately double the cadence or one-half of the time as a traditional 1.0, which is what the rest of the industry is building today. So, they have to get additional capacity either through consolidation or by expanding their capital budgets and building plant whereas we've invested in the technology and the technology and then the system of going from an engineering to order to a configure to order allows us to have that additional cadence through the plant. So, again, allowing us to expand far beyond the traditional theoretical capacity. So, look, we monitor the situation very closely. We're very open. We share it with our clients we're having very long-term discussions well beyond the time period that we would traditionally be having discussions, and they have the confidence to have those discussions with us because of this new operating model, and they see that we -- they understand that we are doing things that will allow us to have the capacity to be -- to continue to expand and deliver and support their projects. James West -- Evercore ISI -- Analyst OK. Got it. Very helpful, Doug. And then I thought the -- some of the first-time awards, particularly in the carbon capture side or fascinating. Could you maybe expand on this use of the C4 for CCS? And was this contemplated initially as we targeted these projects? And if so, are additional offshore projects all targeting that? And then is it the technology are you using kind of existing technology? Or is this new novel technology? Doug Pferdehirt -- Chairman and Chief Executive Officer Both great questions. So, look, we've been working on this for quite some time. And James, as you know, we kind of we look at any challenge from the sea floor up. And I think we might be the only company that really takes that approach because most companies and quite frankly, most developers kind of think about onshore. And then if they go offshore, they want to have some sort of fixed bottom like a mono power or something that is touching the sea floor or if they go further offshore, they want to have some sort of a floating structure. We fundamentally believe the right way to do it is to eliminate the greenhouse footprint associated with those structures is to put everything on the seafloor, but it takes very advanced technology, material science, automation, and controls that, quite frankly, there's very few places in the industry. But beyond the industry, in academia, etc., that really exists today. And we're proud, that's where we operate. We're putting things one to two miles deep in the water on the sea floor, designed to last for 25- to 35-year life with all advanced automation, robotics and controls that, quite frankly, challenge anything that's being done in the industry or beyond the industry today. So, when we look at a challenge like CCS, sure, we can be involved in a terrestrial project and happy to be involved in those projects. But fundamentally, we believe that the safest and best place to store the CO2 will be in say line or abandon depleted reservoirs, far offshore. And they exist. They're well known. You can then transport from shore all the way out to those into those injection fields all subsea without having any sort of a floating infrastructure. It's being demonstrated in the Northern Endurance partnership project, as we described. From a technology point of view, it is important to note there are people that believe you can just reverse the flow and use existing oil and gas infrastructure, that's not true. It is much more of a technical challenge than that would make one believe. I talked a little bit about the tree and the tree design, The valves on the tree, as I explained. It also comes down to the control and automation and also the monitoring that's required on these projects. So, we have developed an entire -- what we, again, call an integrated carbon transportation system that allows us to take it basically from the host facility to an injection point. And we would see -- we definitely see the trend and not just in CCS, but also in other forms of energy. And new energies that are really for them to reach their fullest potential to achieve the scale that is required. We see this going offshore, and that is certainly the trend and one that we are helping to enable and we're proud to do so. James West -- Evercore ISI -- Analyst Got it. Thanks, Doug. Operator Our next question comes from the line of Luke Lemoine with Piper Sandler. Please go ahead. Luke Lemoine -- Piper Sandler -- Analyst Hey, good morning, Doug. You recapped the metrics of the all-electric subsea already, and you have the first announcement with Northern Endurance for CCS. Doug Pferdehirt -- Chairman and Chief Executive Officer Luke, you dropped off, Luke. If you don't mind repeating the question, you dropped off, Luke. Luke Lemoine -- Piper Sandler -- Analyst Yes, sure. Just talking about the first all-electric system for Northern Endurance for CCS, when you kind of look at oil and gas, when can we start seeing the uptake for all-electric? And when you're speaking with customers, what are the pinch points if there are any on your chatting with them? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure, Thank you, Luke. Look, oil and gas is happening in parallel to the CCS opportunity. So, you will see oil and gas opportunities using and electric full field development, and I stress full field because keep in mind, we've been using electric actuation for many years, and we have over 600 electric actuators installed on subsea equipment around the world. So, that part of it is not novel. But to go to a fully electric system, which would include an electric subsurface safety valve would be unique, and that's a partnership for us that we're working together with Halliburton to enable an all-electric subsea field development. But again, there's commercial activity going on in parallel. So, you will see more in that area also. I would stress, though, in the area of oil and gas that I see the bigger opportunities in the tiebacks. And why is that? Look, all-electric tree is more expensive than an electro-hydraulically operated tree, for all the right reasons. Now when you look at it from a tieback point of view, those economics dissipate very quickly because in a long-distance tieback, the umbilical and the cost of the umbilical across that very long distance to be able to use hydraulic actuation would either be limiting. It would not be possible or it would be very costly. But when you look at it on a unit cost versus a unit cost, an all-electric tree is more expensive. So, therefore, in a greenfield development, I think those opportunities will be there. But the big market, and I stress, it will be a significant market will be in the area of brownfield. We've talked about it before. If you look around the world at all the floating production assets that are today, FPSOs, FPSUs, they're producing at between 60% and 70% of nameplate capacity. All electric brownfield tiebacks will allow them to be able to bring that back up to near nameplate capacity without any significant capital cost. And we've gotten the cycle time now on those brownfield projects down to such a level slightly over one year that it makes the economics very, very compelling. Operator Our next question comes from the line of Guillaume Delaby with Bernstein. Please go ahead. Guillaume Delaby -- AllianceBernstein -- Analyst Yes. Good morning, Doug. Maybe a quick question regarding your new capital allocation policy. I'm not sure we can call it that way. So, is it essentially resulting from, I would say, a better financial outlook or is there also some kind of underlying, I would say, strategic thinking behind it, so maybe if you can elaborate a little bit on that? And an associated question. Maybe I know it's time for capital discipline, but are you still considering or do you consider to do some small targeted acquisitions again in the coming quarters? Thank you. Doug Pferdehirt -- Chairman and Chief Executive Officer So let me start with the second part, Guillaume, and thank you for the questions. Look, we have and will continue to do small targeted acquisitions. But in most cases, we're taking small investments in early start-ups. Often, it doesn't cost any capital because we're using a few financial capital because we're using human capital. The greatest currency we have in our company today is our subsea engineering. It is very unique to our company. And we have, by far, the most significant and most experienced and talented workforce. So, often, we can trade, if you will, subsea engineering hours to a company that's trying to tackle this challenge of how do I go from being a terrestrial developer to being an offshore developer. Things change quite a bit. And we have that knowledge, particularly when it comes to dynamic design, and I won't get into the details of that, but that's a major component. And then also, obviously, putting things onto the sea floor. I'm going to have to weigh in on the first part of your comment. But I do want to comment, Guillaume, there were two major messages that Alf delivered earlier. One, we were upgraded by S&P and two, we are targeting net zero in terms of our net debt. So, two major milestones, but I'll pass it over to Alf. Alf Melin -- Chief Financial Officer Yes. Doug, thank you. And maybe just to build on that. So, today, so we have a gross debt of just above $1 billion and a net debt of 327 million. And we have previously stated that we will operate this company on $800 million of cash. And further, as Doug said, believes that the net debt neutral position us, and it would imply that we would reduce debt by a little more than $200 million -- reduced that by a little bit more than $200 million from the current $1 billion level. And so, this is, call it, an intermediate-term target and not necessarily where we need to be immediately. And we certainly have debt that is going to mature over the next two years that will take us there naturally. I will also emphasize that given our business outlook and the strong cash generation, we see ahead, we continue to believe that share repurchases remains one of our best uses of funds, and we demonstrated that by distributing the majority of the measurement solutions proceeds here in the first quarter, but we also remain committed to achieving investment grade. And as Doug said, we achieved an upgrade to investment grade from S&P now just in March. But overall, when you think about it longer term and strategically, and maybe that's what you're asking, with expected growth in EBITDA and with the debt keeps on coming down from current levels, clearly expect to be below one-time gross debt-to-EBITDA leverage ratio as we go forward. Guillaume Delaby -- AllianceBernstein -- Analyst OK, very useful. I'll hand it over. Thank you, Alf. Operator Our next question comes from the line of Marc Bianchi with TD Cowen. Please go ahead. Marc Bianchi -- TD Cowen -- Analyst Hi, thank you. I wanted to ask about sort of your scope opportunity on large projects. And I'm looking at the Whiptail Award and the Yau earlier I think you had expected them to be over $1 billion of inbound and they ended up being $500 million to $1 billion. I suspect what might be going on there is some of the scope that you anticipated to get didn't materialize for you on to competitors. But could you maybe address that? And then talk about for your direct awards, sort of what scope you're getting right now versus maybe what your opportunity could be over time? Doug Pferdehirt -- Chairman and Chief Executive Officer Thanks, Marc. I appreciate it. Look, that's an important question. If it's on your mind, then we need to clarify it. So, I appreciate you giving us the opportunity to clarify it. The subsea opportunity list that we publish every quarter is published from an industry perspective. Think of it as the rig count, if you will. So, we're trying to demonstrate to give people, the opportunity to be able to see the opportunity set that exists within the subsea industry. Therefore, when we put that out, that's not what we expect or what we anticipate -- these are tenders. These are projects that are being tendered by our clients, and the full scope of that is reflected in the value of those awards or we place the value, if you will, we use purple, blue, and red on our chart. So, hopefully, that clarifies this is just what the company happens to be tendering. We may or may not be targeting the full scope of the project. In many cases, we are. What's important also to understand is that is a subset of the opportunity list for TechnipFMC. Now that is the full opportunity set for the competition. But for TechnipFMC, because we are an integrated company, because we have iEPCI, because we do integrated FEED studies, we have the ability to enter into an exclusive proprietary integrated FEED study that upon completion, assuming we achieve the economical hurdle rate, for the project and the project receives FID, that project is then directly awarded to our company. Those aren't on the Subsea opportunity list. Occasionally, one might show up there just because it's such a well-known project. We need to put it out there. But because these are direct awards and proprietary to us, they're not on that opportunity list. So, we have a second opportunity list that we look at every day, and that's really what drives the performance of our company and quite frankly, the performance and why our inbound numbers often surprise to the upside. So, just to give you a little bit of an idea of which there's really two lists, we're looking at one, the world is looking at the other. We may not be tendering some of the projects, by the way, on the Subsea opportunity list because we may not think that they're projects that we can contribute to greatest value to, meaning integrated or Subsea 2.0 or whatever it may be or we may be concerned about something about the project. So, we may or may not tender those as well. As far as the scope, I think you know we have the most comprehensive. We can do an entire subsea project. We don't have to bring in a third party or by a third-party key component. We've talked about it before, the ability to be able to have the entire SPS, the entire SURF, both products and installation capability. makes us and positions us uniquely. Marc Bianchi -- TD Cowen -- Analyst OK, thanks for that Doug. I'll turn it back. Operator Our next question comes from the line of Kurt Hallead with Benchmark. Please go ahead. Kurt Hallead -- The Benchmark Company -- Analyst Hey, good morning, Doug. Good morning, everybody. Maybe just a quick follow-up with respect to Mark's question, right? So, again, in the most recent past, you guys have given some of your outlook regarding what you would anticipate your subsea order book to look like over the course of the next couple of years that wasn't explicitly referenced in this call. However, given the dynamics at play where you talk about quality over quantity, and then you talk about new technologies, unlocking new business opportunities. I was wondering if you might be able to give us some update on how the order outlook has changed or if it has changed at all. Doug Pferdehirt -- Chairman and Chief Executive Officer Again, Kurt, much like Marc, thank you for clarifying because we do our best to communicate effectively, but you learn as well. So, the fact that we did not mention that we have a target of $30 billion in orders for three years through 2025 or that we remain very confident in achieving our 2024 guidance of approaching $10 billion of orders. Us not saying it, we thought was a strong message that we're very confident, but let me be very clear we remain very, very confident. In terms of the feed activity in terms of the tendering activity and in terms of the, I would say, very mature, meaning late-stage pre-FID conversations that I'm having with clients today and I'm not complaining about it, Marc, but I'm very, very busy. Operator Our next question comes from the line of Scott Gruber with Citigroup. Please go ahead. Scott Gruber -- Citi -- Analyst Good morning, One for Alf. With the profitability of the business improving, the tax rate should trend toward a more normalized level over time. And we have the guidance for this year, how should we think about the evolution of the tax rate in '25 and '26, where could that fall to in the years ahead? Alf Melin -- Chief Financial Officer So thanks for the question on the taxes here. So, first of all, maybe just point out, if you look at the effective tax rate for the quarter, there is a little bit of a timing effect of it being a little bit lower than normal in this quarter. So, first of all, we stand behind our guidance of $280 million to $290 million for 2024. And if you consider the growth in EBITDA, etc., that we are projecting, I'd say that this is implying a roughly 35% effective tax rate for the year with our current earnings mix as planned. As we talked about a little bit before, we are targeting a normalized tax rate of 30%, and I would continue to build on that or model on that if you're looking for the out years it largely will come from a combination of earnings mix and some other utilization of tax opportunities that we couldn't take advantage of in the past. So, overall, we remain confident to drive toward a 30% normalized tax rate. Scott Gruber -- Citi -- Analyst And how long do you think it would take to get there? Is that something that's possible in '25 or in '26? Alf Melin -- Chief Financial Officer You're in the right ballpark of somewhere in that between those two years, yes. Scott Gruber -- Citi -- Analyst OK, that's it for me. Thank you. Operator Our next question comes from the line of Doug Becker with Capital One. Please go ahead. Doug Becker -- Capital One Securities -- Analyste Thank you, Doug, you previously mentioned that all-electric subsea production systems could result in incremental tieback opportunities of $8 billion through 2030. I was just hoping you could frame maybe a realistic or risk opportunity as you see it today for FTI. Doug Pferdehirt -- Chairman and Chief Executive Officer Yes. Thanks, Doug. Yes, that number is probably a little stale actually at this point. I would say there's upside to that number in terms of -- we put that out in, I think, 2021. Clearly, All-Electric and the adoption and qualification of all-electric is now. We've pretty much covered our entire client base. And that takes some time. It's obviously developing the technology, but then qualifying it and then getting your customers aligned. I don't have a hard-set year by year kind of how I see that developing yet. It might still be a little bit early, but obviously, getting the first award was key, that being in the CCS environment, not in the brownfield tieback environment. But as I said, things are being bid in parallel today between CCS and traditional energy. So, there'll be more to come. But look, Doug, we remain very confident. And this one, I'll be honest, this one is a little bit of a no-brainer. If you're sitting with an existing host facility that's aging every day, that you can get some additional hydrocarbon to flow through and obviously improve the financial results and leverage the cost of that capital investment that you may have made many years ago it just makes sense. So, we're kind of in a unique position. We have a lot of infrastructure. You know over 50% of the world's infrastructure is on the sea floor. So, we're in a unique position to really try to help to kind of marry up somebody that has a, what would be called a stranded asset, simply meaning it was too far away from a host facility to be able to be economically produced and could not support its own host facility because of the capex required to do so to be able to marry that up with somebody that has a production asset. And that's certainly what we're doing today in the conversations that we're having. Doug Becker -- Capital One Securities -- Analyste No, that certainly sounds encouraging. Is it reasonable to expect an all-electric award on the oil and gas side this year or more of a 2025 award? Doug Pferdehirt -- Chairman and Chief Executive Officer We'd like to think about things in 24-month time frame just to be a little bit conservative, but you could see something on the shorter end of that for an all-electric oil and gas award or a project being FID. I do think you could see that. again, up to our customers when the FID. But if I just think about the commercial discussions and the maturity of those discussions, and that's what I meant by in parallel, meaning it wouldn't be too far out. Doug Becker -- Capital One Securities -- Analyste Got it. And then just a quick one. Alf, the free cash flow loss was narrower than at least I expected to that consensus expected in the context that Subsea is toward the upper half of the guidance range. For free cash flow, is that trending toward the upper half or midpoint still the best place to anchor? Alf Melin -- Chief Financial Officer So first of all, on free cash flow, you're right. We had a strong first quarter for being us at least. The net outflow represents really of 179 really represents a solid start for the year for us. And because it is typically our seasonally most weak quarter that we have. And also point out that we did have the $56 million payment toward the legal settlement that affected the quarter. So, overall, we feel really good about where we are. And I expect, obviously, to build during the year. We typically trend up during the year, and you will see the majority of the cash flow generation in the second half of the year. And clearly, as we grow EBITDA, and in particular in Subsea, we expect to see a little bit of additional conversion of free cash flow from EBITDA. And we typically use the 50% ratio is where we operationally sit today. So, if you want to use that as an approximation. But we're not ready to officially take up free cash flow. There is always working capital dynamics and other things that lead to the end of the year. And again, if you look at our business profile, if fourth quarter will still be the big quarter to determine the overall cash flow for the year. Doug Becker -- Capital One Securities -- Analyste Understood. Thank you. Operator Our next question comes from the line of Daniel Thomson with Exane BNP Paribas. Please go ahead. Daniel Thomson -- Exane BNP Paribas -- Analyst Hi, good morning. I had a question on HISEP. I mean now that the contract has been awarded and clearly, your part of the technology has been qualified with Petrobras. Can you talk about the sort of conversations you're having with that client around using the technology in other fields, anything specific to flag? And have you had any interest from other clients in Brazil or internationally about using a similar technology? Thanks. Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you and good afternoon, Daniel. The answer is yes and yes is the short answer, but I'll give you a little bit of color around it. Clearly, Petrobras is approaching this as a design one, build many, obviously, a benefit of being part of this first award. But they clearly see this as an opportunity to reduce the greenhouse gas intensity first and foremost, but also in the case of the Mero 3 project because it's existing in an existing field or a brownfield, if you will, it also allows to debottleneck and increase production at the same time. But I don't want to speak too much on behalf of my clients, but I can assure you, Petrobras has stated and very much see this technology as one that they are going to use multiple times. Interest from other clients. First of all, there were partners in the Mero 3 project, a very well-known large world-class companies as well along with Petrobras. So, they've obviously been intimately involved and are supportive of the technology and obviously supportive of the project, they provided partner approval for the -- so we have those who are quite intimately included. And I'll tell you, just recently, I traveled actually with a client to Brazil because they wanted to learn more about it. Now they won't be using it in Brazil. they would be using this type of technology outside of Brazil, but they were so interested and I was more than happy to participate in that visit with them. And with the support of Petrobras, we were able to share with them some of the good things that we're doing and what we've done in terms of the development of the technology. So, again, short answer, yes and yes, and if I can squeeze in a follow-up. This time on the surface business in Saudi Arabia after the Aramco MSC 12 announcement, I mean given the incremental spending is going onshore unconventional gas from an offshore market where you don't compete. I mean this seems like an incremental positive for your particular mix in the Middle East. Daniel Thomson -- Exane BNP Paribas -- Analyst But can you confirm your sort of readiness to respond to that incremental onshore demand for surface equipment? And how does the opportunity in Saudi compared to your expectations for demand before the announcement from Aramco? Thanks. Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. And Daniel, maybe just to clarify for everyone, in Saudi Arabia, that business falls under our surface technologies business. And when we think about wellheads and trees, if they don't get wet, i.e., if they don't go below the water surface, then that falls under our surface business. So, our business in Saudi Arabia is primarily an onshore business. That's what we do. And actually, we're very, very good at it. So, the reduction in the jackup market and the reduction in some of the offshore activity. It does affect us because, again, they typically are produced from a production platform, so it's a dry tree. But the number of wells versus for the capex dollars spent versus the number of wells that can be drilled for the same amount of capex on land. The latter is obviously far greater. So, from our perspective, I'm only answering from our perspective, selfishly a shift to land capex from offshore capex is very favorable to our company. Think of it as simple as we sell product that allows a well to be safely and environmentally appropriately produced. And so, we get paid by the wellbore, if you will, and that's what matters. In addition, gas is important to us. our revenue per unit sold is higher in gas than it is in oil. So, the shift to gas is favorable. And in unconventional gas, we are able to provide additional products around the fracturing and the stimulation side of it as well. So, it expands our, let's say, revenue per well. So, that's how the market works for us. Now more importantly, and as you've been following the company, we decided to make a strategic investment in Kingdom to bring manufacturing capacity from Asia to the Kingdom. We continue to ramp up our new facility, and that has gone very successfully. We've not yet reached its fullest potential, and we anticipate further improvement in the second half of the year. So, Saudi Aramco remains very important to us. The Kingdom is a key contributor to our surface international business, and we're very well-positioned. And quite frankly, some of the announcements have been favorable from our perspective. Daniel Thomson -- Exane BNP Paribas -- Analyst Thanks, Doug. Operator Our next question comes from the line of Saurabh Pant with Bank of America. Please go ahead. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst Hi, good morning, Doug. Maybe let's spend a little time on the quality of the backlog that you've been talking about on the subsea side, right? I think it's a little bit and resulted pulling the margins you are delivering, but also the new technology work that you're winning. So, if you can spend a moment on a phrase you mentioned in your press release that the heightened focus on project selectivity, how are you doing that? What's the focus? Is it more about terms and conditions? Or are we talking about just integrated projects versus the stand-alone projects? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. Great question. We talk about it every day. as we look at the different opportunities that we have in front of us. Look, it's a combination of all of the above. But let's start with the main thing that really drives we would deem as quality because we believe -- and we've demonstrated it's best for the project in terms of shortening cycle time, accelerating time to first production and it greatly simplifies our execution model is the Subsea 2.0 configured to order. So, clearly, the higher the 2.0 orders, the higher the quality the backlog. And that allows us to go from engineer to order to configure to order. As I've talked about before on this call, that allows us to eliminate nine months of engineering. So, we take a 1.0 order, which is how the rest of the industry is operating, they have to spend nine months or we would have to spend nine months doing detailed engineering because you're building a first article. It's never been built before. So, you have to go through that before you place a single purchase order with the Subsea 2.0 configure to order a platform. And again, you can't just say, I have it. You have to have a platform, you have to have critical scale that allows you to not only simplify the internal, as I talked about, putting twice the volume through our existing manufacturing footprint but it also allows us to simplify and to secure a much more reliable and competent partners in our supply chain. So, it's really a combination of the two that lead to the quality. In addition to that, an integrated project, we just have many more levers. We take on the full scope. We have the ability to be able to schedule activity that best works for us, and that's why it was so important to consummate the relationship and create TechnipFMC because very difficult to do when you're not a single entity with a single set of financial reporting and a single set of objectives because then you have underlying competing interest. So, we have that. And then on top of that, sure. The terms and conditions of the contracts are important. Our customers understand that. We've talked in the past about what we've done to ensure that the things are being shared in the most appropriate way. And for instance, when it comes to inflation, we put in place several parameters that allow us to be more confident that we're not going to be surprised on that side. So, all in all, it's a combination of the three, but it's very clear for us where our focus is, and as you hear us announce these iEPCI and iEPCI 2.0 and 2.0 awards, it's just very, very favorable to the future and to the surety of our execution. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst No, that's very helpful. Just a very quick follow-up, Doug. I know your $30 billion in your order outlook for subsea does not include any of the frontier basins. But the new flow, especially from Namibia has been particularly positive. Can you share any updated thoughts on your outlook in terms of the front year basis? I know it's beyond '25, but any updated thoughts there? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. lots of discussion, lots of activity. We're using our playbook from Guyana and Mozambique, both of which we were the first mover. We understand how to do this in these emerging markets. We're executing the same playbook in the other emerging markets. And I would say, net-net, from most recently, the indications from our clients that they have stated publicly, I'm not saying anything that's not public I would say, is more favorable trending in a very favorable fashion. So, we look forward to the contribution from those emerging markets in the latter part of the decade. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst All right. OK, perfect. No, thank you. I'll turn it back. Operator Our last question will come from the line of Bertrand Hodee with Kepler Chevreux. Please go ahead. Bertrand Hodee -- Kepler Cheuvreux -- Analyst Yes, hello, Doug. I have probably a follow-up on Namibia. Based on your early discussion and clearly no need to mention any operator name here. But conceptually, from your understanding, do you believe it will require specific technologies and/or the iEPCI model or Subsea 2.0 will be well suited for future Namibia development? Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you, Bertrand. Speaking of Namibia in particular, the one well-known challenge will be the water depth. So, these are very deep. It's very deep within the operating parameters of 2.0, so no concern there. And certainly, we believe the iEPCI model, as we've demonstrated in other emerging markets is clearly a very favorable model and one that we would expect would unlock the greatest value and accelerate time to first oil for our customers, which drives their project economics. So, iEPCI 2.0, but working very closely with our clients. So, they're obviously learning as they're doing their extended well tests in terms of the producibility of the reservoirs, the compartmentalization, the geochemistry. So, there are things we're learning along the way, but we are actively engaged with them to ensure that we'll be ready to provide world-class subsea support. Bertrand Hodee -- Kepler Cheuvreux -- Analyst Thank you. Operator I would now like to turn the call over to Matt Seinsheimer for closing remarks. Matt Seinsheimer -- Vice President, Investor Relations This concludes our fourth quarter conference call. A replay of the call will be available on our website beginning at approximately 8:00 p.m. Greenwich Mean Time today. If you have any further questions, please feel free to contact any member of the investor relations team. Thanks for joining us. You may now end the call. Answer:

the TechnipFMC first quarter 2024 earnings conference call

Operator Thank you for standing by, and welcome to the TechnipFMC first quarter 2024 earnings conference call. I would now like to welcome Matt Seinsheimer to begin the call. Matt, over to you. Matt Seinsheimer -- Vice President, Investor Relations Thank you, Mandi. Good morning and good afternoon, and welcome to TechnipFMC's first quarter 2024 earnings conference call. Our news release and financial statements issued earlier today can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs, and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q, and other periodic filings with the US Securities and Exchange Commission. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise. I will now turn the call over to Doug Pferdehirt, TechnipFMC's chair and chief executive officer. Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you, Matt. Good morning and good afternoon. Thank you for participating in our first quarter earnings call. I am very pleased with the strong performance in the quarter. which further highlights our continuing success in delivering on our commitments. Total company revenue for the first quarter was $2 billion. Total company adjusted EBITDA was $257 million with an adjusted EBITDA margin of 12.6% when excluding foreign exchange impacts. Total company inbound orders in the quarter were $2.8 billion. In Subsea, we had a solid start to the year with first quarter orders of $2.4 billion representing a book-to-bill of 1.4. Importantly, a significant portion of our inbound was driven by new technologies, several of which were industry-first for subsea that will help unlock opportunities in both new and mature offshore basins. In January, we announced our first iEPCI for Petrobras. This one utilizing subsea processing for the Mero 3 HISEP development. The project represents a major industry milestone as it will be the first to use subsea separation to capture CO2 directly from the well stream for injection back into the reservoir, all of which will occur on the sea floor. During the quarter, we were also awarded the first iEPCI to utilize a 20K-production system. This being for Shell's Sparta project in the Paleogene play in the US Gulf of Mexico. The 20,000 PSI production system includes new technologies required to meet the demands of high-pressure, high-temperature reservoir conditions. This marks our third award for 20K production equipment as clients look to produce from deeper waters and reservoirs in the maturing basin. The Paleogene formation spans the central and western regions of the Gulf of Mexico with reservoirs located in water depths that exceed 1,500 meters and generally exhibit higher pressures. The Paleogene has become one of the most productive and fastest-growing sources of supply in the Gulf. And it is estimated that 1 billion barrels of discovered reserves will require the use of 20K technology for development. We expect additional projects to successfully move forward over the next 24 months, representing yet another opportunity set for our company. And finally, we announced an award from the Northern Endurance partnership to deliver the first all-electric subsea iEPCI, which is anticipated to be inbound in the second half of this year. The partnership, which is a joint venture between BP, Equinor, and TotalEnergies, is building CO2 transportation and storage infrastructure for carbon capture projects in the UK's East Coast cluster. Our all-electric solution will collect and feed the pressurized gas into an offer for permanent storage. All-electric systems drive simplification of the field design, enabling the reduction of infrastructure and installation time through the removal of hydraulic components and simplified umbilicals. The technology also enables the development of projects over long distances. With Northern Endurance, the power and controls to the subsea equipment will extend 145 kilometers from the onshore host facility. The award of an entirely all-electric subsea system is a significant achievement for both our company and the industry. Mero 3 HISEP, Sparta, and Northern Endurance are all strong examples of our differentiated technology portfolio. Each of these projects provides a unique solution to an industry challenge. And it is this unique combination of innovative technologies and integrated execution that is creating new market opportunities for our company. While project selectivity remains a critical objective, it is even more important that we successfully deliver on time and on budget as promised. As demonstrated by our financial performance in the quarter, Operational execution across the portfolio continues at a high level, driven in part, by this focus on project selectivity and the favorable impact it is having on the quality of orders in our backlog. Having both the right backlog and strong execution gives us confidence that we can capitalize on the strong market and achieve our financial targets. Finally, we completed the sale of our measurement solutions business in March. In keeping with our commitment to shareholder distributions, a significant portion of the proceeds were allocated to repurchasing $150 million of shares in the first quarter. This brings our total shareholder distributions to $520 million in less than two years. And given this acceleration in share repurchases, we now expect total shareholder distributions in the current year to grow at least 70% when compared to the levels achieved in 2023. I will now turn the call over to Alf. Alf Melin -- Chief Financial Officer Thanks, Doug. Inbound in the quarter was $2.8 billion, driven by $2.4 billion of subsea orders. Total company backlog increased sequentially to $13.5 billion. Revenue in the quarter was $2 billion. EBITDA was $257 million, when excluding a gain on the sale of our measurement solutions business of $75 million; restructuring, impairment, and other charges totaling $5 million, and a foreign exchange loss of $4 million. Turning to the segment results. In subsea, revenue of $1.7 billion was largely flat versus the fourth quarter. Higher project activity in Brazil and the Gulf of Mexico was largely offset by lower activity in the North Sea and Asia Pacific and reduced services revenue due to typical offshore seasonality. Adjusted EBITDA was $242 million, with a margin of 14%, up 90 basis points from the fourth quarter. The sequential increase was driven by strong execution and improved earnings mix from the backlog. In surface technologies, revenue was $307 million, down 14% sequentially. Revenue decreased due to the closing of the sale of measurement solutions before the end of the quarter, lower activity in North America, and portfolio optimization in Latin America. Adjusted EBITDA was $41 million, a 21% decrease from the fourth quarter, driven by lower revenue from measurement solutions and lower activity in North America. Adjusted EBITDA margin was 13.5%, down 120 basis points versus the fourth quarter. Turning to corporate and other items in the period. Corporate expense was $27 million when excluding charges of $5 million, which were primarily transaction-related costs associated with the sale of measurement solutions. Foreign exchange loss was $4 million. Net interest expense was $13 million, which benefited from higher average cash balances in the period. Tax expense in the quarter was $50 million. Cash required by operating activities was $127 million. The outflow follows the typical seasonal pattern of our business. Additionally, cash flow in the period included a payment of $56 million to the P&F. Similar payments will occur in the second and third quarters and will fulfill our remaining obligation. Capital expenditures were $52 million. This resulted in free cash flow consumption of $179 million in the quarter. As Doug highlighted, we completed the sale of the measurement solutions in March. Proceeds from the sale were $186 million, with the majority being used for share repurchase. This drove a significant increase in total shareholder distributions in the first quarter to $172 million, which included $150 million for share repurchase and $22 million in dividends. We ended the period with cash and cash equivalents of $697 million. Net debt was $327 million. Now, I will provide some thoughts on our outlook. Starting with the second quarter. For Subsea, we expect to benefit from the typical seasonal uplift, as well as improved margins in backlog with sequential revenue growth of approximately $200 million and margin expansion of approximately 250 basis points. For surface technologies, we expect revenue and adjusted EBITDA margin to be in line with the first quarter. This includes the impact of the sale of measurement solutions. Now I will also give you an update to our full year outlook. Given the anticipated strength of our first half results and taking into account a range of outcomes, we now expect total company adjusted EBITDA to approximate $1.29 billion when excluding foreign exchange, an increase of approximately $40 million from the guidance we provided in February. Within this total company outlook, we see the following relative to the guidance provided in February. Subsea revenue and EBITDA margin both trending toward the upper half of the guidance ranges. Both revenue and EBITDA margin for surface technologies, as well as corporate expense remain on track for the midpoint of their respective guidance ranges. Lastly, I want to discuss our current view of our capital structure. In March, we received an upgrade from Standard & Poor's to investment grade. This upgrade serves as a significant milestone for the company and reflects the tremendous efforts by the entire organization to materially deleverage the balance sheet and achieve investment-grade metrics. With this update, we are also revising our target capital structure to approximately $800 million of cash and $800 million of debt, together amounting to zero net debt. This is a $500 million reduction versus our prior target and the level we can achieve over time as scheduled debt maturities come due. Importantly, we believe this capital structure provides us with the flexibility to manage our operations and fund our capital needs while also delivering on our commitment to shareholder distributions. Operator, you may now open the line for questions. Questions & Answers: Operator The floor is now open for your questions. [Operator instructions] We ask that you please limit yourself to one question and one follow-up question. We'll now take a moment to compile our roster. Our first question comes from the line of Arun Jayaram with J.P. Morgan Securities. Please go ahead. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Good morning, Doug. I wanted to see if you could provide more details on Northern Endurance what do you think drove your success on the projects? Maybe more details on the scope and perhaps what technologies is FTI providing in terms of the CCS nature of that project? Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you and good morning. Look, this was -- as stated in my prepared remarks, a major milestone for our company but also for the industry. This will be the first application of an all-electric production system. We are extremely, extremely proud to have been selected. There was a very rigorous technical qualification are required to be able to be considered and to receive the award. And we're pleased that we came out on top of that qualification. Think of it as everything from the shore to the seafloor. We call it the integrated carbon transportation system. We have a specific CO 2.0 tree, so part of our 2.0 family. We have developed a configuration to order CO2 injection tree. It looks simplified compared to a traditional oil and gas tree, but it's actually very technical, particularly when it comes to the sealing surfaces because of the number of cycles that you will -- the number of times that you were opening close or would is called a cycle, the cycling of a valve in a CO2 injection tree is far, far greater than what you would do in a typical oil and gas development. So, a higher technical standard. We were extremely pleased to be selected for that. And we have that entire scope and what's really interesting about it is the distance that is being traversed. There's over 145 kilometers, and there will be nothing floating on top of the water. In other words, we've taken it all subsea much like we did on the CCS project in Brazil. On the HISEP project, it is just a major, major milestone where we are really driving the CCS market by enabling the seafloor to be a key component of these projects. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Great, Doug. And I wanted to see if you could maybe comment on your prepared remarks, you talked about some new technologies that you're using to unlock opportunities in more mature basins. I was wondering if you can maybe expand upon that and maybe comment on what you see in some of the more mature basins? I know one of your peers talked about anticipating maybe an improvement in West Africa starting next year, but maybe if you could elaborate on that? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. So, there's just the, I would call it, the traditional projects that are likely to be driven forward in mature basins given the project economics by doing it with an integrated with an integrated approach, what we call iEPCI, along with our 2.0 family, we can help unlock the economic value of those projects. But specifically, what I was referring to was in a mature basin there's really two opportunities is to find a different producing horizon. And in the case of the Paleogene, it's a deeper horizon, in the Gulf of Mexico, or it could just be a further step out from the host facility. And so, what are the technologies that are the key enablers? To get to the Paleogene, it's 20K and to have a full 20K production system fully qualified, supported by the regulators, as well as our clients, major achievement. As noted, this is our third project. This is the first integrated 20K project to be awarded. And as alluded to in the script, we expect more to come in the future. When you look at the further step-outs in a mature basin, that will be enabled by all-electric. So, this will be the primary application in the traditional energy or the oil and gas environment when it comes to the all-electric production systems, again, enabling a much greater distance up to three to four times further than you can do via using hydraulic controls to reach back to an existing host facility. So, the two key technology enablers in this case being 20K, and the all-electric. In the case of HISEP, as we talked about in the first quarter, it was advanced CO2 separation, subsea separation technology, where we are separating and then reinjecting all on the seafloor. Arun Jayaram -- JPMorgan Chase and Company -- Analyst Great. Thanks a lot, Doug. Operator Our next question comes from the line of James West with Evercore ISI. Please go ahead. James West -- Evercore ISI -- Analyst Hey, good morning, guys. Doug Pferdehirt -- Chairman and Chief Executive Officer Good morning, James. How are you? James West -- Evercore ISI -- Analyst I'm doing all right, Doug. How are you? Doug Pferdehirt -- Chairman and Chief Executive Officer Good. Thank you. James West -- Evercore ISI -- Analyst Actually, I saw your results. I know how you're doing well. I wanted to start a little bit bigger picture. It's something we've talked about a bit in the past. With the backlog that you have now, all of these EPCI contracts coming through, how are you feeling about capacity? And are you starting to really lever into some of these joint ventures and partnerships to add to that capacity to make sure you can deliver on all those back on? Doug Pferdehirt -- Chairman and Chief Executive Officer James, a timely question. I would expect that you will see us utilize the support that we have within our ecosystem to be able to continue to grow and expand the iEPCI market. And just for those that are not as familiar with the terminology, ecosystem, we made a decision years ago that we would restructure the way that the subsea industry operated, both from the integrated projects, but also from the way that we would drive higher asset utilization and drive through cycle returns, to a standard that was not only higher than in the past, but sustainable. And the way we would do that was to work well with others. And that's the personality of our company. We're not a big monster. We work well with people. We have very deep relationships, and they're all trust-based, and we put a lot of time and effort into that. So, what that's allowed us to do was to go out to other vessel operators and introduce them to the iEPCI concept. And as the iEPCI market continues to grow and become a very significant portion of the total projects that are being awarded today giving -- providing access to our partners to work alongside us on those projects and deliver integrated projects. So, that's what allows us to, if you will, expand beyond theoretical capacity in the installation portion of the projects, but there's also the manufacturing side of the projects. And this is the -- a significant benefit. And I think one that's not been fully understood, but as you see it showing up in our financial results now of the ability to be able to get leverage by using Subsea 2.0 configure to order. It runs through our plant at approximately double the cadence or one-half of the time as a traditional 1.0, which is what the rest of the industry is building today. So, they have to get additional capacity either through consolidation or by expanding their capital budgets and building plant whereas we've invested in the technology and the technology and then the system of going from an engineering to order to a configure to order allows us to have that additional cadence through the plant. So, again, allowing us to expand far beyond the traditional theoretical capacity. So, look, we monitor the situation very closely. We're very open. We share it with our clients we're having very long-term discussions well beyond the time period that we would traditionally be having discussions, and they have the confidence to have those discussions with us because of this new operating model, and they see that we -- they understand that we are doing things that will allow us to have the capacity to be -- to continue to expand and deliver and support their projects. James West -- Evercore ISI -- Analyst OK. Got it. Very helpful, Doug. And then I thought the -- some of the first-time awards, particularly in the carbon capture side or fascinating. Could you maybe expand on this use of the C4 for CCS? And was this contemplated initially as we targeted these projects? And if so, are additional offshore projects all targeting that? And then is it the technology are you using kind of existing technology? Or is this new novel technology? Doug Pferdehirt -- Chairman and Chief Executive Officer Both great questions. So, look, we've been working on this for quite some time. And James, as you know, we kind of we look at any challenge from the sea floor up. And I think we might be the only company that really takes that approach because most companies and quite frankly, most developers kind of think about onshore. And then if they go offshore, they want to have some sort of fixed bottom like a mono power or something that is touching the sea floor or if they go further offshore, they want to have some sort of a floating structure. We fundamentally believe the right way to do it is to eliminate the greenhouse footprint associated with those structures is to put everything on the seafloor, but it takes very advanced technology, material science, automation, and controls that, quite frankly, there's very few places in the industry. But beyond the industry, in academia, etc., that really exists today. And we're proud, that's where we operate. We're putting things one to two miles deep in the water on the sea floor, designed to last for 25- to 35-year life with all advanced automation, robotics and controls that, quite frankly, challenge anything that's being done in the industry or beyond the industry today. So, when we look at a challenge like CCS, sure, we can be involved in a terrestrial project and happy to be involved in those projects. But fundamentally, we believe that the safest and best place to store the CO2 will be in say line or abandon depleted reservoirs, far offshore. And they exist. They're well known. You can then transport from shore all the way out to those into those injection fields all subsea without having any sort of a floating infrastructure. It's being demonstrated in the Northern Endurance partnership project, as we described. From a technology point of view, it is important to note there are people that believe you can just reverse the flow and use existing oil and gas infrastructure, that's not true. It is much more of a technical challenge than that would make one believe. I talked a little bit about the tree and the tree design, The valves on the tree, as I explained. It also comes down to the control and automation and also the monitoring that's required on these projects. So, we have developed an entire -- what we, again, call an integrated carbon transportation system that allows us to take it basically from the host facility to an injection point. And we would see -- we definitely see the trend and not just in CCS, but also in other forms of energy. And new energies that are really for them to reach their fullest potential to achieve the scale that is required. We see this going offshore, and that is certainly the trend and one that we are helping to enable and we're proud to do so. James West -- Evercore ISI -- Analyst Got it. Thanks, Doug. Operator Our next question comes from the line of Luke Lemoine with Piper Sandler. Please go ahead. Luke Lemoine -- Piper Sandler -- Analyst Hey, good morning, Doug. You recapped the metrics of the all-electric subsea already, and you have the first announcement with Northern Endurance for CCS. Doug Pferdehirt -- Chairman and Chief Executive Officer Luke, you dropped off, Luke. If you don't mind repeating the question, you dropped off, Luke. Luke Lemoine -- Piper Sandler -- Analyst Yes, sure. Just talking about the first all-electric system for Northern Endurance for CCS, when you kind of look at oil and gas, when can we start seeing the uptake for all-electric? And when you're speaking with customers, what are the pinch points if there are any on your chatting with them? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure, Thank you, Luke. Look, oil and gas is happening in parallel to the CCS opportunity. So, you will see oil and gas opportunities using and electric full field development, and I stress full field because keep in mind, we've been using electric actuation for many years, and we have over 600 electric actuators installed on subsea equipment around the world. So, that part of it is not novel. But to go to a fully electric system, which would include an electric subsurface safety valve would be unique, and that's a partnership for us that we're working together with Halliburton to enable an all-electric subsea field development. But again, there's commercial activity going on in parallel. So, you will see more in that area also. I would stress, though, in the area of oil and gas that I see the bigger opportunities in the tiebacks. And why is that? Look, all-electric tree is more expensive than an electro-hydraulically operated tree, for all the right reasons. Now when you look at it from a tieback point of view, those economics dissipate very quickly because in a long-distance tieback, the umbilical and the cost of the umbilical across that very long distance to be able to use hydraulic actuation would either be limiting. It would not be possible or it would be very costly. But when you look at it on a unit cost versus a unit cost, an all-electric tree is more expensive. So, therefore, in a greenfield development, I think those opportunities will be there. But the big market, and I stress, it will be a significant market will be in the area of brownfield. We've talked about it before. If you look around the world at all the floating production assets that are today, FPSOs, FPSUs, they're producing at between 60% and 70% of nameplate capacity. All electric brownfield tiebacks will allow them to be able to bring that back up to near nameplate capacity without any significant capital cost. And we've gotten the cycle time now on those brownfield projects down to such a level slightly over one year that it makes the economics very, very compelling. Operator Our next question comes from the line of Guillaume Delaby with Bernstein. Please go ahead. Guillaume Delaby -- AllianceBernstein -- Analyst Yes. Good morning, Doug. Maybe a quick question regarding your new capital allocation policy. I'm not sure we can call it that way. So, is it essentially resulting from, I would say, a better financial outlook or is there also some kind of underlying, I would say, strategic thinking behind it, so maybe if you can elaborate a little bit on that? And an associated question. Maybe I know it's time for capital discipline, but are you still considering or do you consider to do some small targeted acquisitions again in the coming quarters? Thank you. Doug Pferdehirt -- Chairman and Chief Executive Officer So let me start with the second part, Guillaume, and thank you for the questions. Look, we have and will continue to do small targeted acquisitions. But in most cases, we're taking small investments in early start-ups. Often, it doesn't cost any capital because we're using a few financial capital because we're using human capital. The greatest currency we have in our company today is our subsea engineering. It is very unique to our company. And we have, by far, the most significant and most experienced and talented workforce. So, often, we can trade, if you will, subsea engineering hours to a company that's trying to tackle this challenge of how do I go from being a terrestrial developer to being an offshore developer. Things change quite a bit. And we have that knowledge, particularly when it comes to dynamic design, and I won't get into the details of that, but that's a major component. And then also, obviously, putting things onto the sea floor. I'm going to have to weigh in on the first part of your comment. But I do want to comment, Guillaume, there were two major messages that Alf delivered earlier. One, we were upgraded by S&P and two, we are targeting net zero in terms of our net debt. So, two major milestones, but I'll pass it over to Alf. Alf Melin -- Chief Financial Officer Yes. Doug, thank you. And maybe just to build on that. So, today, so we have a gross debt of just above $1 billion and a net debt of 327 million. And we have previously stated that we will operate this company on $800 million of cash. And further, as Doug said, believes that the net debt neutral position us, and it would imply that we would reduce debt by a little more than $200 million -- reduced that by a little bit more than $200 million from the current $1 billion level. And so, this is, call it, an intermediate-term target and not necessarily where we need to be immediately. And we certainly have debt that is going to mature over the next two years that will take us there naturally. I will also emphasize that given our business outlook and the strong cash generation, we see ahead, we continue to believe that share repurchases remains one of our best uses of funds, and we demonstrated that by distributing the majority of the measurement solutions proceeds here in the first quarter, but we also remain committed to achieving investment grade. And as Doug said, we achieved an upgrade to investment grade from S&P now just in March. But overall, when you think about it longer term and strategically, and maybe that's what you're asking, with expected growth in EBITDA and with the debt keeps on coming down from current levels, clearly expect to be below one-time gross debt-to-EBITDA leverage ratio as we go forward. Guillaume Delaby -- AllianceBernstein -- Analyst OK, very useful. I'll hand it over. Thank you, Alf. Operator Our next question comes from the line of Marc Bianchi with TD Cowen. Please go ahead. Marc Bianchi -- TD Cowen -- Analyst Hi, thank you. I wanted to ask about sort of your scope opportunity on large projects. And I'm looking at the Whiptail Award and the Yau earlier I think you had expected them to be over $1 billion of inbound and they ended up being $500 million to $1 billion. I suspect what might be going on there is some of the scope that you anticipated to get didn't materialize for you on to competitors. But could you maybe address that? And then talk about for your direct awards, sort of what scope you're getting right now versus maybe what your opportunity could be over time? Doug Pferdehirt -- Chairman and Chief Executive Officer Thanks, Marc. I appreciate it. Look, that's an important question. If it's on your mind, then we need to clarify it. So, I appreciate you giving us the opportunity to clarify it. The subsea opportunity list that we publish every quarter is published from an industry perspective. Think of it as the rig count, if you will. So, we're trying to demonstrate to give people, the opportunity to be able to see the opportunity set that exists within the subsea industry. Therefore, when we put that out, that's not what we expect or what we anticipate -- these are tenders. These are projects that are being tendered by our clients, and the full scope of that is reflected in the value of those awards or we place the value, if you will, we use purple, blue, and red on our chart. So, hopefully, that clarifies this is just what the company happens to be tendering. We may or may not be targeting the full scope of the project. In many cases, we are. What's important also to understand is that is a subset of the opportunity list for TechnipFMC. Now that is the full opportunity set for the competition. But for TechnipFMC, because we are an integrated company, because we have iEPCI, because we do integrated FEED studies, we have the ability to enter into an exclusive proprietary integrated FEED study that upon completion, assuming we achieve the economical hurdle rate, for the project and the project receives FID, that project is then directly awarded to our company. Those aren't on the Subsea opportunity list. Occasionally, one might show up there just because it's such a well-known project. We need to put it out there. But because these are direct awards and proprietary to us, they're not on that opportunity list. So, we have a second opportunity list that we look at every day, and that's really what drives the performance of our company and quite frankly, the performance and why our inbound numbers often surprise to the upside. So, just to give you a little bit of an idea of which there's really two lists, we're looking at one, the world is looking at the other. We may not be tendering some of the projects, by the way, on the Subsea opportunity list because we may not think that they're projects that we can contribute to greatest value to, meaning integrated or Subsea 2.0 or whatever it may be or we may be concerned about something about the project. So, we may or may not tender those as well. As far as the scope, I think you know we have the most comprehensive. We can do an entire subsea project. We don't have to bring in a third party or by a third-party key component. We've talked about it before, the ability to be able to have the entire SPS, the entire SURF, both products and installation capability. makes us and positions us uniquely. Marc Bianchi -- TD Cowen -- Analyst OK, thanks for that Doug. I'll turn it back. Operator Our next question comes from the line of Kurt Hallead with Benchmark. Please go ahead. Kurt Hallead -- The Benchmark Company -- Analyst Hey, good morning, Doug. Good morning, everybody. Maybe just a quick follow-up with respect to Mark's question, right? So, again, in the most recent past, you guys have given some of your outlook regarding what you would anticipate your subsea order book to look like over the course of the next couple of years that wasn't explicitly referenced in this call. However, given the dynamics at play where you talk about quality over quantity, and then you talk about new technologies, unlocking new business opportunities. I was wondering if you might be able to give us some update on how the order outlook has changed or if it has changed at all. Doug Pferdehirt -- Chairman and Chief Executive Officer Again, Kurt, much like Marc, thank you for clarifying because we do our best to communicate effectively, but you learn as well. So, the fact that we did not mention that we have a target of $30 billion in orders for three years through 2025 or that we remain very confident in achieving our 2024 guidance of approaching $10 billion of orders. Us not saying it, we thought was a strong message that we're very confident, but let me be very clear we remain very, very confident. In terms of the feed activity in terms of the tendering activity and in terms of the, I would say, very mature, meaning late-stage pre-FID conversations that I'm having with clients today and I'm not complaining about it, Marc, but I'm very, very busy. Operator Our next question comes from the line of Scott Gruber with Citigroup. Please go ahead. Scott Gruber -- Citi -- Analyst Good morning, One for Alf. With the profitability of the business improving, the tax rate should trend toward a more normalized level over time. And we have the guidance for this year, how should we think about the evolution of the tax rate in '25 and '26, where could that fall to in the years ahead? Alf Melin -- Chief Financial Officer So thanks for the question on the taxes here. So, first of all, maybe just point out, if you look at the effective tax rate for the quarter, there is a little bit of a timing effect of it being a little bit lower than normal in this quarter. So, first of all, we stand behind our guidance of $280 million to $290 million for 2024. And if you consider the growth in EBITDA, etc., that we are projecting, I'd say that this is implying a roughly 35% effective tax rate for the year with our current earnings mix as planned. As we talked about a little bit before, we are targeting a normalized tax rate of 30%, and I would continue to build on that or model on that if you're looking for the out years it largely will come from a combination of earnings mix and some other utilization of tax opportunities that we couldn't take advantage of in the past. So, overall, we remain confident to drive toward a 30% normalized tax rate. Scott Gruber -- Citi -- Analyst And how long do you think it would take to get there? Is that something that's possible in '25 or in '26? Alf Melin -- Chief Financial Officer You're in the right ballpark of somewhere in that between those two years, yes. Scott Gruber -- Citi -- Analyst OK, that's it for me. Thank you. Operator Our next question comes from the line of Doug Becker with Capital One. Please go ahead. Doug Becker -- Capital One Securities -- Analyste Thank you, Doug, you previously mentioned that all-electric subsea production systems could result in incremental tieback opportunities of $8 billion through 2030. I was just hoping you could frame maybe a realistic or risk opportunity as you see it today for FTI. Doug Pferdehirt -- Chairman and Chief Executive Officer Yes. Thanks, Doug. Yes, that number is probably a little stale actually at this point. I would say there's upside to that number in terms of -- we put that out in, I think, 2021. Clearly, All-Electric and the adoption and qualification of all-electric is now. We've pretty much covered our entire client base. And that takes some time. It's obviously developing the technology, but then qualifying it and then getting your customers aligned. I don't have a hard-set year by year kind of how I see that developing yet. It might still be a little bit early, but obviously, getting the first award was key, that being in the CCS environment, not in the brownfield tieback environment. But as I said, things are being bid in parallel today between CCS and traditional energy. So, there'll be more to come. But look, Doug, we remain very confident. And this one, I'll be honest, this one is a little bit of a no-brainer. If you're sitting with an existing host facility that's aging every day, that you can get some additional hydrocarbon to flow through and obviously improve the financial results and leverage the cost of that capital investment that you may have made many years ago it just makes sense. So, we're kind of in a unique position. We have a lot of infrastructure. You know over 50% of the world's infrastructure is on the sea floor. So, we're in a unique position to really try to help to kind of marry up somebody that has a, what would be called a stranded asset, simply meaning it was too far away from a host facility to be able to be economically produced and could not support its own host facility because of the capex required to do so to be able to marry that up with somebody that has a production asset. And that's certainly what we're doing today in the conversations that we're having. Doug Becker -- Capital One Securities -- Analyste No, that certainly sounds encouraging. Is it reasonable to expect an all-electric award on the oil and gas side this year or more of a 2025 award? Doug Pferdehirt -- Chairman and Chief Executive Officer We'd like to think about things in 24-month time frame just to be a little bit conservative, but you could see something on the shorter end of that for an all-electric oil and gas award or a project being FID. I do think you could see that. again, up to our customers when the FID. But if I just think about the commercial discussions and the maturity of those discussions, and that's what I meant by in parallel, meaning it wouldn't be too far out. Doug Becker -- Capital One Securities -- Analyste Got it. And then just a quick one. Alf, the free cash flow loss was narrower than at least I expected to that consensus expected in the context that Subsea is toward the upper half of the guidance range. For free cash flow, is that trending toward the upper half or midpoint still the best place to anchor? Alf Melin -- Chief Financial Officer So first of all, on free cash flow, you're right. We had a strong first quarter for being us at least. The net outflow represents really of 179 really represents a solid start for the year for us. And because it is typically our seasonally most weak quarter that we have. And also point out that we did have the $56 million payment toward the legal settlement that affected the quarter. So, overall, we feel really good about where we are. And I expect, obviously, to build during the year. We typically trend up during the year, and you will see the majority of the cash flow generation in the second half of the year. And clearly, as we grow EBITDA, and in particular in Subsea, we expect to see a little bit of additional conversion of free cash flow from EBITDA. And we typically use the 50% ratio is where we operationally sit today. So, if you want to use that as an approximation. But we're not ready to officially take up free cash flow. There is always working capital dynamics and other things that lead to the end of the year. And again, if you look at our business profile, if fourth quarter will still be the big quarter to determine the overall cash flow for the year. Doug Becker -- Capital One Securities -- Analyste Understood. Thank you. Operator Our next question comes from the line of Daniel Thomson with Exane BNP Paribas. Please go ahead. Daniel Thomson -- Exane BNP Paribas -- Analyst Hi, good morning. I had a question on HISEP. I mean now that the contract has been awarded and clearly, your part of the technology has been qualified with Petrobras. Can you talk about the sort of conversations you're having with that client around using the technology in other fields, anything specific to flag? And have you had any interest from other clients in Brazil or internationally about using a similar technology? Thanks. Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you and good afternoon, Daniel. The answer is yes and yes is the short answer, but I'll give you a little bit of color around it. Clearly, Petrobras is approaching this as a design one, build many, obviously, a benefit of being part of this first award. But they clearly see this as an opportunity to reduce the greenhouse gas intensity first and foremost, but also in the case of the Mero 3 project because it's existing in an existing field or a brownfield, if you will, it also allows to debottleneck and increase production at the same time. But I don't want to speak too much on behalf of my clients, but I can assure you, Petrobras has stated and very much see this technology as one that they are going to use multiple times. Interest from other clients. First of all, there were partners in the Mero 3 project, a very well-known large world-class companies as well along with Petrobras. So, they've obviously been intimately involved and are supportive of the technology and obviously supportive of the project, they provided partner approval for the -- so we have those who are quite intimately included. And I'll tell you, just recently, I traveled actually with a client to Brazil because they wanted to learn more about it. Now they won't be using it in Brazil. they would be using this type of technology outside of Brazil, but they were so interested and I was more than happy to participate in that visit with them. And with the support of Petrobras, we were able to share with them some of the good things that we're doing and what we've done in terms of the development of the technology. So, again, short answer, yes and yes, and if I can squeeze in a follow-up. This time on the surface business in Saudi Arabia after the Aramco MSC 12 announcement, I mean given the incremental spending is going onshore unconventional gas from an offshore market where you don't compete. I mean this seems like an incremental positive for your particular mix in the Middle East. Daniel Thomson -- Exane BNP Paribas -- Analyst But can you confirm your sort of readiness to respond to that incremental onshore demand for surface equipment? And how does the opportunity in Saudi compared to your expectations for demand before the announcement from Aramco? Thanks. Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. And Daniel, maybe just to clarify for everyone, in Saudi Arabia, that business falls under our surface technologies business. And when we think about wellheads and trees, if they don't get wet, i.e., if they don't go below the water surface, then that falls under our surface business. So, our business in Saudi Arabia is primarily an onshore business. That's what we do. And actually, we're very, very good at it. So, the reduction in the jackup market and the reduction in some of the offshore activity. It does affect us because, again, they typically are produced from a production platform, so it's a dry tree. But the number of wells versus for the capex dollars spent versus the number of wells that can be drilled for the same amount of capex on land. The latter is obviously far greater. So, from our perspective, I'm only answering from our perspective, selfishly a shift to land capex from offshore capex is very favorable to our company. Think of it as simple as we sell product that allows a well to be safely and environmentally appropriately produced. And so, we get paid by the wellbore, if you will, and that's what matters. In addition, gas is important to us. our revenue per unit sold is higher in gas than it is in oil. So, the shift to gas is favorable. And in unconventional gas, we are able to provide additional products around the fracturing and the stimulation side of it as well. So, it expands our, let's say, revenue per well. So, that's how the market works for us. Now more importantly, and as you've been following the company, we decided to make a strategic investment in Kingdom to bring manufacturing capacity from Asia to the Kingdom. We continue to ramp up our new facility, and that has gone very successfully. We've not yet reached its fullest potential, and we anticipate further improvement in the second half of the year. So, Saudi Aramco remains very important to us. The Kingdom is a key contributor to our surface international business, and we're very well-positioned. And quite frankly, some of the announcements have been favorable from our perspective. Daniel Thomson -- Exane BNP Paribas -- Analyst Thanks, Doug. Operator Our next question comes from the line of Saurabh Pant with Bank of America. Please go ahead. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst Hi, good morning, Doug. Maybe let's spend a little time on the quality of the backlog that you've been talking about on the subsea side, right? I think it's a little bit and resulted pulling the margins you are delivering, but also the new technology work that you're winning. So, if you can spend a moment on a phrase you mentioned in your press release that the heightened focus on project selectivity, how are you doing that? What's the focus? Is it more about terms and conditions? Or are we talking about just integrated projects versus the stand-alone projects? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. Great question. We talk about it every day. as we look at the different opportunities that we have in front of us. Look, it's a combination of all of the above. But let's start with the main thing that really drives we would deem as quality because we believe -- and we've demonstrated it's best for the project in terms of shortening cycle time, accelerating time to first production and it greatly simplifies our execution model is the Subsea 2.0 configured to order. So, clearly, the higher the 2.0 orders, the higher the quality the backlog. And that allows us to go from engineer to order to configure to order. As I've talked about before on this call, that allows us to eliminate nine months of engineering. So, we take a 1.0 order, which is how the rest of the industry is operating, they have to spend nine months or we would have to spend nine months doing detailed engineering because you're building a first article. It's never been built before. So, you have to go through that before you place a single purchase order with the Subsea 2.0 configure to order a platform. And again, you can't just say, I have it. You have to have a platform, you have to have critical scale that allows you to not only simplify the internal, as I talked about, putting twice the volume through our existing manufacturing footprint but it also allows us to simplify and to secure a much more reliable and competent partners in our supply chain. So, it's really a combination of the two that lead to the quality. In addition to that, an integrated project, we just have many more levers. We take on the full scope. We have the ability to be able to schedule activity that best works for us, and that's why it was so important to consummate the relationship and create TechnipFMC because very difficult to do when you're not a single entity with a single set of financial reporting and a single set of objectives because then you have underlying competing interest. So, we have that. And then on top of that, sure. The terms and conditions of the contracts are important. Our customers understand that. We've talked in the past about what we've done to ensure that the things are being shared in the most appropriate way. And for instance, when it comes to inflation, we put in place several parameters that allow us to be more confident that we're not going to be surprised on that side. So, all in all, it's a combination of the three, but it's very clear for us where our focus is, and as you hear us announce these iEPCI and iEPCI 2.0 and 2.0 awards, it's just very, very favorable to the future and to the surety of our execution. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst No, that's very helpful. Just a very quick follow-up, Doug. I know your $30 billion in your order outlook for subsea does not include any of the frontier basins. But the new flow, especially from Namibia has been particularly positive. Can you share any updated thoughts on your outlook in terms of the front year basis? I know it's beyond '25, but any updated thoughts there? Doug Pferdehirt -- Chairman and Chief Executive Officer Sure. lots of discussion, lots of activity. We're using our playbook from Guyana and Mozambique, both of which we were the first mover. We understand how to do this in these emerging markets. We're executing the same playbook in the other emerging markets. And I would say, net-net, from most recently, the indications from our clients that they have stated publicly, I'm not saying anything that's not public I would say, is more favorable trending in a very favorable fashion. So, we look forward to the contribution from those emerging markets in the latter part of the decade. Saurabh Pant -- Bank of America Merrill Lynch -- Analyst All right. OK, perfect. No, thank you. I'll turn it back. Operator Our last question will come from the line of Bertrand Hodee with Kepler Chevreux. Please go ahead. Bertrand Hodee -- Kepler Cheuvreux -- Analyst Yes, hello, Doug. I have probably a follow-up on Namibia. Based on your early discussion and clearly no need to mention any operator name here. But conceptually, from your understanding, do you believe it will require specific technologies and/or the iEPCI model or Subsea 2.0 will be well suited for future Namibia development? Doug Pferdehirt -- Chairman and Chief Executive Officer Thank you, Bertrand. Speaking of Namibia in particular, the one well-known challenge will be the water depth. So, these are very deep. It's very deep within the operating parameters of 2.0, so no concern there. And certainly, we believe the iEPCI model, as we've demonstrated in other emerging markets is clearly a very favorable model and one that we would expect would unlock the greatest value and accelerate time to first oil for our customers, which drives their project economics. So, iEPCI 2.0, but working very closely with our clients. So, they're obviously learning as they're doing their extended well tests in terms of the producibility of the reservoirs, the compartmentalization, the geochemistry. So, there are things we're learning along the way, but we are actively engaged with them to ensure that we'll be ready to provide world-class subsea support. Bertrand Hodee -- Kepler Cheuvreux -- Analyst Thank you. Operator I would now like to turn the call over to Matt Seinsheimer for closing remarks. Matt Seinsheimer -- Vice President, Investor Relations This concludes our fourth quarter conference call. A replay of the call will be available on our website beginning at approximately 8:00 p.m. Greenwich Mean Time today. If you have any further questions, please feel free to contact any member of the investor relations team. Thanks for joining us. You may now end the call.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning. And welcome to the General Dynamics first-quarter 2024 earnings conference call. [Operator instructions] Please note this event is being recorded and I would now like to turn the conference over to Nicole Shelton, vice president of investor relations. Please go ahead. Nicole Shelton -- Vice President, Investor Relations Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics first quarter 2024 conference call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K, 10-Q, and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Phebe Novakovic, our chairman and chief executive officer; and Kim Kuryea, chief financial officer. I will now turn the call over to Phebe. Phebe Novakovic -- Chairman and Chief Executive Officer Thank you, Nicole. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of $2.88 per diluted share on revenue of $10.7 billion, operating earnings of $1,036 million, and net earnings of $799 million. These results compare quite favorably to the year-ago quarter. Revenue is up 8.6% against the first quarter last year. Operating earnings are up 10.4%. Net earnings are up 9.5%. As a result, earnings per diluted share are up $0.24 or 9.1%, more than the year-ago quarter. The operating margin for the entire company was 9.7%, a 20-basis-point improvement over the year-ago quarter. Overall, these numbers represent a very strong quarter and a good start to 2024. However, we fell below our own expectations for the quarter and below analyst consensus, which is predicated, at least in part, on our forecast. The rather obvious explanation is that we forecast 15 to 17 G700 deliveries in the quarter, which did not happen. We received FAA Certification for the G700 at the very end of the quarter, too late to make any G700 deliveries. This obviously impacted revenue and earnings in the Aerospace group in the quarter. The good news is that we now have certification, and the delay in deliveries does not change our outlook for the year. Gulfstream still plans to deliver 50 to 52 G700s this year, so our Aerospace forecast for the year remains unchanged. I'll give you a little more color on this later in my remarks. And other good news, as you can see, was strong performance across the defense portfolio. In short, we performed very well in the quarter over those things within our control. At this point, let me ask Kim Kuryea, our CFO, to provide details on our order activity, solid backlog, and cash activity before I come back with segment observations. Kim Kuryea -- Chief Financial Officer Thank you, Phebe, and good morning. I'll start with orders and backlog. We had a solid quarter from an orders perspective, with an overall book-to-bill ratio of one-to-one for the company. Order activity was particularly strong in the Combat Systems group, with a book-to-bill of 1.6 to 1, and in the Aerospace and Technology segments, which each had a book-to-bill of 1.2 to 1. We ended the quarter with total backlog of $93.7 billion, up slightly from year-end and up 4% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at approximately $134 billion, up 1.5% from year-end. Turning to our cash performance for the quarter, we had an expected slow start to the year, absent the delayed certification and entry into service of the G700 and continued G700 inventory build. So let's start with Technologies. We continued to see strong cash performance from that group in the quarter. As anticipated, Combat Systems and Marine Systems both built working capital in the quarter, based on their unique mix of contract timing versus expected payments. Finally, moving to Aerospace, the lack of G700 deliveries drove us to use cash in the quarter. As a result, our free cash flow for the quarter was a negative $437 million. Since all of what I described is timing-related, we still have an expectation for the year of a cash conversion rate around 100%. We expect most of the negative free cash flow to reverse in the second quarter, followed by substantially improving free cash flow in each of the third and fourth quarters. Now to discuss our capital deployment activities. Capital expenditures were $159 million or 1.5% of sales in the quarter. Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year, as we anticipate spending between 2% and 2.5% of revenue on capex this year. Over 50% of that expected spend will be for infrastructure at our three shipyards, as we continue to invest to support the Navy's submarine and shipbuilding plan. Also in the quarter, we paid $361 million in dividends and repurchased approximately 390,000 shares of stock for $105 million at just under $269 per share. When you add it all up, we ended the quarter with a cash balance of around $1 billion and a net debt position of $8.2 billion. Our net interest expense in the quarter was $82 million, compared with $91 million for the same quarter last year. The reduction in interest expense was attributed to our lower debt balances. Finally, turning to income taxes, we had a 17.5% effective tax rate in the quarter, right in line with our full-year guidance, which reflects higher taxes on foreign earnings. Phebe, that concludes my remarks. I'll turn it back over to you. Phebe Novakovic -- Chairman and Chief Executive Officer Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate, first, Aerospace. Aerospace did very well in the absence of the G700 delivery. It had revenue of $2.1 billion and operating earnings of $255 million with a 12.2% operating margin. Revenue is $192 million more than last year's first quarter, a 10.1% increase. To give you a little detail here, the increase was driven by an increase in new aircraft deliveries and an increase in services at both Gulfstream and Jet Aviation, partially offset by significantly lower special mission aircraft activity, which is always lumpy. The 24 deliveries in the quarter are fewer than planned, but three more than the year-ago quarter. The mix in the quarter favored large cabin and the 650 in particular, which helped both revenue and earnings. Operating earnings of $255 million are up $26 million over last year's first quarter, an 11.4% increase. Earnings on both new aircraft and aircraft services enjoyed good increases, offset in part by lower earnings on special mission, higher G&A, and net R&D. While Gulfstream will continue to experience part shortages that cause significant out-of-station work, which is inherently less efficient, the supply chain is clearly improving and much more predictable. As is now apparent, we plan to deliver a considerable number of G700s in 2024. The first 20 to be delivered are fully built and deliveries have begun. By the end of this month, the next seven to eight will be ready. We plan to deliver these 50 to 52 planes over the quarters in relatively even numbers with improving margins quarter-over-quarter as we go along. The first 20, what we call the lot one, carries some cost and retrofit burden that will not affect subsequent aircraft deliveries. So expect margins in the second quarter to be similar to the first quarter with significant improvement in Q3 and Q4. Aerospace had a decent quarter from an orders perspective with a book-to-bill of 1.2 to 1 in dollar terms. Sales activity and customer interest is evident this quarter, but concerns over persistent inflation and monetary policy in the U.S., together with concerns about conflict in the Middle East, has slowed the consummation of transactions to some degree. It is also worth noting that a significant portion of the demand we see is fleet replenishment for corporations. These multi-aircraft deals usually proceed at a slower pace. The G800 flight test and certification program continues to progress well. The aircraft design, manufacturing, and the overall program are very mature. We continue to target certification of G800 for nine months after the G700 certification, although I'm increasingly reluctant to give estimates about these things that are ultimately out of our control. In short, the Aerospace team had a good quarter. G700 FAA certification is in the rearview mirror and we hope EASA certification is hard on its heels and we expect nicely improving margins, particularly in the second half. Next, Combat Systems. Combat had revenue of $2.1 billion, up almost 20% over the year-ago quarter. Earnings of $282 million are up 15.1%. Margins at 13.4% are down 60 basis points over the year-ago quarter. It is interesting to observe that this very strong increase in revenue is in comparison to last year's first quarter, which enjoyed a 5% increase over 2022. We saw increased revenue performance in each of the three businesses. The increase came from higher volume on new international tank programs, higher artillery program volume, and higher volume on piranha programs and bridges. We also experienced very strong order performance. Orders in the quarter drove total backlog to $15.6 billion, up $1.5 billion from this time the year-ago quarter. Demand for Combat Systems and products continues to increase, particularly in Europe and in some lines of business in the U.S. Orders for wheeled and tracked combat vehicles are up significantly, reflecting the heightened threat environment. In addition to several new combat vehicle starts, demand for Abrams also continues. We've seen tank orders from new users and a number of countries will be introducing Abrams into their combat fleets for the first time. Since Q1 last year, we have received almost $1 billion in orders from both U.S. allies through FMS and the U.S. Army. In the U.S., we are rapidly increasing ammunition production with the opening of our Texas facility, which will increase current 155-millimeter ammo capacity by 83%. As the year goes on, we will continue to work with our Army customer to further increase ammo capacity to meet their requirements. Turning to Marine Systems, once again, our shipbuilding units are demonstrating impressive revenue growth. Let me repeat the recent history that I gave you last year at this time with respect to growth in this decade. The first quarter of 2020 was up 9.1% against Q1 of 2019, Q1 2021 was up 10.6% over Q1 2020, Q1 2022 was up 6.8% over Q1 2021 and Q1 2023 was up 12.9% over Q1 2022. Finally, this quarter at $3.3 billion is up 11.3% over Q1 2023. This is an impressive growth ramp by any standard. However, growth ramps of this character bring with them supply chain and operation issues that are challenging. This particular quarter's growth was almost exclusively Columbia-class construction. Operating earnings are $232 million in the quarter, up 10% from the year-ago quarter. Operating margin is basically the same as last year's quarter. We anticipate that this will improve as we progress through the year. As we have talked about on previous calls, the story at the Marine Group is efficiently managing the growth propelled by the U.S. Navy's need for ships, particularly submarines. As a labor-intensive heavy manufacturing industry, the shipbuilding industrial base was hit hard by the demographic impacts of COVID. This, coupled with a number of sole-source suppliers of highly complex components, has made it difficult for the industrial base to keep pace with increasing demand. The significant financial investments we have made in our shipyards over the last 12 years, particularly at Electric Boat, has mitigated the impact on us, but we are still hit by schedule and quality problems in the supply chain. Our job is to minimize the efficiency and schedule impacts of late material by increasing our throughput and we are doing that each and every quarter. In Q1 alone, our productivity increased 11%, but there is more to do. Finally, the Navy's investment in the supply chain has helped and will continue to help as we move forward. For Technologies, we're off to a solid start. Revenue in the quarter of $3.2 billion is down less than 1% from the prior year, but up 2% over the fourth quarter of last year and modestly ahead of our expectations for the start of the year. Operating earnings of $295 million are consistent with last year, yielding a margin of 9.2%. As we have previously discussed, margins will continue to be driven by the mix of IT service activity and hardware volume. The group received $4 billion in orders during the quarter for a book-to-bill ratio of 1.2 to 1. Both businesses experienced strong order activity, in GDIT's case the highest book-to-bill since mid-2019. This led to a total backlog of $13.5 billion, an increase of over 5% from a year ago, and total estimated contract value of $42.7 billion. The story in Technologies is one of steady growth, particularly at GDIT and increasingly at mission systems as they transition from legacy programs to new programs and faster growth lines of business. Both businesses have robust pipelines driven by their respective investments in different technologies. The group's continual focus on margin performance will result in sequential margin expansion throughout the year as they continue to build their backlog and growth. As you know, we never update guidance at this time of year. Apart from what I have already said about Aerospace, I will stick to that custom. We do, however, confirm the guidance we gave you at the end of last quarter and will update it at midpoint of the year as we typically do. This concludes my remarks with respect to what was, in many respects, a rewarding quarter. Let me now turn the call back to Nicole to take your questions. Nicole Shelton -- Vice President, Investor Relations Thank you, Phebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue? Questions & Answers: Operator Thank you. [Operator instructions] And your first question comes from Scott Deuschle with Deutsche Bank. Your line is open. Scott Deuschle -- Deutsche Bank -- Analyst Hey. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Scott Deuschle -- Deutsche Bank -- Analyst Kim, can you clarify the G700 delivery expectation for the second quarter? Is it the 20 that are ready to go plus the seven to eight that will be ready at the end of this month? Phebe Novakovic -- Chairman and Chief Executive Officer So let me kind of tackle that. I alluded to it in my opening statement. But we are -- we have 50 to 52 airplanes that are going to deliver in about equal amounts of the 700 in the second through the fourth quarters. So think about it that way. So I think that will help you. Scott Deuschle -- Deutsche Bank -- Analyst OK. Thank you. And then, Phebe, I was hoping you could spend a moment maybe talking about the growth that Combat Systems is currently seeing in Europe, and perhaps, how you expect that to trend over the coming quarters? Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer So the growth in Europe is clearly driven by the threat environment. We've seen increases in orders for combat wheeled and tracked vehicles and significant bridge orders. We're also seeing increased orders coming out of various countries in Europe for Abrams through the FMS process. So we see that demand signal continuing until the threat environment, frankly, improves. Operator And we will take our next question from Seth Seifman with J.P. Morgan. Your line is open. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning, Seth. Seth Seifman -- JPMorgan Chase and Company -- Analyst Good morning. Thanks very much. Looking to Marine, when we think about the expectation for the profit margin for the year and kind of where we started, are there kind of visible milestones that you see through the remainder of the year that bring that number higher or kind of is it a change in mix or kind of what drives the underlying margin improvement through the year? Phebe Novakovic -- Chairman and Chief Executive Officer So two things. One is the increase in productivity at each of the shipyards and we see that and we've been seeing that for the last few quarters, and it's also fewer disruptions from the supply chain. So those are the two primary factors. Seth Seifman -- JPMorgan Chase and Company -- Analyst All right. OK. OK. Great. And then just when we think about it, I think, you mentioned some of the headwinds to demand at Gulfstream from here in terms of monetary policy, geopolitical issues. Just to kind of affirm, the expectation for 160 deliveries this year and the way that the backlog will trend through the year, the expectation is that that's a very sustainable number with potential for that to grow in the years beyond? Phebe Novakovic -- Chairman and Chief Executive Officer So let me clarify a bit. There are -- I don't see concerns about inflation or monetary policy impacting demand. It really is just impacting the time from the initiation of a potential interest to the closure of an order, which is also impacted somewhat by large fleet -- airplane fleet orders from corporate customers. So think about it that way, more of a timing issue with the completion of the deals and not ness -- and not a headwind to overall demand. So I think that's an important nuance and we're still sticking to our delivery guidance for the year. And I think, on a going forward basis, we -- as we've intimated before, we see that those deliveries increasing over time. Operator And we will take our next question from Robert Stallard with Vertical Research. Your line is open. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Rob Stallard -- Vertical Research Partners -- Analyst Phebe, I was wondering if you could comment on the recently passed or soon to be signed supplemental and what implications that could have for the Combat business, but also on the submarine side, what sort of additional funding could come from the U.S. Navy? Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer So let me take them in the inverse order. On the submarine side, the preponderance of the funding in the supplemental is to help stabilize the industrial base, ensuring that we continue to drive order activity on a consistent and repeatable basis. So that is really on the submarine side. In Combat, I think, you can see there's a fair amount of ammo funding and we had fully anticipated that. Rob Stallard -- Vertical Research Partners -- Analyst OK. And then just secondly, I was wondering if you could give us an update on the AJAX program in the U.K.? Phebe Novakovic -- Chairman and Chief Executive Officer So it is proceeding extremely well through test and continue to work with that customer, but they're very pleased with the performance of the vehicle. Rob Stallard -- Vertical Research Partners -- Analyst OK. That's great. Thank you very much. Operator And we will take our next question from Sheila Kahyaoglu with Jefferies. Your line is open. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, Phebe. Thanks for the -- Phebe Novakovic -- Chairman and Chief Executive Officer Hi, Sheila. Sheila Kahyaoglu -- Jefferies -- Analyst Thank you for the time. I wanted to ask one about Aerospace, and I'm sorry for putting you on the spot with the mental math, but last year or last quarter, you talked about the G700 profit contribution being around 25%. So when we think about the Q1 performance, it was actually really good relative to our number of 12.1% margins. It would imply you see a deceleration in the underlying business for Aerospace, just given G700 comes in at 50 units. So I guess how do we think about the mixed movement throughout the year for Aerospace? Phebe Novakovic -- Chairman and Chief Executive Officer Well, let's talk about the first predicate in that question. I don't believe we've ever disclosed any margin on a particular airplane and we haven't there. I think we can't take and discern revenue and earnings in any given quarter as attributable to one airplane. So I think you need to think about it holistically. But we see the -- we don't see any real changes in the mix throughout the year and we'll do a detailed bottom-up review in Q2. But for right now, we're sticking with both our mix, our earnings, our margin and revenue expectations. So we're off to a pretty good start, I'd say, and we're very encouraged at how the outlook looks for the rest of the year. Sheila Kahyaoglu -- Jefferies -- Analyst Can we assume that G700 is accretive to the 15% full-year guidance? Phebe Novakovic -- Chairman and Chief Executive Officer So think about it this way. This is ultimately going to be a very profitable program. But as I explained in my remarks, the first lot, 20 or so carries with it additional costs. We'll see those largely in Q2. So think about Q2 as an increase in revenue of about $1 billion to $1.1 billion and in earnings of about $100 million to $110 million, and then progress nicely thereafter. And again, that's all impacted by the multiplicity of factors in our Aerospace business that drive margins. Operator And we will take our next question from David Strauss with Barclays. Your line is open. David Strauss -- Barclays -- Analyst Thanks. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. David Strauss -- Barclays -- Analyst Phebe, so Rob's question on the supplemental and the submarine industrial-based money. So there's money there. There's a lot of money in the base budget, it appears. You're spending additional capex today that you'll eventually recover through working capital, profit. How does -- I mean, it's a lot of money. I mean, how does that manifest itself in your numbers as we think about over the next couple years? Phebe Novakovic -- Chairman and Chief Executive Officer So for the supply chain support, it has minimal impact on us. It's, however, extremely important because the stabilization of the supply chain is critical to the resumption of full cadence on Virginia and the increased cadence on Columbia. So funding is also robust for submarines. We've got one projected in 2025 and then it would be extremely helpful to get a full ship set of Virginias also appropriated because that, again, helps stabilize the industrial base with repeatable revenue that they can plan around. David Strauss -- Barclays -- Analyst OK. Thanks for that. Last quarter, you made some more kind of positive comments regarding the potential for share repurchase to step up. Obviously, you did a little bit this quarter, but not that much. How are you thinking about that now? Did that have to do with the fact that you ended up burning cash in Q1? Just how you're thinking about share repo and the balance sheet from here? Thanks. Phebe Novakovic -- Chairman and Chief Executive Officer So the way we think about share repurchases and this will be true going forward, is really in the regular order. Recall what we were facing in Q1 and that was we're looking down the throat of a potential and at some point looked very likely, government shutdown. And so I think that credence and conservatism in the face of that kind of uncertainty is really key. But the cash performance for the remainder of the year is going to be very strong and we will act accordingly. Operator And we will take our next question from Noah Poponak with Goldman Sachs. Your line is open. Noah Poponak -- Goldman Sachs -- Analyst Hi. Good morning, everyone. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Kim Kuryea -- Chief Financial Officer Good morning. Noah Poponak -- Goldman Sachs -- Analyst Phebe, what's the framework for the pace of G700 deliveries beyond this year compared to this year? Not asking for quarterly numbers or anything like that, but just given this year has some abnormalities compared to a recurring airplane? And then, Kim, just what's the updated view on free cash flow and income conversion for the year? Phebe Novakovic -- Chairman and Chief Executive Officer Well, so let me talk about 700. We never, except I think on one or two occasions about five years, six years ago, give the future year expectations. But 700 is a very, very successful program, and it will continue to execute well. I'll turn it over to Kim on cash. Kim Kuryea -- Chief Financial Officer On cash. Thank you, Phebe. So with respect to cash and the expectation, we still anticipate achieving about 100% of free cash flow conversion in 2024. We had expected the first quarter to be negative even before considering the fact that we didn't deliver any G700. So we had planned for a negative free cash flow in the first quarter and that was mostly driven by some contract timing in the Combat System segment and some in the Marine System segment. But we expect that most of that negative cash will reverse in the second quarter with a stronger third quarter and then a steeper ramp in the fourth quarter. Operator We will take our next question from Myles Walton with Wolfe Research. Your line is open. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Myles Walton -- Wolfe Research -- Analyst Phebe, could you comment on or Kim, could you comment on the margin expansion implied at Combat Systems as you move through the rest of the year? I think it has to be 80 basis points to 100 basis points on average up year on year for the rest of the year. And maybe underlying dynamics of, given the volume, why we didn't see more of a drop-through margin in the first quarter. Phebe Novakovic -- Chairman and Chief Executive Officer So what drove margin in the first quarter were two things. Mixed as we came off of older legacy programs, particularly in the vehicle world and in the U.S., and then began ramping up newer programs, vehicle programs in the U.S. And then a significant amount of the revenue growth came from facilities investment, which by definition carries a lower margin than production. So both of those things will reverse throughout the course of the year and Combat margins will increase. Our expectation is quarter-over-quarter. And remember, this is a high operating leverage group, so they ought to do quite well here. Myles Walton -- Wolfe Research -- Analyst OK. And one clarification on Gulfstream's backlog, if I could. I think that there was some adjustment downward in the backlog. Were those cancellations or four x, maybe six large jet cancellations or thereabouts? Phebe Novakovic -- Chairman and Chief Executive Officer I don't think that's the way to look at it. Why don't Nicole get back to you on that? But there wasn't -- we didn't have any particular notable cancellations. So let us unpack that one with you a little later. Myles Walton -- Wolfe Research -- Analyst OK. Thanks. Operator We will take our next question from Ron Epstein with Bank of America. Your line is open. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey. Yeah. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Ron Epstein -- Bank of America Merrill Lynch -- Analyst So, Phebe, with the increased demand on munitions and so on and so forth, what are you doing to mitigate any of the issues that could arise from growth in those markets? Just like we've seen in the Navy markets, given all the demand and growth, there's been supply chain issues? Are you expecting any -- Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So in the combat world, it's a little bit more of a robust supply chain in general that we typically have not had difficulty with, typically. We know a priori the suppliers who could conceivably cause issues and we've been working with them to ensure that they can manage this growth. But we're pretty comfortable that we can execute the growth. Our focus is really on operations and execution, and those will be the two key drivers of the profitability in that group. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Got it. Got it. And then maybe back to kind of the naval side of the house and the supply chain, can you give us any color on where there are actual weaknesses in the supply chain where investment has to be made? Phebe Novakovic -- Chairman and Chief Executive Officer So I'd say in the large, in the single source, sole source suppliers who are by definition critical, and I think the Navy has focused quite intensely on those particular products and supply chain items, and I think, they've been pretty explicit about where some of that might be and I think it's best to think about it that way. But we do believe that working with the Navy customer, the continued infusion into that supply chain will help stabilize. But they are the pacing item now for Electric Boat. Operator And we will take our next question from Doug Harned with Bernstein. Your line is open. Doug Harned -- AllianceBernstein -- Analyst Good morning. Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Doug Harned -- AllianceBernstein -- Analyst On Marine -- good morning. On Marine, the Navy recently described some shipbuilding delays really across programs and the one that really stood out was Columbia class with delays reported on the turbines and the bow. Can you give us a sense of changes you've seen in schedule that affect you kind of across the program base and particularly on Columbia? Phebe Novakovic -- Chairman and Chief Executive Officer So I think, you've articulated what the Navy has said. I will tell you our throughput and productivity has been strong on Columbia. It is the -- it enjoys the highest national security priority. So we have done pretty well on Columbia and are increasing our throughput on Columbia. So then it's really those pacing items that are out there and we're working with our Navy customer to see if there are additional things we can do to recover some schedule and if there are any workarounds. But this is going to be a bit of a slog for the supply chain. Doug Harned -- AllianceBernstein -- Analyst Well, and then also on shipbuilding, inflation has affected shipbuilding costs a lot over the last few years. We've seen pricing on new awards go up. And when you look forward in the budget, is there a concern that you're basically, if you are going to -- if the Navy's budget's really going to be able to afford the kinds of inflation increases that may come along with the continued ramp in shipbuilding? Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So I think you've known over the years, I tend not to comment on individual service budgeting. But inflation certainly has been a factor and to the extent that we can increase throughput to offset some of that, we will. But the Navy's well aware of the inflation impact and I think is working hard with the whole shipbuilding industrial base to adjust some of that. Operator And we will take our next question from Kristine Liwag with Morgan Stanley. Your line is open. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Kristine Liwag -- Morgan Stanley -- Analyst Phebe, following up on the Marine question, in addition to the delay in the Columbia class, the DoD did request one less Virginia class for the fiscal year 2025 budget request. So I mean, if we take all this into perspective, can you provide some context on what this means for Marine revenue growth over the next few years? And there's a margin with a seven handle on it, is that more the new norm for this business? Phebe Novakovic -- Chairman and Chief Executive Officer So let me address that in the inverse order. Margins will be improving at our shipyards. We have every expectation, all of our shipyards, NASCO, Bath and Electric Boat. One of the things that we've talked frequently about is the margin impact of quality and schedule problems coming out of the supply chain and as the supply chain stabilizes, that will help as well. And what was your first part of your question? Kristine Liwag -- Morgan Stanley -- Analyst The revenue cadence, including the just one Virginia class -- Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So -- OK. So it has no impact in the short-term for Electric Boat because we've got plenty of work in front of us. It could have an impact in the outer years outside of our planning horizon. The second Virginia ship set, so that we're buying it to a year, I think, is very important for the overall health of the industrial -- submarine industrial base. Kristine Liwag -- Morgan Stanley -- Analyst Thank you, Phebe. Operator And we will take our next question from Ken Herbert with RBC. Your line is open. Ken Herbert -- RBC Capital Markets -- Analyst Yeah. Hi. Good morning, Phebe and Kim. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Ken Herbert -- RBC Capital Markets -- Analyst If we look, Phebe, at your comments around timing in Gulfstream, is it still fair to assume that you should be looking at a book-to-bill at one or greater for Gulfstream in 2024? Phebe Novakovic -- Chairman and Chief Executive Officer So it's a good planning assumption. It is how we are thinking about our internal planning, but let's see how we do as we start to significantly ramp up production and deliveries. So but as I said, that's a good planning assumption. Ken Herbert -- RBC Capital Markets -- Analyst OK. Great. And just a clarification for, Kim, the comments sound like the free cash flow ramp really sort of accelerates in the second half of the year, but with all the 700 deliveries expected this quarter, free cash flow should be positive in the second quarter, correct? Phebe Novakovic -- Chairman and Chief Executive Officer Yes. That's pretty much what you should assume. Ken Herbert -- RBC Capital Markets -- Analyst OK. Great. Thank you very much. Operator And we will take our next question from Robert Spingarn with Melius Research. Your line is open. Rob Spingarn -- Melius Research -- Analyst Hi. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Rob Spingarn -- Melius Research -- Analyst Phebe, you said recently that even though the Aerospace supply chain is improving, your ramp this year could challenge that improvement. I was wondering if you could elaborate on that a little bit? Phebe Novakovic -- Chairman and Chief Executive Officer So we still have, look, it's definitely improving. Quality is improving and schedule reliability is improving. But make no mistake, we still have a lot of out-of-station work and that impacts the profitability and margin on airplanes that are experiencing that. So we definitely see improvement. We are optimistic that they can keep pace, but it's not without its margin challenges. Rob Spingarn -- Melius Research -- Analyst OK. And then also, I think you commented, you had good bookings in Aerospace in the quarter, reflecting strong demand. But I think you've said, the U.S. has been very strong. How is aircraft demand elsewhere in the world? Phebe Novakovic -- Chairman and Chief Executive Officer So there's no real change, I think, from the previous quarters. U.S. corporations, private and public. High net worth individuals, both U.S. and outside the U.S. So no real changes, no real surprises, sort of the typical customer base that we see is, I think, the way you should think about it. Rob Spingarn -- Melius Research -- Analyst Thank you. Operator And we will take our next question from Peter Arment with Baird. Your line is open. Peter Arment -- Robert W. Baird and Company -- Analyst Thanks. Good morning, Phebe and Kim. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Peter Arment -- Robert W. Baird and Company -- Analyst Hey, Phebe. Phebe, the Army wants to reach 100,000 155-millimeter shells by, I think, October 2025. Can you update us on how your ramp is going? You discussed that that supply chain is a little more robust. Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So our ramp there is more about increasing the facilities that we have. And as I noted in my remarks, the opening of our Texas facility, which we worked very, very hard to expedite, and frankly, did it in almost record time, was very important because it increased the throughput and the productivity of the number of shells by 83%. So we're on track with the Army to get where we need to be and our objective is to move even faster, and so far we have been. But the Army has been a critical and extremely important partner here in what is really a national security imperative. Peter Arment -- Robert W. Baird and Company -- Analyst Yeah. Thanks for that. And then just if you could make any comments on the G280 program, just given the conflict that's going on in the Middle East? Phebe Novakovic -- Chairman and Chief Executive Officer So we had anticipated the impacts on the 280 in our guidance to you, but I will tell you that they are doing quite well and are slightly ahead of our schedule. We're still sticking to our deliveries, but I think it's notable that they're managing pretty well in this tough environment. Peter Arment -- Robert W. Baird and Company -- Analyst Appreciate the call. Thanks, Phebe. Operator We will take our next question from Cai von Rumohr with TD Cowen. Your line is open. Cai von Rumohr -- TD Cowen -- Analyst Yes. Thank you, Phebe, and good quarter. Phebe Novakovic -- Chairman and Chief Executive Officer Thanks, Cai. Cai von Rumohr -- TD Cowen -- Analyst So could you update us on the status of the G400? How's it doing and is it fair to assume that it might have a gap of approximately 12 months between its certification and that of the G800? Phebe Novakovic -- Chairman and Chief Executive Officer I think I said last quarter, I'm done predicting process over which we have little control. We've tried in the past to give you indicators of our internal or actually our internal dates, but so I'm kind of out of the detailed predicting mode. But I will say the program is doing extremely well and it will fly in the third quarter and I think we'll be flying a pretty mature airplane. Cai von Rumohr -- TD Cowen -- Analyst Excellent. And then your R&D was up a fair amount in the first quarter. Could you give us some color of the pattern of the R&D at Gulfstream this year and looking forward? How should we think about that? Phebe Novakovic -- Chairman and Chief Executive Officer Well, pretty much steady as she goes, particularly this year. We've got a number of, as you know, programs in the certification process. And so I'd see that at least through this year is pretty consistent. No real surprises here. Steady as she goes. Cai von Rumohr -- TD Cowen -- Analyst OK. Thank you. Operator And we will take our next question from Jason Gursky with Citigroup. Your line is open. Jason Gursky -- Citi -- Analyst Good morning, everybody. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Jason Gursky -- Citi -- Analyst Phebe, I wanted to just quickly go back to your comments on Aerospace and what I guess you'd describe as an elongation of your sales cycle. But you could just talk a little bit about the overall size of the pipeline and how that is evolving. I understand things are taking longer to close, but I'd also be kind of curious to know whether there are an increasing number of people that are interested? Phebe Novakovic -- Chairman and Chief Executive Officer So the pipeline remains robust, and I look to that as encouraging, a good sign. It's been that way for a while. People want our airplanes and that's driving demand. Jason Gursky -- Citi -- Analyst OK. Great. So good metrics going on there, it sounds like. Then just really quickly, maybe this is a question targeted at Technologies, but I'd love to get some updated thoughts from you on artificial intelligence, AI, the adoption that you're seeing with your customers, how you see this kind of playing out and affecting your business and maybe this, as I suggest, focused on Technologies. Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So we have been investing in AI to support our customers, and particularly, at GDIT and somewhat at Mission Systems. And I would say that we're working closely with our customers. They define what the art of the possible is for them in AI. And as you all know, there's some governance challenges around that, but the more sophisticated we get in our ability to tailor AI solutions, I think, the more comfortable our customer becomes and will ultimately drive some increased revenue. I haven't seen too much of that yet, because there are -- I think the government is not unlike other industries where its adoption is people are careful and they think properly so. And I would argue that would be true across the entirety of our business. Abby, I think, we have, sorry, OK, I think, we have time for just one more question. Operator Thank you. Our final question today comes from Gavin Parsons with UBS. Your line is open. Gavin Parsons -- UBS -- Analyst Thanks. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Gavin Parsons -- UBS -- Analyst Phebe, you highlighted the stronger second-half Aerospace margins, that's a more normal volume and G700 production. Is that more of an appropriate starting point for 2025 than the full year 15%? Phebe Novakovic -- Chairman and Chief Executive Officer Nice try. So look, yeah, I think, once you get through the first lot, our performance from a margin standpoint will continue to improve. And you'll see that third quarter will be significantly better than second quarter and fourth quarter will be even better still, but we will update you in our regular order. We kind of keep our discipline, as you well know, around updating guidance and I think that that's appropriate. Gavin Parsons -- UBS -- Analyst Yeah. Appreciate that detail. And then just in terms of the 100% cash conversion for the year, what's the opportunity to exceed that, given last year you were well above and you built a lot of G700 inventory? Phebe Novakovic -- Chairman and Chief Executive Officer I think right now we're just focused, given the steep ramp in the second half of the year, we're really focusing on trying to hit that mark at this point in time. Gavin Parsons -- UBS -- Analyst Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer And we should get there. Great. Well, thank you, everyone, for joining our call today. As a reminder, please refer to the General Dynamics website for the first quarter earnings release and highlights presentation. If you have additional questions, I can be reached at (703) 876-3152. Answer:

the General Dynamics first-quarter 2024 earnings conference call

Operator Good morning. And welcome to the General Dynamics first-quarter 2024 earnings conference call. [Operator instructions] Please note this event is being recorded and I would now like to turn the conference over to Nicole Shelton, vice president of investor relations. Please go ahead. Nicole Shelton -- Vice President, Investor Relations Thank you, Operator, and good morning, everyone. Welcome to the General Dynamics first quarter 2024 conference call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K, 10-Q, and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Phebe Novakovic, our chairman and chief executive officer; and Kim Kuryea, chief financial officer. I will now turn the call over to Phebe. Phebe Novakovic -- Chairman and Chief Executive Officer Thank you, Nicole. Good morning, everyone, and thanks for being with us. As you can discern from our press release, we reported earnings of $2.88 per diluted share on revenue of $10.7 billion, operating earnings of $1,036 million, and net earnings of $799 million. These results compare quite favorably to the year-ago quarter. Revenue is up 8.6% against the first quarter last year. Operating earnings are up 10.4%. Net earnings are up 9.5%. As a result, earnings per diluted share are up $0.24 or 9.1%, more than the year-ago quarter. The operating margin for the entire company was 9.7%, a 20-basis-point improvement over the year-ago quarter. Overall, these numbers represent a very strong quarter and a good start to 2024. However, we fell below our own expectations for the quarter and below analyst consensus, which is predicated, at least in part, on our forecast. The rather obvious explanation is that we forecast 15 to 17 G700 deliveries in the quarter, which did not happen. We received FAA Certification for the G700 at the very end of the quarter, too late to make any G700 deliveries. This obviously impacted revenue and earnings in the Aerospace group in the quarter. The good news is that we now have certification, and the delay in deliveries does not change our outlook for the year. Gulfstream still plans to deliver 50 to 52 G700s this year, so our Aerospace forecast for the year remains unchanged. I'll give you a little more color on this later in my remarks. And other good news, as you can see, was strong performance across the defense portfolio. In short, we performed very well in the quarter over those things within our control. At this point, let me ask Kim Kuryea, our CFO, to provide details on our order activity, solid backlog, and cash activity before I come back with segment observations. Kim Kuryea -- Chief Financial Officer Thank you, Phebe, and good morning. I'll start with orders and backlog. We had a solid quarter from an orders perspective, with an overall book-to-bill ratio of one-to-one for the company. Order activity was particularly strong in the Combat Systems group, with a book-to-bill of 1.6 to 1, and in the Aerospace and Technology segments, which each had a book-to-bill of 1.2 to 1. We ended the quarter with total backlog of $93.7 billion, up slightly from year-end and up 4% from a year ago. Our total estimated contract value, which includes options and IDIQ contracts, ended the quarter at approximately $134 billion, up 1.5% from year-end. Turning to our cash performance for the quarter, we had an expected slow start to the year, absent the delayed certification and entry into service of the G700 and continued G700 inventory build. So let's start with Technologies. We continued to see strong cash performance from that group in the quarter. As anticipated, Combat Systems and Marine Systems both built working capital in the quarter, based on their unique mix of contract timing versus expected payments. Finally, moving to Aerospace, the lack of G700 deliveries drove us to use cash in the quarter. As a result, our free cash flow for the quarter was a negative $437 million. Since all of what I described is timing-related, we still have an expectation for the year of a cash conversion rate around 100%. We expect most of the negative free cash flow to reverse in the second quarter, followed by substantially improving free cash flow in each of the third and fourth quarters. Now to discuss our capital deployment activities. Capital expenditures were $159 million or 1.5% of sales in the quarter. Similar to last year, you should expect capital expenditures to increase in subsequent quarters throughout the year, as we anticipate spending between 2% and 2.5% of revenue on capex this year. Over 50% of that expected spend will be for infrastructure at our three shipyards, as we continue to invest to support the Navy's submarine and shipbuilding plan. Also in the quarter, we paid $361 million in dividends and repurchased approximately 390,000 shares of stock for $105 million at just under $269 per share. When you add it all up, we ended the quarter with a cash balance of around $1 billion and a net debt position of $8.2 billion. Our net interest expense in the quarter was $82 million, compared with $91 million for the same quarter last year. The reduction in interest expense was attributed to our lower debt balances. Finally, turning to income taxes, we had a 17.5% effective tax rate in the quarter, right in line with our full-year guidance, which reflects higher taxes on foreign earnings. Phebe, that concludes my remarks. I'll turn it back over to you. Phebe Novakovic -- Chairman and Chief Executive Officer Thanks, Kim. Now let me review the quarter in the context of the business segments and provide detailed color as appropriate, first, Aerospace. Aerospace did very well in the absence of the G700 delivery. It had revenue of $2.1 billion and operating earnings of $255 million with a 12.2% operating margin. Revenue is $192 million more than last year's first quarter, a 10.1% increase. To give you a little detail here, the increase was driven by an increase in new aircraft deliveries and an increase in services at both Gulfstream and Jet Aviation, partially offset by significantly lower special mission aircraft activity, which is always lumpy. The 24 deliveries in the quarter are fewer than planned, but three more than the year-ago quarter. The mix in the quarter favored large cabin and the 650 in particular, which helped both revenue and earnings. Operating earnings of $255 million are up $26 million over last year's first quarter, an 11.4% increase. Earnings on both new aircraft and aircraft services enjoyed good increases, offset in part by lower earnings on special mission, higher G&A, and net R&D. While Gulfstream will continue to experience part shortages that cause significant out-of-station work, which is inherently less efficient, the supply chain is clearly improving and much more predictable. As is now apparent, we plan to deliver a considerable number of G700s in 2024. The first 20 to be delivered are fully built and deliveries have begun. By the end of this month, the next seven to eight will be ready. We plan to deliver these 50 to 52 planes over the quarters in relatively even numbers with improving margins quarter-over-quarter as we go along. The first 20, what we call the lot one, carries some cost and retrofit burden that will not affect subsequent aircraft deliveries. So expect margins in the second quarter to be similar to the first quarter with significant improvement in Q3 and Q4. Aerospace had a decent quarter from an orders perspective with a book-to-bill of 1.2 to 1 in dollar terms. Sales activity and customer interest is evident this quarter, but concerns over persistent inflation and monetary policy in the U.S., together with concerns about conflict in the Middle East, has slowed the consummation of transactions to some degree. It is also worth noting that a significant portion of the demand we see is fleet replenishment for corporations. These multi-aircraft deals usually proceed at a slower pace. The G800 flight test and certification program continues to progress well. The aircraft design, manufacturing, and the overall program are very mature. We continue to target certification of G800 for nine months after the G700 certification, although I'm increasingly reluctant to give estimates about these things that are ultimately out of our control. In short, the Aerospace team had a good quarter. G700 FAA certification is in the rearview mirror and we hope EASA certification is hard on its heels and we expect nicely improving margins, particularly in the second half. Next, Combat Systems. Combat had revenue of $2.1 billion, up almost 20% over the year-ago quarter. Earnings of $282 million are up 15.1%. Margins at 13.4% are down 60 basis points over the year-ago quarter. It is interesting to observe that this very strong increase in revenue is in comparison to last year's first quarter, which enjoyed a 5% increase over 2022. We saw increased revenue performance in each of the three businesses. The increase came from higher volume on new international tank programs, higher artillery program volume, and higher volume on piranha programs and bridges. We also experienced very strong order performance. Orders in the quarter drove total backlog to $15.6 billion, up $1.5 billion from this time the year-ago quarter. Demand for Combat Systems and products continues to increase, particularly in Europe and in some lines of business in the U.S. Orders for wheeled and tracked combat vehicles are up significantly, reflecting the heightened threat environment. In addition to several new combat vehicle starts, demand for Abrams also continues. We've seen tank orders from new users and a number of countries will be introducing Abrams into their combat fleets for the first time. Since Q1 last year, we have received almost $1 billion in orders from both U.S. allies through FMS and the U.S. Army. In the U.S., we are rapidly increasing ammunition production with the opening of our Texas facility, which will increase current 155-millimeter ammo capacity by 83%. As the year goes on, we will continue to work with our Army customer to further increase ammo capacity to meet their requirements. Turning to Marine Systems, once again, our shipbuilding units are demonstrating impressive revenue growth. Let me repeat the recent history that I gave you last year at this time with respect to growth in this decade. The first quarter of 2020 was up 9.1% against Q1 of 2019, Q1 2021 was up 10.6% over Q1 2020, Q1 2022 was up 6.8% over Q1 2021 and Q1 2023 was up 12.9% over Q1 2022. Finally, this quarter at $3.3 billion is up 11.3% over Q1 2023. This is an impressive growth ramp by any standard. However, growth ramps of this character bring with them supply chain and operation issues that are challenging. This particular quarter's growth was almost exclusively Columbia-class construction. Operating earnings are $232 million in the quarter, up 10% from the year-ago quarter. Operating margin is basically the same as last year's quarter. We anticipate that this will improve as we progress through the year. As we have talked about on previous calls, the story at the Marine Group is efficiently managing the growth propelled by the U.S. Navy's need for ships, particularly submarines. As a labor-intensive heavy manufacturing industry, the shipbuilding industrial base was hit hard by the demographic impacts of COVID. This, coupled with a number of sole-source suppliers of highly complex components, has made it difficult for the industrial base to keep pace with increasing demand. The significant financial investments we have made in our shipyards over the last 12 years, particularly at Electric Boat, has mitigated the impact on us, but we are still hit by schedule and quality problems in the supply chain. Our job is to minimize the efficiency and schedule impacts of late material by increasing our throughput and we are doing that each and every quarter. In Q1 alone, our productivity increased 11%, but there is more to do. Finally, the Navy's investment in the supply chain has helped and will continue to help as we move forward. For Technologies, we're off to a solid start. Revenue in the quarter of $3.2 billion is down less than 1% from the prior year, but up 2% over the fourth quarter of last year and modestly ahead of our expectations for the start of the year. Operating earnings of $295 million are consistent with last year, yielding a margin of 9.2%. As we have previously discussed, margins will continue to be driven by the mix of IT service activity and hardware volume. The group received $4 billion in orders during the quarter for a book-to-bill ratio of 1.2 to 1. Both businesses experienced strong order activity, in GDIT's case the highest book-to-bill since mid-2019. This led to a total backlog of $13.5 billion, an increase of over 5% from a year ago, and total estimated contract value of $42.7 billion. The story in Technologies is one of steady growth, particularly at GDIT and increasingly at mission systems as they transition from legacy programs to new programs and faster growth lines of business. Both businesses have robust pipelines driven by their respective investments in different technologies. The group's continual focus on margin performance will result in sequential margin expansion throughout the year as they continue to build their backlog and growth. As you know, we never update guidance at this time of year. Apart from what I have already said about Aerospace, I will stick to that custom. We do, however, confirm the guidance we gave you at the end of last quarter and will update it at midpoint of the year as we typically do. This concludes my remarks with respect to what was, in many respects, a rewarding quarter. Let me now turn the call back to Nicole to take your questions. Nicole Shelton -- Vice President, Investor Relations Thank you, Phebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Operator, could you please remind participants how to enter the queue? Questions & Answers: Operator Thank you. [Operator instructions] And your first question comes from Scott Deuschle with Deutsche Bank. Your line is open. Scott Deuschle -- Deutsche Bank -- Analyst Hey. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Scott Deuschle -- Deutsche Bank -- Analyst Kim, can you clarify the G700 delivery expectation for the second quarter? Is it the 20 that are ready to go plus the seven to eight that will be ready at the end of this month? Phebe Novakovic -- Chairman and Chief Executive Officer So let me kind of tackle that. I alluded to it in my opening statement. But we are -- we have 50 to 52 airplanes that are going to deliver in about equal amounts of the 700 in the second through the fourth quarters. So think about it that way. So I think that will help you. Scott Deuschle -- Deutsche Bank -- Analyst OK. Thank you. And then, Phebe, I was hoping you could spend a moment maybe talking about the growth that Combat Systems is currently seeing in Europe, and perhaps, how you expect that to trend over the coming quarters? Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer So the growth in Europe is clearly driven by the threat environment. We've seen increases in orders for combat wheeled and tracked vehicles and significant bridge orders. We're also seeing increased orders coming out of various countries in Europe for Abrams through the FMS process. So we see that demand signal continuing until the threat environment, frankly, improves. Operator And we will take our next question from Seth Seifman with J.P. Morgan. Your line is open. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning, Seth. Seth Seifman -- JPMorgan Chase and Company -- Analyst Good morning. Thanks very much. Looking to Marine, when we think about the expectation for the profit margin for the year and kind of where we started, are there kind of visible milestones that you see through the remainder of the year that bring that number higher or kind of is it a change in mix or kind of what drives the underlying margin improvement through the year? Phebe Novakovic -- Chairman and Chief Executive Officer So two things. One is the increase in productivity at each of the shipyards and we see that and we've been seeing that for the last few quarters, and it's also fewer disruptions from the supply chain. So those are the two primary factors. Seth Seifman -- JPMorgan Chase and Company -- Analyst All right. OK. OK. Great. And then just when we think about it, I think, you mentioned some of the headwinds to demand at Gulfstream from here in terms of monetary policy, geopolitical issues. Just to kind of affirm, the expectation for 160 deliveries this year and the way that the backlog will trend through the year, the expectation is that that's a very sustainable number with potential for that to grow in the years beyond? Phebe Novakovic -- Chairman and Chief Executive Officer So let me clarify a bit. There are -- I don't see concerns about inflation or monetary policy impacting demand. It really is just impacting the time from the initiation of a potential interest to the closure of an order, which is also impacted somewhat by large fleet -- airplane fleet orders from corporate customers. So think about it that way, more of a timing issue with the completion of the deals and not ness -- and not a headwind to overall demand. So I think that's an important nuance and we're still sticking to our delivery guidance for the year. And I think, on a going forward basis, we -- as we've intimated before, we see that those deliveries increasing over time. Operator And we will take our next question from Robert Stallard with Vertical Research. Your line is open. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Rob Stallard -- Vertical Research Partners -- Analyst Phebe, I was wondering if you could comment on the recently passed or soon to be signed supplemental and what implications that could have for the Combat business, but also on the submarine side, what sort of additional funding could come from the U.S. Navy? Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer So let me take them in the inverse order. On the submarine side, the preponderance of the funding in the supplemental is to help stabilize the industrial base, ensuring that we continue to drive order activity on a consistent and repeatable basis. So that is really on the submarine side. In Combat, I think, you can see there's a fair amount of ammo funding and we had fully anticipated that. Rob Stallard -- Vertical Research Partners -- Analyst OK. And then just secondly, I was wondering if you could give us an update on the AJAX program in the U.K.? Phebe Novakovic -- Chairman and Chief Executive Officer So it is proceeding extremely well through test and continue to work with that customer, but they're very pleased with the performance of the vehicle. Rob Stallard -- Vertical Research Partners -- Analyst OK. That's great. Thank you very much. Operator And we will take our next question from Sheila Kahyaoglu with Jefferies. Your line is open. Sheila Kahyaoglu -- Jefferies -- Analyst Good morning, Phebe. Thanks for the -- Phebe Novakovic -- Chairman and Chief Executive Officer Hi, Sheila. Sheila Kahyaoglu -- Jefferies -- Analyst Thank you for the time. I wanted to ask one about Aerospace, and I'm sorry for putting you on the spot with the mental math, but last year or last quarter, you talked about the G700 profit contribution being around 25%. So when we think about the Q1 performance, it was actually really good relative to our number of 12.1% margins. It would imply you see a deceleration in the underlying business for Aerospace, just given G700 comes in at 50 units. So I guess how do we think about the mixed movement throughout the year for Aerospace? Phebe Novakovic -- Chairman and Chief Executive Officer Well, let's talk about the first predicate in that question. I don't believe we've ever disclosed any margin on a particular airplane and we haven't there. I think we can't take and discern revenue and earnings in any given quarter as attributable to one airplane. So I think you need to think about it holistically. But we see the -- we don't see any real changes in the mix throughout the year and we'll do a detailed bottom-up review in Q2. But for right now, we're sticking with both our mix, our earnings, our margin and revenue expectations. So we're off to a pretty good start, I'd say, and we're very encouraged at how the outlook looks for the rest of the year. Sheila Kahyaoglu -- Jefferies -- Analyst Can we assume that G700 is accretive to the 15% full-year guidance? Phebe Novakovic -- Chairman and Chief Executive Officer So think about it this way. This is ultimately going to be a very profitable program. But as I explained in my remarks, the first lot, 20 or so carries with it additional costs. We'll see those largely in Q2. So think about Q2 as an increase in revenue of about $1 billion to $1.1 billion and in earnings of about $100 million to $110 million, and then progress nicely thereafter. And again, that's all impacted by the multiplicity of factors in our Aerospace business that drive margins. Operator And we will take our next question from David Strauss with Barclays. Your line is open. David Strauss -- Barclays -- Analyst Thanks. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. David Strauss -- Barclays -- Analyst Phebe, so Rob's question on the supplemental and the submarine industrial-based money. So there's money there. There's a lot of money in the base budget, it appears. You're spending additional capex today that you'll eventually recover through working capital, profit. How does -- I mean, it's a lot of money. I mean, how does that manifest itself in your numbers as we think about over the next couple years? Phebe Novakovic -- Chairman and Chief Executive Officer So for the supply chain support, it has minimal impact on us. It's, however, extremely important because the stabilization of the supply chain is critical to the resumption of full cadence on Virginia and the increased cadence on Columbia. So funding is also robust for submarines. We've got one projected in 2025 and then it would be extremely helpful to get a full ship set of Virginias also appropriated because that, again, helps stabilize the industrial base with repeatable revenue that they can plan around. David Strauss -- Barclays -- Analyst OK. Thanks for that. Last quarter, you made some more kind of positive comments regarding the potential for share repurchase to step up. Obviously, you did a little bit this quarter, but not that much. How are you thinking about that now? Did that have to do with the fact that you ended up burning cash in Q1? Just how you're thinking about share repo and the balance sheet from here? Thanks. Phebe Novakovic -- Chairman and Chief Executive Officer So the way we think about share repurchases and this will be true going forward, is really in the regular order. Recall what we were facing in Q1 and that was we're looking down the throat of a potential and at some point looked very likely, government shutdown. And so I think that credence and conservatism in the face of that kind of uncertainty is really key. But the cash performance for the remainder of the year is going to be very strong and we will act accordingly. Operator And we will take our next question from Noah Poponak with Goldman Sachs. Your line is open. Noah Poponak -- Goldman Sachs -- Analyst Hi. Good morning, everyone. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Kim Kuryea -- Chief Financial Officer Good morning. Noah Poponak -- Goldman Sachs -- Analyst Phebe, what's the framework for the pace of G700 deliveries beyond this year compared to this year? Not asking for quarterly numbers or anything like that, but just given this year has some abnormalities compared to a recurring airplane? And then, Kim, just what's the updated view on free cash flow and income conversion for the year? Phebe Novakovic -- Chairman and Chief Executive Officer Well, so let me talk about 700. We never, except I think on one or two occasions about five years, six years ago, give the future year expectations. But 700 is a very, very successful program, and it will continue to execute well. I'll turn it over to Kim on cash. Kim Kuryea -- Chief Financial Officer On cash. Thank you, Phebe. So with respect to cash and the expectation, we still anticipate achieving about 100% of free cash flow conversion in 2024. We had expected the first quarter to be negative even before considering the fact that we didn't deliver any G700. So we had planned for a negative free cash flow in the first quarter and that was mostly driven by some contract timing in the Combat System segment and some in the Marine System segment. But we expect that most of that negative cash will reverse in the second quarter with a stronger third quarter and then a steeper ramp in the fourth quarter. Operator We will take our next question from Myles Walton with Wolfe Research. Your line is open. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Myles Walton -- Wolfe Research -- Analyst Phebe, could you comment on or Kim, could you comment on the margin expansion implied at Combat Systems as you move through the rest of the year? I think it has to be 80 basis points to 100 basis points on average up year on year for the rest of the year. And maybe underlying dynamics of, given the volume, why we didn't see more of a drop-through margin in the first quarter. Phebe Novakovic -- Chairman and Chief Executive Officer So what drove margin in the first quarter were two things. Mixed as we came off of older legacy programs, particularly in the vehicle world and in the U.S., and then began ramping up newer programs, vehicle programs in the U.S. And then a significant amount of the revenue growth came from facilities investment, which by definition carries a lower margin than production. So both of those things will reverse throughout the course of the year and Combat margins will increase. Our expectation is quarter-over-quarter. And remember, this is a high operating leverage group, so they ought to do quite well here. Myles Walton -- Wolfe Research -- Analyst OK. And one clarification on Gulfstream's backlog, if I could. I think that there was some adjustment downward in the backlog. Were those cancellations or four x, maybe six large jet cancellations or thereabouts? Phebe Novakovic -- Chairman and Chief Executive Officer I don't think that's the way to look at it. Why don't Nicole get back to you on that? But there wasn't -- we didn't have any particular notable cancellations. So let us unpack that one with you a little later. Myles Walton -- Wolfe Research -- Analyst OK. Thanks. Operator We will take our next question from Ron Epstein with Bank of America. Your line is open. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey. Yeah. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Ron Epstein -- Bank of America Merrill Lynch -- Analyst So, Phebe, with the increased demand on munitions and so on and so forth, what are you doing to mitigate any of the issues that could arise from growth in those markets? Just like we've seen in the Navy markets, given all the demand and growth, there's been supply chain issues? Are you expecting any -- Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So in the combat world, it's a little bit more of a robust supply chain in general that we typically have not had difficulty with, typically. We know a priori the suppliers who could conceivably cause issues and we've been working with them to ensure that they can manage this growth. But we're pretty comfortable that we can execute the growth. Our focus is really on operations and execution, and those will be the two key drivers of the profitability in that group. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Got it. Got it. And then maybe back to kind of the naval side of the house and the supply chain, can you give us any color on where there are actual weaknesses in the supply chain where investment has to be made? Phebe Novakovic -- Chairman and Chief Executive Officer So I'd say in the large, in the single source, sole source suppliers who are by definition critical, and I think the Navy has focused quite intensely on those particular products and supply chain items, and I think, they've been pretty explicit about where some of that might be and I think it's best to think about it that way. But we do believe that working with the Navy customer, the continued infusion into that supply chain will help stabilize. But they are the pacing item now for Electric Boat. Operator And we will take our next question from Doug Harned with Bernstein. Your line is open. Doug Harned -- AllianceBernstein -- Analyst Good morning. Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Doug Harned -- AllianceBernstein -- Analyst On Marine -- good morning. On Marine, the Navy recently described some shipbuilding delays really across programs and the one that really stood out was Columbia class with delays reported on the turbines and the bow. Can you give us a sense of changes you've seen in schedule that affect you kind of across the program base and particularly on Columbia? Phebe Novakovic -- Chairman and Chief Executive Officer So I think, you've articulated what the Navy has said. I will tell you our throughput and productivity has been strong on Columbia. It is the -- it enjoys the highest national security priority. So we have done pretty well on Columbia and are increasing our throughput on Columbia. So then it's really those pacing items that are out there and we're working with our Navy customer to see if there are additional things we can do to recover some schedule and if there are any workarounds. But this is going to be a bit of a slog for the supply chain. Doug Harned -- AllianceBernstein -- Analyst Well, and then also on shipbuilding, inflation has affected shipbuilding costs a lot over the last few years. We've seen pricing on new awards go up. And when you look forward in the budget, is there a concern that you're basically, if you are going to -- if the Navy's budget's really going to be able to afford the kinds of inflation increases that may come along with the continued ramp in shipbuilding? Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So I think you've known over the years, I tend not to comment on individual service budgeting. But inflation certainly has been a factor and to the extent that we can increase throughput to offset some of that, we will. But the Navy's well aware of the inflation impact and I think is working hard with the whole shipbuilding industrial base to adjust some of that. Operator And we will take our next question from Kristine Liwag with Morgan Stanley. Your line is open. Kristine Liwag -- Morgan Stanley -- Analyst Hey. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Kristine Liwag -- Morgan Stanley -- Analyst Phebe, following up on the Marine question, in addition to the delay in the Columbia class, the DoD did request one less Virginia class for the fiscal year 2025 budget request. So I mean, if we take all this into perspective, can you provide some context on what this means for Marine revenue growth over the next few years? And there's a margin with a seven handle on it, is that more the new norm for this business? Phebe Novakovic -- Chairman and Chief Executive Officer So let me address that in the inverse order. Margins will be improving at our shipyards. We have every expectation, all of our shipyards, NASCO, Bath and Electric Boat. One of the things that we've talked frequently about is the margin impact of quality and schedule problems coming out of the supply chain and as the supply chain stabilizes, that will help as well. And what was your first part of your question? Kristine Liwag -- Morgan Stanley -- Analyst The revenue cadence, including the just one Virginia class -- Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So -- OK. So it has no impact in the short-term for Electric Boat because we've got plenty of work in front of us. It could have an impact in the outer years outside of our planning horizon. The second Virginia ship set, so that we're buying it to a year, I think, is very important for the overall health of the industrial -- submarine industrial base. Kristine Liwag -- Morgan Stanley -- Analyst Thank you, Phebe. Operator And we will take our next question from Ken Herbert with RBC. Your line is open. Ken Herbert -- RBC Capital Markets -- Analyst Yeah. Hi. Good morning, Phebe and Kim. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Ken Herbert -- RBC Capital Markets -- Analyst If we look, Phebe, at your comments around timing in Gulfstream, is it still fair to assume that you should be looking at a book-to-bill at one or greater for Gulfstream in 2024? Phebe Novakovic -- Chairman and Chief Executive Officer So it's a good planning assumption. It is how we are thinking about our internal planning, but let's see how we do as we start to significantly ramp up production and deliveries. So but as I said, that's a good planning assumption. Ken Herbert -- RBC Capital Markets -- Analyst OK. Great. And just a clarification for, Kim, the comments sound like the free cash flow ramp really sort of accelerates in the second half of the year, but with all the 700 deliveries expected this quarter, free cash flow should be positive in the second quarter, correct? Phebe Novakovic -- Chairman and Chief Executive Officer Yes. That's pretty much what you should assume. Ken Herbert -- RBC Capital Markets -- Analyst OK. Great. Thank you very much. Operator And we will take our next question from Robert Spingarn with Melius Research. Your line is open. Rob Spingarn -- Melius Research -- Analyst Hi. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Rob Spingarn -- Melius Research -- Analyst Phebe, you said recently that even though the Aerospace supply chain is improving, your ramp this year could challenge that improvement. I was wondering if you could elaborate on that a little bit? Phebe Novakovic -- Chairman and Chief Executive Officer So we still have, look, it's definitely improving. Quality is improving and schedule reliability is improving. But make no mistake, we still have a lot of out-of-station work and that impacts the profitability and margin on airplanes that are experiencing that. So we definitely see improvement. We are optimistic that they can keep pace, but it's not without its margin challenges. Rob Spingarn -- Melius Research -- Analyst OK. And then also, I think you commented, you had good bookings in Aerospace in the quarter, reflecting strong demand. But I think you've said, the U.S. has been very strong. How is aircraft demand elsewhere in the world? Phebe Novakovic -- Chairman and Chief Executive Officer So there's no real change, I think, from the previous quarters. U.S. corporations, private and public. High net worth individuals, both U.S. and outside the U.S. So no real changes, no real surprises, sort of the typical customer base that we see is, I think, the way you should think about it. Rob Spingarn -- Melius Research -- Analyst Thank you. Operator And we will take our next question from Peter Arment with Baird. Your line is open. Peter Arment -- Robert W. Baird and Company -- Analyst Thanks. Good morning, Phebe and Kim. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Peter Arment -- Robert W. Baird and Company -- Analyst Hey, Phebe. Phebe, the Army wants to reach 100,000 155-millimeter shells by, I think, October 2025. Can you update us on how your ramp is going? You discussed that that supply chain is a little more robust. Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So our ramp there is more about increasing the facilities that we have. And as I noted in my remarks, the opening of our Texas facility, which we worked very, very hard to expedite, and frankly, did it in almost record time, was very important because it increased the throughput and the productivity of the number of shells by 83%. So we're on track with the Army to get where we need to be and our objective is to move even faster, and so far we have been. But the Army has been a critical and extremely important partner here in what is really a national security imperative. Peter Arment -- Robert W. Baird and Company -- Analyst Yeah. Thanks for that. And then just if you could make any comments on the G280 program, just given the conflict that's going on in the Middle East? Phebe Novakovic -- Chairman and Chief Executive Officer So we had anticipated the impacts on the 280 in our guidance to you, but I will tell you that they are doing quite well and are slightly ahead of our schedule. We're still sticking to our deliveries, but I think it's notable that they're managing pretty well in this tough environment. Peter Arment -- Robert W. Baird and Company -- Analyst Appreciate the call. Thanks, Phebe. Operator We will take our next question from Cai von Rumohr with TD Cowen. Your line is open. Cai von Rumohr -- TD Cowen -- Analyst Yes. Thank you, Phebe, and good quarter. Phebe Novakovic -- Chairman and Chief Executive Officer Thanks, Cai. Cai von Rumohr -- TD Cowen -- Analyst So could you update us on the status of the G400? How's it doing and is it fair to assume that it might have a gap of approximately 12 months between its certification and that of the G800? Phebe Novakovic -- Chairman and Chief Executive Officer I think I said last quarter, I'm done predicting process over which we have little control. We've tried in the past to give you indicators of our internal or actually our internal dates, but so I'm kind of out of the detailed predicting mode. But I will say the program is doing extremely well and it will fly in the third quarter and I think we'll be flying a pretty mature airplane. Cai von Rumohr -- TD Cowen -- Analyst Excellent. And then your R&D was up a fair amount in the first quarter. Could you give us some color of the pattern of the R&D at Gulfstream this year and looking forward? How should we think about that? Phebe Novakovic -- Chairman and Chief Executive Officer Well, pretty much steady as she goes, particularly this year. We've got a number of, as you know, programs in the certification process. And so I'd see that at least through this year is pretty consistent. No real surprises here. Steady as she goes. Cai von Rumohr -- TD Cowen -- Analyst OK. Thank you. Operator And we will take our next question from Jason Gursky with Citigroup. Your line is open. Jason Gursky -- Citi -- Analyst Good morning, everybody. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Jason Gursky -- Citi -- Analyst Phebe, I wanted to just quickly go back to your comments on Aerospace and what I guess you'd describe as an elongation of your sales cycle. But you could just talk a little bit about the overall size of the pipeline and how that is evolving. I understand things are taking longer to close, but I'd also be kind of curious to know whether there are an increasing number of people that are interested? Phebe Novakovic -- Chairman and Chief Executive Officer So the pipeline remains robust, and I look to that as encouraging, a good sign. It's been that way for a while. People want our airplanes and that's driving demand. Jason Gursky -- Citi -- Analyst OK. Great. So good metrics going on there, it sounds like. Then just really quickly, maybe this is a question targeted at Technologies, but I'd love to get some updated thoughts from you on artificial intelligence, AI, the adoption that you're seeing with your customers, how you see this kind of playing out and affecting your business and maybe this, as I suggest, focused on Technologies. Phebe Novakovic -- Chairman and Chief Executive Officer Yeah. So we have been investing in AI to support our customers, and particularly, at GDIT and somewhat at Mission Systems. And I would say that we're working closely with our customers. They define what the art of the possible is for them in AI. And as you all know, there's some governance challenges around that, but the more sophisticated we get in our ability to tailor AI solutions, I think, the more comfortable our customer becomes and will ultimately drive some increased revenue. I haven't seen too much of that yet, because there are -- I think the government is not unlike other industries where its adoption is people are careful and they think properly so. And I would argue that would be true across the entirety of our business. Abby, I think, we have, sorry, OK, I think, we have time for just one more question. Operator Thank you. Our final question today comes from Gavin Parsons with UBS. Your line is open. Gavin Parsons -- UBS -- Analyst Thanks. Good morning. Phebe Novakovic -- Chairman and Chief Executive Officer Good morning. Gavin Parsons -- UBS -- Analyst Phebe, you highlighted the stronger second-half Aerospace margins, that's a more normal volume and G700 production. Is that more of an appropriate starting point for 2025 than the full year 15%? Phebe Novakovic -- Chairman and Chief Executive Officer Nice try. So look, yeah, I think, once you get through the first lot, our performance from a margin standpoint will continue to improve. And you'll see that third quarter will be significantly better than second quarter and fourth quarter will be even better still, but we will update you in our regular order. We kind of keep our discipline, as you well know, around updating guidance and I think that that's appropriate. Gavin Parsons -- UBS -- Analyst Yeah. Appreciate that detail. And then just in terms of the 100% cash conversion for the year, what's the opportunity to exceed that, given last year you were well above and you built a lot of G700 inventory? Phebe Novakovic -- Chairman and Chief Executive Officer I think right now we're just focused, given the steep ramp in the second half of the year, we're really focusing on trying to hit that mark at this point in time. Gavin Parsons -- UBS -- Analyst Thank you. Phebe Novakovic -- Chairman and Chief Executive Officer And we should get there. Great. Well, thank you, everyone, for joining our call today. As a reminder, please refer to the General Dynamics website for the first quarter earnings release and highlights presentation. If you have additional questions, I can be reached at (703) 876-3152.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, ladies and gentlemen, and welcome to the GE Aerospace first-quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator for today. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the program to your host for today's conference, Steve Winoker, vice president of investor relations. Please proceed. Steve Winoker -- Vice President, Investor Relations Thanks, Liz. Welcome to GE Aerospace's first-quarter 2024 earnings call. I'm joined by chairman and CEO, Larry Culp; and CFO, Rahul Ghai. Many of the statements we're making are forward-looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and website, those elements may change as the world changes. With the spinoff of GE Vernova successfully completed earlier this month, GE Vernova will report its results separately on April 25th. While included in our first-quarter consolidated results, we're focusing today's commentary and Q&A primarily on GE Aerospace. Now, over to Larry. Larry Culp -- Chairman and Chief Executive Officer Steve, thank you, and good morning, everyone. Welcome to our first earnings call as GE Aerospace, now a pure-play global leader in propulsion services and systems. We're wholly focused on our aerospace and defense customers serving the 900,000 passengers in the air right now with our technology underwing. It's an incredible responsibility for our teams globally and why we take safety and quality so seriously. We'll come back to GE Aerospace in a moment, but before we do, we'll talk about GE on a consolidated basis, which is how we operated for the first few months of this year. Just three weeks ago, on April the 2nd, we completed GE Vernova's spin and launched GE Aerospace, ringing the bell at the New York Stock Exchange after the successful spin of GE Healthcare last year. It was a proud moment that we celebrated with our teams around the world. This marked a new beginning following the completion of GE's multiyear transformation that strengthened our businesses both financially and operationally. Thanks to the GE team, we significantly improved our financial position, reducing debt by more than $100 billion since 2018 and enhance our operational execution by embracing lean with a relentless focus on safety, quality, delivery, and cost, in that order, to better serve our customers. Together, we built a strong foundation for our three independent companies that, to date, have increased shareholder value nearly fivefold. Now, GE begins again, three industry leaders fit for purpose for the next century plus and ready to put their stamps on the world. GE Healthcare, GE Vernova, and GE Aerospace each carry forward GE's innovative spirit, customer focus, and passion to build a world that works, fully focused on their respective missions to lead precision health, the energy transition, and the future of flight. None of this would have been possible without the important work of our teams. I want to express again my sincere gratitude to our incredible people, whose unmatched passion and talent have made this achievement possible. Thank you. We turn to Slide 4. We had an exceptionally strong last quarter as GE. In the first quarter, orders were up substantially in both GE Aerospace and Power. Revenue was up 10% organically with all segments contributing to the growth. And equipment and services were up across both GE Aerospace and GE Vernova. Adjusted operating profit was $1.5 billion, up more than $600 million with 300 basis points of organic margin expansion. This was largely driven by pricing and volume, which more than offset investments and inflation. Adjusted EPS was $0.82, up more than three times year over year. And free cash flow was $850 million, up more than five times, or $700 million, driven by higher earnings and continued reduction in working capital. In all, a very strong performance for GE, reflecting real momentum at both GE Aerospace and GE Vernova. And now, the day has come where we bring our full focus to GE Aerospace. Our commercial propulsion fleet is the industry's largest and youngest, thanks to our world-class engineering and services teams. And in defense, we're proud to be the rotorcraft and combat engine provider of choice, powering two-thirds of these aircraft worldwide, a massive part of our businesses and aftermarket services, representing 70% of our $32 billion in revenue. Importantly, as we meet higher levels of demand today, services enable us to better understand how our technologies are performing, and we use that intelligence to help shape our future product road maps. Turning to our performance. GE Aerospace had a solid start to the year. In the first quarter, we delivered double-digit revenue and profit growth, as well as margin expansion in both businesses, with free cash flow doubling year over year. Overall, we have great confidence in our forward trajectory for raising our full-year operating profit guidance and see a path to our $10 billion operating profit target by 2028. Turning to Slide 6. As you heard from us last month at our Investor Day, we're keeping our strategy simple: Focused on today, tomorrow, and the future with safety and quality first. Enter FLIGHT DECK, our proprietary lean operating model to ensure focused execution as a public company. Fundamentally, it's a systematic approach to running our businesses to deliver exceptional value as measured through the eyes of our customers, and it's the best way we know to operationalize flight safety at GE Aerospace, in combination with our safety and quality management systems. Starting with today, we're focused on service and readiness, keeping our customers' fleets flying. We're experiencing a tremendous demand cycle for services as more people fly and fly more often. In the quarter, GE/CFM departures were up low double digits and were revising our expectations upward for the year. The onus is on us to meet this demand, and with FLIGHT DECK, we're maintaining the highest standards of safety and quality with greater predictability and speed. Easy to say, hard to do. A key priority in our services business is improving turnaround times to increase our shop visit output. We're making progress with LEAP, a significant driver of shop visit growth this year. For example, at our Malaysia site, a joint GE Aerospace and Safran team collaborated to reduce average LEAP test cell hours by 30% for engine, and they're working toward a 50%-plus improvement by year-end. As a result, the team has closed 95% of a 100-engine gap in test capacity so far while optimizing LEAP baseline test time, eliminating interruptions and reducing network variation. Actions like these are improving our shop turnaround time, which, for LEAP, was down approximately -- or down to approximately 90 days this quarter, a 10% reduction, versus our roughly 100-day average last year. While there's more work to do, we're focused on getting engines back in the hands of our customers faster without compromising safety or quality. For tomorrow, we remain focused on delivering on the ramp. This quarter, total engine deliveries improved, up 9% year over year, including defense up over 50%. However, these deliveries were short of our objectives due largely to continued material availability challenges. Thus, we have intensified our efforts working with our suppliers to problem solve these issues. Here is where FLIGHT DECK is key. Currently, we can track about 80% of our largest delivery challenges back to 15 supplier sites. We're deploying more than 550 engineers and supply chain resources, up 25% from last year., working with them to improve quality and delivery performance. For example, we're problem-solving with -- with one of our tier 1 suppliers by going to gemba at their most constrained supplier. We are shoulder to shoulder with them, leveraging FLIGHT DECK and working together to identify and break constraints such as labor shortfalls, manufacturing yield issues, identifying alternate material types for raw material shortages, and improving flow and lead times. As a result, that constrained supplier recently improved output by more than 25% and is no longer pacing deliveries. We also recently announced we're investing more than $650 million in both our manufacturing facilities and our supply chain this year, reflecting our commitment to strengthening quality and increasing production to better support our customers' long-term needs. At the same time, both airlines and our defense customers are expanding and modernizing their fleets and choosing to do so with us, adding to our $150 billion-plus backlog and continuing to build our installed base of engines and services. At the Singapore Air Show, Thai Airways committed to powering its new widebody fleet of Boeing 787 aircraft with our GEnx-1B engines. The GEnx is now a cornerstone of the airline's long-term plan to open new markets and meet surging demand while working to achieve its environmental goals. American Airlines secured 85 new Boeing 737MAX jets, which will be powered by our LEAP-1B. And easyJet made a commitment for more than 300 LEAP-1A engines for its fleet of 157 A320neo aircraft. In our defense and propulsion technologies business, we won a new order for F414 engines to power additional KF-21 fighter jets for the Korean Air Force, continuing to build our international business. And for the future. we're advancing the technology building blocks that will define the future of flight with more than $2 billion of R&D spending this year. For example, we're continuing to make progress with testing in our CFM RISE program. We completed our first fan ingestion test with our full-scale RISE fan blade, and the results were extremely encouraging. On the defense side, in partnership with Sikorsky Innovations, our team is finalizing designs for a hybrid electric power systems testbed with a 600-kilowatt electric motor. This will support Sikorsky's plan to build, test, and fly a hybrid electric vertical takeoff and landing demonstrator with a tilt-wing configuration. Altogether, we're running GE Aerospace with customer expectations front and center while delivering breakthrough innovation that will further shape -- excuse me -- the future of flight. And FLIGHT DECK ensures we work as one team utilizing one operating model, implement one strategy, and ultimately yielding one culture. This will help us to lead the industry forward and advance our vision to be the company that defines flight for today, tomorrow, and the future. Now, let me hand it over to Rahul. Rahul Ghai -- Chief Financial Officer Thank you, Larry, and good morning everyone. Larry, I fully share your enthusiasm as we embark on the next chapter of our journey as a stand-alone company. We will cover GE Aerospace's results on a stand-alone basis, the same as a full-year guide. Also, for simplification, our results will be prepared on a reported basis, and we are limiting non-GAAP free cash flow adjustments to spin-related matters. Overall, GE Aerospace delivered a solid start to the year, with all headline metrics up double digits. Demand remained resilient. Orders grew 34%, with similar growth rates in both commercial engines and services, or CES, and defense and propulsion technologies, or DPT. Revenue was up 15% from pricing, spare parts volume, and an increase in widebody and defense engine deliveries. Operating profit was $1.5 billion, up 24% with margins up 140 basis points to 19.1%. The profit growth was driven primarily by price, growth in services volume, and favorable mix. Profit and margins were up in both CES and DPT. Adjusted corporate costs and elimination, including prior GE corporate costs, were $130 million, down more than 20% year over year. Post the GE Vernova spinoff, we expect to incur roughly $300 million for the remaining wind-down of GE corporate office and close to $250 million to set up stand-alone infrastructure for GE Aerospace. We will continue to adjust these items from earnings and cash. Free cash flow was $1.7 billion, doubling year over year, with higher earnings and working capital improvements offsetting AD&A outflow. Specifically, working capital was a source largely from strong collections and progress payments, while inventory was a headwind. The strength of our operational and financial fundamentals gives us confidence to return 70 to 75% of our available cash to investors. Earlier this month, we initiated a quarterly dividend at $0.28, a 250% increase, and at our investor day, we announced a $15 billion share buyback, a testament to the strength of our balance sheet. To a new capital return framework, we are well positioned to create significant shareholder value while we continue to invest in growth, innovation, and focused M&A. Now, turning to CES and DPT results. Starting with CES, a $24 billion business with 70% of revenue generated from services. As Larry mentioned, demand continues to be robust. For the year, we now expect departures to grow high single digits. Total departures are off to a stronger start versus a prior expectation, growing 11% in the quarter with particular strength in China. We continue to expect departure growth to moderate throughout the year. We expect passenger traffic growth in high single-digit range for the year, a slight improvement. Narrowbody remains solid, with increased CFM56 fleet utilization and significant LEAP growth. Further, we now expect freight demand to be up low single digits versus a prior expectation of down mid-single digits. Heightened geopolitical conflicts have increased the need for air cargo and improved its relative economics. As a result, commercial momentum continues. CES orders were up 34% this quarter. Both services and equipment were up double digits, largely driven by strong demand for LEAP and spare parts across our platforms. Overall, customer dynamics remain positive, with strong order books from both airlines and airframers. On narrowbody platforms, we won more than 300 LEAP-1B engines and a multiyear services agreement from Akasa Air. And on widebody platforms, recent wins included 90 GEnx engines for Thai Airways, 16 GE9X engines for Ethiopian Airlines, and 10 GEnx engines for LATAM group. This improving demand backdrop underscores a confidence in our annual guide and longer-term outlook. Now, looking at CES' first-quarter results. Revenue grew 16%, with volume up low double -- double digits and the remainder driven primarily by higher price. Services growth of 12% was driven by pricing and strong spare part volume, which grew faster than internal shop visits that were up 3%, impacted by material input challenges. Equipment growth of 31% was driven by pricing and deliveries, which were up 2%, with higher widebody engine mix. LEAP shipments were roughly flat year over year given the supply chain challenges. As expected, spare engine shipments were down slightly. Profit was $1.4 billion, up 17%, with margins expanding 10 basis points from pricing, spare part sales, and mix. This more than offset higher inflation investments and a change in estimated profitability on long-term service agreements on a mature platform, which negatively impacted both services revenue and profit by roughly $200 million. At CES, we are pleased with a strong start to the year, delivering significant growth and profit improvement. Turning to DPT, which includes both defense and systems and propulsion and additive technologies. This is roughly a $9 billion business, where services make up approximately 55% of the revenue. Looking at the sector broadly, national defense budgets are growing, with U.S. spending expected to grow low single digits and international spending up mid-single digits. Our defense customers' ask of us is clear: support their readiness while delivering more and more predictably. Turning to our first-quarter results. Orders were up 34%, underscoring strong demand and the quality of our franchisees with defense book to bill a 1.1x. Revenue grew 18%. Defense unit deliveries grew by 45 engines on an easier compare. This, combined with pricing and growth in classified programs, increased defense and systems revenue by 17%. Propulsion and additive technologies grew 19%, primarily from growth at Avio and Unison to support GEnx and LEAP. Profit was $250 million, up 26%, with margins expanding 80 basis points. Volume and pricing, net of inflation, more than offset investments and defense equipment mix. In all, improved delivery and pricing drove strong revenue and profit growth this quarter. Given our solid start and constructive outlook for the rest of the year, we are raising our full-year profit and cash guidance as outlined on Slide 11. We continue to project at least low double-digit revenue growth. In CES, we still expect revenue growth of mid to high teens. In services, we continue to expect mid-teens revenue growth, with shop visit output growing faster than spare parts sales. We are anticipating reduced LEAP output in the range of 10 to 15% growth but continue to expect overall equipment revenue growth of high teens from improving widebody mix. In DPT, we continue to expect mid to high single-digit revenue growth, primarily driven by equipment growth. Operating profit is now expected to be in the range of $6.2 billion to $6.6 billion, up from $6 billion to $6.5 billion previously. CES operating profit guidance is now expected to be in the range of $6.1 billion to $6.4 billion, up $100 million at the midpoint from favorable revenue dynamics. DPT profit guidance is unchanged. In corporate, we continue to expect cost and eliminations of about $1 billion, including $600 million of corporate expenses and roughly $400 million of eliminations. We now expect margins to expand roughly 50 basis points for the year versus flat previously. Now, as a stand-alone company, we are initiating adjusted EPS in the range of $3.80 to $4.05, up more than 30% year over year. This includes first-quarter adjusted EPS of approximately $0.92, up more than 40% year on year. And on free cash flow, we expect higher profit to flow through to cash, delivering more than $5 billion with conversion well above 100% of net income. Overall, we are encouraged by the strong start and the market environment that gives us confidence to raise our performance expectations for the year. Larry, back to you. Larry Culp Rahul, thanks. We're clearly off to a solid start this year. If I close, on Slide 12, this captures the essence of GE Aerospace and what we take forward with us. We have an excellent franchise with sustained competitive advantages and a compelling value proposition. Our platforms are preferred by customers across narrowbody, widebody, and defense. Excuse me. We're aiming to provide industry-leading reliability and durability, prioritizing safety and quality first; then delivery; finally, cost. This means delivering unmatched time on wing and faster turnaround times for our customers, and we're doing this across the industry's largest and growing fleets. With our deep domain expertise and talent, commitment to innovation, and capacity to invest, we're poised to deliver the breakthrough technologies of the future. And with FLIGHT DECK as our foundation to bring this all together, our team is poised to realize our full potential and deliver exceptional value for our customers and our shareholders. I've never been more confident in our path ahead as GE Aerospace. Before I pass it back to Steve for Q&A, I'd like to take a moment to recognize him and his many contributions to GE. As you know by now, today is Steve's last call with us after more than five years with the company or, put another way, after 22 earnings calls. His dedication and partnership leading the investor relations team and serving as a trusted strategic advisor to me and the rest of the leadership team here has been invaluable throughout our transformation. On behalf of myself and the entire team, Steve, we thank you and wish you the best of luck in your next chapter. And I know Rahul would like to say a few words. Rahul Ghai -- Chief Financial Officer Thanks, Larry. Steve, I want to personally thank you for your trusted advice and friendship. As I joined the company and as we executed the launches of GE Aerospace and GE Vernova, your strategic and operating depth and your collaborative style have been instrumental in our transformation. And I know many on these calls and on the calls in the years past are appreciative of your responsiveness to their questions and the work you have done to simplify our financial disclosures while communicating our transformation with clarity and candor. We wish you all the best. And I'll pass it back to you, in the spirit of making you work till the last day, for questions. Steve Winoker -- Vice President, Investor Relations Larry, Rahul, thank you. I can't go on just yet without at least one quick comment. It's really been a true honor, privilege, and pleasure to serve with you and the rest of the teams at GE and GE Aerospace, a real master class for me. Thank you for always giving our investors and analysts a seat at the table. And I'm deeply grateful, proud of the teams, and excited to see what comes next. And I know the futures of GE Aerospace, GE Healthcare, and GE Vernova are bright indeed. So, now, before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask one question so we can get to as many people as possible. And if we have extra time, we'll circle back around. We ask that you please save any GE Vernova questions until their earnings call later this week again. Liz, can you please open the line? Questions & Answers: Operator [Operator instructions] Our first question comes from the line of David Strauss with Barclays. David Strauss -- Barclays -- Analyst Great. Thanks. Good morning. Congrats, Steve. Larry Culp Good morning. David Strauss -- Barclays -- Analyst One to Larry. Want to ask about the updated LEAP delivery guidance, now 10 to 15%, down from 20 to 25. Could you just dig into that a little bit, what drove that? Is that -- is that constraints on the supplier side? Is that Boeing taking down their schedule? What -- what exactly went into that thing? Larry Culp Yeah, I would say that that -- that clearly is a change here in the update this morning. Dave and company are going to talk about their -- their rates tomorrow, I'm sure, on their earnings call. So, we'll -- we'll leave that conversation with them. Rest assured, as we are with all of our -- our customers, we're well calibrated and aligned with respect to what we need to do, what they need from us as we as we look forward. But I think all of us, particularly at this moment, before we talk about rates, always come back to make sure we're doing all that we can on the safety and quality fronts to ensure the -- the best possible performance of our products, both as they're being manufactured and then, in turn, deployed in the field. Operator Our next question comes from Ron Epstein with Bank of America. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey, good morning. Larry Culp Morning, Ron. Ron Epstein -- Bank of America Merrill Lynch -- Analyst If you could talk a little about the -- the -- the orders. I mean, they're up pretty spectacularly. And commercial engines and services up 78%. Defense, propulsion, and technologies, up 72. How much is that volume versus pricing? Rahul Ghai -- Chief Financial Officer Ron, I would say most of that is volume, and pricing helped across the -- across the board, showed up in our revenue growth, margin expansion, and in the orders outlook. But off a 34% increase in orders, I would say, you know, most of that is coming from base volume growth with price contributing as well. Operator Our next question will come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu -- Jefferies -- Analyst Thank you. Good morning, Larry and Rahul and Steve. Larry Culp Good morning. Rahul Ghai -- Chief Financial Officer Good morning. Steve Winoker -- Vice President, Investor Relations Good morning. Sheila Kahyaoglu -- Jefferies -- Analyst Congratulations on elevating the investor relations game to the next level. So, one for Larry or Rahul. You know, with Q1 margins, you guys have done a really great job. 19%, 150 bps above the prior guide -- sorry, the midpoint. You know, Rahul, maybe if you could revisit the two points of margin headwind you pointed us to last quarter. You know, you mentioned LEAP is lower on that unit volume, maybe about 40 bps of a tailwind versus your original guide, and then GE9X is probably consistent. So, maybe if you could talk about the puts and takes along with the investment and timing to get us to that mid-17% range for the year. Rahul Ghai -- Chief Financial Officer OK. A couple of things in there, Sheila. Let me start with where you started, which was, the two points of margin headwind that we had spoken to on the January call and on our investor day. So, if you go back, we had expected two points of margin pressure from LEAP OE ramp, introduction of 9X, and the step-up in R&D to support LEAP durability, introduction of 9X, and develop the future of flight. Now, with the push-out of LEAP volume, that headwind of the two points is marginally lower. but now, if you step back and look at our overall guide for the year, listen, strong start to the year. You know, we are pleased with where we are. And that has given us confidence to raise guidance for the full year. And we expect the momentum to fully continue as we get into the second quarter. And overall, for first half, we are expecting, you know, about low double-digit revenue growth and about half of profit and free cash for the year. So far, more linear year than we have done in the past. And overall, as you step back and look at the full year, you know, profit of $150 million at the midpoint of our guide, you know, to a range of 6.2 billion to 6.6 billion, call it mid-teens profit growth, and more than 30% EPS growth. So, it will be a good year, you know, if you deliver these numbers. Operator Our next question will come from Myles Walton with Wolfe Research. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. And good luck, Steve. If I adjust CES for the $200 million long-term contract adjustment, the CES margins are up 250 basis points year on year despite this OE growth at two times aftermarket growth. And I hear what you're saying earlier on the spares exceeding shop visits, but is there anything else under the surface that really explains that kind of counterintuitive margin expansion? Rahul Ghai -- Chief Financial Officer No. Listen, we had a good start in CES, you know, a billion four of profit, margin expansion despite the CMR or the, you know, the -- the service profit adjustment that we had to make in the quarter. But, you know -- and the big drivers here were pricing and customer mix, both on the equipment and on services. The mix shift from -- mix shift in OE from LEAP to widebody mix health and also in services. Our spare part volume growth was higher than shop visit growth. So, that mix shift in services was a contributor as well. So, encouraging start. But as you go through the year, keep in mind that, you know, the equipment growth will ramp in the second half of the year. Equipment growth will also include 9X shipments, and the services mix will skew back toward the shop visit growth, which we still expect to be maybe, you know, low to mid-teens for the year. So, the second-half profit growth on a year-over-year basis will be lower than the profit growth that we'll see in the first half. But overall, listen, a good start in CES, and this gives us confidence to raise the full year for CES in profit by about $100 million. Operator Our next question will come from Robert Stallard with Vertical Research. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Larry Culp Good morning. Rob Stallard -- Vertical Research Partners -- Analyst Just following on from David's question on the LEAP, do these issues with ramping up the LEAP have positive implications for the CFM shop visit peak, which I think you've earlier estimated at 2025, and also, the -- the height of that peak potentially going forward? Larry Culp Well, I would say that we do see, I think, some knock-on positive effects in the aftermarket, both here in '24, but also in some of our projections. I think it was just even last month at investor day, we talked about how retirements have been lower than we would have anticipated. Thus, that should yield 200 incremental shop visits in 2024 relative to what we anticipated. I think as long as capacity demand remains strong -- I get a report every morning at 6 a.m., this morning showed our departures on a worldwide basis across all of our platforms, up 7.8%, right? That's part of what Rahul alluded to in our prepared remarks with respect to our more optimistic outlook with respect to passenger demand. We know the airlines are looking to generate as much lift as they possibly can, and to the extent that they're paced by deliveries, retirements will -- will slow and that installed base will be worked. And fortunately, much of that came from our factories, and we're well positioned to support that. Does that push out the timing of perhaps peak CFM56? Yes. But it's -- but it's early, right? And I don't think we're going to try today to take a quarter in that time frame is to win. That might occur, but it's -- it's -- it's a positive dynamic force in the aftermarket, both with the existing platforms and increasingly with the LEAP. Operator Our next question will come from Seth Seifman with J.P. Morgan. Seth Seifman -- JPMorgan Chase and Company -- Analyst Hey, thanks very much. Good morning, everyone. And, congratulations, Steve, and thanks for all the help. I wanted to ask about shop visit growth and sort of the -- any challenges around the guidance for the year and the level of visibility that you have sort of starting off with -- with 3% and needing to get to, you know, kind of at least a mid-teens type of number for the year and, you know, that being constrained by, you know, various challenges in supply chain and, you know, internal productivity, and you know, kind of how much -- how much confidence you have around that ramp and shop as it grows? Larry Culp Morning, Seth. Clearly, if we're going to talk about a guide, as we are this morning, there's a high level of conviction. But I think you put your finger on what we are working on day in, day out here operationally. I think the financial numbers year over year are strong, but we know that we could have delivered -- we could have executed on more shop visits in the first quarter had we had more reliable, more predictable material flow into our shops. That doesn't impact us as much in terms of spare parts, right? We don't need everything necessarily to move that product to customers, but we do in the case of a shop visit. Some of the FLIGHT DECK examples that I referenced, I think, give us real encouragement that the work we're doing with those top five or top 15 supplier sites is yielding progress if you look at what we've seen just here in April. We've had a stronger start to the second quarter in terms of shop visit activity, completed outputs than we did in January. That's one comparison that we focus on because we still are not as linear through the course of a quarter as we would like. And making good use of the first two, three, four weeks of a quarter is critical for us to be able to deliver the year-over-year level on the sequential growth that we would like to see that's embedded here, and most importantly, what our customers need from us given how active they're working these assets. So, the supply chain topic is still relevant. I suspect we'll be talking about it again for the foreseeable future, but I'm very encouraged by the progress that we're making. We just need to make a whole lot more. Operator Our next question will come from the line of Ken Herbert with RBC Capital Markets. Ken Herbert -- RBC Capital Markets -- Analyst Hi. Good morning, and congratulations, Steve. Steve Winoker -- Vice President, Investor Relations Thanks, Ken. Ken Herbert -- RBC Capital Markets -- Analyst Hey, Larry or Rahul, you called out freight as a source of growth in the quarter, and I think you raised your full-year outlook there from sort of previously down maybe low single to now up low single. As we think about the impact in CES, is that just in relation to what we've seen in the Middle East? Are you seeing other fundamental changes that give you more confidence there? And how do we think about that impact, specifically as we think about the CES business and where you're seeing that flow through? Larry Culp Well, Ken, you're spot on, we're taking that again. To level set everybody from a outlook, that had us down mid-singles this year to now a positive low single-digit number. I think there is some influence here from what's happening in the Middle East. But I think we're just seeing a higher demand overall, from an air cargo perspective, that will principally course through our widebody exposure, more so than the single aisles. And I don't think we're going to quantify it here, but that's certainly part of what is behind the improved service outlook and thus the improved overall outlook for the rest of this year. Rahul Ghai -- Chief Financial Officer Yeah. And, Ken, just to add to that, you know, the direct impact is -- all depends on the number of shop visits that kind of move into the year. And I think that is -- that always takes time. So, there's not a direct correlation here that may show up during the year. But overall, as we look over an extended period of time, as we look at '24, '25 combined, that will definitely be a positive driver. So, we do expect the benefit from the higher freight departures to be in our financials. The question is probably not as much in '24 more than '25. Operator Our next question comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna -- TD Cowen -- Analyst Hey. Good morning, and congrats, Steve. Steve Winoker -- Vice President, Investor Relations Thanks, Gautam. Larry Culp Good morning. Gautam Khanna -- TD Cowen -- Analyst Hey, so you guys mentioned the lower LEAP production this year. I assume it's a function of lower 1B OE needs, but I was curious if you could just help us understand how we should think about the leap OE versus spares provisioning mix this year versus your prior expectations. And also wondering, given the lower rate on LEAP, are you going to be slowing down some of your LEAP suppliers? Or given the comments you made on the constraints within the supply chain, are you still pushing all these guys to -- to continuously raise production, you know, to work as hard as they can? Larry Culp Well, maybe we'll take those in reverse order. I'll speak to the supply chain, and Rahul can speak to where we are from a spares perspective. As I indicated, we're -- we're calibrated with both of our major narrowbody airframers. As we do that, we are always, in turn, calibrating with the supply base. And I think what we want to do in that work is make sure we're not overly indexed, if you will, on the next quarter or two. So, important, we want to make sure that we are preparing over the next several years to ramp, given the skylines, that -- that both of our major airframer customers enjoy today, right? A single lot slot is a scarce commodity. If we were out looking for one day, we might not find it until the next decade. That said, I think everybody, key aerospace included, is primarily focused on making sure, from a safety and a quality perspective, that we are in no way compromising as we think about the -- the wonderful gift we have in the form of these robust guidelines. And that's been at the heart of the GE work, the lean transformation for -- for years now, right? You hear us talking about SQDC, safety and quality before delivery and cost. It's at the -- at the core of FLIGHT DECK and everything that we do. Rahul, spares? Rahul Ghai -- Chief Financial Officer So, on the spare engines, Gautam, you know, overall, our spare engine ratio came down slightly in the first quarter on a year-over-year basis. And we do expect the full-year spare engine ratio to be down as well versus 2023, kind of as we've communicated before. So, really not a lot of change here from the change that we are making in the LEAP install engine output to translate into spare engine. So, we still expect the spare engine ratio to be down year over year. And -- and it will be -- it'll keep coming down over the next couple of years, I would say, on a gradual basis, Gautam, just given where, you know, LEAP spare engine has been in the past. So, we expect a continued decline here in the spare engine ratio over the next couple of years on a -- you know, gradually. Operator Our next question will come from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle -- Deutsche Bank -- Analyst Hey, good morning. Rahul Ghai -- Chief Financial Officer Morning, Scott. Larry Culp Morning, Scott. Scott Deuschle -- Deutsche Bank -- Analyst Hey, Rahul, what does the 100% free cash flow conversion target for 2028 assume with respect to the proportion of new engines being sold on CSAs in that time frame, particularly on LEAP? Mainly, I'm just curious, if you're assuming mostly migrates to T&M by that time. Thanks. Rahul Ghai -- Chief Financial Officer We do expect, Scott, that as we go through the year -- as you go through the decade, I should say, that there will be more T&M contracts. Keep in mind, as you know, Russell spoke at Investor Day, you know, our 20, 30-ish target for LEAP is we do about 60% or so of the shop visits between us and Safran, and 40% are done externally. And of that 60%, you know, there'll be a mix between CSAs and T&M, but we are actively working to increase the T&M population. Our -- our CBSA partners are standing up there, helping us as well. So, we would see a migration from CSAs to T&M contracts, with about 60% of THE shop visits done in-house here between Safran and GE Aerospace and the remaining 40% being done by our channel partners. Operator Our next question will come from the line of Robert Spingarn with Melius Research. Rob Spingarn -- Melius Research -- Analyst Good morning. Larry Culp Good morning, Rob. Rob Spingarn -- Melius Research -- Analyst Congrats to the team for this new chapter and getting through the spins. And congrats to you, Steve. I wanted to ask you, Larry, about RISE, Just to change the topic a little bit, and the potential here to deliver 20% improvement in fuel consumption versus current engines. Both airframers appear interested in RISE. And if competing engine OEMs aren't providing an open fan architecture, could we find ourselves in a position where RISE is -- or CFM is the only engine provider for the next-gen narrowbodies? Or do you think that the need for competition changes that dynamic? Larry Culp Well, I think where we're focused today is really in two areas: one, making sure that we continue to advance the building blocks of the underlying technologies with that -- with that engine platform. And that's the work that we're spending a considerable amount of money on as part of that $2 billion R&D -- R&D budget this year. I'd say the other area is making sure that we are closely aligned with the airframers, not only with respect to giving them visibility on the progress that we're making in our technology road map, but also working with them as they think about their own product road maps into the future. So, that -- there is that, if you will, that -- that collaborative, symbiotic dynamic. How all that plays out, time -- time will tell. But as we have done over generations, we want to lead with innovation, we want to lead with technology; we want to be close to the airframers. I think everyone understands that we are going to need to see that type of 20%-plus step function in efficiency in the next-gen platform. And as we have in the past, we intend to have GE Aerospace at the forefront. Operator Our next question will come from the line of Noah Poponak with Goldman Sachs. Noah Poponak -- Goldman Sachs -- Analyst Hello? Can you hear me? Larry Culp We can. Rahul Ghai -- Chief Financial Officer Good morning, Noah. Steve Winoker -- Vice President, Investor Relations Morning. Clear. Noah Poponak -- Goldman Sachs -- Analyst Hi. Sorry it cut out on my end, but good morning, everyone. And let me add my congratulations to -- to completing the spin. And, Steve, thanks a lot for all your help getting up to speed. Steve Winoker -- Vice President, Investor Relations Thank you. Noah Poponak -- Goldman Sachs -- Analyst Rahul, could you spend another minute on the free cash in the quarter and for the full year? You know, if -- if you're going to have any seasonality that looks like the company used to or the industry often does through the year, that number in the first quarter would imply a lot of upside to -- to the five. I know you highlighted working capital timing. It didn't look like that big of a number in the quarter on an absolute basis. Maybe it's just normally weaker. So, yeah, I guess how much bigger is the greater sign on the five now than it was before, or did you just truly have pure timing in the quarter? Rahul Ghai -- Chief Financial Officer Yeah, so, Noah, listen, good start on -- on cash. Obviously pleased. You know, we doubled our free cash flow at Aerospace year over year. I would say, first, let's just talk about the quarter. Two main drivers here. One was earnings growth, and second was working capital improvement which kind of offset the AD&A headwind. And, you know, working capital in the quarter was -- was -- was a source of cash versus a use of cash last year. So, that was a good turnaround from what we delivered. And the improvements we saw in the quarter came from a days sales outstanding that were down six days year over year and then progress payments that we got from customers. Inventory continue to be a challenge given all the material availability, you know, so our WIP levels are high, and the trapped inventory that we have increased as well. So, overall, earnings growth and working capital kind of drove the first quarter. And as you look at the -- at the full year, you know, to -- to your question on how -- you know, what's changed versus our prior guide, we've -- as I said in my prepared remarks, we do expect the incremental earnings growth that we are driving to flow through to cash. So, you know, we increased our -- the midpoint of our op profit by $150 million. So, call it $100 million kind of post-taxes that, you know, our free cash should be up by that. Again, on a -- on a full-year basis, you know, same drivers of -- of -- of free cash earnings growth and working capital improvement will continue to be the two big drivers. I think the -- the things that we are watching here, Noah, as you go into the second half of the year, is going to be the inventory reduction that we can drive. So, that's the one that's -- you know, just given the supply chain challenges, given the demand dynamics with the airframers, so we continue to watch our inventory levels and can we drive the same level of inventory reduction that we had initially planned that we had -- we had started the year. So, again, good start. We expect about half the full-year cash to be in the first half of the year. And then, we do think that the earnings increase that we've driven should flow through our cash as well. And greater than 100% conversion, you know, well above 100% for the year. Operator Our next question will come from the line of Matt Akers with Wells Fargo. Matt Akers -- Wells Fargo Securities -- Analyst Yeah. Hi, good morning, guys. Larry Culp Morning. Matt Akers -- Wells Fargo Securities -- Analyst Congrats, Steve. Can you touch a little bit more on the $650 million investment, just the benefits you expect to get from that? And it looks like there's a lot of additive manufacturing in there. If you could just talk about that opportunity as well. Larry Culp Well, it really is a broad-based enhancement of our existing domestic footprint. I'm sure you've seen some of the -- the line-item details that were publicized locally across the country. I think, more than anything, what we wanted to do was make sure we were supporting the -- the fixed capital investments required to operationalize FLIGHT DECK to prepare for the capacity expansions. And in some instances, be it additive or, in some other technologies, like CMCs, that we were getting out ahead of demand to the fullest extent possible. Again, back to the reality of the skylines we talked about earlier. So, that's what we'll do. That's kind of the announcement that we made here recently. I'm sure there will be follow-on announcements as we continue to invest, but the most important investments I think we make are those that we make in our people. And much of what we do from a training development perspective, especially the FLIGHT DECK, is really geared toward making sure that the people who come in every day are able to do great work and put those fixed assets to their highest and best use. Steve Winoker -- Vice President, Investor Relations Hey, Liz, we have -- we have time for one last question. Operator This question will come from a line of Jason Gursky with Citi. Jason Gursky -- Citi -- Analyst Yeah, same thing with Noah. Can you hear me all? Steve Winoker -- Vice President, Investor Relations We can, very well. Larry Culp Yeah. Good morning. Jason Gursky -- Citi -- Analyst It does go quiet right before you're allowed to open the line. Hey, Steve, thanks for all of the help, over the last, you know, year or so. And, Blair, look forward to -- to working with you. I'm sure you're listening in. Larry, a clarification point here, and then just a really quick question. On the clarification side of things, I think in your commentary about volume on lead, during your prepared remarks, you talked a little bit about supply chain being a bit of a constraint there. So, I want to make sure that that's the case in addition to whatever's going on with with Boeing. And then, on the question side of things, the -- just kind of curious how the -- the customer tone is, these days, on the narrowbody side, when -- with those airlines where you're competing for slots against the Pratt and Whitney engine, whether the tone of those conversations is, you know, any more constructive for you and the competitive environment is looking more optimistic for you on head-to-head competition against the Pratt engine. Thanks. Larry Culp I would say is I think both Rahul and I have -- have commented that we're -- we're well calibrated with -- with Boeing on the -- on the LEAP-1B requirements. We'll -- we'll leave it to Dave and Brian to speak to the details tomorrow. I think as we look forward, not only with that engine, but -- but others, the supply chain challenge that we've touched on in prior calls continues to be relevant. With respect to new business, I think if you look at our win rates, particularly in the narrowbody space, over the last several years, we've been very encouraged by the sequential trend, the upticks that we have seen there. And we will continue to work hard to earn the business that ought to come our way. No -- no change in that posture whatsoever. Steve Winoker -- Vice President, Investor Relations So, Larry, any -- any final comments? Larry Culp Steve, thank you, and again, thanks for everything. Let me just close. I hope you see here that the GE Aerospace team is moving forward with a greater focus to invent the future of flight, to lift people up and bring them home safely. And with flight daggers our foundation, I'm confident we will realize our full potential in service of our customers, employees, and shareholders. We appreciate your time today and your interest in GE Aerospace. Answer:

the GE Aerospace first-quarter 2024 earnings conference call

Operator Good day, ladies and gentlemen, and welcome to the GE Aerospace first-quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator for today. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the program to your host for today's conference, Steve Winoker, vice president of investor relations. Please proceed. Steve Winoker -- Vice President, Investor Relations Thanks, Liz. Welcome to GE Aerospace's first-quarter 2024 earnings call. I'm joined by chairman and CEO, Larry Culp; and CFO, Rahul Ghai. Many of the statements we're making are forward-looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and website, those elements may change as the world changes. With the spinoff of GE Vernova successfully completed earlier this month, GE Vernova will report its results separately on April 25th. While included in our first-quarter consolidated results, we're focusing today's commentary and Q&A primarily on GE Aerospace. Now, over to Larry. Larry Culp -- Chairman and Chief Executive Officer Steve, thank you, and good morning, everyone. Welcome to our first earnings call as GE Aerospace, now a pure-play global leader in propulsion services and systems. We're wholly focused on our aerospace and defense customers serving the 900,000 passengers in the air right now with our technology underwing. It's an incredible responsibility for our teams globally and why we take safety and quality so seriously. We'll come back to GE Aerospace in a moment, but before we do, we'll talk about GE on a consolidated basis, which is how we operated for the first few months of this year. Just three weeks ago, on April the 2nd, we completed GE Vernova's spin and launched GE Aerospace, ringing the bell at the New York Stock Exchange after the successful spin of GE Healthcare last year. It was a proud moment that we celebrated with our teams around the world. This marked a new beginning following the completion of GE's multiyear transformation that strengthened our businesses both financially and operationally. Thanks to the GE team, we significantly improved our financial position, reducing debt by more than $100 billion since 2018 and enhance our operational execution by embracing lean with a relentless focus on safety, quality, delivery, and cost, in that order, to better serve our customers. Together, we built a strong foundation for our three independent companies that, to date, have increased shareholder value nearly fivefold. Now, GE begins again, three industry leaders fit for purpose for the next century plus and ready to put their stamps on the world. GE Healthcare, GE Vernova, and GE Aerospace each carry forward GE's innovative spirit, customer focus, and passion to build a world that works, fully focused on their respective missions to lead precision health, the energy transition, and the future of flight. None of this would have been possible without the important work of our teams. I want to express again my sincere gratitude to our incredible people, whose unmatched passion and talent have made this achievement possible. Thank you. We turn to Slide 4. We had an exceptionally strong last quarter as GE. In the first quarter, orders were up substantially in both GE Aerospace and Power. Revenue was up 10% organically with all segments contributing to the growth. And equipment and services were up across both GE Aerospace and GE Vernova. Adjusted operating profit was $1.5 billion, up more than $600 million with 300 basis points of organic margin expansion. This was largely driven by pricing and volume, which more than offset investments and inflation. Adjusted EPS was $0.82, up more than three times year over year. And free cash flow was $850 million, up more than five times, or $700 million, driven by higher earnings and continued reduction in working capital. In all, a very strong performance for GE, reflecting real momentum at both GE Aerospace and GE Vernova. And now, the day has come where we bring our full focus to GE Aerospace. Our commercial propulsion fleet is the industry's largest and youngest, thanks to our world-class engineering and services teams. And in defense, we're proud to be the rotorcraft and combat engine provider of choice, powering two-thirds of these aircraft worldwide, a massive part of our businesses and aftermarket services, representing 70% of our $32 billion in revenue. Importantly, as we meet higher levels of demand today, services enable us to better understand how our technologies are performing, and we use that intelligence to help shape our future product road maps. Turning to our performance. GE Aerospace had a solid start to the year. In the first quarter, we delivered double-digit revenue and profit growth, as well as margin expansion in both businesses, with free cash flow doubling year over year. Overall, we have great confidence in our forward trajectory for raising our full-year operating profit guidance and see a path to our $10 billion operating profit target by 2028. Turning to Slide 6. As you heard from us last month at our Investor Day, we're keeping our strategy simple: Focused on today, tomorrow, and the future with safety and quality first. Enter FLIGHT DECK, our proprietary lean operating model to ensure focused execution as a public company. Fundamentally, it's a systematic approach to running our businesses to deliver exceptional value as measured through the eyes of our customers, and it's the best way we know to operationalize flight safety at GE Aerospace, in combination with our safety and quality management systems. Starting with today, we're focused on service and readiness, keeping our customers' fleets flying. We're experiencing a tremendous demand cycle for services as more people fly and fly more often. In the quarter, GE/CFM departures were up low double digits and were revising our expectations upward for the year. The onus is on us to meet this demand, and with FLIGHT DECK, we're maintaining the highest standards of safety and quality with greater predictability and speed. Easy to say, hard to do. A key priority in our services business is improving turnaround times to increase our shop visit output. We're making progress with LEAP, a significant driver of shop visit growth this year. For example, at our Malaysia site, a joint GE Aerospace and Safran team collaborated to reduce average LEAP test cell hours by 30% for engine, and they're working toward a 50%-plus improvement by year-end. As a result, the team has closed 95% of a 100-engine gap in test capacity so far while optimizing LEAP baseline test time, eliminating interruptions and reducing network variation. Actions like these are improving our shop turnaround time, which, for LEAP, was down approximately -- or down to approximately 90 days this quarter, a 10% reduction, versus our roughly 100-day average last year. While there's more work to do, we're focused on getting engines back in the hands of our customers faster without compromising safety or quality. For tomorrow, we remain focused on delivering on the ramp. This quarter, total engine deliveries improved, up 9% year over year, including defense up over 50%. However, these deliveries were short of our objectives due largely to continued material availability challenges. Thus, we have intensified our efforts working with our suppliers to problem solve these issues. Here is where FLIGHT DECK is key. Currently, we can track about 80% of our largest delivery challenges back to 15 supplier sites. We're deploying more than 550 engineers and supply chain resources, up 25% from last year., working with them to improve quality and delivery performance. For example, we're problem-solving with -- with one of our tier 1 suppliers by going to gemba at their most constrained supplier. We are shoulder to shoulder with them, leveraging FLIGHT DECK and working together to identify and break constraints such as labor shortfalls, manufacturing yield issues, identifying alternate material types for raw material shortages, and improving flow and lead times. As a result, that constrained supplier recently improved output by more than 25% and is no longer pacing deliveries. We also recently announced we're investing more than $650 million in both our manufacturing facilities and our supply chain this year, reflecting our commitment to strengthening quality and increasing production to better support our customers' long-term needs. At the same time, both airlines and our defense customers are expanding and modernizing their fleets and choosing to do so with us, adding to our $150 billion-plus backlog and continuing to build our installed base of engines and services. At the Singapore Air Show, Thai Airways committed to powering its new widebody fleet of Boeing 787 aircraft with our GEnx-1B engines. The GEnx is now a cornerstone of the airline's long-term plan to open new markets and meet surging demand while working to achieve its environmental goals. American Airlines secured 85 new Boeing 737MAX jets, which will be powered by our LEAP-1B. And easyJet made a commitment for more than 300 LEAP-1A engines for its fleet of 157 A320neo aircraft. In our defense and propulsion technologies business, we won a new order for F414 engines to power additional KF-21 fighter jets for the Korean Air Force, continuing to build our international business. And for the future. we're advancing the technology building blocks that will define the future of flight with more than $2 billion of R&D spending this year. For example, we're continuing to make progress with testing in our CFM RISE program. We completed our first fan ingestion test with our full-scale RISE fan blade, and the results were extremely encouraging. On the defense side, in partnership with Sikorsky Innovations, our team is finalizing designs for a hybrid electric power systems testbed with a 600-kilowatt electric motor. This will support Sikorsky's plan to build, test, and fly a hybrid electric vertical takeoff and landing demonstrator with a tilt-wing configuration. Altogether, we're running GE Aerospace with customer expectations front and center while delivering breakthrough innovation that will further shape -- excuse me -- the future of flight. And FLIGHT DECK ensures we work as one team utilizing one operating model, implement one strategy, and ultimately yielding one culture. This will help us to lead the industry forward and advance our vision to be the company that defines flight for today, tomorrow, and the future. Now, let me hand it over to Rahul. Rahul Ghai -- Chief Financial Officer Thank you, Larry, and good morning everyone. Larry, I fully share your enthusiasm as we embark on the next chapter of our journey as a stand-alone company. We will cover GE Aerospace's results on a stand-alone basis, the same as a full-year guide. Also, for simplification, our results will be prepared on a reported basis, and we are limiting non-GAAP free cash flow adjustments to spin-related matters. Overall, GE Aerospace delivered a solid start to the year, with all headline metrics up double digits. Demand remained resilient. Orders grew 34%, with similar growth rates in both commercial engines and services, or CES, and defense and propulsion technologies, or DPT. Revenue was up 15% from pricing, spare parts volume, and an increase in widebody and defense engine deliveries. Operating profit was $1.5 billion, up 24% with margins up 140 basis points to 19.1%. The profit growth was driven primarily by price, growth in services volume, and favorable mix. Profit and margins were up in both CES and DPT. Adjusted corporate costs and elimination, including prior GE corporate costs, were $130 million, down more than 20% year over year. Post the GE Vernova spinoff, we expect to incur roughly $300 million for the remaining wind-down of GE corporate office and close to $250 million to set up stand-alone infrastructure for GE Aerospace. We will continue to adjust these items from earnings and cash. Free cash flow was $1.7 billion, doubling year over year, with higher earnings and working capital improvements offsetting AD&A outflow. Specifically, working capital was a source largely from strong collections and progress payments, while inventory was a headwind. The strength of our operational and financial fundamentals gives us confidence to return 70 to 75% of our available cash to investors. Earlier this month, we initiated a quarterly dividend at $0.28, a 250% increase, and at our investor day, we announced a $15 billion share buyback, a testament to the strength of our balance sheet. To a new capital return framework, we are well positioned to create significant shareholder value while we continue to invest in growth, innovation, and focused M&A. Now, turning to CES and DPT results. Starting with CES, a $24 billion business with 70% of revenue generated from services. As Larry mentioned, demand continues to be robust. For the year, we now expect departures to grow high single digits. Total departures are off to a stronger start versus a prior expectation, growing 11% in the quarter with particular strength in China. We continue to expect departure growth to moderate throughout the year. We expect passenger traffic growth in high single-digit range for the year, a slight improvement. Narrowbody remains solid, with increased CFM56 fleet utilization and significant LEAP growth. Further, we now expect freight demand to be up low single digits versus a prior expectation of down mid-single digits. Heightened geopolitical conflicts have increased the need for air cargo and improved its relative economics. As a result, commercial momentum continues. CES orders were up 34% this quarter. Both services and equipment were up double digits, largely driven by strong demand for LEAP and spare parts across our platforms. Overall, customer dynamics remain positive, with strong order books from both airlines and airframers. On narrowbody platforms, we won more than 300 LEAP-1B engines and a multiyear services agreement from Akasa Air. And on widebody platforms, recent wins included 90 GEnx engines for Thai Airways, 16 GE9X engines for Ethiopian Airlines, and 10 GEnx engines for LATAM group. This improving demand backdrop underscores a confidence in our annual guide and longer-term outlook. Now, looking at CES' first-quarter results. Revenue grew 16%, with volume up low double -- double digits and the remainder driven primarily by higher price. Services growth of 12% was driven by pricing and strong spare part volume, which grew faster than internal shop visits that were up 3%, impacted by material input challenges. Equipment growth of 31% was driven by pricing and deliveries, which were up 2%, with higher widebody engine mix. LEAP shipments were roughly flat year over year given the supply chain challenges. As expected, spare engine shipments were down slightly. Profit was $1.4 billion, up 17%, with margins expanding 10 basis points from pricing, spare part sales, and mix. This more than offset higher inflation investments and a change in estimated profitability on long-term service agreements on a mature platform, which negatively impacted both services revenue and profit by roughly $200 million. At CES, we are pleased with a strong start to the year, delivering significant growth and profit improvement. Turning to DPT, which includes both defense and systems and propulsion and additive technologies. This is roughly a $9 billion business, where services make up approximately 55% of the revenue. Looking at the sector broadly, national defense budgets are growing, with U.S. spending expected to grow low single digits and international spending up mid-single digits. Our defense customers' ask of us is clear: support their readiness while delivering more and more predictably. Turning to our first-quarter results. Orders were up 34%, underscoring strong demand and the quality of our franchisees with defense book to bill a 1.1x. Revenue grew 18%. Defense unit deliveries grew by 45 engines on an easier compare. This, combined with pricing and growth in classified programs, increased defense and systems revenue by 17%. Propulsion and additive technologies grew 19%, primarily from growth at Avio and Unison to support GEnx and LEAP. Profit was $250 million, up 26%, with margins expanding 80 basis points. Volume and pricing, net of inflation, more than offset investments and defense equipment mix. In all, improved delivery and pricing drove strong revenue and profit growth this quarter. Given our solid start and constructive outlook for the rest of the year, we are raising our full-year profit and cash guidance as outlined on Slide 11. We continue to project at least low double-digit revenue growth. In CES, we still expect revenue growth of mid to high teens. In services, we continue to expect mid-teens revenue growth, with shop visit output growing faster than spare parts sales. We are anticipating reduced LEAP output in the range of 10 to 15% growth but continue to expect overall equipment revenue growth of high teens from improving widebody mix. In DPT, we continue to expect mid to high single-digit revenue growth, primarily driven by equipment growth. Operating profit is now expected to be in the range of $6.2 billion to $6.6 billion, up from $6 billion to $6.5 billion previously. CES operating profit guidance is now expected to be in the range of $6.1 billion to $6.4 billion, up $100 million at the midpoint from favorable revenue dynamics. DPT profit guidance is unchanged. In corporate, we continue to expect cost and eliminations of about $1 billion, including $600 million of corporate expenses and roughly $400 million of eliminations. We now expect margins to expand roughly 50 basis points for the year versus flat previously. Now, as a stand-alone company, we are initiating adjusted EPS in the range of $3.80 to $4.05, up more than 30% year over year. This includes first-quarter adjusted EPS of approximately $0.92, up more than 40% year on year. And on free cash flow, we expect higher profit to flow through to cash, delivering more than $5 billion with conversion well above 100% of net income. Overall, we are encouraged by the strong start and the market environment that gives us confidence to raise our performance expectations for the year. Larry, back to you. Larry Culp Rahul, thanks. We're clearly off to a solid start this year. If I close, on Slide 12, this captures the essence of GE Aerospace and what we take forward with us. We have an excellent franchise with sustained competitive advantages and a compelling value proposition. Our platforms are preferred by customers across narrowbody, widebody, and defense. Excuse me. We're aiming to provide industry-leading reliability and durability, prioritizing safety and quality first; then delivery; finally, cost. This means delivering unmatched time on wing and faster turnaround times for our customers, and we're doing this across the industry's largest and growing fleets. With our deep domain expertise and talent, commitment to innovation, and capacity to invest, we're poised to deliver the breakthrough technologies of the future. And with FLIGHT DECK as our foundation to bring this all together, our team is poised to realize our full potential and deliver exceptional value for our customers and our shareholders. I've never been more confident in our path ahead as GE Aerospace. Before I pass it back to Steve for Q&A, I'd like to take a moment to recognize him and his many contributions to GE. As you know by now, today is Steve's last call with us after more than five years with the company or, put another way, after 22 earnings calls. His dedication and partnership leading the investor relations team and serving as a trusted strategic advisor to me and the rest of the leadership team here has been invaluable throughout our transformation. On behalf of myself and the entire team, Steve, we thank you and wish you the best of luck in your next chapter. And I know Rahul would like to say a few words. Rahul Ghai -- Chief Financial Officer Thanks, Larry. Steve, I want to personally thank you for your trusted advice and friendship. As I joined the company and as we executed the launches of GE Aerospace and GE Vernova, your strategic and operating depth and your collaborative style have been instrumental in our transformation. And I know many on these calls and on the calls in the years past are appreciative of your responsiveness to their questions and the work you have done to simplify our financial disclosures while communicating our transformation with clarity and candor. We wish you all the best. And I'll pass it back to you, in the spirit of making you work till the last day, for questions. Steve Winoker -- Vice President, Investor Relations Larry, Rahul, thank you. I can't go on just yet without at least one quick comment. It's really been a true honor, privilege, and pleasure to serve with you and the rest of the teams at GE and GE Aerospace, a real master class for me. Thank you for always giving our investors and analysts a seat at the table. And I'm deeply grateful, proud of the teams, and excited to see what comes next. And I know the futures of GE Aerospace, GE Healthcare, and GE Vernova are bright indeed. So, now, before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask one question so we can get to as many people as possible. And if we have extra time, we'll circle back around. We ask that you please save any GE Vernova questions until their earnings call later this week again. Liz, can you please open the line? Questions & Answers: Operator [Operator instructions] Our first question comes from the line of David Strauss with Barclays. David Strauss -- Barclays -- Analyst Great. Thanks. Good morning. Congrats, Steve. Larry Culp Good morning. David Strauss -- Barclays -- Analyst One to Larry. Want to ask about the updated LEAP delivery guidance, now 10 to 15%, down from 20 to 25. Could you just dig into that a little bit, what drove that? Is that -- is that constraints on the supplier side? Is that Boeing taking down their schedule? What -- what exactly went into that thing? Larry Culp Yeah, I would say that that -- that clearly is a change here in the update this morning. Dave and company are going to talk about their -- their rates tomorrow, I'm sure, on their earnings call. So, we'll -- we'll leave that conversation with them. Rest assured, as we are with all of our -- our customers, we're well calibrated and aligned with respect to what we need to do, what they need from us as we as we look forward. But I think all of us, particularly at this moment, before we talk about rates, always come back to make sure we're doing all that we can on the safety and quality fronts to ensure the -- the best possible performance of our products, both as they're being manufactured and then, in turn, deployed in the field. Operator Our next question comes from Ron Epstein with Bank of America. Ron Epstein -- Bank of America Merrill Lynch -- Analyst Hey, good morning. Larry Culp Morning, Ron. Ron Epstein -- Bank of America Merrill Lynch -- Analyst If you could talk a little about the -- the -- the orders. I mean, they're up pretty spectacularly. And commercial engines and services up 78%. Defense, propulsion, and technologies, up 72. How much is that volume versus pricing? Rahul Ghai -- Chief Financial Officer Ron, I would say most of that is volume, and pricing helped across the -- across the board, showed up in our revenue growth, margin expansion, and in the orders outlook. But off a 34% increase in orders, I would say, you know, most of that is coming from base volume growth with price contributing as well. Operator Our next question will come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu -- Jefferies -- Analyst Thank you. Good morning, Larry and Rahul and Steve. Larry Culp Good morning. Rahul Ghai -- Chief Financial Officer Good morning. Steve Winoker -- Vice President, Investor Relations Good morning. Sheila Kahyaoglu -- Jefferies -- Analyst Congratulations on elevating the investor relations game to the next level. So, one for Larry or Rahul. You know, with Q1 margins, you guys have done a really great job. 19%, 150 bps above the prior guide -- sorry, the midpoint. You know, Rahul, maybe if you could revisit the two points of margin headwind you pointed us to last quarter. You know, you mentioned LEAP is lower on that unit volume, maybe about 40 bps of a tailwind versus your original guide, and then GE9X is probably consistent. So, maybe if you could talk about the puts and takes along with the investment and timing to get us to that mid-17% range for the year. Rahul Ghai -- Chief Financial Officer OK. A couple of things in there, Sheila. Let me start with where you started, which was, the two points of margin headwind that we had spoken to on the January call and on our investor day. So, if you go back, we had expected two points of margin pressure from LEAP OE ramp, introduction of 9X, and the step-up in R&D to support LEAP durability, introduction of 9X, and develop the future of flight. Now, with the push-out of LEAP volume, that headwind of the two points is marginally lower. but now, if you step back and look at our overall guide for the year, listen, strong start to the year. You know, we are pleased with where we are. And that has given us confidence to raise guidance for the full year. And we expect the momentum to fully continue as we get into the second quarter. And overall, for first half, we are expecting, you know, about low double-digit revenue growth and about half of profit and free cash for the year. So far, more linear year than we have done in the past. And overall, as you step back and look at the full year, you know, profit of $150 million at the midpoint of our guide, you know, to a range of 6.2 billion to 6.6 billion, call it mid-teens profit growth, and more than 30% EPS growth. So, it will be a good year, you know, if you deliver these numbers. Operator Our next question will come from Myles Walton with Wolfe Research. Myles Walton -- Wolfe Research -- Analyst Thanks. Good morning. And good luck, Steve. If I adjust CES for the $200 million long-term contract adjustment, the CES margins are up 250 basis points year on year despite this OE growth at two times aftermarket growth. And I hear what you're saying earlier on the spares exceeding shop visits, but is there anything else under the surface that really explains that kind of counterintuitive margin expansion? Rahul Ghai -- Chief Financial Officer No. Listen, we had a good start in CES, you know, a billion four of profit, margin expansion despite the CMR or the, you know, the -- the service profit adjustment that we had to make in the quarter. But, you know -- and the big drivers here were pricing and customer mix, both on the equipment and on services. The mix shift from -- mix shift in OE from LEAP to widebody mix health and also in services. Our spare part volume growth was higher than shop visit growth. So, that mix shift in services was a contributor as well. So, encouraging start. But as you go through the year, keep in mind that, you know, the equipment growth will ramp in the second half of the year. Equipment growth will also include 9X shipments, and the services mix will skew back toward the shop visit growth, which we still expect to be maybe, you know, low to mid-teens for the year. So, the second-half profit growth on a year-over-year basis will be lower than the profit growth that we'll see in the first half. But overall, listen, a good start in CES, and this gives us confidence to raise the full year for CES in profit by about $100 million. Operator Our next question will come from Robert Stallard with Vertical Research. Rob Stallard -- Vertical Research Partners -- Analyst Thanks so much. Good morning. Larry Culp Good morning. Rob Stallard -- Vertical Research Partners -- Analyst Just following on from David's question on the LEAP, do these issues with ramping up the LEAP have positive implications for the CFM shop visit peak, which I think you've earlier estimated at 2025, and also, the -- the height of that peak potentially going forward? Larry Culp Well, I would say that we do see, I think, some knock-on positive effects in the aftermarket, both here in '24, but also in some of our projections. I think it was just even last month at investor day, we talked about how retirements have been lower than we would have anticipated. Thus, that should yield 200 incremental shop visits in 2024 relative to what we anticipated. I think as long as capacity demand remains strong -- I get a report every morning at 6 a.m., this morning showed our departures on a worldwide basis across all of our platforms, up 7.8%, right? That's part of what Rahul alluded to in our prepared remarks with respect to our more optimistic outlook with respect to passenger demand. We know the airlines are looking to generate as much lift as they possibly can, and to the extent that they're paced by deliveries, retirements will -- will slow and that installed base will be worked. And fortunately, much of that came from our factories, and we're well positioned to support that. Does that push out the timing of perhaps peak CFM56? Yes. But it's -- but it's early, right? And I don't think we're going to try today to take a quarter in that time frame is to win. That might occur, but it's -- it's -- it's a positive dynamic force in the aftermarket, both with the existing platforms and increasingly with the LEAP. Operator Our next question will come from Seth Seifman with J.P. Morgan. Seth Seifman -- JPMorgan Chase and Company -- Analyst Hey, thanks very much. Good morning, everyone. And, congratulations, Steve, and thanks for all the help. I wanted to ask about shop visit growth and sort of the -- any challenges around the guidance for the year and the level of visibility that you have sort of starting off with -- with 3% and needing to get to, you know, kind of at least a mid-teens type of number for the year and, you know, that being constrained by, you know, various challenges in supply chain and, you know, internal productivity, and you know, kind of how much -- how much confidence you have around that ramp and shop as it grows? Larry Culp Morning, Seth. Clearly, if we're going to talk about a guide, as we are this morning, there's a high level of conviction. But I think you put your finger on what we are working on day in, day out here operationally. I think the financial numbers year over year are strong, but we know that we could have delivered -- we could have executed on more shop visits in the first quarter had we had more reliable, more predictable material flow into our shops. That doesn't impact us as much in terms of spare parts, right? We don't need everything necessarily to move that product to customers, but we do in the case of a shop visit. Some of the FLIGHT DECK examples that I referenced, I think, give us real encouragement that the work we're doing with those top five or top 15 supplier sites is yielding progress if you look at what we've seen just here in April. We've had a stronger start to the second quarter in terms of shop visit activity, completed outputs than we did in January. That's one comparison that we focus on because we still are not as linear through the course of a quarter as we would like. And making good use of the first two, three, four weeks of a quarter is critical for us to be able to deliver the year-over-year level on the sequential growth that we would like to see that's embedded here, and most importantly, what our customers need from us given how active they're working these assets. So, the supply chain topic is still relevant. I suspect we'll be talking about it again for the foreseeable future, but I'm very encouraged by the progress that we're making. We just need to make a whole lot more. Operator Our next question will come from the line of Ken Herbert with RBC Capital Markets. Ken Herbert -- RBC Capital Markets -- Analyst Hi. Good morning, and congratulations, Steve. Steve Winoker -- Vice President, Investor Relations Thanks, Ken. Ken Herbert -- RBC Capital Markets -- Analyst Hey, Larry or Rahul, you called out freight as a source of growth in the quarter, and I think you raised your full-year outlook there from sort of previously down maybe low single to now up low single. As we think about the impact in CES, is that just in relation to what we've seen in the Middle East? Are you seeing other fundamental changes that give you more confidence there? And how do we think about that impact, specifically as we think about the CES business and where you're seeing that flow through? Larry Culp Well, Ken, you're spot on, we're taking that again. To level set everybody from a outlook, that had us down mid-singles this year to now a positive low single-digit number. I think there is some influence here from what's happening in the Middle East. But I think we're just seeing a higher demand overall, from an air cargo perspective, that will principally course through our widebody exposure, more so than the single aisles. And I don't think we're going to quantify it here, but that's certainly part of what is behind the improved service outlook and thus the improved overall outlook for the rest of this year. Rahul Ghai -- Chief Financial Officer Yeah. And, Ken, just to add to that, you know, the direct impact is -- all depends on the number of shop visits that kind of move into the year. And I think that is -- that always takes time. So, there's not a direct correlation here that may show up during the year. But overall, as we look over an extended period of time, as we look at '24, '25 combined, that will definitely be a positive driver. So, we do expect the benefit from the higher freight departures to be in our financials. The question is probably not as much in '24 more than '25. Operator Our next question comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna -- TD Cowen -- Analyst Hey. Good morning, and congrats, Steve. Steve Winoker -- Vice President, Investor Relations Thanks, Gautam. Larry Culp Good morning. Gautam Khanna -- TD Cowen -- Analyst Hey, so you guys mentioned the lower LEAP production this year. I assume it's a function of lower 1B OE needs, but I was curious if you could just help us understand how we should think about the leap OE versus spares provisioning mix this year versus your prior expectations. And also wondering, given the lower rate on LEAP, are you going to be slowing down some of your LEAP suppliers? Or given the comments you made on the constraints within the supply chain, are you still pushing all these guys to -- to continuously raise production, you know, to work as hard as they can? Larry Culp Well, maybe we'll take those in reverse order. I'll speak to the supply chain, and Rahul can speak to where we are from a spares perspective. As I indicated, we're -- we're calibrated with both of our major narrowbody airframers. As we do that, we are always, in turn, calibrating with the supply base. And I think what we want to do in that work is make sure we're not overly indexed, if you will, on the next quarter or two. So, important, we want to make sure that we are preparing over the next several years to ramp, given the skylines, that -- that both of our major airframer customers enjoy today, right? A single lot slot is a scarce commodity. If we were out looking for one day, we might not find it until the next decade. That said, I think everybody, key aerospace included, is primarily focused on making sure, from a safety and a quality perspective, that we are in no way compromising as we think about the -- the wonderful gift we have in the form of these robust guidelines. And that's been at the heart of the GE work, the lean transformation for -- for years now, right? You hear us talking about SQDC, safety and quality before delivery and cost. It's at the -- at the core of FLIGHT DECK and everything that we do. Rahul, spares? Rahul Ghai -- Chief Financial Officer So, on the spare engines, Gautam, you know, overall, our spare engine ratio came down slightly in the first quarter on a year-over-year basis. And we do expect the full-year spare engine ratio to be down as well versus 2023, kind of as we've communicated before. So, really not a lot of change here from the change that we are making in the LEAP install engine output to translate into spare engine. So, we still expect the spare engine ratio to be down year over year. And -- and it will be -- it'll keep coming down over the next couple of years, I would say, on a gradual basis, Gautam, just given where, you know, LEAP spare engine has been in the past. So, we expect a continued decline here in the spare engine ratio over the next couple of years on a -- you know, gradually. Operator Our next question will come from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle -- Deutsche Bank -- Analyst Hey, good morning. Rahul Ghai -- Chief Financial Officer Morning, Scott. Larry Culp Morning, Scott. Scott Deuschle -- Deutsche Bank -- Analyst Hey, Rahul, what does the 100% free cash flow conversion target for 2028 assume with respect to the proportion of new engines being sold on CSAs in that time frame, particularly on LEAP? Mainly, I'm just curious, if you're assuming mostly migrates to T&M by that time. Thanks. Rahul Ghai -- Chief Financial Officer We do expect, Scott, that as we go through the year -- as you go through the decade, I should say, that there will be more T&M contracts. Keep in mind, as you know, Russell spoke at Investor Day, you know, our 20, 30-ish target for LEAP is we do about 60% or so of the shop visits between us and Safran, and 40% are done externally. And of that 60%, you know, there'll be a mix between CSAs and T&M, but we are actively working to increase the T&M population. Our -- our CBSA partners are standing up there, helping us as well. So, we would see a migration from CSAs to T&M contracts, with about 60% of THE shop visits done in-house here between Safran and GE Aerospace and the remaining 40% being done by our channel partners. Operator Our next question will come from the line of Robert Spingarn with Melius Research. Rob Spingarn -- Melius Research -- Analyst Good morning. Larry Culp Good morning, Rob. Rob Spingarn -- Melius Research -- Analyst Congrats to the team for this new chapter and getting through the spins. And congrats to you, Steve. I wanted to ask you, Larry, about RISE, Just to change the topic a little bit, and the potential here to deliver 20% improvement in fuel consumption versus current engines. Both airframers appear interested in RISE. And if competing engine OEMs aren't providing an open fan architecture, could we find ourselves in a position where RISE is -- or CFM is the only engine provider for the next-gen narrowbodies? Or do you think that the need for competition changes that dynamic? Larry Culp Well, I think where we're focused today is really in two areas: one, making sure that we continue to advance the building blocks of the underlying technologies with that -- with that engine platform. And that's the work that we're spending a considerable amount of money on as part of that $2 billion R&D -- R&D budget this year. I'd say the other area is making sure that we are closely aligned with the airframers, not only with respect to giving them visibility on the progress that we're making in our technology road map, but also working with them as they think about their own product road maps into the future. So, that -- there is that, if you will, that -- that collaborative, symbiotic dynamic. How all that plays out, time -- time will tell. But as we have done over generations, we want to lead with innovation, we want to lead with technology; we want to be close to the airframers. I think everyone understands that we are going to need to see that type of 20%-plus step function in efficiency in the next-gen platform. And as we have in the past, we intend to have GE Aerospace at the forefront. Operator Our next question will come from the line of Noah Poponak with Goldman Sachs. Noah Poponak -- Goldman Sachs -- Analyst Hello? Can you hear me? Larry Culp We can. Rahul Ghai -- Chief Financial Officer Good morning, Noah. Steve Winoker -- Vice President, Investor Relations Morning. Clear. Noah Poponak -- Goldman Sachs -- Analyst Hi. Sorry it cut out on my end, but good morning, everyone. And let me add my congratulations to -- to completing the spin. And, Steve, thanks a lot for all your help getting up to speed. Steve Winoker -- Vice President, Investor Relations Thank you. Noah Poponak -- Goldman Sachs -- Analyst Rahul, could you spend another minute on the free cash in the quarter and for the full year? You know, if -- if you're going to have any seasonality that looks like the company used to or the industry often does through the year, that number in the first quarter would imply a lot of upside to -- to the five. I know you highlighted working capital timing. It didn't look like that big of a number in the quarter on an absolute basis. Maybe it's just normally weaker. So, yeah, I guess how much bigger is the greater sign on the five now than it was before, or did you just truly have pure timing in the quarter? Rahul Ghai -- Chief Financial Officer Yeah, so, Noah, listen, good start on -- on cash. Obviously pleased. You know, we doubled our free cash flow at Aerospace year over year. I would say, first, let's just talk about the quarter. Two main drivers here. One was earnings growth, and second was working capital improvement which kind of offset the AD&A headwind. And, you know, working capital in the quarter was -- was -- was a source of cash versus a use of cash last year. So, that was a good turnaround from what we delivered. And the improvements we saw in the quarter came from a days sales outstanding that were down six days year over year and then progress payments that we got from customers. Inventory continue to be a challenge given all the material availability, you know, so our WIP levels are high, and the trapped inventory that we have increased as well. So, overall, earnings growth and working capital kind of drove the first quarter. And as you look at the -- at the full year, you know, to -- to your question on how -- you know, what's changed versus our prior guide, we've -- as I said in my prepared remarks, we do expect the incremental earnings growth that we are driving to flow through to cash. So, you know, we increased our -- the midpoint of our op profit by $150 million. So, call it $100 million kind of post-taxes that, you know, our free cash should be up by that. Again, on a -- on a full-year basis, you know, same drivers of -- of -- of free cash earnings growth and working capital improvement will continue to be the two big drivers. I think the -- the things that we are watching here, Noah, as you go into the second half of the year, is going to be the inventory reduction that we can drive. So, that's the one that's -- you know, just given the supply chain challenges, given the demand dynamics with the airframers, so we continue to watch our inventory levels and can we drive the same level of inventory reduction that we had initially planned that we had -- we had started the year. So, again, good start. We expect about half the full-year cash to be in the first half of the year. And then, we do think that the earnings increase that we've driven should flow through our cash as well. And greater than 100% conversion, you know, well above 100% for the year. Operator Our next question will come from the line of Matt Akers with Wells Fargo. Matt Akers -- Wells Fargo Securities -- Analyst Yeah. Hi, good morning, guys. Larry Culp Morning. Matt Akers -- Wells Fargo Securities -- Analyst Congrats, Steve. Can you touch a little bit more on the $650 million investment, just the benefits you expect to get from that? And it looks like there's a lot of additive manufacturing in there. If you could just talk about that opportunity as well. Larry Culp Well, it really is a broad-based enhancement of our existing domestic footprint. I'm sure you've seen some of the -- the line-item details that were publicized locally across the country. I think, more than anything, what we wanted to do was make sure we were supporting the -- the fixed capital investments required to operationalize FLIGHT DECK to prepare for the capacity expansions. And in some instances, be it additive or, in some other technologies, like CMCs, that we were getting out ahead of demand to the fullest extent possible. Again, back to the reality of the skylines we talked about earlier. So, that's what we'll do. That's kind of the announcement that we made here recently. I'm sure there will be follow-on announcements as we continue to invest, but the most important investments I think we make are those that we make in our people. And much of what we do from a training development perspective, especially the FLIGHT DECK, is really geared toward making sure that the people who come in every day are able to do great work and put those fixed assets to their highest and best use. Steve Winoker -- Vice President, Investor Relations Hey, Liz, we have -- we have time for one last question. Operator This question will come from a line of Jason Gursky with Citi. Jason Gursky -- Citi -- Analyst Yeah, same thing with Noah. Can you hear me all? Steve Winoker -- Vice President, Investor Relations We can, very well. Larry Culp Yeah. Good morning. Jason Gursky -- Citi -- Analyst It does go quiet right before you're allowed to open the line. Hey, Steve, thanks for all of the help, over the last, you know, year or so. And, Blair, look forward to -- to working with you. I'm sure you're listening in. Larry, a clarification point here, and then just a really quick question. On the clarification side of things, I think in your commentary about volume on lead, during your prepared remarks, you talked a little bit about supply chain being a bit of a constraint there. So, I want to make sure that that's the case in addition to whatever's going on with with Boeing. And then, on the question side of things, the -- just kind of curious how the -- the customer tone is, these days, on the narrowbody side, when -- with those airlines where you're competing for slots against the Pratt and Whitney engine, whether the tone of those conversations is, you know, any more constructive for you and the competitive environment is looking more optimistic for you on head-to-head competition against the Pratt engine. Thanks. Larry Culp I would say is I think both Rahul and I have -- have commented that we're -- we're well calibrated with -- with Boeing on the -- on the LEAP-1B requirements. We'll -- we'll leave it to Dave and Brian to speak to the details tomorrow. I think as we look forward, not only with that engine, but -- but others, the supply chain challenge that we've touched on in prior calls continues to be relevant. With respect to new business, I think if you look at our win rates, particularly in the narrowbody space, over the last several years, we've been very encouraged by the sequential trend, the upticks that we have seen there. And we will continue to work hard to earn the business that ought to come our way. No -- no change in that posture whatsoever. Steve Winoker -- Vice President, Investor Relations So, Larry, any -- any final comments? Larry Culp Steve, thank you, and again, thanks for everything. Let me just close. I hope you see here that the GE Aerospace team is moving forward with a greater focus to invent the future of flight, to lift people up and bring them home safely. And with flight daggers our foundation, I'm confident we will realize our full potential in service of our customers, employees, and shareholders. We appreciate your time today and your interest in GE Aerospace.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good afternoon, everyone, and welcome to Gilead's first quarter 2024 earnings conference call. My name is Rebecca, and I'll be your host for today. In a moment, we'll begin our prepared remarks. After that, we'll have a Q&A session. [Operator instructions] I'll now hand the call over to Jacquie Ross, VP, investor relations and corporate strategic finance. Jacquie Ross -- Vice President, Investor Relations Thank you, Rebecca. Just after market closed today, we issued a press release with earnings results for the first quarter of 2024. The press release, slides, and supplementary data are available on the Investors section of our website at gilead.com. The speakers on today's call will be our chairman and chief executive officer, Daniel O'Day; our chief commercial officer, Johanna Mercier; our chief medical officer, Merdad Parsey; and our chief financial officer, Andrew Dickinson. After that, we'll open Q&A where the team will be joined by Cindy Perettie, the executive vice president of Kite. Before we get started, let me remind you that we will be making forward-looking statements. Please refer to Slide 2 regarding the risks and uncertainties relating to forward-looking statements that could cause actual results to differ materially. With that, I'll turn the call over to Dan. Dan O'Day -- Chairman and Chief Executive Officer Thank you, Jacquie, and good afternoon, everyone. I want to start by thanking the Gilead teams for delivering a strong first quarter, which you see in our commercial performance and our clinical execution. Total product sales, excluding Veklury, grew 6% year over year to $6.1 billion, driven by higher demand across HIV, oncology, and liver disease. Veklury sales continue to track with the rates of hospitalization for COVID-19 and reached a total of $555 million. Once again, sales growth for the quarter reflected the diversity of our portfolio. HIV product sales grew 4% year over year. Oncology product sales were up 18%, driven by Trodelvy, which is well established as the No. 1 regimen for second-line metastatic triple-negative breast cancer, and by our transformative cell therapies. As we outlined at the recent Kite analyst event in Maryland, we have exciting plans to build on our clear market leadership in cell therapy, such as expand into community networks in the U.S., more than double our manufacturing capacity, and move into new indications and disease areas with next-generation products. From an EPS perspective, first-quarter results reflect the close of the CymaBay acquisition with an inquired IP R&D charge of $3.9 billion or an expense of $3.14 per share. Excluding this charge, non-GAAP diluted EPS would have been $1.82 for the first quarter, which is above expectations, driven by higher product sales. The CymaBay acquisition brings us an important registrational medicine, seladelpar, which has the potential to address significant unmet need in liver disease. We have filed for regulatory approval of seladelpar as a treatment for primary biliary cholangitis, or PBC, with both FDA and EMA, and we expect an FDA regulatory decision in August. If approved, we will leverage our industry-leading commercial infrastructure and long-standing expertise in liver disease to bring seladelpar a potentially transformative therapy to people with PBC who might benefit. Moving to clinical execution. We're very pleased with momentum in our HIV pipeline, which was reflected in our 80 data abstracts at CROI. Based on the strength of the data, we've initiated Phase 3 trials for bictegravir and lenacapavir, our novel once-daily oral regimen, and plan to advance once-weekly oral programs, including lenacapavir plus islatravir into Phase 3. Later this year, we will host an HIV analyst event to share details of how we will further shape the HIV landscape with innovative options for prevention and treatment, including the next wave of long-acting therapies. Before I pass it to Johanna, I will briefly recap our 2024 milestones on Slide 6. We have already achieved first patient in for the Phase 3 ARTISTRY-1 and ARTISTRY-2 trials, evaluating once-daily lenacapavir in combination with bictegravir as well as Phase 2 first patient in for SWIFT evaluating GS-1427, our oral alpha-4-beta-7 inhibitor. We are also on track for our upcoming milestones, including updates from three Phase 3 clinical trials for Trodelvy and lenacapavir. Looking ahead to the rest of 2024, this is a time of focused execution for Gilead. We will stay disciplined and agile in our approach, and we will focus the organization on both near-term execution and longer-term plans. With 54 clinical programs in play, no major patent expiration for the decade, and many opportunities for growth, we have a lot of potential and a lot to deliver. My thanks again to the Gilead teams for their great work this quarter and the ongoing progress across our diverse portfolio of therapies. With that, I'll hand it over to Johanna. Johanna Mercier -- Chief Commercial Officer Thanks, Dan, and Good afternoon, everyone. With the first quarter marking the ninth consecutive quarter of year-over-year growth for our base business, our teams delivered a strong start to 2024, notably navigating the seasonal first-quarter dynamics and establishing a firm base on which we can continue to build this year. Beginning on Slide 8, total product sales, excluding Veklury, were $6.1 billion for the first quarter, up 6% year 1, reflecting solid growth of our HIV, oncology, and liver disease businesses. Including Veklury, total product sales were $6.6 billion, up 5% year over year. Moving to HIV on Slide 9. Sales were up 4% year over year to $4.3 billion, primarily driven by higher demand as well as favorable pricing dynamics in Europe that are not expected to repeat. Quarter-over-quarter sales were down 7%, driven by the typical seasonality we experienced in the first quarter of the year, partially offset by higher demand. As a reminder, quarterly HIV growth is, in general, more variable and less indicative of overall trends than the full year. This is evident in the first quarter of every year where inventory drawdown typically occurs following a build that generally happens toward the end of the prior year and patient co-pays and deductibles start of every year, and together with shifts in channel mix lowers average realized price in the first quarter. As always, we typically see these quarterly pricing and inventory dynamics normalize as we progress throughout the year. We continue to expect approximately 4% HIV sales growth for 2024. Supporting that outlook, the treatment market grew in line with our expectations, as shown on Slide 10. Biktarvy remains the leading regimen for HIV treatment across major markets for new starts as well as for those switching regimens with sales up 10% year over year to $2.9 billion, reflecting strong demand. Quarter over quarter, sales were down 5% as the higher demand was offset by the typical seasonal factors discussed earlier. It's notable that six years after launch, Biktarvy continues to gain market share in the U.S., up three percentage points year over year to approximately 49% share and once again, outpacing all other branded regimens for HIV treatment. Moreover, we continue to see Biktarvy's benefit extend into broader populations of people with HIV. Most recently, Biktarvy was granted FDA approval for use in virologically suppressed individuals with known or suspected M184 resistance, a common form of treatment resistance. Turning to prevention. Descovy sales were down 5% year over year to $426 million, driven by lower average realized price due to channel mix, partially offset by higher demand. Sequentially, sales were down 16%, reflecting the seasonal dynamics discussed earlier, partially offset by higher demand. While market volumes in February were temporarily disrupted by the cyberattack on Change Healthcare, volumes readily recovered in March. Overall, the PrEP market continued to demonstrate robust growth, up over 11% in the first quarter, with Descovy maintaining over 40% PrEP market share in the U.S. despite the availability of other regimens, including generics. This is a solid setup as we look to potentially launch lenacapavir as early as late next year as the first and only twice-yearly subcutaneous prevention option. Given Gilead's strong commercial foundation across treatment and prevention, we are well-positioned to maintain leadership in HIV as we look to the evolving marketplace of daily orals, long-acting orals, and long-acting injectables. Moving to liver disease on Slide 11. Sales for the first quarter were $737 million, up 9% year over year, primarily driven by favorable inventory dynamics and the timing of purchases by the Department of Corrections for our HCV products as well as higher demand across HCV, HBV, and HDV. Sequentially, sales were up 7%, primarily reflecting the timing of HCV purchases. Despite fewer HCV starts globally year over year, our viral hepatitis portfolio overall has remained stable and continues to be a meaningful contributor to our commercial performance. This strength is underpinned by our extensive global footprint and expertise in the treatment of liver diseases. To that end, pending approval, Gilead is excited to bring seladelpar to patients for the treatment of certain adults with PBC, impacting approximately 130,000 people in the U.S. and about 125,000 people in Europe. With the sales force that covers almost 80% of the U.S. prescriber base for PBC, we expect to readily make seladelpar available to patients upon approval in the second half of this year. Seladelpar has demonstrated the potential to be best-in-class with a differentiated clinical profile to existing and emerging therapies, particularly on a key symptom of the disease, pruritus. Following its launch in 2024, we expect seladelpar to contribute modestly to sales and more meaningfully in 2025 and beyond. Turning to Slide 12. Veklury continues to be the standard of care antiviral for hospitalized patients treated with COVID-19, with market share well over 60% in the United States. COVID-related hospitalizations were lower in the first quarter with the winter wave peaking earlier than expected in the U.S. and Europe as compared to other regions such as Japan. As a result, Veklury sales overall were down 3% year over year and down 23% sequentially to $555 million. Shifting to oncology on Slide 13. Sales were up 18% year over year to $789 million and are now firmly above a $3 billion annual run rate. Having treated over 50,000 patients to date, we look forward to bringing our portfolio of medicines and future treatments across lines of therapies and tumor types to many more patients around the world. Moving to Slide 14. Trodelvy sales for the first quarter exceeded $300 million, up 39% year over year, reflecting continued demand. Sequentially, sales were up 3%, primarily driven by demand outside the U.S. as well as unfavorable fourth-quarter pricing dynamics in Europe that did not repeat. This was partially offset by inventory dynamics in the U.S. where we saw a drawdown in the first quarter. Overall, Trodelvy's strong market share reflects its awareness among providers and patients. In second-line metastatic triple-negative breast cancer, Trodelvy remains the leading regimen with approximately one-third in the U.S. And in the pre-treated HR+/HER2- metastatic breast cancer setting, Trodelvy has demonstrated continued adoption, most notably in the IHC0 setting. We are confident Trodelvy continues to differentiate itself with its safety profile and clinically meaningful survival benefits, with over 30,000 patients across tumor types already treated to date. We look forward to potentially extending Trodelvy's reach to many more patients in the years ahead, particularly in bladder cancer, earlier-line breast cancer settings, and lung cancer. Turning to Slide 15 and on behalf of Cindy and the Kite team, Cell Therapy sales were $480 million in the first quarter, up 7% year over year. Sequentially, sales were up 3%, in-line with our guidance of flat to slightly up. We're pleased to see continued demand for Yescarta and Tecartus in both existing and new markets across Europe and other geographies, such as in Japan where we have seen good progress in growing brand share and expanding our network of authorized treatment centers to over 20 to date. In the U.S., and consistent with our recent updates, we see opportunity for growth through expanding the number of authorized treatment centers and affiliated satellites, while also driving increased referrals from the community setting. For example, we're proud to have established our flagship community collaboration with Tennessee Oncology in the first quarter. We've identified many critical learnings on how we can partner effectively with community oncology practices for cell therapy, and we will continue to refine this "blueprint" so that we become more efficient at onboarding new centers over time. We expect to start seeing the Impact from this initiative toward the end of 2024. Wrapping up the first quarter, we had a strong start to the year, primarily driven by higher demand across each of our core businesses year over year. We look forward to carrying this momentum through 2024 and as we bring seladelpar to market later this year following approval. I'd like to thank the commercial teams and cross-functional partners across Gilead and Kite for their strong execution as we diligently expand our therapies to new populations, positively impacting more people all around the world. And with that, I'll hand the call over to Merdad. Merdad Parsey -- Chief Medical Officer Thank you, Johanna. We have had a busy first quarter at Gilead, with a cadence of clinical readouts that will continue throughout the rest of the year. Importantly, we anticipate an FDA regulatory decision on seladelpar and three Phase 3 updates across HIV prevention, bladder cancer, and breast cancer. Starting on Slide 17, we continue to progress our industry-leading Virology pipeline, which is building momentum following a data-rich presence at CROI in March. This included robust virologic suppression data from our once-daily oral combination of bictegravir with Lenacapavir from the Phase 3 portion of the ARTISTRY-1 trial. This novel combination has the potential to benefit people with HIV on complex regimens. We have since started two Phase 3 trials of this combination, one in virologically suppressed individuals and another in virologically suppressed treatment-experienced individuals. We expect to complete enrollment in the first half of 2025. We also have two once-weekly oral programs: first, a combination of lenacapavir with Merck's NRTTI, islatravir, in virologically suppressed people with HIV, expected to advance into Phase 3 later this year. And second, a combination of a capsid inhibitor with GS-1720, our novel oral integrase inhibitor. We're working to advance this combination into a Phase 3 study. This second program has the potential to be the first once-weekly oral regimen containing an INSTI agent. INSTIs are the standard-of-care treatment for HIV and an important treatment option for clinicians who continue to prefer INSTI-based regimens. Finally, we presented Phase 1b data from our twice-yearly parenteral program of lenacapavir plus our two broadly neutralizing antibodies for people with HIV at CROI, and we intend to share data from the Phase 3 study in the second half of this year. Moving to PrEP, we plan to share an update from our Phase 3 PURPOSE-1 trial in the second half of this year. Data from PURPOSE-01, together with data from PURPOSE-2, is expected to support the filing of Lenacapavir for HIV prevention. This PrEP option would not only offer a convenient dosing schedule as the first twice-yearly subcutaneous regimen but could also be transformative in terms of adherence to HIV prevention regimens. Turning to Slide 18. Our Trodelvy program continues to be evaluated across a range of solid tumors with seven Phase 3 trials currently underway across breast, bladder, and metastatic non-small cell lung cancers with plans to start the Phase 3 trial in endometrial cancer later this year. Abstract titles were just released yesterday for the upcoming ASCO meeting, and we're pleased to have over a dozen Oncology presentations this year. We will be presenting late-breaking Phase 3 data from our second-line plus metastatic non-small cell lung cancer trial, EVOKE-01. Updated data from first-line, PD-L1 high subjects in Cohort A of the Phase 3 EVOKE-02 trial will also be shared. We plan on providing updates from Cohorts C and D, evaluating Trodelvy plus pembro and chemotherapy in PD-L1 all-comers at a medical congress in the second half of this year. In addition, presentations for both the Phase 3 EDGE-Gastric trial and Phase 3 ARC-9 studies will be highlighted. Depending on the timing of event accruals, we anticipate two more Phase 3 updates this year for Trodelvy. These include overall survival data from our confirmatory Phase 3 bladder cancer study, TROPiCS-04, that could support Trodelvy's submission for full regulatory approval in the U.S. and enable ex-U.S. filings. In TNBC, where Trodelvy is the only ADC to have demonstrated statistically significant improvement in overall survival in the second-line setting, we expect to share an update on the Phase 3 ASCENT-03 trial in first-line PD-L1 negative patients later this year. Moving on to Cell Therapy. I'm pleased to share Kite's approach to the development of novel cell therapies that Cindy and the team presented at last month's investor event. As you can see on slide 19 Yescarta and Tecartus established Kite as the leader in Cell Therapy, and we plan to potentially extend this leadership into multiple myeloma, while also paving the way for innovative next-generation constructs. On anito-cel in later-line multiple myeloma, we expect to provide a Phase 3 iMMagine-1 trial update in the second half of this year. This update follows the highly encouraging Phase 1 data presented at ASH last year, where anito-cel demonstrated durable responses with median progression-free survival not yet met at 26.5 months median follow-up and no cases of parkinsonian symptoms observed in the trial. For our next-generation cell therapy assets, we have bicistronic and optimized manufacturing constructs in Phase 1 trials, which are aimed at overcoming resistance mechanisms, providing potentially deeper and more sustained responses, and improving product potency. Beyond that, we have early research in allogeneic and in vivo CAR, with plans to expand into a range of other disease areas such as multiple myeloma with anito-cel, solid tumors, and autoimmune diseases. Moving to Inflammation on Slide 20. We recently completed our acquisition of CymaBay and added seladelpar, an investigational PPAR-delta agonist to our portfolio. In Phase 3 clinical trials, seladelpar demonstrated significant improvement in both pruritus and markers of cholestasis related to the risk of progression for PBC. As previously announced, FDA and EMA accepted our regulatory filings for seladelpar for the management of PBC in certain adult patients. We anticipate an FDA regulatory decision by August 14th and a decision from European regulators early next year. We continue to work with global regulatory authorities to expand the reach of seladelpar for PBC patients. Further, as we look at the rest of our Inflammation pipeline, we have several early phase assets that have progressed into Phase 2 trials, including our potentially first-in-class oral TPL2 inhibitor, a potentially best-in-class oral alpha-4-beta-7 anti-integrin, and an oral IRAK4 inhibitor. Wrapping up on Slide 21. We continue to progress on our clinical milestones for the year, and we have had two first patients in and one data readout completed in the first quarter, and we remain on-track for our remaining milestones. And now, I'll hand the call over to Andy. Andy Dickinson -- Chief Financial Officer Thank you, Merdad, and good afternoon, everyone. Beginning on Slide 23. It was a strong start to the year with our base business up 6% year over year. The solid growth achieved across HIV, Oncology, and Liver Disease offset the decline in Veklury, with total product sales up 5% year over year to $6.6 billion. As expected, our base business was down quarter over quarter, primarily driven by seasonal inventory and pricing dynamics in HIV. Moving beyond our revenue results, two items significantly impacted our EPS performance in the first quarter, as shown on Slide 24. First, our GAAP and non-GAAP results included an acquired IPR&D charge of $3.9 billion or $3.14 per share, associated with the close of the CymaBay acquisition. As an asset acquisition, this transaction was fully expensed in the first quarter. This was a nondeductible expense item, and as a result, impacted our effective tax rate. Excluding this expense, our non-GAAP EPS would have been $1.82 for the first quarter, above expectations, primarily driven by higher sales. The second item shown on the right-hand side is an impairment charge that is included in our GAAP results and excluded from our non-GAAP results. As a reminder, this relates to the carrying value of the IPR&D indefinite-lived intangible assets acquired from Immunomedics. At the end of 2023, the carrying value was $5.9 billion, all associated with non-small cell lung cancer. As a result of the EVOKE-01 readout in late January, we have reassessed and reduced the remaining value to $3.5 billion. This primarily reflects the smaller addressable market that Trodelvy could serve among 2L+ metastatic non-small cell lung cancer patients, a delay in expected launch timing, and associated competitive activity. We remain confident that Trodelvy will deliver attractive returns over time, with sales now exceeding $1 billion a year, a strong IP portfolio, and a development program with multiple shots-on-goal in new indications as well as earlier-lines of therapy, including some opportunities not included in the initial deal model. In the meantime, you can see that the impairment impacted our first-quarter GAAP EPS by $1.46 per share. Moving to the rest of our non-GAAP results on Slide 25. For the first quarter, product gross margin was down modestly to 85.4%, primarily due to product mix. R&D and SG&A were each down 2% year over year. This is the second consecutive quarter of operating expense declines on a year-over-year basis, reflecting our continued focus on disciplined expense management. Our effective tax rate in the first quarter was a negative 30%, reflecting the nondeductibility of the CymaBay acquired IPR&D charge. Overall, our diluted earnings per share was a negative $1.32 compared to a positive $1.37 for the same period last year, primarily reflecting the $3.14 per share expense related to the CymaBay acquisition. Switching to full-year guidance on Slide 26. There is no change to our revenue expectations for 2024 at this time. We continue to expect total product sales in the range of $27.1 to $27.5 billion; and we continue to expect total product sales, excluding Veklury, in the range of $25.8 to $26.2 billion, representing growth of 4% to 6% for our base business year over year. Additionally, there is no change to our Veklury guidance of approximately $1.3 billion for the full year. As discussed last quarter, we do not expect to update our Veklury guidance until our third-quarter earnings call, absent a very clear trend in COVID-19 infections. Shifting to the other parts of the P&L for 2024 on a non-GAAP basis. There is no change to our gross margin guidance where we continue to expect product gross margin in the range of 85% to 86%. We now expect R&D to grow at the higher end of our previous low-to-mid single-digit growth range, reflecting the incremental expenses associated with the CymaBay acquisition. We continue to expect SG&A expenses to decline a mid-single-digit percentage relative to 2023. On a dollar basis, SG&A is expected to be modestly higher than our previous SG&A expectations as we incorporate CymaBay expenses. However, we can manage this within the window of the previously issued operating expense guidance. Acquired IPR&D is now expected to be approximately $4.4B, due to the CymaBay transaction as well as milestones anticipated throughout the rest of the year. Operating income is now expected in the range of $7 billion to $7.5 billion, reflecting the updated acquired IPR&D guidance and the modest increase to operating expenses associated with the CymaBay transaction. Given the non-deductible impact of the CymaBay acquisition, the effective tax rate for 2024 is expected to be approximately 30%. This includes a negative impact of approximately 11% from the one-time charge for the acquisition of CymaBay. We therefore now expect diluted EPS in the range of $3.45 to $3.85. As shown on Slide 27, this has only been updated to reflect the transactions that were closed in the first quarter of 2024. Excluding these charges, you can see that we are comfortably within the range of the EPS guidance we shared back in early February. On a GAAP basis, we expect full-year 2024 diluted EPS to be in the range of $0.10 and $0.50. Moving to Slide 28. Our capital allocation priorities remain unchanged with sufficient flexibility in our balance sheet. Specifically, as demonstrated in the first quarter, we announced a 2.7% increase to our quarterly dividend and returned approximately $1.4 billion to shareholders. In addition, we acquired CymaBay for $4.3 billion, adding seladelpar to our portfolio. Overall, we'll continue to be disciplined in our use of capital. And while we will continue to be flexible and opportunistic, it is unlikely that Gilead will be engaging in any sizable M&A transactions in the near term. Before I wrap it up, on Slide 29, a quick note on our expectations now that the CymaBay transaction has closed. Pending regulatory approval, we expect to launch seladelpar in the U.S. before the end of 2024, as Johanna highlighted earlier, with a modest revenue contribution expected this year. Additionally, we have shared that the transaction is expected to add to operating expenses this year as we make incremental investments to support the launch as well as other R&D efforts, all of which we are able to manage within the window of the previously issued operating expense guidance. And as we look ahead, while the transaction will be dilutive to our EPS this year, we expect the deal to be breakeven to earnings in 2025, and significantly accretive in 2026 onwards. And now, I'll invite Rebecca to begin the Q&A. Questions & Answers: Operator Thank you, Andy. At this time, we'll open up the call for questions. We ask that you be courteous and limit yourself to one question so that we can get to as many analysts as possible during today's call. [Operator instructions] Our first question comes from Chris Schott at JPMorgan. Chris, go ahead. Your line is open. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much for the question. Just had a question on the HIV franchise and the impact from the Medicare redesign as we think about 2025, I know this is coming from more and more conversations. Can you just talk a little bit about how you're thinking about that impact to your franchise? And maybe just more broadly, can we directionally still think about top-line growth and margin expansion for Gilead next year despite this headwind? So any color you can provide there would be appreciated. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Yeah. Great, Chris. Welcome, everybody. This is Dan. I'm going to have Johanna cover this question. Thank you. Johanna Mercier -- Chief Commercial Officer Thanks, Chris, for the question. So, we do expect an impact of the Part D redesign to be weighted toward our HIV business and expect our HIV growth in 2025 to be offset by the Part D redesign impact. So, as a result, we expect our HIV sales to be roughly flat year on year in 2025. Having said that, overall, we expect our total business to grow despite the impact of the Part D we designed in 2025 with the top line, building momentum in 2020 -- beyond 2025, right, '26 and beyond. So, we do expect growth in '25, but our HIV business, the demand of HIV will offset the impact of Part D. Andy Dickinson -- Chief Financial Officer Chris, it's Andy. I'll take the question on margin expansion. As you know, we don't provide more specific guidance for 2025 beyond what Johanna just mentioned. What we have said historically, and I've underscored, is that we are very focused on disciplined expense management. That will be true in 2025 as it is today. You've seen that in the last two quarters. I think on a non-GAAP basis for this quarter, if you look at our operating margin, if you strip out the CymaBay transaction, you see an improvement in our operating margin, and we expect that to continue over time. So, we do expect broadly for our operating margin to improve over time as you see the continued top-line growth and the disciplined expense management. So, thanks for the question. More details, of course, to be provided early next year when we provide our 2025 guidance specifically. Operator Our next question comes from Daina Graybosch at Leerink Partners. Daina, your line is open. Daina Graybosch -- Leerink Partners -- Analyst Great. Thanks for the question. It's for Kite. FDA's ODAC recently had two important meetings of relevance for multiple myeloma and CAR-T there. One dealt with the early death risk from CARVYKTI and ABECMA. And the second was to recommend MRD as an intermediate endpoint for accelerated approval in multiple myeloma. And I wonder how you're thinking about both of these ODACs in relation to anito-cel in your earlier line trial design. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Thanks, Daina. We've got Cindy Perettie here, so we'll go right over to her. Cindy Perettie -- Executive Vice President, Kite Thanks, Daina. So, if I start off with the early line ODAC, I think we believe this is positive for everybody. What it's shown is that people recognize the value of having CAR Ts therapies earlier in their disease. They value the disease-free intervals that they get from that. So, we were very happy to see that. I think we were equally as excited to see the second ODAC around MRD, minimal residual disease, as a secondary -- as an additional endpoint. I think the piece around this is that we're really encouraged that the ODAC decision is going to open up the door for us to potentially bring anito-cel to market faster for patients. And we're in the process right now of understanding how the MRD surrogate endpoint can be used with regulatory agencies and the application of our program and so more to come on that front. Operator Our next question comes from Umer Raffat of Evercore ISI. Umer, your line is open. Umer Raffat -- Evercore ISI -- Analyst Hi, guys, thanks for taking my question. I just thought I'll spend a quick second on CymaBay given the recent deal. My question is, did Gilead, during the diligence process, deploy independent pathologists to evaluate the cases of "possible" liver pathology that happened in the NASH trial previously as well as the paired liver biopsy data from the PBC trial at the lower dose where CymaBay didn't think it would need safety adjudication? I'd be very curious how you guys did that and if you would ever publish that. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Merdad is here, so I'll let him answer. Merdad Parsey -- Chief Medical Officer Thanks, Umer. Let me start by saying we think seladelpar is one of those medicines that will bring a lot of benefit to patients and really some near-term expansion of our liver portfolio and our -- and what we think will synergize with many of the other -- much of the other work that we're doing in liver disease overall. We obviously did thorough diligence in our approach to seladelpar and CymaBay. We didn't do a third -- I think your question was around whether we did an independent third-party review of the pathology. We did not do that. However, we did a lot of thorough diligence on the data itself and the outcomes. And we are confident around the outcome and what it means for patients over time. Obviously, we're waiting right now the -- our upcoming PDUFA date and also the file in the EMA, which we are optimistic about. And following the questions and all those sorts of items that we're in. So, we're looking forward to providing an update on that as those filings proceed. Operator Our next question comes from Tyler Van Buren at TD Cowen. Tyler, your line is open. Tyler Van Buren -- TD Cowen -- Analyst Hey, guys, good afternoon. Thanks very much for the question. I was hoping you could help set expectations for EVOKE-01 and 02 presentations at ASCO. For EVOKE-02, the late breaker tag is interesting. So, is that related to the 3-month OS benefit in the PD-1 refractory patients? Or could we -- or should we be expecting something more? And for EVOKE-02, what should we hope to see with the Cohort A data that should leave us confident in the EVOKE-03 readout next year? Merdad Parsey -- Chief Medical Officer Thanks, Tyler. It's Merdad again here. So, it's a little challenging because I can't share too many details now because we're under embargo for both of those. And obviously, happy to fill in a lot of the blanks once the data are released, and we can talk about it in ASCO. I think for EVOKE-01, we think there are a number of pipeline updates in our ASCO presentations that we have upcoming, which were -- we see as a real change for us and a real evolution of our pipeline overall and our ability to build our oncology pipeline and bring new options for patients. As part of the late breaker session for EVOKE-01, as you mentioned, we will include data on overall survival, on PFS, ORR, and duration of response as well as the safety profile, of course. And I wish I could give you more details, but I can't at this point. As you say, we will also be providing other updates there, including the EVOKE-02 Cohort A data looking at the PD-L1 high non-small cell population. And again, I can't really talk about the details of those data, but we are looking forward to sharing those results with everyone and talking about the implications of that for our broader lung cancer and especially the frontline lung cancer EVOKE-03 study that we are conducting right now is underway with our partners at Merck. Operator Our next question comes from the line of Geoff Meacham at Bank of America. Geoff, your line is open. Geoff Meacham -- Bank of America Merrill Lynch -- Analyst Good afternoon, everyone. Thanks for the question. Merdad, a question for you. On the cell therapy front, you usually have the anito-cel update later this year, which is big. But beyond that, I wasn't sure what the priority was among the next-gen CAR assets that you've got kind of cartooned on Slide 19. There's a lot of competition in this space, but you guys are among the only players that have real scale and you could move the next-gen stuff, I think, pretty fast. But if you had to pick sort of a priority list, will be good to know. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Thanks, Geoff. This is Dan. We're going to have Cindy Perettie answer that question if you don't mind. So, Cindy, over to you. Cindy Perettie -- Executive Vice President, Kite Hi, Geoff. So, we have three products right now or three constructs that are in Phase 1a and b clinical trials. The first one is a bicistronic CD19, CD20 that has 41BB and CD28. The second one is that same construct with fast manufacturing, 3-day manufacturing. And the other one is a CD19 like Yescarta with three-day manufacturing. So, we're looking at all three of those in parallel with the goal of picking the winner to advance that rapidly into our pivotal trials. So, that's what's coming up next. Obviously, we've shared a lot around anito-cel as well. With anito-cel, we have the iMMagine-1 readout, and we expect to move quickly into earlier lines as it relates to anito-cel, and you'll hear more about that later this year. Hopefully, that answers your question. We certainly have a number of plays in early research, but we would plan to advance our next-generation lymphoma assets quickly. And obviously, with the scale that we have at Kite as well as the integrated fact that we can create the vector as well as the construct in-house. Operator Our next question comes from Michael Yee at Jefferies. Michael, go ahead. Your line is open. Michael Yee -- Jefferies -- Analyst Hi, guys. Thanks. Following up on the Trodelvy data coming at ASCO and your enthusiasm for frontline, can you just remind us, a, do you believe that your data in EVOKE second line that will be at ASCO is at least as competitive or better than Astra, and that is why you're excited about frontline? And b, if you are, do you have a triple therapy on top of chemo combo or is your whole first-line strategy just on top of PD-1? Thank you. Merdad Parsey -- Chief Medical Officer Thanks, Michael. This is Merdad again. As we've noted, I think, and as you talked about, the EVOKE-01 data in second line will be something that we discuss at ASCO and show those data. And the full data set is -- does motivate us to go forward in lung cancer and including discussions with regulators. The unmet need in this population is great, and the data give us options, including discussions with health authorities and conducting follow-up trials. We'll be able to share more once the data are provided at ASCO, and so we look forward to having those deeper discussions once we can speak directly to the data. And I'm sorry, and the second part of your question was around the front line. Again, I think once we are able to share the EVOKE-02 data, the update on EVOKE-02 data, we'll be able to talk more. But it does continue to allow us to think about the frontline and our confidence around about EVOKE-03. And then the last part of your question on other combinations. We do think about our intra-portfolio combinations. For example, we have a combination of dambinelumab and Trodelvy in a trial where we're looking to see if we can get additional efficacy from those sorts of combinations. So, we do continuously look at our portfolio and look for opportunities for moving the needle with combinations from within our portfolio. Operator Our next question comes from Salveen Richter of Goldman Sachs. Salveen, go ahead. Your line is open. Salveen Richter -- Goldman Sachs -- Analyst Good afternoon. Thanks for taking my question. So, you currently have about $5 billion in cash, and noted leverage is back to pre-Immunomedics deal levels. How are you thinking about meaningful or bolt-on BD post the CymaBay acquisition? And is there any preference now between virology, I&I, and oncology? Thank you. Andy Dickinson -- Chief Financial Officer Hey, Salveen, it's Andy. Maybe I'll start with that one. In our prepared remarks, I highlighted that in the near term, we don't expect sizable M&A. So, we have a lot of execution ahead of us. We have a deep portfolio, a lot of growth drivers, including seladelpar. So, we're very clearly highlighting that in the short term, we will continue to do ordinary course business development, the standard licensing deals. You saw a couple of those in the first quarter. But it's unlikely that we'd pursue any meaningful M&A in the near term. We've also said historically that deals like CymaBay are exactly what we're looking for and that we should do deals like that on a regular basis over the cycle and whether that's every two years on average or more or less, that's a general ballpark. So, I think you're appropriately highlighting we have -- we generate a lot of operating cash flow. You saw that again in the first quarter. We will rebuild our cash over time. We're going to continue to invest in the pipeline. But at least in the short run, we don't expect any meaningful M&A in the short run. Dan O'Day -- Chairman and Chief Executive Officer And Salveen, this is Dan. Just to answer the end of your question. I mean, we're always therapeutic area agnostic when we approach these. I mean, first of all, we've got robust portfolios around both urology and oncology and a building portfolio in inflammation. So, we look, frankly, across those spectrums. Seladelpar is a great example of finding an opportunity within our liver disease or -- franchise and be able to use that channel. But equally, we'll look for opportunities and synergies that complement our portfolio across therapeutic areas. And that's our approach. We think that makes sense. We look for the most attractive science. And as Andy said, we have a lot in our hands now to work through and to execute on. And so, we'll keep the bar very high. Operator Our next question comes from James Shin at Deutsche Bank. James, your line is open. James Shin -- Deutsche Bank -- Analyst Hi. Thanks for my question. I wanted to ask on Trodelvy's efforts in HR+/HER2-. DESTINY-Breast06 is going to have data pretty soon it seems. And you also have ASCENT-07. Sort of sounds similar to DESTINY-Breast04 versus TROPiCS-02. Can you share like how you think this landscape will play out with these two trials? Merdad Parsey -- Chief Medical Officer Thanks for the question, James. Well, it's -- I've learned to try to keep away from prognostication. So, that's harder to do. We -- look, maybe the way I would put it is we are proud of the fact that Trodelvy is still the only TROP2 ADC that is approved, and that is in large part driven by the important role that Trodelvy plays in breast cancer right now for patients. And we do continue to want to push that, along with the ASCENT-07. We have a number of other trials ongoing to expand our footprint in breast cancer. I think we are right now in TNBC, the leading regimen. And as we are continuing to advance our HR+/HER2- and in particular, in the IHC-0 population, I think we remain confident around our place there. We've shown a benefit in randomized clinical trials there, and that's been the basis for our regulatory filings and approvals. So, I don't think we can assume success. We'll have to see what the data are. But looking forward into the year that's coming with ASCENT-03 coming up, I think that will provide us additional information to further expand our potential in breast cancer. Johanna, do you want to add? Johanna Mercier -- Chief Commercial Officer Maybe just to add to that, I would also say that the more options these patients have, these women have, in HR+ in earlier lines of therapy instead of cycling through chemotherapies, the better. So, with DB06 results and moving potentially that compound up earlier, it actually allows for Trodelvy to also play a more important and a bigger population than it is today because of the profile of the TROPiCS-02 label. And so, we do believe that there's opportunities for this ADC to move up and also differentiate itself versus other ADCs in this marketplace, depends effect profile, the safety profile, not only on the efficacy. And so, in light of the IHC-0 setting being really our strong foothold in HR+/HER2-, we believe that will continue, whether that's in later lines of therapy or earlier lines of these studies play out. Operator Our Next question comes from Mohit Bansal at Wells Fargo. Mohit, go ahead. Your line is open. Mohit Bansal -- Wells Fargo Securities -- Analyst Great. Thank you very much for taking my question. Maybe a big picture question, if you think about medium to longer term because, I mean, yes, you do not have an LOE. But I mean, HIV growth is somewhere around low single digits. And oncology, I mean, again, I mean, it dropped too and all. The expansion opportunities seem limited at this point. So, just trying to understand how do you turn this low single-digit to more like a high single-digit kind of growth for overall company. CymaBay is definitely an addition, but how are you thinking about it from medium to long term, which probably people like us are missing? Dan O'Day -- Chairman and Chief Executive Officer Mohit, maybe I'll start and then have others add. First of all, I think just stepping back and thinking about the portfolio that we've built over the past four years now more than doubling the size of the portfolio and with significant advances in our HIV portfolio and oncology and with outside of cell therapy. So, as we think about growth moving forward, I mean, first of all, I would say on the HIV side of the business, we have to constantly remind ourselves and others that in addition to the treatment market and the potential for long-acting treatment that we have a very robust program on, and we'll update you a little bit more on toward the second half of this year with an analyst event, we've got the PrEP market that is just beginning to kind of be dimensionalized. And that is -- I think that provides significant growth opportunity when you think about your time frame, which you mentioned, which is until the end of the decade. So, I think it allows us to think about accelerated HIV total growth prevention and treatment as we head toward the second half of the decade. That -- on top of that, then we have the entirety of the oncology portfolio. So, both cell therapy within the large B-cell lymphoma area as well as potentially the multiple myeloma entry with the anito-cel. And then on top of that, a very robust oncology portfolio that has both Trodelvy and other novel agents that we'll read out over the course of this decade. And I'll just remind you, again, we've got close to 20 readouts this year, of which three of those are in Phase 3, including lenacapavir for prep in the second half of this year, two Trodelvy Phase 3 readouts. And then importantly, we've added seladelpar to the mix with a PDUFA date in August. And then finally, just the opportunity to update you on the anito-cel at the end of the year as well. So, we'll be providing more guidance as we continue to look at the entirety of our portfolio, but we really think we have within the company today, by the way, I'll just mention, in addition to complementing where needed from the outside. But within the company today, we have what it takes to drive a substantial growth in our business over the course of the next decade with focus on expense management as well to produce good returns for investors. Operator Our next question comes from Simon Baker at Redburn Atlantic. Go ahead, Simon. Your line is open. Simon Baker -- Redburn Atlantic -- Analyst Thank you for taking my question. One on seladelpar if I may. And a question really around the competitive dynamics at launch. If all goes according to plan, your launch in August, and Ipsen will launch Elafibranor in June. So, I was just wondering if that really makes any difference. You've obviously got far greater infrastructure than Ipsen. Is it too early for them to steal in March? Or paradoxically thus having somebody else on the market promoting PBC actually raise disease awareness and help the situation? So, any color around the dynamics at launch would be very helpful. Thank you. Johanna Mercier -- Chief Commercial Officer Thanks, Simon. It's Johanna. Let me take that one. And I think you're absolutely right. I think the fact that there is more than one competitor hitting the market is great for patients namely around increasing disease awareness around PDC and the fact that there are two options available. Having said that, I also feel incredibly confident that seladelpar is well differentiated to potentially be best in disease when you think about the significant impact and clinically meaningful impact we have with the ALP normalization in the clinical jet Phase 3 clinical trial we've seen as well as the improvement in pruritus which is a key symptom of the disease. And today, there really is no effective antipruritic options for PBC patients. And so, all of that put together, in addition to the fact that we believe our footprint, both commercial and medical is incredibly well established when it comes to liver disease. It already covers about 80% of all U.S. PBC prescribers. And with that strong differentiated profile we were just referring to, I don't think those three months make a difference. I think really, it's about best-in-class launch and that potential with seladelpar that we look forward for our PDUFA date. Operator Our next question comes from Brian Skorney at Baird. Brian, go ahead. Your line is open. Unknown speaker Hi. Thanks for taking the question. This is Charlie on for Brian. So, again, to ask something about seladelpar. Just wondering if you have any ambitions for potentially looking at a label for first line in the future, considering there's a lot of unmet need with pruritus there. As well as any potential synergies you may be considering with the remainder of your liver portfolio. Thank you. Merdad Parsey -- Chief Medical Officer Thanks, Charlie. This is Merdad. Frontline is a challenge given the -- what is currently the background standard of care. But as you know, we think that seladelpar is going to bring a lot of benefit to a lot of patients, especially given the pruritus and the potential for getting to patients earlier in their course will be really important for us. And so, we have to see how the market starts to respond to the presence of seladelpar in the second line. And recall, I think the other thing to recall or think about is the -- how long people actually get frontline therapy before moving on to second-line therapy, given the efficacy profile of the frontline therapies and the fact that there haven't been any options, one could anticipate that patients are moved to second-line therapy relatively early in their treatment course and making -- moving up formally for registrational trials to the frontline potentially superfluous. So, I think we'll see how that plays out in the market. And once we see our label and all those sorts of things, so we'll be able to update more after that. Operator Our next question comes from Brian Abrahams at RBC Capital Markets. Brian, go ahead. Your line is open. Brian Abrahams -- RBC Capital Markets -- Analyst Hi. Good afternoon. Thanks so much for taking my question. PURPOSE 1 is obviously an upcoming readout. So, I wanted to clarify some elements of its unique design, specifically what's the sensitivity of assessing when HIV infection occurred to accurately project the control infection rate? And then how do you control for potential intrinsic differences in risk behavior that the screened-out group serving as the control may have versus individuals who are -- who make it into the trial? Thanks. Merdad Parsey -- Chief Medical Officer Brian, thanks. It's Merdad again. And I could talk about this for a long time. Let me -- I'll try to give a very concise answer. The recency assay that's been developed for HIV, it has been studied very thoroughly, and we can, based on the diagnosis at the time of screening, create a profile for anyone who's potentially HIV infected at that time as to how recently they were infected. And I think that's a key part. And that relates to the second part of your question in that the -- we don't, in a sense, need to compare risk behaviors before and after randomization and that we'll be looking at the overall incidence of HIV at the time of screening and then comparing in this counterfactual design with what happens after people start therapy. So, I think between those two elements and all the discussions we've had with the regulators and the experts in the field, we're confident in that the design will provide the information necessary to get us to approval and for adoption. Operator Our next question comes from Terence Flynn at Morgan Stanley. Terence, go ahead. Your line is open. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks for taking the question. Two parts on the CAR-T franchise. So, just was wondering, high level, your comment to a anito-cel if it proves there is parkinsonism, so meaning it's less differentiated. And then the second part is, curious where your progress stands with respect to developing the CAR-T for immunology. Obviously, a lot of focus here among a number of other companies in the industry. So, just curious on Gilead's thoughts on the forward. Thank you. Cindy Perettie -- Executive Vice President, Kite Thanks, Terence, for the question. So, on the commitment to anito-cel, we're -- as it relates to Parkinson's, we absolutely feel that we're differentiated potentially on both safety and efficacy. As we noted earlier, we have not observed the neurotox that some of the other constructs have observed, and we'll continue to monitor it, but we feel great about the profile right now. And then the efficacy profile, early signals are we think we will be equivalent or could be best-in-class. So, we're 100% behind anito-cel and we're looking forward to bringing those data soon. The second question around autoimmune space. So, we continue to monitor the autoimmune space. And as you've heard from Andy and others before, we will play in that space. We are taking time to take a look at what's in the space versus what we have in our portfolio, and we'll be -- I don't have any updates further than that today. Operator Our last question comes from Carter Gould at Barclays. Carter, go ahead. Your line is open. Carter Gould -- Barclays -- Analyst Great. Good afternoon. Thanks for squeezing me in. Maybe just to round things out on cell therapy, you flagged the same dynamics that have been kind of persisting in the U.S. as far as the -- some of the constraints of the ATCs. I also saw the Tennessee oncology reference. But I guess putting that all together, just your level of confidence you sort of hit that return to more meaningful growth in the second half of the year. I didn't hear that mentioned and clearly, that's a point of focus. Any commentary there would be appreciated. Cindy Perettie -- Executive Vice President, Kite Yeah. No, we feel very confident that we're going to return to growth in the second half of the year, as we stated. I think just as a reminder, we had shared in quarter 4 our guidance was that we'd be flat to slightly down in quarter 1. And part of that is due to the restructure. So, we are putting our strategy into play. We feel very confident about the approach we're taking in the U.S. And we now are looking at having almost a fully stacked sales team back out and working hard. I think a piece that we need to talk about as well as the market dynamics. So, the things we're observing. We're observing out-of-class competition with the bispecifics, the ATC constraints that we've spoken about in the past based on multiple myeloma constructs coming in. But what we're seeing is a lot of the hospitals and ATCs are working through those constraints, and we feel really confident about the second half of this year. Dan O'Day -- Chairman and Chief Executive Officer Thank you, Cindy. This is Dan again. So, I appreciate all of you joining. Maybe just a bit of a summary statement. I want you all to know we at Gilead are very focused on the near-term execution and the long-term plans. We'll continue to stay disciplined and agile in our approach. Just as highlights, we've got 54 active clinical programs, no major patent expiries through the end of the decade, a variety of opportunities for growth, and a lot more to deliver. On top of that, we are on track to provide updates from three Phase 3 clinical trials for Trodelvy, lenacapavir. We've got the seladelpar PDUFA date in August. Any update on the anito-cel Phase 2 update with the management we'll have at the end of the year. So, rest assured that we are firmly focused on the many opportunities we have, and we have a lot more potential to deliver. With that, I'll hand over to Jacquie for closing comments. Jacquie Ross -- Vice President, Investor Relations Thank you, Dan. To close, just one housekeeping item. I can share that we are tentatively planning to release our second quarter 2024 earnings results on Thursday, August 8. Please note that this date is provisional and could be changed to accommodate scheduling conflicts that arise between now and then. As always, we will announce our confirmed date following the close of the second quarter. We appreciate your continued interest in Gilead and look forward to updating you on our progress throughout the quarter. With that, we'll close our call for today. Thank you. Answer:

Gilead's first quarter 2024 earnings conference call

Operator Good afternoon, everyone, and welcome to Gilead's first quarter 2024 earnings conference call. My name is Rebecca, and I'll be your host for today. In a moment, we'll begin our prepared remarks. After that, we'll have a Q&A session. [Operator instructions] I'll now hand the call over to Jacquie Ross, VP, investor relations and corporate strategic finance. Jacquie Ross -- Vice President, Investor Relations Thank you, Rebecca. Just after market closed today, we issued a press release with earnings results for the first quarter of 2024. The press release, slides, and supplementary data are available on the Investors section of our website at gilead.com. The speakers on today's call will be our chairman and chief executive officer, Daniel O'Day; our chief commercial officer, Johanna Mercier; our chief medical officer, Merdad Parsey; and our chief financial officer, Andrew Dickinson. After that, we'll open Q&A where the team will be joined by Cindy Perettie, the executive vice president of Kite. Before we get started, let me remind you that we will be making forward-looking statements. Please refer to Slide 2 regarding the risks and uncertainties relating to forward-looking statements that could cause actual results to differ materially. With that, I'll turn the call over to Dan. Dan O'Day -- Chairman and Chief Executive Officer Thank you, Jacquie, and good afternoon, everyone. I want to start by thanking the Gilead teams for delivering a strong first quarter, which you see in our commercial performance and our clinical execution. Total product sales, excluding Veklury, grew 6% year over year to $6.1 billion, driven by higher demand across HIV, oncology, and liver disease. Veklury sales continue to track with the rates of hospitalization for COVID-19 and reached a total of $555 million. Once again, sales growth for the quarter reflected the diversity of our portfolio. HIV product sales grew 4% year over year. Oncology product sales were up 18%, driven by Trodelvy, which is well established as the No. 1 regimen for second-line metastatic triple-negative breast cancer, and by our transformative cell therapies. As we outlined at the recent Kite analyst event in Maryland, we have exciting plans to build on our clear market leadership in cell therapy, such as expand into community networks in the U.S., more than double our manufacturing capacity, and move into new indications and disease areas with next-generation products. From an EPS perspective, first-quarter results reflect the close of the CymaBay acquisition with an inquired IP R&D charge of $3.9 billion or an expense of $3.14 per share. Excluding this charge, non-GAAP diluted EPS would have been $1.82 for the first quarter, which is above expectations, driven by higher product sales. The CymaBay acquisition brings us an important registrational medicine, seladelpar, which has the potential to address significant unmet need in liver disease. We have filed for regulatory approval of seladelpar as a treatment for primary biliary cholangitis, or PBC, with both FDA and EMA, and we expect an FDA regulatory decision in August. If approved, we will leverage our industry-leading commercial infrastructure and long-standing expertise in liver disease to bring seladelpar a potentially transformative therapy to people with PBC who might benefit. Moving to clinical execution. We're very pleased with momentum in our HIV pipeline, which was reflected in our 80 data abstracts at CROI. Based on the strength of the data, we've initiated Phase 3 trials for bictegravir and lenacapavir, our novel once-daily oral regimen, and plan to advance once-weekly oral programs, including lenacapavir plus islatravir into Phase 3. Later this year, we will host an HIV analyst event to share details of how we will further shape the HIV landscape with innovative options for prevention and treatment, including the next wave of long-acting therapies. Before I pass it to Johanna, I will briefly recap our 2024 milestones on Slide 6. We have already achieved first patient in for the Phase 3 ARTISTRY-1 and ARTISTRY-2 trials, evaluating once-daily lenacapavir in combination with bictegravir as well as Phase 2 first patient in for SWIFT evaluating GS-1427, our oral alpha-4-beta-7 inhibitor. We are also on track for our upcoming milestones, including updates from three Phase 3 clinical trials for Trodelvy and lenacapavir. Looking ahead to the rest of 2024, this is a time of focused execution for Gilead. We will stay disciplined and agile in our approach, and we will focus the organization on both near-term execution and longer-term plans. With 54 clinical programs in play, no major patent expiration for the decade, and many opportunities for growth, we have a lot of potential and a lot to deliver. My thanks again to the Gilead teams for their great work this quarter and the ongoing progress across our diverse portfolio of therapies. With that, I'll hand it over to Johanna. Johanna Mercier -- Chief Commercial Officer Thanks, Dan, and Good afternoon, everyone. With the first quarter marking the ninth consecutive quarter of year-over-year growth for our base business, our teams delivered a strong start to 2024, notably navigating the seasonal first-quarter dynamics and establishing a firm base on which we can continue to build this year. Beginning on Slide 8, total product sales, excluding Veklury, were $6.1 billion for the first quarter, up 6% year 1, reflecting solid growth of our HIV, oncology, and liver disease businesses. Including Veklury, total product sales were $6.6 billion, up 5% year over year. Moving to HIV on Slide 9. Sales were up 4% year over year to $4.3 billion, primarily driven by higher demand as well as favorable pricing dynamics in Europe that are not expected to repeat. Quarter-over-quarter sales were down 7%, driven by the typical seasonality we experienced in the first quarter of the year, partially offset by higher demand. As a reminder, quarterly HIV growth is, in general, more variable and less indicative of overall trends than the full year. This is evident in the first quarter of every year where inventory drawdown typically occurs following a build that generally happens toward the end of the prior year and patient co-pays and deductibles start of every year, and together with shifts in channel mix lowers average realized price in the first quarter. As always, we typically see these quarterly pricing and inventory dynamics normalize as we progress throughout the year. We continue to expect approximately 4% HIV sales growth for 2024. Supporting that outlook, the treatment market grew in line with our expectations, as shown on Slide 10. Biktarvy remains the leading regimen for HIV treatment across major markets for new starts as well as for those switching regimens with sales up 10% year over year to $2.9 billion, reflecting strong demand. Quarter over quarter, sales were down 5% as the higher demand was offset by the typical seasonal factors discussed earlier. It's notable that six years after launch, Biktarvy continues to gain market share in the U.S., up three percentage points year over year to approximately 49% share and once again, outpacing all other branded regimens for HIV treatment. Moreover, we continue to see Biktarvy's benefit extend into broader populations of people with HIV. Most recently, Biktarvy was granted FDA approval for use in virologically suppressed individuals with known or suspected M184 resistance, a common form of treatment resistance. Turning to prevention. Descovy sales were down 5% year over year to $426 million, driven by lower average realized price due to channel mix, partially offset by higher demand. Sequentially, sales were down 16%, reflecting the seasonal dynamics discussed earlier, partially offset by higher demand. While market volumes in February were temporarily disrupted by the cyberattack on Change Healthcare, volumes readily recovered in March. Overall, the PrEP market continued to demonstrate robust growth, up over 11% in the first quarter, with Descovy maintaining over 40% PrEP market share in the U.S. despite the availability of other regimens, including generics. This is a solid setup as we look to potentially launch lenacapavir as early as late next year as the first and only twice-yearly subcutaneous prevention option. Given Gilead's strong commercial foundation across treatment and prevention, we are well-positioned to maintain leadership in HIV as we look to the evolving marketplace of daily orals, long-acting orals, and long-acting injectables. Moving to liver disease on Slide 11. Sales for the first quarter were $737 million, up 9% year over year, primarily driven by favorable inventory dynamics and the timing of purchases by the Department of Corrections for our HCV products as well as higher demand across HCV, HBV, and HDV. Sequentially, sales were up 7%, primarily reflecting the timing of HCV purchases. Despite fewer HCV starts globally year over year, our viral hepatitis portfolio overall has remained stable and continues to be a meaningful contributor to our commercial performance. This strength is underpinned by our extensive global footprint and expertise in the treatment of liver diseases. To that end, pending approval, Gilead is excited to bring seladelpar to patients for the treatment of certain adults with PBC, impacting approximately 130,000 people in the U.S. and about 125,000 people in Europe. With the sales force that covers almost 80% of the U.S. prescriber base for PBC, we expect to readily make seladelpar available to patients upon approval in the second half of this year. Seladelpar has demonstrated the potential to be best-in-class with a differentiated clinical profile to existing and emerging therapies, particularly on a key symptom of the disease, pruritus. Following its launch in 2024, we expect seladelpar to contribute modestly to sales and more meaningfully in 2025 and beyond. Turning to Slide 12. Veklury continues to be the standard of care antiviral for hospitalized patients treated with COVID-19, with market share well over 60% in the United States. COVID-related hospitalizations were lower in the first quarter with the winter wave peaking earlier than expected in the U.S. and Europe as compared to other regions such as Japan. As a result, Veklury sales overall were down 3% year over year and down 23% sequentially to $555 million. Shifting to oncology on Slide 13. Sales were up 18% year over year to $789 million and are now firmly above a $3 billion annual run rate. Having treated over 50,000 patients to date, we look forward to bringing our portfolio of medicines and future treatments across lines of therapies and tumor types to many more patients around the world. Moving to Slide 14. Trodelvy sales for the first quarter exceeded $300 million, up 39% year over year, reflecting continued demand. Sequentially, sales were up 3%, primarily driven by demand outside the U.S. as well as unfavorable fourth-quarter pricing dynamics in Europe that did not repeat. This was partially offset by inventory dynamics in the U.S. where we saw a drawdown in the first quarter. Overall, Trodelvy's strong market share reflects its awareness among providers and patients. In second-line metastatic triple-negative breast cancer, Trodelvy remains the leading regimen with approximately one-third in the U.S. And in the pre-treated HR+/HER2- metastatic breast cancer setting, Trodelvy has demonstrated continued adoption, most notably in the IHC0 setting. We are confident Trodelvy continues to differentiate itself with its safety profile and clinically meaningful survival benefits, with over 30,000 patients across tumor types already treated to date. We look forward to potentially extending Trodelvy's reach to many more patients in the years ahead, particularly in bladder cancer, earlier-line breast cancer settings, and lung cancer. Turning to Slide 15 and on behalf of Cindy and the Kite team, Cell Therapy sales were $480 million in the first quarter, up 7% year over year. Sequentially, sales were up 3%, in-line with our guidance of flat to slightly up. We're pleased to see continued demand for Yescarta and Tecartus in both existing and new markets across Europe and other geographies, such as in Japan where we have seen good progress in growing brand share and expanding our network of authorized treatment centers to over 20 to date. In the U.S., and consistent with our recent updates, we see opportunity for growth through expanding the number of authorized treatment centers and affiliated satellites, while also driving increased referrals from the community setting. For example, we're proud to have established our flagship community collaboration with Tennessee Oncology in the first quarter. We've identified many critical learnings on how we can partner effectively with community oncology practices for cell therapy, and we will continue to refine this "blueprint" so that we become more efficient at onboarding new centers over time. We expect to start seeing the Impact from this initiative toward the end of 2024. Wrapping up the first quarter, we had a strong start to the year, primarily driven by higher demand across each of our core businesses year over year. We look forward to carrying this momentum through 2024 and as we bring seladelpar to market later this year following approval. I'd like to thank the commercial teams and cross-functional partners across Gilead and Kite for their strong execution as we diligently expand our therapies to new populations, positively impacting more people all around the world. And with that, I'll hand the call over to Merdad. Merdad Parsey -- Chief Medical Officer Thank you, Johanna. We have had a busy first quarter at Gilead, with a cadence of clinical readouts that will continue throughout the rest of the year. Importantly, we anticipate an FDA regulatory decision on seladelpar and three Phase 3 updates across HIV prevention, bladder cancer, and breast cancer. Starting on Slide 17, we continue to progress our industry-leading Virology pipeline, which is building momentum following a data-rich presence at CROI in March. This included robust virologic suppression data from our once-daily oral combination of bictegravir with Lenacapavir from the Phase 3 portion of the ARTISTRY-1 trial. This novel combination has the potential to benefit people with HIV on complex regimens. We have since started two Phase 3 trials of this combination, one in virologically suppressed individuals and another in virologically suppressed treatment-experienced individuals. We expect to complete enrollment in the first half of 2025. We also have two once-weekly oral programs: first, a combination of lenacapavir with Merck's NRTTI, islatravir, in virologically suppressed people with HIV, expected to advance into Phase 3 later this year. And second, a combination of a capsid inhibitor with GS-1720, our novel oral integrase inhibitor. We're working to advance this combination into a Phase 3 study. This second program has the potential to be the first once-weekly oral regimen containing an INSTI agent. INSTIs are the standard-of-care treatment for HIV and an important treatment option for clinicians who continue to prefer INSTI-based regimens. Finally, we presented Phase 1b data from our twice-yearly parenteral program of lenacapavir plus our two broadly neutralizing antibodies for people with HIV at CROI, and we intend to share data from the Phase 3 study in the second half of this year. Moving to PrEP, we plan to share an update from our Phase 3 PURPOSE-1 trial in the second half of this year. Data from PURPOSE-01, together with data from PURPOSE-2, is expected to support the filing of Lenacapavir for HIV prevention. This PrEP option would not only offer a convenient dosing schedule as the first twice-yearly subcutaneous regimen but could also be transformative in terms of adherence to HIV prevention regimens. Turning to Slide 18. Our Trodelvy program continues to be evaluated across a range of solid tumors with seven Phase 3 trials currently underway across breast, bladder, and metastatic non-small cell lung cancers with plans to start the Phase 3 trial in endometrial cancer later this year. Abstract titles were just released yesterday for the upcoming ASCO meeting, and we're pleased to have over a dozen Oncology presentations this year. We will be presenting late-breaking Phase 3 data from our second-line plus metastatic non-small cell lung cancer trial, EVOKE-01. Updated data from first-line, PD-L1 high subjects in Cohort A of the Phase 3 EVOKE-02 trial will also be shared. We plan on providing updates from Cohorts C and D, evaluating Trodelvy plus pembro and chemotherapy in PD-L1 all-comers at a medical congress in the second half of this year. In addition, presentations for both the Phase 3 EDGE-Gastric trial and Phase 3 ARC-9 studies will be highlighted. Depending on the timing of event accruals, we anticipate two more Phase 3 updates this year for Trodelvy. These include overall survival data from our confirmatory Phase 3 bladder cancer study, TROPiCS-04, that could support Trodelvy's submission for full regulatory approval in the U.S. and enable ex-U.S. filings. In TNBC, where Trodelvy is the only ADC to have demonstrated statistically significant improvement in overall survival in the second-line setting, we expect to share an update on the Phase 3 ASCENT-03 trial in first-line PD-L1 negative patients later this year. Moving on to Cell Therapy. I'm pleased to share Kite's approach to the development of novel cell therapies that Cindy and the team presented at last month's investor event. As you can see on slide 19 Yescarta and Tecartus established Kite as the leader in Cell Therapy, and we plan to potentially extend this leadership into multiple myeloma, while also paving the way for innovative next-generation constructs. On anito-cel in later-line multiple myeloma, we expect to provide a Phase 3 iMMagine-1 trial update in the second half of this year. This update follows the highly encouraging Phase 1 data presented at ASH last year, where anito-cel demonstrated durable responses with median progression-free survival not yet met at 26.5 months median follow-up and no cases of parkinsonian symptoms observed in the trial. For our next-generation cell therapy assets, we have bicistronic and optimized manufacturing constructs in Phase 1 trials, which are aimed at overcoming resistance mechanisms, providing potentially deeper and more sustained responses, and improving product potency. Beyond that, we have early research in allogeneic and in vivo CAR, with plans to expand into a range of other disease areas such as multiple myeloma with anito-cel, solid tumors, and autoimmune diseases. Moving to Inflammation on Slide 20. We recently completed our acquisition of CymaBay and added seladelpar, an investigational PPAR-delta agonist to our portfolio. In Phase 3 clinical trials, seladelpar demonstrated significant improvement in both pruritus and markers of cholestasis related to the risk of progression for PBC. As previously announced, FDA and EMA accepted our regulatory filings for seladelpar for the management of PBC in certain adult patients. We anticipate an FDA regulatory decision by August 14th and a decision from European regulators early next year. We continue to work with global regulatory authorities to expand the reach of seladelpar for PBC patients. Further, as we look at the rest of our Inflammation pipeline, we have several early phase assets that have progressed into Phase 2 trials, including our potentially first-in-class oral TPL2 inhibitor, a potentially best-in-class oral alpha-4-beta-7 anti-integrin, and an oral IRAK4 inhibitor. Wrapping up on Slide 21. We continue to progress on our clinical milestones for the year, and we have had two first patients in and one data readout completed in the first quarter, and we remain on-track for our remaining milestones. And now, I'll hand the call over to Andy. Andy Dickinson -- Chief Financial Officer Thank you, Merdad, and good afternoon, everyone. Beginning on Slide 23. It was a strong start to the year with our base business up 6% year over year. The solid growth achieved across HIV, Oncology, and Liver Disease offset the decline in Veklury, with total product sales up 5% year over year to $6.6 billion. As expected, our base business was down quarter over quarter, primarily driven by seasonal inventory and pricing dynamics in HIV. Moving beyond our revenue results, two items significantly impacted our EPS performance in the first quarter, as shown on Slide 24. First, our GAAP and non-GAAP results included an acquired IPR&D charge of $3.9 billion or $3.14 per share, associated with the close of the CymaBay acquisition. As an asset acquisition, this transaction was fully expensed in the first quarter. This was a nondeductible expense item, and as a result, impacted our effective tax rate. Excluding this expense, our non-GAAP EPS would have been $1.82 for the first quarter, above expectations, primarily driven by higher sales. The second item shown on the right-hand side is an impairment charge that is included in our GAAP results and excluded from our non-GAAP results. As a reminder, this relates to the carrying value of the IPR&D indefinite-lived intangible assets acquired from Immunomedics. At the end of 2023, the carrying value was $5.9 billion, all associated with non-small cell lung cancer. As a result of the EVOKE-01 readout in late January, we have reassessed and reduced the remaining value to $3.5 billion. This primarily reflects the smaller addressable market that Trodelvy could serve among 2L+ metastatic non-small cell lung cancer patients, a delay in expected launch timing, and associated competitive activity. We remain confident that Trodelvy will deliver attractive returns over time, with sales now exceeding $1 billion a year, a strong IP portfolio, and a development program with multiple shots-on-goal in new indications as well as earlier-lines of therapy, including some opportunities not included in the initial deal model. In the meantime, you can see that the impairment impacted our first-quarter GAAP EPS by $1.46 per share. Moving to the rest of our non-GAAP results on Slide 25. For the first quarter, product gross margin was down modestly to 85.4%, primarily due to product mix. R&D and SG&A were each down 2% year over year. This is the second consecutive quarter of operating expense declines on a year-over-year basis, reflecting our continued focus on disciplined expense management. Our effective tax rate in the first quarter was a negative 30%, reflecting the nondeductibility of the CymaBay acquired IPR&D charge. Overall, our diluted earnings per share was a negative $1.32 compared to a positive $1.37 for the same period last year, primarily reflecting the $3.14 per share expense related to the CymaBay acquisition. Switching to full-year guidance on Slide 26. There is no change to our revenue expectations for 2024 at this time. We continue to expect total product sales in the range of $27.1 to $27.5 billion; and we continue to expect total product sales, excluding Veklury, in the range of $25.8 to $26.2 billion, representing growth of 4% to 6% for our base business year over year. Additionally, there is no change to our Veklury guidance of approximately $1.3 billion for the full year. As discussed last quarter, we do not expect to update our Veklury guidance until our third-quarter earnings call, absent a very clear trend in COVID-19 infections. Shifting to the other parts of the P&L for 2024 on a non-GAAP basis. There is no change to our gross margin guidance where we continue to expect product gross margin in the range of 85% to 86%. We now expect R&D to grow at the higher end of our previous low-to-mid single-digit growth range, reflecting the incremental expenses associated with the CymaBay acquisition. We continue to expect SG&A expenses to decline a mid-single-digit percentage relative to 2023. On a dollar basis, SG&A is expected to be modestly higher than our previous SG&A expectations as we incorporate CymaBay expenses. However, we can manage this within the window of the previously issued operating expense guidance. Acquired IPR&D is now expected to be approximately $4.4B, due to the CymaBay transaction as well as milestones anticipated throughout the rest of the year. Operating income is now expected in the range of $7 billion to $7.5 billion, reflecting the updated acquired IPR&D guidance and the modest increase to operating expenses associated with the CymaBay transaction. Given the non-deductible impact of the CymaBay acquisition, the effective tax rate for 2024 is expected to be approximately 30%. This includes a negative impact of approximately 11% from the one-time charge for the acquisition of CymaBay. We therefore now expect diluted EPS in the range of $3.45 to $3.85. As shown on Slide 27, this has only been updated to reflect the transactions that were closed in the first quarter of 2024. Excluding these charges, you can see that we are comfortably within the range of the EPS guidance we shared back in early February. On a GAAP basis, we expect full-year 2024 diluted EPS to be in the range of $0.10 and $0.50. Moving to Slide 28. Our capital allocation priorities remain unchanged with sufficient flexibility in our balance sheet. Specifically, as demonstrated in the first quarter, we announced a 2.7% increase to our quarterly dividend and returned approximately $1.4 billion to shareholders. In addition, we acquired CymaBay for $4.3 billion, adding seladelpar to our portfolio. Overall, we'll continue to be disciplined in our use of capital. And while we will continue to be flexible and opportunistic, it is unlikely that Gilead will be engaging in any sizable M&A transactions in the near term. Before I wrap it up, on Slide 29, a quick note on our expectations now that the CymaBay transaction has closed. Pending regulatory approval, we expect to launch seladelpar in the U.S. before the end of 2024, as Johanna highlighted earlier, with a modest revenue contribution expected this year. Additionally, we have shared that the transaction is expected to add to operating expenses this year as we make incremental investments to support the launch as well as other R&D efforts, all of which we are able to manage within the window of the previously issued operating expense guidance. And as we look ahead, while the transaction will be dilutive to our EPS this year, we expect the deal to be breakeven to earnings in 2025, and significantly accretive in 2026 onwards. And now, I'll invite Rebecca to begin the Q&A. Questions & Answers: Operator Thank you, Andy. At this time, we'll open up the call for questions. We ask that you be courteous and limit yourself to one question so that we can get to as many analysts as possible during today's call. [Operator instructions] Our first question comes from Chris Schott at JPMorgan. Chris, go ahead. Your line is open. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Thanks so much for the question. Just had a question on the HIV franchise and the impact from the Medicare redesign as we think about 2025, I know this is coming from more and more conversations. Can you just talk a little bit about how you're thinking about that impact to your franchise? And maybe just more broadly, can we directionally still think about top-line growth and margin expansion for Gilead next year despite this headwind? So any color you can provide there would be appreciated. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Yeah. Great, Chris. Welcome, everybody. This is Dan. I'm going to have Johanna cover this question. Thank you. Johanna Mercier -- Chief Commercial Officer Thanks, Chris, for the question. So, we do expect an impact of the Part D redesign to be weighted toward our HIV business and expect our HIV growth in 2025 to be offset by the Part D redesign impact. So, as a result, we expect our HIV sales to be roughly flat year on year in 2025. Having said that, overall, we expect our total business to grow despite the impact of the Part D we designed in 2025 with the top line, building momentum in 2020 -- beyond 2025, right, '26 and beyond. So, we do expect growth in '25, but our HIV business, the demand of HIV will offset the impact of Part D. Andy Dickinson -- Chief Financial Officer Chris, it's Andy. I'll take the question on margin expansion. As you know, we don't provide more specific guidance for 2025 beyond what Johanna just mentioned. What we have said historically, and I've underscored, is that we are very focused on disciplined expense management. That will be true in 2025 as it is today. You've seen that in the last two quarters. I think on a non-GAAP basis for this quarter, if you look at our operating margin, if you strip out the CymaBay transaction, you see an improvement in our operating margin, and we expect that to continue over time. So, we do expect broadly for our operating margin to improve over time as you see the continued top-line growth and the disciplined expense management. So, thanks for the question. More details, of course, to be provided early next year when we provide our 2025 guidance specifically. Operator Our next question comes from Daina Graybosch at Leerink Partners. Daina, your line is open. Daina Graybosch -- Leerink Partners -- Analyst Great. Thanks for the question. It's for Kite. FDA's ODAC recently had two important meetings of relevance for multiple myeloma and CAR-T there. One dealt with the early death risk from CARVYKTI and ABECMA. And the second was to recommend MRD as an intermediate endpoint for accelerated approval in multiple myeloma. And I wonder how you're thinking about both of these ODACs in relation to anito-cel in your earlier line trial design. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Thanks, Daina. We've got Cindy Perettie here, so we'll go right over to her. Cindy Perettie -- Executive Vice President, Kite Thanks, Daina. So, if I start off with the early line ODAC, I think we believe this is positive for everybody. What it's shown is that people recognize the value of having CAR Ts therapies earlier in their disease. They value the disease-free intervals that they get from that. So, we were very happy to see that. I think we were equally as excited to see the second ODAC around MRD, minimal residual disease, as a secondary -- as an additional endpoint. I think the piece around this is that we're really encouraged that the ODAC decision is going to open up the door for us to potentially bring anito-cel to market faster for patients. And we're in the process right now of understanding how the MRD surrogate endpoint can be used with regulatory agencies and the application of our program and so more to come on that front. Operator Our next question comes from Umer Raffat of Evercore ISI. Umer, your line is open. Umer Raffat -- Evercore ISI -- Analyst Hi, guys, thanks for taking my question. I just thought I'll spend a quick second on CymaBay given the recent deal. My question is, did Gilead, during the diligence process, deploy independent pathologists to evaluate the cases of "possible" liver pathology that happened in the NASH trial previously as well as the paired liver biopsy data from the PBC trial at the lower dose where CymaBay didn't think it would need safety adjudication? I'd be very curious how you guys did that and if you would ever publish that. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Merdad is here, so I'll let him answer. Merdad Parsey -- Chief Medical Officer Thanks, Umer. Let me start by saying we think seladelpar is one of those medicines that will bring a lot of benefit to patients and really some near-term expansion of our liver portfolio and our -- and what we think will synergize with many of the other -- much of the other work that we're doing in liver disease overall. We obviously did thorough diligence in our approach to seladelpar and CymaBay. We didn't do a third -- I think your question was around whether we did an independent third-party review of the pathology. We did not do that. However, we did a lot of thorough diligence on the data itself and the outcomes. And we are confident around the outcome and what it means for patients over time. Obviously, we're waiting right now the -- our upcoming PDUFA date and also the file in the EMA, which we are optimistic about. And following the questions and all those sorts of items that we're in. So, we're looking forward to providing an update on that as those filings proceed. Operator Our next question comes from Tyler Van Buren at TD Cowen. Tyler, your line is open. Tyler Van Buren -- TD Cowen -- Analyst Hey, guys, good afternoon. Thanks very much for the question. I was hoping you could help set expectations for EVOKE-01 and 02 presentations at ASCO. For EVOKE-02, the late breaker tag is interesting. So, is that related to the 3-month OS benefit in the PD-1 refractory patients? Or could we -- or should we be expecting something more? And for EVOKE-02, what should we hope to see with the Cohort A data that should leave us confident in the EVOKE-03 readout next year? Merdad Parsey -- Chief Medical Officer Thanks, Tyler. It's Merdad again here. So, it's a little challenging because I can't share too many details now because we're under embargo for both of those. And obviously, happy to fill in a lot of the blanks once the data are released, and we can talk about it in ASCO. I think for EVOKE-01, we think there are a number of pipeline updates in our ASCO presentations that we have upcoming, which were -- we see as a real change for us and a real evolution of our pipeline overall and our ability to build our oncology pipeline and bring new options for patients. As part of the late breaker session for EVOKE-01, as you mentioned, we will include data on overall survival, on PFS, ORR, and duration of response as well as the safety profile, of course. And I wish I could give you more details, but I can't at this point. As you say, we will also be providing other updates there, including the EVOKE-02 Cohort A data looking at the PD-L1 high non-small cell population. And again, I can't really talk about the details of those data, but we are looking forward to sharing those results with everyone and talking about the implications of that for our broader lung cancer and especially the frontline lung cancer EVOKE-03 study that we are conducting right now is underway with our partners at Merck. Operator Our next question comes from the line of Geoff Meacham at Bank of America. Geoff, your line is open. Geoff Meacham -- Bank of America Merrill Lynch -- Analyst Good afternoon, everyone. Thanks for the question. Merdad, a question for you. On the cell therapy front, you usually have the anito-cel update later this year, which is big. But beyond that, I wasn't sure what the priority was among the next-gen CAR assets that you've got kind of cartooned on Slide 19. There's a lot of competition in this space, but you guys are among the only players that have real scale and you could move the next-gen stuff, I think, pretty fast. But if you had to pick sort of a priority list, will be good to know. Thank you. Dan O'Day -- Chairman and Chief Executive Officer Thanks, Geoff. This is Dan. We're going to have Cindy Perettie answer that question if you don't mind. So, Cindy, over to you. Cindy Perettie -- Executive Vice President, Kite Hi, Geoff. So, we have three products right now or three constructs that are in Phase 1a and b clinical trials. The first one is a bicistronic CD19, CD20 that has 41BB and CD28. The second one is that same construct with fast manufacturing, 3-day manufacturing. And the other one is a CD19 like Yescarta with three-day manufacturing. So, we're looking at all three of those in parallel with the goal of picking the winner to advance that rapidly into our pivotal trials. So, that's what's coming up next. Obviously, we've shared a lot around anito-cel as well. With anito-cel, we have the iMMagine-1 readout, and we expect to move quickly into earlier lines as it relates to anito-cel, and you'll hear more about that later this year. Hopefully, that answers your question. We certainly have a number of plays in early research, but we would plan to advance our next-generation lymphoma assets quickly. And obviously, with the scale that we have at Kite as well as the integrated fact that we can create the vector as well as the construct in-house. Operator Our next question comes from Michael Yee at Jefferies. Michael, go ahead. Your line is open. Michael Yee -- Jefferies -- Analyst Hi, guys. Thanks. Following up on the Trodelvy data coming at ASCO and your enthusiasm for frontline, can you just remind us, a, do you believe that your data in EVOKE second line that will be at ASCO is at least as competitive or better than Astra, and that is why you're excited about frontline? And b, if you are, do you have a triple therapy on top of chemo combo or is your whole first-line strategy just on top of PD-1? Thank you. Merdad Parsey -- Chief Medical Officer Thanks, Michael. This is Merdad again. As we've noted, I think, and as you talked about, the EVOKE-01 data in second line will be something that we discuss at ASCO and show those data. And the full data set is -- does motivate us to go forward in lung cancer and including discussions with regulators. The unmet need in this population is great, and the data give us options, including discussions with health authorities and conducting follow-up trials. We'll be able to share more once the data are provided at ASCO, and so we look forward to having those deeper discussions once we can speak directly to the data. And I'm sorry, and the second part of your question was around the front line. Again, I think once we are able to share the EVOKE-02 data, the update on EVOKE-02 data, we'll be able to talk more. But it does continue to allow us to think about the frontline and our confidence around about EVOKE-03. And then the last part of your question on other combinations. We do think about our intra-portfolio combinations. For example, we have a combination of dambinelumab and Trodelvy in a trial where we're looking to see if we can get additional efficacy from those sorts of combinations. So, we do continuously look at our portfolio and look for opportunities for moving the needle with combinations from within our portfolio. Operator Our next question comes from Salveen Richter of Goldman Sachs. Salveen, go ahead. Your line is open. Salveen Richter -- Goldman Sachs -- Analyst Good afternoon. Thanks for taking my question. So, you currently have about $5 billion in cash, and noted leverage is back to pre-Immunomedics deal levels. How are you thinking about meaningful or bolt-on BD post the CymaBay acquisition? And is there any preference now between virology, I&I, and oncology? Thank you. Andy Dickinson -- Chief Financial Officer Hey, Salveen, it's Andy. Maybe I'll start with that one. In our prepared remarks, I highlighted that in the near term, we don't expect sizable M&A. So, we have a lot of execution ahead of us. We have a deep portfolio, a lot of growth drivers, including seladelpar. So, we're very clearly highlighting that in the short term, we will continue to do ordinary course business development, the standard licensing deals. You saw a couple of those in the first quarter. But it's unlikely that we'd pursue any meaningful M&A in the near term. We've also said historically that deals like CymaBay are exactly what we're looking for and that we should do deals like that on a regular basis over the cycle and whether that's every two years on average or more or less, that's a general ballpark. So, I think you're appropriately highlighting we have -- we generate a lot of operating cash flow. You saw that again in the first quarter. We will rebuild our cash over time. We're going to continue to invest in the pipeline. But at least in the short run, we don't expect any meaningful M&A in the short run. Dan O'Day -- Chairman and Chief Executive Officer And Salveen, this is Dan. Just to answer the end of your question. I mean, we're always therapeutic area agnostic when we approach these. I mean, first of all, we've got robust portfolios around both urology and oncology and a building portfolio in inflammation. So, we look, frankly, across those spectrums. Seladelpar is a great example of finding an opportunity within our liver disease or -- franchise and be able to use that channel. But equally, we'll look for opportunities and synergies that complement our portfolio across therapeutic areas. And that's our approach. We think that makes sense. We look for the most attractive science. And as Andy said, we have a lot in our hands now to work through and to execute on. And so, we'll keep the bar very high. Operator Our next question comes from James Shin at Deutsche Bank. James, your line is open. James Shin -- Deutsche Bank -- Analyst Hi. Thanks for my question. I wanted to ask on Trodelvy's efforts in HR+/HER2-. DESTINY-Breast06 is going to have data pretty soon it seems. And you also have ASCENT-07. Sort of sounds similar to DESTINY-Breast04 versus TROPiCS-02. Can you share like how you think this landscape will play out with these two trials? Merdad Parsey -- Chief Medical Officer Thanks for the question, James. Well, it's -- I've learned to try to keep away from prognostication. So, that's harder to do. We -- look, maybe the way I would put it is we are proud of the fact that Trodelvy is still the only TROP2 ADC that is approved, and that is in large part driven by the important role that Trodelvy plays in breast cancer right now for patients. And we do continue to want to push that, along with the ASCENT-07. We have a number of other trials ongoing to expand our footprint in breast cancer. I think we are right now in TNBC, the leading regimen. And as we are continuing to advance our HR+/HER2- and in particular, in the IHC-0 population, I think we remain confident around our place there. We've shown a benefit in randomized clinical trials there, and that's been the basis for our regulatory filings and approvals. So, I don't think we can assume success. We'll have to see what the data are. But looking forward into the year that's coming with ASCENT-03 coming up, I think that will provide us additional information to further expand our potential in breast cancer. Johanna, do you want to add? Johanna Mercier -- Chief Commercial Officer Maybe just to add to that, I would also say that the more options these patients have, these women have, in HR+ in earlier lines of therapy instead of cycling through chemotherapies, the better. So, with DB06 results and moving potentially that compound up earlier, it actually allows for Trodelvy to also play a more important and a bigger population than it is today because of the profile of the TROPiCS-02 label. And so, we do believe that there's opportunities for this ADC to move up and also differentiate itself versus other ADCs in this marketplace, depends effect profile, the safety profile, not only on the efficacy. And so, in light of the IHC-0 setting being really our strong foothold in HR+/HER2-, we believe that will continue, whether that's in later lines of therapy or earlier lines of these studies play out. Operator Our Next question comes from Mohit Bansal at Wells Fargo. Mohit, go ahead. Your line is open. Mohit Bansal -- Wells Fargo Securities -- Analyst Great. Thank you very much for taking my question. Maybe a big picture question, if you think about medium to longer term because, I mean, yes, you do not have an LOE. But I mean, HIV growth is somewhere around low single digits. And oncology, I mean, again, I mean, it dropped too and all. The expansion opportunities seem limited at this point. So, just trying to understand how do you turn this low single-digit to more like a high single-digit kind of growth for overall company. CymaBay is definitely an addition, but how are you thinking about it from medium to long term, which probably people like us are missing? Dan O'Day -- Chairman and Chief Executive Officer Mohit, maybe I'll start and then have others add. First of all, I think just stepping back and thinking about the portfolio that we've built over the past four years now more than doubling the size of the portfolio and with significant advances in our HIV portfolio and oncology and with outside of cell therapy. So, as we think about growth moving forward, I mean, first of all, I would say on the HIV side of the business, we have to constantly remind ourselves and others that in addition to the treatment market and the potential for long-acting treatment that we have a very robust program on, and we'll update you a little bit more on toward the second half of this year with an analyst event, we've got the PrEP market that is just beginning to kind of be dimensionalized. And that is -- I think that provides significant growth opportunity when you think about your time frame, which you mentioned, which is until the end of the decade. So, I think it allows us to think about accelerated HIV total growth prevention and treatment as we head toward the second half of the decade. That -- on top of that, then we have the entirety of the oncology portfolio. So, both cell therapy within the large B-cell lymphoma area as well as potentially the multiple myeloma entry with the anito-cel. And then on top of that, a very robust oncology portfolio that has both Trodelvy and other novel agents that we'll read out over the course of this decade. And I'll just remind you, again, we've got close to 20 readouts this year, of which three of those are in Phase 3, including lenacapavir for prep in the second half of this year, two Trodelvy Phase 3 readouts. And then importantly, we've added seladelpar to the mix with a PDUFA date in August. And then finally, just the opportunity to update you on the anito-cel at the end of the year as well. So, we'll be providing more guidance as we continue to look at the entirety of our portfolio, but we really think we have within the company today, by the way, I'll just mention, in addition to complementing where needed from the outside. But within the company today, we have what it takes to drive a substantial growth in our business over the course of the next decade with focus on expense management as well to produce good returns for investors. Operator Our next question comes from Simon Baker at Redburn Atlantic. Go ahead, Simon. Your line is open. Simon Baker -- Redburn Atlantic -- Analyst Thank you for taking my question. One on seladelpar if I may. And a question really around the competitive dynamics at launch. If all goes according to plan, your launch in August, and Ipsen will launch Elafibranor in June. So, I was just wondering if that really makes any difference. You've obviously got far greater infrastructure than Ipsen. Is it too early for them to steal in March? Or paradoxically thus having somebody else on the market promoting PBC actually raise disease awareness and help the situation? So, any color around the dynamics at launch would be very helpful. Thank you. Johanna Mercier -- Chief Commercial Officer Thanks, Simon. It's Johanna. Let me take that one. And I think you're absolutely right. I think the fact that there is more than one competitor hitting the market is great for patients namely around increasing disease awareness around PDC and the fact that there are two options available. Having said that, I also feel incredibly confident that seladelpar is well differentiated to potentially be best in disease when you think about the significant impact and clinically meaningful impact we have with the ALP normalization in the clinical jet Phase 3 clinical trial we've seen as well as the improvement in pruritus which is a key symptom of the disease. And today, there really is no effective antipruritic options for PBC patients. And so, all of that put together, in addition to the fact that we believe our footprint, both commercial and medical is incredibly well established when it comes to liver disease. It already covers about 80% of all U.S. PBC prescribers. And with that strong differentiated profile we were just referring to, I don't think those three months make a difference. I think really, it's about best-in-class launch and that potential with seladelpar that we look forward for our PDUFA date. Operator Our next question comes from Brian Skorney at Baird. Brian, go ahead. Your line is open. Unknown speaker Hi. Thanks for taking the question. This is Charlie on for Brian. So, again, to ask something about seladelpar. Just wondering if you have any ambitions for potentially looking at a label for first line in the future, considering there's a lot of unmet need with pruritus there. As well as any potential synergies you may be considering with the remainder of your liver portfolio. Thank you. Merdad Parsey -- Chief Medical Officer Thanks, Charlie. This is Merdad. Frontline is a challenge given the -- what is currently the background standard of care. But as you know, we think that seladelpar is going to bring a lot of benefit to a lot of patients, especially given the pruritus and the potential for getting to patients earlier in their course will be really important for us. And so, we have to see how the market starts to respond to the presence of seladelpar in the second line. And recall, I think the other thing to recall or think about is the -- how long people actually get frontline therapy before moving on to second-line therapy, given the efficacy profile of the frontline therapies and the fact that there haven't been any options, one could anticipate that patients are moved to second-line therapy relatively early in their treatment course and making -- moving up formally for registrational trials to the frontline potentially superfluous. So, I think we'll see how that plays out in the market. And once we see our label and all those sorts of things, so we'll be able to update more after that. Operator Our next question comes from Brian Abrahams at RBC Capital Markets. Brian, go ahead. Your line is open. Brian Abrahams -- RBC Capital Markets -- Analyst Hi. Good afternoon. Thanks so much for taking my question. PURPOSE 1 is obviously an upcoming readout. So, I wanted to clarify some elements of its unique design, specifically what's the sensitivity of assessing when HIV infection occurred to accurately project the control infection rate? And then how do you control for potential intrinsic differences in risk behavior that the screened-out group serving as the control may have versus individuals who are -- who make it into the trial? Thanks. Merdad Parsey -- Chief Medical Officer Brian, thanks. It's Merdad again. And I could talk about this for a long time. Let me -- I'll try to give a very concise answer. The recency assay that's been developed for HIV, it has been studied very thoroughly, and we can, based on the diagnosis at the time of screening, create a profile for anyone who's potentially HIV infected at that time as to how recently they were infected. And I think that's a key part. And that relates to the second part of your question in that the -- we don't, in a sense, need to compare risk behaviors before and after randomization and that we'll be looking at the overall incidence of HIV at the time of screening and then comparing in this counterfactual design with what happens after people start therapy. So, I think between those two elements and all the discussions we've had with the regulators and the experts in the field, we're confident in that the design will provide the information necessary to get us to approval and for adoption. Operator Our next question comes from Terence Flynn at Morgan Stanley. Terence, go ahead. Your line is open. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks for taking the question. Two parts on the CAR-T franchise. So, just was wondering, high level, your comment to a anito-cel if it proves there is parkinsonism, so meaning it's less differentiated. And then the second part is, curious where your progress stands with respect to developing the CAR-T for immunology. Obviously, a lot of focus here among a number of other companies in the industry. So, just curious on Gilead's thoughts on the forward. Thank you. Cindy Perettie -- Executive Vice President, Kite Thanks, Terence, for the question. So, on the commitment to anito-cel, we're -- as it relates to Parkinson's, we absolutely feel that we're differentiated potentially on both safety and efficacy. As we noted earlier, we have not observed the neurotox that some of the other constructs have observed, and we'll continue to monitor it, but we feel great about the profile right now. And then the efficacy profile, early signals are we think we will be equivalent or could be best-in-class. So, we're 100% behind anito-cel and we're looking forward to bringing those data soon. The second question around autoimmune space. So, we continue to monitor the autoimmune space. And as you've heard from Andy and others before, we will play in that space. We are taking time to take a look at what's in the space versus what we have in our portfolio, and we'll be -- I don't have any updates further than that today. Operator Our last question comes from Carter Gould at Barclays. Carter, go ahead. Your line is open. Carter Gould -- Barclays -- Analyst Great. Good afternoon. Thanks for squeezing me in. Maybe just to round things out on cell therapy, you flagged the same dynamics that have been kind of persisting in the U.S. as far as the -- some of the constraints of the ATCs. I also saw the Tennessee oncology reference. But I guess putting that all together, just your level of confidence you sort of hit that return to more meaningful growth in the second half of the year. I didn't hear that mentioned and clearly, that's a point of focus. Any commentary there would be appreciated. Cindy Perettie -- Executive Vice President, Kite Yeah. No, we feel very confident that we're going to return to growth in the second half of the year, as we stated. I think just as a reminder, we had shared in quarter 4 our guidance was that we'd be flat to slightly down in quarter 1. And part of that is due to the restructure. So, we are putting our strategy into play. We feel very confident about the approach we're taking in the U.S. And we now are looking at having almost a fully stacked sales team back out and working hard. I think a piece that we need to talk about as well as the market dynamics. So, the things we're observing. We're observing out-of-class competition with the bispecifics, the ATC constraints that we've spoken about in the past based on multiple myeloma constructs coming in. But what we're seeing is a lot of the hospitals and ATCs are working through those constraints, and we feel really confident about the second half of this year. Dan O'Day -- Chairman and Chief Executive Officer Thank you, Cindy. This is Dan again. So, I appreciate all of you joining. Maybe just a bit of a summary statement. I want you all to know we at Gilead are very focused on the near-term execution and the long-term plans. We'll continue to stay disciplined and agile in our approach. Just as highlights, we've got 54 active clinical programs, no major patent expiries through the end of the decade, a variety of opportunities for growth, and a lot more to deliver. On top of that, we are on track to provide updates from three Phase 3 clinical trials for Trodelvy, lenacapavir. We've got the seladelpar PDUFA date in August. Any update on the anito-cel Phase 2 update with the management we'll have at the end of the year. So, rest assured that we are firmly focused on the many opportunities we have, and we have a lot more potential to deliver. With that, I'll hand over to Jacquie for closing comments. Jacquie Ross -- Vice President, Investor Relations Thank you, Dan. To close, just one housekeeping item. I can share that we are tentatively planning to release our second quarter 2024 earnings results on Thursday, August 8. Please note that this date is provisional and could be changed to accommodate scheduling conflicts that arise between now and then. As always, we will announce our confirmed date following the close of the second quarter. We appreciate your continued interest in Gilead and look forward to updating you on our progress throughout the quarter. With that, we'll close our call for today. Thank you.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp first-quarter 2024 earnings conference call. [Operator instructions] This conference call is being recorded today, Thursday, April 25, 2024. Before we begin, note that the matters the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-K -- 10-Q, excuse me, for the quarter ended March 31, 2024. Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Please go ahead, sir. Joe Hanna -- Chief Executive Officer Thank you, Bo. Good afternoon, and thank you, everyone, for joining us on today's call. We are pleased to be together today and look forward to providing additional perspective on our results for the first quarter. I will start with some overall comments on our first quarter and Keith will provide additional detail in his financial review before we open the call up for questions. On a total company basis, we had a good first quarter. Rental revenue increased 9%, sales revenues increased 48%, and adjusted EBITDA grew by 17%. Mobile modular was the highlight of our first quarter with rental revenue increasing 19%. We have been diligently executing our strategy of offering an expanded range of modular solutions to our customers, and it continues to show in the results. Our teams are focused and clear about what success is for our customers and the business, and they've been doing an excellent job delivering on those commitments. We finished the quarter with a rental backlog that is the highest in the company's history. The high backlog was driven by our education segment, which was very active as school districts address both modernization and growth projects in our operating geographies. This is a positive sign as we now have many units under contract that are already scheduled for shipment. Therefore, we have front-loaded much of our planned capex spend for the year. Modular sales revenues were also up very nicely for the quarter, increasing 49%. With our custom modular solutions initiative, we have positioned ourselves as a provider of modular solutions that range from very small installations to projects larger and more complex in scope, and the market opportunities are many. Some are rental projects, and some are sales. We want both. We've been very pleased by the development of this capability within the business and have a talented team in place to grow this segment. Commenting specifically now on our other growth initiatives, we are expanding contract scope and realized strong growth increases in both Mobile Modular Plus and Site Related Services of 26% and 31%, respectively. Our customers value the benefit of having their buildings arrive with additional amenities included in their rental contract as well as the value of services provided on the outside of the building to make it completely ready for use. We are gaining traction as each quarter passes, and customer acceptance has been positive. At Portable Storage, rental revenues increased 8%. Consistent with recent ABI data and other macro indicators of construction-related demand, project activity was slightly muted in the quarter, and returns were higher year-over-year. Importantly, we executed well, and our close ratios remained steady. At TRS-RenTelco, rental revenues decreased by 13% year-over-year, reflecting continued industrywide weakness in the computer and semiconductor portion of the business. We continued adjusting for the softer market conditions. We reduced purchases of new rental equipment and sold fleet, which has collectively reduced our fleet size by $7 million during the quarter. Our team has significant depth of experience, and we are confident in our ability to manage the portfolio effectively through cycles. Since we announced the merger agreement with WillScot Mobile Mini on January 29 and while the transaction is still pending, we continue to operate with a business-as-usual mindset. During this period, our teams remained very focused on delivering exceptional service to our customers and to each other. I could not be more pleased with their performance and commitment. Thank you, everyone, for your dedication and strong execution in the quarter. As always, and now during the pending merger, our focus will remain on the execution of our strategic plans and delivering positive financial results. The preliminary Form S-4 has been filed, and we are working with WillScot Mobile Mini on effectiveness of that document so we can call a special meeting of shareholders to approve the merger. As stated last quarter, we will not be providing any financial guidance or future outlook. Now let me turn the call over to Keith. Keith Pratt -- Chief Financial Officer Thank you, Joe. And good afternoon, everyone. As Joe highlighted, we delivered strong results in the first quarter, driven by the performance of our Mobile Modular and Portable Storage businesses. Looking at the overall corporate results for the first quarter, total revenues from continuing operations increased 15% to $187.8 million, and adjusted EBITDA increased 17% to $72.1 million. During the first quarter, the company sold a property, which resulted in a $9.3 million net gain and contributed $0.28 in earnings per diluted share. These types of sales are infrequent and are excluded from adjusted EBITDA. Reviewing Mobile Modular's operating performance as compared to the first quarter of 2023, Mobile Modular had an impressive quarter with adjusted EBITDA increasing 34% to $43.3 million. Total revenues increased 23% to $127.6 million. There were increases across all revenue streams, including 19% higher rental revenues, 49% higher sales revenues, and 12% higher rental-related services revenues. As a reminder, the prior year first quarter included just 2 months of Vesta Modular from the acquisition date of February 1, 2023. The extra month of Vesta in the first quarter 2024 contributed approximately $5 million rental revenue and $2 million adjusted EBITDA. The rental revenue growth reflected overall positive business conditions across our commercial and education customer bases. Sales revenues increased $8.4 million to $25.3 million, demonstrating continued execution of our initiative to grow modular sales projects. We continued our disciplined fleet management on a larger fleet with 18% higher average rental equipment on rent and average fleet utilization of 78.7% compared to 79.4% a year ago. We have achieved this healthy total fleet utilization throughout the integration process of Vesta while concurrently investing in new rental fleet for growth. Rental revenues increased by 19%, while inventory center costs decreased 6%. And depreciation expense increased 14%, resulting in rental margins of 57%, up from 49% a year ago. Similar to last quarter, I will share additional data that help illustrate our progress delivering on our modular business strategy. First-quarter monthly revenue per unit on rent increased 18% year-over-year to $772. For new shipments over the last 12 months, the average monthly revenue per unit increased 9% to $1,063. Progress with Mobile Modular Plus is embedded in these data points and as an additional growth driver. We continue to make progress with our modular services offerings. For the first quarter 2024, Mobile Modular Plus revenues increased to $7.2 million from $5.7 million a year earlier and Site-Related Services increased to $3.2 million, up from $2.4 million. Turning to the review of Portable Storage in the first quarter. Adjusted EBITDA for Portable Storage was $1.5 million, an increase of 15% compared to the prior year. During the quarter, we saw increases in all revenue streams, resulting in a total revenue increase of 9% to $24.8 million. Rental revenues for the quarter increased 8% to $18.4 million. And rental margins were 87%, up from 85% a year earlier. Average equipment on rent increased 2%, while average utilization for the quarter was 69.8% compared to 80% -- 98.8% a year ago. Turning now to review of TRS-RenTelco. Adjusted EBITDA was $18.5 million, a decrease of 10% compared to last year. Total revenues decreased $2.4 million or 7% to $33.8 million. Rental revenues for the quarter decreased 13% as the industry experienced continued softness in semiconductor-related demand. Average utilization for the quarter was 56.5% compared to 59.2% a year ago, and rental margins were 36% compared to 40% a year ago. Sales revenues increased 33% year-over-year to $6.8 million, with gross profit increasing $1 million to $3.9 million, a result of higher sales revenues and improved margins. To address the softer business conditions at TRS, we continue to maintain our return on capital discipline. We reduced new equipment capital spending, focused on sales of used equipment, and reduced fleet size based on original cost of equipment from $378 million at the end of December to $371 million at the end of March. We continue to make progress with reducing fleet size to better align with current demand conditions. The remainder of my comments will be on a total company basis from continuing operations. First quarter selling and administrative expenses increased $2.3 million to $59.8 million. The increase was primarily the result of higher employee salaries and benefit costs, partly offset by reduced marketing and administrative costs. 2024 costs included $9.4 million of transaction expenses from the pending WillScot merger. 2023 costs included $14.1 million in Vesta acquisition and Adler divestiture-related transaction costs. Interest expense was $12.7 million, an increase of $5.2 million as a result of higher average interest rates and $215 million higher average debt levels during the quarter, which was primarily the result of funding of last year's acquisitions. The first-quarter provision for income taxes was based on an effective tax rate of 23.6% compared to 23.8% a year earlier. The decrease was primarily due to changes in business mix by state. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $59 million compared to $36 million in the prior year. Rental equipment purchases were $79 million compared to $78 million in the prior year. In addition to continued investments in new fleet, healthy cash generation allowed us to pay $12 million in shareholder dividends. Proceeds from sales of property, plant, and equipment were $12 million. At quarter-end, we had net borrowings of $799 million, comprised of $175 million notes outstanding and $624 million under our credit facility. On April 23, the company entered into an incremental borrowing facility amendment, which provided for a $75 million term loan. This loan was used to pay down our existing bank lines of credit and creates additional borrowing capacity for general corporate purposes and working capital needs, including the front loading of our 2024 modular capital spending to support positive demand conditions and for incremental transaction expenses. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 2.43 to 1. We are very proud of McGrath's strong first-quarter performance, and we are fully focused on solid execution for the remainder of 2024. That concludes our prepared remarks. Bo, you may now open the lines for questions. Questions & Answers: Operator [Operator instructions] We'll go first this afternoon to Scott Schneeberger of Oppenheimer. Scott, please go ahead. Scott Schneeberger -- Oppenheimer and Company -- Analyst Oh, thanks very much. Good afternoon, guys. For the first question -- and I have a bunch, the -- Keith, I think you said it about in dollar terms, and I haven't had a chance to go back and reconcile. What was the organic growth in modular versus the Vesta contribution since we were dealing with a partial quarter? Keith Pratt -- Chief Financial Officer Yeah. On the rental revenue side, approximately 12% organic. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks. Appreciate that. With regard to pricing, and this is a question relating to Slide 24. The -- and I have a feeling Vesta played into this answer here. But your units shipped over the last 12 months, modular grew 9% year-over-year in the first quarter. The total portfolio, plus 18% year-over-year. I'm a little confused. I mean, both nice numbers, but I'm a little bit confused by the magnitude of each. And I suspect it has to do with -- I read in the footnote, you started including Vesta in November of '23. Is that the main difference there? And could you take us through that a little bit, please, Keith? Keith Pratt -- Chief Financial Officer Yeah. I think that is the main difference, Scott. Again, that is the data. The footnotes are important as you understand the data. As you glean from the footnotes, we're reflecting the data we have available from our systems, and Vesta was incorporated into the data capture on the 1st of November. I think the trends are still positive across the business. We are getting more revenue per unit on rent. I think that reflects a couple of things. One is units are more expensive, both to purchase and maintain. So we have to charge accordingly. And importantly, we're adding more services into the business. So with some of our contracts, capturing more of the Mobile Modular Plus services further enhances the revenue per unit. Scott Schneeberger -- Oppenheimer and Company -- Analyst All right. Thanks. Some volume questions. I think Joe may have referenced that ABI has been bouncing around recently. I think he addressed it when he was speaking to Portable Storage containers. But just curious, what are you seeing in the demand environment for both of the two major asset classes in Mobile Modular, both portable and modulars, since we last spoke in mid-February? Thanks. Joe Hanna -- Chief Executive Officer Yeah. Scott, actually, as I referenced in the comments, our backlog -- our rental backlog right now is very strong, and that's mostly supported by really good orders that we've received so far for education. So that's been a highlight, I think, of the quarter, actually, not only in bookings that we made, but actual billings, too. So that part of the business is strong. I would say a little bit more muted in the commercial construction market, just not quite the activity level that we've seen in prior years, but still hanging in there, still pretty steady. And so I would say that would be the two major differences. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks. And Joe, you mentioned that you pulled forward capex, maybe this brings Keith into the conversation. Pull forward capex is -- I know that kind of moving away from the annual guidance here. But is this pull forward of capex? Are you looking to do more? Or is it just we'll do it earlier? And it sounds like it's predominantly on education classroom modulars. Is it -- is the excess for anything else? And would you be doing actually less, if not for the educational? Thanks. Keith Pratt -- Chief Financial Officer Yeah. Scott, here's the way I frame it. It's really driven by the education market. As Joe commented, education market conditions have been good for the first part of the year. I think you'll recall the education market is seasonal. Most of the activations will be in the summer months. So we really have to front-load the capex to meet demand in that part of the market. We're certainly adding some fleet selectively, but I would say the new capex focus is much more on the education side of the business, and it needs to happen early in the year to be effective. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks, Keith. This is a question on affordable storage utilization. You've only been reporting that segment separately the last 2 quarters. But it's been down about 1,000 basis points, give or take, year-over-year, and we don't have the historical context prior. But what is the big difference there year-over-year, if you could just elaborate a little bit? Thanks. Joe Hanna -- Chief Executive Officer Yeah, Scott, I would say we have a bigger fleet. So units on rent have actually hung in there pretty well, but utilization has dropped. And we've gotten more returns than we had planned, and bookings were quite as strong as we had planned in the quarter. So I think that's really what you're seeing in the numbers there. Scott Schneeberger -- Oppenheimer and Company -- Analyst And first quarter, Joe, is seasonally softest quarter, right? Joe Hanna -- Chief Executive Officer Correct. Absolutely. Scott Schneeberger -- Oppenheimer and Company -- Analyst All right. Thanks. I'm going to pivot over. I'm getting toward the end here. Thanks. TRS-RenTelco, still semiconductor softness. Are you seeing any signs of return? Any visibility there? Is it still tough to call? Joe Hanna -- Chief Executive Officer Yeah, it's still pretty tough to call. And as you know, in that business, our rental terms are shorter, hard to see out far over the hood there. And so we take it on a month-by-month-by-month basis. So a little bit tough to predict right now, but we're pulling all the right levers in the business to adjust for the current market conditions. So I'm pleased that the team is taking the steps that they are to keep the business healthy. Scott Schneeberger -- Oppenheimer and Company -- Analyst Any quick comments 4G to 5G? Just any progress report on that? Thanks. Joe Hanna -- Chief Executive Officer Not really. No big developments there to speak of. Scott Schneeberger -- Oppenheimer and Company -- Analyst OK. Thanks. And then I'll wrap it up. Recently, a proxy out having to do with your pending transaction with WillScot Mobile Mini. And it was provided revenue, EBITDA, EBIT, unlevered free cash flow for the business. through 2028. Just curious kind of -- I mean, obviously, that's out there publicly for all to see. What was behind kind of some of the major assumptions that you're applying, particularly to the revenue line as that was put together? Thanks. Joe Hanna -- Chief Executive Officer I'll make a quick comment, and Keith can give you more color. I would say that we -- what we really wanted to do there as we put those projections together were to filter in the initiatives that we have that are going in the business, too. And so we try to predict further penetration of those initiatives into all the work that we're doing on a current basis, and so we rolled all that forward. Keith, I don't know if you want to add anything to that. Keith Pratt -- Chief Financial Officer That was going to be exactly my point, Joe, and really emphasizing that was our organic outlook for the business we own and operate. We see a lot of opportunities with it. A lot of those opportunities are based around the modular growth strategy that we've articulated over the last few years. And I think you see in today's report card that we continue to make progress in those areas. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks. And kind of for both of you, such as with regard to initiative is what you're doing with regard to add-on inside and outside the assets. And then maybe, Keith, maybe some consideration for what type of economic outlook it is. I mean, it's a 5-year outlook. So are you kind of what type of CAGR GDP you anticipating there? And anything else just kind of -- I assume no acquisitions are in that number, but I just want to clarify. Thanks. Keith Pratt -- Chief Financial Officer Yeah. All organic, no acquisitions. When we put together any forecast, we really begin by looking at the overall economic backdrop. We review published studies that are out there, and then we look at specific studies that are related to important end markets that we serve. So things like ABI, construction spending and the like, outlook for school spending, school enrollment. All those kinds of things, we'll take a look at as we formulate our forecast. So that's all in the normal course of business. And what is done is we developed the forecast with the information that is most current at the time they're put together. Scott Schneeberger -- Oppenheimer and Company -- Analyst Great. Thanks. I appreciate that. That's helpful. One more, I'm going to sneak in. Just the real estate sale. Can you share a little bit more color on that? And I'll turn it over. Thanks, guys. Keith Pratt -- Chief Financial Officer Yeah. Scott, as you know, for certain key operating locations, we may own our property across our businesses. In this particular instance, this is a property at which Adler Tank Rentals was the division that used the property, and obviously, we divested that business last year, we had an opportunity to sell the property and can use that capital to redeploy it into the modular side of the business. Scott Schneeberger -- Oppenheimer and Company -- Analyst Sounds good. Thanks, guys. Keith Pratt -- Chief Financial Officer Thank you. Joe Hanna -- Chief Executive Officer Thank you. Operator Thank you. We go next now to Marc Riddick of Sidoti. Marc Riddick -- Sidoti and Company -- Analyst So I was wondering if you could sort of take us back to the strength of education for a moment because I think it's kind of interesting, the commentary there. It seems as though things were looking pretty good already as we got to the end of last year in that space. So can you maybe just take us through maybe a couple of puts and takes as to what was stronger than what you expected, whether it was a mix issue, pricing issue? Like what's it that really kind of bumped up education maybe a little faster than what maybe you were expecting at the end of the year? Joe Hanna -- Chief Executive Officer Sure. I would say that really the main driver of our education business is the amount of money that's out on local bond measures and state bond measures. Primarily, what we're seeing now is more local bonds. And so when those go out on the ballot for election, they pass by a nice majority usually, and those are significant bonds that pass in these municipalities for modernization and for growth projects. And over the past year or so, a lot of those have passed, and that money is now being deployed in the market right now. And we're positioned very nicely to take advantage of it, and it's really solid execution. Our relationships with our education clients, that really bring those projects to fruition. So we're very pleased with how that market has developed. Marc Riddick -- Sidoti and Company -- Analyst So it's -- the funding availability that has sort of been building in the last couple of years, folks are now more comfortable with releasing those and sort of putting that to work. Are there -- is that particularly in California and/or Texas? Or are there any particular areas that you're seeing there? Or is it kind of across the board? Joe Hanna -- Chief Executive Officer It's across the board. You're absolutely right. That money is being deployed, and it's across the board. Marc Riddick -- Sidoti and Company -- Analyst Excellent. Excellent. And then so you talked about sort of bringing forward some of the capex to sort of address that. And obviously, there's the seasonal nature and the timing of when those will be delivered. Do you get any sense of any supply chain concerns as to what you'll need? Or how should we think about that? Joe Hanna -- Chief Executive Officer Yeah. I would say supply chain issues. We manage that very carefully. We have excellent relationships with our suppliers. We work with them to reserve line time, and we're not seeing that being a hindrance to us at all for this year. It's been tight in prior years, not quite as tight this year. But like I said, we manage it very carefully, and I think we're in very good shape there with our suppliers. Marc Riddick -- Sidoti and Company -- Analyst OK. Excellent. And then finally, it seems as though with the pricing dynamic that you guys have been working on for quite some time continues to generally move in the right direction. I was wondering if you could talk a little bit about those efforts and kind of if there are any pieces that we should be aware of that maybe we have another chance to talk about as much lately. Keith Pratt -- Chief Financial Officer Yeah, Marc, as we commented earlier, the goal here is deliver more value to the customer. We're achieving better revenue per unit deployed. That's partly because of the services emphasis. It also reflects higher cost of new equipment and higher cost of maintaining equipment and getting it rental-ready. So this is all about protecting our economics. We've talked about that over the last few years. And I think our teams have done really good work addressing those issues, and that's reflected in the numbers. Marc Riddick -- Sidoti and Company -- Analyst And then I guess the last one for me with -- given what's taking place, I was wondering if you could talk a little bit about sort of how you see the labor market and development. I think the entire time I've covered you, I've always worried about that, not being able to get enough drivers and I would imagine that could be something that could be on the table as well. But maybe you could talk a little bit about sort of the labor market and what you're experiencing there. Joe Hanna -- Chief Executive Officer Yeah. Actually, this year, we've been able to fill open positions pretty effectively. You're right, the driver market typically is one that's very, very tight. And we have -- we're not experiencing any specific issues right now in filling those roles. So I feel very good that we have the right labor at the right places in the company to get the job done that we need to right now. So I think we're in pretty good shape. Marc Riddick -- Sidoti and Company -- Analyst Excellent. Thank you very much. Joe Hanna -- Chief Executive Officer Thank you, Marc. Keith Pratt -- Chief Financial Officer Thank you. Operator And ladies and gentlemen, that appears to be the last question. Let me now turn the call back over to Mr. Hanna for any closing comments. Joe Hanna -- Chief Executive Officer I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. Answer:

the McGrath RentCorp first-quarter 2024 earnings conference call

Operator Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp first-quarter 2024 earnings conference call. [Operator instructions] This conference call is being recorded today, Thursday, April 25, 2024. Before we begin, note that the matters the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-K -- 10-Q, excuse me, for the quarter ended March 31, 2024. Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Please go ahead, sir. Joe Hanna -- Chief Executive Officer Thank you, Bo. Good afternoon, and thank you, everyone, for joining us on today's call. We are pleased to be together today and look forward to providing additional perspective on our results for the first quarter. I will start with some overall comments on our first quarter and Keith will provide additional detail in his financial review before we open the call up for questions. On a total company basis, we had a good first quarter. Rental revenue increased 9%, sales revenues increased 48%, and adjusted EBITDA grew by 17%. Mobile modular was the highlight of our first quarter with rental revenue increasing 19%. We have been diligently executing our strategy of offering an expanded range of modular solutions to our customers, and it continues to show in the results. Our teams are focused and clear about what success is for our customers and the business, and they've been doing an excellent job delivering on those commitments. We finished the quarter with a rental backlog that is the highest in the company's history. The high backlog was driven by our education segment, which was very active as school districts address both modernization and growth projects in our operating geographies. This is a positive sign as we now have many units under contract that are already scheduled for shipment. Therefore, we have front-loaded much of our planned capex spend for the year. Modular sales revenues were also up very nicely for the quarter, increasing 49%. With our custom modular solutions initiative, we have positioned ourselves as a provider of modular solutions that range from very small installations to projects larger and more complex in scope, and the market opportunities are many. Some are rental projects, and some are sales. We want both. We've been very pleased by the development of this capability within the business and have a talented team in place to grow this segment. Commenting specifically now on our other growth initiatives, we are expanding contract scope and realized strong growth increases in both Mobile Modular Plus and Site Related Services of 26% and 31%, respectively. Our customers value the benefit of having their buildings arrive with additional amenities included in their rental contract as well as the value of services provided on the outside of the building to make it completely ready for use. We are gaining traction as each quarter passes, and customer acceptance has been positive. At Portable Storage, rental revenues increased 8%. Consistent with recent ABI data and other macro indicators of construction-related demand, project activity was slightly muted in the quarter, and returns were higher year-over-year. Importantly, we executed well, and our close ratios remained steady. At TRS-RenTelco, rental revenues decreased by 13% year-over-year, reflecting continued industrywide weakness in the computer and semiconductor portion of the business. We continued adjusting for the softer market conditions. We reduced purchases of new rental equipment and sold fleet, which has collectively reduced our fleet size by $7 million during the quarter. Our team has significant depth of experience, and we are confident in our ability to manage the portfolio effectively through cycles. Since we announced the merger agreement with WillScot Mobile Mini on January 29 and while the transaction is still pending, we continue to operate with a business-as-usual mindset. During this period, our teams remained very focused on delivering exceptional service to our customers and to each other. I could not be more pleased with their performance and commitment. Thank you, everyone, for your dedication and strong execution in the quarter. As always, and now during the pending merger, our focus will remain on the execution of our strategic plans and delivering positive financial results. The preliminary Form S-4 has been filed, and we are working with WillScot Mobile Mini on effectiveness of that document so we can call a special meeting of shareholders to approve the merger. As stated last quarter, we will not be providing any financial guidance or future outlook. Now let me turn the call over to Keith. Keith Pratt -- Chief Financial Officer Thank you, Joe. And good afternoon, everyone. As Joe highlighted, we delivered strong results in the first quarter, driven by the performance of our Mobile Modular and Portable Storage businesses. Looking at the overall corporate results for the first quarter, total revenues from continuing operations increased 15% to $187.8 million, and adjusted EBITDA increased 17% to $72.1 million. During the first quarter, the company sold a property, which resulted in a $9.3 million net gain and contributed $0.28 in earnings per diluted share. These types of sales are infrequent and are excluded from adjusted EBITDA. Reviewing Mobile Modular's operating performance as compared to the first quarter of 2023, Mobile Modular had an impressive quarter with adjusted EBITDA increasing 34% to $43.3 million. Total revenues increased 23% to $127.6 million. There were increases across all revenue streams, including 19% higher rental revenues, 49% higher sales revenues, and 12% higher rental-related services revenues. As a reminder, the prior year first quarter included just 2 months of Vesta Modular from the acquisition date of February 1, 2023. The extra month of Vesta in the first quarter 2024 contributed approximately $5 million rental revenue and $2 million adjusted EBITDA. The rental revenue growth reflected overall positive business conditions across our commercial and education customer bases. Sales revenues increased $8.4 million to $25.3 million, demonstrating continued execution of our initiative to grow modular sales projects. We continued our disciplined fleet management on a larger fleet with 18% higher average rental equipment on rent and average fleet utilization of 78.7% compared to 79.4% a year ago. We have achieved this healthy total fleet utilization throughout the integration process of Vesta while concurrently investing in new rental fleet for growth. Rental revenues increased by 19%, while inventory center costs decreased 6%. And depreciation expense increased 14%, resulting in rental margins of 57%, up from 49% a year ago. Similar to last quarter, I will share additional data that help illustrate our progress delivering on our modular business strategy. First-quarter monthly revenue per unit on rent increased 18% year-over-year to $772. For new shipments over the last 12 months, the average monthly revenue per unit increased 9% to $1,063. Progress with Mobile Modular Plus is embedded in these data points and as an additional growth driver. We continue to make progress with our modular services offerings. For the first quarter 2024, Mobile Modular Plus revenues increased to $7.2 million from $5.7 million a year earlier and Site-Related Services increased to $3.2 million, up from $2.4 million. Turning to the review of Portable Storage in the first quarter. Adjusted EBITDA for Portable Storage was $1.5 million, an increase of 15% compared to the prior year. During the quarter, we saw increases in all revenue streams, resulting in a total revenue increase of 9% to $24.8 million. Rental revenues for the quarter increased 8% to $18.4 million. And rental margins were 87%, up from 85% a year earlier. Average equipment on rent increased 2%, while average utilization for the quarter was 69.8% compared to 80% -- 98.8% a year ago. Turning now to review of TRS-RenTelco. Adjusted EBITDA was $18.5 million, a decrease of 10% compared to last year. Total revenues decreased $2.4 million or 7% to $33.8 million. Rental revenues for the quarter decreased 13% as the industry experienced continued softness in semiconductor-related demand. Average utilization for the quarter was 56.5% compared to 59.2% a year ago, and rental margins were 36% compared to 40% a year ago. Sales revenues increased 33% year-over-year to $6.8 million, with gross profit increasing $1 million to $3.9 million, a result of higher sales revenues and improved margins. To address the softer business conditions at TRS, we continue to maintain our return on capital discipline. We reduced new equipment capital spending, focused on sales of used equipment, and reduced fleet size based on original cost of equipment from $378 million at the end of December to $371 million at the end of March. We continue to make progress with reducing fleet size to better align with current demand conditions. The remainder of my comments will be on a total company basis from continuing operations. First quarter selling and administrative expenses increased $2.3 million to $59.8 million. The increase was primarily the result of higher employee salaries and benefit costs, partly offset by reduced marketing and administrative costs. 2024 costs included $9.4 million of transaction expenses from the pending WillScot merger. 2023 costs included $14.1 million in Vesta acquisition and Adler divestiture-related transaction costs. Interest expense was $12.7 million, an increase of $5.2 million as a result of higher average interest rates and $215 million higher average debt levels during the quarter, which was primarily the result of funding of last year's acquisitions. The first-quarter provision for income taxes was based on an effective tax rate of 23.6% compared to 23.8% a year earlier. The decrease was primarily due to changes in business mix by state. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $59 million compared to $36 million in the prior year. Rental equipment purchases were $79 million compared to $78 million in the prior year. In addition to continued investments in new fleet, healthy cash generation allowed us to pay $12 million in shareholder dividends. Proceeds from sales of property, plant, and equipment were $12 million. At quarter-end, we had net borrowings of $799 million, comprised of $175 million notes outstanding and $624 million under our credit facility. On April 23, the company entered into an incremental borrowing facility amendment, which provided for a $75 million term loan. This loan was used to pay down our existing bank lines of credit and creates additional borrowing capacity for general corporate purposes and working capital needs, including the front loading of our 2024 modular capital spending to support positive demand conditions and for incremental transaction expenses. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 2.43 to 1. We are very proud of McGrath's strong first-quarter performance, and we are fully focused on solid execution for the remainder of 2024. That concludes our prepared remarks. Bo, you may now open the lines for questions. Questions & Answers: Operator [Operator instructions] We'll go first this afternoon to Scott Schneeberger of Oppenheimer. Scott, please go ahead. Scott Schneeberger -- Oppenheimer and Company -- Analyst Oh, thanks very much. Good afternoon, guys. For the first question -- and I have a bunch, the -- Keith, I think you said it about in dollar terms, and I haven't had a chance to go back and reconcile. What was the organic growth in modular versus the Vesta contribution since we were dealing with a partial quarter? Keith Pratt -- Chief Financial Officer Yeah. On the rental revenue side, approximately 12% organic. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks. Appreciate that. With regard to pricing, and this is a question relating to Slide 24. The -- and I have a feeling Vesta played into this answer here. But your units shipped over the last 12 months, modular grew 9% year-over-year in the first quarter. The total portfolio, plus 18% year-over-year. I'm a little confused. I mean, both nice numbers, but I'm a little bit confused by the magnitude of each. And I suspect it has to do with -- I read in the footnote, you started including Vesta in November of '23. Is that the main difference there? And could you take us through that a little bit, please, Keith? Keith Pratt -- Chief Financial Officer Yeah. I think that is the main difference, Scott. Again, that is the data. The footnotes are important as you understand the data. As you glean from the footnotes, we're reflecting the data we have available from our systems, and Vesta was incorporated into the data capture on the 1st of November. I think the trends are still positive across the business. We are getting more revenue per unit on rent. I think that reflects a couple of things. One is units are more expensive, both to purchase and maintain. So we have to charge accordingly. And importantly, we're adding more services into the business. So with some of our contracts, capturing more of the Mobile Modular Plus services further enhances the revenue per unit. Scott Schneeberger -- Oppenheimer and Company -- Analyst All right. Thanks. Some volume questions. I think Joe may have referenced that ABI has been bouncing around recently. I think he addressed it when he was speaking to Portable Storage containers. But just curious, what are you seeing in the demand environment for both of the two major asset classes in Mobile Modular, both portable and modulars, since we last spoke in mid-February? Thanks. Joe Hanna -- Chief Executive Officer Yeah. Scott, actually, as I referenced in the comments, our backlog -- our rental backlog right now is very strong, and that's mostly supported by really good orders that we've received so far for education. So that's been a highlight, I think, of the quarter, actually, not only in bookings that we made, but actual billings, too. So that part of the business is strong. I would say a little bit more muted in the commercial construction market, just not quite the activity level that we've seen in prior years, but still hanging in there, still pretty steady. And so I would say that would be the two major differences. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks. And Joe, you mentioned that you pulled forward capex, maybe this brings Keith into the conversation. Pull forward capex is -- I know that kind of moving away from the annual guidance here. But is this pull forward of capex? Are you looking to do more? Or is it just we'll do it earlier? And it sounds like it's predominantly on education classroom modulars. Is it -- is the excess for anything else? And would you be doing actually less, if not for the educational? Thanks. Keith Pratt -- Chief Financial Officer Yeah. Scott, here's the way I frame it. It's really driven by the education market. As Joe commented, education market conditions have been good for the first part of the year. I think you'll recall the education market is seasonal. Most of the activations will be in the summer months. So we really have to front-load the capex to meet demand in that part of the market. We're certainly adding some fleet selectively, but I would say the new capex focus is much more on the education side of the business, and it needs to happen early in the year to be effective. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks, Keith. This is a question on affordable storage utilization. You've only been reporting that segment separately the last 2 quarters. But it's been down about 1,000 basis points, give or take, year-over-year, and we don't have the historical context prior. But what is the big difference there year-over-year, if you could just elaborate a little bit? Thanks. Joe Hanna -- Chief Executive Officer Yeah, Scott, I would say we have a bigger fleet. So units on rent have actually hung in there pretty well, but utilization has dropped. And we've gotten more returns than we had planned, and bookings were quite as strong as we had planned in the quarter. So I think that's really what you're seeing in the numbers there. Scott Schneeberger -- Oppenheimer and Company -- Analyst And first quarter, Joe, is seasonally softest quarter, right? Joe Hanna -- Chief Executive Officer Correct. Absolutely. Scott Schneeberger -- Oppenheimer and Company -- Analyst All right. Thanks. I'm going to pivot over. I'm getting toward the end here. Thanks. TRS-RenTelco, still semiconductor softness. Are you seeing any signs of return? Any visibility there? Is it still tough to call? Joe Hanna -- Chief Executive Officer Yeah, it's still pretty tough to call. And as you know, in that business, our rental terms are shorter, hard to see out far over the hood there. And so we take it on a month-by-month-by-month basis. So a little bit tough to predict right now, but we're pulling all the right levers in the business to adjust for the current market conditions. So I'm pleased that the team is taking the steps that they are to keep the business healthy. Scott Schneeberger -- Oppenheimer and Company -- Analyst Any quick comments 4G to 5G? Just any progress report on that? Thanks. Joe Hanna -- Chief Executive Officer Not really. No big developments there to speak of. Scott Schneeberger -- Oppenheimer and Company -- Analyst OK. Thanks. And then I'll wrap it up. Recently, a proxy out having to do with your pending transaction with WillScot Mobile Mini. And it was provided revenue, EBITDA, EBIT, unlevered free cash flow for the business. through 2028. Just curious kind of -- I mean, obviously, that's out there publicly for all to see. What was behind kind of some of the major assumptions that you're applying, particularly to the revenue line as that was put together? Thanks. Joe Hanna -- Chief Executive Officer I'll make a quick comment, and Keith can give you more color. I would say that we -- what we really wanted to do there as we put those projections together were to filter in the initiatives that we have that are going in the business, too. And so we try to predict further penetration of those initiatives into all the work that we're doing on a current basis, and so we rolled all that forward. Keith, I don't know if you want to add anything to that. Keith Pratt -- Chief Financial Officer That was going to be exactly my point, Joe, and really emphasizing that was our organic outlook for the business we own and operate. We see a lot of opportunities with it. A lot of those opportunities are based around the modular growth strategy that we've articulated over the last few years. And I think you see in today's report card that we continue to make progress in those areas. Scott Schneeberger -- Oppenheimer and Company -- Analyst Thanks. And kind of for both of you, such as with regard to initiative is what you're doing with regard to add-on inside and outside the assets. And then maybe, Keith, maybe some consideration for what type of economic outlook it is. I mean, it's a 5-year outlook. So are you kind of what type of CAGR GDP you anticipating there? And anything else just kind of -- I assume no acquisitions are in that number, but I just want to clarify. Thanks. Keith Pratt -- Chief Financial Officer Yeah. All organic, no acquisitions. When we put together any forecast, we really begin by looking at the overall economic backdrop. We review published studies that are out there, and then we look at specific studies that are related to important end markets that we serve. So things like ABI, construction spending and the like, outlook for school spending, school enrollment. All those kinds of things, we'll take a look at as we formulate our forecast. So that's all in the normal course of business. And what is done is we developed the forecast with the information that is most current at the time they're put together. Scott Schneeberger -- Oppenheimer and Company -- Analyst Great. Thanks. I appreciate that. That's helpful. One more, I'm going to sneak in. Just the real estate sale. Can you share a little bit more color on that? And I'll turn it over. Thanks, guys. Keith Pratt -- Chief Financial Officer Yeah. Scott, as you know, for certain key operating locations, we may own our property across our businesses. In this particular instance, this is a property at which Adler Tank Rentals was the division that used the property, and obviously, we divested that business last year, we had an opportunity to sell the property and can use that capital to redeploy it into the modular side of the business. Scott Schneeberger -- Oppenheimer and Company -- Analyst Sounds good. Thanks, guys. Keith Pratt -- Chief Financial Officer Thank you. Joe Hanna -- Chief Executive Officer Thank you. Operator Thank you. We go next now to Marc Riddick of Sidoti. Marc Riddick -- Sidoti and Company -- Analyst So I was wondering if you could sort of take us back to the strength of education for a moment because I think it's kind of interesting, the commentary there. It seems as though things were looking pretty good already as we got to the end of last year in that space. So can you maybe just take us through maybe a couple of puts and takes as to what was stronger than what you expected, whether it was a mix issue, pricing issue? Like what's it that really kind of bumped up education maybe a little faster than what maybe you were expecting at the end of the year? Joe Hanna -- Chief Executive Officer Sure. I would say that really the main driver of our education business is the amount of money that's out on local bond measures and state bond measures. Primarily, what we're seeing now is more local bonds. And so when those go out on the ballot for election, they pass by a nice majority usually, and those are significant bonds that pass in these municipalities for modernization and for growth projects. And over the past year or so, a lot of those have passed, and that money is now being deployed in the market right now. And we're positioned very nicely to take advantage of it, and it's really solid execution. Our relationships with our education clients, that really bring those projects to fruition. So we're very pleased with how that market has developed. Marc Riddick -- Sidoti and Company -- Analyst So it's -- the funding availability that has sort of been building in the last couple of years, folks are now more comfortable with releasing those and sort of putting that to work. Are there -- is that particularly in California and/or Texas? Or are there any particular areas that you're seeing there? Or is it kind of across the board? Joe Hanna -- Chief Executive Officer It's across the board. You're absolutely right. That money is being deployed, and it's across the board. Marc Riddick -- Sidoti and Company -- Analyst Excellent. Excellent. And then so you talked about sort of bringing forward some of the capex to sort of address that. And obviously, there's the seasonal nature and the timing of when those will be delivered. Do you get any sense of any supply chain concerns as to what you'll need? Or how should we think about that? Joe Hanna -- Chief Executive Officer Yeah. I would say supply chain issues. We manage that very carefully. We have excellent relationships with our suppliers. We work with them to reserve line time, and we're not seeing that being a hindrance to us at all for this year. It's been tight in prior years, not quite as tight this year. But like I said, we manage it very carefully, and I think we're in very good shape there with our suppliers. Marc Riddick -- Sidoti and Company -- Analyst OK. Excellent. And then finally, it seems as though with the pricing dynamic that you guys have been working on for quite some time continues to generally move in the right direction. I was wondering if you could talk a little bit about those efforts and kind of if there are any pieces that we should be aware of that maybe we have another chance to talk about as much lately. Keith Pratt -- Chief Financial Officer Yeah, Marc, as we commented earlier, the goal here is deliver more value to the customer. We're achieving better revenue per unit deployed. That's partly because of the services emphasis. It also reflects higher cost of new equipment and higher cost of maintaining equipment and getting it rental-ready. So this is all about protecting our economics. We've talked about that over the last few years. And I think our teams have done really good work addressing those issues, and that's reflected in the numbers. Marc Riddick -- Sidoti and Company -- Analyst And then I guess the last one for me with -- given what's taking place, I was wondering if you could talk a little bit about sort of how you see the labor market and development. I think the entire time I've covered you, I've always worried about that, not being able to get enough drivers and I would imagine that could be something that could be on the table as well. But maybe you could talk a little bit about sort of the labor market and what you're experiencing there. Joe Hanna -- Chief Executive Officer Yeah. Actually, this year, we've been able to fill open positions pretty effectively. You're right, the driver market typically is one that's very, very tight. And we have -- we're not experiencing any specific issues right now in filling those roles. So I feel very good that we have the right labor at the right places in the company to get the job done that we need to right now. So I think we're in pretty good shape. Marc Riddick -- Sidoti and Company -- Analyst Excellent. Thank you very much. Joe Hanna -- Chief Executive Officer Thank you, Marc. Keith Pratt -- Chief Financial Officer Thank you. Operator And ladies and gentlemen, that appears to be the last question. Let me now turn the call back over to Mr. Hanna for any closing comments. Joe Hanna -- Chief Executive Officer I'd like to thank everyone for joining us on the call today and for your continuing interest in our company.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Welcome to Marsh McLennan's earnings conference call. Today's call is being recorded. First quarter 2024 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the Marsh McLennan website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. [Operator instructions] I will now turn this over to John Doyle, president and CEO of Marsh McLennan. John Doyle -- President and Chief Executive Officer Good morning. Thank you for joining us to discuss our first quarter results reported earlier today. I'm John Doyle, president and CEO of Marsh McLennan. On the call with me is Mark McGivney, our CFO, and the CEOs of our businesses: Martin South of Marsh; Dean Klisura of Guy Carpenter; Nick Studer of Oliver Wyman; and Pat Tomlinson of Mercer, who is joining us -- joining this call for the first time. Welcome, Pat. Also, with us today is Sarah DeWitt, head of investor relations. Marsh McLennan had a strong start to 2024. Our first quarter results were excellent, and we are well-positioned for another good year. Top-line continued with 9% underlying revenue growth, which was on top of 9% growth in the first quarter of last year. All of our businesses had strong revenue growth with Marsh, Mercer and Oliver Wyman accelerating growth from the fourth quarter. We grew adjusted operating income by 11% from a year ago. Our adjusted operating margin expanded 80 basis points compared to the first quarter of 2023. We had adjusted EPS growth of 14%. And we completed $300 million of share repurchases in the quarter. In addition, we continue to add to our talent, capabilities and scale through acquisitions. These investments will help strengthen our strategic position and sustain top-line growth. For example, Mercer completed the purchase of Vanguard's OCIO business, which expands our reach into the endowments and foundation segment. MMA acquired two leading agencies in Louisiana, and Oliver Wyman closed the acquisition of SeaTec, which extends our capabilities in the aviation, transportation and defense industries. At Marsh McLennan, we bring together specialized capabilities and perspectives across risk, strategy and people to help clients make critical decisions with confidence. For example, in the area of supply chain risk, we developed a solution called Centrisk, which draws on the perspective and capabilities of Marsh and Oliver Wyman to identify key risks in our client supply chains. Using this framework, we create a digital twin model of a client supply lines, which provides for a scenario-based vulnerability assessment to help manage risk. This product is already helping clients across multiple sectors, including in the banking, manufacturing, aviation and defense industries. As we noted last quarter, Marsh, Oliver Wyman and Guy Carpenter developed the Unity facility, a public-private insurance solution that enables grain shipments from Ukrainian ports. In the first quarter, we worked with the Ukrainian government, DZ Bank, Lloyd's and others to expand the facility to all ships carrying non-military cargo. This will help support Ukraine's economic resilience in time of war. In the healthcare sector, Marsh and Mercer are working together to help clients evaluate connections between talent retention, patient safety and the cost of malpractice insurance. Marsh's risk assessment capabilities and Mercer's extensive health and human capital expertise, combined with our rich datasets, are creating new, highly valued perspectives in the healthcare sector. These are just a few examples of how we're applying our unique expertise to address pressing challenges and deliver significant value to clients. Recently, we released our Annual ESG Report. The report includes enhanced disclosure on our ESG efforts and underscores how the actions we're taking in and on behalf of our clients also have a positive impact on the communities where we live and work. Let me share some examples. We collaborated with the Center for NYC Neighborhoods to launch a community-based catastrophe insurance program. This parametric insurance program helps finance emergency grants to community members following an event, with funds reaching households within days of a catastrophe. In cyber, we developed a global personal microinsurance solution to protect against threats like online identity theft, viruses, cyber-bullying and failure to deliver purchased goods. With regard to sustainability, we are supporting the Dubai Energy and Water Authority's commitment to provide 100% of its energy from clean sources by 2050. As part of this work, we conducted a client -- a climate resilience assessment of one of the world's largest solar parks. We modeled the site's ability to withstand future climate conditions and proposed adaptation measures to mitigate extreme risks. We continue to improve sustainability in our own operations as well. For example, in 2023, we expanded the use of renewable electricity across our US offices and in our largest UK locations. And we submitted our climate targets for validation as part of our goal to achieve net zero globally by 2050. We remain committed to generating exceptional financial performance and returns for shareholders, and we also recognize that the successful outcomes we help enable for our clients and our own actions can have a lasting positive effect on communities around the world. Shifting to the macro picture, we see significant opportunity to help clients navigate the range of outcomes driven by a more complex environment. The geopolitical backdrop remains unsettled with multiple major wars and rising tensions globally. More than half the world's population will go to elections in 2024, and the economic outlook remains uncertain as well. Despite this uncertainty, the environment is supportive of growth in our business. In general, we see continued economic growth in most of our major markets, inflation and interest rates remain elevated, labor markets are tight, the cost of risk is up, and healthcare costs continue to rise. We have a strong record of performance across economic cycles due to the resilience of our business and demand for our advice and solutions. Turning to insurance and reinsurance market conditions, primary insurance rates increased, with the Marsh Global Insurance Market Index up 1% overall in the quarter. Property rates increased 3% versus 6% in the fourth quarter. Casualty was up 3%, in line with last quarter. Workers' compensation decreased mid-single digits while financial and professional liability rates were down 7%, and cyber pricing decreased 6%. Reinsurance market conditions remained stable, with increased client demand and adequate capacity. In the April renewal period, US property cat reinsurance rates were flat with some decreases for accounts without losses. Loss-impacted accounts averaged increases in the 10% to 20% range. The US casualty reinsurance market was challenging, but rates were in line with January renewals. In January, April 1 property cat rates overall were down slightly on a risk-adjusted basis. Early signs for June 1 Florida cat risk renewals point to improved market conditions for cedents. Increased reinsurance appetite for growth should be adequate to meet higher demand. As always, we are helping our clients navigate these dynamic market conditions. Now, let me turn briefly to our first quarter financial performance, which Mark will cover in detail. We generated adjusted EPS of $2.89, which is up 14% versus a year ago. Revenue grew 9% on an underlying basis with 9% growth in both RIS and in consulting. Marsh was up 8%, Guy Carpenter grew 8%, Mercer 6%, and Oliver Wyman was up 13%. Overall, in the first quarter, we had adjusted operating income growth of 11%, and our adjusted operating margin expanded 80 basis points year over year. Turning to our outlook, we are very well-positioned for another good year in 2024. We continue to expect mid-single-digit or better underlying revenue growth, another year of margin expansion and strong growth in adjusted EPS. Our outlook assumes current macro conditions persist. However, meaningful uncertainty remains and the economic backdrop could be materially different than our assumptions. In summary, the first quarter was a great start to the year for Marsh McLennan. Our business delivered strong performance and we continue to execute well on our strategic initiatives. I'm proud of the focus and determination of our colleagues and the value they deliver to our clients and shareholders. With that, let me turn it over to Mark for a more detailed review of our results. Mark McGivney -- Chief Financial Officer Thank you, John, and good morning. Our first quarter results were outstanding and represent an excellent start to the year. We saw continued momentum in underlying growth, strong margin expansion, double-digit growth in adjusted EPS. Our consolidated revenue increased 9% in the first quarter to $6.5 billion, underlying growth of 9%. Operating income was $1.9 billion, and adjusted operating income increased 11% to $2 billion. Our adjusted operating margin increased 80 basis points to 32%, and we expect higher margin expansion for the rest of the year, particularly in the second half. GAAP EPS was $2.82, and adjusted EPS was $2.89, up 14% for last year. Looking at Risk and Insurance Services, first quarter revenue was $4.3 billion, up 9% compared with a year ago on both a reported and underlying basis. This result marks the 12th consecutive quarter of 8% or higher underlying growth in RIS and continues the best stretch of growth in two decades. RIS operating income was $1.6 billion in the first quarter. Adjusted operating income was also $1.6 billion, up 11% over last year, and our adjusted operating margin expanded 50 basis points to 39.1%. At Marsh, revenue in the quarter increased 9% to $3 billion or 8% on an underlying basis. This comes on top of 9% growth in the first quarter of last year. In US and Canada, underlying growth was 8% for the quarter, reflecting solid renewal and new business growth. In international, underlying growth was strong at 8% and comes on top of 10% in the first quarter last year. EMEA was up 9%, Latin America grew 8%, and Asia-Pacific was up 6%. Guy Carpenter's revenue was $1.1 billion, up 7%, or 8% on an underlying basis, driven by growth across most regions and Global Specialties. This was the fifth straight quarter of 8% or higher underlying growth at Guy Carpenter. In the consulting segment, first quarter revenue was $2.2 billion, up 9% on an underlying basis. Consulting operating income was $432 million, and adjusted operating income was $444 million, up 9%. Our adjusted operating margin in consulting was 20.7% in the first quarter, an increase of 40 basis points. Mercer's revenue was $1.4 billion in the quarter, up 6% on an underlying basis. This was Mercer's 12th straight quarter of 5% or higher underlying growth and continues the best run of growth in 15 years. Health underlying growth was 10% and reflected strong momentum across all regions. Wealth grew 5%, driven by growth in both investment management and DB consulting. Our assets under management were $489 billion at the end of the first quarter, up 17% sequentially and up 38% compared to the first quarter of last year. Year-over-year growth was driven by our transactions with Westpac and Vanguard, rebounding capital markets and positive net flows. Career revenue increased 1%, reflecting a tough comparison to a period of strong growth last year, as well as softness in the US. Oliver Wyman's revenue in the first quarter was $789 million, up 13% on an underlying basis from the slow start we had in the first quarter of last year, and reflected strength across all regions. Foreign exchange had very little impact on earnings in the first quarter. Assuming exchange rates remain at current levels, we expect FX to be a $0.02 headwind in the second quarter and a further $0.01 headwind in the second half. Total noteworthy items in the quarter were $49 million. The majority of these items were restructuring costs, mostly related to the program we began in the fourth quarter of 2022. Our other net benefit credit was $67 million in the quarter. For the full year, we expect our other net benefit credit will be approximately $265 million. Interest expense in the first quarter was $159 million, up from $136 million in the first quarter of 2023, reflecting higher levels of debt and higher interest rates. Based on our current forecast, we expect $158 million of interest expense in the second quarter and approximately $620 million for the full year. Our adjusted effective tax rate in the first quarter was 23.9% compared with 25% in the first quarter of last year. Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation, similar to a year ago. Excluding discrete items, our adjusted effective tax rate was approximately 26.5%. When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative. Based on the current environment, we continue to expect an adjusted effective tax rate of between 25.5% and 26.5% for 2024. Turning to capital management and our balance sheet. We ended the quarter with total debt of $13.5 billion. Our next scheduled debt maturity is in the second quarter, when $600 million of senior notes mature. Our cash position at the end of the first quarter was $1.5 billion. Uses of cash in the quarter totaled $1 billion, and included $354 million for dividends, $347 million for acquisitions, and $300 million for share repurchases. We continue to expect to deploy approximately $4.5 billion of capital in 2024 across dividends, acquisitions and share repurchases. The ultimate level of share repurchase will depend on how our M&A pipeline develops. While there continues to be uncertainty in the outlook for the global economy, we feel good about the momentum in our business and the current environment remains supportive of growth. Overall, our strong start leaves us well-positioned for another good year in 2024. Based on our outlook today, for the full year, we continue to expect mid-single-digit or better underlying growth, margin expansion and strong growth in adjusted EPS. With that, I'm happy to turn it back to John. John Doyle -- President and Chief Executive Officer Thank you, Mark. Andrew, we are ready to begin Q&A. Questions & Answers: Operator Certainly. We'll now begin the question-and-answer session. [Operator instructions] And our first question comes from the line of David Motemaden with Evercore ISI. David Motemaden -- Evercore ISI -- Analyst Hi. Thanks. Good morning. My first question is just on the Marsh growth. John, I caught what you said on the global pricing index, which moved down or decelerated a little bit to 1% from 2% last quarter. But the Marsh organic growth accelerated to 8% this quarter from 6% last quarter. So, I'm hoping you can help me bridge the gap between accelerating growth and the decelerating pricing. John Doyle -- President and Chief Executive Officer Thanks, David, for the question, and good morning. We work very hard not to be an index on P&C pricing, right? It's an element. It's a macro factor that obviously does have some impact. But less than half of Marsh's revenue is exposed to P&C pricing. What I would also say to you is that where we're most exposed to commission is in the middle-market. Our index skews to larger account data. Pricing is up a bit more in the middle-market than it is in the large account segment, and typically is less cyclical than what you see in the large account market. But I want to just talk about growth overall. I was very pleased with the start to the year, 9% on top of 9% last year and accelerated growth from the fourth quarter of 7%, as I mentioned. Marsh, Mercer and Oliver Wyman all had accelerated growth from the fourth quarter. The macros continue to be supportive, David. Solid GDP growth in most major markets, although it's under a bit of pressure. Inflation and interest rates remain elevated. There's tight labor markets, as I said before, rising healthcare cost. The overall cost of risk continues to increase. And demand remains very strong. Not long out of the pandemic, of course, we've got a couple of global wars happening, supply chain stress. Our clients are showing broader risk awareness. We're talking to them about that and really trying to help them find better balance between resilience and efficiency. And we continue to invest through this cycle, right? I talked about a couple of the acquisitions we did. We're improving our mix of business as well. We sold some admin businesses at Mercer in the quarter. And I'm very, very pleased with how our colleagues are executing, too. We've been working on our client engagement model and improving that, continue to invest in sales operations. And as I've talked about, over the course of the last year, we're collaborating more than ever. It starts with the talent that we have. We have the best talent in the markets that we operate in. We're, of course, not immune to macros, including pricing on some level, but we're a resilient business and we're quite excited about 2024. Do you have a follow-up? David Motemaden -- Evercore ISI -- Analyst I do. And thanks for that answer, that's helpful. I guess, just specifically zeroing in on the US and Canada within Marsh, that had a nice acceleration in the quarter. Could you talk about the drivers specifically for that business? Was it middle-market, was it your capital markets activity coming back and sort of your outlook on the sustainability, further recovery and growth there? John Doyle -- President and Chief Executive Officer Sure, yeah. Marsh in the US got off to a terrific start, US and Canada, I would point out. And Martin, maybe you could give David a little bit more color. Martin South -- President and Chief Executive Officer, Marsh Yeah. It wasn't just the US and Canada, it was great balanced growth across the business. But I'll dig into the US a little bit and give you some color on some of the drivers of growth there. And it's really been a product of a lot of work in the last few years to get where we are. So, the overall growth of 8%, our businesses -- the mid-market business, MMA, had a terrific start to the year. The growth in that business is driven both by renewal and fantastic new business. Victor, our MGA business, rebounded, has a great performance, very strong performance in Canada. They had a tough year last year, it bounced back and the core business in the US grew nicely. So, very good. The drivers really, particularly in the specialty areas, construction was very strong in the first quarter. Our MMB business was strong. Our advisory business in the US was very strong as part of the risk advisor of the future to the tip of the spear and makes our relationship much stickier. So, our renewal growth was good. And our loss business rate was down. So, we feel very good about all the areas that we've been focusing on, about client relationship, specialization, industry focus advisory, all these things are the drivers for growth. So, we feel very good about things. John Doyle -- President and Chief Executive Officer Thanks, Martin. David, I would add, it wasn't a bang-out quarter in terms of M&A activity in our transaction risk business, but it's a smaller part of our -- smaller part of our business now. It's a little feedback there. It's a smaller part of our business after the slowdown. So, the impact was less. But we did see some volume in M&A activity pick up during the quarter, which of course is encouraging. So, thank you for your questions. Andrew, next question, please. Operator Certainly. Our next question comes from the line of Jimmy Bhullar with J.P. Morgan. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst Hey. Good morning. So, I was wondering if you could just elaborate on the comments John had on the reinsurance market. And it seems like things -- the market is less tight than it was over the past year. But what are you seeing in terms of buyer behavior? Are cedents trying to buy more, given that pricing has come in a little bit, or are they trying to save money and keep sort of coverage levels consistent with what they've had in the past year? John Doyle -- President and Chief Executive Officer Sure, Jimmy. Thanks for the question. Maybe I'll elaborate a little bit on some of my prepared remarks and then ask Dean to talk a bit about the reinsurance market. But I think both markets continue to stabilize on average in the quarter. And again, I would remind everyone it's a collection of markets, not a single market. That stabilization is good for our clients. And in some cases, a better market has led to increased demand in both insurance and reinsurance. I would also point out that in recent years, we've had higher premium growth in the captives that we manage at Marsh compared to the premium flow into the traditional market. That may change a bit now, we'll see as markets stabilize and our clients can adjust to what the market looks like going forward. I mentioned earlier our index skews to major accounts. So, pricing in the middle-market continues to move up a bit more than the data points I mentioned earlier. But I would also say that insurers and reinsurers are cautious about that rising cost-of-risk environment that I mentioned as well. And so, while again, a stabilizing market is better for our clients overall, I don't expect that relative stability to change anytime soon given some of the rising cost of risk issues that the insurance community is confronting. So, Dean, maybe you can talk a little bit more about what's happening in reinsurance. Dean Klisura -- President and Chief Executive Officer, Guy Carpenter Yeah. Thanks, John. And Jimmy, I'll give you a little bit more color on the April 1 reinsurance renewal, that would be helpful. As John noted, we saw a continuation of market conditions that we experienced at January 1. And as John noted, market conditions are stable, but we're definitely seeing increased client demand to provide additional property cat limit, particularly at the top end of programs. That was very pronounced throughout the first quarter at 1/1 through the quarter. And certainly that trend continued on April 1. Strong capital inflows into the reinsurance market, driven by strong reinsurer returns, double-digit returns in 2023. We talked about last quarter on the call, reinsurer appetite has increased for property cat. There is an inflow of capital and capacity. Competition at the top end of programs, it's been good for both buyers and sellers in the marketplace. Specifically to property cat, in the US, at April 1, as I said, capacity was strong. As John noted, the market was generally flat to down incrementally for clients without cat losses. Accounts with cat losses saw 10% to 20% kind of rate increases. But keep in mind, we give you rate-adjusted figures. But when you factor in inflation, exposure growth, value growth, premiums on these cat programs are still increasing year over year. It continues to be a tailwind for Guy Carpenter in the marketplace. And as I said, there's a lot of competition for cat business. US casualty, as John noted, was challenging, just as challenging on April 1 as it was at the January 1 renewal. Reinsurers are exerting pressure on pricing in terms and conditions. Ceding commissions are facing downward pressure from reinsurers on certain quota-share contracts, particularly financial lines, which Martin has talked about in the past. Excess-of-loss contracts are seeing rate increases across the board, in some cases, double-digit. However, there was adequate casualty capacity in the marketplace at April 1, and all of the programs that we placed got completed in full. But I would balance that against continued reinsurer concern with the adverse development, driven by social inflation and increasing loss cost trends. I think that's a good summary of where we were in the US market. Just a note on Japan. Big April 1 cat date in Japan, a very orderly market, sufficient capacity, many cat programs were oversubscribed. We didn't observe any structural changes. Attachment points stayed where they were from a year ago. And again, it was a market that was down on average 5% from a rating perspective, and we didn't really observe any rate impact from the January earthquake in Japan. Overall, a very orderly market at April 1 in Japan. John Doyle -- President and Chief Executive Officer Terrific, Dean. Thank you. Jimmy, do you have a follow-up? Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst That's an income, it was flat sequentially and lower than 3Q. I'm assuming that's more seasonality. But if you could just talk about your expectation for that given where short-term rates are currently? John Doyle -- President and Chief Executive Officer Mark, you want to jump on that one? Mark McGivney -- Chief Financial Officer Yeah. Jimmy, there is a little season, as you pointed out. There is a little -- tends to be a little seasonality in our fiduciary balances. Q1 and Q4 tend to be seasonal lows modestly. So that would explain that. In terms of outlook, we'll see what happens to the rate environment. The interest -- our fiduciary interest income is going to be a function of balances and rates, and we've got about $11.5 billion of balances. So, depending on what you want to assume for the trajectory of rates, the math is pretty straightforward. John Doyle -- President and Chief Executive Officer Thank you, Mark. And thank you, Jimmy. Andrew, next question, please. Operator And our next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan -- Wells Fargo Securities -- Analyst Thanks. Good morning. My first question was on the margin guidance. You guys said more margin expansion in the back half of the year. What's driving that? Is there just more investment in the first half, more savings falling in the second half, or something else that's driving the seasonality within the margin expansion this year? John Doyle -- President and Chief Executive Officer Good morning, Elyse. We expect again good margin expansion in 2024. As you pointed out, Mark noted, we expect the second half to be better than the first half. We have some expected headwinds, not really seasonality, but really driven from a higher merit pool a year ago, some acquisition-related costs, and some higher reimbursable expenses. But I want to remind everybody not to focus on any one particular quarter. Again, margin is an outcome of really how we run the business, and it's not a primary objective of ours. Again, having said that, we see opportunity for margin improvement, continued margin improvement. But we're going to continue to make attractive investments to support the medium to long-term growth of the business. We have a number of different efforts underway, ongoing workflow and automation efforts at Marsh, Mercer and Guy Carpenter. And we continue to press for opportunities to improve efficiency at the intersections of our businesses as well. So, we see opportunity. And as we pointed out, we expect the second half to be better than the first. Do you have a follow-up, Elyse? Elyse Greenspan -- Wells Fargo Securities -- Analyst Yes, thanks. And then, my second question, Marsh recently launched its wholesale venture Victor Access. I know it's early days, but what was the impetus for this strategy? And is there any reason why the majority of the wholesale risk currently placed by Marsh with third-party wholesalers couldn't potentially be internalized through Victor over time? John Doyle -- President and Chief Executive Officer So, let me be clear, Elyse, we're not looking to build a third-party wholesale business. There's obviously been considerable growth in the wholesaler to E&S market over the course of the last several years. We want to bring the best solutions in the marketplace to our clients. Generally, we're preferring admitted solutions for our clients. Not that there aren't good things that happen in the E&S market. Of course, there are, and innovation is one of the areas where the E&S market is important. But we want to access as much of that E&S market directly. We actually access most of our E&S market solutions directly today. But we want to continue to press and make sure that we can access as much of that market directly. So, it's client-driven, It's about us managing the client outcomes, client experiences, really as directly as possible. Having said that, we'll continue to use wholesalers for niche expertise. They serve us very well and our clients very well. In those cases, they also have strong program businesses as well. So, anyway, that's what it's about. It's just, again, making sure we can directly access as much capital directly as possible for our clients. Thank you for that. Andrew, next question? Operator Our next question comes from the line of Greg Peters with Raymond James. Greg Peters -- Raymond James -- Analyst Good morning, everyone. I'd like to pivot to -- for the first question, pivot to the consulting business, which had a nice quarter. I'm wondering if you can provide some additional color around how the different pieces are moving. I know some of the management consultants have pre-announced that they're going to be cutting staff this year. Not really seeing any signs of weakness in your pipeline, but maybe you could give us some color, because forecasting this out seems to be a little bit of a black box? John Doyle -- President and Chief Executive Officer OK. Thanks, Greg. Yeah, we are very pleased with the start to the year. As you recall, of course, Oliver Wyman had a slow start to the year in 2023, had a nice year overall of growth. There's going to be a bit more volatility to revenue growth at Oliver Wyman, but we also expect better growth on average from Oliver Wyman over the medium to longer term. Nick, maybe you can share with Greg some color on demand in the first quarter. Nick Studer -- President and Chief Executive Officer, Oliver Wyman Thank you, John, and thank you, Greg. Yeah, 13% was a very pleasing start to the year, it makes a marvelous headline, and we're very, very proud of a good start on what, as you noted, is a tough environment for many in our profession. John has already given the caution about taking the two-year view. We also probably benefited from a few little timing benefits of things that might have shown up in Q2, might have shown up in Q1. And we still very much give guidance through the cycle. This should be a mid-to-high single-digit business. And you noted the sort of forecasting it out is a tricky challenge. That is true because we have a relatively short backlog. The nature of our work is such that when clients need assistance, they need it quickly. And so, we are always ready to move very, very nimbly. To give you a little bit more color, we grew pretty strongly across all the four regions of our management consulting business and our economic research business, NERA, also grew very strongly, fastest in the Middle East, but in the double-digits or very close to double-digits in all three of the other major regions we have. And sectorally, it was also fairly broadly spread. Our communications media and technology team grew well, healthcare grew well, banking seeing a rebound in private capital work, which I've noted on previous calls, has been pretty robust even in the face of obviously a very much lower deal market, but our work on portfolio company performance has helped us there. But insurance also growing, and quite broadly across the capabilities that we bring to bear as well. So, we think we're in a good position. We're very confident we gained share over the last few years, but it's a tough consulting environment. And our pipeline indicates that mid-to-high single-digit growth environment, growth forecast, is how we think about this business through the cycle. John Doyle -- President and Chief Executive Officer Thank you, Nick. That's very helpful. And Greg, maybe I'll ask Pat Tomlinson also to share some thoughts just on the first quarter at Mercer, given our consulting operations there. And Pat, while you have the floor, as I mentioned, obviously, you're joining this call for the first time. Maybe you could talk a bit about your priorities at Mercer. Pat Tomlinson -- President and Chief Executive Officer, Mercer Sure. Thanks, John. Yes, we are pleased with our Q1 2024 underlying growth, as mentioned earlier, of 6%. It was our 12th consecutive quarter with 5% or more growth, especially the breadth across the practices. Health, another impressive quarter with 10% growth in Q1. That growth was really with double-digit growth nearly across all regions. And it comes on the back of investments in hiring new talent, focus on thought leadership, creating digital tools and really focusing in on client segmentation, trying to match client healthcare needs, based upon industry segment size with the innovative and adaptive solutions that we have. So, really trying to meet clients where they are. We certainly benefited from strong retention. We had good renewal growth. Insurer revenue and medical cost inflation has an impact there. We see significant demand for digital solutions and the innovative benefits that are kind of underscoring the value that we're providing to clients. If I pivot over to wealth, we grew 5% in Q1. There was good, balanced, equally strong performance in DBA and IMS. We see DB plans funding statuses continue to benefit from elevated interest rates that's driving an increase in risk transfer over the last couple of years, as well as we have some regulatory requirements and demands that are creating some project work. If you add in some capital -- some volatile capital markets, it's driving strong demand for both our actuarial and our investment solutions business. Speaking of investment solutions, in OCIO, we benefited from some transactions in Westpac and Vanguard, Mark mentioned that earlier, but also good net new inflows and capital markets provided us some revenue lift in Q1. From a career perspective, growth was muted to 1% for the quarter, but we're following a period of strong growth over the past several years, including a challenging 12% comparable last year. The growth was strong in international, is very broad across all practices and regions. We did see, as was mentioned, some softness in US career, specifically in rewards in the transformation space, as I would say, clients are starting to navigate some of the macro conditions, right? So, let me highlight the career practices coming off that very long period of high growth. As I mentioned, double-digits in -- for the past eight quarters, driven in large part, I would say, by inflation and employee attrition. If we all remember the great resignation back coming out of the pandemic, which drove a lot of labor shortages and really created a lot of demand for projects with clients as they were trying to think about the rewards and how to pay people to keep them retained, the skills that they might need if they had to pivot, because they didn't have the right resources, and also starting to think about transformation as they were having less resources to work with, and there was innovation in technology, as we've all talked about AI, in the past and helping clients through those. So certainly, I think from that perspective, we feel good that there's good breadth of our solutions and demand in the market as we go ahead and fill those needs. John quickly asked me to talk a little bit about how I think about the business and the priorities too. So, obviously, my first call. On April 1, I got to step in and begin this opportunity of a lifetime leading Mercer and our 21,000 colleagues from around the world, as we are focused on creating brighter futures for our clients and for their people. I am extremely humbled and honored to be the CEO of this fantastic firm. And personally, I really want to thank Martine Ferland for a very smooth transition and for the growth momentum and culture that she helped create here. Priority-wise, I want to accelerate that momentum. From the impact that we're having to clients to the fantastic careers we build for colleagues here, the collaboration among our colleagues across Marsh McLennan, we can leverage new technologies, and we perform really purpose-driven work, and can have a positive impact on our communities as well. I think we're very well-positioned, as we've been repositioning ourselves over the last several years, reshaping our portfolio. Mark mentioned the divestitures. We've been divesting admin practices. We've been building capabilities and reach and global benefits in OCIO. We've been accelerating acquisitions and we're really just creating more value for clients at scale. And that's what we've been focused in on. So, I'm very optimistic about our future. John Doyle -- President and Chief Executive Officer Thank you, Pat. We're excited to have you at this table. Greg, do you have a follow-up? Greg Peters -- Raymond James -- Analyst I do. Thanks for the detail on that answer. I want to pivot to M&A. And specifically, Mark, I think you mentioned the interest expense outlook for the company and we note the higher interest rate cost of the debt that's being issued versus that which is being paid off. So, I'm curious if there's been any follow-through on those higher costs in the terms of valuation of transactions that you're looking at. And, I'm also curious if there's any valuation difference between larger properties versus smaller properties that you're looking at in the M&A market. Thank you. John Doyle -- President and Chief Executive Officer Yeah. Thanks, Greg. What I would say is we remain quite active in the market. There's a good -- we have a good strong pipeline, as I've talked about in the past, we have an excellent reputation in that marketplace as being a good owner as well. So, we're excited about the deals we did in the first quarter. And again, we're going to continue to remain active in the market. I think valuations have remained stubbornly high, I would say, on the other side of things. And while we might expect that for top-quality assets, I would also point out that some lesser-quality assets have traded at some very, very high multiples of late. And so, we're going to be picky. We're looking for well-led businesses with real strong growth fundamentals that make us better and are a good cultural fit for our organization. We've been very successful at it. And again, as Mark pointed out, we expect to continue to deploy capital in the market going forward. Thank you, Greg. Andrew, next question, please. Operator And our next question comes from the line of Michael Zaremski with BMO Capital Markets. Michael Zaremski -- BMO Capital Markets -- Analyst Hey. Great. Good morning. Probably for Mark on the margins and the expense bucket. If I look over the last year-plus, the margin improvements come much more so from the general and other bucket, rather than comp and ben. It looks like that it flipped a little bit that relationship this quarter, if I'm correct. Anything changing there, given the expense management programs, or just in terms of how we should think about where the margin improvement is coming from on a go-forward basis? John Doyle -- President and Chief Executive Officer Thanks, Mike. Mark, you want to -- Mark McGivney -- Chief Financial Officer Yeah, I think it's a great point that you're making and I think it reflects the strategy of the company. We've said we continually invest in positioning ourselves for the future. And over the last several years, we've talked about the heavy investments we've made organically in talent. And so, I think we've done a terrific job of really being thoughtful about all of our other operating expenses, functional costs, how we're leveraging things across the firm, T&E. Really some of the gains we made in the pandemic, we've harvested them. So, as you point out, a lot of our margin expansion over the last five years has come from being really disciplined on things far away from the client and investing heavily in client-facing talent. And so, I think that is a factor in our growth. And I think also as we look forward, there's going to be leverage in those investments, which is why we're optimistic about margins going forward. John Doyle -- President and Chief Executive Officer Thank you. Mike, do you have a follow-up? Michael Zaremski -- BMO Capital Markets -- Analyst Yeah, a quick follow-up. And I know you gave a lot of commentary on kind of commercial primary insurance pricing power, you told us the Marsh Index declined a bit. Just curious if you can offer any more context. 1% kind of feels like a soft market number. What is it -- are you seeing just returns on behalf of your career partners being kind of excellent that's kind of driving the pricing power downwards in light of kind of what still seems like inflationary trends, or just any more color there on kind of what's causing the decel? I know you gave us by-line commentary. So, I don't know if there's a lot more to add. John Doyle -- President and Chief Executive Officer Yeah. Mike, I would say that, it doesn't feel like a soft market to our clients after five years of price increases. And as I noted, our index skews to larger accounts and where there's a bit more volatility, typically, throughout the cycle. I expect cycles to be shorter and narrower than what they've been in the past, right? There's better data, better technology on the underwriting front. Capital moves so much more quickly in and out. That's part of the E&S market dynamic that you all have observed over the course of the last several years. So, I expect kind of more relative stability. And from time to time, of course, certain areas of risk, things will change in some meaningful way and that will maybe bounce a particular product outside of a normal cycle. Insurer and reinsurer underwriting results have improved in the aggregate over the course of the last couple of years. And I think most feel good about how their book -- how their portfolios are positioned. It's not all one result, of course. We saw some reserve additions in the fourth quarter results overall. And as I mentioned on our call in the first quarter, the great unknown is casualty loss costs, right? There's lots of emerging data that's troubling for our entire ecosystem, for our client, and it contributes to that rising cost of risk that I mentioned earlier. I maybe should also point out, and Dean touched on this a little bit that our index adjusts for limit, exposure, attachment point, and it includes new business, right? You see some other indices that are out in the market that don't necessarily adjust for all of those factors. And then, maybe the last point, Mike, that I would make is that that number doesn't necessarily correlate directly with what premium growth is in the market, right, because at the end of the day, I mean, it might be at -- you might have less of an increase, you might have certain clients buying more. I think that's most prevalent in the reinsurance market at the moment, but we're seeing that in some cases at Marsh as well, where clients again having adjusted to the new market pricing and new market equilibrium has led to a higher level of demand for coverage from our clients. So, anyway, I hope that's helpful. Andrew, next question, please. Operator Our next question comes from the line of Yaron Kinar with Jefferies. Yaron Kinar -- Jefferies -- Analyst Thank you. Good morning. Two questions on Marsh and the market environment you're seeing there. And I think the first one maybe ties well to your last comments, John. Are you surprised to see casualty rates only up 3% just given the loss trends? I guess I'd love to hear your views both as the CEO of Marsh but also maybe as a former underwriter. John Doyle -- President and Chief Executive Officer It's a -- I actually -- it's very, very hard right now. As I mentioned earlier, there's some troubling data points, right? And thrown in the mix of the last several accident years, of course, a couple of years of the impact of the pandemic, right? And so, just on the clients where we help them, larger clients, with big risk management programs that have a level of frequency, it's very, very difficult to project where loss costs are. But as I said, the underwriting community is better than it's ever been. They have better data, better technology. But there, again, are some troubling signs. It's not just increased frequency. It's not just kind of nuclear verdicts, that term gets kind of thrown around or even some of the bigger settlements. There's a frequency of larger events. See the Francis Scott Key Bridge as an example, that will be a big loss in the market, maybe not as much a casualty loss, but a big loss in the market. But even in like commercial auto, and you've certainly seen that play out in the personal lines auto market, just kind of more frequency type events just costing more to get resolved. And so, we're putting our efforts to helping our clients think through how to better run off liabilities that they assume and even transfer into the market. And the insurers are investing quite a bit in their claims capabilities as well to try to get ahead of this. But I think we're all pointing to again some flashing yellow signals out there about the rising costs overall. Do you have a follow-up? Yaron Kinar -- Jefferies -- Analyst Yes, I do. And thanks for the color there. So, in Marsh, organic, obviously, was strong and then we certainly saw a very nice result in US and Canada. I guess the only place I could maybe poke a little bit if I were to try would be Asia Pacific where we saw a step down. Is that -- is there a timing issue there with some one-offs? I know you had a very, very strong 1Q '23 there. But anything you could point to in terms of the organic results in Asia Pacific would be helpful. John Doyle -- President and Chief Executive Officer Yeah, I don't -- no one-offs or major issues there, just on top of a couple of years of very, very good comps and strong growth. We love how we're positioned in Asia, big protection gaps throughout Asia. We have really strong country -- in-country operations all throughout the region. So, we're not just a regional center. We're in-country and working very, very closely with our clients there. As we've said to you in the past, I wouldn't look at any one particular quarter. And again, it's on top of what's been some outstanding growth in Asia over the last couple of years. So, we feel good about where we're headed in Asia overall. Andrew, next question, please. Operator Certainly. One moment, please. Our next question comes from the line of Meyer Shields with KBW. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst Great. Thanks. I was hoping to discuss the competitive environment in RIS maybe from two perspectives. First, I'm wondering whether there is a difference in the market share gain potential when you're in a rising rate environment and the enormously fragmented brokerage world includes a lot of companies that just don't have the resources to help clients manage higher insurance costs as successfully as a company with Marsh's resources. How much of a difference does that make? John Doyle -- President and Chief Executive Officer It's a good question, Meyer. We're very, very focused on trying to bring scale benefits to our -- well, to all of our key stakeholders, right, including our colleagues, right? We want them -- when they work here, we want them to feel like they have nearly 90,000 folks helping support them with learning and development, data and analytics, market access that you might not have, should you choose to work somewhere else in our industry. So, we certainly think about it from the colleague perspective, we think about it from the client perspective, and we think about it from an investor point of view as well. What I would say, from a client perspective, broadly speaking, again, and this is maybe a bit more upmarket than some of the fragmented segments that you talked about before. Our clients are more risk aware than they've been in the past. I think we have had a role to play in that in trying to make them more risk aware of some meta risks. And again, recent events have certainly helped heighten that. But it's incumbent upon us to bring those scale benefits to the market. And not just scale benefits in terms of data analytics or market access, but different types of solutions. I mentioned earlier, our captive business. We're the largest captive manager in the world, and that's been a meaningful outlet for our clients to manage risk and the rising rate environment over the course of the last several years. So, yes, scale matters. I would also tell you that it plays a role for some of the sellers in the market, as well as we talk through with potential M&A targets, why they may look to sell at the moment at times. It's regarding scale type -- scaled-up-type capabilities that we have that are difficult for them to replicate. And so, as I said earlier, we're looking for well led businesses with really solid growth fundamentals, but we know we can make them better too. And that's the exciting part for us. Do you have a follow-up? Meyer Shields -- Keefe, Bruyette and Woods -- Analyst I do, but I want to thank you for that. That was very thorough. When we look at the parts of the brokerage market that are more concentrated here, I guess I'm thinking reinsurance or Fortune 100-type accounts, in your view, is the competitive -- are competitors fighting at full strength? Are they all -- is competition right now as intense as it normally is, or any differences from longer-term norms? John Doyle -- President and Chief Executive Officer No, it's -- I mean, in both of the segments you mentioned, it is a highly competitive market, and we love competition. There's nothing that gets me more fired up than getting out in front of clients and, of course, winning ultimately. And our team is the same way. We're passionate about the value that we try to deliver to our clients. And so, as I mentioned earlier, we're collaborating more than ever. And in those particular segments you mentioned, I think it's been particularly meaningful over the course of the last year or so, our efforts to bring a broader set of capabilities to that client set. But no, it's a very, very competitive market and we welcome it. It makes us better. Thanks, Meyer. Andrew, next question? And maybe the last one. Operator Our next question comes from the line of Robert Cox with Goldman Sachs. Robert Cox -- Goldman Sachs -- Analyst Hey. Thanks. In the prepared remarks, there were some comments on healthcare costs continuing to rise. I was hoping you guys could talk about what you're seeing there and maybe parts of the business, maybe between brokerage and consulting that are generating the strongest organic growth in that 10% organic in health. John Doyle -- President and Chief Executive Officer Sure. Thank you, Robert. Healthcare and the healthcare industry is a big part of our business overall. And I don't think it's any secret that medical inflation and healthcare-related cost inflation is a major pressure point for our clients in many markets really around the world. It's been a big driver of growth for us, and we continue to invest in it. I talked about in my prepared remarks some of the collaboration between Marsh and Mercer to try to bring some sort of relief to an angle of cost pressure in that marketplace. But Pat, maybe you could talk about the growth we're seeing and some of the cost inflation as well. Pat Tomlinson -- President and Chief Executive Officer, Mercer Sure. So, the way that healthcare inflation impacts the business varies based upon the area of the world that we're in. In certain areas of the world where predominantly fee based, it's more large market that would predominantly be from a Mercer perspective inside like the US and some of our more mature larger markets. And then, in a lot of the markets, we are a little bit more brokerage-based to where it's based that way. But let me be clear, even the spots where we're fixed fee, healthcare inflation drives significant increased cost to clients. So, it does create a lot of -- it creates demand for work for us, a lot of project work. So, we will see projects out of that healthcare inflation, it's not necessarily directly driven that way. And even if there's healthcare inflation in the other areas where it's brokerage, it's not a linear type activity from a commission perspective because we're -- once that cost is flowing through to the client P&L, we're always out there doing plan redesign for a client to help make sure that that full cost of healthcare inflation is not flowing through their P&L, right, because they really don't control -- that's one of the larger costs that they don't control themselves based upon the activity that they've had. So that's really where a lot of the inflation helps us. Part of it is increased activity and project work. Occasionally it does create higher rates that flows through in brokerage, but many times those higher rates, we're still doing plan design with the client to try and mitigate the impact that is going to have on the client P&L even in a spot where it's straight commission based brokerage, we're trying to mitigate those costs. John Doyle -- President and Chief Executive Officer So, rising health and benefit costs in a tight labor market, again, is a pressure point. And another example of where, again, we can bring scale and a broader set of capabilities to the market that our clients appreciate. Do you have a follow-up, Robert? Robert Cox -- Goldman Sachs -- Analyst Yeah, very helpful. Thank you. Maybe just last question. On the wealth segment, correct me if I'm wrong, but I think last year, probably, the pension business was growing stronger than your investment business. Did that occur as well in the first quarter here or were both of them kind of similar to the 5% organic growth that was achieved in well? John Doyle -- President and Chief Executive Officer Yeah, we had good solid growth across investment management and defined benefits. As Pat mentioned, our DB business and this period of elevated interest rates have seen a bit more growth than we expected over the course of the last couple of years, but good growth in our OCIO business and our broader set of consulting capabilities inside of our investment business. So, yes, we felt good about that. Thank you, Robert. Andrew? Operator Thank you. I would now like to turn the call back over to John Doyle, president and CEO of Marsh & McLennan, for any closing remarks. John Doyle -- President and Chief Executive Officer All right. Thank you, Andrew. And I want to thank everyone for joining us on the call this morning. In closing, I want to thank our colleagues for their hard work and dedication. I also want to thank our clients for their continued support. Thank you all very much, and I look forward to speaking with you again next quarter. Answer:

Marsh McLennan's earnings conference call

Operator Welcome to Marsh McLennan's earnings conference call. Today's call is being recorded. First quarter 2024 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the Marsh McLennan website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. [Operator instructions] I will now turn this over to John Doyle, president and CEO of Marsh McLennan. John Doyle -- President and Chief Executive Officer Good morning. Thank you for joining us to discuss our first quarter results reported earlier today. I'm John Doyle, president and CEO of Marsh McLennan. On the call with me is Mark McGivney, our CFO, and the CEOs of our businesses: Martin South of Marsh; Dean Klisura of Guy Carpenter; Nick Studer of Oliver Wyman; and Pat Tomlinson of Mercer, who is joining us -- joining this call for the first time. Welcome, Pat. Also, with us today is Sarah DeWitt, head of investor relations. Marsh McLennan had a strong start to 2024. Our first quarter results were excellent, and we are well-positioned for another good year. Top-line continued with 9% underlying revenue growth, which was on top of 9% growth in the first quarter of last year. All of our businesses had strong revenue growth with Marsh, Mercer and Oliver Wyman accelerating growth from the fourth quarter. We grew adjusted operating income by 11% from a year ago. Our adjusted operating margin expanded 80 basis points compared to the first quarter of 2023. We had adjusted EPS growth of 14%. And we completed $300 million of share repurchases in the quarter. In addition, we continue to add to our talent, capabilities and scale through acquisitions. These investments will help strengthen our strategic position and sustain top-line growth. For example, Mercer completed the purchase of Vanguard's OCIO business, which expands our reach into the endowments and foundation segment. MMA acquired two leading agencies in Louisiana, and Oliver Wyman closed the acquisition of SeaTec, which extends our capabilities in the aviation, transportation and defense industries. At Marsh McLennan, we bring together specialized capabilities and perspectives across risk, strategy and people to help clients make critical decisions with confidence. For example, in the area of supply chain risk, we developed a solution called Centrisk, which draws on the perspective and capabilities of Marsh and Oliver Wyman to identify key risks in our client supply chains. Using this framework, we create a digital twin model of a client supply lines, which provides for a scenario-based vulnerability assessment to help manage risk. This product is already helping clients across multiple sectors, including in the banking, manufacturing, aviation and defense industries. As we noted last quarter, Marsh, Oliver Wyman and Guy Carpenter developed the Unity facility, a public-private insurance solution that enables grain shipments from Ukrainian ports. In the first quarter, we worked with the Ukrainian government, DZ Bank, Lloyd's and others to expand the facility to all ships carrying non-military cargo. This will help support Ukraine's economic resilience in time of war. In the healthcare sector, Marsh and Mercer are working together to help clients evaluate connections between talent retention, patient safety and the cost of malpractice insurance. Marsh's risk assessment capabilities and Mercer's extensive health and human capital expertise, combined with our rich datasets, are creating new, highly valued perspectives in the healthcare sector. These are just a few examples of how we're applying our unique expertise to address pressing challenges and deliver significant value to clients. Recently, we released our Annual ESG Report. The report includes enhanced disclosure on our ESG efforts and underscores how the actions we're taking in and on behalf of our clients also have a positive impact on the communities where we live and work. Let me share some examples. We collaborated with the Center for NYC Neighborhoods to launch a community-based catastrophe insurance program. This parametric insurance program helps finance emergency grants to community members following an event, with funds reaching households within days of a catastrophe. In cyber, we developed a global personal microinsurance solution to protect against threats like online identity theft, viruses, cyber-bullying and failure to deliver purchased goods. With regard to sustainability, we are supporting the Dubai Energy and Water Authority's commitment to provide 100% of its energy from clean sources by 2050. As part of this work, we conducted a client -- a climate resilience assessment of one of the world's largest solar parks. We modeled the site's ability to withstand future climate conditions and proposed adaptation measures to mitigate extreme risks. We continue to improve sustainability in our own operations as well. For example, in 2023, we expanded the use of renewable electricity across our US offices and in our largest UK locations. And we submitted our climate targets for validation as part of our goal to achieve net zero globally by 2050. We remain committed to generating exceptional financial performance and returns for shareholders, and we also recognize that the successful outcomes we help enable for our clients and our own actions can have a lasting positive effect on communities around the world. Shifting to the macro picture, we see significant opportunity to help clients navigate the range of outcomes driven by a more complex environment. The geopolitical backdrop remains unsettled with multiple major wars and rising tensions globally. More than half the world's population will go to elections in 2024, and the economic outlook remains uncertain as well. Despite this uncertainty, the environment is supportive of growth in our business. In general, we see continued economic growth in most of our major markets, inflation and interest rates remain elevated, labor markets are tight, the cost of risk is up, and healthcare costs continue to rise. We have a strong record of performance across economic cycles due to the resilience of our business and demand for our advice and solutions. Turning to insurance and reinsurance market conditions, primary insurance rates increased, with the Marsh Global Insurance Market Index up 1% overall in the quarter. Property rates increased 3% versus 6% in the fourth quarter. Casualty was up 3%, in line with last quarter. Workers' compensation decreased mid-single digits while financial and professional liability rates were down 7%, and cyber pricing decreased 6%. Reinsurance market conditions remained stable, with increased client demand and adequate capacity. In the April renewal period, US property cat reinsurance rates were flat with some decreases for accounts without losses. Loss-impacted accounts averaged increases in the 10% to 20% range. The US casualty reinsurance market was challenging, but rates were in line with January renewals. In January, April 1 property cat rates overall were down slightly on a risk-adjusted basis. Early signs for June 1 Florida cat risk renewals point to improved market conditions for cedents. Increased reinsurance appetite for growth should be adequate to meet higher demand. As always, we are helping our clients navigate these dynamic market conditions. Now, let me turn briefly to our first quarter financial performance, which Mark will cover in detail. We generated adjusted EPS of $2.89, which is up 14% versus a year ago. Revenue grew 9% on an underlying basis with 9% growth in both RIS and in consulting. Marsh was up 8%, Guy Carpenter grew 8%, Mercer 6%, and Oliver Wyman was up 13%. Overall, in the first quarter, we had adjusted operating income growth of 11%, and our adjusted operating margin expanded 80 basis points year over year. Turning to our outlook, we are very well-positioned for another good year in 2024. We continue to expect mid-single-digit or better underlying revenue growth, another year of margin expansion and strong growth in adjusted EPS. Our outlook assumes current macro conditions persist. However, meaningful uncertainty remains and the economic backdrop could be materially different than our assumptions. In summary, the first quarter was a great start to the year for Marsh McLennan. Our business delivered strong performance and we continue to execute well on our strategic initiatives. I'm proud of the focus and determination of our colleagues and the value they deliver to our clients and shareholders. With that, let me turn it over to Mark for a more detailed review of our results. Mark McGivney -- Chief Financial Officer Thank you, John, and good morning. Our first quarter results were outstanding and represent an excellent start to the year. We saw continued momentum in underlying growth, strong margin expansion, double-digit growth in adjusted EPS. Our consolidated revenue increased 9% in the first quarter to $6.5 billion, underlying growth of 9%. Operating income was $1.9 billion, and adjusted operating income increased 11% to $2 billion. Our adjusted operating margin increased 80 basis points to 32%, and we expect higher margin expansion for the rest of the year, particularly in the second half. GAAP EPS was $2.82, and adjusted EPS was $2.89, up 14% for last year. Looking at Risk and Insurance Services, first quarter revenue was $4.3 billion, up 9% compared with a year ago on both a reported and underlying basis. This result marks the 12th consecutive quarter of 8% or higher underlying growth in RIS and continues the best stretch of growth in two decades. RIS operating income was $1.6 billion in the first quarter. Adjusted operating income was also $1.6 billion, up 11% over last year, and our adjusted operating margin expanded 50 basis points to 39.1%. At Marsh, revenue in the quarter increased 9% to $3 billion or 8% on an underlying basis. This comes on top of 9% growth in the first quarter of last year. In US and Canada, underlying growth was 8% for the quarter, reflecting solid renewal and new business growth. In international, underlying growth was strong at 8% and comes on top of 10% in the first quarter last year. EMEA was up 9%, Latin America grew 8%, and Asia-Pacific was up 6%. Guy Carpenter's revenue was $1.1 billion, up 7%, or 8% on an underlying basis, driven by growth across most regions and Global Specialties. This was the fifth straight quarter of 8% or higher underlying growth at Guy Carpenter. In the consulting segment, first quarter revenue was $2.2 billion, up 9% on an underlying basis. Consulting operating income was $432 million, and adjusted operating income was $444 million, up 9%. Our adjusted operating margin in consulting was 20.7% in the first quarter, an increase of 40 basis points. Mercer's revenue was $1.4 billion in the quarter, up 6% on an underlying basis. This was Mercer's 12th straight quarter of 5% or higher underlying growth and continues the best run of growth in 15 years. Health underlying growth was 10% and reflected strong momentum across all regions. Wealth grew 5%, driven by growth in both investment management and DB consulting. Our assets under management were $489 billion at the end of the first quarter, up 17% sequentially and up 38% compared to the first quarter of last year. Year-over-year growth was driven by our transactions with Westpac and Vanguard, rebounding capital markets and positive net flows. Career revenue increased 1%, reflecting a tough comparison to a period of strong growth last year, as well as softness in the US. Oliver Wyman's revenue in the first quarter was $789 million, up 13% on an underlying basis from the slow start we had in the first quarter of last year, and reflected strength across all regions. Foreign exchange had very little impact on earnings in the first quarter. Assuming exchange rates remain at current levels, we expect FX to be a $0.02 headwind in the second quarter and a further $0.01 headwind in the second half. Total noteworthy items in the quarter were $49 million. The majority of these items were restructuring costs, mostly related to the program we began in the fourth quarter of 2022. Our other net benefit credit was $67 million in the quarter. For the full year, we expect our other net benefit credit will be approximately $265 million. Interest expense in the first quarter was $159 million, up from $136 million in the first quarter of 2023, reflecting higher levels of debt and higher interest rates. Based on our current forecast, we expect $158 million of interest expense in the second quarter and approximately $620 million for the full year. Our adjusted effective tax rate in the first quarter was 23.9% compared with 25% in the first quarter of last year. Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation, similar to a year ago. Excluding discrete items, our adjusted effective tax rate was approximately 26.5%. When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative. Based on the current environment, we continue to expect an adjusted effective tax rate of between 25.5% and 26.5% for 2024. Turning to capital management and our balance sheet. We ended the quarter with total debt of $13.5 billion. Our next scheduled debt maturity is in the second quarter, when $600 million of senior notes mature. Our cash position at the end of the first quarter was $1.5 billion. Uses of cash in the quarter totaled $1 billion, and included $354 million for dividends, $347 million for acquisitions, and $300 million for share repurchases. We continue to expect to deploy approximately $4.5 billion of capital in 2024 across dividends, acquisitions and share repurchases. The ultimate level of share repurchase will depend on how our M&A pipeline develops. While there continues to be uncertainty in the outlook for the global economy, we feel good about the momentum in our business and the current environment remains supportive of growth. Overall, our strong start leaves us well-positioned for another good year in 2024. Based on our outlook today, for the full year, we continue to expect mid-single-digit or better underlying growth, margin expansion and strong growth in adjusted EPS. With that, I'm happy to turn it back to John. John Doyle -- President and Chief Executive Officer Thank you, Mark. Andrew, we are ready to begin Q&A. Questions & Answers: Operator Certainly. We'll now begin the question-and-answer session. [Operator instructions] And our first question comes from the line of David Motemaden with Evercore ISI. David Motemaden -- Evercore ISI -- Analyst Hi. Thanks. Good morning. My first question is just on the Marsh growth. John, I caught what you said on the global pricing index, which moved down or decelerated a little bit to 1% from 2% last quarter. But the Marsh organic growth accelerated to 8% this quarter from 6% last quarter. So, I'm hoping you can help me bridge the gap between accelerating growth and the decelerating pricing. John Doyle -- President and Chief Executive Officer Thanks, David, for the question, and good morning. We work very hard not to be an index on P&C pricing, right? It's an element. It's a macro factor that obviously does have some impact. But less than half of Marsh's revenue is exposed to P&C pricing. What I would also say to you is that where we're most exposed to commission is in the middle-market. Our index skews to larger account data. Pricing is up a bit more in the middle-market than it is in the large account segment, and typically is less cyclical than what you see in the large account market. But I want to just talk about growth overall. I was very pleased with the start to the year, 9% on top of 9% last year and accelerated growth from the fourth quarter of 7%, as I mentioned. Marsh, Mercer and Oliver Wyman all had accelerated growth from the fourth quarter. The macros continue to be supportive, David. Solid GDP growth in most major markets, although it's under a bit of pressure. Inflation and interest rates remain elevated. There's tight labor markets, as I said before, rising healthcare cost. The overall cost of risk continues to increase. And demand remains very strong. Not long out of the pandemic, of course, we've got a couple of global wars happening, supply chain stress. Our clients are showing broader risk awareness. We're talking to them about that and really trying to help them find better balance between resilience and efficiency. And we continue to invest through this cycle, right? I talked about a couple of the acquisitions we did. We're improving our mix of business as well. We sold some admin businesses at Mercer in the quarter. And I'm very, very pleased with how our colleagues are executing, too. We've been working on our client engagement model and improving that, continue to invest in sales operations. And as I've talked about, over the course of the last year, we're collaborating more than ever. It starts with the talent that we have. We have the best talent in the markets that we operate in. We're, of course, not immune to macros, including pricing on some level, but we're a resilient business and we're quite excited about 2024. Do you have a follow-up? David Motemaden -- Evercore ISI -- Analyst I do. And thanks for that answer, that's helpful. I guess, just specifically zeroing in on the US and Canada within Marsh, that had a nice acceleration in the quarter. Could you talk about the drivers specifically for that business? Was it middle-market, was it your capital markets activity coming back and sort of your outlook on the sustainability, further recovery and growth there? John Doyle -- President and Chief Executive Officer Sure, yeah. Marsh in the US got off to a terrific start, US and Canada, I would point out. And Martin, maybe you could give David a little bit more color. Martin South -- President and Chief Executive Officer, Marsh Yeah. It wasn't just the US and Canada, it was great balanced growth across the business. But I'll dig into the US a little bit and give you some color on some of the drivers of growth there. And it's really been a product of a lot of work in the last few years to get where we are. So, the overall growth of 8%, our businesses -- the mid-market business, MMA, had a terrific start to the year. The growth in that business is driven both by renewal and fantastic new business. Victor, our MGA business, rebounded, has a great performance, very strong performance in Canada. They had a tough year last year, it bounced back and the core business in the US grew nicely. So, very good. The drivers really, particularly in the specialty areas, construction was very strong in the first quarter. Our MMB business was strong. Our advisory business in the US was very strong as part of the risk advisor of the future to the tip of the spear and makes our relationship much stickier. So, our renewal growth was good. And our loss business rate was down. So, we feel very good about all the areas that we've been focusing on, about client relationship, specialization, industry focus advisory, all these things are the drivers for growth. So, we feel very good about things. John Doyle -- President and Chief Executive Officer Thanks, Martin. David, I would add, it wasn't a bang-out quarter in terms of M&A activity in our transaction risk business, but it's a smaller part of our -- smaller part of our business now. It's a little feedback there. It's a smaller part of our business after the slowdown. So, the impact was less. But we did see some volume in M&A activity pick up during the quarter, which of course is encouraging. So, thank you for your questions. Andrew, next question, please. Operator Certainly. Our next question comes from the line of Jimmy Bhullar with J.P. Morgan. Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst Hey. Good morning. So, I was wondering if you could just elaborate on the comments John had on the reinsurance market. And it seems like things -- the market is less tight than it was over the past year. But what are you seeing in terms of buyer behavior? Are cedents trying to buy more, given that pricing has come in a little bit, or are they trying to save money and keep sort of coverage levels consistent with what they've had in the past year? John Doyle -- President and Chief Executive Officer Sure, Jimmy. Thanks for the question. Maybe I'll elaborate a little bit on some of my prepared remarks and then ask Dean to talk a bit about the reinsurance market. But I think both markets continue to stabilize on average in the quarter. And again, I would remind everyone it's a collection of markets, not a single market. That stabilization is good for our clients. And in some cases, a better market has led to increased demand in both insurance and reinsurance. I would also point out that in recent years, we've had higher premium growth in the captives that we manage at Marsh compared to the premium flow into the traditional market. That may change a bit now, we'll see as markets stabilize and our clients can adjust to what the market looks like going forward. I mentioned earlier our index skews to major accounts. So, pricing in the middle-market continues to move up a bit more than the data points I mentioned earlier. But I would also say that insurers and reinsurers are cautious about that rising cost-of-risk environment that I mentioned as well. And so, while again, a stabilizing market is better for our clients overall, I don't expect that relative stability to change anytime soon given some of the rising cost of risk issues that the insurance community is confronting. So, Dean, maybe you can talk a little bit more about what's happening in reinsurance. Dean Klisura -- President and Chief Executive Officer, Guy Carpenter Yeah. Thanks, John. And Jimmy, I'll give you a little bit more color on the April 1 reinsurance renewal, that would be helpful. As John noted, we saw a continuation of market conditions that we experienced at January 1. And as John noted, market conditions are stable, but we're definitely seeing increased client demand to provide additional property cat limit, particularly at the top end of programs. That was very pronounced throughout the first quarter at 1/1 through the quarter. And certainly that trend continued on April 1. Strong capital inflows into the reinsurance market, driven by strong reinsurer returns, double-digit returns in 2023. We talked about last quarter on the call, reinsurer appetite has increased for property cat. There is an inflow of capital and capacity. Competition at the top end of programs, it's been good for both buyers and sellers in the marketplace. Specifically to property cat, in the US, at April 1, as I said, capacity was strong. As John noted, the market was generally flat to down incrementally for clients without cat losses. Accounts with cat losses saw 10% to 20% kind of rate increases. But keep in mind, we give you rate-adjusted figures. But when you factor in inflation, exposure growth, value growth, premiums on these cat programs are still increasing year over year. It continues to be a tailwind for Guy Carpenter in the marketplace. And as I said, there's a lot of competition for cat business. US casualty, as John noted, was challenging, just as challenging on April 1 as it was at the January 1 renewal. Reinsurers are exerting pressure on pricing in terms and conditions. Ceding commissions are facing downward pressure from reinsurers on certain quota-share contracts, particularly financial lines, which Martin has talked about in the past. Excess-of-loss contracts are seeing rate increases across the board, in some cases, double-digit. However, there was adequate casualty capacity in the marketplace at April 1, and all of the programs that we placed got completed in full. But I would balance that against continued reinsurer concern with the adverse development, driven by social inflation and increasing loss cost trends. I think that's a good summary of where we were in the US market. Just a note on Japan. Big April 1 cat date in Japan, a very orderly market, sufficient capacity, many cat programs were oversubscribed. We didn't observe any structural changes. Attachment points stayed where they were from a year ago. And again, it was a market that was down on average 5% from a rating perspective, and we didn't really observe any rate impact from the January earthquake in Japan. Overall, a very orderly market at April 1 in Japan. John Doyle -- President and Chief Executive Officer Terrific, Dean. Thank you. Jimmy, do you have a follow-up? Jimmy Bhullar -- JPMorgan Chase and Company -- Analyst That's an income, it was flat sequentially and lower than 3Q. I'm assuming that's more seasonality. But if you could just talk about your expectation for that given where short-term rates are currently? John Doyle -- President and Chief Executive Officer Mark, you want to jump on that one? Mark McGivney -- Chief Financial Officer Yeah. Jimmy, there is a little season, as you pointed out. There is a little -- tends to be a little seasonality in our fiduciary balances. Q1 and Q4 tend to be seasonal lows modestly. So that would explain that. In terms of outlook, we'll see what happens to the rate environment. The interest -- our fiduciary interest income is going to be a function of balances and rates, and we've got about $11.5 billion of balances. So, depending on what you want to assume for the trajectory of rates, the math is pretty straightforward. John Doyle -- President and Chief Executive Officer Thank you, Mark. And thank you, Jimmy. Andrew, next question, please. Operator And our next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan -- Wells Fargo Securities -- Analyst Thanks. Good morning. My first question was on the margin guidance. You guys said more margin expansion in the back half of the year. What's driving that? Is there just more investment in the first half, more savings falling in the second half, or something else that's driving the seasonality within the margin expansion this year? John Doyle -- President and Chief Executive Officer Good morning, Elyse. We expect again good margin expansion in 2024. As you pointed out, Mark noted, we expect the second half to be better than the first half. We have some expected headwinds, not really seasonality, but really driven from a higher merit pool a year ago, some acquisition-related costs, and some higher reimbursable expenses. But I want to remind everybody not to focus on any one particular quarter. Again, margin is an outcome of really how we run the business, and it's not a primary objective of ours. Again, having said that, we see opportunity for margin improvement, continued margin improvement. But we're going to continue to make attractive investments to support the medium to long-term growth of the business. We have a number of different efforts underway, ongoing workflow and automation efforts at Marsh, Mercer and Guy Carpenter. And we continue to press for opportunities to improve efficiency at the intersections of our businesses as well. So, we see opportunity. And as we pointed out, we expect the second half to be better than the first. Do you have a follow-up, Elyse? Elyse Greenspan -- Wells Fargo Securities -- Analyst Yes, thanks. And then, my second question, Marsh recently launched its wholesale venture Victor Access. I know it's early days, but what was the impetus for this strategy? And is there any reason why the majority of the wholesale risk currently placed by Marsh with third-party wholesalers couldn't potentially be internalized through Victor over time? John Doyle -- President and Chief Executive Officer So, let me be clear, Elyse, we're not looking to build a third-party wholesale business. There's obviously been considerable growth in the wholesaler to E&S market over the course of the last several years. We want to bring the best solutions in the marketplace to our clients. Generally, we're preferring admitted solutions for our clients. Not that there aren't good things that happen in the E&S market. Of course, there are, and innovation is one of the areas where the E&S market is important. But we want to access as much of that E&S market directly. We actually access most of our E&S market solutions directly today. But we want to continue to press and make sure that we can access as much of that market directly. So, it's client-driven, It's about us managing the client outcomes, client experiences, really as directly as possible. Having said that, we'll continue to use wholesalers for niche expertise. They serve us very well and our clients very well. In those cases, they also have strong program businesses as well. So, anyway, that's what it's about. It's just, again, making sure we can directly access as much capital directly as possible for our clients. Thank you for that. Andrew, next question? Operator Our next question comes from the line of Greg Peters with Raymond James. Greg Peters -- Raymond James -- Analyst Good morning, everyone. I'd like to pivot to -- for the first question, pivot to the consulting business, which had a nice quarter. I'm wondering if you can provide some additional color around how the different pieces are moving. I know some of the management consultants have pre-announced that they're going to be cutting staff this year. Not really seeing any signs of weakness in your pipeline, but maybe you could give us some color, because forecasting this out seems to be a little bit of a black box? John Doyle -- President and Chief Executive Officer OK. Thanks, Greg. Yeah, we are very pleased with the start to the year. As you recall, of course, Oliver Wyman had a slow start to the year in 2023, had a nice year overall of growth. There's going to be a bit more volatility to revenue growth at Oliver Wyman, but we also expect better growth on average from Oliver Wyman over the medium to longer term. Nick, maybe you can share with Greg some color on demand in the first quarter. Nick Studer -- President and Chief Executive Officer, Oliver Wyman Thank you, John, and thank you, Greg. Yeah, 13% was a very pleasing start to the year, it makes a marvelous headline, and we're very, very proud of a good start on what, as you noted, is a tough environment for many in our profession. John has already given the caution about taking the two-year view. We also probably benefited from a few little timing benefits of things that might have shown up in Q2, might have shown up in Q1. And we still very much give guidance through the cycle. This should be a mid-to-high single-digit business. And you noted the sort of forecasting it out is a tricky challenge. That is true because we have a relatively short backlog. The nature of our work is such that when clients need assistance, they need it quickly. And so, we are always ready to move very, very nimbly. To give you a little bit more color, we grew pretty strongly across all the four regions of our management consulting business and our economic research business, NERA, also grew very strongly, fastest in the Middle East, but in the double-digits or very close to double-digits in all three of the other major regions we have. And sectorally, it was also fairly broadly spread. Our communications media and technology team grew well, healthcare grew well, banking seeing a rebound in private capital work, which I've noted on previous calls, has been pretty robust even in the face of obviously a very much lower deal market, but our work on portfolio company performance has helped us there. But insurance also growing, and quite broadly across the capabilities that we bring to bear as well. So, we think we're in a good position. We're very confident we gained share over the last few years, but it's a tough consulting environment. And our pipeline indicates that mid-to-high single-digit growth environment, growth forecast, is how we think about this business through the cycle. John Doyle -- President and Chief Executive Officer Thank you, Nick. That's very helpful. And Greg, maybe I'll ask Pat Tomlinson also to share some thoughts just on the first quarter at Mercer, given our consulting operations there. And Pat, while you have the floor, as I mentioned, obviously, you're joining this call for the first time. Maybe you could talk a bit about your priorities at Mercer. Pat Tomlinson -- President and Chief Executive Officer, Mercer Sure. Thanks, John. Yes, we are pleased with our Q1 2024 underlying growth, as mentioned earlier, of 6%. It was our 12th consecutive quarter with 5% or more growth, especially the breadth across the practices. Health, another impressive quarter with 10% growth in Q1. That growth was really with double-digit growth nearly across all regions. And it comes on the back of investments in hiring new talent, focus on thought leadership, creating digital tools and really focusing in on client segmentation, trying to match client healthcare needs, based upon industry segment size with the innovative and adaptive solutions that we have. So, really trying to meet clients where they are. We certainly benefited from strong retention. We had good renewal growth. Insurer revenue and medical cost inflation has an impact there. We see significant demand for digital solutions and the innovative benefits that are kind of underscoring the value that we're providing to clients. If I pivot over to wealth, we grew 5% in Q1. There was good, balanced, equally strong performance in DBA and IMS. We see DB plans funding statuses continue to benefit from elevated interest rates that's driving an increase in risk transfer over the last couple of years, as well as we have some regulatory requirements and demands that are creating some project work. If you add in some capital -- some volatile capital markets, it's driving strong demand for both our actuarial and our investment solutions business. Speaking of investment solutions, in OCIO, we benefited from some transactions in Westpac and Vanguard, Mark mentioned that earlier, but also good net new inflows and capital markets provided us some revenue lift in Q1. From a career perspective, growth was muted to 1% for the quarter, but we're following a period of strong growth over the past several years, including a challenging 12% comparable last year. The growth was strong in international, is very broad across all practices and regions. We did see, as was mentioned, some softness in US career, specifically in rewards in the transformation space, as I would say, clients are starting to navigate some of the macro conditions, right? So, let me highlight the career practices coming off that very long period of high growth. As I mentioned, double-digits in -- for the past eight quarters, driven in large part, I would say, by inflation and employee attrition. If we all remember the great resignation back coming out of the pandemic, which drove a lot of labor shortages and really created a lot of demand for projects with clients as they were trying to think about the rewards and how to pay people to keep them retained, the skills that they might need if they had to pivot, because they didn't have the right resources, and also starting to think about transformation as they were having less resources to work with, and there was innovation in technology, as we've all talked about AI, in the past and helping clients through those. So certainly, I think from that perspective, we feel good that there's good breadth of our solutions and demand in the market as we go ahead and fill those needs. John quickly asked me to talk a little bit about how I think about the business and the priorities too. So, obviously, my first call. On April 1, I got to step in and begin this opportunity of a lifetime leading Mercer and our 21,000 colleagues from around the world, as we are focused on creating brighter futures for our clients and for their people. I am extremely humbled and honored to be the CEO of this fantastic firm. And personally, I really want to thank Martine Ferland for a very smooth transition and for the growth momentum and culture that she helped create here. Priority-wise, I want to accelerate that momentum. From the impact that we're having to clients to the fantastic careers we build for colleagues here, the collaboration among our colleagues across Marsh McLennan, we can leverage new technologies, and we perform really purpose-driven work, and can have a positive impact on our communities as well. I think we're very well-positioned, as we've been repositioning ourselves over the last several years, reshaping our portfolio. Mark mentioned the divestitures. We've been divesting admin practices. We've been building capabilities and reach and global benefits in OCIO. We've been accelerating acquisitions and we're really just creating more value for clients at scale. And that's what we've been focused in on. So, I'm very optimistic about our future. John Doyle -- President and Chief Executive Officer Thank you, Pat. We're excited to have you at this table. Greg, do you have a follow-up? Greg Peters -- Raymond James -- Analyst I do. Thanks for the detail on that answer. I want to pivot to M&A. And specifically, Mark, I think you mentioned the interest expense outlook for the company and we note the higher interest rate cost of the debt that's being issued versus that which is being paid off. So, I'm curious if there's been any follow-through on those higher costs in the terms of valuation of transactions that you're looking at. And, I'm also curious if there's any valuation difference between larger properties versus smaller properties that you're looking at in the M&A market. Thank you. John Doyle -- President and Chief Executive Officer Yeah. Thanks, Greg. What I would say is we remain quite active in the market. There's a good -- we have a good strong pipeline, as I've talked about in the past, we have an excellent reputation in that marketplace as being a good owner as well. So, we're excited about the deals we did in the first quarter. And again, we're going to continue to remain active in the market. I think valuations have remained stubbornly high, I would say, on the other side of things. And while we might expect that for top-quality assets, I would also point out that some lesser-quality assets have traded at some very, very high multiples of late. And so, we're going to be picky. We're looking for well-led businesses with real strong growth fundamentals that make us better and are a good cultural fit for our organization. We've been very successful at it. And again, as Mark pointed out, we expect to continue to deploy capital in the market going forward. Thank you, Greg. Andrew, next question, please. Operator And our next question comes from the line of Michael Zaremski with BMO Capital Markets. Michael Zaremski -- BMO Capital Markets -- Analyst Hey. Great. Good morning. Probably for Mark on the margins and the expense bucket. If I look over the last year-plus, the margin improvements come much more so from the general and other bucket, rather than comp and ben. It looks like that it flipped a little bit that relationship this quarter, if I'm correct. Anything changing there, given the expense management programs, or just in terms of how we should think about where the margin improvement is coming from on a go-forward basis? John Doyle -- President and Chief Executive Officer Thanks, Mike. Mark, you want to -- Mark McGivney -- Chief Financial Officer Yeah, I think it's a great point that you're making and I think it reflects the strategy of the company. We've said we continually invest in positioning ourselves for the future. And over the last several years, we've talked about the heavy investments we've made organically in talent. And so, I think we've done a terrific job of really being thoughtful about all of our other operating expenses, functional costs, how we're leveraging things across the firm, T&E. Really some of the gains we made in the pandemic, we've harvested them. So, as you point out, a lot of our margin expansion over the last five years has come from being really disciplined on things far away from the client and investing heavily in client-facing talent. And so, I think that is a factor in our growth. And I think also as we look forward, there's going to be leverage in those investments, which is why we're optimistic about margins going forward. John Doyle -- President and Chief Executive Officer Thank you. Mike, do you have a follow-up? Michael Zaremski -- BMO Capital Markets -- Analyst Yeah, a quick follow-up. And I know you gave a lot of commentary on kind of commercial primary insurance pricing power, you told us the Marsh Index declined a bit. Just curious if you can offer any more context. 1% kind of feels like a soft market number. What is it -- are you seeing just returns on behalf of your career partners being kind of excellent that's kind of driving the pricing power downwards in light of kind of what still seems like inflationary trends, or just any more color there on kind of what's causing the decel? I know you gave us by-line commentary. So, I don't know if there's a lot more to add. John Doyle -- President and Chief Executive Officer Yeah. Mike, I would say that, it doesn't feel like a soft market to our clients after five years of price increases. And as I noted, our index skews to larger accounts and where there's a bit more volatility, typically, throughout the cycle. I expect cycles to be shorter and narrower than what they've been in the past, right? There's better data, better technology on the underwriting front. Capital moves so much more quickly in and out. That's part of the E&S market dynamic that you all have observed over the course of the last several years. So, I expect kind of more relative stability. And from time to time, of course, certain areas of risk, things will change in some meaningful way and that will maybe bounce a particular product outside of a normal cycle. Insurer and reinsurer underwriting results have improved in the aggregate over the course of the last couple of years. And I think most feel good about how their book -- how their portfolios are positioned. It's not all one result, of course. We saw some reserve additions in the fourth quarter results overall. And as I mentioned on our call in the first quarter, the great unknown is casualty loss costs, right? There's lots of emerging data that's troubling for our entire ecosystem, for our client, and it contributes to that rising cost of risk that I mentioned earlier. I maybe should also point out, and Dean touched on this a little bit that our index adjusts for limit, exposure, attachment point, and it includes new business, right? You see some other indices that are out in the market that don't necessarily adjust for all of those factors. And then, maybe the last point, Mike, that I would make is that that number doesn't necessarily correlate directly with what premium growth is in the market, right, because at the end of the day, I mean, it might be at -- you might have less of an increase, you might have certain clients buying more. I think that's most prevalent in the reinsurance market at the moment, but we're seeing that in some cases at Marsh as well, where clients again having adjusted to the new market pricing and new market equilibrium has led to a higher level of demand for coverage from our clients. So, anyway, I hope that's helpful. Andrew, next question, please. Operator Our next question comes from the line of Yaron Kinar with Jefferies. Yaron Kinar -- Jefferies -- Analyst Thank you. Good morning. Two questions on Marsh and the market environment you're seeing there. And I think the first one maybe ties well to your last comments, John. Are you surprised to see casualty rates only up 3% just given the loss trends? I guess I'd love to hear your views both as the CEO of Marsh but also maybe as a former underwriter. John Doyle -- President and Chief Executive Officer It's a -- I actually -- it's very, very hard right now. As I mentioned earlier, there's some troubling data points, right? And thrown in the mix of the last several accident years, of course, a couple of years of the impact of the pandemic, right? And so, just on the clients where we help them, larger clients, with big risk management programs that have a level of frequency, it's very, very difficult to project where loss costs are. But as I said, the underwriting community is better than it's ever been. They have better data, better technology. But there, again, are some troubling signs. It's not just increased frequency. It's not just kind of nuclear verdicts, that term gets kind of thrown around or even some of the bigger settlements. There's a frequency of larger events. See the Francis Scott Key Bridge as an example, that will be a big loss in the market, maybe not as much a casualty loss, but a big loss in the market. But even in like commercial auto, and you've certainly seen that play out in the personal lines auto market, just kind of more frequency type events just costing more to get resolved. And so, we're putting our efforts to helping our clients think through how to better run off liabilities that they assume and even transfer into the market. And the insurers are investing quite a bit in their claims capabilities as well to try to get ahead of this. But I think we're all pointing to again some flashing yellow signals out there about the rising costs overall. Do you have a follow-up? Yaron Kinar -- Jefferies -- Analyst Yes, I do. And thanks for the color there. So, in Marsh, organic, obviously, was strong and then we certainly saw a very nice result in US and Canada. I guess the only place I could maybe poke a little bit if I were to try would be Asia Pacific where we saw a step down. Is that -- is there a timing issue there with some one-offs? I know you had a very, very strong 1Q '23 there. But anything you could point to in terms of the organic results in Asia Pacific would be helpful. John Doyle -- President and Chief Executive Officer Yeah, I don't -- no one-offs or major issues there, just on top of a couple of years of very, very good comps and strong growth. We love how we're positioned in Asia, big protection gaps throughout Asia. We have really strong country -- in-country operations all throughout the region. So, we're not just a regional center. We're in-country and working very, very closely with our clients there. As we've said to you in the past, I wouldn't look at any one particular quarter. And again, it's on top of what's been some outstanding growth in Asia over the last couple of years. So, we feel good about where we're headed in Asia overall. Andrew, next question, please. Operator Certainly. One moment, please. Our next question comes from the line of Meyer Shields with KBW. Meyer Shields -- Keefe, Bruyette and Woods -- Analyst Great. Thanks. I was hoping to discuss the competitive environment in RIS maybe from two perspectives. First, I'm wondering whether there is a difference in the market share gain potential when you're in a rising rate environment and the enormously fragmented brokerage world includes a lot of companies that just don't have the resources to help clients manage higher insurance costs as successfully as a company with Marsh's resources. How much of a difference does that make? John Doyle -- President and Chief Executive Officer It's a good question, Meyer. We're very, very focused on trying to bring scale benefits to our -- well, to all of our key stakeholders, right, including our colleagues, right? We want them -- when they work here, we want them to feel like they have nearly 90,000 folks helping support them with learning and development, data and analytics, market access that you might not have, should you choose to work somewhere else in our industry. So, we certainly think about it from the colleague perspective, we think about it from the client perspective, and we think about it from an investor point of view as well. What I would say, from a client perspective, broadly speaking, again, and this is maybe a bit more upmarket than some of the fragmented segments that you talked about before. Our clients are more risk aware than they've been in the past. I think we have had a role to play in that in trying to make them more risk aware of some meta risks. And again, recent events have certainly helped heighten that. But it's incumbent upon us to bring those scale benefits to the market. And not just scale benefits in terms of data analytics or market access, but different types of solutions. I mentioned earlier, our captive business. We're the largest captive manager in the world, and that's been a meaningful outlet for our clients to manage risk and the rising rate environment over the course of the last several years. So, yes, scale matters. I would also tell you that it plays a role for some of the sellers in the market, as well as we talk through with potential M&A targets, why they may look to sell at the moment at times. It's regarding scale type -- scaled-up-type capabilities that we have that are difficult for them to replicate. And so, as I said earlier, we're looking for well led businesses with really solid growth fundamentals, but we know we can make them better too. And that's the exciting part for us. Do you have a follow-up? Meyer Shields -- Keefe, Bruyette and Woods -- Analyst I do, but I want to thank you for that. That was very thorough. When we look at the parts of the brokerage market that are more concentrated here, I guess I'm thinking reinsurance or Fortune 100-type accounts, in your view, is the competitive -- are competitors fighting at full strength? Are they all -- is competition right now as intense as it normally is, or any differences from longer-term norms? John Doyle -- President and Chief Executive Officer No, it's -- I mean, in both of the segments you mentioned, it is a highly competitive market, and we love competition. There's nothing that gets me more fired up than getting out in front of clients and, of course, winning ultimately. And our team is the same way. We're passionate about the value that we try to deliver to our clients. And so, as I mentioned earlier, we're collaborating more than ever. And in those particular segments you mentioned, I think it's been particularly meaningful over the course of the last year or so, our efforts to bring a broader set of capabilities to that client set. But no, it's a very, very competitive market and we welcome it. It makes us better. Thanks, Meyer. Andrew, next question? And maybe the last one. Operator Our next question comes from the line of Robert Cox with Goldman Sachs. Robert Cox -- Goldman Sachs -- Analyst Hey. Thanks. In the prepared remarks, there were some comments on healthcare costs continuing to rise. I was hoping you guys could talk about what you're seeing there and maybe parts of the business, maybe between brokerage and consulting that are generating the strongest organic growth in that 10% organic in health. John Doyle -- President and Chief Executive Officer Sure. Thank you, Robert. Healthcare and the healthcare industry is a big part of our business overall. And I don't think it's any secret that medical inflation and healthcare-related cost inflation is a major pressure point for our clients in many markets really around the world. It's been a big driver of growth for us, and we continue to invest in it. I talked about in my prepared remarks some of the collaboration between Marsh and Mercer to try to bring some sort of relief to an angle of cost pressure in that marketplace. But Pat, maybe you could talk about the growth we're seeing and some of the cost inflation as well. Pat Tomlinson -- President and Chief Executive Officer, Mercer Sure. So, the way that healthcare inflation impacts the business varies based upon the area of the world that we're in. In certain areas of the world where predominantly fee based, it's more large market that would predominantly be from a Mercer perspective inside like the US and some of our more mature larger markets. And then, in a lot of the markets, we are a little bit more brokerage-based to where it's based that way. But let me be clear, even the spots where we're fixed fee, healthcare inflation drives significant increased cost to clients. So, it does create a lot of -- it creates demand for work for us, a lot of project work. So, we will see projects out of that healthcare inflation, it's not necessarily directly driven that way. And even if there's healthcare inflation in the other areas where it's brokerage, it's not a linear type activity from a commission perspective because we're -- once that cost is flowing through to the client P&L, we're always out there doing plan redesign for a client to help make sure that that full cost of healthcare inflation is not flowing through their P&L, right, because they really don't control -- that's one of the larger costs that they don't control themselves based upon the activity that they've had. So that's really where a lot of the inflation helps us. Part of it is increased activity and project work. Occasionally it does create higher rates that flows through in brokerage, but many times those higher rates, we're still doing plan design with the client to try and mitigate the impact that is going to have on the client P&L even in a spot where it's straight commission based brokerage, we're trying to mitigate those costs. John Doyle -- President and Chief Executive Officer So, rising health and benefit costs in a tight labor market, again, is a pressure point. And another example of where, again, we can bring scale and a broader set of capabilities to the market that our clients appreciate. Do you have a follow-up, Robert? Robert Cox -- Goldman Sachs -- Analyst Yeah, very helpful. Thank you. Maybe just last question. On the wealth segment, correct me if I'm wrong, but I think last year, probably, the pension business was growing stronger than your investment business. Did that occur as well in the first quarter here or were both of them kind of similar to the 5% organic growth that was achieved in well? John Doyle -- President and Chief Executive Officer Yeah, we had good solid growth across investment management and defined benefits. As Pat mentioned, our DB business and this period of elevated interest rates have seen a bit more growth than we expected over the course of the last couple of years, but good growth in our OCIO business and our broader set of consulting capabilities inside of our investment business. So, yes, we felt good about that. Thank you, Robert. Andrew? Operator Thank you. I would now like to turn the call back over to John Doyle, president and CEO of Marsh & McLennan, for any closing remarks. John Doyle -- President and Chief Executive Officer All right. Thank you, Andrew. And I want to thank everyone for joining us on the call this morning. In closing, I want to thank our colleagues for their hard work and dedication. I also want to thank our clients for their continued support. Thank you all very much, and I look forward to speaking with you again next quarter.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, and welcome to the Altria Group 2024 first-quarter earnings conference call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question-and-answer session. [Operator instructions] I would now like to turn the call over to Mac Livingston, vice president of investor relations for Altria Client Services. Please go ahead, sir. Mac Livingston -- Vice President, Investor Relations Thanks, Savannah. Good morning and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's first-quarter business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics, and our latest corporate responsibility reports are all available at altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2023. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of our board. We report our financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com. Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, I'll turn the call over to Billy. Billy Gifford -- Chief Executive Officer Thanks, Matt. Good morning and thank you for joining us. We made meaningful progress in pursuit of our vision, and our highly profitable traditional tobacco businesses continued to perform well in a challenging environment. In spite of the absence of an effective regulatory environment, we saw continued early momentum from NJOY and believe our businesses are on track to deliver against full-year plans. We also demonstrated our continued commitment to maximizing the return on our investments and delivering strong shareholder returns with the sale of a portion of our investment in ABI and the subsequent expansion of our share repurchase program in March. My remarks this morning will focus on the continued early momentum behind NJOY's commercialization, the state of the e-vapor category and enforcement progress, encouraging first-quarter results from on!, and our financial outlook. I'll then turn it over to Sal, who will provide further detail on our financial results and additional information on the partial sale of our ABI investment. Let's begin with our e-vapor business. After three full quarters of ownership, we remain excited about NJOY and its potential in the legal U.S. e-vapor market. In the first quarter, we broadened NJOY's distribution to over 80,000 stores, and we expect to expand to approximately 100,000 stores by year-end. We also continued the rollout of NJOY's first retail trade program, which we believe will help NJOY achieve optimal visibility and product fixture space at retail. Today, more than 70% of contractor stores have chosen options that secure premium positioning in the e-vapor fixture for NJOY. And we expect the majority of fixture resets to be completed in the first half of this year. To generate trial of NJOY, we expanded promotional offers at retail in the first quarter and saw promising results. NJOY's retail share of consumables grew in each of the past six months and was 4.3 share points in the quarter, up 0.6 share points sequentially. And we have seen early signs of longer-term adoptions from smokers and vapers that have tried to NJOY. Late last year, we tested a variety of promotional offers in a limited number of retail accounts. Diving into one retail account example, share grew by over 9 percentage points versus the pre-promotional period. In the first quarter, we reduced promotions in the account and NJOY retained over 50% of the share gain during the trial period, settling 5 percentage points higher than the pre-promotion period. We believe these results speak to NJOY's appeal once consumers try the product. We are also inspecting a variety of other metrics to better evaluate trial and adoption of NJOY in the early stages of its expansion. One such metric that we believe is an important indicator of trial in the e-vapor category is retail share of devices as we believe it's a measure of vapor and smoker trial and a potential leading indicator of longer-term adoption. In the first quarter, NJOY's share of devices in the multi-outlet and convenience channel was 11.5 share points, an increase of 2.4 share points sequentially and 6.4 share points since the third quarter of 2023, our first full quarter of ownership. Turning to shipments. NJOY consumables shipment volume was approximately 10.9 million units, and NJOY's device shipment volume was approximately 1 million units. While shipping volume was essentially flat sequentially, recall that 2023 fourth quarter NJOY shipment volume included building pipeline inventory at wholesale and retail to support the increased demand we anticipated in the first quarter. Moving forward, our plan aims to broaden the awareness of NJOY and grow brand affinity through NJOY's improved positioning at retail; a new equity campaign that emphasizes NJOY's unique attributes and exceptional vaping experience; a new adult-only event marketing infrastructure, which NJOY expects to activate this summer; and our adult tobacco consumer database, which allows us to communicate to millions of age-verified U.S. adult tobacco consumers through various marketing channels. We also continue to expect that NJOY will submit PMTA filings for flavored NJOY ACE products with age-gated Bluetooth technology by the end of the second quarter. NJOY's early success is encouraging in the context of broader trends in the e-vapor marketplace, where a lack of FDA-authorized products and the continued proliferation of illicit disposal products threaten to harm reduction opportunity in the United States. As it relates to enforcement, we believe that a comprehensive approach is needed to address this issue, and we continue to actively engage with regulators, state and federal lawmakers, our trade partners, and other stakeholders to build awareness and drive marketplace enforcement. There's still significant work ahead that we saw some encouraging actions in the first quarter. In the first quarter alone, the FDA, in collaboration with the U.S. Customs and Border Protection, issued over 450 e-vapor-related import refusals, up from 348 during all of last year. The agency also continued to levy civil monetary penalties and send warning letters to manufacturers, retailers, and wholesalers of illicit products. While these actions represent signs of progress, we believe they are wholly inadequate. Illicit markets are a threat to public health, and we believe the FDA's enforcement approach is not of the scale or scope needed to bring about fundamental change in the marketplace. As a result, we identified to the agency-specific steps we believe they can take to build a more effective compliance and enforcement program to address the illicit market, including imposing direct liability on the large manufacturers, importers, and distributors of illicit products; focusing on import prevention; and clearing up widespread confusion in the marketplace about the FDA's enforcement priorities. Earlier this month, we sent a letter to the FDA highlighting these recommendations and reinforcing our commitment to work collaboratively on solutions that can restore order in the e-vapor marketplace. We also continue to work with state legislatures that have passed or are considering legislation requiring manufacturers to certify that they are compliant with FDA requirements. As of April 19th, eight states have passed such legislation and 12 states are considering it, and we've seen increased legal action against entities that are enabling the illicit market. As we've previously disclosed, we initiated litigation in the United States District Court in California relating to the sale of unlawful products. Due to some procedural challenges, we voluntarily dismissed this litigation earlier this year. We subsequently filed a new lawsuit against five manufacturers, four brick-and-mortar retailers, and three online retailers of illicit Elf Bar e-vapor products in February in federal court in California. And earlier this month, the City of New York filed a lawsuit against 11 wholesalers for their part in the sale of illegal disposable e-vapor products. We continue to believe in the promise of a responsible e-vapor category, but a strong course correction is needed to protect the tobacco harm reduction opportunity for the millions of adult smokers in the U.S. We've learned from past experience that complex issues like this require the work of many stakeholders. And while we are starting to see some early signs of action, more impactful progress needs to -- to be made. Let's now turn to the oral tobacco category. Oral nicotine pouches grew 13.8 share points year over year and now represent over 40% of the oral tobacco category. Oral nicotine pouches were the primary contributor of the estimated 9.5% increase in oral tobacco industry volume over the past six months. Helix grew on! reported shipment volume to approximately 33 million cans during the first quarter, an increase of 32%. on! continued its momentum at retail, growing its share of the oral tobacco category by 0.7 share points to 7.1%. Helix delivered these impressive results as on!'s retail price increased by 26%. This spring, Helix introduced a new trade program that secures premium positioning for on! in over 80% of contracted stores, creating broader visibility of the brand. Helix is continuing its focus on strategically investing behind the brand as the category growth accelerates. Helix is also making final preparations for filing its PMTA for on! PLUS, which we expect to submit in the first half of this year. Upon FDA authorization, we believe it will contribute meaningfully to Helix's growth. We continue to aggressively pursue efforts to create the conditions for tobacco harm reduction's success in the U.S. to benefit tobacco consumers, society, and our shareholders. I am confident in Altria's ability to lead the way in harm reduction with our exciting portfolio of smoke-free products and our talented and dedicated employees. With our smoke-free progress and the strength of our traditional tobacco businesses in mind, we reaffirm our guidance to deliver 2024 full-year adjusted diluted EPS in the range of $5.05 to $5.17, representing a growth rate of 2% to 4.5% from a base of $4.95 in 2023. I'll now turn it over to Sal to provide more details on the business environment and our results. Sal Mancuso -- Chief Financial Officer Thanks, Billy. First-quarter adjusted diluted earnings per share declined by 2.5%. As we previously noted, we expect that 2024 adjusted diluted EPs growth will be weighted to the second half of the year, resulting from two main factors. The first relates to the timing of the NJOY acquisition in 2023. Since we closed the transaction on June 1st of last year, we are lapping quarters in the first half of the year that do not include the impact of amortization or investments behind the brand. The second factor is the impact of two additional shipping days in the smokeable segment, each of which occur in the second half of the year. Turning now to our first-quarter business results. The smokeable products segment delivered over $2.4 billion in adjusted operating companies income with robust net price realization of 8.5%, and Marlboro maintained its long-standing leadership in the cigarette category. Adjusted OCI margins were 60.2% for the quarter, down slightly from a year ago. Year-over-year margin comparisons were impacted by higher per unit settlement charges and some elevated manufacturing costs. Year-over-year MSA and manufacturing cost per pack increases were higher in the first quarter than we expect for the remainder of the year. These higher costs were partially offset by lower SG&A costs in the quarter. We also expect the segment to benefit from lower SG&A costs as the year progresses. Total smokeable product segment reported and adjusted cigarette volumes declined by 10% in the first quarter. When adjusted for trade inventory movement and other factors, we estimate that industry volumes declined by 9% over the same period. We believe that industry volume trends have been negatively impacted by the proliferation of illicit disposable e-vapor products and continued pressures on tobacco consumer discretionary income. At retail, the discount segment grew 0.8 share points in the first quarter. We believe these results were driven in part by macroeconomic pressures on the adult smokers. We continue to see increased competitive activity in the discount segment, including multiple branded discount offerings priced at deep discount levels. Meanwhile, Marlboro continues to show its resilience, retaining its retail share of 42% in a challenging environment. Marlboro also grew its share of the highly profitable premium segment to 59.3%, an increase of 0.7 share points. We believe Marlboro's strong consumer loyalty and position as the aspirational brand in the category is driving its continued outperformance in the premium segment. In cigars, reported cigar shipment volume decreased by 6.1% in the first quarter. Middleton continued to contribute to smokeable products segment financial results and Black & Mild remains the leader in the highly profitable machine-made large cigar segment. Moving to the oral tobacco products segment. Adjusted OCI grew 4.6% in the first quarter, and adjusted OCI margins expanded by 0.2 percentage points to 69.5%. Total segment reported shipment volume decreased 3.1% as growth in on! was more than offset by lower MST volumes. When adjusted for calendar differences and trade inventory movements, we estimate that first-quarter oral tobacco product segment volumes declined by approximately 4%. Oral tobacco products segment retail share declined 7.1 percentage points as declines in our MST brands were partially offset by the growth of on!. We remain encouraged by the performance of our oral tobacco products as on! continued to grow share, and Copenhagen remain the leading moist smokeless tobacco brand. Moving to capital allocation. In March, we sold a portion of our investment in ABI and expanded our share repurchase program to $3.4 billion. In expanding our repurchase program, we implemented a $2.4 billion accelerated share repurchase program, under which we received 46.5 million shares in March, representing 85% of the ASR program. These repurchases are reflected in our weighted average shares outstanding for the quarter. We expect to receive shares representing the remaining 15% of the ASR program by the end of the second quarter. After the completion of the ASR program, we anticipate having $1 billion remaining under the currently authorized share repurchase program, which we expect to complete by year-end. Turning to ABI's financial results. We recorded $165 million of adjusted equity earnings for the quarter, down 8.3%. As a reminder, we use the equity method of accounting for our investment in ABI and report our share of ABI's results using a one-quarter lag. Accordingly, our first-quarter adjusted equity earnings represent our share of ABI's fourth-quarter earnings. Following the ABI transaction, our ownership of ABI is approximately 8.1% with a tax basis of approximately $1.2 billion. We continue to view the ABI stake as a financial investment, and our goal remains to maximize long-term value of the -- of the investment for our shareholders. Turning to other capital allocation activity. We paid approximately $1.7 billion in dividends and retired $1.1 billion of notes that came due in the first quarter, and as of March 31st, our debt-to-EBITDA ratio was 2.1 times. With that, we'll wrap up, and Billy and I will be happy to take your questions. While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com. We've also posted our usual quarterly metrics which include pricing, inventory, and other items. Let's open the question-and-answer period. Operator, do we have any questions? Questions & Answers: Operator Thank you [Operator instructions] Our first question will come from Pamela Kaufman with Morgan Stanley. Please go ahead. Pam Kaufman -- Morgan Stanley -- Analyst Hi, good morning. Billy Gifford -- Chief Executive Officer Good morning, Pamela. Pam Kaufman -- Morgan Stanley -- Analyst I wanted to ask about the modest raise to your full-year guidance following the ABI share sale. Despite your plans to repurchase an incremental 3% of your stock, what considerations went into that? And, you know, is it a reflection of weaker-than-expected underlying performance relative to your outlook at the beginning of the year? Sal Mancuso -- Chief Financial Officer Good morning, Pamela. Thanks for the question. You know, we were really happy to be able to revise our guidance and take up the bottom end of the guidance by a full percentage point. We took the top half -- the top end of the guidance up about a half a percentage point. I would read into that the confidence in our core businesses but also it provides us with flexibility as we go throughout the year to manage, not only our overall business, but to make investments behind our innovative tobacco products. So, we feel really good about being able to provide the guidance. It reflects the accretion of the ABI transaction. Pam Kaufman -- Morgan Stanley -- Analyst OK, thanks. And the second -- my second question is a bit more philosophical. You know, historically, your strategy has been to maximize operating profit by taking price in excess of cigarette volume declines. And given this is becoming increasingly difficult because of the magnitude of volume declines and the need to reinvest behind alternatives, do you think that this strategy is sustainable in the changing operating backdrop? And have you considered other approaches to maximizing profitability? Billy Gifford -- Chief Executive Officer Yeah, we always look at our strategies, Pamela, but we feel like that is the right strategy. I would phrase it a little bit differently than you did. It's to maximize profitability over the long term while making appropriate investments in Marlboro and the growth segment. So, when you think about that -- I think when you think about the pricing, and we've talked about the factors that go into pricing decisions, certainly we've highlighted for you that our consumer is under economic strain, both from the cumulative impact of inflation, as well as debt loads and high interest rates. And so, we're going to continue to maximize profitability over the long term. We feel good about the price realization we had in the quarter. It was 8.5%. I think it's important to step back and think about the -- what the consumer felt at retail. And so, when you think about that, that was just shy of 6%. So, there's still competition out there. But our consumer is under pressure, and we're going to make appropriate investments and be -- be there for them. I think if you look back through history, that's proven to be a strong strategy. Pam Kaufman -- Morgan Stanley -- Analyst OK, thank you. I'll pass it on. Billy Gifford -- Chief Executive Officer Thank you. Operator Our next question will come from Bonnie Herzog with Goldman Sachs. Please go ahead. Bonnie Herzog -- Goldman Sachs -- Analyst All right, thank you. Good morning, everyone. Maybe a bit of a follow-up question to Pamela. Just, you know, one thing I certainly saw in the quarter was your controllable costs in smokeable, you know, per pack were up quite a bit, I think up mid-teens. So, hoping you could touch on the drivers of that and how we should think about that moving forward. And then, honestly, just ultimately your expectations for improved dollar profit growth in smokeable in the back half. I guess I'm trying to understand, you know, can you -- can you guys hit the mid to high end of your EPS guidance this year, you know, if dollar profits don't recover? Again, kind of a little bit of what Pamela was asking, but just trying to understand how much flexibility you have. Sal Mancuso -- Chief Financial Officer Good morning, Bonnie. I'm going to unpack that question a little bit. Hopefully, I touch on -- on all aspects of it. If I don't, please follow up. As we talked about in our opening remarks, I think, first quarter, there's a couple of items that I would point out. It's really about comparisons to prior year that impact the first quarter at a higher level than we think will impact the rest of the year. A couple of adjustments, if you will, accounting adjustments, as you think about. One is within the MSA cost per pack. We've seen adjustments in the past. There's a lot of variables. It's a complex calculation when you -- when you develop the accrual for MSA. And in the past, you've seen adjustments related to things like inflation. This quarter, we did make an adjustment, it was really specific to industry profits. And specifically, one of our major competitors had lower profits than anticipated. And then, on the -- on the cost side, you know, not to get too deep into the accounting, but we do account for inventory on the LIFO methodology. So, when you revalue the inventory, it does impact the P&L and it impacts the P&L in the first quarter at a higher level than it will in the remainder of the year. To your broader question, we feel very confident in our ability to continue to grow margins within the smokeable product segment, and we're really happy with the performance of that segment, the performance of Marlboro, where you saw stable share performance and growth in the premium segment of the cigarette category. Bonnie Herzog -- Goldman Sachs -- Analyst OK, and I guess -- that's helpful. But I guess if I'm hearing you correctly, it's really maybe more of a timing in like the one-offs that you mentioned. So, as we think about just, honestly, the controllable cost, if those moderate moving forward and especially in the back half, that's going to help to drive the dollar profit growth, is that part of the confidence you have especially now? Sal Mancuso -- Chief Financial Officer Yeah, the -- the year-over-year increase is higher in the first quarter. And then, finally, let me also point out, the smokeable product segment did benefit from lower SG&A costs that -- and it will continue to benefit from that throughout the year. So, again, we feel very good about the smokeable product segment going forward. Bonnie Herzog -- Goldman Sachs -- Analyst Now, that helps. And then, maybe my next question or final question is on pricing. You know, you guys have taken two increases so -- so far this year, and I'm talking about cig pricing. So, you know, that seems to follow your typical quarterly cadence, which, you know, sounds reasonable given the unrelenting pressure on cig volumes. But, you know, your peers don't seem to be following in terms of frequency or strength. And, you know, I guess I'm asking because how concerned are you about the price gaps, and you know, how much they've widened. And I'm asking, you know, especially in light of the downtrading pressures that we're seeing, which you know, seems to be continuing to accelerate, and, as you guys called out, the continued proliferation of illicit e-cigs. You know, how should we think about that in your ability to kind of manage these price gaps, etc., and downtrading? Thank you. Billy Gifford -- Chief Executive Officer Yeah, I appreciate the question, Bonnie. I'll be careful not to talk about future pricing decisions. But I think when you -- you step back and you look at how it's performed over time, I think what you see is the benefit of the investments we made in data analytics, really from a standpoint of being able to bring revenue growth management where we started in traditional moist smokeless tobacco and brought it over to cigarettes. You see that Marlboro has steady overall share and growing share of premium. Yeah, you see a little bit of downtrading, but I think if you look back through history, you see that occur when the consumer is under economic pressure. We feel good about the tools we have within Marlboro, and I think it shows in the strength of the performance of that brand. From a standpoint of the pressures on volume, we try to provide for you the decomposition, and you see both secular decline and price elasticity holding steady. It's really the macroeconomic and, to your point, the proliferation of the illicit e-vapor. And so, we really need to see, from an overall standpoint, a regulatory environment that is effective and is both looking at authorizing smoke-free products to consumers demanding and enforcement against the illicit e-vapor products. Bonnie Herzog -- Goldman Sachs -- Analyst OK, thank you. Billy Gifford -- Chief Executive Officer Thank you. Operator Our next question comes from Faham Baig with UBS. Please go ahead. Faham Baig -- UBS -- Analyst Hi, guys, a couple of questions from me, both on the smokables division. I just want to understand if -- if the industry volume decline remains at minus 9% for -- for the rest of the year, whether that still allows you to hit the bottom end of your EPS outlook, in other words, you still have some room to reduce SG&A costs further and -- and raise pricing higher. And -- and -- and the second question is whether you can share your estimate of the growth of the vapor category in Q1 and -- and what impact this -- this might have had on cigarette volumes in Q1, please. Billy Gifford -- Chief Executive Officer Yeah, I appreciate your question. I think from a standpoint of guidance, look, we run a range of scenarios of what could be the outcomes as we progress through the year. We reaffirmed that guidance and feel very good about the guidance that we have out in the marketplace. I think when you think about the estimate of e-vapor, we believe that the overall e-vapor category continues to grow with a vast majority of that coming from illicit disposable e-vapor products. While there, we started filling some of our information gaps, the nature of it being illicit is it goes around the normal distribution chain. I think the best thing I can point you to, and we included this in our quarterly metrics, you saw the growth in the consumers engaged on a 12-month moving. Just shy of 18 million consumers now engaged with a step-up of both those that are fully converted and those that are still using cigarettes and e-vapor. And then, going to the decomposition range estimate for the impact of e-vapor on the cigarette category is 1.5 to 2.5. And again, we're looking to fill those information gaps, but the nature of it being illicit, we feel good about that range. I know it's a bit of a wide range, but as we continue to fill those information gaps and try to get a read on the illicit marketplace, we'll provide those updates as appropriate. Faham Baig -- UBS -- Analyst OK, thanks for that. Billy Gifford -- Chief Executive Officer Thank you. Operator Our next question comes from Matt Smith with Stifel. Please go ahead. Matt Smith -- Stifel Financial Corp. -- Analyst Hi, good morning. Billy Gifford -- Chief Executive Officer Good morning, Matt. Matt Smith -- Stifel Financial Corp. -- Analyst There was a reacceleration in price realization in the combustible business in the quarter with pricing per pack up 8.5%. That's above the 5.5% in the fourth quarter. Can you talk about the factors behind the stronger price realization? And are you now lapping some stepped-up investments in the -- in the Marlboro brand in response to the pressure on the -- in response to the economic pressure on the consumer? Billy Gifford -- Chief Executive Officer Yeah, I think, from a standpoint, I would encourage you to look at price realization over the longer term. I think it's exactly what you referred to. We highlighted, as we progressed through 2023, there are some investments we wanted to make both on the menthol segment of Marlboro as well as some of the discount pressure we're seeing in pockets. I think it's important to remember that price gap that we show on a national basis, we're managing that price gap down at the store level. So, you can go from one side of a city to the other and see different price gaps in stores. And so, being able to mine that data, I think you see it with the -- the strength of Marlboro and, to your point, the -- the strong price realization we experienced in the quarter. Matt Smith -- Stifel Financial Corp. -- Analyst Thank you. And -- and my second question, R&D spending is shifting to the all other segment. The impact from that shift did not seem meaningful in the first quarter given the unique higher costs in smokeable. Can you talk about the phasing of that R&D shift through 2024? Should we think of the smokeable profitability growth weighted to the second half in addition to the overall company EPS growth weighted to -- to the second half? Sal Mancuso -- Chief Financial Officer Matt, we don't -- as you know, we don't guide at the segment level. But you are correct in that you are seeing a shift in R&D spending toward the innovative products, and that's part of the SG&A benefit I talked about within the smokeable segment earlier with Bonnie. The smokeable segment will continue to benefit from those lower SG&A costs as the year progresses. Matt Smith -- Stifel Financial Corp. -- Analyst Thank you, Sal. I'll pass it on. Operator And our next question will come from Gaurav Jain with Barclays. Please go ahead. Gaurav Jain -- Barclays -- Analyst Hi, good morning. Billy Gifford -- Chief Executive Officer Good morning. Gaurav Jain -- Barclays -- Analyst Two questions -- two questions from me. So, one is on -- on retail pricing. I think you are saying, in Q1, it is 347; and in Q4, it was 377. So, have you stepped up promotions on on! to stem the share loss that you have seen in oral nicotine pouches? Billy Gifford -- Chief Executive Officer I wouldn't say it's stepped up for -- for any purposes from a share standpoint. Really, what we -- you see happening, Gaurav, is you see that the data that we have, I mentioned the investments in advanced analytics, being able to bring that from both moist smokeless tobacco and the smokeable segment over to the nicotine pouch segment. And so, you're going to have pulse promotions through time. The real goal there is to keep the converted consumer engaged with the brand but still induce trial, both from competitive and those that are making different choices in the nicotine space. And so, you're going to see very -- variability on a short-term basis. But over the long term, I think it's important to step back and see the volume growth that we experienced with significant retail price year over year. Gaurav Jain -- Barclays -- Analyst Sure. And my second question is on ABI stake. So, you're highlighting that the remaining stake is a 1.2 billion tax basis. So, you know, you have sold one tranche, your dual losses expire in March 2028. So, would we be fair in expecting a progressive exit from the rest of the stake over the next four years? Sal Mancuso -- Chief Financial Officer I want to make sure I'm answering your question, Gaurav. If I don't, please follow up. You are right that we provided you with the new tax basis in taxes, just one of many variables that we consider related to the ABI investment and our capital allocation analysis. The transaction that we executed earlier this year, the shares we sold were a mix of both the restricted and unrestricted shares. And what we shared with you is that the tax liability was less than $100 million. Our expectation is that we can offset that in the future related to ABI losses -- I'm sorry, JUUL losses. The other thing I'll just remind you is that, if you think about the JUUL losses, we took about half -- let's call it just over half as ordinary losses for tax -- for cash tax purposes. But we fully reserve that on the P&L. We continue to wait to get feedback from the IRS. We hope to hear more as the year progresses. Gaurav Jain -- Barclays -- Analyst Sure. Thank you so much. Sal Mancuso -- Chief Financial Officer You're welcome. Operator Our next question comes from Callum Elliott with Bernstein. Please go ahead. Callum Elliott -- AllianceBernstein -- Analyst Hi, good morning, guys. A couple of slightly different questions from me. On NJOY, you called the 60 basis points of share gain which we can see in the scanner data and sounds impressive and a nice improvement. But the scanner data do also show us that the retail sales for the brand are down double digits for the past few months. And so, I guess my question is this deterioration, is that just ongoing pressure from -- from illicit products that it's impacting the legal products in the market to cause this sort of heavy decline despite the share gain, or is there something else going on in the category? Billy Gifford -- Chief Executive Officer Yeah, I think what you see is exactly what you pointed out, Callum, is that the overall disposable, specifically the illicit vapes in the marketplace, continue to grow while pod -- that segment that's pods, or replaceable capsules, continue to shrink in the marketplace. Callum Elliott -- AllianceBernstein -- Analyst OK. Thank you. And then, my second question is on oral tobacco. We touched on this a little bit earlier with I think Faham's question, but just building upon it. I think based on the numbers in your release, your share of total oral is now 33% and volume is declining slightly. I've got Zyn share based on some numbers from PMI at 28% on an apples-to-apples basis and growing 80% year on year. So, it seems pretty clear that you guys are on the cusp of losing your leadership position now in oral tobacco as a whole. And so, I guess my question is, does losing the leadership position change your mindset in how you're going to come about this category? You know, can you maybe be freed in a sense to come at this from a slightly more challenging mindset relative to the sort of -- maybe slightly defensive mindset that you've necessarily had over the past several years through this pressure from within? Thanks. Billy Gifford -- Chief Executive Officer Yeah, I think when you think about the overall oral tobacco category, really the strategy there is to maximize profitability while balancing investments behind Copenhagen, which is the aspirational brand, and MST, and making appropriate investments in on! You know, Copenhagen continues to be the -- the leader in the MST space. And we're pleased with the results we saw on on! the first quarter. Certainly, the -- the growth in volume, the growth in overall share of the oral tobacco space, and the significant increase in retail price. And then, behind that, being able to file the application with the FDA for the on! PLUS, which we feel like will perform very well in the marketplace once authorized. Callum Elliott -- AllianceBernstein -- Analyst OK. Thanks, Billy. Billy Gifford -- Chief Executive Officer Thank you. Operator [Operator instructions] Our next question comes from Jennifer Maloney with Wall Street Journal. Please go ahead. Jennifer Maloney -- Staff Reporter Good morning. Billy Gifford -- Chief Executive Officer Good morning, Jennifer. Jennifer Maloney -- Staff Reporter First, I wanted to ask about consumers under pressure. You said on this call that you were going to make appropriate investments and be there for them. Could you tell me what do you mean by that? What kind of investments are you referring to? Billy Gifford -- Chief Executive Officer Yeah, Jennifer, really it's around promotions in the marketplace. When you think about the data analytics that we received, and I highlighted earlier, that the price gap in a store can be different than a store across a city or town. And it's really mining that data and seeing the consumer under economic pressure and being able to dial those resources appropriately for the situation that they're facing. And so, it's really about retail promotions in the marketplace that we continue to adjust through time. It allows us to be there for the consumer. Another example would be Marlboro Black having a place for the consumer that wants to engage with Marlboro, having a place that they can continue to engage even when they're under economic pressure. Jennifer Maloney -- Staff Reporter And when you say promotional activity, would that apply to both the Marlboro brand and also some of your lower-priced brands? Billy Gifford -- Chief Executive Officer We look across the portfolio. We think that the portfolio is one big RGM pool. And just like I mentioned Marlboro Black and the Marlboro family, it allows us to take a small segment of Marlboro and be there for the consumer. It gives them a place to continue to engage with the brand, but we look across the entire portfolio. Jennifer Maloney -- Staff Reporter Looking out at the rest of 2024, do you expect pressures on lower-income consumers to continue or to moderate? Billy Gifford -- Chief Executive Officer Yeah, I think when you think about the consumer being at the lower end of the socioeconomic status, they've been impacted. While inflation has slowed down a bit, it's still increasing and it's the cumulative impact of that inflation on their total market purchase, as well as the increase in debt levels. And that, coupled with increased interest rates through time, has impacted discretionary spend for our consumers. Jennifer Maloney -- Staff Reporter Thanks. One more question on modern oral tobacco. So, looking at the share losses in Skoal and Copenhagen and -- and also the share performance in on!, it seems like Zyn is taking significant share from traditional oral tobacco, and on! isn't catching up to Zyn. So, what's your strategy for that overall oral tobacco category, and then, specifically for the modern oral subcategory? Billy Gifford -- Chief Executive Officer Yeah, you may have heard me mention earlier, the overall strategy in oral tobacco is to maximize profitability over the long term while making appropriate investments in Copenhagen and the investments in the -- in our on! product in the marketplace. I think when you think about it, it's intuitive that the moist smokeless consumer is the first to move over. They're used to putting nicotine products in their mouth. And the -- moving from MST to nicotine pouch allows them to avoid some of the social friction, spitting, things of that nature, in relation to enjoying nicotine in their product. When you think about the Zyn versus on!, we feel very good. I think you saw that, and we highlighted in our remarks, we feel like we're going to have better positioning at retail. We feel good about the existing product, and we feel great about the pipeline to follow, which we'll be following with the FDA PMTAs on on! PLUS as we progress through the end of this quarter. Jennifer Maloney -- Staff Reporter So, would it be fair to say that your goal would be to capture those folks who are moving from Skoal and Copenhagen to modern oral to capture as many of those folks as possible with on! rather than losing them to Zyn? Billy Gifford -- Chief Executive Officer That would be correct. Jennifer Maloney -- Staff Reporter OK. Thanks very much. Billy Gifford -- Chief Executive Officer Thank you. Operator There appears to be no further questions at this time. I would like to turn the call back to Mac Livingston for any closing remarks. Mac Livingston -- Vice President, Investor Relations Thanks for joining the call today. I hope you all have a great day. Thanks so much. Answer:

the Altria Group 2024 first-quarter earnings conference call

Operator Good day, and welcome to the Altria Group 2024 first-quarter earnings conference call. Today's call is scheduled to last about one hour, including remarks by Altria's management and a question-and-answer session. [Operator instructions] I would now like to turn the call over to Mac Livingston, vice president of investor relations for Altria Client Services. Please go ahead, sir. Mac Livingston -- Vice President, Investor Relations Thanks, Savannah. Good morning and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's first-quarter business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics, and our latest corporate responsibility reports are all available at altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2023. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of our board. We report our financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in today's earnings release and on our website at altria.com. Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, I'll turn the call over to Billy. Billy Gifford -- Chief Executive Officer Thanks, Matt. Good morning and thank you for joining us. We made meaningful progress in pursuit of our vision, and our highly profitable traditional tobacco businesses continued to perform well in a challenging environment. In spite of the absence of an effective regulatory environment, we saw continued early momentum from NJOY and believe our businesses are on track to deliver against full-year plans. We also demonstrated our continued commitment to maximizing the return on our investments and delivering strong shareholder returns with the sale of a portion of our investment in ABI and the subsequent expansion of our share repurchase program in March. My remarks this morning will focus on the continued early momentum behind NJOY's commercialization, the state of the e-vapor category and enforcement progress, encouraging first-quarter results from on!, and our financial outlook. I'll then turn it over to Sal, who will provide further detail on our financial results and additional information on the partial sale of our ABI investment. Let's begin with our e-vapor business. After three full quarters of ownership, we remain excited about NJOY and its potential in the legal U.S. e-vapor market. In the first quarter, we broadened NJOY's distribution to over 80,000 stores, and we expect to expand to approximately 100,000 stores by year-end. We also continued the rollout of NJOY's first retail trade program, which we believe will help NJOY achieve optimal visibility and product fixture space at retail. Today, more than 70% of contractor stores have chosen options that secure premium positioning in the e-vapor fixture for NJOY. And we expect the majority of fixture resets to be completed in the first half of this year. To generate trial of NJOY, we expanded promotional offers at retail in the first quarter and saw promising results. NJOY's retail share of consumables grew in each of the past six months and was 4.3 share points in the quarter, up 0.6 share points sequentially. And we have seen early signs of longer-term adoptions from smokers and vapers that have tried to NJOY. Late last year, we tested a variety of promotional offers in a limited number of retail accounts. Diving into one retail account example, share grew by over 9 percentage points versus the pre-promotional period. In the first quarter, we reduced promotions in the account and NJOY retained over 50% of the share gain during the trial period, settling 5 percentage points higher than the pre-promotion period. We believe these results speak to NJOY's appeal once consumers try the product. We are also inspecting a variety of other metrics to better evaluate trial and adoption of NJOY in the early stages of its expansion. One such metric that we believe is an important indicator of trial in the e-vapor category is retail share of devices as we believe it's a measure of vapor and smoker trial and a potential leading indicator of longer-term adoption. In the first quarter, NJOY's share of devices in the multi-outlet and convenience channel was 11.5 share points, an increase of 2.4 share points sequentially and 6.4 share points since the third quarter of 2023, our first full quarter of ownership. Turning to shipments. NJOY consumables shipment volume was approximately 10.9 million units, and NJOY's device shipment volume was approximately 1 million units. While shipping volume was essentially flat sequentially, recall that 2023 fourth quarter NJOY shipment volume included building pipeline inventory at wholesale and retail to support the increased demand we anticipated in the first quarter. Moving forward, our plan aims to broaden the awareness of NJOY and grow brand affinity through NJOY's improved positioning at retail; a new equity campaign that emphasizes NJOY's unique attributes and exceptional vaping experience; a new adult-only event marketing infrastructure, which NJOY expects to activate this summer; and our adult tobacco consumer database, which allows us to communicate to millions of age-verified U.S. adult tobacco consumers through various marketing channels. We also continue to expect that NJOY will submit PMTA filings for flavored NJOY ACE products with age-gated Bluetooth technology by the end of the second quarter. NJOY's early success is encouraging in the context of broader trends in the e-vapor marketplace, where a lack of FDA-authorized products and the continued proliferation of illicit disposal products threaten to harm reduction opportunity in the United States. As it relates to enforcement, we believe that a comprehensive approach is needed to address this issue, and we continue to actively engage with regulators, state and federal lawmakers, our trade partners, and other stakeholders to build awareness and drive marketplace enforcement. There's still significant work ahead that we saw some encouraging actions in the first quarter. In the first quarter alone, the FDA, in collaboration with the U.S. Customs and Border Protection, issued over 450 e-vapor-related import refusals, up from 348 during all of last year. The agency also continued to levy civil monetary penalties and send warning letters to manufacturers, retailers, and wholesalers of illicit products. While these actions represent signs of progress, we believe they are wholly inadequate. Illicit markets are a threat to public health, and we believe the FDA's enforcement approach is not of the scale or scope needed to bring about fundamental change in the marketplace. As a result, we identified to the agency-specific steps we believe they can take to build a more effective compliance and enforcement program to address the illicit market, including imposing direct liability on the large manufacturers, importers, and distributors of illicit products; focusing on import prevention; and clearing up widespread confusion in the marketplace about the FDA's enforcement priorities. Earlier this month, we sent a letter to the FDA highlighting these recommendations and reinforcing our commitment to work collaboratively on solutions that can restore order in the e-vapor marketplace. We also continue to work with state legislatures that have passed or are considering legislation requiring manufacturers to certify that they are compliant with FDA requirements. As of April 19th, eight states have passed such legislation and 12 states are considering it, and we've seen increased legal action against entities that are enabling the illicit market. As we've previously disclosed, we initiated litigation in the United States District Court in California relating to the sale of unlawful products. Due to some procedural challenges, we voluntarily dismissed this litigation earlier this year. We subsequently filed a new lawsuit against five manufacturers, four brick-and-mortar retailers, and three online retailers of illicit Elf Bar e-vapor products in February in federal court in California. And earlier this month, the City of New York filed a lawsuit against 11 wholesalers for their part in the sale of illegal disposable e-vapor products. We continue to believe in the promise of a responsible e-vapor category, but a strong course correction is needed to protect the tobacco harm reduction opportunity for the millions of adult smokers in the U.S. We've learned from past experience that complex issues like this require the work of many stakeholders. And while we are starting to see some early signs of action, more impactful progress needs to -- to be made. Let's now turn to the oral tobacco category. Oral nicotine pouches grew 13.8 share points year over year and now represent over 40% of the oral tobacco category. Oral nicotine pouches were the primary contributor of the estimated 9.5% increase in oral tobacco industry volume over the past six months. Helix grew on! reported shipment volume to approximately 33 million cans during the first quarter, an increase of 32%. on! continued its momentum at retail, growing its share of the oral tobacco category by 0.7 share points to 7.1%. Helix delivered these impressive results as on!'s retail price increased by 26%. This spring, Helix introduced a new trade program that secures premium positioning for on! in over 80% of contracted stores, creating broader visibility of the brand. Helix is continuing its focus on strategically investing behind the brand as the category growth accelerates. Helix is also making final preparations for filing its PMTA for on! PLUS, which we expect to submit in the first half of this year. Upon FDA authorization, we believe it will contribute meaningfully to Helix's growth. We continue to aggressively pursue efforts to create the conditions for tobacco harm reduction's success in the U.S. to benefit tobacco consumers, society, and our shareholders. I am confident in Altria's ability to lead the way in harm reduction with our exciting portfolio of smoke-free products and our talented and dedicated employees. With our smoke-free progress and the strength of our traditional tobacco businesses in mind, we reaffirm our guidance to deliver 2024 full-year adjusted diluted EPS in the range of $5.05 to $5.17, representing a growth rate of 2% to 4.5% from a base of $4.95 in 2023. I'll now turn it over to Sal to provide more details on the business environment and our results. Sal Mancuso -- Chief Financial Officer Thanks, Billy. First-quarter adjusted diluted earnings per share declined by 2.5%. As we previously noted, we expect that 2024 adjusted diluted EPs growth will be weighted to the second half of the year, resulting from two main factors. The first relates to the timing of the NJOY acquisition in 2023. Since we closed the transaction on June 1st of last year, we are lapping quarters in the first half of the year that do not include the impact of amortization or investments behind the brand. The second factor is the impact of two additional shipping days in the smokeable segment, each of which occur in the second half of the year. Turning now to our first-quarter business results. The smokeable products segment delivered over $2.4 billion in adjusted operating companies income with robust net price realization of 8.5%, and Marlboro maintained its long-standing leadership in the cigarette category. Adjusted OCI margins were 60.2% for the quarter, down slightly from a year ago. Year-over-year margin comparisons were impacted by higher per unit settlement charges and some elevated manufacturing costs. Year-over-year MSA and manufacturing cost per pack increases were higher in the first quarter than we expect for the remainder of the year. These higher costs were partially offset by lower SG&A costs in the quarter. We also expect the segment to benefit from lower SG&A costs as the year progresses. Total smokeable product segment reported and adjusted cigarette volumes declined by 10% in the first quarter. When adjusted for trade inventory movement and other factors, we estimate that industry volumes declined by 9% over the same period. We believe that industry volume trends have been negatively impacted by the proliferation of illicit disposable e-vapor products and continued pressures on tobacco consumer discretionary income. At retail, the discount segment grew 0.8 share points in the first quarter. We believe these results were driven in part by macroeconomic pressures on the adult smokers. We continue to see increased competitive activity in the discount segment, including multiple branded discount offerings priced at deep discount levels. Meanwhile, Marlboro continues to show its resilience, retaining its retail share of 42% in a challenging environment. Marlboro also grew its share of the highly profitable premium segment to 59.3%, an increase of 0.7 share points. We believe Marlboro's strong consumer loyalty and position as the aspirational brand in the category is driving its continued outperformance in the premium segment. In cigars, reported cigar shipment volume decreased by 6.1% in the first quarter. Middleton continued to contribute to smokeable products segment financial results and Black & Mild remains the leader in the highly profitable machine-made large cigar segment. Moving to the oral tobacco products segment. Adjusted OCI grew 4.6% in the first quarter, and adjusted OCI margins expanded by 0.2 percentage points to 69.5%. Total segment reported shipment volume decreased 3.1% as growth in on! was more than offset by lower MST volumes. When adjusted for calendar differences and trade inventory movements, we estimate that first-quarter oral tobacco product segment volumes declined by approximately 4%. Oral tobacco products segment retail share declined 7.1 percentage points as declines in our MST brands were partially offset by the growth of on!. We remain encouraged by the performance of our oral tobacco products as on! continued to grow share, and Copenhagen remain the leading moist smokeless tobacco brand. Moving to capital allocation. In March, we sold a portion of our investment in ABI and expanded our share repurchase program to $3.4 billion. In expanding our repurchase program, we implemented a $2.4 billion accelerated share repurchase program, under which we received 46.5 million shares in March, representing 85% of the ASR program. These repurchases are reflected in our weighted average shares outstanding for the quarter. We expect to receive shares representing the remaining 15% of the ASR program by the end of the second quarter. After the completion of the ASR program, we anticipate having $1 billion remaining under the currently authorized share repurchase program, which we expect to complete by year-end. Turning to ABI's financial results. We recorded $165 million of adjusted equity earnings for the quarter, down 8.3%. As a reminder, we use the equity method of accounting for our investment in ABI and report our share of ABI's results using a one-quarter lag. Accordingly, our first-quarter adjusted equity earnings represent our share of ABI's fourth-quarter earnings. Following the ABI transaction, our ownership of ABI is approximately 8.1% with a tax basis of approximately $1.2 billion. We continue to view the ABI stake as a financial investment, and our goal remains to maximize long-term value of the -- of the investment for our shareholders. Turning to other capital allocation activity. We paid approximately $1.7 billion in dividends and retired $1.1 billion of notes that came due in the first quarter, and as of March 31st, our debt-to-EBITDA ratio was 2.1 times. With that, we'll wrap up, and Billy and I will be happy to take your questions. While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com. We've also posted our usual quarterly metrics which include pricing, inventory, and other items. Let's open the question-and-answer period. Operator, do we have any questions? Questions & Answers: Operator Thank you [Operator instructions] Our first question will come from Pamela Kaufman with Morgan Stanley. Please go ahead. Pam Kaufman -- Morgan Stanley -- Analyst Hi, good morning. Billy Gifford -- Chief Executive Officer Good morning, Pamela. Pam Kaufman -- Morgan Stanley -- Analyst I wanted to ask about the modest raise to your full-year guidance following the ABI share sale. Despite your plans to repurchase an incremental 3% of your stock, what considerations went into that? And, you know, is it a reflection of weaker-than-expected underlying performance relative to your outlook at the beginning of the year? Sal Mancuso -- Chief Financial Officer Good morning, Pamela. Thanks for the question. You know, we were really happy to be able to revise our guidance and take up the bottom end of the guidance by a full percentage point. We took the top half -- the top end of the guidance up about a half a percentage point. I would read into that the confidence in our core businesses but also it provides us with flexibility as we go throughout the year to manage, not only our overall business, but to make investments behind our innovative tobacco products. So, we feel really good about being able to provide the guidance. It reflects the accretion of the ABI transaction. Pam Kaufman -- Morgan Stanley -- Analyst OK, thanks. And the second -- my second question is a bit more philosophical. You know, historically, your strategy has been to maximize operating profit by taking price in excess of cigarette volume declines. And given this is becoming increasingly difficult because of the magnitude of volume declines and the need to reinvest behind alternatives, do you think that this strategy is sustainable in the changing operating backdrop? And have you considered other approaches to maximizing profitability? Billy Gifford -- Chief Executive Officer Yeah, we always look at our strategies, Pamela, but we feel like that is the right strategy. I would phrase it a little bit differently than you did. It's to maximize profitability over the long term while making appropriate investments in Marlboro and the growth segment. So, when you think about that -- I think when you think about the pricing, and we've talked about the factors that go into pricing decisions, certainly we've highlighted for you that our consumer is under economic strain, both from the cumulative impact of inflation, as well as debt loads and high interest rates. And so, we're going to continue to maximize profitability over the long term. We feel good about the price realization we had in the quarter. It was 8.5%. I think it's important to step back and think about the -- what the consumer felt at retail. And so, when you think about that, that was just shy of 6%. So, there's still competition out there. But our consumer is under pressure, and we're going to make appropriate investments and be -- be there for them. I think if you look back through history, that's proven to be a strong strategy. Pam Kaufman -- Morgan Stanley -- Analyst OK, thank you. I'll pass it on. Billy Gifford -- Chief Executive Officer Thank you. Operator Our next question will come from Bonnie Herzog with Goldman Sachs. Please go ahead. Bonnie Herzog -- Goldman Sachs -- Analyst All right, thank you. Good morning, everyone. Maybe a bit of a follow-up question to Pamela. Just, you know, one thing I certainly saw in the quarter was your controllable costs in smokeable, you know, per pack were up quite a bit, I think up mid-teens. So, hoping you could touch on the drivers of that and how we should think about that moving forward. And then, honestly, just ultimately your expectations for improved dollar profit growth in smokeable in the back half. I guess I'm trying to understand, you know, can you -- can you guys hit the mid to high end of your EPS guidance this year, you know, if dollar profits don't recover? Again, kind of a little bit of what Pamela was asking, but just trying to understand how much flexibility you have. Sal Mancuso -- Chief Financial Officer Good morning, Bonnie. I'm going to unpack that question a little bit. Hopefully, I touch on -- on all aspects of it. If I don't, please follow up. As we talked about in our opening remarks, I think, first quarter, there's a couple of items that I would point out. It's really about comparisons to prior year that impact the first quarter at a higher level than we think will impact the rest of the year. A couple of adjustments, if you will, accounting adjustments, as you think about. One is within the MSA cost per pack. We've seen adjustments in the past. There's a lot of variables. It's a complex calculation when you -- when you develop the accrual for MSA. And in the past, you've seen adjustments related to things like inflation. This quarter, we did make an adjustment, it was really specific to industry profits. And specifically, one of our major competitors had lower profits than anticipated. And then, on the -- on the cost side, you know, not to get too deep into the accounting, but we do account for inventory on the LIFO methodology. So, when you revalue the inventory, it does impact the P&L and it impacts the P&L in the first quarter at a higher level than it will in the remainder of the year. To your broader question, we feel very confident in our ability to continue to grow margins within the smokeable product segment, and we're really happy with the performance of that segment, the performance of Marlboro, where you saw stable share performance and growth in the premium segment of the cigarette category. Bonnie Herzog -- Goldman Sachs -- Analyst OK, and I guess -- that's helpful. But I guess if I'm hearing you correctly, it's really maybe more of a timing in like the one-offs that you mentioned. So, as we think about just, honestly, the controllable cost, if those moderate moving forward and especially in the back half, that's going to help to drive the dollar profit growth, is that part of the confidence you have especially now? Sal Mancuso -- Chief Financial Officer Yeah, the -- the year-over-year increase is higher in the first quarter. And then, finally, let me also point out, the smokeable product segment did benefit from lower SG&A costs that -- and it will continue to benefit from that throughout the year. So, again, we feel very good about the smokeable product segment going forward. Bonnie Herzog -- Goldman Sachs -- Analyst Now, that helps. And then, maybe my next question or final question is on pricing. You know, you guys have taken two increases so -- so far this year, and I'm talking about cig pricing. So, you know, that seems to follow your typical quarterly cadence, which, you know, sounds reasonable given the unrelenting pressure on cig volumes. But, you know, your peers don't seem to be following in terms of frequency or strength. And, you know, I guess I'm asking because how concerned are you about the price gaps, and you know, how much they've widened. And I'm asking, you know, especially in light of the downtrading pressures that we're seeing, which you know, seems to be continuing to accelerate, and, as you guys called out, the continued proliferation of illicit e-cigs. You know, how should we think about that in your ability to kind of manage these price gaps, etc., and downtrading? Thank you. Billy Gifford -- Chief Executive Officer Yeah, I appreciate the question, Bonnie. I'll be careful not to talk about future pricing decisions. But I think when you -- you step back and you look at how it's performed over time, I think what you see is the benefit of the investments we made in data analytics, really from a standpoint of being able to bring revenue growth management where we started in traditional moist smokeless tobacco and brought it over to cigarettes. You see that Marlboro has steady overall share and growing share of premium. Yeah, you see a little bit of downtrading, but I think if you look back through history, you see that occur when the consumer is under economic pressure. We feel good about the tools we have within Marlboro, and I think it shows in the strength of the performance of that brand. From a standpoint of the pressures on volume, we try to provide for you the decomposition, and you see both secular decline and price elasticity holding steady. It's really the macroeconomic and, to your point, the proliferation of the illicit e-vapor. And so, we really need to see, from an overall standpoint, a regulatory environment that is effective and is both looking at authorizing smoke-free products to consumers demanding and enforcement against the illicit e-vapor products. Bonnie Herzog -- Goldman Sachs -- Analyst OK, thank you. Billy Gifford -- Chief Executive Officer Thank you. Operator Our next question comes from Faham Baig with UBS. Please go ahead. Faham Baig -- UBS -- Analyst Hi, guys, a couple of questions from me, both on the smokables division. I just want to understand if -- if the industry volume decline remains at minus 9% for -- for the rest of the year, whether that still allows you to hit the bottom end of your EPS outlook, in other words, you still have some room to reduce SG&A costs further and -- and raise pricing higher. And -- and -- and the second question is whether you can share your estimate of the growth of the vapor category in Q1 and -- and what impact this -- this might have had on cigarette volumes in Q1, please. Billy Gifford -- Chief Executive Officer Yeah, I appreciate your question. I think from a standpoint of guidance, look, we run a range of scenarios of what could be the outcomes as we progress through the year. We reaffirmed that guidance and feel very good about the guidance that we have out in the marketplace. I think when you think about the estimate of e-vapor, we believe that the overall e-vapor category continues to grow with a vast majority of that coming from illicit disposable e-vapor products. While there, we started filling some of our information gaps, the nature of it being illicit is it goes around the normal distribution chain. I think the best thing I can point you to, and we included this in our quarterly metrics, you saw the growth in the consumers engaged on a 12-month moving. Just shy of 18 million consumers now engaged with a step-up of both those that are fully converted and those that are still using cigarettes and e-vapor. And then, going to the decomposition range estimate for the impact of e-vapor on the cigarette category is 1.5 to 2.5. And again, we're looking to fill those information gaps, but the nature of it being illicit, we feel good about that range. I know it's a bit of a wide range, but as we continue to fill those information gaps and try to get a read on the illicit marketplace, we'll provide those updates as appropriate. Faham Baig -- UBS -- Analyst OK, thanks for that. Billy Gifford -- Chief Executive Officer Thank you. Operator Our next question comes from Matt Smith with Stifel. Please go ahead. Matt Smith -- Stifel Financial Corp. -- Analyst Hi, good morning. Billy Gifford -- Chief Executive Officer Good morning, Matt. Matt Smith -- Stifel Financial Corp. -- Analyst There was a reacceleration in price realization in the combustible business in the quarter with pricing per pack up 8.5%. That's above the 5.5% in the fourth quarter. Can you talk about the factors behind the stronger price realization? And are you now lapping some stepped-up investments in the -- in the Marlboro brand in response to the pressure on the -- in response to the economic pressure on the consumer? Billy Gifford -- Chief Executive Officer Yeah, I think, from a standpoint, I would encourage you to look at price realization over the longer term. I think it's exactly what you referred to. We highlighted, as we progressed through 2023, there are some investments we wanted to make both on the menthol segment of Marlboro as well as some of the discount pressure we're seeing in pockets. I think it's important to remember that price gap that we show on a national basis, we're managing that price gap down at the store level. So, you can go from one side of a city to the other and see different price gaps in stores. And so, being able to mine that data, I think you see it with the -- the strength of Marlboro and, to your point, the -- the strong price realization we experienced in the quarter. Matt Smith -- Stifel Financial Corp. -- Analyst Thank you. And -- and my second question, R&D spending is shifting to the all other segment. The impact from that shift did not seem meaningful in the first quarter given the unique higher costs in smokeable. Can you talk about the phasing of that R&D shift through 2024? Should we think of the smokeable profitability growth weighted to the second half in addition to the overall company EPS growth weighted to -- to the second half? Sal Mancuso -- Chief Financial Officer Matt, we don't -- as you know, we don't guide at the segment level. But you are correct in that you are seeing a shift in R&D spending toward the innovative products, and that's part of the SG&A benefit I talked about within the smokeable segment earlier with Bonnie. The smokeable segment will continue to benefit from those lower SG&A costs as the year progresses. Matt Smith -- Stifel Financial Corp. -- Analyst Thank you, Sal. I'll pass it on. Operator And our next question will come from Gaurav Jain with Barclays. Please go ahead. Gaurav Jain -- Barclays -- Analyst Hi, good morning. Billy Gifford -- Chief Executive Officer Good morning. Gaurav Jain -- Barclays -- Analyst Two questions -- two questions from me. So, one is on -- on retail pricing. I think you are saying, in Q1, it is 347; and in Q4, it was 377. So, have you stepped up promotions on on! to stem the share loss that you have seen in oral nicotine pouches? Billy Gifford -- Chief Executive Officer I wouldn't say it's stepped up for -- for any purposes from a share standpoint. Really, what we -- you see happening, Gaurav, is you see that the data that we have, I mentioned the investments in advanced analytics, being able to bring that from both moist smokeless tobacco and the smokeable segment over to the nicotine pouch segment. And so, you're going to have pulse promotions through time. The real goal there is to keep the converted consumer engaged with the brand but still induce trial, both from competitive and those that are making different choices in the nicotine space. And so, you're going to see very -- variability on a short-term basis. But over the long term, I think it's important to step back and see the volume growth that we experienced with significant retail price year over year. Gaurav Jain -- Barclays -- Analyst Sure. And my second question is on ABI stake. So, you're highlighting that the remaining stake is a 1.2 billion tax basis. So, you know, you have sold one tranche, your dual losses expire in March 2028. So, would we be fair in expecting a progressive exit from the rest of the stake over the next four years? Sal Mancuso -- Chief Financial Officer I want to make sure I'm answering your question, Gaurav. If I don't, please follow up. You are right that we provided you with the new tax basis in taxes, just one of many variables that we consider related to the ABI investment and our capital allocation analysis. The transaction that we executed earlier this year, the shares we sold were a mix of both the restricted and unrestricted shares. And what we shared with you is that the tax liability was less than $100 million. Our expectation is that we can offset that in the future related to ABI losses -- I'm sorry, JUUL losses. The other thing I'll just remind you is that, if you think about the JUUL losses, we took about half -- let's call it just over half as ordinary losses for tax -- for cash tax purposes. But we fully reserve that on the P&L. We continue to wait to get feedback from the IRS. We hope to hear more as the year progresses. Gaurav Jain -- Barclays -- Analyst Sure. Thank you so much. Sal Mancuso -- Chief Financial Officer You're welcome. Operator Our next question comes from Callum Elliott with Bernstein. Please go ahead. Callum Elliott -- AllianceBernstein -- Analyst Hi, good morning, guys. A couple of slightly different questions from me. On NJOY, you called the 60 basis points of share gain which we can see in the scanner data and sounds impressive and a nice improvement. But the scanner data do also show us that the retail sales for the brand are down double digits for the past few months. And so, I guess my question is this deterioration, is that just ongoing pressure from -- from illicit products that it's impacting the legal products in the market to cause this sort of heavy decline despite the share gain, or is there something else going on in the category? Billy Gifford -- Chief Executive Officer Yeah, I think what you see is exactly what you pointed out, Callum, is that the overall disposable, specifically the illicit vapes in the marketplace, continue to grow while pod -- that segment that's pods, or replaceable capsules, continue to shrink in the marketplace. Callum Elliott -- AllianceBernstein -- Analyst OK. Thank you. And then, my second question is on oral tobacco. We touched on this a little bit earlier with I think Faham's question, but just building upon it. I think based on the numbers in your release, your share of total oral is now 33% and volume is declining slightly. I've got Zyn share based on some numbers from PMI at 28% on an apples-to-apples basis and growing 80% year on year. So, it seems pretty clear that you guys are on the cusp of losing your leadership position now in oral tobacco as a whole. And so, I guess my question is, does losing the leadership position change your mindset in how you're going to come about this category? You know, can you maybe be freed in a sense to come at this from a slightly more challenging mindset relative to the sort of -- maybe slightly defensive mindset that you've necessarily had over the past several years through this pressure from within? Thanks. Billy Gifford -- Chief Executive Officer Yeah, I think when you think about the overall oral tobacco category, really the strategy there is to maximize profitability while balancing investments behind Copenhagen, which is the aspirational brand, and MST, and making appropriate investments in on! You know, Copenhagen continues to be the -- the leader in the MST space. And we're pleased with the results we saw on on! the first quarter. Certainly, the -- the growth in volume, the growth in overall share of the oral tobacco space, and the significant increase in retail price. And then, behind that, being able to file the application with the FDA for the on! PLUS, which we feel like will perform very well in the marketplace once authorized. Callum Elliott -- AllianceBernstein -- Analyst OK. Thanks, Billy. Billy Gifford -- Chief Executive Officer Thank you. Operator [Operator instructions] Our next question comes from Jennifer Maloney with Wall Street Journal. Please go ahead. Jennifer Maloney -- Staff Reporter Good morning. Billy Gifford -- Chief Executive Officer Good morning, Jennifer. Jennifer Maloney -- Staff Reporter First, I wanted to ask about consumers under pressure. You said on this call that you were going to make appropriate investments and be there for them. Could you tell me what do you mean by that? What kind of investments are you referring to? Billy Gifford -- Chief Executive Officer Yeah, Jennifer, really it's around promotions in the marketplace. When you think about the data analytics that we received, and I highlighted earlier, that the price gap in a store can be different than a store across a city or town. And it's really mining that data and seeing the consumer under economic pressure and being able to dial those resources appropriately for the situation that they're facing. And so, it's really about retail promotions in the marketplace that we continue to adjust through time. It allows us to be there for the consumer. Another example would be Marlboro Black having a place for the consumer that wants to engage with Marlboro, having a place that they can continue to engage even when they're under economic pressure. Jennifer Maloney -- Staff Reporter And when you say promotional activity, would that apply to both the Marlboro brand and also some of your lower-priced brands? Billy Gifford -- Chief Executive Officer We look across the portfolio. We think that the portfolio is one big RGM pool. And just like I mentioned Marlboro Black and the Marlboro family, it allows us to take a small segment of Marlboro and be there for the consumer. It gives them a place to continue to engage with the brand, but we look across the entire portfolio. Jennifer Maloney -- Staff Reporter Looking out at the rest of 2024, do you expect pressures on lower-income consumers to continue or to moderate? Billy Gifford -- Chief Executive Officer Yeah, I think when you think about the consumer being at the lower end of the socioeconomic status, they've been impacted. While inflation has slowed down a bit, it's still increasing and it's the cumulative impact of that inflation on their total market purchase, as well as the increase in debt levels. And that, coupled with increased interest rates through time, has impacted discretionary spend for our consumers. Jennifer Maloney -- Staff Reporter Thanks. One more question on modern oral tobacco. So, looking at the share losses in Skoal and Copenhagen and -- and also the share performance in on!, it seems like Zyn is taking significant share from traditional oral tobacco, and on! isn't catching up to Zyn. So, what's your strategy for that overall oral tobacco category, and then, specifically for the modern oral subcategory? Billy Gifford -- Chief Executive Officer Yeah, you may have heard me mention earlier, the overall strategy in oral tobacco is to maximize profitability over the long term while making appropriate investments in Copenhagen and the investments in the -- in our on! product in the marketplace. I think when you think about it, it's intuitive that the moist smokeless consumer is the first to move over. They're used to putting nicotine products in their mouth. And the -- moving from MST to nicotine pouch allows them to avoid some of the social friction, spitting, things of that nature, in relation to enjoying nicotine in their product. When you think about the Zyn versus on!, we feel very good. I think you saw that, and we highlighted in our remarks, we feel like we're going to have better positioning at retail. We feel good about the existing product, and we feel great about the pipeline to follow, which we'll be following with the FDA PMTAs on on! PLUS as we progress through the end of this quarter. Jennifer Maloney -- Staff Reporter So, would it be fair to say that your goal would be to capture those folks who are moving from Skoal and Copenhagen to modern oral to capture as many of those folks as possible with on! rather than losing them to Zyn? Billy Gifford -- Chief Executive Officer That would be correct. Jennifer Maloney -- Staff Reporter OK. Thanks very much. Billy Gifford -- Chief Executive Officer Thank you. Operator There appears to be no further questions at this time. I would like to turn the call back to Mac Livingston for any closing remarks. Mac Livingston -- Vice President, Investor Relations Thanks for joining the call today. I hope you all have a great day. Thanks so much.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Thank you for standing by. Welcome to the Merck & Co. Q1 sales and earnings conference call. [Operator instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Peter Dannenbaum, senior vice president, investor relations. Sir, you may begin. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Shirley, and good morning, everyone. Welcome to Merck's first quarter 2024 conference call. Speaking on today's call will be Rob Davis, chairman and chief executive officer; Caroline Litchfield, chief financial officer; and Dr. Dean Li, president of Merck Research Labs. Before we get started, I'd like to point out a few items. You will see that we have items in our GAAP results, addition related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A and the 2023 10-K, identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with our earnings release, today's prepared remarks and our SEC filings, are all posted to the investor relations section of Merck's website. With that, I'd like to turn the call over to Rob. Rob Davis -- Chairman and Chief Executive Officer Thanks, Peter. Good morning and thank you for joining today's call. We've begun 2024 with continuing momentum in our business. We're harnessing the power of innovation to advance our deep pipeline and are maximizing the impact of our broad commercial portfolio for the benefit of patients. We drove strong growth across key therapeutic areas, executed strategic business development and are now launching a significant new product in the cardiometabolic space while also preparing for the potential approval and launch of two additional important candidates in vaccines in oncology. We have significant opportunities ahead of us across all areas of our business, and we're highly focused on realizing them. I continue to be inspired by the dedication of our talented global team, which is working tirelessly to bring differentiated medicines and vaccines to patients through seamless, scientific, commercial and operational execution. In March, we received FDA approval for Wind River, a first-in-class treatment for adults with pulmonary arterial hypertension, a rare progressive and ultimately life-threatening disease. This marks the achievement of a significant milestone for our company. It exemplifies the value of our strategic priorities and demonstrates how our enduring commitment to our purpose is resulting in tangible benefits for patients. Just over two years since adding Wind River to our pipeline, our attention now turns to the execution of a strong commercial launch, where we have already seen prescriptions being written. We see a tremendous opportunity to positively impact the lives of people living with PAH. And further, the importance of this therapy to patients provides us with increased confidence in our ability to deliver sustainable long-term value for our shareholders. Strategic business development focused on the best external science remains an important priority for our company. We've demonstrated that we can leverage our deep discovery prowess to identify important acquisition targets and then add significant value through our powerful clinical research engine, our regulatory expertise and our commercial scale, which together can serve to accelerate development and enable broad global access to important medical discoveries for patients in need. Turning to our first quarter results. We achieved strong growth, reflecting robust demand for our innovative portfolio. We're pleased to reflect this momentum in our updated full year guidance, which Caroline will speak to in a moment. Turning to our broader research efforts. We're focused on advancing our expansive and diverse pipeline of leading-edge programs for the benefit of patients. In vaccines, we continue to pioneer new approaches to optimize disease prevention. In HPV, we're building on the foundation set by GARDASIL to further reduce the global burden of certain HPV-related cancers and disease by potentially providing broader protection with a new multivalent HPV vaccine and by generating data to clearly demonstrate whether or not a single dose of GARDASIL-9 provides comparable long-term protection to the approved 3-dose regimen in males and females age of 16 to 26. In pneumococcal, we presented additional compelling data for V116, a vaccine that is specifically designed to help protect against the majority of invasive pneumococcal disease in adults ages 65 and older and look forward to its potential approval in June. Each of these programs are platforms where we can provide meaningful protection to broad populations on a global scale. In HIV, in partnership with Gilead, we shared promising data from our revitalized program for a once-weekly combination of islatravir and lenacapavir in the treatment setting. We're actively progressing our comprehensive clinical program, which is focused on both treatment and prevention strategies to meet the evolving needs of the HIV community. And in oncology, we initiated several late-stage programs of novel candidates from our diverse pipeline as we work to expand our impact for patients and reinforce our leadership position over the long term. Finally, across our deep pipeline, we have significant clinical momentum in a range of therapeutic areas. Cutting-edge science is at the core of who we are, and I'm confident that Merck is well positioned to deliver the next wave of important innovations and value to patients, shareholders and to all of our stakeholders. In summary, our science-led strategy is delivering compelling proof points that we are creating a sustainable innovation engine that with continued clinical success will lead to a more diversified portfolio of growth drivers over the next decade and beyond. I again want to recognize the enormous efforts across our global organization. My confidence is strong and growing that we are well positioned to build on this momentum and drive patient impact and value creation this year and well into the future. With that, I'll turn the call over to Caroline. Caroline Litchfield -- Chief Financial Officer Thank you, Rob. Good morning. As Rob noted, we have had a strong start to the year with robust growth across our business, which reinforces the confidence we have in our outlook. We are also making strategic investments to leverage leading-edge science to save and improve lives around the world, positioning us to continue to deliver long-term value for patients, customers and shareholders. Now, turning to our first quarter results. Total company revenues were $15.8 billion, an increase of 9% or 12%, excluding the impact of foreign exchange. The impact from exchange is primarily driven by the devaluation of the Argentine peso, which was largely offset by inflation-related price increases consistent with market practice. The following revenue comments will be on an ex exchange basis. Our Human Health business continued its momentum with double-digit growth of 13% driven by oncology and vaccines. Sales in our Animal Health business increased 4% across both companion animal and livestock products. Turning to the performance of our key brands. In oncology, sales of KEYTRUDA grew 24% to $6.9 billion driven by increased uptake from earlier-stage cancers and continued strong demand from metastatic indications. In the U.S., KEYTRUDA grew across a broad range of tumors. In earlier-stage cancers, the increase was largely attributable to non-small cell lung cancer following the launches of KEYNOTE-671 and KEYNOTE-091. In the metastatic setting, we saw strong uptake from the recent launch of KEYNOTE-A39 in first-line advanced urothelial cancer. Outside the U.S., KEYTRUDA growth was driven by continued uptake in earlier-stage cancers, including high-risk, early stage, triple-negative breast cancer and renal cell carcinoma, as well as continued strong demand from patients with metastatic disease. Inflation-related price increases, consistent with market practice in Argentina, also contributed to growth. Alliance revenue from Lynparza and Lenvima grew 7% and 10%, respectively. WELIREG sales more than doubled to $85 million driven by the additional indication following FDA approval of Light Spark 005 for certain patients with previously treated advanced renal cell carcinoma, as well as by increased uptake in certain VHL disease-associated tumors. Our vaccines portfolio delivered strong growth, led by GARDASIL, which increased 17% to $2.2 billion driven by global demand. Sales also benefited from the timing of shipments in China and CDC purchasing patterns in the U.S. VAXNEUVANCE sales grew to $219 million driven by continued uptake of the pediatric indication in the U.S. and ongoing launches in international markets, particularly in Europe. In the U.S. VAXNEUVANCE sales also benefited from CDC purchasing patterns. Sales in our Animal Health business grew 4%. Livestock sales growth was driven by price actions, as well as demand for swine and poultry products. Companion animal growth reflects price actions. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 81.2%, an increase of 4.3 percentage points driven by reduced royalty rates for KEYTRUDA and GARDASIL, which went into effect at the beginning of this year, as well as favorable product mix. Operating expenses decreased 4% to $6.4 billion. A charge of $656 million related to the acquisition of Harpoon Therapeutics this quarter was lower than the $1.4 billion of charges a year ago for certain business development transactions charges, operating expenses grew 8%. We remain committed to investing appropriately to realize the promise of our expansive early and late-phase pipeline and support the promotion of our key growth drivers. Other expense was $87 million. Our tax rate was 16.1%, including the impact from the Harpoon transaction for which no tax benefit was recorded. Taken together, earnings per share were $2.07, which includes a $0.26 negative impact from the charge related to Harpoon. Now, turning to our 2024 non-GAAP guidance. The operational strength of our business has enabled us to raise and narrow our full year revenue guidance. We now expect revenue to be between $63.1 billion and $64.3 billion, reflecting strong year-over-year revenue growth of 5% to 7%, including the negative impact from foreign exchange. At the midpoint of this range, operational strength in our business, approximately $600 million is partially offset by an incremental headwind from foreign exchange of approximately $400 million in mid-April rates, resulting in a full year negative impact from foreign exchange of approximately 3%. Our gross margin assumption is now expected to be approximately 81%. Our estimated range of operating expenses is between $25.2 billion and $26.1 billion, which does not assume additional significant potential business development transactions. Other expense is expected to be approximately $250 million. Our full year tax rate is unchanged between 14.5% and 15.5%. We assume approximately 2.55 billion shares outstanding. Taken together, we are increasing and narrowing our expected EPS range to $8.53 to $8.65. This is a $0.07 increase at the midpoint despite an incremental headwind from foreign exchange of approximately $0.05 using mid-April rates, resulting in a full year negative impact from foreign exchange of more than $0.30. As you consider your models, there are a few items to keep in mind. The increase in our sales guidance is driven by the strong performance across our current product portfolio, led by KEYTRUDA, which continues to experience growth from additional indications and patient demand. For GARDASIL, second quarter ex U.S. growth will be adversely impacted by shipment timing to China. This year, we expect more evenly distributed quarterly shipments to China. Recall, in 2023, we accelerated shipments from the second half to the first half of the year, which primarily impacted the second quarter. Over the near and long term, we remain confident in our ability to protect many more people from HPV-related cancers and drive growth of GARDASIL. Sales of LAGEVRIO in the first quarter were driven by an extended age of COVID-19 in Asia Pacific market. LAGEVRIO continues to be an important treatment option for certain patients with COVID-19. So we continue to anticipate full year sales to be lower than last year. We are excited to provide a novel treatment option for adult patients with pulmonary arterial hypertension, following the recent FDA approval of Wind River. We are seeing high interest from patient groups and a range of relevant prescribers. We are also making good progress in enabling access. Several payers have already established coverage policies consistent with the label and STELLAR study criteria, while others are in the process of developing their policies. As we go forward, we intend to provide an appropriate level of transparency to enable insight into the impact we are having on patients, including prescription data and revenues. In summary, we are confident in a successful launch of Wind River, consistent with our prior expectations and look forward to providing updates on our progress. Now, turning to capital allocation, where our strategy remains unchanged. We will prioritize investments in our business to drive near- and long-term growth. We will continue to invest in our innovative pipeline, including the initiation of many new late-stage clinical trials across multiple novel candidates, each of which has the potential to meaningfully address important unmet medical needs. We remain committed to our dividend and plan to increase it over time. Adding compelling science to our pipeline through business development remains a priority. Ample capacity given our strong investment-grade credit rating and cash flow to pursue a giant driven value-enhancing transactions. We will continue to execute a modest level of share repurchases. This includes we remain confident in the near- and long-term outlook of our business driven by the global demand for our innovative medicines and vaccines, as well as our exceptional pipeline. Our unwavering commitment to use the power of cutting-edge science to improve the lives of the patients we serve has put us in a position of financial and operational strength. Our excellent execution and continued investments in innovation will enable us to deliver value to patients, customers and shareholders now and well into the future. With that, I'd now like to turn the call over to Dean. Dean Li -- President, Merck Research Labs Thank you, Caroline. In the first quarter, we continued to make progress with a steady cadence of clinical regulatory milestones across our pipeline. Today, I will provide updates from our cardiometabolic disease portfolio, HIV and vaccine programs and close with advances in our oncology pipeline. As Rob and Caroline noted, late last month, we received approval from the FDA for Wind River, our first-in-class active and signaling inhibitor for the treatment of those living with pulmonary arterial hypertension to increase exercise capacity, improve WHO functional class and reduce the risk of clinical worsening events. Wind Revere is a novel therapeutic option that targets a new PAH treatment pathway and is indicated to treat a broad PAH population. This approval marks a significant step toward our goal of transforming the treatment journey for many patients with PAH. Wind River is currently being reviewed by the European Medicines Agency with the decision anticipated in the second half of this year. The Phase III ZENITH and HYPERION studies evaluating patients with more advanced disease and those earlier on in their disease journey, respectively, are ongoing, as well as a Phase II CADENCE trial evaluating WHO Group II pulmonary hypertension, a type of left heart disease. Our commitment extends to a broad range of pulmonary hypertension. Informed by results from the Phase II cohort of the Phase II/III INSIGNIA PAH study evaluating MK-5475, our inhaled soluble guanylate cyclase stimulator, and the STELLAR trial results for Wind River, we have made the decision to focus the development of MK-5475 on WHO Group 3.1 pulmonary hypertension associated with COPD and not further proceed in PAH. COPD is an area of significant need with no specific therapies currently approved. Our HIV pipeline continues to advance. Last month, presentations at the conference on retroviruses and opportunistic infections reinforced progress in our strategy to develop less frequent dosing regimen for managing and treating HIV. We believe these programs have the potential to help address adherence, stigma and other challenges faced by some individuals taking daily anti-retroviral pills. In collaboration with Gilead, safety and efficacy findings were presented from a Phase II study evaluating a once-weekly oral combination of islatravir, an investigational nucleoside reverse transcriptase translocation inhibitor; and lenacapavir, a first-in-class capsid inhibitor for the treatment of adults living with HIV. At 24 weeks, the trial met its primary endpoint and in a secondary endpoint, maintained a high rate of viral suppression. Additional longer-term data will be presented at a later date. In addition, safety and tolerability data were presented for MK-8527, a novel oral NRTTI candidate, from two Phase I trials that evaluated ascending single dose and multiple doses in adults 18 to 55 years old not infected with HIV. MK-8527 is being investigated as a potential monthly option for HIV pre-exposure prophylaxis. Vaccines remain an important element of our pipeline, and we are making progress across several programs. Findings from multiple Phase III trials of V116, our investigational 21-valent pneumococcal conjugate vaccine, were presented at the meeting of the International Society of Pneumonia and Pneumococcal Diseases last month. V116 was shown to be immunogenic for all 21 serotypes covered by the vaccine, including a pneumococcal vaccine-naive and vaccine-experience adults, as well as those at increased risk for pneumococcal disease. If approved, V116 would be the first vaccine specifically designed to address the majority of serotypes that cause invasive pneumococcal disease in adults ages 65 and older. The target action date is June 17. The meeting of the CDC's Advisory Committee on Immunization Practices is scheduled shortly thereafter. Since the initial approval of GARDASIL, a steady flow of clinical and real-world evidence has been generated to support the favorable efficacy effectiveness, safety and long-term durability of protection against certain human papillomavirus-related cancers and diseases in both males and females. Despite the proven public health benefit of HPV vaccination, the latest global cancer statistics from the International Agency for Research on Cancer indicate there is more to do to help increase vaccination rates. The latest statistics from 2022 ranked cervical cancer as the fourth most common cancer globally in terms of incidents and mortality in women and the leading cause of cancer death in 37 countries, predominantly in Sub-Saharan Africa, South America and Southeast Asia regions. At the UroGen Congress last month, we disclosed plans to build on the development of GARDASIL with a new clinical program to identify a novel multivalent HPV vaccine candidate with the potential to extend protection against a broader array of HPV types. This includes several types known to disproportionately impact African and Asian populations and individuals of African and Asian descent. First-in-human studies are scheduled to start in the fourth quarter of this year. In addition, we announced plans to conduct two randomized, double-blind multiyear clinical trials in females and males ages 16 to 26 years to examine the short- and long-term efficacy and immunogenicity of a single dose of GARDASIL-9 versus the currently approved 3-dose regimen. The goal of these studies is to generate data that clearly demonstrates whether or not a single dose of GARDASIL-9 provides comparable long-term protection to the approved regimen while also satisfying the high standards required by regulatory authorities. The clinical trials are anticipated to start enrolling in the fourth quarter. In oncology, we continue to focus on our three-pillared strategy comprised of immuno-oncology, precision molecular targeting and tissue-targeting agents. In immuno-oncology, September 2024 will mark a decade since the first approval of KEYTRUDA in metastatic melanoma. KEYTRUDA has since amassed approvals for 39 indication and continues to reinforce its reputation as a foundational therapy for certain types of cancer. Building on the recent FDA approval for KEYTRUDA in combination with chemotherapy for the treatment of FGO 2014, Stage 3 through 4a cervical cancer we recently announced that the pivotal KEYNOTE-A18 trial met its primary endpoint of overall survival, potentially providing a new standard of care for these patients. Our commitment to providing better options to prevent and treat cervical cancer remains strong. Also, in women's cancer, the Phase III KEYNOTE-868 trial, known as nRgGy-018, was granted priority review by the FDA for the first-line treatment of patients with primary advanced or recurrent endometrial carcinoma. The agency has set a target action date of June 21. Outside of the U.S., the European Commission approved KEYTRUDA in combination with platinum-doublet chemotherapy as neoadjuvant therapy followed by adjuvant KEYTRUDA in adult patients with non-small cell lung cancer at high risk of recurrence based on the Phase III KEYNOTE-671 study. This marks the first approval in Europe for an anti-PD-1 PD-L1 therapy as part of a treatment regimen for the neoadjuvant followed by adjuvant treatment of resectable non-small cell lung cancer based on positive overall survival results. Next to precision targeting. Building on the success of KEYTRUDA for certain patients with non-small cell lung cancer, earlier this month, we announced the initiation of the Phase III clinical trial for MK-1084, an investigational oral selective KRAS G12C inhibitor in combination with KEYTRUDA for the first-line treatment of certain patients with metastatic non-small cell lung cancer. The decision to proceed to Phase III was based upon early promising evidence from a Phase I study showing antitumor activity and a manageable safety profile. KRAS is one of the most prevalent oncogenes in human cancers, and G12C is the most common KRAS mutation in patients with non-small cell lung cancer. In the tissue targeting space, we are moving with speed and rigor to advance a broad pipeline of antibody drug conjugates with multiple planned and ongoing Phase III trials. In just over six months, we have made remarkable progress in our collaboration with Daiichi Sankyo. Recently, we announced that the first patient has been dosed in the Phase II/III REJOICE ovARIAN-01 trial evaluating the efficacy and safety of relatutidag, deruxtecan, an investigational CDH6-directed DXDADC in patients with platinum-resistant ovarian cancer. We are poised to begin a Phase III study evaluating infinitumab/derixtecan, a B7-H3-directed ADC in small cell lung cancer, a notably difficult-to-treat. New treatment options are desperately needed for these patients where the prognosis remains poor. We are pleased to have recently completed the acquisition of Harpoon Therapeutics, which provides novel T cell engagers, including MK-6070, an investigational delta-like ligand 3 targeting T cell engager, also being evaluated in certain types of small cell lung cancer, as well as neuroendocrine tumors. Finally, please mark your calendars for the evening of Monday, June 3, where we will host an investor event at ASCO in Chicago and provide an update on our diverse portfolio of immuno-oncology, precision molecular and tissue-targeting agents. Looking forward, June promises to be a busy month with three regulatory action dates, including V116 for prevention of invasive pneumococcal disease and pneumococcal pneumonia in adults; KEYTRUDA for primary advanced or recurrent endometrial carcinoma; and patritumab/deruxtecan for advanced EGFR-mutated non-small cell lung cancer. We continue to execute on our strategy with a focus on operational excellence and look forward to providing further updates on our progress throughout the year. And now I will turn the call back to Peter. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Dean. Shirley, we're ready to begin Q&A. We request that analysts limit themselves to one question today to get to as many different questioners as possible. Thank you. Questions & Answers: Operator [Operator instructions] Our first question comes from Terence Flynn with Morgan Stanley. You may ask your question. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks so much for the question. This is probably one for Dean. Obviously, you guys have been focused on building out your cardiometabolic franchise now. You have the sotatercept launch underway. You've got an oral PCSK9 in late-stage development. You have a GLP glucagon also moving forward for NASH, I believe. But I guess I'd just be curious how you think about the opportunity in obesity broadly as, on one hand, it seems like it could align with your current print. But on the other hand, it seems like Merck has gone more toward specialty markets and away from kind of primary care. So maybe just would love your thoughts there, Dean, as you think about building out. Dean Li -- President, Merck Research Labs Well, thank you very much. Yes, we are excited about the build-out that we have in cardiovascular metabolic. You pointed out the programs that have the most visibility right now. But let me assure you, there will be other programs that you will have more visibility over the coming years. In relationship to your question about GLP and obesity, I think there's two ways to look at it: you can look at it from a GLP angle, and you can look at it from an obesity angle. If you look at it from a GLP angle, there has been really important work showing its impact in diabetes, weight loss, more recently, in cardiovascular outcomes, most recently in sleep apnea. And you're right, we're very interested in relationship to MASH. We think that's an also important outcome. And we also think that there will be distinct populations, whether you call it obese or whether you call it MASH or -- within that GLP space. With distinct relations, it will be important to give a benefit of a molecule that really takes care of the primary concern. And that's our play, for example, in MASH, where we think we have a very tolerable drug that has significant reduction in liver fat and also gives a weight loss of 10% to 12%. When you look at that, I think these different outcomes may need different molecules. More generally, if you're talking about obesity, I do think that there's some work going on right now. But I think that there could be another wave where people start thinking about orals, how tolerable they are, the accessibility they are and combinations, how do you maintain, how you preserve muscle and also additional outcomes. And it may not be that the same molecule is the best molecule that wins out in every one of those subpopulations. And so, I would just -- I wonder if there will be some fractionation of the patient population when you say the word, for example, generally, obesity. And we wonder if there's opportunity there. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Terence. Next question please, Shirley. Operator Thank you. Our next question comes from Evan Siegerman with BMO Capital Markets. You may ask your question. Evan Seigerman -- BMO Capital Markets -- Analyst Hi, guys. Thank you so much for taking my question. I wanted to touch on some of your work in lung cancer, specifically with KRAS G12C, echoing Dean's comment. So this space is becoming increasingly crowded. Maybe walk me through what you believe differentiates your assets today from the currently approved one or from the pan-KRAS assets in development. Dean Li -- President, Merck Research Labs Yes. So this is one of my more favorite projects. So I appreciate that you actually asked a question about it. When you look at KRAS, as you point out, there is -- it's one of the most important driver mutations in multiple cancers. And if you say more broadly, not KRAS but pan-RAS, that is also true. In relationship to KRAS G12C, that's a small percentage of all the KRAS mutations and all the RAS mutations. But where KRAS G12C is especially prominent is in non-small cell lung cancer. It's, depending on the percentage, 12% to 15% in that patient population. And I will also emphasize that we have a lot of data in relationship to that patient population in non-small cell lung cancer. It's KEYNOTE-189. It's chemo plus IO. You need a potent compound with a KRAS to move it into first line. That's the game that we're trying to play. So it is crowded. But what you're looking for is a potent compound that has tremendous monotherapy efficacy. But most importantly, when you combine it with, for example, pembro, you maintain the dose, you maintain the ability to not have dose modifications. And that's the data that made us excited about this because I think we reported an ORR of 71% in combination. So that's why we're advancing that. The race for us is to get it in first line and then to think about other KRAS indications and IO-sensitive/insensitive and also other molecules that are coming through in the lung cancer space. And some of them are related to antibody drug conjugate. So we are very excited about our KRAS G12C program, 1084, which is moving to Phase III. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Evan. Next question please, Shirley. Operator Thank you. Our next question comes from Chris Shibutani with Goldman Sachs. You may ask your question. Chris Shibutani -- Goldman Sachs -- Analyst Great. Thank you very much. Maybe focusing on the pipeline on areas that you do not highlight as often, specifically immunology. And then, a lot of the discovery work that you talked about in CNS. With immunology with a TL1A, can you just help us understand where we are on the Crohn's study there and also the Pandion acquisition, that in just Phase II. And then, CNS, you highlight how many folks you have doing discovery research. How do you feel about the distribution of your efforts in CNS there? So just two areas not highlighted in the press release, but I think are important to your overall portfolio. Dean Li -- President, Merck Research Labs Thank you very much. So I'll first touch immunology and specifically in the TL1A space. So that TL1A, we think that it will be a highly effective -- the higher efficacy, and also not just in terms of efficacy, in terms of tolerability. That ulcerative colitis program Phase III has started already and is recruiting. We are hopeful that we will be announcing the opening of the Phase III and patients coming in for the Crohn's disease over the next few months. So we are very excited about moving TL1A eagerly and pretty aggressively move it in Phase III to really sort of outline the really differentiated profile that we have seen for TL1A, and specifically, our compound. I should also emphasize that we also are looking at TL1A not just within sort of inflammatory bowel disease, but we're also interested in other diseases. And one of the things that's really interesting about TL1A, it is blocking inflammation. But there is reasons to believe that it can have profound effects on fibrosis, and that's our interest in Crohn's disease. But there are other diseases, for example, in the lung where fibrosis is a really important component. And we will be interested to see those. We have other assets moving forward both from the Prometheus acquisition that is not the TL1A, as well as other internal that are moving forward with Alacrity. In relationship to neuroscience, we hope to be getting the readout with MK-8189. We have other programs that are moving and advancing. And we have made some commitments in the early discovery space in a BD standpoint to accelerate some of our works that have been made public. I think over the next one to two years, we'll see readouts Phase IIbs, Phase Is moving to Phase II. But I think at that point, we will be able to speak more fully. But I think the investment in neuroscience, I think, is critically important. From a healthcare unmet need, you have to list from an economic value to the healthcare system and population. Especially in the United States, neuro disease continues to be a really important place, and I would say neuro disease not just in terms of degenerative but -- not just classic neuro disease but in the psychiatry arena as well. And you've seen others advance business development in that space. We're interested in continuing in business development there, but also importantly, moving our own internal program, the lead program being MK-8189. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Chris. Next question please, Shirley. Operator Thank you. Our next question from Daina Graybosch. You may ask your question. Daina Graybosch -- Leerink Partners -- Analyst Hi. Thanks for the question. I want to ask some on pneumococcal vaccine. You mentioned several times V116 is customized for adult 65 and older. In the ACIP meeting, they discussed a recommendation in adult 50 or older. And I wonder if you could comment on where you think that ACIP recommendation for V116. And on V117, I wonder if you could talk about how the stack in, which I believe is now in Phase I is customized for pediatric patients. Rob Davis -- Chairman and Chief Executive Officer Yes. Maybe I can start, Daina, and then Dean can add. Obviously, I would just start by saying we were very pleased with the overall tone and tenor of the discussion coming out of the ACIP meeting. And as you look at what we have with V116, we continue to believe -- if you look at the strength of the data behind that, and we've talked about -- Dean mentioned some of the clinical readouts that have come. But recall, we cover 83% of of the serotypes-causing disease in adults. That's 30% higher than PCV20. So it's significant, and that was how it was specifically designed, targeting those serotypes which are most prevalent in adult disease. As a result of that, we continue to believe the value proposition of V116 is very compelling. If you look at the cost effectiveness, it's going to be a very cost-effective vaccine. And as a result, I think that's why you started to see the ACIP ask questions about the 50 to 65 age cohort, as well as the 65-plus. So I don't want to get ahead of the ACIP and their recommendation. But I would say our belief and conviction in the value of the data and the value this vaccine will bring for patients in the pneumococcal space is significant. And I would expect overall that we're going to see broad coverage coming out of the ACIP. Dean Li -- President, Merck Research Labs Yes. I would just add, again, we want to be respectful of ACIP and the FDA. But you did point out something that I think is something that clearly we took notice. When Rob talks about that 83% versus 50% and 30% more, and the specific question that you asked, 50 to 64, I would remind everyone that dropping that age for universal vaccination have been considered previously for other vaccines. And they could not come to a situation where they thought that it would be a good idea based on cost effectiveness and as such. And by increasing it from 50% to 83%, we believe that we changed the calculus, and that made why there is renewed interest in lowering that age based on the broader coverage given for V116. Rob Davis -- Chairman and Chief Executive Officer And I think there was a second question you had, Daina, about V117. I'll just maybe give a general answer, which is, obviously, if you look at the strategy of V116, it's the same strategy with V117: how do we develop an investigational PCV vaccine that is targeted specifically to those serotypes that cause disease in children, in peds, without hopefully causing untoward effects. And so, it's a model that follows that. We've not given any details to the additional serotypes or our thinking. But just understand that if you look at the model of V116, V117 is the same thing in peds. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Daina. Next question please, Shirley. Operator Thank you. Our next question comes from James Shin with Deutsche Bank. Your line is open. You may ask your question. James Shin -- Deutsche Bank -- Analyst Hey. Good morning, guys. Thank you for the question. Firstly, I know Merck does not provide product-level guidance, but given WinnRever's important and investor focus, can you provide any color on when River's contribution to guidance? And then, second one is for Dean on Voice ovarian, and I suppose precision oncology in general. But does the field know how much overlap there is between CAT Hern and FR alpha? And then, for patritumab, I know the data for HER3 shows expression in advanced patients, but there's a lot of development in this space. So how does Merck envision patritumab to be positioned or sequenced? Rob Davis -- Chairman and Chief Executive Officer Yes. Maybe, James, I'll start. And thank you for the question. The short answer is, unfortunately, we don't provide product-level guidance. So I don't think we want to get into trying to tell you what we see Inverter as being a contributor in 2024. But with that said, I think it's important to make a few points just so you understand how we're seeing it. First of all, we're very excited to provide this novel treatment for patients with PAH. As you know, we think this will be a game changer in that space. We were well prepared for the launch. And I can tell you the launch, although very early, is going well so far. We've seen an increasing number of prescriptions being written. We've seen repeat prescriptions, and that's coming both from the COE space, from the Centers of Excellence, which is about 150 in the United States, as well as from non-COEs, which is a good development. We've already begun making shipments to patients' homes. And hopefully, we'll have patients being dosed very soon, if not already. And then, I think the other thing I'd note is the prescribers, as well as the locations are both from the Centers of Excellence and also non-COE. So that's something to note. And then, finally, from a payer perspective, we're seeing good access. No real limits. In fact, we already have several payers who have established coverage policies. And I think as Caroline pointed out in the prepared comments, very consistent with the label and what we saw in STELLAR. But the fact that we've seen policies enacted giving coverage to patients already this quickly at launch, we see as a good sign. It's obviously early. But everything so far looks quite good. So our confidence in a successful launch has not changed. We continue to see this consistent with our expectations. And as we move forward, we'll give you appropriate level of transparency. But I did just want to give flavor, even though we can't give the specific guidance you were asking for. Dean, I'll let you take the second part of the question. Dean Li -- President, Merck Research Labs Yes. So I'll just add a little bit in relationship to Wind River. I think it's important to emphasize that the indication or the label that we have is a broad indication and is based on STELLAR. And there will be potential data flows that will continue to inform and strengthen the field. We have STELLAR and Soteria, which is open label. We have ZENITH, which is advanced, and that will look at mortality and morbidity; and HYPERION, which is in more -- earlier in the journey. We have the European action that will happen in the second half of 2024. And I would just emphasize that this is something that healthcare professionals and self-administration is possible. And in relationship to that, there will be a demand for innovation, and we hope to provide that innovation as this becomes even more used in a self-administration standpoint. You asked a number of questions and many of the questions related, and some of it got blurred out, but some of it related to ovarian, but more broadly speaking, tissue targeting an ADCs. So I'll just give you an overview. When we look at the field, we look at cancers where there is IO and chemo and that combination. And where will we see that? We ask ourselves, can you combine an IO agent with a chemo agent? And we think about KEYTRUDA, but we also think about next-gen tissue targeting IO agents, such as the recent immune engagers that we have from Harpoon. And then, on the other hand, we think about chemo, we think of precision targeting like RAS, how can it combine? And we also think in terms of ADCs. And the specific case that you're talking about, you have HER3 patritumab. That's moving along in EGFR non-small cell lung cancer. In B7-H3, there's prominent data that's in small cell lung cancer, maybe in prostate. And for CDH6 itself, that ovarian data is quite interesting, and that's relatedag. At least for us, it's very interesting because the initial data with our partners in Daiichi Sankyo is striking to us. Because in that patient population, it looked like allcomers did extremely well and that in some situations, you think about a biomarker. But for the CDH6, the impact across sort of biocersubsets was quite impressive. So I hope that gives you a general structure, and we're happy to -- and thank you very much for that question. Peter Dannenbaum -- Senior Vice President, Investor Relations Thanks, James. Next question please, Shirley. Operator Thank you. Our next question comes from Umer Raffat with Evercore. You may ask your question. Umer Raffat -- Evercore ISI -- Analyst Hi, guys. Thanks for taking my question. I'm just trying to think through your next-gen HPV vaccine. And I guess, how should we think about potential penetration rates with a revaccination opportunity with the new broader-spectrum HPV, especially in patients who have already taken GARDASIL. Dean Li -- President, Merck Research Labs Revaccination and relationship to HPV, is that what the question is? Caroline Litchfield -- Chief Financial Officer G9. Rob Davis -- Chairman and Chief Executive Officer The new multivalent -- Dean Li -- President, Merck Research Labs With the G9+. I'm struggling to answer your question because I first got to make a G9+ that works really, really well. And when I get that that will be great because there are patient populations that I think would be extremely well served. But I would also emphasize that we've just talked about cancer. We talked about early stage cancer. This is the time that you can really treat and potentially cure, but we're in the business of preventing cancers as well. One of the questions that comes to us is that in certain patient populations, you want a vaccine that -- the data, for example, Scandinavia, it's 90-plus reduction -- 90% reduction in cancer incidents and then the recent American Cancer Society. We are wondering whether you make a G9+ vaccine, whether you can make the argument, if we're successful with the G9+ and what we hope to aspire for, whether you could fundamentally change how one recommends cancer screening for women in relationship to cervical cancer and also the reduction both in men and women of many other cancers outside of cervical cancer. Caroline Litchfield -- Chief Financial Officer This is Caroline. I'll just add that as we sit here today, we all know there are many, many people around the world that have not received a vaccine to prevent them against -- to help protect them from HPV-related cancers. With the possibility of improving upon G9 with a multivalent vaccine, we're hopeful that we can provide further protection, especially for different population groups. And we will price the vaccine appropriately based on the benefit that it will provide. So we're looking forward to continuing to see growth in GARDASIL and see how the science evolves with our clinical programs. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Umer. Next question please, Shirley. Operator Thank you. Our next question comes from Tim Anderson with Wolfe Research. You may ask your question. Tim Anderson -- Wolfe Research -- Analyst Thank you. I have a few questions on KEYTRUDA subcu. It may not be scientifically sexy, but of course, it could be quite commercially meaningful. So we'll see that data, I believe, later this year. Any whatsoever to that readout? Or can we consider it to be a slam dunk? Second question is when the subcu launches in the U.S., presumably next year, will uptake be fast or slow or somewhere in between? And then, eventually, how much can a subcu account for the franchise on a volume or a patient basis? Dean Li -- President, Merck Research Labs So I'll take the first part of that. I remind myself, nothing is slam dunk once you place innovative drugs in patients. So I'll answer that question. But I think you highlighted really the pembro plus hyaluronidase that we're advancing. I would disagree a little bit. I do kind of think it's sexy in some ways. And that D770, that -- we will be sharing that data by early 2025. The reason I think it's really an important innovation is to really increase the access. You've seen the number of early stage cancer readout that are coming through with ibalizumab and KEYTRUDA and especially in the earlier stages when we talk about KEYNOTE-671, when we talk about in renal cell carcinoma, where we have OS benefit. I think this is going to be really really important for patients. It will also be important in patients for treatment, especially in those who have monotherapy and those especially combos with oral agents because it just makes it so much more accessible. So we think this is an important program and that it could have substantial impact on patients and their access to PD-1, where we know the foundational elements of PD-1. And in terms of financial -- Rob Davis -- Chairman and Chief Executive Officer Yes. Maybe, Tim, I'll just provide some commentary on your questions on uptake and how much of the patient population this can account for. As we think about uptake of this opportunity, I would first point out that we see really -- it starts with the strength of the clinical data underlying the IO agent itself. So it's more about the confidence they have in KEYTRUDA. And then, secondarily, it's about the delivery mechanism, which is important as we think about obviously leveraging the data we have and just the breadth of what KEYTRUDA is. But I will tell you that as we think about bringing this forward when we do launch, our goal will be the price appropriately with the goal of driving quick options. So we do want to see adoption happen, and we do think you will see it. Obviously, if you look at then the size of the patient population where it could be, just to give you a sense, by 2028, if we look at the patients who are on monotherapy with KEYTRUDA who are using combinations with orals and those who are moving into earlier stages of disease through some of our adjuvant and neoadjuvant areas with KEYTRUDA, that represents about 50% of the patient population at that time. So that is really the addressable market for what we see the subcu offering to be. And potentially, we're not foreclosing the opportunity to also look into the metastatic setting and people being -- giving care in institutions, as well as those moving outside of the institutions. But obviously, the value to the patient is ease of use, ability to use it outside of the hospital setting. The time and share is obviously less if you're getting a subcu versus an IV. And then, from a cost to the healthcare system, the ability to not have a patient sitting in the chair for as long allowing for more patients to move through, we think, actually drives access and improves the providing of care as well. So we see it both beneficial from a patient perspective and from the provider perspective, and that's why we do think you'll see uptake of this important medicine when we bring it forward. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Tim. Next question please, Shirley. Operator Thank you. Our next question comes from Louise Chen with Cantor. You may ask your question. Louise Chen -- Cantor Fitzgerald -- Analyst Hi. Thanks for taking my question. I just wanted to ask you for ASCO on June 3. Are there any specific readouts updates that you're very excited about presenting? Dean Li -- President, Merck Research Labs I think there's just going to be a stream of data. There's going to be follow-ups and a series of keynote, whether it be gastric, betacellular, biliary, bladder, non-small cell lung cancer. There will be discussions of many of the programs that I think you're beginning to see coming up in the clinical trial website and relationship to a whole series of Phase II related to molecules that you're familiar with, but also molecules that are sort of earlier in our Phase III development, ranging from bomedemstat to the KRAS program, to many of the ADCs and the updates that we've shown in relationship to not just the Daiichi Sankyo ADCs, but the other ADCs, whether it be TROP2 cloud or net in. So you'll have a whole full array of discussions of those compounds, some at the ASCO, but some at the ASCO investor event. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thanks, Louise. I know we have several more people in the queue. We're going to go an extra five or 10 minutes to try to get to as many questions as possible. Next question please, Shirley. Operator Our next question comes from Trung Huynh with UBS. You may ask your question. Your line is open. Trung Huynh -- UBS -- Analyst Hi, guys. Trung Huynh from UBS. Thanks for fitting me in. On the Wind River launch, thanks for the comments today on access and coverage. On approval, you noted that two thirds of your PAH patients would like Part D and third commercial. Perhaps can you expand on the free assistance program that you're hoping to initiate? And what proportion of those Part D patients do you think could be receiving free product this year? Rob Davis -- Chairman and Chief Executive Officer Yes. I appreciate the question. So as you point out, we are very focused on ensuring that patients get access to the medicine. We're very much committed to it. And that's why we do have -- in addition to our normal programs we would run, we do have the access program we run. That program is actually independent of our commercial operations. We don't really report data coming out of that because it's run through a separate foundation and with the goal, frankly, of making sure that patients get medicines there. So that is available. It can be accessed on our website, and we're committed to making sure patients get the medicine. But specifics on that, we're not going to go into. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Trung. Next question please, Shirley. Operator Thank you. Our next question comes from Carter Gould with Barclays. You may ask your question. Carter Gould -- Barclays -- Analyst Good morning. Thanks for squeezing me in. Maybe on your personalized cancer vaccine with Moderna, as the Phase III sort of nears completion of enrollment, it of course begs the question around the potential to sort of file based on the existing data you have. Can you maybe just update us on your thoughts there and whether you think you still need Phase III data or manufacturing would preclude an early filing? Any help there would be appreciated. Dean Li -- President, Merck Research Labs Yes, I'll take that. I mean, I don't want to speak about whether the FDA will take what action or not. But I'll just reemphasize to everyone what is exciting about our I&T program and our excitement with working with Moderna. So here, we're inducing and coaxing sort of immunity. And we're mixing it with a drug that's well known that and leases pre-existing immunity, which is KEYTRUDA. What we have in our hands is a randomized, early stage IO sensitive trial, where it is very clear of the contribution of components of the INT, not in immunogenicity, but in clinical benefit. So I just want to highlight that about our data as one looks at the data of others. We also have begun to show that we are moving it in Phase III in adjuvant melanoma and adjuvant non-small cell lung cancer and our ability to move that with speed and rigor but get patients recruited, which is going well, I think will be very important because you're going to need a Phase III regardless of what the FDA decides on an accelerated approval or not. And so, that's what we're focused on. We're also focused on looking at other IO-sensitive tumors such as renal cell carcinoma. And I would just emphasize the strength of the data in relationship to durability is being answered. The ability for us to open these trials and successfully advance it is being answered. And we clearly have work to do with our colleagues who we respect deeply for what they've done in relationship to manufacturing. Any -- all mRNA vaccine, I mean, they've really pushed the envelope here. Our ability to do that will be important to make this an important treatment. As far as the FDA's decision, the FDA will need to make their decision as to how they consider the opportunity. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Carter. Next question please, Shirley. Operator Our next question comes from Chris Schott with J.P. Morgan. You may ask your question. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Just a couple of GARDASIL questions. You're pointing to a more evenly distributed China sales this year, and it seems like a tougher 2Q comp. But can you just directionally talk about growth for GARDASIL more broadly for the year? I guess the heart of it is still a healthy growth asset for you this year. And the second one on GARDASIL is if we were to move to a single dose of GARDASIL-9, what does that mean commercially and from a sales perspective for the franchise? Caroline Litchfield -- Chief Financial Officer Chris, it's Caroline. So in terms of the phasing of GARDASIL, as you pointed out, during 2023, we saw in China an acceleration of the shipment from the second half of the year to the first half of the year, specifically to the second quarter. What that's done is it's provided an actual tailwind to revenue growth in the first quarter for China, but it will provide a headwind more significant in the second quarter. And that's what we've called out. As we look at overall growth for GARDASIL, given where we are with the level of vaccinations across the world, given the manufacturing that we have been scaling up, we're confident in our ability to continue to drive growth during 2024. And in 2025, we will see our manufacturing capacity unconstrained, so enabling us to further supply and support the market. As we've talked in the past, our opportunities for growth are significant as we look to continue to improve on adolescent vaccination rates, as we look to improve upon gender-neutral vaccinations, as we look to really activate the mid-adult segment, but increasingly get to the lower-income and middle-income markets, which will come at a different price point. As we sit here today, continue to be confident in the outlook for GARDASIL over both the near and the long term. As we look at the possibility of a single dose of GARDASIL, the study that we are conducting will be a comprehensive study and will take some time to unfold. What we're seeing in the marketplace currently is where certain low-income markets are implementing a single-dose regimen, they are also increasing the numbers of people. They are betternating by broadening the age cohort or also opting to vaccinate males at this stage. We'll have to be long term how the data plays out with regards to a single dose to ensure that we will price our vaccine based on the benefit that we're bringing and we vaccinate as many people in the world that we can. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Chris. Next question please, Shirley. Operator Thank you. Your next question comes from Luisa Hector with Berenberg. You may ask your question. Luisa Hector -- Berenberg Capital Markets -- Analyst Thank you very much. I also have questions on the Wind River launch. I just wanted to check how straightforward the subcutaneous administration is and when you might expect to launch an auto-injector. Also, should we actually expect the Part D access to come online at a similar pace as commercial? I'm just not sure whether that's something that's maybe sitting more into next year. And if I can, just another question on that with Part D is that you price for the Part D restructure next year. How do you expect payers to behave when this happens. I can see that the payer will take on a greater burden for higher-priced oral therapies. Do you expect some pushback within the actual drug that you would have higher rebates at that point? Or do you think that incremental burden for the payers might be spread more broadly across all products? It's a kind of bigger-picture question, but When Roger brings it into focus. Dean Li -- President, Merck Research Labs So this is Dean. I'll answer your questions in terms of delivery of Win Lever. We have it in a vial, and we have it in a situation where both a healthcare provider or self-administration is both feasible, possible and will be used. We believe that the vast majority with time that people will use it as self-administration. This is a patient population that's quite used to doing injection. So we think that that will be able to navigate and that the patients will get access. But as you point out, further innovation will be demanded for, and an auto-injector will be critically important. We are doing the studies right now to evaluate how do we provide such an option, and we hope to have those options and those plans more public in the near future. But we agree with you totally in the fact that a future auto-injector will be important. Caroline Litchfield -- Chief Financial Officer And Luisa, this is Caroline. At this stage, we are seeing a real acceptance of the value proposition of Windriver in the United States. We're seeing policy for coverage equally across both the Medicare and Medicaid patient population, as well as the commercial segment. So as we move forward, we'll look forward to just helping as many patients as we can across all of those segments, irrelevant of their coverage. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Luisa. Next question please, Shirley. We have time for -- this will be our last question. Operator Thank you. Our next question comes from Seamus Fernandez with Guggenheim. You may ask your question. Seamus Fernandez -- Guggenheim Partners -- Analyst Thanks so much. I wanted to ask actually about your RSV-targeted antibody, how you're thinking about that, the optionality for it and the market size and Merck's potential participation in this market as it relates to the competitors' global supply constraints at this point in time. It seems like coming to market more aggressively or as aggressively as possible could actually make for a meaningful market opportunity for Merck. And then, just a follow-up. Rob, I wanted to just get your sort of qualitative view three years, four years in thinking about the evolution of the business. 2028-2029 still represents a meaningful challenge with KEYTRUDA. But as you look forward to the rest of this year and head of 2025, how important is business development to Merck from here in terms of the size and type of acquisitions? I think investors have certainly applauded what Merck has executed on in the last year for sort of mid- to later-stage assets. Dean Li -- President, Merck Research Labs Yes. So I'll take the RSV question. So clasrovumab, we're excited about it. As many of the people know, it's a monoclonal antibody and it's a way to get passive immunity to infants. We think it's really important as we have seen recently. And ours is a single fixed dose and has the durability in terms of covering a whole RSV season, I think, is critically important. And the ability to give this to an infant any time and -- versus, for example, alternative strategies, which is maternal vaccination. And then, also, we believe that this will be a distinguished monoclonal antibody and has high barrier to resistance. So we're excited about moving and -- seeing that data and moving with with both speed and rigor to get this to the market because we think it will be an important contributor, especially given what we've seen in the RSV season just this past season. I do want to just take this one moment to just say it's not just the RSV vaccine that we're very excited. We're also very excited because it's very much in the lay press in our dengue V181, which is a live attenuated tetravalent vaccine. And we're moving with equal eagerness to move that forward into Phase III, as we've already seen data from our colleagues in Institute Butantan about the effectiveness and efficacy of this vaccine. But I'll turn it back to Rob. Rob Davis -- Chairman and Chief Executive Officer Yes. No. Thanks for the question. And so, if I would just kind of, I guess, think a little bit about where we've been in over the last three years, a few points I would want to raise. One, I think we've made tremendous progress in a relatively short period of time, and I give all credit to Dean, to our R&D colleagues for what they've been able to do, how they have been able to really move just flawlessly products through our pipeline. It's amazing you think of it now three years in, we haven't had really any major failures. The one maybe hiccup with islatravir, but that's coming back. And so, I feel very proud of what our colleagues in R&D have been able to do. And then, I think about from a commercial perspective, from a manufacturing perspective, we're pulling the products through, we're showing value. The fact that we're ready for the launch with WhenRover shows how we can build capability very quickly. We did it in KEYTRUDA, we did it in JANUVIA and now we're doing it in inRever, and we'll do it in new spaces coming forward. So we feel very good about that. So across all elements, R&D, commercial manufacturing, the business is delivering. And so, as we sit here today, if our clinical success continues, I think you're going to see us with a more diversified set of growth drivers over time than, frankly, we've had in many years, if ever. And that's very important. And it all is really what leads to the confidence you've heard me express in other settings, that I'm increasingly less focused on 2028. And I would remind you, by the way, it's a staggered LOE. So it's 2028 in the U.S.; in China, it's 2031; in Europe, in 2032 and in Japan. So it's not a one-moment event. It actually happens over time. But that being said, as you've heard me say, I see it is more of a hill than a cliff. And my confidence that we're going to come back with fast growth after that is very high. And we're very focused on the sustainable engine from 2030 to 2040 at this point. So I feel good about where we are, but I just want to reinforce it's a team effort, and I've been left with a great team. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Seamus, and thank you all for your time and your interest today. I'm hoping to see many of you at our ASCO event on June 3 or at a few of the conferences that we'll be attending this quarter. So thank you all very much. Answer:

the Merck & Co. Q1 sales and earnings conference call

Operator Thank you for standing by. Welcome to the Merck & Co. Q1 sales and earnings conference call. [Operator instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Peter Dannenbaum, senior vice president, investor relations. Sir, you may begin. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Shirley, and good morning, everyone. Welcome to Merck's first quarter 2024 conference call. Speaking on today's call will be Rob Davis, chairman and chief executive officer; Caroline Litchfield, chief financial officer; and Dr. Dean Li, president of Merck Research Labs. Before we get started, I'd like to point out a few items. You will see that we have items in our GAAP results, addition related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A and the 2023 10-K, identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with our earnings release, today's prepared remarks and our SEC filings, are all posted to the investor relations section of Merck's website. With that, I'd like to turn the call over to Rob. Rob Davis -- Chairman and Chief Executive Officer Thanks, Peter. Good morning and thank you for joining today's call. We've begun 2024 with continuing momentum in our business. We're harnessing the power of innovation to advance our deep pipeline and are maximizing the impact of our broad commercial portfolio for the benefit of patients. We drove strong growth across key therapeutic areas, executed strategic business development and are now launching a significant new product in the cardiometabolic space while also preparing for the potential approval and launch of two additional important candidates in vaccines in oncology. We have significant opportunities ahead of us across all areas of our business, and we're highly focused on realizing them. I continue to be inspired by the dedication of our talented global team, which is working tirelessly to bring differentiated medicines and vaccines to patients through seamless, scientific, commercial and operational execution. In March, we received FDA approval for Wind River, a first-in-class treatment for adults with pulmonary arterial hypertension, a rare progressive and ultimately life-threatening disease. This marks the achievement of a significant milestone for our company. It exemplifies the value of our strategic priorities and demonstrates how our enduring commitment to our purpose is resulting in tangible benefits for patients. Just over two years since adding Wind River to our pipeline, our attention now turns to the execution of a strong commercial launch, where we have already seen prescriptions being written. We see a tremendous opportunity to positively impact the lives of people living with PAH. And further, the importance of this therapy to patients provides us with increased confidence in our ability to deliver sustainable long-term value for our shareholders. Strategic business development focused on the best external science remains an important priority for our company. We've demonstrated that we can leverage our deep discovery prowess to identify important acquisition targets and then add significant value through our powerful clinical research engine, our regulatory expertise and our commercial scale, which together can serve to accelerate development and enable broad global access to important medical discoveries for patients in need. Turning to our first quarter results. We achieved strong growth, reflecting robust demand for our innovative portfolio. We're pleased to reflect this momentum in our updated full year guidance, which Caroline will speak to in a moment. Turning to our broader research efforts. We're focused on advancing our expansive and diverse pipeline of leading-edge programs for the benefit of patients. In vaccines, we continue to pioneer new approaches to optimize disease prevention. In HPV, we're building on the foundation set by GARDASIL to further reduce the global burden of certain HPV-related cancers and disease by potentially providing broader protection with a new multivalent HPV vaccine and by generating data to clearly demonstrate whether or not a single dose of GARDASIL-9 provides comparable long-term protection to the approved 3-dose regimen in males and females age of 16 to 26. In pneumococcal, we presented additional compelling data for V116, a vaccine that is specifically designed to help protect against the majority of invasive pneumococcal disease in adults ages 65 and older and look forward to its potential approval in June. Each of these programs are platforms where we can provide meaningful protection to broad populations on a global scale. In HIV, in partnership with Gilead, we shared promising data from our revitalized program for a once-weekly combination of islatravir and lenacapavir in the treatment setting. We're actively progressing our comprehensive clinical program, which is focused on both treatment and prevention strategies to meet the evolving needs of the HIV community. And in oncology, we initiated several late-stage programs of novel candidates from our diverse pipeline as we work to expand our impact for patients and reinforce our leadership position over the long term. Finally, across our deep pipeline, we have significant clinical momentum in a range of therapeutic areas. Cutting-edge science is at the core of who we are, and I'm confident that Merck is well positioned to deliver the next wave of important innovations and value to patients, shareholders and to all of our stakeholders. In summary, our science-led strategy is delivering compelling proof points that we are creating a sustainable innovation engine that with continued clinical success will lead to a more diversified portfolio of growth drivers over the next decade and beyond. I again want to recognize the enormous efforts across our global organization. My confidence is strong and growing that we are well positioned to build on this momentum and drive patient impact and value creation this year and well into the future. With that, I'll turn the call over to Caroline. Caroline Litchfield -- Chief Financial Officer Thank you, Rob. Good morning. As Rob noted, we have had a strong start to the year with robust growth across our business, which reinforces the confidence we have in our outlook. We are also making strategic investments to leverage leading-edge science to save and improve lives around the world, positioning us to continue to deliver long-term value for patients, customers and shareholders. Now, turning to our first quarter results. Total company revenues were $15.8 billion, an increase of 9% or 12%, excluding the impact of foreign exchange. The impact from exchange is primarily driven by the devaluation of the Argentine peso, which was largely offset by inflation-related price increases consistent with market practice. The following revenue comments will be on an ex exchange basis. Our Human Health business continued its momentum with double-digit growth of 13% driven by oncology and vaccines. Sales in our Animal Health business increased 4% across both companion animal and livestock products. Turning to the performance of our key brands. In oncology, sales of KEYTRUDA grew 24% to $6.9 billion driven by increased uptake from earlier-stage cancers and continued strong demand from metastatic indications. In the U.S., KEYTRUDA grew across a broad range of tumors. In earlier-stage cancers, the increase was largely attributable to non-small cell lung cancer following the launches of KEYNOTE-671 and KEYNOTE-091. In the metastatic setting, we saw strong uptake from the recent launch of KEYNOTE-A39 in first-line advanced urothelial cancer. Outside the U.S., KEYTRUDA growth was driven by continued uptake in earlier-stage cancers, including high-risk, early stage, triple-negative breast cancer and renal cell carcinoma, as well as continued strong demand from patients with metastatic disease. Inflation-related price increases, consistent with market practice in Argentina, also contributed to growth. Alliance revenue from Lynparza and Lenvima grew 7% and 10%, respectively. WELIREG sales more than doubled to $85 million driven by the additional indication following FDA approval of Light Spark 005 for certain patients with previously treated advanced renal cell carcinoma, as well as by increased uptake in certain VHL disease-associated tumors. Our vaccines portfolio delivered strong growth, led by GARDASIL, which increased 17% to $2.2 billion driven by global demand. Sales also benefited from the timing of shipments in China and CDC purchasing patterns in the U.S. VAXNEUVANCE sales grew to $219 million driven by continued uptake of the pediatric indication in the U.S. and ongoing launches in international markets, particularly in Europe. In the U.S. VAXNEUVANCE sales also benefited from CDC purchasing patterns. Sales in our Animal Health business grew 4%. Livestock sales growth was driven by price actions, as well as demand for swine and poultry products. Companion animal growth reflects price actions. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 81.2%, an increase of 4.3 percentage points driven by reduced royalty rates for KEYTRUDA and GARDASIL, which went into effect at the beginning of this year, as well as favorable product mix. Operating expenses decreased 4% to $6.4 billion. A charge of $656 million related to the acquisition of Harpoon Therapeutics this quarter was lower than the $1.4 billion of charges a year ago for certain business development transactions charges, operating expenses grew 8%. We remain committed to investing appropriately to realize the promise of our expansive early and late-phase pipeline and support the promotion of our key growth drivers. Other expense was $87 million. Our tax rate was 16.1%, including the impact from the Harpoon transaction for which no tax benefit was recorded. Taken together, earnings per share were $2.07, which includes a $0.26 negative impact from the charge related to Harpoon. Now, turning to our 2024 non-GAAP guidance. The operational strength of our business has enabled us to raise and narrow our full year revenue guidance. We now expect revenue to be between $63.1 billion and $64.3 billion, reflecting strong year-over-year revenue growth of 5% to 7%, including the negative impact from foreign exchange. At the midpoint of this range, operational strength in our business, approximately $600 million is partially offset by an incremental headwind from foreign exchange of approximately $400 million in mid-April rates, resulting in a full year negative impact from foreign exchange of approximately 3%. Our gross margin assumption is now expected to be approximately 81%. Our estimated range of operating expenses is between $25.2 billion and $26.1 billion, which does not assume additional significant potential business development transactions. Other expense is expected to be approximately $250 million. Our full year tax rate is unchanged between 14.5% and 15.5%. We assume approximately 2.55 billion shares outstanding. Taken together, we are increasing and narrowing our expected EPS range to $8.53 to $8.65. This is a $0.07 increase at the midpoint despite an incremental headwind from foreign exchange of approximately $0.05 using mid-April rates, resulting in a full year negative impact from foreign exchange of more than $0.30. As you consider your models, there are a few items to keep in mind. The increase in our sales guidance is driven by the strong performance across our current product portfolio, led by KEYTRUDA, which continues to experience growth from additional indications and patient demand. For GARDASIL, second quarter ex U.S. growth will be adversely impacted by shipment timing to China. This year, we expect more evenly distributed quarterly shipments to China. Recall, in 2023, we accelerated shipments from the second half to the first half of the year, which primarily impacted the second quarter. Over the near and long term, we remain confident in our ability to protect many more people from HPV-related cancers and drive growth of GARDASIL. Sales of LAGEVRIO in the first quarter were driven by an extended age of COVID-19 in Asia Pacific market. LAGEVRIO continues to be an important treatment option for certain patients with COVID-19. So we continue to anticipate full year sales to be lower than last year. We are excited to provide a novel treatment option for adult patients with pulmonary arterial hypertension, following the recent FDA approval of Wind River. We are seeing high interest from patient groups and a range of relevant prescribers. We are also making good progress in enabling access. Several payers have already established coverage policies consistent with the label and STELLAR study criteria, while others are in the process of developing their policies. As we go forward, we intend to provide an appropriate level of transparency to enable insight into the impact we are having on patients, including prescription data and revenues. In summary, we are confident in a successful launch of Wind River, consistent with our prior expectations and look forward to providing updates on our progress. Now, turning to capital allocation, where our strategy remains unchanged. We will prioritize investments in our business to drive near- and long-term growth. We will continue to invest in our innovative pipeline, including the initiation of many new late-stage clinical trials across multiple novel candidates, each of which has the potential to meaningfully address important unmet medical needs. We remain committed to our dividend and plan to increase it over time. Adding compelling science to our pipeline through business development remains a priority. Ample capacity given our strong investment-grade credit rating and cash flow to pursue a giant driven value-enhancing transactions. We will continue to execute a modest level of share repurchases. This includes we remain confident in the near- and long-term outlook of our business driven by the global demand for our innovative medicines and vaccines, as well as our exceptional pipeline. Our unwavering commitment to use the power of cutting-edge science to improve the lives of the patients we serve has put us in a position of financial and operational strength. Our excellent execution and continued investments in innovation will enable us to deliver value to patients, customers and shareholders now and well into the future. With that, I'd now like to turn the call over to Dean. Dean Li -- President, Merck Research Labs Thank you, Caroline. In the first quarter, we continued to make progress with a steady cadence of clinical regulatory milestones across our pipeline. Today, I will provide updates from our cardiometabolic disease portfolio, HIV and vaccine programs and close with advances in our oncology pipeline. As Rob and Caroline noted, late last month, we received approval from the FDA for Wind River, our first-in-class active and signaling inhibitor for the treatment of those living with pulmonary arterial hypertension to increase exercise capacity, improve WHO functional class and reduce the risk of clinical worsening events. Wind Revere is a novel therapeutic option that targets a new PAH treatment pathway and is indicated to treat a broad PAH population. This approval marks a significant step toward our goal of transforming the treatment journey for many patients with PAH. Wind River is currently being reviewed by the European Medicines Agency with the decision anticipated in the second half of this year. The Phase III ZENITH and HYPERION studies evaluating patients with more advanced disease and those earlier on in their disease journey, respectively, are ongoing, as well as a Phase II CADENCE trial evaluating WHO Group II pulmonary hypertension, a type of left heart disease. Our commitment extends to a broad range of pulmonary hypertension. Informed by results from the Phase II cohort of the Phase II/III INSIGNIA PAH study evaluating MK-5475, our inhaled soluble guanylate cyclase stimulator, and the STELLAR trial results for Wind River, we have made the decision to focus the development of MK-5475 on WHO Group 3.1 pulmonary hypertension associated with COPD and not further proceed in PAH. COPD is an area of significant need with no specific therapies currently approved. Our HIV pipeline continues to advance. Last month, presentations at the conference on retroviruses and opportunistic infections reinforced progress in our strategy to develop less frequent dosing regimen for managing and treating HIV. We believe these programs have the potential to help address adherence, stigma and other challenges faced by some individuals taking daily anti-retroviral pills. In collaboration with Gilead, safety and efficacy findings were presented from a Phase II study evaluating a once-weekly oral combination of islatravir, an investigational nucleoside reverse transcriptase translocation inhibitor; and lenacapavir, a first-in-class capsid inhibitor for the treatment of adults living with HIV. At 24 weeks, the trial met its primary endpoint and in a secondary endpoint, maintained a high rate of viral suppression. Additional longer-term data will be presented at a later date. In addition, safety and tolerability data were presented for MK-8527, a novel oral NRTTI candidate, from two Phase I trials that evaluated ascending single dose and multiple doses in adults 18 to 55 years old not infected with HIV. MK-8527 is being investigated as a potential monthly option for HIV pre-exposure prophylaxis. Vaccines remain an important element of our pipeline, and we are making progress across several programs. Findings from multiple Phase III trials of V116, our investigational 21-valent pneumococcal conjugate vaccine, were presented at the meeting of the International Society of Pneumonia and Pneumococcal Diseases last month. V116 was shown to be immunogenic for all 21 serotypes covered by the vaccine, including a pneumococcal vaccine-naive and vaccine-experience adults, as well as those at increased risk for pneumococcal disease. If approved, V116 would be the first vaccine specifically designed to address the majority of serotypes that cause invasive pneumococcal disease in adults ages 65 and older. The target action date is June 17. The meeting of the CDC's Advisory Committee on Immunization Practices is scheduled shortly thereafter. Since the initial approval of GARDASIL, a steady flow of clinical and real-world evidence has been generated to support the favorable efficacy effectiveness, safety and long-term durability of protection against certain human papillomavirus-related cancers and diseases in both males and females. Despite the proven public health benefit of HPV vaccination, the latest global cancer statistics from the International Agency for Research on Cancer indicate there is more to do to help increase vaccination rates. The latest statistics from 2022 ranked cervical cancer as the fourth most common cancer globally in terms of incidents and mortality in women and the leading cause of cancer death in 37 countries, predominantly in Sub-Saharan Africa, South America and Southeast Asia regions. At the UroGen Congress last month, we disclosed plans to build on the development of GARDASIL with a new clinical program to identify a novel multivalent HPV vaccine candidate with the potential to extend protection against a broader array of HPV types. This includes several types known to disproportionately impact African and Asian populations and individuals of African and Asian descent. First-in-human studies are scheduled to start in the fourth quarter of this year. In addition, we announced plans to conduct two randomized, double-blind multiyear clinical trials in females and males ages 16 to 26 years to examine the short- and long-term efficacy and immunogenicity of a single dose of GARDASIL-9 versus the currently approved 3-dose regimen. The goal of these studies is to generate data that clearly demonstrates whether or not a single dose of GARDASIL-9 provides comparable long-term protection to the approved regimen while also satisfying the high standards required by regulatory authorities. The clinical trials are anticipated to start enrolling in the fourth quarter. In oncology, we continue to focus on our three-pillared strategy comprised of immuno-oncology, precision molecular targeting and tissue-targeting agents. In immuno-oncology, September 2024 will mark a decade since the first approval of KEYTRUDA in metastatic melanoma. KEYTRUDA has since amassed approvals for 39 indication and continues to reinforce its reputation as a foundational therapy for certain types of cancer. Building on the recent FDA approval for KEYTRUDA in combination with chemotherapy for the treatment of FGO 2014, Stage 3 through 4a cervical cancer we recently announced that the pivotal KEYNOTE-A18 trial met its primary endpoint of overall survival, potentially providing a new standard of care for these patients. Our commitment to providing better options to prevent and treat cervical cancer remains strong. Also, in women's cancer, the Phase III KEYNOTE-868 trial, known as nRgGy-018, was granted priority review by the FDA for the first-line treatment of patients with primary advanced or recurrent endometrial carcinoma. The agency has set a target action date of June 21. Outside of the U.S., the European Commission approved KEYTRUDA in combination with platinum-doublet chemotherapy as neoadjuvant therapy followed by adjuvant KEYTRUDA in adult patients with non-small cell lung cancer at high risk of recurrence based on the Phase III KEYNOTE-671 study. This marks the first approval in Europe for an anti-PD-1 PD-L1 therapy as part of a treatment regimen for the neoadjuvant followed by adjuvant treatment of resectable non-small cell lung cancer based on positive overall survival results. Next to precision targeting. Building on the success of KEYTRUDA for certain patients with non-small cell lung cancer, earlier this month, we announced the initiation of the Phase III clinical trial for MK-1084, an investigational oral selective KRAS G12C inhibitor in combination with KEYTRUDA for the first-line treatment of certain patients with metastatic non-small cell lung cancer. The decision to proceed to Phase III was based upon early promising evidence from a Phase I study showing antitumor activity and a manageable safety profile. KRAS is one of the most prevalent oncogenes in human cancers, and G12C is the most common KRAS mutation in patients with non-small cell lung cancer. In the tissue targeting space, we are moving with speed and rigor to advance a broad pipeline of antibody drug conjugates with multiple planned and ongoing Phase III trials. In just over six months, we have made remarkable progress in our collaboration with Daiichi Sankyo. Recently, we announced that the first patient has been dosed in the Phase II/III REJOICE ovARIAN-01 trial evaluating the efficacy and safety of relatutidag, deruxtecan, an investigational CDH6-directed DXDADC in patients with platinum-resistant ovarian cancer. We are poised to begin a Phase III study evaluating infinitumab/derixtecan, a B7-H3-directed ADC in small cell lung cancer, a notably difficult-to-treat. New treatment options are desperately needed for these patients where the prognosis remains poor. We are pleased to have recently completed the acquisition of Harpoon Therapeutics, which provides novel T cell engagers, including MK-6070, an investigational delta-like ligand 3 targeting T cell engager, also being evaluated in certain types of small cell lung cancer, as well as neuroendocrine tumors. Finally, please mark your calendars for the evening of Monday, June 3, where we will host an investor event at ASCO in Chicago and provide an update on our diverse portfolio of immuno-oncology, precision molecular and tissue-targeting agents. Looking forward, June promises to be a busy month with three regulatory action dates, including V116 for prevention of invasive pneumococcal disease and pneumococcal pneumonia in adults; KEYTRUDA for primary advanced or recurrent endometrial carcinoma; and patritumab/deruxtecan for advanced EGFR-mutated non-small cell lung cancer. We continue to execute on our strategy with a focus on operational excellence and look forward to providing further updates on our progress throughout the year. And now I will turn the call back to Peter. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Dean. Shirley, we're ready to begin Q&A. We request that analysts limit themselves to one question today to get to as many different questioners as possible. Thank you. Questions & Answers: Operator [Operator instructions] Our first question comes from Terence Flynn with Morgan Stanley. You may ask your question. Terence Flynn -- Morgan Stanley -- Analyst Great. Thanks so much for the question. This is probably one for Dean. Obviously, you guys have been focused on building out your cardiometabolic franchise now. You have the sotatercept launch underway. You've got an oral PCSK9 in late-stage development. You have a GLP glucagon also moving forward for NASH, I believe. But I guess I'd just be curious how you think about the opportunity in obesity broadly as, on one hand, it seems like it could align with your current print. But on the other hand, it seems like Merck has gone more toward specialty markets and away from kind of primary care. So maybe just would love your thoughts there, Dean, as you think about building out. Dean Li -- President, Merck Research Labs Well, thank you very much. Yes, we are excited about the build-out that we have in cardiovascular metabolic. You pointed out the programs that have the most visibility right now. But let me assure you, there will be other programs that you will have more visibility over the coming years. In relationship to your question about GLP and obesity, I think there's two ways to look at it: you can look at it from a GLP angle, and you can look at it from an obesity angle. If you look at it from a GLP angle, there has been really important work showing its impact in diabetes, weight loss, more recently, in cardiovascular outcomes, most recently in sleep apnea. And you're right, we're very interested in relationship to MASH. We think that's an also important outcome. And we also think that there will be distinct populations, whether you call it obese or whether you call it MASH or -- within that GLP space. With distinct relations, it will be important to give a benefit of a molecule that really takes care of the primary concern. And that's our play, for example, in MASH, where we think we have a very tolerable drug that has significant reduction in liver fat and also gives a weight loss of 10% to 12%. When you look at that, I think these different outcomes may need different molecules. More generally, if you're talking about obesity, I do think that there's some work going on right now. But I think that there could be another wave where people start thinking about orals, how tolerable they are, the accessibility they are and combinations, how do you maintain, how you preserve muscle and also additional outcomes. And it may not be that the same molecule is the best molecule that wins out in every one of those subpopulations. And so, I would just -- I wonder if there will be some fractionation of the patient population when you say the word, for example, generally, obesity. And we wonder if there's opportunity there. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Terence. Next question please, Shirley. Operator Thank you. Our next question comes from Evan Siegerman with BMO Capital Markets. You may ask your question. Evan Seigerman -- BMO Capital Markets -- Analyst Hi, guys. Thank you so much for taking my question. I wanted to touch on some of your work in lung cancer, specifically with KRAS G12C, echoing Dean's comment. So this space is becoming increasingly crowded. Maybe walk me through what you believe differentiates your assets today from the currently approved one or from the pan-KRAS assets in development. Dean Li -- President, Merck Research Labs Yes. So this is one of my more favorite projects. So I appreciate that you actually asked a question about it. When you look at KRAS, as you point out, there is -- it's one of the most important driver mutations in multiple cancers. And if you say more broadly, not KRAS but pan-RAS, that is also true. In relationship to KRAS G12C, that's a small percentage of all the KRAS mutations and all the RAS mutations. But where KRAS G12C is especially prominent is in non-small cell lung cancer. It's, depending on the percentage, 12% to 15% in that patient population. And I will also emphasize that we have a lot of data in relationship to that patient population in non-small cell lung cancer. It's KEYNOTE-189. It's chemo plus IO. You need a potent compound with a KRAS to move it into first line. That's the game that we're trying to play. So it is crowded. But what you're looking for is a potent compound that has tremendous monotherapy efficacy. But most importantly, when you combine it with, for example, pembro, you maintain the dose, you maintain the ability to not have dose modifications. And that's the data that made us excited about this because I think we reported an ORR of 71% in combination. So that's why we're advancing that. The race for us is to get it in first line and then to think about other KRAS indications and IO-sensitive/insensitive and also other molecules that are coming through in the lung cancer space. And some of them are related to antibody drug conjugate. So we are very excited about our KRAS G12C program, 1084, which is moving to Phase III. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Evan. Next question please, Shirley. Operator Thank you. Our next question comes from Chris Shibutani with Goldman Sachs. You may ask your question. Chris Shibutani -- Goldman Sachs -- Analyst Great. Thank you very much. Maybe focusing on the pipeline on areas that you do not highlight as often, specifically immunology. And then, a lot of the discovery work that you talked about in CNS. With immunology with a TL1A, can you just help us understand where we are on the Crohn's study there and also the Pandion acquisition, that in just Phase II. And then, CNS, you highlight how many folks you have doing discovery research. How do you feel about the distribution of your efforts in CNS there? So just two areas not highlighted in the press release, but I think are important to your overall portfolio. Dean Li -- President, Merck Research Labs Thank you very much. So I'll first touch immunology and specifically in the TL1A space. So that TL1A, we think that it will be a highly effective -- the higher efficacy, and also not just in terms of efficacy, in terms of tolerability. That ulcerative colitis program Phase III has started already and is recruiting. We are hopeful that we will be announcing the opening of the Phase III and patients coming in for the Crohn's disease over the next few months. So we are very excited about moving TL1A eagerly and pretty aggressively move it in Phase III to really sort of outline the really differentiated profile that we have seen for TL1A, and specifically, our compound. I should also emphasize that we also are looking at TL1A not just within sort of inflammatory bowel disease, but we're also interested in other diseases. And one of the things that's really interesting about TL1A, it is blocking inflammation. But there is reasons to believe that it can have profound effects on fibrosis, and that's our interest in Crohn's disease. But there are other diseases, for example, in the lung where fibrosis is a really important component. And we will be interested to see those. We have other assets moving forward both from the Prometheus acquisition that is not the TL1A, as well as other internal that are moving forward with Alacrity. In relationship to neuroscience, we hope to be getting the readout with MK-8189. We have other programs that are moving and advancing. And we have made some commitments in the early discovery space in a BD standpoint to accelerate some of our works that have been made public. I think over the next one to two years, we'll see readouts Phase IIbs, Phase Is moving to Phase II. But I think at that point, we will be able to speak more fully. But I think the investment in neuroscience, I think, is critically important. From a healthcare unmet need, you have to list from an economic value to the healthcare system and population. Especially in the United States, neuro disease continues to be a really important place, and I would say neuro disease not just in terms of degenerative but -- not just classic neuro disease but in the psychiatry arena as well. And you've seen others advance business development in that space. We're interested in continuing in business development there, but also importantly, moving our own internal program, the lead program being MK-8189. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Chris. Next question please, Shirley. Operator Thank you. Our next question from Daina Graybosch. You may ask your question. Daina Graybosch -- Leerink Partners -- Analyst Hi. Thanks for the question. I want to ask some on pneumococcal vaccine. You mentioned several times V116 is customized for adult 65 and older. In the ACIP meeting, they discussed a recommendation in adult 50 or older. And I wonder if you could comment on where you think that ACIP recommendation for V116. And on V117, I wonder if you could talk about how the stack in, which I believe is now in Phase I is customized for pediatric patients. Rob Davis -- Chairman and Chief Executive Officer Yes. Maybe I can start, Daina, and then Dean can add. Obviously, I would just start by saying we were very pleased with the overall tone and tenor of the discussion coming out of the ACIP meeting. And as you look at what we have with V116, we continue to believe -- if you look at the strength of the data behind that, and we've talked about -- Dean mentioned some of the clinical readouts that have come. But recall, we cover 83% of of the serotypes-causing disease in adults. That's 30% higher than PCV20. So it's significant, and that was how it was specifically designed, targeting those serotypes which are most prevalent in adult disease. As a result of that, we continue to believe the value proposition of V116 is very compelling. If you look at the cost effectiveness, it's going to be a very cost-effective vaccine. And as a result, I think that's why you started to see the ACIP ask questions about the 50 to 65 age cohort, as well as the 65-plus. So I don't want to get ahead of the ACIP and their recommendation. But I would say our belief and conviction in the value of the data and the value this vaccine will bring for patients in the pneumococcal space is significant. And I would expect overall that we're going to see broad coverage coming out of the ACIP. Dean Li -- President, Merck Research Labs Yes. I would just add, again, we want to be respectful of ACIP and the FDA. But you did point out something that I think is something that clearly we took notice. When Rob talks about that 83% versus 50% and 30% more, and the specific question that you asked, 50 to 64, I would remind everyone that dropping that age for universal vaccination have been considered previously for other vaccines. And they could not come to a situation where they thought that it would be a good idea based on cost effectiveness and as such. And by increasing it from 50% to 83%, we believe that we changed the calculus, and that made why there is renewed interest in lowering that age based on the broader coverage given for V116. Rob Davis -- Chairman and Chief Executive Officer And I think there was a second question you had, Daina, about V117. I'll just maybe give a general answer, which is, obviously, if you look at the strategy of V116, it's the same strategy with V117: how do we develop an investigational PCV vaccine that is targeted specifically to those serotypes that cause disease in children, in peds, without hopefully causing untoward effects. And so, it's a model that follows that. We've not given any details to the additional serotypes or our thinking. But just understand that if you look at the model of V116, V117 is the same thing in peds. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Daina. Next question please, Shirley. Operator Thank you. Our next question comes from James Shin with Deutsche Bank. Your line is open. You may ask your question. James Shin -- Deutsche Bank -- Analyst Hey. Good morning, guys. Thank you for the question. Firstly, I know Merck does not provide product-level guidance, but given WinnRever's important and investor focus, can you provide any color on when River's contribution to guidance? And then, second one is for Dean on Voice ovarian, and I suppose precision oncology in general. But does the field know how much overlap there is between CAT Hern and FR alpha? And then, for patritumab, I know the data for HER3 shows expression in advanced patients, but there's a lot of development in this space. So how does Merck envision patritumab to be positioned or sequenced? Rob Davis -- Chairman and Chief Executive Officer Yes. Maybe, James, I'll start. And thank you for the question. The short answer is, unfortunately, we don't provide product-level guidance. So I don't think we want to get into trying to tell you what we see Inverter as being a contributor in 2024. But with that said, I think it's important to make a few points just so you understand how we're seeing it. First of all, we're very excited to provide this novel treatment for patients with PAH. As you know, we think this will be a game changer in that space. We were well prepared for the launch. And I can tell you the launch, although very early, is going well so far. We've seen an increasing number of prescriptions being written. We've seen repeat prescriptions, and that's coming both from the COE space, from the Centers of Excellence, which is about 150 in the United States, as well as from non-COEs, which is a good development. We've already begun making shipments to patients' homes. And hopefully, we'll have patients being dosed very soon, if not already. And then, I think the other thing I'd note is the prescribers, as well as the locations are both from the Centers of Excellence and also non-COE. So that's something to note. And then, finally, from a payer perspective, we're seeing good access. No real limits. In fact, we already have several payers who have established coverage policies. And I think as Caroline pointed out in the prepared comments, very consistent with the label and what we saw in STELLAR. But the fact that we've seen policies enacted giving coverage to patients already this quickly at launch, we see as a good sign. It's obviously early. But everything so far looks quite good. So our confidence in a successful launch has not changed. We continue to see this consistent with our expectations. And as we move forward, we'll give you appropriate level of transparency. But I did just want to give flavor, even though we can't give the specific guidance you were asking for. Dean, I'll let you take the second part of the question. Dean Li -- President, Merck Research Labs Yes. So I'll just add a little bit in relationship to Wind River. I think it's important to emphasize that the indication or the label that we have is a broad indication and is based on STELLAR. And there will be potential data flows that will continue to inform and strengthen the field. We have STELLAR and Soteria, which is open label. We have ZENITH, which is advanced, and that will look at mortality and morbidity; and HYPERION, which is in more -- earlier in the journey. We have the European action that will happen in the second half of 2024. And I would just emphasize that this is something that healthcare professionals and self-administration is possible. And in relationship to that, there will be a demand for innovation, and we hope to provide that innovation as this becomes even more used in a self-administration standpoint. You asked a number of questions and many of the questions related, and some of it got blurred out, but some of it related to ovarian, but more broadly speaking, tissue targeting an ADCs. So I'll just give you an overview. When we look at the field, we look at cancers where there is IO and chemo and that combination. And where will we see that? We ask ourselves, can you combine an IO agent with a chemo agent? And we think about KEYTRUDA, but we also think about next-gen tissue targeting IO agents, such as the recent immune engagers that we have from Harpoon. And then, on the other hand, we think about chemo, we think of precision targeting like RAS, how can it combine? And we also think in terms of ADCs. And the specific case that you're talking about, you have HER3 patritumab. That's moving along in EGFR non-small cell lung cancer. In B7-H3, there's prominent data that's in small cell lung cancer, maybe in prostate. And for CDH6 itself, that ovarian data is quite interesting, and that's relatedag. At least for us, it's very interesting because the initial data with our partners in Daiichi Sankyo is striking to us. Because in that patient population, it looked like allcomers did extremely well and that in some situations, you think about a biomarker. But for the CDH6, the impact across sort of biocersubsets was quite impressive. So I hope that gives you a general structure, and we're happy to -- and thank you very much for that question. Peter Dannenbaum -- Senior Vice President, Investor Relations Thanks, James. Next question please, Shirley. Operator Thank you. Our next question comes from Umer Raffat with Evercore. You may ask your question. Umer Raffat -- Evercore ISI -- Analyst Hi, guys. Thanks for taking my question. I'm just trying to think through your next-gen HPV vaccine. And I guess, how should we think about potential penetration rates with a revaccination opportunity with the new broader-spectrum HPV, especially in patients who have already taken GARDASIL. Dean Li -- President, Merck Research Labs Revaccination and relationship to HPV, is that what the question is? Caroline Litchfield -- Chief Financial Officer G9. Rob Davis -- Chairman and Chief Executive Officer The new multivalent -- Dean Li -- President, Merck Research Labs With the G9+. I'm struggling to answer your question because I first got to make a G9+ that works really, really well. And when I get that that will be great because there are patient populations that I think would be extremely well served. But I would also emphasize that we've just talked about cancer. We talked about early stage cancer. This is the time that you can really treat and potentially cure, but we're in the business of preventing cancers as well. One of the questions that comes to us is that in certain patient populations, you want a vaccine that -- the data, for example, Scandinavia, it's 90-plus reduction -- 90% reduction in cancer incidents and then the recent American Cancer Society. We are wondering whether you make a G9+ vaccine, whether you can make the argument, if we're successful with the G9+ and what we hope to aspire for, whether you could fundamentally change how one recommends cancer screening for women in relationship to cervical cancer and also the reduction both in men and women of many other cancers outside of cervical cancer. Caroline Litchfield -- Chief Financial Officer This is Caroline. I'll just add that as we sit here today, we all know there are many, many people around the world that have not received a vaccine to prevent them against -- to help protect them from HPV-related cancers. With the possibility of improving upon G9 with a multivalent vaccine, we're hopeful that we can provide further protection, especially for different population groups. And we will price the vaccine appropriately based on the benefit that it will provide. So we're looking forward to continuing to see growth in GARDASIL and see how the science evolves with our clinical programs. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Umer. Next question please, Shirley. Operator Thank you. Our next question comes from Tim Anderson with Wolfe Research. You may ask your question. Tim Anderson -- Wolfe Research -- Analyst Thank you. I have a few questions on KEYTRUDA subcu. It may not be scientifically sexy, but of course, it could be quite commercially meaningful. So we'll see that data, I believe, later this year. Any whatsoever to that readout? Or can we consider it to be a slam dunk? Second question is when the subcu launches in the U.S., presumably next year, will uptake be fast or slow or somewhere in between? And then, eventually, how much can a subcu account for the franchise on a volume or a patient basis? Dean Li -- President, Merck Research Labs So I'll take the first part of that. I remind myself, nothing is slam dunk once you place innovative drugs in patients. So I'll answer that question. But I think you highlighted really the pembro plus hyaluronidase that we're advancing. I would disagree a little bit. I do kind of think it's sexy in some ways. And that D770, that -- we will be sharing that data by early 2025. The reason I think it's really an important innovation is to really increase the access. You've seen the number of early stage cancer readout that are coming through with ibalizumab and KEYTRUDA and especially in the earlier stages when we talk about KEYNOTE-671, when we talk about in renal cell carcinoma, where we have OS benefit. I think this is going to be really really important for patients. It will also be important in patients for treatment, especially in those who have monotherapy and those especially combos with oral agents because it just makes it so much more accessible. So we think this is an important program and that it could have substantial impact on patients and their access to PD-1, where we know the foundational elements of PD-1. And in terms of financial -- Rob Davis -- Chairman and Chief Executive Officer Yes. Maybe, Tim, I'll just provide some commentary on your questions on uptake and how much of the patient population this can account for. As we think about uptake of this opportunity, I would first point out that we see really -- it starts with the strength of the clinical data underlying the IO agent itself. So it's more about the confidence they have in KEYTRUDA. And then, secondarily, it's about the delivery mechanism, which is important as we think about obviously leveraging the data we have and just the breadth of what KEYTRUDA is. But I will tell you that as we think about bringing this forward when we do launch, our goal will be the price appropriately with the goal of driving quick options. So we do want to see adoption happen, and we do think you will see it. Obviously, if you look at then the size of the patient population where it could be, just to give you a sense, by 2028, if we look at the patients who are on monotherapy with KEYTRUDA who are using combinations with orals and those who are moving into earlier stages of disease through some of our adjuvant and neoadjuvant areas with KEYTRUDA, that represents about 50% of the patient population at that time. So that is really the addressable market for what we see the subcu offering to be. And potentially, we're not foreclosing the opportunity to also look into the metastatic setting and people being -- giving care in institutions, as well as those moving outside of the institutions. But obviously, the value to the patient is ease of use, ability to use it outside of the hospital setting. The time and share is obviously less if you're getting a subcu versus an IV. And then, from a cost to the healthcare system, the ability to not have a patient sitting in the chair for as long allowing for more patients to move through, we think, actually drives access and improves the providing of care as well. So we see it both beneficial from a patient perspective and from the provider perspective, and that's why we do think you'll see uptake of this important medicine when we bring it forward. Peter Dannenbaum -- Senior Vice President, Investor Relations Thank you, Tim. Next question please, Shirley. Operator Thank you. Our next question comes from Louise Chen with Cantor. You may ask your question. Louise Chen -- Cantor Fitzgerald -- Analyst Hi. Thanks for taking my question. I just wanted to ask you for ASCO on June 3. Are there any specific readouts updates that you're very excited about presenting? Dean Li -- President, Merck Research Labs I think there's just going to be a stream of data. There's going to be follow-ups and a series of keynote, whether it be gastric, betacellular, biliary, bladder, non-small cell lung cancer. There will be discussions of many of the programs that I think you're beginning to see coming up in the clinical trial website and relationship to a whole series of Phase II related to molecules that you're familiar with, but also molecules that are sort of earlier in our Phase III development, ranging from bomedemstat to the KRAS program, to many of the ADCs and the updates that we've shown in relationship to not just the Daiichi Sankyo ADCs, but the other ADCs, whether it be TROP2 cloud or net in. So you'll have a whole full array of discussions of those compounds, some at the ASCO, but some at the ASCO investor event. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thanks, Louise. I know we have several more people in the queue. We're going to go an extra five or 10 minutes to try to get to as many questions as possible. Next question please, Shirley. Operator Our next question comes from Trung Huynh with UBS. You may ask your question. Your line is open. Trung Huynh -- UBS -- Analyst Hi, guys. Trung Huynh from UBS. Thanks for fitting me in. On the Wind River launch, thanks for the comments today on access and coverage. On approval, you noted that two thirds of your PAH patients would like Part D and third commercial. Perhaps can you expand on the free assistance program that you're hoping to initiate? And what proportion of those Part D patients do you think could be receiving free product this year? Rob Davis -- Chairman and Chief Executive Officer Yes. I appreciate the question. So as you point out, we are very focused on ensuring that patients get access to the medicine. We're very much committed to it. And that's why we do have -- in addition to our normal programs we would run, we do have the access program we run. That program is actually independent of our commercial operations. We don't really report data coming out of that because it's run through a separate foundation and with the goal, frankly, of making sure that patients get medicines there. So that is available. It can be accessed on our website, and we're committed to making sure patients get the medicine. But specifics on that, we're not going to go into. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Trung. Next question please, Shirley. Operator Thank you. Our next question comes from Carter Gould with Barclays. You may ask your question. Carter Gould -- Barclays -- Analyst Good morning. Thanks for squeezing me in. Maybe on your personalized cancer vaccine with Moderna, as the Phase III sort of nears completion of enrollment, it of course begs the question around the potential to sort of file based on the existing data you have. Can you maybe just update us on your thoughts there and whether you think you still need Phase III data or manufacturing would preclude an early filing? Any help there would be appreciated. Dean Li -- President, Merck Research Labs Yes, I'll take that. I mean, I don't want to speak about whether the FDA will take what action or not. But I'll just reemphasize to everyone what is exciting about our I&T program and our excitement with working with Moderna. So here, we're inducing and coaxing sort of immunity. And we're mixing it with a drug that's well known that and leases pre-existing immunity, which is KEYTRUDA. What we have in our hands is a randomized, early stage IO sensitive trial, where it is very clear of the contribution of components of the INT, not in immunogenicity, but in clinical benefit. So I just want to highlight that about our data as one looks at the data of others. We also have begun to show that we are moving it in Phase III in adjuvant melanoma and adjuvant non-small cell lung cancer and our ability to move that with speed and rigor but get patients recruited, which is going well, I think will be very important because you're going to need a Phase III regardless of what the FDA decides on an accelerated approval or not. And so, that's what we're focused on. We're also focused on looking at other IO-sensitive tumors such as renal cell carcinoma. And I would just emphasize the strength of the data in relationship to durability is being answered. The ability for us to open these trials and successfully advance it is being answered. And we clearly have work to do with our colleagues who we respect deeply for what they've done in relationship to manufacturing. Any -- all mRNA vaccine, I mean, they've really pushed the envelope here. Our ability to do that will be important to make this an important treatment. As far as the FDA's decision, the FDA will need to make their decision as to how they consider the opportunity. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Carter. Next question please, Shirley. Operator Our next question comes from Chris Schott with J.P. Morgan. You may ask your question. Chris Schott -- JPMorgan Chase and Company -- Analyst Great. Just a couple of GARDASIL questions. You're pointing to a more evenly distributed China sales this year, and it seems like a tougher 2Q comp. But can you just directionally talk about growth for GARDASIL more broadly for the year? I guess the heart of it is still a healthy growth asset for you this year. And the second one on GARDASIL is if we were to move to a single dose of GARDASIL-9, what does that mean commercially and from a sales perspective for the franchise? Caroline Litchfield -- Chief Financial Officer Chris, it's Caroline. So in terms of the phasing of GARDASIL, as you pointed out, during 2023, we saw in China an acceleration of the shipment from the second half of the year to the first half of the year, specifically to the second quarter. What that's done is it's provided an actual tailwind to revenue growth in the first quarter for China, but it will provide a headwind more significant in the second quarter. And that's what we've called out. As we look at overall growth for GARDASIL, given where we are with the level of vaccinations across the world, given the manufacturing that we have been scaling up, we're confident in our ability to continue to drive growth during 2024. And in 2025, we will see our manufacturing capacity unconstrained, so enabling us to further supply and support the market. As we've talked in the past, our opportunities for growth are significant as we look to continue to improve on adolescent vaccination rates, as we look to improve upon gender-neutral vaccinations, as we look to really activate the mid-adult segment, but increasingly get to the lower-income and middle-income markets, which will come at a different price point. As we sit here today, continue to be confident in the outlook for GARDASIL over both the near and the long term. As we look at the possibility of a single dose of GARDASIL, the study that we are conducting will be a comprehensive study and will take some time to unfold. What we're seeing in the marketplace currently is where certain low-income markets are implementing a single-dose regimen, they are also increasing the numbers of people. They are betternating by broadening the age cohort or also opting to vaccinate males at this stage. We'll have to be long term how the data plays out with regards to a single dose to ensure that we will price our vaccine based on the benefit that we're bringing and we vaccinate as many people in the world that we can. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Chris. Next question please, Shirley. Operator Thank you. Your next question comes from Luisa Hector with Berenberg. You may ask your question. Luisa Hector -- Berenberg Capital Markets -- Analyst Thank you very much. I also have questions on the Wind River launch. I just wanted to check how straightforward the subcutaneous administration is and when you might expect to launch an auto-injector. Also, should we actually expect the Part D access to come online at a similar pace as commercial? I'm just not sure whether that's something that's maybe sitting more into next year. And if I can, just another question on that with Part D is that you price for the Part D restructure next year. How do you expect payers to behave when this happens. I can see that the payer will take on a greater burden for higher-priced oral therapies. Do you expect some pushback within the actual drug that you would have higher rebates at that point? Or do you think that incremental burden for the payers might be spread more broadly across all products? It's a kind of bigger-picture question, but When Roger brings it into focus. Dean Li -- President, Merck Research Labs So this is Dean. I'll answer your questions in terms of delivery of Win Lever. We have it in a vial, and we have it in a situation where both a healthcare provider or self-administration is both feasible, possible and will be used. We believe that the vast majority with time that people will use it as self-administration. This is a patient population that's quite used to doing injection. So we think that that will be able to navigate and that the patients will get access. But as you point out, further innovation will be demanded for, and an auto-injector will be critically important. We are doing the studies right now to evaluate how do we provide such an option, and we hope to have those options and those plans more public in the near future. But we agree with you totally in the fact that a future auto-injector will be important. Caroline Litchfield -- Chief Financial Officer And Luisa, this is Caroline. At this stage, we are seeing a real acceptance of the value proposition of Windriver in the United States. We're seeing policy for coverage equally across both the Medicare and Medicaid patient population, as well as the commercial segment. So as we move forward, we'll look forward to just helping as many patients as we can across all of those segments, irrelevant of their coverage. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Luisa. Next question please, Shirley. We have time for -- this will be our last question. Operator Thank you. Our next question comes from Seamus Fernandez with Guggenheim. You may ask your question. Seamus Fernandez -- Guggenheim Partners -- Analyst Thanks so much. I wanted to ask actually about your RSV-targeted antibody, how you're thinking about that, the optionality for it and the market size and Merck's potential participation in this market as it relates to the competitors' global supply constraints at this point in time. It seems like coming to market more aggressively or as aggressively as possible could actually make for a meaningful market opportunity for Merck. And then, just a follow-up. Rob, I wanted to just get your sort of qualitative view three years, four years in thinking about the evolution of the business. 2028-2029 still represents a meaningful challenge with KEYTRUDA. But as you look forward to the rest of this year and head of 2025, how important is business development to Merck from here in terms of the size and type of acquisitions? I think investors have certainly applauded what Merck has executed on in the last year for sort of mid- to later-stage assets. Dean Li -- President, Merck Research Labs Yes. So I'll take the RSV question. So clasrovumab, we're excited about it. As many of the people know, it's a monoclonal antibody and it's a way to get passive immunity to infants. We think it's really important as we have seen recently. And ours is a single fixed dose and has the durability in terms of covering a whole RSV season, I think, is critically important. And the ability to give this to an infant any time and -- versus, for example, alternative strategies, which is maternal vaccination. And then, also, we believe that this will be a distinguished monoclonal antibody and has high barrier to resistance. So we're excited about moving and -- seeing that data and moving with with both speed and rigor to get this to the market because we think it will be an important contributor, especially given what we've seen in the RSV season just this past season. I do want to just take this one moment to just say it's not just the RSV vaccine that we're very excited. We're also very excited because it's very much in the lay press in our dengue V181, which is a live attenuated tetravalent vaccine. And we're moving with equal eagerness to move that forward into Phase III, as we've already seen data from our colleagues in Institute Butantan about the effectiveness and efficacy of this vaccine. But I'll turn it back to Rob. Rob Davis -- Chairman and Chief Executive Officer Yes. No. Thanks for the question. And so, if I would just kind of, I guess, think a little bit about where we've been in over the last three years, a few points I would want to raise. One, I think we've made tremendous progress in a relatively short period of time, and I give all credit to Dean, to our R&D colleagues for what they've been able to do, how they have been able to really move just flawlessly products through our pipeline. It's amazing you think of it now three years in, we haven't had really any major failures. The one maybe hiccup with islatravir, but that's coming back. And so, I feel very proud of what our colleagues in R&D have been able to do. And then, I think about from a commercial perspective, from a manufacturing perspective, we're pulling the products through, we're showing value. The fact that we're ready for the launch with WhenRover shows how we can build capability very quickly. We did it in KEYTRUDA, we did it in JANUVIA and now we're doing it in inRever, and we'll do it in new spaces coming forward. So we feel very good about that. So across all elements, R&D, commercial manufacturing, the business is delivering. And so, as we sit here today, if our clinical success continues, I think you're going to see us with a more diversified set of growth drivers over time than, frankly, we've had in many years, if ever. And that's very important. And it all is really what leads to the confidence you've heard me express in other settings, that I'm increasingly less focused on 2028. And I would remind you, by the way, it's a staggered LOE. So it's 2028 in the U.S.; in China, it's 2031; in Europe, in 2032 and in Japan. So it's not a one-moment event. It actually happens over time. But that being said, as you've heard me say, I see it is more of a hill than a cliff. And my confidence that we're going to come back with fast growth after that is very high. And we're very focused on the sustainable engine from 2030 to 2040 at this point. So I feel good about where we are, but I just want to reinforce it's a team effort, and I've been left with a great team. Peter Dannenbaum -- Senior Vice President, Investor Relations Great. Thank you, Seamus, and thank you all for your time and your interest today. I'm hoping to see many of you at our ASCO event on June 3 or at a few of the conferences that we'll be attending this quarter. So thank you all very much.

edtsum4

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good day, ladies and gentlemen, and welcome to the MSCI first quarter 2024 earnings conference call. As a reminder, this call is being recorded. This time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, where participants are requested to ask one question at a time, then add themselves back to the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy Ulan, head of investor relations and treasurer. You may begin. Jeremy Ulan -- Head of Investor Relations and Treasurer Thank you. Good day and welcome to the MSCI first quarter 2024 earnings conference call. Earlier this morning, we issued a press release announcing our results for the first quarter of 2024. This press release, along with an earnings presentation and brief quarterly update, are available on our website, msci.com, under the investor relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our chairman and CEO; Baer Pettit, our president and COO; and Andy Wiechmann, our chief financial officer. As a final housekeeping item, we want to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry. Henry Fernandez -- Chairman and Chief Executive Officer Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the first quarter, MSCI delivered solid financial results that demonstrate the resilience of our business and our ability to maintain profitable growth, supported by durable secular trends. Our operating metrics included some key product and segment milestones. But new recurring sales were flat from last year's levels and reflect the lagging effect of market pressures on client budgets, and cancels were meaningfully elevated in some concentrated areas. On the financial side, MSCI achieved organic revenue growth of 10%, adjusted earnings-per-share growth of 12%, and free cash flow growth of 14%. Meanwhile, our ABF revenue grew by 13%, powered by record AUM balances in both ETFs and nonlisted products linked to MSCI indices. We consider AUM levels in MSCI index-linked products as a leading indicator of improving client conditions. Operationally, we delivered our highest Q1 recurring sales in analytics in a decade at $14 million, our best-ever Q1 of recurring sales among hedge funds at nearly $11 million, and another quarter of double-digit subscription run rate growth of 11% among asset owners, driven by index and analytics. Nonrecurring sales of $18 million were up 16%. At the same time, our first quarter results show the lingering impact of market volatility, changes in interest rate expectations, and pressures on investment and financial firms, especially active equity managers. Notably, MSCI witnessed elevated cancels, which reflected a concentration of unusual client events. Roughly $7 million worth of cancels came from a single client event, a historic merger of two major global banks in Europe that affected us across index, ESG, and analytics. While some client pressures may continue, we do not expect this high level of cancels to continue. In fact, we remain greatly encouraged by our high levels of engagement across all client segments and all geographies. Despite the tough Q1 operating environment for us, we delivered double-digit organic subscription run rate growth among asset owners, hedge funds, wealth management -- managers, and corporates. Among asset managers, redemption, outflow, and fee pressures continue to weigh on some managers, but we were able to deliver 7% organic subscription run rate growth with that segment. In addition, we achieved 39% climate run rate growth across our product lines, driven by APAC and EMEA regions. Likewise, APAC and EMEA helped stabilize our ESG run rate growth at 12% amid continued headwinds in the Americas. Meanwhile, amid a strong U.S. dollar, the benefits of our nondollar expenses helped offset FX-related revenue headwinds. MSCI's all-weather franchise supports our financial resilience. Our diverse mix of clients, products, and geographies helped stabilize our performance in difficult environments, as we experienced in the first quarter. Looking ahead, to the extent equity markets and high AUM balances and liquidity levels remain supportive, that should mitigate certain pressures that have weighed on client spending on MSCI products. We remain keenly focused on capitalizing on the biggest secular trends reshaping our industry such as portfolio customization and indexation, the growth of an increasing allocations to private assets, and the global sustainability revolution. Just last week, we closed our acquisition of the London-based index provider, Foxberry. This will give us a new technology platform to accelerate custom index production while providing simulation and backtesting capabilities for the creation of indices for institutional investors and intermediaries. Turning to our other recent acquisitions. Combining the Fabric platform with MSCI's factor risk models, ESG and climate data, and indices has dramatically enhanced our capabilities and solutions for the wealth segment. Finally, the MSCI Carbon Markets team, formerly Trove Research, has expanded our climate solutions and deepened our engagement with existing and prospective clients beyond institutional investors such as corporates, trading desks, and banks. Considering the lagging effect of market volatility that our clients and MSCI have faced, we expect our all-weather franchise to continue to withstand external challenges such as the client events we saw in Q1. This makes us confident that MSCI can maintain high levels of revenue growth and profitability in 2024 and beyond. And with that, let me turn the call over to Baer. Baer. Baer Pettit -- President and Chief Operating Officer Thank you, Henry, and greetings, everyone. In my remarks today, I will discuss some of the key sources of strength in our first quarter results at both the product and segment levels while putting our results in a broader strategic perspective. First, I would like to expand a bit on Henry's comments about our elevated cancels. As he noted, the vast majority of our first quarter cancels stemmed from client events such as industry consolidation, cost pressures, fund closures, and reorganization. Excluding the single client event from a bank merger, our Q1 retention rate across MSCI was 94%. Clients who use multiple MSCI product lines account for 85% of our total subscription run rate. The Q1 retention of those clients, on average, is 93% or higher. Turning to our product and segment results. As demand for index investments continues to grow, the product ecosystem linked to MSCI indexes remains a competitive advantage, especially as more and more investors push for customized products. In the first quarter, assets under management in equity ETF products linked to MSCI indexes hit a new record high of $1.58 trillion, while AUM in nonlisted products linked to MSCI indexes also set a record of $3.23 trillion. We also delivered index subscription run rate growth of 9.3%, including 12% growth in Asia-Pacific and 24% growth among hedge funds. The 24% subscription run rate growth in index among hedge funds was driven primarily by our float data product and custom index sales. Meanwhile, our custom and special index run rate growth was 19%. MSCI's recent acquisition of Foxberry will further enhance our wide range of custom index solutions and provide a new client-centric interactive experience. The trend toward greater customization cuts across all product lines and client segments. For example, wealth managers increasingly want to customize their client portfolios using advanced technology platforms. That is what motivated MSCI's acquisition of Fabric, whose platform is now part of our analytics offering. Combined with our total portfolio toolkit, the Fabric platform has already boosted our ability to serve the wealth segment, and the feedback from clients has been extremely positive. Our run rate among wealth managers has now surpassed $100 million, growing over 15% year on year. The push for customization is closely related to another shift in the analytic space. Clients have always depended on us for risk and performance attribution tools, but they now want highly specialized insights and deeply integrated content, all supported by leading-edge technology, including generative AI. Our analytics team has met this demand through products such as our Multi-Asset Class Factor Models, our Risk Insights and Risk Manager solutions, and our MSCI ONE platform built on Microsoft Azure. As we have recently seen, these tools can become even more relevant amid market volatility, cyclical pressures, and geopolitical uncertainty. In the first quarter, analytics posted revenue growth of 12% and our highest Q1 in a decade for recurring new sales. At the product level, recurring sales of our Risk Manager tool were up by 60% and included a large strategic win with a major global alternative asset manager, facilitated by our Risk Insights offering. At the segment level, analytics achieved recurring sales growth of 27% among banks, 20% among hedge funds, and 15% among asset owners. Rising demand for highly specialized analytics tools intersects with growing client needs for climate and sustainability regulatory solutions. This represents an attractive opportunity for MSCI, and we have doubled down on our efforts to capture it. Our first quarter run rate growth for ESG regulatory solutions was 33%. To build on this momentum, we have enhanced our solutions for the EU Sustainable Finance Disclosure Regulation while developing a new solution for the Corporate Sustainability Reporting Directive or CSRD. In addition, we will continue exploring untapped opportunities in APAC, where we achieved 18% ESG run rate growth in the first quarter. In MSCI Private Capital Solutions, we achieved a run rate growth of 17% over Burgiss' performance in the same period last year prior to the acquisition and a retention rate of close to 96%. We had early momentum in EMEA, which accounted for over half of new client wins in the product segment. We continue to drive new recurring sales of key existing products such as private capital transparency data and Total Plan portfolio management. We're also making progress on our integrated product road map, including evaluated pricing for LPs and GPs, leveraging MSCI's data, models, and research. In summary, MSCI remains laser-focused on translating our long-term strategy into near-term delivery while harnessing competitive advantages and secular trends. And with that, let me turn the call over to Andy. Andy. Andy Wiechmann -- Chief Financial Officer Thanks, Baer, and hi, everyone. In the first quarter, we delivered double-digit organic revenue growth, 11% adjusted EBITDA growth, and 12% adjusted EPS growth. We delivered 10% organic revenue growth, as well as record asset-based fee revenue, driven by record AUM balances in ETF and non-ETF products linked to MSCI indexes. The solid financial performance highlights the resilience of our business model, even in the face of headwinds reflected in our operating metrics. As we have mentioned previously, we are seeing the impacts of a slow-moving business cycle as the prolonged period of muted flows into active equity strategies have resulted in a lengthening of sales cycles and, in this quarter, a concentration of client event, on top of what is typically a seasonally softer quarter for us. To provide a bit more color, if we compare our cancels to the first quarter of 2023, the two product segments with the biggest increases were index and ESG and climate. Within index, nearly the entirety of the increase, or roughly $7 million of the increase, related to a higher contribution from corporate events. From a client segment lens in index, $5.2 million of the year-over-year increase in cancels came within the broker-dealer and hedge fund client segments, including roughly $4 million from the previously mentioned large global bank merger. Similarly, within ESG and climate, nearly $4 million, or 80% of the increase in cancels, came from a higher level of corporate events, including 2.5 million from the large global bank merger event. The large majority of cancels related to this global bank merger occurred in Q1, although there could be some smaller items that come through in future quarters as the integration is completed. Across all product segments, the retention rate with asset owners and asset managers was 95% and 97%, respectively. While we do expect some elevated level of client events to continue in the near term, we do not expect to see cancels continue at this level in the coming quarters, and we expect retention rates to rebound through the year. Additionally, we have a solid pipeline of new sales opportunities. In index, we had 8% subscription run rate growth in our market-cap weighted modules and 19% growth in custom indexes and special packages. As a reminder, in Q2 of last year, we had a large nonrecurring revenue item related to unlicensed usage of our indexes, which drove an unusually large level of nonrecurring revenue. ABF revenues were up 13% year over year, benefiting from about $21 billion of cash inflows and about $93 billion of market appreciation so far in 2024 within ETFs linked to MSCI equity indexes. Most of the MSCI-linked ETF flows were in developed markets outside the U.S. and emerging markets products, which, together, were over $22 billion. In analytics, organic subscription run rate growth was 7%, which reflects the benefits from the investments we've made in the innovations such as our next-gen models and our Insights offering. These have helped us to drive strong sales in enterprise risk and Multi-Asset Class Models across client segments. We also had several client wins in fixed-income analytics. Analytics revenue this quarter included a large contribution from catch-up revenue items, much of which related to large client implementations. In our ESG and climate reportable segment, organic run rate growth was 13%, which excludes about $4.8 million of run rate from Trove and the impact of FX. And run rate growth for the reportable ESG and climate segment was nearly 18% within Europe and close to 22% in Asia, while the Americas growth was 9%. In Real Assets, run rate growth was about 4%, with subdued net new subscription sales continuing to reflect lower transaction activity and other commercial real estate pressures. We continue to be pleased with our progress on the integration of Burgiss, which, as a reminder, is referred to as the Private Capital Solutions operating segment within our all other private assets reportable segment. Retention was strong at nearly 96% and contributed over $24 million of revenue for the quarter. We continue to have a vigilant focus on disciplined capital allocation, and our cash balance at the end of March was over $500 million, including readily available cash in the U.S. of over $200 million. Last week, we closed on the acquisition of Foxberry for approximately $22 million of upfront consideration. The transaction also has the potential for additional performance-related payments tied to the achievement of key milestones. Our 2024 guidance across all categories remains unchanged and assumes that AUM declined slightly in Q2 and rebounds gradually in the second half of the year. I would note that our first quarter effective tax rate of 13.5% benefited from favorable discrete items and higher excess tax benefits recognized on stock-based comp vested in the period. For the remainder of the year, we expect the quarterly effective tax rate of 21% to 22% each quarter before any discrete items. Overall, our client-centricity and multiyear investments position us well to drive growth throughout 2024, and we look forward to keeping you posted on our progress. With that, operator, please open the line for questions. Questions & Answers: Operator We will now begin the question-and-answer session. [Operator instructions] And your first question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead. Toni Kaplan -- Morgan Stanley -- Analyst Terrific. I wanted to talk about the closures. You know, thank you for giving the segment breakout for the large client event. You know, just -- it sounds to me like that is now in the numbers but wanted to just confirm that there isn't going to be more. And just more in general around the non-UBS event, like, you know, it sounded like maybe there were more closures of asset managers that you saw in the quarter. So, do you expect that to, you know, improve, you know, throughout the year? Thanks. Andy Wiechmann -- Chief Financial Officer Sure. Hey, Tony. It's Andy. So, on the large global bank merger, as we mentioned, the large bulk of the cancels related to that merger occurred in Q1. We did have some small items in previous quarters, and there could be some smaller items that trickle through as the integration continues later in the year, but we don't expect it to be anywhere close to what we saw in Q1 here. Just more generally, I would underscore that retention rates among asset managers and asset owners remain healthy, so at 95% and 97%, respectively. And maybe I can provide a little bit more color on the elevation in cancels that we saw in Q1, in addition to what I mentioned on the prepared remarks here. So, of the 7.6 million increase we saw in index, 7 million, so the large majority of that, came from client events or these corporate events that we alluded to. Four million of that is attributable to this global bank merger. Beyond that, we did see a concentration of hedge fund-related events, so strategy changes, closures, team departures, that all came together in the first quarter here. Similarly, the area that we saw -- the other area where we saw an increase in cancels year over year was ESG and climate. And as I mentioned, 80% of the increase year over year came from higher level of corporate events, including 2.5 million from the global bank merger that we've been alluding to. And so, there really was this acute bunching of events that occurred during the first quarter here. And as we alluded to, we don't expect this level of cancels to continue going forward. Operator Your next question comes from the line of Alex Kramm with UBS. Alex Kramm -- UBS -- Analyst Yes. Hey. Good morning, everyone. You know, at the risk of kind of almost asking the same thing, I'm wondering, in particular, as it comes to the asset management end market, which is still your largest client set, what you're seeing and what gives you confidence that things are getting better? I mean, it sounds like markets are getting better, and that should be a leading indicator. But at the same time, it seems like you guys have historically said that you're doing really, really well with the largest asset managers, but there's a smaller set that I think continues to really struggle with flows and just the overall environment. So, I guess the question is why are you not worried that that smaller end of the asset management market is structurally challenged and could structurally hit you and that it comes back? I mean, you talked to a lot of the clients all the time, so just wondering what you're hearing. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. And so, as we've mentioned before, Alex, budgets were set for this year last year when it was a tough environment. And so, we are seeing the impacts of tighter budgets on sales cycles, buying decisions, and the overall selling environment, on top of what is typically a seasonally soft quarter for us in Q1. As we've alluded to, we are seeing strong engagement among asset managers, and we are focused on helping them where we can, which means selling more to them. And so, we continue to view them as a key opportunity for us and a key area where we see attractive growth as they reposition their business models for the future. And you can see that in the elevated growth in areas like our custom and special packages. And so, we continue to have this steady growth of 8% with asset managers. And when you look at across the module types, we've got the outsized growth in some of these key areas that asset managers are moving toward. So, we would expect, as you alluded to, sustained momentum in equity markets to be a positive factor and be something that continues to be constructive to buying behavior. But this has been a slow-moving cycle, and I think it will take some time to work through. But I would also highlight that we see large and growing demand across other segments, and we see that with new solutions and existing solutions, and we hope that will continue to build as well. Operator Your next question comes from the line of Manav Patnaik with Barclays. Manav Patnaik -- Barclays -- Analyst Thank you. Good morning. I guess my question is broadly on visibility, so maybe just a two-parter. First, you know, all these elevated cancellations that occurred in the first quarter, when, I guess, did you guys know that was going to happen, like how much in advance did they typically, you know, give you notice? And then similarly, like looking ahead, you've talked about, you know, a lot of client engagements, selling them new business, but then you also talked about lengthening sales cycles. So, maybe just your thoughts on when we could see, you know, these engagements convert to bookings and show a pickup in the numbers? Andy Wiechmann -- Chief Financial Officer Yeah. So, on the first point about visibility, you know, listen, we do have some visibility into the overall level of activity. And so, as we've alluded to in the past, we've been seeing some elevated levels of pressure from our clients, and we've been expecting an elevated contribution from client events. But the exact timing of when they occur, we don't always know, and so we did not expect this type of concentration in the first quarter here. We had this bunching of cancels that ended up occurring altogether. And as a result, we don't expect this level of cancels to continue going forward. We do expect some elevated level of client activity, just given the environment. But we are expecting retention rates to rebound through the year here and move more toward what we saw last year as we move toward the latter part of this year. You know, in terms of outlook on the sales side and visibility into the longer-term pipeline, listen, as I mentioned, we do have a solid pipeline. We've got solid engagement from clients. And at the same time, we are seeing just longer sales cycles and these budget constraints. And so, to the extent and when, you know, the pressures begin to alleviate, that should translate through into, I think, encouraging growth for us. And as I alluded to in the last question, it's not just in our core products, but we do see opportunities in newer solutions that we have, as well as in many of these client segments that are a little less exposed to some of the cyclical dynamics that we're talking about. Operator Your next question comes from the line of Alexander Hess with J.P. Morgan. Alex Hess -- JPMorgan Chase and Company -- Analyst Yes. Hi. I was wondering if you could break down the growth in index subscription year on -- run rate year on year into sort of pricing, upsell, cross-sell, new business wins. And then maybe some comments on what you expect for those those line items as the year progresses. Thank you. Andy Wiechmann -- Chief Financial Officer Sure. Sure. Hey, Alex. So, on the pricing front, I would highlight that we -- and we've alluded to this in the past, that we had a lower contribution on a dollar amount and on a percentage level from price increases within new subscription sales. It's important to underscore that we continue to be very measured with our increases. It is an important lever for us, and we do want to make sure we're capturing the value that we are delivering to clients. But we do factor in the overall pricing environment, as well as client health. And so, the contribution from price increase was a little bit more modest relative to what we saw last year. The balance of new subscription sales was largely related to what we would call cross-selling or upselling, so delivering more solutions to existing clients. That is the bulk of sales in the quarter and we believe a key to our growth going forward. And so, that strong engagement with clients is encouraging because we do believe we can continue to sell more to them. As we've alluded to, when you break down the components of growth here, we saw 8% growth within our market-cap modules, we saw 19% growth in custom and special packages, and we saw, across client segments, outsized growth -- continue to see outsized growth with asset owners and wealth managers, and very strong growth despite this bunching of some hedge fund events. Despite that bunching, we continue to see strong growth among hedge funds as well. So, the growth is multifaceted, and I think many of the drivers of long-term opportunity -- Operator Your next question comes from the line of Ashish Sabadra with RBC Capital. Ashish Sabadra -- RBC Capital Markets -- Analyst Hi. Thanks for taking my question. I just wanted to drill down further on the ESG and climate segment. I was wondering if you could talk about how some of the new regulations in Europe, particularly CSRD, could potentially help influence the demand for the products going forward. But also, have you seen any incremental headwinds of politicization of ESG in the U.S.? And lastly, on the climate side, how should we think about the growth momentum there? Thanks. Baer Pettit -- President and Chief Operating Officer [Audio gap] is a very important tailwind for us, notably in EMEA, but, you know, where it is the broadest and a variety of directives are coming in, which affect our clients. But it's also, you know, in many other jurisdictions. Notably, there's been news in Australia about the regulator being very focused on disclosure in ESG and climate. And I won't go through, you know, a laundry list of jurisdictions, but this is a very important continued driver for growth. And for sure, not merely is it not going away, but we see it increasing with new regulations appearing in different jurisdictions, and we are -- you know, we're convinced that we can add a lot of value there. The second thing is, you know, we want to put a great emphasis that, in our ESG, we're focused on financial materiality, which is not a political issue. And as we go into the rest of this year, and notably with our sales and marketing in the United States, we're going to be bringing this central to our communication with clients in the market, and we're confident that we can bring a lot of value to investors with these type of insights. So, those are my observations, both related to regulation and the way that we want to bring our ESG focus back to financial materiality, where it started. Operator Your next question comes from the line of Owen Lau with Oppenheimer. Owen Lau -- Oppenheimer and Company -- Analyst Good morning and thank you for taking my question. So, going back to Slide 9, and thank you for putting together this slide, it mentioned that 85% of subscription run rate subscribing to multiple product lines. Could you please talk about the historical pattern for this percentage? Has it been going up or down or relatively flat? Also, what does it take to increase the engagement with your clients to increase the product line from one product to, let's say, more than one? Thanks. Andy Wiechmann -- Chief Financial Officer Yeah. I would say, Owen, that we have historically seen outsized retention with our largest clients, as well as those clients that are subscribing to multiple products. It's a key part of our strategy and has been a key part of our strategy for many years. As you're probably aware, we have had a more strategic selling effort with these large accounts. We have what we call senior account managers and key account managers across the organization where we agree -- we engage holistically with them. And so, we're engaging typically at the C levels of these organizations, talking to them about what their objectives are and how MSCI can help them achieve those objectives. And that not only leads to higher engagement and retention rates over time, but it also leads to additional sell-in opportunities. And so, the beauty of MSCI is our solutions are interoperable. We run an integrated franchise where our indexes are built on the same frameworks as our risk models and our ESG ratings and research. And so, we can more effectively help these clients achieve their investment objectives over time and help them operate more efficiently. And so, this strategic sell-in effort has been integral to that. And as you can see by the figures we put on Slide 9 here, it's critical to driving that higher level of retention and continued growth among these larger organizations around the globe. Operator Your next question comes from the line of Kelsey Zhu with Autonomous Research. Kelsey Zhu -- Autonomous Research -- Analyst Hi. Good morning. Thanks for taking my question. I want to talk about custom index products for a second. So, this segment saw a really strong run rate growth of 19%. I was wondering if we can get your thoughts around the total addressable market for this product and kind of medium-term run rate growth for this segment. Thanks. Baer Pettit -- President and Chief Operating Officer Yeah, I don't have an exact number for total addressable market in front of me right now. But what I would say is that the range of use cases for customization is very broad. It ranges from asset owners of various different descriptions who require customized benchmarks for their portfolios, and, in turn, those could be very different, depending on the client type, whether it's an insurance company or a pension fund or an endowment. It then, of course, links to asset managers, both for those institutional mandates and for mutual funds. There is a very large market for structured products, you know, which, in turn, is linked to our wealth segment strategy. So, it's really the structured products where the investment banks are building products for wealth distribution. And so, when we look across, you know, the entire sort of ecosystem, this demand for customization is driven by different client types, different use cases, but also by different underlying ingredients. And so, as we have more components, different asset classes, different types of content such as ESG and climate, and different types of strategies, there's a very large upside here. So, we're very excited by this. And our relatively modest size acquisition of Foxberry, you know, which we think will be a great addition, is going to help us accelerate that by building on our sort of -- you know, our great industry quality and reputation with a nimble new software interface, which will help us bring product to market even faster. Operator Your next question comes from the line of George Tong with Goldman Sachs. George Tong -- Goldman Sachs -- Analyst Hi. Thanks. Good morning. This question is for Henry. Henry, can you discuss how you're strategically balancing reinvestment to support long-term growth initiatives with near-term margin performance? Specifically, to what extent do you believe MSCI will be entering a new investment cycle that could fuel strong pursuit of new growth initiatives at the potential expense of near-term margins? Henry Fernandez -- Chairman and Chief Executive Officer That's definitely the key balancing act that we face at MSCI, you know, every year. How do we balance and continue high levels of profitability for our shareholders with, you know, investments that are going to drive significant revenue growth in the future? So, the first thing that we do, George, is that -- the first thing we try to do is we try to keep, you know, the level of investments every year despite any headwinds, and we do that by creating even more efficiencies and, at some point, you know, hitting our compensation, you know, expenses to keep that high level of investment on -- within the year. The second thing that we do is that we try to increase that level of rate of growth of investment on a year-over-year basis at a rate, say, double the noninvestment expenses in the company so that we continue to feed the funding of significant growth opportunities we have ahead of us. The third thing that we do is we believe that having short-term pressures and having short-term, meaning within a year or so, within a few quarters or a year, discipline of maintaining high levels of profitability is actually a positive, not a negative, because it helps us focus on the highest return investment, on the ones that are going to be, you know, paying off shorter term rather than long term, and, you know, making sure that the whole company is mobilizing to continue to do what we currently do, not what we're investing in, but what we currently do much more efficiently and much more productively. So, that's kind of the balancing act. So, I don't think that that's going to dramatically change, given it's almost like a dual mandate. If you were the Fed, right, George, you know, employment and inflation is a little bit of that. You know, we have a dual mandate to maintain high levels of short-term profitability versus, you know, long-term growth. So, that's, you know -- now, we know there are outside possibilities that we have discarded. We're not going to run the EBITDA margin significantly higher, you know, in the company unless there is a flower -- an incredible amount of money that flows through the P&L because of higher equity values in our index-linked products. And on the other hand, we're not going to, you know, meaningfully lower at all the levels of margins that we currently have. So, that's the objective that we have so far. Thank you for that question. Operator Your next question comes from the line of Heather Balsky with Bank of America. Heather Balsky -- Bank of America Merrill Lynch -- Analyst Hi. Thank you for taking my question. I just wanted to piggyback on the last question and just ask you, as you think about areas of investment and areas where you'd like to accelerate investment to drive growth longer term, where are you most focused? What type of products? What segments of your business? Thank you. Henry Fernandez -- Chairman and Chief Executive Officer So, there are a number of areas. I mean, pretty much everything that we do at MSCI has a tail in its back and long-term -- you know, incredible long-term potential. We're very fortunate about that. Now, some things materialize faster, you know, in the short term, and some things are going to take, you know, a few quarters, maybe a few years to materialize in a big way. The first thing that we always focus on is the continued growth of our index franchise because despite what some people think about indexation, whether it's, you know, benchmark indices, active managers -- active equity managers, or the pace of growth of passive investing, we see enormous possibilities of derivative products, both listed, options with the futures, and instruction products. We see enormous potential for nonmarket-cap indices, in ESG, in thematic, in climate, in factors, and all of that. And now, we have a new wave of growth coming from direct indexing in wealth management, which is an ability to basically customize an individual's portfolio in a way that is scalable with indices rather than active management. So -- and on top of that -- that's the equity part. And on top of that, we see a lot of potential in fixed-income indexation. So, you know, this is all part of the barbell in the investment world. On one hand, it's high levels of systematic investing, in which index investing is part of that. And the other part is very high levels of active management, which obviously private asset management is the most important one, but also, you know, concentrated portfolios and things like that. So, that's where we're positioned in the company. So, we start with definitely index. Then we look at, you know, the next level, which is sustainable -- sustainability, and within sustainability, ESG, obviously, but climate. We think ESG will continue to grow. ESG is not a political philosophy, is not a -- you know, is an investment risk and investment opportunity, period. No matter what people say, what people politicizes or whatever, it's part of the fabric of investing as to how are you going to manage a portfolio with respect to all these factors, in addition to financial factors and other market factors. So, that -- we're in a obviously down cycle on that, given the political situation in the U.S., given the reset of regulations in Europe, but we're beginning to see significant growth of that in Asia. So, that's the second component. The third component which we're now positioning ourselves enormously is our ability to be a large provider of transparency and performance and risk tools and benchmark indices, you know, asset allocation, etc. in the private assets. The biggest revolution going on in the world right now is private credit. It's going from balance sheet-driven things, you know, on the balance sheet of banks and the balance sheet of insurance companies to a fund structure. So, if that revolution in private credit into a fund structure has an investor in it, whether it's an institutional or wealth management, you know, individual investor, they're going to need transparency tools, they're going to need -- they're going to have to understand performance and risks and all of that, which will be a lot different than, you know, on the balance sheet of a bank or an insurance company, and this is where we come in. So, those are three big areas that we're focused on. There are other areas that -- obviously, you know, our role in fixed-income portfolio management is a big one, our role in providing even more tools to the -- on analytics, insights, for example, into portfolios, and climate risk within analytics. So, those are basically the broad areas that we're focusing on on the product side. Of course, all of that has a huge corollary on the areas that we're expanding into the client side beyond active managers. You know, as it was said before, you hear quite often, the balance sheet of banks, the hedge funds, the corporates, the asset owners, you know, and so on and so forth. So, that is an area -- those are on the client side we see enormous growth opportunities in the nonasset management segment. So, that's a little bit of a -- of an overview. Operator Your next question comes from the line of Scott Wurtzel with Wolfe Research. Scott Wurtzel -- Wolfe Research -- Analyst Hey. Good morning and thanks for taking my question here. I just wanted to touch on the basis point fees on -- you know, within the index segment and kind of seeing that, you know, steadily decline over the last few quarters. Are there any mix dynamics there we should be aware of as it relates to the current market environment and how should we be thinking about, you know, that basis point fee going forward? Thanks. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. So, we did see a modest decline in the basis points from the prior quarter from 2.50 basis points down to 2.48 basis points. That was driven almost entirely by mix shift. Most of that resulted from a lower contribution of higher fee international products and a higher contribution to AUM from lower fee products with U.S. exposure. I would say there's nothing new to call out here. There can be some dynamics with AUM levels. And you saw this when AUM levels dropped, there was more stability in the fee. So, there are some fee arrangements we have where the fees do step up at lower AUM levels. And vice versa, they step down at higher AUM levels. And so, that can be one small factor to point out. But I'd say nothing out of the ordinary or nothing new relative to what we've seen in the past. We do expect, over time, fees to gradually come down, driven by mix shift, although we expect the growth in assets and the tremendous opportunity we have across so many different frontiers to more than offset that decline, which is what we've seen and as you can tell by the healthy overall ETF revenue contribution, but also the overall ABF revenue growth. And so, I would highlight that within non-ETF passive, the fee dynamics have been much more stable there, and that's going back to the question about custom indexes. In the non-ETF passive category, that is an area where we see tremendous engagement and growth around areas like custom indexes. And many times, those can be higher fee-type mandates that we see. Operator Your next question comes from the line of Craig Huber with Huber Research Partners. Craig Huber -- Huber Research Partners -- Analyst Thank you. Can you touch on AI and the benefits that you're -- can see going forward here, the benefit your products, over time, you could potentially sell at a significantly higher price point? What excites you on that front? And also, touch on, if you would, the cost-cutting opportunity going forward on that front. Thank you. Baer Pettit -- President and Chief Operating Officer Sure. I'll make a few observations on that. So, I'll start with the first point, which is, you know, about efficiencies. So, I think we prefer to see it as efficiencies rather than cost cutting per se because a lot of our goal is to try to get things done faster and to reinvest a lot of that in these growth opportunities that we're talking about. But we're very focused on that aspect of things across, you know, a variety of projects that we have going on. So, in turn, we're also, you know, working to apply AI in a variety of product areas. We have some actually launch coming up during the course of this quarter, you know, on analytic insights, where we, in essence, take an enormous amount of complex data for clients which they normally would have to, you know, parse through in rather inefficient ways and bring them, you know, direct insights using, you know, AI. So, I think that will just be the beginning of that. We have to really be focused on thinking about this in a competitive environment. And so, you know, as we go forward, I think the real benefit of AI for us is that we are a very data-rich environment and our clients are always trying to get greater insights out of all of those capabilities that we deliver to them. And so, you know, in terms of new product development, you know, that's where we'll definitely be keeping you -- you know, have more news during the rest of this year as we bring out, as I said, both in this quarter and quarters ahead, capabilities about bringing our clients greater insight and faster and differentiated, you know, calculations using AI. Operator Your next question comes from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy -- Deutsche Bank -- Analyst Yes. Hi. Good morning. Thank you. I wanted to touch on capital allocation, you know, just given what the stock has been doing over the last, you know, year or more recently. I'm curious if your views on capital allocation have evolved and how you would, you know, prioritize share buybacks versus potential, you know, M&A opportunities and other things. Thank you. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. So, I'd say, generally, our approach to capital allocation has not changed. So, we pay a steady dividend that grows with EPS of the company, and then we look to generate value with excess capital and cash beyond that. And so, we are continually looking for opportunities to do that while we do monitor the market for potentially strategic, attractive MP&As. Sometimes, the best opportunity for us for creating value is investing in MSCI, so buying our stock back. And so, we are long-term believers in the company and the future value. And so, our approach to share repurchases has not changed, and we'll look to use available cash when we see attractive opportunities in the stock. Operator Your next question comes from the line of Russell Quelch with Redburn Atlantic. Russell, I think you're on mute. Your next question comes from the line of Greg Simpson with BNP Paribas. Greg Simpson -- Exane BNP Paribas -- Analyst Hi there. I just wanted to check in on private markets. Can you talk about the run rate growth at Burgiss and if you think the 20% top-line growth you talked about for 2024 and beyond still looks on track or are there any challenges in the sales environment within private markets? Thank you. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. So, as Baer alluded to, we saw a 17% run rate growth in Private Capital Solutions. I would say, generally, our integration is largely on track from both a go-to-market and a technology and data infrastructure standpoint. We have seen encouraging signs in the areas where we think we can add value. So, you know, we've seen outsized growth in EMEA and getting good traction in Asia, so areas where, I think, MSCI can, you know, help on the go-to-market. I would say, more generally, we continue to be optimistic about the long-term opportunity across Private Capital Solutions and continue to see big long-term opportunities there. Operator That concludes our Q&A session. I will now turn the conference back over to Henry Fernandez, chairman and CEO of MSCI. Henry Fernandez -- Chairman and Chief Executive Officer Thank you for joining us today and for those very insightful questions that you had. As we have said in the past, our operating structure at MSCI is to continue to be a long-term compounder of our earnings and our share price and our revenues and all of that. And there is absolutely no change in our objectives to achieve that. Despite the operating environment challenges that we have had in the last two quarters, we remain confident in the secular tailwinds and opportunities that we see ahead and that will continue to power our business. The elevated cancels we experienced in the first quarter were as a result of a concentration of client events that we do not expect to continue at these levels in quarters to come. And as we've said, our level of engagement with clients is unparalleled, is at a record high. The level of things that they want us to do, solutions that we -- that they want us to come up with is totally unparalleled, and it is increasing pretty much every day, every week, every quarter. And therefore, we are very committed in helping them achieve those objectives, whether it's capitalizing on opportunities or dealing with problems in their portfolios. Therefore, our all-weather franchise is very resilient, and it supports the business through good times and bad times. And we would like to thank you again for joining us this morning, and we look forward to speaking with you in the next few days and weeks. Answer:

the MSCI first quarter 2024 earnings conference call

Operator Good day, ladies and gentlemen, and welcome to the MSCI first quarter 2024 earnings conference call. As a reminder, this call is being recorded. This time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, where participants are requested to ask one question at a time, then add themselves back to the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy Ulan, head of investor relations and treasurer. You may begin. Jeremy Ulan -- Head of Investor Relations and Treasurer Thank you. Good day and welcome to the MSCI first quarter 2024 earnings conference call. Earlier this morning, we issued a press release announcing our results for the first quarter of 2024. This press release, along with an earnings presentation and brief quarterly update, are available on our website, msci.com, under the investor relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our chairman and CEO; Baer Pettit, our president and COO; and Andy Wiechmann, our chief financial officer. As a final housekeeping item, we want to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez. Henry. Henry Fernandez -- Chairman and Chief Executive Officer Thank you, Jeremy. Good day, everyone, and thank you for joining us. In the first quarter, MSCI delivered solid financial results that demonstrate the resilience of our business and our ability to maintain profitable growth, supported by durable secular trends. Our operating metrics included some key product and segment milestones. But new recurring sales were flat from last year's levels and reflect the lagging effect of market pressures on client budgets, and cancels were meaningfully elevated in some concentrated areas. On the financial side, MSCI achieved organic revenue growth of 10%, adjusted earnings-per-share growth of 12%, and free cash flow growth of 14%. Meanwhile, our ABF revenue grew by 13%, powered by record AUM balances in both ETFs and nonlisted products linked to MSCI indices. We consider AUM levels in MSCI index-linked products as a leading indicator of improving client conditions. Operationally, we delivered our highest Q1 recurring sales in analytics in a decade at $14 million, our best-ever Q1 of recurring sales among hedge funds at nearly $11 million, and another quarter of double-digit subscription run rate growth of 11% among asset owners, driven by index and analytics. Nonrecurring sales of $18 million were up 16%. At the same time, our first quarter results show the lingering impact of market volatility, changes in interest rate expectations, and pressures on investment and financial firms, especially active equity managers. Notably, MSCI witnessed elevated cancels, which reflected a concentration of unusual client events. Roughly $7 million worth of cancels came from a single client event, a historic merger of two major global banks in Europe that affected us across index, ESG, and analytics. While some client pressures may continue, we do not expect this high level of cancels to continue. In fact, we remain greatly encouraged by our high levels of engagement across all client segments and all geographies. Despite the tough Q1 operating environment for us, we delivered double-digit organic subscription run rate growth among asset owners, hedge funds, wealth management -- managers, and corporates. Among asset managers, redemption, outflow, and fee pressures continue to weigh on some managers, but we were able to deliver 7% organic subscription run rate growth with that segment. In addition, we achieved 39% climate run rate growth across our product lines, driven by APAC and EMEA regions. Likewise, APAC and EMEA helped stabilize our ESG run rate growth at 12% amid continued headwinds in the Americas. Meanwhile, amid a strong U.S. dollar, the benefits of our nondollar expenses helped offset FX-related revenue headwinds. MSCI's all-weather franchise supports our financial resilience. Our diverse mix of clients, products, and geographies helped stabilize our performance in difficult environments, as we experienced in the first quarter. Looking ahead, to the extent equity markets and high AUM balances and liquidity levels remain supportive, that should mitigate certain pressures that have weighed on client spending on MSCI products. We remain keenly focused on capitalizing on the biggest secular trends reshaping our industry such as portfolio customization and indexation, the growth of an increasing allocations to private assets, and the global sustainability revolution. Just last week, we closed our acquisition of the London-based index provider, Foxberry. This will give us a new technology platform to accelerate custom index production while providing simulation and backtesting capabilities for the creation of indices for institutional investors and intermediaries. Turning to our other recent acquisitions. Combining the Fabric platform with MSCI's factor risk models, ESG and climate data, and indices has dramatically enhanced our capabilities and solutions for the wealth segment. Finally, the MSCI Carbon Markets team, formerly Trove Research, has expanded our climate solutions and deepened our engagement with existing and prospective clients beyond institutional investors such as corporates, trading desks, and banks. Considering the lagging effect of market volatility that our clients and MSCI have faced, we expect our all-weather franchise to continue to withstand external challenges such as the client events we saw in Q1. This makes us confident that MSCI can maintain high levels of revenue growth and profitability in 2024 and beyond. And with that, let me turn the call over to Baer. Baer. Baer Pettit -- President and Chief Operating Officer Thank you, Henry, and greetings, everyone. In my remarks today, I will discuss some of the key sources of strength in our first quarter results at both the product and segment levels while putting our results in a broader strategic perspective. First, I would like to expand a bit on Henry's comments about our elevated cancels. As he noted, the vast majority of our first quarter cancels stemmed from client events such as industry consolidation, cost pressures, fund closures, and reorganization. Excluding the single client event from a bank merger, our Q1 retention rate across MSCI was 94%. Clients who use multiple MSCI product lines account for 85% of our total subscription run rate. The Q1 retention of those clients, on average, is 93% or higher. Turning to our product and segment results. As demand for index investments continues to grow, the product ecosystem linked to MSCI indexes remains a competitive advantage, especially as more and more investors push for customized products. In the first quarter, assets under management in equity ETF products linked to MSCI indexes hit a new record high of $1.58 trillion, while AUM in nonlisted products linked to MSCI indexes also set a record of $3.23 trillion. We also delivered index subscription run rate growth of 9.3%, including 12% growth in Asia-Pacific and 24% growth among hedge funds. The 24% subscription run rate growth in index among hedge funds was driven primarily by our float data product and custom index sales. Meanwhile, our custom and special index run rate growth was 19%. MSCI's recent acquisition of Foxberry will further enhance our wide range of custom index solutions and provide a new client-centric interactive experience. The trend toward greater customization cuts across all product lines and client segments. For example, wealth managers increasingly want to customize their client portfolios using advanced technology platforms. That is what motivated MSCI's acquisition of Fabric, whose platform is now part of our analytics offering. Combined with our total portfolio toolkit, the Fabric platform has already boosted our ability to serve the wealth segment, and the feedback from clients has been extremely positive. Our run rate among wealth managers has now surpassed $100 million, growing over 15% year on year. The push for customization is closely related to another shift in the analytic space. Clients have always depended on us for risk and performance attribution tools, but they now want highly specialized insights and deeply integrated content, all supported by leading-edge technology, including generative AI. Our analytics team has met this demand through products such as our Multi-Asset Class Factor Models, our Risk Insights and Risk Manager solutions, and our MSCI ONE platform built on Microsoft Azure. As we have recently seen, these tools can become even more relevant amid market volatility, cyclical pressures, and geopolitical uncertainty. In the first quarter, analytics posted revenue growth of 12% and our highest Q1 in a decade for recurring new sales. At the product level, recurring sales of our Risk Manager tool were up by 60% and included a large strategic win with a major global alternative asset manager, facilitated by our Risk Insights offering. At the segment level, analytics achieved recurring sales growth of 27% among banks, 20% among hedge funds, and 15% among asset owners. Rising demand for highly specialized analytics tools intersects with growing client needs for climate and sustainability regulatory solutions. This represents an attractive opportunity for MSCI, and we have doubled down on our efforts to capture it. Our first quarter run rate growth for ESG regulatory solutions was 33%. To build on this momentum, we have enhanced our solutions for the EU Sustainable Finance Disclosure Regulation while developing a new solution for the Corporate Sustainability Reporting Directive or CSRD. In addition, we will continue exploring untapped opportunities in APAC, where we achieved 18% ESG run rate growth in the first quarter. In MSCI Private Capital Solutions, we achieved a run rate growth of 17% over Burgiss' performance in the same period last year prior to the acquisition and a retention rate of close to 96%. We had early momentum in EMEA, which accounted for over half of new client wins in the product segment. We continue to drive new recurring sales of key existing products such as private capital transparency data and Total Plan portfolio management. We're also making progress on our integrated product road map, including evaluated pricing for LPs and GPs, leveraging MSCI's data, models, and research. In summary, MSCI remains laser-focused on translating our long-term strategy into near-term delivery while harnessing competitive advantages and secular trends. And with that, let me turn the call over to Andy. Andy. Andy Wiechmann -- Chief Financial Officer Thanks, Baer, and hi, everyone. In the first quarter, we delivered double-digit organic revenue growth, 11% adjusted EBITDA growth, and 12% adjusted EPS growth. We delivered 10% organic revenue growth, as well as record asset-based fee revenue, driven by record AUM balances in ETF and non-ETF products linked to MSCI indexes. The solid financial performance highlights the resilience of our business model, even in the face of headwinds reflected in our operating metrics. As we have mentioned previously, we are seeing the impacts of a slow-moving business cycle as the prolonged period of muted flows into active equity strategies have resulted in a lengthening of sales cycles and, in this quarter, a concentration of client event, on top of what is typically a seasonally softer quarter for us. To provide a bit more color, if we compare our cancels to the first quarter of 2023, the two product segments with the biggest increases were index and ESG and climate. Within index, nearly the entirety of the increase, or roughly $7 million of the increase, related to a higher contribution from corporate events. From a client segment lens in index, $5.2 million of the year-over-year increase in cancels came within the broker-dealer and hedge fund client segments, including roughly $4 million from the previously mentioned large global bank merger. Similarly, within ESG and climate, nearly $4 million, or 80% of the increase in cancels, came from a higher level of corporate events, including 2.5 million from the large global bank merger event. The large majority of cancels related to this global bank merger occurred in Q1, although there could be some smaller items that come through in future quarters as the integration is completed. Across all product segments, the retention rate with asset owners and asset managers was 95% and 97%, respectively. While we do expect some elevated level of client events to continue in the near term, we do not expect to see cancels continue at this level in the coming quarters, and we expect retention rates to rebound through the year. Additionally, we have a solid pipeline of new sales opportunities. In index, we had 8% subscription run rate growth in our market-cap weighted modules and 19% growth in custom indexes and special packages. As a reminder, in Q2 of last year, we had a large nonrecurring revenue item related to unlicensed usage of our indexes, which drove an unusually large level of nonrecurring revenue. ABF revenues were up 13% year over year, benefiting from about $21 billion of cash inflows and about $93 billion of market appreciation so far in 2024 within ETFs linked to MSCI equity indexes. Most of the MSCI-linked ETF flows were in developed markets outside the U.S. and emerging markets products, which, together, were over $22 billion. In analytics, organic subscription run rate growth was 7%, which reflects the benefits from the investments we've made in the innovations such as our next-gen models and our Insights offering. These have helped us to drive strong sales in enterprise risk and Multi-Asset Class Models across client segments. We also had several client wins in fixed-income analytics. Analytics revenue this quarter included a large contribution from catch-up revenue items, much of which related to large client implementations. In our ESG and climate reportable segment, organic run rate growth was 13%, which excludes about $4.8 million of run rate from Trove and the impact of FX. And run rate growth for the reportable ESG and climate segment was nearly 18% within Europe and close to 22% in Asia, while the Americas growth was 9%. In Real Assets, run rate growth was about 4%, with subdued net new subscription sales continuing to reflect lower transaction activity and other commercial real estate pressures. We continue to be pleased with our progress on the integration of Burgiss, which, as a reminder, is referred to as the Private Capital Solutions operating segment within our all other private assets reportable segment. Retention was strong at nearly 96% and contributed over $24 million of revenue for the quarter. We continue to have a vigilant focus on disciplined capital allocation, and our cash balance at the end of March was over $500 million, including readily available cash in the U.S. of over $200 million. Last week, we closed on the acquisition of Foxberry for approximately $22 million of upfront consideration. The transaction also has the potential for additional performance-related payments tied to the achievement of key milestones. Our 2024 guidance across all categories remains unchanged and assumes that AUM declined slightly in Q2 and rebounds gradually in the second half of the year. I would note that our first quarter effective tax rate of 13.5% benefited from favorable discrete items and higher excess tax benefits recognized on stock-based comp vested in the period. For the remainder of the year, we expect the quarterly effective tax rate of 21% to 22% each quarter before any discrete items. Overall, our client-centricity and multiyear investments position us well to drive growth throughout 2024, and we look forward to keeping you posted on our progress. With that, operator, please open the line for questions. Questions & Answers: Operator We will now begin the question-and-answer session. [Operator instructions] And your first question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead. Toni Kaplan -- Morgan Stanley -- Analyst Terrific. I wanted to talk about the closures. You know, thank you for giving the segment breakout for the large client event. You know, just -- it sounds to me like that is now in the numbers but wanted to just confirm that there isn't going to be more. And just more in general around the non-UBS event, like, you know, it sounded like maybe there were more closures of asset managers that you saw in the quarter. So, do you expect that to, you know, improve, you know, throughout the year? Thanks. Andy Wiechmann -- Chief Financial Officer Sure. Hey, Tony. It's Andy. So, on the large global bank merger, as we mentioned, the large bulk of the cancels related to that merger occurred in Q1. We did have some small items in previous quarters, and there could be some smaller items that trickle through as the integration continues later in the year, but we don't expect it to be anywhere close to what we saw in Q1 here. Just more generally, I would underscore that retention rates among asset managers and asset owners remain healthy, so at 95% and 97%, respectively. And maybe I can provide a little bit more color on the elevation in cancels that we saw in Q1, in addition to what I mentioned on the prepared remarks here. So, of the 7.6 million increase we saw in index, 7 million, so the large majority of that, came from client events or these corporate events that we alluded to. Four million of that is attributable to this global bank merger. Beyond that, we did see a concentration of hedge fund-related events, so strategy changes, closures, team departures, that all came together in the first quarter here. Similarly, the area that we saw -- the other area where we saw an increase in cancels year over year was ESG and climate. And as I mentioned, 80% of the increase year over year came from higher level of corporate events, including 2.5 million from the global bank merger that we've been alluding to. And so, there really was this acute bunching of events that occurred during the first quarter here. And as we alluded to, we don't expect this level of cancels to continue going forward. Operator Your next question comes from the line of Alex Kramm with UBS. Alex Kramm -- UBS -- Analyst Yes. Hey. Good morning, everyone. You know, at the risk of kind of almost asking the same thing, I'm wondering, in particular, as it comes to the asset management end market, which is still your largest client set, what you're seeing and what gives you confidence that things are getting better? I mean, it sounds like markets are getting better, and that should be a leading indicator. But at the same time, it seems like you guys have historically said that you're doing really, really well with the largest asset managers, but there's a smaller set that I think continues to really struggle with flows and just the overall environment. So, I guess the question is why are you not worried that that smaller end of the asset management market is structurally challenged and could structurally hit you and that it comes back? I mean, you talked to a lot of the clients all the time, so just wondering what you're hearing. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. And so, as we've mentioned before, Alex, budgets were set for this year last year when it was a tough environment. And so, we are seeing the impacts of tighter budgets on sales cycles, buying decisions, and the overall selling environment, on top of what is typically a seasonally soft quarter for us in Q1. As we've alluded to, we are seeing strong engagement among asset managers, and we are focused on helping them where we can, which means selling more to them. And so, we continue to view them as a key opportunity for us and a key area where we see attractive growth as they reposition their business models for the future. And you can see that in the elevated growth in areas like our custom and special packages. And so, we continue to have this steady growth of 8% with asset managers. And when you look at across the module types, we've got the outsized growth in some of these key areas that asset managers are moving toward. So, we would expect, as you alluded to, sustained momentum in equity markets to be a positive factor and be something that continues to be constructive to buying behavior. But this has been a slow-moving cycle, and I think it will take some time to work through. But I would also highlight that we see large and growing demand across other segments, and we see that with new solutions and existing solutions, and we hope that will continue to build as well. Operator Your next question comes from the line of Manav Patnaik with Barclays. Manav Patnaik -- Barclays -- Analyst Thank you. Good morning. I guess my question is broadly on visibility, so maybe just a two-parter. First, you know, all these elevated cancellations that occurred in the first quarter, when, I guess, did you guys know that was going to happen, like how much in advance did they typically, you know, give you notice? And then similarly, like looking ahead, you've talked about, you know, a lot of client engagements, selling them new business, but then you also talked about lengthening sales cycles. So, maybe just your thoughts on when we could see, you know, these engagements convert to bookings and show a pickup in the numbers? Andy Wiechmann -- Chief Financial Officer Yeah. So, on the first point about visibility, you know, listen, we do have some visibility into the overall level of activity. And so, as we've alluded to in the past, we've been seeing some elevated levels of pressure from our clients, and we've been expecting an elevated contribution from client events. But the exact timing of when they occur, we don't always know, and so we did not expect this type of concentration in the first quarter here. We had this bunching of cancels that ended up occurring altogether. And as a result, we don't expect this level of cancels to continue going forward. We do expect some elevated level of client activity, just given the environment. But we are expecting retention rates to rebound through the year here and move more toward what we saw last year as we move toward the latter part of this year. You know, in terms of outlook on the sales side and visibility into the longer-term pipeline, listen, as I mentioned, we do have a solid pipeline. We've got solid engagement from clients. And at the same time, we are seeing just longer sales cycles and these budget constraints. And so, to the extent and when, you know, the pressures begin to alleviate, that should translate through into, I think, encouraging growth for us. And as I alluded to in the last question, it's not just in our core products, but we do see opportunities in newer solutions that we have, as well as in many of these client segments that are a little less exposed to some of the cyclical dynamics that we're talking about. Operator Your next question comes from the line of Alexander Hess with J.P. Morgan. Alex Hess -- JPMorgan Chase and Company -- Analyst Yes. Hi. I was wondering if you could break down the growth in index subscription year on -- run rate year on year into sort of pricing, upsell, cross-sell, new business wins. And then maybe some comments on what you expect for those those line items as the year progresses. Thank you. Andy Wiechmann -- Chief Financial Officer Sure. Sure. Hey, Alex. So, on the pricing front, I would highlight that we -- and we've alluded to this in the past, that we had a lower contribution on a dollar amount and on a percentage level from price increases within new subscription sales. It's important to underscore that we continue to be very measured with our increases. It is an important lever for us, and we do want to make sure we're capturing the value that we are delivering to clients. But we do factor in the overall pricing environment, as well as client health. And so, the contribution from price increase was a little bit more modest relative to what we saw last year. The balance of new subscription sales was largely related to what we would call cross-selling or upselling, so delivering more solutions to existing clients. That is the bulk of sales in the quarter and we believe a key to our growth going forward. And so, that strong engagement with clients is encouraging because we do believe we can continue to sell more to them. As we've alluded to, when you break down the components of growth here, we saw 8% growth within our market-cap modules, we saw 19% growth in custom and special packages, and we saw, across client segments, outsized growth -- continue to see outsized growth with asset owners and wealth managers, and very strong growth despite this bunching of some hedge fund events. Despite that bunching, we continue to see strong growth among hedge funds as well. So, the growth is multifaceted, and I think many of the drivers of long-term opportunity -- Operator Your next question comes from the line of Ashish Sabadra with RBC Capital. Ashish Sabadra -- RBC Capital Markets -- Analyst Hi. Thanks for taking my question. I just wanted to drill down further on the ESG and climate segment. I was wondering if you could talk about how some of the new regulations in Europe, particularly CSRD, could potentially help influence the demand for the products going forward. But also, have you seen any incremental headwinds of politicization of ESG in the U.S.? And lastly, on the climate side, how should we think about the growth momentum there? Thanks. Baer Pettit -- President and Chief Operating Officer [Audio gap] is a very important tailwind for us, notably in EMEA, but, you know, where it is the broadest and a variety of directives are coming in, which affect our clients. But it's also, you know, in many other jurisdictions. Notably, there's been news in Australia about the regulator being very focused on disclosure in ESG and climate. And I won't go through, you know, a laundry list of jurisdictions, but this is a very important continued driver for growth. And for sure, not merely is it not going away, but we see it increasing with new regulations appearing in different jurisdictions, and we are -- you know, we're convinced that we can add a lot of value there. The second thing is, you know, we want to put a great emphasis that, in our ESG, we're focused on financial materiality, which is not a political issue. And as we go into the rest of this year, and notably with our sales and marketing in the United States, we're going to be bringing this central to our communication with clients in the market, and we're confident that we can bring a lot of value to investors with these type of insights. So, those are my observations, both related to regulation and the way that we want to bring our ESG focus back to financial materiality, where it started. Operator Your next question comes from the line of Owen Lau with Oppenheimer. Owen Lau -- Oppenheimer and Company -- Analyst Good morning and thank you for taking my question. So, going back to Slide 9, and thank you for putting together this slide, it mentioned that 85% of subscription run rate subscribing to multiple product lines. Could you please talk about the historical pattern for this percentage? Has it been going up or down or relatively flat? Also, what does it take to increase the engagement with your clients to increase the product line from one product to, let's say, more than one? Thanks. Andy Wiechmann -- Chief Financial Officer Yeah. I would say, Owen, that we have historically seen outsized retention with our largest clients, as well as those clients that are subscribing to multiple products. It's a key part of our strategy and has been a key part of our strategy for many years. As you're probably aware, we have had a more strategic selling effort with these large accounts. We have what we call senior account managers and key account managers across the organization where we agree -- we engage holistically with them. And so, we're engaging typically at the C levels of these organizations, talking to them about what their objectives are and how MSCI can help them achieve those objectives. And that not only leads to higher engagement and retention rates over time, but it also leads to additional sell-in opportunities. And so, the beauty of MSCI is our solutions are interoperable. We run an integrated franchise where our indexes are built on the same frameworks as our risk models and our ESG ratings and research. And so, we can more effectively help these clients achieve their investment objectives over time and help them operate more efficiently. And so, this strategic sell-in effort has been integral to that. And as you can see by the figures we put on Slide 9 here, it's critical to driving that higher level of retention and continued growth among these larger organizations around the globe. Operator Your next question comes from the line of Kelsey Zhu with Autonomous Research. Kelsey Zhu -- Autonomous Research -- Analyst Hi. Good morning. Thanks for taking my question. I want to talk about custom index products for a second. So, this segment saw a really strong run rate growth of 19%. I was wondering if we can get your thoughts around the total addressable market for this product and kind of medium-term run rate growth for this segment. Thanks. Baer Pettit -- President and Chief Operating Officer Yeah, I don't have an exact number for total addressable market in front of me right now. But what I would say is that the range of use cases for customization is very broad. It ranges from asset owners of various different descriptions who require customized benchmarks for their portfolios, and, in turn, those could be very different, depending on the client type, whether it's an insurance company or a pension fund or an endowment. It then, of course, links to asset managers, both for those institutional mandates and for mutual funds. There is a very large market for structured products, you know, which, in turn, is linked to our wealth segment strategy. So, it's really the structured products where the investment banks are building products for wealth distribution. And so, when we look across, you know, the entire sort of ecosystem, this demand for customization is driven by different client types, different use cases, but also by different underlying ingredients. And so, as we have more components, different asset classes, different types of content such as ESG and climate, and different types of strategies, there's a very large upside here. So, we're very excited by this. And our relatively modest size acquisition of Foxberry, you know, which we think will be a great addition, is going to help us accelerate that by building on our sort of -- you know, our great industry quality and reputation with a nimble new software interface, which will help us bring product to market even faster. Operator Your next question comes from the line of George Tong with Goldman Sachs. George Tong -- Goldman Sachs -- Analyst Hi. Thanks. Good morning. This question is for Henry. Henry, can you discuss how you're strategically balancing reinvestment to support long-term growth initiatives with near-term margin performance? Specifically, to what extent do you believe MSCI will be entering a new investment cycle that could fuel strong pursuit of new growth initiatives at the potential expense of near-term margins? Henry Fernandez -- Chairman and Chief Executive Officer That's definitely the key balancing act that we face at MSCI, you know, every year. How do we balance and continue high levels of profitability for our shareholders with, you know, investments that are going to drive significant revenue growth in the future? So, the first thing that we do, George, is that -- the first thing we try to do is we try to keep, you know, the level of investments every year despite any headwinds, and we do that by creating even more efficiencies and, at some point, you know, hitting our compensation, you know, expenses to keep that high level of investment on -- within the year. The second thing that we do is that we try to increase that level of rate of growth of investment on a year-over-year basis at a rate, say, double the noninvestment expenses in the company so that we continue to feed the funding of significant growth opportunities we have ahead of us. The third thing that we do is we believe that having short-term pressures and having short-term, meaning within a year or so, within a few quarters or a year, discipline of maintaining high levels of profitability is actually a positive, not a negative, because it helps us focus on the highest return investment, on the ones that are going to be, you know, paying off shorter term rather than long term, and, you know, making sure that the whole company is mobilizing to continue to do what we currently do, not what we're investing in, but what we currently do much more efficiently and much more productively. So, that's kind of the balancing act. So, I don't think that that's going to dramatically change, given it's almost like a dual mandate. If you were the Fed, right, George, you know, employment and inflation is a little bit of that. You know, we have a dual mandate to maintain high levels of short-term profitability versus, you know, long-term growth. So, that's, you know -- now, we know there are outside possibilities that we have discarded. We're not going to run the EBITDA margin significantly higher, you know, in the company unless there is a flower -- an incredible amount of money that flows through the P&L because of higher equity values in our index-linked products. And on the other hand, we're not going to, you know, meaningfully lower at all the levels of margins that we currently have. So, that's the objective that we have so far. Thank you for that question. Operator Your next question comes from the line of Heather Balsky with Bank of America. Heather Balsky -- Bank of America Merrill Lynch -- Analyst Hi. Thank you for taking my question. I just wanted to piggyback on the last question and just ask you, as you think about areas of investment and areas where you'd like to accelerate investment to drive growth longer term, where are you most focused? What type of products? What segments of your business? Thank you. Henry Fernandez -- Chairman and Chief Executive Officer So, there are a number of areas. I mean, pretty much everything that we do at MSCI has a tail in its back and long-term -- you know, incredible long-term potential. We're very fortunate about that. Now, some things materialize faster, you know, in the short term, and some things are going to take, you know, a few quarters, maybe a few years to materialize in a big way. The first thing that we always focus on is the continued growth of our index franchise because despite what some people think about indexation, whether it's, you know, benchmark indices, active managers -- active equity managers, or the pace of growth of passive investing, we see enormous possibilities of derivative products, both listed, options with the futures, and instruction products. We see enormous potential for nonmarket-cap indices, in ESG, in thematic, in climate, in factors, and all of that. And now, we have a new wave of growth coming from direct indexing in wealth management, which is an ability to basically customize an individual's portfolio in a way that is scalable with indices rather than active management. So -- and on top of that -- that's the equity part. And on top of that, we see a lot of potential in fixed-income indexation. So, you know, this is all part of the barbell in the investment world. On one hand, it's high levels of systematic investing, in which index investing is part of that. And the other part is very high levels of active management, which obviously private asset management is the most important one, but also, you know, concentrated portfolios and things like that. So, that's where we're positioned in the company. So, we start with definitely index. Then we look at, you know, the next level, which is sustainable -- sustainability, and within sustainability, ESG, obviously, but climate. We think ESG will continue to grow. ESG is not a political philosophy, is not a -- you know, is an investment risk and investment opportunity, period. No matter what people say, what people politicizes or whatever, it's part of the fabric of investing as to how are you going to manage a portfolio with respect to all these factors, in addition to financial factors and other market factors. So, that -- we're in a obviously down cycle on that, given the political situation in the U.S., given the reset of regulations in Europe, but we're beginning to see significant growth of that in Asia. So, that's the second component. The third component which we're now positioning ourselves enormously is our ability to be a large provider of transparency and performance and risk tools and benchmark indices, you know, asset allocation, etc. in the private assets. The biggest revolution going on in the world right now is private credit. It's going from balance sheet-driven things, you know, on the balance sheet of banks and the balance sheet of insurance companies to a fund structure. So, if that revolution in private credit into a fund structure has an investor in it, whether it's an institutional or wealth management, you know, individual investor, they're going to need transparency tools, they're going to need -- they're going to have to understand performance and risks and all of that, which will be a lot different than, you know, on the balance sheet of a bank or an insurance company, and this is where we come in. So, those are three big areas that we're focused on. There are other areas that -- obviously, you know, our role in fixed-income portfolio management is a big one, our role in providing even more tools to the -- on analytics, insights, for example, into portfolios, and climate risk within analytics. So, those are basically the broad areas that we're focusing on on the product side. Of course, all of that has a huge corollary on the areas that we're expanding into the client side beyond active managers. You know, as it was said before, you hear quite often, the balance sheet of banks, the hedge funds, the corporates, the asset owners, you know, and so on and so forth. So, that is an area -- those are on the client side we see enormous growth opportunities in the nonasset management segment. So, that's a little bit of a -- of an overview. Operator Your next question comes from the line of Scott Wurtzel with Wolfe Research. Scott Wurtzel -- Wolfe Research -- Analyst Hey. Good morning and thanks for taking my question here. I just wanted to touch on the basis point fees on -- you know, within the index segment and kind of seeing that, you know, steadily decline over the last few quarters. Are there any mix dynamics there we should be aware of as it relates to the current market environment and how should we be thinking about, you know, that basis point fee going forward? Thanks. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. So, we did see a modest decline in the basis points from the prior quarter from 2.50 basis points down to 2.48 basis points. That was driven almost entirely by mix shift. Most of that resulted from a lower contribution of higher fee international products and a higher contribution to AUM from lower fee products with U.S. exposure. I would say there's nothing new to call out here. There can be some dynamics with AUM levels. And you saw this when AUM levels dropped, there was more stability in the fee. So, there are some fee arrangements we have where the fees do step up at lower AUM levels. And vice versa, they step down at higher AUM levels. And so, that can be one small factor to point out. But I'd say nothing out of the ordinary or nothing new relative to what we've seen in the past. We do expect, over time, fees to gradually come down, driven by mix shift, although we expect the growth in assets and the tremendous opportunity we have across so many different frontiers to more than offset that decline, which is what we've seen and as you can tell by the healthy overall ETF revenue contribution, but also the overall ABF revenue growth. And so, I would highlight that within non-ETF passive, the fee dynamics have been much more stable there, and that's going back to the question about custom indexes. In the non-ETF passive category, that is an area where we see tremendous engagement and growth around areas like custom indexes. And many times, those can be higher fee-type mandates that we see. Operator Your next question comes from the line of Craig Huber with Huber Research Partners. Craig Huber -- Huber Research Partners -- Analyst Thank you. Can you touch on AI and the benefits that you're -- can see going forward here, the benefit your products, over time, you could potentially sell at a significantly higher price point? What excites you on that front? And also, touch on, if you would, the cost-cutting opportunity going forward on that front. Thank you. Baer Pettit -- President and Chief Operating Officer Sure. I'll make a few observations on that. So, I'll start with the first point, which is, you know, about efficiencies. So, I think we prefer to see it as efficiencies rather than cost cutting per se because a lot of our goal is to try to get things done faster and to reinvest a lot of that in these growth opportunities that we're talking about. But we're very focused on that aspect of things across, you know, a variety of projects that we have going on. So, in turn, we're also, you know, working to apply AI in a variety of product areas. We have some actually launch coming up during the course of this quarter, you know, on analytic insights, where we, in essence, take an enormous amount of complex data for clients which they normally would have to, you know, parse through in rather inefficient ways and bring them, you know, direct insights using, you know, AI. So, I think that will just be the beginning of that. We have to really be focused on thinking about this in a competitive environment. And so, you know, as we go forward, I think the real benefit of AI for us is that we are a very data-rich environment and our clients are always trying to get greater insights out of all of those capabilities that we deliver to them. And so, you know, in terms of new product development, you know, that's where we'll definitely be keeping you -- you know, have more news during the rest of this year as we bring out, as I said, both in this quarter and quarters ahead, capabilities about bringing our clients greater insight and faster and differentiated, you know, calculations using AI. Operator Your next question comes from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy -- Deutsche Bank -- Analyst Yes. Hi. Good morning. Thank you. I wanted to touch on capital allocation, you know, just given what the stock has been doing over the last, you know, year or more recently. I'm curious if your views on capital allocation have evolved and how you would, you know, prioritize share buybacks versus potential, you know, M&A opportunities and other things. Thank you. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. So, I'd say, generally, our approach to capital allocation has not changed. So, we pay a steady dividend that grows with EPS of the company, and then we look to generate value with excess capital and cash beyond that. And so, we are continually looking for opportunities to do that while we do monitor the market for potentially strategic, attractive MP&As. Sometimes, the best opportunity for us for creating value is investing in MSCI, so buying our stock back. And so, we are long-term believers in the company and the future value. And so, our approach to share repurchases has not changed, and we'll look to use available cash when we see attractive opportunities in the stock. Operator Your next question comes from the line of Russell Quelch with Redburn Atlantic. Russell, I think you're on mute. Your next question comes from the line of Greg Simpson with BNP Paribas. Greg Simpson -- Exane BNP Paribas -- Analyst Hi there. I just wanted to check in on private markets. Can you talk about the run rate growth at Burgiss and if you think the 20% top-line growth you talked about for 2024 and beyond still looks on track or are there any challenges in the sales environment within private markets? Thank you. Andy Wiechmann -- Chief Financial Officer Sure. Yeah. So, as Baer alluded to, we saw a 17% run rate growth in Private Capital Solutions. I would say, generally, our integration is largely on track from both a go-to-market and a technology and data infrastructure standpoint. We have seen encouraging signs in the areas where we think we can add value. So, you know, we've seen outsized growth in EMEA and getting good traction in Asia, so areas where, I think, MSCI can, you know, help on the go-to-market. I would say, more generally, we continue to be optimistic about the long-term opportunity across Private Capital Solutions and continue to see big long-term opportunities there. Operator That concludes our Q&A session. I will now turn the conference back over to Henry Fernandez, chairman and CEO of MSCI. Henry Fernandez -- Chairman and Chief Executive Officer Thank you for joining us today and for those very insightful questions that you had. As we have said in the past, our operating structure at MSCI is to continue to be a long-term compounder of our earnings and our share price and our revenues and all of that. And there is absolutely no change in our objectives to achieve that. Despite the operating environment challenges that we have had in the last two quarters, we remain confident in the secular tailwinds and opportunities that we see ahead and that will continue to power our business. The elevated cancels we experienced in the first quarter were as a result of a concentration of client events that we do not expect to continue at these levels in quarters to come. And as we've said, our level of engagement with clients is unparalleled, is at a record high. The level of things that they want us to do, solutions that we -- that they want us to come up with is totally unparalleled, and it is increasing pretty much every day, every week, every quarter. And therefore, we are very committed in helping them achieve those objectives, whether it's capitalizing on opportunities or dealing with problems in their portfolios. Therefore, our all-weather franchise is very resilient, and it supports the business through good times and bad times. And we would like to thank you again for joining us this morning, and we look forward to speaking with you in the next few days and weeks.

edtsum0

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Greetings and welcome to the Microsoft fiscal year 2024 third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brett Iversen, vice president of investor relations. Brett Iversen -- General Manager, Investor Relations Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, chairman and chief executive officer; Amy Hood, chief financial officer; Alice Jolla, chief accounting officer; and Keith Dolliver, corporate secretary and deputy general counsel. On the Microsoft investor relations, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's third quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft investor relations website. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call, and in the risk factors section of our Form 10-K Forms 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I'll turn the call over to Satya. Satya Nadella -- Chief Executive Officer Thank you, Brett. It was a record third quarter powered by the continued strength of Microsoft Cloud, which surpassed $35 billion in revenue, up 23%. Microsoft Copilot and Copilot stack spanning everyday productivity, business process and developer services to models, data and infrastructure are orchestrating a new era of AI transformation driving better business outcomes across every role and industry. Now I'll highlight examples walking up the stack, starting with AI infrastructure. Azure again took share as customers use our platforms and tools to build their own AI solutions. We offer the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD, as well as our own first-party silicon. Our AI innovation continues to build on our strategic partnership with OpenAI, more than 65% of the Fortune 500 now use Azure OpenAI service. We also continue to innovate and partner broadly to bring customers the best selection of frontier models in open-source models, LLMs, and SLMs with 53, which we announced earlier this week, we offer the most capable and cost-effective SLM available. It's already being trialed by companies like CallMiner, LTIMindtree, PwC, and TCS. Our models as a service offering makes it easy for developers to use LLM and SLM without having to manage any underlying infrastructure. Hundreds of paid customers from Accenture and EY to Schneider Electric are using it to take advantage of API access to third-party models, including as of this quarter, the latest from Cohere, Meta, and Mistral. And as part of our partnership announced last week, G42 will run its AI applications and services on our cloud. All up, the number of Azure AI customers continues to grow and average spend continues to increase. We also saw an acceleration of revenue from migrations to Azure. Azure Arc continues to help customers like DICK'S Sporting Goods and World Bank streamlined their cloud migrations. Arc now has 33,000 customers, up over 2x year over year, and we are the hyperscale platform of choice for SAP and Oracle workloads with Conduent and Medline moving their on-premise Oracle Estates to Azure and Kyndryl and L'Oreal migrating their SAP workloads to Azure. Overall, we are seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus, multiyear commitments announced this month from Cloud Software Group and the Coca-Cola Company. The number of $100 million-plus Azure deals increased over 80% year over year, while the number of $10 million-plus deals more than doubled. Now on to data and analytics. Our Microsoft intelligent data platform provides customers with the broadest capability, spanning databases, analytics, business intelligence, governance, and AI. Over half of our Azure AI customers also use our data and analytics tools. Customers are building intelligent applications running on Azure, PostgreSQL, and Cosmos DB with deep integrations with Azure AI. TomTom is a great example. They've used Cosmos DB along with Azure Open AI service to build their own immersive in-car infotainment system. We are also encouraged by our momentum with our next-generation analytics platform, Microsoft Fabric. Fabric now has over 11,000 paid customers, including leaders in every industry from ABB, EDP, Energy Transfer to Equinor, Foot Locker, ITOCHU, and Lumen, and we are seeing increased usage intensity. Fabric is seamlessly integrated with Azure AI studio meaning customers can run models against enterprise data that's consolidated in Fabric's multi-cloud data lake, OneLake. And Power BI, which is also natively integrated with Fabric provides business users with AI-powered insights. We now have over 350,000 paid customers. Now on to developers. GitHub Copilot is bending the productivity curve for developers. We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter over quarter and continues to see increased adoption from businesses in every industry, including Itau, Lufthansa Systems, Nokia, Pinterest, and Volvo cars. Copilot is driving growth across the broader GitHub platform, too. AT&T, Citigroup, and Honeywell all increased their overall getup usage after seeing productivity and code quality increases with Copilot. All up more than 90% of the Fortune 100 are now GitHub customers and revenue accelerated over 45% year over year. Anyone can be a developer with new AI-powered features across our low-code, no-code tools, which makes it easier to build an app, automate workflow or create a Copilot using natural language. Thirty thousand organizations across every industry have used Copilot studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter over quarter. Cineplex, for example, built a Copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds. All up over 330,000 organizations, including over half of Fortune 100 have used AI-powered capabilities in Power Platform, and Power Apps now has over 25 million monthly active users, up over 40% year over year. Now on to future of work. We are seeing AI democratize expertise across the workforce. What inventory turns are to efficiency of supply chains, knowledge turns, the creation and diffusion, and knowledge are to productivity of an organization and Copilot for Microsoft 365 is helping increase knowledge turns. Thus, having a cascading effect changing work, work artifacts, and workflows, and driving better decision-making, collaboration and efficiency. This quarter, we made Copilot available to organizations of all types and sizes from enterprises to small businesses, nearly 60% of the Fortune 500 now use Copilot and we have seen accelerated adoption across industries and geographies with companies like Amgen, BP, Cognizant, Koch Industries, Moody's, Novo Nordisk, NVIDIA, and Tech Mahindra purchasing over 10,000 seats. We're also seeing increased usage intensity from early adopters, including a nearly 50% increase in the number of Copilot-assisted interactions per user in Teams, bridging group activity with business process workflows and enterprise knowledge. And we're not stopping there. We're accelerating our innovation, adding over 150 Copilot capabilities since the start of the year. With Copilot in Dynamics 365, we are helping businesses transform every role in business function as we take share with our AI-powered apps across all categories. This quarter, we made our Copilot for service and Copilot for sales broadly available, helping customer service agents and sellers at companies like Land O'Lakes, Northern Trust, Rockwell Automation, and Toyota Group generate role-specific insights and recommendations from across Dynamics 365 and Microsoft 365, as well as third-party platforms like Salesforce, ServiceNow, and Zendesk. And with our Copilot for finance, we are drawing context from dynamics, as well as ERP systems like SAP to reduce labor-intensive processes like collections and contract and invoice capture for companies like dentsu and IDC. ISVs are also building their own Copilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketers access campaign insights in the flow of their work. When it comes to devices, Copilot in Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs, up two times quarter over quarter. With Copilot, we have an opportunity to create an entirely new category of devices, purpose built for this new generation of AI. All of our largest OEM partners have announced AI PCs in recent months. And this quarter, we introduced new surface devices, which include integrated NPUs to power on-device AI experiences like auto framing and live captions. And there's much more to come in just a few weeks, we'll hold a special event to talk about our AI vision across Windows and devices. When it comes to Teams, we once again saw year-over-year usage growth. We're rolling out a new version, which is up to two times faster while using 50% less memory for all customers. We surpassed 1 million Teams rooms for the first time as we continue to make hybrid meetings better with new AI-powered features like automatic camera switching and speaker recognition. And Teams Phone continues to be the market leader in cloud calling now with over 20 million PSTN users, up nearly 30% year over year. All of this innovation is driving growth across Microsoft 365 companies across the private and public sector, including Amadeus, BlackRock, Chevron, Ecolab, Kimberly Clark, all chose our premium E5 offerings this quarter for advanced security, compliance, voice, and analytics. Now on to industry and cross-industry clouds. We are also bringing AI-powered transformation to every industry. In healthcare, DAX Copilot is being used by more than 200 healthcare organizations, including Providence, Stanford Health Care, and WellSpan Health. And in manufacturing, this week, at HANNOVER MESSE, customers like BMW, Siemens, and Volvo Penta, shared how they're using our cloud and AI solutions to transform factory operations. Now on to security. Security underpins every layer of the tech stack and it's our No. 1 priority. We launched our Secure Future Initiative last fall for this reason, bringing together every part of the company to advance cybersecurity protection and we are doubling down on this very important work, putting security about all else before all other features and investments. We are focused on making continuous progress across the six pillars of this initiative as we protect tenants and isolate production systems, protect identities and secrets, protect networks, protect engineering systems, monitor and detect threats, and accelerate responses and remediation. We remain committed to sharing our learnings, tools, and innovation with customers. A great example is Copilot for security, which we made generally available earlier this month, bringing together LLM with domain-specific skills informed by our threat intelligence and 78 trillion daily security signals to provide security teams with actionable insights. Now let me talk about our consumer businesses, starting with LinkedIn. We continue to combine our unique data with this new generation of AI to transform the way members learn, sell, and get hired. Features like LinkedIn AI-assisted messages are seeing a 40% higher acceptance rate and accepted over 10% faster by jobseekers saving hires, time and making it easier to connect them to candidates. Our AI-powered collaborative articles, which has reached over 12 million contributions are helping increase engagement on the platform, which reached a new record this quarter. New AI features are also helping accelerate LinkedIn premium growth with revenue up 29% year over year. We are also seeing strength across our other businesses with hiring, taking share for the seventh consecutive quarter. Now on to search advertising and news. We once again took share across Bing and Edge as we continue to apply this new generation of AI to transform how people search and browse. Bing reached over 140 million daily active users, and we are particularly encouraged by our momentum in mobile. Our free Copilot apps on iOS and Android saw a surge in downloads after our Super Bowl ad and are among the highest-rated in this category. We also rolled out Copilot to our ad platform this quarter, helping marketers use AI to generate recommendations for product images, headlines, and descriptions. Now on to gaming. We are committed to meeting players where they are by bringing great games to more people on more devices. We set third quarter records for game streaming hours, console usage, and monthly active devices. And last month, we added our first Activision Blizzard title Diablo 4 to our Game Pass service. Subscribers played over 10 million hours within the first 10 days, making it one of our biggest first-party Game Pass launches ever. We were also encouraged by ongoing success of Call of Duty: Modern Warfare 3, which is attracting new gamers and retaining franchise loyalists. Finally, we are expanding our games to new platforms, bringing four of our fan-favorite titles to Nintendo Switch and Sony PlayStation for the first time. In fact, earlier this month, we had seven games among the top 25 on the PlayStation store more than any other publisher. In closing, I'm energized about our opportunity ahead as we innovate to help people and businesses thrive in this new era. With that, let me turn it over to Amy. Amy Hood -- Chief Financial Officer Thank you, Satya, and good afternoon, everyone. Our third quarter revenue was $61.9 billion, up 17% and earnings per share was $2.94, up 20%. The results exceeded expectations, and we delivered another quarter of double-digit top and bottom-line growth with continued share gains across many of our businesses. In our commercial business, bookings increased 29% and 31% in constant currency, significantly ahead of expectations, driven by Azure commitments with an increase in average deal size and deal length, as well as strong execution across our core annuity sales motions. Microsoft 365 suite strength contributed to ARPU expansion for our Office commercial business, although new business growth continued to moderate for stand-alone products sold outside the Microsoft 365 suite. Commercial remaining performance obligation increased 20% and 21% in constant currency to $235 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 20% year over year. The remaining portion recognized beyond the next 12 months increased 21%. And this quarter, our annuity mix increased to 97%. In our consumer business, PC market demand was slightly better than we expected, benefiting Windows OEM, while advertising spend landed relatively in line with our expectations. In gaming, we also saw better-than-expected performance of Activision titles, benefiting Xbox content and services. At a company level, Activision contributed a net impact of approximately 4 points to revenue growth, was a 2-point drag on operating income growth, and had a negative $0.04 impact to earnings per share. A reminder, this net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first party and also includes $935 million from purchase accounting adjustments, integration, and transaction-related costs. FX did not have a significant impact on our results and was roughly in line with our expectations on total company revenue, segment level revenue, COGS, and operating expense growth. Microsoft Cloud revenue was $35.1 billion and grew 23%, ahead of expectations. Microsoft Cloud gross margin percentage decreased slightly year over year to 72%, a bit better than expected. Excluding the impact of the change in accounting estimate for useful lives, gross margin percentage increased slightly, driven by improvement in Azure and Office 365, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to Azure. Company gross margin dollars increased 18% and gross margin percentage increased slightly year over year to 70%. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 1 point even with the impact from the purchase accounting adjustments, integration, and transaction-related costs from the Activision acquisition. Growth was driven by the improvement in Azure and Office 365 just mentioned, as well as sales mix shift to higher-margin businesses. Operating expenses increased 10% with 9 points from the Activision acquisition. At a total company level, headcount at the end of March was 1% lower than a year ago. Operating income increased 23% and operating margins increased roughly 2 points year over year to 45%, excluding the impact of the change in accounting estimate, operating margins increased roughly 3 points, driven by the higher gross margin noted earlier and improved operating leverage through continued cost discipline. Now to our segment results. Revenue from productivity and business processes was $19.6 billion and grew 12% and 11% in constant currency, in line with expectations. Office Commercial revenue grew 13% and 12% in constant currency. Office 365 commercial revenue increased 15%, in line with expectations, driven by healthy renewal execution, ARPU growth from continued E5 momentum, and early Copilot for Microsoft 365 progress. Paid Office 365 commercial seats grew 8% year over year with installed base expansion across all customer segments. Seat growth was again driven by our small and medium business and frontline worker offerings, although growth continued to moderate in SMB. Office commercial licensing declined 20% and 18% in constant currency, with continued customer shift to cloud offerings. Office consumer revenue increased 4%, slightly below expectations. Microsoft 365 subscriptions grew 14% to $80.8 million. LinkedIn revenue increased 10% and 9% in constant currency, ahead of expectations, driven by slightly better-than-expected performance in our premium subscriptions and talent solutions businesses. However, in talent solutions, bookings growth continues to be impacted by the weaker hiring environment in key verticals. Dynamics revenue grew 19% and 17% in constant currency, ahead of expectations. Growth was driven by Dynamics 365, which grew 23% and 22% in constant currency with continued growth across all workloads and better-than-expected new business, although bookings growth remains moderate. Segment gross margin dollars increased 11%, and gross margin percentage decreased slightly year over year. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly driven by improvement in Office 365. Operating expenses increased 1% and operating income increased 17% and 16% in constant currency. Next, the intelligent cloud segment. Revenue was $26.7 billion, increasing 21%, ahead of expectations with better-than-expected results across all businesses. Overall, server products and cloud services revenue grew 24%. Azure and other cloud services revenue grew 31% ahead of expectations, while our AI services contributed 7 points of growth as expected. In the non-AI portion of our consumption business, we saw greater-than-expected demand broadly across industries and customer segments, as well as some benefit from a greater-than-expected mix of contracts with higher in-period recognition. In our per-user business, the enterprise mobility and security installed base grew 10% to over 274 million seats, with continued impact from the growth trends in new stand-alone business noted earlier. In our on-premises server business, revenue increased 6%, ahead of expectations, driven by better-than-expected renewal strength, particularly for contracts with higher in-period revenue recognition. Enterprise and partner services revenue decreased 9% on a strong prior-year comparable for enterprise support services. Segment gross margin dollars increased 20% and gross margin percentage decreased slightly year over year. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly, primarily driven by the improvement in Azure noted earlier, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to Azure. Operating expenses increased 1% and operating income grew 32%. Now to more personal computing. Revenue was $15.6 billion, increasing 17% with 15 points of net impact from the Activision acquisition. Results were above expectations, driven by better-than-expected performance in gaming and Windows OEM. Windows OEM revenue increased 11% year over year, ahead of expectations, primarily driven by the slightly better PC market noted earlier, as well as mix shift to higher monetizing markets. Windows commercial products and cloud services revenue increased 13% and 12% in constant currency, below expectations with impact from the growth trends in new stand-alone business noted earlier, as well as lower in-period revenue recognition from a mix of contracts. Devices revenue decreased 17% and 16% in constant currency as we remain focused on our higher-margin premium products. Overall, Surface demand was slightly lower than expected. Search and news advertising revenue ex TAC increased 12% ahead of expectations with continued volume growth and increased engagement on Bing and Edge. And in gaming. Revenue increased 51% and 50% in constant currency with 55 points of net impact from the Activision acquisition. Results were ahead of expectations, primarily driven by Call of Duty. Xbox content and services revenue increased 62% and 61% in constant currency with 61 points of net impact from the Activision acquisition. Xbox hardware revenue decreased 31% and 30% in constant currency. Segment gross margin dollars increased 27% and 26% in constant currency, with 13 points of net impact from the Activision acquisition. Gross margin percentage increased roughly 4 points year over year, primarily driven by sales mix shift to higher-margin businesses. Operating expenses increased 41% with 43 points from the Activision acquisition. Operating income increased 16% and 15% in constant currency. Now back to total company results. Capital expenditures, including finance leases, were $14 billion to support our cloud demand, inclusive of the need to scale our AI infrastructure. Cash paid for PP&E was $11 billion. Cash flow from operations was $31.9 billion, up 31%, driven by strong cloud billings and collections. Free cash flow was $21 billion, up 18% year over year, reflecting higher capital expenditures to support our cloud and AI offerings. This quarter, other income and expense was negative $854 million, lower than anticipated, driven by losses on investments accounted for under the equity method. Our effective tax rate was approximately 18%. And finally, we returned $8.4 billion to shareholders through dividends and share repurchases. Now moving to our Q4 outlook, which unless specifically noted otherwise, is on a US dollar basis. First, FX. Based on current rates, which reflect the recent strengthening of the US dollar, we now expect FX to decrease total revenue and segment-level revenue growth by less than 1 point. When compared to our January guide for Q4, FX, this is a decrease to total revenue of roughly $700 million. We expect FX to decrease COGS growth by approximately 1 point and operating expense growth by less than 1 point. In commercial bookings, we expect solid growth on a relatively flat expiry base, driven by continued strong commercial sales execution. As a reminder, larger, long-term Azure contracts, which are more unpredictable in their timing, can drive increased quarterly volatility in our bookings growth rate. Microsoft Cloud gross margin percentage should decrease roughly 2 points year over year. Excluding the impact of the change in accounting estimate, Q4 cloud gross margin percentage will be down slightly as improvement in Azure, inclusive of scaling our AI infrastructure will be offset by sales mix shift to Azure. We expect capital expenditures to increase materially on a sequential basis driven by cloud and AI infrastructure investments. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure build-outs and the timing of finance leases. We continue to bring capacity online as we scale our AI investments with growing demand. Currently, near-term AI demand is a bit higher than our available capacity. Next, to segment guidance. In Productivity and Business Processes, we expect revenue to grow between 9% and 11% in constant currency or USD 19.9 billion to USD 20.2 billion. In Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth primarily through E5. We expect Office 365 revenue growth to be approximately 14% in constant currency. We continue to progress with adoption of Copilot for Microsoft 365 and remain excited for the long-term growth opportunity. In our on-premises business, we expect revenue to decline in the mid- to high teens. In Office Consumer, we expect revenue growth in the low to mid-single digits, driven by Microsoft 365 subscriptions. For LinkedIn, we expect revenue growth in the mid- to high single digits driven by continued growth across all businesses. And in Dynamics, we expect revenue growth in the low to mid-teens, driven by Dynamics 365. For both LinkedIn and Dynamics, the continued bookings growth moderation noted earlier is a headwind to Q4 revenue growth. For Intelligent Cloud, we expect revenue to grow between 19% and 20% in constant currency or USD 28.4 billion to USD 28.7 billion. Revenue will continue to be driven by Azure, which, as a reminder, can have quarterly variability primarily from our per-user business and in-period revenue recognition depending on the mix of contracts. In Azure, we expect Q4 revenue growth to be 30% to 31% in constant currency or similar to our stronger-than-expected Q3 results. Growth will be driven by our Azure consumption business and continued contribution from AI with some impact from the AI capacity availability noted earlier. Our per-user business should see benefit from Microsoft 365 suite momentum. Though we expect continued moderation in seat growth rates given the size of the installed base. In our on-premises server business, we expect revenue growth in the low to mid-single digits with continued hybrid demand, including licenses running in multi-cloud environments. And in enterprise and partner services revenue should decline in the mid- to high single digits on a high prior-year comparable for enterprise support services. In more personal computing, we expect revenue to grow between 10% and 13% in constant currency or USD $15.2 billion to USD 15.6 billion. Windows OEM revenue growth should be in the low to mid-single digits as PC market unit volumes continue at pre-pandemic levels. In Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-single digits. As a reminder, our quarterly revenue growth can have variability primarily from in-period revenue recognition depending on the mix of contracts. In devices, revenue should decline in the mid-teens as we continue to focus on our higher-margin premium products. search and news advertising ex TAC revenue growth should be in the low to mid-teens, driven by continued volume strength. This will be higher than overall search and news advertising revenue growth, which we expect to be relatively flat. And in gaming, we expect revenue growth in the low to mid-40s, including approximately 50 points of net impact from the Activision acquisition. We expect Xbox content and services revenue growth in the high 50s driven by approximately 60 points of net impact from the Activision acquisition. Hardware revenue will decline again year over year. Now back to company guidance. We expect COGS between USD 19.6 billion to USD 19.8 billion, including approximately $700 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition. We expect operating expense of USD 17.15 billion to USD 17.25 billion, including approximately $300 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition. Therefore, we now expect full year FY '24 operating margins to be up over 2 points year over year, even with our cloud and AI investments, the impact from the Activision acquisition, and the headwind from the change in useful lives last year. This operating margin expansion reflects the hard work across every team to drive efficiencies and maintain disciplined cost management, knowing we will continue to grow our cloud and AI investments next year. Other income and expense should be roughly negative $850 million as interest income will be more than offset by interest expense and losses on investments accounted for under the equity method. As a reminder, we are required to recognize gains or losses on our equity investments which can increase quarterly volatility. We expect our Q4 effective tax rate to be approximately 18%. Now I'd like to share some closing thoughts as we look to the next fiscal year. We continue to focus on building businesses that create meaningful value for our customers and therefore, significant growth opportunities for years to come. In FY '25, that focus on execution should again lead to double-digit revenue and operating income growth to scale to meet the growing demand signal for our cloud and AI products, we expect FY '25 capital expenditures to be higher than FY '24. These expenditures over the course of the next year are dependent on demand signals and adoption of our services. So, we will manage that signal throughout the year. We will also continue to prioritize operating leverage. And therefore, we expect FY '25 operating margins to be down only about 1 point year over year, even with our significant cloud and AI investments, as well as a full year of impact from the Activision acquisition. We are leading the AI platform wave and are committed to bringing that value to our global customers as we enter the final quarter of our fiscal year. With that, let's go to Q&A, Brett. Brett Iversen -- General Manager, Investor Relations Thanks, Amy. We'll now move over to Q&A. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions? Questions & Answers: Operator Thank you. [Operator instructions] And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question. Keith Weiss -- Morgan Stanley -- Analyst Excellent. Thank you, guys, for taking the question, and congratulations on the fantastic quarter. a lot of excitement in the marketplace around generative AI and the potential of these technologies. But there's also a lot of investment going on behind them. It looks like Microsoft is on track to ramp capex over 50% year on year this year to over $50 billion. And there's media speculation of more spending ahead with some reports talking about like $100 billion data center. So, obviously, investments are coming well ahead of the revenue contribution. But what I was hoping for is that you could give us some color on how use as the management team, try to quantify the potential opportunities that underlie these investments because they are getting very big. And maybe if you could give us some hints on whether there's any truth to the potential of like $100 billion data center out there. Thank you so much. Satya Nadella -- Chief Executive Officer Thank you, Keith. for the question, let me start and maybe Amy, you can add up. At a high level, the way we, as a management team, talk about it is there are two sides to this, right? There is training and their inference. Given that we want to be a leader in this big generational shift and paradigm shift in technology, that's on the training side. We want to be able to allocate the capital required to essentially be training these large foundation models and stay in the leadership position there. And we've done that successfully all the way today, and you've seen it flow through our P&L, and you can continue to see that going forward. Then Amy referenced what we also do on the inference side, which is, one, we first innovate and build products. And of course, we have an infrastructure business that's also dependent on a lot of ISVs building products that run on our infrastructure. And it's all going to be demand-driven. In other words, we track -- we're closely what's happening with inference demand, and that's something that we will manage, as Amy said in her remarks very, very closely. So, we feel -- and obviously, we've been doing this, quite frankly, Keith, for now multiple years. So, this is not the quarter. I realize in the news, it's a lot more in the quarter nowadays. But if you look at it, we have been doing what is essentially capital allocation to be a leader in AI for multiple years now, and we plan to sort of essentially keep taking that forward. Amy Hood -- Chief Financial Officer And Keith, I do think it's important to really think about our planning cycles and we do talk about spending sequentially higher. And we look forward to being able to continue to build out the infrastructure needed to meet the demand. Another thing that you really asked in the beginning was the opportunity and the size of that. And I think in some ways, it's important to think about every business process that can be impacted and the opportunity that's represented by every business process. And so, when you think of it that way, I think the opportunity is significant. The opportunity to power that next wave of "cloud infrastructure" is important. It's important because we've been the leader for this decade of the cloud transition, and it's important for us to confidently invest to do that in the second wave, building on our success in the first. And I think that's really the best way to think about how we'll spend is the same way we approached it for a decade. Watch the signal, invest to be a leader in the technical foundation, and then execute consistently to add value to customers. The opportunity is represented by the amount of value we add and I look forward to being able to continue to deliver that. Keith Weiss -- Morgan Stanley -- Analyst Excellent. Thank you so much. Brett Iversen -- General Manager, Investor Relations Thanks, Keith. Operator The next question comes from the line of Brent Thill with Jefferies. Please proceed. Brent Thill -- Jefferies -- Analyst Satya, how would you characterize the demand environment? On one hand, you have bookings in Azure both accelerating year over year in the quarter, but we're seeing a lot of future concern hesitation from other vendors we all cover. So, I think everyone love to get your sense of budget health for customers this year. Satya Nadella -- Chief Executive Officer Great question, Brent. There are a couple of things I would say. On the Azure side, which I think is what you specifically asked, we feel very good about -- the we are fundamentally a sharetaker there because if you look at it from our perspective at this point, Azure has become a port of call for pretty much anybody who is doing an AI project. And so, that's sort of been a significant help for us in terms of acquiring even new customers. Some of the logos I even referenced in my remarks, our new Azure customers. So, that's one. The second thing that we're also seeing is AI just doesn't sit on its own. So, AI projects obviously start with calls to AI models, but they also use a vector database. In fact, Azure Search, which is really used by even ChatGPT is one of the fastest-growing services for us. We have Fabric integration to Azure AI. And so, Cosmos DB integration. So, the data tier, the dev tools is another place where we are seeing great traction. So, we are seeing adjacent services in Azure that get attached to AI. And lastly, I would say, migration to Azure as well. So, this is not just all an AI story. We are also looking at customers, I mean, this is something that we have talked about in the past, which is there's always an optimization cycle. But there's also -- as people optimize, they spend money on new project starts, which will grow and then they'll optimize. So, it's a continuous side of it. So, these are the three trends that are playing out on Azure in terms of what at least we see on demand side. Brent Thill -- Jefferies -- Analyst Thank you. Brett Iversen -- General Manager, Investor Relations Thank you, Brent. Operator The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed. Mark Moerdler -- AllianceBernstein -- Analyst Thank you very much for taking my question, and congratulations on the quarter and the guidance. I want to follow up on the AI, obviously. We're seeing companies shifting their IT spending to invest in and learn about AI rather than receiving additional budgets for AI. At some point for, AI to be transformative, as everyone expects, needs to be accretive to spending. Satya, when do you believe AI will hit the maturity level? Will there be a net increase to IT or outside of IT spending? And what would be the leading indicators of that maturation? And Amy, am I characterizing this correctly as it relates to Azure? Some projects are being delayed so that that spending could be shifted from core Azure toward Azure AI. Thank you. Satya Nadella -- Chief Executive Officer Great set of questions, Mark. Let me just start by saying, a good place to start is to watch what's happening in terms of standard issues for software teams, right? I mean if you think about it, they bought tools in the past. Now you basically buy tools plus Copilot, right? So, you could even say that this is characterized as perhaps shift of what is opex dollars into effectively tool spend because it gives operating leverage to all of the opex dollars you're spending today, right? That's really a good example of, I think, what's going to happen across the board. We see that in customer service. We see that in sales. We see that in marketing. Anywhere, there's operations. That's why I described it as knowledge turns. You can even think of it as lean for a long-lived work, right, because it just reduces waste, and increases speed and customer value. And so, one of the interesting rate limiters is culture change inside of organizations. But I think culture change that means process change. And Amy referenced this even in her answer to the first question because at the end of the day, companies will have to take a process, simplify the process, automate the process, and apply these solutions. And so, that requires not just technology but in fact, companies to go do the hard work of culturally changing how they adopt technology to drive that operating leverage. And this is where we are going to see firm-level performance differences. So, one of the things we see is any customer who is working closely with us deploying it internally at Microsoft we see it. We're also taking our own medicine to apply this across every process. And we know that this is not just about technology, it's about being able to have the methodology that goes with it. And so, we see it in software development. We see it in customer service. We're seeing it even in the horizontal use of Copilot today where every day people are discovering new workflows that they can optimize. And so, that's like the PC when it became a standard issue in early '90s. That's the closest analogy I can come up with. And so, yes, it will take time to percolate through the economy. But this is faster diffusion, a faster rate of adoption than anything we have seen in the past. As evidenced even by Copilot, right, it's faster than any suite we have sold in the past and but it is we're going to require workflow and process change. Amy Hood -- Chief Financial Officer And Mark, maybe to answer your question on are we seeing project starts transition from maybe something that was core consumption to an AI project. In our results, that's not what we saw. We saw more of what Satya was speaking to earlier, which is you see maybe growth in migrations again. You're seeing work in the data space, again, and you're seeing AI project starts. And I think that's why maybe you see our growth be different, of course, than you see IT budget spend. It's because it's a share, I think, improvement plus also really focusing on what Satya said, it's about spending maybe in other areas that we don't traditionally think of as being in the IT budget spend under a CIO. It's spend being done by the head of customer service, it's spend being done by the head of marketing. And I do think that will be important as we think about the opportunity ahead. Mark Moerdler -- AllianceBernstein -- Analyst Incredibly helpful. Thank you both. Brett Iversen -- General Manager, Investor Relations Thanks, Mark. Operator, next question, please. Operator The next question comes from the line of Karl Keirstead with UBS. Please proceed. Karl Keirstead -- UBS -- Analyst Thank you. And Satya and Amy, congrats on these outstanding Azure results. I'd love to hone in a little bit on the seven-point lift to Azure growth from AI, outstanding number, but it's leveling off a little bit from 6 points in December. I'm wondering if you could unpack that a little bit. To what extent did the capacity issues that you Amy highlighted on the call, impact that number? Is there any seasonality? I wouldn't think so or any other factor that can swing around that number that you'd advise us to keep in mind? Thanks so much. Amy Hood -- Chief Financial Officer Thanks, Karl. There's not a seasonality to the numbers. So, you're absolutely right to start there, and it's a good question. The way to think about it is a bit more by -- it is how much capacity we have in play and how much capacity that we have to sell on the inferencing side, in particular. And so, that is partially why you see the capital investment in the shape that is, is because right this minute, we do have demand that exceeds our supply by a bit. So, it is fair to say that, that could have been an impact on the number for the quarter and it does impact a little bit the number in Q4. Karl Keirstead -- UBS -- Analyst OK. Helpful. Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Karl. Operator, next question, please. Operator And the next question comes from the line of Raimo Lenschow with Barclays. Please proceed. Raimo Lenschow -- Barclays -- Analyst Thank you. I have more conceptual questions for Satya. If you think about Copilots and what you're doing there, you're kind of impacting a lot of this in businesses and the opportunities seem very broad-based. How do you think this will play out in the industry between you guys offering certain copilots versus like the rest of the industry following and everyone seems to have a copilot now and seems to be talking about it, how does that impact what do you want to do, your partner strategy going forward? Thank you. Satya Nadella -- Chief Executive Officer Yeah, it's a great question. So, the way we see it play out is, if you think about it, the way Office was used broadly for knowledge work was in the context of business processes, right? So, it's not like -- when people do knowledge work, they're not doing knowledge work, they're doing knowledge work and support of making progress in the context of sales enablement, customer service revenue ops, supply chain or what have you, right? So, that's the first thing to note. And they do it inside of email. They do it inside of Teams. They do it inside of Excel, PowerPoint, Word and what have you. Now we have the ability to essentially bridge the work and the work artifacts inside of these knowledge worker tools with the workflow and the business process and the business process data. So, when we think about our Copilot, our Copilot has that ability to integrate, whether it's with ServiceNow, it has the ability to integrate with SAP with Salesforce, with obviously Dynamics. That's what we are seeing. In fact, you'll hear us talk a lot about it at our developer conference, which is the extensibility and Copilot Studio is really off to the races in terms of the product that most people are excited because one of the things in the enterprise, if you want to ground your copilot with enterprise data, which is in all of these SaaS applications and Copilot Studio, is the tool to use it. To make that happen. And so, that's what we are seeing, which is we are building a Copilot, which also happens to be an orchestrator of all in other copilots, which to us appear as extensions. And net-net, what happens is some of these knowledge worker tools that people have used all the time, right? Because when you think about Teams, when you're having a meeting, you're not doing a random meeting, the meeting is in the context of some business process. It could be a supply chain meeting where you're trying to understand which suppliers to bet on or what terms to do. And so, now you can access all that data right in the Team's context. So, that's I think what's exciting for us, having built all these horizontal tools, which I would say we're under underappreciated for the amount of work how people use those tools to make progress on business process, but we now get to bridge that between the business applications and knowledge worker tools, more horizontally. Raimo Lenschow -- Barclays -- Analyst OK. Perfect. Thank you. Congrats from me as well. Brett Iversen -- General Manager, Investor Relations Thanks, Raimo. Operator, next question, please. Operator And the next question comes from the line of Michael Turrin with Wells Fargo. Please proceed. Michael Turrin -- Wells Fargo Securities -- Analyst Hey, great. I appreciate you taking the question, I wanted to go back to Azure. You've been hinting at stabilization there for the past couple of quarters, but still very good to see the balance. Maybe you can expand on just what the commercial bookings number, appreciating the variability there does in terms of visibility. And any characterization you can give us around what you're seeing in areas like cost optimization and core workload growth coming back is just helpful context for us in unpacking the numbers. Thank you. Amy Hood -- Chief Financial Officer Thanks, Michael. I may take those a bit in reverse. It's a little easier to address them. When you think about -- we've been talking about sort of stabilization and what you saw this quarter, if you break down the Azure number as you saw, which I think I talked a little bit about with Karl was 7 points of contribution from AI, and you could call them the difference 24 from our core really Azure business. And within that, the activity we saw on the consumption side was really this balance that we were quite used to and have seen throughout the cloud transition. We saw new workload starts and we saw optimizations. And then those optimizations create new budget, and you apply it. And that cycle which is actually quite normal. We saw it again this quarter in a balanced way. And I think when we talk about stabilization or even what we saw between Q2 and Q3, which is a bit of acceleration in that core was a lot of the newer project starts relating back to not just AI starts, but lots of other workflows. The companies are still going from on-prem to cloud, and Satya mentioned migrations. And some of that, which I know isn't as exciting as talking about all the AI projects. This is still really foundational work to allow companies to take advantage of the cost savings and the total TCO is still really good. And so, I think that balance is really what you saw this quarter, and I do feel like there wasn't really a big difference, Michael, across industries or across geos. So, I would say it was actually pretty consistent in the other maybe texture that I could give you to that question. And so, then when you're saying do we keep sort of pointing to stabilization, I really do look sort of workload to workload. What are we seeing where it starts. And this one actually felt quite balanced and optimization looks like they normally would, which by the way, is super important. It's something we encourage customers to do. You want to run your workloads as efficiently as you possibly can. It's critical to customers being able to grow and get value out of that. So, I sometimes think we -- you all may ask the question more as a negative. And for us, it's just about a healthy cycle at the customer account level. Michael Turrin -- Wells Fargo Securities -- Analyst Consistent core cloud growth is still pretty exciting to us as well. Thank you. Amy Hood -- Chief Financial Officer Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Michael. Operator, next question, please. Operator The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed. Kirk Materne -- Evercore ISI -- Analyst Yes. Thanks for taking the question and I'll add my congrats in the quarter. Satya, I was wondering if you could chime in on a discussion that comes up a lot with investors, which is, is there a sort of data quality problem in the market in terms of being able to take advantage of all these new GenAI capabilities? And I was just curious, if you could comment on, do you see companies making inroads on sort of addressing that? And do you see that as sort of an inhibitor to AI growth at all at this point? Thank you. Satya Nadella -- Chief Executive Officer Yeah, it's a great question because there are two sets of things in order to make sense for successful deployment of these new AI capabilities. I mean if you sort of say this, what is this AI, it does two things, right? There's a new user experience, there is a natural language interface and second thing is it's the reasoning engine. And the reasoning engine requires good data, and it's good requires good data for grounding, right? So, people talk about something called retrieval augmented generation. And in that context, having good grounding data that then helps with the reasoning, I think, is helpful. And then, of course, people are also looking to sort of fine-tune or RLHF or essentially take the large model and ground it further. All of these tools are now available, and the sophistication of how people can deploy these models across various business processes where there is data and where there is tuning of these models is also getting more widespread, even at system integrators and other developers are there to help enterprises. o, all that's maturing. So, we feel good. And this is what I think on the commercial side, these are some of the harder problems to solve broad consumer, right? I mean I think this is a couple of orders of magnitude of improvements in, I'll call it, our models before we can sort of have more sophisticated open-ended consumer scenarios. Whereas in the enterprise, these are all things we can go tackle. Again, I point to GitHub, if you think about how it's got an entire system, right? It's just not an AI model. It's the user experience, scaffolding, editor, the chat, interpreter and the debugger work along with the continuations of the model to help essentially create these reasoning traces which help the entire thing work. And effectively, what we are doing with copilot, Copilot Studio and connectors to all these business systems, think of it as we are creating GitHub Copilot like scenarios for every business system. That's what I think is going to have both what Amy referenced is business value and better grounding. But you're absolutely right in saying a lot of work we're doing with Fabric or Cosmos or PostgreS or SQL is about preparing that data so that it can be integrated with these AI projects. Kirk Materne -- Evercore ISI -- Analyst Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Kirk. Operator, we have time for one last question. Operator Our last question will come from the line of Alex Zukin with Wolfe Research. Please proceed. Alex Zukin -- Wolfe Research -- Analyst Hey guys, thanks for taking the question. I wanted to ask the AI question but from a Microsoft 365 Copilot perspective. I think you talked a little bit about starting to see some of those impacts positively in the quarter on the office business. I wanted to ask more broadly around that capacity constraint that you alluded to in your prepared remarks, Amy. And kind of how does the easing -- how tied are we like as you invest for that capex and bring more of the capacity online? How much does that unlock or unlock the ability to deliver both a higher Azure AI number, as well as a higher Microsoft 365 Copilot number? Thanks. Amy Hood -- Chief Financial Officer Thanks for the question. It's a good opportunity to clarify. And I would not say that there is a capacity constraint on the Copilots. It's a real priority for us to make sure we optimize the allocation of our capacity to make sure that those per-user businesses are able to continue to grow. And so, think about that as our priority 1. And so, then what that does mean is capacity constraints when we have them, you'll tend to see them on the Azure infrastructure side, the consumption side of the business is a better way of thinking about it. Alex Zukin -- Wolfe Research -- Analyst Perfect. Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Alex. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Satya Nadella -- Chief Executive Officer Thank you all. Amy Hood -- Chief Financial Officer Thank you. Answer:

the Microsoft fiscal year 2024 third quarter earnings conference call

Operator Greetings and welcome to the Microsoft fiscal year 2024 third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brett Iversen, vice president of investor relations. Brett Iversen -- General Manager, Investor Relations Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, chairman and chief executive officer; Amy Hood, chief financial officer; Alice Jolla, chief accounting officer; and Keith Dolliver, corporate secretary and deputy general counsel. On the Microsoft investor relations, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's third quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft investor relations website. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call, and in the risk factors section of our Form 10-K Forms 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I'll turn the call over to Satya. Satya Nadella -- Chief Executive Officer Thank you, Brett. It was a record third quarter powered by the continued strength of Microsoft Cloud, which surpassed $35 billion in revenue, up 23%. Microsoft Copilot and Copilot stack spanning everyday productivity, business process and developer services to models, data and infrastructure are orchestrating a new era of AI transformation driving better business outcomes across every role and industry. Now I'll highlight examples walking up the stack, starting with AI infrastructure. Azure again took share as customers use our platforms and tools to build their own AI solutions. We offer the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD, as well as our own first-party silicon. Our AI innovation continues to build on our strategic partnership with OpenAI, more than 65% of the Fortune 500 now use Azure OpenAI service. We also continue to innovate and partner broadly to bring customers the best selection of frontier models in open-source models, LLMs, and SLMs with 53, which we announced earlier this week, we offer the most capable and cost-effective SLM available. It's already being trialed by companies like CallMiner, LTIMindtree, PwC, and TCS. Our models as a service offering makes it easy for developers to use LLM and SLM without having to manage any underlying infrastructure. Hundreds of paid customers from Accenture and EY to Schneider Electric are using it to take advantage of API access to third-party models, including as of this quarter, the latest from Cohere, Meta, and Mistral. And as part of our partnership announced last week, G42 will run its AI applications and services on our cloud. All up, the number of Azure AI customers continues to grow and average spend continues to increase. We also saw an acceleration of revenue from migrations to Azure. Azure Arc continues to help customers like DICK'S Sporting Goods and World Bank streamlined their cloud migrations. Arc now has 33,000 customers, up over 2x year over year, and we are the hyperscale platform of choice for SAP and Oracle workloads with Conduent and Medline moving their on-premise Oracle Estates to Azure and Kyndryl and L'Oreal migrating their SAP workloads to Azure. Overall, we are seeing an acceleration in the number of large Azure deals from leaders across industries, including billion-dollar-plus, multiyear commitments announced this month from Cloud Software Group and the Coca-Cola Company. The number of $100 million-plus Azure deals increased over 80% year over year, while the number of $10 million-plus deals more than doubled. Now on to data and analytics. Our Microsoft intelligent data platform provides customers with the broadest capability, spanning databases, analytics, business intelligence, governance, and AI. Over half of our Azure AI customers also use our data and analytics tools. Customers are building intelligent applications running on Azure, PostgreSQL, and Cosmos DB with deep integrations with Azure AI. TomTom is a great example. They've used Cosmos DB along with Azure Open AI service to build their own immersive in-car infotainment system. We are also encouraged by our momentum with our next-generation analytics platform, Microsoft Fabric. Fabric now has over 11,000 paid customers, including leaders in every industry from ABB, EDP, Energy Transfer to Equinor, Foot Locker, ITOCHU, and Lumen, and we are seeing increased usage intensity. Fabric is seamlessly integrated with Azure AI studio meaning customers can run models against enterprise data that's consolidated in Fabric's multi-cloud data lake, OneLake. And Power BI, which is also natively integrated with Fabric provides business users with AI-powered insights. We now have over 350,000 paid customers. Now on to developers. GitHub Copilot is bending the productivity curve for developers. We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter over quarter and continues to see increased adoption from businesses in every industry, including Itau, Lufthansa Systems, Nokia, Pinterest, and Volvo cars. Copilot is driving growth across the broader GitHub platform, too. AT&T, Citigroup, and Honeywell all increased their overall getup usage after seeing productivity and code quality increases with Copilot. All up more than 90% of the Fortune 100 are now GitHub customers and revenue accelerated over 45% year over year. Anyone can be a developer with new AI-powered features across our low-code, no-code tools, which makes it easier to build an app, automate workflow or create a Copilot using natural language. Thirty thousand organizations across every industry have used Copilot studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter over quarter. Cineplex, for example, built a Copilot for customer service agents, reducing query handling time from as much as 15 minutes to 30 seconds. All up over 330,000 organizations, including over half of Fortune 100 have used AI-powered capabilities in Power Platform, and Power Apps now has over 25 million monthly active users, up over 40% year over year. Now on to future of work. We are seeing AI democratize expertise across the workforce. What inventory turns are to efficiency of supply chains, knowledge turns, the creation and diffusion, and knowledge are to productivity of an organization and Copilot for Microsoft 365 is helping increase knowledge turns. Thus, having a cascading effect changing work, work artifacts, and workflows, and driving better decision-making, collaboration and efficiency. This quarter, we made Copilot available to organizations of all types and sizes from enterprises to small businesses, nearly 60% of the Fortune 500 now use Copilot and we have seen accelerated adoption across industries and geographies with companies like Amgen, BP, Cognizant, Koch Industries, Moody's, Novo Nordisk, NVIDIA, and Tech Mahindra purchasing over 10,000 seats. We're also seeing increased usage intensity from early adopters, including a nearly 50% increase in the number of Copilot-assisted interactions per user in Teams, bridging group activity with business process workflows and enterprise knowledge. And we're not stopping there. We're accelerating our innovation, adding over 150 Copilot capabilities since the start of the year. With Copilot in Dynamics 365, we are helping businesses transform every role in business function as we take share with our AI-powered apps across all categories. This quarter, we made our Copilot for service and Copilot for sales broadly available, helping customer service agents and sellers at companies like Land O'Lakes, Northern Trust, Rockwell Automation, and Toyota Group generate role-specific insights and recommendations from across Dynamics 365 and Microsoft 365, as well as third-party platforms like Salesforce, ServiceNow, and Zendesk. And with our Copilot for finance, we are drawing context from dynamics, as well as ERP systems like SAP to reduce labor-intensive processes like collections and contract and invoice capture for companies like dentsu and IDC. ISVs are also building their own Copilot integrations. For example, new integrations between Adobe Experience Cloud and Copilot will help marketers access campaign insights in the flow of their work. When it comes to devices, Copilot in Windows is now available on nearly 225 million Windows 10 and Windows 11 PCs, up two times quarter over quarter. With Copilot, we have an opportunity to create an entirely new category of devices, purpose built for this new generation of AI. All of our largest OEM partners have announced AI PCs in recent months. And this quarter, we introduced new surface devices, which include integrated NPUs to power on-device AI experiences like auto framing and live captions. And there's much more to come in just a few weeks, we'll hold a special event to talk about our AI vision across Windows and devices. When it comes to Teams, we once again saw year-over-year usage growth. We're rolling out a new version, which is up to two times faster while using 50% less memory for all customers. We surpassed 1 million Teams rooms for the first time as we continue to make hybrid meetings better with new AI-powered features like automatic camera switching and speaker recognition. And Teams Phone continues to be the market leader in cloud calling now with over 20 million PSTN users, up nearly 30% year over year. All of this innovation is driving growth across Microsoft 365 companies across the private and public sector, including Amadeus, BlackRock, Chevron, Ecolab, Kimberly Clark, all chose our premium E5 offerings this quarter for advanced security, compliance, voice, and analytics. Now on to industry and cross-industry clouds. We are also bringing AI-powered transformation to every industry. In healthcare, DAX Copilot is being used by more than 200 healthcare organizations, including Providence, Stanford Health Care, and WellSpan Health. And in manufacturing, this week, at HANNOVER MESSE, customers like BMW, Siemens, and Volvo Penta, shared how they're using our cloud and AI solutions to transform factory operations. Now on to security. Security underpins every layer of the tech stack and it's our No. 1 priority. We launched our Secure Future Initiative last fall for this reason, bringing together every part of the company to advance cybersecurity protection and we are doubling down on this very important work, putting security about all else before all other features and investments. We are focused on making continuous progress across the six pillars of this initiative as we protect tenants and isolate production systems, protect identities and secrets, protect networks, protect engineering systems, monitor and detect threats, and accelerate responses and remediation. We remain committed to sharing our learnings, tools, and innovation with customers. A great example is Copilot for security, which we made generally available earlier this month, bringing together LLM with domain-specific skills informed by our threat intelligence and 78 trillion daily security signals to provide security teams with actionable insights. Now let me talk about our consumer businesses, starting with LinkedIn. We continue to combine our unique data with this new generation of AI to transform the way members learn, sell, and get hired. Features like LinkedIn AI-assisted messages are seeing a 40% higher acceptance rate and accepted over 10% faster by jobseekers saving hires, time and making it easier to connect them to candidates. Our AI-powered collaborative articles, which has reached over 12 million contributions are helping increase engagement on the platform, which reached a new record this quarter. New AI features are also helping accelerate LinkedIn premium growth with revenue up 29% year over year. We are also seeing strength across our other businesses with hiring, taking share for the seventh consecutive quarter. Now on to search advertising and news. We once again took share across Bing and Edge as we continue to apply this new generation of AI to transform how people search and browse. Bing reached over 140 million daily active users, and we are particularly encouraged by our momentum in mobile. Our free Copilot apps on iOS and Android saw a surge in downloads after our Super Bowl ad and are among the highest-rated in this category. We also rolled out Copilot to our ad platform this quarter, helping marketers use AI to generate recommendations for product images, headlines, and descriptions. Now on to gaming. We are committed to meeting players where they are by bringing great games to more people on more devices. We set third quarter records for game streaming hours, console usage, and monthly active devices. And last month, we added our first Activision Blizzard title Diablo 4 to our Game Pass service. Subscribers played over 10 million hours within the first 10 days, making it one of our biggest first-party Game Pass launches ever. We were also encouraged by ongoing success of Call of Duty: Modern Warfare 3, which is attracting new gamers and retaining franchise loyalists. Finally, we are expanding our games to new platforms, bringing four of our fan-favorite titles to Nintendo Switch and Sony PlayStation for the first time. In fact, earlier this month, we had seven games among the top 25 on the PlayStation store more than any other publisher. In closing, I'm energized about our opportunity ahead as we innovate to help people and businesses thrive in this new era. With that, let me turn it over to Amy. Amy Hood -- Chief Financial Officer Thank you, Satya, and good afternoon, everyone. Our third quarter revenue was $61.9 billion, up 17% and earnings per share was $2.94, up 20%. The results exceeded expectations, and we delivered another quarter of double-digit top and bottom-line growth with continued share gains across many of our businesses. In our commercial business, bookings increased 29% and 31% in constant currency, significantly ahead of expectations, driven by Azure commitments with an increase in average deal size and deal length, as well as strong execution across our core annuity sales motions. Microsoft 365 suite strength contributed to ARPU expansion for our Office commercial business, although new business growth continued to moderate for stand-alone products sold outside the Microsoft 365 suite. Commercial remaining performance obligation increased 20% and 21% in constant currency to $235 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 20% year over year. The remaining portion recognized beyond the next 12 months increased 21%. And this quarter, our annuity mix increased to 97%. In our consumer business, PC market demand was slightly better than we expected, benefiting Windows OEM, while advertising spend landed relatively in line with our expectations. In gaming, we also saw better-than-expected performance of Activision titles, benefiting Xbox content and services. At a company level, Activision contributed a net impact of approximately 4 points to revenue growth, was a 2-point drag on operating income growth, and had a negative $0.04 impact to earnings per share. A reminder, this net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first party and also includes $935 million from purchase accounting adjustments, integration, and transaction-related costs. FX did not have a significant impact on our results and was roughly in line with our expectations on total company revenue, segment level revenue, COGS, and operating expense growth. Microsoft Cloud revenue was $35.1 billion and grew 23%, ahead of expectations. Microsoft Cloud gross margin percentage decreased slightly year over year to 72%, a bit better than expected. Excluding the impact of the change in accounting estimate for useful lives, gross margin percentage increased slightly, driven by improvement in Azure and Office 365, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to Azure. Company gross margin dollars increased 18% and gross margin percentage increased slightly year over year to 70%. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 1 point even with the impact from the purchase accounting adjustments, integration, and transaction-related costs from the Activision acquisition. Growth was driven by the improvement in Azure and Office 365 just mentioned, as well as sales mix shift to higher-margin businesses. Operating expenses increased 10% with 9 points from the Activision acquisition. At a total company level, headcount at the end of March was 1% lower than a year ago. Operating income increased 23% and operating margins increased roughly 2 points year over year to 45%, excluding the impact of the change in accounting estimate, operating margins increased roughly 3 points, driven by the higher gross margin noted earlier and improved operating leverage through continued cost discipline. Now to our segment results. Revenue from productivity and business processes was $19.6 billion and grew 12% and 11% in constant currency, in line with expectations. Office Commercial revenue grew 13% and 12% in constant currency. Office 365 commercial revenue increased 15%, in line with expectations, driven by healthy renewal execution, ARPU growth from continued E5 momentum, and early Copilot for Microsoft 365 progress. Paid Office 365 commercial seats grew 8% year over year with installed base expansion across all customer segments. Seat growth was again driven by our small and medium business and frontline worker offerings, although growth continued to moderate in SMB. Office commercial licensing declined 20% and 18% in constant currency, with continued customer shift to cloud offerings. Office consumer revenue increased 4%, slightly below expectations. Microsoft 365 subscriptions grew 14% to $80.8 million. LinkedIn revenue increased 10% and 9% in constant currency, ahead of expectations, driven by slightly better-than-expected performance in our premium subscriptions and talent solutions businesses. However, in talent solutions, bookings growth continues to be impacted by the weaker hiring environment in key verticals. Dynamics revenue grew 19% and 17% in constant currency, ahead of expectations. Growth was driven by Dynamics 365, which grew 23% and 22% in constant currency with continued growth across all workloads and better-than-expected new business, although bookings growth remains moderate. Segment gross margin dollars increased 11%, and gross margin percentage decreased slightly year over year. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly driven by improvement in Office 365. Operating expenses increased 1% and operating income increased 17% and 16% in constant currency. Next, the intelligent cloud segment. Revenue was $26.7 billion, increasing 21%, ahead of expectations with better-than-expected results across all businesses. Overall, server products and cloud services revenue grew 24%. Azure and other cloud services revenue grew 31% ahead of expectations, while our AI services contributed 7 points of growth as expected. In the non-AI portion of our consumption business, we saw greater-than-expected demand broadly across industries and customer segments, as well as some benefit from a greater-than-expected mix of contracts with higher in-period recognition. In our per-user business, the enterprise mobility and security installed base grew 10% to over 274 million seats, with continued impact from the growth trends in new stand-alone business noted earlier. In our on-premises server business, revenue increased 6%, ahead of expectations, driven by better-than-expected renewal strength, particularly for contracts with higher in-period revenue recognition. Enterprise and partner services revenue decreased 9% on a strong prior-year comparable for enterprise support services. Segment gross margin dollars increased 20% and gross margin percentage decreased slightly year over year. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly, primarily driven by the improvement in Azure noted earlier, even with the impact of scaling our AI infrastructure, partially offset by sales mix shift to Azure. Operating expenses increased 1% and operating income grew 32%. Now to more personal computing. Revenue was $15.6 billion, increasing 17% with 15 points of net impact from the Activision acquisition. Results were above expectations, driven by better-than-expected performance in gaming and Windows OEM. Windows OEM revenue increased 11% year over year, ahead of expectations, primarily driven by the slightly better PC market noted earlier, as well as mix shift to higher monetizing markets. Windows commercial products and cloud services revenue increased 13% and 12% in constant currency, below expectations with impact from the growth trends in new stand-alone business noted earlier, as well as lower in-period revenue recognition from a mix of contracts. Devices revenue decreased 17% and 16% in constant currency as we remain focused on our higher-margin premium products. Overall, Surface demand was slightly lower than expected. Search and news advertising revenue ex TAC increased 12% ahead of expectations with continued volume growth and increased engagement on Bing and Edge. And in gaming. Revenue increased 51% and 50% in constant currency with 55 points of net impact from the Activision acquisition. Results were ahead of expectations, primarily driven by Call of Duty. Xbox content and services revenue increased 62% and 61% in constant currency with 61 points of net impact from the Activision acquisition. Xbox hardware revenue decreased 31% and 30% in constant currency. Segment gross margin dollars increased 27% and 26% in constant currency, with 13 points of net impact from the Activision acquisition. Gross margin percentage increased roughly 4 points year over year, primarily driven by sales mix shift to higher-margin businesses. Operating expenses increased 41% with 43 points from the Activision acquisition. Operating income increased 16% and 15% in constant currency. Now back to total company results. Capital expenditures, including finance leases, were $14 billion to support our cloud demand, inclusive of the need to scale our AI infrastructure. Cash paid for PP&E was $11 billion. Cash flow from operations was $31.9 billion, up 31%, driven by strong cloud billings and collections. Free cash flow was $21 billion, up 18% year over year, reflecting higher capital expenditures to support our cloud and AI offerings. This quarter, other income and expense was negative $854 million, lower than anticipated, driven by losses on investments accounted for under the equity method. Our effective tax rate was approximately 18%. And finally, we returned $8.4 billion to shareholders through dividends and share repurchases. Now moving to our Q4 outlook, which unless specifically noted otherwise, is on a US dollar basis. First, FX. Based on current rates, which reflect the recent strengthening of the US dollar, we now expect FX to decrease total revenue and segment-level revenue growth by less than 1 point. When compared to our January guide for Q4, FX, this is a decrease to total revenue of roughly $700 million. We expect FX to decrease COGS growth by approximately 1 point and operating expense growth by less than 1 point. In commercial bookings, we expect solid growth on a relatively flat expiry base, driven by continued strong commercial sales execution. As a reminder, larger, long-term Azure contracts, which are more unpredictable in their timing, can drive increased quarterly volatility in our bookings growth rate. Microsoft Cloud gross margin percentage should decrease roughly 2 points year over year. Excluding the impact of the change in accounting estimate, Q4 cloud gross margin percentage will be down slightly as improvement in Azure, inclusive of scaling our AI infrastructure will be offset by sales mix shift to Azure. We expect capital expenditures to increase materially on a sequential basis driven by cloud and AI infrastructure investments. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure build-outs and the timing of finance leases. We continue to bring capacity online as we scale our AI investments with growing demand. Currently, near-term AI demand is a bit higher than our available capacity. Next, to segment guidance. In Productivity and Business Processes, we expect revenue to grow between 9% and 11% in constant currency or USD 19.9 billion to USD 20.2 billion. In Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth primarily through E5. We expect Office 365 revenue growth to be approximately 14% in constant currency. We continue to progress with adoption of Copilot for Microsoft 365 and remain excited for the long-term growth opportunity. In our on-premises business, we expect revenue to decline in the mid- to high teens. In Office Consumer, we expect revenue growth in the low to mid-single digits, driven by Microsoft 365 subscriptions. For LinkedIn, we expect revenue growth in the mid- to high single digits driven by continued growth across all businesses. And in Dynamics, we expect revenue growth in the low to mid-teens, driven by Dynamics 365. For both LinkedIn and Dynamics, the continued bookings growth moderation noted earlier is a headwind to Q4 revenue growth. For Intelligent Cloud, we expect revenue to grow between 19% and 20% in constant currency or USD 28.4 billion to USD 28.7 billion. Revenue will continue to be driven by Azure, which, as a reminder, can have quarterly variability primarily from our per-user business and in-period revenue recognition depending on the mix of contracts. In Azure, we expect Q4 revenue growth to be 30% to 31% in constant currency or similar to our stronger-than-expected Q3 results. Growth will be driven by our Azure consumption business and continued contribution from AI with some impact from the AI capacity availability noted earlier. Our per-user business should see benefit from Microsoft 365 suite momentum. Though we expect continued moderation in seat growth rates given the size of the installed base. In our on-premises server business, we expect revenue growth in the low to mid-single digits with continued hybrid demand, including licenses running in multi-cloud environments. And in enterprise and partner services revenue should decline in the mid- to high single digits on a high prior-year comparable for enterprise support services. In more personal computing, we expect revenue to grow between 10% and 13% in constant currency or USD $15.2 billion to USD 15.6 billion. Windows OEM revenue growth should be in the low to mid-single digits as PC market unit volumes continue at pre-pandemic levels. In Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-single digits. As a reminder, our quarterly revenue growth can have variability primarily from in-period revenue recognition depending on the mix of contracts. In devices, revenue should decline in the mid-teens as we continue to focus on our higher-margin premium products. search and news advertising ex TAC revenue growth should be in the low to mid-teens, driven by continued volume strength. This will be higher than overall search and news advertising revenue growth, which we expect to be relatively flat. And in gaming, we expect revenue growth in the low to mid-40s, including approximately 50 points of net impact from the Activision acquisition. We expect Xbox content and services revenue growth in the high 50s driven by approximately 60 points of net impact from the Activision acquisition. Hardware revenue will decline again year over year. Now back to company guidance. We expect COGS between USD 19.6 billion to USD 19.8 billion, including approximately $700 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition. We expect operating expense of USD 17.15 billion to USD 17.25 billion, including approximately $300 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition. Therefore, we now expect full year FY '24 operating margins to be up over 2 points year over year, even with our cloud and AI investments, the impact from the Activision acquisition, and the headwind from the change in useful lives last year. This operating margin expansion reflects the hard work across every team to drive efficiencies and maintain disciplined cost management, knowing we will continue to grow our cloud and AI investments next year. Other income and expense should be roughly negative $850 million as interest income will be more than offset by interest expense and losses on investments accounted for under the equity method. As a reminder, we are required to recognize gains or losses on our equity investments which can increase quarterly volatility. We expect our Q4 effective tax rate to be approximately 18%. Now I'd like to share some closing thoughts as we look to the next fiscal year. We continue to focus on building businesses that create meaningful value for our customers and therefore, significant growth opportunities for years to come. In FY '25, that focus on execution should again lead to double-digit revenue and operating income growth to scale to meet the growing demand signal for our cloud and AI products, we expect FY '25 capital expenditures to be higher than FY '24. These expenditures over the course of the next year are dependent on demand signals and adoption of our services. So, we will manage that signal throughout the year. We will also continue to prioritize operating leverage. And therefore, we expect FY '25 operating margins to be down only about 1 point year over year, even with our significant cloud and AI investments, as well as a full year of impact from the Activision acquisition. We are leading the AI platform wave and are committed to bringing that value to our global customers as we enter the final quarter of our fiscal year. With that, let's go to Q&A, Brett. Brett Iversen -- General Manager, Investor Relations Thanks, Amy. We'll now move over to Q&A. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions? Questions & Answers: Operator Thank you. [Operator instructions] And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question. Keith Weiss -- Morgan Stanley -- Analyst Excellent. Thank you, guys, for taking the question, and congratulations on the fantastic quarter. a lot of excitement in the marketplace around generative AI and the potential of these technologies. But there's also a lot of investment going on behind them. It looks like Microsoft is on track to ramp capex over 50% year on year this year to over $50 billion. And there's media speculation of more spending ahead with some reports talking about like $100 billion data center. So, obviously, investments are coming well ahead of the revenue contribution. But what I was hoping for is that you could give us some color on how use as the management team, try to quantify the potential opportunities that underlie these investments because they are getting very big. And maybe if you could give us some hints on whether there's any truth to the potential of like $100 billion data center out there. Thank you so much. Satya Nadella -- Chief Executive Officer Thank you, Keith. for the question, let me start and maybe Amy, you can add up. At a high level, the way we, as a management team, talk about it is there are two sides to this, right? There is training and their inference. Given that we want to be a leader in this big generational shift and paradigm shift in technology, that's on the training side. We want to be able to allocate the capital required to essentially be training these large foundation models and stay in the leadership position there. And we've done that successfully all the way today, and you've seen it flow through our P&L, and you can continue to see that going forward. Then Amy referenced what we also do on the inference side, which is, one, we first innovate and build products. And of course, we have an infrastructure business that's also dependent on a lot of ISVs building products that run on our infrastructure. And it's all going to be demand-driven. In other words, we track -- we're closely what's happening with inference demand, and that's something that we will manage, as Amy said in her remarks very, very closely. So, we feel -- and obviously, we've been doing this, quite frankly, Keith, for now multiple years. So, this is not the quarter. I realize in the news, it's a lot more in the quarter nowadays. But if you look at it, we have been doing what is essentially capital allocation to be a leader in AI for multiple years now, and we plan to sort of essentially keep taking that forward. Amy Hood -- Chief Financial Officer And Keith, I do think it's important to really think about our planning cycles and we do talk about spending sequentially higher. And we look forward to being able to continue to build out the infrastructure needed to meet the demand. Another thing that you really asked in the beginning was the opportunity and the size of that. And I think in some ways, it's important to think about every business process that can be impacted and the opportunity that's represented by every business process. And so, when you think of it that way, I think the opportunity is significant. The opportunity to power that next wave of "cloud infrastructure" is important. It's important because we've been the leader for this decade of the cloud transition, and it's important for us to confidently invest to do that in the second wave, building on our success in the first. And I think that's really the best way to think about how we'll spend is the same way we approached it for a decade. Watch the signal, invest to be a leader in the technical foundation, and then execute consistently to add value to customers. The opportunity is represented by the amount of value we add and I look forward to being able to continue to deliver that. Keith Weiss -- Morgan Stanley -- Analyst Excellent. Thank you so much. Brett Iversen -- General Manager, Investor Relations Thanks, Keith. Operator The next question comes from the line of Brent Thill with Jefferies. Please proceed. Brent Thill -- Jefferies -- Analyst Satya, how would you characterize the demand environment? On one hand, you have bookings in Azure both accelerating year over year in the quarter, but we're seeing a lot of future concern hesitation from other vendors we all cover. So, I think everyone love to get your sense of budget health for customers this year. Satya Nadella -- Chief Executive Officer Great question, Brent. There are a couple of things I would say. On the Azure side, which I think is what you specifically asked, we feel very good about -- the we are fundamentally a sharetaker there because if you look at it from our perspective at this point, Azure has become a port of call for pretty much anybody who is doing an AI project. And so, that's sort of been a significant help for us in terms of acquiring even new customers. Some of the logos I even referenced in my remarks, our new Azure customers. So, that's one. The second thing that we're also seeing is AI just doesn't sit on its own. So, AI projects obviously start with calls to AI models, but they also use a vector database. In fact, Azure Search, which is really used by even ChatGPT is one of the fastest-growing services for us. We have Fabric integration to Azure AI. And so, Cosmos DB integration. So, the data tier, the dev tools is another place where we are seeing great traction. So, we are seeing adjacent services in Azure that get attached to AI. And lastly, I would say, migration to Azure as well. So, this is not just all an AI story. We are also looking at customers, I mean, this is something that we have talked about in the past, which is there's always an optimization cycle. But there's also -- as people optimize, they spend money on new project starts, which will grow and then they'll optimize. So, it's a continuous side of it. So, these are the three trends that are playing out on Azure in terms of what at least we see on demand side. Brent Thill -- Jefferies -- Analyst Thank you. Brett Iversen -- General Manager, Investor Relations Thank you, Brent. Operator The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed. Mark Moerdler -- AllianceBernstein -- Analyst Thank you very much for taking my question, and congratulations on the quarter and the guidance. I want to follow up on the AI, obviously. We're seeing companies shifting their IT spending to invest in and learn about AI rather than receiving additional budgets for AI. At some point for, AI to be transformative, as everyone expects, needs to be accretive to spending. Satya, when do you believe AI will hit the maturity level? Will there be a net increase to IT or outside of IT spending? And what would be the leading indicators of that maturation? And Amy, am I characterizing this correctly as it relates to Azure? Some projects are being delayed so that that spending could be shifted from core Azure toward Azure AI. Thank you. Satya Nadella -- Chief Executive Officer Great set of questions, Mark. Let me just start by saying, a good place to start is to watch what's happening in terms of standard issues for software teams, right? I mean if you think about it, they bought tools in the past. Now you basically buy tools plus Copilot, right? So, you could even say that this is characterized as perhaps shift of what is opex dollars into effectively tool spend because it gives operating leverage to all of the opex dollars you're spending today, right? That's really a good example of, I think, what's going to happen across the board. We see that in customer service. We see that in sales. We see that in marketing. Anywhere, there's operations. That's why I described it as knowledge turns. You can even think of it as lean for a long-lived work, right, because it just reduces waste, and increases speed and customer value. And so, one of the interesting rate limiters is culture change inside of organizations. But I think culture change that means process change. And Amy referenced this even in her answer to the first question because at the end of the day, companies will have to take a process, simplify the process, automate the process, and apply these solutions. And so, that requires not just technology but in fact, companies to go do the hard work of culturally changing how they adopt technology to drive that operating leverage. And this is where we are going to see firm-level performance differences. So, one of the things we see is any customer who is working closely with us deploying it internally at Microsoft we see it. We're also taking our own medicine to apply this across every process. And we know that this is not just about technology, it's about being able to have the methodology that goes with it. And so, we see it in software development. We see it in customer service. We're seeing it even in the horizontal use of Copilot today where every day people are discovering new workflows that they can optimize. And so, that's like the PC when it became a standard issue in early '90s. That's the closest analogy I can come up with. And so, yes, it will take time to percolate through the economy. But this is faster diffusion, a faster rate of adoption than anything we have seen in the past. As evidenced even by Copilot, right, it's faster than any suite we have sold in the past and but it is we're going to require workflow and process change. Amy Hood -- Chief Financial Officer And Mark, maybe to answer your question on are we seeing project starts transition from maybe something that was core consumption to an AI project. In our results, that's not what we saw. We saw more of what Satya was speaking to earlier, which is you see maybe growth in migrations again. You're seeing work in the data space, again, and you're seeing AI project starts. And I think that's why maybe you see our growth be different, of course, than you see IT budget spend. It's because it's a share, I think, improvement plus also really focusing on what Satya said, it's about spending maybe in other areas that we don't traditionally think of as being in the IT budget spend under a CIO. It's spend being done by the head of customer service, it's spend being done by the head of marketing. And I do think that will be important as we think about the opportunity ahead. Mark Moerdler -- AllianceBernstein -- Analyst Incredibly helpful. Thank you both. Brett Iversen -- General Manager, Investor Relations Thanks, Mark. Operator, next question, please. Operator The next question comes from the line of Karl Keirstead with UBS. Please proceed. Karl Keirstead -- UBS -- Analyst Thank you. And Satya and Amy, congrats on these outstanding Azure results. I'd love to hone in a little bit on the seven-point lift to Azure growth from AI, outstanding number, but it's leveling off a little bit from 6 points in December. I'm wondering if you could unpack that a little bit. To what extent did the capacity issues that you Amy highlighted on the call, impact that number? Is there any seasonality? I wouldn't think so or any other factor that can swing around that number that you'd advise us to keep in mind? Thanks so much. Amy Hood -- Chief Financial Officer Thanks, Karl. There's not a seasonality to the numbers. So, you're absolutely right to start there, and it's a good question. The way to think about it is a bit more by -- it is how much capacity we have in play and how much capacity that we have to sell on the inferencing side, in particular. And so, that is partially why you see the capital investment in the shape that is, is because right this minute, we do have demand that exceeds our supply by a bit. So, it is fair to say that, that could have been an impact on the number for the quarter and it does impact a little bit the number in Q4. Karl Keirstead -- UBS -- Analyst OK. Helpful. Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Karl. Operator, next question, please. Operator And the next question comes from the line of Raimo Lenschow with Barclays. Please proceed. Raimo Lenschow -- Barclays -- Analyst Thank you. I have more conceptual questions for Satya. If you think about Copilots and what you're doing there, you're kind of impacting a lot of this in businesses and the opportunities seem very broad-based. How do you think this will play out in the industry between you guys offering certain copilots versus like the rest of the industry following and everyone seems to have a copilot now and seems to be talking about it, how does that impact what do you want to do, your partner strategy going forward? Thank you. Satya Nadella -- Chief Executive Officer Yeah, it's a great question. So, the way we see it play out is, if you think about it, the way Office was used broadly for knowledge work was in the context of business processes, right? So, it's not like -- when people do knowledge work, they're not doing knowledge work, they're doing knowledge work and support of making progress in the context of sales enablement, customer service revenue ops, supply chain or what have you, right? So, that's the first thing to note. And they do it inside of email. They do it inside of Teams. They do it inside of Excel, PowerPoint, Word and what have you. Now we have the ability to essentially bridge the work and the work artifacts inside of these knowledge worker tools with the workflow and the business process and the business process data. So, when we think about our Copilot, our Copilot has that ability to integrate, whether it's with ServiceNow, it has the ability to integrate with SAP with Salesforce, with obviously Dynamics. That's what we are seeing. In fact, you'll hear us talk a lot about it at our developer conference, which is the extensibility and Copilot Studio is really off to the races in terms of the product that most people are excited because one of the things in the enterprise, if you want to ground your copilot with enterprise data, which is in all of these SaaS applications and Copilot Studio, is the tool to use it. To make that happen. And so, that's what we are seeing, which is we are building a Copilot, which also happens to be an orchestrator of all in other copilots, which to us appear as extensions. And net-net, what happens is some of these knowledge worker tools that people have used all the time, right? Because when you think about Teams, when you're having a meeting, you're not doing a random meeting, the meeting is in the context of some business process. It could be a supply chain meeting where you're trying to understand which suppliers to bet on or what terms to do. And so, now you can access all that data right in the Team's context. So, that's I think what's exciting for us, having built all these horizontal tools, which I would say we're under underappreciated for the amount of work how people use those tools to make progress on business process, but we now get to bridge that between the business applications and knowledge worker tools, more horizontally. Raimo Lenschow -- Barclays -- Analyst OK. Perfect. Thank you. Congrats from me as well. Brett Iversen -- General Manager, Investor Relations Thanks, Raimo. Operator, next question, please. Operator And the next question comes from the line of Michael Turrin with Wells Fargo. Please proceed. Michael Turrin -- Wells Fargo Securities -- Analyst Hey, great. I appreciate you taking the question, I wanted to go back to Azure. You've been hinting at stabilization there for the past couple of quarters, but still very good to see the balance. Maybe you can expand on just what the commercial bookings number, appreciating the variability there does in terms of visibility. And any characterization you can give us around what you're seeing in areas like cost optimization and core workload growth coming back is just helpful context for us in unpacking the numbers. Thank you. Amy Hood -- Chief Financial Officer Thanks, Michael. I may take those a bit in reverse. It's a little easier to address them. When you think about -- we've been talking about sort of stabilization and what you saw this quarter, if you break down the Azure number as you saw, which I think I talked a little bit about with Karl was 7 points of contribution from AI, and you could call them the difference 24 from our core really Azure business. And within that, the activity we saw on the consumption side was really this balance that we were quite used to and have seen throughout the cloud transition. We saw new workload starts and we saw optimizations. And then those optimizations create new budget, and you apply it. And that cycle which is actually quite normal. We saw it again this quarter in a balanced way. And I think when we talk about stabilization or even what we saw between Q2 and Q3, which is a bit of acceleration in that core was a lot of the newer project starts relating back to not just AI starts, but lots of other workflows. The companies are still going from on-prem to cloud, and Satya mentioned migrations. And some of that, which I know isn't as exciting as talking about all the AI projects. This is still really foundational work to allow companies to take advantage of the cost savings and the total TCO is still really good. And so, I think that balance is really what you saw this quarter, and I do feel like there wasn't really a big difference, Michael, across industries or across geos. So, I would say it was actually pretty consistent in the other maybe texture that I could give you to that question. And so, then when you're saying do we keep sort of pointing to stabilization, I really do look sort of workload to workload. What are we seeing where it starts. And this one actually felt quite balanced and optimization looks like they normally would, which by the way, is super important. It's something we encourage customers to do. You want to run your workloads as efficiently as you possibly can. It's critical to customers being able to grow and get value out of that. So, I sometimes think we -- you all may ask the question more as a negative. And for us, it's just about a healthy cycle at the customer account level. Michael Turrin -- Wells Fargo Securities -- Analyst Consistent core cloud growth is still pretty exciting to us as well. Thank you. Amy Hood -- Chief Financial Officer Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Michael. Operator, next question, please. Operator The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed. Kirk Materne -- Evercore ISI -- Analyst Yes. Thanks for taking the question and I'll add my congrats in the quarter. Satya, I was wondering if you could chime in on a discussion that comes up a lot with investors, which is, is there a sort of data quality problem in the market in terms of being able to take advantage of all these new GenAI capabilities? And I was just curious, if you could comment on, do you see companies making inroads on sort of addressing that? And do you see that as sort of an inhibitor to AI growth at all at this point? Thank you. Satya Nadella -- Chief Executive Officer Yeah, it's a great question because there are two sets of things in order to make sense for successful deployment of these new AI capabilities. I mean if you sort of say this, what is this AI, it does two things, right? There's a new user experience, there is a natural language interface and second thing is it's the reasoning engine. And the reasoning engine requires good data, and it's good requires good data for grounding, right? So, people talk about something called retrieval augmented generation. And in that context, having good grounding data that then helps with the reasoning, I think, is helpful. And then, of course, people are also looking to sort of fine-tune or RLHF or essentially take the large model and ground it further. All of these tools are now available, and the sophistication of how people can deploy these models across various business processes where there is data and where there is tuning of these models is also getting more widespread, even at system integrators and other developers are there to help enterprises. o, all that's maturing. So, we feel good. And this is what I think on the commercial side, these are some of the harder problems to solve broad consumer, right? I mean I think this is a couple of orders of magnitude of improvements in, I'll call it, our models before we can sort of have more sophisticated open-ended consumer scenarios. Whereas in the enterprise, these are all things we can go tackle. Again, I point to GitHub, if you think about how it's got an entire system, right? It's just not an AI model. It's the user experience, scaffolding, editor, the chat, interpreter and the debugger work along with the continuations of the model to help essentially create these reasoning traces which help the entire thing work. And effectively, what we are doing with copilot, Copilot Studio and connectors to all these business systems, think of it as we are creating GitHub Copilot like scenarios for every business system. That's what I think is going to have both what Amy referenced is business value and better grounding. But you're absolutely right in saying a lot of work we're doing with Fabric or Cosmos or PostgreS or SQL is about preparing that data so that it can be integrated with these AI projects. Kirk Materne -- Evercore ISI -- Analyst Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Kirk. Operator, we have time for one last question. Operator Our last question will come from the line of Alex Zukin with Wolfe Research. Please proceed. Alex Zukin -- Wolfe Research -- Analyst Hey guys, thanks for taking the question. I wanted to ask the AI question but from a Microsoft 365 Copilot perspective. I think you talked a little bit about starting to see some of those impacts positively in the quarter on the office business. I wanted to ask more broadly around that capacity constraint that you alluded to in your prepared remarks, Amy. And kind of how does the easing -- how tied are we like as you invest for that capex and bring more of the capacity online? How much does that unlock or unlock the ability to deliver both a higher Azure AI number, as well as a higher Microsoft 365 Copilot number? Thanks. Amy Hood -- Chief Financial Officer Thanks for the question. It's a good opportunity to clarify. And I would not say that there is a capacity constraint on the Copilots. It's a real priority for us to make sure we optimize the allocation of our capacity to make sure that those per-user businesses are able to continue to grow. And so, think about that as our priority 1. And so, then what that does mean is capacity constraints when we have them, you'll tend to see them on the Azure infrastructure side, the consumption side of the business is a better way of thinking about it. Alex Zukin -- Wolfe Research -- Analyst Perfect. Thank you. Brett Iversen -- General Manager, Investor Relations Thanks, Alex. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Satya Nadella -- Chief Executive Officer Thank you all. Amy Hood -- Chief Financial Officer Thank you.

edtsum1

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Hello, and welcome to the Meritage Homes first quarter 2024 analyst call. [Operator instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Emily Tadano, vice president, investor relations and ESG. Please go ahead, Emily. Emily Tadano -- Vice President, Investor Relations Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2024 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2023 annual report on Form 10-K. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, executive chairman; Phillippe Lord, CEO; and Hilla Sferruzza, executive vice president and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve? Steve Hilton -- Executive Chairman Thank you, Emily, and welcome to everyone listening in on our call. I will briefly discuss current market trends and our recent accomplishments. Phillippe will cover highlights of our operational performance and how our strategy is driving our success. Hilla will provide a financial overview of the first quarter and our forward-looking guidance for Q2 and full year 2024. Meritage had a remarkable start to the year. We achieved an average absorption pace of 4.9 sales per month in the first quarter of 2024, which resulted in our highest quarterly sales orders totaling 3,991 homes. During the spring selling season with a healthy supply of move-in ready inventory, we were able to capitalize on strong market conditions generated by the increasing need for housing for millennials and Gen Zs as well as the move-down Baby Boomers who continue to find our limited inventory, limited availability of resale housing supply. In the first quarter of this year, our record backlog conversion of 138% drove 3,507 home deliveries, which led to home closing revenue of $1.5 billion. Home closing gross margin for the quarter was 25.8%, which combined with SG&A of 10.4%, resulting in diluted EPS of $5.06. As of March 31, 2024, we increased our book value per share 17% year over year to $129.98 and generated a return on equity of 18%. Although visibility into what interest rate mortgage rates will do for the remainder of the year remains unclear, we believe that by satisfying homebuyers desire to have quick closing time lines, our available inventory should position us to continue increasing our market share. Now, on to Slide 4 for our recent milestones. It's very timely that during the month that we celebrate Earth Day, we can announce Meritage's 11th Award as the EPA's ENERGY STAR Partner of the Year for sustained excellence for continued industry leadership in the production of energy-efficient homes. Additionally, Meritage was also named in Newsweek's 2024 America's Greenest Companies list as our commitment to sustainability is recognized even outside of our sector. Also, I take pride in sharing that at the end of the first quarter of this year, Meritage received the President's Volunteer Service Award, a civil award bestowed by the U.S. President and the highest honor available for volunteerism that refers to our partnership with No Child Hungry and the 1,100-plus hours our team members volunteer to package nearly 260,000 meals over the past two years to fight childhood hunger.Lastly, this quarter, we were recognized as one of Forbes' 2024, most successful mid-cap companies based on sales and earnings growth, return on equity, and total stock return for the last five years. At Meritage, we believe that financial achievements must be maintained while maintaining a focus on responsible corporate citizens and we are honored that these accolades continue to illustrate the breadth and depth of our commitment. With that, I'll now turn it over to Phillippe. Phillippe Lord -- Chief Executive Officer Thank you, Steve. This quarter, we are excited to share our financial results, but I wanted to provide a bit more context behind the numbers. Nearly 50% of our quarterly deliveries were sold and closed intra-quarter, a trend that has been increasing for the last three to four quarters, resulting in a record backlog conversion of 138%. This conversion rate is materially north of our previous long-term target of 80% plus and notably higher than even our fourth quarter 2023 backlog conversion of 110%, helping drive improved ROE over the last several quarters. This success was the intentional result of migrating to a move-in ready strategy across both our entry-level and first-mover products, allowing us to enter the year with a sufficient supply of homes available for quick close, particularly in advance of the spring selling season. We were able to both increase prices and offer less financing incentives than we anticipated on those quick move-in closings, meaningfully improving our first quarter 2024 gross margin. With our intra-quarter sales activity representing half of the quarter's closing volume, our gross margin reflects more current market conditions in real time, and our outperformance validates that our move-in-ready strategy is the right one for Meritage and for our customers. Now, turning to Slide 5. Demand remained solid this quarter. Our sales orders of 3,991 homes were up 14% year over year. The nationwide sales event conducted in late January and into February was highly successful. We sold our highest quarterly sales order volume, which benefited from an 8% cancellation rate, significantly below our historical average in the mid-teens. Entry-level homes comprise more than 90% of the total order volume. ASP on orders this quarter of $409,000 was down 5% from prior year, but fairly aligned sequentially from the fourth quarter of 2023. The ASP decrease from 2023 was due to both the larger mix of our closings coming from our Eastern markets and product mix shift, even as we increased pricing in about half of our communities and use fewer rate locks this quarter. The first quarter 2024 average absorption pace of 4.9 per month improved from 4.2 in the prior year and was well above four net sales per month due to strength of spring demand. The first quarter 2024 ending community count of 275 was up 2% sequentially from the fourth quarter of 2023 and down 1% compared to prior year. Thirty-four new communities came online this quarter. We are still on target for more material community growth later in the year, ending 2024 mid to high-single digits higher than where we started with even greater projected growth in 2025. We only control all the lots we need for planned key openings in 2024 as well as most of our 2025 communities. We are now focused on opportunities for quick openings in 2025 as well as longer-term growth into 2026 and beyond. Moving to the regional level trends on Slide 6. All of our regions generated a sales pace well above 4.0 net sales per month during the first quarter of 2024. Although we do expect Q1 to be one of our strongest absorption quarter as the overlap of the spring selling season. The central region combined for Texas market had both the highest regional average absorption pace of 5.2 sales per month and a backlog conversion rate of over 150%. The economic growth in Texas fuels the positive momentum in the housing market and with over 90% of this region's average community being entry level, a steady supply of affordable and move-in ready inventory has been in high demand. The West region had an average absorption pace of 4.8 net sales per month compared to 4.5 last year. Our previously challenged markets in this region regained sales momentum this quarter, primarily in Arizona and Colorado, some of the toughest markets last year. Colorado's first quarter 2024 sales order volume increased double digits on a year-over-year basis on a reduced community count. The East region experienced the largest year-over-year growth at an average absorption pace of 4.7 net sales per month, up from 3.8 from last year. As we have been focused on rebalancing our land portfolio over the last couple of years, our effort in East regions are now visible with a 10% year-over-year growth in average communities and double the prior year spec inventory, which positions us well to continue to take market share in the high-growth market parts of this country. Now, turning to Slide 7. Our quarterly starts were approximately 4,000 homes in the first quarter of 2024. We were up from about 2,500 in the prior year and are consistent with our quarterly cadence for the last few quarters. In order to ensure we have sufficient loans available for quick move-in, we align our start pace with our expected future sales pace. Further, as we grow community count in the later half of this year, we will start more homes to meet our targeted per-community move-in ready supply across our growing footprint. We had approximately 6,000 spec homes in inventory as of March 31, 2024, up 54% from about 3,900 specs as of March 31, 2023, but only about 100 homes greater than where we started this quarter. This represents 22 specs per community this quarter, which equates to 4.5 months supply specs on the ground, well within our target level of four to six months of supply. At our home closings this quarter, 93% came from previously started inventory, up from 87% in the prior year. Twenty-two percent of the total specs were completed as of March 31, 2024, as we continue to make progress to our target run rate of carrying one-third move-in ready homes. Our ending backlog as of March 31, 2024, totaled approximately 3,000 homes, down from about 3,900 homes in the prior year as our intra-quarter sales to closing percentage increased. With our focus on carrying more move-in ready inventory, we would expect our backlog will continue to represent less than one quarter sales as our backlog converged rates start to consistently perform above 100%, improving our returns. With our backlog and specs on the ground totaling over 9,000 homes, we believe we have the optimal level of home supply to deliver on our full-year results.I will now turn it over to Hilla to walk you through our financial results. Hilla? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Thank you, Phillippe. Before I cover our financial highlights, I wanted to first address the momentum we've gained with our land goals as this has been a key pillar in our growth plan. Our land teams have been successful at sourcing deals despite the competitive land market. And through their efforts, we put nearly 6,300 net new lots under control this quarter. This led to the growth in our total lot count by nearly 10% year over year and up sequentially by 3% to approximately 56,400 lots. With these new deals, we are starting to increase our use of off-balance sheet financing, growing our outlook percentage to 31% this quarter from 25% in the first quarter of 2023 and 28% from Q4 of last year. We continue to be focused on accelerating our land acquisitions and looking for off-book opportunities while maintaining a healthy balance sheet. Now, let's turn to Slide 8 and cover our Q1 financial results in more detail. First quarter 2024 home closing revenue was $1.5 billion, reflecting 21% higher home closing volume year over year, that was partially offset by 4% lower ASP due to a shift in product mix. On a sequential basis, ASP closings increased in the first quarter of 2024 with reduced utilization of rate locks and targeted price increases reflected in our intra-quarter sales and closings as the market improved over the last 90 days. Assuming interest rates hold steady or improve, ASP for the rest of the year is expected to be fairly consistent with some reductions from geographic mix and new entry-level communities opening with lower prices will be balanced by reduced financing incentive costs and price increases where the markets can absorb them. While the utilization of rate locks have slowed from 2022 and 2023, our all-in discounts are still running at an elevated level, and we expect to continue to utilize rate locks and buy-downs to negate concerns around rate volatility. Home closing gross margin increased 340 bps to 25.8% in the first quarter of 2024 compared to 22.4% in the prior year. This improvement was a combination of several factors. First, the reduced utilization of rate lock financing incentives that we've discussed. Next, the greater leverage of fixed costs on higher revenue. And finally, improvements in our direct cost as last year's first quarter marked the highest per square footage direct for us since the start of COVID. These savings were partially offset by higher lot costs. We want to take a minute and cover the trends we're seeing in our direct costs. Our team has been leveraging our spec strategy and increasing volume, allowing us to deepen our relationships with our vendors. We are proud of the reductions we achieved to date, and we expect that we will be able to hold the line to keep cost steady and find offsets to the recent lumber increases. On the labor front, capacity has held fairly steady perhaps as multifamily construction has pulled back a bit, creating a stable environment for residential construction at the moment. Our cycle times have settled in at around 140 calendar days over the last three quarters. We remain disciplined in our start cadence and are only selling homes later in the construction process to have the necessary inventory for quick move-in closings. Our goal is to turn our assets three times a year to get their additional capacity will likely be needed for both trade labor and local government staffing for permitting and inspections. When we review the composition of our gross margin, the only known variable is lot cost since the land acquisition and development dollars have already been spent. Elevated land development costs, the impact of the entire industry over the past three years are now fully flowing through our financials as almost all of our land is now for post-COVID acquisitions. Our current guidance reflects the elevated lot cost, and we do not expect any additional pullback on margins beyond 2024 as go-forward lot costs have a similar land development composition component. Over the past four to six quarters, our long-term gross margin target has been at least 22%. Structurally, we believe our target has changed as we continue to dial in our relationships with national vendors and further streamline our operations. The goal of these efforts is to improve cycle times and reduce costs. We've been operating under extreme environments for the past several years, highly favorable and then very challenging. As the markets are stabilizing, we are gaining a clear understanding of our capabilities in a normalized environment and expect to share our higher internal targets with you over the next several quarters. Turning to SG&A. SG&A was 10.4% of home closing revenue in the first quarter of 2024, which was fairly in line with 10.2% for the first quarter of 2023. Higher commissions this quarter offset the incremental leverage achieved on higher home closing revenue. We are still comfortable with our full-year SG&A goal of 10% or under and expect quarterly SG&A to improve throughout the year. Given our anticipated volume growth over the next few years, our longer-term SG&A target is 9.5%.In the first quarter of 2024, the financial services loss of approximately $700,000 included $5.8 million in write-offs related to rate lock unwind costs. This compares to financial services profit of $2.9 million in the first quarter of 2023 that had $1.9 million in similar write-offs. We anticipate potentially incurring another $7 million of rate lock underlying costs in the second quarter, which is included in our guidance. Excluding these charges, the profitability of our financial services is held in line with our historical averages. The first quarter's effective income tax rate was 20.5% this year, essentially flat to prior year, with both periods benefiting from energy tax credits on qualifying homes under the Inflation Reduction Act. Overall, higher home closing revenue and gross profit with flat SG&A leverage and tax rate led to a 43% year-over-year increase in first quarter 2024 diluted EPS to $5.06 from $3.54 in 2023. Before we move to the balance sheet, I wanted to cover our Q1 2024 customers' credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages, with FICO scores near 740 and DTIs around 41 or 42. LTVs were still in the mid-80s and about 80% of our buyers in Q1 received some sort of financing incentives consistent with our mortgage company capture rate. Now, turning to Slide 9. Our balance sheet, returns, and liquidity management are a core focus for us. We have nothing drawn under our credit facility, cash of $905 million, and net debt to cap of 2% at March 31, 2024. Our net debt-to-cap ceiling target is in the mid-20s, leveraging our improving backlog conversion. We also generated $82 million in operating cash flow for the first quarter of 2024. Our overarching capital spend philosophy looks to generate long-term shareholder value expansion through both growth in the business and returning capital to shareholders. Since early 2023, we have been accelerating our investment in organic growth. This quarter, we spent $430 million on land acquisition and development, which was up 39% from prior year. We expect our go-forward trend for full year 2024 and beyond to total $2 billion to $2.5 billion of land spend. Given confidence in our business model and our ability to deliver strong and stable financial performance during the first quarter of 2024, we meaningfully enhanced our shareholder returns directive as well. In February, we instituted a formal programmatic share repurchase plan with a minimum buyback commitment of $15 million in each quarter to provide consistency and predictability to our share repurchase activity. During the first quarter of 2024, we went beyond the systematic $15 million commitment and opportunistically bought back an additional $41 million. We repurchased over 360,000 shares or 1% of common stock outstanding at December 31, 2023, for $56 million this quarter. $129 million remain available under our authorization program. One year after initiating our dividend policy, we nearly tripled our quarterly cash dividend to $0.75 per share this quarter or $0.27 per share, providing another avenue for us to improve our ROE. This resulted in total spend of about $27 million in dividends in the first quarter this year. And rounding out our capital plan for the year, we are also evaluating near-term opportunities to address the senior debt that's coming due in early 2025. On to Slide 10. In the first quarter of 2024, we were able to find and secure land deals that meet our underwriting standards in the majority of our markets meaningfully putting more lots under control than home starts. The nearly 6,300 net new lots under control this quarter represent an estimated 43 future communities. We put about 200 net new lots under control in the first quarter of 2023 as we were only starting to ramp up from the pullback in late 2022 that quarter. As of March 31, 2024, we owned or controlled a total of about 56,400 lots, equating to 4.6 years supply of lots in line with our target of four to five-year supply. Our land financing strategy focuses on managing our capital while being mindful of balance sheet metrics and margin goals. We've been able to utilize our healthy balance sheet to replenish our land portfolio while minimizing the gross margin impact from option land yields for the past several years. As we mentioned earlier, we have recently been utilizing more option financing for our land purchases. About 69% of total lot inventory at March 31, 2024, was owned and 31% optioned compared to prior year, where we had a 75% owned inventory and a 25% option lot position. We believe that off-balance sheet financing will allow us to control more land and increase our year supply of lots beyond what we like our balance sheet to absorb. Our intent is to accelerate our growth into 2025 and onward, and we are currently working on some land financing opportunities that we hope to be able to share with you in the next several quarters. Finally, I'll direct you to Slide 11 for our guidance. Given the robust market conditions and our supply of move-in ready homes, we revised our projections upward for full year 2024 to the following. Total closings between 14,500 and 15,000 units, home closing revenue of $6 billion to $6.2 billion, home closing gross margin of around 24.5% to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $19.20 to $20.70. As for Q2 2024, we are projecting total closings between 3,600 and 3,800 units, home closing revenue of $1.5 billion to $1.6 billion, home closing gross margin of 24.5% to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $4.70 to $5.30. Both Q2 and full-year guidance assume current market conditions and interest rates. We will continue to refine our guidance as additional clarity around interest rates becomes available later in the year. With that, I'll turn it back over to Phillippe. Phillippe Lord -- Chief Executive Officer Thank you, Hilla. To summarize on Slide 12. Our first quarter 2024 results demonstrate that our ample spec home supply for quick closings and our focus on pace over price allowed us to plus up and exceed not only our volume targets but also our gross margin guidance. As we increase our community count in the second half of this year, we believe we are positioned to continue growing our market share. Further, our acceleration on both land spend as well as share repurchases and dividends demonstrates our confidence in our business model. We are committed to balancing growth in the business and returning cash to shareholders in order to continue creating long-term value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question is coming from Stephen Kim from Evercore ISI. Your line is now live. Stephen Kim -- Evercore ISI -- Analyst Thanks very much, guys. Really impressive results. Thanks for all the guidance and color. Question for you regarding the backlog turnover ratio. This is something that we've chatted a lot about over the last year. It sounds like you're clearly now saying that you've arrived at a level at a point now with your business model where you feel comfortable guiding to a turnover ratio at triple digits. I was curious as to whether you think that when -- what you see this year in terms of how you're planning to operate, whether this is a level of backlog turnover ratio that you also think can continue sort of as you progress toward whatever your long-term normalized level is? Is this the new normal? Or do you see 2024 as maybe being a little higher than normal? Steve Hilton -- Executive Chairman I would say that it's pretty much going to be the new normal. As we think about the rest of this year, we're modeling a similar backlog conversion for the remaining quarters. Some of it is just predicated on cycle time stability, which currently we have. The production capacity is really, really good. So, as long as that remains in the same state, this is going to be the new normal for us. Stephen Kim -- Evercore ISI -- Analyst Yeah. That's really great. And I assume the same thing could probably be said for absorption rates perhaps per community, but maybe you can update us on that. I know historically, I think you've talked about three to four. And then as a follow-on to that, you talked about your gross margin now pretty much for this year, incorporating a fully adjusted land cost. You don't have that pre-pandemic unusual land effect. So, that would seem to suggest that your gross margins have potentially some upside from here. I know you're going to give us more on that later. But you had talked in the past about how a higher level of volume translates very directly for you into a higher level of profitability, not just on the SG&A but the gross margin. So, I was wondering if you could remind me again about the sensitivity of higher volume to your gross margin as well as updating us on your absorption rate longer term. Phillippe Lord -- Chief Executive Officer Yeah. I'll take the absorption question, and then I'll hand it over to Hilla on the margin guidance. We obviously believe we're going to sell more houses in the front half of the year than the back half of the year just due to seasonal trends. But we are reevaluating our overall absorption targets specifically for our entry-level business. We've often said that our target is around four to five for entry level and somewhere between three and four for one MU. And the affordable part of the market is extremely strong. We're finding really strong land positions out there to support that affordable price point, and we are evaluating whether we can do better than that 4% to 5%. But stay tuned on that. And I'll let Hilla talk about the margin guide. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Sure. So, historically, when we have longer cycle times and lower closing, sales at closing time, they could be up to 100 bps pickup in the fixed component of gross margin between Q1 and Q4 due to the incremental volume. Now, that's a little bit different these days because we're selling the spring selling homes and closing some of the spring season homes in the same quarter, but increased volume for us, even 400, 500 incremental units in a quarter can have up to 100 bps improvement in our gross margin, not just SG&A leverage. Stephen Kim -- Evercore ISI -- Analyst Great. That's really helpful. Thanks, Hilla. Thanks, Phillippe. Appreciate it. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Next question today is coming from Alan Ratner from Zelman and Associates. Your line is now live. Alan Ratner -- Zelman and Associates -- Analyst Hey, guys, good morning. Congrats on the great quarter. First question, gross margin. So, if I look at your full-year guide, I think the biggest adjustment was to the margin range. And if I think back to three months ago when you gave that, I believe, if I'm remembering correctly, obviously, higher land costs flowing through was kind of the main headwind as far as your expectation for some pressure through the year. But I think you probably also had some assumption on incentives embedded within that as well. And clearly, the first quarter came in better than, I guess, you guys were expecting. But when you think about the macro environment today versus back then, rates are higher and continuing to move higher. So, what is actually embedded in that guide for the remainder of the year as far as incentives? Do you expect to kind of continue the improvement you've seen in the first quarter? Or are you baking in any potential for having to increase incentives as you get to the back half, softer seasonal time of the year? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer We're still in elevated level of incentives compared to where we were pre-2022. So, we're maintaining that level. There was a decent amount, even with the pullback in improved market conditions in Q1, there was still a decent amount of incentives that are being used. But something that's really important to consider when you're selling and closing intra-quarter, even though you're offering an incentive, you can offer it much less expensively if you're offering a 45-day interest rate lock, it's much cheaper than trying to buy a forward commitment. So, we're still planning on using the tools that we have in our toolkit to rate lock buydowns and rate locks just in general, but the cost to those is going to be less expensive because of our ability to sell and close so quickly. So, we're modeling current market conditions, including what we're seeing in April, which includes the uptick in the guidance that we provided to you. Phillippe Lord -- Chief Executive Officer Yeah. I'll just -- I'll give you an extra question here because people are going to ask you about April. We're not needing to go out and increase our rate lock costs to acquire the customers for April. That's included in our guidance. Even in these elevated rate environments, we're able to move people into our move-in ready inventory at about similar costs than we were in Q1. So, it's all baked into our guidance. Alan Ratner -- Zelman and Associates -- Analyst Got it. That's really helpful. Thank you for that added color. Second question, I guess, just pointing to your Slide 10, where you show the lot acquisition activity, which is very helpful to see. So, I know this is not a smooth number by any means, but first quarter looks like it was down a little bit from the last couple of quarters in terms of dollars spent on both development and acquisition. It looks like the community, I guess, acquisition was relatively steady, but you're tracking, I guess, below the $2 billion to $2.5 billion target for land spend year to date. So, is that just a timing function? Or is there -- is it getting harder to find deals to pencil? How should we think about that? Because I know, obviously, your 25 community count growth is somewhat dependent on hitting that target. Phillippe Lord -- Chief Executive Officer Yeah. Everything is going as planned. It's really just a timing thing. I think you'll see that timing reverse out here in Q2 and Q3. But none of it indicates anything around our ability to go acquire the lots we need for 2026 and beyond. And we're also finding deals for 2025. So, it's really all just timing. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer I'll add one more point, Alan. This is a disclosure that comes out in the 10-Q. So, you'll see but I will just give you guys a sneak peak. You guys know that we have about -- at the end of last year, we had about 28,000 lots that some level of due diligence was still ongoing but were not counted in our actual lot totals because we hadn't committed. That number has actually increased from 28,000 to 34,000 just in the quarter while we grew our community comp. So, the ability to find land to pencil is definitely not the issue. It's just timing of when deals were closing. Alan Ratner -- Zelman and Associates -- Analyst Great. That's really helpful. Thanks a lot, guys. Good luck. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Next question is coming from Michael Rehaut from JPMorgan. Your line is now live. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Great. Thanks very much. Congrats on the results. So, first question, just around gross margins. I would love to just get a sense, and I apologize if I kind of missed some of this earlier in the call. But just what drove the actual upside in the first quarter versus prior guidance? I think part of the review that was earlier was more just focused on year over year, but was more interested in kind of zeroing in the upside in the first-quarter results versus your guidance and how that also flows through to the higher guidance for the full year. And then also on the gross margins. I believe I heard correctly that you expect 2025 gross margins to, at minimum, be similar to 2024. And I just wanted to make sure that I heard that correctly as well. Phillippe Lord -- Chief Executive Officer Yes. I'll let Hilla take the second part. So, as we came into Q1 and guided to our Q1. We didn't have real visibility into the strength of spring selling season. So, it was early into January. And obviously, the spring selling season has been very, very strong. So, as you can see from our backlog conversion rate, we were able to convert a lot more move-in ready inventory than we had initially assumed. And the demand for that move-in ready inventory was really strong. So, we were able to take pricing. And we didn't need to use as much of the rate lock dollars we had in our assumptions to get people into those mortgages and those homes. We obviously had assumed that rate locks are still going to be heavily utilized coming into the year, and they were much less utilized. So, between backlog conversion and more leverage, ASP improvement, and then less incentive utilization, obviously, we had a beat on our margin guide. And then I'll let Hilla talk about the guidance for 2025. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. So, we're not providing guidance yet for 2025. We just wanted to clarify. We heard that there was maybe some confusion about the composition of our lot cost that's flowing through the financials in 2024. If it was going to be a little bit of the noise from the higher land development cost in 2024 and some also coming in 2025. And we just wanted to clarify that pretty much everything that's running through our financials these days is fully baked in at the higher land development spend. We don't have any more pre-COVID land. So, for us, the level of lot cost as a percentage of revenue that you're seeing in our numbers in 2024, that's the new run rate until land development costs come down. So, there's not another shoe to drop with another reduction to gross margin from land. We've not given guidance on any other component of gross margin to 2025 just quite yet. Mike Rehaut -- JPMorgan Chase and Company -- Analyst OK. No, I appreciate that. And I guess maybe just also looking forward, you kind of talked consistently about an accelerated rate of growth in 2025 and beyond. You're obviously looking for mid to high single digits this year. Without getting into too many details, I mean, my impression of higher growth would be something more in the low double-digit range at minimum. And I'm just curious if that's the right way to think about that. Or could it even be something in the teens? I'm just trying to get a degree of magnitude when you talk about accelerated growth. Phillippe Lord -- Chief Executive Officer Are you talking about for 2025? Mike Rehaut -- JPMorgan Chase and Company -- Analyst Correct. Yes. Phillippe Lord -- Chief Executive Officer Yeah. I mean, we're obviously not prepared to give any guidance on 2025, but we're buying a lot of land. And anything less than 10% isn't really what we're targeting either, but we're just not prepared to guide to that at this point. Mike Rehaut -- JPMorgan Chase and Company -- Analyst OK. Fair enough. Appreciate it. Thank you. Operator Your next question is coming from John Lovallo from UBS. Your line is now live. John Lovallo -- UBS -- Analyst Hey, guys, thank you for taking my questions. The first one is not to get nitpicky, but if we look at the midpoint of the 2024 delivery outlook, it's 14,750 homes. And if we back out the first-quarter deliveries of 3,507 and then the second-quarter midpoint, sorry, of 3,700, it would imply sort of average deliveries in the third quarter and the fourth quarter of around 3,771. So, I guess is the lack of sequential step-up in delivery more a function of the business becoming a bit more even flow from a production standpoint? Is it sort of a lack of available homes in the pipeline? Or is there something else that may be kind of leveling that growth off? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. So, that's a great point. I'm glad that you made it. Thanks, John. So, I think we alluded to it a little bit, but maybe we'll just put a fine point on it. I'll start and Phillippe can take us from there. When you're selling and closing homes in the same period, the spring selling season results get pulled up. So, before Q4 was kind of our huge quarter where what we were selling through May got delivered 2.5 quarters later because we're now buying. But because now we're selling and closing intra-quarter, you're seeing that same fantastic value just come up earlier into the year. It's still going to be a good Q4, but it's not really reflecting the spring selling season homes anymore. I'll let Phillippe take that as well. Phillippe Lord -- Chief Executive Officer Yeah, that's right. I mean, we expect that we will now see Q2 and Q3 being our biggest volume quarters with Q4 being a little more modest and then Q1, just depending on the spring selling season. So, that's going to be kind of the new cadence of our business, unlike what it was before where, usually, Q3 and Q4 were our biggest quarters. John Lovallo -- UBS -- Analyst Yeah. That makes a lot of sense. OK. And then, you know, you guys returned $83 million back to shareholders in the first quarter, generated a similar level of cash from operations. I mean, as we move forward here, can we sort of think of matching cash flow with repos and dividends over the next few quarters, particularly considering no real debt due until 2025? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. I mean, that's exactly a function of cash. Like Phillippe mentioned earlier, the timing of land development acquisitions is kind of just based on when deals are closing. So, it's not necessarily a function of operating cash flow, but it is a function of prior year profitability. So, if you look at it, we're on target to do like in the 20s of last year's net income and return to shareholders -- return of capital to shareholders. That's kind of more of our target rather than the timing of when a deal is closing on the land side. John Lovallo -- UBS -- Analyst Understood. Thanks very much, guys. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Our next question is coming from Susan Maklari from Goldman Sachs. Your line is now live. Susan Maklari -- Goldman Sachs -- Analyst Thank you. Good afternoon, everyone. My first question is you've commented on the target of taking the ASP down over time. And the guide does imply that sequentially we will see a bit of a slowdown in there. But I guess when you think about that relative to the pricing power and the level of demand that you talked to on the ground, how are you thinking about those two factors coming together? And any thoughts on how that ASP will come through over the longer term? Phillippe Lord -- Chief Executive Officer Yeah. The ASP, our forward-looking ASP guidance is predicated on the land we're buying. So, if we're buying less expensive lots that can allow us to produce our product in a more affordable part of the market long-term, which is what our core strategy is, that's driving the ASP decline. But that doesn't mean we're not taking pricing when the market is elastic in that affordable segment of the market, which it has been and was very strong in Q1. So, there are two different concepts. One is the land we're buying, and the other is what the market allows us to do. Susan Maklari -- Goldman Sachs -- Analyst OK. All right. That makes sense. And then I guess, you know, can you just comment a bit on what you're seeing in terms of just overall cycle times and input costs in terms of some of the sticks and bricks and anything there as we think about the forward quarters? Phillippe Lord -- Chief Executive Officer Yeah. As Hilla said in her opening comments, cycle times are the best they've been in a long time. We're kind of where our target is. Production capacity is really stable. We're hitting our timelines. I'm not sure how much more there is, but capacity is real strong. So, if there's more to take out of our cycle times, we will. And then direct costs are also really quite stable. We have -- given the size of our business at this point, we have really strong relationships that are producing great cost structure for us. Lumber has ticked up a little bit, but we've been able to offset that in other areas and the categories of the business. So, as we look out into 2024, we're modeling stable cycle times and stable direct costs. Susan Maklari -- Goldman Sachs -- Analyst OK. All right. That's great color. Thank you. Good luck with everything. Phillippe Lord -- Chief Executive Officer Thank you. Operator Next question today is coming from Alex Barron from Housing Research Center. Your line is now live. Alex Barron -- Housing Research Center -- Analyst Yes. Thank you. I was hoping you guys could elaborate a little bit on your average buyer. Well, first of all, what percentage of the buyers are actually first-time buyers? And what does that average buyer, entry-level buyer look like, right? What's their cycle, what's their down payment, what's their average income, that type of thing? Phillippe Lord -- Chief Executive Officer Hilla is pulling up some more details for you. So, just give us one second, but I'll kind of reiterate what Hilla said earlier. Our FICO scores, our DTIs, everything is pretty much the same as it was. It's been the same for a long time. We're obviously targeting a more qualified entry-level buyer. But for the most part, these are their first homes. But they have really high income levels, and they're looking for as nice a home as they can buy in a certain price point. But hang on. Hilla will tell you the exact metrics. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. Our first-time buyer, they don't declare themselves the first-time buyer, you can only look at back data and back into whether they're a first-time buyer or not, but our first-time buyer is about two-thirds of our business right now. Alex Barron -- Housing Research Center -- Analyst OK. And I was kind of interested just to see what type of income level do these people have. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. I don't know if we're sharing the income, but you can probably back into it because the DTIs are averaging 41, 42, and we're sharing that the LTV is in the mid-80s, so you kind of take our ASP back into what the loan amount is with an 85% LTV, you can probably back into their monthly -- their average monthly income. Alex Barron -- Housing Research Center -- Analyst Generally? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. Alex Barron -- Housing Research Center -- Analyst OK. Phillippe Lord -- Chief Executive Officer We're not seeing our particular consumer not be able to qualify and afford our home. We don't have to do rate buydowns and rate locks to qualify them. It's more of a psychological -- we want a lower rate on a 30-year mix. It's an incentive versus a qualification. Alex Barron -- Housing Research Center -- Analyst Got it. And then if you can elaborate on a comment you made about the cost of incentives being lower than the forward commitment if it was like a short close if you can elaborate on that because my thought was that the forward commitment was supposed to be the lower form? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer So, a forward commitment, there's a lot -- we don't need to get into all the dynamics of how a forward commitment works. We can talk about that offline. But there's a lot of benefits using a forward commitment. You can both buy and get some locked-in rate to give you an advantage that if rates are moving on you during that period of time, you have that amount locked in. You're not trying to lock it in based on today's date. The way that we choose to do rate locks it also disregards your LLPA, the low-level price adjustment. So, it's agnostic to what your own creditworthiness is. However, if you're doing something spot rate for a short period of time, if you have good credit, that's going to be cheaper. So, we have an opportunity because our sales-to-close cycle time is so short, we have an opportunity for certain customers to go out into the market if the rate is favorable that day and just buy a rate lock and/or buy down for them at that point of sale that could be cheaper than a forward commitment. Alex Barron -- Housing Research Center -- Analyst Got it. OK. Thanks a lot. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Next question today is coming from Jay McCanless from Wedbush Securities. Your line is now live. Jay McCanless -- Wedbush Securities -- Analyst Thanks for taking the questions. Just to clarify what you're saying earlier, Phillippe, are you guys seeing kind of the slowdown in April foot traffic and demand that some of your competitors have talked about? Phillippe Lord -- Chief Executive Officer No. Jay McCanless -- Wedbush Securities -- Analyst OK. And then in terms of pricing power, where do you think you're getting better pricing power right now? Is it on the entry-level, first-mover? How has that been trending? And I guess also, how has that been trending thus far in April? Phillippe Lord -- Chief Executive Officer Now, Jay, we're mostly entry level at this point, although we're trying to source some more what we call one MU land, which we're having some success doing. So, primarily, we're entry level. So, obviously, the pricing power we experienced in Q1 was entry-level pricing power. I would say to give you some more information, it's more geographical and community by community. Certain communities, certain markets are really strong and very -- there's a lot of pricing power. And then other markets that are more price-sensitive, we don't have as much. Jay McCanless -- Wedbush Securities -- Analyst And then just the last question I had. With the pretty large increase that the board put in with the dividend, maybe walk me through that from a capital allocation standpoint because that seems like a pretty big burden to put on the company, especially with a cyclical industry. So, maybe some of the thought process and why make such a big increase right now, especially with rates at this point, not having affected your business, but they might in the future. Phillippe Lord -- Chief Executive Officer So, we talked a lot about this through our organization as well as with our board and Steve here at German. But at the end of the day, we felt that there was a benefit to returning shareholder equity in two different ways, not just buying back shares where we have a limited float but also providing a dividend. We think the dividend signals to the Street that we have tremendous conviction in the cash flow of our business. Our operating model has dramatically changed from where it was seven years ago. You can see our backlog conversion. We're generating a much stronger cash flow quarter to quarter. And so, we felt strongly that that was the signal we needed to send to the street that we believe our operating model, our business is less cyclical than it was before. There's been a lot of conversations about the industry being rerated because our balance sheets are stronger, but we think paying a dividend tells you exactly how strong our balance sheet is. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer I think it's important to note that the dollars, while it's a very impressive increase, we just reiterated our $2 billion to $2.5 billion annual land spend commitment. Our dividends are around $100 million a year. So, I think just to put everything in perspective, that's a pretty small portion and a pretty small commitment for us to be making of the entire capital outflow for the company. Jay McCanless -- Wedbush Securities -- Analyst OK. Great. Thanks for taking my questions. Phillippe Lord -- Chief Executive Officer Thanks, Jay. Appreciate it. Operator Thank you. Next question is coming from Ken Zener from Seaport Research Partners. Your line is now live. Ken Zener -- Seaport Research Partners -- Analyst Good morning, everybody. Phillippe Lord -- Chief Executive Officer Good morning. Ken Zener -- Seaport Research Partners -- Analyst I wonder if you could go into -- look, the beat was very good, both the units and the margins. I'm just trying to understand a little more specifically backlog, I assume converted at the margins you offered at the end of January. So, it's -- and there's a certain spread there. Could you kind of talk about that implied spread? I think I can do the math, half of your units were backlog, half more closings. So, I'm trying to get initial spread. Phillippe Lord -- Chief Executive Officer Obviously, you know what we guided to and then what we delivered. So, if you came into the quarter with a backlog, that's generally what we guided to, but then we closed 148% of that backlog. So, we closed an extra 2,000 houses in the quarter than we were expecting. That's the spread. Ken Zener -- Seaport Research Partners -- Analyst So, it seems like was it the spread on the implied margins for the spec actually improved quite a bit first what you expected plus the units, correct? Phillippe Lord -- Chief Executive Officer Absolutely. As we came into January, our ability and the demand for move-in ready inventory that we were able to close intra-quarter was really strong, which allowed us to increase the pricing of that product as well as use less incentives on that product. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer And the sheer fact that we closed many homes allowed us to leverage and gain incremental benefit in the margin. So, it's a combination of all of those coming together that drove margin. Phillippe Lord -- Chief Executive Officer So, when we guide, we're going to guide to what we know. But if there's a big intra-quarter movement like we saw in the spring selling season, it's either going to benefit us or maybe not. Ken Zener -- Seaport Research Partners -- Analyst Yeah. And the reason I ask is I think where you have -- I prefer looking at inventory, so your backlog plus your spec units, but the math, it seems like you're doing like 27% gross margin on your backlog units, and it implies roughly 300 bps lower on your spec. Is that something that you would be willing to comment on? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer I think we're getting really granular. So, we're just going to pull back from there. I think that's kind of what we said a couple of times in the Q&A, I think we're really comfortable with what we guided. That was what we knew. The incremental volume in the intra-quarter improvement is what you're seeing come through in our actuals. Ken Zener -- Seaport Research Partners -- Analyst Right. No, I think it's good. I'm just trying to -- Phillippe Lord -- Chief Executive Officer We do, too. Did you have another question? Thank you. Operator, is that it? Operator Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Phillippe for any further or closing comments. Phillippe Lord -- Chief Executive Officer Thank you, operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of your day and a great weekend. Thank you. Answer:

the Meritage Homes first quarter 2024 analyst call

Operator Hello, and welcome to the Meritage Homes first quarter 2024 analyst call. [Operator instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Emily Tadano, vice president, investor relations and ESG. Please go ahead, Emily. Emily Tadano -- Vice President, Investor Relations Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2024 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2023 annual report on Form 10-K. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, executive chairman; Phillippe Lord, CEO; and Hilla Sferruzza, executive vice president and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve? Steve Hilton -- Executive Chairman Thank you, Emily, and welcome to everyone listening in on our call. I will briefly discuss current market trends and our recent accomplishments. Phillippe will cover highlights of our operational performance and how our strategy is driving our success. Hilla will provide a financial overview of the first quarter and our forward-looking guidance for Q2 and full year 2024. Meritage had a remarkable start to the year. We achieved an average absorption pace of 4.9 sales per month in the first quarter of 2024, which resulted in our highest quarterly sales orders totaling 3,991 homes. During the spring selling season with a healthy supply of move-in ready inventory, we were able to capitalize on strong market conditions generated by the increasing need for housing for millennials and Gen Zs as well as the move-down Baby Boomers who continue to find our limited inventory, limited availability of resale housing supply. In the first quarter of this year, our record backlog conversion of 138% drove 3,507 home deliveries, which led to home closing revenue of $1.5 billion. Home closing gross margin for the quarter was 25.8%, which combined with SG&A of 10.4%, resulting in diluted EPS of $5.06. As of March 31, 2024, we increased our book value per share 17% year over year to $129.98 and generated a return on equity of 18%. Although visibility into what interest rate mortgage rates will do for the remainder of the year remains unclear, we believe that by satisfying homebuyers desire to have quick closing time lines, our available inventory should position us to continue increasing our market share. Now, on to Slide 4 for our recent milestones. It's very timely that during the month that we celebrate Earth Day, we can announce Meritage's 11th Award as the EPA's ENERGY STAR Partner of the Year for sustained excellence for continued industry leadership in the production of energy-efficient homes. Additionally, Meritage was also named in Newsweek's 2024 America's Greenest Companies list as our commitment to sustainability is recognized even outside of our sector. Also, I take pride in sharing that at the end of the first quarter of this year, Meritage received the President's Volunteer Service Award, a civil award bestowed by the U.S. President and the highest honor available for volunteerism that refers to our partnership with No Child Hungry and the 1,100-plus hours our team members volunteer to package nearly 260,000 meals over the past two years to fight childhood hunger.Lastly, this quarter, we were recognized as one of Forbes' 2024, most successful mid-cap companies based on sales and earnings growth, return on equity, and total stock return for the last five years. At Meritage, we believe that financial achievements must be maintained while maintaining a focus on responsible corporate citizens and we are honored that these accolades continue to illustrate the breadth and depth of our commitment. With that, I'll now turn it over to Phillippe. Phillippe Lord -- Chief Executive Officer Thank you, Steve. This quarter, we are excited to share our financial results, but I wanted to provide a bit more context behind the numbers. Nearly 50% of our quarterly deliveries were sold and closed intra-quarter, a trend that has been increasing for the last three to four quarters, resulting in a record backlog conversion of 138%. This conversion rate is materially north of our previous long-term target of 80% plus and notably higher than even our fourth quarter 2023 backlog conversion of 110%, helping drive improved ROE over the last several quarters. This success was the intentional result of migrating to a move-in ready strategy across both our entry-level and first-mover products, allowing us to enter the year with a sufficient supply of homes available for quick close, particularly in advance of the spring selling season. We were able to both increase prices and offer less financing incentives than we anticipated on those quick move-in closings, meaningfully improving our first quarter 2024 gross margin. With our intra-quarter sales activity representing half of the quarter's closing volume, our gross margin reflects more current market conditions in real time, and our outperformance validates that our move-in-ready strategy is the right one for Meritage and for our customers. Now, turning to Slide 5. Demand remained solid this quarter. Our sales orders of 3,991 homes were up 14% year over year. The nationwide sales event conducted in late January and into February was highly successful. We sold our highest quarterly sales order volume, which benefited from an 8% cancellation rate, significantly below our historical average in the mid-teens. Entry-level homes comprise more than 90% of the total order volume. ASP on orders this quarter of $409,000 was down 5% from prior year, but fairly aligned sequentially from the fourth quarter of 2023. The ASP decrease from 2023 was due to both the larger mix of our closings coming from our Eastern markets and product mix shift, even as we increased pricing in about half of our communities and use fewer rate locks this quarter. The first quarter 2024 average absorption pace of 4.9 per month improved from 4.2 in the prior year and was well above four net sales per month due to strength of spring demand. The first quarter 2024 ending community count of 275 was up 2% sequentially from the fourth quarter of 2023 and down 1% compared to prior year. Thirty-four new communities came online this quarter. We are still on target for more material community growth later in the year, ending 2024 mid to high-single digits higher than where we started with even greater projected growth in 2025. We only control all the lots we need for planned key openings in 2024 as well as most of our 2025 communities. We are now focused on opportunities for quick openings in 2025 as well as longer-term growth into 2026 and beyond. Moving to the regional level trends on Slide 6. All of our regions generated a sales pace well above 4.0 net sales per month during the first quarter of 2024. Although we do expect Q1 to be one of our strongest absorption quarter as the overlap of the spring selling season. The central region combined for Texas market had both the highest regional average absorption pace of 5.2 sales per month and a backlog conversion rate of over 150%. The economic growth in Texas fuels the positive momentum in the housing market and with over 90% of this region's average community being entry level, a steady supply of affordable and move-in ready inventory has been in high demand. The West region had an average absorption pace of 4.8 net sales per month compared to 4.5 last year. Our previously challenged markets in this region regained sales momentum this quarter, primarily in Arizona and Colorado, some of the toughest markets last year. Colorado's first quarter 2024 sales order volume increased double digits on a year-over-year basis on a reduced community count. The East region experienced the largest year-over-year growth at an average absorption pace of 4.7 net sales per month, up from 3.8 from last year. As we have been focused on rebalancing our land portfolio over the last couple of years, our effort in East regions are now visible with a 10% year-over-year growth in average communities and double the prior year spec inventory, which positions us well to continue to take market share in the high-growth market parts of this country. Now, turning to Slide 7. Our quarterly starts were approximately 4,000 homes in the first quarter of 2024. We were up from about 2,500 in the prior year and are consistent with our quarterly cadence for the last few quarters. In order to ensure we have sufficient loans available for quick move-in, we align our start pace with our expected future sales pace. Further, as we grow community count in the later half of this year, we will start more homes to meet our targeted per-community move-in ready supply across our growing footprint. We had approximately 6,000 spec homes in inventory as of March 31, 2024, up 54% from about 3,900 specs as of March 31, 2023, but only about 100 homes greater than where we started this quarter. This represents 22 specs per community this quarter, which equates to 4.5 months supply specs on the ground, well within our target level of four to six months of supply. At our home closings this quarter, 93% came from previously started inventory, up from 87% in the prior year. Twenty-two percent of the total specs were completed as of March 31, 2024, as we continue to make progress to our target run rate of carrying one-third move-in ready homes. Our ending backlog as of March 31, 2024, totaled approximately 3,000 homes, down from about 3,900 homes in the prior year as our intra-quarter sales to closing percentage increased. With our focus on carrying more move-in ready inventory, we would expect our backlog will continue to represent less than one quarter sales as our backlog converged rates start to consistently perform above 100%, improving our returns. With our backlog and specs on the ground totaling over 9,000 homes, we believe we have the optimal level of home supply to deliver on our full-year results.I will now turn it over to Hilla to walk you through our financial results. Hilla? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Thank you, Phillippe. Before I cover our financial highlights, I wanted to first address the momentum we've gained with our land goals as this has been a key pillar in our growth plan. Our land teams have been successful at sourcing deals despite the competitive land market. And through their efforts, we put nearly 6,300 net new lots under control this quarter. This led to the growth in our total lot count by nearly 10% year over year and up sequentially by 3% to approximately 56,400 lots. With these new deals, we are starting to increase our use of off-balance sheet financing, growing our outlook percentage to 31% this quarter from 25% in the first quarter of 2023 and 28% from Q4 of last year. We continue to be focused on accelerating our land acquisitions and looking for off-book opportunities while maintaining a healthy balance sheet. Now, let's turn to Slide 8 and cover our Q1 financial results in more detail. First quarter 2024 home closing revenue was $1.5 billion, reflecting 21% higher home closing volume year over year, that was partially offset by 4% lower ASP due to a shift in product mix. On a sequential basis, ASP closings increased in the first quarter of 2024 with reduced utilization of rate locks and targeted price increases reflected in our intra-quarter sales and closings as the market improved over the last 90 days. Assuming interest rates hold steady or improve, ASP for the rest of the year is expected to be fairly consistent with some reductions from geographic mix and new entry-level communities opening with lower prices will be balanced by reduced financing incentive costs and price increases where the markets can absorb them. While the utilization of rate locks have slowed from 2022 and 2023, our all-in discounts are still running at an elevated level, and we expect to continue to utilize rate locks and buy-downs to negate concerns around rate volatility. Home closing gross margin increased 340 bps to 25.8% in the first quarter of 2024 compared to 22.4% in the prior year. This improvement was a combination of several factors. First, the reduced utilization of rate lock financing incentives that we've discussed. Next, the greater leverage of fixed costs on higher revenue. And finally, improvements in our direct cost as last year's first quarter marked the highest per square footage direct for us since the start of COVID. These savings were partially offset by higher lot costs. We want to take a minute and cover the trends we're seeing in our direct costs. Our team has been leveraging our spec strategy and increasing volume, allowing us to deepen our relationships with our vendors. We are proud of the reductions we achieved to date, and we expect that we will be able to hold the line to keep cost steady and find offsets to the recent lumber increases. On the labor front, capacity has held fairly steady perhaps as multifamily construction has pulled back a bit, creating a stable environment for residential construction at the moment. Our cycle times have settled in at around 140 calendar days over the last three quarters. We remain disciplined in our start cadence and are only selling homes later in the construction process to have the necessary inventory for quick move-in closings. Our goal is to turn our assets three times a year to get their additional capacity will likely be needed for both trade labor and local government staffing for permitting and inspections. When we review the composition of our gross margin, the only known variable is lot cost since the land acquisition and development dollars have already been spent. Elevated land development costs, the impact of the entire industry over the past three years are now fully flowing through our financials as almost all of our land is now for post-COVID acquisitions. Our current guidance reflects the elevated lot cost, and we do not expect any additional pullback on margins beyond 2024 as go-forward lot costs have a similar land development composition component. Over the past four to six quarters, our long-term gross margin target has been at least 22%. Structurally, we believe our target has changed as we continue to dial in our relationships with national vendors and further streamline our operations. The goal of these efforts is to improve cycle times and reduce costs. We've been operating under extreme environments for the past several years, highly favorable and then very challenging. As the markets are stabilizing, we are gaining a clear understanding of our capabilities in a normalized environment and expect to share our higher internal targets with you over the next several quarters. Turning to SG&A. SG&A was 10.4% of home closing revenue in the first quarter of 2024, which was fairly in line with 10.2% for the first quarter of 2023. Higher commissions this quarter offset the incremental leverage achieved on higher home closing revenue. We are still comfortable with our full-year SG&A goal of 10% or under and expect quarterly SG&A to improve throughout the year. Given our anticipated volume growth over the next few years, our longer-term SG&A target is 9.5%.In the first quarter of 2024, the financial services loss of approximately $700,000 included $5.8 million in write-offs related to rate lock unwind costs. This compares to financial services profit of $2.9 million in the first quarter of 2023 that had $1.9 million in similar write-offs. We anticipate potentially incurring another $7 million of rate lock underlying costs in the second quarter, which is included in our guidance. Excluding these charges, the profitability of our financial services is held in line with our historical averages. The first quarter's effective income tax rate was 20.5% this year, essentially flat to prior year, with both periods benefiting from energy tax credits on qualifying homes under the Inflation Reduction Act. Overall, higher home closing revenue and gross profit with flat SG&A leverage and tax rate led to a 43% year-over-year increase in first quarter 2024 diluted EPS to $5.06 from $3.54 in 2023. Before we move to the balance sheet, I wanted to cover our Q1 2024 customers' credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages, with FICO scores near 740 and DTIs around 41 or 42. LTVs were still in the mid-80s and about 80% of our buyers in Q1 received some sort of financing incentives consistent with our mortgage company capture rate. Now, turning to Slide 9. Our balance sheet, returns, and liquidity management are a core focus for us. We have nothing drawn under our credit facility, cash of $905 million, and net debt to cap of 2% at March 31, 2024. Our net debt-to-cap ceiling target is in the mid-20s, leveraging our improving backlog conversion. We also generated $82 million in operating cash flow for the first quarter of 2024. Our overarching capital spend philosophy looks to generate long-term shareholder value expansion through both growth in the business and returning capital to shareholders. Since early 2023, we have been accelerating our investment in organic growth. This quarter, we spent $430 million on land acquisition and development, which was up 39% from prior year. We expect our go-forward trend for full year 2024 and beyond to total $2 billion to $2.5 billion of land spend. Given confidence in our business model and our ability to deliver strong and stable financial performance during the first quarter of 2024, we meaningfully enhanced our shareholder returns directive as well. In February, we instituted a formal programmatic share repurchase plan with a minimum buyback commitment of $15 million in each quarter to provide consistency and predictability to our share repurchase activity. During the first quarter of 2024, we went beyond the systematic $15 million commitment and opportunistically bought back an additional $41 million. We repurchased over 360,000 shares or 1% of common stock outstanding at December 31, 2023, for $56 million this quarter. $129 million remain available under our authorization program. One year after initiating our dividend policy, we nearly tripled our quarterly cash dividend to $0.75 per share this quarter or $0.27 per share, providing another avenue for us to improve our ROE. This resulted in total spend of about $27 million in dividends in the first quarter this year. And rounding out our capital plan for the year, we are also evaluating near-term opportunities to address the senior debt that's coming due in early 2025. On to Slide 10. In the first quarter of 2024, we were able to find and secure land deals that meet our underwriting standards in the majority of our markets meaningfully putting more lots under control than home starts. The nearly 6,300 net new lots under control this quarter represent an estimated 43 future communities. We put about 200 net new lots under control in the first quarter of 2023 as we were only starting to ramp up from the pullback in late 2022 that quarter. As of March 31, 2024, we owned or controlled a total of about 56,400 lots, equating to 4.6 years supply of lots in line with our target of four to five-year supply. Our land financing strategy focuses on managing our capital while being mindful of balance sheet metrics and margin goals. We've been able to utilize our healthy balance sheet to replenish our land portfolio while minimizing the gross margin impact from option land yields for the past several years. As we mentioned earlier, we have recently been utilizing more option financing for our land purchases. About 69% of total lot inventory at March 31, 2024, was owned and 31% optioned compared to prior year, where we had a 75% owned inventory and a 25% option lot position. We believe that off-balance sheet financing will allow us to control more land and increase our year supply of lots beyond what we like our balance sheet to absorb. Our intent is to accelerate our growth into 2025 and onward, and we are currently working on some land financing opportunities that we hope to be able to share with you in the next several quarters. Finally, I'll direct you to Slide 11 for our guidance. Given the robust market conditions and our supply of move-in ready homes, we revised our projections upward for full year 2024 to the following. Total closings between 14,500 and 15,000 units, home closing revenue of $6 billion to $6.2 billion, home closing gross margin of around 24.5% to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $19.20 to $20.70. As for Q2 2024, we are projecting total closings between 3,600 and 3,800 units, home closing revenue of $1.5 billion to $1.6 billion, home closing gross margin of 24.5% to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $4.70 to $5.30. Both Q2 and full-year guidance assume current market conditions and interest rates. We will continue to refine our guidance as additional clarity around interest rates becomes available later in the year. With that, I'll turn it back over to Phillippe. Phillippe Lord -- Chief Executive Officer Thank you, Hilla. To summarize on Slide 12. Our first quarter 2024 results demonstrate that our ample spec home supply for quick closings and our focus on pace over price allowed us to plus up and exceed not only our volume targets but also our gross margin guidance. As we increase our community count in the second half of this year, we believe we are positioned to continue growing our market share. Further, our acceleration on both land spend as well as share repurchases and dividends demonstrates our confidence in our business model. We are committed to balancing growth in the business and returning cash to shareholders in order to continue creating long-term value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Questions & Answers: Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question is coming from Stephen Kim from Evercore ISI. Your line is now live. Stephen Kim -- Evercore ISI -- Analyst Thanks very much, guys. Really impressive results. Thanks for all the guidance and color. Question for you regarding the backlog turnover ratio. This is something that we've chatted a lot about over the last year. It sounds like you're clearly now saying that you've arrived at a level at a point now with your business model where you feel comfortable guiding to a turnover ratio at triple digits. I was curious as to whether you think that when -- what you see this year in terms of how you're planning to operate, whether this is a level of backlog turnover ratio that you also think can continue sort of as you progress toward whatever your long-term normalized level is? Is this the new normal? Or do you see 2024 as maybe being a little higher than normal? Steve Hilton -- Executive Chairman I would say that it's pretty much going to be the new normal. As we think about the rest of this year, we're modeling a similar backlog conversion for the remaining quarters. Some of it is just predicated on cycle time stability, which currently we have. The production capacity is really, really good. So, as long as that remains in the same state, this is going to be the new normal for us. Stephen Kim -- Evercore ISI -- Analyst Yeah. That's really great. And I assume the same thing could probably be said for absorption rates perhaps per community, but maybe you can update us on that. I know historically, I think you've talked about three to four. And then as a follow-on to that, you talked about your gross margin now pretty much for this year, incorporating a fully adjusted land cost. You don't have that pre-pandemic unusual land effect. So, that would seem to suggest that your gross margins have potentially some upside from here. I know you're going to give us more on that later. But you had talked in the past about how a higher level of volume translates very directly for you into a higher level of profitability, not just on the SG&A but the gross margin. So, I was wondering if you could remind me again about the sensitivity of higher volume to your gross margin as well as updating us on your absorption rate longer term. Phillippe Lord -- Chief Executive Officer Yeah. I'll take the absorption question, and then I'll hand it over to Hilla on the margin guidance. We obviously believe we're going to sell more houses in the front half of the year than the back half of the year just due to seasonal trends. But we are reevaluating our overall absorption targets specifically for our entry-level business. We've often said that our target is around four to five for entry level and somewhere between three and four for one MU. And the affordable part of the market is extremely strong. We're finding really strong land positions out there to support that affordable price point, and we are evaluating whether we can do better than that 4% to 5%. But stay tuned on that. And I'll let Hilla talk about the margin guide. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Sure. So, historically, when we have longer cycle times and lower closing, sales at closing time, they could be up to 100 bps pickup in the fixed component of gross margin between Q1 and Q4 due to the incremental volume. Now, that's a little bit different these days because we're selling the spring selling homes and closing some of the spring season homes in the same quarter, but increased volume for us, even 400, 500 incremental units in a quarter can have up to 100 bps improvement in our gross margin, not just SG&A leverage. Stephen Kim -- Evercore ISI -- Analyst Great. That's really helpful. Thanks, Hilla. Thanks, Phillippe. Appreciate it. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Next question today is coming from Alan Ratner from Zelman and Associates. Your line is now live. Alan Ratner -- Zelman and Associates -- Analyst Hey, guys, good morning. Congrats on the great quarter. First question, gross margin. So, if I look at your full-year guide, I think the biggest adjustment was to the margin range. And if I think back to three months ago when you gave that, I believe, if I'm remembering correctly, obviously, higher land costs flowing through was kind of the main headwind as far as your expectation for some pressure through the year. But I think you probably also had some assumption on incentives embedded within that as well. And clearly, the first quarter came in better than, I guess, you guys were expecting. But when you think about the macro environment today versus back then, rates are higher and continuing to move higher. So, what is actually embedded in that guide for the remainder of the year as far as incentives? Do you expect to kind of continue the improvement you've seen in the first quarter? Or are you baking in any potential for having to increase incentives as you get to the back half, softer seasonal time of the year? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer We're still in elevated level of incentives compared to where we were pre-2022. So, we're maintaining that level. There was a decent amount, even with the pullback in improved market conditions in Q1, there was still a decent amount of incentives that are being used. But something that's really important to consider when you're selling and closing intra-quarter, even though you're offering an incentive, you can offer it much less expensively if you're offering a 45-day interest rate lock, it's much cheaper than trying to buy a forward commitment. So, we're still planning on using the tools that we have in our toolkit to rate lock buydowns and rate locks just in general, but the cost to those is going to be less expensive because of our ability to sell and close so quickly. So, we're modeling current market conditions, including what we're seeing in April, which includes the uptick in the guidance that we provided to you. Phillippe Lord -- Chief Executive Officer Yeah. I'll just -- I'll give you an extra question here because people are going to ask you about April. We're not needing to go out and increase our rate lock costs to acquire the customers for April. That's included in our guidance. Even in these elevated rate environments, we're able to move people into our move-in ready inventory at about similar costs than we were in Q1. So, it's all baked into our guidance. Alan Ratner -- Zelman and Associates -- Analyst Got it. That's really helpful. Thank you for that added color. Second question, I guess, just pointing to your Slide 10, where you show the lot acquisition activity, which is very helpful to see. So, I know this is not a smooth number by any means, but first quarter looks like it was down a little bit from the last couple of quarters in terms of dollars spent on both development and acquisition. It looks like the community, I guess, acquisition was relatively steady, but you're tracking, I guess, below the $2 billion to $2.5 billion target for land spend year to date. So, is that just a timing function? Or is there -- is it getting harder to find deals to pencil? How should we think about that? Because I know, obviously, your 25 community count growth is somewhat dependent on hitting that target. Phillippe Lord -- Chief Executive Officer Yeah. Everything is going as planned. It's really just a timing thing. I think you'll see that timing reverse out here in Q2 and Q3. But none of it indicates anything around our ability to go acquire the lots we need for 2026 and beyond. And we're also finding deals for 2025. So, it's really all just timing. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer I'll add one more point, Alan. This is a disclosure that comes out in the 10-Q. So, you'll see but I will just give you guys a sneak peak. You guys know that we have about -- at the end of last year, we had about 28,000 lots that some level of due diligence was still ongoing but were not counted in our actual lot totals because we hadn't committed. That number has actually increased from 28,000 to 34,000 just in the quarter while we grew our community comp. So, the ability to find land to pencil is definitely not the issue. It's just timing of when deals were closing. Alan Ratner -- Zelman and Associates -- Analyst Great. That's really helpful. Thanks a lot, guys. Good luck. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Next question is coming from Michael Rehaut from JPMorgan. Your line is now live. Mike Rehaut -- JPMorgan Chase and Company -- Analyst Great. Thanks very much. Congrats on the results. So, first question, just around gross margins. I would love to just get a sense, and I apologize if I kind of missed some of this earlier in the call. But just what drove the actual upside in the first quarter versus prior guidance? I think part of the review that was earlier was more just focused on year over year, but was more interested in kind of zeroing in the upside in the first-quarter results versus your guidance and how that also flows through to the higher guidance for the full year. And then also on the gross margins. I believe I heard correctly that you expect 2025 gross margins to, at minimum, be similar to 2024. And I just wanted to make sure that I heard that correctly as well. Phillippe Lord -- Chief Executive Officer Yes. I'll let Hilla take the second part. So, as we came into Q1 and guided to our Q1. We didn't have real visibility into the strength of spring selling season. So, it was early into January. And obviously, the spring selling season has been very, very strong. So, as you can see from our backlog conversion rate, we were able to convert a lot more move-in ready inventory than we had initially assumed. And the demand for that move-in ready inventory was really strong. So, we were able to take pricing. And we didn't need to use as much of the rate lock dollars we had in our assumptions to get people into those mortgages and those homes. We obviously had assumed that rate locks are still going to be heavily utilized coming into the year, and they were much less utilized. So, between backlog conversion and more leverage, ASP improvement, and then less incentive utilization, obviously, we had a beat on our margin guide. And then I'll let Hilla talk about the guidance for 2025. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. So, we're not providing guidance yet for 2025. We just wanted to clarify. We heard that there was maybe some confusion about the composition of our lot cost that's flowing through the financials in 2024. If it was going to be a little bit of the noise from the higher land development cost in 2024 and some also coming in 2025. And we just wanted to clarify that pretty much everything that's running through our financials these days is fully baked in at the higher land development spend. We don't have any more pre-COVID land. So, for us, the level of lot cost as a percentage of revenue that you're seeing in our numbers in 2024, that's the new run rate until land development costs come down. So, there's not another shoe to drop with another reduction to gross margin from land. We've not given guidance on any other component of gross margin to 2025 just quite yet. Mike Rehaut -- JPMorgan Chase and Company -- Analyst OK. No, I appreciate that. And I guess maybe just also looking forward, you kind of talked consistently about an accelerated rate of growth in 2025 and beyond. You're obviously looking for mid to high single digits this year. Without getting into too many details, I mean, my impression of higher growth would be something more in the low double-digit range at minimum. And I'm just curious if that's the right way to think about that. Or could it even be something in the teens? I'm just trying to get a degree of magnitude when you talk about accelerated growth. Phillippe Lord -- Chief Executive Officer Are you talking about for 2025? Mike Rehaut -- JPMorgan Chase and Company -- Analyst Correct. Yes. Phillippe Lord -- Chief Executive Officer Yeah. I mean, we're obviously not prepared to give any guidance on 2025, but we're buying a lot of land. And anything less than 10% isn't really what we're targeting either, but we're just not prepared to guide to that at this point. Mike Rehaut -- JPMorgan Chase and Company -- Analyst OK. Fair enough. Appreciate it. Thank you. Operator Your next question is coming from John Lovallo from UBS. Your line is now live. John Lovallo -- UBS -- Analyst Hey, guys, thank you for taking my questions. The first one is not to get nitpicky, but if we look at the midpoint of the 2024 delivery outlook, it's 14,750 homes. And if we back out the first-quarter deliveries of 3,507 and then the second-quarter midpoint, sorry, of 3,700, it would imply sort of average deliveries in the third quarter and the fourth quarter of around 3,771. So, I guess is the lack of sequential step-up in delivery more a function of the business becoming a bit more even flow from a production standpoint? Is it sort of a lack of available homes in the pipeline? Or is there something else that may be kind of leveling that growth off? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. So, that's a great point. I'm glad that you made it. Thanks, John. So, I think we alluded to it a little bit, but maybe we'll just put a fine point on it. I'll start and Phillippe can take us from there. When you're selling and closing homes in the same period, the spring selling season results get pulled up. So, before Q4 was kind of our huge quarter where what we were selling through May got delivered 2.5 quarters later because we're now buying. But because now we're selling and closing intra-quarter, you're seeing that same fantastic value just come up earlier into the year. It's still going to be a good Q4, but it's not really reflecting the spring selling season homes anymore. I'll let Phillippe take that as well. Phillippe Lord -- Chief Executive Officer Yeah, that's right. I mean, we expect that we will now see Q2 and Q3 being our biggest volume quarters with Q4 being a little more modest and then Q1, just depending on the spring selling season. So, that's going to be kind of the new cadence of our business, unlike what it was before where, usually, Q3 and Q4 were our biggest quarters. John Lovallo -- UBS -- Analyst Yeah. That makes a lot of sense. OK. And then, you know, you guys returned $83 million back to shareholders in the first quarter, generated a similar level of cash from operations. I mean, as we move forward here, can we sort of think of matching cash flow with repos and dividends over the next few quarters, particularly considering no real debt due until 2025? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. I mean, that's exactly a function of cash. Like Phillippe mentioned earlier, the timing of land development acquisitions is kind of just based on when deals are closing. So, it's not necessarily a function of operating cash flow, but it is a function of prior year profitability. So, if you look at it, we're on target to do like in the 20s of last year's net income and return to shareholders -- return of capital to shareholders. That's kind of more of our target rather than the timing of when a deal is closing on the land side. John Lovallo -- UBS -- Analyst Understood. Thanks very much, guys. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Our next question is coming from Susan Maklari from Goldman Sachs. Your line is now live. Susan Maklari -- Goldman Sachs -- Analyst Thank you. Good afternoon, everyone. My first question is you've commented on the target of taking the ASP down over time. And the guide does imply that sequentially we will see a bit of a slowdown in there. But I guess when you think about that relative to the pricing power and the level of demand that you talked to on the ground, how are you thinking about those two factors coming together? And any thoughts on how that ASP will come through over the longer term? Phillippe Lord -- Chief Executive Officer Yeah. The ASP, our forward-looking ASP guidance is predicated on the land we're buying. So, if we're buying less expensive lots that can allow us to produce our product in a more affordable part of the market long-term, which is what our core strategy is, that's driving the ASP decline. But that doesn't mean we're not taking pricing when the market is elastic in that affordable segment of the market, which it has been and was very strong in Q1. So, there are two different concepts. One is the land we're buying, and the other is what the market allows us to do. Susan Maklari -- Goldman Sachs -- Analyst OK. All right. That makes sense. And then I guess, you know, can you just comment a bit on what you're seeing in terms of just overall cycle times and input costs in terms of some of the sticks and bricks and anything there as we think about the forward quarters? Phillippe Lord -- Chief Executive Officer Yeah. As Hilla said in her opening comments, cycle times are the best they've been in a long time. We're kind of where our target is. Production capacity is really stable. We're hitting our timelines. I'm not sure how much more there is, but capacity is real strong. So, if there's more to take out of our cycle times, we will. And then direct costs are also really quite stable. We have -- given the size of our business at this point, we have really strong relationships that are producing great cost structure for us. Lumber has ticked up a little bit, but we've been able to offset that in other areas and the categories of the business. So, as we look out into 2024, we're modeling stable cycle times and stable direct costs. Susan Maklari -- Goldman Sachs -- Analyst OK. All right. That's great color. Thank you. Good luck with everything. Phillippe Lord -- Chief Executive Officer Thank you. Operator Next question today is coming from Alex Barron from Housing Research Center. Your line is now live. Alex Barron -- Housing Research Center -- Analyst Yes. Thank you. I was hoping you guys could elaborate a little bit on your average buyer. Well, first of all, what percentage of the buyers are actually first-time buyers? And what does that average buyer, entry-level buyer look like, right? What's their cycle, what's their down payment, what's their average income, that type of thing? Phillippe Lord -- Chief Executive Officer Hilla is pulling up some more details for you. So, just give us one second, but I'll kind of reiterate what Hilla said earlier. Our FICO scores, our DTIs, everything is pretty much the same as it was. It's been the same for a long time. We're obviously targeting a more qualified entry-level buyer. But for the most part, these are their first homes. But they have really high income levels, and they're looking for as nice a home as they can buy in a certain price point. But hang on. Hilla will tell you the exact metrics. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. Our first-time buyer, they don't declare themselves the first-time buyer, you can only look at back data and back into whether they're a first-time buyer or not, but our first-time buyer is about two-thirds of our business right now. Alex Barron -- Housing Research Center -- Analyst OK. And I was kind of interested just to see what type of income level do these people have. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. I don't know if we're sharing the income, but you can probably back into it because the DTIs are averaging 41, 42, and we're sharing that the LTV is in the mid-80s, so you kind of take our ASP back into what the loan amount is with an 85% LTV, you can probably back into their monthly -- their average monthly income. Alex Barron -- Housing Research Center -- Analyst Generally? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer Yeah. Alex Barron -- Housing Research Center -- Analyst OK. Phillippe Lord -- Chief Executive Officer We're not seeing our particular consumer not be able to qualify and afford our home. We don't have to do rate buydowns and rate locks to qualify them. It's more of a psychological -- we want a lower rate on a 30-year mix. It's an incentive versus a qualification. Alex Barron -- Housing Research Center -- Analyst Got it. And then if you can elaborate on a comment you made about the cost of incentives being lower than the forward commitment if it was like a short close if you can elaborate on that because my thought was that the forward commitment was supposed to be the lower form? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer So, a forward commitment, there's a lot -- we don't need to get into all the dynamics of how a forward commitment works. We can talk about that offline. But there's a lot of benefits using a forward commitment. You can both buy and get some locked-in rate to give you an advantage that if rates are moving on you during that period of time, you have that amount locked in. You're not trying to lock it in based on today's date. The way that we choose to do rate locks it also disregards your LLPA, the low-level price adjustment. So, it's agnostic to what your own creditworthiness is. However, if you're doing something spot rate for a short period of time, if you have good credit, that's going to be cheaper. So, we have an opportunity because our sales-to-close cycle time is so short, we have an opportunity for certain customers to go out into the market if the rate is favorable that day and just buy a rate lock and/or buy down for them at that point of sale that could be cheaper than a forward commitment. Alex Barron -- Housing Research Center -- Analyst Got it. OK. Thanks a lot. Phillippe Lord -- Chief Executive Officer Thank you. Operator Thank you. Next question today is coming from Jay McCanless from Wedbush Securities. Your line is now live. Jay McCanless -- Wedbush Securities -- Analyst Thanks for taking the questions. Just to clarify what you're saying earlier, Phillippe, are you guys seeing kind of the slowdown in April foot traffic and demand that some of your competitors have talked about? Phillippe Lord -- Chief Executive Officer No. Jay McCanless -- Wedbush Securities -- Analyst OK. And then in terms of pricing power, where do you think you're getting better pricing power right now? Is it on the entry-level, first-mover? How has that been trending? And I guess also, how has that been trending thus far in April? Phillippe Lord -- Chief Executive Officer Now, Jay, we're mostly entry level at this point, although we're trying to source some more what we call one MU land, which we're having some success doing. So, primarily, we're entry level. So, obviously, the pricing power we experienced in Q1 was entry-level pricing power. I would say to give you some more information, it's more geographical and community by community. Certain communities, certain markets are really strong and very -- there's a lot of pricing power. And then other markets that are more price-sensitive, we don't have as much. Jay McCanless -- Wedbush Securities -- Analyst And then just the last question I had. With the pretty large increase that the board put in with the dividend, maybe walk me through that from a capital allocation standpoint because that seems like a pretty big burden to put on the company, especially with a cyclical industry. So, maybe some of the thought process and why make such a big increase right now, especially with rates at this point, not having affected your business, but they might in the future. Phillippe Lord -- Chief Executive Officer So, we talked a lot about this through our organization as well as with our board and Steve here at German. But at the end of the day, we felt that there was a benefit to returning shareholder equity in two different ways, not just buying back shares where we have a limited float but also providing a dividend. We think the dividend signals to the Street that we have tremendous conviction in the cash flow of our business. Our operating model has dramatically changed from where it was seven years ago. You can see our backlog conversion. We're generating a much stronger cash flow quarter to quarter. And so, we felt strongly that that was the signal we needed to send to the street that we believe our operating model, our business is less cyclical than it was before. There's been a lot of conversations about the industry being rerated because our balance sheets are stronger, but we think paying a dividend tells you exactly how strong our balance sheet is. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer I think it's important to note that the dollars, while it's a very impressive increase, we just reiterated our $2 billion to $2.5 billion annual land spend commitment. Our dividends are around $100 million a year. So, I think just to put everything in perspective, that's a pretty small portion and a pretty small commitment for us to be making of the entire capital outflow for the company. Jay McCanless -- Wedbush Securities -- Analyst OK. Great. Thanks for taking my questions. Phillippe Lord -- Chief Executive Officer Thanks, Jay. Appreciate it. Operator Thank you. Next question is coming from Ken Zener from Seaport Research Partners. Your line is now live. Ken Zener -- Seaport Research Partners -- Analyst Good morning, everybody. Phillippe Lord -- Chief Executive Officer Good morning. Ken Zener -- Seaport Research Partners -- Analyst I wonder if you could go into -- look, the beat was very good, both the units and the margins. I'm just trying to understand a little more specifically backlog, I assume converted at the margins you offered at the end of January. So, it's -- and there's a certain spread there. Could you kind of talk about that implied spread? I think I can do the math, half of your units were backlog, half more closings. So, I'm trying to get initial spread. Phillippe Lord -- Chief Executive Officer Obviously, you know what we guided to and then what we delivered. So, if you came into the quarter with a backlog, that's generally what we guided to, but then we closed 148% of that backlog. So, we closed an extra 2,000 houses in the quarter than we were expecting. That's the spread. Ken Zener -- Seaport Research Partners -- Analyst So, it seems like was it the spread on the implied margins for the spec actually improved quite a bit first what you expected plus the units, correct? Phillippe Lord -- Chief Executive Officer Absolutely. As we came into January, our ability and the demand for move-in ready inventory that we were able to close intra-quarter was really strong, which allowed us to increase the pricing of that product as well as use less incentives on that product. Hilla Sferruzza -- Executive Vice President, Chief Financial Officer And the sheer fact that we closed many homes allowed us to leverage and gain incremental benefit in the margin. So, it's a combination of all of those coming together that drove margin. Phillippe Lord -- Chief Executive Officer So, when we guide, we're going to guide to what we know. But if there's a big intra-quarter movement like we saw in the spring selling season, it's either going to benefit us or maybe not. Ken Zener -- Seaport Research Partners -- Analyst Yeah. And the reason I ask is I think where you have -- I prefer looking at inventory, so your backlog plus your spec units, but the math, it seems like you're doing like 27% gross margin on your backlog units, and it implies roughly 300 bps lower on your spec. Is that something that you would be willing to comment on? Hilla Sferruzza -- Executive Vice President, Chief Financial Officer I think we're getting really granular. So, we're just going to pull back from there. I think that's kind of what we said a couple of times in the Q&A, I think we're really comfortable with what we guided. That was what we knew. The incremental volume in the intra-quarter improvement is what you're seeing come through in our actuals. Ken Zener -- Seaport Research Partners -- Analyst Right. No, I think it's good. I'm just trying to -- Phillippe Lord -- Chief Executive Officer We do, too. Did you have another question? Thank you. Operator, is that it? Operator Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Phillippe for any further or closing comments. Phillippe Lord -- Chief Executive Officer Thank you, operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of your day and a great weekend. Thank you.

edtsum2

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to the NextEra Energy and NextEra Energy Partners LP first-quarter 2024 earnings call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Kristin Rose, director of investor relations. Please go ahead. Kristin Rose -- Director, Investor Relations Thank you, Drew. Good morning, everyone, and thank you for joining our first-quarter 2024 combined financial results conference call for NextEra Energy and NextEra Energy Partners. With me this morning are John Ketchum, chairman, president, and chief executive officer of NextEra Energy; Kirk Crews, executive vice president and chief financial officer of NextEra Energy; Rebecca Kujawa, president and chief executive officer of NextEra Energy Resources; and Mark Hickson, executive vice president of NextEra Energy, all of whom are also officers of NextEra Energy Partners, as well as Armando Pimentel, president and chief executive officer of Florida Power & Light Company. John will provide some opening remarks and will then turn the call over to Kirk for a review of our first-quarter results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call and the risk factor section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our websites, www.nexteraenergy.com and www.nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP financial measures to the closest GAAP financial measure. With that, I will turn the call over to John. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thanks, Kristen, and good morning. NextEra Energy delivered strong first-quarter results, growing adjusted earnings per share by 8.3% year over year. Based on FPL and Energy Resources financial and operational performance, we are once again off to a solid start for the year. In addition, FPL placed into service 1,640 megawatts of new solar, while Energy Resources added 2,765 megawatts of new renewables and storage projects to its backlog. This quarter marks Energy Resources' second-best origination quarter ever, as well as its best solar and best storage origination quarter. As we highlighted at our March Renewables Development Day, we believe NextEra Energy is well-positioned for the expected strong power demand growth through the end of the decade and beyond. After years of relatively flat U.S. power growth, numerous reports now highlight significant future low growth being driven across industries such as oil and gas, manufacturing, and technology. The redomestication of industry in the U.S., supported by public policy, will drive the need for more electricity, and the tech industry is going to need data centers to support the expected cloud capacity demands that come with artificial intelligence applications. Of course, increased load demand will not come all at once and will take some time to materialize, but it is clear that many new customers are concerned about power availability to meet their plans and consider power supply as a significant obstacle to business expansion. We believe renewables and storage are a key enabler to help meet this increased demand. In fact, we believe the U.S. renewables and storage market opportunity has the potential to be 3x bigger over the next seven years compared to the last seven, growing from roughly 140 gigawatts of additions to approximately 375 to 450 gigawatts. And we believe no one is better positioned to address these power supply challenges and capitalize on this demand than NextEra Energy. At NextEra Energy, the plan is simple. Our two businesses are deploying capital in renewables, storage, and transmission for the benefit of customers while also providing visible growth opportunities for shareholders. Our enterprisewide scale, decades of experience, and technology investments are key competitive advantages that allow us to drive value and meet this expected power demand. Scale is one of our key differentiators, and it matters more than ever. Scale allows us to buy and build with better pricing, better protections, and better positioning to navigate disruption. Scale provides access to capital and cost of capital advantages, allowing us to leverage one of the strongest balance sheets in the sector and worldwide banking relationships to finance projects at beneficial terms. Scale has driven top-decile operational performance throughout our generation fleet. Today, NextEra Energy's roughly 74 gigawatt operating fleet, comprised of 35 gigawatts at FPL and 39 gigawatts at Energy Resources, provides significant operational scale. As FPL continues its solar and storage build-out and Energy Resources brings new renewables and storage projects online for customers, the operating fleet could grow to over 100 gigawatts by the end of 2026. This would further extend our scale advantages and create value for customers and shareholders. Our scale has enabled greater supply chain diversification and flexibility, and the good news is the solar supply chain is much improved from two years ago. Inflationary pressures are alleviating and manufacturing capacity is significantly expanding. In the U.S., manufacturing incentives are expected to support increases in domestic module manufacturing capacity to over 50 gigawatts by 2026, from just under 8 gigawatts at the end of 2021. We have greater supplier diversity and flexibility than ever before, strengthening our ability to bring low-cost solar to American consumers and businesses. Our decades of experience is another key competitive advantage. Our experience allows us to navigate power demand challenges, delivering cost-effective, reliable generation for our growing FPL customer base, and designing clean energy solutions to help our Energy Resources customers. We understand every part of the energy value chain with deep expertise in all technologies, the power markets, and transmission. Our team embraces continuous improvement that drives innovation. We recognized the changing landscape and secured land, interconnects, and transmission equipment years in advance. Technology is the next frontier for the power industry, and we believe our two-decade head start on the rest of the industry is a significant competitive advantage. Today, NextEra Energy captures 560 billion operational data points each day and has dozens of proprietary artificial intelligence tools to drive analytical, real-time decision making. We use these tools to analyze over 100 attributes of our own data to secure and develop the best sites in Florida and across the country. We use our tools to iterate millions of site layout designs based on proprietary resource data and assessments to maximize value. And we use our tools to operate nearly all our renewable storage and fossil generation fleets around the clock from our headquarters in South Florida. We are leveraging this combination of enterprisewide scale, decades of experience, and investment in technology to better position both businesses to capitalize on what we believe will be years of demand to drive long-term value for customers and shareholders. Today, electricity represents just 20% of overall U.S. energy consumption, and wind and solar generation represents only 16% of the U.S. electricity mix. In short, we believe the U.S. will need a significant and growing amount of electricity over the next decade and beyond, a large part of which will be powered by new renewables and storage. At FPL, as more people move into Florida, we are focused on extending the customer value proposition by keeping our bills as low as possible and delivering clean, affordable energy by investing in solar, battery storage, and transmission. At Energy Resources, our business is focusing on building low-cost wind, solar, battery storage, and transmission. We are using our data and proprietary technology to help power customers, balance supply and demand while keeping customer bills affordable. We also use our tools with commercial and industrial customers to identify the best locations based on their physical preferences and most important variables. For both power and commercial and industrial customers, we leverage our 300 gigawatt development pipeline and transmission and market expertise to help design the lowest-cost clean energy solutions. Both businesses complement each other, deepen our skill sets and advantages, and foster innovation. And we leverage our greatest asset, our people, who have decades of experience to drive value for our customers and shareholders. When I consider current energy demands, the long-term electricity needs, and our competitive advantages, I wouldn't trade our opportunities set with anyone. I look forward to telling more of our story and explaining why NextEra Energy is uniquely positioned to lead the electrification of the U.S. economy at our Investor Day on June 11th in New York City. With that, I will turn the call over to Kirk to cover the quarterly results. Kirk Crews -- Executive Vice President, Chief Financial Officer, NextEra Energy Thank you, John. For the first quarter of 2024, FPL's earnings per share increased $0.04 year over year. The principal driver of this performance was FPL's regulatory capital employed growth of approximately 11.5% year over year. We now expect FPL to realize roughly 10% average annual growth in regulatory capital employed over our current rate agreement's four-year term, which runs through 2025. FPL's capital expenditures were approximately $2.3 billion for the quarter, and we expect FPL's full-year 2024 capital investments to be between $7.8 billion and $8.8 billion. For the 12 months ending March 2024, FPL's reported ROE for regulatory purposes will be approximately 11.8%. During the first quarter, we utilized approximately $572 million of reserve amortization, leaving FPL with a balance of roughly $651 million. As we've previously discussed, FPL historically utilizes more reserve amortization in the first half of the year, and we expect this trend to continue this year. Earlier this month, FPL received approval to reduce customer bills due to projected 2024 fuel savings. As a result, FPL's typical 1,000 kilowatt-hour residential customer bill is expected to be roughly $14 lower in May than the start of the year, and approximately 37% lower than the current national average. Over the current four-year settlement agreement, we now expect FPL's capital investments to be slightly above our previous range of $32 billion to $34 billion. This quarter, FPL placed into service 1,640 megawatts of new cost-effective solar, putting FPL's owned and operated solar portfolio at over 6,400 megawatts, which is the largest utility-owned solar portfolio in the country. FPL's annual 10-year site plan continues to indicate that solar and storage are the most cost-effective answer for customers to add reliable grid capacity over the next decade. The 2024 plan includes similar levels of new solar generation capacity, 21 gigawatts, across our service territory over the next 10 years compared to our 2023 plan. But our 2024 plan doubles the expected deployment of battery storage to over 4 gigawatts, some of which we expect to be needed earlier than forecasted in our 2023 plan. With this plan, we expect to increase FPL's solar mix from approximately 6% of our total generation in 2023 to 38% in 2033, while continuing to provide customers with clean, affordable energy. FPL believes battery storage will play an increasingly valuable role for customers, serving as an attractive capacity complement to our growing solar generation. From providing system-balancing needs in critical parts of FPL's service territory to supplying energy during any time of day or weather condition, battery storage acts as a key resource to the system that is both valuable and cost-effective for customers. Key indicators show that Florida's economy remains healthy. Florida continues to be one of the fastest-growing states in the nation and has four of the five fastest-growing U.S. metro areas between 2022 and 2023. FPL had its strongest quarter of customer growth in over 15 years, with the average number of customers increasing by more than 100,000 from the comparable prior year period. Although FPL's first quarter retail sales decreased by approximately 1.3% year over year, we estimate that weather had a negative impact on usage per customer of approximately 5.4% on a year-over-year basis. After taking weather into account, first quarter retail sales increased roughly 4.1% on a weather-normalized basis from the comparable prior year period, driven primarily by continued favorable underlying population growth and usage per customer. Now let's turn to energy resources, which report adjusted earnings growth of approximately 13.1% year over year. Contributions from new investments increased $0.15 per share year over year, primarily reflecting continued growth in our renewables portfolio. Our existing clean energy portfolio declined $0.02 per share, primarily due to unfavorable wind resource during the quarter. The comparative contribution from our customer supply business increased results by $0.04 per share. All other impacts reduced earnings by $0.12 per share. This decline reflects higher interest costs of $0.07 per share, half of which related to new borrowing costs to support new investments. Energy resources had a strong quarter of new renewables and storage origination, adding approximately 2,765 megawatts to the backlog. With these additions, our backlog now totals roughly 21.5 gigawatts after taking into account 1,165 megawatts of new projects placed into service since our last earnings call, highlighting energy resources' ability to continue to identify attractive and accretive investment opportunities which provide strong growth visibility in the years ahead. We recently placed 740 megawatts of new solar and storage projects into service, which are being used to support data centers located in Arizona and New Mexico. Both of these projects are now one of the largest battery storage facilities in their respective states, and in combination with their co-located solar, each project enabled the local utility to serve their customers' need for new, reliable, clean energy to grow their own business operations. We are proud to continue to support our power and commercial and industrial customers to meet their growing power and capacity needs, create jobs, and provide economic development in these local communities. Our origination activities across our power and commercial and industrial customers are beginning to reflect the rising power demand. We are seeing it manifest with our power customers in their state RFP processes and bilateral discussions where we deliver cost-effective renewables and storage to their grid. We are also observing it through interactions with our oil and gas and manufacturing customers where we utilize our data and technology to help them make better citing decisions. Our technology customers have been a consistent driver of demand for many years, reflected by our roughly 3 gigawatt operating portfolio and over 3 gigawatt project backlog as we partner with them to provide various clean energy solutions based on their key business variables. We are a partner with both our power and commercial industrial customers' trust. We can leverage our 3 gigawatt development pipeline, our 35 gigawatt operating renewables and storage portfolio, and our transformer and switchgear procurement covering energy resources billed through 2027 to deliver projects for customers. As John said, the power demand growth is expected to be strong through at least the end of the decade. We expect 2024 to be another strong year for new renewables and storage origination. This is on the heels of two consecutive record origination years at Energy Resources. We continue to expect to remain on track for our overall renewable development expectations of roughly 33 gigawatts to 42 gigawatts from 2023 through 2026. Beyond renewables and storage, NextEra Energy Transmissions was recently selected by the California ISO to develop a new 82 mile 500 kV transmission line in Southern California with a capital investment of more than $250 million. We believe this project could unlock over 3 gigawatts of new renewable generation capacity supporting California's ambitious clean energy goals. This award falls a record year for NextEra Energy Transmission in 2023, and we remain excited about the opportunities ahead for this growing business. We continue to believe our ability to build, own, and operate transmission is a key advantage for our renewables business. Turning now to our first quarter 2024 consolidated results, adjusted earnings from corporate and other decreased by $0.01 per share year over year. This quarter, we entered into an agreement to transfer approximately $1 billion of tax credits throughout 2024, representing the bulk of our expected transfers for the year. Our long-term financial expectations remain unchanged. We will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted EPS expectation ranges in 2024, 2025, and 2026. From 2021 to 2026, we continue to expect that our average annual growth in operating cash flow will be at or above our adjusted EPS compound annual growth rate range. And, as we announced in February, the board of directors of NextEra Energy approved a targeted growth rate in dividends per share of roughly 10% per year through at least 2026 off a 2024 base. As always, our expectations assume our caveat. Turning to NextEra Energy Partners. We continue to focus on executing against the partnership's transition plan and delivering an LP distribution growth target of 6% through at least 2026. We bought out the STX Midstream convertible equity portfolio financing in 2023 and have sufficient proceeds available from the Texas Pipeline Portfolio Sale to complete the NEP Renewables II buyout due in June 2024 and 2025. The third convertible equity portfolio financing associated with the Meade natural gas pipeline assets is expected to be addressed in 2025. With a plan for the near-term convertible equity portfolio financing well understood, we remain focused on the partnership's cost of capital improving, which is critical for its success. With that objective in mind, we continue to evaluate alternatives to address the remaining convertible equity portfolio financing with equity buyout obligations in 2027 and beyond. Turning to the partnership's targeted 6% growth in LP distributions per unit, NextEra Energy Partners does not expect to need an acquisition this year to achieve its 6% targeted growth rate, and the partnership does not expect to require growth equity until 2027. In terms of NextEra Energy Partners' growth plan, as a reminder, it involves organic growth, specifically, repowerings of approximately 1.3 gigawatts of wind projects through 2026, as well as acquiring assets at attractive yields. Today, we are announcing plans to repower an additional approximately 100 megawatts of wind facilities through 2026. The partnership has now announced roughly 1,085 megawatts of repowers. Yesterday, NextEra Energy partners' board declared a quarterly distribution of $89.25 per common unit, or $3.57 per common unit, on an annualized basis, which reflects an annualized increase of 6% from its fourth quarter 2023 distribution per common unit. Let me now turn to the detailed results. First-quarter adjusted EBITDA was $462 million, and cash available for distribution was $164 million. New projects, which primarily reflect contributions from approximately 840 megawatts of new projects that either closed in the second quarter of 2023 or achieved commercial operations in 2023, contributed approximately $32 million of adjusted EBITDA and $7 million of cash available for distribution. First quarter adjusted EBITDA contribution from existing projects declined by approximately $37 million year over year, driven primarily by unfavorable wind resource during the quarter and lower generation at Genesis Solar project as a result of a planned outage for major maintenance. Wind resource was approximately 97% of the long-term average versus 102% in the first quarter of 2023. The incentive distribution right fee suspension provided approximately $39 million of benefit this quarter for adjusted EBITDA and cash available for distribution. Finally, adjusted EBITDA and cash available for distribution declined by approximately $44 million and $38 million, respectively, for the divestiture of the Texas pipeline portfolio. From a base of our fourth quarter 2023 distribution per common unit and an annualized rate of $3.52, we continue to see 5% to 8% growth per year in LP distributions per unit, with a current target of 6% growth per year as being a reasonable range of expectations for at least 2026. We continue to expect the partnership's payout ratio to be in the mid-90s through 2026. We expect the annualized rate of the fourth quarter 2024 distribution that is payable in February 2025 to be $3.73 per common unit. NextEra Energy Partners expects run rate contributions for adjusted EBITDA and cash available for distribution from its forecasted portfolio at December 31st, 2024 to be in the ranges of $1.9 billion to $2.1 billion and $730 million to $820 million, respectively. As a reminder, year-end 2024 run rate projections reflect calendar year 2025 contributions from the forecasted portfolio at year-end 2024. As a reminder, our expectations are subject to our caveats. That concludes our prepared remarks, and with that, we will open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] The first question comes from Steve Fleishman with Wolfe Research. Please go ahead. Steve Fleishman -- Wolfe Research -- Analyst Yeah. Hi. Thank you. Just first question, just there's been press reports about potential another AD/CVD case to be filed related to solar panels and, Biden also talking about getting rid of the protection on the bifacial panel tariff. Could you just talk a little bit more about how you're positioned to deal with those cases if they do arise, changes if they arise? Thanks. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Sure. Steve, this is John. I'll go ahead and take that. Let me take those in order. Let me talk about, first of all, the speculation around AD/CVD filing, which, may or may not occur, and then the bifacial exemption. But first on the AD/CVD, the bottom line takeaway for folks is that, we expect that any trade actions that would occur this time around will be very manageable. And for several reasons, I'm going to go through them. This is not like circumvention. This is not circumvention 2.0. The solar panel market is in a very different spot. And the first point I want to make is we don't expect any trade action, if it were to occur, to result in delivery stoppages. And in any event, our panels are delivered well in advance of construction, which gives us a lot of time and opportunity to be able to troubleshoot any issues should they arise. And why do I think no stoppages were going to occur this time around? The main reason is the U.S. is the most expensive solar panel market in the world, and so there's a lot of economic reasons for deliveries to continue to occur. The second point I want to make is that, given our scale, we have appropriate incentives and contractual protections that are in place in our agreements with our suppliers to ensure that delivery occurs timely. And we also don't put all of our eggs in one basket. We have a diversified set of suppliers, as you would all expect, and the ability to pivot from one supplier to another should any issues occur. So I feel like we're in a very good spot there. The third point I want to make, and it's one that I hit in my prepared remarks, is that the U.S. and the global supply of solar panels is bigger than ever, and it's growing. Let me talk, for example, about the U.S. market specifically. The U.S. domestic solar panel industry is getting stronger and stronger than it's ever been. One of the points that I made also in the prepared remarks is at the end of '21, solar panel module capacity in the U.S. was about 8 gigawatts. That's expected to be about 50 gigawatts by the time we get to 2026. So the U.S. market is in a much different spot. There's already been 150 gigawatts of new U.S. solar panel factory announcements that have been made. If you talk to most U.S. domestic solar panel manufacturers, they're sold out through 2026, so they're certainly not having any trouble with demand, which is the other point that I want to make. So now let's speculate a little bit. So if a filing is made around anti-dumping, let me deal with that first. We find it hard to believe that any panels are being dumped into the U.S. market under the law. That would be applied. As I said, the U.S. is the most expensive solar panel market in the world. It's two to three times higher than any other market in the world. And if panels were being dumped, that could not be the case. So that's the first point I want to make on anti-dumping. The second point I want to make, if there were a countervailing duty claim filed, the Department of Commerce would first have to look in to see if the price of solar modules in Southeast Asian countries, for example, were being subsidized. We don't really have any idea or way of knowing that until we see what gets filed. But after we see those arguments, we'll be able to make a better assessment. But countervailing duties historically, if you look at examples for countervailing duties that have been applied in the past against China suppliers, they've typically been around 10% to 15%. So even if those were to be applied in this case, quite manageable. And the other point I want to make is that what's different is tariffs in this situation would be prospective and not retroactive. And so for all of these reasons, even if something were to move forward, we still have no way of knowing if it will. We are very well positioned to manage through this like we always do. Our inventory position and the contractual protections that we have in place are expected to give us strong coverage for our backlog through 2027. And by that time, as more and more U.S. production comes online as expected, these trade issues will fall away. So that's AD/CVD. Let me just turn quickly to a couple of minor comments on the bifacial exemption. The bottom line, the bifacial exemption, even if it's removed, really has no impact on NextEra. Why is that? We've contracted all of our panel needs through February '26, and we have very minimal exposure to the bifacial exemption being removed. And once that bifacial exemption, even if removed, it would expire at the end of February of 2026, and it can't be brought again and reinstated for another eight years. So we feel like we're in a very good spot. And the last point I'll make is as more and more U.S. production capacity comes online and it's actually available by, we will continue to source from U.S. suppliers. So look, when you put all those things together, I feel like this is very manageable and I feel like we will be fine. Steve Fleishman -- Wolfe Research -- Analyst That was very thorough and helpful. Thank you, John. And then I guess one other question on the data center. So you talked about the backlog edge you had this quarter. Just as we go into this year and think about this, is this going to continue to be more kind of one-off or two-off quarter-by-quarter updates, or is there -- should we see more kind of potential for more like long-dated partnerships or kind of larger-scale agreements? How should we think about how that might develop? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy I think kind of all of the above, Steve. Our opportunity set is significant around data centers is the first point that I'll make. And I think if you look historically on what we've been able to do with data center customers, I don't think anybody's had better results than we have. If you look at just our gigawatts in operation, we have 3.5 gigawatts in operation today. We have another close to 3.5 gigawatts in our backlog with technology providers. We really understand their business. We really understand what it is they need. And part of that is because we spend a lot of time with them. We do business with all what I would call the top five hyperscales in this country, also doing business increasingly with some of the developers of data centers as well. And we've owned data centers. And so we understand how they work, how they operate, what the capex and opex is and how it's driven by energy and power and what the right locations are for them. We've developed tools to address them. And so what do we see? We see about a 15% CAGR through the end of the decade for data center demand. I think data center developers are really focused more than anything on three things. They want low-cost energy. They want to be able to say that they've accomplished additionality from a decarbonization standpoint, which requires a new facility to be built, not an existing facility. And the third piece is it's got to be in the right location and it's got to have speed to market. And there's obviously been a lot of talk about renewables and nuclear, and I do want to -- I'm a little more of a skeptic about nukes, and let me explain why that is. They're already in the ground. You can't move them. And if you look at the nuclear fleet, there's only 15 nuclear plants in this country that are west of the Mississippi. And when you think about the 15 that are west of the Mississippi, most of them are already rate regulated or long-term contracted. So that really is just creating maybe an East Coast opportunity for those that aren't rate regulated and that aren't contracted. I think that's a small subset of nuclear units that could perhaps satisfy East Coast demand. But in our discussions with data center providers, getting access to cloud capacity for Silicon Valley, Santa Clara in particular, is critical. We can all count on one or two fingers how many nuclear plants are located in those regions, not many. And you just can't move a nuclear plant. And so the thing we bring to the table is a lot of flexibility and speed to market. We can put the renewable project exactly where it needs to be. And SMRs, I hear a lot of talk about SMRs. SMRs are still a decade to 15 years away. Not only do you have nine OEMs that are really struggling to access capital. If we pass a sanctions bill against Russia, a nuclear fuel that's going to limit conversion and enrichment capacity in the U.S. for sourcing of nuclear fuel for these SMRs, which also is going to require a real step up in technology to get them done. And you're also dealing with undercapitalized fuel providers. I'm a real skeptic on SMRs really coming into the picture to satisfy data center demand any time in the near future. And so when you put all of that together, I think the right answer is renewables in our discussions with data center developers and providers, their first focus is renewables. And I hear a lot about the reliability concerns and what do you do when the wind doesn't blow and the sun doesn't shine and the four-hour battery is not enough? We can overbuild the battery. We can also help work with them to design a clean energy solution where if they do have a grid by it, we can green it up with RECs from our green desk. We have technology and tools which we showcased back in March where we can identify parts of the country that not only the best resource areas but also the best fiber connectivity is the best water resource and those are the areas that we're locking up and we have the sites and we have the relationships. And so I don't think anybody's better positioned to capitalize on data center demand than NextEra is and I'm very excited about what the future opportunities hold for us there, but the other thing I would say, and we'll talk a lot more about this at our investor conference in June is this electricity demand is real. We've been in a period of static demand for decades and the demand is not only coming from data centers. It's coming from decoupling from China, creating more domestic manufacturing around industry, around chip manufacturing, oil and gas industry continues to electrify. We continue to even beyond data centers see significant electric demand. We have the tools. We have the sites. We have the relationship and we are chasing those opportunities and look we're coming off our second-best origination quarter ever. I think the results speak for themselves. Steve Fleishman -- Wolfe Research -- Analyst Great. Thank you. Operator The next question comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead. Shar Pourreza -- Guggenheim Partners -- Analyst Hey. Good morning, guys. Just maybe starting off on NEP, given the continued pressure from capital markets and the benchmark rates, are you advancing any longer-term resolution plans for the CEPFs? Have existing holders and maybe other infrastructure players showed any interest in transactions to fund and maybe simplify the cap structure for longer-term growth? What could that look like and is this Analyst Day disclosure? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yes, sure. Thanks for the question. A few comments that I'll make on it. One is we have talked about private capital raise potentially being a solution to address back-end CEPFs for NEP. Obviously, there's a lot of interest in that just given. NextEra's stature in the market, NextEra Energy Partners' stature in the market. And so those discussions continue to move forward. We don't have anything to say about them right now. We may not have anything to say about them at the Analyst Day. I wouldn't expect us to make a whole lot of comments at the Analyst Day about NEP. When we do have something to say about NEP, as these discussions continue to evolve, we will address them at that point. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. Stay tuned. And then lastly, John, on the FECs, since the process disclosures have been made and obviously showed FP&L was clear of any wrong doing, there were some disagreements with the FEC commissioners on the nonprofit matters. Is there an appeals path, and would there be any further information request to FP&L or NextEra or should we just close the books here? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yeah. I think the way I look at it Shah is plain and simple. The FEC voted. They voted to close the matter. We're now moving on, and I think this is behind us. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. That's it. Very comprehensive. Thank you, guys, and congrats on the results. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thank you. Operator The next question comes from David Arcaro with Morgan Stanley. Please go ahead. Mr. Arcaro, your line is open. Is your phone muted accidentally? I'm sorry. We'll need to go to the next questioner. The next questioner comes from Carly Davenport with Goldman Sachs. Please go ahead. Carly Davenport -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for taking the questions today. I appreciate it. I wanted to just ask one on the backlog good strength in the additions this quarter, and we continue to see a lot of strength in the solar and the storage piece of it. Wind's been a little bit weaker. So I guess just as you think about the difference in the returns on those projects, are there any implications for your financial guidance and your plan as you think about the mix that you've seen actually evolve versus what is in that base plan? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Carly. It's Rebecca. I'll take that question. Good morning. Let me start with probably the most important takeaways first. Obviously, Kirk and John highlighted our continued expectations and expressed the fact that we'd be disappointed if we didn't meet the top end of those expectations as we've outlined. So that's most important. Secondly, we continue to be comfortable with the overall development expectations as we also highlighted in the prepared remarks and that's consistent with what we've seen over time. As we've long stated, obviously there's a mix in technologies. We, four years in advance, are not always going to be predicting exactly where we're going to be able to develop and what our customers are going to be interested in. And notably, since we laid those expectations out for the first time, a lot did change including the passage of the IRA and that had both an impact on changing dynamics for our customers buying wind which was largely in advance of the expectations that the incentives would ultimately wind down and in the IRA the introduction of the production tax credit for solar which made solar more attractive than it was even before, as well as the stand-alone ITC for storage. So that really spurred demand for solar and storage. But if I can take a step back and pile into the question that Steve answered and some of the comments that John made earlier we are seeing significant demand across the entire U.S. economy. That, of course, includes data centers, technology, AI-driven compute demand, but it is also manufacturing, the redomestication of important industries in the U.S. and it is also oil and gas and chemicals companies looking to get lower-cost energy solutions into their mix. That spurs a need for a lot of build. So as we look at our 300 gigawatts of products that are in development and the integrated solutions and solutions that we are designing for our customers, I remain very optimistic about all of the technologies. In various parts of the country, wind is most economic. In parts of the country, it is going to be solar and storage, etc. So I love the portfolio approach and from a returns perspective, I think we continue to realize very attractive returns for all the technologies and, of course, adjusted for the types of risks that we think we take. So mid-teens for solar and above 20% levered returns for wind and storage technologies. So I think from an investor standpoint, that is a very attractive proposition. Carly Davenport -- Goldman Sachs -- Analyst Awesome. Thanks for that, Rebecca. And then you mentioned over the last question 15% CAGR for data center demand growth through the end of the decade. I guess as you think about some of these other drivers that you've mentioned of increased power demand in the US, how do you think that will drive overall load growth? Do you have expectations there through the end of the decade? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources So we'll have a lot more to say in terms of our expectations and certainly in context of a number of third-party views at the investor conference. But I think it's safe to say at this point that we see strong drivers for a long period of time, decades into the future, driving renewables penetration and electricity and electricity penetration into overall U.S. energy consumption which sets up terrific dynamics for us to continue to compete and create opportunities to invest capital for our shareholders at very attractive returns. So I love our opportunity at. Carly Davenport -- Goldman Sachs -- Analyst Thank you for that color. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Thank you. Operator The next question comes from Durgesh Chopra with Evercore ISI. Please go ahead. Durgesh Chopra -- Evercore ISI -- Analyst Good morning. Thank you for giving me time. Maybe just, Rebecca, on the topic of electricity demand growth. One of the questions we consistently get, and I think John hinted on this 15% the data center growth driving it is how quickly can you ramp up? So maybe can you just talk to that? Are there any constraints, whether it's equipment, whether it's sites? How quickly can the generation side of this, the renewable generation can ramp up? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Yeah, Durgesh, I appreciate the question. I think a little bit of context is important. I think all of us, ourselves included, have really started talking about the significant change in load growth really over the last year, maybe even the last six months, and you all very much appreciate that a development business, anything connecting to electrical infrastructure usually talks in terms of years and sometimes a lot of years depending on the market. To get something into place in the ERCOT market is maybe a couple of years, and some markets in the Midwest that have had congested queues and some transmission constraints, that could be five to seven years, and obviously we've been working for a period of time. I think we're the least behind of anybody with our 300 gigawatt portfolio, but some of this will take some time to materialize. I feel very confident in long-term trends. I feel really excited and pleased with our team's preparedness in terms of the development of that pipeline, and I very much think our competitive advantages that John highlighted on scale, experience, and technology really position us well in the types of conversations we're having with our customers, creating this long-term visibility into demand dynamics. You guys asked John a question about data centers and how competitive we are with them. They are not looking for projects anymore. They are looking for integrated solutions that solve long-term problems for them, and we are a perfect partner for them with which to work. Durgesh Chopra -- Evercore ISI -- Analyst That's very helpful, Rebecca. And then maybe just a quick follow-up. I think you made comments around very healthy returns. Are you seeing higher returns, higher margins with your data center clients versus your other clients? Some of your peers have highlighted higher returns there. Maybe just comment on that. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources I continue to believe we have very attractive returns across the board, consistent with the comments that I've made today as well as the comments we made at our development 101 day and included in our monthly updates for investor materials, so mid-teens and solar and above 20% for both wind and storage. Of course, as we talk with customers and we have unique solutions that solve particular problems that we have, we design the solutions to meet those needs and always stay focused at the end of the day on what's the attractive value proposition from an investor standpoint, and we remain disciplined around that. I love the portfolio. I love the positioning, and I believe what we ultimately deliver for investors is very attractive. Durgesh Chopra -- Evercore ISI -- Analyst That is very helpful. Thank you very much. Operator The next question comes from Jeremy Tonet with J.P. Morgan. Please go ahead. Excuse me, Mr. Tonet, your line is open. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Good morning. Thank you. I just want to start off on storage originations coming in quite strong. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Jeremy. It's Rebecca. I'm going to go for the presumptive close on the answer. Hopefully, it's the question you actually asked. Storage origination is very strong. As Kirk highlighted in some of the prepared remarks and John commented in Q&A, as we think about our customers' needs for energy and capacity, it remains a very attractive value proposition to incorporate storage to firm up renewables, either co-located or separate. So we're seeing terrific origination from an energy resources perspective, and we've also talked today about the attractiveness of storage FPL, so I'll hand it off to Armando to give some additional color. Armando Pimentel -- President and Chief Executive Officer, Florida Power and Light Company Thanks, Rebecca. So I would add, if you recall John and Kirk's comments, we filed our 10-year site plan, which we do every year. Our 10-year site plan this year had the same amount of solar that it did last year, which is a lot of solar, 21 gigs over the next 10 years. But we doubled the amount of storage up to 4 gigawatts of storage that we have in our plan. We increasingly see storage as an economical addition in our service area. My expectations are that, as time goes on, that we would likely add more storage to our plans going forward because it is that attractive in the overall economics, especially as we add solar, which, again, continues to be the best proposition from a cost standpoint for our customers. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Thank you for that. And just going back to the Renewable Development Day, or for people that weren't able to make it, any particular points you want to highlight? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Jeremy, you broke up a little bit, so I'm going to, again, guess a little bit on what the question was. But I'm assuming it was what were some of the key takeaways from the Development 101 Day. And I hope it was a worthwhile time for our investors. We certainly were so proud of our team in talking about what it is that we believe differentiates us as we talk to our customers. And it really was around that scale, experience, and technology, not just individually how all of those are important, but also how they interact with one another. So, as John highlighted, with the scale advantages comes the ability to deploy technologies that are unique. And with that experience, we actually are able to invest in capturing that data that we get from scale and put it in technologies to actually get some really cool insights. So I think the key takeaway from my perspective is significant load growth, certainly, some opportunities to deploy that scale, experience, and technology to deploy unique and compelling solutions to our customers. So I love our growth prospects. I love the position that we have, just as John highlighted in his comments. And I look forward to telling you more at the investor conference in June. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Answer:

the NextEra Energy and NextEra Energy Partners LP first-quarter 2024 earnings call

Operator Good morning, and welcome to the NextEra Energy and NextEra Energy Partners LP first-quarter 2024 earnings call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Kristin Rose, director of investor relations. Please go ahead. Kristin Rose -- Director, Investor Relations Thank you, Drew. Good morning, everyone, and thank you for joining our first-quarter 2024 combined financial results conference call for NextEra Energy and NextEra Energy Partners. With me this morning are John Ketchum, chairman, president, and chief executive officer of NextEra Energy; Kirk Crews, executive vice president and chief financial officer of NextEra Energy; Rebecca Kujawa, president and chief executive officer of NextEra Energy Resources; and Mark Hickson, executive vice president of NextEra Energy, all of whom are also officers of NextEra Energy Partners, as well as Armando Pimentel, president and chief executive officer of Florida Power & Light Company. John will provide some opening remarks and will then turn the call over to Kirk for a review of our first-quarter results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call and the risk factor section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our websites, www.nexteraenergy.com and www.nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP financial measures to the closest GAAP financial measure. With that, I will turn the call over to John. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thanks, Kristen, and good morning. NextEra Energy delivered strong first-quarter results, growing adjusted earnings per share by 8.3% year over year. Based on FPL and Energy Resources financial and operational performance, we are once again off to a solid start for the year. In addition, FPL placed into service 1,640 megawatts of new solar, while Energy Resources added 2,765 megawatts of new renewables and storage projects to its backlog. This quarter marks Energy Resources' second-best origination quarter ever, as well as its best solar and best storage origination quarter. As we highlighted at our March Renewables Development Day, we believe NextEra Energy is well-positioned for the expected strong power demand growth through the end of the decade and beyond. After years of relatively flat U.S. power growth, numerous reports now highlight significant future low growth being driven across industries such as oil and gas, manufacturing, and technology. The redomestication of industry in the U.S., supported by public policy, will drive the need for more electricity, and the tech industry is going to need data centers to support the expected cloud capacity demands that come with artificial intelligence applications. Of course, increased load demand will not come all at once and will take some time to materialize, but it is clear that many new customers are concerned about power availability to meet their plans and consider power supply as a significant obstacle to business expansion. We believe renewables and storage are a key enabler to help meet this increased demand. In fact, we believe the U.S. renewables and storage market opportunity has the potential to be 3x bigger over the next seven years compared to the last seven, growing from roughly 140 gigawatts of additions to approximately 375 to 450 gigawatts. And we believe no one is better positioned to address these power supply challenges and capitalize on this demand than NextEra Energy. At NextEra Energy, the plan is simple. Our two businesses are deploying capital in renewables, storage, and transmission for the benefit of customers while also providing visible growth opportunities for shareholders. Our enterprisewide scale, decades of experience, and technology investments are key competitive advantages that allow us to drive value and meet this expected power demand. Scale is one of our key differentiators, and it matters more than ever. Scale allows us to buy and build with better pricing, better protections, and better positioning to navigate disruption. Scale provides access to capital and cost of capital advantages, allowing us to leverage one of the strongest balance sheets in the sector and worldwide banking relationships to finance projects at beneficial terms. Scale has driven top-decile operational performance throughout our generation fleet. Today, NextEra Energy's roughly 74 gigawatt operating fleet, comprised of 35 gigawatts at FPL and 39 gigawatts at Energy Resources, provides significant operational scale. As FPL continues its solar and storage build-out and Energy Resources brings new renewables and storage projects online for customers, the operating fleet could grow to over 100 gigawatts by the end of 2026. This would further extend our scale advantages and create value for customers and shareholders. Our scale has enabled greater supply chain diversification and flexibility, and the good news is the solar supply chain is much improved from two years ago. Inflationary pressures are alleviating and manufacturing capacity is significantly expanding. In the U.S., manufacturing incentives are expected to support increases in domestic module manufacturing capacity to over 50 gigawatts by 2026, from just under 8 gigawatts at the end of 2021. We have greater supplier diversity and flexibility than ever before, strengthening our ability to bring low-cost solar to American consumers and businesses. Our decades of experience is another key competitive advantage. Our experience allows us to navigate power demand challenges, delivering cost-effective, reliable generation for our growing FPL customer base, and designing clean energy solutions to help our Energy Resources customers. We understand every part of the energy value chain with deep expertise in all technologies, the power markets, and transmission. Our team embraces continuous improvement that drives innovation. We recognized the changing landscape and secured land, interconnects, and transmission equipment years in advance. Technology is the next frontier for the power industry, and we believe our two-decade head start on the rest of the industry is a significant competitive advantage. Today, NextEra Energy captures 560 billion operational data points each day and has dozens of proprietary artificial intelligence tools to drive analytical, real-time decision making. We use these tools to analyze over 100 attributes of our own data to secure and develop the best sites in Florida and across the country. We use our tools to iterate millions of site layout designs based on proprietary resource data and assessments to maximize value. And we use our tools to operate nearly all our renewable storage and fossil generation fleets around the clock from our headquarters in South Florida. We are leveraging this combination of enterprisewide scale, decades of experience, and investment in technology to better position both businesses to capitalize on what we believe will be years of demand to drive long-term value for customers and shareholders. Today, electricity represents just 20% of overall U.S. energy consumption, and wind and solar generation represents only 16% of the U.S. electricity mix. In short, we believe the U.S. will need a significant and growing amount of electricity over the next decade and beyond, a large part of which will be powered by new renewables and storage. At FPL, as more people move into Florida, we are focused on extending the customer value proposition by keeping our bills as low as possible and delivering clean, affordable energy by investing in solar, battery storage, and transmission. At Energy Resources, our business is focusing on building low-cost wind, solar, battery storage, and transmission. We are using our data and proprietary technology to help power customers, balance supply and demand while keeping customer bills affordable. We also use our tools with commercial and industrial customers to identify the best locations based on their physical preferences and most important variables. For both power and commercial and industrial customers, we leverage our 300 gigawatt development pipeline and transmission and market expertise to help design the lowest-cost clean energy solutions. Both businesses complement each other, deepen our skill sets and advantages, and foster innovation. And we leverage our greatest asset, our people, who have decades of experience to drive value for our customers and shareholders. When I consider current energy demands, the long-term electricity needs, and our competitive advantages, I wouldn't trade our opportunities set with anyone. I look forward to telling more of our story and explaining why NextEra Energy is uniquely positioned to lead the electrification of the U.S. economy at our Investor Day on June 11th in New York City. With that, I will turn the call over to Kirk to cover the quarterly results. Kirk Crews -- Executive Vice President, Chief Financial Officer, NextEra Energy Thank you, John. For the first quarter of 2024, FPL's earnings per share increased $0.04 year over year. The principal driver of this performance was FPL's regulatory capital employed growth of approximately 11.5% year over year. We now expect FPL to realize roughly 10% average annual growth in regulatory capital employed over our current rate agreement's four-year term, which runs through 2025. FPL's capital expenditures were approximately $2.3 billion for the quarter, and we expect FPL's full-year 2024 capital investments to be between $7.8 billion and $8.8 billion. For the 12 months ending March 2024, FPL's reported ROE for regulatory purposes will be approximately 11.8%. During the first quarter, we utilized approximately $572 million of reserve amortization, leaving FPL with a balance of roughly $651 million. As we've previously discussed, FPL historically utilizes more reserve amortization in the first half of the year, and we expect this trend to continue this year. Earlier this month, FPL received approval to reduce customer bills due to projected 2024 fuel savings. As a result, FPL's typical 1,000 kilowatt-hour residential customer bill is expected to be roughly $14 lower in May than the start of the year, and approximately 37% lower than the current national average. Over the current four-year settlement agreement, we now expect FPL's capital investments to be slightly above our previous range of $32 billion to $34 billion. This quarter, FPL placed into service 1,640 megawatts of new cost-effective solar, putting FPL's owned and operated solar portfolio at over 6,400 megawatts, which is the largest utility-owned solar portfolio in the country. FPL's annual 10-year site plan continues to indicate that solar and storage are the most cost-effective answer for customers to add reliable grid capacity over the next decade. The 2024 plan includes similar levels of new solar generation capacity, 21 gigawatts, across our service territory over the next 10 years compared to our 2023 plan. But our 2024 plan doubles the expected deployment of battery storage to over 4 gigawatts, some of which we expect to be needed earlier than forecasted in our 2023 plan. With this plan, we expect to increase FPL's solar mix from approximately 6% of our total generation in 2023 to 38% in 2033, while continuing to provide customers with clean, affordable energy. FPL believes battery storage will play an increasingly valuable role for customers, serving as an attractive capacity complement to our growing solar generation. From providing system-balancing needs in critical parts of FPL's service territory to supplying energy during any time of day or weather condition, battery storage acts as a key resource to the system that is both valuable and cost-effective for customers. Key indicators show that Florida's economy remains healthy. Florida continues to be one of the fastest-growing states in the nation and has four of the five fastest-growing U.S. metro areas between 2022 and 2023. FPL had its strongest quarter of customer growth in over 15 years, with the average number of customers increasing by more than 100,000 from the comparable prior year period. Although FPL's first quarter retail sales decreased by approximately 1.3% year over year, we estimate that weather had a negative impact on usage per customer of approximately 5.4% on a year-over-year basis. After taking weather into account, first quarter retail sales increased roughly 4.1% on a weather-normalized basis from the comparable prior year period, driven primarily by continued favorable underlying population growth and usage per customer. Now let's turn to energy resources, which report adjusted earnings growth of approximately 13.1% year over year. Contributions from new investments increased $0.15 per share year over year, primarily reflecting continued growth in our renewables portfolio. Our existing clean energy portfolio declined $0.02 per share, primarily due to unfavorable wind resource during the quarter. The comparative contribution from our customer supply business increased results by $0.04 per share. All other impacts reduced earnings by $0.12 per share. This decline reflects higher interest costs of $0.07 per share, half of which related to new borrowing costs to support new investments. Energy resources had a strong quarter of new renewables and storage origination, adding approximately 2,765 megawatts to the backlog. With these additions, our backlog now totals roughly 21.5 gigawatts after taking into account 1,165 megawatts of new projects placed into service since our last earnings call, highlighting energy resources' ability to continue to identify attractive and accretive investment opportunities which provide strong growth visibility in the years ahead. We recently placed 740 megawatts of new solar and storage projects into service, which are being used to support data centers located in Arizona and New Mexico. Both of these projects are now one of the largest battery storage facilities in their respective states, and in combination with their co-located solar, each project enabled the local utility to serve their customers' need for new, reliable, clean energy to grow their own business operations. We are proud to continue to support our power and commercial and industrial customers to meet their growing power and capacity needs, create jobs, and provide economic development in these local communities. Our origination activities across our power and commercial and industrial customers are beginning to reflect the rising power demand. We are seeing it manifest with our power customers in their state RFP processes and bilateral discussions where we deliver cost-effective renewables and storage to their grid. We are also observing it through interactions with our oil and gas and manufacturing customers where we utilize our data and technology to help them make better citing decisions. Our technology customers have been a consistent driver of demand for many years, reflected by our roughly 3 gigawatt operating portfolio and over 3 gigawatt project backlog as we partner with them to provide various clean energy solutions based on their key business variables. We are a partner with both our power and commercial industrial customers' trust. We can leverage our 3 gigawatt development pipeline, our 35 gigawatt operating renewables and storage portfolio, and our transformer and switchgear procurement covering energy resources billed through 2027 to deliver projects for customers. As John said, the power demand growth is expected to be strong through at least the end of the decade. We expect 2024 to be another strong year for new renewables and storage origination. This is on the heels of two consecutive record origination years at Energy Resources. We continue to expect to remain on track for our overall renewable development expectations of roughly 33 gigawatts to 42 gigawatts from 2023 through 2026. Beyond renewables and storage, NextEra Energy Transmissions was recently selected by the California ISO to develop a new 82 mile 500 kV transmission line in Southern California with a capital investment of more than $250 million. We believe this project could unlock over 3 gigawatts of new renewable generation capacity supporting California's ambitious clean energy goals. This award falls a record year for NextEra Energy Transmission in 2023, and we remain excited about the opportunities ahead for this growing business. We continue to believe our ability to build, own, and operate transmission is a key advantage for our renewables business. Turning now to our first quarter 2024 consolidated results, adjusted earnings from corporate and other decreased by $0.01 per share year over year. This quarter, we entered into an agreement to transfer approximately $1 billion of tax credits throughout 2024, representing the bulk of our expected transfers for the year. Our long-term financial expectations remain unchanged. We will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted EPS expectation ranges in 2024, 2025, and 2026. From 2021 to 2026, we continue to expect that our average annual growth in operating cash flow will be at or above our adjusted EPS compound annual growth rate range. And, as we announced in February, the board of directors of NextEra Energy approved a targeted growth rate in dividends per share of roughly 10% per year through at least 2026 off a 2024 base. As always, our expectations assume our caveat. Turning to NextEra Energy Partners. We continue to focus on executing against the partnership's transition plan and delivering an LP distribution growth target of 6% through at least 2026. We bought out the STX Midstream convertible equity portfolio financing in 2023 and have sufficient proceeds available from the Texas Pipeline Portfolio Sale to complete the NEP Renewables II buyout due in June 2024 and 2025. The third convertible equity portfolio financing associated with the Meade natural gas pipeline assets is expected to be addressed in 2025. With a plan for the near-term convertible equity portfolio financing well understood, we remain focused on the partnership's cost of capital improving, which is critical for its success. With that objective in mind, we continue to evaluate alternatives to address the remaining convertible equity portfolio financing with equity buyout obligations in 2027 and beyond. Turning to the partnership's targeted 6% growth in LP distributions per unit, NextEra Energy Partners does not expect to need an acquisition this year to achieve its 6% targeted growth rate, and the partnership does not expect to require growth equity until 2027. In terms of NextEra Energy Partners' growth plan, as a reminder, it involves organic growth, specifically, repowerings of approximately 1.3 gigawatts of wind projects through 2026, as well as acquiring assets at attractive yields. Today, we are announcing plans to repower an additional approximately 100 megawatts of wind facilities through 2026. The partnership has now announced roughly 1,085 megawatts of repowers. Yesterday, NextEra Energy partners' board declared a quarterly distribution of $89.25 per common unit, or $3.57 per common unit, on an annualized basis, which reflects an annualized increase of 6% from its fourth quarter 2023 distribution per common unit. Let me now turn to the detailed results. First-quarter adjusted EBITDA was $462 million, and cash available for distribution was $164 million. New projects, which primarily reflect contributions from approximately 840 megawatts of new projects that either closed in the second quarter of 2023 or achieved commercial operations in 2023, contributed approximately $32 million of adjusted EBITDA and $7 million of cash available for distribution. First quarter adjusted EBITDA contribution from existing projects declined by approximately $37 million year over year, driven primarily by unfavorable wind resource during the quarter and lower generation at Genesis Solar project as a result of a planned outage for major maintenance. Wind resource was approximately 97% of the long-term average versus 102% in the first quarter of 2023. The incentive distribution right fee suspension provided approximately $39 million of benefit this quarter for adjusted EBITDA and cash available for distribution. Finally, adjusted EBITDA and cash available for distribution declined by approximately $44 million and $38 million, respectively, for the divestiture of the Texas pipeline portfolio. From a base of our fourth quarter 2023 distribution per common unit and an annualized rate of $3.52, we continue to see 5% to 8% growth per year in LP distributions per unit, with a current target of 6% growth per year as being a reasonable range of expectations for at least 2026. We continue to expect the partnership's payout ratio to be in the mid-90s through 2026. We expect the annualized rate of the fourth quarter 2024 distribution that is payable in February 2025 to be $3.73 per common unit. NextEra Energy Partners expects run rate contributions for adjusted EBITDA and cash available for distribution from its forecasted portfolio at December 31st, 2024 to be in the ranges of $1.9 billion to $2.1 billion and $730 million to $820 million, respectively. As a reminder, year-end 2024 run rate projections reflect calendar year 2025 contributions from the forecasted portfolio at year-end 2024. As a reminder, our expectations are subject to our caveats. That concludes our prepared remarks, and with that, we will open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] The first question comes from Steve Fleishman with Wolfe Research. Please go ahead. Steve Fleishman -- Wolfe Research -- Analyst Yeah. Hi. Thank you. Just first question, just there's been press reports about potential another AD/CVD case to be filed related to solar panels and, Biden also talking about getting rid of the protection on the bifacial panel tariff. Could you just talk a little bit more about how you're positioned to deal with those cases if they do arise, changes if they arise? Thanks. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Sure. Steve, this is John. I'll go ahead and take that. Let me take those in order. Let me talk about, first of all, the speculation around AD/CVD filing, which, may or may not occur, and then the bifacial exemption. But first on the AD/CVD, the bottom line takeaway for folks is that, we expect that any trade actions that would occur this time around will be very manageable. And for several reasons, I'm going to go through them. This is not like circumvention. This is not circumvention 2.0. The solar panel market is in a very different spot. And the first point I want to make is we don't expect any trade action, if it were to occur, to result in delivery stoppages. And in any event, our panels are delivered well in advance of construction, which gives us a lot of time and opportunity to be able to troubleshoot any issues should they arise. And why do I think no stoppages were going to occur this time around? The main reason is the U.S. is the most expensive solar panel market in the world, and so there's a lot of economic reasons for deliveries to continue to occur. The second point I want to make is that, given our scale, we have appropriate incentives and contractual protections that are in place in our agreements with our suppliers to ensure that delivery occurs timely. And we also don't put all of our eggs in one basket. We have a diversified set of suppliers, as you would all expect, and the ability to pivot from one supplier to another should any issues occur. So I feel like we're in a very good spot there. The third point I want to make, and it's one that I hit in my prepared remarks, is that the U.S. and the global supply of solar panels is bigger than ever, and it's growing. Let me talk, for example, about the U.S. market specifically. The U.S. domestic solar panel industry is getting stronger and stronger than it's ever been. One of the points that I made also in the prepared remarks is at the end of '21, solar panel module capacity in the U.S. was about 8 gigawatts. That's expected to be about 50 gigawatts by the time we get to 2026. So the U.S. market is in a much different spot. There's already been 150 gigawatts of new U.S. solar panel factory announcements that have been made. If you talk to most U.S. domestic solar panel manufacturers, they're sold out through 2026, so they're certainly not having any trouble with demand, which is the other point that I want to make. So now let's speculate a little bit. So if a filing is made around anti-dumping, let me deal with that first. We find it hard to believe that any panels are being dumped into the U.S. market under the law. That would be applied. As I said, the U.S. is the most expensive solar panel market in the world. It's two to three times higher than any other market in the world. And if panels were being dumped, that could not be the case. So that's the first point I want to make on anti-dumping. The second point I want to make, if there were a countervailing duty claim filed, the Department of Commerce would first have to look in to see if the price of solar modules in Southeast Asian countries, for example, were being subsidized. We don't really have any idea or way of knowing that until we see what gets filed. But after we see those arguments, we'll be able to make a better assessment. But countervailing duties historically, if you look at examples for countervailing duties that have been applied in the past against China suppliers, they've typically been around 10% to 15%. So even if those were to be applied in this case, quite manageable. And the other point I want to make is that what's different is tariffs in this situation would be prospective and not retroactive. And so for all of these reasons, even if something were to move forward, we still have no way of knowing if it will. We are very well positioned to manage through this like we always do. Our inventory position and the contractual protections that we have in place are expected to give us strong coverage for our backlog through 2027. And by that time, as more and more U.S. production comes online as expected, these trade issues will fall away. So that's AD/CVD. Let me just turn quickly to a couple of minor comments on the bifacial exemption. The bottom line, the bifacial exemption, even if it's removed, really has no impact on NextEra. Why is that? We've contracted all of our panel needs through February '26, and we have very minimal exposure to the bifacial exemption being removed. And once that bifacial exemption, even if removed, it would expire at the end of February of 2026, and it can't be brought again and reinstated for another eight years. So we feel like we're in a very good spot. And the last point I'll make is as more and more U.S. production capacity comes online and it's actually available by, we will continue to source from U.S. suppliers. So look, when you put all those things together, I feel like this is very manageable and I feel like we will be fine. Steve Fleishman -- Wolfe Research -- Analyst That was very thorough and helpful. Thank you, John. And then I guess one other question on the data center. So you talked about the backlog edge you had this quarter. Just as we go into this year and think about this, is this going to continue to be more kind of one-off or two-off quarter-by-quarter updates, or is there -- should we see more kind of potential for more like long-dated partnerships or kind of larger-scale agreements? How should we think about how that might develop? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy I think kind of all of the above, Steve. Our opportunity set is significant around data centers is the first point that I'll make. And I think if you look historically on what we've been able to do with data center customers, I don't think anybody's had better results than we have. If you look at just our gigawatts in operation, we have 3.5 gigawatts in operation today. We have another close to 3.5 gigawatts in our backlog with technology providers. We really understand their business. We really understand what it is they need. And part of that is because we spend a lot of time with them. We do business with all what I would call the top five hyperscales in this country, also doing business increasingly with some of the developers of data centers as well. And we've owned data centers. And so we understand how they work, how they operate, what the capex and opex is and how it's driven by energy and power and what the right locations are for them. We've developed tools to address them. And so what do we see? We see about a 15% CAGR through the end of the decade for data center demand. I think data center developers are really focused more than anything on three things. They want low-cost energy. They want to be able to say that they've accomplished additionality from a decarbonization standpoint, which requires a new facility to be built, not an existing facility. And the third piece is it's got to be in the right location and it's got to have speed to market. And there's obviously been a lot of talk about renewables and nuclear, and I do want to -- I'm a little more of a skeptic about nukes, and let me explain why that is. They're already in the ground. You can't move them. And if you look at the nuclear fleet, there's only 15 nuclear plants in this country that are west of the Mississippi. And when you think about the 15 that are west of the Mississippi, most of them are already rate regulated or long-term contracted. So that really is just creating maybe an East Coast opportunity for those that aren't rate regulated and that aren't contracted. I think that's a small subset of nuclear units that could perhaps satisfy East Coast demand. But in our discussions with data center providers, getting access to cloud capacity for Silicon Valley, Santa Clara in particular, is critical. We can all count on one or two fingers how many nuclear plants are located in those regions, not many. And you just can't move a nuclear plant. And so the thing we bring to the table is a lot of flexibility and speed to market. We can put the renewable project exactly where it needs to be. And SMRs, I hear a lot of talk about SMRs. SMRs are still a decade to 15 years away. Not only do you have nine OEMs that are really struggling to access capital. If we pass a sanctions bill against Russia, a nuclear fuel that's going to limit conversion and enrichment capacity in the U.S. for sourcing of nuclear fuel for these SMRs, which also is going to require a real step up in technology to get them done. And you're also dealing with undercapitalized fuel providers. I'm a real skeptic on SMRs really coming into the picture to satisfy data center demand any time in the near future. And so when you put all of that together, I think the right answer is renewables in our discussions with data center developers and providers, their first focus is renewables. And I hear a lot about the reliability concerns and what do you do when the wind doesn't blow and the sun doesn't shine and the four-hour battery is not enough? We can overbuild the battery. We can also help work with them to design a clean energy solution where if they do have a grid by it, we can green it up with RECs from our green desk. We have technology and tools which we showcased back in March where we can identify parts of the country that not only the best resource areas but also the best fiber connectivity is the best water resource and those are the areas that we're locking up and we have the sites and we have the relationships. And so I don't think anybody's better positioned to capitalize on data center demand than NextEra is and I'm very excited about what the future opportunities hold for us there, but the other thing I would say, and we'll talk a lot more about this at our investor conference in June is this electricity demand is real. We've been in a period of static demand for decades and the demand is not only coming from data centers. It's coming from decoupling from China, creating more domestic manufacturing around industry, around chip manufacturing, oil and gas industry continues to electrify. We continue to even beyond data centers see significant electric demand. We have the tools. We have the sites. We have the relationship and we are chasing those opportunities and look we're coming off our second-best origination quarter ever. I think the results speak for themselves. Steve Fleishman -- Wolfe Research -- Analyst Great. Thank you. Operator The next question comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead. Shar Pourreza -- Guggenheim Partners -- Analyst Hey. Good morning, guys. Just maybe starting off on NEP, given the continued pressure from capital markets and the benchmark rates, are you advancing any longer-term resolution plans for the CEPFs? Have existing holders and maybe other infrastructure players showed any interest in transactions to fund and maybe simplify the cap structure for longer-term growth? What could that look like and is this Analyst Day disclosure? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yes, sure. Thanks for the question. A few comments that I'll make on it. One is we have talked about private capital raise potentially being a solution to address back-end CEPFs for NEP. Obviously, there's a lot of interest in that just given. NextEra's stature in the market, NextEra Energy Partners' stature in the market. And so those discussions continue to move forward. We don't have anything to say about them right now. We may not have anything to say about them at the Analyst Day. I wouldn't expect us to make a whole lot of comments at the Analyst Day about NEP. When we do have something to say about NEP, as these discussions continue to evolve, we will address them at that point. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. Stay tuned. And then lastly, John, on the FECs, since the process disclosures have been made and obviously showed FP&L was clear of any wrong doing, there were some disagreements with the FEC commissioners on the nonprofit matters. Is there an appeals path, and would there be any further information request to FP&L or NextEra or should we just close the books here? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yeah. I think the way I look at it Shah is plain and simple. The FEC voted. They voted to close the matter. We're now moving on, and I think this is behind us. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. That's it. Very comprehensive. Thank you, guys, and congrats on the results. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thank you. Operator The next question comes from David Arcaro with Morgan Stanley. Please go ahead. Mr. Arcaro, your line is open. Is your phone muted accidentally? I'm sorry. We'll need to go to the next questioner. The next questioner comes from Carly Davenport with Goldman Sachs. Please go ahead. Carly Davenport -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for taking the questions today. I appreciate it. I wanted to just ask one on the backlog good strength in the additions this quarter, and we continue to see a lot of strength in the solar and the storage piece of it. Wind's been a little bit weaker. So I guess just as you think about the difference in the returns on those projects, are there any implications for your financial guidance and your plan as you think about the mix that you've seen actually evolve versus what is in that base plan? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Carly. It's Rebecca. I'll take that question. Good morning. Let me start with probably the most important takeaways first. Obviously, Kirk and John highlighted our continued expectations and expressed the fact that we'd be disappointed if we didn't meet the top end of those expectations as we've outlined. So that's most important. Secondly, we continue to be comfortable with the overall development expectations as we also highlighted in the prepared remarks and that's consistent with what we've seen over time. As we've long stated, obviously there's a mix in technologies. We, four years in advance, are not always going to be predicting exactly where we're going to be able to develop and what our customers are going to be interested in. And notably, since we laid those expectations out for the first time, a lot did change including the passage of the IRA and that had both an impact on changing dynamics for our customers buying wind which was largely in advance of the expectations that the incentives would ultimately wind down and in the IRA the introduction of the production tax credit for solar which made solar more attractive than it was even before, as well as the stand-alone ITC for storage. So that really spurred demand for solar and storage. But if I can take a step back and pile into the question that Steve answered and some of the comments that John made earlier we are seeing significant demand across the entire U.S. economy. That, of course, includes data centers, technology, AI-driven compute demand, but it is also manufacturing, the redomestication of important industries in the U.S. and it is also oil and gas and chemicals companies looking to get lower-cost energy solutions into their mix. That spurs a need for a lot of build. So as we look at our 300 gigawatts of products that are in development and the integrated solutions and solutions that we are designing for our customers, I remain very optimistic about all of the technologies. In various parts of the country, wind is most economic. In parts of the country, it is going to be solar and storage, etc. So I love the portfolio approach and from a returns perspective, I think we continue to realize very attractive returns for all the technologies and, of course, adjusted for the types of risks that we think we take. So mid-teens for solar and above 20% levered returns for wind and storage technologies. So I think from an investor standpoint, that is a very attractive proposition. Carly Davenport -- Goldman Sachs -- Analyst Awesome. Thanks for that, Rebecca. And then you mentioned over the last question 15% CAGR for data center demand growth through the end of the decade. I guess as you think about some of these other drivers that you've mentioned of increased power demand in the US, how do you think that will drive overall load growth? Do you have expectations there through the end of the decade? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources So we'll have a lot more to say in terms of our expectations and certainly in context of a number of third-party views at the investor conference. But I think it's safe to say at this point that we see strong drivers for a long period of time, decades into the future, driving renewables penetration and electricity and electricity penetration into overall U.S. energy consumption which sets up terrific dynamics for us to continue to compete and create opportunities to invest capital for our shareholders at very attractive returns. So I love our opportunity at. Carly Davenport -- Goldman Sachs -- Analyst Thank you for that color. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Thank you. Operator The next question comes from Durgesh Chopra with Evercore ISI. Please go ahead. Durgesh Chopra -- Evercore ISI -- Analyst Good morning. Thank you for giving me time. Maybe just, Rebecca, on the topic of electricity demand growth. One of the questions we consistently get, and I think John hinted on this 15% the data center growth driving it is how quickly can you ramp up? So maybe can you just talk to that? Are there any constraints, whether it's equipment, whether it's sites? How quickly can the generation side of this, the renewable generation can ramp up? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Yeah, Durgesh, I appreciate the question. I think a little bit of context is important. I think all of us, ourselves included, have really started talking about the significant change in load growth really over the last year, maybe even the last six months, and you all very much appreciate that a development business, anything connecting to electrical infrastructure usually talks in terms of years and sometimes a lot of years depending on the market. To get something into place in the ERCOT market is maybe a couple of years, and some markets in the Midwest that have had congested queues and some transmission constraints, that could be five to seven years, and obviously we've been working for a period of time. I think we're the least behind of anybody with our 300 gigawatt portfolio, but some of this will take some time to materialize. I feel very confident in long-term trends. I feel really excited and pleased with our team's preparedness in terms of the development of that pipeline, and I very much think our competitive advantages that John highlighted on scale, experience, and technology really position us well in the types of conversations we're having with our customers, creating this long-term visibility into demand dynamics. You guys asked John a question about data centers and how competitive we are with them. They are not looking for projects anymore. They are looking for integrated solutions that solve long-term problems for them, and we are a perfect partner for them with which to work. Durgesh Chopra -- Evercore ISI -- Analyst That's very helpful, Rebecca. And then maybe just a quick follow-up. I think you made comments around very healthy returns. Are you seeing higher returns, higher margins with your data center clients versus your other clients? Some of your peers have highlighted higher returns there. Maybe just comment on that. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources I continue to believe we have very attractive returns across the board, consistent with the comments that I've made today as well as the comments we made at our development 101 day and included in our monthly updates for investor materials, so mid-teens and solar and above 20% for both wind and storage. Of course, as we talk with customers and we have unique solutions that solve particular problems that we have, we design the solutions to meet those needs and always stay focused at the end of the day on what's the attractive value proposition from an investor standpoint, and we remain disciplined around that. I love the portfolio. I love the positioning, and I believe what we ultimately deliver for investors is very attractive. Durgesh Chopra -- Evercore ISI -- Analyst That is very helpful. Thank you very much. Operator The next question comes from Jeremy Tonet with J.P. Morgan. Please go ahead. Excuse me, Mr. Tonet, your line is open. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Good morning. Thank you. I just want to start off on storage originations coming in quite strong. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Jeremy. It's Rebecca. I'm going to go for the presumptive close on the answer. Hopefully, it's the question you actually asked. Storage origination is very strong. As Kirk highlighted in some of the prepared remarks and John commented in Q&A, as we think about our customers' needs for energy and capacity, it remains a very attractive value proposition to incorporate storage to firm up renewables, either co-located or separate. So we're seeing terrific origination from an energy resources perspective, and we've also talked today about the attractiveness of storage FPL, so I'll hand it off to Armando to give some additional color. Armando Pimentel -- President and Chief Executive Officer, Florida Power and Light Company Thanks, Rebecca. So I would add, if you recall John and Kirk's comments, we filed our 10-year site plan, which we do every year. Our 10-year site plan this year had the same amount of solar that it did last year, which is a lot of solar, 21 gigs over the next 10 years. But we doubled the amount of storage up to 4 gigawatts of storage that we have in our plan. We increasingly see storage as an economical addition in our service area. My expectations are that, as time goes on, that we would likely add more storage to our plans going forward because it is that attractive in the overall economics, especially as we add solar, which, again, continues to be the best proposition from a cost standpoint for our customers. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Thank you for that. And just going back to the Renewable Development Day, or for people that weren't able to make it, any particular points you want to highlight? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Jeremy, you broke up a little bit, so I'm going to, again, guess a little bit on what the question was. But I'm assuming it was what were some of the key takeaways from the Development 101 Day. And I hope it was a worthwhile time for our investors. We certainly were so proud of our team in talking about what it is that we believe differentiates us as we talk to our customers. And it really was around that scale, experience, and technology, not just individually how all of those are important, but also how they interact with one another. So, as John highlighted, with the scale advantages comes the ability to deploy technologies that are unique. And with that experience, we actually are able to invest in capturing that data that we get from scale and put it in technologies to actually get some really cool insights. So I think the key takeaway from my perspective is significant load growth, certainly, some opportunities to deploy that scale, experience, and technology to deploy unique and compelling solutions to our customers. So I love our growth prospects. I love the position that we have, just as John highlighted in his comments. And I look forward to telling you more at the investor conference in June. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Great. Thank you very much.

edtsum3

You are given a text that consists of multiple sentences. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. Text: Operator Good morning, and welcome to the NextEra Energy and NextEra Energy Partners LP first-quarter 2024 earnings call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Kristin Rose, director of investor relations. Please go ahead. Kristin Rose -- Director, Investor Relations Thank you, Drew. Good morning, everyone, and thank you for joining our first-quarter 2024 combined financial results conference call for NextEra Energy and NextEra Energy Partners. With me this morning are John Ketchum, chairman, president, and chief executive officer of NextEra Energy; Kirk Crews, executive vice president and chief financial officer of NextEra Energy; Rebecca Kujawa, president and chief executive officer of NextEra Energy Resources; and Mark Hickson, executive vice president of NextEra Energy, all of whom are also officers of NextEra Energy Partners, as well as Armando Pimentel, president and chief executive officer of Florida Power & Light Company. John will provide some opening remarks and will then turn the call over to Kirk for a review of our first-quarter results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call and the risk factor section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our websites, www.nexteraenergy.com and www.nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP financial measures to the closest GAAP financial measure. With that, I will turn the call over to John. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thanks, Kristen, and good morning. NextEra Energy delivered strong first-quarter results, growing adjusted earnings per share by 8.3% year over year. Based on FPL and Energy Resources financial and operational performance, we are once again off to a solid start for the year. In addition, FPL placed into service 1,640 megawatts of new solar, while Energy Resources added 2,765 megawatts of new renewables and storage projects to its backlog. This quarter marks Energy Resources' second-best origination quarter ever, as well as its best solar and best storage origination quarter. As we highlighted at our March Renewables Development Day, we believe NextEra Energy is well-positioned for the expected strong power demand growth through the end of the decade and beyond. After years of relatively flat U.S. power growth, numerous reports now highlight significant future low growth being driven across industries such as oil and gas, manufacturing, and technology. The redomestication of industry in the U.S., supported by public policy, will drive the need for more electricity, and the tech industry is going to need data centers to support the expected cloud capacity demands that come with artificial intelligence applications. Of course, increased load demand will not come all at once and will take some time to materialize, but it is clear that many new customers are concerned about power availability to meet their plans and consider power supply as a significant obstacle to business expansion. We believe renewables and storage are a key enabler to help meet this increased demand. In fact, we believe the U.S. renewables and storage market opportunity has the potential to be 3x bigger over the next seven years compared to the last seven, growing from roughly 140 gigawatts of additions to approximately 375 to 450 gigawatts. And we believe no one is better positioned to address these power supply challenges and capitalize on this demand than NextEra Energy. At NextEra Energy, the plan is simple. Our two businesses are deploying capital in renewables, storage, and transmission for the benefit of customers while also providing visible growth opportunities for shareholders. Our enterprisewide scale, decades of experience, and technology investments are key competitive advantages that allow us to drive value and meet this expected power demand. Scale is one of our key differentiators, and it matters more than ever. Scale allows us to buy and build with better pricing, better protections, and better positioning to navigate disruption. Scale provides access to capital and cost of capital advantages, allowing us to leverage one of the strongest balance sheets in the sector and worldwide banking relationships to finance projects at beneficial terms. Scale has driven top-decile operational performance throughout our generation fleet. Today, NextEra Energy's roughly 74 gigawatt operating fleet, comprised of 35 gigawatts at FPL and 39 gigawatts at Energy Resources, provides significant operational scale. As FPL continues its solar and storage build-out and Energy Resources brings new renewables and storage projects online for customers, the operating fleet could grow to over 100 gigawatts by the end of 2026. This would further extend our scale advantages and create value for customers and shareholders. Our scale has enabled greater supply chain diversification and flexibility, and the good news is the solar supply chain is much improved from two years ago. Inflationary pressures are alleviating and manufacturing capacity is significantly expanding. In the U.S., manufacturing incentives are expected to support increases in domestic module manufacturing capacity to over 50 gigawatts by 2026, from just under 8 gigawatts at the end of 2021. We have greater supplier diversity and flexibility than ever before, strengthening our ability to bring low-cost solar to American consumers and businesses. Our decades of experience is another key competitive advantage. Our experience allows us to navigate power demand challenges, delivering cost-effective, reliable generation for our growing FPL customer base, and designing clean energy solutions to help our Energy Resources customers. We understand every part of the energy value chain with deep expertise in all technologies, the power markets, and transmission. Our team embraces continuous improvement that drives innovation. We recognized the changing landscape and secured land, interconnects, and transmission equipment years in advance. Technology is the next frontier for the power industry, and we believe our two-decade head start on the rest of the industry is a significant competitive advantage. Today, NextEra Energy captures 560 billion operational data points each day and has dozens of proprietary artificial intelligence tools to drive analytical, real-time decision making. We use these tools to analyze over 100 attributes of our own data to secure and develop the best sites in Florida and across the country. We use our tools to iterate millions of site layout designs based on proprietary resource data and assessments to maximize value. And we use our tools to operate nearly all our renewable storage and fossil generation fleets around the clock from our headquarters in South Florida. We are leveraging this combination of enterprisewide scale, decades of experience, and investment in technology to better position both businesses to capitalize on what we believe will be years of demand to drive long-term value for customers and shareholders. Today, electricity represents just 20% of overall U.S. energy consumption, and wind and solar generation represents only 16% of the U.S. electricity mix. In short, we believe the U.S. will need a significant and growing amount of electricity over the next decade and beyond, a large part of which will be powered by new renewables and storage. At FPL, as more people move into Florida, we are focused on extending the customer value proposition by keeping our bills as low as possible and delivering clean, affordable energy by investing in solar, battery storage, and transmission. At Energy Resources, our business is focusing on building low-cost wind, solar, battery storage, and transmission. We are using our data and proprietary technology to help power customers, balance supply and demand while keeping customer bills affordable. We also use our tools with commercial and industrial customers to identify the best locations based on their physical preferences and most important variables. For both power and commercial and industrial customers, we leverage our 300 gigawatt development pipeline and transmission and market expertise to help design the lowest-cost clean energy solutions. Both businesses complement each other, deepen our skill sets and advantages, and foster innovation. And we leverage our greatest asset, our people, who have decades of experience to drive value for our customers and shareholders. When I consider current energy demands, the long-term electricity needs, and our competitive advantages, I wouldn't trade our opportunities set with anyone. I look forward to telling more of our story and explaining why NextEra Energy is uniquely positioned to lead the electrification of the U.S. economy at our Investor Day on June 11th in New York City. With that, I will turn the call over to Kirk to cover the quarterly results. Kirk Crews -- Executive Vice President, Chief Financial Officer, NextEra Energy Thank you, John. For the first quarter of 2024, FPL's earnings per share increased $0.04 year over year. The principal driver of this performance was FPL's regulatory capital employed growth of approximately 11.5% year over year. We now expect FPL to realize roughly 10% average annual growth in regulatory capital employed over our current rate agreement's four-year term, which runs through 2025. FPL's capital expenditures were approximately $2.3 billion for the quarter, and we expect FPL's full-year 2024 capital investments to be between $7.8 billion and $8.8 billion. For the 12 months ending March 2024, FPL's reported ROE for regulatory purposes will be approximately 11.8%. During the first quarter, we utilized approximately $572 million of reserve amortization, leaving FPL with a balance of roughly $651 million. As we've previously discussed, FPL historically utilizes more reserve amortization in the first half of the year, and we expect this trend to continue this year. Earlier this month, FPL received approval to reduce customer bills due to projected 2024 fuel savings. As a result, FPL's typical 1,000 kilowatt-hour residential customer bill is expected to be roughly $14 lower in May than the start of the year, and approximately 37% lower than the current national average. Over the current four-year settlement agreement, we now expect FPL's capital investments to be slightly above our previous range of $32 billion to $34 billion. This quarter, FPL placed into service 1,640 megawatts of new cost-effective solar, putting FPL's owned and operated solar portfolio at over 6,400 megawatts, which is the largest utility-owned solar portfolio in the country. FPL's annual 10-year site plan continues to indicate that solar and storage are the most cost-effective answer for customers to add reliable grid capacity over the next decade. The 2024 plan includes similar levels of new solar generation capacity, 21 gigawatts, across our service territory over the next 10 years compared to our 2023 plan. But our 2024 plan doubles the expected deployment of battery storage to over 4 gigawatts, some of which we expect to be needed earlier than forecasted in our 2023 plan. With this plan, we expect to increase FPL's solar mix from approximately 6% of our total generation in 2023 to 38% in 2033, while continuing to provide customers with clean, affordable energy. FPL believes battery storage will play an increasingly valuable role for customers, serving as an attractive capacity complement to our growing solar generation. From providing system-balancing needs in critical parts of FPL's service territory to supplying energy during any time of day or weather condition, battery storage acts as a key resource to the system that is both valuable and cost-effective for customers. Key indicators show that Florida's economy remains healthy. Florida continues to be one of the fastest-growing states in the nation and has four of the five fastest-growing U.S. metro areas between 2022 and 2023. FPL had its strongest quarter of customer growth in over 15 years, with the average number of customers increasing by more than 100,000 from the comparable prior year period. Although FPL's first quarter retail sales decreased by approximately 1.3% year over year, we estimate that weather had a negative impact on usage per customer of approximately 5.4% on a year-over-year basis. After taking weather into account, first quarter retail sales increased roughly 4.1% on a weather-normalized basis from the comparable prior year period, driven primarily by continued favorable underlying population growth and usage per customer. Now let's turn to energy resources, which report adjusted earnings growth of approximately 13.1% year over year. Contributions from new investments increased $0.15 per share year over year, primarily reflecting continued growth in our renewables portfolio. Our existing clean energy portfolio declined $0.02 per share, primarily due to unfavorable wind resource during the quarter. The comparative contribution from our customer supply business increased results by $0.04 per share. All other impacts reduced earnings by $0.12 per share. This decline reflects higher interest costs of $0.07 per share, half of which related to new borrowing costs to support new investments. Energy resources had a strong quarter of new renewables and storage origination, adding approximately 2,765 megawatts to the backlog. With these additions, our backlog now totals roughly 21.5 gigawatts after taking into account 1,165 megawatts of new projects placed into service since our last earnings call, highlighting energy resources' ability to continue to identify attractive and accretive investment opportunities which provide strong growth visibility in the years ahead. We recently placed 740 megawatts of new solar and storage projects into service, which are being used to support data centers located in Arizona and New Mexico. Both of these projects are now one of the largest battery storage facilities in their respective states, and in combination with their co-located solar, each project enabled the local utility to serve their customers' need for new, reliable, clean energy to grow their own business operations. We are proud to continue to support our power and commercial and industrial customers to meet their growing power and capacity needs, create jobs, and provide economic development in these local communities. Our origination activities across our power and commercial and industrial customers are beginning to reflect the rising power demand. We are seeing it manifest with our power customers in their state RFP processes and bilateral discussions where we deliver cost-effective renewables and storage to their grid. We are also observing it through interactions with our oil and gas and manufacturing customers where we utilize our data and technology to help them make better citing decisions. Our technology customers have been a consistent driver of demand for many years, reflected by our roughly 3 gigawatt operating portfolio and over 3 gigawatt project backlog as we partner with them to provide various clean energy solutions based on their key business variables. We are a partner with both our power and commercial industrial customers' trust. We can leverage our 3 gigawatt development pipeline, our 35 gigawatt operating renewables and storage portfolio, and our transformer and switchgear procurement covering energy resources billed through 2027 to deliver projects for customers. As John said, the power demand growth is expected to be strong through at least the end of the decade. We expect 2024 to be another strong year for new renewables and storage origination. This is on the heels of two consecutive record origination years at Energy Resources. We continue to expect to remain on track for our overall renewable development expectations of roughly 33 gigawatts to 42 gigawatts from 2023 through 2026. Beyond renewables and storage, NextEra Energy Transmissions was recently selected by the California ISO to develop a new 82 mile 500 kV transmission line in Southern California with a capital investment of more than $250 million. We believe this project could unlock over 3 gigawatts of new renewable generation capacity supporting California's ambitious clean energy goals. This award falls a record year for NextEra Energy Transmission in 2023, and we remain excited about the opportunities ahead for this growing business. We continue to believe our ability to build, own, and operate transmission is a key advantage for our renewables business. Turning now to our first quarter 2024 consolidated results, adjusted earnings from corporate and other decreased by $0.01 per share year over year. This quarter, we entered into an agreement to transfer approximately $1 billion of tax credits throughout 2024, representing the bulk of our expected transfers for the year. Our long-term financial expectations remain unchanged. We will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted EPS expectation ranges in 2024, 2025, and 2026. From 2021 to 2026, we continue to expect that our average annual growth in operating cash flow will be at or above our adjusted EPS compound annual growth rate range. And, as we announced in February, the board of directors of NextEra Energy approved a targeted growth rate in dividends per share of roughly 10% per year through at least 2026 off a 2024 base. As always, our expectations assume our caveat. Turning to NextEra Energy Partners. We continue to focus on executing against the partnership's transition plan and delivering an LP distribution growth target of 6% through at least 2026. We bought out the STX Midstream convertible equity portfolio financing in 2023 and have sufficient proceeds available from the Texas Pipeline Portfolio Sale to complete the NEP Renewables II buyout due in June 2024 and 2025. The third convertible equity portfolio financing associated with the Meade natural gas pipeline assets is expected to be addressed in 2025. With a plan for the near-term convertible equity portfolio financing well understood, we remain focused on the partnership's cost of capital improving, which is critical for its success. With that objective in mind, we continue to evaluate alternatives to address the remaining convertible equity portfolio financing with equity buyout obligations in 2027 and beyond. Turning to the partnership's targeted 6% growth in LP distributions per unit, NextEra Energy Partners does not expect to need an acquisition this year to achieve its 6% targeted growth rate, and the partnership does not expect to require growth equity until 2027. In terms of NextEra Energy Partners' growth plan, as a reminder, it involves organic growth, specifically, repowerings of approximately 1.3 gigawatts of wind projects through 2026, as well as acquiring assets at attractive yields. Today, we are announcing plans to repower an additional approximately 100 megawatts of wind facilities through 2026. The partnership has now announced roughly 1,085 megawatts of repowers. Yesterday, NextEra Energy partners' board declared a quarterly distribution of $89.25 per common unit, or $3.57 per common unit, on an annualized basis, which reflects an annualized increase of 6% from its fourth quarter 2023 distribution per common unit. Let me now turn to the detailed results. First-quarter adjusted EBITDA was $462 million, and cash available for distribution was $164 million. New projects, which primarily reflect contributions from approximately 840 megawatts of new projects that either closed in the second quarter of 2023 or achieved commercial operations in 2023, contributed approximately $32 million of adjusted EBITDA and $7 million of cash available for distribution. First quarter adjusted EBITDA contribution from existing projects declined by approximately $37 million year over year, driven primarily by unfavorable wind resource during the quarter and lower generation at Genesis Solar project as a result of a planned outage for major maintenance. Wind resource was approximately 97% of the long-term average versus 102% in the first quarter of 2023. The incentive distribution right fee suspension provided approximately $39 million of benefit this quarter for adjusted EBITDA and cash available for distribution. Finally, adjusted EBITDA and cash available for distribution declined by approximately $44 million and $38 million, respectively, for the divestiture of the Texas pipeline portfolio. From a base of our fourth quarter 2023 distribution per common unit and an annualized rate of $3.52, we continue to see 5% to 8% growth per year in LP distributions per unit, with a current target of 6% growth per year as being a reasonable range of expectations for at least 2026. We continue to expect the partnership's payout ratio to be in the mid-90s through 2026. We expect the annualized rate of the fourth quarter 2024 distribution that is payable in February 2025 to be $3.73 per common unit. NextEra Energy Partners expects run rate contributions for adjusted EBITDA and cash available for distribution from its forecasted portfolio at December 31st, 2024 to be in the ranges of $1.9 billion to $2.1 billion and $730 million to $820 million, respectively. As a reminder, year-end 2024 run rate projections reflect calendar year 2025 contributions from the forecasted portfolio at year-end 2024. As a reminder, our expectations are subject to our caveats. That concludes our prepared remarks, and with that, we will open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] The first question comes from Steve Fleishman with Wolfe Research. Please go ahead. Steve Fleishman -- Wolfe Research -- Analyst Yeah. Hi. Thank you. Just first question, just there's been press reports about potential another AD/CVD case to be filed related to solar panels and, Biden also talking about getting rid of the protection on the bifacial panel tariff. Could you just talk a little bit more about how you're positioned to deal with those cases if they do arise, changes if they arise? Thanks. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Sure. Steve, this is John. I'll go ahead and take that. Let me take those in order. Let me talk about, first of all, the speculation around AD/CVD filing, which, may or may not occur, and then the bifacial exemption. But first on the AD/CVD, the bottom line takeaway for folks is that, we expect that any trade actions that would occur this time around will be very manageable. And for several reasons, I'm going to go through them. This is not like circumvention. This is not circumvention 2.0. The solar panel market is in a very different spot. And the first point I want to make is we don't expect any trade action, if it were to occur, to result in delivery stoppages. And in any event, our panels are delivered well in advance of construction, which gives us a lot of time and opportunity to be able to troubleshoot any issues should they arise. And why do I think no stoppages were going to occur this time around? The main reason is the U.S. is the most expensive solar panel market in the world, and so there's a lot of economic reasons for deliveries to continue to occur. The second point I want to make is that, given our scale, we have appropriate incentives and contractual protections that are in place in our agreements with our suppliers to ensure that delivery occurs timely. And we also don't put all of our eggs in one basket. We have a diversified set of suppliers, as you would all expect, and the ability to pivot from one supplier to another should any issues occur. So I feel like we're in a very good spot there. The third point I want to make, and it's one that I hit in my prepared remarks, is that the U.S. and the global supply of solar panels is bigger than ever, and it's growing. Let me talk, for example, about the U.S. market specifically. The U.S. domestic solar panel industry is getting stronger and stronger than it's ever been. One of the points that I made also in the prepared remarks is at the end of '21, solar panel module capacity in the U.S. was about 8 gigawatts. That's expected to be about 50 gigawatts by the time we get to 2026. So the U.S. market is in a much different spot. There's already been 150 gigawatts of new U.S. solar panel factory announcements that have been made. If you talk to most U.S. domestic solar panel manufacturers, they're sold out through 2026, so they're certainly not having any trouble with demand, which is the other point that I want to make. So now let's speculate a little bit. So if a filing is made around anti-dumping, let me deal with that first. We find it hard to believe that any panels are being dumped into the U.S. market under the law. That would be applied. As I said, the U.S. is the most expensive solar panel market in the world. It's two to three times higher than any other market in the world. And if panels were being dumped, that could not be the case. So that's the first point I want to make on anti-dumping. The second point I want to make, if there were a countervailing duty claim filed, the Department of Commerce would first have to look in to see if the price of solar modules in Southeast Asian countries, for example, were being subsidized. We don't really have any idea or way of knowing that until we see what gets filed. But after we see those arguments, we'll be able to make a better assessment. But countervailing duties historically, if you look at examples for countervailing duties that have been applied in the past against China suppliers, they've typically been around 10% to 15%. So even if those were to be applied in this case, quite manageable. And the other point I want to make is that what's different is tariffs in this situation would be prospective and not retroactive. And so for all of these reasons, even if something were to move forward, we still have no way of knowing if it will. We are very well positioned to manage through this like we always do. Our inventory position and the contractual protections that we have in place are expected to give us strong coverage for our backlog through 2027. And by that time, as more and more U.S. production comes online as expected, these trade issues will fall away. So that's AD/CVD. Let me just turn quickly to a couple of minor comments on the bifacial exemption. The bottom line, the bifacial exemption, even if it's removed, really has no impact on NextEra. Why is that? We've contracted all of our panel needs through February '26, and we have very minimal exposure to the bifacial exemption being removed. And once that bifacial exemption, even if removed, it would expire at the end of February of 2026, and it can't be brought again and reinstated for another eight years. So we feel like we're in a very good spot. And the last point I'll make is as more and more U.S. production capacity comes online and it's actually available by, we will continue to source from U.S. suppliers. So look, when you put all those things together, I feel like this is very manageable and I feel like we will be fine. Steve Fleishman -- Wolfe Research -- Analyst That was very thorough and helpful. Thank you, John. And then I guess one other question on the data center. So you talked about the backlog edge you had this quarter. Just as we go into this year and think about this, is this going to continue to be more kind of one-off or two-off quarter-by-quarter updates, or is there -- should we see more kind of potential for more like long-dated partnerships or kind of larger-scale agreements? How should we think about how that might develop? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy I think kind of all of the above, Steve. Our opportunity set is significant around data centers is the first point that I'll make. And I think if you look historically on what we've been able to do with data center customers, I don't think anybody's had better results than we have. If you look at just our gigawatts in operation, we have 3.5 gigawatts in operation today. We have another close to 3.5 gigawatts in our backlog with technology providers. We really understand their business. We really understand what it is they need. And part of that is because we spend a lot of time with them. We do business with all what I would call the top five hyperscales in this country, also doing business increasingly with some of the developers of data centers as well. And we've owned data centers. And so we understand how they work, how they operate, what the capex and opex is and how it's driven by energy and power and what the right locations are for them. We've developed tools to address them. And so what do we see? We see about a 15% CAGR through the end of the decade for data center demand. I think data center developers are really focused more than anything on three things. They want low-cost energy. They want to be able to say that they've accomplished additionality from a decarbonization standpoint, which requires a new facility to be built, not an existing facility. And the third piece is it's got to be in the right location and it's got to have speed to market. And there's obviously been a lot of talk about renewables and nuclear, and I do want to -- I'm a little more of a skeptic about nukes, and let me explain why that is. They're already in the ground. You can't move them. And if you look at the nuclear fleet, there's only 15 nuclear plants in this country that are west of the Mississippi. And when you think about the 15 that are west of the Mississippi, most of them are already rate regulated or long-term contracted. So that really is just creating maybe an East Coast opportunity for those that aren't rate regulated and that aren't contracted. I think that's a small subset of nuclear units that could perhaps satisfy East Coast demand. But in our discussions with data center providers, getting access to cloud capacity for Silicon Valley, Santa Clara in particular, is critical. We can all count on one or two fingers how many nuclear plants are located in those regions, not many. And you just can't move a nuclear plant. And so the thing we bring to the table is a lot of flexibility and speed to market. We can put the renewable project exactly where it needs to be. And SMRs, I hear a lot of talk about SMRs. SMRs are still a decade to 15 years away. Not only do you have nine OEMs that are really struggling to access capital. If we pass a sanctions bill against Russia, a nuclear fuel that's going to limit conversion and enrichment capacity in the U.S. for sourcing of nuclear fuel for these SMRs, which also is going to require a real step up in technology to get them done. And you're also dealing with undercapitalized fuel providers. I'm a real skeptic on SMRs really coming into the picture to satisfy data center demand any time in the near future. And so when you put all of that together, I think the right answer is renewables in our discussions with data center developers and providers, their first focus is renewables. And I hear a lot about the reliability concerns and what do you do when the wind doesn't blow and the sun doesn't shine and the four-hour battery is not enough? We can overbuild the battery. We can also help work with them to design a clean energy solution where if they do have a grid by it, we can green it up with RECs from our green desk. We have technology and tools which we showcased back in March where we can identify parts of the country that not only the best resource areas but also the best fiber connectivity is the best water resource and those are the areas that we're locking up and we have the sites and we have the relationships. And so I don't think anybody's better positioned to capitalize on data center demand than NextEra is and I'm very excited about what the future opportunities hold for us there, but the other thing I would say, and we'll talk a lot more about this at our investor conference in June is this electricity demand is real. We've been in a period of static demand for decades and the demand is not only coming from data centers. It's coming from decoupling from China, creating more domestic manufacturing around industry, around chip manufacturing, oil and gas industry continues to electrify. We continue to even beyond data centers see significant electric demand. We have the tools. We have the sites. We have the relationship and we are chasing those opportunities and look we're coming off our second-best origination quarter ever. I think the results speak for themselves. Steve Fleishman -- Wolfe Research -- Analyst Great. Thank you. Operator The next question comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead. Shar Pourreza -- Guggenheim Partners -- Analyst Hey. Good morning, guys. Just maybe starting off on NEP, given the continued pressure from capital markets and the benchmark rates, are you advancing any longer-term resolution plans for the CEPFs? Have existing holders and maybe other infrastructure players showed any interest in transactions to fund and maybe simplify the cap structure for longer-term growth? What could that look like and is this Analyst Day disclosure? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yes, sure. Thanks for the question. A few comments that I'll make on it. One is we have talked about private capital raise potentially being a solution to address back-end CEPFs for NEP. Obviously, there's a lot of interest in that just given. NextEra's stature in the market, NextEra Energy Partners' stature in the market. And so those discussions continue to move forward. We don't have anything to say about them right now. We may not have anything to say about them at the Analyst Day. I wouldn't expect us to make a whole lot of comments at the Analyst Day about NEP. When we do have something to say about NEP, as these discussions continue to evolve, we will address them at that point. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. Stay tuned. And then lastly, John, on the FECs, since the process disclosures have been made and obviously showed FP&L was clear of any wrong doing, there were some disagreements with the FEC commissioners on the nonprofit matters. Is there an appeals path, and would there be any further information request to FP&L or NextEra or should we just close the books here? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yeah. I think the way I look at it Shah is plain and simple. The FEC voted. They voted to close the matter. We're now moving on, and I think this is behind us. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. That's it. Very comprehensive. Thank you, guys, and congrats on the results. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thank you. Operator The next question comes from David Arcaro with Morgan Stanley. Please go ahead. Mr. Arcaro, your line is open. Is your phone muted accidentally? I'm sorry. We'll need to go to the next questioner. The next questioner comes from Carly Davenport with Goldman Sachs. Please go ahead. Carly Davenport -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for taking the questions today. I appreciate it. I wanted to just ask one on the backlog good strength in the additions this quarter, and we continue to see a lot of strength in the solar and the storage piece of it. Wind's been a little bit weaker. So I guess just as you think about the difference in the returns on those projects, are there any implications for your financial guidance and your plan as you think about the mix that you've seen actually evolve versus what is in that base plan? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Carly. It's Rebecca. I'll take that question. Good morning. Let me start with probably the most important takeaways first. Obviously, Kirk and John highlighted our continued expectations and expressed the fact that we'd be disappointed if we didn't meet the top end of those expectations as we've outlined. So that's most important. Secondly, we continue to be comfortable with the overall development expectations as we also highlighted in the prepared remarks and that's consistent with what we've seen over time. As we've long stated, obviously there's a mix in technologies. We, four years in advance, are not always going to be predicting exactly where we're going to be able to develop and what our customers are going to be interested in. And notably, since we laid those expectations out for the first time, a lot did change including the passage of the IRA and that had both an impact on changing dynamics for our customers buying wind which was largely in advance of the expectations that the incentives would ultimately wind down and in the IRA the introduction of the production tax credit for solar which made solar more attractive than it was even before, as well as the stand-alone ITC for storage. So that really spurred demand for solar and storage. But if I can take a step back and pile into the question that Steve answered and some of the comments that John made earlier we are seeing significant demand across the entire U.S. economy. That, of course, includes data centers, technology, AI-driven compute demand, but it is also manufacturing, the redomestication of important industries in the U.S. and it is also oil and gas and chemicals companies looking to get lower-cost energy solutions into their mix. That spurs a need for a lot of build. So as we look at our 300 gigawatts of products that are in development and the integrated solutions and solutions that we are designing for our customers, I remain very optimistic about all of the technologies. In various parts of the country, wind is most economic. In parts of the country, it is going to be solar and storage, etc. So I love the portfolio approach and from a returns perspective, I think we continue to realize very attractive returns for all the technologies and, of course, adjusted for the types of risks that we think we take. So mid-teens for solar and above 20% levered returns for wind and storage technologies. So I think from an investor standpoint, that is a very attractive proposition. Carly Davenport -- Goldman Sachs -- Analyst Awesome. Thanks for that, Rebecca. And then you mentioned over the last question 15% CAGR for data center demand growth through the end of the decade. I guess as you think about some of these other drivers that you've mentioned of increased power demand in the US, how do you think that will drive overall load growth? Do you have expectations there through the end of the decade? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources So we'll have a lot more to say in terms of our expectations and certainly in context of a number of third-party views at the investor conference. But I think it's safe to say at this point that we see strong drivers for a long period of time, decades into the future, driving renewables penetration and electricity and electricity penetration into overall U.S. energy consumption which sets up terrific dynamics for us to continue to compete and create opportunities to invest capital for our shareholders at very attractive returns. So I love our opportunity at. Carly Davenport -- Goldman Sachs -- Analyst Thank you for that color. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Thank you. Operator The next question comes from Durgesh Chopra with Evercore ISI. Please go ahead. Durgesh Chopra -- Evercore ISI -- Analyst Good morning. Thank you for giving me time. Maybe just, Rebecca, on the topic of electricity demand growth. One of the questions we consistently get, and I think John hinted on this 15% the data center growth driving it is how quickly can you ramp up? So maybe can you just talk to that? Are there any constraints, whether it's equipment, whether it's sites? How quickly can the generation side of this, the renewable generation can ramp up? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Yeah, Durgesh, I appreciate the question. I think a little bit of context is important. I think all of us, ourselves included, have really started talking about the significant change in load growth really over the last year, maybe even the last six months, and you all very much appreciate that a development business, anything connecting to electrical infrastructure usually talks in terms of years and sometimes a lot of years depending on the market. To get something into place in the ERCOT market is maybe a couple of years, and some markets in the Midwest that have had congested queues and some transmission constraints, that could be five to seven years, and obviously we've been working for a period of time. I think we're the least behind of anybody with our 300 gigawatt portfolio, but some of this will take some time to materialize. I feel very confident in long-term trends. I feel really excited and pleased with our team's preparedness in terms of the development of that pipeline, and I very much think our competitive advantages that John highlighted on scale, experience, and technology really position us well in the types of conversations we're having with our customers, creating this long-term visibility into demand dynamics. You guys asked John a question about data centers and how competitive we are with them. They are not looking for projects anymore. They are looking for integrated solutions that solve long-term problems for them, and we are a perfect partner for them with which to work. Durgesh Chopra -- Evercore ISI -- Analyst That's very helpful, Rebecca. And then maybe just a quick follow-up. I think you made comments around very healthy returns. Are you seeing higher returns, higher margins with your data center clients versus your other clients? Some of your peers have highlighted higher returns there. Maybe just comment on that. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources I continue to believe we have very attractive returns across the board, consistent with the comments that I've made today as well as the comments we made at our development 101 day and included in our monthly updates for investor materials, so mid-teens and solar and above 20% for both wind and storage. Of course, as we talk with customers and we have unique solutions that solve particular problems that we have, we design the solutions to meet those needs and always stay focused at the end of the day on what's the attractive value proposition from an investor standpoint, and we remain disciplined around that. I love the portfolio. I love the positioning, and I believe what we ultimately deliver for investors is very attractive. Durgesh Chopra -- Evercore ISI -- Analyst That is very helpful. Thank you very much. Operator The next question comes from Jeremy Tonet with J.P. Morgan. Please go ahead. Excuse me, Mr. Tonet, your line is open. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Good morning. Thank you. I just want to start off on storage originations coming in quite strong. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Jeremy. It's Rebecca. I'm going to go for the presumptive close on the answer. Hopefully, it's the question you actually asked. Storage origination is very strong. As Kirk highlighted in some of the prepared remarks and John commented in Q&A, as we think about our customers' needs for energy and capacity, it remains a very attractive value proposition to incorporate storage to firm up renewables, either co-located or separate. So we're seeing terrific origination from an energy resources perspective, and we've also talked today about the attractiveness of storage FPL, so I'll hand it off to Armando to give some additional color. Armando Pimentel -- President and Chief Executive Officer, Florida Power and Light Company Thanks, Rebecca. So I would add, if you recall John and Kirk's comments, we filed our 10-year site plan, which we do every year. Our 10-year site plan this year had the same amount of solar that it did last year, which is a lot of solar, 21 gigs over the next 10 years. But we doubled the amount of storage up to 4 gigawatts of storage that we have in our plan. We increasingly see storage as an economical addition in our service area. My expectations are that, as time goes on, that we would likely add more storage to our plans going forward because it is that attractive in the overall economics, especially as we add solar, which, again, continues to be the best proposition from a cost standpoint for our customers. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Thank you for that. And just going back to the Renewable Development Day, or for people that weren't able to make it, any particular points you want to highlight? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Jeremy, you broke up a little bit, so I'm going to, again, guess a little bit on what the question was. But I'm assuming it was what were some of the key takeaways from the Development 101 Day. And I hope it was a worthwhile time for our investors. We certainly were so proud of our team in talking about what it is that we believe differentiates us as we talk to our customers. And it really was around that scale, experience, and technology, not just individually how all of those are important, but also how they interact with one another. So, as John highlighted, with the scale advantages comes the ability to deploy technologies that are unique. And with that experience, we actually are able to invest in capturing that data that we get from scale and put it in technologies to actually get some really cool insights. So I think the key takeaway from my perspective is significant load growth, certainly, some opportunities to deploy that scale, experience, and technology to deploy unique and compelling solutions to our customers. So I love our growth prospects. I love the position that we have, just as John highlighted in his comments. And I look forward to telling you more at the investor conference in June. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Great. Thank you very much. Answer:

the NextEra Energy and NextEra Energy Partners LP first-quarter 2024 earnings call

Operator Good morning, and welcome to the NextEra Energy and NextEra Energy Partners LP first-quarter 2024 earnings call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Kristin Rose, director of investor relations. Please go ahead. Kristin Rose -- Director, Investor Relations Thank you, Drew. Good morning, everyone, and thank you for joining our first-quarter 2024 combined financial results conference call for NextEra Energy and NextEra Energy Partners. With me this morning are John Ketchum, chairman, president, and chief executive officer of NextEra Energy; Kirk Crews, executive vice president and chief financial officer of NextEra Energy; Rebecca Kujawa, president and chief executive officer of NextEra Energy Resources; and Mark Hickson, executive vice president of NextEra Energy, all of whom are also officers of NextEra Energy Partners, as well as Armando Pimentel, president and chief executive officer of Florida Power & Light Company. John will provide some opening remarks and will then turn the call over to Kirk for a review of our first-quarter results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call and the risk factor section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our websites, www.nexteraenergy.com and www.nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP financial measures to the closest GAAP financial measure. With that, I will turn the call over to John. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thanks, Kristen, and good morning. NextEra Energy delivered strong first-quarter results, growing adjusted earnings per share by 8.3% year over year. Based on FPL and Energy Resources financial and operational performance, we are once again off to a solid start for the year. In addition, FPL placed into service 1,640 megawatts of new solar, while Energy Resources added 2,765 megawatts of new renewables and storage projects to its backlog. This quarter marks Energy Resources' second-best origination quarter ever, as well as its best solar and best storage origination quarter. As we highlighted at our March Renewables Development Day, we believe NextEra Energy is well-positioned for the expected strong power demand growth through the end of the decade and beyond. After years of relatively flat U.S. power growth, numerous reports now highlight significant future low growth being driven across industries such as oil and gas, manufacturing, and technology. The redomestication of industry in the U.S., supported by public policy, will drive the need for more electricity, and the tech industry is going to need data centers to support the expected cloud capacity demands that come with artificial intelligence applications. Of course, increased load demand will not come all at once and will take some time to materialize, but it is clear that many new customers are concerned about power availability to meet their plans and consider power supply as a significant obstacle to business expansion. We believe renewables and storage are a key enabler to help meet this increased demand. In fact, we believe the U.S. renewables and storage market opportunity has the potential to be 3x bigger over the next seven years compared to the last seven, growing from roughly 140 gigawatts of additions to approximately 375 to 450 gigawatts. And we believe no one is better positioned to address these power supply challenges and capitalize on this demand than NextEra Energy. At NextEra Energy, the plan is simple. Our two businesses are deploying capital in renewables, storage, and transmission for the benefit of customers while also providing visible growth opportunities for shareholders. Our enterprisewide scale, decades of experience, and technology investments are key competitive advantages that allow us to drive value and meet this expected power demand. Scale is one of our key differentiators, and it matters more than ever. Scale allows us to buy and build with better pricing, better protections, and better positioning to navigate disruption. Scale provides access to capital and cost of capital advantages, allowing us to leverage one of the strongest balance sheets in the sector and worldwide banking relationships to finance projects at beneficial terms. Scale has driven top-decile operational performance throughout our generation fleet. Today, NextEra Energy's roughly 74 gigawatt operating fleet, comprised of 35 gigawatts at FPL and 39 gigawatts at Energy Resources, provides significant operational scale. As FPL continues its solar and storage build-out and Energy Resources brings new renewables and storage projects online for customers, the operating fleet could grow to over 100 gigawatts by the end of 2026. This would further extend our scale advantages and create value for customers and shareholders. Our scale has enabled greater supply chain diversification and flexibility, and the good news is the solar supply chain is much improved from two years ago. Inflationary pressures are alleviating and manufacturing capacity is significantly expanding. In the U.S., manufacturing incentives are expected to support increases in domestic module manufacturing capacity to over 50 gigawatts by 2026, from just under 8 gigawatts at the end of 2021. We have greater supplier diversity and flexibility than ever before, strengthening our ability to bring low-cost solar to American consumers and businesses. Our decades of experience is another key competitive advantage. Our experience allows us to navigate power demand challenges, delivering cost-effective, reliable generation for our growing FPL customer base, and designing clean energy solutions to help our Energy Resources customers. We understand every part of the energy value chain with deep expertise in all technologies, the power markets, and transmission. Our team embraces continuous improvement that drives innovation. We recognized the changing landscape and secured land, interconnects, and transmission equipment years in advance. Technology is the next frontier for the power industry, and we believe our two-decade head start on the rest of the industry is a significant competitive advantage. Today, NextEra Energy captures 560 billion operational data points each day and has dozens of proprietary artificial intelligence tools to drive analytical, real-time decision making. We use these tools to analyze over 100 attributes of our own data to secure and develop the best sites in Florida and across the country. We use our tools to iterate millions of site layout designs based on proprietary resource data and assessments to maximize value. And we use our tools to operate nearly all our renewable storage and fossil generation fleets around the clock from our headquarters in South Florida. We are leveraging this combination of enterprisewide scale, decades of experience, and investment in technology to better position both businesses to capitalize on what we believe will be years of demand to drive long-term value for customers and shareholders. Today, electricity represents just 20% of overall U.S. energy consumption, and wind and solar generation represents only 16% of the U.S. electricity mix. In short, we believe the U.S. will need a significant and growing amount of electricity over the next decade and beyond, a large part of which will be powered by new renewables and storage. At FPL, as more people move into Florida, we are focused on extending the customer value proposition by keeping our bills as low as possible and delivering clean, affordable energy by investing in solar, battery storage, and transmission. At Energy Resources, our business is focusing on building low-cost wind, solar, battery storage, and transmission. We are using our data and proprietary technology to help power customers, balance supply and demand while keeping customer bills affordable. We also use our tools with commercial and industrial customers to identify the best locations based on their physical preferences and most important variables. For both power and commercial and industrial customers, we leverage our 300 gigawatt development pipeline and transmission and market expertise to help design the lowest-cost clean energy solutions. Both businesses complement each other, deepen our skill sets and advantages, and foster innovation. And we leverage our greatest asset, our people, who have decades of experience to drive value for our customers and shareholders. When I consider current energy demands, the long-term electricity needs, and our competitive advantages, I wouldn't trade our opportunities set with anyone. I look forward to telling more of our story and explaining why NextEra Energy is uniquely positioned to lead the electrification of the U.S. economy at our Investor Day on June 11th in New York City. With that, I will turn the call over to Kirk to cover the quarterly results. Kirk Crews -- Executive Vice President, Chief Financial Officer, NextEra Energy Thank you, John. For the first quarter of 2024, FPL's earnings per share increased $0.04 year over year. The principal driver of this performance was FPL's regulatory capital employed growth of approximately 11.5% year over year. We now expect FPL to realize roughly 10% average annual growth in regulatory capital employed over our current rate agreement's four-year term, which runs through 2025. FPL's capital expenditures were approximately $2.3 billion for the quarter, and we expect FPL's full-year 2024 capital investments to be between $7.8 billion and $8.8 billion. For the 12 months ending March 2024, FPL's reported ROE for regulatory purposes will be approximately 11.8%. During the first quarter, we utilized approximately $572 million of reserve amortization, leaving FPL with a balance of roughly $651 million. As we've previously discussed, FPL historically utilizes more reserve amortization in the first half of the year, and we expect this trend to continue this year. Earlier this month, FPL received approval to reduce customer bills due to projected 2024 fuel savings. As a result, FPL's typical 1,000 kilowatt-hour residential customer bill is expected to be roughly $14 lower in May than the start of the year, and approximately 37% lower than the current national average. Over the current four-year settlement agreement, we now expect FPL's capital investments to be slightly above our previous range of $32 billion to $34 billion. This quarter, FPL placed into service 1,640 megawatts of new cost-effective solar, putting FPL's owned and operated solar portfolio at over 6,400 megawatts, which is the largest utility-owned solar portfolio in the country. FPL's annual 10-year site plan continues to indicate that solar and storage are the most cost-effective answer for customers to add reliable grid capacity over the next decade. The 2024 plan includes similar levels of new solar generation capacity, 21 gigawatts, across our service territory over the next 10 years compared to our 2023 plan. But our 2024 plan doubles the expected deployment of battery storage to over 4 gigawatts, some of which we expect to be needed earlier than forecasted in our 2023 plan. With this plan, we expect to increase FPL's solar mix from approximately 6% of our total generation in 2023 to 38% in 2033, while continuing to provide customers with clean, affordable energy. FPL believes battery storage will play an increasingly valuable role for customers, serving as an attractive capacity complement to our growing solar generation. From providing system-balancing needs in critical parts of FPL's service territory to supplying energy during any time of day or weather condition, battery storage acts as a key resource to the system that is both valuable and cost-effective for customers. Key indicators show that Florida's economy remains healthy. Florida continues to be one of the fastest-growing states in the nation and has four of the five fastest-growing U.S. metro areas between 2022 and 2023. FPL had its strongest quarter of customer growth in over 15 years, with the average number of customers increasing by more than 100,000 from the comparable prior year period. Although FPL's first quarter retail sales decreased by approximately 1.3% year over year, we estimate that weather had a negative impact on usage per customer of approximately 5.4% on a year-over-year basis. After taking weather into account, first quarter retail sales increased roughly 4.1% on a weather-normalized basis from the comparable prior year period, driven primarily by continued favorable underlying population growth and usage per customer. Now let's turn to energy resources, which report adjusted earnings growth of approximately 13.1% year over year. Contributions from new investments increased $0.15 per share year over year, primarily reflecting continued growth in our renewables portfolio. Our existing clean energy portfolio declined $0.02 per share, primarily due to unfavorable wind resource during the quarter. The comparative contribution from our customer supply business increased results by $0.04 per share. All other impacts reduced earnings by $0.12 per share. This decline reflects higher interest costs of $0.07 per share, half of which related to new borrowing costs to support new investments. Energy resources had a strong quarter of new renewables and storage origination, adding approximately 2,765 megawatts to the backlog. With these additions, our backlog now totals roughly 21.5 gigawatts after taking into account 1,165 megawatts of new projects placed into service since our last earnings call, highlighting energy resources' ability to continue to identify attractive and accretive investment opportunities which provide strong growth visibility in the years ahead. We recently placed 740 megawatts of new solar and storage projects into service, which are being used to support data centers located in Arizona and New Mexico. Both of these projects are now one of the largest battery storage facilities in their respective states, and in combination with their co-located solar, each project enabled the local utility to serve their customers' need for new, reliable, clean energy to grow their own business operations. We are proud to continue to support our power and commercial and industrial customers to meet their growing power and capacity needs, create jobs, and provide economic development in these local communities. Our origination activities across our power and commercial and industrial customers are beginning to reflect the rising power demand. We are seeing it manifest with our power customers in their state RFP processes and bilateral discussions where we deliver cost-effective renewables and storage to their grid. We are also observing it through interactions with our oil and gas and manufacturing customers where we utilize our data and technology to help them make better citing decisions. Our technology customers have been a consistent driver of demand for many years, reflected by our roughly 3 gigawatt operating portfolio and over 3 gigawatt project backlog as we partner with them to provide various clean energy solutions based on their key business variables. We are a partner with both our power and commercial industrial customers' trust. We can leverage our 3 gigawatt development pipeline, our 35 gigawatt operating renewables and storage portfolio, and our transformer and switchgear procurement covering energy resources billed through 2027 to deliver projects for customers. As John said, the power demand growth is expected to be strong through at least the end of the decade. We expect 2024 to be another strong year for new renewables and storage origination. This is on the heels of two consecutive record origination years at Energy Resources. We continue to expect to remain on track for our overall renewable development expectations of roughly 33 gigawatts to 42 gigawatts from 2023 through 2026. Beyond renewables and storage, NextEra Energy Transmissions was recently selected by the California ISO to develop a new 82 mile 500 kV transmission line in Southern California with a capital investment of more than $250 million. We believe this project could unlock over 3 gigawatts of new renewable generation capacity supporting California's ambitious clean energy goals. This award falls a record year for NextEra Energy Transmission in 2023, and we remain excited about the opportunities ahead for this growing business. We continue to believe our ability to build, own, and operate transmission is a key advantage for our renewables business. Turning now to our first quarter 2024 consolidated results, adjusted earnings from corporate and other decreased by $0.01 per share year over year. This quarter, we entered into an agreement to transfer approximately $1 billion of tax credits throughout 2024, representing the bulk of our expected transfers for the year. Our long-term financial expectations remain unchanged. We will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted EPS expectation ranges in 2024, 2025, and 2026. From 2021 to 2026, we continue to expect that our average annual growth in operating cash flow will be at or above our adjusted EPS compound annual growth rate range. And, as we announced in February, the board of directors of NextEra Energy approved a targeted growth rate in dividends per share of roughly 10% per year through at least 2026 off a 2024 base. As always, our expectations assume our caveat. Turning to NextEra Energy Partners. We continue to focus on executing against the partnership's transition plan and delivering an LP distribution growth target of 6% through at least 2026. We bought out the STX Midstream convertible equity portfolio financing in 2023 and have sufficient proceeds available from the Texas Pipeline Portfolio Sale to complete the NEP Renewables II buyout due in June 2024 and 2025. The third convertible equity portfolio financing associated with the Meade natural gas pipeline assets is expected to be addressed in 2025. With a plan for the near-term convertible equity portfolio financing well understood, we remain focused on the partnership's cost of capital improving, which is critical for its success. With that objective in mind, we continue to evaluate alternatives to address the remaining convertible equity portfolio financing with equity buyout obligations in 2027 and beyond. Turning to the partnership's targeted 6% growth in LP distributions per unit, NextEra Energy Partners does not expect to need an acquisition this year to achieve its 6% targeted growth rate, and the partnership does not expect to require growth equity until 2027. In terms of NextEra Energy Partners' growth plan, as a reminder, it involves organic growth, specifically, repowerings of approximately 1.3 gigawatts of wind projects through 2026, as well as acquiring assets at attractive yields. Today, we are announcing plans to repower an additional approximately 100 megawatts of wind facilities through 2026. The partnership has now announced roughly 1,085 megawatts of repowers. Yesterday, NextEra Energy partners' board declared a quarterly distribution of $89.25 per common unit, or $3.57 per common unit, on an annualized basis, which reflects an annualized increase of 6% from its fourth quarter 2023 distribution per common unit. Let me now turn to the detailed results. First-quarter adjusted EBITDA was $462 million, and cash available for distribution was $164 million. New projects, which primarily reflect contributions from approximately 840 megawatts of new projects that either closed in the second quarter of 2023 or achieved commercial operations in 2023, contributed approximately $32 million of adjusted EBITDA and $7 million of cash available for distribution. First quarter adjusted EBITDA contribution from existing projects declined by approximately $37 million year over year, driven primarily by unfavorable wind resource during the quarter and lower generation at Genesis Solar project as a result of a planned outage for major maintenance. Wind resource was approximately 97% of the long-term average versus 102% in the first quarter of 2023. The incentive distribution right fee suspension provided approximately $39 million of benefit this quarter for adjusted EBITDA and cash available for distribution. Finally, adjusted EBITDA and cash available for distribution declined by approximately $44 million and $38 million, respectively, for the divestiture of the Texas pipeline portfolio. From a base of our fourth quarter 2023 distribution per common unit and an annualized rate of $3.52, we continue to see 5% to 8% growth per year in LP distributions per unit, with a current target of 6% growth per year as being a reasonable range of expectations for at least 2026. We continue to expect the partnership's payout ratio to be in the mid-90s through 2026. We expect the annualized rate of the fourth quarter 2024 distribution that is payable in February 2025 to be $3.73 per common unit. NextEra Energy Partners expects run rate contributions for adjusted EBITDA and cash available for distribution from its forecasted portfolio at December 31st, 2024 to be in the ranges of $1.9 billion to $2.1 billion and $730 million to $820 million, respectively. As a reminder, year-end 2024 run rate projections reflect calendar year 2025 contributions from the forecasted portfolio at year-end 2024. As a reminder, our expectations are subject to our caveats. That concludes our prepared remarks, and with that, we will open the line for questions. Questions & Answers: Operator Thank you. [Operator instructions] The first question comes from Steve Fleishman with Wolfe Research. Please go ahead. Steve Fleishman -- Wolfe Research -- Analyst Yeah. Hi. Thank you. Just first question, just there's been press reports about potential another AD/CVD case to be filed related to solar panels and, Biden also talking about getting rid of the protection on the bifacial panel tariff. Could you just talk a little bit more about how you're positioned to deal with those cases if they do arise, changes if they arise? Thanks. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Sure. Steve, this is John. I'll go ahead and take that. Let me take those in order. Let me talk about, first of all, the speculation around AD/CVD filing, which, may or may not occur, and then the bifacial exemption. But first on the AD/CVD, the bottom line takeaway for folks is that, we expect that any trade actions that would occur this time around will be very manageable. And for several reasons, I'm going to go through them. This is not like circumvention. This is not circumvention 2.0. The solar panel market is in a very different spot. And the first point I want to make is we don't expect any trade action, if it were to occur, to result in delivery stoppages. And in any event, our panels are delivered well in advance of construction, which gives us a lot of time and opportunity to be able to troubleshoot any issues should they arise. And why do I think no stoppages were going to occur this time around? The main reason is the U.S. is the most expensive solar panel market in the world, and so there's a lot of economic reasons for deliveries to continue to occur. The second point I want to make is that, given our scale, we have appropriate incentives and contractual protections that are in place in our agreements with our suppliers to ensure that delivery occurs timely. And we also don't put all of our eggs in one basket. We have a diversified set of suppliers, as you would all expect, and the ability to pivot from one supplier to another should any issues occur. So I feel like we're in a very good spot there. The third point I want to make, and it's one that I hit in my prepared remarks, is that the U.S. and the global supply of solar panels is bigger than ever, and it's growing. Let me talk, for example, about the U.S. market specifically. The U.S. domestic solar panel industry is getting stronger and stronger than it's ever been. One of the points that I made also in the prepared remarks is at the end of '21, solar panel module capacity in the U.S. was about 8 gigawatts. That's expected to be about 50 gigawatts by the time we get to 2026. So the U.S. market is in a much different spot. There's already been 150 gigawatts of new U.S. solar panel factory announcements that have been made. If you talk to most U.S. domestic solar panel manufacturers, they're sold out through 2026, so they're certainly not having any trouble with demand, which is the other point that I want to make. So now let's speculate a little bit. So if a filing is made around anti-dumping, let me deal with that first. We find it hard to believe that any panels are being dumped into the U.S. market under the law. That would be applied. As I said, the U.S. is the most expensive solar panel market in the world. It's two to three times higher than any other market in the world. And if panels were being dumped, that could not be the case. So that's the first point I want to make on anti-dumping. The second point I want to make, if there were a countervailing duty claim filed, the Department of Commerce would first have to look in to see if the price of solar modules in Southeast Asian countries, for example, were being subsidized. We don't really have any idea or way of knowing that until we see what gets filed. But after we see those arguments, we'll be able to make a better assessment. But countervailing duties historically, if you look at examples for countervailing duties that have been applied in the past against China suppliers, they've typically been around 10% to 15%. So even if those were to be applied in this case, quite manageable. And the other point I want to make is that what's different is tariffs in this situation would be prospective and not retroactive. And so for all of these reasons, even if something were to move forward, we still have no way of knowing if it will. We are very well positioned to manage through this like we always do. Our inventory position and the contractual protections that we have in place are expected to give us strong coverage for our backlog through 2027. And by that time, as more and more U.S. production comes online as expected, these trade issues will fall away. So that's AD/CVD. Let me just turn quickly to a couple of minor comments on the bifacial exemption. The bottom line, the bifacial exemption, even if it's removed, really has no impact on NextEra. Why is that? We've contracted all of our panel needs through February '26, and we have very minimal exposure to the bifacial exemption being removed. And once that bifacial exemption, even if removed, it would expire at the end of February of 2026, and it can't be brought again and reinstated for another eight years. So we feel like we're in a very good spot. And the last point I'll make is as more and more U.S. production capacity comes online and it's actually available by, we will continue to source from U.S. suppliers. So look, when you put all those things together, I feel like this is very manageable and I feel like we will be fine. Steve Fleishman -- Wolfe Research -- Analyst That was very thorough and helpful. Thank you, John. And then I guess one other question on the data center. So you talked about the backlog edge you had this quarter. Just as we go into this year and think about this, is this going to continue to be more kind of one-off or two-off quarter-by-quarter updates, or is there -- should we see more kind of potential for more like long-dated partnerships or kind of larger-scale agreements? How should we think about how that might develop? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy I think kind of all of the above, Steve. Our opportunity set is significant around data centers is the first point that I'll make. And I think if you look historically on what we've been able to do with data center customers, I don't think anybody's had better results than we have. If you look at just our gigawatts in operation, we have 3.5 gigawatts in operation today. We have another close to 3.5 gigawatts in our backlog with technology providers. We really understand their business. We really understand what it is they need. And part of that is because we spend a lot of time with them. We do business with all what I would call the top five hyperscales in this country, also doing business increasingly with some of the developers of data centers as well. And we've owned data centers. And so we understand how they work, how they operate, what the capex and opex is and how it's driven by energy and power and what the right locations are for them. We've developed tools to address them. And so what do we see? We see about a 15% CAGR through the end of the decade for data center demand. I think data center developers are really focused more than anything on three things. They want low-cost energy. They want to be able to say that they've accomplished additionality from a decarbonization standpoint, which requires a new facility to be built, not an existing facility. And the third piece is it's got to be in the right location and it's got to have speed to market. And there's obviously been a lot of talk about renewables and nuclear, and I do want to -- I'm a little more of a skeptic about nukes, and let me explain why that is. They're already in the ground. You can't move them. And if you look at the nuclear fleet, there's only 15 nuclear plants in this country that are west of the Mississippi. And when you think about the 15 that are west of the Mississippi, most of them are already rate regulated or long-term contracted. So that really is just creating maybe an East Coast opportunity for those that aren't rate regulated and that aren't contracted. I think that's a small subset of nuclear units that could perhaps satisfy East Coast demand. But in our discussions with data center providers, getting access to cloud capacity for Silicon Valley, Santa Clara in particular, is critical. We can all count on one or two fingers how many nuclear plants are located in those regions, not many. And you just can't move a nuclear plant. And so the thing we bring to the table is a lot of flexibility and speed to market. We can put the renewable project exactly where it needs to be. And SMRs, I hear a lot of talk about SMRs. SMRs are still a decade to 15 years away. Not only do you have nine OEMs that are really struggling to access capital. If we pass a sanctions bill against Russia, a nuclear fuel that's going to limit conversion and enrichment capacity in the U.S. for sourcing of nuclear fuel for these SMRs, which also is going to require a real step up in technology to get them done. And you're also dealing with undercapitalized fuel providers. I'm a real skeptic on SMRs really coming into the picture to satisfy data center demand any time in the near future. And so when you put all of that together, I think the right answer is renewables in our discussions with data center developers and providers, their first focus is renewables. And I hear a lot about the reliability concerns and what do you do when the wind doesn't blow and the sun doesn't shine and the four-hour battery is not enough? We can overbuild the battery. We can also help work with them to design a clean energy solution where if they do have a grid by it, we can green it up with RECs from our green desk. We have technology and tools which we showcased back in March where we can identify parts of the country that not only the best resource areas but also the best fiber connectivity is the best water resource and those are the areas that we're locking up and we have the sites and we have the relationships. And so I don't think anybody's better positioned to capitalize on data center demand than NextEra is and I'm very excited about what the future opportunities hold for us there, but the other thing I would say, and we'll talk a lot more about this at our investor conference in June is this electricity demand is real. We've been in a period of static demand for decades and the demand is not only coming from data centers. It's coming from decoupling from China, creating more domestic manufacturing around industry, around chip manufacturing, oil and gas industry continues to electrify. We continue to even beyond data centers see significant electric demand. We have the tools. We have the sites. We have the relationship and we are chasing those opportunities and look we're coming off our second-best origination quarter ever. I think the results speak for themselves. Steve Fleishman -- Wolfe Research -- Analyst Great. Thank you. Operator The next question comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead. Shar Pourreza -- Guggenheim Partners -- Analyst Hey. Good morning, guys. Just maybe starting off on NEP, given the continued pressure from capital markets and the benchmark rates, are you advancing any longer-term resolution plans for the CEPFs? Have existing holders and maybe other infrastructure players showed any interest in transactions to fund and maybe simplify the cap structure for longer-term growth? What could that look like and is this Analyst Day disclosure? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yes, sure. Thanks for the question. A few comments that I'll make on it. One is we have talked about private capital raise potentially being a solution to address back-end CEPFs for NEP. Obviously, there's a lot of interest in that just given. NextEra's stature in the market, NextEra Energy Partners' stature in the market. And so those discussions continue to move forward. We don't have anything to say about them right now. We may not have anything to say about them at the Analyst Day. I wouldn't expect us to make a whole lot of comments at the Analyst Day about NEP. When we do have something to say about NEP, as these discussions continue to evolve, we will address them at that point. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. Stay tuned. And then lastly, John, on the FECs, since the process disclosures have been made and obviously showed FP&L was clear of any wrong doing, there were some disagreements with the FEC commissioners on the nonprofit matters. Is there an appeals path, and would there be any further information request to FP&L or NextEra or should we just close the books here? John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Yeah. I think the way I look at it Shah is plain and simple. The FEC voted. They voted to close the matter. We're now moving on, and I think this is behind us. Shar Pourreza -- Guggenheim Partners -- Analyst OK. Perfect. That's it. Very comprehensive. Thank you, guys, and congrats on the results. John Ketchum -- Chairman, President, and Chief Executive Officer, NextEra Energy Thank you. Operator The next question comes from David Arcaro with Morgan Stanley. Please go ahead. Mr. Arcaro, your line is open. Is your phone muted accidentally? I'm sorry. We'll need to go to the next questioner. The next questioner comes from Carly Davenport with Goldman Sachs. Please go ahead. Carly Davenport -- Goldman Sachs -- Analyst Hi. Good morning. Thanks for taking the questions today. I appreciate it. I wanted to just ask one on the backlog good strength in the additions this quarter, and we continue to see a lot of strength in the solar and the storage piece of it. Wind's been a little bit weaker. So I guess just as you think about the difference in the returns on those projects, are there any implications for your financial guidance and your plan as you think about the mix that you've seen actually evolve versus what is in that base plan? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Carly. It's Rebecca. I'll take that question. Good morning. Let me start with probably the most important takeaways first. Obviously, Kirk and John highlighted our continued expectations and expressed the fact that we'd be disappointed if we didn't meet the top end of those expectations as we've outlined. So that's most important. Secondly, we continue to be comfortable with the overall development expectations as we also highlighted in the prepared remarks and that's consistent with what we've seen over time. As we've long stated, obviously there's a mix in technologies. We, four years in advance, are not always going to be predicting exactly where we're going to be able to develop and what our customers are going to be interested in. And notably, since we laid those expectations out for the first time, a lot did change including the passage of the IRA and that had both an impact on changing dynamics for our customers buying wind which was largely in advance of the expectations that the incentives would ultimately wind down and in the IRA the introduction of the production tax credit for solar which made solar more attractive than it was even before, as well as the stand-alone ITC for storage. So that really spurred demand for solar and storage. But if I can take a step back and pile into the question that Steve answered and some of the comments that John made earlier we are seeing significant demand across the entire U.S. economy. That, of course, includes data centers, technology, AI-driven compute demand, but it is also manufacturing, the redomestication of important industries in the U.S. and it is also oil and gas and chemicals companies looking to get lower-cost energy solutions into their mix. That spurs a need for a lot of build. So as we look at our 300 gigawatts of products that are in development and the integrated solutions and solutions that we are designing for our customers, I remain very optimistic about all of the technologies. In various parts of the country, wind is most economic. In parts of the country, it is going to be solar and storage, etc. So I love the portfolio approach and from a returns perspective, I think we continue to realize very attractive returns for all the technologies and, of course, adjusted for the types of risks that we think we take. So mid-teens for solar and above 20% levered returns for wind and storage technologies. So I think from an investor standpoint, that is a very attractive proposition. Carly Davenport -- Goldman Sachs -- Analyst Awesome. Thanks for that, Rebecca. And then you mentioned over the last question 15% CAGR for data center demand growth through the end of the decade. I guess as you think about some of these other drivers that you've mentioned of increased power demand in the US, how do you think that will drive overall load growth? Do you have expectations there through the end of the decade? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources So we'll have a lot more to say in terms of our expectations and certainly in context of a number of third-party views at the investor conference. But I think it's safe to say at this point that we see strong drivers for a long period of time, decades into the future, driving renewables penetration and electricity and electricity penetration into overall U.S. energy consumption which sets up terrific dynamics for us to continue to compete and create opportunities to invest capital for our shareholders at very attractive returns. So I love our opportunity at. Carly Davenport -- Goldman Sachs -- Analyst Thank you for that color. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Thank you. Operator The next question comes from Durgesh Chopra with Evercore ISI. Please go ahead. Durgesh Chopra -- Evercore ISI -- Analyst Good morning. Thank you for giving me time. Maybe just, Rebecca, on the topic of electricity demand growth. One of the questions we consistently get, and I think John hinted on this 15% the data center growth driving it is how quickly can you ramp up? So maybe can you just talk to that? Are there any constraints, whether it's equipment, whether it's sites? How quickly can the generation side of this, the renewable generation can ramp up? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Yeah, Durgesh, I appreciate the question. I think a little bit of context is important. I think all of us, ourselves included, have really started talking about the significant change in load growth really over the last year, maybe even the last six months, and you all very much appreciate that a development business, anything connecting to electrical infrastructure usually talks in terms of years and sometimes a lot of years depending on the market. To get something into place in the ERCOT market is maybe a couple of years, and some markets in the Midwest that have had congested queues and some transmission constraints, that could be five to seven years, and obviously we've been working for a period of time. I think we're the least behind of anybody with our 300 gigawatt portfolio, but some of this will take some time to materialize. I feel very confident in long-term trends. I feel really excited and pleased with our team's preparedness in terms of the development of that pipeline, and I very much think our competitive advantages that John highlighted on scale, experience, and technology really position us well in the types of conversations we're having with our customers, creating this long-term visibility into demand dynamics. You guys asked John a question about data centers and how competitive we are with them. They are not looking for projects anymore. They are looking for integrated solutions that solve long-term problems for them, and we are a perfect partner for them with which to work. Durgesh Chopra -- Evercore ISI -- Analyst That's very helpful, Rebecca. And then maybe just a quick follow-up. I think you made comments around very healthy returns. Are you seeing higher returns, higher margins with your data center clients versus your other clients? Some of your peers have highlighted higher returns there. Maybe just comment on that. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources I continue to believe we have very attractive returns across the board, consistent with the comments that I've made today as well as the comments we made at our development 101 day and included in our monthly updates for investor materials, so mid-teens and solar and above 20% for both wind and storage. Of course, as we talk with customers and we have unique solutions that solve particular problems that we have, we design the solutions to meet those needs and always stay focused at the end of the day on what's the attractive value proposition from an investor standpoint, and we remain disciplined around that. I love the portfolio. I love the positioning, and I believe what we ultimately deliver for investors is very attractive. Durgesh Chopra -- Evercore ISI -- Analyst That is very helpful. Thank you very much. Operator The next question comes from Jeremy Tonet with J.P. Morgan. Please go ahead. Excuse me, Mr. Tonet, your line is open. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Good morning. Thank you. I just want to start off on storage originations coming in quite strong. Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Hi, Jeremy. It's Rebecca. I'm going to go for the presumptive close on the answer. Hopefully, it's the question you actually asked. Storage origination is very strong. As Kirk highlighted in some of the prepared remarks and John commented in Q&A, as we think about our customers' needs for energy and capacity, it remains a very attractive value proposition to incorporate storage to firm up renewables, either co-located or separate. So we're seeing terrific origination from an energy resources perspective, and we've also talked today about the attractiveness of storage FPL, so I'll hand it off to Armando to give some additional color. Armando Pimentel -- President and Chief Executive Officer, Florida Power and Light Company Thanks, Rebecca. So I would add, if you recall John and Kirk's comments, we filed our 10-year site plan, which we do every year. Our 10-year site plan this year had the same amount of solar that it did last year, which is a lot of solar, 21 gigs over the next 10 years. But we doubled the amount of storage up to 4 gigawatts of storage that we have in our plan. We increasingly see storage as an economical addition in our service area. My expectations are that, as time goes on, that we would likely add more storage to our plans going forward because it is that attractive in the overall economics, especially as we add solar, which, again, continues to be the best proposition from a cost standpoint for our customers. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Thank you for that. And just going back to the Renewable Development Day, or for people that weren't able to make it, any particular points you want to highlight? Rebecca Kujawa -- President and Chief Executive Officer, NextEra Energy Resources Jeremy, you broke up a little bit, so I'm going to, again, guess a little bit on what the question was. But I'm assuming it was what were some of the key takeaways from the Development 101 Day. And I hope it was a worthwhile time for our investors. We certainly were so proud of our team in talking about what it is that we believe differentiates us as we talk to our customers. And it really was around that scale, experience, and technology, not just individually how all of those are important, but also how they interact with one another. So, as John highlighted, with the scale advantages comes the ability to deploy technologies that are unique. And with that experience, we actually are able to invest in capturing that data that we get from scale and put it in technologies to actually get some really cool insights. So I think the key takeaway from my perspective is significant load growth, certainly, some opportunities to deploy that scale, experience, and technology to deploy unique and compelling solutions to our customers. So I love our growth prospects. I love the position that we have, just as John highlighted in his comments. And I look forward to telling you more at the investor conference in June. Jeremy Tonet -- JPMorgan Chase and Company -- Analyst Great. Thank you very much.